Topic: Tax and Budget Policy

Cheney’s Secret Failure

The Washington Post has been running a huge series on the power and influence of Vice President Cheney. The first two parts examined his immense influence on the administration’s response to 9/11, “pushing the envelope” of presidential power (not to mention vice-presidential power) and crafting the administration’s position on the use of torture — or rather “cruel, inhuman or degrading” methods of questioning.

But the third part, although written with the same sinister soundtrack, tells a very different story. The Post reporters seem to want us to be alarmed by Cheney’s power over fiscal policy and by his relentless push to reduce the burdens of taxes and spending on the American people. But there’s a problem with that story: not only is fiscal conservatism a good thing — unlike, say, secret authorization for domestic surveillance — but if Cheney’s goal was to constrain spending, he failed utterly.

Jo Becker and Barton Gellman report on Cheney’s power over the budget:

Cheney has changed history more than once, earning his reputation as the nation’s most powerful vice president. His impact has been on public display in the arenas of foreign policy and homeland security, and in a long-running battle to broaden presidential authority. But he has also been the unseen hand behind some of the president’s major domestic initiatives….

And it was Cheney who served as the guardian of conservative orthodoxy on budget and tax matters….

The vice president chairs a budget review board, a panel the Bush administration created to set spending priorities and serve as arbiter when Cabinet members appeal decisions by White House budget officials. The White House has portrayed the board as a device to keep Bush from wasting time on petty disagreements, but previous administrations have seldom seen Cabinet-level disputes in that light. Cheney’s leadership of the panel gives him direct and indirect power over the federal budget — and over those who must live within it….

Cheney often stepped in if he sensed the administration was softening its commitment to Republican “first principles,” Bolten said, and he was “a pretty vigorous voice for holding the line on spending and for holding the line on tax cuts.” Longtime Cheney adviser Mary Matalin said the vice president brings a “spine quotient” to internal debates.

To a fiscal conservative, this all sounds just fine: The most powerful vice president in American history, known as a strong conservative, is put in charge of fiscal policy and forces bureaucrats and Cabinet officers to “live within the budget.”

But we know the rest of the story: President Bush has increased federal spending at a faster pace than any president since Lyndon Johnson — or indeed faster. (And it is by no means all defense and homeland security spending.)

The Post reporters never quite tell us that, though there are some hints:

Cheney shared conservative trepidations about the president’s signature education initiative, the No Child Left Behind Act, which gave the federal government more control over K-12 education. He has griped privately to confidants, such as economist and CNBC host Lawrence Kudlow, about the administration’s failure to control spending. And in robust internal White House discussions, he raised concerns about the cost of the administration’s decision to expand Medicare to include a new multibillion-dollar drug entitlement, but bowed to the political reality that the president had to fulfill a campaign promise….

“Dick once told me that our president is a ‘big-government conservative,’” said former senator Phil Gramm (R-Tex.), in a recollection disputed by Cheney’s office. “Now, Dick keeps his opinions to himself whenever he disagrees with the administration, as he should. But I believe that Dick is a small-government conservative.”

In a way, Cheney’s story is the story of the Bush administration: Where they pushed bad policies, policies that dramatically expand the power of the federal government and infringe on our liberties, they have had much success. When Cheney and occasionally Bush backed good policies, policies that would constrain government, they failed miserably. Indeed, if Vice President Cheney is indeed a “small-government conservative” who used his unprecedented power to “hold the line” for “conservative orthodoxy on budget and tax matters,” he has been a failure of Carteresque proportions.

Maybe taxpayers would be better off if Cheney had had his own staff prepare a secret federal budget and implement it without input from Bush’s staff, relevant Cabinet officers, Congress, or the courts.

Jurisdictional Competition is the Only Hope for Europe’s Taxpayers

A new report from the European Commission shows that the tax burden continues to climb. The only silver lining to this dark cloud is that tax competition is forcing politicians to lower corporate rates and to consider lowering tax rates on labor. A Dow Jones report notes that Eastern European nations are having a good effect since their low-rate tax systems are forcing reforms elsewhere in Europe:

Eurostat said the E.U.’s tax burden remained below the high of 41.0% reached in 1999. The tax burden last increased in 2003. Taxes on work rose to 35.2% from 35.1% in the E.U., and to 36.8% from 36.2% in the euro zone. Eurostat said the decline in labor taxes that began at the turn of the century had come to a halt “despite a wide consensus on the desirability of reducing labor taxes.” E.U. governments have agreed that persuading more Europeans to work is essential if the bloc is to remain economically competitive with the U.S. and Asia. Cutting taxes on work is seen as a vital step in that direction. Eurostat said that although taxes on work remained below the 2000 high of 36.5%, they are “much higher…than in the other main industrialized economies.” …there is growing evidence of tax competition between E.U. members that is pushing tax rates down. In general, new E.U. members from eastern Europe have lower top rates of income and corporation tax. Fearing that companies may move production to the new members, some older members of the E.U. have begun to cut corporation tax rates, including Germany and the U.K..

