This story about the idiotic bailout our Senate is planning for Fannie Mae and Freddie Mac is a perfect example of why we need a flat tax law that prohibits this sort of case-by-case meddling by Congress.

Like the bailout that has already passed the House, the Senate bill features a special new tax on Fannie Mae and Freddie Mac. We have long urged reform of the two mortgage giants, which operate with an implicit government guarantee and therefore a license to endanger the taxpayer if they take on too much risk. The shares of both plunged yesterday to new lows based on their credit risks. But as a price for allowing more oversight of the two companies, Mr. Dodd and House Financial Services Chairman Barney Frank want to cut their allies in on even more of the action. Mr. Dodd creates an annual tax of 4.2 basis points on the mortgages that Fan and Fred purchase each year. Initially this money will go to finance losses resulting from the bill's bailout of refinanced mortgages. But by 2012 most of the cash from this tax will be directed to the new "affordable housing" funds. Mr. Frank applies a 1.2 basis-point tax on the value of all the loans Fan and Fred hold or have guaranteed, to collect roughly the same amount of money. The annual windfall here could amount to more than $600 million at the start, growing to perhaps $1 billion or more, depending on how fast the companies grow. Even better for the pols, this money won't end up in the Treasury's general fund. Instead, they've written the bill to steer the cash toward some of their favorite political allies. In the Senate bill, the Secretary of Housing and Urban Development gets the largest pot to distribute, a full 65% of the "affordable housing" funds. Within guidelines established by the bill, the HUD chief has discretion to favor particular states while punishing others in creating a formula for doling out block grants. Much of the political clout will be enjoyed by state politicians once they receive the checks from HUD. The state pols will be free to share the wealth with favored organizations, which will include both nonprofit and for-profit groups with an agenda.

Our government is basically run like a giant pyramid scheme, and those of us who produce wealth by our labor and investments are the suckers.

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