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The FBI versus the Citizens

Tue, 03/11/2014 - 16:45

Gene Healy

This Thursday at Cato, we’re hosting an event for a remarkable new book: Betty Medsger’s The Burglary: The Discovery of J. Edgar Hoover’s Secret FBI (RSVP here). As I explain in the Washington Examiner today, it’s a story as riveting as any heist film, and far more significant:  

Forty-three years ago last Saturday, an unlikely band of antiwar activists calling themselves “The Citizens Commission to Investigate the FBI” broke into a Bureau branch office in Media, Pennsylvania, making off with reams of classified documents. Despite a manhunt involving 200 agents at its peak, the burglars were never caught, but the files they mailed to selected journalists proved that the agency was waging a secret, unconstitutional war against American citizens.  

As a young Washington Post reporter, Medsger was the first to receive and publish selections from the files—over the protests of then-attorney general (and later Watergate felon) John Mitchell, who called the Post three times falsely claiming that publication would jeopardize national security and threaten agents’ lives. 

Four decades later, those claims echo in former NSA head Michael Hayden’s assertion that the US is “infinitely weaker” because of Snowden’s leaks. Like the apocryphal old saw suggests, if history doesn’t repeat itself, at least it rhymes.

“As if arranged by the gods of irony,” Medsger writes, the very morning Hoover learned of the break-in, then-assistant attorney general William H. Rehnquist (later Chief Justice), in testimony the FBI had helped prepare, told a Senate subcommittee that what little surveillance the government engaged in did not have a “chilling effect” on constitutional rights. Among the first documents Medsger reported weeks later, was a memo urging agents to “enhance the paranoia… get the point across there is an FBI agent behind every mailbox.”

Ironies abound. The burglars timed the heist for March 8, 1971, when the country would be distracted by the “Fight of the Century” between Muhammad Ali and Joe Frazier. Medsger notes the “poetic justice” that the much-spied upon Ali would unwittingly help provide cover for exposure of FBI spying. Oddly, it’s acting attorney general Robert Bork–survivor of the “Saturday Night Massacre” and nobody’s idea of a civil libertarian)–who orders the release of key documents on the COINTELPRO program and urged the incoming attorney general to investigate the program. There’s another vignette where President Nixon speaks to an FBI Academy graduating class about “reestablishing respect for the law”–and the next evening orders Haldeman to have someone break into the Brookings Institution and steal a purloined copy of the Pentagon Papers (a zealous Chuck Colson suggested firebombing the think tank to create a distraction).  

The book is full of “truth is stranger” moments: if a historical novelist made up a scenario where, two days before the burglary, the ringleader, Haverford physics professor William Davidon, goes to the White House for a sit-down with Henry Kissinger to argue about the Vietnam War (thanks, ultimately, to an introduction made by Shirley MacLaine), there’s no way I’d have bought it. Stranger still, at the time, Davidon was an unindicted co-conspirator in a bogus kidnapping case engineered by Hoover in which Catholic peace activists had supposedly plotted to hold Kissinger hostage. Kissinger didn’t take it very seriously, having joked to the press that the plot had been engineered by “three sex-starved nuns.” As the meeting began, Medsger reports, “Kissinger immediately turned to Sister Beverly, sitting on his other side, and apologized for his flippant ‘sex-starved nuns’ comment.”

Last week, an indignant Rep. Mike Pompeo (R.-KA) chastised the organizers of Austin’s South by Southwest conference for inviting Edward Snowden to address the group via video feed: Snowden is “a traitor and a common criminal,” he railed, “whose only apparent qualification is a willingness to steal from his own government.” As I’ve said before, the debate over the content of Snowden’s character is a sideshow: what’s important is what he revealed: secret, unlawful surveillance capabilities that J. Edgar Hoover could hardly have imagined 40+ years ago. Unless we’ve made radical improvements in human nature in the interim, those capabilities–and the temptations they represent–should concern us greatly.

The legacy of the Citizens’ Commission shows that their “willingness to steal from their own government” may have been the only way to stop much greater lawlessness. Here’s what the FBI’s own website says about the burglars:

A radical group called “Citizens’ Committee to Investigate the FBI” broke into the office in Media and stole a wide array of domestic security documents that had not been properly secured. Some of the documents mentioned “Cointelpro”, or Counterintelligence Programs—a series of programs aimed to disrupt some of the more radical groups of the 1950s and 1960s. The leaking of those documents to the news media and politicians and the subsequent criticism, both inside and outside the Bureau, led to a significant reevaluation of FBI domestic security policy.

Medsger quotes Neil Welch, one of the few top agents within the Bureau to oppose COINTELPRO at the time:

“If [the burglars] had been convicted, I would have recommended that they should be given suspended sentences because of the major contribution they made to their country.”

 

 

Categories: Policy Institutes

Washington’s Inflated Sense of Security Leadership

Tue, 03/11/2014 - 16:30

Ted Galen Carpenter

With the Ukrainian crisis continuing to simmer, criticism of the Obama administration’s response is growing. One common refrain is that the administration has squandered its leadership role, not only in Europe, but globally. Calls are mounting for the United States to inspire and cajole its NATO allies to support a hard-line policy toward Russia. Representative Peter King (R-NY), speaking on NBC’s Meet the Press, stated that Washington needs to make clear not only that “there will be firm sanctions,” but we “have to make sure the allies are working together.”

Such calls reflect wishful thinking rather than sober analysis. Although the European countries (especially those in Eastern Europe) are nervous and unhappy about the Kremlin’s decision to send troops into Ukraine’s Crimea region, the principal European powers (Germany, Italy, France and Britain) show few signs of wanting a confrontation with Moscow. Indeed, their criticisms of Putin’s military intervention have been slower to materialize and remain milder than those expressed by U.S. officials. That is not coincidental. The United States has scant economic ties with Russia; barely two percent of America’s foreign trade is with that country, and U.S. investment there is similarly modest. Imposing sanctions and risking Moscow’s retaliation would have little impact on America’s fortunes.

But Washington’s European allies have far more substantial—and vulnerable—ties. Germany, for example, gets nearly 40 percent of its natural gas supplies from Russia, and that country is also a significant arena for German investment. Unsurprisingly, Chancellor Angela Merkel has been relatively circumspect in her criticism of the Kremlin’s conduct in the Ukraine crisis. She is unlikely to accord calls for NATO solidarity greater importance than the need to keep German homes warm and business operating in the cold winter months.

