Topic: Tax and Budget Policy

Fiscal Responsibility, Bush Style

As we all know, if you just put the word “defense,” or “homeland” or “security” anywhere in the name of a government program, its fiscal impact is immediately zeroed out. But if this mystical transformation didn’t take place, President Bush’s fiscal legacy would be looking darker and darker each day. Noah Shachtman gives us a rundown:

The Pentagon’s internal watchdogs can’t keep up with the explosive growth in military spending. Which means $152 billion’s worth of contracts annually aren’t being reviewed for fraud, abuse and criminal interference by the Defense Department’s Inspector General, according to a newly-unearthed report to Congress. The result: “undetected or inadequately investigated criminal activity and significant financial loss,” as well as “personnel, facilities and assets [that] are more vulnerable to terrorist activities.”

Since fiscal year 2000, the military’s budget has essentially doubled, from less than $300 billion to more than $600 billion. Two wars have begun. But the number of criminal investigators and financial auditors at the Department of Defense Office of Inspector General (DoD IG) has stayed more or less the same. So there are now “gaps in coverage in important areas, such as major weapon systems acquisition, health care fraud, product substitution, and Defense intelligence agencies,” according to the report, obtained by the Project on Government Oversight.

[…]

The DOD IG’s office has certainly stayed busy. In just the last few months, the DOD IG caught a Philippine corporation bilking $100 million from the military health care system; nabbed a trio trying to bribe their way into drinking water contracts for troops; busted an Air Force general who tried to steer a $50 million deal to his buddies; and launched investigations into the Pentagon’s propaganda projects and the youthful arms-dealer who sold tens of millions of dollars’ worth of dud ammunition to the government.

Shachtman then observes: “The question is: How much more could they have done, with a bigger staff?” It’s almost like you sink a half a trillion dollars a year into one massive bureaucracy and it’s hard to keep track of it all. President McCain’s going to have to find a lot of earmarks to offset this sort of thing.

Starved for Good Data: 35 Million Not Hungry

America’s supposed hunger epidemic is catching up to crocodiles in the sewers as the most popular urban legend. The difference is that the hunger epidemic is being promoted by the nation’s major media.

Under the headline “Going Hungry in America,” Parade magazine (circulation 32 million) claimed: “More than 35.5 million Americans–12% of the U.S. population and 17% of our children–don’t have enough food, according to the Department of Agriculture.”

This article comes two weeks after the Washington Post led a story: “About 35 million Americans regularly go hungry each year, according to federal statistics.” (And see here).

I’m not a hunger expert, but I actually looked at the official Department of Agriculture data, rather than relying on biased second-party sources, as many reporters seem to do.

In addition to the links I provided in prior blogs, check out this USDA discussion. The 35 million figure includes 24 million that are in a broader group called “low food security.” The USDA notes: “These food-insecure households obtained enough food to avoid substantially disrupting their eating patterns or reducing food intake, by using a variety of coping strategies, such as eating less varied diets, participating in Federal food assistance programs, or getting emergency food from community food pantries.”

Thus, 24 million of the 35 million are not “going hungry” as news reports keep claiming.

“Going hungry” better applies to the 11 million in the “very low food security” group. For this group, the USDA says “food intake was reduced at times during the year because they had insufficient money or other resources for food. In previous reports, these households were described as ‘food insecure with hunger.’ ” Notice that even for this smaller group, episodes of hunger may be fairly rare.

Finally, compare this USDA assessment: “In 2006, 430,000 children (0.6 percent of the nation’s children) lived in households with very low food security among children,” with Parade’s grim report “…17% of our children—don’t have enough food.” 

Actual hunger among the poor is, of course, a terrible thing. That is one reason why the federal goverment ought to repeal ethanol subsidies, terminate its Soviet-style controls on milk, and other reform other policies that push up the price of food.

That’s Why They’re Called Beltway Bandits

Federal cost-cutting should be a central focus of the next president. One effort that should be bipartisan is overhauling the government’s out-of-control procurement system. Federal contractors routinely get away with outrageous cost overruns at taxpayer expense. From today’s Wall Street Journal:

Despite billions of dollars in cost overruns and years of delay, Lockheed Martin Corp. and U.S. Navy officials are confident they will hang on to next year’s funding for development of a new presidential helicopter….

The program initially called for about $6.1 billion in spending to develop and build the next generation of so-called Marine One choppers…. [B]ut the expected cost of the program has now ballooned to an estimated $11.2 billion….

This program fits the pattern of Edwards’ Budget Law — when the government claims that a new project will cost $1, the ultimate taxpayer cost will be about $2 or more.

For more evidence on the government’s chronic cost overrun problem, see here and here.

