Topic: Tax and Budget Policy

Are Well-Meaning but Misguided Conservatives Being Seduced by the Value-Added Tax?

Having a vision of a free society doesn’t mean libertarians are incapable of common-sense political calculations.

For example, the long-run goal is to dramatically shrink the size and scope of the federal government, both because that’s how the Founding Fathers wanted our system to operate and because our economy will grow much faster if labor and capital are allocated by economic forces rather than political calculations. But in the short run, I’m advocating for incremental progress in the form of modest spending restraint.

Why? Because that’s the best that we can hope for at the moment.

Another example of common-sense libertarianism is my approach to tax reform. One of the reasons I prefer the flat tax over the national sales tax is that I don’t trust that politicians will get rid of the income tax if they decide to adopt the Fair Tax. And if the politicians suddenly have two big sources of tax revenue, you better believe they’ll want to increase the burden of government spending.

Which is what happened (and is still happening) in Europe when value-added taxes were adopted.

And that’s a good segue to today’s topic, which deals with a common-sense analysis of the value-added tax.

Here’s the issue: I’m getting increasingly antsy because some very sound people are expressing support for the VAT.

I don’t object to their theoretical analysis. They say they don’t want the VAT in order to finance bigger government. Instead, they argue the VAT should be used only to replace the corporate income tax, which is a far more destructive way of generating revenue.

And if that was the final–and permanent–outcome of the legislative process, I would accept that deal in a heartbeat. But notice I added the requirement about a “permanent” outcome. That’s because I have two requirements for such a deal:

1. The corporate income tax could never be reinstated.

2. The VAT could never be increased.

And this shows why theoretical analysis can be dangerous without real-world considerations. Simply stated, there is no way to guarantee those two requirements without amending the Constitution, and that obviously isn’t part of the discussion.

Report Concludes that Yucca Mountain Is Safe

For decades, the federal government has struggled with the issue of storing waste from commercial nuclear reactors and defense-related nuclear activities. The government has spent billions of dollars planning for nuclear waste disposal, but the creation of a permanent storage site is years behind schedule due to federal mismanagement and safety concerns. A new report confirms that the current proposed site, Yucca Mountain in Nevada, is safe for use.

The United States has more than 65,000 metric tons of spent nuclear fuel with the volume expected to double by 2055. The Nuclear Waste Policy Act of 1982 aimed to create a permanent disposal site for radioactive waste by 1998. After many studies, Yucca Mountain was chosen as the single national disposal site in 1987, and engineers and construction crews went to work. Between 2001 and 2007 the project’s total life-cycle cost estimate increased from $77 billion to $106 billion, measured in constant 2012 dollars.

To fund the project, the 1982 Act created a fee or tax on all nuclear electric utilities charged on the basis of kilowatt hours generated. The fee generated $750 million annually for the Nuclear Waste Fund, which accumulated a balance on paper of more than $25 billion.

In 2010, the Obama administration, with strong urging from Senate Majority Leader Harry Reid, a Democrat from Nevada, decided to close down the Yucca Mountain site. The Government Accountability Office (GAO) said that the administration did not cite any “technical or safety issues” for the closure. The administration also did not include other options for storage, but instead set up a committee to study the issue. Apparently, Reid did not want the site in his state under any circumstances, regardless of any previous agreements between the nuclear industry and the government.  

The abrupt closure created a bizarre situation; electric utilities and their customers were paying $750 million annual tax to store nuclear waste at Yucca, but those storage plans were halted. In November 2013 an appeals court ordered the Department of Energy to stop collecting the Nuclear Waste Fund fee and resume planning for the site. Energy Secretary Moniz suspended the fee in 2014.

The appeals court also ordered the Nuclear Regulatory Commission to resume the site’s licensing process. Now, the long-awaited safety report confirms that the Yucca Mountain site meets project requirements. The New York Times summarized the report saying that it “concluded that the design had the required multiple barriers, to assure long-term isolation of radioactive materials.” Storage is expected to be safe within the site for one million years.

The administration must now decide how to proceed. It can ignore the report and try to push the issue of nuclear storage onto the next administration, or it can reopen the permitting process and ignore the wishes of Majority Leader Reid.

The issue of nuclear waste is complex, but federal mismanagement and the actions of the Obama administration have delayed a long-term solution.

Government Gold-Plating

Sen. Tom Coburn (R-OK) released his annual Wastebook this past week. It contains a laundry list of doozies. The U.S. government’s gold-plating operations included $190,000 to study compost digested by worms, $297 million for the purchase of an unused mega blimp, and $1 million on a Virginia bus stop where only 15 people can huddle under a half-baked roof. These questionable (read: absurd) expenditures only represent the tip of the iceberg.

