Trump Budget: A Good Start on Domestic Cuts

The White House released President Donald Trump’s first budget today. In the opening message, the president says, “Our Budget Blueprint insists on $54 billion in reductions to non-defense programs. We are going to do more with less, and make the government lean and accountable to the people.”

I would rather that the government do less with a lot less, but I appreciate that Trump is proposing to fully offset to his defense spending increases. His Republican predecessor in office pushed for large increases in defense, education, health care, and other spending without sufficient offsets, thus putting us on our current path of endless deficits and rising debt.

Budget director Mick Mulvaney has assembled a thoughtful array of cuts, including:

  • Ending the Community Development Block Grant.
  • Ending the Economic Development Administration.
  • Ending the Minority Business Development Agency.
  • Ending Essential Air Service (EAS) subsidies.
  • Cutting an array of K-12 subsidies.
  • Moving air traffic control to the private sector.
  • Cutting the EPA budget by almost one-third.
  • Cutting subsidies for local water and sewer.
  • Cutting rural subsidies.
  • Ending various energy subsidy programs.
  • Ending the Low Income Energy Assistance Program (LIHEAP).
  • Ending the Community Services Block Grant.
  • Cutting pork-barrel transportation grants.
  • Cutting Amtrak subsidies.
  • Cutting job-training subsidies.
  • Ending the Weatherization Assistance Program.
  • Cutting funding for the United Nations and the World Bank.
  • Ending funding for the National Endowment for the Arts, the National Endowment for the Humanities, and the Corporation for Public Broadcasting.

Nearly all of these cuts have been recommended by DownsizingGovernment.org.

Many of them would remove the federal government from activities that are properly state, local, and private. So while liberals and lobby groups will complain, individual states can fund programs such as LIHEAP and EAS themselves. If EAS really is “essential,” then local businesses and governments in affected communities will have a strong incentive to raise their own funding for it.

Kudos to Mulvaney and his team for proposing such a broad range of reforms.

American Family Incomes Reach Record High

Prevailing wisdom holds that this is a time of stagnating incomes and economic struggle for American families. That is indeed a reality in many homes. But as economist and HumanProgress.org advisory board member Mark Perry recently pointed out, most American families are doing better than the prevailing wisdom might have them believe. 

After adjusting for inflation, it turns out that median income for families reached a record high in 2015, the last year for which the U.S. Census Bureau has data. Families that include married couples, particularly those where both spouses participate in the labor force, did even better and also saw their incomes break records in 2015. The Census Bureau defines a family as “a group of two people or more … related by birth, marriage, or adoption and residing together.”

 U.S. median income graph

Please note that median family income is not the same thing as median household income, as the latter includes non-family households.  Median household income has been more stagnant. It was 56,516 dollars in 2015, around 14,000 dollars less than median income for family households. Interestingly, 65 percent of U.S. households were family households in 2016, the most recent year of data.

All family types saw a somewhat notable median income uptick in 2015, allowing each type to outperform pre-Great Recession income levels. Of course, some families have done better than others. Families headed by single women (simplified to “single mothers” in the above graph) have seen their incomes rise only slowly, while families headed by single men (“single fathers” in the graph) have seen their incomes essentially stagnate since the 1970s.

However, most families fall into the categories that have made impressive real income gains. 73 percent of family households include married couples, while 19 percent are headed by single women and only 8 percent are headed by single men. Moreover, both spouses now work in over 60 percent of married couple families, placing them in the highest-earning category of family.

The median income for all U.S. families was only 28,144 dollars in 1947, compared to 70,697 dollars in 2015. That is an increase of 151 percent. Again, that is after adjusting for inflation.

So despite the popular narrative of economic decline pushed by some politicians and newspeople, the American family is earning more than ever before recorded.

