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Archive for the ‘Politics’ Category

There are several challenges when trying to analyze the impact of policy on economic performance.

One problem is isolating the impact of a specific policy. I like Switzerland’s spending cap, for instance, but to what extent is that policy responsible for the country’s admirable economic performance? Yes, I think the spending cap helps, but Switzerland also many other good policies such as a modest tax burden, private retirement accounts, open trade, and federalism.

Another problem is the honest and accurate use of data. You can make any nation look good or bad simply by choosing either growth years or recession years for analysis. This is known as “cherry-picking” data and I try to avoid this methodological sin by looking at multi-year periods (or, even better, multi-decade periods) when analyzing various policies.

But not everyone is careful.

Jason Furman, who was Chairman of the Council of Economic Advisers during Obama’s second term, has a column in today’s Wall Street Journal. What immediately struck me is how he cherry-picked data to bolster his claim that the government shouldn’t reduce its claim on taxpayers. Here’s his core argument.

…the 1981 and 2001 model of tax cuts makes no sense in today’s fiscal environment. Tax revenue as a percentage of gross domestic product is lower today than it was when Presidents Reagan and George W. Bush cut taxes.

And here the chart he shared, which apparently is supposed to be persuasive.

But here’s the problem. If you look at OMB data for the entire post-World War II era, tax revenues have averaged 17.2 percent of GDP. If you look at CBO data, which starts in 1967, tax revenues, on average, have consumed 17.4 percent of GDP.

So Furman’s implication that tax receipts today are abnormally low is completely wrong.

Moreover, he shows the projection for 2017 tax receipts, which is appropriate, but he neglects to mention that the Congressional Budget Office’s forecast for the next 10 years shows revenues averaging 18.1 percent of GDP (or the 30-year forecast that shows revenues becoming an even bigger burden).

In other words, a substantial tax cut is needed to keep the tax burden from climbing well above the long-run average.

Furman’s slippery use of data is disappointing, but it’s also inexplicable. He could have offered some effective and honest arguments against tax cuts, most notably that reducing revenues is problematical since Trump and Republicans seem unwilling to restrain the growth of government spending.

Let’s close by looking at a few other interesting passages from his column.

I found this sentence to be rather amusing since he’s basically admitting that Obamanomics was a failure.

Growth has been too low for too long and raising it should be a top priority.

He then asserts that tax cuts never pay for themselves. I would have agreed if he wrote “almost never,” or if he wrote that the new GOP package won’t pay for itself. But his doctrinaire statement is belied by data from the United States, Canada, and United Kingdom.

…no serious analyst has ever claimed that tax cuts generate enough growth to pay for themselves.

By the way, Furman openly admits the Laffer Curve is real. And if the Joint Committee on Taxation shows revenue feedback of 20 percent-30 percent when scoring the Republican plan, that will represent huge progress.

Estimates by a wide range of economists and the nonpartisan scorekeepers at the Joint Committee on Taxation have found that the additional growth associated with well-designed tax reform may offset 20% to 30% of the gross cost of tax cuts—not counting dynamic feedback.

Last but not least, he comes out of the tax-increase closet by embracing the truly awful Simpson-Bowles budget plan.

The economy needs a fiscal plan that combines an increase in revenues with entitlement reforms that protect the poor a la Simpson-Bowles.

As I’ve explained before, Simpson-Bowles is best characterized as lots of new revenue on the tax side and plenty of gimmicky provisions on the spending side (rather than genuine reform).

P.S. Even though Republicans are not serious about controlling spending and even though I don’t think the GOP tax cut will come anywhere close to “paying for itself,” the tax cuts are still a good idea. Both to generate growth and also because reduced tax receipts hopefully will translate into pressure to control spending at some point.

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Every time I’ve gone overseas in the past six months, I’ve been peppered with questions about Donald Trump. It doesn’t matter whether my speech was about tax reform, entitlements, fiscal crisis, or tax competition, most people wanted to know what I think about The Donald.

