Topic: Tax and Budget Policy

The Progressive Income Tax Enriches the Envious and Greedy

Most Americans dislike the income tax, now more than a century old. The rates are too high. The provisions are unfair. The record-keeping is onerous. The revenues are wasted.

But there are fans, certainly, such as the politicians of both parties. What good would it do to serve in Congress if you didn’t have money to spend? 

The beneficiaries of the politicians’ largesse also share in the income tax lovefest. Uncle Sam needs money to write checks. He can borrow, but there’s a limit to the credulity of investors. Borrow too much and they might doubt Washington’s ability to repay. 

Then there are the fans of expensive and expansive government. Never mind the endless mess created by Uncle Sam. Something he does must work!

More dangerous may be the social engineers. For instance, Yale economic professor Robert J. Shiller suggested using the income tax to mitigate “some of the worst consequences of income inequality.” He proposed indexing taxes to income inequality.

It’s a genuinely nutty idea. Inequality measures are sensitive to data distortion. Moreover, they incorporate no moral judgment as to how the inequality arose. Were opportunities obstructed and systems manipulated, or did a generally free society operate naturally and deliver ever-changing income and wealth patterns? 

Should Companies Do What’s Best for Government, or Should They Do What’s Best for Workers, Consumers, and Shareholders?

I’m in favor of free markets. That means I’m sometimes on the same side as big business, but it also means that I’m often very critical of big business. That’s because large companies are largely amoral. Depending on the issue, they may be on the side of the angels, such as when they resist bad government policies such as higher tax rates and increased red tape. But many of those same companies will then turn around and try to manipulate the system for subsidies, protectionism, and corrupt tax loopholes.

Today, I’m going to defend big business. That’s because we have a controversy about whether a company has the legal and moral right to protect itself from bad tax policy. We’re dealing specifically with a drugstore chain that has merged with a similar company based in Switzerland, which raises the question of whether the expanded company should be domiciled in the United States or overseas.

Here’s some of what I wrote on this issue for yesterday’s Chicago Tribune.

Should Walgreen move? …Many shareholders want a “corporate inversion” with the company based in Europe, possibly Switzerland. …if the combined company were based in Switzerland and got out from under America’s misguided tax system, the firm’s tax burden would drop, and UBS analysts predict that earnings per share would jump by 75 percent. That’s a plus for shareholders, of course, but also good for employees and consumers.

Folks on the left, though, are upset about this potential move, implying that this would be an example of corporate tax cheating. But they either don’t know what they’re talking about or they’re prevaricating.

Some think this would allow Walgreen to avoid paying tax on American profits to Uncle Sam. This is not true. All companies, whether domiciled in America or elsewhere, pay tax to the IRS on income earned in the U.S. 

The benefit of “inverting” basically revolves around the taxation of income earned in other nations.

No Honor Among Cronies: Maryland’s House of Cards Sequel

The state of Maryland has doled out more than $26 million in tax-credit subsidies to the hit Netflix series House of Cards, which films in the state. Last month in this space, my colleague David Boaz compared the arrangement itself to a House of Cards plot line: “It’s hard to imagine a better example of rent-seeking, crony capitalism, and conspiracy between the rich, the famous, and the powerful against the unorganized taxpayers.”

Shortly after he wrote, the plot began taking further twists reminiscent of fiction. In response to demands from the show’s producers for even steeper subsidies as the price of staying to film more seasons, some lawmakers decided to remind the Hollywood crowd who held the guns in the relationship:

Responding to a threat that the “House of Cards” television series may leave Maryland if it doesn’t get more tax credits, the House of Delegates adopted budget language … requiring the state to seize the production company’s property if it stops filming in the state. …

Del. William Frick, a Montgomery County Democrat, proposed the provision, which orders the state to use the right of eminent domain to buy or condemn the property of any company that has claimed $10 million or more credits against the state income tax. The provision would appear to apply only to the Netflix series, which has gotten the bulk of the state credits.

This smash-‘n’-grab approach to the use of eminent domain power is something of a local specialty in the Old Line State. In 1984, a bill was introduced in the Maryland legislature authorizing an eminent domain takeover of the Baltimore Colts, which had been eyeing the exits. In reaction, the owner packed the team into vans at night and moved to Indianapolis. In 2009, Gov. Martin O’Malley threatened eminent domain to keep the famed Preakness Stakes horse race, including its trademarks, copyrights, and contracts, from leaving Baltimore. (It stayed.)

Close the Advanced Technology Vehicles Manufacturing Program

The Government Accountability Office’s annual duplication report is out. This year, the report highlights 30 ways that the federal government can save money. One way is to terminate the Advanced Technology Vehicles Manufacturing (ATVM) program, which provides government-subsidized loans to companies that make fuel-efficient cars. The program has been a failure, and it has cost taxpayers millions of dollars.

Established by the Energy Independence and Security Act of 2007, ATVM was authorized to provide a total of $25 billion in loans for projects that “support the production of fuel-efficient, advanced technology vehicles and components in the United States.” Companies that participated in the program could borrow funds directly from the government with very little out-of-pocket expenses—participants only had to pay some upfront borrowing costs. But Congress made the program even more lucrative in 2009 by provided $7.5 billion to help offset those borrowing costs.

The Department of Energy (DOE) has issued five ATVM loans totaling $8.4 billion so far—with an additional $3.3 billion in borrowing costs. In its promotional material for the program, DOE highlights three of the recipients: Ford Motor Company, Nissan North America, and Tesla Motors.

However, these DOE materials don’t mention loans to two other companies, Fisker Automotive and Vehicle Production Group (VPG). I think I know why: taxpayers lost almost $200 million on those two loans.

