On Friday, I waded into the heated debate regarding the D.C. Council’s tax reform package. I noted that the proposal is far from perfect, but it is a good first step towards reforming D.C.’s burdensome tax structure.
Shortly after I released my post, councilmember and mayoral candidate David Catania proposed a compromise: He would maintain the current sales tax exemption for the fitness industry. In exchange, he would change the way the corporate income tax rate is cut.
The original D.C. Council proposal would cut corporate income tax rates from the current 9.975 percent to 8.25 percent in 2019. Catania’s plan would also cut the corporate income tax rate to 8.25 percent, but it wouldn’t reach that level until 2020.
The chart below shows the two competing proposals.
In addition to taking a year longer to reach 8.25 percent, Catania’s plan includes higher tax rates in each and every year. Under this proposal, all corporate businesses would pay higher taxes in order to maintain the sales tax exemption for the fitness industry.
When I made this point a few days ago, supporters of Catania’s amendment said that my characterization wasn’t accurate. But Catania’s own press release on the issue acknowledges that businesses will pay more under this proposal. It says “the difference in the average annual tax savings for small businesses between the current version of the FY15 budget and the Catania Amendment amounts to just $15 or $1.25 per month. When factoring in all businesses—including the very largest—the difference in the total average business tax savings is only $346 annually or just $28.83 per month.”
I don’t have a strong view as to whether these increased taxes are a good swap for maintaining the current sales tax exemption. But I do know that even a D.C. corporate tax rate of 8.25 percent is still far above the U.S. state average of 4 percent.
The Advisory Council on Wildlife Trafficking met last week as the administration prepares to turn millions of Americans into criminals and destroy billions of dollars in property. The policy is driven by ideology and actually would kill more elephants.
Most ivory in America is legal and its sale does not endanger wildlife today. Before the international ban of 1989, millions of objects made of ivory or accented by small amounts of ivory entered the United States.
To fight poaching the government could fight poaching. That is, target those illegally killing elephants and selling illicit ivory.
Instead, the government has decided to penalize those trading in legal older ivory. Alas, doing so won’t protect any elephants.
In February, the Fish and Wildlife Service took what it described as “our first step to implement a nearly complete ban on commercial elephant ivory trade.” The agency plans to prohibit the sale of even antique ivory if the owner cannot “demonstrate” the age with “documented evidence.” Since 17th century carvers did not provide certificates of authenticity, virtually no ivory owner has such documentation, which Washington never before required.
The argument for the rule is that it would make life easier for FWS. But it wouldn’t help stop poaching.
First, until politics changed the policy this year, FWS successfully targeted real criminals. For instance, Convention on International Trade in Endangered Species reported a high level of effective enforcement in America. In a 2008 study, elephant researcher Daniel Stiles and conservationist Esmond Martin concluded: “The USA has a good record for [ivory] seizures.”
Second, the fact the law may be difficult to enforce is no excuse for treating those who followed the law and played by the rules as criminals. Dealers and collectors learn the difference between newer and older ivories.
Third, illicit ivory accounts for just a few percent of ivories sold in America. Multiplying the number of illegal objects subject to seizure would make it far harder to stop the limited trade in new ivories that endangers elephants.
Merging the illegal and legal markets would encourage illicit sales. In a new study for the Ivory Education Institute, economist Brendan Moyle argued that legal ivories help restrain prices for illegal items. Moreover, desperate collectors would be tempted to turn to those on the other side of the law. FWS would have to shift resources away from poachers.
Fourth, Americans are not driving the demand for poached ivory. In September 2012 FWS admitted: “we do not believe that there is a significant illegal ivory trade into this country.” Stiles, an African elephant specialist, concluded in March: “Most of the ivory sold in the U.S. is legal recycled ivory or genuine antiques.” Moyle similarly noted: “The size of the U.S. ivory market is a reflection of its historical size and not current poaching levels.”
China is by far the largest market for illegal ivory. Some prohibitionists contend that punishing Americans would lead China to act against poaching. However, Beijing won’t harm its own people because the U.S. government treats U.S. antique collectors and dealers like criminals.
The real agenda of some activists is not to save elephants. They believe anyone possessing ivory deserves to lose the item’s value.
Yet an 18th century ivory cane is an object, neither moral nor immoral. There is nothing wrong with buying it, whatever its nature centuries ago. Moreover, some ivory was obtained from elephants which died naturally or were culled—killed because the habitat would not support them.
As I point out in Forbes online, “the administration’s assault on the rule of law should scare even those who do not own any ivory.” FWS would essentially steal people’s property at the behest of activist ideologues by changing a few words in the Federal Register.
Americans should work together to save elephants with policies that actually address the problem and which respect people’s basic constitutional rights and liberties. The proposed ivory ban fails on all these counts.
To execute any search or seizure, a police officer must reasonably suspect that a crime has been or is being committed based on the facts available to him at the time he executes the search or seizure. Under this standard, searches can be lawful even if the officer is mistaken in his understanding of the facts before him, as long as his understanding led him to reasonably suspect criminal activity. But what if the officer is mistaken about whether a particular activity is actually criminal?
Nicholas Heien was driving with a broken taillight in North Carolina when he was pulled over by police who mistakenly believed that state law required two working taillights. Upon receiving consent to search the car—note: you don’t have to agree to such requests!—police found cocaine and charged Heien with drug trafficking. At his trial, Heien sought to suppress the evidence arising out of the search by arguing that the officer never had the reasonable suspicion necessary to pull his vehicle over because having one broken taillight is not illegal. The trial court ruled against him, but the appellate court found a Fourth Amendment violation and reversed. The North Carolina Supreme Court reversed in turn, by a 4-3 vote, holding that an officer’s understanding of the state’s taillight requirements could form the basis for reasonable suspicion because that understanding, while incorrect, was reasonable.
There is considerable disagreement among state and federal courts, so the U.S. Supreme Court took the case to resolve the issue. In a brief filed jointly with the National Association of Criminal Defense Lawyers, the ACLU, and the ACLU of North Carolina, Cato argues that the approach taken by the North Carolina Supreme is inconsistent with the logic that applies to factual mistakes committed by law enforcement and erodes civil liberties, all while undermining police authority and safety. The allowance for mistakes of fact in police evaluation of suspicious conduct is justified because facts can be ambiguous and unique to each circumstance, and officers must make quick evaluations based on their own observation and expertise. In contrast, the law is the same regardless of the particular circumstance to which it is applied, and can be ascertained long before the officer needs to enforce it. Officers have no specialized expertise in evaluating law, while ambiguities in the criminal code are typically resolved (by courts) in favor of criminal defendants, or struck down for vagueness. The burden placed on citizens by our accommodation of officers’ mistakes of fact is justified as a means of avoiding the social cost of unlawful conduct. Lawful conduct imposes no such cost, however, so excusing mistakes of law serves no social purpose.
