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Posts Tagged ‘Corruption’

Back in 2014, I shared a World Bank study that measured how tax complexity facilitates more corruption by government officials.

Not that anyone should have been surprised. Complex tax codes enable politicians to extort bribes when writing the law (a problem that definitely exists in Washington) and they makes it possible for bureaucrats to extort bribes when administering the system.

Now the World Bank has a new study showing how a larger regulatory burden enables and facilitates corruption.

The two authors, Mohammad Amin and Yew Chong Soh, wanted to use better types of data to get an accurate assessment of the problem.

Business regulations often create opportunities for public officials to collect bribes… If true, this simple insight provides a practical and powerful way for deregulation to combat corruption and its many harmful effects on the economy. …Regulation is often measured by laws on the books rather than the actual regulatory burden on the firms even though it is the latter that is the primary determinant of corruption… The present paper attempts to fill this gap in the literature by using firm-level survey data on the actual corruption and regulatory burden experienced by the firms. …the public choice theory, stresses that regulation is intended to create rents to be distributed between the industry incumbents and the corrupt public officials. In some cases, the main beneficiary of regulation is the industry (regulatory capture view) while in others, it is the politicians and public officials (tollbooth view). …The present paper contributes to the…literature in several ways. …most previous studies have used perceived corruption indices…we depart from the literature by using firms’ experience with corruption instead. … for regulation, we use the actual regulatory burden experienced by the firms rather than rules on the books. This is an important departure from the literature.

For those not familiar with the term, “public choice” refers to research on the self-interested behavior of people in government.

Anyhow, prior research already showed that red tape gave politicians and bureaucrats the ability to extort money from the private economy.

…several studies analyze the possible effects of regulation on corruption. Using macro-level data for a cross-section of 85 countries in 1999, Djankov et al. (2002) look at the relationship between entry regulations and the level of corruption. …Consistent with the tollbooth view, the study finds strong evidence of higher corruption associated with heavier regulation of businesses. Using data from three worldwide firm surveys, Kaufmann and Wei (2000) confirm that when bribe-extracting bureaucrats can endogenously choose regulatory burden and delay, the effective (not just nominal) red tape and bribery can be positively correlated across firms.

The results in the new World Bank study build on the earlier research and confirm (as I noted in a video more than 10 years ago) more power for government means more corruption by government.

Our results show a large positive impact of the regulatory burden on the level of overall corruption as well as petty corruption. For the baseline specification, the overall bribery rate (bribes as percentage of firms’ annual sales) rises by about 0.03 percentage point for each percentage point increase in the regulatory burden. …The results show that irrespective of the set of controls, there is a large positive relationship between Overall Corruption and Time Tax… That is, for each percentage point increase in the regulatory burden, the overall bribe rate increases by 0.028 percentage point. Alternatively, an increase in regulatory burden from its minimum to maximum level leads to 2.8 percentage points increase in the level of overall corruption. This is a large increase given that the mean level of overall corruption equals about 1.1 percent.

By the way, “time tax” is defined as “the average of the percentage of senior management’s time spent in dealing with business regulations”

Here’s a graphic from the study for those of you who like digging into the empirical details.

P.S. The World Bank also released a study last year showing how more regulation reduces business productivity. Needless to say, that ultimately translates into lower wages for workers.

P.P.S. I’ve been asked why the World Bank seems friendlier to good policy than either the International Monetary Fund or Organization for Economic Cooperation and Development. I point out that it’s not uncommon to see quality work from the professional economists at all international bureaucracies, even the IMF and OECD. But the World Bank seems to have a higher percentage of quality research. My guess it that this is a result of its focus on poverty alleviation.

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I wrote last October about how poor nations that followed the pro-market recipe of the “Washington Consensus” in the 1980s and 1990s got good results. Johan Norberg addresses the same topic in this video.

Sadly, international organizations are infamous nowadays for the bizarre argument that developing nations should try to boost prosperity by imposing higher taxes and bigger government. I’m not joking.

