South Carolina Gov. Nikki Haley has announced that Rep. Tim Scott (R‑SC) will replace the departing Jim DeMint in the Senate. Scott is a member of the 2010 “Tea Party Class” of Republican freshmen and is considered a solid fiscal conservative. So let’s take a quick look at how he voted this year on opportunities to terminate federal agencies and programs.

The good:

Scott voted to terminate the Economic Development Administration, Advanced Manufacturing Technology Consortia, Essential Air Service program, Energy Efficiency & Renewable Energy subsidies, Fossil Energy subsidies, the Department of Energy’s Title 17 guaranteed loan program, and the Community Development Block Grant program. He also voted against the lamentable continuing resolution in September.

The bad:

Scott voted to reauthorize the Export-Import Bank, a notorious example of corporate welfare. He also voted against terminating nuclear energy subsidies, which a lot of Republicans have an unfounded soft spot for.

Overall, that’s a good record and considerably better than the average freshman’s voting record. The votes against the EDA and CDBG program in particular indicate that Scott has an appreciation for fiscal federalism. Perhaps that will be a cause that Scott can join Sen. Rand Paul (R‑KY) and (hopefully) others in championing.

Few Frenchmen are more recognizable at home and abroad than the movie star Gerard Depardieu. Last week, Depardieu caused a great controversy in his native land by moving to Belgium – partly to avoid the 75 percent income tax on the wealthy that was introduced by the socialist President of France, Francois Hollande. Depardieu’s move was condemned by the French political establishment, including the Prime Minister Jean-Marc Ayrault who called the actor’s action “pathetic.”

Depardieu shot back and, in an open letter to Monsieur Ayrault, wrote, “I’m leaving because you think success, creation, talent and anything different should be punished. I am sending you back my passport and social security, which I have never used.” The French actor claims to have “paid 85 percent taxes on his revenues this year [2012] and estimated that he had paid €145m ($189m) in total since he started work as a printer at the age of 14.”

The lessons from Monsieur Hollande’s debacle should be obvious. The rich are a mobile lot and there are plenty of countries that will welcome them with open arms. The British Prime Minister David Cameron, for example, has promised to “roll out a red carpet” for the French tax refuges. Moreover, as my colleague Alan Reynolds reminds us, high tax rates on income may discourage many wealthy people from remaining in the labor force, since, to use economic jargon, their elasticity of taxable income is much higher than that of low and middle income earners. Translated into English, people like me have to work even if our tax rates go up, because we have to come up with money to pay our mortgages, student loans, etc. The rich people don’t.

The French government was warned of the negative consequences of tax increases. It chose to ignore those warnings. Instead, the French socialists assumed that they could go on plucking the golden goose indefinitely. (Then again, the socialist grasp on reality has never been very good.) Of course, when idiotic policies backfire, politicians feign surprise and then shift the blame onto others. Thus, French Labor Minister Michel Sapin asked in a radio interview “What is more normal than those who earn enormous amounts of money paying lots of tax?” The French Culture and Communication Minister Aurelie Filippetti bemoaned Depardieu’s action by stating that “We shouldn’t be receiving moral lessons from people who abandon the battlefield when we need everyone to be mobilized.”

So, there you have it. A great actor who started with nothing and built a spectacular career that revived the French movie industry and filled the coffers of the French state is condemned for finally standing up for himself by a member of parasitic political elite that has brought a great country to the edge of fiscal ruin. Straight out of Ayn Rand’s novel. 

I’m a strong believer in fundamental tax reform. We need a system like the flat tax to improve economic performance.

No tax system is good for growth, of course, but the negative impact of taxation can be reduced by lowering marginal tax rate(s), eliminating double taxation of saving and investment, and getting rid of loopholes that encourage people to make decisions for tax reasons even if they don’t make economic sense.

While the general public is quite sympathetic to tax reform and would like to de-fang the IRS, there are three main pockets of resistance.

