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Archive for February, 2011

Sooner or later, there will be a giant battle in Washington over the value-added tax. The people who want bigger government (and the people who are willing to surrender to big government) understand that a new source of tax revenue is needed to turn the United States into a European-style social welfare state. But that’s exactly why the VAT is a terrible idea.

I explain why in a column for Reuters. The entire thing is worth reading, but here’s an excerpt of some key points.

Many Washington insiders are claiming that America needs a value-added tax (VAT) to get rid of red ink. …And President Obama says that a VAT is “something that has worked for other countries.”

Every single one of these assertions is demonstrably false.

…One of the many problems with a VAT is that it is a hidden levy. …VATs are imposed at each stage of the production process and thus get embedded in the price of goods. And because the VAT is hidden from consumers, politicians find they are an easy source of new revenue – which is one reason why the average VAT rate in Europe is now more than 20 percent!

…Western European nations first began imposing VATs about 40 years ago, and the result has been bigger government, permanent deficits and more debt. According to the Economist Intelligence Unit, public debt is equal to 74 percent of GDP in Western Europe, compared to 64 percent of GDP in the United States (and the gap was much bigger before the Bush-Obama spending spree doubled America’s debt burden).

The most important comparison is not debt, but rather the burden of government spending. …you don’t cure an alcoholic by giving him keys to a liquor store, you don’t promote fiscal responsibility by giving government a new source of revenue.

…To be sure, we would have a better tax system if proponents got rid of the income tax and replaced it with a VAT. But that’s not what’s being discussed. At best, some proponents claim we could reduce other taxes in exchange for a VAT. Once again, though, the evidence from Europe shows this is a naive hope. The tax burden on personal and corporate income is much higher today than it was in the pre-VAT era.

…When President Obama said the VAT is “something that has worked for other countries,” he should have specified that the tax is good for the politicians of those nations, but not for the people. The political elite got more money that they use to buy votes, and they got a new tax code, enabling them to auction off loopholes to special interest groups.

You can see some amusing – but also painfully accurate – cartoons about the VAT by clicking here, here, and here.

For further information on why the VAT is a horrible proposal, including lots of specific numbers and comparisons between the United States and Western Europe, here’s a video from the Center for Freedom and Prosperity.

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I’m a lucky guy to work at the Cato Institute, and I’m especially happy to be at Cato’s Benefactor Summit in San Diego this weekend. One of our supporters, John Aglialoro, is the person most responsible for the movie version of Atlas Shrugged (he independently produced the film with his own money), and he let us see the movie yesterday.

Five stars. Two thumbs up. Whatever rating system you use, you need to see this movie. You don’t need to be a “Randroid” or objectivist to like the film. Heck, you probably don’t even need to like small government or have capitalist sympathies.

I realize I’m biased, but I genuinely think John did a fantastic job. The production quality is first rate, the musical score (I think that’s the term) is perfect, and the story is well told – a particularly challenging task since the 1000 page-plus book is actually being brought to the screen in three parts and this is just the first installment.

The movie is released to the public on April 15 (yes, that choice is deliberate).

If you want to see the trailer, click here.

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I spoke at the Tea Party Patriots convention earlier today. Great people, great crowd.

My job was to debate on the side of the flat tax over the fair tax. Several people asked for more information, and I promised to put this video on the blog. Long-time readers probably will have seen it before, but it’s always good to be reminded why we need tax reform – and also reminded why we can’t trust politicians with a new source of revenue.

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When existing spending authority expires on March 4, the “non-essential” parts of the federal government will shut down unless Republicans and Democrats reach an agreement. This is causing lots of agitation in Washington, both by Democrats who don’t want the money spigots in the off position and Republicans who fret that they will be blamed for (gasp) gridlock.

I have a new piece at National Review that explains how the GOP can win this fight. Indeed, I explain that Republicans actually did a pretty good job during the 1995 fight, even though they now have negative memories of the experience. This excerpt provides my basic assessment, but the full article has lots of additional information, including quotes from news accounts in 1995 showing that the GOP held the upper hand, as well as four specific recommendation of how advocates of limited government can do even better this year.