I was even a credentialed participant at a conference on precisely this topic at the United Nations. It was a strange experience to be surrounded by anti-empirical people, but at least I wasn’t threatened with arrest, as happened at an OECD event.

Needless to say, these folks also think it’s a good idea to use foreign aid to finance bigger fiscal burdens in poor nations.

I’ve previously explained why this is a bad idea, at least if we care about achieving more prosperity for people. Simply stated, there’s considerable evidence that foreign aid retards economic growth by subsidizing bad policy.

Today, though, let’s focus on a different adverse consequence of aid, which is that it erodes the quality of governance.

For instance, the Economist reports on some spiked research from the World Bank, which showed that foreign aid subsidizes corruption.

Their conclusion was dispiriting. World Bank payouts to 22 aid-dependent countries during 1990-2010 were followed by a jump in their deposits in foreign financial havens. The leaks averaged about 5% of the bank’s aid to these countries. …The…working paper…passed an exacting internal review by other researchers in November. But, according to informed sources, publication was blocked by higher officials. They may have been worried about how it would look if the bank’s own researchers said that a chunk of its aid ended up in Swiss bank accounts and the like.

I’m a fan of “Swiss bank accounts” and “foreign financial havens,” but I want them available for taxpayers, not politicians and government insiders.

Sadly, foreign aid helps the wrong people get rich.

Jose Nino draws the most appropriate conclusion.

In 2019, a total of $39.2 billion was spent on foreign assistance, and at a quick glance it has left a lot to be desired. …Foreign aid is not a get-rich-quick scheme for developing countries. Instead of building wealth, it comes with some not-so-pleasant consequences for the recipient nation. …governments receiving aid no longer have to be accountable to their citizens. Knowing that US taxpayers will bail them out, some governments have no incentive whatsoever to innovate or keep corruption in check. …It is the height of naivete to believe that developing countries will magically become rich via wealth transfers from First World countries. It ignores many of the institutions of freedom—private property and federalism—that enabled countries like the US to become the most prosperous societies in human history.

Some folks may think Jose’s conclusion is too sweeping.

So let’s cite some more scholarly evidence.

Three economists, including one from the World Bank, found that foreign aid undermines democracy.

In this paper we investigate the relationship between aid and political institutions. One view of this relationship suggests that aid is needed to advance democratic institutions in developing countries. …A second view holds that foreign aid could leads politicians in power to engage in rent-seeking activities in order to appropriate these resources… By doing so political institutions are damaged because they became less democratic and less representative. Our findings support the second view. Foreign aid damages the political institutions of the country by reducing democratic rules. The magnitudes are striking. If the average share of foreign aid over GDP in a country were 1.9% over the period 1960-1999, then the recipient country would have gone from the average level of democracy in recipient countries in the initial year to a total absence of democratic institutions.

Here’s a graph from the study showing the negative relationship between aid and democracy.

The bottom line is that foreign aid doesn’t work. At least not if the goal is to improve the lives of the less fortunate.

If we want to help poor people in poor nations, the only practical answer is pro-capitalism policies such as small government, rule of law, and free trade.

P.S. Bigger government also enables corruption in rich nations.

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The Department of Agriculture should be abolished. Yesterday, if possible.

It’s basically a welfare scam for politically connected farmers and it undermines the efficiency of America’s agriculture sector.

Some of the specific handouts – such as those for milk, corn, sugar, and even cranberries – are unbelievably wasteful.

But the European Union’s system of subsidies may be even worse. As reported by the New York Times, it is a toxic brew of waste, fraud, sleaze, and corruption.