Fisker Automotive borrowed $529 million from the federal government to produce its luxury car, Karma. The loan was touted by the administration, including by Vice President Biden. Biden said “the story of Fisker is a story of ingenuity of an American company, a commitment to innovation by the U.S. government and the perseverance of the American auto industry.”

The car was a flop from the beginning. It was recalled, and it received poor performance ratings. Fisker lost an estimated $35,000 on each vehicle sold. A year after issuing the loan, DOE halted Fisker’s borrowing authority after the company had already borrowed $192 million. Fisker filed for bankruptcy shortly thereafter. Only $50 million of the $192 million has been recovered for taxpayers.

Vehicle Production Group had financial and production problems as well. In addition, its loan was questioned due to the political connection between its adviser and the White House. The adviser was a fundraiser for the White House and “headed Obama’s vice presidential selection committee in 2008.” The company quietly folded costing taxpayers the full $50 million loan.

The taxpayer losses from Fisker and VPG were in addition to the losses from other federal energy loans to companies such as Solyndra and Abound Solar. After all the bad press from these failed energy subsidies, demand for the loans dried up. According to a March 2013 report from GAO, DOE was no longer considering applications for the remaining $16.6 billion in loan authority and $4.2 billion in borrowing cost subsidies. Auto companies told GAO that the “costs of participating outweigh the benefits.”

However, Congress still has not rescinded ATVM’s loan authority. DOE could start reissuing loans under the failed program at any point, and it is re-launching its promotional efforts. Closing the program would not only save taxpayers money, it would reduce government interventions in the energy and automobile markets. For reformers in Congress, this change should be a no-brainer.

Government Keeps Growing

Political scientist Matt Grossmann discussed the results of his research on federal government growth in the Washington Post last week.

I combed through hundreds of history books covering American public policy since 1945, tracking the most significant domestic policy changes that made it into law and the actors that historians credit for those changes. Of the 509 most significant domestic policies passed by Congress, only one in five were conservative, in that they contracted the scope of government funding, regulation or responsibility. More than 60 percent were liberal: They clearly expanded government. The others offered a mix of liberal or conservative components or took no clear ideological direction.

Grossman mentioned one of the structural reasons why this has happened:

Liberal policies are self-reinforcing because they create beneficiaries who act as constituencies for their continuation and expansion. Policy debates center on what additional actions government should take, not whether to discontinue existing roles.

Grossman is essentially saying that not only has the size of the federal government expanded, but so has the scope. The problem is not just that programs such as Medicare keep growing, but also that Congress keeps adding new programs.

The following chart shows an official count of the number of federal benefit, subsidy, and aid programs—Medicare, farm subsidies, food stamps, and more than 2,000 others. The source is the CFDA website for recent years and hard copy CFDA catalogs for the older years.

Why Did Western Nations Continue to Prosper in the 20th Century even though Fiscal Burdens Increased?

In the pre-World War I era, the fiscal burden of government was very modest in North America and Western Europe. Total government spending consumed only about 10 percent of economic output, most nations were free from the plague of the income tax, and the value-added tax hadn’t even been invented.

Today, by contrast, every major nation has an onerous income tax and the VAT is ubiquitous. Those punitive tax systems exist largely because—on average—the burden of government spending now consumes more than 40 percent of GDP.

historical-size-of-govt

To be blunt, fiscal policy has moved dramatically in the wrong direction over the past 100-plus years. And thanks to demographic change and poorly designed entitlement programs, things are going to get much worse, according to Bank of International Settlements, Organization for Economic Cooperation and Development, and International Monetary Fund projections.

While those numbers, both past and future, are a bit depressing, they also present a challenge to advocates of small government. If taxes and spending are bad for growth, why did the United States (and other nations in the Western world) enjoy considerable prosperity all through the 20th century? I sometimes get asked that question after speeches or panel discussions on fiscal policy. In some cases, the person making the inquiry is genuinely curious. In other cases, it’s a leftist asking a “gotcha” question.

Long-Run GDP

I’ve generally had two responses.

Jeb Bush’s Fiscal Record

Former Florida Governor Jeb Bush is considering running for president. One good thing about presidential contenders who have been governors is that they have a measurable track record.

Part of that record is captured by Cato’s biennial “Fiscal Policy Report Card on America’s Governors.” This report issues grades of “A” to “F” to governors based on their taxing and spending policies. Here at Cato we believe in small government, so we award grades of “A” to the governors who cut taxes and spending the most.

Steve Moore and other Cato authors graded Bush four times during his eight years in office. In 2000 Bush received a “B.” In 2002 he scored an “A.” In 2004 he was down to a “B” again. In 2006 he fell to a “C.”

The basic story from the Cato reports is that Jeb Bush was a prolific tax cutter, but he let spending rise quickly toward the end of his tenure. Like George W. Bush, Jeb was good on taxes, but apparently not so good on spending.

Jeb Bush was in office from 1999 to 2007. Florida general fund spending increased from $18.0 billion to $28.2 billion during those eight years, or 57 percent. Total state spending increased from $45.6 billion to $66.1 billion, or 45 percent. (This is NASBO data from here and here). Over those eight years, Florida’s population grew 16 percent and the CPI, which measures inflation, grew 24 percent.

The chart on page 5 of this state budget document shows that total spending was restrained in Bush’s first term, but then rose quite rapidly in his second term. Similarly, the table on page 14 here shows the second-term budget expansion under Bush.

This Fall, look for Cato’s 2014 Report Card, which will include grades for Christie, Pence, Jindal, Perry, Walker, and other possible presidential candidates.