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Thursday

7

June 2018

Eliminate Schedule B to Protect Public Debate

Written by , Posted in Liberty & Limited Government
Originally published in Morning Consult

A healthy democracy needs its citizens capable and willing to express their political preferences even, or especially, when they conflict with the views of those in power. Tellingly, robust protections for speech were listed first among the Bill of Rights and have long been a cornerstone of our republic. Supporting like-minded organizations working to inform and shape the public debate has proven to be a valuable means by which millions of Americans express their political preferences. Unfortunately, invasive donor reporting requirements instituted by the Internal Revenue Service threaten to chill this critical democratic tool.

Schedule B requires 501(c) organizations to include certain contributors’ names and addresses with their annual Form 990 reports. Yet the IRS has acknowledged that this information has no enforcement value. Instead, its collection creates opportunities for abuse and chills speech and civic participation.

Like the secret ballot, respecting donor privacy and thus anonymous speech and association is essential to prevent majoritarian abuse and intimidation that subverts democracy. This was a lesson learned in the civil rights era after the shameful attacks on the NAACP and its supporters.

Although officials pledge to keep the collected information confidential, there’s good reason to question the ability of the government to protect sensitive taxpayer information given the history of inadvertent disclosures and information leaks at the IRS. For example, an IRS official wrongly included the Schedule B donor information provided by the National Organization for Marriage in response to an individual’s request for its Form 990. The information was subsequently shared with an adversarial organization that then made it public.

The NOM leak became a national story and potentially influenced an election when an entity associated with then-presidential candidate Mitt Romney was found to be among those donating to the group. In a twisted sort of irony, the same law that the official violated, intending to protect taxpayers, was used by the agency to shield the perpetrator from scrutiny and deny victims any opportunity to learn more about the incident.

Similarly, as part of the investigation into the targeting of conservative organizations by the IRS, Lois Lerner was found to have illegally shared confidential Form 990 taxpayer information with the Federal Election Commission. The classified information disclosed by Edward Snowden further demonstrated that data collected by one government agency is vulnerable to illegal access and exploitation by any other.

For minority viewpoints, public exposure can lead to intimidation or other private consequences. We saw this when Brendan Eich was forced out as Mozilla CEO after it was revealed he donated in support of California Prop 8.

Not long after that, an effort by then-California Attorney General Kamala Harris to collect donor information was found to be unconstitutional as applied to the Americans for Prosperity Foundation and the Thomas More Law Center, though a similar challenge by the Center for Competitive Politics failed. In ruling on the Thomas More Law Center challenge, the district court found that “in the context of a proven and substantial history of inadvertent disclosures,” the state’s government could not assure donor confidentiality.

The federal government performs no better on that score. In 2015, the IRS admitted that “organized crime syndicates” used an exploit to gain access to the past tax returns of more than 100,000 taxpayers. Unsurprisingly, the Government Accountability Office for years has found the IRS deficient in its protection of sensitive financial and taxpayer data. The most recent audit found that “continuing and newly identified control deficiencies limited the effectiveness of security controls for protecting the confidentiality, integrity, and availability of IRS’s key financial and tax processing systems.”

Several years ago, the IRS was said to be considering dropping the unnecessary Schedule B reporting requirement, which it was never required by statute to collect in the first place. Unfortunately, the agency did not follow through under President Barack Obama, but IRS acting Commissioner David Kautter recently told a Senate panel that he was in discussions with the Treasury secretary about scrapping the requirement. The Trump administration should do what the Obama administration would not and ensure the right of Americans to participate in the political process without fear that they will be made vulnerable to targeting based on their political views.

Thursday

19

April 2018

Will U.S. Tax Reform Kick Off Another Round of Beneficial Tax Competition?

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

When Ronald Reagan and Margaret Thatcher slashed top personal income tax rates in the 1980s for the U.S. and the U.K., other nations were forced to follow suit. In the following decades, the global tax environment was transformed. Tax competition led to average top tax rates in the developed world to be cut from more than 65 percent in Reagan’s day to around 40 percent today.

This leaves to an obvious question: will the latest U.S. tax overhaul produce similar results?

