Topic: Tax and Budget Policy

U.S. Sugar Program Costs Another $1.75 Billion

The state of Florida announced yesterday that it will pay $1.75 billion to buy out the nation’s largest sugar producer and 300 square miles of land it owns north of the environmentally sensitive Florida Everglades. Although most news stories ignored the connection, the deal is yet another cost Americans continue to pay for our misguided agricultural programs.

The company selling the land, United States Sugar, has for decades benefited from a federal program that guarantees a minimum price for United States Sugar’s crop through a system of loan guarantees and strict import quotas. This means American families and sugar-consuming industries are typically paying two to three times the world price for sugar.

The sugar program also imposes damage on the environment, which motivated yesterday’s announcement. Like other farm programs, the sugar program encourages over-production. In the case of United States Sugar, that means the extraction of fresh water that would otherwise flow naturally into the Everglades, and the over-application of fertilizers that artificially raise the phosphorous content of the runoff, causing a sharp decline in periphyton, such as algae, that supports bird and other animal life in the Everglades. [For more about the environmental damage caused by U.S. farm programs, see my 2005 article published by the Property and Environment Research Center.]

In large part because of the damage caused by subsidized domestic sugar producers, Congress allocated $8 billion in 2000 for cleaning up the Everglades. Florida’s purchase of United States Sugar was just the latest installment in an ongoing clean-up operation.

Of course, Congress could have avoided much of this mess years ago by repealing the sugar program. If Americans had been free to buy sugar at world prices, our domestic sugar industry would have been smaller and more efficient with a much smaller environmental footprint. Converting the sugar-cane fields to more environmentally friendly uses would have been much less expensive because the annual subsidies would not have been capitalized into the value of the land.

When the Democrats took power in Congress in 2007, they pledged themselves to be in favor of reform, fiscal responsibility, and protection of the environment. Yet the new farm bill that Democrats voting overwhelmingly in favor of last month, and that their likely presidential candidate Barack Obama endorsed, strikes out on all three counts.

A Big-Government Running Mate for McCain?

The Washington rumor mill has Minnesota Governor Tim Pawlenty as the leading candidate to be John McCain’s running mate. If so, that would be a clear slap in the face to small-government conservatives.

Pawlenty, who reportedly coined the term “Sam’s Club conservative” to describe his political philosophy, has been an economic populist and big-spender generally. Among other things, he:

  • Supported government subsidized health care for all children as the first step toward universal health insurance, and opposed President Bush’s veto of a Democratic bill that would have expanded the State Children’s Health Insurance program (SCHIP) to families earning as much as $83,000 per year;
  • Supports Massachusetts-style health care reform, including a “health care exchange” and an individual mandate;
  • Has called for banning all prescription drug advertizing, and seeks government imposed price controls for drugs offered through Medicare;
  • Proposed a $4000 per child preschool program for low-income children;
  • Pushed a statewide smoking ban smoking ban in workplaces, restaurants and bars;
  • Increased the state’s minimum wage;
  • Imposed some of the most aggressive and expensive renewable energy mandates in the country;
  • Was an ardent supporter of the farm bill;
  • Received only a “C” ranking on Cato’s 2006 Governor’s Report Card, finishing below such Democrats as Iowa Governor Tom Vilsack and tied with Democratic Pennsylvania Governor Ed Rendell.

It was the Republicans’ big-spending, big-government ways that helped ensure their defeat in the 2006 midterm elections. Suburbanites, independents, and others who were fed up not just with the war and corruption, but also with the Republican drift toward big-government who stayed home, or even voted Democratic, on election day 2006. That night, more than 65 percent of voters told a pollster they believed that “The Republicans used to be the party of economic growth, fiscal discipline, and limited government, but in recent years, too many Republicans in Washington have become just like the big spenders they used to oppose.”

