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Archive for the ‘Class warfare’ Category

I’ve had some fun over the years by pointing out that Paul Krugman has butchered numbers when writing about fiscal policy in nations such as France, Estonia, Germany, and the United Kingdom.

So I shouldn’t be surprised that he wants to catch me making an error. But I’m not sure his “gotcha” moment is very persuasive. Here’s some of what he wrote for today’s New York Times.

Gov. Jerry Brown was able to push through a modestly liberal agenda of higher taxes, spending increases and a rise in the minimum wage. California also moved enthusiastically to implement Obamacare. …Needless to say, conservatives predicted doom. …Daniel J. Mitchell of the Cato Institute declared that by voting for Proposition 30, which authorized those tax increases, “the looters and moochers of the Golden State” (yes, they really do think they’re living in an Ayn Rand novel) were committing “economic suicide.”

Kudos to Krugman for having read Atlas Shrugged, or for at least knowing that Rand sometimes referred to to “looters and moochers.” Though I have to subtract points because he thinks I’m a conservative rather than a libertarian.

But what about his characterization of my position? Well, he’s right, though I’m predicting slow-motion suicide. Voting for a tax hike isn’t akin to jumping off the Golden Gate bridge. Instead, by further penalizing success and expanding the burden of government, California is engaging in the economic equivalent of smoking four packs of cigarettes every day instead of three and one-half packs.

Here’s some of what I wrote.

I’m generally reluctant to make predictions, but I feel safe in stating that this measure is going to accelerate California’s economic decline. Some successful taxpayers are going to tunnel under the proverbial Berlin Wall and escape to states with better (or less worse) fiscal policy. And that will mean fewer jobs and lower wages than otherwise would be the case.

Anyhow, Krugman wants readers to think that California is a success rather than a failure because the state now has a budget surplus and there’s been an uptick in job creation.

Here’s more of what he wrote.

There is, I’m sorry to say, no sign of the promised catastrophe. If tax increases are causing a major flight of jobs from California, you can’t see it in the job numbers. Employment is up 3.6 percent in the past 18 months, compared with a national average of 2.8 percent; at this point, California’s share of national employment, which was hit hard by the bursting of the state’s enormous housing bubble, is back to pre-recession levels. …And, yes, the budget is back in surplus. …So what do we learn from the California comeback? Mainly, that you should take anti-government propaganda with large helpings of salt. Tax increases aren’t economic suicide; sometimes they’re a useful way to pay for things we need.

I’m not persuaded, and I definitely don’t think this counts as a “gotcha” moment.

First, I’m a bit surprised that he wants to brag about California’s employment numbers. The Golden State has one of the highest joblessness rates in the nation. Indeed, only four states rank below California.

Second, I don’t particularly care whether the state has a budget surplus. I care about the size of government.

Krugman might respond by saying that the tax hike generated revenues, thus disproving the Laffer Curve, which is something that does matter to supporters of small government.

But the Laffer Curve doesn’t say that all tax hikes lose revenue. Instead, it says that tax rate increases will have a negative impact on taxable income. It’s then an empirical question to figure out if revenues go up a lot, go up a little, stay flat, or decline.

And what matters most of all is the long-run impact. You can rape and pillage upper-income taxpayers in the short run, particularly if a tax hike is retroactive. In the long run, though, people can move, re-organize their finances, and take other steps to reduce their exposure to the greed of the political class.

In other words, people can vote with their feet…and with their money.

And that’s what seems to be happening in California. Take a look at how much income has emigrated from the state since 1992.

Next we have a map showing which states, over time, are gaining taxable income and which states are losing income (and I invite you to look at how zero-income tax states tend to be very green).

The data isn’t population adjusted, so populous states are over-represented, but you’ll still see that California is losing while Texas is winning.

And here is similar data from the Tax Foundation.

So what’s all of this mean?

Well, it means I’m standing by my prediction of slow-motion economic suicide. The state is going to become the France of America…at least if Illinois doesn’t get there first.

California has some natural advantages that make it very desirable. And I suspect that the state’s politicians could get away with above-average taxes simply because certain people will pay some sort of premium to enjoy the climate and geography.

But the number of people willing to pay will shrink as the premium rises.

In other words, this Chuck Asay cartoon may be the most accurate depiction of California’s future. And this Lisa Benson cartoon shows what will happen between now and then.

But I won’t hold my breath waiting for a mea culpa from Krugman.

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Why do statists make so many mistakes with data? Paul Krugman, for instance, has butchered numbers when writing about fiscal policy in nations such as France, Estonia, Germany, and the United Kingdom.

But Krugman isn’t alone. We also have Thomas Piketty, who was lionized by the left after publication of Capital in the Twenty-First Century.

Ever since his book was published, various experts have called into question the veracity of Piketty’s numbers. Most recently, here’s some of what Alan Reynolds, my colleague at the Cato Institute, wrote about his data for the Wall Street Journal.

Thomas Piketty…remains a hero on the left, but the honeymoon may be drawing to a sour close as evidence mounts that his numbers don’t add up. …data are so misleading as to be worthless. They attempt to estimate top U.S. wealth shares on the basis of that portion of capital income reported on individual income tax returns—interest, dividends, rent and capital gains. This won’t work because federal tax laws in 1981, 1986, 1997 and 2003 momentously changed (1) the rules about which sorts of capital income have to be reported, (2) the tax incentives to report business income on individual rather than corporate tax forms, and (3) the tax incentives for high-income taxpayers to respond to lower tax rates on capital gains and dividends by realizing more capital gains and holding more dividend-paying stocks.

Alan lists some of specific problems that exist when you try to make sweeping assertions based on tax return data.

For example, interest income from tax-exempt municipal bonds was unreported before 1987—so the subsequent reporting of income created an illusory increase in top incomes and wealth. Since 1997, by contrast, most capital gains on home sales have disappeared from the tax returns of middle-income couples, thanks to a $500,000 tax exemption. …since the mid-1980s, most capital income and capital gains of middle-income savers began to vanish from tax returns by migrating into IRAs, 401(k)s and other retirement and college savings plans. Balances in private retirement plans rose to $12.4 trillion in 2012 from $875 billion in 1984. …When individual tax rates dropped from 70% in 1980 to 28% in 1988, this provoked a massive shift: from retaining private business income inside C-corporations to letting earnings pass through to the owners’ individual tax returns via partnerships, LLCs and Subchapter S corporations. …Although more frequent asset sales showed up as an increase in capital income, realized gains are no more valuable than unrealized gains so realization of gains tells us almost nothing about wealth. Similarly, a portfolio shift from municipal bonds, coins or cash into dividend-paying stocks after the tax on dividends fell to 15% in 2003 might look like more capital income when it was merely swapping an untaxed asset for a taxable one.

So what’s the bottom line?

Mr. Piketty’s premonition of soaring U.S. wealth shares for the top 1% finds no credible support in his book or elsewhere.

But let’s now conduct a thought experiment. What if Piketty’s data was right? Would that justify punitive class-warfare tax rates?

I’ve already explained that this would be the wrong approach.

And Diana Furchtgott-Roth of the Manhattan Institute cites some new academic research to make a similar point.

Meltzer and Richard show that using redistribution to ameliorate income inequality is not only ineffective, but worsens the problem that policy makers seek to cure. …Since workers’ productivity levels increase with the more they produce, and because higher taxes create disincentives to working, taxes lead to lower economic growth. …Higher tax rates that fund transfer payments hamper economic growth. That’s because they increase the number of people who depend on these payments and find it preferable not to work. There also is less learning-by-doing among those who work. …As taxes and transfers rise, hours of work and acquired skills decline, reducing economic growth. …it is this decline in hours worked for low-productivity workers that leads to more economic inequality — not the growth of technology nor the rent-seeking privileges of the rich, two causes cited by Piketty. Reduced effort by the rich in reaction to higher taxes comes at the expense of economic growth, which has the potential to raise everyone’s living standards and increase economic opportunity. …Meltzer and Richard show that the growth of government is the true driver behind inequality.

In other words, the supposed solution of ever-higher tax rates from folks such as Piketty (and Obama) would be harmful to the overall economy and be especially damaging to those with lower incomes.

If we want to help the poor, the goal should be to achieve faster economic growth by enabling capitalism and entrepreneurship.

In other words, copy Hong Kong and Singapore, not France.

Here’s the video I narrated for the Center for Freedom and Prosperity explaining why class-warfare tax policy is so misguided.

P.S. This isn’t the first time that Alan Reynolds has debunked Piketty.

P.P.S. These two pizzas tell you everything you need to know about how the left would define success.

P.P.P.S. And Margaret Thatcher exposed why their definition of success is absurd.

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Our leftist friends have decided that income inequality is a scourge that must be addressed.

That might be a noble goal if they were motivated by a desire to improve the lives of the less fortunate.

Based on their policy proposals, though, it appears that the main goal is to punish the so-called rich. And they’re so fixated on that objective, Margaret Thatcher pointed out, that they’re willing to make the poor worse off.

And what’s especially bizarre is that rich leftists are among the biggest cheerleaders for these policies. Heck, I’ve even debated some of these limousine liberals, as you can see here and here.

But maybe their feelings of self-loathing and guilt are justified. After all, it seems that statist policies are actually associated with higher degrees of income inequality.

Let’s see what Steve Moore and Rich Vedder discovered when they looked at evidence from the states. Here are excerpts from their column in the Wall Street Journal.

Our state-by-state analysis finds that the more liberal states whose policies are supposed to promote fairness have a bigger gap between higher and lower incomes than do states that have more conservative, pro-growth policies. …According to 2012 Census Bureau data (the latest available figures), the District of Columbia, New York, Connecticut, Mississippi and Louisiana have the highest measure of income inequality of all the states; Wyoming, Alaska, Utah, Hawaii and New Hampshire have the lowest Gini coefficients. The three places that are most unequal—Washington, D.C., New York and Connecticut—are dominated by liberal policies and politicians. Four of the five states with the lowest Gini coefficients—Wyoming, Alaska, Utah and New Hampshire—are generally red states.

Steve and Rich then look at some specific comparison and some specific issues.

Texas is often regarded as an unregulated Wild West of winner-take-all-capitalism, while California is held up as the model of progressive government. Yet Texas has a lower Gini coefficient (.477) and a lower poverty rate (20.5%) than California (Gini coefficient .482, poverty rate 25.8%). Do the 19 states with minimum wages above the $7.25 federal minimum have lower income inequality? Sorry, no. States with a super minimum wage like Connecticut ($8.70), California ($8), New York ($8) and Vermont ($8.73) have significantly wider gaps between rich and poor than those states that don’t. What about welfare benefits? …In general, the higher the benefit package, the higher the Gini coefficient. States with high income-tax rates aren’t any more equal than states with no income tax.

So what’s the bottom line?

The conclusion is nearly inescapable that liberal policy prescriptions—especially high income-tax rates and the lack of a right-to-work law—make states less prosperous because they chase away workers, businesses and capital. …When politicians get fixated on closing income gaps rather than creating an overall climate conducive to prosperity, middle- and lower-income groups suffer most and income inequality rises. …John F. Kennedy had it right that a rising tide lifts all boats. It would be better for low- and middle-income Americans if growth and not equality became the driving policy goal in the states and in Washington, D.C.

Speaking of rich, guilt-ridden leftists, Michael Moore is getting divorced and the fight with his soon-to-be ex is resulting in some revelations about the immense wealth of this anti-capitalist crusader.

Here are some eye-catching details from a story in the UK-based Daily Mail.

According to Celebrity Worth, Moore has $50m in assets. …the Torch Lake mansion…put a spotlight on his wealth and opened him up for ridicule because he has so often criticized the rich in his films. …The home, which was completed years ago, is believed to cost in the neighborhood of $2m. …The lake house isn’t their only home. They own a total of nine properties in Michigan and New York. Their Manhattan condo was created through ‘the combination of three separate units,’ according to The Smoking Gun. …Together Moore and Glynn own ‘multiple substantial residences and multiple companies,’ including Dog Eat Dog Films, the production company behind films Roger & Me and Bowling for Columbine.

Nine properties, including a lakefront mansion and a three-units-combined-into-one Manhattan condo?!?

Who knew bashing the rich was such a lucrative gig.

Geesh, I’m a defender of the top 1 percent and I only have a house in Virginia.

I’m obviously doing something wrong.

P.S. While rich leftists say they want higher taxes, they’ve been exposed on camera as complete hypocrites.

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In previous columns, I’ve explained why a wealth tax is a very bad idea. And I’ve also pontificated on why leftists are wrong to pursue policies of coerced equality.

So it goes without saying that I’m a big fan of a new Wall Street Journal column by John Steele Gordon.

He writes that the anti-wealth ideology animating the political elite is based on a fundamental misunderstanding of how large fortunes are generated.

He starts by pointing out that many of today’s richest people earned their money as a result of the microprocessor, a technological development that has dramatically improved the lives of ordinary people.

