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Archive for the ‘Competitiveness’ Category

One of the worst things about working in Washington is that it’s so easy to get frustrated about the fact-free nature of political debates.

For instance, there’s now a big controversy about companies “re-domiciling” or “inverting” from the United States to lower-tax nations such as Ireland and Switzerland.

This should not be controversial. Unless, of course, you think businesses shouldn’t be allowed to move from California to Texas. Or from New York to Tennessee.

And even if you somehow think taxpayers don’t have the right to legally protect themselves from punitive taxation, there are two very stark facts that should guide the political debate.

First, the United States has the world’s highest corporate tax rate, which undermines job creation and competitiveness in America, regardless of whether there are inversions.

Second, the United States has the most punitive “worldwide” tax system, meaning the IRS gets to tax American-domiciled companies on income that is earned (and already subject to tax) in other nations.

This is why, as I explain in this video, that the politicians who are protesting against inversions are putting demagoguery above jobs.

One of the most important aspects of this debate, though, doesn’t involve the intricacies of corporate taxation. Instead, it’s a broader public finance point about whether it’s good public policy to disadvantage shareholders, workers, and consumers in order to give politicians more money to spend.

In my mind, that’s a no-brainer.

P.S. Kudos to Rand Paul for being one of the few politicians who is willing to publicly defend companies that engage in legal tax planning.

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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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When people in other nations ask me for evidence in favor of low taxes, I often will ask them to compare the economic performance of a high-tax nation like France with the performance of a nation such as Switzerland with less onerous taxes.

If I’m asked by Americans, I generally suggest that they compare different states. For instance, I show them evidence that California has a much more punitive tax system than Texas. And when you look at all the available state rankings, it’s clear that there’s a big difference.

*Tax burdens as a share of state income.

*The State Tyranny Index.

*Mercatus State Fiscal Ranking.

*State Business Tax Climate Index.

*Tax Foundation’s Tax Freedom Day.

*State Freedom Index.

*Death Spiral states.

And I then ask folks to compare economic performance. There’s lots of evidence that Texas is growing much faster and creating far more jobs than California.

Heck, it’s almost as if California politicians want to drive successful people out of the Golden State (fortunately, the state’s politicians didn’t read Walter Williams’ satirical column about putting a barbed-wire fence at the border). And when upper-income taxpayers leave the state, that means taxable income and tax revenue also escape.

Though it’s worth pointing out that the case for low taxes isn’t based solely on comparisons of Texas and California. We know, for instance, that states with no income taxes generally outperform other states.

Moreover, we don’t need to rely on casual empiricism. Here are some of the results from a new study published by the Mercatus Center.

…this study uses the average tax rate as a practical approximation of the overall state tax burden. …The coefficient of average tax rate is negative and statistically significant in both models, suggesting that a higher tax burden as a share of income reduces state economic growth. …Elasticity of −2.6, for example, implies that a 1 percent increase in the tax rate decreases economic growth by 2.6 percent, not percentage points. …While the aforementioned income growth results are insightful, the impact of taxation on the level of income is also important. …income tax progressivity has a significant negative relationship with real GSP per capita. …An alternative way to measure economic activity is to look at the number of private firms that operate in each state. …The main conclusion from the two regression models is that only personal income tax progressivity seems to have a significant negative effect on the growth in the number of firms. … By voting with their feet, people send a clear signal about where they prefer to live and work. …an empirical analysis of migration may show, indirectly, how taxes affect the flow of economic activity across states. …state net immigration rate is negatively related to the personal income tax rate … The net immigration rate also seems to have a significantly negative correlation with the average tax rate and income tax progressivity.

These findings should not be a surprise.

It’s common sense that economic activity – and taxpayers – will flow to states that don’t punish people for creating wealth.

Let’s now circle back to the Texas-vs-California comparisons. Take a look at this remarkable chart put together by Mark Perry of the American Enterprise Institute.

As you can see, total employment in Texas has jumped almost 10 percent since 2008. In California, by contrast, total employment has increased by less than 2/10ths of 1 percent.

So you can see why this Lisa Benson cartoon is so appropriate.

Speaking of humor, this Chuck Asay cartoon speculates on how future archaeologists will view California. And this joke about Texas, California, and a coyote is among my most-viewed blog posts.

All jokes aside, none of this should be interpreted to suggest that Texas is perfect. There’s too much government in the Lone Star state. It’s only a success story when compared to California.

And even though California does worse than Texas in my Moocher Index, it’s worth pointing out that Californians are the least likely of all Americans to sign up for food stamps.

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I wrote the other day that Americans, regardless of all the bad policy we get from Washington, should be thankful we’re not stuck in a hellhole like Venezuela.

But we also should be happy we’re not Europeans. This is a point I’ve made before, usually accompanied by data showing that Americans have significantly higher living standards than their cousins on the other side of the Atlantic.

It’s now time to re-emphasize that message. The European Commission has issued its annual report on “Taxation Trends” and it is – at least for wonks and others who care about fiscal policy – a fascinating and compelling document.

If you believe in limited government, you’ll read the report in the same way you might look at a deadly traffic accident, filled with morbid curiosity and fear that you may eventually suffer the same fate.

But if you’re a statist, you’ll read the report like a 14-year old boy with his first copy of a girlie magazine, filled with fantasies about eventually getting to experience what your eyes are seeing.

