Art and Its Political Hijacking

15 Friday Dec 2017

Posted by in Art & Politics

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Art and politics have a long connection that is often quite awkward. One philosophy holds that art cannot be divorced from its social origins, that it is a legitimate platform from which to confront injustice and oppression, and indeed, that art must “serve some moral or didactic purpose”. In the nineteenth century, the contrary view was expressed by the phrase “art for art’s sake“, which has been credited to several individuals including Edgar Allen Poe. At the time, Marxists said the slogan served to prop-up the “petty bourgeois”, as if artistic beauty and exploration must themselves be inspired by political interests. Exploiting art to promote a point of view is not the exclusive domain of the Left, however. The Right has its own variations on political expression through art. But all such varieties on the Left and Right make me cringe just a bit; I cringe even when the intent of art is to promote views with which I strongly agree.

Art and Advocacy

Great art derives from an amorphous combination of talent, certain acquired technical skills, and inspiration. Inspiration can come from anything that might be, strictly speaking, non-art, such as natural beauty, any kind of human drama, the spiritual, or even politics. While many of us can agree that certain artistic works are great, it will always be a subjective matter to one degree or another.

Art may cross subjective boundaries of propriety, and it may offend. No matter the specific topic or the intent, art becomes confrontational and political when some parties object to whatever is portrayed, and especially when attempts are made to suppress it. A work of art is tendentious if the intent is to promote a political viewpoint or a policy, either as a matter of protest or when it is used by either the state or “subversive elements” in an effort to propagandize. It ranges from state-sponsored “artistic” propaganda to private but jingoistic expression, to “protest art”, and to any kind of politically-motivated art.

Obviously, tendentious art can be good from a purely technical perspective even while the subject matter is unappealing to a particular observer. As well, TA can appeal to the emotions effectively, and it can be interesting as a sociological exercise. However, art can portray conditions, dire or otherwise, and appeal to emotions without advocating social policy, and art can be abstract and devoid of any political implication whatsoever.

Even worse than tendentious art are attempts to either censor it or subsidize it. May tendentious art live on as a tool in the marketplace of ideas, free of government involvement. However, on the whole, public or private, I find it unappealing.

Why I’m Averse to Tendentious Art 

Here are several propositions about tendentious art (TA) to which I subscribe. They are overlapping to some extent, and I emphasize they are often matters of degree rather than kind:

  1. It compromises artistic standards;
  2. Persuasion is its purpose, making art subsidiary to the politics;
  3. It demotes art to a tool of delivery, subservient to the message;
  4. TA exploits art for political purposes;
  5. Art often functions as a refuge or escape; TA cannot;
  6. TA is often angry;
  7. the appeal of TA is often self-reverential;
  8. It confuses artistic value and political “virtue”;
  9. practitioners of TA often engage in willful historical distortion;
  10. TA can be self-antiquating;
  11. TA often recycles and co-opts existing art;
  12. It is never Pareto-improving.

I’ll elaborate on some of these points:

TA demotes the art part: To the extent that the art and the political message are separable, art becomes subsidiary to the message, and that is almost always true when the message is explicit. In fact, art becomes a mere conveyance.

Artistic compromise: Your political message does not make you an artist. This is worth extra emphasis in the age of the meme and the meme “artist”. I’ve seen what I consider bad art. I’ve seen a great deal of bad TA. It is as if the artist can be forgiven for an unimpressive artistic effort so long as the message is valued by like-minded partisans. In this way, TA creates confusion over artistic value relative to political “virtue”.

Politics attempts to exploit art: I am appalled at the recent treatment of certain celebrities, artists or otherwise, who are facing demands to publicly state their political views, to support or denounce this or that person or policy. Whether or not one’s work intersects with the political sphere should be up to the artist. It is within one’s rights to be apolitical.

TA is Pareto-violating: Tendentiousness makes art unappealing to certain observers, and that might even be what the artist intends. A particular policy position embodied in TA, if adopted, might actually be threatening to some individuals in terms of their economic welfare or personal liberties. Even worse, extreme forms of TA might serve to incite violent action (free speech demands that government may not engage in “prior restraint”). The point I’m making here is distinct from any issues posed by physical presentation, such as high volume or lighting, that might make a third-party worse off.

In economics, exchange is said to be Pareto-improving if two trading parties are made better-off while no one is made worse off. Of course, one can always ignore certain forms of art, or one can try to if its expression is non-threatening. But someone may well be made worse-off by an exercise of TA, and in a value-free sense, that makes TA inferior to other art.

Trapped like a rat: TA tends to be ineffective as a refuge or escape, no matter how cathartic some might find the message. The observer is bound by the political reality and the conflict it implies. Art doesn’t have to transcend reality to serve as an escape, but it can transcend explicit advocacy.

Your art and your virtue: I don’t think it’s unfair to say that an observer who enjoys tendentious art indulges in a pleasure that is strongly self-reverential. They feel virtuous, and that is the wrong sentiment to derive from art. TA derives some of its value and power by stroking the ego of the observer.

Distorting history: I have seen many examples of inaccurate historical accounts in theatre and elsewhere. The musical Hamilton is prominent in this respect. The musical Annie has its share of distortions regarding the largely similar policies of Herbert Hoover and Franklin Delano Roosevelt. Che Guevara is sometimes depicted in art as heroic, yet he was murderous, misogynistic, and tyrannical. Got any Stalin shirts? I could go on….

TA can get stale: In some circumstances, TA can make art self-antiquating: captive to the time in which it is created and reducing its relevance as times change, especially if the artist is on the losing side of the politics.

What Prompted This? A Band Beyond Description

This post was motivated by my observation of comments on “fan pages” to which I belong on-line. I’ve been an avid follower of a certain group of musicians over the years, and these fan pages give me an opportunity to interact with other enthusiasts, view concert video, and get news about the band. The fans tend to be affable and we share a certain cultural zeitgeist. However, there is division on these pages over politics, and while I’d describe many of the fans as leftist, there is more diversity of opinion than one might guess. One fan page actually has a “no politics” rule, as it’s proven to create unwelcome strife on other pages. I believe the page administrators are correct in viewing politics as “off-topic”. That is not censorship; it is private governance — house rules, as it were, to which I can’t object. Some fans just can’t help violating the rule, however. There, and on other fan pages, a significant segment of fans seem to believe that one cannot really “get” the band and their music without sharing certain political opinions. That doesn’t surprise me, but I dislike the “groupthink” attitude it reflects.

