Archives: September, 2012

Called it! Eleven Years Ago

What is this blog for, if not to let Cato scholars call out what smarty-pantses they are?

The Wall Street Journal reports on automobile license plates as the “new tracking frontier.”

For more than two years, the police in San Leandro, Calif., photographed Mike Katz-Lacabe’s Toyota Tercel almost weekly. They have shots of it cruising along Estudillo Avenue near the library, parked at his friend’s house and near a coffee shop he likes. In one case, they snapped a photo of him and his two daughters getting out of a car in his driveway. Mr. Katz-Lacabe isn’t charged with, or suspected of, any crime. Local police are tracking his vehicle automatically, using cameras mounted on a patrol car that record every nearby vehicle—license plate, time and location.

I didn’t have every detail, of course, but 11 years ago I noted the coming problem of license-plate tracking in testimony to a House Transportation subcommittee.

It was a little odd at the time, and still is, to talk about the privacy problem with license plates. But the emerging technology environment makes it essential to analyze and assess more carefully the information and identification demands that the government places on us.

[T]he requirement in all fifty states that cars must exhibit license plates linked to their owners is “anti-privacy” law, as would be a law requiring people to wear name tags in order to walk on public sidewalks. Mandatory license plates prevent citizens from exhibiting the expectation of privacy that Justice Harlan wrote about in Katz. Roughly speaking, they require people to expose their identities to police as a condition of driving on our roadways.

I expanded on “anti-privacy” law in my 2004 Cato Policy Analysis, “Understanding Privacy—and the Real Threats To It.”

We’re still grappling with the problem of privacy “in public.” The Supreme Court’s decision on GPS tracking in the Jones case is the most significant recent iteration of that. (Cato brief and related blog post; pre-decision posts: 1, 2, 3; post-decision posts: 4, 5, 6.) The latest Cato Supreme Court Review (also available digitally) includes an article of mine on the case. My latest thinking on Fourth Amendment privacy can by found in Cato’s brief in Florida v. Jardines.

It is possible to think systematically about privacy. Privacy is not just a morass of feelings about advancing technologies. Once one understands privacy (in its strongest sense) as the exercise of power to control information about oneself, one can see a decade ahead that license plates create privacy problems.

Pretty smart, huh? Yeah.

ObamaCare Is Pro-Market Like the Berlin Wall Was Pro-Migrant

Today’s New York Times features an opinion piece by J.D. Kleinke of the conservative American Enterprise Institute. Kleinke’s thesis is that ObamaCare’s conservative opponents should stop complaining. “ObamaCare is based on conservative, not liberal, ideas.”

If one defines conservative ideas as those that emphasize free markets and personal responsibility, there is zero truth to this claim.

  • Free markets require freedom, like the freedom to control your own property, to enter markets, and to negotiate prices and other contractual terms. ObamaCare mandates how people must dispose of their property, imposes tremendous barriers to entry into markets, and imposes price controls and myriad other terms on ostensibly private contracts.
  • Market prices are the lifeblood of a market economy. Kleinke considers them a “flaw” that ObamaCare uses “market principles” to “correct.”
  • As I have written elsewhere, ObamaCare “promotes irresponsibility by allowing healthy people to wait until they get sick to buy coverage. It creates that free-rider problem, which has been known to make insurance markets collapse. Supporters of the law could have taken personal responsibility for this instability they introduced into the market—say, by volunteering to pay the free riders’ premiums. Instead, they imposed a mandate, which attempts to stabilize the market by depriving others of their money and freedom. Forcing others to bear the costs of your decisions is the opposite of personal responsibility.”
  • Employers are hardly “free to decide” under a law that penalizes them for not offering government-designed health benefits.
  • Kleinke is apparently unaware that half of the $2 trillion of new government spending in this “pro-market” law comes from a massive expansion of a tax-financed, government-run health insurance program that crowds out private markets – Medicaid.

I could go on.