1. The class-warfare crowd is opposed to the flat tax for ideological reasons. They want high tax rates and punitive double taxation – even if the government winds up collecting less money.
2. The lobbyists and special interest groups also are opposed to tax reform, along with the politicians that they cultivate. The tax code is a major source of political corruption, after all, and there would be a lot fewer opportunities to game the system and swap loopholes for political support if the 72,000 page tax code was tossed in a dumpster.
3. Beneficiaries of certain tax preferences such as the mortgage interest deduction, the charitable deduction, and the state and local tax deduction are worried about tax reform, either because they are taxpayers who utilize the preferences or because they represent interest groups that benefit because the government has tilted the playing field.

This post is designed to allay the fears of this third group, specifically the folks who worry that tax reform might be bad news for charities.

The Wall Street Journal today published a pro-con debate on the charitable deduction. As you might expect, my role is to argue in favor of a simple and fair system that would eliminate all tax preferences.

Here’s some of what I wrote on the charitable deduction, beginning with the key point that economic growth is key because the biggest determinants of charitable giving are disposable income and net wealth.

…the best way to help charities is to boost economic growth, which leaves people with more money to donate. And I think the best way to do that is to replace our current system with a simple and fair flat tax. …I don’t think there’s a compelling argument for the charitable deduction. …Over the decades, there have been major changes in tax rates and thus major changes in the tax treatment of charitable contributions. At some points, there has been a big tax advantage to giving, at others much less. Yet charitable giving tends to hover around 2% of U.S. gross domestic product, no matter what the incentive.

The final sentence in the above excerpt is key. The value of a tax deduction is determined by the tax rate. So in 1980, when the top tax rate was 70 percent, it only cost 30 cents to give $1 to charity. By 1988, though, the top tax rate was down to 28 percent, which means that the cost of giving $1 had jumped to 72 cents.

Yet charitable giving rose during the 1980s. Why? Because Reagan implemented reforms – such as lower tax rates – that produced a healthier economy.

Some may wonder whether the example I just cited is appropriate since it focuses on the tax rate (and therefore the value of the tax deduction) for upper-income taxpayers.

But there’s a good reason for that choice. The charitable deduction overwhelmingly goes to the rich.

Upper-income households are the biggest beneficiaries of the deduction, with those making more than $100,000 per year taking 81% of the deduction even though they account for just 13.5% of all U.S. tax returns. The data are even more skewed for households with more than $200,000 of income. They account for fewer than 3% of all tax returns, yet they take 55% of all charitable deductions.

I’m not against rich people, or against them lowering their tax liabilities. But I do want a tax system that generates more prosperity because that’s good news for the entire economy – including the nonprofit sector.

Speaking of which, I think tax-deductible groups will become better and more efficient without the deduction.

Charities, meanwhile, get fatter and lazier because of that dynamic. Think of all the exposés in recent years about charities that devote an overwhelming share of their budgets to administrative costs and marketing expenses. No system will create perfect nonprofit groups, but cutting back or cutting out the deduction would break the cycle of inefficiency that now exists.

My debating partner is Diana Aviv, the head of Independent Sector, which is basically a trade associate in DC for charities. Here are the most relevant excerpts from her piece.

…more than 80% of those who itemized their tax returns in 2009 claimed the charitable deduction and were responsible for more than 76% of all individual contributions to charitable organizations.

That’s all fine and well. What she’s basically saying is that almost all rich people itemize and those rich people get the lion’s share of the benefit from the deduction.

But that’s not the key issue. What matters is whether the deduction makes a big difference for the amount that people contribute. Diana addresses that point.

According to a 2010 Indiana University survey, more than two-thirds of high-net-worth donors said they would decrease their giving if they did not receive a deduction for donations.

I don’t put complete faith in public opinion data, but let’s assume that this poll is a completely accurate snapshot of how rich people think they would react. But let’s balance that off with the real-world evidence from the 1980s, which shows that rich people gave more money in the 1980s after Reagan cut tax rates and dramatically lowered the value of the tax deduction.

I’m not saying the lower tax rates caused the increase in giving, but I am saying that the lower tax rates and other reforms helped boost the economy. And I’m saying that rich people gave more to charity because they had more income and more wealth.

I also can’t resist a comment about this excerpt.