Let’s start by giving the bureaucrats some credit for self-awareness. They openly admit that the tax burden is very onerous in the European Union.

The EU remains a high tax area. In 2012, the overall tax ratio, i.e. the sum of taxes and compulsory actual social contributions in the 28 Member States (EU-28) amounted to 39.4 % in the GDP-weighted average, nearly 15 percentage points of GDP over the level recorded for the USA and around 10 percentage points above the level recorded by Japan. The tax level in the EU is high not only compared to those two countries but also compared to other advanced economies; among the major non-European OECD members for which recent detailed tax data is available, Russia (35.6 % of GDP in 2011) and New Zealand (31.8 % of GDP in 2011) have tax ratios exceeding 30 % of GDP, while tax-to-GDP ratios for Canada, Australia and South Korea (2011 data) remained well below 30 %.

Here’s a chart from the report showing that taxes consume about 40 percent of economic output in EU nations. And while Americans correctly view the internal revenue code as very burdensome, taxes “only” consume about 25 percent of GDP in the United States.

EU Report Total Tax

Other nations with comparatively modest tax burdens include Canada (CA), Australia (AU), South Korea (KR), and Switzerland (CH).

But it’s important to understand that not all nations in the European Union are identical.

Just as there are high-tax states and low-tax states in America, there are high-tax countries and low-tax countries in Europe. Surprisingly, France was not the worst nation.

…the ratio of 2012 tax revenue to GDP was highest in Denmark, Belgium and France (48.1 %, 45.4 % and 45.0 % respectively); the lowest shares were recorded in Lithuania (27.2 % of GDP), Bulgaria (27.9 % of GDP) and Latvia (27.9 % of GDP).

I’m surprised, by the way, that Sweden isn’t among the highest-taxed nations. I guess they’ve made even more progress than I thought.

Now let’s drill down into the report and look at some of the specific data.

But you may want to stop reading now if you get easily depressed.

That’s because it’s time to look at a chart showing what’s happened to income tax rates. Specifically, this chart shows the average top tax rate on personal income, both for Eurozone (nations using the euro currency) and European Union nations.

As you can see, the average top tax rate has jumped by almost four percentage points for euro nations and by about two percentage points for all EU nations.

EU Report Personal Income Tax

This is very unfortunate. Tax rates were heading in the right direction when there was vigorous tax competition inside Europe. But now that high-tax nations have been somewhat successful in forcing low-tax jurisdictions to become deputy tax enforcers, that positive trend has halted and policy is moving in the wrong direction.

But not in all regards.

Tax competition also has been compelling governments to lower corporate tax rates. And while that trend has abated, you can see in this chart that politicians haven’t felt they have leeway to push rates higher.

EU Report Corporate Income Tax

Though I am very concerned about the OECD’s campaign to undermine corporate tax competition.

If they’re successful, there’s no doubt we’ll see higher corporate tax rates.

Let’s now look at some more depressing data. This chart shows that a continuation in the trend toward higher rates for value-added taxes (VATs).

EU Report VAT

I’ve warned repeatedly that the VAT is a money machine for big government and the EU data certainly supports my position.

But if you want evidence from other parts of the world, there’s some IMF data that clearly shows how politicians use the VAT to expand the burden of government.

Last but not least, let’s now draw some conclusions from all this information.

At the beginning of the column, I mentioned that Americans should not copy Europe because bigger government translates into lower living standards.

Simply stated, there’s a negative relationship between the size of government and economic performance.

So let’s look at another piece of data to emphasize that point. The bureaucrats at the OECD just did a report on the U.S. economy and they produced a chart showing that the current recovery is very anemic. We haven’t recaptured lost economic output, which normally happens after a downturn. Indeed, we haven’t even returned to normal growth levels.

But that’s not news to regular readers. I’ve shared powerful data from the Minneapolis Federal Reserve showing the failure of Obamanomics.

What is noteworthy, though, is comparing Europe to the United States. As you can see from these two charts, euro nations have flat lined. And if you look at the vertical scale, you can see that they were growing a lot slower than the United States to begin with.

Dismal European Economy

In other words, we’re not doing very well in the United States.

But compared to Europe, we’re Hong Kong.

Two final caveats: First, I always like to stress that economic performance is impacted by a wide range of policies. So while I think that rising tax burdens and higher tax rates are hurting growth in Europe, there are other factors that also matter.

Second, any analysis of fiscal policy should also include data on the burden of government spending. After all, a nation with a low tax burden will still suffer economic problems if there’s a large public sector financed by red ink.

And one big warning: Obama wants to make America more like Europe. If he succeeds, we can expect European-style stagnation.

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Last August, I shared a list of companies that “re-domiciled” in other nations so they could escape America’s punitive “worldwide” tax system.

This past April, I augmented that list with some commentary about whether Walgreen’s might become a Swiss-based company.

And in May, I pontificated about Pfizer’s effort to re-domicile in the United Kingdom.

Well, to paraphrase what Ronald Reagan said to Jimmy Carter in the 1980 presidential debate, here we go again.

Here’s the opening few sentences from a report in the Wall Street Journal.

