The Comeback

by Gary Shapiro

  The first role of federal government is to protect our nation. No challenge of government is greater than protecting its citizens, and in this global community that means national defense is the single most important priority for government programs and spending.

  The second role of federal government is to protect our citizens domestically—through courts and a criminal justice system. This is obvious to most of us, but somehow we have created a legal system that appears to have morphed beyond reason so that politically motivated prosecutors can bring charges against anyone for violations as vague as “insider trading” or RICO (Racketeer Influenced and Corrupt Organization Act) charges. In 2010, the Supreme Court recognized this when it unanimously threw out financial charges based on “theft of service,” a crucial underpinning of many RICO legal actions.

  Our long-lasting war on drugs has been an expensive failure, costing taxpayers billions of dollars in judicial, penal, and incarceration programs. Struggling local police departments now pursue marijuana violators because they receive federal money as an incentive. Yet jails are then filled with these so-called felons, at a huge cost to state and local government.

  Other victimless crimes have wasted societal resources and simply make no sense to prosecute, especially in light of the federal, state, and local budget challenges we face. Moreover, too many lawyers are facilitating spurious lawsuits on individuals and businesses. What is compounding these problems is that there are no real penalties for filing frivolous lawsuits (unlike the “loser pays” practice in England). One result is that businesses can be ruined by lawyers bringing lawsuits every time a company stock goes down, someone is injured, or some other perceived harm occurs.

  The third role of federal government is to promote the general welfare. This is a laudable challenge for any society, but the promise cannot be unlimited and requires setting standards and priorities. For example, is every American entitled to clean water? That deals with infrastructure. On the other hand, is every American entitled to own a home? This view, aggressively pushed by politicians onto federal regulators, led to the sub-prime mortgage debacle, which almost collapsed the American and global financial systems.

  In other guises, promoting the general welfare has come to mean universal health care or cradle-to-grave social programs. Indeed, we are paying the price today for unrestrained good intentions. I do believe that government should help its citizens at certain critical times. No American should die from hunger or untreated disease. With notable exceptions (severe disabilities and old age), this aid should be temporary and designed to incentivize people to keep trying to improve their lot.

  But what about federal spending that doesn’t fit into one of these three categories? Again, any additional spending should still be subject to triage and priority setting. Should we subsidize crops that are not healthy for Americans? Should we be laying off teachers and cutting the class size of non–special education students so we can ensure that every special-needs child has personalized education? Should we consider the cost of keeping terminally ill patients alive? The “death panel” accusations as part of the 2009–2010 health-care debate were a deliberate perversion of a commonsense bipartisan effort to compensate doctors for discussing end-of-life options with patients.

  I have some personal views about how such analysis and triage should proceed, some of which include the following procedural suggestions:

  Identify all government spending by whether it invests in and promotes the future of our children, or is a clearly rational response to a specific, high-priority need. I have previously explained why our nation’s future depends on future generations.

  Require measurements in all government spending programs to assess whether the program is working, and include triggers to discontinue any program if it is not meeting the goals assumed when it passed Congress. This is mere common sense, even if it prevents politicians from promising all things to all people.

  Cut overseas spending unless it promotes a clear strategic priority. Our spending in Afghanistan, Egypt, Iraq, and South Korea is vastly disproportionate to our spending elsewhere, and we need to reallocate resources.

  Link the compensation of our federal legislators to our annual national deficit. For example, a bill might be passed that says, “Congressional salaries will be reduced 20 percent from prior year salaries if the budget the Congress approves is not balanced.” Such an approach might require a constitutional amendment but is clearly worth such a challenge. And if such a measure seems harsh, remember that this is what happens every day in the business world in one form or another (usually the executives are fired or the business is closed). The simple fact is that politicians are not doing their job by making tough decisions; rather, they take the easy way out by saying “yes” to virtually everything, especially if it gains them campaign contributions.

  Require Congress to vote up or down on a bipartisan commission to address our national debt and unfunded liabilities. This actually was a bipartisan proposal in the Senate, defeated in 2010, that would have created a commission to examine all federal taxes and spending. It would have empowered a commission to come up with a balanced budget proposal and required a simple up or down congressional vote on the proposal. A similar approach was taken a few years ago on the contentious issue of which American military bases should be closed. It worked because Congress voted only to accept or reject the conclusions of the commission. The driver is requiring an up or down vote by Congress on a proposal that cannot be amended. Regrettably, President Obama instead created a bipartisan commission whose recommendations Congress will not be required to vote up or down.

  POLICY RECOMMENDATIONS

  In addition to the above procedural suggestions, I have several specific policy recommendations that I believe are crucial to restoring sanity to our nation’s fiscal condition:

  Reduce unfunded pension liabilities for public unions. In this regard, I have five specific suggestions:

  Immediately freeze all government-defined benefit plans. This means no newly hired workers will benefit from the plans. They should be eligible for defined-contribution 401(k) or 403(b) plans, which means you pay for these plans as you go.