The North Carolina ruling opens citizens up to searches based on all kinds of lawful conduct, as long as law enforcement can have a “reasonable” misapprehension of the law in a given area. To avoid the intrusion of police searches, people will need not only to avoid appearing to participate in criminal activity, but also to avoid appearing to participate in innocent activity which police could construe as criminal. The result is a system in which “ignorance of the law is no excuse” for citizens facing conviction, but police can use their own ignorance about the law to their advantage. Officers are therefore disincentivized from knowing the law, which undermines public confidence in their authority and encourages citizens to dispute it during police encounters—putting both parties in greater danger. The U.S. Supreme Court should make clear that law enforcement mistakes of law preclude lawful searches and seizures under the Fourth Amendment.
The Supreme Court will hear the case of Heien v. North Carolina this fall
Daniel J. Mitchell
Why are some nations rich and other nations poor? What has enabled some nations to escape poverty while others continue to languish?
And if we want to help poor nations prosper, what’s the right recipe?
But even that doesn’t really tell us what causes growth.
In the past, I’ve highlighted the importance of capital formation and shared a remarkable chart showing how workers earn more when the capital stock is larger (which is why we should avoid punitive double taxation of income that is saved and invested).
But that also doesn’t really answer the question. After all, if a larger capital stock was all that mattered, doesn’t that imply that we could get prosperity if government simply mandated more saving and investing?
There’s something else that’s necessary. Something perhaps intangible, but critically important.
Deirdre McCloskey, in a video for Learn Liberty, says that ideas and innovation drive growth.
This is a great video for many reasons, but two points strike me as very important.
First, Deirdre is saying that economic liberty matters, but that modern prosperity also was enabled by a change in the culture. People began to appreciate and respect entrepreneurs. You could call this a form of social capital (and I think such cultural norms are critically important for a thriving society).
And entrepreneurs are the innovators who figure out ways of mixing capital and labor in ways that generate ever-larger amounts of economic output, so they play a critical role in boosting prosperity.
Second, she reminds us that poverty is the normal human condition and that the modern era truly is an amazing change. Indeed, I was so shocked by her numbers that I had to investigate to see if she was exaggerating.
She wasn’t. Using the Angus Maddison data set, I looked to see if Deirdre was right about world prosperity resembling a hockey stick.
Sure enough, there was an amazing increase in prosperity beginning about 1800, just as she explained. Indeed, she could have said that people lived on less than $2 per day for much of recorded history.
Here’s the data for world per-capita economic output over the past two thousand years.
Wow. Unlike the make-believe hockey stick used by global warming alarmists, this one is real. And it shows that the economy definitely isn’t a fixed pie if the right policies – and the right attitudes – prevail.
So what’s the moral of the story?
Perhaps the most obvious lesson is that we should respect and appreciate entrepreneurs and other wealth creators.
Unfortunately, we live in an era where politicians would like us to believe that the economic pie is fixed and that it’s the job of government to re-slice the pie with class-warfare tax policy and lots of redistribution.
But when they re-slice the pie, they also change the size of the pie. And not in a good way.
It is a truism that laws tend to be arranged for the benefit of the political class. Still, I was surprised how blatantly this truism plays out in the case of a Connecticut law by the name of Conn. Gen. Stat. 31-51l, which I learned of through a post earlier this year by Daniel Schwartz at his Connecticut Employment Law Blog. He writes:
Here’s the scenario: Suppose you are a salesperson for a mid-size employer in the state and you decide to run for a full-time local or state office. You then win (congrats). And maybe you win a second term. But then - after eight years in office - you decide to leave office.
Can you get your job back with your prior employer? Well, under state law, the answer is remarkably (with a caveat or two) yes.
And better still: you can get credit for your time in office.
The provision covers private Connecticut employers with 25 or more persons on their payroll, and has a couple of exceptions, as when an employer manages to plead hardship or changed circumstances. Still, imagine being able to demand that your job at United Technologies, Yale-New Haven Hospital, or ESPN be held open for eight years:
Upon reapplication to the employer, the employer must then reinstate that employee to his or her original position or a similar position with equivalent pay and accumulated seniority, retirement, fringe benefits and other service credits.
Because Connecticut’s own legislature is part-time rather than full-time, the lawmakers who maintain this statute on the books can’t take advantage of it themselves (unless they happen to run for another public office, which is hardly unheard of). But members of the political class tend to hang out with each other, and can readily identify with each other’s situations.
More, it sometimes seems, than with the situation of those they govern.
Steve H. Hanke
“Governments constantly choose between telling lies and fighting wars, with the end result always being the same. One will always lead to the other.”
- Thomas Jefferson
Nobel Laureate George Akerlof uses this edifying quote from Thomas Jefferson to good effect in his foreword of Hossein Askari’s excellent read, Conflicts and Wars: Their Fallout and Prevention (Palgrave MacMillan, New York, 2012). Indeed, Prof. Akerlof has this to say about Askari’s work:
“Professor Askari begins by surveying the burden of military expenditures and of conflicts and wars. Their dollar expenditures, which are close to 15 percent of global GNP, exceed the cost of our financial crisis, of global warming, and what would be required for worldwide poverty reduction.
He bases his approach on three interrelated propositions: aggressors do not pay the full price of their aggression; governments will do nothing to change this state of affairs on their own; and, as a result, the process of reducing conflicts must originate in the private sector.”
The U.S. shouldered a heavy load in the Iraq War, to the tune of $2.4 trillion from 2003-2011. As depicted in the chart below, the $2.4 trillion U.S. tab accounted for over 75% of global expenditures in the Iraq War.
If we dissect the $2.4 trillion in U.S. expenditures (see chart below), the picture becomes even clearer and, well, drearier. Iraq was a costly war for everyone involved, including U.S. taxpayers. The annual expenditure rate of the Iraq war comes out to $2991 per U.S. taxpayer from 2003-2011 (based on the level of income tax returns), far higher than the annual tab per US taxpayer for the Afghan fiasco.
President Obama announced to Congress yesterday that he is deploying 275 military personnel to Iraq to secure the American embassy in Baghdad. Here we go, again.
Over the last few weeks, the media has been abuzz with stories of unaccompanied minors coming across the border and being apprehended by Customs and Border Protections (CBP). Many of the facts on the ground are fuzzy because we do not have a complete picture of all of the relevant data. In this post I will lay out several of the relevant facts as they exist. I will present information that focuses on how the detention facilities are overwhelmed but that it is less likely that border patrol agents on the border are actually overwhelmed.
The unlawful immigration of minors is not a new phenomenon, although it has increased recently. CBP released this table showing the large increase in the number of unaccompanied minors that have been encountered (different from “apprehended”):Country Fiscal Year 2009 Fiscal Year 2010 Fiscal Year 2011 Fiscal Year 2012 Fiscal Year 2013 Fiscal Year 2014 El Salvador 1,221 1,910 1,394 3,314 5,990 9,850 Guatemala 1,115 1,517 1,565 3,835 8,068 11,479 Honduras 968 1,017 974 2,997 6,747 13,282 Mexico 16,114 13,724 11,768 13,974 17,240 11,577 Total: 19,418 18,168 15,701 24,120 38,045 46,188
The government has not released data for the total number of unauthorized immigrants encountered or apprehended so far in 2014. As a result, I have to use 2013 data to see how big of an addition unaccompanied minors made to apprehensions of unlawful immigrants in that year. Encounters and apprehensions are not synonymous in Border Patrol statistics but they are close enough for a back of the envelope calculation.
