Topic: Tax and Budget Policy

The Pentagon as a Jobs Program, Cont…

Last week I discussed the tendency for policymakers to treat the Pentagon like a giant jobs program. It was prompted by an article from the Associated Press on members of Congress shoving unwanted upgraded Abrams tanks down taxpayers’ throats because retooling tanks sustains jobs back in the district. As it turns out, former Reagan budget director David Stockman touches on the Abrams tank situation in his new book, The Great Deformation. 

In Chapter 5, “Triumph of the Warfare State,” Stockman gives an account of the behind-the-scenes dealings that resulted in the massive military buildup during the Reagan administration. Stockman says political calculations—and not “one scintilla of bottoms-up program detail or even a single hour of professional analysis”—drove the new Reagan administration to champion 7 percent (real) growth in defense spending every year for five years (1982-1986), and from an already elevated level. According to Stockman, the “7 percent real growth top line” was a “blank check” for the Pentagon to go on a spending binge, much to the pleasure of the military-industrial complex. 

From p. 74: 

No fresh start or strategically coherent defense plan was ever developed by the Reagan administration. This immense, content-free “top line” was simply backfilled by the greatest stampede of Pentagon log-rolling and budget aggrandizement by the military-industrial complex ever recorded. 

In a process that went on week after week for the better part of a year, the huge swaths of empty budget space under the new defense “top line” were converted into more and more of virtually everything that inhabited the Pentagon’s vasty deep. Much of it, which had languished for years and decades on the wish lists of the brass and military contractors, now got funded without much ado. 

With defense funds being virtually slopped onto the waiting plates of the four military services, it is not surprising that much of it went to the conventional forces. Notwithstanding all the scary stories about the nascent Soviet nuclear first-strike capabilities, there really weren’t many concrete programs to counter it except for a new strategic bomber and an MX missile upgrade. 

At the heart of the Reagan defense buildup, therefore, was a great double shuffle. The war drums were sounding a strategic nuclear threat that virtually imperiled American civilization. Yet the money was actually being allocated to tanks, amphibious landing craft, close air support helicopters, and a vast conventional armada of ships and planes. 

These weapons were of little use in the existing nuclear standoff, but were well suited to imperialistic missions of invasion and occupation. Ironically, therefore, the Reagan defense buildup was justified by an Evil Empire that was rapidly fading but was eventually used to launch elective wars against an Axis of Evil which didn’t even exist. 

That leads to the Abrams tank. 

Farmers Starting to Resent Strings Attached to Subsidies

Earlier this week, farming and some conservation groups announced that they had come to a deal to link eligibility for crop insurance premium subsidies to compliance with conservation measures. In return, in one of the great sell-outs in modern times, the conservation groups agreed not to push for payment limits or means testing on farm subsidies.

But it seems that the new link between conservation and government support for crop insurance has angered the House Agriculture Committee Chairman, Frank Lucas. From the DTN Ag Policy Blog yesterday:

Lucas, a Republican from Oklahoma, told DTN off the House floor Wednesday that he has a philosophical problem with various lobby groups “tying strings to how farmers farm” and dictating terms to producers when the farm bill is supposed to be about raising food and fiber.

“My perspective has always been, very sincerely, if a farm bill is about raising food — and I know 80% of it now is about making sure people have enough to eat, helping them buy their food — but if it is about raising food, farmers should have the tools to raise the food and fiber,” Lucas said. “And if you engage in whole series of things, such as you can’t get crop insurance unless you plant in a certain way, on a certain day, in a certain direction, or you can’t access a variety of other programs, then we aren’t having a farm bill that helps farmers raise food and fiber, but we have a social tool here that’s used to direct how farmers use their lives and conduct their business.” [emphasis added]

You’ll excuse me if I am having trouble summoning much sympathy for your special interest friends, Mr Lucas. It’s just that I feel that having to accept inconvenient conditions should be expected when you suck at the government teat. The Farm Bill was designed as a social tool, and you and your colleagues over the years have added more “social tools” like food stamps, environmental programs and energy subsidies in order to secure sufficient votes for your pork. Complaining now that all these other people are ruining your party is, to say the least, a bit rich.

If farmers don’t want to be directed on “how [they] use their lives and conduct their business,” then I suggest they start sending their cheques back. Ending farm programs will truly Free the Farm.

Heritage Immigration Study and Government Spending

Conservative and libertarian scholars are clashing over the findings and political implications of the new Heritage Foundation immigration study. The study spans 92 pages and is jam-packed full of statistics and detailed calculations.

