The IMF Wants to Make Canada’s Bad Tax System Even Worse

Less than two months ago, I shared a chart looking at tax burdens on saving and investment in the industrialized world.

The nation with the lowest tax burden on capital was Lithuania (unsurprisingly, all of the Baltic countries scored well).

The country with the worst tax treatment of capital, by contrast, was Canada.

As you can see, the average tax burden on saving and investment is 50 percent. That’s even worse than Denmark and France.

Assuming the goal is to boost prosperity and competitiveness, the logical response to this depressing data is for Canada to lower taxes on capital.

The International Monetary Fund, however, is not logical. That bureaucracy recently assessed the Canadian economy.

Not only did the bureaucrats recommend tax increases (the IMF’s reflexive answer to any question) and a bigger burden of spending, they actually endorsed higher taxes on capital.

I’m not joking, Here are some excerpts.

…further consolidation will put Canada in a stronger position to address…structural spending needs related to climate, defense, healthcare, and other critical areas. Thus, while the spending initiatives in the federal budget are appropriate, they should have been offset through greater revenue mobilization. The increase in the capital gains inclusion rate improves the tax system… Consideration could be given to other changes—such as an increase in the GST rate.

This is awful advice.

Canada’s fiscal situation is troubling for one simple reason. The current Prime Minister, Justin Trudeau, has been spending too much money (something I warned about shortly after he took office).

Indeed, according to the IMF’s own data, Trudeau has increased spending twice as fast as inflation since taking office. Reversing that mistake is the advice Canada needs (and it’s an approach that Liberal Party politicians have actually implemented in the past).

But don’t hold your breath waiting for fiscal prudence from Trudeau.

P.S. This is a bit of inside baseball, but the IMF generally tailors its recommendations to match the preferences of the politicians who control a country. This is not that surprising since IMF bureaucrats have very comfy jobs (with tax-free salaries!), so they have an incentive to curry favor with the national governments that have ultimate power over their lavish paychecks. So the IMF and Trudeau deserve joint blame for the latest IMF report.

P.P.S. Another flaw with the IMF report is that it praises Canada for reducing inflation but fails to point out that it was the Canadian government’s bad monetary policy that caused the inflation in the first place. Notwithstanding the vapid comments from one central banker, inflation doesn’t magically materialize out of thin air.

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Fiscal Lunacy from D.C.’s Politicians, Fiscal Realism from the Washington Post

As I wrote yesterday, trend lines are important for fiscal policy.

If a government complies with Golden Rule over a multi-year period, that’s almost always a recipe for good fiscal outcomes.

But if politicians allows the burden of spending to climb faster than the productive sector of the economy, that usually creates conditions for budgetary troubles.

As you might expect, Washington is filled with the wrong kind of politicians. But I’m not referring to the spendaholics in Congress and the White House.

Today, we’re going to look at the fiscal pyromaniacs in charge of the District of Columbia’s budget.

Here’s some data from the 2018 and 2023 State Expenditure Reports published by the National Association of State Budget Officers.

If you do the math, you’ll find that government spending in D.C. increased by about 50 percent between 2016 and 2022.

Yet if you look at the federal government’s inflation calculator, prices rose by 23 percent over the same time period.

In other words, the burden of spending grew more than two times faster than inflation.

This has produced two very predictable outcomes. First, there is now a fiscal mess in D.C. Second, city politicians want to raise taxes rather than impose long-overdue spending restraint.

This is so irresponsible that even the left-leaning Washington Post is objecting. Here are some excerpts from a new editorial.

D.C. faces a cash crunch. …The District’s leaders have tough choices to make in their 2025 budget to close a $700 million hole. …Taxes are going up… Ms. Bowser (D) would raise the paid family leave tax that businesses pay, add an 80-cent per night fee on hotel rooms and increase the sales tax (gradually, from 6 percent now to 7 percent by fiscal 2027). In total, revenue would rise $447 million next year under the mayor’s proposal. The council would raise more — $550 million in new revenue next year — via both a higher paid family leave tax and higher property taxes on homes worth $2.5 million or above. In fact, the council’s budget closes the vast majority of the budget shortfall via higher taxes. That’s unwise. Raising so many taxes, in lieu of spending cuts, signals to businesses and residents…a warning sign of more taxes and fees to come if budget holes persist. As business leaders consider whether to keep their business in the city or relocate to Maryland or Virginia, they will factor in the city’s…finances. …there has to be a reality check on taxes and spending. Scaling back is hard. But making tough choices now is better than losing business to Virginia and Maryland.

Kudos to the Washington Post for recognizing (again!) that tax increases are the wrong approach.

Too bad they don’t apply the same logic when looking at the federal government’s finances. But I guess a journey of a thousand miles begins with a first step.

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The IMF’s Destructive Advice for Germany

I wrote last November that Germany is in a period of fiscal decay.

Over the past eight-plus years, the burden of government spending has grown far too fast, violating the Golden Rule of fiscal policy.

As a result, the share of the economy being consumed by the public sector has jumped from 44 percent to nearly 49 percent.

That’s worse than Denmark!

So what should Germany do? A rational person, especially if that person had any knowledge of economics, would urge spending restraint.

But let’s instead look at what the Keystone Cops at the International Monetary Fund are recommending. They want Germany to weaken its fiscal rule to enable even more spending.

An aging population will also adversely affect public finances as tax revenue growth slows and spending on pensions and healthcare rises. …To accommodate rising spending needs, the authorities should consider moderately easing the debt brake. …Germany’s debt brake is set at a relatively tight level, such that the annual limit on net borrowing could be eased by about 1 percentage point of GDP while still keeping the debt-to-GDP ratio on a downward path. Such an easing would allow more room for much-needed public investment and other key priorities.

And, keeping with tradition, the bureaucrats at the IMF also want higher taxes in Germany.

Options that could be explored include eliminating environmentally harmful…tax expenditures, …raising taxes on real estate and on goods and services (as Germany’s revenue from such sources is below the advanced-economy average), and/or closing loopholes in inheritance taxes.

Adding more spending to Germany’s fiscal burden is bad news, but adding more taxes is equally offensive.

That part of the report merits two observations.

1. If the IMF cared about growth, it would recommend lower tax rates in the many areas where Germany is above the advanced-economy average, not pushing for higher taxes in the few areas where the German government has demonstrated a bit of restraint.
2. It is utterly hypocritical for IMF bureaucrats to push for higher taxes (in Germany or elsewhere) since their generous salaries are exempt from tax. Maybe if they had to pay taxes and live by the same rules as everyone else, they wouldn’t be so quick to urge bad policies.

P.S. I can’t resist citing one final bit of economic illiteracy from the IMF.

High energy prices following the shut-off of Russian gas contributed to surging inflation during 2022-23.

This is nonsense. Higher energy prices cause a shift in relative prices. Bad monetary policy (as we recently experienced in Europe, the United States, Canada, and the United Kingdom) is the reason for the increase in overall prices.

P.P.S. Given this statement by the previous head of the IMF (and current head of the ECB), you’ll understand why there’s a problem with economic literacy at that international bureaucracy.

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Leftist Governments (and the IMF) Pushing Global Wealth Tax

When Joe Biden began his push for a global corporate tax cartel back in 2021, I explained why the idea was very bad news for the world’s workers, consumers, and shareholders.

And I pointed out it was specifically bad news for developing nations since they would be prevented from using good tax policy to encourage rapid growth.

Most important, at least for purposes of today’s column, I also told the BBC that a corporate tax cartel would be very dangerous since politicians would quickly try to apply the same approach to other types of taxes.

Well, I was right.

As reported in Barron‘s, some of the world’s greediest governments are now pushing a global wealth tax cartel. Here are some excerpts from the story by Daniel Avis.

Brazil, which is chairing the G20 this year, has been pushing for the group of nations which together account for 80 percent of the world’s economy to adopt a shared stance… “Fair international taxation is not just a topic of choice for progressive economists, but a key concern at the very heart of macroeconomic management today,” Brazilian finance minister Fernando Haddad said during an IMF event in Washington. “Without international cooperation, there is a limit to what states can do, both rich and developing ones,” he added. …Sitting alongside Haddad at the IMF event, French finance minister Bruno Le Maire renewed his calls for a global minimum tax… “The future of the world cannot be a race to the bottom,” Le Maire said.

Haddad seems like a not-very-good person. He’s been a political science professor, according to Wikipedia, and he’s authored some publications that suggest he’s a leftist ideologue.

• In Defense of Socialism
• Theses on Karl Marx
• Work and Language for the Renewal of Socialism

This crank is now trying to set tax policy for the entire world!

Marcela Ayres and Andrea Shalal of Reuters also reported on Haddad’s iniiative, and their article noted the predictably pernicious role of the International Monetary Fund.

Brazil’s proposal to tax the super-rich globally gained momentum among Group of Twenty members…with France’s finance minister and the head of the International Monetary Fund backing a coordinated push to generate new revenue… IMF chief Kristalina Georgieva said…ensuring that the richest paid their fair share would mobilize funds… She said IMF research…also estimated that setting a minimum floor for carbon pricing could boost revenue by $1.4 trillion a year. …Gabriel Zucman, director of the European Tax Observatory, …has proposed that very-high-net-worth individuals…pay at least the equivalent of 2% of their wealth in income tax each year. That would generate $250 billion per year.

I can’t resist pointing out that Ms. Georgieva (like all IMF bureaucrats) gets a very lavish salary that is exempt from taxation. Yet this hypocritical parasite agitates for higher taxes on everyone else.

Fortunately, at least one major government is skeptical of this money grab.

In a separate report from Reuters, Christian Kraemer and Maria Martinez note that Germany’s Finance Minister is not a fan.

