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July 2, 2012 12:20PM

An ObamaCare Silver Lining?

Today POLITICO Arena asks:

Was the health care ruling actually a long-term victory for conservative jurisprudence?

My response:

It will take some time to fully digest the Court's massive and often opaque split decision on ObamaCare, but whether the ruling will eventually lead to a victory for conservative jurisprudence will now be in the hands of the voters. If the reaction to this decision brings the majority of citizens who've consistently opposed ObamaCare to the polls, not only might ObamaCare be repealed, but the Court itself may eventually change in the direction the dissent marked out, and that would be good.

To be sure, some have suggested that this decision is not as bad as it seemed at first, but here are just a few responses to that contention: (1) the Commerce Clause "victory" is extremely limited; Congress cannot compel people to engage in commerce so it can then regulate that commerce, but this is the first time Congress has ever tried such a thing, so it's not an everyday affair; (2) the vast post-New Deal regulatory power that Congress has practiced remains untouched by this decision; (3) a good case can be made that this Commerce Clause "victory" will be read as dicta and hence will not be binding in future cases; and finally, (4) Congress can now do the same thing under its taxing power, so as a practical matter there was no change.

Yes, that last point puts the matter "on budget," and that's no small matter, politically. But it will take a political reaction and then a change on the Court before this decision can be read, doubtless by historians, as having precipitated a victory, not so much for "conservative jurisprudence," which is not of a piece, but for the Constitution.

July 2, 2012 11:46AM

“Conservatives’ Last Legal Option to Invalidate Obamacare”

The New Republic reports on an issue that Jonathan Adler and I have been highlighting: an IRS rule that will tax employers and subsidize private health insurance companies without congressional authorization. Why would the IRS issue such a rule? Perhaps because ObamaCare could collapse without it.

The post quotes another law professor who acknowledges the Obama administration faces a serious problem:

“It’s fairly decent textual case,” says Kevin Outterson, a professor at Boston University Law School, and health care blogger for The Incidental Economist. And if it stood, he says, the consequences could be disastrous.

Disastrous for ObamaCare, that is. But as Adler and I have written previously, if  saving ObamaCare means letting the IRS tax employers without congressional authorization, then ObamaCare is not worth saving.

July 2, 2012 11:36AM

Iraq’s Oil‐​Fueled State Socialism

Over the weekend, the New York Times reported on rising consumerism in Iraq, as evidenced by the popularity of American-style shopping malls. I was more intrigued by the tales of cronyism and a wholly dysfunctional state. Here are a few tidbits:

economists and other experts...say the emerging consumer culture masks fundamental flaws in an economy that, like those of other energy-rich countries like Saudi Arabia and Qatar, stifles productive enterprise by relying almost solely on oil profits and the millions of government salaries those profits finance as part of the country’s vast patronage system.

“Basically, Iraq is trying to build a consumer society, not on state capitalism like in China, but on socialism,” said Marie-Hélène Bricknell, the World Bank’s representative in Iraq.

[...]

experts worry [the expected boom in government revenues] will finance more of what Iraq already has: corruption and a huge government work force.

Most of the major industries remain in the hands of the state, and the greatest ambition of many Iraqis is to secure a government job. According to statistics from the Iraqi Ministry of Planning, almost a third of the labor force works for the government. That is more than five million people, and the number is rising, as political parties that run government ministries use paychecks to expand their constituencies.

[...]

Because government salaries are much higher than those in the private sector, independent businesses operate at a disadvantage because, among other disincentives, would-be entrepreneurs cannot afford to hire the most skilled workers. The World Bank ranks Iraq 153rd out of 183 countries on the ease of doing business.

“Building a consumer society on top of nothing is like building a bubble that will burst in the future,” Ms. Bricknell said. With the shopping malls, she said, “you are putting a veneer over a rotting core, basically.”

