November 30, 2015 4:25PM

The U.S.-Taiwan Relationship Needs a Change

Senators Benjamin L. Cardin and John McCain will soon get their wish for a U.S. arms sale to Taiwan. Last Wednesday, Josh Rogin of Bloomberg View reported that the Obama administration will formally announce a $1 billion arms sale in December. Congress has not been notified of a new arms sale to Taiwan in four years.

The changing balance of power in the Taiwan Strait warrants a serious examination of the existing U.S.-Taiwan security relationship, which is held up by two pillars: a U.S. commitment to sell “defensive” arms to Taiwan; and the pledge to take “appropriate action” in response to any “threat to the security…of the people on Taiwan.”

The arms sales and vague security pledge have contributed to peace in the Taiwan Strait, but the status quo may not last much longer. A recent RAND report concluded that China is catching up to the United States’ military capabilities to defend Taiwan. America could absorb the rising cost of defending Taiwan, but the reunification of Taiwan and mainland China is a core interest of the Chinese government. Since China has more at stake, it has an incentive to keep raising the costs of confrontation until the United States is no longer willing to absorb them.  

This argues for dropping Washington’s pledge to come to Taiwan’s aid. Supporters of the pledge worry about the message that a reduced commitment would send to allies in East Asia. But there is a significant difference between a formal security commitment defined in a treaty, and an informal one like America’s to Taiwan.

Washington’s formal treaty commitments in East Asia (Japan, South Korea, and the Philippines) are more clearly stated and some are supported by forward-deployed U.S. forces. Failing to come to the aid of a formal treaty ally would be a significant blow to U.S. credibility, but Taiwan does not enjoy such status.

However, arms sales to Taiwan should continue for several reasons. First, the arms sales have not significantly damaged U.S.-China relations. Second, ending both arms sales and the pledge would be unnecessarily disruptive. Third, the United States still has a legitimate interest in a peaceful resolution of the cross-strait dispute, but defending Taiwan’s quasi independent status through military intervention against a nuclear-armed and conventionally powerful China would have high costs for limited benefits. Moreover, the costs of intervention would likely increase over time, while the benefits would remain flat.  

Future arms sales should emphasize weapons systems that allow Taiwan to mount an effective asymmetric challenge to Chinese forces. The United States should also make future arms sales contingent on Taiwan’s investment in indigenously-produced capabilities and increased military spending independent of spending on U.S. arms. Ending the already vague pledge to come to Taiwan’s defense while continuing arms sales is a low-cost policy that reduces the probability of a U.S.-China war over Taiwan while preserving Taiwan’s ability to defend itself.

November 30, 2015 1:56PM

Honoring the Man Who Prevented the Second Korean War

Former president Kim Young-sam was laid to rest in Seoul. Kim long battled against military rule. In 1992 he was elected president.

His reputation suffered when the Republic of Korea was engulfed by the Asian economic crisis. But Kim may have prevented the Second Korean War.

Early during Kim’s tenure the first nuclear crisis exploded. The so-called Democratic People’s Republic of Korea had embarked on a nuclear program, centered at Yongbyon.

President Bill Clinton, Secretary of Defense William Perry, and Assistant Secretary of Defense Ashton Carter, the current Pentagon chief, decided to strike. War was a truly mad idea.

Carter and Perry later explained that they had “readied plans for striking at North Korea’s nuclear facilities and for mobilizing hundreds of thousands of American troops for the war that probably would have followed.” Nevertheless, they expected to limit deaths to “thousands of U.S. troops and tens of thousands of South Korean troops” due to the allies’ overwhelming military superiority.

However, the two underplayed likely civilian casualties. With mass artillery dug in along the Demilitarized Zone, abundant Scud missiles available for attack, and mass armor poised only a few miles north of Seoul, the casualties and destruction could be enormous. Nuclear radiation also would threaten.

Perhaps most extraordinary, the Clinton administration planned for war without involving Seoul. When informed, Kim argued with Clinton, causing the latter to relent, but only temporarily. Former President Jimmy Carter then visited the North, transmitting Kim Il-sung’s offer to negotiate.