The French economist Thomas Piketty, in his new book “Capital in the 21st Century,” calls for an 80% tax on incomes over $250,000 and a 2% annual tax on net worth in order to prevent an excessive concentration of wealth. That is a monumentally bad idea. The great growth of fortunes in recent decades is not a sinister development. Instead it is simply the inevitable result of an extraordinary technological innovation, the microprocessor… Seven of the 10 largest fortunes in America today were built on this technology, as have been countless smaller ones. …no one is poorer because Bill Gates, Larry Ellison, et al., are so much richer. These new fortunes came into existence only because the public wanted the products and services—and lower prices—that the microprocessor made possible.

He then points out that this is actually a consistent pattern through history.

New technologies make us better off, and also create riches for those who most effectively bring those new developments to consumers.

Whenever a new technology comes along that greatly reduces the cost of a fundamental input to the economy, or makes possible what had previously been impossible, there has always been a flowering of great new fortunes—often far larger than those that came before. …The full-rigged ship that Europeans developed in the 15th century, for instance, was capable of reaching the far corners of the globe. …The Dutch exploited the new trade so successfully that the historian Simon Schama entitled his 1987 book on this period of Dutch history “The Embarrassment of Riches.” …Before James Watt’s rotary steam engine, patented in 1781, only human and animal muscles, water mills and windmills could supply power. But with Watt’s engine it was suddenly possible to input vast amounts of very-low-cost energy into the economy. Combined with the factory system of production, the steam engine sparked the Industrial Revolution, causing growth—and thus wealth as well as job creation—to sharply accelerate. By the 1820s so many new fortunes were piling up that the English social critic John Sterling was writing, “Wealth! Wealth! Wealth! Praise to the God of the 19th century! The Golden Idol! The mighty Mammon!” In 1826 the young Benjamin Disraeli coined the word millionaire to denote the holders of these new industrial fortunes. …before the railroad, moving goods overland was extremely, and often prohibitively, expensive. The railroad made it cheap. Such fortunes as those of the railroad-owning Vanderbilts, Goulds and Harrimans became legendary for their size. …Many of the new fortunes in America’s Gilded Age in the late 19th century were based on petroleum, by then inexpensive and abundant thanks to Edwin Drake’s drilling technique. Steel, suddenly made cheap thanks to the Bessemer converter, could now have a thousand new uses. Oil and steel, taken together, made the automobile possible. That produced still more great fortunes, not only in car manufacturing, but also in rubber, glass, highway construction and such ancillary industries.

Gordon then concludes by warning against class-warfare tax policy, since it would discourage the risk-taking that necessarily accompanies big investments in new technology.

Any attempt to tax away new fortunes in the name of preventing inequality is certain to have adverse effects on further technology creation and niche exploitation by entrepreneurs—and harm job creation as a result. The reason is one of the laws of economics: Potential reward must equal the risk or the risk won’t be taken. And the risks in any new technology are very real in the highly competitive game that is capitalism. In 1903, 57 automobile companies opened for business in this country, hoping to exploit the new technology. Only the Ford Motor Co. survived the Darwinian struggle to succeed. As Henry Ford’s fortune grew to dazzling levels, some might have decried it, but they also should have rejoiced as he made the automobile affordable for everyman.

My only complaint about Gordon’s column is that he didn’t have the space to emphasize a related point.

All of the large fortunes that he discusses were not accumulated at the expense of those with less money.

In other words, the economy was not a fixed pie. Capitalism made everybody better off. Some just got richer faster than other people got richer.

P.S. I wrote the other day about the VA scandal and emphasized that the problem was not inadequate spending.

I want to revisit the issue because Professor Glenn Reynolds makes a very important point about greed in a column for USA Today.

People sometimes think that government or “nonprofit” operations will be run more honestly than for-profit businesses because the businesses operate on the basis of “greed.” But, in fact, greed is a human characteristic that is present in any organization made up of humans. It’s all about incentives. And, ironically, a for-profit medical system might actually offer employees less room for greed than a government system. That’s because VA patients were stuck with the VA. If wait times were long, they just had to wait, or do without care. In a free-market system, a provider whose wait times were too long would lose business, and even if the employees faked up the wait-time numbers, that loss of business would show up on the bottom line. That would lead top managers to act, or lose their jobs. In the VA system, however, the losses didn’t show up on the bottom line because, well, there isn’t one. Instead, the losses were diffused among the many patients who went without care — visible to them, but not to the people who ran the agency, who relied on the cooked-books numbers from their bonus-seeking underlings. …that’s the problem with socialism. The absence of a bottom line doesn’t reduce greed and self-dealing — it removes a constraint on greed and self-dealing.

Amen.

Greed is always with us. The question is whether greed is channeled in productive ways. In a free market, greedy people can only become rich by providing the rest of us with valuable goods and services.

In statist systems, by contrast, greedy people manipulate coercive government policies in order to obtain unearned wealth.

And that choice has big consequences for the rest of us, as illustrated by this satirical image.

P.S. Here’s a cartoon from Robert Ariail that sums up how Washington will probably deal with the mess at the Veterans Administration.

Sort of reminds me of this Gary Varvel cartoon.

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There aren’t any nations with pure libertarian economic policy, but there are a handful of jurisdictions that deserve praise, either because they have comparatively low levels of statism or because they have made big strides in the right direction.

Hong Kong and Singapore are examples of the former, and Switzerland deserves honorable mention.

And if we look at nations that have moved in the right direction, then Chile is definitely a success story.

The free-market revolution in Chile is remarkable. If you look at the Economic Freedom of the World rankings, Chile was in last place in 1970 and third from the bottom in 1975. But then reforms began. It climbed to 60th place in 1980, 40th place in 1985, 28th place in 2000, and Chile now has one of the world’s freest economies, hovering around 10th place.

And the results are amazing. Now known as the Latin Tiger, Chile has become the richest nation in the region, thanks to a big increase in economic liberty. Many people know about that nation’s very successful system of personal retirement accounts (discussed here by Jose Pinera), but Chile’s economic renaissance is much deeper than private pensions.

The country has an admirable system of school choice, for instance, and 60 percent of students now attend private schools.

Most remarkable, the poverty rate has plummeted, showing that free markets and small government are the best way of helping the less fortunate.

But there’s no such thing as permanent success, and it appears that Chilean politicians may try to kill the geese that are laying the golden eggs.

Here are some excerpts from a Wall Street Journal report, starting with a description of the class-warfare tax plan proposed by the nation’s socialist leader.

Chile’s leftist government is proposing a controversial overhaul of its tax code that business leaders say threatens to reverse the gains that have made this country Latin America’s most prosperous nation. …The government says the tax reform will increase the tax haul by three percentage points of annual economic output, or by about $8.2 billion annually. The proposed overhaul includes an increase in the corporate tax rate to 25% from the current rate of 20% and the elimination of a popular tax exemption program that allows businesses that reinvest profits, known as the FUT. …Ms. Bachelet, a 62-year-old Socialist Party member, said Wednesday that the changes are required to fund a plan to improve the quality of the schools system.

The FUT system sounds like expensing, which is how the tax code should treat business investment, not a loophole.

In any event, we definitely know that the tax plan would significantly boost the tax burden.

And that has wealth creators worried.

The plan to raise the corporate tax rate and close an exemption that companies use to reinvest profits has stirred up an ideologically-charged debate at a time when economic growth has weakened to its slowest level in four years. …many of the company’s 450 business clients in Chile are reconsidering investment plans. “They are watching this with a lot of concern.” …business groups say they will try to pressure the government to rethink the tax overhaul. Juan Pablo Swett, the head of Chile’s association of small businesses, said that some 250,000 small-business owners could protest if the government doesn’t save the FUT. “Chile is going down the road of Latin American populism,” added Axel Kaiser, an economist and executive director at the Foundation for Progress, a conservative Chilean think tank.

The story notes that economic reform has been very positive for Chile.

This mineral-rich, long sliver of a country that hugs the Pacific Ocean has long been a laboratory for economic innovation. Starting in the mid-1970s, when much of Latin America had closed their economies from international trade, Chile went the other way, embarking on a program to liberalize trade, deregulate and even create a private pension system. Since 1990, successive governments, most of them left-leaning, oversaw business-friendly policies that turned it into the region’s most stable and wealthiest nation. …The robust economic growth, coined the “Chilean Miracle,” led to a decline in poverty to 15% in 2011 from almost 40% in 1990, according to the World Bank. During the same period, Chile’s gross domestic product per capita rose from less than $5,000 to more than $20,000, the highest in Latin America.

And since reform has produced such good results, that leaves us with two issues.

First, why do the politicians want to ruin a good thing? These people presumably are educated and well-traveled. They must realize how Chile has prospered relative to other nations in the region. So why tinker with success? Are they really so short-sighted that they’re willing to condemn their nation to slower growth just so they have the ability to buy votes with a temporary increase in tax revenue?

Second, why did voters elect these politicians? Don’t they realize that they’ve benefited from the pro-market reforms? Though I suspect the answer is that previous left-of-center governments haven’t done anything bad, while the recently ousted right-of-center government didn’t do anything good, so maybe voters didn’t realize that the new left-leaning government intended to make radical changes.

Regardless, it will be tragic if these reforms are imposed and Chile sinks back into economic stagnation.

The world in general – and Latin America in particular – already has plenty of basket case economies such as Cuba, Venezuela, and Argentina. The last thing we need is another statist economy.

I realize this may sound like whining, but it would make my job easier to have more examples of jurisdictions that can be role models for free markets and small government.

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I’ve already written about how the Paris-based Organization for Economic Cooperation and Development (OECD), which is heavily subsidized by American taxpayers, is advocating for bigger government.

I’m especially irked that the OECD has gotten in bed with nutjobs from the Occupy movement and also joined forces with the union bosses to push for statist policies.

So I guess I shouldn’t be surprised that the bureaucrats are now acting as cheerleaders for Thomas Piketty and class-warfare tax policy.

This is evident in a new report on “Top Incomes and Taxation in OECD Countries.” The bias is evident on the very first page, with the report asserting that “the very richest in society are accumulating an ever-increasing proportion of national incomes.” Yet this language inaccurately implies the economic pie is fixed in size and it is rather revealing that it uses “accumulating” rather than “earning.”

But that’s trivial compared to the assertion, also on the opening page, that the goal is to “identify concrete policy options to ensure a fairer distribution of resources.” In other words, the focus is on re-slicing the pie, not making it bigger.

But the problem is not merely bad rhetoric. The report concludes with a long list of potential tax hikes, all of which supposedly are justified because “historically high levels and the sustained rise in the share of top income recipients in total income are often taken as signs that top earners’ “capacity to pay” tax has increased. Furthermore, this coincides with a period where public finances are tight and governments are seeking new sources of revenue.”

I guess we shouldn’t be surprised that a bureaucracy representing governments has a list of policies designed to increase government power. But that doesn’t change the fact that class-warfare policies are destructive.

The OECD lists a smorgasbord of tax hikes, beginning with higher top tax rates.

A most direct way to ensure that top income earners pay a higher share of taxes is to raise marginal tax rates on income as well as other taxes which affect them. While there may be some concerns that such measures may not be as effective as intended with regard to raising tax revenues, some recent analysis suggests that there is still some scope to increase top tax rates to maximise tax revenues.

I supposed I should be happy that the bureaucrats are at least acknowledging that higher tax rates may not be “effective” because of Laffer Curve reasons, but it’s nonetheless disturbing that they think the goal should be revenue maximization.

That implies imposing a lot of economic damage to collect very small amounts of revenue. As Professor Martin Feldstein observed:

Why look for the rate that maximizes revenue? As the tax rate rises, the “deadweight loss” (real loss to the economy rises) so as the rate gets close to maximizing revenue the loss to the economy exceeds the gain in revenue…. I dislike budget deficits as much as anyone else. But would I really want to give up say $1 billion of GDP in order to reduce the deficit by $100 million? No. National income is a goal in itself. That is what drives consumption and our standard of living.

Looking specifically at an Obama proposal to boost payroll tax rates, Lawrence Lindsey admitted that the government would get more money, but at very high cost.

We should also keep in mind that the economic well-being of the country is not measured by how much taxes the government can collect, or even the size of the deficit. Rather, it is measured by the country’s productive capacity. …It is shocking to think that we have a presidential candidate who would make the private sector $5 poorer in order to make the government $1 richer.

And here’s what I wrote about some research from the European Central Bank.

…this study implies that the government would reduce private-sector taxable income by about $20 for every $1 of new tax revenue. Does that seem like good public policy? Ask yourself what sort of politicians are willing to destroy so much private sector output to get their greedy paws on a bit more revenue.

Here’s the remaining list of suggested tax hikes, followed by my parenthetical observations.

• Abolishing or scaling back a wide range of those tax deductions, credits and exemptions which benefit high income recipients disproportionately; (I want to get rid of loopholes, assuming we use the right definition, but only if the money is used to finance lower tax rates).

• Taxing as ordinary income all remuneration, including fringe benefits, carried interest arrangements and stock options; (I want to tax fringe benefits, but only as part of good tax reform and good health reform, not to give politicians more money).

• Considering shifting the tax mix towards a greater reliance on recurrent taxes on immovable property; (I already don’t like Fairfax County raping me for property taxes, so I sure don’t want the federal government doing the same thing).

