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Archive for the ‘Economics’ Category

Back in March, I shared a remarkable study from the International Monetary Fund which explained that spending caps are the only truly effective way to achieve good fiscal policy.

And earlier this month, I discussed another good IMF study that showed how deficit and debt rules in Europe have been a failure.

In hopes of teaching American lawmakers about this international evidence, the Cato Institute put together a forum on Capitol Hill to highlight the specific reforms that have been successful.

I moderated the panel and began by pointing out that there are many examples of nations that have enjoyed good results thanks to multi-year periods of spending restraint.

I even pointed out that we actually had an unintentional – but very successful – spending freeze in Washington between 2009 and 2014.

But the problem, I suggested, is that it is very difficult to convince politicians to sustain good policy on a long-run basis. The gains of good policy (such as what was achieved in the 1990s) can quickly be erased by a spending binge (such as what happened during the Bush years).

Unless, of course, there’s some sort of constraint on the desire to spend money. And the panelists discussed the three most successful examples of reforms that constrain the growth of government.

We started with a presentation by Daniel Freihofer from the Swiss Embassy. He talked about Switzerland’s “Debt Brake,” which actually is a spending cap.

It’s remarkable how well Switzerland has performed while most other European nations have suffered downward spirals of more spending-more taxes-more debt. Here’s a chart I put together on what’s happened to spending in Switzerland ever since 85 percent of voters imposed the Debt Brake early last decade.

By the way, Herr Freihofer said during the Q&A session that support for the Debt Brake is now probably about 95 percent, so Swiss voters obviously understand that the policy has been very successful.

Our second speaker was Clement Leung, Hong Kong’s Commissioner to the United States. He talked about Article 107 and other rules from Hong Kong’s Basic Law (their constitution) that limit the temptation to over-tax and over-spend.

And if you want to see some of the positive results of these rules in Hong Kong, here’s some of what Commissioner Leung presented.

By the way, the burden of government spending in Hong Kong averages about 18 percent of economic output. That’s the most impressive result. And Commissioner Leung explained that there’s a commitment to keep the burden of spending below 20 percent of GDP.

The final panelist was Jonathan Williams from the American Legislative Exchange Council, and he talked about Colorado’s Taxpayer Bill of Rights, popularly known as TABOR.

Jonathan talked about how the pro-spending lobbies keep attacking TABOR, and he mentioned that they narrowly succeeded in getting a five-year suspension of the law back in 2005. But Colorado voters generally understand they have a good policy.

The most recent attempt to enable more spending came in the form of an increase in the state’s flat tax back in 2013 and voters rejected it by a stunning 66-34 margin (almost as impressive as the recent vote against tax hikes in Michigan) even though Jonathan said advocates outspent opponents by a 289-1 margin.

Here’s a slide from his presentation showing what happened during other attempts to enable more spending.

By the way, Jonathan also mentioned that Colorado’s voters are about to get a TABOR-mandated tax cut because taxes on marijuana are pushing revenues above the limit. Talk about a win-win situation!

To wrap up, one of the big lessons from all the presentations is that governments generally get in trouble because they can’t resist over-spending when the economy is doing well and generating lots of tax revenue.

I fully agree, and I’ve previously explained this is why Alberta got in fiscal trouble, and also why California suffers a boom-bust budgetary cycle.

The way you solve this problem is not with a balanced budget requirement (which often serves as the justification for tax hikes), but some sort of spending limitation rule.

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Over the years, I’ve had many arguments about economic policy with my statist friends. I put them into three categories.

  • The completely unreasonable statists blindly assert, notwithstanding all the evidence around the world, that bigger government and more intervention are actually good for growth.
  • The somewhat unreasonable statists acknowledge that bigger government and more intervention might have some minor “efficiency” costs, but those costs are acceptable and affordable in the pursuit of more “equity.”
  • The semi-reasonable statists admit that bigger government and more intervention hurt growth, but they argue that “libertarian types” must somehow be wrong because our predictions of economic chaos never materialize.

The folks in the last category have a point. For decades, advocates of limited government and free markets have warned about the economic cost of bad policy, yet where’s the collapse?

Why hasn’t Atlas shrugged, as libertarians have warned? Why have predictions of economic dystopia (examples here and here) been wrong?

