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Archive for the ‘Fiscal Policy’ Category

At some point in the next 10 years, there will be a huge fight in the United States over fiscal policy. This battle is inevitable because politicians are violating the Golden Rule of fiscal policy by allowing government spending to grow faster than the private sector (exacerbated by the recent budget deal), leading to ever-larger budget deficits.

I’m more sanguine about red ink than most people. After all, deficits and debt are merely symptoms. The real problem is excessive government spending.

But when peacetime, non-recessionary deficits climb above $1 trillion, the political pressure to adopt some sort of “austerity” package will become enormous. What’s critical to understand, however, is that not all forms of austerity are created equal.

The crowd in Washington reflexively will assert that higher taxes are necessary and desirable. People like me will respond by explaining that the real problem is entitlements and that we need structural reform of programs such as Medicaid and Medicare. Moreover, I will point out that higher taxes most likely will simply trigger and enable additional spending. And I will warn that tax increases will undermine economic performance.

Regarding that last point, three professors, led by Alberto Alesina at Harvard, have unveiled some new research looking at the economic impact of expenditure-based austerity compared to tax-based austerity.

…we started from detailed information on the consolidations implemented by 16 OECD countries between 1978 and 2014. …we group measures in just two broad categories: spending, g, and taxes, t. …We distinguish fiscal plans between those that are expenditure based (EB) and those that are tax based (TB)… Measuring the macroeconomic impact of a plan requires modelling the relationship between plans and macroeconomic variables.

Here are their econometric results.

There is a large and statistically significant difference between the effects on output of EB and TB austerity. EB fiscal consolidations have, on average, been associated with a very small downturn in output growth: a spending based plan worth one percent of GDP implies a loss of about half of a percentage point relative to the average GDP growth of the country, which lasts less than two year. Moreover, if an EB austerity plan is launched when the economy is not in a recession, the output costs are zero on average. …On the other hand TB plans are associated with large and long lasting recessions. A TB plan worth one per cent of GDP is followed, on average, by a two percent fall in GDP relative to its pre-austerity path. This large recessionary effect lasts several years.

Here’s a chart from the study showing that economic performance drops farther and farther to the extent taxes are part of an austerity package.

In addition to the core results, the authors explain why tax-based austerity packages are bad for capital…

…investment growth responds very differently following the introduction of the two types of austerity plans. It responds positively to EB plans and negatively to TB plans. …in their sample of OECD countries, business confidence increases immediately at the start of an EB consolidation plan, much more so that at the beginning of a TB plan.

…and why tax-based austerity packages are bad for labor.

…clearly tax hikes and spending cuts – beyond other effects – have different effects on labor supply. …EB plans are the least recessionary the longer lived is the reduction in government spending. Symmetrically, TB plans are more recessionary the longer lasting is the increase in the tax burden and thus in distortions.

Since capital and labor are the two factors of production, the obvious and inevitable conclusion is that the economy does worse when taxes are higher.

The study also make a critical point about the futility of tax increases when the burden of government spending is rising faster than the private sector. Simply stated, that’s a recipe for ever-increasing taxes, sort of like a dog chasing its tail.

…a TB plan which does not address the automatic growth of entitlements and other spending programs which grow over time if much less like likely to produce a long lasting effect on the budget. If the automatic increase of spending is not addressed, taxes will have to be continually increased to cover the increase in outlays.

That’s why spending restraint is the only way to successfully address red ink.

It doesn’t even require dramatic spending cuts, even though that would be desirable. All that’s needed is some modest fiscal restraint so that spending grows slower than the productive sector of the economy.

Nations that follow this approach for a multi-year period always get good results. But if you want examples of nations that have achieved good outcomes with tax increases, you’ll have to explore a parallel universe because there aren’t any on this planet.

P.S. I need to update the table because both the United States (between 2009-2014) and the United Kingdom (between 2010-2016) enjoyed dramatic improvements in fiscal outcomes in recent years because of spending restraint.

P.P.S. Politicians don’t like spending restraint, which is why most periods of good fiscal policy come to an end. To achieve good long-run outcomes, some sort of constitutional spending cap is probably necessary.

P.P.P.S. The study cited above builds upon research I cited in 2016.