I realized early-on that the band tended to avoid tendentious art, greatly to their credit. Their music often focuses on traditional themes like love, love lost, celebration, the human condition, and many fascinating stories populated with colorful characters. They even cover some biblical topics that are just great stories. Other frequent musical themes are quite abstract, by turns sinister and dreamy.

There is no doubt that the members of the band have opinions about politics. They have supported a number of causes such as the anti-war movement, ending the drug war, environmental causes, and gay rights. But I believe they have intentionally avoided explicit advocacy in their music. They tend not to use the stage as a pulpit, except generally as a pulpit of musical celebration and fun. They sing sweetly (mostly) and they can rock!

Again, the distinctions I’m making are matters of degree. For example, occasionally the group plays concerts to benefit causes or even candidates for office. That’s fine. I might not support their candidate, or I might disagree with a policy position, but that sort of explicit advocacy seldom if ever intersects with their music. It imposes little or nothing on me.

The band has written and performed a few songs expressing concerns that I don’t fully share. In my opinion (in seeming violation of some of the principles I listed above), I consider those songs to be great from a purely musical perspective; the lyrics are well-turned; and they tend to reveal general sentiment and anxiety about things we’d all like to resolve, rather than direct advocacy of specific policies. I like those songs, though I might disagree with the policy prescriptions of the musicians themselves. In any case, they don’t claim technical expertise in those subject areas. I like their art and don’t really care about their policy preferences, unless they rub my nose in them. But they don’t.

Again, while these are matters of degree, this band has always tended not to use their music as a political soapbox. Perhaps the band’s greatest luminary once said the following:

“You need music, I don’t know why. It’s probably one of those Joe Campbell questions [who said, ‘Follow your bliss.’], why we need ritual. We need magic, and bliss, and power, myth, and celebration and religion in our lives, and music is a good way to encapsulate a lot of it.“

Denouement

My admittedly subjective opinion is that the explicit messaging of tendentious art cheapens artistic expression in several ways: it demotes art in favor of political messaging; it subverts the role of art as an escape; it may be inferior by making third-parties worse off; its enjoyment is something of a self-reverential exercise; it confuses artistic value with political “virtue”; it makes art less durable to the extent that the message it embodies may become less relevant with time; and it is usually angry.

The band I’ve referenced in this discussion is the Grateful Dead. I’ll continue to celebrate their great music with anyone who appreciates it as music. (The name of the band originally appealed to the group partly because it seemed somewhat repellent to conformists. That’s a bit confrontational, perhaps, but the name is folkloric.) Their politics don’t much matter to me because I believe they are artists first. They have kept their art largely free of politics.

I close with lyrics to a Grateful Dead song about music and it’s effect on the human spirit, written by John Perry Barlow and Bob Weir. It is non-tendentious:

The Music Never Stopped

[First voice]
There’s mosquitoes on the river
Fish are rising up like birds
It’s been hot for seven weeks now
Too hot to even speak now
Did you hear what I just heard?

Say, it might have been a fiddle
Or it could have been the wind
But there seems to be a beat now
I can feel it in my feet now
Listen here it comes again

[Second voice]
There’s a band out on the highway
They’re high-stepping into town

It’s a rainbow full of sound
It’s fireworks, calliopes and clowns
Everybody’s dancing

[First voice]
Come on children, come on children
Come on clap your hands

The sun went down in honey
And the moon came up in wine
You know stars were spinning dizzy
Lord the band kept us so busy
We forgot about the time

They’re a band beyond description
Like Jehovah’s favorite choir
People joining hand in hand
While the music plays the band
Lord they’re setting us on fire

Crazy rooster crowing midnight
Balls of lightning roll along
Old men sing about their dreams
Women laugh and children scream
And the band keeps playing on

[Second voice]
Keep on dancing through to daylight
Greet the morning air with song
No one’s noticed but the band’s all packed and gone
Was it ever here at all?
But they kept on dancing

[First voice]
Come on children, come on children
Come on clap your hands

Well the cool breeze came on Tuesday
And the corn’s a bumper crop
And the fields are full of dancing
Full of singing and romancing
The music never stopped

Liar-Left, Daft-Left Bellow: It’s the Unkindest Tax Cut of All

08 Friday Dec 2017

Posted by in Health Insurance, Taxes

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A misapprehension of progressive leftists is that the tax reform bills under debate by the GOP will revoke something from the needy: the poor, cancer patients, the working class, the aged, you name it. Well, that is a misapprehension held by many earnest leftists, but it amounts to deceitful rhetoric from others. David Harsanyi, in an article about the Left’s penchant for corrupting the English language, attempts to set the record straight:

“Whenever the rare threat of a passable Republican bill emerges, we learn from Democrats that thousands, or perhaps millions, of lives are at stake. …

… the most obvious and ubiquitous of the Left’s contorted contentions about the tax bill deliberately muddles the concept of giving and the concept of not taking enough. This distortion is so embedded in contemporary rhetoric that I’m not sure most of the foot soldiers even think it’s odd to say anymore. …  Whatever you make of the separate tax bills the House and Senate have passed, though, the authors do not take one penny from anyone. In fact, no spending is being cut (unfortunately). Not one welfare program is being block-granted. Not one person is losing a subsidy. It’s just a wide-ranging tax cut without any concurrent spending cuts.“

The Left may have a basic math incompetency, or maybe they know better when they insist that the GOP plans will inflict a new burden on the middle class. The middle class actually receives larger reductions in taxes than higher strata. Veronique de Rugy highlighted this point recently:

“President Trump’s intention to give a real tax break to the middle class is counter-productive considering the middle class barely shoulders any of the income tax as it is. The top 10 percent of income earners—households making $133K [or more], not $1 million as most assume—currently pay more than 70 percent of all income tax revenue. The middle quintile pays, on average, 2.6 percent of the federal income tax.

And yet, in both the House and Senate plans the middle class receives the largest tax relief by reducing their marginal tax rates, increasing the child tax credit and doubling the standard deduction. The result is fewer taxpayers would be paying income tax at all, problematic from a small government perspective. It also means a more progressive income tax code than it already is.

The House plan also effectively jacks up the top marginal rate for some high earners by using a 39.6 percent bubble rate on the first $90K earned by single taxpayers making $1 million and married taxpayers making $1.2 million and a 12 percent rate like everyone else.“

I have listened to horror stories about school teachers who, in the past, were able to deduct supplies they purchased for their students. Now, the cruel GOP is trying to take that away! This argument neatly ignores the doubling of the standard deduction. Many teachers will find that it no longer makes sense to itemize deductions, and they will come out ahead. But for the sake of argument, suppose a teacher earning $50,000 itemizes and spends $2,500 on unreimbursed supplies for their students every year. At the Senate plan’s new rate in that bracket, the lost deduction will cost the teacher $550, but about $300 would be saved via rate reductions for every $10,000 of taxable income. The teacher is likely to come out ahead even if he unwisely passes on the improved standard deduction.