I have two responses to these questions.

First, the economic damage caused by an expanding welfare state has been offset by improvements in other types of economic policy.

Second, maybe dour libertarians have been right, but got the timing wrong because it takes a long time and a lot of bad policy to destroy an economy.

And that’s today’s topic, because it certainly looks like both Greece and Venezuela have finally reached the end of the road. Let’s call it the Thatcher Inflection Point.

Here are some excerpts from a very grim New York Times story about the economic misery in Greece

Bulldozers lie abandoned on city streets. Exhausted surgeons operate through the night. And the wealthy bail out broke police departments. A nearly bankrupt Greece is taking desperate measures to preserve cash. …In a society that has lived off the generosity of the government for decades, the cash crisis has already had a shattering impact. Universities, hospitals and municipalities are struggling to provide basic services… Greece is already operating as a bankrupt state. …For a generation of Greek politicians who saw government spending (and borrowing) as a national birthright, the idea of deploying only the money at hand has been jarring.

Egads, imagine the horror of only being able to consume what you’re able to produce. Obviously a violation of human rights!

Though some people apparently are learning the right lesson.

…for other Greeks who are eager to break from the country’s tradition of dispensing political favors to the well-connected, these years of imposed restraint have also provided a valuable lesson. “There are no free rides in this country anymore,” said Kostas Bakoyannis, 37, the governor of the Central Greece administrative region. “…Now we have to live on what we can make and produce.”

By the way, don’t cry too many tears for the Greeks. Yes, they’ve had to make genuine budget cuts since outlays peaked near the end of last decade. But government spending in Greece, after adjusting for inflation, is about the same level it was in 2000.

And that wasn’t an era of “harsh austerity.”

In other words, Greece wouldn’t be in trouble today had politicians simply obeyed my Golden Rule.

Besides, how can you feel sorry for a nation that subsidizes pedophiles and requires…um…stool samples to set up online companies.

When it comes to bizarre government policy, Greece truly is special.

Now let’s look at Venezuela, where economic buffoonery is an art form. My Cato colleague Steve Hanke has a new column about that nation’s grotesquely reckless monetary policy.

I estimate Venezuela’s annual inflation rate at 335%. That’s the highest rate in the world. For those holding bolivars, it amounts to: “no rule of law, bad money.” …Facing this inflationary theft, Venezuelan’s have voted with their wallets. Indeed, they have unofficially begun to dollarize the economy.

Here’s John Hinderaker’s summary of the overall situation.

When a country can neither produce nor buy toilet paper, you know the end is approaching. …Venezuela’s regime is long past eating its seed corn; now it’s selling the furniture. Will Maduro’s government default on the country’s debt, some of which carries 30% interest? …The IMF is helping to keep Venezuela’s economy afloat, and if oil prices rise, the Maduro regime might be able to buy a little more time. But the end game is obvious: economic collapse.

I’ll add one modification (and I’m sure John would agree), which is that economic collapse is obvious if policy stays on the current path.

Venezuela (or Greece, or any other nation) could save itself by shifting to a policy of free markets and small government. But I’m not holding my breath.

By the way, I suppose we could also use the example of the Soviet Union. That was a collapse of turbo-charged big government.

But let’s close instead with a point about richer nations in the western world because some readers understandably are thinking that countries such as Germany, Japan, and the United States will never suffer the fate of nations such as Greece, Venezuela, and the Soviet Union.

That’s probably true, but keep in mind that demographic changes are a wild card. Simply stated, aging populations and poorly designed entitlement programs are a very unpalatable combination.

And if governments wait too long to implement reforms, the political obstacles may be too great. Restoring good policy is a lot harder once the people in the wagon outnumber the folks pulling the wagon (as illustrated by these cartoons).

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When I write about columns in the New York Times, I’m normally pointing out silly examples of bias or exposing absurd mistakes (with Paul Krugman deserving his own special category for sloppiness, as seen here, here, here, here, here, herehere, here, here, here, here, and here).

But every so often, there’s an insightful piece that is worth sharing rather than worth mocking. And that’s the case with a column by Claire Cain Miller on the unintended negative consequences of policies that ostensibly are supposed to help women but actually hurt them.

