Fatal Conceit

The Fatal Conceit

Blogging on political economy and philosophy from the perspective of a Hayekian classical liberal. All pieces by Zachary Woodman, student of Economics at Hillsdale College.

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How the NSA is Harming the Economy

Posted by Zachary Woodman on March 22, 2014 at 4:55 PM Comments comments (0)

As if the harm the NSA has done couldn’t get any worse, now it appears that the NSA is harming America’s growth. Companies are fearful for the privacy of their clients, and so are taking their business and data outside of the US to avoid the US. As The New York Times reports:

Microsoft has lost customers, including the government of Brazil.

IBM is spending more than a billion dollars to build data centers overseas to reassure foreign customers that their information is safe from prying eyes in the United States government.

And tech companies abroad, from Europe to South America, say they are gaining customers that are shunning United States providers, suspicious because of the revelations by Edward J. Snowden that tied these providers to the National Security Agency’s vast surveillance program.

Paul Waldmen further writes for the Washington Post on how US dominance over technology services may be subsiding as the international community leaves American business for the sake of their privacy:

Just how much business is leaving U.S. shores? One analyst quoted in the story says it could be $35 billion. And for the sky-is-falling perspective: “Forrester Research, a technology research firm, said the losses could be as high as $180 billion, or 25 percent of industry revenue, based on the size of the cloud computing, web hosting and outsourcing markets and the worst case for damages.

Companies have good reason to fear America’s invasion on internet privacy. The Associated Press yesterday reported out the NSA targeted one Chinese company:

U.S. intelligence agencies hacked into the email servers of Chinese tech giant Huawei five years ago, around the time concerns were growing in Washington that the telecommunications equipment manufacturer was a threat to U.S. national security, two newspapers reported Saturday.

The National Security Agency began targeting Huawei in early 2009 and quickly succeeded in gaining access to the company's client lists and email archive, German weekly Der Spiegel reported, citing secret U.S. intelligence documents leaked by former NSA contractor Edward Snowden. The New York Times also published a report Saturday about the documents.

Keep in mind all this economic damage is coming even though there’s little evidence the NSA’s activities stop terror.


Everything You Need to Know about the New Republican Tax Reform Proposal

Posted by Zachary Woodman on March 14, 2014 at 6:40 PM Comments comments (0)

 I’ve found it fairly hard to actually get a good amount of information on Congressman Dave Camp’s (R-MI) recent plan to reform the tax code, proposed at the end of February. Thus, I’ve decided to do a bit of research on it and assemble a bit of a primer on the policy. Overall, the bill makes a couple of great steps, however it is not without problems.


Why do we need tax reform?

Simply put, the tax code is way too complex. It is currently over 6,000 pages long and has only grown historically, as this chart from the Cato Institute points out:


Image Courtesy of the Cato Institute.

Not only is the tax code unbelievably long, it is also constantly changing. The National Taxpayer Advocate claims that there have been over 4,428 changes to the tax code last decade.


Such a complex, impossible tax code makes it extremely difficult, and costly, for American taxpayers to even follow the law. As James Madison said in the Federalist Papers, “It will be of little avail to the people… if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood; if they be repealed or revised before they are promulgated, or undergo such incessant changes that no man, who knows what the law is to-day, can guess what it will be to-morrow. [sic]”


The complexity of the tax code is not only an inconvenience, it’s also harmful to economic growth and reduces tax revenue. The Mercatus Center estimates that Americans spend as much as $378 billion and 6 billion hours a year simply complying with the tax code. That’s billions of hours and dollars Americans could be spending doing economically productive activities, so there’s a high marginal cost to tax compliance. It’s estimated that these compliance costs reduce economic growth by between $148 billion and $609 billion annually. Compliance results in billions of dollars in lobbying and political corruption as lobbyists try to rework the tax code to benefit their clients, and reduces revenue to the government by as much as $452 billion a year.


The House Ways and Means Committee—which Camp is the chair of—has a neat video explaining why we need some degree of tax reform, and some of the basics of the proposal:


You need Adobe Flash Player to view this content.


