Topic: Government and Politics

Fiscal Fights with Friends, Part I: Responding to Reihan Salam’s Argument against the Flat Tax

In my ultimate fantasy world, Washington wouldn’t need any sort of broad-based tax because we succeeded in shrinking the federal government back to the very limited size and scope envisioned by our Founding Fathers.

In my more realistic fantasy world, we might not be able to restore constitutional limits on Washington, but at least we could reform the tax code so that revenues were generated in a less destructive fashion.

That’s why I’m a big advocate of a simple and fair flat tax, which has several desirable features.

  • The rate is as low as possible, to minimize penalties on productive behavior.
  • There’s no double taxation, so no more bias against saving and investment.
  • And there are no distorting loopholes that bribe people into inefficient choices.

But not everyone is on board, The class-warfare crowd will never like a flat tax. And Washington insiders hate tax reform because it undermines their power.

But there are also sensible people who are hesitant to back fundamental reform.

Consider what Reihan Salam just wrote for National Review. He starts with a reasonably fair description of the proposal.

The original flat tax, championed by the economists Robert Hall and Alvin Rabushka, which formed the basis of Steve Forbes’s flat-tax proposal in 1996, is a single-rate tax on consumption, with a substantial exemption to make the tax progressive at the low end of the household-income distribution.

Though if I want to nit-pick, I could point out that the flat tax has effective progressivity across all incomes because the family-based exemption is available to everyone. As such, a poor household pays nothing. A middle-income household might have an effective tax rate of 12 percent. And the tax rate for Bill Gates would be asymptotically approaching 17 percent (or whatever the statutory rate is).

My far greater concerns arise when Reihan delves into economic analysis.

Privatize to Solve Government Cost Overruns

On large and complex government projects, costs will double from the original estimates. This tendency is called Edwards’ Law of Cost Doubling.   

The Wall Street Journal reports on the PATH rail station at the World Trade Center. Edwards’ Law was in effect:

… it has become a budgetary boondoggle, its cost doubling to nearly $4 billion, which gives it the unenviable distinction of the world’s most expensive train station.

Some people are blaming the project’s architect, Santiago Calatrava, for the problems. But, as I noted here, the real causes seem to have been political squabbling and mismanagement by the overgrown Port Authority of New York and New Jersey (PANYNJ). The WSJ notes:

But at the World Trade Center, Mr. Calatrava’s travails signal broader disharmony and discord at the country’s most recognizable construction project. The nearly 14-year effort—for which his firm has collected more than $80 million, according to a person familiar with the payments—has been marred by frequent public fighting between the governmental and private parties involved.

Bursting budgets throughout the 16-acre site have weighed heavily on the Port Authority of New York and New Jersey, the body that owns the site. The agency has delayed other projects like renovations of the region’s airports, and tolls on bridges and tunnels to New Jersey have more than doubled in recent years to raise revenue.

America’s NATO Liabilities

Washington’s collection of European security dependents (aka, the NATO allies) seek an even stronger U.S. commitment to their defense.  That desire has clearly been on the rise since Russia’s annexation of Crimea in 2014 and the subsequent escalation of the Ukraine crisis.  Not surprisingly, Moscow’s smaller neighbors, especially the three Baltic republics, worry about the Kremlin’s intentions and want to take cover behind the shield of America’s military power.  Their latest ploy is to seek the permanent deployment of a NATO brigade (some 3,000 to 5,000 troops) on their territory.  It is a safe bet that they will want U.S. forces to be part of that unit.  Indeed, the United States already keeps more than 150 troops (along with military aircraft) in those countries as part of a continuing rotation of forces.

It is not hard to understand why small, weak nations would seek maximum protection from a distant power against a large, powerful neighbor that has displayed worrisome intentions.  It is much harder to understand, though, why undertaking such a risk would be in the best interest of the United States.  Allies are only beneficial when they augment a nation’s strength, and the potential benefits of defending them significantly outweigh the potential costs and risks. The Baltic republics (and most NATO members, for that matter) spectacularly fail that basic test.  They do next to nothing to augment America’s already vast military power, while (being on bad terms with their powerful neighbor) they create the risk of a U.S.-Russia confrontation where none would otherwise exist.  In short, they are strategic liabilities, not strategic assets. 