In addition to supporting members of Congress and civil servants, U.S. taxpayers support welfare recipients. And they support them lavishly, too. Hawaii, Massachusetts, and D.C. residents receive sizeable welfare payments (read: salaries). Indeed, the magnitude of these payments exceeds the average salary of an American teacher, as well as a soldier deployed in Afghanistan, by at least $10,000 per year.

The public can forget all the clap-trap they are hearing about austerity. Indeed, a fairly dull knife could cut billions of dollars from the U.S. government’s largess. 

Wading Through Disability Paperwork

Social Security Disability Insurance (SSDI) provides benefits to 11 million individuals, costing $140 billion annually. Its trust fund will become insolvent by 2016, so policymakers have little time to reform the system.

Funding is not the only issue facing the program. A new report from the Washington Post highlights the long list of disability cases waiting to be adjudicated.

Individuals apply to the Social Security Administration (SSA) to claim disability benefits. The file is reviewed by an administrator who makes an initial ruling, with 32 percent of applicants qualifying. Individuals who are denied can appeal the ruling. Eleven percent of appeals are approved for benefits. More than 633,000 individuals are waiting on initial claims with 170,000 waiting on appeal.

An individual’s second appeal goes to one of SSA’s 1,445 judges, whom are tasked with more than 990,000 individuals waiting on appeals. The average wait for a hearing is longer than a year.

The backlog for a hearing before an appeals judge is not new. It started during the Gerald Ford administration and SSA has never caught up. The agency tried various tactics to solve the problem, but nothing seemed to work.

Several years ago, the SSA tried a different approach. The SSA pressured judges to decide 500 cases annually, but that led to a different problem.

Wastebook: 100 Silly Government Projects

The office of Senator Tom Coburn released its fifth annual “Wastebook.” The report highlights “100 silly, unnecessary, and low priority projects” funded by federal tax dollars or government debt. The 100 projects in this year’s report cost taxpayers $25 billion and represent the enormous scale of the federal government.

Among the waste in the report:

  • The National Institutes of Health’s grant-making is roundly criticized. NIH provided $533,000 to study the “effects of meditation…from reading Buddhist texts,” $1.5 million to develop a smartphone game to help parents of children with picky-eating habits, $387,000 to provide Swedish massages to rabbits, and $371,000 to study whether moms love dogs or their own children more.
  • The National Science Foundation awarded an $856,000 grant to train three mountain lions to use treadmills to study mountain lions’ use of energy while hunting. This follows NSF’s earlier grant to study shrimps’ ability to walk on treadmills.
  • A small bridge in Morrison, Colorado may be removed and rebuilt for violating the federal government’s “Buy American” provision. The original bridge, built with $52,000 in federal highway dollars, contains $3,300 in American steel that was rolled into sheets in Canada. Reconstruction costs are estimated at $20,000.
  • The Department of Housing and Urban Development provided a $1.4 million grant to build a luxury hotel in Cary, North Carolina. The hotel features afternoon tea, facials, and an “upscale cocktail bar.” There are 50 hotels within 15 minutes of driving distance.

The report also includes several other boondoggles that I’ve highlighted recently:

  • Customs and Border Protection built 21 homes in Ajo, Arizona for its agents. CBP overpaid for land, added unnecessary amenities, and wasted $4.6 million on these extravagant homes.
  • The Department of Homeland Security’s vehicle fleet is underutilized. Fifty-nine percent of the agency’s vehicles are driven less than 12,000 miles a year, wasting up to $48.6 million.

These projects represent a fraction of the federal government’s almost $4 trillion in annual spending, but illustrate a larger trend. Agencies spend wildly and Congress refuses to provide the necessary oversight.

Entrenched interests encourage policymakers to allow wasteful spending to continue. For instance, the Department of Agriculture tried to close a $2 million sheep research station in Idaho, but “politicians in the region stepped in to keep it open.”  There are many similar examples.

Policymakers applaud themselves for the recent drop in the budget deficit, but Senator Coburn’s “Wastebook” shows that a lot of work is left to complete.

Abusing Federal Paid Leave

Compensation for federal civilian employees is more generous than private-sector workers. Federal workers receive better benefits than their non-governmental counterparts in particular, and generous paid leave benefits are one of the federal advantages. A new report from the Government Accountability Office (GAO) suggests that federal agencies are abusing this benefit.

The Washington Post summarizes the GAO findings regarding the number of workers who are being paid for staying home:

53,000 civilian employees were kept home for one to three months during the three fiscal years that ended in September 2013. About 4,000 were idled for three months to a year and several hundred for one to three years. This is the first time the government has calculated the scope and cost of administrative leave.

