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Posts Tagged ‘Donald Trump’

Fundamental tax reform such as a flat tax should accomplish three big goals.

The good news is that almost all Republicans believe in the first two goals and at least pay lip services to the third goal.

The bad news is that they nonetheless can’t be trusted with tax reform.

Here’s why. Major tax reform is based on the assumption that achieving the first two goals will lower tax revenue and achieving the third goal will generate tax revenue. A reform plan doesn’t have to be “revenue neutral,” of course, but politicians would be very reluctant to vote for a package that substantially reduced tax revenue. So serious proposals have revenue-raising provisions that are roughly similar in magnitude to the revenue-losing provisions.

Here’s the problem.   Notwithstanding lip service, Republicans are not willing to go after major tax loopholes like the healthcare exclusion. And that means that they are looking for other sources of revenue. In some cases, such as the proposal in the House plan to put debt and equity on a level playing field, they come up with decent ideas. In other cases, such as the border-adjustment tax, they come up with misguided ideas.

And some of them are even talking about very bad ideas, such as a value-added tax or carbon tax.

This is why it would be best to set aside tax reform and focus on a more limited agenda, such as a plan to lower the corporate tax rate. I discussed that idea a few weeks ago on Neil Cavuto’s show, and I echoed myself last week in another appearance on Fox Business.

Lest you think I’m being overly paranoid about Republicans doing the wrong thing, here’s what’s being reported in the establishment press.

The Hill is reporting that the Trump Administration is still undecided on the BAT.

The most controversial aspect of the House’s plan is its reliance on border adjustability to tax imports and exempt exports. …the White House has yet to fully embrace it. …If the administration opts against the border-adjustment proposal, it would have to find another way to raise revenue to pay for lowering tax rates.

While I hope the White House ultimately rejects the BAT, that won’t necessarily be good news if the Administration signs on to another new source of revenue.

And that’s apparently under discussion.

The Washington Post last week reported that the White House was looking at other ideas, including a value-added tax and a carbon tax… Even if administration officials are simply batting around ideas, it seems clear that Trump’s team is open to a different approach.

The Associated Press also tries to read the tea leaves and speculates whether the Trump Administration may try to cut or eliminate the Social Security payroll tax.

The administration’s first attempt to write legislation is in its early stages and the White House has kept much of it under wraps. But it has already sprouted the consideration of a series of unorthodox proposals including a drastic cut to the payroll tax, aimed at appealing to Democrats.

I’m not a big fan of fiddling with the payroll tax, and I definitely worry about making major changes.

Why? Because it’s quite likely politicians will replace it with a tax that is even worse.

This would require a new dedicated funding source for Social Security. The change, proposed by a GOP lobbyist with close ties to the Trump administration, would transform Brady’s plan on imports into something closer to a value-added tax by also eliminating the deduction of labor expenses. This would bring it in line with WTO rules and generate an additional $12 trillion over 10 years, according to budget estimates.

Last but not least, the New York Times has a story today on the latest machinations, and it appears that Republicans are no closer to a consensus today than they were the day Trump got inaugurated.

…it is becoming increasingly unlikely that there will be a simpler system, or even lower tax rates, this time next year. The Trump administration’s tax plan, promised in February, has yet to materialize; a House Republican plan has bogged down, taking as much fire from conservatives as liberals… Speaker Paul D. Ryan built a tax blueprint around a “border adjustment” tax… With no palpable support in the Senate, its prospects appear to be nearly dead. …The president’s own vision for a new tax system is muddled at best. In the past few months, he has called for taxing companies that move operations abroad, waffled on the border tax and, last week, called for a “reciprocal” tax that would match the import taxes other countries impose on the United States.

The report notes that Trump may have a personal reason to oppose one of the provisions of the House plan.

Perhaps the most consequential concern relates to a House Republican proposal to get rid of a rule that lets companies write off the interest they pay on loans — a move real estate developers and Mr. Trump vehemently oppose. Doing so would raise $1 trillion in revenue and reduce the appeal of one of Mr. Trump’s favorite business tools: debt.

From my perspective, the most encouraging part of the story is that the lack of consensus may lead Republicans to my position, which is simply to cut the corporate tax rate.

With little appetite for bipartisanship, many veterans of tax fights and lobbyists in Washington expect that Mr. Trump will ultimately embrace straight tax cuts, with some cleaning up of deductions, and call it a victory.

