Democrats Push French Tax Plan

The House Democrats want to mitigate the impact of the alternative minimum tax on taxpayers with incomes of less than $250,000 by dramatically raising tax rates on entrepreneurs and investors. As the Wall Street Journal explains, the proposal would boost the top tax rate by 4.3 percentage points. But the plan conveniently neglects to extend the Bush tax cuts, and the editorial calculates that this will push to top rate to about 44 percent. And since the AMT will still exist for the so-called rich, marginal tax rates could reach 80 percent or more (and pity the entrepreneurs and investors who live in high-tax states such as California and New York). The proposal is a good recipe for making America less competitive. As fiscal policy, though, it is a disaster:

Tax rates are falling all over the globe – even in Sweden. The exception is the U.S. Congress, which is scrambling to find some way, any way, to raise them. Last week, Democrats on the House Ways and Means Committee released a draft of their tax plan that would raise the highest income tax rate by 4.3 percentage points to 39.3% immediately. And because the proposal doesn’t extend the Bush tax cuts, the highest income tax rate would rise to the neighborhood of 44% after 2010. This would lift the top federal income tax rate higher than it was even under Bill Clinton. And get this: For families with incomes between $250,000 and $500,000, the “marginal” tax rate paid on the next dollar of earned income could soar to 80%, or in some cases even above 100%. Why? Because when income rises above $250,000, some taxpayers would be kicked into the Alternative Minimum Tax – which means that they lose tens of thousands of dollars of write-offs for state and local tax deductions, marriage penalty relief, certain child credits, and so on. The value of the lost deductions can exceed the value of the extra income earned. So some Americans could pay more than $1 in taxes for every $1 they earn under the House tax plan. …The wealthiest 1% of Americans already pay more than one of every three income tax dollars into the Treasury. Under the Ways and Means proposal, the share of all income taxes paid by the top 1% would rise to nearly 40%. The top 2% would pay roughly as much as the bottom 98% of all taxpayers. …A 44% top marginal rate would reduce U.S. competitiveness by reducing the after-tax return on investment. Less investment means fewer jobs and lower wages.

Furman on Inequality

Following in my illustrious footsteps as an Economist.com guest blogger, Brookings senior fellow Jason Furman writes thusly of rising income inequality

According to the Congressional Budget Office’s income inequality data, the top 1 percent of households have seen their incomes go up by 7 percent and the bottom 80 percent have seen their income shares go down by 7 percent.  In total that is a $664 billion increase in inequality, representing $7,000 for each household in the bottom 80 percent and nearly $600,000 for each household in the top 1 percent.

That number motivates a Hamilton Project tax strategy paper co-authored by Larry Summers, Jason Bordoff and myself that is being released today.

It is far from obvious what has caused the change; in just the last month alone the National Bureau of Economic Research has released three working papers with divergent explanations:  a reduction in the bargaining power of workers, an increased reward for skills and worker productivity, and the destruction of good jobs by trade.

Regardless of the cause of rising inequality, lefties, utilitarians, Rawlsians and anyone with a deep-seated reverence for markets and the capitalist system should all be concerned.  As Alan Greenspan memorably stated, “income inequality is where the capitalist system is most vulnerable.  You can’t have the capitalist system if an increasing number of people think it is unjust.”

Well, I consider myself a sort of Rawlsian (a Rawlsekian!) with a deep-seated reverence for markets and the capitalist system. Should I be concerned? I agree with the sainted Greenspan that capitalism cannot survive a widespread conviction that it is unjust. And I agree that income inequality is one of those things that some thinkers like wheel out to try to convince us that capitalism is unjust, at least around the edges, in order to build popular support for such things as more steeply “progressive taxes combined with expanded benefits like health insurance,” like Furman wants. But I’m not so worried by rising income inequality as I am by Furman’s facile slide from income inequality numbers, which are meaningless by themselves, to the possibility of a crisis of legitimacy.

It is worth repeatedly and forcefully emphasizing that income inequality may or may not be symptomatic of injustice. The three hypotheses for rising inequality Furman mentions are perfectly consistent with advances in justice. And if they are generating income inequality, then it may vindicate capitalism. For example, the loss of jobs, a decrease in wages, or a decrease in bargaining power for some workers may be a consequence of lifting coercive restrictions on voluntary exchange across borders – restrictions that are themselves a form of injustice. Furman himself notes that protectionist policies could decrease inequality, though he advises against them, and rightly so, since they are unjust. But if protectionist policies are lifted, and inequality increases, that uptick in inequality is a side-effect of justice, not a symptom of injustice.

