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The Lighthouse is the weekly email newsletter of the Independent Institute.
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Volume 16, Issue 47: November 25, 2014

  1. Why Government Regulations Target Businesses
  2. States Game Medicaid at Federal Taxpayers’ Expense
  3. The Case for Tax-Free E-Commerce
  4. Disconnecting Federal Telecom Subsidies Won’t Be Easy
  5. New Blog Posts
  6. Selected News Alerts


1) Why Government Regulations Target Businesses

Most government regulations—the overwhelming majority—are imposed not on individuals in their capacity as private citizens, but on business firms. To be sure, the individual consumer carries the burden of the regulations, but usually only indirectly, through having to pay higher prices, having a smaller quantity and variety of goods and services to choose from, or having lower-quality goods and services than would otherwise be the case. Why does government tend to target business firms more than individuals? Part of the answer, according to Independent Institute Senior Fellow John C. Goodman, has to do with the very reason for the existence of firms in the first place: to economize on transactions costs.

The above is an oversimplification, but a very useful and insightful one. Here’s why. The late Ronald Coase was awarded a Nobel prize in economics in part because of a paper he wrote in 1937 called “The Nature of the Firm.” In it, he explained that businesses add tremendously to the output of human labor because they facilitate production (including R&D and marketing) by bringing together so many steps under one roof, as it were, and thereby eliminating the need for workers and entrepreneurs to directly sell their wares to numerous others who specialize in a different stage in the production process.

Just as business firms make production more efficient, so from the standpoint of the government the targeting of businesses makes regulation more efficient: it allows government leaders to bypass having to fight off political opposition from hordes of consumers, consumers who would surely object if they were subjected to the regulations directly, but who don’t even notice when they bear the burden of regulations indirectly, via the businesses from which they purchase goods and to which they sell their labor. As Goodman writes, “Bottom line: if there were no firms, taxes would be much lower, there would be far fewer regulations, and government would be a much less important institution in our lives.”

The Reason for Big Government: The Firm, by John C. Goodman (Forbes, 11/12/14)

Healthcare Solutions for Post-Obamacare America, by John C. Goodman

Priceless: Curing the Healthcare Crisis, by John C. Goodman

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2) States Game Medicaid at Federal Taxpayers’ Expense

Governments are adept at seeking out subjects to exploit—including other governments. Case in point: A recent study from the Office of the Inspector General of the U.S. Department of Health and Human Services shows how state Medicaid programs have bamboozled the federal government. That shouldn’t be too surprising, given that states like California, New York, and Pennsylvania can easily determine that they get back far more from the federal government’s contributions to Medicaid then they spend on Medicaid themselves. Unfortunately, the trend will worsen under Obamacare’s Medicaid expansion, according to Independent Institute Senior Fellow John R. Graham.

“Obamacare’s newly eligible Medicaid dependents will bring in a lot more revenue to states than the current crop does,” Graham writes. “Newly eligible Medicaid beneficiaries will be fully financed by the federal government for 2014 through 2016. Then, it slides down until the federal government funds 90 percent of their costs starting in 2020, with the states footing 10 percent.... The new normal is that they will be able to get nine times their money! Their creativity will be truly unleashed, and Medicaid costs will increase significantly beyond what is currently estimated.”

Some states have resisted the temptation—but for how long? And how should reformers try to discourage states from gaming the system? “A reform in the right direction,” Graham continues, “would be to get rid of the federal match in favor of a block grant, based on a simple measurement of the population in each state, and precisely define a limited federal commitment.”

Medicaid Spending Has Exploded, and It Will Keep Rising Faster Than Expected, by John R. Graham (The Daily Caller, 11/12/14)

Medicaid’s Financing Merry-Go-Round, by John R. Graham (The Beacon, 8/5/14)

Healthcare Solutions for Post-Obamacare America, by John C. Goodman

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3) The Case for Tax-Free E-Commerce

Under federal law, state governments can’t collect sales taxes on goods sold over the Internet to out-of-state customers. That moratorium, first enacted in 1998, is set to expire on December 11 unless Congress passes the Permanent Internet Tax Freedom Act. The House passed the bill last summer, but it faces stiff opposition from Senate Majority Leader Harry Reid (D-NV) and others, who claim that the ban is unfair to traditional sellers. But as Independent Institute Research Fellow William F. Shughart II notes, the claim that online sellers have a decisive advantage is just plain wrong.

For starters, unlike e-commerce customers, shoppers at traditional stores can typically touch and inspect the products they’re considering buying. That’s a huge advantage for many brick-and-mortar stores. Moreover, traditional stores don’t have the extra shipping and handling costs that e-commerce vendors face. But as important as those differences are, according to Shughart there is a more fundamental reason to continue the out-of-state sales tax moratorium: by withholding a source of revenue for state governments—as much as $23 billion annually for some—the exemption puts a damper on the growth of government.

“Eliminate the exclusion and you give state lawmakers a green light to increase these rates, making everyone poorer and transferring more money from the private sector to the already bloated and inefficient public sector,” Shughart writes. “Lifting the internet sales tax moratorium is a recipe for bigger, more intrusive state governments.”

Harry Reid’s Tax-Raising Ploy Is a Political Bamboozle, by William F. Shughart II (Chicago Tribune, The Fresno Bee, McClatchy-Tribune News Service, 11/13/14)

Taxing Choice: The Predatory Politics of Fiscal Discrimination, edited by William F. Shughart II

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4) Disconnecting Federal Telecom Subsidies Won’t Be Easy

Lifeline, a government program that subsidizes phone service for low-income Americans, has long been at the center of controversy. Its defenders say it provides the poor with essential services, including for emergency calls, whereas critics say it’s wasteful and unnecessary (in part because other laws ensure that phone companies don’t charge for emergency calls). Federal legislation to reform the program is pending in Congress, but according to Independent Institute Research Fellow Abigail R. Hall, that effort may fail.

Although the Federal Communications Commission reported last year that up to 2 million Lifeline “subscribers” were violating the program’s eligibility requirements, a well-heeled lobbying campaign to preserve the program may well succeed. That shouldn’t be surprising when one considers the special interests that benefit from the program, Hall explains. In 2011, for example, Sprint and AT&T earned $275 million each from Lifeline; the program generated even more money that year for a less famous competitor, Tracfone—a whopping $452 million. Don’t expect these telecom giants to sit quietly while their cash cow is under attack.

Moreover, although policymakers have proposed ways to reduce fraud in the program—including capping expenditures and requiring a modest monthly users’ fee—such half-way measures are insufficient. “Although these suggestions may help to some degree,” Hall writes, “they won’t solve the underlying problem with the program: When something is seen as ‘free’ it becomes addictive. This is not unique to Lifeline. It’s one of the fundamental problems with the welfare state and the real problem the new Congress will need to confront.”

Time to Hang Up on Uncle Sam’s Addictive Phone Plan, by Abigail R. Hall (The Fresno Bee, McClatchy-Tribune News Service, 11/12/14)

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5) New Blog Posts

From The Beacon:

From MyGovCost News & Blog:

Government Regulatory Surge Will Neuter Internet
K. Lloyd Billingsley (11/24/14)

Entitlements Squeezing Out Everything Else
Craig Eyermann (11/21/14)

Government Wings It on Waste
K. Lloyd Billingsley (11/19/14)

How Generous Are Military Benefits?
Craig Eyermann (11/18/14)

You can find the Independent Institute’s Spanish-language website here and blog here.

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6) Selected News Alerts

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