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Posts Tagged ‘Paul Ryan’

Paul Ryan’s Legacy

Most politicians are contemptible. They are shallow, grasping, insecure clowns who want to expand the size and scope of government so they have more power to dictate how the rest of us live our lives.

To make matters worse, many of them know they are doing the wrong thing, but they don’t have the moral courage to resist the corrupt, go-along-to-get-along culture of Washington.

But that doesn’t mean they’re bad people. When people ask me what motivates politicians, I sometime explain the theory of “public choice.” In other cases, I tell the simple story of the guy who is endlessly conflicted between an angel on one shoulder and a devil on the other shoulder.

And I tell them that a good politician is one who – more often than not – sides with the angel.

And that’s why, when asked to comment on the outgoing Speaker of the House, I applauded Paul Ryan. You can watch the entire interview here, but I’ve excerpted a segment that hits the two main points.

Simply stated, Ryan was instrumental in moving the ball forward on tax reform. I very much doubt we would have achieved a lower corporate tax rate or scaled back the state and local tax deduction without all the work he did during his time at the Budget Committee and Ways & Means Committee.

And while entitlement reform never happened, first because of Obama and now because of Trump, it’s nonetheless a remarkable achievement that Ryan was able to:

  • Put together budgets with genuine Medicaid and Medicare reform.
  • Get those budgets approved by the House and Senate.

By the way, I’m not being a naive cheerleader.

Ryan had plenty of bad votes, including the horribly corrupt TARP bailout. And he routinely supported many other elements of George W. Bush’s big-government agenda.

And his tax record wasn’t perfect, either. His Roadmap budget plan had some great reforms, but also included a value-added tax. More recently, he supported the border-adjustment tax (sort of a pre-VAT).

But even Saint Ronald wasn’t perfect.

P.S. My biggest sin of omission in the interview is that I didn’t mention the de facto five-year spending freeze between 2009-2014, an achievement that largely overlapped with Ryan’s tenure as Chairman of the Budget Committee.

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I wrote yesterday to praise the Better Way tax plan put forth by House Republicans, but I added a very important caveat: The “destination-based” nature of the revised corporate income tax could be a poison pill for reform.

I listed five concerns about a so-called destination-based cash flow tax (DBCFT), most notably my concerns that it would undermine tax competition (folks on the left think it creates a “race to the bottom” when governments have to compete with each other) and also that it could (because of international trade treaties) be an inadvertent stepping stone for a government-expanding value-added tax.

Brian Garst of the Center for Freedom and Prosperity has just authored a new study on the DBCFT. Here’s his summary description of the tax.

The DBCFT would be a new type of corporate income tax that disallows any deductions for imports while also exempting export-related revenue from taxation. This mercantilist system is based on the same “destination” principle as European value-added taxes, which means that it is explicitly designed to preclude tax competition.

Since CF&P was created to protect and promote tax competition, you won’t be surprised to learn that the DBCFT’s anti-tax competition structure is a primary objection to this new tax.

First, the DBCFT is likely to grow government in the long-run due to its weakening of international tax competition and the loss of its disciplinary impact on political behavior. … Tax competition works because assets are mobile. This provides pressure on politicians to keep rates from climbing too high. When the tax base shifts heavily toward immobile economic activity, such competition is dramatically weakened. This is cited as a benefit of the tax by those seeking higher and more progressive rates. …Alan Auerbach, touts that the DBCFT “alleviates the pressure to reduce the corporate tax rate,” and that it would “alter fundamentally the terms of international tax competition.” This raises the obvious question—would those businesses and economists that favor the DBCFT at a 20% rate be so supportive at a higher rate?

Brian also shares my concern that the plan may morph into a VAT if the WTO ultimately decides that is violates trade rules.

Second, the DBCFT almost certainly violates World Trade Organization commitments. …Unfortunately, it is quite possible that lawmakers will try to “fix” the tax by making it into an actual value-added tax rather than something that is merely based on the same anti-tax competition principles as European-style VATs. …the close similarity of the VAT and the DBCFT is worrisome… Before VATs were widely adopted, European nations featured similar levels of government spending as the United States… Feeding at least in part off the easy revenue generate by their VATs, European nations grew much more drastically over the last half century than the United States and now feature higher burdens of government spending. The lack of a VAT-like revenue engine in the U.S. constrained efforts to put the United States on a similar trajectory as European nations.

And if you’re wondering why a VAT would be a bad idea, here’s a chart from Brian’s paper showing how the burden of government spending in Europe increased once that tax was imposed.

In the new report, Brian elaborates on the downsides of a VAT.

If the DBCFT turns into a subtraction-method VAT, its costs would be further hidden from taxpayers. Workers would not easily understand that their employers were paying a big VAT withholding tax (in addition to withholding for income tax). This makes it easier for politicians to raise rates in the future. …Keep in mind that European nations have corporate income tax systems in addition to their onerous VAT regimes.

And he points out that those who support the DBCFT for protectionist reasons will be disappointed at the final outcome.

…if other nations were to follow suit and adopt a destination-based system as proponents suggest, it will mean more taxes on U.S. exports. Due to the resulting decline in competitive downward pressure on tax rates, the long-run result would be higher tax burdens across the board and a worse global economic environment.

Brian concludes with some advice for Republicans.

Lawmakers should always consider what is likely to happen once the other side eventually returns to power, especially when they embark upon politically risky endeavors… In this case, left-leaning politicians would see the DBCFT not as something to be undone, but as a jumping off point for new and higher taxes. A highly probable outcome is that the United States’ corporate tax environment becomes more like that of Europe, consisting of both consumption and income taxes. The long-run consequences will thus be the opposite of what today’s lawmakers hope to achieve. Instead of a less destructive tax code, the eventual result could be bigger government, higher taxes, and slower economic growth.

Amen.

My concern with the DBCFT is partly based on theoretical objections, but what really motivates me is that I don’t want to accidentally or inadvertently help statists expand the size and scope of government. And that will happen if we undermine tax competition and/or set in motion events that could lead to a value-added tax.

Let’s close with three hopefully helpful observations.

Helpful Reminder #1: Congressional supporters want a destination-based system as a “pay for” to help finance pro-growth tax reforms, but they should keep in mind that leftists want a destination-based system for bad reasons.

Based on dozens of conversations, I think it’s fair to say that the supporters of the Better Way plan don’t have strong feelings for destination-based taxation as an economic principle. Instead, they simply chose that approach because it is projected to generate $1.2 trillion of revenue and they want to use that money to “pay for” the good tax cuts in the overall plan.

That’s a legitimate choice. But they also should keep in mind why other people prefer that approach. Folks on the left want a destination-based tax system because they don’t like tax competition. They understand that tax competition restrains the ability of governments to over-tax and over-spend. Governments in Europe chose destination-based value-added taxes to prevent consumers from being able to buy goods and services where VAT rates are lower. In other words, to neuter tax competition. Some state governments with high sales taxes in the United States are pushing a destination-based system for sales taxes because they want to hinder consumers from buying goods and services from states with low (or no) sales taxes. Again, their goal is to cripple tax competition.

Something else to keep in mind is that leftist supporters of the DBCFT also presumably see the plan as being a big step toward achieving a value-added tax, which they support as the most effective way of enabling bigger government in the United States.

Helpful Reminder #2: Choosing the right tax base (i.e., taxing income only one time, otherwise known as a consumption-base system) does not require choosing a destination-based approach.

The proponents of the Better Way plan want a “consumption-base” tax. This is a worthy goal. After all, that principle means a system where economic activity is taxed only one time. But that choice is completely independent of the decision whether the tax system should be “origin-based” or “destination-based.”

The gold standard of tax reform has always been the Hall-Rabushka flat tax, which is a consumption-base tax because there is no double taxation of income that is saved and invested. It also is an “origin-based” tax because economic activity is taxed (only one time!) where income is earned rather than where income is consumed.

The bottom line is that you can have the right tax base with either an origin-based system or a destination-based system.

Helpful Reminder #3: The good reforms of the Better Way plan can be achieved without the downside risks of a destination-based tax system.

The Tax Foundation, even in rare instances when I disagree with its conclusions, always does very good work. And they are the go-to place for estimates of how policy changes will affect tax receipts and the economy. Here is a chart with their estimates of the revenue impact of various changes to business taxation in the Better Way plan. As you can see, the switch to a destination-based system (“border adjustment”) pulls in about $1.2 trillion over 10 years. And you can also see all the good reforms (expensing, rate reduction, etc) that are being financed with the various “pay fors” in the plan.

I am constantly asked how the numbers can work if “border adjustment” is removed from the plan. That’s a very fair question.

But there are lots of potential answers, including:

  • Make a virtue out of necessity by reducing government revenue by $1.2 trillion.
  • Reduce the growth of government spending to generate offsetting savings.
  • Find other “pay fors” in the tax code (my first choice would be the healthcare exclusion).
  • Reduce the size of the tax cuts in the Better Way plan by $1.2 trillion.

I’m not pretending that any of these options are politically easy. If they were, the drafters of the Better Way plan probably would have picked them already. But I am suggesting that any of those options would be better than adopting a destination-based system for business taxation.

Ultimately, the debate over the DBCFT is about how different people assess political risks. House Republicans advocating the plan want good things, and they obviously think the downside risks in the future are outweighed by the ability to finance a larger level of good tax reforms today. Skeptics appreciate that those proponents want good policy, but we worry about the long-run consequences of changes that may (especially when the left sooner or late regains control) enable bigger government.

P.S. This is not the first time that advocates of good policy have bickered with each other. During the 2016 nomination battle, Rand Paul and Ted Cruz plans proposed tax reform plans that fixed many of the bad problems in the tax code. But they financed some of those changes by including value-added taxes in their plans. In the short run, either plan would have been much better than the current system. But I was critical because I worried the inclusion of VATs would eventually give statists a tool to further increase the burden of government.

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The Republicans in the House of Representatives, led by Ways & Means Chairman Kevin Brady and Speaker Paul Ryan, have proposed a “Better Way” tax plan that has many very desirable features.

And there are many other provisions that would reduce penalties on work, saving, investment, and entrepreneurship. No, it’s not quite a flat tax, which is the gold standard of tax reform, but it is a very pro-growth initiative worthy of praise.

That being said, there is a feature of the plan that merits closer inspection. The plan would radically change the structure of business taxation by imposing a 20 percent tax on all imports and providing a special exemption for all export-related income. This approach, known as “border adjustability,” is part of the plan to create a “destination-based cash flow tax” (DBCFT).

When I spoke about the Better Way plan at the Heritage Foundation last month, I highlighted the good features of the plan in the first few minutes of my brief remarks, but raised my concerns about the DBCFT in my final few minutes.

Allow me to elaborate on those comments with five specific worries about the proposal.

Concern #1: Is the DBCFT protectionist?

It certainly sounds protectionist. Here’s how the Financial Times described the plan.

The border tax adjustment would work by denying US companies their current ability to deduct import costs from their taxable income, meaning companies selling imported products would effectively be taxed on the full value of the sale rather than just the profit. Export revenues, meanwhile, would be excluded from company tax bases, giving net exporters the equivalent of a subsidy that would make them big beneficiaries of the change.

Charles Lane of the Washington Post explains how it works.

