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A stubborn myth of the pro-tax left (exemplified by Bernie Sanders) is that the Reagan tax cuts merely benefitted the rich (aka Top 1%), so it would be both harmless and fair to roll back the top tax rates to 70% or 91%.

Nothing could be further from the truth. Between the cyclical peaks of 1979 and 2007, average individual income tax rates fell most dramatically for the bottom 80%  of taxpayers, with the bottom 40 percent receiving more in refundable tax credits than paid in taxes.  By 2008 (with the 2003 tax cuts in place), the OECD found the U.S. had the most progressive tax system among OECD countries while taxes in Sweden and France were among the least progressive.

What is commonly forgotten is that before two across-the-board tax rate reductions of 30% in 1964 and 23% in 1983, families with very modest incomes faced astonishingly high marginal tax rates on every increase in income from extra work or saving (there were no tax-favored saving plans for retirement or college).

From 1954 to 1963 there were 24 tax brackets and 19 of those brackets were higher than 35%.  The lowest rate was 20% -double what it is now.  The highest was 91%.

High and steeply progressive marginal tax rates were terrible for the economy but terrific for tax avoidance. Revenues from the individual income tax were only 7.5% from 1954 to 1963 when the highest tax rate was 91%, which compares poorly with revenues of 7.9% of GDP from 1988 to 1990 when the highest tax rate was 28%. 

The graph, from the Brookings-Urban Tax Policy Center, shows how inflation pushed more and more families into higher and higher tax brackets from 1973 to 1981, when inflation averaged 7.6% as measured by the PCE deflator.   Thanks to runaway inflation and escalating bracket creep, from 1973 to 1981 marginal tax rates were rising for everyone at or above the middle income (the 50th percentile shown in light blue). 

Unfortunately, the 1981 tax law waited until 1983 to phase-in a diluted 23% rate reduction (the 1964 Kennedy rate cuts were 30%).   Yet in 1983, as Bloomberg’s Megan McArdle points out, “the individual income tax was still taking in 8.2% of GDP, which was above the average of the 1970s.” 

In 1983-84, only 18% paid no income tax. Today, mainly because of tax laws enacted by Republicans in 1986 and 2001-2003, 45.3% of tax returns pay no tax –with many receiving refundable tax credits that exceed their Social Security taxes.

Despite dramatically lower inflation after 1981, bracket creep continued to impose small but sneaky tax hikes on middle-income taxpayers until 1985 when tax bracket income thresholds were finally indexed. If tax rate are flat, or nearly so, that whole game of pushing people into higher tax brackets is over. That happened to some extent from 1988 to 1990, when the 1986 Tax Reform briefly cut the top tax rate to 28% through 1990.  The worse that could then happen from a raise, promotion or second earner would be to shove you into a 28% tax bracket, which we now consider “middle class.” From 1988 to 1990 the nearly-flat individual income tax brought in 7.9% of GDP (despite overtaxing capital gains) with a top tax rate of 28%.  Ironically, revenues under that 28% top tax were greater than the 7.6% average of 1991-95, despite or because of the Bush and Clinton “tax increases.” 

Since 1988, despite vigorous efforts of the pro-tax establishment (e.g., Treasury, CBO and their graduates at the Tax Policy Center), marginal tax rates at all income levels remained much lower than they were from 1932 to 1981. Thank Presidents Kennedy and Reagan for that, but also Senator Bill Bradley (D-NJ) and especially Congressmen Jack Kemp (R-NY).  But thanks are also due to Congressmen Bill Steiger (R-WI) and Bill Thomas (R-CA) for lower tax rates on capital gains and dividends. Despite all this widespread relief from onerous and punishing taxation, Bernie Sanders seems oddly nostalgic about President Eisenhower’s 19 tax brackets above 35% while Secretary Clinton dreams of resuscitating a disastrous capital gains tax scheme FDR was forced to abandon in 1938. 

Neither the Kennedy tax rate reductions of 1964-65 nor the Reagan tax rate reductions of 1983-88 were enacted “to benefit the rich.”  That is just a worn-out myth. 

In the run-up to President Obama’s visit to Saudi Arabia later this week, two domestic issues which concern the U.S.-Saudi relationship are also gaining attention. Yet these developments – a congressional bill which allows Americans to sue foreign governments for supporting terrorist groups, and growing calls to declassify the remaining 28 pages of the 9/11 Commission’s report - are unlikely to substantially impact the U.S.-Saudi relationship, which is already on a downward trend due to other, more substantive factors.

Certainly, the bill would have major legal implications for relatives of victims of the 9/11 attacks, who have previously tried to sue the Saudi government for their possible involvement. However, their hope that the declassified report would yield a better understanding of the scope of that involvement is unlikely to yield any smoking gun revelations.

Some of the purported revelations are, in fact, already known. It has been long known that Saudi Arabia has had a hand in the spread, through schools and philanthropic endeavors, of a certain kind of extremist Islamic philosophy often described as Wahhabism. That this philosophy is shared by various radical groups including ISIS and Al Qaeda is likewise well-known, but there is no evidence that the Saudi government ever provided material support to either group.

Though lesser-known, it is also the case that many private Saudi citizens have provided funding to extremist groups over the years. And while it did not come from the government, as Ben Rhodes, the president’s Deputy National Security Advisor noted this week, the Saudi government often paid “insufficient attention” to such funding, particularly prior to 2001. The 9/11 Commission report, though likely to be less detailed than many of the studies of this phenomenon conducted over the last decade, may well include data on the extent to which the Saudi government turned a blind eye to terrorist funding.

Comments from those who have read the reports, and previously declassified information, also suggests that junior Saudi officials may even have played some role in the 9/11 attacks themselves. Indeed, perhaps the best known line in the 9/11 report itself is the assertion that the Commission found “No evidence that the Saudi government as an institution or senior Saudi officials individually funded the organization,” an obvious loophole that leaves little to the imagination. Yet, it is worth noting that any such revelations contained in the report would be at best preliminary, based on unvetted and unverified intelligence.

In fact, while the Saudi government has not objected to declassification of the report, it clearly perceives the congressional bill as a larger concern, threatening economic reprisals. The threat to sell-off American assets if the bill passes is likely an empty one, but it certainly underscores the concern Saudi leaders feel about the potential for such lawsuits.

Perhaps the most interesting aspect of this whole episode is that it is happening at all, a development at least partially driven by the deteriorating U.S.-Saudi relationship. President Obama’s trip to Riyadh will not be an entirely pleasant one given all the tensions in the U.S.-Saudi relationship. Indeed, only a few weeks ago, President Obama himself publicly questioned the Saudi alliance in an interview with the Atlantic’s Jeffrey Goldberg.

Ultimately, the Saudi alliance is changing. Once thought unshakeable, common U.S.-Saudi interests such as energy security and anti-communism have diverged or disappeared entirely. Meanwhile, disagreements on regional stability, Saudi involvement in conflicts like Syria and Yemen, and their support for various extreme groups have helped to sour the relationship. Whether or not the 9/11 Commission report is declassified, it is these larger tensions which present the major obstacle to smooth U.S.-Saudi relations in the future. 

A Time article by James Grant warning about rising federal debt has prompted pushback by columnists questioning whether debt is really so bad. At the Washington Post, Wonkblog columnist Matt O’Brien says “there’s no reason to cut the debt today.” Fellow Wonkblog columnist Max Ehrenfreund suggests that Grant’s figure of $42,998 government debt per person overstates the problem.

O’Brien suggests that the only reason to fear debt would be if it was leading to a financial crisis, but it isn’t because interest rates are low. But O’Brien neglects to mention that interest rates may rise substantially in coming years. CBO projects that as rates rise, federal interest costs will triple from $253 billion this year to $839 billion by 2026.

As for Ehrenfreund, he is right that $42,998 overstates the debt problem because it does not take into account our future rising population. At the same, however, $42,998 understates the problem because each year the government adds more debt. Over the next 10 years, the U.S. population will grow 8 percent, but the CBO says federal debt will rise 69 percent. So Grant’s simple debt metric will increase over time.