Finally, there’s another important consideration. The charitable deduction is unique in that it’s a government incentive to sacrifice on behalf of the commonweal. Unlike incentives to save for retirement or buy a home, it encourages behavior for which a taxpayer gets no direct, personal, tangible benefit.

Huh?!? Diana’s entire article is based on the notion that people need to be bribed in order to contribute, yet she simultaneously says that taxpayers get “no direct, personal, tangible benefit.”

Let me close by tying this debate to the fiscal cliff negotiations. There is some discussion of capping itemized deductions as a way of extracting more money from the rich. That creates a bit of a quandary. Here’s something else I wrote for my part of the debate.

I don’t want to give more revenue to Washington. That’s like putting blood in the water with hungry sharks around. But if politicians are going to extract more money from the private sector anyway, reducing or eliminating the deduction is much less damaging to growth than imposing higher marginal tax rates.

That being said, that type of change – while not as bad for the economy – probably would have a negative impact on charitable giving.

My argument is that real tax reform can benefit the nonprofit sector because the loss of the deduction is more than offset by the pro-growth impact of lower tax rates, less double taxation, etc.

But if all politicians are doing is limiting the deduction as part of a money grab, then nonprofits get some pain and no gain.

Incidentally, this is why the nonprofit community should join the rest of us in fighting against an ever-climbing burden of government spending. If we don’t rein in Leviathan, it’s just a matter of time before politicians get rid of the deduction as part of a relentless search for more revenue.

I think it would be better for nonprofits – and for the rest of us – if we limit the size and scope of government and enact a tax system that produces the kind of prosperity that is beneficial for all sectors of the economy.

The Small Business Administration was created in the 1950s to make it appear as though federal politicians cared about the plight of the “little fellow.” A more helpful expression of concern would have been a rollback of the federal government’s increasingly heavy hand in the post-New Deal economy. Instead, they went with the more politically alluring option of using the heavy hand to deliver handouts.

As Veronique De Rugy and I discuss in an essay on the Small Business Administration, it didn’t take long for the politicians to turn the new agency into a favor dispenser:

Once the SBA seed was planted, it grew. SBA lending quadrupled between 1954 and 1960, and its staff jumped from 550 to 2,200 employees. In 1958, Eisenhower’s Budget Bureau warned that the SBA was “an uncontrollable program,” but both parties wanted to signal that they supported the “little fellow.” Also, members of Congress enjoyed using the SBA to distribute money and favors to their constituents. Members sometimes leaned on the agency to declare a particular business “small” or to have a constituent’s competitor declared “not small.”

Decades later, the SBA is still being used by politicians to show that they care.

For those who don’t follow hockey, almost half of the National Hockey League’s season has been lost because owners and players have yet to agree on a new labor deal. That’s obviously bad news for restaurants, bars, and other small businesses located near hockey arenas. But owning and operating a business comes with risks and an unexpected drop in walk-in traffic is one of them.

According to Sen. Bob Casey (D‑PA), however, it’s the federal government’s job to mitigate such risks by placing it on taxpayers instead. On Wednesday, Casey sent a letter to the head of the SBA asking her to – wink, wink, nod, nod – keep in mind the needs of small businesses located near the homes of the Pittsburgh Penguins and Philadelphia Flyers:

Small businesses are the backbone of our economy and their success is vital to our continued recovery. I appreciate your willingness to offer free counseling to businesses that rely heavily on NHL crowds for business. I also urge you to continue to monitor the situation and to make yourself available in case these businesses should require additional resources and guidance. I stand ready to assist you with this. If you have any questions, please feel free to reach out to me directly.

And with that, Sen. Casey shows that he cares. I would argue, however, that if he really cared about making life easier on small business owners, he would be leading an effort in the Senate to rein in taxes and government red tape. After all, those two categories combined represent the “single most important” problem facing small businesses according to the latest survey from the National Federation of Independent Business. But, like most politicians, it’s simply a lot easier –and more politically rewarding – to hand out other people’s money.

Note: While I appreciate the argument that Pittsburgh businesses deserve SBA assistance but not Philly businesses because the former support a franchise that recently won its third Stanley Cup while the latter hasn’t hoisted it since 1975, I still don’t think the federal government should be picking winners and losers in the marketplace – or in that case, picking a winner over a loser.