…the DBCFT would impose a flat 20 percent tax only on earnings from sales of output consumed within the United States… It gets complicated, but the upshot is that the cost of imported supplies would no longer be deductible from taxable income, while all revenue from exports would be. This would be a huge incentive to import less and export more, significant change indeed for an economy deeply dependent on global supply chains.

That certainly sounds protectionist as well. A tax on imports and a special exemption for exports.

But proponents say there’s no protectionism because the tax is neutral if the benchmark is where products are consumed rather than where income is earned. Moreover, they claim exchange rates will adjust to offset the impact of the tax changes. Here’s how Lane explains the issue.

…the greenback would have to rise 25 percent to offset what would be a new 20 percent tax on imported inputs — propelling the U.S. currency to its highest level on record. The international consequences of that are unforeseeable, but unlikely to be totally benign for everyone. Bear in mind that many other countries — China comes to mind — can and will manipulate exchange rates to protect their own short-term interests.

For what it’s worth, I accept the argument that the dollar will rise in value, thus blunting the protectionist impact of border adjustability. It would remain to be seen, though, how quickly or how completely the value of the dollar would change.

Concern #2: Is the DBCFT compliant with WTO obligations?

The United States is part of the World Trade Organization (WTO) and we have ratified various agreements designed to liberalize world trade. This is great for the global economy, but it might not be good news for the Better Way plan because WTO rules only allow border adjustability for indirect taxes like a credit-invoice value-added tax. The DBCFT, by contrast, is a version of a corporate income tax, which is a direct tax.

The column by Charles Lane explains one of the specific problems.

Trading partners could also challenge the GOP plan as a discriminatory subsidy at the World Trade Organization. That’s because it includes a deduction for wages paid by U.S.-located firms, importers and exporters alike — a break that would obviously not be available to competitors abroad.

Advocates argue that the DBCFT is a consumption-base tax, like a VAT. And since credit-invoice VATs are border adjustable, they assert their plan also should get the same treatment. But the WTO rules say that only “indirect” taxes are eligible for border adjustability. The New York Times reports that the WTO therefore would almost surely reject the plan.

Michael Graetz, a tax expert at the Columbia Law School, said he doubted that argument would prevail in Geneva. “W.T.O. lawyers do not take the view that things that look the same economically are acceptable,” Mr. Graetz said.

A story in the Wall Street Journal considers the potential for an adverse ruling from the World Trade Organization.

Even though it’s economically similar to, and probably better than, the value-added taxes (VATs) many other countries use, it may be illegal under World Trade Organization rules. An international clash over taxes is something the world can ill afford when protectionist sentiment is already running high. …The controversy is over whether border adjustability discriminates against trade partners. …the WTO operates not according to economics but trade treaties, which generally treat tax exemptions on exports as illegal unless they are consumption taxes, such as the VAT. …the U.S. has lost similar disputes before. In 1971 it introduced a tax break for exporters that, despite several revamps, the WTO ruled illegal in 2002.

And a Washington Post editorial is similarly concerned.

Republicans are going to have to figure out how to make such a huge de facto shift in the U.S. tax treatment of imports compliant with international trade law. In its current iteration, the proposal would allow corporations to deduct the costs of wages paid within this country — a nice reward for hiring Americans and paying them well, which for complex reasons could be construed as a discriminatory subsidy under existing World Trade Organization doctrine.

Concern #3: Is the DBCFT a stepping stone to a VAT?

If the plan is adopted, it will be challenged. And if it is challenged, it presumably will be rejected by the WTO. At that point, we would be in uncharted territory.

Would that force the folks in Washington to entirely rewrite the tax system? Would they be more surgical and just repeal border adjustability? Would they ignore the WTO, which would give other nations the right to impose tariffs on American exports?

One worrisome option is that they might simply turn the DBCFT into a subtraction-method value-added tax (VAT) by tweaking the law so that employers no longer could deduct  expenses for labor compensation. This change would be seen as more likely to get approval from the WTO since credit-invoice VATs are border adjustable.

This possibility is already being discussed. The Wall Street Journal story about the WTO issue points out that there is a relatively simple way of making the DBCFT fit within America’s trade obligations, and that’s to turn it into a value-added tax.

One way to avoid such a confrontation would be to revise the cash flow tax to make it a de facto VAT.

The Economist shares this assessment.

…unless America switches to a full-fledged VAT, border adjustability may also be judged to breach World Trade Organisation rules.

Steve Forbes is blunt about this possibility.

One tax initiative that should be strangled before it sees the light of day is to give a tax rebate to exporters and to impose taxes on imports. …It’s a bad idea. Why do we want to make American consumers pay more for products while subsidizing foreign buyers? It also could put us on the slippery slope to our own VAT.

And that’s not a slope we want to be on. Unless the income tax is fully repealed (sadly not an option), a VAT would be a recipe for turning America into a European-style welfare state.

Concern #4: Does the DBCFT undermine tax competition and give politicians more ability to increase tax burdens?

Alan Auerbach, an academic from California who previously was an adviser for John Kerry and also worked at the Joint Committee on Taxation when Democrats controlled Capitol Hill, is the main advocate of a DBCFT (the New York Times wrote that he is the “principal intellectual champion” of the idea).

He wrote a paper several years ago for the Center for American Progress, a hard-left group closely associated with Hillary Clinton. Auerbach explicitly argued that this new tax scheme is good because politicians no longer would feel any pressure to lower tax rates.

This…alternative treatment of international transactions that would relieve the international pressure to reduce rates while attracting foreign business activity to the United States. It addresses concerns about the effect of rising international competition for multinational business operations on the sustainability of the current corporate tax system. With rising international capital flows, multinational corporations, and cross-border investment, countries’ tax rates and tax structures are of increasing importance. Indeed, part of the explanation for declining corporate tax rates abroad is competition among countries for business activity. …my proposed reforms…builds on the [Obama] Administration’s approach…and alleviates the pressure to reduce the corporate tax rate.

This is very troubling. Tax competition is a very valuable liberalizing force in the world economy. It partially offsets the public choice pressures on politicians to over-tax and over-spend. If governments no longer had to worry that taxable activity could escape across national borders, they would boost tax rates and engage in more class warfare.

Also, it’s worth noting that the so-called Marketplace Fairness Act, which is designed to undermine tax competition and create a sales tax cartel among American states, uses the same “destination-based” model as the DBCFT.

Concern #5: Does the DBCFT create needless conflict and division among supporters of tax reform?

As I pointed out in my remarks at the Heritage Foundation, there’s normally near-unanimous support from the business community for pro-growth tax reforms.

That’s not the case with the DBCFT.

The Washington Examiner reports on the divisions in the business community.

Major retailers are skeptical of the House Republican plan to revamp the tax code, fearing that the GOP call to border-adjust corporate taxes could harm them even if they win a significant cut to their tax rate. As a result, retailers, oil refiners and other industries that import goods to sell in the U.S. could provide a major obstacle to the Republican effort to reform taxes. …The effect of the border adjustment, retailers fear, would be that the goods they import to sell to consumers would face a 20 percent mark-up, one that would force retailers like Walmart, the Home Depot and Sears…to raise prices and lose customers.

A story from CNBC highlights why retailers are so concerned.

…retailers are nervous. Very nervous. …About 95 percent of clothing and shoes sold in the U.S. are manufactured overseas, which means imports make up a vast majority of many U.S. retailers’ merchandise. …If the GOP plan were adopted as it’s currently laid out, Gap pays 20 percent corporate tax on the $5 profit from the sweater, or $1. Plus, 20 percent tax on the $80 cost it paid for that sweater from the overseas supplier, or $16. That means the tax goes from $1.75 to $17 for that sweater, more than three times the profit on that sweater. Talk about a hit to margins. …Retailers certainly aren’t taking a lot of comfort in the economic theory of dollar appreciation. …the tax reform plan will dilute specialty retailers’ earnings by an average of 132 percent. …Athletic manufacturers could take a 40 percent earnings hit… Gap, Carter’s , Urban Outfitters , Fossil and Under Armour are most at risk under the plan.

And here’s another article from the Washington Examiner that explains why folks in the energy industry are concerned.

…the border adjustment would raise costs for refiners that import oil. In turn, that could raise prices for consumers. The border adjustment would amount to a $10-a-barrel tax on imported crude oil, raising costs for drivers buying gasoline by up to 25 cents a gallon, the energy analyst group PIRA Energy Group warned this week. The report warned of a “potential huge impact across the petroleum industry,” even while noting that the tax reform plan faces many obstacles to passage.

Concern #6: What happens when other nations adopt their versions of a DBCFT?

Advocates of the DBCFT plausibly argue that if the WTO somehow approves their plan, then other nations will almost certainly copy the new American system.

That will be a significant blow to tax competition, which would be very bad news for the global economy.

But is also has negative implications for the fight to protect America from a VAT. The main selling point for advocates of the DBCFT is that we need a border-adjustable tax to offset the supposed advantage that other nations have because of border-adjustable VATs (both Paul Krugman and I agree that this is nonsense, but it still manages to be persuasive for some people).

So what happens when other nations turn their corporate income taxes into DBCFTs, which presumably will happen? We’re than back where we started and misguided people will say we need our own VAT to balance out the VATs in other nations.

The bottom line is that a DBCFT is not the answer to America’s wretched business tax system. There are simply too many risks associated with this proposal. I’ll elaborate tomorrow in Part II and also explain some good ways of pursuing tax reform without a DBCFT.

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Led by Speaker Paul Ryan, House Republicans have put forth an anti-poverty agenda.

It’s definitely worth reading just for the indictment of the current welfare state. There are some excellent charts, including versions of ones that I’ve already shared on the $1 trillion-plus fiscal burden of current welfare programs, as well as the “bloated, jumbled, and overlapping bureaucracy” that administers all that money.

But there are some charts that deserve to be reproduced, either because they contain new insights or because they make very important economic points.

Regarding the former, here’s a chart that indirectly shows that the most effective anti-poverty program is work. Specifically a full-time job.

So the real challenge is why there are some households with persistent multi-generational poverty.

And, as Thomas Sowell already has told us, that’s a behavioral problem.

But it’s somewhat understandable behavior because government in many cases makes dependency more attractive than self-sufficiency.

Here’s a chart showing the implicit marginal tax rates that apply if a poor household tries to climb out of poverty. The bottom line is that handouts are so generous that it’s very difficult for a poor person to be better off by working instead of mooching.

No wonder dependency is a growing problem!

Some folks say the solution to this problem is to reduce the “phase-out” of benefits, but that’s a recipe for making the welfare state vastly more expensive and giving handouts to people who are not poor. That’s the approach in some European nations and it hasn’t worked.

Here’s another chart that basically makes the same point about the upside-down incentive structure created by redistribution programs. It shows that a poor household can enjoy a much higher standard of living with low earnings than with high earnings.

The bottom line is that the current welfare state is a disaster for both poor people and taxpayers.

And this video is an excellent introduction to that topic.

But let’s focus on the GOP anti-poverty plan. They put together a powerful indictment of what we have now, but what are they proposing as a solution?

Here’s where we get good news and bad news. The good news is that there is a focus on work, as explained in a column for Forbes by Scott Winship of the Manhattan Institute.

…the report declares that “Our welfare system should encourage work-capable welfare recipients to work or prepare for work in exchange for benefits, and states should be held accountable for helping welfare recipients find jobs and stay employed.” The blueprint points toward greater use of work requirements and time limits for food stamp recipients and beneficiaries of federal housing benefits who are able to work. …This emphasis on work generalizes the experience from the landmark 1996 welfare reform legislation, which increased work among single-parent families, reduced welfare receipt and (most importantly) lowered poverty.

