Fiscal Fights with Friends, Part I: Responding to Reihan Salam’s Argument against the Flat Tax

In my ultimate fantasy world, Washington wouldn’t need any sort of broad-based tax because we succeeded in shrinking the federal government back to the very limited size and scope envisioned by our Founding Fathers.

In my more realistic fantasy world, we might not be able to restore constitutional limits on Washington, but at least we could reform the tax code so that revenues were generated in a less destructive fashion.

That’s why I’m a big advocate of a simple and fair flat tax, which has several desirable features.

  • The rate is as low as possible, to minimize penalties on productive behavior.
  • There’s no double taxation, so no more bias against saving and investment.
  • And there are no distorting loopholes that bribe people into inefficient choices.

But not everyone is on board, The class-warfare crowd will never like a flat tax. And Washington insiders hate tax reform because it undermines their power.

But there are also sensible people who are hesitant to back fundamental reform.

Consider what Reihan Salam just wrote for National Review. He starts with a reasonably fair description of the proposal.

The original flat tax, championed by the economists Robert Hall and Alvin Rabushka, which formed the basis of Steve Forbes’s flat-tax proposal in 1996, is a single-rate tax on consumption, with a substantial exemption to make the tax progressive at the low end of the household-income distribution.

Though if I want to nit-pick, I could point out that the flat tax has effective progressivity across all incomes because the family-based exemption is available to everyone. As such, a poor household pays nothing. A middle-income household might have an effective tax rate of 12 percent. And the tax rate for Bill Gates would be asymptotically approaching 17 percent (or whatever the statutory rate is).

My far greater concerns arise when Reihan delves into economic analysis.

A Word about “Gotcha Questions” and Personal Responsibility

A peculiar tic of contemporary American nationalism is the notion that the American state, particularly if helmed by a Republican president, makes no errors of commission in its conduct of military affairs. No American war was ill-founded, or aimed at a threat that didn’t exist or didn’t warrant the effort. This logic never applies in the domestic sphere for Republicans, where government programs are at best naïve and bound to make problems worse or at worst, venal and Machiavellian.

This tic is the only reason I can think of that we’re actually sustaining a debate in 2015 about whether, with the benefit of hindsight, it was a good idea to invade Iraq. Jim Fallows at the Atlantic argues that nobody should again ask a politician the question, since

the only people who might say Yes on the Iraq question would be those with family ties (poor Jeb Bush); those who are inept or out of practice in handling potentially tricky questions (surprisingly, again poor Bush); or those who are such Cheney-Bolton-Wolfowitz-style bitter enders that they survey the landscape of “what we know now”—the cost and death and damage, the generation’s worth of chaos unleashed in the Middle East, and of course the absence of WMDs—and still say, Heck of a job.

I actually think this makes the case why the question should be—or at least should have been—asked, since at least one fortunate Republican son, Marco Rubio, belongs in Fallows’ bitter-ender camp. To the extent voters—and donors—care about competent foreign policy, they deserve to know that Rubio strongly opposes it, even with the benefit of hindsight.

But beyond the politics, a weird narrative has begun to emerge on the right that asking about the Iraq war is a “gotcha question.” Keep in mind: we are discussing a policy that was dreamed up by the Bush administration, marketed by the Bush administration, and purchased by the vast majority of our legislators, including the likely Democratic nominee in 2016.

Privatize to Solve Government Cost Overruns

On large and complex government projects, costs will double from the original estimates. This tendency is called Edwards’ Law of Cost Doubling.   

The Wall Street Journal reports on the PATH rail station at the World Trade Center. Edwards’ Law was in effect:

… it has become a budgetary boondoggle, its cost doubling to nearly $4 billion, which gives it the unenviable distinction of the world’s most expensive train station.

Some people are blaming the project’s architect, Santiago Calatrava, for the problems. But, as I noted here, the real causes seem to have been political squabbling and mismanagement by the overgrown Port Authority of New York and New Jersey (PANYNJ). The WSJ notes:

But at the World Trade Center, Mr. Calatrava’s travails signal broader disharmony and discord at the country’s most recognizable construction project. The nearly 14-year effort—for which his firm has collected more than $80 million, according to a person familiar with the payments—has been marred by frequent public fighting between the governmental and private parties involved.

Bursting budgets throughout the 16-acre site have weighed heavily on the Port Authority of New York and New Jersey, the body that owns the site. The agency has delayed other projects like renovations of the region’s airports, and tolls on bridges and tunnels to New Jersey have more than doubled in recent years to raise revenue.

EPA’s Political Activism

Federal regulations are generally issued under a notice-and-comment process. A regulating agency releases a draft of a rule, the public provides comments on the draft, the agency reviews the comments, and then issues a final rule which incorporates public feedback.  

Outside groups can and do launch campaigns to encourage citizens to weigh in on proposed rules. But now it appears that a federal regulatory agency has been using grass-roots style activism and propaganda to push its own rules. The Environmental Protection Agency launched a lobbying campaign to encourage support for a major new rule on drinking water.

The New York Times reports:

Late last year, the EPA sponsored a drive on Facebook and Twitter to promote its proposed clean water rule in conjunction with the Sierra Club. At the same time, Organizing for Action, a grass-roots group with deep ties to Mr. Obama, was also pushing the rule. They urged the public to flood the agency with positive comments to counter opposition from farming and industry groups.

