The Mikulski Principle

Politicians are circling around hedge funds like vultures. They want to raise taxes on hedge funds, maybe by treating their capital gains as normal income. Why? Because hedge funds are mysterious — do you know what they really do? — and they have a lot of money. Make billion-dollar profits, get headlines, attract taxers — it’s as certain as ants at a picnic.

There are whole books on the correct theory of taxation. I’ve always assumed that Democratic members of Congress operate on the theory most clearly enunciated in 1990 by Sen. Barbara Mikulski (D, Md.):

Let’s go and get it from those who’ve got it.

There are many theories of taxation, such as Haig-Simons, the Tiebout model, and the Ramsay Principle. But I’d bet that the Mikulski Principle explains actual taxation best.

You Mean It Could Get Worse?

The House Agriculture Committee yesterday released its preliminary discussion draft of the commodity section of the Farm Bill (the section that deals with the subsidy programs). But the changes proposed by Rep. Colin Peterson (D, Minn.), House Agriculture Committee chairman, are precisely the wrong sort of changes needed to avoid legal challenges to its farm programs and inject life into the Doha round of global trade talks.

Chairman Peterson has suggested increasing most of the price-linked subsidies, and paying for the increase out of the money currently allocated for direct subsidies that farmers receive regardless of production or market prices.

When farmers are paid according to the amount they produce, this encourages overproduction and depresses world market prices. That infuriates our trade partners, and we can expect more of the type of legal challenge to U.S. farm programs as the cotton case (more here) and the new case against U.S. farm subsidies brought by Canada (background here).

While paying farmers “money for nothing” may be fiscally irresponsible, it is less market distorting than the types of subsidies that Chairman Peterson is proposing to increase. It makes no sense to increase the types of payments that are causing legal trouble. And if commodity prices fall from the current historic highs, then these subsidies would have a necessarily higher budgetary impact than the current setup.

My colleage Dan Griswold and I have proposed bribing farmers to let us scrap the whole thing altogether.

And These Folks Are Our Friends…

Here’s what Anatole Kaletsky, columnist at the London Times, has to say about the task facing Gordon Brown:

The question Mr Brown must now ask himself is whether he can still allow himself to remain publicly allied to a US Administration that is so recklessly belligerent in its diplomatic conduct, so demonstrably incompetent in warfare and so irresponsibly dangerous to the peace of the world.

As the anarchy in Iraq goes from bad to worse and Washington’s only answer is to expand the circle of its aggression, clichés about the special relationship are no longer sufficient. Mr Brown must decide whether to remain a silent but active partner in this madness, whether to retreat quietly like the Italians, Poles and Spaniards or to develop a third and genuinely courageous option. This is to positively forestall further disasters by breaking publicly with the Bush Administration and trying to develop a genuine European alternative to the suicidal American-led policies, not only in Iraq, but also in Israel, Palestine and Iran.

It’s one thing to hear Dominique de Villepin or “Pootie-Poot” talking like this, but when your friends in England have thrown up their hands, it’s doubly bad news. Interestingly, both Brown and the Tory leader David Cameron have moved away from the stance of Tony Blair, with Cameron going so far as to announce that “We should be solid but not slavish in our friendship with America.”

Sometimes the best friends provide not reflexive support but constructive criticism and prudent advice. Hopefully the U.S.-England relationship will move away from the former and toward the latter.

Maine House Approves Flat Tax — Over GOP Objections

Maine has one of the country’s highest income tax rates, which stifles growth and undermines competitiveness. But this may soon be a relic of the past, as the state House has approved a flat tax. The supposed revenue loss from lower income tax collections will be offset by broadening the base of the sales tax, which currently applies to only a narrow range of products.

Interestingly, Republicans in the statehouse are opposing the proposal, though it is not clear whether they are being partisans and reflexively opposing a Democratic plan or whether there are some genuinely objectionable features of what otherwise seems to be a pro-growth reform. This story in the (Brunswick, ME) Times Record, for instance, does not reveal whether the tax plan is designed to raise more money for government:

The House voted largely along party lines Wednesday to support a tax restructuring plan that expands the sales tax base to lower the income tax rate — a plan Republicans warned would cause a revolt back home when people realize how it affects their day-to-day purchases.

…[I]t gives tax relief to Mainers of all income-levels and stabilizes the tax system that currently relies on sales in just 24 categories. That limited base makes sales tax revenue very volatile and leaves the state short on cash when the economy slows. On the other hand, the state has the seventh highest income tax rate in the country and that discourages businesses from moving here and retirees from making the state their full-time home. The plan would rebalance that system. “This plan will provide a tremendous economic boost to the state of Maine,” [state Rep. John] Piotti said. “It will be a huge stimulus for people in state who want to expand and for people out of state looking to do business….”

The proposal would raise more than $230 million in sales-related revenue by expanding the 5 percent sales tax base to a long list of currently exempt services; raising the meals and lodging tax from 7 to 8 percent; increasing the real estate transfer tax on a sliding scale based on the property’s selling price; and doubling the excise tax on beer and wine. That money, in turn, would be used to lower the state’s graduated income tax to a flat tax of 6 percent.

Ron Paul and the NBA

Ron Paul is the San Antonio Spurs of Congress.

Washington Post sports columnist Mike Wise praises the resilience of the Spurs, who keep coming back to win the NBA championship without ever being quite a Bulls-style dynasty. He says the Spurs “had their crown taken away twice since 2003 and got it back both times.”

Similarly, Ron Paul is the only current member of Congress to have been elected three times as a non-incumbent. Given the 98 percent reelection rates for House members, it’s no great shakes to win three terms — or 10 terms — in a row. It’s winning that first one that’s the challenge. And Ron Paul has done that three times.

He first won in a special election for an open seat. He then lost his seat and won it back two years later, defeating the incumbent. After two more terms he left his seat to run unsuccessfully for the U.S. Senate (and thereby did his greatest disservice to the American Republic, as his seat was won by Tom DeLay). Twelve years later, in 1996, after some redistricting, he ran again for Congress, again defeating an incumbent, this time in the Republican primary. Some political scientist should study the political skills it takes to win election to Congress without the benefit of incumbency — three times.

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.