WASHINGTON, July 15 (UPI) -- The UPI think tank wrap-up is a daily digest covering brief opinion pieces, reactions to recent news events and position statements released by various think tanks. This is the first of two wrap-ups for July 15.
The National Center for Policy Analysis
(The NCPA is a nonprofit, nonpartisan public policy research institute that seeks innovative private sector solutions to public policy problems.)
DALLAS, Tex.-- Kemp-Roth Changed American Economic Policy
By Bruce Bartlett
Yesterday (July 14) was (is) an important anniversary in the history of tax policy. On that day in 1977 -- 25 years ago -- then-Congressman Jack Kemp, Republican of New York, and then-Sen. William Roth, Republican of Delaware, introduced what came to be called the Kemp-Roth tax bill. Enacted into law just four years later, this legislation fundamentally altered debate about economic policy in the U.S. that continues to the present day.
The Kemp-Roth bill proposed cutting statutory tax rates by about 30 percent across the board. The bottom rate would be reduced from 14 percent to 10 percent and the top rate from 70 percent to 50 percent. Both of these rates had been unchanged since the Kennedy tax cut of the early 1960s.
In the meantime, however, there had been massive inflation. Between 1963 and 1977, the price level doubled, meaning that one needed twice as much income in 1977 to live as well as in 1963. This had the effect of raising the effective tax rate on most people. As workers got cost-of-living raises, they got pushed up into higher and higher tax brackets as if their real income had increased.
According to the Treasury Department, the average federal income tax rate on a family with the median income rose from 7.09 percent in 1965, after the Kennedy tax cut was fully phased in, to 10.42 percent in 1977, when the Kemp-Roth bill was introduced. Over the same period, the marginal tax rate -- the tax on each additional dollar earned -- went up from 17 percent to 22 percent. In other words, a worker with the median income went from keeping 83 cents out of every dollar of pay increase to keeping just 78 cents.
Kemp and Roth thought that this sharp rise in tax rates was largely responsible for the stagnation of the American economy in the 1970s. They believed workers and entrepreneurs needed to keep more of their earnings in order to stimulate growth, productivity and investment. They also thought that high tax rates were exacerbating inflation by reducing the supply of goods and services in the economy. Since inflation is too much money chasing too few goods, anything that increased production was per se anti-inflationary.
At the time the Kemp-Roth bill was introduced, however, the dominant view among economists was that budget deficits were the primary cause of inflation. They favored tax increases, not tax cuts, and said that passage of the Kemp-Roth bill would be dangerously inflationary. Kemp and Roth responded that inflation resulted from the Federal Reserve creating too much money, not deficits, and that a tight monetary policy, which they supported, would reduce inflation regardless of how large the deficit was.
Such a view was absolute heresy in 1977. The Congressional Budget Office, for example, believed that the money supply had nothing whatsoever to do with inflation, and that cutting tax rates would add fuel to it. CBO Director Alice Rivlin said that output would fall if tax rates were cut, because workers could work less and still get the same after-tax income.
A commonly held view at the time was that it would either take decades to bring inflation down to tolerable levels or another Great Depression. Arthur Okun of the Brookings Institution reflected the views of most economists when he said in 1977 that the economy would shrink by 10 percent for every 1 percent fall in the inflation rate.
To his credit, Ronald Reagan rejected the conventional view and supported Kemp-Roth, making it his principal campaign issue in 1980. Jimmy Carter, who endorsed the establishment's thinking, rejected tax cuts as inflationary. He said that inflation was just due to a lot of bad luck--oil price increases by Arab countries, bad harvests and the like. Carter never once took responsibility for inflation's rise from 4.9 percent in Gerald Ford's last year to 13.3 percent in 1979 and 12.5 percent in 1980.
Kemp-Roth was considered reckless even by Republicans -- George H.W. Bush called it "voodoo economics" and Senate Majority Leader Howard Baker, Republican of Tennessee, called it a "riverboat gamble." But Mr. Reagan pressed ahead with a tight money policy at the Fed and a sharp reduction in tax rates in 1981. And as he, Kemp and Roth knew would happen, the economy not only recovered, but inflation collapsed to about 4 percent throughout the 1980s.
To this day, none of the economists who predicted hyperinflation from the Reagan-Kemp-Roth tax cut have ever acknowledged the gross error of their predictions. They just pretend that the whole thing never happened. Yet the 180-degree turnaround in the American economy from the 1970s to the 1980s took place and cannot be denied. Without Jack Kemp and Bill Roth, it might not have happened.
(Bruce Bartlett is a senior fellow at the National Center for Policy Analysis.)
The Independent Institute
(II is an independent public policy research organization whose goal is to transcend the political and partisan interests that influence debate about public policy. II aims to redefine the debate over public issues, and foster new and effective directions for government reform, by adhering to the highest standards of independent scholarly inquiry, without regard to political or social biases.)
OAKLAND, Calif. -- The Government Needs to Get Its Own Accounting House in Order
By Robert Higgs
President Bush has been lashing out at corporate accounting shenanigans. "Corporate America has got to understand," he declares, "there's a higher calling than trying to fudge the numbers, trying to slip a billion here or a billion there and maybe hope nobody notices." In the wake of scandals at Enron, WorldCom, Xerox, and other big companies, the president warns that the Justice Department will prosecute corporations that play fast and loose with their accounts.
The Democrats, smelling blood in the water, are trying to tie the Bush administration to the accounting miscreants. Senate leader Tom Daschle blames "a deregulatory, permissive atmosphere that has relied too much on corporate America to police itself," and he points specifically to problems at Halliburton, which vice president Dick Cheney headed not long ago. The Republicans' "laissez-faire attitude," Daschle claims, has encouraged the corporate titans to lie, cheat, and steal.
