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Still Gridlocked after All These Years

July 17, 2015 in Economics

By Randal O’Toole

Randal O’Toole

Despite controlling both houses of Congress, Republicans haven’t been able to agree on a highway-and-transit bill. Instead, when the previous law expired on May31, they passed a short-term extension that expires at the end of this month, when they’ll probably pass another short-term extension.

Traditionally, transportation laws sunset and must be renewed every six years. But since the 2005 bill expired in 2011, Congress has passed more than thirty short-term extensions. The result is uncertainty for state transportation agencies, unsustainable deficit spending, and a continuation of some programs that probably do more harm than good.

The source of the deadlock is a provision in the 2005 bill requiring that spending on highways and transit grow each year even if revenues to the highway trust fund fail to cover that growth. After 2007, high oil prices and a depressed economy reduced gasoline sales, with the result that Congress is now spending $52 billion per year on highways and transit when it collects only $40 billion in highway user fees. This has led to three factions in Congress. A tax-and-spend group wants to increase fuel taxes by at least ten cents per gallon, which would cover the deficit, and preferably even more to allow increased infrastructure spending.

The solution is to distribute both highway and transit funds using simple formulas, not as political grants.”

This approach has the support of businesses that expect to profit from that spending. However, most members of Congress are reluctant to support a tax increase that voters will see almost every day.

Second are fiscal conservatives who want to reduce spending to be no more than revenues. This approach is strongly opposed by numerous special interest groups who will fight any cuts to their portions of transportation funds.

The third group, which includes both President Obama and many Republican leaders in Congress, might be called fiscal liberals, as they oppose a tax increase but want to keep spending at the current excessive levels. This may be the largest faction because it minimizes potential criticisms from either voters who pay gas taxes or special interest groups that profit from transportation dollars.

To break the deadlock, we need to go back to the first principles that Congress used when it created the Highway Trust Fund in 1956 and built the Interstate Highway System, the largest and most successful public works project in history.

The most important principle was pay as …read more

Source: OP-EDS

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Greece Is Being Taxed to Death

July 17, 2015 in Economics

By Alan Reynolds

Alan Reynolds

More than five years have passed since May 2010, when Greece was enticed to borrow €73 billion from the International Monetary Fund (IMF), European Commission (EC) and European Central Bank (ECB) with painful strings attached.

That 2010 program, said the IMF, “had two broad aims: to make fiscal policy and the fiscal and debt position sustainable, and to improve competitiveness.”  There was no emphasis on improving domestic economic growth or employment — just “competitiveness” in trade. The IMF speculated that “restoring confidence” would “lead to a growth recovery” in 2012. When that didn’t happen, another €154 billion in loans was provided. And the IMF blamed the bad “investment climate” on a “lack of confidence,” rather than any lack of after-tax income.

Prominent U.S. economists blame the seven-year depression in Greece on savage cutbacks in government spending. “The contraction in government spending has been predictably devastating,” wrote Joseph Stiglitz in February. And Paul Krugman later criticized the period “from 2009 to 2013, the last year of major spending cuts” in Southern Europe. In reality, however, Greek government spending rose from 44.9 percent of GDP in 2006 to 53.7 percent from 2009 to 2012 and to 60.1 percent in 2013. That 2009-2013 “fiscal stimulus” was precisely when the economy contracted — by 4.4 percent in 2009, 5.4 percent in 2010, 8.9 percent in 2011, 6.6 percent in 2012 and 3.9 percent in 2013. By contrast, the economy grew slightly in 2014 when government spending was “only” half of GDP.  That is, the economy fell when government’s share rose, and the economy rose when government’s share fell.

What is rarely or never mentioned in the typically one-sided misperception ofspending “austerity” is the other side of the budget — namely, taxes.

No debtor ever became more creditworthy by being forced to accept less income.”

The latest Greek efforts to appease creditors would raise corporate tax again to 28 percent, raise the 5 percent “solidarity surcharge” on personal incomes, and discourage tourism by raising the VAT on restaurants and island shopping.

Looked at separately, each of these suffocating tax rates might appear almost reasonable. Looked at together, they are totally unreasonable. To offer a Greek employee an extra €100 requires that €42 be first subtracted for Social Security tax, and then up to €46 more subtracted for income tax. Out of the original €100 of marginal labor cost, the remaining €14 of after-tax income going to a skilled worker could only buy about €10 worth of goods after value-added tax …read more

Source: OP-EDS