So far so good, and Scott also notes that the key to work is reducing the appeal of being on the dole.

Most of the success of welfare reform in encouraging work can be attributed to the ways that it has made receipt of benefits less attractive relative to work. People largely left welfare or chose not to enroll independently of state work promotion efforts.

But here’s the problem. There’s no big attempt to reduce benefits in the GOP proposal.

Indeed, it doesn’t even turn programs over to the states, which presumably would lead to better policy since sub-national governments wouldn’t want to be overly generous lest they attract welfare migration.

But the dog that didn’t bark in the new agenda is the consolidation and block granting proposed in Speaker Ryan’s Budget Committee discussion draft from 2014. Rather, the blueprint appears to envision increased use of state waivers in the various programs… It is worth recalling that in the 2014 discussion draft, the “opportunity grants” that would have combined a dozen federal programs and funded them at a fixed level were proposed as a pilot program in a few states.

Though at least the plan apparently doesn’t increase the fiscal burden of the welfare state by further expanding the EITC, which already is the federal government’s most costly redistribution program.

The antipoverty blueprint mentions the Earned Income Tax Credit (EITC)…only in passing. On the one hand, the report points out that an expanded EITC would be one way to reduce some of the high marginal tax rates that recipients of federal aid face when they contemplate working. On the other, the program’s high rate of improper payments is also emphasized, rightfully, as a problem that must be addressed.

Scott also points out that the Republican plan also foresees a much more aggressive attempt to measure what works and doesn’t work. Which is good, though hardly necessary since we already know that a one-size-fits-all approach from Washington is a recipe for ever-higher costs and ever-increasing dependency.

Indeed, there’s even a Laffer Curve-type relationship between welfare spending and poverty.

Let’s check out a couple of other reactions.

From the left, Jordan Weissman of Slate is predictably unimpressed.

As part of his effort to convince Americans that the Republican Party is [not] a band of nihilistic anti-government lunatics—House Speaker Paul Ryan unveiled…an anti-poverty plan. Which is a laugh riot. …Most of the agenda is a rehash of, or at least a variation on, material Ryan has trotted out before. Inspired by the welfare reforms of the 1990s, the speaker still wants to push more safety net beneficiaries to go to work, devolve more program control down to state and local officials, and yet somehow increase accountability and carefully monitor results… There’s also some talk about increasing the Earned Income Tax Credit for low-wage workers—which is one of those nice, liberal-conservative consensus positions that never seems to go anywhere.

From the right, Kevin Williamson sympathizes with the GOP/Ryan approach, but also makes a more important point in his National Review column.

Paul Ryan has just introduced a welfare-reform proposal… We already knew what was going to be in it — work requirements and time limits for able-bodied adults — because there are only so many meaningful avenues of reform. We also know what the Left’s response is going to be: that this is cruel, callous, punitive, etc. But there are really only two choices: Get people moving toward economic self-sufficiency or sustain them forever in the soul-killing state of dependency. There isn’t a third option. Not really. This is only partly about money. We are a very, very rich society, and we can afford to provide decently for people who cannot care for themselves, including children and those who are physically or mentally disabled. But that isn’t our problem: Our problem isn’t people who are physically disabled but people who are morally disabled, people who wouldn’t take a bus 15 minutes to work at a gas station, much less walk 15 miles to do so.

My view, for what it’s worth, is that the only good welfare reform is one that shifts all programs to the states as part of a block grant. But since funding redistribution is not a function of the federal government, that block grant should then disappear over time.

Last but not least, we need to understand that economic growth is easily the most powerful and effective anti-poverty program. That’s why the poverty rate fell from 90 percent to 15 percent in America before we had a welfare state.

And it’s no coincidence that we stopped making progress once the so-called War on Poverty began.

P.S. On the topic of poverty, it’s worth remembering that the White House has tried to redefine poverty as part of a dishonest campaign to promote class warfare policies. And the leftist bureaucrats at the OECD are pushing the same disingenuous approach.

P.P.S. If you want to know which states have the highest welfare benefits, click here. And if you want to know which ones have the highest overall levels of redistribution, click here.

P.P.P.S. There’s at least one honest leftist who understands the human cost of redistribution.

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Since I criticized Paul Ryan’s Roadmap budget plan yesterday as part of my column against the value-added tax, I now feel obliged to defend the proposal in one important respect.

But first, some background.

In a recent piece for the American Enterprise Institute, James Pethokoukis applauded former Florida Governor Jeb Bush for being willing to accept a tax increase deal.

…whatever the real-time political impact of what Bush said, the fiscal analysis supporting it is sound. …Would a GOP president really not accept an entitlement reform deal somehow that kept spending at 20% but only raised revenue to 18.4% of GDP from its postwar average of 17.4%?

I actually would accept such a deal as well, at least in theory. After all, the burden of federal government spending – if left on autopilot – is expected to grow to about 40 percent of economic output by 2050.

Heck, if I knew I could restrain federal spending so it only consumed 20 percent of GDP in 2050, I’d even accept tax revenues of 20 percent of GDP.

So does this mean I’m a Jeb Bush-style squish on taxes?

Not at all. Simply stated, the deal that Pethokoukis proposes doesn’t exist. Anywhere.

So saying I’d accept such a deal is about as relevant as me saying I’m willing to play quarterback next year for the Georgia Bulldogs.

And even if such a deal did exist, I strongly suspect the other side wouldn’t fulfill its side of the bargain. That’s certainly been the track record of previous tax-hiking budget deals. The tax hike gets imposed, but promised spending “cuts” quickly evaporate.

So Pethokoukis (and Jeb Bush) are simply being impractical when they put tax hikes on the table.

You’re probably wondering at this point how this connects to Congressman Paul Ryan’s Roadmap proposal.

Time to reward your patience. Pethokoukis tries to defend Jeb Bush by asserting that Ryan’s Roadmap plan assumes higher levels of taxes and spending.

Look at Paul Ryan’s much-celebrated — at least in conservative circles — Roadmap for America. According to its budget plan, government spending in 2039 would be 23.7% of GDP with revenue of 19.0%. Now according to CBO’s alternate budget forecast, 2039 spending is currently on path to be 25.9%. So the Ryan plan would increase historical tax revenue by just less than two percentage points while reducing projected spending by just more than two percentage points. That is nowhere close to 10-to-1. It’s not even 2-to-1.

So does this mean Jeb Bush is more philosophically sound than Paul Ryan?

Hardly. Pethokoukis is mixing apples and oranges. Or, to be more accurate, he’s mixing apples and rocks.

The Ryan Roadmap, like all budget proposals on Capitol Hill, is measured against a “baseline” estimate of what happens if government is left on autopilot.

And that baseline assumes huge increases in the burden of government spending (because of entitlements and demographic changes) and a big increase in the overall tax burden (since even modest growth over time pushes households into higher tax brackets).

Compared to that baseline, Ryan’s Roadmap would significantly reduce the upward trajectory of spending, and also mitigate the increased tax burden.

Here are a pair of charts from the House Budget Committee, showing the long-run impact of the plan on taxes and spending.

So while I don’t like the fact that the plan includes a VAT, I very much applaud what Congressman Ryan is trying to achieve.

Jeb Bush’s theoretical budget deal, by contrast, would involve adding even more tax revenue on top of all the additional tax revenue that CBO projects. And Bush’s supposed spending cuts would be based on Washington’s funny budget math and measured against the CBO baseline as well, so I feel very safe in asserting that government would be much bigger under a risky tax-hike deal than it would be with Ryan’s Roadmap.

This is why the no-tax hike pledge is a valuable way of weeding out politicians who aren’t serious about dealing with the problem of big government.

P.S. It’s worth noting that the New York Times accidentally admitted that the only successful budget deal was the one that cut taxes.

P.P.S. The first President Bush was a disaster for advocates of limited government, as was the second President Bush, and there’s a very big reason at this point to be skeptical about version 3.0.

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Libertarians are sometimes accused of being unrealistic and impractical because we occasionally talk about unconventional ideas such as competitive currencies and privatized roads.

But having a vision of a free society doesn’t mean we’re incapable of common-sense political calculations.

For example, my long-run goal is to dramatically shrink the size and scope of the federal government, both because that’s how the Founding Fathers wanted our system to operate and because our economy will grow much faster if labor and capital are allocated by economic forces rather than political calculations. But in the short run, I’m advocating for incremental progress in the form of modest spending restraint.

Why? Because that’s the best that we can hope for at the moment.

Another example of common-sense libertarianism is my approach to tax reform. One of the reasons I prefer the flat tax over the national sales tax is that I don’t trust that politicians will get rid of the income tax if they decide to adopt the Fair Tax. And if the politicians suddenly have two big sources of tax revenue, you better believe they’ll want to increase the burden of government spending.

Which is what happened (and is still happening) in Europe when value-added taxes were adopted.

And that’s a good segue to today’s topic, which deals with a common-sense analysis of the value-added tax.

Here’s the issue: I’m getting increasingly antsy because some very sound people are expressing support for the VAT.

I don’t object to their theoretical analysis. They say they don’t want the VAT in order to finance bigger government. Instead, they argue the VAT should be used only to replace the corporate income tax, which is a far more destructive way of generating revenue.

And if that was the final – and permanent – outcome of the legislative process, I would accept that deal in a heartbeat. But notice I added the requirement about a “permanent” outcome. That’s because I have two requirements for such a deal.

1. The corporate income tax could never be re-instated.

2. The VAT could never be increased.

And this shows why theoretical analysis can be dangerous without real-world considerations. Simply stated, there is no way to guarantee those two requirements without amending the Constitution, and that obviously isn’t part of the discussion.

So my fear is that some good people will help implement a VAT, based on the theory that it will replace a worse form of taxation. But in the near future, when the dust settles, the bad people will somehow control the outcome and the VAT will be used to finance bigger government.

Here are examples to show why I am concerned.

Here’s some of what Tom Donlan wrote for Barron’s.

…the U.S. imposes the highest corporate tax rate in the developed world. Make no mistake, corporations pay no tax. That is a tax on American consumers, American workers, and American shareholders.  Don’t think that the corporate income tax eases your personal tax burden. Add your share of the corporate income tax to the other taxes you pay.  Better yet, create a business tax we can all understand. A value-added tax is a tax on consumption. We would pay it according to the amount of the economic resources we choose to enjoy, and we would not pay it when we choose to save and invest in making the economy bigger and more productive. We would pay it on imported goods as much as on those domestically produced. The makers of goods for export would receive a rebate on their value-added tax.  Trading the corporate income tax for the value-added tax is one of the best fiscal deals the U.S. could make.

I agree in theory.

America’s corporate tax system is a nightmare.

But I think giving Washington a new source of tax revenue is an even bigger nightmare.

Professor Greg Mankiw at Harvard, writing for the New York Times, also thinks a VAT is better than the corporate income tax.

…here’s a proposal: Let’s repeal the corporate income tax entirely, and scale back the personal income tax as well. We can replace them with a broad-based tax on consumption. The consumption tax could take the form of a value-added tax, which in other countries has proved to be a remarkably efficient way to raise government revenue.

Once again, I can’t argue with the theory.

