The Best and Worst News of 2017

Since it’s the last day of the year, let’s look back on 2017 and highlight the biggest victories and losses for liberty.

For last year’s column, we had an impressive list of overseas victories in 2016, including the United Kingdom’s Brexit from the European Union, the vote against basic income in Switzerland, the adoption of constitutional spending caps in Brazil, and even the abolition of the income tax in Antigua and Barbuda.

The only good policies I could find in the United States, by contrast, were food stamp reforms in Maine, Wisconsin, and Kansas.

This year has a depressingly small list of victories. Indeed, the only good thing I had on my initial list was the tax bill. So to make 2017 appear better, I’m turning that victory into three victories.

• A lower corporate tax rate – Dropping the federal corporate tax rate from 35 percent to 21 percent will boost investment, wages, and competitiveness, while also pressuring other nations to drop their corporate rates in a virtuous cycle of tax competition. An unambiguous victory.
• Limits on the deductibility of state and local taxes – It would have been preferable to totally abolish the deduction for state and local taxes, but a $10,000 cap will substantially curtail the federal tax subsidy for higher taxes by state and local government. The provision is only temporary, so it’s not an unambiguous win, but the whining and complaining from class-warfare politicians in New York and California is music to my ears.
• No border-adjustment tax – Early in 2017, I was worried that tax reform was going to be tax deform. House Republicans may have had good intentions, but their proposed border-adjustment tax would have set the stage for a value-added tax. I like to think I played at least a small role in killing this bad idea.
• Regulatory Rollback – The other bit of (modest) good news is that the Trump Administration has taken some steps to curtail and limit red tape. A journey of a thousand miles begins with a first step.

Now let’s look elsewhere in the world for a victory. Once again, there’s not much.

• Macron’s election in France – As I scoured my archives for some good foreign news, the only thing I could find was that a socialist beat a socialist in the French presidential election. But since I have some vague hope that Emanuel Macron will cut red tape and reduce the fiscal burden in France, I’m going to list this as good news. Yes, I’m grading on a curve.

Now let’s look at the bad news.

Last year, my list included growing GOP support for a VAT, eroding support for open trade, and the leftward shift of the Democratic Party.

Here are five examples of policy defeats in 2017.

• Illinois tax increase – If there was a contest for bad state fiscal policy, Illinois would be a strong contender. That was true even before 2017. And now that the state legislature rammed through a big tax increase, Illinois is trying even harder to be the nation’s most uncompetitive state.
• Kansas tax clawback – The big-government wing of the Kansas Republican Party joined forces with Democrats to undo a significant portion of the Brownback tax cuts. Since this was really a fight over whether there would be spending restraint or business-as-usual in Kansas, this was a double defeat.
• Botched Obamacare repeal – After winning numerous elections by promising to repeal Obamacare, Republicans finally got total control of Washington and then proceeded to produce a bill that repealed only portions. And even that effort flopped. This was a very sad confirmation of my Second Theorem of Government.
• Failure to control spending – I pointed out early in the year that it would be easy to cut taxes, control spending, and balance the budget. And I did the same thing late in the year. Unfortunately, there is no desire in Washington to restrain the growth of Leviathan. Sooner or later, this is going to generate very bad economic and political developments.
• Venezuela’s tyrannical regime is still standing – Since I had hoped the awful socialist government would collapse, the fact that nothing has changed in Venezuela counts as bad news. Actually, some things have changed. The economy is getting worse and worse.
• The Export-Import Bank is still alive – With total GOP control of Washington, one would hope this egregious dispenser of corporate welfare would be gone. Sadly, the swamp is winning this battle.

Tomorrow, I’ll do a new version of my annual hopes-and-fears column.

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The IRS Doesn’t Deserve Sympathy and It Doesn’t Deserve a Bigger Budget

When I criticize America’s wretched tax code (now slightly less worse because of the recent tax bill), I generally focus my ire on the politicians who have spent more than 100 years creating an insanely complicated and convoluted system.

The Internal Revenue Service, by contrast, is simply the bureaucracy that is charged with enforcing the code.

But that doesn’t mean the IRS should escape criticism. The bureaucrats have some leeway and that discretion sometimes gets abused. The most glaring example in recent years was the agency’s despicable attempt to tilt the political playing field and influence elections by discriminating against Tea Party groups.

Yet not everyone thinks the IRS misbehaved. The Washington Post actually published an editorial that tries to portray the IRS as a victim. Seriously. I’m not joking.

Conservatives who long sought to restrain the Internal Revenue Service have managed to throw a wrench into an IRS division that is supposed to regulate tax-exempt nonprofits and charities, just at a time when these groups are becoming more partisan and complex. …The number of applications from new charities has exploded in recent years, and the law is a bit of a gray zone — vaguely written and hard to enforce. In recent years, overwhelmed by applications, the…division seems to have lost its will to scrutinize charities. According to Mr. O’Harrow, last year the division rejected just 37 of the 79,582 applications on which it made a final determination. He reported that charities have now begun to recognize they face little or no chance of examination or sanction. The division’s budget has declined from a peak of $102 million in 2011 to $82 million last year. The number of division employees has fallen from 889 to 642.

I have a modest bit of sympathy for the IRS. As the editorial notes, the tax code is “vaguely written and hard to enforce.”

But my solution is to remove IRS discretion. In the long run, that can happen with a simple and fair flat tax that does away with the deduction for charitable contributions and thus removes any need for monitoring and enforcement.

In the short run, the easy answer is that charitable status should be automatic and the 642 bureaucrats should concentrate on finding and punishing nonprofit groups that violate the law.

But here’s the part of the editorial that is delusional.

…the division and its then-leader, Lois Lerner, fell into the crosshairs of the conservative tea party movement for the slow pace of approvals of tea party groups, which they claimed was due to a conspiracy by the Obama administration to target them. Subsequent investigations found mismanagement — the IRS was taking shortcuts and using keywords to deal with the mountain of applications — but not deliberate targeting.

Wow. I wonder if the person who wrote this editorial is ignorant or mendacious. The IRS admitted that it targeted Tea Party groups! The bias was in the keywords.

And that wasn’t even the first time the Post tried to make excuses for the IRS.

Investor’s Business Daily opined on this issue over the summer.

This is one of the most serious abuses of power by a federal agency in decades. That no one really lost a job and no one has been prosecuted for abusing the powers of the federal government to harass groups for their political beliefs — the kind of thing routinely done in places such as Russia and Venezuela, not in the U.S. — is nothing less than shocking. For those who need a reminder and without getting too deep in the weeds, the scandal involves IRS bureaucrats denying tax-exempt status to groups apparently solely due to their conservative political beliefs. This is clearly highly illegal. … the Nonprofit Quarterly…notes that…”Various congressional committees attempted to ferret out what happened and who did it but were stymied by the IRS’ slow responses to records requests and, in some cases, destruction of computer media (that) might have contained important information.” In short, it looks like a classic case of a gross violation of federal law followed by a possibly criminal cover-up. …This is unconscionable behavior by a federal agency that is governed by that very same Constitution.

Amen.

This is why I agreed with George Will about the impeachment of the IRS Commissioner and also argued in favor of budgetary consequences for the agency.

Sadly, the Trump Administration has basically gone to bat for the IRS when it should be pushing for transparency and reform.

By the way, my complaints about the IRS go way beyond the fact that the bureaucrats persecuted the Tea Party.

Let’s look at a recent story about a dodgy contract the IRS recently issued.

The IRS will pay Equifax $7.25 million to verify taxpayer identities and help prevent fraud under a no-bid contract issued last week, even as lawmakers lash the embattled company about a massive security breach that exposed personal information of as many as 145.5 million Americans. A contract award for Equifax’s data services was posted to the Federal Business Opportunities database Sept. 30 — the final day of the fiscal year. …The notice describes the contract as a “sole source order,” meaning Equifax is the only company deemed capable of providing the service.

What mostly bothers me is not that the IRS gave a contract to a company that had just suffered a major data leak. Instead, I’m very suspicious about it being a no-bid contract issued on the last day of the fiscal year.

Sounds like the bureaucrats had some use-it-or-lose-it funds and they decided to screw taxpayers.

And here’s another story that’s worth sharing.

Internal Revenue Service (IRS) employees have backed Democrats over Republicans by 2-1 in their political donations over the last 25 years. Donors listing the IRS as their employer have donated roughly $453,800 to Democratic candidates and causes and $221,400 to Republican candidates and causes since 1990. About one in four of the dollars for Democrats, or roughly $117,500, went to President Barack Obama. But IRS employees since 1990 have also donated $203,000 to the National Treasury Employees Union, which in turn has given about 95 percent of its $6 million in political contributions to Democrats over the last 25 years, OpenSecrets.org data shows. Disclosure of the huge bias among IRS employees for Democrats won’t help an agency under fire for years for illegally targeting conservative groups applying for tax-exempt status.

To be sure, bureaucrats can give political contributions and remain honest and fair in their dealings with the public.

Nonetheless, I suspect Lois Lerner wasn’t the only partisan hack who tried to interfere with the political process.

Let’s now end where we started. The Washington Post editorial implied that the IRS deserved a bigger budget and more staff so bureaucrats could investigate each application.

I’ve already explained why that’s not the right approach from a compliance perspective, but there’s also a moral argument against further expanding the IRS budget (something Republicans sadly don’t understand).

P.S. The IRS awarded itself “performance bonuses” after the scandal.

P.P.S. I also thought it was remarkable that IRS bureaucrats wanted to be exempt from Obamacare while asking for more money to enforce fines on ordinary people who didn’t sign up.

P.P.P.S. I’ve certainly done my part to explain why the IRS bureaucracy deserves scorn.

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

P.P.P.P.S. I don’t want to end on a sour note, so here are examples of IRS humor from my archives, including a new Obama 1040 form, a death tax cartoon, a list of tax day tips from David Letterman, a Reason video, a cartoon of how GPS would work if operated by the IRS, an IRS-designed pencil sharpener, two Obamacare/IRS cartoons (here and here), a collection of IRS jokes, a sale on 1040-form toilet paper (a real product), a song about the tax agency, the IRS’s version of the quadratic formula, and (my favorite) a joke about a Rabbi and an IRS agent.

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The Never-Ending Rip Off of Government Infrastructure, the NYC Edition

In 2011, I wrote about how taxpayers were getting pillaged to finance a new metro line in Fairfax County, Virginia.

But you won’t be surprised to learn that California taxpayers are getting screwed even worse.

I’ve since learned, however, that the real experts at wasting money are in the Big Apple. Earlier this year, as part of a column on why the federal government shouldn’t be involved with infrastructure, I shared some depressing details about a far more expensive subway project in New York City.

And now the New York Times has a must-read report about how another big infrastructure project in NYC is an even more absurd boondoggle. The story starts with an anecdote

The budget showed that 900 workers were being paid to dig caverns for the platforms as part of a 3.5-mile tunnel connecting the historic station to the Long Island Rail Road. But the accountant could only identify about 700 jobs that needed to be done, according to three project supervisors. Officials could not find any reason for the other 200 people to be there. …“All we knew is they were each being paid about $1,000 every day.”

Nice “work” if you can get it, as the old saying goes. A pretend job that pays $1,000 per day.

That makes the gravy train for federal bureaucrats seem miserly by comparison.

Unfortunately, that anecdote is just the tip of the iceberg. The entire project is a monument to how money gets wasted in New York City.

The estimated cost of the Long Island Rail Road project, known as “East Side Access,” has ballooned to $12 billion, or nearly $3.5 billion for each new mile of track — seven times the average elsewhere in the world. …a host of factors have contributed to the transit authority’s exorbitant capital costs. …public officials have stood by as a small group of politically connected labor unions, construction companies and consulting firms have amassed large profits.

In other words, the story’s headline is no exaggeration.

The special deals for unions are jaw-dropping.

Trade unions, which have closely aligned themselves with Gov. Andrew M. Cuomo and other politicians, have secured deals requiring underground construction work to be staffed by as many as four times more laborers than elsewhere in the world, documents show. …Worker wages and labor conditions are determined through negotiations between the unions and the companies, none of whom have any incentive to control costs. The transit authority has made no attempt to intervene to contain the spending.

The featherbedding belies belief.

Mr. Roach, a California-based tunneling contractor, was…stunned by how many people were operating the machine churning through soil to create the tunnel. “I actually started counting because I was so surprised, and I counted 25 or 26 people,” he said. “That’s three times what I’m used to.” …documents reveal a dizzying maze of jobs, many of which do not exist on projects elsewhere. There are “nippers” to watch material being moved around and “hog house tenders” to supervise the break room. Each crane must have an “oiler,” a relic of a time when they needed frequent lubrication. Standby electricians and plumbers are to be on hand at all times, as is at least one “master mechanic.” Generators and elevators must have their own operators, even though they are automatic. …In New York, “underground construction employs approximately four times the number of personnel as in similar jobs in Asia, Australia, or Europe,” according to an internal report by Arup, a consulting firm that worked on…many similar projects around the world.

The international cost comparisons are the most persuasive part of the story.

Taxpayers in New York City are paying far more to get far less.

…transit construction is booming around the world. At least 150 projects have been initiated since 1990, according to a recent study by Yale University researcher David Schleicher. The approximate average cost of the projects — both in the U.S. and abroad — has been less than $500 million per track mile, the study concluded. “There was one glaring exception,” Mr. Schleicher said. “New York.”

If you want a partial explanation of why this staggering level of graft and corruption is allowed, this sentence is a good place to start.

The unions working on M.T.A. projects have donated more than $1 million combined to Mr. Cuomo during his administration, records show.

And I’m sure huge amounts of money have also been diverted to city politicians as well.

It’s almost as if the whole thing is a racket, with politicians and union bosses conspiring to rip off taxpayers.

“Almost”? I must be getting soft in my old age. Let me rephrase that sentence: It is a racket to rip off taxpayers.

But let’s be fair. I don’t want to imply that it’s all the fault of the unions. The contractors also buy off the politicians.

…the…main engineering firm: WSP USA, …has donated hundreds of thousands to politicians in recent years, and has hired so many transit officials that some in the system refer to it as “the M.T.A. retirement home.”

Speaking of the M.T.A., the bureaucrats also get a sweet deal, with the rest of us picking up the tab.

More than a dozen M.T.A. workers were fined for accepting gifts from contractors during that time, records show. …A Times analysis of the 25 M.T.A. agency presidents who have left over the past two decades found that at least 18 of them became consultants or went to work for authority contractors, including many who have worked on expansion projects. “Is it rigged? Yes,” said Charles G. Moerdler, who has served on the M.T.A. board since 2010.

There’s a lot more to read in the article, including details on how a big French infrastructure project is being built at far lower cost.

It’s basically a perfect example of what Milton Friedman said about what happens when you get to spend other people’s money.

For instance, the story also has grim data about cost overruns, which are a routine feature of government infrastructure scams, both in America and other nations.

But one thing that isn’t in the report is the degree to which Washington is subsidizing this wretched boondoggle.

This is the part that irks me. I wouldn’t get too upset if New York City politicians were conspiring with interest groups to rip off New York City taxpayers. Heck, I wouldn’t even care if they were ripping off taxpayers from elsewhere in the state.

But the fact that I’m also paying for this pork-barrel project is very distressing. And it helps to explain why I want to shut down the Department of Transportation in Washington. That’s the real moral of this story.

P.S. Trump’s infrastructure plan will be unveiled next year. I’m not overflowing with optimism, but hope springs eternal that maybe he’ll listen to my advice.

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Nightmare for New York and California: Tax Reform Will Put Added Pressure on High-Tax States

The right kind of tax reform can help people directly and indirectly.

• They benefit directly if reform reduces their tax burden and gives them more take-home income.
• They benefit indirectly if reform increases growth and leads to additional pre-tax income.

For what it’s worth, I think the indirect impact is most important for family finances, and I discussed the potential benefits of faster growth in this recent interview on Fox Business.

But for today’s column, I want to focus on the final portion of the interview, when I pontificated on how limiting the state and local tax deduction is going to motivate some successful taxpayers to “vote with their  feet” and therefore put additional pressure on high-tax states.

And if we get lower tax rates at the state level, we can include that outcome as another indirect benefit of federal tax reform.

I’m leery of predictions, but I think this will happen. The bottom line is that high-income taxpayers – even before tax reform from Washington – have been escaping from states such as Illinois and California. Here are some fun facts from a recent column in National Review based on IRS data.

Last month, the Internal Revenue Service released the latest tax and migration numbers for 2015 and 2016. …the latest figures show that Florida is seeing an overwhelming influx of taxpayers from other states. In 2015 and 2016, the Sunshine State attracted a staggering net inflow of $17.4 billion in adjusted gross incomes. …the IRS is able to break down new residents by age groups. During the 2015–16 reporting period, nearly 70,000 tax filers between the ages of 26 and 35 moved into the state. That age group accounted for the biggest influx of new Florida residents, over ten thousand more than the 55-and-over category. …The states that lost the most net taxpayers in both dollar and percentage terms relative to their existing tax bases are Connecticut (–$2.7 billion) and New York (–$8.8 billion). What does this tell us? …the size of a state’s government matters. Florida’s per capita state spending is the lowest in the country… Connecticut, meanwhile, has the eighth highest per capita state spending, and New York ranks 15th. …New York has the second heaviest aggregate tax burden of any state, while Florida’s is the fourth lightest.

The Daily Caller combed through some new data from the Census Bureau.

Three Democratic-leaning states hemorrhaged hundreds of thousands of people in 2016 and 2017 as crime, high taxes and, in some cases, crummy weather had residents seeking greener pastures elsewhere. The exodus of residents was most pronounced in New York, which saw about 190,000 people leave the state between July 1, 2016 and July 1, 2017, according to U.S. Census Bureau data released last week. …Illinois lost so many residents that it dropped from the fifth to the sixth-most populous state in 2017, losing its previous spot to Pennsylvania. Just under 115,000 Illinois residents decamped for other states between July 2016 and July 2017. Since 2010, the Land of Lincoln has lost about 650,000 residents to other states on net… Illinois’ Democratic-dominated legislature has tried to ameliorate the situation with tax hikes, causing even more people to leave and throwing the state into a demographic spiral. Illinois experiences a net loss of about 33,000 residents in 2016, the fourth consecutive year of population decline. …California was the third deep blue state to experience significant domestic out-migration between July 2016 and July 2017, and it couldn’t blame the outflow on retirees searching for a more agreeable climate. About 138,000 residents left the state during that time period, second only to New York.

Even the establishment media is noticing.

Here are excerpts from a recent report in the Mercury News.

A growing number of Bay Area residents — besieged by home prices, worsening traffic, high taxes and a generally more expensive cost of living — believe life would be better just about anywhere else but here. During the 12 months ending June 30, the number of people leaving California for another state exceeded by 61,100 the number who moved here from elsewhere in the U.S., according to state Finance Department statistics. The so-called “net outward migration” was the largest since 2011, when 63,300 more people fled California than entered. …”They are tired of the state of California and the endless taxes here,” said Scott McElfresh, a certified moving consultant. “People are getting soaked every time they turn around.”

And now that state and local taxes will no longer be fully deductible, this out-migration is going to accelerate. Which, of course, will mean added pressure for lower tax rates in states like New York and California. And New Jersey, Illinois, and Connecticut.

Here are some excerpts from a story from Yahoo Finance.

Wall Street tax expert Robert Willens, president of Robert Willens LLC, has never heard more discussion from wealthy New Yorkers about relocating to another state with a more favorable tax environment until now because of the GOP tax plan. “Everybody I speak to brings this up. Every NYC resident I speak to asks about the feasibility involved in doing it,” Willens, who regularly advises hedge fund clients on tax matters as it relates to investing, told Yahoo Finance. “I’ve been doing this more than 40 years, and never heard more discussion about relocating than recently.” …“He believes it will devastate NY (and, to a lesser extent, CA), primarily by ending or severely limiting the deduction of the very high state and local taxes. He estimated that his tax rate (and others [similarly] situated) will go from mid-30% to 56%, which will trigger a massive exodus from NY to places like Florida, which will crush the NYC (and therefore state) economy.” …Kelly Smallridge, the president and CEO of Palm Beach County’s Business Development Board, has seen an uptick in activity from CEOs looking to explore Florida since there’s no state tax on personal income. …The move from the northeast to Florida has been somewhat of a trend in recent years. In the last five years, 60 financial services firms have relocated to the Palm Beach area, Smallridge noted.

If you want to know what states are most vulnerable, the Tax Foundation’s map of state income tax burdens is a good place to start. Also, the Tax Foundation’s State Business Tax Climate Index is another measure of which states over-tax their citizens.

And here’s a survey of small business sentiment that shows which states are viewed as having unfriendly tax codes. Green is good and orange is bad.

And it’s also worth reviewing the evidence that already exists for tax-motivated migration.

Here’s a map showing the entire country and here’s a map showing the exodus from California.

Let’s close with this amusing cartoon strip.

Very clever. Sort of reminds me of these two cartoons (here and here) on the economic rivalry between Texas and California.

P.S. The folks at Redpanels, by the way, also have produced great cartoons on Keynesian economics, communism, the minimum wage, basic income, and infrastructure.

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Is Greece Ready for a Ronald Reagan or Margaret Thatcher?

I’ve written that it’s theoretically possible for Greece to pay its debts and restore prosperity.

After all, it’s simply a matter of obeying fiscal policy’s Golden Rule and reforming a suffocating tax system.

But I’ve always figured none of that will happen because Greek voters would never vote for a government that favors Reagan-style or Thatcher-style economic reforms.

Simply stated, there are too may Greek people living off the state. But that’s just part of the problem. An even bigger obstacle to reform is that the people have decided that it’s morally acceptable to mooch off the government.

As a result, I’ve assumed that Greece has passed a tipping point because the moral foundation of Greek society has been corroded by dependency. And it’s very difficult to put that toothpaste back in the tube.

But maybe I’ve been wrong. Courtesy of the great people at the Atlas Network, here’s some remarkable polling data from Greece.

…the people may finally be fed up with big government, runaway spending, public-sector corruption, and job-killing regulations. A recent in-depth survey, published by the daily Kathimerini newspaper and the new think tank Dianeosis, reveals that Greek society seems to be experiencing an ideological sea change.

On a philosophical level, Greeks seem to be embracing the principles of classical liberalism.

In Greece, the term “liberalism” retains its classical meaning of support for individual liberty, free markets, and social tolerance. The latest finding from the Dianeosis poll shows that 27 percent of respondents identify as either liberal or neoliberal, together making the largest ideological group for the country’s overall population. These ideas have taken even stronger hold among the rising generation, with an astonishing 50 percent of Greek youth identifying as either liberals or neoliberals.

And this translates into greater support for small-government policies.

About 60 percent agree that government is intervening too much in economic matters, and thereby prevents the private sector from creating jobs and wealth.

Here’s some of the relevant polling data.

It’s also encouraging to see that there was movement in the right direction between April 2015 and December 2016.

On a policy level, the Greeks now seem to recognize that the state is too big.

Even more telling is that the majority of Greeks, 55 percent, believe that lower taxation is preferable even if that results in less government welfare. This finding is particularly important because two years ago only 39.2 percent agreed with that statement.

Here are those numbers from the survey.

The last bit of good news from the survey is that Greeks have positive feelings about market-oriented terms.

Greeks today also seem to show overwhelming support for many fundamental concepts of the free-market tradition. About 73 percent agreed that “markets” have a positive connotation…a primary reason for this turn toward free markets is that the government regimes in Greece have clearly failed, thereby tainting their devotion to destructive statism and populism. This has caused many Greeks to consider economic freedom as a viable solution for the country’s devastating problems.

On the other hand, the country they most want to mimic is Sweden.

And it’s not even close (though I wonder if this chart would look different if Switzerland and Hong Kong were options).

You may be wondering (like me) how the Greeks can tell pollsters they want smaller government while simultaneously picking Sweden as a role model?

The pessimistic answer is that Greeks don’t know what they’re talking about. Or maybe they are hypocrites, willing to pay lip service to economic liberty but ultimately yearning for a cradle-to-grave welfare state.

The optimistic answer is that Sweden actually is a pretty good role model.

Check out this comparison of Greece and Sweden, based on data from Economic Freedom of the World. Sweden is ranked #27, which is in the top-20 percent of nations for economic liberty. Greece, by contrast, is way down at #116.

Yes, both countries have terrible fiscal policy, but it turns out that Sweden is very market-oriented in areas like money, trade, regulation, and rule of law. And even though it still has a long way to go, Sweden significantly improved fiscal policy in the 1990s and has even enjoyed some modest improvement in recent years.

