Archives: February, 2012

Based on Where the Top 1 Percent Lives, the Occupy Crowd Should Be Protesting Against Big Government

I’ve written before about how big government is enriching people in the Washington metropolitan area. This is for two reasons.

First, bureaucrats are paid too much, getting twice as much compensation, on average, as people in the productive sector of the economy.

Second, lobbyists, contractors, and interest groups have figured out how to get lucrative positions at the federal trough.

A new report from MSN Money illustrates how the political elite is getting very rich by plundering honest Americans. America has 3,033 counties, and they identified the 15 richest jurisdictions from that list.

Of those 15 super-elite counties (the top 1/2 of one percent), 10 are in the Washington metropolitan area. I’ve identified them with stars in the map.

You may be wondering, by the way, about the location of the other counties in the top 15. Well, four of them are suburbs of New York City, meaning that they are home to rich Wall Street people who mooched from the taxpayers thanks to TARP bailouts and other subsidies.

So if you really want to be cynical, you could count them as auxiliary counties of Washington, DC. That’s probably an unfair conclusion, but TARP was unfair to honest and hard-working people, so I don’t feel too guilty.

As far as I can tell, the only untarnished jurisdiction in the top 15 is Douglas County, Colorado. And given that these are the folks who are implementing a good school choice plan, it seems that we have a group of productive people who also believe in doing the right thing.

For more information about the overcompensation of bureaucrats, this video is loaded with information.

Most important of all, remember that any proposals to increase government spending will further widen the income gulf between the political elite and regular Americans. And any initiative to boost the tax burden would lead to the same result.

Would Haass and Levi Accept Their Own Proposed Deal?

One of the more exasperating phenomena surrounding the question of “diplomacy” with Iran is that many of the people proposing diplomatic offers have outlandish suggestions for the contours of a negotiated settlement on the nuclear issue. The latest offering comes in today’s Wall Street Journal, courtesy of Richard Haass and Michael Levi of the Council on Foreign Relations.

Before the criticism, though, a bit of praise: Haass and Levi concede at the outset that

Iran will not do away with its nuclear program, which is simply too extensive and enjoys too much political support among Iranians. No Iranian government could forfeit the “right to enrich” and survive.

This is a refreshing and welcome reality check for the foreign-policy fantasists in the United States Senate, whom Paul Pillar has rightly criticized [over at the National Interest].

Setting that aside, however, the Haass/Levi proposal is almost certain to fail. The essential dilemma of U.S.-Iran diplomacy is that anything our domestic politics permits will fail and anything that might not fail is impossible because of our domestic politics. (If pressed, I am enough of a realist to guess that even in a perfectly permissive domestic political environment any deal we could offer would not be accepted and adhered to by Iran, for the simple reason that they have little reason to trust us.) Robert Wright has a useful rundown on some of the domestic political constraints at the Atlantic.

But despite not demanding outlandish things like foregoing any enrichment or ending any ballistic missile programs, for all Haass and Levi’s recognition that either another Middle East war or a nuclear Iran would be a mess, they don’t propose a particularly irresistible set of enticements to Tehran. To wit:

the world should offer to dial back the most recent sanctions (including those not yet fully implemented) that target the Iranian oil and financial sectors. But no existing sanctions should be eased (or new sanctions delayed) as a reward for Iran’s agreeing to talk, lest negotiations prove to be nothing more than a tactic. And sanctions aimed at firms and individuals involved in illicit nuclear activities—particularly those associated with military efforts—would need to stay. So, too, would other sanctions prompted by Iranian violations of human rights, support for terrorism, and threats to regional security beyond its nuclear program.

It is definitely sensible to insist that sanctions on illicit nuclear activities should remain in place, but the rest of this seems certain to produce little more than a yawn and a backhanded wave from Tehran. The paragraph is a bit confusing, but it seems like the ultimate payoff here is that the recent financial and oil sanctions would be lifted if the diplomatic process produced fruit. The phasing-in question is important here—maybe the most important piece. And what Haass and Levi suggest that the United States, with a much stronger negotiating position than Iran, should offer up front isn’t clear. Given the constant threats against Iran, if I were sitting in Tehran, I wouldn’t view this as a deal worth taking. There’s reason to believe that Ehud Barak wouldn’t take it, either.

So perhaps it bears asking of Haass and Levi, as well as all advocates of diplomacy with Iran: If the situation were reversed, would you take the deal you’re suggesting the United States should offer?

Cross-posted from the Skeptics at the National Interest.

