Oil Boom and Government Glut

The government buys 5 million barrels of oil for its stockpile by JEFFREY A. TUCKER.

It’s a sweet thing when Uncle Sam becomes a mega-buyer of your product.

While the price of oil continues to plunge to record lows, drivers are celebrating, and oil executives are sweating it out. But never fear, the government is running to the rescue — of the oil industry. The Department of Energy is planning to enter the market with a purchase of 5 million barrels. It’s necessary for national security, don’t you know.

Oil prices have fallen 55 percent in the last year. The trend defied every expectation, and it’s been wonderful for drivers, businesses, and consumers. It’s an impressive illustration of how prices reveal information about underlying resource realities.

Technology has blasted away the last decade’s wild and misguided fears of a shortage. Production is at an all-time high in response to unprecedented demand. The stunning events have been a boon to consumers, as downward pressure keeps pushing on prices at the pump.

The market is giving us oil as never before. It is not failing. It is succeeding beyond belief.

“Experts” keep saying the trend is temporary, but no one knows for sure. We could see $20 per barrel before year’s end.

The new purchase is for the Strategic Petroleum Reserve, a hoary leftover from Gerald Ford’s presidency. It pays oil companies for their products, as the DoE says, “to protect the United States from severe petroleum supply interruptions through the acquisition, storage, distribution and management of emergency petroleum.”

But far from seeing “disruption,” we are seeing more and better distribution. You can tell from its language that this is the most thrown-back program imaginable. It illustrates a complete lack of understanding of the price system, which is the signaling mechanism that reveals shortages and surpluses in the market. Prices coordinate the interests of buyers and sellers with facts about underlying scarcity. Rising prices signal facts about supply and demand, incentivizing less consumption and more production. Falling prices encourage consumers to buy more and producers to make less.

The price system actually works, unlike these lame attempts at central planning. The proposed purchase by the government constitutes only half a day’s worth of production in the United States — as if an intervention so small would make the difference between prosperity and disaster.

If it is really necessary to have a “strategic reserve” for oil, wouldn’t we also have to have the same for carrots, beef, iPads, tennis shoes, wine, or raisins? Actually, we have one of those too: a National Raisin Reserve, an equally bizarre anachronism from the Great Depression that requires raisin farmers to give as much as half their crop to the government in order to keep raisin prices high.

The full Strategic Petroleum Reserve covers less than two months of US production, which is itself only 10 percent of world production. Why not make it six months? Why not a year? And what’s a half-day, more or less? There is no rational way to decide.

Let’s imagine there really were some weird catastrophe that caused all distribution to stop. Prices would surge through the roof and inspire a gigantic increase in oil production from all over the world.

But let’s also pretend, because of some foreign policy issue, that the United States also stopped all imports, and then tapped the “Reserve.” It’s not the consuming public that would benefit. It would be the government itself, making sure that the military and all the “essential” government agencies stayed running.

In other words, this program is not about you and me, even in theory. To understand why the Reserve exists, look who benefits most directly: the oil industry itself. It’s a guaranteed market, a kind of subsidy to big business, just as food stamps are for agriculture. Perhaps this is why this proposal is being made again right now, just as prices are falling so dramatically. It’s just thinly veiled corporate welfare.

The Reserve-subsidy came about during a period when oil prices were controlled by the government, and the oil industry was facing very serious financial pressure. The Reserve helped to alleviate that pressure — a classic case of how one intervention leads to others, until all special interests are satisfied with the new equilibrium. The SPR was a fix for a “market failure” created by government-failure.

Oil prices haven’t been controlled since the late 1970s, completely removing any objective conditions for why this needs to exist at all. The only time we ever had gas lines was when we had a “czar” telling people how much they could buy and what they were allowed pay for gas, and the lines disappeared when the controls were removed.

What harm does the Strategic Petroleum Reserve do? Most of the time, it’s simply an unconscionable waste of taxpayer money. When its supplies are actually deployed, dumping oil on the market from a government-mandated reserve, it puts downward pressure on the price and reduces the incentive to step up production right when it is needed most.

The Reserve is a perfect illustration of the dangers of any government program: once one starts, it is extremely difficult to get rid of it, no matter how irrelevant the original rationale has become. Here we are 40 years later, with astounding increases in supply and the technology for refinement and distribution, but we are still paying for this economically illiterate central plan for stockpiling oil.

It needs to be completely abolished, just as Ronald Reagan suggested in 1980 (before he later changed his mind to favor its expansion). The SPR is just like the Post Office in this sense: it exists solely due to that magic combination of economic ignorance and special-interest pleading.


Jeffrey Tucker is a distinguished fellow at FEE, CLO of the startup Liberty.me, and editor at Laissez Faire Books. Author of five books, he speaks at FEE summer seminars and other events. His latest book is Bit by Bit: How P2P Is Freeing the World.

EDITORS NOTE: The featured image is courtesy of FEE and Shutterstock.

Profits Are the Only Business of Business by D.W. MACKENZIE

Forty-three years ago today Milton Friedman published his article “The Social Responsibility of Business Is to Increase its Profits.” It is to Friedman’s credit that most of this short article rings as true today as it did on September 13, 1970. It is at the same time disappointing that this piece remains timely precisely because too few Americans have understood and accepted Friedman’s arguments against corporate executives promoting social welfare over private profit.

How do the specifics of Friedman’s article look today? Does an executive who spends profits to promote “social ends,” to fund education, or to “fix the environment” impose what amounts to a tax? Yes, Friedman is correct.

Is the imposition of such a de-facto tax undemocratic? Perhaps it is. Friedman admits that the shareholders could fire a CEO for imposing a de-facto “social responsibility tax”- so the shareholders can vote against their CEO. Legally, the CEO is an agent of the stockholder, their employee. However, proposals to spend part of corporate profits on socially responsible ends aim at overriding the interests of shareholders; it undermines the democratic element of corporations.

Do arguments for redirecting corporate policies toward social responsibility erode personal liberty, aim at conformity, and promote socialism and collectivism? Yes. Stockholders invest in a corporation for profit, for personal gain. If the CEO starts aiming at social ends at the expense of private shareholder interests, then the corporations is effectively being run as if it were owned by society. This is, in effect, socialism. As Friedman put it, the social justice doctrine “would extend the scope of the political mechanism to every human activity.” The idea of aiming at social responsibility actually means directing corporate funds toward one person’s particular opinion about the interests of “society.” Social welfare and social justice are, at very best, vague concepts. As Ludwig von Mises put it in his 1949 treatise, “under socialism one will dominates.”

Friedman also claims that taxation by the state is the legitimate mechanism for collecting funds to promote socially responsible ends. We have constitutional, legislative, and judicial mechanisms to collect and spend legal tax dollars. Is this claim true? Are legal tax mechanisms better at promoting social responsibility than the illicit use of corporate funds for these purposes? Friedman notes, quite correctly, that people who push for socially responsible corporate policies are those who have failed to convince their fellow citizens to support their personal version of social responsibility. Having failed in an attempt to use the political mechanism, they resort to trying to politicize the market mechanism. Friedman is right, but this brings us back to my assessment of Friedman’s article: Friedman has himself failed to convince his fellow citizens that his view of profit is correct.

I agree that democracy can only work if public discourse works. The best ideas will rise to the top of an open and free debate among rational, reasonable people. I agree that people who press for corporate social responsibility are usually collectivists who press for conformity and disdain opposite points of view. However, the fact that political debate involves a high degree of intransigence and emotion means that the democratic process does not function very well.

Consequently, I must disagree with Friedman’s assertion that the public sector can work effectively to promote social responsibility. The fact that so many people continue to press for social responsibility and economic justice against Friedman’s advice shows that his support of government taxation for social responsibility is unfounded. Friedman is correct in noting that the great merit of private enterprise is that it makes people responsible for all their actions, either selfish or unselfish. However, lack of personal responsibility in the public sector does not promote responsibility in thinking about how to best use tax dollars in a socially responsible manner.

