Archive for the ‘Fiscal Policy’ Category

Give him credit. Most elected officials are content to tinker at the edges, but Governor Jindal of Louisiana actually wants to solve problems.

Look what he’s done, for instance, on fiscal policy.

He sought to abolish his state’s personal income tax, a step that would have dramatically boosted the states competitiveness.

That effort stalled, but he actually has been successful in curtailing state spending. He’s amassed one of the best records for frugality of all governors seeking the GOP presidential nomination.

And he’s now joined the list of presidential candidates seeking to rewrite the internal revenue code.

Since we’ve already reviewed the tax reform plans put forth by Rand Paul, Marco Rubio, Jeb Bush, and Donald Trump, let’s do the same for the Louisiana governor.

Regular readers hopefully will recall that there are three big problems with the current tax code.

  1. High tax rates that undermine incentives for work and entrepreneurship.
  2. Double taxation of income that is saved and invested, reducing capital formation and wages.
  3. Loopholes that hinder economic efficiency by distorting the allocation of resources.

Let’s see whether Governor Jindal’s plan mitigates these problems.

On the issue of tax rates, the Louisiana Governor replaces the seven rates in the current system with three rates, starting at 2 percent. And instead of a top rate of 39.6 percent, the maximum penalty on work and entrepreneurship would be 25 percent.

He also abolishes the marriage penalty and gets rid of the alternative minimum tax (a perverse part of the code that forces people to calculate their taxes a second time, based on a different set of rules, with the IRS being the only beneficiary).

Regarding double taxation, one of the big problems in the current system is that corporate income is taxed at both the business level and the shareholder level. Most proposals seek to fix this problem by reducing or eliminating the tax burden on dividends on households. Governor Jindal, by contrast, would keep that tax and instead abolish America’s corporate income tax, which is probably the worst in the world.

In one fell swoop, that bold piece of reform also solves many other problems. You don’t have to worry about the tax bias of depreciation. You don’t have to worry about the anti-competitive policy of worldwide taxation. And you wipe out a bunch of corrupt tax preferences.

The plan also would create universal savings accounts that would be free of double taxation (a policy that has been very successful in Canada). Jindal’s plan also eliminates the death tax, though there would still be a capital gains tax.

Shifting to loopholes, the disappointing news is that the charitable deduction is untouched and the home mortgage interest deduction is merely trimmed. But the positive news is that the state and local tax deduction apparently goes away. And because the abolition of the corporate income tax automatically gets rid of the loophole for fringe benefits such as health insurance policies, the Governor also proposes to create an individual deduction for those costs.

The net effect of all these changes is that the tax code will be far less punitive.

The Tax Foundation is the go-to place for analysis on the economic and revenue impact of tax reform plans. Here’s what they predicted would happen to the economy if Jindal’s plan was adopted.

Now let’s end with two observations that may be more political than economic.

First, Jindal’s plan is a huge tax cut. About $10 trillion over 10 years according to the experts at the Tax Foundation. In this regard, Jindal is in the same league with Trump, who also proposed a very large tax cut. Paul, Rubio, and Bush, by contrast, have much more modest tax cuts.

This is a good thing, of course, assuming candidates have serious plans to restrain – and perhaps even cut – federal spending. I don’t lose sleep about whether there’s a balanced budget in year 5 or year 10, but a tax reform plan with a big tax cut isn’t serious unless there’s a concomitant proposal to shrink the burden of government spending.

Second, Jindal proposes to have all Americans pay some income tax. That’s the purpose of the 2-percent rate in his plan. His argument is quite explicit: “Every citizen needs to help row the boat, even if only a little.”

This is an appealing argument. While Mitt Romney was wrong in his assertion that 47 percent of the population was part of the dependent class, we don’t want too many people riding in the wagon and thinking government is “free.”

P.S. If you’re curious about Jindal’s position on other policy issues, he has a good track record on education. He implemented some good school choice reform, notwithstanding wretched and predictable opposition from the state’s teachers’ union.

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What’s worse, Democrats who deliberately seek to make government bigger because of their ideological belief in statism, or Republicans who sort of realize that big government is bad yet make government bigger because of incompetence?

