Malo periculosam, libertatem quam quietam servitutem.



January 2016

Puerto Rico Must Save Itself

Written by , Posted in Economics & the Economy
Originally published in The Daily Caller

Puerto Rico’s fiscal mess has Congress working frantically to provide “relief.” The island territory is overloaded with debt and cannot meet its obligations, and House Speaker Paul Ryan set March as a deadline for Congress to provide a “responsible solution.” Now Washington is busy debating whether to simply bailout Puerto Rico or instead allow it to stiff creditors through bankruptcy. Few seem willing to consider that both options would create terrible precedent and undermine real reforms.

The economic downturn has obviously taken a toll, but like so many other distressed jurisdictions, Puerto Rico has been hampered by fiscal irresponsibility, mismanagement, and widespread corruption. Its politicians also spent frivolously, increasing spending by 100 percent between 1980 and 2013, far outpacing the 12 percent population growth during that period.

In five of the last six years, Puerto Rico’s government has ignored its constitutional requirement to pass a balanced budget. And in 14 of the last 15 years, it has failed to adhere to the budgets it passed. Today it has over $70 billion in outstanding debt.

Much of the problem is due to the island’s bloated and generously paid government workforce. Over two-thirds of the budget goes to payroll, with public sector workers earning on average more than twice Puerto Rico’s median household income. Governor Padilla has refused to further trim the government labor force.

Instead, Puerto Rico’s politicians have responded to the growing debt crisis in the worst manner possible by raising both taxes and spending year after year. And now Washington is preparing to reward their irresponsible overspending.

Some Republicans argue that allowing Puerto Rico or its government-owned subsidiaries, like its utility companies, to file for bankruptcy is a preferable alternative to a taxpayer bailout. But this is a false dichotomy. Neither option provides a responsible path forward.

A bailout would not only be unfair to mainland taxpayers, but would create a moral hazard and signal to other big spending states and municipalities that Washington will be there to rescue them from the messes of their own making. But a bankruptcy that allows the government to stiff its creditors poses the same problem, while only shifting the financial costs from federal taxpayers to bondholders.

Puerto Rico issued bonds with the understanding that default was not an option. It shouldn’t get to retroactively change the rules now. That doesn’t mean, however, that it can’t negotiate with creditors for better terms, such as happened earlier this year when the state-owned power company reached an agreement with a group of bondholders to restructure. Unfortunately, the island’s government overall has so far preferred gamesmanship to good faith engagement by withholding financial information, being excessively tardy in filing audited annual financial statements, and using restrictive NDA’s to prevent creditors from talking to one another.

What Puerto Rico needs is a fiscal correction and pro-growth reforms. That won’t happen so long as  Washington is intent on granting a reprieve from the consequences of bad policy.

There are some constructive things that Congress can do, however. Many of the counter-productive, European-style labor rules that inhibit hiring are of Puerto Rico’s own making, but Congress decades ago forced it to equalize its minimum wage laws with the federal level. Because the island’s standard of living is lower, the same minimum wage imposes a higher burden on Puerto Rican businesses than it would elsewhere. The island is also hurt by the Jones Act, which roughly doubles shipping costs by requiring that only American built, owned, and operated ships can operate between U.S. ports. Congress should lead by example and help kick start Puerto Rico’s pro-growth reforms by repealing costly federal regulations and mandates.

All eyes seem to be on Congress to do something about Puerto Rico, when that attention would largely be better directed at Puerto Rico itself. The island doesn’t need a Washington bailout regardless of the form it takes. It needs fiscal responsibly, and that won’t happen if politicians are allowed to worm out of their obligations through bankruptcy.



January 2016

Why Just Stop With Tariffs on China?

Written by , Posted in Economics & the Economy, Free Markets

Noted scholar and respected intellectual Donald Trump has unveiled another part of his plan to “make America great again:”

Donald J. Trump said he would favor a 45 percent tariff on Chinese exports to the United States, proposing the idea during a wide-ranging meeting with members of the editorial board of The New York Times.

…“I would tax China on products coming in,” Mr. Trump said. “I would do a tariff, yes — and they do it to us.”

Mr. Trump added that he’s “a free trader,” but that “it’s got to be reasonably fair.”