The main elements of Friedman’s article are correct. The sum of these elements is highly questionable when it comes to his confidence in political mechanisms. Profits are the only business of business. Social responsibility should be the business of government, but it is time to recognize that the modern tax and regulatory state has failed in this endeavor.


D. W. MacKenzie is an assistant professor of economics at Carroll College in Helena, Montana.

Going Postal, Again: The USPS is in the red for the eighth straight year by DOUG BANDOW

The United States Postal Service (USPS) lost $5.5 billion last year. That is the eighth annual loss in a row and the third-highest ever. The only silver lining is that the loss was below the red-ink tsunami of $15.9 billion in 2012.

Why does the federal government deliver the mail? Why does it have a monopoly over delivering the mail?

Admittedly, the Postal Service is one of the few government programs with actual constitutional warrant. The Constitution authorizes Congress to establish post offices. And early American politicians rushed to take advantage of their opportunity, creating the Post Office Department in 1792.

Alas, one-time revolutionaries turned the system into a fount of federal patronage. Local postmasters became perhaps the president’s most important appointments, at one time accounting for three-quarters of all federal employees. The postmaster general actually was a member of the cabinet from 1829 to 1971.

With politics rather than service as the post office’s priority, Congress took the next step and approved the Private Express Statutes, which prevented anyone from competing with the government in delivering first-class mail. And Uncle Sam enforced his monopoly, fining would-be competitors, including celebrated libertarian author Lysander Spooner.

The feds continue to prosecute anyone with the temerity to compete with the USPS, even threatening the Cub Scouts for once offering to deliver Christmas cards.

Believing that Americans existed to serve the USPS left the system ill-equipped to adapt to changing circumstances. In 1971, Congress turned the Post Office Department into the semi-independent USPS. That removed its direct role in politics, but the USPS still is exempt from taxes and regulations, including local parking restrictions. Congress retained its control over postal policies and, of course, preserved the system’s delivery monopoly.

But banning competition could not preserve the postal market. The number of pieces of mail peaked in 2001 and continues to fall despite a rising population. Mail pieces dropped from 213 billion in 2006 to 155 billion last year, and the number is expected to decline to 130 billion by 2020. The USPS’s last profitable year was 2006. Since then, losses have run between $2.8 billion and $15.9 billion. The Postal Service has maxed out its borrowing from Uncle Sam and missed four retiree program payments. With characteristic understatement, the Government Accountability Office observed, “Given its financial problems and outlook, USPS cannot support its current level of service and operations.”

The postal unions insist that nothing is wrong — at least, nothing that a federal bailout wouldn’t solve. They reserve particular ire for the requirement that the USPS prefund workers’ retirement. Had this rule not been in place, noted former postmaster general Patrick Donahoe, the Postal Service would have earned money last year.

But prefunding protects taxpayers. Washington’s unfunded (government) retirement liability is about $800 billion and growing every year. That no other agency is required to prefund is unfair to taxpayers, not the Postal Service, since every agency should have to set aside sufficient money to fulfill its financial promises. With the Postal Service earning too little to pay and with nothing left of its federal credit line, the USPS has defaulted four times over the last three years on its mandated contributions.

Even Donahoe acknowledged that prefunding is appropriate. He contacted me after I wrote about the issue a couple of years ago and disputed only the amount the USPS should set aside. He said he asked postal workers what they thought of an unfunded system in light of Detroit’s bankruptcy, when city coffers were empty.

The unions may simply assume that Congress would bail them out if need be. Legislators normally can be counted on to do the wrong thing, but with the unfunded liability for Social Security and Medicare around $100 trillion, there won’t be a lot of cash available when the big retirement bills come due. Tens of millions of elderly retirees have the edge in fighting with postal workers over a diminishing public pot. The postal workers shouldn’t bet their retirement on winning that political battle.

There’s no other obvious way for the USPS to become solvent. Over the last half-century, the postal authorities raised rates 50 percent faster than the rate of inflation. Pushing hikes even faster in the future would encourage more people to use alternatives. Squeezing postal consumers would work only for truly essential first-class delivery services, but what are they? Bills are paid online; digital magazines and greeting cards go instantly and inexpensively. Junk mail trumps online spam only in the ability to blanket every address in a neighborhood.

The USPS has reduced costs through facility closures and staff reductions despite strong opposition. Cuts in compensation, retirement benefits, and workforce levels and improvements in productivity also are obvious responses, but they must overcome union opposition. Proposals for reducing services abound: end Saturday delivery, cut delivery to just three or four days a week, close more post offices, stop door-to-door delivery (with neighborhood “cluster boxes”). All of these anger consumers, encouraging them to go elsewhere — including to Federal Express and UPS, which offer better options for packages. Irritated workers and customers also complain to Congress, creating political roadblocks for the USPS.

Odder ideas involve offering services that already are widely available, such as check cashing and photocopying. Perhaps the strangest, from the Greeting Card Association, is to transform post offices into “centers of continuous democracy” and offer “community bulletin boards, licenses, permit applications, [and] citizen polling/opinion gathering.” In other words: a bizarre mix of political activism and government regulation, with no obvious way to raise the billions annually needed to balance the books.

Instead of attempting to save an unnecessary political monopoly, Congress should look abroad, where numerous countries, some pushed by the European Union, have introduced competition and innovation into their postal markets. Even such unlikely states as Indonesia, Russia, and Sweden have pursued postal liberalization.

The Organisation for Economic Co-operation and Development, made up of wealthy industrialized states, including the United States, reported that such reforms have yielded “quality of service improvements, increases in profitability, increases in employment and real reductions in prices.” Only in the supposed laissez-faire paradise of America — where a union-led “Grand Alliance to Save Our Public Postal Service” just formed to ensure that whatever has been will forever be — do such ideas seem radical.

Even President Barack Obama appeared to get it. A few years back, he admitted, “It’s the post office that’s always having problems.” In contrast, “UPS and FedEx are doing just fine.” That suggests an obvious solution.

Better management and less politics would help. In fact, revenue was up a bit last year, much of it for package delivery, despite the bigger loss. But over the long term, the USPS cannot escape from a seeming death spiral of bigger losses, higher rates, poorer services, fewer customers, bigger losses, and so on.

Uncle Sam should get out of the postal business. Privatize the USPS and drop the federal first-class monopoly. No one can say for sure what would happen. But if history is a guide, innovative entrepreneurs would be more likely to find cost-effective solutions than will today’s mix of politicians and bureaucrats.


Doug Bandow is a senior fellow at the Cato Institute and the author of a number of books on economics and politics. He writes regularly on military non-interventionism.

Congressman Yoder: “A bold proposal”

The Internal Revenue Service admitted in a 2012 report that Americans waste around $168 billion and 6.1 billion hours every year trying to comply with the tax code. At over 4 million words, the code is a lengthy nightmare and thousands of jobs are lost as individuals and small businesses must waste precious resources paying accountants and lawyers to navigate its complexities.

Not only is it a constant drain on our economy, but it is also fundamentally unfair. This year alone, over half of all Americans – and many corporations – will pay no income tax due to the numerous loopholes existing in the current code. Much like today’s political system, the tax code’s main strategy is class warfare, with its primary purpose being the redistribution of wealth, not the generation of revenue to finance the operation of government.

It’s been said that the power to tax is the power to destroy, and this should be the motto of the current Administration as it deploys the powers of the tax code to trample the constitutional rights of Americans. From targeting the free speech of conservative groups and individuals, to spying and reading Americans’ emails without a warrant, to seizing Americans’ assets without due process, the IRS cares not for the Constitution.

That is why I am a cosponsor of Representative Rob Woodall’s HR 25, The Fair Tax. It scraps the tax code by repealing the income, employment, estate, and gift taxes. Most importantly, it abolishes the IRS.

