Daniel J. Mitchell
The title of this piece has an asterisk because, unfortunately, we’re not talking about progress on the Laffer Curve in the United States.
Instead, we’re discussing today how lawmakers in other nations are beginning to recognize that it’s absurdly inaccurate to predict the revenue impact of changes in tax rates without also trying to measure what happens to taxable income (if you want a short tutorial on the Laffer Curve, click here).
But I’m a firm believer that policies in other nations (for better or worse) are a very persuasive form of real-world evidence. Simply stated, if you’re trying to convince a politician that a certain policy is worth pursuing, you’ll have a much greater chance of success if you can point to tangible examples of how it has been successful.
That’s why I cite Hong Kong and Singapore as examples of why free markets and small government are the best recipe for prosperity. It’s also why I use nations such as New Zealand, Canada, and Estonia when arguing for a lower burden of government spending.
And it’s why I’m quite encouraged that even the squishy Tory-Liberal coalition government in the United Kingdom has begun to acknowledge that the Laffer Curve should be part of the analysis when making major changes in taxation.
I don’t know whether that’s because they learned a lesson from the disastrous failure of Gordon Brown’s class-warfare tax hike, or whether they feel they should do something good to compensate for bad tax policies they’re pursuing in other areas, but I’m not going to quibble when politicians finally begin to move in the right direction.
The Wall Street Journal opines that this is a very worthwhile development.
Chancellor of the Exchequer George Osborne has cut Britain’s corporate tax rate to 22% from 28% since taking office in 2010, with a further cut to 20% due in 2015. On paper, these tax cuts were predicted to “cost” Her Majesty’s Treasury some £7.8 billion a year when fully phased in. But Mr. Osborne asked his department to figure out how much additional revenue would be generated by the higher investment, wages and productivity made possible by leaving that money in private hands.
By the way, I can’t resist a bit of nit-picking at this point. The increases in investment, wages, and productivity all occur because the marginal corporate tax rate is reduced, not because more money is in private hands.
I’m all in favor of leaving more money in private hands, but you get more growth when you change relative prices to make productive behavior more rewarding. And this happens when you reduce the tax code’s penalty on work compared to leisure and when you lower the tax on saving and investment compared to consumption.
The Wall Street Journal obviously understands this and was simply trying to avoid wordiness, so this is a friendly amendment rather than a criticism.
Anyhow, back to the editorial. The WSJ notes that the lower corporate tax rate in the United Kingdom is expected to lose far less revenue than was predicted by static estimates.
The Treasury’s answer in a report this week is that extra growth and changed business behavior will likely recoup 45%-60% of that revenue. The report says that even that amount is almost certainly understated, since Treasury didn’t attempt to model the effects of the lower rate on increased foreign investment or other “spillover benefits.”
And maybe this more sensible approach eventually will spread to the United States.
…the results are especially notable because the U.K. Treasury gnomes are typically as bound by static-revenue accounting as are the American tax scorers at Congress’s Joint Tax Committee. While the British rate cut is sizable, the U.S. has even more room to climb down the Laffer Curve because the top corporate rate is 35%, plus what the states add—9.x% in benighted Illinois, for example. This means the revenue feedback effects from a rate cut would be even more substantial.
The WSJ says America’s corporate tax rate should be lowered, and there’s no question that should be a priority since the United States now has the least competitive corporate tax system in the developed world (and we rank a lowly 94 out of the world’s top 100 nations).
But the logic of the Laffer Curve also explains why we should lower personal tax rates. But it’s not just curmudgeonly libertarians who are making this argument.
Writing in London’s City AM, Allister Heath points out that even John Maynard Keynes very clearly recognized a Laffer Curve constraint on excessive taxation.
Even Keynes himself accepted this. Like many other economists throughout the ages, he understood and agreed with the principles that underpinned what eventually came to be known as the Laffer curve: that above a certain rate, hiking taxes further can actually lead to a fall in income, and cutting tax rates can actually lead to increased revenues.Writing in 1933, Keynes said that under certain circumstances “taxation may be so high as to defeat its object… given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget. For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more—and who, when at last his account is balanced with nought on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss.”
For what it’s worth, Keynes also thought that it would be a mistake to let government get too large, having written that “25 percent [of GDP] as the maximum tolerable proportion of taxation.”
But let’s stay on message and re-focus our attention on the Laffer Curve. Amazingly, it appears that even a few of our French friends are coming around on this issue.
Here are some portion of a report from the Paris-based Institute for Research in Economic and Fiscal Issues.
In an interview given to the newspaper Les Echos on November 18th, French Prime Minister Jean -Marc Ayrault finally understood that “the French tax system has become very complex, almost unreadable, and the French often do not understand its logic or are not convinced that what they are paying is fair and that this system is efficient.” …The Government was seriously disappointed when knowing that a shortfall of over 10 billion euros is expected in late 2013 according to calculations by the National Assembly. …In fact, we have probably reached a threshold where taxation no longer brings in enough money to the Government because taxes weigh too much on production and growth.
This is a point that has also been acknowledged by France’s state auditor. And even a member of the traditionally statist European Commission felt compelled to warn that French taxes had reached the point whether they “destroy growth and handicap the creation of jobs”
But don’t hold your breath waiting for good reforms in France. I fear the current French government is too ideologically fixated on punishing the rich to make a shift toward more sensible tax policy.
