Archives: 06/2013

Moral of the Story: Tax Havens Are Okay if You’re a Politically Connnected Statist

Earlier this year, I had some fun when it was revealed that the president’s new Treasury Secretary had a lot of money in the Cayman Islands.

After all, leftists want us to believe tax havens are rogue regimes that should be eliminated. Some of them even want military intervention against these low-tax jurisdictions!

Much to my amusement, Mr. Lew even pretended he was financially illiterate to justify making sensible decisions to invest via the Cayman Islands.

And unlike the president’s first Treasury Secretary, Mr. Lew didn’t break the law and cheat on his tax return.

You probably won’t be surprised to learn that Secretary Lew wasn’t the first Democrat to utilize tax havens. Lawmakers such as John Kerry, Bill Clinton, John Edwards, and others on the left also have utilized tax havens to boost their own personal finances.

And it appears that Mr. Lew won’t be the last Democrat to be caught with his hands in the cookie jar.

Here’s some of what’s being reported by the New York Times in regard to the president’s nominee to be U.S. Trade Representative:

Michael Froman, a longtime White House economic aide nominated to be President Obama’s trade representative, has nearly half a million dollars in a fund based in the Cayman Islands, according to financial documents provided to the Senate Finance Committee. …White House officials said Mr. Froman played no role in creating, managing or operating the investment funds and had done nothing wrong. “Mike Froman has paid every penny of his taxes and reported all of the income, gains and losses from the investment on his tax returns,” Mr. Whithorne said.

I don’t remember that compliance with the tax law mattered when Obama and the media were going after Romney in 2012 for legally investing in the Cayman Islands.

Could it be that tax havens are okay, but only if you support big government?

NR: States Should Join Oklahoma, Challenge IRS’s $800b Power Grab

The IRS is attempting to tax, borrow, and spend more than $800 billion over the next 10 years without congressional authorization, and indeed in violation of an express statutory prohibition enacted by both chambers of Congress and signed into law by President Obama. 

In a new editorial, National Review calls on officials in 33 states to join Oklahoma attorney general Scott Pruitt in filing court challenges to this illegal and partisan power grab:

By offering the [Patient Protection and Affordable Care Act’s] subsidies in states that have not set up [health insurance] exchanges, the federal government is inflicting tax penalties on individuals and employers that go beyond even what Obamacare allows…

Pruitt v. Sebelius has been supplemented by a lawsuit filed last month by a group of small businesses and individual taxpayers also challenging the IRS’s authority to impose penalties outside of state-created exchanges…

Stopping the IRS from imposing punitive taxes where it has no legal power to do so should in fact be a popular and bipartisan issue, regardless of one’s opinions about the ACA itself…

Republican governors, attorneys general, and state legislators looking to use their offices to the significant benefit of the nation as a whole should be lining up to create a 30-state united front with Oklahoma. Scott Pruitt is fighting for the rule of law, and Republican governors might trouble themselves to give him a hand. 

Click here for information on an upcoming Cato policy forum on Halbig v. Sebeliusthe legal challenge filed by several small businesses and taxpayers.

The Pentagon as a Jobs Program, Part 3

A couple of months ago, I cited the example of upgraded Abrams tanks being shoved down the Pentagon’s throat by certain members of Congress because tank production = jobs back in the district. I followed that up with some historical background on congressional Pentagon pork-barreling that is discussed in former Reagan budget director David Stockman’s new book. Yesterday, a Wall Street Journal article on congressional resistance to reprioritizing military spending provided a new example:  

The battle over the Global Hawk is emblematic of the difficulty the Pentagon faces in trying to reduce its inventory while shifting its focus from the ground war in Afghanistan to emerging threats elsewhere.  

The Defense Department has sought to ground the fleet of 18 Global Hawk Block 30 drones, which has been used to conduct surveillance from Afghanistan to Libya. The Air Force says its piloted U-2 planes have better surveillance equipment for the job—and that ending the Global Hawk program can save $2.5 billion over the next four years.  

Lawmakers have not only rejected the Pentagon plans, but set aside $443 million to compel the Air Force to buy three more Global Hawks. On Tuesday, the Air Force said it is moving ahead with buying the drones even though it doesn’t want them. 

Northrop can rely on bipartisan support. The planes are built in the district represented by Rep. Howard “Buck” McKeon (R., Calif.), who heads the Armed Services Committee, which will consider a plan to keep Global Hawk running through 2016.  

McKeon – who has issues with numbers when it comes to military spending – recently made news when it was discovered by Politico that a lobbying firm run by his brother and nephews is taking on military-related companies as clients. In a statement to Politico, McKeon said that “We are knowledgeable about the [ethics] rules involved and will be devout in our adherence to both the letter and the spirit of those rules.” Well, that’s good to hear. It’s worth noting, however, that when it comes to congressional ethics rules, the fox is guarding the henhouse

 

End Prohibition-Era Alcohol Regulations

The three-tiered system of beer distribution that many states adopted to curb breweries’ influence on consumers is an unfortunate hangover from the end of Prohibition. In states like Pennsylvania, for example, most breweries must sell their beer to a wholesaler, which then sells the beer to a retailer where then it can finally be sold to the consumer. Not only does this scheme add artificial costs to retail beer, the legal mandate doesn’t apply to in-state breweries and so this expensive law is also a classic case of crony capitalism.