Wrong Lessons from Canada’s Private Currency, Part 1

I’ve referred often in these pages to the virtues of Canada’s late-19th century currency system, with its heavy reliance upon circulating notes issued by several dozen commercial banks, most of which commanded extensive nationwide branch networks. I’ve also lamented the fact that so few monetary economists today, let alone members of the general public, seem aware of that arrangement, the superiority of which, both absolutely and compared to its U.S. counterpart, was once widely celebrated. For I’m certain that, if more people were aware of it, the scales might drop from their eyes, plainly revealing the gigantic blunder our nation (and most others) committed by entrusting the management of paper currency to a government-sponsored monopoly managed by bureaucrats.

So you might expect me to be jumping for joy after seeing this new Bank of Canada Staff Working Paper by Ben Fung, Scott Hendry, and Warren E. Weber, on “Canadian Bank Notes and Dominion Notes: Lessons for Digital Currencies.”  But no such luck: instead, after reading it, I’ve been in a blue funk.

How come? Because, instead of drawing badly-needed attention to the substantial merits of Canada’s private currency system, Messrs. Fung, Hendry, and Weber focus on its shortcomings, claiming that it suffered from serious flaws that only the government could fix. They then go on to argue that government intervention may also be needed to keep today’s private digital currencies from displaying similar flaws. In short, according to them, Canada’s experience, instead of casting doubt on the desirability of special government regulation of private currencies, supplies grist for regulators’ mill.

Is their perspective compelling? I don’t think so. As I plan to show, and as even a cautious reading of Fung et al.’s own assessment will suggest to persons familiar with other nations’ experiences, the imperfections of Canada’s private banknote currency were minor ones, especially in comparison to those of the concurrent U.S. arrangement. Nor is it even clear that they were genuine flaws, in the sense that implies market failure. The reforms that eventually eliminated the imperfections were, in any case, not imposed on Canada’s commercial bankers against their wishes, but instigated by those bankers themselves. Finally, the suggested analogy between Canada’s 19th-century banknotes and modern digital currencies, far from supplying solid grounds for supposing that unregulated digital currencies are likely to exhibit the same (real or presumed) shortcomings as their 19th-century Canadian counterparts, is so forced as to be utterly unconvincing. For all these reasons, those seeking to draw useful lessons from Canada’s private currency experience will be well-advised to look for them elsewhere.

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.

Upcoming Event: America’s Global Role in the 21st Century

The Cato Institute has long been unique in Washington, D.C.’s foreign policy debate. For years, our scholars have argued that there is essentially no debate over grand strategy here in the nation’s capital. Vigorous political battles about U.S. foreign policy tend to happen only within a very narrow range of opinion, usually centering on tactics rather than competing strategic visions. These surface level disagreements mask a bipartisan consensus in favor of a grand strategy of primacy (alternatively termed “liberal hegemony” or “deep engagement”), which is further buttressed by an extensive network of foreign policy professionals within the national security bureaucracies. The consensus sees the United States as the indispensable nation - the policeman of the world - that must maintain military preponderance and extensive security commitments in Europe, the Middle East, and Asia in the name of upholding the international order.

The election of Donald Trump to the presidency has, in an odd way, created incentives for a debate about grand strategy. The president’s erratic and often contradictory utterances on alliances, free trade, and interventionism - what the Brookings Institution’s Thomas Wright describes as Trump’s Jekyll and Hyde foreign policy -  has occasionally questioned the core foundations of U.S. grand strategy in the post-WWII era. Unfortunately, Trump is just about the worst vessel for ushering in such a debate, for reasons that are too numerous to count but include his economic protectionism, chauvinistic nationalism, habitual threat inflation, and worrying illiberal tendencies. Nevertheless, the shock to the status quo that is Trump’s rise has elicited number of well-publicized defenses of primacy by people in the Washington foreign policy community.