“I would do a tax. and the tax, let me tell you what the tax should be … the tax should be 45 percent,” Mr. Trump said.

Now, I know I’m just a simpleton, but something strikes me as off about this plan. Perhaps The Donald can help a poor confused sap make sense of all this.

Presuming he believes this tariff on goods coming in from China will benefit Americans, why does he not propose similar measures on goods from other countries?

But why stop there. If a tariff on goods coming into the U.S. is good for those within the U.S., then so too must a tariff on goods coming into a state be good for those within that state. Should Florida, then, tax goods made in Texas at 45%, or better yet, do so for goods made in any state other than Florida?

It seems to me that Donald Trump believes taxing goods when they cross borders makes us better off, so I’m having a hard time understanding why he isn’t compassionate enough to want to improve our lot even more by implementing that policy across the board. I mean, it’s all well and good to “make America great again,” but why not make it SUPER DUPER great? Hmm?



November 2015

Market Power

Written by , Posted in Economics & the Economy, Free Markets

The Week has a great story (hat-tip: Alex Tabarrok) about how Feeding America, which runs the largest network of food banks and is the third largest non-profit in the U.S., drastically improved its operations by adopting a market approach to solve its food distribution problem.

Supermarkets usually donate food directly to their local food bank. But large food manufacturers often donate to Feeding America headquarters, which then allocates this food across its nationwide network of food banks…

Before 2005, Feeding America allocated food centrally, and according to its rather subjective perception of what food banks needed. Headquarters would call up the food banks in a priority order and offer them a truckload of food. Bizarrely, all food was treated more or less equally, irrespective of its nutritional content. A pound of chicken was the same as a pound of french fries. If the food bank accepted the load, it paid the transportation costs and had the truck sent to them. If the food bank refused, Feeding America would judge this food bank as having lower need and push it down the priority list. Unsurprisingly, food banks went out of their way to avoid refusing food loads — even if they were already stocked with that particular food.

It shouldn’t be difficult to see the warped incentive structure and information shortfalls that would plague such a system. Indeed, the author notes:

This Soviet-style system was hugely inefficient. Some urban food banks had great access to local food donations and often ended up with a surplus of food. A lot of food rotted in places where it was not needed, while many shelves in other food banks stood empty. Feeding America simply knew too little about what their food banks needed on a given day.

After seeking the advice of four University of Chicago economists, Feeding America adopted an internal price and auction system to take advantage of the vastly superior ability of price signals to transmit information.

Here’s how the new system works:

Every day, each food bank is allocated a pot of fiat currency called “shares.” Food banks in areas with bigger populations and more poverty receive larger numbers of shares. Twice a day, they can use their shares to bid online on any of the 30 to 40 truckloads of food that were donated directly to Feeding America. The winners of the auction pay for the truckloads with their shares.

Then, all the shares spent on a particular day are reallocated back to food banks at midnight. That means that food banks that did not spend their shares on a particular day would end up with more shares and thus a greater ability to bid the next day. In this way, the system has built-in fairness: If a large food bank could afford to spend a fortune on a truck of frozen chicken, its shares would show up on the balance of smaller food banks the next day. Moreover, neighboring food banks can now team up to bid jointly to reduce their transport costs.

Note everyone was thrilled with the idea, however:

Initially, there was plenty of resistance. As one food bank director told Canice Prendergast, an economist advising Feeding America, “I am a socialist. That’s why I run a food bank. I don’t believe in markets. I’m not saying I won’t listen, but I am against this.”

But the Chicago economists managed to design a market that worked even for participants who did not believe in it. Within half a year of the auction system being introduced, 97 percent of food banks won at least one load, and the amount of food allocated from Feeding America’s headquarters rose by over 35 percent, to the delight of volunteers and donors.

I can’t help but wish for some follow-up with Ms. Prendergast to see if her experience with the market system, and its superiority over the prior approach, has caused her to rethink her preference for central planning over markets. I argue in my column at EveryJoe this week that greater exposure to functioning markets, such as those popular in the emerging sharing economy, poses a threat to the political left. So her answer could help determine if I’m right.



October 2015

Getting Better All The Time

Written by , Posted in Economics & the Economy, Free Markets

You wouldn’t know it from the popularity of Thomas Piketty’s anti-capitalism treatise, or the Pope’s routine railing against free markets, but the world is getting ever more prosperous. The dramatic decline in global poverty in the last few decades is nothing short of remarkable.

