Topic: Tax and Budget Policy

Huckabee’s Support for Higher Taxes and More Spending

Former Arkansas Governor Mike Huckabee launched his presidential campaign last week. Huckabee highlighted his fiscal successes as governor during his announcement. He claims that he cut taxes 94 times while governor, and he promised to bring his tax-cutting experience to Washington, D.C. Huckabee’s statements do not tell the full story. While Huckabee cut some taxes, his time in office also included a rapid increase in Arkansas state spending and multiple tax hikes. 

Huckabee took office in July 1996 after Governor Jim Guy Tucker was convicted for his involvement in the Whitewater scandal. Shortly after taking office,  Huckabee signed a $70 million  package of income tax cuts. It eliminated the marriage penalty, increased the standard deduction, and indexed tax brackets to inflation. The broad-based tax cut was Arkansas’s first in 20 years.  Huckabee followed it with a large cut to the state’s capital gains tax. These tax cuts were popular, and they improved Arkansas’s economic climate.

Huckabee’s fiscal policies then changed direction. Huckabee used the state’s tobacco settlement money to expand Medicaid, and he supported a large bond initiative to increase spending for infrastructure. These and other spending policies came with a hefty price tag.

Universal Savings Accounts (USAs)

My op-ed today at The Federalist discusses exciting developments in Canada and Britain regarding personal savings. Both nations have implemented universal savings vehicles of the type I proposed with Ernest Christian back in 2002. The vehicles have been a roaring success in Canada and Britain, and both countries have recently expanded them.

In Canada, the government’s new budget increased the annual contribution limit on Tax-Free Savings Accounts (TFSAs) from $5,500 to $10,000. In Britain, the annual contribution limit on Individual Savings Accounts (ISAs) was recently increased to 15,240 pounds (about $23,000). TFSAs and ISAs are impressive reforms—they are pro-growth, pro-family, and pro-freedom.

America should create a version of these accounts, which Christian and I dubbed Universal Savings Accounts (USAs). As with Roth IRAs, individuals would contribute to USAs with after-tax income, and then earnings and withdrawals would be tax-free. With USAs, withdrawals could be made at any time for any reason.

Retaliation and Intimidation within the VA

Mismanagement within the Department of Veterans Affairs (VA) is chronic. The agency mismanages its projects and its patients. Last year’s scandal at the Phoenix VA centered on allegations that veterans waited months for treatment while never being added to the official waiting lists. The VA Secretary resigned and the agency focused on changing course. New reports suggest that agency reforms still have a long way to go.

A congresswoman at a recent congressional hearing described the VA as having a “culture of retaliation and intimidation.” Employees who raise concerns about agency missteps are punished. The U.S. Office of Special Counsel (OSC), which manages federal employee whistleblower complaints, reported that it receives twice as complaints from VA employees than from Pentagon employees, even though the Pentagon has double the staff. Forty percent of OSC claims in 2015 have come from VA employees, compared to 20 percent in 2009, 2010, and 2011.

During the hearing, a VA surgeon testified about the retaliation he faced following his attempts to highlight a coworker’s timecard fraud. From July 2014 until March 2015, his supervisors revoked his operating privileges, criticized him in front of other employees, and relocated his office to a dirty closet before demoting him from Chief of Staff.

Another physician was suspended from his job shortly after alerting supervisors to mishandled lab specimens. A week’s worth of samples were lost. Several months later, he reported another instance of specimen mishandling and his office was searched. He became a target of immense criticism.

Breastmilk, Formula, and WIC

The federal government runs more than 2,300 subsidy programs. One of the problems created by the armada of hand-outs is that many programs work at cross-purposes.

Government information programs urge women to breastfeed. This website says, “the cells, hormones, and antibodies in breastmilk protect babies from illness. This protection is unique and changes to meet your baby’s needs.” Breastfeeding, the government says, may protect babies against asthma, leukemia, obesity, ear infections, eczema, diarrhea, vomiting, lower respiratory infections, necrotizing enterocolitis, sudden infant death syndrome, and diabetes. 

The alternative to breastfeeding is baby formula. Some moms need to use formula, but you would think given the superiority of breastmilk that the government would not want to encourage formula. But that is exactly what the government does with the Women, Infants, and Children (WIC) program. According to the Wall Street Journal, the “largest single expense” in the $6 billion program is subsidies for formula. If you subsidize something, you get more of it. And, presumably, more formula means less breastmilk.

Failing Aviation Administration (FAA)

The federal government operates the air traffic control (ATC) system as an old-fashioned bureaucracy, even though ATC is a high-tech business. It’s as if the government took over Apple Computer and tried to design breakthrough products. The government would surely screw it up, which is the situation today with ATC run by the Federal Aviation Administration (FAA).

The Washington Post reports:

A day after the Federal Aviation Administration celebrated the latest success in its $40 billion modernization of the air-traffic control system, the agency was hit Friday by the most scathing criticism to date for the pace of its efforts.

The FAA has frustrated Congress and been subject to frequent critical reports as it struggles to roll out the massive and complex system called NextGen, but the thorough condemnation in a study released Friday by the National Academies was unprecedented.

