cpr septoct08 (page 1) - cato institute · toward high-income taxpayers and even ... libertarian...

I n D.C. v. Heller, the Supreme Court clearly declared that the Second Amendment protects an individual right tokeep and bear arms.Robert A. Levy, a Cato senior fellow

and board member, may not own a gun, but he acted as “prime mover”of the case, financing it, assembling the orig-inal plaintiffs, and guiding the case through the lower courts.Pictured from left to right at the Court after the decision: Levy (wired for radio interviews), who acted as co-counselthroughout, plaintiff Dick Heller, and lead counsel Alan Gura talk to reporters following the historic decision.

very contest for the presidency is also a contest among interestgroups, think tanks, and jour-nalists eager to gain attentionand influence public policy by

persuading candidates to adopt theiragenda as a campaign theme.

Income inequality has long been afavorite rhetorical device to promotesuch disparate policies as tariffs, im-migration restrictions, or subsidies tobuilders of low-income housing. In thecurrent election cycle, the mantra of“rising inequality” is incessantly used as a rationale for punitive tax policiestoward high-income taxpayers and evenmiddle-income investors—proposalsrarely defended on their economic mer-its. “Fairness” arguments often seem todrown out serious debate about thepotential impact of higher marginal taxrates on economic efficiency, incentives,tax avoidance or economic growth. Thiscampaign for higher tax rates on upperincomes invariably relies on measures ofincomes among the “top 1%” as report-ed on individual income tax returns (a strange average of incomes rangingfrom about $350,000 to $3.5 billion).

ALAN REYNOLDS is a senior fellow at the Cato Institute and theauthor of Income and Wealth.

CONT’D ON PAGE 6

E

September/October 2008 Vol. XXX No. 5

BY ALAN REYNOLDS

Inequality and Taxes

REJOICENGWENYAZimbabwe inflation:12,500,000 percent

PAGE 4

GEORGEWILLOn the crisisof the welfarestate

PAGE 9

ENCYCLOPEDIA OFLIBERTARIANISMA comprehensive survey of people and ideas

PAGE 14

”

2 • Cato Policy Report September/October 2008

ll of this blog talk about which major partycandidate is more likely to be receptive to libertarian policy positions, I suggest, is awaste of time unless the winning candidate

of either major party is dependent on the votes of libertarians.

Increased outrage about the state of Americanpolitics and the prospect for a large number of close elections increase the potential effectiveness ofa different “libertarian party”—one that sometimesendorses one or the other major party candidate butdoes not run a party candidate for that position.

The effectiveness of the Libertarian Party andalmost all other third parties in U.S. history in pro-moting their policy positions has usually been coun-terproductive, because running a third-party candi-date reduces the vote for the less undesirable of the major party candidates. A disciplined group thatis prepared to endorse one or the other major partycandidate in a close election, however, can have asubstantial effect on the issue positions of bothmajor party candidates. The following conditionsmust be met to achieve this:

1. An effective libertarian party must not run a separate candidate.

2. The size of the party must be larger thanthe expected vote difference between themajor party candidates.

3. After the major party candidates areselected, the party leadership must havethe opportunity to bargain with each of the major party candidates on the

issue positions of highest priority for the libertarian party.

4. The party, as much as possible, must act in concert to support the majorparty candidate that is preferred by the members of the party in that district.

There is no reason for this libertarian party to be active in any district for which the party does notmeet all four of the above conditions. Condition 2illustrates why a different libertarian party could befar more effective than the current Libertarian Party;several polls indicate that about 20 percent of votershave general libertarian political preferences, but few Libertarian Party candidates win more than 1percent of the popular vote. Condition 4, I suspect, is the most difficult of these conditions for liber-tarians to meet. In addition, the party should notemphasize the same issues in every district, becausethe choice of these issues should depend on thosefor which one or the other major party candidates iswilling to bargain.

This is a strategy to increase the approval of libertarian policy positions rather than the usuallycounterproductive effort to increase the number of votes for Libertarian Party candidates. Maybe itwould be better to term the organization that I havedescribed as a libertarian political action committeeor a liberty caucus rather than a libertarian party.

AChairman’s Message

BY WILLIAM A. NISKANEN

“

A Case for a Different Libertarian Party

Adisciplinedgroup that isprepared toendorse oneor the othermajor party

candidate in aclose election

can have asubstantial

effect on theissue posi-

tions of bothmajor partycandidates.

What do Sen. Chuck Hagel, Rep. Earl Blumenauer, and George Will have in common?They all appeared in the September edition of CatoAudio.

Every month, CatoAudio brings you inside the Cato Institute to hear 60 minutes of highlights from the most

insightful, fact-filled, and provocative lectures hosted at Cato. Whether in your home or on the road, you can

sit in on the action and hear debates, policy proposals, and ideas that are available nowhere else.

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September/October 2008 Cato Policy Report • 3

Second Amendment RevivedSupreme Court’s Heller ruling is clear

Thanks in no small part to the workof Cato senior fellow Robert A. Levy,the long, heated debate over themeaning of the Second Amendment

to the U.S. Constitution has been decided:Americans have the right to own firearmsfor self-defense.

On June 26, 2008, the Supreme Courtdecided 5-4 in D.C. v. Heller to strike downthe District of Columbia’s 32-year-old ban on handguns, the most restrictive inthe nation. The decision unequivocally af-firmed the right of individual American cit-izens to own firearms irrespective of service

in a militia. Writing for the majority, JusticeAntonin Scalia said the militia languagewas merely a “prefatory statement of pur-pose,” while the “operative clause” was “theright to keep and bear arms.”

According to a June 26 New York Times syn-opsis, D.C. v. Heller “reached the court as theresult of an assumption by the Cato Institute,a libertarian policy organization here, that the time was right to test the prevailing in-terpretation of the Second Amendment.”

Robert A. Levy, a Cato senior fellow,board member, and co-counsel to D.C. v.Heller, deserves most of the credit. As chron-icled in past editions of Cato Policy Report, it was Levy, who was the “prime mover”behind the case, conceiving it and financ-ing it as it traveled from the lower courts to the nation’s highest court. He chose tochallenge D.C.’s gun ban, as it was the mostrestrictive in the nation and, crucially, sub-ject only to federal law. He recruited law-abiding District of Columbia residents tobe plaintiffs, including Dick Heller, anarmed security guard by day, barred by lawfrom protecting his own family by night,

and Cato vice president Tom G. Palmer,who once brandished a pistol to defend him-self from potential attackers. Ultimately it was Levy who decided, against the activeopposition of groups such as the NationalRifle Association, to challenge the D.C. gun ban at the district, appeals, and finally,Supreme Court level.

It’s difficult to overstate just how signif-icant this decision is for libertarians. TheSupreme Court had not conclusively inter-preted the Second Amendment since itsratification in 1791. It had only attemptedto do so once, in 1939, offering a murky ruling in U.S. v. Miller that led to fierce and often ideological battles among legalscholars and effectively allowed local legis-lators to ignore the Second Amendment incrafting gun regulations. In short, an entireamendment of the Bill of Rights was beingtrampled on, thanks to being essentiallyignored by the Supreme Court, and Levy,along with Alan Gura of Gura & Possessky,as well as Clark Neily of the Institute forJustice, was able to overcome that.

The decision in Heller means a revital-ized Second Amendment, one that clearlyprotects for the individual right to keep afirearm for self-defense. Just how muchlocal gun regulation will change as a resultof the decision is debatable. Randy E. Barnett,a senior fellow at the Cato Institute, pre-dicted in a June 27 Wall Street Journal op-edthat the ruling would not merely stand in the District, but would “eventually beextended to the states.” New York, SanFrancisco, and Chicago are all subject toextremely strict gun regulation borderingon outright bans, and expect to experiencea flurry of litigation.

Cato has commissioned a book on thecase and on the history of the controversyover the right to bear arms entitled Gun Control on Trial, by Reason magazinesenior editor Brian Doherty. It will be outNovember 1. Also, be sure to check outwww.cato.org/gunban, where you can learnmore about Heller, read Cato commentarieson the case from throughout the newsmedia, read the full text of the decision, andhear podcasts with Robert A. Levy.

At long last, the CatoInstitute is pleased tooffer its own necktie.The men’s silk tie ismaroon and featuresCato’s logo imprinted ingrey and red through-out.The New York Timesliked the tie enough tosay “the Cato Institute

doesn’t just set the libertarian intellectualagenda, it provides the libertarian intellec-tual wardrobe.”We think you’ll really like it,too. It’s heavy and rich—not gimmicky likeother company ties. Visit Cato’s store atwww.catostore.org to claim your own for thelow price of $25. For the ladies, there’s amatching scarf, also only $25.

