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Government Bytes

Milton Friedman's Legacy
Posted By: Michael Tasselmyer - 07/28/14

As a Nobel laureate, winner of the Presidential Medal of Freedom, and founder of the Chicago school of economic theory, few would argue that Milton Friedman's economic philosophy hasn't been widely influential. However, his modern fame and recognition make it possible to forget that in the beginning of his career, he faced great opposition to his work and few would have predicted it would earn him the respect it has today.

A 2006 memoriam in The Economist offered some perspective:

"In the wake of the Great Depression and the second world war, with the Keynesian revolution still young, championing the free market was deeply unfashionable, even (or especially) among economists. Mr Friedman and kindred spirits -- such as Friedrich von Hayek, author of 'The Road to Serfdom' -- were seen as cranks. Surely the horrors of the Depression had shown that markets were not to be trusted? The state, it was plain, should be master of the market; and, equipped with John Maynard Keynes's 'General Theory', governments should spend and borrow to keep the economy topped up and unemployment at bay. That economists and policymakers think differently now is to a great degree Mr Friedman's achievement."

Friedman was a tireless advocate for smaller government, and took a staunch position when it came to tax reform: "I am in favor of reducing taxes under any circumstances, for any excuse, for any reason whatsoever." One of Friedman's major contentions with the U.S. tax system that he frequently lamented was its complexity. The tax system, he said, was an "unholy mess" that was so dominated by special interests and lobbying groups that he went so far as to claim reform was "impossible." Despite his pessimism regarding tax reform, he saw some of his ideas translated into reality after the Code was revised in 1986.

Had Friedman had his way, though, he likely would have supported one of two alternative tax systems.

  • He was known as a supporter of the "negative income tax," which would offer a stipend to those earning incomes below a certain threshold. He argued that doing so offered the poverty-reducing benefits of programs like food stamps and rent subsidies, but without the bureaucratic inefficiencies that usually accompany them. In other words, as the New York Times put it, "[i]f the main problem of the poor is that they have too little money, he reasoned, the simplest and cheapest solution is to give them some more."
  • Friedman also supported a flat tax system in his well-known 1962 work "Capitalism and Freedom." He told the Wall Street Journal in 1996 that "[a]ll things considered, the personal income tax structure that seems to me best is a flat-rate tax on income above an exemption."

July 31 would have been Milton Friedman's 102nd birthday. In celebration of his life and work, NTUF is hosting a happy hour event with Liberty on the Rocks D.C. and the Tax Foundation in downtown Washington, D.C. tomorrow evening (Tuesday, July 29). The event will feature discussion of Friedman's influence and a school supplies drive benefitting Perry Street Preparatory School, a local charter school whose independent status represents the education reforms Friedman spent so much time and energy advocating for.

If you can't make it in person, we're also hosting an online poll asking participants which tax reform proposal they'd like to see enacted. Friedman proposed a flat tax, but would you prefer a FairTax or Value Added Tax? Let us know, and you'll be entered to win a $50 Visa gift card!

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Senate to Vote on Highway Trust Fund Bill This Week; D.C. Metro Opens New Silver Line – Late Edition, July 28
Posted By: Jihun Han - 07/28/14

Today's Taxpayer News! 

The Senate is set to vote on the Highway Trust Fund Bill that the House passed a couple weeks ago. The Senate wants to pass the bill before the August recess. Read here for more!

The D.C. Metro opened up the new silver line over the weekend. Construction of the metro rail cost taxpayers more than $150 million. Virginia Gov. Terry McAuliffe is open to having Virginians pay more for phase two of the project. Washington Post has the breakdown!

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Milton Friedman: the Father of School Choice
Posted By: Michael Tasselmyer - 07/27/14

As NTUF gets ready to host our happy hour event in honor of Milton Friedman's 102nd birthday, many are gearing up to enjoy a fantastic opportunity to network, play Cards Against Liberty, and celebrate the legacy of the influential economist. However, one activity taking place at this event -- a school supply drive for Perry Street Preparatory Public Charter School -- happens to be inspired by Friedman's strong, life-long advocacy for school choice.