Mincing no words, the panel of 10 academic experts brought together by the academy’s National Research Council (NRC) said the FAA was not delivering the system that had been promised and should “reset expectations” about what it is delivering to the public and the airlines that use the system.

The “success” the WaPo initially refers to is a component of NextGen that was four years behind schedule and millions of dollars over-budget. That is success for government work I suppose.

The NRC’s findings come on the heels of other critical reports and years of FAA failings. The failings have become so routine—and the potential benefits of improved ATC so large— that even moderate politicians, corporate heads, and bureaucratic insiders now support major reforms:

“We will never get there on the current path,” Rep. Bill Shuster (R-Pa.), chairman of the House Transportation Committee, said two months ago at a roundtable discussion on Capitol Hill. “We’ve spent $6 billion on NextGen, but the airlines have seen few benefits.”

American Airlines chief executive Doug Parker added, “FAA’s modernization efforts have been plagued with delays.”

And David Grizzle, former head of the FAA’s air-traffic control division, said taking that division out of FAA hands “is the only means to create a stable” future for the development of NextGen.

The reform we need is ATC privatization. Following the leads of Canada and Britain, we should move the entire ATC system to a private and self-supporting nonprofit corporation. The corporation would cover its costs by generating revenues from customers—the airlines—which would make it more responsible for delivering results.

Here is an interesting finding from the NRC report:  “Airlines are not motivated to spend money on equipment and training for NextGen.” Apparently, the airlines do not trust the government to do its part, and so progress gets stalled because companies cannot be sure their investments will pay off. So an advantage of privatization would be to create a more trustworthy ATC partner for the users of the system.

ATC privatization should be an opportunity for Democrats and Republicans to forge a bipartisan legislative success. In Canada, the successful ATC privatization was enacted by a Liberal government and supported by the subsequent Conservative government. So let’s use the Canadian system as a model, and move ahead with ATC reform and modernization.

Those Gruelling U.S. Tax Rates: A Global Perspective

The Tax Foundation released its inaugural “International Tax Competitiveness Index” (ITCI) on September 15th, 2014. The United States was ranked an abysmal 32nd out of the 34 OECD member countries for the year 2014. (See accompanying Table 1.) The European welfare states such as Norway, Sweden and Denmark, with their large social welfare systems, still managed to have less burdensome tax systems on local businesses than the U.S. The U.S. is even ranked below Italy, the country that has had such a pervasive problem with tax evasion that the head of its Agency of Revenue (roughly equivalent to the Internal Revenue Service in the United States) recently joked that Italians don’t pay taxes because they were Catholic and hence were used to “gaining absolution.” In fact, according to the ranking, only France and Portugal have the dubious honor of operating less competitive tax systems than the United States.

The ITCI measures “the extent to which a country’s tax system adheres to two important principles of tax policy: competitiveness and neutrality.” The competitiveness of a tax system can be measured by the overall tax rates faced by domestic businesses operating within the country. In the words of the Tax Foundation, when tax rates are too high, it “drives investment elsewhere, leading to slower economic growth.” Tax competitiveness is measured from 40 different variables across five different categories: consumption taxes, individual taxes, corporate income taxes, property taxes, and the treatment of foreign earnings. Tax neutrality, the other principle taken into account when composing the ITCI, refers to a “tax code that seeks to raise the most revenue with the fewest economic distortions.” This would mean that tax systems are fair and equally targeted towards all firms and industries, with no tax breaks for any specific business activity. A neutral tax system would also limit the rate of – amongst others – capital gains and dividends taxes, all of which encourage consumption at the expense of savings and investment. 

Even the two countries that have less competitive tax regimes than the U.S. – France and Portugal – have lower corporate tax rates than the U.S., at 34.4% and 31.5%, respectively. The U.S. corporate rate on average across states, on the other hand, is at 39.1%. This is the highest rate in the OECD, which has an average corporate tax rate of 24.8% across the 34 member countries. According to a report by KPMG, if the United Arab Emirates’ severance tax on oil companies was ignored, the U.S. average corporate tax rate would be the world’s highest.

U.S. Corporate Tax Rate Double Canada’s

While the Obama administration has focused on tax increases over the years, Canada has focused on tax cuts. The new Canadian budget, out a couple weeks ago, summarized some of the progress that they have made.

The budget says,

The government’s low-tax plan is also giving businesses strong incentives to invest in Canada. This helps the economy grow, spurs job creation, and raises Canada’s standard of living.

That is a refreshing attitude. While the U.S. government’s approach has been to penalize businesses and treat them as a cash box to be raided, Canada’s approach has been to reduce tax burdens and spur growth to the benefit of everybody.

A chart in the new budget—reproduced below the jump—shows that Canada now has the lowest marginal effective tax rate on business investment among major economies. It also shows that the U.S tax rate of 34.7 percent is almost twice the Canadian rate of 17.5 percent.

These “effective” tax rates take into account stated or statutory rates, plus various tax base factors such as depreciation schedules. Skeptics of corporate tax rate cuts in this country often say that while the United States has a high statutory tax rate of 40 percent, we have so many loopholes that our effective rate is low. The new Canadian estimates show that is not true: the United States has both a high statutory rate (which spawns tax avoidance) and a high effective rate (which kills investment).

For the solution to this problem, see here.