That’s definitely not the case in Greece.

In other words, I certainly don’t mind if Swedish policy is the short-run goal for Greek voters. If they ever get to that point, then I’ll try to convince them to go the Full Hong Kong.

P.S. In the real world, are there any examples of countries that have escaped statism and enjoyed something akin to a Greece-to-Sweden jump in economic liberty?

The answer is yes. Chile would be an obvious example, as would certain post-Soviet Bloc nations such as Estonia.

It would be great to add Greece to the collection.

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Plenty of Fat and Waste to Cut at the United Nations, Part I

I expressed approval when Trump proposed to reduce U.S. funding for international bureaucracies, mostly because of my disdain for the statist policy agenda of the International Monetary Fund and Organization for Economic Cooperation and Development.

Sadly, there’s has not been much follow-through by the White House, and it looks like Congress isn’t going to cut either the funding or the authority of these bloated institutions. And that means they will continue to advocate for class-warfare tax policy and bigger government.

But, as reported by AFP, some seeds were planted early in the year that may eventually save money for taxpayers.

…a draft executive order…prepared at the White House could deprive the United Nations of billions of dollars in US financial support. The United States is by far the UN’s biggest financial contributor, providing 22 percent of its operating budget and funding 28 percent of peacekeeping missions, which currently cost $7.8 billion annually. …The Trump administration is proposing a 40 percent cut in some US funding, according to the draft executive order titled “Auditing and Reducing US Funding of International Organizations.”

And it appears that some of the seeds germinated. According to the Associated Press, steps are being taken to reduce the fiscal burden of the United Nations.

The U.S. government says it has negotiated a significant cut in the United Nations budget. The U.S. Mission to the United Nations said on Sunday that the U.N.’s 2018-2019 budget would be slashed by over $285 million. The mission said reductions would also be made to the U.N.’s management and support functions. The announcement didn’t make clear the entire amount of the budget or specify what effect the cut would have on the U.S. contribution. U.S. ambassador to the U.N. Nikki Haley said that the “inefficiency and overspending” of the organization is well-known, and she would not let “the generosity of the American people be taken advantage of.”

By the way, “nicked” or “trimmed” would be more accurate than “slashed.”

Nonetheless, at least it’s a small step in the right direction.

And the recent U.N. vote against the U.S. may lead to additional budgetary savings, as explained in the Wall Street Journal by John Bolton, a former ambassador from the United States to that bureaucracy.

…the U.N. showed its true colors with a 128-9 vote condemning President Trump’s recognition of Jerusalem as Israel’s capital. …America is heard much more clearly at the U.N. when it puts its money where its mouth is. …the White House should also reconsider how Washington funds the U.N. more broadly. …Despite decades of U.N. “reform” efforts, little or nothing in its culture or effectiveness has changed. …Turtle Bay has been impervious to reform largely because most U.N. budgets are financed through effectively mandatory contributions. Under this system, calculated by a “capacity to pay” formula, each U.N. member is assigned a fixed percentage of each agency’s budget to contribute. The highest assessment is 22%, paid by the U.S. This far exceeds other major economies… The U.S. should reject this international taxation regime and move instead to voluntary contributions. This means paying only for what the country wants—and expecting to get what it pays for. Agencies failing to deliver will see their budgets cut, modestly or substantially. Perhaps America will depart some organizations entirely.

Bolton has some targets in mind.

…earlier this year the U.N. dispatched a special rapporteur to investigate poverty in the U.S.? American taxpayers effectively paid a progressive professor to lecture them about how evil their country is. The U.N.’s five regional economic and social councils, which have no concrete accomplishments, don’t deserve American funding either. …Next come vast swaths of U.N. bureaucracy. Most of these budgets could be slashed with little or no real-world impact. Start with the Office for Disarmament Affairs. The U.N. Development Program is another example. Significant savings could be realized by reducing other U.N. offices that are little more than self-licking ice cream cones, including many dealing with “Palestinian” questions. …Thus could Mr. Trump revolutionize the U.N. system. The swamp in Turtle Bay might be drained much more quickly than the one in Washington.

And Rich Lowry of National Review didn’t even wait for the latest controversy.

Here are some excerpts from a column he wrote in late 2016.

We are the chief funder of a swollen, unaccountable U.N. apparatus that has been a gross disappointment for more than 70 years now. …As early as 1947, a U.S. Senate committee flagged “serious problems of overlap, duplication of effort, weak coordination, proliferating mandates and programs, and overly generous compensation of staff within the infant, but rapidly growing, UN system.” And those were the early, lean years. We pay more than anyone else to keep the U.N. in business, about 22 percent of the U.N.’s regular budget. …Because nothing involving the U.N. is clean or straightforward, it’s hard to even know how much the U.S. pays in total into the U.N. system. But it’s probably around $8 billion a year. We should withhold some significant portion of it.

My view, for what it’s worth, is that the United Nations is better (less worse?) than the OECD or IMF.

But that’s mostly because it doesn’t have much power. When it does try to intervene in policy (global warming and gun control, for instance, as well as the Internet, the War on Drugs, monetary policy, and taxpayer-financed birth control), the U.N. inevitably urges more power and control for government.

If you think I’m exaggerating about a statist mindset at the United Nations, check out this jaw-dropping tweet from a high-level bureaucrat.

Wow. Before capitalism, as explained in videos by Deirdre McCloskey and Don Boudreaux, human existence was characterized by grinding poverty. But once free markets were unleashed, the world has enjoyed unprecedented prosperity.

Yet this liberating and enriching system is “an urgent threat” according to the United Nations.

Wouldn’t it be more appropriate if the bureaucrat who sent out this tweet instead focused on hellholes where the free market is suppressed and persecuted – such as Venezuela, North Korea, Zimbabwe, and Cuba?

My friend Walter Williams perhaps has the best response to the U.N.’s vapid sentiment (h/t: libertarian Reddit).

Others share my concern, as illustrated by this passage from a column in the U.K.-based Daily Telegraph.

Hillel Neuer, the head of UN Watch, a campaign group, called this a “loony tweet”, adding: “While millions of people are suffering from genocide, sexual slavery and starvation, it is far from clear why the UN would instead focus its attention on unidentifiable ‘urgent threats’, let alone on economic subjects about which it has neither competence nor expertise.” Mr Neuer pointed out that socialist economics had brought misery to Venezuela without drawing similar criticism from the UN. “The same UN human rights office has failed to issue a single tweet about this past month’s dire human rights crisis in Venezuela, where millions face mass hunger in part due to attacks on the free market,” he said.

Let’s look at other examples of U.N. statism.

For example, the bureaucrats are inserting themselves in American racial issues.

The history of slavery in the United States justifies reparations for African Americans, argues a recent report by a U.N.-affiliated group based in Geneva. …The group of experts, which includes leading human rights lawyers from around the world, presented its findings to the United Nations Human Rights Council on Monday, pointing to the continuing link between present injustices and the dark chapters of American history. “In particular, the legacy of colonial history, enslavement, racial subordination and segregation, racial terrorism and racial inequality in the United States remains a serious challenge, as there has been no real commitment to reparations and to truth and reconciliation for people of African descent,” the report stated. …The reparations could come in a variety of forms, according to the panel, including “a formal apology, health initiatives, educational opportunities … psychological rehabilitation, technology transfer and financial support, and debt cancellation.”

By the way, I’m fine with a formal apology (assuming one hasn’t already been issued). Slavery is a stain on American history, after all.

And I’d be delighted to see a massive school choice initiative, which would benefit students from all backgrounds, but I strongly suspect black kids would disproportionately gain.

I fear, though, that the U.N. panel is primarily interested in “financial support,” which is simply a euphemism for a bigger welfare state. And since the current welfare state already has caused great damage to the black community, making it even bigger would be very ill-advised.

Here’s another example of bizarre policy from a division of the United Nations. The bureaucrats at the World Health Organization want to classify the absence of a sexual partner as a disability.

…the World Health Organisation will change the standard to suggest that a person who is unable to find a suitable sexual partner or is lacking a sexual relationship to have children – will now be equally classified as disabled. WHO says the change will give every individual “the right to reproduce”. …Gareth Johnson MP, former chair of the All Parliamentary Group on Infertility, whose own children were born thanks to fertility treatment, said: “I’m in general a supporter of IVF. But I’ve never regarded infertility as a disability or a disease but rather a medical matter. …Dr David Adamson, an author of the new standards, argued…”It puts a stake in the ground and says an individual’s got a right to reproduce whether or not they have a partner. It’s a big change. …It sets an international legal standard. Countries are bound by it.”

Hey, I’m had many tragic periods of celibacy in my life and I never even got a handicapped parking sticker!

More seriously, I have great sympathy for people with fertility issues. Not only because I have empathy for them, but also because of my concerns about demographic decline.

But there’s a big difference between saying that people have a right to try to have children and the U.N.’s assertion that others are obliged to help people have children.

It doesn’t help that the U.N. newest top bureaucrat has a very dismal track record.

Here are some of the grim details from Claudia Rosett.

…former Prime Minister of Portugal Antonio Guterres…brings to the job a record that suggests he is a perfect fit to head a UN that is prone to overreach, mismanagement, waste, fraud, abuse and government meddling in every aspect of life — provided we all want even more of the same. …Guterres also served as president of the Socialist International, from 1999-2005… From 2005-2015, Guterres served as high commissioner of the UN agency for refugees (UNHCR)… That sounds great, except the UN’s own auditors…issued an audit report identifying a series of “critical” lapses by the UNHCR under Guterres’s management. …If that’s how Guterres managed — or mismanaged — a single UN agency while running it for more than a decade, is it likely he will do a better job as secretary-general? …we get a longtime socialist with a record of managerial incompetence, heading a multi-billion dollar, diplomatically immune, opaque, globe-girdling organization funded with billions of other people’s money (America, which bankrolls roughly one-quarter of the UN system with your tax dollars, being the largest contributor). What could go wrong?

The answer to Claudia’s question is that we’ll probably get business as usual.

And since that means more waste and more advocacy of bad policy, that’s unfortunate news for taxpayers all over the world.

So I’m keeping my fingers crossed that the Trump Administration does the right thing and puts the U.N. on a diet.

Let’s close with some humor. Here’s a Jeff MacNelly cartoon, presumably from way back in the 1970s.

P.S. In my experience, many U.N. officials and bureaucrats are smart, well-meaning people. But as I noted during a trip to Switzerland back in 2009, it would be much better if they were in the private sector where their skills and abilities could be used for expanding prosperity.

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A Karl Marx Christmas vs. an Ayn Rand Christmas

Over the years, I’ve shared examples of a politically correct Christmas, several versions of a TSA Christmas (here, here, and here), a couple of versions of The Night Before Christmas (here and here), and even a story of Santa Claus getting busted by the IRS.

But one of my favorites is the poster asking whether Santa Claus is on the left or on right.

Is he more like Bernie Sanders because he “gives out lots of free stuff”?

Or is he more like Paul Ryan because he “is a maker, not a taker”?

Amusing, but it’s time to take this this to the next level. Right or left is too mainstream. Let’s ask the more fundamental question: Is Christmas a Marxist holiday or a Randian holiday ?

We’ll start with the first option. Here’s a cartoon strip that would make Karl Marx smile.

Now let’s look at some Christmas spirit from Ayn Rand.

There are 21 satirical Randian Christmas cards to choose from. Here are the two that I found most amusing.

And…

Ouch. While I’m a fan of Atlas Shrugged and think Rand was a net plus for the cause of liberty, I’m not a Randian and these quotes are a good example of why her philosophy of objectivism leaves something to be desired.

But this isn’t a day for serious discussion.

So I’ll close by linking to some clever Obama-era Christmas cartoons (here, here, and here).

And this one-liner from Jay Leno is always worth a chuckle.

Last but not least, here’s a cartoon video showing what would happen if Obama ran the North Pole and another video with Santa grousing about unhelpful policies from Washington.

Merry Christmas everyone.

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The (Spending) Nightmare Before Christmas

Yesterday’s column about “the tax nightmare before Christmas” was based on my fear that politicians will try to impose a value-added tax at some point in the not-too-distant future.

Today’s column is about the spending nightmare that is already happening. The bottom line, as expressed in this clip from a recent interview with Neil Cavuto, is that Republicans are not doing what’s right for the country.

Need some evidence?

How about  what was reported today in the Hill?

Lawmakers are under pressure to get a deal to increase the budget caps and prevent automatic across-the-board spending cuts, known as sequestration. …a deal has remained elusive, with both sides battling over how much to increase both defense and nondefense spending.

Needless to say, they should be battling over how much to cut spending, not how much to increase it.

Unfortunately, the propensity to over-spend is a long-standing pattern. In an uncharacteristic episode of fiscal sanity, Congress enacted the Budget Control Act in 2011, which then led to a much-needed sequestration early in 2013.

But ever since that point, as explained back in 2015 by the New York Times, politicians have been figuring out ways to get out from under this modest bit of fiscal discipline.

They raised the spending caps at the end of 2013.

And raised the spending caps again in 2015.

In other words, GOP fecklessness isn’t anything new.

Here’s another clip from the recent Cavuto interview. I argue for spending caps with sequester enforcement.

But I confess that enacting such caps is just part of the battle. The real challenge is making sure politicians can’t wiggle out from under such fiscal constraints.

In my fantasy world, we avoid that problem by making spending restraint part of the Constitution, an approach that has been very successful for Hong Kong and Switzerland.

That doesn’t seem likely any time soon in America.

And let’s not forget that Republicans also are poised to splurge on a new “emergency” package – and this money would be exempt from spending caps. Here’s another portion of the Hill story.

The $81 billion package provides aid for communities affected by recent hurricanes in Texas, Florida, Puerto Rico and the U.S. Virgin Islands, as well as wildfires in California. The Senate is expected to take the legislation up once they return to Washington.

And the bill is turning into a bidding war, thanks in part to some supposed fiscal conservatives.

…Cornyn and fellow Texas GOP Sen. Ted Cruz want… more funding for their state’s Hurricane Harvey recovery efforts. …Cruz said…his state, which he said had up to $180 billion in hurricane damage, would only be eligible for a small portion of the money in the House bill. But any push to help Texas would likely set off a demand from other delegations for help responding to wildfires in California, as well as additional funding for hurricane relief in Puerto Rico. Rep. Luis Gutiérrez (D-Ill.)…said that Puerto Rico needs an estimated $94 billion to rebuild.

I don’t think the federal government should be in the business of compensating people for losses following natural disasters. That simply rewards those who go without insurance while also creating perverse incentives to build in risky areas.

But if politicians actually think that it’s the federal government’s responsibility, then they should reduce other spending to finance supposed emergencies. Heck, FDR and Truman did this for World War II and the Korean War, and they weren’t exactly fiscal conservatives.

Let’s close with some additional bad news. What’s written above relates to the GOP’s failure to control “discretionary” spending. That’s the part of the budget that funds the Pentagon, as well as providing most of the outlays for departments that shouldn’t even exist (such as Transportation, Housing and Urban Development, Education, Energy, and Agriculture).

If you really want to be depressed, keep in mind that Republicans also are dropping the ball on “entitlements,” which are programs that are designed to automatically increase every year (such as Social Security, Medicare, and Medicaid) and are largely responsible for America’s very grim long-run fiscal outlook.

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The (Tax) Nightmare Before Christmas

I never saw The Nightmare Before Christmas, a 1993 film. But that’s fine, because I am already dealing with my own nightmare with the holiday just around the corner.

What’s haunting me in the specter of a value-added tax, which some reporters now think is a clear and present danger (my concern, not theirs).

We’ll start with this disconcerting report a couple of days ago from Politico.

Is the real lesson from tax reform that Americans rely too much on the income tax to fund their government? …Most other industrial nations lighten the load on their income tax by combining it with some form of consumption taxes… “If you want a code that is predictable and simple and competitive with rates on the global market place, you have to bring in other sources of income, other than the income tax,” said Sen. Ben Cardin (D-Md.). “A progressive consumption tax is the most logical way to move forward but we’re not there yet. I think ultimately we’ll get there.”

By the way, there’s a huge mistake in the above excerpt.

I don’t know if it’s because of dishonesty of incompetence, but the reporter is wrong to claim that other nations “lighten the load of their income tax.” Here’s a chart, based on OECD data, comparing the burden of personal income tax for the U.S. and Western Europe.

In other words, governments adopt VATs because politicians want to spend more.

And what sort of spending will we get?

Our statist friends are salivating at the thought of financing a bigger welfare state.

As a rule, the regressive nature of consumption taxes makes them less attractive to Democrats. But given concerns about climate change, a carbon tax is one consumption tax that has begun to attract some following. And economist Henry Aaron at the non-profit Brookings Institution said Democrats are “short-sighted” if they reject consumption taxes… Given the aging population and desire to do more to help workers adjust to technologies that threaten their jobs, the needs are there. “The bulk of redistribution occurs on the expenditure side of the budget,” Aaron said. “Those of us who want more progressivity would rather see a progressive tax … but the impact on income redistribution is going to be overwhelmed by what is done with revenue on the expenditure side. That’s going to completely overwhelm any regressivity in the collection mechanism.”

And here are some excerpts from a Yahoo column from earlier this month.

We’re being warned that politicians will use the next fiscal crisis to impose a VAT.

…at some point, the United States will have to reduce annual deficits that could swell to $1 trillion per year as early as 2019. Republicans would prefer to solve that problem by cutting social spending. But that seems unlikely. To make a difference, cuts in programs such as Social Security and Medicare would have to be vast, which would outrage voters. A more likely solution is a national consumption tax, otherwise known as a value-added tax, or VAT. “A 5% VAT would raise an enormous amount of money,” says Jeremy Scott, a tax attorney who is vice president of editorial at the publisher Tax Analysts. “The next major fiscal crisis might be followed by a VAT.”

Gee, isn’t that wonderful. The politicians will spend us into a fiscal cul-de-sac, and then use that spending crisis as an excuse to seize more of our money.

And I can’t resist sharing this passage to remind folks that those of us who opposed the “border-adjustment tax” were on the side of the angels. The BAT was basically a pre-VAT.

House Republicans actually proposed a tax similar to a VAT in the tax plan they introduced in 2016, and carried into 2017 as the starting point for the Trump tax cuts. That tax alone would have raised $1.2 trillion in new revenue during the first decade and more during the second decade — a large pot of new funds that would have allowed significant cuts elsewhere in the tax code. That tax was controversial, however, and Trump declared it too complicated. So House Republicans dropped it. Still, old ideas have a way of coming back around in Washington.

Yes, it is certainly the case that bad ideas never go away in Washington.

Let’s close with an amusing poem from Reddit‘s libertarian page.

VAT a poem by Roger McGough
byu/AverageJoeSkeptic inLibertarian

P.S. If minimalist poetry isn’t your cup of tea, you can enjoy some cartoons about the VAT by clicking here, here, and here.

P.P.S. The 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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Great Moments in International Taxation

Back in 2013, I wrote about a gay guy adopting his long-time lover in order to escape the evil and pernicious death tax. I speculated that this would cause confusion and angst in some circles.

• Traditional leftists would want to applaud the adoption because of their support for gay rights, but they would be conflicted because of their support for the death tax.
• Traditional conservatives, by contrast, would dislike the way adoption laws were being used, but presumably like the fact that the reach of the death tax was being curtailed.

Now we have a somewhat similar example of the death tax leading people to take an unusual step.

Here are some excerpts from a report in the Belfast Telegraph.

Two best friends in the Republic of Ireland who have decided to get married to avoid paying inheritance tax… Michael O’Sullivan, a father of three, is set to marry his friend Matt Murphy in January. …Friends for almost 30 years they have made the decision so that Michael will inherit Matt’s home in Stoneybatter, Dublin when he dies. …Neither man is gay and say they are like brothers.

Not only will this save them money, it will be beneficial for other taxpayers as well.

Both men say they are currently on a small pension and say their idea is “saving the State money”. Michael said: “We found out from a friend of mine that she is paying €1,760 a week to stay in a nursing home, okay I could put Matt in a nursing home and then people would be paying their tax to look after him in the nursing home. “I don’t have much money and Matt can’t pay me to look after him but we tried to find out how much it would cost for a 24-hour care, you’re talking about a couple of thousand a week. “We are saving the State money.”

By the way, this story also may be an indirect example of excessive regulation.

It seems the guys could have received a subsidy from the government so that Michael could take care of Matt, but that would have triggered so much hassle and red tape that it wasn’t worth it.

“We didn’t go for the Carer’s Allowance because Matt would have to be examined, the house would have to be looked at.

Amen. Nobody welcomes a bunch of nosy bureaucrats poking through their life.

Now let’s zoom out and consider some broader policy implications.

I like and defend Ireland’s policy of aggressively using low corporate taxes to attract jobs and investment, but that doesn’t mean other policies in the country are favorable for taxpayers.

Indeed, there’s plenty of evidence that other taxes in that country are too high and it’s quite clear that the burden of government spending also is excessive.

The story doesn’t give details about the extent of the death tax, but it obviously must be punitive if two straight guys are marrying each other to dodge the levy.

In any event, it belongs in my collection of odd moments in international taxation.

• Bizarrely foolish tax policies, such as the German tax on online coffee sales that loses money for government.
• Heartening protests against government greed, such as Irish taxpayers refusing to pay a housing levy.
• Quirky examples of tax avoidance in Ukraine, Finland, Scotland, and Catalonia.
• Inexplicable taxation rules, such as porn being taxed at lower rates than high culture in Spain.
• Strange forms of tax enforcement, such as transgender tax collectors in Pakistan.
• Governments get very creative, such as a German plan to tax prostitutes with parking meters.
• Clever forms of tax avoidance, such as the Spanish theatre that gave free passes to patrons who bought lightly taxed carrots.
• X-rated tax protests, such as the brothel owner in Austria who provided free “services” to lower his tax bill.

It doesn’t really belong in this collection, but I think the oddest tax story I’ve ever read is that a bureaucrat from the tax-loving European Commission criticized France for excessive taxation.

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The Win-Win-Win-Loss of Tax Reform

Now that we have a final bill rather than a mere “agreement in principle,” let’s step back and consider some implications of tax reform.

There are three reasons to be pleased and one reason to worry.

Win: Less-destructive federal tax code

There are several provisions of the tax bill that will boost the economy, most notably dropping the federal corporate tax rate from 35 percent to 21 percent. Slightly lower individual tax rates will also help growth, as will provisions such as the expanded death tax exemption and the mitigation of the alternative minimum tax.

How much faster will the economy perform? There are several estimates, with microeconomic-based models predicting better outcomes that Keynesian-based models. Here are some findings from two market-based models.

From the Tax Foundation:

…we estimate that the plan would increase long-run GDP by 1.7 percent. The larger economy would translate into 1.5 percent higher wages and result in an additional 339,000 full-time equivalent jobs. Due to the larger economy and the broader tax base, the plan would generate $600 billion in additional permanent revenue over the next decade on a dynamic basis. Overall, the plan would decrease federal revenues by $1.47 trillion on a static basis and by $448 billion on a dynamic basis.

From the Heritage Foundations:

We project that the final bill will increase the level of gross domestic product (GDP) in the long run by 2.2 percent. To put that number in perspective, the increase in GDP translates into an increase of just under $3,000 per household. Though we only estimate the change in GDP over the long run, most of the increase in GDP would likely occur within the 10-year budget window. …the final bill would increase the capital stock related to equipment by 4.5 percent, and the capital stock related to structures by 9.4 percent. We also estimate that the number of hours worked would increase by 0.5 percent.

And here is an estimate from a partially market-based model at the Joint Committee on Taxation:

We estimate that this proposal would increase the level of output (as measured by real Gross Domestic Product (“GDP”) by about 0.7 percent on average over the 10-year budget window. That increase in output would increase revenues, relative to the conventional estimate of a loss of $1,436.8 billion by about $483 billion over that period. This budget effect would be partially offset by an increase in interest payments on the Federal debt of about $55 billion over the budget period. We expect that both an increase in GDP and resulting additional revenues would continue in the second decade after enactment, although at a lower level.*

And here is an estimate from a Keynesian-oriented model at the Tax Policy Center:

We find the legislation would boost US gross domestic product (GDP) 0.8 percent in 2018 and would have little effect on GDP in 2027 or 2037. The resulting increase in taxable incomes would reduce the revenue loss arising from the legislation by $186 billion from 2018 to 2027 (around 13 percent).

