Democrats running for the White House are pushing all kinds of tax increases. One bad idea supported by all the leading candidates is to hike the top capital gains tax rate. Capital gains taxes may seem obscure to many people but limiting them is crucial to long‐term economic growth.
Congress has kept capital gains tax rates below ordinary rates for most of the past century, and nearly all other advanced economies provide favorable rules for gains. Inflation, double taxation, and international competitiveness need to be considered, as I discuss in a new op‐ed in The Hill.
I am particularly concerned about the negative effects of a capital gains tax increase on entrepreneurial finance. The reward that angel investors receive for putting their time and money into risky startups is a capital gain 5 or 10 years down the road. The angel role is crucial because the economy needs a diversity of startups to discover new products and technologies.
Raising the capital gains tax would induce angels to shift their money to safer investments and the economy would be starved of the funding that high‐growth companies and technology industries rely on.
Higher capital gains taxes would also reduce entrepreneurship. People considering launching startups would instead take safer wage jobs. The chance to earn a capital gain from a high‐growth startup would not be worth all the extra stress, risk, and hard work.
Some Democrats used to understand the importance of startup financing. Arguing in favor of a capital gains tax cut in 1978 hearings, Senator Lloyd Bentsen of Texas said, “This country has prospered because we have had a free enterprise system that has encouraged the entrepreneur, the small businessman, to take a risk with the understanding that he was going to be able to keep some of it, if he won.”
What is the best capital gains tax policy? Federal Reserve chair Alan Greenspan got it right at 1997 Senate Banking Committee hearings: “While all taxes impede economic growth to one extent or another, the capital gains tax is at the far end of the scale.” The proper rate for capital gains taxes, Greenspan concluded, is zero.
This year’s Council of Economic Advisers (CEA) Economic Report of the President (EROP) contains a very heartening chapter on antitrust policy and competition issues. It’s clear the CEA doesn’t buy into the idea that the U.S. has a pervasive “monopoly problem” and is very aware of the danger of simplistic thinking around large digital platforms.
The President’s economic advisers echo much of my recent critique on the use of crude national industry concentration measures as proxies for the health of competition. They bring lots of theoretical arguments and empirical evidence to bear that these are not reflective of relevant product markets pertaining to antitrust enforcement, not least because markets are often incredibly local.
For example, six‐digit NAICS codes are often used to assess sector‐level concentration in many studies – and these go as granular as industries such as “book publishers,” “beauty salons,” and “car washes.” But, as a moment’s reflection of these examples suggests, these are clearly not relevant markets for antitrust. A beauty salon in Kenosha, Wisconsin doesn’t compete with one in Dupont Circle, Washington DC. In fact, the EROP highlights evidence I hadn’t seen before:
Werden and Froeb (2018) calculate the volume of commerce of the relevant markets alleged in DOJ merger complaints between 2013 and 2015 as a share of industry shipments in the six‐digit NAICS sector. They find that in most cases, the antitrust markets accounted for less than 0.5 percent of the six‐digit NAICS sector. In many cases, this is because the antitrust markets where the DOJ identified a competition problem involved single localities such as a city, State, or region, whereas the NAICS sectors are national.
Still though, many seem to be conducting the public debate over whether the U.S. has a monopoly problem knowingly using data that is easy to collect but which doesn’t represent actual markets. It’s very pleasing the CEA demurs from this growing trend.
Even better, the CEA report is clearly extremely skeptical of “Hipster Antitrust” calls to broaden the scope of antitrust law and the most interventionist policy proposals on “Big Tech,” including proposals for sector‐specific remedies such as enforced data portability and interoperability, tougher restrictions on acquisitions, and bringing in a specific digital sector regulator.
Perhaps most pleasing of all though is that the EROP doesn’t fall for the “this time is different” narratives we hear about digital platforms. It’s common to read that because of economies of scale, network effects, data, or firms competing on platforms they operate, that there’s something just unique about today’s tech companies that requires a more “forward‐looking” antitrust. The CEA cites lots of evidence showing that none of these economic features of these markets ensure sustained dominance, in line with my own work showing how Schumpeterian competition from new products put pay to historical examples of firms said to have just these types of advantages.
The overall chapter concludes:
confusion surrounding the effects of rising concentration appears to be driven by questionable evidence and an overly simple narrative that “Big Is Bad.” When companies achieve scale and large market share by innovating and providing their customers with value, this is a welcome result of healthy competition.
Despite the fact that minority families tend to want school choice, and certainly desire it more than white families, choice opponents love to imply that the modern choice movement is grounded in segregation. On what do they base this? After the U.S. Supreme Court declared longstanding, government‐forced public school segregation unconstitutional in Brown v. Board of Education (1954), some people in the South tried to use publicly funded private school choice to avoid integration. Lately, choice resisters have been citing a “new” book by Steve Suitts, former vice president of the Southern Education Foundation and an adjunct lecturer at Emory University, to make their case. The title says it all: Overturning Brown: The Segregationist Legacy of the Modern School Choice.