Ashton Carter continued to propose war against the DPRK. In 2002 Carter and Perry coauthored an article for the Washington Post: “Today, just as in 1994, a conventional war would be incredibly dangerous, but not as dangerous as allowing North Korea to proceed with this new [uranium] program,” they wrote. Thus, “North Korea now needs to proceed with the understanding that the United States would not tolerate a North Korean program to build nuclear weapons.”

In 2006 the two were at it again. This time they were worried about the North’s planned missile test. They wrote: “the United States should immediately make clear its intention to strike and destroy the North Korean Taepodong missile before it can be launched.” If the DPRK retaliated, no worries: the U.S. could bolster its forces.

Obviously, it is undesirable for Pyongyang to possess nuclear weapons or missiles. However, while the North’s Kim dynasty gives no evidence of being suicidal. Preserving the peace should be the number one objective on the peninsula given the costs of a Korean War rerun.

Which Kim well understood.

One problem with well-reasoned military proposals counting on the North’s rational restraint is that Pyongyang would be extremely foolish to rely on any assurances. After all, the U.S. has routinely imposed regime change.

Those who know best doubt Pyongyang’s forbearance. A North Korean defector said the military was determined to take the initiative in any war. Gen. Gary Luck, former U.S. commander in Korea, opined: “If we pull an Osirak, they will be coming south.”

The second problem is that the DPRK may well choose a limited military option commensurate with the U.S. attack. An hour long bombardment of Seoul, for instance, accompanied by the demand to expel U.S. forces. What then? It isn’t clear whether the South Korean public would be angrier with North Korea or the U.S.

U.S. war proposals are especially foolish since North Korean threats against the South as well as Japan are not threats against America. Indeed, Washington is of interest to the DPRK mostly because the former has unnecessarily intruded in a struggle between the two Koreas. Given the South’s extraordinary advantages—40 times the GDP, twice the population—there’s no reason for Washington to stay, let alone plot new wars.

As I wrote in Forbes: “Kim was political hero, but his most important legacy probably was preserving peace. Thousands, at least, and perhaps many more South Koreans and Americans have him to thank for their lives. Kim Young-sam, rest in peace.”

November 30, 2015 1:55PM

Turkey Downs Russian Plane, Shows Is No Friend of West

Turkey’s rash decision to shoot down a Russian plane for allegedly violating its airspace isn’t likely to trigger World War III. But Ankara demonstrated that it stands with the Islamic State and against the West.

The Obama administration’s war against ISIL is turning into another interminable conflict that serves the interests of other nations far more than America. U.S. policy has been impossibly incoherent.

While Russia’s September entry into the war outraged Washington, Moscow showed clarity and realism. Russia simply sought to bolster Syria’s President Bashar al-Assad against insurgents dominated by radical Islamists. Ironically, this approach is far more likely than the administration’s confused policy to advance America’s core interests.

However, Turkish President Recep Tayyip Erdogan played the fool when his military downed a Russian aircraft for allegedly violating his nation’s airspace. It’s not enough to “discourage any escalation,” as President Barack Obama insisted. Washington should drop the alliance relationship.

Turkey is a growing threat to Western interests and values. Ankara never has been a true friend of the West. Turkey was a useful ally during the Cold War, though it always seemed readier to go to war with Greece than the Soviet Union.

President Erdogan and his Justice and Development Party (AKP) came to power in 2002. Initially then-Prime Minister Erdogan played the liberator. But he eventually gained control of the police and judiciary; conducted multiple mass conspiracy trials; and attacked independent journalists, opposition politicians, and business critics.

President Erdogan also is moving Turkey in a more Islamist direction. Worse, his government has aided the Islamic State. Despite agreeing to assist Washington, the Erdogan government appears to have played the U.S., directing most of Turkey’s fire against America’s Kurdish allies.

Shooting down the Russian aircraft was even more irresponsible. Ankara knew that no attack on Turkish forces was planned. Downing the plane was a direct attack on Moscow for supporting the Assad government.

Turkey demonstrates that NATO is a bad deal for America. Military alliances should serve U.S. interests. But any existential threat against Turkey ended along with the Cold War.

At the same time, the shared interests between Turkey and the West dissipated. The alliance should not be responsible for defending Ankara as the latter promotes Islamist radicals and, even worse, commits a gratuitous act of war seemingly designed only to provoke Moscow.