Financial Privacy Facing Major Assault from High-Tax Nations

An article from Der Spiegel in Germany analyzes the aggressive campaign against nations like Switzerland that have strong human-rights policies on financial privacy. High-tax nations are opposed to privacy, of course, because that makes it more difficult for them to enforce bad tax law.

After fighting Switzerland’s banking secrecy laws for decades, European finance ministers are about to receive support from the United States. Investigations into major Swiss bank UBS and a proposed law against tax havens are ratcheting up pressure against the system.

…[T]he United States is by no means the only place where Swiss high finance and the country’s banking secrecy laws are coming under growing pressure. Foreign authorities around the globe are increasingly taking sharper action against tax evaders. Swiss financial institutions, often in tandem with partners in Liechtenstein, play a central role in helping the ultra-rich avoid paying billions in taxes. An almost unimaginable fortune of more than €3 trillion ($4.7 trillion) is currently sitting in Swiss bank accounts. The discreet Swiss allow vast amounts of money to disappear into trusts, offshore companies and bank accounts, money that is often protected by Switzerland’s banking secrecy laws.

…Political conflict is also on the horizon. An aggressive bill to combat tax evasion, the “Stop Tax Haven Abuse Act,” was introduced in the US Congress last year. The legislation provides for tough measures against 34 tax havens, including Liechtenstein, Luxembourg and Switzerland. The bill has stood little chance of becoming law until now. But that could quickly change after the presidential election in November. Once of the bill’s three sponsors is Senator Barack Obama, who is currently favored to win the White House.

But the campaign against financial privacy extends beyond Europe. As a report from the Wall Street Journal indicates, the United States also is putting pressure on Swtizerland and other jurisdictions with financial privacy laws:

As government officials intensify a multinational crackdown on offshore bank accounts, many wealthy Americans who use them to illegally shield income are facing a difficult decision: whether to turn themselves in — and if so, how. …Tax dodgers are facing these stark choices as major cracks emerge in what once appeared to be an impenetrable wall of secrecy surrounding bank accounts in such well-known havens as Liechtenstein and Switzerland. While officials have launched many similar campaigns in the past, their latest efforts are attracting widespread attention because they are coming from so many different directions.

Supporters of the attack say privacy must be sacrificed to reduce tax evasion, but this sidesteps the more relevant discussion of how best to improve tax compliance. Fundamental tax reform solves the problem since most tax evasion occurs because of high tax rates and double taxation of income that is saved and invested. This means that pro-growth policy not only generates more prosperity, but it eliminates any impulse to attack the sovereigny of other nations.

Will 2009 be 1965?

Forty four years ago today Lyndon Baines Johnson traveled to Ann Arbor, Michigan, to deliver a speech that outlined the vision that would guide his administration. The speech may be read profitably today. 

LBJ began that spring day by stating a goal: “The purpose of protecting the life of our Nation and preserving the liberty of our citizens is to pursue the happiness of our people. Our success in that pursuit is the test of our success as a Nation.”

The statement may be usefully compared to some earlier words about the purposes of American government: “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.” These words from the Declaration of Independence reflect the individualistic, natural rights philosophy of the American founders.

LBJ’s words reflected a fundamentally different philosophy, Progressivism. Individuals do not pursue happiness within a framework of rights; government pursues happiness for them or rather for “our” people. Johnson noted two means to that collective end: the life of our Nation and the liberty of our citizens. The first is tautological, the second is revealing. The liberty of the individual is not a goal of government; it is rather the means for the collective pursuit of happiness.   The Great Society would realize that collective happiness. In the Great Society , “men are more concerned with the quality of their goals than the quantity of their goods.” They put aside “unbridled growth” and “the demands of commerce” to fulfill “the hunger for community.” Mere business and trade do produce a “soulless wealth” that is far short of national aspiration.  

The reader who sees in LBJ’s words as call to secular spirituality through government are not far wrong. He said to the students and faculty of the University of Michigan: “You have the chance never before afforded to any people in any age. You can help build a society where the demands of morality, and the needs of the spirit, can be realized in the life of the Nation.” The speech ends with the hope of a “new world,” a remaking of the nation.

Ironically, in light of what actually happened later, LBJ also claimed that “The solution to these problems does not rest on a massive program in Washington, nor can it rely solely on the strained resources of local authority. They require us to create new concepts of cooperation, a creative federalism, between the National Capital and the leaders of local communities.” Over the next decade, federal spending tripled.

Like LBJ, Barack Obama sees in politics and governing the possibility of secular transcendence. He is a far better orator than LBJ was, and his skills might well bring a third phase of Progressivism to the United States in 2009.