P.S. The strongest single piece of evidence for the Laffer Curve is what happened to tax collections from the rich in the 1980s. The top tax rate dropped from 70 percent to 28 percent, leading many statists to complain that the wealthy wouldn’t pay enough and that the government would be starved of revenue. To put it mildly, they were wildly wrong.
I cite that example, as well as other pieces of evidence, in this video.The Laffer Curve, Part II: Reviewing the Evidence
P.P.S. And it you want to understand specifically why class-warfare tax policy is so likely to fail, this post explains why it’s a fool’s game to target upper-income taxpayers since they have considerable control over the timing, level, and composition of their income.
P.P.P.S. Above all else, never forget that the goal should be to maximize growth rather than revenues. That’s because we want small government. But even for those that don’t want small government, you don’t want to be near the revenue-maximizing point of the Laffer Curve since that implies significant economic damage per every dollar collected.
Andrew J. Coulson
A new Brookings study looks at the influence of different education advocacy groups on the passage of Louisiana’s state-wide school voucher bill. In a clever twist, Russ Whitehurst and his co-authors added a fictitious advocacy group to the survey form as a placebo, to calibrate the rankings. After acknowledging that Governor Bobby Jindal was far more responsible for the enactment of the voucher program than any advocacy group, the paper concludes that the Louisiana Association of Business and Industry was the next most influential player. That’s not surprising given that its political contributions topped three quarters of a million dollars in the last state election cycle. Second and third places went, respectively, to the Black Alliance for Educational Options and the Louisiana Federation for Children.
This is useful information but it should be digested with two important caveats in mind. First, enacting a particular bill is an imperfect measure of long-term impact on policy, as the case of Utah illustrates. In February 2007, Utah enacted a universal voucher program. Less than a month later, teachers’ union opponents began a petition to put the voucher bill to a referendum vote and campaigned aggressively against it. By November, before a single child had ever received a voucher, voters struck the program down by a 3 to 2 margin. The lesson? If reform advocates don’t win over the public, their influence with state legislators can’t protect a program from ultimately being hobbled or overturned.
The second point is that, to the extent advocacy organizations do exert a lasting impact, they have a responsibility to ensure that their recommendations can deliver on their promises. “School choice” is a catchall phrase, encompassing reforms as disparate as public school open enrollment, charter schools, vouchers, and education tax credits. Even within each of these policy categories, details between programs vary substantially. But expertise in advocacy does not automatically confer expertise in policy (or vice versa). Will a particular policy perpetuate social conflicts over what is taught, or help to end them? Will it ultimately suffocate educators with regulatory red tape and limit parental choices, or preserve freedom in the long term? Will it allow brilliant educators to reach masses of students while limiting the growth of inferior schools? There are already at least tentative answers to these questions, though much remains to be learned. The more deeply advocacy organizations explore these questions before pushing through legislation, the more successful they will ultimately be.
The Christmas tree this year at Union Station overlooking the U.S. Capitol, a gift from the government of Norway, is decorated with 700 ornaments depicting Edvard Munch’s “The Scream” to commemorate the famous painter’s 150th birthday. How Washington-appropriate can you get?
The Washington Post has great reporters, but there may be room for improvement in sharing research and reviewing past stories by colleagues.
An article on Sunday discussed how candy factories “had laid off thousands of workers” in a Chicago neighborhood where a new Wal-Mart has located:
“When Chicago was at its peak as America’s candy-making king, the sweet smells of Starbrite mints, Milk Maid caramels and Maple Nut Goodies wafted down North Cicero Avenue. The Brach’s plant, first opened in 1924, grew into one of the world’s largest candy factories, home to thousands of union workers pumping out 200 varieties of chocolates and hard candies. But in the 1990s, as American manufacturing moved overseas, the stream of departing blue-collar jobs here turned into a tidal wave. In 1993, Leaf Candy closed its factory, laying off 500 workers who used to make Whoppers malted milk balls. After dropping 2,800 jobs in 15 years, Brach’s moved its final 1,100 jobs to Mexico in 2003.”
The story features a sad photo of the abandoned Brach’s factory, but it does not report why all the candy businesses had departed.
Meanwhile, a different article in Sunday’s Post described how special-interest lobbying trumps ideology when it comes to the federal sugar program. Left-wing Democrats—who often claim to champion the poor—side with rich sugar barons, such as the Fanjuls of Florida. Conservative Republicans—who often claim to support free markets—support Soviet-style government controls on sugar markets.
The controls raise the domestic price of sugar and make the United States a lousy place to manufacture candy and other types of food. The Post article describes how candy manufacturers lobby against the sugar program, but that their efforts are no match for the remarkable influence of the Fanjuls and other Big Sugar crony capitalists. Who but Alfy Fanjul could have been patched through directly to the Oval Office right in the middle of a Clinton-Lewinsky “private encounter,” as the Post calls it?
In sum, one Post story missed the economic damage done by the sugar program to Chicago, while another Post story just focused on sugar politics. But a 2006 Post story puts it all together. It accurately identifies the culprit in Chicago’s job losses, and the cause of that empty Brach’s factory:
“Producers of hard candy, such as Primrose and Brach’s, which closed its Chicago plant in 2004 to move its operations to Mexico, blame their shifting production strategies on one culprit: U.S. sugar subsidies that keep prices of domestic sugar much higher than prices on the world market. In addition, tight import quotas make it hard to import cheaper foreign-produced sugar.”
