Topic: Tax and Budget Policy

Hollywood For the Stylish

I loved this. It seems that there is a push (led by a fashion lawyer and a fashion show consultant, no less) for Washington, D.C. to get its own version of Chicago’s Magnificent Mile. According to today’s Yeas and Nays column in the Examiner (second item), a few D.C. council members are pushing to create a “Commission on Fashion Arts and Events.” It will “recognize the achievements of D.C.’s burgeoning fashion community” (really) and dedicate a section of the “city’s landscape” for fashion retail.

Bad Tax System and Predictable Bureaucratic Sloth Put Americans at Greater Risk of Adverse Consequences in Cases of Identity Theft

A story in Tax-news.com reports on sloppy security at the IRS. The Treasury Inspector General for Tax Administration found numerous instances of confidential taxpayer information being improperly safeguarded. The article highlights the risks for taxpayers, mostly because of identity theft, but the untold story is that much of the risk is a function of the current tax system. Taxpayers today are forced to divulge information about their financial assets. Why? Because the internal revenue code contains pervasive double-taxation of income that is saved and invested. So if a thief steals an IRS laptop, he may be able to determine all of a taxpayer’s assets. Under a flat tax system, by contrast, there is no double-taxation. Income is taxed only one time, when first earned, and there is no additional tax if people save and invest their after-tax income. The only personal information the IRS would need to enforce a flat tax is the size of the taxpayer’s household and the level of wage and pension income. Under a national sales tax (assuming politicians could be trusted to completely eliminate the income tax), the IRS would have no personal taxpayer information:

…a new government report…has revealed just how vulnerable taxpayer data contained on employee laptops is to theft, fraud and other criminal abuses. The report by the Treasury Inspector General for Tax Administration (TIGTA) found that hundreds of IRS laptop computers and other computer devices had been lost or stolen, employees were not properly encrypting data on the computer devices, and password controls over laptop computers were not adequate. TIGTA concluded that as a result, “it is likely that sensitive data for a significant number of taxpayers have been unnecessarily exposed to potential identity theft and/or other fraudulent schemes.” The report prompted harsh criticism from Grassley, the senior Republican on the Finance Committee, who commented that: “Thieves are very good at mining sensitive data for their own end. One stolen IRS laptop could put thousands of taxpayers in jeopardy. It’s hard to see why this is still a problem when the IRS knew about it more than three years ago.” …The TIGTA report shows that theft of IRS computer equipment potentially containing sensitive information on thousands of taxpayers is running at alarmingly high levels. Between January 2, 2003, and June 13, 2006, IRS employees reported the loss or theft of at least 490 computers. A large number of IRS laptops were stolen from employees’ vehicles and residences, but 111 incidents occurred within IRS facilities, where employees were likely not storing their laptop computers in lockable cabinets while they were away from the office. …TIGTA also evaluated the security of backup data stored at four offsite facilities and found that data was not encrypted and adequately protected at the four sites. For example, at one site, non-IRS employees had full access to the storage area and the IRS backup media. Envelopes and boxes with backup media were open and not resealed. At another site, one employee who retired in March 2006 had full access rights to the non-IRS offsite facility when TIGTA inspectors visited in July 2006.

Albania Joins the Flat Tax Club

Spurred by tax competition, the flat tax revolution continues to generate positive results. Albania will have a 10 percent flat tax beginning in January 2008. The corporate rate also will be 10 percent, as will the payroll tax. The latter reform is particularly interesting since many of the flat tax nations in Eastern Europe retain punnitive payroll tax rates - a policy that undermines the pro-growth and pro-employment effects of the flat tax. The Southest European Times reports:

In a bid to promote growth and improve the business climate, the administration of Albanian Prime Minister Sali Berisha plans a major overhaul of the tax system. The biggest change is a switch to a flat tax. “As of January 1st, 2008, Albania will have implemented the 10% flat tax system, one of the lowest in Europe,” Berisha told a business community meeting in late March. Corporate taxes, currently at 20%, are to be slashed in half. Social security contributions from businesses will likewise be capped at 10%. The government and other supporters of the reform say it will widen the taxable base and simplify tax administration, while also making Albania an easier place to invest. According to Finance Minister Ridvan Bode, the changes will lead to a more streamlined fiscal system. “The flat tax helps eliminate the potential arbitrage between corporate tax, dividend taxes and the income tax,” he says. VAT and other taxes will also be gradually reduced in order to woo investors, the minister added. …In the past, the IMF has been wary of plans to reduce taxes in Albania. This time, however, it seems more receptive – provided the overhaul is combined with more effective revenue collection. “We will negotiate with the Albanian government about the tax reduction, depending on the tax collection,” IMF representative Ann Margaret Westin told the press.