John McCain cannot hope to win this fall without the support of economic and small government conservatives. Many are attracted to what appears to be McCain’s genuine fiscal conservatism. But many others are suspicious of McCain’s populist, big-government tendencies on issues from energy and the environment to civil liberties, the war and campaign finance. McCain needs to reach out to Reagan/Goldwater small-government conservatives. Vice President Pawlenty would be sending a very different signal.

Another Entrepreneur Escapes French Tax System

One almost feels sorry for the French. Several years ago, supermodel Laetitia Casta escaped to London because of France’s onerous tax regime. This was a a particularly painful blow to French pride since she was selected in 1999 to be Marianne, a symbol of the nation. To add insult to injury, one of France’s most prominent chefs has now escaped to Monaco. The UK-based Times has the details:

France has just lost one of its greatest chefs. Alain Ducasse, the holder of 14 Michelin stars and a worlwide restaurant and hotel empire, has given up his French citizenship for the privilege of becoming a Monegasque, we hear today. Ducasse, 51, whose interests turn over about 160 million million euros a year, has gone into tax exile. He could have chosen Switzerland and kept his citizenship but Ducasse, a southerner by birth, has ties to Monaco, where he owns the three-star Louix XV. Monaco imposes no income or wealth tax on its residents – provided they are not French. …So, the wheeze for French would-be exiles is to become a Monaco citizen – a privilege accorded very sparingly. Prince Albert II has just granted this “sovereign order” to Ducasse.  There are only 8,000 Monaco citizens and there is a long waiting list for French candidates. …Because of the wealth tax plus steep income and social security taxes, many high earners and very well off people moved over the past two decades to London, Brussels and other capitals as well as the traditional haven Switzerland. They are not returning in noticeable numbers, mainly because the wealth tax remains and they do not trust their country to reverse policy at the drop of a hat. Sarko has maintained the Impôt sur la Fortune (ISF) as the 26-year-old annual tax is known (the exiles call it Incitation à Sortir de France). The tax gathers relatively little income and drives capital abroad but the public supports soaking the rich, so scrapping it is politically unacceptable.

But Americans should not be overly amused by this story. At least French taxpayers have the freedom to choose another nation’s tax system. The United States imposes an exit tax (a policy almost always associated with despicable regimes such as the Soviet Union and Nazi Germany), making it very difficult for people to dump the internal revenue code.

Right Message, Wrong Messenger

A column in the Wall Street Journal correctly explains that Senators Obama and McCain have a habit of displaying economic illiteracy. So it is rather ironic that the author is Karl Rove, the man who spent the past seven years steering George W. Bush into one bad economic decision after another.

On many occasions, I visited economists in the administration to complain about their Keynesian fiscal policy (such as rebates), wasteful spending (such as farm bills and Medicare expansion), and senseless regulation (such as Sarbanes-Oxley), and invariably I would be told that the Bush White House was pursuing bad policy but that there was nothing that could be done because Karl Rove’s political strategy shop was calling the shots.

Only in Washington can people disply this amount of chutzpah and still retain credibility:

Barack Obama and John McCain are busy demonstrating that in close elections during tough economic times, candidates for president can be economically illiterate and irresponsibly populist. In Raleigh, N.C., last week, Sen. Obama promised, “I’ll make oil companies like Exxon pay a tax on their windfall profits, and we’ll use the money to help families pay for their skyrocketing energy costs and other bills.” Set aside for a minute that Jimmy Carter passed a “windfall profits tax” to devastating effect, putting American oil companies at a competitive disadvantage to foreign competitors, virtually ending domestic energy exploration, and making the U.S. more dependent on foreign sources of oil and gas. Instead ask this: Why should we stop with oil companies? They make about 8.3 cents in gross profit per dollar of sales. Why doesn’t Mr. Obama slap a windfall profits tax on sectors of the economy that have fatter margins? Electronics make 14.5 cents per dollar and computer equipment makers take in 13.7 cents per dollar, according to the Census Bureau. Microsoft’s margin is 27.5 cents per dollar of sales. Call out Mr. Obama’s Windfall Profits Police!