Washington’s leadership clout within NATO has long been exaggerated. As I note in a recent article over at National Interest Online, U.S. officials have never been able even to get the European allies to spend credible amounts on their own defenses. Burden-sharing complaints go back to the earliest months of the alliance in 1949, and have surfaced repeatedly since then. In 2006, George W. Bush’s administration extracted a promise that all members would spend at least two percent of their gross domestic product on the military. (That was a very modest target; the United States spends nearly 4 ½ percent.) Today, the vast majority of members, including such leading countries as Germany, Italy and Spain, fail to fulfill their commitment. Even Britain and France have fallen perilously close to that spending floor.

Shortly before the onset of the Ukraine crisis, Secretary of Defense Chuck Hagel admonished his NATO colleagues that the current downward spiral in European defense budgets “is not sustainable.” Rebalancing NATO’s “burden-sharing and capabilities,” he stressed “is mandatory, not elective.” But his call for a more serious effort on the part of the European allies will probably fare no better than previous ones. Even Russia’s jarring actions in Ukraine are unlikely to dislodge the NATO countries from their fondness for free-riding on the security exertions of the United States. The Baltic republics and other nations directly on Russia’s border have made some comments about the need to increase their military spending, but only time will tell whether they turn out to be more than yet another episode of empty talk. And the major Western European powers show few signs of altering their policies or budgets.

Indeed, even the vulnerable Eastern European countries are spending more energy trying to get the United States to enhance its military commitment to the region than they are on boosting their own defenses. Lithuanian President Dalia Grybauskaite, for example, warns that “Russia is a threat to the whole of Europe, and Europe must understand what it is dealing with.” However, just a few years ago, she led efforts to cut Lithuania’s already meager defense budget. Today, the country spends barely 0.8 percent of GDP on defense.

Invocations of U.S. leadership cannot get alliance partners to adopt measures they do not wish to pay for or assume risks that they want to avoid. Anyone believing that the United States will lead a grand alliance parade to counter Russian aggression in Ukraine will soon find that this country is marching alone.

Categories: Policy Institutes

American Society as Chessboard

Tue, 03/11/2014 - 16:06

Chris Edwards

One of my favorite Adam Smith passages is:

The man of system … seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it.

Today, the men and women of system in the nation’s capital have a high regard for their ability to arrange the chess pieces of American society. There are 318 million individuals, 28 million businesses, 50 state governments, 89,000 local governments, and countless churches, charities, and other organizations in this great nation. Congress passes laws to intervene in the affairs of all of these people and groups, trying to impress its design.

But federal policymakers usually ignore, or fail to understand, the principles of motion in society. They impose minimum wages and health laws, and businesses cut hiring. They subsidize water, which exacerbates droughts. They subsidize flood insurance, which increases the damage from floods. They impose the world’s highest corporate tax rate, and they are shocked when corporations shift their profits abroad.

Federal attempts to arrange state government policies bring surprises as well. Federal policymakers offer matching grants for Medicaid, and are surprised that it prompts rapid state spending growth and dubious schemes to boost payments. Federal policymakers provide state aid for schools, but states probably just substitute added federal funding for their own.

The latest lesson on society’s principles of motion regards food stamp aid. From the Washington Post:

Congress last month passed a revamp of agriculture and food policy that was supposed to save the U.S. government $8.6 billion in food-stamp costs over a decade. That may not happen, though, now that some states are finding a way to avoid the cuts.

New York, Connecticut and Pennsylvania are triggering extra nutrition spending by adding money to a home-heating subsidy tied to increased food-stamp aid. The move feeds needy families while thwarting spending-reduction goals … If more follow, the federal government would have to spend much of the $8.6 billion it planned to save, as states reduce spending on other programs to meet the new mandate.

“These federal cuts have made it harder for our state’s most vulnerable residents to put food on the table. The state has intervened on behalf of these low-income New Yorkers,” Gov. Andrew M. Cuomo (D) said in a statement Feb 25. “New York is stepping up to help families in need.”

Categories: Policy Institutes

Europeans See Ukraine and Fear Russia? Time for Them to Take over Europe’s Defense

Tue, 03/11/2014 - 14:07

Doug Bandow

Had the U.S. been so foolish as to bring Ukraine into NATO, Washington would have a treaty responsibility to start World War III.  Today’s game of geopolitical chicken might have a nuclear end.

Still, the West cannot easily ignore Russia’s Crimean takeover.  It was an act of aggression against Kiev, yet a majority of Crimean residents may welcome the move.  Although secessionist sentiment has been largely dormant of late, the Western-supported putsch/street revolution against President Viktor Yanukovich inflamed pro-Russian passions in eastern Ukraine. 

Of course, Moscow intervened for its own ends.  And Putin is wrong, dangerously wrong, to use force.  But how to punish Moscow?  America’s direct stake in the controversy is essentially nil. 

Putin is a garden-variety authoritarian, not another Adolf Hitler.  The former’s ambitions are focused on border security and international respect, not global conquest and ideological domination.  Moreover, Russia—with a weak economy dependent on energy revenues and badly managed military in desperate need of reform—is no Nazi Germany. 

Since whatever happens between Russia and Ukraine poses little threat to Americans, military retaliation is inconceivable.  Yet the administration added fighter patrols in Europe and others have proposed sending the Sixth Fleet into the Black Sea.  However, absent plans to strafe Russian villages and seize Sevastopol, what’s the point? 

Former White House aides Stephen J. Hadley and Damon Wilson advocated “deploying and exercising NATO forces in Poland, the Baltic states, and Romania.”  That would only reinforce Moscow’s determination to prevent Ukraine from becoming a similar advance base for the U.S. military.

John Bolton suggested putting “both Georgia and Ukraine on a clear path to NATO membership.”  Yet alliances are supposed to increase America’s security, not increase the likelihood of confrontation and war.

The Europeans don’t have much of a military option because they don’t have much of a military.  Despite constant exhortations from Washington to do more, almost all European states are cutting back.

Which leaves economic and diplomatic sanctions for both America and Europe.  Alas, many measures, such as individual visa bans, would have but minimal impact on Moscow. 

More serious would be sanctioning Russian banks, restricting energy sales, and embargoing trade.  However, enthusiasm in Europe for acting drops the farther one moves from Russia. 

Moscow also could retaliate by freezing the assets of Western businesses.  Moreover, Russia could damage significant allied interests elsewhere, impeding logistical support for Afghanistan and buttressing Iran in negotiations over its nuclear program, for instance. 

As I point out in my latest article on Forbes online:  “The best answer for the Crimean crisis is a negotiated climb-down, where Russia pulls back its forces, Kiev addresses those disenfranchised by Yanukovich’s ouster, Crimea delays its referendum, Ukraine accepts a secession vote, Europe respects the result, Washington stops meddling in Kiev’s politics, and everyone disavows any intention of bringing Ukraine into NATO.”