For what it’s worth, the market-based (or microeconomic-based) models are more accurate since they are based on the impact of tax-rate changes on incentives to engage in productive behavior.

That being said, proponents of tax reform should not expect Hong Kong-style growth. First, this is only a modest version of tax reform, not a game-changing step such as a simple and fair flat tax. As George Will opined today, “On a scale of importance from one (negligible) to 10 (stupendous), the legislation might be a three.”

Second, keep in mind that fiscal policy only accounts for about 20 percent of a nation’s economic performance. And if taxes and spending each account for half of that grade, policymakers in Washington have positively impacted a variable that determines 10 percent of America’s prosperity.

That may sound discouraging, but even small differences in economic growth make a big difference if sustained over time. As I noted in 2014:

…very modest changes in annual growth, if sustained over time, can yield big increases in household income. … long-run growth will average only 2.3% over the next 75 years. If good tax policy simply raised annual growth to 2.5%, it would mean about $4,500 of additional income for the average household within 25 years.

Win: Pressure for better tax policy in other nations

I consider myself to be the world’s bigger cheerleader and advocate of tax competition. I’ve even risked getting thrown in jail to promote fiscal rivalry between nations. And I’ve written several times about how this tax reform package is good because it will encourage better tax policy abroad (see here, here, and here).

I’ll bolster my argument today by sharing some excerpts from a Wall Street Journal editorial.

German economists at the Center for European Economic Research (ZEW) released a study last week finding that U.S. corporate tax reform will sharply improve incentives for foreigners to invest in America—at the expense of high-tax countries such as Germany. …In the ZEW model, U.S. firms needed a return of around 7.6% for an investment to be profitable under pre-reform tax law, compared to an EU average of 6%, and 5.7% in low-tax Ireland. The U.S. reform changes all this. America’s statutory and effective corporate rates will both be near the EU average, essentially even with Britain and the Netherlands and well below France (a 39% headline rate) and Germany (31%). …Companies from low-tax Ireland, high-tax Germany and the EU as a whole would all see their effective tax rates and their cost of capital for U.S. investment plummet under the reform.

Another German think tank reached a similar conclusion.

US administrations have refrained from any major corporate tax reform since that implemented by Reagan in 1986. This passivity has been remarkable in the sense that most industrial countries have put forward considerable corporate tax cuts in the last decades. This long period of inaction has now come to an end. …Without doubt, this far reaching corporate tax reform of the largest economy will change the setting of international tax competition.

And how will it change the setting?

First, a caveat. The German study looked at the likely impact of a 20-percent corporate rate, so keep in mind that updated numbers to reflect the 21-percent rate in the final deal would look slightly different.

Second, the corporate tax burden in the United States is still going to higher than the European average, even after the 21-percent rate is implemented. Here’s a chart from the German study and I’ve highlighted the current U.S. position and the post-tax reform position (“US_20%_Dep” is where we would be if “expensing” had been included).

Third, even though the reduction in the corporate rate is just a modest step in the right direction, it’s going to yield major benefits.

The US tax reform will affect the net-of-tax profitability of both inbound and outbound FDI as well as domestic investments. …in the case of Germany the reduction in the tax burden for German FDI in the US outweighs the reduction of the tax burden for US outbound FDI in Germany by almost factor 3. …FDI stocks in a country increases by 2.49% if the tax rate is reduced by one percentage point. … despite the overall expansion after the US tax reform which is expected to foster FDI in all countries, the US will benefit disproportionally by additional inward FDI. This comes at the cost of European countries which will face increasing outbound FDI flows to the US which are not accompanied with inbound FDI flows from the US in the same amount. …After the implementation of the US corporate tax reform, manufacturing FDI be particularly expanded. The US will attract additional inbound FDI of 113.5 billion EUR from investors located in the EU28. … European high-tax jurisdictions such as Germany will most likely be confronted with a higher net outflow of investments than European low-tax jurisdictions such as Ireland. Ultimately, the European high-tax jurisdictions will lose ground in the competition for FDI.

And here’s another chart from the study. It shows that it will be somewhat more profitable for U.S. companies to compete abroad, and a lot more profitable for foreign investors to put money in America.

Win: Pressure for better state tax policy

As I’ve repeatedly argued, getting rid of the deduction for state and local taxes is a very desirable policy. On the federal level, it’s good because that reform frees up some revenue that can be used to offset lower tax rates. On the state level, it’s good because politicians in high-tax areas will now feel a lot of pressure to lower tax rates.

Or, if you look at the glass being half empty, they’ll feel pressure not to further increase tax rates.

The Wall Street Journal has a new editorial on this topic, asking “how much will they have to cut income-tax rates to retain and attract the high-income earners who finance so much of their state budgets?”

The mere possibility is caused great angst in some circles.

New York Gov. Andrew Cuomo last weekend declared that the GOP bill’s limit on the state-and-local tax deduction will trigger “an economic civil war” between high- and low-tax states. California Governor Jerry Brown has likened Republicans to “mafia thugs” while Mr. Cuomo calls the bill a “dagger at the economic heart of New York.”

Though only a select slice of taxpayers will be impacted, and some of them are in red states.

…the tax math will be tricky for many high-earners in states with the highest tax rates. …high earners in states with top rates exceeding 6.56% could see their tax bills increase. The nearby table shows the 17 states with top income-tax rates exceeding 6.56%. The four with the highest income tax rates have Democratic Governors—California, New York, Oregon and Minnesota—and liberal political cultures heavily influenced by public unions. …Iowa ranks fifth with a top rate of 8.98% that hits at a mere $70,785 for married couples, which is more punitive than even New Jersey’s 8.87% that hits households making more than $500,000. Wisconsin (7.65%), Idaho (7.4%), South Carolina (7%), Arkansas (6.9%) and Nebraska (6.84%) are among Donald Trump -voting states that also make the high-tax list. …This ought to put pressure on high-tax Midwestern states such as Wisconsin, Iowa and Minnesota to reduce their rates.

But the ultra-high-tax blue states are the ones that will really feel the squeeze to lower tax rates.

…limiting the deduction will increase the existing rate divide between high- and low-tax states. New York, New Jersey and Connecticut have been losing billions of dollars each year in adjusted gross income from high earners fleeing to lower tax climes like Florida. Nevada will become an even more attractive tax haven for wealthy Californians. The problem is more acute when you consider that the top 1% of earners pay nearly 50% of state income taxes in California and New York, and 37% in New Jersey. States may experience significant budget carnage if more high earners defect. To head off a high-earner revolt, Mr. Cuomo could seek to eliminate the millionaire’s tax he campaigned against in 2010 but has repeatedly extended. Mr. Brown could campaign to repeal the 3% surcharge on millionaires he championed in 2012.

Loss: Failure to restrain federal spending puts tax reform at risk

Now that we’ve looked at three reasons to be optimistic about tax reform, let’s close with some grim news.

Republicans could have produced a far bolder tax reform plan had they been willing to restrain spending. That didn’t happen.

Instead, they only were able to produce a tax bill that featured a very modest – and temporary – amount of tax relief.

And because they were constrained by the budget numbers, many of the provisions impacting individuals are sunset at the end of 2025.

It’s not just a question of not doing the right thing. Republicans are actually making matters worse on the spending side of the budget. They are busting the budget caps and doing a lot of so-called emergency spending.

All this will come back to bite them when it’s time extend (or, better yet, make permanent) the provisions that are scheduled to expire. The bottom line if that it’s impossible to have a good tax code with an ever-growing burden of government spending.

* The Joint Committee on Taxation estimate is for the House-passed version of tax reform. An estimate of the final bill hasn’t been released, though it presumably will be similar.

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Even (some) Socialists Are Disowning Venezuela

I wrote a lengthy column yesterday on the horrific situation in Venezuela.

As I thought about the suffering, especially among the poor, I wondered whether Bernie Sanders and Joe Stiglitz are still willing to defend that country’s barbaric government.

And I also contemplated whether there are any comments from Jeremy Corbyn, Sean Penn, Jesse Jackson, Michael Moore, and Noam Chomsky, who also carried water in the past for that despicable regime.

Would these people still defend Venezuelan statism? And if they did, what could they possibly say?

It’s not my job to give advice to Sanders, Stiglitz, et al, but they may want to borrow the strategy of the Socialist Party in the United Kingdom. Those folks are actually arguing that the real problem with Venezuela is that it’s not socialist enough.

I’m not joking.

Let’s look at some recent tweets.

Venezuela has a capitalist economy with leftists managing it. Socialists want a class-free state-free money-free society of equals. Stop reporting fake news. pic.twitter.com/KHI7vytGLB

— The Socialist Party (@OfficialSPGB) December 10, 2017

To be fair, since there is still some degree of private ownership in the nation, the statism practiced in Venezuela is probably closer to fascism than pure socialism, so there was a tiny bit of merit to that tweet.

The U.K.’s socialists double down on this argument by claiming that true socialism only exists when there is collective ownership of the means of production.

Failed LEFTISM in Venezuela is being used to attack ‘socialism’ by those who support huge inequality and selfish greed. Let’s nail this lie. pic.twitter.com/tK9UfWQsOq

— The Socialist Party (@OfficialSPGB) August 4, 2017

That’s also a reasonable point. But on that basis, then it’s silly for anyone (like Bernie Sanders) to claim that places such as Denmark and Sweden are socialist.

Let’s take a look at one final tweet from Socialist Party on the other side of the Atlantic. What makes this one special is that they actually claim that North Korea is an example of capitalism.

Look, if you are really an ‘economics professor’, then you ought to know about economics. Especially the fundamental difference between capitalist and socialist economics. Any economy where production is intended to make profits (like Venezuela) is capitalist — not socialist. pic.twitter.com/XcqhPJvfGJ

— The Socialist Party (@OfficialSPGB) November 26, 2017

This is utterly bizarre. Are they smoking crack? In North Korea, the government does own and control the means of production (factories, mines, railways, etc).

If you read the fine print on the last row, you’ll see that they define socialism to exist only in a make-believe world where there’s basically no state. Anarcho-socialism, or something like that.

If that’s how they want to redefine socialism, then I have no problem with it. If a bunch of people want to set up some sort of commune based on voluntary sharing of everything, that’s fine with me so long as they don’t try to force me to either pay for it or be part of it.

I’ll simply close by noting that the Pilgrims used that model when they first landed in America and many of them starved to death.

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Six Months and 28 Examples of Venezuelan Horror

What country has the world’s worst government? It’s not an easy question. There may be a different set of answers based on whether the focus is political oppression or economic mismanagement.

Regardless of methodology, there are some nations that will probably show up on just about any list.

• Cuba
• North Korea
• Zimbabwe

Today, though, I want to make the case for Venezuela. That unfortunate country used to be rich compared to other Latin American nations, but decades of bad policy have now morphed into awful policy. The long-run drop in economic freedom – from 10th-freest to 159th-freest – is staggering.

Wow. Combined with growing political oppression, the country may zip through the fourth circle of statist hell and soon find itself in the fifth and final circle.

To grasp the horror of the situation, let’s look at what’s happened since April, when I put together a column of 28 headlines to capture the death throes of Venezuelan socialism.

Now, in just the last six months, we have another 28 examples.

On May 30, a column in the New York Times catalogued the misery in Venezuela.

…huge protests rocking Venezuela… President Nicolás Maduro has responded with an iron fist. More than 50 people have been killed, 1,000 injured, and 2,700 arrested, and that last figure doesn’t include the country’s more than 180 long-term political prisoners. …economic and humanitarian crisis. It is hard to overstate the severity of the suffering of the 31 million people of this once-rich country. …hospitals lack 98 percent of needed medical supplies and 85 of 100 drugs are totally unavailable. As a result, in the last year, some 11,500 infants died before their first birthday… Cases of malaria are up 76 percent and diphtheria, which had been eradicated 20 years ago, has returned to Venezuela.

On June 1, we learned about the bravery and ingenuity of protestors.

Daniella Liendo is gaining frontline practical experience as she completes her medical studies. …On the streets of Caracas this week, the second-year student treated a demonstrator who had been shot at close range with a marble pellet in the city’s Chacao neighbourhood. “Once we get to a patient we must decide with the more senior doctors if [the injured] must be taken away for treatment,” she said. “The most common problem is asphyxia from the tear gas. We’ve also had a lot of head traumas and burns to deal with.” …An exodus of Venezuelan medical graduates has meant that even those with the most basic training are in demand. An estimated 15,000 doctors have left to work abroad since 2003.

On June 2, Reuters exposed the gilded lives of the government elite.

One is shown blowing a kiss from a private jet. Another is seen posing in front of a store of luxury jeweler Cartier in China. Others grin as they tuck into a plate of lobster or a massive birthday cake. Venezuelan activists are increasingly posting details of locations and lifestyles of leftist officials and their families, depicting them as thriving off corruption while the population struggles to eat in a devastating economic crisis. …One Twitter account published photos purportedly showing the wife of Vice President Tareck El Aissami enjoying champagne and lounging on a pristine beach with her sisters. In another case, an alleged lover of a powerful Socialist Party official is shown on trips to the Middle East. Venezuela’s opposition accuses officials of profiting from currency controls and a decade-long oil boom to fill their pockets. The opposition-led congress estimates that at least $11 billion have “disappeared” from state-run oil company PDVSA .

On June 5, Fox reported on women driven to prostitution by poverty.

As a humanitarian and political crisis in neighboring Venezuela deepens, a growing number of Venezuelan women are working in bars and brothels across Colombia. “I didn’t do this in Venezuela. I never ever imagined I’d be doing this in Colombia,” said Maria, who…charges $17 for 15-minutes of sex, and the money earned is spent on buying medicine for her mother who has cancer. …According to Asmubuli, a Colombian sex workers association, currently there are around 4,500 Venezuelan sex workers in the country. …It’s not just women who say they have no option but to sell their bodies for sex, but young Venezuelan men too. Dorian, 25, started working in Bogota’s Lourdes Park about two weeks ago. “It’s disappointing. I’m disappointed in myself,” said Dorian, a business studies university graduate unable to find a job and with no money to pay for rent and food.

On June 6, we learned about the current regime’s utter depravity.

Norma Camero Reno has been shipping a steady supply of desperately needed medicines from the United States to Venezuela. Reno and other members of her nonprofit, Move Foundation, pack painkillers, cold medicines and other supplies to be distributed to hospitals, health clinics and churches throughout the beleaguered nation. Two weeks ago, however, that all changed. …Reno discovered that none of the recent medicine shipments had made it to her contacts in the country. …“They are stopping everything from going in,” Reno told Fox News. “They are taking everything for themselves.”

On June 28, a column in the New York Times condemned Maduro’s brutal regime.

Every day, Venezuelans of all stripes pour into the streets protesting the loss of their freedom and their constitutional rights by a tyrannical regime that condemns them to scarcity, illness, malnutrition and outright hunger. …There has been terrible economic and social destruction. Across 15 years, a trillion dollars’ worth of oil income has been squandered and 80 percent of Venezuelans have fallen into poverty. …Venezuela has become the Zimbabwe of the Americas, a shameless alliance of corrupt politicians and the military acquiescent to the dictates of Cuba. …They have kidnapped the Latin American nation that is richest in oil resources, which they wish to appropriate for themselves, permanently and at whatever human cost it may require.

On July 3, we learned that poor people are waking up to the downside of socialism.

In Caracas, the rich and poor are suddenly less divided. For most of Venezuela’s two-decade socialist experiment, the city’s wealthier, whiter east has been the hotbed of anti-government sentiment. Now, noisy protests are erupting in poorer-but-calmer western neighborhoods that were strongholds for embattled President Nicolas Maduro as crime explodes and medicine and food are scarce and expensive. …They’re increasingly demanding a change in government, infuriated by mismanagement… “Everyone protests, without differences, because the hunger of the stomach and the hunger for democracy have been united,” said Carlos Julio Rojas, a La Candelaria activist… Services are shaky in Caracas, particularly in the slums that surround the capital. Water pipes go dry for days at a time, trash sits rotting and lights go out.

On July 20, the Economist shared news of despair about the plight of Venezuelan women.

Barbara and her cousin Sophia have more serious business: they hope to make enough money from selling sex to live decently after fleeing Venezuela, where survival is a struggle. Barbara, who is 27, prefers her former occupation as the owner of a nail and hair business in Caracas, Venezuela’s capital. But polish and shampoo are as hard to find as food and medicine, and so she has come to Medellín. In an hour a sex worker can make the equivalent of a month’s minimum wage in Venezuela. Colombian pesos “are worth something”, unlike Venezuela’s debauched currency, the bolívar, Barbara says. “At least here one can eat breakfast and lunch.” …Some 4,500 Venezuelan prostitutes are thought to be working in Colombia… The sex workers are joined by electricians, mechanics, empanada vendors—all of whom are seeking a way to cope with their country’s shortages and queues, and an inflation rate expected to exceed 700% this year.

On July 30, a column in the Wall Street Journal analyzed the crumbing of Venezuela.

Hungry, hurting Venezuelans are done talking. The country is in the early stages of civil war. …In polls, some 80% of Venezuelans oppose Mr. Maduro’s “constituent assembly.” But the opposition boycotted Sunday’s election because they know Cuba is running things, that voter rolls are corrupted, and that there is no transparency in the operation of electronic voting machines. …faith and hope in a peaceful solution has been lost. One symptom of this desperation is the mass exodus under way. On Tuesday the Panam Post reported that “more than 26,000 people crossed the border into Colombia Monday, July 26… But a citizens’ revolt, led by young people whose families are starving, is already under way.

On July 31, we got a thorough analysis of economic chaos in Venezuela.

With per capita GDP down by 40% since 2013, Venezuela’s economic catastrophe dwarfs any in the history of the US, Western Europe, or the rest of Latin America. And yet headline GDP numbers actually understate the magnitude of the economy’s decline. …Venezuelans clearly want out – and it’s not hard to see why. Media worldwide have been reporting on Venezuela, documenting truly horrible situations, with images of starvation, hopelessness, and rage.

On August 2, the Associated Press published a first-person look at the country’s decline.

The first thing the muscled-up men did was take my cellphone. They had stopped me on the street as I left an interview in the hometown of the late President Hugo Chavez and wrangled me into a black SUV. …I had thought that being a foreign reporter protected me from the growing chaos in Venezuela. But with the country unraveling so fast, I was about to learn there was no way to remain insulated. I came to Caracas as a correspondent for The Associated Press in 2014, just in time to witness the country’s accelerating descent into a humanitarian catastrophe. …the men trained a camera on me for an interrogation. One said that I would end up like the American journalist who had recently been beheaded in Syria. Another said if I gave him a kiss I could go free. …In the end, the secret police cut me loose a few hours after they arrested me, with a warning not to return.

On August 7, a CNN story looked at Venezuela’s looming default.

he country, which is engulfed in crisis, …has other payments coming due in the near future and could fall short on those if the economy continues to tailspin… “This model is broken, and default is inevitable,” says Siobhan Morden, an expert in Latin American bonds at Nomura Holdings. …Venezuela’s economy continues to spiral our of control. The unofficial exchange rate that most Venezuelans use has more than doubled since late July. Inflation is expected to soar 720% this year and and over 2,000% next year, according to the International Monetary Fund.

On August 13, we learned about the plight of Jews in Venezuela.

Jews in Venezuela are increasingly fleeing the country amid the rising political instability and violence under President Nicolas Maduro, with a growing number decamping for Israel. Estella and Haim Sadna, a religious couple with four kids from the Venezuelan capital Caracas, described the food scarcity and rampant crime that drove them to move the Jewish state. …While Venezuela once had one of the largest Jewish communities in the region, numbering some 25,000 in 1999, only about 9,000 Jews are believed to remain in the country.

On August 15, the Miami Herald reported that even the military must beg for food.

Venezuelan soldiers — armed and in uniform — were caught in neighboring Guyana last week begging for food, local police reported, another sign of Venezuela’s deepening hunger crisis. …Hunger is on the rise in Venezuela, amid triple-digit inflation and the government’s inability to import basic goods. And neighboring Colombia, Brazil and Guyana have seen a spike in Venezuelans looking for food. …That soldiers would cross into Guyana is telling. The two nations have been locked in a centuries-old border dispute over a swath of Guyanese territory known as the Esequibo and are not on good terms.

On August 29, the incompetent brutality of the government was discussed.

…socialist policies exacerbated the oil crisis and created the poverty we see in Venezuela today. …the poorest economies in the world are characterized by oppressive government intervention. …In Venezuela’s case, a government takeover of the oil industry reduced supply, sowing the seeds of future impoverishment. …When Hugo Chavez took power in 1999, he…closed Venezuela’s oil fields to foreign investment and stopped reinvesting oil proceeds in the company. He fired 18,000 workers at PDVSA, replacing professional oil employees with inept but politically loyal workers. …Healthy non-oil industries could have diversified Venezuela’s economy and blunted the impact of falling oil prices. By strangling them, Chavez and his successor, Nicolas Maduro, forced the economy to rely more on oil at precisely the wrong time. …Commentators who dismiss Venezuela’s suffering as being caused by the oil crisis need to explain why other oil-dependent countries have not collapsed. According to the World Bank, seven nations rely more on oil than Venezuela. All seven saw economic growth from 2013 to 2017.

On September 11, it was reported that even the United Nations is appalled by the regime’s actions.

The United Nations human rights chief has said that Venezuelan security forces may have committed “crimes against humanity” against protesters and called for an international investigation. …Zeid said the government was using criminal proceedings against opposition leaders, arbitrary detentions, excessive use of force and ill-treatment of detainees, which in some cases amounted to torture. …Last month, Zeid’s office said Venezuela’s security forces had committed extensive and apparently deliberate human rights violations in crushing anti-government protests and that democracy was “barely alive”. …Venezuela is among the 47 members of the Human Rights Council, where it enjoys strong support from Cuba, Iran and other states.

On September 15, we learned more about the depravity of the socialist government.

The association Prepara Familia denounced yesterday the death of 11-year old Cristhian Malavé, contaminated with a bacteria from the hemodialysis unit of the the J. M. de los Ríos Children’s Hospital. He’s the fifth child to die of this cause. Others die of unattended complications and their records are blurred and their names are lost in view of a State unable to offer a response to our simplest and most urgent needs. …Tamara Suju, head of the Casla Institute, denounced in fron of the OAS the tortures and violations committed by public force officers against 289 people, protesters and citizens. There are complaints of assaults and rapes (with batons or firearms), feces force-feeding, electroshocks, beating, in most cases, and psychological torture, in all of them. The huge majority of victims are men, 79% between 18 and 30 years old. Torture in Venezuela went from selective to massive and no government representative has denied torture cases.

On September 22, the Miami Herald reported on the tragic growth of prostitution.

At a squat, concrete brothel on the muddy banks of the Arauca River, Gabriel Sánchez rattled off the previous jobs of the women who now sell their bodies at his establishment for $25 an hour. “We’ve got lots of teachers, some doctors, many professional women and one petroleum engineer,” he yelled over the din of vallenato music. “All of them showed up with their degrees in hand.” And all of them came from Venezuela. As Venezuela’s economy continues to collapse amid food shortages, …waves of economic refugees have fled the country. …with jobs scarce, many young — and not so young — women are turning to the world’s oldest profession to make ends meet. …“Prostitution obviously isn’t a good job,” she said. “But I’m thankful for it, because it’s allowing me to buy food and support my family.”

On September 25, we learned more about the suffering of the people.

As the economic and political crisis deepens in, so do the levels of hunger. A survey by a top university found the average Venezuelan has lost nine kilogrammes in the past year. Many families are now forced to scavenge for food in what was once South America’s richest country. At a soup kitchen run by the Catholic Church in Caracas, …many of the children are given a special formula after arriving, when they are found to be severely malnourished. …Venezuela’s prolonged and acute economic crisis – characterised by food shortages and hyperinflation – has seen infant mortality rise to almost 35 percent and maternal mortality to 65 percent in just the last year. Anemia is rampant.

On October 6, Reuters reported on the country’s miserable business environment.

With Venezuela’s economy in shambles, Ford has furloughed Nunez and 1200 colleagues at its moribund plant here in Valencia, Venezuela’s third-largest city. …Nunez hasn’t reported for work in ten months, save for a few days in September… But he still collects a quarter of his weekly salary of 50,000 bolivars, the equivalent of just $1.70 at the widely used black-market exchange rate. The father of two teenagers counts himself lucky. …Ford is among roughly 150 multinationals still hanging on in Venezuela. The once-prosperous OPEC nation is now in the fourth year of a recession caused by a fall in oil prices and, economists say, failed policies of its socialist government. …As of April 2016, half of Venezuela’s working population was either jobless or employed only in part-time, “informal” jobs.