JAMES A. DORN, vice president for academ-ic affairs and editor of Cato Journal, con-tributed the entry on Peter Bauer in the sec-ond edition of the New Palgrave Dictionaryof Economics, which has been called “thestandard reference work on economics.”Dorn reviews Bauer’s pioneering work indevelopment economics, which challengedthe state-led development model that wasin fashion when Bauer began writing, andnotes Bauer’s receipt of the first MiltonFriedman Prize for Advancing Liberty justbefore his death in 2002.

The Cato Institute is pleased to name GENEHEALY as vice president. From 1994 to1996 he served as managing editor ofRegulation magazine. After earning his J.D.from the University of Chicago and sam-pling private practice at Howrey SimonArnold & White, he returned to Cato as sen-ior editor in 2001, with responsibility forediting all Cato studies. As vice president,Gene will oversee Cato’s foreign policy, con-stitutional, and civil liberties policy work, inaddition to maintaining major editingresponsibilities. He’ll also continue to write.A recent George Will column describedHealy’s The Cult of the Presidency as “bril-liant” and “the year’s most pertinent andsobering public affairs book.”

N E W SN O T E S


C A T O E V E N T S

T he world’s largest democracy,India, is an emerging economicgiant. Reforms that began in the

1980s and accelerated in the 1990shave led to high growth and havereduced poverty by fully one third. At a Cato Book Forum, ARVINDPANAGARIYA, the Jagdish Bhagwatiprofessor of Indian political econo-my at Columbia University, saidIndia’s growth will continue, perhapseven overshadowing China’s goingforward. He cited an assortment ofindicators: India is adding 8 millioncell phones per month, its trade-to-GDP ratio has more than tripled inthe last 15 years, and rapidly risingforeign direct investment indicatesthat world players are banking onIndia’s continuing development.

A t the Goldwater Institute on July 16, author AL REGNERY(right) said that from a limited-government perspectivethe Bush administration is a glass half-full. Cato executive

vice president DAVID BOAZ held up an empty glass to apprecia-tive laughter from former congressman MICKEY EDWARDS,author of Reclaiming Conservatism, and the audience of 200.

A t a Capitol Hill Briefing,Zimbabwean activist REJOICENGWENYA said hyperinflation,

currently at 12.5 million percent,has gotten so out of hand thatprices double every 22 days and a single tomato costs 5 millionZimbabwean dollars—for now.


On a continent scarred by politi-cal repression and economicunderdevelopment, Botswana

and Mauritius stand out. In 2007,Freedom House certified both coun-tries as free, and the latest EconomicFreedom of the World report foundthat Botswana and Mauritius hadthe two freest economies in Africa.According to the World Bank, thetwo also have—along with Seychel-les—Africa’s highest per capitaincomes. Pictured: (left) KAILASHRUHEE, ambassador of the Republic of Mauritius, and (right)LAPOLOGANG CAESAR LEKOA, ambas-sador of the Republic of Botswana,field questions from reporters following a Cato Policy Forum on the African success stories.

Twelve million undocumented workers currently reside in the United States, and more are on theway. (Left) At a Cato Book Forum, JASON RILEY, author of Let Them In: The Case for Open Borders and a member of the editorial board at the Wall Street Journal, said conservatives ought to rethink their

opposition to immigration. He asked how they can criticize laws that prevent the free flow of goods andcapital across borders, yet turn protectionist when it comes to people doing the same. (Right) MICHAELBARONE of U.S. News and World Report pointed out that the greatest wave of immigration occurred notin the present day, nor in the 1920s, but in the 1850s, when predominantly German and Irish immi-grants came in massive numbers to experience American opportunity. That wave, like all succeedingones, was a major boon for the U.S. economy.

Telling this story always involves pickingtwo dates very carefully, as if that describedan ongoing trend.

The Old Two-Year Ruse (start with 1979)

In June 2007, the Pew Charitable Trust’s“Mobility Project” was launched with apamphlet written by project director JohnE. Morton, former foreign policy adviser toSen. John Kerry’s presidential campaign,and Isabel Sawhill, associate director of theOffice of Management and Budget underPresident Bill Clinton. The first sentencenoted that “the convergence of a presiden-tial election cycle” and “income inequalitieslast seen nearly a century ago” provide “aunique opportunity to refocus the debate.”

The document claimed that the UnitedStates “is a society with rapidly growingincome inequality,” noting that “theCongressional Budget Office [CBO] findsthat between 1979 and 2004, the real after-tax income of the poorest one-fifth ofAmericans rose by 9 percent, that of therichest one-fifth by 69 percent, and that ofthe top 1 percent by 176 percent.” Yet “rap-idly growing” surely implies inequality isgrowing rapidly in the present, not the past.Comparing 1979 and 2004 shows thatsomething happened between those twodates, but not what happened or when. If weneeded only two years to define a trend,then the same CBO estimates would showthat the share of income for the top 1% was12% in 1988 and 12.2% in 2003. It is noaccident that the Mobility Project startedwith 1979.

One thing that happened between 1979and 1988 is that marginal tax rates on indi-viduals stopped being higher than tax rateson corporations. The textbook Taxes andBusiness Strategy, by Myron Scholes and oth-ers, shows that “pre-1981 . . . many doctors,lawyers and consultants incorporated toescape the high personal tax rate.” After thehighest individual tax rate fell from 70% to28%, they added, “many of the corpora-tions converted back” to partnerships,LLCs, and Subchapter-S corporations.

Shifting income from the corporate taxto the individual tax created an illusoryincrease in top incomes in studies by theCBO and by economists Thomas Pikettyand Emmanuel Saez in their 2003 study“Income Inequality in the United States,1913–1998,” which is regularly updated onSaez’s website. Business income was only11.1% of the reported income of the top 1%in 1986, according to Piketty and Saez, butthat fraction nearly doubled in only twoyears to 21.2%. The unusually rapid in-crease in reported top incomes between1979 and 1988 largely reflects increasedincentives to earn more income in taxablecash (rather than perks), and to report thatincome on individual (rather than corpo-rate) tax returns. But it also reflects the factthat inflation fell from 13.3% at the end of1979 to 4.4% by 1988, greatly increasing thevalue of bonds and stocks. That, in turn,added to capital gains and stock optionpayoffs in the CBO estimates of topincomes—particularly in 1986, when therewere huge sales of appreciated assets toavoid a higher tax in 1987. To now lookback on 1979 as an ideal example of lowinequality is ironic, because the runawayinflation of 1979 and the subsequentthree-year recession hurt rich and pooralike.

Conflicting EvidenceUsing the same CBO figures, if the

income gains are measured from 1988instead of 1979, the increase in the incomeof the top 1% drops from 176% to 47%, theincrease for the top fifth drops from 69% to31%, and the increase among the bottomfifth rises from 9% to 16%. In other words,nearly all of the “rapidly rising” inequalityhappened between 1979 and 1988 —a peri-od that ended 20 years ago. Some rise ininequality still remains in this particular setof data, to be sure, even after eliminating theexaggeration resulting from using 1979 as

the base year. Yet other measures of incomeshow a quite different pattern of gains, par-ticularly for low-income households.

Table 1 shows two estimates of thechanges in before-tax income gains for thepoorest, richest, and middle fifths of house-holds. The first column is from a May 2007CBO study, “Changes in the EconomicResources of Low-Income Households withChildren,” and it begins with the 1991 reces-sion and ends with 2005 (http://www.cbo.gov/ftpdocs/81xx/doc8113/05-16-Low-Income.pdf). This report was based onCensus Bureau income plus transfer pay-ments, notably the earned income tax cred-it (EITC). The second column covers allhouseholds, using the Federal Reserve’s triennial Survey of Consumer Financesfrom the cyclical peak of 1989 to 2004(https://www.federalreserve.gov/pubs/oss/oss2/2004/bulletin.tables.pub.xls ). The SCFuses a broader measure of income than theusual Census Bureau definition, includingrealized capital gains, business income, andtransfer payments.

Both surveys show relatively large in-creases in real, inflation-adjusted incomeamong both the poorest and richest fifths,with smaller gains in the middle. The per-centage gains for the top and bottom fifthsappear much larger in the CBO figures part-ly because that study begins with the 1991recession, which exaggerates cyclical change.In the SCF figures, the 1989–2004 incomegains among the poorest fifth (23.4%) andsecond-poorest (20.9%) exceeded the gainsamong the top 10% (18.3%) , which does notmeet any definition of rising inequality.


Continued from page 1

“”

Bad statistics are never a

good excuse for enacting bad

policies.