Even if one adopts the more forgiving definition that conservative ideas are whatever ideas conservatives advocate, there still isn’t enough truth to sustain Kleinke’s point. Yes, the conservative Heritage Foundation trumpeted ObamaCare’s regulatory scheme from 1989 until around the time a Democratic president endorsed it. But as National Review’s Ramesh Ponnuru writes, accurately, “The think tankers were divided, with the Heritage Foundation an outlier. It was an outlier, too, in the broader right-of-center intellectual world.” Kleinke even flubs the paternity of the individual mandate, which he says is “an idea forged not by liberal social engineers at Brookings but conservative economists at the Heritage Foundation.” In fact, the idea originated with Randall Bovbjerg of the left-wing Urban Institute.

Kleinke has done insightful work. This oped is just nutty, and emblematic of the lack of intellectual rigor among the Church of Universal Coverage members residing in both left-wing and right-wing think tanks.

Another UN Push for Global Taxation

But I guess I’m not very persuasive. The bureaucrats have just released a new report entitled, “In Search of New Development Finance.”
As you can probably guess, what they’re really searching for is more money for global redistribution.
But here’s the most worrisome part of their proposal: they want the UN to be in charge of collecting the taxes, sort of a permanent international bureaucracy entitlement.
I’ve written before about the UN’s desire for tax authority (on more than one occasion), but this new report is noteworthy for the size and scope of taxes that have been proposed.
Here’s the wish list of potential global taxes, pulled from page vi of the preface:

Below is some of what the report has to say about a few of the various tax options. We’ll start with the carbon tax, which I recently explained was a bad idea if it were to be imposed on Americans by politicians in Washington. It’s a horrible idea if imposed globally by the kleptocrats at the UN.

…a tax of $25 per ton of CO2 emitted by developed countries is expected to raise $250 billion per year in global tax revenues. Such a tax would be in addition to taxes already imposed at the national level, as many Governments (of developing as well as developed countries) already tax carbon emissions, in some cases explicitly, and in other cases, indirectly through taxes on specific fuels.

Notice that the tax would apply only to “developed countries,” so this scheme is best characterized as discriminatory taxation. If Obama is genuinely worried about jobs being “outsourced” to developing nations like China (as he implies in his recent attack on Romney), then he should announce his strong opposition to this potential tax.

But don’t hold your breath waiting for that to happen.

Next, here’s what the UN says about a financial transactions tax:

A small tax of half a “basis point” (0.005 per cent) on all trading in the four major currencies (the dollar, euro, yen and pound sterling) might yield an estimated $40 billion per year. …even a low tax rate would limit high-frequency trading to some extent. It would thus result in the earning of a “double dividend” by helping reduce currency volatility and raising revenue for development. While a higher rate would limit trading to a greater extent, this might be at the expense of revenue.

This is an issue that already has attracted my attention, and I also mentioned that it was a topic in my meeting with the European Union’s tax commissioner.

But rather than reiterate some of my concerns about taxing financial consumers, I want to give a bit of a compliment to the UN: the bureaucrats, by writing that “a higher rate … might be at the expense of revenue,” deserve credit for openly acknowledging the Laffer Curve.

By the way, this is an issue where both the United States and Canada have basically been on the right side, though the Obama administration blows hot and cold on the topic.

Now let’s turn to the worst idea in the UN report. Its authors want to steal wealth from rich people. But even more remarkable, they want us to think this won’t have any negative economic impact.

…the least distorting, most fair and most efficient tax is a “lump sum” payment, such as a levy on the accumulated wealth of the world’s richest individuals (assuming the wealthy could not evade the tax). In particular, it is estimated that in early 2012, there were 1,226 individuals in the world worth $1 billion or more, 425 of whom lived in the United States, 90 in other countries of the Americas, 315 in the Asia-Pacific region, 310 in Europe and 86 in Africa and the Middle East. Together, they owned $4.6 trillion in assets, for an average of $3.75 billion in wealth per person. A 1 percent tax on the wealth of these individuals would raise $46 billion in 2012.

I’ll be the first to admit that you can’t change people’s incentives to produce in the past. So if you steal wealth accumulated as the result of a lifetime of work, that kind of “lump sum” tax isn’t very “distorting.”

But here’s some news for the UN: rich people aren’t stupid (or at least their financial advisers aren’t stupid). So you might be able to engage in a one-time act of plunder, but it is naiveté to think that this would be a successful long-term source of revenue.