In 2013, Central American children encounters as percent of total apprehensions on the southwest border were relatively small:
Source: http://www.cbp.gov/sites/default/files/documents/U.S.%20Border%20Patrol%20Fiscal%20Year%20Apprehension%20Statistics%201960-2013.pdf and http://www.cbp.gov/newsroom/stats/southwest-border-unaccompanied-children
That is in contrast to the usual graph you see of the increase in unaccompanied minors (below). The blue on the following graph, except for 2014, is the blue in the above graph.
In 2013, only 6 percent of all apprehensions on the southwest border were unaccompanied minors:
Source: http://www.cbp.gov/newsroom/stats/southwest-border-unaccompanied-children and http://www.cbp.gov/sites/default/files/documents/U.S.%20Border%20Patrol%20Fiscal%20Year%20Apprehension%20Statistics%201960-2013.pdf
CBP divides the border in sectors. Many of the unaccompanied minors crossing into the United States are concentrated in specific sectors – like the Rio Grande sector. The 2014 data on the total number of apprehensions per border sector are not available although the government has released the data on the number of unaccompanied minors apprehended per border sector. Here are the numbers from 2013 and so far in 2014:Sector Fiscal Year 2013 Fiscal Year 2014 % Change Big Bend Sector 99 148 49% Del Rio Sector 1,396 2,401 72% El Centro Sector 304 411 35% El Paso Sector 534 682 28% Laredo Sector 2,496 2,745 10% Rio Grande Sector 12,484 33,470 168% San Diego Sector 414 642 55% Tucson Sector 6,569 6,254 -5% Yuma Sector 197 264 34% Southwest Border Total 24,493 47,017 92%
The Rio Grande sector has seen the greatest number of unaccompanied minors trying to cross. In 2013, 12,484 unaccompanied minors were apprehended in that sector. So far in 2014, the number has risen to 33,470 – a 168 percent increase over last year, and fiscal year 2014 isn’t over yet.
By the end of the year the numbers should increase even further. But compared to historical crossings in the Rio Grande Valley, the total numbers in 2013 are not unprecedented. We have to wait for the 2014 numbers for all apprehensions per border sector to understand how the recent surge in unauthorized immigrants compares to past increases. Historically, border patrol in the Rio Grande Valley has apprehended more unauthorized immigrants in the past with far fewer border patrol agents.
Border Patrol Overwhelmed? Yes and no.
Consistent statements from CBP assert that they are overwhelmed by the recent influx of unaccompanied minors. Detention facilities are certainly overflowing – partly because of the government’s increased border enforcement over the last 10 years. However, the number of Border Patrol agents on the southwest border has never been greater:
The number of Border Patrol apprehensions on the southwest border has also decreased over time, mainly because of a decrease in the number of unlawful immigrants attempting to enter.
In 2013, each border patrol agent apprehended 22.3 unlawful immigrants, on average. This is compared to 1993, when each border patrol agent on average apprehended 352.2 unlawful immigrants. Many government apprehension facilities are overwhelmed but it is a stretch to state that the largest border patrol in U.S. history, with fewer apprehensions per agent in 2013 than almost any previous year, is suddenly overwhelmed.
The real bottleneck is in detention facilities, not the numbers of border patrol agents on the ground. As the New York Times reported:
“While the Obama administration has moved aggressively to deport adults, it has in fact expelled far fewer children than in the past. Largely because of a 2008 federal law aimed at protecting trafficked children, the administration in 2013 deported one-fifth the number of Central American children as were expelled in 2008, according to federal government statistics.”
The 2008 act, the William Wilberforce Trafficking Victims Protection Reauthorization Act (TVPRA) of 2008, forced U.S. official to inquire into the vulnerability of unaccompanied minors to trafficking and other forms of abuse. U.S. officials were then only allowed to deport the children quickly if they make a voluntary decision to return. Longer processing times created by the 2008 act mean longer wait times for the minors in immigration detention facilities. As a result, crowding has occurred and the overflow has been moved to military bases. The short-term solution is not to further deprive these children of their rights by deporting them without due process but to release them quickly into the care of their resident American families or American non-profits charged with their care. In the long term, cheaper and more streamlined family reunification policies should be implemented to move otherwise peaceful and healthy children out of detention as fast as possible.
Few unaccompanied minors have been incentivized to come because of the legal change because, as Dara Lind at Vox noted, few unaccompanied minors even knew about it. The TVPRA caused a bureaucratic backlog, thus making the immigration enforcement system less capable of handling a sudden increase in unaccompanied minors. The agents on the ground are not overwhelmed, bureaucratic ossification has created a bottleneck in the processing and detention apparatus. In a future post, I will analyze the various theories explaining why there has been a sudden increase in the immigration of unaccompanied minors.
The largest sporting event on Earth is taking place this summer in Brazil. Yet, despite having known since 2007 that Brazil would be hosting the 2014 FIFA World Cup Brazilian authorities failed to adequately prepare for the event, which is estimated to cost more than $11 billion. Not only has the construction of the stadiums and the relevant infrastructure been far from ideal, Brazil also has a hotel room shortage.
In light of the shortage of hotel rooms Brazilian authorities have welcomed Airbnb, the San Francisco-based company that connects those looking for a place to stay with property owners willing to provide short-term accommodation. Patrick Hoge of the San Francisco Business Times explains:
While Airbnb has been controversial in many cities around the world, Brazilian officials, facing shortages of hotel rooms, have been more welcoming to the San Francisco company, seeing it as a resource for housing the massive influx of tourists expected.
Hoge also reported that, according to Airbnb Brazil general director Christian Gessner, the number of Airbnb listings in Brazil increased from around 3,000 to more than 35,000 in the two year period ahead of the start of the World Cup.
Considering their state of preparation for the World Cup it is not hard to see why Brazilian officials have welcomed a company that makes it easier for private individuals to do what they have been doing for thousands of years: letting strangers stay in their property for a short time in exchange for money.
However, as Hoge noted, there are cities around the world less welcoming to those who wish to temporarily rent out their properties or rooms. According toThe Telegraph, during the London 2012 Olympics those who failed to apply for planning permission before renting their property for less than three months (as required by 40-year-old legislation) faced heavy fines.
Thankfully, British Communities Secretary Eric Pickles has said that, “The internet is changing the way we work and live, and the law needs to catch up,” and, “It’s time to change the outdated, impractical and restrictive laws from the 1970s, open up London’s homes to visitors and allow Londoners to make some extra cash.” Changes in the legislation related to renting private property are set to be included in the Deregulation Bill currently working its way through Parliament.
