Topic: Government and Politics

AEI Forum on American Indians

At an AEI forum this week, Naomi Schaefer Riley discussed her insightful new book on Indian policies, The New Trail of Tears. I was pleased to take part in the forum alongside Robert Doar of AEI, Rep. Rob Bishop, and Keith Moore, who headed the Bureau of Indian Education (BIE).

I focused on the bureaucratic failures of the BIE and Bureau of Indian Affairs (BIA), as well as the institutional factors that deter growth on reservations. All of the panelists agreed that the lack of individual property rights on reservations is a key problem.

Keith Moore’s comments impressed me. Keith grew up on, and nearby, the Rosebud reservation in South Dakota. He served as BIE head from 2010 to 2012. Here are a few of his observations:

  • On the effects of subsidies: “Ingenuity, and the innovative, and creative parts of life have been pretty squelched for a long time because the government has provided.”
  • On reservation land being held in trust: “We’re not going to get where we need to go in Indian country until we have freedom, autonomy, and the ability to buy land and own it and create wealth.”
  • On the federal bureaucracy: “You look at the BIA system, it’s a nightmare. Bottom line, I lived it, I was in it, I left it … I don’t know how you move this bureaucratic titanic to get to a spot where it could have a positive effect. ”

The answer, as I think Keith would agree, does not lie in the BIA/BIE, but in Congress and the tribes making fundamental institutional reforms in areas such as property rights and education.

For background on how federal policies toward American Indians have been failing for two centuries, see this study.

Neil Gorsuch Will Make a Fine Justice

My first choice from the president’s fabulous list of terrific judges – they’re all winners, believe me (no really, solid list) – was probably the judiciary’s twitter laureate, Texas Supreme Court Justice Don Willett, but Judge Neil Gorsuch of the Tenth Circuit was right up there. As you can see by my statement to CNN, I’m pleased as punch with the selection. 

There’ll be time enough to analyze Judge Gorsuch’s work, but after reading a stack of his opinions over the weekend, the most salient parts of his judicial record are as follows:

  1. A keen appreciation for constitutional structure as a guarantor of our rights and liberties.
  2. A real devotion to originalism – probably more than the self-described “faint-hearted originalist” Antonin Scalia – and textualism.
  3. Strong support for the freedom of speech and religion, and the First Amendment more broadly.
  4. Skepticism of the administrative state.
  5. Like Scalia, he construes criminal statutes narrowly, so people aren’t convicted and punished without the government’s meeting its evidentiary burden or establishing that it didn’t violate constitutional rights in arresting and prosecuting defendants.
  6. Really, really good writing, which even Justice Elena Kagan has praised.

Gorsuch also maintains a good relationship with Cato and has published a Policy Analysis with us. In short, Donald Trump has managed to pick a nominee who should please everyone other than progressives: social conservatives, libertarians, legal elites, and I imagine the populists who trust him to pick “the best judges.” Left-wing activists are already talking about how Gorsuch is extreme and is anti-women, workers, yada yada – they have to raise money somehow – but I find it hard to see how Senate Democrats will muster 40 votes to sustain a filibuster against someone who was unanimously confirmed in 2006, particularly with a tough 2018 map.

For more analysis, see my short piece in the New York Post, plus Andrew Grossman and David Rivkin in the Wall Street Journal, as well as these excellent essays by Ramesh Ponnuru and Ed Whelan.

Second Doubts about a Border-Adjustable Corporate Tax (BACT)

First Doubts” dealt with predictions that a 25% rise in the dollar could make a 20% tax on imports disappear with only temporary effects on trade but a $1.2 trillion increase in tax revenues (which would supposedly be paid by foreigners, and without complaint).  

Second Doubts will focus on a key claim that border adjustability is needed because “exports from the United States implicitly bear the cost of the U.S. income tax while imports into the United States do not bear any U.S. income tax cost.”   And we’ll question whether border adjustability is justified because corporate “cash flow” taxes under the House GOP plan are more like value-added taxes than corporate income taxes in other countries.