Liberal thought-whisperers have goaded their minions into believing that the GOP intends to cut Medicare funds by $25 billion a year going forward. The bills under discussion would do no such thing. However, in a rare gesture of fiscal responsibility, President Obama in 2010 signed the Statutory Pay-As-You-Go Act (Paygo), which may require automatic reductions in outlays when spending or tax changes lead to an increase in federal debt. The act has never been enforced, and Republican leadership in both houses insists that Paygo can and will be waived. Clearly, the GOP’s intent is not to allow the Paygo cuts to take place. Even the left-leaning Snopes.com is reasonably neutral on this point. But if Paygo takes hold, the lefties will have themselves to blame.

At the last link, Snopes also touches on one actual provision of the Senate tax plan, the repeal of the Obamacare individual mandate, or rather, the repeal of the “penalty tax” imposed by the IRS on uninsured individuals. The Supreme Court ruled that it is a tax in 2012, at the time giving rise to a mixture of delight and embarrassment on the Left. The ruling saved Obamacare, but the Left had been loath to call the penalty a tax. The supposed rub here is that repeal of the mandate will be greeted enthusiastically by many young and healthy individuals. Freed from coercion, many of them will elect to go without coverage, leading to a deterioration of the exchange risk pools and causing premiums paid by the remaining exchange buyers to rise. However, the critics conveniently ignore the fact that Obamacare individual subsidies will automatically ratchet upward with increases in the premium on the Silver Plan. So the panic related to this portion of the Senate tax bill is misplaced.

One other point about the mandate: because it coerces the payment of cross-subsidies by the young and healthy to higher-risk insurance buyers, the mandate distorts the pricing of risk, the incentives to insure, and the use of resources in the provision of health insurance and health care itself. This is how the proper function of a market is destroyed. And this is how resources are wasted. Good riddance to the mandate. The high-risk population should be subsidized directly, not through distorted pricing, at least until such time as a market for future insurability can be established. As Jeffrey Tucker has said, repeal of the mandate is a very good first step.

The loss of the medical expense deduction is not a done deal. While the House plan eliminates the deduction, the Senate plan reduces the minimum medical expense requirement from 10% to just 7.5% of qualified income, so it is more generous than under current law. I’ve seen bloggers commit basic misstatements of facts on this and other provisions, such as confusing this limit with a total limit on the amount of the medical deduction. This deduction tends to benefit higher-income individuals who itemize deductions, which will represent a higher threshold under the increased standard deduction. Of course, this deduction appeals to our sense of fairness, but like all the complexities in the tax code, it comes with costs: not only does it add to compliance costs and create a need for higher tax rates, but it subsidizes demand for medical care, much like the tax breaks available on employer-provided health care, and it therefore inflates health care costs for everyone. To the extent that these deductions and many others are still in play, the GOP plans fall short of real tax reform.

The GOP tax bills certainly have their shortcomings. I hope some of them are rectified in conference. The bills do not offer extensive simplification of the tax code, and they would not be truly historic: in real terms, an earlier version of the House bill would have been the fourth biggest cut in U.S. history relative to GDP, and I believe the version that passed the House is smaller. However, many of the arguments mounted by the Left against the bills are without merit and are often deceitful. The Left strongly identifies with the zero-sum philosophy inherent in collectivism, and the misleading arguments I’ve cited are plausible to the less-informed among that crowd. That brings me back to David Harsanyi’s point, discussed at the top of this post: “intellectuals” on the progressive Left find value in corrupting the meaning of words and phrases like “budget cuts”, “giving” and “taking”:

“Everyone tends to dramatize the consequences of policy for effect, of course, but a Democratic Party drifting towards Bernie-ism is far more likely to perceive cuts in taxation as limiting state control and thus an attack on all decency and morality.“

“There is a parallel explanation for the hysterics. With failure comes frustration, and frustration ratchets up the panic-stricken rhetoric. It’s no longer enough to hang nefarious personal motivations on your political opponents — although it certainly can’t hurt! — you have to corrupt language and ideas to imbue your ham-fisted arguments with some kind of basic plausibility.“

Weighing Tax Reform vs. Spending and Deficits

05 Tuesday Dec 2017

Posted by in Taxes

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The tax reform legislation likely to come out of the House and Senate reconciliation process will be far from ideal, but it will be much better than current tax law in several respects (see my last several posts listed in the left-hand margin). One complaint raised by Democrats and others, however, is that the GOP tax compromise will lead to higher budget deficits. Of course they are right, but Democrats fail as legitimate critics given their hypocrisy on the issue of deficit spending. And chronic deficits are ultimately a symptom of government excess. Deficits exist when the polity is unwilling to support the explicit taxes necessary to pay for the spending that politicians are willing and able to authorize.

Nevertheless, there is near-universal consensus that the tax plans passed by the House and Senate would add to the deficit if either were to become law, the biggest exception to that consensus being Republican leadership. The Joint Committee on Taxation (JCT) has estimated that the Senate plan would add $1.4 trillion to the deficit without the benefit of economic feedback. That shrinks to about $1 trillion with the dynamic feedback effect of resultant economic growth. Others believe the gap would be smaller, however. The Tax Foundation, for example, estimates the net cost in tax revenue at $500 billion. Veronique de Rugy quotes a dynamic score by Quantria/Inforum that would put the revenue loss at about $300 billion, based on the starting JCT static estimate. The Tax Foundation, as noted by de Rugy, believes the JCT errs in treating the U.S. economy as a closed economy in which business funding is limited to a fixed pool of domestic saving, and in assuming that the Federal Reserve would attempt to offset the economic growth spurred by the tax cuts. These JCT assumptions mute the economic and revenue responses to tax changes.