In the U.S. Airbnb faces numerous challenges. Last month Airbnb handed over “anonymized” information on hosts in New York after a six-month legal battle with New York Attorney General Eric Schneiderman, who claims some of the hosts may be in violation of local laws such as the one prohibiting New York residents from renting out a property for fewer than 30 days if they are not living there.
Over at SFGate.com Carolyn Said notes that Airbnb violates ordinances not only in New York, but also in San Francisco, where “Anecdotal reports” suggest that some hosts are taking down listings over fears of being punished for lease violations and ignoring city bans on short-term rentals.
Perhaps lawmakers in San Francisco and New York should consider welcoming Airbnb, like Brazilian officials have, and attempt to reform outdated laws, as is happening in the U.K. Airbnb is not going anywhere. In April it was valued at $10 billion, and it is available in over 34,000 cities in 190 countries. Lawmakers should be finding a way to accommodate Airbnb, not trying to fit it into an outdated legal and regulatory framework.
A new Pew poll finds that three out of four “consistent liberals” would rather live in a community “where the houses are smaller and closer to each other” but within walking distance of schools, stores, and restaurants. Conversely, three out of four “consistent conservatives” would rather live in a larger home on a large lot even if it means driving to schools, stores, and restaurants.
Pew says this shows that “differences between right and left go beyond politics,” which Pew claims is one of the seven most important things to know about polarization in America. Yet the left has turned the choice between a traditional suburb and a so-called walkable community into a political issue, so it is no wonder that people’s views on this choice are polarized.
Disappointingly, Pew’s report on polarization defines everything in terms of liberal vs. conservative. Pew’s big news is that the share of Americans who are consistently conservative or consistently liberal has more than doubled since 1994–yet you have to read deep into the report to learn that these groups make up just 21 percent of the country. The report says little about the other 79 percent of Americans, yet you’d think they would be important since they outnumber the consistent ones by almost four to one.
Pew does say that 39 percent of Americans “take a roughly equal number of liberal and conservative positions,” while the information that 22 percent are “mostly liberal” and 18 percent are “mostly conservative” is buried in an appendix. Most of the the body of the report seems to focus on the “consistent” extremists.
It seems likely that most of the mixed group, and many of the “mostlies,” are libertarians who are fiscally conservative and socially liberal. Yet the term “libertarian” isn’t once mentioned in the Pew report. Probably fewer are socially conservative and fiscally liberal, a group so small that it has no agreed-upon name, though some call them “liberal conservatives.”
Libertarians should have been discussed because issues of personal freedom help explain much of the polarization that the report documents. For conservatives, the decision to live in a drivable vs. a walkable community is a mere lifestyle choice. For liberals, it is matter of life and death, making them eager to impose their preferences on others.
This attitude is the source of the increasing polarization which, Pew believes, began growing in the 1970s. Consistent liberals and consistent conservatives both frighten their opponents for the same reason: they are both quite willing to sacrifice your freedom in order to attain their goals.
Social conservatives believe, for example, that an embryo is human, and they are willing to sacrifice a woman’s freedom to terminate her embryo or fetus in order to achieve their idea of a moral society. Of course, the key Supreme Court decision on abortion was made in 1973.
Liberals believe that all life on earth depends on us reducing greenhouse gas emissions, and they are willing to sacrifice other peoples’ freedom to drive or live in a big house in order to save the planet. Of course, the whole climate change issue grew out of environmental issues that first hit public awareness in about 1970.
Abortion and climate change aren’t specifically mentioned in the ten questions used in the Pew poll, but they include proxies for those issues. The questions are listed in full on page 79 of the report, but briefly they are:
- Is government wasteful or efficient?
- Is government regulation harmful or helpful?
- Do government benefits help or hurt the poor?
- Should government do more or less to help the poor?
- Is the failure of more blacks to get ahead the result of racism or self-inflicted?
- Do immigrants burden or strengthen society?
- Is peace achieved through military strength or diplomacy?
- Do corporations make too much profit?
- Are stricter environmental laws worth the cost?
- Should society accept or discourage homosexuality
A libertarian would say that at least seven of these questions are really about freedom. Questions 2, 6, 8, 9, and 10 specifically deal with freedom. Questions 3 and 4 have to do with freedom in the sense that confiscating money from you to give to someone else infringes on your freedom (and besides can give the recipients the wrong incentives). Similarly, libertarians might say question 5 should have asked, “Is the failure of more blacks to get ahead the result of racism or bad incentives created by the welfare state?”
Libertarians would respond to question 1 by arguing that government is both wasteful and infringes on people’s freedom, and even if government were efficient they would object to it because of its tendency to reduce freedom. And another way of asking question 7 would be, “Is it appropriate to use our military to impose our will on other nations, taking away their freedom?”
Almost all of these issues go back to the 1960s and 1970s, a period that started encouraging sexual freedom, minority rights, environmental protection, and a federal “war on poverty,” while questioning foreign policy. Only the immigration and corporate profit issues date to another time.
Since so many issues trace back to the 1960s and 1970s, it is no wonder that America has become more polarized since then. Some argue that polarization has resulted from a perceived decline in income equality, but I think this is less important, partly because many of the liberals who make the most of the inequality issue tend to have higher incomes than many of the conservatives who just want government to leave them alone.
Instead, the real source of polarization is this: do I have the right to curtail your freedom to achieve a goal I believe is important even if you don’t share that goal? Those who want to end polarization need to to find ways for people to achieve their goals without reducing other peoples’ freedom.
Daniel J. Mitchell
This past April, I augmented that list with some commentary about whether Walgreen’s might become a Swiss-based company.
And in May, I pontificated about Pfizer’s effort to re-domicile in the United Kingdom.
Well, to paraphrase what Ronald Reagan said to Jimmy Carter in the 1980 presidential debate, here we go again.
Here’s the opening few sentences from a report in the Wall Street Journal.
Medtronic Inc.’s agreement on Sunday to buy rival medical-device maker Covidien COV PLC for $42.9 billion is the latest in a wave of recent moves designed—at least in part—to sidestep U.S. corporate taxes. Covidien’s U.S. headquarters are in Mansfield, Mass., where many of its executives are based. But officially it is domiciled in Ireland, which is known for having a relatively low tax rate: The main corporate rate in Ireland is 12.5%. In the U.S., home to Medtronic, the 35% tax rate is among the world’s highest. Such so-called “tax inversion” deals have become increasingly popular, especially among health-care companies, many of which have ample cash abroad that would be taxed should they bring it back to the U.S.
It’s not just Medtronic. Here are some passages from a story by Tax Analysts.
Teva Pharmaceuticals Inc. agreed to buy U.S. pharmaceutical company Labrys Biologics Inc. Teva, an Israeli-headquartered company, had an effective tax rate of 4 percent in 2013. In yet another pharma deal, Swiss company Roche has agreed to acquire U.S. company Genia Technologies Inc. Corporations are also taking other steps to shift valuable assets and businesses out of the U.S. On Tuesday the U.K. company Vodafone announced plans to move its center for product innovation and development from Silicon Valley to the U.K. The move likely means that revenue from intangibles developed in the future by the research and development center would be taxable primarily in the U.K., and not the U.S.