In Chile, a law requires employers to provide working mothers with child care. One result? Women are paid less. In Spain, a policy to give parents of young children the right to work part-time has led to a decline in full-time, stable jobs available to all women — even those who are not mothers. Elsewhere in Europe, generous maternity leaves have meant that women are much less likely than men to become managers or achieve other high-powered positions at work.

Why all these bad results, which seemingly are contrary to the intentions of lawmakers?

…these policies often have unintended consequences. They can end up discouraging employers from hiring women in the first place, because they fear women will leave for long periods or use expensive benefits.

Amen. You don’t make workers more attractive to employers with laws and regulations that increase the real and/or potential costs of employing those workers.

The column cites some research on the impact of the Family and Medical Leave Act in the United States. As well as the harmful effect of similar laws in other nations.

Women are 5 percent more likely to remain employed but 8 percent less likely to get promotions than they were before it became law, according to an unpublished new study by Mallika Thomas, who will be an assistant professor of economics at Cornell University. …These findings are consistent with previous research by Francine Blau and Lawrence Kahn, economists at Cornell. In a study of 22 countries, they found that generous family-friendly policies like long maternity leaves and part-time work protections in Europe made it possible for more women to work — but that they were more likely to be in dead-end jobs and less likely to be managers.

The bottom line is that government intervention is not a recipe for helping people, especially once you factor in the effect of unintended consequences.

Speaking of which, I made the same argument when looking at a government proposal to help those struggling with long-run unemployment.

All of which tells us that you must have asked a very silly question if the answer is more government.

P.S. My favorite articles and columns from the New York Times are the ones that accidentally show the superiority of small government and free markets.

P.P.S. Since I wrote the other day about the wisdom of allowing successful foreigners to emigrate to the United States, here’s a related graphic.

Maybe I’m missing something, but doesn’t this suggest we should welcome more Indians to America?

After all, the economy isn’t a fixed pie and sensible folks understand that the rest of us benefit when there are more rich and successful people.

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What’s the most effective way of screwing up a sector of the economy? Since I’m a fiscal policy economist, I’m tempted to say that bad tax policy is the fastest way of causing damage. And France might be my top example.

But other forms of government intervention also can have a poisonous effect. Regulation, for instance, imposes an enormous burden on our economy.

Today, though, we’re going to look at how subsidies can result in costly distortions. More specifically, using examples from the health sector and higher-ed sectors, we’re going to see how “third-party payer” is a very expensive form of intervention.

We’ll start with the example from the healthcare sector. Writing for the Institute for Policy Innovation, Merrill Matthews has a must-read article about an unintended consequences of Obamacare.

He starts with a very sensible point about the effect of third-party payer.

Health care actuaries will tell you that when people have to spend more out of pocket for health care, they tend to spend less. And when a third party—employers, health insurers or the government—insulates consumers from the cost of care they tend to spend more. Just imagine how much more people would spend on cars if they could have any car they wanted for a $20 copay.

The car-buying example is great. I’ve previously tried to make the same point about third-party payer by using the examples of home insurance and car insurance, but I may have to steal Merrill’s argument since it’s so intuitively effective.

But that’s a digression. Merrill has a far more important point about what’s actually happening today in the health care sector.

…out-of-pocket spending on health care has declined for decades—until the Affordable Care Act kicked in. In 1961, Americans forked over 43 cents out of their own pocket for every dollar spent on health care. That out-of-pocket spending steadily declined over the years so that by 2010 consumers were only spending about 12 cents out of pocket.Enter Obamacare in 2010. By 2012 out-of-pocket spending had risen to 14.8 percent of total health care spending, and by 2013 it was up to 15.2 percent, according to the Health Care Cost Institute. With people spending more out of pocket, they will naturally curb their spending. And expect to be spending more out of pocket in the future. That’s in part because so many Americans have had to shift to very high deductible policies in order to afford Obamacare’s very expensive coverage. Thank you, President Obama! …The upshot of these higher deductibles is that people will spend less on health care, and that is helping to slow the growth in health care spending—giving Obama his boasting point. Rising deductibles aren’t the only factor, but they are an important one.

