Published for www.nationalreview.com/corner, March 9, 2012

The specter of austerity lies heavy on America. Hardly a day passes without another warning from New York Times whiner and erstwhile economist Paul Krugman, his colleague Nicholas Kristof, and the legion of other progressive apologists that “austerity” is threatening the U.S. recovery and destroying Europe.

Where is this austerity? It is certainly not anywhere to be found in the federal budget. Total spending in 2011 was $3.598 billion in 2011, higher than the stimulus-bloated total in 2009, and 21 percent higher than the year of the Bush administration. Austerity?

Maybe the austerity is found in discretionary spending — the annual decisions of Congress. Mandatory spending — entitlements — continues its relentless march to the (red) sea, up to $2.215 billion in 2011 or 24 percent above 2008 levels. But discretionary spending in 2011 was $1.346 billion, an entire $1 billion lower than in 2010. One billion dollars. To be sure, the new Congress put the brakes on the discretionary-spending binge, but austerity it is not.

Or, perhaps the austerity stems from the draconian Budget Control Act of 2011 — the so-called debt limit deal. The BCA “cut” $917 billion from discretionary spending over the next 10 years. Sort of. Actually those “cuts” are promises that a future administration and Congress in, say, 2018 will spend less that it would otherwise (honest, really and truly, cross our hearts). Hopeful thinking, yes. But austerity?

Maybe the austerity is sneaking in at the sub-federal level. Mr. Krugman is fond of making this claim. But the data don’t really bear that out. In the National Income and Product Accounts state and local spending has risen the last three straight years and is back to 2008 levels. And recall that 2008 spending was bloated by bubble-driven revenues, to the point that it was over 50 percent above 2000 levels. Austerity?

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Published for www.nationalreview.com/corner, March 6, 2012

Once again, the president has chosen a politically driven policy of targeted junk for favored constituencies over a clear, pro-growth approach to the problem of the day. The president claims today’s tweaks are just pieces of a larger housing recovery strategy, but the entire strategy of 22 separate initiatives appears to be riddled with more of the same: piecemeal goodies as he panders his way toward the November election. As a recovery strategy, today’s proposal is laughable. If former President Clinton used to be accused of playing small ball, this is playing BB ball.

The administration quietly released their “Housing Scorecard” at 4:30 p.m. this past Friday, hoping nobody would notice that $45 billion of home equity has been lost over the last quarter and 396,000 more Americans are in underwater mortgages. Taxpayers deserve more than this.

Let’s look at the details.

Review of foreclosed veterans and service members. The banks have agreed to review the file of every service member foreclosed upon since 2006 and compensate accordingly. They’re also going to pay $10 million into the Veterans Affairs fund that guarantees loans for veterans. But this is on top of the $25 billion settlement on claims of abuse in the foreclosure process by all homeowners announced less than a month ago. Righting wrongs is important, but as I feared, that $25 billion appears to be just a down payment sought by the administration. When will the administration let the housing market move onwards and upwards?

Reduction in refinancing fees for FHA-backed loans: First of all, the FHA is broke, so in what world would this ever be a good idea? This comes on the heels of the FHA acknowledging this and raising the premiums for new borrowers by 0.75 percentage points. Raising premiums here, lowering fees there, does not a housing recovery make.

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Published for www.nationalreview.com/corner, February 28, 2012

Obamacare’s advocates are desperately trying to reverse public opinion, even as the evidence mounts that the voters aren’t buying it — and that they shouldn’t. Ezra Klein fired the latest salvo arguing that (a) the Massachusetts reforms are the same as Obamacare and that (b) evidence from Massachusetts indicates that Obamacare is working.

Wrong on both counts.

The myth that the Massachusetts reforms are the same as Obamacare is built on a shaky foundation of facts. Yes, Massachusetts re-directed existing health spending to expand coverage. The resemblance ends there. Massachusetts did not have $500 billion in new taxes on investment income, medical devices, health insurance companies, and “Cadillac” health-insurance policies. Massachusetts did not have a dangerous Independent Payment Advisory Board, misguided Patient-Centered Outcomes Research Institute, futile Center for Medicare & Medicaid Innovation, and myriad other agencies, boards and bureaucracies. Massachusetts did not rely on budget gimmicks like the CLASS Act, student loan “savings,” and mythical Medicare cuts to squeeze past the finish line.

Obamacare and the Massachusetts reforms are not even close cousins.

And if advocates wish to cling to the myth of twin reforms, the facts bode poorly for Obamacare. Massachusetts had a relatively low number of uninsured at the time of reform. It can shed no light on the likely success of Obamacare’s massive apparatus of federal and state exchanges, creation of a trillion-dollar new entitlement, and expansion of Medicaid. The early results are not promising, with a growing legacy of missed deadlines.

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Published for www.nationalreview.com/corner, February 22, 2012

President Obama will unveil his long-delayed corporate income tax reform just before noon today. As someone who has been critical of the administration’s failure to provide specifics on tax reform, entitlement reform, stabilizing the debt — well, anything of any real importance to America’s future — it is a welcome moment. Credit where credit is due.

