Scandalous as the allegations of sexual misconduct by Harvey Weinstein and Roy Moore have been, to my eye the most scandalous revelation has been that millions of dollars of taxpayer money has been paid out as “hush money” to conceal the transgressions of members of Congress. The New York Times declaims:

As charges of sexual harassment and assault swept from Hollywood to Washington, Congress has faced questions about how it addresses such claims. The answer: terribly.

For two decades, taxpayers have been underwriting secret payments to people who accuse lawmakers of sexual misconduct under a 1995 law called, paradoxically, the Congressional Accountability Act. The legislation applied to Congress many laws on workplace safety, employment and civil rights from which it had been exempt. In the process, it established an account to pay settlements, which prevented lawmakers from being personally liable, and created an Office of Compliance that kept charges and payments secret.

After public pressure, the Office of Compliance released a tally of the settlements this month: Between 1997 and the present, the office has paid more than $17 million on more than 260 claims. In keeping with Congress’s maddening lack of transparency, the tally lumps harassment with discrimination and other claims, so the number of harassment claims isn’t clear. It also doesn’t name any of those accused.

It isn’t just the Office of Compliance and the misuse of public funds isn’t limited to hushing up sexual misconduct.
The Washington Times reported:

Rep. Raul M. Grijalva quietly arranged a “severance package” in 2015 for one of his top staffers who threatened a lawsuit claiming the Arizona Democrat was frequently drunk and created a hostile workplace environment, revealing yet another way that lawmakers can use taxpayer dollars to hide their misbehavior on Capitol Hill.
While the Office of Compliance has been the focus of outrage on Capitol Hill for hush-money payouts in sexual harassment cases, the Grijalva payout points to another office that lawmakers can use to sweep accusations under the rug with taxpayer-funded settlements negotiated by the House Employment Counsel, which acts as the attorney for all House offices.

The employment counsel negotiated a deal for taxpayers to give $48,395 — five additional months’ salary — to the female aide, who left her job after three months. She didn’t pursue the hostile workplace complaint further.

The Government Accounting Office, a legislative branch agency, is the highest auditing institution of the federal government. Established in 1921 its empowering legislation says it is required to:

investigate, at the seat of government or elsewhere, all matters relating to the receipt, disbursement, and application of public funds, and shall make to the President … and to Congress … reports [and] recommendations looking to greater economy or efficiency in public expenditures

Note: it is required to report the misapplication of public funds to the president. What the heck has the GAO been doing? Was the GAO unaware of these payments? How were they concealed? Were they aware but failed to report? Has the executive branch been in collusion with the legislative branch to conceal criminal misuse of public funds? How long as this been going on?

Terrible as the Hollywood and Alabama stories are, this calls into question the very foundations of American government.

You presumably are aware that “Black Friday”, the day after Thanksgiving, traditionally was the biggest retail sales day of the year and marked the point at which retailers were “in the black”, i.e. started making a profit. That goes back half a century or more.

Not so much today. The results from the Black Friday weekend (Thanksgiving through Monday) are still coming in but here are some preliminary findings.

1. Online

Yesterday, “Cyber Monday”, was the biggest day for online sales ever. According to Adobe Digital Insights by 10:00am Monday online sales had already increased by 17% over last year’s figures.

2. Mobile

From the same source a lot of those online sales were made on mobile devices—nearly half of the total, mostly using smartphones.

3. BOPIS

“Buy Online—Pickup in Store” is a hot trend in retailing and Black Friday was no exception. This presents a challenge to retail analysis companies who must disaggregate in-store conversions and BOPIS. As BOPIS becomes increasingly popular, it will also cause stores to rethink their layouts.

4. In-store sales: meh

According to ShopperTrak, shopper visits to retail stores actually declined 1.6% relative to last year. This continues the downward trend of “brick and mortar” stores.

5. Brand dilution

Basically, Black Friday ain’t what it used to be. Discounting begins long before Thanksgiving and continues right through the holidays. “Black Thanksgiving”, as conducting major sales on Thanksgiving Day has been called, Black Friday, Cyber Monday, and the stores that are just sitting out Black Friday—they all contribute to a decline in importance for what used to be the most important day of the year for retail sales.

For the last several months we’ve been inundated with “Pritzker for Governor” ads on television. Mostly, they attacked Rauner on the grounds that he was a billionaire while Pritzker on the other hand was a different kind of billionaire. At the Sun-Times Mark Brown laments:

J.B. Pritzker and Chris Kennedy proved Monday that rich Illinois Democrats are no more inclined to be forthcoming about their personal finances than rich Illinois Republicans.