And that’s what makes an upcoming Cato Institute event so timely and important. The debate over grand strategy in academia has always been comparatively robust, and two leading scholars who advocate the continuation of America’s deep engagement, Stephen G. Brooks and William C. Wohlforth, both professors at Dartmouth College, will be here on March 21 to discuss their newest book, America Abroad: The United States’ Global Role in the 21st Century. Our two discussants are at the other end of the spectrum on grand strategy: Cato’s own Benjamin H. Friedman and Eugene Gholz, professor at the University of Texas at Austin and Cato adjunct scholar. 

Please join us for this vital discussion of America’s role in the world. Register to attend the event here

CBO: Full Repeal Would Cover More People than House GOP’s ObamaCare-Lite Bill

A new Congressional Budget Office report projecting the effects of the House Republican leadership’s American Health Care Act weakens the case for the bill’s ObamaCare-lite approach, and strengthens the case for full repeal. The CBO projects that over the next two years, the AHCA would cause average premiums to rise 15 percent to 20 percent above ObamaCare’s already high premium levels. The report raises the prospect that insurance markets may collapse under the AHCA, just as they are collapsing under ObamaCare. It makes unreasonable assumptions about Medicaid spending; more reasonable assumptions could completely eliminate the bill’s projected deficit reduction. Finally, the CBO projects more people will lose coverage under the AHCA than under full repeal.

ObamaCare-Lite, ObamaCare-Forever

The AHCA purports to repeal and replace ObamaCare. In reality, it would do no such thing.

In a previous post, I wrote:

This bill is a train wreck waiting to happen.

The House leadership bill isn’t even a repeal bill. Not by a long shot. It would repeal far less of ObamaCare than the bill Republicans sent to President Obama one year ago…

[It] merely applies a new coat of paint to a building that Republicans themselves have already condemned…If this is the choice, it would be better if Congress simply did nothing.

The ACHA retains all the powers ObamaCare gives the federal government over private insurance, gives those powers a bipartisan imprimatur, and therefore gives them immortality. Its repeal of ObamaCare’s Medicaid expansion would likely never take effect. It fails to create real block grants in Medicaid, and preserves perverse incentives from both the “old” Medicaid program and the expansion. It would create an ongoing series of crises in the individual market, for which Republicans would take the blame and suffer at the polls, at the same time it would create pressure for more taxes and government spending. It’s hard to imagine what House Republicans were thinking.

Premiums and Market Stability

Full repeal, in particular repeal of ObamaCare’s health-insurance regulations, would cause premiums to fall for the vast majority of consumers in the individual market.

In contrast, the AHCA would increase premiums from their already high ObamaCare levels. “In 2018 and 2019…average premiums for single policyholders in the nongroup market would be 15 percent to 20 percent higher than under current law,” the CBO reported.

Premium increases of that magnitude could further destabilize ObamaCare’s health-insurance Exchanges. Adverse selection has already led to an exodus of insurers from the individual market. ObamaCare has driven every last insurer from the Exchange in 16 counties in Tennessee, leaving 43,000 residents with no health insurance options for 2018. In a thousand other counties around the country, the law has driven all but one insurer from the Exchange. Nearly 3 million people in those counties are just one carrier exit from being in the same position as those 43,000 Tennesseans.

The CBO posits that, nonetheless, “the nongroup market would probably be stable in most areas under either current law or the legislation.”

In most areas. Probably.

Supporters of the legislation note that the CBO projects the average premiums would then begin to fall after 2019. One reason is that the AHCA would end one of ObamaCare’s health-insurance regulations (actuarial-value requirements). Another is that the CBO predicts states would use the AHCA’s new Patient and State Stability Fund to subsidize high-cost enrollees.

There are reasons to doubt this prediction. First, it assumes the Exchanges survive the ensuing adverse selection and make it to 2020. Second, the Patient and State Stability Fund would not reduce premiums. Like ObamaCare’s reinsurance program, it would hide a portion of the full premium by shifting it to taxpayers. So even though the CBO reports that the portion of the premium that consumers see would fall 10 percent by 2026, it is not accurate to say premiums would fall. We don’t know if the full premium would fall or rise after 2019, because the CBO isn’t telling us.