Is Efficient Government A Good Thing?

One of the behind-the-scenes initiatives of President Bush’s budget staff the past six years has been something called the Program Assessment Ratings Tool (PART) analysis. It’s an effort to measure the “effectiveness” and “efficiency” of nearly 1,000 federal programs. Each program is graded on how well it achieves its “goals,” with marks ranging from “effective” (the equivalent of an A grade) to “ineffective” (the equivalent of an F grade).

In Tuesday’s Investor’s Business Daily op-ed section, Ernest Christian and Gary Robbins take a look at the results to date of the effort:

Congress is about to wave its wand over nearly $1 trillion of additional “discretionary” spending that will, among other things, perpetuate or increase funding for nearly 500 expenditure programs that are not even “moderately effective,” according to the Office of Management and Budget. This includes more than 200 expenditure programs that have failing grades of D or F.

By our calculations, the OMB study, called Program Assessment Ratings Tool (PART), further reveals that on average more than half of all federal expenditure programs are falling about 50% short of their stated goals.

This means that out of every dollar spent, 50 cents may possibly be accomplishing something worthwhile, but the remaining 50 cents might as well have been poured down a rat hole. In these cases alone, the cost of government incompetence is over $250 billion per year.

The list of programs with the lowest grades might make any supporter of limited government point wildly and say, “Told you so!” This rogue’s gallery includes the Department of Housing and Urban Development’s pork-filled Community Development Block Grants, the Department of Education’s Even Start literacy program, and Amtrak.

But what about the ones that received the equivalent of an A or B grade – those programs that are “effective” or “moderately effective”? That list includes homeless assistance grants, agricultural export subsidies, Indian housing loan guarantees, the non-insured crop assistance program, and corporate welfare programs like the Trade and Development Agency which subsidizes overseas demand for the products of various corporations.

The main activity these programs are really “efficient” at is spending your money in new and interesting ways on things they shouldn’t be spending your money on in the first place.

Take the non-insured crop assistance program, for instance. This program subsidizes farmers who aren’t holding a federal crop insurance policy in the event of a crop-damaging natural disaster. What did it do to earn the honor of being listed as “moderately effective”? It became very good at increasing the number of crops eligible for subsidies.

Sure, knowing when the government is losing money to fraud or mismanagment is important. But it makes more sense to determine whether these programs should exist at all before deciding what they should be “efficient” at doing. Besides, an efficient but unjustified wealth-redistribution program might actually be worse than an inefficient one. The former will likely be better at finding innovative ways of expanding the scope of its operations.

Slapping the “efficiency” label on certain federal programs is a bit like putting lipstick on a pig. You can dress up Leviathan, but it’s still Leviathan.

Chocolate Chutzpah

Americans love their chocolate. So it’s no surprise that one of the most-read pages currently on the New York Times’ website is Monday’s op-ed decrying a proposal to change federal regulations on what can be legally labeled “chocolate.”

Under Food and Drug Administration regulations, “chocolate” must contain crushed cacao beans and may contain a short list of other ingredients, including spices, nuts, sweeteners, and dairy products. Confections that do not comply with those regulations cannot carry the “chocolate” label.

Some candymakers have petitioned the FDA to expand the list of allowable additives to include various fats. If that happens, chocolatiers could substitute cheaper vegetable oils for expensive cocoa butter — the fat in cacao beans that provides chocolate’s melt-in-your-mouth texture. By substituting away from cocoa butter, confectioners would lower their production costs,  which would lead to greater profit margins or, if the candymakers compete on price, lower chocolate’s price to consumers.

To be clear, chocolatiers can already make this substitution, but the resulting product cannot legally be called “chocolate.” A rose by any other name may smell as sweet, but “chocolate-like candy” apparently doesn’t sell as well as “chocolate.”

That brings us to the NYT op-ed, penned by Mort Rosenblum. He laments:

The proposal would widen the gap between good and awful. Industrial food companies could sell their waxy [confections] for less. But purveyors of the real thing have no corners to cut. While discerning chocoholics will fork over whatever it takes, those who can’t pay will never know chocolate.

As a chocophile, I sympathize with Rosenblum’s opinion of the would-be chocolates. But his lament is difficult to square with chocolate’s history, its current market trend, and basic economics.

When edible chocolate first appeared in the mid-19th century, the high price of cacao made it an endulgence for only the wealthy. Fortunately, the confection became more affordable a few decades later when chocolate makers started mixing in cheaper additives. The most important of those was milk, first popularized by the Swiss entrepreneur Daniel Peter (with help from a powdered milk maker named Henri Nestlé). In the United States, Milton Hershey experimented with the same idea, resulting in his affordable and popular ”great American chocolate bar.” Some Rosenblum predecessor likely complained that the added milk and sugar meant that consumers “will never know chocolate,” but it’s difficult to see Peter’s and Hershey’s creations as anything but a benefit to the consumer.