File these sorts of stories away for the next time that you encounter (maybe at a 4th of July celebration?) patriotic, red-blooded, so-called conservatives bragging about their commitment to limited government and the free market, and who then declare that the Iraq war was a great victory for such principles.

July 2, 2012 10:47AM

Looking at Austerity in Portugal

Portugal is “on edge of abyss” reads the headline of a Reuters story last week. Despite receiving a $104.5 billion bailout last year from the EU and the IMF, the country’s economy continues to shrink as unemployment soars and uncertainty about its permanence in the euro remains steady. Just like Greece, Portugal might need a second bailout soon.

As has been the case elsewhere, some pundits claim that austerity is in part responsible for Portugal’s current economic malaise. Even the IMF has said that deficit targeting “may not be the best policy” if the country falls deeper into recession. The question then is what we understand by “austerity.”

First, it is important to point out that Portugal got in trouble for having a government that spent too much over a long time. Back in 2001 the country was the first to breach the 3% of GDP deficit ceiling agreed to as part of the Stability and Growth Pact. Since then, it ran significant budget deficits, and in 2009, as a reaction to the global downturn, Portugal implemented a massive stimulus package that shot its deficit to 9.4% of GDP. (It is worth noting that the stimulus didn’t work, unemployment went up from 9.5% in 2009 to 14.9% now).

Media Name: graph12.png

* Using GDP deflator.
Source: European Commission, Economic and Financial Affairs.

Spending in nominal terms increased on average by 5.6% every year from 2000 to 2010. As we can see in the graph, it accelerated in 2009 as the Socialist government of José Socrates tried to fend off the global recession with a Keynesian-style stimulus. It was not until 2011 that the new government of Pedro Passos Coelho began implementing spending cuts, which reduced overall spending by 5.5% from the previous year. Still, government spending in 2011 was at the same level of 2009. In real terms, there has been no decline in spending levels.

As a percentage of the size of the economy, total government spending in Portugal in 2011 stood at 45.2% of GDP, just a whisker down from its 2009 peak of 45.8%.

Early on Socrates tried to tame the deficit with tax increases. He raised the VAT rate from 19% to 21%. As part of last year’s the bailout agreement, Passos Coelho raised the VAT further to 23%, one of the highest rates in Europe. His government also introduced changes in the income tax: some rebates were scrapped; a surtax of 1.5% and 2.5% was introduced for middle and high income earners, respectively. A special corporate tax rate of 12.5% for small businesses was raised to 20%, and a surtax of 3% and 5% was created for medium and big companies, respectively. There were also tax increases on alcohol, fuel and tobacco.

The evidence suggests that even though in the last year there have been measurable spending cuts in Portugal (and I’m sure that people there are feeling the pinch from those cuts), tax increases constitute a significant chunk of the austerity policies implemented in that country.

July 2, 2012 10:18AM

It’s “Declaration of Internet Freedom” Day!

... or at least I should have said so back on March 4th.

That was the anniversary of the day that Congress proposed to append a Bill of Rights to our Constitution. With a lovely preamble that went a little somethin' like this:

THE Conventions of a number of the States, having at the time of their adopting the Constitution, expressed a desire, in order to prevent misconstruction or abuse of its powers, that further declaratory and restrictive clauses should be added: And as extending the ground of public confidence in the Government, will best ensure the beneficent ends of its institution.

The Bill of Rights contains gems like "Congress shall make no law ... abridging the freedom of speech, or of the press," (Amendment 1) and, "The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated" (Amendment 4).

I think this original Declaration of Internet Freedom is the bee's knees. Yes, it's taking some work to apply its strictures to the modern communications environment, but that's a much more contained problem than starting over.

Starting over. That's what a collection of really lovely groups--some highly pro-regulation, others handmaidens of government growth--are doing. They've come up with a "Declaration of Internet Freedom" whose principal virtue is a pretty cool graphic. The actual "principles" in it are so weasel-y that I wouldn't trust 'em as far as I could throw 'em.

