April 2018

April 17, 2018 2:01PM

Democrats and Republicans Should Both Oppose E‐​Verify

Florida’s Constitution Revision Commission, a group that meets every 20 years to recommend changes to Florida’s state constitution, yesterday rejected a proposal to add mandatory E-Verify to the ballot next November.  The American Business Immigration Coalition and Immigration Partnership & Coalition Fund led the fight against the proposal (full disclosure: those groups used Cato's research in their efforts to stop E-Verify and I did have contact with them during the Florida debate).  The most convincing arguments against E-Verify were those that highlighted its inaccuracies, potential damage to the economy, and that it would not even effectively restrict illegal immigrant access to employment

Just to recap, E-Verify is a federal electronic eligibility for employment verification system whereby employers are supposed to check the identities of new hires against government databases to guarantee that they are legally eligible to work.  Four states have mandated E-Verify for all new hires, several other states have mandated it for some hires, and the federal government requires it for some occupations. 

Democrats and Republicans have both embraced E-Verify for different reasons in recent years.  Republicans did so because they believe that it is a useful enforcement mechanism and Democrats because they believe that they can trade it for a more generous legalization or other reforms to the legal immigration system.  Indeed, increasingly bitter partisan disagreements over immigration policy have not affected support for E-Verify.  Perhaps they should. 

There are many good reasons for Democrats to oppose E-Verify nationally and on the state level.  The first is that E-Verify is an immigration enforcement tool that disproportionately returns incorrect results for legal immigrants, Hispanic Americans, and those who have hyphenated last names (most likely to be women).  An incorrect result can temporarily bar a worker from working or, if the proper legal procedures aren’t followed, push the worker afflicted into long-term unemployment.  Democrats increasingly argue that they represent those three groups so they have political incentives to remove regulatory barriers that keep them from gaining employment.

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April 17, 2018 1:31PM

IRS Refunds

Today you are supposed to settle up with the IRS on your 2017 taxes. One would think that Tax Day was a painful, hated day for Americans. But the IRS commissioner recently noted that about 80 percent of households receive refunds upon filing, rather than having to make a further payment.

The predominance of refunds is a problem. For one thing, Tax Day has become more like Christmas with the receipt of gifts from Uncle Sam, rather than a day of sober reflection about the costs of government. Those costs are obscured under the income tax by employer withholding and Tax Day refunds. (I discuss other ways that politicians hide costs here).

Another problem with widespread refunds is that they make the system more vulnerable to cyber criminals. With 112 million people a year receiving an average IRS refund of $2,900, the tax system is a juicy target for scammers. One growing problem is that criminals are hacking tax preparation firms to access client data, then submitting fake returns with large refunds, and then finally convincing victims to give them the cash.

Vast IRS data collection on just about every adult in the nation has created major privacy and cybercrime vulnerabilities. Michael Hatfield of the University of Washington has examined some of the risks, including extensive refunds.

The refund problem has been exacerbated by the growth in refundable tax credits—mainly the earned income tax credit and child tax credit—which provide more than $80 billion a year in subsidies to tens of millions of people. These programs are rife with abuse, and should be scaled back or eliminated.

Another reform would be for the IRS to change its guidance for employer withholding to reduce the amounts deducted from worker paychecks. If more filers had to pay additional taxes in April, the system would be less vulnerable to scams and more people would be reminded that government spending ultimately comes out of their wallets.

April 16, 2018 3:18PM

Saying Thanks on Tax Day

Tomorrow is Tax Day, which is the deadline for you to mail or e‐​file your 1040 to the IRS.

We should say thanks on Tax Day, but not to the federal politicians who impose $1.6 trillion of income taxes on us and spend that treasure on low‐​value, damaging, and pork‐​barrel programs.

Rather, we should thank the entrepreneurs and other high earners who work hard, create jobs, invent new industries, and make a lot of money doing so. Those folks bear most of the costs of all that federal spending.

The harder you work and more value you add, the more the government wallops you under the income tax. The more benefits you generate for society through the marketplace, the larger the share of your earnings the government confiscates.

The chart shows that the top‐​earning 1 percent of households paid 39 percent of all individual income taxes in 2015, while the top 10 percent paid 71 percent. The data is here. Those shares have risen over time, and the new tax law exacerbates the upward skew in burdens.