For more on the federal sugar program, see this backgrounder.
A group called the National Fair Housing Alliance has taken the lead in levying sensational bias charges against mortgage lenders, claiming that neglect of REO (real-estate-owned) properties following foreclosure has followed racially discriminatory patterns. It helped negotiate the extraction of $42 million from Wells Fargo, and is pursuing tens of millions in claims against Bank of America and other lenders. NFHA’s claims have routinely been given unskeptical circulation in the press, but now an investigation by Kate Berry and Jeff Horwitz in the American Banker is bringing overdue scrutiny:
The group has disclosed addresses for only a fraction of the properties it alleges the banks have neglected, but a review of those it has released indicates that NFHA regularly misidentified the institution legally responsible for maintaining specific homes. In some cases, it conflated the banks responsible for maintaining properties with those that were simply serving as trustees for mortgage-bond investors. In others, it faulted banks for damage that occurred before they took possession of properties.
Not in dispute is the leverage the NFHA has gained in its dealings with banks from its close ties to supporters in the federal government. Unusual among Washington agencies, the Department of Housing and Urban Development both funds housing discrimination investigations by nonprofits, including by the NFHA, and provides the venue for them to negotiate their claims.
Grants from HUD and Fannie Mae helped get the NFHA and its leader, Shanna Smith, into the profitable business of investigations in the first place. Banks complain without success about Smith’s practice of demanding a deal while withholding the actual identities and addresses of the properties said to be suffering from bank neglect. Now the HUD-brokered Wells Fargo settlement has paid off richly with $30 million+ for the NFHA and its affiliates, the better with which to stir up more complaints. And watch the revolving door spin, amid few qualms arising from conflicts of interest: “Sara Pratt, the HUD official responsible for investigating and resolving the NFHA’s complaints, and who oversaw its settlement with Wells Fargo, is a former NFHA staffer and consultant.” [cross-posted from Overlawyered]
We’ve already noted that zero tolerance means zero logic, but this story ranks among the most asinine. The Rutherford Institute is representing the parents of a 10-year-old child who was threatened with expulsion and eventually suspended for playfully firing an imaginary “arrow” from an imaginary “bow” at another student “armed” with an imaginary “gun”:
As we understand the facts of Johnny’s case, during the week of October 14th, Johnny asked his teacher for a pencil during class. He walked to the front of the classroom to retrieve the pencil, and during his walk back to his seat, a classmate and friend of Johnny’s held his folder like an imaginary gun and “shot” at Johnny. Johnny playfully used his hands to draw the bowstrings on a completely imaginary “bow” and “shot” an arrow back at the friend. The two children laughed.
Seeing this, another girl in the class reported to the teacher that the boys were shooting at each other. The teacher took both Johnny and the other boy into the hall and lectured them about disruption. This is exactly where the story should end.
Instead, however, the teacher sent an email to Johnny’s mother, Beverly Jones, alerting her to the seriousness of the violation because the children were using “firearms” in their horseplay, noting that Johnny was issued a referral to the Principal.
Principal John Horton contacted Ms. Jones soon thereafter and asserted that Johnny’s behavior was a serious offense that could result in expulsion, although Mr. Horton offered to “merely” require that Johnny serve a one-day in-office suspension.
When Ms. Jones asked Mr. Horton what policy Johnny had violated, Mr. Horton replied that Johnny had “made a threat” to another student using a “replica or representation of a firearm,” through his use of an imaginary bow and arrow…
Shouldn’t school officials just be glad that, instead of using play swords, these kids are safely “killing” each other from across the room?
(Hat tip: Michael Graham.)
I was surprised to read this assertion about the minimum wage by labor analyst Harry Holzer in the Washington Post today:
“The biggest concern among economists is that imposing pay increases on employers will reduce the hiring of low-wage workers and raise unemployment. But in four decades of research by economists, this appears to be a small or nonexistent effect.”
I was even more surprised that the online version of Holzer’s oped linked to an NBER study by Neumark and Wascher that concluded roughly the opposite. You can judge for yourself: here is the abstract from the Neumark-Wascher study linked by Holzer in support of his “small or nonexistent” claim:
“We review the burgeoning literature on the employment effects of minimum wages - in the United States and other countries - that was spurred by the new minimum wage research beginning in the early 1990s. Our review indicates that there is a wide range of existing estimates and, accordingly, a lack of consensus about the overall effects on low-wage employment of an increase in the minimum wage. However, the oft-stated assertion that recent research fails to support the traditional view that the minimum wage reduces the employment of low-wage workers is clearly incorrect. A sizable majority of the studies surveyed in this monograph give a relatively consistent (although not always statistically significant) indication of negative employment effects of minimum wages. In addition, among the papers we view as providing the most credible evidence, almost all point to negative employment effects, both for the United States as well as for many other countries. Two other important conclusions emerge from our review. First, we see very few - if any - studies that provide convincing evidence of positive employment effects of minimum wages, especially from those studies that focus on the broader groups (rather than a narrow industry) for which the competitive model predicts disemployment effects. Second, the studies that focus on the least-skilled groups provide relatively overwhelming evidence of stronger disemployment effects for these groups.”