His philosophy centered on the idea that, while education is an incredibly valuable commodity, no one type of school setting is ideal (or even adequate) for every child. The ability for families to actually choose the type of schooling that they desire for their children leads to the highest quality K-12 education. To satisfy this end, families may elect to have the money that would otherwise be spent on their children's public education transferred to them so that they can select a school more tailored to their child's needs. Many areas around the country support such a model incorporating a variety of systems to transfer this money including: vouchers, educational savings accounts, tax-credit scholarships, and individual tax credits/deductions.

Perry Street Prep (PSP) is one such school that operates on this principle. Driven by a mission of empowering "students to be college-ready and to thrive in a global society," PSP strives to build relationships with families from a community of diverse learners. Founded in 1999 as the Hyde Leadership Public Charter School by Joseph W. Gauld, the school currently serves 953 students and supports an average class size of 15 students to every teacher. In addition, the school boasts a faculty that is certified as 100 percent HQT (Highly Qualified Teacher).

If you're in the Washington, D.C. area this week, come out on Tuesday, July 29 to the Laughing Man Tavern and celebrate one of the most influential economists of our time, and while you're at it, bring school supplies to help support this fantastic school.

Can't make it in person? Join NTUF online at our special #Milton102 page, where you can vote for your favorite tax reform proposal and be entered into a drawing for a $50 Visa gift card. Last year, we received input from taxpayers all over the country and we expect even more participation this time around. Whether you'd prefer a Flat Tax, a FairTax, or a modified version of our current system, let us know and be part of the nation-wide discussion among policy experts and grassroots members alike on this important issue!

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Red Wings Announce Glorious New Arena. But Is It Good For Fans?
Posted By: Jihun Han - 07/25/14

The Detroit Red Wings announced that their new arena is slated to be opened in 2017, and it will be partially paid for by taxpayers.

Well, “partially” is a rather soft term in this particular case, “mostly” would be more fitting. Taxpayers in Detroit will pay 58% of the overall $450 million new arena, making them responsible for a $261.5 million tab (as of now).

The Red Wings (and Tigers) owners, the Ilitch Family ($3.6 billion net worth), will only pay $188.4 million, or 42% of total costs.

The arena project is also part of a larger $650 million plan that would build retail stores and office buildings among others near the venue.

Mike Ilitch, Chairman of the Red Wings, claims that the new arena will generate more than one billion dollars in revenue and will bring thousands of jobs to Detroit. However, according to the arena deal, Detroit will not receive any share in revenue from money made from the arena.

Olympia Development of Michigan, which is in charge of the entire project, will get all the profits from naming rights.

In the Red Wings current venue, Joe Louis Arena, the city gets a share of $7 million in revenue that includes ticket sales and concession sales.

Were taxpayers considered at all in this deal? Especially given the sorry fiscal state Detroit is in?

To make matters worse, according to National Taxpayers Union Foundation (NTUF), new stadiums don’t actually increase employment or income. Rather, new stadiums monopolize venue competition and bring all the spending and employment to just one venue.

The Detroit Deal uses municipal bonds, a familiar tactic for stadium financing, to put that taxpayer cash to work.

This is similar to the Dallas Cowboys, who built a whopping $1.2 billion stadium in Arlington, Texas that opened in 2009. Arlington used municipal bonds, snagging about $325 million from taxpayers for that behemoth. That allowed the Cowboys’ ownership at a lower rate than normal, increasing revenues for the team.

The new Red Wings arena will also be paid in a similar fashion through 30-year bonds.

The stadium financing problem might exemplify government’s willingness to shell out taxpayer dollars to connected interests better than anything else, simply because the purpose is for a game, and those benefitting (the owners) are always going to be of enough means that there is no sob story cover.

And it adds up for taxpayers when we look at the big picture…

21 out of 32 NFL Stadiums were “partly” financed by the public. 64 other major league teams that include baseball, hockey, and basketball use municipal bonds to finance stadiums/arenas.

In a must-read blog post last year, NTUF examined how taxpayer-funded stadiums cost more than privately funded ones. According to the blog post, when taxpayers contribute more than 50% for total construction costs, stadiums will be $65 million more expensive on average.

If that statistic applies to Detroit, it will be catastrophic to taxpayers in the Motor City. Detroit filed for bankruptcy around this time last year and definitely cannot afford to have taxpayers pay for a sports arena that a private citizen is well capable of paying for on his own. The city has an unemployment rate above 14% as of April 2014 that is higher than the national average.

