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Based on new 10-year fiscal estimates from the Congressional Budget Office, I wrote yesterday that balancing the budget actually is very simple with a modest bit of spending restraint.

If lawmakers simply limit annual spending increases to 1 percent annually, the budget is balanced by 2022. If spending is allowed to grow by 2 percent annually, the budget is balanced by 2025. And if the goal is balancing the budget by the end of the 10-year window, that simply requires that spending grow no more than 2.63 percent annually.

I also pointed out that this wouldn’t require unprecedented fiscal discipline. After all, we had a de facto spending freeze (zero percent spending growth) from 2009-2014.

And in another previous column, I shared many other examples of nations that achieved excellent fiscal results with multi-year periods of spending restraint (as defined by outlays growing by an average of less than 2 percent).

Today, we’re going to add tax cuts to our fiscal equation.

Some people seem to think it’s impossible to balance the budget if lawmakers are also reducing the amount of tax revenue that goes to Washington each year.

And they think big tax cuts, such as the Trump plan (which would reduce revenues over 10 years by $2.6 trillion-$3.9 trillion according to the Tax Foundation), are absurd and preposterous.

After all, if politicians tried to simultaneously enact a big tax cut and balance the budget, it would require deep and harsh spending cuts that would decimate the federal budget, right?

Nope. Not at all.

They just need to comply with my Golden Rule.

 

 

Let’s examine the fiscal implications of a $3 trillion tax cut. If you look at CBO’s baseline revenue forecast for the next 10 years, the federal government is projected to collect more than $43 trillion during that decade. If you reduce that baseline by an average of $300 billion each year, receipts will still grow. Indeed, they’ll rise from $3.4 trillion this year to $4.8 trillion in 2027.

And since CBO is forecasting that the federal government this year will spend more than $3.9 trillion, we simply have to figure out the amount of spending restraint necessary so that outlays in 2027 don’t exceed $4.8 trillion.

That’s not a difficult calculation. It turns out that the American people can get a substantial $3 trillion tax and a balanced budget if politicians simply exercise a modest amount of fiscal discipline and limit annual spending increases to 1.96 percent annually.

In other words, if the crowd in Washington does nothing more than simply have government grow just a tiny bit less than the projected rate of inflation, lots of good things can be achieved.

P.S. I can’t resist pointing out yet again that we shouldn’t fixate on balancing the budget. The real goal should be to shrink the burden of federal spending so more resources are allocated by the productive sector of the economy. That being said, if lawmakers address the underlying disease of excessive spending, that automatically solves the symptom of red ink.

P.P.S. Higher taxes, by contrast, generally lead to higher deficits and debt.

The Christian Science Monitor thinks that the Democrats wrote their infrastructure plan as a “political bridge to President Trump.” Fox News thinks that Trump might “get on board” the Democrats’ plan. Statements like these show that many reporters–and by extension members of the public–haven’t yet figured out the real issues behind the infrastructure debate.

As Business Insider points out, there’s a bigger difference between the two sides over “how it’s paid for” than “what gets built.” The Democrats want the federal government to spend a trillion dollars, money it would have to borrow. Trump wants private investors to spend their own money. Never the twain shall meet. 

But Business Insider doesn’t understand how Trump’s idea will work. If Trump is going to rely on the private sector, it says, then only projects that generate revenue will be built because “projects that don’t generate revenue for the private sector generally don’t get financed.” But there are two kinds of public-private partnerships. The kind that Business Insider is writing about is called demand risk because the private partner takes the risk that tolls, fares, or other user fees won’t repay the cost.

The second kind is called availability payments because the government agrees to pay the private partner the cost of the project over time, whether or not anyone pays user fees or even uses it at all. In this kind, the public takes the risk. While I much prefer the demand-risk form because I think nearly all infrastructure ought to be paid for out of user fees, Trump may be happy to go with availability payments so long as state or local governments are making the payments, not the feds. Democrats in Congress don’t like either one because they short-circuit their ability to appear to give gifts to their constituents.

The third issue that many people don’t understand is the difference between Trump and the Democrats over jobs. The Democrats’ plan estimates that number of jobs that will be created by spending money on construction and maintenance. They used a simple formula: each billion dollars of spending generates 13,000 jobs (about $76,000 per job). Of course, they really mean job-years, and that formula works as well for digging holes and filling them up as for building roads or water lines.

Trump is less concerned about the immediate jobs than whether projects generate long-term benefits for the economy. Digging a hole and filling it up creates short-term jobs, but if there are no jobs after the project is done, it wasn’t worth it. A transportation improvement that generates new travel will generate jobs in the long term. A transportation project that merely substitutes one form of travel for another will generate few, if any, long-term jobs.

So there are three irreconcilable differences between Trump and the Democrats: where the money comes from in the short run (public vs. private); how it is financed in the long run (feds vs. state & local); and what kind of jobs they should shoot for (short-term vs. long-term). In short, while both sides talk about “trillion-dollar plans,” they mean very different things.

One of President Trump’s executive orders will reestablish Secure Communities (SCOMM), which was the most effective interior immigration enforcement program in decades. It was started during the Bush administration and rapidly expanded under Obama, eventually covering virtually all counties in the United States. It worked by checking the fingerprints of local and state arrestees against federal immigration and criminal databases. If Immigration and Customs Enforcement (ICE) suspected the arrestee of being an illegal immigrant they would issue a detainer to hold the arrestee until ICE could pick them up. The Obama administration ended SCOMM in 2014 and replaced it with the similar Priority Enforcement Program.

SCOMM was certainly effective at apprehending and deporting illegal immigrants but it did not make communities more secure from actual criminals. SCOMM was not rolled out nationwide all at once, but rather incrementally (by county) over a four year period of time, in a way unrelated to local crime rates. Social scientists were able to exploit this quirk of SCOMM’s implementation to see if it had an effect on local crime rates, which it would if illegal immigrants were more or less likely to commit violent or property crimes. To make communities more secure, SCOMM would have to have lowered local crime rates.

In a paper published in the prestigious Journal of Law and Economics, Thomas J. Miles and Adam B. Cox found that SCOMM had no effect on local crime rates. Elina Treyger, Aaron Chalfin, and Charles Loeffler similarly found that SCOMM had no effect on local crime rates. Their findings suggest several things. One, SCOMM did not make communities more secure from crime. Two, illegal immigrants are less crime-prone than many people think and probably have about the same level of criminality as natives. Three, a community’s cooperation with the federal government in enforcing immigration law doesn’t seem to raise crime rates (some people suggest that such cooperation makes policing less effective).

Secure Communities is an immigration enforcement strategy that was very effective at identifying and removing illegal immigrants. Many states, like California, will not cooperate with the federal government in this reiteration of SCOMM, so it will likely be less effective than before. However, SCOMM supporters cannot claim that the program makes communities more secure by reducing the amount of violent or property crime.

Tomorrow, President Trump is expected to sign an executive order enacting a 30-day suspension of all visas for nationals from Iraq, Iran, Libya, Somalia, Sudan, Syria, and Yemen.  Foreigners from those seven nations have killed zero Americans in terrorist attacks on U.S. soil between 1975 and the end of 2015.  Six Iranians, six Sudanese, two Somalis, two Iraqis, and one Yemini have been convicted of attempting or carrying out terrorist attacks on U.S. soil. Zero Libyans or Syrians have been convicted of planning a terrorist attack on U.S. soil during that time period.

Many other foreigners have been convicted of terrorism-related offenses that did not include planning a terrorist attack on U.S. soil.  One list released by Senator Jeff Sessions (R-AL) details 580 terror-related convictions since 9/11. This incomplete list probably influenced which countries are temporarily banned, and likely provided justification for another section of Trump’s executive order, which directs the Department of Homeland Security (DHS) to release all information on foreign-born terrorists going forward, and requires additional DHS reports to study foreign-born terrorism.

I exhaustively evaluated Senator Sessions’ list of convictions based on publicly available data and discovered some startling details.