A Better Way” (a House Republican discussion document of June 24, 2016) says, “In the absence of border adjustments, exports from the United States implicitly bear the cost of the U.S. income tax while imports into the United States do not bear any U.S. income tax cost. This amounts to a self-imposed unilateral penalty on U.S. exports and a self-imposed unilateral subsidy for U.S. imports [emphasis added].”  

That statement makes the case for “border adjustment” – which means the costs of imports (unlike equivalent domestic costs) would cease to be tax-deductible for business and rewards from selling exports would cease to be taxable.  

Since all countries have corporate income taxes, what could it possibly mean to say only our own corporate income tax is an “implicit” tax on exports?  Who pays this “implicit” tax?

What could it mean to say that failure to impose U.S. income tax on foreign factories is a “subsidy to imports?”  

Heritage Forum: Trump and Infrastructure

On Friday, the Heritage Foundation hosted a panel of experts to discuss prospects for infrastructure policy during the Trump administration. You can watch the event on C-SPAN.

I discussed why infrastructure activities should be devolved to the states and private sector, and why the Trump plan to subsidize equity investments in infrastructure is not a good approach.

There were numerous points of agreement on the panel, which included Michael Sargent of Heritage, Robert Puentes of the Eno Center, and Marc Scribner of CEI. We all favored greater private investment in traditionally public infrastructure, and we all agreed that the Trump administration should put a high priority on air traffic control reform this year.

I make the case for privatizing air traffic control in a new op-ed in The Hill.

First Doubts about Border Adjustability

President Trump created a stir by dismissing as “too complicated” the border adjustability feature in the House Republican corporate tax reform. Yet a few days later his press secretary Sean Spicer suggested the seemingly rejected border tax could pay for a Mexican border wall.   

Meanwhile, the President suggested the dollar is “too strong” even though (1) Commerce Secretary Wilbur Ross boasted about Trump having talking the Mexico peso down 35% and (2) Martin Feldstein and other economists pushing border adjustability predict that the plan would push the dollar 25% higher. 

To call border adjustability too complicated is starting to look like a huge understatement. 

In the House Republicans’ tentative “Better Way” plan, border adjustment means corporations could no longer treat expenses of imported materials, parts, or equipment as a cost doing business. Manufacturers of electrical machinery or plumbing parts could not deduct the cost of copper (36% of which is imported).  Retailers could not deduct the cost of imported goods. Refiners would pay a 20% tax on crude oil from Canada.

Exports, by contrast, would not count as income for U.S. tax purposes. Big exporters might even qualify for a federal check. “Any border adjustment should include cash refunds for exporters,” writes economist Alan Viard.   

This “border adjustability” is said to be comparable to the way we exempt foreigners from our sales and excise taxes and other countries likewise exempt us from their equivalent value added taxes (VAT). But that analogy depends on treating a tax on corporate cash flow (essentially income minus expensed investments) as equivalent to a tax on sales. I plan to discuss the VAT analogy in a separate blog.

Tax Policy Center economist Bill Gale notes, “Many economists—but very few non-economists—believe that the international trade effects of border adjustments will be small.” Indeed, the architects of the House GOP plan, as well as potential winners and losers among business leaders, depict the House GOP tax proposal as an export incentive and import penalty. So does economist Diana Furchtgott-Roth who writes, “Border adjustability taxes are essentially tariffs under another name.” Carolyn Freund of the Peterson Institute likewise shows how a “Maryland-produced sweatshirt will face a lower tax rate than the Chinese-produced sweatshirt, exactly as if a tariff were applied.” Foreign trading partners will surely see it the same way.  

How can economists disagree? “In a simple textbook model,” explains Alan Viard, “a border adjustment would trigger a real increase in the value of the dollar that would raise the cost of U.S. exports and reduce the cost of U.S. imports by an amount that would exactly offset the direct effects of the border adjustment.”

This textbook model claims the so-called “destination-based cash-flow tax (DBCFT)” will not affect the U.S. trade deficit because, as Paul Krugman explains,  “wages and/or the exchange rate would change.” Rather than dealing with changing wages, border adjustment enthusiasts claim the real exchange rate of the dollar would supposedly rise “exactly” enough to make U.S. exports sufficiently expensive to foreigners to “exactly” offset the export subsidy. And the dollar prices of foreign imports would likewise fall by “exactly” the right amount to compensate for the importers’ extra 20% tax, neither more nor less.  

