– Diana Furchtgott-Roth, dfr@hudson.org, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The views expressed are her own.  –

It’s April 15, and you’ve finished the arduous task of filing your taxes. You’ve found your W-2 form from your employer, your pennies of interest income from your checking account. If you itemize, you’ve tracked down the acknowledgement of your charitable contributions to the church, the Sierra Club, and the local anti-poverty organization.

The system is so complex that it may have contributed to the tax delinquencies of four Cabinet-level Obama appointees (or their spouses) who had to pay up to win Senate confirmation. At least two other Obama choices withdrew because of their tax problems.

President Obama recognizes the problem. Today he asked his Economic Advisory Board, under the leadership of former Federal Reserve Chairman Paul Volcker, to send him recommendations for tax simplification by the end of the year.

Enter Wisconsin Representative Paul Ryan, a member of Congress for 10 years and now the ranking Republican on the House Budget Committee. In H.R. 6110, entitled “Roadmap for America’s Future” (www.americanroadmap.org), he has proposed a radical simplification of the tax code.

Mr. Ryan describes the tax system as “needlessly complex and burdensome.” In contrast, he writes, “a world-class tax system should be simple, fair, and efficient. The U.S. tax code fails on all three counts.”
Under the Ryan proposal, couples would pay tax at a 10 percent rate on their first $100,000 of taxable income ($50,000 for singles), and then 25 percent on any earnings above that. They would pay a 15 percent tax on capital gains and dividends, and no tax on savings. In exchange, they would give up almost all deductions, including home mortgage interest and charitable contributions.

The only deduction allowed would be a refundable $5,000 tax credit for families and $2,500 for individuals to help with the purchase of private-sector health insurance. Health insurance could be purchased in any state, to encourage more companies and plans to participate.

Many efforts to simplify the tax code have failed because people are attached to their deductions — and because Congress seeks to use tax law to achieve social goals, such as home ownership and helping low-income parents with the earned-income tax credit, a stunningly complex provision.

Moreover, charities and universities fear, probably with good reason, that if contributions are not deductible, people will give less.

To disarm the opposition, Mr. Ryan would give taxpayers a choice. Within 10 years of the passage of the law, they could choose today’s system, with its multiple rates and deductions; or they could adopt the simplified Ryan system, giving up the deductions. To prevent people from switching every year if it would benefit them, they could change only once in a lifetime — except in the case of what Ryan calls “a life-changing event,” such as death, divorce, or marriage, when an additional change would be permitted.

Mr. Ryan’s proposal is a variant of the flat, or one-rate, tax suggested in the Reagan era by some economists and advocated in the 1980s by then House Majority Leader Dick Armey, and later by Steve Forbes in his 1996 and 2000 bids for the Republican presidential nomination.

Then, the main attack on the idea was that it is inequitable. However, Mr. Ryan’s tax contains not one but two rates, and it is progressive because it retains standard deductions and personal exemptions. A family of four would start paying tax only after earning $39,000. Further, many upper-income people benefit from existing deductions, and they would lose this benefit if they adopt Ryan’s two-rate tariff.

No tax proposal offered by a minority member of Congress of either party ever has any chance of passage. Political loyalties aside, the American public might want to take a careful look at Mr. Ryan’s proposal, while memories of filling out their tax forms are still fresh.

– Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. –

It’s welcome news that President Obama will turn his attention to immigration reform this year, as was announced on Wednesday by Deputy Assistant to the President Cecilia Muñoz. Economic recovery will happen more quickly if both high- and low-skill immigrants are permitted to enter the United States and work legally.

Two years ago, when Congress was considering comprehensive immigration reform, both President Bush’s Council of Economic Advisers and the Congressional Budget Office, headed by Peter Orszag, an economist closely identified with the Democratic Party, estimated that the benefits of additional immigrants outweighed the costs. If Congress allowed more immigration, then American taxpayers would come out ahead financially.

Yet, after Congress refused to pass President Bush’s plan to allow most undocumented workers to receive work visas and wait in line for citizenship, the Bush administration’s immigration policy deteriorated into a series of arbitrary raids on different companies, rounding up undocumented workers and deporting them, in many cases separating husbands and wives, parents and children.