I know better than to be surprised, but I’m still extremely disappointed.

By making public only the front two pages of their income tax returns, Pritzker and Kennedy fell far short of the ethical standards we should be demanding of an Illinois governor.

They both chose to keep secret the accompanying schedules and statements from their returns that explain where they made their money, as well as the deductions used to lower their tax bills.

I cruised on over to Mr. Pritzker’s web site. I wasn’t particularly surprised that he wants to spend more money on health care, education, and infrastructure, i.e. sweetheart deals for political supporters. Nothing on putting the state’s fiscal house in order or stemming the flood of Illinoisans heading for the exits.

Mr. Pritzker might want to take a look at Illinois’s balance sheet. The state doesn’t have the money to do anything other than pay the pensions of retired public employees. I want to see exactly whose taxes he plans to raise and by how much to support all of the new spending he wants to do.

In her chronicle of how Americans became so divided in their political and partisan views, Nancy Gibbs’s Harvard speech, reproduced at Time, has some curious lacunae. She doesn’t, for example, mention that the proportion of immigrants living here has doubled since 1990, the period she’s considering, and is now as high as it’s been in more than a century. Good or bad I don’t think we should be surprised that the social fabric is becoming frayed.

I’m also a bit skeptical of her premise. How would you go about distinguishing between divisions that have arisen over the last generation and those that pre-existed and are only now being revealed by all-seeing social media and the collapse of gatekeeper media? Some of the evidence she presents (the number of uncontested elections) points to tremendous agreement rather than disagreement. Maybe the number of uncontested elections reveals the tremendous disconnect between the political powers-that-be and the people they serve.

However, the one observation I can make is that the stakes are enormously higher than they’ve ever been. Never have so many people made so much money from business as usual at the federal government.

So, follow the money. Who benefits from division?

The Congressional representative for Illinois’s Fourth Congressional District, Luis Guitierrez, has decided not to run for re-election in 2018. From the Chicago Tribune:

Longtime Democratic U.S. Rep. Luis Gutierrez won’t seek re-election next year, sources said Monday night, setting off a domino effect in Chicago Latino politics.

Cook County Commissioner Jesus “Chuy” Garcia plans to start gathering signatures on Tuesday to seek Gutierrez’s congressional seat, the sources said. And 22nd Ward Ald. Ricardo Munoz plans to run for Garcia’s County Board seat, they added.

The decision marks a swift change from Monday morning, when Gutierrez’s campaign filed his paperwork to secure a spot on the March 20 primary ballot, and Garcia filed to seek re-election to the County Board.

There hasn’t been much reaction to the news as yet. Rep. Guitierrez is most generally known nationally as an immigration activist if not absolutist. IMO the Fourth District, one of the most gerrymandered in the country, should be reorganized with the Third, Fifth, Sixth, and Seventh Districts to form more compact districts. The reasoning that created the Fourth District (Rep. Guitierrez is the only representative to have served the district in anything like its present form), creating a guaranteed seat for a Hispanic Congressman, is no longer operative. The present district is probably preventing the election of multiple Hispanic Congressmen. Maybe that’s become its new purpose.

Commissioner Garcia forced Chicago Mayor Rahm Emanuel into a runoff election last time around so it would likely give him a firmer grip on his office if he chooses to run again, which just about everybody assumes he will. Otherwise it wouldn’t change the political dynamics much. All of the likely candidates believe in generally open borders, higher taxes, and expansion of government.

I see that I’m largely in agreement with the Committee for a Responsible Federal Budget about the likely effects of the tax cut being considered:

Increasing growth by 0.4 percentage points on a sustained basis might sound doable, but such an increase actually means raising projected growth rates by more than one-fifth and is unlikely to occur because of tax reform alone.

Certainly, policymakers should work toward enacting reforms to improve economic growth by as much as possible, and tax reform is one critical piece of a comprehensive growth plan. But the tax reform plan under consideration is unlikely to generate more than 0.1 percentage points of increased growth per year, and over the long run it may actually slow economic growth. Lawmakers should not pretend otherwise but should instead both work to improve the bill and enact other pro-growth policies, including improving the debt trajectory, entitlement reform, regulatory reform, and labor market improvements.

What is needed is much more targeted reform. Other reforms that should be considered include trade reform (more reciprocity), reforms specifically designed to encourage domestic business investment, and immigration reform.