Other than possibly causing a financial crisis, rising federal debt creates other harms:

  • Raises Future Taxes. Taxes damage the economy by reducing incentives for productive activities, a harm called deadweight losses. With borrowing, the deadweight losses from taxes are moved to the future when taxes are raised to pay the interest and principal on the debt. So the damage from borrowing is imposed on people down the road because that is when the government will use its coercive power to extract the extra money.
  • Reduces National Saving. Rising debt may crowd out private investment, reduce the U.S. capital stock, and thus reduce future incomes. Economist James Buchanan said, “By financing current public outlay by debt, we are, in effect, chopping up the apple trees for firewood, thereby reducing the yield of the orchard forever.” Such a decline in investment may be averted if private saving rises to offset government deficits. But the CBO says, “the rise in private saving is generally a good deal smaller than the increase in federal borrowing, so greater federal borrowing leads to less national saving.”
  • Saps Business Confidence. Rising government debt may also deter private investment through the mechanism of business expectations. Businesses may be reluctant to make long-term investments, such as building new factories, if high and rising government debt creates a fear of tax increases down the road.
  • Siphoned to Pay Foreigners. Some pundits, such as Paul Krugman, tell us not to worry about government debt because we “owe it to ourselves.” But today about half of federal debt is owed to foreigners. So growing debt means that a rising share of the future earnings of U.S. workers will be siphoned off by the government to repay foreign creditors.
  • Distorts Government Decisionmaking. The availability of debt finance may induce policymakers to increase spending excessively. Since borrowing makes programs appear to be “free” to citizens and policymakers, the government has less incentive to be frugal, and is more likely to spend on low-value programs.

Wonkblog’s O’Brien says he “feels fine” about today’s $13.9 trillion of debt. But how about tomorrow’s $24 trillion, as shown in the chart? And what if America has further recessions, wars, and other negative shocks, and it becomes $30 trillion? Surely, in today’s uncertain world, we want our policymakers to err on the side of prudence, and so debt growth measured in trillions makes me feel far from fine.


For a brief history of federal debt and why it is a major problem, see this 2015 report.

The conventional wisdom that United States v. Texas would be one of the handful of 4-4 ties in the post-Scalia era looks pretty wise indeed. After an hour and a half of argument and huge masses of demonstrators outside the courthouse – more people than I’ve ever seen – that result would be anticlimactic: DAPA remains enjoined, without a Supreme Court opinion.

That’s a good thing for two reasons:  1) in my view, President Obama’s executive action goes beyond executive power under the immigration (and administrative) laws and 2) because the next president will almost certainly rescind (if a Republican) or expand (if a Democrat) the program – mooting or transforming the case. While the government’s supporters had been hoping that the 26-state lawsuit would be dismissed for lack of standing – perhaps Chief Justice John Roberts could be swayed to that technical solution – there do not seem to be five votes for that solution either.

But even though we aren’t likely to get a real decision, this morning’s argument highlighted the importance of the case beyond the immigration context, raising key separation-of-powers issues. As the Obama administration has taken executive power to heights it has never been before, the U.S. solicitor general at one point mentioned “the change in federal law” that DAPA represents – and, of course, it takes a new law passed by Congress to change an old law. Justice Kennedy thus asked about a limiting principle – echoing past arguments over Obamacare and other battles over federal power – and how to define “the limits of discretion.”

With respect to immigration, Texas’s solicitor general concisely boiled down the case to a matter of transforming deferred action (a non-binding decision not to seek removal) into a grant of legal status. That’s the nub: much as we would want an immigration system that makes sense, that allows peaceful people to be productive members of society, that’s not what we have, and the president can’t just use his pen and phone to fix it.

As Justice Robert Jackson put it in his canonical statement about constitutional structure in the 1952 Steel Seizure Case, courts must be last, not first, in giving up on the separation of powers. Just because we might like a policy or think that its costs outweigh its benefits, doesn’t mean that it’s constitutional.

A new study, published in the journal Circulation, adds to growing doubts about the benefits of skim or low-fat milk, NPR reports this morning: 

“People who had the most dairy fat in their diet had about a 50 percent lower risk of diabetes” compared with people who consumed the least dairy fat, says Dariush Mozaffarian, dean of the Friedman School of Nutrition Science and Policy at Tufts University, who is also an author of the study.

NPR reporter Allison Aubrey notes other recent studies on the possible benefits of dairy fat and then reports:

With all the new evidence that challenges the low-fat-is-best orthodoxy, Mozaffarian says it may be time to reconsider the National School Lunch Program rules, which allow only skim and low-fat milk.

“Our research indicates that the national policy should be neutral about dairy fat, until we learn more,” says Mozaffarian.

And there’s the problem for public policy. Why do we need a national policy on dairy fat? Why do we need national rules on what local schools can serve for lunch? And most specifically, since our understanding of nutrition science is always changing, why should we codify today’s understandings in law and regulation?

As I wrote a few months ago in response to a Washington Post story on the possibility that decades of government warnings about whole milk may have been in error,

It’s understandable that some scientific studies turn out to be wrong. Science is a process of trial and error, hypothesis and testing. Some studies are bad, some turn out to have missed complicating factors, some just point in the wrong direction. I have no criticism of scientists’ efforts to find evidence about good nutrition and to report what they (think they) have learned. My concern is that we not use government coercion to tip the scales either in research or in actual bans and mandates and Official Science. Let scientists conduct research, let other scientists examine it, let journalists report it, let doctors give us advice. But let’s keep nutrition – and much else – in the realm of persuasion, not force. First, because it’s wrong to use force against peaceful people, and second, because we might be wrong….

Today’s scientific hypotheses may be wrong. Better, then, not to make them law.

The New York Metropolitan Transportation Authority (MTA) has formally quit its membership in the American Public Transportation Association (APTA), the nation’s principle transit lobby. In a harshly worded seven-page letter, MTA accused APTA of poor governance, an undue focus on small transit agencies, and having an embarrassingly large compensation package to APTA’s president.

The MTA and its affiliates, Metro North, the Long Island Railroad, and New York City Transit, together carry 35 percent of all transit riders in America. Since MTA’s ridership has been growing while transit elsewhere has declined, this percentage is increasing.

Yet APTA’s focus has been on lobbying for increased funding for smaller agencies, including building new rail transit lines in cities that haven’t had rail transit and extending transit service in smaller cities and rural areas that have had little transit at all. As a result, says the letter, MTA has been short-changed by roughly a billion dollars a year in federal funding that it would have received if funds were distributed according to the number of transit riders carried.

This accords with the finding of a Cato policy analysis that found that New York has been shorted half a billion dollars a year in discretionary transit funds. Since discretionary funds make up less than half of all federal transit funds, it is easy to imagine that the nation’s largest urban area is losing a billion dollars a year to smaller cities that are not making effective use of those funds.

The letter observes that APTA’s executive committee, which makes most month-to-month decisions for the group, has up almost no representatives of “legacy systems,” meaning transit systems that had rail transit before 1980. The committee is thus biased towards smaller systems where transit spending is less needed and/or less effective than in big urban areas such as New York, Chicago, and Philadelphia.

The legacy systems, the letter notes, all have “State-of-Good-Repair needs that are an order of magnitude greater than the non-Legacy rail systems.” Yet APTA’s focus has been on building more rail lines rather than funding the maintenance needs of the legacy systems.

MTA’s APTA membership fee of more than $400,000 a year is only about 2 percent of APTA’s annual budget. The transit agency that carries more than a third of the nation’s transit riders could get away with contributing only 2 percent of the transit lobby’s budget because APTA has lots of “associate members” that aren’t transit agencies. Yet even this is a sore point with the MTA, as those associate members are mainly contractors, many of whom make their money from designing and building new rail transit lines, so their influence further dilutes the interests of the MTA and other legacy systems.

The letter concludes with what it calls the “elephant in the room,” the subject of which (it says) was the cause of “acrimonious discussions at the board level” over the compensation for APTA’s president and CEO. APTA’s 2014 IRS report reveals that it paid its president a whopping $892,471 in 2013, not counting another $57,248 in benefits. To many agency officials, this extremely high salary seems incongruous at a time when most transit agencies are having to cut their spending in response to the reduced tax revenues associated with the recent recession. For MTA in particular, this excessive compensation seems particularly galling considering it hasn’t resulted in greater federal funding for MTA at a time when MTA’s ridership is growing relative to that of the rest of the country.

