ATR, Supermajorities, and Balanced Budgets

Americans for Tax Reform is an utterly misnamed organization at this point since its political efforts are now entirely aimed at preserving the utterly dysfunctional status quo of our public revenue system. Lobbying hard against removing ridiculous tax subsidies for ethanol was a low point. It's position on a supermajority requirement for raising taxes in a Balanced Budget Amendment is even lower.

This is how ATR explains things:

Washington has an overspending problem, not an under-taxing problem. Historically, outlays have averaged about 21 percent of Gross Domestic Product (GDP) while revenues have amounted to about 18 percent of GDP. Due to the Obama Administration and Congressional Democrats’ spending binge, outlays now average almost 25 percent of GDP, and are projected to stay around 23 percent in perpetuity.

Unless tax hikes are taken off the table, reckless lawmakers will increase taxes to pay for these new bloated spending levels, rather than bring spending in line with revenues. Any lawmaker serious about restoring American solvency cannot seriously vote for a BBA that does not include a super-majority requirement for tax increases. To pass a BBA that allows a tax hike by simple majority is to distract from the real problem of government spending, and leave taxpayers to bear the burden of foolhardy federal budgeting.

First of all, Washington does have an under taxing problem right now. Revenues are about 14% of GDP, well below the 18% historical average. Raising revenues back to 18% would cut the deficit in half. But, I digress.

A rule to require a supermajority vote in order to "raise taxes" means that a host of sensible, valuable, pro-growth, conservative ideas for, you know, tax reform effectively get taken off the table. Removing deductions, credits, and exemptions for special interests? Getting rid of the awful carried interest loophole for equity fund managers' pay? Generally moving to a flatter, fairer, simpler, more transparent tax system? Under any of these arrangements, someone's taxes will increase even if many people's tax liabilities go down. If we apply the ATR's interpretation of its so-called "Taxpayer Protection Pledge" to a constitutional provision requiring a supermajority vote to raise taxes, then the prospects of actually, you know, reforming the tax system in a meaningful way goes down the toilet.

Moreover, the temptation in Congress is not going to be to raise taxes in general but to raise taxes selectively to cover spending. So, the right approach is to include a provision that sets a maximum ratio of the highest marginal tax rates to the lowest marginal tax rate above a defined income threshold. For example:

In no case shall the highest total marginal rate of taxes on annual individual incomes imposed by the government of the United States be no greater than three times the lowest total marginal rate of taxes on annual individual income above $35,000 or its equivalent adjusted for inflation.

So, if the lowest total marginal income tax rate (the rate produced by combining collections from income taxes, Social Security taxes, Medicare taxes, etc.) [say on income between $35k and $50k] were 15%, the highest combined marginal tax rate could be no higher than 45%. And, if Congress wanted to raise the total marginal rate at the high end, they would have to raise the rate at the low end, too.

This rule would ensure that the costs of government are borne broadly by the American people so that efforts to increase the size and scope of government activities necessarily imply imposing real costs on electoral majorities. By extension, any "reckless" legislators who tried to support spending on less useful programs and services by passing the buck to taxpayers would quickly find himself out of a job. 

In contrast, an arbitrary supermajority threshold for tax increases doesn't really protect taxpayers. It just institutionalizes a mechanism that will build up unsatisfied demand for government services and programs that will, eventually, manifest itself as the unthinkable supermajority that imposes skewed tax increases along with its bursts of new government programming. Indeed, the supermajority rule for tax increases strikes me a sure-fire recipe for exacerbating the pathologies of the current fiscal mess in which the country finds itself.

The other provision utterly lacking in drafts of Balanced Budget Amendment proposals I have seen is a rule for spending in the absence of a new budget. Congress is legally obligated to pass a budget each year, and we see how well that works. Unless a BBA is judicially enforceable, i.e. courts can order new taxes or spending (which we really don't want to do) there is no mechanism to ensure that budgets actually balance and no accounting for spending that's not part of an official budget, like this year's government by continuing resolution.

For any fiscal year or part of a fiscal year for which Congress has not adopted a budget in accordance with the provisions of this Article,  nominal budget authorizations and actual rates of taxation for the last year in which a budget was adopted shall prevail.

This would establishes a constitutionally mandated "continuing resolution" provision that would hold spending at the previous year's level until a new budget is enacted.

The Higher Cost of Higher Education

I keep seeing figures like this one from the American Enterprise Institute floating around showing that the cost of higher education is growing much faster than the rate of inflation.

I have two young sons, and it is likely that my family will continue to grow over the next few years. I expect that my children will want to go to college, and I am very much concerned about the cost data displayed in that figure.

