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Archive for March, 2011

Press reports indicate that there is a tentative agreement between Republicans and Democrats to trim $33 billion of spending for the remainder of the current fiscal year. Here are a few blurbs from a story in The Hill.

A source familiar with the talks said members of the Senate and House Appropriations panels are working toward a target of $33 billion in spending cuts. …The $33 billion would be close to the cuts first proposed by House GOP leaders, who moved to $61 billion in proposed cuts under pressure from freshmen in their conference. Policy language defunding the new healthcare law and Planned Parenthood, which conservatives have insisted should be in a final deal, remains a sticking point.

If the final result is anywhere close to $33 billion, this has to be considered a disappointment. I was never under any illusion that GOPers would get $61 billion of cuts. But I was hoping the final number would be somewhere in the range of $45 billion.

To put this in context, the budget for the current fiscal year is $3,800 billion. And that’s almost $2,000 billion higher than it was when Bill Clinton left office. Yet politicians, after a 10-year binge of higher spending, can only find $33 billion of cuts?!?

One Capitol Hill staffer told me that this is a “kiss-your-sister” deal, implying that neither side won or lost. But if that’s the case, then I’m definitely not related to Claudia Schiffer. In this case, my sister is…well, never mind…I don’t want to be snarky.

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Jeffrey Sachs of Columbia University is a big booster of the discredited notion that foreign aid is a cure-all for poverty in the developing world, but he is now branching out and saying silly things about policy in other areas.

In a column for the Financial Times, he complains that tax competition is forcing governments to “race to the bottom” with regards to tax rates. The answer, he wants us to believe, is some sort of global tax cartel. Sort of an “OPEC for politicians” that will facilitate the imposition of higher tax rates.

Only international co-operation can now solve what is becoming a runaway social crisis in many high-income countries. …With capital globally mobile, moreover, governments are now in a race to the bottom with regard to corporate taxation and loopholes for personal taxation of high incomes. Each government aims to attract mobile capital by cutting taxes relative to others. …countries cannot act by themselves. Even the social democracies of northern Europe, with their balanced budgets and high tax rates, are increasingly being pulled into the vortex of tax cutting and the race to the bottom. …recent trends…require increased, not decreased, taxation of higher incomes, including corporate profits; and that tax and regulatory co-ordination across countries are vital to prevent a ruinous fiscal race to the bottom.

If this overwrought rhetoric is true, it would mean that governments have been starved of revenue because of race-to-the-bottom tax cuts for evil corporations and sinister rich people. Well, it is true that tax competition over the past 30-plus years has resulted in lower tax rates. But do lower tax rates mean less tax revenue, as implied by Sachs’ analysis?

At the risk of being impolite and shattering anyone’s illusions, let’s actually see what happened to the overall tax burden on both personal and corporate income.

This chart, showing the average for industrialized nations, shows that Sachs and his ilk are wrong. Way wrong. Tax rates have come down, but the overall tax burden actually has increased. So while there may be a race to less-destructive tax rates, there certainly isn’t a race to bottom for tax revenue.

Hmmm….lower tax rates and higher tax revenue. That seems vaguely familiar. Maybe it has something to do with “supply-side economics.” One can only wonder if Sachs has heard about that strange idea known as the Laffer Curve.

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Yesterday, I analyzed how the GOP should fight the budget battle, but I may have made a big mistake. I assumed the Republican leadership actually wanted to do the right thing. I thought they learned the right lessons from the disastrous Bush years, and that the GOP no longer would be handmaidens for big government. And I naively assumed that the Republican leadership would not betray the base and stab the Tea Party in the back.

Unfortunately, if this Washington Post story is accurate, that may be what is happening.

Having difficulty finding consensus within their own ranks, House Republican leaders have begun courting moderate Democrats on several key fiscal issues, including a deal to avoid a government shutdown at the end of next week. The basic outline would involve more than $30 billion in cuts for the 2011 spending package, well short of the $61 billion initially demanded by freshman Republicans and other conservatives, according to senior aides in both parties. Such a deal probably would be acceptable to Senate leaders and President Obama as long as the House didn’t impose funding restrictions on certain social and regulatory programs supported by Democrats, Senate and administration aides said.

Having been in Washington for 25 years, I’m not blind to reality. I knew it was never going to be possible to get all $61 billion of cuts. At some point, there would be a compromise. And I also was aware that the GOP “riders” – such as blocking Obamacare, curtailing the EPA’s power grab, and defunding the leeches at Planned Parenthood – were an uphill battle.

But I thought the GOP leadership would fight and get a decent deal rather than unilaterally surrender. If the Washington Post report is true and Republicans act like the French army, it will discourage the base and cause a rift with the Tea Party. So it’s dumb politics and dumb policy.

