Topic: Government and Politics

OECD Overlooks Amazing Success of Low-Tax Singapore, Urges Higher Taxes in Asia

I wrote a rather favorable column a few days ago about a new study from economists at the Organization for Economic Cooperation and Development. Their research showed how larger levels of government spending are associated with weaker economic performance, and the results were worth sharing even though the study’s methodology almost certainly led to numbers that understated the case against big government.

Regardless, saying anything positive about research from the OECD was an unusual experience since I’m normally writing critical articles about the statist agenda of the international bureaucracy’s political appointees.

That being said, I feel on more familiar ground today since I’m going to write something negative about the antics of the Paris-based bureaucracy.

The OECD just published Revenue Statistics in Asian Countries, which covers Indonesia, Singapore, Malaysia, South Korea, Japan, and the Philippines for the 1990-2014 period. Much of the data is useful and interesting, but some of the analysis is utterly bizarre and preposterous, starting with the completely unsubstantiated assertion that there’s a need for more tax revenue in the region.

…the need to mobilise government revenue in developing countries to fund public goods and services is increasing. …In the Philippines and Indonesia, the governments are endeavoring to strengthen their tax revenues and have established tax-to-GDP targets. The Philippines aims to increase their tax-to-GDP ratio to 17% (excluding Social Security contributions) by 2016…and Indonesia aims to reach the same level by 2019.

Needless to say, there’s not even an iota of evidence in the report to justify the assertion that there’s a need for more tax revenue. Not a shred of data to suggest that higher taxes would lead to more economic development or more public goods. The OECD simply makes a claim and offers no backup or support.

But here’s the most amazing part. The OECD report argues that a nation isn’t developed unless taxes consume at least 25 percent of GDP.

These targets will contribute to increasing financial capacity toward the minimum tax-to-GDP ratio of 25% deemed essential to become a developed country.

This is a jaw-dropping assertion in part because most of the world’s rich nations became prosperous back in the 1800s and early 1900s when government spending consumed only about 10 percent of economic output.

11 Key Facts About Americans’ Attitudes Toward the Police

The Cato Institute has released Policing in America—an extensive national public opinion report that explores Americans’ attitudes toward the police based on an original Cato Institute/YouGov national survey of 2,000 Americans. Here are eleven key facts about Americans’ attitudes toward the police. 

  1. There are stark racial and partisan divides in favorability toward policebut no group is anti-cop: 68% of white Americans have a favorable view of the police, only 40% of African Americans and 59% of Hispanic Americans also have a favorable view. Republicans (81%) are 22 points more favorable toward the police than independents (59%) and Democrats (59%). Although some groups have less positive views of the police, findings weaken the ascertain that these groups are “anti-cop.” For instance 9 in 10 white, black, and Hispanic Americans oppose cutting police forces and 6 in 10 worry the police have very dangerous jobs. [1]
  2. 54% say police using military equipment goes too far, while 46% say it’s necessary for law enforcement purposes. Majorities of whites (53%), Hispanics (51%), and blacks (58%) oppose police using military weapons and armored vehicles. Most Republicans (65%) believe police need to use military weapons, while 60% of both Democrats and independents believe police using such equipment goes too far.
  3. 84% of Americans oppose civil asset forfeiture. Americans oppose police seizing “a person’s money or property that is suspected to have been involved in a drug crime before the person is convicted.” When police departments seize people’s property, 76% say the local department should not keep the assets. Instead Americans think seized assets should go either to the state general fund (48%) or a state-level law enforcement fund (28%). A quarter (24%) say police departments should keep the property they seize.
  4. 79% support outside law enforcement agencies conducting investigations of police misconductwhile 21% prefer police departments handle such investigations internally. Strong majorities of Republicans (76%), independents (77%), and Democrats (83%) all agree that outside agencies should conduct such investigations.
  5. 89% of Americans support police body cameras and majorities are willing to raise taxes pay for them (51%) and let police look at the footage before making official statements (52%). Body cameras aren’t a zero-sum proposition: 74% think body cameras protect both officers and citizens equally.
  6. Only 30% say police should prioritize enforcing drug laws.  Instead, Americans want police to prioritize investigating violent crime (78%), protecting people from becoming crime victims (64%), and investigating property crime (58%). Americans across partisan and demographic groups share these top three priorities for law enforcement.
  7. Nearly half (49%) of Americans say “most” police officers think they are “above the law.” African Americans (61%), Hispanics (61%), and Democrats (61%) are considerably more likely than whites (46%) and Republicans (36%) to say that most police officers think they are above the law. Instead, a majority of whites (54%) and Republicans (64%) say police don’t think they’re above the law.
  8. 65% of Americans think police officers “commonly” racially profile Americans and 63% oppose itMajorities of whites (62%), Hispanics (62%), and blacks (77%) oppose police stopping “motorists and pedestrians of certain racial or ethnic backgrounds because the officer believes that these groups are more likely than others to commit certain types of crimes.” Republicans stand out with a slim majority (51%) in favor of racial profiling and 49% opposed. Black Republicans, however, disagree, with 65% who oppose racial profiling and 35% who support it.[2]
  9. 61% say there is a “war on police” in America. Sixty-five percent (65%) of Americans worry that police officers have “very dangerous jobs,” and 58% feel officers too often must deal with recalcitrant citizens who don’t show enough respect. Although Republicans and Democrats both believe police have dangerous jobs, Republicans are more than 30 points more likely than Democrats to believe there is a “war on police” today (82% vs. 49%) and that Americans show insufficient respect to officers (77% vs. 45%). 
  10. African Americans are nearly twice as likely as whites to report a police officer swearing at them. About a quarter of African Americans (26%) and Hispanics (22%) report police using abusive language or profanity with them compared to 15% of whites. Nearly 4 in 10 African Americans (39%) and 27% of Hispanics report knowing someone physically mistreated by police, compared to 18% of whites.
  11. 60% say it’s more important to protect the innocent than punish the guilty. When asked which would be worse, 60% say it would be worse to imprison 20,000 innocent people, while 40% say it would be worse to have 20,000 guilty people who are free. Majorities of Republicans (55%), independents (60%), and Democrats (64%) all agree it’s worse to imprison innocent people. However, Donald Trump’s early core supporters stand out with a majority (52%) who say it’s actually worse to not punish the guilty. Other Republican voters disagree. For instance 65% of Ted Cruz’s early primary supporters say it’s worse to imprison the innocent.[3] 

