Malo periculosam, libertatem quam quietam servitutem.



December 2017

Can We Politic Without Lies and Hyperbole?

Written by , Posted in Culture & Society, Taxes

I think it’s clear that our current political discourse is unsustainably broken. While these issues have always existed, the degree to which distrust and animous have come to characterize mainstream political discourse feels unusual. At some point, this will have to change. But judging by the absurd (and shockingly dishonest, even to me) reaction to the Republican tax reform package, that day is not today.

For context, the tax plan’s centerpiece is the slashing of the corporate tax rate from a uniquely high and uncompetitive 35 percent down to 21 percent (which, when combined with state taxes, will move the U.S. to near the OECD average).

Just a few years ago, the need to cut corporate taxes was considered a bipartisan consensus. Obama wanted to cut it to 28%. Was that also a “windfall” for CEOs, as some on the left claim? In which case, why was it the desire of Patron Saint of Liberalism Barack Obama? Did he “chose corporate profit over the American people” as Sen. Booker claims of Republicans?

Presumably, Obama wasn’t beholden to Republican donors (which we are told repeatedly by the leftwing hordes on twitter is the real motivation behind reform), so what was his motivation? It was the same basic one as that of Republicans: to bring the U.S. corporate tax rate into competitive alignment with the rest of the world and make it an attractive destination for business investment. That Republicans went for a lower rate strikes me as a fairly ordinary policy disagreement unworthy of the hysterics we are currently seeing from the left.

The same nonsense is being said about the individual rate cuts. Rather than simply cut across the board and preserve the current progressivity of the tax code, Republicans went out of their way to stack the deck in favor of the poor and middle-class, even undercutting the goal of simplification by increasing spending subsidies in the tax code. The result of this approach is that the wealthy will end up shouldering an even higher share of the total tax burden than before. This ought to please the left, but they have latched on to the fact that top earners are getting any of the cuts to portray it as a giveaway to the wealthy. Tim Kaine, for instance, inexplicably says that “the middle class foot the bill for a big tax cut for the top,” despite all evidence to the contrary.

This rhetoric has been typical of the tax reform process. Thought to be among the last remaining Democratic Senate moderates, a designation one must now question, Sen. Mark Warner said the bill was “the single worst piece of legislation that I’ve seen since I’ve been in the Senate.” Nancy Pelosi went even further, having also called tax reform “armageddon,” and said it was the worst “in the history of Congress.” Worse, apparently, than even the Fugitive Slave Act, to pick one of several morally appalling legislative episodes from our history. Such rhetoric is, needless to say, lacking in the sobriety department.

A glance at social media shows that the Democratic base has taken cues from their leaders. They even showed up at the vote to debase themselves with lame slogans like “kill the bill, don’t kill us.” Though given the predictions of doom, it’s a wonder that anyone is even left alive after the FCC rolled back its Title II power grab, in the name of “net neutrality,” over the internet.

I don’t want to pick exclusively on the left, it’s just that tax reform is on my mind and they’re providing the timeliest example of the problem. But it must be pointed out that Donald Trump ran an entire campaign on the premise that no issue is too small to be worthy of lies and exaggerations. Just about every subject he addressed was required to be either the best or worst thing ever (if that subject was a person, which moniker was warranted was entirely dependent on whether they said good or bad things about Donald Trump).

As Trump found during the campaign and Democrats are finding now, use of such hyperbole can succeed in riling up supporters, but it comes at the cost of stripping all nuance from every issue. That, in turn, makes negotiation and compromise all but impossible. Republicans, like Democrats with Obamacare, were able to narrowly pass a top legislative priority on a strict party-line vote, but it’s clear that moving legislation is getting increasingly difficult. I’m not normally one to fret about an absence of political action–I generally prefer it–but the frantic yearly scramble to pass a spending bill because Congress can’t be bothered to appropriate leads to all sort of suboptimal outcomes.

Many of those who expressed concern about the quality of the campaign are now jumping at the chance to condemn with the most over-the-top and outlandish rhetoric a tax overhaul that, while sweeping in its scope, is fairly mainstream center-right in its ideological placement. So long as public discourse is only worthy of concern when it’s politically convenient, the problem will not be resolved.



August 2017

FCC Should Empower Private Sector to Bring Broadband to Rural America

Written by , Posted in General/Misc.
Originally published in Townhall

It’s difficult to participate in the modern world without access to affordable, high-speed internet. As the economy becomes increasingly digital and solutions to everyday problems continue to be found more and more online, lack of access to broadband threatens to leave millions behind.