The data for 2015 also show that average federal income taxes paid as a share of income for the top 1 percent of households was 27 percent, while the average for the other 99 percent of households was 11 percent. 

Some people call this “progressive,” but to me it is unproductive and discriminatory. It also weakens political responsibility when the costs of government are borne so narrowly.

So on Tax Day, we should ponder the huge cost of government, while also considering whether it is healthy for democracy when such a small group carries most of the load.

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April 16, 2018 9:11AM

The Beginning of the End for Cannabis Prohibition?

The Boston Globe reports Colorado Senator Cory Gardner is crafting a bill that would prevent the federal government from interfering with states that have voted to legalize cannabis for recreational or medicinal purposes. The Senator is busy recruiting several co-sponsors for the bill, and he has received assurances from President Trump that he would sign such a bill into law.

This would be a step in the right direction and would alleviate concerns in many states that the Department of Justice, under new guidance from Attorney General Sessions, might enforce federal marijuana prohibition.

Unfortunately, as long as the Drug Enforcement Administration continues to classify cannabis as a Schedule 1 drug, quality clinical research on the potential medical applications of cannabis will remain significantly inhibited. By definition, a Schedule 1 drug has “no currently accepted medical treatment use.” Recent studies have shown that chronic pain patients have been able to reduce their opioid dosage and consumption by adding cannabis to their pain management regimen. A study of Medicare Part D patients from the University of Georgia published in JAMA earlier this month demonstrated this effect in states where medicinal marijuana has been legal. Another study published the same week from the University of Kentucky showed this effect was even greater in states where marijuana is legal for recreational use. And another recent study from the Minnesota Department of Health earlier this year found 63 percent of patients taking medical marijuana for their chronic pain were able to reduce or eliminate their opioid use within 6 months.

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April 16, 2018 9:09AM

Democrats Ask Trump Administration to Block Consumer Protections

In a recent letter to the Trump administration, leading congressional Democrats ask the administration not to allow protections for enrollees in short-term health plans.

Yes, you read that right. Dated April 12, the letter comes from Sens. Patty Murray (WA) and Ron Wyden (OR), as well as Reps. Frank Pallone (NJ), Bobby Scott (VA), and Richard Neal (MA), each the top Democrat on a different congressional committee with jurisdiction over health care. They ask the administration to withdraw in its entirety a proposed rule that, if implemented, would offer significant protections to enrollees in so-called "short-term limited duration plans."

The administration has proposed lengthening the maximum term for such plans from 3 months to 12 months, which had been the limit for nearly two decades before the Obama administration shortened it. The administration has also asked for public comments (due April 23) on whether it should allow insurers to offer short-term plans with "renewal guarantees"—a consumer protection that allows enrollees who develop expensive illnesses to continue paying low, healthy-person premiums.

The letter asks the administration to "withdraw the proposed rule in its entirety," which would block those consumer protections. These Democrats literally want to prevent short-term plans from giving consumers the peace of mind from knowing they will be covered for an entire year. Worse, these Democrats want to prohibit short-term plans from offering a consumer protection that protects the sick from premium spikes. 

The reason for this animosity toward short-term plans is rather clear: ObamaCare supporters don't want the competition. Federal law exempts "short-term limited duration plans" from ObamaCare and other federal health-insurance regulations. Short-term plans free consumers to purchase only the coverage they want, rather than have ObamaCare force them to buy coverage they don't want, including coverage for things they may find morally repugnant. ObamaCare supporters do not want consumers to have that freedom, because when consumers leave ObamaCare coverage for short-term plans, ObamaCare premiums will reflect more and more of the cost of that law.

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April 13, 2018 1:35PM

Keep Facial Recognition Away From Body Cameras

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The Chinese tech giant Alibaba recently invested $600 million in a start‐​up that specializes in facial and object recognition. Thanks to the investment the start‐​up, SenseTime, is now the world’s most valuable artificial intelligence start‐​up. Although such technology undoubtedly has potential when it comes to picking up your morning coffee and easing congestion at metro ticket lines, it has been making news in China because it is playing an increasingly prevalent role in that country’s growing surveillance state. While the Chinese are leaders in surveillance technology innovation, we should keep in mind that facial recognition in the U.S. also poses a unique and significant threat to privacy, and it’s a threat that is not being adequately addressed.