German Finance Minister Christian Lindner rejected on Thursday Brazil’s proposal to tax the super-rich, indicating a challenging path for it to gain widespread G20 support. …Speaking after meeting U.S. Senator Bernie Sanders on Thursday, Brazil’s Finance Minister Fernando Haddad said of Lindner’s opposition to the proposal: “He will change (his mind).” Sanders said he “strongly” supports the proposal… But the Brazilian government is aware that other countries like Japan and Italy have shown resistance to the initiative, added the source. …Le Maire said that moving to tax the rich was the logical next step for a series of global taxation reforms launched in 2017, including agreement on a global corporate minimum tax.

Let’s hope Germany holds firm, and that Japan and Italy also are on the right side.

But I worry because the statist countries will be relentless.

Remember, the corporate tax cartel seemed crazy when it was first proposed about 10 years ago. But the left kept pushing and now it’s in the process of being implemented.

I worry the same thing will now happen with a global wealth tax cartel.

P.S. The corporate tax cartel seemed crazy because it is crazy (assuming one wants more prosperity)

P.P.S. It was nice of Monsieur Le Maire to confirm what I told the BBC about the corporate tax cartel being the first step on the path to other tax cartels.

P.P.P.S. I have not bothered to make the economic case against the wealth tax in this column, but feel free to click here, here, here, and here for that type of analysis.

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Trump and the Flat Tax?

There’s going to be a big tax fight in Washington next year, regardless of who wins the House, the Senate, and/or the presidency. That’s because major portions of Trump’s 2017 Tax Cuts and Jobs Act will expire on December 31, 2025.

Will those tax cuts be extended? Will they be expanded? Will they be curtailed? Politicians will be forced to choose.

In general, I’m rather pessimistic about the outcome for the simple reason that there’s been a huge increase in the burden of government spending.

I wrote about that problem two days ago and highlighted how politicians used the pandemic as an excuse to permanently increase the cost of government.

One result of all that wasteful spending is that we now have enormous deficits. And even though I don’t worry much about red ink (the real problem is spending, not how it’s financed), the practical reality is that it is well nigh impossible to have good tax policy when there is bad spending policy.

But that doesn’t mean we shouldn’t try. In an article for Bloomberg, Stephanie Lai, Amanda L Gordon, and Enda Curran write about the advice Trump is getting on tax policy.

Donald Trump is under pressure from economists in his circle to embrace a flat tax rate… The efforts demonstrate how people around the former president are already lobbying for their preferred economic policies ahead of a potential second term where both taxes and tariffs will be top priorities. …Forbes said…he is advocating for Trump to support a flat 17% tax rate for all income brackets with “generous” exemptions… For a family of four, he said, he would suggest the first $54,000 of income be exempt from federal income tax. …Whoever wins the White House in November will be forced to negotiate a tax deal next year because key portions of Trump’s 2017 tax cuts — including individual rates — expire at the end of 2025. That will set up a complex negotiation — particularly if control of Washington is split between Republicans and Democrats… Trump has not detailed what his tax plan would look like.

I’m glad that people are pushing Trump to be bold on taxes, but that advice needs to be augmented by a big push to make him better on spending.

Alas, that’s one of his worst areas.

Not as bad as he is on trade, but he record on spending is nonetheless mediocre. And that was the case even before the pandemic spending orgy.

The bottom line is that Trump needs to change his mind on entitlements if we want to have any hope of better tax policy. I won’t be holding me breath.

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Everything You Need to Know about the Value-Added Tax

While in Sweden last week, I wrote several columns (here, here, and here) about that nation’s fiscal policy.

But I also had a discussion about American fiscal policy with one of the tax experts at the Confederation of Swedish Enterprise. That included a discussion of the value-added tax (VAT).

If you don’t want to spend a few minutes watching the video, I made two theoretical observations and two practical observations.

Here are my theoretical points.

1. VATs tend to be less destructive than income taxes, largely because they don’t have “progressive” tax rates and also don’t exacerbate the tax bias against saving and investment.
2. A VAT has the same “tax base” as a flat tax. The structural difference is that a flat tax takes a slice of your income as you earn and a VAT takes a slice of your income as you spend.

So if there ever was an opportunity to swap the income tax for a VAT, I would take that trade (assuming, of course, repeal of the 16th Amendment so politicians couldn’t pull a bait-and-switch scam). Just like I would swap the income tax for a national sales tax.

But we’ll never be given a chance to make that swap.

Instead, some people claim that we are facing a different type of choice. Should we finance our (baked-in-the-cake) expanding burden of government with class-warfare taxes or a value-added tax?

The right answer, needless to say, is to restrain spending. But if someone is holding a gun to your head and demanding that you choose a tax increase, which one do you pick?

Seems like a VAT would be the less-harmful approach, but this is a good opportunity to raise my two practical points.

1. In the real world, adoption of a VAT almost surely will lead to more class warfare taxes because politicians will want to balance the harm to lower-income people by also imposing taxes that hurt higher-income people.
2. In the real world, the level of government spending is not exogenous. More specifically, VATs have been money machines to finance bigger government in Europe and the same thing likely will happen in the United States.

If you want evidence for my first point, this chart is very compelling.

And if you want evidence for my second point, this chart tells you what you need to know.

P.S. You can enjoy some amusing – but also painfully accurate – cartoons about the VAT by clicking here, here, and here.

P.P.S. VAT rates tend not to be as high as income tax rates, but they are nonetheless very onerous.

P.P.P.S. In 2016, I debunked some VAT myths.

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An Inaccurate – But at Least Not Hypocritical – Leftist

Our friends on the left are often very hypocritical. I’ve written many times, for instance, about statist politicians who oppose school choice while sending their kids to private schools.

I’ve also shared columns about hypocrisy on issues such as the environment, pandemic, and minimum wage.

And, given my interest in fiscal policy, I especially enjoy mocking the leftists who urge higher taxes yet fail to lead by example.

In some cases, they aggressively seek to minimize their taxes (Joe Biden, John Kerry, and Hillary Clinton). In other cases, they say they want to pay more but don’t take the simple step that would make that happen (Elizabeth Warren).

That being said, not every leftist is a hypocrite. Some do lead by example.

Here are some excerpts from a New York Times column by Matthew Desmond, a Princeton sociologist.

Alejandro Narváez is OK taking less. …when it comes to paying taxes, he forgoes many deductions…filing his taxes with TurboTax, not to save money but to lose it. “I see it as my responsibility to pay my fair share of taxes,” Mr. Narváez, who is 70, told me. “I have so many opportunities to reduce my taxes, but I choose not to.” …this time of year also provides us the opportunity to ask ourselves: Is it ethical to take tax breaks that primarily make the rich richer? …Besides the occasional statement from liberal elites asking to be taxed more, many of the biggest beneficiaries of the government’s largess have done very little to bring about fair tax reform. Why do we keep waiting for Congress to act when we could effectively tax ourselves more by following Mr. Narváez’s example and refusing to take some deductions? …My family has struggled with this question. …I have criticized the mortgage-interest deduction… My family qualifies for this ridiculous deduction. But we don’t want it. …So we’ve decided to create that society in miniature form, and with full recognition that we have the privilege of doing so, by donating what we receive from the mortgage-interest deduction to affordable housing initiatives on top of our regular giving. …I honestly don’t know if it’s better to donate tax deductions or, like Mr. Narváez, refuse them outright. I only know that it feels unfair to keep it all for ourselves. …Imagine if we all came to view tax breaks not as entitlements but as money that is not rightfully ours.

Kudos to Mr. Narváez and Mr. Desmond for putting their money where their mouths are.

I think it’s crazy to give more money to the nation’s most venal and corrupt people, but at least they’re not hypocrites.

However, I can’t resist pointing out that Mr. Desmond made several inaccurate statements in his column.

For instance, he echoes Joe Biden’s laughably dishonest assertion about tax rates.

…tax breaks benefit the billionaire class, which has the lowest effective tax rate in the country.

He also doesn’t understand (or doesn’t care) that both dividends and capital gains are example of double taxation.

…dividends and capital gains…are taxed at lower rates than other sources of income

And the same is true with regards to the death tax.

U.S. law allows wealth to be passed onto heirs almost tax-free.

Last but not least, he regurgitates the leftist trope that being allowed to keep your own money is a subsidy or handout.

…money the country dedicates to subsidizing private affluence.

Though I guess we need to acknowledge that at least they are being honest about their radical agenda.

P.S. Here’s the humor version of leftist hypocrisy.

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The Economic Consequences of Biden’s Budget

The good news is that there is very little risk that President’s new budget – which is very similar to his previous budgets – will be approved by Congress.

The bad news is that his budget is filled with terrible policy. Big expansions in the burden of spending and big increases in tax rates.

At the risk of understatement, the economic consequences of those policies would be unfortunate.

Given my interest in competitiveness, I think this visual from the Tax Foundation is the most important thing to understand. Biden wants tax rates in the United States to go from dark blue to light blue.

What makes this visual so disappointing is when you compare tax rates in the United States to other industrialized nations.

Tax rates in America already are high compared to those other countries, especially when looking at the taxation of saving and investment.

But the most shocking results are when you compare tax rates in other nations to Biden’s proposed tax rates. The United States would be shooting itself in the foot.

Given those terrible policies, this set of numbers from the Tax Foundation is hardly a surprise. Government would get more money and households would lose money.

I’ll close by observing that the Tax Foundation’s model is based on how higher tax rates discourage productive behavior. And there’s lots of academic evidence to support that approach.

As far as I know, though, the Tax Foundation does not quantify or estimate the economic damage from higher spending. So the actual consequences of Biden’s proposed budget surely would be even worse (the case for smaller government is bolstered by research from the Congressional Budget Office, as well as from generally left-leaning international bureaucracies such as the OECD, World Bank, ECB, and IMF).

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Fiscal Fights with Friends: Tax Increases Don’t Improve National Well-Being

Last year, I filled out a do-it-yourself federal budget prepared by the Washington Post and another one put together by the Committee for a Responsible Federal Budget.

In both cases, my main complaint was that they did not give enough options to shut down counterproductive departments and/or offer enough proposals for much-needed entitlement reform.

