Topic: Tax and Budget Policy

The 1994 Clinton Crime Bill

With the New York primary just days away, a policy fight has erupted on the left regarding the 1994 Clinton Crime Bill.  I have a piece today over at Newsweek on the subject.  Here’s an excerpt:

The Crime Bill maddens today’s BLM activists because it earmarked $7.9 billion in grants to the states for the building of prisons. To be eligible for the funds, states had to meet certain conditions. The idea was to encourage the states to embrace the stricter policies found in the federal system, which had abolished parole and limited good time credits for prisoners, which allow well behaved inmates to earn an earlier release date.

Many states were eager to do just that. During the 1990s, America was building a new prison every week, on average. And as soon as those facilities opened up, they were soon operating beyond their original design capacity.

Many of the prisoners were young minority men, nonviolent drug offenders who were serving mandatory minimum sentences….

Hillary has tried to sound like a reformer, saying, “We need a true national debate about how to reduce our prison population while keeping our communities safe.”  

Such throwaway lines are not nearly enough for BLM activists. For them (and others too), support for the 1994 Crime Bill is the political equivalent of Hillary’s vote to support the Iraq war: It was a key indicator of policy judgment—and the Clintons failed the test.

I also point out that Cato’s 1995 Handbook for Congress called for repealing the Clinton Crime Bill precisely because it would lock up thousands and thousands of people who do not belong there.  We urged policymakers to call off the drug war and to reserve prison space for violent offenders.  Alas, Congress turned away from our policy advice. 

Balancing the Federal Budget

Donald Trump says, “we’ve got to start balancing budgets,” and promises that he is “going to cut spending big league.” Trump provides few specifics, but his impulse is certainly commendable.

Ted Cruz offers a much more detailed plan, which includes abolishing four cabinet departments and a couple dozen agencies and programs. The presidential candidate is right that the “current and projected rates of government growth are unsustainable, irresponsible, and constitutionally indefensible.”

Large spending cuts should be on the agenda when the next president enters office in 2017. Spending cuts would spur economic growth by shifting resources from lower-valued government activities to higher-valued private ones. Cuts would expand freedom by giving people more control over their lives and reducing the regulations that come with spending programs.

What should the next president cut? I have updated a plan at DownsizingGovernment to cut dozens of agencies and programs across the budget. I’ve included cuts to entitlements, business subsidies, aid to the states, and other items. The cuts would not only balance the budget and begin reducing the government’s massive debt, but they would also enhance our civil liberties by dispersing power from Washington.

See the new spending cut plan here.

Sweden Isn’t a Good Role Model for Bernie Sanders

Senator Bernie Sanders wants to dramatically increase the burden of government and he claims that his policies won’t lead to economic misery because nations such as Sweden show that you can be a prosperous country with a big welfare state.

Perhaps, but there are degrees of prosperity. And a large public sector imposes a non-trivial burden on Nordic nations, resulting in living standards that lag U.S. levels according to OECD data.

Moreover, according to research by a Swedish economist, people of Scandinavian descent in America produce and earn much more than their counterparts at home.

That’s not exactly a ringing endorsement of the Nordic Model.

But there actually are some things we can learn from places such as Sweden. And not just things to avoid.

As Johan Norberg explains in this short video, there are some very good policies in his home country. Indeed, in some ways, his nation is more free market than America.

I especially like Johan’s explanation about how Sweden became a rich country before the welfare state was adopted.

And he’s right that Sweden had a smaller government and a lower tax burden than the United States for a long period.

Ranking States for Income Taxes and Government Efficiency

There’s no agreement on the most important variable for state tax competitiveness.

I’m sympathetic to the final option, in part because of my disdain for the income tax. And if an income tax is imposed, I prefer a simple and fair flat tax.

With that in mind, here’s a fascinating infographic I received via email. I don’t know if Reboot Illinois is left wing, right wing, or apolitical, but they did a very good job. I particularly like the map showing zero-income tax states (gray), flat tax states (red), and states with so-called progressive tax schemes (blue).

For what it’s worth, Illinois taxpayers should fight as hard as possible to preserve the state’s flat tax. If the politicians get the power to discriminate among income classes, it will just be a matter of time before all taxpayers are hit by higher rates.

Now let’s shift to the spending side of the fiscal ledger.

Like any good libertarian, I generally focus on the size of government. I compare France with Hong Kong and that tells me that big is bad and small is good.

But regardless of whether a government is large or small, it’s desirable if it spends money efficiently and generates some benefit. I shared, for instance, a fascinating study on “public sector efficiency” from the European Central Bank and was not surprised to see that nations with smaller public sectors got much more bang for the buck (with Singapore easily winning the prize for the most efficient government).

So I was very interested to see that WalletHub put together a report showing each state’s “return on investment” based on how effectively it uses tax monies to achieve desirable outcomes for education, health, safety, economy, and infrastructure, and pollution.

I’m not completely comfortable with the methodology (is it a state government’s fault if the population is more obese and therefore less healthy, for instance, and what about adjusting for demographic factors such as age and race?), but I nonetheless think the study is both useful and interesting.

Here are the best and worst states.

One thing that should stand out is that the best states are dominated by zero-income tax states and flat tax states.

The worst states, by contrast, tend to have punitive tax systems (Alaska is a bit of an outlier because it collects - and squanders - a lot of revenue from oil).

P.S. WalletHub put together some fascinating data on which cities get a good return on investment (i.e., bang for the back) for spending on police and education.

