A duopsony built around rent-seeking

By Edward J. Pinto, Resident Fellow, American Enterprise Institute, and Norbert Michel, Director, Center for Data Analysis at The Heritage Foundation.

A recent Senate Banking Committee hearing explored “The Status of the Housing Finance System After Nine Years of Conservatorship.” The title pretty much says it all — Congress has done nothing substantive on housing finance reform in almost a full decade.

Given the spectacular failure of Fannie Mae and Freddie Mac that led to the 2008 financial crisis, the fact that these Government-Sponsored Enterprises (GSEs) remain in government conservatorship might seem surprising. After all, during the crisis, Fannie Mae and Freddie Mac transformed from political untouchables in housing finance to pariahs.

[…]

*This piece originally appeared on AEIdeas. To read click here.

How the GOP Tax Bill Will Affect the Economy

By Parker Sheppard, Senior Policy Analyst, Center for Data Analysis at The Heritage Foundation, and David Burton, Senior Fellow, Roe Institute for Economic Policy Studies at The Heritage Foundation.

The House passed its version of the Tax Cuts and Jobs Act on Thursday, a bill that would reform the tax code by lowering marginal rates for most households, corporations, and small businesses.

The Senate is also working on its own version of the bill. Though the complete details are yet to be finalized, both the House and Senate versions contain enough in common that we can estimate the effect these bills would have on the economy once a new equilibrium is reached. Most of these effects would likely occur within the 10-year budget window.

The following estimates reflect the House bill as reported out of the Ways and Means Committee and the chairman’s mark being debated in the Senate Finance Committee. (The version that the House passed is nearly identical to the bill reported out of committee).

Main Reforms in the Bill

Both versions of the Tax Cuts and Jobs Act reduce the corporate tax rate from 35 percent to 20 percent, reduce tax rates on non-corporate (pass-through) businesses, and increase the present discounted value of capital cost recovery allowances.

The capital cost recovery allowance improvements are primarily a function of a reduced class life for structures in the Senate bill, and higher section 179 expensing thresholds, as well as temporary expensing for machinery and equipment in both the House and Senate bills.

The Senate bill generally lowers the rates on pass-through entities to a greater degree than the House bill.

Long-Run Estimates

The economy and our tax code are complex systems. A complete analysis of any tax reform proposal should reflect that complexity. However, a simple estimate that focuses on the key marginal rate changes is sufficient to give an idea of the magnitude of the economic effects without resorting to complicated models.

The estimates presented here are within a reasonable range of values, based on empirical studies as described below in the methodology section.

We estimate that the House bill would increase the capital stock related to equipment by 4.9 percent, and the capital stock related to structures by 9.1 percent. These estimates are very similar to the comparable projections for the Senate bill (4.6 percent and 10.9 percent for equipment and structures, respectively).

The House bill is projected to boost long-run gross domestic product (GDP) by 2.6 percent, and the Senate version is expected to increase long-run GDP by 2.8 percent. To put that number in perspective, the increase in GDP translates into an increase of $4,000 to $4,400 per household. These results are comparable to other recently published estimates, such as those released by the Tax Foundation and the Council of Economic Advisers.

Both bills only temporarily change the rules for expensing of new investment. We calculated the effects of the bills when the expensing rules are in place and the effects after the expensing changes have expired. Our reported estimates are the simple average of the two, which reflects business’ expectations that the changes in expensing rules may or may not be made permanent at a later date.

If the expensing rules were made permanent, we estimate that GDP would be 3.0 percent higher than baseline under both bills. If the expensing rules were to expire, we estimate the House bill would increase GDP by 2.3 percent and the Senate bill would increase GDP by 2.6 percent.

Methodology

Our estimate is based on a standard neoclassical production function, which shows how the amount of capital and labor used in production determine economic output. When more capital or labor is used in production, output increases.

Our estimates reflect the steady-state values of capital and labor. In the steady state, the capital stock and hours worked per person have reached their equilibrium values because the marginal costs from additional investment and work just equal the marginal benefits, after taxes. However, economic growth continues due to increases in population and technological innovation.

The presence of taxes on businesses and households creates differences between the returns generated by investment and the returns paid to savers, as well as differences between the wages paid by employers and the wages received by workers.

These differences create lost opportunities. Firms don’t invest and households don’t work on projects where the marginal benefit is lower than the amount of the tax. Economists often call this loss dead-weight loss or excess burden.