According to a recent World Bank report, extreme poverty is expected to fall below 10% by the end of 2015, which will be a first in human history. I mentioned a few other improvements in a recent EveryJoe column chastising the Pope for spreading economic ignorance:

Across a variety of metrics, life continues to get better and better. Extreme poverty – measuring those living on $2 per day or less – has been cut in half since 1981 and will be all but eliminated by 2030. Global GDP per person has never been higher. Pick a measure of human wellbeing and it’s virtually the same story over and over again: life expectancy is up, infant mortality rates have plummeted, women are better represented in governments than ever before, etc. etc.

The world is simply not the horrible place the pope describes. It is better than it ever has been and we have precisely those institutions that he savages to thank for it.

Over at Cato, Ian Vásquez ties the decline in global poverty to the spread of economic freedom:


Using updated methodology, the World Bank recalculated poverty figures back to 1990. The new data track closely with previous Bank figures, which I use in the graph to show the fall in poverty since the early 1980s when 43 percent of the world’s population was extremely poor…The drop in poverty also coincides with a significant increase in global economic freedom, beginning with China’s reforms some 35 years ago and the globalization that followed the collapse of central planning in the late 1980s and early 1990s.

Much more could be said on that point, but there are any number of examples demonstrated the superiority of market freedom when it comes to producing wealth (Argentina versus Chile, Venezuela versus Singapore, etc.). Yet the more things get better, the more we seem to worry that they’re not. As the totality of social problems decreases, we devote more energy to those that remain. Which in many ways is healthy. A benefit of being better off overall is that we need not tolerate things which we had no choice but to accept in the past.

But we must be careful not to lose perspective. Exaggerating current problems can lead to poor policy choices if it causes us to disregard the means by which we achieved our current prosperity in the first place.



August 2015

BEPS Pivotal in Fight Over Tax Competition

Written by , Posted in Taxes
Originally published in Cayman Financial Review
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At first glance the OECD’s Base Erosion and Profit Shifting (BEPS) project is difficult to understand.

There has been no decline in corporate tax revenues in recent years, and nations already possess a variety of tools to respond to erosion when needed. BEPS is thus drawing an inordinate  amount of global attention and resources for apparently low expected returns. The only way to thus explain the project is to recognize that it represents a new front in the OECD’s long running war on tax competition.

The BEPS project has proceeded swiftly following the initial 2012 communiqué from G20 leaders encouraging OECD action on BEPS. In just eight months the OECD returned a report declaring that, “Base erosion constitutes a serious risk to tax revenues, tax sovereignty and tax fairness for OECD member countries and non-members alike.” Only four months after that it followed up with an “Action Plan on Base Erosion and Profit Shifting” that identified the specific areas it intended to address.

Reports for about half of the items identified in the Action Plan were delivered in 2014, with the rest expected in fourth quarter 2015. What has already been released reveals an aggressive agenda clearly aimed at striking a blow against tax competition.

Why the rush?

Political processes typically move slowly, and it might be expected that a project as massive as BEPS with participation from across the globe would require a more deliberate pace. But BEPS has advanced with relative speed. The reason is that the OECD has learned from its past mistakes.

When the OECD released its infamous 1998 paper excoriating “Harmful Tax Competition,” the organization was caught by surprise at the backlash that developed. But it took time for that resistance to coalesce, and it was given a major boost when the United States presidency switched from a Democrat to a Republican in 2000.

A U.S. presidential election is again approaching in 2016, and with Barack Obama finishing his second term there is guaranteed to be a transition, with at least a fair chance of a similar party swap.

Such an outcome could turn the influential United States from a supporter of the OECD’s efforts to an opponent. The agency would rather advance the project beyond the presumptive point of no return before that can happen. Moving quickly likewise provides less time for the business community and other besieged parties to react with organized opposition.

It’s important to note that base erosion, if it really constitutes a problem, is fairly correctable through unilateral action. Transfer pricing rules offer governments considerable power to restrict corporate tax planning if desired, yet the OECD plan goes well beyond providing assistance in developing these rules. The most powerful tool, however, comes from the simple ability to set competitive tax rates.