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The biggest victory for taxpayers during the Obama years was the Budget Control Act in 2011, which imposed sequester-enforced caps on discretionary spending.

Indeed, that legislation was then followed by a sequester in early 2013, which was a stinging defeat for Obama (he tried to forestall the sequester with hysterical predictions of doom).

But politicians don’t like fiscal restraint. Spending caps limit their ability to buy votes with other people’s money. So they evaded the spending caps in late 2013. Then they did the same thing in late 2015.

And now it’s happened again. The budget caps have been busted again as part of a new agreement. To be blunt, the swamp has triumphed over taxpayers. The politicians who promised to clean up the mess in Washington have decided that the cesspool is actually a hot tub.

Most critics of the deal are focusing on how it means more red ink. But that’s a secondary problem. The real mistake is that government is getting bigger, and that means private sector activity is being displaced.

Here’s everything you need to know about what’s happening to overall discretionary spending, captured in a chart from the Committee for a Responsible Federal Budget.

The blue bars in the above chart show what happened in the real world (technically, they show annual “budget authority,” which is sort of like the money that gets deposited in a checking account and “outlays” are when checks are written). The green line shows the spending-on-autopilot forecast from early 2011. The red line shows the discretionary spending allowed by the Budget Control Act. And the yellow line shows what spending should have been if the sequester was left unchanged.

The bottom line is that the spending levels for 2018 and 2019 mean that the victory of the Budget Control Act has been almost entirely undone.

Now let’s look at the numbers for non-defense discretionary spending, based on data from the Congressional Research Service and the Office of Management and Budget.

Once again, we see the same pattern of good promises and bad results. And this happened with Republicans in partial control or (now) complete control of the process.

Needless to say, I tried to convince GOPers to do the right thing. But I failed.

Republicans claim, for what it’s worth, that the deal was necessary to get higher defense spending. I question that goal (we already spend enormous amounts of money compared to any potential adversaries, and I also think we shouldn’t squander blood and treasure on  overseas nation building). But even if one believes in more defense spending, why add huge increases in domestic spending?

Why not copy Franklin Roosevelt and Harry Truman, both of whom reduced the burden of domestic spending when increasing defense outlays?

My pro-GOP friends in Washington respond by stating that Republicans didn’t have 60 votes to overcome a filibuster in the Senate. That’s a legitimate point, but I respond by asking why they didn’t force Democrats to conduct a real filibuster (hold the floor for 24 hours a day, 7 days a week)?

They then tell me that a filibuster (assuming Democrats didn’t get tired of holding the floor) would mean stalemate and eventually could result in a shutdown. Another fair point, but I then point out that left-wing constituencies are the ones that will feel the pinch if non-essential parts of the government cease operating.

At this point, the truth usually comes out and they tell me that Republican leaders can’t play hardball because too many of their members actually like big government.

By the way, I put a greater share of the blame on the Trump Administration. If the White House drew a line in the sand and told Congress it would block any spending above the caps, lawmakers would have been forced to prioritize. But since Trump doesn’t seem to have any interest in fiscal restraint, we’re getting a repeat of the profligate Bush years – with congressional Republicans figuring they may as well take part in the feeding frenzy.

I’ll close by noting that this isn’t the end of the world. Yes, we have far too much discretionary spending, and the additional spending in this agreement is bad news. That being said, the extra outlays are relatively trivial compared to the gigantic problem of ever-expanding entitlement spending.

But the fact that Republicans aren’t willing to enforce any discipline on discretionary outlays certainly does not bode well for the presumably more-difficult battle for genuine entitlement reform.

P.S. I’ll make a prediction right now (and I’ll even make a wager with any interested parties) that inflation-adjusted domestic spending will climb faster under Trump than it did under Obama.

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I strongly applauded the tax reform plan that was enacted in December, especially the lower corporate tax rate and the limit on the deduction for state and local taxes.

But I’m not satisfied. Our long-run goal should be fundamental tax reform. And that means replacing the current system with a simple and fair flat tax.

And the recent tax plan only took a small step in that direction. How small? Well, the Tax Foundation just calculated that it only improved the United States from #30 to #25 in their International Tax Competitiveness Ranking. In other words, we have a long way to go before we catch up to Estonia.

