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Posts Tagged ‘Government intervention’

I’ve periodically opined about why politicians should not try to control people’s behavior with discriminatory taxes, such as the ones being imposed on soda.

And I’ve cited some examples of how these taxes backfire.

If the following headlines are any indication, we can add Philadelphia to that list.

For instances, this story from the Philadelphia Inquirer.

Or this story from the local CBS affiliate.

These examples reinforce my view that it is not a good idea to let meddling politicians impose more taxes in an effort to control people’s behavior.

Some of my left-leaning friends periodically remind me, however, that there’s a difference between anecdotes and evidence. There’s a lot of truth to that cautionary observation.

To be sure, I could simply respond by saying a pattern is evident when a couple of anecdotes turns into dozens of anecdotes. And when dozens become hundreds, surely it’s possible to say the pattern shows causality.

That being said, it is good to have rigorous, statistics-based analysis if we really want to convince skeptics.

So let’s look at the results of some new academic research from scholars at Stanford, Northwestern, and the University of Minnesota. We’ll start with the abstract, which nicely summarizes their findings about the impact of Philadelphia’s big soda tax.

We analyze the impact of a tax on sweetened beverages, often referred to as a “soda tax,” using a unique data-set of prices, quantities sold and nutritional information across several thousand taxed and untaxed beverages for a large set of stores in Philadelphia and its surrounding area. We find that the tax is passed through at a rate of 75-115%, leading to a 30-40% price increase. Demand in the taxed area decreases dramatically by 42% in response to the tax. There is no significant substitution to untaxed beverages (water and natural juices), but cross-shopping at stores outside of Philadelphia completely o↵sets the reduction in sales within the taxed area. As a consequence, we find no significant reduction in calorie and sugar intake.

Here are some of their conclusions.

We draw several lessons about the effectiveness of local sweetened-beverage taxes from these analyses. First, the tax was ineffective at reducing consumption of unhealthy products. Second, in terms of revenue generation, the tax was only partly effective due to consumers substituting to stores outside of Philadelphia. Third, low income households are less likely to engage in cross-shopping, and instead are more likely to continue to purchase taxed products at a higher price at stores in Philadelphia. The lower propensity for low income households to avoid the tax through cross-shopping leads to a relatively larger tax burden for those households. In summary, the tax does not lead to a shift in consumption towards healthier products, it affects low income households more severely, and it is limited in its ability to raise revenue.

If you’re wondering why consumers responded so strongly, here’s a chart from the study showing the price difference after the tax was imposed.

The bottom numbers in Figure 3 show that some sales still occurred in the city, but a persistent gap between city sales and suburban sales appeared.

And here’s what happened to sales inside the city (taxed) and outside the city (untaxed).

Wow. This data makes me wonder if suburban sellers will start contributing to the Philadelphia politicians who have generated this windfall?

Others have noticed how the tax is hurting rather than helping.

The Wall Street Journal opined about the failure of Philly’s soda tax.

When Philadelphia became the first major U.S. city to pass a soda tax in 2016, Mayor Jim Kenney said it would improve public health while funding universal pre-K. Two years in, the policy hasn’t delivered on that elite ideological goal. But the tax has come at the expense of working people… On Jan. 2, Brown’s Super Stores announced the closure of a ShopRite on Haverford Avenue. The supermarket is close to the city limit, and customers discovered they could avoid the soda tax by shopping outside Philly. …the once-profitable store began losing about $1 million a year. …That means fewer opportunities for workers with a criminal record. Mr. Brown’s supermarkets employ more than 600 of them, with the majority in Philadelphia. Some of the ex-cons have become his most-valued employees.

And Kyle Smith explained in National Review how the tax backfired.

Philadelphia’s outlandish soda tax is what Democratic-party politics looks like when it lets its freak flag fly. So many classic elements are there: (failed) social engineering and “think of the children!” on one side, paid for with a punitive tax on poor people and destroyed businesses, which means destroyed jobs, which in turn means lives upended. …Now that beer is, in some cases, cheaper than soda in Philadelphia, alcohol sales are up sharply. …the total loss attributable to the tax in sales of all items was $300,000 a month per store. Other, untaxed drinks also suffered sales declines within the city, suggesting people were simply saving up their shopping trips for when they left town.

I don’t feel compelled to add much to what’s been cited.

Though I will cite a headline from the Seattle Times to reinforce one of the points in the academic study about consumers bearing the cost of the tax rather than the soda companies.

And my one modest contribution to all this analysis is this comparison of the winners and loser from Philadelphia’s new tax.

For what it’s worth, similar comparisons could be developed for just about every action by every government. Academics call this “public choice” while ordinary people realize it’s just common sense.

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How many times can you say the same thing over and over and over again?

When it comes to the minimum wage, we may never know the answer.

No matter how often new research is produced showing that low-skilled workers are hurt when politicians cut off the bottom rungs of the economic ladder, politicians persist in pushing for bad policy.

Many state already have increased minimum wages, and the “Fight for $15” crowd wants a nationwide increase.

So let’s explain, for the umpteenth time, why this is misguided.

We have lots of data and anecdotes to review, so let’s begin with some scholarly research from Europe.

Here are some results from a study in Denmark, where the minimum wage increases when workers reach age 18, at which point many of them lose their jobs (h/t: Marginal Revolution).