CBO1991-2005

SCF1989-2004

Poorest Fifth 35.0% 23.4%Middle Fifth 17.3% 14.1%Top Fifth 53.2% 18.3%

TABLE 1ESTIMATED GROWTH OF REAL INCOME


The Pew report, as well as sensationalnews stories this year in The New York Times(April 9) and the Wall Street Journal (April 19),suggested there was something unusuallybad about the fact that real median house-hold income in 2006 had not yet gotten backto the peak level of 2000. Yet in the last busi-ness cycle median income was also well belowthe 1989 peak in 1995, after six years, andonly $34 higher in 1996 (despite cheap oil).Moreover, the relatively slow growth of mid-dle income in CBO and SCF data shows whythe similar measure of median income is nota reliable approximation of how real incomein general has grown. In both studies, 80% ofthe population experience more rapid realincome growth than the middle did.

A New Two-Year Ruse (start with 2002)

Those who cite rising inequality as thereason for undoing the most economicallysignificant tax rate reductions of 2000–2003 must realize they need evidence aboutwhat happened since 2000, not since 1979.Lacking the required proof that the “Bushtax cuts” resulted in a dramatic increase in after-tax inequality since 2000 (andtherefore should be repealed), proponentsof higher tax rates resorted to misleadingstatements about before-tax incomes since 2002.

Writing in the May 1 issue of Time,Justin Fox said, “According to economistsThomas Piketty and Emmanuel Saez, 75%of all income gains from 2002 to ’06 wentto the top 1%—households making morethan $382,600 a year.” Noting with ap-proval that “Obama in particular has beenexplicit about wanting to shift more of theincome-tax burden . . . onto those makingmore than $200,000 a year,” Fox blamedinequality on President Reagan’s tax cutsand cited a recent poll showing 51% favor“heavy taxes on the rich.” Yet his figures,from Piketty and Saez, refer to incomebefore taxes.

Citing the same Piketty and Saez calcu-lations, Wall Street Journal columnist DavidWessel added “the trend didn’t begin withPresident Bush’s election, but he didn’t do

much to arrest it.” What could he have done? Raising tax rates on the rich or trans-fers to the poor could not change thesenumbers, because Piketty and Saez excludetaxes and transfers. “There is significantdisagreement among politicians and votersabout . . . how much the tax code shouldredistribute income,” wrote Wessel, notingthat “Sen. Obama would wield the tax codemore aggressively than Senator McCain.”This alleged policy debate relies on statis-tics that exclude taxes in order to rational-ize the use of higher tax rates to reducehigh incomes. That makes no sense.

The statistics were lifted uncriticallyfrom a March 15 memo by EmmanuelSaez of the University of California atBerkeley, “Striking It Richer.” Saez com-pares the 1993–2000 Clinton expansionwith the Bush 2002–2006 expansion, con-cluding that “during both expansions, theincomes of the top 1% grew extremelyquickly at an annual rate over 10.1 and11.0% respectively.” But that is only becausehe starts with 2002, after stock prices hadcollapsed, and includes capital gains.Realized capital gains fell from 6% of GDP

in 2000 to 2.4% in 2002, and then recoveredto 5.2% in 2006.

The first column of Table 2 shows thePiketty and Saez estimates of average (mean)income for the top 1%, measured in 2006dollars and including capital gains. Thesefigures supposedly show that real incomesof the top 1% have been growing very rapid-ly under Bush, just as they did during thetech stock boom of 1997-2000.. In reality,top incomes doubled from 1993 to 2000,but then fell 31% by 2002. For the remaining99%, by contrast, real income fell by only 4%from 2000 to 2002. Saez claims incomes ofthe top 1% continued to rise “extremelyquickly” after the Clinton years, both inabsolute terms and also relative to otherincomes. For the whole period from 2000 to2006, however, his figures show that realincome of the top 1% rose by 9% (from$1.185 trillion to $1.243 trillion), while thereal income of everyone else rose by 9.8%(from $6.22 trillion to $6.83 trillion).

The second column shows the decliningshare of top incomes received from salary,bonuses, and stock options. Saez, however,says, “A significant fraction of the surge intop incomes since 1970 is due to an explo-sion of top wages and salaries.” That wastrue from 1966 to 1988, and from 1994 to2000, but not since then. His data show thatreal labor income of the top 1% was flatfrom 1988 to 1994, rose 65.7% from 1994 to2000, and then fell 8.4% from 2000 to 2006.

The relatively small increase in top 1%incomes from 2000 to 2006 is mainlybecause of income shifting—the businessshare of the top 1% of income rose from27.4% in 2002 to 30.1% in 2006, after indi-vidual and corporate tax rates became thesame. Lower tax rates on dividends alsoraised taxable top incomes. Dividendsaccounted for only 4.2% of top percentileincomes in 2002 (aside from capital gains),but 7.4% in 2006. When capital gains wereincluded, they accounted for 5.8% of theincome of the top 1% in 2000, 2.3% in 2002,and 4.4% in 2006. It is not difficult to imag-ine why Saez chose to include capital gainsand to measure top income gains from2002 rather than from 2000.

“”

It is clearly illogical to point to income

before taxes to suggest that the rich do not pay

enough taxes.

INCOME($)

SALARY SHARE(%)

1993 596,525 59.82000 1,185,533 56.92002 820,102 58.72006 1,242,595 48.4

TABLE 2AVERAGE BEFORE-TAX INCOME OF THETOP 1% (IN 2006 DOLLARS, INCLUDINGCAPITAL GAINS)

Source: Thomas Piketty and Emmanuel Saez, “Updated Tables,” Tables A6 and A7, http://elsa.berkeley.edu/~saez/TabFig2006.xls. Salary share adapted from Table A7 (which ex-cludes capital gains) to define income to include capital gains.


Imagine There’s No Taxes . . .The Brookings Institution began a new

policy program in 2006, the HamiltonProject—founded by former Treasury secre-tary Robert Rubin. The first director wasPeter Orszag, now head of the Congres-sional Budget Office. The project’s seminalstatement on tax policy, “Achieving Pro-gressive Tax Reform,” was coauthored inJune 2007 by former Treasury secretaryLarry Summers; Jason Furman, now eco-nomic director for the Obama campaign;and Jason Bordoff, the new project director.

The paper acknowledged that “excessive-ly high tax rates distort economic behaviorby changing the incentives to work, save,and invest, which can harm economic per-formance.” Yet the key theme was to assertthat “rising inequality strengthens the case for progressivity.” Proof of such risinginequality again relied on CBO estimates ofincome changes since 1979. Like Saez,Summers, Furman, and Bordoff empha-sized before-tax data: “In 1979,” they wrote,“the before-tax income of the most affluent1 percent of the U.S. population alreadyequaled that of the bottom 26 percent. Thatshare has since risen nearly continuously,reaching 45 percent in 2004.”

Even if those figures were credible, theyare irrelevant to the policies being pre-scribed. It is clearly illogical to point toincome before taxes to suggest that the richdo not pay enough taxes. It is also illogicalto point to income before transfer paymentsto prove that the poor do not receiveenough transfer payments. The before-taxCBO estimates exclude the refundableearned income tax credit (EITC). Theauthors’ estimates also rely on Piketty andSaez, who exclude all transfer payments. Iftransfer payments are excluded, the CensusBureau calculates that incomes of thepoorest fifth in 2006 averaged only $5,208but their disposable income—includingtransfers—was $12,329. Similarly, the before-tax income of the richest fifth averaged$182,505, but their disposable income—aftertaxes—was $137,293.

The Hamilton Project paper claims that

“the tax system itself has become consider-ably less progressive. Reductions in taxeshave been particularly dramatic for veryhigh income taxpayers.” That commentcannot refer to individual income taxes, aspresidential policy debates assume. CBOestimates the individual income tax rateamong the top 1% fell modestly from21.8% in 1979 (when the top tax rate was70%) to 19.9% in 1989 (when the top taxrate was 28%) and 19.4% in 2005 (when thetop tax rate was 35%).

By contrast, reductions in taxes havebeen “particularly dramatic” for the middlefifth, whose average tax was slashed from7.5% in 1979 to 5% in 2000 and 3% in 2005.For the poorest fifth, the tax rate fell tominus 1.6% in 1989, minus 4.6% in 2000, andminus 6.5% in 2005—reflecting the expan-sion of refundable tax credits. In the samepaper, Summers, Furman, and Bordoffargue that the progressive 1986–2003reductions in income tax for the bottom40% have now made it “regressive” toreduce anyone else’s income tax: “The bot-tom 60 percent of households pay less than1 percent of total income taxes,” they write,so “any income tax cuts that do not includeexpansions in refundable credits such asthe EITC are therefore necessarily regres-sive.” Making that comment even moreironic, the authors exclude the EITC whenadding-up incomes of the bottom 40%.

