Cut the Corporate Tax Rate; Drop the BAT.

We will never achieve a good tax reform by trusting bad revenue estimates.

According to Wall Street Journal reporter Richard Rubin, “Each percentage-point reduction in the 35% corporate tax rate cuts federal revenue by about $100 billion over a decade, and independent analyses show economic growth can’t cover all the costs of rate cuts.”

Economic growth does not have to “cover all the cost” to make that $100 billion-per-point rule of thumb almost all wrong.  If extra growth covered only 70% the cost of a lower rate, the static estimates would be 70% wrong.  Yet the other 30% would be wrong too, because it ignores reduced tax avoidance.  Mr. Rubin’s bookkeepers’’ rule-of-thumb implicitly assumes zero “elasticity” of reported taxable profits. Corporations supposedly make no more effort to avoid a 35% tax than to avoid a 25% tax.

Acceptance of this simplistic thumb rule – which imagines a 35% corporate rate could raise $1 trillion more over a decade than a 25% rate – explains why Ways and Means Committee Chairman Kevin Brady still insists a big new import tax is needed to “pay for” a lower corporate tax rate. 

In this view, a border adjustment tax (BAT) is depicted as a tax increase for some companies to offset a tax cut for others.  No wonder the idea has been ruinously divisive – with major exporters lobbying hard for a BAT and major retailers, refiners and automakers vehemently opposed.  Mr. Rubin declares the BAT “dead or on political life support,” while nevertheless accepting that it would and should raise an extra $1 trillion over a decade – assuming no harm to the economy and no effect on trade deficits.

Like Mr. Rubin, Reuters claims “Trump could have trouble getting the rate much below 30 percent without border adjustability.”  That is false even on its own terms because the Ryan-Brady plan would eliminate deductibility of interest expense, which is enough to “pay for” cutting the rate to 25% on a static basis.  Adding a BAT appears to cut the rate further to 20%, but the effective Ryan-Brady rate is really closer to 25% because the import tax and lost interest deduction are not a free lunch.

In any case, the entire premise is wrong. There is no need to “pay for” cutting a 35% corporate “much below 30 percent” because nearly every major country has already done that and ended up with far more corporate tax revenue than the U.S. collects with its 35% tax.  

The average OECD corporate tax rate has been near 25% since 2008, and revenue from that tax averaged 2.9% of GDP.  The U.S. federal tax rate is 35% and revenue averaged just 1.9% of GDP.  Ireland’s 12.5% corporate rate, by contrast, brought in 2.4% of GDP from 2008 to 2015.

Sweden cut the corporate tax rate from 28% to 22% since 2013 and corporate tax revenues rose from 2.6% of GDP in 2012 to 3% in 2015 according to the OECD. Britain’s new 20% corporate tax in 2015 brought in 2.5% of GDP according the same source, unchanged from 2013 when the rate was 23%. 

The New York Times Is Wrong About Transit’s Effect on Urban Development

The New York Times has once again published a report claiming that transit hubs are a “growing lure for developers.” The Times published a similar story eight years ago, and I quickly showed that subsidies from tax-increment financing (TIF) and other government support, not transit, was what stimulated those developments.

So has anything changed since then? Nope. The first development described in the recent story by Times reporter Joe Gose is Assembly Row, in the Boston suburb of Somerville. Is it subsidized? Yes, with at least $25 million in TIF along with other state funds. Far from being “free money” as its advocates claim, TIF steals from school districts and other agencies that rely on property taxes to subsidize developers.

Then Gose mentions Chicago’s Fulton Market, downtown Kansas City, Austin, and Denver’s RiNo neighborhood. Fulton Market just happened to receive at least $42 million in support from the city of Chicago, much of which comes from TIF

Supposedly a new streetcar sparked a revitalization of downtown Kansas City. But could it be that revitalization was due more to Kansas City’s twenty-four downtown TIF districts?

Gose doesn’t specify a particular neighborhood or development in Austin, Texas. Of course, Austin is one of the fastest growing cities in America, so anything that’s open for development is going to be developed. But not satisfied to let the market work, Austin has heavily bought into the use of TIF districts. Transit is an afterthought in Austin, carrying less than 1 percent of the passenger travel; the city’s sole rail line was a huge flop that cost way more than expected and now carries fewer than 1,500 round-trips per weekday.