Medtronic Inc.’s agreement on Sunday to buy rival medical-device maker Covidien COV PLC for $42.9 billion is the latest in a wave of recent moves designed—at least in part—to sidestep U.S. corporate taxes. Covidien’s U.S. headquarters are in Mansfield, Mass., where many of its executives are based. But officially it is domiciled in Ireland, which is known for having a relatively low tax rate: The main corporate rate in Ireland is 12.5%. In the U.S., home to Medtronic, the 35% tax rate is among the world’s highest. Such so-called “tax inversion” deals have become increasingly popular, especially among health-care companies, many of which have ample cash abroad that would be taxed should they bring it back to the U.S.

It’s not just Medtronic. Here are some passages from a story by Tax Analysts.

Teva Pharmaceuticals Inc. agreed to buy U.S. pharmaceutical company Labrys Biologics Inc. Teva, an Israeli-headquartered company, had an effective tax rate of 4 percent in 2013. In yet another pharma deal, Swiss company Roche has agreed to acquire U.S. company Genia Technologies Inc. Corporations are also taking other steps to shift valuable assets and businesses out of the U.S. On Tuesday the U.K. company Vodafone announced plans to move its center for product innovation and development from Silicon Valley to the U.K. The move likely means that revenue from intangibles developed in the future by the research and development center would be taxable primarily in the U.K., and not the U.S.

So how should we interpret these moves?

From a logical and ethical perspective, we should applaud companies for protecting shareholders, workers and consumers. If a government is imposing destructive tax laws (and the United States arguably has the world’s worst corporate tax system), then firms have a moral obligation to minimize the damage.

Writing in the Wall Street Journal, an accounting professor from MIT has some wise words on the issue.

Even worse, legislators have responded with proposals that seek to prevent companies from escaping the U.S. tax system. The U.S. corporate statutory tax rate is one of the highest in the world at 35%. In addition, the U.S. has a world-wide tax system under which profits earned abroad face U.S. taxation when brought back to America. The other G-7 countries, however, all have some form of a territorial tax system that imposes little or no tax on repatriated earnings. To compete with foreign-based companies that have lower tax burdens, U.S. corporations have developed do-it-yourself territorial tax strategies. …Some firms have taken the next logical step to stay competitive with foreign-based companies: reincorporating as foreign companies through cross-border mergers.

Unsurprisingly, some politicians are responding with punitive policies. Instead of fixing the flaws in the internal revenue code, they want various forms of financial protectionism in order the stop companies from inversions.

Professor Hanlon is unimpressed.

Threatening corporations with stricter rules and retroactive tax punishments will not attract business and investment to the U.S. The responses by the federal government and U.S. corporations are creating what in managerial accounting we call a death spiral. The government is trying to generate revenue through high corporate taxes, but corporations cannot compete when they have such high tax costs. …The real solution is a tax system that attracts businesses to our shores, and keeps them here. …The U.K. may be a good example: In 2010, after realizing that too many companies were leaving for the greener tax pastures of Ireland, the government’s economic and finance ministry wrote in a report that it wanted to “send out the signal loud and clear, Britain is open for business.” The country made substantive tax-policy changes such as reducing the corporate tax rate and implementing a territorial tax system. Congress and President Obama should make tax reform a priority.

Here’s some info, by the way, about the United Kingdom’s smart moves on corporate taxation.

For more information on territorial taxation, here’s a video I narrated for the Center for Freedom and Prosperity.

And here’s my futile effort to educate the New York Times on the issue.

And if you want some info on the importance of lower corporate taxation, here’s another CF&P video.

P.S. Last February, I shared a hilarious video spoof about some action figures called the “Kronies.” These fake toys symbolize the sleazy insiders that have made DC a racket for well-connected insiders.

Well, the Kronies are back with a new video about the Export Import Bank, which exists to subsidize companies that give lots of contributions to politicians.

I’ve written before about the Export-Import Bank being a perfect (in a bad way) example of corruption in Washington, but if you want to know the details about this crony institution, Veronique de Rugy of the Mercatus Center is a walking encyclopedia on the topic.

By the way, the recently defeated House Majority Leader has been a big supporter of Ex-Im Bank subsidies, and it’s very revealing that Boeing’s share price fell after his defeat. Investors obviously think those handouts are very valuable, and they’re worried that the gravy train may come to an end with Cantor on his way out the door.

Addendum: Some readers have already asked whether it would have been better to say that America’s corporate tax is “sadistic” rather than “masochistic.”

From the perspective of companies (and their shareholders, workers, and consumers), the answer is yes.

But I chose “masochistic” because politicians presumably want to extract the maximum amount of revenue from companies, yet that’s not happening because they’ve set the rate so high and made the system so unfriendly. In other words, they’re hurting themselves. I guess they hate the Laffer Curve even more than they like having more money with which to buy votes.

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When the new Tory-led government came to power in the United Kingdom, I was rather unimpressed.

David Cameron positioned himself as a British version of George W. Bush, full of “compassionate conservative” ideas to expand the burden of government.

But even worse than Bush, because Cameron also jacked up taxes when he first took office, including big increases in the capital gains tax and the value-added tax.

But I must admit that policy in recent years has moved in the right direction, at least with regard to corporate taxation.

Writing for the U.K.-based Telegraph, Jeremy Warner remarks that business activity has significantly strengthened.

