BrianGarst.com

Friday

13

January 2017

Three Cheers for Process Reform

Written by Brian Garst, 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.

Tuesday

1

November 2016

U.S. Anti-Inversion Regulations Badly Miss Target

Written by Brian Garst, 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.

Friday

16

September 2016

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

Written by Brian Garst, 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.

Thursday

23

June 2016

Sotomayor Was Right on Utah v. Strieff Because She Articulated a Constitutional Principle, Not Because of Her Race

Written by Brian Garst, Posted in General/Misc.

I wasn’t a fan of Sotomayor’s appointment to the Supreme Court, and what I found particularly disappointing about her nomination, aside from her judicial philosophy, was the furor of identity politics which surrounded it. Nothing has really caused me to reassess that stance, though I have no problem giving credit where it is due. Sotomayor was right to dissent in Utah v. Strieff, and the mostly conservative majority was wrong. Unfortunately, the hyperventilating coverage of her dissent from the political left is again myopically focused on identity politics.

The facts of the case were not in dispute. The stop of Strieff was acknowledged by all to be illegal. The question was whether, upon happening to find an outstanding warrant, any evidence uncovered during the stop would then be admissible. The majority said it would. I find this troubling, and think it severely undermines Fourth Amendment protections by not punishing officers for undertaking illegal searches.

Sotomayor, along with Ginsburg and Kagan, were in the minority. One passage of Sotomayor’s dissent, not joined by the others, has gotten particular attention. It reads:

[T]his case tells everyone, white and black, guilty and innocent, that an officer can verify your legal status at any time. It says that your body is subject to invasion while courts excuse the violation of your rights. It implies that you are not a citizen of a democracy but the subject of a carceral state, just waiting to be cataloged. We must not pretend that the countless people who are routinely targeted by police are “isolated.” They are the canaries in the coal mine whose deaths, civil and literal, warn us that no one can breathe in this atmosphere. See L. Guinier & G. Torres, The Miner’s Canary 274–283 (2002). They are the ones who recognize that unlawful police stops corrode all our civil liberties and threaten all our lives. Until their voices matter too, our justice system will continue to be anything but.

Aside from the vague social justice-y “until their voices matter” bit, which has no legal or policy meaning that I can deduce, I think she’s generally on the money. The leftwing coverage of the matter, however, has been atrocious.

Ethan Epstein at the Weekly Standard (I don’t know what his/the magazine’s opinion of the decision is, though I suspect it’s not the same as my own) accurately captures the vacuousness of much of the leftist coverage in his mocking headline, “You Won’t Believe What Happened When Justice Sotomayor Dissented.”

It’s not just the clickbait-style breathlessness of their coverage which is so exasperating, but also the weird fixation on Sotomayor’s personal characteristics instead of the quality of her opinion. The Nation, before changing its headline (hopefully due to realizing how stupid it was), declared “Sonia Sotomayor’s Epic Dissent Shows Why We Need People of Color on the Supreme Court.” (For those keeping track, “People of Color” is the current approved nomenclature, though it will no doubt be rotated out soon enough). The New Republic assessed, “Sonia Sotomayor just showed the value of having a ‘wise Latina’ on the court.” This apparent obsession is worth noting because it can lead to false conclusions on how to reach better judicial decisions.

Insofar as Sotomayor’s got it right, it was due not to her race but her defense of the clear intent of a key Constitutional protection. She is not, after all, the only minority on the court, and her fellow “POC” voted with the other side. In my original critique of the boosters of Sotomayor’s appointment, I noted how the reverence to identity is inconsistent, employed by the left when it serves ideological interests and tossed aside when it does not. They certainly have never respected the “lived experience” of Clarence Thomas.

To the point, if we want a SCOTUS more consistent in its defense of individual rights, it will not come from appointments based on whatever personal characteristics happen to be the most important according to the identity politics of the day. It will come through recognizing the proper role of the Court as a patrolman on the border of governmental power, a last safeguard against the persistent encroachment of state authority on individual rights through enforcement of clear Constitutional limits.

Saturday

28

May 2016

NYC Police Commissioner’s Circular Drug War Reasoning

Written by Brian Garst, Posted in General/Misc.

New York Police Commissioner William Bratton is confused by the fact that more and more states and their voters are embracing liberty minded drug policies.