Were the OECD merely providing tools and recommended practices to assist nations looking to address their own tax systems, they wouldn’t need to hurry the process. In that scenario individual governments could decide for themselves and without coercion whether to heed the BEPS recommendations whenever they happened to be ready. Because the OECD’s aims are much broader, they require not only for the recommendations to be successfully crafted, but eventually for them to be universally adopted as well. And that means getting to the finish line before the opposition even realizes what’s happening.

Homing in on tax competition

The OECD’s animosity toward tax competition by now has been well documented. To put it simply, politicians resent restrictions on the ability to tax and spend as they please.
As capital has grown increasingly mobile, the negative economic feedback from excessive taxation has simultaneously become sharper and more immediate.

Average corporate tax rates among OECD nations have been slashed by more than half since the 1980s, down from around 50 percent to almost 24 percent today. More nations have also switched to territorial systems. Of the 34 current members of the OECD, the number taxing corporations on a territorial basis has doubled since 2000, up to 28 of 34 in 2012.

Although these reforms have benefited the global economy, members of the ruling class tend to be firm believers in the power of government to direct economic growth. The more politicians have to spend, in this backwards view, the stronger will be the economy. The lack of decline in corporate tax revenues as a share of GDP despite major rate cuts, thanks to the dynamic growth effects of better tax policy, is met with denial. Revenues, they believe, would be even higher if rates had not been reduced.

On this understanding the OECD declared itself with the 1998 report to be the primary tool through which international tax collectors and bureaucrats would seek to mitigate tax competition’s impact on domestic policymaking. But because it initially faced political backlash, the OECD has waged the campaign against tax competition through various proxies – money laundering, tax evasion, and now base erosion and profit shifting.

OECD learns from past mistakes

Combating tax competition, unlike base erosion, requires governments working together in what amounts to a tax cartel. This is why it’s essential for the OECD to build a narrative of inevitability surrounding BEPS, and to conclude its work before opposition has time to puncture the narrative. It’s also why the eventual recommendations will be anything but suggestions.

Past efforts prove that when the OECD makes recommendations, they tend to be of the variety that cannot be refused. When developing policies to combat tax evasion, a previous but still popular stand-in for tax competition, the OECD has used a combination of blacklists, intimidation, and threats of sanctions to compel adoption of its preferred tax policies. Those policies naturally reflect the preferences of the OECD’s membership – primarily high-tax welfare states – and the G20 nations pulling its strings.

Although the OECD isn’t advertising the role of BEPS in restricting tax competition, they aren’t exactly hiding it either. The Action Plan lists the “Harmful Tax Competition” report as one of its only four references, alongside the G20 letter and the first BEPS report.

And shortly after the Action Plan notes without substantiation that “Globalisation means that domestic policies, including tax policy, cannot be designed in isolation,” its authors make the following stunning admission:

“While it may be difficult to determine which country has in fact lost tax revenue, because the laws of each country involved have been followed, there is a reduction of the overall tax paid by all parties involved as a whole, which harms competition, economic efficiency, transparency and fairness.”

That single passage includes two significant revelations. The first is that they don’t care whether or not there exists evidence of actual erosion. The second is that the OECD has staked out a normative position regarding nations’ domestic tax policies. Namely, that lower tax burdens reflected in “lost revenue” are presumptively harmful and even somehow unfair.


Corporate taxes are widely understood to be among the most economically destructive forms of taxation, providing just one of many reasons why rational policymakers might choose to find other sources of revenue. The BEPS project has as one of its core assumptions that they are wrong to do so because high corporate taxes are the ideal policy – a policy to which tax competition has become the primary obstacle.

Before the recent campaigns against tax competition, international cooperation on tax policy primarily focused on eliminating double taxation and ensuring that government greed didn’t choke the private sector and kill the goose that laid the golden egg. The OECD even assisted by helping facilitate these efforts.

Now, the OECD wants to turn back the clock and undo the tremendous gains brought about by tax competition.

At the same time as nations are negotiating historic new trade agreements to knock down barriers and further liberalize global commerce, the OECD is running in the opposite direction. BEPS threatens to erect substantial and costly new barriers to global commerce, and its proponents clearly hope that no one will notice until it’s too late.