If Moscow forges ahead anyway, the allies should play a long game—employ limited economic sanctions against business elites and sustained diplomatic pressure against political elites, while avoiding a new cold war.  However, the U.S. should act only in cooperation with Europe, since there is no gain to unilaterally penalizing American business. 

Finally, over the longer-term, Washington should force Europe to take over responsibility for its own defense.  In early March the administration undertook what Secretary of State John Kerry termed “concrete steps to reassure our NATO allies.”  Actually, Washington should adopt the opposite strategy.  America’s friends should understand that if they are not willing to defend themselves, no one else will do so. 

At the same time, Washington should rethink nonproliferation policy.  It’s too late for Ukraine, but Kiev gave up Soviet nuclear weapons left on its soil in return for paper border guarantees.  Possession of even a handful of nuclear-tipped missiles would have changed Moscow’s risk calculations. 

Whatever the resolution of the immediate crisis, the Obama administration should use Russia’s Crimean gambit to end Europe’s dependent military relationship.  That would offer at least one silver lining to yet another potential conflict without end.

Categories: Policy Institutes

E-Verify Does Not “Turn Off” Job Magnet

Tue, 03/11/2014 - 12:24

Alex Nowrasteh

One of the main claims of E-Verify’ ssupporters is that it will turn off the job magnet that incentivizes unauthorized immigration.  A recent Working Paper by economists Pia M. Orrenius and Madeline Zavodny casts doubt on that.

They find that E-Verify mandates in the states have decreased wages by likely Mexican unauthorized immigrant men by about 7.8 percent and unauthorized immigrant Mexican women by 1.2 percent.  The likelihood of men being employed is not much affected by E-Verify but it does increase female employment and labor force participation – which makes sense in the context of making migration and employment decisions on the family level.  Clearly, E-Verify has diminished the anticipated wage gains from illegally immigrating to the United States.

However, E-Verify has not turned off the job magnet.  Assuming that unauthorized immigrant men and women earn the same wages, the estimated gains to coming here for the marginal Mexican immigrant is only slightly lowered.  Based on gender data from Pew, assuming that Mexican immigrant wage and comparing identical workers in Mexico and the United States, here are some back of the envelope calculations showing how E-Verify has affected wages for unauthorized Mexican immigrants:

Unauthorized Immigrant Workers 

 

Female

Male

All

Gender

39.4%

60.6%

100.0%

Monthly Wages in U.S. (Pre-E-Verify)

 $  1,470.80

 $  1,470.80

 $  1,470.80

Monthly Wages in Mexico

 $     580.90

 $     580.90

 $     580.90

Wages Multiple from Working in U.S.

2.53

2.53

2.53

Monthly Wages (Post E-Verify)

$1,453.15

$1,356.08

$1,394.32

Wages Multiple from Working in U.S. Under E-Verify

2.50

2.33

2.40

Sources: Center for Global Development, Pew Hispanic Center, and Dallas Fed Working Paper

E-Verify lowers the wage gain for all Mexican unauthorized workers from 2.53 times as great as in Mexico to 2.4 times as great – a whopping 5 percent decrease.  That’s not much to brag about considering E-Verify is supposed to be the lynchpin of future immigration enforcement.  It’s hard to see how E-Verify proponents can look at this small wage effect and conclude that E-Verify is worth it, given the enormous array of problems and burdens caused by it.  In practice, E-Verify does not turn off the job magnet that attracts unauthorized immigrants to our shores and will not if it is ever mandated.   

Categories: Policy Institutes

How Much Tax Revenue from Legalized Marijuana?

Tue, 03/11/2014 - 10:20

Jeffrey Miron

Some marijuana legalizers push the argument that legalization will generate additional tax revenue. Opinions differ widely, however, on exactly how much revenue.

In mid-February, Colorado Governor John Hickenlooper predicted that the taxes, licenses, and fees on medical-plus-recreational marijuana would generate $134 million for the fiscal year starting in July.

In my 2010 Cato White Paper, I predicted that full legalization (federal and state) would generate roughly $55-60 million per year for Colorado.

Now just released data from Colorado for January, the first month of fully legal marijuana sales, show about $2 million from recreational marijuana and about $3.5 million for medical-plus-recreational marijuana.  The latter figure implies annual revenues of about $42 million.

This January figure may turn out to be misleading.  On one hand, the industry could grow over time, boosting revenues. On the other hand, initial hoopla over legalization may have inflated January sales.  And, longer term, sales in Colorado could decline if other states legalize or medicalize.

If the lower revenue numbers persist, does that weaken the case for legalization?

No: Increased tax revenue was never the main reason for legalization. Instead, the crucial goals of legalization are greater freedom for marijuana users and elimination of prohibition’s unintended consequences (crime, corruption, poor quality control, diminished civil liberties, restrictions on medical uses, and expenditure on enforcement).

Collecting revenue on legalized marijuana is perfectly sensible; it allows lower tax rates on everything else. But this appears to be a small effect, and it is not the main benefit of legalization in any case.

Categories: Policy Institutes

We're from the Government and We're Here to Help: School Lunch Edition

Tue, 03/11/2014 - 08:47

Jason Bedrick

How much does a “free” school lunch cost?

In the last few years, First Lady Michelle Obama has worked with the U.S. Department of Agriculture to make school lunches healthier. In 2011, Neal McCluskey argued that, though well-intentioned, the changes would result in more wasted food, higher costs, and major implementation challenges. The General Accounting Office has now issued a report that confirms these concerns:

According to the GAO report, local and state authorities told researchers the new standards have resulted in more waste, higher food costs, challenges with menu planning and difficulties in sourcing products that meet the federal portion and calorie requirements.

When such decisions are made at the local level, schools can solicit and respond to feedback from parents and students. However, when the proverbial faceless bureaucrat in some distant Washington office decides, the rules tend to be uniform and inflexible, leading to all sorts of unintended consequences:

The federal government’s changes to school lunch menus have been disastrous, causing problems for cafeterias trying to comply with the rules and leaving the menu so expensive or unpalatable that more than 1 million students have stopped buying lunch, according to a government audit…

One school district told federal investigators that it had to add unhealthy pudding and potato chips to its menu to meet the government’s minimum calorie requirements. Other school districts removed peanut butter and jelly sandwiches from their elementary school menus.

Five of the eight school districts surveyed by the Government Accountability Office, the official watchdog for Congress, said they believed students were going hungry because of smaller entree portions demanded by the rules.

In other words, the so-called “Healthy, Hunger-Free Kids Act” actually resulted in some kids being served less healthy food while other kids went hungry.