While much progress in expanding access has been made, growth in broadband adoption has slowed in recent years. The FCC’s 2016 Broadband Progress Report estimates 34 million Americans, 10% of the population, lack access to the minimum broadband speed of 25Mbps. Further, over 46 million homes have access only to a single broadband provider and thus lack the price-reducing benefits of market competition.

Much of the challenge in spreading high-speed internet is due to the sheer size of the nation and the low population density of so much of the heartland. It has not typically been economical to build the infrastructure needed to provide broadband access to much of rural America. Thankfully, that need no longer be the case.

The FCC is in the process of repacking the broadcast spectrum to make way for more wireless broadband. As part of this process, “white spaces” found between TV channels will be available for public use. And one exciting possible use for this spectrum is to deliver broadband to rural America.

Many Americans already benefit from unlicensed spectrum through the use of Wi-Fi. However, Wi-Fi operates at very high frequencies and thus cannot travel far, often not even entirely throughout a single home. TV white spaces, on the other hand, are found at lower frequencies where a broadband internet connection can cover 9 miles.

Microsoft recently unveiled a rural broadband initiative to leverage private investment and use TV white spaces to expand broadband access to rural America. But Microsoft and other companies first need regulatory certainty before that investment can be unleashed.

The FCC can provide the certainty needed simply by finalizing several rules currently under consideration that would preserve three white spaces channels in every market for public use. Knowing that access to this spectrum will be assured going forward will allow private sector innovation to solve a pressing public problem. Economic analysis suggests doing so could lead to $28.4 billion in additional output per year and an increase of about 358,000 jobs.

Broadcasters are fighting to convince the FCC to close off public access to these critical unlicensed bands. Despite controlling 92 percent of the spectrum in the tv band, heavily subsidized broadcasters are pulling out all the stops, even spreading unsubstantiated scaremongering about potential interference with medical devices, to deny the preservation of just a tiny bit of spectrum to help expand broadband access to millions of Americans.

Thankfully, a large, bipartisan Congressional coalition is calling on the FCC to ignore these special interest pleas and help make expanding broadband through TV white spaces a reality. And FCC Commissioner Ajit Pai has spoken repeatedly about the need to expand broadband access. He and the FCC need to stick to their guns in the face of special-interested pleading and finalizing the rules to preserve tv white spaces for public access.



April 2017



April 2017

Don’t Fall For Air Travel Protectionism Appeals

Written by , Posted in Free Markets
Originally published in The Daily Caller

Days after Emirates Airlines launched a new route from Newark to Athens to Dubai, a coalition representing Delta Air Lines, United Airlines, and American Airlines called on the administration to freeze the route, and others from Etihad Airways and Qatar Airways, under the Open Skies agreements between the U.S. and Persian Gulf governments. They claim that there is not a “fair playing field” due to illegal subsidies to the state-owned airlines. Granting their request would harm American consumers and is not justified under the circumstances.

Adoption of the Open Skies agreements—the U.S. has them in place with over 100 jurisdictions—helped to deregulate the airline industry and eliminate government interference in the market. As a result, competition increased and consumers benefited through lower prices, more frequent flights, and better in-flight service. A Brookings Institution study estimated $4 billion in annual consumer benefits. American airlines have also been able to vastly expand their reach through access to new markets thanks to Open Skies agreements.

But several U.S. airlines—facing new competition for customers on certain routes—now cry foul. They claim that billions in subsidies are going to the Gulf carriers and use it as a reason to call for revisiting the Open Skies agreements. The free markets that have long benefited consumers are no longer sufficient, they say, and “fairness” ought to now be ensured by the government.

This would represent a major step backward for an airline industry that suffered under stiff regulation for decades. “Market fairness,” after all, has long been a euphemism used by those who don’t trust freedom and favor instead government control over the economy. Its use, in this case, is pure corporate rent-seeking rather than motivated by ideology, but the desired result is the same: a government that picks winners and losers and thus ultimately makes losers of us all.

And just how unfair is the playing field, really?

Lest we forget, U.S. airlines also benefit significantly from subsidies. They received a quick bailout following 9/11, and continue to benefit from the Essential Air Service program and its subsidies for airlines serving many rural communities, and the Fly America Act, which requires federal agencies to favor U.S. air carriers regardless of cost or convenience. Then there are the significant tax dollars funneled into air travel infrastructure.

The companies in question also seem to be doing just fine despite claims of being unable to compete. Delta was proud to announce “a year of record-breaking performance in 2016,” for instance. United and American have also been showing hefty profits.

When foreign governments subsidize foreign companies, the biggest losers are foreign taxpayers. In addition, distortions of market activity ultimately lead to large inefficiencies and slower economic growth. That’s why such policies cannot last in the long run when set against the free market. American companies should look to history if they need more confidence on that point.

