The Cronyism Grown Into U.S. Food Aid

America is a generous country. Taxpayers can take pride in the fact that, under the terms of the 2014 Farm Bill, they will send more than $2 billion worth of food to needy countries this year. Thanks to these aid programs, more than 50 million people in 51 countries will be fed by U.S. foreign aid. That’s the good news.

The bad news is that these programs are rife with cronyism that make them more expensive and less effective than they should be.

Just how much cronyism is there? Enough that another 8 to 10 million people could be fed at no added cost just by removing two unnecessary regulations.

What do these regulations do? The first requires that nearly all U.S. food aid be sourced from American farmers. The logic is that American food aid can combine generosity with national self-interest, stabilizing U.S. agricultural markets while providing aid.

But that self-interest has a cost, and a significant one. Namely, there is often more than enough food nearby that could be purchased and transported at a far lower cost and with far less waste than by shipping American food across the ocean. Even Africa, the continent most commonly associated with hunger crises, produces more than enough food to feed itself — as does the world as a whole, for that matter. In light of this fact, requiring that food aid be sourced in the United States no longer makes sense.

It’s a bizarre case where the costs of cronyism so outweigh the benefits that even one of the primary beneficiaries, the American Farm Bureau Federation, supports reform. The problem is that this regulation is a relic of a different era, one in which food aid was a meaningful portion of American agricultural exports and in which local food production in hunger-stricken areas was rarely sufficient to meet local demand. That is no longer the case — food aid today accounts for less than 1 percent of agricultural exports and less than 0.1 percent of food production in the country. The times have changed, but our rules have not.

The other regulation mandates that at least half of all U.S. food aid be carried on U.S.-flag vessels, known as the Cargo Preference for Food Aid (CPFA). The Government Accountability Office (GAO) studied the effects of the CPFA, and found that the costs were significant. Overall, the GAO estimated that the CFPA increased costs of shipping by 23 percent between 2011 and 2014, making up over $107 million of the total $456 million cost.

This time, the original intent behind the rule was based on national security concerns rather than economic ones. Lawmakers intended to use the food aid program to subsidize a merchant marine that could be called upon in times of war. Yet again, the organization that the regulation is intended to benefit, the Department of Defense, supports reform. The vast majority of U.S. vessels carrying food aid do not meet minimum standards for reform, and the DoD has stated that elimination of the regulation would not impact America’s maritime readiness in the case of war.

It is an unfortunate fact that as much as 60 percent of the food aid budget is spent on items that have nothing to do with food — such as transportation costs for the American food that we’re sending halfway around the world on more expensive American ships. And it’s why simple reform, such as the bipartisan Food for Peace Reform Act of 2018, would free up nearly $300 million simply by reducing the requirement for U.S.-sourced food to 25 percent.

It’s rare that cronyism is so egregious and outdated that its beneficiaries support reform. When they do, lawmakers should take the hint, and support reform as well.

The post The Cronyism Grown Into U.S. Food Aid appeared first on The American Spectator.

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Yes, there really is a tax break for upper-income graduate students and Congress won’t let it expire – AEI – American Enterprise Institute: Freedom, Opportunity, Enterprise

In an earlier Evidence Speaks post this year, Susan Dynarski and Judith Scott-Clayton summarized important research showing that federal tax benefits for college tuition have had no measurable impact on increasing college-going behavior.[1] Moreover, they note that the benefits are numerous, overlapping and complicated. Yet for all their flaws, these tax breaks enjoy such strong support from lawmakers that even the oddest one, which quietly expires each year, is always revived in a last-minute bill just in time for the tax filing season. The tuition and fees deduction (“the deduction”) was recently extended for a seventh time in an omnibus budget bill in February.[2] Out of all the tuition tax benefits the government offers, this one should be relatively easy to let go because of whom it unintentionally targets.

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Here is how the deduction works. Tax filers can deduct up to $4,000 of tuition and fees paid for higher education in the tax year. It is an “above-the-line” deduction, meaning filers can claim it without having to itemize deductions. As a deduction, filers earn a benefit equal to their marginal tax rate. The maximum benefit any filer could extract from the deduction is $880, the top marginal tax rate of those who are eligible (22 percent) times $4,000. There is no limit to the number of times a filer can claim the deduction, so long as he has incurred tuition expenses, and it does not matter what type of credential he pursues. There is, however, an income limit. Taxpayers with adjusted gross incomes above $80,000 ($160,000 for joint filers) cannot claim it.