Let’s keep our fingers crossed, though, and hope this is just a trial balloon that quickly will be shot down.

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According to news reports, Democrats and Republicans are unlikely to reach any sort of budget agreement before April 8, when a short-term spending bill for the current fiscal year expires.

Barring some new development, this could mean a shutdown of the non-essential parts of the government.

This makes both sides very nervous. Democrats don’t want the spending spigot turned off and are worried that voters might conclude that there’s no reason to ever re-open departments such as Housing and Urban Development. Republicans, meanwhile, mostly worry that they might look unreasonable and get blamed if certain parts of the government are mothballed and voters can’t get passports or visit national parks.

Given this state of play, what’s the best strategy for fiscal conservatives, libertarians, and other advocates of smaller government?

Fred Barnes of the Weekly Standard thinks Republicans should continue with short-term spending bills.

…the incremental strategy is working. Republicans have passed two short-term measures to keep the government in operation since early March while slashing $10 billion in spending. At this rate, they would achieve the target of GOP congressional leaders of lopping off $61 billion from President Obama’s proposed budget in the final seven months of the 2011 fiscal year. There’s every reason to believe the incremental strategy would continue to succeed.

He’s worried that a more confrontational approach, where the GOP passes a take-it-or-leave-it spending bill, might backfire – even though any shutdown would exist solely because Senator Reid and/or President Obama refused to act.

Would a shutdown give Republicans more muscle in negotiating for cuts? …Maybe it would. But it might not. …So long as they control the Senate and White House, Democrats will reject massive cuts. Republicans also want to bar spending for Planned Parenthood, the Corporation for Public Broadcasting, and Mr. Obama’s health-care program. Attach any of these prohibitions to a spending measure and Democratic opposition is certain. Should Republicans insist, we’ll get a government shutdown. This is a big gamble. …Indeed it might discredit Republicans and boost Mr. Obama in the same way the shutdown in 1995 hurt Republicans and lifted President Bill Clinton out of the doldrums. It could alienate independent voters so critical to the Republican triumph in 2010. True enough, the political atmosphere is more favorable to serious spending reductions than it was 16 years ago. …But why take a chance?

I think Barnes is a bit off in his portrayal of what happened in 1995, as I’ve previously explained, but these are all fair points. A “shutdown” fight could be considered uncharted territory.

Keith Hennessey, a former Hill staffer and Bush Administration official, also is skeptical of a confrontational approach. Instead, he suggests that the GOP increase the pressure on Democrats by slowly increasing the amount of weekly spending cuts.

While negotiating with the President’s team and Senate Democrats, in this variant House Republicans continue to pass short-term Continuing Resolutions as long as there is not an acceptable full-year deal. In these repeated future CRs, they ratchet up the spending cuts by the paltry figure of only $100 million each week. …Under this new variant, as April 8th approaches House Republicans would pass another three week CR, one which cuts $2.1 B in its first week, $2.2 B in its second week, and $2.3 B in its third week. …Such a tiny weekly increment would be nearly impossible for Democrats to reject. And yet if continued through the end of this fiscal year, $4.5 B of discretionary spending would be cut in the final week, that of September 23rd. This strategy…poses zero additional risk for Congressional Republicans. They would maintain the high ground on spending cuts and remain on the offensive for the next six months.

There’s a lot to like about Keith’s approach. If successful, he explains, GOPers could wind up with $82 billion of cuts rather than just $61 billion.

But here’s my concern about an incremental strategy. What makes anyone think that the left will go along with short-term spending bills, regardless of whether they cut $2 billion per week, or even more?

Democrats already have agreed to $10 billion of cuts, and even though that’s very trivial when compared to total spending (akin to a couple of french fries out of a Big Mac meal), the pro-spending lobbies and their allies on Capitol Hill are balking at the thought of additional cuts. So while it might be possible to push through a couple of additional short-term spending bills, there will come a point when Democrats refuse to play ball. And when that happens, we’re back to a partial shutdown.

Here’s how constitutional lawyer James Bopp, Jr., explained the issue in a piece for the Washington Times.

A government shutdown is inevitable because President Obama will insist on it. Nothing the Republicans do, short of total capitulation, will prevent this from happening. …With a three-week extension of government funding (which included $6 billion in cuts) expiring April 8, now is the time to escalate one’s bid. Demand $12 billion in cuts the next time. And when the shutdown occurs because of an Obama veto or a vote in the Democrat-controlled Senate, the House should keep passing bills to reopen the government, coupling it with more spending cuts. …There is a fundamental contradiction in the Democrats’ shutting down the government. The Democrats are the party of government. It is like a bank robber, caught in the act, who threatens to pull the trigger on himself if arrested; what would the cop say but, “Go ahead”? The government shutdown threat defeats the Democrats own objective and is thus ultimately self-defeating, while the Republicans protect the bank depositors – the taxpayers – from the bank robber.