On the other hand, an intervention by the U.S. government could spark retaliation and the closing of some markets to American carriers. The result would be higher prices and fewer choices for international travelers, which would not only inconvenience American consumers but also depress tourism and its sundry benefits to the U.S. economy.

In an ideal world, governments wouldn’t be subsidizing any companies. Things are obviously not yet ideal, but Open Skies agreements have moved us closer in that direction.

If U.S. air carriers want to offer up all current and future benefits that they receive in exchange for the elimination of subsidies overseas, that’s a discussion worth having. Taxpayers the world over would certainly rejoice. But let’s not make the mistake of compounding one bad policy with another by re-regulating the air travel industry.



April 2017

What We Can Learn From Maryland’s Work on Opioid Abuse

Written by , Posted in Health Care, Welfare & Entitlements, The Courts, Criminal Justice & Tort
Coauthor(s): Andrew F. Quinlan
Originally published in Herald-Mail

Lawmakers at the state and national levels are scrambling to find answers to the growing problem of opioid abuse. Overdose deaths involving opioids increased by 200 percent between 2000 and 2014, and opioids are now a factor in almost two-thirds of all fatal drug overdoses. With overdoses now surpassing deaths from car accidents, firearms and suicides, opioid abuse is a serious public health problem.

President Donald Trump recently signed an executive order to tackle opioid addiction and abuse—creating the President’s Commission on Combating Drug Addiction and the Opioid Crisis. The Commission is charged with identifying existing programs to combat drug addiction and evaluating their effectiveness, assessing the availability of drug addiction treatment services and reporting on best practices for addiction prevention, among other things. It has 90 days to report its interim recommendations.

Many states are already working to solve the problem in their communities. Their work should inform the President’s Commission. In “Evaluating Public Policy Responses to Opioid Abuse and Maryland’s Proposed and Existing Initiatives,” a new policy study from the Maryland Public Policy Institute, we looked at Maryland’s current and proposed responses to opioid abuse and whether they can or should be adopted elsewhere.

Like the President, Maryland Governor Larry Hogan moved quickly after his election to establish a task force to tackle opioid abuse. More recently, he declared a state of emergency and promised to commit $50 million over five years to enforcement. prevention and treatment. He has also pushed several pieces of legislation as part of the 2017 Heroin and Opioid Prevention, Treatment, and Enforcement Initiative.

Overall, we find that Maryland’s approach is likely to produce mixed results.

We find that efforts to limit access to opioids can have negative unintended consequences. Since some patients who become addicted to opioids are first exposed while undergoing treatment for painful conditions, it may be tempting to seek to restrict access to much-needed medications. Yet doing so just makes it harder for those with medical needs to get treatment, while ultimately failing to have a major impact on abuse.

Abusers will simply turn to the black market for access while law-abiding patients suffer. Unfortunately, as part of his initiative, Governor Hogan proposed the Prescriber Limits Act, which would prevent more than seven days’ worth of opioid painkillers from being prescribed during a patient’s first visit.

Another proposed bill, the Distribution of Opioids Resulting in Death Act, would enact new felony charges for selling opioids that result in the death of a user. Yet responsibility is often difficult to determine given the high percentage of overdoses that involve a mix of drugs. The history of our nation’s war on drugs further demonstrates that this bill would do a great job at filling prisons—with all the economic and social costs that entails—while ultimately doing little to reduce drug abuse or illegal sales.

To really fix the problem, addiction itself must be tackled. On that front, Maryland has demonstrated a better record, as the state has sought to expand the number of physicians qualified to prescribe buprenorphine, which is used to treat addiction, and has directed considerable financial resources toward addiction treatment.

We also find that solutions may reside in policy areas where lawmakers might not always think to look. For instance, Maryland’s Pharmacy and Therapy Committee replaced Suboxone Film, a form of buprenorphine that has proven easy to smuggle in prisons and highly susceptible to abuse, with the more efficient Zubsolv tablets on the Medicaid preferred drug list.

In just six months after the change, the Department of Public Safety and Correctional Services reported significant declines in Suboxone Film contraband, which it identified as “by far the most prevalent form of contraband found in Maryland State Correctional Facilities.” Zubsolv’s greater efficiency makes it less attractive to abusers since it uses less of the active ingredient to achieve the same results.

This simple change has quickly started paying dividends in Maryland, and would be easy to replicate in other jurisdictions. At the same time, lawmakers should recognize that addiction is a powerful motivator and that those who suffer from it will not easily be deterred from finding a fix. Placing costly, heavy-handed controls on access to needed painkillers will only hurt those who need relief from chronic or severe pain.