August 2015

Third Time Won’t Be the Charm in Greece

Written by , Posted in Big Government, Economics & the Economy, Foreign Affairs & Policy, Free Markets, Taxes

Greece is getting bailed out for the third time in just five years, proving yet again that lessons from political mistakes are rarely heeded. As I wrote last month in a column for EveryJoe:

The simple explanation is that Greece tried socialism and it predictably failed, as socialism is wont to do… More specifically, Greece has saddled its economy and its people with heavy taxes to fund a corrupt government weighed down by excessive pensions for their bloated workforce. A byzantine and oppressive regulatory system further stifles growth and prevents the economy from keeping up.

To put some numbers on the problem, Greek debt exceeds 177 percent of its GDP. That means Greeks would have to work almost two years to produce an equivalent amount of goods and services. It’s unfunded future liabilities, which includes generous pensions, tops 875 percent of GDP! Its yearly spending on pensions alone accounts for a whopping 16 percent of Greece’s GDP, and overall the government spends upwards of 50 percent.

If all this proves that Greece is suicidal, it was its entrance into the European Union that gave it the rope needed to hang itself. When it joined the EU, Greece suddenly had access to levels of credit it never had before thanks to the implicit backing of stronger EU economies like Germany. Creditors determined – correctly, apparently – that if Greece couldn’t pay its debt then they would be bailed out by the larger economies. And like a kid that got his hands on his parent’s credit card for the first time, Greece went nuts. In economic terms that’s called a moral hazard, and the latest bailout has only reinforced it.

This week’s announcement of yet another bailout will only exacerbate the moral hazard, and demonstrates the continued folly of the EU’s grand experiment with a common currency without a common fiscal policy.

Continuing to prop up Greece’s bloated government will not solve the problem. There are no good solutions, but the least bad option is for them to go bankrupt and solve the root of their problem, which is excessive government spending.

Instead, Germany and the rich EU nations are offering yet another loan to the demonstrably irresponsible, on condition that they raise taxes and cut spending. Unfortunately, only one of those conditions will help while the other will prove counterproductive. Leftist bleating about ‘austerity’ conflates tax hikes with spending cuts, but the former is bad for growth and saps the political will for belt tightening, while the latter is a proven path toward fiscal solvency.

What Greece needs is to tear down its bloated bureaucracy and insane regulatory regime, but that won’t happen so long as the EU continues acting as enabler.



June 2015

Don’t Cry Wolf on Religious Liberty Infringements

Written by , Posted in Culture & Society, Liberty & Limited Government

Respect for religious freedom has deep roots in American society. Many of those who came to America did so to escape religious persecution, and they brought with them a profound understanding of the importance of protecting such personal rights from oppressive rule, be it by the hand of monarchy or democratic majority. Thus why Constitutional protections for religious freedom were included in the First Amendment.

Yet many areas where religious freedom is said to be under attack are actually examples of a different sort of problem. No one should be forced to make a gay wedding cake, for instance, simply because they make their living as a baker (assuming they are their own employer). The idea that one must sell to all in order to sell to any contradicts basic Constitutional tenets, yet is an idea that has wormed its way into Constitutional doctrine thanks to the misguided idea of “public accommodations” in non-discrimination law, and long eviscerated protections for economic liberty. Focusing on the subset of cases where objections are made on the grounds of religious sensibilities misses the larger issue, which is that the freedom of association and basic liberty should allow all the right to choose with whom they do or do not engage in commercial exchange – for any reason, be it religiously motivated or not, that the individual sees fit.

But there are also ways in which religious freedoms are actually in danger of being undermined today. Under the direction of Houston’s first openly gay mayor, Annise Parker, the city last year subpoenaed sermons and other pastoral communication from local churches. They were ordered to turn over any communication relating to a contentious local non-discrimination law, as well as “all speeches and sermons related to Mayor Annise Parker, homosexuality and gender identity.” She backed down after national uproar over the flagrant abuse of power, but the episode is both illuminating and disturbing.