Our analysis shows the effects of the Tax Cuts and Jobs Act through two channels. The first channel focuses on the demand for financing capital. A firm considering an investment in capital has to weigh the marginal cost of the capital investment against its marginal benefit, which is its projected return. The cost of capital to a firm is a function of the return it pays to equity and debt holders, the rate of depreciation of capital, and the taxes due on that capital. The equation for calculating the cost, originally set forth by Robert Hall and Dale Jorgenson, is referred to as the user cost of capital. Higher corporate tax rates increase the user cost of capital. Additionally, increases in the present discounted value of capital cost recovery allowances decrease the user cost of capital.

The second channel focuses on the supply of labor. When households decide how much to work, they have to weigh the marginal benefit of their after-tax wages against the marginal cost of activities other than work. An increase in after-tax wages increases the benefit to households from forgoing other activities, resulting in additional hours worked.

The lower the corporate tax rate, the greater the number of investment projects that are economically worthwhile, and higher the steady-state level of capital. Similarly, the lower the income tax rate, the greater the number of job opportunities that are economically worthwhile, and the higher the steady-state level of hours worked.

Economic growth would increase temporarily following the passage of the Tax Cuts and Jobs Act as the economy would move to a new steady state with a higher per-capita GDP. The benefits of these reforms would accrue every year as the economy would operate in a steady state with higher GDP into the indefinite future.

Details About How the Estimate Was Conducted

We take the nominal rate of the return to capital to be 9 percent, which is the approximate average annual nominal return on the S&P 500 from 1871 to 2017. Recent yields on Baa corporate bonds have averaged around 5 percent. We take the inflation rate to be 2 percent, which is the value that the Federal Open Market Committee judges to constitute stable prices. Assuming that companies rely on debt for 25 percent of their financing, these values imply a required real rate of return of 6 percent. We assume that interest rates remain the same following the change in taxes.

The marginal tax rates for pass-through entities change with income and type of pass-through entity. We simplify the range of rates and take the current law to have a marginal rate of 28 percent, the House bill to lower the marginal rate to 25 percent, and the Senate bill to lower the marginal rate to 21 percent.

For depreciation rates, we use 0.13 for equipment and 0.03 for structures, which correspond to the average depreciation relative to the current-cost stock of each asset type as reported by the Bureau of Economic Analysis in the period 2006-2016.

The user-cost elasticity of capital describes the percentage change in the capital stock given a one percent increase in the user cost of capital. It also corresponds to the elasticity of substitution between capital and labor in production. The larger this value, the easier it is for firms to change the mix of capital and labor used in production. The standard neoclassical Cobb-Douglas production function implies a value for this elasticity of -1. A recent report from the Council of Economic Advisers notes a consensus in the literature around this value.

The cut in the corporate tax rate only applies to corporations, which hold about 75 percent of private, non-residential fixed assets, according to data from the Bureau of Economic Analysis. The changes in expensing will apply to all firms. Our estimates of the change in capital stock reflect the distribution of capital holdings by legal form of organization.

The output elasticity of capital describes the percentage change in output that follows a one percent increase in capital. We use values of 0.15 for equipment and 0.13 for structures, which are both taken from a paper by Akos Valentinyi and Berthold Herrendorf.

Though both bills maintain the graduated income tax brackets, for simplicity we reduce the several marginal income tax brackets to a single marginal rate. We take a weighted average of the marginal rates according to the proportion of filers in each bracket as reported by the U.S. Census. The weighted changes are dominated by the $15,000-$75,000 bracket, which contains approximately half of households. We take both bills to increase after-tax wages by 4 percent.

We use a labor supply elasticity of 0.3. In a survey, Michael Keane suggests that this is a typical estimate for the labor supply elasticity of individuals. It is also the value used by the Tax Foundation in their Taxes and Growth model.

We use a value of 0.6 for the output elasticity of labor. That value approximately corresponds to the share of labor’s compensation in output.

Additional Considerations

The estimates we report are for our preferred values. Changing the parameters of the model or incorporating additional features will produce slightly different estimates, though they should be within the range of what we report here.

There is some disagreement in the literature about the appropriate value for the user-cost elasticity of capital. However, a relatively recent survey by Robert Chirinko reports a number of estimates in that range, but places more weight on estimates in the range of -0.4 to -0.6. Using these alternative values suggests that the change in GDP due to changes in the cost of capital would be half as large as reported in the table above. We also note that the lower the elasticity of substitution between capital and labor, the higher the increase in labor productivity and wages from additional investment.