This letter reflects an age-old battle within the transit industry: should the industry concentrate on providing transit in areas where transit usage is highest, or should it focus instead on trying to generate new transit riders in areas where usage is minimal? On one hand, per capita transit ridership is falling almost everywhere, even New York, so if the industry is to grow some efforts must be made in attracting new customers. On the other hand, the industry is clearly subject to diminishing returns: that is, the cost of getting each new customer is increasing.

One reason for that increase is the industry’s questionable strategy of spending huge amounts of money on high-cost infrastructure including light rail, streetcars, and exclusive bus lanes. Far more riders could be gained by spending the same amount of dollars on improvements to basic bus transit. But here is where APTA’s associate members come in, as they have a clear interest in promoting new infrastructure construction rather than expanded operations on existing infrastructure.

To be fair, APTA has to deal with the political environment in Washington, D.C., an environment that favors new construction over maintenance and at the same time favors distributing dollars to as many states and congressional districts as possible. In this environment, it could be argued, the natural outcome is to favor smaller urban areas over big ones such as New York.

But if this outcome is preordained, MTA might ask, then what good is APTA in the first place? The answer appears to be that APTA spends $20 million a year churning out press releases taking credit for decisions and results over which it, in fact, has little or no control. At least some transit supporters think that APTA could have done more to help its members find ways to spend money in ways that would more effectively attract new transit riders, although doing so might have lost APTA some of its associate members.

Since MTA’s annual fee represents such a small part of APTA’s budget, its departure will have little impact on APTA’s funding unless it is followed by similar resignations by other legacy systems. But the dent in APTA’s reputation may be more severe and may force APTA to reconsider its policy of promoting new construction over operation and maintenance of transit systems in the cities that most heavily use transit.

What do you get when you combine family trips to a gardening store and loose-leaf tea in your trash? To Kansas law enforcement, it’s probable cause to get a search warrant and perform a SWAT-style raid on a private home.

In 2011, Robert Harte and his 13-year-old son went to a store for hydroponic equipment to grow tomatoes for a school project. A state trooper had been assigned to watch that store and write down the license plates of any customers (apparently, shopping at a gardening store translates to marijuana production). To follow up that stellar bit of police work, the Johnson County Sheriff’s Office twice examined the Hartes’ trash. They found, both times, an ounce or so of “saturated plant material.”

The Keystone Kops couldn’t tell the difference between tea and tokes using their senses, so they field-tested the substance and the test came back positive for marijuana. (“A partial list of substances that the tests have mistaken for illegal drugs would include sage, chocolate chip cookies, motor oil, spearmint, soap, tortilla dough, deodorant, billiard’s chalk, patchouli, flour, eucalyptus, breath mints, Jolly Ranchers and vitamins,” notes Radley Balko.)

Still, after falsely reading the tea leaves, the deputy sheriffs performed a military-style raid on the family home. At 7:30am, the Hartes were woken up by pounding on their doors; as soon as Mr. Harte answered, an armed team flooded into the room, ordered him to the ground, and rifled through the home for three hours. The officers—once they realized that there was no large-scale growing operation—began searching for “any kind of criminal activity,” a far greater sweep than a warrant to search for “marijuana” and “drug paraphernalia” permits. Moreover, the deputies left the canine units in the house longer than was necessary, to give them “training or just experience”—so the terrifying armed raid was a mistaken fishing expedition that then turned into a training exercise.

Cato has filed an amicus brief in the federal appellate court where the Hartes’ lawsuit against the police is currently pending (after the district court dismissed it). We argue that the police failed to knock and announce their presence in anything but a literal sense—an important Fourth Amendment rule—and also exceeded the scope of their warrant to look for “any criminal activity.” The case thus raises pressing issues of police militarization in society and warrantless police authority. In briefing for an earlier case, Cato noted that “SWAT team deployments have increased more than 1,400% since the 1980s… . SWAT teams and tactical units were originally created to address high-risk situations, such as terrorist attacks and hostage crises. Today, however, these extreme situations account for only a small fraction of SWAT deployments; they’re used primarily to serve low-level drug-search warrants.”

Moreover, the knock-and-announce rule is an ancient one rooted in the English common law dating back to the early 17th century. The rule serves to protect the life, limb, and property of both home occupants and police serving a search or arrest warrant. When officers use the force associated with a SWAT raid, even without literally breaking the door, their pro forma compliance with the knock-and-announce rule converts the Fourth Amendment into a “parchment barrier.”

Indeed, the systemic use of SWAT-style force to execute low-risk drug warrants converts the presumption that people normally peaceably comply with police—central to the knock-and-announce rule—on its head. The police here could easily have investigated their suspicions here without going commando.

Accordingly, we call upon the U.S. Court of Appeals for the Tenth Circuit to send this case back for trial, consistent with the common law underlying the Fourth Amendment. 

This week congressional trade leaders introduced The American Manufacturing Competitiveness Act of 2016 (AMCA), a bill to reform and reinvigorate the stalled Miscellaneous Tariff Bill (MTB) process.  MTBs are legislative vehicles through which Congress temporarily suspends import duties on certain qualified products typically used as inputs in U.S. manufacturing operations. Soon followed the self-congratulatory triumphalism.

House Ways and Means Committee Chairman Kevin Brady (R-TX) said: “This bipartisan bill will empower American manufacturers to compete around the world, create new jobs at home, and grow our economy.”

Ranking Member Sander Levin (D-MI) added: “The MTB is a critical tool that supports American manufacturers and workers, and I’m pleased that we’re finally moving forward with this legislation.”

Senate Finance Committee Chairman Orrin Hatch (R-UT) boasted: “With this legislation, we offer a smart bicameral and bipartisan approach for MTBs — one that improves transparency and allows domestic firms to receive appropriate tariff relief on products that can only be found abroad so that those firms can produce American-made goods here at home.”

Ranking Member Ron Widen (D-OR) moralized: “We need to do everything we can to make U.S. manufacturers more competitive — that includes passing a miscellaneous tariff bill that reduces costs of components we don’t make here in the U.S.”

Let’s unpack this. 

At great expense to producers, consumers, and taxpayers, the U.S. government maintains “protective” tariffs on thousands of imported products, including thousands not even produced domestically.  To mitigate these costs, since 1982, Congress has passed eight so-called Miscellaneous Tariff Bills, which temporarily suspend duties on certain, “non-controversial” products – usually intermediate goods, such as chemicals, electronic components, and mechanical parts – that are not manufactured domestically, but are needed by U.S.-manufacturers in the production of their own output.  Though limited in impact by its temporary nature, the “no domestic production” requirement, and the caveat that the suspended duty not reduce tariff revenues by more than $500,000, the MTB does provide some cost savings to U.S. producers. The last MTB, which expired in 2012, provided an estimated $748 million of import tax relief.

But relief from what? The MTB provides relief from an abomination of Congress’s own making. Why do we even have import duties on products not produced in the United States?  And, if suspending taxes on imported industrial inputs is as good for U.S. manufacturers as the trade leadership jubilantly proclaims (see above), then why not get rid of all duties on industrial inputs – and permanently?  U.S. Customs and Border Protection collected $45 billion in import duties and fees last year.  About $26 billion were taxes on imported intermediate goods. But Congress wants credit for relieving U.S. manufacturers of less than 3% of that cost burden ($748 million/$26 billion) imposed by U.S. tariffs.  

When I asked someone from the Ways and Means Committee today why Congress doesn’t eliminate all tariffs on intermediate goods – since doing so would help attract investment, valued-added activity, and job creation in the U.S. manufacturing sector, the answer I got explains why trade policy is such a tough slog and so poorly understood.  The answer was that we need to keep those tariffs in place so that we have leverage to negotiate foreign market tariff reduction. Get that?  Even though eliminating tariffs reduces cost for manufacturers and makes them more competitive at home and abroad, the position of Congress is that we should keep self-flaggelating until other governments stop whipping their own producers with tariffs.