So how should we interpret these moves?
From a logical and ethical perspective, we should applaud companies for protecting shareholders, workers and consumers. If a government is imposing destructive tax laws (and the United States arguably has the world’s worst corporate tax system), then firms have a moral obligation to minimize the damage.
Writing in the Wall Street Journal, an accounting professor from MIT has some wise words on the issue.
Even worse, legislators have responded with proposals that seek to prevent companies from escaping the U.S. tax system. The U.S. corporate statutory tax rate is one of the highest in the world at 35%. In addition, the U.S. has a world-wide tax system under which profits earned abroad face U.S. taxation when brought back to America. The other G-7 countries, however, all have some form of a territorial tax system that imposes little or no tax on repatriated earnings. To compete with foreign-based companies that have lower tax burdens, U.S. corporations have developed do-it-yourself territorial tax strategies. …Some firms have taken the next logical step to stay competitive with foreign-based companies: reincorporating as foreign companies through cross-border mergers.
Unsurprisingly, some politicians are responding with punitive policies. Instead of fixing the flaws in the internal revenue code, they want various forms of financial protectionism in order the stop companies from inversions.
Professor Hanlon is unimpressed.
Threatening corporations with stricter rules and retroactive tax punishments will not attract business and investment to the U.S. The responses by the federal government and U.S. corporations are creating what in managerial accounting we call a death spiral. The government is trying to generate revenue through high corporate taxes, but corporations cannot compete when they have such high tax costs. …The real solution is a tax system that attracts businesses to our shores, and keeps them here. …The U.K. may be a good example: In 2010, after realizing that too many companies were leaving for the greener tax pastures of Ireland, the government’s economic and finance ministry wrote in a report that it wanted to “send out the signal loud and clear, Britain is open for business.” The country made substantive tax-policy changes such as reducing the corporate tax rate and implementing a territorial tax system. Congress and President Obama should make tax reform a priority.
Here’s some info, by the way, about the United Kingdom’s smart moves on corporate taxation.
For more information on territorial taxation, here’s a video I narrated for the Center for Freedom and Prosperity.
And here’s my futile effort to educate the New York Times on the issue.
And if you want some info on the importance of lower corporate taxation, here’s another CF&P video.
P.S. You may be asking yourself whether it would have been better to say that America’s corporate tax is “sadistic” rather than “masochistic.”
From the perspective of companies (and their shareholders, workers, and consumers), the answer is yes.
But I chose “masochistic” because politicians presumably want to extract the maximum amount of revenue from companies, yet that’s not happening because they’ve set the rate so high and made the system so unfriendly. In other words, they’re hurting themselves. I guess they hate the Laffer Curve even more than they like having more money with which to buy votes.
Juan Carlos Hidalgo
Today, the U.S. Supreme Court inflicted a major blow to Argentina in its decade-long legal struggle with some of its creditors since it defaulted on its debt in 2001—the largest sovereign default in history.
While in 2005 and 2010 most of Argentina’s creditors settled to swap their old bonds with heavily discounted new bonds, a group of holdout creditors challenged Buenos Aires in the courts. In October 2012, the U.S. Court of Appeals for the Second Circuit sided with plaintiffs to rule that Argentina must treat all its creditors equally and pay owners of defaulted bonds that were issued under New York law. Today, SCOTUS rejected Argentina’s appeal to that ruling. Buenos Aires now faces three options:
- Comply with the ruling and pay the holdout creditors the $1.33 billion it owes them. Argentina can afford this. According to the most recent estimates (June 6), the country has $28.6 billions in Central Bank reserves. Paying the holdouts would send a strong signal that Argentina is willing to play by the rules and honor its debts. However, the government of Cristina Fernández de Kirchner has made a political crusade out of its struggle against the holdouts (whom she calls “vultures”). Unfortunately, most voices in the opposition share her distaste for paying the holdouts.
- Ignore the ruling. If it does so, Argentina will be legally prevented from paying the other 93% of creditors that agreed to the previous bond swaps of 2005 and 2010 because the ruling requires Argentina to pay holdouts along with those who accepted the swaps. If this happens, Argentina would enter into a technical default. The economic consequences are uncertain. The central government is already mostly shunned out of international markets. But Argentine provinces and businesses could face a more difficult time servicing their debts.
- In an effort to avoid a technical default, Argentina could offer the bondholders who agreed to the 2005 and 2010 debt swaps new bonds issued under Argentina’s jurisdiction. Thus, the bondholders would face a terrible choice: either they stick to their U.S.-issued bonds and risk an almost certain default, or accept Argentina’s offer of new bonds issued under the “protection” of its shaky legal and political institutions. The chants of “Argentina, Argentina!” in the chambers of Congress in 2001 when the country opted for defaulting should be in the bondholders’ minds when considering this option.
Clearly, the best option for Argentina’s long-term economic prosperity is the first one. But it requires the country’s political class to swallow its pride and agree to play by the rules. That would be a first in a very long time.
If a state’s truth ministry has threatened to prosecute you for something you said during an election campaign, can you sue? Of course, said the unanimous Supreme Court, with what would undoubtedly have been a guffaw if one could be conveyed in a legal opinion. While the Court left it to its lesser brethren to deal further with a law that criminalizes making “false statements” – whatever that means: too many Pinocchios? – about political candidates, the satirical graffiti is clearly on the wall for that Buckeye bunkum.
As Cato’s brief alongside P.J. O’Rourke made clear, allegations, insinuations, “truthiness,” smears, and all that other rigamarole have been part and parcel of American political discourse since time immemorial. Indeed political speech – including lies, so long as they’re not defamatory (for which there are clear legal standards) – resides firmly in the throbbing heart of the First Amendment. It’s farcical to think that a legislature could charge a panel of bureaucrats (like the state election commission here) with enforcing some sort of Marquis of Queensbury debate rules.
While standing is often hard to come by, even the most curmudgeonly jurisprudential sticklers can see that political advocates have to be able to challenge a law that restricts political advocacy – one that’s already been used against them, no less! At the end of the day and in the fullness of time, today was a banner morning for free speech and judicial engagement.
The U.S. government is driving some of its most productive citizens abroad. The only beneficiaries are countries such as Singapore and Switzerland, which offer sanctuary to Americans fleeing avaricious Uncle Sam.
Three years ago Eduardo Saverin, one of Facebook’s founders, joined 1780 other Americans in renouncing their citizenship. Heading overseas allowed him to reduce the federal government’s take when his company went public.
Just 231 people gave up their citizenship in 2008. Last year the number was 2999. The first three months of 2014 was 1001, up from 679 for the first quarter of last year.
Tax flight is not an option for most people. However, the rich have more choices internationally. And they increasingly are telling Uncle Sam goodbye.
So are big corporations, such as Pfizer, which is seeking to buy the British pharmaceutical company AstraZeneca. The acquisition would allow Pfizer to move its headquarters to the United Kingdom, which employs a “territorial” tax system, with taxes collected only where the income is earned, in contrast to Washington’s worldwide levy.