Obama’s Corporate Tax Reform

President Obama released a document on business tax reform today. I’m glad the administration is taking an interest in this important topic, but his plan has more negatives than positives. The administration’s tax reform approach is also self-contradictory in numerous ways. Here’s a quick take:

  • The proposal would lower the federal corporate tax rate from 35 percent to 28 percent. That’s a small step in the right direction, but with state-level taxes included the U.S. rate would still be about 33 percent. By contrast, the average rate among OECD countries is just 25 percent.
  • Studies by Jack Mintz show substantially different marginal effective tax rates than does the new administration study. For 2010, Mintz found that the U.S. rate was 34.6 percent, which was much higher than the average OECD rate of just 18.6 percent.
  • The administration rails against tax loopholes, but it proposes a whole slew of new ones in its recent budget.
  • Most of the “loopholes” the administration does go after are not real loopholes at all, such as accelerated depreciation.
  • The administration’s proposals would further penalize the foreign operations of U.S. companies. Most high-income nations have gone in the reverse direction and adopted territorial corporate tax systems. See Global Tax Revolution.
  • The administration’s study describes the problems caused by double taxing corporate equity, but its own proposal to hike the top individual dividend tax rate to 40 percent would make the problem much worse.
  • The administration’s plan would be a revenue raiser. As such, it won’t go anywhere on Capitol Hill. Indeed, I doubt whether a revenue-neutral corporate tax plan (if scored statically) would pass Congress. Instead, policymakers should focus on either a pure rate cut or matching a rate cut with cuts to business subsidies and other wasterful spending.

President Obama’s Corporate Tax Reform Rearranges the Deck Chairs on the Titanic

American companies are hindered by what is arguably the world’s most punitive corporate tax system. The federal corporate rate is 35 percent, which climbs to more than 39 percent when you add state corporate taxes. Among developed nations, only Japan is in the same ballpark, and that country is hardly a role model of economic dynamism.

But the tax rate is just one piece of the puzzle. It’s also critically important to look at the government’s definition of taxable income. If there are lots of corrupt loopholes – such as ethanol – that enable some income to escape taxation, then the “effective” tax rate might be rather modest.

On the other hand, if the government forces companies to overstate their income with policies such as worldwide taxation and depreciation, then the statutory tax rate understates the actual tax burden.

The U.S. tax system, as the chart suggests, is riddled with both types of provisions.

This information is important because there are good and not-so-good ways of lowering tax rates as part of corporate tax reform. If politicians decide to “pay for” lower rates by eliminating loopholes, that creates a win-win situation for the economy since the penalty on productive behavior is reduced and a tax preference that distorts economic choices is removed.

But if politicians “pay for” the lower rates by expanding the second layer of tax on U.S. companies competing in foreign markets or by changing depreciation rules to make firms pretend that investment expenditures are actually net income, then the reform is nothing but a re-shuffling of the deck chairs on the Titanic.

Now let’s look at President Obama’s plan for corporate tax reform.

  • The good news is that he reduces the tax rate on companies from 35 percent to 28 percent (still more than 32 percent when state corporate taxes are added to the mix).
  • The bad news is that he exacerbates the tax burden on new investment and increases the second layer of taxation imposed on American companies competing for market share overseas.

In other words, to paraphrase the Bible, the President giveth and the President taketh away.

This doesn’t mean the proposal would be a step in the wrong direction. There are some loopholes, properly understood, that are scaled back.

But when you add up all the pieces, it is largely a kiss-your-sister package. Some companies would come out ahead and others would lose.

Unfortunately, that’s not enough to measurably improve incomes for American workers. In a competitive global economy, where even Europe’s welfare states recognize reality and have lowered their corporate tax rates, on average, to 23 percent, the President’s proposal at best is a tiny step in the right direction.

Franken to Chu: Doggone It, Like My State’s Company

The Senate Energy and Natural Resources Committee held a hearing last week on the Department of Energy’s budget request for fiscal 2013. Chris Edwards tipped me off to a particularly galling exchange between Energy secretary Steven Chu and Sen. Al Franken (D-MN). Sen. Franken uses his allotted time to badger Chu about a federal loan that Energy conditionally committed to a Minnesota company in 2010 that apparently has yet to be approved.

The exchange begins around the 61 minute mark here. Our trusty interns, Devon Sanchez and Stephen Wooten, transcribed the exchange, which I’ll share a portion of:

Sen. Franken:

One such project is from a company in Minnesota called SAGE Electrochromics. I know you are aware of that. Sage has developed energy efficient windows that are cutting edge, better than anything in the world and uses photo-voltaic cells to control the window how dark it gets during the summer to block out UV light and lower air conditioning costs and to let it all in, lower heating costs in the summer. And it’s really…I’ve been there and it’s just an amazing tech. In the Spring of 2010, the DoE promised the company it would receive a $72 million loan guarantee under the 1703 Program to build a new manufacturing facility that would create 160 manufacturing jobs and 200 construction jobs in southern Minnesota. It’s now been two years since SAGE has been notified that it will receive a loan guarantee and the deal has not yet been closed. While the Department of Energy prolongs closing the deal, time and money are running out for SAGE. There are high-tech manufacturing construction jobs at stake here. It’s been going forward with the project assuming they get this loan guarantee but they’re running out of time and they may have to sell themselves to a French company. My first question is that the SAGE loan guarantee was going to be submitted to the credit committee on August 23rd, but it was stopped. Why is the Department of Energy continuing to delay closing and executing the SAGE loan guarantee?