February 2017

U.S. Considers Border Adjustable Tax Folly

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

One of the key separators between U.S. and European tax policy has long been the presence of value-added taxes. That might change thanks to a provision in the proposed blueprint that will serve as the starting point for corporate tax reform in the new U.S. Congress. If enacted, the fundamental change to U.S. corporate tax rates will also have significant implications for the international community.

VATs are efficient revenue raisers that enable bigger government, which is why it is all the more puzzling that Republicans are the ones whose actions might finally result in bringing a VAT to the United States. Republicans aren’t proposing a VAT exactly, but one aspect of the blueprint put out last year by Speaker Paul Ryan and House Ways and Means Chairman Kevin Brady comes worryingly close, and is likely to lead to a straight VAT in the future.

The Ryan-Brady blueprint

After an election in which Donald Trump won the White House and Republicans maintained majorities in both the House and Senate, tax reform is looking more likely to happen than ever. Donald Trump issued a tax reform plan during his campaign, but the major legislative legwork is going to take place in Congress. And Congressional Republicans are likely to draw heavily on the Ryan-Brady blueprint released last year as they work to get tax reform quickly out the door.

The House blueprint contains many desirable, pro-growth provisions. It would replace depreciation with full expensing for most capital purchases, end the worldwide taxation of income, and lower rates to more competitive levels.

Yet included with these much needed reforms is a provision that has divided free market advocates, the business community and economists alike. The blueprint would convert the corporate income tax into a destination-based cash flow tax (DBCFT). It is “border adjustable,” which the blueprint accomplishes by exempting revenue derived from exports from taxation and denying deductions for the cost of imports.

Full impact uncertain

Despite the apparent protectionist nature of the DBCFT, proponents insist that because much of the rest of the world uses border-adjustments in their VATs, it is neutral between domestic and foreign produced goods and thus an improvement over the present system. Some politicians also tout it as stimulating exports, but even those economists who otherwise support the DBCFT deny that would occur.

Proponents also suggest that price increases for consumer goods would be offset by increases in the value of the dollar relative to foreign currencies. That’s uncertain at best. Real world data raises questions as to whether the theoretical assumption of perfectly efficient currency markets is warranted. Even if the dollar appreciated enough to offset higher consumer price tags, that would “deliver a sizeable hit to US residents’ foreign wealth and could create risks of dollar-denominated debt problems abroad,” according to Goldman Sachs.

Heading toward a VAT-tastrophe

Consumer price increases – which may or may not be offset by changes in the value of the dollar – and potential market disruptions to existing supply chains are problematic enough. But the real danger from the DBCFT is the likelihood that it will evolve into a straight VAT and enable bigger government for decades to come.

As proposed, the DBCFT is very similar to a VAT. The main difference is that the DBCFT allows for the deduction of payroll costs. But even that difference might not last.

It’s highly dubious whether the DBCFT would be permitted under WTO rules. Historically, the WTO has made a distinction, whether justified or not, between direct and indirect taxes when it comes to border-adjustability. Rebates on direct (i.e. income) taxes are considered to be illegal export subsidies, while rebates on indirect (i.e. consumption) taxes are permitted. VATs, in other words, can be border adjustable while income taxes cannot.

The uncertainty regarding the DBCFT is due to the fact that it’s an income tax that resembles a consumption tax base. The blueprint, however, is very clear that its authors do not consider it to be a VAT. If the WTO takes them at their word, the DBCFT is likely to be ruled impermissible.

Such a ruling would not simply be a lawmaker inconvenience. It could be the first domino to fall on the way toward seeing a VAT adopted in the United States. After all, the most likely solution for members of Congress facing a bad WTO ruling would be to make a few tweaks and turn the DBCFT into a VAT.

More worrisome still, there’s no telling the partisan makeup or disposition of Congress by the time the WTO rules. If the left is back in power, the result could be a nightmare scenario where the U.S. corporate tax environment becomes more like that of Europe, with both income and consumption taxes.

Diminished competition

Whether the DBCFT is adopted doesn’t just matter to the United States or those doing business with America. One of the primary reasons for adopting a DBCFT, according to its many left-leaning academic supporters, is the fact that it would relieve politicians from pressure to lower rates in the future. Because it is destination-based, in other words, there’s no chance for taxpayers to seek an alternative system should tax rates become too onerous.

That’s bad for U.S. taxpayers, as it means the pressure of tax competition would no longer help keep politicians from pursuing their most avaricious fantasies. And if other nations follow suit, it would mean higher taxes all around.

