Topic: Government and Politics

The Pay Czar at Work

Mark Calabria notes how the form of salary scheme at financial institutions played no apparent role in sparking the financial crisis.  But that hasn’t stopped the federal pay czar from boasting about his power, even to regulate compensation set before he took office.

Reports the Martha’s Vineyard Times:

Speaking to a packed house in West Tisbury Sunday night, Kenneth Feinberg rejected the title of “compensation czar,” but he also said said his broad and “binding” authority over executive compensation includes not only the ability to trim 2009 compensation for some top executives but to change pay plans for second tier executives as well.

In addition, Mr. Feinberg said he has the authority to “claw back” money already paid to executives in the seven companies whose pay plans he will review.

And, he said that if companies had signed valid contractual pay agreements before February 11 this year, the legislation creating his “special master” office allowed him to ask that those contracts be renegotiated. If such a request were not honored, Mr. Feinberg explained that he could adjust pay in subsequent years to recapture overpayments that were legally beyond his reach in 2009.

This isn’t the first time that federal money has come with onerous conditions, of course.  But it provides yet another illustration of the perniciousness of today’s bail-out economy.

Robert D. Novak, 1931-2009

51433922Veteran political columnist Robert D. Novak, 78, died today of a brain tumor at his home in Washington DC.

Odd that the self-described Prince of Darkness was one of the nicest persons I’ve ever known. Unlike many here in Babylon-by-the-Potomac, Bob became less enamored of the Establishment the longer he was here. He believed in liberty and was a great friend of the Cato Institute.

He will be sorely missed.

Citizens United and False Consciousness

The Washington Post offers a brief item this morning on the upcoming Citizens United reargument. Robert Barnes writes, “The court is considering whether to overturn its previous decisions that restrict unions and corporations from using their general treasuries to influence election campaigns.”

Actually, a better description of the case would be: the Supreme Court is considering overturning decisions that restrict corporations from using their general treasuries to try to influence election campaigns.

In the most important decision at issue, Austin v. Michigan Chamber of Commerce, the latter organization wished to run an advertisement naming a candidate and supporting his views on economic policy. That ad may have convinced some voters. It may have repelled others. Many voters would not have been moved at all. Whatever influence the ad might have had would have depended on its reception among the voters.

Many people would like to see Austin affirmed. Absent restrictions on corporate issue spending, they say, business would have too much influence on policymaking. But the Supreme Court said in Buckley v. Valeo (and more recently) that restricting speech in the name of equality violates the First Amendment. Others see corporate spending as a kind of corruption and thus subject to the restrictions of campaign finance law. But if Austin falls,  corporations will not be able to give candidates contributions in exchange for favors. They will be able to fund speech independently of campaigns and parties.

In truth, I think many people who support proscribing corporate spending in campaigns believe speech by business is “bad speech” that will make for bad policies. But “prior restraint” of speech clearly violates the First Amendment. Voters, and not censors, are supposed to decide what constitutes “bad speech” and “bad policy.” The fear of corporate speech often reflects a fear that voters will be persuaded by business interests to endorse candidates and policies that are not in the interest of the most voters. But coercion to preclude false consciousness is not compatible with the foundations of a liberal republic, the form of government ordained by the U.S. Constitution.

So the Court may well let corporations and labor unions try to influence elections. Voters will decide whether such organizations actually do influence elections.

Here’s a video produced by Cato’s Caleb Brown and Austin Bragg following the oral argument of Citizens United (and featuring Yours Truly):

Health Care Reform: WWJD?

Today’s post comes from my theologian father:

There was a man (M) going down from Jerusalem to Jericho who needed health care (Luke 10:25-37).  All bypassers were free to provide for him or keep walking.  The Priest (P) and the Levite (L) used their freedom in one way and the Samaritan (S) used his the another way.

WWJD?  He said do what S did.  (M’s quality of care was outstanding.)

