Tag: federalism

Study from German Economists Shows that Tax Competition and Fiscal Decentralization Limit Income Redistribution

If we want to avoid the kind of Greek-style fiscal collapse implied by this BIS and OECD data, we need some external force to limit the tendency of politicians to over-tax and over-spend.

That’s why I’m a big advocate of tax competition, fiscal sovereignty, and financial privacy (read Pierre Bessard and Allister Heath to understand why these issues are critical).

Simply stated, I want people to have the freedom to benefit from better tax policy in other jurisdictions, especially since that penalizes governments that get too greedy.

I’m currently surrounded by hundreds of people who share my views since I’m in Prague at a meeting of the Mont Pelerin Society. And I’m particularly happy since Professor Lars Feld of the University of Freiburg presented a paper yesterday on “Redistribution through public budgets: Who pays, who receives, and what effects do political institutions have?”

His research produced all sorts of interesting results, but I was drawn to his estimates on how tax competition and fiscal decentralization are an effective means of restraining bad fiscal policy.

Here are some findings from the study, which was co-authored with Jan Schnellenbach of the University of Heidelberg.

In line with the previous subsections, we find that countries with a higher GDP per employee, i.e. a higher overall labor productivity, have a more unequal primary income distribution. …fiscal competition within a country or trade openness as an indicator of globalization do not exacerbate, but reduce the gap between income classes. …expenditure and revenue decentralization restrict the government’s ability to redistribute income when fiscal decentralization also involves fiscal competition. …fiscal decentralization, when accompanied by high fiscal autonomy, involves significantly less fiscal redistribution. Please also note that fiscal competition induces a more equal distribution of primary income and, even though the distribution of disposable income is more unequal, it is open how the effect of fiscal competition on income distribution should be evaluated. Because measures of income redistribution usu-ally have adverse incentive effects which consequently affect economic growth negatively, fiscal competition might be favorable for countries which have strong egalitarian preferences. A rising tide lifts all boats and might in the long-run outperform countries with more moderate income redistribution even in distributional terms.

The paper includes a bunch of empirical results that are too arcane to reproduce here, but they basically show that the welfare state is difficult to maintain if taxpayers have the ability to vote with their feet.

Or perhaps the better way to interpret the data is that fiscal competition makes it difficult for governments to expand the welfare state to dangerous levels. In other words, it is a way of protecting governments from the worst impulses of their politicians.

I can’t resist sharing one additional bit of information from the Feld-Schnellenbach paper. They compare redistribution in several nations. As you can see in the table reproduced below, the United States and Switzerland benefit from having the lowest levels of overall redistribution (circled in red).

It’s no coincidence that the United States and Switzerland are also the two nations with the most decentralization (some argue that Canada may be more decentralized that the United States, but Canada also scores very well in this measure, so the point is strong regardless).

Interestingly, Switzerland definitely has significantly more genuine federalism than any other nation, so you won’t be surprised to see that Switzerland is far and away the nation with the lowest level of tax redistribution (circled in blue).

One clear example of Switzerland’s sensible approach is that voters overwhelmingly rejected a 2010 referendum that would have imposed a minimum federal tax rate of 22 percent on incomes above 250,000 Swiss Francs (about $262,000 U.S. dollars). And the Swiss also have a spending cap that has reduced the burden of government spending while most other nations have moved in the wrong direction.

While there are some things about Switzerland I don’t like, its political institutions are a good role model. And since good institutions promote good policy (one of the hypotheses in the Feld-Schnellenbach paper) and good policy leads to more prosperity, you won’t be surprised to learn that Swiss living standards now exceed those in the United States. And they’re the highest-ranked nation in the World Economic Forum’s Global Competitiveness Report.

The President Can’t Expand Federal Power by Signing a Treaty

This blogpost was co-authored by Cato legal associate Trevor Burrus.

In 2010, the Supreme Court decided United States v. Bond, a case that seems right out of a soap opera. Carol Anne Bond learned that her best friend was having an affair with her husband, so she spread toxic chemicals on the woman’s car and mailbox. Postal inspectors discovered this plot after they caught Bond on film stealing from the woman’s mailbox.

Rather than leave this caper to local law enforcement to resolve, however, a federal prosecutor charged Bond with violating a statute that implements U.S. treaty obligations under the 1993 Chemical Weapons Convention. Bond pled guilty and was sentenced, but she reserved the right to appeal her conviction on the ground that the statute at issue violates the Tenth Amendment—in that her offense was local in nature and not properly subject to federal prosecution.

She won the first part of that appeal process: The Supreme Court unanimously accepted the argument offered in an amicus brief by Cato and the Center for Constitutional Jurisprudence that there’s no reason in constitutional structure or history that someone can’t use the Tenth Amendment to challenge the constitutionality of the statute under which she was convicted.

On remand to the Philadelphia-based U.S Court of Appeals for the Third Circuit, Bond (now with standing to challenge that law) raised the argument that Congress’s limited and enumerated powers cannot be increased by treaties. We again filed in that case in support of Bond. The Third Circuit disagreed, however—if reluctantly—based on one sentence by Justice Oliver Wendell Holmes in Missouri v. Holland (1920) that has been interpreted to mean that Congress’s constitutional powers can indeed be expanded by treaties.