In reality, the authors’ claim that taxeshave become “less progressive” cannot anddoes not refer to the reduction in individualincome tax rates. Instead, it mainly refers toa CBO estimate that the effective corporaterate on the top 1% fell from 13.8% in 1970to 6.7% in 2000—before rising to 9.9% in2005. That timing makes it difficult toblame the 2001–2003 tax cuts for makingtaxes “less progressive.” Besides, the CBO’stechnique for distributing the corporatetax is seriously flawed.

Adding Two-Thirds of CorporateTax to Top Incomes

Believe it or not, the CBO adds two-thirds of corporate taxes to the before-taxincome of households of the top 1%. Theydo that to estimate what share of that tax isborne by the top 1%. Yet adding most cor-porate taxes to top incomes makes before-tax CBO figures a particularly untenableway to measure changes in top incomes.CBO economists reason that the corporatetax is borne by owners of capital in general.Unfortunately, they then make an indefen-sible leap by estimating the ownership ofcapital by looking at only the dwindlingportion of capital gains, dividends, interestincome and rent still reported on taxreturns. As a result, the estimated share ofcorporate taxes added to top 1% incomesrose from 34% in 1979 to 66.4% in 2004.And that, in turns, accounts for a sizableportion of that 1979–2004 increase in top“incomes” (including corporate taxes) usedto defend the Hamilton Project’s uneasycase for steeper marginal tax rates onincomes well below the top 1%.

The top 1% could not possibly havereceived 66.4% of the nation’s investmentreturns in 2004. Their share of wealth was33.4% according to the SCF, and closer to21% according a study co-authored by Saez.Neither study finds any upward trend inwealth inequality, so assigning 66.4% of cap-ital income to the top 1% is literally unbe-lievable. The only reason the top 1%accounts for a rising share of taxable savingsis that a rapidly increasing share of everyoneelse’s savings is now sheltered in tax-freeretirement plans. Returns on those invest-ments will never be reported to the IRS asdividends, interest, or capital gains, becausedistributions from deferred plans arereported as ordinary income while capitalgains or dividends from Roth IRAs are neverreported. Most capital gains on home salesalso vanished from tax returns since 1997.

The CBO’s statistical blunder of usingtaxable investment returns to guess the shareof corporate taxes for the top 1% resulted in

“

”

Telling a story about rising

inequality always involves picking two dates very

carefully.

Continued on page 19

It’s a pleasure to be at Cato to talk aboutbooks, because in spite of all the hoo-haabout the Internet and new media, Icontinue to believe not just that ideas

have consequences but that only ideas havelarge and lasting consequences, and thatbooks remain the primary carriers of ideas.

The Cato Institute certainly exemplifiesthis. Mr. Samples’s book The Fallacy ofCampaign Finance Reform is a major contri-bution to rolling back the regulation ofpolitical free speech. Gene Healy’s splendidbook The Cult of the Presidency is a very timelyreminder that we invest irrational and dan-gerous hopes in the presidency. And I’m verymuch indebted to Brink Lindsey’s The Age ofAbundance on affluence in America and thetransformation of American culture as aresult of this.

The book I’ve assembled, One Man’sAmerica: The Pleasures and Provocations of OurSingular Nation, is a little bit different becauseit’s very light on controversies about the cur-rent political agenda. It’s more aboutAmerican history and culture and interest-ing people you meet around the country.My hope is that at a moment when there’sconsiderable argument as to what consti-

tutes conservatism, people can read this andsay, “Ah, that’s a conservative sensibility.” Itend to believe sensibility precedes philoso-phy and ideology, and that there really aretwo fairly distinct sensibilities, a liberal sensi-bility and a conservative sensibility. I hope,after having read my book about HughHefner and Bill Buckley and the Dust Bowland the Bakersfield sound and countrymusic and all the rest, people will close it andsay, “Well, I got it. That’s what one conserva-tive’s mind playing on a wide range of reali-ty looks like.” I leave it up to them to decidewhether they are conservative or not.

It’s a very strange moment for those of uswho are conservatives. We are facing, as thehousing rescue bill proceeds through Con-gress, what I think can be called another pre-scription drug entitlement moment, duringwhich conservatives either will or will notstand up and be counted. I wouldn’t holdmy breath.

It’s a moment in which the cognitive dis-sonance of the country—the gap betweenthe rhetorical conservatism and the opera-tional liberalism of the country—becomes sodiscordant as to get everyone’s attention.

In the next hour, as happens every hour

of every day, the center of the American pop-ulation will move two feet farther south andwest. It didn’t cross the Mississippi riveruntil the 1980 census; today it is southwestof St. Louis, heading for Clark County,Nevada—which is Las Vegas—and MaricopaCounty, Arizona—which is Phoenix. Thisshift of the political weight of the countrylargely explains why when George W. Bushleaves office at noon, January 20, 2009, all ofthe elected presidents for 45 years will havecome from Georgia, Arkansas, Texas, orSouthern California. And this tends to givesome people the soothing feeling thatdemography must be destiny, and thereforethe shift of the political weight of the coun-try toward the more traditionally conserva-tive and indeed libertarian parts of the coun-try guarantees a conservative ascendancy.The problem with that is that also in thenext hour the federal government will, as itdoes every hour of every day, spend another$193 million on entitlement programs.

There is a disjunction in the Americanmind without precedent in history. Formore than two centuries the assumptionhas been that the very process that producesenhanced national wealth—the dynamicmarket capitalist economy—simultaneouslywould produce increased family and in-dividual security. Today a great manyAmericans believe that the market economyundermines family security. This is produc-ing an epidemic of quite irrational appre-hension. Never have Americans been moreprosperous than they are today, but rarelyhave they felt more precarious. And this issetting us up for what I would call the cul-tural contradiction of the welfare state.

About 45 years ago, Daniel Bell, distin-guished sociologist at Harvard, published abook called The Cultural Contradictions ofCapitalism. His argument, much bowdler-ized, in simplicity was that capitalismdepends on certain social capital of sternvirtues—thrift, industriousness, deferral ofgratification. The problem is that those


P O L I C Y F O R U M

With America suffering from a host of economic ills,and a pending presidential election that offers littlereason for hope, you can forgive Americans for won-

dering what the future holds. Perhaps no one is more qualifiedto weigh in on that future than George F. Will, the PulitzerPrize–winning columnist for the Washington Post and Newsweek.At a July 24 Cato Book Forum for his latest book, One Man’s Amer-ica: The Pleasures and Provocations of Our Singular Nation, Will saidhe was nervous about the out-of-control growth of the entitle-ment state, but that he remained optimistic for other reasons.Read his presentation in full here, or watch the video at www.cato.org.Just click the “events” tab and then click “event archives.”

One Man’s America


P O L I C Y F O R U M

stern virtues produce wealth, affluence,leisure, comfort, indolence, and self-indul-gence, which in turn undermine thrift,industriousness, and the deferral of gratifi-cation. In other words, capitalism under-mines its own moral prerequisites.

Something of the sort I think may behappening with the welfare state—particu-larly in the context of an aging population.Given the fact that a welfare state exists totransfer wealth from the working young andmiddle-aged to the retired elderly, a welfare

state depends on a rapid rate of economicgrowth to throw off the revenues to pay thebills. But a welfare state, by whetting theappetite for security, and by giving people asense of entitlement to protection againstthe risks of the churning of a market econo-my and the creative destruction of capital-ism, produces a political backlash, a politicaldrive to provide security that is incompatiblewith the economic dynamism that a welfarestate presupposes. Hence the welfare statebegins to undermine through its entitle-ment mentality its own prerequisites.

It also I think produces a kind of infan-tilism on the part of people, by insulatingthem from the real choices necessary for aresponsible society of self-sufficient individ-uals. Just consider the American savings rate,or lack thereof. In the 1980s, the Americanpeople saved approximately 10 cents ofevery dollar of disposable income. In the1990s, they saved about a nickel. In 2005, forthe first time since the Great Depression, the

American savings rate went negative.Today, in this country, there are more

than 105 billion credit cards, approximately9 per cardholder. Although this is an unreli-able figure because it is based on self-report-ing, the estimate is that the average house-hold is carrying $12,000 of credit card debt.It is a generally accepted figure, I think, thathousehold debt is now at about 140 percentof household income. Small wonder thenthat the American people have, to keep theparty going, turned their homes into ATMs.

And small wonder when you democratizecredit as we have done. When, with creditcards and internet purchases and catalogshopping, you so thoroughly separate thepleasure of purchasing and the pain of pay-ing for it, you are setting a country up for adelusional life.

