Topic: Tax and Budget Policy

Making a Good Budget Great

President Trump’s 2018 budget takes a meat cleaver to many federal programs. In my issue areas–transportation, housing, and public lands–it would end the Federal Transit Administration’s New Starts program; end funding for Amtrak’s long-distance trains; eliminate HUD community development block grants; and reduce funding for public land acquisition.

Trump calls this the “America First” budget. What it really is is a “Federal Funding Last” budget, as Trump proposes to devolve to state and local governments and private parties a number of programs now funded by the feds. In theory, the result should be greater efficiency and less regulation. However, in most of the areas I know about, Trump could have gone further and produced even better results.

Transportation: I applaud the elimination of New Starts, the program that encourages cities to waste money on obsolete transit systems, but am disappointed that Trump would continue to fund projects with full-funding grant agreements. There are several insanely expensive projects, including the Maryland Purple Line and the Minneapolis Southwest Line, that have such agreements but haven’t started construction and should be eliminated. A number of streetcar and bus-rapid transit projects also fall into this category. If Congress is willing to live with no more full-funding grant agreements, it should allow the administration to also review and eliminate projects that haven’t yet begun construction or have made only token construction efforts.

The proposal to eliminate Amtrak long-distance trains is politically problematic. Since Amtrak’s other trains reach just 22 states, while the long-distance trains add 26 more, this proposal will look like it is favoring some states over others. As an alternative, I would have suggested that the federal government offer to cover 25 percent (or less) of the fully allocated costs (including depreciation) of each train or route, including the Northeast Corridor. If fares don’t cover the other 75 percent, then state support would be required or the trains would be cut. This is much more fair, especially because some state-supported trains actually require subsidies per passenger mile that are much larger than many of the long-distance trains.

Three other transportation proposals look good. One would transfer air traffic control to an independent, non-governmental organization, which would quickly install new equipment and increase airline capacities and safety. A second would eliminate the so-called Essential Air Service program, which subsidizes airports in smaller communities. Trump also proposes to eliminate the TIGER grant program, a relic of the 2009 stimulus bill, that has funded streetcars and other ridiculous projects.

Based on His Leaked 2005 Tax Data, Donald Trump Should Move to Italy (or the Isle of Man)

The multi-faceted controversy over Donald Trump’s taxes has been rejuvenated by a partial leak of his 2005 tax return.

Interestingly, it appears that Trump pays a lot of tax. At least for that one year. Which is contrary to what a lot of people have suspected—including me in the column I wrote on this topic last year for Time.

Some Trump supporters are even highlighting the fact that Trump’s effective tax rate that year was higher than what’s been paid by other political figures in more recent years.

But I’m not impressed. First, we have no idea what Trump’s tax rate was in other years. So the people defending Trump on that basis may wind up with egg on their face if tax returns from other years ever get published.

Second, why is it a good thing that Trump paid so much tax? I realize I’m a curmudgeonly libertarian, but I was one of the people who applauded Trump for saying that he does everything possible to minimize the amount of money he turns over to the IRS. As far as I’m concerned, he failed in 2005.

But let’s set politics aside and focus on the fact that Trump coughed up $38 million to the IRS in 2005. If that’s representative of what he pays every year (and I realize that’s a big “if”), my main thought is that he should move to Italy.

Yes, I realize that sounds crazy given Italy’s awful fiscal system and grim outlook. But there’s actually a new special tax regime to lure wealthy foreigners. Regardless of their income, rich people who move to Italy from other nations can pay a flat amount of €100,000 every year. Note that we’re talking about a flat amount, not a flat rate.

Here’s how the reform was characterized by an Asian news outlet.

Italy on Wednesday (Mar 8) introduced a flat tax for wealthy foreigners in a bid to compete with similar incentives offered in Britain and Spain, which have successfully attracted a slew of rich footballers and entertainers. The new flat rate tax of €100,000 (US$105,000) a year will apply to all worldwide income for foreigners who declare Italy to be their residency for tax purposes.

Here’s how Bloomberg/BNA described the new initiative.

Italy unveiled a plan to allow the ultra-wealthy willing to take up residency in the country to pay an annual “flat tax” of 100,000 euros ($105,000) regardless of their level of income. A former Italian tax official told Bloomberg BNA the initiative is an attempt to entice high-net-worth individuals based in the U.K. to set up residency in Italy… Individuals paying the flat tax can add family members for an additional 25,000 euros ($26,250) each. The local media speculated that the measure would attract at least 1,000 high-income individuals.

Think about this from Donald Trump’s perspective. Would he rather pay $38 million to the charming people at the IRS, or would he rather make an annual payment of €100,000 (plus another €50,000 for his wife and youngest son) to the Agenzia Entrate?

Seems like a no-brainer to me, especially since Italy is one of the most beautiful nations in the world. Like France, it’s not a place where it’s easy to become rich, but it’s a great place to live if you already have money.