On October 11, the horror of Venezuela was captured by a single story.

Conditions in socialist Venezuela are so diabolical that people are forced to eat cats in the street. A stomach-churning video shows a homeless woman sitting on the roadside with her possessions around her and a dead domestic cat in front of her. She painstakingly skins the cat and then slices off pieces of its body before popping them in her mouth. …Viewers have blamed the socialist government for leaving people penniless and hungry with price controls, soaring inflation and shortages of basic essentials.

On October 19, we learned more about the exodus from the socialist hellhole.

Ana Linares…earns about $15 a day — more than she made in a month in her native Venezuela. …Linares arrived in Lima last May after enduring a six-day bus trip from central Venezuela, her 8-month-old son on her lap… Life in Venezuela had become intolerable, with millions struggling with hyperinflation, food shortages, lack of work and lawlessness. “Everything there has turned ugly. There’s hunger and crime. You can’t leave your house after 5 p.m. because you’re going to be robbed or killed,” Linares said, adding that she now earns enough to afford three meals a day, an impossibility for many these days in Venezuela. …as many as 500,000 Venezuelans have fled their country in the last two years and a total of 2.1 million since 1998.

On November 3, Katherine Mangu-Ward of Reason correctly assigned blame for the horrible situation.

Venezuela—which is the midst of a brutal food shortages brought about by a brutal socialist regime—…continues to worsen. Good soldiers are rewarded with scarce basic necessities such as toilet paper. Citizens are urged to eat rabbits. Opposing forces have taken to the streetsas the country’s socialism descends into dictatorship. Meanwhile the government is reserving food aid for loyalists and others turn to bitcoin to survive.

On November 4, we learned that animals in zoos are on the menu because of starvation.

In a country that once was rich, but where people are beginning to starve, few animals are safe. One morning in August at the metropolitan zoo in the torrid city of Maracaibo, workers were shocked to find the bones of a buffalo and some wild pigs inside their cages with clear signs of mutilation. …In west Caracas, …the same sort of thing happened. Watchmen found the bones and offal of a black horse inside its enclosure. Apparently the perpetrators only took the edible parts of the animal.

Though the people eating zoo animals are the lucky ones.

Every Saturday, Natalí wakes up…dresses in a hurry and whenever she can she feeds something to her sons and daughters and tells them to wait patiently for her return. …Natalí takes a four-wheel-drive car, then a bus, and then the train from Antímano to municipal Coche Market in south Caracas where, for the last three and a half months, she has made her pilgrimage to dig through the garbage left by the vendors—trying to find a half-rotted vegetable, a piece of fruit, or, if luck is on her side, chicken skin to take back home and feed her children.

On November 19, a column in the Wall Street Journal points out that the misery is deliberate policy.

Venezuelan shortages of everything are widely acknowledged. But there is less recognition that strongman Nicolás Maduro is using control of food to stamp out opposition. Hyperinflation has shriveled household budgets and the government has taken over food production and distribution. Most damning is evidence that access to government rations has become conditional on Maduro’s good favor. The hardship is killing and deforming children. …some communities are experiencing undeniable “famine” and that in some parts of the country 50% of the children have left school because of hunger.

On December 14, USA Today looked at the people escaping Venezuelan tyranny.

Although Venezuelans for years have been fleeing the “socialist revolution” first launched by the late Hugo Chávez in 1999, in recent months the trickle has turned into a flood as living conditions become ever more dire — from hyperinflation to acute shortages of food and medicine to one of the worst homicide rates in the world. …In response to…the once-wealthy country’s seeming demise, …many exiles had fled to the United States, surging numbers, like the Sequieras, now head to other Latin American nations. …From Mexico to Argentina, immigration agencies are reporting skyrocketing numbers of Venezuelan arrivals, doubling and even tripling the total for previous years.

On December 17, the New York Times exposed the pervasive hunger and horror in Venezuela.

Kenyerber Aquino Merchán was 17 months old when he starved to death. …Hunger has stalked Venezuela for years. Now, it is killing the nation’s children at an alarming rate, doctors in the country’s public hospitals say. …Riots and protests over the lack of affordable food, excruciating long lines for basic provisions, soldiers posted outside bakeries and angry crowds ransacking grocery stores have rattled cities, providing a telling, public display of the depths of the crisis. But deaths from malnutrition have remained a closely guarded secret by the Venezuelan government. …doctors at 21 public hospitals in 17 states across the country said that their emergency rooms were being overwhelmed by children with severe malnutrition… Parents like Kenyerber’s mother go days without eating, shriveling to the weight of children themselves.

On December 18, we got the latest details on the victims of Venezuelan statism.

Joel Rodriguez, a one legged panhandler, bursts into tears as a young man dressed as Santa Claus gives him food and clothing — a rare scene of holiday cheer in economically-depressed Venezuela. “Sometimes we eat out of the garbage,” said Rodriguez… In a Caracas with no Christmas lights or decorations this year because of the economic crisis, …Venezuelans are enduring acute shortages of food and medicine, and inflation is forecast by the IMF to hit a staggering 2,349 percent in 2018. “…are you doing the Maduro diet?” people shouted… They were using a popular expression used to refer to President Nicolas Maduro and people who have lost weight because of the hard economic times. This is so common it has been documented by Venezuelan universities.

Now that we’ve caught up with the calendar, let’s return the economic freedom scores from the Fraser Institute.

We started today’s column looking at Venezuela’s amazing (in a bad way) loss of overall economic liberty since 1970. Now let’s look at the specific issue of monetary policy. The country has gone from an almost-perfect score to the world’s most abysmal rating.

When I look at that data, it makes me glad that at least some Venezuelans are able to protect themselves with either offshore bank accounts or bitcoin.

And it makes me grateful to be in the United States. In my video on the history of central banking, I groused that the dollar has lost 95 percent of its value since the Federal Reserve was created in 1913. But that’s a heck of a lot better than losing 95 percent its value every year, which seems to be what’s happening in Venezuela.

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Potential Christmas Presents for Libertarians and Statists, Plus Daunting Challenges for Santa Claus

Last year, I wrote that I wanted a spending cap for Christmas. Sadly, Santa Claus did not deliver, so I’m stuck with my consolation prize from 2013.

I’m not expecting a spending cap under the tree this year, either.

But for those of you panicking about presents with one week left, there are some good Christmas gifts for libertarians, as shown in this video from Reason. My favorites are 1) Entitle-Mints, 2) the libertarian doorbell, 3) Jury Nullification Barbie, and 4) Hungry, Hungry Venezuelans.

But keep in mind that Santa doesn’t discriminate, and neither should you.

After all, it wouldn’t be nice to get Christmas gifts for libertarian friends and family while neglecting the socialists in your life.

Writing for the Financial Times, Merryn Somerset Webb has a serious list of books that she thinks would be very helpful for deluded leftists.

I’m concerned — and hardly alone in being concerned — about the bad rap capitalism is getting… So I thought I would suggest some rollicking good reads that also show the market economy, big business and the capitalist instinct in a good light. …what Christmas reads might help ardent socialists see that entrepreneurialism and business creates the wealth that pays for everything else, and that capitalism is a force for good? One slightly unexpected place to start might be Great Expectations. Escaped criminal turned super-rich entrepreneur Magwitch offers a fabulous lesson in the uses of capitalism to Pip… Another contender has to be Ayn Rand’s 1957 novel Atlas Shrugged, in which industrialists, fed up with the failures of central planning and stultifying effects of overregulation on their businesses, effectively go on strike from productive activity. …I’d point you towards Henry Hazlitt’s similarly themed 1966 novel Time Will Run Back. It is a better read (Hazlitt is known to be one of the few economists who is also a good writer) and is basically an economics explainer hidden in a work of fiction. It kicks off in a miserably Orwellian state (think 1984) which is gradually turned — to everyone’s benefit — into a capitalist one.

I’m a fan of Atlas Shrugged, so I’ll echo that suggestion.

I’ll track down the Hazlitt book, which sounds promising, but I’ll pass on Great Expectations since I was underwhelmed when forced to read it in high school.

Now let’s shift gears and contemplate the challenges that Santa sometimes faces.

Here’s what happens when a child asks St. Nick for a tolerable government (h/t: libertarian Reddit).

We have another example, only this time Santa is asked for a non-oppressive government (h/t: libertarian Reddit).

P.S. If you know folks who spend a lot of time in the bathroom, you can get them IRS-themed or inflation-themed toilet paper for Christmas (this offer not valid in Cuba and Venezuela).

P.P.S. If you’re shopping for an environmentalist, this option might work. And if you need a gift for a Keynesian, this Christmas album would be perfect.

P.P.P.S. At this time of year, remember that adoption is a way of providing a good home.

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Journalistic Alchemy: Washington Post Magically Transforms a Spending Cut into a Tax Increase

I don’t focus much on media bias because journalists generally aren’t dishonest. Instead, they choose which stories to highlight or downplay based on what advances their political agenda. Though every so often I’ll highlight an example of where bias leads to an egregious (maybe even deliberately dishonest) mistake.

• Like the time a column in the New York Times argued that “austerity” kills people, but the examples cited were countries where the burden of government spending was higher.
• Or the time that the Washington Post said that a $71 billion increase in Medicaid spending was a 25 percent cut?
• And how about when the New York Times published a story about schools being “starved of funding” when even a cursory look at the data would confirm outlays have climbed substantially.

Now we have an addition to that collection from a WonkBlog column in the Washington Post. The piece starts with an accurate observation that the tax plan on Capitol Hill isn’t a long-run tax cut.

Senate rules require the Tax Cuts and Jobs Act not to add to the federal deficit after 10 years. …The bill aims to cut corporate taxes in perpetuity…but they actually need to raise money to offset the permanent corporate tax reduction.

Yes, as I wrote two weeks ago, the long-run tax cuts have to be offset by long-run revenue increases. So that part of the column is fine.

We then get this rather dubious assertion.

Republicans are paying for a permanent cut for corporations with an under-the-radar tax increase on individuals.

In part, it’s a dodgy claim because there are provisions in the bill that collect more revenue from companies, such as the partial loss of interest deductibility and various base erosion rules. So if he wanted to be accurate, the author should have begun that sentence with “Republicans are partially paying for…”

But that’s only part of the problem. As you can see from this next excerpt, he cites a former Democrat staffer and doubles down on the allegation that individual taxpayers will be coughing up more money to Uncle Sam because of the legislation.

This chart, playing off what the Senate’s former top tax aide and New York University professor Lily Batchelder pointed out on Twitter on Friday evening, makes vividly clear where Republicans ultimately raise that money. …we know it’s individual taxpayers who ultimately bear the cost of the tax bill.

And here’s the chart that ostensibly shows that you and me are going to pay more money so evil corporations can enjoy a tax cut.

Notice, however, the part I circled in green. It shows that Republicans are repealing Obamacare’s individual mandate as part of their tax reform plan, and it also shows that repeal has budgetary effects.

So how is this a tax increase (the pink portion of the bar chart), as the Washington Post wants us to believe?

Needless to say, the honest answer is that it isn’t a tax hike. Getting rid of the mandate means people won’t get “fined” by the IRS if they choose not to buy health insurance. If anything, that should count as a tax cut.

But that’s not what’s represented by the pink part of the bar chart. Instead, it shows that when you get rid of the mandate and consumers choose not to get Obamacare policies, that automatically means that insurance companies will get fewer subsidies from Uncle Sam (getting access to that cash was one of the reasons the big insurance companies lobbied for Obamacare).

In other words, the chart actually is showing that corporate rate reduction is partially financed by a reduction in spending, which is a win-win from my perspective.

By the way, you don’t have to believe me. On page 9 of the Joint Committee on Taxation’s revenue estimate (which presumably will be posted on the JCT website at some point), you find this footnote about the “outlay effect” of repealing the mandate.

At the risk of stating the obvious, an “outlay effect” is when a change in law causes a shift in government spending. That’s what’s happening, not a tax increase on individuals.

By the way, the author sort of admits this is true in a passage buried near the bottom of the column.

…a number of analysts argue that it’s wrong to consider the loss of insurance related to the end of the ACA mandate a tax increase, because it reflects individuals’ choice not to get insurance.

That’s a pathetic attempt at justifying a dishonest article.

Here’s the bottom line.

1. Individuals will be paying less money to the IRS because of this provision, not more.
2. The fiscal impact of the provision is less spending, not more tax revenue.

Sadly, most readers will have no idea that they were deliberately misled.

P.S. The “alternative inflation measure” in the bill (the red portion of the bar chart) arguably is a tax increase. Or, for those who persuasively argue that it’s a more accurate measure, it’s a provision that will result in individual taxpayers sending more money to Uncle Sam compared to current law since the new measure (chained CPI) will result in smaller inflation adjustments to tax brackets and the standard deduction.

P.P.S. If repealing just one small piece of Obamacare will save about $300 billion over the next decade, imagine how much money we could save if the entire law was repealed.

P.P.P.S. Since I’ve previously explained how politicians use alchemy to turn spending increases into tax cuts, I guess it’s not surprising that some folks are using the same magic to turn spending cuts into tax increases.

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The Greek Experiment: Can an Economy Be Wiped Out by Taxation?

Greece has confirmed that a nation can spend itself into a fiscal crisis.

And the Greek experience also has confirmed that bailouts exacerbate a fiscal crisis by enabling more bad policy, while also rewarding spendthrift politicians and reckless lenders (as I predicted when Greece’s finances first began to unravel).

So now let’s look at a third question: Can a country tax itself to death? Greek politicians are doing their best to see if this is possible, with a seemingly endless parade of tax increases (so many that even the tax-loving folks at the IMF have balked).

At the very least, they’ve pushed the private sector into hospice care.

Let’s peruse a couple of recent stories from Ekathimerini, an English-language Greek news outlet. We’ll start with a rather grim look at a very punitive tax regime that is aggressively grabbing money from taxpayers with arrears.

Tax authorities have confiscated the salaries, pensions and assets of more that 180,000 taxpayers since the start of the year, but expired debts to the state have continued to rise, reaching almost 100 billion euros, as the taxpaying capacity of the Greeks is all but exhausted. In the month of October, authorities made almost 1,000 confiscations a day from people with debts to the state of more than 500 euros. In the first 10 months of the year, the state confiscated some 4 billion euros.

But the Greek government is losing a race. The more it raises taxes, the more people fall behind.

in October alone, the unpaid tax obligations of households and enterprises came to 1.2 billion euros. Unpaid taxes from January to October amounted to 10.44 billion euros, which brings the total including unpaid debts from previous years to almost 100 billion euros (99.8 billion), or about 55 percent of the country’s gross domestic product. The inability of citizens and businesses to meet their obligations is also confirmed by the course of public revenues, which this year have declined by more than 2.5 billion euros. The same situation is expected to continue into next year, as the new tax burdens and increased social security contributions look set to send debts to the state soaring.

The fact that revenues have declined should be a glaring signal to politicians that they are past the revenue-maximizing point on the Laffer Curve.

But the government probably won’t be satisfied until everyone in the private sector is in debt to the state.

There are now 4.17 million taxpayers who owe the state money. This means that one in every two taxpayers is in arrears to the state, with 1,724,708 taxpayers facing the risk of forced collection measures. Of the 99.8 billion euros of total debt, just 10-15 billion euros is still considered to be collectible.

Here’s another article from Ekathimerini that looks at how Greece is doubling down on suicidal fiscal policy.

Greece is defying the prevalent trend among the world’s industrialized nations for reducing tax rates in order to boost investment and competitiveness… According to the report, in contrast to the majority of OECD member states, Greece has raised taxes and social security contributions as government policy is geared toward reaching fiscal targets, even though this inevitably harms the crisis-hit country’s competitiveness.

It’s hard to think of a tax that Greek politicians haven’t increased.

Greece…is also the only one among them that increased taxes on labor and corporate profits. …eight OECD member states reduced rates in 2017 on an average of 2.7 percent…, in stark contrast to Greece, which…has the highest corporate tax rates in the OECD compared to 2008. Many countries also offered breaks and reductions on income tax, …also cutting social contributions in 2015-2016. Not so Greece, which in 2016 raised both, thereby increasing the overall burden on low-income earners by 1.5 percent. Greece was also the only country in the OECD to raise value-added tax rates in 2016.

And what was accomplished by all these tax increases? Less tax revenue and recession. That’s a lose-lose scenario by almost any standard.

…in the 2014-2015 period, 25 of the 32 countries for which data is available recorded an increase in tax-to-GDP levels. The report…mentions Greece as an exception to this trend as well, noting that the country was in recession in that two-year period.

Even an establishment outlet like the U.K.-based Financial Times has noticed.

Unemployment is at 23 per cent and 44 per cent of those aged 15-24 are out of work. More than a fifth of Greeks get by without basics such as heating or a telephone connection. …Sweeping new taxes imposed across the economy have already left communities scrabbling to survive. …this year will bring €1bn worth of new taxes on cars, telecoms, television, fuel, cigarettes, coffee and beer… New taxes have eroded disposable incomes still further. Value added tax has increased to 24 per cent on food, disproportionately hurting the poor, for whom living costs represent a far higher proportion of income. Most detested is the Enfia property levy, which brings in €2.65bn a year – roughly €650 from each of Greece’s four million households. …recent direct taxes like the new estate tax have affected households that have seen their income decline greatly during the crisis. The rise of VAT, meanwhile, only adds to the cost of life of poor families.” …this month, new levies will mean the taxes paid by his business will jump 29 per cent.

Interestingly, the article acknowledges that profligate politicians created the mess, while also noting that the Greek people also deserve blame.

…blame is laid on the politicians who spent the 27 years of Greece’s EU membership before the crisis loading the country with debt to fund increased defence expenditure, more public sector jobs and higher pension and other social benefit payments. …“The Greek people should be blamed. We voted for these people,” he concludes.

The problem, of course, is that Greek voters don’t show any interest in now voting for politicians who will clean up the mess. Simply stated, too many people in the country are living off the government.

In other words, even though it’s mathematically possible to fix the problems, the erosion of societal capital suggests that Greece may have reached the point of collapse.

From a fiscal perspective, this chart from OECD data confirms that policy is getting worse rather than better. Measured as a share of economic output, taxes and spending have both become a bigger burden over the past 10 years.

What makes this chart especially depressing is that economic output is lower today than it was in 2005, which means that the problem isn’t so much that annual tax receipts and spending level are climbing, but rather that the private economy is declining.

Let’s close with an additional look at the moribund Greek economy and a discussion of how the bailouts have made a bad situation even worse.

The Wall Street Journal editorialized on the impact of ever-higher taxes and a still-stifling bureaucratic business environment.

…the bailout is not in fact working, if you think the goal should be to restore Athens to sound public finances and to offer Greeks economic hope for the future. The European Commission’s autumn forecast predicts eurozone economic growth of 2.2% this year, the fastest in a decade. But Greece is falling further behind. …Investment has collapsed in the country, to 11% of GDP last year from 26% of GDP in 2007. …The bailouts are creating a dangerous situation in which the government has enough cash to meet its debts but no one else in Greece can thrive.

And here’s the scary part. What happens when there’s another global recession? The already-bad numbers in Greece will get even worse. Not a pleasant thought.

P.S. If you want to know why I’m not optimistic about Greece’s future, how can you expect good policy from a nation that subsidizes pedophiles and requires stool samples to set up online companies? I’d be more hopeful if Greek politicians instead had learned some lessons from Slovakia or Latvia.

P.P.S. Notwithstanding a the constant stream of bad policy, I am capable of feeling sorry for Greece.

P.P.P.S. Newer readers may not be familiar with my collection of Greek-related humor. This cartoon is quite  good, but this this one is my favorite. And the final cartoon in this post also has a Greek theme.

We also have a couple of videos. The first one features a European romantic comedy and the second one features a Greek comic pontificating about Germany.

Last but not least, here are some very un-PC maps of how various peoples – including the Greeks – view different European nations. Speaking of stereotypes, the Greeks are in a tight race with the Italians and Germans for being considered untrustworthy.

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What’s the Best Tax Policy for Working Families?

Adopting tax reform (even a watered-down version of tax reform) is not easy.

• Some critics say it will deprive the federal government of too much money (a strange argument since it will be a net tax increase starting in 2027).
• Some critics say it will make it more difficult for state and local governments to raise tax rates (they’re right, but that’s a selling point for reform).
• Some critics say it will make debt less attractive for companies compared to equity (they’re right, though that’s another selling point for reform).
• Some critics say it will cause capital to shift from residential real estate to business investment (they’re right, but that’s a good thing for the economy).

Now there’s a new obstacle to tax reform. Senator Marco Rubio says he wants some additional tax relief for working families. And he’s willing to impose a higher corporate tax rate to make the numbers work.

That proposal was not warmly received by his GOP colleagues since the 20-percent corporate rate was perceived as their biggest achievement.

But now Republicans are contemplating a 21-percent corporate rate so they have wiggle room to lower the top personal tax rate to 37 percent. Which prompted Senator Rubio to issue a sarcastic tweet about the priorities of his colleagues.

20.94% Corp. rate to pay for tax cut for working family making $40k was anti-growth but 21% to cut tax for couples making $1million is fine?

— Marco Rubio (@marcorubio) December 12, 2017

Since tax reform is partly a political exercise, with politicians allocating benefits to various groups of supporters, there’s nothing inherently accurate or inaccurate about Senator Rubio’s observation.

But since I inhabit the wonky world of public finance economics, I want to explain today that there are some adverse consequences to Rubio’s preferred approach.

Simply stated, not all tax cuts are created equal. If the goal is faster economic growth, lawmakers should concentrate on “supply-side” reforms, such as reducing marginal tax rates on work, saving, investment, and entrepreneurship (in which case, it’s a judgement call on whether it’s best to lower the corporate tax rate or the personal tax rate).

By contrast, family-oriented tax relief (a $500 lower burden for each child in a household, for instance) is much less likely to impact incentives to engage in productive behavior.

Most supporters of family tax relief would agree with this economic analysis. But they would say economic growth is not the only goal of tax reform. They would say that it’s also important to make sure various groups get something from the process. So if big businesses are getting a lower corporate rate, small businesses are getting tax relief, and investors are getting less double taxation, isn’t it reasonable to give families a tax cut as well?

As a political matter, the answer is yes.

But here’s my modest contribution to this debate. And I’m going to cite one of my favorite people, myself! Here’s an excerpt from a Wall Street Journal column back in 2014.

The most commonly cited reason for family-based tax relief is to raise take-home pay. That’s a noble goal, but it overlooks the fact that there are two ways to raise after-tax incomes. Child-based tax cuts are an effective way of giving targeted relief to families with children… The more effective policy—at least in the long run—is to boost economic growth so that families have more income in the first place. Even very modest changes in annual growth, if sustained over time, can yield big increases in household income. … long-run growth will average only 2.3% over the next 75 years. If good tax policy simply raised annual growth to 2.5%, it would mean about $4,500 of additional income for the average household within 25 years. This is why the right kind of tax policy is so important.

Now let’s put this in visual form.

Let’s imagine a working family with a modest income. What’s best for them, a $1,000 tax cut because they have a couple of kids or some supply-side tax policy that produces faster growth?

In the short run, compared to the option of doing nothing (silver line), both types of tax reform benefit this hypothetical family with $25,000 of income in 2017.

But the family tax relief (blue line) is better for their household budget than supply-side tax cuts (orange line).

But what if we look at a longer period of time?

Here’s the same data, but extrapolated for 50 years. And since there’s universal agreement that the status quo is not good for our hypothetical family, let’s simply focus on the difference between family tax relief (again, blue line) and supply-side tax cuts (orange line).

And what we find is that the family actually has more income with supply-side reform starting in 2026 and the gap gets larger with each subsequent year. In the long run, the family is much better off with supply-side tax policies.

To be sure, I’ve provided an artificial example. If you assume growth only increases to 2.4 percent rather than 2.5 percent, the numbers are less impressive. Moreover, what if the additional growth only lasts for a period of time and then reverts back to 2.3 percent?

And keep in mind that money in the future is not as valuable as money today, so the net benefit of picking supply-side tax cuts would not be as large using “present value” calculations.

Last but not least, the biggest caveat is that these two charts are based on the example in my Wall Street Journal column and are not a comparison of the different growth rates that might result from a 20-percent corporate tax rate compared to a 21-percent rate (even a wild-eyed supply-side economist wouldn’t project that much additional growth from a one-percentage-point difference in tax rates).