Federal employees are overpaid and underworked (probably a good thing), but a tear-jerker in today’s Washington Post reports that “job satisfaction across the government has hit its lowest point in almost a decade”:

It’s no secret that federal workers are feeling worn down. They’ve had their salaries frozen and are at the center of a partisan debate over the value of their work. A report due out Thursday, based on the largest sample ever of the workforce of 2 million, confirms a steady decline in morale and ebbing commitment.

Meanwhile, private sector workers – the people whose taxes pay for the salaries and benefits of federal workers – are still dealing with the aftermath of an economic downturn caused in large part by federal policies. Federal workers – with their cushy benefits and job protections – are worn down? Tell that to private sector workers who have seen their benefits reduced and their job security undermined by the economic uncertainty being engineered by the Beltway kleptocrats.

As if the fiscal angle wasn’t irritating enough, we’re apparently supposed to feel sorry for the government employees who get paid to trample on our civil liberties:

Just 52.9 percent of employees at the sprawling Department of Homeland Security, for example, are satisfied with their jobs, making it the lowest-ranked large agency, followed by the Department of Veterans Affairs…

“We work for a horrible agency, but we do great work,” said Ricky D. McCoy, a transportation security officer at Chicago O’Hare International Airport and president of Local 777 of the American Federation of Government Employees. Just 32 percent of employees at the Transportation Security Administration, part of DHS, are satisfied with their pay, which is among the lowest in the government.

McCoy said he expects the TSA’s first collective-bargaining agreement, signed in November, to improve morale. “We’re hopeful now that things will turn in our direction,” he said.

The president has said that he wants to make working for the federal government “cool again.” Gee, what could be cooler than getting a pay raise for molesting people all day?

It appears likely that congressional Republicans are eventually going to accept a tax increase in exchange for real spending cuts smaller spending increases in the future. If and when that happens, Speaker Boehner should surround himself with Santa Claus, the Easter Bunny, and the Tooth Fairy at the press conference on the deal.

I could spend days explaining my pessimism, but I’ll just point to two pertinent examples of Congress being unable to control itself. First, we have the so-called Medicare “doc fix,” which was adeptly explained by Reason’s Peter Suderman earlier this week. In 1997, Congress created a formula (“sustainable growth rate”) to constrain physician reimbursements. But shortly after the formula started to do what it was intended to, Congress got cold feet:

The next year, when the formula called for another reimbursement cut, Congress passed an override. And each year since, Congress has followed the same pattern. The SGR calls for a reimbursement cut. Congress either freezes payments or gives physicians a small increase for a short period of time. Sometimes the overrides last for a few months. More often they last for about a year. But a permanent fix never arrives. And each time the formula calls for a bigger cut—because with each override, Medicare’s physician payment levels grow further and further from the trendline called for by the formula. If the doc fix is allowed to occur this year, physicians face a 26.5 percent cut in Medicare fees. At the same time, the long-term cost of a permanent fix grows each year. Last year’s one-year fix cost $18.5 billion. This year’s is expected to cost about $25 billion. Estimates put the cost between $244 and $370 billion over a decade. The ever-rising cost means that with each override the chances of a permanent fix grow even harder.

The second example – a federal aid package for states affected by Hurricane Sandy – hasn’t actually happened, but it will. Indeed, the White House just requested $60.4 billion for Sandy relief. The Obama administration has no honest interest in spending cuts, so it’s not much of a surprise that it would submit a bill that isn’t offset by spending cuts (real or imagined) elsewhere. But shouldn’t House Republicans be counted on to push for offsets, especially at a time when they keep telling the world that deficit reduction requires spending cuts? Well, according to the The Hill, that’s probably not going to happen:

Passage of a Hurricane Sandy supplemental spending bill this month appears more likely following a meeting on Thursday between Speaker John Boehner (R‑Ohio) and Gov. Chris Christie (R‑N.J.). Sen. Robert Menendez (D‑N.J.) said on Thursday that Boehner indicated to Christie that offsets, or dollar-for-dollar spending cuts, are not going to be a big issue. “The governor did say that the Speaker … has said that while some in his conference may raise offsets, that is not where he believes the majority of his conference will be on this issue. That is critically important for us,” Menendez told reporters…

“Speaker Boehner is deeply concerned by the devastation resulting from this terrible storm. When we get the request from the Obama administration, we will get to work immediately,” Boehner spokesman Michael Steel said in response. Last month, Rep. Pete King (R‑N.Y.) told The Hill that Boehner told him he supports moving a bill without offsets.

