Topic: Tax and Budget Policy

Food Aid as Industrial Policy

By
Simon Lester

It’s understandable that Americans would see malnourished people in other countries and want to help. Despite our recent economic woes, we are still relatively wealthy, and our instinct is to make the world a better place if we can.

The role of the government in any such issue is debatable. But not surprisingly, once the government gets involved, the original purpose gets distorted. In practice, after becoming a government program, the idea of giving food to poor people has been turned into an industrial policy tool. Instead of simply giving money to people to buy food from the cheapest source, the U.S. government buys food from U.S. producers and requires that it be sent overseas on U.S. ships.

Thus, government turns aid for the foreign poor into a domestic jobs program. As a result, the percentage of food aid money actually spent on food for the hungry is significantly reduced, as some of that money is now diverted to subsidizing domestic agricultural and other interests. (That, of course, is the problem with all industrial policy: it reduces overall welfare in order to help a favored few.)

Hopefully, that may change soon.  From the Washington Post:

The Obama administration has proposed the first major change in three decades to the way the United States supplies food aid to impoverished nations, significantly scaling back the program that buys commodities from U.S. farmers and ships them to the needy overseas.

Under a proposal in the White House budget released Wednesday, nearly half of $1.4 billion in requested funds for the aid could instead be spent to purchase local bulk food in countries in need or to distribute individual vouchers for local purchases.

Reducing the government’s requirement to purchase U.S. food, most of which by law must be shipped on U.S.-flag vessels, will save enough money to feed an additional 4 million children, according to Rajiv Shah, administrator of the U.S. Agency for International Development (USAID).

…

Although the United States is the biggest provider of food assistance in the world, it is the only donor nation that continues to require national purchases and shipment. Government and academic studies in recent years have described the U.S. system as both wasteful and inefficient.

Topics: 
Foreign Policy and National Security, Government and Politics, Tax and Budget Policy, Trade and Immigration

National Standardizers, Time to Speak Out against Federal Coercion

By
Neal McCluskey

Maybe because it’s now hitting schools, or because it’s gotten high on the radars of Michelle Malkin and Glenn Beck, or because national science standards have raised a ruckus, but for whatever reason the Common Core is finally starting to get the national—and critical—attention it has desperately needed. Indeed, just yesterday Sen. Chuck Grassley (R-IA) sent a letter to the Senate appropriations subcomittee that deals with education urging members to employ legislative language prohibiting federal funding or coercion regarding curricula. That follows the Republican National Committee last week passing a resolution opposing the Common Core.

It’s terrific to see serious attention paid to the Common Core, even if it is probably too late for many states to un-adopt the program in the near term. At the very least, this gives new hope that the public will be alert if there are efforts to connect annual federal funding to national standards and tests through a reauthorized No Child Left Behind Act. And there are certainly some states where nationalization could be halted in the next few months. Perhaps most important, the Grassley letter gives Common Core supporters who’ve said they oppose federal coercion a huge opening to act on their words—to loudly support an effort to keep Washington out. They can either do that, or substantiate the powerful suspicion that they are happy to use federal force to impose standards, they just don’t want to admit it.

Topics: 
Education and Child Policy, General, Tax and Budget Policy

New GAO Study Mistakenly Focuses on Make-Believe Tax Expenditures

By
Daniel J. Mitchell

I’m very leery of corporate tax reform, largely because I don’t think there are enough genuine loopholes on the business side of the tax code to finance a meaningful reduction in the corporate tax rate.

That leads me to worry that politicians might try to “pay for” lower rates by forcing companies to overstate their income.

Based on a new study about so-called corporate tax expenditures from the Government Accountability Office, my concerns are quite warranted.

The vast majority of the $181 billion in annual “tax expenditures” listed by the GAO are not loopholes. Instead, they are provisions designed to mitigate mistakes in the tax code that force firms to exaggerate their income.

Here are the key findings.

