Topic: Tax and Budget Policy

House Budget Committee Testimony on Debt

I testified to the House Budget Committee yesterday on the history of federal debt and reasons to balance the budget. John Taylor, Jared Bernstein, and Ryan Silvey also testified.

The ratio of federal debt to the size of the economy has never been anywhere near as high during peacetime as it is today. Federal debt has often spiked during wars, but has always been reduced afterwards.

Before the 1930s, policymakers believed that high debt was immoral and bad for the economy. Those beliefs restrained the basic political instinct to spend more than the available revenue. Unfortunately, in recent decades, Keynesian theory has informed policymakers that deficit spending is beneficial. That has led to the “modern era of profligacy,” noted economist James Buchanan.

Federal borrowing imposes an unfair and damaging burden on future generations, and it should be avoided except during major crises such as wars. Paul Krugman and Steve Landsburg are completely mistaken when they urge people not to worry about government debt because we “owe it to ourselves.”

Cutting spending to balance the budget would reduce the damage from future taxes, increase macroeconomic stability, and potentially increase capital formation. Requiring the government to balance its budget would also curtail spending on lower-valued activities, create incentives to prune waste, and thus spur greater economic growth. 

The video and written testimony is here.

Senator Rand Paul’s Very Good Tax Plan Needs One Important Tweak

Our nation very much needs fundamental tax reform, so it’s welcome news that major public figures - including presidential candidates - are proposing to gut the internal revenue code and replace it with plans that collect revenue in less-destructive ways.

A few months ago, I wrote about a sweeping proposal by Senator Marco Rubio of Florida.

Today, let’s look at the plan that Senator Rand Paul has put forward in a Wall Street Journal column.

He has some great info on why the current tax system is a corrupt mess.

From 2001 until 2010, there were at least 4,430 changes to tax laws—an average of one “fix” a day—always promising more fairness, more simplicity or more growth stimulants. And every year the Internal Revenue Code grows absurdly more incomprehensible, as if it were designed as a jobs program for accountants, IRS agents and tax attorneys.

And he explains that punitive tax policy helps explain why our economy has been under-performing.

…redistribution policies have led to rising income inequality and negative income gains for families. …We are already at least $2 trillion behind where we should be with a normal recovery; the growth gap widens every month.

So what’s his proposal?

…repeal the entire IRS tax code—more than 70,000 pages—and replace it with a low, broad-based tax of 14.5% on individuals and businesses. I would eliminate nearly every special-interest loophole. The plan also eliminates the payroll tax on workers and several federal taxes outright, including gift and estate taxes, telephone taxes, and all duties and tariffs. I call this “The Fair and Flat Tax.” …establish a 14.5% flat-rate tax applied equally to all personal income, including wages, salaries, dividends, capital gains, rents and interest. All deductions except for a mortgage and charities would be eliminated. The first $50,000 of income for a family of four would not be taxed. For low-income working families, the plan would retain the earned-income tax credit.

Kudos to Senator Paul. This type of tax system would be far less destructive than the current system.

VA Spends Billions without a Contract

The Department of Veterans Affairs (VA) spends $60 billion a year providing health care benefits to service veterans. Its mismanagement is well-known and widespread. A recent letter provided to the Washington Post and Congress suggests that as much as 10 percent of the VA’s annual spending is in violation of federal contracting rules, representing billions of taxpayer dollars.

Employees of a New York VA facility used their government purchase cards to buy prosthetics for patients in a manner that violates standard operating procedures. Per the VA’s rules, purchasing cards are available to buy supplies costing less than $3,000. Items costing more require a contract and invoice.  The facility purchased at least 2,000 prosthetics for $24,999, well above the $3,000 limit and only $1 less than the card limit of $25,000. All told, $54 million was spent by this facility in violation of policy.

When congressional investigators heard about the questionable purchases at the Bronx facility, investigators asked for the accompanying contracts to prove the purchases were legitimate. VA employees tried to cover their missteps and blame the missing documents on Superstorm Sandy, according to the Washington Post.

VA officials had received an inquiry from Congress in September 2012 about the Bronx payments, but a letter signed by former secretary Eric Shinseki did not go out until July 2013. The agency had prepared to say that the records had been transferred to VA’s medical center in Manhattan, where they were destroyed in Hurricane Sandy, documents obtained by The Post show.

But in reviewing the claim that the records had been destroyed, a senior adviser in Shinseki’s office was skeptical. “Gemma — this isn’t going to work,” the adviser wrote in an e-mail obtained by The Post.

“The [congressman’s] letter was dated 26 Sept and the storm was 28 October. Yet we talk about visits in December 2012 and again in January. Not clear why we didn’t figure out in December that we lost the records and had to go back in January,” he wrote in April 2013.

“This is not cleared.”

Rice said in a statement Monday, “The damage caused by Superstorm Sandy was devastating and far-reaching, but the claim that all of these documents were destroyed strikes me as all too convenient and must be substantiated. We need to know exactly what happened to the documents, how and why this money was spent without written contracts, and who is accountable.”

This is just one instance of malfeasance. Jan R. Frye, VA’s deputy assistant secretary for acquisition and logistics, and now a VA whistleblower, found the actions at the NY facility were not an isolated event. Frye found a total of $1.2 billion in prosthetics purchases without a contract over an 18 month period in 2013 and 2014. Frye sent a 35 page memo to the VA Secretary, Robert McDonald arguing that laziness is the motivating factor behind the VA’s mismanagement. Purchasing cards are much easier than using the contract process.