Yet Obama doesn’t really deserve to boast.

But here’s the irony: Obama never intended any of this. He thought Obamacare would reduce out-of-pocket spending. And he and most Democrats have railed against high-deductible policies for years, claiming that greedy health insurers were taking people’s money but didn’t have to pay any claims (because of the high deductibles). And yet under Obamacare deductibles have never been so high. The fact is that moving to higher deductibles, especially when accompanied by a tax-free health care spending account for smaller and routine expenditures, is good policy.

And let’s not forget that Obama’s “Cadillac tax” on employer-provided health insurance also is good policy (though it was implemented the wrong way).

So maybe, as that policy also takes effect, we’ll get even further reductions over time in third-party payer!

Which might cause me adjust my overall assessment of Obamacare. In the past, I’ve said it was awful policy because it expanded the Medicaid entitlement while also mucking up the private insurance market.

All that’s still true, but we’re getting some unintended consequences that are positive. Not only are some states refusing to expand Medicaid, but Merrill’s big point is that the private insurance market is evolving in ways that have some good effects.

So maybe instead of Obamacare shifting us from a 68-percent-government-controlled healthcare system to one where government has 79-percent control, as I speculated back in 2013, maybe we’ll wind up with a system that’s “only” 73-percent dictated by government.

Not a victory, to be sure, but at least we’re going in the wrong direction at a slower pace.

Now let’s shift to the higher-ed sector.

Paul Campos, a law professor at the University of Colorado, writes in The Atlantic about the surging level of subsidies for higher education.

…when considering government support for American higher education as a whole, subsidies for colleges and universities are—even on a per-student basis and despite the enrollment explosion—greater than ever before. In particular, per-capita government subsidies are far higher now than they were 35 years ago, when tuition was drastically lower. …The federal government is currently spending approximately $80 billion per year on subsidies for higher education—a figure that almost exactly matches the combined higher-ed spending of the 50 legislatures. …The Pell grant program has expanded rapidly, more than tripling in size since 2000.  …What’s far less known…is the remarkable extent to which the federal tax code has been amended in ways that benefit colleges and universities. According to the congressional Joint Committee on Taxation’s most recent estimates of federal tax expenditures, the IRS is currently redistributing approximately $45.7 billion annually in tax revenue in ways that directly and indirectly support American higher education. (This represents a 675 percent increase in such spending since 1990.)

Even though I agree with his analysis, I get agitated when tax preferences are referred to as “spending.”

But that’s not particularly relevant today. What matters is that there’s been an unbroken increase in handouts and subsidies for the higher-ed sector over the past few decades.

Here’s a chart from his article.

Now let’s look at the policy implications. Mr. Campos outlines a series of problems in the higher-education sector.

…total per-student government support for higher education has increased. Yet this increase has failed to stop or even slow massive tuition increases at both public and private schools. …many higher-ed institutions have become increasingly bloated and inefficient—even as they’ve relied on a growing population of poorly paid contingent faculty members and on hundreds of billions of dollars of federal student loans, only a small percentage of which are currently being repaid in a timely manner. …roughly half of recent college graduates in the U.S. find themselves either unemployed or seriously underemployed. And many graduates struggle to pay educational debts that, unlike almost all other debts in American society, typically can’t be settled via bankruptcy.

But he doesn’t really connect the dots, other than to point out that it is absurdly dishonest when some people (like Senator Bernie Sanders) want others to believe that we need even more intervention and more handouts to compensate for non-existent budget cuts.

Claiming that skyrocketing tuition has been caused by “cuts” in government subsidies only helps delay American higher education’s inevitable day of fiscal reckoning.

If he did connect the dots, he would have explained that the higher-ed sector is needlessly expensive and pointlessly inefficient because of all the subsidies from government.

He may even agree with that assessment, though he isn’t explicit about the connection. Though Professor Richard Vedder doesn’t hesitate in pointing out that bad government policy deserves the blame.

And if you want to learn more, here’s a great video from Learn Liberty explaining why subsidies have translated into higher tuition.

Last but not least, here’s my two cents on the issue, including my dour prediction that the higher-ed bubble won’t pop until and unless we stop the handouts from government.

Yet another reason why we should dismantle the Department of Education.