Furthermore, Detroit has a debt that is roughly $18 billion. With so much debt in a city, should citizens shoulder even more just to upgrade a hockey team’s arena?

Especially when history shows the promises of economic boom are likely to bust, and the cost estimates always seem to leave the ballpark?

So next time you go to a major sporting event and look around at the majestic stadium you’re in, remember: You’re probably paying a lot more than the price of your ticket!

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Paul Ryan Seeks to Strengthen Safety Net
Posted By: Dan Barrett - 07/25/14

Congressman Paul Ryan (R-WI), the Chairman of the House Committee on the Budget, recently spoke at the American Enterprise Institute about strengthening the safety net for disadvantaged and unemployed Americans.  Specifically, he reflected on the state of public benefits for the poor and how, through his proposal of an Opportunity Grant pilot program, welfare programs could be greatly improved.  The transcript and recorded video can be found here.

The Opportunity Grant would streamline existing sources of federal funding into one program.  States could then apply for that funding, and would be eligible for federal assistance so long as the anti-poverty initiatives receiving the support adhered to certain guidelines:

  1. Tax dollars must be spent on people in need, not infrastructure or other projects. 
  2. If benefits recipients are capable of working, they must do so. 
  3. There is to be a choice available for people to receive help, whether the alternatives are non-profit or for-profit groups (i.e. the state welfare agency must not be the only option that people can turn to).
  4. The results must be measured by a third party to ensure that progress is being made.

Overall, Congressman Ryan’s theme is to allow the federal government to support state programs, not to supplant their efforts.  Since the Great Society programs of the 1960s, many local efforts have become dependent on federal funds, thus becoming defacto federal operations. Congressman Ryan’s proposal is an attempt to address that by making federal welfare funding streams more efficient.

Another proposal from Congressman Ryan is to increase the Earned Income Tax Credit for childless workers.  This would be accomplished by lowering the minimum eligibility from 25 to 21 and to double the maximum credit to $1,005. To pay for this reform, he would not raise taxes but instead cut funding for less effective government programs, such as subsidies for renewable energy businesses.  His goal is to “stop programs that don’t work and support the programs that do”.

Congressman Ryan also addressed the need to expand access to education.  By bringing “more competition to the college cartels” through accreditation reform, the cost of schooling could be reduced as more educational institutions are available.

Criminal justice reform was also discussed at the event, particularly as it related to helping non-violent offenders contribute to the economy.  Instead of convicting those individuals for maximum sentences, Congressman Ryan proposed counseling and work programs in order to reduce recidivism and prepare them to enter the workforce.

He concluded by proposing to cut regulatory red tape by requiring that future regulations be approved by Congress.  If a regulation disproportionately affects low-income families, then the agency would be required to defend it on record for its actions.  In a bid to improve collaboration between government and taxpayers, Congressman Ryan invited anyone to comment on his proposals via an email to ExpandingOpportunity@mail.house.gov.

After the Chairman spoke, there was a roundtable discussion which included Ron Haskins, Stuart Butler, and Bob Woodson.  Along with the Congressman, each expert emphasized different aspects of aiding Americans in poverty. Bob Woodson noted that the poor in America face different barriers to economic prosperity. “Both people on the left and the right have myths about the poor,” he said, and categorizing people only as victims does not help individuals overcome challenges posed by poverty.  The discussion conveyed the need to collaborate and to focus on solutions that are proven to be successful for lifting Americans out of financial difficulty.

The problem is not just academic.  According to the 2012 report by the U.S. Census Bureau, 48.5 million Americans live in poverty, 16 million of whom are children. Though the federal government spent over $1 trillion in 2012 on 80 (oftentimes overlapping) welfare programs, poverty continues to be a major economic issue. Legislators have always proposed reforms but many measures attempt to address the symptoms of poverty, rather than the root causes (education, health, and skills being major factors). On paper, much of what Congressman Ryan presented could help the disadvantaged, but they face significant political obstacles within the halls of Congress and the White House. By decreasing the costs of anti-poverty efforts while lowering the numbers of those actually in poverty, taxpayers and those in poverty both win. The question is whether or not Congress will choose to continue spending money on entrenched programs rather than take further risks on new ones.

Thanks to Ian Johnson for drafting this post.