• Reviewing other forms of wealth taxes such as inheritance taxes; (On a per-dollar-collected basis, a wealth tax might be the most destructive levy).

• Examining ways to harmonise capital and labour income taxation; (This means increased double taxation of income that is saved and invested).

• Increasing transparency and international cooperation on tax rules to minimise “treaty shopping” (when high-income individuals and companies structure their finances to take account of favourable tax provisions in different countries) and tax optimisation; (Is anyone shocked that the OECD is endorsing its own campaign to impose higher tax burdens on multinational companies?).

• Broadening the tax base of the income tax, so as to reduce avoidance opportunities and thereby the elasticity of taxable income; (Perhaps I’m missing something, but how is this different from the aforementioned point about credits, deductions, and exemptions?).

• Developing policies to improve transparency and tax compliance, including continued support of the international efforts, led by the OECD, to ensure the automatic exchange of information between tax authorities. (In other words, undermine tax competition to enable and facilitate higher tax burdens).

By the way, there’s one group that doesn’t have to worry very much about all these proposed tax hikes. OECD bureaucrats get tax-free salaries, which may explain why they seem oblivious to the real-world impact of their proposed policies.

Interestingly, the report inadvertently acknowledges that lower tax rates are good for capital formation and tax compliance.

The decline in top rates of income tax leads to a reduction in the tax burden carried by high earners and thus increases their post-tax income. Higher disposable income makes it easier for individuals to save and accumulate capital which eventually increases incomes further. Reducing top rates of income tax reduces the incentive to engage in tax planning to avoid or evade tax, so leads to more income being declared for income tax purposes.

Though this accidental bit of insight certainly didn’t have any impact on the OECD’s policy recommendations.

P.S. I periodically cite data from the IMF, BIS, and OECD to show that rising burdens of government spending are sewing the seeds of fiscal crisis in most industrialized nations.

We now have updated numbers from the OECD. The good news, so to speak, that America’s need for “budgetary consolidation” appears to have dropped from about 9.5 percent of GDP to 9 percent of GDP. But we’re still one of nations with the biggest long-run challenge, which is why I’m a broken record on the need for real entitlement reform.

OECD Fiscal Consolidation

The numbers for Greece and Portugal have gotten much worse in the past couple of years. I’m tempted to say that this is evidence that all the tax increases in those two nations have backfired. But I suspect it’s more a function of the OECD statistics people being wildly off base a couple of years ago.

P.P.S. If you were asked about the policies needed to promote more growth in Malaysia and Indonesia, you would probably suggest copying the high-growth economies in the region such as Hong Kong and Singapore.

But if you were an OECD bureaucrat, you would instead put out a report about “Rising tax revenues: A key to economic development in emerging Asian countries.”

And you would make this absurd assertion.

Increased domestic resource mobilisation is widely accepted as crucial for countries to successfully meet the challenges of development and achieve higher living standards for their people. Additional tax revenues enable governments to simultaneously strengthen infrastructure development, enhance the quality of education and promote social cohesion.

But don’t be surprised. The OECD made the exact same recommendation for higher taxes to finance bigger government when looking at Latin American economies. So at least they’re consistent.

Too bad the OECD bureaucrats are so in love with higher taxes that they never suggest the policies that enabled Western Europe to become rich.

P.P.P.S. The OECD report focuses on “taxing the rich,” but always remember that politicians use that as a strategic gimmick in order to justify higher taxes on the rest of us.

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The President’s new budget has been unveiled.

There are lots of provisions that deserve detailed attention, but I always look first at the overall trends. Most specifically, I want to see what’s happening with the burden of government spending.

And you probably won’t be surprised to see that Obama isn’t imposing any fiscal restraint. He wants spending to increase more than twice as fast as needed to keep pace with inflation.

Obama 2015 Budget Growth

What makes these numbers so disappointing is that we learned last month that even a modest bit of spending discipline is all that’s needed to balance the budget.

By the way, you probably won’t be surprised to learn that the President also wants a $651 billion tax hike.

That’s in addition to the big fiscal cliff tax hike from early last and the (thankfully smaller) tax increase in the Ryan-Murray budget that was approved late last year.

P.S. Since we’re talking about government spending, I may as well add some more bad news.

I’ve shared some really outrageous examples of government waste, but here’s a new example that has me foaming at the mouth. Government bureaucrats are flying in luxury and sticking taxpayers with big costs. Here are some of the odious details from the Washington Examiner.

What can $4,367 buy? For one NASA employee, it bought a business-class flight from Frankfurt, Germany, to Vienna, Austria. Coach-class fare for the same flight was $39. The federal government spent millions of dollars on thousands of upgraded flights for employees in 2012 and 2013, paying many times more for business and first-class seats than the same flights would have cost in coach or the government-contracted rate. …Agencies report their premium travel expenses to the General Services Administration each year. These reports were obtained by the Washington Examiner through Freedom of Information Act requests. …The most common reasons across agencies for such “premium” flights in 2012 and 2013 were medical necessities and flights with more than 14 hours of travel time.

By the way, “medical necessities” is an easily exploited loophole. All too often, bureaucrats get notes from their doctors saying that they have bad backs (or something similarly dodgy) and that they require extra seating space.

Probably the same doctors who participate in the disability scam.

But I’m digressing. It’s sometimes hard to focus when there are so many examples of foolish government policy.

Let’s look at more examples of taxpayers getting reamed.

One such flight was a trip from Washington, D.C., to Brussels, Belgium, which cost $6,612 instead of $863. Similar mission-required upgrades included several flights to Kuwait for $6,911 instead of $1,471, a flight from D.C. to Tokyo for $7,234 instead of $1,081 and a trip from D.C. to Paris for $6,037 instead of $477. …NASA employees also racked up a long list of flights that cost 26, 72 and even 112 times the cost of coach fares, according to Examiner calculations. Several space agency employees flew from Oslo, Norway, to Tromso, Norway — a trip that should have cost $65. Instead, each flew business class for $4,668. Another NASA employee flew from Frankfurt, Germany, to Cologne, Germany, for $6,851 instead of $133, a flight that cost almost 52 times more than the coach fare. …One flight from D.C. to Hanoi, Vietnam, for an informational meeting cost $15,529 instead of $1,649, according to the agency’s 2012 report.

Frankfurt to Cologne for $6851?!? Did the trip include caviar and a masseuse? A domestic flight in Norway for $4668? Was the plane made of gold?

I do enough international travel to know that these prices are absurd, even if you somehow think bureaucrats should get business class travel (and they shouldn’t).

And as you might suspect, much of the travel was for wasteful boondoggles.

Department of the Interior employees, for example, flew to such exotic locations as Costa Rica, Denmark, Japan and South Africa in 2012. …The Department of Labor sent employees to places like Vietnam and the Philippines for “informational meetings,” conferences and site visits.

The one sliver of good news is that taxpayers didn’t get ripped off to the same extent last year as they did the previous year.

The agencies spent $5.7 million in 2012, almost double the $3 million they paid for premium travel in 2013.

The moral of the story is that lowering overall budgets – as happened in 2013 – is the only effective way of reducing waste.

P.P.S. Want to know why the tax reform plan introduced by Congressman Dave Camp was so uninspiring, as I noted last week?

The answer is that he preemptively acquiesced to the left’s demands that class warfare should guide tax policy. Politico has the details.

Republicans had vowed for more than three years to slash the top individual income tax rate to 25 percent as part of a Tax Code overhaul. …last week Camp abandoned plans for a deep cut in the top marginal tax rate. He settled for 35 percent, which is just 4 percentage points lower than the current one. “It was a distribution issue,” Camp said. Getting all the way down to 25 percent “would have reduced taxes for the top 1 percent” and “I said we would be distributionally neutral.”

In other words, this is the tax code version of the Brezhnev Doctrine. Whenever the left is successful is raising the tax burden on the so-called rich (the top 20 percent already bears two-thirds of the burden), that then supposedly becomes a never-to-be-changed benchmark.

Fortunately, Reagan did not accept the left’s distorted rules and we got the Economic Recovery Tax Act in 1981, which helped trigger the 1980s boom.

And even when Reagan agreed to “distributional neutrality,” as happened as part of the 1986 Tax Reform Act, at least he got something big in exchange.

The Camp plan, by contrast, is thin gruel.

A big rate cut is what powered the last major tax overhaul, in 1986, which delivered tax cuts to every income group while slicing the top rate to 28 percent from a whopping 50 percent. …Lawmakers may look at the proposal and think: “I’m having the world coming down on me” and “all this just to get the rate down 4 points?”

That being said, the Camp plan has plenty of good features, including modest rate reductions and repeal of a few bad loopholes. But it’s accompanied by some really bad provisions, such as increased double taxation and higher taxes on business investment.

P.P.P.S. Long-time readers may remember this amusing Reagan-Obama comparison.

For understandable reasons, that’s what crossed my mind when seeing this example of Obama humor.

I should hasten to add, incidentally, that this is not to suggest I want Obama to do anything about the Ukrainian conflict (other than perhaps encourage decentralized power).

Unless one genuinely thinks that Putin has both the capacity and the desire for global imperialism, it’s hard to see how America’s national security is affected.

But I still appreciate good political humor. I like it when Obama is the target, and I like it even when it’s directed at people like me.

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My main goal for fiscal policy is shrinking the size and scope of the federal government and lowering the burden of government spending.

But I’m also motivated by a desire for better tax policy, which means lower tax rates, less double taxation, and fewer corrupting loopholes and other distortions.

One of the big obstacles to good tax policy is that many statists think that higher tax rates on the rich are a simple and easy way of financing bigger government.

I’ve tried to explain that soak-the-rich tax policies won’t work because upper-income taxpayers have considerable ability to change the timing, level, and composition of their income. Simply stated, when the tax rate goes up, their taxable income goes down.

And that means it’s not clear whether higher tax rates lead to more revenue or less revenue. This is the underlying principle of the Laffer Curve.

For more information, here’s a video from Prager University, narrated by UCLA Professor of Economics Tim Groseclose.

An excellent job, and I particularly like the data showing that the rich paid more to the IRS following Reagan’s tax cuts.

But I do have one minor complaint.

The video would have been even better if it emphasized that the tax rate shouldn’t be at the top of the “hump.”

Why? Because as tax rates get closer and closer to the revenue-maximizing point, the economic damage becomes very significant. Here’s some of what I wrote about that topic back in 2012.

…labor taxes could be approximately doubled before getting to the downward-sloping portion of the curve. But notice that this means that tax revenues only increase by about 10 percent. …this study implies that the government would reduce private-sector taxable income by about $20 for every $1 of new tax revenue. Does that seem like good public policy? Ask yourself what sort of politicians are willing to destroy so much private sector output to get their greedy paws on a bit more revenue.

The key point to remember is that we want to be at the growth-maximizing point of the Laffer Curve, not the revenue-maximizing point.

P.S. Here’s my video on the Laffer Curve.

Since it was basically a do-it-yourself production, the graphics aren’t as fancy as the ones you find in the Prager University video, but I’m pleased that I emphasized on more than one occasion that it’s bad to be at the revenue-maximizing point on the Laffer Curve.

Not as bad as putting rates even higher, as some envy-motivated leftists would prefer, but still an example of bad tax policy.

P.P.S. Switching to a different topic, it’s been a while since I’ve mocked Sandra Fluke, a real-life Julia.

To fix this oversight, here’s an amusing image based on Ms. Fluke’s apparent interest in becoming a politician.

Fluke Filing Fee

But she’s apparently reconsidered her plans to run for Congress and instead now intends to seek a seat in the California state legislature.

She’ll fit in perfectly.

If you want to see previous examples of Fluke mockery, check out this great Reason video, this funny cartoon, and four more jokes here.

P.P.P.S. And since I’m making one of left-wing women, we may as well include some humor about Wendy Davis.

Check out this excerpt from a story in the Daily Caller.

A dating service that pairs wealthy “sugar daddies” with “sugar babies” for “mutually beneficial dating arrangements” has endorsed Texas Democratic gubernatorial candidate Wendy Davis. SeekingArrangement.com’s Friday announcement followed a recent report in the Dallas Morning News which detailed a number of discrepancies in Davis’ personal narrative, including that she left a man 13 years her senior the day after he made the last payment for her Harvard Law School education. “Wendy Davis is proof that the sugar lifestyle is empowering,” seeking arrangements founder and CEO Brandon Wade said in his endorsement.

Mr. Wade obviously is a clever marketer, but he may also be a closet libertarian.

After all, he also mocked Obamacare with an ad telling young women to join his site so they could find a sugar daddy to pay for the higher premiums caused by government-run healthcare.

Then again, I’ve also speculated that Jay Leno and Bill Maher may be closet libertarians, so I may be guilty of bending over backwards to find allies.

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Why do statists support higher tax rates?

The most obvious answer is greed. In other words, leftists want more tax money since they personally benefit when there’s a larger burden of government spending. And the greed can take many forms.

They may want bigger government because they’re welfare recipients getting handouts.

They may want bigger government because they are overpaid bureaucrats administering ever-growing programs.

They may want bigger government because they’re lobbyists manipulating the system and it’s good to have more loot circulating.

They may want bigger government because they’re one of the many interest groups feeding at the federal trough.