To be sure, elimating duties – even though temporarily and only on products not made domestically – helps at the margins.  But the self congratulations is a bit much.  And when one considers the reason that the MTB process was derailed, and that AMCA only gets us back to where we were four years ago, the whole episode is just embarrassing.

In 2012, then-Senator Jim DeMint (R-SC) spearheaded an effort to derail the MTB process, declaring duty suspensions to be earmarks, which congressional Republicans took a vow to oppose, because they provide only a “limited tariff benefit” – defined under House GOP rules as benefiting ten or fewer entities. AMCA is an effort to reconcile the MTB process with the Republican ban on earmarks so that duty suspensions can resume.  It presumably accomplishes that by inserting the U.S. International Trade Commission into the process so that duty suspension requests don’t go directly from constituents to Members and Senators, but are vetted first by this disinterested, objective, third-party intermediary.

Although AMCA provides resolution to the GOP quandary, the impasse should have never happened because duty suspensions are not earmarks.  First, duty suspensions will nearly always have more than ten beneficiaries – meaning they defy the earmark definition – because the number of importing entities is likely to increase after a duty is suspended, and the entities in the supply chains of these importers will benefit, too.  The number of beneficiaries is not static.

Second, and crucially, it is the duties – not the measures to suspend them – that are the real earmarks.  Duties enshrined in the U.S. Harmonized Tariff Schedule constitute transfers from consumers and consuming industries to specific, chosen producers.  Those duties were obtained through a process that included earmarking, logrolling, and other forms of backroom dealing.  Efforts to suspend those duties today are intended to return the tax landscape to a state of neutrality.  That objective clearly differs from measures that would channel resources from the national treasury to projects that benefit a limited few in a particular congressional district.

Under the MTB process, the suspension of import duties on qualified products is an outcome available to anyone, and the suspended duties provide benefits to everyone in the downstream supply chain all the way to the final consumer. The fundamental failure to make this connection – to recognize that there are dynamic, but not immediately observable benefits that will accrue to the economy – helps explain why Congress struggles to see the bigger picture.

Given that duty suspension of qualified products is available to all, the only conceivable sense in which one might consider the benefits limited is that not everyone has equal access to the process.  Some import-consuming companies have the wherewithal to make the formal requests – previously to their Members or Senators; prospectively to the USITC – while other companies do not. 

Accordingly, AMCA aims too low.  Why require formal duty suspension requests at all?  Why not make them automatic?  Why not have the USITC do an assessment of the entire Harmonized Tariff Schedule to identify all items that meet the statutory requirements for duty suspension?  Why have such restrictive criteria at all?

If one has low expectations about how Congress can make the United States a more attractive option for manufacturers to establish and maintain operations, then AMCA represents a laudable – though mostly cosmetic – effort to end a GOP semantics battle and restore the status quo.  But Congress should be thinking bigger – much bigger – than the AMCA. 

Rather than celebrate a bill that leaves in place 97 percent of the taxes collected by Customs on imported inputs used by U.S. producers, Congress should commit to working a little harder to eliminate these costly, investment- and production-diverting import duties.

Reportage in The Wall Street Journal on April 3th states that “A fund owned by China’s foreign-exchange regulator has been taking stakes in some of the country’s biggest banks, raising speculation that it may be a new member of the so-called ‘national team’ of investors the Chinese government unleashes to support its stock market.”

Statists and interventionists around the world (read: those who embrace State Capitalism) think “Big Players,” as the academic literature has dubbed them, will protect us from economic storms. While there is a budding and serious academic literature on Big Players – aka Market Disrupters – the financial press virtually ignores the Disrupters’ potential to bury us. Indeed, instead of stabilizing markets, the Big Players disrupt them. They are the purveyors of instability. For those who wish to grapple with the technical literature, I recommend: Roger Koppl. Big Players and the Economic Theory of Expectations. New York: Palgrave Macmillan, 2002.

Big Players have three defining characteristics. Firstly, they are big — big enough to influence markets. Secondly, they are largely insensitive to the discipline of profits and losses, insulating them from competitive pressures. Thirdly, their freedom from a prescribed set of rules affords them a high degree of discretion.

With these characteristics, Big Players are hard to predict. In consequence, they can disrupt. They divert entrepreneurial attention away from the assessment of strictly economic market fundamentals, such as the present value of prospective cash flows. Instead, the focus shifts toward attempting to predict the actions of Big Players, which are inherently political and unpredictable. This reduces the reliability of expectations, replacing skill with luck.

The Big Players’ discretionary interventions render unreliable most market signals about fundamentals. They foster environments that are ripe for herding and bandwagon effects, as well as noise trading, which is subject to fads and fashions. This partially explains why investment groups are spending big bucks to create a thinking, learning, and trading computer — a search for a master algorithm. Never mind. Big Players heighten volatility and create bubbles. They are the disrupters of the universe.

Just who are the Disrupters? Most central banks possess all the characteristics of Big Players in spades. Since the advent and implementation of quantitative easing (QE), they have become bigger players, with the state money they produce making up a much greater portion of broad money (state, plus bank money) than before 2009. Not only have their balance sheets exploded, but the composition of some of their balance sheets has changed in surprising ways. Not so long ago, central bank assets were largely comprised of domestic and foreign government bonds. Well, now you can find corporate bonds on some central bank balance sheets. And that’s not all. Central banks use their discretion to purchase equities, too. Just take a look at the Swiss National Bank (SNB), one of the alleged paragons of conservative central banking. By the end of Q4 2015, the total value of stocks held by the SNB had risen to $106.62 billion. That’s the size of some of the largest hedge funds in the world, and amounts to over 16.7 percent of Switzerland’s GDP.

The Bank of Japan (BoJ) is also openly a big buyer of stocks — namely, Japanese ETFs. The BoJ is authorized to purchase roughly $25 billion of ETFs per year, and the government leans on the BoJ to use its fire power — especially when the Japanese stock markets are “weak.”

The rogues’ gallery of Big Players also includes: sovereign wealth funds, state-owned enterprises, and many other friends who do the State’s bidding. 

We are becoming grossly over-reliant on Big Players. In consequence, fundamental-based investing has been forced to take a back seat and the markets have become less safe. 

The Heritage Foundation’s John Malcolm and I have a new oped where we draw from newly uncovered to documents to show that the officials who bestowed upon Congress its own special exemption from ObamaCare likely violated numerous federal laws. Malcolm is a former assistant U.S. attorney, a former deputy assistant attorney general in the Department of Justice’s Criminal Division, and the current chairman of the Criminal Law Practice Group of the Federalist Society.

First, a little background. The Affordable Care Act threw members and staff out of the Federal Employees Health Benefits Program, and basically says they can only get health benefits through one of the law’s new Exchanges. Under pressure from Congress and the president himself, the federal Office of Personnel Management (which administers benefits for federal workers, including Congress) decided the House and Senate would participate in the District of Columbia’s “Small Business Health Options Program,” or “SHOP” Exchange, rather than the Exchanges that exist for individuals. The reason is that federal law would not allow members and staff to keep receiving a taxpayer contribution of up to $12,000 toward their premiums if they enrolled in individual-market Exchanges. Yet putting Congress in a small-business Exchange isn’t exactly legal, either. Both federal and D.C. law expressly prohibited any employer with more than 50 employees from participating D.C.’s SHOP Exchange. The House and Senate each employ thousands upon thousands of people.

Okay, now here’s an excerpt from our new oped:

Documents obtained under the Freedom of Information Act show that unnamed officials who administer benefits for Congress made clearly false statements when they originally applied to have the House and Senate participate in D.C.’s “SHOP” Exchange for 2014. Notably, they claimed the 435-member House had only 45 members and 45 staffers, while the 100-member Senate had only 45 employees total…

Making a materially false or fraudulent statement as part of a claim against the U.S. Treasury is a separate federal crime, as is wire fraud. Ordinary citizens who violate these laws face fines of up to three times the amount drawn from the Treasury and/or up to 20 years in prison. They might also face prosecution for health care fraud (10 years), violating the Sarbanes-Oxley ban on falsifying documents (20 years), conspiracy to commit such offenses (5 years), and other crimes under federal and D.C. law.