Indeed, Turkey is merely the latest example of alliance members seeking to drag the U.S. into conflicts of no interest to America. Britain and France largely orchestrated the Libya war, in which Washington helped deconstruct yet another Muslim country without purpose.

Moscow is a better and more reliable partner than Turkey for America in the Middle East. Vladimir Putin is a nasty character. At home he has suppressed the civil liberties and political freedoms Americans value. But President Erdogan differs little from President Putin in this regard.

Where Presidents Putin and Erdogan dramatically diverge is their policies toward radical Islamists. As noted earlier, Ankara has consistently backed the murderous jihadists of most concern to America.

In contrast, as I point out on Forbes online: “in the Middle East U.S. and Russian interests broadly coincide. Exactly why the U.S. feels duty-bound to oust Assad isn’t clear. Both Iraq and Libya dramatically demonstrated that it’s not enough to get rid of the bad guy. You need a good guy as successor. Washington has none in Syria.”

In fact, American policy in the Mideast has failed catastrophically. Yet the Obama administration is committed to doing more of the same in the forlorn hope of achieving a different result.

Cooperating with Russia doesn’t require befriending President Putin. Rather the two governments simply should work together when doing so serves both nations’ interests. That’s more than occurs with Turkey today.

Washington should abandon outdated alliances and stop covering for Ankara. Russia may not be an ally, but at least it is friendlier and less dangerous than Turkey today.

November 30, 2015 1:36PM

Everything You Need to Know about Deductions, Loopholes, and Special‐​Interest Tax Provisions

Why does the tax code require more than 10,000,000 words and more than 75,000 pages?

There are several reasons and none of them are good. But if you had to pick one cause for all the mess, it would be the fact that politicians have worked with interest groups and lobbyists to create myriad deductions, credits, exclusions, preferences, exemptions, and other loopholes.

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This is a great deal for the lobbyists, who get big fees. It's a great scam for politicians, who get lots of contributions. And it's a great outcome for interest groups, who benefit from back-door industrial policy that distorts the economy.

But it's not great for the American people or the American economy.

Writing for Reason, Veronique de Rugy of the Mercatus Center explains that the net result is a Byzantine tax code that imposes very harsh compliance costs on the productive sector.

According to a 2012 study from the Internal Revenue Service (IRS) and the Treasury Department, ...corporations alone spent $104 billion complying with the tax code in 2012. ...The cost to individuals may be even higher. According to a 2013 study by Jason Fichtner and Jacob Feldman of the Mercatus Center, Americans face nearly $1 trillion annually in hidden tax-compliance costs. ...Why does tax compliance cost so much? The answer is largely that the Internal Revenue Code...is riddled with exclusions, exemptions, deductions, preferential rates, and credits.

And she also points to a solution.

Genuine reform would cut out loopholes that tilt the playing field in favor of those with political connections. It would also aim to provide lower tax rates, fewer tax brackets, and less double taxation of income that is saved and invested. Such measures would be good for growth, but they would also mean taking on the interest groups that benefit from swapping tax preferences for campaign cash.

Since I want to rip up the tax code and replace it with a simple and fair flat tax, this is music to my ears.

Of course, achieving genuine tax reform won't be easy.

There's the obvious political obstacle since all the groups that benefit from the current system (politicians, lobbyists, bureaucrats, cronyists, interest groups, and other insiders) will fiercely resist reform.

There's also a policy obstacle because many people oppose loopholes in theory but they haven't paid sufficient attention to the nuts-and-bolts details.

With that in mind, let's set out a set of guiding principles for the elimination of tax loopholes and the creation of a neutral tax system.

1. A loophole exists when income isn't taxed - In libertarian Nirvana, the central government is so small that there's no need for an income tax. Until we get to that point, though, we're stuck with the internal revenue code and the goal should be to collect revenue (hopefully a modest amount) in a way that minimizes the economic damage per dollar collected. And that means a tax code that doesn't have loopholes, which are best defined as provisions that enable people to avoid any tax based on how they earn income or how they spend income. In a neutral system, all income is taxed one time.