I’ll leave the immigration policy to my colleagues who are experts in that area. To me, the study provides a very useful exploration into how massive the American welfare state has become. Here are some highlights:

  • “There are over 80 of these [means-tested] programs which, at a cost of nearly $900 billion per year, provide cash, food, housing, medical, and other services to roughly 100 million low-income Americans.”
  • “The governmental system is highly redistributive … For example, in 2010, in the whole U.S. population, households with college-educated heads, on average, received $24,839 in government benefits while paying $54,089 in taxes … [and] households headed by persons without a high school degree, on average, received $46,582 in government benefits while paying only $11,469 in taxes.”
  • “Few lawmakers really understand the current size of government and the scope of redistribution. The fact that the average household gets $31,600 in government benefits each year is a shock.”

Total federal, state, and local government spending in 2010 was $5.4 trillion, or $44,932 per U.S. household. The figure of $31,600 in “benefits” is total spending less spending on public goods, interest, and government pensions.

A useful feature of the Heritage study is a breakdown of the $5.4 trillion in spending into six categories constructed by the authors. “Direct benefits” includes mainly Social Security and Medicare. “Pure public goods” includes programs such as defense and scientific research. “Population-based services” includes programs aimed at whole communities, such as police and highways. (Some of these also seem to be public goods). “Means-tested benefits” includes programs such as food stamps. Education includes both K-12 and college subsidies. “Interest and pensions” is the current costs of past spending, which includes servicing the debt and paying for government pensions. The chart shows spending in 2010.  

This spending breakdown is useful for thinking about the proper size of government. From a libertarian standpoint, governments ought to be spending only on public goods and population-based services, as a first cut. That would be $1.94 trillion, or just 36 percent of the current total of $5.4 trillion. As a percent of GDP in 2010, that would be spending of 14 percent, rather than current spending of 38 percent.

But some of the population-based services mentioned by the authors could be privatized, and spending on some of the public goods could be cut. So a good libertarian target might be less than 36 percent of current spending, or less than 14 percent of GDP.

The Heritage study is sparking a debate about what type of immigration reform the nation should have. But hopefully, it will also spur more discussion about the massive size of the American welfare state. Immigration is partly, or mainly, such a contentious issue because we have such a huge welfare state.

The study includes projections about how many trillions of dollars of government benefits will flow to immigrants and their children in the decades ahead. But conservatives and libertarians agree that we ought to cut trillions of dollars in benefits to immigrants and nonimmigrants alike.

So is there some common ground here? Can we work toward an immigration reform that cuts government dependency in general and downsizes the welfare state?

Washington Sport: Throwing Competitors under the Bus

One reason why Washington keeps getting bigger is that so many business people are willing to throw their competitors under the government bus. The Washington Post today describes how a major lobby group representing small banks cut a secret deal with Rep. Barney Frank to not oppose his big-government financial bill if it excluded small banks from regulations and shifted $1.5 billion in annual fees from them to the big banks.

We saw a similar jockeying of lobbyists with the Obamacare health bill, and we see it with legislation on the agenda right now. With the Internet tax bill before Congress (the Marketplace Fairness Act), giant Amazon has switched sides to support expanding online sales taxes, and thus throwing smaller retailers and consumers under the bus.

With corporate tax reform under discussion, all firms want a lower rate but some firms not targeted by base broadening seem willing to throw those that are under the bus. The problem is that some of the proposed base broadening is bad policy, so legislation could end up making road kill of economic growth.

What about the ethics of all this? It’s appalling to see how bad legislation like Dodd-Frank gets passed on the strength of special-interest payoffs. But lobbyists—such as the head of the small-bank association profiled by the Post—surely think that acting in the interests of their members is the ethical thing to do.

As for legislators, most of them probably think that you can’t make an omelette without cracking eggs. So while they may know that they are causing some damage, they also have warm feelings for the people they are helping—friends in the lobby groups they smooze with, other legislators they owe favors to, and businesses in their home districts. Furthermore, legislators can absolve any nagging ethical doubts they may have by demonizing the groups that the government is running over in legislation.

The problem is that when Washington acts to expand an already big government, it nearly always damages society overall. That’s because government legislation coerces people to take actions that they would not freely choose. Reducing freedom nearly always means reducing prosperity. So while Capitol Hill horse-trading may seem like a good sport, the end result is often more mandates and taxes enforced by police power. It is usually a zero-sum game, or much worse.

Private markets work on fundamentally different principles. The main one being that voluntary trade is mutually beneficial. If individuals and businesses are acting in an honest fashion and not trampling anyone’s rights, freedom of trade is a win-win for all involved. It generates value and leads to overall growth and prosperity in society.

So while the ethics of lobbyists is a concern, a more important problem in Washington is that too many legislators think they can solve society’s problems with mandates and taxes. Dirty Harry said “a man’s got to know his limitations.” And so do policymakers because their good intentions are not enough to overcome the inevitable damage caused by further expansions in government power.      