Now I used the phrase a moment agoabout the welfare state in the context of anaging population. If we date the arrival ofthe welfare state—somewhat capriciously—at the enactment of the Social Security Actin 1935, it is fair to say that the welfare statetoday exists to subsidize two things that didnot exist in 1935. One is protracted retire-ment and the other is competent medicine.

In 1935, retirement as we think of it—aprolonged period of subsidized leisure afterwork—was a luxury of a tiny, economicallyand physiologically blessed people in thecountry. The span of retirement in the 20thcentury increased from 2 years to almost 20 years. We simply didn’t anticipate any of

this happening.And with regard to competent medicine,

there was virtually no medicine in 1935. In1924, Calvin Coolidge—the sainted Cool-idge, the last president with whom I fullyagreed—was living in the White House withaccess to the best medicine the country hadto offer. His 16-year-old son played tenniswithout socks; he got a blister, it got infect-ed, and he died. There was very little medi-cine could do at that point. It is estimatedthat at least a quarter of the medical treat-

ments now in use—diagnostic, therapeutic,and pharmacological—did not exist in 1965when Medicare was enacted.

We have put in place as a matter of rightan entitlement. We have attached the mostrapidly growing portion of the population—the elderly—to the most dynamic sector ofAmerican society—this scientifically inten-sive health care industry—as a matter ofright. And we’re going to pay a very steepprice for this.

We also are poised to see in the comingyear or two the most astonishing tax in-crease in American history imposed uponthe country automatically with the expira-tion of the Bush tax cuts. Will Rogersfamously said, “The only difference betweendeath and taxes is that death doesn’t getworse every time Congress meets.” Taxes willget very much worse without Congressdoing anything under this dispensation.

To listen to our politics, you have to listenwith a third ear to hear what is not said. And

“A welfare state produces apolitical backlash, a politicaldrive to provide security that

is incompatible with the economic dynamism that awelfare state presupposes.”


it is encouraging to see that no one was actu-ally calling for the repeal of the emblematicachievement of the 1980s, the Reagan taxcuts—going back to when we had 70 percentmarginal tax rates. But if we revert to a 39.6percent marginal tax rate, then add inincreases in the Social Security and theMedicare taxes, and then add in the averagetop rate in the states, which is 6.5 percent,you’re getting close to 60 percent marginaltax rates for the top income earners in theUnited States. It is politically incorrect, butcorrect, to note that those people are the mostcreative class in the country when it comes towealth and job creation. Add to this stew ofcoming problems the fact that we now have adangerous emphasis on widening inequalityof income in the United States, and we are setup for some confusing responses to prob-lems, some real and some not.

There is indeed a widening inequality inincome in the United States. The cure for it asfar as I can tell is for Americans to drop out ofschool sooner. Two centuries ago the greatsource of wealth in the Western world wasland, a century ago the great source of wealthwas fixed capital. Today the great source ofgrowth is human capital—mind, learning, thecapacity to handle information. The slogan“you earn what you learn” is a good one.What we’ve seen from the market is a widen-ing, emphatic return on the yield to educa-tion. The market is saying at the top of its considerable lungs, “stay in school.” Theproblem is—and I hate to break this news bul-letin here—that half of America’s children areof below average intelligence.

As I speak at the F. A. Hayek auditorium,

let me say that we are set up for what Hayekcalled the Fatal Conceit. That is, the beliefthat government can know and plan theunfolding future and should do so. That is arecipe for what my good friend PatrickMoynihan used to call iatrogenic socialproblems. In medicine, an iatrogenic prob-lem is a disease or problem caused by medi-cine. In social life, an iatrogenic social prob-lem is a problem caused by government’sattempt to solve a problem.

The good news is that while all of theseindicators are for a recrudescence of mis-placed government confidence, that con-tains the seeds of its own correction. Doremember the following: between 1938 and 1964, there was no liberal legislatingmajority in this town. In 1938 the countryresponded against Roosevelt and his court-packing plan, and brought the New Deal toheel. Between that and the anti-Goldwaterlandslide, conservative Southern Democratsand Republicans kept the government on a more or less even keel. For two years afterGoldwater lost 44 states, liberalism had its

way. And, four years later, in 1968, Republi-cans began the process of winning 7 of thenext 10 presidential elections. The market inpolitics, as well as in economics, does seemto work, and there does seem to be a self-cor-recting mechanism.

I think the American people broadly re-main wise. Broadly remain convinced that abenevolent government is not always a bene-factor. Broadly remain convinced that capi-talism does not just make us better off; itmakes us in some senses better. They’rebroadly convinced that when Jack Kennedysaid, “Ask not what your country can do foryou. Ask what you can do for your country,”one sensible response is that one thing youcan do for your country is to reserve a spa-cious portion of your own life for whichyou—not your country—are responsible .

I think most Americans still understandwhat Milton Friedman meant when he said:Take any three letters from the alphabet, putthem in any order you want, and you willhave an acronym designating a federalagency we could do without. I think mostAmericans still understand what RobertFrost meant when he said “I’m against ahomogenized society because I want thecream to rise.” And most of all I think theyunderstand what Ronald Reagan meantwhen he said, “I do not want to go back tothe past; I want to go back to the past way of facing the future.”

It is my understanding that the pur-pose of the Cato Institute is to do precisely that, and I thank them for having me heretoday to talk about my book. Thank youvery much.

“

”

One thing you can do for your

country is to reserve a spacious portion of your

own life for which you—not your country—are responsible.

When our nation’s Founders wrote the Declaration of Independence and the Constitution, they believed those documents would serve to limit government and protect individual liberty. They never dreamed of today’s bloated federal leviathan, which almost casually abuses constitutional rights, stifles the economy, and wastes billions of dollars.

For three decades, the Cato Institute has fought to restore our Founders’ vision. As Frederick W. Smith,CEO of FedEx and a member of Cato’s Board of Directors, recently said, “There is no institution that,person for person, dollar for dollar, idea for idea, has been even close to the Cato Institute in advancingfundamental principles.”

Your support will strengthen Cato’s efforts to “secure the blessings of liberty to ourselves and our posterity.” Please send your tax-deductible contribution in the business reply envelope in the center of Cato PolicyReport, or make a gift online at www.cato.org.


C A T O E V E N T S

STEVE H. HANKE, professor of applied economics at JohnsHopkins University and a Cato senior fellow, testifiedbefore the House Budget Committee in July. He urged the

Federal Reserve to show restraint, blaming loose monetarypolicy for the recent run-up in fuel and food prices.

VACLAV KLAUS, president of the Czech Republic, author of Blue Planet in Green Shackles, and an economist by training,analyzes the economics of global warming in a meeting with

Pat Michaels, Jerry Taylor, and other Cato scholars in the Catoboardroom. He stressed that the worst approach to the threat of climate change is to slow economic growth and innovation.

Egyptian civil rightsactivist DALIA ZIADAspoke to the Cato

interns about her per-sonal experience of geni-tal mutilation and theongoing struggle forwomen’s rights, as well ashuman rights generally,in the Arab world.

JUNE 6: Globalization and theWorld’s Rising Living Standards

JUNE 12: The Psychology of Evil: TheLucifer Effect in Action

JUNE 12: America: Our Next Chapterwith Chuck Hagel

JUNE 17: Smart Power: Toward aPrudent Foreign Policy for America

JUNE 18: Let Them In: The Case forOpen Borders

JUNE 19: Botswana and Mauritius:African Success Stories

JUNE 24: The Dirty Dozen: HowTwelve Supreme Court Cases Radically

Expanded Government and Eroded Freedom

JUNE 26: Trade Facilitation: TheNew Wave of International TradeLiberalization?

JULY 2: India: The Emerging Giant

JULY 11: Securing EconomicGrowth through Trade Facilitation

JULY 15: McCain and Obama:Comparing Their EconomicPlatforms

JULY 20-25: Cato University:Freedom’s Campaign in the 21stCentury

JULY 23: The FBI Turns 100

JULY 24: One Man’s America: ThePleasures and Provocations of OurSingular Nation with George F. Will

JULY 25: Should Congress LowerTariffs on Imported Shoes?

JULY 28: Escaping Poverty in Sub-Saharan Africa

JULY 31: The Dirty Dozen: Are Theythe Worst Supreme Court Cases inthe Modern Era?

Find more information about events in Ed Crane’sbimonthly memo for Cato Sponsors. Audio andvideo of most Cato events can be found on theCato Institute website. Visit www.cato.org and click the Events tab at the top.

CATO CLUB 200 RETREATKiawah Island, SCThe Sanctuary at Kiawah IslandSeptember 18--21, 2008Speakers include Gov. Mark Sanfordand John Zogby.

LESSONS FROM THESUBPRIME CRISIS26th ANNUAL MONETARY CONFERENCEWashington ● Cato InstituteNovember 19, 2008Speakers include Donald Kohn,Anna J. Schwartz, William Poole,Brian Wesbury, and WolfgangMunchau.

