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Archive for May 29th, 2012

The fiscal nightmare in Europe should be all the proof that’s needed about the dangers of wasteful spending and punitive tax rates. Unfortunately, if his proposals for bigger government and class-warfare tax policy are any indication, President Obama still seems to think those policies would be good for America.

“Let’s mimic California and France!”

American states also are a laboratory, showing that states with better tax policy create more jobs and grow much faster. And many state policy makers have learned the right lesson.

Here’s some of what the Wall Street Journal said in an editorial this morning.

Last week Governor Sam Brownback continued the post-2010 reform trend among GOP Governors by signing the biggest tax cut in Kansas history. The plan chops the state income tax rate to 4.9% from 6.45% and eliminates income taxes on about 190,000 Kansas small businesses. …Mr. Brownback says the income tax cut will put Kansas “on a road to faster growth.” Although no one in Europe or the White House agrees with the philosophy, tax-cut initiatives have been spreading in the states. Already this year Tennessee has eliminated its gift and estate tax, Arizona has cut its capital gains tax (to 3.4% from 4.54%), and Idaho and Nebraska have cut income tax rates. Oklahoma is expected to cut tax rates. The tax cutting Governors all say they hope to be more like no-income-tax Texas, which has far outpaced other states in job creation.

Sadly, the folks in the White House aren’t hopping on the tax cut bandwagon.

Instead, they want America to be more like the President’s home state of Illinois, a fiscal basket case. But it’s not just Illinois that’s in trouble because of a bloated and expensive public sector.

It turns out that millions of Americans are voting with their feet to escape states with excessive taxes.

Here are some passages from a CNS report on some fascinating data from the Tax Foundation.

New York State accounted for the biggest migration exodus of any state in the nation between 2000 and 2010, with 3.4 million residents leaving over that period, according to the Tax Foundation. Over that decade the state gained 2.1 million, so net migration amounted to 1.3 million, representing a loss of $45.6 billion in income. Where are they escaping to?  The Tax Foundation found that more than 600,000 New York residents moved to Florida over the decade – opting perhaps for the Sunshine State’s more lenient tax system – taking nearly $20 billion in adjusted gross income with them. Over that same time period, 208,794 Pennsylvanians moved to Florida, taking $8 billion in income. …California is also known for more onerous taxes and regulations, and the foundation shows similar trends of migration from there to other states like Texas and Arizona. The Tax Foundation ranked the Golden State sixth highest in the nation for state and local tax burden in 2009. Between 2000 and 2010, the most recent data available, 551,914 people left California for Texas, taking $14.3 billion in income.  Texas has no state income tax or estate tax. …Another 28,088 from California relocated to Nevada and 30,663 to Arizona, a loss of  $699.1 million and $707.8 million in income respectively.

While these are remarkable numbers, they shouldn’t be a surprise. I’ve written about the failures of New York and California, and I’ve also commented on the success of Texas.

And for those who prefer international evidence, I’ve cited the differences between successful low-tax jurisdictions such as Hong Kong and Singapore and decrepit high-tax nations such as France.

This doesn’t mean that fiscal policy is a silver bullet. There are reasonably successful nations with big governments, but they compensate with ultra-free markets in other areas. And there are also low-tax nations that languish because of mistakes such as excessive regulation and failure to protect property rights.

But all other things being equal, big government and high tax rates are a recipe for decline. Yet that’s the only item on the White House menu.

P.S. If you think people should have the right to lower their tax burdens by moving from California to Nevada, shouldn’t they also have the right to do the same thing by moving from the United States to Singapore?

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Last week, I jumped into the surreal debate about whether Obama has been the most fiscally conservative president in recent history.

I sliced the historical data from the Office of Management and Budget a couple of ways, showing that overall spending has grown at a relatively slow rate during the Obama years. Adjusted for inflation, both total spending and primary spending (total spending minus interest payments) have been restrained.

So does this make Obama a fiscal conservative?

And how can these numbers make sense when the President saddled the nation with the faux stimulus and Obamacare?

Good questions. It turns out that Obama supposed frugality is largely the result of how TARP is measured in the federal budget. To put it simply, TARP pushed spending up in Bush’s final fiscal year (FY2009, which began October 1, 2008) and then repayments from the banks (which count as “negative spending”) artificially reduced spending in subsequent years.

The combination of those two factors made a big difference in the numbers. Here’s another table from my prior post, looking at how the presidents rank when you subtract both defense and the fiscal impact of deposit insurance and TARP.

All of a sudden, Obama drops down to the second-to-last position, sandwiched between two of the worst presidents in American history. Not exactly a ringing endorsement.

But this ranking is incomplete. At that point, I was trying to gauge Obama’s record on domestic spending, and the numbers certainly provide some evidence that he is a stereotypical big-spending liberal.

But the main debate is about which president was the biggest overall spender. So I’ve run through the numbers again, and here’s a new table looking at the rankings based on average annual changes in inflation-adjusted primary spending, minus the distorting impact of deposit insurance and TARP.

Obama is still in the second-to-last position, but spending is increasing by “only” 5.5 percent per year rather than 7.0 percent annually. This is obviously because defense spending is not growing as fast as domestic spending.

Reagan remains in first place, though his score drops now that his defense buildup is part of the calculations. Clinton, conversely, stays in second place but his score jumps because he benefited from the peace dividend after Reagan’s policies led to the collapse of the Soviet Empire.

Let’s now look at these numbers from a policy perspective. Rahn Curve research shows that government is far too big today, so the goal of fiscal policy should be to restrain the burden of government spending relative to economic output.

This means that policy moves in the right direction when government grows more slowly than the private sector, as it did under Reagan and Clinton.

But if government spending is growing faster than the productive sector of the economy, as has been the case during the Bush-Obama years, then a nation eventually will become Greece.

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