This paper estimates the long-run impact of youth minimum wages on youth employment by exploiting a large discontinuity in Danish minimum wage rules at age 18 and using monthly payroll records for the Danish population. …On average, the hourly wage rate jumps up by 40 percent when individuals turn eighteen years old. Employment (extensive margin) falls by 33 percent and total labor input (extensive and intensive margin) decreases by around 45 percent, leaving the aggregate wage payment nearly unchanged. Data on flows into and out of employment show that the drop in employment is driven almost entirely by job loss when individuals turn 18 years old. We estimate that the relevant elasticity for evaluating the effect on youth employment of changes in their minimum wage is about -0.8.

Here’s the most relevant chart from the study. A rather remarkable drop in employment, as you can see.

Speaking of academic research, a new report from the European Central Bank confirms that higher minimum wages have a negative impact on both employment and consumer costs.

Rises in the minimum wage determine not only the bottom part of the earnings distribution but also labour costs in general, and this could potentially cause headcount reductions. …We address this topic using a unique firm-level cross-country survey dataset compiled from a survey… Firms in eight Central and Eastern European (CEE8) countries, namely Bulgaria, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Slovenia, were asked about the particular adjustment strategies they had chosen following a specific instance of a rise in the minimum wage… The most popular adjustment channels are the increase in product prices…employment effects are realised mostly through reduced hiring, rather than direct layoffs.

This chart from the study is actually somewhat encouraging since it shows that employers bend over backwards to try to save jobs.

Now let’s look at real-world examples from the United States.

A landmark restaurant in Boston is closing, in part because the minimum wage was increased.

One of Boston’s most historic restaurants is closing its doors…Durgin-Park in Faneuil Hall…disappointed customers are trying to get in their final meals. …”This is another passing of a great institution,” said Berg. Rachelle Mazzone is Durgin-Park’s bartender and says dozens of long-time workers were told the restaurant would be closing next weekend. She was told it’s no longer profitable. …According to Ark Restaurants CEO Michael Weinstein, the restaurant wasn’t profitable anymore. He says…increase in minimum wage and health care costs…were all factors in the restaurant’s downfall. …Since 1827, the business attracted faithful diners and tourists to its Faneuil Hall location, winning several culinary awards.

An increase in the minimum wage may have been the straw to break the camel’s back for three restaurants in New York.

The rising minimum wage is getting at least part of the blame for the abrupt closure of three St. Lawrence County restaurants. …About 60 people have lost their jobs. “The minimum wage increase has been a big burden on our business. At one point we were up to 100 employees and the minimum wage has just increased every year since I opened in 2009. It’s been harder and harder to do business in New York state every year,” said Marc Morley, owner of the restaurants. …Morley said he told the restaurant managers to notify the workers. “They held all the contact information for all their individual employees,” he said. “It was an abrupt decision on our end. It wasn’t something we were planning on doing. We just got to the point where the businesses weren’t profitable and we were losing money every week.”

Here are some results from a study on the higher minimum wage in Minnesota.

Beginning in 2014, the state of Minnesota began a series of minimum wage increases. …While the effects of minimum wages changes remains a controversial topic, comparing relative outcomes in Wisconsin and Minnesota suggests that the minimum wage increases led to employment losses in Minnesota, particularly in the restaurant industry and youth demographic most affected by the changes. …Following the minimum wage increases limited service restaurant employment fell by 4% in Minnesota relative to Wisconsin. Further, youth employment fell by 9% in Minnesota following the minimum wage increases, while it increased by 10.6% in Wisconsin over the same time period. In addition, part of the increased wage costs employers faced have been passed on to consumers through higher prices. The relative price of restaurant food in the Minneapolis metro area had fallen by 2% in the four years preceding the minimum wage hikes, but it has risen by 6% in the four years since.

This chart from the study shows the impact on employment levels. The gap between the two lines is a measure of the foregone jobs in Minnesota.

As I’ve noted before, some groups are more victimized than others.

Here are excerpts from an article by Black Entertainment Television.

…economists William Even from Miami University and David Macpherson from Trinity University report that when a state, or the federal government, increases the minimum wage, Black teens are more likely to be laid off. The duo analyzed 600,000 data points… The report focused on 16-to 24-year-old males without a high school diploma and found that for each 10 percent increase in the federal or state minimum wage employment for young Black males decreased 6.5 percent. By contrast, after the same wage boost, employment for white and Hispanic males fell respectively just 2.5 percent and 1.2 percent. The real hit for Black teens occurred, however, in the 21 states that had the federal minimum wage increase in 2007, 2008 and 2009. The findings reveal that while 13,200 Black young adults lost their jobs as a direct result of the recession nearly 40 percent more, a total of 18,500, were fired because of the rise in the federal minimum wage.

Now let’s look at a video on the Seattle minimum-wage hike.

Now that we’ve dug through lots of data and research on why it would be bad news for workers if the minimum wage went up, it would be appropriate to make the obvious point that higher wages would be a desirable outcome.

And as Andy Puzder explained in the Wall Street Journal, that is why there is no substitute for economic growth.