High Taxes are Hurting Michigan’s Economy

An onerous tax burden, combined with the inevitable inefficiencies that occur when politicians try to pick winners and losers, are causing Michigan’s economy to lag compared to other states. A column in the Wall Street Journal notes that the governor wants higher taxes - policies that will accelerate Michigan’s decline:

Michigan’s private sector is contracting compared to the expanding tax bases of every other state. The economic fog will lift when policies are enacted that make Michigan a good place to do business for newcomers as well as for existing firms. This won’t happen if the legislators in Lansing, the state capital – who advocate heavier tax burdens on the remaining taxpayers to subsidize or attract firms handpicked by government officials – get their way. These targeted subsidies simply redistribute scarce income. Nor is the governor, Jennifer Granholm, moving in the right direction. Her recent call to impose a 2% tax on most services is a nonstarter. But she’s also calling for a new tax on the estates of wealthy residents, giving those with the means an even more urgent reason to leave. Michigan’s slide will continue.

If Michigan policy makers want the state to prosper, they should return to the policies that originally helped create wealth. First on the list would be repeal of the personal income tax:

Michigan was a formidable competitor prior to 1967, when the state had no personal income tax. Why not return to these days by abolishing the state’s 3.9% personal income tax and replace it with nothing? Even a slow phase-out of the tax will allow the state to vie for business, new jobs and private-sector investment with fast-growing Florida, Texas and the nearly half-dozen other states that do not levy an income tax. If Florida and Texas – two of the fastest growing states in the union – can survive without income taxes, Michigan can too.

We’re Not in Kansas Anymore, Toto

The latest installment in the ongoing ”welfare for the wealthy” series:

Today’s Washington Post has an excellent front-page investigative story on the tens of billions of dollars in federal Department of Agriculture aid that go to projects that, well, aren’t so agricultural.

A snippet:

All told, the USDA has handed out more than $70 billion in grants, loans and loan guarantees since 2001 as part of its sprawling but little-known Rural Development program. More than half of that money has gone to metropolitan regions or communities within easy commuting distance of a midsize city, including beach resorts and suburban developments, a Washington Post investigation found.

More than three times as much money went to metropolitan areas with populations of 50,000 or more ($30.3 billion) as to poor or shrinking rural counties ($8.6 billion). Recreational or retirement communities alone got $8.8 billion.

Among the recipients were electric companies awarded almost $1 billion in low-interest loans to serve the booming suburbs of Atlanta and Tampa. Beach towns from Cape Cod to New Jersey to Florida collected federal money for water and sewer systems, town halls, and boardwalks. An Internet provider in Houston got $23 million in loans to wire affluent subdivisions, including one that boasts million-dollar houses and an equestrian center.

Great Moments in Government

In the private sector, there is a bottom-line incentive to obtain the best supplies at the cheapest price. In government bureaucracies, by contrast, there is little incentive to be frugal. Instead, the focus is on mindless paperwork and onerous regulation.

The process for obtaining paper towels on Capitol Hill is a good example. Even the Washington Post is unable to resist a tongue-in-cheek tone in an article about the search:

The office of the Architect of the Capitol, which is responsible for stocking paper towels in bathrooms throughout the Capitol complex, recently released its requirements for paper supplies to potential vendors.

…The specifications, written with the detail only your massive federal bureaucracy could provide, spell out eight requirements for towels fit for the Capitol. Among them: “C-fold paper towels provided shall have a minimum unfolded width of 10.25 inches, with a permissible variance of plus .25 or minus .50 inches, and maximum length of 14 inches. Each towel shall have a minimum area of 130 square inches. The folded width of each towel shall be 3 inches, with a permissible variance of plus .25 or minus .50 inches. The rate of absorption of paper towel material provided shall not be greater than 20 seconds for the absorption of 0.1 milliliter of water on any representative sample of paper towel as submitted. The color of the paper towel shall be white, with a minimum brightness rating of 70 when measured in accordance with the requirements of test method T-452 of the Technical Association of the Pulp and Paper Industries. The minimum thickness of 12 single plies of the paper towel material provided shall be 0.070 inch when measured under an applied pressure of 0.5 psig.”

And we won’t even get into the “average bursting strength” requirement of the two-ply toilet paper. 

The Sound of No ‘Peak’ Story Popping

Last week, in a Capitol Hill press conference featuring congressmen Roscoe Bartlett (R-Md.) and Tom Udall (D-N.M.),  the Government Accountability Office unveiled a new report on the looming catastrophe the United States faces from “peak oil.” With gas prices up and environmental stories popping in the press, Bartlett, Udall, and the GAO had to be thinking they’d have a hit on their hands.