A survey by EY, published on Monday, showed that the UK is continuing to pull away from the rest of Europe in terms of Foreign Direct Investment (FDI). The UK secured nearly 800 projects last year, the highest ever, accounting for around a fifth of all European FDI, far in advance of any other country. …Such investment is in turn helping to fuel Britain’s economic recovery… Go back 10 years and it was all the other way; companies were scrambling to leave the country and domicile somewhere else. It is perhaps the Coalition’s biggest unsung achievement that it has managed to reverse this flow.

So why has the United Kingdom experienced this economic rebound?

Lower corporate tax rates are key, Warner explains.

…it has done so largely through the tax system, where it has been as good as its promise to make the UK the most competitive in the G20. By next year, Britain will have the equal lowest headline rate of corporation tax – along with Russia and Saudi Arabia – in this eclectic group of economies, as well as at 20pc the lowest by some distance of the G7 major advanced economies. Other G7 countries range from 25pc to a crushing 38pc and 39pc in France and the US. …Britain has also halted the double taxation of repatriated foreign profits and the taxation of controlled foreign subsidiaries.

So the 20 percent corporate tax rate has yielded good results.

Now let’s connect the dots.

More economic activity means more income for taxpayers.

And more income means a bigger tax base.

Which means…can you guess?…yup, it means revenue feedback.

In other words, we have another piece of evidence that the Laffer Curve is very real.

…Reducing corporation tax has reversed the outflow of corporate head office functions, and doing so has substantially added to overall employment, output, income tax, national insurance and VAT receipts. Dynamic modelling by the UK Treasury has shown that lower tax rates are helping to drive a higher overall tax take. The “Laffer curve” lives. …Let business profit from its own enterprise. It’s amazing how effective this principle can be in generating growth, and yes, taxes, too.

If you want more evidence about the Laffer Curve, here’s one of the videos I narrated.

Warner points out, by the way, that the United Kingdom should not rest on its laurels.

If modest reductions in the corporate tax rate are good, then deeper cuts should be even better.

If comparatively minor changes like these to the competitiveness of the tax system can have such dramatic effects, just think what more serious, root and branch tax reform might achieve. In Singapore, the headline rate is 17pc, in Hong Kong 16.5pc and in Ireland just 12.5pc. There’s a way to go.

Though if The U.K. keeps moving in the right direction, that may arouse hostility and attacks from countries with uncompetitive tax systems.

Indeed, the statists at the European Commission have just launched an investigation of three countries for supposedly under-taxing companies.

Here are some blurbs from a report in the Wall Street Journal.

European Union regulators are preparing to open a formal investigation into corporate-tax regimes in Ireland, Luxembourg and the Netherlands… The probe by the European Commission, the EU’s executive arm, follows criticism in Europe of low tax rates paid by global corporations… The probe is likely to consider whether generous corporate-tax regimes in Ireland, Luxembourg and the Netherlands amount to illegal state aid. …The EU’s tax commissioner, Algirdas Semeta, has warned that the region “can no longer afford freeloaders who reap huge profits in the EU without contributing to the public purse.”

This is remarkable.

In the twisted minds of the euro-crats in Brussels, it is “state aid” if you let companies keep some of the money they earn.

This is horrible economics, but it’s even worse from a moral perspective.

A subsidy (or “state aid”) occurs when the government taxes money from Person A and gives it to Person B. But it’s a perversion of the English language to say that a subsidy takes place if Person A gets a tax cut.

By the way, this perverse mentality is not limited to Europe.

The “tax expenditure” concept in the United States is based on the twisted notion that a tax cut that results in more money in your pocket is economically (and morally) equivalent to a spending handout that puts more money in your pocket.

P.S. The United Kingdom also provides us with powerful evidence that the Laffer Curve plays a big role when there are changes in the personal income tax.

P.P.S. Notwithstanding a bit of good news on corporate tax, I’m not optimistic about the U.K.’s long-run outlook. Simply stated, the nation’s political elite is too statist.

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The title of this post sounds like the beginning of a strange joke, but it’s actually because we’re covering three issues today.

Our first topic is corporate taxation. More specifically, we’re looking at a nation that seems to be learning that it’s foolish the have a punitive corporate tax system.

By way of background, the United States used to have the second-highest corporate tax rate in the developed world.

But then the Japanese came to their senses and reduced their tax rate on companies, leaving America with the dubious honor of having the world’s highest rate.

So did the United States respond with a tax cut in order to improve competitiveness? Nope, our rate is still high and the United States arguably now has the world’s worst tax system for businesses.

But the Japanese learned if a step in the right direction is good, then another step in the right direction must be even better.

The Wall Street Journal reports that Japan will be lowering its corporate tax rate again.

Japan’s ruling party on Tuesday cleared the way for a corporate tax cut to take effect next year… Reducing the corporate tax rate, currently about 35%, is a long-standing demand of large corporations. They say they bear an unfair share of the burden and have an incentive to move plants overseas to where taxes are lower. …Business leaders want the rate to fall below 30% within the next few years and eventually to 25%… The Japan Business Federation, known as Keidanren, says tax cuts could partly pay for themselves by spurring investment. Japan’s current corporate tax rate is higher than most European and Asian countries, although it is lower than the U.S. level of roughly 40%.

If only American politicians could be equally sensible.

The Japanese (at least some of them) even understand that a lower corporate rate will generate revenue feedback because of the Laffer Curve.

I’ve tried to make the same point to American policymakers, but that’s like teaching budget calculus to kids from the fiscal policy short bus.

Let’s switch gears to our second topic and look at what one veteran wrote about handouts from Uncle Sam.

