The Power and the Money

Trump’s executive orders are not unconstitutional but they are a sign that the Constitution is breaking

Did Donald Trump just repeal Article 1 of the constitution on Saturday? After looking at the details, I published a hot take on Twitter that seems to be standing up to the test of time. So my short answer: no.

Longer answer: No, but it’s worrying.

Longest answer:

The president’s executive order postpones payroll tax collection until next year under Section 7508A of the Internal Revenue Code, which allows for tax collections to be postponed for the victims of natural disasters. But since this is Trump, there are several problems. Section 3101 of the IRC puts payroll taxes on individuals, who get relief. But employers are still responsible for collecting the tax under Section 3102(b).

So why would businesses would want to stop collecting the tax? After all, there’s a big chance that they’ll be responsible for the uncollected sums come January 2021. And the uncollected funds will go to their employees, not to them. They’d have to claw back that money somehow, or take a double hit, paying out today’s payroll taxes to employees in the form of wages and then paying them again to the federal government.

In other words, it’s a mess! But it’s not an unconstitutional mess.

The unemployment insurance is a different wrinkle. What the President aims to do here is redirect $44 billion of the $70 billion in FEMA’s Disaster Relief Fund to the Federal Additional Unemployment Compensation Program. It’s not clear that he can do this, but I suspect that the courts will allow it. After all, a pandemic certainly qualifies as a natural disaster. Paying it through unemployment insurance is, well, unorthodox, but SCOTUS has been pretty lenient so far with this sort of thing.

That won’t last long. Here’s a back-of-the-envelope calculation. In June, the Feds spent $80.4 billion on unemployment insurance for roughly 17.6 million unemployed people. So, figuring that outlays go down by 33% 50% (from $600 to $400 $300, with the states picking up $100) and the number of unemployed falls another 10%, then the DRF will be exhausted on September 5th September 16th.

Of course, there’s another problem, which is that the states have to kick in roughly $15 billion in order to enable the feds to spend that $44 billion. The President is talking about waiving that, but there he really doesn’t seem to have any statutory authority, no matter how tenuous.

In other words, it’s a bad policy (why cut benefits at all?) that relies on a benign hurricane season (good luck with that) and dumps us right back into the soup next month. But it’s not clearly unconstitutional. This is not the John Yoo strategy, not yet.

Still, it’s worrisome. First, it’s worrisome that the executive felt no need to compromise with the legislature. Second, it’s worrisome that they’d break a bunch of norms to get leverage in negotiations. It adds more weight to Juan Linz’s argument about the dangers of a presidential system. (President Obama’s DACA and DAPA orders can be interpreted in the same light.) And third, it’s worrisome that Congress is looking increasingly unable to check the president.

The failure modes are piling up.

The problem with Chile

Even with the República Argentina on the verge of an historic election, the riots and subsequent demonstrations in Chile have attracted a lot of attention. Below is a much smaller sympathy demonstration getting started in Buenos Aires, organized by the Frente de Izquierda.

Argentines look upon their neighbor to the west with a mixture of contempt and envy. Contempt, because there is a strain of “Why is that place even a country?” You don’t quite get the spontaneous outbursts that Uruguay attracts — random people in restaurants and bars will tell you, unprompted, “That’s a province of Argentina, you know” if you mention having visited Uruguay — but Chile can ignite the same feeling in some Argentines. (They know who they are.) Envy, because that historical accident to the west has become richer than Argentina and a putative “developed” nation while Argentina remains in its malaise.

So there is schadenfreude in excess on this side of the Andes.

That said, it is worth noting that the problem with Chile is simple: taxes and spending. Chile has some nice statistics about this. The Chilean personal income tax system is moderately progressive, although note that the country collects more from the regressive VAT than from progressive income taxes. Still, the bottom 76% of tax units in 2016 earned an average income of US$3,875 and paid nothing.

But look at that household income number! It is not a misprint. It is substantially lower (in nominal terms) than in Mexico. The Chilean state is /much/ more powerful than the Mexican state. So the country appears orderly, even in small impoverished villages and the outskirts of large cities. That gives an impression of prosperity that even places like Monterrey don’t have.

But it is a false impression. In median terms (not average) Mexico is more prosperous. And not by a little, either.

Getting back to Chile, the top 0.43% of tax units in 2016 earned an average income of US$210,236 and paid an average rate of 28%. So what did the government do? Cut the marginal tax rate from 40% to 35%! And this was under President Bachelet, a socialist.

To be fair to Bachelet, the net impact of her reform was to reduce income inequality. The share of national income going to the top 1% dropped from 16.6% to 15.5%. (See page 7 at the above link, a World Bank report entitled “Efectos Distributivos de la Reforma Tributaria de 2014.”) But that was due to a change in corporate and business taxes. Dropping personal rates was a political compromise, but in the words of my friend Gónzalo Monroy, “In the short term, it is about sending the right signal to diffuse social tensions.”