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Honoring Milton Friedman in D.C. and Online
Posted By: Michael Tasselmyer - 07/25/14

Are you in the DC area this Tuesday? Do you enjoy happy hours, economics, and complementary drinks? Then come on down to the Laughing Man Tavern for a happy hour event hosted by the National Taxpayers Union Foundation, the Tax Foundation, and the DC Chapter of Liberty on the Rocks to celebrate the life and legacy of economist Milton Friedman.

The event is this Tuesday, July 29th at 1306 G Street NW, Washington, DC. We will be playing Friedman-themed games and collecting school supplies for the Perry Street Preparatory School.

If you are unable to attend, we are also hosting a special online poll: vote for your ideal tax reform proposal, and you could win a $50 Visa gift card.

Be sure to follow NTUF on Twitter (@ntuf), on Facebook, and by subscribing to The Taxpayer's Tab to keep up with all the latest news!

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Operation Choke Point: Closing Legal Businesses
Posted By: Melodie Bowler - 07/24/14

On July 17th, the House Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law held a hearing on Operation Choke Point (OCP), a program within the Department of Justice (DOJ). The first witness, Assistant Attorney General Stuart Delery of the DOJ Civil Division, stated OCP’s objective is to identify and prevent fraudulent merchants and payment processors from accessing financial services. An obscure program until recently, OCP is gaining recognition for the questionable manner of its investigations. Thus far, the DOJ has sent fifty subpoenas to financial institutions, largely local banks and credit unions, requesting information on their customers. Only one of the cases has closed, the remaining are ongoing.

When questioned by Rep. Darrell Issa (R-CA), Delery agreed that the subpoenas he sent are not meant to change routine banking operations. Since the inception of OCP, however, businesses in particular industries have reported being denied loans or having their long-standing bank accounts closed. The Federal Deposit Insurance Corporation (FDIC) published a list of “high risk” industries (including businesses as diverse as firearms sales, home-based charities, coin dealers, and dating services), but Delery denied any connection between that list and DOJ objectives. Upon further scrutiny of the issued subpoenas, which Delery signed, Rep. Issa found a truncated version of the FDIC’s list attached to each one. Somehow, Delery still denied a connection between OCP-DOJ objectives and the FDIC list.

Whether intending to or not, by including the list in the subpoenas and effectively endorsing FDIC “recommendations,” the DOJ has caused banks to rethink their clientele in order to maintain compliancy with the federal government. Subcommittee Chairman Spencer Bachus (R-AL) mentioned a letter circulated to lawmakers last fall, in which one bank claimed it was threatened with an audit if it agreed to service an online lender. Another said the FDIC refused to close an audit unless the bank stopped certain payment processing. Despite these accounts, Delery continued to insist the DOJ is innocent. He stated that his department is making efforts to explain to financial institutions that they are not discouraging legal business, but encouraging due diligence.

As Rep. Issa illuminated in the hearing, the FDIC list was created based on “ideological decisions of what is high risk rather than economic.” For businesses whose accounts were closed, the basis had nothing to do with a change in their risk profiles and was instead predicated on a change in bureaucratic opinion. It is far less costly for banks to drop unfavorably-viewed clients now, than to respond to subpoenas later. In the subpoenas that were already issued, the DOJ requested the banks’ documents from each merchant’s account for every month in which they had a return rate of 3 percent or more, despite Delery’s admission that fraud is indicated by return rates of 30 percent or more. Delery could not attest to the cost of compliance with such a request. Another witness, David Thompson, representing short-term lenders, said the cost can be in the hundreds of thousands. For small banks and credit unions, the new expense of servicing these legal yet “high risk” businesses makes them no longer profitable, resulting in closed accounts.

Fitting with the hearing’s title, “Guilty Until Proven Innocent,” the panel uncovered that the DOJ is targeting banks for serving legal industries, rather than investigating specific cases of fraud within individual businesses. House Judiciary Committee Chairman Bob Goodlatte (R-VA) described the problem in his opening statement, clarifying that Operation Choke Point does stop some fraud, but there are too many casualties.

For more information, Michael Ligouri’s blog covers the House Financial Services Committee’s hearing on July 15th, and Brandon Arnold’s blog overviews the operation as a whole.

