The Future of the GOP?

Tuesday night’s CNBC/MSNBC Republican candidate debate showed those of us who still value limited government the extent of the GOP rebuilding process to date — a preview of what Republicans would stand for in a post-Bush world.

The top-tier candidates avoided the crass populism some of the second-tier candidates favor and defended free trade instead. It also seems that the candidates have at least learned something from the electoral trouncing last year since each of them ran screaming from the wreckage that is the GOP spending record of the past six years.

Yet each candidate seemed unwilling or unable to enunciate a coherent view of what the role of government should be in a free society. The support for free trade was saddled with an incongruous quest for an unachievable and nebulous “energy independence.” The promises to “control” health care costs were mostly uninfluenced by the notion that it was government meddling that caused the problems in the first place. Even a tepid endorsement of a private-account solution to the impending bankruptcy of Medicare and Social Security was nowhere to be heard.

Some limited-government conservatives might have been slightly reassured by the look of the GOP future on Tuesday, but I’m sure many were left wanting, too.

[A version of this post originally appeared in a National Review Online symposium today.]

Overtreated

My review of Shannon Brownlee’s new book says,

The point is that getting the advantages of McMedicine may not be a matter of sheer collective will, as Brownlee would have it. Instead, it might require radical deregulation of medical licensure and practice regulations.

I like the fact that her book often inverts the usual story of villains and victims in health care. For example, lawyers and doctors who fight insurance companies for approval of a desperate cancer therapy turn out to be wrong.

Tim Carney on SCHIP’s Bootleggers

Amid the debate over the State Children’s Health Insurance Program, author and Washington Examiner columnist Tim Carney asks the question, “Does SCHIP insure kids or subsidize savvy HMOs?”:

[W]hile Democrats are dragging children to the White House for photo ops, as if the children are the primary constituency of this bill, federal lobbying records tell a different tale.

Lobbying records from the first half of 2007 show that the health care industry spent more than $227 million lobbying Washington. Congressional Quarterly Healthbeat News reported last month: “What’s behind health care lobbyists’ spending frenzy? Most signs point to … SCHIP.”

Sure enough, the biggest lobbyists in the industry all support the Democratic bill. America’s Health Insurance Plans (AHIP), the trade association for HMOs, supports the bill, as do its biggest members, such as Blue Cross Blue Shield.

The Pharmaceutical Research and Manufacturing Association (PhRMA), one of Washington’s most powerful lobbyists, is also behind the bill. So is the American Medical Association.

Because the details of any substantial bill or regulation will be complex, the mainstream media will always portray the debate as a battle between the interested parties. In this case, the official storyline is that it’s poor children against a president overly concerned about the boogie man “government-run health care.”

But poor children don’t have clout on Capitol Hill. They’re not the reason this bill got 68 votes in the Senate and 265 votes in the House.

It’s got to be nice [for] the Democrats now. You get to do a favor for the HMOs, and everyone’s convinced it’s “for the children.”

I include the nation’s governors – who are always in favor of more federal money – in the bootleggers category.

Kudos to Tim Carney for reporting what less-rigorous reporters will not. (Why, oh, why can’t we have a better press corps?)

CAFTA Survives U.S. Meddling

Costa Rica’s voting public wants to join CAFTA. This comes despite last-minute efforts by leading U.S. Democrats to dissuade Costa Ricans from voting to support the national referendum.

Worse, these particular lawmakers showed an alarming cynicism in attempting to convince Costa Ricans to reject CAFTA.

For example, Sen. Bernie Sanders and Rep. Michael Michaud recently traveled to Costa Rica for press conference with Ottón Solís, a former presidential candidate who opposes CAFTA. Their message was that Costa Ricans had nothing to fear by rejecting CAFTA, since, according to them, the country would continue to enjoy duty-free access to the American market under the Caribbean Basin Initiative (CBI).  However, as a congressman in 2000, Sanders voted against CBTPA, an extension of the CBI that allows duty-free access to Costa Rican textiles and tuna . This program expires next year.

More recently, Nancy Pelosi and Harry Reid sent a letter to Costa Rica’s ambassador in Washington reaffirming Sanders’ message: Costa Ricans can safely reject CAFTA and continue to enjoy trade preferences to the U.S market. Guess what? Reid also voted against the CBTPA in 2000.

Reid and Sanders were later joined by Sen. Sherrod Brown, who gave a highly-publicized speech in the Senate floor in solidarity with Costa Rican naysayers. Brown himself was a naysayer to the CBTPA when he was in the House of Representatives in 2000.

This is the cynicism of protectionism at its best: Profess concern for Costa Rican workers after consistently opposing previous efforts to ease trade restrictions with the country. A majority of Costa Ricans voters didn’t buy the story and supported CAFTA.

Still, with these kinds of friends, who needs enemies?

Taxes, Trade and the “Level Playing Field”

Almost every nation has a value-added tax (VAT), which is a type of national sales tax that is imposed at each stage of the production process. Indeed, the United States is the only developed nation without a VAT. But this is a good thing. It is no coincidence that the burden of government in America is smaller than it is in almost every other industrialized country. Simply stated, VATs are “money machines” for big government.