Pentagon Bureaucracy: $125 Billion in Waste

The Washington Post has a blockbuster story today documenting vast overhead costs in the Department of Defense (DoD). Experts often lambast the DoD’s excessive bureaucracy, and I have charted the growth in the number of civilian DoD workers.

But the Post reveals remarkable new measures of the department’s bloat, based on a leaked study it obtained:

The Pentagon has buried an internal study that exposed $125 billion in administrative waste in its business operations amid fears Congress would use the findings as an excuse to slash the defense budget, according to interviews and confidential memos obtained by The Washington Post.

Pentagon leaders had requested the study to help make their enormous back-office bureaucracy more efficient and reinvest any savings in combat power. But after the project documented far more wasteful spending than expected, senior defense officials moved swiftly to kill it by discrediting and suppressing the results.

The study was produced last year by the Defense Business Board, a federal advisory panel of corporate executives, and consultants from McKinsey and Company. Based on reams of personnel and cost data, their report revealed for the first time that the Pentagon was spending almost a quarter of its $580 billion budget on overhead and core business operations such as accounting, human resources, logistics and property management.

The data showed that the Defense Department was paying a staggering number of people — 1,014,000 contractors, civilians and uniformed personnel — to fill back-office jobs far from the front lines. That workforce supports 1.3 million troops on active duty, the fewest since 1940.

The DoD’s effort to bury the study is appalling, but Pentagon waste is a complex problem. You can’t just chop $125 billion worth of “back office” jobs overnight. However, it is also true that the 1,014,000 such jobs—in logistics, procurement, and other activities—are the exact types of functions that have become vastly more efficient in the private sector.

TPC “Experts” Don’t Know Who Gets What Share of Trump Tax Cuts

According to Wall Street Journal writer Laura Saunders, future Treasury Secretary Mnuchin must be wrong because Tax Policy Center experts say so. Actually, Mr. Mnuchin may be partly right, but the experts are almost entirely wrong.

“Steven Mnuchin, the likely next Treasury secretary, this week said rich U.S. taxpayers won’t get “an absolute tax cut” under President-elect Donald Trump,” writes Ms. Saunders; “But that is not what Mr. Trump says in his taxation plan. In fact, under his approach the wealthy would receive an average tax cut of about $215,000 per household, experts say.” 

“What Mr. Trump says” is not at all the same as what some “experts say.” Expert or not, Tax Policy Center (TPC) estimates of who pays what under different tax rates are distressingly capricious.

Mr. Mnuchin appeared to be talking only about individual income taxes. That is why he suggested that lower marginal tax rates for high earners “will be offset by less deductions.” So long as we focus only on non-business taxes (including high salaries and dividends), Mr. Mnuchin was probably right. Indeed, according to Ms. Saunders’ experts, the lost revenue from lower tax rates over 10 years totals $1.49 trillion plus $145 billion from eliminating the 3.8% Obamacare surtax.  Yet those individual tax cuts are more than offset by $2.6 trillion in added revenue from Trump’s cap on itemized deductions and the loss of personal exemptions. More than doubling the standard deduction loses considerable revenue, but not from high-income taxpayers.

Ms. Saunders mentions only the loss of itemized deductions—not exemptions—and concludes “these limits don’t fully offset the effects of income- and estate-tax cuts for high earners proposed by Mr. Trump, according to experts.” 

Repealing the estate tax loses very little revenue, but it is arbitrary for the TPC to assign that lost revenue to people with high incomes because the estate tax is borne by heirs and charities—not dead people.

