I testified to the House Budget Committee yesterday on the history of federal debt and reasons to balance the budget. John Taylor, Jared Bernstein, and Ryan Silvey also testified.

The ratio of federal debt to the size of the economy has never been anywhere near as high during peacetime as it is today. Federal debt has often spiked during wars, but has always been reduced afterwards.

Before the 1930s, policymakers believed that high debt was immoral and bad for the economy. Those beliefs restrained the basic political instinct to spend more than the available revenue. Unfortunately, in recent decades, Keynesian theory has informed policymakers that deficit spending is beneficial. That has led to the “modern era of profligacy,” noted economist James Buchanan.

Federal borrowing imposes an unfair and damaging burden on future generations, and it should be avoided except during major crises such as wars. Paul Krugman and Steve Landsburg are completely mistaken when they urge people not to worry about government debt because we “owe it to ourselves.”

Cutting spending to balance the budget would reduce the damage from future taxes, increase macroeconomic stability, and potentially increase capital formation. Requiring the government to balance its budget would also curtail spending on lower-valued activities, create incentives to prune waste, and thus spur greater economic growth. 

The video and written testimony is here.

Our nation very much needs fundamental tax reform, so it’s welcome news that major public figures — including presidential candidates — are proposing to gut the internal revenue code and replace it with plans that collect revenue in less-destructive ways.

A few months ago, I wrote about a sweeping proposal by Senator Marco Rubio of Florida.

Today, let’s look at the plan that Senator Rand Paul has put forward in a Wall Street Journal column.

He has some great info on why the current tax system is a corrupt mess.

From 2001 until 2010, there were at least 4,430 changes to tax laws—an average of one “fix” a day—always promising more fairness, more simplicity or more growth stimulants. And every year the Internal Revenue Code grows absurdly more incomprehensible, as if it were designed as a jobs program for accountants, IRS agents and tax attorneys.

And he explains that punitive tax policy helps explain why our economy has been under-performing.

…redistribution policies have led to rising income inequality and negative income gains for families. …We are already at least $2 trillion behind where we should be with a normal recovery; the growth gap widens every month.

So what’s his proposal?

…repeal the entire IRS tax code—more than 70,000 pages—and replace it with a low, broad-based tax of 14.5% on individuals and businesses. I would eliminate nearly every special-interest loophole. The plan also eliminates the payroll tax on workers and several federal taxes outright, including gift and estate taxes, telephone taxes, and all duties and tariffs. I call this “The Fair and Flat Tax.” …establish a 14.5% flat-rate tax applied equally to all personal income, including wages, salaries, dividends, capital gains, rents and interest. All deductions except for a mortgage and charities would be eliminated. The first $50,000 of income for a family of four would not be taxed. For low-income working families, the plan would retain the earned-income tax credit.

Kudos to Senator Paul. This type of tax system would be far less destructive than the current system.

That being said, it’s not perfect. Here are three things I don’t like.

1. The Social Security payroll tax already is a flat tax, so it’s unclear why it should be wrapped into reform of the income tax,
   
   particularly if that change complicates the possibility of shifting to a system of personal retirement accounts.
2. There would still be some double taxation of dividends, capital gains, and interest, though the destructive impact of that policy would be mitigated because of the low 14.5 percent rate.
3. The earned-income credit (a spending program embedded in the tax code) should be eliminated as part of a plan to shift all means-tested programs back to the states.

But it’s important not to make the perfect the enemy of the good, particularly since the debate in Washington so often is about bad ideas and worse ideas.

So the aforementioned three complaints don’t cause me much heartburn.

But there’s another part of the Paul plan that does give me gastrointestinal discomfort. Here’s a final excerpt from his column.

I would also apply this uniform 14.5% business-activity tax on all companies.… This tax would be levied on revenues minus allowable expenses, such as the purchase of parts, computers and office equipment. All capital purchases would be immediately expensed, ending complicated depreciation schedules.

You may be wondering why this passage is worrisome. After all, it’s great news that the very high corporate tax rate is being replaced by a low-rate system. Replacing depreciation with expensing also is a huge step in the right direction.

So what’s not to like?

The answer is that Senator Paul’s “business-activity tax” doesn’t allow a deduction for wages and salaries. This means, for all intents and purposes, that he is turning the corporate income tax into a value-added tax (VAT).

