The Independent Institute


Interest Groups and Tax Reform

In a recent post in The Beacon, I said that President Trump’s tax reform proposal is a move in the right direction. But I find part of it very troubling: He wants to keep the mortgage interest deduction and the deduction for charitable contributions for individual taxpayers.

Both of these deductions have reasonable justifications, but so do a host of other deductions; both those in the current tax code and some that various interest groups would like to see added. Arguing that these two should be kept rather than eliminating all deductions speaks to the power of the interest groups that support them. That tells us right away that any tax reform that does occur will be shaped by special interests, and that additional interests are likely to enter the tax reform conversation to modify the tax code for their own benefit. Indeed, President Trump’s bargaining position begins by acknowledging that these interests can’t be beat, so should be accommodated.

Is the Largest Cost of Federal Regulation Not Measured? Insights from the (Growing) Wells Fargo Bank Scandal

A widely-cited study by W. Mark Crain and Nicole V. Crain estimates the cost of complying with U.S. government regulations at a staggering $2 trillion per year, an amount equal to 12 percent of gross domestic product. Annual compliance costs average about $10,000 per employee. Businesses in the service sector shoulder the biggest burden among all sectors, with compliance costs approaching $460 billion annually.

Despite the enormous compliance costs associated with federal regulations, it is possible that the largest regulatory cost of all might be unmeasured. I call this cost the “misplaced trust” cost, and it is illustrated by the recent scandals at Wells Fargo Bank.

As I recount in my 2016 op-ed for the San Francisco Chronicle:

Since 2011, thousands of Wells Fargo employees pursued compensation incentives by secretly opening millions of bank and credit card accounts using customer names and signatures without authorization. Debit cards and PINs were activated without consent. In some cases, employees conjured phony email addresses to enroll their victims in online-banking services. Some clients suffered major hits to their credit scores and may spend years repairing the damage. The fraud was so common that employees had a name for it: sandbagging.

Trump’s Tax Plan: A Move in the Right Direction

President Trump released an outline of changes he hopes to see in the federal income tax. If his proposal became law, we would have a better tax system than we do now.

One major change would be reducing the corporate income tax rate from 35% to 15%. The US has one of the highest corporate tax rates in the world, which is responsible for the “tax inversions” and other corporate financial manipulations that keep revenues from US corporations overseas. Rather than trying to pass regulations to prevent this activity, a better policy is to make it attractive for corporations to do business in, and keep their revenues in the United States.

Brexit Can Herald a New ‘Golden Era’ for the City of London as a Global Powerhouse

On June 23, 2016, the British people voted to leave the European Union. Prime Minister Theresa May’s Lancaster House speech on January 17, 2017 then made it clear that the United Kingdom would opt for a hard Brexit: It would leave not just the EU, but also the European Economic Area, membership of which means accepting freedom of movement and the vast regulatory apparatus of the Single Market. Then on March 29, the UK invoked Article 50 of the Treaty on European Union, thereby giving formal notice of its intent to leave and triggering a two-year deadline that can be extended only if all parties agree, which is highly unlikely. The UK is therefore likely to leave the EU on March 29, 2019.

One of the most complicated and difficult topics related to Brexit is that of financial services, and in particular, the future of the City of London. To be frank, the relationship between the City and the EU was always a strained one (see, e.g., Congdon, 2014). The City had grown to prominence in an earlier era, when regulation was light and competition prospered. Indeed, competition was the key to the City’s success as a global financial leader. As the EU project developed, however, the City became subject to increasingly onerous EU regulations and especially after the Eurozone was established, these regulations tended to favor the interests of the Eurozone financial sector over those of the UK’s.

Review: The Promise, the Armenian Holocaust, and the Origins of Genocide

If you want to know the origin of the term “genocide,” watch the film The Promise. Literally. The movie is billed as a romantic drama, but it’s really a well-produced, narratively complex story of the Ottoman Empire’s systematic and targeted extermination of 1.5 million Christian Armenians through starvation, forced labor, rioting, and massacres in what is now Turkey.

In fact, the word “genocide” was coined in 1944 by Raphael Lemkin, who drew directly from the Turkish government’s expulsion of 2 million Armenians between 1915 and 1924 to define the practical parameters of the term. The Promise, while fiction, does a hauntingly good job of staying faithful to the story of the what is often now referred to as the Armenian Holocaust.

The Promise opens on the eve of World War I. The Ottoman Empire is desperately trying to hold on to power. The Muslim government has allied with Germany and the Austro-Hungarian Empire against England, France, Italy, and the Russians. Anti-Armenian feelings have been festering for decades as Mikael (Oscar Isaac, Star Wars: The Force Awakens, X-Men: Apocalypse), a young Armenian apothecary (traditional pharmacist), decides to become a doctor. But he’s too poor to afford the fees at the imperial medical school. So, he agrees to marry Maral (Angela Sarafyan, A Beautiful Life, Lost and Found in Armenia) and uses her dowry to pay for medical school. He sincerely promises Maral he will return, marry her, and spend the rest of his life in service to his ethnically and religiously diverse village.

Think Twice before You Find Fault with Modernity

Modernity has never lacked for critics, people who see only regression from a nobler or more glorious past when men were men and women liked them that way. But for the economic or cultural historian, such an outlook is the sheerest balderdash.