Why do I put “new” in quotes? Because while the book is technically new, it appears to be an almost word‐for‐word reproduction of an article Suitts published last year in Southern Spaces. That he turned the article into a book is fine, but it is important for journalists, wonks, and other readers to know that de facto responses to the book may already be out there. Indeed, I wrote one myself, published by Education Next. So I’m not going to write a review here—it already exists!
My response lays out, in as measured and charitable a way as I could muster, many failings of Suitts’ argument, including his unfair treatment of Milton Friedman, his almost entirely ignoring that Roman Catholics demanded school choice beginning in the 1840s, and his skipping over the Ku Klux Klan working to force all students into public schools in the 1920s. Suitts basically turns a blind eye to the deep pock marks of bigotry all over public schooling, and leaves out much of the history of school choice, to hang the “segregationist” banner on modern‐day choice supporters.
I won’t add anything here, except to say to journalists, wonks, or anyone else involved in the school choice debate, if you don’t challenge the school‐choice‐is‐segregationist narrative you are doing a major disservice to your readers, policymakers, and anyone seeking truth about American education. Feel free to reach out to Cato’s Center for Educational Freedom whenever you want to put together a full and fair treatment of American education. We all deserve nothing less.
A persistent complaint about the H‑1B visa program for skilled foreign workers is that employers use it to replace U.S. workers, leading many to fail to find jobs. Of course, it is true that many U.S. college graduates fail to find jobs that use their education, but the fact is that the prevalence of this phenomenon has remained roughly constant for 30 years, even as the number of H‑1B visas issued has escalated.
The data for this post comes from the Federal Reserve Bank of New York’s analysis of the Census Bureau, Bureau of Labor Statistics, and Department of Labor data.
Figure 1 compares H‑1B visa issuances to underemployment among college graduates for each year from 1990 to 2019. There’s not a statistically significant correlation between H‑1B visas and underemployment among recent college graduates nor among all college graduates. The overall underemployment rate fluctuated within a range of just 2.9 percentage points over 30 years. The underemployment rate was 34 percent in 1990 when the H‑1B premiered and 34 percent in 2019 after three decades of use. The rate has varied more widely among recent college graduates, but there’s still no statistically significant correlation there (and the coefficient is negative anyway).
These facts will not stop opponents of the H‑1B visa from claiming that H‑1B workers have some more subtle effects that this overall metric demonstrates. But the knowledge that the significant amount of underemployment among American college graduates entirely predates the H‑1B program should lead policymakers to realize that underemployment is a persistent problem, and not one that they can easily fix by nixing the H‑1B.
Thanks to the Constitution’s federalist structure, America has fifty administrative states in addition to the federal leviathan.
Sometimes, state and federal governments jointly administer “cooperative federalism” programs established by Congress and state legislatures, such as the Clean Air Act or Medicaid. More often, state regulatory agencies implement local regulations, independent of the federal government. Here, the quintessential example is zoning.
These programs, in turn, engender controversies that go before state courts. Thus, administrative law develops independently in each state.
Take Chevron deference, the most famous principle in (federal) administrative law. Under the Chevron doctrine, Article III courts yield to an agency’s interpretation of the law—including the scope of the agency’s own authority—even if the court thinks that it has a better reading of the statute.
At the state level, however, only a subset of courts has adopted a Chevron-like approach to statutory interpretation.
In a landmark 2008 article, Michael Pappas surveyed state courts to discern how they interpret laws that empower regulatory agencies. Many such courts review statutes as a blank slate, without any deference to government agencies. Others were deferential. A couple courts operate anti‐deference doctrines; that is, they expressly discourage reliance on an agency’s interpretation of the law. In short, there is a great deal of variety in approaches.
Of course, legal doctrine is fluid. It’s always changing. Which brings me to what’s going on in Mississippi.
In 2008, when Pappas performed his survey, he described Mississippi courts as affording “strong deference” to a state agency’s statutory interpretation—stronger than even Chevron.
But the state’s supreme court pivoted 180 degrees a decade later in King v. Mississippi Military Department. In that case, the court unanimously ended the practice of giving deference to state executive agencies’ interpretations of statutes.
Now, the court seems to have its eyes set on another major deference doctrine. Up to this point, I’ve been discussing statutory interpretations. Yet agencies also interpret their regulations, which have the force and effect of law (just like a statute).
Judicial deference to an agency’s regulatory interpretations is even more controversial than statutory deference. With either doctrine, courts arguably abdicate their duty to “say what the law is.” But regulatory deference further offends our constitutional structure by allowing the rule‐writer to serve as the rule‐interpreter.
While the Mississippi Supreme Court gives this kind of deference–for now–change is on the horizon.
Last week, in Central Mississippi Medical Center v. Mississippi Division of Medicaid, three judges on the court announced that the “practice of the courts deferring to an executive‐branch interpretation of agency regulations should end.”