WWJND?  He did not say that S, P, and L should agree on the level of care and funding for M and chip in.  Maybe He realized that P and L had a bullet-proof majority.  Maybe He realized the time, attention, care, funding, and personal touch of S were very important.  Maybe He realized that even if M got to an inn, the innkeeper would be at risk for exceeding guidelines and would have to wait longer to be reimbursed.  Maybe He realized the devil was in the details and could complicate or possibly compromise M’s care: the timely availability of government run donkeys (ambulances); inns (hospitals); professionals at every point in the chain and in between; plus, auditors to prevent fraud and abuse.  The moral lesson Jesus drew was: use your freedom to care for your neighbor and do not hand it over to P and L if you want your neighbor and yourself to get to Jericho.

Today, millions of Ms are by the side of the road in nursing homes, and the Ps and Ls have already said they want to shrink their funding so they can fund care for the rest of us.  Sympathy and sentiment are wonderful but do not always work well as criteria for good policy.

Jesus was a magnificent policy wonk.

For more on how the Parable of the Good Samaritan applies to health policy, click here and here.

The Price We All Pay for High Tax Rates

Politicians tend to like high tax rates because they believe it yields more revenue for them to redistribute.  Yet the perverse incentive effects of high rates tend to limit the increase in revenue, since the higher the rates, the more worthwhile are tax avoidance activities.  At some point it becomes better to consume than invest and play than work, since the rate of return is so low.

Reports Robert Carroll for the Tax Foundation:

Economic Effects of High Tax Rates
High tax rates discourage work, saving and entrepreneurship. They also encourage taxpayers to rearrange their tax affairs to receive more of their compensation in less heavily taxed forms and to take greater advantage of the myriad tax preferences in today’s tax code. For example, taxpayers can reduce their tax bill by financing more of a home purchase, receiving more of their compensation as tax-free fringe benefits, or rebalancing their investment portfolios towards tax-exempt state and local government bonds.

It’s important to remember that every time a taxpayer makes a decision based on tax considerations rather than economic merit, we all lose. It wastes resources by redirecting them to less productive uses. The cost of high tax rates is not trivial. Research on the major changes in tax rates over the last several decades—the lower tax rates enacted in 1981, 1986 and 2001 or the higher tax rates enacted in 1993—finds that the behavioral responses can be large. This research generally finds that for every 1 percent decrease in the after-tax reward from earning income, taxpayers reduce their reported income by about 0.4 percent.

This does not mean that tax cuts pay for themselves. Rather, tax rate changes can have a profound effect on the size of the tax base, with lower tax rates increasing the size of the tax base and higher tax rates, such as those proposed by President Obama, shrinking the tax base. A shrinking tax base is not only suggestive of the economic costs of high tax rates, but also means that the government will take in less revenue than the casual observer might assume.

High Tax Rates Will Shrink the Federal Income Tax Base
Consider the combined effect of President Obama’s proposal to raise the top tax rate from 35 percent to 39.6 percent and the new surtax. This means high-income households will receive 54 cents rather than 65 cents from every dollar they earn; that is, the after-tax reward from earning income falls by 17 percent. Based on the research mentioned above, with such large increases in tax rates, we can expect taxpayers facing the top tax rates to reduce their reported incomes by nearly 7 percent.

What is critically important from the government’s perspective is that while it collects an extra 10 cents for every dollar subject to the higher rates, it loses over 45 cents for every dollar by which reported income falls due to taxpayers working less or otherwise reporting less income.

Overall, simulating the effect of the higher tax rates in 2011 shows that the federal government can expect to raise at most only 60 cents on the dollar. While “large” is always in the eye of the beholder, losing 40 cents on a dollar should cause us all to question this policy. Moreover, this is a cautious estimate. It is based on the behavioral response estimated for the overall taxpaying population, even though high-income households are likely to be much more responsive. Thus, we might expect an even faster shrinkage of the federal tax base from these tax increases.

President Barack Obama wants Americans to believe that they can enjoy all of his proposed programs without paying for them because “the rich” will cover the cost.  Alas, this is a dangerous political fantasy.  Taxing “the rich” will only be the start.  To get real money, the big spenders are going to have to tax the middle class as well.  There ain’t no such thing as a free lunch–or a free government program!