As a long-time advocate of tax reform, I’m not a fan of distortionary loopholes in the tax code. Ideally, we would junk the 74,000-page internal revenue code and replace it with a simple and fair flat tax — meaning one low rate, no double taxation, and no favoritism.*

The right kind of tax reform would generate more growth and also reduce corruption in Washington. Politicians no longer would have the ability to create special tax breaks for well-connected contributors.

But we won’t get to the right destination if we have the wrong map, and this is why a new report about “tax expenditures” from the Congressional Budget Office is so disappointing.

As you can see from this excerpted table, CBO makes the same mistake as the Tax Policy Center and assumes that there should be double taxation of income that is saved and invested. As such, they list IRAs and 401(k)s as tax expenditures, even though those provisions merely enable people to avoid being double-taxed.

Likewise, the CBO report assumes that there should be double taxation of dividends and capital gains, so provisions to guard against such destructive policies also are listed as tax expenditures.

The CBO report says that tax expenditures will total about $12 trillion over the next 10 years, but about one-third of that amount (which I’ve marked with a red X) doesn’t belong on the list.

By the way, at least the Tax Policy Center has an excuse for putting its thumb on the scale and issuing a flawed estimate of tax expenditures. It’s a project of the Brookings Institution and Urban Institute, both of which are on the left side of the political spectrum. So it’s hardly a surprise that they use a benchmark designed to promote punitive tax policy.

But what’s CBO’s excuse?

To be fair, at least CBO admitted in the report that there’s a different way of seeing the world.

…tax expenditures are measured relative to a comprehensive income tax system. If tax expenditures were evaluated relative to an alternative tax system—for instance, a comprehensive consumption tax, such as a national retail sales tax or a value-added tax—some of the 10 major tax expenditures analyzed here would not be considered tax expenditures. For example, because a consumption tax would exclude all savings and investment income from taxation, the exclusion of net pension contributions and earnings would be considered part of the normal tax system and not a tax expenditure.

But admitting the existence of another approach doesn’t let CBO off the hook. At the very least, the bureaucracy should have produced a parallel set of estimates for tax expenditures assuming no double taxation. That’s basic competence and fairness.

By the way, the Government Accountability Office is worse than CBO. When GAO did a report on corporate tax expenditures, that bureaucracy didn’t even acknowledge that there was an alternate way of looking at the data.

*Actually, the ideal approach would be to dramatically reduce the burden of government spending, shrinking the size and scope of the federal government back to what the Founding Fathers had in mind. Under that system, there presumably wouldn’t be a need for any broad-based tax.

P.S. This new report is not even close to being the worst thing produced by CBO. The bureaucrats on several occasions have asserted that higher taxes are good for growth, even to the point of implying that the growth-maximizing tax rate is 100 percent! And CBO is slavishly devoted to Keynesian economics, notwithstanding several decades of evidence that you can’t make an economy richer by taking money out of one pocket and putting it in another pocket.

Yet for inexplicable reasons, Republicans failed to deal with CBO bias back when they were in charge.

A story in Reuters today offers a good reminder of why the focus of trade negotiators is so often at odds with what really matters when it comes to opening markets at home and abroad.

The proposed U.S.-EU preferential trade agreement (called the Trans Atlantic Trade and Investment Partnership) is being subject to two days of hearings from various groups with an interest in the negotiations. The article implies that most of the witnesses (at least, those who have testified so far) are wary of the deal, on the grounds that various “protections” offered to consumers will be undermined by opening markets to trade and investment:

Since tariffs between the United States and the EU are relatively low, the most difficult part of the upcoming talks will be reducing regulatory and other “behind-the-border” barriers that impede trade in sectors ranging from agriculture to chemicals to autos to finance.

That worries consumer groups such as Public Citizen, which says the United States and the EU have different regulations because the concerns of their citizens are not the same. For example, EU consumers have voiced stronger objections to genetically modified food than their U.S. counterparts.

“Trying to eliminate a big swath of regulatory differences via a trade deal would have a democratic cost because you’re taking away a power from the electorate,” said Ben Beachy, research director at Public Citizen’s Global Trade Watch.

The reason why we have protectionism, when the case for free trade is clear and relatively uncontroversial among economists, is that the powers who gain from closed markets are organised and those, like consumers, who would gain from open markets are diffuse, hard to organise, and have little individual incentive to lobby.