In other words, the government should not have made that political compromise at all. Leave the top tax rate at 40% and raise business taxes. That sends the right signal to diffuse social tensions. In fact, the top rate should be raised to 50%. Raising the tax take on the top 0.43% by another ten points would net the government only US$854 million per year. But the income isn’t the point. Fairness is the point. These are people who have done very well by the Chilean Republic. They can shoulder more.

And considering Chile’s recent economic history, they damn well should shoulder more! Leticia Abad (CUNY) and Peter Lindert (UC-Davis) have tracked the net impact of fiscal transfers across Latin America. Below are their results from Chile between 1965 and 2013.

Look at the numbers! The dictatorship was astonishingly regressive. They rich not only captured most of the benefits from economic growth, they got the tax system to transfer to them even more. But even under democracy, the bottom quintile only became net recipients from the fiscal system in 2005.

And they have benefited little since, with the lion’s share of net transfers going to the upper middle class, those between the 60th percentile and 80th percentile of the income distribution. Chilean democracy is a system to transfer wealth from the rich to the upper middle class. 

Do I think that raising taxes on wealthy Chileans would solve the social problem? Not in the long run. As Leticia Abad says, spending matters.

But in the short run, well, yeah, I kinda do think that raising taxes would go a long way towards cooling social tensions.

Which begs the question of why smart Chilean politicians don’t have the same impression that I do? Either I’m missing something, or Chilean politicians are really bad at politics. Help?

Outside the box #2 for Venezuela: An oil-for-food program?

Foreigners (including Venezuelans in el extranjero) want to find an international response to Venezuela’s descent into dictatorship that won’t kill children. We aren’t yet in a situation where inaction will lead to the deaths of even more children. Which means that a lot of people want to find something new. 

Julian Adams has such a suggestion: imposing an oil-for-food program on Venezuela. Under Oil-for-Food, created in 1995, the the U.N. permitted Iraqi oil exports under its control. Payments for Iraqi oil went to the U.N. and could only be spent on U.N.-approved imports. The idea was to prevent the Iraqi government from being able to finance its war machine without starving the Iraqi people. In the Venezuelan case, the idea would be to prevent the Venezuelan government from distributing oil largesse to its cronies without starving the Venezuelan people.

One problem is that the U.N. is not about to impose such sanctions. Adams points out that most Venezuelan exports go to the United States and India, but he is not quite right that there is no capacity to refine Venezuelan crude elsewhere. In point of fact, Venezuela could find alternative markets, albeit at a large discount. If the regime really believed that oil-for-food threatened its control, then it would find those markets.  

Second,  Iraq managed to collect illegal surcharges on the export of its oil. These surcharges were not that large: Yujin Jeong (American) and Robert Weiner (GWU) found that they came to about 0.8% of the total value of oil exports. Iraq had to discount its oil by 11%, so the surcharges did not match the losses, but they earned Saddam Hussein an additional $91 million per year in 2000-02. The equivalent number for Venezuela would be about $135 million per year.*

But the real problem is that the Venezuelan state would continue to control the internal distribution of food and medicine. That would provide a massive source of largess to distribute. Imports could be given to middlemen and sold on the black market. That might be slightly less efficient that the current way the government redistributes its export income, but when was the Bolivarian Republic ever about efficiency?

It is a very neat idea, but I do not see how it could work. Is there something I am missing?

Don’t be too harsh on Trinidad; the U.S. is not doing much better

It’s tempting to dump on Trinidad for undergoing a resource boom that failed (AFAWK) to lift median incomes by any substantive amount. Nor did that boom go into an impressive increase in public infrastructure. In fact, most of what you can say about it is that it left the nation better-housed and with more cars.

Which does not really look all that different than the United States over the past four decades of economic growth:

In fact, there is some evidence that Trinidad has managed to reduce poverty substantially. As I mentioned, the shantytowns have disappeared. A more detailed study by Karl Theodore and Ewan Scott and the University of the West Indies shows poverty falling from 29% in 1997 to 23% in 2005 and 18% in 2008. (They checked their estimates using data from the Survey of Living Conditions, which showed a drop from 24% to 17% in 1997-2005.) The drop is due, in large part, to subsidies provided by the state: a household with two working adults and three children that earned less than TT$18,000 a year (poverty is defined as TT$9,780) would qualify for a bit more than TT$43,000 in subsidies. (The full paper is here.)

My son redistributed some wealth by winning at dominoes (somehow he won half the matches!) but that was regressive.

Trinidadian governments, in fact, have not done a terrible job of insuring that the poorest of the poor share in the boom, even if they have failed its middle class. And in that it does not look all that different from the United States under the Obama administration, despite the corruption and mismanagement.

So there is a case for not judging to harshly.

But judging harshly, of course, is what I fully intend to do as these posts continue! Any thoughts or requests for more information about T&T?