Today, I’m going to write about a do-it-yourself budget from the American Enterprise Institute. But I’m not going to bother to share my results because I think the model has a fatal flaw.

To illustrate, here is the model’s baseline estimate for national well-being (in this case, “welfare” refers to the overall prosperity of the nation rather than redistribution spending). As you can see, the model assumes that national well-being eventually begins to shrink if we leave government policy on autopilot.

Because the burden of government spending is projected to dramatically increase in coming decades, I don’t have any problem with the assumption that living standards will begin to decline.

After all, if America becomes a European-style welfare state, it’s perfectly reasonable to expect European-style economic malaise.

But here’s where things go awry. To show how the model is messed up, I made these two choices.

• The biggest-possible increase in income taxes.
• The biggest-possible increase in payroll taxes.

I then clicked “run model” and here are the results. In every single year, it shows that national well-being improves with these two big tax increases.

Before explaining how and why this is wrong, here is an explanation of the model’s methodology.

In our October 2023 working paper, we…explain, justify, and show the results of our macroeconomic projection model of the U.S. economy and federal budget. …As a companion to our working paper, we have developed a dashboard which allows users to adjust assumptions and implement their own policies to reduce future levels of debt and improve welfare for generations to come. By adjusting the sliders on the left-hand side of the screen, users can, e.g., increase income taxes, increase levels of investment, reduce Social Security benefits, and change projected health care elasticities. …Users can adjust various assumptions or implement policy changes using the sliders on the left, then click “Run Model” to produce new projections using this new set of assumptions. For example, to reduce deficits, one could increase income and Social Security payroll tax rates by one percentage point each, cut non-health federal spending by ten percent, and increase the average Social Security replacement rate by five percentage points. New projections after making these changes are shown… The solid circles continue to show baseline assumptions while the empty circles represent outcomes under the new set of assumptions.

So why does the modal produce screwy results?

Here’s what you need to know.

…welfare improves as, in our model (based on assumptions made by CBO), deficits crowd out investment, reduce capital, and slow economic growth, so efforts to reduce the deficit will generally improve welfare.

There is nothing wrong with that bit of analysis, but it’s fatally incomplete.

It fails to account for how tax increases would negatively impact national well-being. And it also fails to account for how a rising burden of government spending will adversely impact national well-being.

To put it in simple terms, projecting the economy based solely on what happens to deficits and debt is like predicting the outcome of a baseball game by looking at what happened in the 2nd inning. That’s part of the answer, but grossly inadequate.

Which is an analogy I should have used in this video from 2009, which explains that spending is the problem, not red ink.

If you don’t want to spend a few minutes with the video, this short column tells you why fixating solely on deficits leads to absurd results. And this column is a must-read for people who think tax-financed spending somehow is less harmful than debt-financed spending.

P.S. I write about “Fiscal Fights with Friends” when I think someone is well meaning but is pushing bad policy or bad analysis. Previous editions have focused on Medicaid reform, tax increases, parental leave, the value-added tax, fiscal policy, the flat tax, and the carbon tax (twice),

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Beware Bad Budget Deals, Part III

I’ve already written two columns (here and here) about why a “bipartisan” budget deal would be a recipe for higher taxes and bigger government.

To start our third installment in this series, here’s a clip from my recent appearance on Vance Ginn’s Let People Prosper.

Simply stated, America’s long-run fiscal problems are entirely the result of government being too big and growing too fast.

So there is no need to make our bad tax system even worse with tax increases. Especially since (as I explained in the above video clip) politicians almost surely would spend any extra revenue.

By the way, my opposition to “putting taxes on the table” is practical rather than ideological. Back in 2012, I wrote that I would accept a big tax increase, but only if the other side would accept various changes to control the burden of government spending.

Needless to say, none of those options are acceptable to the big spenders in Washington. Not in 2012 and not today.

Since I’m focusing on practicality, I’ll share two additional pieces of evidence against having a pro-tax increase fiscal commission.

1. In 2011, a reporter from the New York Times inadvertently showed that the only budget deal that actually led to a balanced budget was the 1997 agreement that cut taxes. All the other budget deals raised taxes and the net result was more spending and continued red ink.
2. Tax burdens in Europe have dramatically increased over the past 50-plus years, usually because politicians claimed people needed to surrender more money in order to reduce red ink. But over that same time period, government debt more than doubled because politicians spent all the new revenue.

Given all this data, you might think I’m happy about this tweet from a Bloomberg reporter.

But I’m only half-happy. I’m glad the Speaker of the House is ruling out tax increases.

However, his anti-tax position is not credible when he also says that entitlement programs can’t be touched.

That’s the Biden–Trump view and it’s a recipe for fiscal chaos and – sooner or later – huge tax increases on lower-income and middle-class Americans.

The bottom line is that there’s an unavoidable choice to be made in the United States. We either reform the entitlement programs or we agree to let politicians take more of our money.

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Understanding Biden’s New Budget in Three Tweets

I wrote yesterday to announce my new book on America’s fiscal crisis.

Today, let’s look at how Joe Biden’s new budget will make that bad problem even worse.

I’m going to start with two charts. The first one shows that government spending in recent years has climbed above the trendline (and the trendline showed excessive spending growth even before the fiscal orgy that took place under Trump and Biden).

The second chart shows that taxes also are above the trendline.

These two charts come from a tweet by Brian Wesbury.

And they basically tell you everything we need to know about our current fiscal mess.

But there’s more bad news to share.

Next, here’s a tweet from Preston Brashers about Biden’s plan to further bloat the IRS budget in order to have more audits of families and small businesses.

Biden’s proposal is based on the notion that a massive expansion of the IRS will magically generate additional tax revenue to finance ever-larger government.

History tells us that this perpetual-motion-machine approach won’t work.

Last but not least, we have this tweet from Steven Moore about Biden’s preposterous claim that he has reduced red ink.

All politicians lie. They are not good people. But Biden is an extreme example.

Here’s what really happened: Yes, the deficit fell in 2022, but only because there was a massive amount of one-time pandemic spending in 2021.

But if you look at the actual effect of Biden’s policies, he has increased red ink in every single year.

P.S. Remember that our real fiscal problem is too much spending. Red ink is merely one of the symptoms of that problem (as are punitive tax burdens and money printing).

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The Practical Case Against Higher Taxes

As clearly shown by the Congressional Budget Office, America’s long-run fiscal challenge is an ever-growing burden of federal spending. Particularly entitlement programs.

Moreover, because the tax burden is projected to gradually increase (largely because of “real bracket creep“), it is accurate to say that more than 100 percent of America’s fiscal problem is excessive government spending. And it’s been that way for a long time.

This is one reason why tax increases would be bad public policy. Why increase the burden on American families when the problem is excessive spending by politicians?

Especially since we can deal with the symptom of red ink with some modest spending restraint.

Unfortunately, some Republicans get seduced into thinking that if they surrender on the tax issue, Democrats may get serious about spending restraint.

These are members of what I call the Charlie Brown Club.

The latest example is Congressman Jodey Arrington of Texas. Here are some excerpts from a Semafor report by Kadia Goba.

The chair of the House Budget Committee has a message for his fellow Republicans: If they ever want to fix Washington’s finances, they’ll have to talk about raising taxes. “It’s only fair to have both revenue and expenditures on the table,” Rep. Jodey Arrington, R-Texas recently told Semafor… The fiscal commission he’s championed would be charged with crafting a plan to stabilize the federal debt as a share of the economy… Washington has seen versions of this movie before. The blue ribbon Simpson-Bowles commission famously failed to approve its own plan in 2010… Arrington argues…pressure for a bipartisan budget solution… “Without discussing the revenue side, you will never have a commission and you will never have Democrats show up for a consensus solution,” he said.

I’ve already explained why Arrington is wrong. We have a spending problem, not a revenue problem.

But the Texas Congressman obviously is convinced we have a deficit problem, and this misplaced focus leads him to think Republicans need to surrender on the tax issue.

Today, I won’t to show why he’s wrong. And we’ll start by accepting his misguided premise that America’s fiscal challenge is too much red ink.

There are two scenarios for how to reduce deficits and debt:

1. With divided government, have a bipartisan budget deal based on higher taxes and spending restraint.
2. Wait for GOP control and resuscitate something akin to the Ryan budget, based on entitlement reform.

From a practical perspective, even if the only goal is controlling red ink, the second option is the way to go. Republicans were pushing such an approach last decade.

The first option, by contrast, is a recipe for a bigger fiscal mess.

This is because tax-hiking budget deals have a terrible track record. Simply stated, they don’t reduce red ink. There are three big reasons why that happens.

• The economy suffers because of the tax increases, and that means less taxable income. So the projected tax increases don’t raise as much revenue as politicians think.
• Once tax increases are part of the discussion, any hope of genuine spending restraint goes out the window. Indeed, politicians usually respond with spending increases.
• The supposed spending cuts aren’t real spending cuts, just reductions in previously planned increases. And the likelihood of structural reform is vanishingly small.

I’ll close by (sort of) contradicting everything I just wrote.

As I explained way back in 2012, I would accept a big tax hike. But only if taxpayers got a major benefit in exchange such as real entitlement reform, eliminating wasteful departments, and/or enacting a flat tax.

Today, I’ll add a fourth potential item for trade. I’ll accept a big tax hike in exchange for an ironclad spending cap, sort of like the one that has been so successful in Switzerland.

Needless to say, the odds of getting any of these four things from Joe Biden or Chuck Schumer are the same as the odds of me playing centerfield this year for the New York Yankees.

P.S. If you want an example of failed bipartisan deals, check out the Simpson-Bowles package.

P.P.S. I admit that GOP control won’t solve the problem if the president is a big spender like Trump.

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Promote U.S. Prosperity by Rejecting the OECD Tax Cartel

I support tax competition because it is our best hope of avoiding “goldfish government.”