What about those budget caps that were agreed to as part of the 2011 deal to raise the debt ceiling? It’s hard to imagine that a bill that large wouldn’t breach the caps.

Anyhow, even if Sandy aid doesn’t do it, some future war, natural disaster, or economic downturn will create an excuse for Congress to spend more money than some past deal said it was allowed to. The only real way to make spending cuts stick – or at least give it a good chance – is to actually terminate agencies and programs. Unfortunately, that’s not on the agenda of either party.

Atlas is shrugging and Dan Mitchell is laughing.

I predicted back in May that well-to-do French taxpayers weren’t fools who would meekly sit still while the hyenas in the political class confiscated ever-larger shares of their income.

But the new President of France, Francois Hollande, doesn’t seem overly concerned by economic rationality and decided (Obama must be quite envious) that a top tax rate of 75 percent is fair. And patriotic as well!

[caption align=left] French Prime Minister: “I’m upset that the wildebeest aren’t remaining still for their disembowelment.”[/caption]

So I was pleased — but not surprised — when the news leaked out that France’s richest man was saying au revoir and moving to Belgium.

But he’s not the only one. The nation’s top actor also decided that he doesn’t want to be a fatted calf. Indeed, it appears that there are entire communities of French tax exiles living just across the border in Belgium.

Best of all, the greedy politicians are throwing temper tantrums that the geese have found a better place for their golden eggs.

France’s Prime Minister seems particularly agitated about this real-world evidence for the Laffer Curve. Here are some excerpts from a story in the UK-based Telegraph.

France’s prime minister has slammed wealthy citizens fleeing the country’s punitive tax on high incomes as greedy profiteers seeking to “become even richer”. Jean-Marc Ayrault’s outburst came after France’s best-known actor, Gerard Dépardieu, took up legal residence in a small village just over the border in Belgium, alongside hundreds of other wealthy French nationals seeking lower taxes. “Those who are seeking exile abroad are not those who are scared of becoming poor,” the prime minister declared after unveiling sweeping anti-poverty measures to help those hit by the economic crisis. These individuals are leaving “because they want to get even richer,” he said. “We cannot fight poverty if those with the most, and sometimes with a lot, do not show solidarity and a bit of generosity,” he added.

In the interests of accuracy, let’s re-write Monsieur Ayrault’s final quote from the excerpt. What he’s really saying is: “We cannot buy votes and create dependency if those that produce, and sometimes produce a lot, do not act like morons and let us rape and pillage without consequence.”

So what’s going to happen? Well, I wrote in September that France was going to suffer a fiscal crisis, and I followed up in October with a post explaining how a bloated welfare state was a form of economic suicide.

Yet French politicians don’t seem to care. They don’t seem to realize that a high burden of government spending causes economic weakness by misallocating labor and capital. They seem oblivious to basic tax policy matters, even though there is plenty of evidence that the Laffer Curve works even in France.

So as France gets ever-closer to fiscal collapse, part of me gets a bit of perverse pleasure from the news. Not because of dislike for the French. The people actually are very nice, in my experience, and France is a very pleasant place to visit. And it was even listed as the best place in the world to live, according to one ranking.

But it helps to have bad examples. And just as I’ve used Greece to help educate American lawmakers about the dangers of statism, I’ll also use France as an example of what not to do.

P.S. France actually is much better than the United States in that rich people actually are free to move across the border without getting shaken down with exit taxes that are reminiscent of totalitarian regimes.

P.P.S. This Chuck Asay cartoon seems to capture the mentality of the French government.