But in reality, I simply don’t trust that politicians won’t reinstate the corporate tax. And I don’t trust that they’ll keep the VAT rate reasonable.

At this point, some of you may be thinking I’m needlessly worried. After all, journalists and academic economists aren’t the ones who enact laws.

I think that’s a mistaken attitude. You don’t have to be on Capitol Hill to have an impact on the debate.

Besides, there are elected officials who already are pushing for a value-added tax! Congressman Paul Ryan, the Chairman of the House Budget Committee, actually has a “Roadmap” plan that would replace the corporate income tax with a VAT, which is exactly what Donlan and Mankiw are proposing.

this plan does away with the corporate income tax, which discourages investment and job creation, distorts business activity, and puts American businesses at a competitive disadvantage against foreign competitors. In its place, the proposal establishes a simple and efficient business consumption tax [BCT].

At the risk of being repetitive, Paul Ryan’s plan to replace the corporate income tax with a VAT is theoretically very good. Moreover, the Roadmap not only has good tax reform, but it also includes genuine entitlement reform.

But I’m nonetheless very uneasy about the overall plan because of very practical concerns about the actions of future politicians.

In the absence of (impossible to achieve) changes to the Constitution, how do you ensure that the corporate income tax doesn’t get re-imposed and that the VAT doesn’t become a revenue machine for big government?

By the way, this susceptibility to the VAT is not limited to Tom Dolan, Greg Mankiw, and Paul Ryan. I’ve previously expressed discomfort about the pro-VAT sympathies of Kevin Williamson, Josh Barro, and Andrew Stuttaford.

And I’ve written that Mitch Daniels, Herman Cain, and Mitt Romney were not overly attractive presidential candidates because they’ve expressed openness to the VAT.

This video sums up why a value-added tax is wrong for America.

Last but not least, let me preemptively address those who will say that corporate tax reform is so important that we have to roll the dice and take a chance with the VAT.

I fully agree that the corporate income tax is a self-inflicted wound to American prosperity, but allow me to point out that incremental reform is a far simpler – and far safer – way of dealing with the biggest warts plaguing the current system.

Lower the corporate tax rate.

Replace depreciation with expensing.

Replace worldwide taxation with territorial taxation.

So here’s the bottom line. If there’s enough support in Congress to get rid of the corporate income tax and impose a VAT, that means there’s also enough support to implement these incremental reforms.

There’s a risk, to be sure, that future politicians will undo these reforms. But the adverse consequences of that outcome are far lower than the catastrophic consequences of future politicians using a VAT to turn America into France.

P.S. You can enjoy some good VAT cartoons by clicking here, here, and here.

P.P.S. I also very much recommend what George Will wrote about the value-added tax.

P.P.P.S. I’m also quite amused that the IMF accidentally provided key evidence against the VAT.

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Congressman Paul Ryan, the Republican Chairman of the House Budget Committee, has unveiled the GOP’s latest budget plan.

Is this proposal deserving of applause or criticism? The answer is yes and yes, with a bit of emphasis on the former.

Let’s start with some depressing news. The Ryan budget has gotten weaker each year.

Three years ago, he put forth a budget that limited spending so that it grew 2.8 percent per year.

Two years ago, he put forth a budget that limited spending so that it grew 3.1 percent per year.

Last year, he put forth a budget that limited spending so that it grew 3.4 percent per year.

His latest budget continues this slide in the wrong direction. Here are the numbers from the new budget, showing that the burden of government spending will rise by an average of 3.5 percent annually over the next 10 years.

And this is during a time when inflation is projected to be about 2 percent per year!

Ryan FY2015 Budget

Since it would be foolish to ever expect perfection from the political process, let’s now look at the positive features of the Ryan budget.

1. Spending may be growing, but it would grow at a slower rate than the President’s proposed budget.

2. Spending may be growing, but it would grow at a slower rate than nominal economic output, thus satisfying Mitchell’s Golden Rule.

3. Perhaps most important, the budget contains genuine and structural reform of both Medicare and Medicaid, so it at least partially solves the long-run fiscal crisis.

4. The budget also foresees tax reform, including lower tax rates for households, a 25 percent corporate tax rate, and a move toward territorial taxation.

Now let’s close with some hard-to-judge news.

The tax reform would be “revenue neutral,” so it’s difficult to accurately assess the proposal without knowing the “revenue raisers” that would offset the “revenue losers” listed above (particularly since lawmakers would be bound by static scoring).

If lower tax rates are financed by getting rid of distortions such as the healthcare exclusion, the net effect is very positive.

But if lower tax rates are financed with increased double taxation (a major shortcoming of the Cong. Camp tax plan), then it’s unclear whether policy has improved.

One final comment. I’m disappointed that the House Budget Committee’s report approvingly cites Congressional Budget Office analysis to suggest that the Ryan budget would boost economic performance.

I think that’s a tactically and morally dubious approach. It’s tactically misguided because the Ryan budget supposedly hurts growth from 2015-2017 according to CBO’s short-term Keynesianism.

And it’s morally dubious because it’s wrong to use bad arguments to advance good policy. The supposed added growth beginning in 2018 is based on the assumption that interest rates are the significant determinant of economic growth – which is the same thinking displayed in the left-wing debt video I shared yesterday.

Paul Ryan and the House GOP can legitimately claim that the proposed budget is good for growth. But improved economic performance would be the result of a smaller burden of government spending and a potentially less destructive tax system. Those are the policies that free up labor and capital for the productive sector and boost incentives to utilize those resources efficiently.

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How Disappointing, but how predictable.

Politicians approved legislation in 2011 that was supposed to impose a modest bit of spending restraint over the next 10 years.

It wasn’t much. The enforcement mechanism, known as sequestration, merely was supposed to guarantee that spending climbed by $2.3 trillion rather than $2.4 trillion over the 10-year period.

But something is better than nothing, and the sequester that took place this year was a bitter defeat for President Obama and other advocates of bigger government.

And it also provided comic relief as the White House engaged in hysterical rhetoric in an attempt to scare people about sequestration.

But now there’s a deal to weaken the sequester and allow more government spending over the next two years. Hatched by Paul Ryan, the Republican Chairman of the House Budget Committee, and Patty Murray, the Democrat Chairwoman of the Senate Budget Committee, the most important takeaway is that the agreement will increase spending caps by $63 billion over the next two years.

This chart shows what will happen.

Murray-Ryan Budget Deal

The second most important thing to understand is that the Murray-Ryan deal contains several tax hikes. But since politicians can’t resist prevaricating, these provisions are being referred to as “user fees” and “offsetting receipts.”

The most outrageous tax hike is the added levy on airline travel. Honest people call this an increase in the ticket tax. The folks in Washington call it an “Aviation security service fee.”

There’s also a tax hike on private pension plans, as well as additional taxes (oops, I mean “user fees”) on trade.

You also won’t be surprised to learn that the so-called spending cuts in the agreement are mostly fluff and gimmicks.

The Treasury Department and Justice Department have been told not to spend “unobligated balances” in their forfeiture funds, but that was money they presumably weren’t going to spend anyway.

States, meanwhile, have been told they have to pay part of the cost of managing mineral leases on federal lands within their borders. Maybe someone can explain to me why payments from state governments to Washington count as a budget cuts.

And the agreement also assumes that Washington will do a better job of policing fraud in areas such as unemployment insurance and illegal utilization of handouts by prisoners. Those would be positive developments, to be sure, but one has to wonder why they weren’t enforcing those laws already.

By the way, the aforementioned tax hikes and make-believe spending cuts are supposed to generate “savings” over 10 years that will “offset” the higher spending that will occur in 2014 and 2015.

Needless to say, it’s goes without saying that all the new spending will take place in 2014 and 2015. But I wouldn’t hold my breath for alleged savings that are supposed to take effect in the following years.

Simply stated, the ink won’t even be dry on this agreement before the lobbyists, politicians, bureaucrats, and interest groups that control Washington start maneuvering to bust the spending caps and weaken the sequester next year. And the following year. And the year after that. And…well, you can fill in the blanks.

So what’s the bottom line?

Well, it’s clearly a big disappointment that Congressman Paul Ryan engineered this turkey of a deal rather than fighting for the sequester. Heck, this was the guy who put together very good entitlement reforms, yet now he’s helping Obama escape the sequester?

To be fair, folks on the Hill have told me that Ryan didn’t have much leverage because several Republicans indicated that they wouldn’t vote to comply with the sequester spending levels.

But if that’s the case, he should have at least forced a vote so the American people could see which GOP politicians are wobbly on the critical issue of restraining Leviathan.

To close on a somewhat optimistic note, it does appear that all the new spending is confined to 2014 and 2015. So if the spending caps are preserved for subsequent years, then it’s possible that the long-run trend line of government spending is unaffected.

That would be a good outcome. Not because the long-run trends are positive (if you look at the long-run data, we’re screwed), but because at least they wouldn’t have made a bad situation even worse.

If you want to damn the Murray-Ryan plan with faint praise, you could say it’s not nearly as bad as the read-my-lips deal of George H.W. Bush. That’s certainly true, but the sequester would be a much better outcome.

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There’s a saying in the sports world about how last-minute comebacks are examples of “snatching victory from the jaws of defeat.”

I don’t like that phrase because it reminds me of the painful way my beloved Georgia Bulldogs were defeated a couple of weeks ago by Auburn.

But I also don’t like the saying because it describes what Obama and other advocates of big government must be thinking now that Republicans apparently are about to do the opposite and “snatch defeat from the jaws of victory.”

More specifically, the GOP appears willing to give away the sequester’s real and meaningful spending restraint and replace that fiscal discipline with a package of gimmicks and new revenues.

I warned last month that something bad might happen to the sequester, but even a pessimist like me didn’t envision such a big defeat for fiscal responsibility.

You may be thinking to yourself that even the “stupid party” couldn’t be foolish enough to save Obama from his biggest defeat, but check out these excerpts from a Wall Street Journal report.

Sen. Patty Murray (D., Wash.) and Rep. Paul Ryan (R., Wis.), chief negotiators for their parties, are closing in on a deal… At issue are efforts to craft a compromise that would ease across-the-board spending cuts due to take effect in January, known as the sequester, and replace them with a mix of increased fees and cuts in mandatory spending programs.

But the supposed cuts wouldn’t include any genuine entitlement reform. And there would be back-door tax hikes.

Officials familiar with the talks say negotiators are stitching together a package of offsets to the planned sequester cuts that would include none of the major cuts in Medicare or other entitlement programs that Mr. Ryan has wanted… Instead, it would include more targeted and arcane measures, such as increased fees for airport-security and federal guarantees of private pensions.

But the package may get even worse before the ink is dry.

Democrats on Thursday stepped up their demands in advance of the closing days of negotiations between Ms. Murray and Mr. Ryan. House Democratic Leader Nancy Pelosi (D., Calif.) brought a fresh demand to the table by saying she wouldn’t support any budget deal unless in included or was accompanied by an agreement to renew expanded unemployment benefits that expire before the end of the year—which would be a major threat to any deal.

Gee, wouldn’t that be wonderful. Not only may GOPers surrender the sequester and acquiesce to some tax hikes, but they might also condemn unemployed people to further joblessness and despair.

That’s even worse than the part of the plan that would increase taxes on airline travel to further subsidize the Keystone Cops of the TSA.