With the GOP-led House and the Democratic Senate and White House far apart on a measure to pay the federal government’s bills past March 4, Washington is rumbling toward a repeat of the 1995 government-shutdown fight (actually two shutdown fights, one in mid-November of that year and the other in mid-December).

This makes some Republicans nervous. They think Bill Clinton “won” the blame game that year, and they’re afraid they will get the short end of the stick if there is a 1995-type impasse this year.

A timid approach, though, is a recipe for failure. It means that President Obama and Senate Majority Leader Harry Reid can sit on their hands, make zero concessions, and wait for the GOP to surrender any time a deadline approaches.

In other words, budget hawks in the House have no choice. They have to fight.

But they can take comfort in the fact that this is not a suicide mission. The conventional wisdom about what happened in November of 1995 is very misleading.

Republicans certainly did not suffer at the polls. They lost only nine House seats, a relatively trivial number after a net gain of 54 in 1994. They actually added to their majority in the Senate, picking up two seats in the 1996 cycle.

More important, they succeeded in dramatically reducing the growth of federal spending. They did not get everything they wanted, to be sure, but government spending grew by just 2.9 percent during the first four years of GOP control, helping to turn a $164 billion deficit in 1995 into a $126 billion surplus in 1999. And they enacted a big tax cut in 1997.

If that’s what happens when Republicans are defeated, I hope the GOP loses again this year.

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The showdown in Wisconsin has generated competing claims about whether state and local government bureaucrats are paid too much or paid too little compared to their private sector counterparts.

The data on total compensation clearly show a big advantage for state and local bureaucrats, largely because of lavish benefits (which is the problem that  Governor Walker in Wisconsin is trying to fix). But the government unions argue that any advantage they receive disappears after the data is adjusted for factors such as education.

This is a fair point, so we need to find some objective measure that neutralizes all the possible differences. Fortunately, the Bureau of Labor Statistics has a Job Openings and Labor Turnover Survey, and this “JOLTS” data includes a measure of how often workers voluntarily leave job, and we can examine this data for different parts of the workforce.

Every labor economist, right or left, will agree that higher “quit rates” are much more likely in sectors that are underpaid and lower levels are much more likely in sectors where compensation is generous.

Not surprisingly, this data shows state and local bureaucrats are living on Easy Street. As the chart illustrates, private sector workers are more than three times as likely to quit their jobs.

This helps explain why the unions are treating the Wisconsin debate as if it was Custer’s Last Stand. The bureaucrats know they have comfortable sinecures and they are fighting to preserve their unfair privileges.

The only bit of semi-good news for Wisconsin taxpayers is that state and local bureaucrats are not as lavishly over-compensated as federal bureaucrats.

This Center for Freedom and Prosperity video looks at all of the data and reveals a pecking order. Federal bureaucrats are at the kings and queens of compensation. State and local bureaucrats are like the nobility. And private sector taxpayers are the serfs that worker harder and earn less, but nonetheless finance the entire racket.

The video closes with a very important point that the right pay level for many bureaucrats is zero. This is because they work for programs, departments, and agencies that should not exist.

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This is really remarkable. We’re supposed to go through porno strip machines at the airport so the bureaucrats can detect firearms. Yet the Keystone Cops at the TSA in Dallas failed when an undercover agent tested their awareness by hiding a gun in her undergarments. They didn’t just fail. They. Failed. Every. Single. Time.

Check out this local news report, including a video at the link.

An undercover TSA agent was able to get through security at Dallas/Fort Worth International Airport with a handgun during testing of the enhanced-imaging body scanners, according to a high-ranking, inside source at the Transportation Security Administration. The source said the undercover agent carried a pistol in her undergarments when she put the body scanners to the test. The officer successfully made it through the airport’s body scanners every time she tried, the source said. “In this case, where they had a test, and it was just a dismal failure as I’m told,” said Larry Wansley, former head of security at American Airlines. “As I’ve heard (it), you got a problem, especially with a fire arm.”

This story worries me. But not because a terrorist might smuggle a gun on board. Passengers are now the most effective line of defense against hijacking, along with hardened cockpit doors and armed pilots.

But I am worried that the TSA might over-react, demand more intensive scrutiny, and cause airport security lines to become even slower.