…children toil for new overlords, a group of oligarchs and political patrons…a feudal system…financed and emboldened by the European Union. Every year, the 28-country bloc pays out $65 billion in farm subsidies… But across…much of Central and Eastern Europe, the bulk goes to a connected and powerful few. The prime minister of the Czech Republic collected tens of millions of dollars in subsidies just last year. Subsidies have underwritten Mafia-style land grabs in Slovakia and Bulgaria. …a subsidy system that is deliberately opaque, grossly undermines the European Union’s environmental goals and is warped by corruption and self-dealing. …The program is the biggest item in the European Union’s central budget, accounting for 40 percent of expenditures. It’s one of the largest subsidy programs in the world. …The European Union spends three times as much as the United States on farm subsidies each year, but as the system has expanded, accountability has not kept up. …Even as the European Union champions the subsidy program as an essential safety net for hardworking farmers, studies have repeatedly shown that 80 percent of the money goes to the biggest 20 percent of recipients. …It is a type of modern feudalism, where small farmers live in the shadows of huge, politically powerful interests — and European Union subsidies help finance it.

Is anyone surprised that big government leads to big corruption?

By the way, the article focused on the sleaze in Eastern Europe.

The problem, however, is not regional. Here’s a nice visual showing how there’s also plenty of graft lining pockets in Western Europe.

P.S. I imagine British politicians will concoct their own system of foolish subsidies, but the CAP handouts are another reason why voters were smart to vote for Brexit.

P.P.S. The CAP subsidies are one of many reasons why the European Union has been a net negative for national economies.

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The 2008 financial crisis was largely the result of bad government policy, including subsidies for the housing sector from Fannie Mae and Freddie Mac.

This video is 10 years old, but it does a great job of explaining the damaging role of those two government-created entities.

The financial crisis led to many decisions in Washington, most notably “moral hazard” and the corrupt TARP bailout.

But the silver lining to that dark cloud is that Fannie and Freddie were placed in “conservatorship,” which basically has curtailed their actions over the past 10 years.

Indeed, some people even hoped that the Trump Administration would take advantage of their weakened status to unwind Fannie and Freddie and allow the free market to determine the future of housing finance.

Those hopes have been dashed.

Cronyists in the Treasury Department unveiled a plan earlier this year that will resuscitate Fannie and Freddie and recreate the bad incentives that led to the mess last decade.

This proposal may be even further to the left than proposals from the Obama Administration. And, as Peter Wallison and Edward Pinto of the American Enterprise Institute explained in the Wall Street Journal earlier this year, this won’t end well.

…the president’s Memorandum on Housing Finance Reform…is a major disappointment. It will keep taxpayers on the hook for more than $7 trillion in mortgage debt. And it is likely to induce another housing-market bust, for which President Trump will take the blame.The memo directs the Treasury to produce a government housing-finance system that roughly replicates what existed before 2008: government backing for the obligations of the government-sponsored enterprises Fannie Mae and Freddie Mac , and affordable-housing mandates requiring the GSEs to encourage and engage in risky mortgage lending. …Most of the U.S. economy is open to the innovation and competition of the private sector. Yet for no discernible reason, the housing market—one-sixth of the U.S. economy—is and has been controlled by the government to a far greater extent than in any other developed country. …The resulting policies produced a highly volatile U.S. housing market, subject to enormous booms and busts. Its culmination was the 2008 financial crisis, in which a massive housing-price boom—driven by the credit leverage associated with low down payments—led to millions of mortgage defaults when housing prices regressed to the long-term mean.

Wallison also authored an article that was published this past week by National Review.

He warns again that the Trump Administration is making a grave mistake by choosing government over free enterprise.