The Supreme Court struck down this sort of in-state favoritism in the 2005 case of Granholm v. Heald, in which nearly identical laws were used to protect wine distributors in New York and Michigan. Does Pennsylvania and other states with similar laws think that Granholm doesn’t apply because commerce in beer is constitutionally different from commerce in wine?

Last week, the Competitive Enterprise Institute released a paper, authored by former Cato legal associate David Scott, calling for the Keystone State to abide by the Supreme Court’s ruling and end its protectionist three-tiered beer distribution system.

“Balancing” and DNA Swabs

My colleagues Ilya, Jim, Roger, and Walter have said most of what needs to be said about the Supreme Court’s recent decision in the DNA sampling case Maryland v. King. So let me just hover for a moment on a point Roger makes.  Everyone seems to agree that Justice Kennedy’s majority opinion strains the bounds of language by arguing that the state purpose of “identification” served by DNA sampling arrestees includes establishing a “context” for understanding “who the person really is,” including their “past conduct.” By the same logic, we might justify searching the homes of every drunk driver for evidence of unrelated crimes, since this too would give us a sense of “who they really are,” and whether they have reason to jump bail lest other crimes be discovered. The real argument, disingenuously shoehorned into this rubric of “identification,” is that this is indeed a warrantless search for ordinary investigative purposes, but that once a person has already been legitimately detained, the marginal intrusion involved in a cheek swab is trivial—and the benefit to society of enabling serious crimes to be solved so great—that an exception to the normal Fourth Amendment rules is justifiable.  This is, as Roger suggests, a closer call.

Let’s go further and make the argument that Justice Kennedy, determined to cast this as a matter of “identification,” didn’t bother with.  He could, after all, have cited to the Supreme Court’s major dog-sniff cases, Place and Caballes, in support of the following argument: The limited DNA profile actually entered into the CODIS database is only useful for matching, not for revealing other sensitive facts about medical conditions or genetic predispositions.  In essence, then, this is a search that only reveals whether one is the unidentified perpetrator of a crime—which, like possession of contraband, is a fact in which a person has no “reasonable expectation of privacy.”  So one might argue.

The first point to make is that the narrow “if you have nothing to hide, you have nothing to fear” argument doesn’t really work.  A murder investigation will naturally involve collection of foreign DNA samples on the victim, which may well belong to persons that had nothing to do with the crime. Thus a search of an innocent arrested persons DNA could easily reveal the existence of, say, an unrelated but secret sexual relationship with the victim, or merely the presence of the searched person at the scene of a crime they had no involvement in. So this is not really a search with no realistic risk of exposing innocent but legitimately private information.

The larger point, though, is that the provisions of the Bill of Rights were meant to avoid precisely this kind of granular case-by-case “balancing” process, to the extent possible. An analogy to the First Amendment may be helpful here. Let’s concede: It is totally plausible that prohibiting Nazis from marching through a community of Holocaust survivors, or the grotesque Westboro Baptist Church from picketing military funerals with signs that read “Thank God for Dead Soldiers” and “God Hates Fags,” would suppress particular instances of speech with no real social value and spare decent people anguish they do not deserve. In a vacuum, probably neither instance of speech would survive a “balancing test.”  But the courts correctly protected both nevertheless, because the First Amendment articulates a meta-balancing judgment that we do not want the government engaged in this kind of specific case-by-case balancing analysis of which speech is valuable enough to be protected. The Framers of the Constitution had already done a balancing test about when it is better not to engage in balancing tests.

So it is, I would argue, with the Fourth Amendment. In the short term, it is easy enough to say that a few cheek swabs are a trivial marginal intrusion, even if they sometimes expose innocent private information, compared with the social benefit of catching murderers and rapists. But especially as DNA testing technology evolves, what are the consequences of establishing a massive repository of genetic information about the one-third of Americans who will be arrested by the age of 23—especially if that database disproportionately encompasses poor minorities, many of whom are never convicted of any crime? (Those who ARE convicted, as Justice Scalia’s dissent in King observed, get sampled anyway—so the policy in  question here only really makes a difference to the innocent.)  How do you “balance” the crimes solved at the margin when samples are taken from people arrested though ultimately acquitted against the creation of an architecture of genetic information-gathering, which may in itself encourage pretextual arrests for trivial offenses to circumvent the need for search warrants for genetic material, whose long-term uses are impossible to foresee? The general attitude of the courts, after all, is that once information or evidence has been legitimately acquired by police, there is no Fourth Amendment barrier to further analysis of that evidence, even if unrelated to the purpose for which it was acquired. (There are, I think, good theoretical reasons to regard this as a mistake, but that’s how things presently stand.)

