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Archive for January, 2011

I refuse to allow myself to get too excited about the chances of Obamacare ultimately being declared unconstitutional, but I’m definitely semi-psyched that this horrid law has been declared void by another federal judge. Here’s what the Washington Examiner has to say.

The full text of the decision from Federal Judge Roger Vinson is not available yet, but according to reporters who’ve seen the decision, he’s ruled the entire Patient Protection and Affordable Care Act unconstitutional. The ruling favors of the 26 state attorney generals challenging the law. The judge ruled the individual mandate that requires all Americans to purchase health insurance invalid and, according to the decision, “because the individual mandate is unconstitutional and not severable, the entire Act must be declared void.”

By the way, my skepticism has nothing to do with the legal merits. I have no doubt that our Founding Fathers would be horrified by much of what happens in Washington, and there is no doubt in my mind that Obamacare is wildly inconsistent with the original intent of the Constitution.

But the courts have done such a lousy job of protecting economic liberty ever since the 1930s and 1940s that I’m afraid some appeals court will give Obamacare a free pass.

But, at least for today, let’s celebrate.

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I’m in Milan, at the office of the Institute Bruno Leoni, which overlooks the famous Castle Sforza and is almost within shouting distance of the remarkable cathedral.

This evening, I’ll be talking about how Italy should balance its budget by limiting the size of government, and my message will be identical to the one I give American policymakers. Restraining spending is the only pro-growth way of lowering red ink.

Italy actually has a smaller budget deficit than the United States according to OECD data, so that should make their job easier. On the other hand, the economy seems permanently stagnant, so revenues are projected to climb by an average of only 3.5 percent annually (compared to 7 percent in the United States).

Here are the specific numbers. The Italian budget this year is about €822 billion, while revenues are estimated to be about €752 billion. If the budget is frozen at current levels, the deficit disappears within three years. If spending grows by 1 percent each year, the budget is balanced in 2015. And if spending is allowed to grow only 2 percent annually, there is a surplus in 2017. If lawmakers can maintain fiscal discipline in subsequent years, they can begin to reduce the public debt.

This last point is important because Italian politicians are actually considering proposals to either levy a temporary property tax or a temporary tax on all assets, supposedly for the purpose of reducing the nation’s debt.

Some economists might argue that one-off taxes on assets are an efficient way of collecting revenue. After all, taxes on assets punish income that already was earned and do not punish earning income today or in the future. That is true, but such a tax would represent a blatant confiscation of private capital.

If the government is successful, this policy will undermine economic confidence and give Italian taxpayers an additional reason to move their money overseas. And since the politicians can achieve their alleged goal of debt reduction by restraining spending, there is no legitimate reason to steal wealth from the Italian people.

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While many of my posts mock American politicians for their foolish, short-sighted, and corrupt choices, I’m still very happy to be a citizen of the United States. Or, to be more accurate, I’m glad that I live in a nation that is part of Western civilization.

Consider what it would be like to live in Iran, where the government executes people for victimless crimes. Here’s part of a report from AFP.

Iranian courts on Sunday sentenced two people to death for running porn sites, prosecutor general Abbas Jafari Dolatabadi said, quoted on the Islamic republic’s official IRNA news agency. …Last December, Canada expressed concern over the reported death sentence handed down to an Iranian-born Canadian resident for allegedly designing an adult website. …Malekpour was detained in Iran after returning in 2008 to visit his ailing father. He was sentenced to death in December. The Netherlands froze contacts with Tehran after Saturday’s hanging of an Iranian-Dutch woman for drug smuggling, having initially been arrested for taking part in anti-government protests.

Iran also executes gay people, so the thugs running the government get bent out of shape about all sorts of private, consensual acts.

And let’s not forget that these nutjobs apparently are on the verge of getting nuclear weapons.

I rarely comment on foreign policy, and I don’t pretend to know what, if anything, should be done about Iran. My libertarian instincts tell me that any Western intervention would backfire. That being said, the world might be a safer place if Iran’s nuclear weapons program was disabled by an Israeli strike.

The best outcome, at least to my untrained eye, would be a domestic revolution. Some people fear this means instability, but Anne Applebaum persuasively argues in today’s Washington post that the uncertainty of change is better than the certainty of oppression. She’s commenting on Egypt’s turmoil, but I think her message has wide application. As such, one can only hope that the Iranian people rise up and overthrow the current regime. At which point, maybe gay Persians should be allowed to decide an appropriate punishment for the ousted tyrants.

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The title of this post doesn’t quite roll off the tongue like “It was the best of times, it was the worst of times.” But what can you expect when you compare politicians to the opening line of Charles Dickens’ A Tale of Two Cities.