Treasury’s plan for releasing Fannie Mae and Freddie Mac from their conservatorships is missing only one thing: a good reason for doing it. The dangers the two companies will create for the U.S. economy will far outweigh whatever benefits Treasury sees. Under the plan, Fannie and Freddie will be fully recapitalized… The Treasury says the purpose of their recapitalization is to protect the taxpayers in the event that the two firms fail again. But that makes little sense. The taxpayers would not have to be protected if the companies were adequately capitalized and operated without government backing. Indeed, it should have been clear by now that government backing for private profit-seeking firms is a clear and present danger to the stability of the U.S. financial system. Government support enables companies to raise virtually unlimited debt while taking financial risks that the market would routinely deny to firms that operate without it. …their government support will allow them to earn significant profits in a different way — by taking on the risks of subprime and other high-cost mortgage loans. That business would make effective use of their government backing and — at least for a while — earn the profits that their shareholders will demand. …This is an open invitation to create another financial crisis. If we learned anything from the 2008 mortgage market collapse, it is that once a government-backed entity begins to accept mortgages with low down payments and high debt-to-income ratios, the entire market begins to shift in that direction. …why is the Treasury proposing this plan? There is no obvious need for a government-backed profit-making firm in today’s housing finance market. FHA could assume the important role of helping low- and moderate-income families buy their first home. …Why this hasn’t already happened in a conservative administration remains an enduring mystery.

I’ll conclude by sharing some academic research that debunks the notion that housing would suffer in the absence of Fannie and Freddie.

A working paper by two economists at the Federal Reserve finds that Fannie and Freddie have not increased homeownership.

The U.S. government guarantees a majority of mortgages, which is often justified as a means to promote homeownership. In this paper, we estimate the effect by using a difference-in-differences design, with detailed property-level data, that exploits changes of the conforming loan limits (CLLs) along county borders. We find a sizable effect of CLLs on government guarantees but no robust effect on homeownership. Thus, government guarantees could be considerably reduced,with very modest effects on the homeownership rate. Our finding is particularly relevant for recent housing finance reform plans that propose to gradually reduce the government’s involvement in the mortgage market by reducing the CLLs.

For those who care about the wonky details, here’s the most relevant set of charts, which led the Fed economists to conclude that, “There appears to be no positive effect of the CLL increases in 2008 and no negative effect of the CLL reductions in 2011.”

And let’s not forget that other academic research has shown that government favoritism for the housing sector harms overall economic growth by diverting capital from business investment.

The bottom line is that Fannie and Freddie are cronyist institutions that hurt the economy and create financial instability, while providing no benefit except to a handful of insiders.

As I suggested many years ago, they should be dumped in the Potomac River. Unfortunately, the Trump Administration is choosing Obama-style interventionism over fairness and free markets.

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When I wrote last month about the Green New Deal, I warned that it was cronyism on steroids.

Simply stated, the proposal gives politicians massive new powers to intervene and this would be a recipe for staggering levels of Solyndra-style corruption.

Well, the World Bank has some new scholarly research that echoes my concerns. Two economists investigated the relationship with the regulatory burden and corruption.

Empirical studies such as Meon and Sekkat (2005) and De Rosa et al. (2010) show that corruption is more damaging for economic performance at higher levels of regulation or lower levels of governance quality. …Building on the above literature, in this paper, we use firm-level survey data on 39,732 firms in 111 countries collected by the World Bank’s Enterprise Surveys between 2009 and 2017 to test the hypothesis that corruption impedes firm productivity more at higher levels of regulation. …estimate the model using sample weighted OLS (Ordinary Least Squares) regression analysis.

And what did they discover?

We find that the negative relationship between corruption and productivity is amplified at high levels of regulation. In fact, at low levels of regulation, the relationship between corruption and productivity is insignificant. …we find that a 1 percent increase in bribes that firms pay to get things done, expressed as the share of annual sales, is significantly associated with about a 0.9 percent decrease in productivity of firms at the 75th percentile value of regulation (high regulation). In contrast, at the 25th percentile value of regulation (low regulation), the corresponding change is very small and statistically insignificant, though it is still negative. …after we control for investment, skills and raw materials, the coefficients of the interaction term between corruption and regulation became much larger… This provides support for the hypothesis that corruption is more damaging for productivity at higher levels of regulation.

Lord Acton famously wrote that “power corrupts, and absolute power corrupts absolutely.”

Based on the results from the World Bank study, we can say “regulation corrupts, and added regulation corrupts additionally.”

Not very poetic, but definitely accurate.

Figure 4 from the study shows this relationship.

Seems like we need separation of business and state, not just separation of church and state.