How to Get a Piece of the Taxpayers’ Money

Two articles in the same section of the Washington Post remind us of how government actually works. First, on page B1 we learn that it pays to know the mayor:

D.C. Mayor Muriel E. Bowser has pitched her plan to create family homeless shelters in almost every ward of the city as an equitable way for the community to share the burden of caring for the neediest residents.

But records show that most of the private properties proposed as shelter sites are owned or at least partly controlled by major donors to the mayor. And experts have calculated that the city leases­ would increase the assessed value of those properties by as much as 10 times for that small group of landowners and developers.

Then on B5 an obituary for Martin O. Sabo, who was chairman of the House Budget Committee and a high-ranking member of the Appropriations Committee, reminds us of how federal tax dollars get allocated:

Politicians praised Mr. Sabo, a Norwegian Lutheran, for his understated manner and ability to deliver millions of dollars to the Twin Cities for road and housing projects, including the Hiawatha Avenue light-rail line and the Minneapolis Veterans Medical Center.

Gov. Mark Dayton (D) said Minnesota has important infrastructure projects because of Mr. Sabo’s senior position on the House Appropriations Committee.

We all know the civics book story of how laws get made. Congress itself explains the process to young people in slightly less catchy language than Schoolhouse Rock:

Little-Known Facts About U.S. Trade With China

Trade with China in ServicesWilliam Galston’s Wall Street Journal column, “Why Trade Critics Are Getting Traction,” asks why U.S. employment in manufacturing fell from 17.2 million in December 2000 to 12.3 million last year.    He suggests that “import penetration from China [not Mexico] has been responsible for up to 20% of U.S. job losses.” But “up to” 20% explains very little, and that figure is at the high end of a range of estimates about 1999-2011 from a working paper by David Autor, David Dorn and Gordon Hanson. They speculate that “had import competition not grown after 1999” then there would have been 10% more U.S. manufacturing jobs in 2011.  In that hypothetical sense, “direct import competition [would] amount to 10 percent of the realized job loss” from 1999 to 2011.  Since 2007, however, the study’s authors find “a marked slowdown in import expansion following the onset of the global financial crisis, which halted trade growth worldwide.”

Deep recession and weak recovery is what slashed manufacturing jobs since 2007, not imports. In reality, imports always fall in recessions.  Although Autor, Dorn and Hanson emphasize imports of consumer goods (clothing and furniture), nearly half of U.S. goods imports (47.7% last year) are industrial supplies and capital goods which are essential inputs into expanding U.S. production.  That is a big reason why imports rise when U.S. industry expands and fall in slumps.

Even if “up to” 20% of manufacturing jobs lost since 2007 could be blamed on imports from China, as Galston claims, that need not mean the overall numbers of U.S. jobs were reduced.  “There is no evidence,” writes Galston, “that increased competition from China has produced offsetting employment increases in other industries whose products are traded internationally [emphasis added].”  Confining overall employment effects to “traded goods,” as Autor, Dorn and Hanson do, arbitrarily excludes services – such as financial and legal services, accounting, advertising, travel, telecom and insurance.   Services account for 32% of U.S. exports, and the U.S. runs a large and growing trade surplus with China ($28 billion in 2014) and with the world ($233 billion). Dollars foreign firms earn by exporting goods to the U.S. are commonly used to import services from the U.S. or to invest in U.S. real and financial assets; both those activities create U.S. jobs. Hollywood, Madison Avenue and Wall Street are big, high-wage U.S. exporters.

Confining the job impact to traded goods also excludes U.S. jobs in transporting, wholesaling and retailing Chinese goods (Walmart, Amazon…), as well as shipping U.S. exports to China and Hong Kong.  Incidentally, the U.S. ran a $30.5 billion trade surplus with Hong Kong last year, which isn’t counted trade with China though it really is.

Galston acknowledges that “rising productivity” [output per worker] is “part of the story” about manufacturing jobs.  In fact, it is essentially the whole story from 1987 to 2007, when U.S. manufacturing output nearly doubled.  The deep recession and slow recovery explain what happened to manufacturing jobs over the past ten years, not foreign trade.  

Index of U.S. Manufacturing Output and Employment

Pfizer’s Inversion Is Good News for American Workers, American Consumers, and American Shareholders

I’m still capable of being shocked when other people make outlandish assertions.

Like the policy wonk who claimed that capitalism is actually coercion, even though free markets are based on voluntary exchange. Or the statist columnist who argued people aren’t free unless they’re entitled to other people’s money, even though that turns some people into unfree serfs.

Here’s another example of upside-down thinking. It deals with the “inversion” issue, which involves American-chartered companies choosing to redomicile overseas.

A column in the Huffington Post implies that Pfizer is some sort of economic traitor for making a sensible business decision to protect the interests of workers, consumers, and shareholders.

Pfizer…wants to turn its back on America by claiming to be an Irish company through an offshore merger, giving it access to Ireland’s low tax rates. The change would only be on paper. The company would still be run from the United States, enjoying all the benefits of being based in America—such as our taxpayer-supported roads, public colleges, and patent protections—without paying its part to support them.

There’s a remarkable level of inaccuracy in that short excerpt. Pfizer wouldn’t be claiming to be an Irish company. It would be an Irish company. And it would still pay tax to the IRS on all U.S.-source income. All that changes with an inversion is that the company no longer would have to pay tax to the IRS on non-U.S. income. Which is money the American government shouldn’t be taxing in the first place!