Two-thirds of states reported on the GAO survey that implementation in 2012-13 was a “very great challenge” or an “extreme challenge.” The report noted that much of the difficulty was related to the sheer volume of regulations. In just 18 months, the USDA issued 1,800 pages of “guidance” for following the new rules. Moreover, the “guidance” was “provided too late in the 2012-2013 school year to be helpful” because schools “had already planned menus and trained food service staff” on what they thought the new rules required. However, some guidance memos “either substantively changed or contradicted aspects of previously issued memos.” When state officials contacted the USDA’s regional offices for guidance on understanding the “guidance,” the USDA staff were “sometimes unable to answer state questions on the guidance.” 

Let’s hope this serves as a cautionary tale for those who want the federal government to play a larger role in education policy in general.

Categories: Policy Institutes

Cato Keeps Challenging an Illegal IRS Rule Regarding Obamacare

Tue, 03/11/2014 - 08:45

Ilya Shapiro

Last month, Cato filed a brief in the D.C. Circuit case of Halbig v. Sebelius, supporting a challenge to the IRS’s unilateral and unauthorized decision to extend tax credits to individuals who purchased health insurance from exchanges that were not established by their state. Now we’re continuing out advocacy in this area by filing a brief, joined by the Pacific Research Institute and the American Civil Rights Union, supporting the challengers in a similar Fourth Circuit case.

Here’s the background: To encourage the purchase of health insurance, the Affordable Care Act added a number of deductions, exemptions, and penalties to the federal tax code. As might be expected from a 2,700 page law, these new tax rules have the potential to interact in unforeseen and counter-intuitive ways. As first discovered by Michael Cannon and Jonathan Adler, one of these new tax provisions, when combined with state decision-making and IRS rule-making, has given Obamacare yet another legal problem. The legislation’s Section 1311 provides a generous tax credit for anyone who buys insurance from an insurance exchange “established by the State”—as an incentive for states to create the exchanges—but only 16 states have opted to do so. In the other states, the federal government established its own exchanges, as another section of the ACA specifies. But where § 1311 only explicitly authorized a tax credit for people who buy insurance from a state exchange, the IRS issued a rule interpreting § 1311 as also applying to purchases from federal exchanges. This creative interpretation hurts individuals like David King, a 63-year-old resident of Virginia.

Because buying insurance would cost King more than 8% of his income, he should be immune from Obamacare’s tax on the decision not to buy insurance (the “tax” that you’ll recall Chief Justice Roberts devised in his NFIB v. Sebelius opinion). After the IRS expanded § 1311 to subsidize people in states with federal exchanges (like Virginia), however, King could have bought health insurance for an amount low enough to again subject him to the Roberts tax. King argues that he faces these costs only because the IRS exceeded the scope of its powers.

In our latest brief, we argue that the IRS’s decision wasn’t just unauthorized, it was a blatant invasion of the powers exclusively awarded to Congress in Article I of the Constitution. This error was compounded by the district court’s holding that the IRS actions were lawful because, even if Obamacare explicitly restricts the availability of tax credits to states which set up their own exchanges, the expansion of tax-credit availability serves the law’s general purpose of making healthcare more affordable. By elevating its own perception of congressional purpose over the statutory text, the district court ignored the cardinal principle that legislative intent must be effected by the words Congress uses, not the words it may have meant or should have chosen to use.

In other words, if Congress wants to extend the tax credit, it can do so by passing new legislation. The only reason for executive-branch officials not to go back to Congress for clarification, and instead legislate by fiat, is to bypass the democratic process, thereby undermining constitutional separation of powers. This case ultimately isn’t about money, the wisdom of individual health care decision-making, or even political opposition to Obamacare. It’s about who gets to create the laws we live by: the democratically elected members of Congress, or the bureaucrats charged with no more than executing the laws that Congress passes and the president signs.

The U.S. Court of Appeals for the Fourth Circuit (based in Richmond) will hear argument in King v. Sebelius in May.

Categories: Policy Institutes

...In Which Katz Is Not Cited

Tue, 03/11/2014 - 08:41

Jim Harper

The Supreme Court is gradually coming to terms with the effect information technology is having on the Fourth Amendment. In 2001, the Kyllo court curtailed the use of high-tech devices for searching homes. In its early 2012 decision in United States v. Jones, a unanimous Court agreed that government agents can’t attach a GPS device to a vehicle and track it for four weeks without a warrant.

But the Court was divided as to rationale. The majority opinion in Jones found (consistent with Cato’s brief) that attaching the device to the car was at the heart of the Fourth Amendment violation. Four concurring members of the Court felt that the government’s tracking violated a “reasonable expectation of privacy.”

What is the right way to decide these cases? Fourth Amendment law is at a crossroads.

The next round of development in Fourth Amendment law may come in a pair of cases being argued in April. They ask whether government agents are entitled to search the cell phone of someone they’ve arrested merely because the phone has been properly seized. Riley v. California and Wurie v. United States have slightly different fact patterns, which should allow the fullest exposition of the issues.

Cato’s brief in Riley, filed this week, again seeks to guide the Court toward using time-tested principles in Fourth Amendment cases. Rather than vague pronouncements about privacy and people’s expectations around it, we invite the Court to apply the Fourth Amendment as a law.

“Courts should examine whether there was a seizure or search,” the brief concludes, “and whether any such seizure or search was of persons, papers, houses, and effects. If those conditions are met, courts should examine whether the warrantless seizures and searches were reasonable.”

The brief argues that the Court should carefully examine the many distinct seizures and searches that occur in the typical law enforcement stop. Crucially, the Court should recognize that the search of a phone is a distinct, additional step from the seizure of the phone that occurs when all items are taken off a suspect for the purposes of officer safety. Looking through the phone’s contents requires its own legal justification, and typically, given the massive amounts of personal and private information on a cell phone, that search for additional evidence will require a warrant.

Cato’s brief invites the Court to openly discuss a premise that the government and the petitioner share: that a cell phone is an “effect” for purposes of Fourth Amendment analysis. No court we found has yet held this. And the contents of phones are distinct “papers and effects,” which serve the same human ends that papers, postal mail, books, drawings, and portraits did in the founding era.

In Jones, both the majority and the concurring opinion quoted Kyllo in agreeing that the Court should “assur[e] preservation of that degree of privacy against government that existed when the Fourth Amendment was adopted.” The Cato Institute’s brief in Riley shows them how to do that.

Cato’s brief does not cite Katz v. United States, the 1967 case that produced the “reasonable expectation of privacy” test. With luck, the Katz test will not survive into its second half-century of weakening Americans’ constitutional protections for privacy from government.