We can do better. Although the unemployment rate reached 8.5 percent last month, the jobs are going to come back, and, as has been the case in the past, native-born Americans will want jobs that are different from those of immigrants, according to economics professor Giovanni Peri of the University of California at Davis.

Congress needs to overhaul immigration law and create an expanded temporary worker program with a path to citizenship, along with more verification to prevent workers from working illegally, and monitoring of tourists and students so that they do not overstay their visas.

A rational immigration policy would have numerous advantages:

• Undocumented workers would pay taxes to federal and state governments rather than to grey-market check cashing services.

• Payments for health care through insurance could be collected more easily, rather than burdening hospital emergency rooms with immigrants without health insurance.

• Foreigners who want to work here could pay the government for visas rather than pay smugglers for unsafe, illicit transportation.

• Improvements in security. Legal visas and bank accounts would make it far easier to identify and track potential terrorists, dubious financial transactions, and those who simply overstay visas.

A rational immigration policy would solve several real problems the United States faces with regard to immigration. The international economy is tremendously dynamic; our immigration system is not. Temporary workers must spend months applying for admission, and due to the pile-up in April of every year, may not even get a visa.

Few low-skilled workers have a legal and reliable method to enter this country and work legally, and few Americans want to do the jobs, such as fruit picking and cleaning, that these workers want to pursue. And even high-skilled workers trained at U.S. colleges and universities, often at taxpayer expense, might have to wait years and spend thousands of dollars to become permanent residents of the nation.

Mr. Obama might want to consider transferring the authority of setting quotas from Congress to the Labor Department. The Labor Department already has the presumptive authority to judge whether demand for foreign labor is justified, through its foreign labor certifications. If the Labor Department is allowed to determine whether or not a foreign worker would displace a native one, it could also be allowed to calculate visa quotas.

High-skilled workers educated in America ought to be able to stay; otherwise, our investment in their education becomes lost to another country. If the Labor Department determines that a foreign worker would not displace Americans, that worker should not be barred from entering the country due to an arbitrary quota. And people who want to enter this country in order to work in jobs Americans are not willing to take ought to have an easy, legal way to do so.

Mr. Obama has the opportunity to craft a sensible and dynamic immigration system. All Americans should wish him success.

– Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. —

Republicans and Democrats in Congress, along with President Obama and Treasury Secretary Geithner, have been raking AIG over the coals in hearings and speeches for paying employees bonuses totaling $165 million. But today’s Los Angeles Times reports that the Treasury Department specifically agreed to the bonuses in a 586-page agreement signed on November 25. The deal allows AIG to pay out bonuses for the 2009 year that equal bonuses paid for 2007.

It stands to reason that the contracts to pay bonuses would have been known to Treasury officials a half-year ago, when they reviewed AIG’s financial position before funneling $85 billion into the firm to prevent its collapse. Basic due-diligence scrutiny of the firm’s books would have revealed the contractual obligations to make bonus payments to retain talented staff. What is puzzling is why the administration pretends not to know.

According to documents from AIG, the bonuses are compensation owed to employees under Connecticut law. Under the Connecticut Wage Act, the company said, if the bonuses are not paid, AIG becomes liable for legal costs of employees who try to collect, as well as penalties that could equal twice the bonuses owed. AIG might also leave itself liable to shareholder suits.

Despite the show trial in Congress and the sense of public outrage, it would be unwise for the government to go back on the contracts and sue to recover the money, especially when they agreed to it in November. This could make America resemble Russia, where trumped-up charges are used to prosecute companies that fall out of favor with the ruling elite.

Members of Congress are also discussing emergency legislation to tax away part or all of the bonus. This would set a precedent—corrupting if not unlawful—of using the IRS and the tax code as weapons of the state to go after individuals whom the administration and Congress want to punish. Such sanctions might amount to ex post facto punishment, legislation that makes unlawful behavior that was lawful when it occurred. The Constitution prohibits such legislation. Even President Nixon, who had an enemies list, never dreamed of this.

The wave of public sentiment against the AIG bonuses presents the government with a choice. It can try to run companies that receive bailout funding in a way calculated to win public approval, micromanaging every detail. This is impossible, because the government cannot even manage its own federal agencies efficiently, with episodes of wasted resources surfacing regularly.