The Office of Personnel Management permits paid leave for many reasons including jury duty and snow days. But those types of absence do not require one to three months of time out of the office. Instead, it appears that agencies are shifting employees to paid leave for months at a time while dealing with performance issues:

Auditors found that supervisors used wide discretion in putting employees on leave, including for alleged violations of government rules and laws, whistleblowing, doubts about trust­worthiness, and disputes with colleagues or bosses. Some employees remain on paid leave while they challenge demotions and other punishments.

This practice varies from the private sector where paid leave is used infrequently. The Washington Post notes that in the private sector “an employee accused of wrongdoing either stays at the office and is reassigned or is suspended without pay,” generally within days to minimize costs.

All told, GAO estimates that federal employees collected $775 million in salary while on leave. Employees continue to receive other benefits as well. Time on leave counts towards pension and pay increase calculations, and employees continue to accrue vacation and sick days.

GAO acknowledges that this cost estimate understates the problem because it only includes three-fifths of the federal civilian workforce. Leave is not tracked for the remaining employees.

Abusive practices are not a new phenomenon. As early as 1958, the comptroller general found excessive use of leave and ruled that it should not be used for more than 24 hours for employees under investigation.

Senators Chuck Grassley of Iowa and Jon Tester of Montana are working on legislation to overhaul this practice. If passed, the legislation “would narrowly define the circumstances in which employees can be kept home” and “pay would be limited to a few days,” to match private-sector practices. Limiting this abusive practice would save millions in unnecessary expense.

TFSAs Spur Canada Savings Revolution

A tax reform is spurring a savings revolution in Canada. Amity Shlaes and I wrote about Canada’s Tax-Free Savings Accounts (TFSAs) in the Wall Street Journal in August. We think that such accounts would be a fantastic policy reform for America. They would simplify the taxation of savings, encourage families to save more, and spur stronger economic growth.

Toronto firm, Investor Economics, has released new data confirming the popularity of TFSAs. In just the past year, TFSA account assets increased 34 percent, and the number of accounts increased 16 percent. In June 2014, 13 million Canadians held $132 billion in TFSA assets. Given that the U.S. population is about 10 times that of Canada, it would be like 130 million Americans pouring $1.3 trillion into a new personal savings vehicle.

The chart shows the rapid growth of TFSAs since they were introduced in 2009:

 

  

There are 27.7 million Canadian adults, so about 47 percent of them own a TFSA, according to the data from Investor Economics. A 2013 survey by a bank found a similar figure of 48 percent. In just five years, TFSAs have become the most popular savings vehicle in Canada, outstripping the Canadian version of 401(k)s. TFSA growth is expected to continue, and the accounts may soon play a central role in virtually every family’s financial planning.

The American vehicle most similar to the TFSA is the Roth Individual Retirement Account (IRA). But Roths are far inferior, and thus just 16 percent of U.S. households own them. Indeed, just 38 percent of U.S. households hold any type of IRA, even though these accounts have been around a lot longer than TFSAs.

TFSAs are like supercharged Roth IRAs. Here are some of the key features: 

  • Individuals can deposit up to $5,500 after-tax each year. Annual contribution limits accumulate if you do not use them. So if you contribute $2,000 this year, you will be able to put away $9,000 next year ($3,500+$5,500).
  • All account earnings and withdrawals are tax-free.
  • Withdrawals can be made at any time for any reason with no penalties or taxes. That greatly simplifies the accounts and increases liquidity, both of which encourage added savings.
  • There are no income limits and no withdrawal requirements. All Canadian adults can contribute and withdraw at any time during their lives.
  • TFSAs can be opened at any bank branch or online. They can hold bank deposits, stocks, bonds, mutual funds, and other types of assets.
  • TFSAs are great for all types of saving, including saving to buy a home, a car, or to start a business, and saving for health expenses, unemployment, or retirement.    

Why are we letting Canadians have all the fun? Everyone agrees that Americans don’t save enough, so why don’t we kick-start a home-grown savings revolution with a U.S. version of TFSAs? Former Treasury official Ernest Christian has long championed similar accounts, which he and I call Universal Savings Accounts (USAs). Canada has now run the real-world experiment on such accounts, and it has succeeded brilliantly.

TFSAs, or USAs, are a better way to handle savings in the tax code. Currently, many people are scared off by the complexity of U.S. savings vehicles and by the lack of liquidity in retirement accounts. TFSAs solve these problems. Members of Congress and presidential aspirants for 2016 who are interested in a popular, pro-growth, and pro-family reform to champion—this is what you are looking for.