“If the dollar doesn’t rise quickly enough or high enough,” notes The Wall Street Journal, “a border-adjusted tax is expected to penalize big retailers and other large corporations reliant on lower-cost foreign production.” Even if we could be certain of the real exchange rate rising by 25%, past experience does not suggest that is likely to happen in fewer than four years, or that import prices would fall proportionately or uniformly.

For Women, Cultural Pressures Remain Paramount

A fascinating new field experiment may cast light on the effectiveness of Ivanka Trump’s prospective mandated paid leave and child care initiatives.

In the Acting Wife study, researchers asked elite Masters in Business Administration (MBA) students questions about their job preferences. Students were told that the answers would be provided to the school’s career center and used to place the students in internship roles.

When single women thought that their responses would be public to their peers, they answered the career center’s questions differently – for example, by indicating they desire $18,000 less in annual compensation, are willing to travel 7 days less per month, and are willing to work four hours less per week than the control group. They also reported lower levels of career ambition and less leadership ability when they knew that peers could access the information.[1]

Chart 1

Chart 2

Chart 3

In the observational portion of the study, 73% of single women and 61% of non-single[2] women reported that they had avoided behaviors that they believed would help their career – like speaking up in meetings or asking for a raise or promotion – because they were worried about looking too ambitious. In other words, women are wary of sending signals that damage their social image.

Chart 4

According to the researchers, the results 

“…suggest that single women avoid actions that would help their careers because of marriage market concerns. Many schooling and initial career decisions – such as whether to take advanced math in high school, major in engineering, or become an entrepreneur – occur early in life when most women are single. These decisions can have labor market consequences that last long after these women get married.

Though not addressed directly in the study, it seems probable that women that signal faux professional apathy to male peers in the marriage market may have difficulty renegotiating when domestic responsibilities become material later in the relationship. This may partially help explain why 43% of highly-qualified women with children leave their careers or off-ramp for a period of time.[3]

Although Ivanka’s $300 billion solution to women’s professional dilemmas are well-intentioned, mandated paid leave and tax deductions for child care are not a panacea. In fact, short of re-programming women and their prospective mates, the most consequential barriers to women’s professional success appear difficult to overcome through government policy.

 


[1] Study results were statistically significant, and single male counterparts and married women did not behave this way.

[2] Where “non-single” indicates a woman who is in a relationship, cohabiting, engaged, or married.

[3] According to Sheryl Sandberg’s Lean In.

Trump’s Wall Plan Is Disgraceful, Belligerent, and Disastrous

Regardless of whether wall construction is funded through a discriminatory tariff on imports from Mexico or the border adjustment taxes envisaged in the GOP tax proposal, U.S. consumers and taxpayers will be flipping the bill.  The very idea of building the wall in the first place is a disgrace, but demonizing our neighbors and hatching plans that could subvert the Mexican economy and put another Venezuela on our southern border, is belligerent and potentially disastrous.

Hitting all Mexican imports with a 20% tariff is, unfortunately, something the president could do.  Under the Constitution, Congress is authorized to regulate foreign commerce, which includes imposing tariffs.  But over the years, Congress has delegated some of that authority to the president through various statutes. All of those statutes require that some condition be met (findings of a surge in imports; subsidized imports; unfair foreign practices that hurt U.S. companies; national security crises; public health or safety threats, etc.) before restrictions can be imposed. Sometimes the restrictions are limited in magnitude and duration, sometimes not.  Sometimes the actions are subject to judicial review, sometimes not.

By and large, these statutes were passed in conjunction with legislation to implement trade agreements, lower tariffs, or otherwise liberalize trade.  They were crafted as safeguards to assuage those concerned that the country’s seemingly inexorable march toward free trade would bring rapid change, which would carry massive adjustment costs and other maladies and threats that the government would be incapable of addressing. The expectation was that the president would use this conditional power sparingly and in the service of greater openness and liberalization. In other words, unlike the Founding Fathers, U.S. Congresses during the 20th century failed to imagine adequately the likes of a Donald Trump as president.