But whether you believe the JCT’s estimates or the others, the impact is relatively minor compared to the existing fiscal shortfalls brought on by government excess. Brian Riedl puts the proposed tax cuts in perspective. The 10-year deficit was already projected at $10 trillion, with little apparent concern from Democrats. Riedl notes that the opposition has repeatedly shown itself unwilling to address fiscal problems such as Obama’s deficit legislation, Bernie Sander’s $30 trillion health care plan, and a shortfall in Social Security and Medicare funding of $82 trillion over the next three decades:

“Critics who are unwilling to confront these mammoth spending deficits are in no position to lecture others on the deficit implications of a (comparatively modest) $2 trillion tax cut.“

Jeffrey Tucker, whose posts I usually enjoy, seems to assert that deficits are not worthy of great concern. He offers a negative and somewhat muddled assessment of Ricardian equivalence, the idea that deficit spending is neutral because the expectation of future taxes discourages private spending. Tucker’s position is rooted in impatience with the rhetoric of revenue neutrality, but I think his real point might not be too far from Reidl’s. To his credit, Tucker condemns “fiscal profligacy”. He says:

“To be sure, this is not a defense of fiscal irresponsibility. Debts and deficits are terrible. Fiscal conservatism is a good thing. The budget should always be balanced. But there is one proviso: none of this should happen at the expense of the wealth creators in society: you, me, and the business sector. Government should bear responsibility for its own profligacy.“

I will interpret that last remark generously to mean that Tucker would cut spending to shrink deficits, but he also advocates for the sale of federal assets, which I generally support.

Concern by some Republicans over the deficit effects of tax reform prompted a debate during the Senate negotiations over a so-called “trigger” that would have increased taxes automatically if revenue fell short of certain benchmarks. At the last link, Ryan Bourne explains what a bad idea that would have been. A future revenue shortfall could be attributed to any number of future developments, not all of which would be compatible with a tax hike as a fix. The trigger would also create uncertainty, dampening the positive revenue effects that would otherwise be operative. It’s a relief that the trigger idea was abandoned by the GOP.

Despite the corrosive effects of big government and excessive spending, there is a relatively painless solution to closing the fiscal gap, with or without GOP tax reform. (I use the word “painless” guardedly, because big government inflicts distortions and costs well beyond mere spending levels.) Dan Mitchell has updated his calculations showing that the annual deficit would be eliminated by a decline in the budgeted annual growth of spending from 5.49% to 2.67% over ten years, starting in 2019. That hardly seems draconian, but watch: progressives and even relatively reflective Democrats would call such growth reductions “heartless cuts”. Such is the intellectual integrity of the left.

Taxes and the Labor “Discount”: What Could Go Wrong?

29 Wednesday Nov 2017

Posted by in Labor Markets

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A supposed labor market distortion that I’d never considered is that government receives a “discount” on labor services because public employees’ income tax liability is returned to the very government coffers from which they are paid. Tyler Cowen regards this as a “wacky” idea, but not easy to refute. Suppose the income tax rate is 20%. If the government pays a worker $10, then $2 is returned to that same government via the tax. The net cost to government is just $8. But a tax “discount” on cost is not unique to government, though the form it takes may differ.

Who Gets a Labor “Discount”?

Does it cost a private employer more than government to pay a worker $10? It depends on the situation. Maybe more, maybe less. If the private employer pays the same 20% tax rate on its profits, the wage payment creates a tax deduction worth $2 in avoided tax. The net cost is $8, so there is no difference. However, a firm must be profitable to get that deduction, so unprofitable startups, strugglers, and nonprofits do not get the same wage “discount” as government. Of course, losses can be carried forward to reduce taxes if the firm ever becomes profitable, and non-profits have tax advantages of their own.

The value of the tax deduction (the private “discount”) depends on the tax rate paid by the firm. A profitable C corporation with a marginal tax rate of 35% (under current law) gets a steeper discount than a small businessperson in the 28% tax bracket. To some extent, a steeper discount subsidizes the cost of hiring employees who are highly compensated. A highly successful pass-through entity like a sole proprietorship, partnership or S corporation can face the highest individual marginal rates, so the “discount” for such a firm could be the largest relative to wages.

Economic Distortions

There are a couple of potential distortions involved here: one is the standard wedge driven between the value of workers’ marginal product and the after-tax wage they receive. This discourages labor supply. There is a second distortion to the extent that the “discount” gives government and profitable firms an artificial competitive advantage of over unprofitable buyers of labor services. Furthermore, the loss of the labor discount for firms falling into unprofitable positions imparts an undesirable procyclical element into the tax system, potentially aggravating episodes of under-production and high unemployment.

The government’s labor “discount” may reduce the available supply of labor to the private sector. Government does not operate under the profit motive, and unlike private firms, it need not concern itself with efficiency standards for survival. Government production does not face a market test, so it is difficult to measure worker productivity, which is the key to the efficient pricing and use of labor in the private sector. The penalty to government for paying an above-market wage is zero.

The same “discount” argument can be made for government contracts with private firms. The profits earned on those contracts are taxed by the government payer, so the total cost to the government is essentially discounted. Contracts between private firms are on the same footing if the payer is profitable, since the paying firm can deduct its costs from taxable profits. A payer that is not profitable is at a disadvantage. The government “discount” might not be the primary reason to suspect that government contracting is subject to distortion and inflated values, but it is a reason nevertheless. One could be forgiven for thinking that the “discount” creates additional leeway for graft!

Does the government labor “discount” really impinge on the federal agency budget process? I doubt that anyone having a critical role in the Congressional or executive budget process thinks much about it, to say nothing of agency hiring and compensation managers. Yet spending levels may “bake-in” a certain amount of over-payment of wages or fat in government contracts. In any case, historically, federal spending has not been tightly constrained by the flow of tax revenue.

Federal Wages vs. Private Wages

There is empirical evidence on government vs. private wages. These data are of interest in their own right, but since so much of the private sector receives the same tax “discount” as government, it’s not clear that it should cause much if any differential in pay. The Congressional Budget Office (CBO) compared differences in compensation from 2005-2010 and again from 2011-2015 and found that federal wages and benefits exceeded private sector wages and benefits over both periods. The gap decreased with increases in education. For workers with a bachelor’s degree or less (71% of the CBO’s latest federal workforce sample), the gap was substantial. The difference was just a few thousand dollars for those with a master’s degree. The professional degree/Ph.D. category stood in fairly sharp contrast to the others, with private workers having a fairly large advantage. It is possible that the most highly-educated category, being the most scarce and probably the most specialized, has unique market characteristics. It should also be noted that the sample of federal workers was about 4 years older, on average, than the private sector sample, which might have skewed the results.

The CATO Institute used data from the U.S. Bureau of Economic Analysis (BEA) and found that federal civilian workers earned 80% more than private sector workers in 2016. The CATO report cites several other studies, including the CBO’s, which consistently find that federal workers earn more. This could be partly attributable to the government labor discount, bureaucratic laxity, the heavy unionization of the federal work force, and even the geographical distribution of federal workers.

Discount My Taxes, Please

The worst aspect of the tax “discount” on federal and many private-sector wage payments is the taxation itself. However, the fact that some firms and organizations don’t qualify for the discount represents a significant distortion. To some extent, labor input is discouraged for unprofitable startup firms, firms struggling for survival, and of course the non-profit sector. These organizations are at a distinct disadvantage in terms of resource allocation relative to those who qualify for the “discount”.