With estate tax repeal included, only 22% of the Trump tax cut goes to households (including investors) according to the TPC, with 44% of Trump tax cuts going to corporate earnings (and the rest to unincorporated business). 

Problems with Paid Family Leave Redux

Last week I wrote about the unintended consequences of the proposed DC family leave benefit, which is to be financed by a payroll tax on all employers in the District. 

My objections were that the tax increases the cost of operating in the District and that this will likely push some businesses contemplating opening in DC to Maryland or Virginia instead. The other objection I had was that it specified a benefit to be provided that not all companies may want to provide. In an ideal world companies would pay wages to workers and then allow workers to get their own insurance, pensions, transportation, food, and the like on their own and not have these things provided by their workplace. Today, the tax breaks afforded most fringe benefits behoove companies to give many of these things to their workers in lieu of wages, and that’s not efficient. 

I received a surprising amount of feedback from my article, most of which was positive—a first for me—and some readers suggested that I missed a couple issues relevant to the benefit. The first is that while tying the tax to payroll may make sense as far as this benefit is concerned, it also tends to make it more difficult for people to understand the true cost involved. 

A tax that’s .62% of payroll may not seem like a lot, but for a restaurant that has $1 million of revenue that translates to a tax of $2,100 a year, assuming that payroll is one-third of total revenue. For businesses other than restaurants, where payroll typically equals two-thirds of revenue, double that number. That amounts to 2.2% instead of 4.4% of profits, on top of the 8.95% DC corporate profits tax on revenue over $1 million. If they expand the tax to cover medical leave as well—which is on the table—that would add another thousand dollars or so to a restaurant’s cost of doing business. In fact, a better way to see this is as a 50% increase on the tax on business profits, except that this doesn’t vary much with the business cycle.

The other point a restaurant owner suggested to me is that their workers are typically young and part-time, and often have another job. In short, they see this as a benefit few of their twenty-something employees would claim, yet they still would be paying for it. Fortune 500 companies may find the tax easy to swallow, but not so for businesses like my local kebab house that are on the verge of hanging on. This tax, combined with a sharply higher minimum wage and other government mandates—such as the city’s inexplicable refusal to charge for-profit food trucks to use city-owned property for their business, increasing restaurants’ competition further—are hurting their bottom lines, and life is getting more precarious for businesses on the margins. 

Tax Policy Center’s Flawed $6.2 Trillion Revenue Loss from Trump Tax Plan

A crucial graph in the Wall Street Journal article, “Trump Fiscal Plain Roils the GOP,” relies on estimates from the Tax Policy Center. Unfortunately, the TPC provides only static estimates of revenue effects of House Republican or Trump tax plans.  That is, they assume lower marginal tax rates on families and firms have literally no effect at all on tax avoidance or long-term economic growth. 

The Wall Street Journal graph purports to project budget deficits over the next 10 years under Congressional Budget Office (CBO) baseline, the House Republican tax plan and the Trump tax plan.  This is quite misleading, because all three scenarios treat future federal spending as given, unchangeable.  Federal spending rose from 17.6% of GDP in 2001 to 19.1% by 2007, and is now 20.7% in 2015. The 2017 Budget projects spending to reach to 22.4% by 2021 and keep rising. 

The CBO August baseline projects federal spending to total $50.2 trillion from 2017 to 2026, so a mere 5% reduction in that growth would exceed $2.5 trillion.

Under President-elect Trump’s revised tax proposal, claims the Tax Policy Center, “revenues would fall by $6.2 billion over the first decade before accounting for interest costs and macroeconomic effects. Including those factors, the federal debt would rise by at least $7 trillion over the first decade.” 

Do not confuse these alleged “macroeconomic effects” with dynamic analysis used in Tax Foundation models and academic studies. The Tax Foundation estimates, for example, that the House Republican tax plan “would reduce federal revenue by $2.4 trillion over the first decades on a static basis,” but that figure shrinks to $191 billion once they properly account for improved investment incentives,  greater labor and entrepreneurial effort and therefore faster economic growth. 

By contrast, the Tax Policy Center presents only “macro feedback” estimates for the Trump plan. The TPC Keynesian model and Penn-Wharton models assume that revenue losses are 2.6% of GDP, the same as static estimates.  But interest rates are higher, adding to deficits and debt.

Revenues from Trump Plan Unfairly Compared to Fanciful CBO Projections

Tax Policy Center estimate of a 10-year $6.2 trillion revenue loss is used to predict higher interest rates, and those higher interest rates prevent the economy from growing faster, which in turn vindicates the static assumption of a $6.2 trillion revenue loss.  

The circularity of this tangled fable is remarkably illogical.  How could interest rates remain higher if private investment is crowded out leaving GDP growth unchanged?

The TPC tells a similar story about the House Republican tax plan.  “Although the House GOP tax plan would improve incentives to save and invest, it would also substantially increase budget deficits unless offset by spending cuts, resulting in higher interest rates that would crowd out investment [emphasis added].”  This too is an unsupported assertion. The TPC analysis predicts more private savings and therefore cannot simply assume deficits “would crowd out investment.”