Topic: Tax and Budget Policy

Highway Bill: Fiscal Reform or Big Government?

If you are interested in financial markets, Cato has an interesting forum tomorrow on bank runs. But if you are more interested in highways and spending, you can catch me at this Heritage forum tomorrow on the Hill.  

Which Way for the Highway Bill: Fiscal Reform or Big Government?

Emily Goff, Heritage Foundation; Chris Edwards, Cato Institute; Ken Orski, Innovation NewsBriefs

Wednesday, June 4th, 2014 at 12:00p.m.

1310 Longworth House Office Building

I’m not sure which lunch forum will have the best sandwiches, but I do know that fiscal reform is the best direction for transportation policy.

Federal Employment by Department

We’ve learned about what a huge and dysfunctional agency Veterans Affairs is in recent weeks. I had not realized that the agency added 100,000 workers in just the past seven years.

How large is the VA compared to the rest of the federal bureaucracy? OPM publishes historical data here for the major departments, which I’ve summarized in the two figures below covering 1950 to 2012.

Figure 1: Splits total federal civilian (non-uniformed) employment into defense and nondefense. For nondefense, you can see the modest retrenchments under Reagan and Clinton, and you can see the expansions under Bush 1, Bush 2, and Obama.

Figure 2: Shows the breakdown by department, aside from defense. Veterans (blue line) is by far the largest nondefense department, with 69 percent more employees that second place Homeland Security (red line). One alarming trend is the rapid growth in Justice Department employment (black line), which has doubled since the late-1980s to 117,000 workers.

Data notes: For some departments created since 1950, such as Homeland, it looks like OPM extrapolated the time series backwards based on the original component agencies of the new department. For Transportation on the other hand, it looks like OPM represented employment as zero before it was created. I did one tweak to the OPM data, which was moving TSA from Transportation to DHS for 2002. 

VA Scandal: Crisis of Big Government

Peggy Noonan’s op-ed on the weekend was titled “The VA Scandal Is a Crisis of Leadership.” Noonan discusses how President Obama “doesn’t do the plodding, unshowy, unromantic work of making government work.” Obama is not a good manager, and so scandals like the current one are to be expected.

I enjoy Noonan’s articles and her observations on Obama’s style are right on target, but her view about why the VA scandal happened is off the mark. The president does seem to spend his time giving speeches, strategizing politics, and playing golf rather than rolling up his shirt sleeves and fixing programs. He does seem to be “a show horse, not a workhorse,” as Noonan says. But that’s not why the VA scandal happened.

The VA situation is appalling, but it has common elements with scandals that happen under every president. Those elements include bureaucrats behaving selfishly, politicians promising reforms and not following through, federal workforce dysfunction, and the failed central planning of a complex industry. The VA scandal happened because the government is a giant monopoly with none of the built-in checks of the marketplace. Federal politicians themselves are not a check because they are too distracted and the government is far too large for them to keep track of.

Noonan says, “the president is an executive, and executives manage.” Really? He could efficiently manage the entire $3.5 trillion government and its 2.1 million workers and 2,200 programs? I doubt it. I think we could vote in the head of PWC as the next president, and we would still have scandal after scandal in Washington.

Noonan worked in the Reagan administration, and so she remembers the 1980’s HUD scandal. The shenanigans, waste, and bad behavior under Reagan’s HUD secretary Sam Pierce over eight years were jaw-dropping. HUD under Pierce was a cronyism factory for the secretary’s buddies and Republican donors. Tad DeHaven discusses the abuses in this essay.

Perhaps Ronald Reagan should have been a better manager. But he understood that the problem in Washington is far deeper than just a need to run things better, as many of his famous comments reveal:

Government is not a solution to our problem, government is the problem.”

No government ever voluntarily reduces itself in size. So governments’ programs, once launched, never disappear. Actually, a government bureau is the nearest thing to eternal life we’ll ever see on this earth.”

The nine most terrifying words in the English language are: I’m from the government and I’m here to help.”

Walking to School? Yeah, There’s a Federal Program for That

The Associated Press reports:

For a growing number of children in Rhode Island, Iowa and other states, the school day starts and ends in the same way — they walk with their classmates and an adult volunteer to and from school. Walking school buses are catching on in school districts nationwide because they are seen as a way to fight childhood obesity, improve attendance rates and ensure that kids get to school safely….

Many programs across the country are funded by the federal Safe Routes to School program, which pays for infrastructure improvements and initiatives to enable children to walk and bike to school.

 

Corporate Taxes: Less Is More

Why does the Canadian federal government collect 1.9 percent of GDP in revenues with a 15 percent corporate tax rate, while the U.S. federal government only collects about the same (2.0 percent) with a 35 percent corporate tax rate?

One reason is that a low corporate tax rate induces higher real investment and economic growth, which in turn generates higher government revenues.

Another reason is profit shifting by multinational corporations. Over time, paper profits are steadily shifted out of countries (such as the United States) that have unfavorable tax rates and tax rules. The (now abandoned) plan for American Pfizer to merge into British AstraZeneca to save $1 billion a year on taxes was one illustration of how tax based migration works.