Categories: Policy Institutes

Let’s Try Anti-Sanctions

Mon, 03/10/2014 - 15:08

K. William Watson

As U.S. policymakers develop their response to the Russian incursion into Ukraine, it seems quite likely that some form of sanctions will be employed.  But sanctions are always harmful to innocents and never particularly effective.  It’s worth considering, then, whether there are policy options that would have a positive impact on the geopolitical situation in Ukraine while directly improving human lives and increasing liberty.  We could call them “anti-sanctions.”

One possibility would be to liberalize U.S. exports of natural gas.  John Boehner and others in Congress have argued that doing so would reduce Russia’s influence in the region by providing countries like Ukraine a non-Russian source of energy.  Even if the geopolitical benefits are slow to materialize, allowing more oil and gas exports would have tremendous economic benefits for the United States.

A much simpler anti-sanction response would be to drop U.S. tariffs on imports from Ukraine.  Normally, many products from Ukraine would be allowed to enter the United States duty free under the Generalized System of Preferences.  But that program, meant to aid development in poor countries, expired last summer.  Renewing GSP would reduce Ukraine’s economic dependence on Russia while directly helping Ukrainians and the Americans they do (or would do) business with.  

Perhaps I am hopelessly naïve, but exploring avenues for peaceful interaction seems to me like a much friendlier and more constructive way to approach international problems.  I suspect there are a great number of pro-liberty “anti-sanctions” that the U.S. government could employ as a response to the crisis in Ukraine that might actually make a positive difference in the lives of Ukrainian people.

Categories: Policy Institutes

SAT Changes = Bad News for Common Core?

Mon, 03/10/2014 - 14:41

Neal McCluskey

Working on education every day, you get used to your subject rarely making major national news, probably because the troubles are constant and sudden crises rare.  But change the SAT – once known as the Scholastic Aptitude Test – and all heck breaks loose. Of course, something else has been springing heck all over the country, too  – the Common Core – but because that fight has been taking place mainly at the state level, the nation’s collective attention has never been turned to it all at once. The SAT brouhaha might, however, change that, likely to the chagrin of Core defenders.

What’s the connection between the Core and the SAT? A big one: David Coleman, who is both a chief architect of the Core and president of the SAT-owning College Board. Coleman announced when he took over the Board that he would align the SAT with the Core, and it was clear in the Board’s SAT press release that that is what’s happening. Employing Common Core code, the Board announced that the new SAT will focus on “college and career readiness.”

Why is this potentially bad news for Core supporters? Because the SAT changes are widely being criticized as dumbing-down the test – good-bye words like “prevaricator,” hello toughies like “synthesis” – and that may drive attention to people who are questioning the quality of the Core. Illustrating unhappiness with the changes, in the Washington Post yesterday both a house editorial and a column by Kathleen Parker dumped on the coming SAT reforms, with the editorial stating:

It sounds as though students could conceivably get a perfect score on the new exam and yet struggle to fully comprehend some of the articles in this newspaper. Colleges should want to know if their would-be English majors are conversant in words more challenging than “synthesis,” or that their scores reflect more than lucky bubble guesses…

Maybe even more troubling than losing an outlet like the Post, if you’re a Core supporter, is possibly losing a guy like Andy Smarick at the pro-Core Thomas B. Fordham Institute. Last week Smarick defended knowledge of words that SAT bosses now deem too “obscure.” To be sure, Smarick didn’t “decimate” the new SAT (see the post), but his critique was enough to elicit a response from Coleman himself.

From a Core opposition perspective, it is crucial that people make the connection between the SAT and the Core, and that may be happening. The Post noted that “it’s no accident that this push comes from a College Board president who helped produce the K-12 Common Core standards.” Similarly, the New York Times report on the changes identified Coleman as “an architect of the Common Core curriculum standards.”

Making this connection is important because Core supporters’ major pro-Core (as opposed to anti-Core-opponent) argument is that the standards are highly “rigorous.” That claim has taken heat from several subject-matter experts, but they have struggled to be heard amidst pro-Core rhetoric.  Sudden and intense national scrutiny of the SAT, if directly connected to the Core, might help doubters of Core excellence get more attention.

Of course, the primary reason to object to the Core is not that it may or may not be high-quality – though that is certainly an important concern – but that it is being foisted on the nation through federal power, and a monopoly over what schools teach is a huge problem. It kills competition among differing ideas and models of education, stifles innovation, and severely limits the ability of children – who are all unique individuals – to access education tailored to their specific needs, abilities, and dreams.

Common Core opponents should be encouraged by a national critique of coming SAT changes not, ultimately, because the changes are good or bad, but because serious scrutiny could well bolster resistance to the federally driven Core. In so doing, it could help to preserve some of the freedom necessary to ensure that standards have to earn their business rather than having children handed to them by Washington.

Categories: Policy Institutes

Supreme Court to Government: Stop Railroading Property Owners

Mon, 03/10/2014 - 14:18

Trevor Burrus

Today, in Marvin M. Brandt Revocable Trust v. United States, the Supreme Court rebuked another attempt by the Obama administration to adopt a novel and extreme litigating position that was contrary to well-established precedent. Eight justices agreed with Cato’s amicus brief, holding that the United States does not retain a property interest in former railroad lands that are no longer used by railroads. Although this may seem like an arcane issue for Cato to be involved in, the case actually resembles a typical takings case, but this time the government tried to define a property right out of existence rather than pay compensation to the owners.

To be fair to the Obama administration, this case began in 2006, and both Republican and Democratic administrations have been litigating similar cases for some time. Brandt is a best seen as an example of how governments of all stripes will find the path of least resistance to accomplish its goals, including defining a property right out of existence to avoid paying for it.

First, a little background on property law for those who haven’t been to law school. You may have heard the term “bundle of rights” or “bundle of sticks” applied to property. Those phrases merely describe the various rights that people can have in property. It is possible to own something, such as prescription drugs, that you’re not allowed to sell. Thus, you wouldn’t have the “right to sell” in your bundle of rights.

When it comes to real property (the term lawyers use for land) there are many rights in the bundle, and those rights can be split up both temporally and spatially. For example, mineral rights can be sold or leased, as can the airspace above land. Those rights can then be split up temporally, as in an agreement to transfer mineral rights to a neighbor in 10 years for a period of two years, at which point the rights would revert back to the original owner. At the time of the agreement, the neighbor would have a “future interest” in the mineral rights (he would take possession of it in 10 years) and the original owner would have a reversionary future interest (in 12 years the rights will revert back to her).

