Tuesday, July 14, 2009

Libertarian: Thinking Clearly about Economic Inequality

Thinking Clearly about Economic Inequality, by Will Wilkinson
Cato, Jul 14, 2009

Will Wilkinson is a research fellow at the Cato Institute and editor of Cato Unbound.

Recent discussions of economic inequality, marked by a lack of clarity and care, have confused the public about the meaning and moral significance of rising income inequality. Income statistics paint a misleading picture of real standards of living and real economic inequality. Several strands of evidence about real standards of living suggest a very different picture of the trends in economic inequality. In any case, the dispersion of incomes at any given time has, at best, a tenuous connection to human welfare or social justice. The pattern of incomes is affected by both morally desirable and undesirable mechanisms. When injustice or wrongdoing increases income inequality, the problem is the original malign cause, not the resulting inequality. Many thinkers mistake national populations for "society" and thereby obscure the real story about the effects of trade and immigration on welfare, equality, and justice. There is little evidence that high levels of income inequality lead down a slippery slope to the destruction of democracy and rule by the rich. The unequal political voice of the poor can be addressed only through policies that actually work to fight poverty and improve education. Income inequality is a dangerous distraction from the real problems: poverty, lack of economic opportunity, and systemic injustice.

WaPo Editorial On Nabucco and Russia's "campaign to turn its neighbors into satellites, using blunt instruments such as military force"

A Well-Placed Pipeline. WaPo Editorial
How Russia's 19th-century policies produced some 21st-century cooperation
Tuesday, July 14, 2009

PRESIDENT OBAMA'S appeal to Russia last week that it move beyond a "19th-century" foreign policy appears to have had little impact on President Dmitry Medvedev. Yesterday found Mr. Medvedev in Tskhinvali, the capital of the Georgian province of South Ossetia, which Russia invaded last August and then unilaterally recognized as an independent state. Coming just six days after Mr. Obama left Moscow, the message of Mr. Medvedev's provocative visit was unmistakable: Russia has no intention of abandoning its campaign to turn its neighbors into satellites, using blunt instruments such as military force and its control of energy supplies.

That's why it was encouraging that yesterday also brought a multinational meeting in Ankara at which Turkey and four European countries formally agreed to route a new natural gas pipeline across their territories. The Nabucco project would carry gas from the Caspian Sea region and the Middle East to Europe through Turkey, Bulgaria, Romania, Hungary and Austria -- thereby providing a path for European energy supplies not controlled by Russia. Though energy pipelines are not usually the subject of international politics and high diplomacy, Moscow has made them so. Twice in the past four years, it has turned off a pipeline that supplies countries across Europe in an attempt to undermine the democratic government of Ukraine, which, like Georgia, has refused to become a Kremlin vassal.

The midwinter blackmail, personally overseen by Mr. Medvedev's mentor, Vladimir Putin, has had the effect of vitalizing a project that once looked like little more than a pipe dream. Nabucco, which will extend 2,000 miles and cost more than $10 billion to construct, was championed tirelessly by the Bush administration. But the countries that would most benefit from it, such as Hungary and Austria, were more interested in negotiating new pipeline routes with Russia until recently. Now they appear to recognize that diversifying their sources of gas is essential to their national security -- and also to promoting a Russia that will not seek to use its natural resources as a means to rebuild the Soviet empire.

The new pipeline is hardly a panacea. At best it will supply about 10 percent of Europe's gas consumption, sometime after 2014. The product to fill it still needs to be found: Though Azerbaijan, Turkmenistan, Iraq, Syria and Egypt have all expressed interest in selling gas through Nabucco, none has committed to doing so. Still, yesterday's signing was an important step toward a more secure Europe; it is a lot more likely to produce results than Mr. Medvedev's lonely trip to Tskhinvali.