There is nothing odd about those terms per se, but they interact with other tax benefits the government offers for tuition such that only upper-income graduate students benefit from the deduction. First, undergraduates, while eligible for the deduction, don’t claim it because a different tax credit only for undergraduates is more beneficial: the American Opportunity Tax Credit, which is worth up to $2,500 in tax relief for filers earning up to $90,000 ($180,000 for joint filers).[3] Tax filers can claim only one tuition tax benefit although they usually qualify for more than one. Second, graduate students with lower and middle incomes are also eligible for the deduction, but they can claim the $2,000 Lifetime Learning Credit, which almost always delivers a bigger tax break than the tuition and fees deduction.[4] But the Lifetime Learning credit has a lower income cut-off than the deduction. Those earning over $66,000 ($132,000 for joint filers) in 2017 cannot claim it.[5]

That’s how the deduction ends up targeting upper-income graduate students. While graduate students would always obtain a larger benefit from the Lifetime Learning Credit, they cannot claim it if they earn more than $66,000 ($132,000 for joint filers). They can, however, claim the deduction until their earnings exceed $80,000 ($160,000 for joint filers). Thus a narrow band of graduate students, those earning between the income limits for the two benefits, are the only students who would claim the deduction. At those levels, their incomes are higher than the incomes of about 80 percent of U.S. households.[6] Of course, tax filers can unintentionally claim a less generous benefit if they are eligible for more than one, such as an undergraduate claiming the deduction when she was eligible for the American Opportunity Tax Credit, which does happen.[7]

What the data say about eligible students

Using a representative sample of graduate students in 2011-12, Kim Dancy of New America and I estimated that just 8 percent of graduate students would benefit from the deduction. Meanwhile, 64 percent of graduate students would benefit most from the Lifetime Learning Credit. The rest of graduate students (28 percent) were ineligible for any tax benefit because they have no taxable income, their tuition was fully covered by grants and scholarships, or their earnings were too high.[8] The analysis assumes that tax filers claim the benefit that provides them with the largest tax reduction if they qualify for more than one. These numbers have likely shifted in recent years, with even fewer students benefiting from the deduction, because Congress has increased the earnings cap for the Lifetime Learning Credit to account for inflation but left the limits for the deduction unchanged.

We also estimated the average benefit graduate students would claim through the deduction for the 2011-12 academic year. At $621, it was smaller than the $859 average benefit that filers eligible for the Lifetime Learning Credit could claim.[9] Due to small sample sizes, however, we were unable to reliably assess important characteristics of filers eligible for the deduction, such as field of study.

The deduction didn’t start out as a graduate school tax break

As is often the case in public policy, lawmakers did not set out explicitly to provide a tax break to upper-income graduate students. In fact, graduate students were never the target group for the tuition tax breaks; undergraduates were always the focus. Although graduate students have been eligible for the tax benefits since their inception, changes to the policies over the years have left the deduction benefiting upper-income graduate students alone.

Prior to mid-1990s, the federal government did not offer widely-available tax breaks for college tuition. The idea first gained prominence when President Clinton proposed a $10,000 deduction for college tuition as part of his “Middle-Class Bill of Rights” reelection platform.[10] After critics noted that a deduction would provide more help to families in higher tax brackets, Clinton added a separate tax credit for the first two years of college to his proposal to provide more even benefits.[11] Congress adopted the president’s idea for the credit in 1997, naming it the Hope Tax Credit, but rejected the additional proposal for a $10,000 deduction. They instead replaced that proposal with a separate credit for “lifelong learning” (i.e., the Lifetime Learning Credit) that families could claim for education after the first two years of college, including graduate school.[12]

Thus, President Clinton’s original idea for a deduction and a credit was replaced with two credits, the Hope Tax Credit and the Lifetime Learning Tax Credit. In keeping with their original purpose to provide middle-class tax relief, Congress capped income eligibility for both benefits at $55,000 ($100,000 for joint filers) in 1997.[13]

With these two tax credits on the books, the idea of a deduction for tuition would be unnecessary and redundant, yet Congress later decided to add one anyway. Seemingly out of nowhere, lawmakers included a $4,000 deduction for tuition and fees in the Economic Growth and Tax Relief Reconciliation Act of 2001, the sweeping bill that included President Bush’s campaign proposal to cut marginal tax rates.[14]

The deduction differed from the two initial tax credits in a key way, which partially explains why lawmakers added it. Families earning up to $80,000 ($160,000 for joint filers) would be eligible as of 2004. That was significantly higher than the income cutoff for the Hope and Lifetime Learning Credits at the time and would therefore offer tax benefits to families with incomes arguably well above middle class. But why not just raise the income limits on the existing credits then? Because creating the new deduction was a way to restrict costs relative to expanding the existing Lifetime Learning Credit in terms of forgone revenue to the government. Recall that the value of the deduction is worth the amount deducted times the marginal tax rate, which at the time it was created would have been $1,120 at the most.[15] That is about half the maximum value of the Lifetime Learning credit.[16]

In other words, the deduction was a way to let upper-income families into the college tax benefit club on the cheap. It also ensured their benefits would be smaller than those of the middle-class families, who were eligible for the credits.