In other words, I’m not trying to argue that a supply-side tax cut is always the answer. Heck, even supply-side reform plans such as the flat tax include very generous family-based allowances, so there’s a consensus that taxpayers should be able to protect some income from tax and that those protections should be based on family size.

Instead, the point of this column is simply to explain that there’s a tradeoff. When politicians devote more money to family tax relief and less money to supply-side tax cuts, that will reduce the pro-growth impact of a tax plan. And depending on the level of family tax relief and the amount of foregone growth, it’s quite possible that working families will be better off with supply-side reforms.

P.S. A separate problem with Senator Rubio’s approach is that he wants his family tax relief to be “refundable,” which is a technical term for a provision that gives a tax cut to people who don’t pay tax. Needless to say, it’s impossible to give a tax cut to someone who isn’t paying tax. The real story is that “refundable tax cuts” are actually government spending. But instead of having a program where people sign up for government checks, the spending is laundered through the tax code.

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Grading the AiP House-Senate Republican Tax Plan

In early November, I reviewed the House’s tax plan and the Senate’s tax plan.

I was grading on a curve. I wasn’t expecting or hoping for something really bold like a flat tax.

Instead, I simply put forward a wish list of  a few incremental reforms that would make an awful tax system somewhat less punitive.

A few things to make April 15 more bearable.

Some changes that would give the economy a chance to grow faster and create more jobs so that living standards could improve. Is that asking too much?

It wasn’t even a long list. Just two primary goals.

• A lower corporate tax rate.
• Ending the deduction for state and local taxes.

And two secondary goals.

• Death tax repeal.
• Eliminate special tax preferences for green-energy.

Based on those items, I think House and Senate GOPers did a reasonably good job (at least compared to my low expectations earlier in the year).

Now let’s look at the agreement in principle (AiP) that was just announced by House and Senate negotiators and assign grades to the key provisions. And we’ll start by looking at the items on my wish list.

Is there a big reduction in the corporate tax rate?

Yes. The deal would slash the current 35 percent rate to 21 percent. That’s not as good as 20 percent, but it’s nonetheless a huge improvement that will result in more investment, higher wages, and enhanced competitiveness. And since other nations will face pressure to further reduce their rates, there will be global economic benefits. Final grade: A-

Is the deduction for state and local taxes abolished?

Not completely. The agreement does impose a $10,000 cap on the amount of that can be deducted. Combined with a doubling of the standard deduction, this will significantly reduce the number of people who “itemize.” As such, there will be more resistance to bad tax policy by state and local governments. Final grade: B+

Is the death tax repealed?

Not fully. The deal doubles the exempt amount to more than $10 million, which will protect many more families from this pernicious form of double taxation (and the ones who will still be impacted are the ones with greater ability to protect themselves, albeit at the cost of allocating their capital less efficiently).  Final grade: B

Are special tax preferences for green energy wiped out?

No. This is a very disappointing feature of the agreement. I’m tempted to assign a failing grade, but that low mark should be reserved for provisions that actually are worse than current law. All that’s happening in the deal is that bad policy is being left in place. Final grade: C

A grade for everything else?

There are other provisions in the final deal that are worthy of attention. In most cases, lawmakers did move in the right direction when looking at the key principles of good tax reform (reducing tax rates, reducing double taxation, and reducing distortionary preferences). Final grade B

Here’s a partial list of the other provisions.

• There is a modest reduction in personal tax rates, including a reduction in the top rate on households from 39.6 percent to 37 percent. It’s always good to lower marginal tax rates, especially for high earners.
• The tax rate on pass-through businesses (i.e., smaller businesses that file personal tax returns rather than corporate returns) is indirectly reduced. This is good news, though it may lead to more complexity.
• Full expensing of business investment for next five years. This would be a very good reform if it was permanent, though even temporary expensing is positive
• The tax preference for housing is curtailed by allowing the write-off of interest only on mortgages up to $750,000. This is an improvement over current law, especially when combined with the higher standard deduction.
• The corporate alternative minimum tax is abolished. This is good news.
• The Obamacare individual mandate is repealed. This is good news, though it doesn’t solve the underlying problems with that law.
• The individual alternative minimum tax is curtailed. Repeal would have been better, but this is an improvement over current law.

I’ll close with a caveat. An AiP is not the same as final legislative language. It’s not the same as votes for final passage in the House. Or the Senate. And it’s not the same as a presidential signature on a bill.

Aficianados of “public choice” are painfully aware that politicians and interest groups are depressingly clever about preserving their goodies. So while it seems like tax reform is going to happen, it’s not a done deal. When dealing with Washington, it’s wise to assume the worst.

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A Big Corporate Tax Cut in the United States Will Bring more Prosperity to China and Europe

When Ronald Reagan slashed tax rates in America in the 1980s, the obvious direct effect was more prosperity in America.

But the under-appreciated indirect effect of Reaganomics was that it helped generate more prosperity elsewhere in the world.

Not because Americans had higher income and could buy more products from home and abroad (though that is a nice fringe benefit), but rather because the Reagan tax cuts triggered a virtuous cycle of tax competition. Politicians in other countries had to lower their tax rates because of concerns that jobs and investment were migrating to America (Margaret Thatcher also deserves some credit since she also dramatically reduced tax rates and put even more competitive pressure on other nations to do the same thing).

If you look at the data for developed nations, the average top income tax rate in 1980 was more than 67 percent. It’s now closer to 40 percent.

And because even countries like Germany and France enacted supply-side reforms, the global economy enjoyed a 25-year renaissance of growth and prosperity.

Unfortunately, there’s been some slippage in the wrong direction in recent years, probably caused in part be the erosion of tax competition (politicians are more likely to grab additional money if they think targeted victims don’t have escape options).

But we may be poised for a new virtuous cycle of tax competition, at least with regards to business taxation. A big drop in the U.S. corporate tax rate will pressure other nations to lower their taxes as well. And if new developments from China and Europe are accurate, I’ve been underestimating the potential positive impact.

Let’s start with news from China, where some officials are acting as if dropping the U.S. corporate tax rate to 20 percent is akin to economic warfare.

U.S. tax cuts—the biggest passed since those during the presidency of Ronald Reagan three decades ago—have Beijing in a bind. Prominent in the new tax policy are generous reductions in the corporate tax and a rationalization of the global tax scheme. Both are expected to draw capital and skilled labor back to the United States. …In April, Chinese state-controlled media slammed the tax cuts, accusing the U.S. leadership of risking a “tax war”… On April 27, state-run newspaper People’s Daily quoted a Chinese financial official as saying, “We’ve made our stance clear: We oppose tax competition.” …Beijing has good reason to be afraid. …“Due to the tax cut, the capital—mostly from the manufacturing industry—will flow back to the U.S.,” Chen said.

While Chinese officials are worried about tax competition, they have a very effective response. They can cut tax rates as well.

…the Communist Party had promised to implement financial policy that would be more beneficial for the general public, but has not put this into practice. Instead, Beijing has kept and expanded a regime whereby heavy taxes do not benefit the people…, but are used to prop up inefficient state-owned enterprises… Chinese officials and scholars are considering the necessity of implementing their own tax reforms to keep up with the Trump administration. …Zhu Guangyao, a deputy minister of finance, said in a meeting that it was “indeed impossible” to “ignore the international effects” of the American tax cut, and that “proactive measures” needed to be taken to adjust accordingly. …a Chinese state-run overseas publication called “Xiakedao” came out with a report saying that while Trump’s tax cuts put pressure on China, the pressure “can all the same be transformed into an opportunity for reform.” It remains to be seen whether communist authorities are willing to accept a hit to their tax revenue to balance the economy and let capital flow into the hands of the private sector.

The Wall Street Journal also has a story on how China’s government might react to U.S. tax reform.

…economic mandarins in Beijing are focusing on a potentially… immediate threat from Washington— Donald Trump’s tax overhaul. In the Beijing leadership compound of Zhongnanhai, officials are putting in place a contingency plan to combat consequences for China of U.S. tax changes… What they fear is…sapping money out of China by making the U.S. a more attractive place to invest.

Pardon me for digressing, but isn’t it remarkable that nominally communist officials in China clearly understand that lower tax rates will boost investment while some left-leaning fiscal “experts” in America still want us to believe that lower tax won’t help growth.

But let’s get back to the main point.

An official involved in Beijing’s deliberations called Washington’s tax plan a “gray rhino,” an obvious danger in China’s economy that shouldn’t be ignored. …While the tax overhaul isn’t directly aimed at Beijing, …China will be squeezed. Under the tax plan now going through the U.S. legislative process, America’s corporate levy could drop to about 20% from 35%. Over the next few years, economists say, that could spur manufacturers—whether American or Chinese—to opt to set up plants in the U.S. rather than China.

It’s an open question, though, whether China will respond with bad policy or good policy.

Imposing capital controls to limit the flow of money to the United States would be an unfortunate reaction. Using American reform as an impetus for Chinese reform, by contrast, would be serendipitous.

The sweeping overhaul of the U.S. tax code, estimated to result in $1.4 trillion in U.S. cuts over a decade, is also serving as a wake-up call for Beijing, which for years has dragged its feet on revamping China’s own rigid tax system. Chinese businesses have long complained about high taxes, and the government has pledged to reduce the levies on them. …Chinese companies face a welter of other taxes and fees their U.S. counterparts don’t, including a 17% value-added tax. …Chinese employers pay far-higher payroll taxes. Welfare and social insurance taxes cost between 40% and 100% of a paycheck in China. World Bank figures for 2016 show that total tax burden on Chinese businesses are among the highest of major economies: 68% of profits, compared with 44% in the U.S. and 40.6% on average world-wide. The figures include national and local income taxes, value-added or sales taxes and any mandatory employer contributions for welfare and social security.

I very much hope Chinese officials respond to American tax cuts with their own supply-side reforms. I’ve applauded the Chinese government in the past for partial economic liberalization. Those policies have dramatically reduced poverty and been very beneficial for the country.

Lower tax rates could be the next step to boost living standards in China.

By the way, the Chinese aren’t the only ones paying attention to fiscal developments in the United States. The GOP tax plan also is causing headaches in Europe, as reported by CNN.

Germany, France, Britain, Spain and Italy have written to Treasury Sec. Steven Mnuchin… The letter argues that proposed changes to the U.S. tax code could give American companies an advantage over foreign rivals. …They said the provision could also tax the profits of foreign businesses that do not have a permanent base in the U.S. …The finance ministers said they opposed another measure in the Senate bill that could benefit American companies.

I have two responses. First, I actually agree with some of the complaints in the letter about selected provisions in the tax bill (see, for instance, Veronique de Rugy’s analysis in National Review about the danger of the BAT-like excise tax). We should be welcoming investment from foreign companies, not treating them like potential cash cows for Uncle Sam.

That being said, European officials are throwing stones in a glass house. They are the ones pushing the OECD’s initiative on “base erosion and profit shifting,” which is basically a scheme to extract more money from American multinational firms. And let’s also remember that the European Commission is also going after American companies using the novel argument that low taxes are a form of “state aid.”

Second, I think the Europeans are mostly worried about the lower corporate rate. German officials, for instance, have already been cited for their fear of a “ruinous era of tax competition.” And politicians at the European Parliament have been whining about a “race to the bottom.”

So I’ll give them the same advice I offered to China. Respond to Americans tax cuts by doing the right thing for your citizens. Boost growth and wages with lower tax rates.

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The Under-Appreciated Success of Canadian Welfare Reform

Back in 2014, I shared a report that looked at the growth of redistribution spending in developed nations.

That bad news in the story was that the welfare state was expanding at a rapid pace in the United States. The good news is that the overall fiscal burden of those programs was still comparatively low. At least compared to other industrialized countries (though depressingly high by historical standards).

I specifically noted that Switzerland deserved a lot of praise because redistribution spending was not only relatively modest, but that it also was growing at a slow rate. Yet another sign it truly is the “sensible country.”

But I also expressed admiration for Canada.

Canada deserves honorable mention. It has the second-lowest overall burden of welfare spending, and it had the sixth-best performance in controlling spending since 2000. Welfare outlays in our northern neighbor grew by 10 percent since 2000, barely one-fourth as fast as the American increase during the reckless Bush-Obama years.

But I didn’t try to explain why Canada had good numbers.

Now it’s time to rectify that oversight. I went to the University of Texas-Arlington last week to give a speech and had the pleasure of meeting Professor Todd Gabel. Originally from Canada, Professor Gabel has written extensively on Canadian welfare policy and he gave me a basic explanation of what happened in his home country.

I asked him to share some of his academic research and he sent me several publications, including two academic studies he co-authored with Nathan Berg from the University of Otago.

Here are some excerpts from their 2015 study published in the Canadian Journal of Economics. Gabel and Berg explain welfare reform in Canada and look at which policies were most successful.

During the 1990s and 2000s, Canada’s social assistance (SA) system transitioned from a relatively centralized program with federal administrative controls to a decentralized mix of programs in which provinces had considerable discretion to undertake new policies. This transition led to substantially different SA programs across provinces and years… Some provincial governments experimented aggressively with new policy tools aimed at reducing SA participation. Others did not. In different years and by different amounts, nearly all provinces reduced SA benefit levels and tightened eligibility requirements.

By the way, the SA program in Canada is basically a more generous version of the Temporary Assistance to Needy Families (TANF) program in America, in part because there are not separate programs for food and housing.

The study includes this remarkable chart showing a significant drop in Canadian welfare dependency, along with specific data for three provinces.

The authors wanted to know why welfare dependency declined in Canada. Was is simply a result of a better macroeconomic environment? Or did specific reforms in welfare policy play a role?

…what role, if any, did new reform strategies undertaken by provinces play in observed declines in SA participation. This paper attempts to address this question by measuring disaggregated effects of new reform strategies on provinces’ SA participation rates, while controlling for changes in benefit levels, eligibility requirements, labour market conditions, GDP growth and demographic composition.

Their conclusion is that welfare reform helped reduce dependency.

…our econometric models let the data decide on a ranking of which mechanisms—reductions in benefit levels, tightened eligibility requirements, improved macro-economic conditions or adoption of new reform strategies—had the largest statistical associations with declines in participation. The data suggest that new reforms were the second most important policy reform after reductions in employment insurance benefits. … In the empirical models that disaggregate the effects of different new reform strategies, it appears that work requirements with strong sanctions for non-compliance had the largest effects. The presence of strong work requirements is associated with a 27% reduction in SA participation.

Here’s their table showing the drop in various provinces between 1994 and 2009.

The same authors unveiled a new scholarly study published in 2017 in Applied Economics, which is based on individual-level data rather than province-level data.

Here are the key portions.

A heterogeneous mix of aggressive welfare reforms took effect in different provinces and years starting in the 1990s. Welfare participation rates subsequently declined. Previous investigations of these declines focused on cuts in benefits and stricter eligibility requirements. This article focuses instead on work requirements, diversion, earning exemptions and time limits – referred to jointly as new welfare reform strategies.

Here’s their breakdown of the types of reforms in the various provinces.

And here are the results of their statistical investigation.

The empirical models suggest that new reform strategies significantly reduced the probability of welfare participation by a minimum of 13% overall…the mean person in the sample faces a reduced risk of welfare participation of 1.1–1.3 percentage points when new reform strategies are present… the participation rates of the disabled, immigrants, aboriginals and single parents, appear to have responded to the presence of new reform strategies significantly more than the average Canadian in our sample. The expected rate of welfare participation for these groups fell by two to four times the mean rate of decline associated with new reform policies.

The bottom line is that welfare reform was very beneficial for Canada. Taxpayers benefited because the fiscal burden decreased. And poor people benefited because of a transition from dependency to work.

Let’s close by looking at data measuring redistribution spending in Canada compared to other developed nations. These OECD numbers include social insurance outlays as well as social welfare outlays, so this is a broad measure of redistribution spending, not just the money being spent on welfare. But it’s nonetheless worth noting the huge improvement in Canada’s numbers starting about 1994.

Canada now has the world’s 5th-freest economy. Welfare reform is just one piece of a very good policy puzzle. There also have been relatively sensible policies involving spending restraint, corporate tax reform, bank bailouts, regulatory budgeting, the tax treatment of saving, and privatization of air traffic control.

P.S. If it wasn’t so cold in Canada, that might be my escape option instead of Australia.

P.P.S. Given the mentality of the current Prime Minister, it’s unclear whether Canada will remain an economic success story.

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Throwing Good Money after Bad Doesn’t Improve Government Schools

Whenever I discuss education policy with one of my leftist friends, it usually follows the same script.

They’ll ask whether I want good education for kids. I’ll say yes. They’ll then say we should devote more money to government schools.

I then show them this powerful chart and point out that we’ve been following their approach for 40-plus years and that it hasn’t worked.

None of them has ever had an effective or coherent response.

I then point out that the United States spends far more than other developed nations, on a per-pupil basis. Yet our national test scores are dismal compared to other developed nations.

Once again, none of them has ever had an effective or coherent response.

The simple reality if that giving more money to government schools is a foolish gesture.

Today, we’re going to look at some additional evidence.

Research from the World Bank pours cold water on the notion that more money for teachers leads to better outcomes for students.

…countries sometimes implement large increases in public-sector salaries to attract higher-quality applicants to government jobs and to better motivate existing employees. …understanding the extent to which unconditional pay increases make incumbent public-sector workers more motivated and productive is a key consideration in evaluating the cost effectiveness of such salary increases. …In this paper, we provide experimental evidence on the impact of a large unconditional salary increase on the effort and productivity of incumbent public employees. Our study was conducted in the context of a policy change in Indonesia that permanently doubled the base pay of eligible civil-service teachers… The reform moved teacher salaries from the 50th to the 90th percentile of the college-graduate salary distribution. Civil-service teachers in Indonesia also enjoy generous benefits and high job security, and quit rates were very low even before the pay increase. Thus, the teachers in our study are typical of public-sector employees in many low- and middle-income countries, who hold highly coveted jobs and enjoy a significant wage premium relative to their private-sector counterparts.

So what were the results of this experiment? The good news, as you might expect, is that teachers were quite happy.

The experiment significantly improved measures of teacher welfare: At the end of two and three years of the experiment, teachers in treated schools had higher income, were more likely to be satisfied with their income, and were less likely to report financial stress.

But for those of us who actually want better education for children, the results were not very satisfactory.

…despite this improvement in incumbent teachers’ pay, satisfaction, …the policy did not improve either their effort or student learning. Teachers in treated schools did not score better on tests of teacher subject knowledge, and we find no consistent pattern of impact on self-reported measures of teacher attendance. Most importantly, we find no difference in student test scores in language, mathematics, or science across treatment and control schools. …Finally, we use the school-level random assignment as an instrumental variable for being taught by a certified teacher in a given year, and find no improvement in student test scores from being taught by a certified teacher (relative to students in control schools taught by similar “target” teachers). These effects are also precisely estimated…our results are consistent with other studies finding no correlation between teacher salaries in the public sector and their teaching effectiveness (Muralidharan and Sundararaman 2011, Bau and Das 2017), and with studies finding that contract teachers who are paid much lower salaries than civil-service teachers are no less effective (Muralidharan and Sundararaman 2013, Duflo, Dupas, and Kremer 2015, Bau and Das 2017).

Indonesia is not similar to the United States, so some people will want to dismiss these finding.

But the authors note that U.S.-focused studies have reached the same conclusion.

Our results are consistent with prior studies finding no correlation between in creases in teacher pay and improved student performance in the US (Hanushek 1986; Betts 1995; Grogger 1996).

If giving teachers more money doesn’t work, is it possible that spending more money on facilities will help?

Let’s look at another academic study, published in the Journal of Public Economics, for some insight. Here’s the approach used by the scholars.

In this paper we provide the most comprehensive assessment of achievement effects from school facility investments initiated and financed by local school districts. The first part of the analysis examines the impact of nearly 1400 capital campaigns initiated by 748 school districts in the state of Texas over a 14-year period. …We examine the impact of capital campaigns on student outcomes using information on all tested students in the state over this time period, which includes all 3rd through 8th graders and 10th or 11th graders that take the state’s high school exit exam.

And here are the very disappointing results.

…the second part of the study directly measures the effect of capital investment on students actually exposed to it by analyzing more than 1300 major campus renovations. Controls for lagged individual test scores permit us to address changes in student composition resulting from capital investment, analogous to “value-added” models of teacher effectiveness. With or without this adjustment, we find no evidence of achievement effects of major campus renovations, even for renovations that appear to have generated large improvements in school facility conditions. Our estimates are sufficiently precise such that we can rule out positive effects larger than about 0.02 for math and 0.01 for reading for the first four years following a campus renovation.

By the way, I’m not arguing that pay and facilities are irrelevant. I think the takeaway from these studies is that more money doesn’t help when the underlying structure of the education system is faulty. So long as we have a centralized monopoly, more money isn’t going to help.

Unfortunately, American politicians are part of the problem.

Under President George W. Bush, the federal government spent more money on education and grabbed more control of the sector as part of the so-called No Child Left Behind initiative. That didn’t yield good results.

Under President Barack Obama, the same thing happened. Thanks to Common Core, the federal government spent more money on education and grabbed more control of the sector. That didn’t yield good results.

Indeed, a report last year for the National Center for Policy Analysis notes the dismal impact of the federal government.

Over the years, federal funding of primary and secondary education has increased, while students’ academic performance has flatlined. For instance, the high school reading and math scores on the National Assessment of Education Progress show that student performance has remained flat for the past 20 years… education reform initiatives by several administrations produced, at best, minimal improvements in student performance at a high price to taxpayers. Given its track record, the federal government should get out of the education business. Federal education reforms have failed to achieve their goals and failed to have a positive impact on education performance.

Amen. The Department of Education in Washington should be eliminated. It’s part of the problem.

Let’s close with a Reason video that looks at some absurd examples of how taxpayer money is wasted by the government school monopoly.

P.S. Let’s close with a bit of humor showing the evolution of math lessons in government schools.

P.P.S. If you want some unintentional humor, the New York Times thinks that government education spending has been reduced.

P.P.P.S. And you’ll also be amused (and outraged and disgusted) by the truly bizarre examples of political correctness in government schools.

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Everything You Need to Know about Tax Reform and the Mortgage Interest Deduction

Both the House and Senate have approved reasonably good tax reform plans.

Lawmakers are now in a “conference committee” to iron out the differences between the two bills so that a consensus package can be a approved and sent to the White House for the President’s signature.

Sounds like we’re on the verge of getting a less-destructive tax system, right?

I hope so, but there are still some major hurdles. The conference committee has a difficult task. They’re only allowed $1.5 trillion in tax relief in the short run and have to produce a bill that is “revenue neutral” in the long run. That won’t be easy in an environment where interest groups are putting heavy pressure on lawmakers.

I joked that doing tax reform with these restrictions is like trying to fit an NFL lineman in Pee Wee Herman’s clothes. But the serious point is that genuine tax reform requires some revenue-raising provisions to offset the parts of the bill that reduce revenue.

Needless to say, the right way of doing this is by going after economically harmful tax preferences. I’ve already written (over and over and over again) that the deduction for state and local taxes should be on the chopping block. To their credit, lawmakers are curtailing that loophole.

Today, I want to make the case that housing preferences in the tax code also should be targeted. I’m not naive enough to think politicians are suddenly going to decide to eliminate the mortgage interest deduction. But the bills – especially the House version – slightly curtail preferences for housing and it would be nice if they went a bit further.

That would free up more revenue for pro-growth tax cuts and also be smart policy. Let’s look at what some expert voices, starting with market-oriented people.

Edward Pinto of the American Enterprise Institute explains the provisions in the House bill for the Wall Street Journal.

Tax reform could make housing more affordable. Done correctly, it could increase the supply of homes by reducing federal tax subsidies for homeownership. The House’s Tax Cuts and Jobs Act furthers this aim in several ways—by raising the standard deduction, capping new loans qualifying for the mortgage-interest deduction at $500,000, eliminating the deduction on loans for second homes and the deduction on cashing out home equity, and capping the property-tax deduction at $10,000.

The Senate bill raises the standard deduction as well, but otherwise basically gives housing a pass. In the conference committee, Senators should agree to the House approach. Pinto explains that homeownership will be higher with less “help” from Washington.