My general reaction has been to disavow any expertise (as illustrated by my wildly inaccurate election prediction). But, when pressed, I speculate that Hillary Clinton wasn’t a very attractive candidate and that Trump managed to tap into disdain for Washington (i.e., drain the swamp) and angst about the economy’s sub-par performance.

What I find galling, though, is when I get follow-up questions – and this happens a lot, especially in Europe – asking how it is possible that the United States could somehow go from electing a wonderful visionary like Obama to electing a dangerous clown like Trump.

Since I’m not a big Trump fan, I don’t particularly care how they characterize the current president, but I’m mystified about the ongoing Obama worship in other nations. Even among folks who otherwise are sympathetic to free markets.

I’ve generally responded by explaining that Obama was a statist who wound up decimating the Democratic Party.

And my favorite factoid has been the 2013 poll showing that Reagan would have trounced Obama in a hypothetical matchup.

I especially like sharing that data since many foreigners think Reagan wasn’t a successful President. So when I share that polling data, it also gives me an opportunity to set the record straight about the success of Reaganomics.

I’m motivated to write about this topic because I’m currently in Europe and earlier today I wound up having one of these conversations in the Frankfurt Airport with a German who noticed my accent and asked me about “crazy American politics.”

I had no problem admitting that the political situation in the U.S. is somewhat surreal, so that was a bonding moment. But as the conversation progressed and I started to give my standard explanation about Obama being a dismal president and I shared the 2013 poll, my German friend didn’t believe me.

So I felt motivated to quickly go online and find some additional data to augment my argument. And I was very happy to find a Quinnipiac poll from 2014. Here are some of the highlights, as reported by USA Today.

…33% named Obama the worst president since World War II, and 28% put Bush at the bottom of post-war presidents. “Over the span of 69 years of American history and 12 presidencies, President Barack Obama finds himself with President George W. Bush at the bottom of the popularity barrel,” said Tim Malloy, assistant director of the Quinnipiac University Poll. …Ronald Reagan topped the poll as the best president since World War II, with 35%. He is followed by presidents Bill Clinton (18%) and John F. Kennedy (15%).

Yes, Ronald Reagan easily was considered the best President in the post-World War II era.

Here’s the relevant chart from the story. Kudos to the American people from giving the Gipper high scores.

And what about the bottom of the list?

Here’s the chart showing Obama edging out George W. Bush for last place.

By the way, I suspect these numbers will look much different in 50 years. I’m guessing many Republicans picked Obama simply because he was the most recent Democrat president and a lot of Democrats picked W because he was the most recent Republican President.

With the passage of time, I think Nixon and Carter deservedly will get some of those votes (and I think LBJ deserves more votes as the worst president, for what it’s worth).

The bottom line, though, is that I now have a second poll to share with foreigners.

P.S. If there’s ever a poll that isn’t limited to the post-World War II era, I would urge votes not only for Reagan, but also for Calvin Coolidge and Grover Cleveland.

P.P.S. People are surprised when I explain that Bill Clinton deserves to be in second place for post-WWII presidents.

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The last time there was a presidential election in France, I like to think my endorsement made a difference in the outcome.

Now that another election is about to take place, with a first round this Sunday and a runoff election between the top-2 candidates two week later, it’s time to once again pontificate about the political situation in France. But before looking at the major candidates, let’s consider a couple of pieces of economic data to get a sense of the enormous challenges that will have to be overcome to boost France’s anemic economy.

We’ll start with this measure of implicit pension debt (IPD) in various European nations. France, not surprisingly, has made commitments to spend money that greatly exceed the private sector’s capacity to generate tax revenue.

By the way, the accompany article notes that the numbers for France are even worse than suggested by the chart.