As such, I’m very opposed to tax harmonization schemes, all of which are designed to make it easier for politicians to impose higher tax burdens. .

That’s why I’m so hostile to the Organization for Economic Cooperation and Development. Politicians from high-tax nations have co-0pted that Paris-based bureaucracy and are using it to push for a global tax cartel.

Adam Michel of the Cato Institute recently wrote an in-depth study on the OECD’s proposed business tax cartel and explained why the United States should not participate.

I recommend that people read that report. But for those who have limited time, I’m going to share some excerpts from his new column for National Review, which addresses the same topic.

To protect their businesses from facing competition, the European Union and the Organization for Economic Co-operation and Development (OECD) have concocted an international tax cartel to weaken America’s most successful international businesses. The new tax rules discourage international investment by imposing tens of billions of dollars in compliance and economic costs. …Instead of endorsing the European plan, Congress should double down on America’s successful tax cuts by further cutting business rates and simplifying other tax rules. A low enough corporate-tax rate would break the OECD’s tax cartel, benefit domestic workers, and attract new businesses. …Republicans have raised concerns about the OECD plan and proposed retaliatory measures in response to the OECD taxes. But, as is too often the case, they are being too timid. …Supporters of the OECD plan will argue that the new world-order tax cartel is here to stay, so it’s time for the United States to get on board. They dubiously claim that United States will benefit from new tax revenue… Fortunately, the agreement is more fragile than they let on. Cartels are inherently unstable. Instead of ceding tax sovereignty and encouraging businesses to conduct their activity elsewhere, Congress should increase the attractiveness of the United States as an investment destination and reject the OECD’s tax tyranny.

Amen.

Tax competition is the right approach, not tax harmonization.

The simple – and accurate – way of summarizing the OECD’s plan is that some governments win and almost everyone else loses.

Note that only some governments win.

Countries with very sensible business tax systems (Ireland, Estonia, etc) will lose, as will jurisdictions with good overall tax policy (Bermuda, Cayman Islands, etc).

Workers and businesses lose everywhere, of course.

I’ll close with some bad news. The Biden Administration enthusiastically supports the OECD scheme, even though it largely targets American companies.

P.S. November’s election may not make a difference. The Trump Administration was bad on tax competition issues between 2017-2020, so it would be putting hope over experience to expect good policy if Trump wins a second term.

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The IMF (Again) Pushes for Bigger, More Expensive Government

By providing bailouts to profligate governments, the International Monetary Fund creates “moral hazard” and thus does considerable damage to the global economy.

To make matters worse, the IMF pressures those profligate governments to raise taxes in exchange for bailout cash.

Then, to add insult to injury, the IMF pushes for higher taxes even when countries don’t need bailouts.

The IMF repeatedly has urged higher taxes in the United States. And now the bureaucrats are pushing for higher taxes in the United Kingdom.

In an article for the BBC, Faisal Islam and Jonathan Josephs describe the IMF’s assertions and the British government’s response.

The International Monetary Fund (IMF) has “advised the UK against further tax cuts”… It said preserving public services and investment implied higher spending than was reflected in the government’s current plans. The IMF suggested the Treasury’s pencilled-in spending cuts from this year were unrealistic. …Commenting on the IMF’s advice, Mr Hunt said: “The IMF expect growth to strengthen over the next few years, supported by our introduction of the biggest capital investment tax reliefs anywhere in the world, alongside National Insurance cuts to improve work incentives. “It is too early to know whether further reductions in tax will be affordable in the Budget, but we continue to believe that smart tax reductions can make a big difference in boosting growth.”

I have two reactions.

• First, the United Kingdom is in trouble because of excessive spending and it is (predictably) disappointing that the IMF actually wants an even bigger burden of government financed by even higher taxes.
• Second, I have zero sympathy for the U.K.’s supposedly conservative government, which is only contemplating tax cuts as an election-year stunt in hopes voters will forget its track record of bad fiscal policy.

Indeed, a squabble between the IMF and the current British government reminds me of the fight more than 10 years ago between the IMF and the European Commission. The best that can be hoped for is plenty of casualties on both sides.

P.S. I can’t resist sharing one additional excerpt.

…economic forecasters are not always right when it comes to predicting the future. The IMF has previously stated its forecasts for most advanced economies, such as the UK’s, have more often than not been within about 1.5 percentage points of what actually happens.

As a general rule, economists are lousy forecasters. But IMF economists seem to be the worst of the worst.

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Stifling VAT Burdens in Europe

I wrote 10 days ago about why a value-added tax would be a mistake for the United States.

To help reinforce that argument, here’s a new map from the Tax Foundation showing VAT rates on the other side of the Atlantic Ocean.

With a few exceptions (notably Switzerland), these hidden taxes are enormous burden. Indeed, the average EU VAT rate is approaching 22 percent, a huge increase over the past five decades.

From a tax policy perspective, high VAT rates are misguided since they increase the gap between pre-tax income and post-tax consumption. And lower-income households are especially disadvantaged.

But high VAT rates also are misguided since they enable bigger burdens of government spending.

Here’s a chart based on OECD tax data and OECD spending data. As you can see, when compared to the United States, higher VAT burdens among EU/OECD members are associated with higher spending burdens.

The bottom line is that the VAT is a money machine for bigger government.

As such, American politicians should not impose this levy and make the US more like Europe.

Unless, of course, the goal is slower growth and less prosperity.

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A State Suicide Pact, Part II

Almost exactly one year ago, I wrote a column about a coordinated effort to impose class-warfare tax increases in seven left-wing states.

Fortunately, that effort fizzled.

Meanwhile, there was continued progress in other states to lower tax rates. The net effect was “the feel-good map of 2023.”

And we have more and more evidence that taxpayers are “voting with their feet” by moving to the lower-tax states.

So it would seem that the issue is settled, right?

Not exactly. Our friends on the left have not given up.

David Chen of the New York Times reports that there’s now an effort to impose class-warfare taxes in 10 states.

Here are some excerpts from his story.

Lawmakers in Vermont are introducing legislation this week that would impose new taxes on the state’s wealthiest residents, joining a growing national campaign… One proposal in Vermont would tax people with more than $10 million in net worth on their capital gains, even if the gains have not yet been realized. Another would add a 3 percent marginal tax on individual incomes exceeding $500,000 a year… The package of bills is part of a broader push across the country by progressive groups… the campaign began in earnest a year ago, when legislators in seven states…coordinated the introduction of bills… None of those proposals got out of committee. But this year, with Vermont, Pennsylvania and possibly other states joining the fold, organizers are redoubling their efforts… Some of the ultrawealthy agree: More than 250 billionaires and millionaires, including heirs to the Rockefeller and Disney fortunes, recently signed an open letter, coinciding with the World Economic Forum in Davos, Switzerland, that urged world leaders to tax them more.

With regards to the rich people who claim to want higher taxes, I invite them to follow these instructions on how to voluntarily pay extra money to Washington.

But since none of them ever go for that option, we can safely assume that they are virtue-signalling hypocrites.

So let’s instead consider what will happen if politicians succeed in raising taxes in any of the 10 states mentioned in the article. And we’ll use Vermont as an example.

The top tax rate in Vermont is currently 8.75 percent and some politicians want to push that rate to 11.75 percent. If they are successful, Vermont will have the nation’s second-highest top tax rate, with only California being worse.

That’s economic suicide, especially since Vermont is right next to zero-tax New Hampshire.

And if Vermont politicians also impose a tax on unrealized capital gains (an idea so crazy that no other government has ever imposed such a levy), then the state’s suicide timetable will get even more compressed.

For what it’s worth, part of me perversely hopes Vermont goes down this path.

Just like it is helpful to have good examples, it’s also helpful to have bad examples. New Hampshire vs. Vermont could be the domestic version of Switzerland vs Greece.

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Kenya Crashes on the Laffer Curve

The Laffer Curve is the common-sense notion that there is not a simplistic mechanical relationship between tax rates and tax revenue.

You also have to consider potential changes to what’s being taxed.

I’ve cited interesting case studies from Canada, Denmark, Hungary, Ireland, Italy, Portugal, Russia, France, and the United Kingdom.

Today we’re going to add Kenya to our list.

But before looking at Kenyan tax policy, let’s first look at some IMF data on the rapidly growing burden of government spending in that East African nation.

That’s a very depressing chart, showing about 10 times as much spending today compared to 20 years ago. But keep in mind that there’s been inflation.

If you look instead at spending as a share of economic output, the government budget is now consuming about 22.5 percent of GDP compared to 15.5 percent of GDP two decades ago.

A very troubling development, though not as bad as implied by the chart.

As is usually the case, bad spending policy has led to bad tax policy. Kenyan politicians have been trying to squeeze more money out of the private sector.

However, as reported by Victor Amadala for the Star, higher taxes are backfiring.

Kenyans…talked to the Star on measures they take to survive in a tough economic environment characterized by the high cost of goods and services due to high taxes… Last year, the government introduced several tax measures in the Finance Act, 2023 that added pressure on taxpayers, pushing up the cost of living. It, for instance, doubled Value Added Tax to 16 percent on fuel… Others are the introduction of a housing levy and raised deductions on national health coverage and social protection. …An analysis of official data by both the Kenya National Bureau of Statistics and the Energy and Petroleum Regulatory Authority (EPRA) shows kerosene consumption dropped by almost half, three months after VAT on fuel doubled in July last year. Only 15.3 million litres of kerosene were sold in the review period compared to 28.8 million litres same period in 2022, the lowest in past five years. …The state is on the receiving end as consumers become creative to escape high taxes. The latest report by the Parliamentary Budget Office (BPO) shows Kenya Revenue Authority (KRA) missed the tax revenue collection target for quarter one of the current financial year by Sh72.5 billion. …”You cannot defy the Laffer Curve theory and survive. Tax measures must be of mutual benefit between the public and the state. This is just the tip of the iceberg, winter is coming,” an economist Shem Mutonji opines. …This sentiment is echoed by his colleague, Joe Ngatia who says you cannot overmilk a cow to prosperity for “It will throw a hoaf in desperation.”