Here are excerpts from his column in the Washington Post.

Though I spent more than five years on active duty during the 1970s as an Army infantry officer and an additional 23 years in the Reserves, I never fired a weapon other than in training, and I spent no time in a combat zone. …nearly half of the 4.5 million active-duty service members and reservists over the past decade were never deployed overseas. Among those who were, many never experienced combat. …support jobs aren’t particularly hazardous. Police officers, firefighters and construction workers face more danger than Army public affairs specialists, Air Force mechanics, Marine Corps legal assistants, Navy finance clerks or headquarters staff officers.

So what’s the point? Well, this former soldier thinks that benefits are too generous.

And yet, the benefits flow lavishly. …Even though I spent 80 percent of my time in uniform as a reservist, I received an annual pension in 2013 of $24,990, to which I contributed no money while serving. …My family and I have access to U.S. military bases worldwide, where we can use the fitness facilities at no charge and take advantage of the tax-free prices at the commissaries and post exchanges. The most generous benefit of all is Tricare. This year I paid just $550 for family medical insurance. In the civilian sector, the average family contribution for health care in 2013 was $4,565… Simply put, I’m getting more than I gave. Tricare for military retirees and their families is so underpriced that it’s more of a gift than a benefit. …budget deficits are tilting America toward financial malaise. Our elected representatives will have to summon the courage to confront the costs of benefits and entitlements and make hard choices. Some “no” votes when it comes to our service members and, in particular, military retirees will be necessary.

The entire column is informative and thoughtful. My only quibble is that it would be more accurate to say “an expanding burden of government is tilting America toward financial malaise.”

But I shouldn’t nitpick, even though I think it’s important to focus on the underlying problem of spending rather than the symptom of red ink.

Simply stated, it’s refreshing to read someone who writes that his group should get fewer taxpayer-financed goodies. And I like the idea of reserving generous benefits for those who put their lives at risk, or actually got injured.

Last but not least, I periodically share stories that highlight challenging public policy issues, even for principled libertarians.

You can check out some of my prior examples of “you be the judge” by clicking here.

Today, we have another installment.

The New York Times has reported that a mom and dad in the United Kingdom were arrested because their kid was too fat.

The parents of an 11-year-old boy were arrested in Britain on suspicion of neglect and child cruelty after authorities grew alarmed about the child’s weight. The boy, who like his parents was not identified, weighed 210 pounds. …In a statement, the police said that “obesity and neglect of children” were sensitive issues, but that its child abuse investigation unit worked with health care and social service agencies to ensure a “proportionate and necessary” response. The police said in the statement that “intervention at this level is very rare and will only occur where other attempts to protect the child have been unsuccessful.”

So was this a proper example of state intervention?

My instinct is to say no. After all, even bad parents presumably care about their kids. And they’ll almost certainly do a better job of taking care of them than a government bureaucracy.

But there are limits. Even strict libertarians, for instance, will accept government intervention if parents are sadistically beating a child.

And if bad parents were giving multiple shots of whiskey to 7-year olds every single night, that also would justify intervention in the minds of almost everybody.

On the other hand, would any of us want the state to intervene simply because parents don’t do a good job overseeing homework? Or because they let their kids play outside without supervision (a real issue in the United States, I’m embarrassed to admit)?

The answer hopefully is no.

But how do we decide when we have parents who are over-feeding a kid?

My take, for what it’s worth, is that the size of kids is not a legitimate function of government. My heart might want there to be intervention, but my head tells me that bureaucrats can’t be trusted to exercise this power prudently.

P.S. I guess “bye bye burger boy” in the United Kingdom didn’t work very well.

P.P.S. But the U.K. government does fund foreign sex travel, and that has to burn some calories.

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While theory is important, I suspect most people are more likely to be convinced by real-world evidence.

This is why I frequently compare nations when arguing that free markets and small government are the best way of generating prosperity.

Simply stated, I want people to understand that economic liberty produces faster growth, and that faster growth can make a huge difference, particularly when looking at several decades of data.

Most recently, I showed how Poland is out-pacing Ukraine.

I’ve compared South Korea and North Korea.

The data for Chile, Argentina, and Venezuela is very powerful.

I’ve shown how Singapore has eclipsed Jamaica.

Hong Kong has caught up with the United States.

After looking at these examples, you’ll understand why I’m very happy to share this new video from one of Sweden’s free-market think tanks. It looks at how nations with more economic freedom get better results.

And I particularly like the comparisons of nations that are moving in the right direction versus those that are degenerating toward more statism.

Another good part of the video is that it shows how the European Union could have a very free economy if all nations simply copied the European nation with the best policy in the five major categories of economic liberty (rule of law, fiscal policy, trade, regulation, and monetary policy).

And it turns out that Denmark is the best in three of the categories (rule of law, trade, and regulation), which is why that nation manages to remain very competitive even though it does very poorly in fiscal policy.

The moral of the story is that trendlines matter. Better policy leads to faster growth, and sustained faster growth is immensely important to long-run living standards.

This appreciation for trendlines is also why I’m so fixated on controlling the long-run growth of government spending.

Indeed, my Golden Rule is a combination of two trend lines. If government spending grows at a slow rate and the private economy grows at a rapid rate, that’s a wonderful combination that could cure the fiscal nightmare of any nation. Even France and Greece.