Or they may want bigger government because they are politicians seeking to buy votes.

But greed isn’t the only answer.

Some statists want higher tax rates for reasons of spite and envy.

Consider this poll from the United Kingdom. It shows that an overwhelming majority of Labour voters want higher tax rates even if the government doesn’t collect any money.

Class Warfare UK Tax Poll

These numbers are remarkable.  It’s not just that the Labour Party is filled with people who want to punish success, I’m also dismayed to see that 16 percent of Tory voters and 35 percent of UKIP voters also want class-warfare tax hikes solely as an instrument of envy (though, given the mentality of some of their leaders, I’m pleasantly surprised that “only” 29 percent of Lib Dems are motivated by spite).

What about Americans? Do they have the same mentality?

We don’t have identical polling data, so it’s hard to say. But it would be very interesting to show leftists the IRS data from the 1980s, which unambiguously demonstrates that rich people paid more tax after Reagan dramatically lowered the top rate, and then see how they would answer the same question.

If they’re motivated by greed, they would favor Reagan’s tax cuts. But if they’re motivated by envy, like leftists in the United Kingdom, they’ll be against Reagan’s lower tax rates.

Unfortunately, there’s at least one prominent statist in America who has the same views as England’s Labour Party voters. Pay close attention at the 4:20 mark of this video.

Yes, you heard correctly. President Obama wants higher tax rates and class-warfare tax policy even if the government doesn’t collect any additional money.

Which means, of course, that he’s willing to undermine American competitiveness and reduce economic output solely to penalize entrepreneurs, investors, small business owners, and other “rich” taxpayers.

Remarkable.

P.S. By the way, the poll of UK voters wasn’t merely a theoretical question. UK Laffer Curve Class WarfareThe previous Labour Party government raised the top tax rate from 40 percent to 50 percent near the end of last decade and there’s very strong evidence that this tax hike failed to raise any revenue. In all likelihood, the then-Prime Minister, Gordon Brown, imposed the class-warfare policy in hopes of gaining votes in the upcoming election.

P.P.S. Notwithstanding their many flaws, at least the folks who work for left-leaning international bureaucracies acknowledge the Laffer Curve and generally argue against pushing tax rates above the revenue-maximizing level.

Since it takes a lot to be to the left of the United Nations, that gives you an idea of where Obama (and UK Labour Party voters) are on the ideological spectrum. Which is why I made the tongue-in-cheek suggestion that Birthers accuse Obama of being born in Denmark rather than Kenya.

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If you want to know why the left is wrong about income inequality, you need to watch this Margaret Thatcher video. In just a few minutes, the “Iron Lady” explains how some – perhaps most – statists would be willing to reduce income for the poor if they could impose even greater damage on the rich.

This picture is another way of getting across the same point. It was sent to me by Richard Rahn (famous for the Rahn Curve), and it uses two pizzas to show how leftist policies would “solve” inequality.

Leftist Fairness

I like this analogy, and not just because I also used the pizza analogy to make the same argument in this TV interview.

The growing or shrinking pizza is useful because it helps to focus people on the importance of growth.

Nations that follow the right policy recipe can enjoy the kind of strong and sustained growth that enables huge increases in prosperity for all income classes. In other words, everyone can have a bigger slice if the pie is growing.

I even tried to educate a PBS audience that growth is better than redistribution if you really want to help the poor. Talk about Daniel in the Lion’s Den!

I don’t know if I persuaded anyone, but at least the facts are on my side. Consider, for instance, how the world’s two most laissez-faire jurisdictions – Hong Kong and Singapore – have overtaken the United States over the past 50-plus years.

That’s been great news for low-income and middle-income people, not just the rich.

So ask yourself whether you’d rather be a poor person in one of those jurisdiction or in France. The government in France has all sorts of programs to make your life easier, but you have very little hope of escaping a life of dependency.

And now ask yourself whether it’s good that Obama is doing his best to push America in that direction.

P.S. If you want another example of how long-run growth makes a big difference, check out this chart comparing Chile, Argentina, and Venezuela. Not only has Chile overtaken the other nation thanks to pro-market reforms, but the poverty rate has fallen dramatically.

P.P.S. Since this post shares a very good image about income inequality, let’s include a bonus picture on taxation.

It’s a helpful suggestion on how to make kids aware of the cost of big government.

Tax Lesson for Kids

Though let’s be sure to acknowledge that Obama is doing what he can to make kids more skeptical of class warfare.

P.P.P.S. On a separate topic, I’ve explained that the so-called “austerity” vs “growth” argument is grossly misguided because Keynesian spending isn’t pro-growth and also because it’s important to distinguish between good austerity and bad austerity.

Too many governments are choosing the wrong type of austerity, imposing destructive tax hikes on the private sector. What’s really needed in genuine spending restraint so that “austerity” is imposed on the public sector.

But some folks on the left say there’s been too much spending restraint in recent years.

So who’s right? Well, UBS has produced a report containing some very useful data.

Viewing the global economy as a single unit, we see a very  different picture to the post-crisis world of austerity – at least if “austerity” is taken to mean government spending cuts. The two largest components of global GDP, namely private consumption and fixed investment, both hit multi-year peaks in the first quarter of 2008. …Since the start of 2008, government consumption at the  global level has risen by 20% in real terms, whereas private consumption and fixed investment have risen just 8% and 5%, respectively. In other words, despite talk of austerity, government spending continues to run ahead of private-sector spending.

Hmmm…the burden of government has been growing faster than the private sector. That’s the opposite of what the Golden Rule calls for.

And not only has government been growing too fast in the past, it’s likely that fiscal policy will get even worse in the future.

Structurally, government debt, government spending, and the share of government within the economy must be sustainable. Government consumption’s share of global GDP has risen from 11% to 14% over the past 15 years. In 2013, it reached its highest level since 1980. At the same time, government debt-to-GDP ratios have hit record highs in many countries. In the long run, such elevated levels of expenditure (and corresponding levels of debt and deficit) are probably not sustainable, in particular, given other structural changes underway. For instance, demographic trends in many advanced economies pose challenges.

The moral of the story is that America and other nations should be restraining budgets, ideally by enacting the right kind of entitlement reform.

Though I’m worried that Obama is learning the wrong lesson from what’s happening in Europe.

Indeed, this Henry Payne cartoon shows what he has in mind. And if he succeeds, this satirical 2012 campaign slogan may become reality.

P.P.P.P.S. Here’s a final image that captures the essence of Washington.

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Back in the 1960s, Clint Eastwood starred in a movie entitled The Good, the Bad and the Ugly.

I was thinking that might be a good title for today’s post about some new research by Michelle Harding, a tax economist for the OECD. But then I realized that her study on “Taxation of Dividend, Interest, and Capital Gain Income” doesn’t contain any “good” news.

At least not if you want the United States to be more competitive and create more jobs. This is because the numbers show that the internal revenue code results in punitive double taxation of income that is saved and invested.

But it’s not newsworthy that there’s a lot of double taxation in America. What is shocking and discouraging, however, is finding out that our tax code is more punitive than just about every European welfare state.

This is the “bad” part of today’s discussion. Indeed, the tax burden on dividends, interest, and capital gains in America is far above the average for other industrialized nations.

Let’s look at some charts from the study, starting with the one comparing the tax burden on dividends.

OECD Study Dividend Tax Rates

As you can see, the United States has the dubious honor of having the sixth-highest overall tax rate (combined burden of corporate and personal taxes) among developed nations.

Though maybe we should feel lucky we’re not in France or Denmark.

The next chart looks at the tax burden on capital gains.

OECD Study Cap Gains Tax Rates

Once again, the United States has one of the most onerous tax systems among OECD countries, with only four other nations imposing a higher combined tax rate on capital gains.

By the way, if you want to know why this is a very bad idea, click here.

Last but not least, let’s look at the tax burden on interest.

OECD Study Interest Tax Rates

I’m sure you’ve already detected the pattern, but I’ll state the obvious that this is another example of the United States being on the wrong side of the graph.

So the next time you hear somebody bloviating about Americans being too short-sighted and not saving enough, you may want to inform them that there’s not much incentive to save when the IRS gets a big share of any interest we earn.

Not that any of us are getting much interest since the Fed’s easy-money policy has created an atmosphere of artificially low interest rates, but that’s a topic for another day.

Let’s now move to the “ugly” part of the analysis.

Some of you may have noticed that the charts replicated above are based on tax laws on July 1, 2012.

Well, thanks to Obamacare and the fiscal cliff deal, the IRS began imposing higher tax rates on dividends, capital gains, and interest on January 1, 2013.

And because of the new surtax on investments and the higher tax rates on dividends and capital gains, the United States will move even further in the wrong direction on the three charts.

I don’t know if that means we’ll overtake France in the contest to have the most anti-competitive tax treatment of dividends and capital gains, but it’s definitely bad news.

Oh, and let’s add another bit of “ugly” news to the discussion.

The OECD study didn’t look at death tax rates, but a study by the American Council for Capital Formation shows that the United States also has one of the world’s most punitive death taxes.

Even worse than France, Greece, and Venezuela, which is nothing to brag about.

I don’t want to be the bearer of nothing but bad news, so let’s close with some “good” news. At least relatively speaking.

It’s not part of the study, but it’s worth pointing out that the overall burden of taxation – measured as a share of GDP – is higher in most other nations. The absence of a value-added tax is probably the most important reason why the United States retains an advantage in this category.

Needless to say, this is why we should fight to our last breath to make sure this European version of a national sales tax is never imposed in America.

P.S. One of the big accounting firms, Ernst and Young, published some research last year that is very similar to the OECD’s data.

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We know that countries suffer when taxes get too high, in part because investors, entrepreneurs, and other successful taxpayers escape to jurisdiction with less oppressive fiscal regimes. France is a glaring example. On steroids.

We know that states also suffer when the tax burden becomes to onerous, leading to an exodus of jobs and investment.Jerry Brown Promised Land California and Illinois are case studies of this self-destructive practice.

But it’s especially foolish for state governments to over-tax because it’s relatively easy to move from one state to another. Escaping a high-tax nation, by contrast, is a much costlier step and some governments impose quasi-totalitarian barriers to emigration.

Well, if states are foolish for imposing excessive taxation, then local governments that do the same thing are downright suicidal. It hardly requires any effort to move to another neighborhood on the other side of a city’s borders.

That’s why Detroit was doomed to failure. It’s why California cities are going bankrupt. And it explains why I’m now very bearish about New York City.

That’s because the voters of the Big Apple just voted for a Mayor who thinks class-warfare tax policy is the right approach.

That’s not going to end well. Here’s some of what I wrote for City AM, a newspaper that serves the London financial community.

The new mayor-elect Bill de Blasio has a tax-and-spend agenda reminiscent of the profligacy that led Greece to fiscal ruin. …It doesn’t take mass emigration to destabilise a local government’s finances, particularly when a city is very dependent on a limited number of high-income taxpayers. That is why de Blasio’s fiscal agenda is so risky. He wants to raise the New York City income tax (which comes on top of the 39.6 per cent federal income tax and the 8.8 per cent state income tax) from 3.876 per cent to 4.41 percent for taxpayers with an annual income over $500,000.

The Wall Street Crowd, however, doesn’t need to call the moving vans right away.

But there is some good news: New York City does not have full control of its fiscal affairs. Any changes in the local income tax or local sales tax have to be approved by the state. Democratic governor Andrew Cuomo reportedly has national ambitions, and has expressed scepticism about de Blasio’s planned tax hike. Further, Republicans control the state senate and presumably will not be overly sympathetic to any fiscal plan that pillages Wall Street. So folks in places that compete with New York City – such as London, Tokyo, and Hong Kong – shouldn’t put champagne on ice quite yet. Mayor-elect de Blasio wants to help your cities, but it’s uncertain at this stage whether he will succeed.

If you put a gun to my head, I suspect de Blasio will get some sort of tax hike, but probably not what he wants.

So what will that mean? It’s hard to answer that question without also know what will happen on the spending side of the budget. If he pays off his union supporters by augmenting the already excessive pay and benefits of city workers, then New York City will be on the fast track to fiscal trouble.

But if he “merely” gets a tax hike, then the City’s collapse will take longer. As I noted earlier this year, there are many people who are willing to swallow big tax bills to live in particular locations.

…it’s clear that some people are willing to pay more because they like the non-political features of NYC and the Golden State. For those who like museums, fancy dining, and Broadway shows, there’s no easy substitute for New York City. And for people who like the ocean and a Mediterranean climate, it’s hard to compete with California.

But there are limits. Each time the fiscal burden increases, a few more rich people may decide to leave. And since New York City is heavily dependent on upper-income taxpayers (the government already gets 43 percent of its income tax revenue from this sliver of the population), it doesn’t take much fiscal emigration to destabilize the City’s budget.

Perhaps the most important lesson, though, is that higher taxes on the rich are simply the appetizer course. It’s just a matter of time before politicians go after the rest of us – for the simple reason that you can’t finance a welfare state without screwing the middle class.

P.S. If you want more class-warfare cartoons, click here, here, here, and here.