I have my own suspicions about the reasons for the rapid growth in higher education costs.

Part of it is almost certainly that colleges provide many more amenities and services to students than they did in the past. Equivalents to the professionally staffed academic advising center, writing center, counseling center, and career center available to my students at Texas A&M were not available to my dad at the University of Florida in the late 1960s. nor was he able to make use of programs like the Alcohol and Drug Education Program, the GLTB Resource Center, or the Student Conflict Resolution Center available to Aggies today. As near as I can tell, his in-state tuition and fees and UF got him a pretty Spartan dorm room (no air conditioning, community bathroom, weeknight curfew) and 15 credit hours a semester. Paying to build space and staff for these programs is expensive.

Another chunk is almost certainly due to the amazing growth in university administration and equally amazing increase in administrators' status and pay. The Chancellor of the University of Texas System makes about three aquarters of a millions dollars a year and the President of the University of Texas is pulling $600,000 annually. The president of Texas A&M makes a more modest, but still hefty, $425,000 a year. In the College of Liberal Arts at A&M, we have a dean, four associate deans, and two assistant deans. That's seven deans for twelve departments. My hunch is that if you could dig up an organizational chart for Texas A&M University thirty or forty years ago, the ratio of deans to departments was much lower and that the salaries of those serving as administrators were more comparable to ordinary faculty salaries.

The biggest mover in higher education costs, though, is very likely to be good old-fashioned supply and demand. In 1940, only 4.6% of Americans age 25 or older (about 3.4 million people) had completed four or more years of college. In 2010, 30.0% of Americans age 25 or older had completed four or more years of higher education (about 59.8 million people). Given the very high costs and long lead times necessary to create new universities or expand the capacity of existing institutions, it strikes me that places in colleges, especially in good colleges, are simple much more scarce than they used to be. As providers of a valuable service, colleges and universities are simply pricing higher education at its market rate. If anything, they are pricing it below market rates in many cases since, I would guess, many colleges could substantially increase tuition over today's rates and still fill incoming classes many times over with students of equivalent quality.

In the big picture, I am sure you could make some meaningful but ultimately marginal dents in the cost of higher education by rolling back student services, unpopular academic programs, and scaling back central administrations, but until students stop clambering to get in there is no reason for prices to come down. Higher ed reformers, therefore, are likely to have their biggest impact on college and universities (in terms of pricing and in terms of education) by working to create viable alternatives to traditional colleges and universities that still serve as gateways to reasonable employment opportunities. Only when demand for higher education actually wanes will suppliers of higher education have real incentives to lower prices.

Elizabeth Warren

Elizabeth Warren is an accomplished scholar and a rising political star, but she has no place running federal agency.

"Let me put it this way," said Warren on yesterday's call. "I'm saving all the rocks in my pockets for Republicans. And if that's too partisan for you, then shame on me.... We're not here to serve banks. We're not here to serve Wall Street. We're not here," she emphasizes that last bit, "to serve Congress. We're here to serve American families."

Got that?

She wants to throw rocks at Republicans.

Throw rocks. Not thoroughly examine, carefully consider, and judiciously regulate. Throw rocks.

At Republicans. Not irresponsible businesses or predatory lenders. Republicans.

Throw rocks at Republicans, that is, intentionally do damage to her and her party's political opposition backed up by a federal agency with the power to investigate, regulate, and punish.

Any hope she might bring balance to the new consumer protection bureau? Take into account the legitimate needs of businesses? Or at least respond to the duly elected representatives of the people?

Nope. Not here to serve banks, Wall Street, or Congress. Just "American families" however she chooses to define them and their interests.

Elizabeth Warren is many wonderful things, but she is also exactly the sort of partisan busybody who likes to think she knows how to make better choices for other people than they do and is eerily comfortable using the coercive power of government to push the rest of us into making the kinds of choices she likes and punish those who disagree with her. I welcome her departure from the executive branch of government, and I hope folks up in Massachusetts have better sense than to let her loose in the legislative branch.

Self-Incrimination and Encrypted Data

Does the 5th Amendment's protection against self-incrimination protect a criminal defendant's refusal to de-encrypt computer files that may provide evidence of wrongdoing?

CNET's Declan McCullagh writes about the case of a Colorado woman accused of mortgage fraud. In a raid of her home, police found a laptop containing encrypted files that may provide evidence in the case. So far, the woman has declined to provide the password to police. Prosecutors are seeking a court order to compel her to de-encrypt the files (though not necessarily to reveal the password to them directly).