But look at the bright side…at least for DC insiders. If the sequester is gutted, that will be a big victory for lobbyists. That means they’ll get larger bonuses, which means their kids will have even more presents under the Christmas tree.

As for the rest of the nation? Well, you can’t make an omelet without scrambling a few eggs.

P.S. I suppose we should consider ourselves lucky that this looming agreement isn’t as bad as some past budget deals, such as the read-my-lips fiasco of 1990.

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There’s a joke in Washington that Democrats are the evil party and Republicans are the stupid party.

Except this joke isn’t very funny since a lot of bad policy occurs when gullible GOPers get lured into “bipartisan” deals that expand government. Consider, for example, all the tax-hiking budget deals – such as the “read my lips” capitulation of the first President Bush – that enable more spending.

To be fair, sometimes Republicans are placed in a no-win situation. During the “fiscal cliff” discussions last year, Obama held the upper hand since he would get a huge automatic tax hike if nothing happened. So the final agreement, which resulted in a smaller tax increase, was actually better (or, to be more accurate, less worse) than I was expecting.

But in other cases, Republicans should prevail because they have the stronger hand. That’s the situation we’re in today with the automatic spending cuts known as sequestration.

The sequester, which resulted from the 2011 debt-limit fight, was an unambiguous defeat for Obama and a significant victory for advocates of smaller government. And it was a defeat for all the lobbyists, special interests, and crony capitalists that get rich when there’s more money in Washington.

Though I don’t want to exaggerate. The “cuts” merely reduce the projected growth of federal spending.

But after years of unconstrained spending by both Bush and Obama, any fiscal restraint is a welcome development. Indeed, the sequester helps to explain why we’ve seen two consecutive years of lower spending in Washington for the first time since the 1950s.

No wonder Obama is desperate to cancel sequestration, even to the point of making himself a laughingstock to cartoonists.

But maybe Obama will have the last laugh because some Republicans are negotiating with Democrats to undo some of the benefits of sequestration. Here are some excerpts from a Politico report.

…an agreement may not be so elusive after all. Hopes are growing that Ryan and Murray could reach a narrow deal to replace a portion of the automatic spending cuts known as sequestration, according to lawmakers and senior aides involved in the discussions. …On Tuesday, several key lawmakers and aides said there was about a 50-50 chance, if not better, that a small deal could be reached — a much better prognosis than many had anticipated. Murray said in an interview Tuesday that she’s in “very good conversations” with Ryan. “The goal here is to replace sequestration with responsible spending cuts and revenue,” Murray said.

I shudder to think what Senator Murray means by “responsible spending cuts.” Presumably gimmicks.

But we don’t need a vivid imagination to know what she means by “revenue.” The real question is why Republicans would be willing to “feed the beast” with more revenue, particularly when it means eviscerating the genuine spending restraint imposed by sequestration.

It even appears as if Republicans are willing to increase unemployment as part of a bad deal.

House and Senate appropriators are putting major pressure on Murray and Ryan… Revenue raisers being discussed include increased Transportation Security Administration fees… As an extra bargaining chip, Republicans would consider including an extension of extended unemployment benefits, which expire on Dec. 28. …Murray has made clear she won’t agree to any structural changes to Medicare or Social Security, particularly without significant revenue increases.

So let’s summarize this issue.

Current law is the sequester, which is a big victory.

The big spenders understandably want to eliminate or weaken the sequester, and would be especially happy to get more revenue coming to Washington.

Paul Ryan and the other Republican negotiators have the upper hand since the sequester continues if there’s no agreement.

So we have to ask ourselves why GOPers are even bothering to negotiate. There are two possible answers.

1. The “stupid party” joke actually is an accurate assessment of mental ability and Republicans are easy to trick because of their developmental challenges.

2. Republicans pretend to be fiscal conservatives when talking to voters but secretly want to enable more spending by sabotaging the sequester.

I’m actually being a bit unfair. What’s really happening is that there are divisions inside the GOP. A majority of the Republican caucus presumably understands that they hold a winning hand and they’re content to maintain current law and let the sequester continue.

But the Republicans on the Appropriations Committee tend to dislike the sequester since it reduces their ability to spend other people’s money in exchange for political support.

They correctly complain that America’s main fiscal problem is entitlement spending, so you can understand why they’re a bit irked that their programs are being restrained while boondoggles such as Obamacare are putting us deeper in a fiscal hole.

But that’s not an argument to waste money on so-called discretionary programs. Moreover, the appropriators are wildly wrong when they assert that appropriations spending already has been “cut to the bone.”

There are also some hawks who accurately complain that defense spending incurs a disproportionate share of the sequester, but they are wrong when they say this endangers national security. After all, defense spending still grows under sequestration and America will still account for nearly 50 percent of the world’s military spending.

So what’s the bottom line?

In an ideal world, policy makers would focus first on desperately needed entitlement reform. And I suspect many members of the Appropriations and Defense Committees would grumble a lot less about restraints on discretionary spending if real structural reforms to so-called mandatory programs were being implemented.

But we don’t live in that world. The sad reality of Washington is that genuine entitlement reform won’t happen with Obama in the White House. But that’s not an argument for surrendering on sequestration and allowing discretionary spending to climb at a faster rate.

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It can be very frustrating to work at the Cato Institute and fight for small government.

Consider what’s happened the past couple of days.

Congressman Paul Ryan introduces a budget and I dig through the numbers with a sense of disappointment because government spending will grow by an average of 3.4 percent annually, much faster than needed to keep pace with inflation.

But I don’t even want government to grow as fast as inflation. I want to reduce the size and scope of the federal government.

“Can’t they shut down even one department?”

I want to shut down useless and counterproductive parts of Leviathan, including the Department of Housing and Urban Development, the Department of Education, the Department of Energy, the Department of Transportation, the Department of Agriculture, etc, etc…

I want to restore limited and constitutional government, which we had for much of our nation’s history, with the burden of federal spending consuming only about 3 percent of economic output.

So I look at the Ryan budget in the same way I look at sequestration – as a very modest step to curtail the growth of government. Sort of a rear-guard action to stem the bleeding and stabilize the patient.

But, to be colloquial, it sure ain’t libertarian Nirvana (though, to be fair, the reforms to Medicare and Medicaid are admirable and stem in part from the work of Cato’s healthcare experts).

But my frustration doesn’t exist merely because the Ryan budget is just a small step.

I also have to deal with the surreal experience of reading critics who assert that the Ryan budget is a cut-to-the-bone, harsh, draconian, dog-eat-dog, laissez-faire fiscal roadmap.

If only!

To get an idea of why this rhetoric is so over-the-top hysterical, here’s a chart showing how fast government spending is supposed to grow under the Ryan budget, compared to how fast it grew during the Clinton years and how fast it has been growing during the Bush-Obama years.

Ryan Clinton vs Bush Obama

I vaguely remember taking the SAT test in high school and dealing with questions entitled, “One of these things is not like the others.”

Well, I would have received a perfect score if asked to identify the outlier on this chart.

Bush and Obama have been irresponsible big spenders, while Clinton was comparatively frugal.

And all Paul Ryan is proposing is that we emulate the policy of the Clinton years.

Now ask yourself whether the economy was more robust during the Clinton years or the Bush-Obama years and think about what that implies for what we should do today about the federal budget.

At the very least, we should be copying what those “radical” Canadians and other have done, which is to impose some genuine restraint of government spending.

The Swiss debt brake, which is really a spending cap, might be a good place to start.

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Sigh. Even when they’re sort of doing the right thing, Republicans are incapable of using the right argument.

Paul Ryan, Chairman of the House Budget Committee, has unveiled his proposed budget and he and other Republicans are bragging that the plan will balance the budget in 10 years.

That’s all fine and well, but good fiscal policy is achieved by reducing the burden of government spending, and that means that restraining the budget so that federal outlays grow slower than the private sector.

It’s good to balance the budget, of course, but that should be a secondary goal.

Now for the good news. The Ryan Budget does satisfy the Golden Rule of fiscal policy. As you can see in the chart, federal spending grows by an average of 3.4 percent annual, and that modest bit of fiscal discipline is enough to reduce the burden of government spending to 19.1 percent of economic output by 2023.

Ryan FY2014 Budget

It’s also good news that the Ryan Budget calls for structural reform of entitlement programs, including Medicaid block grants and Medicare premium support. The budget also assumes the repeal of the costly Obamacare program.

And there’s also some good tax policy. Not bold tax reform like a flat tax, but top tax rates would be reduced to 25 percent and many forms of double taxation like the death tax and capital gains tax presumably would be reduced or eliminated.

Let’s be clear, though, that this is not a libertarian budget. Federal spending will still be far too high. Indeed, the budget will consume a larger share of the economy than it did when Bill Clinton left office.

And while Republicans do a good job of restraining spending in the first couple of years of the new Ryan Budget, outlays rise far too rapidly beginning around 2016.

Moreover, there’s no Social Security reform.

Equally worrisome, the budget assumes that the federal tax burden should remain about 19 percent of GDP, higher than the long-run average of 18 percent of GDP and – for all intents and purposes – permanently enshrining Obama’s fiscal cliff victory.

And it’s depressing to see that the Ryan budget has gotten weaker each year.

At this rate, it won’t be that long before the GOP budget and Obama budget converge.

Okay, that’s an exaggeration. But the moral of the story is that the Ryan Budget is a step in the right direction, but much more will be needed to restore limited, constitutional government.

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When I give speeches about entitlement reform, I often make the point that there’s nothing radical about Paul Ryan’s plan to reform Medicare.

Spending will go up, for instance, not down. And the reforms only affect people under age 55. This is evolutionary change, not revolutionary change.

But my main example is that future seniors, for all intents and purposes, will have a health plan similar to what’s now available for Members of Congress. Not only the politicians, but also their staff and the entire federal bureaucracy.

I’m not the only one to think this is a powerful point. Here are a couple of passages from Deroy Murdock’s National Review column on the topic.

The Medicare-reform proposal of presumptive GOP running-mate Paul Ryan is precisely as extreme as the health plan available today to every member of Congress. Ryan envisions average seniors’ being able to enjoy Capitol Hill–style medical options. This itself, however, would be a choice. Seniors who oppose choice in health coverage will be 100 percent welcome to remain within traditional Medicare. …Wyden-Ryan mirrors the way federal legislators buy health insurance. As FactCheck.org’s Brooks Jackson notes, “House and Senate members are allowed to purchase private health insurance offered through the Federal Employees Health Benefits Program, which covers more than 8 million other federal employees, retirees and their families.” …As FactCheck.org, elaborates, “All plans cover hospital, surgical and physician services, and mental health services, prescription drugs and ‘catastrophic’ coverage against very large medical expenses . . . There are no exclusions for preexisting conditions.” Participants may change plans during annual “open season” periods. Also, the government pays 72 percent of the average worker’s premium, with a maximum of 75 percent. Democrats cannot explain why Medicare recipients need to become congressmen to enjoy such choices in health coverage. If Ryancare, in essence, is good enough for senior citizens like Nancy Pelosi and Harry Reid, it’s good enough for any senior who wants it after 2022.

Deroy’s column shows how supporters of entitlement reform can counter some of the left’s demagoguery.

He’s making a point about political salesmanship, but it’s also important to understand why Medicare modernization is good healthcare policy.