In theory, this is a good step. After all, the VAT is a consumption-based tax which does far less damage to the economy, on a per-dollar-collected basis, than the corporate income tax.

But theoretical appeal isn’t the same as real-world impact.

Simply stated, the VAT is a money machine for big government.

• 
  The VAT helped finance the giant expansion of the welfare state in Europe.
• And the VAT is now being used to enable ever-bigger government in Japan.
• Heck, even the IMF has provided evidence (albeit inadvertently) that the VAT is a money machine.

All of which helps to explain why it would be a big mistake to give politicians this new source of revenue.

Indeed, this is why I was critical of Herman Cain’s 9–9‑9 plan four years ago.

It’s why I’ve been leery of Congressman Paul Ryan’s otherwise very admirable Roadmap plan.

And it’s one of the reasons why I feared Mitt Romney’s policies would have facilitated a larger burden of government.

These politicians may have had their hearts in the right place and wanted to use the VAT to finance pro-growth tax reforms. But I can’t stop worrying about what happens when politicians with bad motives get control.

Particularly when there are safer ways of achieving the same objectives.

Here’s some of what I wrote last year on this exact topic.

…the corporate income tax is a self-inflicted wound to American prosperity, but allow me to point out that incremental reform is a far simpler – and far safer – way of dealing with the biggest warts plaguing the current system.

Lower the corporate tax rate.

Replace depreciation with expensing.

Replace worldwide taxation with territorial taxation.

So here’s the bottom line. If there’s enough support in Congress to get rid of the corporate income tax and impose a VAT, that means there’s also enough support to implement these incremental reforms.

There’s a risk, to be sure, that future politicians will undo these reforms. But the adverse consequences of that outcome are far lower than the catastrophic consequences of future politicians using a VAT to turn America into France.

To wrap things up, there’s no doubt that Senator Paul has a very good proposal. And his heart is in the right place.

But watch this video to understand why his plan also has a very big wart that should be excised.

For what it’s worth, I’m mystified why pro-growth policy makers don’t simply latch onto an unadulterated flat tax.

That plan has all the good features needed for tax reform without any of the dangers associated with a VAT.

P.S. You can enjoy some good VAT cartoons by clicking here, here, and here.

The Department of Veterans Affairs (VA) spends $60 billion a year providing health care benefits to service veterans. Its mismanagement is well-known and widespread. A recent letter provided to the Washington Post and Congress suggests that as much as 10 percent of the VA’s annual spending is in violation of federal contracting rules, representing billions of taxpayer dollars.

Employees of a New York VA facility used their government purchase cards to buy prosthetics for patients in a manner that violates standard operating procedures. Per the VA’s rules, purchasing cards are available to buy supplies costing less than $3,000. Items costing more require a contract and invoice. The facility purchased at least 2,000 prosthetics for $24,999, well above the $3,000 limit and only $1 less than the card limit of $25,000. All told, $54 million was spent by this facility in violation of policy.

When congressional investigators heard about the questionable purchases at the Bronx facility, investigators asked for the accompanying contracts to prove the purchases were legitimate. VA employees tried to cover their missteps and blame the missing documents on Superstorm Sandy, according to the Washington Post.

VA officials had received an inquiry from Congress in September 2012 about the Bronx payments, but a letter signed by former secretary Eric Shinseki did not go out until July 2013. The agency had prepared to say that the records had been transferred to VA’s medical center in Manhattan, where they were destroyed in Hurricane Sandy, documents obtained by The Post show.

But in reviewing the claim that the records had been destroyed, a senior adviser in Shinseki’s office was skeptical. “Gemma — this isn’t going to work,” the adviser wrote in an e‑mail obtained by The Post.

“The [congressman’s] letter was dated 26 Sept and the storm was 28 October. Yet we talk about visits in December 2012 and again in January. Not clear why we didn’t figure out in December that we lost the records and had to go back in January,” he wrote in April 2013.

“This is not cleared.”

Rice said in a statement Monday, “The damage caused by Superstorm Sandy was devastating and far-reaching, but the claim that all of these documents were destroyed strikes me as all too convenient and must be substantiated. We need to know exactly what happened to the documents, how and why this money was spent without written contracts, and who is accountable.”

