Topic: Tax and Budget Policy

In the Federal Workforce Every Employee Is Above Average

A new report from the Government Accountability Office finds that virtually every one of the 1.2 million employees in their study received a rating at or above “fully successful,” compared to only 0.1 percent who were deemed “unacceptable,” which might be surprising given the scandals that have rocked multiple agencies in recent years and the fact that these employees are people, prone to making mistakes or every day struggles like everyone else. Milton Friedman once asked “where in the world you find these angels who are going to organize society for us?” If these performance ratings are to be believed, they’re already in the federal workforce, which might surprise anyone who has followed the developments at the VA or TSA. The extremely skewed distribution of ratings highlighted in the report highlight the shortcomings of the current evaluation system, which makes it harder to actually address any real problems with the performance of federal employees.

Distribution of Performance Ratings, 2013

 

Source: GAO

Note: Ratings for permanent, non-senior executive service employees.

The authors of the report used data from the Office of Personnel Management to analyze performance ratings for permanent, non-Senior Executive Service employees who received a rating for fiscal year 2014. While there are some exclusions, like the U.S. Postal Service and intelligence agencies, the 24 agencies included “are generally the largest federal agencies and account for more than 98 percent of the federal workforce.” According to the ratings, not only are there virtually no underperforming employees, but many of them go above and beyond the call of duty: 27.4 percent were rated as “exceeds fully successful” and a remarkable 33.1 percent received the highest rating of “outstanding.” While agencies use ratings systems with different numbers of levels, the pattern remains the same: almost every employee rates as “fully successful” or above, with roughly 0.1 percent rating as “unacceptable.”

Things are even rosier when breaking the ratings down by occupational category. The clerical group, which accounts for 4.2 percent of these workers, is the only one of six occupational categories where more than one percent of workers received either an “unacceptable” or “minimally successful” rating. According to the feedback from the ratings systems, coming across a less than stellar federal worker in the administrative, professional, or technical fields is like finding a needle in a haystack. These federal workers are people, fallible like anyone else, so a distribution so heavily skewed towards positive ratings makes the system less credible.

Distribution of Performance Ratings by Occupational Category, 2013

Source: GAO

Note: Ratings for permanent, non-senior executive service employees.

The performance feedback is even more skewed towards stellar when the authors look at workers in higher grades of the General Schedule. Roughly 78 percent of workers in the highest group received one of the top two ratings, compared to 0.4 percent who received anything less than “fully successful.” 

Distribution of Performance Ratings by GS Group, 2013

Source: GAO

Note: Ratings for permanent, non-senior executive service employees.

The authors delve into some of the difficulties in trying to normalize the ratings system from a situation where nearly everyone is a top performer: “[a] cultural shift might be needed among agencies and employees to acknowledge that a rating of ‘fully successful’ is already a high bar and should be valued and regarded and that ‘outstanding’ is a difficult level to achieve.” When more than a third of the covered federal employees, and roughly 46 percent of higher level GS employees received this “outstanding” rating, the system loses much of its value. At this point, the ratings have more in common with the participation trophies found in little league than a meaningful feedback system to address shortcomings and improve performance. In one sense, taxpayers aren’t the only ones done a disservice by this poorly functioning system, as more competent federal workers are indistinguishable from their less able peers, and promotions cease to be based on things related to actual job performance. Having a functional evaluations system is even more important outside of the private sector, where market forces convey valuable information about which methods and employees are successful through profits and losses. As my colleague Chris Edwards has explained, the absence of these market mechanisms one of the reasons for the failures in federal bureaucracy.

As this report notes, the “transparency and credibility of the performance management process is enhanced when meaningful performance distinctions are made.” Given the government’s problems with transparency and credibility in so many other spheres, is it any surprise that the performance evaluation system struggles with the same issues? Until these agencies are able to address this “long-standing challenge,” it seems we’ll just have to take their word for it that virtually every one of these federal employees is above average, and hundreds of thousands are “outstanding.”

 

Much Higher Tax Rates in 2013 Left Top 1% Taxes About the Same

Top Tax Rate and Taxes Paid

A timely new blog post from the Tax Foundation points out that, “taxes on the rich are much higher than they’ve been in recent years. Between 2008 and 2012, the top 1 percent of households paid an average tax rate of 28.8 percent. However, in 2013, this figure spiked to 34.0 percent, as a result of tax increases in the “fiscal cliff” deal and the Affordable Care Act”.

“Readers should check out the new CBO report,” the authors suggest, “and reflect for themselves about whether or not high-income Americans are now paying their fair share of taxes.”

The trouble is that the tax rate alone can’t tell us how much the Top 1% paid in taxes: To know how much taxes were paid by the Top 1% requires knowing how much income they reported to the IRS.  The reason this matters is that there is ample evidence that the “elasticity of taxable income” is very high among top taxpayers, which simply means they find ways to report less income if marginal tax rates go up.  This doesn’t require lawyers or loopholes: Avoid capital gains tax by not selling assets and/or shifting into exempt assets (housing up to $500k); avoid the dividend tax by holding tax-exempt bonds; defer personal tax on business income by retaining earnings within a C-corporation; avoid punitive tax rates on second earners by becoming a one-earner household; retire early, etc.

