Topic: Tax and Budget Policy

Sawing Through the Limb You’re Standing On

I was just asked by a business reporter about the state of economics education in the United States, and thought I’d share my response:

There are no national or international benchmarks for student achievement in economics, so it’s hard to precisely gauge Americans’ grasp of the subject. The available evidence is not comforting, however. An academic survey study conducted in 1990 compared how much Americans and Russians understood about the way markets work. It found no significant difference. Americans understood free markets no better than a nation of people with virtually no personal experience of them. That’s sobering. And since the heaviest academic emphasis of the last fifteen years has been on elementary mathematics and reading, there is little reason to believe that we have improved our grasp of economics in the interim.

This should come as no surprise, for a couple of reasons. First, and most obviously, the academic performance of U.S. twelfth graders is at or near the bottom in mathematics and science according to the Third International Mathematics and Science Study, when compared to the performance of students in other industrialized nations. We’re doing poorly in other subjects, why should economics be any different?

Second, it would be institutionally suicidal for a monopoly school system to do a good job of teaching market economics. The very fact that we continue to have a monopoly school system is retroactive proof that market economics has not been well taught. Monopolies, after all, tend to be frowned on by the economically savvy.

Note that this observation does not assume that government school officials are deliberately neglecting instruction in market economics. It simply posits that if they had been doing a good job of it, the system would already have been supplanted by one organized along free market lines.

Europe’s Rising Tax Burden

A new report from Eurostat shows that taxes in the average EU nation confiscate nearly 41 percent of national economic output. Sweden and Denmark compete for the dubious honor of imposing the most onerous tax burden. Flat tax nations in Eastern Europe have the lowest tax burdens, and Ireland also scores well. For what it’s worth, the tax burden in the United States is lower than it is in any EU nation, almost certainly because America is not burdened with a value-added tax. Tax-news.com reports on the Eurostat findings:

The European Statistics Office (Eurostat) on Tuesday published figures examining taxation in the EU from 1995 to 2005. According to the Eurostat report, in 2005, tax revenue in the EU27 stood at 40.8% of GDP, compared with 40.4% in 2004. In the euro area, tax revenue was 41.2% of GDP in 2005, compared to 40.9% in 2004. Over a longer period, tax revenue as a percentage of GDP in both the EU25 and the euro area were in 2005 slightly below the levels recorded in 1995. …In 2005, Sweden (52.1%) recorded the highest ratio, followed by Denmark (51.2%), Belgium (47.7%), France (45.8%), Finland (44.0%) and Austria (43.6%). The lowest ratios were observed in Romania (28.8%), Lithuania (29.2%), Slovakia (29.5%), Latvia (29.6%), Estonia (31.0%) and Ireland (32.2%). …With regard to taxes on income and wealth, Denmark (31.2%), Sweden (20.1%) and Finland (17.5%) recorded the highest ratios to GDP, compared to an EU27 average of 12.8%, while Romania (5.3%), Bulgaria and Slovakia (both 6.1%) registered the lowest ratios. For actual social contributions, the highest ratios to GDP were observed in Germany (16.7%), France (16.4%) and the Czech Republic (15.1%), compared to an EU27 average of 13.0%, whereas Denmark (1.1%), Ireland (4.8%) and Malta (7.2%) recorded the lowest ratios.

Democratic Budget Threatens Repeal of Bush Tax Cuts and Adoption of Dorgan and Levin Anti-Tax Competition Bills

In a discouraging development, the Chairman of the Senate Budget Committee has crafted a budget that does not make the Bush tax cuts permanent. He implies that the tax cuts can be extended if other taxes are raised, and he specifically suggests that legislation attacking so-called tax havens could provide offsetting revenue. But these punitive and discriminatory bills would raise very little money (especially since they would force many American companies and entrepreneurs to reduce their efforts to compete in global markets). As the Wall Street Journal explains, Senator Conrad’s real goal is repealing the Bush tax cuts and imposing a huge tax hike on the productive sector of America’s economy:

Mr. Conrad has no intention of extending the Bush tax cuts… But Senate Democrats don’t want anyone to know this, at least not before the 2008 election. So Mr. Conrad says his budget revenue estimates “assume that Congress will take steps to counter the effects of the expiration of tax cuts in 2010 in a manner that does not add to the nation’s debt burden.” How so? Well, “this additional revenue can be achieved without raising taxes by closing the tax gap, shutting down illegal tax shelters, addressing tax havens, and simplifying the tax code,” he avers. …The 10-year revenue increase from repealing the Bush tax cuts is something like $2 trillion, according to Congress’s static-revenue models. Mr. Conrad is claiming that Congress will make up for all of that lost revenue by chasing down such illusions as the “tax gap,” which the IRS claims is the difference between the taxes people owe and what they pay. …All of this is really sleight-of-hand to disguise that Democrats are intent on repealing the Bush tax cuts. This would raise the tax on capital gains to 20% from 15%, more than double the tax rate on dividends to 39.6% from 15%, and sharply increase marginal tax rates at all levels of income. …The market fell 200 points on the day Mr. Conrad unveiled his magic act last week.

K for Korruption

The Washington Post has been running a series on its website (Citizen K Street) on the life of Gerald Cassidy, the preeminent entrepreneur of federal budget earmarking since the 1970s. Here are a few thoughts:

- Cassidy is a liberal Democrat, but a much more important aspect of his character seems to be his insatiable quest for money, money, money.