Additionally, there is a range of estimates for labor supply elasticity. This range is in part due to differences between labor supply at the individual household level and at the aggregate, economy-wide level. Individuals tend to work around 40-hour work weeks, and may change hours only a little in response to lower taxes. However, lower income taxes are more substantial factors for people deciding whether or not to enter the workforce. Thus, while the micro estimates may place the elasticity of labor supply around 0.3, Edward Prescott and Johanna Wallenius suggest that the aggregate labor supply elasticity is around 3. That elasticity would imply that the effects of the Tax Cuts and Jobs Act on labor supply are 10 times larger than what we have reported in our estimates. However, we choose to use the conservative elasticity value in our estimates.

All of our estimates assume that wages and interest rates remain constant. The changes in the tax code constitute shifts in the demand for capital financing and the supply of labor. Wages and interest rates will only stay constant if the supply of savings and the demand for labor are perfectly elastic. The former is more plausible once the international mobility of capital is considered. The lower the elasticity of these curves, the larger the increase in returns and decrease in pre-tax wages, and the smaller the increases in capital and labor.

This calculation is not meant to substitute for the full analysis of a more detailed model. However, the simplicity of the calculation clarifies the mechanisms at work.

The Tax Cuts and Jobs Act would lower the cost of capital and increase after-tax wages, which would increase the capital stock and number of hours worked, both of which would cause an increase in GDP.

*To read this article in The Daily Signal, click here.

Repeal HIT on consumers and small businesses

By David Burton, Senior Fellow in Economic Policy, Roe Institute for Economic Policy Studies, Institute for Economic Freedom and Opportunity at The Heritage Foundation.

After a one-year moratorium, a new Obamacare tax will kick in this January. As a result, premiums for individual and small group health insurance plans will increase by 2 percent to 3 percent.

The tax will have little effect on large employers and their employees because large firms usually self-insure. But small businesses and families who buy their own coverage will bear the cost of this hidden tax. It should be repealed.

[…]

*This piece originally appeared in The Washington Times. To read click here.

ACLU Threatens to Stamp Out Diversity by Shuttering Faith-Based Adoption Agencies

By Emilie Kao, Director, Richard and Helen DeVos Center for Religion & Civil Society at The Heritage Foundation, and Zachary Jones, Member, Young Leaders Program at The Heritage Foundation.

November is National Adoption Awareness Month.

And how is the American Civil Liberties Union celebrating? By trying to reduce the number of agencies that place needy children with families.

Specifically, the American Civil Liberties Union is suing the state of Michigan over a 2015 law that allows religious adoption agencies to decline placing children with same-sex parents, in accordance with their religious convictions.

If the ACLU prevails in court, it would overturn the Michigan law and force numerous faith-based adoption agencies to choose between following their beliefs about marriage and family, or going out of business, leaving thousands of foster children out in the cold without families.

Despite the ACLU’s attacks, Michigan’s law is neither unconventional nor unprecedented. It simply preserves the status quo in which religious adoption agencies and foster families can serve children on equal terms with secular adoption agencies and foster families.

As Michigan state Rep. Andrea LaFontaine explained at the time of the bill’s enactment, “[The bill] simply preserve[s] the system we use today. It is not about who can and who cannot adopt a child. It’s about ensuring the most alternatives for people wanting to adopt a child.”

Similar laws have been adopted in six other states—Alabama, Mississippi, North Dakota, South Dakota, Texas, and Virginia. This lawsuit shows why a federal law, like the Child Welfare Provider Inclusion Act, is so needed to protect faith-based adoption providers.

High Stakes for Michigan Children

There are currently more than 13,000 children in the Michigan foster care system. Placing these orphaned and hurting children with permanent, loving families requires an all-out effort from a diversity of agencies.

These agencies work tirelessly to recruit foster and adoptive parents, and diversity aids their cause. Having a diversity of providers means there are more connections with communities and families who want to open their homes to children in need.

Considering the decline in the number of parents who are adopting, it’s difficult to understand why anyone would seek to limit the number of adoption agencies and foster care providers. Doing so would only further delay the day that each child in Michigan can join a “forever family.”