First, 241 of the convictions (42 percent) were not for terrorism offenses.  Senator Sessions puffed his numbers by including “terrorism-related convictions,” a nebulous category that includes investigations that begin due to a terrorism tip but then end in non-terrorism convictions.  My favorite examples of this are the convictions of Nasser Abuali, Hussein Abuali, and Rabi Ahmed.  An informant told the FBI that the trio tried to purchase a rocket-propelled grenade launcher, but the FBI found no evidence supporting the accusation.  The three individuals were instead convicted of receiving two truckloads of stolen cereal.  That is a crime but it is not terrorism. 

Second, only 40 of the 580 convictions (6.9 percent) were for foreigners planning a terrorist attack on U.S. soil.  Seeking to join a foreign terrorist group overseas, material support for a foreign terrorist, and seeking to commit an act of terror on foreign soil account for 179 of the 580 convictions (31 percent).  Terrorism on foreign soil is a crime, should be a crime, and those convicted of these offenses should be punished severely but the government cannot claim that these convictions made America safe again because these folks were not targeting U.S. soil.

Third, 92 of the 580 convictions (16 percent) were for U.S. born citizens.  No change in immigration law, visa limitations, or more rigorous security checks would have stopped them. 

The executive order includes national security exemptions to be made on a case-by-case basis.  The President reserves the option to ban the entry of nationals from additional countries in the future based on a national security risk report written by DHS.  Furthermore, the Secretaries of State and Homeland Security can recommend visa bans for nationals from additional countries at any time.

In addition to the visa restrictions above, Trump’s executive order further cuts the refugee program to 50,000 annually, indefinitely blocks all refugees from Syria, and suspends all refugee admissions for 120 days.  This is a response to a phantom menace.  From 1975 to the end of 2015, 20 refugees have been convicted of attempting or committing terrorism on U.S. soil, and only three Americans have been killed in attacks committed by refugees—all in the 1970s.  Zero Americans have been killed by Syrian refugees in a terrorist attack on U.S. soil.  The annual chance of an American dying in a terrorist attack committed by a refugee is one in 3.6 billion.  The other 17 convictions have mainly been for aiding or attempting to join foreign terrorists.  

President Trump tweeted earlier this week that executive orders were intended to improve national security by reducing the terrorist threat.  However, a rational evaluation of national security threats is not the basis for Trump’s orders, as the risk is fairly small but the cost is great. The measures taken here will have virtually no effect on improving U.S. national security.

The new mayor of São Paulo is showing the way if President Trump wants to follow through on his “drain the swamp” pledge. According to today’s Wall Street Journal:

The multimillionaire star of the Brazilian version of “The Apprentice” TV show, who took over as São Paulo’s mayor this month, is set to embark on the biggest municipal privatization drive in the country’s history.

João Doria, who won a landslide victory in October and has drawn comparisons to U.S. President Donald Trump, said in an interview with The Wall Street Journal he plans to sell off everything from São Paulo’s carnival venue to rights to the city’s cemeteries, aiming to raise more than 7 billion reais (about $2.2 billion).

The plan by the businessman-turned-mayor comes as Brazil looks to shrink its cumbersome and graft-ridden government apparatus in the wake of a vast corruption scandal that has destroyed voters’ faith in traditional politicians.

“The heavy role of the state is one of Brazil’s most serious problems—it is inefficient and it invites corruption,” said Mr. Doria.”

The problem is the same in the United States, and so is the solution.

Mark Fields, president and CEO of Ford Motor Company, celebrated President Trump’s Jan. 23, 2017, executive order withdrawing the United States from the Trans-Pacific Partnership (TPP).  In a statement the following day, Fields said, “And I would just call out yesterday, the president’s decision to withdraw from the TPP.  We’ve been very vocal, both as an industry and as a company, and we’ve repeatedly said that the mother of all trade barriers is currency manipulation, and TPP failed in meaningfully dealing with that, and we appreciate the president’s courage to walk away from a bad trade deal.”

Field’s comments are consistent with Ford’s longstanding position, so were not surprising.  What is harder to understand is that the company appears to be ignoring the economic interests of farmers and ranchers, a significant portion of its customer base for F-150 and heavier trucks.

The F-150 is the best-selling vehicle in the United States and has enjoyed that status for many years.  Some 820,000 were sold last year in this country, with another 145,000 sold in Canada.

The 2012 Census of Agriculture reported slightly more than 2.1 million farms in the United States.  Many of them are quite small, part-time operations.  However, there are more than 500,000 commercially significant farms with sales in excess of $50,000 per year.  A high percentage of farmers drive pickup trucks.

Due to relatively low commodity prices, recent years haven’t been great for farmers.  Net farm income has fallen almost by half since 2013, dropping from $123.7 billion to a forecast level of $66.9 billion in 2016.  Many farmers are putting off buying new machinery and equipment, as well as new pickups.  The farm economy really could benefit from a boost in demand for agricultural products.

Farmers expressed dismay at the president’s decision to withdraw from TPP.  An American Farm Bureau Federation study had predicted that improved access to 250 million customers in Japan, Vietnam, Malaysia, New Zealand, and Brunei would raise U.S. net farm income by $4.4 billion per year, as well as adding more than 40,000 jobs to the American economy.  (No estimate was made as to how many of those jobs would have been related to building more pickup trucks.)

It’s true that not all F-150s are bought by farmers.  Construction workers and others who need to haul stuff around find them to be genuinely useful vehicles.  It’s not obvious that many non-farm pickup buyers would have seen their economic prospects hurt by the implementation of TPP.  The detailed TPP study prepared by the U.S. International Trade Commission estimated real Gross Domestic Product (GDP) would increase by more than $40 billion per year by 2032, and employment would rise by over 120,000.  Even though the gains from TPP would be modest in the context of the large U.S. economy, any additional growth leads to demand for more F-150s.

But what about currency manipulation?  TPP included a side agreement “that addresses unfair currency practices by promoting transparency and accountability.”  Member nations committed to avoid currency devaluations intended to enhance the competitiveness of their exporters.  The agreement called for regular consultations and public reporting regarding foreign-exchange interventions.  Achieving consensus on this provision was made easier because no TPP member currently is pushing its currency to an abnormally low level.

Even though this was the first time the issue of currency manipulation had been dealt with in the context of a U.S. free-trade agreement, the provision was insufficient to quell the concerns of critics, including Ford.  The company has not explained how its pursuit of justice with respect to currency scofflaws will be enhanced by killing this meaningful effort to address it.

As a major manufacturer with large investments in numerous countries, changes in relative currency values can be problematic for Ford.  Global investment decisions made on the basis of one set of currency relationships can become uneconomic if the dollar’s value changes markedly compared to the yen, for instance.  Firms with world-wide supply chains tend to prefer currency stability.

For the broader economy, though, the effects of currency manipulation can be counterintuitive.  A shift in exchange rates changes a country’s “terms of trade,” which is an expression used by economists to describe the ratio of a country’s export prices to its import prices.  From a U.S. perspective, if another country sets its currency at an artificially low level relative to the dollar, America’s terms of trade will improve.  The United States will be able to obtain a greater quantity of imports for the same quantity of exports.  Exporting the same number of airplanes and soybeans as before will pay for the importation of larger quantities of shoes, coffee and flat-screen TVs.

The country that chooses to undervalue its currency will be placing an unrealistically low value on the output created by workers and capital in its domestic economy.  It will, in effect, be selling its exports for less than their true economic worth.  A nation that is consciously devaluing is making a decision to transfer wealth to the United States.  Our country should think twice before rejecting such a gift.

An increase in affordable imports generally doesn’t strike consumers as a bad thing.  People tend to enjoy the higher standards of living that result from trade.  Lower prices on imported goods mean that consumers have more money left with which to buy pickup trucks.  And Ford needn’t have worried about TPP unleashing a flood of foreign pickups onto the U.S. market.  U.S. negotiators were successful in getting other countries to agree to a 30-year continuation of the 25-percent U.S. tariff on light trucks.  (Not exactly a “free trade” provision, is it?)  This tariff helps explain why Honda and Nissan manufacture pickup trucks in the United States.

It’s difficult to conclude anything other than that Ford’s misguided perspective on currency manipulation has caused it to embrace a curious approach to trade policy that will be detrimental to a substantial portion of its customer base.  What the death of TPP ultimately will mean to the U.S. and world economies, to vehicle manufacturers, and to farmers and ranchers remains to be seen.