Inequality may reflect real injustice in our culture and institutions, and some portion of it probably does. But then our focus ought to be on rooting out those injustices, not papering them over with confiscatory redistribution which, in the absence of a reason to do it other than arbitrarily reducing measured inequality, is straightforwardly immoral.

Let’s set aside the matter of the intelligibility of “shares” of “national income” as a subject of justice for another time.  

Enemy Combatants

The Al-Marri ruling  (pdf) this week brings the “enemy combatant” controversy back into the news.  I addressed the Al-Marri case in this article (pdf) for the Cato Supreme Court Review (see pp. 37-39).  In the article, I set forth a legal framework for analyzing the competing claims of security and liberty.  I think factors such as citizenship and place of capture matter. 

President Bush advances the sweeping claim that the entire world, including every inch of U.S. territory is a “battlefield.” He then argues that the “battlefield” is no place for police officers, search warrants, trials, and judges.  There are no rights on the battlefield.  Bush is the commander-in-chief and he’ll decide who needs to be killed or locked up.  And his decisions are final.  No “second-guessing” by the Congress or the judiciary.

Despite his sinking poll numbers, Bush’s dangerous legal claims are alive and well.  This evening, Bush could have any American secretly arrested and put on a plane for incommunicado detention and interrogation at Guantanamo.  This is what a federal appellate court ruled in the Padilla case.  And just when it looked as if the Supreme Court was ready to overturn that case and declare Bush’s policy (at least with respect to citizens in the USA) illegal, the Bush administration suddenly moved Padilla from military custody to civilian custody where he is now on trial in Florida.  Bush’s lawyers told the Supreme Court that there was no longer any need to hear the case–since Padilla was no longer in military custody.  Unfortunately, the Supreme Court agreed.  By declining to hear Padilla’s appeal, the lower court precedent approving Bush’s sweeping legal claim was left in place.  If an American were to be sent to Guantanamo this evening, it would take several years of litigation before the Supreme Court would be ready to rule on the matter.  It is thus no exaggeration to say that right now the liberty of every American rests upon the grace of the White House.

Al-Marri’s case is about non-citizens imprisoned in military brigs inside the United States.  Al-Marri is a citizen of Qatar.  He entered the U.S. one day before the 9/11 attacks and the government says he is a terrorist and his mission was to engage in follow-on attacks here in the U.S.  He was initially arrested and charged with criminal offenses, but then he was declared an “enemy combatant” and was moved to a military brig.  He has been imprisoned in a South Carolina military prison for four years while his attorneys challenged the legality of his imprisonment.  This week a federal appeals court ruled that Al-Marri must be (1) deported; or (2) charged with a crime; or (3) released from custody.  The U.S. military cannot continue to keep him locked up.

This outcome creates  a weird situation in which an American can be held in military custody, but a legal immigrant cannot be.  I don’t agree with everything in the Al-Marri ruling, but it does reject Bush’s most sweeping claims about his power.  Excerpt: “To sanction such presidential authority to order the military to seize and indefinitely detain civilians, even if the President calls them ‘enemy combatants,’ would have disastrous consequences for the Constitution – and the country. … We refuse to recognize a claim to power that would so alter the constitutional foundations of our Republic.”

Mr. Bush’s lawyers say they plan to appeal the ruling.

For a complete report on the Bush administration’s constitutional record, read this.

“No, man. Danger is my MIDDLE name”

The thing about Austin “Danger” Powers is that he lived up to his middle name. The same can’t always be said for the American Enterprise Institute.

According to its website, “AEI’s purposes are to defend the principles and improve the institutions of American freedom and democratic capitalism–limited government, private enterprise, individual liberty and responsibility…”

But this idea of developing free enterprise solutions to public policy problems is entirely missing from AEI’s latest “Education Outlook” publication. The piece deals with the putatitvely competing goals of the No Child Left Behind act (raise achievement on the low end and reduce achievement gaps) and the American Competitiveness Initiative (pursue excellence in math and science achievement).

AEI’s Frederick Hess teamed up with Ed Sector’s Andrew Rotherham to write the piece, and they jointly concluded that:

Schools are meant to serve a staggeringly diverse population of students and a raft of competing needs. Buckling down somewhere will almost inevitably mean easing up elsewhere. The best we can hope for is an incremental, awkward stagger toward meeting a stew of public and private objectives.

The truth is that we cannot do everything. This means accepting disagreement and abandoning the tempting dream that we might reach consensus on what needs to be done if only good-hearted souls would examine the right data. It also means acknowledging that every policy decision will yield both winners and losers. What we need… is… honest and informed debate about whose needs take precedence at a given moment, what to do about it today, and what to leave for tomorrow.