What is in Congressman Camp’s Plan?

Perhaps the biggest aspect of the plan are major individual tax cuts and major income tax simplification. At the moment, there are seven individual income tax brackets, which look like this:


Image Courtesy of Forbes.

The Camp plan will collapse the brackets into just three, a 10% tax on those earning below $35,600 a year, 25% for incomes up to $400,000, and 35% for everyone above $400,000. (Note that the exact income level varies for joint-filers, the Tax Foundation has a more detailed summary of the entire plan here.) Though the plan is still moderately progressive, it is a major step in the direction of a flat income tax. This means a reduction in marginal tax rates for almost every American.


Another major aspect of the proposal is a reduction in the corporate income tax to 25%, and it eliminates the Alternative Minimum Tax—which requires individuals to pay a minimum amount of taxes after deductions.


However, the actual amount people pay in taxes may not be directly reflected by changes in rates. Congressman Camp wanted his proposal to be revenue neutral—not add to the deficit—and to simplify the tax code. This proves to be a hard challenge as the Joint Committee on Taxation (JTC) estimates the changes to the income tax rates, corporate tax, and alternative minimum tax could cost $5 trillion in revenue.


Thus, the bill eliminates and reduces a lot of deductions—for businesses, the wealthy, middle class, and the poor alike. The Tax Foundation summarizes a good chunk of the eliminated credits and deductions (I’ve added links in case you don’t know what these are):

• Eliminates the personal exemption

• ...Eliminates state and local tax deduction

• Eliminates deduction of interest on education loans.

• Eliminates adoption tax credit

• Eliminates credit for green energy residential improvements

• Eliminates credits for qualified electric vehicles and alternative motor vehicles

• Eliminates first time homebuyer credit

• Eliminates deduction for tax preparation expenses

• Eliminates deduction for medical expenses

• Eliminates deduction for moving expenses

• ….Reduces the principal cap for the home mortgage interest deduction from new mortgages from $1 million to $500,000 over four years.

• Reduces the maximum credits for the EITC to $200 for joint filers with no children, $2,400 with filers with one child, and $4,000 for joint filers with two or more children. For taxpayers with children, phase outs begin at $20,000 for single filers and $27,000 for joint filers.


It’s also important to remember that the overall tax cuts may help increase tax revenue if it can increase growth. The JTC estimates that it will increase GDP output by $3.4 trillion over ten years (though that number is in contention, more on that later); given the historical relationship between revenue and GDP to be 19%, that means revenues could grow $646 billion in new revenue from economic growth alone—not enough to completely offset the cost, but still a factor in mitigation.


With deductions, the JTC estimates a reduction in taxes to the average family of four of $1,300. Despite the reduced amount of deductions, most Americans will still see lower taxes.


Other changes in the bill include a massive amount of reductions in green energy related tax credits. It eliminates an ObamaCare excise tax on medical devices, which has already cost jobs and lives. Phases out a business deduction for manufacturing expenses, eliminates deductions to businesses for executive bonuses. It also includes other tax hikes, such as an $86 billion excise tax on big banks, a 8.75% tax on corporate earnings overseas, and increasing taxes on R&D and Advertisement. It also increases capital gains taxes to 24.8%.


All told, it means overall net tax increases of $580 billion over ten years for businesses, and $580 billion in tax cuts for individuals.


What does Camp’s Plan Mean for the Economy?

This is a point that is in contention. As mentioned earlier, the JCT analysis shows higher economic growth will come as a result of the bill. However, the Tax Foundation argues that the methodology of the JCT paints a bit of a rosy picture. The JCT’s analysis, they argue, depends on increased labor force participation as a result of the lower taxes on individuals to result:

In nearly all the cases examined, most of the short-term improvement in GDP, and all of the long-term gain, is anticipated to come from higher labor force participation and hours worked due to lower average and marginal tax rates on individuals (a positive supply-side effect), and to higher consumption as higher after-tax incomes raise the demand for goods and services (pumping up demand). It does not come from increased investment in plant, equipment, and structures; indeed, the plan is expected to raise the cost of capital, and the capital of domestic firms is expected to have declined, or to be declining, by the second half of the period.