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There’s an off-year election today in the United States. There are no contests for the White House or Congress, but that doesn’t mean there aren’t any important choices being made.

I say that notwithstanding the fact that the big races between politicians at the state and local level aren’t expected to be close.

Governor Christie in New Jersey is poised for a landslide victory in his race for a second term. The only interesting aspect of this race is whether he will use his reelection as a springboard for a run at the White House in 2016. That may please you, depending on whether you focus on his rhetoric (here and here) or his record (here and here).

Bill de Blasio is going to be elected Mayor of New York City, replacing a politically correct Napoleonic busy-body (see here, here, here, here, and here) with a hard-left statist. I expect many productive people will be fleeing in the next few years. Given what will happen, I suspect Detroit-on-the-Hudson will be the future name of NYC.

Terry McAuliffe, a former Clinton fundraiser, will probably become Governor of Virginia. The GOP in the state has been dispirited and weak every since the corrupt Republican governor imposed a big tax hike, though the GOP candidate has a slight chance for an upset because of growing anti-Obamacare sentiment.

The contest that should command our attention is Amendment 66 in Colorado, a ballot initiative that would eliminate the state’s 4.63 percent flat tax and replace it with a so-called progressive tax regime with rates of 5 percent and 5.9 percent.

Here’s how the Wall Street Journal describes the proposal.

Colorado has veered to the political left in recent years, and on November 5 it may take another leap toward California. The Democrats and unions who now run state government are promoting a ballot initiative that would raise taxes and unleash a brave new era of liberal governance. …a $950 million revenue increase for politicians in the first year alone.

The real problem is what happens once the flat tax is gutted and politicians can play divide and conquer with the tax code.

…the real prize is down the road. Once a graduated tax code is in place, unions and Democrats will try again and again to raise tax rates on “the rich.” This has happened everywhere Democrats have run the show in the last decade, from Maryland to Connecticut, New York, Oregon and California. Within a decade, the top tax rate will be closer to 8% or 9%.  …that won’t make the state any more competitive in its interior U.S. neighborhood, where states like Kansas and Oklahoma are cutting tax rates. High-tax states created one net new job for every four in states without an income tax from 2002-2012, according to a study for the American Legislative Exchange Council.

So which side will win this vote?

As recently as 2011, Colorado voters voted down a state sales and income-tax increase, but the unions keep coming. And it’s no surprise they’ve already put $2 million behind Amendment 66. If it passes, they know they’ll get a big return on that political investment for decades to come. If it does pass, we’ll also know that millions of Coloradans have taken to smoking that marijuana they legalized last year.

Hmmm…that’s probably the strongest argument I’ve heard in favor of drug prohibition.

For what it’s worth, I’m predicting Colorado voters will reject this foolish class warfare scheme. Jerry Brown Promised LandThough I realize that may be a foolish guess. After all, 54 percent of crazy Oregon voters approved a tax hike in 2010 and their southern neighbors in the suicidal state of California voted by a similar margin for a class-warfare tax hike in 2012.

I’d feel a lot more confident, however, if we could replace Colorado’s voters with some sensible people from Switzerland. When faced with a class-warfare tax hike referendum in 2010, they voted against it by a very strong 58.5-41.5 margin.

And it was Swiss voters who overwhelmingly voted (84.7 percent) for the “debt brake” in 2001. And as I noted just yesterday, that de facto spending cap has been quite effective in controlling the burden of government spending.

Anyhow, if you know any Colorado voters, you may want to send them this video.

Regardless of how they vote, they should understand the potential consequences if Amendment 66 is approved.

P.S. Some Colorado voters just made a very sensible decision to defend the Second Amendment, but it’s unclear whether they have a similar attitude about economic liberty.

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I recently speculated whether Detroit’s fiscal problems should be a warning sign for the crowd in Washington.

The answer, of course, is yes, though it’s not a perfect analogy. The federal government is in deep trouble because of unsustainable entitlement programs while Detroit got in trouble because of a combination of too much compensation for bureaucrats and too many taxpayers escaping the city.

A better analogy might be to compare Detroit to other local governments. Some large cities in California already have declared bankruptcy, for instance, and you can find the same pattern of overcompensated bureaucrats and escaping taxpayers.

And the same thing may happen to New York City if the next Mayor is successful in pushing for more class-warfare tax policy. Here are some excerpts from an excellent New York Post column by Nicole Gelinas.

Mayoral candidate Bill de Blasio…thinks New York can hike taxes on the rich and not suffer… De Blasio’s scheme is this: Hike income taxes by 13.8 percent on New Yorkers making above half a million dollars annually. …After five years, de Blasio would let this tax surcharge lapse, and — he says — find another way to pay.

But there’s a big problem with de Blasio’s plan. Rich people are not fatted calves meekly awaiting slaughter.

In 2009, the top 1 percent of taxpayers (the 34,598 households making above $493,439 annually) paid 43.2 percent of city income taxes (they made 33.9 percent of income), according to the city’s Independent Budget Office. Each of these families paid an average $75,477. No, most people won’t up and leave (though if 20 percent did, they’d leave New York with less money than before the tax hike). But they can rearrange their incomes. Unlike most of us, folks making, say, $10 million have considerable control over how and when they get paid. That’s because much of their money comes from cashing out a partnership, or selling stock or a house or a painting. To avoid a tax hike, it’s easy enough for them to pay themselves earlier by selling their stuff earlier — before the tax hike. The city made $800 million in extra taxes last year because rich people sold their stuff before President Obama increased investment taxes in December. Or, people can pay themselves later — after the five years’ worth of higher taxes are up.

Gelinas makes some very important points. She warns that the city would have less money if just 20 percent of rich people escaped. She doesn’t think that will happen, but she does explain that rich people can stay but take some simple steps to reduce their taxable income.

This is because rich people are different from the rest of us. As I’ve previously explained with IRS data, they get the vast majority of their income from business and investment sources rather than from wages and salaries.

This means, as Gelinas notes, they have considerable control over the timing, level, and composition of their income.

So if Mr. de Blasio wins and succeeds in pushing through his tax agenda, don’t expect to see much – if any – additional revenue. This will be a tailor-made example of the Laffer Curve in action.

In this video on class warfare taxation, I explain that the Laffer Curve is one of five reasons why soak-the-rich taxes are misguided.

I’ll close by addressing a common argument from folks on the left. They assert that places such as New York City (or states such as California) can impose higher taxes because they provide more in exchange.

I sort of agree, though not with the notion that people are getting “more in exchange” from the politicians in New York City and California.

Instead, it’s clear that some people are willing to pay more because they like the non-political features of NYC and the Golden State. For those who like museums, fancy dining, and Broadway shows, there’s no easy substitute for New York City. And for people who like the ocean and a Mediterranean climate, it’s hard to compete with California.

But there are limits. Last month, I shared a very powerful map from the Tax Foundation showing there’s been a huge shift of taxable income out of New York and California between 2000 and 2010.

Governor Jerry Brown recently succeeded in pushing through a huge tax hike in California, so I expect even more people will leave that state, regardless of the climate.

And if Mr. de Blasio is elected and imposes a big tax hike in New York City, I suspect some rich people will decide enough is enough.

No, they won’t move to Connecticut or New Jersey, both of which have become high-tax nightmares in recent decades. But there are a good handful of zero-income tax states, and the rich folks in New York City will figure out that there are also good restaurants in places such as West Palm Beach, Florida, and Austin, Texas.

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I never thought I would wind up in Costco’s monthly magazine, but I was asked to take part in a pro-con debate on “Should offshore tax havens be illegal?”

Given my fervent (and sometimes risky) support of tax competition, financial privacy, and fiscal sovereignty, regular readers won’t be surprised to learn that I jumped at the opportunity.

After all, if I’m willing to take part in a debate on tax havens for the upper-income folks who read the New York Times, I should do the same thing for the middle-class folks who patronize big-box stores.

My main argument was that we need tax havens to help control the greed of the political elite. Simply stated, politicians rarely think past the next election, so they’ll tax and spend until we suffer a catastrophic Greek-style fiscal collapse unless there’s some sort of external check and balance.

…politicians have an unfortunate tendency to over-spend and over-tax. …And if they over-tax and over-spend for a long period, then you suffer the kind of fiscal crisis that we now see in so many European nations.  That’s not what any of us want, but how can we restrain politicians? There’s no single answer, but “tax competition” is one of the most effective ways of controlling the greed of the political elite. …Nations with pro-growth tax systems, such as Switzerland and Singapore, attract jobs and investment from uncompetitive countries such as France and Germany. These “tax havens” force the politicians in Paris and Berlin to restrain their greed.  Some complain that these low-tax jurisdictions make it hard for high-tax nations to enforce their punitive tax laws. But why should the jurisdictions with good policy, such as the Cayman Islands, be responsible for enforcing the tax law of governments that impose bad policy?

Costco MitchellI also made the point that the best way to undermine tax havens is to make our tax system fair and reasonable with something like a flat tax.

…the best way to reduce tax evasion is lower tax rates and tax reform. If the United States had a flat tax, for instance, we would enjoy much faster growth and we would attract trillions of dollars of new investment.

And I concluded by pointing out that there are other very important moral reasons why people need financial privacy.

In addition to promoting good fiscal policy, tax havens also help protect human rights. …To cite just a few examples, tax havens offer secure financial services to political dissidents in Russia, ethnic Chinese in Indonesia and the Philippines, Jews in North Africa, gays in Iran, and farmers in Zimbabwe. The moral of the story is that tax havens should be celebrated, not persecuted.

And what did my opponent, Chye-Ching Huang from the Center for Budget and Policy Priorities, have to say about the issue? To her credit, she was open and honest about wanting to finance bigger government. And she recognizes that tax competition is an obstacle to the statist agenda.

It drains the United States of tax revenues that could be used to reduce deficits or invested in critical needs, including education, healthcare, and infrastructure.

Costco HuangShe also didn’t shy away from wanting to give the scandal-plagued IRS more power and money.

U.S. policymakers could and should act… Policymakers could provide the Internal Revenue Service (IRS) with the funding it needs to ensure that people pay the taxes they owe, including sufficient funds to detect filers who are using offshore accounts to avoid paying their taxes.

Her other big point was to argue against corporate tax reforms.

…a “territorial” tax system…would further drain revenues, and domestic businesses and individual taxpayers could end up shouldering the burden of making up the difference.

Given that the United States has the highest statutory tax rate for companies in the industrialized world and ranks only 94 out of 100 nations for business “tax attractiveness,” I obviously disagree with her views.

And I think she’s wildly wrong to think that tax havens lead to higher taxes for ordinary citizens. Heck, even the New York Times inadvertently admitted that’s not true.

In any event, I think both of us had a good opportunity to make our points, so kudos to Costco for exposing shoppers to the type of public finance discussion that normally is limited to pointy-headed policy wonks in sparsely attended Washington conferences.

That’s the good news.

The bad news is that I don’t think I’m going to prevail in Costco’s online poll. It’s not that I made weak arguments, but the question wound up being altered from “Should offshore tax havens be illegal?” to “Should offshore bank accounts be taxable?”

Costco Debate QuestionSo I imagine the average reader will think this is a debate on whether they should be taxed on their account at the bank down the street while some rich guy isn’t taxed on his account at a bank in Switzerland.

Heck, even I would be sorely tempted to click “Yes” if that was the issue.

In reality, I don’t think any of our bank accounts should be taxable (whether they’re in Geneva, Switzerland or Geneva, Illinois) for the simple reason that there shouldn’t be any double taxation of income that is saved and invested.

The folks at Costco should have stuck with the original question (at least the way it was phrased to me in the email they sent), or come up with something such as “Are tax havens good for the global economy?”

But just as you can’t un-ring a bell, I can’t change Costco’s question, so I’m not holding my breath expecting to win this debate.

P.S. I’m at FreedomFest in Las Vegas, where I just debated Jim Henry of the Tax Justice Network on the same topic. I should have asked him what he though of all the politically connected leftists who utilize tax havens.

P.P.S. If you like tax haven debates, here are Part I and Part II of a very civilized debate I had with a young lady from the Task Force on Financial Integrity and Economic Development.

P.P.P.S. Maybe I haven’t looked hard enough, but I don’t have any tax haven-oriented cartoons to share other than one that compares where Romney put his money to where Obama puts our money.

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I periodically cite new academic research about tax policy and economic activity. I sometimes even publicize research from international bureaucracies showing the link between taxes and growth.

I’m not naive enough to think that any particular study will change minds, but when the bulk of the research unambiguously tells us that lower tax rates are better for economic performance, I think (or at least hope) that it may have some impact on government officials.

Which is why I’m particularly interested in some new research by Professor Karel Mertens from Cornell University.

Here are some key findings from Professor Mertens’ study, beginning with some observations on existing research.

To what extent do marginal tax rates matter for individual decisions to work and invest? The answer is essential for public policy and its role in shaping economic growth. The strand of the empirical literature that uses tax return data, surveyed in Saez, Slemrod and Giertz (2012), finds that incomes before taxes react only modestly to marginal tax rates and that the response is mostly situated at the very top of the income distribution.