The formula is simple: When the economy accelerates, employers compete for employees and wages increase. I experienced this during my 17 years as CEO of a national quick-service restaurant chain. The stronger the economy, the harder it was to get good employees. Conversely, when growth is weak, as it was during most of the Obama presidency, employees compete for jobs and wages stagnate. …The left’s proposed solution to wage stagnation has been for government to mandate increased wages by more than doubling the minimum wage from $7.25 to $15 an hour. That causes employers to eliminate jobs and reduce hours to offset their increased costs. To increase wages without these unintended consequences, you need economic growth. …With regulatory relief, tax cuts and the increased business that comes from economic growth, employers now have the resources to bid up wages. …the competition for employees and the associated wage increases will continue—if government stays out of the way.

I basically said the same thing at the end of this interview from a few years ago.

Let’s close with some minimum wage-related humor.

Our resident philoso-raptor makes a return appearance (previous appearances here and here) to ask a question that even Hillary Clinton answered correctly.

And it’s always fun to mock the social justice warriors.

It takes a special person (h/t: Libertarian Reddit) to parade their ignorance so boldly.

Last but not least is this amusing cartoon strip that showed up in my inbox.

Reminds me of the superb crayon cartoon, which basically captures the first two-thirds of Mitchell’s Law.

P.S. This video is a great summary of why minimum wage laws should be eliminated.

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While I have no objection to applauding Donald Trump’s good policies such as tax reform and deregulation, I also don’t hesitate to criticize his bad policies.

His big missteps are protectionism and fiscal profligacy, but he also does small things that are misguided.

I’ve already written about his energy socialism and his increased handouts to the World Bank.

Today, we’re going to analyze his proposal for price controls on certain prescription drugs.

For some background on the topic, we’ll start with a very sound editorial from the Wall Street Journal. Here are the key passages.

…the U.S. shouldn’t put the world’s most innovative drug market at the mercy of what Greece is willing to pay for a cancer treatment. …a potential rule…would tether what Medicare Part B pays for certain drugs to a price index of what other developed countries pay. The goal is to bring prices down to 126% of what other countries pay, versus 180% today. …The reason European countries pay less for drugs is because they run single-payer health systems and dictate the prices they’re willing to pay. …Other countries have the luxury of extortion because the U.S. produces more drugs than the rest of the world combined. Mr. Trump mentioned these realities in his speech but blew past them to suggest importing the same bad behavior.

If we import bad policies, we import bad outcomes.

Europe does pay more—in the form of reduced access. Of 74 cancer drugs launched between 2011 and 2018, 70 (95%) are available in the United States. Compare that with 74% in the U.K., 49% in Japan, and 8% in Greece. This should cure anyone of the delusion that these countries will simply start to pay more for drugs. They’re willing to deny treatments… Better quality care in the U.S. is why America outpaces 10 European countries on cancer survival rates… Any investor who wants to bankroll the cure for Alzheimer’s is already staring at a very small chance of success—and the Trump HHS proposal adds another a potential limit on return that will be restricted further if Democrats retake power and use it as a precedent.

Here’s the bottom line.

Mr. Trump is right that Europe, Australia and many others are freeloaders on U.S. innovation, and better intellectual property protections in trade deals might help. But that is no reason to repeat their price-control mistake and undermine the reasons the United States is the last, best hope for medical progress.

Sadly, there aren’t many politicians willing to say and do the right thing.

Which is why Congressman Bucshon of Indiana deserves praise. Here are some details from a report by the Hill.

Rep. Larry Bucshon (R-Ind.) on Friday criticized a drug pricing proposal President Trump made last month, marking some of the first public resistance to the move from congressional Republicans. Bucshon told The Hill that Trump’s proposal to lower some drug prices in Medicare by tying them to cheaper prices in other countries is too far of a move toward “price controls.” …“I understand that we do want to get drug prices down but I think that any proposal that would lead to government price-fixing in that space is a pathway we don’t want to follow.” Trump’s move, announced in October, went farther in the direction of price controls on drugs than what Republicans typically support. Some Democrats praised his move… Bucshon helped lead opposition to a somewhat similar Medicare drug pricing proposal from former President Obama in 2016.

Amen.

A bad Obama policy of intervention doesn’t suddenly become a good policy simply because Trump has adopted it.

Here’s some of what I wrote about the issue in a column for FEE.

…prescription drug prices are typically higher in the US than many other nations. That’s both because bad domestic policies restrict the kind of competition that would keep prices in check and the fact that many foreign governments enact price controls while threatening to steal patents from companies that don’t cooperate. So, it’s especially troubling to see a proposed rule from the Trump administration that would index prescription drug reimbursements under Medicare Part B—which covers drugs exclusively handled by physicians and hospitals like vaccines and cancer medications—based on the prices paid in other countries, including those with nationalized health care systems. To borrow a legal metaphor, it’s fruit of the poisonous tree.

And what happens when we import bad policies?

At stake aren’t just high-minded free-market principles but the vitality of the most innovative pharmaceutical market in the world. US drug companies have only weathered the abuses of foreign governments because the domestic market is large enough that they can recoup the losses. That’s why the president is right to call it “very, very unfair” for other countries to keep their prices artificially low at the expense of American patients; but importing those losses by allowing foreign abuses to set US prices will mean no more market in which to offset losses to socialized systems and thus an inevitable decline in research and development of new medications.