Most tax and accounting codes require companies to report such implicit debts on the liability side of the ledger as obligations. Not so with governments, whose accounting practices would under normal circumstances be considered as falsifying public accounts. …According to a recent study, six European countries – Austria, Finland, France, Germany, Italy and Poland – have an IPD exceeding 300 percent of gross domestic product. …And the kicker? The data cited above are based on the present value of future pensions as of 2006. More up-to-date figures probably won’t be available until the end of 2017. …The issue is no longer when France goes bankrupt, but when Europe does. The level of debt declared in the national accounts is already worrying. With implicit pension liabilities a multiple of that, it appears that a systemic implosion is unavoidable.

Here’s another sobering visual. France is doing a very good job of scaring off the geese that lay the golden eggs. It is losing more millionaires than any other country.

The combined message of these two visuals is that the already-enormous burden of spending in France will get worse, yet the country is chasing away the people who finance the lion’s share of the government’s budget.

And lots of young entrepreneurs also are escaping, which further exacerbates the nation’s long-run troubles.

Now that we’ve looked at where France is heading, let’s contemplate whether the politicians running for President will make the situation better or worse.

We’ll start with this helpful table summarizing the views of the major candidates (though the hard-left vote apparently has consolidated behind Mélenchon, so Hamon can be ignored).

What’s not captured in this table, however, is that the presidential race pits two outsiders (Mélenchon and Le Pen) against two establishment candidates (Macron and Fillon).

And this is leading to some interesting analysis. The establishment point of view is captured by Sebastian Mallaby’s column in the Washington Post. He is very opposed to Fillon, Le Pen, and Mélenchon, and also rather concerned that his preferred candidate – Emmanuel Macron – won’t make it to the runoff.

In the first round of its presidential election, to be held on Sunday, some three-quarters of the French electorate are expected to back candidates who stand variously for corruption, a 100 percent top tax rate, Islamophobia, Russophilia, Holocaust denial, the undermining of NATO and the traumatic breakup of Europe’s political and monetary union. France was once the cradle of the Western Enlightenment. Now it threatens to become a spectacle of decadent collapse.

I disagree with some of Mallaby’s analysis, but enjoyed his depiction of Mélenchon, who bizarrely thinks Venezuela is a role model.

Jean-Luc Mélenchon, the Communist-allied candidate who styles himself after Venezuela’s Hugo Chávez and promises a “citizens’ revolution.” No prizes for guessing that he’s the one who proposes a 100 percent top tax rate… Oblivious to the fact that France has taxed and regulated its way to a 25 percent youth unemployment rate and a government-debt trajectory that threatens Armageddon, he wants further cuts to the French workweek, an additional 10,000 civil servants and a shift in the retirement age from 62 to 60.

To put it in simple terms, Mélenchon is appealing to voters who think Hollande didn’t go far enough.

CNN reports that Mélenchon is even more fixated on class warfare than Bernie Sanders.

Instead of a 90 percent top tax rate, he wants to steal every penny from the supposedly evil rich.

Jean-Luc Mélenchon, who has been endorsed by the French Communist Party, says he would introduce a 100% tax on income above €400,000 ($425,000). …France already has some of the world’s highest rates of income tax, and previous attempts to push them even higher have failed. …Around 10,000 millionaires left the country in 2015, followed by 12,000 last year, according to New World Wealth.

Though maybe he’s the French version of Obama, who also got support from communists.

And, like Obama, he thinks he should get to decide when someone has earned enough money.

“I believe that there is a limit to the accumulation [of wealth],” Mélenchon said in March. “If there are any who want to go abroad, well, goodbye!”

Though at least he has the courage of his convictions. He doesn’t mind if upper-income taxpayers leave. Though I wonder if he’s given any thought to who will then pay the bills?

Anyhow, the 100 percent tax is just one of many crazy ideas.

He also wants to limit pay for CEOs to 20 times the salary of their worst-paid employee. …Here’s a quick look at Mélenchon’s other economic policy proposals: Cut France’s working week to four days…More vacation days for workers…Raise minimum wage by 16%…Increase the tax on inherited wealth…100% renewable energy by 2050…No new free trade agreements…Nationalize French energy company EDF and gas provider Engie.