In the meantime, pickup buyers have a number of alternatives.  Chevy Silverado, anyone?

During his inaugural address, Donald Trump vowed to “completely eradicate” radical Islamic terrorism. Today, in its first moves intended to do that, the administration acknowledged its plans for a complete ban on immigrants and refugees from several majority Muslim countries, including Syria, Iraq, Iran, Libya, Somalia, Sudan and Yemen. Yet the new policy will work contrary to its goal. U.S. Muslim immigration is reducing radical Islamism and anti-Americanism around the world.

For President Trump to fulfill his promise, America will need to do more than kill terrorists and arrest their collaborators. It will need to change the minds of many Muslims around the world about America and its institutions. Immigration is the best—perhaps the only—way that it can do this, and right now, U.S. Muslim immigration is reforming the religion, creating a new cohort of liberal Muslims able to combat Islamist arguments.

For example, Pew Research Center polls reveal that an average of just 4 percent of Muslims in other countries consider homosexuality “morally acceptable,” compared to 45 percent among U.S. Muslims—81 percent of whom are either first or second generation immigrants. Only 20 percent of foreign Muslims believe that other religions can lead to eternal life, compared to 56 percent in the United States. Fully 55 percent of U.S. Muslims believe that the Quran should not be even a source among many for legislation, compared to just 15 percent elsewhere.

This process of assimilation is actually accelerating as Muslim immigration to the United States has peaked. More immigration is not impeding integration. From 2007 to 2014, the share of U.S. Muslims who agree not just that homosexuality should be legal, but that it is “morally acceptable” rose from 27 percent to 45 percent. Pew also documents an 8 percent decline—from 50 percent to 42 percent—in the share of U.S. Muslims who believe that the Quran should be interpreted “literally.”

These facts show that Americans as individuals are good at changing people’s minds. One Syrian refugee and her husband were resettled in Las Vegas—not really known as a haven for religious Muslims. “We had to Google it,” she told the Las Vegas Sun. “We read about its image as a sin city.” But even in the midst of the most extremely socially liberal environment in America, they were quickly won over. “When we came here, we liked it,” she said.

America’s socially tolerant Muslims also reflect the fact that many Muslims who want to come to the United States are prone to accept our way of life from the start. “I immigrated to the U.S. and left my family and home because of my freedom,” one Syrian who escaped to Nashville said. “I also wanted to ensure such freedom is protected, not only for my children, but also for everyone else. I strongly believe in the U.S. Constitution and will fight to protect it, period! Everyone in my community felt the same way.”

These warm feelings about the United States and religious freedom are being transmitted to families and friends around the world. “I want to keep painting the image to all of my family and friends about the goodness of the American people,” Marwan Batman told the Indy Star. “I wish other refugees would be able to come and experience the same things we have experienced … to find the same happiness we have found here.”

This pattern is replicated repeatedly across the United States, where almost 20,000 Syrian refugees have come. “I didn’t know anything about Memphis,” one Syrian refugee told his local paper early last year. “The people have been excellent.” He wants everyone to know. “When I talk to my family they ask, ‘How is the treatment of Americans,’ and I say ‘it’s wonderful,’” he explained.

America has changed a major world religion before. During the 19th and early 20th centuries, as Catholic immigrants poured in, its popes repeatedly condemned religious freedom as an anti-Catholic idea. Americans raised the alarm about this “invasion” of illiberal immigrants who operated their own schools and lived in separate neighborhoods.

Yet it was this wave of immigration that changed the Church. Just after America elected its first Catholic president who vowed to fiercely defend the separation of Church and State, the Church evolved its view, pointing to liberal democracies as proof that freedom of conscience worked. American theologian John Courtney Murray even drafted its statement on religious liberty and convinced the Second Vatican Council to accept it in 1965.

Something similar is already underway in a much smaller way among the 3 million U.S. Muslims. But for this movement to change Islam worldwide, there will need to be many more U.S. Muslims. Right now, they make up just 1 percent of the U.S. population, while Catholics represented a quarter in 1965.

Rejecting Muslims from this part of the world will not make us safer. To “eradicate” radical Islamic terrorism completely, Trump will need more than just bombs and “extreme vetting.” He will need to convince many millions of people that freedom of religion and tolerance is better than jihad. He will need many more allies than he has now. Preventing potential allies from coming to the United States is no way to win this fight.

You Ought to Have a Look is a regular feature from the Center for the Study of Science.  While this section will feature all of the areas of interest that we are emphasizing, the prominence of the climate issue is driving a tremendous amount of web traffic.  Here we post a few of the best in recent days, along with our color commentary.

In a bit of a departure from our typical YOTHAL recipe, where we highlight three or four items from around the web that we found worthy of recommending to you for additional scrutiny, this week we highlight just a single, albeit somewhat lengthy, article that we feel is worth dedicating your time to. The article takes the form of an in-depth interview with Dr. William Happer, emeritus Department of Physics professor at Princeton University (and Cato Adjunct Scholar). It was conducted by TheBestSchools.org as part of their “Focused Civil Dialogues” series, with the topic being global warming. Although the interview was conducted last summer, it has received renewed attention lately as Happer’s name has come up as a good choice for President Trump’s science advisor. It is therefore a good example of the kind of tone that the incoming Administration could set on the topic of human-caused climate change.

During the interview, TheBestSchools and Happer work through the flow chart below, from top to bottom. Each step along the way, including the introduction featuring Happer’s personal history and accomplishments, is an interesting read featuring numerous anecdotes to back his well-thought out and thorough reasoning on why carbon dioxide emissions should not be vilified or regulated (at the same time being an ardent supporter of government actions to restrict/reduce real forms of pollution). The interview exudes history, including historical examples of the dangers and downfalls of political intervention in science and restrictions placed on scientific inquiry.

Here’s Happer’s bottom line (with internal figure references removed):

Strongest arguments against consensus view:

  • Climate models have predicted far more warming than has been observed. This is strong evidence that the equilibrium temperature increases from doubling CO2 levels is not 3° C to 3.5° C, as assumed in most climate models, but much less, probably close to 1° C.
  • The consensus has largely ignored the huge positive effects of more CO2.
  • The large temperature changes of the Medieval Warm Period and the Little Ice Age occurred before the widespread use of fossil fuels after the industrial revolution.
  • There is a strong correlation of temperature with solar activity.
  • Frenzied, ad hominem attacks on credible opponents show that consensus supporters have a very weak scientific case. You don’t need potentially counterproductive ad hominem attacks if you have strong scientific arguments.

Weakest arguments for consensus view:

  • Ninety-seven percent of scientists agree with the consensus.
  • Temperature has increased for the past century and CO2 levels have increased. Therefore the temperature increase was caused by CO2.
  • Government funded, consensus-supporting researchers have no conflict of interest.
  • Scientific opponents of the consensus are prostitutes of the evil fossil fuel industry.

But there is so much more to this interview than is captured by the bottom line—you ought to have a look at the whole thing!

Senate Judiciary Committee Chairman Chuck Grassley recently reintroduced an E-Verify bill that ought to concern privacy advocates. If enacted, the bill would implement the employment verification scheme nationwide, something President Trump called for during his campaign. Nationwide E-Verify would establish the framework for a national ID system that would undoubtedly come to be used for more than the enforcement of immigration laws.

E-Verify allows employers to check a new hire’s information against government databases to confirm legal status. It is an ineffective system. One reason why E-Verify suffers from inefficiency is because, as things stand, employers taking part in E-Verify use information from documents such as Social Security cards provided by employees. Because the E-Verify system matches employees’ names with a Social Security Number (SSN) it’s possible for an unauthorized worker using a fraudulent SSN to be cleared for employment. A 2009 audit commissioned by the United States Citizenship and Immigration Services estimated that 54 percent of unauthorized workers who submitted documents via E-Verify were erroneously cleared for employment thanks to fraud.

An effective E-Verify system would have to address this glaring loophole. One way of addressing E-Verify’s inadequacy is to include biometric information, such as a facial photograph. Such proposals are worrying.

The E-Verify system currently checks submitted data against Department of Homeland Security (DHS) and Social Security Administration databases. Section 11 of Grassley’s bill would allow the E-Verify system to include the “passport and visa record (including photographs) maintained by the Department of State” as well as driver’s license photos. Seven states voluntarily provide DHS with driver’s license data as part of the Records and Information from DMVs for E-Verify (RIDE) initiative. 