Though the three judges were in the minority, the politics of the decision indicates that their argument enjoys momentum. As a general matter, progressives support deference, while conservatives oppose these sorts of doctrines. In this context, it is noteworthy that two of the court’s most liberal justices (Kitchens and King) were among the avowed opponents of regulatory deference. This strongly suggests that the doctrine’s days are numbered in Mississippi.
Were the Mississippi Supreme Court to jettison judicial deference to an agency’s regulatory interpretation, the justices would be following in the footsteps of the nation’s high court. Last summer, the Supreme Court gutted the doctrine at the federal level.
One of the most important practical applications of freedom of contract in present‐day America is arbitration, which allows parties to take disputes out of the court system by agreeing to submit to the judgment of an arbitrator. As an institution, arbitration has grown vital to the business community as a way of planning around the costs, delays, and uncertainties of courtroom litigation. At the same time, arbitration has come under intense attack from opponents.
The U.S. Supreme Court has defended arbitration through its interpretations of the Federal Arbitration Act (“FAA”), which Congress passed in 1925 in an effort to overcome judicial antagonism toward the practice. The FAA requires that courts treat arbitration agreements as favorably as they do other contracts, setting aside these agreements only “upon such grounds as exist at law or equity for the revocation of any contract.” That has led to a series of cycles of evasion in which lower courts have contrived to disallow arbitration clauses by resorting to seemingly neutral contractual principles in a manner that is practically hostile to arbitration and to the FAA. No courts have been more active in trying to bypass arbitration than those of California, which have repeatedly used ostensibly neutral state‐law principles in a manner that failed to provide equal treatment to contracts calling for arbitration.
OTO L.L.C. v. Kho arose when an employee terminated from an auto dealership refused to abide by the arbitration agreement to which both had agreed and instead pursued his employment dispute with the California Labor Commissioner. The arbitration agreement at issue provided the parties with procedural protections similar to what they could expect in an ordinary civil trial, which amounts to more protections that they would have otherwise had in a California administrative hearing. The arbitration would have been overseen by a retired California Superior Court judge.
The California Supreme Court, in a divided opinion, disallowed the agreement. Its decision targets arbitration for special scrutiny, deeming it unconscionable for parties to contract out of the supposed “efficiency” of the dispute resolution system provided by the state’s employment bureaucracy.
The Cato Institute has filed a brief in support of the petition for Supreme Court review by OTO L.L.C. We argue that the high court should review the case and protect Americans’ freedom to contract by correcting the California courts’ continued evasion of the FAA and the Court’s own precedents.
The US-China Economic and Trade Agreement, described as a "phase one" deal, entered into force today (30 days after signature, pursuant to Article 8.3, para. 1). The Agreement has created a temporary tariff truce. For the time being, it seems that tariffs will not be raised further, and both sides lowered their retaliatory tariffs to some extent, which is good news.
But with all the talk of tariffs, it is easy to lose sight of the U.S. concerns about Chinese trade practices. How does the Agreement do in terms of addressing the purported basis for the trade war?
The trade war began with a Section 301 investigation and report by the U.S. Trade Representative's Office on China’s "Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation." Pursuant to the Agreement, China has agreed to undertake new obligations in these areas. Will these new obligations successfully address the concerns? In this blog post, we offer some preliminary observations on this question, based on the text of the Agreement. A full analysis will have to await China's actions to implement the Agreement. (Under Article 1.35, "Within 30 working days after the date of entry into force of this Agreement, China will promulgate an Action Plan to strengthen intellectual property protection aimed at promoting its high-quality growth.")
The main findings of the Section 301 report were as follows:
• “China uses joint venture requirements, foreign investment restrictions, and administrative review and licensing processes to require or pressure technology transfer from U.S. companies”;
• “China deprives U.S. companies of the ability to set market-based terms in licensing and other technology-related negotiations”;
• “China directs and unfairly facilitates the systematic investment in, and acquisition of, U.S. companies and assets to generate large-scale technology transfer”;
• “China conducts and supports cyber intrusions into U.S. commercial computer networks to gain unauthorized access to commercially-valuable business information.”
In addition to these four findings, USTR also concluded that certain “other Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation may also burden or restrict US commerce.”
We will now go through each of the findings and evaluate whether, and to what extent, it has been addressed in the Agreement.
Forced technology transfer
In the Section 301 report, USTR found that China uses its foreign investment policy to encourage technology transfer by foreign companies to their Chinese joint venture partners. American (and other foreign) companies are forced to partner with Chinese companies in exchange for entering the Chinese market, and as part of this arrangement, the foreign companies have to share their technology with the Chinese partners.
Ideally, the requirement that foreign investors use joint ventures would be eliminated. In the Agreement, China does not make commitments to open its market (other than the financial services sector) to wholly owned foreign investments. However, recently, outside the context of the Agreement, China announced that it would lift foreign capital restrictions in some manufacturing sectors, including aircraft and automobile manufacturing, within several years. This will help ease forced technology transfer concerns to some extent.Read the rest of this post »