In a radio interview yesterday, New York Police Commissioner William Bratton said violence associated with marijuana trafficking in his city should give pause to advocates of legalization. “In New York City,” Bratton told AM 970 host John Catsimatidis, “most of the violence we see around drug trafficking is involving marijuana, and I have to scratch my head as we are seeing many states wanting to legalize marijuana.”

I suppose his confusion is understandable given his apparent ignorance of the consequences of prohibition. What these other states know and Commissioner Bratton does not is that prohibition does not eliminate the market for a good, but rather drives it underground in the black market where crime is more likely to occur.

The negative effects of prohibition are not a secret. It is well understood, for instance, that the production and sale of alcohol is not an inherently violent trade, despite its close relationship with organized crime during Prohibition. This occurred for a multitude of reasons. Prohibition significantly increases the costs of a good, which creates a strong profit motive. But because entering the market requires breaking the law, only those comfortable with doing so move to capture those profits. And if they don’t mind breaking the law to make and sell a product, they’re less likely to care about breaking it to fight, often with violence, their competitors.

Prohibition also increases health risks for users. Product quality declines on the black market, where information on who produces what and how are necessarily hidden from consumers, and torts are not available to hold producers liable for subpar product. The Iron Law of Prohibition also states that, for reasons of economic efficiency, product potency increases in concert with the level of enforcement. Put another way, “the harder the enforcement, the harder the drugs.”

All of this is to say that what Commissioner Bratton sees are the products of prohibition itself, not justifications for it. Sadly, he is also providing a demonstration of how bad government tends to beget more bad government.

Sunday

1

May 2016

Panama Leaks: Exposing Private Information Serves an Ideological Agenda

Written by Brian Garst, Posted in Taxes
Coauthor(s): Dan Mitchell
Originally published in IFC Review

The public dump of millions of private correspondence and other legal documents as part of the so-called ‘Panama Papers’ leak predictably sparked a media frenzy. In the weeks since, politicians, high-tax advocacy groups, and their allies in the media, have sought to exploit the story as part of a long-running campaign to abolish financial privacy. The nature of the coverage suggests a clear intention to start a new round of attacks on the offshore financial community.

Given international developments over the last few years, including the OECD’s recently concluded BEPS project and the adoption of automatic exchange of taxpayer information as a supposed global standard, offshore financial centres might be tempted to think that things can’t get any worse. That would be a mistake. If there is one observation that can be made from the OECD’s war on tax competition over the last two decades, it is that they are forever moving the goalposts. Their victories are always soon followed by a new round of more ambitious demands.

The tone and tenor of the discussion in the aftermath of the leak has signalled an intention to press forward until all financial privacy rights have been eliminated. Consider the very choice of ‘Panama Papers’ as the name, even though it was comprised of documents from a single firm. Why not, say, call it the ‘Mossack Fonseca Papers?’ The answer is clear. Mossack Fonseca, which has so far not been shown to have committed any wrongdoing in its provision of ordinary legal services for international businesses, is not the target. Panama is.

As a so-called ‘tax haven’ – a designation earned for respecting privacy rights and adopting sensible tax policy – Panama represents precisely what the OECD and the European nations driving its agenda seek to eradicate. The President of Panama’s decision to grovel and beg forgiveness through a New York Times op-ed will not take the target off his nation’s back, just as previous appeasements have failed to satisfy the OECD in its ever more aggressive pursuit of low-tax jurisdictions.

A common tactic of both the reporters covering the leak and the grandstanding politicians decrying offshore banking has been to conflate tax evasion and legal avoidance. They falsely insinuate that the mere usage of offshore accounts is evidence of wrongdoing. The goal is to stir up a public outcry for ever more onerous rules and regulations, subverting tax competition and paving the way for higher global tax rates.

This false narrative has come at the expense of the real story. There is corruption. There is wrongdoing. And like all criminal activity, it is sometimes facilitated through use of otherwise legitimate and valuable services. Instead of obsessing about the latter, there should be greater discussion of the underlying causes of corruption itself.

What ought to be sparking public outrage is the fact that many nations still lack basic political and economic liberties. They provide a breeding ground political corruption, where the ruling classes are able to loot treasuries without recourse. Graft, embezzlement, bribery, and extortion are common place. If anything should have captured the world’s attention, it should be the continued existence of so many illiberal regimes from which law abiding citizens have every reason to want to protect their assets.