Writing separately, Judge Ambro agreed that Holland clearly addressed the issue but “urge[d] the Supreme Court to provide a clarifying explanation of its statement” regarding the treaty power. Bond has thus brought her case back to the Supreme Court, asking the Court to clarify and cabin Holland.

In this, our third brief in the case, we are joined again by the Center for Constitutional Jurisprudence in arguing—again based on the work of Georgetown law professor and Cato senior fellow Nicholas Quinn Rosenkranz—that allowing Congress to broaden its powers via treaties is an astounding manner in which to interpret a document that creates a federal government of limited powers. Not only would this mean that the Executive has the ability to expand federal power by signing a treaty, but it would mean that foreign governments could change federal power by abrogating a previously valid treaty—thus removing the constitutional authority from certain laws.

We also point out how the most influential argument supporting Holland is based on a clear misreading of constitutional history that has been repeated without question and that the ruling is in deep tension with other cases. We’re in a constitutional quagmire with respect to the treaty power that can only be escaped by limiting or overturning Missouri v. Holland.

The Court will decide this fall whether to Bond v. United States.

The GOP’s Insipid American Exceptionalism

I’ve had it with “American exceptionalism.” Enough already.

The phrase has garnered a considerable amount of attention lately, namely because Republicans are saying it over and over again. The Atlantic points out that the term itself was coined by Joseph Stalin, lamenting America’s inability to go communist (cf. Louis Hartz). Of course, the concept that America was different than Europe goes back at least to Tocqueville, but is it too much to ask that we recall Tocqueville was writing nearly 200 years ago? Might we not pause, at least momentarily, to reconsider the argument from authority and subject it to a bit of scrutiny?

I complained about the pervasive theme at the Republican convention in my podcast yesterday, and Alex Massie holds forth against the exceptionally exceptionalistic speechifying at Foreign Policy today. Republicans—and the rest of us—ought to just shut up about exceptionalism already. As it stands now, a few word substitutions could make Herder or Fichte feel right at home at a GOP convention. We ought not to like this.

Encouraging citizens to reify, then flutter with excitement at the uniqueness of their own “imagined community” lubricates both the administrative capacity of and enthusiasm for the Great American Welfare/Warfare State that is presently bankrupting our unborn children. Those of us who would like a bit more federalism, veering toward sectionalism even, do so realizing that this would create downward pressure on the centralization of our lives in the body of the national government. (“Who is this fellow 2,000 miles away from me and why should I subsidize his career and pay his flood insurance and pension?”) That the disgrace of slavery accompanied the last era of sectionalism in this country is no reason to throw out the concept itself.

Bizarrely, the GOP married this nationalistic theme with an ostensible concern for how America is viewed across the world. Might we not consider that the world finds this constant self-congratulation unseemly and perhaps even dangerous? Imagine your coworker, or neighbor, or spouse, constantly parading about, preening and pronouncing that he is the greatest person ever to have been made and marveling at how lucky are those subject to his ministrations. Any impartial observer would forgive you for nudging him off a pier, and all the more so if he were, in fact, great.

This is perhaps the saddest part of the whole garish spectacle. The United States is a great country. Take a look around you. Saying it over and over again doesn’t make it any more so; in fact it makes it less. All the bleating about our exceptionalism from our leaders is enough to make you think that they don’t really believe it. The party doth protest too much, methinks.

The next time your would-be ruler holds forth about exceptionalism, remind yourself what Mencken said:

Democratic man, as I have remarked, is quite unable to think of himself as a free individual; he must belong to a group, or shake with fear and loneliness—and the group, of course, must have its leaders. It would be hard to find a country in which such brummagem serene highnesses are revered with more passionate devotion than they get in the United States. The distinction that goes with mere office runs far ahead of the distinction that goes with actual achievement.

That’s what this is all about: If we allow the other party or candidate to insert its peculiar and grotesque proboscides into our homes, wallets, and lives—well, we’ll be just that much less exceptional.

Much more in the podcast:

States Should Flatly Refuse to Create ObamaCare Exchanges (New Cato Video)

This new Cato Institute video explains why it is in no state’s interest to create an ObamaCare Exchange.

Many thanks to Cato’s very talented Caleb O. Brown and Austin Bragg.

For the more-words-no-pictures version, click here or here. For a word about ObamaCare profiteers the pro-Exchange lobby, click here. Click here to read about what is happening in the states.

The Federal Government Can’t Give Itself More Power Just By Signing a Treaty

With ObamaCare, immigration, affirmative action, gay marriage, and the other hot-button issues rolling through our courts this year, some of you may have overlooked a little case on the Treaty Power, United States v. Bond, which was at the Court last year and may well make it back next year.

I’ve covered Bond before, and Cato has filed two amicus briefs in the case (before the Supreme Court and then in the Third Circuit on remand). As I described it last year, Bond is “your typical sordid tale of adultery, toxic chemicals, and federalism.” It’s a bizarre scenario you can read about in the previous links, but the issue that has drawn Cato’s attention—and that of Paul Clement, who remains Mrs. Bond’s counsel—is whether Congress can regulate the conduct of something solely because the United States is party to a treaty regarding that subject.