For more information, I addressed wealth taxes in this post, and the argument I was making applies to a global wealth tax just as much as it applies to a national wealth tax.

Now let’s conclude with a very important warning. Some people doubtlessly will dismiss the UN report as a preposterous wish list. In part, they’re right. There is virtually no likelihood of these bad policies getting implemented any time in the near future.

But UN bureaucrats have been relentless in their push for global taxation, and I’m worried they eventually will find a way to impose the first global tax. And if you’ll forgive me for mixing metaphors, once the camel’s nose is under the tent, it’s just a matter of time before the floodgates open.

The greatest threat is the World Health Organization’s scheme for a global tobacco tax. I wrote about this issue back in May, and it seems my concerns were very warranted. Those global bureaucrats recently unveiled a proposal—to be discussed at a conference in South Korea in November—that would look at schemes to harmonize tobacco taxes and/or impose global taxes.

Here’s some of what the Washington Free Beacon wrote:

The World Health Organization (WHO) is considering a global excise tax of up to 70 percent on cigarettes at an upcoming November conference, raising concerns among free market tax policy analysts about fiscal sovereignty and bureaucratic mission creep. In draft guidelines published this September, the WHO Framework Convention on Tobacco Control indicated it may put a cigarette tax on the table at its November conference in Seoul, Korea. …it is considering two proposals on cigarette taxes to present to member countries. The first would be an excise tax of up to 70 percent. …The second proposal is a tiered earmark on packs of cigarettes: 5 cents for high-income countries, 3 cents for middle-income countries, and 1 cent for low-income countries. WHO has estimated that such a tax in 43 selected high-/middle-/low-income countries would generate $5.46 billion in tax revenue. …Whichever option the WHO ends up backing, “they’re both two big, bad ideas,” said Daniel Mitchell, a senior tax policy fellow at the Cato Institute. …Critics also argue such a tax increase will not generate more revenue, but push more sales to the black market and counterfeit cigarette producers. “It’s already a huge problem,” Mitchell said. “In many countries, a substantial share of cigarettes are black market or counterfeit. They put it in a Marlboro packet, but it’s not a Marlboro cigarette. Obviously it’s a big thing for organized crime.” …The other concern is mission creep. Tobacco, Mitchell says, is easy to vilify, making it an attractive beachhead from which to launch future vice tax initiatives.

It’s my final comment that has me most worried. The politicians and bureaucrats are going after tobacco because it’s low-hanging fruit. They may not even care that their schemes will boost organized crime and may not raise much revenue.

They’re more concerned about establishing a precedent that international bureaucracies can impose global taxes.

I wrote the other day about whether Americans should escape to Canada, Australia, Chile, or some other nation when the entitlement crisis causes a Greek-style fiscal collapse.

But if the statists get the power to impose global taxes, then what choice will we have?

You Shouldn’t Have to Give Up Your Health Insurance When You Take Social Security

This blogpost and the amicus brief it references were co-authored by Trevor Burrus and Kathleen Hunker.

When Brian Hall, former House Majority Leader Dick Armey, and other over-65 retirees requested to opt out of Medicare’s hospital insurance coverage (because they preferred their existing private coverage), the Social Security Administration didn’t thank them for saving taxpayers’ money. Instead, the SSA explained that, because of a guideline in its “Program Operations Manual System”—essentially a manual that explains how to operate the Social Security system—anyone who declined Medicare benefits would lose Social Security.

That is, Hall and the others could disclaim their Medicare hospital insurance coverage, but only if they forfeited all of their future claims to Social Security and repaid whatever benefits they already had received — roughly $280,000 altogether. The plaintiffs challenged the linking of Social Security and Medicare as being beyond the SSA’s statutory authority. Neither the Social Security Act nor the Medicare Act allows administrative agencies to precondition benefits under one program on acceptance of benefits from other. Instead, the plain language of both statutes states that petitioners are “entitled” to benefits, which according to legal and general usage describes someone who is “legally qualified” and thus has the option of claiming benefits.