Religious concerns from the fallout of Obergefell are also not without merit, as admitted by U.S. Solicitor General Donald Verrili when he acknowledged during oral arguments that tax-exempt status “is going to be an issue” with the Court’s potential (and now real) ruling that the exclusion of same-sex couples from marriage (rightly) violates Constitutional protections. The ACLU has also decided that it’s no longer on board with the whole religious freedom thing now that Christians might be the one’s in need of legal protections. And given the proven vindictiveness of today’s cultural winners, more attacks ought to be expected.

Which is all the more reason why it’s a shame that Ted Cruz and some other Republicans, along with the Texas Attorney General, are insisting that county clerks in Texas or elsewhere ought to be able to be able to “opt out” of issuing same-sex marriage licenses if they have religious objections. This is a misapplication of religious liberty.

Look, we’re not talking about clergy or non-state wedding officiators here, who like bakers ought to be able to decide whether they wish to take part in a same-sex wedding or not. These are people whose job it is to process paperwork and issue wedding licenses. County Clerks are municipal employees, be they elected or appointed, and therefor agents of the state. And agents of the state don’t get to dictate actions of the state based on personal whims. If they won’t or can’t do the job required of them and fulfill their duties as public servants then they ought to resign.

Individuals have every right to not work at a place that requires issuing same-sex marriage licenses, but what they don’t have is the right to insist that they not be replaced by someone who will do the entire job and not just part of it. Anyone with true convictions should understand that sometimes upholding those beliefs means making sacrifices, including not working at places that as a fundamental part of the job necessitate violating those beliefs.

There are real threats to religious freedoms, and those who might wish to meet those threats with robust Constitutional protections shouldn’t try to expand the concept to its breaking point. I’m sure it’s not easy to have to choose between honoring ones principles or performing a duty that one currently under obligation to perform, but there’s no Constitutional right to not have to make tough choices.



June 2015

Reducing the Government Footprint to Improve Airport Infrastructure

Written by , Posted in Free Markets, Taxes
Originally published in Human Events

Political hand-wringing about the state of infrastructure in America is common, with chatter recently spiking thanks to the Amtrak derailing in Philadelphia. The complaints are typically without merit, and more often than not are simply arguments of convenience to justify higher taxes and increased government spending. That doesn’t mean improvements can’t be made, however. A simple market-oriented change to how airports are funded would go a long way toward improving an essential mode of transportation.

Air travel is understandably popular within a country so large as the United States, yet the state of American airports doesn’t always reflect that reality. Donald Trump once likened New York’s LaGuardia to a “Third World airport,” and it’s only going to get worse. The FAA expects a record-high 775.8 million passenger trips in fiscal 2015. As traffic continues to grow, so too must the capacity to handle that traffic. The question is how best to fund needed improvements. Market-oriented reforms would improve the current outdated and inefficient approach.

In a proper market services are paid for by the users who benefit from them. This contrasts with political mechanisms where costs are borne by taxpayers who may or may not receive any direct benefit from expenditures.

Several taxes are currently levied on airline passengers, including a domestic passenger ticket tax, a domestic flights segment tax, and an international arrival and departure tax, among others. These taxes go through the IRS and into the Airport and Airway Trust Fund, some of which then goes into the Airport Improvement Program to fund federal grants to individual airports.

Shuffling funds through multiple agencies and programs before returning them back to airports creates unnecessary bureaucratic waste. In addition, airports that produce the vast majority of the revenue receive a much smaller fraction of the funds, leading to market inefficiencies as improvements are not concentrated where they would provide the most benefit to consumers.

There is a better alternative. A recent paper from the Tax Foundation makes the case that funding granted by the federal government would be better spent directly by airports through greater use of the Passenger Facility Charge (PFC). The PFC is a user fee, which economists prefer over taxes because they more closely resemble the functioning of a market system.

The PFC is a fee on each passenger used to fund airport infrastructure improvements. Rather than going through the federal treasury, the PFC stays with the airport that collects it. This reduces bureaucratic waste while ensuring that funds are spent where consumers derive the greatest benefit.

Airlines objected to the first PFCs – like the government, they would prefer the full costs of air travel be obscured from passengers – but were defeated in their legal challenge in 1972. They had better luck lobbying Congress, however, which outlawed the fees. In 1990 Congress finally allowed PFCs, though highly restricted and capped at three dollars per passenger (airports can charge less, or nothing, if they choose). In 2000 the cap was raised to $4.50, where it stands today.