 

It’s possible, of course, to apply different weights and come up with a different list. I think the Tax Foundation’s numbers could be improved, for instance, by including a measure of the aggregate tax burden. And that presumably would boost the U.S. score.

But the fact would remain that the U.S. score would be depressingly low. In other words, the internal revenue code is still a self-imposed wound and huge improvements are still necessary.

That’s why we need another round of tax reform, based on the three core principles of good tax policy.

  1. Lower tax rates
  2. Less double taxation
  3. Fewer loopholes

But how is tax reform possible in a fiscal environment of big government and rising deficits?

This is a challenge. In an ideal world, there would be accompanying budget reforms to save money, thus creating leeway for tax reform to be a net tax cut.

But even in the current fiscal environment, tax reform is possible if policy makers finance pro-growth reforms by closing undesirable loopholes.

Indeed, that’s basically what happened in the recent tax plan. The lower corporate rate was financed by restricting the state and local tax deduction and a few other changes. The budget rules did allow for a modest short-run tax cut, but the overall package was revenue neutral in the long run (i.e., starting in 2027).

It’s now time to repeat this exercise.

The Congressional Budget Office periodically issues a report on Budget Options, which lists all sort of spending reforms and tax increases, along with numbers showing what those changes would mean to the budget over the next 10 years.

I’ve never been a huge fan of this report because it is too limited on the spending side. You won’t find fleshed-out options to shut down departments, for instance, which is unfortunate given the target-rich environment (including TransportationHousing and Urban DevelopmentEducationEnergy, and Agriculture).

And on the tax side, it has a lengthy list of tax hikes, generally presented as ways to finance an ever-expanding burden of government spending. The list must be akin to porn for statists like Bernie Sanders.

It includes new taxes.

And it includes increases in existing taxes.

But the CBO report also includes some tax preferences that could be used to finance good tax reforms.

Here are four provisions of the tax code that should be the “pay-fors” in a new tax reform plan.

We’ll start with two that are described in the CBO document.

Further reductions in itemized deductions – The limit on the state and local tax deduction should be the first step. The entire deduction could be repealed as part of a second wave of tax reform. And the same is true for the home mortgage interest deduction and the charitable contributions deduction.

Green-energy pork – The House version of tax reform gutted many of the corrupt tax preferences for green energy. Unfortunately, those changes were not included in the final bill. But the silver lining to that bad decision is that those provisions can be used to finance good reforms in a new bill.

Surprisingly, the CBO report overlooks or only gives cursory treatment to a couple of major tax preferences that each could finance $1 trillion or more of pro-growth changes over the next 10 years.

Municipal bond interest – Under current law, there is no federal tax on the interest paid to owners of bonds issued by state and local governments. This “muni-bond” loophole is very bad tax policy since it creates an incentive that diverts capital from private business investment to subsidizing the profligacy of cities like Chicago and states like California.

Healthcare exclusion – Current law also allows a giant tax break for fringe benefits. When companies purchase health insurance plans for employees, that compensation escapes both payroll taxes and income taxes. Repealing – or at least capping – this exclusion could raise a lot of money for pro-growth reforms (and it would be good healthcare policy as well).

What’s potentially interesting about the four loopholes listed above is that they all disproportionately benefit rich people. This means that if they are curtailed or repealed and the money as part of tax reform, the left won’t be able to argue that upper-income taxpayers are getting unfair benefits.

Actually, they’ll probably still make their usual class-warfare arguments, but they will be laughably wrong.

The bottom line is that we should have smaller government and less taxation. But even if that’s not immediately possible, we can at least figure out revenue-neutral reforms that will produce a tax system that does less damage to growth, jobs, and competitiveness.

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Here are three things I’ve written about tax policy. See if you can detect a pattern:

  • I’ve written that I don’t want a value-added tax because the money would be used to finance bigger government.
  • I’ve also explained I don’t want a carbon tax because the revenue from such a levy would finance bigger government.
  • I’ve given thumbs down to financial transactions taxes as well because I don’t want to finance bigger government.

Just in case it’s not obvious, the common theme is that I don’t want to give politicians new sources of revenue that would be used to expand the burden of government spending.

Some of my technocrat friends get upset by these writings. They argue, often correctly, that some of these taxes are not as destructive as the current tax code.