That’s what came to my mind, though, when I noticed two stories next to each other on the Washington Post website. The first story was about a new lawmaker, infused with the spirit of the Tea Party, seeking to shrink the size and scope of Washington. The other story was about a career politician trying to expand the power of the federal government.

Let’s start with the good news. Here’s an excerpt from the Washington Post report about Senator Rand Paul’s bold plan to reduce the burden of government spending, including an attack on one of Washington’s sacred cows – subsidies for Israel.

The freshman Kentucky lawmaker unveiled his budget proposal this week that would make significant cuts in education, housing and energy while reducing money for wars in Afghanistan and Iraq by $16 billion. Paul’s plan also would cut some $20 billion in overseas aid, and he said he wants to eliminate the $3 billion the United States provides to Israel annually in foreign military assistance. “The overwhelming majority of Americans agree with Senator Paul – our current fiscal crisis makes it impossible to continue the spending policies of the past,” Paul spokesman Gary Howard said in a statement responding to the criticism. “We simply cannot afford to give money away, even to our allies, with so much debt mounting on a daily basis.” The latest economic forecast puts the deficit at a record $1.5 trillion. Paul explained his position in an interview with CNN on Wednesday, saying he respects Israel as a Democratic nation but feared funding an arms race in the Mideast.

Now, for the business-as-usual story, we have a story about the latest antics of Senator Charles Schumer, who has discovered a new “crisis” that requires action by Washington. Here’s a blurb from the Washington post.

U.S. Sen. Charles Schumer of New York says he wants the federal government to ban new designer drugs known as bath salts that pack as much punch as cocaine or methamphetamines. The small, inexpensive packets of powder are meant to be snorted for a hallucination-inducing high, but they are often marketed with a wink on the Internet or in convenience stores as bathing salts. The Democratic senator is announcing a bill Sunday that would add those chemicals to the list of federally controlled substances. …Schumer says the bath salts “contain ingredients that are nothing more than legally sanctioned narcotics.”

I confess total ignorance about “narcotic” bath salts, but even in the unlikely case that they should be banned, that is a decision for state governments. Last time I checked, the enumerated powers of Congress did not include authority to tell us what we can put in our baths or up our noses.

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In an interview with the Wall Street Journal, Clint Eastwood is asked about the new governor of California and uses the opportunity to advocate a simple and fair flat tax.

“But I’ll tell you when I liked him—and I wasn’t a registered Democrat—but I liked him when he was running for president [in 1992] on the flat tax. . . . A ton of economists, both liberal and conservative, have argued for a flat tax, but nobody’s ever had the nerve to do it. . . . It would simplify things, but simplification doesn’t seem to be in the human psyche.”

It’s always good to get endorsements from the right kind of celebrities. Years ago, the nation’s most infamous shock jock, Howard Stern, praised the flat tax. I used to listen to Stern every day, so that was a win-win situation from my perspective, but I realized that he wasn’t universally admired.

Clint Eastwood isn’t nearly as controversial, so perhaps he can be the public face of tax reform. Actually, maybe he’s the actor who should have been governor of California. Unlike Schwarzenegger, he would have known how to deal with greedy special interest groups.

I’m no Dirty Harry, so I can only push for a flat tax with words.

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Johnny Munkhammar is a member of the Swedish Parliament and a committed supporter of economic liberalization. He has a column in the Wall Street Journal Europe that does a great job of explaining how Sweden became rich when it was a small-government, pro-market nation. He then notes that his country veered off track in the 1970s and 1980s, but is now heading back in the right direction. I’ll have more analysis below these excerpts, but it is especially impressive that Sweden is ahead of America on key reforms such as Social Security personal accounts and school choice.

…Sweden is not socialist. According to the World Values Survey and other similar studies, Sweden combines one of the highest degrees of individualism in the world, solid trust in well-functioning institutions, and a high degree of social cohesion. Among the 160 countries studied in the Index of Economic Freedom, Sweden ranks 21st, and is one of the few countries that increased its economic freedoms during the financial crisis.

…Sweden wasn’t always so free. But Sweden’s socialism lasted only for a couple of decades, roughly during the 1970s and 1980s. And as it happens, these decades mark the only break in the modern Swedish success story.

…The Swedish tax burden was lower than the European average throughout these successful 60 years, and lower even than in the U.S. Only in 1950 did Sweden’s tax burden rise to 20% of GDP, though that remained comparatively low.