By moving from an income-based tax system to a consumption-based tax system, Americans would be encouraged to earn, save, and invest, which in turn would create an economic boom in our country.  Everyone would pay what they owe based upon what they consume, without loopholes, social engineering, or government-picked winners and losers.

The Fair Tax admittedly is a bold proposal.  But simply moving deck chairs on the Titanic won’t work. The IRS is broken and it’s lost the trust of the American people. It’s time for Congress to take up real change and to take bold acts. It’s time to stop the IRS from suffocating our economy and trampling our constitutional rights. It’s time to consider and pass the Fair Tax and give each individual the tools to realize the American Dream.

Representative Kevin Yoder Congressman

Watch him question an IRS official on the agency’s toxic culture at a recent House hearing:

EDITORS NOTE: Congressman Yoder represents the third district of Kansas.

IRS: Legally Blind…Literally!

“One should judge a man mainly from his depravities. Virtues can be faked. Depravities are real.” – Klaus Kinski

The last two years have once again provided the American people with great illumination into the arrogant, deceitful and nefarious ways in which the IRS treats the hardworking citizens who pay their tab. Hardly a day, week or month has gone by without a new revelation that left most of us dropping our jaws further and further and further.

In fact, there has been so much lawlessness that people became almost immune to the escalating nature of their egregious conduct. This week’s vile and disgusting revelation: the agency had a legally blind individual conducting the inspection of Lois Lerner’s hard drive. Yes, you read that right – the IRS used a blind employee to inspect Lerner’s hard drive.

Political appointees who play cat and mouse with Congressional investigators are something we’ve come to expect. But for a federal agency like the IRS to engage a blind employee as a pawn in a political chess match is best described in terms of moral depravity.

It’s yet another reason Congress must pass the FairTax Plan as soon as possible.

The FairTax is the only tax reform/replacement plan that disbands, defunds and eliminates the IRS. The flat tax doesn’t, the proposed income tax reforms don’t and neither do the other plans bantered about by various Members of Congress. Nope – they have to pass the genuine article, the real deal, the one and only FairTax Plan.

Peggy Green-Ernst to lead AFFT government relations

This is why I am so pleased to announce the FairTax campaign’s newest secret weapon for getting the FairTax passed. Enter Texas FairTax supporter, Peggy Green-Ernst, who has joined AFFT as our new Director of Government Relations. In this role Peggy will be directing AFFT’s federal and state government relations and lobbying activities, and will be expanding the FairTax Memorial initiative that was first initiated by the Florida FairTax team.

Peggy hails from the great state of Texas where she serves as the volunteer legislative director for the Texas FairTax organization. Her professional and political career encompassed the corporate, business, academic and nonprofit sectors, where she was:

  • Executive Director of the Housing Roundtable
  • Director of Government Relations for the National Gypsum Company
  • Commissioner, Texas National Research Laboratory Commission (appointed by then-Texas Governor Ann Richards)

Peggy is a seasoned political strategist who excels in coalition building, policy analysis, political action committee (PAC) administration and media management. She’s smart, engaging and politically savvy.

A Texan by birth, Peggy spent her formative years enjoying an international education while supporting her father’s military career. She graduated from Southern Methodist University (SMU) in Dallas, TX with a master’s degree in business administration.

Peggy will be joining AFFT Chairman and President Steve Hayes in Washington in a few weeks and has already begun to aggressively book meetings with cosponsors, cosponsor prospects and other influencers. It’s going to be a great week in Washington when Peggy comes to town. I can’t wait to hear all about it!

Got Purpose?

“Light yourself on fire with passion and people will come from miles to watch you burn.” – John Wesley

In my prior professional career, one of the jobs I enjoyed the most was serving the company’s executive leadership as a 360°, leadership feedback coach. 360° feedback is a human resources tool in which employees and leaders receive confidential, anonymous performance feedback from direct reports, peers and management via a competency management tool incorporating the company’s preferred management competencies and leadership behaviors.

The feedback is then shared with the employee during a two and a half to three hour confidential coaching session. Coaching preparation is intense and includes analyzing and aligning both numerical and graphical data with unvarnished, sometimes brutal, written commentary.

Occasionally, I would prepare a report that portrayed an extraordinary leader. The more I analyzed the person the more excited I became to meet them. And when I finally came face-to-face with the individual behind the numbers and graphs, it didn’t take long to understand why the executive was revered as a powerhouse leader.

Time after time, what separated the truly superb leader from the good or even great leader was passion and purpose.

Powerhouse leaders have a passion for what they do, a passion for leading people and a clearly defined sense of purpose for who they are and where they are going. These are truly remarkable people. I saw that kind of passion and purpose this week in a young man who came to my home to prepare his company’s moving estimate. In the course of gathering information he shared that he was of Cuban descent and spoke about the loss of freedom he experienced in his early years while living in his native country. I wish you could have seen the intensity of expression when he described the freedom he gained when coming to America. He then asked me what I did. I told him about the FairTax®. He immediately got it, and quickly commented on how important it is that America understands the lost freedom inherent in taxing income. He then began to tell me about a book – and he insisted I read it. He also told me about the author’s freedom project and why it had ignited in him such an extraordinary passion; so much so that he committed to donating $100 per paycheck to buy more and more books so he could give them to people that he meets through his work.

Folks, that’s the power of passion! It’s a power so strong that it drove this young man to make a huge financial commitment for an advocacy project that he uniquely understands – individual freedom. 

Imagine what could happen to the FairTax campaign if this movement experienced an explosion of passion and purpose – passion for accelerating the pace of the campaign’s progress, passion for driving a new awakening about what it means to have freedom from the tyranny of income taxation and the IRS, and passion for being a nation that has the courage to enact a tax plan that is fair and simple for all taxpayers – regardless of income, family size, marital status or political persuasion.

Have you found your FairTax purpose – your FairTax passion? As Bishop T.D. Jakes said, “If you can’t figure out your purpose, figure out your passion.  For your passion will lead you right into your purpose.” Is your purpose in serving as a grassroots volunteer – maybe telling people you meet about the FairTax, sharing Facebook posts, supporting local education efforts or joining Glen Terrell’s letters to the editor team? Is your passion seeing the FairTax campaign gain new cosponsors in Congress or in recruiting new AFFT 1040 Club members? Whatever your FairTax passion, whatever your FairTax purpose, bring it on! If you don’t know, I challenge you to jump in with both feet and begin exploring different opportunities.

You may be amazed at what happens next.

Unemployment Benefits: The Government Gets What It Pays For

Have the perverse incentives been proved? by ROBERT P. MURPHY…

Just about everyone agrees that incentives affect behavior, but economists really mean it. That’s because economists take the logic of incentives further than most other people are willing to. Such analysis often reveals that government policies have unintended consequences that seem shocking to the average person. The list includes welfare programs that lead to higher rates of birth out of wedlock, seat-belt laws that lead to more pedestrian deaths, and even the possibility of changes in estate taxation that lead to people strategically timing their deaths.

But perhaps one of the most perverse distortions comes from unemployment benefits. Economists argue that these can provide an incentive for people simply not to work. Indeed, a new NBER working paper by Marcus Hagedorn, Iourii Manovskii, and Kurt Mitman estimates that the abrupt end of unemployment benefit extensions led to 1.8 million additional new US jobs created in 2014.

The theory here is straightforward: when the government subsidizes an activity, other things equal, people will engage in more of it.

If politicians want to encourage more people to go to college, what do they do? Provide financial support, either directly in the form of tuition assistance, or indirectly through loans with lower interest rates than students could obtain in a free market. If politicians want to encourage people to reduce their consumption of fossil fuels, they might offer tax rebates for the purchase of electric cars or insulation in their homes.