- Rather than adding to the nation’s gross domestic product, Cassidy earned his fortune of about $125 million as the middleman in the forced transfer of wealth from taxpayers to state and local recipient groups willing to play the Washington game.  

- Annual revenues of registered lobbyists in Washington have increased from $100 million in 1975 to $2.5 billion by 2006.

- The word “conservative” doesn’t have any meaning when it comes to big government spending. The Post describes former Rep. Jamie Whitten as a “conservative Mississippi Democrat,” yet Whitten was a famous pork barrel spender. The Post story also captures a smiling Tom Delay and Roy Blunt–supposedly staunch Republican conservatives– at a party in honor of Cassidy and Associates’ 30-year record of lobbying for pork.   

- Cassidy pioneered earmarking for universities and other state and local institutions. His firm provides a very high return on investment for his clients. One client paid Cassidy $1.3 million in fees and was rewarded with a $29 million taxpayer-funded earmark. Another client paid Cassidy $15 million and received $106 million in earmarks. And in another case, a client paid Cassidy $1.2 million and received a $15 million earmark.

- Washington tends to attract sharp, aggressive, amibitious people like Cassidy, who want to become rich, and don’t seem to care about limited government, constitutional government, good government, or the broad public interest. 

- When you combine democracy with the tremendous entrepreneurial abilities of folks like Cassidy, and some of the members of Congress he serves, the result is a federal government that will spend about $3 trillion this year.   

Europe’s Insane Agriculture Subsidies

American politicians have created a wretched system of agricultural subsidies, but it seems that Europe’s lawmakers win the prize for concocting the most perverse ways to squander tax money. The Times reports that there is now a secondary market in buying and selling agricultural subsidy entitlements:

City dwellers are making huge profits out of an EU loophole that allows people who have never set foot on a farm to claim European farm subsidies. …Auctioneers and brokers who used to sell cattle and farm-land are now focusing their attention on selling the rights to receive European taxpayers’ money — known as entitlement trading — in what one described as a “ferocious” market with the rights to subsidies “flying off the shelf”. …Open auctions are being held — with one in Aberdeen due next Friday — while investors are also buying the rights to subsidies over the telephone, through brokers, through internet auction sites and inter-active trading. …Under EU regulations, only someone classified as a farmer can buy the right to receive subsidies, but to be classified officially as a farmer, people need only hold a lease on a minimum of 1.7 acres for ten months of the year, and never need to visit it. Scottish landowners are now leasing out vast tracts of rocky highland for as little as £5 an acre a year, so that investors can claim to be farmers. For each acre you lease, you can buy annual subsidies averaging £100 an acre, but which can rise to over £1,000 an acre.

A newspaper in Scotland, meanwhile, reports that one dairy farmer has figured out how to scam the system for about $2 million per year - most of which is received as a subsidy for milk that does not exist:

A Scottish dairy farmer has exploited a glaring loophole in European law to annually earn the right to claim more than £1million in subsidies. William Hamilton and Sons, of Meldrum Farm, Blairdrummond, Stirling, has taken advantage of a flaw that allows it to get handouts on almost nine times the amount of milk it produces. Under EU law, the business will continue to qualify for the lottery-size payment annually until 2012 - even if it stops producing milk.

British Taxpayers Pay to Give Self-Esteem Massages to Welfare Recipients

In the global contest to waste taxpayer money, the U.K. has a very strong entry. According to the Times, people who already receive handouts are now getting taxpayer-financed shopping sprees, beauty treatments, and other goodies to supposedly build their confidence. Not surprisingly, European Union funds also are subsidizing this boondoggle, so at least British taxpayers can take comfort from the fact that some of the cost is shifted to people in other parts of Europe:

The government is paying for unemployed single parents to have massages, beauty treatments and shopping sprees to “boost their confidence” and encourage them to attend job centre appointments. The treats, part of a programme named Big Brother…, include £30 to spend on a day out, as well as lunch and childcare. …A brochure describes it as a “free two-week scheme that will boost your self-esteem and supercharge your confidence”. Organisers said it would be “nice” if participants found work, but this was not vital. …A man from Whitley Bay, Tyne and Wear, whose teenage daughter works at a salon involved in the scheme, said: “She was baffled when she was told these women were getting treatment for nothing. They had their make-up done, they had facials, they had their nails filed and some even had their ears pierced. “My daughter doesn’t get a penny from the government and will earn less than these single mothers get in benefits. What message does this send out?” …Martin Callanan, a Conservative MEP for the North East, said: “There are lots of other parents, not to mention pensioners, who would like the state to pay for their pampering. It is suspicious that they are unable to tell us how much this is costing taxpayers.”

Is This a Log Cabin?

Photo from Washington PostBelmont College guard Andrew House complained that the NCAA assigned his team to this hotel, the historic Brookstown Inn in Winston-Salem, N.C. He objected to the old, 19-inch television sets in the room and said that the hotel felt more like a log cabin.

Isn’t it great to live in a world so rich that a 20-year-old college student thinks a beautiful, historic four-story hotel is like a log cabin? Next year, no doubt, players will complain about being assigned to hotels with old Ethernet connections that you actually have to plug your laptop computer into, like pioneer times.