A different environment

There are some reasons to question whether the recent U.S. tax reform effort will spark a new cutting frenzy, as there are notable differences between today’s tax environment and that of the 1980s and 1990s. For one, the largest U.S. reforms this time were on the corporate side, where the U.S. dropped the top rate from 35 percent to 21 percent and moved to a territorial system, though one with so-called base-erosion rules that partially undermine the change. This was a dramatic, pro-growth move, but rather than setting a new global standard, it only brings the U.S. approximately even with the OECD average corporate tax rate.

The second reason U.S. tax reform may not lead to a new global tax revolution is the emergence of an organized resistance to the forces of tax competition. With the subsequent takeover of the OECD by European tax collectors, there are powerful and entrenched interests determined and prepared to stop any more tax reform dominos from falling.
Despite these caveats, there is also evidence, in the fact that they are publicly attacking the U.S. tax reform, that high-tax nations are feeling pressured to respond.

The EU resists

Before the legislation was even finalized, much less signed into law, EU ministers were raising objections. A joint letter from finance ministers from Germany, the U.K., France, Spain, and Italy took issue with the Base Erosion Anti-Abuse Tax (BEAT) and the Global Intangible Low-Tax Income (GILTI) provisions.

There are reasons to criticize these provisions, as they exemplify an OECD-style preference for ignoring proportionality and prioritizing the punishment of tax avoidance over establishing an attractive destination for investment, but what the EU ministers really resented was that the U.S. was planning to establish its own rules rather than simply copy the work of the OECD and BEPS. It was, in other words, a threat to the relevance of the organization at the front line in their fight to preserve heavy tax takes.

Douglas S. Stransky of Sullivan & Worcester LLP perhaps said it best: “I find it laughable that the same ministers who have hammered away at U.S.-based multinationals over not paying their fair share are now crying when it looks like the attempts by the U.S. to reduce incidences of BEPS may actually have an indirect impact on these economies. These are the same ministers who have time after time accused U.S.-based multinationals of base erosion and profit shifting in their countries.”

Competition or harmonization?

The real threat to the EU from tax reform is the intensifying pressure to remain competitive. First comes the end of the uniquely uncompetitive corporate tax regime of the U.S. that left opportunity for others to target U.S.-based multinationals with large offshore cash holdings with aggressive tax grabs. That is bad enough for European tax collectors, but the prospect that it could spark a round of cuts from other nations is truly frightening.

This fear was expressed by former French finance minister and current IMF head Christine Lagarde, who fretted, “What we are beginning to see already and what is of concern is the beginning of a race to the bottom, where many other policy makers around the world are saying: ‘Well, if you’re going to cut tax and you’re going to have sweet deals with your corporates, I’m going to do the same thing.’”

The “race to the bottom” rhetoric is frequently deployed by opponents of tax competition who somehow manage to make bloated welfare states sound like paupers. The implication that governments cannot survive without high corporate income taxes, considered by many economists to be among the most destructive forms of taxation, is nonsense.

EU leaders were not quite as forthright as Ms. Lagarde. French Finance Minister Bruno Le Maire somewhat defensively claimed, “We are not criticizing the right of the American administration to reduce the level of corporate tax in the U.S.” Nevertheless, Germany’s acting finance minister promised: “We will closely assess the economic effects. We want to avoid companies moving their headquarters from Europe to the U.S. and we want to avoid investment flows being redirected.”

The key question is whether they will seek to avoid redirected investment by imposing new barriers and hindering tax competition, or by engaging in it.

Perhaps a telling sign is the fact that France and Germany are pressing forward with a plan to establish a common corporate tax, which they hope will build support for the proposed European Union common consolidated corporate tax base. Though, German Chancellor Angela Merkel did say that, “When we decide on a joint corporation tax assessment basis for France and Germany, we will also consider the realities that are unfolding in America.” Whether that could mean lower rates remains to be seen.

Others are working hard to resist the pressures to cut. A senior New Zealand tax figure warned his country against joining in corporate tax cuts. The head of the Chinese state council’s research office announced that his country was ahead of the corporate tax cut curve, but that it would not join a new international tax cut race. Canada’s current government has rejected business calls to cut rates, which Finance Minister Bill Morneau says remain competitive after the U.S. reforms.

At least for the time being, it appears a substantial resistance is holding strong.