…This past Thursday, Mr. McCain came close to advocating a form of industrial policy, saying, “I’m very angry, frankly, at the oil companies not only because of the obscene profits they’ve made, but their failure to invest in alternate energy.” …And do we really want the government deciding how profits should be invested? If so, should Microsoft be forced to invest in Linux-based software or McDonald’s in weight-loss research? Mr. McCain’s angry statement shows a lack of understanding of the insights of Joseph Schumpeter, the 20th century economist who explained that capitalism is inherently unstable because a “perennial gale of creative destruction” is brought on by entrepreneurs who create new goods, markets and processes. The entrepreneur is “the pivot on which everything turns,” Schumpeter argued, and “proceeds by competitively destroying old businesses.”

…Messrs. Obama and McCain both reveal a disturbing animus toward free markets and success. It is uncalled for and self-defeating for presidential candidates to demonize American companies. It is understandable that Mr. Obama, the most liberal member of the Senate, would endorse reckless policies that are the DNA of the party he leads. But Mr. McCain, a self-described Reagan Republican, should know better.

What Do the U.S., North Korea, and the Old Soviet Union Have in Common?

Sadly, the answer to this question is that the United States is in unsavory company because of taxation.

For one thing, the U.S. Internal Revenue Code applies even to citizens who live and work abroad, an approach followed by very few nations other than hell-holes like North Korea. No other developed nation has this “citizenship-based” tax system, largely because it is unfair and anti-competitive. It is unfair because Americans who live and work abroad already are subject to all applicable foreign taxes (much as foreigners who live and work in the U.S. get the pleasure of dealing with the IRS). And it it anti-competitive because this punitive policy makes it harder for U.S. firms to earn a larger share of the market when competing in foreign markets. America’s tax policy is so punitive that some people are giving up their citizenship. But rather than dealing with this problem by fixing the tax code, politicians have decided to impose punitive exit taxes. The Economist has some of the unpleasant details: 

Queues of frustrated foreigners crowd many an American consulate around the world hoping to get into the United States. Less noticed are the heavily taxed American expatriates wanting to get out — by renouncing their citizenship. In Hong Kong just now, they cannot. “Please note that this office cannot accept renunciation applications at this time,” the consulate’s website states. Apart from sounding like East Germany before the fall of the Berlin Wall, the closure is unfortunately timed. Because of pending legislation on President Bush’s desk that is expected to become law by June 16th, any American who wants to surrender his passport has only a few days to do so before facing an enormous penalty.

…Congress has turned on expats, especially those who, since new tax laws in 2006, have become increasingly eager to give up their citizenship to escape the taxman. Under the proposed legislation, expatriates surrendering their citizenship with a net worth of $2m or more, or a high income, will have to act as if they have sold all their worldwide assets at a fair market price.

…That expats want to leave at all is evidence of America’s odd tax system. Along with citizens of North Korea and a few other countries, Americans are taxed based on their citizenship, rather than where they live. So they usually pay twice — to their host country and the Internal Revenue Service. As this makes citizenship less palatable, Congress has erected large barriers to stop them jumping ship. …[I]t may have the opposite effect. Under the new structure, it would make financial sense for any young American working overseas with a promising career to renounce his citizenship as early as possible, before his assets accumulate.

Another embarrassing feature of U.S. tax law is that exit taxes historically have been adopted only by the world’s most reprehensible regimes. As Richard Rahn explains in the Washington Times, the United States should not mimic the Soviet Union by confiscating the wealth of people who displease the ruling elites:

One of [the] old Soviet Union’s actions that was most heavily and correctly criticized by human-rights activists both left and right was its confiscation of the wealth of those who chose to leave the U.S.S.R. The right to emigrate is considered by civilized people to be a basic human right. Regretfully and embarrassingly, the U.S. Congress has just passed a law that places a higher tax burden (and in some cases wealth confiscation) on those who choose to permanently leave the United States, and may make some “tax hostages.”