Simply stated, the main healthcare problem in America is the third-party payer crisis. As explained in this video, markets are dysfunctional when government programs and other forms of intervention create a system where 89 cents out of every healthcare dollar is paid for by somebody other than the consumer.

Ryan’s Medicare reform doesn’t directly address this problem, just as block-granting Medicaid and reforming the tax system don’t automatically restore a market-based approach.

But if a sufficient share of future seniors use their premium support vouchers to buy high-deductible catastrophic insurance policies (which presumably will be the smart approach), then a growing share of routine medical expenses will be purchased directly by consumers – thus slowly but surely returning market forces to healthcare.

So I fully agree with Deroy that there are smart ways to promote the Ryan Medicare reforms. But I also want people to understand what it is that we want to accomplish.

I elaborate in my video on Congressman Ryan’s proposed Medicare reform.

Last but not least, check out this chart and you’ll begin to understand the potential benefits of fixing the third-party payer problem.

P.S. The current version of the Ryan plan, now known as Ryan-Wyden, is not as good as the original version because it keeps the current Medicare system as an option.

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Even though I’ve already made clear that I am less-than-overwhelmed by the thought of Mitt Romney in the White House, I worry that people will become to think I’m a GOP toady.

That’s because I’ve been spending a lot of time providing favorable analysis and commentary on the relative merits of the Ryan budget (particularly proposed reforms to Medicare and Medicaid) compared to President Obama’s statist agenda of class warfare and bigger government.

I’ve already done a couple of TV interviews on Ryanomics vs Obamanomics and the Wall Street Journal this morning published my column explaining the key features of the Ryan budget.

Here are some highlights. In one of my early paragraphs, I give Ryan credit for steering the GOP back in the right direction after the fiscal recklessness of the Bush years.

…the era of bipartisan big government may have come to an end. Largely thanks to Rep. Paul Ryan and the fiscal blueprint he prepared as chairman of the House Budget Committee earlier this year, the GOP has begun climbing back on the wagon of fiscal sobriety and has shown at least some willingness to restrain the growth of government.

I probably should have also credited the Tea Party, but I’ll try to make up for that omission in the future.

These next couple of sentences are the main point of my column.

The most important headline about the Ryan budget is that it limits the growth rate of federal spending, with outlays increasing by an average of 3.1% annually over the next 10 years. …limiting spending so it grows by 3.1% per year, as Mr. Ryan proposes, quickly leads to less red ink. This is because federal tax revenues are projected by the House Budget Committee to increase 6.6% annually over the next 10 years if the House budget is approved (and this assumes the Bush tax cuts are made permanent).

Some conservatives complain that the Ryan budget doesn’t balance the budget in 10 years. I explain how that could happen, but I then emphasize that what really matters is shrinking the burden of government spending.

To balance the budget within 10 years would require that outlays grow by about 2% each year. …There are many who would prefer that the deficit come down more quickly, but from a jobs and growth perspective, it isn’t the deficit that matters. Rather, what matters for prosperity and living standards is the degree to which labor and capital are used productively. This is why policy makers should focus on reducing the burden of government spending as a share of GDP—leaving more resources in the private economy. The simple way of making this happen is to follow what I’ve been calling the golden rule of good fiscal policy: The private sector should grow faster than the government.

Actually, I’ve been calling it Mitchell’s Golden Rule, but I couldn’t bring myself to be that narcissistic and self-aggrandizing on the nation’s most important and influential editorial page.

One final point from the column that’s worth emphasizing is that Ryan does the right kind of entitlement reform.

One of the best features of the Ryan budget is that he reforms the two big health entitlements instead of simply trying to save money. Medicaid gets block-granted to the states, building on the success of welfare reform in the 1990s. And Medicare is modernized by creating a premium-support option for people retiring in 2022 and beyond. This is much better than the traditional Beltway approach of trying to save money with price controls on health-care providers and means testing on health-care consumers. …But good entitlement policy also is a godsend for taxpayers, particularly in the long run. Without reform, the burden of federal spending will jump to 35% of GDP by 2040, compared to 18.75% of output under the Ryan budget.

The last sentence of the excerpt is critical. If the Golden Rule of fiscal policy is to have the private sector grow faster than government, then the Golden Goal is to reduce government spending as a share of GDP.

I’ve commented before how America will become Greece in the absence of reform. Well, that’s basically the Obama fiscal plan, as illustrated by this amusing cartoon.

What makes the Ryan budget so impressive is that it includes the reforms that are needed to avoid this fate.

No, it doesn’t bring the federal government back down to 3 percent of GDP, so it’s not libertarian Nirvana.

But we manage to stay out of fiscal hell, so that counts for something.

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While most people in Washington are focused on the political implications of adding Paul Ryan to the GOP ticket, my only concern is trying to limit the size and scope of government so we can enjoy more freedom and prosperity.

In this debate for PBS, I explain that the Ryan budget would boost the economy – but only if Republicans actually followed through on their rhetoric and did the right thing after obtaining power.

A few comments on the debate. I channel the wisdom of Mitchell’s Golden Rule by saying the most important goal is restraining the growth of federal spending.

I fully agree with Jared that the GOP economic plans won’t work if Republicans get squeamish about doing what’s best for America. If Romney wins, and does a repeat of the statist Bush years, the GOP will deserve to be cast out of power for decades.

At the end of our interview, I obviously disagreed with Jared’s embrace of the Keynesian fantasy that more government spending magically increases growth. If I was feeling mean, I could have pointed out that he was the co-author of the infamous report claiming that Obama’s so-called stimulus would keep unemployment below 8 percent.

I also appeared on Bloomberg TV to comment on Ryan’s economic plan.

It won’t surprise regular readers of this blog that I emphasized the importance of restraining the growth of government so that the burden of the public sector shrinks as a share of overall economic output.

In my second soundbite, I make a simple point about the Laffer Curve. As we saw in the 1980s, lower tax rates don’t automatically mean lower tax revenues.

I also point out the similarities between what Paul Ryan is proposing today with what was achieved in the 1990s during the Clinton Administration.

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The honest answer is that it probably means nothing. I don’t think there’s been an election in my lifetime that was impacted by the second person on a presidential ticket.

And a quick look at Intrade.com shows that Ryan’s selection hasn’t (at least yet) moved the needle. Obama is still in the high 50s.

Moreover, the person who becomes Vice President usually plays only a minor role in Administration policy.

With those caveats out of the way, the Ryan pick is mostly good news.

Here are the reasons why I’m happy.

Here are two reasons why I’m worried.

  • Both Romney and Ryan are somewhat sympathetic to a value-added tax. My worst-case scenario is they win the election, but then can’t get a good budget approved because of some squishy Republican senators who put self interest above national interest. Romney and Ryan then decide that this European-style national sales tax is the only way – on paper – of making the budget balance. In reality, of course, we’ll suffer the same fate as Europe since the VAT revenues will be used to finance ever-larger government.
  • Ryan has some very bad votes in his past, including support for TARP, the auto bailout, the no-bureaucrat-left-behind education legislation, and the reckless Medicare prescription drug entitlement. Everyone says to ignore those votes because Ryan knew he was voting the wrong way, but if he’s already made some deliberately bad decisions for political reasons, what’s to stop him from making more deliberately bad decisions for political reasons?

But as I said above, don’t read too much into Ryan’s selection. if Republicans win, Romney will be the one calling the shots.

Though this does give Ryan a big advantage the next time there’s an open contest for the GOP nomination – either 2016 or 2020.

P.S. I suspect putting Ryan on the ticket will shift Wisconsin into the GOP column. Based on my last prediction, that would be enough to defeat Obama. But I’ll have to contemplate whether the pick hurts Romney’s chances in another state. You’ll have to wait until September 6 for my updated election prediction.

P.P.S. For those who care about politics, some are saying that selecting Ryan was risky because it gives Obama and his allies an opportunity to demagogue the GOP ticket about entitlement reform. I disagree. Even if Romney picked Nancy Pelosi, that demagoguery was going to happen. Heck, they’ve already accused Romney of causing a woman’s death, so I hardly think they’ll be bashful about throwing around other accusations.

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I posted yesterday about Obama’s demagoguery against the Ryan budget and criticized the President for sloppy budget math, tedious class warfare, and a deeply flawed grasp of America’s founding principles.

This was followed by an opportunity yesterday evening to debate Jared Bernstein on the PBS NewsHour.

Here’s the interview, though I warn you that excerpts of Obama’s  speech take up the first 3:17 of the video, and you won’t get to the debate until about 4:20.

A few observations about the interview (other than that I need a haircut).

By the way, Jared Bernstein is a co-author of the infamous White House report that claimed unemployment would never rise above 8 percent if we squandered $800 billion on a faux stimulus package based on Keynesian economics. But I’m a nice guy, so I chose not to raise that issue.

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Actually, Bill Clinton must be something even worse than a social Darwinist. That’s because the title of this post is wrong. Obama said that Paul Ryan’s plan (which allows spending to grow by an average of 3.1 percent per year over the next decade) is a form of “social Darwinism.”

Proponent of social Darwinism?

But the proposal from the House Budget Committee Chairman only reduces the burden of federal spending to 20.25 percent of GDP by the year 2023.

Yet when Bill Clinton left office in 2001, following several years of spending restraint, the federal government was consuming 18.2 percent of economic output.

And by the President’s reasoning, this must make Clinton something worse than a Darwinist. Perhaps Marquis de Sade or Hannibal Lecter.

Here’s a blurb from the New York Times on Obama’s speech.

Mr. Obama’s attack, in a speech during a lunch with editors and reporters from The Associated Press, was part of a broader indictment of the Republican economic blueprint for the nation. The Republican budget, and the philosophy it represents, he said in remarks prepared for delivery, is “antithetical to our entire history as a land of opportunity and upward mobility for everyone who’s willing to work for it.” …“Disguised as a deficit reduction plan, it’s really an attempt to impose a radical vision on our country. It’s nothing but thinly veiled social Darwinism,” Mr. Obama said. “By gutting the very things we need to grow an economy that’s built to last — education and training, research and development — it’s a prescription for decline.”

I’m particularly amused by the President’s demagoguery that Ryan’s plan is “antithetical to our entire history” and “a radical vision.”

Is he really unaware that a small and constrained central government is part of America’s history and vision? Doesn’t he know that the federal government, for two-thirds of our nation’s history, consumed less than 5 percent of GDP?

Of course, that was back in the dark ages when people in Washington actually believed that the Constitution’s list of enumerated powers in Article 1, Section 8, actually enumerated the powers of the federal government. How quaint.

No wonder this Ramirez cartoon is so effectively amusing. It certainly seems to capture the President’s view of America’s founding principles.

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I’ve recently become a fan of Lisa Benson’s cartoons (see here, here and here), and this may be her best piece of work.

My only quibble is that there should be an elephant somewhere on the wagon since Schwarzenegger also was a big spender.

I’m also a big fan of the work of Michael Ramirez work (see here, hereherehere,here, and here), and he has a new cartoon about Paul Ryan’s plan for Medicare reform.

What makes this cartoon especially biting is that Ryan’s current plan isn’t quite as good as the one he proposed last year, but that isn’t stopping demagogues from complaining.

Which raises a good issue. If you’re going to be viciously demagogued regardless of whether you solve 5 percent of a problem or 100 percent of a problem, why not go all the way?