Nevertheless, this unevenly applied discount may be an unfortunate mathematical implication of a public sector with income-taxing and spending powers. The discount on wages and contract payments provides additional margin along which government can be wasteful. A partial solution is to maintain whatever firewalls exist between taxing and spending authorities, but that won’t unwind past distortions. Of course, the best solution is to shrink government: reduce taxes and reduce the federal role in everything from infrastructure to public health, dismantle the administrative state, and reduce military spending. I didn’t really need another reason to warn of the dangers of big government, but count this one as duly noted!

Stumbling Through Pass-Through Tax Reform

22 Wednesday Nov 2017

Posted by in Taxes

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The GOP tax reform bill passed by the House of Representatives last week contains a reduced tax rate for “pass-through” business income. The discussion of this provision in my post of November 9 was accurate as far as it went, with one qualification: the highest marginal federal tax rate on pass-through profit income would be 25% under the bill, down from 39.6% currently. However, the bill contains complex rules for defining pass-through profit that qualifies for the lower rate, and my earlier treatment was woefully inadequate with regard to those rules.

The House bill seeks to address concerns that owners of personal-service businesses would be tempted to classify an “excessive” share of their income as profit rather than wages and salary. Profit would qualify for the new rate, but the wages and salary paid to the owner would not. Currently, all pass-through income is treated the same. Therefore, “safeguards” were inserted in the bill to prevent the presumed “abuse” that could occur under the bill (or see here or here). First, pass-throughs would be subject to a 70/30 rule: 70% of pass-through income would be treated as wage and salary payments; 30% would be treated as profit. That’s the simplest option. But it means that the true marginal rate on a dollar of income for an owner in the top bracket would be roughly 35.2% (0.7×39.6% + 0.3×25%). That’s much less favorable than my earlier post implied. It’s also less favorable than the corporate rate cut.

Alternatively, a business owner could use a schedule based on invested capital to determine a percentage of income qualifying for the 25% rate. This might benefit a physician invested in costly medical equipment, for example. However, other personal-service businesses are specifically assigned a percentage of zero. This list includes accountants, lawyers, financial advisors, and performers. Imagine that: the House approved a benefit for which lawyers cannot not qualify!!

Another important point is that many small businesses people do not earn enough to benefit from the 25% pass-through rate. Yes, they would see reductions in their marginal rates in lower brackets (and there would be fewer brackets), but in some cases the loss of deductions for items like state and local taxes would be more than offsetting. So it’s not clear how many pass-through business owners would actually benefit from the plan.

The Senate bill takes an entirely different approach. It reduces tax rates in lower brackets, but it would also allow pass-throughs to deduct a flat 17.4% from taxable income, effectively reducing the top marginal rate from 39.6% to 32.7%. Effective rates in all lower brackets would be reduced by the same percentage. There is no distinction in the Senate bill between wage and salary payments versus profits.

The post linked in the first paragraph left the impression that the House tax bill offered more relief for small businesses than the Senate bill, and that’s probably not true, at least for the most successful small businesses. However, the National Federation of Independent Business estimates that at least 85% of small business would not qualify for the 25% rate. Some businesses won’t qualify simply because they are too small to pay a rate exceeding 25%. And when a business qualifies, only 30% of its income will qualify for the reduced rate. Other pass-through businesses won’t qualify due to the nature of their services, another example of different tax treatment of different sources of income. The rules governing qualification for the 25% rate are distortionary and are hardly a simplification. The Senate bill, on the whole, probably does more for small business owners in lower brackets and probably many in higher brackets as well.

The Socially Seductive Tax Deduction

20 Monday Nov 2017

Posted by in Taxes

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deductions desert

The rat’s nest that is the federal income tax code is a testament to the counter-productive nature of central economic planning. Not only does the tax code force citizens to waste time and other resources on compliance activities. It also encourages us to direct resources into uses that would not be worthwhile in the absence of tax incentives, uses that are not worthwhile in a societal context.

A general rationale for many provisions of the tax code is that they serve some “worthwhile” public purpose. A special tax provision is created to subsidize activities contributing to that purpose. Since that reduces the flow of revenue, tax rates must increase as an offset. However, high tax rates are damaging to economic health in and of themselves. They blunt incentives and drive wedges between the values and rewards that guide all economic decisions.

The competing tax plans under debate in the House and Senate would eliminate or pare back deductions to varying degrees, enabling a reduction in tax rates. I applaud steps in that direction, though a consequence of doing so piecemeal is to invite later tinkering of the sort that got us into this mess in the first place. Both the House and Senate bills are piecemeal. Here is a run-down of some of the deductions that are under review in the GOP plans:

State and Local Tax (SALT) Deductions: this deduction prevents the imposition of federal “taxes on taxes”, which is a worthwhile consideration. However, SALT also gives lower levels of government a “discount” on tax burdens they impose on their citizens, thereby forcing that burden to be shared by members of other jurisdictions. According to the Tax Foundation:

“The deduction favors high-income, high-tax states like California and New York, which together receive nearly one-third of the deduction’s total value nationwide. Six states—California, New York, New Jersey, Illinois, Texas, and Pennsylvania—claim more than half of the value of the deduction.“

Defenders of this deduction note peremptorily that it is used by taxpayers in all fifty states, as if that should come as a surprise. Well of course it is! And those who are taxed most heavily benefit the most from this deduction, and those benefits are most concentrated in high-tax states. The House GOP bill would limit the SALT deduction to $10,000, while the Senate version would eliminate it entirely.

Mortgage Interest (MI) Deduction: Long ago, the idea took hold that ownership of a home was of greater inherent value than mere occupancy. It’s obviously true that owners have greater rights than renters over use of a property. Those benefits are internalized, and owner-occupants might well be more inclined than renters to take pride in, care for, and improve a property. That suggests a social or external benefit from home ownership, one that at least benefits others in the vicinity of a given property.

The MI deduction creates an incentive for debt-financed home ownership, but only for the minority of taxpayers who can benefit from itemizing deductions. It therefore tends to subsidize the housing choices of those at higher levels of income and those with larger homes. It has contributed little, if anything, to the homeownership rate. Here are Edward Glaeser and Jesse Shapiro describing the findings of their NBER Working Paper:

“Externalities from living around homeowners are far too small to justify the deduction. … the home mortgage interest deduction is a particularly poor instrument for encouraging homeownership since it is targeted at the wealthy, who are almost always homeowners. The irrelevance of the deduction is supported by the time series which shows that the ownership subsidy moves with inflation and has changed significantly between 1960 and today, but the homeownership rate has been essentially constant.“

This deduction has fostered a massive over-investment in housing relative to other assets and forms of consumption. The House tax bill would allow a deduction on interest payments for up to $500,000 of mortgage debt, but this limit would apply only to new mortgages. The Senate bill would not alter the deduction in any way. These steps are severely limited in their reform ambitions.

Medical Expense Deduction: To take this deduction, you must 1) be an itemizer; and 2) have eligible medical expenses exceeding 10% of adjusted gross income (AGI). Then, you can deduct only the excess above 10%. A relatively small percentage of taxpayers actually take this deduction, mostly wealthy, older individuals or couples. It can be argued that the deduction encourages overuse of medical resources in some cases, but there are certainly others in which it provides relief from the hardship of an illness requiring expensive care. On the other hand, the deduction might serve to discourage the purchase of supplemental Medicare coverage by individuals who can afford it but are willing to bet that they won’t need it. Part of that bet is covered by the deduction.

The House bill would repeal this deduction in its entirety. The Senate bill would leave it untouched.

Student Loan Interest Deduction: Currently, up to $2,500 of student loan interest can be deducted “above the line” by non-itemizers, but only if their AGI is within certain limits. Higher education is often claimed to have social (external) benefits. To some extent, the student loan interest deduction helps bring the cost of an eduction to within reach of a broader swath of the citizenry. These considerations provide the rationale for public subsidies for funding tuition and other costs with debt. The tax deduction is only one of many forms of education subsidies. Another is provided by the below-market rates at which students are able to borrow from the federal government.

The social benefits of higher education are strongly associated with the value it adds for the individual. It can be argued that as a society, we may have pushed college education well beyond that point. A large number of indebted students decide, too late, that continued enrollment has little value, so they drop out and often default on their federally-subsidized debt. Moreover, these loan subsidies stimulate the demand for college education, which leads to a certain amount of escalation in tuition and fees. These ill effects make elimination of this deduction a tempting way to broaden the income-tax base, enabling a reduction in tax rates.

The House bill eliminates the deduction for student loan interest, but the Senate bill leaves it intact.

Conclusion: There are plenty of shortcomings in both the House and Senate versions of tax reform. Three liberalizing goals of reform are tax simplification, elimination of provisions that benefit special interests, and of course lower rates. Most of the complexities in the tax code benefit special interests in one way or another. The deductions discussed above fall into that category and necessitate higher tax rates on personal income. That in turn makes the deductions more valuable to those who claim them. In terms of the liberalizing goals of reform, the House tax bill is wider ranging than the Senate version, though the Senate bill’s complete elimination of the SALT deduction is better.

Happy Hour With Nanny: Cancer Cocktail or Cardio Cooler?

11 Saturday Nov 2017

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Last week brought news that even moderate alcohol consumption can increase your risk of cancer. I heard it over and over, so it must be true! A report from the American Society of Clinical Oncology (ASCO) cites research findings of elevated risk of several types of cancer for drinkers, especially for heavy drinkers. It’s good to be aware of those associations, but drinking alcohol responsibly confers certain benefits that are more than compensatory. I won’t change my drinking habits on account of ASCO’s statement, and the findings in the report do not justify some of ASCO’s public policy recommendations.

Ronald Bailey in Reason was quick to note that ASCO’s findings required some “cherry picking” of research findings. Aaron E. Carroll in The New York Times used the same words. ASCO’s conclusions relied upon studies that found increased risks between drinking alcohol and certain cancers without mentioning that some of the same studies found protective effects against other cancers. And both Bailey and Carroll point out that drinking mitigates other risks. Bailey quotes one influential study:

“… ‘light and moderate alcohol intake predicted reduced all-cause, cardiovascular, and cancer mortalities in both men and women.’ That’s right, light to moderate drinkers not only had lower risks of dying from any cause or from cardiovascular diseases, but also lower risks of dying from cancer.“

And evidently, as Bailey notes, there may be positive social and economic advantages associated with a bit of tippling.

The ASCO report contains a section called “PUBLIC HEALTH STRATEGIES TO REDUCE HIGH-RISK ALCOHOL CONSUMPTION”. Bailey flatly states that ASCO is a group of “public health nannies” and summarizes their positions thusly:

“The group treats consuming alcohol as a pure public health problem to which the only solutions are various forms of prohibition. They recommend regulating alcohol outlet density; increasing alcohol taxes and prices; maintaining limits on days and hours of sale; enhancing enforcement of laws prohibiting sales to minors; restricting youth exposure to advertising of alcoholic beverages; and resisting further privatization of retail alcohol sales in communities with current government control.“

Oh, please, calm down! Yes, there are risks to boozing, the most dangerous of which are well known. As Carroll emphasizes, ASCO’s statement doesn’t change the calculus much. There are few risks presented by moderate enjoyment of adult beverages, and the benefits are compelling. Please keep the nanny state out of my liquor cabinet!

The House GOP Tax Plan’s Disparate Treatment of Income Sources

09 Thursday Nov 2017

Posted by in Taxes

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Update: In writing the following post, I neglected to devote sufficient attention to the rules that would govern taxation of pass-through income under the House GOP tax plan. Those rules significantly alter some of the conclusions below. Those rules are discussed in a later post: Stumbling Through Pass-Through Tax Reform.

Double taxation of corporate income is a feature of the U.S. income tax code that is partially addressed in the tax reform bill proposed by the House GOP. Corporate income is taxed to the firm and again to owners on their receipt of dividends or when a company’s growth results in capital gains. Ultimately, the total rate of taxation matters more than whether it is implemented as single or double taxation of income flows. However, there is an unfortunate tendency to view corporate taxes as if they are levied on entitites wholly separate from their owners, so double taxation carries a stench of politically sneakiness. It also creates multiple distortions in the decisions of investors and the separately managed firms they own.

Non-corporate income taxation is reduced by the House plan even more substantially than the cut in taxes on corporate-derived income. However, the plan does not reduce taxes on high-earning professionals, many of whom are situated similarly to successful business owners and investors from an economic perspective.

Tax Burdens and Distortions

The federal corporate tax is not borne 100% by shareholders, as discussed in the previous post on Sacred Cow Chips. Some part of the burden is borne by labor via reduced wages. It is difficult to correct for this distortion in terms of calculating an effective marginal tax rate on corporate income. For example, suppose a new 35% tax would reduce corporate income from $100 to $65. The firm finds, however, that it can reduce wage payments by half of the expected tax payment, or $17.50. The firm would now earn $117.50 before tax and $76.38 after tax. Relative to the new level of pre-tax income, the tax rate is still 35%. It is no less than that by way of the reduction in wages, though the impact on the firm’s pre-tax income is mitigated.

The discussion here of tax rates, and even double taxation, is not intended as commentary on tax fairness. It might or might not be fair that the burden of the tax is shared with labor. Instead, the issue is the magnitude of the economic distortions caused by taxes. Tax rates themselves are a reasonable starting point for such a discussion, and they are easy to measure. Lower tax rates beget fewer distortions in economic outcomes than high tax rates. Low rates provide greater incentives to save and invest in productive assets, which enhances labor productivity, wages, and economic growth. Indeed, businesses go to great lengths to avoid taxes altogether, if possible, but typically those are non-productive uses of resources, which demonstrates the very distortions at issue.

Current and Proposed Marginal Tax Rates

Under current law, the top personal income tax rate on dividends is 20%. It is 23.8% if we include the Obamacare surtax. Adding that to the corporate rate yields the effective top tax rate paid by shareholders: 23.8% + 35% = 58.8%. The GOP bill does not alter the 23.8% top rate on dividends or capitals gains. By virtue of the corporate tax reduction, however, the plan would reduce the overall top rate on shareholders to 23.8% + 20% = 43.8%.

The income earned by investors in pass-through entities like proprietorships, partnerships and S-corporations is taxed as personal income under current law at rates ranging from 15% to 39.6% (43.4% at the top, including the surtax). Thus, under present law, the owner of a pass-through company is taxed less heavily at the top rate than the owner of a public company (43.4% vs. 58.8%). (I am ignoring the 15.3% FICA payroll tax owed by self-emloyed individuals in proprietorships or partnerships on incomes up to $127,200, and 2.9% above that level. The combined tax rates would be almost equal even if we include the FICA tax.)

The tax on pass-through business income would be reduced under the GOP bill via a cap of 25% on federal business income taxes. Presumably, this cap would nullify the House plan’s “bubble tax” of 6% on personal income between $1.2 million and $1.6 million of income, as well as the Obamacare surtax. Thus, the tax advantage for pass-through entities over corporations would be somewhat wider under the House plan than under current law (25% vs. 43.4%). (The FICA tax on owners of proprietorships and partnerships would not quite equalize the overall marginal tax rates over a certain income range.)

In addition, the House plan rewards the owners of pass-through businesses relative to individuals earning high levels of wage and salary income. If anything, the bill would penalize these individuals. For example, while the owner of a high-earning pass-through would face a 25% tax rate, a high-earning professional or corporate employee would pay the top marginal rate (39.6%) plus the surtax (3.8%) and possibly the bubble tax (6%). This is one reason why Scott Sumner says it looks as if the House plan was designed by Bernie Sanders!

The Upshot

The tax system should be neutral across different sources of income. Divergent effective tax rates on owners of corporations, pass-throughs, and high wage-earning individuals is undesirable and introduces arbitrary elements into private decision-making. If anything, the House GOP tax plan exacerbates those differences. By cutting marginal tax rates, it would reduce the magnitude of business tax distortions both for corporate and pass-through organizations and their owners, but the relative advantage of pass-throughs would increase relative to corporations, and owners of corporations and pass-throughs benefit relative to high-earning individuals. Let’s hope this is fixed as the bill evolves, but more balanced reductions in rates would require higher rates on business owners than contemplated in the current plan.

Labor Shares the Burden of the Corporate Income Tax

03 Friday Nov 2017

Posted by in Taxes

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As expected, a reduction of the corporate income tax rate from 35% to 20% is included in the GOP’s tax reform bill, a summary of which was released today. That rate cut would be a welcome development for workers, consumers, and corporate shareholders. It should be no surprise that the burden of the U.S. corporate income tax is not borne exclusively by owners of capital. In fact, it might hurt workers and consumers substantially while imposing relatively little burden on shareholders.

John Cochrane’s post on the incidence of the tax on corporate income is very interesting, though by turns it rambles and may be too technical for some tastes. He notes that the incidence of the corporate tax can fall on only three different groups: shareholders, workers and customers:

“As an accounting matter, every cent [of taxes] corporations pay comes from higher prices, lower wages, or lower payments to shareholders. The only question is which one.“

Cochrane quotes Lawrence Summers and Paul Krugman, both of whom are of the belief that the incidence of the corporate tax must fall primarily on capital and not on labor. That’s consistent with their view that a reduction in corporate taxes amounts to a gift to shareholders. But Cochrane isn’t at all convinced:

“The usual principle is that he or she bears the burden who can’t get out of the way. So, how much room do companies, as a whole, have to raise prices, lower wages, lower interest payments, or lower dividends?”

In fact, owners of capital can get out of the way. Capital is very mobile relative to labor. Here’s a counterfactual exercise Cochrane steps through in order to illustrate the implications of ownership bearing the incidence of the tax: if equity markets are efficient, share prices reflect all available information about the firm. If wages and product prices are unchanged after the imposition of the tax, then shareholders would suffer an immediate loss. Once the tax is discounted into share prices, there would be no further impact on current or future shareholders. Thus, future buyers of shares would escape the tax burden entirely. As a first approximation, the share price must fall to the point at which the ongoing return on the stock is restored to its value prior to imposition of the tax.

Cochrane notes that evidence on the reaction of stock prices to corporate tax changes is mixed at best, which implies that the incidence of corporate taxation falls more weakly on shareholders than many believe. That leaves consumers or workers to bear a significant part of the burden. Workers and consumers are mostly one and the same: economy-wide, higher prices mean lower real wages; lower wages also mean lower real wages. So I’ll continue to speak as if the incidence of the tax falls on either labor or capital, and we can leave aside consumers as a separate category. Cochrane says:

“It used to be thought that it was easy to lower payments to shareholders — ‘the supply of savings is inelastic’ — so that’s where the tax would come from. The newer consensus is that companies as a whole have very little power to pay less to investors, … so the corporate tax comes from lower wages or, equivalently, higher prices. Then, indirectly, reducing the corporate tax would increase capital, which would result in higher wages.”

Cochrane’s post and another on his blog were prompted by an earlier piece by Greg Mankiw showing that real wages, in an open economy, will have a strong negative response to a corporate tax increase. Here is the reasoning: the tax reduces the return earned from invested capital in the short run. Ideally, capital is deployed only up to the point at which its return no longer exceeds the opportunity cost needed to attract it. Given time to adjust, less capital must be deployed after the imposition of the tax in order to force the return on a marginal unit of capital back up to the given opportunity cost. That means less capital deployed per worker, and that, in turn, reduces labor productivity and wages.

Another issue addressed by Cochrane has to do with assertions that monopoly power in the corporate sector is a good rationale for a high tax on corporate income. You can easily convince me that the “average” firm in the corporate sector earns a positive margin over marginal cost. However, a microeconomic analysis of monopoly behavior by the entire corporate sector would be awkward, to say the least. Despite all that, Cochrane notes that monopolists have more power than firms in competitive sectors to raise prices, and monopsonists have more power to reduce wages. Therefore, the “tax the monopolists” line of argument does not suggest that labor will avoid a significant burden of a corporate tax. A safer bet is that firms in the U.S. corporate sector are price-takers in capital markets, but to some degree may be price-makers in product and labor markets.

Cochrane also emphasizes the inefficiency of the corporate tax as a redistributional mechanism, even if shareholders bear a significant share of its burden. It is still likely to harm workers via lost productivity, as discussed above. It is also true that many workers hold corporate equities in their retirement funds, so a corporate tax harms them directly in their dual role as owners of capital.

The cut in the corporate tax rate is but one element of many in the GOP bill, but a related provision is that so-called “pass-through” income, of the type earned via many privately-owned businesses, would be taxed at a maximum rate of 25%. These businesses generate more income than C-corporations. Currently, pass-through income is taxed as ordinary income, so capping the top rate at 25% represents a very large tax cut. As Alex Tabarrok points out at the last link, tax treatment should be neutral with respect to the form of business organization, but under the GOP bill, the effective gap between the top rate for pass-throughs versus corporate income would be even larger than it is now.

Critics of a reduction in corporate taxes should bear in mind that its incidence falls at least partly on labor, perhaps mainly on labor. The U.S. has the highest corporate tax rate in the industrialized world. That undermines U.S. competitiveness, as does the complexity of corporate tax rules. Tax planning and compliance burn up massive resources while drastically reducing the tax “take”, i.e., the revenue actually collected. The corporate income tax is something of a “show” tax that exists to appease populist and leftist elements in the electorate who consistently fail to recognize the unexpectedly nasty consequences of their own advocacy.

 

Slam the Damn Brakes on the Regulatory Potentate

28 Saturday Oct 2017

Posted by in Regulation

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The stock market’s recent gains have at least three plausible explanations: corporate earnings growth, the prospect of tax reform, and deregulation. Tax reform and deregulation are stated priorities of the Trump Administration and have the potential to lift the economy and generate additional earnings. Investors obviously like that prospect, though regulation itself is a tool used subversively by crony capitalists to stifle competition in their markets. Conceivably, some of the large firms that dominate major stock indices could suffer from deregulation. And I have to wonder whether the economic threat of Trumpian trade protectionism is not taken seriously by the equity markets. Let’s hope they’re right.

It’s no mystery that high taxes and tax complexity can inhibit economic growth. Let’s face it: when it comes to productive effort, we can all think of better things to do than tax planning, crony capitalist or not. The same is true of regulation: the massive diversion of resources into non-productive compliance activities stifles innovation, growth, and even the stability of the status quo. Regulation creates obstacles to activities like new construction and the diffusion of telecommunications services. And it discourages the creation of new products and services like potentially life-saving drugs and slows their introduction to market. The sheer number of federal regulations is so spectacular that one wonders how anything productive ever gets done! Patrick McLaughlin of The Mercatus Center and several coauthors tell of “The Impossibility of Comprehending, or Even Reading, All Federal Regulations“.

Regulation is more than a mere economic burden. It is the product of an administrative apparatus that is not subject to the checks and balances that are at the very heart of our system of constitutional government. That is a threat to basic liberties. Barry Brownstein offers an instructive case study of “The Tyranny of Administrative Power” involving violations of property rights in New Hampshire. The case involves the administrative machinations surrounding an installation of high-power lines.

Governmental efforts to spur innovation ordinarily take the form of spending on research, subsidies for certain technologies or favored industries (e.g., alternative energy), and large government programs dedicated to the achievement of various technological goals (e.g., NASA, DARPA). Together with regulatory rules that influence the allocation of resources, these governmental efforts are called industrial policy. An unfortunate recent example is Trump’s decision to retain the renewable fuel standard (RFS), but on the whole, industrial policy does not seem central to Trump’s effort to stimulate innovation.

It’s clear that a deregulatory effort is well underway: the so-called “deconstruction of the administrative state” hailed by Steve Bannon not long after Trump took office. First came Trump’s 2-for 1 executive order (also see here) requiring the elimination (or modification) of two rules for every new rule. In the Wall Street Journal, Greg Ip writes about changes at the FDA and the FCC that could dramatically alter the pace of innovation in the pharmaceutical and telecom industries. (If the link is gated, you access the article on the WSJ’s Facebook page.) Speedier and less burdensome reviews of new drugs will greatly benefit consumers. An end to net neutrality rules will support greater investment in broadband infrastructure and access to innovative services. There is a new emphasis at the FCC on enabling innovative solutions to communications problems, such as Google’s effort to provide cell phone service in Puerto Rico by flying balloons over the island. The Trump Administration is also reining-in an aggressive EPA, the source of many questionable rules that weaken property rights and inhibit growth. (Again, the RFS is a disappointing exception.) Health care reform could offer much needed relief from overzealous insurance regulation and high compliance costs for physicians and other providers.

But deconstructing the administrative state is hard. Regulations just seem to metastasize, so deregulatory gains are offset by continued rule-making. This is partly from new legislation, but it is also a consequence of the incentives facing self-interested regulators. With that in mind, it’s impressive that regulation has not grown, on balance, thus far into Trump’s first year in office. According to Patrick McLaughlin, zero regulatory growth has been unusual going back at least to the Carter Administration. In quoting McLaughlin, The Weekly Standard says that Trump might well earn the mantle of “King of Deregulation“, but he has a long way to go. Brookings has this interactive tool to keep track of his deregulatory progress. One item on the Brookings list is the President’s intention to withdraw from the Paris Climate Accord. That represents a big save in terms of avoiding future regulatory burdens.

I can’t help but be wary of other avenues through which the Trump Administration might regulate activity and undermine economic growth. Chief among these is Trump’s negative attitude toward foreign trade. Government interference with our freedom to freely engage in transactions with the rest of the world is costly in terms of both foreign and domestic prices. With something of a history as a crony capitalist himself, Trump is not immune to pressure from private economic interests, as illustrated by his recent cow-tow to the ethanol lobby. Nevertheless, I’m mostly encouraged by the administration’s deregulatory efforts, and I hope they continue. The equity market apparently expects that to be the case.