Now let’s shift to other candidates. I’m irked that Macron generally is portrayed as a centrist and even more irked that Le Pen is portrayed as being on the right.

Prince Michael of Liechtenstein is a very astute observer of European political and economic affairs and his analysis is more accurate. We’ll start with what he wrote about Le Pen’s support for statism.

Ms. Le Pen’s…socialist economic program will continue the ongoing destruction of the French economy, its competitiveness and public finances. …Such a scenario would, however, only accelerate a disaster that was already looming. The present government’s socialist policies, which have shied away from reform and preserved France’s oversized public sector, will eventually bear the same results.

To augment that analysis, Le Pen is considered on the right simply because of her anti-immigrant policy. But on economic policy, she is very much on the left.

Prince Michael also exposed Macron’s support for a more burdensome government.

Mr. Macron…claims that he will bring France’s budget deficit below the European benchmark of 3 percent. …The candidate’s plan…does not appear plausible in light of his intention to further increase government spending. Mr. Macron’s pronouncements indicate an adherence to the Keynesian economic policy approach at the EU level. According to him, Europe should end austerity and introduce a growth model in which additional spending – on top of the already lavish outlays planned by European Commission chief Jean-Claude Juncker – ought to be implemented. The Macron policies boil down to more state and more EU centralization. At the heart of the scheme is the creation of a European Ministry of Finance and Economy, an all-powerful body to plan and monitor the EU economy. …Macron intends to continue treating the French cancer with aspirin and transmit the disease to Germany and the rest of the EU, while demanding that they pay for France’s subsistence in the meantime.

In other words, Macron wants this cartoon to be official French policy. Yet some people actually think of him as a pro-market reformer. Wow.

Let’s conclude with these wise words from an editorial in today’s Wall Street Journal, which is very worried that the runoff may feature two pro-big government outsiders.

All four major candidates are polling at around 20%, but Mr. Mélenchon has momentum and the highest personal favorability. A Le Pen-Mélenchon finale would be a political shock to markets and perhaps to the future of the EU and eurozone. …Mr. Hollande’s Socialists have made France the sickest of Europe’s large economies, with growth of merely 1.1% in 2016, a jobless rate above 10% for most of the past five years, and youth unemployment at nearly 25%. His predecessor Nicolas Sarkozy and the Republicans talked a good reform game but never delivered. …the stage is set for candidates who appeal to nativism or a cost-free welfare state. Let’s hope a French majority steps back from the political brink.

By the way, it’s not yet time for me to make an official endorsement, though I’ll share my leanings.

I confess that I’m torn between Fillon and Mélenchon. By French standards, Fillon is apparently very pro-free market. So I should like him. He could be the Ronald Reagan or Margaret Thatcher of France.

But what if he turns out to be another Sarkozy, a big-government fraud?

If I support Mélenchon, by contrast, at least I can say with great confidence that I will be able to continue using France as an example of bad public policy. I realize that’s not an ideal outcome for the French people, but you know what they say about omelets and eggs.

In any event, I’ll wait until the runoff election before selecting a candidate.

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For three decades, I’ve been trying to convince politicians to adopt good policy. I give them theoretical reasons why it’s a good idea to have limited government. I share with them empirical evidence demonstrating the superiority of free markets over statism. And I’m probably annoyingly relentless about disseminating examples of good and bad policy from around the world (my version of “teachable moments”).

But if you want to get a politician to do the right thing, you need more than theory, data, and real-world case studies. You need to convince them – notwithstanding my Second Theorem of Government – that good policy won’t threaten their reelection.

My usual approach is to remind them that Ronald Reagan adopted a bunch of supposedly unpopular policies, yet he got reelected in a landslide because reducing the burden of government allowed the private sector to grow much faster. George H.W. Bush, by contrast, became a one-term blunder because his tax increase and other statist policies undermined the economy’s performance.

I’m hoping this argument will resonate with some of my friends who are now working in the White House. And I don’t rely on vague hints. In this clip from a recent interview, I bluntly point out that good policy is good politics because a faster-growing economy presumably will have a big impact on the 2020 election.