Facial recognition fits in the family tree of biometric investigatory technologies, which determine identity via analysis of unique biological and physical traits. Many are familiar to anyone who watches CSI shows or other fictional portrayals of law enforcement: fingerprint and DNA analysis are a couple of examples.

If law enforcement has access to your fingerprints it’s likely because you volunteered them as part of a job requirement, you’re an immigrant, they were recorded after you were arrested, or they were collected at a crime scene. About 40 percent of fingerprints in the FBI’s fingerprint database are not related to arrests or forensic investigations. The FBI’s DNA database only includes DNA related to criminal arrests or forensic investigations.

Unlike databases for fingerprints and DNA, one of the FBI’s facial recognition services allows agents to search through databases that mostly include information related to law‐​abiding Americans, with only 8 percent of the facial images in the network being associated with criminal or forensic investigations. This is in part thanks to the fact that the FBI has access to drivers license photos from at least 16 states as well as passport photos from the State Department. All told, this Facial Analysis Comparison and Evaluation services allows the FBI to access more than 411 million facial images. A Georgetown study on facial recognition estimates that about half of American adults can be found in a law enforcement facial recognition network.

This is especially concerning because facial recognition can be used to conduct surveillance. It’s already being used for the purpose in China, and here in the U.S. the law enforcement community seems poised to spread the use of facial recognition without sufficient limitations in place.

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April 13, 2018 11:59AM

Who Gained from the Tax Cuts?

The Tax Policy Center (TPC) has released a new analysis of the Tax Cuts and Jobs Act passed in December. The analysis examines the distributional effects of the individual income tax changes separately from the corporate and estate tax changes. 

In the abstract of the new report, TPC suggests that high earners got the best deal. They say, “The individual income tax cuts as a percentage of after‐​tax income will be largest for high‐​income households.”

In the table, I have presented TPC’s new data for 2018 in a different way. The table shows the average impact for households within each income quintile, as well as the top 1 percent.

Columns 3 and 5 in the table show that lower‐ and middle‐​income groups received the largest relative individual income tax cuts from the GOP law. They received the largest percentage cuts in their taxes.

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Let’s go through the columns …

Column 1 shows that higher‐​income groups received larger percentage point cuts in their average tax rates (taxes as a percent of income). This is one of the (problematic) measures that TPC presents in its report.

Column 2 shows TPC estimates for total prior law federal taxes as a percent of income. This includes individual income, corporate, payroll, excise, and estate taxes. By “prior law,” I mean taxes that people would have paid in 2018 without the GOP cuts.

Column 3 is column 1 divided by column 2. It is individual income tax cuts as a percent of total prior law taxes. The tax cuts are generally smaller for higher income groups. The top 1 percent received the smallest percentage tax cuts.

Column 4 shows TPC estimates of prior law individual income taxes as a percent of income. The bottom two quintiles are less than zero because, on net, those groups do not pay any income tax. Indeed, they receive refundable credits, or spending subsidies from the government.

Column 5 is column 1 divided by column 4. It is individual income tax cuts as a percent of prior law individual income taxes. In my view, this is the best and fairest measure of the tax cut’s distributional effect.

The bottom two quintiles are “n/​a” because those folks, on net, do not pay any individual income taxes. Those two groups will receive larger refundable credits (subsidies) under the GOP law.

Looking at column 5, by far the largest percentage tax cuts go to the middle class. The middle quintile received a huge 31.6 percent income tax cut, which is three times the 10.6 percent cut received by the top quintile. The top 1 percent received a much smaller cut of 6 percent.

These results mean that the GOP’s individual income tax cuts made the income tax system more “progressive,” with higher earners paying a larger share of the overall burden. At the same time, households with lower incomes will receive larger spending subsidies (refundable credits) from the government. That was the wrong direction to go, but it is a reality that is still being underreported in the media.

In the long run, none of this may matter. The individual tax cuts are scheduled to expire after 2025, and lawmakers are running up such huge deficits that there will be pressure to let the tax changes lapse at that time.

Prior analyses of the distributional effects of the tax reform are here and here.