That Grassley’s bill explicitly mentions driver’s license photos is important. Allowing the DHS secretary to deem it necessary for the E-Verify system to confirm identity via driver’s license photos introduces biometric information that proponents believe will make the system more effective.

If the statute purports to require that 43 states provide DMV information that raises constitutional concerns, but as the recent debates surrounding REAL-ID show, the federal government could try to coerce states into compliance. DHS announced earlier this year that residents in nine states will need an identifying document other than a state driver’s license to fly if their licenses are not REAL-ID compliant by January 22, 2018.

Even if the federal government fails to force states to submit DMV data under a nationwide E-Verify scheme, there is still the possibility of nationwide E-Verify leading to a de facto biometric national ID card.

Congress could gather biometric data from residents of states that don’t send DMV data to the federal government by mandating a biometric Social Security card in an attempt to address one of E-Verify’s most prominent flaws. Such a plan has been proposed before.

In 2010 Sens. Charles Schumer (D-NY) and Lindsey Graham (R-SC) took to the pages of The Washington Post, proposing a way to “mend immigration.” They listed mandatory biometric Social Security cards as one of the four pillars of their plan. 

If nationwide E-Verify is enforced we should expect such proposals to resurface as states resist DHS requests for their driver’s license photos. These proposals would lead to a biometric national ID being required for employment.

Such a biometric ID card will not only be used to enforce immigration law. A mandatory nationwide identity card provides an ideal mechanism for lawmakers wishing to establish a gun registry, something gun rights activists haven’t overlooked. In 2015, the president of the National Association for Gun Rights (NAGR) wrote to supporters, urging them to contact the House Judiciary Committee to register their opposition to Rep. Lamar Smith’s (R-TX) “Legal Workforce Act.” If enacted, the legislation would have mandated E-Verify nationwide. 

But it’s not only law abiding gun owners who should fear nationwide E-Verify. A national ID system designed for immigration enforcement will almost certainly be applied in wider law and regulatory enforcement contexts. A national ID could be used to regulate and oversee access to healthcare, medicine, and housing. Such a system would put citizens’ privacy at risk, allowing for increased government monitoring and data collection.

Grassley’s bill is cosponsored by some of his Republican colleagues. Perhaps Grassley and his bill’s cosponsors should consider that many notable members of their party considered national ID schemes anathema to Republican principles. When Attorney General William French Smith proposed a national ID, President Reagan ridiculed the idea saying, “Maybe we should just brand all the babies.” Sen. Barry Goldwater (R-AZ) was also opposed to a national ID system. More recently, Sen. Rand Paul (R-KY) has spoken out against national ID

Nationwide E-Verify’s costs would vastly outweigh its proclaimed benefits, and would lead to calls for, and implementation of, nationwide biometric ID. Such proposals are a threat to Americans’ privacy and a needless expansion of federal government power.

Donald Trump’s rhetoric on trade policy has been, to say the least, over the top.  The economic nationalism in his inauguration speech was particularly alarming. But there is a great deal of uncertainty about the extent to which his actual policies will reflect this rhetoric. As an example, look at what Trump said yesterday about requiring domestic materials (mainly iron and steel) in the construction of pipelines, and compare that to what he actually did.

First, here’s what he said as he signed a Presidential memorandum on “Construction of American Pipelines”:

This is construction of pipelines in this country. We are – and I am – very insistent that if we’re going to build pipelines in the United States, the pipes should be made in the United States. So, unless there’s difficulty with that because companies are gonna have to sort of gear up; much pipeline is bought from other countries. From now on, we’re gonna start making pipeline in the United States. We build it in the United States; we build the pipelines; we wanna build the pipe. Gonna put a lot of workers, a lot of steel workers, back to work. Okay. We will build our own pipeline. We will build our own pipes. That’s what it has to deal with. Like we used to, in the old days.

That sounds very strident and forceful: We will use American steel for American pipelines!

What he actually did, however, is much more nuanced. Here is an excerpt from the memorandum he signed:

MEMORANDUM FOR THE SECRETARY OF COMMERCE

SUBJECT: Construction of American Pipelines

The Secretary of Commerce, in consultation with all relevant executive departments and agencies, shall develop a plan under which all new pipelines, as well as retrofitted, repaired, or expanded pipelines, inside the borders of the United States, including portions of pipelines, use materials and equipment produced in the United States, to the maximum extent possible and to the extent permitted by law. The Secretary shall submit the plan to the President within 180 days of the date of this memorandum.

So instead of there being an immediate requirement to use domestic iron and steel in pipelines, which is kind of how it sounded when Trump made the announcement, there will be an interagency consultations process to “develop a plan” within 180 days.  And under this plan, domestic iron and steel is to be used “to the maximum extent possible and to the extent permitted by law.”  The “to the extent permitted by law” qualification is particularly relevant, as it could be interpreted to mean that the requirement would not apply if it violated international trade obligations, such as the non-discrimination rules in the World Trade Organization (WTO).  That is, the requirement which is actually applied after the plan is developed might exempt all countries who are members of the WTO.  If such an exemption were used, the impact of the requirement would be negligible, since most counries are WTO members.  (On a trade specialty blog I run, I explained why this kind of domestic content requirement would almost certainly violate trade obligations).  

The difference between the rhetoric and the possible reality here means that we still don’t have a very good idea of what U.S. trade policy under Trump is going to look like. At some moments, it seems like we are headed into uncharted protectionist territory; at others, it seems more like a continuation of existing policies, with minor modifications.  All we can do at this point is wait for concrete policy proposals and evaluate them as they come out.  Hopefully the reality will not match the rhetoric.

The Congressional Budget Office, as part of The Budget and Economic Outlook: 2017 to 2027, has just released fiscal projections for the next 10 years.

This happens twice every year. As part of this biannual exercise, I regularly (most recently here and here) dig through the data and highlight the most relevant numbers.

Let’s repeat that process. Here’s what you need to know from CBO’s new report.

  • Under current law, tax revenues over the next 10 years are projected to grow by an average of 4.2 percent each year.
  • If left on autopilot, the burden of government spending will rise by an average of 5.2 percent each year.
  • If that happens, the federal budget will consume 23.4 percent of economic output in 2027 compared to 20.7 percent of GDP in 2017.
  • Under that do-nothing scenario, the budget deficits jumps to $1.4 trillion by 2027.

But what happens if there is a modest bit of spending restraint? What if politicians decide to comply with my Golden Rule and limit how fast the budget grows every year?

This shouldn’t be too difficult. After all, even with Obama in the White House, there was a de facto spending freeze between 2009-2014. In other words, all the fights over debt limits, sequesters, and shutdowns actually yielded good results.

So if the Republicans who now control Washington are serious about protecting the interests of taxpayers, it should be relatively simple for them to adopt good fiscal policy.

And if GOPers actually decide to do the right thing, the grim numbers in the CBO’s new report quickly turn positive.

  • If spending is frozen at 2017 levels, there’s a budget surplus by 2021.
  • If spending is allowed to grow 1 percent annually, there’s a budget surplus by 2022.
  • If spending is allowed to grow 2 percent annually, there’s a budget surplus by 2025.
  • If spending is allowed to grow 2.63 percent annually, the budget is balanced in 10 years.
  • With 2.63 percent spending growth, the burden of government spending drops to 18.4 percent of GDP by 2027.

To put all these numbers in context, inflation is supposed to average about 2 percent annually over the next decade.

Here’s a chart showing the overall fiscal impact of modest spending restraint.

By the way, it’s worth pointing out that the primary objective of good fiscal policy should be reducing the burden of government spending, not balancing the budget. However, if you address the disease of excessive spending, you automatically eliminate the symptom of red ink.

For more background information, here’s a video I narrated on this topic. It was released in 2010, so the numbers have changed, but the analysis is still spot on.

P.S. Achieving good fiscal policy obviously becomes much more difficult if Republicans in Washington decide to embark on a foolish crusade to expand the federal government’s role in infrastructure.

P.P.S. Achieving good fiscal policy obviously becomes much more difficult if Republicans in Washington decide to leave entitlement programs on autopilot.