I’m not sure, though this is a perfect example of why I often joke that Washington is divided between the Evil Party and the Stupid Party.

And the fight over spending caps is a perfect example.

President Obama and the Democrats despise this small bit of fiscal discipline, which was created as part of the 2011 Budget Control Act (BCA). They’re aggressively seeking to eviscerate the law, particularly the sequester enforcement mechanism. And since they believe in bigger government, their actions make sense.

Republicans, by contrast, claim to believe in smaller government and fiscal responsibility. So they should be in the driver’s seat on this fight. After all, the BCA is the law of the land and the spending caps – assuming they are not changed – will automatically limit overspending in Washington. In other words, the BCA fight is like the fight over reauthorizing the corrupt Export-Import Bank. Republicans can win simply by doing nothing.

Seems like a slam dunk win for taxpayers, right?

Not exactly. With apologies for mixing my sports metaphors, the Republicans are poised to fumble the ball at the one-yard line.

Which would be a very depressing development. In this interview, I explain that preserving the spending caps should be the most important goal for advocates of limited government.

And you’ll see that I also explained that fighting for good policy today is necessary if we want to avoid huge fiscal problems in the future.

But that doesn’t seem to matter very much for a lot of Republicans.

Let’s look at what other fiscal policy experts are saying about this issue.

Writing for Reason, Veronique de Rugy of the Mercatus Center explains that the key to good fiscal policy (including tax cuts) is to have effective and enforceable long-run spending restraint.

If lawmakers want big tax cuts, there will need to be commensurately greater levels of spending restraint. The difficulty, of course, is to persuade politicians to implement such spending constraints and actually stick to them in the long run.


That’s basically the same message I shared yesterday.

President Obama, however, has threatened to veto the budget and shut down the government if Congress doesn’t agree to bust the current spending caps.

And plenty of Republicans, either because they also want to buy votes with other people’s money or because they’re scared of a shutdown fight, are willing to throw in the towel.

The battle isn’t lost, at least not yet, but it’s very discouraging that this fight even exists. Controlling discretionary spending should be the easy part.

After all, if politicians balk at the modest requirements of the BCA, what hope is there that they’ll properly address entitlements? As Veronique notes, those are the programs that are driving America’s long-run fiscal crisis.

…the only realistic way to limit spending growth to 2 or 3 percent per year is to reform the fastest-growing programs in our budget, or the so-called entitlements.

What makes this issue especially frustrating is that we know sustained spending restraint is possible.

Nations such have Switzerland have shown how spending caps produce very positive results.

But that requires some commitment for good policy by at least some people in Washington.

And that may be lacking. In a column for the Wall Street Journal, Steve Moore takes a closer look at how GOPers are poised to throw away their biggest fiscal victory of the Obama years.

Let’s start with an excerpt illustrating how the BCA and sequestration have worked.

…the Budget Control Act helped slam the brakes on Mr. Obama’s first-term spending spree. …In 2009 the federal government accounted for nearly a quarter of the American economy, 24.4%. That fell by 2014 to 20.3% of GDP.

He’s right. I’ve shared similar numbers showing how Obama’s spending binge was halted.

And that’s led to the biggest five-year reduction in the burden of government spending since the end of World War II.

But fiscal sobriety needs to be sustained. Deciding to have “just one drink” at the big spender’s bar is not a good way to stay on the wagon.

And Steve shares some bad news on this issue.

Congress and the White House are quietly negotiating a deal for the new fiscal year that would bust the spending caps that have brought down the deficit. Breaking the caps yet again—this would be the third violation in four years—is lousy policy. …the GOP is reportedly forging a compromise with Mr. Obama that would raise the caps by $70 billion to $100 billion. …What’s worse, the deal would likely raise the spending caps permanently, meaning…nearly $1 trillion…over the next decade.

By the way, there’s a reason why this sounds like déjà vu all over again. Republicans already agreed to bust the spending caps at the end of 2013.

That was an unambiguous victory for Obama.

And now it may happen again. Steven discusses the implications of this looming GOP surrender.