Reducing employment is only one of the negative effects associated with the minimum wage. In this study, Mark Wilson discusses some of the other harms that may occur depending on the situation in particular markets.
Unfortunately, too many policymakers believe in the free lunch theory of government intervention. The reality is that unless a clear market failure is occurring, when the government shoves its way into markets and destroys voluntary exchanges, it invariably causes more harm than good.
As with many things, Milton Friedman said it best: “The minimum wage law is most properly described as a law saying employers must discriminate against people who have low skills.”
For more on minimum wage economics, see this Downsizing Government essay.
Sometimes there are setbacks to the efforts of the Department of Homeland Security, the American Association of Motor Vehicle Administrators, and state motor vehicle bureaucrats to quietly knit together a national ID. If this story is true, Ohio appears to be breaking with the national ID plan.
What’s remarkable about this case is Ohio’s recognition that the federal government will never act on the threat that TSA will refuse drivers’ licenses and IDs from states that decline to implement the REAL ID Act.
Ohio is among a growing number of states that are refusing to comply with federal standards intended to toughen access to driver’s licenses. … The states are betting that federal officials do not implement plans to accept only “Gold Star” licenses as proof of identity to fly on commercial flights or to enter federal buildings and courthouses. “We’re not so sure the federal government” will only honor IDs that meet its requirements, [Ohio Department of Public Safety spokesman Joe] Andrews said.
Time was when states fell in line at the suggestion of this federal government threat. Eight-and-a-half years after REAL ID became law, the states may be recognizing the inability of the feds to coerce them into implementing their national ID.
An interesting op-ed in today’s WSJ echoing my own previous op-eds (http://www.cato.org/publications/commentary/treasury-departments-regulatory-overreach-expands and http://www.cato.org/publications/commentary/too-big-fail-too-foolish-continue). The WSJ quotes former House Financial Services Chairman Barney Frank as saying that he does not favor designating large asset managers such as BlackRock or Fidelity as “systemically important” and that this was not the intent of his law. Those are pretty strong words from one of the chief architects of Dodd-Frank and all the more remarkable since Frank has seldom acknowledged an aspect of the financial sector he didn’t think could use more regulation.
According to the Journal, Frank noted that “overloading the circuits isn’t a good idea” and said that the Financial Stability Oversight Council (FSOC) created by Dodd-Frank “has enough to do regulating the institutions that are clearly meant to be covered—the large banks.”
Implicit in this this statement, is the idea that the FSOC is somewhat out of its depth when it comes to identifying “systemic risks” in the nonbank financial system. Unsurprising, since most of the Council’s staffers are young political appointees with no financial sector experience. Even more fundamental, as Frank alludes to, is the lack of evidence that the industries being targeted in any way contribute to widespread systemic risk. Frank concentrated on the lack of evidence that asset managers transmit risk through the system, but the same logic can be applied to insurers and hedge funds as well.
Absent a full repeal of the Dodd-Frank, and given the growing bipartisan recognition of the dangers of extending bank-like supervision to the nonbank sector, at the very least, Congress should limit the application of Titles I and II of Dodd-Frank to bank holding companies only.
K. William Watson
I would like to second Simon Lester’s ambivalent endorsement of the trade agreement reached by WTO members in Bali last week. Despite cheers from governments and embarrassingly unrealistic claims of economic value, the new WTO agreement on trade facilitation is hardly something for free traders to get super-excited about.
There was some excitement, however, when a bit of last-minute diplomatic drama at the talks threatened to derail everything. Cuba, it turns out, had some genuine demands for actual trade liberalization and indecorously refused to be ignored. As reported by Inside U.S Trade [$]:
Cuba and three other Latin American countries – Bolivia, Venezuela and Nicaragua – had withheld consensus from the so-called Bali package consisting of a trade facilitation agreement as well as agriculture and development components.
Specifically, Cuba had refused to endorse the package until its demands were met for a provision in the trade facilitation deal that would prevent countries from applying discriminatory measures to goods in transit. This was aimed at counteracting a part of the U.S. trade embargo that prevents ships that engage in trade in Cuban ports from unloading cargo in the U.S. for 180 days thereafter.
After Cuba’s demands on trade facilitation came to the fore as the last outstanding issue on the evening of Dec. 6, WTO Director-General Roberto Azevedo held consultations throughout the night with the U.S. and Cuban delegations until 6 am. At that point, the two sides agreed to compromise language to address Cuba’s demands, according to an informed source.
The compromise language consists of one sentence in the Bali ministerial declaration that appears immediately after a sentence adopting the trade facilitation deal. It states: “In this regard, we affirm that the non-discrimination principle in Article V of the [General Agreement on Tariffs and Trade] 1994 remains valid.”
This “compromise” means that the U.S. takes on no new obligations, and the embargo remains as is. Cuba wasn’t looking for an end to the embargo with its demands, merely recognition that this one small component of the embargo violates the brand new, U.S.-approved WTO rules.
It’s difficult to imagine, however, that the process could have worked out any differently. If there’s one thing that’s clear about the new WTO package at this point, it’s that the deal will not have any meaningful impact on U.S. trade policy.
Something is amiss when the global trading system’s achievements depend on the United States convincing Cuba and Venezuela to stop demanding freer trade.
Republican and Democratic negotiators are expected to agree to a budget deal this week setting spending levels for 2014. The Washington Post says that the deal will amount to “little more than a cease-fire.”