Sounds like we need Shem Mutonji and Joe Ngatia working for the U.S. Treasury. Maybe they could convince Joe Biden that overtaxing the American economy is not a good idea.

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Why Is Someone at AEI Proposing a Massive Tax Increase to Finance Ever-Growing Government, Part II?

I wrote yesterday to criticize Andrew Biggs of the American Enterprise Institute and Alicia Munnell of Boston College for suggesting a $3 trillion 10-year tax increase on IRAs and 401(k)s.

My column explained that more double taxation was a bad idea, and I also pointed out that shifting to a savings-based system was the right way of addressing Social Security’s long-run fiscal problems.

But I committed a sin of omission, which needs to be rectified.

I did not challenge the Biggs-Munnell assumption that a big tax increase would deal with Social Security’s huge funding shortfall.

That was a mistake on my part. We have lots of evidence, as Milton Friedman wisely observed, that tax increases “feed the beast.”

In other words, politicians will increase the burden of spending when they get more revenue.

And this point is especially relevant because today’s column is going to analyze another giant tax increase being advocated by someone at the American Enterprise Institute.

Just last month, Alan Viard testified to a subommittee in Congress in favor of an add-on value-added tax. Here are some excerpts from his testimony.

A value-added tax (VAT) is an essential component… The United States should follow the lead of 170 other countries and territories by adding a VAT… We should act sooner rather than later to limit the debt buildup and ease the fiscal burden on future generations. …there is no viable way to fully address the fiscal imbalance without middle-class tax increases. …The European Union, the International Monetary Fund, and the World Bank have promoted the VAT. …To be sure, the VAT is not as economically efficient as entitlement benefit cuts. Notably, a VAT (or a retail sales tax) creates work disincentives similar to those created by income taxes. …When addressing the fiscal imbalance, time is not on our side. To promote long-term economic growth and ease the fiscal burden on future generations, we should adopt a VAT sooner rather than later.

I’m not sure why Viard thinks copying bad policies of other countries is a good idea. Especially since the United States is much richer than about 98 percent of those nations. Seems like they should be copying us.

But the main point I want to get across is that it is utterly naive to think that giving politicians a huge source of additional revenue will lead to less debt.

Why do I say that?

For the simple reason that the nations most similar to the United States tried Viard’s approach and the results were horrible.

I’m going to recycle three charts from last year. The first one shows that the tax burden increased dramatically in Western Europe over the past 50-plus years – in large part because all those nations adopted big value-added taxes.

My second chart than asked whether those massive tax increases in Europe reduced the debt, which averaged about 45 percent of GDP in the late 1960s.

The answer, unsurprisingly, is that debt increased. Dramatically.

Politicians spent every single penny of the additional revenue. And then spent even more.

So much more spending that debt in Western Europe now averages 90 percent of GDP, two times higher than it was before value-added taxes were imposed.

Needless to say, Viard did not address that point in his testimony.

But someone did touch on that issue when testifying to many years ago.

Here’s what that charming and lovable person said.

P.S. In the above charts, I used averages for five-year periods so that nobody could accuse me of cherry-picking a single year that might not be representative of actual trends.

P.P.S. Some readers may be wondering if debt skyrocketed in Europe because of emergency pandemic spending instead of the value-added tax. Nope. I also did similar sets of charts in 2012 and 2016 and you see the same pattern. All that has changed is that taxes, spending, and debt get higher every time I update the numbers.

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Why Is Someone at AEI Proposing a Massive Tax Increase to Finance Ever-Growing Government, Part I?

Serious and responsible people (in other words, not Trump or Biden) know that Social Security has a massive long-run problem.

A fast-growing number of seniors are expecting future benefits but only a slow-growing number of workers will be paying into the system.

But even if this demographic problem didn’t exist, there is the underlying flaw of a retirement system based on tax-and-spend (or debt-and-spend) rather than wealth accumulation.

The solution is obvious.

We need to shift to a system based on personal retirement accounts.

The transition to a modern system will be expensive, to be sure, but not nearly as costly as the $60 trillion-plus burden of propping up the current system.

But some people prefer the more-expensive option.

Andrew Biggs of the American Enterprise Institute and Alicia Munnell of Boston College want to divert a massive amount of money from the private sector to the government, and they want to do it by double-taxing the money Americans have in retirement accounts.

Here are excerpts from their new report.

The U.S. Treasury estimates that the tax preference for employer-sponsored retirement plans and IRAs reduced federal income taxes by about $185-$189 billion in 2020, equal to about 0.9 percent of gross domestic product. …it actually offers policymakers an opportunity to strengthen the nation’s retirement income system. Revenues saved from repealing the retirement saving tax preferences could be reallocated to address the majority of Social Security’s long-term funding gap. …an opportunity to use taxpayer resources more productively. …the case is strong for eliminating the current tax expenditures on retirement plans, and using the increase in tax revenues to address Social Security’s long-term financing shortfall. …Tax expenditures for employer-sponsored retirement plans are expensive – costing about $185 billion in 2020. … reducing tax expenditures for retirement plans could be an effective way to help address other pressing demands on the federal budget, such as Social Security’s financing shortfall.

By the way, it is no exaggeration to say the authors “want to divert a massive amount of money” to politicians over the next decade. Based on the Congressional Budget Office’s latest 10-year forecast, 0.9 percent of GDP is about $3 trillion.

It’s not just that the authors want to prop up a system that needs reform.

They also want to undo provisions in the tax code (IRAs and 401(k)s) that allow people to protect themselves against two layers of tax on income that is saved and invested.

It’s also laughable that the report states that a huge tax increase will “use taxpayer resources more productively.” If higher taxes to fund bigger government was a good idea, Europe’s welfare states would be richer than the United States rather than way behind.

Even the title of the Biggs-Munnell study is offensive. It implies that taxpayers are getting a handout or favor if politicians don’t impose double taxation. At the risk of understatement, being taxed one time rather than two times is not a subsidy.

P.S. The better option is a shift to retirement systems based on private savings, like the ones in Australia, Chile, Switzerland, Hong Kong, Netherlands, the Faroe Islands, Denmark, Israel, and Sweden.

P.P.S. Biggs and Munnell are misguided for wanting a big tax increase to prop up a bankrupt system. That’s the bad news. The worse news is that some people want to expand the bankrupt system. And they are proposing tax increases that arguably would cause even more economic damage.

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Senator Bill Cassidy, Senator Lindsey Graham, and other Pro-Tax Republicans

I’m a fan of the no-tax increase pledge for the simple reason that our greatest economic threat is the rising burden of government spending.

And since there are only three ways that politicians can finance spending (taxes, borrowing, and money-printing), I’m in favor of making those options more difficult.

Sadly, some GOP politicians don’t understand – or don’t care – about restraining the burden of government spending.

Using global warming as an excuse, they want a big tax on some imported goods.

The Wall Street Journal editorialized against the pro-tax wing of the Republican Party.

Too many Republicans these days have lost their economic bearings. Look no further than a GOP Senate bill that would enact a carbon tariff—i.e., a new tax. …The Foreign Pollution Fee Act, sponsored by Louisiana’s Bill Cassidy and South Carolina’s Lindsey Graham, could well have been written by the Sierra Club and AFL-CIO. …The bill would expand the administrative state by creating a new bureaucracy with sweeping powers that would be hard for future Congresses to rein in. …the bill defines “pollution” as “greenhouse gas emissions.” This is a gift to Democrats who have been trying to codify the Supreme Court’s misconceived Massachusetts v. EPA (2007) ruling that let the Environmental Protection Agency regulate greenhouse gases as pollutants. This is the Administration’s legal justification for its back-door ban on gas-powered cars. …The bill’s unstated purpose is to protect American businesses from foreign competition as they face rising energy costs at home owing to the government’s force-fed green-energy transition. Mr. Cassidy..’s right that rising energy prices could discourage U.S. manufacturing investment and undercut Washington’s industrial policy. But layering a carbon tax on top of sundry green-energy subsidies would raise U.S. manufacturers’ costs and create a Rube Goldberg contraption of economic distortions. …Senate Democrats last Congress introduced two carbon tariff bills, which have the added virtue for progressives of raising revenue they can spend.

Daren Bakst of the Competitive Enterprise Institute opined about this issue in a column for the Hill.

…new taxes, higher prices, punishing energy use, and giving foreign countries leverage over how the U.S. regulates. …a handful of Republicans are promoting a policy idea that will lead to those very outcomes. A carbon tariff is a tax on imported goods. It would result in American businesses and consumers paying higher prices. …There are actually two taxes of concern with these bills: the tax on imports and a domestic carbon tax. Once an emissions measuring scheme for domestic and foreign products has been established to impose a carbon tariff, it will also put in place the structure necessary for domestic carbon tax advocates to impose this new tax on Americans. It would be naïve to think otherwise. In fact, a domestic carbon tax would likely be required in order to impose a carbon tariff that complies with our international trade obligations. …a carbon tariff is a tax on the energy that makes modern life possible and keeps billions of people alive every winter. Put more simply, it’s a tax on modern life. It would, among other things, make medical care, housing, communications, and transportation less affordable, especially for people who already struggle to pay their bills. …Policymakers, regardless of party, should reject anything connected to carbon tariffs. After all, higher taxes and higher prices are terrible policy and will undermine the economic wellbeing of all Americans.

I don’t like carbon taxes, but I don’t want to focus on that issue (you can read my thoughts here).

I don’t like carbon protectionism, but I don’t want to focus on that issue (you can read my thoughts here).

I don’t like any type of protectionism, but I don’t want to focus on that issue (you can read my thought here).

Instead, I want to stress a very simple point. The Republicans pushing this new tax could have made their plan fiscally legitimate – and perhaps even defensible – by including an offsetting tax cut.