The Department of Justice argues:

Public interests will be harmed absent requiring defendants to make available unencrypted contents in circumstances like these. Failing to compel Ms. Fricosu amounts to a concession to her and potential criminals (be it in child exploitation, national security, terrorism, financial crimes or drug trafficking cases) that encrypting all inculpatory digital evidence will serve to defeat the efforts of law enforcement officers to obtain such evidence through judicially authorized search warrants, and thus make their prosecution impossible.

Her attorneys argue that her 5th Amendment protection from self-incrimination should shield her from assisting a criminal investigation against her using her knowledge of the password.

In a brief filed last Friday, Fricosu's Colorado Springs-based attorney, Philip Dubois, said defendants can't be constitutionally obligated to help the government interpret their files. "If agents execute a search warrant and find, say, a diary handwritten in code, could the target be compelled to decode, i.e., decrypt, the diary?"

McCullagh notes that legal scholars have been grappling with this hypothetical case for some time and that there remains much debate about whether a computer password is protected by the 5th Amendment.

I suspect, however, that if the government is permitted to compel the de-encryption of files from memorized passphrases:

1. Criminal defendants will become very forgetful
2. New encryption software that automatically securely deletes files if an incorrect password is entered will find its way into wide circulation

The "Carried Interest" Loophole Is a Shame

Nick Kristof writes about the carried interest tax loophole in today's The New York Times. The loophole allows earnings taken from the profits of securities and financial transactions to be taxed at the capital gains tax rate (15%) rather than the normal marginal income rate (35% in the top bracket). The loophole mostly benefits those who work in high level positions in hedge funds and private equity firms who are take a commission directly from the profits of the transactions they manage. Kristof writes:

This tax loophole is also intellectually vacuous. The performance fee is a return on the manager’s labor, not his or her capital, so there’s no reason to give it preferential capital gains treatment.

Exactly. The fund managers work on commissions, and it is preposterous to tax those commissions differently than other performance-contingent income. A fund manager's commission's should be taxed no differently than a salesman's.

I oppose high taxes, but I am equally opposed to unfair and arbitrary taxes. Picking and choosing this or that type of income to be taxed at a preferential or discriminatory rate skews economic incentives and produces inefficiencies in the labor market that are ultimately disadvantageous to everyone. Republicans have been thoroughly in the right as they have criticized the Obama administration for pursuing policies that "pick winners and losers" rather than permitting normal market forces to shape economic outcomes. Its abdication of free market principles and a commitment to tax fairness in opposition to all "tax increases" is indefensible. (Also, it forces me to agree with Kristof, which I really hate.)

Republicans leaders have been wise to use the debt-ceiling negotiations to force spending cuts. They should further magnify their accomplishment by bargaining for a simplified tax code that would lower marginal income tax rates across the board in exchange for eliminating many of the various deductions, credits, and loopholes that imbalance economic incentives and impose substantial compliance costs on ordinary Americans. Tax simplification would increase the fairness of the federal revenue system, put money into the pockets of ordinary Americans, reduce the substantial compliance costs of paying taxes, and generally make the world a better place.

Lunchtime Reading: Dominique Strauss-Kahn's Eyebrows and Two Stories of Peer Review

The biochemistry that keeps Dominique Strauss-Kahn's eyebrows black while his hair has turned white.

Research on social contagions runs into trouble in the peer review process.

My friend and colleague, Kim Yi Dionne, and her coauthors have a paper pulled from the Bulletin of the WHO because an earlier version of the manuscript had been posted online as a working paper.

Lunchtime Reading

David Brooks get mad about the debt ceiling negotiations.

Jonah Goldberg gets mad at President Obama's rhetoric on jets and taxes.

Clarissa Rappoport-Hankins on vampire politics.

David Brooks and the Problem With "Normal Parties"

David Brooks's column in today's Times begins by praising congressional Republicans for moving fiscal reforms onto the national agenda and for using the debt ceiling to extract substantial concessions from Democrats to reduce the deficit with sizeable spending cuts against modest increases in taxes (derived mostly from ending tax credits and eliminating "loopholes" rather than adjusting tax rates themselves upwards.

The Republicans have changed American politics since they took control of the House of Representatives. They have put spending restraint and debt reduction at the top of the national agenda. They have sparked a discussion on entitlement reform. They have turned a bill to raise the debt limit into an opportunity to put the U.S. on a stable fiscal course.

Republican leaders have also proved to be effective negotiators. They have been tough and inflexible and forced the Democrats to come to them. The Democrats have agreed to tie budget cuts to the debt ceiling bill. They have agreed not to raise tax rates. They have agreed to a roughly 3-to-1 rate of spending cuts to revenue increases, an astonishing concession.