Looking at the same thing from a different angle, the graph shows that average taxes actually paid by the Top 1% grew rapidly after the tax rate on capital gains was cut from 28 percent to 20 percent in 1997. Taxes paid by the Top 1% grew even more rapidly after 2003 when the tax rate on capital gains and dividends was further reduced to 15 percent and the top tax on salaries and unincorporated businesses was cut from 39.6 percent to 35 percent.  If you want the rich to pay more taxes, cut their tax rates.  

As it turns out, 2013 showed that we can’t just assume higher tax rates mean docile taxpayers will simply write bigger checks to the U.S. Treasury. On the contrary, when the average tax rate on the Top 1% increased by 18.4 percent in 2013, the amount of income reported by the Top 1% fell by 15.4 percent – from $1,856,000 in 2012 to $1,571,600. The net effect was almost a wash, in terms of taxes actually paid. According to the CBO, average federal taxes paid by the Top 1% were $530,128 in 2013 –virtually unchanged from $529,056 in 2012. 

Presidential candidates Bernie Sanders and Hillary Clinton propose even more increases in top tax rates on income and capital gains (to 54.2 percent with Sanders, 43.6 percent with Clinton), ostensibly to finance their lavish government spending plans.  But even a relatively small dose of this same poison failed to raise significant revenue from the Top 1% in 2013, partly because of the drag on the overall economy from reduced incomes and incentives. 

Is Defending Tax Competition Akin to “Trading with the Enemy”?

When I was younger, my left-wing friends said conservatives unfairly attacked them for being unpatriotic and anti-American simply because they disagreed on how to deal with the Soviet Union.

Now the shoe is on the other foot.

Last decade, a Treasury Department official accused me of being disloyal to America because I defended the fiscal sovereignty of low-tax jurisdictions.

And just today, in a story in the Washington Post about the Center for Freedom and Prosperity (I’m Chairman of the Center’s Board of Directors), former Senator Carl Levin has accused me and others of “trading with the enemy” because of our work to protect and promote tax competition.

Here’s the relevant passage.

Former senator Carl Levin (D-Mich.)…said in a recent interview that the center’s activities run counter to America’s values and undermine the nation’s ability to raise revenue. “It’s like trading with the enemy,” said Levin, whose staff on a powerful panel investigating tax havens regularly faced public challenges from the center. “I consider tax havens the enemy. They’re the enemy of American taxpayers and the things we try to do with our revenues — infrastructure, roads, bridges, education, defense. They help to starve us of resources that we need for all the things we do. And this center is out there helping them to accomplish that.”

Before even getting into the issue of tax competition and tax havens and whether it’s disloyal to want limits on the power of governments, I can’t resist addressing the “starve us of resources” comment by Levin.

Our Corrupt Navy

The Glenn Defense Marine scandal has exposed “a staggering degree of corruption within the Navy,” concludes a Washington Post investigation.

A more accurate title for this blog might have been “Our Corrupt 7th Fleet,” but the ease with which one foreign contractor infiltrated and ripped off the Navy in the Pacific makes one wonder about the integrity and strength of the broader institution. It is surprising that Navy officers with so much training and experience fell prey to the simple flattery, bribes, and other low-tech tools of a Singapore-based huckster.

For more than a decade, the head of Glenn Defense, Leonard Glenn Francis, cozied up to Navy leaders to win lucrative contracts to refuel and resupply ships. At the same time, he was gathering internal Navy procurement information and other intelligence. To do so, he wined and dined Navy officers, and provided them with gifts, prostitutes, and other favors to get them to do his bidding.

If this nobody, who had no military background, could wrap so many Navy leaders around his finger with little more than charisma, there is a huge institutional problem here. What about our other military and intelligence services and agencies—are they just as easy for hucksters, let alone expert foreign spy services, to penetrate?

You should read the full Post story. The revelations are disgusting and pathetic. I assume the Navy puts a huge effort into training, protocols, security, and technology to ensure that we have the most effective fighting force possible. Yet all of that was so easily undermined in such old-fashioned ways. I don’t get it.

To the Navy’s credit, it was their internal investigation that eventually exposed the corruption. And the Post story indicates that there were some officers who wouldn’t go along with the sleaze.

Francis was captured and pled guilty to various crimes. Four Navy officers, an enlisted sailor, and a Navy investigator have pled guilty to crimes. Last Friday three more officers were charged with corruption-related offenses. Investigations are ongoing, and dozens of other Navy officials are under scrutiny.

Here are some of the highlights from the Post story about one of the worst national security breaches in years:

Leonard Glenn Francis was legendary on the high seas for his charm and his appetite for excess. For years, the Singapore-based businessman had showered Navy officers with gifts, epicurean dinners, prostitutes and, if necessary, cash bribes so they would look the other way while he swindled the Navy to refuel and resupply its ships.

Much more than a contracting scandal, the investigation has revealed how Francis seduced the Navy’s storied 7th Fleet, long a proving ground for admirals given its strategic role in patrolling the Pacific and Indian oceans.