Nor did milk chocolate lead consumers to turn away from “real” chocolate. Until Monday’s NYT op-ed, recent news coverage on the chocolate industry has trumpeted the strong market trend toward premium chocolate. With plenty of Hershey’s, Whitman’s, and Russell Stover’s on the market, Americans nonetheless are buying more See’s, Godiva, and Lindt’s, and are searching for chocolate bars with higher and higher cacao content. And the large chocolate manufacturers are responding to the demand for premium chocolate.

From an economic perspective, this makes perfect sense. Consumers shift from a product to its substitute because they find the substitute preferable. In the case of the would-be chocolates, consumers would shift away from “real” chocolates because they prefer either the price or the taste of the new confections. Rosenblum makes clear his opinion that “real” chocolate is far better tasting, so only consumers with a strong concern about price would make the switch. Those consumers would not fail to “know chocolate” — they just would be unwilling to pay its price. Meanwhile, people who do prefer “real” chocolate — people who happily pay chocolate’s current price — will go on paying that price to enjoy the food of the gods.

A concern that Rosenblum’s op-ed could have raised is that consumers may be misled as to the nature of the candy bar they are purchasing if the “chocolate” regulation is amended as proposed. But even that concern seems hollow. As noted above, premium chocolates are currently en vogue, and the chocolate bars in the checkout lines at my Trader Joe’s boldly advertise their cacao content (some topping 85%). If the federal government were to change the chocolate regulations, quality chocolatiers would quickly respond with labels telling consumers that their chocolates contain no “foreign fats.”

Rosenblum’s op-ed is a fun and informative read, but the alarm it raises is, well, hard to swallow.

And now, I think I’ll head across the street to the CVS and grab a Ritter Sport bar.

Politics and Pricing

There are two ways to price products:

The market way, used for thousands of products for hundreds of years, and

the government way, used for certain politically favored products, such as milk, since the 1930s.

This is 2007. Don’t policymakers have enough experience yet to understand that one of these methods is simple, effective, and efficient, while the other is unfair, wasteful, and bureaucratic?

Mauritius Accelerates Move to Flat Tax

With the world’s list of flat tax nations growing every year, the pressure to adopt good tax policy is becoming more powerful. The latest example comes from the Indian Ocean. Mauritius already had adopted a flat tax, with the new system scheduled to go into effect in 2009. But tax competition is leading the government to implement the pro-growth system even sooner. Tax-news.com reports:

Deputy Prime Minister and Minister of Finance and Economic Development Rama Sithanen has announced the introduction of a flat corporate income tax, as the government strives to create conditions for “robust, sustained and inclusive growth” whilst opening the economy, facilitating business, and accelerating the transition to global competitiveness. …Central to attaining this goal is the reduction of corporate tax to a flat rate of 15%, a measure which has been brought forward by two years to July 1, 2007. This flat rate will also apply for personal income tax. Initially, the government had planned to reduce corporate tax in stages, starting with a cut in the top rate to 22.5% last year, to 20% this year and to 15% by 2009. …the Finance Minister stated….”We…have a system that is now geared towards rewarding effort and entrepreneurship.”

Justice Department’s Unethical Tax Evasion Case against KPMG Is Falling Apart

Thanks in large part to a punitive corporate tax rate and mind-numbing complexity in the tax code, a lot of accountants and lawyers get rich by figuring out ways to protect shareholder money. This irritates politicians and bureaucrats, who constantly tinker with the law in an attempt to grab more tax revenue (though this effort is offset by politicians looking for campaign cash, which leads to the endless creation of new loopholes). This is business-as-usual in Washington, but the Justice Department added a bizarre twist to the game by launching a legal attack on some partners from an accounting firm, even though the tax shelters they were peddling were not illegal. The Justice Department’s actions were reprehensible, rather akin to the totalitarian tactics of the tax authorities in Russia. If tax lawyers at the Department of Justice think that some people are taking advantage of tax loopholes, they certainly have every right to inform lawmakers and to ask them to change the law. In an ideal world, they would even recommend lower tax rates to remove the incentive to seek out new shelters. But they should never have the right or the ability to arbitrarily declare – by bureaucratic fiat – that tax planning is a criminal act. The Wall Street Journal condemns the Justice Department for its unethical behavior:

The Justice Department’s case against 16 former KPMG partners for tax evasion continues to unravel, with prosecutors themselves conceding late last week that federal Judge Lewis Kaplan has little choice but to dismiss the charges against most of the defendants. Judge Kaplan ruled last year that Justice had violated the defendants’ Constitutional rights by pressuring KPMG not to pay their legal fees. He is now considering a defense motion to dismiss. Prosecutors continue to protest the judge’s ruling but on Friday they admitted in a court filing that dismissal is the only remedy for the rights violations. The more honorable route would have been for prosecutors to acknowledge their mistakes and dismiss the charges themselves. The truth is that this tax shelter case should never have been brought. Both KPMG and its partners believed the shelters they marketed were legal, and no tax court had ruled against the shelters before Justice brought its criminal charges. Then prosecutors used the threat of criminal indictment against all of KPMG to extort an admission of guilt from the firm and force it to stop paying the legal bills of individual partners.