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Archive for September 18th, 2012

Even though I have remarked on many occasions that the burden of government was reduced during the Clinton years, that doesn’t mean Bill Clinton was in favor of smaller government. And it definitely doesn’t mean that his appointees believed in economic liberty.

Consider the case of Laura Tyson, who served as Chair of Clinton’s Council of Economic Advisers. She recently penned a column for the UK-based Financial Times that is riddled with disingenuous assertions.

Even though it deserves to be ignored, I can’t resist the temptation to make corrections.

Tyson myth:

“Even after the economy recovers, current tax policies will not generate enough revenue to cover future spending on social security, health, defence and debt interest, let alone basic government operations and investments. In 2012, federal tax revenues are likely to be less than 16 per cent of gross domestic product, compared with an average of more than 18 per cent in the 20 years before the crisis hit in 2008.”

Factual correction:

I already corrected this myth earlier this year when I debunked some disingenuous comments by Obama’s former CEA Chairman.

Just take a look at this chart, which assumes that all the 2001 and 2003 tax cuts expire and that millions of additional taxpayers will get nailed by the alternative minimum tax.

But even if you assumed that the tax cuts were made permanent and the AMT was constrained, federal tax revenues would jump to above 25 percent of GDP.

As you can see, tax revenues are projected to climb well above the long-run average of 18 percent of GDP. In other words, a rising burden of government spending is responsible for more than 100 percent of America’s long-run fiscal challenge.

Tyson myth:

…there is scant evidence that taxes as a share of GDP and economic growth are negatively correlated. Indeed, there is a small positive correlation between income per capita and tax revenue as a share of GDP.

Factual correction:

Ms. Tyson is trying to take advantage of the paradox of Wagner’s Law, which is that wealthy nations tend to adopt welfare states. And even though the welfare state slows growth, these nations are still richer than some developing countries that have smaller burdens of government.

These posts about Sweden and Denmark show why she’s wrong, but I would also call your attention to this World Bank research that unambiguously shows – using apples-to-apples comparisons – that larger governments reduce prosperity.

Tyson myth:

…tax reform should not come at the expense of progressivity. Income inequality is greater in the US than in the other developed countries of the OECD. The US tax system is considerably less progressive than it was a few decades ago and it does less to counteract pre-tax income inequality than other OECD systems.

Factual correction:

As explained by Veronique de Rugy, America’s tax system actually is more progressive than European tax systems.

But not because we tax rich people more. Instead, our system is more progressive because we don’t screw over lower-income and middle-income taxpayers with policies like the value-added tax.

That’s one of the reasons why the burden of government isn’t as high in the United States – which is very much one of the reasons why there’s so much more prosperity, as shown in this chart, in America than on the other side of the Atlantic.

Tyson myth:

A more efficient and progressive way to pay for a lower corporate tax rate would be to increase taxes on dividends and capital gains. This would shift more of the burden towards capital owners and away from labour, which bears the burden in the form of fewer jobs and lower wages. Mr Obama proposes to raise rates on capital gains and dividends for the top 2 per cent of taxpayers. Most capital gains and dividends go to this group.

Factual correction:

This actually isn’t a myth. She’s simply making an assertion that it would be desirable to increase the double taxation of dividends and capital gains.

America already has pervasive double taxation, as illustrated by this flowchart, and this post shows that Obama’s policies would make a bad situation even worse.

Does anybody think American competitiveness will improve if we have the highest capital gains tax in the industrialized world?

Tyson myth:

The US economy needs efficient and progressive tax reform and it needs more revenues for deficit reduction. Revenue increases have been a significant component of all major deficit-reduction packages enacted over the past 30 years.

Factual correction:

This is remarkable. I assume Ms. Tyson reads the New York Times, so perhaps she overlooked or deliberate forgot the column that inadvertently revealed that the only successful deficit-reduction package in recent memory was the one that cut taxes instead of raising them.

Interestingly, that successful package was implemented during the Clinton years, but only after she left office.

During Tyson’s tenure at CEA, we did get a tax increase rather than a tax cut. But the Clinton Administration admitted 18 months later that the tax hike was a failure and was not going to balance the budget.

Yet she wants to push the same failed class-warfare tax policy today.

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Wow. I wasn’t surprised to learn that the United States dropped in the new rankings unveiled today in Economic Freedom of the World.

But I’m somewhat shocked to learn that we fell from 10th last year all the way down to 18th this year, as can be seen on the chart (click to enlarge).

Last year, the U.S. fell from 7th to 10th, and I though dropping three spots was bad. But falling by eight spots this past year is a stunning decline.

Who would have thought that Scandinavian welfare states such as Denmark and Finland would rank higher than the United States? Or that Ireland, with all its problems, would be above America?

But since I’m not a misery-loves-company guy, I’m happy to see some nations doing well. I’ve previously highlighted the good policies in Hong Kong and Singapore. And I’ve trumpeted the good policies in Switzerland and Australia, as well as Canada, Chile, and Estonia.

So kudos to the leaders in those nations.

American politicians, by contrast, deserve scorn. Let’s update the chart I posted when last year’s report was issued.

As you can see, it’s an understatement to say that the United States is heading in the wrong direction. We’re still considerably ahead of interventionist welfare states such as France and Italy, though I’m afraid to think about what the U.S. score will be five years from now.

Here’s what the authors of the report had to say about America’s decline.

The United States, long considered the standard bearer for economic freedom among large industrial nations, has experienced a substantial decline in economic freedom during the past decade. From 1980 to 2000, the United States was generally rated the third freest economy in the world, ranking behind only Hong Kong and Singapore. After increasing steadily during the period from 1980 to 2000, the chainlinked EFW rating of the United States fell from 8.65 in 2000 to 8.21 in 2005 and 7.70 in 2010. The chain-linked ranking of the United States has fallen precipitously from second in 2000 to eighth in 2005 and 19th in 2010 (unadjusted ranking of 18th).

For those interested in why the United States has dropped, the “size of government” score has fallen from 8.65 in 2000 to 7.70 in the latest report. That’s not a surprise since the burden of government spending has exploded during the Bush-Obama years.

But the trade score also dropped significantly over the same period, from 8.78 to 7.65. So the protectionists should be happy, even though the rest of us have less prosperity.

The most dramatic decline, though, was the in the “legal system and property rights” category, where the U.S. plummeted from 9.23 in 2000 down to 7.12 in the new report. We’re not quite Argentina (3.76!), to be sure, but the trend is very troubling.

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