Denver’s RiNo neighborhood–RiNo being short for River North–is growing thanks to at least $44 million on infrastructure improvements in that neighborhood, plus additional TIF funds for special projects.

In Washington, DC, Gose mentions a $3 million project “in Washington’s fast-growing Capital Riverfront neighborhood.” That’s the same neighborhood that received at least $198 million in TIF subsidies.

Still Unhappy with PBS for Airing School Inc.

Before it even hit the fiber-optics, defenders of public schooling were agitated that PBS stations would be airing Andrew Coulson’s documentary School Inc., which takes viewers on a ride through time and around the world to learn how innovation happens, and why it happens too rarely in education. Last Friday a new critique was published, this time on the website of Phi Delta Kappa, a professional association of educators. In the piece, Loyola University Chicago professor Amy Shuffelton asks, “Why did PBS and its local New York affiliate, WNET, agree to broadcast and distribute such an unbalanced, journalistically questionable series on such a controversial and complicated topic as education?”

Perhaps the answer is that PBS officials thought the series had high-quality content, and discerning viewers could determine for themselves whether they accepted its premise. Writes Shuffelton: “According to WNET’s Specter [Shuffelton does not provide a first name], the second part of the series title, ‘A Personal Journey’ is key to understanding the project. ‘When you read that subtitle, you know that you’re going to get a point of view, and we’re not opposed to presenting different points of view.’”

The documentary certainly is clear that you are getting one person’s perspective. And while I don’t watch a lot of television, PBS or otherwise, it seems unlikely that PBS programs such as Bill Moyer’s Journal or Democracy Now! have been committed to strict, equal time for opposing views. As with public schooling, there is good reason to oppose publicly funded television because it is impossible to represent the views of every taxpayer equally. But PBS exists, and points of view seem to be articulated without having to be balanced out.

Of course, the best way to judge the quality and merits of School Inc. is to view it yourself, which you can do here, or by watching this space for future airings in your market. And you should of course read opposing views like Shuffelton’s, though don’t expect objectivity there, either. For instance, Shuffelton says that Coulson quotes Horace Mann and Thomas Jefferson out of context, but does not say how. Worse, she suggests that Coulson believes discrimination in government funding is a solution to religious conflicts in education:

Coulson does consider the possibility of civic discord in the last ten minutes of the series, but his answers are not convincing. School Inc. turns to Supreme Court Justice Steven Breyer’s dissent in the case Zelman v Simmons-Harris, which upheld an Ohio voucher program. Breyer worried that publicly financed voucher programs, which funnel federal funds to religious schools, raise the possibility of religiously based social conflict.

Coulson’s response should raise concern for anyone worried about First Amendment rights. To show that social conflict is unlikely to follow, he uses the example of a voucher program proposed in New Orleans. One of the schools eager to participate was a Muslim school. When Louisianans got wind of this, controversy followed. So the Muslim school dropped out. In Coulson’s eyes, the problem was thereby solved.

Wait, I found myself thinking as I watched, that’s discrimination, not a defense of First Amendment rights. I expected Coulson to explain why it was not, but the series moved on to clips of jazz performances, which, according to Coulson, demonstrate Americans’ ability to get along.

This is just incorrect. For one thing, Coulson devotes nearly half of the final episode to social conflict, choice, and equality. And far from condoning exclusion of the Muslim school, he explains that a fundamental problem with vouchers is that while they create more freedom and equality than majority-rules public schools, they can still unjustly compel people to furnish funds for teachings they oppose, opening choice up for government discrimination.

The solution, Coulson suggests, are tax credits for people who choose to donate to groups that award scholarships. Want to give to a group providing scholarships for Montessori students? Go ahead! Catholic schools? Sure! Muslim institutions? Absolutely! This maximizes freedom for both families and funders, and minimizes incentives to legally exclude groups.

I think there is a huge amount of value to be found in School Inc., but others can certainly disagree. What they should not try to do is squelch the documentary, or misrepresent what it says. Oh, and if they want to learn even more about Andrew and debate his ideas, they can check out this new book. After all, the more open discussion we have, the better!