What’s the bottom line? As I noted, we’ll get bad results.

From rent control to the gasoline lines of the 1970s, the connection between price controls and shortages has been well established.

In the case of pharmaceuticals, I fear the main result will be a decline in innovation. The drug companies make nice profits in drugs that already are developed and approved, so I doubt they’ll have much incentive to withhold production on existing drugs if price controls are imposed.

But those profits help to offset the very high cost of development and testing. Including for all the research and development that doesn’t produce marketable products.

So the real victims will be all of us since we won’t have access to the potentially life-saving and life-improving drugs that might be created in the future – assuming an absence of price controls.

The economics of price controls are clear. The consequences are always bad, whether we’re looking at price controls on labor, price controls on gasoline, or price controls on other products.

Which is why such policies generally are supported by the world’s most economically illiterate governments (or, in the case of Nixon, the most venal politicians). Oh, and don’t forget Puerto Rico.

We need Ludwig Erhard, but we got Donald Trump.

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Some departments of the federal government should be shut down because of federalism. High on that list would be the Department of Education and Department of Transportation.

Other departments should be shut down because there is simply no role for any government involvement at any level.

I usually cite the Department of Housing and Urban Development as an example, but the Department of Agriculture also should be terminated.

It’s a rat’s nest of special interest favors. I’ve previously written about inane intervention to enrich Big Dairy, Big Sugar, and Big Corn.

But I confess that I was unaware of Big Cranberry.

The Wall Street Journal opines about the nonsensical nature of cranberry intervention.

As you dip into the Thanksgiving cranberry sauce, here’s a tart story that may make you want to drain the bog. This fall the U.S. Agriculture Department gave cranberry growers its approval to dump a quarter of their 2018 crop. Tons of fruit and juice—in the ballpark of 100 million pounds—will be turned into compost, used as animal feed, donated or otherwise discarded. The goal is to prop up prices.

Needless to say, there’s nothing about propping up cranberry prices in Article 1, Section 8, of the Constitution.

This is also a common-sense issue, as the WSJ explains.

The USDA rule caps growers’ production based on their historical output, with some exemptions. Small cranberry processors aren’t covered, and neither are those that don’t have inventory left over from last year. The trouble is that this reduces everyone’s incentive to downsize… Among the many economic perversities of agricultural policy, this is merely a vignette. Still, America is growing 100 million pounds of cranberries and then throwing them away to raise prices per government order. Wouldn’t it be better—and easier—to let the market work?

By the way, Trump’s protectionism is also part of the problem.

President Trump’s trade war hasn’t helped. About a third of production usually goes overseas. But in June the European Union put a 25% tariff on U.S. cranberry-juice concentrate in retaliation for U.S. steel tariffs. A month later, China bumped its tariff on dried cranberries to 40% from 15%. Mexico and Canada also added duties.

A typical Washington cluster-you-know-what.

Though I don’t recommend thinking about it too much, lest you get indigestion.

The solution is to copy New Zealand and get rid of all agriculture handouts.

P.S. If you like Thanksgiving-themed libertarian humor, the image at the bottom of this column augments the image to your right.

P.P.S. And if you like Thanksgiving-themed videos with libertarian messages, here’s one option and here are two others.

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During the 2016 presidential campaign, I was very critical of Donald Trump’s proposal to expand the entitlement state with a new program for paid parental leave, just as I was very critical of a similar proposal from Hillary Clinton.

Neither candidate offered much detail, but it was reckless and irresponsible for both of them to propose any sort of new tax-and-transfer scheme when the country already faces a long-run crisis because of entitlement programs.

And that looming entitlement crisis explains why I also criticized a paid-leave proposal developed by AEI and the Urban Institute.

But not all parental leave proposals involve a net increase in the fiscal burden of government. Senator Marco Rubio and Congresswoman Ann Wagner have put forth a plan that would allow new parents to finance time off with newborns with money from Social Security, so long as they are willing to accept lower retirement benefits in the future.

The Wall Street Journal is skeptical of this kind of initiative.

Republicans should consider the consequences before signing up for a major expansion of the entitlement state. …Mr. Rubio…claims his benefit doesn’t expand government or create a new entitlement. But what is expanding government if not taking a benefit financed by private industry and administering it through a government program? Paid leave by definition entitles Americans to a de novo benefit… Mr. Rubio says leave will pay for itself by delaying retirement benefits… Does anyone believe those retirement benefits won’t be restored eventually, at least for the non-affluent? …The biggest illusion is that this proposal is a shrewd political move that will steal an issue from Democrats. In the real world they will see Mr. Rubio and raise. The National Partnership for Women & Families called the Rubio plan “reckless, irresponsible and ill-conceived” for making parents choose between kids and retirement. They want both. Once Social Security is open for family leave, Democrats will want to use it for college tuition, and why not a home downpayment?

Ramesh Ponnuru counters the WSJ, arguing in his Bloomberg column that the Rubio/Wagner plan merely creates budget-neutral flexibility.