But this article shows us that even those who think of themselves as consumers’ advocates, and are organized ostensibly to argue their case, often agitate against freer trade. Rarely do I hear of a “consumer group” giving support to the lower prices and greater variety that international trade brings; they’re too busy fighting the agreements based on some warped sense of “democracy” or because they want to limit consumers’ choices. It’s no wonder that trade liberalization is such a hard slog.

Speaking of consumer protections, and how they can be abused by more self-interested lobby groups, a reminder to read the paper written by Bill Watson and me on the rise of regulatory protectionism.

So here’s the sequence: 

1. Government strong-arms production of new designs of environment-friendly front-loading washing machines.

2. The new front-loading washers turn out to have novel maintenance issues. In particular, they may develop musty smells unless owners practice some combination of leaving doors open to vent, wiping down surfaces, and other steps. Some consumers are irritated at this and regret the purchase, others not.

3. Trial lawyers sue all the major makers in class actions on behalf of all purchasers saying the new designs are defective, even though Consumer Reports rates the new category of washer “best in class” despite its drawbacks.

4. One of these class actions lands before Judge Posner at the Seventh Circuit, and he rules for letting it go forward on a theory of “predominance” (do these plaintiffs all belong in the same suit, when many are experiencing no problem at all?) that varies interestingly from what people assumed the Supreme Court’s thinking was on that subject.

5. The U.S. Supreme Court decides (coming up momentarily) whether to grant certiorari in Sears v. Butler.

There isn’t actually a strong logical chain linking 1) through 5); it’s kind of happenstance that the case threw up an issue involving predominance that the Supreme Court may find worth its attention, as opposed to merely presenting an overall profile of “hasn’t the whole system just become a crazy way to enrich lawyers?” Because “hasn’t the whole system just become a crazy way to enrich lawyers?” doesn’t count as a well-formed question for certiorari. [Background: Ted Frank, more, Daniel Fisher]

[cross-posted in slightly adapted form from Overlawyered]

From the Washington Post:

Hedge fund executives and other investors are increasingly interested in the timing and nature of health-policy decisions in Washington because they directly affect the profits and stock prices of pharmaceutical, insurance, hospital and managed-care companies…

[Former Centers for Medicare & Medicaid Services] director Thomas Scully, who served during the Bush administration…said he thought that it was useful for CMS officials to have more communication with Wall Street investors as a way for regulators to learn and “explain what an $800-billion-a-year agency” does with its money.

So long as someone is still making a buck, it’s not socialized medicine…right?

I’m in Beijing, having completed a brief conference on China’s development and U.S.-China relations. The event was organized by the Communist Party’s International Department. Before our visit the department, which plays an important role in formulating China’s foreign policy, hosted a delegation from North Korea, the results of which were of great interest to the United States.

The American contingent contained people with a range of political views, but all agreed that it was imperative for the two nations to maintain good bilateral relations. The existing super power must accommodate the rising regional, and potential global, power. 

My point of reference is the late 1800s, when Great Britain faced both the United States and Germany as rising powers. Britain adjusted to the first, making America a friend and ally for decades to come. Britain resisted the second, helping trigger two global wars. Whatever the momentary disagreements and problems between the United States and China, the two governments must resolve their differences peacefully.

We finished our official sessions with a meeting with Wang Jiarui, Minister of the International Department of the Communist Party Central Committee and Vice Chairman of the Chinese People’s Consultative Conference. He promoted the idea of a new kind of relationship between great powers. He was friendly, but demonstrated the gulf between United States and Chinese policy when he talked about North Korea. 

He reported favorably on Pyongyang’s recent mission to his country and viewed as positive the North’s promise to return to the Six Party Talks. Alas, few in Washington expect any serious results from any new round of talks. 

Minister Wang also treated as equally provocative routine U.S.-South Korean military maneuvers in the South and the North’s recent flurry of promises to nuke the United States and South Korea. Although the former are unnecessary—in fact, American forces should be brought home, since the Republic of Korea could defend itself—the operations reflect a history of North Korean aggression, advanced military deployments, and constant saber-rattling. It is Pyongyang’s behavior that generates the allied response which Beijing criticizes.

The best chance of transforming the so-called Democratic People’s Republic of Korea—or, at least, ending its nuclear ambitions—is closer cooperation between the United States, its allies, and China. However, that would require Washington to address Beijing’s interests. Particularly, the United States needs to respond to China’s fear of a North Korean collapse and its opposition to a unified Korean nation allied with America. Developing a strategy that might attract Chinese support will be the subject of my next Cato Policy Analysis.