Picking on the Swiss - The Obama Administration blows up a tax treaty

Picking on the Swiss. WSJ Editorial
The Obama Administration blows up a tax treaty.
WSJ, Jul 14, 2009

President Obama has been traveling the world to "reset" diplomatic relations with the likes of Russia and Iran. But his Administration continues to do what it can to blow up America's long and amicable relationship with Switzerland.

In a federal court in Florida, the IRS and Justice Department are seeking to compel the Swiss bank UBS to hand over the names of 52,000 U.S. taxpayers with private-banking accounts in Switzerland. According to an affidavit filed with the court by the Swiss tax authorities, the summons "does not identify any facts that could be construed as constituting tax fraud or the like, but rather makes a broad demand for the identity of all U.S. taxpayers for which certain forms have not been filed."

This sort of fishing expedition expressly violates the U.S.-Swiss treaty on sharing tax information. The original treaty dates back 30 years, and under the pact the Swiss regularly provide the IRS with information on specific cases. But what the IRS is attempting here is a mass search of U.S. taxpayers merely for banking in Switzerland.

This is not to say that everyone caught up in the IRS's dragnet is pure. But the American system of justice contains probable cause and reasonable search requirements precisely to prevent law enforcement from rounding up everyone who might conceivably be guilty of some crime. And while Justice argues that UBS systematically marketed its private banking services in order to avoid U.S. taxation, the charges against UBS itself were settled in February, so this is not about the bank. It is about its customers, and an effort to grab perhaps a couple of billion dollars in allegedly unpaid taxes.

Those customers are protected by Swiss bank-secrecy laws that make it a felony to improperly disclose client identities. Those laws are very much in force, and the Swiss authorities have threatened to seize the client data demanded by the U.S. rather than permit UBS to comply.

Switzerland is a neutral country and so technically isn't an American ally, but it has long been a good friend, representing U.S. interests in Cuba and Iran, among other good offices. On Monday, Judge Alan Gold delayed until August a hearing on the case, giving UBS and the feds time to reach a settlement before the judge rules on the IRS demands. Justice is nonetheless still threatening to indict UBS if it fails to comply.

Apart from the diplomatic ramifications, the government's request for so broad a swath of information could well run afoul of the Fourth Amendment's protections against unreasonable search. The Obama Administration should use the court reprieve to rethink the whole case.

The Obama Democrats pick income redistribution over job creation and economic growth

The Small Business Surtax. WSJ Editorial
The Obama Democrats pick income redistribution over job creation and economic growth.
WSJ, Jul 14, 2009

Jason Furman owes an apology to Michael Boskin, the Stanford economist who wrote a year ago on these pages that Barack Obama would raise American income tax rates nearly to 60%. Mr. Furman, then in the Obama campaign and now at the White House, claimed this was wrong and that Democrats would merely raise taxes back to their Clinton-era level.

House Democrats are now proving that Mr. Boskin had it right, and before it's over even he may have underestimated how high taxes will go. In the middle of a recession and with rising unemployment, Democrats have been letting it leak that they want to raise U.S. tax rates higher than they've been in nearly 30 years in order to finance government health care.

Every detail isn't known, but late last week Ways and Means Chairman Charlie Rangel disclosed that his draft bill would impose a "surtax" on individuals with adjusted gross income of more than $280,000 a year. This would hit job creators especially hard because more than six of every 10 who earn that much are small business owners, operators or investors, according to a 2007 Treasury study. That study also found that almost half of the income taxed at this highest rate is small business income from the more than 500,000 sole proprietorships and subchapter S corporations whose owners pay the individual rate.

In addition, many more smaller business owners with lower profits would be hit by the Rangel plan's payroll tax surcharge. That surcharge would apply to all firms with 25 or more workers that don't offer health insurance to their employees, and it would amount to an astonishing eight percentage point fee above the current 15% payroll levy.

Here's the ugly income-tax math. First, Mr. Obama has promised to let the lower Bush tax rates expire after 2010. This would raise the top personal income tax rate to 39.6% from 35%, and the next rate to 36% from 33%. The Bush expiration would also phase out various tax deductions and exemptions, bringing the top marginal rate to as high as 41%.