The piece continued:

The Thunderclap [a social media tool] effort was promoted in advance with the EPA issuing a news release and other promotional material, including a photograph of a young boy drinking a glass of water.

“Clean water is important to me,” the message said. “I want E.P.A. to protect it for my health, my family and my community.”

In the end, the message was sent to an estimated 1.8 million people, Thunderclap said.

The EPA advocacy campaign ginned-up more than one million public comments on the proposed water rule. Then Gina McCarthy, the EPA’s administrator, had the audacity to testify to the Senate that 87 percent of commenters supported the rule—as if that high percentage was actual spontaneous and broad-based support from the public.

The EPA’s campaign may have violated federal law, but even it did not, this is a dangerous path for federal agencies to go down.

From this incident, it appears that the EPA is not serious about taking opposing public comments into account before engaging in regulatory action. The purpose of public comments is to gauge public sentiment before a final rule is issued. The agency should act as an unbiased arbitrator of comments, not as an advocacy organization.

How a WTO Meat Labeling Dispute Could Prompt Congress to Change a Bad Law

After losing again at the World Trade Organization, U.S. regulations mandating country of origin labels (COOL) on meat may finally end.  Driven by the possibility that Canada and Mexico could retaliate with increased tariffs, Congress has already begun consideration of a bill to repeal the protectionist program.  If COOL regulations are indeed repealed, American consumers, meat packers, and retailers owe a debt to the WTO’s dispute settlement system.

In the latest WTO decision, the United States lost its appeal of a report originally issued last October.  At that time, I wrote about how the WTO process can help alter the political dynamics in ways that favor free market reform.

Under current U.S. COOL rules, retailers selling beef and pork must include labels stating what country the animal was in when it was born, raised, and slaughtered. This information might be interesting to a curious shopper, but it is completely useless in determining the quality or safety of meat. The same U.S. food safety standards apply regardless of where the animal came from.

Consumers are, of course, welcome to care about things that don’t really matter, and generally, more information is a good thing to have. Sometimes, though, the cost of providing that information is greater than its value. Mandating that companies provide consumers with information will overcome that hurdle by removing the low-information option and forcing consumers to pay the higher price. Making labels mandatory also introduces opportunities for rent-seeking by companies looking to shift costs onto their competitors.

That’s exactly what’s happening with the COOL regulations, and is the crux of the WTO complaint. Canada and Mexico are not complaining that American consumers, armed with their dinner’s travel itinerary will eschew immigrant cattle. Rather, they point out that complying with the rules imposes huge costs on U.S. meat processors who buy cattle that once lived across the border. If a slaughterhouse buys any cattle that rode on a truck traversing the 49th parallel, it must segregate those animals and their meat through the entire production and delivery process.

Two-Month Extension for Federal Highway and Transit Funding

The House of Representatives voted yesterday to extend federal funding for highways and transit for two months. The Senate is expected to pass similar legislation later this week. While transportation bills normally last for six years, this short-term action, which followed a ten-month extension last fall and a two-year extension in 2012, has proven necessary because no one has been able to rustle up a majority agreement on the federal role in transportation.

For those who haven’t followed the issue, the federal government collects about $34 billion a year in gas taxes and related highway user fees. Once dedicated to highways, an increasing share has gone for transit and other uses since the early 1980s. A 1998 decision to mandate that spending equal the projected growth in fuel taxes compounded the problem. When fuel tax revenues stopped growing in 2007, spending did not and thus annual spending is now about $13 billion more than revenues.

Under Congressional rules, Congress must find a revenue source to cover that deficit. My colleague at the Cato Institute, Chris Edwards, thinks that the simple solution is for Congress to just reduce spending by $13 billion a year. That may be arithmetically simple, but politically it is not. Too many powerful interest groups count on that spending who have persuaded many (falsely, in my opinion) that we need to spend more on supposedly crumbling highways.

The Year of Educational Choice: Update II

Educational choice is on the march.

As I noted back in February, the stars appeared to be aligned for a “Year of Educational Choice.” By late April, state legislatures were halfway toward beating the record of 13 states adopting new or expanded school choice laws in 2011, which the Wall Street Journal dubbed the “Year of School Choice.” The major difference in the types of legislative proposals under consideration this year is that more than a dozen states considered education savings account (ESA) laws that allow parents to purchase a wide variety of educational products and services and save for future education expenses, including college.

On Monday, Tennessee Gov. Bill Haslam signed the Individualized Education Act, an ESA program for students with special needs. Earlier this year, Mississippi enacted the nation’s third ESA law, behind Arizona and Florida. Lawmakers in Montana also passed an ESA, but Gov. Steve Bullock vetoed it earlier this month.

Nevertheless, Gov. Bullock allowed a universal tax-credit scholarship bill to become law without his signature. The law is an important step toward educational freedom, albeit a very modest one. Taxpayers can only receive tax credits for donations to scholarship organizations up to $150, meaning that a single $4,500 scholarship will require 30 donors. No other state has such a restrictive per-donor credit cap. Unless the legislature raises or eliminates the cap, Montana’s tax-credit scholarship program is likely to help very few students.