Yet that is exactly what the ACLU is doing in Dumont et al. v. Lyon. It is not just an attack on fairness within the adoption industry, but on the children who are served by religious adoption agencies.

As former president of the National Council for Adoption warned, “If all faith-based agencies closed … the adoption and child welfare field would be decimated, depriving thousands of children [of opportunities to] grow up in families.”

The ACLU’s Michigan lawsuit could create the same conditions that led to the shuttering of faith-based adoption and foster care providers in Massachusetts, Illinois, and the District of Columbia.

Groups in those states were compelled to either shut down or comply with government mandates that violate their sincerely held religious beliefs.

In the case of Illinois, over 2,000 children had to be moved to agencies around the state. Closing these institutions—which in Michigan make up 50 percent of all adoption and foster care services—did not help a single child find a home, or any couple find a child.

In fact, it hurt the most vulnerable children, as faith-based agencies—which tend to have the highest success in placing older children and disabled children with families—were unable to provide the required services.

In essence, Illinois scored a symbolic political point in the culture war at the expense of over 2,000 children.

The ACLU’s Claims

The ACLU argues that the Michigan law violates the First Amendment’s prohibition on government establishment of a religion.

But the legislation does not force the government of Michigan to establish a religion, nor does it favor one particular faith or doctrine. Instead, it allows faith-based groups to partner with the government to serve the larger community while remaining true to their beliefs.

In Trinity Lutheran v. Comer, the Supreme Court faulted the state of Missouri for expressly requiring Trinity Lu­theran Church Child Learning Center “to renounce its religious character in order to participate in an otherwise generally available public benefit program, for which it is fully qualified.”

Here, as in Trinity Lutheran, excluding faith-based child welfare providers from working with the government solely because of their religious character would be unjustified discrimination.

The ACLU’s interpretation of the First Amendment’s establishment clause is wrong and misleading.

The ACLU also claims that the faith-based groups violate the equal protection clause of the 14th Amendment by discriminating on the basis of sexual orientation.

However, the preference of faith-based agencies for placing children with mothers and fathers is not based on sexual orientation. It is based on beliefs about the uniqueness of both sexes in parenting, and the value of giving a child a mother and a father wherever possible.

An agency could choose to place a child with a mother and father rather than with two women or two men (whatever their orientations) because the best two dads or two moms can’t replace both a mom and a dad.

This has nothing to do with the sexual orientation of the individuals. Even the Supreme Court has referred to the support for opposite-sex marriage as “decent” and “honorable,” and based on “reasonable” premises.

Same-sex couples in Michigan seeking to adopt are free to do so with dozens of agencies across the state. One of the plaintiff couples refused to take advantage of a secular agency that was only 11 miles away, insisting that a faith-based agency had to violate the tenets of its faith for them to adopt a child.

Contrary to the ACLU’s claims, there is no constitutional or practical reason why a faith-based agency must be forced to violate its religious beliefs when there are an ample number of alternatives across the state.

There should be enough room in Michigan for every qualified agency to provide adoption and foster care services.

Erasing a Win-Win Policy

Plaintiff Kristy Dumont said, “So many children in Michigan need homes. The state should do all that it can to make sure children in the foster care system have access to all available, qualified families.”

The people of Michigan agreed with Dumont and chose to have diversity in their child-placing provider options, passing legislation that preserves a variety of options for everyone.

If the ACLU has its way, it will remove this increasingly rare “win-win” legislative solution and prevent the agencies most successful at finding homes for hurting children from operating.

The courts should reject the ACLU’s attempt to impose ideological uniformity on adoption and foster care providers at the expense of Michigan’s most vulnerable children.

*To read this piece on The Daily Signal website, click here.

Taxpayers shouldn’t be forced to subsidize California’s spending addiction

By Dan Holler, Vice President, Heritage Action for America.

Buried within the more than 74,000 pages of our nation’s tax code lies a special tax deduction that allows state and local governments with excessively high taxes to shift part of the burden to taxpayers in other states.

In other words, the state and local tax deduction forces taxpayers in low tax states to subsidize the big-government spending policies of states like California.

Not only does this deduction feed lawmakers’ spending addiction, it makes it easier for these states to accumulate debt, which could ultimately result in future requests for federal bailouts.

While it’s clear that SALT is detrimental to our economy as a whole, it’s important to take a closer look at who actually benefits.

[…]

*This piece originally appeared in The Orange County Register, to read click here.