Secretary Chu tells Sen. Franken that he can’t discuss the details and advises the senator to speak with SAGE. A frustrated Sen. Franken takes another crack at getting Chu to explain the holdup, but doesn’t get anywhere and his speaking time runs out. Anyhow, the exchange is sad commentary on the state of affairs in Washington. Sen. Franken sitting there singing the virtues of handing out other people’s money to commercial interests in general would have been problem enough. That he instead used his time to grovel for a handout to a company in his state just goes to show that too many policymakers see the federal government as a favor dispenser.

If this company is producing such “amazing tech,” then perhaps Sen. Franken should lend SAGE some of his money? (Maybe he could use the royalties he receives from DVD sales of “Stuart Saves His Family” to help the company.) Wisecracks aside, a quick Google search shows that SAGE has already received private capital. If this company is so great then it should have no trouble finding additional investors to lend it the money it needs. Then again, Franken says that it’s running out of money so perhaps it isn’t so great. But that’s the way Washington works: taxpayers get the losses while private companies get the profits…and arrogant senators get to pat themselves on the back for “creating jobs.”

See here for more on downsizing the Department of Energy.

USPS: Stuck With the Government Business Model

The U.S. Postal Service has released a new five-year plan for congressional consideration that it says would get the beleaguered government mail monopoly on sounder financial footing and thus avoid a taxpayer bailout. The plan repeats previous suggestions (i.e., workforce reductions, postal network consolidations, elimination of Saturday delivery, elimination of the retiree healthcare benefit funding requirement) and proposes an increase in the price of a first-class stamp from forty-five to fifty cents.

Whether or not it would achieve what the USPS hopes, it probably doesn’t matter given that asking Congress for greater operational flexibility is like asking a two year old to stop playing with their food. That’s why the focus should be on completely transitioning the USPS from a government-run business to a privately-run business (or perhaps businesses).

Over at the Courier Express and Postal Observer blog, Alan Robinson says that “just like all plans that came before, [the new USPS plan] started with the assumption that the Postal Service remains a quasi-governmental entity.” As a result, Robinson notes that the plan is missing two key ingredients for success that foreign posts have utilized: private capital and an expanded range of products and services.

In an essay on the U.S. Postal Service, I discuss how liberalization in other countries has enabled foreign mailers to diversify into non-postal activities:

Consultants at Accenture have found that diversification not only has a measurable impact on the performance of international posts, but that it is what ultimately distinguishes high performers from low performers. America’s relatively dynamic economy is particularly suited for the diversification opportunities that would arise under postal liberalization.

Germany’s former postal monopoly, Deutsche Post, illustrates the type of transformation possible by liberalization. Today, the private Deutsche Post World Net has changed its compensation structure, imported managers from other industries, modernized the mail and parcels network within Germany, and developed new products such as hybrid mail and e-commerce. The company now has interests in not only the traditional mail and parcels business but also express mail logistics, banking, and more.

Given that the USPS’s plan is going to be unpopular with various postal stakeholders (i.e., special interests), Alan says that they should consider the advantages of privatization:

It is clear that the business plan that the Postal Service has chosen is not the one that has worked in other countries. The plan avoids talking about either private capital or expanding the breadth of service offerings as neither is on the legislative table.    Introducing thinking about how private capital could be introduced and the product offerings could be expanded forces stakeholders to think about privatization, an idea that is nearly as unpopular as the changes that the proposed business model introduced.   However, as this brief post notes, privatization offers significant financial advantages that could reduce the operating and price changes envisions by the Postal Service’s business plan. Therefore, those who see the greatest harm from this plan need to see if the advantages of privatization could benefit their interests sufficiently to overcome long-held objections to the idea.

I think Robinson is right, but I suspect that the “stakeholders” believe there’s a good chance that Congress will ultimately come to their aid with some sort of taxpayer bailout. Therefore, it’s possible that they believe that it is in their best interest to continue fighting for the status quo. Unfortunately, the recent bipartisan federal bailouts of the financial industry and the automakers suggest that they could be correct.

Stossel Thursday — New Time

I’ll be on the Stossel show this coming Thursday, along with nearly 1000 cheering Students for Liberty at their annual conference. Also taking questions from John Stossel and the students are Nick Gillespie of Reason, John Bolton (!), and Ken Klukowski of the Family Research Council (!!).

Beginning this week, Stossel can be seen at a new time, 9:00 p.m. ET. (Which means 8 pm CT, 7 pm MT, and 6 pm PT.)

Set your DVR for the Fox Business Network at 9 pm Thursday.

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