Maybe I’ll call this “Mitchell’s Don’t-Cross-a-Canyon-in-Two-Leaps Principle,” to complement “Mitchell’s Law” and “Mitchell’s Golden Rule.”

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The Chairman of the House Budget Committee has produced a new budget plan which contrasts very favorably with the tax-heavy, big-spending proposal submitted by the President last month.

Perhaps most important, Congressman Ryan’s plan restrains spending growth, allowing the private sector to grow faster than the burden of government, thus satisfying Mitchell’s Golden Rule so that spending falls as a share of GDP.

The most important detail in the proposal is that the federal budget, which currently consumes 24 percent of GDP, would fall to less than 20 percent of GDP beginning in 2016.

That’s the good news. There are three pieces of not-so-good news.

1. Ryan’s plan allows spending to grow by an average of 3.1 percent annually over the next 10 years, with is faster than the 2.8 percent average annual growth in last year’s budget.

2. His proposed Medicare reform, while far better than current law, also is not as good as what was proposed last year.

3. The federal budget would still consume a greater share of the economy’s output than it did when Bill Clinton left office.

I suppose it’s also worth mentioning that Ryan’s proposal isn’t as good as Rand Paul’s budget. Spending only climbs 2.2 percent yearly under the plan put together by the Kentucky Senator, and he also abolishes several useless cabinet-level departments.

But the very good shouldn’t be the enemy of the good. As noted already, Congressman Ryan’s plan meets the most important test, which is restraining spending so that the federal budget grows slower than the private economy. And, as the chart shows, he obviously imposes more fiscal restrain then President Obama.

Regular readers know that I generally show no mercy to jelly-spined Republicans, but I praised GOPers for approving last year’s Ryan budget. The same will be true if they approve this year’s version.

P.S. I am frustrated and nauseated by all the people who are fixating on whether Congressman Ryan’s plan balances the budget in 10 years, 20 years, or whenever. What matters is shrinking the burden of government. I hereby bestow the Bob Dole Award on all the people who are mistakenly focusing on the symptom of red ink rather than the underlying disease of bloated government.

P.P.S. I’m happy to report that there is no value-added tax in the revenue portion of Congressman Ryan’s budget. There is a VAT in his Roadmap plan, and I endlessly worry that this poison pill will re-emerge and ruin other good fiscal plans put forth by the Wisconsin lawmaker.

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There’s been a lot of discussion about Mitt Romney’s appeal – or lack thereof – among supporters of limited government.

To put it mildly, many libertarians and conservatives are underwhelmed by his less-than-stellar record on healthcare, his weakness on Social Security reform, his anemic list of proposed budget savings, and his reprehensible support for ethanol subsidies.

Notwithstanding this dismal track record, some advocates of free markets argue that anybody would be better than Obama.

But that’s not necessarily the case. Economic history shows that the burden of government often expands the most under Republicans, with Nixon and Bush (either one) being obvious examples.

On the other hand, even a skeptic like me has admitted that Romney’s record in Massachusetts is difficult to assess because he was governor of a very left-wing state and he had to deal with a state legislature with heavy Democratic majorities.

That being said, there’s a new development that suggests Romney may be an unacceptable alternative to Obama. In an interview with the Wall Street Journal, he basically said he is willing to consider a value-added tax for the United States. Here’s the relevant passage.

He says he doesn’t “like the idea” of layering a VAT onto the current income tax system. But he adds that, philosophically speaking, a VAT might work as a replacement for some part of the tax code, “particularly at the corporate level,” as Paul Ryan proposed several years ago. What he doesn’t do is rule a VAT out.

For those who are not familiar with a VAT, it is a version of a national sales tax, but imposed at every stage in the production process and embedded in the price of goods and services. Perhaps more important, it is despised by everyone who wants to limit the size of government. This video explains how it works and why it is a money machine for big government.

Simply stated, this is an awful tax. If it ever gets implemented in the United States, the battle will be over. America will descend to European-style stagnation, eventually leading to fiscal crisis.

Any politician that supports a VAT (or even hints at supporting a VAT) should not be allowed anywhere near the White House. That applies to Mitt Romney. And it should be the rule for Paul Ryan as well.

But what about Barack Obama, you may be asking. Hasn’t he said nice things about a VAT?

Not surprisingly, he has been sympathetic, appointing VAT sympathizers to high office and remarking that a VAT is “something that has worked for other countries.”

But there’s no way a VAT will happen if Obama gets reelected. Republicans will be overwhelmingly opposed, even if only for shallow reasons of partisanship.

But if Romney wins and decides to push a VAT, many Republicans will say yes because of loyalty (much as many GOPers went along with Bush’s statist agenda) and many Democrats will say yes in order to get a new source of revenue to expand government.

The consequences, as explained here, would be disastrous.

P.S. For a humorous – but accurate – perspective on the VAT, take a look at these clever cartoons (here, here, and here).

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It’s obviously quite disappointing that Congressman Paul Ryan has teamed up with Senator Ron Wyden, a Democratic from Oregon, to put forth a significantly watered down version of his Medicare reform plan.

Ben Domenech of the Heartland Institute and Peter Suderman of Reason have good summaries of why the new plan is a less-than-exciting development.

I’m not happy, but I’m not surprised. Having read a lot of the commentary flowing back and forth today, I have two initial observations.

1. Blame Romney and Gingrich. Republican House members are very nervous about getting demagogued during next year’s election because of their courageous vote this year for the Ryan budget. And since the two frontrunners for the GOP nomination are very squishy on the issue (and likely to become even worse once one of them gets the nomination), this leaves House GOPers in a risky position.

2. Ryan-Wyden may be “Obamacare for Seniors,” but that’s still better than the current system, which is sort of a “UK-single-payer-for-seniors” plan. In other words, Ryan-Wyden isn’t a good plan, but it’s not as bad as the current system. It would be a small step in the right direction. But it’s hard to get excited about a small step when lawmakers earlier this year voted for a big step.

But here’s the problem. America needs leadership to make the changes that are necessary to save the U.S. from a Greek-style fiscal crisis. Given the weak set of candidates running for President, I can understand why Ryan and other congressional Republicans are trimming their sails. But that doesn’t change the fact that America needs something bolder.

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Here’s a very good new video from the Chairman of the House Budget Committee, in which he explains why lower tax rates and fewer loopholes are the keys to a simple, fair, and competitive tax system.

Very well done. Given my video on the flat tax, as well as my video on the global flat tax revolution, you probably are not surprised by my reaction to Congressman Ryan’s contribution.

But I’m a glass-half-empty skeptic and pessimist, particularly when dealing with Republicans, so here are a few additional thoughts.

1.Why not take the logic of this video to its sensible conclusion and come out in favor of a flat tax? Yes, a half loaf is better than no loaf, but the special-interest groups and class-warfare crowd will fight just as hard against partial tax reform and they will against full tax reform, so why not go for the Full Monty?

2. I would feel much happier if people who talk about getting rid of loopholes (including Ryan) made clear that every single penny of revenue generated by eliminating tax preferences was used to finance lower tax rates. If tax reform ever becomes a vehicle for higher taxes, the exercise will either blow up or become a scam to rip off the American people.

3. There was no discussion of double taxation. Since every economic theory, even socialism and Marxism, acknowledges that saving and investment are vital for long-run economic growth, higher wages, and better living standards, this is an unfortunate omission. Given that a single dollar of income can be hit by several layers of tax – capital gains tax, corporate income tax, double tax on dividends, and death tax, this is not a trivial concern.

4. Congressman Ryan has been sympathetic to a value-added tax. Indeed, his “Roadmap Plan” includes a VAT. As I’ve explained many times before, a VAT would be fiscal poison for America. If tax reform ever becomes a vehicle for a VAT, the exercise will either blow up or become a scam to rip off the American people.

The concerns I just outlined are not a knock on the video, which obviously was designed to highlight a couple of key principles.

But I am saying that good tax policy involves more than what Congressman Ryan outlined. Lower rates and fewer loopholes are necessary conditions for better tax policy, but there are other pieces of the puzzle that can’t be ignored.

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Republicans have finally woken up and are beginning to explain why Medicare needs to be reformed.

Here’s a very good new video from Congressman Paul Ryan, Chairman of the House Budget Committee. He hits on key points regarding market competition versus government monopolies, and warns about the danger of giving control of the health care system to Obama’s panel of bureaucrats.

Senator Marco Rubio, meanwhile, has a video emphasizing the need for reform. He also trashes the demagoguery of the left.

Not surprisingly, I can’t resist adding my video to the mix. I’m not as polished as the two lawmakers, but I hope the information in my video is a very important complement to the issues discussed by Rep. Ryan and Sen. Rubio.

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This new video from the Center for Freedom and Prosperity discusses a proposal to solve Medicare’s bankrupt finances by replacing an unsustainable entitlement with a “premium-support” system for private insurance, also known as vouchers.

This topic is very hot right now, in part because Medicare reform is included in the bold budget approved by House Republicans, but also because Newt Gingrich inexplicably has decided to echo White House talking points by attacking Congressman Ryan’s voucher plan.

Narrated by yours truly, the video has two sections. The first part reviews Congressman Ryan’s proposal and notes that it is based on a plan put together with Alice Rivlin, who served as Director of the Office of Management and Budget under Bill Clinton. Among serious budget people (as opposed to the hacks on Capitol Hill), this is an important sign of bipartisan support.

The video also notes that the “voucher” proposal is actually very similar to the plan that is used by Members of Congress and their staff. This is a selling point that proponents should emphasize since most Americans realize that lawmakers would never subject themselves to something that didn’t work.

The second part discusses the economics of the health care sector, and explains the critical need to address the third-party payer crisis. More specifically, 88 percent of every health care dollar in America is paid for by someone other than the consumer. People do pay huge amounts for health care, to be sure, but not at the point of delivery. Instead, they pay high tax burdens and have huge shares of their compensation diverted to pay for insurance policies.

I’ve explained before that this inefficient system causes spiraling costs and bureaucratic inefficiency because it erodes any incentive to be a smart shopper when buying health care services (much as it’s difficult to maintain a good diet by pre-paying for a year of dining at all-you-can-eat restaurants).  In other words, government intervention has largely eroded market forces in health care. And this was true even before Obamacare was enacted.

Medicare reform, by itself, won’t solve the third-party payer problem, but it could be part of the solution – especially if seniors used their vouchers to purchase real insurance (i.e., for large, unexpected expenses) rather than the inefficient pre-paid health plans that are so prevalent today.

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Washington is filled with groups that piously express their devotion to balanced budgets and fiscal responsibility, so it is rather revealing that some of these groups have less-than-friendly responses to Congressman Ryan’s budget plan.

The Committee for a Responsible Federal Budget, for instance, portrays itself as a bunch of deficit hawks. So you would think they would be doing cartwheels to celebrate a lawmaker who makes a real proposal that would control red ink. Yet Maya MacGuineas, president of the CRFB, basically rejects Ryan’s plan because it fails to increase the tax burden.

…while the proposal deserves praise for being bold, the national discussion has moved beyond just finding a plan with sufficient savings to finding one that can generate enough support to move forward. All parts of the budget, including defense and revenues, will have to be part of a budget deal… Now that both the White House and House Republicans have made their opening bids, this continues to reinforce our belief that a comprehensive plan to fix the budget like the one the Fiscal Commission recommended has the best hope of moving forward.