2. The economy performs better without a loophole-riddled tax code - Most people understand that high tax rates are bad for growth because they penalize people for earning income. They also generally understand that double taxation of saving and investment is bad for growth because it creates a bias against capital formation. But there's not nearly enough appreciation of the fact that loopholes in the code are bad for growth since they are a back-door form of industrial policy that exist for the purpose of incentivizing people to make decisions on the basis of tax rather than on the basis of what makes economic sense. A neutral tax system means less economic damage.

3. It's not a loophole to protect income from double taxation or to require income to be measured correctly - The bad news is that the current system forces taxpayers to overstate their income and it also imposes

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multiple layers of tax on income that is saved and invested. The good news is that there are provisions in the tax code - such as IRAs, 401(k)s, deferral, bonus depreciation - that seek to mitigate these biases. These parts of the system oftentimes are needlessly complex and they frequently will alleviate penalties in a discriminatory manner, but they are not loopholes. In a neutral system, all income is taxed only one time.

4. Loopholes should be eliminated as part of a plan to lower tax rates, not in order to give politicians more money - If loopholes are a corrupt and distorting dark cloud, the silver lining to that cloud is that all the special favors in the tax code deprive the government of tax revenue. Even the most egregious of loopholes, such as ethanol, have this redeeming feature. This is why loopholes should only be eliminated as part of an overall tax reform plan that also lowers tax rates and reduces double taxation. A neutral tax system shouldn't enable bigger government.

There are some important implications that follow from these four guiding principles.

As a practical matter, we can now identify provisions in the tax code that are clearly loopholes, such as the healthcare exclusion, the municipal bond exemption, and the state and local tax deduction (the mortgage interest deduction is misguided, but isn't technically a loophole since one of the goals of tax reform is to give business investment the same tax-income-only-one-time treatment now reserved for residential real estate).

We also know that the capital gains tax rate isn't a "preferential" loophole, but instead is the mitigation of a penalty that shouldn't exist. Similarly, it's not a loophole when companies deduct expenses when calculating income. And you're not getting some sort of handout simply because Uncle Sam isn't imposing double taxation on your retirement account. At the risk of repeating myself, all income should be taxed in a neutral system, but only one time.

Let's close by looking at a few secondary - but still important - implications of a neutral tax code.

First, getting rid of loopholes won't put a burden on poor and middle-income taxpayers for the simple reason that an overwhelming share of the benefits of these provisions go to high-income taxpayers.

I've already shown how the vast majority of charitable deductions are taken by those making more than $200,000 per year.

Charity JCT

The same is true for the state and local tax deduction and the healthcare exclusion.

And the Washington Post just editorialized that the home mortgage interest deduction is a boon for rich taxpayers as well.

The mortgage interest deduction is also a significant cause of after-tax income inequality: The top 20 percent of earners get 75 percent of the benefits; the top 1 percent get 15 percent, according to the Congressional Budget Office. ...Specifically, 10 metropolitan “hot spot” counties (among them Los Angeles in California and Fairfax in Virginia) with the greatest number of mortgages larger than $500,000 accounted for 45.1 percent of all such mortgages nationally. Just eight California urban and suburban counties accounted for 40 percent of the national total. Outside of such tony coastal precincts, the only big-mortgage hot spots were resort destinations such as Martha’s Vineyard, Mass., and Vail, Colo. — where many homes are vacation places, not primary residences.

To be sure, the Post is misguided in that it wants to restrict tax preferences in order to finance a larger burden of government spending.

So I'm not expecting the editors to join a coalition for pro-growth tax reform.

The second implication is that a neutral tax system means less corruption.

To cite one example, consider the oleaginous way that politicians deal with so-called tax extenders. Marc Short and Andy Koenig explain in a column they wrote for the New York Times.

Congress will soon take up the so-called tax extenders package, which has more than 50 tax breaks affecting a variety of industries and issues. ...this bill mostly helps the wealthy and the well connected.

The fact that rich insiders benefit is no surprise, but what makes "tax extenders" so odious is that what began in 1988 as a supposedly one-time fix now has become a regular part of the process, a scam that gives lobbyists and politicians a way of generating fees and contributions.

The first tax-extender package...opened a door that lobbyists and lawmakers were all too willing to run through. ...A 2014 analysis by Americans for Tax Fairness found that more than one out of every 10 lobbyists in Washington focused specifically on the extenders package. Given that this bill comes up about every year or two, special interests constantly have the opportunity to demand new handouts.

