Topic: Tax and Budget Policy

Stacked Deck

The Senate Agriculture Committee continues their hearings today with a focus on Title I – that’s the part of the farm bill that deals with farm subsidies. In the list of witnesses (available here), you will see significant representation from the main commodity groups (corn, soybeans, wheat, rice and a few others) and farmer groups (American Farm Bureau Federation, National Farmers Union). From what I can see, only two witnesses (out of the list of sixteen due to appear) could be expected to give a different take on farm programs: the North American Millers Association, as a user of commodities, might speak up about the damage commodity programs do to markets, and Bread for the World are rightly concerned about the effect of American farm subsidies on poor people around the world.

To be sure, farmers are affected by these programs and deserve a seat at the witness table. But where are the taxpayer groups? The food producer associations? Is the Committee even interested in the effects these programs have on the rest of us who pay for farm welfare? I guess that’s a rhetorical question.

Getting It Wrong (Again) on Social Security

Yesterday, the Social Security Trustees released their annual report on the programs finances and much of the national news media thought they saw good news. “Extra Year Expected for Retirement Funds,” was a typical headline, with nearly all the media reports focusing on the Trustees’ projection that the Social Security Trust Fund would be exhausted in 2041, a year later than was projected last year.

But, of course, that date is meaningless. The Trust Fund is not a pile of money that can be used to pay Social Security benefits. It is simply an accounting measure of how much money the system owes, a collection of IOUs. No one explained it better than the Clinton administration in its 2000 budget message.

These Trust Fund balances are available to finance future benefit payments…but only in a bookkeeping sense….They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large Trust Fund balances, therefore, does not by itself have any impact on the government’s ability to pay benefits.

The important date in the Trustees’ Report is 2017, just 10 years from now. That is when Social Security will begin running a deficit. At that point, Social Security will have to begin redeeming the special issue bonds held by the Trust Fund. Since the federal government has no extra money with which to redeem these bonds (note our ongoing budget deficit), it will have to raise taxes, borrow more, or cut other government spending.

Moreover, the failure to reform Social Security has allowed the program’s financial problems to get worse. The system’s total unfunded liabilities are now $15.6 trillion (in discounted present value terms). That’s $100 billion worse than last year, despite $600 billion in savings from changes in technical assumptions.  And, of course, workers still have no legal, contractual, or property rights to their benefits.

That doesn’t sound much like good news to me.

If Inequality Is Okay, Let’s Redistribute Anyway

In an outstanding post, Alex Tabarrok explains how the changing economic and technological conditions that helped Harry Potter creator J.K. Rowling become a billionaire lead to inequality without apparent injustice.

Matthew Yglesias’s reply puzzled me:

Insofar as this is a large part of the inequality story, it does tend to undercut highly moralized objections to the right [to be] so darn rich. Rowling isn’t doing anything wrong to get so rich. But on the other hand, insofar as this story is right, it also seems to me that the primary pragmatic worries one might have about pro-equality measures likewise tend to melt away. If the very best in a range of fields are just bound to reap enormous windfall earnings under current technological conditions then it seems unlikely that tax measures aimed at limiting the size of those windfalls would significantly deter anyone from doing their work. One doubts Rowling set about down this path because she thought it stood any reasonable chance of making her a billionaire.

I am confused. If Alex’s account “tends to undercut” the moralized objection to wealth inequality generated by superstar effects, then it also tends to undercut a large part of the motivation for wealth-equalizing confiscation and redistribution, namely, so-called “distributive justice.” Despite his misguided insistence in referring to a sum created by millions of voluntary acts of exchange as a “windfall,” Matt has, it seems, conceded that Rowling’s riches have been justly earned–that the process by which all this money got “distributed” to her is fair. So there is no question of exploitation, injustice, cause for redress, etc. Nevertheless, Matt would like us to know that should political elites decide to confiscate a good portion of Rowling’s fortune anyway, despite the fact that she owns it justly, this policy may not actually be self-undermining in the long run. But then, what is the point of this kind of “pro-equality” redistribution once it is agreed that there was no moral objection to the prior distribution? I’m sure Matt has something in mind, and I hope he’ll share it.

In any case, regarding the “pragmatic” case for taxing superstars, in The Winner Takes-All Society, Robert Frank and Philip Cook argue that huge payouts for superstars induce inefficient overinvestment in their fields. The point of taxing superstars, on this account, is precisely to limit entry into superstar fields and to channel human capital investment that will otherwise be wasted in the largely futile attempt to become NBA players or Hollywood screen legends into more socially productive uses. Frank and Cook acknowledge that this may result in a reduced supply of excellence in certain fields, but argue that this loss is more than offset by more mundane economic gains from increased efficiency in the allocation of skills to people. Even if we don’t get the best rock stars, we’ll still have good rock stars, and we’ll have fewer people wasting productive years trying to be rock stars. And lower levels of inequality!