This gives me a good excuse to recycle this video I narrated more than 10 years ago.

P.S. Five years ago, I cited a World Bank study showing that tax complexity facilitates corruption. Which means a simple and fair flat tax isn’t merely a way of achieving more prosperity, it’s also a way of draining the swamp.

The moral of the story – whether we’re looking at red tape, taxes, spending, trade, or any other issue – is that smaller government is the most effective way of reducing sleaze and corruption.

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Even though I (correctly) doubted the Trump Administration’s sincerity, I applauded proposed reductions in foreign aid back in 2017.

I very much want to reduce poverty in poor nations, of course, but the evidence is very strong that government handouts don’t do a very good job.

Moreover, we also have lots of data showing poor nations can enjoy dramatic improvements in living standards so long as they adopt good policy.

Hong Kong, Singapore, Chile, and Botswana are very good examples.

Yet some people haven’t learned this lesson. Consider the current debate over Trump’s threat to end aid to Central America if illegal immigration isn’t reduced.

A column in Fortune makes the case that handouts to Central America are necessary to reduce human smuggling.

President Donald Trump ordered the State Department to cut funding for Guatemala, Honduras, and El Salvador this weekend in retaliation for the recent influx of migrants from these nations, reversing a longstanding policy that says aid helps abate immigration. …According to Liz Schrayer, president and CEO of the U.S. Global Leadership Coalition—a nonprofit coalition of businesses and NGOs dedicated to American development and diplomacy—pulling back aid “exasperates the exact root causes that are creating the migration numbers’ increase.” …“It will only result in more children and families being forced to make the dangerous journey north to the U.S.-Mexico border,” said the five Democratic lawmakers in a statement.

A piece in the New York Times makes the same argument.

The Trump administration’s decision to cut off aid to El Salvador, Guatemala and Honduras to punish their governments for failing to curb migration is a rash response to a real policy dilemma. …it will exacerbate migration from the region without twisting Central American politicians’ arms. …The decision to cut off aid is bound to drive up migration numbers.

Ironically, the author admits that aid is ineffective.

…we shouldn’t pretend that the aid itself was doing much good… it is mostly distributed inefficiently in large blocks by foreign contractors.

Though he seems to share the naive (and presumably self-interested) arguments of international bureaucrats about the potential efficacy of aid.

Central American governments and elites have gotten away with abdicating their fiduciary, social and legal responsibilities to their citizens. They have failed to collect tax revenue and to invest in social programs and job creation that alleviate the plight of their poor.

Even some small-government conservatives seem to think that more aid would make recipient nations more prosperous and thus reduce illegal immigration.

What President Trump is doing now — cutting aid — is wrong. …As former White House Chief of Staff and SOUTHCOM Commander, General John Kelly, has noted, “If we can improve the conditions, the lot in life of Hondurans, Guatemalans, Central Americans, we can do an awful lot to protect the southwest border.” …We risk undermining our longterm national interests by cutting foreign aid. We should, instead, spend it wisely in those countries to ensure stable governments that view us as allies and work with them to root out crime, corruption, and cartels. The present policy to cut foreign aid cuts off our national nose to spite our face.

This is not an impossible prescription.

But it’s also the triumph of hope over experience.

In the real world, we have mountains of evidence that foreign aid weakens recipient economies by subsidizing corruption and larger burdens of government.

Let’s look at some analysis on this issue.

In a piece published by CapX, Matt Warner recommends less redistribution rather than more.

…the poor know how to get themselves out of poverty. They just need more opportunity to do it. The question we must ask ourselves is: to what degree are our current development aid strategies aligned with this insight? …If the intervention itself is part of the problem, what can outsiders really do to help? Today there are at least 481 research and advocacy organisations in 92 countries pushing reform agendas to provide more economic opportunity and prosperity for all. The “Doing Business” report provides a blueprint for change. Local reform organisations, supported by private philanthropy, provide the leadership to achieve it and the world’s poor will show us their own paths to prosperity if we will all just learn to get out of their way.