What nobody seems to notice is that while Enron, WorldCom, and the other corporate bad boys are getting their comeuppance in the stock market and sink into bankruptcy, the biggest accounting scofflaw of all continues merrily along its irresponsible way. I refer to none other than the organization with which both Bush and Daschle are connected, the federal government. Whereas Enron and WorldCom have misbehaved with billions of dollars in bad accounts, the federal government has misbehaved--and continues to misbehave, contrary to a number of federal statutes--with trillions of dollars in bad accounts.
Although by no means the only guilty agency, the Dept. of Defense is by far the worst offender. Since 1994, federal law has required government departments to make financial audits. Seems reasonable, given the trillions of dollars of taxpayer money that pass through the bureaucrats' hands each year. The Defense Department, however, has never been able to comply with the auditing requirement, because its records are such a mess that they cannot even be audited.
A memorandum of February 15, 2001, signed by David K. Steensma, deputy assistant inspector general for auditing, states that "Dept. of Defense could not provide sufficient or reliable information for us to evaluate management's assertions or verify amounts on the FY 2000 Dept. of Defense Agency-wide Financial Statements."
Moreover, "We identified $1.1 trillion in department-level accounting entries to financial data used to prepare Dept. of Defense component financial statements that were not supported by adequate audit trails or by sufficient evidence to determine their validity. In addition, we also identified $107 billion in department-level accounting entries to financial data used to prepare Dept. of Defense component financial statements that were improper because the entries were illogical or did not follow accounting principles."
The preceding assessment applies only to department-wide accounting problems. The auditors also found the accounts for the individual military services to be a complete mess.
The Dept. of Defense has broken the law year after year. According to the Steensma memorandum, "Dept. of Defense did not fully comply with the laws and regulations that had a direct and material effect on its ability to determine financial statement amounts. Dept. of Defense financial management systems were not in substantial compliance with Federal financial management system requirements; applicable Federal accounting standards; and the U.S. Government Standard General Ledger at the transaction level, as required by the Federal Financial Management Improvement Act of 1996."
Last year, defense secretary Donald Rumsfeld told Congress, "We have an obligation to taxpayers to spend their money wisely. Today, we're not doing that."
Talk about an understatement. Not only is the Dept. of Defense wasting money by the shipload, but it hasn't the foggiest idea of how many trillions of dollars it has squandered, and how it has done so, over the past decade. Yet department officials also have testified that no compliance with the law is in sight. The Pentagon lawbreakers simply expect to go on breaking the law, and to get away with it, as they have been getting away with it for years.
In a letter to Rumsfeld dated April 27, 2001, congressmen Christopher Shays and Dennis Kucinich stated, "The Dept. of Defense Inspector General testified before Congress in 1995 that a turnaround in the Pentagon's budgeting practices might be expected by the year 2000. Hundreds of auditors and tens of billions of dollars in recommended adjustments later, Dept. of Defense's books remain in shambles. To date, no major part of the Dept. of Defense has been able to pass the test of an independent audit" (emphasis in original).
When Enron or WorldCom can't present a proper audit statement, they are ruined. When the Dept. of Defense cannot put its financial records in shape even to be audited, the department is rewarded with the biggest increase in its budget since Ronald Reagan's first term as president.
(Robert Higgs is senior fellow in political economy at the Independent Institute and editor of The Independent Review.)
The Reason Foundation
By Jacob Sullum
Years ago the American Council on Science and Health started mailing out mock holiday dinner menus listing the naturally occurring carcinogens in traditional Christmas and Thanksgiving dishes. The menus were a sly rebuttal of environmentalist hysteria about pesticide traces in the food supply and, more generally, of attempts to predict the health risk that tiny amounts of a chemical pose to humans based on the effects of huge amounts fed to laboratory animals. The message was threefold: Mice are not people; the dose makes the poison; and natural isn't necessarily safer.
Now at least some activists seem to have taken that last point to heart. It's not enough for food to be "natural" or "organic" anymore. It also has to be raw.
Two California environmental groups have announced that they plan to sue McDonald's and Burger King under the state's Proposition 65, which requires manufacturers to warn consumers about toxins in their products. In particular, the groups claim to be worried about acrylamide, a possible carcinogen found in starchy foods cooked at high temperatures.
In April a group of Swedish researchers generated alarm by reporting "relatively high" amounts of acrylamide in a wide variety of baked and fried foods. Last month the Center for Science in the Public Interest announced its own findings, saying the levels of acrylamide in French fries, potato chips, and breakfast cereals far exceed the amount the Environmental Protection Agency allows in a glass of water.
Calmer minds have pointed out that it's not clear whether acrylamide is a human carcinogen. If it is, the animal research indicates that people would have to consume enormous amounts of acrylamide-containing foods every day before an increase in risk could be measured. The skeptics have also noted that the acrylamide scare dovetails nicely with the wars on fat and fast food.
But acrylamide is not limited to politically incorrect foods. Moving from mock menus to mock lawsuits, the American Council on Science and Health this week announced its own Prop. 65 complaint. The target is not a burger-and-fries hawker but the country's leading natural food retailer. ACSH is demanding that Whole Foods Market put warning labels on its whole wheat and organic breads -- a tactic reminiscent of the Competitive Enterprise Institute's tongue-in-cheek complaint about dioxin in Ben & Jerry's ice cream.
There's always a danger that such stunts will be misconstrued, of course. But it's safe to predict that, faced with a choice between starving and taking a more skeptical attitude toward food scares, most Americans will prefer to eat.
(Jacob Sullum is a senior editor at Reason magazine.)