The mystery is why Republicans are so ready to throw away their best fiscal weapon… Liberals hate the sequester because it squeezes their favorite programs, from transit grants to Head Start. But it is the law of the land. President Obama can do nothing to circumvent the sequester—unless Republicans in Congress cave in. …Busting the spending caps will only reverse progress toward a balanced budget, fatten liberal social programs, and confirm what many tea-party voters have been shouting for years: that Republicans break their promises once elected.

For all intents and purposes, the battle over BCA spending caps is a huge test of GOP sincerity. Do they really believe in limited government, or is that just empty rhetoric they reserve for campaign speeches.

P.S. Some Republicans argue that they favor smaller government, but that the sequester is “unfair” and the spending caps are too “harsh” because the defense budget is disproportionately affected.

It’s true that the defense budget is being capped while most domestic spending (specifically entitlement programs) is left unconstrained. But that doesn’t mean the nation’s security is threatened.

Defense spending still grows under these laws and our military budget is still far bigger than the combined budgets of all possible adversaries.

For further information, read George Will’s sober analysis and also peruse some writings by Mark Steyn and Steve Chapman.

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I’m pleasantly surprised by the tax plans proposed by Marco Rubio, Rand Paul, Jeb Bush, and Donald Trump.

In varying ways, all these candidate have put forth relatively detailed proposals that address high tax rates, punitive double taxation, and distorting tax preferences.

But saying the right thing and doing the right thing are not the same. I just did an interview focused on Donald Trump’s tax proposal, and one of my first points was that candidates may come up with good plans, but those proposals are only worthwhile if the candidates are sincere and if they intend to do the heavy lifting necessary to push reform through Congress.

Today, though, I want to focus on another point, which I raised starting about the 0:55 mark of the interview.

For the plans to be credible, candidates also need to have concomitant proposals to restrain the growth of federal spending.

I don’t necessarily care whether they balance the budget, but I do think proposals to reform and lower taxes won’t have any chance of success unless there are also reasonable plans to gradually shrink government spending as a share of economic output.

As part of recent speeches in New Hampshire and Nevada, I shared my simple plan to impose enough spending restraint to balance the budget in less than 10 years.

But those speeches were based on politicians collecting all the revenue projected under current law.

By contrast, the GOP candidates are proposing to reduce tax burdens. On a static basis, the cuts are significant. According to the Tax Foundation, the 10-year savings for taxpayers would be $2.97 trillion with Rand Paul’s plan, $3.67 trillion under Jeb Bush’s plan, $4.14 trillion with Marco Rubio’s plan, all the way up to $11.98 trillion for Donald Trump’s plan.

Those sound like very large tax cuts (and Trump’s plan actually is a very large tax cut), but keep in mind that those are 10-year savings. And since the Congressional Budget Office is projecting that the federal government will collect $41.58 trillion over the next decade, the bottom line, as seen in this chart, is that all of the plans (other than Trump’s) would still allow the IRS to collect more than 90 percent of projected revenues.

Now let’s make the analysis more realistic by considering that tax cuts and tax reforms will generate faster growth, which will lead to more taxable income.

And the experts at the Tax Foundation made precisely those calculations based on their sophisticated model.

Here’s an updated chart showing 10-year revenue estimates based on “dynamic scoring.”

The Trump plan is an obvious outlier, but the proposals from Jeb Bush, Rand Paul, and Marco Rubio all would generate at least 96 percent of the revenues that are projected under current law.

Returning to the original point of this exercise, all we have to do is figure out what level of spending restraint is necessary to put the budget on a glide path to balance (remembering, of course, that the real goal should be to shrink the burden of spending relative to GDP).

But before answering this question, it’s important to understand that the aforementioned 10-year numbers are a bit misleading since we can’t see yearly changes. In the real world, pro-growth tax cuts presumably lose a lot of revenue when first enacted. But as the economy begins to respond (because of improved incentives for work, saving, investment, and entrepreneurship), taxable income starts climbing.

Here’s an example from the Tax Foundation’s analysis of the Rubio plan. As you can see, the proposal leads to a lot more red ink when it’s first implemented. But as the economy starts growing faster and generating more income, there’s a growing amount of “revenue feedback.” And by the end of the 10-year period, the plan is actually projected to increase revenue compared to current law.