About 50 firms have moved their headquarters over the last three decades, half of them since 2008. Last month the Obama administration decried the practice and proposed to increase the share of foreign ownership required for inversions.
Traditionally the entrepreneurial and productive wanted to come to America. Many still do. But the choice is no longer so clear-cut.
Some lawyers admit that they counsel foreign businessmen to consider carefully before seeking American citizenship. Washington’s increasingly greedy and petty behavior appears to be having an impact. Hong Kong tax attorney Timothy Burns argued: “Fifteen or 20 years ago there was a big rush to make sure your kids became U.S. citizens, for access to U.S. schools for example. Now we’re seeing just the opposite.”
There are high, progressive rates at home on top of a comically complicated tax code. The U.S. alone among major industrialized states taxes Americans living overseas. America also is one of the few countries to use worldwide corporate taxation—claiming a cut of money earned everywhere, no matter how little a connection to the U.S.
Moreover, as I point out in my article on fee.org: “U.S. citizens overseas must file foreign bank account reports, backed by big civil and criminal penalties. In 2010 Congress passed the Foreign Accounts Tax Compliance Act, which attempts to turn every foreign financial institution into an IRS agent. The results are significant compliance costs and fearsome legal risks.”
Increasingly banks and other companies are telling Americans to go elsewhere. Complained tax attorney Brad Westerfield, the rules have “become so complicated—the increased filing obligations over the years. You see more people giving up their citizenship or relinquishing their Green Cards.”
Not that it’s easy to escape. Washington hits up departing wealthy citizens for a tax on unrealized capital gains. Yet Senators Chuck Schumer and Bob Casey have introduced legislation to double the levy to 30 percent for those leaving America.
Of course, most people are likely to think about more than money before giving up their citizenship. But current policy creates powerful pressure for some. Increasing tax flight should serve as a wake-up call for Washington politicians. Unfortunately, they insist on blaming everyone but themselves. Heading overseas to save money is “immoral,” asserted Sen. Charles Grassley (R-Iowa).
But what is moral about the looting and pillaging that goes on every day in Washington? Politicians are among the greediest people in America, acting at the behest of the envious who are determined to use government to live at everyone else’s expense. Today’s political overseers promise much, take more, and deliver little.
America once was a land of opportunity. As it loses that distinction more people are tempted to go elsewhere. Instead of seeking to punish those who desire to move, policymakers who are real patriots would change the punitive policies which are pushing people abroad.
Congratulations to the San Antonio Spurs on their fifth non-consecutive NBA championship. Back in 2007, when they won their third, Washington Post sports columnist Mike Wise praised the resilience of the Spurs, who kept coming back to win the NBA championship without ever being quite a Bulls-style dynasty. He said the Spurs “had their crown taken away twice since 2003 and got it back both times.”
I noted at the time that his comments reminded me of Ron Paul, who was then the only current member of Congress to have been elected three times as a non-incumbent. Given the 98 percent reelection rates for House members, it’s no great shakes to win three terms — or 10 terms — in a row. It’s winning that first one that’s the challenge. And Ron Paul did that three times.
He first won in a special election for an open seat. He then lost his seat and won it back two years later, defeating the incumbent. After two more terms he left his seat to run unsuccessfully for the U.S. Senate (and thereby did his greatest disservice to the American Republic, as his seat was won by Tom DeLay). Twelve years later, in 1996, after some redistricting, he ran again for Congress, again defeating an incumbent, this time in the Republican primary. Some political scientist should study the political skills it takes to win election to Congress without the benefit of incumbency — three times.
Now the Spurs have won five times as the “non-incumbent,” to Ron Paul’s three. But then, Paul won 12 congressional elections in total, and the Spurs are still a long way from that.
An implicit principle in a democracy is that the officials who decide how your taxes are spent represent you, the taxpayers, and not the bureaucracies that receive your taxes. But Congress violated this principle when it wrote MAP-21, the 2012 transportation law. As detailed in a proposed rule earlier this month, the law gives transit agencies in major urban areas a vote on how much of each region’s transportation dollars are spent on transit.
State legislatures are made up of people elected by various voting districts, not representatives selected by the state departments of transportation, justice, welfare, fish & wildlife, parks, and other bureaucracies. Similarly, city councils are made up of people elected by the voters in that city, not by representatives selected by the various water, transportation, fire, and other bureaus.
In 1962, Congress mandated that urban areas of 50,000 people or more create metropolitan planning organizations (MPOs) that would decide how to spend federal transportation and housing funds. At that time, it recognized this principle, specifying that the governing board of each MPO consist of elected officials from the various cities and counties in that urban area. While this was one step removed from the voters, it at least insured that the voters had an indirect say over how their money is spent.
However, MAP-21, the 2012 law reauthorizing federal transportation funding (including funding for MPOs), departed from this principle by requiring that transit agencies in all urban areas with 200,000 or more people be given representation on the MPO boards. In other words, the bureaucrats themselves will get to vote on their own budgets.
Some might think that it is unfair that transit agencies get a vote on MPO boards but highway and street agencies don’t. In fact, it is unfair for any agency to have votes on the boards that help determine their own budgets.
Others might argue that transit agencies are a part of the community and deserve to have a say on the future of that community. But they already have a say through the city councilors and county commissioners elected by the people of the urban area, which includes most transit agency staff and employees (except those who commute from outside the region). Giving transit agencies their own seat on the MPO board violates the one-person, one-vote rule established by the Supreme Court in the 1960s.
We wouldn’t be happy if the NSA got to have a seat on a Congressional committee investigating NSA spying on American citizens or one determining NSA budgets. We wouldn’t be happy with oil companies having a seat on Congressional energy committees, or if university athletic departments got an automatic seat on a state higher education committees, or if a pavement company got an automatic seat on a city council’s transportation committee. Why should transit agencies get an automatic seat on the board determining transit’s share of federal and regional funding?
MAP-21 specified that the requirement that transit agencies have a seat on MPO boards go into effect by October 1, 2014. But MAP-21 itself expires on September 30, 2014. So Congress has the opportunity to redress this problem when it writes a new law to replace the current one.
Given a divided Congress, observers expect Congress will simply extend the current law with a few minor changes. But MAP-21 itself was simply an extension with, supposedly, a few minor changes.
If those who believe in the principles of representative government demand it, Congress could easily remove this provision from the law and specify that any transit (or other) agency officials already on MPO boards be taken off those boards immediately. Removing this conflict of interest is a small change compared with what fiscal conservatives might like to see done with federal transportation law, but it needs to be done to maintain the integrity of public decision making.
The claim for physician licensure is that it protects consumers from “quacks;” it is just a coincidence that licensure also reduces competition and raises doctors’ incomes! In this case, the strength of licensing should be similar across states, and licensure requirements should determine whether a prospective doctor is competent, not whether a U.S. native or a migrant.