I’ve mentioned it before. There’s a wonderful little book called “How to Lie With Statistics” that should be required reading (it was required reading at my high school). Justin Fox’s recent piece at Bloomberg View, comparing overall taxes paid with the costs of education and health care for various different countries could be a case study. Consider this graph, for example:

It has several problems. What is it measuring? Average tuition? Median tuition? There no way to tell. Additionally, three-quarters of American students attend public colleges and universities. What percentage of Japanese college students attend Japanese private college or universities? Israeli? There’s no way to tell, at least not from the information that’s provided. Worse yet it adjusts the numbers based on purchasing power parity. In other words the data are already adjusted to normalize costs among countries. With all of that finagling the graph tells you practically nothing. I would bet that American public university costs are a lot higher than Japanese or Canadian but that’s just a guess.

Or this graph:

It has a similar list of problems. For one thing what is “voluntary health insurance” in the United States? Isn’t there an individual mandate? Is voluntary health insurance in France the same as voluntary health insurance in the United States? I don’t think so. I think a graph similar to this would have told a clear story if it had been limited to out-of-pocket spending for health care but I think it could have told a very different story. Or if it had just compared Medicare spending with spending for people over 65 in other countries.

I believe that Mr. Fox is attempting to make the case that Americans could get a lot more for their money by channeling it through the federal government via taxes. IMO the reality is that healthcare and education are expensive in the United States because so much of them is channeled through government at all levels and government is very expensive here, Americans know that, and, consequently, are wary of big promises by big government advocates.

I think we can safely conclude that the editors of the Wall Street Journal very much support cutting taxes. They’ve got two editorials on the subject today. In the first editorial they point to the inadequacies of the present system:

Start with the fact that the GOP budget outline allows for a net tax cut of $1.5 trillion over a decade on a statically scored basis thanks to a deal brokered by Senators Pat Toomey and Bob Corker. Democrats and their media chorus are using that number to claim that reform will bust the budget and add to the federal debt. This comes with ill grace from people who cheered Barack Obama’s doubling of the national debt in eight years, but it’s also overwrought.

The actual budget hole is smaller than $1.5 trillion because the GOP budget is scored on a “current law” baseline. This assumes that tax breaks that are “current policy” will expire and more revenue will flow to Treasury. This is worth more than $400 billion over 10 years, which means the budget “hole” is closer to $1 trillion out of the $43 trillion the Congressional Budget Office projects in revenues over the next decade. In other words, this is a modest net tax cut even assuming no additional economic growth.

CBO’s estimates are inherently speculative because no one knows when the next recession might hit or what some future Congress might do. But CBO has typically underestimated the growth and revenue feedback from tax cuts. A classic example is the 2003 cut in the tax rate on capital gains. Dan Clifton of Strategas Research notes that in January 2004, eight months after the tax cut passed, CBO predicted $215 billion in capital-gains revenue through 2007. The actual figure? $377 billion. CBO underestimated economic growth and how much investors would cash in their gains.

CBO’s roughly $43 trillion revenue estimate also depends on a projection of average economic growth of 1.9% a year. But the U.S. economy has never grown that slowly for so long. CBO says that every 0.1% increase in GDP adds about $270 billion in revenue over 10 years. That means a mere four years at 3% growth—the U.S. historical norm—could fill a $1 trillion hole. An average growth rate of even 2.4% over the decade would more than fill the hole.

Nearby we reprint a letter from some of the country’s most distinguished economists making the case that the House and Senate reforms will significantly raise U.S. growth potential. The biggest boost comes from the reductions in the tax burden on capital, which should increase investment and thus growth.

One of the signers, Larry Lindsey, predicted in our pages this fall that economic growth under the GOP plan would accelerate to 3.2% for three to five years and then settle at 2.5%. The Tax Foundation predicts the Senate plan will produce more than $1 trillion in revenue, in part thanks to an investment catalyst from immediate capital expensing in the first year.

The left ignores all this and flogs as unrefutable whatever emerges from the Joint Committee on Taxation. But Joint Tax assumes the U.S. is a partially “closed” economy with little access to global markets. Its models assume that higher deficits will “crowd out” private borrowing and thus drive up interest rates and offset the growth impact of the tax cut. Yet a major goal of the tax reform is make the U.S. more competitive as a destination for foreign capital, and interest rates in a global capital market will be determined by far more than a modest increase in the U.S. budget deficit.