In perhaps the worst national-security breach of its kind to hit the Navy since the end of the Cold War, Francis doled out sex and money to a shocking number of people in uniform who fed him classified material about U.S. warship and submarine movements. Some also leaked him confidential contracting information and even files about active law enforcement investigations into his company.

He exploited the intelligence for illicit profit, brazenly ordering his moles to redirect aircraft carriers to ports he controlled in Southeast Asia so he could more easily bilk the Navy for fuel, tugboats, barges, food, water and sewage removal.

Over at least a decade, according to documents filed by prosecutors, Glenn Defense ripped off the Navy with little fear of getting caught because Francis had so thoroughly infiltrated the ranks.

The company forged invoices, falsified quotes and ran kickback schemes. It created ghost subcontractors and fake port authorities to fool the Navy into paying for services it never received.

The investigation has mushroomed partly because Glenn Defense was a pillar of U.S. maritime operations for a quarter-century. The 7th Fleet depended on the firm more than any other to refuel and resupply its vessels.

Over time, Francis became so skilled at cultivating Navy informants that it was a challenge to juggle them all. On a near-daily basis, they pelted him with demands for money, prostitutes, hotel rooms and plane tickets.

“The Soviets couldn’t have penetrated us better than Leonard Francis,” said a retired Navy officer who worked closely with Francis and spoke on the condition of anonymity to avoid reprisal. “He’s got people skills that are off the scale. He can hook you so fast that you don’t see it coming. . . . At one time he had infiltrated the entire leadership line. The KGB could not have done what he did.”

Lesson from Cyprus: Spending Restraint Is the Pro-Growth Way to Solve a Fiscal Crisis

Much of my work on fiscal policy is focused on educating audiences about the long-run benefits of small government and modest taxation.

But what about the short-run issue of how to deal with a fiscal crisis? I have periodically weighed in on this topic, citing research from places like the European Central Bank and International Monetary Fund to show that spending restraint is the right approach.

And I’ve also highlighted the success of the Baltic nations, all of which responded to the recent crisis with genuine spending cuts (and I very much enjoyed exposing Paul Krugman’s erroneous attack on Estonia).

Today, let’s look at Cyprus. That Mediterranean nation got in trouble because of an unsustainable long-run increase in the burden of government spending. Combined with the fallout caused by an insolvent banking system, Cyprus suffered a deep crisis earlier this decade.

Unlike many other European nations, however, Cyprus decided to deal with its over-spending problem by tightening belts in the public sector rather than the private sector.

This approach has been very successful according to a report from the Associated Press.

…emerging from a three-year, multi-billion euro rescue program, Cyprus boasts one of the highest economic growth rates among the 19 Eurozone countries — an annual rate of 2.7 percent in the first quarter. Finance Minister Harris Georgiades says Cyprus turned its economy around by aggressively slashing costs but also by avoiding piling on new taxes that would weigh ordinary folks down and put a serious damper on growth. “We didn’t raise taxes that would burden an already strained economy,” he told The Associated Press in an interview. “We found spending cuts that weren’t detrimental to economic activity.”

Issa on the TSA: Privatize It

Rep. Darrell Issa proposes Cato-style aviation reforms in a CNN op-ed today. The congressman does an excellent job laying out problems with the Transportation Security Administration (TSA) and arguing that privatized screening would increase both efficiency and security.

Here are some excerpts:

These firestorms online and in the media [regarding security lines] have brought new attention to our broken airport security system, a problem that has been slowly growing for years. But if we really “hate the wait” and want to fix it, the solution couldn’t be any simpler: let’s get the TSA out of the airport screening business altogether.

The idea of privatizing airport security isn’t a new one. Look no further than Canada and almost every single European country, which all use private airport screeners.

Last year, an internal investigation revealed that undercover agents were able to sneak mock explosives or banned weapons through the agency’s security checkpoints a whopping 95% of the time.

A number of case studies show that private screeners are not only more efficient at their jobs, allowing them to screen more passengers in less time, but are also better at detecting threats.

Under the TSA’s “Screening Partnership Program,” 22 airports have been allowed to contract with private companies to administer airport screening operations. Numerous studies of those programs … offer ample evidence that private security screeners are much better able to detect dangerous objects, including explosives and weapons, than their government-employed counterparts.

Private screeners are also shown to process passengers more efficiently, too, meaning faster-moving lines and more taxpayer savings.

For more on privatizing the TSA, see here and here.

Cato Fiscal Grades: Gary Johnson and William Weld

For November, voters turned off by Trump and Clinton may be interested in the likely Libertarian Party ticket of Gary Johnson and William Weld. Johnson is a former governor of New Mexico (1995-2003), and Weld is a former governor of Massachusetts (1991-1997).

David Boaz gives an overview of their records, noting that both governors scored well on Cato’s fiscal report cards. Since 1992, the report cards have examined the tax and spending records of the nation’s governors every two years.  

Cato report cards are here. The best governors get an “A” and the worst get an “F.” The reports covering Johnson and Weld were written by Steve Moore and various coauthors.