Topic: Tax and Budget Policy

Clinton’s $5,000 Baby Giveaway

In a speech last week, Senator Hillary Clinton proposed giving $5,000 (of your money) to every baby born in America in the form of a government-controlled savings account. In a speech last year, Clinton proposed a $500 baby savings account, so the cost is rising as we get closer to the election.

Clinton’s comments had roots in ideas proposed by both conservative and liberal think tanks and politicians. That’s not surprising, because both liberals and conservatives inside the beltway specialize in top-down government planning schemes. The liberal New America Foundation has a plan for a $6,000 baby giveaway. Conservative plans are discussed here.

Here are seven problems I see with baby giveaway plans:

1) Cost. Clinton’s plan would cost about $20 billion annually, but would be higher if added private savings were matched by further government subsidies. The money would come from higher taxes, causing damage to the private economy on the order of $2 for every $1 extracted (as Martin Feldstein estimated).   

2) Lobbying for Expansion. Suppose Clinton’s plan passed and would begin January 1, 2010. Do you think that parents of kids born in 2009 or 2008 would be happy that their neighbors were getting $5,000 giveaways and they weren’t? I don’t think so. I think lobby groups would quickly get Congress to expand the benefits to tens of millions of existing kids.

3) Cookie Jar Problem. Clinton suggested that when kids turned 18, they could use the money for college, buying a home, starting a business, or saving for retirement. But don’t you think that a $5,000 per-child cookie jar would be tempting for families to raid early? Interest groups would help them by lobbying to expand the accounts to cover: baby formula expenses, kids’ health costs, children’s clothes, kid’s school and tutoring costs, family emergencies, and so on. 

4)  Bureaucracy. All these exceptions would require hundreds of pages of regulations and a huge bureaucracy to administer. And we would also need a huge enforcement bureaucracy because with the government handing out $5,000 to anyone who mailed in a birth certificate, the temptation for fraud would be large.

5) Not savings. Giving people $5,000 is not savings. Savings involves individuals sacrificing current consumption for greater future security and income. There is no sacrifice here except by the taxpayers who have their own income and savings swiped by the government in higher taxes. 

6) Increased Consumption. Proponents of these savings plans claim that giving people money in freebie savings accounts will encourage them to save more on their own. Maybe. But the opposite would also occur. Parents would increase their own consumption rather than saving for their kids’ college costs because they would be counting on the government account. And kids reaching 18 would increase their own consumption because the government has their home downpayment covered. Savings is about frugality, but these accounts would encourage the opposite.

7) Generational Issues. The current Social Security and Medicare systems create a huge and involuntary transfer from young people to old people. Senator Clinton does not favor cutting these programs, while her new baby proposal would create a new program to take from older people (who are paying taxes) to give to young people. Clinton thus favors different programs that work exactly against each other.

Rather than having multiple government transfer programs working at cross-purposes, politicians might try simply cutting benefits and scaling down the fiscal war of all against all.

To boost savings, we should eliminate current government tax hurdles through universal, all-purpose, tax-free savings accounts

While money to fund baby accounts doesn’t grow on trees, crackpot schemes do in the fertile ground of federal election campaigns.

The Antitrust Religion

Many successful American businesses have been accused of anti-competitive practices. In The Antitrust Religion, a new book published by the Cato Institute, attorney and author Edwin S. Rockefeller argues that much of the conventional wisdom about antitrust is wrong. Drawing on 50 years of experience with U.S. antitrust laws, Rockefeller sheds light on why lawmakers, bureaucrats, academics, and journalists use arbitrary and irrational laws and enforcement mechanisms to punish capitalists rather than promote competition.

Rockefeller also participated in a Cato daily podcast about the book.

Maryland and Michigan Committing Economic Suicide

The title is a bit of an exaggeration, but states that raise income tax rates are engaging in extremely foolish behavior because entrepreneurs, investors, and business owners will shift to states with lower tax rates. The Wall Street Journal opines against these self-destructive policies, noting that Maryland’s tax-increase orgy will finance new spending and penalize small business:

Governor Martin O’Malley has been undertaking something close to a tax-increase-a-day tour. In Ellicott City he proposed raising the sales tax to a rate of 6% from a nickel. The next day in suburban Baltimore he unveiled his plan to raise the top income tax rate to 6.5% from 4.75%. Last Wednesday in Landover he called for a doubling of the cigarette tax to $2 a pack. He has also endorsed a one percentage point hike in the state corporate income tax to 8%, new commercial real estate taxes, and a 12 cent hike in the gasoline tax to 35.5 cents a gallon. …