In 2011, the Department of the Treasury estimated 80 tax expenditures resulted in the government forgoing corporate tax revenue totaling more than $181 billion. …approximately the same size as the amount of corporate income tax revenue the federal government collected that year. …According to Treasury’s 2011 estimates, 80 tax expenditures had corporate revenue losses. Of those, two expenditures accounted for 65 percent of all estimated corporate revenues losses in 2011 while another five tax expenditures—each with at least $5 billion or more in estimated revenue loss for 2011—accounted for an additional 21 percent of corporate revenue loss estimates.

Sounds innocuous, but take a look at this table from the report, which identifies the “seven largest corporate tax expenditures.”

GAO Tax Expenditure Table

To be blunt, there’s a huge problem in the GAO analysis. Neither depreciation nor deferral are loopholes.

Read the rest of this post »

Topics: 
Government and Politics, Tax and Budget Policy

In the Wake of Tragedy, Policymakers Should Exercise Restraint

By
Tad DeHaven

An article in Politico reports that some policymakers are already using the tragedy in Boston to criticize the sequestration spending cuts that went into effect in March. With the nation’s nerves frayed, policymakers should choose their words more carefully. 

At a press conference held yesterday morning, House Minority Whip Steny Hoyer (D-MD) told reporters that he doubted that sequestration had “any impact presently.” He should have left it at that. Instead, he strayed far from the issue of national security and sequestration by lumping in other issues that didn’t have anything to do with the bombing: 

“I think there are multiple reasons for ensuring that we invest in our security – both domestic and international security. That we invest in the education of our children. That we invest in growing jobs in America. And don’t pursue an irrational, across-the-board policy of cutting the highest priorities and the lowest priorities essentially the same percentage…. I think this is another proof of that – if proof is needed, which I don’t think frankly it is.”

There’s a time and a place to discuss education spending and “growing jobs in America.” At a press conference less than 24 hours after a tragedy is not the right time.  

 

Topics: 
Tax and Budget Policy

Entitlement Spending Is America’s Biggest Fiscal Challenge, but Discretionary Spending Is Still Far too High

By
Daniel J. Mitchell

If America descends into Greek-style fiscal chaos, there’s no doubt that entitlement programs will be the main factor. Social Security, Medicare, Medicaid, and Disability are all fiscal train wrecks today, and the long-run outlook for these programs is frightful.

Just look at these numbers from the Bank for International Settlements and OECD to see how our fiscal future is bleaker than many of Europe’s welfare states.

Simply stated, if we don’t implement the right kind of entitlement reform, our children and grandchildren at some point will curse our memory.

But that doesn’t mean we shouldn’t worry about other parts of the budget, including the so-called discretionary programs that also have been getting bigger and bigger budgets over time.

That’s why I want to add some additional analysis to Veronique de Rugy’s recent piece in National Review Online, which might lead some to mistakenly conclude that these programs are “shrinking” and being subject to a “Big Squeeze.”

…there is another number to look at in that budget. It’s the shrinking share of the budget consumed by discretionary spending (spending on things like defense and infrastructure) to make space for mandatory spending and interest. This is the Big Squeeze. …in FY 2014 mandatory spending plus interest will eat up 67 percent of the budget, leaving discretionary spending with 33 percent of the budget (down from 36 percent in FY 2012). Now by FY 2023, mandatory and interest spending will consume 77 percent of the total budget. Discretionary spending will be left with 23 percent of the budget.

She’s right that discretionary spending is becoming a smaller share of the budget, but it’s important to realize that this is solely because entitlement outlays are growing faster than discretionary spending.

Here’s some data from the Historical Tables of the Budget, showing what is happening to spending for both defense discretionary and domestic discretionary. And these are inflation-adjusted numbers, so the we’re looking at genuine increases in spending.

Discretionary Spending FY62-14

As you can see, defense outlays have climbed by about $100 billion over the past 50 years, while outlays for domestic discretionary programs have more than tripled.

If that’s a “Big Squeeze,” I’m hoping that my household budget experiences a similar degree of “shrinking”!

Veronique obviously understands these numbers, of course, and is simply making the point that politicians presumably should have an incentive to restrain entitlement programs so they have more leeway to also buy votes with discretionary spending.

But I’d hate to think that an uninformed reader would jump to the wrong conclusion and decide we need more discretionary spending.