I’m in Beijing for a conference organized by the International Department of the Central Committee of the Communist Party of China. We have a short but intensive program, with several American and Chinese scholars as well as Chinese political officials. I just hope I will be semi-conscious, since the 12-hour time difference means a flip of day and night.

As we drove into the city I was reminded how much the country has changed over the last two decades or so since my first trip here. We flew in on Air China, which is fully competitive with Western airlines. The airport is modern. Some of the passport clerks actually smile.

Once clearing passport control, there are no further barriers to entry. No one questions you as you head out of customs on to your next flight or into the Beijing. A freeway leads into what looks like a modern city. Colorful advertising showcases Western as well as Chinese products and styles. Kentucky Fried Chicken and Pizza Hut make their appearance.

Some of the office buildings sport their names in English as well as Chinese. We are staying at an older hotel, the Wanshou, which was originally built in 1966 to house foreign guests. It retains the overall feel of old communist construction but has been refurbished, making it quite comfortable. The Wanshou passed my test of serving Diet Coke, but the gym opens at 9—which suggests it doesn’t have a lot of Western guests.

However, quibbles aside, Beijing is a modern city. It was moving in that direction 20 or 25 years ago, but it’s now there.

Perhaps the most dramatic and obvious change is the traffic. Chinese cities once were renowned for their swarms of cyclists, who weaved in and out of what appeared to be constant chaos on the roads. Today the swarms are made up of automobiles. To reduce traffic, Beijing actually bars residents from driving certain days depending on their license plate numbers, but, noted one of my hosts, more Chinese are wealthier and therefore can afford a second car—and thus a second license plate.

Rural China remains poor and underdeveloped, but even that is changing. China poses a serious geopolitical challenge to America, but it is important to keep two basic factors in mind. 

First, hundreds of millions of people who once would have died in immiserating poverty now enjoy much better lives. Second, while one should never underestimate the appeal of nationalism, all Chinese now have much at stake in a peaceful regional and global order. While the future remains uncertain, there are good reasons to hope for, and even expect, a productive and cooperative future.

On to the conference!

Last week, the Senate accepted by unanimous consent an amendment to the pending farm bill that would ban convicted murderers, rapists, and pedophiles from receiving Supplemental Nutrition Assistance Program benefits (a.k.a. food stamps). Introduced by Louisiana Republican David Vitter, the amendment has received condemnation from the left and at least one round of applause on the right. 

My initial reaction was “A few undesirables will lose a taxpayer-financed handout—so what?” But the more I thought about the amendment, the less I cared for it. For starters, the amendment appears to be politically motivated. Vote against it and a Senator can expect to see a negative campaign add from his or her next opponent. That’s probably why the amendment was agreed to by unanimous consent instead of being formally voted on in the Democratic-controlled Senate.  

More importantly, what does it accomplish? In terms of budgetary savings, it probably won’t save taxpayers much money. In addition to doing little to curb the size of government, it does nothing to rein in the federal government’s scope. I believe that it is not a proper role of the federal government to fund and/​or administer anti-poverty programs. At most, such concerns should be the domain of state and local governments. Ideally, poverty relief would be completely handled by charities and other private organizations. The Vitter amendment, however, is just another example of the Beltway’s one-size-fits-all mentality. 

So should an individual convicted of a horrible crime who has paid his or her dues to society be denied assistance? Some would say yes, others would say no. The left has a case when they argue that denying assistance to an ex-criminal could have the unintended consequence of incentivizing further criminal activity. But the right also has a case that, hey, that’s our hard-earned money being taken from the government and being handed over to people who made awful choices. 

The diversity of opinion points to a fundamental problem with the government trying to act like a charity: the country gets stuck with whatever the politicians conjure up. Contrary to what youngsters are led to believe in school, our elected officials are not altruistic, enlightened beings. In reality, federal efforts to alleviate poverty will always be undermined by the self-serving nature of politics. And even when approached with the noblest of intentions, bureaucratic sclerosis and the undue influence of special interests will ultimately undermine a program’s effectiveness and efficiency.  

Personally, I would have no problem donating to a charity that helps struggling ex-cons who need to put food on the family table. Perhaps other people wouldn’t feel as comfortable and would instead direct their donations toward charities that only serve, say, hungry women and children who were the victims of violent crime. That’s the beauty of choice, which stands in stark contrast to the ugly, coercive alternative of the political system.