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I can understand why immigration reform is so contentious since it touches on all sorts of hot-button issues, such as jobs, politics, national identity, and the welfare state.

But I don’t understand why there’s a controversy just because Governor Walker of Wisconsin supports a specific part of the immigration system that provides easier access for foreigners who are willing to invest money and create jobs in America.

Seems like a win-win situation, but check out these excerpts from a report in the Milwaukee Journal Sentinel.

We’ll start with a description of the program.

Congress created the EB-5 program in 1990… Under the Citizenship and Immigration Services’ Immigrant Investor Program, foreigners can obtain these visas by investing $500,000 in high unemployment areas — or $1 million elsewhere — in projects generating or saving 10 jobs over two years. According to The New York Times, the federal government puts the green card applications from these foreign investors on the fast track. In general, it takes about two years to obtain legal residency through the program; other visa programs take much longer.

Not let’s get to the controversy over Governor Walker’s support.

…there’s one federal visa program you won’t hear him attack. It’s the controversial and deeply troubled immigrant investor program. The program — known as EB-5 — puts wealthy foreigners on the path to U.S. citizenship if they invest at least $500,000 in an American commercial project that will create or preserve 10 jobs. Critics have called the abuse-riddled program a “scam” that essentially sells green cards to the affluent and their families, with more than 80% of those in the program coming from China. …David North, a fellow with the conservative Center for Immigration Studies, said…the program is flawed in its premise. “I think it’s immoral, fattening and otherwise unattractive to sell visas, which is what we’re doing now,” North said.

By thew way, there are reasons to be unhappy about the EB-5 program, at least in the way it operates.

I’ve already shared examples of how political insiders are manipulating the program for cronyist purposes.

But today let’s look at the concept of whether it’s good to have an “economic citizenship” program.

And we’ll start the very relevant point that any immigration system is going to be arbitrary.

  • A lottery system is arbitrary because you get to come to America because of luck.
  • A family-reunification system is arbitrary because you get to come to America because of your genes.
  • A system based on refugee status is arbitrary because you get to come to America based on geopolitical circumstances.
  • Even an “open borders” system is arbitrary because you don’t get to come to America if you’re a terrorist, criminal, have communicable diseases, etc.

So if a system is going to be based on arbitrary factors, what’s wrong with deciding that one of the criteria is economic benefit to the United States?

Indeed, maybe I’m too myopic because of my background and training, but it seems like economic benefit should be a factor that everyone can support. After all, these won’t be people seeking handouts from the welfare system.

Consider these passages from a recent New York Times story about all the EB-5 money that’s boosting the Empire State’s economy.

Through a federal visa program known as EB-5, foreigners, more than 80 percent of them from China, are investing billions of dollars in hotels, condominiums, office towers and public/private works in the hope it will result in green cards. Twelve-hundred foreigners have poured $600 million into projects at Hudson Yards; 1,154 have invested $577 million in Pacific Park Brooklyn, the development formerly known as Atlantic Yards; and 500 have put $250 million into the Four Seasons hotel and condominium in the financial district. The list of projects involving EB-5 investments also includes the International Gem Tower on West 47th Street and the New York Wheel on Staten Island. …In the last four years, the program’s popularity has surged. In fiscal year 2010, 1,885 visas were issued. But by fiscal year 2013 that figure jumped 354 percent to 8,564, according to government data. Last year, the entire annual allotment of 10,000 visas had been claimed by August — before the end of the fiscal year in October. This year the quota was reached even earlier, on May 1.

As an aside, this program isn’t attractive to those with lots of money because of America’s punitive tax system.

“This program is not for the very rich in China, because the superwealthy do not want to pay U.S. taxes.” Instead, he said, the wealthiest Chinese prefer to have their legal residences in low tax jurisdictions like Hong Kong or Singapore, and then take advantage of 10-year tourist visas to the United States.

While I’m tempted to now explain why we should fix our bad tax system, let’s stick to the topic of immigration and delve further into the issue of whether it’s good to attract economically successful foreigners to America.

Some scholars say the answer is yes, but they think the EB-5 program is inefficient.

Here’s some of what Professor Eric Posner of the University of Chicago Law School wrote for Slate.