Huge Value-Added Tax Increases in Europe Show Why Washington Politicians Should Never Be Given a New Source of Tax Revenue

The most important, powerful, and relevant argument against the value-added tax in the short run is that we can balance the budget in just five years by capping spending so it grows at the rate of inflation, a very modest level of fiscal restraint.

The most important, powerful, and relevant argument against the value-added tax in the long run is that more than 100 percent of America’s long-term fiscal problem is too much spending.

So why even consider giving politicians a new source of revenue such as the VAT, particularly since this hidden form of national sales tax helped cause the European fiscal crisis by facilitating a bigger welfare state?*

And now Europeans are doubling down on that failed approach, thus confirming that politicians will rarely make necessary spending reforms if they think more revenue can be squeezed from taxpayers.

Here’s a chart taken from the recent European Commission report on taxation trends in the EU. As you can see, the average VAT rate in Europe has jumped by nearly 2 percentage points in just five years.

VAT EU Increase

As I explained last week, European politicians also have been increasing income tax rates, so taxpayers are getting punished when they earn their income and they’re getting punished when they spend their income.

Which helps to explain why much of Europe is suffering from economic stagnation. Given the perverse incentives created by redistributionist fiscal policy, it makes more sense to climb in the wagon of government dependency.

For more information, here’s my video that describes the VAT and explains why it’s a bad idea.

*The same thing is now happening in Japan.

P.S. I don’t know if you’ll want to laugh or cry, but the tax-free bureaucrats at the Organization for Economic Cooperation and Development actually argue that the VAT is good for jobs and growth.

Where Are the European Spending Cuts?

Paul Krugman recently tried to declare victory for Keynesian economics over so-called austerity, but all he really accomplished was to show that tax-financed government spending is bad for prosperity.

More specifically, he presented a decent case against the European-IMF version of “austerity,” which has produced big tax increases.

But what happens if nations adopt the libertarian approach, which means “austerity” is imposed on the government, rather than on taxpayers?

In the past, Krugman has also tried to argue that European nations have erred by cutting spending, but this has led to some embarrassing mistakes.

Now we have some additional evidence about the absence of spending austerity in Europe. A leading public finance economist from Ireland, Constantin Gurdgiev, reviewed the IMF data and had a hard time finding any spending cuts:

…in celebration of that great [May 1] socialist holiday, “In Spain, Portugal, Greece, Italy and France tens of thousands of people took to the streets to demand jobs and an end to years of belt-tightening”. Except, no one really asked them what did the mean by ‘belt-tightening’. …let’s check out expenditure side of Europe’s ‘savage austerity’ story… The picture hardly shows much of any ‘savage cuts’ anywhere in sight.

As seen in his chart, Constantin compared government spending burdens in 2012 to the average for the pre-recession period, thus allowing an accurate assessment of what’s happened to the size of the public sector over a multi-year period.

Austerity in Europe

Here are some of his conclusions from reviewing the data:

Of the three countries that experienced reductions in Government spending as % of GDP compared to the pre-crisis period, Germany posted a decline of 1.26 percentage points (from 46.261% of GDP average for 2003-2007 period to 45.005% for 2012), Malta posted a reduction of just 0.349 ppt and Sweden posted a reduction of 1.37 ppt.

No peripheral country - where protests are the loudest - or France et al have posted a reduction. In France, Government spending rose 3.44 ppt on pre-crisis level as % of GDP, in Greece by 4.76 ppt, in Ireland by 7.74 ppt, in Italy by 2.773 ppt, in Portugal by 0.562 ppt, and in Spain by 8.0 ppt.

Average Government spending in the sample in the pre-crisis period run at 44.36% of GDP and in 2012 this number was 48.05% of GDP. In other words: it went up, not down.

…All in, there is no ‘savage austerity’ in spending levels or as % of GDP.

I’ll add a few additional observations.

New European Data: When Tax Competition Is Weakened, Politicians Respond by Increasing Tax Rates

I often argue that we need to preserve tax competition and tax havens in order to limit the greed of the political class.

Without some sort of external constraint, they will over-tax and over-spend, creating the kind of downward economic spiral already happening in some European nations.

Speaking of which, new evidence from Europe bolsters my case.

Back in 2009, facing pressure from the big G-20 nations, all of the world’s major low-tax jurisdictions - even Switzerland - acquiesced to the notion that human rights laws protecting financial privacy no longer would apply to foreign investors.

In other words, high-tax governments now have much greater ability to track - and tax - flight capital.

So how have they responded since that time? Well, look at this chart from the European Union’s new report on taxation trends. Tax rates have begun to increase, reversing a very positive trend (which began with the Reagan and Thatcher tax cuts, though this chart only shows data since 1995).

Top EU Tax Rates