So does this mean some tax cuts are a “free lunch” and pay for themselves? Sound like a controversial proposition, but that’s exactly what happened with some of the tax rate reductions of the Reagan years.

To be sure, that doesn’t guarantee what will happen if any of the aforementioned tax plans are enacted. Moreover, one can quibble with the structure and specifications of the Tax Foundation’s model. Economists, after all, aren’t exactly famous for their forecasting prowess.

But none of this matters because the Tax Foundation isn’t in charge of making official revenue estimates. That’s the job of the Joint Committee on Taxation, and that bureaucracy largely relies on static scoring.

Which brings me back to today’s topic. The good tax reform plans of certain candidates need to be matched by credible plans to restrain the growth of federal spending.

Fortunately, that shouldn’t be that difficult. I explained last month that big tax cuts were possible with modest spending restraint. If spending grows by 2 percent instead of 3 percent, for instance, the 10-year savings would be about $1.4 trillion.

And since it’s good to reduce tax burdens and also good to restrain spending, it’s a win-win situation to combine those two policies. Sort of the fiscal equivalent of mixing peanut butter and chocolate in the famous commercial for Reese’s Peanut Butter Cups.

P.S. Returning to my interview embedded above, I suppose it’s worthwhile to emphasize a couple of other points.

P.P.S. Writing about the prospect of tax reform back in April, I warned that “…regardless of what happens with elections, I’m not overly optimistic about making progress.”

Today, I still think it’s an uphill battle. But if candidates begin to put forth good plans to restrain spending, the odds will improve.

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Perhaps the least recognized and least appreciated triumph of the GOP Congress is the de facto spending freeze between 2009 and 2014.

Fights over debt limits, sequestration, spending caps, and government shutdowns were messy and chaotic, but it’s hard to argue with the results. The burden of federal spending fell from 24.4 pct of GDP to 20.3 pct of economic output in just five years.

So I was pleased to see this morning that the Wall Street Journal opined this morning on this success.

…amid all the conservative denunciations of the John Boehner era, a key political fact is typically ignored. To wit, the GOP takeover of the House in 2010 has led to a marked decline in federal spending. …The stimulus boosted spending to a modern record of 24.4% of GDP in 2009… Then Republicans won the election in 2010 on a mandate to cut spending. …Total federal outlays fell two years in a row—from $3.6 trillion in 2011 to $3.45 trillion in 2013… The spending decline was even more marked as a share of the economy, falling for three straight years—from 23.4% in 2011 to 20.3% in 2014. This kind of spending restraint almost never happens in Washington…domestic spending fell by about 2.8% of GDP during the same period.

The editorial specifically praises the spending caps that were part of the Budget Control Act, which are enforced by sequestration.

…the discretionary spending caps and sequester included as part of the 2011 agreement…forced discipline that has kept a lid on spending-as-usual.


The lobbyists, special interests, bureaucrats, cronyists, politicians, and contractors in Washington hate budget caps and sequestration, but it’s been a big success.

Writing for the Washington Examiner, Michael Barone makes a similar argument.

The hold-down of federal spending was accomplished by the sequester procedure which has stayed in place now for four years. It’s not the optimal way to form a budget. But if your goal is holding down spending — and reducing spending from 25 percent of GDP to 20 percent — then the sequester has been very effective.

Now let’s consider some very good news.

The Budget Control Act, along with the genuine enforcement mechanism of sequestration, is the law of the land. The growth of discretionary spending is capped not only this year, but also next year. And the rest of the decade. And even into the 2020s.

But now let’s contemplate some very bad news.

The pro-spending crowd in Washington has been working hard to weaken the spending caps and they may be on the verge of success.

Here are some excerpts from a report in The Hill.

Congressional Republican leaders are launching budget talks with the White House. …News of the budget talks is already unnerving…House conservatives… GOP leaders are seeking to strike a deal that would set top-line budget numbers for the next two years. …A White House official said McConnell and Boehner reached out to Obama on Sept. 17. …A source close to McConnell said he hopes to secure a deal to increase discretionary spending for defense and nondefense programs in exchange for reductions to mandatory spending.


Why are GOP leaders negotiating a new deal when there’s already a good deal in place for many more years?