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Which nation is richer, Belarus or Luxembourg?

If you look at total economic output, you might be tempted to say Belarus. The GDP of Belarus, after all, is almost $72 billion while Luxembourg’s GDP is less than $60 billion.

But that would be a preposterous answer since there are about 9.5 million people in Belarus compared to only about 540,000 folks in Luxembourg.

It should be obvious that what matters is per-capita GDP, and the residents of Luxembourg unambiguously enjoy far higher living standards than their cousins in Belarus.

This seems like an elementary point, but it has to be made because there have been a bunch of misleading stories about China “overtaking” the United States in economic output. Look, for instance, at these excerpts from a Bloomberg report.

China is poised to overtake the U.S. as the world’s biggest economy earlier than expected, possibly as soon as this year… The latest tally adds to the debate on how the world’s top two economic powers are progressing. Projecting growth rates from 2011 onwards suggests China’s size when measured in PPP may surpass the U.S. in 2014.

There are methodological issues with PPP data, some of which are acknowledged in the data, and there’s also the challenge of whether Chinese numbers can be trusted.

But let’s assume these are the right numbers. My response is “so what?”

I’ve previously written that the Chinese tiger is more akin to a paper tiger. But Mark Perry of the American Enterprise Institute put together a chart that is far more compelling than what I wrote. He looks at the per-capita numbers and shows that China is still way behind the United States.

To be blunt, Americans shouldn’t worry about the myth of Chinese economic supremacy.

But that’s not the main point of today’s column.

Instead, I want to call attention to Taiwan. That jurisdiction doesn’t get as much attention as Hong Kong and Singapore, but it’s one of the world’s success stories.

And if you compare Taiwan to China, as I’ve done in this chart, there’s no question which jurisdiction deserves praise.

China v Taiwan

Yes, China has made big strides in recent decades thanks to reforms to ease the burden of government. But Taiwan is far above the world average while China has only recently reached that level (and only if you believe official Chinese numbers).

So why is there a big difference between China and Taiwan? Well, if you look at Economic Freedom of the World, you’ll see that Taiwan ranks among the top-20 nations while China ranks only 123 out of 152 countries.

By the way, Taiwan has a relatively modest burden of government spending. The public sector only consumes about 21.5 percent of economic output. That’s very good compared to other advanced nations.

Moreover, Taiwan is one of the nations that enjoyed considerable progress by adhering to Mitchell’s Golden Rule. Between 2001 and 2006, total government spending didn’t grow at all.

Taiwan Spending Freeze

During this period of fiscal restraint, you won’t be surprised to learn that the burden of government spending fell as a share of GDP.

And it should go without saying (but I’ll say it anyhow) that because politicians addressed the underlying disease of government spending, that also enabled big progress is dealing with the symptom of government borrowing.

Look at what happened to spending and deficits between 2001 and 2006.

Taiwan Fiscal Restraint Benefits

P.S. You probably didn’t realize that it was possible to see dark humor in communist oppression.

P.P.S. But at least some communists in China seem to understand that the welfare state is a very bad idea.

P.P.P.S. Some business leaders say China is now more business-friendly than the United States. That’s probably not good news for America, but my goal is to have a market-friendly nation, not a business-friendly nation.

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If you’re a regular reader, you already know I’m a big supporter of tax competition and tax havens.

Here’s the premise: Politicians almost always are focused on their next election and this encourages them to pursue policies that are designed to maximize votes and power within that short time horizon. Unfortunately, this often results in very short-sighted and misguided fiscal policies that burden the economy, such as class-warfare tax policy and counterproductive government spending.

So we need some sort of countervailing force that will make such policies less attractive to the political class. We don’t have anything that inhibits wasteful spending,* but we do have something that discourages politicians from class-warfare tax policy. Tax competition and tax havens give taxpayers some ability to escape extortionate tax policies.

Now we have a couple of new – and very high-profile – examples of this process.

First, a big American drug company is seeking to redomicile in the United Kingdom.

The New York Times has a thorough (and fair) analysis of the issues.

Pfizer proposed a $99 billion acquisition of its British rival AstraZeneca that would allow it to reincorporate in Britain. Doing so would allow Pfizer to escape the United States corporate tax rate and tap into a mountain of cash trapped overseas, saving it billions of dollars each year and making the company more competitive with other global drug makers. …the company wishes to effectively renounce its United States citizenship. …a deal would allow it to follow dozens of other large American companies that have already reincorporated abroad through acquiring foreign businesses. They have been drawn to countries like Ireland and the Netherlands that have lower corporate rates, as well as by the ability to spend their overseas cash without being highly taxed. At least 50 American companies have completed mergers that allowed them to reincorporate in another country, and nearly half of those deals have taken place in the last two years. …American businesses have long complained about the corporate tax rate, arguing that in today’s global marketplace, they are left at a competitive disadvantage.

You can click here if you want some of those additional examples.

To get an idea of why companies want to redomicile, here’s another excerpt from the story.

…the British corporate tax rate is currently 21 percent and will soon fall to 20 percent. Analysts at Barclays estimated that for each percentage point less Pfizer paid in taxes, it would save about $200 million a year by reincorporating. People briefed on Pfizer’s discussions said that figure could be substantially higher. That means that Pfizer would be saving at least $1 billion a year in taxes alone. And moving to a lower-tax jurisdiction would allow Pfizer to tap cash that it holds overseas without paying a steep tax to bring it back to the United States. Of the company’s $49 billion in cash, some 70 to 90 percent of that is estimated to be held overseas.