And I think that would be a victory as well, even though I ultimately want to junk the entire tax code and replace it with a flat tax.

P.S. In an ideal world, tax reform would be financed in large part with spending restraint. Sadly, Washington, DC, isn’t in the same galaxy as that ideal world.

P.P.S. To further explain why Republicans cannot be trusted, even if they mean well, recall that Rand Paul and Ted Cruz both included VATs in the tax plans they unveiled during the 2016 presidential campaign.

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On major economic issues, it does not appear that Republican control of Washington makes much of a difference.

  • Efforts to repeal Obamacare have bogged down because GOPers are willing to deal with the fiscal wreckage of that law, but don’t seem very comfortable about undoing the interventions and regulations that have caused premiums to skyrocket.
  • Efforts to cut taxes and reform the tax code don’t look very promising because House Republicans have proposed a misguided border-adjustment tax and the White House seems hopelessly divided on how to proceed.
  • Efforts to restrain government spending haven’t gotten off the ground. A full budget is due next month, but it’s not overly encouraging that Trump’s proposed domestic cuts would be used to expand the Pentagon’s budget.

Let’s see whether we get a different story when we examine regulatory issues.

We’ll start with some good news? Well, sort of. It seems the United States has the largest and 4th-largest GDPs in the world.

You may think that makes no sense, but this is where we have to share some bad news on the regulatory burden from the Mercatus Center.

Economic growth has been reduced by an average of 0.8 percent per year from 1980 to 2012 due to regulatory accumulation. Regulations force companies to invest less in activities that enhance productivity and growth, such as research and development, as companies must divert resources into regulatory compliance and similar activities. …Compared to a scenario where regulations are held constant at levels observed in 1980, the study finds that the difference between the economy we are in and a hypothetical economy where regulatory accumulation halted in 1980 is approximately $4 trillion. …The $4 trillion dollars in lost GDP associated with regulatory accumulation would be the fourth largest economy in the world—larger than major countries like Germany, France, and India.

By the way, this data from Mercatus gives me an opportunity to re-emphasize the importance of even small variations in economic growth. It may not make that much difference if the economy grows 0.8 percent faster or slower in one year.

But, as just noted, a loss of 0.8 percent annual growth over 32 years has been enormously expensive to the U.S. economy.

The Competitive Enterprise Institute has a depressing array of data on America’s regulatory burden. Here’s the chart that grabbed my attention.

And here’s a video on the burden of red tape from the folks at CEI.

Who deserves the blame for this nightmare of red tape?

The previous president definitely added to the regulatory morass. The Hill reported last year on a study by the American Action Forum.

The Obama administration issues an average of 81 major rules, those with an economic impact of at least $100 million, on a yearly basis, the study found. That’s about one major rule every four to five days, or, as the American Action Forum puts it, one rule for every three days that the federal government is open. “It is a $2,294 regulatory imposition on every person in the United States,” wrote Sam Batkins, director of regulatory policy at the American Action Forum, who conducted the study.

And there was a big effort to add more red tape in Obama’s final days, as noted by Kimberly Strassel of the Wall Street Journal.

Since the election Mr. Obama has broken with all precedent by issuing rules that would be astonishing at any moment and are downright obnoxious at this point. This past week we learned of several sweeping new rules from the Interior Department and the Environmental Protection Agency, including regs on methane on public lands (cost: $2.4 billion); a new anti-coal rule related to streams ($1.2 billion) and renewable fuel standards ($1.5 billion).

As you might expect, the net cost of Obama’s regulatory excess is significant. Here’s some of what the Washington Examiner wrote during the waning days of Obama’s tenure.

According to new information from the White House, finally released after a two year wait, the total burden of federal government paperwork is more than 11.5 billion man-hours a year. That’s almost 500 million man-days, or 1.3 million man-years. More importantly, it’s 35 hours every person in the country (on average) has to spend doing federal paperwork every year, on average. …Time is money, and paperwork time alone costs the country almost $2 trillion a year, or about 11 percent of GDP.

But it’s not solely Obama’s fault. Not even close.

Both parties can be blamed for this mess, as reported by the Economist.

The call to cut red tape is now an emotive rallying cry for Republicans—more so, in the hearts of many congressmen, than slashing deficits. Deregulation will, they argue, unleash a “confident America” in which businesses thrive and wages soar, leaving economists, with their excuses for the “new normal” of low growth, red-faced. Are they right?