In part, it’s because many Republicans are big spenders, particularly for the defense budget. But part of the answer is that President Obama has threatened to veto any budget that doesn’t bust the caps. The President has even threatened to shut down the government to get more spending.

And GOPers think they’ll get blamed, even though Obama is the one who would be reneging on the deal he agreed to back in 2011.

So where does this lead?

Well, if Republicans don’t try (or don’t care) to make an argument for fiscal restraint, Obama will prevail. And the net effect will be a repeat of the so-called Ryan-Murray budget deal that weakened the spending caps back in 2013.

That means more discretionary spending, accompanied by budget gimmicks and thinly disguised tax hikes.

P.S. Some advocates of bigger government say sequestration would hurt the economy, but I challenge any of them to justify their Keynesian argument after looking at evidence from the U.S. and Canada in the 1990s.

P.P.S. And if sequestration is bad, then why didn’t any of the President’s hysterical predictions become reality after the 2013 sequester?

P.P.P.S. You can enjoy some good sequester cartoons here, here, and here.

P.P.P.P.S. Here’s my contribution to sequestration humor.

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I’m delighted that so many presidential candidates are talking about partial tax reform and I’ve specifically analyzed the plans put forth by Marco Rubio, Rand Paul, Jeb Bush, and Donald Trump.

These proposals all make the tax code less punitive, and that would be good news for job creation, growth, and American competitiveness.

But that doesn’t mean any of them are perfect. They all fall short of the pure flat tax, which is the gold standard for full tax reform. Another problem is that these proposals won’t be plausible or sustainable unless unaccompanied by some prudent plans to restrain the growth of federal spending.

Today, though, I want to focus on another shortcoming. The various plans need to be augmented by long-overdue restrictions on the IRS, which has become and abusive and rogue bureaucracy.

Consider a few examples.

These horror stories provide plenty of evidence that the internal revenue service should have its wings clipped.

But let’s add another straw to the camel’s back. The tax collection agency in the midst of an audit fight with Microsoft and the IRS is making a mockery of its own rules and flagrantly abusing the company’s legal rights.

This is bad news for one of America’s most successful firms, but it also is creating a very dangerous precedent that could victimize many other companies – large and small – in the future.

Writing for The Hill, Andy Quinlan of the Center for Freedom and Prosperity highlights some of the IRS’s most offensive actions.

First, the IRS is flouting its own rules as part of its persecution of Microsoft.

Government officials, counter to federal law, are trying to bully the company into extending an audit process that should have ended over 6 years ago. …Federal law provides a three-year time period for the completion of an audit, yet IRS officials have been digging through the company’s files for over nine years.

Second, the IRS won’t even tell the company how much money it wants!

Seattle-based Microsoft had to force a hearing on this matter because the IRS refused to submit a final tax bill to Microsoft for a dispute over taxes owed from 2004 to 2006. The IRS has been dragging out this audit process for close to a decade, and continues to pressure the company to sign waivers extending the audit infinitum.

Third, the IRS has been whining about supposedly inadequate budgets, but the bureaucrats are paying a private law firm millions of dollars to participate in this never-ending audit.

In 2014, the government in an unprecedented move hired Quinn Emanuel, a L.A.-based litigation firm to help audit the company. The IRS has billions in budget, teams of lawyers and accountants, yet they decided spend $2.2 million dollars outsourcing their legal team to lawyers that charge in excess of $1000 an hour.  It should come as no shock to anyone following the IRS scandal that Quinn Emanuel is chock full of lawyers who are also large contributors to the party in power.

Fourth, the IRS’s rogue behavior may become standard practice if the bureaucrats don’t face any repercussions for stepping over the line.

This fight actually has little to do with Microsoft. It has everything to do with the prospect of the IRS abusing power, wasting taxpayer money and setting dangerous precedents for enforcement against small businesses. …The actions of the IRS that put this matter into court threatens to set a dangerous precedent on the power of the federal government with regard to tax issues. Congress needs to protect citizens against IRS overreach, and now a potential new procedure that will allow private tax information to be shared with outside law firms.

Wow, what a damning indictment against a vindictive bureaucracy.

