Topic: Tax and Budget Policy

GDP Growth Was “Stronger after Tax Increases on the Wealthy”?

New York Times columnist David Leonhardt claims, “G.D.P. growth has been stronger after recent tax increases on the wealthy.”  To prove it he writes,  “The economy has performed better under Democratic Presidents during the last half century.”  

This might make sense if Eisenhower and Nixon had cut tax rates for the wealthy and JFK and LBJ raised them.  But the opposite happened.  It might also make sense if Clinton had raised the capital gains tax rate in 1997 rather than cutting it from 28% (under Reagan-Bush) to 20%. 

President Eisenhower put the highest tax rate up to 92% in 1953-54 and the lowest rate to 22%.  By contrast, President Kennedy’s 1963 plan for “getting America moving again” proposed to cut income tax rates to 14-65%.  As enacted by LBJ after Kennedy’s assassination, the top tax rate was reduced to 70% and the lowest to 15%.  These rate cuts came quickly, unlike Reagan’s – which were was unwisely postponed until 1983-84. 

The Lavish Life of Overcompensated Bureaucrats

Yesterday I shared some very good news about Brazil adopting a spending cap.

Today, I also want to share some good news, though it’s not nearly as momentous.

Indeed, it’s not even good news. Instead, it’s just that some bad news isn’t as bad as it used to be.

I’m referring to the fact that the nation’s capital region used to be home to 10 of the nation’s 15-richest counties.

Corporate Welfare and Corruption

President-elect Donald Trump says that he will cut wasteful spending and “drain the swamp” in Washington. The first thing he should target is business subsidies in the federal budget. Such “corporate welfare” spending attracts corruption like garbage dumps attract rats.

A Cato study estimated that there is $100 billion of corporate welfare in the budget. That spending harms the economy, but the incoming administration should be aware that such spending also spawns damaging scandals. That pattern goes all the way back to the 19th century. Federal subsidies for the first transcontinental railroad led to the Credit Mobilier scandal of the 1870s, which involved dozens of members of Congress.

More recently, corporate welfare has spawned these scandals: 

  • HUD Subsidies under Reagan. President Ronald Reagan’s Department of Housing and Urban Development overflowed with corruption in the 1980s under Secretary Sam Pierce. Pierce routinely dished out grants, loans, and other subsidies to friends, business associates, and Republican Party contributors.
  • Commerce Subsidies under Clinton. President Bill Clinton’s Commerce Secretary, Ron Brown, used business subsidies as a fund-raising tool for the Democratic Party in the 1990s. Corporate executives who played the game were given access to export promotion trips and federal export loans. In his investigations, U.S. District Judge Royce Lamberth determined that Commerce officials concealed and destroyed documents relating to the trade mission scandal, and he compared officials to “con artists.”
  • Enron Subsidies under Clinton and Bush. Enron Corporation lobbied federal officials to expand export subsidy programs, and it received billions of dollars in aid for its risky foreign schemes. During the Clinton and Bush administrations, high-level officials went to great lengths to aid Enron on an Indian power plant deal. Federal aid induced Enron to make misguided foreign investments, and the resulting losses helped cause the company’s implosion.
  • Green Subsidies under Obama. The Washington Post found that “Obama’s green-technology program was infused with politics at every level.” The $535 million loan guarantee for the failed Solyndra is a prime example. The Department of Energy approved the loan after pressure from the White House. A main Solyndra investor was a billionaire Obama fundraiser. The New York Times found that Solyndra “spent nearly $1.8 million on Washington lobbyists, employing six firms with ties to members of Congress and officials of the Obama White House.”

American businesses have a right to lobby the federal government. But Congress throws fuel onto the corruption fire by funding business subsidy programs. The Trump administration should work to eliminate corporate welfare, including green subsidies, export subsidies, and housing subsidies. Corporate welfare undermines honest governance, and one message of the election is that Americans are sick and tired of the resulting scandals. 

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.

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.

Heritage Foundation Infrastructure Proposals

In a new report for the Heritage Foundation, Michael Sargent summarizes what we need on infrastructure from the incoming Trump administration. I agree with all of Michael’s points, which I paraphrase here:

  • Ignore rhetoric about crumbling highways and falling-down bridges. America’s infrastructure needs improvements, but the scare stories are off-base.
  • Reduce government red tape to speed investment.
  • Repeal harmful labor rules, which raise the costs of infrastructure construction.
  • Embrace privatization.
  • Approve energy projects blocked by the Obama administration.
  • Repeal the net neutrality regulations on the Internet.
  • Limit regulations on emerging technologies.
  • Cut the federal highway gas tax, end spending on urban transit, and reduce the federal role in highways.
  • Privatize air traffic control, eliminate subsidies for airports, and remove barriers for the states to restructure airports as self-funded businesses.
  • Do not pass a federal infrastructure spending stimulus.
  • Do not use repatriated corporate earnings for a government stimulus. If such revenues arise from corporate tax reform, use them to reduce the corporate tax rate.
  • Do not create new tax loopholes or subsidies for infrastructure.
  • Do not create a federal infrastructure bank. That would lead to more bureaucracy, subsidies, and central control.

I would add to Michael’s points that I share concerns expressed by Trump and others that America should have world-class infrastructure. But the way to get it is not through subsidies, regulations, and centralization. Instead, the incoming administration should focus on market-based reforms to privatize facilities, reduce subsidies and regulations, and increase competition.

For more information on infrastructure reforms, see here, here, here, and here.

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).