However, there is room for doubt. Obama lives in a different world than LBJ.

In 1965, Democrats held more than two-thirds of both chambers of Congress. As LBJ said on his inaugural night, “We can pass it all now.” Democrats may gain seats in Congress this year, but they will not have the same majorities LBJ had. President Obama will not say as LBJ did:“We can pass it all now.”

LBJ began his quest for the Great Society by cutting taxes. Obama will have to raise taxes to pursue his dreams. Excuse me, “our” dreams. Once “hope” and “change” cost real money, Obama may find Congress less willing to dream.

1n 1964, 76 percent of Americans trusted the federal government to do what is right almost always or most of the time. The Pew Research Center for the People and the Press recently reported that ”positive views of the federal government are at their lowest point in at least a decade. Americans may not be in the mood for a new crusade to change the world through collective coercion.

People skeptical of the beneficence of the federal government have reasons to be pessimistic in 2008. Neither candidate shares their skepticism fully. But the spring of 1964 was much worse. Barack Obama may expect to renew the left’s quest for a secular spirituality rooted in politics and government, a religion to replace the older faiths. But 2009 is unlikely to be 1965.  

Tom Davis: Policy, What’s That?

News of the intellectual demise of the Republican Party comes almost daily. In its coverage of the bipartisan vote in favor of the farm bill (which overrode a well-deserved Bush veto) the Washington Post included this reaction:

 ”If I was a farm-belt guy, I would be all over my district now, saying, ‘I stood with you, not the party of the president,’ said Rep. Tom Davis (R-Va.), who wrote to GOP leaders last week, urging them to defy Bush or at least allow rank-and-file members to save themselves. ‘Anytime you can separate yourself from someone with a 28 percent favorability rating, that’s a good thing.’ “

As Davis noted, he’s not a farm-belt guy. So one would think that he would want to stand up for the taxpayers in his suburban district and against the massive $300 billion grab by well-off farm businesses.

Indeed, Davis is retiring from Congress this year, so one would think that he would want to stand up for the general national interest for a change, rather than defending special interests and pushing his party’s advantage (as he sees it), as he often has during 14 years in the House.

Sadly, it’s all about politics for such legislators. The idea that members of Congress should promote policies to improve economic growth, increase individual freedom, and reform failed programs is completely foreign to them.

One can imagine that a conversation between Rep. Davis and an agricultural economist would go something like this:

Economist: The huge subsidies in this farm bill will distort markets, damage the economy, hurt the environment, and strain our international trade relationships.

Tom: What?

Economist: The agricultural industry is the most coddled in America, with dozens of programs subsidizing every aspect of the farm business. Why should this industry be specially favored by the government?

Tom: Huh?

Economist: Farm households have higher incomes than other American families. Farm incomes have risen rapidly in recent years, and farm prices are at record highs. Now should be the time to cut subsidies, not expand them.

Tom: I don’t follow.

Economist: Alas, I see that the farm lobby organized a massive campaign in favor of the farm bill, and they have bombarded Capitol Hill with propaganda, while twisting the arms of your colleagues.

Tom: Now I got ya! That’s right, us Republicans need to respond to the concerns of these hard-pressed farmers and help them out in rough times!

Economist: But, as I said, these are good times for farmers …

Tom:  Yes, yes, yes, we need to pass this bill and guarantee good times for the farmers–and, God willing, good times for GOP candidates this fall.

An Inexplicable Vote

Yesterday, the House passed the Renewable Energy and Job Creation Act, which is essentially a hodgepodge of tax provisions, most of which extend existing tax breaks, such as the R&D tax credit and production incentives for renewable fuels.  There are also a few new items, such as a tax cut specifically for trial lawyers who work on a contingency basis.  These tax breaks are offset with $55 billion in tax increases on hedge fund managers and multinational corporations.

The bill passed easily – virtually all Democrats supported it, along with a few dozen Republicans.

As reported in CongressDaily (subscription required), Republican Congressman David Hobson supported the bill with the following justification:

“Probably the responsible vote is ‘no,’ but how do you explain that in a media that’s frantic over gasoline prices? Frankly, this has nothing to do with gasoline prices, but you can’t explain it, and it taxes the rich guys,” Hobson said.

Incidentally, Congressman Hobson hails from a “safe” GOP district in Ohio.  He has been in Congress since 1990 and has won reelection each cycle with no less than 61 percent of the vote.  He already announced that he will retire at the end of the current Congress. Nonetheless, for political reasons, he supported a bill he knows to be unmeritorious.

If a retiring congressman from a safe district cannot muster up the gumption to oppose an admittedly bad bill that contains a hefty tax hike, what does that mean for the state of Congress?