However, the deal being described in media reports would be much worse than a cease-fire for Republicans, at least for fiscally conservative Republicans. That’s because the Budget Control Act of 2011 and related sequester have started bearing fruit and are currently providing substantial discretionary spending control. Yet Republican leaders are apparently planning to throw it away in return for revenue increases and paltry spending trims.
In theory, Republicans have the upper hand in budget talks because current law specifies that discretionary spending will be modestly reduced in 2014 to $967 billion. Republicans always claim that they are for spending restraint, and here they just need to hold firm on current-law budget caps to save serious money over time.
However, the Post story indicates that the GOP may agree to scrap the budget cap for 2014 and spend up to $1.015 billion in return for a tiny cut to federal pensions and a revenue increase, possibly from auctioning radio spectrum.
That would be a giant cave-in because a precedent will have been set. The next decade of savings from current-law budget caps would be in jeopardy. If Republican leaders up-end the budget caps this year, they will empower big-spending Democrats, liberal Republicans, and appropriators to completely blow up the caps in later years.
A $48 billion cap overrun this year could set the stage for spending hundreds of billions of dollars more over the coming decade. That would be snatching defeat from the jaws of 2011’s modest budget victory.
There’s suddenly a lot going on in the trade negotiating world. Unfortunately, there is not as much free trade involved as one might hope or expect.
Over the weekend, the members of the WTO reached an agreement on several issues, the main one being “trade facilitation”. This was touted as a big deal because it is the first time the WTO agreed on just about anything in its almost 20 years of existence. In addition, supporters talked up its potential “$1 trillion” increase in global trade.
It’s important to understand, however, that this agreement is not an agreement under which all countries will lower tariffs or barriers to trade in services, which is the traditional kind of trade agreement. My colleague Dan Ikenson wrote about trade facilitation here. Reading through a draft of the agreement, it seems to cover two things. First, it tries to achieve “good governance” in customs procedures, such as through requiring an appeals process for customs decisions. And second, it requires governments to speed up the import process where possible, for example by letting frequent traders use expedited procedures. These are all good things, but it is not the same as using trade agreements to rein in protectionism. Also of note is how it accomplishes these things. Basically, it will be rich country governments paying, through money and training, for improvements to customs procedures in developing countries. Is that the best way to accomplish all this? I’m not really sure, to be honest, but that’s what they are doing.
Next up is the Trans Pacific Partnership (TPP), an agreement being negotiated by 12 countries in the Pacific region. Those talks have started up again, with a goal of finishing by the end of the year. (Probably won’t happen, but it’s good to have goals, I guess). What’s fascinating about these talks is how many non-free trade issues are involved. Someone just leaked a summary of where the parties stand on all the issues. What jumps out at me in this document is that about half the issues deal with environmental law or intellectual property! Not that there is no free trade at all in there, of course. There is the traditional tariff lowering as well. But there are so many other things to be ambivalent about.
And finally, next week the Europeans will be in town for another round of negotiations on the Transatlantic Trade and Investment Partnership (TTIP). These talks are in a much earlier stage than the others. The big issue being talked about here is what to do about “regulatory trade barriers.” Some on the left fear that this will mean lowering everybody’s regulation to a least common denominator. Some conservatives and libertarians worry that it will mean more regulation, as regulations are harmonized around higher standards. In practice, I think it is unlikely to mean either of these things. I don’t see much of a role for international law, through trade agreements, to make substantive regulatory policy, and I would be surprised if the TTIP does much of this. But where I think international agreements could help is pushing countries to remove the impact of divergent regulations. For example, if the U.S. and EU both regulate for auto safety, but do it differently, why can’t both sides sell their cars in the other market as is, based on the assumption that the regulations are functionally equivalent?
So that’s a basic round-up. There are some modest successes, and some issues causing distractions from actual free trade, but things are moving forward, for better or worse. (How’s that for a not-so-ringing endorsement?)
Two years ago this week, I published an op-ed called “President Obama’s Top 10 Constitutional Violations.” Although it didn’t go into depth about any particular issue, it struck a chord (note to aspiring pundits: readers and media bookers like lists, particularly at year’s end).
There’s so much material to choose from for an updated piece on which I’m long overdue, but in the meantime the House Judiciary Committee had an important hearing last week on the president’s constitutional duty “to take care that the laws be faithfully executed.” My colleagues Michael Cannon and Nicholas Quinn Rosenkranz testified, as did GW law professor Jonathan Turley (who voted for Obama in 2008 and is not known to be libertarian or conservative), and their devastating testimony is a collective tour de force regarding this administration’s incredible and unconstitutional power grab. (My friend and frequent sparring partner Simon Lazarus of the Constitutional Accountability Center also testified, on the other side, offering a valiant if ultimately insufficient defense.)
Given the state of current affairs, the hearing focused on Obamacare, whose problematic rollout should have come as no surprise to those who follow this blog. Quite apart from the healthcare.gov fiasco – incompetent, sure, but it’s not unconstitutional to have a bad website – you simply cannot require expansive health “insurance” for all without regard to preexisting conditions and expect insurers not to cancel nonconforming policies or increase premiums. (Forget never running a business or caring about the Constitution; has nobody in the White House ever taken an economics class?)