  Stop all consideration of any “card check” bills. If enacted into law, the so-called Employee Free Choice Act will allow secret unionization and thus destroy the ability of employers to control their pension costs.

  Stop requiring that federal government money go only to those using union labor. This provision is what the Democrats in Congress try to put in every stimulus and jobs bill (under the euphemism of requiring government to pay a “prevailing wage”). This not only raises the taxpayers’ cost of government programs but also expands unfunded defined benefit obligations.

  Stop “in-sourcing” government work. The recent Obama Administration initiative to shift work from private employers to government has been executed with questionable ethics and does not consider the enormously higher future costs of using government workers and the overhead that supports them.

  Rescind local, state, and federal government-defined benefit plan obligations to unions as the sponsoring localities declare bankruptcy. This is unpleasant and unfair to those that have worked careers with a promised pension, but employees are creditors like everyone else, and unlike the pre-packaged GM bankruptcy, we cannot throw over all other creditors in favor of one class. Yes, it is most unfortunate that we must focus on the benefits of long-tenured employees, but as our nation’s fiscal woes dramatically mount because of spending promiscuity, we must make tough decisions.

  Reduce Social Security spending. The social security obligation is financially choking our nation, and soon we will have very few workers supporting an aging population that is living longer and longer. Fortunately, we have difficult but straightforward solutions. First, we must raise the retirement age before payments are made. Second, we need to means-test the payments to recipients. Third, we must stop automatic cost-of-living increases. Although these bre
ak the “contract” for some contributors, we can no longer let our older generation steal from the younger generation.

  Cut Medicare and Medicaid spending. Most importantly, we must do the following:

  Reform medical malpractice costs and incentives. Simply by limiting jury awards in malpractice cases, we would save $54 billion over the next ten years according to the Congressional Budget Office. If doctors’ malpractice premiums can be lowered, if they are not discouraged from practicing defensive medicine, and if they can spend their time outside a courtroom, then their reimbursements can be slowed because their costs don’t have to be raised.

  Reconsider end-of-life treatment policies. The last few months of life’s treatment is estimated to consume one-third to one-half of all health-care costs. To address this problem, when getting a driver’s license every American should be asked to state his or her preferences for end-of-life care. More provocatively, a person could choose to forgo end-of-life non-palliative care in return for a cash payment from the government, which could be given to the heirs. The issue is not the falsely named “death panels” but rather free choice by Americans when they still have the capacity to make the choice.

  Reward innovation that cuts costs and/or improves health. Drug companies are now incentivized to develop and test variations of drugs to extend expiring patents. Such drugs often provide only marginally improved benefits. Instead, every treatment must be measured relative to its cost and the benefit it confers. Further, doctors and drug companies that develop game-changing drugs and treatments should be recognized and rewarded.

  Reward and encourage healthy lifestyles. With two-thirds of Americans overweight or obese, and with “lifestyle” choices contributing to the bulk of American health-care costs, from diabetes to low infant birth weights, this is a realm of potentially great savings. First Lady Michelle Obama is right to focus on childhood obesity. Its societal cost is huge.

  I should note that the 2009 and 2010 congressional debate about health care was disingenuous about solutions and actual budgetary impact of the so-called “reform.” The “scoring” of the law was deceptive on many levels: It assumed six years of expense compared to ten years of revenue. It assumed a 21 percent cut in physician Medicare reimbursement, which was immediately restored in May 2010. It assumed $350 billion in “unspecified” Medicare cuts. It did not even include the $100 billion it will cost the federal government to operate the program. We cannot tolerate such deception by our politicians.

  Capture “off the book” tax revenues. The fact is that a large portion of Americans escape paying taxes because they don’t report their true income. The IRS estimates that the cash economy forces the government to lose some $300 billion annually in lost taxes, which of course imposes a higher tax burden on everyone else. Don’t believe me? Run a free ad on Craigslist for any non-skilled job from waiter to nanny, and see how many responses you get from people who insist on being paid off the books. When my wife and I hired a nanny, most experienced candidates insisted on off-the-books payments because that was what they had done before in their economic interests. Sadly for them, they received no benefit from the Social Security match that the law requires the rest of us to pay (7.5 percent of their salary), and they built up no Social Security benefits; however, they also pay no income taxes. Among those we need to capture:

  From the working poor: Many of those reaping government benefits are doing so because they are not reporting all their income and so qualify as “needy.” The Las Vegas doorman getting fistfuls of dollars, the maids, bellboys, hairdressers, cab and limo drivers, bartenders, and others getting tips and income by conducting a cash business are certainly entitled to the tips and other income that they receive. But they are not entitled to pay no taxes on this income. Movement to electronic payments will ease tax under-reporting and help keep people honest. In addition to the tens of billions of legitimate payments going to the IRS, we should see a dropoff in eligibility for government assistance programs and thus lower expenditures for these programs.