POLICY PERSPECTIVES 2008New York ● Waldorf-Astoria November 21, 2008

POLICY PERSPECTIVES 2008Chicago ● The DrakeDecember 3, 2008

21ST ANNUAL BENEFACTOR SUMMITRiviera Maya, Mexico Fairmont Mayakoba March 4--8, 2009


C A T O C A L E N D A R

“

”SEN. CHUCK HAGEL(R-NE)

—

We have devoted so many resources

to scaring thepublic about

terrorism that wehave neglected our

actual nationalsecurity.


or the first time,the libertarian movement,which has excit-

ed voters and the news media; which has inspired presidentsand prime ministers across theworld; and whose ideas haveswept across the Internet andbecome so “astonishingly wide-spread in American culture” that two elite professors wrote a book lamenting it, can claim a new mark of distinction: itsown encyclopedia.

As the libertarianism move-ment has gained prominence, so has the need for a standard reference work. The Encyclopedia of Libertarianism, a project of theCato Institute, serves as a usefulintroduction to and compendi-um of libertarian scholarship via a series of brief articles on the historical, sociological, and economic aspects of libertarianism within the broader context.

F

Get your copy of The Encyclopedia of Libertarianism from the Cato bookstore at www.catostore.org or by

dialing 800-767-1241 ($125.00 hardback).

Anthony de Jasay, Deirdre McCloskey, RichardEpstein, James Buchanan, Randy Barnett, RobertHiggs, Tyler Cowen, Gordon Tullock, Vernon L.Smith, and Israel Kirzner are among the impres-sive cast of contributors. Many Cato scholars contribute articles as well, including ChairmanWilliam A. Niskanen and Executive Vice PresidentDavid Boaz. In fact, one of the stranger market-ing challenges Cato has ever experienced was trying to find people to review the encyclopediawho hadn’t already submitted entries!

The encyclopedia was edited by RonaldHamowy, a distinguished historian who studiedunder Mises, Hayek, and Friedman and is now aFellow in Social Thought at Cato, with the assis-tance of Jason Kuznicki and Aaron Steelman.

The encyclopedia begins with a substantial essay introducing the reader to libertarian ideas and history and continues with more than 300 original entries, from Aristotle to Whiggism. In

between, you’ll find entries on contemporary notables such as Ron Paul, and past greatthinkers such as Robert Nozick and Ludwig von Mises. For those looking for a studied as-sessment of the economics of prohibition or privatization, just flip to the “P” section. And for those who want a broad overview of the libertarian movement, then The Encyclopedia ofLibertarianism—which offers a sweeping over-view from ancient times to the present, with an emphasis on the classical liberal tradition in Europe and its subsequent development inAmerica—is for you. Meanwhile, contemporarypolicy issues from health care to transportationpolicy to worldwide economic development arealso covered. And don’t miss entries on Objec-tivism, Austrian Economics, Term Limits, TaxCompetition, and Evolutionary Psychology. At 664 pages, The Encyclopedia of Libertarianismis large even for an encyclopedia.

Abolitionism, Abortion, Lord Acton, John Adams, Affirmative Action, American Revolution, Anarchism, Anarcho-Capitalism, Anti-Corn Law League, Antitrust,

Thomas Aquinas, Aristotle . . . Price Controls, Privacy, PrivateProperty, Privatization, Progress, Progressive Era . . . Social

Darwinism, Socialism, Socialist Calculation Debate, Social Security, Sociology and Libertarianism,

Thomas Sowell, Herbert Spencer . . .


C A T O P U B L I C A T I O N S

Bill Niskanen reflects on politics and policy

Cato books are available at bookstores nationwide, online at www.catostore.org, or by calling toll-free 800-767-1241.

In an internationally best-selling book, New York Times columnist Thomas Friedman proclaimed that the worldwas becoming “flat.”A new book from the Cato Institute, Global Tax Revolution, by director of tax policy stud-ies Chris Edwards and senior fellow Daniel J. Mitchell, says the world is becoming even flatter than Friedmancould convey.As the economic mobility of capital and labor has increased, tax rates have tumbled along with

them. Since the 1990s alone, the average corporate tax rate in the European Union plunged from 38 percent to24 percent. Individual income tax rates have also fallen sharply, with the average top rate in the 30-nation Orga-nization for Economic Cooperation and Development having plummeted 26 percentage points since 1980.Meanwhile, a large and growing number of nations plugged into the “flat” world economy have adopted a “flattax.” Twenty-five nations have scrapped their multi-rate, growth-dampening, and economically distortionary taxregimes in favor of a simple, low “flat tax.” “Tax competition,” wherein nations compete with each other for capitaland labor by offering more attractive tax and regulatory regimes, is the centerpiece of this story, a reminder that globalization is important not only for its immediate economic benefits but for its longer-run effects on insti-tutions. $21.95 hardback.

Reflections of a Political Economist collects some of the most incisive and important policy analysis andpublic choice articles by Cato Institute chairman William A. Niskanen in the last 15 years. Niskanen coversmany different areas of public policy, always with an eye toward rigorous economic thinking, fiscal conser-vatism,and finding shrewd,practical solutions to important problems.Taxation, health and retirement fund-

ing, terrorism, military preparedness, corporate governance, and global warming are among the subjects covered.Although Niskanen formerly served on President Ronald Reagan’s Council of Economic Advisers, he doesn’t putmuch faith in the Republican brand. Rather, he makes the case for divided government—where one house of Con-gress is controlled by a party other than the party of the president.The seemingly inevitable growth of government ishistorically much slower in such a situation, and American participation in every war involving more than a week ofground combat for the past 200 years was initiated by a unified government, a trend impossible to ignore. Reflec-tions of a Political Economist also contains Niskanen’s book reviews, in which he considers the works of othernotable economists, including Paul Krugman, Mancur Olson, James M. Buchanan, and Alan Greenspan. The bookconcludes with Niskanen’s personal reflections, each to some degree removed from economics, but all reflectinghis thoughtful, understated approach to important issues, wherever he finds them. $24.95 hardback.

At 145 pages, New Frontiers in Free Trade: Globalization’s Future and Asia’s Rising Role offers a concisebut comprehensive summary of the present state of affairs in international trade. Author Razeen Sally, sen-ior lecturer at the London School of Economics and co-director of the European Centre for InternationalPolitical Economy, tackles the economic case for free trade, the World Trade Organization’s declining signifi-

cance, whether bilateral trade agreements represent a good alternative, the emergence of trading giants China andIndia, and the future of globalization.With the collapse of the Doha round of WTO negotiations, and bilateral tradeagreements not delivering significant trade expansion, Sally calls for nations to unilaterally liberalize their trade—that is, practice free trade regardless of whether their trading partners do. Sally’s message to free trade proponentsis to re-root the argument for free trade in the classical liberal framework. For Adam Smith, free trade was a way totilt the balance away from rent-seeking producer interests—who are good at gaming the political process—andtoward the mass of consumers. It was part of a wider constitutional package to keep government limited, transpar-ent, and clean, enabling it to concentrate better on the public good. In the developing world especially, the argu-ment needs to be made that free trade—including cross-border flows of capital and people—is linked to domesticinstitutions and growth, all on the canvas of the long-run progress of commercial society. $18.95 hardback.

Global Taxes and Global Trade


If you haven’t checked out Jim Powell yet,you’re missing out. The former Laissez-Faire Books editor and current Cato sen-ior fellow is an expert on the history of

liberty. But don’t take our word for it—readany number of his most recent books!

In The Triumph of Liberty: A 2,000 Year History Told through the Lives of Freedom’sGreatest Champions (2000), Powell providescapsule biographies of 65 freedom fighters,tracing the struggle for freedom fromoppression, equality under the law, sanctityof property rights, freedom of speech andthought, and peace. In addition to figuresyou might expect, like John Locke andLysander Spooner, Powell also chroniclesthe lives of people like Hugo Grotius, a lesser-known Dutch antiwar philosopherwho wrote, in 1625 (long before it was ac-ceptable), that wars should be prosecutedonly in self-defense.

After The Triumph of Liberty Powell em-barked on an ambitious sequence ofexposés of some of America’s most reveredpresidents, offering contrarian analyses ofTheodore Roosevelt, Woodrow Wilson, andFranklin Delano Roosevelt. Powell’s best-known work is FDR’s Folly (2003), in whichhe hammered home the notion that FDR’spolicies were not rehabilitative, but destruc-tive, prolonging the Great Depression. AsPowell points out, the median joblessnessrate throughout the New Deal was 17.2 per-cent, and never dropped below 14 percent.Powell’s easy-to-understand analysis of theunintended consequences of FDR’s NewDeal monetary policy was characterized asconvincing “without a shadow of a doubt”by none other than Milton Friedman.