…The 1970s were a decade of radical government intervention in society and in markets, during which Sweden doubled its overall tax burden, socialized a slew of industries, re-regulated its markets, expanded its public systems, and shuttered its borders. In 1970, Sweden had the world’s fourth-highest GDP per capita. By 1990, it had fallen 13 positions. In those 20 years, real wages in Sweden increased by only one percentage point.

…By the late 1980s, though, Sweden had started de-regulating its markets once again, decreased its marginal tax rates, and opted for a sound-money, low-inflation policy. In the early 1990s, the pace quickened, and most markets except for labor and housing were liberalized. The state sold its shares in a number of companies, granted independence to its central bank, and introduced school vouchers that improved choice and competition in education. Stockholm slashed public pensions and introduced private retirement schemes, keeping the system demographically sustainable.

These decisive economic liberalizations, and not socialism, are what laid the foundations for Sweden’s success over the last 15 years. …Today, the state’s total tax take comes to 45% of GDP, from 56% ten years ago.

Meanwhile, unemployment benefits, sick leave and early retirement plans have all been streamlined to encourage work. The number of people receiving such welfare—which soared during the socialist decades—has fallen by 150,000 since 2006, a main reason for Sweden’s remarkably sound public finances.

Sweden still has a public sector that is far too big, but the damage caused by bloated government is at least partially offset by very good policy in other areas. Sweden is actually slightly more free market than the United States on non-fiscal measures in the Economic Freedom of the World index. Here’s a chart comparing Sweden and the United States. But I also included a few other nations for purposes of comparison. You can see Switzerland, the U.S., Sweden, and the United Kingdom all have similar scores for economic freedom if the burden of taxation and government spending is removed from the mix. But things change dramatically when taxes and spending are added to the formula. Switzerland is ranked 4th overall because of a decent fiscal system, ahead of the United States (6th) and United Kingdom (10th). while Sweden falls all the way to 37th place.

Denmark gets very high marks for non-fiscal freedom, so it only drops to 14th in the overall rating because of its bloated welfare state. Hong Kong and Singapore, meanwhile, rank 1st and 2nd in the world because of strong ratings on non-fiscal factors and they also manage to limit the fiscal burden of government.

Last but not least, many of Johnny’s points are included in this Center for Freedom and Prosperity video.

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Hello from the Most Serene Republic of San Marino, a 24-square mile enclave centered around Monte Titano in eastern Italy. I’m here for a conference on “Competition and Alliances among States.”

Like many other so-called tax havens, San Marino has been bludgeoned in recent years by politicians from high-tax nations, who resent the flow of jobs and capital to low-tax jurisdictions. This is creating problems for the economy, which is one of the most prosperous in the world.

I will speak later today about the ongoing battle between those who favor tax competition and those who want tax harmonization. Not surprisingly, my presentation will include some jabs at France, Germany, and other high-tax nations, as well as statist international bureaucracies such as the Organization for Economic Cooperation and Development.

But my main goal will be to put this battle in context, pointing out that the attacks against low-tax jurisdictions will get more intense in the future as welfare states begin to fall apart and politicians desperately search for more revenue to delay the day of reckoning.

This is not to imply that San Marino is a laissez-faire paradise. Yes, comparatively low tax rates have generated prosperity, but prosperity generates a lot of tax revenue (the Laffer Curve strikes again!), and the nation’s politicians have succumbed to temptation and spent all the money. Indeed, there is not much difference between the welfare state in San Marino and the one in Italy.

The moral of the story, of course, is that all nations should strive to shrink the overall burden of government. San Marino should try to be more like Hong Kong and less like France. The same is true for the United States.

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Very few things that happen in Washington are legitimate functions of the federal government. I’ve already posted about the need to dismantle the Department of Transportation and send it back to the states, but some things  shouldn’t even be handled by state and local governments. Housing is a perfect example. There should be no role for government in building or subsidizing housing, period.

But I’ll be happy if we can simply get rid of the Department of Housing and Urban Development in Washington. This $53 billion turkey should be the top target for GOP reformers.

Fealty to the Constitution should be the only reason lawmakers need to abolish HUD, but if they’re looking for some tangible examples of how the Department squanders money, J.P. Freire of the Washington Examiner opines on the issue, citing some devastating findings in a report from the Center for Public Integrity.