In so far as the Panama Papers helped expose that story, they perhaps in part can be applauded. Unfortunately, in their zeal to take down low-tax regimes, the International Consortium of Investigative Journalists caught the vast majority of honest and law-abiding customers of offshore services in the crossfire. Their private information should not be exposed to service an ideological agenda.

Wednesday

13

April 2016

Most Common Media Myths About the Panama Papers

Written by Brian Garst, Posted in Liberty & Limited Government, Media Bias, Taxes

The media has breathlessly reported on the massive data breach of Panamanian law firm Mossack Fonseca. Much of that coverage has involved the politicians and other figures whose activities revealed corruption, ethical lapses, or dishonesty and wrongdoing. That includes Icelandic Prime Minister Sigmundur David Gunnlaugsson, who has “stepped aside” for an unspecified period of time after his ownership of a holding company established by Mossack in the British Virgin Islands was discovered. There’s been no indication so far that there was anything legally wrong with the company or its activities, or that he pursued favoritism on behalf of his financial interests while in office. However, he failed to disclose his assets in Iceland’s parliamentary register of MPs’ financial interests and was not forthcoming with his constituency.

In other words, like most of the stories from the Panama Papers that are dominating the news, Gunnlaugsson’s is one of only tangential relation to the actual business of Mossack Fonseca. Had he been a private citizen with the exact same legal and business arrangements, no one would care. Where he erred was on his responsibility to disclose his holdings and maintain the trust of his citizens.

Nevertheless, his and other similar stories have been framed as proof that something must be done about “shady” offshore dealings. In fact, the entire media coverage from start to finish has been littered, either directly or through implication, with myths.

Here are a few areas where the media, and the public discussion surrounding the Panama Papers, has more often than not gotten it wrong:

Myth 1: Tax Avoidance and Tax Evasion Are Both Wrong

On the tax front (the instances of corruption representing a different matter entirely), most all of the media and political hand-wringing surrounding the Panama Papers has been due to a willful blurring of the lines between tax evasion and avoidance. Yet in reality there are significant legal and ethical differences between the two.

Tax evasion is a crime, and involves the deliberate disregard of tax obligations. Evasion can be committed by lying about assets or engaging in fraud. Banking in jurisdictions that respect privacy rights can be used by unscrupulous individuals as part of a strategy to commit tax evasion. But so can using cash. Both also have legitimate functions, making it unfair to treat everyone who uses privacy respecting services (or cash) as suspect and unwise to create rules on that assumption.

Tax avoidance is not a crime. It is, in fact, simply obedience to the law as it is written. Lawmakers bemoan those who seek to minimize their tax burdens when doing so shines a negative light on the quality of the laws they have written. But in other instances they encourage it. When politicians provide tax credits, for instance, it is with the understanding that those who use them are doing so to avoid paying more tax than they have to. And when they seek to discourage other activities through excise taxes, they are counting on people changing their behavior to avoid the tax. Politicians understand and even expect tax avoidance when it suits them, and decry it when it does not.

Most of what the media directly claims or indirectly implies to be tax evasion is merely legal avoidance. It is individuals choosing to do business in jurisdictions with less onerous tax codes. Not only is this legal, but it has concomitant positive benefits. Tax competition between jurisdictions serves as a check on political greed, and pressures governments to adopt tax policies designed to grow economies instead of just treasuries.

Myth 2: Offshore Financial Services Are Only Used for Wrongdoing

Opportunists who have long despised the ability of individuals to legally flee from confiscatory tax rates want to make the Panama Papers story about financial privacy. It’s not. That makes no more sense than if the story of Congressman William Jefferson, found with a stash of ill-gotten money in his freezer, had been spun as one primarily about cash or kitchen appliances.

Yes, bad people also use legal and financial services. Sometimes they even do so to help them conduct their illicit activity. They also sometimes use airplanes to meet with co-conspirators, or cash to conduct black market sales. That’s not an argument for depriving law abiding citizens of then use of either of those. The fact that corrupt politicians made use of the legal services of Mossack Fonseca does not mean that something must be done about Mossack Fonseca and similar firms. It suggests, if anything, that something must be done about political corruption.