If I had lived a thousand years ago, I would almost certainly have scratched out a precarious living, constantly on the edge of starvation, chronically ill, and culturally embedded in an inescapable wasteland of vicious error and destructive superstitions. I would never have thrilled to a song by Handel, a concerto grosso by Bach, a symphony by Beethoven or Brahms. I would never have watched any of Shakespeare’s plays or read any of his poetry. I would never have encountered even the intellectual gems that existed in the works of Aristotle or the classical Greek dramatists, never have learned Euclidean geometry, never have met with the ancient contributions to astronomy, because I would almost certainly have been illiterate and too far removed from any place that harbored learned people. And in those days, before the development of printing with movable type, the only means of spreading existing knowledge remained as always before the laborious copying of existing works by hand and the slow passage of copies from hand to hand. In short, life would have been poor, nasty, brutish, and short, even if not solitary.

People who glamorize the remote past practice a highly selective filtering of gold from a mountainous mass of ugly, toxic dirt. Life was hard even for those who sat in luxury above the masses and exploited them. They knew nothing of bacteriology; their children died in droves. The masses worked against heavy odds to extract enough from the soil to make their survival possible, and many failed to meet the test. Even if one doesn’t like industrialization and its consequences, one cannot escape the reality that what preceded modernity was materially, intellectually, and culturally close to zero for nearly everyone. Something is surely amiss when modern critics, enjoying all the material comforts and conveniences as well as the cultural amenities available at the push of a button, venture to dismiss modernity as if it were something even one in a thousand of them would give up.

State Governments Are Becoming the Biggest Drug Lords of All

The so-called war on drugs—actually a war on certain people associated in various ways with certain drugs—has served since the Nixon administration as a major profit center for governments at every level. Owing to the ostensible efforts to suppress the possession, use, and commerce in these drugs, governments have been able to justify great increases in their staffs, budgets, and power. Of all the interest groups that have devoted themselves to propping up this social, economic, and political catastrophe, the government itself stands prominently above the others, especially the police, the prosecutors, the prison guards, and the unions that represent the police and the prison personnel. Despite substantial efforts by various private groups opposed to the war on drugs and despite the growing public disapproval of the war on drugs, especially the marijuana laws, the government groups have remained steadfast in their opposition to any slackening of the established actions to cut off drug supplies and punish everyone engaged in the industry, whether as producer, consumer, or middleman. At present, President Trump, his attorney general, and his secretary of homeland security are all voicing support for not only retaining, but ramping up the national government’s war on drugs, including its enforcement of the federal marijuana laws.

In recent decades, however, a growing number of states have liberalized their drug laws, especially those related to marijuana.

Twenty-six states and the District of Columbia currently have laws broadly legalizing marijuana in some form. Three other states will soon join them after recently passing measures permitting use of medical marijuana.

Seven states and the District of Columbia have adopted the most expansive laws legalizing marijuana for receational use. Most recently, California, Massachusetts, Maine and Nevada all passed measures in November legalizing recreational marijuana. California’s Prop. 64 measure allows adults 21 and older to possess up to one ounce of marijuana and grow up to six plants in their homes. Other tax and licensing provisions of the law will not take effect until January 2018. (For source, see here.)

As this summary indicates, states that are “liberalizing” their marijuana laws are not doing so by simply repealing existing laws that make the possession, distribution, and production of these products illegal. Instead, the states are creating a complex regime of control, regulation, and taxation.

Thoughts on the Trinity Lutheran Case and SCOTUS

The media has been reporting on the arguments in Trinity Lutheran Church v. Comer, the so-called “playground case.” I’ve had a chance to examine the briefs and arguments and wanted to share these thoughts.

First, a bit of background. The state of Missouri operates a program whereby it reimburses nonprofits when they install rubber playground surfaces made from recycled tires. Money for the state program comes from a fee/tax on new tire sales. Trinity Lutheran Church, according to its petition to the Supreme Court, applied for Missouri’s Scrap Tire Grant Program so that it could provide a safer playground for children who attend its daycare and for neighborhood children who use the playground after hours.

The Church would have gotten the grant but for the following provision in the Missouri Constitution: “That no money shall ever be taken from the public treasury, directly or indirectly, in aid of any church, sect or denomination of religion, or in aid of any priest, preacher, minister or teacher thereof, as such; and that no preference shall be given to nor any discrimination made against any church, sect or creed of religion, or any form of religious faith or worship.”

UK News Special: Theresa May Calls a General Election

You will by now have seen the news from the United Kingdom: Prime Minister Theresa May is calling a snap general election. Frankly, I had been wondering why she didn’t do this earlier.

Here is my quick take:

Now, I admit that I was never a great fan of Mrs. May. I don’t care for Tory “law and order” types who have a long history of instinctively overreacting, especially in Ireland, and as Home Secretary she supported measures that greatly restricted our freedom.

But she is proving to be a skilled and formidable Prime Minister. She respected the result of the Brexit referendum despite being a Remainer herself. She got it right on the UK leaving the Single Market, she is doing a good job dealing with EU leaders, and she is right to blame Scottish National Party leader Nicola Sturgeon, who will just not keep quiet with her daily demands for IndyRef2, a second referendum on Scottish independence. Calling an election will not only give Mrs. May a fresh five-year mandate, but it should also sort out the Sturgeon problem once and for all.

The Fed’s Inflation Fixation

The Federal Reserve has an inflation target of 2% per year. That target appears to be a minimum: They are concerned when inflation falls below their target but appear to be content with inflation above 2%. The current inflation rate from March 2016 to March 2017, measured by the Consumer Price Index, is 2.4%.

Prices provide information about the cost of bringing goods and services to market. Viewed in that way, a price increase should indicate that a good or service is more expensive to produce, and a price decrease should indicate it is less expensive to produce. Deviations from this function lower the informational value of prices and make economic calculation more difficult.

Because advances in technology generally make goods and services less expensive to produce, prices should generally be falling to reflect the falling real cost of production. Even a stable price level is somewhat misleading when productivity increases lower the cost of producing goods and services. Increased productivity would result in falling prices, were it not for the fact that the value of money is falling faster.