By the same token, then, suppose that politicians wanted to encourage laid-off workers to refrain from accepting a new job. What would they do? Naturally, they would offer to send the jobless workers checks so long as they remained unemployed. This logic, of course, is exactly why “unemployment insurance benefits” are perverse. Even though their avowed purpose is to provide a safety net for those unfortunate enough to lose work, it is undeniable that the existence of such a program provides an incentive for job seekers to prolong their search for new positions.

Whenever an economist proposes something “heartless” in this fashion, the tenderhearted critic reacts with outrage and points out that real human beings aren’t the soulless robots that populate economic models.

This is certainly true, but it misunderstands the claim. The economist is not arguing that the existence of government unemployment benefits will cause every single worker to “rationally” remain on the couch. Rather, a more nuanced model of the labor market is one of “search,” where job applicants and employers are trying to find each other. The longer the search lasts, the better the match will be, but of course the longer the spell of unemployment. By introducing financial payments during unemployment, the government tips the scales in favor of a longer search before accepting an offer. It might not change the behavior of any particular worker, but with a pool of many millions of unemployed people, surely a generous unemployment insurance program will have a noticeable impact.

I hasten to point out that it’s not merely Chicago-school or Austrian economists who subscribe to this view. For example, Paul Krugman, Robin Wells, and Kathryn Graddy wrote in the 2010 edition of their popular textbook:

People respond to incentives. If unemployment becomes more attractive because of the unemployment benefit, some unemployed workers may no longer try to find a job, or may not try to find one as quickly as they would without the benefit. Ways to get around this problem are to provide unemployment benefits only for a limited time or to require recipients to prove they are actively looking for a new job.

So we see that this view really is standard among professional economists. (This fact led to some awkwardness when Krugman in early 2014 excoriated heartless Republicans for endorsing this theory, without mentioning that he himself included it in his textbook.) The only argument is over the empirical size of the effect.

Here is where the new NBER paper provides results that surprised many readers.

Keynesian economists in particular argue that the supply-side impact of unemployment benefits is swamped during a slack labor market by the direct demand-side impact. In other words, many Keynesians argue that during the Great Recession, the frequent extensions of federal unemployment benefits increasedemployment, because the checks allowed unemployed workers to continue spending and hold up aggregate demand. That is why it was so significant that the authors of the new paper found the following (from their abstract):

We measure the effect of unemployment benefit duration on employment. We exploit the variation induced by the decision of Congress in December 2013 not to reauthorize the unprecedented benefit extensions introduced during the Great Recession. Federal benefit extensions that ranged from 0 to 47 weeks across U.S. states at the beginning of December 2013 were abruptly cut to zero.… In levels, 1.8 million additional jobs were created in 2014 due to the benefit cut. Almost 1 million of these jobs were filled by workers from out of the labor force who would not have participated in the labor market had benefit extensions been reauthorized.

The interested reader can directly consult the paper to review the particular econometric technique the authors used to try to tease out causation from correlation (relying on discontinuities at state borders, for example).

The interesting takeaway for the general reader is that the surprisingly robust growth in the US economy in 2014 may have been due to Congress’s late 2013 decision to cease extensions of unemployment benefits. In short, when the federal government stopped sending checks to people who remained unemployed, more of them found work.


Robert P. Murphy has a PhD in economics from NYU. He is the author of The Politically Incorrect Guide to Capitalism and The Politically Incorrect Guide to The Great Depression and the New Deal. He is also the Senior Economist with the Institute for Energy Research and a Research Fellow at the Independent Institute. You can find him at http://consultingbyrpm.com/.

Florida Subsidizing Corporate Tax Dodgers

As Florida policymakers consider cutting corporate profits tax revenues, nonpartisan research institute Integrity Florida released a study to provide more transparency about the actual corporate profit tax rates being paid by the Fortune 500 corporations headquartered in Florida to state governments in the U.S.

Key Findings about the Fortune 500 corporations headquartered in Florida:

  • While the corporate profits tax rate in Florida is 5.5 percent, the 13 profitable Fortune 500 corporations headquartered in Florida paid a 2.7 percent average corporate profits tax rate to state governments in the U.S. between 2011 and 2013.
  • The 13 profitable Fortune 500 corporations headquartered in Florida made $35.1 billion in estimated corporate profits between 2011 and 2013.
  • The 13 profitable Fortune 500 corporations headquartered in Florida paid $945.7 million in total estimated corporate profits taxes to all state governments in the U.S. between 2011 and 2013.
  • Florida taxpayers paid more than $2.4 billion to 10 of Florida’s 17 top Fortune 500 corporations for state government contracts between 2011 and 2013.
  • Florida taxpayers have provided 13 of the 17 Fortune 500 corporations headquartered in the state more than $147 million in subsidies.
  • Floridians gave the largest profitable corporations in the state more public money through government contracts and subsidies than those corporations paid back in state taxes on their profits nationally between 2011 and 2013.
  • Policies that allowed these corporations to take advantage of low corporate profits tax rates, along with large government contracts and subsidies, could be a result of the corporations’ significant lobbying and campaign contributions, including the more than $22 million they spent for those purposes in Florida just between 2012 and 2014.

Key Policy Recommendations:

  1. Florida policymakers should consider adoption of the model state corporate profits tax disclosure act. At a minimum, any corporation seeking a government contract or taxpayer-funded subsidy should be required to disclose publicly the organization’s corporate profits tax rate and amount of state and local tax revenue paid during the years the entity receives a government contract or subsidy.
  2. The Florida Department of Economic Opportunity’s Economic Development Incentives Portal should be expanded to publicly disclose the details of every state and local subsidy deal.
  3. Florida’s lobbyist disclosure laws should be enhanced to detail the exact compensation provided by clients to their lobbyists as well as the specific legislative and executive policies being influenced by their lobbying activities.
  4. Site selection consultants and other professional services firms that seek subsidies for corporations should be required to register as lobbyists.
  5. The Florida Legislature should implement the budget transparency recommendations of the User Experience Task Force to help the public follow their money.

Click here to read the report “Subsidizing Corporate Tax Dodgers”.


Integrity Florida is a nonpartisan, nonprofit research institute and government watchdog whose mission is to promote integrity in government and expose public corruption.  Our vision is government in Florida that is the most open, ethical, responsive and accountable in the world. Integrity Florida and its research have been cited by major news outlets including CNN, the BBC, the Wall Street JournalNew York TimesWashington Post, Reuters and the Associated Press.

Integrity Florida policy solutions have been incorporated into 10 new laws increasing government transparency and accountability in Florida. Founded in January 2012 by Dan Krassner, Nicole Krassner and Michael Dema, Integrity Florida is based in Tallahassee, Florida.  Research Director Ben Wilcox joined the organization in February 2012. Learn more about Integrity Florida by clicking here.

Buffaloed by Obamacare’s Hidden Taxes

Obamacare’s costs are starting to show by D.W. MACKENZIE:

Someone at Buffalo Wild Wings decided to make the costs of the so-called Affordable Care Act (ACA) explicit in the restaurant’s register receipts. An estimated ACA cost of 2 percent was charged to each paying customer.

BW3’s customers complained. Apparently, they’d rather keep these costs hidden. But hiding costs won’t make Obamacare’s higher prices go away.

Adding the cost of a specific government program to a receipt is unusual. Normally, the only tax itemized on register tapes is sales tax — but these are a fraction of the true costs of governmental activity. There are, in fact, too many different government programs to list on each register receipt. Because the price of regulation is usually built into the prices of goods and services, we tend to pay for regulatory costs unwittingly.

Obama’s “Affordable” Care Act imposes regulations, taxes, and subsidies as a means of income redistribution. As usual, the goal is to tax and regulate higher-income people to subsidize those with lower incomes — but that’s never the way things work out.

Real people do not simply pay taxes and regulatory costs as required by written laws. Everyone tries to avoid taxes by whatever means are available. Tax avoidance usually stems from bargaining over prices in markets. Sellers push for higher prices, and buyers push for lower prices.