Senator Marco Rubio of Florida and Representative Ann Wagner of Missouri…have introduced legislation to let parents finance leave by either delaying taking Social Security benefits when they retire or getting slightly reduced benefits. …The proposal doesn’t raise federal spending over the long run, but only moves benefits forward in time from a person’s retirement to her working years. …the proposal is better seen as a way of adding flexibility into an existing entitlement than of creating one. …Because Democrats will demand more generous leave policies, the Journal warns that the Rubio-Wagner proposal will backfire politically. But the bill is an attempt to satisfy a demand among voters for help with family leave. It’s not creating that demand. Republicans can choose whether to counter Democratic policies with nothing, or with an idea that gives families a new option at no net long-term cost to taxpayers. The political choice should be easy.

Ramesh makes several good points. There is a big difference between what Rubio and Wagner are proposing and the plans that involve new taxes and additional spending.

And he even cites the example of a provision in the Social Security system, involving early benefits for disabled widows, that hasn’t resulted in a net increase in the burden of government.

So what’s not to like about the plan?

Plenty. At least according to John Cogan of the Hoover Institution, who has a column warning that it is very unrealistic to hope that politicians won’t expand an entitlement program.

Mr. Rubio’s well-intentioned plan begins by promising a small, carefully targeted benefit and assuring us that it won’t add to the long-run public debt. But history demonstrates that is how costly entitlement programs begin. …New programs initially target benefits to a group of individuals deemed particularly worthy at the time. Eventually the excluded come forth to assert that they are no less worthy of aid and pressure lawmakers to relax eligibility rules. …The broadening of eligibility rules brings yet another group of claimants closer to the boundaries of eligibility, and the pressure to relax qualifying rules begins all over again. The process…repeats itself until the entitlement program reaches a point where its original noble goals are no longer recognizable. …Medicaid and food-stamp programs followed a similar path. These programs were originally limited to providing health and nutrition assistance, respectively, mainly to supplement welfare cash assistance. Both programs now extend aid to large segments of the population who are not on cash welfare and in some cases above the poverty line. Medicaid assists 25% of the nonelderly population. Food stamps pay a major part of the grocery bills for 14% of the nonelderly population. …For more than 200 years, no entitlement program has been immune from the expansionary pressures…and there is no earthly reason to think Mr. Rubio’s plan will prove the exception.

Here’s my two cents on the topic (the same points I made when addressing this issue earlier in the year).

  1. From a big-picture philosophical perspective, I don’t think the federal government should have any role in family life. Child care certainly is not one of the enumerated powers in Article 1, Section 8, of the Constitution. Proponents of intervention routinely argue that the United States is the only advanced nation without such a program, but I view that as a feature, not a bug. We’re also the only advanced nation without a value-added tax. Does that mean we should join other countries and commit fiscal suicide with that onerous levy?
  2. Another objection is that there is a very significant risk that a small program eventually become will become much larger. …once the principle is established that Uncle Sam is playing a role, what will stop future politicians from expanding the short-run goodies and eliminating the long-run savings? It’s worth remembering that the original income tax in 1913 had a top rate of 7 percent and it only applied to 1/2 of 1 percent of the population. How long did that last?
  3. Finally, I still haven’t given up on the fantasy of replacing the bankrupt tax-and-transfer Social Security system with a system of personal retirement accounts. Funded systems based on real savings work very well in jurisdictions such as AustraliaChileSwitzerlandHong Kong, and the Netherlands, but achieving this reform in the United States will be a huge challenge. And I fear that battle will become even harder if we turn Social Security into a piggy bank for other social goals. For what it’s worth, this is also why I oppose plans to integrate the payroll tax with the income tax.

My goal today is not to savage Sen. Rubio and Rep. Wagner for their proposal. For all intents and purposes, they are proposing to do the wrong thing in the best possible way.

If it’s a choice between their plan and some as-yet-undeveloped Trump-Pelosi tax and transfer scheme, the nation obviously will be better off with the Rubio-Wagner approach.

But hopefully we won’t be forced to choose between unpalatable and awful.

P.S. This debate reminds me of the tax reform debate in 2016. Only instead of doing the wrong thing in the best possible way, Senators Rand Paul and Ted Cruz had tax plans that did the right thing in the most risky way.

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As a fiscal policy wonk, I’ve come across depressing examples of counterproductive tax provisions (health benefits exclusion, ethanol credits) and spending programs (the entire HUD budget, OECD subsidies).

But the folks who work on regulatory policy may get exposed to the most inane government policies (Fannie-Freddie mandate, EEOC rulings).

For example, consider how the government is undermining public health by going after e-cigarettes.

Sally Satel of the American Enterprise Institute offers a good introduction to the issue.

Strikingly, it is members of the public health establishment that have fanned the pessimism surrounding the battery-powered devices that deliver nicotine without the carcinogenic tar. One leading culprit is the Centers for Disease Control which refuses to acknowledge the steep risk reduction for smokers who switch to non-combustible tobacco, overlooks evidence of immediate gains in respiratory health when e-cigarettes are used as an alternative to smoking, and dramatizes as yet unrealized harm to children. …at the heart of this skepticism in the US is the FDA, who has devised an onerous rule that “deems” e-cigarettes to be tobacco products and thus subject to the same regulatory regime as combustible cigarettes. The rule…places undue regulatory burden and cost on vaping manufacturers. …the agency’s mandate for manufacturers to submit data prior to product approval is deeply misguided. Although patterns of youth uptake, flavor preferences, and nicotine level preferences are important data, they do not trump the benefit to adult smokers’ health. …The regulatory politics of non-combustible nicotine products stand as one of the great paradoxes in public health. While our health agencies now strongly champion harm reduction for opiate misuse, they are making it more and more difficult to improve and save the lives of smokers.