Newly unearthed documents suggest these officials knew they were violating the law.

Those new documents include admissions by officials in Congress and D.C.’s small-business Exchange that the House and Senate are in fact not small businesses. Read the whole thing.

Just as I am once again highlighting how the Obama administration is trying to save this ill-conceived and unworkable law by spending money it has no authority to spend, University of Michigan law professor Nicholas Bagley is once again defending the administration. Bagley agrees with a large part of my account when he writes:

The exchange website in Washington, DC includes a field for the number of employees. If you enter a figure above 50, the website won’t accept the application. That’s because large employers are ineligible to use the SHOP exchange.

Actually, the web site doesn’t include that field any more, which is part of why Bagley is wrong. But I’ll save that for another day.

Bagley’s argument is that since OPM determined Congress may participate in D.C.’s SHOP Exchange, those false statements were not “material to the approval of their applications,” and therefore do not satisfy the elements of one of the federal crimes we mentioned. 

If OPM’s interpretation of the statute is lawful, Bagley may be right. But if OPM’s decision is not lawful, the these false statements are what Malcolm and I allege: a material part of a fraudulent scheme “to facilitate illegal, taxpayer-funded gifts to members of Congress.” So a lot is riding on whether OPM’s determination is lawful.

Bagley claims OPM’s determination is lawful because the ACA exempts Congress from the rules requiring SHOP Exchanges to reject employers with more than 50 employees. If he has evidence that such an exemption exists, he should cite it. He doesn’t cite it, however, because it doesn’t exist. If it did, OPM no doubt would have cited it when the agency announced this curious decision in the first place. Instead, the agency just pretended that such an exemption existed, and pretended the statutory requirement it was vitiating, and D.C.’s corresponding statutory requirement, do not. All Bagley offers in support of this claim is a link to a three-year-old post of his that addresses a different issue (about which Bagley is also wrong; but again, we’ll save that another day). Curiouser and curiouser.

In sum, if Bagley can substantiate his claim that “the ACA singles out [Congress] as a special case” where the rules requiring SHOP Exchanges to reject large employers do not apply, he should do so. If not, what does that tell us?

(Two addenda. First, I have twice asked Bagley via email whether, regardless of whether he thinks it would be a good idea, 18 U.S.C. 1001 is broad enough to allow a federal prosecutor to bring charges given this fact pattern. No answer yet. Second, Bagley calls our oped “irresponsible” and counsels us to “try and keep some kind of perspective, for Pete’s sake.” Good idea. Here’s another. Let’s stick to arguing the facts.)

We’ve updated the charting tool at with the latest data. You can plot spending on hundreds of federal agencies and programs in constant, or inflation-adjusted, dollars. The charts cover 1970 to 2016.

Which are the largest federal government agencies, and how much have they grown? The following series of seven charts captured from the charting tool shows the 21 largest agencies in order by size.

The first chart shows that Defense, Health and Human Services, and the Social Security Administration used to vie for top spot as the largest agency. But Defense is now being left in the dust, as the latter two entitlement-dispensing agencies gobble up ever more tax dollars.

The second chart shows that Veterans Affairs, Agriculture, and the IRS have soared in cost over the past decade. And, remember, these charts are in constant dollars. The bulk of Agriculture’s budget is the food stamp program, which should be put on the chopping block. IRS spending has soared due to the cost of “refundable” tax credits, such as the earned income tax credit.

The third chart shows Education, Transportation, and the Office of Personnel Management. The latter agency includes retirement and health care programs for federal workers. The Education budget gyrates widely because of recalculations in the costs of student loans. The line for Transportation shows a solid upward trend, despite all the whining we hear about the shortchanging of infrastructure. Anyway, the proper amount of federal Transportation spending ought to be near zero, for reasons I discuss here.

The fourth chart shows Labor, Homeland Security, and Other Defense Civil Programs. The latter includes spending on military retirement and health care. The spike in Labor was due to the extra long UI benefits passed by Congress during the recession. Homeland spending spiked during the Bush years and remains high.

The fifth chart shows that State department spending has soared under Obama. It also shows a large drop in HUD spending, and that relates to the way that the budget accounts for housing finance subsidies. HUD subsidies for rental aid and community development remain at high levels.

The sixth chart shows Energy, NASA, and International Aid. The recent Energy spike stems from the “stimulus” package passed in 2009.

The seventh and final chart, below, shows Interior, Commerce, and the EPA. The spikes in Commerce surround Census years. You can see this clearly if you go to, click open Commerce, and plot Census separately.

Similarly, use the chart tool to see that the Commerce spike in the late 1970s was for the Economic Development Administration, which by the way is one of the dumbest agencies in the government. Finally, if you click open EPA on the charting tool, you can see that the spike in the late 1970s was due to a surge in grants to state governments.

Which of all these departments and agencies should be cut? I’d suggest starting with these.

I am not a lawyer, and I’m certainly not an expert on California law, but yesterday’s state appeals court ruling in the much-discussed Vergara v. California teacher tenure case seems plausible. While Golden State statutes make it very hard to remove bad teachers, and may lead to the worst teachers being disproportionately assigned to schools serving low-income kids, district administrators could curb that if they really, really wanted to. It would just require very expensive, convoluted dismissal procedures be followed for each unsatisfactory educator. So technically, the law may not violate California’s constitution. But to defend it, in reality, is to defend a system heavily slanted against low-income students.

Vergara has spawned similar cases in other states, and I would guess there is a good chance similar rulings will come down the pike in those places. But there is probably also a good chance of tenure laws being overturned. It doesn’t strike me that, from a legal perspective, either side has a clearly superior case. But again, I am not a lawyer.

What this once again screams is that public policy needs to move away from an education system in which parents are dependent on politicians or courts to protect their children. They need money to be attached to kids and to have the ability to take their children out of schools they do not like and put them into other institutions. And there should be no blanket state seniority or teacher evaluation rules. Educators should be free to get together and set up schools with whatever policies they want, and whether or not those schools survive or those policies are maintained should depend on their ability to attract enough paying customers with the services they produce.

We need to stop making parents and children wards of the state, and instead give them real power.

“We don’t win anymore!” Republican presidential candidate Donald Trump tells us. One of the main reasons, according to Trump, is due to free trade agreements. At a rally in North Carolina he declared: “All this free trade, you know what, it is free trade for them, not for us. We’re losing our shirts.” Trump has proposed imposing various taxes on foreign imports to the US because he believes this will help facilitate bringing back jobs to the US (my colleague Daniel Ikenson has written about this here and here).

Trump’s talk of unfair trade and his proposals to punish importers has resonated with many Americans. In fact, a recent CBS/New York Times survey finds that 61% of Americans agree that “trade restrictions are necessary to protect domestic industries” whereas 29% say free trade should be allowed even if domestic industries are hurt by competition abroad. 

Yet, Americans may not be willing to foot the bill of goods’ higher prices that will result from Trump’s proposed trade restrictions. A recent AP/GfK poll finds that 67% of Americans would rather buy cheaper products made in another country rather than pay more for the same product made in the United States. Thirty percent (30%) say they’d rather pay more to buy American made products. That being said, 71% report that they’d like to buy American made items, but that they are often too costly or difficult to find. Furthermore, only 9% say they hold firm to only buying American made goods even if they cost more.

These poll results give some insight into Americans’ revealed preferences, or their actual consumer behavior. While in theory Americans like the idea of buying items made closer to home by their fellow citizens, ultimately their pocketbook may prove more relevant to their behavior.

When it comes to free trade agreements impact on American jobs and wages, Americans are divided but tend not to be concerned. Fifty-four percent (54%) do not believe that free trade agreements decrease wages for American workers while 43% think these agreements do harm wages. Similarly 51% do not think that free trade agreements cost American jobs, while 46% think they do.

Overall, Americans are quite divided over the general benefits of free trade with a third who believe free trade agreements are good for the economy, 37% who say they don’t make a difference, and about a quarter who think these agreements harm the economy.