Moreover, many important Democrats are open to a truly large budget deal. President Obama has a strong incentive to reach a deal so he can campaign in 2012 as a moderate. The Senate majority leader, Harry Reid, has talked about supporting a debt reduction measure of $3 trillion or even $4 trillion if the Republicans meet him part way. There are Democrats in the White House and elsewhere who would be willing to accept Medicare cuts if the Republicans would be willing to increase revenues.

Then, he rakes the same Republicans over the coals for not having yet agreed to a debt ceiling deal.

If the Republican Party were a normal party, it would take advantage of this amazing moment. It is being offered the deal of the century: trillions of dollars in spending cuts in exchange for a few hundred million dollars of revenue increases.

A normal Republican Party would seize the opportunity to put a long-term limit on the growth of government. It would seize the opportunity to put the country on a sound fiscal footing. It would seize the opportunity to do these things without putting any real crimp in economic growth.

The party is not being asked to raise marginal tax rates in a way that might pervert incentives. On the contrary, Republicans are merely being asked to close loopholes and eliminate tax expenditures that are themselves distortionary.

This, as I say, is the mother of all no-brainers.

But we can have no confidence that the Republicans will seize this opportunity. That’s because the Republican Party may no longer be a normal party. Over the past few years, it has been infected by a faction that is more of a psychological protest than a practical, governing alternative.

Here's the thing, though: the stuff Brooks loves about the current Republican Party---its willingness to tread in the dangerous waters of entitlement reform and balancing the budge, its tough and productive negotiations with the president and democratic leaders, and the progress it has catalyzed on the most intractable problems  in the American political economy---are motivated by the same things that Brooks hates about the current Republican Party---its willingness to risk default on the national debt in order to eek out every possible concession in deficit reduction negotiations with the president even in the presence of a very good deal on the table.

Both come from the Republican's tea Party-motivated inflexibility on moving toward a balanced budget without raising taxes. Republicans have gotten traction on overall federal spending and on entitlement reform precisely because they have lashed themselves to this particular mast. If they did not have an actual, firm bottom line, the President and Democratic never would have given up so much already.

In fact, all the good things that have come from the current Republican majority in the House of Representatives---all of the accomplishments that Brooks' praises---have come from the Republican Party giving up being a "normal party." A "normal party" doesn't propose a plan for entitlement reform and spending cuts to popular programs in order to restore fiscal balance. A "normal party" doesn't threaten to shut down the government over cuts to a continuing resolution. A "normal party" would rather sit idly by, accumulating debt at a record pace without actually proposing a budget for the last or coming fiscal year let alone a long-term strategy for balancing the budget.

"Normal party" politics created the budget problem. Democrats (and many Republicans) love to spend money on new programs without raising taxes to pay for them. Republicans (and many Democrats) love cutting taxes without reducing spending to preserve fiscal balance. Balancing the budget will require something other than "normal party" politics.

David Brooks wants the Republican Party to make extraordinary progress through the normal channels. He wants fiscal reforms without brinkmanship or uncertainty. He wants smart people with calculators to go into a room with plenty of pens and legal pads and to come out, twelve hours later with their neckties loosened and their sleeves rolled up, and announce a reasonable and rational path to balancing the budget and repaying the national debt the republicans and democrats can all get behind because of its self-evident worthiness and sensibility. Those things are fine enough to want, I supposed, but it is childish and unreasonable to expect them.

I expect Republicans in Congress will wait until the last minute and make the best deal they can---just like they did on the AMT fix and the continuing resolution. The economic costs for the country and the political costs for the Republican Party are too high to do otherwise. Yet, their willingness to wait until the last minute and to seriously consider going beyond that are the things that motivate the entire bargain in the first place.

For Independence Day

IN CONGRESS, July 4, 1776.

The unanimous Declaration of the thirteen united States of America,
When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.
We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.--That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, --That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.--Such has been the patient sufferance of these Colonies; and such is now the necessity which constrains them to alter their former Systems of Government. The history of the present King of Great Britain is a history of repeated injuries and usurpations, all having in direct object the establishment of an absolute Tyranny over these States. To prove this, let Facts be submitted to a candid world.