The current cap, which due to inflation is worth less in real dollars than when it was last raised, leaves airports dependent on taxpayer funded grants, and all their downsides, to fund improvements. The Tax Foundation report argues that raising the cap to $8.50 and indexing it for inflation would better accommodate the needs of airports. Even better would be granting local authorities power to set the cap themselves.

Coupled with reductions in excise taxes on air travel, these reforms would also reduce waste without increasing the overall burden on travelers. A similar approach has helped revitalize the Canadian airline industry while reducing central government control.

Politicians like to pretend that services are free, and they use taxes to hide the true costs to consumers. As we have seen in health care, this can significantly distort the market and reduce the overall quality of service despite increasing total costs. User fees are more transparent for consumers and provide a better alternative than taxes and central control. Allowing the PFC to cover a larger share of airport improvement costs will go a long way toward reducing the government footprint in air travel.



April 2015

FATCA Reporting System Leaves Taxpayer Data Vulnerable

Written by , Posted in Taxes
Originally published in Cayman Financial Review

After years of upheaval in the financial sector, taxpayer confusion, and widespread international angst, the IRS has finally unveiled its FATCA registration and reporting system. The system is known as IDES, or the International Data Exchange Service, and claims to provide “a secure web application … to transmit FATCA data directly to the IRS.”

Given the sensitive nature of the data involved, security is of paramount importance. Unfortunately, the track record of the U.S. government and the IRS suggests individual taxpayer data will be extremely vulnerable.

At issue is FATCA’s requirement that banks essentially spy on their U.S. customers and report a wide variety of detailed information to the IRS. The reporting requirements create multiple new sources of vulnerability for individual financial data thanks to the government’s inability to keep its technology up to date, the incompetence of its personnel, and the tendency of IRS bureaucrats to abuse their positions to punish political opponents.

Poor government record on cybersecurity

When it comes to cybersecurity, the record of the U.S. government can only be described as atrocious. Consider just a few recent events.

In 2012, sensitive infrastructure data on the nation’s 85,000 dams was taken from an Army Corps of Engineers database. A National Weather Service employee with ties to the Chinese government was later indicted for downloading restricted information that intelligence officials warn could be used to maximize the loss of life and property in a hypothetical attack on American infrastructure.

The next year, the Emergency Alert System was hacked and used to warn Americans of a zombie outbreak. Stations in several states interrupted programming to report that, “Civil authorities in your area have reported that the bodies of the dead are rising from their graves and attacking the living.”

The month after that, in a particularly ironic twist, the web server of the National Institute of Standards and Technology, which hosts the government’s database of known software vulnerabilities, was itself exploited by a vulnerability and taken out of service for several days.

All told, there have been breaches of sensitive information from systems at the Departments of Defense, State, Justice, Labor, Energy, Commerce, and Homeland Security, as well as NASA, the EPA, the FDA, the Commodity Futures Trading Commission, and the Federal Reserve. And those are just the ones publicly reported.

Despite significant increases in federal spending on cybersecurity, the rate of breaches has grown each of the last 8 years for which data is available, increasing an incredible 1,012 percent from 5,503 incidents in 2006 to 61,214 in 2013. During this time the share of breaches exposing personal data has also grown, with an average of almost 40 percent of reported cybersecurity failures potentially exposing private data to outside groups.

The IRS itself has been accused by government watchdogs of having serious vulnerabilities, and of moving too slowly to fix them.

Every year since 2008, the Government Accounting Office has identified 100 cybersecurity weaknesses at the agency. Specifically, the IRS has been faulted for routinely failing to encrypt data or for using weak methods for doing so, allowing greater access to data than workers require to perform their duties, permitting user passwords that are easily guessed, and being dangerously slow to install crucial software updates and security patches.

This record alone is enough to question the ability of the IRS to secure and protect the sheer breadth of financial records it will receive due to FATCA, but serious concerns are already being raised about IDES’ specific security protocols.

The system’s rules for encryption recommend use of Electronic Codebook (ECB) as its encryption mode. ECB is widely faulted by cryptography experts as being incredibly weak, as it encrypts blocks one at a time and it thus does a poor job of hiding data patterns. Upon discovering the IDES recommendation of ECB in its protocols, prominent security expert Bruce Schneier incredulously asked, “Are they serious?”