Writing for Barron’s, Paul Theroux notes that Africa regressed when it was showered with aid.

Africa receives roughly $50 billion in aid annually from foreign governments, and perhaps $13 billion more from private philanthropic institutions… Africa is much worse off than when I first went there 50 years ago to teach English: poorer, sicker, less educated, and more badly governed. It seems that much of the aid has made things worse. …Zambian-born economist Dambisa Moyo calls aid a “debilitating drug,” arguing that “real per-capita income [in Africa] today is lower than it was in the 1970s, and more than 50% of the population — over 350 million people — live on less than a dollar a day, a figure that has nearly doubled in two decades.” The Kenyan economist James Shikwati takes this same line on aid, famously telling the German magazine Der Spiegel, “For God’s sake, please stop.”

Brad Lips of the Atlas Network explains why aid often is counterproductive.

The international community has donated more than $1.8 trillion to poor countries since 2000 – but this development aid hasn’t lifted many people out of poverty. Arguably, it has made some recipient nations poorer. …the aid has bred corruption, fostered dependence and impeded reforms that deliver sustainable economic growth. …Between 1970 and 2000 – a period in which aid to Africa skyrocketed – annual gross domestic product growth per capita on the continent fell from about 2 percent to zero growth, according to a study by an economist at New York University.

A column in the U.K.-based Times is very blunt about what all this means.

…the international development secretary should have abolished her department as soon as she was appointed to it… We kid ourselves that this aid works, to salve our consciences about being better off. But as we know, the money benefits charities, quangos, bureaucrats, tyrants and the predatory elite, and all these years later your average African is no better off.

Let’s close by looking at a thorough 2005 study from the International Policy Network. Authored by Fredrik Erixon, it documents the failure of foreign aid.

…the ‘gap theory’…assumes that poor countries are trapped in a vicious cycle of poverty because they are unable to save and hence have insufficient capital to invest in growth-promoting, productivity-enhancing activities. But there simply is no evidence that this savings/investment ‘gap’ exists in practice. As a result, aid has failed to ‘fill the gap’. Instead, it has, over the past fifty years, largely been counterproductive: it has crowded out private sector investments, undermined democracy, and enabled despots to continue with oppressive policies, perpetuating poverty. …The reason countries are poor is…because they lack the institutions of the free society: property rights, the rule of law, free markets, and limited government. … many studies point to the fact that government consumption in SubSaharan Africa has increased when aid has increased.

Here’s the evidence showing has more development assistance is associated with weaker economic performance.

By the way, the International Monetary Fund deserves unrestrained scorn for recommending higher tax burdens on Africans, thus making economic growth even harder to achieve.

Now let’s look at how two Asian regions have enjoyed growth as aid lessened.

Last but not least, here’s some very encouraging data from Africa.

I already mentioned that Botswana is an exception to the rule. As you can see, that nation’s success is definitely not the result of more handouts.

The bottom line is that President Trump is right, even if his motives are misguided.

Foreign aid is not the recipe for prosperity in Central America.

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Since I’m a proponent of tax reform, I don’t like special favors in the tax code.

Deductions, exemptions, credits, exclusions, and other preferences are back-door forms of cronyism and government intervention.

Indeed, they basically exist to lure people into making decisions that otherwise aren’t economically rational.

These distortionary provisions help to explain why we have a hopelessly convoluted and deeply corrupt tax code of more than 75,000 pages.

And they also encourage higher tax rates as greedy politicians seek alternative sources of revenue.

This current debate over “tax extenders” is a sad illustration of why the system is such a mess.

Writing for Reason, Veronique de Rugy explains how special interests work the system.