  But it is not only the tax revenue that is lost, it is the benefits that are obtained fraudulently by those claiming poverty. Anyone seeking government payments should have a high barrier to prove that they are entitled to the payments and are reporting all the money they make. Given the fact that most low-wage earners pay little taxes on reported income—and actually get money back through the Earned Income Credit—there is little reason not to insist that everyone be paid “on the books.” Absent this change, the Earned Income Credit should be eliminated because it is rife with and encourages fraud. Moreover, it is only right that every citizen pays legally required taxes. Yet today, barely a majority of adult Americans actually pay income taxes.

  From small businesses: Many small businesses operate with two sets of books so that they will never show a profit for tax purposes. Most commonly, many personal expenses are attributed to the business and thus are tax-deductible. That is unfair even if it is how business is done in this country, and a few thousand comprehensive audits of small businesses would uncover patterns and trends useful in tax collection. I am concerned that small businesses are over-regulated, but running a party store or nail salon should not be a tool for tax avoidance.

  From credit card companies and large companies and their fraudulent executive expense accounts: Overlooked fraud is not restricted to the working poor and small businesses. Some executives at larger companies take advantage of the generous cash rebate programs from credit card companies to transfer corporate expense payments into certificates usable like cash for personal expenses at restaurants and retailers. One former employee at CEA used a corporate American Express card to pay company bills and to accumulate “points,” which he said would be used for last-minute business air travel. When I asked him to account for the benefits, I learned that, for the $3 million in American Express corporate purchases he’d made over eighteen months, he had received $30,000 in cash equivalencies at clothing stores and restaurants. He was immediately fired, but he probably never paid taxes on that $30,000 he stole from us. Credit card companies should be held accountable for these gifts. Comprehensive category audits are needed, and penalties for willful fraud need to be increased. For example, the IRS should simply subpoena the top 10,000 gift certificate receivers from American Express to determine how their cash equivalencies were used. Were they used for personal or corporate expenses? If it was corporate spending that “earned” the points (or dollars) and they were used to reduce corporate expenses, that is fine. But if individuals at the companies are receiving personal benefits that they are almost certainly not reporting as income to the IRS, then the IRS must act to prevent fraud and collect fair tax revenues.

  On another personal note, any greater effectiveness of tax collecting makes me uncomfortable, but it is fair, necessary, and right. I have had challenges with the IRS, as the IRS sought to assess me additional taxes. Two years in a row my response to the IRS was somehow “lost,” and they sought to assess additional penalties. The experience was frustrating, and I felt helpless. Eventually, in each case, I prevailed, and the IRS dropped both cases.

  I don’t like paying taxes. But I recognize that taxes are the price of living in a free society with a functioning, relevant government. No matter how angry I am at our federal government, I remind myself that paying taxes is not only a civic duty but a privilege, as long as these taxes are fairly raised and prudently spent. Our challenge is to ensure that taxes to support government spending are fair and actually promote our nation’s defense, prosperity, and welfare.

  12

  Private Enterprise: Restoring Our Foundation for Growth

  “Some people regard private enterprise as a predatory tiger to be shot. Others look on it as a cow they can milk. Not enough people see it as a healthy horse, pulling a sturdy wagon.”

  —WINSTON CHURCHILL

  TO CHURCHILL AND most of our citizens today, it seems obvious that private enterprise is the primary driver of qual
ity economic growth and, at least historically, the preferred source of satisfying careers. Yet there is a seemingly incessant condemnation of private enterprise from certain politicians, union leaders, public intellectuals, lawyers, and the media. This steady drumbeat has fomented a multitude of laws and regulations that are hobbling our economic engine, with no end in sight.

  To some critics, private enterprise is synonymous with such pejoratives as “big business,” “corporate greed,” “fat cats,” and similar descriptions that label private enterprise as responsible for oh-so-many ills of our society. Clearly, the world these critics live in is out of whack and divorced from reality. But these critics wield significant political power, so they must be confronted, not ignored or discounted.

  Let me be clear. The U.S. has more than 23 million businesses. In any population that large, there unfortunately will be bad actors. But an enlightened electorate and courageous political leadership will not support laws and regulations based on the assumption that the bad guys are the norm. Yet that seems to be what we have come to, and it is past time to correct the political dynamics.

  I believe there are four major problems that must be aggressively confronted and successfully resolved if we are to ensure that our legal and regulatory structures are reality-based and promote our free enterprise system:

  High corporate income tax rate. The U.S. statutory corporate income tax rate is 35 percent, the second highest among developed nations, behind only Japan. There is no rational economic justification for this high rate, not least because it helps drive businesses abroad in search of economies that better appreciate the economic contributions of business. Instead, arguments for the high tax rate are based on notions of social re-engineering and so-called economic justice.

  Moreover, the reality is that businesses do not actually pay income taxes; instead, the economic impacts of tax payments are passed on through the corporation to stockholders in the form of lower investment returns, and to customers in the form of higher prices. Those who demonize private enterprise are engaged in a shell con game. Worse, these high tax rates put U.S. companies at a disadvantage compared to their global competitors.