That is, even though Congress does not have the power to pass, for example, general criminal statutes, if Congress ratifies a treaty calling for such statutes, the dominant reading of an old precedent called Missouri v. Holland is that its power increases beyond constitutional limits. Not only would this mean that the Executive has the ability to expand congressional power by signing a treaty, but it would mean that foreign governments could change congressional power by abrogating a previously valid treaty—thus removing the constitutional authority from certain laws. Cato’s briefs have taken issue with such an interpretation of the Treaty Power, tracking the argument made by new Cato senior fellow (and Georgetown law professor) Nicholas Quinn Rosenkranz in his magisterial Harvard Law Review article, “Executing the Treaty Power.”

Earlier this month, the Third Circuit upheld Mrs. Bond’s conviction because the statute under which she was convicted duly implemented the Chemical Conventions Act and a lower court can’t overrule Missouri v. Holland. The court cited Cato’s brief and Nick’s article, however, and a concurrence by Judge Thomas Ambro, after also citing John Eastman’s article about the case in the Cato Supreme Court Review, specifically called on the Supreme Court to clarify the meaning of Missouri v. Holland.

The Court will have an opportunity to do so, with Paul Clement currently preparing a cert petition, which Cato will again support. In the meantime, you can listen in on a teleforum the Federalist Society is having about the case, featuring Prof. Rosenkranz (Fed Soc membership required, which costs $5-50 per year).

Immigration Laws at the Supreme Court: Constitutional but Bad Policy

For anyone suffering from post-Obamacare-argument Supreme Court withdrawal, this Wednesday the Court takes up Arizona’s controversial Senate Bill (“SB”) 1070.  See my blogpost from when the Court granted review for some background.

SB 1070 is much-misunderstood: it has nothing to do with sexy political issues like racial profiling and everything to do with boring legal ones like whether a given state provision is “preempted” by federal law.  That is, do the various parts of the state law – each one of which the Court will be evaluating independently – conflict with federal law (direct preemption) or intrude in an area exclusively reserved to Congress (implied preemption).

United States v. Arizona shows that there’s a difference between what’s constitutional and what’s good policy. SB 1070 was crafted to mirror federal law rather than asserting new state powers that interfere with federal authority over immigration.  That’s why lower courts only enjoined four of its provisions and why the Supreme Court would not be wrong to resurrect even those four.

But beyond this hyper-technical legal analysis, SB 1070 and copy-cat laws elsewhere – some of which go further than Arizona’s and thus are of more dubious constitutionality – highlight the dysfunction in our immigration system.  Given Congress’s failure to act in this area, state governments have spawned a host of federalism experiments.  Many of these laws are terrible policy for reasons ranging from economic effects to the misuse of law enforcement resources.

Legal scholars always enjoy the opportunity to point out laws that they think are constitutional but bad policy.  It makes them feel intellectually honesty (if they have reason to be defensive in that regard).  Well, immigration is the most obvious place where my constitutional and policy views diverge.  The ultimate solution here isn’t for the Supreme Court to strike down the states’ lawful if misguided legislation, but for Congress and the president to enact a comprehensive national reform.

For more on what’s at stake in the case, see my SCOTUSblog essay from last summer, my forthcoming law review article, and my new colleague Alex Nowrasteh’s recent op-ed.  For the briefs and other background materials, see SCOTUSblog’s case page.

National Surveillance Programs and Their State Impediments

Having originally come to Washington to defend federalism, I am always delighted to see the division of powers among the states and the federal government have its proper effect: to protect liberty and limited government.

As with REAL ID, the E-Verify federal background check system is meeting up with state resistance. The Republican Liberty Caucus of New Hampshire reported yesterday:

This afternoon, the House passed HB 1549, which would prohibit the state’s participation in the E-Verify system, with a nearly unanimous voice vote. The House also killed HB 1492, which would require employers to verify an employee’s eligibility to work in the United States using the E-Verify System, with a 226-59 vote.

E-Verify is essentially a national identification system that requires employers to verify all job applicants’ citizenship in a national database system before they can employ them. If the state agreed to participate, all citizens would have to be listed in this national database as a U.S. citizen in order to get a job.

You want to fix immigration, feds? You do it without putting American citizens into a national ID system. Good message.

Here’s the clear language of HB 1549, which the New Hampshire House has approved to govern release of motor vehicle records. It embraces legitimate law enforcement while rejecting national identification schemes.

III. Motor vehicle records may be made available pursuant to a court order or in response to a request from a state, a political subdivision of a state, the federal government, or a law enforcement agency for use in official business. The request shall be on a case-by-case basis. Any records received pursuant to this paragraph shall not be further transferred or otherwise made available to any other person or listed entity not authorized under this paragraph. No records made available under this section shall be used, directly or indirectly, for any federal identification database. (New language in bold.)

To learn more about E-Verify and its role as a nascent national identification scheme, read my Cato Policy Analysis: “Electronic Employment Eligibility Verification: Franz Kafka’s Solution to Illegal Immigration.”