Now, I don’t know about Rowling’s motivations in particular, but Frank and Cook’s argument – the most sophisticated case I’m aware of for raising taxing on superstars – seems to me to undercut Matt’s general point. If Matt would like to change his argument to “Sure, by sticking it to big-money authors we might not have gotten Harry Potter, but we would have gotten offsetting returns from increased output among schoolteachers and lawyers, and a decrease in inequality,” then I’ll be happy to argue against that instead. As it stands, his current argument seems wrong both as a matter of morality and a matter of pragmatism.           

Free Market Has Lifted Millions Out of Poverty

Free market incentives are spectacularly changing lives over much of the world. In the last 25 years, hundreds of millions of people—400 million in China alone—have climbed out of the dire poverty of living on less than $1 per day. It is the largest movement out of poverty in human history. At 10 p.m. EST on Tuesday, April 24, HDNet will be premiering the documentary The Ultimate Resource, which tells the story of what can happen when ordinary people around the world are given the tools to help themselves. Cato senior fellow Johan Norberg, James Tooley, the author of several Cato policy papers, and noted scholars Muhammad Yunus and Hernando de Soto, are featured in the production.

An IMF Study Says the UK Is a Tax Haven

The International Monetary Fund has published a study that seeks to use a neutral formula for determining which jurisdictions are tax havens. The formula used is far from ideal, focusing primarily on the size of the financial services sector relative to the overall economy rather than specific policies such as privacy laws and/or information-sharing policies. But it is worth noting that the United Kingdom was placed on the list of major offshore centers. Does anybody want to guess when the Organization for Economic Cooperation and Development will put the UK on its “tax haven” blacklist? If you answered never, you get a gold star. The OECD is infamous for targeting small and relatively powerless jurisdictions, while giving a free pass to its own member nations - such as the UK, US, Netherlands, Switzerland, Luxembourg, Austria, and Belgium - that have tax haven policies (see this study from the Center for Freedom and Prosperity for more information). In any event, the IMF study is good news since it further exposes OECD hypocrisy and enables persecuted low-tax jurisdictions to more effectively resist pressure from high-tax nations. The IMF study also is good news, since it upsets leftists in the UK, as this column in the Observer illustrates:

The International Monetary Fund has effectively branded Britain a tax haven. The world’s most important financial organisation last week published a working paper seeking a definition of offshore financial centres. For the very first time it ranked Britain alongside the likes of Bermuda and the Cayman Islands - unregulated jurisdictions associated with illicit funds. …The City of London is the world’s largest tax haven… The UK has become a centre for illicit funds drained from many of the world’s poorer countries, and British offshore secrecy prevents those countries from running effective tax regimes.

IRS Chief Will Make Ideal Vampire

The American Red Cross is known for its blood drives, so there is something appropriate about the selection of an IRS Commissioner as its new chief. Mark W. Everson compiled a dismal record at the IRS, expanding the power and size of the tax agency, so he has ample experiencing extracting blood from unwilling victims. The Washington Post reports:

One day after taxpayers filed their annual returns, the American Red Cross picked the head of the Internal Revenue Service to take over the disaster-relief agency as it struggles to restore a reputation damaged by its responses to Hurricane Katrina and other recent catastrophes. The Red Cross Board of Governors voted yesterday to name IRS Commissioner Mark W. Everson, the nation’s top tax man since 2003, as the new president and chief executive of the $6 billion organization.

Paulson Commits Faux Pas, Tells Truth About Tax Gap

Democrats on Capitol Hill are upset because the Treasury Secretary told the truth about the tax gap. Testifying before the Senate Finance Committee, Henry Paulson explained that there was very little chance of substantially closing the tax gap without resorting to onerous measures that would diminish freedom and penalize millions of compliant taxpayers. Paulson’s testimony is particularly refreshing since the IRS has been using the issue to seek a bigger budget and more power. The Washington Post has the story:

Treasury Secretary Henry M. Paulson said yesterday that the Internal Revenue Service would have a tough time wringing money out of the nation’s tax cheats without imposing “draconian” new burdens on honest taxpayers. Speaking to a Senate committee led by Democrats eager to raise cash without raising tax rates, Paulson said it was “unrealistic” for them to expect to collect hundreds of billions of dollars from the federal tax gap, the difference between taxes owed and taxes paid. …Democrats bristled at Paulson’s remarks and accused the administration of failing to take seriously its duty to enforce the nation’s tax laws. Finance Committee Chairman Max Baucus (D-Mont.) demanded that Paulson return in July with a strategy for increasing the voluntary compliance rate to 90 percent by 2017 from 84 percent, a change he said would increase tax collections by $150 billion a year. …Paulson said other tax-gap ideas floating around Washington “would be unnecessarily painful, expensive and time-consuming for taxpayers.” Politicians haven’t endorsed the more extreme notions, but Paulson cited some anyway – steps such as eliminating most cash transactions or tripling the number of IRS audits. “In theory, each of these measures could bring in some additional revenue,” Paulson said. “But the cost of compliance for individuals and businesses – most of whom already pay what they owe – would far outweigh the gains.”