At the time it was created, the deduction was as much an undergraduate benefit as a graduate one. Upper-income families would claim it for tuition paid in pursuit of either degree. According to my analysis referenced earlier, about the same share of graduate students as undergraduates qualified for it prior to 2009.[17] But in 2009, Congress would make it pointless for almost any undergraduate to claim the deduction. That year, lawmakers replaced the Hope Credit with the American Opportunity Tax Credit, which provided larger benefits than the deduction with an income cutoff even higher than the deduction. With upper-income undergraduates now qualifying for American Opportunity Tax Credit, graduate students became the only group left who could benefit from the original tuition and fees deduction.

Conclusion

While Congress never decided to directly create a special tax break for upper-income graduate students alone, opting to extend the deduction year after year is effectively the same thing. The latest one-year extension, which made the deduction available for the 2017 tax year, cost the government over $200 million in forgone revenue.[18]

At a time when an undergraduate education feels financially out of reach for so many families, it’s fair to ask why Congress continues to spend these resources on students who have already earned an undergraduate degree. Moreover, these students earn a median household income of $102,000, according to my analysis.[19] There does not appear to be a good answer to that question other than inertia. Lawmakers have always extended the benefit so they continue to extend it. They may not realize, however, that it no longer benefits undergraduate students.

All of the tax benefits may be a policy failure for not increasing enrollment or being overly complex, but at least those for undergraduates put more money in the pockets of low- and middle-income families working toward their first degree. Today, the deduction does neither. It helps those who already have an undergraduate degree and earn high incomes to boot. While its cost in terms of forgone revenue are relatively modest, those resources would be better spent on aid that encourages students to enroll in and complete an undergraduate degree.

Footnotes

[1] Sue Dynarski and Judith Scott-Clayton, “The Tax Benefits for Education Don’t Increase Education,” Brookings Institution, April 2018, https://www.brookings.edu/research/the-tax-benefits-for-education-dont-increase-education/.
[2] Bipartisan Budget Act of 2018, Public Law 115–123, § 40203 (2018).
[3] Internal Revenue Service, “Instructions for Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits) (2017),” https://www.irs.gov/pub/irs-pdf/i8863.pdf.
[4] There are some circumstances when the deduction might produce a larger benefit than the Lifetime Learning Credit if a filer paid tuition and fees below $4,000 and he is in the highest tax bracket of those eligible for the deduction. For example, a filer in the 22% tax bracket who deducts $3,000 in expenses receives a $660 tax reduction; under the Lifetime Learning credit his benefit would be $600.
[5] Ibid.
[6] Author’s calculation using the American Community Survey, 2016.
[7] Government Accountability Office, “Improved Tax Information Could Help Families Pay for College,” May 2012, https://www.gao.gov/assets/600/590970.pdf
[8] Jason Delisle and Kim Dancy, “Graduate Students and Tuition Tax Benefits,” New America, December 2015, 6–7, https://na-production.s3.amazonaws.com/documents/graduate-students-and-tuition-tax-benefits.pdf.
[9] Author’s calculation using the National Postsecondary Student Aid Study 2011–12. See also Jason Delisle and Kim Dancy, “Graduate Students and Tuition Tax Benefits,” New America, December 2015.
[10] William J. Clinton, “Address to the Nation on the Middle Class Bill of Rights,” December 15, 1997, www.presidency.ucsb.edu/ws/?pid=49591.
[11] Douglas Lederman, “The Politicking and Policy Making Behind a $40-Billion Windfall: How Clinton, Congress, and Colleges Battled to Shape Hope Scholarships,” Chronicle of Higher Education, November 28, 1997.
[12] Taxpayer Relief Act of 1997, Public Law 105–34 § 201 (1997).
[13] Taxpayer Relief Act of 1997, Public Law 105–34 § 101 (1997).
[14] Economic Growth and Tax Relief Reconciliation Act of 2001, Public Law 107–16 § 431 (2001).
[15] The top marginal tax rate for filers eligible for the deduction was 28 percent in the mid 2000s.
[16] See endnote 4. for an explanation of how sometimes when tuition and fees are below $4,000, tax filers can qualify for a larger tax reduction through the deduction than if the Lifetime Learning Credit.
[17] Jason Delisle and Kim Dancy, “A New Look at Tuition Tax Benefits,” New America, November 2015, https://static.newamerica.org/attachments/10416-a-new-look-at-tuition-tax-benefits/TaxCredits11.2.277d3f7daa014d5a8632090f97641cee.pdf; and Jason Delisle and Kim Dancy, “Graduate Students and Tuition Tax Benefits,” New America, December 2015, 6–7, https://na-production.s3.amazonaws.com/documents/graduate-students-and-tuition-tax-benefits.pdf.
[18] Joint Committee on Taxation, “Federal Tax Provisions Expired in 2017” (JCX-5-18), March 9, 2018.
[19] Author’s calculation using the National Postsecondary Student Aid Study 2011–12. See also Jason Delisle and Kim Dancy, “Graduate Students and Tuition Tax Benefits,” New America, December 2015.