Japan is a developed nation that allows little immigration, thus winning occasionalpraise from American immigration restrictionists. If the reason for copying Japan’s immigration policy of almost no immigrants is that it will improve the labor markets, conditions there do not provide evidence for that claim, at least on the surface. 

Japan’s immigrant population is minuscule compared to the United States, as a percent of either country’s population (Figure 1).

Figure 1: Immigrant Stock as Percentage of Population

Source: World Bank.

Although there is little immigration to Japan, real average monthly cash earnings have declined slightly since 1995 (Figure 2). During the same time period, U.S. wages have actually grown, albeit not as fast as many want (Figure 3). If those graphs were unlabeled, my hunch is that most immigration restrictionists would assume the better graph is Japan. Japan’s sluggish wage growth in a low-immigration environment doesn’t match the restrictionist fairytale while American wage growth contradicts it.

Figure 2: Japanese Real Average Monthly Cash Earnings, (2010 Thousand Yen)

Source: Statistics Japan: Statistics Bureau, Ministry of Internal Affairs and CommunicationsWorld Bank Data.

Figure 3: U.S. Real Average Wages, Annual, (2010 dollars)

Source: United States Census and World Bank.

An immigration restrictionist might counter that more Japanese are employed due to a paucity of immigration, thus outweighing (or explaining) the sluggish wage growth. That response doesn’t fit either as labor force participation rates (LFPR) for the entire adult population in Japan has been lower than in the United States for as long as World Bank data is available (Figure 4). Japan’s population is older than the United States which likely explains much of their lower LFPR.

Figure 4: Labor Force Participation Rates (% of total population ages 15+)

Source: The World Bank,

However, according to a different ILO estimate of LFPR for those aged 15-64, Japanese workers are more likely to be in the workforce since 2009 but less likely prior to then (Figure 5). 

Figure 5: Labor Force Participation Rate, Modeled ILO Estimate (% of total population ages 15-64)

Source: The World Bank,

Prime Minister Shinzo Abe is turning his attention to reforming Japan’s lackluster labor market that is widely blamed for holding back the country’s economic recovery. Immigration reform could be a portion of that reform package. Some Japanese politicians are less satisfied with their immigration restrictions than they used to be. Japanese public opinion toward immigration has softened recently, especially when viewed in an economic context. Regardless of potentially shifting Japanese public opinion, Japan’s labor market experience does not help immigration restrictionists make their case in the United States.      


Quick note:

Due to difficulty in finding Japanese data I had to rely on average wage rates and use the CPI as an inflation benchmark.    


In the April 13, New York Times an article discusses developments in the civil proceeding between an owner of shares in Fannie Mae and Freddie Mac and the federal government over the latter’s decision in August 2012 to revise the terms of its conservatorship of Fannie Mae and Freddie Mac.  The original agreement stated that the U.S. Treasury would receive a 10 percent dividend on its 189.5 billion dollar injection of capital.  The revised terms gave all positive cash flows from Fannie and Freddie to the Treasury leaving little for the firms’ shareholders.  Granting a request from the government, materials produced under discovery in the case have been under seal.  Responding to a request by the New York Times the judge in the case has released two depositions.  In one the former chief financial officer of Fannie Mae said that she told Treasury officials before their 2012 decision that Fannie Mae would soon earn profits again and that she believes her briefing played a role in the government’s decision to alter the terms governing the conservatorship. 

For some background on this issue you should read my Working Papers column in the Fall 2014 issue of Regulation in which I discuss two papers relevant to the issue.  In “Stealing Fannie and Freddie,” Yale Law School professorJonathan Macey argues that the decision by the Treasury to take all of the profits now earned by Fannie and Freddie erodes the rule of law and violates shareholder rights.

In “The Fannie and Freddie Bailouts Through the Corporate Lens,” Adam Badawi, professor of law at Washington University, and Anthony Casey, assistant professor of law at the University of Chicago argue that in the third quarter of 2012, when the federal government changed the financial arrangements to take all future positive cash flows, the value of shareholder equity in Freddie alone was negative $68 billion.  That is, for the shareholders to earn anything, Freddie would first have to earn $68 billion, which was more than Freddie had earned in the 19 years prior to its financial difficulties (1988–2006). But if Freddie lost only $4 billion more (which is the amount of losses per week in 2008–2009), the senior preferred Treasury shares would be worthless.  The data for Fannie were even worse: it would have to earn $114 billion before common shareholders would earn anything, which is more than it had earned in the 27 years prior to the financial crisis.  The authors argue that when equity’s real value is negative, the directors’ duty to maximize the value of the firm is the practical equivalent of a duty to creditors and not shareholders.  The authors argue that the government’s actions are consistent with what we would expect from a private creditor and do not violate shareholder rights.

I think both papers may be relevant.  As my colleague Mark Calabria has argued the Treasury may have violated the spirit if not the letter of the law.  And in a commentary written at the time he argued creditors were advantaged rather than taxpayers.

But similar to the decision in the AIG case in which a judge ruled that the federal government exceeded its authority in its takeover of AIG but that the government owed no damages to shareholders, the damages to Fannie and Freddie shareholders also may be zero because at the time the firms had negative net worth and would continue to have negative net worth for the foreseeable future.

In the April 13, New York Times an article discusses developments in the civil proceeding between an owner of shares in Fannie Mae and Freddie Mac and the federal government over the latter’s decision in August 2012 to revise the terms of its conservatorship of Fannie Mae and Freddie Mac.  The original agreement stated that the U.S. Treasury would receive a 10 percent dividend on its 189.5 billion dollar injection of capital.  The revised terms gave all positive cash flows from Fannie and Freddie to the Treasury leaving little for the firms’ shareholders.  Granting a request from the government, materials produced under discovery in the case have been under seal.  Responding to a request by the New York Times the judge in the case has released two depositions.  In one the former chief financial officer of Fannie Mae said that she told Treasury officials before their 2012 decision that Fannie Mae would soon earn profits again and that she believes her briefing played a role in the government’s decision to alter the terms governing the conservatorship. 

For some background on this issue you should read my Working Papers column in the Fall 2014 issue of Regulation in which I discuss two papers relevant to the issue.  In “Stealing Fannie and Freddie,” Yale Law School professorJonathan Macey argues that the decision by the Treasury to take all of the profits now earned by Fannie and Freddie erodes the rule of law and violates shareholder rights.

In “The Fannie and Freddie Bailouts Through the Corporate Lens,”Adam Badawi, professor of law at Washington University, and Anthony Casey, assistant professor of law at the University of Chicago argue that in the third quarter of 2012, when the federal government changed the financial arrangements to take all future positive cash flows, the value of shareholder equity in Freddie alone was negative $68 billion.  That is, for the shareholders to earn anything, Freddie would first have to earn $68 billion, which was more than Freddie had earned in the 19 years prior to its financial difficulties (1988–2006).  But if Freddie lost only $4 billion more (which is the amount of losses per week in 2008–2009), the senior preferred Treasury shares would be worthless. The data for Fannie were even worse: it would have to earn $114 billion before common shareholders would earn anything, which is more than it had earned in the 27 years prior to the financial crisis.  The authors argue that when equity’s real value is negative, the directors’ duty to maximize the value of the firm is the practical equivalent of a duty to creditors and not shareholders.  The authors argue that the government’s actions are consistent with what we would expect from a private creditor and do not violate shareholder rights.

I think both papers may be relevant.  As my colleague Mark Calabria has argued the Treasury may have violated the spirit if not the letter of the law.  And in a commentary written at the time he argued creditors were advantaged rather than taxpayers.

But similar to the decision in the AIG case in which a judge ruled that the federal government exceeded its authority in its takeover of AIG but that the government owed no damages to shareholders, the damages to Fannie and Freddie shareholders also may be zero because at the time the firms had negative net worth and would continue to have negative net worth for the foreseeable future.

A number of House Republicans have testified to the Ways and Means Committee about their ideas for overhauling the tax code. Rep. Roger Williams testified about his plan this week. And Reps. Michael Burgess, Devin Nunes, and Robert Woodall presented their plans a couple weeks ago.