I think this is largely correct, particularly in that there almost certainly will be a shutdown fight. The only question is when it will happen. And if a shutdown battle is inevitable, advocates of smaller government should decide whether it’s better to have that fight sooner rather than later.

My instinct is that it would be better to fight now. GOP resolve presumably will decrease over time, particularly since the “easy” spending cuts get used up first. Moreover, it is quite likely that a strategy of short-term spending bills will complicate GOP efforts to get budget process reform in a couple of months in exchange for an increase in the debt limit.

Democrats surely don’t want the GOP to have another opportunity to restrain the size of government, so they would insist on an increase in the federal government’s borrowing authority as the price for approving whatever short-term spending bill is being considered around that time. Republicans presumably will balk at that demand. But that brings us back, once again, to a shutdown fight. Only this time, it will be complicated by demagogic assertions of a default.

So long as the final result is a smaller burden of government, there is no right or wrong answer about the process. It’s simply a question of which approach is more likely to achieve the desired outcome. I think fighting now is better than fighting later, but if the GOP chooses a strategy of short-term spending bills, I hope I’m wrong.

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General Electric has received a lot of unwelcome attention for paying zero federal income tax in 2010, even though it reported $5.1 billion in U.S. profits. This is a good news-bad news situation.

The good news is that GE’s clever tax planning deprived the government of revenue. And I’m in favor of just about anything that reduces the amount of money that winds up in the hands of the most corrupt and least competent people in America (a.k.a., the political class in Washington).

The bad news, though, is that politicians can engage in borrow-and-spend vote-buying behavior, so depriving them of revenue doesn’t seem to have much impact on the overall burden of government spending.

Moreover, there are good ways to cut taxes and not-so-good ways to cut taxes. Special loopholes for politically powerful companies and well-connected insiders are unfair, corrupt, and inefficient.And I’ve already written about GE’s distasteful track record of getting in bed with politicians in exchange for grubby favors.

Ideally, we should junk the corrupt internal revenue code (and the corporate side of the tax code makes the personal tax code seem simple by comparison) and replace it with a simple and transparent system such as the flat tax.

That way, all income would be taxed since loopholes would be abolished, but there would be a very low tax rate and no double taxation.

Tim Carney of the Washington Examiner is one of the best economic and policy journalists on the scene today, and this excerpt from his column explains what is right and wrong about GE’s tax bill.

GE allocates hundreds of talented minds to attempts at lowering taxes. I don’t blame GE for that. It’s probably worth it — which is exactly the problem. In a world with a simpler tax code — or better yet, with no corporate income tax — GE would spend those resources creating something of value. Again, this is a case where government creates a chasm between what’s profitable (gaming tax law) and what’s valuable for society. Also, this story demonstrates once again how Big Government hurts small business much more than it affects Big Business, which can afford to figure out a way around taxes.

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Okay, the title’s an exaggeration, but this chart is rather revealing. It shows how per-capita GDP has changed between 1980 and 2008 in Chile, Argentina, and Venezuela.

As you can see, Chile used to be the poorest of the three countries and now it is comparatively rich. Argentina has enjoyed a bit of growth. Venezuela, by contrast, used to be the richest of the three nations but has stagnated and now is in last place.

So what accounts for these remarkable changes in relative prosperity? The answer, at least in part, is the difference between free markets and statism. Simply stated, Chile has reduced the burden of government a lot in the past three decades, Argentina has reduced the burden of government a little, and Venezuela has gone in the wrong direction and increased the burden of government.

The following numbers come from the Economic Freedom of the World, which looks at all facets of economic policy, including regulation, trade policy, monetary policy, fiscal policy, rule of law, and property rights.

* Chile’s score jumped from 5.6 in 1980 to 8.0 in 2008, and the country now ranks as the world’s 4th-freest economy (ahead of the United States!).

* Argentina’s ranking has improved a bit, rising from 4.4 to 6.0 between 1980 and 2008, but that still only puts them in 94th-place in the world rankings.

* Venezuela, by contrast, is embarrassingly bad. The nation’s score has dropped from 6.3 to 4.4, and its ranking has plunged from 22nd-place in 1980 to 121st-place in 2006.

The simple lesson is that nations have the ability to create prosperity, but they have to follow a simple recipe. Adam Smith is reported to have written several hundred years ago that, “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice.”

Since Adam Smith probably never imagined a world filled with things such as OSHA, the Department of Energy, the IRS, agriculture subsidies, and fiat money, his recipe might be a bit dated, but the general idea still holds.