When you're done pondering how one could "throw" a principle, consider an alternative to the "mainstream" declaration put out by our friends at TechFreedom. Their Declaration of Internet Freedom has a bunch of principles like "Humility" and "Rule of Law."

Their thing on "Free Expression" cites the First Amendment. Remember that one? That's the "Congress shall make no law" one. So that's pretty good.

But I'm really hoping that nobody living today gets to define the basic principles by which the Internet is ruled. We've got that. It's a neato collection of negative rights, preventing the government from interfering with society's development, whether that development occurs online or off.

So happy Declaration of Internet Freedom day! I'll be celebrating the real one.

In case you've gotten confused in all the jostling around, the real one is the Bill of Rights.

July 2, 2012 9:57AM

The Laffer Curve Wreaks Havoc in the United Kingdom

Back in 2010, I excoriated the new Prime Minister of the United Kingdom, noting that David Cameron was increasing tax rates and expanding the burden of government spending (including an increase in the capital gains tax!).

I also criticized Cameron for leaving in place the 50 percent income tax rate imposed by his feckless predecessor, and was not surprised when experts began to warn that this class-warfare tax hike might actually result in less revenue because the reduction in taxable income could be more significant than the increase in the tax rate.

Media Name: Laffer-Curve1.jpg

In other words, bad policy might lead to a turbo-charged version of the Laffer Curve.

Allow me to elaborate. In most cases, punitive tax hikes do raise revenue, but not as much as politicians predict. As explained in this three-part video series, this is because it takes a very significant reduction in taxable income to offset the revenue-generating impact of the higher tax rate.

But if a tax increase imposes a lot of damage and taxpayers have enough flexibility in their financial affairs, then it's possible that a tax hike can lose revenue (or, as we saw with Reagan's "tax cuts for the rich," a well-designed reduction in tax rates can actually generate higher revenue).

With that background knowledge, let's now take a closer look at David Cameron's tax increases. They've been in place for a while, so we can look at some real-world data. Allister Heath of City AM has the details.

Something very worrying is happening to the UK’s public finances. Income tax and capital gains tax receipts fell by 7.3 per cent in May compared with a year ago, according to official figures. Over the first two months of the fiscal year, they are down by 0.5 per cent. This is merely the confirmation of a hugely important but largely overlooked trend: income and capital gains tax (CGT) receipts were stagnant in 2011-12, edging up by just £414m to £151.7bn, from £151.3bn, a rise of under 0.3 per cent. By contrast, overall tax receipts rose 3.9 per cent.

Is this because the United Kingdom is cutting tax rates? Nope. As we mentioned in the introduction, Cameron is doing just the opposite.

...overall taxes on labour and capital have been hiked: the 50p tax was introduced from April 2010 (and will fall to a still high 45p in April 2013), those earning above £150,000 have lost their personal allowance, CGT has risen to 28 per cent, many workers have been dragged into higher tax thresholds, and so on. In theory, if one were to believe the traditional static model of tax, beloved of establishment economists, this should have meant higher receipts, not lower revenues.

So what's the problem? Well, it seems that there's thing called the Laffer Curve.

...there is a revenue-maximising rate of tax – and that if you set rates too high, you raise less because people work less, find ways of avoiding tax or quit the country. The world isn’t static, it is dynamic; people respond to tax rates, just as they respond to other prices. Laffer told a gathering at the Institute of Economic Affairs that this is definitely true in the UK today – and the struggling tax take revealed in the official numbers suggest that he is right. Tax rates and levels are so high as to be counterproductive: slashing capital gains tax would undoubtedly increase its yield, for example. Many self-employed workers are delaying incomes as much as possible until the new, lower top rate of tax kicks in.

Allister's column also makes the critical point that not all taxes are created equal.

...higher VAT is also damaging growth, though it is still yielding more. Some taxes can still raise more – but try doing that with income tax, CGT or corporation tax and the result is now clearly counter-productive. These taxes are maxed out; they have been pushed beyond their ability to raise revenues.