I’m encouraged, by the way, that reporters for the New York Times are smart enough to figure out the destructive impact of worldwide taxation. Too bad the editors at the paper don’t have the same aptitude.

By the way, it’s worth pointing out that Pfizer’s expatriation doesn’t have any negative impact on America.

Pfizer points out that it would retain its corporate headquarters here and remain listed on the New York Stock Exchange. …Pfizer’s chief executive, Ian C. Read, a Briton, said Pfizer found it was hard to compete with other acquirers while saddled with “an uncompetitive tax rate.” Still, he added that even as a reincorporated British company, “we will continue to pay tax bills” in the United States.

The only meaningful change is that the redomiciled company no longer would pay tax to the IRS on foreign-source income, but that’s income that shouldn’t be taxed anyhow!

The Wall Street Journal opined on this issue and made what should be very obvious points about why this is happening.

…because the combined state-federal corporate income tax rate in the U.S. is nearly 40%, compared to the 21% rate in the U.K.

Amen. America’s punitive corporate tax rate is a self-inflicted wound.

But it’s not the just the statutory tax rate. The WSJ also points out that the United States also wants companies to pay tax to the IRS on foreign-source income even though that income already has been subject to tax by foreign governments!

The U.S., almost alone among the world’s governments, demands to be paid on a company’s world-wide profits whenever those profits are brought back to the U.S.

It’s for reasons like this that America’s corporate tax system came in 94th place (out of 100!) in a ranking of the degree to which national tax systems impacted competitiveness.

Now let’s look at the second example of a high-profile tax-motivated corporate migration.

Toyota is moving the heart of its American operation from high-tax California to zero-income tax Texas.

And the Wall Street Journal correctly explains the lesson we should learn. Or, to be more accurate, the lesson that politicians should learn.

In addition to its sales headquarters, Toyota says it plans to move 3,000 professional jobs to the Dallas suburb… Toyota’s chief executive for North America Jim Lentz…listed the friendly Texas business climate…as well as such lifestyle benefits as affordable housing and zero income tax.

This isn’t the first time this has happened.

In 2006, Nissan moved its headquarters from Gardena—north of Torrance—to Franklin, Tennessee. CEO Carlos Ghosn cited Tennessee’s lower business costs.

The bottom line is that greedy California politicians are trying to seize too much money and are driving away the geese that lay the golden eggs.

According to the Tax Foundation, the state-local tax burden is more than 50% higher in California than in Tennessee and Texas, which don’t levy a personal income tax. California’s top 13.3% marginal rate is the highest in the country. …Since 2011 more than two dozen California companies including Titan Laboratories, Xeris Pharmaceuticals, Superconductor Technologies, Pacific Union Financial and Med-Logics have relocated in Texas. Dozens of others such as Roku, Pandora and Oracle have expanded there.

No wonder, as I wrote a few years ago, Texas is thumping California.

The real puzzle is why most high-tax governments don’t learn the right lessons. Are the politicians really so short-sighted that they’ll drive away their most productive people?

But notice I wrote most, not all. Because we do have some very recent examples of very left-wing states doing the right thing because of tax competition.

Here are some excerpts from a column in Forbes.

Maryland is the latest state to make its estate tax less onerous, and it’s significant because it’s a staunchly Democratic state indicating that easing the pain of the death tax isn’t just a Republican issue. Today the Maryland Senate passed the measure, already passed by the House, gradually raising the amount exempt from the state’s estate tax to match the generous federal estate tax exemption.

And other blue jurisdictions seem to be learning the same lesson.

In New York, Gov. Andrew Cuomo’s budget calls for increasing the state’s estate tax exemption from $1 million to match the federal exemption, and lowering the top rate from 16% down to 10% by fiscal 2017.  …A commission on tax reform in the District of Columbia recently recommended raising D.C.’s estate tax exemption from $1 million to the federal level. …In Minnesota, Democratic Governor Mark Dayton has proposed doubling the state estate tax exemption from $1 million to $2 million as part of a bigger tax package.

This is why tax competition is such a wonderful thing. There’s no question that politicians in states such as New York don’t want to lower the burden of the death tax.

But they’re doing it anyhow because they know that successful taxpayers will move to states without this awful form of double taxation.

Just like European politicians reduced corporate tax rates even though they would have preferred to keep high tax rates.

Tax competition isn’t a sufficient condition for good policy, but it sure is a necessary condition!

*There are spending caps that restrain wasteful government spending, such as the debt brake in Switzerland and TABOR in Colorado, but those are policies rather than processes.

P.S. Here’s a joke about California, Texas, and a coyote.

P.P.S. And supporters of the Second Amendment will appreciate this Texas vs. California joke.

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Using a comparison of Jamaica and Singapore, I recently argued that growth should trump inequality.

Simply stated, a growing economic pie is much better for poor people that incentive-sapping redistribution programs that trap people in dependency.

In other words, nations with smaller government and less intervention produce better results than nations with bloated governments and lots of meddling.

You see that relationship by comparing Jamaica and Singapore, and you also see it when examining other nations.

This is fresh in my mind since I just spoke at the Kyiv stop on the Free Market Road Show.

