Published for www.bloomberg.com, January 30, 2012

Although Warren Buffett may be a stellar investor, his entry into the world of federal tax policy has brought forth nothing but bad ideas based on flawed information and misleading demagoguery. Let’s review the record.

In his State of the Union address last week, President Barack Obama called for enactment of the so-called Buffett rule, saying it wasn’t fair that a rich person pays a lower tax rate than Buffett’s secretary. In a bald act of political theater, Obama invited Buffett’s secretary to sit in one of the guest seats in the gallery near first lady Michelle Obama during the speech.

Last year, the president proposed that no household making more than $1 million a year pay a smaller share of its income in taxes than middle-class families. In support of this rule, he called for these earners to pay a minimum effective tax rate of at least 30 percent.
The trouble with the Buffett rule is that it is an example of the dangers of making policy based on anecdote, instead of facts. As the Congressional Research Service documents, the average effective tax rate among millionaires is already about 30 percent. The president is trying to solve a problem that doesn’t exist.

Taxation Objectives

Of course, it is true that not every millionaire has an effective tax rate of 30 percent. But what does that tell us? Tax policy reflects a balance among the objectives of economic growth, ease of compliance, cost of administration, social policy and — yes — fairness. Because millionaires can legally reduce their tax liability below some perceived “fair” level, it implies that they are contributing to some or all of these other objectives. Obama may succeed in his single-minded, fairness-only approach to income taxation, although I think he will come to regret it.

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Published for www.nationalreview.com/corner, January 17, 2012

Will someone please teach the Left the rudiments of good tax policy? Today’s brouhaha started when Gov. Mitt Romney told reporters that his tax rate is approximately 15 percent. This fact should surprise no one, since he has not drawn a salary in many years and relies on his significant investment income, which is — for sound economic growth reasons — largely taxed at the dividend-income and capital-gains rates. Of course, the Democratic National Committee immediately issued a memo calling the capital-gains tax a “loophole” and attacking Romney for paying his taxes at the rate required by law. The memo also parrots an erroneous Citizens for Tax Justice report that claims a single person earning $60,000 would pay taxes at a 30 percent rate.

The DNC and their friends at the CTJ are wrong on the facts, the policy, and the principle. For starters, the CTJ report counts the employer’s payroll tax as paid by the employee. But the DNC conveniently forgets to include the incidence of taxes — including the corporate-income tax — that would affect Romney’s investment returns. So their comparison is apples-to-oranges, and overstates the hypothetical individual’s tax burden by about 25 percent. The DNC is also cherry-picking a very atypical taxpayer. In fact, as the CBO’s report on effective tax rates makes clear, the median household pays an effective income-tax rate of only 3 percent.

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Published for www.nationalreview.com/corner, January 12, 2012

Ten years ago this week, Pres. George W. Bush signed the No Child Left Behind Act into law, marking a new era for elementary and secondary education in the United States. On this anniversary, it’s important to check in, assess where we are, and chart where we should go. Margaret Spellings, secretary of education under President Bush, recently stated, “Like it or hate it, the law has been a game-changer.” Much has been accomplished due to NCLB, notably an illumination of our education problem-areas, but there is still a lot of work to be done going forward.

The most notable success of NCLB has been the vast amount of data we’ve collected. Student performance, particularly for disadvantaged students, now matters and has become the focus of national and state education policies. The debate shifted from focusing on inputs to focusing on student academic outcomes. Parents are no longer in the dark about how their child performs relative to their peers or how their school stacks up against others in the state. For the past decade, educators and policymakers have been held accountable to parents, students, and taxpayers for increasing or not increasing student performance.

Along with the data came opportunities to do something about the results. We now know what groups of students are underperforming and what schools they attend. Many of these underperforming schools have increased student performance in reading and math and those that consistently fail to make academic gains have been restructured to bring in new leadership to boost academic performance. Children attending low performing schools can now receive free tutoring to help them reach grade level and parents can choose to send their children to a public charter school or higher performing public elementary or secondary school if their school consistently fails to improve. Parents were given numerous options, previously unavailable to them, to help increase their child’s academic performance.

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Published for The Corner at The National Review, December 22, 2011

Lost, perhaps, in the furor over the process of extending the payroll-tax holiday is what’s at stake from a policy perspective. To get a feel for it, let us run the numbers.