Frye is not the first to criticize purchasing card usage by the VA. The Washington Post says:

Some of his [Frye’s] concerns were previously flagged by VA’s inspector general, who has reported for years that weak contracting systems put the agency at risk of waste and abuse. Thousands of pharmaceutical purchases were made without competition or contracts in fiscal years 2012 and 2013, often by unqualified employees, investigators found. And according to documents that have not been made public, the inspector general’s office has warned VA repeatedly that its use of purchase cards needs better oversight.

As much as $6 billion of VA’s annual spending violates federal contracting rules. Internal stakeholders have raised the issue in the past, now it is time for the VA to finally tackle the issue.

Senate Testimony on Wasteful Spending

Federal debt is piling up and spending is expected to soar in coming years. Projections show rivers of red ink unless federal policymakers enact reforms. They should cut spending in every department. A great place to start would be cutting aid-to-state programs, which cost more than $600 billion a year.

That was my message at a Senate hearing last week to a committee chaired by Senator Rand Paul. Kudos to Paul for holding the hearing and inviting an interesting array of witnesses. In the photo, that’s Romina Boccia, me, Steve Ellis, and Tom Schatz. Don Kettl also testified. We all gave the committee good ideas, now it is their job to cut.

Our testimony is here.

 

Wasting Billions on Disability Insurance

The federal Supplemental Security Income (SSI) program provides income to low-income, disabled individuals, including children. In 2014, SSI paid benefits totaling $56 billion to 8 million people. A new Government Accountability Office (GAO) report suggests that a substantial share of that money was spent improperly.

GAO reports that in 2014, SSI wasted $5.1 billion, or almost 10 percent of SSI spending, on improper payments. GAO says that much of the problem is due to SSI’s “management challenges that constrain its ability to ensure program integrity.” SSI is not conducting proper reviews of current beneficiaries in a number of ways.

First, SSI is failing to review files to ensure that beneficiaries continue to be eligible for benefits based on their health. When a person’s health improves, they are supposed to exit the program. According to GAO, SSI’s review backlog totaled 1.3 million files as of January 2014.  Eliminating this backlog would save SSI billions of dollars as ineligible persons would be removed from the program. For instance, children comprise 15 percent of SSI beneficiaries. In 2012 SSI had 435,000 children cases waiting to be reviewed. Many of those cases had been pending for review for six years. Seventy percent of those pending for six years involved cases where the child was projected to improve within three years. Likely, thousands of children received benefits for years past their eligibility due to SSI’s inability to conduct to reviews. GAO estimated that eliminating the backlog of reviews for children would save $1.3 billion over five years. Eliminating SSI’s entire backlog would save millions more.

OECD Scheme to Boost Taxes on Business Sector Will Hurt Global Economy and Enable Bigger Government

Citing the work of David Burton and Richard Rahn, I warned last July about the dangerous consequences of allowing governments to create a global tax cartel based on the collection and sharing of sensitive personal financial information.

I was focused on the danger to individuals, but it’s also risky to let governments obtain more data from businesses.

Remarkably, even the World Bank acknowledges the downside of giving more information to governments.

Here are some blurbs from the abstract of a new study looking at what happens when companies divulge more data.

Relying on a data set of more than 70,000 firms in 121 countries, the analysis finds that disclosure can be a double-edged sword. …The findings reveal the dark side of voluntary information disclosure: exposing firms to government expropriation.

And here are some additional details from the full report.

…disclosure has important costs in allowing exposure to government expropriation… We show that accounting information disclosure can be detrimental to firm development… Such disclosure allows corrupt bureaucrats to gain access to firm-level information and use it for endogenous harassment. …once firm information is disclosed, the threat of government expropriation is widespread. Information disclosure thus allows rent-seeking bureaucrats to gain access to the disclosed information and use it to extract bribes. …Our paper offers a vivid illustration that an important hindrance to institutional development—here in the form of adopting information disclosure—is government expropriation. …The results are thus supportive of Acemoglu and Johnson (2005) on the overwhelming importance of constraining government expropriation in facilitating economic development.

Yet this doesn’t seem to bother advocates of bigger government.

King v. Burwell: Obama Pounds the Table to Distract Attention from His Lawbreaking

There is an old lawyers’ adage: “When the facts are on your side, argue the facts. When the law is on your side, argue the law. When neither are on your side, pound the table.” President Obama will deliver a speech today in which he pounds the table with the supposed successes of the Affordable Care Act. The address is part effort to influence the Supreme Court’s upcoming decision in King v. Burwell, part effort to spin a potential loss in that case.

The problem is, those supposed successes are not due to the ACA. They are the product, two federal courts have found, of billions of dollars of illegal taxes, borrowing, and spending imposed by the IRS at the behest of the president’s political appointees.

The president can pound the table all he wants about his theories of what Congress intended, or how, in his opinion, those illegal taxes have benefited America. No speech can change the fact that he signed into law a health care bill that makes it unmistakably clear that those taxes and subsidies are only available “through an Exchange established by the State.” If he didn’t like that part of the bill, he shouldn’t have signed it.