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Corporate Inversion: Fleeing from the Terrifying Tax Code
Posted By: Melodie Bowler - 07/24/14

“The American tax code is an anti-competitive mess.” Chairman Ron Wyden (D-OR) of the Senate Finance Committee stated the complicated problem quite simply in his opening remarks for the hearing titled “The U.S. Tax Code: Love It, Leave It or Reform It!” On July 22nd, the committee heard testimony from six witnesses on the recent flood of corporate inversions. Dozens of U.S.-based companies have decided to acquire competitors abroad in order to relocate their headquarters and lower their tax bills. U.S. corporations pay the highest income tax rate among OECD countries at 35 percent. When state taxes are included, U.S.-based businesses bear on average a 39.1 percent tax burden. In comparison, the OECD tax average is 25 percent, putting American businesses at a disadvantage.

The first witness, Robert Stack who is Deputy Assistant Secretary for International Tax Affairs at the Department of the Treasury, made the statement upon which everyone could agree: “there is universal consensus that our rate is too high.” Obviously, the high U.S. corporate tax rate compared to other developed nations is the primary reason for corporate flight, yet disagreement remains on how to solve the problem. Chairman Wyden highlighted the issue facing Congress today, that “tax reform is moving slowly, inversions are moving rapidly.” For that reason he would prefer to enact punitive, retroactive laws to attempt to stop inversions immediately. Two such bills, S. 2360 in the Senate and H.R. 4679 in the House would seek to prevent further inversions in the short term by changing the IRS criteria for being considered inverted, based on the portion of stock the foreign entity holds and the volume of business activities which continue in the U.S. Both bills would be retroactive to May 8, 2014, but S. 2360 would sunset in two years, whereas H.R. 4679 would be permanent.

The Finance Committee’s Ranking Member Sen. Orrin Hatch (R-UT) would rather see immediate, comprehensive correction of the tax system. While Congress generally moves slowly, especially on taxation, the rapid loss of the tax base could be the impetus needed to force an overhaul. Sen. John Thune (R-SD) agreed, not wanting to punish corporations for leaving because “when you make bad rules, you get bad outcomes.” Sen. Rob Portman (R-OH) also felt “this is an opportunity for us to encourage solving the problem rather than dealing with the symptom.” Medical analogies were used to illustrate the issue, describing a short-term fix as a tourniquet which will stem the flow to allow for time to deliberate over changes to the tax code. However, as one witness mentioned, if the tourniquet is left on for too long with no resolution to the underlying problem, the result will be gangrene.

The witnesses floated a number of ideas on how to reform the tax code to discourage inversions. For instance, the U.S. could switch to a territorial tax system, in which the IRS would only tax multinational corporations for the income they generate domestically. One witness, Dr. Leslie Robinson, a business professor at Dartmouth, suggested simply ending deferral and lowering the rate. Either choice could improve upon the system currently in place. All business owners search for cheaper inputs to lower their costs and increase profits, and the U.S. tax burden has been targeted as an input well worth adjusting.

One reason corporate inversion is generating greater attention now is the consequent loss of tax revenue for the government. With mounting debt and yearly deficits, Congress and the White House cannot bear to see taxpaying companies move elsewhere. Treasury Secretary Jacob Lew outlined these concerns in a letter he sent to Sens. Wyden and Hatch and Reps. Dave Camp (R-MI) and Sander Levin (D-MI), who are Chairman and Ranking Member of the House Ways and Means Committee. Secretary Lew stated that, “What we need is a new sense of economic patriotism,” and “We should not be providing supporting for corporations that seek to shift their profits overseas to avoid paying their fair share of taxes.” He implies that the current tax rate constitutes a “fair share,” but corporations considering inversion clearly view it differently. When operating abroad, U.S. multinationals face the same taxes that other corporations pay, but to bring profits home, they must comply with a much higher tax. The federal government has caused this problem through their own mishandling of the tax system, and now it is time for a permanent fix.

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Senate to Debate ‘Carrot & Stick’ Approach to Moving Jobs Abroad; San Francisco City Leaders Approve of “Soda Tax” – Late Edition, July 24
Posted By: Jihun Han - 07/24/14

Today's Taxpayer News!

The Senate will debate on a bill that would give tax credits (the carrot) to companies that bring jobs home from outside the country; and slap a higher tax bill (the stick) on those who don’t “bring them back” to the U.S. Read here for more!

San Francisco city leaders voted to approve a tax on soda and other sugary beverages. The measure will now be on the ballot in November for voters to decide. Reuters has the latest! 

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