Topic: Tax and Budget Policy

SCHIP’s Perverse Incentives

Picking the worst government program would be a huge challenge, but picking the worst funding system is much easier. Programs involving joint federal-state funding contain built-in incentives to expand the size of government because politicians at either level can buy more votes by expanding the program, knowing that they only have to pay (depending on the formula) a share of the cost. In other words, lawmakers can promise $1 worth of goodies for, say, 50 cents. This is one of the reasons why Medicaid is a fiscal disaster. It’s also why welfare reform was a step in the right direction (the old system funneled more money to states when they added more people on the dole, creating a terrible incentive system). Unfortunately, politicians generally make things worse rather than better, and a Wall Street Journal editorial (sub only) shows how the SCHIP program is encouraging more government:

Schip was created in 1997 to help insure children from low-income families, but it has since become a stealth vehicle to expand government control of health care. Schip expires next week, and House and Senate negotiators are hashing out a “compromise” that would expand the program by about $35 billion over the next five years (plus a budget gimmick concealing at least $30 billion). … Many states like New Jersey have been taking advantage of Schip’s “flexibility” and covering more affluent children, their parents, and even childless adults. In a tardy response to this trend, the federal Department of Health and Human Services announced in August that before states could further expand their Schip programs beyond 250% of poverty, they would have to enroll 95% of children below 200% of poverty. …For several years the number of uninsured New Jersey children under 200% has held steady, while New Jersey’s Schip rolls have grown by about 10% a year. One major reason is that the state continues to enroll families with incomes up to $72,275. … Governor Corzine could always tax his own residents to pay for this largesse. Then again, New Jersey already has one of the worst tax burdens in the country, and Trenton has raised taxes five times in the last six years. For the Governor, the political beauty of Schip is that it allows New Jersey to finance its spendthrift ways on the backs of more responsible states.

Politicians and Retailers Conspire to Impose Sales Tax Cartel

As reported by, a collection of trade associations is calling on Congress to impose the so-called Streamlined Sales and Use Tax Agreement on all states. Their argument is that it is unfair to let online companies make tax-free sales to out-of-state consumers (states routinely choose not to tax their retailers who make such sales). There is an inequity in the current approach, to be sure, but politicians (with help from naive business groups) are picking the wrong solution. Creating a nationwide tax cartel - one that will require a massive invasion of privacy because of a database of online purchases – will insulate politicians from competition by making it extremely difficult for consumers to shop where taxes are lower. The right way to deal with the inequity is for states to apply their sales taxes (ideally at a low rate) on a non-discriminatory basis. In other words, the sales tax would apply to all sales made in a state, regardless of whether a good is sold in person or online, and regardless of whether the customer is an in-state resident or out-of-state resident. This would eliminate an inequity, preserve tax competition, and protect privacy.

The US National Retail Federation and nearly 100 retailers and trade associations are urging Congress to approve legislation making it easier to require internet merchants, mail-order houses and other “remote sellers” to collect sales tax across state lines. Coalition members are hoping to see action this fall on the Sales Tax Fairness and Simplification Act, which is pending in both the House and Senate. The measure would allow states that have implemented the Streamlined Sales and Use Tax Agreement to require that out-of-state merchants collect sales tax on merchandise sold to residents of their states. …While the Streamlined Sales and Use Tax Agreement went into effect on a voluntary basis in 2005, the coalition says that passage of federal legislation is needed before sales tax collection can become mandatory. Thus far, 22 states have passed legislation implementing the agreement. In addition, more than 1,000 companies have participated in the agreement voluntarily, and have collected more than $125 million in state and local sales tax that would otherwise have gone unpaid. The NRF helped draft the Streamlined Sales and Use Tax Agreement, and has long argued that remote sellers enjoy an unfair price advantage in situations where they are not required to collect sales tax. The NRF wants a level playing field where all retailers are subject to the same tax rules when their merchandise is sold from a store, through a catalog or over the internet.

Bush the Budget Warrior

After six and a half years of spending faster than LBJ, President Bush has decided to proclaim himself the guardian of the taxpayers, accusing Democrats of “working to bring back the failed tax-and-spend policies of the past.” The very recent past, perhaps? Today he complained that Congress has not yet completed appropriations bills for the fiscal year that begins Monday, and warned that Democrats shouldn’t send him an omnibus bill that would “make it easier for members to sneak in all kinds of special projects, put in wasteful spending or pork barrel that they are not willing to debate in the open.”

Republicans protecting the taxpayers from the tax-and-spend Democrats. It’s a golden oldie. But it doesn’t have much relevance in the past decade. As the chart below indicates, spending has risen more than twice as much in Bush’s first seven budgets as it did in Clinton’s eight years.