This is just one instance of malfeasance. Jan R. Frye, VA’s deputy assistant secretary for acquisition and logistics, and now a VA whistleblower, found the actions at the NY facility were not an isolated event. Frye found a total of $1.2 billion in prosthetics purchases without a contract over an 18 month period in 2013 and 2014. Frye sent a 35 page memo to the VA Secretary, Robert McDonald arguing that laziness is the motivating factor behind the VA’s mismanagement. Purchasing cards are much easier than using the contract process.

Frye is not the first to criticize purchasing card usage by the VA. The Washington Post says:

Some of his [Frye’s] concerns were previously flagged by VA’s inspector general, who has reported for years that weak contracting systems put the agency at risk of waste and abuse. Thousands of pharmaceutical purchases were made without competition or contracts in fiscal years 2012 and 2013, often by unqualified employees, investigators found. And according to documents that have not been made public, the inspector general’s office has warned VA repeatedly that its use of purchase cards needs better oversight.

As much as $6 billion of VA’s annual spending violates federal contracting rules. Internal stakeholders have raised the issue in the past, now it is time for the VA to finally tackle the issue.

Federal debt is piling up and spending is expected to soar in coming years. Projections show rivers of red ink unless federal policymakers enact reforms. They should cut spending in every department. A great place to start would be cutting aid-to-state programs, which cost more than $600 billion a year.

That was my message at a Senate hearing last week to a committee chaired by Senator Rand Paul. Kudos to Paul for holding the hearing and inviting an interesting array of witnesses. In the photo, that’s Romina Boccia, me, Steve Ellis, and Tom Schatz. Don Kettl also testified. We all gave the committee good ideas, now it is their job to cut.

Our testimony is here.

The federal Supplemental Security Income (SSI) program provides income to low-income, disabled individuals, including children. In 2014, SSI paid benefits totaling $56 billion to 8 million people. A new Government Accountability Office (GAO) report suggests that a substantial share of that money was spent improperly.

GAO reports that in 2014, SSI wasted $5.1 billion, or almost 10 percent of SSI spending, on improper payments. GAO says that much of the problem is due to SSI’s “management challenges that constrain its ability to ensure program integrity.” SSI is not conducting proper reviews of current beneficiaries in a number of ways.

First, SSI is failing to review files to ensure that beneficiaries continue to be eligible for benefits based on their health. When a person’s health improves, they are supposed to exit the program. According to GAO, SSI’s review backlog totaled 1.3 million files as of January 2014. Eliminating this backlog would save SSI billions of dollars as ineligible persons would be removed from the program. For instance, children comprise 15 percent of SSI beneficiaries. In 2012 SSI had 435,000 children cases waiting to be reviewed. Many of those cases had been pending for review for six years. Seventy percent of those pending for six years involved cases where the child was projected to improve within three years. Likely, thousands of children received benefits for years past their eligibility due to SSI’s inability to conduct to reviews. GAO estimated that eliminating the backlog of reviews for children would save $1.3 billion over five years. Eliminating SSI’s entire backlog would save millions more.

Second, SSI is also failing to conduct appropriate reviews of beneficiaries’ financial information. SSI beneficiaries must earn less than $721 in monthly income ($1,082 if married) and have less than $2,000 in assets. SSI is supposed to review financial information on an ongoing basis to ensure that beneficiaries continue to be eligible, but that isn’t happening according to GAO. Inappropriate financial reviews compose a large share of SSI’s overpayments. It represented 37 percent in fiscal year 2011.

When SSI does find that an individual received too much in benefits, it rarely makes an individual repay the overage. In 2011, SSI approved 76 percent of overpayment waivers, meaning the individuals got to keep their excess payments.

These problems mirror those within the Social Security Disability Insurance program (SSDI) which operates in tandem with SSI. A report from last year highlighted that over 630,000 individuals were waiting to apply for benefits with hundreds of thousands waiting on appeals. SSDI’s trust fund will also be exhausted in late 2016.

Both SSI and SSDI need large-scale reform. Congress should use the opportunity of SSDI’s trust fund bankruptcy to reform these two programs. The issues within the programs are well documented.

Citing the work of David Burton and Richard Rahn, I warned last July about the dangerous consequences of allowing governments to create a global tax cartel based on the collection and sharing of sensitive personal financial information.

I was focused on the danger to individuals, but it’s also risky to let governments obtain more data from businesses.

Remarkably, even the World Bank acknowledges the downside of giving more information to governments.