Sellers have costs to cover: labor, capital, and taxes. It is a simple fact of economics that when an entrepreneur’s taxes rise, he or she will pass part of that additional cost on to customers.

Regulations are de-facto taxes. There is no economic difference between taxing money from someone to fund some activity and a regulatory requirement to achieve the same goal. The ACA is a complex set of taxes.

How do entrepreneurs respond to ACA taxes? The same way they respond to all taxes, explicit or regulatory: by raising the price of whatever they sell.

There is an inescapable fact of taxation: tax burdens are always shared. Taxes charged to upper-income earners for redistribution are in some measure always redistributed to those with lower incomes through price increases.

While ACA benefits have been touted as “free” to lower-income recipients, this proposition is false — and impossible. Somebody always pays for insurance, or any other good. Goods that seem to be paid for by government only appear to be free because their costs are hidden or obscured. Costs of government programs, like the ACA, are just added into the total costs of taxation, and the costs of taxation are partly factored into the prices of all goods.

Taxpayers cannot buy the same amount of goods when final tax-adjusted prices go up. Economists call the effect of taxes on consumer purchases the tax wedge, because taxes drive a wedge between what consumers pay and what entrepreneurs receive. Taxes make goods more expensive for consumers and less profitable for entrepreneurs.

The explicit 2 percent ACA surcharge at Buffalo Wild Wings may or may not have been intended as permanent. The restaurant chain’s executives have already cancelled the policy after customers reacted negatively. But there is a lesson to be learned from the surcharge. Government programs have the superficial appearance of being free, but they never are.

Government’s lack of financial transparency often leads to an ironic outcome: things that appear to be government gifts end up costing more. Why? Because the public sector’s hidden costs mean less cost control in the public sector.

Private enterprises make costs clear with prices. Prices don’t itemize each cost, but because costs are more easily perceived in the private sector, people make greater efforts to control costs. Some find the explicit nature of costs in the private sector unpleasant. Conversely, the fantasy of a free lunch from the state does have a certain emotional appeal. But the inability of most people to perceive the costs of government makes it almost certain that these costs will be higher, compared to the efficiency the private sector can achieve.

As Buffalo Wild Wings made clear, the ACA is just another example of a government program that makes a false promise of free benefits. Rational economic analysis tells us that there ain’t no such thing as a free lunch, yet politicians continue to use that fantasy for political gain.

Let’s abandon the myth of gifts from government. Every action has an economic cost, public or private.


D. W. MacKenzie is an assistant professor of economics at Carroll College in Helena, Montana.

Florida Senate urges Congress to Repeal the Federal Income Tax by Rudy Treml


Florida Secretary of State Ken Detzner

“The current income tax system requires individual taxpayers to prepare annual tax returns using many complicated forms, causing innocent errors that are heavily punished.” 

This is an excerpt from Senate Memorial 118, adopted by the Florida Legislature during its 2014 session and sent to Washington, D.C., urging Congress to eliminate the Internal Revenue Service.

It’s true! The position paper – also known as SM-118 – was sent to our president on behalf of the State of Florida Secretary of State Ken Detzner on May 22, 2014.

In his cover letter, Detzner wrote, “This Memorial urges Congress to repeal all taxes on income and enact a national retail sales tax as specified in H.R. 25, the FairTax Act.”

SM-118 has a prose style similar to that of the U.S. Declaration of Independence authored by Thomas Jefferson and approved by the 13 American Colonies in July 1776. That declaration listed grievances against King George III, which justified the demand of the United States for freedom from the British Empire.

SM-118, also, lists grievances placed upon U.S. citizens by the federal income-tax system, to justify the demand for a national sales tax in place of an income tax, as well as the abolishment of the IRS and the repeal of the 16th Amendment to the United States Constitution.

The current tax system, according to SM-118, erodes jobs, retards economic growth, has reduced the standard of living for U.S. citizens, forces family farms to be sold so taxes can be paid, unnecessarily intrudes on citizens’ privacy, isn’t complied with at acceptable levels, has a disproportionate adverse impact on lower-income people, and imposes unacceptable compliance costs.

Our 160 elected representatives in the Florida Legislature have urged the United States Congress to enact H.R. 25, the FairTax Act, which was reintroduced into the 114th Congress on Jan. 6. U.S. Reps. John Mica and Ron DeSantis are co-sponsors of H.R. 25, as are seven other U.S. House members from Florida and another 55 co-sponsors from other states.

H.R. 25 eliminates all federal taxes on productivity (income) in favor of a national consumption tax. It also replaces Social Security and Medicare taxes. It eliminates all corporate taxes thereby making the USA the preferred worldwide manufacturing destination, and bringing jobs back to the USA while growing our economy.

With the passage of H.R. 25, the IRS is defunded and April 15 becomes just another spring day. Citizens control their tax obligation via their spending habits, and there is no sales tax on used items.Everyone is treated equally under a progressive national consumption tax. Those who spend the most pay the most tax. Plus, H.R. 25 authorizes the return of the federal sales tax paid by U.S. citizens for the necessities of life, in the form of a rebate.

The FairTax Act of 2015 is about 130 pages long, compared to the current 75,000-plus pages of income tax codes and regulations.

The FairTax is simple to understand, efficient to collect, hard to avoid, and visible, so taxpayers see the true cost of their government.

With its passage, no longer would politicians be able to use the tax code to reward their friends, punish their enemies, and do social engineering.


Rudy Treml is a longtime proponent of the FairTax, and an activist with the Florida FairTax Educational Association.

County Sheriff Stands Up to the IRS

Mentioned below is an article regarding the tension in Carlsbad, New Mexico as a County Sheriff stood between a resident in his county, and the Federal Marshall Service!  Sheriff Scott London had a nationally known and respected Constitutional Lawyer spend a day teaching his department the reality of the US Constitution, especially the protection of private property rights from intrusion by an unchecked federal government and it’s agencies and departments.  KrisAnne Hall is a former State’s Attorney with many years of prosecution experience.  Between returning to school to study Constitutional Law and studying on her own, KrisAnne has become recognized nationally as a subject-matter expert.  Her books and DVDs will attest to that statement.

I have been most fortunate to have met KrisAnne on a couple of occasions, and was proud to host her for a full-morning seminar at the Arizona State Capitol this past January.  Sheriff London of Eddy County, New Mexico has participated in one of KrisAnne’s eye-popping, quick note taking, head spinning, and solid constitutional law and facts training.  The Arizona Legislators, law enforcement officers, and various elected officials from across the State of Arizona took more notes than they have since college, or so they reported.  A month later and I have about a dozen requests from law makers to “bring KrisAnne back to Arizona!”  I am quite certain Sheriff London, and his department, wants a return seminar, also.

Sheriff London decided to act on his authority and rights as the Constitutionally-elected Chief Law Enforcement Officer of Eddy County, New Mexico.  This authority gives the Sheriff absolute authority to stand against federal intervention in his county, and neither can a Board of Supervisors or County Commissioners, a State Legislature, the Governor, or even Federal Departments order the Sheriff.  The people of Eddy County, New Mexico have the authority to cause the sheriff to be turned-out of office, even recalled if the Sheriff is abusing his authority.

The 3,200 Sheriffs across America are accountable to the people! 

The Framers of our Constitution especially created this document with that provision in mind.  As a guard against runaway tyranny and heavy handed federal intrusion, our Forefathers created the Office of the Sheriff to be a watchdog for breaches of sovereignty, and a protector of people’s rights and constitutional gifts.

Sheriff London has been informed that much help is available to him and his department if he so chooses.  The Sheriff is not running for reelection, so statements that he is grandstanding are typical grandstanding in their own verbiage.  A single sheriff in an out-of-the-way county in the Southwest stood on his U.S. Constitutional authority and protected a citizen, and a citizen’s private property.  Hooray for this Sheriff of Eddy County, New Mexico!  Hooray for those sheriffs across this land who do likewise.  I am afraid they will be put to the test far more in coming months.