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I haven’t commented on what’s been happening in Libya, Egypt, and the rest of the Arab world. This isn’t because I don’t care, but rather because I don’t have much knowledge about the area and I’m not sure what, if anything, the United States should do. Or could do.

I will say, however, that one of my concerns is that these countries will stumble from one form of oppression to another. And maybe the new form of oppression (post-1979 Iran) will be worse than the old form of oppression (pre-1979 Iran). I suspect President Obama and his team understand this, which is why the White House is being very cautious.

What I would like to see, of course, is genuine freedom and liberty. But this is not the same as democracy.

Democracy and liberty can overlap, to be sure, but democracy also can morph into untrammeled majoritarianism – what is sometimes known as tyranny of the majority.

Interestingly, even researchers at the International Monetary Fund share my concerns. A recent study from the IMF reported that, “economic freedom [is]… beneficial to growth, while democracy may have a small negative effect.” In other words, give people liberty, and good things happen. Give them democracy, and the outlook is not nearly as encouraging.

Walter Williams, as is so often the case, explains the real issue. This is a long excerpt, but every word is worth reading, especially the quotes from the Founding Fathers.

Like the founders of our nation, I find democracy and majority rule a contemptible form of government.

…I’ll begin by quoting our founders on democracy. James Madison, in Federalist Paper No. 10, said that in a pure democracy, “there is nothing to check the inducement to sacrifice the weaker party or the obnoxious individual.” At the 1787 Constitutional Convention, Virginia Gov. Edmund Randolph said, “… that in tracing these evils to their origin every man had found it in the turbulence and follies of democracy.” John Adams said, “Remember, democracy never lasts long. It soon wastes, exhausts, and murders itself. There was never a democracy yet that did not commit suicide.” Alexander Hamilton said, “We are now forming a Republican form of government. Real Liberty is not found in the extremes of democracy, but in moderate governments. If we incline too much to democracy, we shall soon shoot into a monarchy, or some other form of dictatorship.”

The word “democracy” appears nowhere in the two most fundamental documents of our nation — the Declaration of Independence and the U.S. Constitution.

…What’s the difference between republican and democratic forms of government? John Adams captured the essence when he said, “You have rights antecedent to all earthly governments; rights that cannot be repealed or restrained by human laws; rights derived from the Great Legislator of the Universe.” That means Congress does not grant us rights; their job is to protect our natural or God-given rights.

For example, the Constitution’s First Amendment doesn’t say Congress shall grant us freedom of speech, the press and religion. It says, “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press…”

…In a democracy, the majority rules either directly or through its elected representatives. As in a monarchy, the law is whatever the government determines it to be. Laws do not represent reason. They represent force. The restraint is upon the individual instead of government. Unlike that envisioned under a republican form of government, rights are seen as privileges and permissions that are granted by government and can be rescinded by government.

To highlight the offensiveness to liberty that democracy and majority rule is, just ask yourself how many decisions in your life would you like to be made democratically. How about what car you drive, where you live, whom you marry, whether you have turkey or ham for Thanksgiving dinner?

Here are a few of David Harsanyi’s sage comments, from an article he wrote for Reason. He makes many of the same points about the importance of protecting individual liberty, regardless of the sentiments of 51 percent of the general population.

…a number of anchors and talking heads have made a careless habit of using the words “democracy” and “freedom” as if they were interchangeable ideas. …Alas, it only takes 51 percent of you to ban a stiff energy drink or a decent light bulb—a crime against not only liberty but also decent luminosity. When liberals crusade to end electoral colleges or scoff at states’ rights, they are fighting for a more direct, centralized democracy in which liberty becomes susceptible to the temporary whims, ideological currents, and fears (rational and sometimes not) of the majority. When the tea party members talk about returning “power to the people”—as they’re apt to do on occasion—they’re missing the point, as well. We already defer too much power to other people. If you knew the people I do, you’d be chanting “power from the people.” …democracy is clearly a vast improvement over an autocracy. …Democracy without a moral foundation, economic freedom, or a respect for individual and human rights, though, has the potential not to be any kind of freedom at all. We all wish the Muslim world the best in shedding its dictatorships and theocracies and finding true liberty. But let’s not confuse two distinct ideas.

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