Recent research by Brenton Peterson, Sonal Pandya, and David Leblang (University of Virginia), however, finds the opposite:
Licensure regulations ostensibly serve the public interest by certifying competence, but they can simultaneously be formidable barriers to entry by skilled migrants. From a collective action perspective, skilled natives can more easily secure sub-national, occupation-specific policies than influence national immigration policy. We exploit the unique structure of the American medical profession that allows us to distinguish between public interest and protectionist motives for migrant physician licensure regulations. We show that over the 1973–2010 period, states with greater physician control over licensure requirements imposed more stringent requirements for migrant physician licensure and, as a consequence, received fewer new migrant physicians. By our estimates over a third of all US states could reduce their physician shortages by at least 10 percent within 5 years just by equalizing migrant and native licensure requirements.
Little evidence suggests that professonal licensure promotes quality or protects the public, but arbitrary discrimination against migrant physicians (many trained in the United States!) is particularly insane. As are all restrictions on high-skill (or other) immigration.
On Wednesday, President Obama stated an irrefutable fact: the state of humanity is better than any time before. He said,
…if you had to choose any moment to be born in human history, not knowing what your position was gonna be, who you were gonna be, you’d choose this time. The world is less violent than it has ever been. It is healthier than it has ever been. It is more tolerant than it has ever been. It is better fed than it has ever been. It is more educated than it has ever been. Terrible things happen around the world every single day but the trend lines of progress are unmistakable.
This is merry news, especially since he is helping to spread the message of Cato’s new website, HumanProgress.org. And who could help to spread it faster than the leader of the free world?
His understanding of the reasons for improvements in human well-being is unclear, though he seems to imply that people, left to their own devices, will try to improve their lot:
(T)he trend lines of progress are unmistakable. And the reason is because each successive generation tries to learn from previous mistakes and push us, the course of history, in a better direction.
The President is correct in recognizing that progress is most commonly realized when people are left free to pursue their enlightened self-interest. Consider the following examples:
Life expectancy and economic freedom were both higher in Venezuela than in Chile in the 1970s. As Venezuela became less economically free and Chile became more economically free, Chile caught up with Venezuela and eventually overtook it. Today, life expectancy in liberal Chile is higher than in socialist Venezuela.
Consider also China’s reforms: As China embraced free market policies, its poverty rate has plummeted.
Obama did his young audience a service in teaching them that the world is the best it has ever been. These massive improvements were the result of no one’s intention, other than the intention to better one’s own life through free markets. Look no further than North and South Korea, East and West Germany, and Taiwan and pre-reform China for evidence of the power of free markets to create sustainable development.
Daniel J. Mitchell
Imagine how weird it would be if the Cato Institute and Americans for Tax Reform praised Barack Obama for fiscal responsibility. And think how inconceivable it would be for the Heritage Foundation and the National Taxpayers Union to applaud Tim Geithner for economic stewardship.
The Canadian version of that happened while I was at the conference of the World Taxpayers Association in Vancouver two weeks ago.
The event was organized by the Canadian Taxpayers Federation and the main speaker was Paul Martin of the Liberal Party, who served as finance minister from 1993 to 2002, and then as prime minister from 2003 to 2006. I should add, for context, that the Liberal Party in Canada is not a classical liberal party with a track record of free markets and small government.
But Paul Martin was honored because he was responsible, while finance minister, for one of the best records of fiscal restraint of any policymaker in recent history (click here for international comparisons).
I’ve pointed out that the burden of spending fell under Bill Clinton, and I’ve even acknowledged that the federal budget hasn’t grown much under Obama, at least once you get past his first couple of years. But Paul Martin was far more frugal. And since Canada has a parliamentary system, there’s no ambiguity about who deserves credit. He restrained spending when his party had control.
What happened to generate the good results? For all intents and purposes, he imposed a spending freeze. And I’m talking a nominal spending freeze, not the kind of fake fiscal discipline you get when politicians make “cuts” off an inflated baseline. Because the budget was successfully restrained, that addressed both the problem of too much spending and the symptom of red ink.
In his speech, Martin won me over when he bragged that the burden of government spending fell to its lowest point in 50 years. My man-crush on him became even more pronounced when he said his administration allowed agencies to ask for more funds, but only if they identified offsetting cuts elsewhere. What a novel concept! A government that actually looked at tradeoffs and prioritized outlays. Sort of like a household or business.
I asked the former prime minister a couple of questions. I was specifically interested in why the Liberal Party didn’t behave like other left-wing parties and raise taxes to enable bigger government. Martin said there were some in his party who wanted that approach, but that there were two reasons why he instead chose to follow good policy.
First, enough people understood that Canada has a spending problem rather than a revenue problem. And second, there was concern that financial markets would react poorly if policymakers simply pushed for higher taxes and ignored the size of government. I wish the average Republican had the same sophisticated understanding of fiscal policy.
No wonder Canada got such good results. They imposed austerity on the public sector, rather than trying to squeeze the private sector (a distinction that seems to escape Paul Krugman).
To give you an idea of what Paul Martin accomplished, here is a video, prepared by the Canadian Taxpayers Federation, that features laudatory comments by representatives of major market-oriented think tanks. At the risk of stating the obvious, I don’t think there will ever be a video like this about Obama.
The video is very well done, even though I think it focused too much on red ink and not enough on the real accomplishment of spending restraint. On that issue, Chris Edwards has produced some very good data on what’s happened to the burden of government spending is his home country. And for further information on the topic, here’s my video on international examples of spending restraint. Canada, you’ll notice, is one of the prominent case studies.
P.S.: If you know any Keynesians, you can have some fun by asking them why Canada’s economy grew when the burden of government spending was reduced.
P.P.S.: It’s also very impressive that Canada has one of the lowest levels of welfare spending of any developed nation.
P.P.P.P.S.: To end on a humorous note, Canada should fortify its border to avoid an influx of American leftists.
Steve H. Hanke
As Peter noted, M.A. “Morry” Adelman—a great economist, mentor, and friend—passed away last month at the age of 96. The first paragraph of The New York Times obituary (June 8, 2014) had this to say of Professor Adelman’s passing.
Morris A. Adelman, an energy economist who marshaled free-market principles and hard data in arguing that the world’s oil supply was not running out, died May 8 at his home in Newton, Mass. He was 96. The Massachusetts Institute of Technology, where he taught and researched for 65 years, announced the death on May 15.
I first had the pleasure of meeting Morry in June of 1967, shortly after I had joined the faculty at the Colorado School of Mines. The Rocky Mountain Petroleum Economics Institute had convened a meeting at Mines; Morry was one of the speakers on a star-studded program. I had been invited to edit a book, Essays in Petroleum Economics, of the conference papers.
As a rookie facing what was, at the time, an array of the most notable petroleum economists in the world (Adelman, Richard Gonzalez, Minor Jameson, John Lichtblau, Milton Lipton, Wallace Lovejoy, Stephen McDonald, James McKie, and Frank Young), I was, to put it mildly, anxious. But, thanks to the likes of Adelman, that problem was quickly put to rest.