The Sheriff is far more than a law enforcement professional, he/she are truly our last line of defense against tyranny and runaway federal intrusion.

EXCLUSIVE: Sheriff Stands Up to IRS, Cancels Land Sale

By: Priscilla Jones Feb 7, 2015

The first Republican elected sheriff in Eddy County, New Mexico, became the first sheriff in 25 years to stand up to the IRS. He physically stood at the gate of a troubled citizen’s property while US Marshals threatened his arrest. The landowner filed an appeal with the court and expects his case to receive due process before his land is publicly sold. The sheriff agrees. The judge does not.

Sheriff Scott London says he learned more about the Constitution in the year he spent campaigning for his job than in all of his years of schooling combined.

WASHINGTON, February 7, 2015—New Mexico’s Eddy County Sheriff Scott London notified the Internal Revenue Service (IRS) via letter that the sale of county resident Kent Carter’s property is canceled until Carter receives due process of law and his appeal is heard. The certified letter dated February 4 received an immediate response from the Undersecretary of the Treasury’s office. According to the Treasury’s website, however, the public auction is still slated for February 19.

“Many officers have stood up over the years for the rights of citizens being victimized by the federal government,” said Sheriff Mack, founder of the Constitutional Sheriffs and Peace Officers Association, “But Sheriff London is the first one to stand up to the IRS since the early 1990s.” Mack said, “His actions show courage and humility. London is setting a good example for the rest of our sheriffs.”

Approximately ten days before Christmas, U.S. Marshals broke in the door of Carter’s rental property with their guns drawn. The tenant was a young mother with a new baby—home alone while her husband was at work. Sheriff London was called to the property to intervene. He advised the Marshals that Carter’s case was in appeal and he deserved due process. They threatened to arrest London, but he stood his ground and they backed off.

Carter has battled the IRS for decades over taxes on the earnings of his modest construction business. One court document listed his debt at $145,000, a figure Carter says an assessing agent “pulled out of thin air.” Every time he challenged them, his bill would shoot up a few hundred thousand dollars. His legal complaints state that the IRS failed to adhere to its own tax code, did not use proper accounting methods, and that the collection activity was unlawful because no notices of deficiency were given. Carter says his private and confidential information, including his social security number, was filed in public records and given to third parties. The IRS countered that it can publish and disperse the private information of Americans if it is trying to collect their money or property. A judge agreed.

Carter says the IRS is currently claiming he owes $890,000, a figure that “doubled with the stroke of a pen.”

The Taxation & Revenue Department ordered Carter to cease “engaging in business in New Mexico” until his arbitrary tax debt was paid. Carter appealed this injunction on the grounds that it was both unconstitutional and vague, as it deprived him of his right to make a living and also prohibited him from, “carrying on or causing to be carried on any activity with the purpose of direct or indirect benefit.”

“The IRS fabricates evidence against citizens by pulling numbers out of a hat and adding fees,” said Mack, “They wear people down emotionally and financially until they can’t take it anymore. No citizen should ever have to fight the IRS for decades in order to keep his land.”

“The IRS is a lie. The income tax is a lie,” said Carter. “Why should they be able to take anything? They’re worse than the mafia.”

The Carter properties have liens placed against them. A locksmith was instructed to change the locks. The IRS authorized the United States Marshal Service to arrest/evict anyone found on the premises. London, however, physically stood in front of Carter’s gate until the Marshals backed down. A public auction on the front steps of the Eddy County Courthouse is scheduled, but the local county sheriff—trained in the Constitution—resisted.

Carter voluntarily vacated his property and relocated his mobile home to an undisclosed location. “I chose to leave to keep it from escalating to something ugly—like Ruby Ridge, Idaho,” he said. Carter said he advised the Marshals and IRS Agents who publicly claimed he had armed friends on his land, “If there is going to be any violence, it is going to be you who starts it.”

Carter says 100% of his Social Security benefits is seized each month by the IRS, in addition to $2,800 the agency drained from his bank account. Legally, he says, the IRS can take no more than 15% of Social Security benefits.

Mack says banking institutions quiver when faced with the IRS’ gestapo tactics and generally hand over customers’ personal banking information, including access to accounts, without requiring a warrant or even any documentation. He encourages county sheriffs to brief every bank in their jurisdiction to refer inquiries from IRS agents to them.

Sheriff Mack is calling for the IRS to start following the law, including no “random” audits without probable cause, as they violate the Fourth Amendment. He asks them to stop committing crimes and rewarding IRS employees with bonuses for cheating on their personal taxes. “I agree with Senator Ted Cruz and others who say the IRS should be abolished,” said Mack. “It’s time they got off the backs of the American people.”

Carter says he prays daily for wisdom, and that he is surviving to be able to look into his grandchildren’s eyes and tell them he fought for their future and for America.

London is the first Republican to ever be elected sheriff in Eddy County. He distributes Bibles on behalf of Gideon International and met his wife in choir practice.

pricilla jonesAbout Priscilla Jones

Priscilla Jones is a business writer and communications strategist based in the nation’s capitals—Austin and D.C. Shedding light on incidences of abuse by overreaching government entities is her passion. Priscilla pens political humor pieces, a few of which are pure satire. When authentic investigative journalism is required, however, she delivers. Her beats are the criminal “justice” system, the security industry, and gun + private property rights. If you have a lead, please contact her. She is PatriotWriter on Twitter.

The FairTax Deserves An Up or Down Vote by U.S. Senator Jerry Moran (KS)


Congress and the American people are ready to have a conversation about comprehensive tax reform, and now more than ever there is the opportunity to replace our deeply flawed tax system with a commonsense system that is simpler and more growth-oriented.

Senator Moran Discusses FairTax Legislation on U.S. Senate Floor:

Many of my colleagues suggest that tax reform should be achieved by creating a fairer, more balanced system with lower rates and a broader base – I couldn’t agree more. But, I am also convinced we must think bigger if we are to capitalize on this opportunity for economic growth and new prosperity.

I am proud to join my colleague, Senator David Perdue of Georgia, in introducing the Fair Tax Act of 2015. As a longtime proponent of the FairTax®, it is a privilege to lead this effort in Congress following the retirement of Senator Saxby Chambliss of Georgia from the U.S. Senate. Thanks also to the thousands of FairTax advocates, grassroots volunteers and Americans For Fair Taxation leadership for your steadfast support of this legislation.

The FairTax is a significant step in the direction of individual freedom, a fundamental concept of our nation’s founding. By eliminating the withholding of federal income taxes and social security taxes from paychecks, it would allow Americans to keep the entirety of their income and put individuals in charge of their own finances rather than the government or, more specifically, the Internal Revenue Service.

All Americans have the right to assume that the IRS, which exercises great authority over the taxpayers of this country, is operating in a neutral, fair and appropriate manner. Unfortunately, we now know that the IRS under the Obama Administration has failed in those basic tenets. To quote one of my colleagues from across the aisle, the IRS has done “permanent damage” to its reputation and legacy through the political targeting of conservative nonprofit groups. Rendered obsolete by the FairTax, the IRS would become a thing of the past.

The benefits of the FairTax are immediate and obvious. This year, Americans will likely work 100 days or longer to earn enough to pay their share of federal, state and local taxes. Americans will then spend billions of hours preparing their tax returns this spring.

A 2013 study by the Mercatus Center at George Mason University estimates that Americans spend between $300 billion and $1 trillion each year attempting to comply with the 70,000+ page tax code. There is no reason why paying taxes should be so confusing and complicated. The burden this process places on individuals and small businesses must be relieved.