But if Trump prefers cold rain over Mediterranean sunshine, he could also pick the Isle of Man for his new home.

There are no capital gains, inheritance tax or stamp duty, and personal income tax has a 10% standard rate and 20% higher rate.  In addition there is a tax cap on total income payable of £125,000 per person, which has encouraged a steady flow of wealthy individuals and families to settle on the Island.

Though there are other options, as David Schrieberg explained for Forbes.

Italy is not exactly breaking new ground here. Various countries including Portugal, Malta, Cyprus and Ireland have been chasing high net worth individuals with various incentives. In 2014, some 60% of Swiss voters rejected a Socialist Party bid to end a 152-year-old tax break through which an estimated 5,600 wealthy foreigners pay a single lump sum similar to the new Italian regime.

Though all of these options are inferior to Monaco, where rich people (and everyone else) don’t pay any income tax. Same with the Cayman Islands and Bermuda. And don’t forget Vanuatu.

If you think all of this sounds too good to be true, you’re right. At least for Donald Trump and other Americans. The United States has a very onerous worldwide tax system based on citizenship.

In other words, unlike folks in the rest of the world, Americans have to give up their passports in order to benefit from these attractive options. And the IRS insists that such people pay a Soviet-style exit tax on their way out the door.

Trump Launches Downsizing Effort

President Donald Trump signed an executive order to create a “Comprehensive Plan for Reorganizing the Executive Branch.” The order requires his budget director, Mick Mulvaney, to complete a plan recommending specific spending cuts based on input from federal agencies and outside scholars.

This is a promising initiative. It will be up to Congress to enact the administration’s plan into law, but Mulvaney is a serious reformer who will likely use this opportunity to push for substantial terminations.

The executive order does not just ask for modest efficiency gains, but for major cuts:

The proposed plan shall include, as appropriate, recommendations to eliminate unnecessary agencies, components of agencies, and agency programs, and to merge functions.

The plan contemplates a revival of federalism:

In developing the proposed plan … the Director shall consider … whether some or all of the functions of an agency, a component, or a program are appropriate for the Federal Government or would be better left to State or local governments or to the private sector through free enterprise.

As it turns out, the federal budget includes 1,100 aid-to-state programs costing almost $700 billion a year that “would be better left to state and local governments.” As for free enterprise, we could start by weaning farmers off welfare and allowing them to earn a living in the marketplace like the rest of us do.

The executive order asks Mulvaney to consider, “whether the costs of continuing to operate an agency, a component, or a program are justified by the public benefits it provides.” This is a call for Mulvaney to initiate detailed cost-benefit analyses of spending programs. Federal law currently requires cost-benefit analyses of regulations, but there is no similar accountability for spending programs.

Consider, for example, that Congress spends $8 billion a year on farm insurance subsidies. Taxpayers are supposed to take it on faith that this is a good use of their money. Sorry, but that is just not good enough anymore in an era of $600 billion budget deficits.

So, as a first step, Mulvaney should identify a few dozen major programs that outside experts have pointed to as dubious (such as farm insurance subsidies) and subject them to a rigorous cost-benefit analysis. Such analyses would include the deadweight losses imposed by each program’s needed tax funding, as well as other sorts of damage to society.

Prior presidents have “reorganized” the government in harmful and expansive ways. George W. Bush compounded bureaucracy, wasted money, and reduced efficiency by creating a Homeland Security superstructure on top of 22 existing federal agencies.

The language of Trump’s executive order suggests that he will move in the opposite direction, and Mulvaney is the right man to lead this effort.

To understand the failings of federal bureaucracies, see here.

For a menu of high-priority cuts, see here.

Corporate Tax Rates and Revenues in Britain

If Republicans succeed in slashing the federal corporate tax rate from 35 percent to 20 percent or less, the tax base will expand as investment increases and tax avoidance falls. There is no need for a legislated expansion in the tax base, as the GOP is proposing with its “border adjustment” scheme. The tax base will broaden automatically over time to offset the government’s revenue loss from the rate cut.

New evidence comes from Britain, which has enacted a series of corporate tax rate cuts. A study by the Centre for Policy Studies includes this chart. It shows the tax rate falling from 35 percent to 20 percent since the late 1980s and corporate tax revenues as a percentage of gross domestic product (GDP) trending upwards. As the rate has fallen, the tax base has grown more than enough to keep money pouring into the Treasury.

Does legislated base broadening explain the increase in U.K. tax revenues? Not for the most recent round of rate cuts. In 2010-11, the government collected £36.2 billion from a 28 percent corporate tax. The government expected its corporate tax package—including a rate cut to 20 percent—to lose £7.9 billion a year by 2015-16 on a static basis. That large expected loss indicated that the package had little legislated base broadening. Study author Daniel Mahoney sent me a table confirming that the package included only modest base-broadening measures that were mainly offset by base-narrowing measures.