In Wilson’s War: How Woodrow Wilson’sGreat Blunder Led to Hitler, Lenin, Stalin andWorld War II (2005), Powell shows that gov-

ernment intervention leads to unintendedconsequences not only in economic affairsbut in foreign policy too. World War I, an elective war born of Wilson’s liberalinternationalism, did not bring the stable,peaceful world that Wilson imagined—instead, it brought on World War II, accord-ing to Powell.

The Republican nominee for president,John McCain, may like Teddy Roosevelt(because he “liberally interpreted the auth-ority of the office” and “nourished the soulof a great nation,” of all things), but JimPowell is not a fan. In Bully Boy: The Truthabout Theodore Roosevelt’s Legacy (2006), Powell takes on Roosevelt’s “trust busting”and the Pure Food and Drugs Act that waspassed with his support, showing that evenduring Roosevelt’s own time, those policieshurt the very consumers they were sup-posed to protect.

Powell’s latest offering is arguably hismost ambitious. In Greatest Emancipa-tions: How the West Abolished Slavery, Pow-ell asks why slavery, unchallenged inprinciple or practice for thousands ofyears, disappeared in a single century. It’san important question, and one rarelyaddressed head-on. In trying to answerthis question, Powell looks at places likeHaiti, the British Caribbean, Cuba, andBrazil—where slavery was particularlyentrenched—asking why their poli-tical leaders were able to emancipatetheir slaves without the violence thatoccurred in America’s Civil War. Turn-ing to that war, Powell writes on the Abo-litionist movement leading up to theCivil War, the war itself, and its after-math in Reconstruction. His look at thebig picture leads him to ultimately con-clude that the greater the amount of vio-lence that was involved in the emancipa-tion process, the worse the outcomeswere for the former slaves.

Jim Powell’s Greatest Emancipations: How theWest Abolished Slavery is available for $26.95 at www.catostore.org.

Jim Powell Takes on the History of FreedomA one-man publishing house for liberty


C A T O S T U D I E S

In the past, the federal government hasintroduced moral hazard in the bank-ing system through deposit insurance.Banks underpriced risk because of the

federal guarantee that backed deposits.After banking crises in the 1980s and1990s, deposit insurance was put on asound basis and that source of moral haz-ard was mitigated. But in its place, mone-tary policy has become a source of moralhazard, says Cato senior fellow Gerald P.O’Driscoll Jr. In “Asset Bubbles and TheirConsequences” (Briefing Paper no. 103),he writes that in acting to counter the eco-nomic effects of declining asset prices, theFederal Reserve has come to be viewed as underwriting risky investments. Policypronouncements by senior Fed officialshave reinforced that perception. Theseactions and pronouncements are mutuallyreinforcing and destructive to the opera-tion of financial markets. The currentfinancial crisis began in the subprime hous-ing market and then spread throughoutcredit markets. The new Fed policy fueledthe housing boom. Refusing to acceptresponsibility for the housing bubble, theFed’s recent actions will likely fuel a newasset bubble.

Hyperinflation in Zimbabwe The hallmark of Zimbabwe’s economic col-lapse is hyperinflation—2.5 million percenta year at last tally. Zimbabwe’s hyperinfla-tion is destroying the economy, pushingmore of its inhabitants into poverty, andforcing millions of Zimbabweans to emi-grate. Steve H. Hanke, professor of appliedeconomics at Johns Hopkins University,says that the source of Zimbabwe’s hyper-inflation is the Reserve Bank of Zimbab-we’s money machine, and that it must bestopped. In “Zimbabwe: From Hyperin-flation to Growth” (Development PolicyAnalysis no. 6), he suggests three optionsto rapidly slash inflation and restore stabil-ity and growth to the Zimbabwean econo-my: “Dollarization,” which would replacethe discredited Zimbabwe dollar with a for-eign currency, such as the U.S. dollar or theSouth African rand; a currency board,which would mean the Zimbabwean cur-rency would be fully backed by a foreignreserve currency and freely convertible intothe reserve currency at a fixed rate ondemand; or free banking, which wouldallow commercial banks to issue their ownprivate notes and other liabilities with min-imum government regulation.

McCain vs. Obama on Health careIn “A Fork in the Road: Obama, McCain,and Health Care” (Briefing Paper no. 104),Cato senior fellow Michael D. Tanner findsvast differences in the health care plans ofthe Republican and Democratic presiden-

tial contenders. SenatorObama’s approach reliesheavily on governmentmandates, regulations,and subsidies. He wouldmandate that employersprovide health care cov-

erage for their workers and that parentspurchase health insurance for their chil-dren. He would significantly increase regu-lation of the insurance industry, establish-ing a standard minimum benefits packageand requiring insurers to accept all appli-cants regardless of their health. He wouldoffer a variety of new and expanded subsi-dies to middle- and low-income Americans.In contrast, Senator McCain emphasizesconsumer choice and greater competitionin the health care industry. He would moveaway from our current employment-basedinsurance system by replacing the currenttax exclusion for employer-provided insur-

Boom, Bust, Rinse, Repeat

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CATO POLICY REPORT

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Edward H. Crane .............................................President and CEOWilliam A. Niskanen.....................................................ChairmanDavid Boaz..............................................Executive Vice PresidentLesley Albanese.....................................................Vice PresidentKhristine Brookes.......................................V.P., CommunicationsTed Galen Carpenter ......V.P., Defense & Foreign Policy StudiesJames A. Dorn ...........................................V.P., Academic AffairsWilliam Erickson......................V.P., Finance and AdministrationGene Healy..............................................................Vice PresidentBrink Lindsey ...........................................................V.P., ResearchTom G. Palmer ...................................V.P., International ProgramsRoger Pilon .........................................................V.P., Legal Affairs

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Brandon Arnold................................Director,Government AffairsMichael F. Cannon........................Director, Health Policy StudiesAndrew Coulson.........Director,Center for Educational FreedomChris Edwards...............................Director, Fiscal Policy StudiesBenjamin H. Friedman......................................Research Fellow Robert Garber.................................................Director, MarketingJagadeesh Gokhale...............................................Senior FellowDaniel T. Griswold........................Director, Trade Policy StudiesJim Harper............................Director, Information Policy StudiesLinda Hertzog..............................................Director, ConferencesJuan Carlos Hidalgo........Project Coordinator for Latin AmericaDaniel J. Ikenson........ Associate Director, Trade Policy StudiesAndrei Illarionov.....................................................Senior FellowMalou Innocent.........................................Foreign Policy AnalystSallie James.................................................Trade Policy AnalystJason Kuznicki...................................................Research FellowDavid Lampo.................................................Publications DirectorRobert A. Levy...................Senior Fellow, Constitutional StudiesTrisha Line.......................................................................ControllerJustin Logan...................Assoc. Director, Foreign Policy StudiesTimothy Lynch.......................................Director, Criminal JusticeAshley March...............................Director, Foundation RelationsNeal McCluskey...Assoc. Director, Center for Educational FreedomJon Meyers..................................................................Art DirectorDaniel J. Mitchell...................................................Senior FellowJohan Norberg........................................................Senior FellowRandal O’Toole........................................................Senior FellowJeff Patch................................................................Budget FellowAlan Peterson.......................................................Director of MISChristopher Preble.....................Director, Foreign Policy StudiesAlan Reynolds..........................................................Senior Fellow

Claudia Ringel...................................Manager, Editorial ServicesJohn Samples....................Director, Ctr. for Representative Govt.Adam B. Schaeffer................................Education Policy AnalystIlya Shapiro............................................................. ..Senior FellowMichael Tanner.........................................................Senior FellowJerry Taylor................................................................Senior FellowMarian Tupy.......................................Development Policy AnalystPeter Van Doren.................................................Editor, RegulationIan Vásquez.......Director, Ctr. for Global Liberty and ProsperityWill Wilkinson.........................................................Policy Analyst

James M. Buchanan.......................Distinguished Senior FellowJosé Piñera.......................................Distinguished Senior FellowEarl C. Ravenal.................................Distinguished Senior FellowRandy E. Barnett.......................................................Senior FellowLawrence Gasman..............Senior Fellow in TelecommunicationsRonald Hamowy.....................................Fellow in Social ThoughtSteve H. Hanke.........................................................Senior FellowJohn Hasnas............................................................. Senior FellowPenn Jillette.........................................Mencken Research FellowDavid B. Kopel........................................Associate Policy AnalystChristopher Layne..............Visiting Fellow, Foreign Policy StudiesPatrick J. Michaels......Senior Fellow in Environmental StudiesGerald P. O’Driscoll Jr.............................................Senior FellowP. J. O’Rourke ......................................Mencken Research FellowWilliam Poole...........................................................Senior FellowJim Powell.................................................................Senior FellowRichard W. Rahn.......................................................Senior FellowRonald Rotunda.................Senior Fellow, Constitutional StudiesTeller......................................................Mencken Research FellowCathy Young.....................................................Research Associate

ance with a refundable tax credit for indi-viduals. At the same time he would sharplyderegulate the insurance industry toincrease competition.