As a benchmark, consider the household-budgeting problems facing a 41-year-old head of household who makes $50,000 a year. Suppose she expects to see real incomes rise at 2 percent annually, pay an average overall effective tax rate of 15 percent, and retire at age 65, and anticipates a ten-year retirement with income that replaces half of her labor-market earnings.

Based on the above and running the numbers, the household head would spend $49,290 (inflation-adjusted) annually, borrowing up front, saving during the later part of her career, and living off the surpluses during retirement. What does a 2 percent payroll-tax holiday of $1,000 do for the worker? Adjusting the numbers, she would spend $49,335 — a massive “stimulus” of $45. The bulk of the holiday would be saved.

This is hardly a surprising result. By and large, the holiday is the moral equivalent of sending the worker a check. The U.S. sent checks in 2001 and again in 2008 — and was disappointed each time. (Fool me once, shame on you. Fool me twice, shame on me. Fool me three times?)

Now, suppose that instead our worker can only anticipate one-sixth of the holiday — two months. She spends $49,298. That is, the inability to lock in the full year knocks $37 dollars (82 percent) of the impact off the books.

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Published for The Corner at The National Review, December 21, 2011

When President Obama signed the Budget Control Act into law, Americans were promised that it would slow Congress’s appetite for spending. CBO estimated that the new spending caps would reduce appropriations by about $825 billion. In FY 2012, the cap was set at $1,043 billion, a modest reduction of $7 billion from total regular appropriations last year. When Congress completed the appropriations process this past week, the beleaguered U.S. taxpayer should have had every assurance that Congress would abide by the spirit of the Act and stay under the cap.

Alas, Senate Democrats preferred the letter of that law and exploited the rules to end up spending more than was spent last year. Shockingly enough, President Obama signed without blinking.

The House of Representatives passed the last spending measure in three parts: H.R 2055, the Omnibus; H.R. 3672, which included program-integrity measures and disaster funding; and H. Con. Res. 94, a modest across-the-board reduction to offset the spending contained in H.R. 3672.

The Senate passed only two of the three measures. Care to guess which two?

Predictably, Senate Democrats supported the spending measures and not the reduction. Despite having over $1 trillion in appropriations, the thought of reducing spending by less than $9 billion was evidently too much pain to bear.

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Published at The Corner for The National Review, November 30, 2011

When AT&T and T-Mobile requested to withdraw their application for FCC review of their proposed merger, preferring to concentrate for now on winning the unfair suit brought against them by the Justice Department, the initial response from progressives was furious. They demanded instead that the FCC dismiss the application with prejudice, effectively killing the merger despite the plain language of the commission’s own rules. And they further demanded that the FCC release its “staff report” on the merger, rumored to be highly negative thanks to the input of those same anti-merger groups.

Unfortunately, both of these things are against the rules and precedent. One might think that would be the end of the story, but no. Yesterday, the commission agreed to follow its own rules and dismiss the application without prejudice. However, it disgraced itself, landed a punch on AT&T, and pleased the Left by releasing the staff report. Notice that a staff report by definition does not reflect the judgment or even the consideration of the commission. The FCC action is unprecedented given that the applicants had won approval to withdraw their application without prejudice earlier that day from the full commission.

This is not how government is supposed to work, yet we see more and more examples of this overbearing regulation every day. The consequences are tragic, not just for companies who need government approval for business transactions, but for everyone. Without new large-scale private-sector investments, there will be few if any new jobs in the United States. When parties seeking government approval are convinced that the deck is stacked against them, that they can’t even count on the procedural protections and due process in an agency’s own rules, potential investors start to become seriously worried. Yet the administration keeps sending signals to potential investors that America isn’t really open for business — it’s open only on their terms.

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Published for The Corner at The National Review, November 16, 2011

The House is voting tomorrow on a balanced budget amendment (BBA) to the U.S. constitution. The conventional wisdom — espoused in graduate programs in economics across the nation — is that a BBA is the budgetary policy equivalent of returning modern medicine to the practice of bloodletting. This is badly mistaken. It is time for the U.S. to adopt a BBA.