Senate Democrats have proposed an infrastructure plan that calls for $1 trillion in federal deficit spending. In detail, the plan calls for:

  • $100 billion for reconstructing roads and bridges;
  • $100 billion to “revitalize Main Street,” that is, subsidies to New Urbanism and affordable housing;
  • $10 billion for TIGER stimulus projects;
  • $110 billion for reconstructing water and sewer;
  • $50 billion for modernizing rail (Amtrak and freight railroad) infrastructure;
  • $130 billion to repair and expand transit;
  • $75 billion for rebuilding public schools;
  • $30 billion to improve airports;
  • $10 billion for ports and waterways;
  • $25 billion to improve communities’ resistance to natural disasters;
  • $100 billion for a next-generation electrical grid;
  • $20 billion for broadband;
  • $20 billion for public lands and tribal infrastructure;
  • $10 billion for VA hospitals;
  • $10 billion for an infrastructure bank;
  • $200 billion for “vital projects” that “think big,” such as building “the world’s fastest trains.”

In response, someone has leaked what is supposedly the Trump administration’s own list of 50 infrastructure priority projects. It includes such boondoggles as a Dallas-Houston passenger rail line, the congestion-inducing Maryland Purple Line, the $14 billion Hudson River tunnels, and completion of the $2.2-billion-per-mile Second Avenue Subway. Except for the Dallas-Houston line, most of the passenger rail projects were already pretty well decided, but they are still foolish investments that will cost a lot and return little to the economy. There are supposedly more than 250 other projects on a priority list, but it isn’t absolutely certain that this list was endorsed by Trump or merely proposed to him.

What most people have been calling Trump’s infrastructure plan calls for giving tax credits to private investors who spend money on these kind of infrastructure projects. This has some virtues over the Democratic proposal of direct federal spending:

  1. While the Democrats take a top-down approach dictating where the money will go, Trump leaves the setting of priorities to state and local governments, which have already approved most of the projects on his top-50 list;
  2. Where Democrats would commit the federal government to spend an arbitrary amount of money whether it needs to be spent or not, Trump lets state and local governments decide how much to spend and how they will pay for it;
  3. Where Democrats would add $1 trillion to the deficit, Trump relies on a tax credit program that will cost the feds no more than $167 billion per trillion in spending (less, obviously, if less than $1 trillion is spent);
  4. Where a lot of the Democrats’ money would go down a rat hole, at least some of federal tax credits that Trump’s plan would issue will be offset by the reduced use of tax-free municipal bonds and taxes paid by companies and workers earning the money.

Typical of central planners, the dollar figures in the Democrats’ plan are completely arbitrary.

  • Why should trains and transit, which carry 1 percent as many passenger miles as roads, get roughly as much money as roads and bridges (and probably more considering much of the $200 billion “vital infrastructure” fund would go for high-speed rail)?
  • Why spend $40 billion expanding transit and no money expanding highways when highway use is growing faster than transit in most places and most years?
  • Why no money for upgrading the air traffic control system (which is on Trump’s top-50 list)? I don’t support the use of tax dollars for such things, but it is a huge oversight from a plan predicated on the idea that federal central planners know the best places to spend your money.
  • Why $110 billion on water and sewer, and not $100 billion or $120 billion? It seems the point of these numbers is to add up to a nice round $1 trillion while divvying up the money to special-interest groups.
  • For that matter, why any at all on water, sewer, and the electrical grid when these should already be adequately funded through user fees?
  • Why is education even on the list when the federal government has never spent more than token amounts of money for school infrastructure?

My complaints about the Trump plan have been:

  1. It’s not really a plan—it’s just one funding tool;
  2. It doesn’t prevent state and local governments from spending the money on completely looney projects such as the aforementioned Dallas–Houston high-speed rail; and
  3. The private-partnership aspect has confused many people into believing that it will only fund projects that can be paid for out of user fees when in fact most projects would require state and local taxpayers to ultimately replay the private contractors out of tax dollars.

While these are valid complaints, the Trump plan is more bottom-up than top-down, as most if not all of the projects on the possibly fake priority list are supported by state and local officials. And while Trump brought a new idea to the table, the Democrats’ plan is the same old borrow-and-spend formula that they have used in the past. This is actually worse than tax-and-spend because taxing and spending doesn’t leave huge debt problems and interest payments for the future.

While we can hope that Trump’s projects will rely more on user fees more than taxes, at the moment the score has to be Trump 1/2, Democrats minus 1.

In its ongoing crackdown on advocates of free speech, human rights and other liberties, China’s communist party has shut down the website of Milton Friedman Prize winner Mao Yushi’s think tank. Mao has spent a lifetime promoting the values and principles of a free society for which he has often paid a high price, including severe persecution. The Unirule Institute of Economics that he cofounded has educated new and old generations of Chinese on the importance of private property, the rule of law, freedom of choice, voluntary exchange, and other aspects of the market economy, and on how to transition away from central planning.

In recent years, Mao has been warning about a “leftist revival” in China and has called for a critical evaluation of Mao Zedong’s role in Chinese history—an officially taboo subject. His essay “Returning Mao Zedong to Human Form” (upon which this English summary is based) condemned the communist leader’s brutal policies and earned him retribution from the neo-Maoist movement that has been growing with the regime’s encouragement. Repression under President Xi Jinping has intensified as journalists, lawyers, human rights activists, scholars, and members of religious communities have been jailed or otherwise oppressed. The regime has warned against the danger of foreign and western ideas, increased censorship and closed numerous NGOs, accusing them of being foreign agents.

It is in the context of that widening crackdown and disregard for due process or the rule of law that the communist party has closed Mao Yushi’s website. We hope that it does not signal further repression against Mao, his think tank or his colleagues, but we cannot be confident that the law will protect them. Indeed, the head of China’s Supreme Court recently asserted that the Party is above the law and warned against western concepts such as judicial independence.

Free speech champion Flemming Rose, also a Friedman Prize winner, rightly denounces the regime’s abuse: “I am deeply concerned by the Chinese authorities shutting down of Unirule’s website. Why silence a voice for reason calling for the rule of law? Without the rule of law that includes a climate of a free exchange of ideas, China won’t be able to transform itself successfully.”

Unfortunately, it has not been a great year for Friedman Prize winners. Venezuelan Yon Goicoechea, who received the award in 2008, was illegally arrested by the regime last August and remains imprisoned. His and Mao’s experiences are a reminder of what’s at stake in too many places in the world where the promotion of liberalism requires courageous and admirable efforts.

President Donald Trump has not yet signed an executive order about his proposed border wall.  An executive order would only do so much as Congress would have to appropriate funds to actually construct the wall.  A wall built to the dimensions and specifications promised by Trump would cost about $25 billion to $31.2 billion and run 1000 miles along the border with Mexico

Since the Mexican government won’t pay for the wall and holding up all remittances in order to get the Mexican government to pay for it runs into constitutional problems, some like Mark Krikorian of the Center for Immigration Studies have proposed a nation-wide refundable fee (a tax with another name) on wire remittances to fund the wall.  Taxing remittances of illegal immigrants will not raise enough funds for a huge new border wall.

A remittances tax would have to be very high to raise enough revenue to pay for a wall, even assuming there is no fall off in revenue at higher rates.  The state of Oklahoma has a wire transmitter fee equal to about one percent of the funds transmitted.  In 2016, the tax raised $12,696,879.25 or $133.65 per illegal immigrant in the state.  Back of the envelope, a nationwide version of the wire transmitter fee would only raise about $1.6 billion annually.  If the nationwide wire transmitter fee tax was 5 times as high as in Oklahoma then it would raise enough money to pay for the wall in three to four years assuming there is no fall off in revenue at such a high rate or other disruptions don’t occur.           

Oklahoma labels this tax a fee because it’s a fully refunded tax credit.  A full 96 percent of those who pay the fees don’t claim the credit.  David North of the Center for Immigration Studies argues that illegal immigrants pay virtually the entire tax because most of the credits aren’t claimed.  That’s probably right but North overstates his case.  The IRS estimates that about one in five folks eligible for the EITC do not claim it although there are many improper payments made too.  Furthermore, between 55 percent and 75 percent of illegal immigrants file tax returns, have money withheld from their paychecks, or both.  That being said, most of the people paying the tax are likely illegal immigrants but many Americans also pay directly.