Congress Is Putting Itself in a Straightjacket on Tax Reform

By Bill Walton, Host of “Common Ground with Bill Walton” and Trustee of The Heritage Foundation.

It’s beginning to look like Republicans in Congress are going to squander yet another opportunity to do something big to boost the economy.

Our pro-prosperity president wants a pro-growth tax package, but our Republicans in the House cannot break out of self-imposed constraints and propose one. As a result, the House’s tax plan narrows the tax base, makes the code more complicated, and fails to reduce taxes on wealth creators—AKA the rich.

Yes, there are some positives in the plan, as Rachel Greszler and Adam Michel of The Heritage Foundation explained to me on a recent visit to “Common Ground with Bill Walton.” But the package could do so much more if the tax writers were not so captured by static analysis paralysis and afraid of being accused of favoring the rich.

As a consequence, the Tax Cuts and Jobs Act is mostly small ball.

The biggest positive, said Michel, would be reducing the federal corporate tax rate from 35 percent—the highest in the industrial world—to 20 percent. But even there, earlier proposals had called for a 15 percent or even 12 percent to match Ireland’s.

Businesses can write off investments quicker, but this provision has also been watered down to exclude many items like used equipment.

Same with the estate tax. It is eliminated … in six years. If this provision survives intact, invest in respirator companies because people will be doing whatever they can to keep Dear Old Dad alive until 2023.

There’s also a doubling of the standard deduction to $24,000 for individuals, which helps individuals and small, pass-through corporations but does little to spur investment.

This leaves us with lower rates for most people making less than $200,000 and an uptick in the percentage of people paying no income tax, but a higher tax bill for those in the $200,000-$500,000 bracket.

Meanwhile, a tax bracket was added, and the top rate of 39.6 percent won’t change.

The Republicans are stuck on the idea that they must provide significant tax cuts to the quote-unquote “middle class.” But 50 percent of Americans pay hardly any federal income tax, and the top 10 percent of income earners pay 70 percent of all taxes.

If we truly want to reform the income tax system, we must be talking about bringing down those top rates as well. Moving around little pieces, trying to provide a big tax cut for people that already don’t pay a large share of the total income tax, doesn’t get you much.

It becomes even harder when you consider the rules the Republican majority chooses to play under.

Proposals such as the Tax Cuts and Jobs Act continue to be scored under a static system that assumes changes in the tax code have no bearing on investment and savings decisions, as opposed to a dynamic system that accounts for incentives.

It’s “just this box that Congress puts itself in,” Greszler said. “You don’t get those revenue effects. We don’t really have dynamic scoring. They’re not going to give the full true growth effects that we believe are going to happen.”

The Senate passed a measure that said the tax cut can’t exceed $1.5 trillion. Now, it must tie itself into knots trying to achieve that number.

Michel said, “Republicans have pushed to change the rules and do revenue estimates on a 20-year basis, rather than the current 10, to allow the economic benefits of tax breaks more time to accrue. This would make economic growth and human flourishing a much bigger part of the equation and what’s-in-it-for-me thinking a bit smaller.”

As it is, we “have all these complicated rules to make that $1.5 trillion number work,” Michel said. “The economic growth would make it not nearly as deficit-heavy as it otherwise would be. It’s working in the system, saying, ‘If the Joint Committee on Taxation is going to give us this irresponsible score, we’ll work within that world. But in reality, we understand that this isn’t actually going to be a tax cut of $3 or $4 trillion.’ In the real world, economic growth is going to make up a big piece of this.”

We’re left with some progress, which we hope will create momentum for more. But we’re also left with the thought that so much more could have been done now.

“A lot of it is a lack of desire to make that bold move to say we no longer want to be constrained by these arcane rules,” Michel said.

“It’s really that they’re allowing themselves to be shackled by process. You can debate whether that process came from a good place or has a role in the future. But a lot of the things can be changed. It’s just a matter of mustering the political courage to change them.”

*Click here to view this content on The Daily Signal.

Bill Would Protect Pro-Life Nurses Like These 3 Women

By Ian Snively, Member, Young Leaders Program at The Heritage Foundation.

Pro-life members of Congress have introduced legislation to protect health care providers from being compelled to provide abortions under threat of losing their jobs.