I’m mystified by Maya’s reference to an “opening bid” by the White House. What on earth is she talking about? Obama punted in his budget and didn’t even endorse the findings of his own Fiscal Commission. But I digress.

Another example of a group called Third Way, which purports to favor “moderate policy and political ideas” and “private-sector economic growth.” Sounds like they should be cheerleaders for Congressman Ryan’s plan, but they are even more overtly hostile to his proposal to reduce the burden of government.

House Budget Chairman Paul Ryan’s budget is a deep disappointment. There is a serious framework on the table for a bipartisan deal on our long term budget crisis. It’s the Bowles-Simpson blueprint, now being turned into legislation by the Gang of Six. It puts everything on the table – a specific plan to save Social Security, significant defense cuts, large reductions in tax expenditures and reforms to make Medicare and Medicaid more efficient, not eliminate them.

That sounds hard left, not third way. But it’s not unusual. Many of the self-proclaimed deficit hawks on Capitol Hill also have been either silent or critical of Ryan’s plan.

Which leaves me to conclude that what they really want are tax increases, and they simply use rhetoric about debt and deficits to push their real agenda.

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Forget all this talk about giant “spending cuts” of $6.2 trillion in Congressman Ryan’s budget plan. That’s music to my ears, but it’s also based on Washington’s bizarre budget math – i.e., the screwy system where politicians can increase spending but say they’re cutting spending because the budget could have grown even faster.

What really matters is how much money government is spending this year compared to how much money will be spent in subsequent years. Using this common-sense benchmark, let’s look at two competing proposals.

According to the new numbers released today, Congressman Ryan’s budget plan will result in government growing, on average, by almost 2.8 percent annually over the next 10 years.

President Obama’s budget plan, by contrast, would increase the burden of government spending by an average of nearly 4.7 percent each year.

This chart compares the two budget plans. Because Chairman Ryan does not let spending grow as rapidly, cumulative spending over that period will be $6.2 billion less than it would be based on the President’s plan. That’s an impressive amount of money that taxpayers will save if Ryan is successful, but it’s not a spending cut.

Not surprisingly, the big spenders in Washington are claiming that the “spending cuts” in Representative Ryan’s budget are “harsh” and “extreme.” But Ryan’s proposal would allow the budget to grow faster than inflation, which is projected to average less than 2.1 percent annually over the 10-year period.

Good fiscal policy is very simple. Restrain the size and scope of government so that outlays grow slower than the private sector. If that happens, the burden of federal spending will shrink as a share of economic output

That’s exactly what happens with Ryan’s plan. By 2018, the federal budget will drop to less than 20 percent of GDP. That still doesn’t bring us back to where we were at the end of the fiscally responsible Clinton years, when federal spending consumed only 18.2 percent of GDP. But after a 10-year spending binge under Bush and Obama, Congressman Ryan’s plan would move America back toward fiscal responsibility.

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The left already is wailing about the Medicare and Medicaid reforms in Congressman Paul Ryan’s budget. They don’t have any solutions of their own for these bankrupt programs, but they hope to scare voters in the short run and don’t seem to care about the nation in the long run.

But, as Margaret Thatcher famously warned, the problem with socialism is that sooner or later you run out of other people’s money. With that in mind, it’s quite appropriate to cite a story about another needless death resulting from the inefficient U.K. government-run health care system.

But what makes this story so remarkable is that the person who died was part of the upper-level bureaucracy. When folks relatively high in the pecking order start suffering from needless death and wind up having their surgeries delayed four times, you know it’s just a matter of time before the system collapses.

A former NHS director died after waiting for nine months for an operation – at her own hospital. Margaret Hutchon, a former mayor, had been waiting since last June for a follow-up stomach operation at Broomfield Hospital in Chelmsford, Essex. But her appointments to go under the knife were cancelled four times and she barely regained consciousness after finally having surgery. Her devastated husband, Jim, is now demanding answers from Mid Essex Hospital Services NHS Trust – the organisation where his wife had served as a non-executive member of the board of directors.

Keep in mind that this is America’s future if we don’t reform entitlements. That’s what the leftist critics of Ryan’s plan aren’t telling you.

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The Chairman of the House Budget Committee, Congressman Paul Ryan of Wisconsin, will be unveiling his FY2012 budget tomorrow. Not all the details are public information, but what we do know is very encouraging.

Ryan’s plan is a broad reform package, including limits on so-called discretionary spending, limits on excessive pay for federal bureaucrats, and steep reductions in corporate welfare.

But the two most exciting parts are entitlement reform and tax reform. Ryan’s proposals would simultaneously address the long-run threat of bloated government and put in place tax policies that will boost growth and improve competitiveness.

1. The long-run fiscal threat to America is entitlement spending. Ryan’s plan will address this crisis by block-granting Medicaid to the states (repeating the success of the welfare reform legislation of the 1990s) and transforming Medicare for future retirees into a “premium-support” plan (similar to what was proposed as part of the bipartisan Domenici-Rivlin Debt Reduction Task Force).

2. America’s tax system is a complicated disgrace that manages to both undermine growth and promote corruption. The answer is a simple and fair flat tax, and Ryan’s plan will take an important step in that direction with lower tax rates, less double taxation of saving and investment, and fewer distorting loopholes.

One potential criticism is that the plan reportedly will not balance the budget within 10 years, at least based on the antiquated and inaccurate scoring systems used by the Congressional Budget Office and Joint Committee on Taxation. While I would prefer more spending reductions, I’m not overly fixated on getting to balance with 10 years.

What matters most is “bending the cost curve” of government. Obama’s budget leaves government on auto-pilot and leaves America on a path to becoming a decrepit European-style welfare state. Ryan’s budget, by contrast, would shrink the burden of federal spending relative to the productive sector of the economy.

Along with other Cato colleagues, I’ll have more analysis of the plan when it is officially released.

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While admitting that spending restraint is the ideal approach, Tyler Cowen of Marginal Revolution asks whether a value-added tax (VAT) might be the most desirable of all realistic options for dealing with an unsustainable budget situation.

Read his post for yourself, but I think a fair summary is that he is basically saying that a) there will be a crisis if we don’t do something about future deficits, b) a crisis will result in very bad policy, and c) if we support a VAT now, we will at least be able to extract concessions from the other side.

I have no idea whether there will be a future crisis, but I think the rest of Tyler’s argument is wrong.

But before explaining my position, let’s start by stating what I assume to be our mutual objective, which is to control the size of government. We all agree that there is a problem because government is too big now, and it is projected to get even bigger because of the built-in growth of entitlement programs. One symptom of growing government is deficits, which are very large today and will be even bigger in the near future as more and more baby boomers retire and push up costs for Social Security, Medicare, and Medicaid.

Our side (broadly speaking) wants to solve the budgetary situation by restraining the growth of government. One proposed solution is Congressman Paul Ryan’s Roadmap plan, which would reform entitlements and curtail other programs so that the long-term burden of federal spending is reduced to less than 20 percent of GDP. Since long-term federal tax revenues under current law – even if the 2001 and 2003 tax cuts are made permanent – are expected to be about 19 percent of GDP, this solves the budet problem  (the tax reform component of the Roadmap includes a VAT, which is a poison pill in an otherwise excellent plan, but let’s set that aside for another day).

The left, by contrast, generally wants to let federal spending consume ever-larger shares of economic output, and they believe that increasing the tax burden is the right way of keeping the deficit from getting too large. No statist has put forth a detailed plan to match Rep. Ryan, but several high-ranking Democrats have made no secret about their desire for a VAT (see here, here, and here). And everyone agrees that a VAT is capable of extracting a lot of money from the productive sector of the economy.

These two visions are fundamentally incompatible, which helps to explain why there is a standoff. The bad guys do not want to control the size of government and the good guys do not want to raise taxes. But now we have to add one more piece to the puzzle. While gridlock normally is a good result, inaction to some degree favors the other side because entitlement programs automatically expand. The helps to explain why Tyler (with reluctance) thinks that it may be best to acquiesce to a VAT now rather than to wait for a fiscal crisis.

Now let’s explain why Tyler is wrong. First, it is far from clear that surrendering to a VAT now will result in better (less worse) policy than what will happen during a crisis. It certainly is true that some past crises have led to terrible policy, such as the failed policies of Hoover and Roosevelt in the 1930s or the more recent Bush-Paulson-Obama-Geithner TARP debacle. But at other points in time, a crisis atmosphere has paved the way for better policy, with Reagan’s presidency being the most obvious example.

The wait-for-a-crisis strategy clearly is a bit of a gamble, but even if we lose, we get a VAT in the future rather than a VAT today. So what’s the downside? Tyler and others might say that the future legislation in the midst of a crisis could be a vehicle for other bad provisions, but he offers no evidence for this proposition. And it may be the case that the other side would be forced to add good provisions instead. Moreover, the lack of a VAT in the period between today and the future crisis might help lead to some much-needed spending restraint.

What about Tyler’s argument that the good guys could extract some concessions from the other side by putting a VAT on the table. This is horribly naive. Even though George Mason University is less than 20 miles from Washington, and even though Tyler is a renassaince man with many talents, he does not understand how Washington really works.

Imagine there is a budget summit where politicians from both sides get together to work on this supposed deal. Here are the inevitable ground rules – and the consequences they will produce:

1. The deal will be 50 percent spending cuts and 50 percent tax increases, but the supposed spending “cuts” will be nothing more than reductions in already-legislated increases. The tax increases, by contrast, will be on top of all the additional revenue that is already exepected under current law (not a trivial matter since receipts will be $1.5 trillion higher in 2015 than they are today according to OMB). For proponents of limited government, using the “current services baseline” as a benchmark in budget negotiations is like playing a five-minute basketball game after spotting the other team a 20-point lead.

2. All spending and revenue decisions will be examined through the prism of CBO income distribution tables, and the left will successfully insist that nothing is done to make the tax code less progressive. But since a VAT is a proportional tax, the only way of preserving overall progressivity is to raise tax rates on those wicked and evil rich people and/or to massively increase “refundable” tax credits (what normal people call income redistribution). Any proposal to lower income tax rates or eliminate the corporate income tax, as Tyler envisions, would be laughed out of the room (though Democrats will offer a fig leaf or two in order to seduce a sufficient number of gullible Republicans into supporting a terrible agreement, and that might include a cosmetic change to the corporate tax regime).

3. Many of the supposed spending cuts, for all intents and purposes, will be back-door tax increases on saving and investment. More specifically, a big chunk of the supposed spending cut portion of a budget deal will be from means-testing entitlement programs. This sounds good. After all, who wants to send a Social Security check to Bill Gates when he retires? But consider how such a system actually will work. The government will say that people with income (and/or assets) above a certain level are ineligible for some or all of the benefits available to less-fortunate retirees. From an economic persepective, this is very much akin to a higher tax rate on people who save and invest during their working years. And since means testing would only generate substantial budgetary savings if it applied to millions of regular people in addition to Bill Gates, we would wind up with a system that created big penalties on middle-class families that were dumb enough to save and invest.

I’ve already pontificated enough for one blog post, so let me summarize by stating that Tyler’s approach, while not unreasonable, is about how to lose gracefully. Even if his strategy works perfectly, the result is bigger government. I’d much rather fight. If you want some inspiration for the battle, watch this video. If you haven’t had enough of me already, here’s my video explaining why the VAT is a horrible idea.

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