Last but not least, he makes an essential point about the role of bad spending policy.

The problem is that spending is too high – central government current expenditure is up by 3.7 per cent year on year in April-May – not that taxes are too low. The result is that the April-May budget deficit reached £30.7bn, some £6.2bn higher than a year ago.

By the way, you won't be surprised to learn that Paul Krugman has been whining about "spending cuts" in the United Kingdom, even though the burden of the public sector has been climbing. But given his outlandish errors about Estonia, we shouldn't be surprised.

But that's not the point of this post. The relevant question is why do politicians pursue bad policy and why do some economists aid and abet bad policy?

For politicians, I think the answer is easy. They simply care about getting elected and holding power. So if they think class-warfare tax policy is the way of achieving those narcissistic goals, they'll push higher tax rates. Even if it means lower revenue, notwithstanding their usual desire to have more money so they can buy more votes.

I'm more mystified by the behavior of economists. Let's look at a couple of examples. Justin Wolfers and Mark Thoma recently cited some survey data to claim that the Laffer Curve was universally rejected by the profession.

But as James Pethokoukis of the American Enterprise Institute explained, the survey actually showed just the opposite, with economists by a margin of nearly 5-1 agreeing that lower tax rates could boost GDP (and therefore taxable income).

Those economists did say that a reduction in tax rates, based on current levels, would not cause taxable income to jump by a large enough amount to fully offset the revenue-losing impact of the lower tax rate. But the Laffer Curve says that only happens in extreme circumstances, so there's zero contradiction.

So why did Wolfers and Thoma create a straw man in an attempt to discredit the Laffer Curve?

I have no idea, but Republican politicians probably deserve some of the blame. Too many of them make silly claims that "all tax cuts pay for themselves," even when talking about new credits and deductions that have no positive impact on economic performance.

To the extent that Wolfers, Thoma, and others think that's what the Laffer Curve is all about, then their skepticism is warranted.

But if that's the case, they should read what Art Laffer actually wrote so they can be more accurate in the future. Or they can watch these three videos.

Part I describes the theory.

Part II describes the evidence.

And Part III explains the sloppy and inaccurate revenue-estimating methodology of the Joint Committee on Taxation.

But if they think I'm too biased or that Art is similarly misguided, then they should look at some of the evidence produced by other economists.

The sooner they get up to speed on these issues, the sooner they can help give politicians good advice so that the Laffer Curve doesn't cause more unpleasant surprises.

July 2, 2012 9:28AM

Another Triumph for Bipartisanship

The Washington Post reports:

Lawmakers approved a broad measure Friday that freezes federally subsidized student loan rates for another year, reauthorizes the government flood insurance program and extends federal transportation funding for two more years.

The deal resolved months of acrimonious debate on key legislative concerns on the eve of a Fourth of July recess, and offered President Obama an opportunity to claim victory after a high-profile campaign to pressure Congress into action on both the student loan and transportation issues....

The agreement includes the first long-term transportation spending plan agreed to since 2005, replacing a series of short-term extensions. It passed the House 373 to 52 and the Senate by a vote of 74 to 19.

So as George Will and I noted recently, bipartisanship consistently seems to mean the expansion of government and government spending. Democrats and Republicans may fight about abortion and tax cuts, but they can agree on (in Will's words):

No Child Left Behind, a counterproductive federal intrusion in primary and secondary education; the McCain-Feingold speech rationing law (the Bipartisan Campaign Reform Act); an unfunded prescription drug entitlement; troublemaking by Fannie Mae and Freddie Mac; government-directed capitalism from the Export-Import Bank; crony capitalism from energy subsidies; unseemly agriculture and transportation bills; continuous bailouts of an unreformed Postal Service; housing subsidies; subsidies for state and local governments; and many other bipartisan deeds, including most appropriations bills.