Another false charge from the left is that the GOP bills are merely a tax cut without any reform. But the bills eliminate trillions of dollars in loopholes, such as the state and local tax deduction. The House bill caps the mortgage-interest deduction at $500,000.

while the second piece outlines notions of how the run on effects of a tax cut in the form of an open letter to the Secretary of the Treasury signed by a list of economists and other worthies:

The present debate over tax reforms proposed by President Trump’s administration and embodied in bills that have passed the House of Representatives and the Senate Finance Committee has raised the basic question of whether the bills are “pro-growth”: Would the proposals raise current and future economic activity and generate federal tax revenue that would reduce the “static cost” of the reforms? This letter explains why we believe that the answer to these questions is “yes.”

Economists generally think of fundamental tax reform as a set of tax changes that reduces tax distortions on productive activities (for example, business investment and work) and broadens the tax base to reduce tax differences among similarly situated businesses and individuals. Fundamental tax reform should also advance the objectives of fairness and simplification.

The quest for such fundamental tax reform has been pursued by policy makers and economists for decades. Examples include the Tax Reform Act of 1986, proposals for reducing the double taxation of corporate equity by the Treasury Department and the American Law Institute (enacted in part in 2003), the “Growth and Investment Plan” from President George W. Bush’s Advisory Panel on Federal Tax Reform, and arguments from President Obama’s administration to lower corporate tax rates. The proposals emerging from the House, Senate, and President Trump’s administration, fall squarely within this tradition.

Reducing Corporate Tax Rates, as Proposed, Will Increase Economic Activity

While the overall House and Senate tax plans contain numerous household and business provisions, we focus on the corporate tax changes, returning to other provisions before concluding. A key concept in this context is the “user cost of capital,” which essentially measures the expected cost to firms of making additional investments in equipment. A considerable body of economic research concludes that reductions in the user cost of capital raise output in the short and long run. Several of the proposals that have emerged in the current debate are key to lowering the user cost of capital. For example, expensing, which allows firms to deduct the full cost of investment at the time it is made, lowers the user cost of capital relative to depreciation over time. A lower corporate tax rate also lowers the user cost of capital, which not only induces U.S. firms to invest more, but also makes it more attractive for both U.S. and foreign multinational corporations to locate investment in the United States.

There is some uncertainty about just how much additional investment is induced by reductions in the cost of capital, but based on an extensive body of scholarly research, many economists believe that a 10% reduction in the cost of capital would lead to a 10% increase in the amount of investment. Simultaneously reducing the corporate tax rate to 20% and moving to immediate expensing of equipment and intangible investment would reduce the user cost by an average of 15%, which would increase the demand for capital by 15%. A conventional approach to economic modeling suggests that such an increase in the capital stock would raise the level of GDP in the long run by just over 4%. If achieved over a decade, the associated increase in the annual rate of GDP growth would be about 0.4% per year. Because the House and Senate bills contemplate expensing only for five years, the increase in capital accumulation would be less, and the gain in the long-run level of GDP would be just over 3%, or 0.3% per year for a decade.

Is this estimate of the growth effect realistic? According to one leading model using an alternative framework, the proposal would increase the U.S. capital stock by between 12% and 19%, which would raise the level of GDP in the long run by between 3% and 5%. Yet another model, this one used in the analysis of the “Growth and Investment Plan” in the 2005 President’s Advisory Panel on Federal Tax Reform, found that a business cash-flow tax with expensing and a corporate tax rate of 30% would yield a 20.4% increase in the capital stock in the long run and a 4.8% increase in GDP in the long run. More conservative estimates from the OECD suggest that corporate tax changes alone would raise long-run GDP by 2%. In short, there is a substantial body of research suggesting that fundamental tax reform of the type being proposed would have an important effect on long-run GDP. We view long-run effects of about 3% assuming five years of full expensing, and 4% assuming permanent full expensing, as reasonable estimates.

Another advantage of the corporate rate reduction embodied in the House and Senate Finance bills is that it would lead both U.S. and foreign firms to invest more in the United States. In addition, U.S. multinational firms would face a reduced incentive to shift profits abroad, which would raise federal revenue, all else equal.

In the foregoing analysis, we assumed a revenue-neutral corporate tax change. Deficit financing of part of a reduction in taxes increases federal debt and interest rates, all else equal. For the House and Senate Finance bills, this offset is likely to be modest, given that the United States operates in an international capital market, which means that the impact of changes in interest rates resulting from greater investment demand and government borrowing are likely to be relatively small.