The district court disagreed and the U.S. Court of Appeals for the D.C. Circuit, in a split decision, affirmed the trial court’s result but declined to grant the POMS rules deference. The court then unanimously denied a petition for rehearing. Recognizing that the D.C. Circuit ruling, if left in place, could encourage future encroachments on congressional power by administrative agencies, Cato filed an amicus brief supporting Hall’s request that the Supreme Court take the case and enforce the statute as it was written.

We note that administrative agencies have no powers not granted to them by Congress and that regulations must be anchored in the operative statute—as well as the agency’s fair and considered judgment—in order to warrant judicial deference. The POMS regulation fails this standard because Congress’s use of the word “entitled” was clear and unambiguous. Combined with the fiscal irresponsibility of forcing citizens to accept costly benefits in an economic recession, the POMS rule appears to be an arbitrary power grab rather than a faithful effort to implement the will of Congress. We conclude by reminding the Court that agency overreach imperils the separation of powers and therefore liberty.

When Congress fails to counter an unauthorized expansion of power by an administrative agency, the judiciary has a duty to uphold the Constitution by enforcing the relevant statute as written.

The Supreme Court will decide later this fall whether to take the case of Hall v. Sebelius.

Is the Federal Government Bound by the Agreements It Makes With States?

The Interstate Agreement on Detainers, a compact authorized by federal statute, provides a simple procedure for transferring custody of prisoners between states. Because the federal government annually seeks to prosecute thousands of prisoners already in state custody, it joined the IAD in 1970 to get the benefit of this unified procedure. When it joined, it did so as a “state” for purposes of the agreement, and exempted itself from only two provisions (which aren’t relevant here). One of the provisions that the federal government decided not to exempt itself from, Article IV(a), allows the governor of the sending state to deny any request made by a receiving state to transfer a prisoner.

In September of 2010, Jason Pleau offered to plead guilty to robbery and murder charges in Rhode Island in exchange for life in prison without parole, the harshest sentence that state’s law allows. Pleau’s crimes also allegedly violated federal law, however, and the U.S. government wanted to prosecute Pleau itself in order to seek the death penalty. The federal government thus sought custody through the IAD by filing for the little-known writ of habeas corpus ad prosequendum (“show me the body for prosecution”).

The governor of Rhode Island, Lincoln Chafee, disapproves of the death penalty and used his authority under the IAD’s Article IV(a) to deny the federal request. A federal district court, later affirmed by the U.S. Court of Appeals for the First Circuit, overruled Chafee’s denial, stating that the Supremacy Clause prevented the governor from interfering with the federal government’s wishes.

The First Circuit found that the compact’s specific text and the normal canons of statutory construction were “all beside the point.” According to the court, what was important was that Congress could not possibly have meant to grant state governors the power to deny federal transfer requests—and thus the IAD didn’t affect the balance of power between the federal government and the states. The First Circuit thus granted the writ, and Pleau is now in federal custody.

The question presented here, whether the Supremacy Clause trumps a governor’s right to deny a request for transfer of custody under the IAD, raises two important issues: First, if the First Circuit is right, then the federal government may reap the benefit of interstate bargains without having to fulfill its own obligations under them. Second, the First Circuit’s opinion effectively treats the state courts as inferior to the federal courts, which upsets the system of concurrent sovereignty that the Founders designed.

Cato has joined the Independence Institute to file an amicus brief urging the U.S. Supreme Court to hear this case, with a focus on the second issue. We argue that the U.S. legal system has always recognized the dual sovereignty of federal and state courts, dating back to Chief Justice John Marshall. As Chief Justice Marshall explained, that dual system requires that state courts not be considered inferior to federal courts, and thus federal courts have no independent authority to order prisoners under state jurisdiction to be transferred to the federal system.

Furthermore, when abrogating state sovereignty via the Supremacy Clause, Congress must demonstrate its intent to do so with “unmistakably clear language”—and none of the statutes applicable here contain any such language. Finally, we argue that the First Circuit has misinterpreted relevant Supreme Court precedent and that a proper reading of the relevant case law would establish that a state is well within its rights to treat the federal government like any other state under the IAD and deny its request to transfer a prisoner into federal custody.

The Supreme Court will decide whether to take up the case of Chafee v. United States and Pleau v. United States later this fall.