The political fight

The DBCFT has already led to the formation of unusual political alliances. Proponents include some free market advocates who value a tax they see as less destructive than corporate income taxes, left-leaning academics who see potential to raise rates and make taxes more progressive once competition is eliminated, and protectionist politicians who either see it boosting exports or at least the ability to sell it to the public as if it does. The latter group includes Trump Chief of Staff Reince Priebus, who said the administration wants border adjustability “so that American jobs are protected,” and House Ways and Means Chairman Kevin Brady, who says it is a “key part” of the tax reform plan and “going to stay.”

Opposed to the change are other free market advocates who see danger in providing an efficient revenue engine for future government growth, along with a large group of retailers and other industries which rely heavily on imports and who fear their ability to remain profitable going forward. The free market advocates who oppose the change lament that the insistence of Republicans that the good pieces of the plan must be “paid for” amounts to premature surrender to the flawed, static scoring models -used by the Congressional Budget Office and the Joint Tax Committee – which favor government growth and have long been used by Democrats to prevent pro-growth or government shrinking reforms. It’s a departure from the precedent set by Ronald Reagan, who cut taxes and let revenues fall in the short run in order to grow the economy, and thus revenues, in the long run. By providing future elected officials an easy means to raise revenue, they also see it as trading long-term pain for only short-term gain.

The split in the business community creates an additional political obstacle to passage of corporate tax reform. There are almost always going to be winners and losers, but whereas businesses would otherwise support corporate tax reform practically in unison, the inclusion of border adjustments has led to a rift, primarily between importers and exporters. With Republicans barely holding a majority in the Senate and needing the support of a few Democrats to prevent a filibuster, a fractured business community could prove the difference between passage and failure.


It remains to be seen just how likely the DBCFT is to be adopted. It creates unnecessary political obstacles to reform by dividing the business community and free market advocates alike. The idea has not been thoroughly vetted compared to other key reforms under consideration, likely because Republicans probably did not foresee the extent of the electoral victory when the blueprint was being crafted. Now they have to deliver on campaign promises, and unfortunately, new administrations have limited time in which to get major agenda items done before the next campaign season begins. There is not much time left for lawmakers to come to their senses.



January 2017

It’s Time To Bring Email Privacy Into The 21st Century

Written by , Posted in Legislation, Liberty & Limited Government
Originally published in The Daily Caller

President Trump has made clear that he wants Congress to quickly move to advance his agenda. In addition to the big ticket items like Obamacare repeal and tax reform, Congress should also waste no time in sending the Email Privacy Act (H.R. 387) to the president’s desk for his signature.

Reps. Kevin Yoder and Jared Polis recently reintroduced the Email Privacy Act in order to finally bring the 1986 Electronic Communications Privacy Act (ECPA) into the 21st Century. Without reform, the inadequate protections offered by ECPA leave Americans’ privacy rights vulnerable to bureaucratic overreach.

ECPA’s biggest flaw is that it protects emails from warrantless searches only so long as they are less than 180 days old. Any emails held by a third-party beyond 180 days are treated as abandoned and require only a simple subpoena for law enforcement to obtain access. This threshold might have made sense with the technology and behaviors of 1986, but it is laughably outdated in the age of cloud computing.

Last year, the House passed the Email Privacy Act with an overwhelming 419-0 vote only to see it languish in the Senate. They should try again to close this egregious loophole.

Exemplifying the need for adding clarification and certainty to the nexus between law enforcement and digital privacy is a lengthy legal battle between Microsoft and the Department of Justice.

In 2014 Microsoft was held in contempt of court for refusing to hand over the data of an Irish citizen that was being stored on a server in Dublin. The government argued that a U.S. warrant was sufficient because the Irish company is a subsidiary of the U.S.-based Microsoft.

In a landmark ruling in July 2016, the Second Circuit ruled in Microsoft’s favor and slapped down the government’s attempted overreach. Obama’s Justice Department then filed for the full court to rehear the case, only to see its appeal rejected earlier this week.

If the court had accepted the government’s assertion of global jurisdiction, it would have placed both U.S.-based multinationals and the privacy of American citizens in jeopardy. The former would have faced the impossible task of complying with aggressive U.S. law enforcement demands while also respecting the privacy laws of foreign jurisdictions, while the latter could have been caught in the crossfire as other nations followed suit with their own aggressive demands.

The Justice Department would no doubt like to continue the case all the way to the Supreme Court. Further litigation is not the answer, however.

A better approach would be for the Justice Department to work with Congress on passing clarifying legislation that balances legitimate law enforcement needs with respect for privacy and jurisdictional limits.