Here are some blurbs from the abstract of a new study looking at what happens when companies divulge more data.

Relying on a data set of more than 70,000 firms in 121 countries, the analysis finds that disclosure can be a double-edged sword. …The findings reveal the dark side of voluntary information disclosure: exposing firms to government expropriation.

And here are some additional details from the full report.

…disclosure has important costs in allowing exposure to government expropriation… We show that accounting information disclosure can be detrimental to firm development… Such disclosure allows corrupt bureaucrats to gain access to firm-level information and use it for endogenous harassment. …once firm information is disclosed, the threat of government expropriation is widespread. Information disclosure thus allows rent-seeking bureaucrats to gain access to the disclosed information and use it to extract bribes. …Our paper offers a vivid illustration that an important hindrance to institutional development—here in the form of adopting information disclosure—is government expropriation. …The results are thus supportive of Acemoglu and Johnson (2005) on the overwhelming importance of constraining government expropriation in facilitating economic development.

Yet this doesn’t seem to bother advocates of bigger government.

Indeed, they’re using a Paris-based international bureaucracy to push a “base erosion and profit shifting” initiative designed to produce global rules that would give governments far greater access to business data.

Their goal is to extract more money openly with tax policy rather than surreptitiously with bribes, but the net effect will be just as bad for the global economy.

A new study from the Center for Freedom and Prosperity has the disturbing details.

Under direction of the G20, the Organization for Economic Cooperation and Development (OECD) began two years ago a major initiative on “base erosion and profit shifting” (BEPS). …Through the BEPS project, the OECD is continuing its war against tax competition.

For all intents and purposes, politicians from high-tax nations are using the G20 and OECD to undermine the liberalizing force of tax competition.

They want to rewrite international tax policy to prop up nations with uncompetitive tax systems.

[BEPS] would…lead to an overall higher tax environment as politicians freed from the pressures of global tax competition inevitably raise rates to levels last seen in the early 1980s, when reforms by Reagan and Thatcher sparked a global reduction in corporate tax rates that has continued to this day. Through tax competition, the average corporate tax rate of OECD nations declined from almost 50% in 1981 to 25% in 2015. …The [BEPS] Action Plan…considers the benefits of tax competition to be the real problem, explaining that “there is a reduction of the overall tax paid by all parties involved as a whole.” The prospect of there being less money to be spent by politicians is perceived as a problem to be solved.

Even though there’s no evidence of a problem, even from the perspective of revenue-hungry politicians.

Particularly since the OECD’s own data shows that corporate tax revenue keeps increasing, as noted in the CF&P study.

The OECD’s BEPS Report itself undercuts the argument that there is a pressing need for a global response when it acknowledges that “revenues from corporate income taxes as a share of GDP have increased over time.” Likewise, the Action Plan admits when discussing hybrid mismatch that “it may be difficult to determine which country has in fact lost tax revenue.”

So BEPS isn’t a response to the nonexistent problem of falling revenue. Instead, the real goal is to make it easier to impose higher tax rates and change other rules to raise additional revenue.

Even if the required policies have very troubling implications. As part of this new campaign against tax competition, here’s some of what the OECD is seeking.

Proposed recommendations for transfer-pricing documentation and country-by-country reporting, for instance, feature broad reporting requirements that go far beyond what is required for purposes of tax collection. …Information contained in the local and master files are particularly vulnerable, since it would take a breach in only a single jurisdiction for it to be exposed. The OECD makes assurances for the confidentiality of these reports, but they are empty promises. Such government assurances of privacy protection are contradicted by experience and the long history of leaks of taxpayer information. In the United States alone tax data has frequently been exposed thanks to inadequate safeguards, or even released by officials to attack political opponents. …Even without malicious intent, governments are ill equipped to protect sensitive information from outside access. …As poor as the United States has proven at protecting privacy, there are likely to be nations even more vulnerable. Through the master file and other reporting mechanisms, BEPS will demand of corporations propriety information and other sensitive data that they have every right to keep private.

Requiring more information is just one part of BEPS.

There are many other elements, all of which are designed to facilitate higher tax burdens. Indeed, the Wall Street Journal warned that, “this is an attempt to limit corporate global tax competition and take more cash out of the private economy.”

But as bad as BEPS is now, the study from the Center for Freedom and Prosperity explains it will get worse over time.