The Orange County Register is not a big fan of what’s been happening.

There’s a strange anti-vaping hysteria hitting governments. …The itch to treat vaping like smoking afflicting so many public health activists and government officials may be well-intentioned, but it is also misguided and harmful to the very goal of reducing smoking which these campaigners claim to champion. …Vapor products offer a way to consume nicotine without inhaling the lethal smoke that causes cancer and kills smokers. It has long been known that it is the smoke from burning tobacco, not the nicotine, that kills smokers. …Flavors are a critical ingredient to the success of tobacco harm reduction. According to a 2013 study published in the International Journal of Environmental Research and Public Health, of 4,618 vapers surveyed, more than 91 percent classified themselves as “former” smokers, with the majority saying flavor variety was “very important” to their efforts to quit smoking. The study also found the number of flavors a vaper used was independently associated with quitting smoking. Supporters of flavor bans argue these products appeal to children and will induce them to start smoking cigarettes. But the data fails to bear this out. A 2015 study from the Journal of Nicotine & Tobacco Research found nonsmoking teens’ interest in e-cigarettes was “very low” and didn’t change with the availability of flavors.

Looking at this debate motivated me to write an article on the story behind the story.

In an ideal world, the discussion and debate about how (or if) to tax e-cigarettes, heat-not-burn, and other tobacco harm-reduction products would be guided by science. …In the real world, however, politicians are guided by other factors. There are two things to understand… First, this is a battle over tax revenue. Politicians are concerned that they will lose tax revenue if a substantial number of smokers switch to options such as vaping. …Second, this is a quasi-ideological fight. Not about capitalism versus socialism, or big government versus small government. It’s basically a fight over paternalism, or a battle over goals. For all intents and purposes, the question is whether lawmakers should seek to simultaneously discourage both tobacco use and vaping because both carry some risk (and perhaps because both are considered vices for the lower classes)? Or should they welcome vaping since it leads to harm reduction as smokers shift to a dramatically safer way of consuming nicotine?

I used an analogy from the world of statistics.

…researchers presumably always recognize the dangers of certain types of mistakes, known as Type I errors (also known as a “false positive”) and Type II errors (also known as a “false negative”). …The advocates of high taxes on e-cigarettes and other non-combustible products are fixated on the possibility that vaping will entice some people into the market. Maybe vaping will even act as a gateway to smoking. So, they want high taxes on vaping, akin to high taxes on tobacco, even though the net result is that this leads many smokers to stick with cigarettes instead of making a switch to less harmful products. …At some point in the future, observers may joke that one side is willing to accept more smoking if one teenager forgoes vaping while the other side is willing to have lots of vapers if it means one less smoker.

On the issue of taxes, here’s a 2017 map from the Tax Foundation that shows state excise taxes on vaping.

There has been some pushback against the regulators.

The electronic cigarette industry and its free-market allies are seeing fresh opportunities to ease federal rules on e-cigarettes… More than a dozen conservative groups wrote to congressional leaders…, calling on them to add a pro-vaping provision to a spending measure… A rule issued…by the Obama administration “deems” e-cigarettes to be tobacco products and allows the FDA to retroactively examine all tobacco products on the market in February 2007. …industry advocates say the costly FDA approval process would force most e-cigarette companies to shut down. …The notion of “harm reduction” is the main argument pro-vaping forces use in their push to remove the requirement that tobacco companies retroactively prove their e-cigarettes are safe.

For what it’s worth, the FDA has kicked the can down the road, basically postponing its harsh new regulatory regime until 2022.

In the world of business, that’s just around the corner. Especially since investors and entrepreneurs have relatively long time horizons.

So let’s look at some evidence that hopefully will lead the bureaucrats at the FDA to make rational decisions.

The main argument, as noted in this column in the Wall Street Journal, is that vaping is the most effective way of reducing smoking.

Two major government surveys show that regular e-cigarette use by people who have never smoked is under 1%. Some 4.2% of high-school seniors report smoking conventional cigarettes daily, according to Monitoring the Future, and 9.7% reported smoking at least once in the previous month. These are “the high-risk youth” we need to worry about… Overheated worries about youth vaping are threatening to obscure the massive potential benefits to the nation’s 38 million cigarette smokers. Two million have already quit thanks to e-cigarettes. Vaping products are already the most widely used quit-smoking tool.

And smoking is the real danger to health, as Veronique de Rugy notes in a Reason article.

Tobacco kills 480,000 people a year in the United States. Yet when an innovative alternative that delivers nicotine and eliminates 95 percent of the harm of smoking is available, the wary Food and Drug Administration fails to embrace this revolutionary lifesaving technology. All in the name of the children, of course. Using e-cigarettes, known as vaping, has been around long enough for respected health authorities to conclude after many studies that it is eminently safer than smoking cigarettes. Britain’s Royal College of Physicians called any attempts by public officials to discourage smokers from switching to vaping “unjust, irrational and immoral.” …no one wants teens to vape, but we certainly don’t want them to smoke cigarettes and die an agonizing death later in life. As a parent, I tell my children that they shouldn’t do either. But the truth is that I know, as do they, that if they are going to do something as stupid as committing so much of their money to that sort of activity, vaping is the way to go. The bottom line is that government alarmists should back off. The first step is for the FDA to stick to its plan to postpone regulation until 2022 and create a clear pathway for the permanent approval of these products. It would allow the vaping companies time to establish their products as a safer alternative to cigarettes.