Here’s another clip from that same interview, where I point out that the GOP’s repeal-and-replace legislation was good news in that it got rid of a lot of the misguided taxes and spending that were part of Obamacare.

But the Republican plan did not try to fix the government-imposed third-party-payer distortions that cause health care to be so expensive and inefficient. And I pointed out at the end of this clip that Republicans would have been held responsible as the system got even more costly and bureaucratic.

Now let’s shift to fiscal policy.

Here’s a clip from an interview about Trump’s budget. I’m happy about some of the specific reductions (see here, here, and here), but I grouse that there’s no attempt to fix entitlements and I’m also unhappy that the reductions in domestic discretionary spending are used to benefit the Pentagon rather than taxpayers.

The latter half of the above interview is about the corruption that defines the Washington swamp. Yes, it’s possible that Trump could use the “bully pulpit” to push Congress in the right direction, but I wish I had more time to emphasize that shrinking the overall size of government is the only way to really “drain the swamp.”

And since we’re talking about good policy and good politics, here’s a clip from another interview.

Back when the stock market was climbing, I suggested it was a rather risky move for Trump to say higher stock values were a referendum on the benefits of his policies. After all, what goes up can go down.

The hosts acknowledge that the stock market may decline in the short run, but they seem optimistic in the long run based on what happened during the Reagan years.

But this brings me back to my original point. Yes, Reagan’s policies led to a strong stock market. His policies also produced rising levels of median household income. Moreover, the economy boomed and millions of jobs were created. These were among the reasons he was reelected in a landslide.

But these good things weren’t random. They happened because Reagan made big positive changes in policy. He tamed inflation. He slashed tax rates. He substantially reduced the burden of domestic spending. He curtailed red tape.

In other words, there was a direct connection between good policy, good economy, and good political results. Indeed, let’s enshrine this relationship in a “Fourth Theorem of Government.”

For what it’s worth, Reagan also demonstrated leadership, enacting all those pro-growth reforms over the vociferous opposition of various interest groups.

Will Trump’s reform be that bold and that brave? His proposed 15-percent corporate tax rate deserves praise, and he seems serious about restraining the regulatory state, but he will need to do a lot more if he wants to be the second coming of Ronald Reagan. Not only will he need more good policies, but he’ll also need to ditch some of the bad policies (childcare subsidies, infrastructure pork, carried-interest capital gains tax hike, etc) that would increase the burden of government.

The jury is still out, but I’m a bit pessimistic on the final verdict.

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A couple of years ago, filled with disgust at the sleazy corruption of the federal Leviathan, I put forth a simple explanation for what happens in Washington, DC.

I call it the “First Theorem of Government,” and I think it accurately reflects the real purpose and operation of government. Except I probably should have added lobbyists and contractors. And it goes without saying (though I probably should have said it anyhow) that politicians are the main beneficiaries of this odious racket.

I think this theorem has stood the test of time. It works just as well when Republicans are in charge as it does when Democrats are in charge.

But it doesn’t describe everything.

For instance, Republicans have won landslide elections in recent years by promising that they will repeal Obamacare the moment they’re in charge. Well, now they control both Congress and the White House and their muscular rhetoric has magically transformed into anemic legislation.

This is very disappointing and perhaps I’ll share some of Michael Cannon’s work in future columns about the policy details, but today I want to focus on why GOP toughness has turned into mush.

In part, this is simply a reflection of the fact the rhetoric of politicians is always bolder than their legislation (I didn’t agree with 98 percent of what was said by Mario Cuomo, the former Governor of New York, but he was correct that “You campaign in poetry. You govern in prose.”)

But that’s just a small part of the problem. The real issue is that it’s relatively easy for GOP politicians to battle against proposed handouts and it’s very difficult to battle against existing handouts. That’s because government goodies are like a drug. Recipients quickly get hooked and they will fight much harder to preserve handouts than they will to get them in the first place.