Another reason that a nationwide wire transfer tax won’t pay for a wall is that a high rate will simply force remittances onto non-wire systems.  The most obvious alternative is sending remittances through banks or credit unions that are exempt from Oklahoma’s Wire Transmitter Fee.  Congress could try to impose a transfer fee for those funds but that would penalize millions of Americans transferring money abroad – including those of us who paid for college abroad.  The government could set up another tax credit scheme but that would be more bureaucracy and time added on top of an already overly complex tax system.  Using Bitcoin or sending  gift cards are also viable ways to remit large amounts of cash outside of the wire system

Illegal immigrant remitters will also be able to rely on their American citizen or legal immigrant friends and family members to transfer funds through wire services.  About 16.6 million people live in households with the 11 to 12 million illegal immigrants in the United States.  Many of those legal immigrants or U.S.-natives would be happy to remit money for their illegal immigrants family members.    

As a last resort, remitters could use the black market.  Many unlawful immigrants entered the country illegally and some of them use fraudulent documents to work in the United States.  Surely they will find a way to illegally remit funds if the tax is large enough.  Expanding the size of the black market is not the point of a tax on remittances. 

Trump’s proposed border wall is expensive and the Mexican government will not pay for it.  Taxing remittances by illegal immigrants is a proposed way of funding such a wall but it is unlikely to raise enough funds and will also directly tax many Americans.  Either the tax will have to raise much more revenue than I anticipate, the border wall will have to be a lot cheaper,  or both for a tax on remittances to raise enough money for this project.  If this wall ever gets built then American taxpayers will foot the bill - as usual.  

Nearly eight-and-a-half years after its initial application, the Keystone XL pipeline project has been given the green light (“subject to a renegotiation of terms by us”) by an executive order signed by President Trump today. Finally.

Whether the impetus and economics is still there to build it (with oil prices in the mid-$50 barrel range) remains to be seen. But I’d imagine so, if nothing more than as an infrastructural investment in the future.

But from the federal government standpoint, this shouldn’t matter. If private monies want to take the risk, the federal government should not stand in the way. After all, the Keystone XL pipeline passed each and every environmental impact/safety assessment along the way. Even the climate impact, much touted and hyped by the previous Administration and its supporters, was shown, dispassionately, to be inconsequential—a mere 1/100th of a degree of warming by century’s end (and that’s being generous).

President Obama rejected the pipeline for no other reason than for appearances—to make it seem to the rest of the world that the U.S. was serious about climate change. Apparently, he didn’t see the irony.

His successor is resurrecting the pipeline for the same reason—appearances. In this case, the appearance of creating jobs. But as I exasperatingly explained in these pages some two years ago (“Keystone XL Pipeline: Enough Already!”):

This project is so small in the grand scheme of anything it boggles the mind anyone outside of those directly involved in building and operating it gives it a second thought…

At this point, the Keystone XL is just another construction project. In fact, that is all it ever was. If it didn’t require crossing the border with Canada (which required a “presidential permit”), we never would have heard a peep about it.

With the pipeline’s apparent revival, now at least, all the government resources spent examining and re-examining and fretting and re-fretting, etc. over the project will have amounted to something—even though that something should have been decided (and approved) some four or five years ago.

What executive powers taketh away, executive powers giveth. I’m sure this won’t be the last of Obama’s symbolic actions on climate change that President Trump overturns. Each will better clear the way for us to move on to more important matters.

Congressional Republicans have a new plan for a military spending boost. John McCain, the Chairman of the Senate Armed Services Committee, last week released a report calling for a $54 billion increase in 2018 Pentagon spending and a $430 billion increase above current Pentagon plans for the next five fiscal years. McCain’s House counterpart, Mac Thornberry, backed that plan today in a Fox News op-ed. Both chairmen also want an immediate “supplemental” increase of an indeterminate amount to the 2017 military budget. 

Enacting the McCain/Thornberry plan requires undoing the defense spending caps set by the Budget Control Act. Complying with the caps would shave more than $100 billion off existing plans over the next five years, meaning that the new plan would spend more than half a trillion more than current law allows. That’s before counting any 2017 supplemental or Overseas Contingency Operations (OCO) funding, currently at $59 billion. The plan calls for transferring OCO spending, which is now uncapped, back into the base budget once the abolishment of the Budget Control Act leaves it unconstrained.

The title of Thornberry’s op-ed, Here’s How We Will Make America’s Military Great Again, suggests its intended audience. During the campaign, President Trump endorsed an across-the-board military buildup likely to cost $70 to $100 billion a year but absurdly claimed that he could fund it by cutting Pentagon waste, fraud, and abuse. Since his election, Trump and his advisors have done little to clarify how they’ll fund the buildup or use the expanded military, besides parading it down Pennsylvania Avenue.

Trump’s distraction allowed McCain and Thornberry the opportunity to set the GOP’s direction on defense. Trump’s appointments and his difficulty formulating policies mean that he’s likely to support the McCain/Thornberry plan. Given that and Republican control of both Houses, the plan might seem destined for success, with the increase funded in the GOP’s preferred way: through cuts to non-defense spending.

But Senate Democrats are likely to filibuster an effort to erase the defense caps absent a matching increase in non-defense discretionary spending. While that sort of deficit-swelling deal might be acceptable to Trump, McCain, and Thornberry, it could produce enough congressional Republican opposition to prevent passage.

If there’s a way to have a defense build-up while satisfying Democrats and most Congressional Republicans, it’s to stick with what’s worked in recent years: maintaining a semblance of concern about deficits and a show of parity between defense and non-defense spending. That means raising but maintaining caps in both areas while shoving more base Pentagon funds into OCO under the pretext that it’s temporary. The bottom line is that the current political circumstances will probably produce a big defense buildup funded through deficit spending or, more likely, a smaller defense increase funded by more deceptive deficit-spending.

Not even that sort of watered-down buildup is needed. The case for a buildup relies on a tired litany of exaggerated dangers and misrepresentations about the horrors of the Pentagon having to live on $600 billion a year. In fact, current military spending is easily sufficient to meet current threats. With a more restrained military strategy steering the U.S military away from avoidable tensions and endless wars, the defense budget could be far smaller.

Both McCain and Thornberry contend that sequestration is ravaging U.S. military readiness. But there has been no sequestration since 2013; it occurs only if spending exceeds caps, and defense spending remains near Cold War highs. The recent drawdown was historically mild and mostly funded by shrunken war costs. Readiness is generally okay but could be improved if the Pentagon—or the House Armed Services Committees—shifted money from acquisition to operational accounts.

The report and op-ed both focus on the threats low defense spending is supposedly encouraging. They fail to note that fighting terrorists including ISIS—even if the effort were expanded by Trump—costs less than a tenth of U.S. military spending. They fail to explain how higher defense spending would solve the difficulties posed by Iran and North Korea. Nor is there reason to believe that higher military spending would cow Russia and China into more compliant behavior, as both Chairmen contend. If there is a deficiency in the U.S. approach to the Ukraine and the South China Sea that allows aggression, it is a result of the limited U.S. will to start a catastrophic war over matters remote from U.S. safety, not an absence of military power to use if war occurs.

There are strains on the U.S. military today. But they’re more the result of a lack of strategy than a lack of money. By spending money on everything and endorsing every mission, the McCain/Thornberry plan would create a larger version of the same problem. We should instead do less with our military—avoiding the distant trouble that justifies most military spending.

On why that sort of restraint would improve U.S. security, see the various Cato works on defense budgets and policy and our conference on “The Case for Restraint.” On the exaggeration of danger as a means to justify high defense spending, see Christopher Preble and John Mueller’s edited volume and other works by Cato scholars.

It’s National School Choice Week, so it’s a good time to survey the countryside and see what’s in store for the year ahead.

Last year was relatively quiet in terms of school choice legislation. South Dakota enacted a relatively limited tax-credit scholarship program and Maryland enacted a small voucher program, but there wasn’t much progress otherwise. 