The idea that anyone benefiting from the legal services of Mossack Fonseca, and others who specialize in meeting the needs of international clientele in establishing new businesses and trusts, simply does not match reality. They file incorporation papers. What is then done with those companies is on the people who actually manage them.

Myth 3: Indiscriminate Leaking of Private Financial and Legal Information, Especially of the Rich, Serves a Public Good

While exposing potential corruption of politicians who might be looting their national treasuries or hiding potential conflicts of interest likely serves a public good, massive data leaks that include innocents are still a massive violation of privacy. The Panama Papers leak consists of confidential and legally protected communications, including those of the vast majority of innocent Mossack Fonseca clients caught up in the data for no other reason than that they used ordinary legal and tax planning services that a small number of elites may have been simultaneously misusing.

Whether or not the individuals who did nothing wrong but were exposed anyway are wealthy or not shouldn’t matter. They have the same expectation of privacy as the rest of us. Moreover, the implication that they are “hiding” their wealth even when all tax laws have been followed presumes a public right to individual financial information that does not exist. No one accuses an individual with an ordinary savings account who chooses not to broadcast their account balance as “hiding” their money. That information is simply their business and their business alone.

Sunday

20

March 2016

Garland SCOTUS Pick Good Politics, Bad Substance

Written by Brian Garst, Posted in Liberty & Limited Government, The Courts, Criminal Justice & Tort

President Obama made the relatively obvious strategic choice by nominating a “moderate” judge to fill the late Judge Antonin Scalia’s seat. Although it disappointed the hard left, in particular the race and gender obsessed identity politics crowd, Merrick Garland’s nomination will challenge Republicans’ resolve to deny Obama opportunity to fill the seat before he leaves office.

Had Obama simply appointed another die-hard leftist, Republicans would have risked nothing by waiting him out and seeing what happened during the election. If Hillary won they’d be no worse off, but if a Republican (not named Trump) won they’d get someone more to their liking. And the idea put forth by Democrats that stalling would spark an electoral backlash against the GOP is wishful thinking at best.

But now it’s trickier. Hillary will almost certainly appoint someone to the left of Garland, who Orrin Hatch in 2010 pushed Obama to nominate to the seat eventually filled by Elena Kagan. He and some other Senate Republicans have suggested they might take up Garland’s nomination during the lame duck session after the election. However, if a Democrat wins Obama will likely withdraw the nomination (which Sanders has already publicly asked him to do in the unlikely scenario that he is elected) and allow his predecessor to put forth a Progressive ideologue. That puts pressure on them to

A wildcard is Trump’s populist insurgency. If he is the nominee, Republicans can go ahead and assume Hillary will win – baring the increasingly unlikely scenario that she is indicted – and act accordingly.

Long story short, Obama has forced Republicans to weigh the risks and rewards of accepting his nominee instead of the no-risk position they’d have faced against a more hardline pick.

But while his nomination is good politics, what might the “moderate” Garland mean for liberty if confirmed? Sure, he has some level of bipartisan appeal, but they are mostly on issues in which the parties are both wrong.

As Ilya Shapiro explains, he is simply too deferential to government.

Garland has shown an alarming amount of deference to the government in his years on the important D.C. Circuit, which handles appeals from administrative agencies. I also fear that he won’t represent the check on ever-expanding federal power and executive actions to the same extent as Scalia. And if you’re a civil libertarian, his solicitude for law enforcement makes him much less appealing than other judges who had been under consideration.

Reason’s Damon Root made a similar case:

While Garland is undoubtedly a legal liberal, his record reflects a version of legal liberalism that tends to line up in favor of broad judicial deference to law enforcement and wartime executive power.

In the area of criminal law, for example, Garland’s votes have frequently come down on the side of prosecutors and police. In 2010, when Garland was reported to be under consideration to replace retiring Justice John Paul Stevens, SCOTUSblog founder Tom Goldstein observed that “Judge Garland rarely votes in favor of criminal defendants’ appeals of their convictions.”

Likewise, Garland voted in support of the George W. Bush administration’s controversial war on terrorism policies in the Guantanamo detainee case Al Odah v. United States, in which Garland joined the majority opinion holding that enemy combatants held as detainees at the U.S. military facility at Guantanamo Bay were not entitled to habeus corpus protections. The U.S. Supreme Court ultimately overruled that decision, holding in the landmark caseBoumediene v. Bush that Guantanamo detainees do enjoy habeus corpus rights.

