Topic: Tax and Budget Policy

Federal Government Pay Exceeds Most Industries

New data show that worker compensation is rising faster in the federal government than in the private sector. After rapid growth in federal pay during the George W. Bush years, growth slowed from 2011 to 2013 after policymakers enacted a partial freeze on federal wages.

That era of restraint is now over. The latest data from the Bureau of Economic Analysis (BEA) show that wages rose 2.9 percent in the federal government in 2014, on average, compared to 1.7 percent in the private sector. When benefits such as pensions and health care are included, federal compensation increased 2.8 percent, on average, compared to 1.3 percent in the private sector.

Federal civilian workers had an average wage of $84,153 in 2014, compared to an average in the private sector of $56,350. The federal advantage in overall compensation (wages plus benefits) is even greater. Federal compensation averaged $119,934 in 2014, which was 78 percent higher than the private-sector average of $67,246. This essay discusses trends in federal and private pay.

The BEA provides compensation data by industry. The figure shows average compensation in 17 major private industry groups, as well as compensation for federal civilian workers, the military, state and local governments, and federal government enterprises (mainly the postal service).

The federal government has the fourth highest paid workers in the United States, after utilities, mining, and the management of companies. Federal compensation is higher, on average, than compensation in the information, finance and insurance, and professional and scientific industries. Federal compensation is more than twice as high as compensation in the education industry, and it is more than three times higher than compensation in the retail trade industry.

For more information, see here.

Waste in Military Purchasing

The longest running show on Broadway is The Phantom of the Opera at 27 years. The longest running show on television is Meet the Press at 68 years. The longest running show of waste in Washington is cost overruns on Pentagon weapon systems. That show has been ongoing for more than 220 years.

As one of the first major procurements under the Constitution, the federal government bought six Navy frigates in 1794. The ships were projected to cost $688,889, but a myriad of problems pushed the ultimate cost up 70 percent to $1,176,721. Nicole Kaeding and I mention that project and many recent ones in our new study “Federal Government Cost Overruns.”

The Washington Post reports today on yet another troubled defense program:

As the Gerald R. Ford-class aircraft carrier enters the annals of troubled acquisition programs—billions over budget, years behind schedule—it follows a familiar script, becoming yet another example of how the Pentagon struggles with buying major weapons systems.

The Navy’s program has become “one of the most spectacular acquisition debacles in recent memory. And that is saying something,” McCain (R-Ariz.) said during a Senate hearing on the troubled program Thursday.

The program is now $6 billion over budget, according to a review by McCain’s staff. And while the lead ship is expected to be delivered next year, the second ship in the fleet is five years behind schedule and won’t be ready until 2024.

Like many other programs, the Ford-class carriers suffered from unrealistic cost estimates and overly optimistic timelines. And key Pentagon officials pushed the program forward even though key technologies hadn’t been fully tested, developed or designed, officials testified.

The problem with Pentagon procurement is not just that federal officials deceive taxpayers about the costs of projects, but also that many cancelled projects—which never should have been started—end up throwing billions of dollars down the drain.

A story yesterday in the Washington Post put a staggering number on that aspect of waste:

The Pentagon spent $46 billion on at least a dozen programs, including a new fleet of presidential helicopters, between 2001 and 2011 that never became operational, according to an analysis by the Center for Strategic and Budgetary Assessments.

The Post reports that there are serious efforts to reform procurement currently moving forward. After 220 years of waste, military purchasing is long overdue for an overhaul.

Trump Tax Plan Would Increase Tax Eaters

Data from the Tax Policy Center show that 45 percent of U.S. households (“tax units”) will pay no federal income tax in 2015. That figure has risen in recent decades.

In raw numbers, 94 million households will pay some income tax in 2015, while 78 million will pay none. As the TPC table shows, virtually all higher-income households pay income tax, while the nonpayers are mainly in the bottom half.

Presidential candidate Donald Trump says that he would take another 31 million off the tax rolls, in addition to what he says are 42 million current nonpayers. As you can see, the Trump and TPC data do not match regarding the current number of nonpayers.

Let’s go with the TPC data. Adding tens of millions more nonpayers would push the total number over 100 million. There would be more “tax eaters” in America than taxpayers, at least in terms of the federal income tax.

To be fair, not all 100+ million nonpayers would be tax eaters. If someone paid no income tax, but also received no subsidies from the federal government, she could be called tax neutral. However, millions of moderate-income people receive the earned income tax credit (EITC), which is “refundable.” Those folks pay no income tax but get a check from the government when they file their tax return. They are tax eaters.

So a missing detail from the Trump proposal is his plan for the EITC. By zeroing out income tax for 31 million additional tax filers, he would automatically be boosting spending through the EITC. The refundable, or spending, part of the EITC is already $60 billion a year. Would Trump push that spending even higher?

I like many features of Trump’s overall tax plan. But taking more people off the tax rolls is not a good way to keep the government limited. If something is “free,” people will demand more of it. Under Trump, 31 million more households would have an incentive to demand more spending from Washington.

Trump and Taxes: A Bush-Like Plan from “The Donald”

It’s been a challenge to assess Donald Trump’s fiscal policies since they’ve been an eclectic and evolving mix of good and bad soundbites.

Though I did like what he said about wanting to pay as little tax as possible because the government wastes so much of our money.

On the other hand, some of his comments about raising tax burdens on investors obviously rubbed me the wrong way.