The International Communications Privacy Act (ICPA), introduced last Congress by Sens. Orrin Hatch Chris Coons, and Dean Heller, would allow for law enforcement to obtain data on U.S. citizens from service providers regardless of where the data is held, with a proper warrant of course. They could also pursue data of foreign nationals where appropriate cooperation agreements are in place. In addition, ICPA would reform the mutual legal assistance treaty process to make international cooperation less cumbersome, giving law enforcement no excuse for further seeking to circumvent legal protections.

Refocusing the Justice Department away from aggressive litigation that will do nothing to solve the underlying problems with the ancient Electronic Communications Privacy Act should be the first task of Sen. Jeff Sessions if and when he is confirmed by the Senate as the new attorney general. Reversing the Obama administration’s attempted invasions of privacy and the damage it is doing to American businesses would be a productive way to promote Trump’s “America First” agenda.

A Justice Department that is willing to be reasonable and not demand unlimited power for law enforcement could be the final push needed for either of the already popular and bipartisan Email Privacy Act or International Privacy Communications Act to become law.



January 2017

Three Cheers for Process Reform

Written by , Posted in Legislation, Liberty & Limited Government, The Nanny State & A Regulated Society

Outside of election season, few people really pay attention to what happens in Washington DC. Start talking about “process reform” and the average citizen completely tunes out. That’s unfortunate because the how of policymaking is often more important than the who.

Public choice teaches us to look at the incentives and institutional constraints placed on elected (and unelected) officials in order to understand how they are likely to behave. This is of practical import. If we want to compel government to live within its means, for instance, then applying public choice theory we know to direct our efforts toward the creation of a debt break or other spending cap, rather than naively thinking it is sufficient simply to elect politicians claiming they will be more responsible. The reason the latter doesn’t work is because politicians are incentivized to seek reelection, and showering various constituencies with taxpayer dollars remains the best way to go about it (we could drill down deeper, if we desired, into things like the problem of concentrated benefits and dispersed costs to further understand why electoral mechanisms are unlikely to enforce spending restraint).

There are a great many reforms that are needed if the nation’s many policy-related problems are ever to be solved. Thankfully, there seems to be enough awareness of this fact that some key process reforms are moving forward. One of them is the REINS Act, which was passed by the House last week, and attempts to solve the issue of excessively expensive and numerous regulations. Recognizing the fact that career bureaucrats have an incentive to grow their power and to ignore the costs imposed on society by doing so, the REINS Act requires Congress and the president to approve regulations with significant economic impact before they are finalized.

It understandably has the left freaking out, as the REINS Act would return to Congress a bit of the lawmaking power that has long been delegated to unaccountable regulators–power which the left has exploited to insert government into every aspect of our lives. And while Congress carries its own set of perverse incentives, looping legislators into the rule-making process adds an obstacle to the promulgation of new regulations that should hopefully prevent some of the more onerous and destructive rules from ever coming to fruition.

The REINS Act reforms Congress as much as it does regulatory agencies. Under the current system, legislators can hide from electoral accountability by delegating more and more of their responsibilities to unelected bureaucrats, who they then campaign against. By restoring the role of Congress in filling in the details for new laws, legislators cannot as easily duck electoral responsibility for agency actions.

Other regulatory reform efforts are also proceeding concurrently. But there are other areas that can improve from process reforms as well.

One of those is the electoral system. There’s been renewed interest in the topic post-election, though most of it is motivated by the particular partisan circumstance of recent elections and directed in unhelpful ways.

Hillary supporters are focused on the fact that she won the popular vote but lost in the electoral college. Ignoring that we don’t actually know how the campaign would have unfolded were the goal different from the beginning, they are focused on the wrong reform. The real tragedy of 2016 is that despite two major party candidates with historic unfavorables, and an electorate in which a plurality of 43% choose not to belong to either major party, the major party nominees still secured 94.3% of the vote.

Why did this happen? Because the voting system we have chosen compels it to. See Duverger’s law for the full explanation, but the short of it is that our first-past-the-post voting system (pick one, winner take all) incentives voters to vote against their most hated candidate instead of for their most liked one.

Interestingly, this same election also produced a tiny step toward a new (and I’d argue better) system. Maine passed a ballot initiative to implement ranked-choice voting for all statewide elections (though not federal House, Senate, or presidential campaigns). It works by having voters rank their top choices in order. If no candidate breaks 50 percent, the candidate with the least first choice votes is dropped and the ballots recounted. This continues to happen until a candidate reaches a majority. If such an approach had been used in the presidential election, as an example, voters could have supported a candidate outside the Republican-Democrat duopoly without fear that they were inadvertently supporting Hillary or Trump depending on which they loathed more.

But that’s not our voting system, and so we are left with the most unpopular president ever elected. Process is destiny.