Morry knew how to mentor young rookies. He also knew more about the oil industry–even the institutional details–than most of the conference representatives from the industry. He was not only a master of applied economics and detailed, sharp pencil work, but was an economist with a personality–a very sharp wit, very sharp indeed. This wit and his personality come through loud and clear in his writings. So, Morry remains with us, fortunately.
As I reread “Trends in Cost of Finding and Developing Oil and Gas in the U.S.”, which was Adelman’s chapter in Essays in Petroleum Economics, I am struck by just how careful he was to protect his text–a master of rhetoric, too. He paid the most careful and anxious attention to stressing that he was not making predictions, but only presenting short-term projections. As for intermediate projections, beyond 1980, Adelman thought (in 1967) they “only were of minor interest.” And “projections past the year 2000 are funny because it is better to laugh than to weep in the vain presumption of thinking we can see that far ahead.”
That said, Adelman’s chapter does suggest that he had what turned out to be very clear ideas about the possible long-run scenarios:
Nobody can tell what will happen either to energy demand or supply. All we need mention are a decisive breakthrough on: shale oil extraction, or direct finding of conventional crude oil, or coal conversion to liquids, or nuclear power, particularly the fast breeder reactor, or the fuel cell and other methods of energy conversion, not to mention the electric automobile. A major change in any one of these would put altogether new perspectives on developments in oil supply and cost.
Ever since my first encounter with Morry, I benefited from his generous mentoring and his many writings on petroleum economics. This really came home to roost in 1985, when, while retaining my post as a professor of applied economics at The Johns Hopkins University, I became the chief economist at the Friedberg Mercantile Group in Toronto. By late 1985, we were very short crude, as well as the Saudi riyal and the Kuwaiti dinar. We predicted that OPEC was about ready to collapse and that the price of crude would fall to below $10 per barrel. We ended up being right in a big way, when oil collapsed to below $10 per barrel in April of 1986 and both the Saudi riyal and the Kuwaiti dinar devalued shortly thereafter. My writings supporting those trades: “The Unravelling of OPEC: Crude Calculations” (Nov. 17, 1985) and “A Crude Roller Coaster” (Dec. 15, 1985) appeared in Friedberg’s Commodity and Currency Comments, a monthly publication. My analyses rested firmly on Adelman’s pioneering works.
A few years later, I wrote another Friedberg’s piece that was pure Adelman. It illustrates how property rights can be worked into the analysis of extractive industries like oil and gas (“Crude Oil: Take the Money and Run”, Friedberg’s Commodity and Currency Comments, Feb. 15, 1987). This, in part, is what I wrote:
Governmental spokesmen and financial analysts have been oversupplying us with atmospherics about the new OPEC agreement. To redress this imbalance, we offer some crude analytics.
The economic production rate for oil is determined by the following equation: P – V = MC, where P is the market price of a barrel of oil, V is the present value of a barrel of reserves, and MC is the marginal recovery cost of a barrel of oil.
With this simple model for the economics of depletable resources, we demonstrate that for Saudi Arabia–which has 35% of OPEC’s capacity and holds the key to any viable cartel arrangement–oil in the ground is not worth more than money in the bank. In fact, for the Saudis to maximize the value of their oil resources, they should dramatically increase the rate at which they liquidate their oil reserves.
To understand the economics that might force the Saudis to increase their production, we must understand any forces that might tend to raise the Saudis’ (and other producers’) discount rates. To determine the present value of a barrel of reserves (V in our production equation), we must forecast the price that would be received from liquidating a barrel of reserves at some future date and then discount this price to present value. In consequence, when the discount rate is raised, the value of reserves (V) falls, the gross value of current production (P – V) rises, and increased rates of current production are justified.
When it comes to the political instability in the Middle East, the popular view is that increased tensions in the region will reduce oil production. Economic analysis suggests that the tensions will actually work to increase oil production.
Let’s suppose that the real risk-adjusted rate of discount, without any prospect of property expropriation, is 20% for the Saudis. Now, consider what happens to the discount rate if there is a 50-50 chance that a belligerent will overthrow the House of Saud within the next 10 years. In this case, in any given year, there would be a 6.7% chance of an overthrow. This risk to the Saudis would cause them to compute a real risk-adjusted rate of discount, with the prospect of having their oil reserves expropriated. In this example, the relevant discount rate would increase to 28.6% from 20% (See the accompanying table for alternative scenarios). This increase in the discount rate will cause the present value of reserves to decrease dramatically. For example, the present value of $1 in 10 years at 20% is $0.16, while it is worth only $0.08 at 28.6%. The reduction in the present value of reserves will make increased current production more attractive because the gross value of current production (P – V) will be higher.
Thank you Morry. We miss you.
An important local story in Washington, D.C. this week is the D.C. City Council’s proposed tax overhaul package. The package would restructure the tax code and reduce revenue by $67 million a year. Unfortunately, special interests may be poised to defeat generally good, pro-growth reform.
The proposal passed 11–2 on its first reading. It was the byproduct of months of study and debate. Under the plan, income tax rates would be cut, which would benefit middle-income residents. The standard deduction would be increased, particularly benefiting lower-income residents. The DC Fiscal Policy Institute estimates that middle-income families with incomes between $50,000 and $75,000 would save an average $400 annually.
It also would lower the corporate tax rate from 9.975 percent to 8.25 percent by 2019, while cutting the “death tax” and eliminating some wasteful tax credits.
These changes would provide much needed relief to D.C. residents and businesses, and make D.C. a little more competitive with its neighbors.
To partly offset the loss in revenue, the city council decided to expand the sales tax base to include some currently untaxed services, such as carpet cleaning, beautician services, and storage facilities. It would keep the sales tax rate at 5.75 percent, lower than Maryland and Virginia.
However, one particular service industry is trying to sink the entire deal. The sales tax base expansion would include fitness services, such as gym and yoga studio memberships. One gym, Vida Fitness, is leading the charge against the “D.C. Fitness Tax,” urging customers and D.C. residents to sign a petition opposing treating fitness services like most other retail goods and services. Contrary to what Vida Fitness and others say, this isn’t a new tax only affecting their industry; it is simply the expansion of the general sales tax base to include their industry’s products.
I’m not in favor of new taxes, but it is also not fair that gyms are exempt from sales taxes that hit most other retailers and their customers. As Wes Rivers of the DC Fiscal Policy Institute described it, “D.C. residents already pay sales tax on exercise equipment, running shoes, and yoga mats.” Twenty-two states include fitness services in their sales tax bases.
Middle-income residents will save more in income taxes than people will pay in increased sales taxes on gym memberships. Many of those taxpayers likely belong to gyms and yoga studies, so Vida Fitness’ opposition may hurt its customers more than it helps.
The city council should go further in cutting tax rates, but this package is a good first step. It moves D.C.’s tax code a little away from the income tax and towards the consumption tax, which is a more fair and efficient tax structure. Hopefully, policymakers won’t let special interests derail a generally pro-growth reform in D.C.