And that’s the basic insight of the “Second Theorem of Government.”

Here’s a recent interview on FBN. The topic is the Republican reluctance to fully repeal Obamacare. I only got two soundbites, and they both occur in the first half of the discussion, but you can see why I was motivated to put forth the new theorem.

Simply stated, I’m disappointed, but I’m more resigned than agitated because this development was so sadly predictable.

And here are a couple of follow-up observations. I guess we’ll call them corollaries to the theorem.

  1. You break it, you buy it – Government intervention had screwed up the system well before Obamacare was enacted, but people now blame the 2010 law (and the Democrats who voted for it) for everything that goes wrong with healthcare. Republicans fear that all the blame will shift to them if their “Repeal and Replace” legislation is adopted.
  2. Follow the money – What’s partly driving GOP timidity is their desire not to anger many of the interest groups – such as state governments, hospitals, doctors, insurance companies, etc – who benefit from various Obamacare handouts. That’s what is motivating criticism for politicians such as Ohio’s John Kasich and Alaska’s Lisa Murkowski.
  3. Don’t throw the baby out with the bathwater – The “Cadillac Tax” is the one part of Obamacare that’s worth preserving because it will slowly cut back on the distorting tax preferences that lead to over-insurance and third-party payer. For what it’s worth, the GOP plan retains that provision, albeit postponed until 2025.
  4. The switch in time that saved…Obamacare – I’m still upset that Chief Justice John Roberts (aka, the reincarnation of the 1930s version of Justice Roberts) put politics above the Constitution by providing the decisive vote in the Supreme Court decision that upheld Obamacare. If the law had been blocked before the handouts began, we wouldn’t be in the current mess.

For these reasons (as well as other corollaries to my theorem), I’m not brimming with optimism that we’ll get real Obamacare repeal this year. Or even substantive Obamacare reform.

P.S. Now you know what I speculated many years ago that Obamacare would be a long-run victory for the left even though Democrats lost many elections because of it. I sometimes hate when I’m right.

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President Trump gave his first address to a joint session of Congress last night.

The one thing I can say with great confidence, based on applause patterns, is that it didn’t generate the same spirit of bipartisan good will as the Pope’s address back in 2015.

But let’s set aside the Republican-vs-Democrat silliness and focus on public policy.

What was good in Trump’s speech? Overall, there were nine things that seemed positive.

These are the three things that got my blood pumping.

  1. Lower corporate tax rate – Trump didn’t specifically reference the 15-percent rate he mentioned in the campaign, but he aggressively argued for a big drop in America’s punitive corporate tax rate.
  2. Obamacare repeal – The president effectively outlined how Obamacare is a disaster for taxpayers, for consumers, for the economy, and for the healthcare system.
  3. Food and Drug Administration – Trump correctly criticized the bureaucrats at the FDA for stifling medical progress. I think it’s safe to assume that bureaucracy will be better behaved for the next four years. Maybe we’ll even get rid of the milk police.

What was hopeful about Trump’s speech?

Quite a bit, actually. Here are six things that caught my attention where it’s possible that we’ll see progress.

  1. Jobs – President Trump correctly diagnosed the problem of dismal labor force participation. It remains to be seen whether the net effect of his policies is more job creation.
  2. Washington corruption – I like that he focused on trying to clean up Washington, but I don’t think a handful of restrictions that make it hard for Administration officials to become lobbyists will make a difference. You need to shrink government to “drain the swamp.”
  3. Obamacare replacement – While the repeal message was strong, the replace message was fuzzy. It seems Trump wants more of everything, but at lower cost. That’s what a free market can deliver, but I worry that’s not quite what he has in mind. In the back of my mind, I’m worried that I was right five years ago when I predicted that Obamacare would decimate the Democrats politically but nonetheless be a long-fun victory for statism.
  4. Medicaid reform – We didn’t get the necessary specifics, but the President definitely used rhetoric that suggests he is not going to be an obstacle to at least this slice of entitlement reform. I feel good about the soft prediction I made two months ago.
  5. School choice – Trump’s comments on education were very uplifting. At the very least, the White House will use the bully pulpit to promote choices for parents rather than throwing more money into a failed system. It would be great if there was some follow-up, ideally leading to the abolition of the Department of Education.
  6. High-skilled immigration – I was surprised that the President said nice things about skilled immigration. Maybe this is a positive sign for the EB-5 program and other job-creating initiatives that are designed to attract successful investors and entrepreneurs to the United States.