In other words, there will be a slight shift in short-run and long-run Aggregate Supply, but a larger shift in Aggregate Demand. However, though there might be a higher shift in consumption, the higher business taxes are, in the words of the JCT’s report, “expected to increase the cost of capital for domestic firms, thus reducing the incentive for investment in domestic capital stock.” This downward trend in investment may mitigate the shift from the lower individual tax rate. From the Tax Foundation’s report (emphasis added):

JCT is right to conclude that the labor force participation rate and hours worked should respond positively to higher after-tax wages. The JCT gets a major portion of its growth from assuming a reduction in the average and marginal tax rate on labor and a resulting increase in labor force participation and hours worked.

However, history tells us that the labor supply response to changes in after-tax wages is much smaller that the response of capital to changes in the after-tax rates of return. Any dollar-for-dollar rise in the tax on capital (if reflected in lower marginal returns) and reduction in the tax on labor (especially if it chiefly lowers the average tax rate on labor, with less reduction at the margin) must reduce total inputs of labor and capital and reduce GDP.

Additionally, the Tax Foundation rightly points out that the shifts in consumption for aggregate demand are only in the short-term, and “have no place in a long-run growth estimate.” They also (rightly) argue, given the fact that the policy is overall revenue neutral, that should mitigate the growth response even less.


However, the fact that 50% of business income is paid through the reduced income tax rates and reduced compliance costs can increase growth add to the prospects of the bill’s economic success. Even if the bill is negative in terms of growth, the Fed could engage in monetary offset to make the fiscal policy less problematic.


Thus, overall, the long-term effects on economic growth are uncertain. Positive or negative, the overall impact on growth probably will not be severe and will be for the most part neutral, given the deficit neutrality of it and the fact that fiscal multipliers are dubious.


If Camp and company want to make it more pro-growth, they should drop some of the harmful business taxes, particularly the one on banks and protectionist tax on overseas earnings. Though it might eliminate the deficit neutral headline for selling the bill, it is simply better policy; the higher macroeconomic growth that comes from tax hikes can broaden the tax base and increase revenue overall, possibly improving the fiscal prospects of the bill even more.


Does the bill have a chance of passing?

Probably not. The reduced tax rates for the rich are going to make it impossible to convince democrats, not to mention that the plan makes tax rates less progressive overall. Additionally, the elimination of various tax deductions are going to make lobbyists very upset. Democrats will not accept the elimination in green energy credits and reduction to the Earned Income Tax Credit. Lobbyists are already screaming against it, the Associated Press reports:

American Fuel & Petrochemical Manufacturers President Charles T. Drevna also thought the proposal needed revising. "Although Chairman Camp's intent was to make the tax code tax simpler and fairer and to level the playing field, he unfortunately missed the mark. To date, the tax reform debate has been fixated on a one-size-fits-all approach of lowering the corporate rate to a certain percentage across the board, while eliminating various existing deductions. We urge Congress to take a comprehensive look at how different tax structures impact different sectors of the economy and use such analysis to develop a comprehensive tax reform."

Ray Gaesser, Iowa farmer and American Soybean Association president, issued the following statement: "The farmers of the American Soybean Association commend Chairman Camp for his willingness to tackle the difficult task of tax reform. ... We are significantly concerned, however, in the proposal's elimination of the biodiesel tax credit. … ASA believes the biodiesel tax credit is worthy of extension given the many benefits it provides, including support for jobs, economic development in rural communities, diversity in our energy sources, and reduction in greenhouse gas emissions, among others."

Sen. Chuck Schumer, D-NY, said, "Any proposal that eliminates the deduction for state and local taxes, as the Republican plan would do, is dead on arrival."

The National Association of Realtors issued a statement saying it "supports reforms promoting economic growth, but we strongly oppose altering the rules that govern ownership and investment." That particular embrace of the general and rejection of the specific was a reaction to Camp calling for a reduction in the home mortgage tax deduction, part of his overall plan to reduce or eliminate some breaks in exchange for lowering rates for all.