In Brandt, the question was whether the U.S. government retained a reversionary interest in the easements it gave to railroad companies in the 19th century. Easements are generally rights of way. They give the right to move across someone’s property, but they do not give the right to build on the land or live on it. Historically, in American and English common law, when an easement was “extinguished” the rights would merge back into the rights of the underlying property owner. The owner would then have his property back, unencumbered by the easement. In this case, however, the government argued that possession of lands with abandoned railroad easements should revert back to the government, not to the landowners.

This may seem like a small and unimportant question, but there are hundreds of thousands of miles of former railroad tracks in the country, and 3,000-4,000 miles of track are being abandoned every year. Much of that trackland crosses the land of private landowners, particularly ranchers in the West, and thus who owns the land when the easement expires–the government or the landowners–is an important question. There is even a National Association of Reversionary Property Owners that has assisted over 10,000 property owners in litigation against the government.

So why has the government so doggedly tried to take this land? There are many reasons, but one is the “rails to trails” program, which turns former railroad land into hiking and biking trails. If former railroad land is owned by the underlying property owners, then the government has to pay compensation to take it. If the government owns it, then of course no compensation is needed. Over the years, the government has litigated dozens of these cases, and they have increasingly used tenuous arguments that one court called “so thin as to border on the frivolous.”

Today, a near-unanimous Court clarified who owns the property: the private landowners. Most damaging to the government’s position was the fact that, 70 years ago, the United States argued that the railroads only owned a common easement to the trackland, and, as explained, a traditional easement reverts back to the underlying property owner when extinguished. As Chief Justice Roberts wrote, “The Govern­ment loses th[e] argument today, in large part because it won when it argued the opposite before this Court more than 70 years ago[.]”

Despite Brandt’s arcane subject matter, it is an important victory for property rights. Stable and predictable property rights are vital to a well-functioning and free society. Not only do they facilitate commerce, but they protect the rights of private owners against the grabby hands of government officials who believe that they can put that property to better use. Now, if the government wants to turn rails into trails, they can pay for the land, just like anyone else.

Categories: Policy Institutes

A Bumpy -- but Hopeful -- Road Ahead for Ukraine

Mon, 03/10/2014 - 13:41

Dalibor Rohac

Even when one tries to ignore the current developments in the East of the country, Ukraine is in a pickle. With one of the lowest incomes per capita among the transitional economies of Eastern Europe, rampant corruption, and quickly depleting foreign reserves, the country is overdue for a reform package in many areas, including fiscal and monetary policy, the judiciary system, bankruptcy law, energy policy, state ownership, to name just a few.

While there is no shortage of foreign experts offering their views on what policies Ukraine needs or does not need, the future of Ukraine is for Ukrainians to decide. Still, the outside world can help. The Cato Institute, for example, is teaming up with the Atlas Network and the Kyiv-based European Business Association this week, hosting an emergency conference on Ukrainian economy.

Instead of policy wonks from Washington, the conference convenes a stellar group of policymakers from the region, who have direct experience with reforms enhancing economic freedom. The speakers include Einars Repse, the former Prime Minister of Latvia, Ivan Miklos, author of Slovakia’s flat tax revolution, Kakha Bendukidze, who as Minister of the Economy was the driving force behind economic reforms in Georgia, Sven Otto Littorin, the former Minister for Employment of Sweden, who assisted with the liberalization of the country’s labor markets, Jan Vincent-Rostowski, until recently the Minister of Finance of Poland, as well as Cato’s very own Andrei Illarionov.

The conference website is here, and you can follow my live twitter feed at this link. Notwithstanding the pessimism of the daily news coming from that part of the world, the recent events in Ukraine have given its people and its leaders a unique window of opportunity to make a departure from the country’s post-Soviet legacy and to put in place institutions that will lead to economic opportunity, freedom, and shared prosperity.

Categories: Policy Institutes

Fifty Years Ago Yesterday...

Mon, 03/10/2014 - 12:14

Walter Olson

…the U.S. Supreme Court handed down what was to become one of its most celebrated tort reform decisions. A profitable national manufacturer had been sued in a distant rural state in which it was decidedly unpopular, resulting in a runaway jury verdict which it sought to challenge on appeal. Pointing out the disadvantages of unpredictable and locally variable tort standards, the corporation’s lawyers pushed for a more uniform and modern standard of liability suited to a nationwide market, which the high court agreed unanimously to develop for the occasion and impose on state courts. And ever since 1964, the winning party in the case — that is to say, the New York Times Company — has taken a sympathetic editorial interest in the plight of other national businesses subjected to runaway verdicts in local courts.

Well, OK, maybe not that last sentence. But the rest of it did happen, in the celebrated libel case of New York Times v. Sullivan. [adapted slightly and re-posted from Overlawyered in January]

Categories: Policy Institutes

Kansas Court Wrests School-Budget Decisions from Voters

Mon, 03/10/2014 - 12:12

Walter Olson

Many public schooling advocates chafe at our constitutional tradition that public moneys be appropriated only at the behest of voters or their elected lawmakers, since it means school budgets often wind up getting rejected, trimmed, or balanced off against other budgetary priorities. As I’ve noted previously in this space, a well-organized, foundation-backed movement has pursued litigation around the 50 states urging courts instead to seize control of school funding in the name of “equitable” or “adequate” school funding.

Such an effort succeeded last week in Kansas, where the state supreme court ruled in favor of a challenge and “ordered increases by July 1 that, according to the state Department of Education, would total $129 million annually.” The case will go back to litigation in a lower court and conceivably could result in further court decrees that could be broader and much more expensive. The Kansas affiliate of the National Education Association can hardly contain its jubilation, while the Associated Press writes that “If the courts order more spending in the future, lawmakers may have to reconsider personal income tax cuts in 2012 and 2013 that were championed by [Gov. Sam] Brownback.”

As I wrote a while back on New Jersey’s Abbott school finance litigation (one broken link removed):

school reform lawsuits like Abbott are much more than just vehicles for inefficiency and waste of tax dollars: they’re examples of an alternative method of governance…. Typically, successful litigation of this sort transfers control over an important issue like school funding from branches of government that are accountable to taxpayers and voters to a cluster of private litigators, expert witnesses, special masters, consultants, law professors, backers in liberal foundations, and so forth. The legal basis for the power grab is often flimsy in the extreme; in the Garden State, for example, the state constitution vaguely mandates that there be a “thorough and efficient” system of public education, and “educational equity” lawyers have prevailed on the courts to erect the whole thirty-year edifice of Abbott orders on a filling in of those mysterious blanks, a process that Gov. Christie has accurately described as “legislating from the bench”. (Our friend Hans Bader at CEI has more here.) In New Jersey, as in many other states and cities subject to these suits, governors and legislators may come and go, but the permanent government of court orders and negotiated consent decrees grinds on and on, conferring a curiously unaccountable power on the lawyers who manage and advance the litigation and their circle of allies.