In all, Mr. O’Malley hopes to wrench $2 billion a year from Maryland workers – in the name of filling a $1.5 billion gap in the state’s $30 billion budget. The extra $500 million will finance new spending. … Mr. O’Malley’s income tax plan is consistent with the Democratic Party’s nationwide revival of its New Deal theme of the tax code as a tool for income redistribution. While nations over the globe move to flatter, simpler, pro-growth tax systems, the Governor is selling his proposal as a pain-free whack at the rich. Trouble is, there aren’t enough truly rich to finance his spending goals, so his real target is the not-so-upper middle class. His two new tax brackets of 6% and 6.5% will kick in at incomes of $200,000 and $500,000, respectively, for couples. …

The Governor also fails to mention that about two-thirds of the people he wants to hammer are small business owners – the major employers in the state. He might acquaint himself with a new study by Barry Poulson of the University of Colorado which finds that states with either no income tax, or low flat-rate structures, have significantly higher income growth rates than states with steeply progressive tax rates. … The losers will be Maryland citizens, unless they move to another state, which we’d guess some of them will.

The WSJ also explains that Michigan’s tax increase is going to undermine a state that already suffers from a weak economy and a punitive tax regime:

At about 2 a.m. Monday, a handful of Republicans in the Legislature broke days of gridlock and handed Democratic Governor Jennifer Granholm the $1.48 billion tax increase she has been demanding. The state’s personal income tax will rise to 4.35% from 3.9%, and the rest of the revenue grab will come from a new 6% sales tax on business services. Already 14th in tax burden among the 50 states, according to the Tax Foundation, Michigan is now headed up in the rankings. Congratulations. …

By the way, last year Michigan introduced a new 4.95% business income tax, which will be applied on top of the sales tax. Last year, amid the national expansion, Michigan was the only state outside the Gulf Coast to lose jobs and see a decline in economic output. Comerica Bank recently moved its headquarters to Texas, in part because of Michigan’s hostile business climate. Michigan’s 7.4% jobless rate is the highest of all states and far above the 4.6% national rate. …

In the past 25 years, the only period when Michigan’s growth has exceeded that of the national economy was in the mid-1990s after then-Governor John Engler’s tax cutting and welfare reform. For a time, Michigan became the unlikely national leader in job creation. Now the total tax burden is returning to where it was before the Engler years. Michigan last went on a taxing binge in 1983, and voters were outraged enough to mount a successful recall campaign against two state Senate ringleaders. This time, two of three Michigan voters have told pollsters they want budget cuts, not new taxes. It may be that the only way to get jobs back into Michigan is to make sure the taxing politicians in Lansing lose theirs.

The only good news from Maryland and Michigan is that these states will serve as laboratories for economic failure. In upcoming years, public policy experts will compare their economic performance to the results in states – like Rhode Island and New Mexico – that have lowered tax rates. Needless to say, it is easy to predict that the states lowering tax rates will prosper relative to the states that are increasing the burden of government.

More on Klein (and Cusack)

Tim flays poor Naomi Klein’s impoverished reading of Milton Friedman below, but there are even more bizarre assertions in the interview (which is conducted, unfortunately, by a fawning John Cusack).

Klein claims that times of crisis, such as the aftermath of terrorist attacks, are the most fertile moments to “push through radical free-market policies” against the will of the American people. This, of course, defies all systematic study of such things, which has proved to the contrary that the State, not the private sector, is the beneficiary of such environments. For starters, go to the books by Bruce Porter or Robert Higgs. There is a wealth of literature out there on this topic, and any undergraduate with a passing interest in the subject should be familiar with it. Such knowledge would preclude making the type of nutty claim that Klein does.

But even if one limits his analysis to, say, life under the Bush administration, one would be hard-pressed to point to the “radical free-market policies” which the administration has successfully and quietly spirited into American society in the wake of 9/11. Remember, for example, the widely-debated and spectacularly unsuccessful Bush approach to trying to partially privatize Social Security. Or, for a broader look, refer to my colleague Steve Slivinksi’s conclusion two years ago that

Even after excluding spending on defense and homeland security, Bush is still the biggest-spending president in 30 years…

Total government spending grew by 33 percent during Bush’s first term. The federal budget as a share of the economy grew from 18.5 percent of GDP on Clinton’s last day in office to 20.3 percent by the end of Bush’s first term.

Those don’t sound like stealthily enacted radical free-market policies to me. To the extent that Klein gestures toward these facts in the interview, she seems to protest that she’s not against government exploitation of crises per se, but rather is disgusted that the beneficiaries of this largesse may include private sector companies. For example, Klein is aghast that “food” and “pest control” in Iraq are provided by private companies. The horror!