After watching snippets of the hearing and reading the written testimony, I thought maybe I should start my “top 10 constitutional violations” update with the Affordable Care Act alone. But it seems that I’m not the only one thinking along these lines. Hot off the presses, at 10am today, the office of Senator Ted Cruz (R-TX) released its second report on “The Obama Administration’s Attempts to Expand Federal Power” – the first was on the Supreme Court’s unanimous rejection of the Justice Department’s more outlandish positions, a trend I’ve written about as well – titled “The Administration’s Lawless Acts on Obamacare and Continued Court Challenges to Obamacare.”
Here are the seven items the new Cruz report highlights:
Category One: Implementation Contrary to Statutory Text
- Unilateral grant of a one-year delay on all Obamacare health insurance requirements.
- Unilateral delay of the employer mandate.
- Unilateral delay of out-pocket caps.
- Allowing congressional staff to continue on government-subsidized health care.
Category Two : Pending Court Challenges
- Violates the Origination Clause because it’s a revenue-raising bill that originated in the Senate.
- Contraception/abortifacient mandate violates religious liberties.
- Expansion of employer mandate’s penalty through IRS regulation.
Add to those the individual mandate (which the Supreme Court struck down before Chief Justice Roberts rewrote and upheld the provision as a tax), the coerced expansion of Medicaid (which the Court made voluntary), and the Independent Payment Advisory Board (litigation ongoing), and you’ve got an even ten. And that’s without straining to find the constitutional defects buried in thousands of pages of legislation and hundreds of thousands of pages of regulations.
Forget PPACA, ACA, and Obamacare; what people really ought to call the healthcare law is the “Constitutional Scholar Full Employment Act.”
Tim LynchThe Harvard Bait & Switch: Harvey Silverglate on the University’s Free Speech Fakery
Harvey Silverglate is an adjunct scholar with Cato.
For more information about the work of FIRE, go here.
Ted Galen Carpenter
As China’s economic and military power continues to grow, the country’s political leaders are engaging in increasingly assertive, if not abrasive, behavior. Two recent examples confirm that Beijing is determined to play diplomatic hardball.
The first was a stunningly meager pledge of aid to the Philippines in response to Typhoon Haiyan. In an article over at China-U.S. Focus, I point out that while such countries as the United States, Australia, and Japan rushed to provide generous relief assistance, China’s response was miserly and grudging. Beijing initially offered a paltry $100,000 in aid funds, and then after some apparent reluctance upped that total to a still very modest $1.6 million.
That appeared to be a deliberate snub, and the Chinese leadership seemed willing to incur the negative international publicity. Beijing’s relations with Manila have been quite frosty in recent years, primarily because of competing territorial claims in the South China Sea. Tensions surged again earlier this year when the Philippines filed an unprecedented arbitration case—over Beijing’s strenuous objections—regarding those claims with the United Nations’ Convention on the Law of the Sea. Chinese officials have been doing a slow burn since that filing.
One should not underestimate the depth of China’s anger about such developments, or the willingness of Chinese officials to “send Manila a message”—including by withholding humanitarian aid during a time of great need. The message is that there will be a substantial price to pay for any nation that defies China’s policy preferences and seeks to undermine China’s interests.
The second episode that confirms Beijing’s willingness to play diplomatic hardball was the announcement on November 23rd of a new Air Defense Identification Zone over the East China Sea. Portions of that ADIZ overlapped similar zones that Japan and South Korea had long implemented. China’s ADIZ also included the airspace over the Senkaku/Diaoyu Islands, which are the subject of a bitter territorial dispute between China and Japan, and airspace near another island involving a bilateral dispute with South Korea. Beijing insisted that all foreign military and commercial aircraft flying through the new zone file approved flight plans with the Chinese government.
That action was not well received. Unless Chinese leaders were uncharacteristically obtuse, Beijing had to anticipate that the Japanese and South Korean governments would not tamely accept the new proclamation and the procedures it outlined. They also had to assume that Washington would back the position of its allies. The decision appeared to be a diplomatic ploy to strengthen China’s territorial claims in the East China Sea, and quite possibly to be a precedent for creating a similar ADIZ in the South China Sea, where Beijing has even more extensive claims that various neighboring countries challenge.
What Chinese leaders may not have fully calculated was the nature of the reaction from the United States and its allies. Tokyo, Seoul, and Washington did not confine their response to diplomatic protests. Instead, all three countries promptly sent military aircraft (in Washington’s case, B-52 bombers) through the zone without complying with any of Beijing’s requirements. That defiance has infuriated the Chinese government, and tensions have now reached worrisome levels.
The measures that the United States and its allies adopted were both premature and excessive. China’s proclamation may not have been the most skillful diplomatic initiative, but creating a new ADIZ was not outrageous—especially since Japan has insisted on similar requirements in the same area for years. Indeed, Tokyo warns violators that they risk interception by Japanese military aircraft, and apparently has occasionally even carried out such intercepts. In any case, engaging in a provocative display of military power to defy China’s ADIZ was a clumsy response that has made matters even worse. This is an issue that cries out for restraint and sober dialogue on the part of all parties.
Over at Cato’s Police Misconduct Reporting Project, we have named the worst case for the month of November. It was the repeated, forced cavity search of two young men—in separate incidents—in New Mexico.