Here’s some scholarly research on the topic.

 US tobacco control policies to reduce cigarette use have been effective, but their impact has been relatively slow. This study considers a strategy of switching cigarette smokers to e-cigarette use (‘vaping’) in the USA to accelerate tobacco control progress. …Compared with the Status Quo, replacement of cigarette by e-cigarette use over a 10-year period yields 6.6 million fewer premature deaths with 86.7 million fewer life years lost in the Optimistic Scenario. Under the Pessimistic Scenario, 1.6 million premature deaths are averted with 20.8 million fewer life years lost. The largest gains are among younger cohorts, with a 0.5 gain in average life expectancy projected for the age 15 years cohort in 2016. …Our projections show that a strategy of replacing cigarette smoking with vaping would yield substantial life year gains, even under pessimistic assumptions regarding cessation, initiation and relative harm.

And the Wall Street Journal opines on the issue.

E-cigarettes do not contain tobacco. They contain nicotine, a chemical derived from tobacco and other plants. Plain English was never a deterrent, though, to regulators on an empire-expanding mission. The Food and Drug Administration this week rolled out new regulations on e-cigarettes based on a 2009 law giving the agency power over products that “contain tobacco.” …Plain English also does not authorize inclusion of e-cigarettes under the 1998 Master Settlement Agreement, the deal struck between the cigarette industry and 46 states that settled a bunch of lawsuits by imposing a government-run cartel to jack up the price of cigarettes (in the name of curbing consumption, naturally) and distribute the excess profits to the states and a handful of now-plutocrat trial lawyers. …Lovers of freedom and enemies of regulatory overkill do not exaggerate when they say FDA rules are designed to murder numerous small manufacturers and thousands of “vape” shops that account for about half the electronic-cigarette business.

You won’t be surprised to learn that the bureaucrats at the World Health Organization, who already are pushing for harmonized tobacco taxes, also want to go after vaping.

…who gets a say in what the WHO does is a hotly contest matter. Only thirty members of the public and selected members of the media are treated to limited, stage managed press conferences. Nations like China, with state-owned tobacco monopolies, are warmly welcomed, but anyone with the slightest connection to a private tobacco industry is shown the exit. Large pharmaceutical companies generously fund conference attendees, while their anti-tobacco products like Nicorette gum compete with products that the WHO views unfavorably, like electronic cigarettes. The secretive nature of the conference didn’t go over well with India’s tobacco farmers. After a few minutes of protest outside the convention, 500 farmers were corralled by police and detained inside this local police station. …it’s hard to understand why a $4 billion organization like the WHO feels threatened by the average Indian farmer who lives on $3 a day… Expanding its authority beyond tobacco control, e-cigarettes and vape products now find themselves potentially subject to a worldwide ban. Delegates to the convention have expressed support for “a complete ban on the sale, manufacture, import and export of Electronic Nicotine Delivery Systems”.

WHO bureaucrats are not the only ones to misbehave. Here’s a column from the Wall Street Journal exposing misbehavior in the United States.

There are many reasons to criticize the FDA’s action, but its most fundamental flaw—and the one that our legal foundation raises in three lawsuits on behalf of Ms. Manor and nine others—is that the rule was finalized by someone without authority to do so. The rule was not issued or signed by either the secretary of health and human services or the FDA commissioner, both Senate-confirmed officials. Instead, it was issued and signed by Leslie Kux, a career bureaucrat at FDA. …The attempted delegation of rule-making authority to someone not appointed as an “Officer of the United States” violates one of the most important separation-of-powers clauses in the Constitution. …Political accountability matters; that’s why the Framers included the Appointments Clause in Article II of the U.S. Constitution.

Last but not least, here’s a must-watch video on this issue from Prager University.

I’m not a big fan of the Food and Drug Administration, mostly because it delays the adoption of life-saving drugs and denies options for critically ill people.

Now that it’s going after e-cigarettes and other products that help smokers kick the habit, the FDA bureaucracy deserves ever-greater scorn.

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There are three reasons why the right kind of tax reform can help the economy grow faster.

  1. Lower tax rates give people more incentive to earn income.
  2. Less double taxation boosts incentives to save and invest.
  3. Fewer loopholes improves incentives for economic efficiency.

Let’s focus on the third item. I don’t like special preferences in the tax code because it’s bad for growth when the tax code lures people into misallocating their labor and capital. Ethanol, for instance, shows how irrational decisions are subsidized by the IRS.

Moreover, I’d rather have smart and capable people in the private sector focusing how to create wealth instead of spending their time figuring out how to manipulate the internal revenue code.

That’s why, in my semi-dream world, I’d like to see a flat tax.* Not only would there be a low rate and no double taxation, but there also would be no distortions.

But in the real world, I’m happy to make partial progress.