So what does this mean? A lot depends on how one defines “modestly,” though it’s worth noting that even very small changes in growth – if sustained over time – can have big impacts on prosperity. Which, in turn, has a significant effect on government finances.

And I have no objection to the assertion that upper-income taxpayers are most sensitive to changes in tax rates. After all, people like me who rely on wage and salary income don’t have much opportunity to alter our compensation in response to changes in tax rates.

But upper-income taxpayers get most of their compensation in the form of business profits and investment returns, and this gives them substantial control over the timing, level, and composition of their income. So it’s quite understandable that their taxable income is quite sensitive to changes in tax rates.

That being said, Professor Mertens’ research suggests that conventional analysis has underestimated the impact of tax rates on the general population.

This paper adopts a macro-time series approach that addresses the endogeneity of average marginal tax rates in novel ways and permits insight into dynamics. Based on this approach, I find large income responses to marginal tax rates that extend across the income distribution. …The empirical results in this paper are relevant for several important debates. First, they reinforce the findings by a number of recent macro studies of large effects of aggregate tax changes on real GDP both in the US and internationally. The results imply that raising marginal tax rates to resolve budget deficits comes at a high price and that a proportional across-the-board tax cut provides successful stimulus that does not necessarily lead to greater income concentration at the top.

Interestingly, the first part of the last sentence helps to explain the very poor results of tax-heavy “austerity” packages in places such as Greece, Spain, Ireland, the United Kingdom, and Portugal.

Politicians in those countries are squeezing the private sector in hopes of minimizing the restraint imposed on bloated public sectors. But that doesn’t generate good results.

The Baltic nations took a much better approach, imposing genuine spending cuts the moment the crisis hit. Now their finances are in stronger shape and they’re enjoying renewed growth.

But I’m digressing. Let’s return to Professor Mertens’ research. He also produced some interesting results about tax rates and high-income taxpayers.

Many of the postwar tax reforms have made particularly large changes in top marginal tax rates. This variation in top statutory rates may be used to estimate the effects of a hypothetical tax reform that only alters marginal tax rates for the top 1%. …The specification…displays the response to a one percent rise in the net-of-tax rate of the top 1% in the income distribution. …The tax cut leads to significant increases in average top 1% incomes, which rise on impact by 0.52 percent and by 0.97 and 1.02 percent in the following two years, after which there is a gradual decline. …the cut in top 1% tax rates leads to a statistically significant increase in real GDP of up to 0.34 percent in the third year. …There are also spillover effects to incomes outside of the top 1%. Average incomes of the bottom 99% rise by 0.15 percent on impact and by up to 0.35 percent in the third year.

So we learn that lower tax rates for the “rich” are good for the economy and also beneficial for the living standards of the general population.

Why, then, would anybody want to impose high tax rates? Here’s a hint from the study.

Despite the spillover effects, a top marginal rate cut unambiguously leads to greater inequality in pre-tax income.

In other words, the rich get richer faster than the non-rich get richer when the top tax rate is reduced. So if you’re driven by class-warfare animus, you may decide that you’re willing to hurt poor and middle-class people in order to prevent upper-income taxpayers from realizing a bigger share of the economy’s increased output.

That doesn’t make much sense. But if you watch this video on class-warfare tax policy, there’s no logical reason to support higher tax rates on more successful taxpayers.

Unfortunately, politicians generally are motivated by a desire to maximize votes and power, not by what’s logical.

Which is why, when I’m doing educational outreach on Capitol Hill, I often make an extra effort to explain that a bigger economy – enabled by small government and free markets – is the same as a bigger tax base.

That’s far from a pure libertarian argument, to be sure, but it’s not easy when you’re trying to convince the foxes that it doesn’t make long-run sense to deplete the henhouse.

P.S. Notwithstanding all the academic evidence, there’s one group of people in Washington who deliberately assume that tax policy has no impact on economic output.

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In a recent interview with the BBC, I basically accused UK Prime Minister David Cameron of being a feckless and clueless demagogue who is engaged in a desperate effort to resuscitate his political future.

Two peas in a pod

I shouldn’t have been so kind. Cameron manages to combine bad policy and bad morality in a way that is embarrassing even for a politician.

Writing for the Daily Telegraph, Janet Daley eviscerates Cameron’s puerile approach to fiscal policy, beginning with some mockery of his class-warfare approach to tax enforcement.

David Cameron said something last week that was the precise opposite of the truth…the Prime Minister said was: “If you want a low-tax economy, you have to collect the taxes that are owed.” When what he should have said, of course, was: “If you want to collect the taxes that are owed, you have to have a low-tax economy.” Mr Cameron’s statement was one of the more subtle threats contained in the declaration by the G8 – which was pretty much all they could agree on – that they are now the rightful owners of all the wealth produced by anyone except for certain exemptions that they will, subject to minimal notice, decide upon. His remark, presumably designed to provide moral justification for the unprecedented levels of shared surveillance and breaches of data protection that governments are preparing to launch, actually stood on its head the truth about effective tax collection. Which is that the lower rates of taxation are, the less likely it is that payment of them will be avoided or evaded.

She also makes some very astute points about other issues, including the Laffer Curve.

The introduction of the 50p rate of income tax caused two-thirds of those earning a million pounds per year simply to disappear from the reach of HM Revenue & Customs. Whereas under the previous highest tax level of 40p, 16,000 people were prepared to declare earnings of one million pounds, that number shrank to only 6,000 after Gordon Brown, bless him, raised it to 50p. Result: the Treasury lost £7 billion in revenue.

Ms. Daley also comments on tax compliance and the risks of letting governments destroy financial privacy as part of their efforts to undermine tax competition.

If people regard levels of tax as fair (in the true sense of the word, not the Left-wing sense, which actually means “vindictive”), they will not go to expensive and dangerous lengths to escape from paying. The more punitive and discouraging of wealth-creation taxes are, the more they are avoided by stealth or geographical relocation – or by the even more economically disastrous measure of people being disinclined to increase their own productivity. Ah yes, but isn’t this the problem that those heads of government are determined to address? Rather than lowering taxes to levels that those who are taxed find acceptable, they will simply close off all the avenues of escape. There is to be no more possibility, by international agreement (which is to say, the coercion of smaller, less rich countries), of geographical movement for tax advantage.

She closes by opining on why this is really a debate about the burden of government spending and whether taxpayers exist to feed the spending appetites of politicians.

If you eliminate tax competition – if you create a uniform, universally policed tax standard – it is the poorer countries that suffer because they are deprived of the capacity to attract foreign capital. …What is at the heart of all this is the growth of governments: the treasuries of the world are becoming needier and greedier. …Underlying almost all political debate on this matter now is the unspoken assumption that privately owned wealth is inherently evil, and that its only moral justification is to provide revenue that governments can redistribute. …let me remind you of what you may actually believe, shocking as it may sound in the context of prevailing public discourse. Are you ready? It is not the primary function of business to provide funds for politicians to spend.

Amen. The statists and collectivists that dominate the political elite treat us like a herd of cattle to be milked and slaughtered.

We need tax havens in order to impose at least a tiny bit of restraint on the greed of the political class. These low-tax jurisdictions aren’t a sufficient condition to save us from statism, but they sure as heck are a necessary condition.

P.S. Who moved farther in the wrong direction, U.S. Republicans who went from Reagan to Bush or U.K. Tories who went from Thatcher to Cameron?

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With many European nations already in the midst of a fiscal crisis caused by excessive government, and with most other industrialized nations heading down the same path thanks to aging populations and poorly designed entitlement programs, this would be a good time for supposed experts to propose ways to rein in the welfare state.

But the bureaucrats at the Organization for Economic Cooperation and Development don’t get distracted by trivial details such as real-world events and evidence. The Paris-based bureaucracy is funded by governments and it predictably endeavors to keep its paymasters content by embracing proposals that increase the size and scope of government.

This attitude is quite apparent in the OECD’s new report on Inequality and Poverty in the United States. Here are some of the key recommendations.

1. More education spending and centralization – The report states that “more resources need to be directed towards disadvantaged students” and that a goal should be “upgrading the teaching profession…by raising its low pay.” Education spending-performance chartYet as illustrated by this remarkable chart, education spending in America has skyrocketed without any positive impact. Moreover, the United States already spends more than per capita than almost any other nation and gets very poor results. The OECD report also supports more centralization, urging lawmakers to “replace the local-property tax system of financing schools by state-level financing.”

2. More class-warfare taxation – The report frets about the “effectiveness of the capital income tax as a redistribution instrument” and suggests “raising the corporate income and/or capital income taxes at the personal level.” In addition to those class-warfare policies, it endorses more double taxation of income that is saved and invested, suggesting that “tax breaks to encourage the accumulation of individual private pensions could…be phased out or progressively more tightly capped.” The report even calls for making some features of the death tax more onerous, urging that “capital gains on bequeathed assets…should be taxed to avoid undermining the effectiveness of the gift and estate tax.”

3. More welfare spending – The report complains that “cash transfer programmes…reduce poverty…less than in other OECD countries” and suggests that “government should restore the inequality-reducing power of the transfer system.” Since welfare spending in the United States is at record levels, it’s unclear what the bureaucrats mean by “restore,” but it’s quite clear that they want more spending on programs that have undermined the fight against poverty.

Sounds almost as if the OECD report could have been written by a couple of interns from Obama’s reelection campaign.

Though, to be fair, the analysis in the study at times is sound. The problem is that the OECD’s bureaucrats lean strongly to the left whenever it is time to make policy recommendations.

But at least they’re not as far to the left as some of the crowd in Washington. Can you imagine this analysis being uttered by somebody associated with the Obama Administration?

…an increase in the progressivity of the taxation of capital  income and wealth reduces the incomes of US households across the income distribution. Such a reform can thus, while lowering income inequality, make the majority of the population less well off. …high marginal tax rates create inefficiencies by distorting both the labour-leisure choice (i.e. by discouraging labour supply) and the choice between consuming now or in the future (i.e. by discouraging saving), with harmful effects to economic growth.

That’s a nice endorsement of lower tax rates and less double taxation, at least in theory.

Now that I’ve said something nice about the report, I want to close by pointing out something grotesquely dishonest. The bureaucrats who authored the report assert that “relative poverty” in the United States is “among the highest in the OECD.”

They even included this chart showing that the United States has one of the worst rates of “relative poverty.”

OECD Junk Poverty Data

But if you read the fine print, you may notice one itsy-bitsy detail. The chart isn’t a measure of poverty. Not even close. Indeed, the chart wouldn’t change if all of the people of any nation (or all nations) suddenly had 10 times as much income.

That’s because the OECD is measuring is relative income distribution rather than relative poverty. And the left likes this measure because coerced redistribution automatically leads to the appearance of less poverty.

Even if everybody’s income is lower!

As I explained last year, this crazy approach makes it seem as if there’s more poverty in America than in nations such as Greece, Portugal, Hungary, and Turkey.

The final insult to injury is that American taxpayers are financing the biggest share of the OECD’s budget. Sort of like having tax dollars get diverted to the research staff at the Democratic National Committee.

But with one irritating difference. OECD bureaucrats get tax-free salaries, so they don’t suffer the consequences of the policies they want to impose on the rest of us. Nice work if you can get it.

P.S. If you want other examples of OECD bias, there are plenty.

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I joked back in 2010 that Barack Obama had a very simple flat tax proposal.

But as you can see, sometimes simple isn’t the same as good.

Well, satire too often becomes reality in a world of greedy and corrupt politicians who think class-warfare is an acceptable guide to tax policy.

I say this because thousands of French taxpayers now are being subject to this satirical Obama flat tax.

Here are some of the grotesque details from a Reuters report.

More than 8,000 French households’ tax bills topped 100 percent of their income last year, the business newspaper Les Echos reported on Saturday, citing Finance Ministry data. …President Francois Hollande’s Socialist government imposed the tax surcharge last year, shortly after taking office… The government has been forced to redraft a proposed bill to levy a temporary 75 percent tax on earnings over 1 million euros, which had been one of Hollande’s campaign pledges. …Since then, a top administrative court has determined that a marginal tax rate higher than 66.66 percent on a single household risked being considered as confiscatory by the council.

Ironically, President Hollande already made a commitment that no taxpayers should have to surrender more than 80 percent of their incomes, but I guess that promise didn’t mean much.

After all, this is the guy who equates higher taxes with patriotism.

No wonder successful people are fleeing the country.

If you want to understand real tax reform, click here.

And here’s my video describing why the right kind of flat tax is a good idea.

This topic is particularly meaningful to me since I’m in the middle of the Free Market Road Show and I’ve been five flat tax nations – Bulgaria, Romania, Kosovo, Macedonia, and Albania – in the past 36 hours.

Too bad there’s little reason to hope that America will ever be part of the flat tax club.

P.S. I guess it’s good that the French court thinks that a 66.66 percent tax is “confiscatory.” But isn’t that true of any tax – at any rate – that is used to fund illegitimate activities?

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It’s been more than three weeks since I targeted French fiscal policy for abuse and more than one week since I wrote something negative about the French fiscal system.

I must be slowing down as I get older, so it’s time of rectify this oversight.

My fundamental problem with the French system is that the burden of government spending is excessive and the politicians seem to think the answer is additional increments of class-warfare tax policy.