And while Microsoft is a big company with plenty of money to defend itself, this is still outrageous. Particularly since the IRS will employ these thuggish tactics against less powerful taxpayers if it isn’t slapped down for by either Congress or the courts.

By the way, I should say something about the underlying dispute. The IRS is not happy about the prices that Microsoft charged when doing intra-firm sales between the parent company and foreign subsidiaries.

Yet if the bureaucrats really think Microsoft abused the “transfer pricing” rules, then the IRS should come up with its own estimate and – if necessary – they can go to court to see who’s right.

For what it’s worth, I suspect the IRS isn’t presenting Microsoft with a bill precisely because the bureaucrats ultimately wouldn’t prevail in a legal fight. The agency probably hopes a never-ending audit eventually will force the company to voluntarily over-pay just to end the torture.

Since I’m a policy wonk, I can’t resist noting that the only reason this kind of dispute even exists is because the United States has the highest corporate tax rate in the entire world. So companies naturally seek to maximize the income they earn in other nations (sort of like entrepreneurs and investors decide it’s better to do business in low-tax states such as Texas rather than fiscal hellholes such as Illinois).

And there’s nothing wrong – legally or ethically – with taxpayers choosing not to overpay the federal government.

The IRS can, of course, ask politicians to change the law if their goal is to grab more money. But as explained by Brian McNicoll in a column for the Washington Times, it shouldn’t try to confiscate more loot with endless harassment and dubious tactics.

If Microsoft’s business strategies are a problem for the IRS, it is up to Congress to change the tax law. But as long as those strategies are legal, no one should question Microsoft for doing what it can to limit its tax obligation. …there is reason Congress gives the IRS three years — not eight and certainly not carte blanche to go on indefinitely. …If the IRS has something on Microsoft, by all means bring it forward. But if it doesn’t, it needs to close the books on this near-decade of harassment and send Microsoft a bill for its taxes.

Returning to our main point, this is why tax reform should be accompanied by reforms to rein in the IRS’s improper behavior.

P.S. They haven’t put forth many details, but some candidates have indicated support for the kind of radical tax reform that would de-fang the IRS. Rick Santorum, Ben Carson, and John Kasich have all stated that they like the flat tax. And Mike Huckabee embraces a national sales tax to replace the current tax code.

And if there’s wholesale replacement of the internal revenue code, then a lot of the problems with the IRS automatically disappear.

P.P.S. Since we’re criticizing the IRS, I can’t resist sharing some oldies but goodies.

P.P.P.S. And since I’m digging through my archives, here’s my collection of IRS humor, including a new Obama 1040 form, a death tax cartoon, a list of tax day tips from David Letterman, 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 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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It’s been a challenge to assess Donald Trump’s fiscal policies since they’ve been an eclectic and evolving mix of good and bad soundbites.

Though I did like what he said about wanting to pay as little tax as possible because the government wastes so much of our money.

On the other hand, some of his comments about raising tax burdens on investors obviously rubbed me the wrong way.

But now “The Donald” has unveiled a real plan and we have plenty of details to assess. Here are some of the key provisions, as reported by the Wall Street Journal. We’ll start with the features that represent better tax policy and/or lead to lower tax burdens, such as somewhat lower statutory tax rates on households and a big reduction in the very high tax rate imposed on companies, as well as a slight reduction in the double tax on capital gains.

…no federal income tax would be levied against individuals earning less than $25,000 and married couples earning less than $50,000. The Trump campaign estimates that would reduce taxes to zero for 31 million households that currently pay at least some income tax. The highest individual income-tax rate would be 25%, compared with the current 39.6% rate. …Mr. Trump also would cut the top capital gains rate to 20%, from the current 23.8%. And he would eliminate the alternative minimum tax. …For businesses, Mr. Trump’s 15% rate is among the lowest that have been proposed so far.

But there are also features that would move tax policy in the wrong direction and/or raise revenue.

Most notably, Trump would scale back certain deductions as taxpayers earn more money. He also would increase the capital gains tax burden for partnerships that receive “carried interest.” And he would impose worldwide taxation on businesses.