But the problems with our current tax code go deeper than the complexities of paperwork, and the FairTax gets to the very root of those problems. Loaded with thousands of loopholes, exceptions, exemptions, credits, deductions, you name it – our tax code grossly manipulates the decision-making of businesses in our country.

By some estimates, U.S. companies are currently holding more than $2 trillion overseas. We can only speculate how much foreign investment continues to sit on the sidelines when it could be brought to America to create jobs and stimulate economic growth. For international businesses looking to relocate to the United States, the FairTax would be welcome news.

With the FairTax, Americans would no longer be punished for working hard to make money to support their families. All Americans, regardless of economic status, would be on equal footing and achieve greater freedom.

Overhauling the American tax system is not an easy undertaking, but the economic need for a leaner and fairer tax code has never been greater. It should be common sense: a simplified tax code will help boost the economy. With no tax on savings or investment, there will be more jobs and greater productivity.

The FairTax deserves to be heard in a committee setting, debated, and given an up or down vote. Americans know that when our economy is strong they can provide for their families, and see their children and grandchildren pursue the American Dream. The FairTax is a commonsense step toward restoring that dream.

What About Julia? A True Story

I spent the past weekend celebrating my daughter Amelia’s third birthday. One of the stops we made was in the local Build-A-Bear store to buy her a new teddy bear. While we were there we ran into a woman, let’s call her “Julia”, who worked in the daycare location where we used to send Amelia.

What has President Obama really done to help the real ‘Julias’ of the world; is it the “free” community college plan?

It turns out that Julia works in the Build-A-Bear store, along with the daycare center, all the while holding down a third job to make ends meet. Julia kept smiling the entire time we were in the Build-A-Bear, and I admired her for doing so, despite the obvious fatigue showing on her face. Watching a fatigued Julia work despite her exhaustion reminded me that Julia lives in the real world, and in the real world, real policies have real implications for real people. My interaction with Julia, who is a flesh-and-blood person living in the real world, makes me wonder what happened to the faux-Julia from the 2012 Obama interactive web campaign ad (note: this ad has been removed from the campaign website)? Do you remember her? It was a campaign ad designed to highlight the government’s involvement through Obama’s policies, in the life of a fictitious woman named Julia.

The Julia I ran into in the Build-A-Bear already has access to student loans for college and, if President Obama was honest with her about the additional taxes which will be taken out of her three part-time paychecks to pay for “free” community college whether she attends community college or not, I’m not sure she would be so willing to take the deal. If President Obama was even more transparent and explained to her how excessive government involvement in the student-loan business has been a primary-driver of the elevated costs of a college education, she would probably be even less likely to look favorably upon the deal.

What about Obamacare; surely that helped Julia? It’s likely that Julia has to work three separate part-time jobs because Obamacare has incentivized companies to move positions from full to part-time. Obamacare’s mandates, which redefine “full-time” work as a 30-hour work week has, as most government programs do, created a tidal wave of unintended consequences which birthed an incentive for companies to make the Julias of the world part-time and to reduce their hours to under 30 per week.

President Obama may talk a big game about young single-women and all of the beneficial policy prescriptions he has filled for them but his real legacy is frightening. President Obama had lorded over an economic recovery which ranks as the worst in modern times which, when combined with the devastation in middle-class incomes during the Obama years, has forced the Julias of America to trade a future of boundless opportunity for a present consisting of paycheck-to-paycheck survival. President Obama has also forced our Julias to trade a few dollars in savings on readily available contraceptives for hundreds of extra dollars per month in inflated healthcare premiums as a result of Obamacare red tape and mandates.

The Julias of America, working those part-time jobs to stay above water as the waves come crashing in, have been celebrated by this President when it comes to his rhetoric, and abandoned by him when it comes to policy leadership. As conservatives, we will always be at a tactical disadvantage to the far-left purveyors of that failed ideology because they insist on telling the American people about all of the “free” stuff they are going to “give away.” Being a conservative means telling the American people the truth about the real costs of “free” government giveaways, both in terms of their tax dollars and in terms of the damaging effects on the free market through the distorting effects of government third-party-payer models. These are never easy conversations to have but, if we lose elections on the right side of the truth, did we really lose?

As I watched “Julia” work to keep those kids happy in the Build-A-Bear store, despite the obvious exhaustion in her eyes, my frustration grew because I knew that it didn’t have to be this way. If we could just get more money in Julia’s pockets through tax cuts, if we could get Julia the healthcare freedom she needs to make her own cost and quality decisions with regard to her healthcare future and, if we could get the government anchor off of the backs of the small Build-A-Bear businesses that expend precious resources complying with their government masters in the regulatory, tax, and healthcare compliance front, then maybe the Julias of America could trade the look of exhaustion while working their third job of the week, for a look of satisfaction that a better tomorrow is right around the corner.

EDITORS NOTE: This column and the featured image originally appeared in the Conservative Review.

3 Myths about “Tax Reform”

How both Left and Right get it wrong by ROBERT P. MURPHY:

Conservative pundits are supposed to be hard-nosed and economically savvy, but when it comes to tax reform they can be as emotional and misguided as progressives.

The question of tax reform may be a moral issue, but it only makes sense to discuss reform if the conversation is grounded in economics.

Unfortunately, when discussing “tax reform,” American pundits on both the Right and Left often ground their analyses on simple fallacies. I’ll expose three widespread myths about tax reform.

Myth 1: The economic damage of a tax is measured by the amount of revenue it raises for the government.

You see examples of this myth all the time. For example, the Congressional Budget Office (CBO) will “score” a tax bill based on how much revenue it will raise compared to the status quo, and then the bill’s opponents might vilify it as “the biggest tax hike in recorded history!” Or, going the other way, a politician might promise to cut taxes and “return that money to the citizens.”

The reality is that there are different ways to raise, say, a million dollars in tax receipts. They are all damaging economically, but some are more harmful than others. This is because the structure or form of a tax has a great effect on how much it alters incentives, even holding the dollar amount fixed.

Suppose the government wants to raise $1 billion and has to choose between two methods of doing it. Using method A, the IRS sends a bill for $100 to 10 million randomly selected adults. Using method B, the IRS imposes a surtax of $10 million on each of the first 100 companies that hire new employees.

Even though both approaches would raise an extra $1 billion for the government, clearly the first method — relying on a modest lump-sum tax distributed over many people — would disrupt the economy much less than the second method, which would introduce absurd bottlenecks into the labor market and cause employers to engage in a game of chicken.

Myth 2: Tax reform should reward saving and risk taking.

This second myth is especially popular among conservative writers. The grain of truth here is that the tax code should not arbitrarily penalize saving and investment. Yet many writers go beyond this correct statement and end up recommending that the government actively promote these activities through tax incentives.

The “correct” amount of saving, in terms of economic theory, is that which people choose in a free market. People have underlying preferences for present versus future consumption, and they engage in mutually advantageous trades — guided by interest rates — to rearrange the timing of their income and consumption.

It is true, as many critics complain, that the income tax imposes a “double tax” on labor income if it is saved and invested. However, the real problem here (from the point of view of resource allocation) is that a tax on dividend and interest income imposes an artificial penalty on future consumption versus present consumption. This is the sense in which a flat income tax of 10 percent will cause more economic inefficiency than a flat consumption tax of 10 percent, and it is the basis of many proposals to reform the tax code.

Yet, the problem here isn’t the government’s failure to reward (or encourage) saving; the problem is that the income tax artificially punishes deferred consumption relative to immediate consumption. Because it reduces the (after-tax) interest rate, an income tax makes future consumption more expensive than it would be in a tax-free world, and therefore unnecessarily alters people’s intertemporal consumption choices. This distorts the economy more than it needs to, just as surely as if the government had levied a tax of 11 percent on Coke and 9 percent on Pepsi, rather than a 10 percent tax on both.