Rep. Chris Smith, R-N.J., held a press conference on the House Triangle outside the U.S. Capitol on Wednesday to promote the Conscience Protection Act. The bill is designed to “end discrimination against people, [insurance] plans and providers for choosing not to be involved in abortion,” according to a statement from Smith.

“Health care, my friends, is about saving lives,” Smith said. “It is about eradicating disease. It’s about mitigating disabilities, not taking the lives of unborn children. At the very least, health care providers should have the right not to be coerced into facilitating abortion.”

Since the 1970s, it has been illegal for public authorities to force individuals or entities to perform or assist in the abortion process. But Smith said the law isn’t enforced, and people like the three nurses who joined Smith at the press event had their livelihoods threatened for seeking to avoid performing abortions.

“My faith in God and the Catholic Church’s teachings about the sanctity of all human life further inspired my career in nursing,” said Cathy DeCarlo, one of the three nurses.

DeCarlo said she moved from the Philippines to the U.S. to expand her opportunities in the medical field. In 2004, she served as an operating-room nurse at a New York hospital. For five years, her bosses assured her that she wouldn’t be compelled to assist in or perform abortions.

But that changed in May 2009, when she was ordered to perform an abortion on a 22-week-old unborn child. Despite pleading with her supervisor, she was told she either needed to comply or be charged with insubordination and abandoning her patient.

“[I] watched in horror as the doctor dismembered and removed the baby’s bloody limbs,” said DeCarlo, trying to hold back tears. “And I had to account for all the pieces. I still have nightmares about that day.”

The two other nurses, Sandra Mendoza and Fe Vinoya, faced similar threats to their careers if they didn’t comply with their facilities’ new requirements; namely, to assist in taking the lives of unborn babies.

Smith said the legislation will provide “a right of private action, so they can take those … rights of conscience into a court of law” and win their cases.

“Being American has always been experiencing the freedom to live by the dictates of one’s deeply held beliefs,” said Rep. Diane Black, R-Tenn., who was one of the authors of the Conscience Protection Act.

“We are not seeking to change anyone’s minds on abortion,” she said, “though I would hope one day they could. We are simply asking to protect the fundamental rights of Americans. No one, ever, should be forced to participate in killing an unborn child.”

Sen. James Lankford, R-Okla., who co-wrote the Conscience Protection Act with Black, was also on hand for the bill’s rollout.

“Federal funds do not extend to forcing or compelling individuals to participate in abortion,” Lankford said. “That’s already settled law.”

Lending bipartisan support, Rep. Dan Lipinski, D-Ill., defended his fellow congressmen and their statements about people’s rights to live by their beliefs.

“If we cannot uphold these freedoms,” he said, “[then] this is really a great detriment to our nation. We have to live up to our principles.”

*To read this piece on The Daily Signal website, click here.

Congress Could Soon Face a Budget Fight. Here’s How Lawmakers Can Rein in Spending.

By Romina Boccia, Deputy Director, Thomas A. Roe Institute for Economic Policy Studies and Grover M. Hermann Research Fellow at The Heritage Foundation.

Two thousand seventy-five dollars. That’s every American’s personal share of the fiscal year 2017 budget deficit. The total deficit? Six hundred sixty-six billion dollars.

It’s the American people who are on the hook for Congress’ incessant spending appetite. The good news, though, is that Congress has a chance to address deficits and overspending as we approach the fiscal year 2018 funding deadline.

While Congress is doing the critical work of reforming the U.S. tax code, it must not neglect opportunities to right-size government spending. As the late Milton Friedman reminded us, spending is the true tax. Deficit spending is simply deferred taxation, and today, both spending and deficits are on an upward trajectory.

With the expiration of the continuing resolution on Dec. 8, Congress will be faced with a major budget deadline to set spending for the remainder of fiscal year 2018.

Many lawmakers in Congress are considering seizing this opportunity to raise spending this year, particularly on defense. They also have an incentive to raise the budget caps, as any bump in spending above current law will cause automatic cuts to kick in.

Both of these incentives make a budget deal likely before year’s end, and it would likely put us on the path to further fiscal decline.

A Much-Needed Restraint

The Budget Control Act, passed in 2011, imposes fiscal discipline on Congress by limiting discretionary spending for both defense and nondefense to certain levels. The budget caps are set in law, and enforced by sequestration.

The law is far from perfect, and fiscal conservatives have struggled with repeated revisions by Congress to circumvent the spending limits put into law. But thus far, it has been effective at reining in spending.