The program is a mess. …it’s almost impossible to figure out whether a specific investment generates jobs rather than reshuffles them from one place to another. There have also been examples of outright fraud and political cronyism. Part of the problem is a lack of documentation but the real problem is that the program is misconceived. …the price we charge for citizenship is extraordinarily low. …A shrewd investor will find an investment that pays a couple percentage points below the market rate. If he invests $500,000 in order to obtain, say, a 6 percent return rather than an 8 percent return, then the true price he pays for U.S. citizenship is $10,000 in foregone return.

So what’s the alternative?

Gary Becker, the late University of Chicago economist and Nobel laureate, once proposed that the United States should sell citizenship to foreigners for a flat fee. The EB-5 program approximates Becker’s proposal, albeit in the most inefficient way possible. Becker argued that citizenship is a scarce good just like tomatoes and hula hoops, and is thus subject to the law of supply and demand. America owns visas and should sell them to willing buyers at the market-clearing price. We would attract immigrants who are skilled enough to earn wages that would cover the fee, and we would gain again from the tax on their wages once they began work in this country. These types of immigrants—the ones who could afford the fee—would be least likely to burden the public fisc by needing welfare payments.

The Becker plan, which Posner basically supports, certainly would be simpler than the EB-5 program.

And it presumably eliminates the instances of corrupt cronyism that taint that otherwise good system.

Moreover, many of the nations with economic citizenship programs use this approach.

But here’s the downside. If you sell citizenship directly, the money goes to the government rather than to the productive sector of the economy.

That might be acceptable if it meant that the politicians reduced or eliminated some tax. But I fear the real-world impact would be to simply give the crowd in Washington more money to waste.

So perhaps the real challenge is to figure out some smarter way of operating the EB-5 program so we get even more private investment and job creation while also reducing opportunities for cronyist intervention.

P.S. If you want to enjoy some immigration-themed humor, here’s some involving Peru and Canada.

P.P.S. While I don’t like government getting more money, that shouldn’t be the only factor when grading a policy proposal. I fretted, for instance, that pot legalization in Colorado would be a mixed blessing because it would generate more tax revenue. But thanks to Colorado’s Taxpayer Bill of Rights, the politicians haven’t been able to spend all the new money, so it’s unambiguously a win-win situation.

P.P.P.S. The Princess of the Levant is in America because of the immigration lottery, so I certainly won’t be complaining too much about arbitrary systems. [correction: The PoTL has informed me that her U.S. residency is the result of her grandfather’s application and not the lottery]

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In my ultimate fantasy world, Washington wouldn’t need any sort of broad-based tax because we succeeded in shrinking the federal government back to the very limited size and scope envisioned by our Founding Fathers.

In my more realistic fantasy world, we might not be able to restore constitutional limits on Washington, but at least we could reform the tax code so that revenues were generated in a less destructive fashion.

That’s why I’m a big advocate of a simple and fair flat tax, which has several desirable features.

The rate is as low as possible, to minimize penalties on productive behavior.

There’s no double taxation, so no more bias against saving and investment.

And there are no distorting loopholes that bribe people into inefficient choices.

But not everyone is on board, The class-warfare crowd will never like a flat tax. And Washington insiders hate tax reform because it undermines their power.

But there are also sensible people who are hesitant to back fundamental reform.

Consider what Reihan Salam just wrote for National Review. He starts with a reasonably fair description of the proposal.

The original flat tax, championed by the economists Robert Hall and Alvin Rabushka, which formed the basis of Steve Forbes’s flat-tax proposal in 1996, is a single-rate tax on consumption, with a substantial exemption to make the tax progressive at the low end of the household-income distribution.

Though if I want to nit-pick, I could point out that the flat tax has effective progressivity across all incomes because the family-based exemption is available to everyone. As such, a poor household pays nothing. A middle-income household might have an effective tax rate of 12 percent. And the tax rate for Bill Gates would be asymptotically approaching 17 percent (or whatever the statutory rate is).

My far greater concerns arise when Reihan delves into economic analysis.

…the Hall-Rabushka tax would be highly regressive, in part because high-income households tend to consume less of their income than lower-income households and because investment income would not be taxed (or rather double-taxed).