Unhealthy Snacks: Your Tax Dollars at Work

Politicians from Mike Huckabee to Michael Bloomberg to Michelle Obama have been hectoring Americans about their eating habits. (What is it about the name “Michael,” anyway, that seems to encourage paternalism and nanny-state politics? Well, it turns out that “Michael” comes from a Hebrew name meaning “Who is like God?” Maybe Michaels just get the idea that they are.)

But meanwhile, I was struck by this report buried in a Washington Post story titled “Obama showering Ohio with attention and money”:

[A] company making potato chips and other snack food about 100 miles from Cleveland … has received three Small Business Administration loans totaling $3.9 million since Obama took office, along with a $2 million loan during the Bush administration. In August, the agency’s head, Karen Mills, toured his facility for the launch of a kit that allows people to flavor their own gourmet potato chips. Last year, Biden singled him out in a speech near Cleveland.

So while the first lady stumps for healthy eating, administration appointees heap praise—and millions of tax dollars—on a company making potato chips. I think we should stop giving subsidies to all businesses and let them compete in a free market. But examples like this might lead even advocates of subsidies to wonder if this makes sense.

Evidence from England Shows that If You Want to ‘Soak the Rich,’ Keep Tax Rates Low

I’ve pulled evidence from IRS publications to show that rich people paid a lot more to Uncle Sam after Reagan reduced the top tax rate from 70 percent to 28 percent.

The good ol’ days

But the Gipper wasn’t the only one to unleash the Laffer Curve. The United Kingdom saw similar dramatic results when Margaret Thatcher lowered the top tax rate from 83 percent to 40 percent. Allister Heath explains.

During the 1970s, when the tax system specialised in inflicting pain, the top one per cent of earners contributed 11pc of income tax. By 1986-87, with the top rate down to 60pc, that had increased to 14pc. After the top rate fell to 40pc in 1988, the top 1pc’s share jumped, reaching 21.3pc by 1999-2000, 24.4pc in 2007-08 and 26.5pc in 2009-10. Lower taxes fuelled a hard-work culture and an entrepreneurial revolution. Combined with globalisation and the much greater rewards available for skilled workers, Britain’s most successful individuals earned a lot and paid a lot in tax.

In other words, Margaret Thatcher’s supply-side tax rate reductions paid big dividends, both for the economy and for the Treasury.

Unfortunately, just as American politicians have forgotten (or decided to ignore) the lessons of the Reagan era, British politicians also have gravitated to a class-warfare approach. Allister points out that this is having a negative impact.

Yet times are changing, and not just because of the recession. HMRC recently slashed its forecasts for revenues from the top 1pc. It now believes the number of people expected to report £500,000 or more in earnings will fall by a tenth this year; those on £2m are set to drop by a third.

Why have the numbers headed in the wrong direction? There are almost certainly lots of factors, but tax policy has moved in the wrong direction and presumably deserves part of the blame. The top income tax rate is now 45 percent. The value-added tax has jumped to 20 percent. Allister provides more details.

Capital gains tax is too high. Luxury homes transactions are falling because of higher stamp duty. Britain is now a high tax economy; this is distorting work and investment decisions, gradually shifting talent and capital overseas. The overwhelming majority of high earners are already contributing disproportionately to the exchequer; tightening the screws further will be disastrously counter-productive. The lesson of the past 30 years is clear: the best way to entice the rich to pay even more tax is to keep rates low and allow them to get even richer.

I have to admit that I don’t want anyone to pay more tax, but I’m even less happy about punitively high tax rates. So I’m reluctantly willing to let the clowns in government have more money in exchange for a tax system that is more conducive to economic growth.

Here’s my Laffer Curve video, which explains more about the relationship of tax rates, taxable income, and tax revenue.

The ultimate goal, of course, is to shrink the central government so that the legitimate functions of the state can be financed at very low tax rates. Heck, if the United States and the United Kingdom had the kind of limited governments that existed 100 years ago, neither nation would even need a flat tax. A few user fees and excise taxes would suffice. Now that’s hope and change.

P.S. I periodically share two great Reagan videos, which can be seen here and here, but I also have a couple of inspiring videos of Thatcher in action, which can be viewed here and here.

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