Then add the Rangel Surtax of one percentage point, starting at $280,000 ($350,000 for couples), plus another percentage point at $400,000 ($500,000 for couples), rising to three points on more than $800,000 ($1 million) in 2011. But wait, there's more. The surcharge could rise by two more percentage points in 2013 if health-care costs are larger than advertised -- which is a near-certainty. Add all of this up and the top marginal tax rate would climb to 46%, which hasn't been seen in the U.S. since the Reagan tax reform of 1986 cut the top rate to 28% from 50%.

States have also been raising their income tax rates, so in California and New York City the top rate would be around 58%. The Tax Foundation reports that at least half of all states would have combined state-federal tax rates of more than 50%.

Mr. Rangel also wants to apply his surcharges to investment income like capital gains. So the combined effect of repealing the Bush tax cuts and the new surcharges would be to raise the tax on stock appreciation by at least 60% -- to as high as 24% from 15% today. President Obama has been worrying about a capital squeeze on small businesses, but raising the capital gains tax would only further starve them of funds.

Democrats claim these tax increases on the rich won't do any economic harm. They should read the work of Christina Romer before she became chief White House economist. Ms. Romer and her husband, David Romer, a Berkeley economist, have published multiple studies on the impact of tax policy changes over the past 100 years. One of their findings is that "tax increases appear to have a very large, sustained and highly significant negative impact on output." In other words, tax hikes are an antistimulus.

Another implication of the Rangel plan is that America's successful small businesses would pay higher tax rates than the Fortune 500, and for that matter than most companies around the world. The corporate federal-state tax rate applied to General Electric and Google is about 39% in the U.S., and the business tax rate is about 25% in the OECD countries. So the U.S. would have close to the most punitive taxes on small business income anywhere on the globe.

Mr. Rangel and House Democrats are also banking on the idea that raising tax rates by 20% will raise 20% more tax revenue, but that's like telling Wal-Mart it can raise prices by 20% and get 20% more profit. When taxes on the rich rise, their reported income tends to decline. The last time the top federal income tax rate was 50%, the richest 1% paid only about 25% of all income taxes. Today, at a 35% rate they pay nearly 40%.

A new study by the Kaufman Foundation finds that small business entrepreneurs have led America out of its last seven post-World War II recessions. They also generate about two of every three new jobs during a recovery. The more the Obama Democrats reveal of their policies, the more it's clear that they prize income redistribution above all else, including job creation and economic growth.

Obama Gets It Right on Africa - We'd be glad if the government only skimmed 20%

Obama Gets It Right on Africa. By BRET STEPHENS
We'd be glad if the government only skimmed 20%.
WSJ, Jul 14, 2009

There's a striking passage in "Dreams From My Father," in which a young Barack Obama, on safari in Kenya, gets an unembellished picture of everyday African life from his driver, a man named Francis.

"[Francis] said he enjoyed his work with the travel agency but disliked being away from his family. 'If I could, I might prefer farming full-time,' he said, 'but the KCU makes it impossible.'

"'What's the KCU?' I asked.

"'The Kenyan Coffee Union. They are thieves. They regulate what we can plant and when we can plant it. I can only sell my coffee to them, and they sell it overseas. They say to us that prices are dropping, but I know they still get one hundred times what they pay to me. The rest goes where?' Francis shook his head with disgust. 'It's a terrible thing when the government steals from its own people.'"

Terrible indeed. And perhaps it was an echo of Francis's voice that shaped Mr. Obama's speech last Saturday in Ghana, by far the best of his presidency.