Germany’s Attack on Free Speech

Since the end of the Cold War Europe has been obsessed with the idea of eradicating hate as a shortcut to eternal peace. In short, a world relieved from human conflict. This is an utopia and we know from earlier attempts to turn utopias into reality that one of the first victims of these fantasies is freedom. In this case freedom of expression will be endangered.

Germany has for several years been at the forefront of this endeavor so it shouldn’t come as a surprise that the German government now wants to enable its authorities to fine social media companies up to 50 million euros for not deleting online ”hate speech” and defamatory ”fake news” within 24 hours after being notified.

 

In Germany criminalization of hate speech and fake news is seen as a legitimate way to protect democracy and the historical truth against onslaught. That’s why a mainstream German politician and member of the European Parliament a couple of years ago countered my criticism of legislation against Holocaust denial by insisting that ”European citizens have a constitutional right to the truth.” The frightening implications of this statement didn’t bother him at all. He didn’t realize that it would be welcomed by any dictator wanting a monopoly on state-sanctioned ”facts” and ”truth”.

In Germany and other European democracies the right to free speech is just one among many rights that has to be balanced against other rights, values and considerations, be it public order, dignity, democracy, religious sensibilities, security, equality and so on and so forth.

In the U.S. the First Amendment’s protection of speech cannot be balanced against other rights. That principle has served the US well.

When Heiko Maas, Germany’s minister of justice, earlier this year announced that the government was planning new legislation to criminalize fake news he said:

Defamation and malicious gossip are not covered under freedom of speech. (…) Justice authorities must prosecute that, even on the internet. Anyone who tries to manipulate the political discussion with lies needs to be aware (of the consequences).

Socialist Catastrophe in Venezuela

Journalists are now reporting regularly on the crisis in Venezuela, with shortages of everything from toilet paper to food and now daily street protests. What the news reports too often miss is, Why? Why is a formerly middle-class, oil-rich country now so desperately poor?

The Weekly Standard notes a New York Times article, “How Venezuela Stumbled to the Brink of Collapse,” that spends 1800 words on the country’s “collapse into authoritarianism.” The Standard summarizes:

The strongman Hugo Chávez “ran for president in 1998. His populist message of returning power to the people won him victory.” Chávez polarized because “populism describes a world divided between the righteous people and the corrupt elite.” Now, under the late Chávez’s successor, Nicolás Maduro, “The political system, after years of erosion, has become a hybrid of democratic and authoritarian features.”

But never does the article identify what economic system could cause such disaster. It does mention specific policies: subsidies, welfare programs, money printing, inflation, and price controls. But nationalization is never mentioned. And in particular, the Standard points out, the article does not use the word “socialism” (or “socialist”). It does not mention that Hugo Chavez and Nicolas Maduro have headed the United Socialist Party of Venezuela. Socialism is the cause that must not be named.

So it’s refreshing to see a rather more forthright article in the Washington Post this weekend by Mariana Zuniga and Nick Miroff:

With cash running low and debts piling up, Venezuela’s socialist government has cut back sharply on food imports….

Venezuela’s disaster is man-made, economists point out — the result of farm nationalizations, currency distortions and a government takeover of food distribution. While millions of Venezuelans can’t get enough to eat, officials have refused to allow international aid groups to deliver food, accustomed to viewing their oil-rich country as the benefactor of poorer nations, not a charity case.  

“It’s not only the nationalization of land,” said Carlos Machado, an expert on Venezuelan agriculture. “The government has made the decision to be the producer, processor and distributor, so the entire chain of food production suffers from an inefficient agricultural bureaucracy.”

My colleague Marian Tupy notes that according to the Economic Freedom of the World Index, economic freedom in Venezuela fell from just above 7 out of 10 in 1970 to barely above 3 in this decade. Meanwhile, its GDP per capita has fallen over 40 years, while Chile’s has tripled.

Venezuela doesn’t have to be poor. But to restore its standard of living, it will have to reverse recent changes in property rights, judicial independence, free trade, and corruption.