To pay for the proposed tax benefits, the Trump plan would eliminate or reduce deductions and loopholes to high-income taxpayers, and would curb some deductions and other breaks for middle-class taxpayers by capping the level of individual deductions, a politically dicey proposition. Mr. Trump also would end the “carried interest” tax break, which allows many investment-fund managers to pay lower taxes on much of their compensation. …The Trump plan would raise revenues in at least a couple of significant ways. It would limit the value of individual deductions, with middle-class households keeping all or most of their deductions, higher-income taxpayers keeping around half of theirs, and the very wealthy losing a significant chunk of theirs. It also would wipe out many corporate deductions. …The plan also proposes capping the amount of interest payments that businesses can deduct now, a change phased in over a long period, and would impose a corporate tax on future foreign earnings of American multinationals.

Last but not least, there are parts of Trump’s plan that leave current policy unchanged.

Which could be characterized as “sins of omission” since many of these provisions in the tax code – such as double taxation, the tax bias against business investment, and tax preferences – should be altered.

…the candidate doesn’t propose to end taxation of individuals’ investment income… Mr. Trump would not…allow businesses to expense all their new equipment purchases, as some other Republicans do. …All taxpayers would keep their current deductions for mortgage-interest on their homes and charitable giving.

So what’s the net effect?

The answer depends on whether one hopes for perfect policy. The flat tax is the gold standard for genuine tax reform and Mr. Trump’s plan obviously falls short by that test.

But the perfect isn’t the enemy of the good. If we compare what he’s proposing to what we have now, the answer is easy. Trump’s plan is far better than the status quo.

Now that I’ve looked at the good and bad policies in Trump’s plan, I can’t resist closing with a political observation.  Notwithstanding his rivalry with Jeb Bush, it’s remarkable that Trump’s proposal is very similar to the plan already put forth by the former Florida Governor.

I’m not sure either candidate will like my interpretation, but I think it’s flattery. Both deserve plaudits for proposing to make the internal revenue code less onerous for the American economy.

P.S. Here’s what I wrote about the plans put forth by Marco Rubio and Rand Paul.

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As we get deeper into an election season, many politicians feel compelled to discuss how to deal with poverty.  And some of them may even be serious about trying to improve the system.

This hopefully will lead to big-picture discussions of key issues, such as why the poverty rate stopped falling in the mid-1960s.

If so, it helps to look past the headline numbers and actually understand the scope of the problem.

Nicholas Eberstadt of the American Enterprise Institute explains that the official poverty data from the Census Bureau overstates the number of poor people.

…the official poverty rate is a positive embarrassment today. The poverty rate manifestly cannot do the single thing it was intended for: to count the number of people in our country subsisting below a fixed and absolute “poverty line.” Among its many other shortcomings, this index implicitly assumes that a family’s annual reported income is identical to its spending power… But income and spending patterns no longer track for the lowest income strata in modern America. …the bottom quintile of US households spent 130% more than their reported pretax income. The disparity between spending and income levels for poorer Americans has been gradually widening over time.

Though the shortcomings of the Census Bureau sometimes largely don’t matter because advocates of bigger government arbitrarily choose different numbers that further exaggerate the degree of poverty in the United States.

In a column for National Review, the Heritage Foundation’s Robert Rector exposes the dishonest tactic (promoted by the Obama Administration and used by the OECD) of measuring income differences instead of actual poverty.

The Left often claims that the U.S has a far higher poverty rate than other developed nations have. These claims are based on a “relative poverty” standard, in which being “poor” is defined as having an income below 50 percent of the national median. Since the median income in the United States is substantially higher than the median income in most European countries, these comparisons establish a higher hurdle for escaping from “poverty” in the U.S. than is found elsewhere.

Based on honest apples-to-apples numbers, the United States is just as capable as other developed nations of minimizing material deprivation.