November 2016

U.S. Anti-Inversion Regulations Badly Miss Target

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

According to the simple Civics 101 view of American government, laws are passed by the legislative branch, interpreted by the judicial branch, and enforced by the executive branch. In reality, both the president and his executive agencies exercise broad rule-making authority, either because Congress has delegated it to them or, more commonly, because they grabbed it for themselves. This is particularly true in the area of tax, where unelected bureaucrats create and amend rules at tremendous cost to private firms and the economy. Examples include the so-called debt equity regulations proposed under Section 385 of the U.S. tax code and related anti-inversion rules.

Targeting inversions

The White House and Democrats in Congress have made corporate inversions a political campaign issue. They have demonized companies moving offshore as “unpatriotic” because they refuse to pay their “fair share.” Rather than reform the problems with the tax code that are driving companies away – high rates, a world-wide system – they think it’s possible to tweak the rules and limit corporate mobility.

Trying to stop companies from moving to jurisdictions with more favorable tax and regulatory systems is a fool’s errand, but it is nevertheless what Treasury Department regulators are seeking to do.

In April they proposed sweeping new regulations that had the immediate effect of scuttling a planned merger between Pfizer and Allergen. In order to make inversions less attractive, the rules require that certain kinds of debt common in inverted and other multinational corporations be treated instead as equity, which is taxed at a higher rate. But the rules are so broadly constructed that they will hinder ordinary business and financial transactions not typically associated with inversions or tax avoidance, like shareholder loans, securitization transactions, and cash pooling. And in addition to the debt equity rules are changes to how multistep acquisitions are considered for tax purposes under Section 7874.

Questionable authority and process

Section 385 was established in 1969 as part of the Tax Reform Act of 1969. Seeking to address a growing body of inconsistent case law, Congress gave Treasury authority to establish guidelines and factors to consider for courts distinguishing between debt and equity. Congress intended for regulators to inform the judiciary by clarifying the law, not for them to take on the role of the courts and make those determinations of fact for themselves.

In a prior and equally foolhardy attempt in 2004 to limit reincorporation abroad, Congress enacted Section 7874. It established that a foreign corporation must own over 20 percent of the U.S. corporation in order for the inversion to be valid. The new rules would make it harder to reach that threshold by discounting other acquisitions within the last three years even if they are not directly related. Although Congress set clear guideposts, Treasury is doing everything in its power to undermine or disregard them altogether.

Their procedures are also questionable. In a recent letter, Senate Finance Committee Chairman Orrin Hatch observed, “the Treasury Department is moving at an unprecedented pace and is attempting to regulate a very complex area on a very short timeline.” He faulted regulators for providing, “no advanced notice of the proposed regulations … prior to the early April promulgation.” Further, “Only the standard 90 days was given for written comments to be submitted – despite their tremendous complexity, and despite numerous calls from the business community and tax-writing members of Congress to extend the comment period.”

The U.S. Chamber of Commerce filed a lawsuit in August, arguing that the multiple acquisition rules are not a good faith interpretation of the law and were tailored specifically to impact the Pfizer-Allergen deal. They cite the fact that, once finalized, the rules will be retroactive to the date they were first proposed and thus capable of thwarting current deals despite not going through the full regulatory process. Courts have struck down other overreaching agency interpretations in the past.

Congressional opposition

Distraught businesses have found generally receptive ears in Congress. Republicans on the Senate Finance Committee noted in an Aug. 24 letter to Treasury Secretary Lew noted that they “have repeatedly raised concerns … in regards to the range of negative, unintended consequences of these proposed rules, if finalized without substantial reforms.” In his separate letter, Committee Chairman Hatch asked for the rules to be re-proposed in light of the questionable nature of their original introduction and the rushed procedures.

Even Democrats have raised concerns. Although supportive of the rule’s intentions, their members on the House Ways and Means Committee noted in their own letter to Treasury that there are “broader concerns related to various internal cash management practices such as cash pooling,” and asked for consideration of exceptions or transitional rules. Their Republican colleagues were more direct: “The proposed regulations in present form will have a profound and detrimental impact on business operations nationwide.”

Offshore and economic impact

Perversely, the debt equity regulations aimed at preventing inversions will likely lead to more corporations leaving U.S. shores. Only instead of inverting, they will simply be acquired by foreign firms. That’s because complexity and costly regulatory burdens put American companies at a global disadvantage. Ernst & Young already estimated a loss of $769 billion to the U.S. over the last decade from such mergers and acquisitions, but that figure would surely increase under the new rules.