This is a very schizophrenic passage since he makes a claim of regressivity even though he acknowledged that the flat tax has effective progressivity just a few sentences earlier.

And since he admits that the flat tax actually does tax income that is saved and invested (but only one time rather than over and over again, as can happen in the current system), it’s puzzling why he says the system is “highly regressive.”

If he simply said the flat tax was far less progressive (i.e., less discriminatory) than the current system, that would have been fine.

Here’s the next passage that rubbed me the wrong way.

…there is some dispute over whether ending the double taxation of savings would yield significant growth dividends. Chris William Sanchirico of Penn Law School takes a skeptical view in a review of the academic research on the subject, in part because cutting capital-income taxation as part of a revenue-neutral reform would require offsetting increases in labor-income taxation, which would dampen long-term economic growth in their own right.

I’m not even sure where to start. First, Reihan seems to dismiss the role of dynamic scoring in enabling low tax rates on labor. Second, he cites just one professor about growth effects and overlooks the overwhelming evidence from other perspectives. And third, he says the flat tax would be revenue neutral, when virtually every plan that’s been proposed combines tax reform with a tax cut.

On a somewhat more positive note, Reihan then suggests that lawmakers instead embrace “universal savings accounts” as an alternative to sweeping tax reform.

Instead of campaigning for a flat tax, GOP candidates ought to consider backing Universal Savings Accounts (USAs)… The main difference between USAs and Roth IRAs is that “withdrawals could be made at any time for any reason,” a change that would make the accounts far more attractive to far more people. …Unlike a wholesale shift to consumption taxation, USAs with a contribution limit are a modest step in the same general direction, which future reformers can build on.

I have no objection to incremental reform to reduce double taxation, and I’ve previously written about the attractiveness of USAs, so it sounds like we’re on the same page. And if you get rid of all double taxation and keep rates about where they are now, you get the Rubio-Lee tax plan, which I’ve also argued is a positive reform.

But then he closes with an endorsement of more redistribution through the tax code.

Republicans should put Earned Income Tax Credit expansion and other measures to improve work incentives for low-income households at the heart of their tax-reform agenda.

I want to improve work incentives, but it’s important to realize that the EIC is “refundable,” which is simply an inside-the-beltway term for spending that is laundered through the tax code. In other words, the government isn’t refunding taxes to people. It’s giving money to people who don’t owe taxes.

As an economist, I definitely think it’s better to pay people to work instead of subsidizing them for not working. But we also need to understand that this additional spending has two negative tax implications.

  1. When politicians spend more money, that either increases pressure for tax increases or it makes tax cuts more difficult to achieve.
  2. The EIC is supposed to boost labor force participation, but the evidence is mixed on this point, and any possible benefit with regards to the number of people working may be offset by reductions in actual hours worked because the phase out of the EIC’s wage subsidy is akin to a steep increase in marginal tax rates on additional labor supply.

In any event, I don’t want the federal government in the business of redistributing income. We’ll get much better results, both for poor people and taxpayers, if state and local government compete and innovate to figure out the best ways of ending dependency.

The rest of Reihan’s column is more focused on political obstacles to the flat tax. Since I’ve expressed pessimism on getting a flat tax in my lifetime, I can’t really argue too strenuously with those points.

In closing, I used “friendly fight” in the title of this post for a reason. I don’t get the sense that Mr. Salam is opposed to good policy. Indeed, I would be very surprised if he preferred the current convoluted system over the flat tax.

But if there was a spectrum with “prudence” and “caution” on one side and “bold” and “aggressive” on the other side, I suspect we wouldn’t be on the same side. And since it’s good for there to be both types of people in any movement, that’s a good thing.

P.S. I got a special treat this morning. I was at Reagan Airport for a flight to Detroit at the same time as a bunch of America’s World War II vets arrived on an Honor Flight to visit the WWII Memorial.

Here’s my rather pathetic attempt to get a photo of one of the vets being greeted.

Since I’ll never be in demand as a photographer, you should watch this video to learn more about this great private initiative to honor World War II veterans.

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There’s an old saying that you shouldn’t bite the hand that feeds you. Unfortunately, politicians in Washington don’t follow that advice.