The government’s dynamic analysis of the corporate tax package projected a revenue loss of about half of the static amount over the long run. But that analysis was apparently too pessimistic: actual revenues in 2015-16 had risen to £43.9 billion. So in five years, the statutory tax rate fell 29 percent (28 percent to 20 percent) but revenues increased 21 percent (£36.2 billion to £43.9 billion). That is dynamic!

Looking at the longer term, the CPS study says, “In 1982-83 when the rate was 52%, corporation tax receipts yielded revenues equivalent to 2% of GDP. Corporation tax now raises over 2.3% of GDP when the headline rate is at just 20%.” The Brits have scheduled a further rate cut to 17 percent.

Canada’s experience also shows that when you slash the corporate tax rate, substantially more profits appear on corporate returns over time. Canada cut its federal corporate tax rate from 28 percent and higher in the 1980s to just 15 percent today, but it collects about the same amount of corporate tax revenues as a share of GDP now as then.

The British and Canadian experiences show that large corporate tax rate cuts lose governments little if any money. There is no need for risky changes to the corporate tax base, as House Republicans are proposing with border adjustments. That approach would disrupt the economy and invite retaliation from our trading partners for no economic gain.

The CPS study suggests that British industry has responded strongly to tax rate cuts, with rising investment and higher wages for workers. That’s what we want here. So Republicans should put aside their complex base-broadening plan, and just slash the corporate tax rate to the British-Canadian range of 15 to 20 percent.

The CPS study is here.

Kenneth Boulding on the Serious Distortion of Economic Ethics

From Kenneth Boulding, A Reconstruction of Economics (NY, Science Editions 1962) pp. 481-82:

“Economic ethics has been seriously distorted by static and short-run criteria of value. ‘Justice’ has been thought of too much in terms of division of a fixed pie than in terms of encouraging the baking of more pies… .The importance of this problem rests on a matter of simple arithmetic: that if redistribution toward any group causes a fall in the rate of growth of national income, no matter how slight, there will be some date beyond which the absolute income of the favored group will be less than it would have been if the redistribution had not taken place.”

Misconceptions in Raj Chetty’s “Fading American Dream”

Raj Chetty, the head of Stanford’s “Equality of Opportunity” project, recently released a paper called “The Fading American Dream” co-authored with another economist, a sociologist, and three grad students. It claims that “rates of absolute mobility have fallen from approximately 90% for children born in 1940 to 50% for children born in the 1980s.” [Though the study ends with 2014, when most of those “born in the 1980s” were not yet 30.]

The title alone was sure to attract media excitement, particularly because the new study thanks New York Times columnist David Leonhardt “for posing the question that led to this research.” 

Leonhardt, in turn, gushed that Chetty’s research “is among the most eye-opening economics work in recent years.”  He explained that he asked Chetty to “create an index of the American dream” which “shows the percentage of children who earn more money… than their parent earned at the same age.”  The result, he concludes, is “very alarming. It’s a portrait of an economy that disappoints a huge number of people who have heard that they live in a country where life gets better, only to experience something quite different.”

“Another Chetty-bomb just exploded in the mobility debate,” declared a Brookings Institution memo: “Only half of Americans born in 1980 are economically better off than their parents. This compares to 90 percent of those born in 1940.”

At Vox.com,  Jim Tankersley proclaimed “The  American Dream [is] collapsing for young adults.”

“Sons born in 1984 are only 41 percent likely to earn more than their fathers, compared to 95 percent of sons born in 1940,” wrote USA Today reporter Nathan Bomey.  “If the American dream is defined as earning more money than your parents,” said Bomey, “today’s young adults are just as likely to have a nightmare as they are to achieve the dream.”

The Chetty study proved to be a politically irresistible story, since it appears to confirm a popular nostalgia for the good old days and belief that it has become more and more difficult to get ahead. But that is not what the study really shows.  What it really shows is:

First: Incomes were extremely low in 1940, so it was quite easy to do better 30 years later.

Second: Doing better than your parents is not defined by your income at age 30, but by income and wealth accumulated over a lifetime (including retirement).

Third: A rising percentage of young people remain in grad school at age 30, so their current income is lower than that of their parents at that age but their future income is likely to be much higher.

State Department Spending Triples

President Trump is reportedly planning to cut the Department of State’s budget by 37 percent. I’m not an expert on the department’s activities, but it would seem ripe for cuts given the large run-up in spending in recent years.

The chart shows Department of State outlays since 1970 in constant 2016 dollars. Real spending has more than tripled the past 16 years—from $9.5 billion in 2000 to $30.9 billion in 2016. The data comes from President Obama’s last budget. You can chart spending on federal departments and agencies here at DownsizingGovernment.org.

The Trump administration apparently wants to make budget room for Department of Defense spending increases, but the Pentagon is also bloated with inefficiency, as discussed here, here, and here.