Categories: Policy Institutes

A Fiscal Lesson from Germany

Mon, 03/10/2014 - 08:57

Daniel J. Mitchell

Germany isn’t exactly a fiscal role model.

Tax rates are too onerous and government spending consumes about 44 percent of economic output.

That’s even higher than it is in the United States, where politicians at the federal, state, and local levels divert about 39 percent of GDP into the public sector.

Germany also has too much red tape and government intervention, which helps to explain why it lags other European nations such as Denmark and Estonia in the Economic Freedom of the World rankings.

But I have (sort of) defended Germany a couple of times, at least on fiscal policy, explaining that the Germans didn’t squander much money on Keynesian spending schemes during the downturn and also explaining that Paul Krugman was wrong in his column on Germany and austerity.

Today, though, I’m going to give Germany some unambiguous praise.

If you look at last decade’s fiscal data, you’ll see that our Teutonic friends actually followed my Golden Rule on fiscal policy for a four-year period.

Here’s a chart, based on IMF numbers, showing total government spending in Germany from 2003-2007. As you can see, German policy makers basically froze spending.

I realize that I’m a libertarian and that I shouldn’t be happy unless the burden of spending is being dramatically reduced, but we’re talking about the performance of European politicians, so I’m grading on a curve.

By that standard, limiting spending so it grows by an average of 0.18 percent is rather impressive. Interestingly, this period of fiscal discipline began when the Social Democrats were in power.

And because the economy’s productive sector was growing at a faster rate during this time, a bit more than 2 percent annually, the relative burden of government spending did fall.

The red line in this next chart shows that the public sector, measured as a share of economic output, fell from almost 49 percent of GDP to less than 44 percent of GDP.

It’s also worth noting that this four-year period of spending restraint also led to a balanced budget, as shown by the blue line.

In other words, by addressing the underlying problem of too much government, the German government automatically dealt with the symptom of red ink.

That’s the good news.

The bad news is that the German government wasn’t willing to sustain this modest degree of fiscal discipline. The Christian Democrats, who took office in mid-2005, allowed faster spending growth beginning in 2008. As I noted above, the budget increases haven’t been huge, but there’s been enough additional spending that Germany no longer is complying with the Golden Rule and the burden of the public sector is stuck at about 44 percent of GDP.

The moral of the story is that Germany shows that good things happen when spending is restrained, but long-run good performance requires long-run spending discipline.

That’s why I’m a fan of Switzerland’s spending cap. It’s called the “debt brake,” but it basically requires politicians to limit spending so that the budget doesn’t grow much faster than inflation plus population.

And that’s why Switzerland has enjoyed more than a decade of good policy.

To see other examples of nations that have enjoyed fiscal success with period of spending restrain, watch this video.

The Canadian example is particularly impressive.

Categories: Policy Institutes

Tax Reform Error #2: Phasing-in Lower Tax Rates

Sun, 03/09/2014 - 14:20

Alan Reynolds

Since 1981, Republican legislators have shown a strong penchant for phasing-in tax rate reductions over several years.  That tradition is maintained in Ways and Means Committee Chair Dave Camp’s proposed 979-page “simplification” of the U.S. tax system.  The Camp draft retains a very high top tax rate of 38.8 percent on businesses that file under the individual income tax as partnerships, proprietorships, LLCs or Subchapter S corporations. For those choosing to file as C-corporations, by contrast, the Camp proposal would gradually reduce the corporate tax rate by two percentage points a year over five years, eventually reducing it from 35 to 25 percent. 

The trouble with phasing-in lower tax rates is that it creates an incentive to postpone efforts and investments until later, when tax rates will be lower.  Reducing the corporate tax rate by two percentage points a year would create an incentive to repeatedly delay reported profits, year after year, holding back the economy and tax receipts.  Sensible tax planners would write-off expenses soon as possible, including interest expenses, but defer investment until future years when the tax rate would be reduced on any resulting added earnings.  

Meanwhile, the widening gap between corporate and noncorporate tax rates (a difference of 13.8 percentage points after five years) would encourage many small businesses, farms and professionals to set up C-corporations to shelter retained earnings.  Owners of closely-held private corporations can defer double taxation indefinitely by not paying dividends and taking most compensation in the form of tax-free corporate perks. Many enterprises contemplating the new incentive to shift income from individual to corporate tax forms after five years would postpone expansion plans until after they made that switch, further depressing the economy and tax receipts.

The Republican Party’s proclivity for phased-in tax cuts may have originated with former Federal Reserve Chairman Alan Greenspan.  In his January 25, 2001 testimony before the Senate Budget committee, Chairman Greenspan said, “In recognition of the uncertainties in the economic and budget outlook, it is important that any long-term tax plan … be phased in.”  That was the same advice he gave in January 1981 when Greenspan and I served on President Reagan’s transition team.  Unfortunately, his advice to phase-in lower tax rates was followed both times, with disastrous results.

During the deep recession from July 1981 to November 1982, Congress opted to postpone most tax relief until the 1983-84 tax years.  Individual tax rates were ostensibly reduced by 5 percent in October 1981, but with only three months left in the year that meant just 1.25 percent.   Rates were again reduced by 10 percent in July of 1982, but that applied to only half of that year’s income.  Meanwhile, bracket creep from high inflation kept pushing people into higher tax brackets (until indexing took effect in 1985), negating much of the intended effect.  The final 10 percent reduction in July 1983 was not fully effective until calendar year 1984. 

Oddly enough, the painful blunder of phasing-in the Reagan tax cuts after a recession was repeated by the Bush administration in March 2001, three months after the economy slipped into recession.  Aside from the fiscal frivolity of adding a 10 percent tax bracket on the first $12,000 of income (cutting taxes $300-600 at all incomes), reductions in the four highest tax rates were originally scheduled to be very gradually phased-in by 2006.  Congress later came to its senses in May 2003 and reduced marginal tax rates. Yet substantial damage was already done.   University of Michigan economists Christopher House and Matthew Shapiro found, “The phased-in nature [of lower tax rates] contributed to the slow recovery from the 2001 recession, while the elimination of the phase-in helped explain the increase in economic activity in 2003.” The harmful impact of the phase-in was confirmed by Cornell University economist Karel Mertens and Morton Ravin of University College London. 