In other words, if their proposed tax would generate X billion dollars, their legislation should also include provisions reducing other taxes by X billion dollars.

Depending on the size of their tax increase, it might generate enough revenue to get rid of the capital gains tax. Or the death tax.

There are many attractive and much-needed tax cuts. The fact that supporters did not propose offsetting tax cuts is a giant red flag.

P.S. Some supporters have tried to justify this tax increase by claiming that it’s just a way of punishing China.

But Daren Bakst debunked that claim in his column.

…if Cassidy is really concerned with China’s emissions, he should develop legislation that is specifically targeted at China, which doesn’t simultaneously torpedo America’s well-being. …There is something far more direct that Cassidy could do to address China’s emissions: propose that China no longer be considered a developing country in environmental agreements. China’s current designation as a developing country means that China doesn’t have the same emissions reduction obligations as the U.S.

P.P.S. Even though I said I wouldn’t address the issue of carbon taxes, I can’t resist making one final observation. Some of the supporters of carbon-based tariffs claim they are against carbon taxes. But this reminds me of the fight back in 2017 when some Republicans were pushing a “destination-based cash-flow tax” that would have set the stage for a value-added tax. The one big difference is that at least supporters of the DBCFT proposed offsetting tax cuts. So their hearts were in the right place. Too bad we can’t say the same for Republicans who are pushing for carbon protectionism today.

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Why – and How – to Squeeze Tax Loopholes

Public-finance economists generally agree about three principles of good tax policy.

1. Avoid high marginal tax rates on productive behaviors such as work.
2. Don’t have extra layers of tax on income that is saved and invested.
3. Eliminate tax loopholes that cause harmful economic distortions.

For what it’s worth, I would add a fourth bullet point about limiting the overall tax burden (in hopes of making it harder for politicians to increase the spending burden), and that’s somewhat important for purposes of today’s column.

George Callas, a former senior Republican tax staffer on Capitol Hill, recently authored a column for the Wall Street Journal on indefensible tax preferences that benefit big businesses and upper-income taxpayers. Here are some excerpts.

The Limit, Save, Grow Act would have cut trillions of dollars in spending and raised $515 billion in revenue by ending many of the Inflation Reduction Act’s green-energy subsidies. By raising revenue in a way that advanced conservative principles, the party showed it could promote deficit reduction… House and Senate Republicans should seize every opportunity to end tax loopholes incongruent with conservative values and direct the revenue to repairing our nation’s balance sheet. Here are five such fixes. …First, eliminate the deduction for state and local taxes. …Second, revisit tax exemptions for large nonprofits that generate billions in revenue. …Third, close the so-called round-tripping loophole that allows multinational corporations to route profits from sales to the U.S. through foreign tax havens. …Fourth, treat corporate stock buybacks more like dividends for tax purposes. …Fifth, repeal the preferential qualified small-business-stock exemption for venture-capital profits. …These proposals are consistent with free-market governance.

There is a lot to like in the above analysis. But there is also a glaring problem. He writes that “raising revenue” would be a way to “promote deficit reduction.”

In other words, he thinks Republicans should support tax increases. That’s wrong.

• It’s wrong because we have a spending problem in Washington and replacing debt-financed spending with tax-financed spending would not solve the problem.
• It’s also wrong because giving politicians more money inevitably means they will spend more money. In other words, it’s futile to think tax increases will be used to reduce red ink.

The willingness to give politicians more money to waste is a fundamental mistake.

That being said, I also think Mr. Callas missed the mark somewhat in his list of so-called tax loopholes. In part, this is because I think he is wrong to target stock buybacks.

But I think the bigger sin of omission is that he missed out on a couple of major tax preferences that each could finance $1 trillion or more of pro-growth changes over the next 10 years.

Municipal bond interest – Under current law, there is no federal tax on the interest paid to owners of bonds issued by state and local governments. This “muni-bond” loophole is very bad tax policy since it creates an incentive that diverts capital from private business investment to subsidizing the profligacy of cities like Chicago and states like California.

Healthcare exclusion – Current law also allows a giant tax break for fringe benefits. When companies purchase health insurance plans for employees, that compensation escapes both payroll taxes and income taxes. Repealing – or at least capping – this exclusion could raise a lot of money for pro-growth reforms (and it would be good healthcare policy as well).

The bottom line is that we need real tax reform, such as a flat tax. That means getting rid of all loopholes to generate trillions of dollars of revenue…so long as every penny of that money is used to finance good things like lower tax rates and less double taxation.

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The IMF’s Campaign to Keep Poor Countries Impoverished

What’s the best way of helping poor countries achieve faster growth so they can converge with rich nations?

Sensible people respond with a range of good answers.

• Removing trade barriers.
• Lowering corruption.
• Improved rule of law.
• Minimizing red tape.
• Reducing fiscal burdens.
• Sound monetary policy.

Unfortunately, the world has plenty of people who are not sensible (or who have a self-interested reason to make senseless arguments). And some of them have congregated at the International Monetary Fund.

That bureaucracy recently published its recipe for economic development and – keeping with long-standing IMF tradition – endorsed massive tax increases for poor nations. Here’s their main recommendation.

You may be wondering why IMF bureaucrats want to make life more difficult for people in developing nations.

Here’s some of what was written by Vitor Gaspar, Mario Mansour, and Charles Vellutini.

Emerging markets and developing economies need $3 trillion annually through 2030 to finance their development goals … That amounts to about 7 percent of these countries’ combined 2022 gross domestic product and poses a formidable challenge… Our new research finds that many countries have the potential to increase their tax-to-GDP ratios—enabling them to provide critical government services—by as much as 9 percentage points… Countries have considerable room to collect more revenue based on their tax potential… We find that low-income countries could raise their tax-to-GDP ratio by as much as 6.7 percentage points on average. …The total revenue-raising potential, at 9 percentage points of GDP—a staggering two-thirds increase relative to their tax-to-GDP ratio in 2020… Similarly, emerging market economies can raise their tax-to-GDP ratio by 5 percentage points on average.

There are two things to address in the above excerpt.

First is it possible that developing nations, with sufficient “tax effort,” can increase their tax burdens by an average of 9 percentage points of GDP? Perhaps.

Second (and far more important), would that be a good idea? For people who care about empirical reality, definitely not.

Allow me to briefly elaborate on this second point. Bureaucrats at the IMF want readers to blindly accept the assertion that $3 trillion of additional tax revenue will help achieve development goals.

But notice that the IMF does not provide any supporting evidence. And neither do any of the other international bureaucracies making similar arguments.

Why don’t they offer any evidence? Why have not responded to my repeated requests to provide at least one example of a country that got rich by increasing fiscal burdens?

For the simple reason that every rich country in the world got rich when it had small government and low taxes.

In other words, the nations that achieved “development goals” took the opposite approach of what the IMF is recommending.

P.S. If the world truly is suffering from inadequate tax revenue, you would think that IMF bureaucrats would give up their special perk of tax-free salaries. But don’t hold your breath waiting for that to happen.

P.P.S. To give the IMF credit, the bureaucrats don’t discriminate. Yes, they push for bad fiscal policy in relatively poor parts of Africa, Asia, and Latin America, but they also argue for higher taxes and bigger government in relatively rich places, like Japan, Europe, and the United States.

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Beware Bad Budget Deals, Part II

Even though America’s fiscal policy is in bad shape and getting worse, I’m afraid that politicians who claim to want to make things better will wind up making things worse.

For instance, when two former Senators (Rob Portman of Ohio and Kent Conrad of North Dakota) wrote earlier this year that it was time for a bipartisan commission to deal with the budget, I offered two reasons why I was unhappy with their proposal.

1. They focus on red ink, which should be viewed as a symptom. The real problem is excessive spending. Real-world evidence shows that if you cure the underlying disease of excessive government, you automatically solve the symptom of deficits and debt.

2. They explicitly – and mistakenly – open the door to tax increases. But once taxes are on the table, we know from history that the result will be a deal filled with (very bad) tax increases and make-believe (and quickly vanishing) spending restraint.

By the way, my opposition to higher taxes is practical rather than ideological. Back in 2012, I listed three big tax increases I would accept assuming politicians would be willing to make some long-overdue spending changes such as genuine entitlement reform.

But nobody on the left is interested in the types of deals I listed, even though I offered to accept $1 trillion of higher taxes over 10 years.

Instead, they want a traditional Washington budget deal, which means permanent tax increases mixed with make-believe (and quickly evaporating) spending cuts.

If you think I’m being too pessimistic, let’s look at some excerpts from a recent column in the Washington Post by two law professors, Natasha Sarin and Kimberly Clausing.

…let us offer a ray of hope: An opportunity is fast approaching to turn onto a more fiscally sustainable path. Many of the Trump administration tax cuts are set to expire at the end of 2025, and a full extension of the expiring cuts would cost more than $3 trillion, presenting an important moment of fiscal reckoning for policymakers. …At minimum, policymakers should commit to paying for any tax cuts they extend. But given the seriousness of our fiscal problem, their aspirations — and ours — need to be loftier: Raise enough to make a meaningful dent on the deficit, while paying for needed policy changes such as a fully refundable child tax credit… To do this, policymakers will need to find better sources of revenue for the years ahead.

As you might expect, the two academics propose a bunch of class-warfare taxes (which won’t raise as much money as they think), along with a big energy tax on American consumers.

…In a recently released paper, we suggest a menu of nearly $3.5 trillion in progressive revenue increases…corporate changes would raise (on net) about $1.5 trillion over 10 years…we suggest a corporate carbon fee… For individuals, we suggest somewhat higher rates on capital income and estates, raising $650 billion.

They say their plan is a “ray of hope,” but it would be a nightmare for taxpayers.

And they don’t even pretend to match their huge tax increases with any restraint on the spending side of the fiscal ledger.

Heck, they openly propose to use a big chunk of the new revenues to finance a bigger welfare state.