The Budget Control Act needs several key reforms, which would strengthen the law and enhance transparency and accountability in budgeting for domestic and defense programs.

Congress should seriously consider adopting an overall discretionary spending cap instead of separate caps on defense and nondefense programs. Moreover, loopholes that allow for spending above the caps should be phased out, reserving any additional funding for true emergencies.

Congress should make sure any spending increases are fully offset to include any additional interest costs incurred over the 10-year budget window, with spending reductions taking place elsewhere. Offsetting this spending would help keep ballooning costs under control.

Importantly, Congress should make spending limits permanent and make them apply to mandatory programs as well as discretionary spending. Congress also must not allow spending limits to expire after 2021, as would happen under current law.

Further caps on autopilot entitlement programs will be required to truly rein in spending, as health care and old-age entitlements drive the vast majority of spending growth projected for the budget.

Despite its shortcomings, the Budget Control Act has overall been successful in controlling discretionary spending and in securing spending offsets whenever lawmakers have struck a deal to raise discretionary spending beyond what the law allowed. This has saved taxpayers hundreds of billions of dollars since the law’s inception.

(Photo: Federal Budget in Pictures)

Every year since 2011, Congress has revised the Budget Control Act caps in exchange for offsetting spending reductions and additional revenues (usually from government fee collection). Congress made real progress, despite the fact that billions of dollars in offsets were gimmicky and misrepresented the true costs of the revisions.

Strengthen the Budget Control Act. Don’t Weaken It.

The threat to America’s budget is even bigger this year.

Lawmakers may decide to forego offsetting spending reductions altogether, because cutting spending is hard work. But increasing overall spending would be careless this year and reckless in the long run.

What may seem like a small increase in spending in light of the $4 trillion federal budget will have much more far-reaching implications, driving up the debt and related interest costs over the long run, while growing the overall size of government.

Cutting spending, however, can help pave the way for the structural entitlement reforms that will ultimately be needed to square our fiscal situation. Congress must start somewhere.

And beyond budgetary concerns, inappropriate and wasteful federal spending imposes other costs on society. It hamstrings entrepreneurial ventures with excessive regulatory requirements and supplants appropriate private-sector functions with federal subsidies and loan guarantees, which distort U.S. economic activity and reduce potential economic growth.

Congress should right-size federal spending by following the president’s lead and provide for critical defense needs in a fiscally responsible manner.

There are savings in both mandatory and discretionary programs that can fully offset any Budget Control Act cap revision for defense. (A long list of these savings can be found in “Blueprint for Balance” and in the president’s budget proposalto Congress.)

Congress should also ensure that any Budget Control Act revision includes important reforms to strengthen the law and secures permanent spending limits.

Enforceable fiscal controls, like the spending limits in the Budget Control Act, are the nation’s best hope to drive federal spending down bit by bit, every year. Without such spending controls, deficit spending will eventually catch up to us.

*To read this piece on The Daily Signal website, click here.

The Ethanol Mandate Promotes Swamp Dominance, Not Energy Dominance

By Nicolas Loris, Herbert and Joyce Morgan Fellow in Energy and Environmental Policy, Center for Free Markets and Regulatory Reform at The Heritage Foundation, and Samantha Block, Member, Young Leaders Program at The Heritage Foundation.

Washington is known for political arm-twisting.

There’s a good reason for that. It too often works, and it helps prop up bad policies like mandates to blend corn-based ethanol and other biofuels into our fuel supply.

In September, the Environmental Protection Agency proposed cutting the volumetric requirements for the Renewable Fuel Standard. The reductions were not major by any means—they dropped the total renewable requirement from 19.24 billion gallons under the proposed 2018 standard to 18.77 billion gallons in 2019.

The reduction was a win for a range of environmental organizations, world hunger activists, economists, energy companies, and many in the agricultural community (cattlemen, chicken, and turkey farmers, etc.) harmed by the mandate.

Then certain Corn Belt politicians stepped in, criticizing the cuts and threatening to use their positions to hold up EPA nominees.

The EPA caved to their demands and committed to reversing proposed cuts to biodiesel and cellulosic ethanol volumes in the Renewable Fuel Standard. This would set the 2018 standard at or above the current levels.

Sen. Ted Cruz, R-Texas, who won the Iowa caucus while blasting the mandate, is fighting back. Cruz is doing this by blocking the nomination of Iowa Agriculture Secretary Bill Northey to a top U.S. Department of Agriculture post until a meeting on the Renewable Fuel Standard is held.