Clarence Anthony, executive director of the National League of Cities, said Congressman Camp's work was well-intentioned, but added: "It will reduce cities' ability to promote construction jobs and build the foundations for future growth. Municipal and private activity bonds are used to build schools, roads, bridges, hospitals, and develop blighted areas of the community."

As Jarret Skorup writes for the Mackinac Center for Public Policy:

Part of the economic theory of public choice explains how interest groups have an oversized influence on the political process. In sum, as I have noted in the past, "When a small segment stands to benefit greatly from some policy, it will fight much harder for it than the larger segment that is harmed will lobby against it since the harm is either hidden or so small that it is not rational for the individuals making up the larger segment to spend a lot of time fighting the policy."

Overall, I still favor a tax reform that eliminates the income tax and replaces it with a flat sales tax. However, for anything like that to happen something like Camp’s bill is a necessary step in the right direction. If some of the business taxes are eliminated, it would be a very good first step for reform. At the very least, Camp deserves credit for keeping the national conversation on tax reform going.

Libertarians Can Sympathize with Left-Wing Social Issues Without being Statists

Posted by Zachary Woodman on March 13, 2014 at 11:05 PM Comments comments (0)

Christopher Cantwell recently posted a response to Jeffery Tucker’s good column for FEE “Against Libertarian Brutalism.” (To avoid the unnecessary inconvenience of summarizing the two articles, I ask you to read the two before moving on).

It goes without saying that I don't think Cantwell is a racist, sexist homophobe, but I think Cantwell completely misses the point of Tucker's argument. Tucker simply points out that, though it is true one has the right to be racist or sexist and the government plays no role in the matter, it is imprudent to emphasize such a point. Reading Cantwell’s response, you wouldn’t know that, Cantwell thinks that because Tucker promotes some social issues that are sympathetic to some liberal points of few, he's somehow promoting "state race propaganda." Somehow, for having any degree of sympathies towards feminism, Cantwell thinks Tucker wants to “find any mention, implication, or demographic disparity pertaining to race or gender, and then label it racist or misogynist” or “find any disparity of wealth, and call it privilege.” Reading Cantwell, you’d think Tucker is now some sort of a radical Rawlsian egalitarian or a Tumblr Social Justice Warrior or a Third Wave Feminist.

Though it is true that Tucker overuses buzz words like “racist” and “sexist,” this caricature that Cantwell presents is certainly not what Tucker is saying. He’s simply saying libertarians should advocate non-governmental feminism and non-governmental humanitarianism. Just because you’re opposed to private rhetoric which promotes highly immoral action does not mean you are now in favor of all forms of egalitarianism, it is absolutely intellectually dishonest to make such a huge mental leap.

After those ridiculous, personal attacks and shallow straw men, Cantwell moves on to make this point:

You simply distract from the point that race is irrelevant. You give credence to those who would use the State in their perpetually failing efforts to “correct” these disparities. You feed into the misperception that libertarianism is racist for not caring about race. You turn off the independent minded black, female, and homosexual people out there who would otherwise join us.

For many people, things like race and gender are not "irrelevant." And though libertarianism as a political ideology is silent on whether we should use coercion in any sense in regards to race, if libertarians do not speak out about their personal convictions on the matter, we will be isolated from the people to whom it does matter.