But will it be tax reform or just another bad tax code? The details are not yet out, but I am beginning to worry. Start with the top line: a reduction in the tax rate to 28 percent. Obviously, 28 is better than 35. But 28 is not internationally competitive — to achieve that would require a rate of 25 percent or lower. And 28 means that a C corporation will face a lower rate than a pass-through entity (sole-proprietor, partnership, etc.) which is a purely wasteful incentive for dentists, doctors, and maybe even economists to incorporate, put their families on the payroll, and otherwise game the tax system.

The lesson is that you cannot do corporate reform in isolation and the president is dead-set against individual reform — his proposals consist exclusively of targeted tax increases.

Now consider the new minimum tax on foreign earnings of global companies. Is this really new? No. We currently tax the worldwide earnings of global companies (albeit with deferral of some tax until the money is brought back to the U.S.). This has put the U.S. out of step with every major economic competitor. (For a full discussion, see here.) The president’s own fiscal-reform commission recommended moving away from this archaic approach. Consistent with his track record of ignoring all things Bowles-Simpson, the president is moving in the wrong direction.

This is just another way to collect a damaging, anti-competitive tax; not reform.

The other headline leak is a special tax regime for manufacturers. But, aha! There is already a special deduction for manufacturers, which does not seem to have created the goods-producing nirvana the president desires. And it raises the question of why one would want such a provision. After all, it provides a huge incentive to get classified as manufacturing (McDonalds qualifies for the current deduction) — which leads to the type of lobbying and policy corruption that the president decries.

So, a new policy misstep dressed up in Jimmy Choos. Really?

I hope I’m wrong — I am a lot — but I expect to be underwhelmed at 11:30.

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Published for www.nationalreview.com, February 12, 2012

Tomorrow President Obama reveals his 2013 budget blueprint, although the White House’s key initiatives have been leaking for days. As a campaign document, it will be straightforward. Tax increases as a sop to those who blame their economic misery on the affluent and Wall Street. Billions of dollars in new “investments” as the president restarts his successful campaign-as-handout factory.

But the presidency is supposed to be about more than getting and keeping a job. What will the budget say about the United States he governs? According to the aphorism, “budget is policy.” And for the president, this proposed policy constitutes his plan for the future of the nation. What kind of plan can we expect?

We can expect that this will mark his fourth consecutive abdication of core obligations of his office.

We can expect a plan rich with red ink. In his 2010 budget, the president promised a deficit of $1.2 trillion (8 percent of GDP) and economic growth of 3.2 percent. The taxpayers got $1.3 trillion (9 percent of GDP) in additional debt and growth of barely 3 percent. He was just getting started. Fiscal 2011 brought a deficit of $1.3 trillion again (8.7 percent of GDP versus the budgeted amount of 8.3 percent), and growth of 1.7 percent — far short of the promised 3.8 percent. Last year’s budget planned for $1.1 trillion in deficits and growth of 3.6 percent. We don’t know the actual performance yet, but both numbers look optimistic. Now, the leaks indicate that the White House already intends to make the deficit bigger — a sobering step for an administration whose perennial budget strategy appears to be “promise bad, deliver worse.”

We can expect a plan devoid of leadership. Last year’s budget kicked to the gutter the recommendations of the president’s own fiscal-reform commission — the so-called Bowles-Simpson Commission — which had concluded that the United States faced a “moment of truth” that required tax reform, entitlement reform, and genuine leadership to steer us away from a Greek-style fiscal meltdown. The president took a pass in favor of a warmed-over stimulus package, shrugged his shoulders at the downgrade of the United States, and to date has delivered not one single piece of legislation to implement any piece of the Bowles-Simpson plan.

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Published for www.nationalreview.com, February 9, 2012

The president can’t bring himself to put politics aside, aid the housing-market recovery, and generate stronger economic growth. Odd for an administration supposedly laser-focused on jobs.

Today’s evidence comes from two important news items. Early reports are that after a full-court press by the administration, government officials are securing a $25 billion deal with five major banks — Ally Financial, Bank of America Corp., Citigroup, J.P. Morgan Chase, and Wells Fargo — to settle claims of abuse in the foreclosure process. The $25 billion consists of $5 billion in penalties and $20 billion in aid to homeowners who are underwater in their mortgages, but current on their payments. The five banks involved are responsible for roughly one-half of outstanding home loans.

Viewed in isolation, the pact represents an important step forward. The industry has the opportunity to put whatever abuses occurred in the rearview mirror, obtains a bit of legal certainty — at the price of the largest check since the tobacco settlement — and has improved incentives to move ahead in mortgage finance.

The economy would ultimately benefit tremendously as the long-delayed workout of excess supplies can finally move forward. Once that adjustment has cleared, housing can resume its traditional role as a key cyclical industry in driving a more rapid pace of economic growth and improved payroll employment.

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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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