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My previous post looked at the federal government’s troubling decision to investigate, persecute, prosecute, and ultimately imprison a random home-loan borrower named Charlie Engle for the crime of mortgage fraud. Citing a column on the legal fallout from the financial crisis in the New York Times, I noted that it was rather odd that the government would target a nobody like Mr. Engle while letting all the big fish swim away.

This story certainly paints a picture of a government that has one set of rules for ordinary people, but an entirely different set of rules for the political elite and those who make big campaign contributions to that ruling class. But I also noted that I’m not a legal expert and was unsure about the degree to which the big players actually broke laws, or whether they simply made stupid business decisions (often encouraged by bad government policy).

The most upsetting part of the story, though, is how the government wound up targeting Mr. Engle. It turns out that an IRS agent, Robert Norlander, must have been competing for the IRS’s Thug-of-the-Year Award (or maybe it was A-Hole-of-the-Year or Jerk-of-the-Year) because here are some of the things he did:

o  Mr. Norlander decided to snoop into Mr. Engle’s because he saw a film about him training for a marathon. In other words, there was no probable cause, no reasonable suspicion, nothing. Just the perverse decision of an IRS bully to go after someone.

o  Mr. Norlander admitted a pattern of thuggish behavior, stating that he will snoop into someone’s private life simply because that person drives an expensive car.

o  Mr. Norlander continued to investigate and persecute Mr. Engle, subjecting him to undercover surveillance, even though his tax returns showed no wrongdoing.

o  Mr. Norlander even engaged in “dumpster dives” to look for evidence of wrongdoing in Mr. Engle’s garbage. Keep in mind that there is no probable cause, no reasonable suspicion, and Engle’s tax returns were legit.

o  Mr. Norlander used a sleazy KGB tactic by sending an attractive woman to flirt with Mr. Engle in hopes of getting him to somehow admit to a crime.

o  Mr. Norlander failed to find any evidence of a tax crime. He couldn’t even hit Engle with a money-laundering offense. But the undercover agent who was part of the “honey trap” was wearing a wire and supposedly got Engle to admit to mortgage fraud and Norlander used that extremely flimsy evidence to justify a Justice Department case against Mr. Engle.

In other words, this whole thing has a terrible stench. Assuming the details in the story are accurate, we have an IRS agent engaging in a vendetta against someone, and then apparently justifying his jihad by figuring out how to nail the guy for a very weak charge of mortgage fraud. I would refer to Mr. Norlander as a “rogue agent,” but apparently his jackboot behavior is business-as-usual at the IRS.

Here are the relevant passages from the New York Times column.

Mr. Engle received $30,000 for his participation. The film, “Running the Sahara,” was released in the fall of 2008. Eventually, it caught the attention of Robert W. Nordlander, a special agent for the Internal Revenue Service. As Mr. Nordlander later told the grand jury, “Being the special agent that I am, I was wondering, how does a guy train for this because most people have to work from nine to five and it’s very difficult to train for this part-time.” (He also told the grand jurors that sometimes, when he sees somebody driving a Ferrari, he’ll check to see if they make enough money to afford it. When I called Mr. Nordlander and others at the I.R.S. to ask whether this was an appropriate way to choose subjects for criminal tax investigations, my questions were met with a stone wall of silence.) Mr. Engle’s tax records showed that while his actual income was substantial, his taxable income was quite small, in part because he had a large tax-loss carry forward, due to a business deal he’d been involved in several years earlier. (Mr. Nordlander would later inform the grand jury only of his much lower taxable income, which made it seem more suspicious.) Still convinced that Mr. Engle must be hiding income, Mr. Nordlander did undercover surveillance and took “Dumpster dives” into Mr. Engle’s garbage. He mainly discovered that Mr. Engle lived modestly. In March 2009, still unsatisfied, Mr. Nordlander persuaded his superiors to send an attractive female undercover agent, Ellen Burrows, to meet Mr. Engle and see if she could get him to say something incriminating. In the course of several flirtatious encounters, she asked him about his investments. …Unbeknownst to Mr. Engle, Ms. Burrows was wearing a wire. …No tax charges were ever brought, even though that was Mr. Nordlander’s original rationale. Money laundering, the suspicion of which was needed to justify the undercover sting, was a nonissue as well. As for that “confession” to Ms. Burrows, take a closer look. It really isn’t a confession at all. Mr. Engle is confessing to his mortgage broker’s sins, not his own.

Now you understand why I’m a libertarian. As George Washington is reported to have stated, “Government is not reason; it is not eloquence; it is force. Like fire, it is a dangerous servant and a fearful master.”

Unfortunately, thanks to bad laws and thuggish bureaucrats, that government is now our master.

A previous post of mine addressed the issue of whether Republicans were right to trim the IRS’s budget. So long as the IRS is employing thugs such as Mr. Norlander, the answer is a resounding yes.

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