The truth is that there is a system that does not require us to reach consensus on a single “right” way to improve achievement, and that can simultaneously improve achievement on the low end and stimulate excellence. It’s the free enterprise system, baby, and it’s your middle name.

Here’s a look at how market forces in education reduce achievement gaps, improve social outcomes, and improve overall achievement, replete with links to the full text of various studies.

And here’s a more technical look  [pdf] at the evidence on market versus non-market provision of education.

Education markets. They’re groovy baby. Yeah!

New at Cato Unbound: Has Globalization Changed the Game?

Fletcher School international politics hotshot and blogger extraordinaire Dan Drezner kicked off this month’s Cato Unbound last week with an essay drawing on his recent book, All Politics Is Global: Explaining International Regulatory Regimes, which argues that big nation-states still rule the roost and globalization has changed things less than you might think. 

In her reply to Drezner, Ann Florini, director of the Centre on Asia and Globalisation at the National University of Singapore and senior fellow at the Brookings Institution, disagrees that global governance remains dominated by a few great state powers. “We’re heading for a multi-polar system where very different kinds of states, at very different levels of development, will matter,” she argues.

Jeremy Rabkin – recently moved from Cornell to the George Mason School of Law – argues that the collapse of communism and the discrediting of socialism has led to a world in which “states now are so entangled in international regimes — because so entangled in international exchange.” He agrees with Drezner that the big states tend to dominate the process,  but non-state actors now often succeed in making marginal changes to policy (which add up) while the big powers are asleep at the wheel.  

And hot off the press today, UCLA’s Kal Raustiala maintains that we can learn something important about global governance by looking to the forces affecting domestic politics over the last century: powerful lobbyists and special interests did not emerge because the state was getting weaker. “The rise of interdependence and NGOs in American society didn’t signal the end of the state; it signaled the growth of the state.”

Who can get enough of the exciting evolution of international regulatory regimes? So stay tuned as Drezner kicks off the informal blog conversation Friday with a response to his critics.        

Another Government Shakedown

Politicians are agitating for a big tax hike on the private equity industry, but the motive for this talk may involve more than just a desire to have more money to spend. Holman Jenkins of the Wall Street Journal explains that politicians threaten an industry in order to extract campaign contributions. The column suggests this is what spurred the attack on the so-called junk-bond industry in the 1980s. Another good example would be the assaults on Microsoft and Intel. This does not mean politicians are like mobsters. Mobsters, after all, don’t add insult to injury by trying to rationalize their protection rackets as being for the public good:

Being a shrewd bunch, the private equity industry presumably has gotten the message: When vast new fountains of wealth open up in the economy, Congress must receive its ransom in campaign donations. Delivering the wagged finger were none other than Max Baucus and Charles Grassley, chairman and ranking member of the Senate Finance Committee, who’ve taken to musing aloud about how the tax code’s treatment of private equity’s lately fabulous profits might be revised. The bipartisan nature of the initiative should reassure readers that there’s no philosophical issue here. It’s purely bidness. You, private equity, have been remiss in your patriotic duty. Cough up. Anyone who recalls the junk bond wars of the 1980s will notice a pattern. Then too, Congress was awash in proposals for taxing the takeover industry: by eliminating the interest deduction for junk bond interest, by imposing an excise tax on assets acquired in a hostile takeover, etc. These ideas came to naught, not least because of the fright the proposals put into the stock market. But the endless debate unlimbered a delicious flow of campaign dollars from all concerned. …the message has been received. Private equity has now set up a Washington trade group and has opened its pockets to politicians, with Barack Obama being a special heartthrob. Oh, happy day for members of the House and Senate tax committees, who lived for years off the junk bond wars and now will live for years off the private equity plutocrats.

You’re Not the Boss of Me

A headline in the Los Angeles Times reads,

GOP senators getting visit from boss on immigration

And who is the boss of 49 Republican senators? Minority Leader Mitch McConnell? 50 million voters? No, the Times is referring to President Bush. Thankfully, the suggestion that the president is the “boss” of the Senate appears only in the headline, not in the text of the article. But even headline writers should remember that Congress is created by Article I of the Constitution, and the president by Article II.

The president is not the boss of the Congress. Nor is he the commander-in-chief of the United States, as Sen. John McCain has said. Small-r republicans need to keep reminding people that what Gene Healy calls “the bipartisan romance with the imperial presidency” is not rooted in the American system.