Nevertheless, there is at least one issue likely to prove a major obstacle to Garland’s finding broad Republican support, and that is gun control.

Overall, however, deference to government is a common trap for Republicans, who fear “judicial activism” to the point that they would rather Congress and the Executive operate without significant judicial constraints. As such, they might see Garland as a real move in their direction from Obama, when in fact he’s more likely to be another ally of big government and a disappointment for civil liberties.

Wednesday

24

February 2016

No Investor Should Be Too Connected To Fail

Written by Brian Garst, Posted in Economics & the Economy, Free Markets, Government Meddling
Originally published in The Daily Caller

Should hedge fund managers be allowed to be too politically connected to fail? The answer might seem obvious, but the responsiveness of regulators and some lawmakers to the self-interested demands of Pershing Square manager Bill Ackman raise serious doubts. If Ackman succeeds in his current effort to enlist the forces of government in destroying another company for personal gain, it will at the least confirm the public’s worst fears about cronyism, and likely encourage others to pursue the same strategy.

Ackman has been waging war on Herbalife, which bills itself as “a global nutrition and weight management company.” Ackman, however, insists it is really a pyramid scheme. He began his onslaught by publicly shorting Herbalife’s stock – betting it would drop – to a tune of $1 billion in 2012, which is fine, but then spent millions more lobbying politicians and regulators to destroy the company, which is not fine.

Recently, The Wall Street Journal reported that probes by the FBI and the U.S. attorney’s office following nearly two years of investigations cleared Herbalife of allegations that it operates a fraudulent business model. That’s far from the end of the matter, however, as Ackman has put considerable resources into mobilizing as many federal agencies as possible to take on Herbalife.

As part of his anti-Herbalife blitz, Ackman not only set up websites and 1-800 numbers to troll for potential victims, but also lobbied the SEC and the FTC directly for government action. He even got three representatives and a senator, along with a number of state attorneys general, to write to the FTC on his behalf. They have responded by engaging in their own investigations.

Ackman’s campaign rests on Herbalife’s status as a multi-level marketer. MLMs recruit and use distributors to sell product, often to their friends and family as well as the broader public. Many MLMs are in fact pyramid schemes, but the structure itself does not necessarily demonstrate one way or another whether a company is legitimate. Key factors for making that determination include whether a business focuses more on recruitment than selling, and if products actually wind up with end users instead of stuck, along with their costs, with recently recruited distributors.

Among MLMs, including prominent brands like Avon and Tupperware, Herbalife and its $5 billion in sales last year is largest by capitalization and second by revenue. Does this and the fact that it has been around for 35 years mean that it can’t possibly be a pyramid scheme? Of course not, but those facts do make it less likely. And despite the considerable resources Ackman has pumped into finding evidence to bolster his campaign, the prosecutors and investors alike remain unconvinced.

While Herbalife stock has been more volatile since Ackman’s fight began, it hasn’t collapsed like he hoped despite numerous public presentations and, most recently, a mini-documentary of supposed Herbalife videos. Both the lack of stock decline and the recent acknowledgment by investigators that they have no legal case suggests his extensive efforts have turned up no smoking gun, but there’s still a chance his efforts with other agencies could result in regulatory action.

From the broader policy perspective the question at this point isn’t whether Herbalife is likely to survive in the long run or not, or even if it should, but whether federal agencies should be so easily bought and used as another investment tool.

Encouraging others to behave as Ackman has by rewarding his extensive lobbying would be good for neither government nor the market. The former would be made even corruptible, further compromising the public’s faith in a system that all too often seems to favor the wealthy, or more accurately the politically connected, over everyone else. The market would similarly suffer with the introduction of even more incentive to direct resources toward pleasing politicians and regulators instead of providing real value and satisfying customers.

Ackman may well end up right about the fate of Herbalife. Like any business it could fail, whether for reasons Ackman suspects or not, and he will cash in on his big bet. But if he’s wrong and Herbalife stock continues defying his expectations, the government shouldn’t step in to bail him out from the consequences of his failed prediction just because he has the resources and connections necessary to direct regulatory attention wherever he desires.

Monday

25

January 2016

Puerto Rico Must Save Itself

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

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

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

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

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

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

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

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

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

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

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

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

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