He has refused his Assent to Laws, the most wholesome and necessary for the public good.
He has forbidden his Governors to pass Laws of immediate and pressing importance, unless suspended in their operation till his Assent should be obtained; and when so suspended, he has utterly neglected to attend to them.
He has refused to pass other Laws for the accommodation of large districts of people, unless those people would relinquish the right of Representation in the Legislature, a right inestimable to them and formidable to tyrants only.
He has called together legislative bodies at places unusual, uncomfortable, and distant from the depository of their public Records, for the sole purpose of fatiguing them into compliance with his measures.
He has dissolved Representative Houses repeatedly, for opposing with manly firmness his invasions on the rights of the people.
He has refused for a long time, after such dissolutions, to cause others to be elected; whereby the Legislative powers, incapable of Annihilation, have returned to the People at large for their exercise; the State remaining in the mean time exposed to all the dangers of invasion from without, and convulsions within.
He has endeavoured to prevent the population of these States; for that purpose obstructing the Laws for Naturalization of Foreigners; refusing to pass others to encourage their migrations hither, and raising the conditions of new Appropriations of Lands.
He has obstructed the Administration of Justice, by refusing his Assent to Laws for establishing Judiciary powers.
He has made Judges dependent on his Will alone, for the tenure of their offices, and the amount and payment of their salaries.
He has erected a multitude of New Offices, and sent hither swarms of Officers to harrass our people, and eat out their substance.
He has kept among us, in times of peace, Standing Armies without the Consent of our legislatures.
He has affected to render the Military independent of and superior to the Civil power.
He has combined with others to subject us to a jurisdiction foreign to our constitution, and unacknowledged by our laws; giving his Assent to their Acts of pretended Legislation:
For Quartering large bodies of armed troops among us:
For protecting them, by a mock Trial, from punishment for any Murders which they should commit on the Inhabitants of these States:
For cutting off our Trade with all parts of the world:
For imposing Taxes on us without our Consent:
For depriving us in many cases, of the benefits of Trial by Jury:
For transporting us beyond Seas to be tried for pretended offences
For abolishing the free System of English Laws in a neighbouring Province, establishing therein an Arbitrary government, and enlarging its Boundaries so as to render it at once an example and fit instrument for introducing the same absolute rule into these Colonies:
For taking away our Charters, abolishing our most valuable Laws, and altering fundamentally the Forms of our Governments:
For suspending our own Legislatures, and declaring themselves invested with power to legislate for us in all cases whatsoever.
He has abdicated Government here, by declaring us out of his Protection and waging War against us.
He has plundered our seas, ravaged our Coasts, burnt our towns, and destroyed the lives of our people.
He is at this time transporting large Armies of foreign Mercenaries to compleat the works of death, desolation and tyranny, already begun with circumstances of Cruelty & perfidy scarcely paralleled in the most barbarous ages, and totally unworthy the Head of a civilized nation.
He has constrained our fellow Citizens taken Captive on the high Seas to bear Arms against their Country, to become the executioners of their friends and Brethren, or to fall themselves by their Hands.
He has excited domestic insurrections amongst us, and has endeavoured to bring on the inhabitants of our frontiers, the merciless Indian Savages, whose known rule of warfare, is an undistinguished destruction of all ages, sexes and conditions.

In every stage of these Oppressions We have Petitioned for Redress in the most humble terms: Our repeated Petitions have been answered only by repeated injury. A Prince whose character is thus marked by every act which may define a Tyrant, is unfit to be the ruler of a free people.
Nor have We been wanting in attentions to our Brittish brethren. We have warned them from time to time of attempts by their legislature to extend an unwarrantable jurisdiction over us. We have reminded them of the circumstances of our emigration and settlement here. We have appealed to their native justice and magnanimity, and we have conjured them by the ties of our common kindred to disavow these usurpations, which, would inevitably interrupt our connections and correspondence. They too have been deaf to the voice of justice and of consanguinity. We must, therefore, acquiesce in the necessity, which denounces our Separation, and hold them, as we hold the rest of mankind, Enemies in War, in Peace Friends.
We, therefore, the Representatives of the united States of America, in General Congress, Assembled, appealing to the Supreme Judge of the world for the rectitude of our intentions, do, in the Name, and by Authority of the good People of these Colonies, solemnly publish and declare, That these United Colonies are, and of Right ought to be Free and Independent States; that they are Absolved from all Allegiance to the British Crown, and that all political connection between them and the State of Great Britain, is and ought to be totally dissolved; and that as Free and Independent States, they have full Power to levy War, conclude Peace, contract Alliances, establish Commerce, and to do all other Acts and Things which Independent States may of right do. And for the support of this Declaration, with a firm reliance on the protection of divine Providence, we mutually pledge to each other our Lives, our Fortunes and our sacred Honor.

Three Good Reads for Lunchtime

Will Wilkinson on John Jay and the Founders' debates over slavery.

Jeffrey Rosen pines away for Sandra Day O'Connor.

Suzanne Mettler on tax expenditures and the submerged state.