One might expect this type of nonsense from Klein, but it’s really disappointing to see John Cusack do the interview with his eyebrows raised about an inch and a half above his eyes, apparently floored by Klein’s analytical brilliance. A shame, really–the guy’s made some pretty good movies.

Klein Slanders Friedman

A video interview of Naomi Klein, who’s promoting her new book, has some truly vicious slander of Milton Friedman. Klein says:

I start the book with a quote from Milton Friedman saying only a crisis, actual or perceived, produces real change. And you know Milton Friedman lived by this. His first laboratory was Chile under Augusto Pinoche, where the crisis was the coup and an economic crisis and it was after that that you had the economic shock therapy. And you also had another kind of shock which is torture, which was a way of enforcing these policies.

Klein seems to be insinuating that Friedman somehow orchestrated, supported, or encouraged the coup in Chile, or at least that he was an important Pinochet advisor. She also makes it sound like torturing people was one of Friedman’s policy recommendations. But here’s how Friedman tells the story:

MILTON FRIEDMAN: While I was in Santiago, Chile, I gave a talk at the Catholic University of Chile. Now, I should explain that the University of Chicago had had an arrangement for years with the Catholic University of Chile, whereby they send students to us and we send people down there to help them reorganize their economics department. And I gave a talk at the Catholic University of Chile under the title “The Fragility of Freedom.” The essence of the talk was that freedom was a very fragile thing and that what destroyed it more than anything else was central control; that in order to maintain freedom, you had to have free markets, and that free markets would work best if you had political freedom. So it was essentially an anti-totalitarian talk.

INTERVIEWER: So you envisaged, therefore, that the free markets ultimately would undermine Pinochet?

MILTON FRIEDMAN: Oh, absolutely. The emphasis of that talk was that free markets would undermine political centralization and political control. And incidentally, I should say that I was not in Chile as a guest of the government. I was in Chile as the guest of a private organization.

It’s true, of course, that Pinochet employed some of the economic policies Friedman had been advocating for decades, that some of Pinochet’s advisors had studied economics at the University of Chicago, and that Friedman subsequently cited the success of those policies. But just as Michael Moore’s endorsement of Cuba’s health care system doesn’t constitute endorsement of Castro’s dictatorial rule, so Friedman’s endorsement for Chilean tax or pension policies don’t constitute an endorsement of coups, purges, or torture.

There’s also some ideological slander at the heart of Klein’s argument, which she lays out later in the video. Klein seems to believe that Haliburton and Blackwater—companies that thrive on wartime corporate welfare—represent Friedman’s ideal society. Not only is this obviously wrong on a theoretical level, but it’s also flatly at odds with Friedman’s stated views. Milton Friedman was an opponent of the Iraq war and has been vociferous critic of corporate welfare for decades. Conflating Friedman’s advocacy of limited government with Bush’s interventionist foreign policy and profligate domestic spending illustrates either a failure to grasp the basics of Friedman’s position or a calculated attempt to play to the prejudices of her intended audience, many of whom will lump together anyone they don’t agree with as “right wingers,” even if they have little in common with one another.

John Berthoud, In Memoriam

BerthoudWe have lost a good friend in the battle for limited government with the passing yesterday of John Berthoud, president of National Taxpayers Union. John was a scholar, a leader in public policy in Washington, and the head of a very important institution that helps Americans understand the huge cost of their government. John was an extremely kind and honorable person, and he will be missed greatly.

Three Cheers for the World Bank

I admit I’m committing an ideological sin, but the World Bank has released its 2008 “Doing Business” report, which ranks 178 countries on regulatory impediments to entrepreurship, and it is a first-rate publication. I realize the World Bank should not exist, and I’m quite aware that many of their activities in other areas hinder economic growth, but this report is very helpful in promoting regulatory competition among jurisdictions. I’ll atone for my sin by coming up with a reason to criticize the international bureaucracy in the near future, but this EU Observer story shows how Doing Business creates pressure for regulatory liberalization:

Thanks to regulatory reforms, Eastern Europe and Central Asia have surpassed East Asia for ease of doing business, a World Bank report says. The report, called “Doing Business” compares and ranks 178 economies and seven regions on the basis of ten indicators related to business regulations. …Several of the region’s countries have also overtaken some Western European economies. Estonia and Georgia for instance, the region’s two top performers, have surpassed most EU members and both hold a spot in the top twenty.