…the House tax bill would create about 870,000 additional available units over 10 years. This represents a boost of 14% (the current build rate will yield about 6.2 million units over 10 years). Cutting homeowner subsidies out of the tax code provides other important benefits. The percentage of mortgage holders who itemize would drop from about 60% to 12%. This would free nearly half of mortgaged homeowners from a massive federal tax incentive hanging over their financial decisions, thereby greatly reducing the market-distorting impact produced by the interest deduction. …Lower prices due to loss of subsidies will ultimately allow more low-wealth Americans to become homeowners, since less cash will be needed to close a purchase. Rents will remain roughly constant as house prices decline, thus reducing the cost of homeownership compared with renting—another positive outcome. …It is time to put the interests of taxpayers and aspiring homeowners ahead of the interests of the housing lobby. Tax reform—especially if the final bill fully implements the House’s subsidy cuts—will improve the housing market and make homeownership more accessible to all.

Professor Jeffrey Dorfman of the University of Georgia (home of the national championship-bound Bulldogs, I can’t resist pointing out) discusses the issue in Forbes.

About 64% of Americans own a house. Roughly two-thirds of those homeowners have a mortgage. Only 6% of all mortgages are for $500,000 or more. Put all those numbers together and you will find that home builders and realtors think their world is ending over policy changes to the mortgage interest deduction that impact only about 2.5% of American households. Plus, existing mortgages are grandfathered in, so anyone who purchased a home expecting the deduction will continue to enjoy it. …doubling the standard deduction means fewer people will itemize, meaning fewer will use the mortgage interest deduction. Importantly, those households that stop itemizing are doing so because the newly enlarged standard deduction provides them a lower tax burden. Households that have more after-tax income have more money to spend on houses, mortgage payments, and everything else in the economy. Housing is not being made unaffordable by the proposed tax reform since the vast majority of Americans will receive a moderate tax cut under the plan. Home builders and realtors seem concerned that a few rich Americans might not buy as expensive houses without as big a tax break, even though they will have more disposable income. …Housing depends much more on disposable income, the health of the job market, and Americans’ confidence in the economic future than it does on tax breaks. Don’t listen to the real estate industry; they will be just fine if the Tax Cut and Jobs Act passes.

George Will is not a fan of housing preferences in the tax code.

…only around 30 percent of taxpayers itemize their deductions. …not even half of all homeowners use the deduction. …the unpleasantness of 2008 demonstrated the downside of encouraging too much homeownership. Furthermore, the deduction might actually suppress homeownership by being priced into rising housing costs. Besides, Australia, Canada and Britain, which have no mortgage interest deductions, have homeownership rates comparable to that of the United States. …Homeownership is…not an investment because “it does not improve the productive capacity of the economy.” Indeed, the more money that flows into housing, the less flows into stocks, bonds or banks.

Amen. We should have learned from 2008 that it’s bad news for government to muck around in housing.

Yet some politicians can’t resist because of their desire to buy votes.

Kevin Williamson of National Review adds his two cents.

It’s time for…a proposal to reduce or eliminate the mortgage-interest deduction, a tax subsidy that makes having a big mortgage on an expensive house relatively attractive to affluent households… Do not hold your breath waiting for the inequality warriors to congratulate Republicans for proposing…significant tax increases on the rich. …Slate economics editor Jordan Weissmann, who is not exactly Grover Norquist on the question of taxes, describes the mortgage-interest deduction as “an objectively horrible piece of public policy that should be reformed,” and it is difficult to disagree with him. It distorts the housing market in favor of higher prices, which is great if you are old and rich and own a house or three like Bernie Sanders but stinks if you are young and strapped and looking to buy a house. It encourages buyers to take on more debt at higher interest rates than they probably would without the deduction, and almost all of the benefits go to well-off households in the top income quintile. It is the classic example of upper-class welfare. …mortgage subsidies are not randomly distributed. The mortgage-interest deduction is much more important to rich people in San Francisco, where the median home price exceeds $1 million, than it is to middle-class people in Tulsa, where the median home price is about $110,000. …The best course of action would be to eliminate the mortgage-interest deduction entirely over a relatively short period of time, say five years. …it is difficult to make a compelling case that subsidizing Lena Dunham’s mortgage on her $5 million Brooklyn apartment (or helping out whoever took that $4.2 million Trump apartment off Keith Olbermann’s hands) needs to be a top national policy priority.

Writing for the City Journal, Howard Husock explains why the deduction is bad policy.

…the deduction should be pruned or eliminated—not just because it is inequitable but also because it distorts the housing market. Currently, a taxpayer can deduct interest on a mortgage up to $1.1 million—substantially more than the median U.S. home value ($203,000). Not surprisingly, the Government Accountability Office has found that higher-income households are generally more likely to use the mortgage-interest and property-tax deductions. In 2008, the most recent tax year for which data are available, taxpayers with adjusted gross incomes of $100,000 or more “accounted for 13 percent of all returns but claimed nearly half (47 percent) of all mortgage interest and property tax deductions.” …The core problem with the MID, though, lies in how it affects housing markets. Inevitably, any policy that provides a tax reduction for those who buy or own homes increases the price of housing, through the implicit promise that the tax code will lower the effective house payments. MID supporters say that it encourages homeownership, but the Urban Institute finds that it mostly “rewards affluent households who would have bought homes anyway,” …Not surprisingly, the homebuilders lobby—among the hardiest of Washington swamp creatures—is fighting the proposal. …Reducing tax deductions that put the U.S. at a competitive disadvantage should not be impeded by a special-interest group that has achieved its purported social goal—homeownership—in the U.S. at a rate (64 percent) that lags that of Canada (67 percent), where mortgage interest is not deductible.

Even folks on the left realize that housing preferences are bad policy.

Here are some excerpts from a Slate column.

It also must be said that the mortgage interest deduction is an objectively horrible piece of public policy that should be reformed. Currently, it’s an estimated $80 billion-plus subsidy that disproportionately helps upper-middle-class and wealthy households—according to the Tax Policy Center, 72 percent of its benefits go to the highest-earning 20 percent of taxpayers. This is to be expected, since wealthier people can buy larger houses and take out bigger mortgages. It also explains much of its political invulnerability; people who earn low- to mid-six-figures vote and very much treasure their slice of the welfare state that’s submerged in our tax code. But as a result, the deduction mostly encourages people who could have afforded homes anyway to buy bigger. Research has shown it does little if anything to expand homeownership overall, and may actually discourage it among younger American by driving up prices.

Derek Thompson of the Atlantic points out that housing preferences are a reverse from of class warfare.

Although about two-thirds of American households own a home, only one-quarter of them claim the deduction…households earning more than $100,000 receive almost 90 percent of the benefits. …it makes it harder for poor renters to join the class of homeowners. …Desmond writes, “a 15-story public housing tower and a mortgaged suburban home are both government-subsidized, but only one looks (and feels) that way.”

Scholars also find he deduction is not good policy.

A just-released academic study confirms that the right kind of tax reform will be very good for society, the economy, and homeownership.

The model demonstrates that repealing the regressive mortgage interest deduction decreases housing consumption by the wealthy, increases aggregate homeownership, improves overall welfare, and leads to a decline in aggregate mortgage debt. The mechanisms behind these results are intuitive. When both house prices and rents are allowed to adjust, the repeal of the mortgage interest deduction decreases house prices because, ceteris paribus, the after-tax cost of occupying a square foot of housing has risen. Reduced house prices allow low wealth, credit-constrained households to become homeowners because the minimum down payment required to purchase a house falls. At the same time, the elimination of the tax favored status of mortgages, acting in concert with the fall in equilibrium house prices, causes unconstrained households to reduce their mortgage debt. Because rents remain roughly constant as house prices decline, homeownership becomes cheaper relative to renting, which further re-enforces the positive effect of eliminating the mortgage interest deduction on homeownership. Importantly, the expected lifetime welfare of a newborn household rises because the tax reform shifts housing consumption from high income households (the main beneficiaries of the tax subsidy in its current form) to lower income families for whom the additional shelter consumption is relatively more valuable.

Now let’s look at experts who have strong arguments against the deduction, but who also comment on the distasteful role of special interests.

Matt Mitchell and Tad DeHaven, in a column for U.S. News & World Report, point out that the only real beneficiary of the deduction are interest groups (I call them swamp creatures) that want homeowners to go into debt in order to spend more money.

Motivated in part by a need to find revenue offsets for its broader tax cut proposal, the House has proposed to reduce the amount of mortgage debt taxpayers may deduct interest on from $1.1 million to $500,000; the Senate version would slightly reduce it to $1 million. But even these modest reforms have raised the ire of Big Housing. Indeed, even if both chambers had proposed to leave the mortgage interest deduction alone, this powerful lobby would still be upset that Congressional Republicans intend to raise the standard deduction: Doing so would cause fewer taxpayers to itemize, which means fewer people would claim the deduction. … the mortgage interest tax deduction…benefits wealthier Americans and the housing lobby at the expense of the majority of taxpayers, who receive no benefit…even the benefit for wealthier taxpayers is illusory “because the tax gains to homeowners are largely offset by increases in home prices.” That leaves the powerful housing lobby – represented most prominently by the National Association of Realtors and National Association of Homebuilders – as the real beneficiary. …why, then, has Big Housing fought so hard to keep the mortgage interest deduction? The answer is that although the deduction doesn’t affect home ownership, it does incentivize people to purchase more expensive homes. That translates into more money for realtors and home builders. And because the deduction is taken against the interest payment and not the down payment, it encourages home buyers to put more of the purchase on credit. So in reality, the deduction encourages home-borrowship, not homeownership. Did we mention that the Mortgage Bankers Association is also a prominent defender of the mortgage interest deduction?

Since we’re on the topic of swamp creatures, Tim Carney of the Washington Examiner explains that housing preferences are bad for families and good for interest groups.

That means a married couple who rents (or owns a modest house, say, less than $225,000) making $70,000 would probably see their federal income taxes fall by 25 percent. Some lower-income families — including homeowners — would have their federal income tax liability wiped out. Middle-class families who currently itemize their deductions (because they spend more $12,600 a year on mortgage interest and charitable giving) would have their taxes go down, and their tax-filing simplified. …Will this lower home prices? Probably yes, because the value of this deduction gets priced into homes. That is, this deduction wasn’t really helping homeowners anyway. Who was the deduction helping? Mortgage lenders and homebuilders mostly, also realtors. These are the special interests who created and who fight tirelessly to save this deduction. Removing an economic distortion that has inflated home prices will create some losers, sure, but that doesn’t make it bad. Inflated home prices have stultified mobility, delayed family formation, increased household debt, and otherwise tied up families’ assets.

Tom Giovanetti of the Institute for Policy Innovation also criticizes the interest groups defending special preferences.

One of the obstacles to fundamental tax reform has always been that there is an entrenched constituency that benefits in some way from every provision in the tax code, and that can be counted on to noisily oppose any change to it. These constituencies are often not taxpayers themselves but business interests that have built a business on a particular tax provision. An obvious example is the residential mortgage interest deduction. …current tax reform plans would increase the standard deduction available to taxpayers who choose not to itemize their deductions. In other words, the real estate industry has a targeted tax preference that is only available to home owners through the itemized deduction, and they don’t want to see that tax preference diluted by a higher standard deduction available to everyone else. This is an obnoxious argument for the real estate industry to be making. Giving a higher standard deduction to those who do not itemize doesn’t take anything away from taxpayers who do, and it would simplify tax filing for many taxpayers because it would make the standard deduction more attractive. Apparently the real estate industry doesn’t want Americans to get a tax break unless they agree to go into massive debt to buy a house.

The Wall Street Journal also opined about the odious role of interest groups.

…doubling the standard deduction…would make the first $24,000 of income for a married couple tax-free. What’s not to like? Plenty, says the housing lobby. The National Association of Homebuilders (NAHB) and the National Association of Realtors each bashed the larger standard deduction on grounds that it would make the tax subsidy to their industries less appealing. …a reminder of how misguided the mortgage-interest deduction is. For starters, it distorts the allocation of capital by favoring housing, a form of consumption, over investments that might be more productive and raise everyone’s living standards. The deduction also disproportionately benefits the affluent, who buy more expensive homes with bigger mortgages. A 2013 Congressional Budget Office study found that 75% of the benefit of the mortgage-interest deduction goes to the top 20% of income earners. Two of three American tax filers don’t even itemize, which means they can’t deduct mortgage interest even if they have it. It’s also not clear the mortgage deduction is as critical to home ownership as advocates contend. Canada and Britain have similar rates of home ownership as the U.S. (nearly two thirds of their citizens) without a mortgage-interest deduction. …Republicans should reconsider giving housing a pass. For example, the GOP could limit the amount of mortgage-interest that could be deducted, or limit the deduction to borrowing below, say, $250,000. This would make the tax benefit less tilted to the affluent, and it would also provide more revenue for lower tax rates.

Since the WSJ editorial mentions that Canada has very high homeownership without any loopholes, let’s close today’s column by reviewing some additional global evidence.

In a chapter for a book on tax reform, Bill Gale of Brookings points out that the U.K. dramatically curtailed the tax benefit of housing without any adverse impact on homeownership.

Great Britain conducted a fascinating experiment showing both the political and economic viability of reducing mortgage subsidies.’ When tax subsidies for most forms of borrowing were eliminated in 1974-1975, subsidies for interest on the principal primary residence were retained, subject to a loan limit of £25,000. No subsidies were provided on second homes. The limit was raised to £30,000 in 1983-1984 and has stayed fixed since. …More recently, the subsidy has been provided only up to a fixed rate, set at 25 percent and then reduced to 15 percent for new loans in 1998. The British experience raises several interesting possibilities. …because the £30,000 limit is well below the average new mortgage loan, mortgage subsidies provide no marginal incentive for most taxpayers. …the decline in the value of the mortgage interest subsidy has been gradual, but huge. From 1974 to 1996, the value-thought of as the interest rate times the rate at which the subsidy is taken times the real loan limit-fell by about 90 percent. Nevertheless, finding much of an effect of the policies on the housing sector is difficult. From 1974 to 1994, homeownership rates, the ratio of mortgage debt to GDP, the ratio of mortgage debt to the housing stock, and the ratio of housing to fixed capital rose faster in the United Kingdom than in the United States. …the significant reduction in mortgage subsidies when homeownership rates were rising (by thirteen percentage points from 1974 to 1994) may make the events even more remarkable from a political perspective. The British experience and cross-country evidence that the presence of a deduction for mortgage interest does not greatly influence homeownership rates suggest that the value of subsidies for owner-occupied housing could be reduced.

Charles Hughes of the Manhattan Institute writes about the deduction’s downsides, but the part of his article that I want to highlight is the description of how Denmark curtailed housing preferences with no adverse consequences.

Many areas in the tax code introduce substantial distortions that are ripe for reform. One area is the mortgage interest deduction (MID), which allows claimants to deduct mortgage interest on their primary or secondary residences, up to a certain threshold. The Joint Committee on Taxation estimates that the deduction for mortgage interest will reduce revenue by $72.4 billion this year, and by $234 billion through 2020, making it one of the most expensive tax expenditures in the tax code. Even at this magnitude, only about a quarter of tax filers claim the deduction… A new working paper analyzing the effects of the mortgage interest deduction in Denmark finds that it has no effect on homeownership rates in the long run, and it distorts decision-making about the size and price of which homes to buy. …the economists found no short- or long-run effects on home ownership.

Here’s a chart from that study. As you can see, dramatically curtailing the value of the deduction for mortgage interest did not have any noticeable impact on homeownership.

P.S. If you like the gory details of tax policy, I explained in 2012 that the problem with the tax code and housing isn’t the mortgage interest deduction, per se, but rather the fact that business investment doesn’t get the same treatment as residential real estate.

P.P.S. While lawmakers are debating whether to slightly limit preferences for housing, I should point out that there are two other huge loopholes – the municipal bond interest exemption and the healthcare exclusion – that basically were left untouched. Hopefully they will be on the chopping block for the next installment of tax reform.

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100 Years of Communism, 100 Million Deaths, and the Morally Bankrupt Death Cult of Che Guevara

It’s time for the final installment of my series commemorating the evil impact of 100 years of communism.

• We started at the end of October by looking at the 100 million victims of communist butchery.
• On November 5, we looked at the moral blindness of communist apologists.
• On November 7, we reviewed the silver lining of anti-communist humor.
• On November 9, we examined how some economists were reprehensibly clueless about communism.
• On November 14, we considered the economic challenges of nations escaping communist tyranny.
• On November 19, we analyzed the ongoing horror of North Korea’s brutal regime.

Today we’re going to wrap up the series with a look at Che Guevera and contemplate how a mass-murdering racist and homophobe became a cultural icon.

Jay Nordlinger looks at the legacy of Guevera in a column for National Review.

Danilo Maldonado Machado, a.k.a. El Sexto, the Cuban street artist and human-rights activist, who is in and out of prison. I interviewed him at the Oslo Freedom Forum. …At the end of our interview, I asked him a standard question: “What do you wish people could know?” And you know what he said? You know what were the first words out of his mouth? “Che Guevara was a murderer.  He wasn’t a hero.” …“Maldonado says he can excuse Cubans who wear Che shirts: They have been propagandized all their lives. He has a much harder time excusing men and women from free societies.”

Writing for the Washington Examiner, Tom Rogan has a good summary of Guevera’s monstrous life.

Che Guevara was definitely evil, almost certainly a moron, and possibly also a psychopath. …Acting as Castro’s Treasury Secretary, Guevara ignored the failures and associated moral hardships his collectivist policies imposed. …Guevara may have been a psychopath. …for ideological zealots like Guevara, purifying the Earth of non-believers is an act of the highest moral order. In Guevara’s blood lust, we see his mental union with the propaganda offerings of ISIS… Guevara was also intellectually defective to the point of being a moron. …Guevara’s fervent obstinance planted the roots of far-left delusion that prevail today. It doesn’t matter that every population that tries out capitalism…does better than under communism. …He might have murdered hundreds of political prisoners…the true metaphor of Guevara’s cigar smoking face is not one of moral courage, insurgent glory, and resolute intellect, but of a useful idiot for totalitarian propaganda.

Even the establishment understands that there’s something wrong about Che idolatry, as illustrated by this Economist column.

In death Che, with his flowing hair and beret, has become one of the world’s favourite revolutionary icons. His fans span the globe. …The ascetic, asthmatic Argentine doctor first fought alongside Fidel Castro in the mountains of Cuba’s Sierra Maestra. After the Cuban revolution had imposed communism on the island, Guevara left to try to “liberate” first Congo and then Bolivia. Those who idolise Che do so because they see him as an idealist who laid down his life for a cause. An aura of Christian sacrifice surrounds him. …In Guevara’s view, equality was to be achieved by levelling down. As minister of industries in Cuba, he wanted to expropriate every farm and shop. …the cost of miserable wages, the denial of opportunity and the brutal suppression of dissent. In Venezuela’s pastiche of the Cuban revolution, installed by the late Hugo Chávez, another Che fan, the masses have been impoverished while insiders have become fabulously and corruptly rich. …Not only does democracy offer the best hope of progress for the masses, it also protects the left against its own mistakes. It is long past time to bury Che and find a better icon.

Let’s go back in time and look at excerpts from a 2004 Slate column.

The cult of Ernesto Che Guevara is an episode in the moral callousness of our time. Che was a totalitarian. …Che was a mainstay of the hardline pro-Soviet faction, and his faction won. Che presided over the Cuban Revolution’s first firing squads. He founded Cuba’s “labor camp” system—the system that was eventually employed to incarcerate gays, dissidents, and AIDS victims. To get himself killed, and to get a lot of other people killed, was central to Che’s imagination. … “Hatred as an element of struggle; unbending hatred for the enemy, which pushes a human being beyond his natural limitations, making him into an effective, violent, selective, and cold-blooded killing machine. This is what our soldiers must become …”— and so on. …The present-day cult of Che—the T-shirts, the bars, the posters—has succeeded in obscuring this dreadful reality. …Che was an enemy of freedom, and yet he has been erected into a symbol of freedom. He helped establish an unjust social system in Cuba and has been erected into a symbol of social justice. He stood for the ancient rigidities of Latin-American thought, in a Marxist-Leninist version… I wonder if people who stand up to cheer a hagiography of Che Guevara…will ever give a damn about the oppressed people of Cuba—will ever lift a finger on behalf of the Cuban liberals and dissidents.

And here’s a grim body count from the Cuba Archive.

Ernesto Guevara, better known as “Che,” is the ultimate poster boy of “revolutionary chic,” a quintessential icon of mass culture. …the flesh and blood “Che” exhibited a deep contempt for the sanctity of human life. He knew from his communist self-education that terror would be a necessary component of revolutionary order. …from day one of the new revolutionary government, January 1, 1959, he and the Castro brothers set out to take control in Cuba by sheer terror through mass killings. …From January 1 to 3, 1959, Che executed, or left orders to execute, 25 people in Santa Clara. On January 3, Fidel Castro appointed him commander of La Cabaña prison in Havana and supreme judge of the revolutionary tribunals. In the few months Che was in charge of La Cabaña (from January 4 to November 26, 1959), 73 people are believed to have been executed without basic legal guarantees; the vast majority was killed immediately after kangaroo summary trials that often lasted minutes and presented no evidence of the alleged crimes of the accused. …Che spoke frankly to the international community about the revolutionary government’s killings in Cuba. At the United Nations in New York on December 11, 1964, he made his famous statement: “”Fusilamientos” (executions by firing squad), yes, we have executed, we execute, and will continue executing while necessary.”

Here’s some more background on Guevara from Politifact, including his murder of fellow Cubans and his racist attitude.

Ernesto “Ché” Guevara was a Latin American guerrilla leader and Marxist revolutionary, and a major figure in the Cuban revolution led by Fidel Castro in the late 1950s. Although hailed in some circles as a legendary icon of rebellion, the Argentine-born doctor is also reviled by many Cubans for ruthlessly ordering the execution of more than 150 prisoners in Cuba without a fair trial. …But was he a racist? …The most compelling evidence was from The Motorcycle Diaries, a book based on diaries he kept while traveling through Latin America in the early 1950s. ” …their different ways of approaching life separate them completely: The black is indolent and a dreamer; spending his meager wage on frivolity or drink; the European has a tradition of work and saving, which has pursued him as far as this corner of America and drives him to advance himself, even independently of his own individual aspirations.”

This story, by the way, attempts to exonerate Guevara even though it acknowledges his racist pedigree.

Guevara’s words in The Motorcycle Diaries were highly critical of the blacks he came across in that Caracas neighborhood, and he placed them beneath Europeans. The experts we consulted said the remarks are real and would not have been unusual coming from a 24-year-old from Argentina at the time. …We rate this claim Mostly False.

So he was racist, but it’s “Mostly False” to say he was racist because he was a product of his times.

Does anyone think Politifact would say that slaveowners in the 1840s weren’t really racist because they were products of their times? Likewise, who thinks defenders of the Jim Crow laws in the 1960s would get a free pass since they were products of their times?

For some bizarre reason, leftists (and lots of vacuous college kids and brainless celebrities) want to excuse – or even justify – Guevara’s unsavory life.

Indeed, notwithstanding a record of cruelty and hate, Che Guevara has a big contingent of fanboys.

Such as the government of Ireland.

An Post have issued a one euro stamp featuring the face of Che Guevara, a leading figure in the Cuban Revolution of the 1950s and 1960s. The stamp, which features a famous image of Guevara by Dublin artist Jim Fitzpatrick, commemorates the 50th anniversary of the revolutionary’s death on October 9, 1967. …Designed by Red&Grey, the stamp is based on Mr Fitzpatrick’s artwork, which appears on t-shirts, posters, badges and clothing worldwide and is now rated among the world’s top 10 most iconic images.

I’m assuming Ireland’s vacuous president somehow played a role in the decision to honor Guevera.

In any event, I can’t wait to see the new stamps for Hitler, Mao, and Stalin that the Irish postal service doubtlessly is preparing.

The United Nations also is part of the Che death cult.

With an impeccable instinct for venerating murderous thugs, the United Nations Educational, Scientific and Cultural Organization (UNESCO) has now added to its Memory of the World Register the writings of Cuba’s Ernesto “Che” Guevara. That means that the documents generated by Che during his bloody career will now be treated as historical treasures, protected and cared for with the help of UNESCO. What’s next? The teachings of Stalin and Pol Pot? …Che’s works were nominated for UNESCO’s special attentions by Cuba and Bolivia, and to be added to the UNESCO Register the nomination had to be endorsed by UNESCO’s director-general, Irina Bokova. You might suppose that as a former Bulgarian government functionary, from the days when Bulgaria orbited the Soviet Union, Bokova would be aware of the horrors behind Che’s radical “cool.” But Bokova appears to suffer from a longstanding infatuation with Cuba’s repressive regime. …one might wish for a UN cultural organization endowed with at least some hint of a moral compass.