They may be right, but they never seem to take action when they’re in charge.

Between 1970 and 2008 the number of prescriptive words like “shall” or “must” in the code of federal regulations grew from 403,000 to nearly 963,000, or about 15,000 edicts a year… The unyielding growth of rules, then, has persisted through Republican and Democratic administrations… The endless pile-up of regulation enrages businessmen. One in five small firms say it is their biggest problem, according to the National Federation of Independent Business.

Though I would point out that President Reagan was the exception to this dismal rule.

That being said, who cares about finger pointing? What matters is that the economy is being stymied by excessive red tape.

So what can be done about this? President Trump has promised a 2-for-1 deal, saying that his Administration will wipe out two existing regulations for every new rule that gets imposed.

Susan Dudley opines on this proposal, noting that Trump hasn’t put any meat on the bones.

Like pebbles tossed in a stream, each individual regulation may do little economic harm, but eventually the pebbles accumulate and like a dam, may block economic growth and innovation. A policy of removing two regulations for every new one would provide agencies incentives to evaluate the costs and effectiveness of those accumulated regulations and determine which have outlived their usefulness. Mr. Trump’s statement doesn’t provide details on how this new policy would work.

Ms. Dudley points out, however, that other nations have achieved some success with similar-sounding approaches.

…his team could look to experiences in other countries for insights. The Netherlands, Canada, Australia and the United Kingdom have all adopted similar requirements to offset the costs of new regulations by removing or modifying existing rules of comparable or greater effect. …The Netherlands program established a net quantitative burden reduction target that reduced regulatory burdens by 20% between 2003 and 2007. It is currently on track to save €2.5 billion in regulatory burden between 2012 and 2017 by tying the introduction of new regulations “to the revision or scrapping of existing rules.” Under Canada’s “One-for-One Rule,” launched in 2012, new regulatory changes that increase administrative burdens must be offset with equal burden reductions elsewhere. Further, for each new regulation that imposes administrative burden costs, cabinet ministers must remove at least one regulation. Similarly, Australia’s policy is that “the cost burden of new regulation must be fully offset by reductions in existing regulatory burden.” The British began with a “One-in, One-out” policy, requiring any increases in the cost of regulation to be offset by deregulatory measures of at least an equivalent value. In 2013, it moved to “One-in, Two-out” (OITO) and more recently to a “One-in, Three-out” policy in an effort to cut red tape by £10 billion.

The bottom line is that progress will depend on Trump appointing good people. And on that issue, the jury is still out.

The legislative branch also could get involved.

In a column for Reason, Senator Rand Paul explained that the REINS Act could make a big difference.

…13 of the 15 longest registers in American history have been authored by the past two presidential administrations (Barack Obama owns seven of the top eight, with George W. Bush filling in most of the rest)…federal lawmakers should pass something called the REINS Act—the “Regulations from the Executive in Need of Scrutiny Act. The REINS Act would require every new regulation that costs more than $100 million to be approved by Congress. As it is now, agencies can pass those rules unilaterally. Such major rules only account for about 3 percent of annual regulations, but they are the ones that cause the most headaches for individuals and businesses. …the REINS Act did pass the House on four occasions during the Obama administration. Lack of support in the Senate and the threat of a presidential veto kept it from ever reaching Obama’s desk.

But would it make a difference if Congress had to affirm major new rules?

Given how agencies will lie about regulatory burdens, it wouldn’t be a silver bullet.

But,based on the hysterical opposition from the left, I’m betting the REINS Act would be very helpful.

REINS would fundamentally alter the federal government in ways that could hobble federal agencies during periods when the same party controls Congress and the White House — and absolutely cripple those agencies during periods of divided government. Many federal laws delegate authority to agencies to work out the details of how to achieve relatively broad objectives set by the law itself. …REINS, however, effectively strips agencies of much of this authority.

That sounds like good news to me. If the crazies at Think Progress are this upset about the REINS Act, it must be a step in the right direction.

Let’s close with a bit of evidence that maybe, just maybe, Republicans will move the ball in the right direction. Here are some excerpts from a Bloomberg story.

The White House estimates it will save $10 billion over 20 years by having rescinded 11 Obama-era regulations under a relatively obscure 1996 law that lets Congress fast-track repeal legislation with a simple majority. …In all, the law has been used to repeal 11 rules, with two more awaiting the president’s signature… About two dozen measures with CRA’s targeting them remain, but because the law can only be used on rules issued in the final six months of the previous administration, Congress only has only a few more weeks to use the procedure.