In the more than 3,000 public housing agencies nationwide funded by the Department of Housing and Urban Development, and particularly inside the 172 that HUD considers the most troubled, ABC News and the Center for Public Integrity found a struggle to combat theft, corruption, and mismanagement. According to the report, one official embezzled $900,000 and bought a mansion. Other funds went to support sex workers. In other words, this is a perfect illustration of why recommending cuts to such assistance programs is not heartless but actually wise — waste is rampant:

The problems are widespread, from an executive in New Orleans convicted of embezzling more than $900,000 in housing money around the time he bought a lavish Florida mansion to federal funds wrongly being spent to provide housing for sex offenders or to pay vouchers to residents long since dead. Despite red flags from its own internal watchdog, HUD has continued to plow fresh federal dollars into these troubled agencies, including $218 million in stimulus funds since 2009, the joint investigation found.

These are horrific examples of government waste, and they are tailor-made for soundbites and blog posts, but waste, fraud, and corruption are not the real issues. HUD should be abolished even if every penny of the budget could be accounted for. If Republicans can’t get rid of HUD, voters should get rid of Republicans.

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Many of the politicians in Washington, including President Obama during his State-of-the-Union address, piously tell us that there is no way to balance the budget without tax increases. Trying to get rid of red ink without higher taxes, they tell us, would require “savage” and “draconian” budget cuts.

I would like to slash the budget and free up resources for private-sector growth, so that sounds good to me. But what’s the truth?

The Congressional Budget Office has just released its 10-year projections for the budget, so I crunched the numbers to determine what it would take to balance the budget without tax hikes. Much to nobody’s surprise, the politicians are not telling the truth.

The chart below shows that revenues are expected to grow (because of factors such as inflation, more population, and economic expansion) by more than 7 percent each year. Balancing the budget is simple so long as politicians increase spending at a slower rate. If they freeze the budget, we almost balance the budget by 2017. If federal spending is capped so it grows 1 percent each year, the budget is balanced in 2019. And if the crowd in Washington can limit spending growth to about 2 percent each year, red ink almost disappears in just 10 years.

These numbers, incidentally, assume that the 2001 and 2003 tax cuts are made permanent (they are now scheduled to expire in two years). They also assume that the AMT is adjusted for inflation, so the chart shows that we can balance the budget without any increase in the tax burden.

I did these calculations last year, and found the same results. And I also examined how we balanced the budget in the 1990s and found that spending restraint was the key. The combination of a GOP Congress and Bill Clinton in the White House led to a four-year period of government spending growing by an average of just 2.9 percent each year.

We also have international evidence showing that spending restraint – not higher taxes – is the key to balancing the budget. New Zealand got rid of a big budget deficit in the 1990s with a five-year spending freeze. Canada also got rid of red ink that decade with a five-year period where spending grew by an average of only 1 percent per year. And Ireland slashed its deficit in the late 1980s by 10 percentage points of GDP with a four-year spending freeze.

No wonder international bureaucracies such as the International Monetary fund and European Central Bank are producing research showing that spending discipline is the right approach.

This video provides all the details.

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I write about the Laffer Curve so often that I’m surprised people don’t run away screaming. But I’ll continue to be a pest because I want people to understand that you can’t just look at changes in tax rates when predicting changes in tax revenue. You also have to consider changes in taxable income.

Simply stated, my goal is for people to recognize that higher tax rates lower incentives to earn and report income and lower tax rates increase incentives to earn and report income. However, I also want people to understand that this doesn’t mean “all tax cuts pay for themselves.” That only happens in very rare cases. Moreover, it would be good if people recognized that there are lots of factors that influence the economy’s performance, and it’s therefore important to be cautious when making claims about the relationships between tax rates, taxable income, and tax revenue.

So we many not be able to precisely measure the impact of the Laffer Curve, we know it’s there and we know it can be very significant. We also know that economic incentives are not constrained by national borders. The Laffer Curve exists even in nations where politicians generally are not sympathetic to good tax policy. France naturally comes to mind, and here are some excerpts from a new report from Pierre Garello. He examines recent changes in tax rates and the tax base, and finds that better tax policy is having a positive impact.

In 2006 a major change was implemented in France regarding the income tax. Not only the top marginal rate was lowered (from 48.09% to 40.00%), but the same treatment was applied to the other rates. Also, the number of brackets was reduced from 7 to 5. As a result, whatever the level of taxable income, the rate applied was lower after the changes took place than before. …the tax base was also enlarged. In particular, while 20% of gross income from salaries was until then automatically deduced to compute the level taxable income, this was no longer the case with income earned in 2006 and after. …Based on data from the French Public Finances General Directorate (DGFiP) we can see that the impact was a minor drop in tax revenues from the 2006 personal income followed by a slightly higher increase in PIT revenues from 2007 earnings. As illustrated by the graph below, the successive cuts in marginal tax rates between 1995 and 2007 have resulted in higher tax revenues.

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