Let’s look at a couple of videos.

We’ll start with Johan Norberg’s succinct summary of Guevara.

Reason has a video about the Che fetish, with a special focus on Hollywood’s moral bankruptcy.

Let’s close on an uplifting note.

Some people are waking up on the issue, as noted in a report from the Economist.

Che Guevara was born in Rosario, then Argentina’s second-largest city… A red banner marks the posh apartment block where he was born. A four-metre-high (13-foot) bronze statue stands in Che Guevara Square. The city council finances CELChe, a centre devoted to the study of his life, and celebrates “Che week” around his birthday in June. …Not everyone in Rosario thinks the bereted revolutionary…deserves such reverence. Fundación Bases, a liberal think-tank based in the city, has launched a petition to persuade the city council to remove the monuments. The martyr was himself a killer, says Franco Martín López, the institute’s director. Guevara was second-in-command to Fidel Castro, whose Cuban revolution killed more than 10,000 people. …Under the motto “a murderer doesn’t deserve state tributes”, Mr López’s foundation has produced videos to educate Argentines, and rosarinos in particular. One shows a clip of Guevara promising to “continue the firing squads for as long as necessary” in a speech to the UN General Assembly in 1964. In another, a narrator reads out the accusatory suicide note of Reinaldo Arenas, a gay novelist who died in 1990 after suffering decades of persecution by Cuba’s government. …Norberto Galiotti, the cigar-smoking secretary of Rosario’s Communist Party, …suspects liberals are envious of Che’s posthumous charisma. “You don’t see many kids walking around with Margaret Thatcher T-shirts,” he observes.

I rarely agree with communists, but it is sad that kids are more likely to idolize Guevara than a great leader like Margaret Thatcher.

By the way, my disdain for Che and the Cuban dictatorship does not mean I support a trade embargo by the United States.

Such a policy may have been appropriate when the Soviet Union still existed and was using Cuba as a proxy regime. But that’s no longer the case.

Yes, the current regime in Cuba is still deplorable. It impoverishes and oppresses its own people. But that description applies to a lot of nations that have normal economic relations with the United States. If we allow trade and travel with China, Venezuela, and Saudi Arabia, the same should be true for Cuba.

The bottom line is that we can have economic relations with unsavory nations. Even with nations that produce evil people like Che Guevara.

P.S. Returning to the topic of Che Guevara fanboys, don’t forget the cynical actions of Mercedes-Benz. But at least the company apologized.

P.P.S. If you want to understand the economic impact of communism, consider the astounding fact that Cuba and Hong Kong had similar living standards in the late 1950s.

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The Policy Solution to the World’s Demographic Problem

I wrote yesterday about “the world’s demographic problem,” citing a new study about the fiscal implications of aging populations. The report was produced by the Organization for Economic Cooperation and Development, which is not my favorite international bureaucracy when they make policy recommendations, but I’ll be the first to admit that the bureaucrats produce some useful statistics and interesting reports.

To be succinct, the basic message of the study is that developed nations (the U.S., Europe, Asia, etc) face a demographic nightmare of increased longevity and falling birthrates.

It’s good that people are living longer, of course, and there’s nothing wrong with people choosing to have fewer kids. But since most governments maintain tax-and-transfer entitlement programs, the OECD report basically warns that those demographic changes have some very grim fiscal implications. In other words, the world’s demographic shift is actually a policy problem.

That’s the bad news.

The good news is that there’s a policy solution.

The aforementioned OECD study (which can be accessed here) is a survey of how retirement income is provided in key nations. So in addition to grim information about fiscally unstable government-run retirement systems we looked at yesterday, the report also has data about the nations that rely – at least to some degree – on private savings.

Let’s start with this helpful flowchart in the report. It illustrates that there are three approaches for the provision of retirement income. The first tier is government-run programs such as the U.S. Social Security system and the third tier is voluntary savings such as IRAs and 401(k)s in America.

For today’s discussion, let’s focus on the second tier. These are the systems that are “funded” with mandatory savings.

And I highlighted (in green) the two private options. In a “defined contribution” system, retirement income is determined by how much is saved and how well it is invested. Workers accumulate a big nest egg and then choose how to spend the money when retired. In a “defined benefit” system, workers are promised a pre-determined level of retirement income and the managers of their pension funds are expected to ensure that enough money will be available.

Yes, public options based on real savings do exist. And they presumably are better than the pay-as-you-go, tax-and-transfer schemes found in the first tier. But it’s also the case that these systems (such as pension funds for state and local bureaucrats) generally don’t work very well.

So now let’s look at another table from the OECD report. It shows nations that have some degree of mandatory private retirement savings, either defined contribution (highlighted in red) or defined benefit (highlighted in yellow). As you can see, there actually are a lot of “privatized” systems.

I’ve actually written about many of these systems, especially the ones in Australia and Chile.

And I have very recent columns on the Dutch and Swiss systems.

A common theme in these columns is that government-run systems are very risky because workers are at the mercy of politicians, who are great at making extravagant promises. But huge unfunded liabilities show that they’re not very good at delivering on those promises.

Nations with funded systems, by contrast, accumulate private savings. That’s not only good for workers, but it’s very beneficial for national economies.

This table from the OECD report shows that Americans and Canadians have managed to save a lot of money, but all of the other nations with pension assets of more than 100 percent of GDP have mandatory funded systems.

When I talk about how the United States would benefit by moving to a private retirement system, people sometimes say it sounds too good to be true.

That’s obviously not the case since other nations have very successful private systems. But there is a catch, as I acknowledged in 2015.

…a big challenge for real Social Security reform is the “transition cost” of financing promised benefits to current retirees and older workers when younger workers are allowed to shift their payroll taxes to personal accounts. Dealing with this challenge presumably means more borrowing over the next few decades.

The appropriate analogy is that shifting to private retirement accounts for younger workers (while protecting current retirees and older workers) would be like refinancing a mortgage. The short-run costs might be higher, but that temporary burden is overwhelmed by the long-run savings. That’s a good deal, at least if the goal is fiscal stability and secure retirement.

Or we can stay with the current approach and become another Greece.

P.S. Social Security reform is especially beneficial for blacks and other minorities.

P.P.S. There is some risk with personal retirement accounts. But I’m not talking about the implications of a falling stock market crash (even a horrible crash would be offset by decades of compounding earnings). Instead, I’m referring to the possibility that future politicians might simply confiscate the money.

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The World’s Demographic Problem

I gave a speech last night at the University of Texas Arlington on the topic of “Is America turning into Greece? How the growth of government and debt risk creating a dismal future for young Americans.”

Not a very succinct title, I realize, but I wanted to warn students that they are the ones who will suffer if today’s politicians fail to enact genuine entitlement reform. And since I told them I wasn’t expecting reform with Trump in the White House, my message was rather gloomy.

My only good news is that I told students that nations such as Italy, Japan, and France likely would suffer fiscal crises before the you-know-what hit the fan in America.

Though it would have been better if my speech was today. I could have cited this Robert Samuelson column from the Washington Post.

No one can say we weren’t warned. For years, scholars of all shapes and sizes — demographers, economists, political scientists — have cautioned that the populations of most advanced countries are gradually getting older, with dramatic consequences for economics and politics. But we haven’t taken heed by preparing for an unavoidable future. The “we” refers not just to the United States but to virtually all advanced societies. In fact, America’s aging, though substantial, is relatively modest compared with that of many European countries and Japan. …The problem is simple. Low birth rates and increasing life expectancies result in aging populations. Since 1970, average life expectancy at age 60 in OECD countries has risen from 18 years to 23.4 years; by 2050, it’s forecast to increase to 27.9 years — that is, to nearly 90. The costs of Social Security and pensions will explode. …The implication: Unless retirement ages are raised sharply or benefits are cut deeply, more and more of the income of the working-age population will be siphoned off through higher taxes or cuts in other government spending to support retirees.

Here’s a table from the article that shows the radical erosion in the age-dependency ratio for selected nations. To give you an idea what the numbers mean, a ratio of 33 (Greece today) means that each worker is supporting one-third of a retiree while a ratio of 73 (Greece in 2050) means that each worker is supporting three-fourths of a retiree.

The Greek numbers are grim, of course, and Italy and Japan are also in very bad shape.

And it’s worth noting that the ratio in China will rapidly deteriorate.

An article in New Scientist makes a similar observation about dramatic demographic change.

Could the population bomb be about to go off in the most unexpected way? Rather than a Malthusian meltdown, could we instead be on the verge of a demographic implosion? To find out how and why, go to Japan, where a recent survey found that people are giving up on sex. Despite a life expectancy of 85 and rising, the number of Japanese is falling thanks to a fertility rate of just 1.4 children per woman… Half the world’s nations have fertility rates below the replacement level of just over two children per woman. Countries across Europe and the Far East are teetering on a demographic cliff, with rates below 1.5. On recent trends, Germany and Italy could see their populations halve within the next 60 years.

The most sobering information is contained in a new report from my “friends” at the Organization for Economic Cooperation and Development. I’m definitely not a fan of the OECD’s policy work, but it does a good job of collecting apples-to-apples data.

Let’s start with the OECD’s calculations of how the old-age dependency ratio will change in various nations.

It’s not good to have a very tall black line in Figure 1.1, so we can confirm the bad news about Italy, Greece, and Japan. But note that Spain, Portugal, and South Korea also face a grim future. Simply stated, tomorrow’s workers will face an enormous burden.

There are two reasons for these grim numbers.

First, we’re living longer. That’s good news for us, but it’s bad news for the sustainability of tax-and-transfer entitlement programs (i.e., this partially explains why Social Security in the U.S. has a $44 trillion shortfall).

This chart shows that increasing longevity is a big reason why both men and women are spending more years in retirement (though there’s a glimmer of good news since the data shows that we’re no longer retiring at ever-younger ages).

In addition to living longer, we’re also having fewer kids.

This is a big deal because more babies today mean more future taxpayers.

But you can see from this table that birthrates have declined in America, as well as in other developed nations (keep in mind that a fertility rate of 2.1 is needed to keep the native-born population from shrinking).

Even more shocking, check out the demographic data for Japan and South Korea. Birth rates in Japan already had fallen by 1960 and they’re even lower today. But the numbers for South Korea are staggering.

Wow.

I guess it’s now easy to understand this story from South Korea.

Students at two South Korean universities are being offering courses that make it mandatory for them to date their classmates as the country battles to reverse one of the lowest birth rates in the world. Seoul’s Dongguk and Kyung Hee universities say the courses on dating, sex, love and relationships target a generation which is shunning traditional family lives. …She said: ”Korea’s fall in population has made dating and marriage important but young Koreans are too busy these days and clumsy in making new acquaintances.” And as part of the course, students have to date three classmates for a month… Seoul has spent about £50 billion trying to boost the birth rate.

I don’t know what’s the strangest part of the article, the part about having to date your classmates as part of homework (do you get extra credit if the girl gets pregnant?!?) or the part about the government squandering an astounding 50 billion pounds (about 67 billion dollars) on trying to encourage kids (I guess politicians never learn).

Or this story from Japan that brings back painful memories of high school.

Talk about a shrinking population. A survey of Japanese people aged 18 to 34 found that almost 70 percent of unmarried men and 60 percent of unmarried women are not in a relationship. Moreover, many of them have never got close and cuddly. Around 42 percent of the men and 44.2 percent of the women admitted they were virgins. The government won’t be pleased that sexlessness is becoming as Japanese as sumo and sake. The administration of Prime Minister Shinzo Abe has talked up boosting the birthrate through support for child care, but until the nation bones up on bedroom gymnastics there’ll be no medals to hand out. …Boosting the birthrate is one of the coveted goals of the Abe administration, which has declared it will raise the fertility rate from the current 1.4 to 1.8 by 2025 or so.

The bottom line, as Samuelson suggested in his column, is that western nations are facing a baked-in-the-cake demographic-fiscal crisis.

What’s sad is that we know the crisis will happen, but politicians in most nations have no intention of solving the problems.

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Lessons from Portugal about Ending the Drug War

When I explain to people how the government’s War on Drugs violates the rights of people to do dumb things to their own bodies, they intellectually understand but they’re usually not convinced.

When I also explain why the Drug War causes additional crime and enriches mobsters, they almost always nod their heads in agreement but resist the obvious implication that we should decriminalize.

When I then explain that the War on Drugs has led to horrific policies such as civil asset forfeiture and senseless policies such as costly and ineffective money-laundering laws, they agree that the consequences are bad but they’re generally unpersuaded about legalization.

The stumbling block in every case is that they fear decriminalization will lead to more drug use, more addiction, and more suffering families.

Unfortunately, we don’t have a lot of real-world examples to put their minds at ease. But “a lot” isn’t the same as “any.”

This report about Portugal from the U.K.-based Guardian is must reading and may convince the doubters that we can end the War on Drugs without societal chaos and decay. It starts  with an observation about the ravages of illegal drugs.

It was the 80s, and by the time one in 10 people had slipped into the depths of heroin use – bankers, university students, carpenters, socialites, miners – Portugal was in a state of panic. …one in every 100 Portuguese was battling a problematic heroin addiction at that time… Headlines in the local press raised the alarm about overdose deaths and rising crime. The rate of HIV infection in Portugal became the highest in the European Union.

This led to predictable responses.

In the early days of Portugal’s panic, …the state’s first instinct was to attack. Drugs were denounced as evil, drug users were demonised, and proximity to either was criminally and spiritually punishable. The Portuguese government launched a series of national anti-drug campaigns that were less “Just Say No” and more “Drugs Are Satan”.

But something remarkable then happened. Rational voices began to push a libertarian-oriented message.

The first official call to change Portugal’s drug laws came from Rui Pereira, a former constitutional court judge who undertook an overhaul of the penal code in 1996. He found the practice of jailing people for taking drugs to be counterproductive and unethical. “My thought right off the bat was that it wasn’t legitimate for the state to punish users,”

And Portugal ultimately went in that direction – and got very positive results.

In 2001, …Portugal became the first country to decriminalise the possession and consumption of all illicit substances. …The opioid crisis soon stabilised, and the ensuing years saw dramatic drops in problematic drug use, HIV and hepatitis infection rates, overdose deaths, drug-related crime and incarceration rates. HIV infection plummeted from an all-time high in 2000 of 104.2 new cases per million to 4.2 cases per million in 2015. …The official policy of decriminalisation made it far easier for a broad range of services (health, psychiatry, employment, housing etc) that had been struggling to pool their resources and expertise, to work together more effectively to serve their communities.

Here’s a summary of the Portuguese approach, which certainly seems more humane and logical than what we do in America.

Portugal’s policy rests on three pillars: one, that there’s no such thing as a soft or hard drug, only healthy and unhealthy relationships with drugs; two, that an individual’s unhealthy relationship with drugs often conceals frayed relationships with loved ones, with the world around them, and with themselves; and three, that the eradication of all drugs is an impossible goal.

Want some additional evidence?

Here’s a chart from the invaluable Mark Perry of the American Enterprise Institute.

A 2009 study from the Cato Institute also highlighted the benefits of Portugal’s reform.

Because more than seven years have now elapsed since enactment of Portugal’s decriminalization system, there are ample data enabling its effects to be assessed. Notably, decriminalization has become increasingly popular in Portugal since 2001. …very few domestic political factions are agitating for a repeal of the 2001 law. …none of the nightmare scenarios touted by preenactment decriminalization opponents — from rampant increases in drug usage among the young to the transformation of Lisbon into a haven for “drug tourists” — has occurred. …The political consensus in favor of decriminalization is unsurprising in light of the relevant empirical data. …drug usage rates in Portugal, which, in numerous categories, are now among the lowest in the EU, particularly when compared with states with stringent criminalization regimes. …drug-related pathologies — such as sexually transmitted diseases and deaths due to drug usage — have decreased dramatically. …judged by virtually every metric, the Portuguese decriminalization framework has been a resounding success.

By the way, allow me to reiterate that my support for decriminalization is not an endorsement of drug use.

It’s not just that I’m a teetotaler and want others to make the same choice. Stories like this one from CNN genuinely worry me.

Regina Mitchell, a co-owner of Warren Fabricating & Machining in Hubbard, Ohio, told The New York Times this week that four out of 10 applicants otherwise qualified to be welders, machinists and crane operators will fail a routine drug test. …”We have a 150-ton crane in our machine shop. And we’re moving 300,000 pounds of steel around in that building on a regular basis. So I cannot take the chance to have anyone impaired running that crane, or working 40 feet in the air.” …For 48 of the 50 years her company has been around, drug abuse had never been an issue, she told Smerconish.”It hasn’t been until the last two years that we needed to have a policy, a corporate policy in place, that protects us from employees coming into work impaired,” she said. …there are almost 12,000 open skilled labor jobs in Mahoning County.”There are good-paying jobs and the opportunity for people in our area. We just can’t find people to show up who can pass a drug test,” she said.

This is not good news for the country. And I’ve personally spoken to several employers in other parts of the country who have made the same point.

But I’ll simply observe that we have this problem with drugs being illegal already. Given the evidence from Portugal, I’m hopeful that decriminalization might lead to less drug use.

I also wonder whether redistribution programs enable reckless behavior. In other words, people may decide it’s okay to be stoners because they can rely on handouts to stay alive instead of staying clean and having a job.

In any event, let’s review a couple of additional stories. Here’s a column from National Review, written by Michelle Malkin, which shows continuing progress on the right.

My own interest in pediatric use of medicinal marijuana is more than academic. When my daughter, Veronica, fell ill in late spring of 2015 — unable to breathe normally, bedridden with chronic pain and fatigue — she saw of specialists. …The various drugs prescribed to my daughter weren’t working and had awful side effects. …To our surprise, the mainstream neurologist suggested Veronica try CBD. This doctor had other young patients who used CBD oil with positive results… So we did our own independent research…consulted with other medical professionals and friends — and entered a whole new world. Two physicians signed off on our daughter’s application for a medical-marijuana card. She became one of more than 360 children under 18 to join Colorado’s medical-marijuana registry in 2015. …we became pediatric pot parents. For Veronica, CBD provided more relief than all the other mainstream pharmaceutical interventions she had endured, and without the scary side effects.

To her credit, Michelle has learned that the harm of government intervention exceeds any potential benefit.

As a lifelong social conservative, my views on marijuana policy may surprise some of you. I used to be a table-pounding crusader for the government’s war on drugs. …But the war on drugs has been a ghastly quagmire — an expensive and selective form of government paternalism that has done far more harm than good. What has this trillion-dollar war wrought? Overcrowded jails teeming with nonviolent drug offenders. An expanded police state enriched by civil asset forfeiture. And marginalization of medical researchers pursuing legitimate research on marijuana’s possible therapeutic benefits for patients with a wide variety of illnesses. …let me be clear as a liberty-loving, conservative mom: Keep your hands off. Let the scientists lead. Limited government is the best medicine.

Her commentary brings to mind this snarky – but accurate – image from Reddit‘s libertarian page.

Now let’s add some economic analysis to the discussion.

Here’s some insight from the Foundation for Economic Education about how the Drug War is increasing the potency and danger of drugs.

One issue that is often mentioned but rarely explained is the increasing potency of illegal drugs, whether it be cannabis with a high percentage of THC in the US or super potent MDMA (Ecstasy) in Europe. What’s behind this phenomenon? …economic theory might have the answer. …The theory that can explain rising drug potency under prohibition was first described in 1964 by Armen Alchian and William R Allen. It states that when the price of two substitute goods is increased by a fixed per-unit amount (such as transportation or taxation) the consumer will opt for the higher priced, higher quality good because the price of the more expensive product has sunk in proportion to the price of the less expensive product. …In the particular case of illegal drugs, two different kinds of drugs–let’s say two different kinds of cannabis–act as the substitute goods. When buying illegal drugs on the black market, you do not only pay for the drug itself. On top of the monetary price comes the potential social cost you pay. This can range from a small regulatory offence, where you must pay a fine, to a felony where you can face a prison sentence. This comes with other problems: losing your job, family, social status and so on. This is the fixed per-unit cost added on top of the price of the drug itself.

All of which leads to yet another reason why prohibition is backfiring and another reason why decriminalization is the answer.

It is not worth the risk to buy a low-quality product regarding the potential price you must pay. …Drug cartels have recognised this behaviour and increased the potency of their drugs (i.e. improved the quality of their product) so you get more value for the potential fixed per-unit cost you pay. …What sounds good in economic theory becomes a massive public health problem in real life. The potency of many drugs has increased too much. As it is in most prohibitionist countries, many consumers don’t know exactly what drug they are taking and in which dosage they are consuming the drug: not to mention added substances that increase quantity. …If drugs were decriminalized, customers would have knowledge about the contents of their MDMA, their cocaine, their cannabis. Drugs that are too potent could easily be avoided. Legalized drugs would include packaging with the specific content. Sales in specialized stores would allow customers to receive medical help if they show signs of problematic consumption, without fear of being imprisoned over it.

And since we’ve veered into some economic analysis, one of the reasons I favor legalization is that I don’t want law enforcement resources being misallocated.

Which is why this column resonates with me.

Police in Ohio are blaming a lack of resources for the fact that unsolved homicide cases greatly outnumber the cases that are solved, yet they seem to have the resources to arrest thousands of suspected cannabis users. …in the state of Ohio…an average of over 20,000 people are arrested on charges of cannabis possession each year. …despite the fact that they seem to have plenty of resources when it comes to arresting and detaining nonviolent offenders, police in Ohio are blaming a lack of resources for the fact that the number of homicide cases they solve continues to decline. …How did police in the United States go from solving over 90 percent of homicides in the 1960s to around 60 percent today, with cities like Columbus solving as little as 30 percent of homicides? It was not a change in resources—it was the introduction of the Drug War. …“Around the country, police make more arrests for drug possession than for any other crime,” an ACLU and Human Rights Watch report found last year. “More than one of every nine arrests by state law enforcement is for drug possession, amounting to more than 1.25 million arrests each year.” In fact, police make more arrests for marijuana possession alone than for all violent crimes combined. …As states like Ohio find that the number of unsolved homicide cases greatly outnumber the cases that are solved, it makes you wonder—what more could they accomplish if they were able to use their resources to track down violent murder suspects, instead of wasting them on nonviolent individuals who are found in possession of a plant?

Let’s close with some wisdom from Milton Friedman (h/t: Reddit).

As was so often the case, Friedman was right. If you look at the real-world consequences of the War on Drugs, the net effect of prohibition has been to enrich some very bad people.

P.S. It’s an open question whether the War on Drugs has been more damaging or less damaging than the War on Poverty. I guess the moral of the story is that there are a lot of “friendly fire” casualties when politicians declare war.

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Big Government Can Be Deadly, Literally

Too much government can be hazardous to your health.

• But I’m not talking about government killing you because you bet on a football game.
• And I’m not talking about government killing you for selling an untaxed cigarette.
• Nor am I talking about government killing you with bureaucrat-run healthcare.

Instead, this is a column about the wonky issue of cost-benefit analysis. Specifically, we’re going to look at whether some regulations can be sufficiently onerous that the resulting economic damage actually produces needless death. This insight can even apply to regulations that are designed to save lives!

It’s quite common, when I first suggest this hypothesis, for people to think I’m nuts. But they begin to see the light when I share this example from an article I wrote 25 years ago for the Journal of Regulation and Social Cost.

People in wealthier nations, on average, live longer and better lives than residents of poorer nations. …government policy makers should consider the adverse effects on health and mortality of economic policies that impose costs on the productive sector of the economy. …it is quite possible that regulations designed to reduced mortality and morbidity, if they impose sufficiently high costs on the economy, actually can result in premature deaths and a less healthy population. Banning the use of motor vehicles, for instance, would save…lives lost annually in traffic accidents as well as preventing whatever number of premature deaths can be attributed to auto emissions. …It would be absurd, however, to…support the elimination of motor vehicles… The higher living standards made possible by fast and efficient transportation clearly must result in reduced mortality…rates over time for the general population.

I don’t know if they accept that society would be so much poorer that – on net – more people would die. But they definitely grasp that there’s a tradeoff.

And that’s a big victory. After all, people are much more likely to accept cost-benefit analysis when they understand that a decision can have both good and bad consequences.