Let me explain. All economic theories – even Marxism and socialism – agree that capital formation is a necessary condition for long-run growth and higher wages.

The Marxists and the socialists are misguided in thinking that government has the capacity to be in charge of saving and investing, but at least they recognize that you have to set aside some of today’s income to finance tomorrow’s growth. And they even understand that capital formation leads to more productivity and higher wages.

The politicians, however, act as if they don’t understand the importance of saving and investment. Or, based on the policies we get from Washington, maybe they simply don’t care about the well-being of workers, savers, and investors.

Which is a very short-sighted attitude since capital formation leads to a bigger tax base (i.e., more income that they can tax), which is something they presumably should care about!

I’m pondering this conundrum because of a thought-provoking column. Writing for the Wall Street Journal, Thomas Duesterberg and Donald Norman explore the very important question of why corporations are in very strong shape while investment is lagging.

Corporate profits and cash flow are strong, cash on the books of American firms is at record highs… Yet capital investment, which is one of the main pillars of growing productivity and rising living standards, is historically weak. …In 2014, real gross domestic product was 8.7% above the level it reached just before the onset of the great recession in late 2007, …yet gross private investment was just 3.9% higher. Private investment net of depreciation—an even better measure of keeping up production and innovation capacity—was $524 billion in 2013 (the last year for which we have good data), compared with $860 billion in 2006.

Why is this a problem?

For the simple reason that less investment means lower productivity. And lower productivity translates into stagnant wages.

Bureau of Labor Statistics data show that labor productivity grew at an average rate of just 1.5% a year between 2005 and 2014, and by 0.7% a year since 2011. These numbers compare poorly with the average annual growth rates of 3.3% between 1948 and 1973, and 3.2% between 1996 and 2004.

So why has investment been weak?

You shouldn’t be surprised to learn that bad government policy is at the top of the list. Having the world’s highest corporate tax rate obviously doesn’t help.

…one clear factor—noted by many economic analysts—is corporate tax rates, including effective tax rates. These rates can sway decisions about where companies locate new production or research facilities.

Mindless regulation and red tape also puts a costly burden on the economy’s productive sector.

Regulation is also a growing burden. For example, a 2012 study by NERA Economic Consulting notes that the number of major regulations in the manufacturing sector has grown at the compound annual rate of 7.6% since 1998, compared with only 2.2% average annual growth in GDP. …in the World Economic Forum’s annual “Global Competitiveness Report.” …in the category for “burden of government regulation” the latest report ranks the U.S. 82nd of 144.

America also is falling behind in trade.

More than 400 regional free trade agreements have come into effect since 1995, but the United States is party to just two of these and to 10 smaller-scale bilateral agreements. Europe has 38 separate FTAs, and Mexico has added Europe and all of Latin America to its arsenal, which is one reason cited by Audi recently in locating its newest plant there instead of in the U.S.

Last but not least, the overall policy environment in Washington is creating “regime uncertainty.”

A number of studies—including one at Stanford led by Nicholas Bloom and Scott Baker, and at the University of Chicago led by Steven Davis—have employed sophisticated models to chart what is seen as a secular trend in growth of uncertainty that is tied to growth in government regulation, spending, taxes…major shifts in monetary policy probably also contribute to uncertainty.

In other words, investment is lagging both because of the bad policies that have been imposed and because of the expectation/fear that there will be additional burdens coming from Washington.

So we shouldn’t be surprised that corporations are sitting on record piles of cash. Simply stated, it doesn’t make much sense to invest if there’s little hope of future profits.

And don’t be surprised that banks also are sitting on record piles of cash for the same reason.

When I share this kind of information with some of my leftist friends, I frequently get a visceral response about how they won’t shed any tears just because there are fewer profitable opportunities for “fatcat investors” and “rich corporations.”

That reaction doesn’t bother me, at least in the sense that I never lose sleep about the financial health of Warren Buffett or General Electric.

But then I ask my statist friends whether we should be concerned about the “collateral damage” that occurs when lower levels of investment result in less productivity growth, which translates into stagnant wages for ordinary Americans.

Here’s the bottom line. If you punish investors, you also punish workers. This is why, as Walter Williams has explained, the class-warfare mentality is so destructive.

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