Tax Revenues Hit All-Time Highs

While Democrats plot to raise taxes (and Republicans indirectly help them by failing to push for smaller government), Investor’s Business Daily provides a useful service by pointing out that inflation-adjusted tax revenues have reached record levels. And even when measured as a share of economic output, tax collections have risen above their long-term average (though the assumption that politicians automatically deserve a slice of additional economic output is a pernicious notion):

Tax revenues will be about 18.5% of GDP this year — above the average of 18.2% since 1960. As for inflation-adjusted tax revenues — a little-used but equally telling statistic — they’ll reach an all-time high of $2.013 trillion. That’s higher even than in the last year of the dot-com boom. And by the way, it’s an astounding 26% gain since 2003 — after inflation. What about the claim that tax cuts “lose” revenues for the government? Also not true. What is true is that by creating a dynamic of powerful economic growth, lower taxes expand the economy and, therefore, overall tax revenues. They do this by giving people more incentives to work, save, invest and innovate — all drivers of long-term economic growth.

Good News for School Choice in AZ

The Arizona Superior Court handed the anti-school-choice crowd yet another in a long string of legal defeats by upholding the recently passed voucher program for foster children.  They still have cases pending, but if they couldn’t get the courts to overturn a voucher, they have no chance with the tax credit. 

I can’t say it any better than the Institute for Justice, the public-interest law firm that’s defending this and many other school choice programs:

Relying on U.S. Supreme Court and Arizona Supreme Court precedent, including 1999’s Kotterman v. Killian case upholding Arizona’s first tax credit scholarships program, Judge Hicks rejected opponents’ claims that the new scholarship programs violate the state Constitution’s Blaine Amendments and its education guarantee.

“This is the fifth lawsuit that school choice opponents have filed against educational aid programs designed to help Arizona schoolchildren most in need, and it is the fifth time that courts have sided with kids,” said Tim Keller, executive director of the Institute for Justice Arizona Chapter.  “It is time for opponents of genuine education reform to get the message and stop these frivolous legal battles.  All our clients want is a good education that meets their children’s unique needs.”

I suppose we all should be happy that they’re continuing to waste so many resources fighting a lost cause in AZ.  Hopefully Big Ed remains clueless and doesn’t move on.

Teachers Win (a little) at the Supreme Court

The U.S. Supreme Court has just ruled, in Davenport v. Washington Education Association (WEA), that states can require public school employee unions to obtain non-member teachers’ explicit consent before using their compulsory dues for political activities.

Hurray! Sort of.

This ruling is great as far as it goes, and Washington State’s Evergreen Freedom Foundation should be commended for all the hard (and smart) work it put in fighting this case on behalf of the state’s teachers.

This, however, is just a baby step in the right direction. It is still legal for unions to forcibly collect dues from non-members in states all across the country. This is a patent violation of the 13th Amendment’s injunction against involuntary servitude. To work in a public school, teachers MUST pay union dues in “agency shop” states, whether they want to or not. They must work for the financial benefit of others against their will. That is involuntary servitude.

The rationale for this practice is that anyone who benefits from the union’s actions should be compelled to pay for them. By the same argument, anyone who invests money and time landscaping their front yard, and thus raising their own and their neighbors’ property values, would be entitled to accost those neighbors, reach into their wallets, and pull out their “fair” share. Such a practice would be unthinkable, and yet the analogous practice of levying compulsory union dues is the law of the land in many states.

Which presidential candidates, I wonder, will be most likely to appoint justices who can see that simple fact?

Bark Dwarfs Bite in China Currency Legislation

Yesterday, THE much-anticipated, passable-with-a-veto-proof-majority, WTO-consistent, legislative response to Chinese intransigence over its undervalued currency was introduced in the Senate.  As it turns out, “much-anticipated” and “legislative” appear to be the only apt adjectives.  It is unlikely to pass with a veto-proof majority, and my initial analysis leads me to conclude that its provisions would likely contravene U.S. WTO commitments. 

That being said, I am heartened by the bill because, despite all the hostile rhetoric and hand wringing on Capitol Hill, it seems to reflect a surprising degree of realism and rationality that I assumed was missing in Congress.  It quietly acknowledges that precipitous currency adjustment could be destabilizing and that U.S. WTO obligations are, in fact, worthy and worthwhile commitments to honor. 

On the continuum of prospective proposals under consideration ranging from innocuous to the nuclear 27.5% across-the-board-tariff, the “Currency Exchange Rate Oversight Reform Act of 2007” is relatively tame.  It has its problems and it is unnecessarily intrusive, but if this represents the final word of Congress on the matter, I’ll take it. 

Here is the gist of the bill. 

First, it makes “currency misalignment” instead of “currency manipulation” the trigger for action, which effectively lowers the threshold, and is thus not good.  Changing the designation effectively strips the Treasury Secretary of the discretion to determine whether currencies are manipulated intentionally for purposes of gaining a trade advantage.  Under the new rule, a formula will be used to determine automatically whether a conclusion of misalignment is rendered.  The precise formula is still a bit unclear to me, though. 

Depending on the degree of misalignment, countries will either be put on notice and consultations requested or priority action will be considered right away.  As far as I can tell, it would be a minimum of six months after the designation of misalignment before any punitive action can be taken against a priority country.   

Punitive action includes a cessation of U.S. government purchases of goods and services from the offending country; U.S. denial of support for multilateral institution or OPIC financing of projects in the offending country; U.S. denial of support for proposals and other items of interest to the “offending” country within multilateral institutions; adverse consideration of proposals to graduate the offending country from non-market economy status to market economy status for purposes of the antidumping law, and perhaps most significantly; adverse treatment of exchange rate conversions for purposes of calculating antidumping deposits and owings.  That would lead, inevitably, to higher dumping duties.  