I wrote about this topic back in 2012 because supporters of President Obama basically accused Mitt Romney of contributing to the death of a woman who lost her health insurance. So I looked at the academic data on the relationship between economic prosperity and lifespans to measure Obama’s body count.

Looking over much of this research, it appears that $14 million is a reasonable middle-ground estimate of how much foregone income is associated with a needless death. Now let’s do some simple math to get an estimate of the total number of preventable deaths caused by the economy’s sub-par performance during Obama’s reign. …divide $836.6 billion (our earlier estimate of foregone growth) by $14 million and we get an estimate that Obama’s policies have caused 59,757 deaths.

In that column, I warned that my back-of-the-envelope calculations were not very unreliable, and I also pointed out that it would be wrong to hold Obama personally accountable for any premature deaths.

I simply wanted people to understand that a weak economy has serious consequences (I also thought that Obama’s supporters were making a very dodgy attack on Romney, particularly since there were so many other reasons to criticize the GOP candidate).

But I’m beginning to digress. The purpose of today’s column is to further explain why we should be concerned about the economic damage of excessive government. But not just because of lost income and reduced prosperity. We also need to recognize that a weaker economy translates into needless deaths.

So let’s look at some additional research.

A study prepared for the Environmental Protection Agency provides a dispassionate analysis of this form of cost-benefit analysis. The report starts with a couple of specific examples.

The essence of risk-risk analysis, as it will be referred to here, is the assertion that regulations seeking risk-reduction benefits may also unintentionally increase risks, and by enough in some cases to outweigh the intended benefits. …One such situation currently of concern is the possibility that parents with young children might elect the more risky option of driving a long distance instead of the less risky alternative of flying if the latter alternative is rendered much more expensive by a requirement to purchase a seat on the aircraft for the child instead of sharing a seat with the parent. Similarly, if regulations governing small drinking system quality are sufficiently costly, individuals might elect to use private wells, which could pose even more risks to their health than the public water supply in the absence of the costly rules.

It then puts forth the sensible hypothesis about the economy-wide implications of onerous red tape.

A slightly different version of risk-risk analysis is predicated on the observation that people’s wealth and health status, as measured by mortality, morbidity, and other metrics, are positively correlated. Hence, those who bear a regulation’s compliance costs may also suffer a decline in their health status, and if the costs are large enough, these increased risks might be greater than the direct risk-reduction benefits of the regulation. Advocates of risk-risk analysis emphasize its use as an important commonsense screen… It does seem eminently reasonable not to promulgate costly rules that actually increase risks rather than decrease them.

The study looks at some of the past academic literature.

Lutter and Morrall (1994) attribute to Aaron Wildavsky, see for example Wildavsky (1980), the general proposition that government programs tend to reduce economic growth, thereby interfering with the primary mechanism by which human health has improved over time. According to Lutter and Morrall, the first to apply this principle quantitatively was Keeney (1990), who calculated that an additional death occurs for roughly each $3.14 million to $7.25 million of income lost (1980 dollars). OMB on several occasions has brought health-health analysis to bear both in its review of OSHA regulations related to worker safety, and in examining regulations of other agencies, such as EPA and FDA. For example, using a finding that $7.5 million of costs induces one additional statistical death, OMB argued that although OSHA’s proposed permissible exposure limits for a large number of workplace air contaminants would offer the benefit of preventing 8 to 13 deaths per year, the regulatory costs of $163 million per year would indirectly cause some 22 deaths annually. On that basis, OMB suspended its review of the proposed regulation and OSHA agreed to study the issue further….researchers continue to further refine this estimated relationship between income and mortality risk. For example, Viscusi (1994) reports various estimates of the lost income that induces an additional statistical death ranging from $1.9 million to $33.2 million, and indicates that his own research (in press at the time) places this number at about $30 million to $70 million.

Keep in mind that the Environmental Protection Agency is not a hotbed of free market radicals. So it’s noteworthy that at least some people at that bureaucracy realize that there should be some cost-benefit constraints on regulation.

The Institute of Energy Research also explored the issue.

…in practice we all make decisions that increase the risk of death, and in that sense, we trade off our own longevity for other goals. In this context, economists can estimate the implied value of a human life, judged by the choices of the individuals themselves. One surprising implication of this approach is that costly government regulations not only reduce Americans’ standard of living, but they also indirectly lead to more deaths. In a modern economy, wealth is health, and so an inefficient regulation doesn’t merely reduce GDP—it also reduces average lifespans. …By analyzing consumer behavior, economists can come up with rough estimates of the implied “value of a statistical life” (VSL) that this behavior exhibits.

Here’s an example.

…suppose a very stringent rule on the emission of soot from smokestacks theoretically would reduce deaths by 2,000 lives, but at an aggregate cost to the economy of $80 billion in forfeited GDP. With these numbers, even on its own terms, such a regulation would save lives at a price of $40 million per life. This is much more than typical Americans spend with their own money to reduce risks and prolong their lifespans, and thus it indicates that the proposed regulation is inefficient because it implicitly forces Americans to “spend” much more on reducing a particular risk, rather than on other goods and services that they value more.

And here’s the key takeaway.

…there is a well-established causal connection between wealth and health. Costly federal regulations make Americans poorer and thus indirectly lead to more deaths, because poorer people are less able to take advantage of private methods of prolonging their lives. If regulations are particularly inefficient, this indirect effect might overwhelm the direct benefit of the regulation, meaning that it not only makes Americans poorer, but actually kills them on net.

Here are some excerpts from a study published by the AEI-Brookings Joint Center for Regulatory Studies.

Many forms of regulation have grown dramatically in recent decades—especially in the areas of environment, health, and safety. Moreover, expenditures in those areas are likely to continue to grow faster than the rate of government spending. Yet, the economic impact of regulation receives much less scrutiny than direct, budgeted government spending. We believe that policymakers need to rectify that imbalance. …We should judge regulations by their individual benefits and costs… One study found that a reallocation of mandated expenditures toward those regulations with the highest payoff to society could save as many as 60,000 more lives per year at no additional cost. …the costs of compliance with regulations pose risks. Compliance typically reduces the amount of private resources that people have to spend on a wide range of activities, including health care, children’s education, and automobile safety. When people have fewer resources, they spend less to reduce risks. The resulting increase in risk offsets the direct reduction in risk attributable to a government action. Moreover, if that direct risk reduction is small and the regulation is very ineffective relative to its cost, then total risk could rise instead of fall.

The AEI-Brookings report also looks at some of the existing research.

Dozens of articles in economics and public health journals substantiate the claim that richer people live longer.10 Simple correlations of annual death rates and income suggest that a community whose income rises by about $10 million can expect about one fewer death. …Sunstein argued that courts should find that regulations that raise risks rather than lower them are arbitrary and capricious. … Lutter, Morrall, and Viscusi…estimated that an increase in income of about $15 million in a large U.S. population reduces mortality risk by one statistical death.

The authors look at regulations from the 1980s and 1990s and calculate which ones saved lives and which ones cost lives.

By the way, allow me to interject by pointing out some specific examples of regulations that are on the books and are causing needless deaths.

• Fewer life-saving drugs because of an overly cautious Food and Drug Administration.
• Anti-gun policies that leave people defenseless.
• Rules that limit the amount of organs available for transplants.

Now let’s close with a look at a very recent analysis from the Mercatus enter.

…many regulations result in unintended consequences that increase mortality risk in various ways. These adverse repercussions are often the result of regulatory impacts that compete with the intended goal of the regulation, or they are direct behavioral responses to regulation. As examples, fuel efficiency regulations can encourage automobile manufacturers to produce smaller cars that are more dangerous in an accident (Crandall and Graham 1989). Increased airport security measures after 9/11 made air travel more inconvenient, which has led to increases in estimated car accident deaths as individuals substituted driving for flying (Blalock, Kadiyali, and Simon 2007). …Finally, regulatory efforts reduce individual expenditures on health, both because risk reduction achieved through regulation is a substitute for private risk reduction and because the costs incurred by regulations reduce private health-related expenditures. It is this last item that has been the focus of health-health analysis (HHA).

The authors look at potential ways of conducting this type of cost-benefit analysis.

Despite a robust academic literature that spans decades, HHA has not become widely used by policymakers… HHA relies on an estimate of what is known as the cost-per-life-saved cutoff (the “cutoff”), which is a threshold cost-effectiveness level beyond which life-saving regulations will be counterproductive in that they can be expected to induce more fatalities than they prevent. …There are two competing ways of identifying the cutoff, a direct approach based on empirical observation and an indirect approach grounded in economic theory. …The indirect approach, which is our preferred method, relies on a theoretical model of the income-mortality relationship that is calibrated using data on the value of a statistical life (VSL) and the marginal propensity to spend on health (MPSH). …Employing the indirect approach has led to a cost-per-life-saved cutoff value closer to $85 million for the United States. We employ the indirect approach here as well, estimating a cutoff range from $75.4 million to $123.2 million (2015 dollars). A reasonable rule of thumb might be to assume that regulations costing more than $100 million per life saved will be counterproductive in that they can be expected to increase mortality risk on net.

Like the other studies, there’s a look at previous research.

Ralph Keeney developed the first formal model for estimating fatalities induced by income losses, finding that for every $7.25 million (1980 dollars) in costs, one statistical fatality will be induced (Keeney 1990). Chapman and Hariharan’s (1994) study, published in a special issue of the Journal of Risk and Uncertainty devoted to HHA, develops a similar empirical model but controls for initial health status as a means to account for reverse causality (i.e., poor health causing lower income). The study’s authors estimate the cutoff at $12.2 million (1990 dollars). Keeney provided an update of his model in 1997, estimating the cutoff at between $5 million and $14 million (1991 dollars), depending on the distribution of costs.

Including some foreign studies.

Elvik (1999) is a Norwegian study that estimated the cutoff in Norway at between 25 million and 317 million NOK (1995 prices), which translates to US$3.8 million to US$47.5 million (1995 US dollars). Gerdtham and Johannesson (2002) used longitudinal data (tracking individuals for between 10 and 17 years) for a sample of randomly selected Swedes. After controlling for initial health status, they estimated the cutoff at between US$6.8 million and US$9.8 million (1996 US dollars), depending on how costs are distributed. More recently, Ashe et al. (2012) examined fire prevention regulations in Australia. These authors estimate the cutoff at between AU$20 million and AU$50 million (2010 Australian dollars), again depending on how costs are distributed across the population.

The Mercatus study then contemplates the indirect approach, which utilizes the “value of a statistical life” approach, or VSL.

…the empirical evidence from the United States and other countries, as well as the evidence from labor market estimates of the VSL and revealed preference studies, indicate a positive income elasticity of the VSL and a greater income elasticity at lower income levels. This economic mechanism is also consistent with the common conjecture that the mortality effects of regulatory expenditures will be greatest for the poorest members of society. …When a binding government regulation affects risk levels, there will be two effects. First, because health expenditures and job safety levels are substitutes, regulation will decrease the private incentive to invest in health. Second, because the individual bears regulatory costs, there will be decreased investment in health. Whether a regulation reduces risks on balance depends on the sum of three components: the direct effect of the regulation on safety, the indirect effect on risk through a substitution toward safety achieved through regulation and away from personal health expenditures, and the indirect effect on risk as personal health expenditures fall from reduced income as a result of compliance with regulations.

And the authors come up with a range.

According to our estimates, the cost-per-life-saved cutoff is in the range of $75.4 million to $123.2 million (2015 dollars). Any regulation with a cost-per-life-saved that exceeds this range can be expected to increase mortality risk on net. There is a great deal of uncertainty surrounding a number of factors that produce this estimate, however, including the fraction of income spent on risk reduction, the income elasticity of risk-reducing expenditures, and the VSL.

I don’t have the competence to judge which approach is best. The part of me that is worried about excessive red tape hopes the direct approach is more accurate since a lower “cutoff” means we can argue that a greater share of regulations fail to meet the threshold.

On the other hand, the part of me that is resigned to ever-expanding amounts of red tape hopes the indirect approach generates more accurate numbers since a higher “cutoff” means that the net cost of regulation is not as onerous.

Regardless, my only point is that there should be some form of cost-benefit analysis before bureaucrats churn out new rules, and the impact of red tape on overall economic performance should be part of the equation.

P.S. Speaking of economic impact, a study from the European Central Bank had some very sobering data.

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What’s the Best Reason to Support Tax Havens, Protecting Human Rights or Restraining Greedy Politicians?

The late Mancur Olsen was a very accomplished academic economist who described the unfortunate tendency of vote-seeking governments to behave like “stationary bandits,” seeking to extract the maximum amount of money from taxpayers.

I’m not nearly as sophisticated, so I simply refer to this process as “goldfish government.”

Tax competition is a way of discouraging this self-destructive behavior. Politicians are less likely to over-tax and over-spend if they know that jobs and investment can migrate from high-tax nations to low-tax jurisdictions (borders can be a hassle, but they are beneficial since they presumably represent a limit on the reach of a government’s power).

This is why I’m a big fan of so-called tax havens.

I want politicians to be afraid that the geese with the golden eggs may fly away. This is one of the reasons why “offshore” nations play a very valuable role in the global economy.

But it’s important to realize that there’s also a moral argument for tax havens.

Ask yourself whether you would want the government to have easy access to your nest egg (whether it’s a lot or a little) if you lived in Russia? Or Venezuela? Or China? Or Zimbabwe?

Ask yourself whether you trust the bureaucracy to protect the privacy of your personal financial information if you lived in a country with corruption problems like Mexico? Or India? Or South Africa?

Here’s a story from France24 that underscores my point.

Turkish President Recep Tayyip Erdogan declared Sunday that businessmen who move assets abroad are committing “treason”, adding that his government should put an end to the practice. “I am aware that some businessmen are attempting to place their assets overseas. I call on the government not to authorise any such moves, because these are acts of treason,” Erdogan said in televised comments to party members in the eastern town on Mus.

Allow me to translate. What Erdogan is saying is “I don’t want escape options for potential victims of expropriation.” For all intents and purposes, he’s basically whining that he can’t steal money that is held offshore.

Which, of course, is why offshore finance is so important.

Professor Tyler Cowen elaborates in a Bloomberg column.

I’d like to speak up for offshore banking as a significant protection against tyranny and unjust autocracy. It’s not just that many offshore financial institutions, such as hedge funds registered in the Cayman Islands, are entirely legal, but also that the practice of hiding wealth overseas has its upside. …offshore…accounts make it harder for autocratic governments to confiscate resources from their citizens. That in turn limits the potential for tyranny.

Tyler looks at some of the research and unsurprisingly finds that there’s a lot of capital flight from unstable regimes.

A recent study shows which countries are most likely to use offshore banking, as measured by a percentage of their gross domestic product. …The top five countries on this list, measured as a percentage of GDP, are United Arab Emirates, Venezuela, Saudi Arabia, Russia and Argentina, based on estimates from 2007. In all of those cases the risk of arbitrary political confiscations of wealth is relatively high. …When I consider that list of countries, I don’t think confidential offshore banking is such a bad thing. …consider some of the countries that are not major players in the offshore wealth sweepstakes. China and Iran, for instance, have quite low percentages of their GDPs held in offshore accounts, in part because they haven’t been well integrated into global capital markets. …Are we so sure it would be bad for more Chinese and Iranian wealth to find its way into offshore banks? The upshot would be additional limits on the power of the central leaders to confiscate wealth and to keep political opposition in line.

So what’s the bottom line?

Simple. People need ways of protecting themselves from greedy government.

From the vantage point of Western liberalism, individuals should be free from arbitrary confiscations of their wealth, connected to threats against their life and liberty, even if those individuals didn’t earn all of that wealth justly or honestly. There is even a “takings clause” built into the U.S. Constitution. On top of these moral issues, such confiscations may scare off foreign investment and slow progress toward the rule of law.

By the way, the moral argument shouldn’t be limited to nations with overtly venal governments that engage in wealth expropriation. What about the rights of people in nations – such as Argentina and Greece – where  governments wreck economies because of blind incompetence? Shouldn’t they have the ability to protect themselves from wealth destruction?

I actually raised some of these arguments almost 10 years ago in this video from the Center for Freedom and Prosperity.

P.S. There’s lots of evidence that politicians raise tax rates when tax competition is weakened.

P.P.S. Which is why I’m very happy that Rand Paul is leading the fight against a scheme for a global tax cartel.

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New Research on the Benefits of Lower Corporate Tax Rates

As part of yesterday’s column about the comparatively tiny – and temporary – tax cut in the Republican tax reform plan, I quoted a leftist columnist for US News & World Report, who argued that there should be a big tax increase (including a big tax hike on middle-income taxpayers) and that such a tax hike would not hurt the economy.

Today, I want to address the latter argument about taxes and economic growth. When this topic arises, I normally cite both public-finance theory and empirical research to make the case that taxes do impact economic performance, and I try to always stress that not all taxes are created equal.

And if the focus is corporate taxation, I usually share my primer on the issue, and then link to research from Australia, Canada, Germany, and the United Kingdom.

But maybe it will be more persuasive to look at some new academic evidence from a study on U.S. corporate taxes by Professor Eric Ohrn (forthcoming in the American Economic Journal).

If you don’t want to dwell on the details, the paper’s abstract tells you the highlights. Simply stated, a lower corporate rate translates into more investment and less debt.

I exploit quasi-experimental variation created by the Domestic Production Activities Deduction, a corporate tax expenditure created in 2005. A one percentage point reduction in tax rates increases investment by 4.7 percent of installed capital, increases payouts by 0.3 percent of sales, and decreases debt by 5.3 percent of total assets. These estimates suggest that lower corporate tax rates and faster accelerated depreciation each stimulate a similar increase in investment, per dollar in lost revenue.

But hopefully there will be interest in some of the details from the study.

Here’s the problem Professor Ohrn identified.

…relatively little empirical work has been able to directly estimate the effects of a reduction in the corporate income tax rate on business activity. This study provides new evidence on these effects.

His evidence is based on the fact lawmakers created a lower tax rate for America-based manufacturing (a.k.a., the domestic production activities deduction, or DPAD).

In 2005, when the DPAD was implemented, firms could deduct 3 percent of manufacturing income. This rate was scaled to 6 percent in 2007 and 9 percent in 2010, where it remains today. As a result of the policy, after 2010, firms that derive all of their income from domestic manufacturing activities and face the top statutory corporate income tax rate have a 3.15 (= 0.09 × 35 percent) percentage point lower effective tax rate than firms with no domestic manufacturing activities. …I use data provided by the IRS Statistics of Income (SOI) Division. The SOI publishes the aggregate annual dollar values of the DPAD and Net Taxable Income for corporations in 75 unique industries and all businesses in 12 asset-classes (firm size bins).

And what did he find as he looked at the difference between firms with lower tax rates and higher tax rates?

It turns out that even modest differences in tax rates can have a big impact.

I find that the DPAD has a large effect on corporate behavior. A one percentage point reduction in the effective corporate income tax rate via the DPAD increases investment by 4.7 percent of installed capital, increases payouts by 0.3 percent of revenues, and decreases debt usage by 5.3 percent of total assets. …corporations respond strongly to the DPAD, and corporate income tax rate cuts more generally, by increasing investment and payouts and decreasing debt usage. The average firm does not report more taxable income per dollar of asset, suggesting that any increases in revenue generated by corporate tax rate reductions are the product of real effects such as investment but not decreased avoidance activity.

Here are a couple of charts from the study. The dark blue line represents companies with lower tax rates and the dashed line represents the ones with higher tax rates.

And since it’s good to have more investment and good to have less debt, both these findings re very positive.

Interestingly, the benefits of fixing depreciation laws (by moving in the direction of expensing) are quite similar to the benefits of lowering the corporate tax rates.

…a dollar spent by the government stimulates virtually the same amount of investment whether it is used to reduce corporate tax rates or accelerate depreciation expenses.

I hate to digress, but I can’t resist pointing out that I’m irked by the language about “a dollar spent by the government.” Professor Ohrn certainly seems to be a rigorous and capable economist, but he has a bit of a moral blind spot. If the federal government adopts a policy that allows a business to keep more of the money it earns, that is not “a dollar spent” by government.

Unless you have the bizarre mindset of some statists who think all output belongs to the state.

Anyhow, back to regularly scheduled programming.

We’re now at a critical point in the battle for tax reform. The House passed its version and now the Senate has passed its version. The good news is that there’s strong agreement on Capitol Hill to slash the corporate tax rate.

This latest study underscores why that reform will boost investment. And remember, when investment increases, that translates into higher wages for workers.

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Balancing the Budget Should Be Very Easy, Regardless of the GOP’s Tiny (and Temporary) Tax Cut

Since the House has passed a tax cut and the Senate has passed a tax cut, it’s quite likely that there will be a consensus deal that will be signed into law.

Which makes me happy since any agreement presumably will include a lower corporate tax rate and the elimination of the deduction for state and local income taxes.

But some folks don’t think this is good news.

Writing for U.S. News & World Report, Pat Garofalo argues that taxes should be going up.

The entire bill is premised off the belief that taxes are too high and need to go down, when the opposite is actually true. …the U.S. is, by developed country standards, a very low-tax country. It raises about a quarter of its gross domestic product in revenue at all levels of government, compared to about a third in the rest of the developed world, and well more than 40 percent in some countries. For the last several decades, the U.S. at the federal level alone has raised roughly 18 percent of GDP in taxes, while spending around 20 percent. Sorry, but that just doesn’t cut it. …other countries prove there’s plenty of room to raise more revenue without kneecapping economic growth. …America’s concentration of wealth is such that there’s plenty of room to raise taxes on the rich with nary an economic blip… it is possible, as Sen. Bernie Sanders, I-Vt., does all the time, to make a case that, yes, taxes on the middle class will go up, but that the benefits will be more than worth it.

I won’t bother responding to all his inaccurate assertions, but I will give Mr. Garofalo credit for honesty. Unlike a lot of folks on the left, he openly acknowledges that the middle class will have to be pillaged to finance a European-style welfare state. I’ll add him to my list of honest leftists.

But honesty is not the same as accuracy.

Chris Edwards put together a very helpful chart showing federal taxes and revenues as a share of economic output. As you can see, America’s real fiscal problem is government spending. The tax cut being considered on Capitol Hill only causes a small – and completely temporary – drop in revenues.

This is such good information that it deserves a closer look.

I decided to look at the raw year-to-year numbers. I got the latest 10-year budget projections from the Congressional Budget Office, as well as the 10-year projections for the Senate tax bill from the Joint Committee on Taxation (the House bill’s numbers are very similar, so these figures presumably are a very accurate proxy of any final package).

Let’s start with a look at the annual baseline revenues (blue) and annual baseline spending (orange), along with the annual post-tax cut revenues (grey). As you can see, there’s very little difference in the two revenue lines. There’s some short-run aggregate tax relief, but that quickly begins to shrink. And by the 10th year, the federal government actually will be collecting more revenue!

Some people nonetheless will oppose even a tiny and temporary tax cut. They will claim they want to balance the budget (though oftentimes these are the same people who supported the faux stimulus and wanted the new Obamacare entitlement, so judge for yourself whether they are sincere).

Even in the unlikely event that they are sincere, their complaints don’t make sense since revenues will be higher after 10 years. And that’s not even properly considering the impact of additional economic growth, which would cause tax receipts to grow even faster.

But let’s set that aside and consider what would be necessary to balance the budget over the 10-year budget window. Earlier this year, I calculated that it would be possible to balance the budget and enact a $3 trillion tax cut so long as politicians would simply restrain federal spending so that it grew by 1.96 percent per year.

Based on the most recent numbers (and starting the spending restraint in 2019 rather than 2018), the budget can be balanced if federal spending grows by 2.67 percent annually. Since that’s much faster than what would be necessary to keep pace with inflation (projected to average about 2 percent per year), this wouldn’t require any “harsh” austerity.

By the way, if you want an example of successful multi-year spending restraint, we had a five-year de facto spending freeze from 2009-2014 (yes, those fights over debt limits, sequestration, and government shutdowns produced a big payoff).

Heck, when Clinton was in the White House, overall government spending grew by 3.2 percent annually between 1993 and 1999.

Surely Republicans can beat Bill Clinton’s record, right?

I’ll close by observing that we shouldn’t fixate on balancing the budget in any particular year. It’s much more important to shrink the burden of government spending. And that happens when the private sector grows faster than the federal budget.

To be sure, it’s also a good idea to shrink red ink, at least relative to our ability to finance debt. That happens whenever the private economy grows faster than federal borrowing.

The good news is that spending restraint is the one policy that achieves both goals.

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