Lowering Individual Tax Rates Also Offers Generally Positive Economic Effects

The House and Senate bills also contemplate a number of individual tax provisions that can affect economic activity and incomes. In recognition of the fact that non-corporate business income is substantial in the United States, both bills would reduce taxation of non-corporate business income and increase the amount of capital expensing allowed. While difficult to quantify, as the bills specify different effective tax rates, these provisions would increase investment and GDP above the level associated with the corporate tax changes discussed above. Also on the individual side, both the House and Senate bills reduce marginal tax rates on labor income for most taxpayers, increasing the reward for work. Increases in labor supply, in turn, increase taxable income and tax revenues. One should note, however, that some taxpayers would face increases in effective marginal tax rates because of base-broadening features of the bills, such as limits on the federal tax deductibility of state and local income taxes. On balance, though, we believe that the individual tax base broadening embodied in the proposals would enhance economic efficiency by confronting most households with lower marginal tax rates. In addition, fairness would be served by reducing differences in the tax treatment of individuals with similar incomes, and simplification by reducing the number of individuals who itemize for federal tax purposes.

Confirming a Pro-Growth Objective Is Important for the Path Forward

You have consistently stressed that the objective of tax reform should be to enhance prospects for increased economic growth and household incomes. We agree with this objective, which is consistent with the traditional norms of public finance going back to Adam Smith. We believe that the reforms embodied in the House and Senate Finance bills would achieve this objective. The increased growth, in turn, would lead to greater taxable income and federal tax revenues, which would reduce the static cost of lost federal tax revenue from the reform.

We hope these analytical points of support for the growth effects of tax plans being discussed are useful to you and to the Congress as you complete the important economic task of fundamental tax reform. We would be happy to discuss our conclusions with you at your convenience.

I’ve already outlined my views on our tax system multiple times. I think that at the very least we should cut the corporate income tax so the nominal rates fall within OECD norms, preferably abolishing it entirely, and add a tax rate above present brackets to make up the difference. A more complete overhaul would abolish both corporate and personal income tax in favor of a prebated VAT.

I wish the Democratic Congressional leadership would present their views in a more complete way. Democratic arguments against tax cuts have tended to center around fairness, something for which I never recall their giving a real definition. A head tax meets intuitive ideas of fairness. They’re enforceable but highly regressive. What’s called a “flat tax” (single tax bracket) also meets intuitive ideas of fairness but it, too, is regressive.

Consider this graph:

Clearly, the present system isn’t fair. The lowest 50% of income earners pay too little; the top 1% pay too much. In the light of that graph and their frequent complaints about fairness I think it’s incumbent on the Democratic leadership to define their idea of fairness.

I also want to know how they’ll meet our future spending commitments at the very low rate of economic growth that prevailed under the Obama Administration or, alternatively, how they’d encourage economic growth. I find it amusing that the very same people who complained that the Republicans had no alternative health care reform plan in 2010 do not fault the Democrats for having no credible economic plan now.

I’m skeptical of the Republican view. I don’t think that we can achieve the level of economic growth they foresee as long as we import as much as we do, so much of GDP is based on consumer spending, and domestic business investment is so low. I also see little in their plans which would change any of that.

When I say “it’s complicated”, that’s what I mean.

There is one tiny fact missing from the Washington Post editorial calling for the Congress to allow those brought here illegally by their parents as children to remain in the country:

Democrats, having failed for more than 15 years to enact legislation to allow dreamers to stay in the country, now threaten to block a must-pass spending bill, potentially shutting down the government, unless the measure is amended to resolve the impasse. Republicans say that’s unacceptable.

Meanwhile, the clock is ticking on dreamers, most of them in their teens, 20s and early 30s. Owing to the administration’s decision to terminate Obama-era protections for them, about 30,000 will lose their protected status each month starting in March unless Congress acts. That means that in addition to becoming eligible for deportation, they will also lose permits under the Deferred Action for Childhood Arrivals program, which the Trump administration axed, that enable many of them to enroll in college with in-state tuition subsidies, work legally and obtain valid state driver’s licenses.

and that is that they are here illegally. It is in fact a misdemeanor under the U. S. Immigration and Naturalization Act for them to be here without presenting themselves to a duly constituted representative of the federal government.

The argument against deporting them is primarily that they lack a mens rea, i.e. intent. I believe that argument would find better support if all sides would acknowledge the simple reality and that the same argument cannot be made for the parents of the “Dreamers”. There is such a thing as moral hazard.

I’ve long supported some accommodation for the Dreamers but I also think that, whatever standards are decided on, they should be enforced rather than engaging in special pleading for every single illegal immigrant.