Better, the government should get out of the business of rescuing ailing companies. The bailouts have won little support among Americans. In a CBS poll published on March 16, 53 percent of Americans disapprove of the government giving money to banks and financial institutions even as a way to help the economy and only 37 percent approve.

When TARP began in early October, it was supposed to resolve the problems of the financial sector and avert an economic slump. In late September, President Bush warned that if a bailout bill did not pass: “More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. “

Even though TARP passed, 28 more banks have failed, the stock market has dropped by almost one-third, and median home prices have declined by 9 percent. It’s natural that Americans have become disillusioned.

The attack on AIG is being used by the administration and Congress to bolster sinking approval ratings and hide the failures to date of the $700 billion TARP and the $787 billion stimulus package, as well as their lavish future spending plans: the $275 billion housing bailout plan, the $634 billion health fund, and higher individual and carbon tax increases. The outrage would be put to better use abandoning bailouts altogether.

– Diana Furchtgott-Roth is a senior fellow at the Hudson Institute and former chief economist at the U.S. Department of Labor. The views expressed are her own. –

This week Treasury Secretary Tim Geithner unveiled a financial stabilization plan that could cost $2 trillion, in addition to the $790 billion that Congress plans to spend on economic stabilization. All this without any consultation with Congress.

That’s financial stability?

The Dow Jones Industrial average fell almost 400 points Tuesday on the news, and the Asian equity markets followed. This steep decline is symptomatic of the unease that permeates financial markets.

It’s not just the amount of money that is troubling. The markets were also distressed by a lack of detail, especially on how to deal with so-called toxic assets - loans with diminished and uncertain value. The previous Treasury secretary, Henry Paulson, proposed to buy toxic assets, then discovered the difficulties of pricing and so switched to purchases of banks’ preferred stock to infuse capital into the banks.

Geithner promised “to consult closely with Congress” as he moved forward, but Congress has not held hearings on implementing the program, even though it would leverage $1 trillion of Federal Reserve funds and close to that in private-sector funds. The public fears that the $2 trillion dollar bank bailout fund would be just throwing good money after bad.

Last October Congress allocated $700 billion to the Troubled Asset Relief Program. But TARP, with roughly half the funding disbursed, has not yet delivered on its promises. Then, on February 10, it was déjà vu all over again. Geithner declared, “Our plan will help restart the flow of credit, clean up and strengthen our banks, and provide critical aid for homeowners and for small businesses.” He didn’t say how long it would take - because no one knows.

The Geithner plan is another version of TARP, but with more bells and whistles. Banks with assets over $100 billion would be subject to an intensive audit, to measure their capabilities. A Public-Private Investment Fund would purchase troubled assets, although how private money is to be mobilized was unclear.

Carnegie Mellon economics professor Allan Meltzer disagrees with Geithner’s approach. He proposes to allow banks access to government funds only if they can first raise an equivalent sum on their own. If not, it’s off to bankruptcy court they must go, with their competitors free to snap up any worthwhile assets at bargain prices.

The idea behind TARP was not new. Similar programs had successfully been put in place in the Asian banking crisis of the late 1990s. A government agency, a so-called “bad bank,” would buy the toxic assets, paying for them with fresh capital so that the banks could continue to function.

By definition, if the government is purchasing distressed assets it is paying more than the “market price,” more than a private buyer would pay.

Geithner might be better off admitting that these assets will have to be purchased by the Treasury at prices higher than market, and then going to Congress and the American people to make his case. He could say that this will be expensive, but will allow banks to clear underperforming assets off their balance sheet, enabling banks to start lending again. With revived credit markets, the economy can grow.

The implicit reason for going beyond Congress is: “Trust us, we know what we are doing.” Yet Geithner undermined that message by stating that all of this is uncharted territory and that mistakes would certainly be made. Neither the message nor the messenger reassures financial markets. Quite the opposite.

Indeed, Geithner and the Administration may have done what the Democratic leaders, Senator Harry Reid and Speaker Nancy Pelosi have consistently failed to do - make Congress appear to be the last best hope for responsible government in Washington.

Diana Furchtgott-Roth, dfr@hudson.org, is a senior fellow at the Hudson Institute and former chief economist at the U.S. Department of Labor.