P.S. Just in case you want to put hope over experience and allow taxes to be part of the discussion, check out this updated data from Europe.

P.P.S. There was one budget deal that led to a surplus and it had one major difference compared to the budget deals that failed.

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Paul Krugman’s Convenient U-Turn on Deficits

Paul Krugman isn’t always wrong. A few years ago, for instance, he admitted the Laffer Curve is real.

And he even once wrote something sensible about tax policy.

But those are the exceptions. His usual routine is to pontificate in favor of bigger government.

Which drives him to make weak attacks on Reaganomics and weak defenses of Bidenomics.

And his ideological zeal leads him to make errors (often about U.S. data, but also about what’s happened in Canada, Germany, Estonia, the PIIGS, Denmark, and the United Kingdom).

Today, we are going to look at an example of him pursuing his goal of bigger government.

Here’s some of what he wrote in his latest column for the New York Times.

…one piece of the economic picture that’s worrisome: Long-term interest rates have gone up a lot since early 2002, especially over the past six months… It’s not a crisis, at least not yet. But in a better world we’d be taking action to bring interest rates down in a sustainable way. In particular, now would be a good time to rein in budget deficits. …To make room for lower interest rates, then, we would need to take some heat out of the economy in another way — most obviously by reducing the budget deficit.

Since Krugman is an unabashed supporter of Keynesian economics, you may be wondering about his sudden embrace of deficit reduction.

He tries to preemptively address that issue.

…some readers may be surprised to hear me saying that. After all, I spent a large part of the past 15 years inveighing against the deficit scolds… But there’s a big difference between obsessing over the budget deficit in, say, early 2013 and believing that we could use a lower deficit now. Back then, the interest rate on bonds protected against inflation risk was negative, so that investors were in effect paying the federal government to take their money. Now that rate is 2.4 percent. So it makes much more sense to be worried about borrowing now.

Needless to say, there were many people who pointed out that borrowing when interest rates were low was a risky strategy when those loans would have to be rolled over in the future when interest rates were higher.

Such as today.

But let’s set that issue aside and get to Krugman’s real point.

He wants America to become a high-tax European-style welfare state, even though that means much lower living standards.

The United States has a much weaker social safety net than other advanced economies, reflecting low government social spending… But what about the deficit? Well, there’s an obvious answer: Collect more taxes. America is in fact a very low-tax nation compared with Europe…while Democrats are at least willing to tax the rich, that by itself won’t be enough (although it would help)…they aren’t willing to take the political heat for proposing tax hikes on the middle class.

I’ll close by venturing a guess that Krugman is like me in that neither one of us is overly fixated about deficits.

But we have a giant difference in that I want smaller government and lower taxes, regardless of whether deficits are small or large.

And he wants bigger government and higher taxes, regardless of whether deficits are small or large.

P.S. Notice, by the way, that Krugman (again) endorsed higher taxes on lower-income and middle-class household. So give him credit for being an honest leftist.

P.P.S. But perhaps also a silly leftist.

P.P.P.S. I was unimpressed by his criticism of my analysis.

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More Taxes = More Spending = More Debt

I’ve been warning for many years (including less than two weeks ago) that it would be a big mistake to have a “grand bargain” budget deal that includes tax increases.

This is not because of math. It is possible, of course, to have an acceptable budget agreement that includes tax increases.

But only in theory. In reality, we have gobs of evidence (even from the New York Times, albeit inadvertently) that budget deals with higher taxes don’t work.

The reason is that politicians can’t resist the temptation to increase spending whenever they think more tax revenue might be available.

In other words, Milton Friedman was right when he warned that “History shows that over a long period of time government will spend whatever the tax system raises plus as much more as it can get away with.”

Unfortunately, some people don’t understand history. Or they don’t care.

For instance, Fareed Zakaria argues in the Washington Post that politicians should impose a value-added tax. Here are some excerpts.

Total debt is now more than $33 trillion, the deficit is over 7 percent of gross domestic product, and this year’s net interest payment on the debt will probably be over $650 billion… For almost a generation, policymakers have been able to avoid seriously confronting deficits… Fortunately, there is a simple solution staring us in the face… Adopt a national sales tax, like every other advanced economy in the world. …According to the Congressional Budget Office, a broad 5 percent tax of this kind could raise $3 trillion over the next decade… On average, European Union countries get roughly 20 percent of their tax revenue from a VAT; the United States is getting zero. …It is time for the United States to join more than 160 other countries with a value-added tax and ask all Americans to chip in to set the country on a firmer fiscal path for decades.

Zakaria’s numbers are accurate. A VAT would raise a lot of money, as predicted by the CBO. And European nations generate a lot of VAT revenue.

But what about his analysis? Is Zakaria correct that a VAT would put America on “a firmer fiscal path”?

Since he cites Europe, let’s look at the evidence. I did this back in 2012, looking at the nations in Western Europe that are most similar to the United States, and comparing tax and debt levels both before and after value-added taxes.

And I did the same thing in 2016. In both cases, I used five-year averages to ensure that the numbers were not misleading because of the business cycle or anything else that might produce quirky data for a year or two.

In both cases, I found that politicians imposed massive tax increases, with VATs playing a big role. But I also discovered that politicians spent even more money (just as Friedman predicted), so the net result was more red ink.

Let’s now update that research.

We’ll start with this chart, which shows yet again that there has been a massive increase in tax revenue in Western European nations over the past five-plus decades.

If Zakaria and other pro-tax increase people are right, all that new revenue should have produced “a firmer fiscal path” of less debt.

Our second chart shows that government debt in the late 1960s averaged about 45 percent of GDP in Western Europe.

So what actually happened?

Did debt get paid off? Did debt get reduced? Was Western Europe put on “a firmer fiscal path”?

Of course not

As shown in our final chart, debt levels in the past five-plus decades have doubled to nearly 90 percent of GDP.

By the way, I’m mixing and matching data from several sources, so I’m sure that the numbers from the late 1960s are not a perfect match for the IMF numbers I used for 1919-2023.

That being said, there’s no arguing with the core finding. Massive revenue increases resulted in much higher levels of red ink because politicians increased the burden of government spending even faster.

Needless to say, analysis from “public choice” tells us that the same thing would happen in the United States.

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There Are Not Enough Rich People to Finance European-Sized Government

Mostly because of an aging population, entitlement spending in the United States is projected to become a much bigger burden.

Without reform of those programs, the U.S. within a few decades will have a European-sized level of government spending.

Joe Biden and Donald Trump have both stated that they oppose entitlement reform, so this raises the very important question of how they would finance this massive expansion in the burden of government.

Biden’s answer is “tax the rich” while Trump simply pretends the problem doesn’t exist.

Since there’s no way of dealing logically with Trump’s head-in-the-sand approach, let’s address Biden’s supposed solution of soak-the-rich taxes (and keep in mind Biden wants several trillion dollars of new spending on top of the trillions of dollars of higher spending that’s already in the pipeline for existing entitlements).

I’ve written about this issue before, but this is an opportune time for some new data since Brian Riedl of the Manhattan Institute has a new study on the topic.

Here’s the table he put together of the revenue that might be generated by the various class-warfare tax proposals the left has offered.

As you can see, establishment sources estimate the maximum revenue from all of these soak-the-rich tax increases is 2 percent of GDP.

And the actual revenue collected would be lower because all of these tax hikes would significantly undermine incentives to engage in productive behavior by entrepreneurs, investors, small business owners, and others.

Would 1-2 percent of GDP be enough to finance existing spending promises, as well as Biden’s proposals for more spending?

Not even close. As Brian explains, it doesn’t even deal with current levels of spending.

Budget deficits have risen to nearly 6% of GDP and are projected to rise to 10% of GDP over three decades. …To close these baseline deficits and finance additional expansions, most progressives reject most spending cuts as well as middle-class tax increases. Instead, just “tax the rich” has become an easy and popular answer. However, …the plausible revenue estimates from these proposals fall far short of closing these budget gaps. …America’s federal tax code is already the most progressive in the Organisation for Economic Co-operation and Development (OECD) and has become sharply more progressive over the past 40 years. Much of this tax progressivity is the result of drastic cuts to low- and middle-income taxes while leaving upper-income-tax rates closer to international norms. …Europe’s significantly higher tax revenues are driven overwhelmingly by broad-based consumption and payroll taxes, rather than by notably higher tax rates on the wealthy.

In other words, Brian’s research confirms my Twelfth Theorem of Government.

This is true even in Nordic nations, as Brian explains.

American progressives often hold up Europe—and especially the Scandinavian social democracies of Denmark, Finland, Norway, and Sweden—as successful tax-the-rich utopias that the U.S. should replicate. In reality, European tax systems do not fit the American progressive stereotype, as their higher revenues are overwhelmingly raised through steep income, payroll, and consumption taxes on the middle class.

Here’s a table from the study showing that Denmark, Finland, Norway, and Sweden have slightly higher taxes on income and capital gains, but that’s offset by lower taxes on corporations and lower death taxes.

So what’s the bottom line?

Simply stated, as explained in my Fifteenth Theorem of Government, there is no way to have European-sized government without European-level taxes on lower-income and middle-class households.

As you can see from this table, it’s the only place where there is substantial potential tax revenue.

P.S. There’s one final excerpt from the study I want to share.

I mentioned above that class-warfare taxes would be very detrimental to growth. Well, don’t forget that payroll and consumption taxes are bad for growth as well. And a bigger burden of government spending also is very harmful to prosperity.

So if we go down the wrong path of bigger government and higher taxes, we can expect European-style economic anemia. And Brian explains that also has fiscal consequences.

…a tax package that reduces annual economic growth rates by 1 percentage point would, in turn, reduce tax revenues by $3.3 trillion over the decade—likely canceling all static tax-revenue gains while also costing jobs and reducing incomes. In other words, tax-the-rich advocates cannot afford to ignore economic considerations. Raising every upper-income-tax rate to its revenue-maximizing level—the point at which the economic damage cancels out any additional revenues—is a recipe for economic stagnation, job losses, and declining incomes.