Of particular relevance for understanding the BEPS initiative is the pattern demonstrated by the OECD during the course of this campaign. After each recommendation was widely adopted – typically under duress in the case of low-tax jurisdictions – the OECD immediately pushed a new requirement that was more radical and invasive than the last. First was a call to adopt a certain number of Tax Information Exchange Agreements and a standard of information exchange upon request, then a peer-review process whereby tax policies are judged according to the standards of high-tax welfare states. Then, after years of meetings and costly compliance efforts, the old standard for information exchange upon request was replaced with a call for global automatic exchange.

The OECD’s strategy of moving the goalposts is worth noting because the BEPS project almost certainly will evolve in ways that enable ever-higher tax burdens.

I predicted back in 2013 that the end result will be “global formula apportionment,” a system that would enable dramatically higher tax burdens on the business community.

And I’m sticking with that prediction, in part because that’s what would be in the interests of politicians from high-tax nations. If national governments were able to tax on the basis of what companies sold inside their borders, regardless of how much income actually was being earned, there would be very little competitive pressure to keep tax rates reasonable.

Politicians could push corporate tax rates back up to 50 percent, or even higher.

The folks on the left certainly would like that kind of system. Here are some excerpts from a CNN story.

It’s time for a complete overhaul of the global tax system to ensure each company pays their fair share, says Nobel laureate Joseph Stiglitz. …“Multinational corporations act and therefore should be taxed as single and unified firms. It is time for our [political] leaders to be bold,” Stiglitz said. …Stiglitz said that creating a new worldwide tax system is realistic, but all nations would have to work together to agree rules and close loopholes. The group of economists said in a statement that it was critical to “curb tax competition to prevent a race to the bottom.” Developed nations should take the first step by agreeing on a minimum rate of corporate tax, possibly under the auspices of the Organisation for Economic Cooperation and Development. …The economists also suggest establishing an intergovernmental tax body within the United Nations that would combat abusive tax practices.

The bottom line is that politicians and statist interest groups both want to extract more money from the productive sector of the economy.

And OECD bureaucrats have been assigned the task of crafting rules to undermine tax competition so that companies can’t escape those higher burdens.

Developing new rules is actually the easy part. The hard part is when the bureaucrats try to rationalize how higher tax rates and bigger government are somehow good for the global economy.

Particularly since economists who work at the OECD have written that lower tax rates and tax competition result in better economic performance.

P.S. To add insult to injury, American taxpayers provide the biggest share of the OECD’s budget. This means that our tax dollars are being used to generate policies that will result in higher tax burdens. Which is why I’ve argued, on a per-dollar-spent basis, that subsidies to the OECD are the most destructively wasteful part of the federal budget.

P.P.S. And to add insult upon insult, OECD bureaucrats get tax-free salaries, so they are insulated from the negative effects of policies they’re trying to impose on the rest of the world.

There is an old lawyers’ adage: “When the facts are on your side, argue the facts. When the law is on your side, argue the law. When neither are on your side, pound the table.” President Obama will deliver a speech today in which he pounds the table with the supposed successes of the Affordable Care Act. The address is part effort to influence the Supreme Court’s upcoming decision in King v. Burwell, part effort to spin a potential loss in that case.

The problem is, those supposed successes are not due to the ACA. They are the product, two federal courts have found, of billions of dollars of illegal taxes, borrowing, and spending imposed by the IRS at the behest of the president’s political appointees.

The president can pound the table all he wants about his theories of what Congress intended, or how, in his opinion, those illegal taxes have benefited America. No speech can change the fact that he signed into law a health care bill that makes it unmistakably clear that those taxes and subsidies are only available “through an Exchange established by the State.” If he didn’t like that part of the bill, he shouldn’t have signed it.

The president thinks it is “a contorted reading of the statute” to insist on the unmistakably clear distinction Congress drew between Exchanges established by “States” versus the federal government. The Congressional Research Service disagrees. So do the D.C. Circuit, and even the Fourth Circuit. Even Harvard law professor Noah Feldman says the president’s theories “seem forced.”

Two federal courts have found the law is clear, and the president is on the wrong side of it. The president would rather that you not focus on that small detail. But the Supreme Court’s job is to hold the president to the law he enacted. Let’s hope they do. Because if the Court instead allows the IRS to tax and spend without congressional authorization, the disruption will be much greater than any caused by ObamaCare.