By the way, some of the extenders actually are good policy. They're in the mitigation-of-penalties category I discussed above.

But those good provisions should be made permanent and the bad provisions should be jettisoned.

Unfortunately, that's not in the interests of the politicians and lobbyists who benefit from an annual extender package, so the problem doubtlessly will fester.

Last but not least, let's consider the moral component.

For those of us who believe in justice, it is ethically offensive that some rich and powerful taxpayer get better treatment simply because they know how to manipulate the political process.

This violates the important principle that the law should treat everyone alike. Yet another reason to have a simple and fair flat tax.

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P.S. At the risk of being a nit-picker about my own writing, I should confess that a flat tax is not a purely neutral tax system. There will still be a penalty on earning income. But the penalty presumably will be modest if there is a low rate and that penalty won't be exacerbated by penalties and loopholes that distort how people earn income and spend income.

P.P.S. Here, in one image, is all you really need to know about the economics of taxation.

November 30, 2015 11:33AM

Some Post‐​Thanksgiving Reasons To Be Thankful

In this post-Thanksgiving atmosphere, here is another installment in Human Progress’s series of posts on incremental (and sometimes revolutionary) ways in which our world is becoming a better place. This week we look at anti-aging drugs, falling maternal mortality deaths and death rates, prosthetic hands with a sense of touch and a potential breakthrough in air travel. 

British Company to ‘Transform’ Air and Space Travel with Pioneering New Engine Design 

BAE Systems has recently bought a minority stake of a small technology company called Reaction Engine. The support of BAE will allow Reaction Engine to continue working on its breakthrough engine, known as Sabre. This versatile engine can be used for both air and space travel, reaching up to five times the speed of sound for air travel and twenty-five times the speed of sound for space travel. Using these high rates of speed, it could be possible to fly anywhere in the world in four hours within the next ten to fifteen years. Reaction Engine hopes that the first Sabre engine will be tested within the decade. 

World’s First Anti-Aging Drug Could See Humans Live to 120 

The aging process is not inevitable. Our cells contain a DNA blueprint that can, theoretically, keep our bodies functioning forever. However, overtime our cells divide rapidly, leading to an increased likelihood of “errors” occurring. These “errors” cause diseases like cancer and dementia. Recently, the FDA approved a human trial for a drug called Metformin, which has been proven to increase the lifespan of animals. The trial contains around 3,000 people who are between the ages of 70 and 80. If similar results occur with humans as with animals, the human lifespan could increase by up to 50 percent. 

Maternal Mortality Falls by Almost 50% - UN Report 

The United Nations has been monitoring maternal mortality, which is defined as the number of mothers who die during pregnancy or shortly thereafter, for a number of decades. According to a recent report, global maternal mortality has dropped from 532,000 deaths in 1990 to 303,000 in 2015. That’s a reduction of 44 percent. Eastern Asia made the most substantial progress, with maternal mortality rates dropping from 95 deaths for every 100,000 live births to 27. Maternal mortality, once ubiquitous throughout the world, is now almost exclusively (99 percent) found in poor countries. Once again, economic development and income growth are the keys to further progress. 

A Prosthetic Hand that Can Feel 

Researchers at Case Western Reserve University have recently created a prosthetic hand that allows the patient to not only grip objects more accurately, but also enjoy a sense of touch. The technology works by creating a connection between the artificial hand and the brain. When the prosthetic hand senses pressure, it sends a neural code to the brain through an artificial pathway. Igor Spetic, who lost his hand about five years ago due to a workplace accident, is one of the first patients to receive the artificial hand. Because of his newly acquired treatment, Igor is now able to cut up fruits and vegetables, confidently grip cups, and open bags and containers. Researchers are currently developing a wireless version of this technology, which they hope to have finished within the next five years.

November 30, 2015 9:50AM

AZ School Officials Oppose Higher Public School Spending

What might explain this unusual turn of events?

Allow the WSJ to explain: Arizona governor Doug Ducey has come up with a plan to spend $2 billion more on public schools over the next decade--without raising taxes. According to his plan, the money would go directly into the classroom, rather than though the public school bureacracy's normal funding process.That's a big deal in Arizona, which spends a smaller portion of its education budget in the classroom (54%) than is typical of other states (61%).