Here are a few notes:

Michael Burgess Flat Tax. Rep. Burgess testified in favor of a classic Hall-Rabushka flat tax, which is the plan that has been supported by Steve Forbes and Dick Armey. The tax is named after economists Robert Hall and Alvin Rabushka, who is an adjunct scholar at Cato.

The Burgess plan would have a 19 percent rate (dropping to 17 percent), a large standard deduction ($32,000 for a married couple), and large child deductions ($7,000 per child). My preference would be for a lower rate with a smaller standard deduction, but the Burgess plan is generally excellent.

The flat tax would vastly simplify the tax code. Individuals would be able to file their tax return on a postcard because the plan would abolish nearly all deductions, exemptions, and credits, and individuals would be generally only taxed on their labor income. All capital income would be taxed at the business level at the same 19 or 17 percent rate.

Business taxation would have a simplified cash-flow structure, and companies would immediately write-off capital investment. Complex income tax concepts such as depreciation, amortization, and capital gains would be abolished.

The Burgess tax would eliminate the current tax code bias against savings and investment, which is a key weakness of income taxation. With an economically neutral base and a low rate, the Burgess flat tax would be very pro-growth.

Devin Nunes Business Tax. The Nunes proposal is essentially the business part of the Hall-Rabushka flat tax, but with a 25 percent rate. This is a cash-flow tax, meaning that accrual accounting and noncash concepts such as depreciation would be scrapped. Business investment would be expensed.

Rep. Nunes may have been inspired to pursue his proposal by my 2003 Cato study on replacing the corporate income tax with a business cash-flow tax. Alan Viard at AEI has also written about the idea.

Politicians love to rail against corporate tax avoidance. But the way to actually solve the problem would be to slash the tax rate and replace the current business tax base—which relies on the imprecise concept of “income”—with the easy-to-measure base of net cash-flow, as under the Nunes plan. The current system has so many “loopholes” partly because Congress is taxing the wrong base.

The Nunes plan would be territorial, meaning that the earnings of foreign subsidiaries would not be taxed by both foreign governments and the U.S. government. The plan would encourage multinational corporations to locate their headquarters and their factories here in America, and that would be a boon to U.S. workers. 

Robert Woodall FairTax. Rep. Robert Woodall proposes replacing federal income and payroll taxes with a national retail sales tax called the FairTax. I appreciate the radical spirit of this proposal, and if it were enacted, it would simplify taxation and boost economic growth. However, there are risks to this sort of reform.

One risk is that Congress enacts a national retail sales tax and the income tax is either not repealed or it comes back down the road. The last thing we need is for the overgrown government to have multiple huge tax bases. The Woodall bill would repeal the 16th Amendment, but I don’t think that would be sufficient protection to prevent resumption of income taxation. After all, Congress enacted the corporate income before the 16th Amendment was adopted by claiming that it was an “excise” tax, and today this “excise” tax is the most damaging part of the income tax. Presumably, a liberal Congress could decide that it wanted to impose a similar “excise” tax on America’s more than 20 million small businesses.

Another concern about the FairTax is the plan’s rebate mechanism that would provide families a check each month to offset part of the sales tax burden. That would be a large and redistributive entitlement program, and it would surely become larger and more complex over time as politicians expanded and manipulated it.

All that said, kudos to the sponsors and cosponsors of these bills for their support of a dramatic tax overhaul. Let’s hope that their support can be translated into major tax reform moving through Congress next year.  

For more on the flat tax, national sales tax, and other reforms, see here.

Tacoma, Washington’s News Tribune has editorialized about the REAL ID Act in a way that will be unfamiliar to followers of the national ID law and its implementation. The state has been “dawdling,” it says, by not moving forward on the national ID. The Department of Homeland Security (DHS) has been “patient to a fault” and “dispensed grace” to the 28 states (NT’s number) that have escaped federal punishment. Next we’ll be told that the federal government is efficient and responsive.

If you’re just tuning in, last fall DHS began a major, concerted effort to bring state governments in line with the provisions of the REAL ID Act, a federal law designed to create a national ID system. Washington State has resisted this federal power-grab up over the last decade, but Senator Curtis King (R) recently introduced legislation that would bring Washington into compliance. This threatens Washingtonians privacy and liberty.

Passed in 2005, the REAL ID Act is a federal law designed to coerce states into adopting uniform standards for driver’s licenses and non-driver IDs. Compliance would also require the Washington State Department of Licensing to share drivers’ personal data and documents with departments of motor vehicles across the country through a nationwide data sharing system. If fully implemented, REAL ID would create a de facto national ID card administered by states for DHS. The back-end database system the law requires would expose data about drivers and copies of basic documents, such as birth certificates and Social Security cards, to hacking risks and access by corrupt DMV employees anywhere in the country.

Congress passed REAL ID Act without a hearings and no up-or-down vote in the Senate. Indeed, it was tacked onto a “must pass” military spending bill. Proponents frequently tout REAL ID as having been in a recommendation of the 9/11 Commission. In fact, the REAL ID Act repealed federal legislation that had been passed based on the Commission’s recommendations. It also canceled a negotiated rulemaking process, which was bringing together state and federal officials, privacy groups, and civil libertarians in an effort to shape ID policy. Instead, the REAL ID Act ordered one-size fits all federal regulations with no input from outside groups, much less states.

As the costs to state budgets and Americans’ privacy became clear, many states rejected REAL ID compliance, passing resolutions against the law or outright banning themselves from complying. Washington was one of the strong states. It banned itself from complying with REAL ID in April 2007.

Seeking to break down state resistance, DHS has been issuing threats that it will soon begin refusing drivers’ license and IDs from non-compliant states at Transportation Security Administration checkpoints. But DHS can only threaten; it has never made good on the threat and it never will. That is because DHS itself would take all the blame if it started refusing Americans their right to travel. Multiple DHS-invented “deadlines” have come and gone since the original deadline set by the law in 2008. In January, DHS backed off from a claim made last fall that it would start refusing many states’ licenses in 2016. The latest DHS-invented deadline is in 2018.

When Congress passed REAL ID in 2005, the claim was that it would be a tool in the fight against terrorism. Neither the DHS nor any advocate for a national ID has articulated how it would provide cost-effective security. The true result of the federal government’s national ID program would be greater tracking and control of law-abiding Americans, not terrorists. And data about law-abiding Americans would be exposed to the far more common threats of hacking and identity fraud. These are reasons why Washington resisted REAL ID when the federal Department of Homeland Security first tried to take over the Washington State Department of Licensing.

Another reason for resistance is the certainty that Washington, D.C., will move the goalposts after Washington State moves toward compliance. DHS bureaucrats will be able to change Washington State’s driver licensing policies, require the state to spend funds on the Department of Licensing as the federal bureaucracy wishes.

Washingtonians stood at the forefront of the anti-REAL ID movement when the law first appeared. They should continue to do so, and continue to fight against DHS and its allies in Olympia. There is no security benefit from implementing REAL ID. It simply transfers power from states like Washington to a growing federal government. Senator King should not want to be the official who goes down in hisotry as having pressed a national ID into the hands of Washingtonians.

New Balance announced this week that it will intensify its lobbying efforts against the Trans-Pacific Partnership after the Department of Defense refused to accept the company’s bid to become the exclusive supplier of shoes for new military recruits.  The news has gotten attention because it hints at how the Obama administration may be bribing companies to support the TPP.  That’s an interesting angle, but the incident also highlights New Balance’s long history of rent-seeking and how they intentionally adopt inefficient business practices to curry favor with the government. 

Unlike its global competitors, New Balance assembles shoes in the United States.  They have a handful of factories in New England that employ about 1400 people.  Only about 25% of New Balance shoes sold in America are assembled in its U.S. factories (the rest are imported), and its Made-in-America shoes are manufactured from approximately 70% domestic material. 

Because New Balance is less dependent on trade than its competitors, it benefits from U.S. tariffs on shoes.  Those tariffs range from 8% to 60%, with the higher rates reserved for cheaper shoes.  The tariffs directly cost American consumers and businesses over $2 billion per year. 