Why? At present, the federal government does not have a fiscal policy. Instead, it has fiscal “outcomes.” The House and Senate do not reliably agree on a budget resolution. Annual appropriations reflect the contemporaneous politics of conference-committee compromise, and White House negotiation. Often, the annual appropriations process is in whole or part replaced with a continuing resolution. Annual discretionary spending is not coordinated in any way with the outlays from mandatory spending programs operating on autopilot. And nothing annually constrains overall spending to have any relationship to the fees and tax receipts flowing into the U.S. Treasury. The fiscal outcome is whatever it turns out to be (usually bad), and certainly not a policy choice.

I believe that it would be tremendously valuable for the federal government to adopt a fiscal rule. Such a rule could take the form of an overall cap on federal spending (perhaps as a share of GDP, a limit on the ratio of federal debt in the hands of the public relative to GDP, a balanced-budget requirement, or something else. Committing to a fiscal rule would force the current disjointed appropriations, mandatory-spending, and tax decisions to fit coherently within the adopted fiscal rule. Accordingly, it would force lawmakers to make tough tradeoffs, especially across categories of spending.

Most importantly, it would give Congress a way to say no. Sending proposals would not simply have to be good ideas. They would have to be good enough to merit cutting other spending programs or using taxes to dragoon resources from the private sector. Congress would more easily be able to say, “Not good enough, sorry.”

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Published for The Corner at The National Review, November 8, 2011

Every now and then the journalistic community commits enough sins in a short span to drive me wild. The latest is Time’s effort to get an F in undergraduate economics and logic. In effect, Time purports to rebut the notion that regulatory burdens hurt U.S. growth by reporting that in “mid-October the World Bank released its annual ranking of countries on the basis of ease of doing business; it took into account the number of regulations, tax rates, the time it takes to start a business and other factors. Out of 183 countries, the US was deemed the fourth easiest place in the world to do business, unchanged from the year before.”

Further, a “number of lower-ranked nations — including South Africa, China and Brazil — have had much faster-growing economies than the US in the past five years.”

Strike one. Strike two. Strike three. Time is out.

Strike one: “The U.S. was deemed the fourth easiest place.” So what? The level does not matter; the change does. If it used to be the best place for doing business, then the increased regulations would have had a significant effect. This is not much more complicated than “Shakespeare is better than Paul Krugman,” so I would think even Time could get it.

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Published for The Corner at The National Review, September 8, 2011

It wasn’t much of a speech, was it? Nobody expected it to be a policy home run. After all, the specifics — nearly all of which were leaked in advance — were warmed-over retreads from previous “jobs” speeches. Of the initiatives:

· Temporary payroll tax reduction, plus an extension to new businesses

· A new-hire tax break

· Extended unemployment insurance with a new training for the long-term unemployed

· Extending the expensing of small business expensing

· Supposed “quick acting” infrastructure spending, especially in schools

· Checks to states to hold on to favored employees

Only the notion that it would be “paid for” was held back for the speech itself — but of course that is just another promise. So we got another speech with fundamentally mediocre substance. Indeed, even by late August Macroeconomic Advisers was warning that a similar package would generate under 40,000 new jobs per month between now and the end of 2012. This package is “bigger” and would like get scored differently, but the bottom line would be the same.

In short, we knew in advance that the President wanted to spend nearly another ½ trillion dollars and not move the dial on unemployment. We didn’t know that it would be spend and promise to tax, but the shock value is small.

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Published for The Corner, August 31, 2011

This has been a bad week for business, thanks to the Obama administration — and it’s only Wednesday. When President Obama rolls out his job-creation plan next week, we should evaluate his lofty rhetoric in the context of what his administration has actually accomplished.

The week started off on a bad note when the National Labor Relations Board decided all of a sudden that employers should be forced to advertise for unions. Did Congress secretly pass a law mandating the change? Of course not — it just seemed like a good idea for the administration to please union leaders in the run-up to next November.

Today, the Department of Justice announced that it will attempt to block AT&T’s proposed merger with T-Mobile. Markets, responding to a rash of economic news and DOJ action, fell across the board. Not surprisingly, AT&T was the biggest loser, shedding 4.6 percent and dragging the S&P index down with it. To some, the DOJ’s move will resurrect memories of the Clinton administration’s attack on Microsoft, a company that still hasn’t fully recovered from its generation-long fight with regulators. Google, like AT&T, is also in the crosshairs of bureaucrats. For companies looking to expand and hire, the DOJ has served notice that success can bring ample demands from the government.

No word on how any jobs will be created by the NLRB’s move or the DOJ’s action to block the proposed merger.

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