Myth 3: It’s always economically beneficial to move in the direction of “tax bads, not goods.”

recent column by Washington Post opinion writer Charles Krauthammer epitomizes this third and final myth. Krauthammer calls for a $1 per gallon hike in the federal gasoline tax, citing benefits such as reduced climate-change damage, less conventional air pollution, and an elbow in the side of hostile regimes dependent on oil exports.

But as a good conservative, Krauthammer doesn’t want the extra revenue feeding Big Government, so he also calls for a dollar-for-dollar refund of Social Security taxes. As Krauthammer summarizes: “The point is exclusively to alter incentives — to reduce the disincentive for work (the Social Security tax) and to increase the disincentive to consume gasoline. It’s win-win.”

There are different layers to unpack in Krauthammer’s case. Those who wish to delve deeply into the technical details can consider my critique of the “textbook” case for a carbon tax. Those who are really brave they can read about the “tax interaction effect,” which shows how the prior existence of distortionary taxes (such as an income tax) reduces the benefit of bringing in a new tax on a “negative externality,” even if the revenues are fully used to offset the original tax.

For the purposes of this article, however, let me try something much simpler. If you read Krauthammer’s column, you will see that there is nothing special about $1 for his recommended gasoline tax; he clearly pulled that amount out of the air. Moreover, he doesn’t even hint at the downside of his proposal. So why not impose a gas tax of $10 or $100 per gallon? Think of how much money could be refunded in Social Security taxes, and how many jobs would be created, while we really stuck it to Russia and Iran!

Even if we stipulate for argument’s sake the mainstream economics concept of “negative externalities” that require a penalty tax, it is still important to get the size of the tax right. The “economically optimal” level of gasoline consumption, and carbon dioxide emissions, is not zero, even if we concede the popular computer models about global warming. Krauthammer does not show any evidence that he even is aware of how an economist actually weighs the pros and cons of changes to the tax code.

Krauthammer is not alone; plenty of writers make the same mistake he did, as well as fall victim to the earlier myths I addressed. To paraphrase Murray Rothbard, it is no crime to be ignorant of the economic analysis of tax reform, for it is a technical subject. But such people should stop writing about the topic.


Robert P. Murphy has a PhD in economics from NYU. He is the author of The Politically Incorrect Guide to Capitalism and The Politically Incorrect Guide to The Great Depression and the New Deal. He is also the Senior Economist with the Institute for Energy Research and a Research Fellow at the Independent Institute. You can find him at http://consultingbyrpm.com/

The Crowding-Out Tipping Point: Increasing economic growth means shrinking government by James A. Dorn

The size and scope of government in the United States today would have been beyond the imagination of the American founders. For more than a century after the Constitution’s ratification, Americans took limits on government power seriously.

At the start of the 20th century, total government spending was less than 10 percent of GDP, with the majority of spending taking place at the state and local levels. In 1900, federal spending was a mere 2.8 percent of GDP compared to 21.1 percent in 2014. Meanwhile, state and local spending stood at 5 percent of GDP in 1900, but reached 11.5 percent in 2014. Overall government spending now stands at nearly 33 percent of GDP.

That tectonic shift is largely due to the growth of entitlements and the regulatory state. Nearly half of federal spending goes toward Social Security, Medicare, and Medicaid; government imposes huge regulatory costs on the private sector; and the higher taxes needed to finance big government erode economic incentives to work, save, and invest.

How big is too big?

There is a growing body of evidence that bigger government means slower growth of real GDP. Once the level of total government spending as a percentage of GDP reaches a tipping point, estimated to be from 15 percent to 25 percent of GDP, additional expansion crowds out private productive investment and slows economic growth. An overreaching government diminishes economic freedom and limits private exchange opportunities, restricting the range of choices open to individuals.

In a pioneering study of the link between government growth and national wealth, which appeared in the fall 1998 issue of the Cato Journal, economists James Gwartney, Randall Holcombe, and Robert Lawson found that a 10 percentage point increase in government spending as a percentage of GDP decreases real GDP growth by 1 percentage point. Thus, if government spending went from 25 percent of GDP to 35 percent, real GDP growth would slow over the longer term by a full percentage point. They also found that a 10 percentage point increase in the government’s share of GDP lowered private investment by 1.6 percentage points.

Factors of growth

One of their study’s key findings was that secure property rights — which includes a legal system that protects persons and property, enforces contracts, and limits the power of government by a just rule of law — play an important role in promoting economic growth.

The late Bernhard Heitger, an economist at the Kiel Institute for World Economics, more fully developed the positive relationship between property rights and economic growth in his pathbreaking article in the winter 2004 Cato Journal. In that article, Heitger distinguished between proximate and ultimate determinants of economic growth. The former are well known: additions to physical and human capital and technological progress (also known as “total factor productivity”). But Heitger was interested in the question of what drives capital accumulation and innovation. His answer: the structure of property rights and the associated incentives.

Conventional growth theory took private property rights and incentives as givens. Heitger rigorously showed that private property rights and the rule of law are the ultimate sources of economic growth and the wealth of nations. Well-defined private property rights improve efficiency and increase per capita income. In turn, as a nation grows richer, people demand stronger protection of their property rights, advancing institutional change.

Using data from an international cross-section of countries from 1975–95, Heitger found that “a doubling of the property rights index more than doubles per capita income” and that “more secure property rights significantly raise the accumulation of physical and human capital.”

Bauer’s foresight

That outcome would not have surprised Peter Bauer, a pioneer of development economics. He was critical of the simplistic idea that physical capital accumulation is the key determinant of economic growth. As early as 1957, in his classic Economic Analysis and Policy in Underdeveloped Countries, Bauer noted:

It is misleading to think of investment as the only or the principal determinant of development. Other factors and influences, such as institutional and political forces, the qualities and attitudes of the population, and the supply of complementary resources, are often equally important or even more important.

In the same book, Bauer also anticipated modern endogenous growth theory, stating: “It is more meaningful to say that capital is created in the process of development, rather than that development is a function of capital.” What mattered to Bauer, and to other classical liberals, in the process of development was freedom — namely, the freedom to pursue one’s happiness without government interference except to protect life, liberty, and property. (See James A. Dorn, “Economic Development and Freedom: The Legacy of Peter Bauer.”)

In that sense, Bauer argued that “the principal objective and criterion of economic development” is “the extension of the range of choice, that is, an increase in the range of effective alternatives open to people.” Free markets — resting on effective private property rights — and free people are thus the ultimate determinants of economic growth. When government expands beyond its core functions, it undermines the primacy of property, diminishes the principle of freedom, and erodes the wealth of nations.

The United States falls

The loss of economic freedom in the United States is revealed in the annual Economic Freedom of the World Report, published by the Fraser Institute along with the Cato Institute and a number of global think tanks. In 2000, the United States was the second most economically free country in the world, based on data from 1998. Today it is ranked 12th, based on 2012 data.

To move up the freedom ladder, the United States needs to change the climate of ideas and recognize the importance of private property rights and the rule of law. A legal framework that safeguards persons and property means incentivizing individuals to take responsibility for their actions and allowing people to learn from their mistakes. It means cutting back the size and scope of government and not bailing out businesses.

The nature of government is coercion; the nature of the market is consent. The “great constitutional charter” that George Washington referred to in his first inaugural address (April 30, 1789) was intended to bind Congress to the powers enumerated in Article 1, Section 8 of the Constitution. Thomas Jefferson reiterated Washington’s admonition by stating in his first inaugural address (March 4, 1801): “The sum of good government” is “a wise and frugal government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned.”

Wise and frugal

The challenge for the 114th Congress is to return to “a wise and frugal government.” A first step would be to understand the detrimental effects of expanding government power on economic liberties — especially on private property rights. If history has taught us anything, it is that the size and scope of government matter, both for freedom and prosperity.


James A. Dorn is vice president for monetary studies, editor of the Cato Journal, senior fellow, and director of Cato’s annual monetary conference.