Trade After Doha The bad news is that the Doha round ofWorld Trade Organization negotiationscollapsed without a new agreement beingreached. The good news is that improvingthe international trading system does not

require a new, comprehensive multilateralagreement. In “While Doha Sleeps: Secur-ing Economic Growth through TradeFacilitation” (Policy Analysis no. 37), DanielJ. Ikenson, associate director of Cato’s Cen-

ter for Trade Policy Studies, says countriescan derive large gains by cutting bureaucrat-ic red tape to the import and export ofgoods, a policy known as trade facilitation.Such reforms could do more to increaseglobal trade flows than further reductionsin tariff rates. For many developing coun-tries—particularly those that receive prefer-ential tariff treatment from rich countries—reducing transportation and logistics-relatedcosts through trade facilitation reformswould be much more beneficial than furthertariff cuts. With the assistance of Cato’smedia team and the International PolicyNetwork, op-eds by Ikenson based on this study appeared in the Wall Street Journal,the Jerusalem Post, the Straits Times ofMalaysia, the Sunday China Post, Business Dayof South Africa, the Daily News of Egypt, theMint of India, El Universal of Caracas, theSouth China Morning Post, the Australian, andmany other papers.

A New Tool for School Choice AnalysisEducation tax credits—programs thatallow individuals to deduct education

expenses from their tax liabilities or corpo-rations to do the same for donations toscholarship funds—are a great way to putconsumers back in charge of education.But according to “The Fiscal Impact of a Large-Scale Education Tax Credit System” (Policy Analysis no. 618), theywould also save billions of dollars for stategovernments if enacted. Andrew Coulson,director of Cato’s Center for EducationalFreedom, and Ball State University econo-mist Anca Cotet estimate the effect thatmodel legislation for tax credits would haveon the budgets of five different states. In itsfirst 10 years of operation, savings from themodel education tax credit bill would rangefrom $1.1 billion for South Carolina to$15.9 billion for Texas. Illinois, Wisconsin,and New York would also see 10-year savings in that range. Accompanying thereport is the Fiscal Impact Calculator, a generalized spreadsheet tool capable of calculating the fiscal impact of educa-tion tax credits on other states. This tool is available to state policymakers, pundits,and other interested parties at www.cato.org/pub_display.php?pub_id=9515.


nearly $150 billion being added to the“before-tax income of the most affluent 1percent” in 2004. That huge miscalculation,in turn, was critical to the Hamilton Project’sunexplained assertion that “rising inequalitystrengthens the case for progressivity.”

The Brookings-Urban Tax Policy Centeralso uses the CBO’s erroneous method toestimate how the corporate tax is distributed.As a result, they estimate that top 1% wouldreceive two-thirds of the benefit from SenatorMcCain’s proposal to cut the corporateincome tax. Such estimates are not credible.

Unpaid Taxes Don’t Pay Bills orRedistribute Income

The fundamental problem with tryingto measure income from individual taxreturns is that people try to minimize theirtaxes. Many studies find that an increase inmarginal tax rates on capital gains or highincomes causes income reported from those

sources to drop significantly. Economistscall this “the elasticity of taxable income.”

If the tax rate on dividends is increased,investors will shift many of their dividend-paying stocks into tax-exempt pensionfunds or sell them to tax-exempt domesticand foreign investors and hold more tax-exempt bonds. If the tax rate on capitalgains is increased, investors will hold fewershares in taxable accounts and avoid sellingwinning stocks unless they have offsettinglosses. If the highest individual income is raised far above the corporate tax rate,thousands of professionals and businessescurrently filing as partnerships, Subchap-ter S corporations, and LLCs will reincor-porate to shelter income under the corpo-rate income tax.

Because of such well-documented re-sponses, income tax data provide incorrectinformation about income distributionwhen tax rates change. A large body of evi-dence finds large and sustained increases in

reported income among high-income tax-payers in the wake of major reductions intax rates on salaries (1988) or capital gains(1997) or both (2003). It follows that wecould expect sustained reductions in reportedincome among high-income taxpayers ifthere were major increases in marginal taxrates on high individual incomes and/orcapital gains. Such defensive moves by tar-geted taxpayers would indeed appear toreduce before-tax top incomes reported onindividual tax returns. But it also means thehigher tax rates would be largely or entirelyineffective in reducing after-tax income or inraising additional revenue.

Dubious estimates of relative incomechanges since 1979 or 2002, usually con-structed from before-tax IRS data, are beingwidely cited as a sufficient justification forembracing tax policies that are undeniablyharmful to economic progress and prosper-ity. Bad statistics are never a good excuse foradvocating bad policies. ■

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GO AHEAD WITH YOUR OWN LIFE,AND LEAVE ME ALONE[Campaigning for Hillary Clinton, BillClinton offered] the succinct statementof the case: “You ought to be for her be-cause she’s spent a lifetime making theonly kind of change that matters: mak-ing changes in other people’s lives.”—Vanity Fair, July 2008

GOOD NEWS FROM OBAMABarack Obama told House Democrats on Tuesday that as president he wouldorder his attorney general to scour WhiteHouse executive orders and expunge anythat “trample on liberty.”—Associated Press, July 29, 2008

ECON 101 ON CAPITOL HILLIn a pair of lengthy and sometimes testyclosed-door sessions in the Senate lastweek, executives from Goldman Sachsand Morgan Stanley, two of Wall Street’slargest investment banks, made the casethat their multibillion-dollar invest-ments in energy contracts have not led to higher oil prices. Rather, they toldDemocratic staff members of the Energyand Natural Resources Committee thatthe trades allow international markets tooperate efficiently and that the run-up in oil prices results not from speculationbut from actual imbalances of supplyand demand.

But the executives were met withskepticism and occasional hostility.

“Spare us your lecture about supply anddemand,” one of the Democratic aidessaid, abruptly cutting off one of the exec-utives, according to a staff member inthe room.—Washington Post, June 19, 2008

THE WORLD’S WORST CENTRAL BANKERHAS A SENSE OF HUMOROf all the world’s central bankers, Zim-babwe’s gets the biggest—or at least thelongest—salary. [Gideon] Gono won’tsay how much he earns exactly as head of the Reserve Bank of Zimbabwe butdoes claim to have “more digits” on hispay slip that any of his peers. He earnstrillions of Zimbabwe dollars. It nowtakes more than 16 billion of these tobuy a single U.S. dollar. U.S. Federal Re-serve Chairman Ben Bernanke earnsonly six figures, $191,300.—Wall Street Journal, July 8, 2008

AUTHOR OF MCCAIN-FEINGOLD ACTTHINKS SECOND AMENDMENT IS JUST AS SACRED AS FIRST AMENDMENT.GRAB YOUR GUNS.Today’s ruling recognizes that gun ownership is a fundamental right—sacred, just as the right to free speechand assembly.—JohnMcCain.com, June 27, 2008

COINCIDENTALLY, IT WOULD SAVE THE TAXPAYERS $300 MILLIONThe [Louisiana] House is considering an

income tax cut that would cost the state$300 million.—New York Times, June 2, 2008

IN NEWSPEAK, “MORE OPTIONS”MEANS FEWER OPTIONSA law that would bar fast-food res-taurants from opening in South LosAngeles for at least a year sailed through the Los Angeles City Councilon Tuesday. . .

Councilwoman Jan Perry, who haspushed for a moratorium for six years,said . . . “I believe this is a victory for the people of south and southeast LosAngeles, for them to have greater foodoptions.”—Time, March 27, 2008

FUN WITH NATION BUILDINGAre you a road engineer who speaks Urdu?A city planner fluent in Arabic? Maybe a former judge who happens to knowPashto and seeks foreign adventure?

There’s a job for you at the CivilianResponse Corps, the State Departmentunit designed to deploy with or shortlyafter U.S. troops in world hot spots. Thecorps is designed to be a kind of interna-tional Federal Emergency ManagementAgency, U.S. officials said, an agency thatwould take charge of entities includinglocal police, courts, the banking systemand airports after states collapse or gov-ernments are defeated. —Los Angeles Times, July 30, 2008

CATO POLICY REPORT1000 Massachusetts Ave., N.W.Washington, D.C. 20001

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