My response is that they’re making an irrelevant argument. Politicians who advocate the above taxes are not proposing to eliminate the income tax and repeal the 16th Amendment. Instead, they simply want to levy a new tax without fully repealing the awful system that already exists.

And now there’s a new tax idea gaining steam.

The Task Force on Fiscal Policy for Health…will examine the evidence on excise tax policy for health, including barriers to implementation, and make recommendations on how countries can best leverage fiscal policies to yield improved health outcomes for their citizens with the added benefit of bringing in additional revenue.

For readers who aren’t familiar with DC bureaucrat-speak, “leverage fiscal policies” means higher taxes. More specifically, advocates want higher “sin taxes” on unhealthy food and drink.

This Task Force is being spearheaded by Larry Summers (yes, that Larry Summers) and Mike Bloomberg (yes, that Mike Bloomberg), so it’s no surprise that this pair of leftists view “additional revenue” as an “added benefit.”

While my focus is on the negative fiscal and economic consequences of higher taxes and more spending, it’s worth pointing out the moral and practical argument against sin taxes.

Bill Wirtz, in a column for CapX, warns that nanny-state policies treat people as infants.

2017 has seen yet another increase in lifestyle regulations and sin taxes… Historically, it was social conservatives pushing for this kind of meddling. …How different is today’s excruciatingly irritating public health lobby…? Food and non-alcoholic drinks are…under fire, and blamed for a range of health issues. France and Ireland are now cracking down on that scourge on society: fizzy drinks. Ireland introduced a new tax on sugary drinks, while France increased the tax created in 2012 under French president Nicolas Sarkozy. Such policies are highly regressive… When Denmark introduced its controversial tax on fatty foods, consumers simply switched to cheaper – but equally unhealthy – alternatives. The country’s diet did not improve. …We are adults and we sometimes make decisions for ourselves which are unhealthy. The answer is for us to moderate our consumption, not quasi-prohibition. It’s time to stop infantilising the…consumer.

Charles Hughes of the Manhattan Institute reviews what happened with a new sin tax on sweetened beverages in Seattle.

Seattle recently became the latest major city to enact a sweetened beverage tax. …customers are reeling from sticker shock. One local reporter found that the tax added $10.34 to a case of Gatorade, bringing the final price to more than $26.00. …One of the justifications for beverage taxes is that customers will respond to price changes by reducing consumption of taxed beverages. The mechanism here is straightforward: tax something to get less of it. If people were to substitute diet sodas or other, less-harmful beverages for sugared sodas, they would be healthier.

But will such a policy work?

Many people are likely to avoid the tax by traveling to other untaxed locations to purchase groceries. Costco tells its customers about locations outside the city that are not subject to the beverage tax. …so the tax will have limited success in its health-related goals while also harming local businesses and failing to generate revenue.

Yet the fact the tax will be a failure at generating revenue isn’t stopping the city was squandering the money.

…revenue has already been allocated to a smorgasbord of causes, ranging from $500,000 for displaced worker retraining, to more than $1 million in tax administration costs, to vouchers to purchase fruits and vegetables.

While I’m glad consumers are escaping the tax by buying beverages from outside the city’s borders, in an ideal world, they would react in a bolder fashion.

If nothing else, the pro-tax crowd has a very elastic definition of sin.

They even want to tax meat.

Move over, taxes on carbon and sugar: the global levy that may be next is meat. Some investors are betting governments around the world will find a way to start taxing meat production… Meat could encounter the same fate as tobacco, carbon and sugar, which are currently taxed in 180, 60, and 25 jurisdictions around the world, respectively, according to a report Monday from investor group the FAIRR (Farm Animal Investment Risk & Return) Initiative. Lawmakers in Denmark, Germany, China and Sweden have discussed creating livestock-related taxes in the past two years.

By the way, the supposed Conservative Party in the United Kingdom is pushing sin taxes to finance bigger government.

The sugar tax was announced by Chancellor Philip Hammond in his budget statement in 2017. He said the money raised as part of the levy would go to the Department for Education. The former Chancellor said the new levy would be put on drinks companies and they would be taxed according to how much sugar was in their beverages. Two categories of taxation are set to come into force. One on the total sugar content on drinks with more than 5g per 100ml and a higher levy for drinks with 8g per 100ml or more. …The new tax could whack up the cost of a 2 litre bottle of Coca-Cola (10.6g per 100ml) by as much as 48p.