If you think I’m exaggerating, just check out this chart on government spending. The public sector in France is more bloated than the ones that exist in Italy, Sweden, and Greece!

That’s quite an achievement.

And then remember that the new French President is imposing a new top income tax rate of 75 percent. Though, to be fair, President Hollande generously says he doesn’t want the overall tax burden on any taxpayer to exceed 80 percent. All hail Francois the Merciful!

Notwithstanding this magnanimous gesture, some taxpayers have the gall (no pun intended) to object to this level of fleecing. Famous actors and successful entrepreneurs are among those saying Au Revoir and moving to jurisdictions that have less punitive tax laws.

What most amuses me about this exodus is the way France’s political elite is throwing a temper tantrum. How dare our victims run away!

The situation is so grim in France that The Economist wrote up a special report warning that France is Europe’s “time-bomb.”

Which raises an interesting question. How brightly is the fuse burning, and how much longer until the bomb detonates?

The honest answer is that I don’t know, but here are two stories worth noting.

First, you have to figure the tax burden is a bit too onerous if even high-ranking officials from a socialist government are utilizing tax havens to protect themselves. Here are details from a BBC report.

Jean-Jacques Augier, who managed Mr Hollande’s campaign funds, told the daily Le Monde that there was “nothing illegal” in his tax haven affairs. Meanwhile, ex-budget minister Jerome Cahuzac has been charged with fraud. Ministers are under pressure to reveal what they knew about his tax evasion. On Wednesday President Hollande addressed the scandal on national television, saying that in future all ministers and MPs would have to declare fully their personal finances.

Gee, don’t these members of the political elite understand that Hollande wants them to be able to keep 20 percent of their earnings? What a bunch of ingrates!

Our next story shows that French politicians are so greedy that they’re even willing to undermine their own national sport.

Prime Minister Jean-Marc Ayrault’s office issued a statement today confirming that a 75 percent surcharge on salaries above 1 million euros ($1.3 million) will apply to soccer clubs. “This new tax will cost first-division teams 82 million euros,” France’s Football League said in a statement. “With these crazy labor costs, France will lose its best players, our clubs will see their competitiveness in Europe decline, and the government will lose its best taxpayers.” …Many soccer players would already be taxed at France’s top marginal rate of 49 percent, which kicks in at 500,000 euros a year. Teams would then pay a surcharge to bring the effective tax rate on salaries above 1 million euros to 75 percent.

Mon Dieu! The government “will lose its best taxpayers.” Sounds like the Laffer Curve effects may be so large that the government actually loses tax revenue.

“Follow me. We can escape in this direction”

And since even left-leaning economists have confirmed that tax rates have a big impact on the decisions of such athletes, I hope French sports fans won’t mind if all the best players decide to take their talents elsewhere.

With policy this bad, no wonder Obama will probably never achieve his goal of turning America into another France. But he can take comfort in the fact that the French people overwhelmingly support what he’s trying to do.

But they also must be schizophrenic. As of 2010, an overwhelming majority of them also acknowledged that it was necessary to lower the burden of government spending to boost growth. And an astounding 52 percent of them might move to evil capitalistic America if given the opportunity.

The key thing is not to import French economic policy. Having escaped from her former country, Veronique de Rugy explains why that would be a mistake.

You can also watch Veronique explain the basics of fiscal policy in this testimony to a congressional committee.

P.S. This Chuck Asay cartoon captures the French mentality. Makes you wonder what they’ll do when the house of cards comes tumbling down. All I can say for sure is that the ones who put their money in tax havens will be much happier than the ones who thought they could trust government.

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Maybe actors and other Hollywood types are only acting when they embrace statism?

We’ve already seen Hollywood liberals like Rob Schneider and Jon Lovitz complain about class-warfare policy.

And Gerard Depardieu moved out of France to escape the suicidally destructive taxes being demanded by French president Francois Hollande.

But the most shocking news is that even Bill Maher is getting irked that he’s being treated like a pinata.

Take a look at this short video. Ignore the first 2/3rds, which is Rachel Maddow making inane comments about the Ryan budget, and notice what Maher says in the final part.

Wow. He notes that the rich pay the overwhelming share of the federal tax burden (hmmm…I wonder if he watched this video).

And he’s not overly happy about California raping him with a new top tax rate of 13.3 percent.

Closet libertarian?

So now he’s saying he may move out of the state, just like Phil Mickelson. I won’t believe it ’til I see it, but for every well-known celebrity who publicly speculates about migrating to a zero-income tax state, there are probably dozens of investors, entrepreneurs, and small business owners who actually take that step.

And this, folks, is one of the reasons why class-warfare tax policy is so pointlessly destructive.

Reagan showed us in the 1980s that lower tax rates on upper-income taxpayers can generate more tax revenue. California is doing the same experiment, but in reverse.

Magnitudes matter, so we’ll have to wait and see before determining the net impact of Jerry Brown’s tax hike on California tax revenue. But I will blindly assert with confidence that revenues will be far below what politicians are hoping to collect.

In other words, we will see the revenge of the Laffer Curve, regardless of what Bill Maher decides.

P.S. I can’t help adding that Rachel Maddow doesn’t know what she’s talking about. The Ryan budget does not propose a net tax cut, so it’s absurd to claim – or even imply – that there will be “tax cuts for the rich” financed by changes to healthcare. That budget does propose reforms to Medicare and Medicaid, but those changes are to salvage the programs by making them sustainable.

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As a general rule, it’s not right to take pleasure at the misfortune of others.

But I think we’re allowed an exception to that Schadenfreude rule when the “others” are greedy politicians pursuing spiteful policies. We want the political elite to suffer misfortune because of our desire to promote freedom and prosperity for ordinary people.

With that in mind, I have a big smile on my face because Francois Hollande’s class-warfare tax policy in France is a bigger failure than even I predicted it would be.

I’m particularly happy that the geese with the golden eggs are flying away. And the flock seems to get bigger every day.

Here are some amusing excerpts from a story in the Financial Times.

New evidence of top French executives leaving the country has emerged as President Francois Hollande battles a stalling economy and tumbling approval ratings. Two senior executives at Moet Hennessy, the champagne and cognac arm of the LVMH luxury group, are moving to London from Paris and the head of Dassault Systemes, the software arm of Dassault Aviation, said some senior managers of his company had left and he was considering following suit. …The news follows Mr Arnault’s own application for Belgian citizenship, leaked last September, which poured fuel on a fiery debate in France about entrepreneurship, patriotism and high taxes.

Yup, just like Joe Biden, French politicians want people to think it’s patriotic to give more money to wasteful and incompetent politicians.

“I am the John Galt of France”

And then they have the gall (no pun intended) to complain when the intended victims decide they don’t want to cooperate in their own disembowelment.

You can see why I have a smile on my face.

While I’m happy that some people are escaping Hollande’s punitive tax grasp, there are plenty of victims that can’t escape. France’s economy is in the toilet and millions of ordinary people are suffering.

Figures released on Monday showing a worse-than-expected 1.2 per cent fall in industrial production in January over December underlined the grim outlook facing Mr Hollande, whose approval ratings have fallen this month to as low as 30 per cent. The economy went into reverse in the last quarter of 2012, unemployment has hit 10 per cent of the workforce

Not surprisingly, the politicians are not learning any lessons. They either have their heads buried in the sand or they lash out at those who offer constructive criticism.

The government has denied claims of a tax exodus and denounced as “French bashing” criticism such as the declaration last month by Maurice Taylor, head of tyremaker Titan International, that he would be “stupid” to buy a French factory.

Hollande and his cronies can pretend that successful taxpayers aren’t escaping, but reality will hit them over the head when they count how much tax revenue they receive this year and next year.

In other words, we’re going to see an interesting Laffer Curve experiment.

We saw in America that rich people paid a lot more to the IRS when Reagan lowered their tax rates in the 1980s.

Francois Hollande is trying to run the same experiment, only in reverse.

Anybody want to take a wild guess how that’s going to turn out?

P.S. As shown in this remarkable chart, the real problem in France is that government is far too big. And if the public sector is consuming more than 50 percent of a nation’s economic output, it’s impossible to have a good tax system.

Some big-government nations – such as Sweden and Denmark – try to minimize the damage of high tax burdens, but there’s no way to have a non-destructive tax system when the government wants to take half of what people produce.

And France is trying to maximize the pain rather than minimize the pain, so it’s a safe bet that Hollande’s policies won’t end well.

P.P.S. The debacle in France helps explain why we should celebrate tax competition. The fact that entrepreneurs can migrate to nations with better (or less worse) tax systems is a valuable way of penalizing politicians that impose bad policy.

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I’m not a fan of loopholes in the tax code.

I’ve complained about the number of pages in the tax code, the number of provisions in the tax code, and I’ve even groused about the rising number of pages in the instruction manual for the 1040 tax form.

And I’ve specifically come out against tax preferences for ethanol, housing, municipal bonds, charity, and state and local taxes.

But just as you don’t necessarily know whether someone is tall or short without knowing the average height of a population, you can’t automatically identify loopholes without first defining an ideal tax system. In other words, you need a benchmark (referred to as “the tax base” or “taxable income”) in order to measure what’s a loophole.

Unfortunately, that’s not an easy task because there are two competing visions of the ideal benchmark. I’ve addressed this issue previously, in this post on the “tax expenditure con job,” but let’s dig into the weeds a bit.

  1. Those on the left, including the Joint Committee on Taxation, use what is sometimes called the “Haig-Simons” definition of a tax base. Also known as the “comprehensive income tax base,” this system assumes that there should be double taxation of income that is saved and invested (as shown by this startling chart). Another way of saying this is that the Haig-Simons approach assumes the government should tax income plus changes in the value of assets. Moreover, the Haig-Simons system assumes “worldwide taxation” and that businesses can’t deduct investment costs as they occur.
  2. Those on the right, by contrast, support what is generally called “consumption-based” taxation. This doesn’t mean a tax collected at the cash register (though a national sales tax is an example of a tax with a “consumption base”). Instead, it simply refers to a system where income is taxed only one time. So, for example, a flat tax is a consumption-base tax since income is taxed only one time as it is earned, just as a national sales tax is a consumption-base tax since income is taxed only one time as it is spent. Moreover, a consumption-base system assumes “territorial taxation” and that business expenses should be deductible in the year the money changes hands.

While some features of the tax code – such as the healthcare exclusion – are loopholes according to both the Haig-Simons system and the consumption-base system, you get a divergence of opinion in key areas.

a) In a consumption-base world, there’s no double taxation and the capital gains tax therefore doesn’t exist. But from the perspective of the Haig-Simons tax base, the fact that capital gains are taxed at 23.8 percent instead of 39.6 percent is characterized as a loophole.

b) In a consumption-base world, there’s no double taxation and all savings gets the equivalent of IRA or 401(k) treatment. But from the perspective of Haig-Simons tax base, IRAs and 401(k)s are loopholes.

c) In a consumption-base world, there’s territorial taxation and no attempt to impose tax on income earned (and subject to tax) in other countries. But the Haig-Simons tax base assumes “worldwide taxation,” which means that “deferral” is a loophole rather than a way of mitigating a discriminatory penalty.

So why am I getting into boring details on this wonky issue? In part, because it helps people understand that tax reform is not just a matter of having a low tax rate. It’s also very important to define income correctly.

But I also think some background knowledge is necessary to explain why the White House is blowing smoke when they relentlessly demagogue against “corporate jets” as part of their never-ending campaign for class-warfare tax policy.

Let’s examine some excerpts from an ABC News report.

Listening to the White House, you’d think the key to averting the across-the-board spending cuts (the dreaded “sequester”) set to in place on March 1 is closing the tax break for owners of private jets. …Carney has brought up the corporate jet tax break at every single briefing this week. Listening to the White House, you might think that the “balanced” Democratic plan to avert the spending cuts would close that loophole for private jets. But you would be wrong. The Senate Democratic plan – which has been endorsed by the White House and is, in fact, the only Democratic plan actively under consideration right now – doesn’t touch corporate jets. …The tax break…allows the owners of private jets to depreciate their airplanes over five years instead of the standard seven years for commercial airplanes.

I don’t want you to focus on the demagoguery or the potential hypocrisy. Instead, consider the final sentence of the excerpt.

It turns out that the supposed “loophole” is really a penalty from a consumption-base perspective. If a company purchases a jet for $20 million, they should be able to deduct – or expense – that $20 million when calculating that year’s taxable income (after all, what is profit other than total revenue minus total costs?).

A sensible tax system defines profit as total revenue minus total costs – including purchases of private jets

But today’s screwy tax code forces them to wait five years before fully deducting the cost of the jet (a process known as depreciation). Given that money today has more value than money in the future, this is a penalty that creates a tax bias against investment (the tax code also requires depreciation for purchases of machines, structures, and other forms of investment).

Anyhow, because the tax bias imposes a five-year wait rather than a seven-year wait, the Obama White House would like us to believe that companies are getting some sort of egregious loophole.

Nonsense. In a good tax regime, companies should be able to deduct expenses in the year they are incurred. The fact that they have to wait five years is a penalty. But the White House wants us to perceive this penalty as a loophole or subsidy because it could be even more onerous.