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Don’t Let Defense Contract Losers Block Options for Taxpayers

Defense contracting is hard to get right. Unelected government officials dealing out princely sums naturally creates an area of government that is ripe for cronyism and waste if not overseen properly. That’s why the Government Accountability Office has had Department of Defense contracts on its High Risk List since 1992 for programs that are vulnerable to waste, fraud, and abuse. And it’s also why it’s so important that when the DoD awards a contract based on merit and not access, all participants know the reasons and understand the rules of the process.

The battle for the DoD’s cloud-computing contract, known as Joint Enterprise Defense Infrastructure (JEDI), has been heating up for months. Though the DoD initially solicited proposals from single entities as well as multiple companies cooperating together, its decision to make the contract single-award angered many smaller contractors. A larger corporation, such as Amazon, now appears to be the favorite to take home the lucrative contract, which will be worth billions of dollars.

Naturally, some in Congress who are familiar with traditional contracts and the companies who pursue them have begun to cry foul. And some of the remedies they’ve proposed — such as regular reports and justifications for the single-award decision — are smart precautions. Transparency is important.

Companies such as Oracle, Microsoft, and IBM have argued that a single-award contract is “unfair” and implied that Congress should step in and change the rules. Some opinion pages have followed suit — even the Spectator’s Mytheos Holt made a similar argument back in March. Yet this mistakes the purpose of the DoD contracting process — it’s not to give everyone a piece of the pie, it’s to ensure that the DoD gets the best value and service for taxpayer money. And that’s exactly what the DoD’s process is attempting to achieve in this case: it allowed itself the opportunity to evaluate the relative benefits of choosing a single provider or multiple, and decided to go with just one.

In justifying its choice for a single provider, the DoD makes strong enough arguments to throw cold water on the idea that it was in cahoots with big business to shut out the “little guys.” The future of warfare is going to be about the speed of machine learning, allowing troops access to data at the speed machines can process it. Forcing the military to manage connections between multiple providers would risk this speed and disrupt the DoD’s plans to centralize its scattered data so it can be accessed by hundreds of thousands of users. On top of this, the DoD argued that multiple providers would require a drawn-out bidding process for new capabilities, a process avoided with a single-provider contract.

As with most situations where billions of dollars are on the line, both sides have opened up their wallets to bring their lobbying armies to Congress. The danger here is that Congress will overcorrect and end up quashing the single-award approach for political reasons, rather than doing what is best for national defense and taxpayers.

In doing so, Congress would be, ironically, be fighting a cronyism red herring with real cronyism. Cronyism is often mistakenly defined as “government actions that benefit big business” rather than “government actions that unfairly benefit big business at the expense of taxpayers or a competitive process.” The distinction is important — it’s the difference between being anti-corporate and being pro-market.

It’s also important to note that the contract only lasts two years. After that period, the DoD can choose to renew or find a different provider. If Amazon is truly being awarded this contract for reasons other than merit, it will become apparent over that time period, at which point the DoD can switch to another provider. The DoD may even decide over that period that multiple providers are a superior option, and switch the contract award type. What’s important is that, so long as the DoD is acting in the best interests of the country, the process is not allowed to be hijacked.

I’m not exactly Amazon’s biggest cheerleader, but I am a fan of taxpayer dollars being used efficiently. It’s a rare enough occurrence that when it does happen, we can’t afford to let those who miss out change the rules late in the game to benefit their own interests.

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