The nanny-state crowd complains that this isn’t enough.

Health campaigners have said the fizzy drinks tax should be extended to cover all chocolate, sweets and other confectionery containing the highest levels of sugar. …Action on Sugar is urging a mandatory levy set at a minimum of 20 per cent on all confectionery products that contain high levels of sugar.

Politicians in other nations also are using this excuse to extract more money from the citizenry.

Other countries have introduced similar measures and have seen some success in reducing the drinking of fizzy drinks. Mexico introduced a 10 per cent tax on sugary drinks in 2014 and saw a 12 per cent reduction over the first year. Hungary brought in a tax on the drinks companies and saw a 40 per cent decrease in the amount of sugar in the products. Brits will be joining some of our European neighbours with the move with similar measures in place on drinks in France and Finland and the Norwegians chocolate tax.

Let’s sum this up. The case against sin taxes is based on two simple principles.

  1. Politicians want to seize more of our money in order to have greater ability to buy votes. Saying no to tax increases is a necessary (though sadly not sufficient) condition for good fiscal policy.
  2. Politicians want to tell us how to live our lives. But that’s not their job, even in cases where I agree with the underlying advice. Coerced good behavior is not a sign of virtue.

The bottom line is that some proponents of sin taxes presumably have their hearts in the right place. But they need their brains in a good place as well. If they want to be taken seriously, at the very least they should match their proposed sin taxes with permanent repeal of an existing tax of similar magnitude.

For example, offer to trade a sugar tax for repeal of the death tax. Or suggest a fat tax accompanied by elimination of the capital gains tax.

Until we see such offers, advocates of sin taxes should be met with unyielding opposition.

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This is depressing.

Republicans botched the repeal of Obamacare. They’ve already sold out (twice!) on the spending caps in the Budget Control Act, and they’re about to do it again.

And now they want to bring back earmarks.

In this interview with Neil Cavuto, I explain why this is a very troubling development.

One thing I didn’t mention in the interview is that earmarks are inherently corrupt. Indeed, there’s a near-universal four-step process that – in a just world – would result in politicians getting arrested (see 18 U.S. Code § 203) for bribery, graft, and conflicts of interest.

  1. An interest group decides it wants other people’s money and decides to use government as a middleman.
  2. The interest group hires lobbyists, most of whom are former members of Congress or former staff members.
  3. The interest group and the lobbyists direct campaign contributions to one or more politicians.
  4. In exchange for those contributions, one or more earmarks are inserted in a spending bill.

That’s a great deal for Washington insiders, but not so good for taxpayers or honest government.

And if you don’t believe me, read about the oleaginous behavior of Senator Tom Harkin and Representative Jim Moran.

Now let’s consider an argument in favor of earmarks. Writing for Bloomberg, Professor Tyler Cowen of George Mason University argues that the system needs a bit of grease to work better.

…think of earmarks as local benefits inserted into bills to buy more votes in Congress. …Recalcitrant representatives can be swayed by the promise of a perk for their district. That eases gridlock…whether we like it or not, there is something inherently transactional about being governed.

As I stated in the interview, I don’t think this assertion is persuasive. Most legislation is bad for liberty, so I agree with America’s Founders that gridlock is good.

That being said, Tyler makes a couple of compelling arguments. First, he points out that we may need some pork to get good legislation through the process.

Advocates of smaller government should keep in mind that reforming spending and regulation requires some activism from Congress. Gridlock today is not the friend of fiscal responsibility, coherent policy, or a free, well-functioning capitalist economy.

I agree with the first sentence and said the same thing in my talk with Neil. We will need congressional action to reform entitlements and save the country. And if that means bribing a few members to get votes, so be it.

However, I think his second sentence is too optimistic. Good reform is not very likely with Trump in the White House. It’s a judgement call, to be sure, but I believe gridlock will be a good thing for the next few years.

Second, Tyler acknowledges that politicians try to buy votes, but he suggests that earmarks are cheap compared to potential alternatives (such as new entitlements, presumably).