If President Bush is indeed going to be a fiscal conservative for the last one-sixth of his term, that’s good news. But he has already raised annual federal spending by more than one trillion dollars, and he’s not planning to reduce spending, just to slow the growth from a massively bloated base. Fiscal conservatism remains an orphan in today’s Washington.

European Central Bank Mocks French Fiscal Policy

An amusing public fight is taking place, with Germany and the European Central Bank on one side and France on the other. I’m not sure whether this calls for a surrender joke or a wry reference to the Iran-Iraq war and how it would be nice for both sides to lose, but I will demonstrate uncharacteristic maturity by instead focusing on the policy implications.

The French, not surprisingly, are wrong. They have been badgering the European Central Bank to mimic the mistakes of America’s Federal Reserve by creating too much liquidity in order to artificially lower interest rates.

Germany is on the side of the Central Bank, which wisely has focused on maintaining the value of the currency (which helps explain why the dollar has been falling compared to the euro). As part of this spat, the head of the European Central Bank very publicly pointed out the wretched state of France’s bloated government budget. The EU Observer reports:

European Central Bank (ECB) chief Jean-Claude Trichet has said that France’s public finances are in “very great difficulty.” “In 2007, according to statistics from the European commission, France will be the country spending the most in public expenditure in relation to gross domestic product, not only within the eurozone but among the 27 members of the European Union”, Mr Trichet told Europe 1 radio on Sunday (23 September). On top of that, “the development of France’s public finances has on average been significantly worse than that of other European countries”, he added. …Mr Trichet’s comments also come as a reply to French president Nicolas Sarkozy, who has repeatedly criticised the ECB lately on a number of points, notably for not cutting interest rates. …Mr Trichet, who has also repeatedly stressed the need for the ECB to remain independent from any political pressure and has been riled by Mr Sarkozy’ comments, pointedly took Berlin as an example of a government which has managed to lower its public expenditure. Currently, Germany’s public spending is nine percentage points of GDP lower than that of France, which has to “adapt faster”, if it wants to benefit best from a global economy, Mr Trichet said.

Europeans Do Not Want American-Style Capitalism

The Financial Times reports on a poll showing that Europeans generally want more government intervention and have little desire for an “American-style” capitalist system. At the same time, the Europeans have little faith that they can compete in the modern economy. It is unclear, though, whether they understand that their support for bigger government is a reason why Europe has trouble competing with the rest of the world:

Europeans have little faith that their continent can compete economically with fast-growing Asian countries – but are even more convinced that it should not become more like the US. …multinational corporations are seen by Europeans as more powerful than governments, while those polled generally believed that regulations protecting workers’ rights should be strengthened rather than relaxed. …When asked whether Europe’s economy should be more like that of the US, the results were clear-cut. Those saying it should not, included 78 per cent of Germans, 73 per cent of the French, 58 per cent of the Spanish. In both Italy and the UK, 46 per cent opposed the US model. …Asked if a free-market, capitalist economy was the best system, Spanish and German respondents agreed overall, but the French and Italians did not. The British were less clear, although there was more support than opposition for a “capitalist” system.

The unintentionally amusing (or sad) part of the story is that America does not have an “American-style” capitalist system. The difference between the United States and Europe is that America has a medium-size welfare state while most European nations have large-size welfare states. The difference is not trivial, which is why America is more prosperous, but Europeans have a very distorted view of the United States thanks to ideologically biased information sources such as Michael Moore and CNN International.

Sink This SCHIP

That’s the catchy title of my oped in today’s New York Post:

The State Children’s Health Insurance Program is set to expire on Sept. 30. Unfortunately, neither side in Washington seems to have considered letting this SCHIP die…

Congress could make coverage more affordable simply by letting consumers and employers purchase out-of-state coverage…

Sweeping away those trade barriers would make coverage more affordable without increasing government spending, trapping families in low-wage jobs or increasing prices for private purchasers.

President of Senegal to Speak at Cato

Since becoming the president of Senegal in 2000, Abdoulaye Wade has been one of Africa’s most vocal proponents of liberal economic reforms. As he recently said, “I don’t want money, and I don’t want hand-outs. I want trade agreements….I believe in a liberal economy and have never put much faith in the state-run economy, because it fails….The state should intervene only to create the conditions necessary for the private sector to thrive. I am counting on the private sector, because it is crucial to Senegal’s future.” Join us on September 28 to hear President Wade discuss economic reforms in Senegal and the future of liberalization on the African continent.