Here's some of what Mr. Obama said: "No business wants to invest in a place where the government skims 20% off the top." "The purpose of foreign assistance must be creating the conditions where it's no longer needed." "The West is not responsible for the destruction of the Zimbabwean economy over the last decade, or wars in which children are enlisted as combatants." "We must support strong and sustainable democratic governments." "America can also do more to promote trade and investment." "We have a responsibility to support those who act responsibly and to isolate those who don't, and that is exactly what America will do." "History shows that countries thrive when they . . . create space for small and medium-sized businesses that create jobs."

All this is not only true, it's groundbreaking. Since British Prime Minister Harold Macmillan gave his "Wind of Change" speech (also in Ghana) nearly 50 years ago, Western policy toward Africa has been a matter of throwing money at a guilty conscience (or a client of convenience), no questions asked. The result, as Mr. Obama pointed out, was that countries such as Kenya, which had a larger GDP than South Korea in 1961, "have been badly outpaced."

Maybe it took a president unburdened by that kind of guilt to junk the policy. Or maybe it simply took a conversation with some of the Francises of Africa -- the politically invisible middle classes held down by their own kleptocratic rulers. Whatever the case, Africa will be well served if Mr. Obama can make good on his rhetoric.

Now if only Mr. Obama would apply those same principles to the rest of his agenda, foreign and domestic.

For instance, if trade and investment are good ideas for the U.S.-Africa relationship, why has the Obama administration dragged its feet on free-trade agreements with Colombia and South Korea? Or, if the U.S. owes Africa no apologies for its recent disasters, why has Mr. Obama gone to such lengths to apologize to Iran for the 1953 Mossadegh coup, and, in his Cairo speech, to the entire Muslim world for the politics of the Cold War? Or if Mr. Obama wants to "isolate" irresponsible actors, why does he continue to promise engagement with Iran, Syria, Russia and perhaps North Korea no matter how they behave?

Similarly, while U.S. government officials don't usually demand bribes (at least outside of Illinois), the U.S. corporate tax rate, at 39%, is the second highest in the industrialized world. That's about 10 percentage points higher than the OECD average, or nearly twice the 20% "bribe tax" that scandalizes Mr. Obama.

As for creating "space for small and medium-sized businesses," it's ironic that Mr. Obama would make this point on the same weekend that House Ways and Means Chairman Charlie Rangel is calling for a 3% surtax on the wealthy -- many of whom, as Scott Hodge of the Tax Foundation notes, happen to be business owners. These are the same people now facing the prospect of next year's expiration of the Bush tax cuts and the return to the 55% top rate on estate taxes, another scourge of small-business owners.

Finally, if the $2.3 trillion the West has given in foreign aid over the past five decades -- a "stimulus" package if ever there was one -- has done nothing to raise Africa out of poverty, why does Mr. Obama think that any amount of stimulus spending is going to revive America's economic fortunes? At least in Africa's case, the West could periodically forgive its debts. Who will forgive ours?

In his conversation with Francis, Mr. Obama records his lament that Kenya's "big men" fail to take responsibility for their country:

"'Attitudes aren't so different in America,' I told Francis."

"'You are probably right,' he said. 'But you see, a rich country like America can perhaps afford to be stupid.'"

Somebody make this guy treasury secretary.

If other countries have 'good ideas' it's up to Congress, not the courts, to copy them

Sotomayor and International Law. By COLLIN LEVY
If other countries have 'good ideas' it's up to Congress, not the courts, to copy them.
WSJ, Jul 14, 2009

Sonia Sotomayor will parry a wide range of questions about her judicial philosophy during her Supreme Court confirmation hearings in the Senate this week. The most revealing line of inquiry may be about her views on the use of foreign and international law when judging cases.

Like several of the judges on the left branch of the court, Judge Sotomayor has said she favors a broader consideration of foreign and international law in U.S. judicial opinions. While she rarely had occasion to dip into foreign sources during her time on the Second Circuit, she recently went out of her way to embrace the concept and its applications by the high court.