…virtually every member of Congress looks to support government spending that will boost his or her re-election prospects. It is often the case that directly targeted local spending — which may take the form of earmarks — buys support for a relatively low dollar price per vote. If earmarks are removed, representatives are still going to pursue votes, but the total amount of electorally motivated, wasteful government spending may be higher.

This is a potentially persuasive point, but I’ll be skeptical until I see some supporting evidence.

In a gridlock environment, I suspect enacting non-earmark spending is not that easy (though I admit an Obamacare-level budget buster every 10 years would completely wipe out in just one year the money that might be saved over several decades with an earmark ban).

In addition to what Tyler wrote, another pro-earmark argument is that there will always be a person who decides how money is spent. And I’ve had members of Congress tell me that they’d rather make those decisions that have a bunch of left-wing bureaucrats allocate money.

That’s a perfectly reasonable argument, but it doesn’t address my fundamental concern that the existence of earmarks will seduce members into supporting higher overall levels of spending.

Which brings me to my final point. I’m willing to cut a deal.

I’m willing to let politicians allocate 100 percent of spending with earmarks if they’ll agree to a comprehensive spending cap that complies with the Golden Rule and slowly but surely shrinks the overall burden of federal spending.

If the crowd in Washington is serious about the argument that earmarks are needed to grease the skids for desirable legislation, it’s time for them to put their votes where their mouths are.

Given the track records of most of the politicians who support earmarks, I’m not holding my breath.

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During the Obamacare bill-signing ceremony, Vice President Biden had a “hot mic” incident when he was overheard telling Obama that “this is a big f***ing deal.”

And he was telling the truth. It was a big deal (albeit a wrong deal) from a fiscal perspective and a health perspective. And it also was a very costly deal for Democrats, costing them the House in 2010 and the Senate in 2014. But it definitely was consequential.

Well, there’s another “big f***ing deal” in Washington, and it’s what just happened to the state and local tax deduction. It wasn’t totally repealed, as I would have preferred, but there’s now going to be a $10,000 limit on the amount of state and local taxes that can be deducted.

I’ve already explained why this is going to reverberate around the nation, putting pressure on governors and state legislators for better tax policy, and I augment that argument in this clip from a recent interview with Trish Regan.

The bottom line is that high-tax states no longer will be able to jack up taxes, using federal deductibility to spread some of the burden to low-tax states.

Let’s look at what this means, starting with a superb column in today’s Wall Street Journal by Alfredo Ortiz.

The great American migration out of high-tax states like New York and Illinois may be about to accelerate. The tax reform enacted last month caps the deduction for state and local taxes, known as SALT, at $10,000. …between July 1, 2016, and July 1, 2017, …high-tax states like New York, New Jersey, Connecticut, Illinois and Rhode Island either lost residents or stagnated. …When people move, they take their money with them. The five high-tax states listed above have lost more than $200 billion of combined adjusted gross income since 1992… In contrast, Nevada, Washington, Florida and Texas gained roughly the same amount. If politicians in high-tax states want to prevent this migration from becoming a stampede, they will have to deliver fiscal discipline.

Mr. Ortiz shows how some state politicians already seem to realize higher taxes won’t be an easy option anymore.

New Jersey’s Gov.-elect Phil Murphy campaigned on a promise to impose a “millionaires’ tax.” But the Democratic president of the state Senate, Steve Sweeney, said in November that New Jersey needs to “hit the pause button” because “we can’t afford to lose thousands of people.” His next words could have come from a Republican: “You know, 1% of the people in the state of New Jersey pay about 42% of its tax base. And you know, they can leave.” New York City Mayor Bill de Blasio may need to rethink his proposed millionaires’ tax. George Sweeting, deputy director of the city’s Independent Budget Office, told Politico in November that eliminating the SALT deduction would “make it a tougher challenge if the city or the state wanted to raise their taxes.” New York state Comptroller Thomas DiNapoli added: “If you lose that deductibility, I worry about more middle-class families leaving.” …the limit on the SALT deduction is a gift that will keep on giving. In the years to come it will spur additional tax cuts and forestall tax increases at the state and local level.

Though the politicians from high-tax states are definitely whining about the new system.

The Governor of New Jersey is even fantasizing about a lawsuit to reverse reform.