Much of the added burden is thanks to the added information reporting required to enforce the regulations. Businesses will have to supply loads of documentation just to make a transaction between two subsidiaries of the same business. The IRS estimates the reporting costs at $15 million annually, though business groups argue they severely underestimate the impact. Business Roundtable suggests the costs of compliance could reach into the millions just for each company.

Ernst & Young’s James Tobin rebuts the Treasury claim that the rules address the problem of inconsistent analysis by different courts, arguing, “the Proposed Regulations merely add costs and the administrative burden of threshold documents for all intercompany debts but with no added certainty.” And the fact that U.S. companies operating overseas must not only comply with the regulations in the country they are operating in, but also with the new reporting burdens from the debt equity regulations, further adds insult to injury. The rules provide yet another reason for new businesses to choose to headquarter anywhere but the United States.

Compounding the damage to the economy is the fact that the rules are backdated to an effective date of April 4, 2016. So even though the rules may not be finalized until later this year or even next year, they are impacting the behavior of companies right now. Businesses are operating under significant and unnecessary uncertainty as the regulations proceed through the rule-making process, a price which Treasury consciously calculated was worth paying in order to torpedo the Pfizer-Allergen deal for political reasons.

The proposed regulations are having an impact now. They will do even more damage if Treasury follows through on its original intention to rush the regulations out the door before the end of the current administration. Given historical precedent, however, we can expect even more aggressive attempts to follow closely behind, as no amount of bureaucratic rule-making will render the hostile U.S. corporate tax code attractive. Only Congress has that power.



September 2016

Washington Can’t Permit EU-Led Open Season On U.S. Companies

Written by , Posted in Taxes

To justify its recent $14.5 billion ruling against Apple, the EU claimed that Apple benefited from “a significant advantage over other businesses that are subject to the same national taxation rules.” If they had provided any evidence of a special carve-out for Apple, this might be easier to believe. Instead, the likely explanation is that the EU is stepping up its war on tax competition as part of its long-standing pursuit of harmonization of tax rates across the continent and ultimately the globe.

The European Commission says Apple owes $14.5 billion plus interest in back taxes to Ireland. What makes the ruling particularly unusual is the fact that Ireland itself disagrees. They don’t want to collect the money. They would rather continue to be a nation with an attractive corporate tax code so that they can benefit from tax competition, rather than short-shortsightedly treating companies as ATM machines.

At issue is whether Ireland granted illegal “state aid” to Apple, which is prohibited under the EU treaty. Such aid is admittedly the wrong way to do tax competition. Jurisdictions should compete through the overall tax and regulatory code, not through special carve-outs. But even where they get it wrong, sovereign nations must be free to administer their own tax codes for tax competition to exist.

The EU surely knows this, which is why their ongoing efforts to move control of tax policy away from individual jurisdictions and towards Brussels is deeply disturbing. The Apple ruling fits a pattern of seeking to eliminate tax competition on the continent, where nations like France and Germany have in the past pressured Ireland to raise its 12.5% corporate tax rate. They wrongly fear a “race to the bottom” that would leave national treasuries empty, instead of recognizing that taxpayers and politicians alike benefit from the higher economic growth induced when destructive taxes are kept low.

It is not at all clear that Apple did in fact receive special dispensation. Those facts will continue to be litigated, as both Apple and Ireland plan to appeal the ruling. They insist that the company was merely given rulings that offered clarification as to how the tax law would be applied in their case, which is both a common and desirable practice because it provides certainty. Adding uncertainty through broad retroactive tax rulings won’t just impact the U.S. companies that Europe wrongly thinks can provide their financial salvation, but it will make the continent less attractive to businesses going forward.

Ultimately, it is up the the United States to defend its businesses against these opportunistic tax grabs. The bipartisan criticism of the EU ruling is a good first start. But politicians must stop demonizing businesses to distract from their own failures to spend responsibly. The U.S. should also lead by example and end its own greedy worldwide tax system.

We’ve seen through the OECD BEPS project what happens when Washington, and in particular Congress, allows European bureaucrats to dream up global tax rules unmolested. It inevitably leads to a byzantine system of arcana designed to keep the government bureaucrats and  accountants employed while squeezing the maximum amount of tax revenue possible out of the global economy. If U.S. politicians continue to sit on the sidelines, these threats will only multiply.

Unfortunately, years of politically motivated attacks on corporations have made large multinationals like Apple seem like low-risk targets. Voters are not going to take to the streets on behalf of the likes of Apple, Google, or Amazon. After pounding on and on about big business not paying its “fair share,” Washington is in an awkward place now that the EU has said “we agree” while helping themselves to the coffers of an American company. Yet if Washington doesn’t act, Apple will just be the first of many.