This May 5 story in Tax Notes International (subscription required) provides another illustration from the pharmaceutical industry:

The combined entity resulting from the proposed acquisition of U.S.-based Allergan Inc. by Valeant Pharmaceuticals would have an effective tax rate in the single digits, around 20 percentage points lower than Allergan’s current rate, according to Valeant CEO J. Michael Pearson.

Quebec-based serial acquirer Valeant on April 22 announced an offer of close to $46 billion in cash and stock in its bid for competitor Allergan, the company behind Botox. The acquisition would make Valeant the second largest company in eye health globally, ahead of Johnson & Johnson and behind Alcon.

Valeant has partnered with Allergan’s largest shareholder, Pershing Square Capital Management, led by CEO William Ackman, to solicit support for the deal from Allergan shareholders.

Ackman said he has spent time familiarizing himself with the sustainability of Valeant’s tax structure. “The company has the benefit of being based in Canada; there are some unique attributes of the Canadian tax system,” he said during an April 22 presentation to investors led by Valeant’s management team. High on the list of selling points are tax synergies that would result from the deal. The combined company would have a high single-digit cash tax rate, Pearson said, adding, “and those of you who know us know what we’re able to do there.”

Pearson may have been alluding to tax savings Valeant has achieved in the past using strategic deal structures and intellectual property migration.

Valeant, which began as a New Jersey company with an effective tax rate in the mid-30 percent range, merged with Canadian pharmaceutical company Biovail Corp. in a 2010 inversion that resulted in a combined company domiciled in Canada with offshore IP and a worldwide effective tax rate of about 5 percent. Last year Valeant bought New York-based Bausch & Lomb for around $8.7 billion cash and promptly integrated the U.S. company into Valeant’s decentralized model.

During the April 22 presentation, Valeant CFO Howard Schiller confirmed that the Allergan acquisition plan would be business as usual on the tax front: Allergan would be integrated into Valeant’s corporate structure in much the same way as Bausch & Lomb, with the new company based in Canada.

“We’ll use an installment sale approach to migrate our IP to our Irish subsidiary and, just like in Bausch & Lomb, we expect to get immediate synergies in that regard,” Schiller said, adding, “and we will have a high single-digit tax rate for the foreseeable future.”

The tax projection comes from five- to six-year models and should be welcome news to shareholders of Allergan, which expects an effective tax rate for 2014 of between 26 and 27 percent.

But Valeant is sensitive to those who might see the new effective rate as high, compared with the company’s typical low single-digit rates. “There are things that we’re looking at that we could possibly do to improve that,” Schiller said. “Over time, if we bought assets outside the U.S., which, given our footprint we’re likely to do, that would create opportunities.”

Talking Taxes with Rep. Ralph Hall

Rep. Ralph Hall is in the news for losing to a primary challenger in his Texas district. I first met 91-year-old Hall just last week as we were on a Capitol Hill panel together organized by the Texas Association of Business (TAB). In the photo, that’s Hall to my right and Rep. Kevin Brady and TAB head Bill Hammond on my left. (Photo credit: Office of Rep. Hall).

One thing we discussed was how tax reform has stalled because the two parties see “reform” so differently. Rep. Brady noted that the Democrats keep insisting on tax increases as part of any tax reform. I noted that the Democrats have moved so far to left on economics in recent years that it makes 1986-style tax reform very difficult to achieve.

The 1986 Tax Reform Act was a major bipartisan success, with Democratic leaders such as Dick Gephardt and Bill Bradley playing key roles. This 1985 article in Cato Journal by Gephardt reads almost like it could have been written by a Cato scholar, so you can see how the tax deal was possible.

The gulf between that article by a leading Democrat in the 1980s and the relentless drive today by the Obama administration to raise taxes in the most anti-growth of ways is huge. I discussed Democratic tax policy then and now in this op-ed.

Rep. Hall himself reflects the changing party ideologies. He had been a Democrat for decades and always considered himself to be a conservative. But a decade ago he finally switched parties to better line up his beliefs with his affiliation. His loss to a Republican challenger apparently stemmed from the desire to see a fresh face in the district. And yet, when it comes to fresh faces, I sure hope I look as good as Hall does at 91.

Veterans Affairs in the Federal Budget

The Department of Veterans Affairs (VA) is the fifth largest agency measured by spending. Looking at estimated outlays for 2014, VA spending of $151 billion comes in behind the Department of Health and Human Services at $958 billion, the Social Security Administration at $914 billion, the Department of Defense at $593 billion, and the Department of Treasury (mainly interest costs) at $469 billion. See Table 4.1.

Figure 1 below shows that VA spending has tripled since 2000. Figure 2 shows the breakdown of VA spending by function. Interestingly, the largest function is not hospital and medical care, but income security. Within income security, the largest item is compensation paid to veterans for disabilities incurred in, or aggravated during, active military service. (Figure 2 based on calculations from database here).

The Obama administration’s most recent budget summary for the VA is here. It promises “high quality and timely health care services” and “improvements in efficiency and responsiveness.”

The Obama budget also notes: “The Nation has a solemn obligation to take care of its veterans and to honor them for their service and sacrifice on behalf of the United States.”

VA Spending

VA Spending Outlays

Further VA budget details are here and here.