So, if a GAO report falls on Capitol Hill and the media ignores it, does it count as news?

I can find no coverage of the press conference or the report in either the New York Times or the Washington Post. The only mention of it on either of those papers’ websites is in a transcript of an online chat session with Post politics reporter Lois Romano, wherein a reader asks if the Bartlett-Udall press conference will generate buzz.  Romano’s response (in essence): What press conference?

In fairness, the report did get a bit of play: the AP moved a short story on it and the WSJ briefed it. But no one is interviewed in either story, and the two pieces have the whiff of being quickly typed up from a press release. In other words, the media decided the report didn’t merit any real attention.

Peak oil, if you’ve never heard the term, is the theory that oil, as a finite resource, will grow increasingly difficult and expensive to extract over time. At some point, the global extraction rate will peak and then decline because of the increasing cost and difficulty.

The GAO report investigates the theory and comes up with three scintillating conclusions (I’m paraphrasing):

(1)  The world will indeed reach an oil peak — in the next few years, or the next 15 years, or the next 35 years, or the next 70 years, or sometime in the 22nd century.

(2)  It’s currently unclear how the United States will adjust to declining production rates when they do occur.

(3)  We’re all doomed, doomed I tellz ya’!

OK, (3) is hyperbolic — but just a tiny bit.

The notion of peak oil gained currency back in the early 1970s, a little more than a decade after geophysicist Marion King Hubbert correctly predicted that (Lower-48) U.S.-produced oil would peak around 1970. (Peak oil theory is often referred to as “Hubbert’s peak.”)

But Hubbert wasn’t the first person to come up with the concept. The notion dates at least to 1875 (yes, 1875) when John Strong Newberry claimed the oil peak was imminent. From then on, there’ve been many versions of the same refrain: The End (of oil) is nigh.

In respect to Newberry, Hubbert, Bartlett, Udall, and all the other “end is nigh” guys, there is validity to their theory. At some point in the future, the rate of global oil production will max out and then begin to decline. And it’s quite possible that we may not have cheap and easy substitutes for oil when that occurs, so there’ll be some significant changes for the world. But it’s also quite possible that we’ll develop substitutes for oil long before the cost of extraction, by itself, produces an oil peak; instead, the peak would result from our preferring — and thus shifting to — the substitutes. After all, that’s what has produced many previous natural resource shifts.

But let’s assume the former scenario plays out. Does that mean we are, indeed, doomed? And should we thus adopt the GAO report’s two policy recommendations that the U.S. government (1) carry out a massive global information-gathering effort to determine when the oil peak will occur, and (2) orchestrate a bold, unified national program to prepare for the peak oil transition to substitutes?

Let’s consider the policy recommendations first. Given the U.S. government’s track record on determining Iraq’s supply of weapons of mass destruction, how wise would it be to rely on the government to estimate the future supply of known and unknown sources of oil in Iraq, Iran, Saudi, Nigeria, Russia, Kuwait, Syria, Venezuela, China, Cuba, under the world’s oceans, etc.? How reliable would be government projections of the future technological developments that will increase human abilities to access that oil? Moreover, given that the U.S. government’s only great success in developing and broadly implementing an alternative energy program is nuclear power, do we really want it to be orchestrating a national program for a major transition to new energy sources? (I won’t mention the risk that the government, in carrying out these policies, would “fix” its findings and efforts around various politicians’ agendas.) If we are solely dependent on government to save us from the ruination of peak oil, then we probably are doomed.

So, does this mean that we should do nothing? Quite the opposite, quite the opposite — we should, and already are, acting boldly on energy. There are countless scientists, engineers, business executives, economists, and others, both in the United States and abroad, exploring and developing all sorts of transition strategies and technologies to substitute for oil. And there are countless scientists, engineers, business executives, and others, both in the United States and elsewhere, who are exploring and developing strategies and technologies to extend the life of the oil we have yet to extract. And we consumers have the best (and only necessary) incentive to utilize those developments when it makes sense to do so — we have to pay for the oil and alternative energies that we use. Those dynamics are far broader, more powerful, and more effective than any government Great (Energy) Leap Forward would be.

Bartlett, Udall, and the GAO are correct to be thinking about peak oil. But realizing that oil will peak one day is only the beginning of a thoughtful policy discussion, not the clinching demonstration that immediate government action is necessary. The only necessary (and sufficient) government energy policy is to allow consumers, innovators and entrepreneurs the degrees of freedom to make their own energy choices and to experience the costs and benefits of those choices.

Government is not the sole enlightened, rational actor on the planet. (Some might say the word “sole” should be removed from the previous sentence.) Somehow, we need to get the politicians to discover that.