Even though New Balance imports most of the shoes it sells, it has lobbied aggressively to maintain those tariffs—likely because the tariffs impose a relatively greater strain on its competitors.  The TPP would eliminate tariffs on shoes from Vietnam, where Nike employs over 350,000 people.

But New Balance’s business model doesn’t depend only on taxing American consumers for doing business with their competitors.  They also want to leverage their American manufacturing as a way to get preferences in government procurement.  That includes using a 75-year-old law to force the Pentagon to buy only New Balance shoes for new recruits.

Under the 1941 Berry Amendment, the Department of Defense may only purchase certain products if they are “wholly of US origin.”  New Balance’s American shoes, remember, are only 70% American, so the Pentagon has been able to provide running shoes for new recruits free of the Berry Amendment’s sourcing restrictions.

A few years ago New Balance decided to try making a 100% American shoe in hopes that the military would then be forced by law to buy only that shoe for all new recruits.  According to the Boston Globe, New Balance “bought a contraption that makes midsoles — a key missing link in its domestic supply chain — and installed the machine, which is the size of a school bus, at its Brighton plant about two years ago in anticipation of the military work.”

However, New Balance’s efforts to use protectionist laws and its leverage in Congress haven’t made the Pentagon actually want to buy its shoes.  Military officials were able to avoid New Balance’s trap by relying on a practical exception to the Berry Amendment that applies when U.S made products “cannot be acquired as and when needed in a satisfactory quality and sufficient quantity at U.S. market prices.”   The Boston Globe reports:

The problem, according to the Department of Defense, is that none of the three New Balance shoes offered for consideration met the agency’s cost requirements and one didn’t meet durability standards.

New Balance’s vice president of public affairs says the problem is President Obama and excessive bureaucracy: 

We were assured this would be a top-down approach at the Department of Defense if we agreed to either support or remain neutral on TPP. [But] the chances of the Department of Defense buying shoes that are made in the USA are slim to none while Obama is president.

They’ve put up roadblock after roadblock. Our shoes are ready to go. It’s a bureaucracy run amok.

So, to recap, New Balance went and made their operations even less efficient in an attempt to get access to sweet government money, but the government agency they wanted to force into buying their product resisted.  Now that that avenue seems to have dried up, they are going to stop playing nice on the TPP, redoubling their efforts to prevent the elimination of regressive shoe tariffs. 

It’s all an excellent example of how companies that rely on government-granted privileges, in this case through protectionist tariffs, learn to make rent-seeking a key part of their business model.

The FT published a piece this week suggesting that it’s actually perfectly legal for the Puerto Rican government–which is on the brink of insolvency–to change its constitution and repudiate its guarantee to general obligation bondholders, in a rhetorical sleight-of-hand that makes me convinced that Jacques Derrida has won the war for the hearts and minds of America’s youth.

The article’s proposal is at once banal and unserious, and much of it they credit to their students, presumably because they recognize this: the first is that while the Puerto Rican constitution may guarantee the payment to the general obligation bondholders with the full faith and credit of the government, that doesn’t mean that the commonwealth’s government couldn’t just change the constitution and eliminate this pesky promise. Legality achieved! Laws change all the time–even constitutions–they aver, and debtors shouldn’t be surprised if that happens in a way that just happens to hurt them financially.  

Another way for the commonwealth to get around the constitutional promises, they suggest, is to make use of provision 3105 of Puerto Rico’s civil code, which “recognises that creditors sometimes have a duty not to enforce debt in ways that prejudice other creditors.”

The other creditors in this instance are the retirees and state employees of Puerto Rico, who may see their wages or pension benefits frozen as a part of the island’s financial reforms. Doing such a thing is, in their perspective, always and everywhere a disaster, and setting aside the law is justifiable because of the harm that would be done if other government spending were ever forced to be cut in order to pay the island’s debt.

But every budget requires a government to decide how to split its revenue between debtors, capital projects, workers, and pensioners, and that inevitably means that the government must spend less in the short run than it would presumably like on police and teachers in order to satisfy its lenders. By this interpretation of provision 3105 Puerto Rico has the right to void its contract with its debtors at any time, even if it’s solvent. It would also mean that no one would have lent to them had they known it would be interpreted this way.

It is a fundamentally unserious idea.

The problem facing Puerto Rico is an age-old one that many governments throughout the world have faced: Puerto Rico can’t pay its debt and it has few options, but it doesn’t want its debtors or the federal government to constrain it in any way while it tries to negotiate a fresh start. Despite the fact that the U.S. Treasury wants to help them in their insouciance, this isn’t the way these negotiations work, and if they ever want to return to capital markets the commonwealth will have to either make some politically difficult decisions to reduce the size and scope of the government or else let someone do it for them. 

Drawing on a new World Bank study, Washington Post columnist Charles Lane today notes “a vast reduction in poverty and income inequality worldwide over the past quarter-century” – despite what you might think if you listen to Pope Francis, Bernie Sanders, and other voices prominent in the media.

Specifically, the world’s Gini coefficient — the most commonly used measure of income distribution — has fallen from 0.69 in 1988 to 0.63 in 2011. (A higher Gini coefficient connotes greater inequality, up to a maximum of 1.0.)

That may seem modest until you consider that the estimate’s author, former World Bank economist Branko Milanovic, thinks we may be witnessing the first period of declining global inequality since the Industrial Revolution.

Note that this hopeful figure applies to the world’s population as though every individual lived in one big country. When Milanovic assessed the distribution of income between nations, adjusted for population, the improvement was even more striking: a decline in the Gini coefficient from 0.60 in 1988 to 0.48 in 2014.

The global middle class expanded, as real income went up between 70 percent and 80 percent for those around the world who were already earning at or near the global median, including some 200 million Chinese, 90 million Indians and 30 million people each in Indonesia, Egypt and Brazil.

Those in the bottom third of the global income distribution registered real income gains between 40 percent and 70 percent, Milanovic reports. The share of the world’s population living on $1.25 or less per day — what the World Bank defines as “absolute poverty” — fell from 44 percent to 23 percent.

So maybe this is a result of all the agitation on behalf of a more moral or planned economy? No, says Lane, citing Milanovic:

Did this historic progress, with its overwhelmingly beneficial consequences for millions of the world’s humblest inhabitants, occur because everyone finally adopted “democratic socialism”? Was it due to a conscious, organized effort to construct a “moral economy” as per Vatican standards?

To the contrary: The big story after 1988 is the collapse of communism and the spread of market institutions, albeit imperfect ones, to India, China and Latin America. This was a process mightily abetted by freer flows of international trade and private capital, which were, in turn, promoted by a bipartisan succession of U.S. presidents and Congresses.

The extension of capitalism fueled economic growth, which Milanovic correctly calls “the most powerful tool for reducing global poverty and inequality.”

This is the good news about the world today. Indeed, it’s the most important news about our world. We hear so much about poverty, inequality, gaps, resource depletion, and the like, it’s a wonder any NPR listeners can bear to get out of bed in the morning. But as the economic historian Deirdre McCloskey says, this is the “Great Fact,” the most important fact about our world today – the enormous and unprecedented growth in living standards that began in the western world around 1700. She calls it “a factor of sixteen”: we moderns consume at least 16 times the food, clothing, housing, and education that our ancestors did in London in the 18th century. And this vast increase in wealth that began in northwestern Europe, mostly Britain and the Netherlands, has now spread to most of Europe, the United States, Japan, and increasingly to the rest of the world.

Bernie Sanders is leaving tonight for the Vatican, where he’ll speak at a conference of the Pontifical Academy of Social Sciences on changes in politics, economics, and culture over the past 25 years. Other speakers will include the leftist presidents of Ecuador and Bolivia. The Vatican would do better to invite Branko Milanovic and Deirdre McCloskey, who have a much better understanding of the real changes in our world than do Sanders, Rafael Correa, and Evo Morales.

Economic growth has not eliminated all poverty, and it will never solve all the problems of the human heart. But understanding the enormous increase in world standards of living over the past three centuries and the past 25 years should be a starting point for any discussion of further progress. Neither the Vatican nor the American media do a good job of informing us about the Great Fact.