In fact, there is room for libertarians to make points about gender and race and remain anti-state. Tyranny does not only present itself in the form of the state, it can also present itself in the form of private sector oppression. This idea is not new at all to classical liberal thought; consider what John Stuart Mill wrote in On Liberty on so-called “tyranny of the majority:”

Like other tyrannies, the tyranny of the majority was at first, and is still vulgarly, held in dread, chiefly as operating through the acts of the public authorities. But reflecting persons perceived that when society is itself the tyrant—society collectively, over the separate individuals who compose it—its means of tyrannising are not restricted to the acts which it may do by the hands of its political functionaries. Society can and does execute its own mandates: and if it issues wrong mandates instead of right, or any mandates at all in things with which it ought not to meddle, it practises a social tyranny more formidable than many kinds of political oppression, since, though not usually upheld by such extreme penalties, it leaves fewer means of escape, penetrating much more deeply into the details of life, and enslaving the soul itself. Protection, therefore, against the tyranny of the magistrate is not enough: there needs protection also against the tyranny of the prevailing opinion and feeling; against the tendency of society to impose, by other means than civil penalties, its own ideas and practices as rules of conduct on those who dissent from them; to fetter the development, and, if possible, prevent the formation, of any individuality not in harmony with its ways, and compel all characters to fashion themselves upon the model of its own. There is a limit to the legitimate interference of collective opinion with individual independence: and to find that limit, and maintain it against encroachment, is as indispensable to a good condition of human affairs, as protection against political despotism.

If you’re a minarchist, that “tyranny of the majority”—which presents itself in the private sector—would and could be mitigated by the minarchist state; if you’re an anarcho-capitalist, it could be the role of a private defense company to protect against such grievances. Regardless, there is no reason why libertarians of all stripes cannot speak out on such issues. I do not care if you're conservative, socialist, liberal, anarcho-capitalist, minarchist, or what-have-you, treating other people as less than people is wrong whether the government does it or a racist bigot does it. Though there might not be a place for government to intrude, libertarians can and should change the public's opinions about such issues.

Or, libertarians can point out examples where the state enforces gender and racial problems (which even Cantwell admits is fine, though I'd be surprised to see him act on such a belief). Consider, for example of how libertarians can discuss these issues, what Peter Boettke recently wrote on his blog:

In a recent paper published in Crime & Deliquency, it is estimated that 49% of all black males have been arrested for non-traffic related violations by the time they reach the age of 23. 49%! For white males the figure is 40%. Again 40%! What does the law and order system think this does to young males who attempt to go to school and find employment, but now must explain their arrest record? And this just for the fortune ones that do not have their life chances seriously dampened by having to spend time incarcerated. If we look at incarcertation, then what has happened to young black males is simply tragic. And, much of this for the non-violent crime of illegal drug use --- drug use I should point out that the last 3 presidents have readily admitted to engaging in during their youth. Truncating economic opportunity through bad public policy isn't an issue of The Other, it is, instead, Our America that should cause outrage among this generation and their parents and grandparents.

A functioning market economy operates on the incentives provided by property rights, the signals provided by prices, the lure of profit, and the discipline of loss. It is for all practical purposes a color blind institution -- except that is for the color of money. But ordinary politics operates on a different set of incentives, signals, rewards and penalties. The systemic bias in politics is to concentrate benefits on well organized and well informed special interests and disperse the costs on unorganized and ill informed masses. It is by its operational mechanisms discriminatory, unless structural rules are in place to counter the natural tendencies. This again is my reason for invoking the Hayekian point --- democracy within LIBERALISM, not liberalism with DEMOCRACY. LIBERALISM is defined here as a system that permits neither discrimination nor dominion. By pursuing liberalism within DEMOCRACY, one just shifts who the benefactors of government privileges are. The life chances of some are thus enhanced, while for others they are truncated by policy design.

Rather than just repeat the same old argument (that, by the way, even most statists agree with by now) that racists have a right to be racist, libertarians can act within the dialogue on these social issues to promote liberty-oriented thinking. Simply stopping at “I don’t care if you’re racist” without exploring the complexity of these issues is, not only intellectually lazy, but alienates the movement from a large segment of people. If you’re fine with that, I have nothing more to say than you’re not doing anyone any favors. However that’s exactly why Tuckers’ analogy of brutalist architecture is so shrewd to the purpose; people like Cantwell want to simply take the nuts and bolts, the functionality, of liberty and shove it down people’s throats without realizing that liberty is a humane principle that has the potential to apply to a wide-range of issues—especially those that usually don’t get the traditional core group of libertarians (ie. Cantwell) excited.



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