Murphy, a Democrat, said he has spoken with leadership in New York and California and with legal scholars about doing “whatever it takes”… Asked if that included a joint lawsuit with other states, Murphy said “emphatically, yes.” …Murphy said. “This is a complete and utter outrage. And I don’t know how else to say it. We ain’t gonna stand for it.”

Here’s a story from New York Times that warmed my heart last month.

…while Mr. Cuomo and his counterparts from California and New Jersey seemed dead-certain about the tax bill’s intent — Mr. Brown called it “evil in the extreme” — there were still an array of questions about how states would respond. None of the three Democrats offered concrete plans on what action their states might take.

They haven’t offered any concrete plans because the only sensible policy – lower tax rates and streamlined government – is anathema to politicians who like buying votes with other people’s money.

California will be hard-hit, but a columnist for the L.A. Times correctly observes tax reform will serve as a much-need wake-up call for state lawmakers.

…let’s be intellectually honest. There’s no credible justification for the federal government subsidizing California’s highest-in-the-nation state income tax — or, for that matter, any local levy like the property tax. Why should federal tax money from people in other states be spent on partially rebating Californians for their state and local tax payments? Some of those states don’t even have their own income tax, including Nevada and Washington. Neither do Texas and Florida. …federal subsidies just encourage the high-tax states to rake in more money and spend it. And they numb the states’ taxpayers. …Republican state Sen. Jeff Stone of Temecula put it this way after Trump unveiled his proposal last week: “For years, the Democrats who raise our taxes in California have said, ‘Don’t worry. The increase won’t matter all that much because tax increases are deductible.’” Trump’s plan, Stone continued, “seems to finally force states to be transparent about how much they actually tax their own residents.”

He also makes a very wise point about the built-in instability of California’s class-warfare system – similar to a point I made years ago.

Our archaic system is way too volatile. The nonpartisan Legislative Analyst’s Office reported last week that income tax revenue is five times as volatile as personal income itself. The “unpredictable revenue swings complicate budgetary planning and contributed to the state’s boom-and-bust budgeting of the 2000s,” the analyst wrote. During the recession in 2008, for example, a 3.7% dip in the California economy resulted in a 23% nosedive in state revenue. The revenue stream has become unreliable because it depends too heavily on high-income earners, especially their capital gains. During an economic downturn, capital gains go bust and revenue slows to a trickle. In 2015, the top 1% of California earners paid about 48% of the total state income tax while drawing 24% of the taxable income.

Let’s close with some sage analysis from Deroy Murdock.

“Taxes should hurt,” Ronald Reagan once said. He referred to withholding taxes, which empower politicians to siphon workers’ money stealthily, before it reaches their paychecks. Writing the IRS a check each month, like covering the rent, would help taxpayers feel the public sector’s true cost. This would boost demand for tax relief and fuel scrutiny of big government. Like withholding taxes, SALT keeps high state-and-local taxes from hurting. In that sense, SALT is the opiate of the overtaxed masses. The heavy levies that liberal Democrats (and, inexcusably, some statist Republicans) impose from New York’s city hall to statehouses in Albany, Trenton, and Sacramento lack their full sting, since SALT soothes their pain. Just wait: Once social-justice warriors from Malibu to Manhattan feel the entire weight of their Democrat overlords’ yokes around their necks, they will squeal. Some will join the stampede to income-tax-free states, including Texas and Florida. …A conservative, the saying goes, is a liberal who has been mugged by reality. Dumping SALT into the Potomac should inspire a similar epiphany among the Democratic coastal elite.

He’s right. This reform could cause a political shake-up in blue states.

P.S. Since I started this column with some observations about the political consequences of Obamacare, this is a good time to mention some recent academic research about the impact of that law on the 2016 race.

We combine administrative records from the federal health care exchange with aggregate- and individual-level data on vote choice in the 2016 election. We show that personal experiences with the Affordable Care Act informed voting behavior and that these effects could have altered the election outcome in pivotal states… We also offer evidence that consumers purchasing coverage through the exchange were sensitive to premium price hikes publicized shortly before the election… Placebo tests using survey responses collected before the premium information became public suggest that these relationships are indeed causal.

Wow. Obamacare there’s a strong case that Obamacare delivered the House to the GOP, the Senate to the GOP, and also the White House to the GOP. Hopefully the Democrats will be less likely to do something really bad or really crazy the next time they hold power.

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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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