Cruz and other allies in the Senate wrote their concerns to the White House, stating that the concessions made to the Corn Belt senators would result in refinery job losses and high costs. They requested the meeting be held within three weeks.

Cruz is right. Other voices need to be heard. The Renewable Fuel Standard benefits a select few at the expense of many, including many industries in the Midwest and the agricultural community.

Within the agriculture community, the National Chicken Council, National Cattlemen’s Beef Association, National Pork Producers Council, National Turkey Federation, Milk Producers Council, and many other groups have called on Congress to repeal the standard.

Some small rural towns bet big on biofuels and lost. Utah State University’s Institute of Political Economy details how preferential treatment for ethanol shifted the risk from companies to the local communities, where cities would offer incentives that in some instances lasted multiple decades or front the costs to build out the infrastructure.

Americans at large are made worse off through higher food and fuel prices. They need a voice in this fight. Refiners have also received the short end of the stick from this policy, having to pay more than $1 billion in credits and surcharges to comply with tshe mandate.

Ironically, the U.S. is more than willing to point out other countries’ subsidizing of biofuels. The Department of Commerce determined that Argentina and Indonesia were heavily subsidizing their biodiesel by as much as 72 percent.

Commerce Secretary Wilbur Ross stated, “The unfair government subsidization of products is something the department takes very seriously. While the United States is committed to free, fair, and reciprocal trade with all countries, the Trump administration will stand up for American workers and companies being unfairly harmed.”

Accommodating to “swamp” special interests prevents real reform. Washington needs to stop picking winners and losers. The Renewable Fuel Standard mandate eliminates the risk and competition necessary for a healthy and growing energy industry.

Energy dominance doesn’t come from production quotas. Congress and the administration should stop caving to politicians and producers who benefit from this policy, and stop ignoring those who are harmed by it.

*To read this piece on The Daily Signal website, click here.

How Tax Reform Would Simplify Taxes for Tens of Millions

By Rachel Greszler, Research Fellow, Economics, Budget and Entitlements at The Heritage Foundation.

Lawmakers have long championed a system that allows Americans to fill out their tax returns on a postcard.

The Tax Cuts and Jobs Act proposed by Republicans in Congress could help turn that vision into a reality for most Americans.

The U.S. tax code imposes a huge burden on Americans, and not just in terms of the taxes they pay. The current system is so tortuous and complex that most Americans pay an accountant or buy tax software to help them file their taxes each year.

Typical tax software costs about $50 to $100, and the CPA Practice Advisor estimates that the average taxpayer who itemizes will pay about $275 in tax preparation fees. Those costs may not seem terribly high, but multiply it by roughly 150 million taxpayers and we’re talking about tens of billions of dollars just in tax filing fees.

Other compliance costs, including time, raise the tax burden even higher.

About 46 million taxpayers (30 percent) itemize their taxes each year, meaning they have to keep track of things like mortgage interest, medical expenses, charitable donations, and sometimes even the sales taxes they pay on hundreds or thousands of purchases throughout the year.

Even some people who don’t end up itemizing needlessly keep track of these deductible expenses because they don’t know if it will be advantageous for them to itemize or not.

By doubling the standard deduction, partially or fully eliminating the state and local tax deductions, and removing other deductions, the proposed plans would cut the number of taxpayers who itemize by more than half, saving between 21 and 28 million Americans the hassle of keeping track of and itemizing their deductions.

We estimate that doubling the standard deduction alone would reduce the percentage of taxpayers who itemize from 30 percent to 16 percent. Fully eliminating state and local tax deductions (as the Senate’s version does) would further cut the percentage of itemizers down to under 14 percent.

While all income groups would be less likely to itemize their deductions, doubling the standard deduction would generate the biggest reduction in the number of lower- and middle-income taxpayers who itemize.

Getting rid of the state and local tax deduction, on the other hand, would greatly reduce the number of high-income taxpayers who itemize.

Doubling the standard deduction and erasing lots of problematic deductions and exemptions would make tax filing easier for tens of millions of Americans. Lower taxes for most taxpayers would also put a big chunk of change back into most Americans’ pockets.

Tax simplification and tax reduction are two undeniable benefits that would come from the proposed GOP plan.

*To read this piece on The Daily Signal website, click here.

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