Particularly since the federal government shouldn’t be spending even one penny for many of the programs and department that are part of the domestic discretionary category. Should there be a federal Department of Transportation? A federal Department of Housing and Urban Development? A federal Department of Agriculture?

No, NO, and Hell NO. I could continue, but you get the idea.

The burden of federal government spending in the United States is far too high and it should be reduced. That includes discretionary spending and entitlement spending.

P.S. For those who don’t have the misfortune of following the federal budget, “entitlements” are programs that are “permanently appropriated,” which simply means that spending automatically changes in response to factors such as eligibility rules, demographic shifts, inflation, and program expansions. Sometimes these programs (such as Social Security, Medicare, Medicaid, etc) are referred to as “mandatory spending.”

The other big part of the budget is “discretionary spending” or “appropriations.” These are programs funded by annual spending bills from the Appropriations Committees, often divided into the two big categories of “defense discretionary” and “nondefense discretionary.”

Topics: 
General, Government and Politics, Tax and Budget Policy

Simplifying the Tax Code by Fixing the Base

By
Chris Edwards

The Sunlight Foundation blogs today about the 6,503 registered tax lobbyists in Washington, and they provide 11 examples of the changes that these folks are pushing for.

I share Sunlight’s concern about special-interest lobbying, but their list actually drives home the more important point that tax simplification should begin by getting the tax base right first.

In this Cato study, I described why consumption-based taxation would be far superior to the current income tax for both growth and simplification reasons. A consumption-based tax—such as the Hall-Rabushka flat tax—would get rid of two of the most complex parts of the current code—capital gains and the capitalization of investment (which involves depreciation and amortization).

Let’s look at Sunlight’s list of 11 proposed tax changes:

  • Five of them (#1, #3, #7, #10, #11) have to do with capitalization. Number 7, for example, regards allowing fire equipment to be expensed rather than depreciated. But under a consumption tax, all investments would be expensed (that is, written off in the first year), which is both simpler and more efficient.
  • Two of them (#6, #8) have to do capital gains. Capital gains taxes would abolished under a consumption tax.
  • Two of them (#4, #9) are tax credits. Almost all tax credits are bad tax policy, including these two. Number 9 is a proposal for a $500 tax credit for hearing aids. Good grief.
  • Two of them (#2, #5) are over my head.

Here’s what I concluded in my study:

The key factor that causes rising income tax complexity is that the tax base is inherently difficult to measure. The Haig-Simons measure of income favored by many academic theorists is economically damaging and too impractical to use in the real world. As a result, policymakers have fallen back on ad hoc and inconsistent rules to define the income tax base. That intensifies complexity and creates instability as policymakers gyrate between different definitions of the tax base. In addition, the lack of a consistently defined tax base increases the use of the tax code for special-interest tax breaks, thus further adding to the system’s complexity.

The complexity and inefficiency of the individual and corporate income taxes have led to great interest in replacing them with a consumption-based tax. The leading consumption-based tax proposals, including the national retail sales tax and the Hall-Rabushka flat tax, could dramatically simplify federal taxation. Those tax systems would eliminate many of the most complex aspects of federal taxation, including depreciation accounting and capital gains taxation.

Imposing the largest federal tax on income was a historic mistake: no simple, efficient, and stable measure of income has been found in nine decades of the income tax. It is time to recognize this mistake and replace the income tax with a consumption-based alternative.

Our Troubling Tax System
Topics: 
Tax and Budget Policy

Your Tax Dollars at Work: Subsidizing the Security of Wealthy Allies

By
Christopher A. Preble

It’s Tax Day, and for millions of Americans that means ponying up to the IRS. The federal government does many things these days—most of which would be more efficiently carried out at the local level, or in the private sector. But Uncle Sam also engages in a particular form of charity that many Americans overlook: spending many tens of billions of dollars to defend wealthy, developed nations.

A new Cato infographic puts it all in perspective. It shows how much American taxpayers spend to subsidize the security, and to defend the interests, of other nations that are more than capable of defending themselves.

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Topics: 
Foreign Policy and National Security, Government and Politics, Tax and Budget Policy

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