Before getting too excited, remember that the annual cost of regulation is about $2 trillion and the White House is bragging about actions that will reduce red tape by $10 billion over two decades. Which means annual savings of only $500 million.

Which, if my math is right, addresses 0.025 percent of the problem.

I’ll take it, but it should be viewed as just a tiny first step on a very long journey.

P.S. The Congressional Review Act was signed into law by Bill Clinton. Yet another bit of evidence that he was a surprisingly pro-market President.

P.P.S. If you want some wonky analysis of regulation, I have some detailed columns here, here, here, here, here, here, and here.

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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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The multi-faceted controversy over Donald Trump’s taxes has been rejuvenated by a partial leak of his 2005 tax return.

Interestingly, it appears that Trump pays a lot of tax. At least for that one year. Which is contrary to what a lot of people have suspected – including me in the column I wrote on this topic last year for Time.

Some Trump supporters are even highlighting the fact that Trump’s effective tax rate that year was higher than what’s been paid by other political figures in more recent years.

But I’m not impressed. First, we have no idea what Trump’s tax rate was in other years. So the people defending Trump on that basis may wind up with egg on their face if tax returns from other years ever get published.

Second, why is it a good thing that Trump paid so much tax? I realize I’m a curmudgeonly libertarian, but I was one of the people who applauded Trump for saying that he does everything possible to minimize the amount of money he turns over to the IRS. As far as I’m concerned, he failed in 2005.

But let’s set politics aside and focus on the fact that Trump coughed up $38 million to the IRS in 2005. If that’s representative of what he pays every year (and I realize that’s a big “if”), my main thought is that he should move to Italy.

Yes, I realize that sounds crazy given Italy’s awful fiscal system and grim outlook. But there’s actually a new special tax regime to lure wealthy foreigners. Regardless of their income, rich people who move to Italy from other nations can pay a flat amount of €100,000 every year. Note that we’re talking about a flat amount, not a flat rate.

Here’s how the reform was characterized by an Asian news outlet.

Italy on Wednesday (Mar 8) introduced a flat tax for wealthy foreigners in a bid to compete with similar incentives offered in Britain and Spain, which have successfully attracted a slew of rich footballers and entertainers. The new flat rate tax of €100,000 (US$105,000) a year will apply to all worldwide income for foreigners who declare Italy to be their residency for tax purposes.

Here’s how Bloomberg/BNA described the new initiative.

Italy unveiled a plan to allow the ultra-wealthy willing to take up residency in the country to pay an annual “flat tax” of 100,000 euros ($105,000) regardless of their level of income. A former Italian tax official told Bloomberg BNA the initiative is an attempt to entice high-net-worth individuals based in the U.K. to set up residency in Italy… Individuals paying the flat tax can add family members for an additional 25,000 euros ($26,250) each. The local media speculated that the measure would attract at least 1,000 high-income individuals.

Think about this from Donald Trump’s perspective. Would he rather pay $38 million to the ghouls at the IRS, or would he rather make an annual payment of €100,000 (plus another €50,000 for his wife and youngest son) to the Agenzia Entrate?

Seems like a no-brainer to me, especially since Italy is one of the most beautiful nations in the world. Like France, it’s not a place where it’s easy to become rich, but it’s a great place to live if you already have money.

But if Trump prefers cold rain over Mediterranean sunshine, he could also pick the Isle of Man for his new home.

There are no capital gains, inheritance tax or stamp duty, and personal income tax has a 10% standard rate and 20% higher rate.  In addition there is a tax cap on total income payable of £125,000 per person, which has encouraged a steady flow of wealthy individuals and families to settle on the Island.

Though there are other options, as David Schrieberg explained for Forbes.

Italy is not exactly breaking new ground here. Various countries including Portugal, Malta, Cyprus and Ireland have been chasing high net worth individuals with various incentives. In 2014, some 60% of Swiss voters rejected a Socialist Party bid to end a 152-year-old tax break through which an estimated 5,600 wealthy foreigners pay a single lump sum similar to the new Italian regime.

Though all of these options are inferior to Monaco, where rich people (and everyone else) don’t pay any income tax. Same with the Cayman Islands and Bermuda. And don’t forget Vanuatu.