Tax extenders are temporary and narrowly targeted tax provisions for individuals and businesses. Examples include the deductibility of mortgage-insurance premiums and tax credits for coal produced from reserves owned by Native American tribes. …These tax provisions were last authorized as part of the Bipartisan Budget Act of 2018, which retroactively extended them through the end of 2017, after which they have thus far been left to remain expired. If Congress indeed takes up extenders during the current lame-duck session, any extended provisions are likely to once again apply retroactively through the end of 2018, or perhaps longer. There are several problems with this approach to tax policy. Frequently allowing tax provisions to expire before retroactively reauthorizing them creates uncertainty that undermines any potential benefits from incentivizing particular behaviors.

To make matters more complicated, a few of the extenders are good policy because they seek to limit double taxation (a pervasive problem in the U.S. tax system).

…not all tax extenders are a problem. Some are meant to avoid or limit the double taxation of income that’s common in our tax code. Those extenders should be preserved. Yet others are straightforward giveaways to special interests. Those should be eliminated.

Veronique suggests a sensible approach.

It’s time for a new approach under which tax extenders are evaluated and debated on their individual merits. The emphasis should be on eliminating special-interest handouts or provisions that otherwise represent bad policy. Conversely, any and all worthy provisions should be made permanent features of the tax code. …The dire need to fix the federal budget, along with the dysfunctional effects from extenders, should provide the additional motivation needed to end this practice once and for all.

Needless to say, Washington is very resistant to sensible policies.

In part, that’s for the typical “public choice” reasons (i.e., special interests getting into bed with politicians to manipulate the system).

But the debate over extenders is even sleazier than that.

As Howard Gleckman explained for Forbes, lobbyists, politicians, and other insiders relish temporary provisions because they offer more than one bite at the shakedown apple.

If you are a lobbyist, this history represents scalps on your belt (and client fees in your pocket). If you are a member of Congress, it is the gift that keeps on giving—countless Washington reps and their clients attending endless fundraisers, all filling your campaign coffers, election after election. An indelible image: It is pre-dawn in September, 1986. House and Senate tax writers have just completed their work on the Tax Reform Act.  A lobbyist friend sits forlornly in the corner of the majestic Ways & Means Committee hearing room. “What’s wrong,” I naively ask, “Did you lose some stuff?” Oh no, he replies, he got three client amendments in the bill. And that was the problem. After years of billable hours, his gravy train had abruptly derailed. The client got what it wanted. Permanently. And it no longer needed him. Few make that mistake now. Lawmakers, staffs, and lobbyists have figured out how to keep milking the cash cow. There are now five dozen temporary provisions, all of which need to be renewed every few years. To add to the drama, Congress often lets them expire so it can step in at the last minute to retroactively resurrect the seemingly lifeless subsidies.

In other words, the temporary nature of extenders is a feature, not a bug.

This is a perfect (albeit depressing) example of how the federal government is largely a racket. It enriches insiders (as I noted a few days ago) and the rest of us bear the cost.

All of which reinforces my wish that we could rip up the tax code and replace it with a simple and fair flat tax. Not only would we get more growth, we would eliminate a major avenue for D.C. corruption.

P.S. I focused today on the perverse process, but I can’t help but single out the special tax break for electric vehicles, which unquestionably is one of the most egregious tax extenders.

EV tax credits…subsidize the wealthy at the expense of the lower and middle classes. Recent research by Dr. Wayne Winegarden of the Pacific Research Institute shows that 79 percent of EV tax credits were claimed by households with adjusted gross incomes greater than $100,000. Asking struggling Americans to subsidize the lifestyles of America’s wealthiest is perverse… Voters also shouldn’t be fooled by the promise of large environmental benefits. Modern internal combustion engines emit very little pollution compared to older models. Electric vehicles are also only as clean as the electricity that powers them, which in the United States primarily comes from fossil fuels.

I was hoping that provisions such as the EV tax credit would get wiped out as part of tax reform. Alas, it survived.

I don’t like when politicians mistreat rich people, but I get far more upset when they do things that impose disproportionate costs on poor people. This is one of the reasons I especially dislike government flood insuranceSocial Security, government-run lotteries, the Export-Import Bank, the mortgage interest deduction, or the National Endowment for the Arts. Let’s add the EV tax credit to this shameful list.

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