At the risk of understatement, we don’t want to copy Europe.

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Soda Taxes Are Wrong, but Not Educating Kids is Worse

I wrote more than four years ago about a misguided soda tax in Philadelphia. This video from John Stossel updates us on what’s happened.

As usual, John makes good points

I’m especially amazed that he was able to get an overpaid local politician to go on camera to defend such an indefensible levy.

And it was also nice to see that he exposed the local politicians for spending some of the money on things other than early childhood education.

But some of the money presumably was spent as promised, and my contribution to this discussion will be an investigation of whether the money was used productively.

In other words, did young children see improved performance?

Based on test scores reported by the city, the answer is no. Here’s the data on test scores for English. As you can see, not only does Philadelphia do a rotten job, with only about one in three students being proficient, the test scores are lower today than when the was first approved back in 2016.

The math scores also are dismal, with fewer than 30 percent of students being proficient.

Though there’s a slight improvement since 2016, so the news is not uniformly bad.

So what’s the bottom line?

I don’t know whether the education bureaucracy got a lot of money from the soda tax or a small amount, but we can definitely say that overall performance among third graders (the students who presumably were supposed to have benefited over the past few years) was flat, with a slight improvement in math being offset by a slight decline in English.

None of this should be a surprise. There is a lot of research showing that you don’t improve educational outcomes by dumping more money into government schools.

If Philadelphia politicians actually want to help students, either young or old, they should adopt school choice.

But if they want to buy votes, they should continue with their tax-and-spend agenda (and we can all guess their top priority).

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Beware Bad Budget Deals, Part I

Even though America’s long-run fiscal outlook is very grim, I wrote a two-part series earlier this year (here and here) to explain why the situation is not hopeless.

First and foremost, I noted that the only good solution is long-run spending restraint. Fortunately, that’s been done before. There have been three periods of good fiscal policy in recent decades.

• Under Reagan.
• In the 1990s.
• The Tea Party.

And I also explained that we already know what specifically needs to be done to fix entitlements (which unambiguously are the cause of our long-run problems).

In other words, we know the problem, we know how to solve it, and history shows that periods of fiscal restraint are possible.

I’m not the only one who is expressing optimism.

Two former Senators, Rob Portman (R-OH) and Kent Conrad (D-ND), have a column in yesterday’s Washington Post about the need to address America’s fiscal problems.

And they also don’t think the situation is hopeless. Here’s their core argument.

The deficit has doubled in the past year, and the national debt — some $33 trillion… — is diminishing our standing in the world. It is immoral to leave this level of debt to our children and grandchildren, and it is already affecting our economy. …But this is not a hopeless situation. …it is time to try an approach that removes some of our divisive politics from the picture: Congress must establish a bipartisan commission to put the country on a sustainable fiscal path. …Democrats will resist many of the necessary spending reductions, Republicans will resist needed revenue increases, and Democrats and Republicans alike will balk at the needed reforms to entitlement programs. But this approach has repeatedly helped move the country out of stalemate in the past. …our near- and long-term fiscal outlook is dangerously unsustainable. A fiscal commission should explain in objective terms the fiscal crisis we face and its consequences, scrutinize the entire federal budget, and make specific recommendations on revenue and spending, including what should be done to rescue our entitlement programs from insolvency. …A bipartisan commission might be our best chance to bestow upon future generations a stable financial future rather than an overwhelming financial burden and an America in decline.

I’m glad that these two former lawmakers are calling attention to our fiscal mess.

That being said, I have two big concerns with their argument.

1. They focus on red ink, which should be viewed as a symptom. The real problem is excessive spending. Real-world evidence shows that if you cure the underlying disease of excessive government, you automatically solve the symptom of deficits and debt.
2. They explicitly – and mistakenly – open the door to tax increases. But once taxes are on the table, we know from history that the result will be a deal filled with (very bad) tax increases and make-believe (and quickly vanishing) spending restraint.

Interestingly, the New York Times accidentally did some research that proves my case.

In an article back in 2011, Catherine Rampell looked at various bipartisan budget deal to measure the ratio of tax increases to (supposed) spending cuts.

What she found was that only one budget deal had zero tax increases, the one in 1997. Indeed, that budget deal actually cut taxes.

And guess what? That was the only budget deal that produced a budget surplus.

The moral of the story should be obvious.

P.S. Senators Portman and Conrad seem to think that Simpson-Bowles budget plan is a good framework, but I explained in 2012 and 2013 why that plan would be an unmitigated disaster.

P.P.S. My opposition to higher taxes is practical rather than ideological. Back in 2012, I listed three big tax increases I would accept assuming politicians would be willing to make some long-overdue spending reforms. Suffice to say nobody on the left has been willing to accept that offer.

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The Failure of Big-Government Tories Should Be a Warning to Big-Government Republicans

I’ve been very critical of big-spending Republicans like Trump for two reasons.

• First, bigger government saps economic vitality by diverting resources from the economy’s productive sector.
• Second, bigger government sooner or later will lead to massive tax increases such as a value-added tax.

I’ve also been critical of big spending Tories in the United Kingdom.

Just as today’s Republicans have forgotten the lessons of Ronald Reagan, the U.K.’s Conservative Party has forgotten the legacy of Margaret Thatcher.

To be more specific, the Tories have allowed spending to increase, particularly during the pandemic.

But rather than undo that mistake, they have opted for big tax increases.

This is a path that is bad policy…and bad politics.

On that topic, Joseph Sternberg of the Wall Street Journal opined last week about the feckless incompetence of the British Conservative Party.

The Tories made a deal with the devil when they won power in 2010. Today they’re paying up. The deal concerned spending. Prime Minister David Cameron and Chancellor George Osborne rode into office in 2010 on the back of a global financial panic that had become a fiscal crisis for the U.K. Government spending had ballooned to just above 46% of gross domestic product in the 2009-10 fiscal year, a level not seen since the mid-1970s… Believe it or not, British voters care about such things and responded well to Tory promises to get a grip on the public purse. But Messrs. Cameron and Osborne weren’t entirely candid… The absolute level of spending in inflation-adjusted terms was roughly 1.4% lower in 2013-14 than it had been when Messrs. Cameron and Osborne took office, but then crept upward to end the decade 3.5% higher than at the start of the Tories’ term. …a dollop of ultracheap money thanks to low interest rates…allowed the Tories to redistribute public spending toward entitlements. Social transfers to the elderly grew as a proportion of total spending to 14.5% from 13.8% between 2009-10 and 2019-20, and health spending grew to 18.5% from 16.2% as the Conservatives shoveled money into the NHS. …This shift has made the Tories the indentured servants of the welfare state. …If they lose the next election, a big part of the reason will be their twin failures to make realistic entitlement pledges and to prevent entitlements from devouring the cash necessary to fulfill their other promises. …When Mr. Trump inveighs against Social Security and Medicare reform, he threatens to ensnare the Republican Party in the same form of fiscal servitude in which British Tories are trapped.

For American readers, the last sentence of the above excerpt is key.

The Trump position on entitlements of kicking the can down the road is a recipe for massive future tax increases.

For British readers, the fecklessness of Tories is producing policies that are definitely bad for the U.K. economy (but almost certainly will be good for the Labour Party when the next election occurs).

The moral of the story is that good policy is not easy, but it beats the alternative.

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Prosperity and Taxation: What Can We Learn from the 1950s (Part II)?

I wrote in 2017 that class warfare in the 1950s did not work because well-to-do taxpayers could choose to earn less, evade taxes, or avoid taxes.

In this video, Brian Domitrovic elaborates on the failure of confiscatory tax rates.

Let’s dig deeper into this topic, and we’ll start with this table from a 2012 article by James Pethokoukis.

It shows that income tax revenues during the 1950s were lower than they were in the 1960s (after the Kennedy tax cuts) and the 1980s (after the Reagan tax cuts).

Here’s some of what he wrote to accompany the table.

1950s tax rates actually generated less tax revenue than subsequent periods of lower rates. From 1950 to 1963, income tax revenue averaged 7.5 percent of GDP; that’s less than in the Reagan years when rates were being slashed. This could suggest that rates are right around the Laffer Curve equilibrium point in the current economy. …And, of course, an ultrahigh tax rate on an initially small slice of the population…would neither raise very much revenue nor do anything to create jobs. And look at what just happened in Great Britain. Their Independent Fiscal Oversight Commission—which reviews all of the budgetary assumptions—just ruled that cutting the top rate of tax from 50 to 45 was revenue neutral, implying the revenue maximizing rate is in that range. The Brits don’t have state income taxes, which implies by extension that our revenue maximizing federal rate is lower than theirs—a whole lot lower than 70, 80, or 90%. Back to the 1950s? Forget it.

In a 2023 article for the Foundation for Economic Education, Rainer Zitelmann also explains that the high tax rates didn’t produce high revenues (gee, I think there’s a way of describing this insight).

Left-wing politicians who demand higher taxes on the rich argue that the United States has, in the past, prospered when tax rates were very high, proving that high taxes do not harm the economy. …In the 1950s and early 1960s, the top federal personal income tax rate in the US was a horrendous 91 percent… Interestingly, the actual percentage paid by the top 1 percent of earners in the US was only 16.1 percent in 1962, when the top marginal rate was 91 percent. However, in 1988, when the top rate was only 28 percent, the percentage paid by the top 1 percent of earners had risen to 21.5 percent! …This seems paradoxical, but it is logical, because it is not only the tax rate that is decisive, but the amount of income that is actually taxable. …So the myth that the US experienced strong economic growth when the top marginal tax rate was high is false.

The bottom line is that the economy sputtered in the 1950s because of high tax rates and tax revenues languished for the same reason.

P.S. While the 1950s were bad, President Franklin Roosevelt actually tried to impose a 100 percent tax rate in the 1940s (and that’s not even the worst thing he advocated).

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