Not surprisingly, this is why many politicians in Washington would love a VAT. But what is surprising is that some otherwise sensible people are sympathetic to a VAT because they think it will help exports. They point out, quite correctly, that the World Trade Organization allows governments to provide rebates for value-added taxes on exports (a practice known as border adjustability). But they are wrong when they argue that this boosts exports and creates a trade advantage.

Regarding the first point, it is downright silly to argue that imposing a VAT - and then creating an export exemption - will boost exports. At the risk of stating the obvious, the export exemption cancels the tax, so the price of American products sold outside US borders would not change.

It is also misguided to claim that a border-adjustable VAT gives other nations some sort of trade advantage. Under current law, all goods sold in America, whether made in America or made in Europe, are sold without a VAT. Likewise, all goods sold in Europe, whether made in America or made in Europe, are sold with a VAT. How much more level can the playing field get? This is not just a debate for navel-gazing academics and lint-covered policy wonks. As reported by the Wall Street Journal, some Republican presidential candidates (or at least their advisers) are focused on “border adjustability.”

Mr. Thompson’s aides outline a change to the tax code that would move away from taxing income or profits and shift toward a system that would reduce taxes on exports when they cross the border and impose them on imports when they enter the country. Under international rules, the European value-added tax, a kind of sales tax, is waived for exports, but those rules block the U.S. from reducing corporate-profit taxes for exporters. “The best thing to do would be to have the [World Trade Organization] change its rules to level the playing field, and that should be the first step. If that fails then we should play by the same game that everyone else plays,” said Lawrence Lindsey, Mr. Thompson’s economic adviser and former director of the National Economic Council for President Bush.

The key question, of course, is whether focusing on the unimportant issue of border adjustability leads to good policy or bad policy. Senator Thompson has made some positive noises about a wholesale replacement of our current anti-growth tax system with a consumption-base tax system like a flat tax or national sales tax. That would be great news, and it would be great news even if border adjustability led the candidate to choose a sales tax over the flat tax. What matters is not border adjustability, but that we would be getting rid of the many warts in the current tax system. But if a myopic fixation on border adjustability led a candidate to propose a VAT or other form of national sales tax without fully (and permanently) eliminating the income tax, then politicians would have an additional source of money to waste and America would be at grave risk of becoming an uncompetitive, European-style welfare state.

Tax Shares for Rich and Poor

The Tax Foundation provides a nice summary of the latest Internal Revenue Service income tax data here.

Pundits are always interested in tax data for particular income groups. For example, they want to know whether Bush has favored the highest-income 1% of taxpayers.

A good way to find out is to look at average tax rates over time. By “average tax rates” I mean total federal income taxes divided by adjusted gross income. The following figure shows average tax rates for six income groups in 1990, 2000, and 2005. 

The income groups refer to percentiles of tax filers ranked from those with the highest AGI to those with the lowest AGI. The figure shows the highest-income groups on the left and the lowest-income groups on the right.

1990 was before the Clinton tax increases of 1993. 2000 was after the modest tax cuts of 1997, but before the Bush tax cuts of 2001. 2005 was with the Bush tax cuts in place. 

Observations

Tax rates on those with high incomes are far greater than for other Americans. Folks at the top pay about 25% of their income in federal income taxes, which compares to less than 5% for half of the population at the bottom end.

For the top two groups, the tax rate in 2005 was about the same as 1990. Essentially, the Bush tax cuts just reversed out the Clinton tax increases on these folks.

The Bush tax cuts substantially reduced tax rates for people in every income group. Indeed, those at the bottom had the largest relative reductions in their tax rates.

This is a little wonky, but let’s compare average tax rates in 2000 to 2005. For the top group, the rate fell from 27.45% to 23.13%, a reduction of 16%.

Now consider the middle-income “top 26-50%” group, for example. Their tax rate fell from 9.28% to 6.93%, a reduction of 25%.  

Those at the bottom have paid little, and now they pay even less, due to legislation under both Clinton and Bush. Indeed, these data do not include the tens of billions of dollars sent to lower-income families as a result of the earned income tax credit, and thus it overstates taxes paid by the bottom group.

I’m for lower taxes for everyone, but I wish people would look at the actual data first before carping about the rich supposedly being specially favored by recent tax cuts.

Regulatory Competition Leads to Better Policy in France

The Financial Times reports that France is deregulating and cutting taxes in hopes of competing with London in the financial services market. The article also notes that Switzerland and Germany also are trying to attract business by reducing the burden of government. Needless to say, these positive reforms would not happen if the bureaucrats in Brussels had the authority to create a continent-wide regulatory regime. Another threat to deregulation and better policy is IOSCO (the International Organization of Securities Commissions), which wants to impose one-size-fits-all regulation on all jurisdictions - particularly ones with a more laissez-faire approach:

The French government yesterday unveiled its plans to boost Paris as a financial centre, proposing a more lightly regulated market for companies and funds on the Euronext exchange. Several of the measures are closely modelled on UK structures, as the French capital seeks to make up ground lost to London. The new market segment would operate according to European Union minimum standards in terms of listing and disclosure. …Switzerland’s leading financial services companies launched their own campaign last month for tax cuts, a relaxation of immigration rules and other measures to turn their country into the world’s third largest financial centre after London and New York. Frankfurt launched its own more lightly regulated market segment two years ago… Ms Lagarde said the government had already shown serious commitment to financial services by cutting taxes, particularly for higher earners. France’s high taxation is one reason why so many young French bankers flock to London.