But now “The Donald” has unveiled a real plan and we have plenty of details to assess. Here are some of the key provisions, as reported by the Wall Street Journal. We’ll start with the features that represent better tax policy and/or lead to lower tax burdens, such as somewhat lower statutory tax rates on households and a big reduction in the very high tax rate imposed on companies, as well as a slight reduction in the double tax on capital gains.

…no federal income tax would be levied against individuals earning less than $25,000 and married couples earning less than $50,000. The Trump campaign estimates that would reduce taxes to zero for 31 million households that currently pay at least some income tax. The highest individual income-tax rate would be 25%, compared with the current 39.6% rate. …Mr. Trump also would cut the top capital gains rate to 20%, from the current 23.8%. And he would eliminate the alternative minimum tax. …For businesses, Mr. Trump’s 15% rate is among the lowest that have been proposed so far.

But there are also features that would move tax policy in the wrong direction and/or raise revenue.

Most notably, Trump would scale back certain deductions as taxpayers earn more money. He also would increase the capital gains tax burden for partnerships that receive “carried interest.” And he would impose worldwide taxation on businesses.

To pay for the proposed tax benefits, the Trump plan would eliminate or reduce deductions and loopholes to high-income taxpayers, and would curb some deductions and other breaks for middle-class taxpayers by capping the level of individual deductions, a politically dicey proposition. Mr. Trump also would end the “carried interest” tax break, which allows many investment-fund managers to pay lower taxes on much of their compensation. …The Trump plan would raise revenues in at least a couple of significant ways. It would limit the value of individual deductions, with middle-class households keeping all or most of their deductions, higher-income taxpayers keeping around half of theirs, and the very wealthy losing a significant chunk of theirs. It also would wipe out many corporate deductions. …The plan also proposes capping the amount of interest payments that businesses can deduct now, a change phased in over a long period, and would impose a corporate tax on future foreign earnings of American multinationals.

Last but not least, there are parts of Trump’s plan that leave current policy unchanged.

Which could be characterized as “sins of omission” since many of these provisions in the tax code - such as double taxation, the tax bias against business investment, and tax preferences - should be altered.

…the candidate doesn’t propose to end taxation of individuals’ investment income… Mr. Trump would not…allow businesses to expense all their new equipment purchases, as some other Republicans do. …All taxpayers would keep their current deductions for mortgage-interest on their homes and charitable giving.

So what’s the net effect?

The answer depends on whether one hopes for perfect policy. The flat tax is the gold standard for genuine tax reform and Mr. Trump’s plan obviously falls short by that test.

But the perfect isn’t the enemy of the good. If we compare what he’s proposing to what we have now, the answer is easy. Trump’s plan is far better than the status quo.

Now that I’ve looked at the good and bad policies in Trump’s plan, I can’t resist closing with a political observation.  Notwithstanding his rivalry with Jeb Bush, it’s remarkable that Trump’s proposal is very similar to the plan already put forth by the former Florida Governor.

I’m not sure either candidate will like my interpretation, but I think it’s flattery. Both deserve plaudits for proposing to make the internal revenue code less onerous for the American economy.

P.S. Here’s what I wrote about the plans put forth by Marco Rubio and Rand Paul.

Federal Bureaucratic Failure

The federal government spends almost $4 trillion a year. It has hundreds of agencies and runs more than 2,300 subsidy programs. It employs 2.1 million civilian workers, 1.4 million uniformed military personnel, and 560,000 postal workers. It is a huge organization.

It also fails a lot and is increasingly distrusted. One new Gallup poll finds that three-quarters of Americans think that government corruption is widespread, while another shows that half of Americans believe that the federal government is a threat to our freedom.

A new essay, “Bureaucratic Failure in the Federal Government,” at DownsizingGovernment.org examines structural features of the executive branch that cause federal failure and help to engender such a dim view from the public.

By the Numbers: America’s Unfortunate Fiscal Evolution from Madisonian Constitutionalism to Wilsonian Statism

I’m a big fan of fiscal data.

In part this is because I’m a policy wonk, but I also like budget numbers because they generally provide strong evidence for my philosophical belief in small government and spending restraint.

For instance, I enjoy sharing my table showing nations that have experienced great success with multi-year limits on spending growth, particularly since I enjoy putting my leftist friends in an uncomfortable position by asking them for a similar list of countries that have made progress by raising taxes (hint: that’s called the null set).

Given my affinity for budget data, I was excited to learn that the Joint Economic Committee (JEC) just released “An Economic History of Federal Spending and Debt.”

This new publication is filled with fiscal information starting in the late 1700s.

Why Is $15 the “Right” Minimum Wage?

Earlier today, New York Governor Andrew Cuomo proposed a $15 per hour minimum wage for his state; Vice-President Joe Biden joined the press conference.

Cato and other scholars have long argued against any minimum wage; see here.  I will not re-hash those arguments today.

Instead, let’s ask the proponents of a minimum wage why, if a $15 per hour minimum is good, why isn’t a $150 per hour minimum better? 

The answer will presumably be, “Well, $150 per hour would kills job.”  

Exactly!  

So why is not the same true of $15 per hour, just to a milder degree? How can proponents seriously claim that minimum wages do not affect employment? Existing evidence does show small effects from most minimum wage hikes; but that is because those hikes have been modest. Were they ever large (as with Cuomo’s proposal), substantial disemployment and other distortions are inevitable.