If you think all of this sounds too good to be true, you’re right. At least for Donald Trump and other Americans. The United States has a very onerous worldwide tax system based on citizenship.

In other words, unlike folks in the rest of the world, Americans have to give up their passports in order to benefit from these attractive options. And the IRS insists that such people pay a Soviet-style exit tax on their way out the door.

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We have reached the 50th full day of the Trump Presidency.

In that span of time, we’ve had lots of political wrangling between Trump and the media. We’ve been introduced to the concept of the “Deep State” (yes, there is a permanent bureaucracy that acts to protect its own interests, but it’s silly to call it a conspiracy). There have been some controversial executive orders. And Trump made his big speech to Congress.

Lots of noise, though, does not mean lots of action. The President hasn’t signed any big legislation to repeal Obamacare, or even any legislation to tinker with Obamacare. There haven’t been any big changes on fiscal policy, either with regards to spending or taxes.

Heck, Trump hasn’t even told us what he really thinks on some of these issues.

In other words, the biggest takeaway after 50 days is that we still don’t know whether Trump is going to make government bigger or smaller.

I address some of these issues in two recent interviews. We’ll start with this discussion on the day of Trump’s Joint Address. I mostly focus on the need for entitlement reform and explain how Trump could do the right thing for America…if he wants to.

You’ll also notice, right at the end of the interview, that I made sure to sneak in a reference to fiscal policy’s Golden Rule. Gotta stay on message!

In this second interview, which occurred a couple of days later, I start the conversation by fretting about how the border-adjustable tax could kill the chances of getting good tax policy.

In the latter part of the interview, the discussion shifts to infrastructure and I make the rare point that we should copy Europe and get the private sector more involved (it’s generally a good idea to do the opposite of Europe, to be sure, but there are a small handful of other areas – including corporate tax rates, Social Security, and privatized postal services – where various European countries are ahead of us).

The bottom line is that we didn’t know before the election whether Trump wants to limit the burden of government, and we still don’t know today. My guess last year was that we’ll get the wrong answer, though I confess that the jury is still out.

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While President Trump apparently intends to waste taxpayer money for more childcare subsidies and presumably is going to duck the critical issue of entitlement reform, there is some good news for advocates of limited government and fiscal responsibility. According a recent news report., he’s not a big fan of outlays for foreign aid.

The White House budget director confirmed Saturday that the Trump administration will propose “fairly dramatic reductions” in the U.S. foreign aid budget later this month. …news outlets reported earlier this week that the administration plans to propose to Congress cuts in the budgets for the U.S. State Department and Agency for International Development by about one third. …The United States spends just over $50 billion annually on the State Department and USAID.

Trump’s skepticism of foreign aid is highly appropriate. Indeed, he’s probably being too soft on the budget for foreign aid.

Government-to-government handouts have a terrible track record. Indeed, the main impact of such transfers is to undermine good reform and enrich corrupt elites in poor nations.

Moreover, if the goal is to actually create prosperity in developing countries, there is no substitute for free markets and limited government.

Let’s look at some additional evidence about the harmful impact of aid.

We’ll start with a rather amazing admission from a 2016 study published by the International Monetary Fund.

Foreign aid is a sizable source of government financing for several developing countries and its allocation matters for the conduct of fiscal policy. This paper revisits fiscal effects of shifts in aid dependency in 59 developing countries from 1960 to 2010. …we show that upward shifts and downward shifts in aid dependency have asymmetric effects on the fiscal accounts. Large aid inflows undermine tax capacity and public investment while large reductions in aid inflows tend to keep recipients’ tax and expenditure ratios unchanged. …we find that the undesirable fiscal effects of aid are more pronounced in countries with low governance scores and low absorptive capacity, as well as those with IMF-supported programs.

Wow, I’m not a big fan of the IMF, but you have to give the authors credit for honesty. They admit that aid is especially harmful in nations that are also receiving IMF bailouts.

But the main takeaway is that foreign governments simply use foreign aid money as an excuse to raise and spend their own money. That outcome presumably should irk leftists. From my perspective, such nations have too much spending, regardless of whether it’s being financed by their own taxpayers or foreign taxpayers.

Instead, these nations should be copying the small-government policies that enabled western nations to move from agricultural poverty to middle class prosperity.

Let’s consider a couple of real-world examples.

We’ll start in South Sudan, where aid has subsidized awful behavior. Ian Birrell explains in an article for CapX.