Apparently they are not about protecting taxpayer information.

The human element may be worse

Cyber attacks are not the only threat to the private financial data collected by FATCA. Even greater danger may lurk in the form of IRS employees. Even the most secure system won’t provide sufficient protections if the IRS itself abuses the information it receives. There’s strong reason to suspect that will happen, as the IRS has in recent years engaged in numerous activities that either violate privacy rights or represent flagrant abuses of power.

For instance, the agency for years has been embroiled in scandal surrounding accusations that Tea Party and conservative groups were targeted for special attention.

During the course of the targeting investigation, emails revealed that donor lists from nonprofit groups were obtained as part of a “secret research project” conducted by a top IRS official. Two individuals involved in both the targeting and the secret project – Lois Lerner and David Fish – also had their hard drives containing tens of thousands of emails mysteriously crash.

When emails between the two were later recovered, one was reported to say, “No one will ever believe that both your hard drive and mine crashed within a week of each other.” They got that right.

The IRS initially claimed that the data on the drives was irretrievably destroyed because backup tapes did not exist, but it took only two weeks for outside investigators to find them. The Inspector General’s (IG) office conducting the investigation reported that the IT staff responsible for the tapes claim IRS officials never even asked for them. The IRS clearly believes itself beyond the law or legal oversight.

In another case, the IRS last year admitted wrongdoing and agreed to pay $50,000 in damages for the 2008 leak to a gay rights group of the National Organization for Marriage’s tax return. The leak included the name of the organization’s major donors, among which was then-Presidential candidate Mitt Romney, and also likely the leak’s true target.

And in further demonstration of the contempt with which the IRS treats the rules and its responsibilities, a recent IG report revealed that the IRS rehired hundreds of employees in recent years who had previously engaged in misconduct, including some who had improperly accessed taxpayer data.

Given this lax attitude toward preserving taxpayer privacy, it came as little surprise when another IG report last year revealed an identity theft ring operating out of an IRS office. The employees in that case were prosecuted and convicted, but how many such abuses are never caught thanks to the mismanagement and indifference of top IRS officials to the abuse of taxpayers is anyone’s guess.


Thanks to FATCA the IRS will have at its disposal more private taxpayer information than ever before. Institutions required to report on their clients owe it to them to demand the highest security for their data, security there is little reason to believe the IRS is willing or capable of providing.

These vulnerabilities don’t even account for the IGA nations where FATCA data will first be transmitted to local governments before the IRS, which could increase the risks exponentially. FATCA, in other words, is a privacy nightmare.

For all the trouble FATCA has caused during the implementation process alone, the worst may be yet to come. To make matters worse, it looks like just a warm-up to the OECD’s more ambitious plans for global tax information exchange.



April 2015

Everyone Wants a Simpler Tax Code, Right?

Written by , Posted in General/Misc.

It seems obvious. The tax code is a complicated mess that everyone agrees should be simplified. Yet it doesn’t happen. Why not?

As it turns out, quite a few people don’t want to be rid of the current code, as I explain in this recent column at EveryJoe.

Sadly, tax code opacity and complexity is seen as a feature by the ruling class. The problem has been understood for decades yet only ever gets worse. Nothing gets done about it because politicians and the parasite class benefit tremendously from the complexity of the tax code, and as far as they are concerned, the less that you know is being taken from your wallet, the better.

First and foremost, a complex tax system makes it easier for politicians to reward their friends and allies by auctioning off loopholes in exchange for campaign dollars. K Street is filled with lobbyists that make a mint off of securing favorable tax treatment for special interests. These deals only work because no one on the outside can possibly track what any particular change to an obscure section of the byzantine tax code means in the real world.

Another significant political benefit of the withholding system is that it reduces the taxpayer anger toward Washington that would otherwise be felt during tax season. Paradoxically, some taxpayers even look forward to tax day because they will get a refund! What’s not great about getting money, right? Nevermind that it was money they worked for in the first place, and that by overpaying the IRS throughout the year they’ve effectively reduced the value of their earnings (there’s no interest from forced loans to the IRS). Yet taxpayers still perceive the influx as a positive event, and that’s good for politicians who like to tax and spend.

Find the rest of the piece here.