In a speech to the American Civil Liberties Union of Puerto Rico in April, Judge Sotomayor explained that "ideas have no boundaries," and that "international law and foreign law will be very important in the discussion of how to think about the unsettled issues in our own legal system." To discourage the use of foreign or international law, she added, would "be asking American judges to close their minds to good ideas."

That's political quicksand for a judge Democrats are eager to portray as a moderate inclined to narrow reading of text and precedent.

Of particular interest to the confirmation hearings will be Judge Sotomayor's favorable reference in the ACLU speech to the Supreme Court's reasoning in two recent cases citing foreign and international law: Roper v. Simmons and Lawrence v. Texas. In Roper, the Court drew on international criticism of the death penalty to buttress the argument that it should be prohibited for juveniles under the Eighth Amendment prohibition of cruel and unusual punishment.

In Lawrence v. Texas, the court overturned a Texas statute against sodomy on the grounds that it violated due process. In his opinion for the majority, Justice Anthony Kennedy cited the European Court of Human Rights to show that the court's earlier decision in Bowers v. Hardwick was incorrect. In both those cases, Judge Sotomayor said, the court was using the foreign or international law to "help us understand what the concepts meant to other countries and . . . whether our understanding of our own constitutional rights fell into the mainstream of human thinking."

Cases like Roper and Lawrence fit squarely into that area of overseas law most sought after for borrowing by the more liberal justices of the court -- that is, the realms of moral or social policy. The problem with such inspiration is that it is inherently subjective and arbitrary. The laws of the world are infinitely diverse, and praising one necessarily condemns another. Cherry-picking desirable law introduces the very kind of legal chaos our Constitution was designed to prevent. If one judge may look to the courts of Western Europe for expansion of liberal thoughts on human rights, why may another not look to decidedly less liberal ideas?

Iran allows women who appear without a hijab on the streets to be lashed 74 times. China limits families to bearing one child. Even the democracies of Western Europe have laws that differ broadly from ours. Few countries, for instance, share our rules protecting the rights of the accused, or have the U.S.'s constitutionally mandated separation of church and state.

In his dissent from the court's reliance on foreign law in Roper v. Simmons, Justice Antonin Scalia wrote that "The Court should either profess its willingness to reconsider all these matters in light of the views of foreigners, or else it should cease putting forth foreigners' views as part of the reasoned basis of its decisions. To invoke alien law when it agrees with one's own thinking and ignore it otherwise is not reasoned decision making, but sophistry."

There are plenty of ways to use foreign law appropriately -- most obviously in comparing standards for implementation in the case of treaties. Some judges have also looked to Constitutional antecedents like English jurist William Blackstone to help better understand the context and thinking of the Founders and their foundations in English common law.

Outside of that, using foreign law as a guidepost or inspiration raises issues of both sovereignty and democracy by permitting jurists outside the U.S. system to guide the trajectory of our democracy. The proper place for the consideration of whatever "good ideas" may be found in foreign law is not the courts but the Congress.

Judge Sotomayor insists in the ACLU speech that the brouhaha about foreign and international law is due to a misunderstanding about how she and others like Justices Stephen Breyer and Ruth Bader Ginsburg would propose to use it. The point, she says, isn't that judges actually use foreign decisions as precedent (er, well, of course they don't), but that they open their minds to the intellectual force of their foreign counterparts.

But either foreign ideas carry weight by butressing judicial arguments, or they don't. Judicial opinions are written with great precision and care because they matter, and each strand of argument becomes a part of the grit and texture of American law.

No one is suggesting that judges stop reading or learning in ways that help expand their understanding of the law and the cases they are hearing. But that is an altogether different matter than official citation in a decision.

Our system of government has stood the test of time not in spite of but because it is uniquely drawn from the priorities of our own citizens, and them alone. The responsibility of the Supreme Court is neither to win an international beauty pageant, nor to encourage the export of our ideas.
It is to extend principles of the Founders and the words of the Constitution into a world that still needs their wisdom.

Ms. Levy is a senior editorial writer for the Journal, based in Washington.