And here’s what was negative about Trump’s remarks.

We’ll start with the five things that left me feeling somewhat pessimistic that we’ll have bigger government when the dust settles.

  1. Transportation infrastructure – The President wants a lot of money spent on infrastructure. Fortunately, he was careful not to say that the federal government will be the sole source of the new spending. But I worry that we’ll get a bigger and more wasteful Department of Transportation at the end of the process.
  2. Border-adjustable taxation – It’s troubling that Trump recycled the myth that foreign nations discriminate against American products when they impose value-added taxes on their citizens. It may be an indication that he will sign on to the misguided “border-adjustable tax” in an otherwise pro-growth House tax plan.
  3. Veterans – Trump said he wants to take care of veterans. That’s a good idea, and the ideal solution is to abolish the Veterans Administration. I’m worried, though, Trump will simply throw good money after bad by padding the budget of a bloated and incompetent bureaucracy that rewarded itself with bonuses after putting veterans on secret waiting lists.
  4. Immigration – Notwithstanding the positive comments about skilled immigrants, his overall tone was very anti-immigration. Given that so many immigrant groups from all over the world prosper enormously in the United States (and thus generate benefits for the rest of us), it would have been better if he has a more welcoming attitude while focusing instead on restricting access to the welfare state.
  5. Pentagon blank check – President Trump gave a mixed message. He criticized the heavy cost of needless overseas interventionism, yet then urged more money for a bureaucracy-heavy Pentagon. Yet why spend even more money if there aren’t going to be any more nation building exercises?

What was really disappointing about Trump’s speech? Here’s my list of three things that were unambiguously depressing.

  1. Protectionism – The president seems determined to harm American consumers and undermine America’s economy. Let’s hope these policies don’t lead to a global trade war like in the 1930s.
  2. Childcare Entitlement – Federal subsidies have resulted in higher costs and inefficiency in health care and higher education. Trump now wants to cause the same problems in childcare. This won’t end well.
  3. Paid Parental Leave – When even columnists for the New York Times confess that this type of policy backfires on women by making them less attractive to employers, it’s bizarre that it would be endorsed by a Republican president.

So what’s the bottom line?

To be blunt, beats the heck out of me.

I wondered back during the campaign whether Trump is a big-government Republican or a small-government conservative. I contemplated the same question when he got elected. And also when he got inaugurated.

Last night’s speech left me still wondering, though it’s safe to say Trump does not share Reagan’s instinctive understanding that government is the problem rather than solution.

That doesn’t necessarily mean we’ll get bad policy over the next four years. But there’s no guarantee we’ll get good policy, either.

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As part of an otherwise very good tax reform plan, House Republicans have proposed to modify the corporate income tax so that it becomes a “destination-based cash-flow tax.”

For those not familiar with wonky inside-the-beltway tax terminology, there are three main things to understand about this proposal.

  • First, the tax rate on business would drop from 35 percent to 20 percent. This is unambiguously positive.
  • Second, it would replace depreciation with expensing, which is a very desirable change that would eliminate a very counter-productive tax on new investment outlays. This is basically what makes the plan a “cash-flow” tax.
  • Third, any income generated by exports would be exempt from tax but the 20-percent tax would be imposed on all imports. These “border-adjustable” provisions are what makes the plan a “destination-based” tax.

I’m a big fan of the first two provisions, but I’m very hostile to the third item.