By contrast, 2015 was the Year of Educational Choice. Not only did 15 states adopt 21 new or expanded educational choice programs, three of them enacted education savings account (ESA) laws. As I’ve noted previously, ESAs represent a move from school choice to educational choice because families can use ESA funds to pay for a lot more than just private school tuition. Parents can use the ESA funds for tutors, textbooks, homeschool curricula, online classes, educational therapy, and more. They can also save unused funds for future educational expenses, including college.

Already, several states this year are considering ESA legislation. Last week, legislators in Arkansas introduced a universal-eligibility, tax-credit funded ESA similar to what Jonathan Butcher and I described in our report last year, “Taking Credit for Education.” Donors would receive tax credits for contributions to nonprofit scholarship organizations that would fund the ESAs. According to a just-released study from Julie Trivitt and Corey DeAngelis of the University of Arkansas, if enacted, the ESA would expand educational choice while saving taxpayers an estimated $2.8 million.

This week, the Missouri Senate Education Committee will hold a hearing on a bill to create tax-credit funded ESA, similar to the Arkansas bill described above. Missouri will also consider publicly funded ESAs, as well as other choice proposals.

Other states considering publicly funded ESAs include Indiana, Iowa, New Hampshire, Oklahoma, and Texas. I’ve also heard that Arizona legislators are considering expanding their ESA, possibly to include all Arizona students. Meanwhile, in Nevada, Gov. Sandoval is looking to find ways to fund his state’s ESA after the state supreme court upheld the constitutionality of the program but struck down its funding mechanism

Several states will also be considering tax-credit scholarship programs, including Kentucky, Nebraska, and (likely) Texas. In addition, South Carolina is looking to expand its tax credit.

I’m liking missing a number of proposals, and it will be tough to top 2015, but 2017 very well might be the Year of Educational Choice, Jr.

Earlier today, demonstrating his preference for action over reason, President Trump signed an executive order to officially withdraw the United States from the Trans-Pacific Partnership agreement. On the one hand, it’s refreshing to witness the rare act of a politician fulfilling a campaign pledge. On the other hand, there is nothing else good about it. Trump detonated a bomb; six years of negotiations went boom; now what?

To a president who seems intent on turning the country inward, raising the barricades, demanding self-sufficiency, and eschewing the outside world, the TPP was an obvious target. But what’s especially disconcerting is that the president didn’t need to go this far to keep TPP out of play. The agreement couldn’t possibly take effect without congressional passage of implementing legislation, and his signature affixed. He could have just kept TPP on the back-burner in the event that its utility, relevance, or imperative to U.S. economic and geostrategic objectives became evident, as his term progressed. Because it will.

My colleagues and I did a thorough, chapter-by-chapter assessment of the TPP and concluded that, on net, implementation would advance our economic freedoms. But there is also a geostrategic rationale for the TPP that compels beyond the text of the agreement. I presented that case in a few different articles, but here’s an excerpt from the most recent oped, in The Hill

The TPP is a comprehensive trade and investment agreement that reduces tariffs and other trade barriers among 12 Pacific-Rim nations. Implementation would help generate greater wealth and higher living standards by more closely integrating economies that account for 40 percent of global GDP.

As an agreement among countries on four continents, the TPP is uniquely qualified to fill the void created by the once successful, but now dysfunctional, multilateral negotiating “round” approach to global trade liberalization.

But perhaps more significantly, the TPP offers a unique opportunity to refresh the U.S.-created rules and institutions of international trade and adapt them to the nature and conditions of the 21st century global economy. It is a blueprint for securing U.S. geoeconomic and geopolitical interests now and into the future.

The geostrategic rationale for TPP—which has yet to dawn on the president-elect—is much less about achieving overt economic and security objectives than it is about preserving and strengthening U.S. soft power.

Without the TPP, as the economic center of gravity continues its shift across the Pacific toward Asia, those successful trade rules and institutions could become superseded by lesser, opaque, discriminatory rules, which subvert the existing order, advance parochial objectives, and disadvantage U.S. commercial interests.

The geostrategic rationale for TPP—which has yet to dawn on the president-elect—is much less about achieving overt economic and security objectives than it is about preserving and strengthening U.S. soft power.

Unlike most other trade agreements, the TPP permits new members to join. The fact that TPP has achieved critical mass allows its terms to be offered on a take-it-or-leave-it basis.

Just as larger bodies floating in space have significant gravitational pull on smaller, surrounding objects, the TPP—by virtue of its heft—would pull other countries on other continents into its orbit because the costs of remaining on the outside will increase with each new accession.

The evidence of this effect is considerable. As investment in production platforms and supply chains has begun to shift from TPP outsiders to TPP members, current non-members such as South Korea, the Philippines, Indonesia, Thailand, and Taiwan have been considering and implementing various domestic reforms to improve their prospects for eventually joining.

With TPP rules and benefits applying to China’s most important trade partners, Beijing would have no better alternatives than to embrace the TPP itself, which would be good for all TPP parties.

In addition, what better way to dissuade China from bellicosity over its territorial disputes with Vietnam, Japan, and the Philippines than to demonstrate a prosperous alternative to 1930’s-style resource-driven expansionism in Asia?

Rather than deploy a naval fleet, offer China’s neighbors—and China itself—a clearly plausible path to economic growth and security.

But without TPP, China is the large mass drawing smaller countries into its gravitational pull. With the China-led Regional Comprehensive Economic Partnership negotiations waiting in the wings for TPP’s failure, countries in the region will be drawn more deeply into China’s orbit.

That shift doesn’t mean trade between the United States and those countries will suddenly dry up, but it does mean that existing China-focused investment and supply chain relationships will be reinforced, new ones will emerge and become established, and the costs of reorienting those relationships in the event of some future TPP implementation will increase with each passing year.

U.S. commercial and diplomatic interests in the region would be further impaired by Washington’s failure to follow through on its promises. Reformers in foreign governments that incurred political costs to push the TPP in their countries with expectations of U.S. participation wouldn’t soon forget that the United States proved to be an unreliable partner.

Hopes for the TPP jump-starting a new wave of global trade liberalization would be dashed and, with U.S. credibility diminished around the world, America’s policy objectives would become more difficult to meet.

Perhaps the highest legislative priority for House Republicans in the 115th Session of Congress is an overhaul of the United States’ antiquated and onerous corporate tax code. The details of the GOP plan aren’t out yet—it’s only summarized in a House Republican “blueprint” and the legislative text hasn’t been finalized—but the general idea is to replace the current 35% “worldwide” corporate income tax with a 20-25% “destination-based” tax on corporations’ US sales (i.e., including domestic sales of imports in the tax base, but excluding export sales—so called “border tax adjustments”).

This “destination-based cash-flow tax” (or “#DBCFT” as the tax nerds are now calling it on the interwebs) would be a fundamental shift in how (and on what) American corporations now pay tax, and it raises complex economic issues—including how trade would be affected—that I wouldn’t dare try to navigate here (but these analyses are a good start). 

On the other hand, the DBCFT debate also has addressed whether the tax plan would be consistent with World Trade Organization (WTO) rules on “border adjustable” taxes, with some folks already going so far as to claim that any version of the DBCFT would violate the United States’ international obligations and thus expose US exports to billions of dollars-worth of WTO-sanctioned retaliation. As I discuss below, however, that assumption’s not really correct; in fact, there is a very good argument that the DBCFT, if properly constructed, would pass muster at the WTO and thereby avoid potential retaliatory tariffs on US exports.