The first victim, David Eckert, was pulled over by police for failing to make a complete stop at a stop sign. After a police K-9 who was uncertified for drug searches indicated the presence of marijuana, the officers told a judge that the victim appeared to be “clenching his buttocks” and requested a body cavity search warrant, which the judge granted. The officers took Eckert to a local hospital and requested that doctors perform the search, but the hospital doctors refused. The cops then took Eckert to a second hospital, in a neighboring county that was not covered by the warrant, where they found doctors willing to perform the search.
First, the doctors took an x-ray of Eckert’s abdomen, which showed no hidden drugs. Next, they forcibly probed Eckert’s anus with their fingers, which again uncovered no drugs. Undeterred, the doctors inserted an enema and forced Eckert to defecate in front of the officers: again, no drugs. The enema search was repeated twice, and still no drugs were found. Another x-ray was taken: no drugs. To cap off Eckert’s nightmare ordeal, the officers had the doctors sedate him and perform a colonoscopy, probing his anus, colon, rectum, and large intestines. No drugs found. All of this was done against Eckert’s protest, in a county not covered by the search warrant, with part of the search done after the warrant had expired.
The second victim, Timothy Young, was brutalized in a similar manner after he was pulled over for failing to signal before making a turn, and after another marijuana indication by the same non-certified police dog. He was taken to the same hospital as Eckert and subjected to similar searching methods against his protests.
Cato’s Police Misconduct website often reports instances of police rape and sexual misconduct. In those cases, the offending officers typically do not contend that they have the legal right to abuse their victims’ bodies and are typically punished for their crime, even if often more lightly than others would be punished. Cases like this are entirely different. These cases show that officers can drum up warrants—for a dog’s bark and a perceived “clench”—to repeatedly and forcefully penetrate the depths of the human body for hours on end, and still think they have the power and lawful authority to repeat the process. Even worse, the futile, repeated nature of the searches seriously calls into doubt whether the officers were actually searching for drugs or just torturing the victims under the banner of law enforcement.
As Dan Mitchell has noted, Republican budget negotiators are poised to win Dan’s prestigious Charlie Brown Award for Fiscal Policy. With their 2011 Budget Control Act bearing fruit and providing some spending control the last two years, Republicans are gearing up to throw it away in return for fee increases and paltry spending trims.
In theory, Republicans have the upper hand in current budget talks because current law specifies that discretionary spending will be modestly reduced in 2014 to $967 billion. Republicans always claim that they are for spending restraint, and here they just need to hold firm on current-law budget caps to save serious money over time.
However, news reports indicate that the GOP may agree to spend at least $30 billion more in 2014 than budget caps specify while extending unemployment subsidies, in return for a tiny cut to federal pensions, aviation fee increases, and health provider cuts that won’t actually materialize.
That would be a worse GOP cave-in than new stories are indicating. That’s because a precedent will have been set. The next decade of savings from current-law budget caps will be in jeopardy. If Republican leaders up-end the budget caps this year, they will empower the big-spending Democrats, liberal Republicans, and appropriators to completely blow up the caps in later years. We could end up spending hundreds of billions of dollars more than both parties previously agreed to.
Here comes Charlie running down the field, determined to show that he can score budget reform points and win the broad support of fans. Here’s Lucy holding the ball, pretending to be on the same budget reform team, but actually not really interested in spending restraint. Will Charlie land on his behind and end up badly bruising fiscal policy for years to come?
Daniel J. Mitchell
There’s a saying in sports that teams that lose in the final minutes often “snatch defeat from the jaws of victory.”
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 President Obama and other advocates of big government must be thinking now that Republicans apparently are about to do with the Sequester.
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 like this might happen, but even a pessimist like me didn’t envision such a big defeat for fiscal responsibility.
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.
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.
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 would the GOPers surrender the sequester and acquiesce to some tax hikes, but they could 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—for D.C. 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 breaking 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.
Reporters who cover state and local government should heed the example of the Topeka-Capital Journal’s Andy Marso. It’s my opinion that reporters often insufficiently examine how state and local politicians spend federal tax dollars. Heck, I’m even surprised when a reporter mentions that the money originated from Uncle Sam to begin with.
Marso recently looked at the use of federal Community Development Block Grant money by Osage City in Kansas (see this Cato essay for more on the CDBG program). In particular, $750k from federal taxpayers that was wasted on a now defunct modular home builder:
Osage City Mayor Quintin Robert says John Samples and his modular housing company Kan Build Inc. was about as safe an investment as a company could be in 2006.
Samples owned Kan Build when the city council and Kansas Department of Commerce approved funneling $750,000 in federal money to the company through the Community Development Block Grant program. The business had nearly closed one year earlier, but Samples stepped in, leading a group of investors in buying the manufacturing facility.
Samples was a successful businessman who had bought and rehabilitated the company once before. Despite the turmoil, Robert, who was on the city council at the time, said betting on Samples seemed like a good play.
“I think the decision was based on, ‘Hey, this guy bought this plant when it closed, got multiple grants, was one of the only people to pay them back and had an award, an entrepreneur of year award,’ ” Robert said in a recent phone interview. “He got a lot of accolades, because it is a big deal in a small community. A couple hundred jobs are a big deal.”
Then the housing market crashed, and by February 2011 the plant closed and the 108 jobs it had when it got the grant money disappeared.