I don’t like it because I worry it sets the stage for a value-added tax. I don’t like it because it is designed to undermine tax competition. I don’t like it because it has a protectionist stench and presumably violates America’s trade commitments. I don’t like it because that part of the plan only exists because politicians aren’t willing to engage in more spending restraint. And I don’t like it because politicians should try to reinvent the wheel when we already know the right way to do tax reform.

Heck, I feel like the Dr. Seuss character who lists all the ways he would not like green eggs and ham. Except I can state with complete certainty I wouldn’t change my mind if I was suddenly forced to take a bite of this new tax.

Today, I’m going to augment my economic arguments by noting that the plan also is turning into a political liability. Here are some excerpts from a news report in the Wall Street Journal about opposition in the business community.

A linchpin of the House Republicans’ tax plan, an approach called “border adjustment,” has split Republicans and fractured the business world into competing coalitions before a bill has even been drafted. …There is also global uncertainty: Other countries may retaliate, either by border-adjusting their corporate taxes or by challenging the U.S. plan at the World Trade Organization as too tilted toward American producers.

And The Hill reports that grassroots organizations also are up in arms.

Americans for Prosperity is stepping up its efforts to advocate against a proposal from House Republicans to tax imports and exempt exports, as lawmakers are increasingly raising concerns about the proposal. …AFP has hundreds of volunteers and staff who are making phone calls about the proposal. The group has about 100 meetings set up with Congress members and their staff for next week, while Congress is in recess.

Meanwhile, the Economist reports that the plan is causing uncertainty around the world.

To offset a border-adjusted tax of 20%—the rate favoured by House Republicans—the greenback would need to rise fully 25%, enough to destabilise emerging markets burdened with dollar-denominated debts. If the dollar stayed put and wages and prices rose 25% instead, the Federal Reserve would have to decide how to respond to an unprecedented surge in inflation. Why tolerate such disruption?

Holman Jenkins of the Wall Street Journal has a devastating take on the issue.

Like a European value-added tax, its cost would be deeply hidden in the price of goods, thus easily jacked up over time. Also, compared with the current tax structure, businesses would see less incentive to move abroad in search of lower taxes, eroding a useful pressure on politicians to be fiscally sane. And because the tax would alter the terms of trade, it would be expected to lead to a sharp increase in the dollar. U.S. holders of foreign assets would suffer large paper losses. Since many foreigners borrow in dollars too, a global debt crisis might follow. The tax might also violate World Trade Organization rules, inviting other countries to impose punitive taxes on U.S. exports.

Last but not least, John Tamny outlines some of the political downsides at Real Clear Markets.

…the House of Representatives…is aggressively promoting a…tax on imports. …When we get up and go to work each day, our work is what we exchange for what we don’t have, including voluminous goods and services produced for us around the world.  …Party members are proudly seeking a tax on our work. …Only the “stupid” Party could come up with something so injurious to every American, to the American economy, and to its growth-focused brand.  But that’s where we are at the moment.  The Party that attained majorities with its tax cutting reputation is aggressively seeking to shed its growth brand through the introduction of tax hikes meant to give politicians even more of what we the people produce.  If so, the majority Party can kiss its majority goodbye.  It will have earned its minority status.

For what it’s worth, I think John overstates the case against the plan. The additional revenue from border-adjustable tax provision would be used to cut taxes elsewhere. Heck, the plan is actually a significant net tax cut.

But John is right when you look at the issue through a political lens. If the DBCFT actually began to move through the legislative process, opponents would start running commercials about the “GOP scheme to impose new consumption tax on Americans.” Journalists (most of whom dislike Republicans) would have a field day publicizing reports about the “GOP plan to raise average family tax bill by hundreds of dollars.”

Such charges would be ignoring the other side of the equation, of course, but that’s how politics works.

All of which brings me back to one of my original points. We already know that the flat tax is the gold standard of tax reform. And we already know the various ways of moving the tax code in that direction.

My advice is that Republicans abandon the border-adjustable provision and focus on lowering tax rates, reducing double taxation, and cutting back on loopholes. Such ideas are economically sounder and politically safer.

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