By the way, if we’re worried about actual subsidies that benefit corporate jets, Tim Carney’s already explained that we should focus on the cronyists at the Export-Import Bank. And I heartily agree.

P.S. Defining the right “tax base” doesn’t imply anything about tax rates. You can have a so-called progressive rate structure or a single rate with either the Haig-Simons system or a consumption-base system.

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All statists want much bigger government, but not all of them are honest about how to finance a Greek-sized welfare state.

The President, for instance, wants us to believe that the rich are some sort of fiscal pinata, capable of generating endless amounts of tax revenue.

Using IRS tax data, I’ve shown that this is a very inaccurate assumption. And I’ve also used IRS data to show the President that there are big Laffer-Curve effects when you try to rape and pillage high-income Americans.

Heck, even the Europeans have realized that you can only squeeze so much blood from that stone.

Notwithstanding the misleading rhetoric from the Obama Administration, there are some honest folks on the left who understand and acknowledge that you can’t have bigger government unless you put ordinary people on the chopping block.

The New York Times seems really fixated on screwing Joe Lunchbucket. Here are some excerpts from an editorial in today’s paper.

…new taxes on high-income Americans are a matter of necessity and fairness; they are also a necessary precondition to what in time will have to be tax increases on the middle class. …As the economy strengthens and the population ages, more taxes will be needed from further down the income scale… But there will never be a consensus for more taxes from the middle class without imposing higher taxes on wealthy Americans, who have enjoyed low taxes for a long time.

What’s particularly interesting about this editorial is that the New York Times is very explicit about political strategy. They support more class-warfare taxes in order to set the stage for higher taxes on the middle class.

We can’t say we haven’t been warned.

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Every so often, you get a “teaching moment” in Washington, and we now have an excellent opportunity to educate lawmakers about the “offshore” world because President Obama’s nominee to be Treasury Secretary has been caught with his hand in the tax haven cookie jar.

Mr. Lew not only invested some of his own money in a Cayman-based fund, he also was in charge of a Citi Bank division that had over 100 Cayman-domiciled funds.

As you can imagine, Republicans are having some fun with this issue.

Democrats used to be critical of Ugland House

Mitt Romney was subjected to a lot of class-warfare demagoguery during the 2012 campaign because he also invested  some of his wealth in a Cayman fund, so GOPers are hoisting Lew on a petard and grilling him about the obvious hypocrisy of a leftist utilizing – both personally and professionally – a jurisdiction that commits the unforgivable crime of not imposing income tax.

In a sensible world, Lew would say what everyone in the financial world already understands, which is that the Cayman Islands are an excellent, fully legal, tax-neutral platform for investment funds because 1) there’s no added layer of tax, 2) there’s good rule of law, and, 3) foreigners can invest in the American economy without creating any nexus with the IRS.

But we don’t live in a sensible world, so Lew instead wants us to believe he’s a moron and that he didn’t realize that funds were domiciled in Cayman.

And I guess all the other wealthy leftists with offshore-based investments probably think that as well, right?

Anyhow, I’m taking a glass-half-full perspective on this kerfuffle since it gives me an opportunity to educate more people about why tax havens are a liberalizing and positive force in the global economy.

Oh, what about Lew as Treasury Secretary? Well, as I explain for Real News, he’s competent but misguided.

In other words, the chances of any good reform in the next four years are asymptotically approaching zero. Based on his background (and also based on the views of the President he’ll be serving), it’s virtually impossible to envision good entitlement reform, pro-growth tax reform, and any changes to lessen the likelihood of future Greek-style fiscal collapse (as amusingly illustrated by this cartoon).

So with any luck, they’ll be some tax havens around that the rest of us can utilize when that day of reckoning occurs.

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I’ve been in Washington long enough to build up a bit of immunity to run-of-the-mill rhetorical nonsense.

So when Obama claims that corrupt, pork-barrel projects like Solyndra are “an investment,” I shake my head with disgust but I don’t get overly agitated.

And when the class-warfare crowd says that the so-called rich should “contribute” more to “give back” to society, I roll my eyes with disdain but don’t lose any sleep.

That being said, rhetoric matters and we should mock and counter the statists when they try to distort language for political purposes.

That’s why this Scott Stantis cartoon strip is very much worth sharing.

Contribute Cartoon

Stantis, by the way, produced the best-ever cartoon about the so-called stimulus. In one picture, he achieved everything I tried to explain in my video on Keynesian economics.

And he also has a good cartoon about Obama’s anti-gun agenda and the Constitution.

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I’ve been pointing out the differences between California stagnation and Texas prosperity for quite some time.

And since California voters approved a new 13.3 percent top tax rate last November, I expect the gap to become even wider.

Simply stated, California is the France of America and Texas is the Cayman Islands of America.

So it’s understandable that the Governor of Texas is telling employers in California that his state has a better climate for job creation.

John Fund of National Review opines on this bit of competition between states.

Texas governor Rick Perry knows how to start a rumble. Last week, he spent a mere $24,000 on radio ads in California, urging firms there to move to Texas, with its “zero state income tax, low overall tax burden, sensible regulations, and fair legal system.” …He begins a four-day barnstorming tour of California today, touting Texas’s virtues to business owners. …several observers acknowledged that Perry has gotten the better of the battle.

Texas is clearly doing better on jobs, and it’s easy to avoid higher taxes when you obey Mitchell’s Golden Rule and restrain the burden of government spending.

Indeed, in the last five years Texas has gained 400,000 new jobs while California has lost 640,000. The Lone Star State’s rate of job growth was 33 percent higher than California’s last year, even as the Golden State finally pulled out of the recession. …Texas’s legislature has just trimmed its $188 billion two-year budget by 8 percent, and the state may have more revenue than it can legally spend because it is barred from raising outlays more than the rate of economic growth.

Here’s a very good Steve Breen cartoon about Perry’s fishing trip to the west coast.

Texas Seduction Cartoon

And remember my post about Phil Mickelson threatening to leave the state? Well, Chip Bok has a humorous take on that looming departure.

California Escape Cartoon

I’ve already written about the exodus of jobs from California, and expect even more in the future.

P.S. Texas is far from perfect. There’s a good bit of crony capitalism in the state. But there’s also some bad policy in the Cayman Islands, so the analogy is appropriate.

P.P.S. This “coyote” joke about California and Texas is the fourth-most viewed post in the history of this blog.

P.P.P.S. Here’s a photo that shows the California bureaucracy in action, and a cartoon featuring archaeologists from the future.

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Daniel Hannan is a member of the European Parliament from England. He is one of the few economically sensible people in that body, as demonstrated in these short clips of him speaking about tax competition and deriding the European Commission’s corrupt racket.

And as you can see from his latest article in the UK-based Telegraph, he’s also very wise on issues of class warfare tax policy and Laffer Curve responses to punitive taxation.

France’s richest man, Bernard Arnault, is shifting his fortune to Belgium. Gérard Depardieu, the country’s greatest actor (figuratively and literally)is moving to Russia. And, if rumours are to be believed, Nicolas Sarkozy is planning a new career in London. That’s the problem with very high taxes – they don’t redistribute wealth; they redistribute people. …the rich don’t sit around waiting to be taxed. …many financiers can open their businesses abroad simply by opening their laptops. The result of a hike in tax rates is thus often a fall in tax revenue – which means, of course, that the rest of us end up paying more to cover the share of the departed plutocrats.

Hannan understands that rich people have considerable control over the timing, level, and composition of their income, which is precisely why there are powerful Laffer Curve effects when politicians go after the so-called rich (as I tried to explain in a lesson for President Obama).

But Hannan also makes a good point about complexity.

The complexity of a tax system is every bit as damaging to competitiveness as the overall tax rate. The more convoluted the tax code becomes, the more time we have to take off work to comply with it.Tolley’s Tax Handbook is now 11,500 pages long, twice what it was when Gordon Brown became chancellor, and the number of tax lawyers has increased commensurately. …The very wealthy, who can afford ingenious tax advisers and high upfront fees, turn this complexity to their advantage, sheltering their assets in various pockets unintentionally created by government schemes. Again, the rest of us then have to pay more to make up their portion.

Since we have 72,000 pages of complexity and corruption in our tax code, I can’t help but comment that the Brits are lucky that they “only” have 11,500 pages (assuming, of course, that the methodology in both page counts is similar).

In both cases, though, Hannan is right in stating that complexity benefits those who can hire lots of tax lawyers, financial planners, accountants, and other tax advisers.

The answer, of course, is a flat tax. Hannan doesn’t explicitly embrace that option, but he does write about the benefits of lower rates and fewer distortions.

There is one other point he makes that is worth noting. He cites a former Labour Party politician who explicitly was willing to have less prosperity if it meant more equality.

You might, of course, agree with Roy Hattersley, who once said that he’d rather have 5% more equality than 10% more prosperity. That is a respectable position, but at least be honest about it. Wealth taxes create more equal, but poorer societies.

Margaret Thatcher eviscerated that destructive mentality many years ago in this famous speech, but this is an area where proponents of limited government need to do more work.

There are plenty of well-meaning people who mistakenly think the economy is a fixed pie. If we want to help them understand the benefits of small government and free markets, we need to come up with more effective ways of educating them about the important implications of even small differences in economic growth.

I try to make that point in this PBS interview, but I suspect these charts comparing North Korea and South Korea and comparing Chile, Argentina, and Venezuela are much more compelling.

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I’m fond of my video analyzing the problems with class warfare tax policy, and I’ve explained that higher tax rates on the rich will cause bad Laffer Curve effects because investors, entrepreneurs, and small business owners have considerable ability to change the timing, level, and composition of their income.

But if you want to enjoy a succinct video that captures the moral bankruptcy of Obama’s agenda of class warfare and redistribution, this Penn & Teller video is well worth watching. And sharing.

And if you want to see rich, pro-tax statists exposed as hypocrites, watch these ambush interviews by Michelle Fields (who also narrated a very good video explaining how government policy mistakes caused – and exacerbated – the Great Depression).

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How do you define a terrible team? No, this isn’t going to be a joke about Notre Dame foolishly thinking it could match up against a team from the Southeastern Conference in college football’s national title game (though the Irish win the contest for prettiest make-believe girlfriends).

I’m asking the question because a winless record is usually a good indication of a team that doesn’t know what it’s doing and is in over its head.

With that in mind, and given the White House’s position that class warfare taxation is good fiscal policy, how should we interpret a recent publication from the Tax Foundation, which reviews the academic research on taxes and growth and doesn’t find a single study supporting the notion that higher tax rates are good for prosperity.

None. Zero. Nada. Zilch.

Twenty-three studies found a negative relationship between taxes and growth, by contrast, while three studies didn’t find any relationship.

For those keeping score at home, that’s a score of 0-23-3 for the view espoused by the Obama Administration.

This new Tax Foundation report is also useful if you want more information to debunk the absurd study from the Congressional Research Service that claimed no relationship between tax policy and growth. Indeed, the TF report even explains that serious methodological flaws made “the CRS study unpublishable in any peer-reviewed academic journal.”

So what do we find in the Tax Foundation report?

…what does the academic literature say about the empirical relationship between taxes and economic growth? While there are a variety of methods and data sources, the results consistently point to significant negative effects of taxes on economic growth even after controlling for various other factors such as government spending, business cycle conditions, and monetary policy. In this review of the literature, I find twenty-six such studies going back to 1983, and all but three of those studies, and every study in the last fifteen years, find a negative effect of taxes on growth.

And what does this mean?

…results support the Neo-classical view that income and wealth must first be produced and then consumed, meaning that taxes on the factors of production, i.e., capital and labor, are particularly disruptive of wealth creation. Corporate and shareholder taxes reduce the incentive to invest and to build capital. Less investment means fewer productive workers and correspondingly lower wages. Taxes on income and wages reduce the incentive to work. Progressive income taxes, where higher income is taxed at higher rates, reduce the returns to education, since high incomes are associated with high levels of education, and so reduce the incentive to build human capital. Progressive taxation also reduces investment, risk taking, and entrepreneurial activity since a disproportionately large share of these activities is done by high income earners.

To be blunt, the report’s findings suggest the Obama White House is clueless about tax policy.

…there are not a lot of dissenting opinions coming from peer-reviewed academic journals. More and more, the consensus among experts is that taxes on corporate and personal income are particularly harmful to economic growth… This is because economic growth ultimately comes from production, innovation, and risk-taking.

Here’s my cut-and-paste copy of the table summarizing all the academic research.

Taxes and growthTaxes and growth 2Taxes and Growth 3Taxes and Growth 4Taxes and Growth 5

So what’s the bottom line? The Tax Foundation report concludes with the following.

In sum, the U.S. tax system is a drag on the economy.  Pro-growth tax reform that reduces the burden of corporate and personal income taxes would generate a more robust economic recovery and put the U.S. on a higher growth trajectory, with more investment, more employment, higher wages, and a higher standard of living.

In other words, America would be more prosperous with a simple and fair system such as the flat tax.

Too bad the political elite is more focused on maintaining (or even exacerbating) a corrupt status quo, even if it means less prosperity for the nation.

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