Before we get to that analysis, however, three very important notes:

  • First, the Republican plan is not a tariff or other border measure that applies only to imports; it is an “internal tax” that applies to both imports and domestically-produced goods and services. (Think of it like a sales tax, which is paid on a good or service consumed in the United States, regardless of its origin.) This has two important implications: 1) the tax is not the same as, for example, a steep “border tax” on imports into the United States from US companies that engage in “outsourcing” (though many have speculated that the Republican tax proposal could serve as a final compromise between Congress and President Trump on the issue of “outsourcing” and border taxes); and 2) the tax plan is therefore not inherently “protectionist” (though it may have important distributional effects, depending on things like currency movements—see economic links above).
  • Second, and relatedly, WTO rules are primarily concerned with preventing discrimination in a Member’s domestic market—in favor of certain WTO Members’ goods and services (the “most favored nation” principle) or domestic industry (the “national treatment” principle or rules prohibiting certain subsidies). Thus, a WTO Member is relatively free to apply many types of measures, such as the DBCFT, that could have significant effects on trade flows or domestic investment but might not actually violate those WTO rules. And, whether other WTO Members reciprocate with similar taxes on US-origin goods and services is immaterial to any ultimate conclusions of the DBCFT’s WTO-consistency (though it may have a practical effect). These distinctions might sound wonky (and they are), but they’re important: while most of the trade-related focus on the DBCFT has been on the taxation of imports and rebate or exemption for exports or on whether other WTO Members apply similar taxes to American products, the WTO focus is, as you’ll see below, instead on two things: 1) whether the tax itself discriminates against imports in favor of identical domestic goods in the US market or 2) whether the “border adjustment” on exports is an impermissible export subsidy. Thus, the DBCFT’s consistency with WTO rules is important in terms of international trade relations, but it does not necessarily mean the DBCFT is good economic policy.
  • Finally, just because something looks WTO-inconsistent doesn’t actually mean that it is (or that a WTO Member will challenge it). All WTO Members’ laws are considered to be consistent with WTO rules until found otherwise in official dispute settlement. Many Members therefore adopt policies that could be problematic under WTO rules, particularly when they think that the policies won’t be challenged, or political or economic considerations are more important that WTO ones. The threat of WTO retaliation and the appearance of being a responsible WTO Member are important variables, but they’re certainly not the only (or even predominant) ones.

So with those three things out of the way, let’s get on with the analysis. In general, a border adjustable internal tax will likely be consistent with WTO rules where—

1) The tax itself is among the types for which border adjustments are permitted. Under the WTOSubsidies Agreement, “direct taxes” (like a corporate income tax) are ineligible for border adjustment, and any such adjustment on export sales would constitute a prohibited export subsidy. This rule was put to the test in the late 90s when the United States lost a series of WTO disputes over its corporate income tax exemptions for “foreign sales corporations” (FSC/ETI): WTO panels and the Appellate Body found that the US corporate income tax was a “direct tax,” that the FSC/ETI tax breaks were “subsidies” to the recipient US firms, and that such tax breaks were contingent upon exportation—precisely the type of prohibited border tax adjustment subsidy listed in the Subsidies Agreement’s “Illustrative List” of prohibited subsidies.

On the other hand, the same WTO subsidy rules permit border adjustments on “indirect taxes” like value-added taxes (VATs), including the one applied by the EU. As a result, the conventional wisdom holds that only traditional consumption taxes (e.g., sales taxes or “credit-invoice” VATs that are paid by consumers and applied directly on products) are eligible for border adjustment under WTO rules. Those taxes certainly are eligible, but other taxes might also qualify. Most importantly, the definitions of “direct tax” and “indirect tax” in the WTO Subsidies Agreement leave possible gray areas for corporate taxes that share characteristics of both forms of taxation. This could include a “subtraction-method VAT,” under which a uniform rate of tax is levied directly on corporate sellers (as opposed to products/consumers) based on their sales revenue, less taxable (domestic) purchases.  Such a system is widely accepted as VAT (thus fitting the Subsidies Agreement’s definition of “indirect tax”), but it is also a tax on a form of corporate income (thus potentially meeting the “direct tax” definition). This ambiguity could protect a border adjustable, subtraction-method VAT from the relatively straightforward analysis that applied to the FSC/ETI measures. Indeed, Japan has imposed a border adjustable, subtraction-method VAT since the early 1990s, without any serious interest or concern from other WTO Members—a decent indication that the system doesn’t raise the same WTO alarm bells as FSC/ETI did. (Other WTO Members, of course, might disagree.)

2) The tax imposes identical burdens on imported goods and domestically produced “like” products. The General Agreement on Tariffs and Trade (GATT) generally prohibits taxes on imports other than duties, but Article II:2(a) allows a government to impose at the time a product crosses its border “a charge equivalent to an internal tax imposed…on a like domestic product,” as long as it is imposed consistently with the “national treatment” principle of GATT Article III. Thus, an internal tax at the border would be consistent with GATT Article II (on tariffs and import charges) and Article III (National Treatment) the imported good at issue is “not subject, directly or indirectly to internal taxes or other internal charges of any kind in excess of those applied directly or indirectly to like domestic products.”

3) The border adjustment on exports is no greater than the actual amount of tax collected or due. Under WTO rules, the rebate or exemption of eligible taxes (such as VAT) on exports will not be treated as an export subsidy, as long as the rebate/exemption rate is not greater than the rate at which the tax is levied domestically. On the other hand, such a rebate/exemption will constitute a prohibited export subsidy where it is in excess of the actual tax collected or due.

Based on these general rules, the DBCFT could, depending on its design, arguably pass muster at the WTO. First, in order for the tax exemption or rebate on US exports to avoid being designated a prohibited export subsidy, the adjusted corporate tax must not be a “direct tax,” as defined in the WTO Subsidies Agreement. The Republican proposal might pass this test if it is, for example, a subtraction method VAT. Second, the DBCFT must also be levied on imported products at a rate or amount no higher than the rate/amount levied on domestically produced “like” products (to be consistent with GATT Articles II and III). Third, the DBCFT cannot provide a border adjustment on export that is greater than the amount of tax actually levied or due (to avoid being a prohibited export subsidy).

All of these tests would require far more detail than we have at this stage, but the second issue may be the most problematic for the DBCFT. Various commenters have indicated that the DBCFT will permit certain additional deductions (e.g., for domestic wages and salaries) from the tax base, thus leading to a lower effective tax rate on domestic products than on the exact same imports. If that is, in fact, the case, then the DBCFT probably discriminates against imports in violation of GATT rules. We can test this once the legislative text is released through a simple hypothetical assessment of the tax’s effect on two identical U.S. companies selling and exporting the same product, with one company selling only imported final goods and the other selling identical products with 100% US content. If the total DBCFT paid by the former company is more than that paid by the latter (accounting for the whole value chain), then the tax measure would likely discriminate against imported goods in violation of GATT Articles II and III.  f the total export border adjustment provided to one of the companies is more than the tax collected (or otherwise due), then the system would likely be a prohibited export subsidy.

Obviously, the devil will be in the details. At this stage, I’m pretty agnostic about the DBCFT, but that certainly could change depending on the text of the final proposal and analyses of its projected economic (trade, budget, etc.) effects. In the meantime, however, we can dispense with the conventional wisdom that the DBCFT is definitely “protectionist” or that it definitely violates the United States’ WTO obligations. WTO-consistency, of course, doesn’t necessarily make the DBCFT good policy overall, but at least it would let us avoid a mess at the WTO and potential retaliation from our trading partners.

Donald Trump, in his inaugural address today: “The oath I take today is an oath of allegiance to all Americans.” A harmless rhetorical flourish, no doubt, and one that Trump is by no means the first to make. And yet…

Note that the President’s actual oath of office says nothing about allegiance. It instead contains verbs promising two types of action: “faithfully execute the Office” and “preserve, protect and defend the Constitution.” Its exact text reads: “I do solemnly swear that I will faithfully execute the office of President of the United States and will to the best of my ability, preserve, protect and defend the Constitution of the United States.”

If a President does those two things, the American people as a whole will benefit. So no big difference from what Trump said, right? Maybe. 

The words of the actual oath require the President first to uphold legality, even above his vision of what might be good for the people. This element of legal constraint is lost if a President sees his allegiance as being to someone rather than something. As colleague Tim Lynch wrote on Wednesday, “There are many other checks and balances in our system, but the oath of office is supposed to be the first line of defense.”

Now history may look back and see this as an unimportant choice of words. Trump’s actions one way or the other will speak louder than his shades of wording.

Still, I wish the speech had used the word “Constitution,” or “law” in a way beyond the phrase “law enforcement,” or “Framers” or “Founders,” or “Declaration” or “Amendment” or “individual” or perhaps “rights.” The one occurrence of “right” was in a passage about “the right of all nations to put their interests first.”

During his campaign, Trump’s style was noteworthy for how seldom he mentioned the Constitution, the legal limits of government power, or the rights of the individual. Let us hope that these themes emerge in future speeches by the new President.

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