That’s why I was happy that last year’s tax bill produced a $10,000 cap for the state and local tax deduction and reduced the value of other write-offs by increasing the standard deduction. Yes, I’d like to wipe out the deductions for home mortgage interest, charitable giving, and state and local taxes, but a limit is better than nothing.

And I’m also happy that lower tax rates are an indirect way of reducing the value of loopholes and other preferences.

To understand the indirect benefits of low tax rates, consider this new report from the Washington Post. Unsurprisingly, we’re discovering that a less onerous death tax means less demand for clever tax lawyers.

A single aging rich person would often hire more than a dozen people — accountants, estate administrators, insurance agents, bank attorneys, financial planners, stockbrokers — to make sure they paid as little as possible in taxes when they died. But David W. Klasing, an estate tax attorney in Orange County, Calif., said he’s seen a sharp drop in these kinds of cases. The steady erosion of the federal estate tax, shrunk again by the Republican tax law last fall, has dramatically reduced the number of Americans who have to worry about the estate tax — as well as work for those who get paid to worry about it for them, Klasing said. In 2002, about 100,000 Americans filed estate tax returns to the Internal Revenue Service, according to the IRS. In 2018, only 5,000 taxpayers are expected to file these returns… “You had almost every single tax professional trying to grab as much of that pot as they could,” Klasing said. “Now almost everybody has had to find other work.”

Needless to say, I’m delighted that these people are having to “find other work.”

By the way, I’m not against these people. They were working to protect families from an odious form of double taxation, which was a noble endeavor.

I’m simply stating that I’m glad there’s less need for their services.

Charles “Skip” Fox, president of the American College of Trust and Estate Counsel, said he frequently hears of lawyers shifting their focus away from navigating the estate tax, and adds that there has been a downturn in the number of young attorneys going into the estate tax field. Jennifer Bird-Pollan, who teaches the estate tax to law students at the University of Kentucky, said that nearly a decade ago her classes were packed with dozens of students. Now, only a handful of students every so often may be interested in the subject or pursuing it as a career. “There’s about as much interest in [the class] law and literature,” Pollan said. “The very, very wealthy are still hiring estate tax lawyers, but basically people are no longer paying $1,000 an hour for advice about this stuff. They don’t need it.”

Though I am glad one lawyer is losing business.

Stacey Schlitz, a tax attorney in Nashville, said when she got out of law school about a decade ago roughly 80 percent of her clients were seeking help with their estate taxes. Now, less than 1 percent are, she said, adding that Tennessee’s state inheritance tax was eliminated by 2016. “It is disappointing that this area of my business dried up so that such a small segment of society could get even richer,” Schlitz said in an email.

I hope every rich person in Nashville sees this story and steers clear of Ms. Schlitz, who apparently wants her clients to be victimized by government.

Now let’s shift to the business side of the tax code and consider another example showing why lower tax rates produce more sensible behavior.

Now that the corporate tax rate has been reduced, American companies no longer have as much desire to invest in Ireland.

US investment in Ireland declined by €45bn ($51bn) in 2017, in another sign that sweeping tax reforms introduced by US president Donald Trump have impacted the decisions of American multinational companies. …Economists have been warning that…Trump’s overhaul of the US tax code, which aimed to reduce the use of foreign low-tax jurisdictions by US companies, would dent inward investment in Ireland. …In November 2017, Trump went so far as to single out Ireland, saying it was one of several countries that corporations used to offshore profits. “For too long our tax code has incentivised companies to leave our country in search of lower tax rates. It happens—many, many companies. They’re going to Ireland. They’re going all over,” he said.

Incidentally, I’m a qualified fan of Ireland’s low corporate rate. Indeed, I hope Irish lawmakers lower the rate in response to the change in American law.

And I’d like to see the US rate fall even further since it’s still too high compared to other nations.

Heck, it would be wonderful to see tax competition produce a virtuous cycle of rate reductions all over the world.

But that’s a topic I’ve addressed before.

Today’s lesson is simply that lower tax rates reduce incentives to engage in tax planning. I’ll close with simple thought experiment showing the difference between a punitive tax system and reasonable tax system.

  • 60 percent tax rate – If you do nothing, you only get to keep 40 cents of every additional dollar you earn. But if you find some sort of deduction, exemption, or exclusion, you increase your take-home pay by an additional 60 cents. That’s a good deal even if the tax preference loses 30 cents of economic value.
  • 20 percent tax rate – If you do nothing, you get to keep 80 cents of every dollar you earn. With that reasonable rate, you may not even care about seeking out deductions, exemptions, and exclusions. And if you do look for a tax preference, you certainly won’t pick one where you lose anything close to 20 cents of economic value.

The bottom line is that lower tax rates are a “two-fer.” They directly help economic growth by increasing incentives to earn income and they indirectly help economic growth by reducing incentives to engage in inefficient tax planning.

*My semi-dream world is a flat tax. My dream world is when the federal government is so small (as America’s Founders envisioned) that there’s no need for any broad-based tax.

P.S. It’s not the focus of today’s column, but since I talked about loopholes, it’s worth pointing out that they should be properly defined. Sadly, that simple task is too challenging for the Joint Committee on Taxation, the Government Accountability Office, and the Congressional Budget Office (or even the Republican party).

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