Ultimately, if insufficient action is taken by the offending country to bring its currency into alignment, the
United States can lodge a formal complaint in the WTO (although it is unclear to me exactly what WTO provision the offending country would be violating). WTO-consistency was one of the driving considerations of this bill.  But I rather doubt that the antidumping provision would pass muster with a dispute panel, since Article 2.3 of the Antidumping Agreement seems to require that currency conversions be made using the exchange rate on the date of the U.S. sale.  The new legislation would allow the
U.S. authorities to substitute its estimate of the market-based exchange rate for the official exchange rate. Finally, and very importantly, as is the case with respect to Section 421 trade cases (the China-specific safeguard, agreed as part of China’s accession protocol), the president has the authority under this bill to reject any remedial/punitive measures on national economic security grounds.  That’s a very important safety net because the executive branch is typically much less willing to engage in the sort of punitive actions that Congress tends to demand reflexively. 

Thus, at the end of the day, even though the legislation is banal and unnecessary, something was going to materialize legislatively.  Congress talked itself into a corner with its continuous complaining about the administration’s failure to address “unfair” Chinese practices.  Congress promised to get tough if the administration continued to fiddle.  So it had to walk the walk.   

Despite some harsh provisions, it could have been worse.  Practically speaking, at the end of the day, there might not be much difference between this legislation and the gradual, negotiations approach to the Chinese currency issue that is favored by the administration, and to which this legislation is supposed to be an alternative.  Here’s why. 

By the time the bill introduced yesterday makes it through conference, passes both chambers of Congress, gets vetoed by the President, and then secures two-thirds majorities in both chambers to override the veto to become law, and then the new regulations are promulgated, it will likely be too late for the statutory September 15 Treasury report to be issued.  The earliest report that could identify Chinese currency misalignment would be the March 2008 report, and the earliest that countervailing action could take effect would be September 2008.  The Yuan has appreciated against the dollar by nearly 8.5 percent since July 2005.  Since the Chinese government allowed for a wider band of daily fluctuation and appreciation two months ago, the Yuan is now on a steeper trajectory of appreciation.  By then—15 months from now—the Yuan is likely to have appreciated considerably more.  It could very well have appreciated “between 15 and 40 percent,” which has been the estimate of undervaluation for the past few years.  If that is the case, there should be no need for action.  

But, finally, given the feature of executive override and precisely because sanctions are a long way off under this bill, I can’t see it passing Congress with a veto-proof majority.  But a more hostile, impose-sanctions-first-ask-questions-later bill is also unlikely to pass with a veto proof majority.   

Thus, the preferable and much wiser gradual approach it is, by default. 

Neocons Refocus on China

It’s easy to forget that in the early days of the Bush presidency, the neocons were lambasting President Bush for visiting a “national humiliation” on the United States in the form of his handling of the EP-3 crash off the coast of China. It actually wasn’t that humiliating, particularly in comparison to the neocons’ own pet project, but it was a stark reflection of their overarching “bring ‘em on” attitude toward dealing with the world.

There have been signs lately that neoconservative energies have once again been focused on encouraging increased politico-military ties between the US and Taiwan and poisoning the US-China relationship. Gary Schmitt today takes to the pages of the Washington Post to ring the alarm bells about China, but more notably, Therese Shaheen, an AEI adjunct fellow, former head of the US non-embassy embassy in Taiwan, and wife of Rumsfeld flack Larry di Rita, writes in the Asian Wall Street Journal wondering why the U.S. is ignoring Taiwan. (sub. req’d)

Lest anyone think that the fact that the Taiwan issue has been off the radar screen lately is a good sign, here is what Jeff Stein of Congressional Quarterly had to report about back channel discussions between the U.S. and Taiwan, some of which involved Ms. Shaheen:

Lawrence B. Wilkerson, the U.S. Army colonel who was Powell’s chief of staff through two administrations, said in little-noted remarks early last month that “neocons” in the top rungs of the administration quietly encouraged Taiwanese politicians to move toward a declaration of independence from mainland China…

The top U.S. diplomat in Taiwan at the time, Douglas Paal, backs up Wilkerson’s account…

[One] key character in the minidrama was Therese Shaheen, the outspoken chief of the U.S. office of the American Institute in Taiwan, which took on the functions of the American embassy after the formal 1979 diplomatic switch.

Shaheen, who happens to be DiRita’s wife, openly championed Chen and the independence movement, at one point even publicly reinterpreting Bush’s reiteration of the “one China” policy, saying that the administration “had never said it ‘opposed’ Taiwan independence,” according to a 2004 account in the authoritative Far Eastern Economic Review.

“Therese Shaheen … said don’t sweat it, the president didn’t really mean what he said,” Wilkerson said…

Douglas Paal was then head of the American Institute in Taiwan, effectively making him the U.S. ambassador there. He backed up Wilkerson’s account.

“In the early years of the Bush administration,” Paal said by e-mail last week, “there was a problem with mixed signals to Taiwan from Washington. This was most notably captured in the statements and actions of Ms. Therese Shaheen, the former AIT chair, which ultimately led to her departure.”

Now retired, Paal said he, too, “received many first- and second-hand reports of messages conveyed to Taiwan by DoD civilians and perhaps a uniformed officer or two during that time that were out of sync with President Bush’s position.”

If you think the “long, hard slog” in Iraq is swell, wait until there’s a shooting war in the Taiwan Strait.

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.