Courts Shouldn’t Join the #Resistance

Last week’s travel-ban ruling by the U.S. Court of Appeals for the Fourth Circuit is a travesty. Not because the underlying policy is anything to write home about. As I wrote when the second executive order came out in March, “[r]efugees generally aren’t a security threat, for example, and it’s unclear whether vetting or visa-issuing procedures in the six remaining targeted countries represent the biggest weakness in our border defenses or ability to prevent terrorism on American soil.” But the judiciary simply can’t substitute its own policy judgment for that of our elected representatives, no matter how well-informed judges may be or how misguided they think our political leaders may be.

Indeed, what’s going on here isn’t a sober legal analysis – incredibly, the majority opinion contains no discussion of the relevant statutory text, or of the scope of executive power in light of congressional policy (the so-called Youngstown Steel analysis) – but a wholesale rejection of Donald Trump. Essentially, the court ruled that anything the current president does, at least in the areas of immigration and national security, is de facto (and therefore de jure) illegitimate. The judiciary has joined the #resistance.

Of course, even a court engaged in civil disobedience has to clothe its willfulness in legal trappings. Here’s how that fig leaf looks here:

  1. Find “snowflake standing” to bring the lawsuit for individuals who haven’t personally been harmed but are experiencing “feelings of disparagement and exclusion.”
  2. As other courts have done, bypass the more technical analysis regarding statutory authorizations and restrictions on the executive power over immigration in order to pontificate on sexier constitutional claims (the opposite of the standard “constitutional avoidance” that courts practice).
  3. Privilege various statements made by Donald Trump on the election trail, as well as media interviews by the president and his surrogates, over official determinations by the Departments of Justice and Homeland Security and the text of the revised executive order itself. Ignore the admissions of plaintiffs’ counsel that another president, one not burdened by the “forever taint” of Trump’s supposed bad faith, could lawfully execute the same order.
  4. Indeed, ignore the revisions to the executive order, even though they fix the problems that the first order’s hasty rollout created by, for example, providing exemptions not just to those with green cards and other valid visas, but also people with significant contacts to United States, students, children, urgent medical cases, and other special circumstances – as well as detailing reasons for the remaining restrictions.
  5. Find that the order violates the Establishment Clause by cherry-picking irrelevant precedents even though our immigration laws routinely classify would-be refugees and immigrants on religious grounds and the order only affects six of the 50 Muslim-majority countries, which contain but 13 percent of Muslims worldwide.

With no due respect, that’s not law. It’s another dog’s breakfast of a legal ruling which I won’t dignify with a full fisking. (Josh Blackman is a better man than I because he’s in the midst of a multi-part series that does unpack the opinions, and I also recommend the work of Peter Margulies, a progressive immigration and national-security expert who actually believes in the rule of law.) 

Dual-Capable Cruise Missiles: Past Performance No Guarantee of Future Results

Earlier this week I attended a very thoughtful and stimulating debate on the modernization of U.S. nuclear missiles hosted by the Project on Nuclear Issues (PONI) at CSIS. The debate addressed the merits and downsides of two planned U.S. nuclear delivery system recapitalization efforts: the Ground Based Strategic Deterrent intended to replace the Minuteman III ballistic missile system, and the Long-Range Stand-Off (LRSO) cruise missile that is supposed to replace the AGM-86 air-launched cruise missile (ALCM). The ALCM is a dual-capable missile, meaning it can carry either a nuclear or conventional payload. While the LRSO is planned to be only used for nuclear missions, in a conflict scenario it would be hard to discern between it and a conventionally-armed cruise missile until the moment of impact.

One topic raised during the debate was the effect of the LRSO on strategic stability, an important and hotly debated issue. The advocates of the LRSO downplayed the destabilizing potential of the system by pointing out that the United States has used dual-capable cruise missiles in past conflicts. Concerns about strategic stability should be kept in mind, they argued, but the United States has a track record of using dual-capable cruise missiles while safely navigating such concerns.

This argument may be technically true, but it ignores a critical fact: all past uses of dual-capable cruise missiles were in conflicts with countries that did not have nuclear weapons—not between two nuclear-armed countries. Policymakers should be wary of arguments that use historical evidence to dismiss or downplay the negative effects of LRSO on strategic stability because there are no adequate past cases to test such arguments against.