The [negative]reaction to Ducey's plan seems to be spearheaded by Michael Cowan, the superintendent of Mesa Public Schools, Arizona’s largest district,who launched an email and robocall campaign to turn parents against the proposal.Why? Well, naturally: "for the children." How preventing an increase in classroom spending might help children may not be obvious to everyone,so the WSJ helpfully offers an alternative explanation for district officials' opposition: "Mr. Ducey’s plan disrupted the usual coalition of teachers unions and public school districts, leading some in the K-12 establishment—those administrators and union officials who have a way of soaking up dollars while doing little for students—to take the unfamiliar position of objecting to new education funding." either that, or, somehow(?), "it's for the children."™

If only there were a system for organizing economic activity under which revenues are most easily raised by better-serving one's customers or by attracting additional ones. And if only that system had been shown to work in education  just as in other fields.

November 25, 2015 3:12PM

How about This for Dealing with Politically Obtuse Relatives?: Just Say “Let’s Stop Trying to Control Each Other”

Every holiday season, pundits and politicians of all stripes weigh in on how to talk to family members who disagree with you. The Democratic National Committee even runs a website, YourRepublicanUncle.com, which gives useful talking points for your red-state benighted family members. Here’s a different strategy for the holidays: Just say, “let’s stop trying to control each other.”

Here’s how it works:

- “These Republicans, they don’t know anything about how to run a health care program. I think they want people to just die, especially people who vote Democrat. People need low-deductible plans with broad catastrophic coverage and full coverage for all basic daily needs. Just read the studies.”

- “Okay Uncle Kevin, you might be right. Or, alternatively, we could stop trying to control each other and forcing others who disagree to comply just because they’re on the wrong side of 50.01 percent of the population. That’s inevitably going to create strife. Just think about how you would feel when you’re on the losing side of an election.”

- “These Democrats think they know everything. Whatever happened to the family? Whatever happened to good schools that teach good values? A school system that taught family, responsibility, and, yes, even religion would go way further toward solving this country’s problems than anything a Democrat has proposed in 50 years.”

- “Okay Aunt Jane, you might be right. But what if you’re wrong? What if you get your school plan passed, across the whole nation even, and it ends up that your curriculum doesn’t help, especially for families with different needs and goals? Then what? Well, then you’ve subjected the entire nation to your errors, and getting rid of those errors is going to be costly and painful. Alternatively, you could stop trying to control other people simply because your side is temporarily on the right side of an election. You wouldn’t want someone to do that to your kids, right?”

It’s all quite simple, seemingly deceptively so. One of the biggest virtues of limited government is that it places less emphasis on who happens to win a given election because fewer monumental things are at stake. And if we stop trying to control each other, it’s much easier to be friends with your political opponents. Politics makes us worse, and the more it matters the worse it makes us—in fact, it makes us primitive. Few people are at each other’s throats because of a difference of opinion about where the roads should go.

When we start saying “let’s stop trying to control each other,” we also eliminate the need to have public debates over private values. We don’t have a public political debate over Taylor Swift vs. Beethoven because no one is trying to force others to listen. That may seem like a ridiculous example, but that question is not too different from “what’s the best healthcare plan to have?” How can that question be answered when so many competing values and life goals are inexorably in the mix?

In Exit, Voice, and Loyalty, A.O. Hirschmann pointed out that there is a tension between exit and voice. With exit, you can vote with your feet, your dollar, or your radio dial. You don’t need to rise up and “make your voice heard” and deal with all the attendant problems of special interests and democratic mobilization. Instead, you just walk out the door. Markets work because of the right of exit, and politics often doesn’t work because it is so limited in how it can solve collective-action problems.

So many Americans are concerned with how “Washington isn’t listening to them,” and candidates like Bernie Sanders, Donald Trump, and Ben Carson are stoking that outrage. But maybe Washington isn’t listening because it is so big that only mobilized special interests have the resources and incentives to pay attention. Maybe big government will never really pay attention to the people. If this is so, then maybe people should stop trying to control each other so much.

So, the next time Uncle Kevin or Aunt Jane open their big mouths to opine about “how things should be,” maybe you should just suggest that 50.01 percent of the table should fill the plates of the minority. Maybe they’ll get the point.