Making matters even worse, the Baltic countries and the other European members of NATO don’t seem terribly serious about their own defense, even as they sound alarm bells about Russia’s behavior.  As I note in a new article in Aspenia Online, their defense spending continues to be woeful.  Despite a commitment following the 2006 NATO summit, only the United States, Britain, Greece, and Estonia currently spend at least two percent of annual GDP on defense.  What is especially frustrating is that several major NATO powers, including Germany, Italy, and Spain, have spending levels far below the two percent target.  By comparison, just the U.S. base military budget is more than four percent of a much larger GDP, and if overseas contingency spending for supposed emergency missions (like the ongoing wars in Iraq and Afghanistan) is included, Washington’s defense outlays reach nearly five percent. 

Put Harriet Tubman on the $20 Bill

Washington’s latest symbolic battle is looming. America’s money celebrates its early political leaders, all white males. There’s now a campaign to add a woman. A recent poll named antislavery activist Harriet Tubman the favorite, ahead of First Lady Eleanor Roosevelt.

Of course, it wouldn’t be the first time that a woman appeared on America’s money. Suffragette Susan B. Anthony and Native American Sacagawea graced ill-fated dollar coins which were little used and quickly forgotten.

President Barack Obama indicated his interest in showcasing more women. Republican legislators should take up the challenge and introduce a resolution urging the Treasury to add Tubman. There’s nothing sacred about the present currency line-up. After all, America was created by many more people than presidents and other politicians. Indeed, replacing Andrew Jackson makes a certain sense since he resolutely opposed a federal central bank.

Moreover, Tubman would be a great choice to replace him. She was born between 1820 and 1822 in Maryland to slave parents. Tubman was hired out and often beaten. After her owner’s death in 1849, which led his widow to begin selling their slaves, she escaped through the Underground Railroad to Philadelphia.

However, a year later she returned to Maryland to rescue her niece and the latter’s two children, beginning a career of leading slaves to freedom. She was daring and creative; her plans were sophisticated. Although she trusted God she also saw value in arming herself. She directed her last rescue in December 1860.

The IRS Folds, Returns 100% of Lyndon McLellan’s Money

Defying a demand from the federal government to stop publicizing his case, today Lyndon McLellan was told the IRS is abandoning its efforts to keep more than $107,000 it took from his bank account without ever charging him with a crime.

The case received national attention and outrage, including from a member of Congress, which led to this threatening message from an Assistant U.S. Attorney to McLellan’s lawyers:

Whoever made [the case file] public may serve their own interest but will not help this particular case. Your client needs to resolve this or litigate it. But publicity about it doesn’t help. It just ratchets up feelings in the agency. My offer is to return 50% of the money. 

So much for that; Mr. McLellan will be receiving 100% of his money back.  

Insuring John Galt?

Caleb’s latest podcast is an interview with Charles Murray on his new book, By the People: Rebuilding Liberty without Permission. You can watch the podcast below or download the audio here. Be forewarned: if you’re like me, you’ll be Kindle-ing the book before the interview ends.

The word “provocative” is applied to far too many books these days, and often to books that should instead be called “wacky.” Murray’s thesis fully earns the former adjective, and perhaps a touch of the second–and I write that as high praise.

He argues that American government today is so far divorced from the nation’s founding principles of limited government and individual liberty that it can’t be returned to those principles through normal political action. No presidential administration, congressional turnover, or set of SCOTUS appointments will restore the Commerce and General Welfare clauses. Thus, he writes, supporters of liberty should try to effect change through carefully chosen but broadly adopted acts of civil disobedience against publicly unpopular regulations. Some examples that come to my mind: people could become part-time Uber drivers, or cash businesses could routinely make deposits of $9,999, or parents could include cupcakes in their schoolchildren’s packed lunches.

Appealing President Obama’s Executive Action on Immigration

On November 20, 2014, President Obama unveiled DAPA, an executive policy that would defer the deportation of up to four millions illegal aliens and afford them work authorization. One week later, Texas, joined by 25 other states, filed a lawsuit against this unprecedented expansion of executive power.

Cato, joined by law professors Josh Blackman, Jeremy Rabkin, and Peter Margulies, filed an amicus brief supporting the challenge. While we broadly support comprehensive immigration reform, we argued that DAPA violated the president’s constitutional duty to take care that the laws were faithfully executed because this action went far beyond merely setting priorities on who will be pursued and deported given finite enforcement resources. It was highly unusual for Cato to file in a district court—amicus briefs of any kind are rare at this level—but this was a highly unusual situation.

On February 16, 2015, Judge Andrew Hanen blocked DAPA from going into effect, finding that the executive branch did not follow the proper administrative procedures—such as seeking comments from the public—before implementing what is effectively a substantive change in established immigration law.