Conclusion

While it was not as bold a move as many were hoping for, the U.S. threw down the gauntlet with last year’s tax reform. The world’s largest economy is no longer hampered by the massive handicap that was the previous version of its business tax code. How Europe chooses to respond will have major ramifications for the offshore community and the global economy.

If high-tax nations double down on tax harmonization and an anti-tax competition agenda, they will suffer the consequences of lost business and slower economic growth. The global economy will similarly suffer, but even more so the offshore community and low-tax jurisdictions that will have to deal with the fallout from a renewed push by the OECD or other international organizations to control global financial flows and the tax policies of other nations. If, on the other hand, these nations embrace competing for investment by reducing their most destructive taxes, all will benefit from increased growth under a better global tax environment.

Wednesday

20

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.

Monday

28

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.

Wednesday

26

April 2017

Sunday

9

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.

Friday

7

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.

Thursday

16

February 2017

The Free Market is the Solution for Upgrading Airport Infrastructure

Written by , Posted in Taxes
Originally published in American Thinker

During the presidential campaign, Donald Trump compared domestic airports unfavorably to those found overseas, going so far as to say that American airports “are, like, from a third-world country.” While that’s a bit of an exaggeration, the larger point is sound. Not a single U.S. airport is found in the top 25 best rated airports in the world according to the Skytrax World Airport Awards. As President, Trump can now help do something about that fact by promoting free-market reforms.

Senate Democrats recently put forward a $1-trillion infrastructure plan that would throw taxpayer dollars at a seemingly arbitrary array of pet political projects.  Many of these – like high-speed rail – would carry price tags well out of proportion to the tiny fraction of American travelers who would benefit either directly or indirectly.

Upgrading aviation infrastructure, however, would greatly impact the millions of Americans who fly each year. Not only that, but doing so need not cost taxpayers much, if anything at all. In contrast to the top-down approach offered by Senate Democrats, a market-oriented approach would involve unwinding existing federal programs for funding airport infrastructure and instead freeing airports and local authorities to take greater control.

The free-market ideas on which President Trump could base his own infrastructure policies are well vetted. The Heritage Foundation’s Michael Sargent provided a comprehensive infrastructure plan in a report titled “Building on Victory: An Infrastructure Agenda for the New Administration.” He expanded on the issue of aviation in particular with another report, “End of the Runway: Rethinking the Airport Improvement Program and the Federal Role in Airport Funding,” which shared many recommendations with a Cato Institute report on “Privatizing U.S. Airports.”

These reports argue for reforms to how aviation infrastructure is funded. Right now, airports are awarded grants for capital improvements through the Airport Improvement Program, which receives a share of the revenue collected from various federal taxes on air travel. The grants are distributed inefficiently, often by bureaucratic and political favoritism instead of economic need, which results in airports that see smaller consumer traffic getting a disproportionate share of the funds.

At the same time, the government caps the funds that airports can collect through Passenger Facility Charges (PFC) to pay for improvements. This cap was put in place at the behest of airlines, who previously failed to have the fees thrown out in court, but it is no favor for travelers.

The PFC is a user fee and thus provides a superior approach to airport funding than taxes. User fees reflect market behavior rather than political and bureaucratic whims, with more fees able to be collected at the airports that see a greater number of travelers. The current PFC cap of $4.50 hasn’t been raised since 2000, during which time almost half of its purchasing power has been lost to inflation.

Rather than simply raise the cap, Congress should abolish it altogether and let airports raise the funds they need to make necessary improvement.  At the same time, the Airport Improvement Program should be shuttered and the taxes used to fund it eliminated. This will create a more efficient and competitive system that allows for much needed upgrades to U.S. airports without in most cases adding to the total burden on travelers.

The Cato report also describes how other countries have had great success by partially or fully privatizing their airports.  The United States should consider doing the same, but in the meantime, a simple free-market change to how infrastructure improvements are funded would go a long way toward enabling the kind of airports that President Trump and other Americans can be proud of.

Wednesday

1

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.

Conclusion

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.

Wednesday

25

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.

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About Me

profileI serve as Vice President of the Center for Freedom and Prosperity, a non-profit think tank dedicated to preserving tax competition and free markets. This site features my personal views, which are not reflective of CF&P.

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