…the fledgling state stumbles from the savagery of civil war into the horror of famine. …sadly these events also illustrate another example of the dismal failure of Western aid policies. …our politicians would be wise to stop spouting their usual nonsense about saving the world’s poor and start considering the corrosion caused by the billions already poured in to this failed state, pursuing naive ideas about state building based on floods of cash. …Experts such as the academic Alex de Waal say “looting food aid was elevated to military strategy” by militia commanders who later controlled the country. Despite these activities, $1 billion a year was handed over in aid in the years before independence, rising to $1.4 billion following arrival as the 193rd nation represented at the UN. …An estimated $4 billion was missing “or simply put, stolen”… But still aid poured in, leading to public spending per capita more than three times the levels seen in neighbouring Kenya. …there was a fake ministry of finance to deal with gullible donors and well-meaning armies of advisers, while the real version carried on under the generals with its backdoor dealings. …For all the fine words and good intentions, the West has ended up assisting and empowering a callous kleptocracy – again.

The bottom line is that foreign aid enabled and subsidized an awful government doing awful things.

Now let’s look at another African jurisdiction, only this one has been neglected by the international community.

But as Negash Tekie explains in another article of CapX, benign neglect can be a positive thing.

Over the years, the West has spent many millions to help stabilise the Horn of Africa, and alleviate the grinding poverty of many of its residents. …In Somalia, meanwhile, the international community is still trying – as it has for decades – to build a functioning government. Yet despite massive amounts in aid, …there is little hope of either building resilient and inclusive state institutions. What a stark contrast there is with neighbouring Somaliland. …Somaliland is, admittedly, desperately poor… But it is, in a volatile region, a beacon of security and stability. …Somaliland…claimed its independence from Somalia in May 1991, amid the chaos of the civil war there. But international bodies, and the African Union, have refused to recognise it.

But this absence of recognition has been a blessing in disguise.

The result has been that, without international aid and support, Somaliland has had to fall back on its own resources. In contrast to other African nations, state-building programmes and public services have been entirely financed by domestic income, rather than being supported by international donors. …countries that are dependent on aid can afford to neglect tax collection, countries without it are forced to use taxation appropriately. In 1990-2000, the Somaliland ministry of finance reported that “95 per cent of the resource that finance the activities are locally mobilised, mostly through taxation”. Not only are taxes collected in a non-coercive manner… For example, in early 2000s the government attempted to increase taxes on the private sector and proposed a VAT rate of 30 per cent, but the business sector lobbied against it and the policy was reversed. …A number of aid experts have argued that heavy dependence on external assistance undermines democracy, creates a dependency culture, diminishes political accountability and makes the state more accountable to donors than its own citizens.Somaliland is an example that…the inhabitants of the Horn of Africa can still build functioning states. …Somaliland is a lesson to the world in how to achieve successful state-building without aid.

Somaliland is far from a success story, and the article acknowledges big problems with drought, Chinese influence, and other factors, but at least there are some positive developments.

The key lesson is that the absence of aid has a very sobering effect.

And you know I get a “thrill up my leg” when I read about a place that fights against the value-added tax.

So I’m crossing my fingers that Somaliland stays independent and begins to prosper.

Let’s close by sharing a startling confession by a former senior aid bureaucrat in the United Kingdom.

Foreign aid spending is “out of control” and the department responsible for it should be abolished, according to its own former minister of state. …Grant Shapps, who was second-in-command at the Department for International Development (DfID) until 14 months ago, attacked its “profoundly worrying” tendency to “shovel cash out of the door”. …Shapps, whose criticisms are unprecedented from a former insider, said he had “agonised” for more than a year about going public. …He described how, in the Foreign Office, he would protest to African dictators about their “denial of human rights and democratic values” but “then, with my DfID hat on, I would rifle through my red box [of ministerial papers] to find cheques for hundreds of millions of pounds payable to the same countries. …Money was thrown at wasteful multilateral aid providers, such as the European Union and the United Nations, to reach the required spending level.

Too bad we don’t have enough ethical bureaucrats to blow the whistle on similar examples of waste and corruption in America’s foreign-aid system (though at least we have two former officials who were in charge of the federal government’s asset-forfeiture office and now say it should be shut down).

P.S. Next time leftists want to make a satirical video attacking libertarianism, they should use Somaliland rather than Somalia.

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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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