Mayor Robert’s simple-minded comments on the deal demonstrate the folly of allowing politicians to play economic planner with other people’s money. It’s even worse when a politician uses money that he or she didn’t have to first collect from his or her voters/taxpayers, which is a fundamental problem with federal subsidies to state and local government. Under that arrangement, local citizens have little incentive to pay attention to how their elected officials are spending money.
As Marso notes, the Osage City City Council’s spent all of three minutes on the decision to give Kan Build the money. If that wasn’t bad enough, it turns out that Mayor Robert “worked for Kan Build in various capacities in the early 1980s, early 1990s and from 1999 until it closed.” The Office of the Inspector General for the Department of Housing and Urban Development might want to look into that.
Anyhow, great work by Marso. There are a lot of similar stories out there waiting to be told.
Daniel J. Mitchell
It’s no secret that I dislike the value-added tax.
But this isn’t because of its design. The VAT, after all, would be (presumably) a single-rate, consumption-based system, just like the flat tax and national sales tax. And that’s a much less destructive way of raising revenue compared to America’s corrupt and punitive internal revenue code.
Advocates of the VAT, by contrast, want to keep the income tax and give politicians another big source of revenue. That’s a catastrophically bad idea.
To understand what I mean, let’s look at a Bloomberg column by Al Hunt. He starts with a look at the political appetite for reform.
There is broad consensus that the U.S. tax system is inefficient, inequitable and hopelessly complex. …a 1986-style tax reform – broadening the base and lowering the rates – isn’t politically achievable today. …the conservative dream of starving government by slashing taxes and the liberal idea of paying for new initiatives by closing loopholes for the rich are nonstarters.
I agree with everything in those excerpts.
So does this mean Al Hunt and I are on the same wavelength?
Not exactly. I think we have to wait until 2017 to have any hope of tax reform (even then, only if we’re very lucky), whereas Hunt thinks the current logjam can be broken by adopting a VAT and modifying the income tax. More specifically, he’s talking about a proposal from a Columbia University Law Professor that would impose a 12.9 percent VAT while simultaneously creating a much bigger family allowance (sometimes referred to as the zero-bracket amount) so that millions of additional Americans no longer have to pay income tax.
Hunt likes this idea.
The Graetz initiative offers something for both sides. It starts, he suggests, with countering the observation once offered by former Treasury Secretary Larry Summers that liberals fear a value-added tax because it’s regressive and conservatives fear it because it’s a money machine. Graetz’s measure overcomes both objections.
Regarding the final sentence of that excerpt, he’s half right. Folks on the left will be happy to know that there will be a lot more redistribution through the tax code.
Graetz addresses the regressivity of most sales taxes, not by exempting food, drugs and other necessities as most of the older European systems do, but with a system of credits and offsets… He provides a payroll tax cut and expanded child-care credits focused on low- and moderate-income workers.
But what do advocates of small government get out of the deal?
Well, they do get something in the short run. Graetz wants to use the VAT money to reduce the burden of the income tax. Rates for households are lowered, with the top rate falling to 31 percent. And the best part of the plan may be that it reduces America’s uncompetitive corporate tax rate to 15 percent.
What’s in the plan, for instance, that would prevent the VAT from becoming a “money machine”? Or what guarantees would be put in place to prevent politicians from re-expanding the income tax?
Unfortunately, there don’t appear to be any safeguards. Professor Graetz has expressed some support for supermajority rules to protect against tax hikes, but he’s quoted in the article explicitly stating that a VAT could be used to generate more money to prop up the welfare state.
The Tax Policy Center found that his proposal succeeds in raising the same amount of revenue as current law. If revenue is to be part of any longer-term deficit reduction, Graetz observes, the value-added tax or the income taxes could be tweaked. “Actually, this would put us in a better situation to address the fiscal crunch down the road,” he says.
That statement scares the heck out of me. We desperately need the right kind of entitlement reform to save America from becoming another doomed welfare state. But what are the odds of getting good changes if politicians think they can continuously kick the can down the road by raising the VAT every couple of years.
Before you know it, we’re Greece!
If you don’t believe me about the VAT being a money machine, perhaps you’ll be more trusting of analysis from the International Monetary Fund. That bureaucracy actually supports the VAT, but the IMF inadvertently revealed in some research last year that the VAT is far more effective at generating new revenue than the income tax.
And that’s true for poor nations and rich nations.
This video from the Center for Freedom and Prosperity, narrated by yours truly, explains why the VAT would finance the road to serfdom.The Value Added Tax: A Hidden New Tax to Finance Much Bigger Government
Last but not least, it’s worth pointing out that Professor Graetz’s proposal has become more punitive over time. Check out this portion of a Tax Policy Center study showing that the VAT rate has been increased and that a new class-warfare tax rate has been added to the proposal.
So if the proposal has become more onerous on paper, imagine how much worse it will get once politicians get their hands on it.
P.S. To be fair, there’s very little indication that Prof. Graetz wants bigger and more expensive government. He’s proposing a VAT for the same reason Cong. Paul Ryan has proposed a VAT. They think the revenue can be used to reduce the burden of the income tax. They’re not wrong in theory. They just don’t appreciate the danger of giving politicians a new source of revenue.
P.P.P.S. Some advocates say the VAT is needed to forestall higher income tax rates, but that certainly hasn’t been the case in Europe.