In this case, then, the Court has invoked the idea of “identification” to obscure what is fundamentally an application of a “balancing test” to a warrantless investigative technique. But the Court is balancing benefits it can see reasonably clearly with costs it cannot.  Perhaps, even in the long run, the benefits will outweigh the costs. But the point of the Fourth Amendment is to provide a basis for limiting governmental information gathering that, to the extent possible, avoids saddling the Court with the responsibility for engaging in this sort of utilitarian calculus. It cannot be avoided entirely, of course—that much is implicit in the inclusion of the normative term “unreasonable” in the text of the Fourth Amendment—but it should not be the ordinary grounds for deciding which particular searches are permissible. Sometimes, as Hayek understood, we stick to simple rules, not because they are truly optimal, but because we are not clever or prescient enough to develop more nuanced rules that do better.

Congratulations to the Free Traders of the 112th Congress

Do you remember the 112th Congress—the one that repeatedly almost shut down the government while still managing to raise taxes and spending? It turns out they did some interesting things with trade policy. The votes recorded in Cato’s congressional trade votes database have been counted, tabulated, and analyzed, and the results are mixed. The predictable legislative outcome was that with a Republican House and Democratic Senate, the 112th Congress furthered the bipartisan establishment trade policy of reciprocal tariff reduction and unilateral subsidy expansion.

The more interesting revelations come from looking at the voting records of individual members. Rather than simply noting whether a policy would promote or diminish free trade or would increase or decrease America’s engagement in the global economy, Cato’s Free Trade, Free Markets methodology distinguishes between barriers (like tariffs and quotas) and subsidies (like loan guarantees, tax credits, and price supports). This distinction enables us to place members within a two-dimensional matrix.

Free traders are those that oppose both barriers and subsidies. Interventionists are those that support both barriers and subsidies. Isolationists are those that support barriers but oppose subsidies. Internationalists are those that oppose barriers but support subsidies. 

The release of this report offers a wonderful opportunity to name names. First I’d like to point out that last term, three Republican representatives voted consistently to support trade barriers. Just to be clear, these barriers are taxes expressly intended to prevent you from buying things you want. The representatives are Walter Jones of North Carolina, Frank LoBiondo of New Jersey, and Steve LaTourette of Ohio. While Walter Jones consistently opposed subsidies (making him the House’s only isolationist last term), Messrs. LoBiondo and LaTourette joined 115 Democrats as interventionists.

With that unpleasantness out of the way, I would like to offer my congratulations and gratitude to the 112th Congress’s free traders. There were 19 in the Senate and 85 in the House. The high number of free traders in the House last term is due mostly to the fact that there was only one trade subsidy vote; if there were more, I’m sure many of these names would disappear from the list, but many would not and they all deserve credit nonetheless.

Why Are There So Few Unlawful Immigrants?

Labor markets are heavily distorted by immigration restrictions, producing wide and persistent wage differences for observably identical workers in developed and developing nations. Income for low skilled American workers is 16 times as high as Haitians in Haiti, about 7 times as high as Indians in India, and about 4 times as high as Mexicans in Mexico—all adjusted for purchasing power parity. Just by moving here immigrants can largely close that wage gap. 

There are very limited avenues for low skilled immigrants to immigrate legally, which raises an important question: if the economic benefits of immigrating are so high, why are there only 11 to 12 million unlawful immigrants here?  

Below are the two broad reasons: 

First, the benefits of immigrating are not as high as they seem. The probability of being employed in the destination country is a vital variable because unemployment does not confer any benefits on the immigrant. The skill level of prospective unlawful immigrants restricts job opportunities to certain occupations. If the sectors where low skilled immigrants work have high unemployment rates, as many do now, the chances of earning higher wages here is lower so the economic benefits of immigration are lower. Downward wage bargaining by immigrants is limited but unlawful immigrants do take a wage cut, all else being equal, of about 20 percent to compensate their employers for the legal risk of hiring them and other reasons. Growing economies in places like Mexico, China, and elsewhere might partially offset the benefits of immigrating by promising higher incomes in the near future.   

Second, the cost of unlawfully immigrating is very high. Opportunity costs, search costs (including language barriers), transportation costs, legal costs, the probability of dying en route, the probability of being sold into slavery, and the probability of not making it to the United States despite paying the smuggling fee are all high and increase risk. Immigration enforcement is very effective at deterring most would-be unlawful immigrants. High smuggling fees are a high up front cost. 

Immigration can be understood as an investment over a period of years.  The length of time the immigrant spends here employed at higher wages increases the economic benefits of immigrating. The costs of immigrating, like paying for a smuggler, are fixed while there seems to be a low marginal cost for staying here to avoid immigration enforcement. The psychic costs could shift with time.

Here is an example: