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Jason Ficthner Discusses the Earned Income Tax Credit on CSPAN's Washington Journal

Jason J. Fichtner — Tue, 11 Mar 2014 11:46:37 -0400

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Jason Ficthner Discusses the Earned Income Tax Credit on CSPAN's Washington Journal

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Behavior, Paternalism, and Policy: Evaluating Consumer Financial Protection

Adam C. Smith, Todd Zywicki — Tue, 11 Mar 2014 10:42:53 -0400

Publication

The Consumer Financial Protection Bureau (CFPB) is one of the most powerful and least accountable regulatory agencies in American history. Immune from budgetary oversight by Congress and headed by a single director whom the president cannot remove except under special circumstances, the agency wields unconstrained, vaguely defined powers to regulate virtually every consumer and small business credit product in America (Zywicki 2013a). In part, the CFPB has justified its ongoing intervention into financial credit markets based on a prior belief in the inability of consumers to competently weigh their decisions. This belief is founded on research conducted in the area of behavioral economics, which shows that people are prone to a variety of errors in their decision-making.

Beginning with the seminal work of Nobel Laureate Daniel Kahneman and his coauthor Amos Tversky, behavioral economics has identified numerous purported behavioral “anomalies” through extensive laboratory investigation. Anomalies (or behavioral biases) are defined as observed behavioral deviations from the predictions of neoclassical economic theory, where it is assumed that people rationally optimize according to a given set of information and constraints. Behavioral economists have sought to explain the sources of such anomalous choices by identifying and cataloging a variety of cognitive limitations and psychological biases.

Building on these findings, behavioral theorists have exported their research into the policy realm. This program, led by such luminaries as Richard Thaler and Cass Sunstein—and known as behavioral law and economics (BLE)—applies the insights gleaned from studies of human behavior to improve existing institutions by designing rules to compensate for (or take advantage of) behavioral biases. Starting from the premise that observed choices are inconsistent with neoclassical theory, behavioral economists argue that intervention is necessary to generate desirable outcomes for consumers who would otherwise make poor choices.

It is useful and imperative at the outset to distinguish between behavioral economics and behavioral law and economics research. In this paper, we use these terms to distinguish between distinct concepts. We use the term “behavioral economics” (BE) to refer to the underlying economic and behavioral science research program of hypothesis-testing to identify—and, where possible, to quantify—actual consumer behavior. We use the term “behavioral law and economics” (BLE) to describe the efforts to take the biases identified by BE scholars and to operationalize them into normative prescriptions for judges and regulators.

Vending Machine Regulations Aren't Worth the Price

Sherzod Abdukadirov — Tue, 11 Mar 2014 13:12:34 -0400

Expert Commentary

As the Food and Drug Administration inches closer to issuing rules that would require vending machines to display calorie labels, a bipartisan group of lawmakers is arguing for less onerous alternatives. Yet these alternatives still can’t salvage the rule, which will cost $26 million to implement and then $24 million each year in ongoing costs.

The proposed alternatives focus on reducing the regulation’s costs but fail to address the real underlying problem – the rule is unlikely to produce any benefits. The FDA’s own analysis struggled to justify the rule and ultimately failed to do so. But instead of admitting that the regulation will not work, the FDA is proceeding with a wasteful effort.

When Copyright Smothers Free Expression

Jerry Brito — Mon, 10 Mar 2014 16:38:37 -0400

Expert Commentary

Innocence of Muslims, the low rent, 14-minute propaganda video released in 2012, has sparked a new controversy. This time it’s not protests in the streets of Benghazi, but shock and indignation among copyright experts.

The Ninth Circuit Court of Appeals has ruled that one of the video’s actresses has a copyright interest in it and can therefore force YouTube to take it down. If this ruling is allowed to stand and it becomes precedent, get ready to see dozens, if not hundreds, or lawsuits by actors claiming they own copyright in their performances, separate and apart from the copyright in the movie itself.

For those who don’t remember, Innocence of Muslims is a video written and produced by one Nakoula Basseley Nakoula, an Egyptian Copt living in the U.S. who had previously been convicted of bank fraud. The video purports to be a trailer for a feature film, and it portrays the prophet Mohammed as a bloodthirsty fraud who is also gay and a child molester.

That portrayal angered muslims around the world and led to a series of protests on September 11, 2012. The reaction began in Cairo where protesters scaled the walls of the U.S. embassy, tore down the American flag, and replace it with an Islamic flag. Ultimately the protests spread all around the world, and the video was cited by the Obama Administration as a motive for the attack on the U.S. mission in Benghazi that killed Ambassador Christopher Stevens.

Shortly after the video’s release, an Egyptian cleric called for the death of those involved in its making, saying, “I issue a fatwa and call on the Muslim youth in America and Europe to do this duty, which is to kill the director, the producer and the actors and everyone who helped and promoted the film.”

One of those actors was Cindy Lee Garcia. She appeared in the video for all of three seconds, and her performance was partially dubbed over so that she appeared to be asking, “Is your Mohammed a child molester?” Like others in the production, Garcia had been cast under false pretenses. She had been told by Nakoula that she was acting in an adventure film titled, Desert Warrior.

Garcia understandably wanted the video taken down from YouTube immediately, so she filed a series of “notice-and-takedown” requests claiming a violation of her copyright. Google, which owns YouTube, refused to take down the video pointing out that as an actress she does not hold the copyright. Garcia sued, and the court agreed with Google that no injunction should issue, but the Ninth Circuit reversed in a strange opinion by the otherwise-reasonable Judge Alex Kozinski.

There are many problems with the ruling in Garcia v. Google, not the least of which is the question of what exactly is the work over which Garcia is supposed to have copyright. Clearly she doesn’t have copyright over the entire video, and Kozinski says as much. Instead, he found that she has a “copyright interest in her performance.” The problem with that reasoning is that copyright only extends to “original works of authorship fixed in any tangible medium of expression[.]” It’s not reasonable to see a fleeting performance, such as Garcia’s three seconds of acting, as a separate work. Her performance is also not “fixed,” as the Copyright Acts requires, in a form separate from the larger work.

Indeed, the decision has drawn strong criticism from a wide array of legal academics,activists, and commentators who view Kozinski’s decision as results-driven. There’s no denying that Garcia is a sympathetic plaintiff, but as the adage goes, bad cases make bad laws. If this decision is allowed to stand, it will encourage actors everywhere to begin to assert separate copyrights over their performances in films in which they have appeared. And this gets to what’s really wrong with the decision.

Apart from considering the technical legal problems with the decision, we should also ask ourselves, does the ruling further the purpose of copyright? After all, copyright exists not primarily for the benefit of creators, but for the benefit of the public. It serves to create an incentive for creators to produce and make available works that the public can enjoy. The exclusive rights creators enjoy under copyright are a means to an end, not an end in themselves.

So how does Garcia v. Google measure up at furthering copyright’s purpose? Not very well. In his opinion Kozinski bent backwards to find a copyright interest in order to allow Garcia to remove the work from public availability. Indeed, by creating a new right in actors’ performances, Kozinski may be unleashing a wave of lawsuits that will result not only in no new benefit to the public, but it may make any number of works unavailable at the behest of actors.

There is zero evidence that the public lacks access to films because actors do not enjoy a separate copyright in their performance sufficient to motivate them to create. This means that the only practical effect of such a new right will be to sow confusion and draw extortionist suits against existing film owners. This may well be the first time the Motion Picture Association of America will oppose copyright expansion, and they will be right.

More Taxes and Spending in the President's FY 2015 Budget

Veronique de Rugy — Tue, 11 Mar 2014 10:45:07 -0400

Publication

President Obama just released his budget proposal for FY 2015. This week’s charts compare these new budget projections from the Office of Management and Budget (OMB) to the most recent projections from the Congressional Budget Office (CBO). President Obama’s newest budget projections anticipate higher spending, higher revenues, and lower debt levels by 2024, relative to CBO projections.

The first chart compares the differences in debt projections between the FY 2015 budget and the CBO’s Budget and Economic Outlook for 2014 through 2024. While the president’s budget calls for higher debt levels as a percentage of GDP from 2013 to 2017 when compared to CBO current law numbers, the president’s budget plan projects that debt will drop below current trajectories by 2018. By the end of the ten-year window there is a significant divergence between the two; by 2024, President Obama projects that his plan will leave us with a debt of 69 percent of GDP, compared to the CBO current law projection of 79.2 percent of GDP.

How will the president’s budget succeed in achieving this lower level of debt? The second chart displays revenue and spending projections for the FY 2015 budget and the CBO’s 2014 current law projections. The chart shows that President Obama’s FY 2015 budget projects considerably higher revenues over the next ten years than the CBO’s most recent projections. Tax revenues are expected to increase by $1 trillion over the next ten years to finance new spending while restraining growth in public debt. Spending under the president’s proposed budget would moderately increase compared to current law until 2017, when it commences decreasing as a percentage of GDP, compared to current law.

President Obama’s budget deal will also revise last year’s budget compromise in which policymakers agreed to replace sequestration cuts for two years and pre-establish spending for federal agencies through 2015. This budget would allocate another $56 billion over the established amounts to agencies, with only $28 billion offset in tax hikes and alternative spending cuts.

President Obama’s FY 2015 budget can also be compared to the CBO cost estimate of Rep. Paul Ryan and Sen. Patty Murray’s proposed Bipartisan Budget Act of 2013. The third chart includes CBO projections of revenues and spending for the Ryan-Murray budget proposal.

Much of the president’s proposed budget’s rosy projections will require considerable tax financing and political restraint to come to fruition. If revenues are lower than anticipated or spending is not restricted as planned, the ten-year debt picture will look quite different. I have noted before that President Obama’s later mid-session review budget differed considerably from his early budget projections. Early revenue and outlay projections were higher than actual amounts, while deficit spending surged much higher than anticipated from 2010 to 2012. This budget will likely mis-project critical variables as well. The rosiest projections all too often turn out to be the most disappointing.

The Myth of the Great Wages 'Decoupling'

Donald J. Boudreaux, Liya Palagashvili — Mon, 10 Mar 2014 10:15:45 -0400

Expert Commentary

Many pundits, politicians and economists claim that wages have fallen behind productivity gains over the last generation. This "decoupling" explains allegedly stagnant (or in some versions of the story, declining) middle-class incomes and is held out as a crisis of the market economy.

This story, though, is built on an illusion. There is no great decoupling of worker pay from productivity. Nor have workers' incomes stagnated over the past four decades.

Read more at the Wall Street Journal

Internet Governance Principles

Eli Dourado — Mon, 10 Mar 2014 14:27:48 -0400

Publication

Taking Consent Seriously

It is a self-evident truth, wrote Thomas Jefferson, that governments “derive their just powers from the consent of the governed.” If this statement is indeed so self-evidently true that NETmundial participants can agree to it, then it has important implications for the role of governments with respect to the multistakeholder model of Internet governance.

The role of governments has been one of the multistakeholder model’s most controversial aspects. Before the development of the Internet, questions of global importance were always addressed by governments, with minimal involvement from other sources. The Internet now enables greater global coordination and problem solving without reliance upon governments, and indeed, Internet governance has so far been effected without the implementation of any clearly articulated role for governments at all.

The fact that governments are not evidently needed to coordinate global Internet resources raises the valid question of whether other stakeholder communities want governments to represent them or whether they want to represent themselves. Many are electing to represent themselves. On a consent-based view of the legitimacy of government, other stakeholder communities have this right.

Insofar as stakeholder communities elect to participate in Internet governance processes on their own account, governments should not have a primary role in Internet governance. Policy authority for Internet-related public policy issues is not, as the Tunis Agenda (a document agreed to only by governments) claims, the sovereign right of states. It is the sovereign right of the people, delegated to states as they see fit, which, in view of their participation on their own account, means not at all.

Instead, we should conceive of the role of government as a subordinate one. Governments should facilitate the participation of their domestic stakeholder communities in Internet governance processes. They do not have the right to advance positions that contradict the consensus of other domestic stakeholders because such exercises of government power do not reflect the consent of the governed and are therefore illegitimate.

If some stakeholder communities want and are able to represent themselves, it follows also that intergovernmental bodies are never the right fora to discuss matters relating to Internet governance. Stakeholder communities participate directly in Internet governance discussions because their governments do not adequately represent their views. Consequently, any process that relies on governments to represent the views of domestic stakeholder communities when those communities do not consent to that representation is illegitimate and exclusionary.

Finally, in exercising even their subordinate role of facilitating the participation of their domestic stakeholder communities, governments should subject themselves to rigorous standards of transparency so that domestic stakeholder communities can verify that they are being well served.

To conclude, a view of governmental legitimacy that is grounded in the consent of the governed has several implications for Internet governance. I invite fellow NETmundial participants to join me in endorsing the following high-level principles.

The role of governments in the multistakeholder model is limited to the facilitation of the participation of their domestic stakeholder communities in Internet governance processes.
Intergovernmental bodies are inappropriate fora to discuss matters relating to Internet governance.
Governments should be subject to rigorous standards of transparency in matters relating to Internet governance.

The Uses and Misuses of Budget Data

David M. Primo — Tue, 11 Mar 2014 17:33:54 -0400

Publication

How can analysts using the same set of budget figures come to dramatically different conclusions about the course of federal government spending? It’s because they start with different notions of what’s important in the spending outlook. While their presentations may all be equally accurate, it is important to understand that each reflects various assumptions about government finances, and is thus subject to manipulation.

In a new study published by the Mercatus Center at George Mason University, David M. Primo reviews the various measures of government spending and examines how they can be properly or improperly employed. Below is a brief summary. Please see “The Uses and Misuses of Budget Data” to read the study in its entirety and learn more about the author.

KEY POINTS

Budget Presentations

The same budget data can yield different conclusions about the condition and course of the federal budget—depending on the way the data are presented.

A model using absolute dollar figures will show a dramatic increase in spending over several decades. Adjusting the same figures for inflation, however, allows for more accurate comparisons of spending levels over time. Any trends that remain are due purely to the growth in government and not to the changing value of the dollar.
Another option is to measure government spending per person. Spending over time will appear to be declining using this measure if the population grows faster than spending, even if spending itself has increased in absolute or inflation-adjusted dollars.
Presenting the figures as percentages of gross domestic product (GDP)—that is, as shares of national economic output—allows one to evaluate the weight of government spending on the private sector. Here, too, spending will appear to be declining if the economy is growing faster than spending.
When the population or the economy is growing, measuring trends using population- or GDP-adjusted spending may mask the magnitude of spending increases.

Baseline Bungling

Budget presentations may also vary depending on the starting point used for measuring budgetary changes, known as the “baseline.”

The Congressional Budget Office (CBO) uses the “current law” baseline to show the budgetary implications of existing law, including changes in law that are scheduled to occur.
- For example, CBO must assume a reduction in Medicare physicians’ payments, as required under existing law.
- But Congress has regularly rejected these cuts in an action called the “doc fix,” which then results in higher Medicare spending than the current law baseline.
The CBO also produces an alternative scenario using a “current policy” baseline, which shows what will happen if existing policies are maintained indefinitely without change. Continuing with the Medicare example, CBO uses this baseline to show what will happen to Medicare spending if Congress acts as it has in the past and passes a “doc fix” to cancel the scheduled spending cuts.
Neither of these models is intended as an exact prediction, because Congress may change laws and policies; they are simply intended to show the likely course of spending under different scenarios.
Any model can create confusion about what constitutes an “increase” or a “cut” in spending; it depends on what baseline is used for comparison.

A Case Study: The Obama Budget

The fiscal year 2014 Obama budget can be presented in different ways—absolute dollars, inflation-adjusted dollars, inflation-and-population-adjusted dollars, and percentage of GDP. Thus, its spending may be seen as either increasing or decreasing depending on which set of values is used.

While none of the analyses are wrong, they can be misused if their underlying assumptions are hidden, or if those citing the analyses fail to explain their various nuances.
In addition, because the president’s budget—like congressional budgets—shows only 10 years of spending, it fails to reflect the long-term implications of current laws and policies.

Identifying the Problem: The First Step in the Regulatory Process

Jerry Ellig — Fri, 07 Mar 2014 14:57:49 -0500

Events

The regulatory process consists of many stages, but the essential first step is answering the question “what’s the problem?” A thorough regulatory impact analysis should provide evidence that the regulation addresses a significant, systemic problem and trace that problem back to its root cause. A cursory or faulty analysis of the problem prevents regulators from devising an effective solution and considering realistic alternatives.

Please join the Mercatus Center at George Mason University and senior research fellow, Dr. Jerry Ellig, for a Regulation University program focusing on the elements essential to defining the problem and how agencies perform in completing this first essential step.

Space is limited. Please register online for this event.

This event is free and open to all congressional and federal agency staff. This event is not open to the general public. Food will be provided. Due to space constraints, please no interns. Questions? Please contact Caitlyn Van Orden, Event Associate, at cvanorden@mercatus.gmu.edu or (703) 993-4925.

Modest Job Gains, But Labor Force and Overall Momentum Dragging

Keith Hall — Tue, 11 Mar 2014 10:41:06 -0400

Expert Commentary

Mercatus Center senior research fellow Keith Hall—former commissioner of the Bureau of Labor Statistics—reacts to today’s unemployment report from the BLS:

"The 175,000 jobs added in February was a modest but welcome pickup in job creation after disappointing gains in the prior two months (84,000 in December and 129,000 in January). But we are still looking to fully regain the momentum from most of 2013 when we averaged 194,000 new jobs.

"Also, the very low labor force participation rate—which dropped by 0.8 percentage point over the 12 months of 2013—still hasn’t improved much, holding its’ ground at the same 63.0 percent mark as last month. A particularly big concern is that participation remains at a low level for the prime working age population between 25 and 54 years old.

"The unemployment rate was little changed at 6.7 percent, but it has been made essentially irrelevant by the low labor force participation.

"I estimate that approximately two-thirds of the overall decline in participation since 2007 was not from the aging of the population, but from working age people leaving the labor force. This portion of the decline, 4.5 million people, lowered national income last year by over $500 billion–or 2.9 percent of GDP.

"Although there were weather effects evident in the data, it likely didn’t have much impact on the February payroll jobs numbers, just as in the prior two months.

"A large number of people, 627,000, missed work because of weather in February–the most since January of 2011. Similarly, nearly 7 million people worked part time because of weather, the highest level since January of 1996 (when 10.5 million people were part-time for weather reasons). However, this didn’t show up much in the payroll survey as average weekly hours was little changed at 34.2 hours (down slightly from 34.3 hours last month).

Because all of these people were counted as employed by the household survey, there was no effect on the unemployment rate. Additionally, weather generally has little effect on the number of payroll jobs are those that worked as little as one hour in the pay period covered by the survey are counted as employed."

How Will Dodd-Frank Affect the Future of Small Banks?

Hester Peirce, Ian Robinson — Mon, 10 Mar 2014 11:14:33 -0400

Video

As implementation of the Dodd-Frank Act continues, American financial institutions are grappling with dramatic changes in the structure of financial regulation. The full weight of those regulatory changes, however, is not likely to be distributed evenly across the financial sector. The size of an individual can play a significant role in determining how heavily regulatory burdens fall. A forthcoming Mercatus Center survey of small banks sheds light on how Dodd-Frank is affecting smaller institutions.

http://mercatus.org/events/how-will-dodd-frank-affect-future-small-banks

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Benjamin Powell Book Panel: Out of Poverty: Sweatshops in the Global Economy

Benjamin Powell, Peter J. Boettke — Mon, 10 Mar 2014 11:15:15 -0400

Video

The F. A. Hayek Program for Advanced Study in Philosophy, Politics and Economics at the Mercatus Center hosted a panel discussion featuring Benjamin Powell and his new book, Out of Poverty: Sweatshops in the Global Economy. This book provides a comprehensive defense of third-world sweatshops. It explains how these sweatshops provide the best available opportunity to workers and how they play an important role in the process of development that eventually leads to better wages and working conditions.

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Regulators Need To Take It Easy On Bitcoin Startups

Jerry Brito — Thu, 06 Mar 2014 11:11:53 -0500

Expert Commentary

The recent implosion of bitcoin exchange Mt. Gox — and the loss of almost a half-billion dollars of user funds — is prompting some to call for regulating this and other cryptocurrencies.

But that would be a mistake. Not because protecting consumers isn’t important — it is — it’s just that regulators should balance their goal of protecting consumers with the equally important goal of fostering a climate that welcomes entrepreneurs and innovation. Recreating the internet’s permissionless innovation environment may not be possible in a highly regulated sector as finance. But as regulators look to strike a balance, they should consider creating a safe harbor for small new entrants.

Some bitcoin startups are two-, three- or four-person teams, and as venture capitalist Fred Wilson put it during New York’s hearings on virtual currencies, “It’s very hard for them to do what JPMorgan Chase does. I think there needs to be an on-ramp to regulation that is inviting for young companies to embrace regulation.”

A sensible safe harbor could be that on-ramp.

Almost every state requires money transmitters, like bitcoin exchanges, to be licensed before opening for business. Getting licensed is a difficult and expensive process, and it’s meant to be that way to weed out fraudsters and operators who don’t have the capital or expertise to successfully run a money transmission business. State licensing requires background checks and net worth minimums, as well as the posting of surety bonds. Licensees must also file anti-money-laundering compliance programs and dutifully comply with examiner requests for information.

The intent behind this type of consumer protection regulation is to prevent scenarios similar to the Mt. Gox debacle. (It’s partly why there are no real U.S.-based bitcoin exchanges.) But this doesn’t just affect bitcoin businesses: Last year Illinois ordered Square to cease business in the state until it obtained a license; Florida granted them one, but only after the company paid a half million dollars in fines for the time it had operated without one. There don’t seem to be any consumer complaints related to either case. So why this regulatory power? Because Square is trying to make it easy for anyone to accept credit card payments, which means it can be considered a money transmitter.

No smart entrepreneur would want to innovate in such a hostile regulatory environment. Especially because licensing, while well intentioned, means that only those with deep pockets can afford to enter the field. Such barriers to entry probably suit century-old incumbents like Western Union just fine. They give internet giants an edge too; Google, Facebook, and Amazon all have money transmitter licenses.

But where the web made it cheaper to successfully start up a company, licensing makes it very expensive to start up. Silicon Valley has been the country’s engine of innovation partly due to its culture of smart risk-taking. Startups are experiments, yet we see too few experiments and too little innovation in the money transmissions space. That’s why the financial industry has been impervious to much-needed change — otherwise, wire transfers wouldn’t cost over $20 and take days (just as they have for decades). There’s no technological reason we can’t have fast and cheap money transfers.

Luckily, bitcoin presents an opportunity to reform the law. Today, dozens of states around the country are working to interpret or update their money transmission rules to take cryptocurrencies into account. New York’s Department of Financial Services has been the most public, holding hearings in January on the possibility of creating a new kind of license for virtual currency businesses. And the Conference of State Bank Supervisors tapped nine regulators — including those from New York, California, Texas, and Florida — to form an Emerging Payments Task Force that will study and make recommendations about virtual currencies and other innovations.

A safe harbor could take many forms, but its ultimate purpose would be allowing startups to jump into the space without compromising consumer protection. (Note that Bitcoin exchanges like Mt. Gox were actually already subject to strict regulations and early complaints.) Under safe harbor provisions, new entrants could be allowed to operate while their license application is pending as long as: they register with federal money laundering authorities; certify that they are well capitalized; and don’t attract consumer complaints. Regulators could also require small firms to clearly disclose their probationary status and post a standard bond pegged to the volume of business they do.

The point of such a safe harbor is to provide a clear path for startups that doesn’t require them to get permission (almost 50 licenses before they even open up shop) to innovate. This kind of balanced approach to regulation would mean not just more bright minds turning their attention to financial innovation, it would mean more investors willing to back their ideas. But most importantly it means the potential to change an outdated, entrenched system for the better.

Tech entrepreneurs have successfully disrupted industry after industry — from journalism to retailing to music and TV — by leveraging the internet-driven principle of permissionless innovation. It’s time for finance to be added to that list. After all, consumers are the ones who benefit from innovation that makes financial services cheaper, faster, and more convenient. Ensuring that consumers are absolutely safe may not make them better off overall if doing so means they only have access to expensive, telegraph-era services.

The Deduction of State and Local Taxes from Federal Income Taxes

Jeremy Horpedahl, Harrison Searles — Thu, 06 Mar 2014 11:06:06 -0500

Publication

Taxpayers who itemize their deductions are allowed to deduct state and local taxes from their federal taxable income. This deduction is limited to either income or sales taxes, but not both. Personal property taxes, such as local taxes on housing and real estate, can also be deducted. The main benefit of this deduction is to provide some tax relief to taxpayers living in states with higher taxes, since they have less disposable income. However, this benefit also points to the main cost of the deduction: it subsidizes higher taxes and spending at the local level, since taxpayers in those states will not feel the full burden of the taxes. Instead, the burden of these taxes is in some sense “exported” to taxpayers in other states, since federal tax rates must be higher than otherwise to fund the same level of federal spending.

When discussing taxation in the United States, it is important to consider all levels of taxation rather than just focusing on one at a time, such as federal income taxes, because these tax levels affect each other. One way in which these taxes interact is found in the federal income tax code, whereby taxpayers who itemize deductions are able to deduct a variety of state and local taxes when calculating taxable income. In most years it is one of the five largest tax expenditures in the individual income tax, and it is thus one of the largest “tax expenditures” as defined by government agencies, such as the Office of Management and Budget.¹ OMB estimates that in fiscal year 2012, this deduction reduced federal tax revenue by about $45 billion, and this amount will roughly double over the next five years. As a result, this deduction has had a large impact upon the overall tax system of the nation at all levels of government, which warrants further analysis of its overall desirability.

Two Concerns For Equity

The distribution of the benefits of this tax expenditure, as well as the costs of removing it, can be thought of in two ways. First, there is the question of which taxpayers within the distribution of income benefit the most. According to estimates by the Joint Committee on Taxation for 2012, almost 95 percent of the benefits of this deduction go those earning over $75,000 per year, and over half (55 percent) of the benefits are for those earning over $200,000. The average deduction for those in the over $200,000 income group is over $5,000, while it is only about $250 for those in the $50,000 to $75,000 group (around the national median).² These averages only include those taxpayers that claimed the deduction, which is only 27 percent of all taxpayers since most do not itemize their deductions.

Second, there is the distribution of benefits across the 50 states, based on how high taxes are in each state. States with higher taxes will have more filers claiming this deduction, and therefore the deduction will also be a larger share of the state’s income. These high-tax states also tend to be high-income states, implying that there is a transfer from low-income to high-income states through this deduction. By looking at the total deductions in this category as a percent of adjusted gross income, we can see that there is wide variation across the states. The states with the lowest state and local tax deductions (Alaska, Wyoming, South Dakota) claim deductions amounting to less than two percent of their adjusted gross income, while the highest tax states (New York and New Jersey) claim over nine percent of their adjusted gross income. The figure below plots the correlation between the total deduction for state and local taxes and per capita adjusted gross income for 2010 for all 50 states and DC.³

Redistribution Or Offset For Higher Taxes?

During the 1985 tax debate, NYU law professors Brookes Billman and Noel Cunningham offered an economic justification for the deduction: state and local taxes reduce an individual’s income and ability to pay federal taxes, which should then be considered by the federal tax code.⁴ After all, if federal taxes should be based on an individual’s ability to pay, then local taxes could reasonably be considered as reducing one’s ability to pay federal taxes.

Economist Bruce Bartlett took a contrary position to Billman and Cunningham, arguing that this deduction is a subsidy to high-tax states from low-tax states, and high-tax states tend to have higher per capita incomes. He also found that, in general, the deduction is associated with higher state and local taxes because the federal government is paying a portion of these taxes, with most estimates suggesting state and local taxes are about 13 to 14 percent higher.⁵ In this case, more services may be provided publicly, even if it is more efficient to provide them privately. This deduction also influences the types of taxes that state and local governments use, biasing them toward choosing taxes that are deductible rather than those that are most efficient.⁶ More recent estimates confirm that state and local spending “could fall in the absence of deductibility,” indicating that the deduction does indeed increase government spending.⁷

Furthermore, the ability-to-pay reasoning of Billman and Cunningham overlooks where state and local taxes go, since taxes are not only collected, but spent. Unless one views all government spending as complete waste, it is a reasonable assumption that the local taxes are providing some services to those that pay them (though likely not equal to the full value of taxes paid in many cases). Thus, local taxes don’t reduce an individual’s willingness to pay by the full amount of the tax, or possibly even at all. The local taxes an individual pays are returned to the individual as local government services, minus the costs and wastes associated with government provision of services.

For example, in cities where garbage collection is provided by the local government, the property or sales taxes that fund this service are deductible. For cities where garbage collection is provided privately, the fees paid to the garbage company are not tax deductible. But from an economic perspective, these two situations are identical and should be treated the same in the tax code. The current tax code gives preference to city-provided garbage collection, which potentially violates both equity and efficiency. The tax code also biases municipalities towards providing services, such as garbage collection, even though it may be more efficient for these services to be provided privately.

Tax Rates And Macroeconomics Effects

Eliminating the deduction for state and local taxes will likely lead to increased macroeconomic activity by removing the economic distortions listed above. It will also potentially lead to more federal tax revenue, though this depends on how individuals react to what would be, in effect, a tax increase. A better policy would be to simultaneously decrease tax rates at the same time that this deduction is eliminated, generating additional economic activity without increasing the amount of revenue concentrated at the federal government.

Estimating the economic and tax-revenue effects is a difficult matter. Two recent studies by the Tax Foundation attempt to examine the effects of removing the deduction for state and local income, sales, and property taxes. These estimates should not be taken as definitive point estimates, but as indicative of the direction of the effects. For the state and local income and sales tax deduction, they estimate that eliminating the deduction combined with an across-the-board cut in individual income tax rates by 5.8 percent (i.e., the 10 percent rate would drop to 9.42 percent) would result in an increase in total employment by around 300,000 jobs.⁸ They found similar effects for the property tax deduction, though this would also require a decrease in business property taxes because “capital (even owner-occupied housing) is quite sensitive to taxes.”⁹

Conclusion

Removing the federal tax deduction for state and local taxes would make taxes more equitable throughout the nation, as both high-tax and low-tax states are treated equally by the federal government. It may also provide an efficiency boost for states and localities, as they abandon some services that could be better provided by private companies. The removal of this deduction would also allow federal marginal tax rates to be cut across the board, providing a secondary boost to the economy while still remaining revenue-neutral at the federal level.

Notes

_{For a discussion of the largest individual and corporate tax expenditures, see Jeremy Horpedahl and Brandon Pizzola, “A Trillion Little Subsidies: The Economic Impact of Tax Expenditures in the Federal Income Tax Code” (Mercatus Research, Mercatus Center at George Mason University, Arlington, VA, October 25, 2012).}
_{See Table 3 of Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2012–2017 (Washington, DC, February 1, 2013), JCS-1-13. The JCT estimates do not provide any further details on the about $200,000 group, but due to AMT and phase-outs of deductions, it is likely that the benefits are not flowing to taxpayers with extremely high incomes.}
_{Deduction totals include property taxes and either income or sales taxes. Tax data from Internal Revenue Service, SOI Tax Stats—Historical Table 2, updated April 23, 2013, http://www.irs.gov/uac /SOI-Tax-Stats---Historic-Table-2.}
_{Brookes D. Billman Jr. and Noel B. Cunningham, “Nonbusiness State and Local Taxes: The Case for Deductibility,” Tax Notes 28 (September 2, 1985): 1105–1120.}
_{Bruce Bartlett, “The Case for Eliminating Deductibility of State and Local Taxes,” Tax Notes 28 (September 2, 1985): 1121–25.}
_{Martin Feldstein and Gilbert Metcalf, “The Effect of Federal Tax Deductibility on State and Local Taxes and Spending,” Journal of Political Economy (1987): 710–36.}
_{Gilbert Metcalf, “Assessing the Federal Deduction for State and Local Tax Payments,” National Tax Journal 64 (June 2011): 565–590.}
_{Michael Schuyler and Stephen J. Entin, “Case Study #4: The Deduction of State and Local Income Taxes or General Sales Taxes,” Tax Foundation Fiscal Fact, no. 382 (August 2013).}
_{Stephen J. Entin and Michael Schuyler, “Case Study #2: Property Tax Deduction for Owner-Occupied Housing,” Tax Foundation Fiscal Fact, no. 380 (July 2013).}

Consequences of Regulation Accumulation

Patrick McLaughlin — Wed, 05 Mar 2014 16:04:11 -0500

Video

Government spending may be slowing but regulatory output is not. The number of regulations passed the one million mark in 2010, and their volume continues to rise. What does the continuing growth of so many rules mean for the U.S. economy and individual industries?

http://mercatus.org/events/consequences-regulation-accumulation

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Current Good Manufacturing Practice and Hazard Analysis and Risk-Based Preventive Controls for Food for Animals

Jerry Ellig, Richard Williams — Tue, 04 Mar 2014 23:00:05 -0500

Publication

The Food Safety Modernization Act, signed in 2011, directs the Food and Drug Administration (FDA) to adopt regulations requiring facilities that manufacture, process, pack, or hold food, including animal food, to implement preventive controls to ensure that the food is not “adulterated,” as defined in section 402 of the Food, Drug, and Cosmetic Act.¹The proposed regulation applies both to pet food and to livestock feed, and it contains two principal requirements. First, it requires that facilities implement a set of “current good manufacturing practices” (CGMPs) intended to prevent contamination of animal food.² Second, it requires covered facilities to develop a written food-safety plan, conduct a hazard analysis, implement preventive controls for hazards that are reasonably likely to occur, monitor the controls, verify that they are effective, take corrective actions, and maintain records.³

The proposed regulation also establishes criteria that exempt certain “qualified facilities” and activities from the requirement for hazard analysis and risk-based preventive controls. Particularly noteworthy are proposed exemptions for “small” businesses (average annual sales below $500,000 and at least half of sales to consumers or local retailers or restaurants), “small” businesses performing on-farm activities (fewer than 500 employees), or “very small” businesses (total annual sales below a threshold to be determined by the FDA). The FDA seeks comment on the dollar threshold to use in defining “very small” businesses.⁴

Unfortunately, the Regulatory Impact Analysis (RIA) accompanying the proposed regulation provides scant assessment of the nature, cause, and significance of the problem the regulation seeks to solve. In the absence of such an assessment, the RIA has no basis for estimating the benefits of the proposed rule or the benefits associated with the alternative definitions of “very small” business. It estimates the costs of the alternatives, but since the differential benefits of the alternatives are unknown, there is no way to determine whether the more restrictive definitions of “small business” produce benefits that justify the additional costs. Indeed, the analysis fails to prove that the regulation would produce any significant benefits at all. Our own estimate of the benefits suggests that the costs of the proposed rule estimated by the FDA ($87–129 million annually) substantially outweigh any possible benefits (about $30 million per year).

Before issuing a final regulation, the FDA should:

Use empirical evidence to evaluate whether a market failure exists. A market failure exists if the level of animal food safety expected in the future is likely to depart from the optimal level because consumers or producers lack sufficient information to detect and deter hazards.
Assess whether a more limited regulation, inspection, or enforcement initiative targeting bad actors in the marketplace could accomplish many of the goals of the Food Safety Modernization Act more effectively or at lower cost than the proposed regulation.
Assess whether emphasizing tracebacks and attribution might create sufficient incentive for manufacturers to exercise due diligence.⁵
Assess whether a less-intrusive labeling regulation or public education campaign could reduce the incidence of salmonella infection from animal food more effectively or at a lower cost than the proposed regulation.
Assesses whether a regulation targeted only at pet food could achieve most of the goals of the proposed regulation at lower cost.
Demonstrate with empirical evidence that any new regulation is likely to produce significant, quantifiable benefits by reducing the risk of hazards below the level that is likely to occur in the absence of a new regulation.

Reportcard Fields

Reportcard Final Score:

Rule Publication Date:

October 29, 2013

March 04, 2014

Comment Period Closing Date:

March 31, 2014

Public Interest Comment PDF:

ElligWilliams_FoodforAnimals_PIC.pdf

Report Card PDF:

Ellig_FoodforAnimals_rc_v1.pdf

Proposed Rule PDF:

FDA-2011-N-0922-0019.pdf

Regulatory Impact Analysis PDF:

FDA-2011-N-0922-0003-1.pdf

Supplemental Applications Proposing Labeling Changes for Approved Drugs and Biological Products

Todd Nesbit — Tue, 04 Mar 2014 21:33:07 -0500

Publication

INTRODUCTION

The Regulatory Studies Program of the Mercatus Center at George Mason University is dedicated to advancing knowledge about the effects of regulation on society. As part of its mission, the program conducts careful and independent analyses that employ contemporary economic scholarship to assess rulemaking proposals and their effects on the economic opportunities and social well-being available to all members of American society.

This comment addresses the efficiency and efficacy of this proposed rule from an economic point of view. Specifically, it examines how the proposed rule may be improved by more closely examining the societal goals the rule intends to achieve and whether this proposed regulation will successfully achieve those goals. In many instances, regulations can be substantially improved by choosing more effective regulatory options or more carefully assessing the actual societal problem.

SUMMARY

The proposed “Supplemental Applications Proposing Labeling Changes for Approved Drugs and Biological Products” rule[1] would enable Abbreviated New Drug Application (ANDA) holders of approved generic drugs to enact a safety-related labeling change by submitting a Changes Being Effected (CBE-0) supplement even when the New Drug Application (NDA) holder of the reference-listed drug has not submitted a CBE-0 for the said change. Current regulations require generic drugs to have identical safety-related labeling as the reference-listed drug. As such, an ANDA holder of an approved generic drug currently may request to change product safety-related labeling only after the respective NDA holder of the reference drug has had such changes approved by the Food and Drug Administration (FDA).[2] This rule would allow ANDA holders to independently submit a CBE-0 supplement.

The FDA argues that this rule will allow ANDA holders to more actively participate in the updating of safety-related labeling, potentially increasing the speed of communication of important drug safety information, specifically for generic drugs, to physicians and the public. Given that 80 percent of all prescription medications dispensed are generic—and that 94 percent are generic when generic drugs are available—adequate dissemination of drug-safety information for generic drugs is certainly an important matter.3

While increasing the parity between NDAs and ANDAs in relation to safety-related drug labeling may, in fact, prove to exhibit a positive net benefit on society, the analysis presented in the Preliminary Regulatory Impact Analysis (PRIA) fails to substantiate such a claim. First, the FDA fails to quantify any of the public health benefits of the proposed rule, providing a brief qualitative discussion instead. Second, the estimated costs associated with the proposed rule are greatly understated. Several factors influence this downward-biased estimate, including ignoring FDA administrative costs in the final estimate, assuming away the costs associated with simultaneous CBE-0 submissions from multiple ANDAs, and calculating the high and low estimates based on questionable assumptions. The cost estimations also fail to adequately account for changes in ANDA incentives. Specifically, the analysis does not account for how ANDA holders may increase resources devoted to post-marketing surveillance evaluation and reporting and to legal concerns in response to increased exposure to products liability suits.

The proposed rule may, if finalized, improve the parity between NDAs and ANDAs and possibly better align the interests of ANDAs with physicians and the ultimate consumers of generic drugs. These are certainly laudable goals. Under the current rules, ANDAs cannot independently submit a CBE-0 for a safety-related label change, and an individual’s ability to access state courts to file “failure to warn” tort claims depends on whether the individual is dispensed a “brand name” or generic drug.4 With an FDA-reported 80 percent of prescription drugs dispensed being generic, a sizable share of prescription drug consumers are unable to appeal to the courts for “failure to warn” lawsuits. As such, it is quite possible that the benefits of the proposed rule are sizable. Unfortunately, the FDA presents a careless approach to the estimation of costs and benefits of this proposed rule related to safety-related drug labeling changes.

Given the potential impact on consumer health, this regulation deserves a more thoughtful analysis than the FDA has provided to date. The FDA should improve the Regulatory Impact Analysis to estimate the benefits of the proposed rule and to more accurately estimate all of the costs stemming from it. Further, it is advisable that the FDA compare and contrast the net benefit of the proposed rule with that of other reasonable alternatives. Only after addressing these concerns is it possible to make an educated decision regarding the appropriateness of the proposed rule.

More FDA Funding Doesn't Equal Better Food Safety

Richard Williams — Tue, 04 Mar 2014 10:03:22 -0500

Expert Commentary

Senior officials at agencies routinely ask Congress for more funding, so the latest call from the Food and Drug Administration’s Michael Taylor for more money to implement regulations promulgated under the Food Safety Modernization Act isn’t that unusual. But regulators rarely provide evidence that additional funding will actually help solve the social problems the money is intended to address.

According to Taylor, the food safety law means that the FDA “cannot do all that is asked of us without additional resources.” Based on the last time the agency got an infusion of cash, however, it’s not clear what the agency can do even if it has all of the additional resources it asks for.

Naples Supporter and Friend Lunch

Jason J. Fichtner — Mon, 03 Mar 2014 16:58:31 -0500

Events

Please join Mercatus Center scholar Dr. Jason Fichtner for lunch and a discussion on ways to help Congress bring fiscal responsibility to Washington by addressing the greatest drivers of future debt: Medicare, Medicaid, and Social Security.

As you know, government spending is a critical issue, and the federal government shutdown this past fall is just another example of how this issue is one of the main drivers in the current policy debate. Jason will discuss why fundamental spending reform plays a key role in balancing the budget as well as analyzing which spending reduction proposals are likely to be effective.

One of the key pieces to resolve the spending problem is entitlement reform, and there is agreement that entitlement spending must be addressed. But what continues to be debated in that discussion is how, when, and where does Congress begin. Several plans are in discussion, but according to Jason, none of the plans have really provided the necessary reform in order to bring spending under control.

Jason’s background at the Social Security Administration has allowed him to serve as the expert on entitlement reform. He will address the fundamental drivers and confusion surrounding each program from the fiscal level along with potential reform plans and whether or not we take a comprehensive or piecemeal approach.

This is not a fundraising event, and there is no charge to join us. We are pleased to have you as our guest to show our thanks and appreciation to our donors. Dress is business casual. Please invite friends or associates who might be interested.

Questions? Contact Lindsey Emmick at lemmick@mercatus.gmu.edu or (703) 993-8956.

Economic Experts on FY 2015 Budget

Mon, 03 Mar 2014 22:44:00 -0500

Expert Commentary

Below, scholars with the Mercatus Center at George Mason University—the world’s premier university source for market-oriented ideas—look ahead to key policy areas the president will likely focus on in his FY 2015 budget submission.

ON FISCAL HEALTH:

Charles Blahous, senior research fellow and public trustee for Social Security and Medicare

If President Obama’s upcoming budget were solely about achieving sustainable federal finances, it would contain concrete recommendations to slow the spending growth of the Big Four (Social Security, Medicare, Medicaid, the Affordable Care Act) entitlements. These politically sensitive programs will generate all of the projected spending growth that is expected to drive future federal deficits. The extent to which the president’s budget diverges from this blueprint is the extent to which other agendas are diverting us from urgently needed fiscal repairs.