A more meaningful analysis would compare countries against a uniform standard. …Garfinkel and his co-authors do exactly that. They measure the percentage of people in each country who fall below the poverty-income threshold in the U.S. ($24,008 per year for a family of four in 2014). The authors reasonably broaden the measure of income to include “non-cash” benefits such as food stamps, the earned-income tax credit, and equivalent programs in other nations. They also subtract taxes paid by low-income families, which are heavy in Europe. …the differences in poverty according to this uniform standard were very small. For example, the poverty rate in the U.S. was 8.7 percent, while the average among other affluent countries was around 7.6 percent. The rate in Germany was 7.3 percent, and in Sweden, it was 7.5 percent. Using a slightly higher uniform standard set at 125 percent of the U.S. poverty-income thresholds, the authors find that the U.S. actually has a slightly lower poverty rate than other affluent countries.

These numbers probably disappoint leftists who want to believe that European nations are somehow more generous and more effective in dealing with poverty.

But Robert explains that advocates of smaller government and individual responsibility should not be happy because the federal government’s profligacy isn’t helping poor people become self sufficient.

It is, of course, a good thing that left-wing claims of widespread deprivation in the U.S. are inaccurate. But government welfare policy should be about more than shoveling out a trillion dollars per year in “free” benefits. When President Lyndon Johnson launched the War on Poverty, he sought to decrease welfare dependence and increase self-sufficiency: the ability of family to support itself above poverty without the need for government handouts. By that score, the War on Poverty has been a $24 trillion flop. While self-sufficiency improved dramatically in the decades before the War on Poverty started, for the last 45 years, it has been at a standstill.

Robert Doar and Angela Rachidi of the American Enterprise Institute make a very similar point about the welfare state failing to promote self sufficiency.

Recently released data show that the official poverty rate was 14.8% in 2014, only slightly below the 15% in poverty in 1970. And this is despite large increases in federal spending on anti-poverty programs.  Spending on these programs has increased almost tenfold in constant dollars since the early 1970s and increased from 1.0% of GDP in 1972 to 3.8% in 2012… Where does this leave us? If helping people achieve self-sufficiency and be free of government assistance is the goal, the safety net has largely failed. But if reducing material hardship is the goal, it performs well.

I would make a very important change to the above passage. Doar and Rachidi write that the poverty rate hasn’t declined “despite large increases” in supposed anti-poverty spending. Based on the evidence, it would be more accurate to say that poverty has stayed high “because of large increases.”

Simply stated, when you subsidize something, you get more of it.

Anyhow, all this matters for three reasons.

  • First, dependency is bad news for poor people, particularly when government subsidizes multi-generational poverty and unwed motherhood.
  • Second, the current welfare state is bad news for taxpayers, who are financing a $1 trillion income-redistribution system that fails in its most important task.
  • Third, the current system is bad news for the economy because millions of people are bribed to be out of the labor force, thus lowering potential output.

Let’s summarize what we know. The official poverty rate exaggerates the actual number of poor people by failing to properly measure income, but that may not matter much since proponents of more redistribution prefer to use dishonest numbers that are even more distorted.

And we also know that the welfare state is capable of redistributing lots of money, but also that it does a terrible job of promoting self sufficiency. Indeed, it’s almost certainly the case that massive levels of redistribution have had a negative effect.

So what’s the solution to this mess?

Folks on the left want even more of the same. But why should we expect that to have any positive effect? Indeed, it’s more likely that an expansion of the welfare state will simply lure more people into lives of sloth and dependency.

Some people on the right want to replace the welfare state with a guaranteed or basic income. This has some theoretical appeal, but it is based on the very shaky assumption that politicians could be convinced to completely repeal all existing redistribution programs.

Which is why the most prudent and effective step is to simply get the federal government out of the business of redistributing income and let state and local governments decide how best to deal with the issue.

This federalism-based approach has several advantages.

  1. Since redistributing income is not listed as an enumerated power, ending Washington’s role would be consistent with the Constitution.
  2. This federalism model already has been successfully tested with welfare reform in the 1990s and it also is the core feature of proposals to block grant Medicaid.
  3. A state-based model is far more likely to result in the degree of experimentation, diversity, and innovation needed to discover how best to actually promote self sufficiency.

By the way, this federalist system may begin with block grants from the federal government (i.e., transfers of cash to state and local governments), but the ultimate goal should be to phase out such subsidies so that state and local governments are responsible for choosing how to raise funds and how to allocate them.

And once welfare is truly a responsibility of state and local governments, we have good evidence that this will lead to better policy.

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