…People who choose to renounce their citizenship are often looked upon as traitors, both by those in totalitarian and authoritarian states, and unfortunately sometimes by those in democratic societies, even when their intentions are benign. Many who immigrated to America over the last four centuries had some, or most of, their wealth in the old country taken from them in one form or another. This was rightly considered unjust. Yet, the descendants of many of those who suffered just voted to do something similar that differs only in degree, but not in kind or spirit.

…The apologists for Fidel Castro and Hugo Chavez will be able to point to this new U.S. law and ask why this is any different from the property takings by the aforementioned thugs? Yes, it is [a] bit different, but behind it is the same mean-spiritedness and disregard for property rights and the right to emigrate because of political beliefs. Such laws only make the United States look hypocritical to the rest of the world.

More on Medicare’s Stupid Strategies for Reducing Administrative Costs

A recent Government Accountability Office report highlights another way Medicare keeps its administrative costs down: sending checks to providers without bothering to check whether those providers owe back taxes.

According to today’s Washington Post:

Health-care providers are allowed to collect millions of dollars in federal Medicare payments each year despite owing the government more than $2 billion in back taxes, congressional investigators said yesterday.

The Government Accountability Office found that more than 27,000 nursing homes, hospitals, physicians and other providers flouted the tax system while collecting Medicare fees in 2006. That represented 6 percent of all providers [who participate in] Medicare….

Some cases cited in the new report were especially egregious. They included a nursing home operator with a history of asset concealment schemes who filed $15 million in Medicare claims while owing $7 million in unpaid taxes and establishing a charitable foundation that purchased luxury cars for the owner’s personal use.

And there was the hospital that collected $21 million in Medicare fees while owing $15 million in taxes, mostly for failing to forward to the Internal Revenue Service payroll taxes that were withheld from employees’ checks.

What’s that?  This seems more like the IRS’s responsibility than Medicare’s?  Perhaps.  But even taking that into consideration, Medicare is still delinquent:

The IRS has an automated system to hold back a portion of payments to contractors who are delinquent on their taxes. Medicare officials have been slow to join, but Kerry Weems, acting administrator for the Centers for Medicare and Medicaid Services, said that all Medicare payments will be part of the program by October. “We take this issue very seriously,” he said.

Oh, indeed.  Medicare takes this issue as seriously as any government program whose raison d’être is to shovel money out the door.

REAL ID Grant Process Collapses, Money Goes to No-Bid Contract

Mickey McCarter at Homeland Security Today has the scoop on REAL ID grants that the Department of Homeland Security is doling out today.

Yes, REAL ID grants. Ten states have passed legislation to bar themselves from participating. (Arizona was the most recent.) And many more have registered their objections to the national ID law. But the Department of Homeland Security is still trying to revive it — this time, by spreading a little money around.

What’s “a little money”? The estimated $85 million in grants is about 0.5% of the $17 billion that it would cost to implement REAL ID, so it’s just a little. But that’s $85 million that taxpayers won’t be getting back.

It’s interesting to see where the money is going, of course.

The breakdown of awards, obtained by HSToday.us, signifies that AAMVA effectively gains a no-bid contract under the awards, as DHS designates it the sole national centralized database of driver’s license information under REAL ID through a grant award to the state of Missouri… . . A competitive grant process could have resulted in multiple hub awards instead of a sole-source contract to AAMVA, sources argue, decentralizing REAL ID information somewhat and encouraging the rise of the most effective database solution between competing vendors.

With enthusiasm for the program distinctly lacking, DHS abandoned its plan to award grants competitively and just divvied up the money state by state.

[A]lthough many states did submit proposals in response to the REAL ID guidance, according to a source knowledgeable of the evaluation process who requested anonymity, many of the state proposals for REAL ID grants were very poor. Evaluators who examined the proposals received by March 7 were surprised by the number that did not even request the funds for the specific program, instead asking for the money to spend on emergency response equipment and other needs.

No-bid contracts and funds for a program the states don’t want? Congress should not allow DHS to throw this good money after bad.