Mertens and Ravin also found that lower corporate tax rates do not reduce U.S. tax revenues, partly because lower tax rates increase domestic investment while reducing tax incentives to take on excess debt.  The Camp plan to phase-in a 25 percent corporate tax rate over many years would be as unnecessary as it would be counterproductive.  Most other countries reduced their corporate tax rates to 25 percent or less long ago – creating marginal effective rates on new investment that are commonly less than half the U.S. level – with clearly beneficial effects on their economies and tax receipts.  

The important, unlearned lesson of 1981 and 2001 is that phased-in reductions in marginal tax rates can make things worse before they make things better.

An uncompetitive U.S. corporate tax rate fosters excessive tax-deductible debt and gives a big cost advantage to foreign enterprises.  There is nothing to be gained, and much to be lost, by improving the U.S. tax climate slowly rather than quickly.

Categories: Policy Institutes

Police Misconduct: The Worst Case in February

Fri, 03/07/2014 - 16:16

Tim Lynch

Over at Cato’s Police Misconduct web site, we have identified the worst case for February. It is a case from Towson, Md., where the local police seem to think they can suspend the First Amendment.

A young man was video recording a late-night altercation involving arrests in downtown Towson when Baltimore County police noticed him recording, roughed him up, and threatened him with arrest if he continued to record the ongoing arrests. When the man cited the First Amendment right to record the police (which Baltimore County Police policy fully recognizes), the officer accosted him and shouted “You have no rights!”

Earlier in the recording, another officer tries to justify ordering the man to leave the scene, shouting “you diverted my attention from that … LEAVE!” Then the officer immediately resorted to physical force to push the recorder away from the scene. The video shows multiple officers reacting violently to being recorded. The fact that they are flaunting the law and their department policy so willfully, while knowing they are being recorded, makes these Baltimore County police officers our prime candidates for the worst police misconduct for February.

For additional background, go here.

Categories: Policy Institutes

Live Free and Learn

Fri, 03/07/2014 - 16:12

Jason Bedrick

Earlier this week, the Show-Me Institute released my study “Live Free and Learn,” the first analysis of New Hampshire’s trailblazing scholarship tax credit program, which is the first in the nation to include homeschoolers. The study found that participants in the program were overwhelmingly low-income and nearly universally satisfied. Some of the key findings include:

  • 97 percent of parents of scholarship recipients are satisfied with their chosen private or home school.
  • 68 percent of parents reported that they noticed measurable academic improvement in their child since receiving the scholarship.
  • 91 percent of scholarship recipients had a household income that would qualify for a free or reduced-price lunch program under the federal National School Lunch program (185 percent of the federal poverty line, or $43,568 for a family of four).
  • 74 percent of private school parents reported that they would have been unable to afford tuition without the scholarship.

I discuss the findings of the study in greater detail at the Education Next blog.

Categories: Policy Institutes

Tax Reform Error #1: Confusing Tax Expenditures with Revenues

Fri, 03/07/2014 - 15:39

Alan Reynolds

House Ways and Means Chairman Dave Camp has released a complex 182-page “discussion draft” called The Tax Reform Act of 2014. Rather get bogged down in details, I will take this opportunity to review several fundamental errors that repeatedly plagued most past and present efforts to reform the federal income tax, including the Camp proposal.

One of the most pernicious errors among would-be tax reformers is to assume that, as the Tax Policy Center asserts, “tax expenditures are revenue losses” attributable to various “loopholes.” On the contrary, the Joint Committee on Taxation (JCT) clearly states that the estimated dollar value of any “tax expenditure … is not the same as a revenue estimate for the repeal of the tax expenditure provision.” As the JCT explains, “unlike revenue estimates, tax expenditure calculations do not incorporate the effects of the behavioral changes that are anticipated to occur in response to the repeal of a tax expenditure provision…. Taxpayer behavior is assumed to remain unchanged for tax expenditure estimate purposes … to simplify the calculation.”

One glaring difference between revenue estimates and tax expenditure estimates involves taxation of capital gains if those gains are realized by selling assets from a taxable account (unlike IRAs or most home sales). Estimated tax expenditures from not taxing realized capital gains at the top income tax rate of 43.4 percent is listed as a big revenue-losing tax expenditure, even though Treasury, the JCT and the Congressional Budget Office (CBO) revenue estimates would rightly predict that the behavioral response to such a high tax would crush asset sales and thus lose revenue. 

Mainly because the artificially estimated “tax expenditure” from a lower capital gains tax is wrongly equated with estimated revenues, the Simpson-Bowles plan hopes to raise an extra $585 billion over ten years. In reality, investors realize fewer gains when the tax rate goes up, so the higher tax on fewer transactions means revenues fall rather than rise.

The same Simpson-Bowles confusion of tax expenditures with tax revenues recently led Washington Post columnist Robert Samuelson to recommend, “ending preferential rates on capital gains (profits on the sale of stocks and other assets).” Samuelson has a noble goal: to use the expected revenue windfall from “taxing capital gains at full income tax rates” to reduce the top tax rate to 25 percent on salaries and small business profits. But that raises an unresolvable  dilemma: The top capital gains tax was already increased to 23.8 percent in 2014, so raising it to 25 percent wouldn’t matter. The only reason this “tax expenditure” would vanish under Samuelson’s plan is not the trivially higher tax on capital gains but the much lower 25 percent tax rate on income. The tax expenditure would indeed be gone, by definition, but eliminating the tax expenditure would not provide more revenue with which to lower tax rates or the deficit. 

Contrary to hoary tax reform mythology, most of the reduction in estimated tax expenditures after the 1986 Tax Reform was likewise the result of reducing the top marginal tax rate to 28 percent, not from trading fewer itemized deductions for a larger standard deduction. Most of the unexpectly strong revenue gain was also from more taxable income earned and reported at the 28 top tax rate (called the “elasticity of taxable income”). Higher tax rates on capital gains clearly reduced revenue until that rate was lowered in 2007. Higher effective rates on corporate profits also produced much less revenue than projected. There was no “tax preference” when the top tax was 28 percent on both capital gains and income, but that certainly does not mean the higher tax rate on capital gains provided revenue with which to lower the marginal tax rate on income. All that was required to lower the top tax rate was the political courage to do so. 

Suppose the individual tax on realized capital gains was raised to the current top rate of 43.4 percent or the Camp proposal’s top rate of 38.8 percent. In either case, the Treasury Department, JCT, and CBO would rightly estimate that revenues would fall not rise. The “tax expenditure” would again disappear by definition, but so would a lot of tax revenue.

Getting rid of tax expenditures is not at all the same as raising more revenue. Confusing tax expenditures with revenue is the first of many persistent fallacies that hamper effective tax reform.

Categories: Policy Institutes

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