I told the audience about the reforms that Ukraine needs to strengthen economic performance, but I probably should have simply read what one expert recently wrote about Ukraine and Poland.

Here’s some of what Allister Heath had to say for London’s City A.M.

In the dreadful communist days, Ukraine and Poland used to be equally poor. The former was part of the Soviet Union, and Poland was one of the USSR’s satellite nations, belonging to the Warsaw pact. In 1990, both countries had roughly the same GDP per capita – their economies were eerily similar. A quarter of a century later, everything has changed… It’s a tale of two economic models, and a central reason why Russia – a waning world power desperate to cling on to its historic zone of influence – has felt able to bully Ukraine in such a shocking way. …The big difference is that Poland has pursued free-market policies, reducing the size of its state, introducing a strict rule of law and respect for property rights, privatising in a sensible way, avoiding the kleptocracy and corruption that has plagued regimes in Kiev, and embracing as much as possible Western capitalism.

Allister cites World Bank data to state that “Poland’s GDP per capita is now 3.3 times greater than Ukraine’s.”

I prefer the Angus Maddison data, which doesn’t show quite the same divergence. But if you look at the chart, you still see an amazing change in relative living standards in the two nations.

Ukraine v Poland

These numbers are shocking. Even with the Maddison data, Poland quickly passed Ukraine after the collapse of communism and now enjoys more than twice the level of per-capita output (and would probably have about three times as much per-capita GDP if the numbers were updated through 2014).

This doesn’t mean, by the way, that Poland is a pro-market paradise. As Allister explains, it’s not exactly Hong Kong or Singapore.

Poland’s tax system remains far too oppressive, the red tape is too strict and the bureaucracy still too redolent of the bad old days, the labour market is excessively regulated, parts of the population rejects elements of the new order and the country remains relatively poor, which explains why so many of its most ambitious folk have moved to the UK and elsewhere. But Poland has been one of the great success stories of the post-communist era, whereas Ukraine, tragically, has been one of the great failures.

To add some details, Freedom of the World ranks Poland as the 59th-freest economy in the world.

That’s not great, but it’s a lot better than Ukraine, which ranks only 126 out of 152 nations (behind even Russia!).

More important, Poland’s overall score was only 3.90 in 1990 and now it is up to 7.20.

Ukraine, by contrast, has only climbed to 6.16.

As I’ve already stated, their big problem is Putinomics. If they want to catch the West, they need free markets and small government.

P.S. If you examine the five major factors in Freedom of the World, Ukraine does best in the fiscal policy measure (in part because it has a flat tax!), but it has a horrible grade for monetary policy and doesn’t do well in the other areas.

P.P.S. On the issue of ethnic division in the country, Ukraine also would benefit from Swiss-style decentralization.

P.P.P.S. This chart comparing Argentina, Chile, and Venezuela also should be very persuasive to every open-minded person.

P.P.P.P.S. I visited the Maidan Square, which is where the recent revolution took place.

Here’s one of the main buildings that caught fire.

IMG-20140430-00301

Here are pictures of those killed by (presumably) government snipers.

IMG-20140430-00299

And here’s yours truly playing tourist.

IMG-20140430-00303

It’s only an armored personnel carrier, but it got me thinking that maybe I should copy other Americans and get my own tank?

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I periodically (some would say over and over and over again, though occasionally made more palatable by using humor and cartoons) warn that the United States should not become a European-style welfare state.

But I wonder whether I spend enough time explaining why this would be a bad idea.

After all, some people may think that you get more security and benefits with the European approach, so why not head in that direction. And these folks aren’t just pointing with approval to the Nordic nations. A writer for the New York Times actually thinks we should copy Italy.

So it is fortuitous that I’m currently in Poland as part of the Free Market Road Show and got to hear a speech by Prof. Leszek Balcerowicz of the Warsaw School of Economics (and former Deputy Prime Minister and head of Poland’s central bank).

Prof. Balcerowicz specifically compared economic performance in Western Europe and the United States, and the results are not very favorable to the welfare state.

Standard economic theory suggests that poor nations should catch up with rich nations. This “convergence theory” actually worked for the first few decades after World War II.

But as you can see from Prof. Balcerowicz’s chart, the convergence process slowed down after the welfare state began to expand in the 1960s. And after the pro-growth reforms of the Reagan years and Clinton years, the United States actually has opened up a bigger lead.

Convergence Balcerowicz

But maybe this chart doesn’t make things sufficiently clear. So I went to the OECD website and found the most recently available data on “average individual consumption,” which is a measure of actual living standards.

OECD AIC

The United States is way ahead of Europe. The only three nations close to us include Norway, which has the good fortune of major oil fields, and Luxembourg and Switzerland, which have the advantage of being tax havens.

By the way, I also shared that data series last year, and you can also see some older AIC data in this 2010 post. But it doesn’t matter how you slice the numbers or when you look at the numbers, the United States has a big lead.

And that lead is now getting larger over time. Heck, the Europeans apparently think any growth – even anemic growth of less than 1 percent – is worth celebrating. Talk about low expectations!

This is why we don’t want to copy Europe. If higher living standards are a good idea (and they are!), then we should copy Hong Kong and Singapore, not France and Italy.

P.S. I’ve always thought that this comparison of the per-capita income of Swedes in Sweden and the per-capita income of folks of Swedish ancestry in the United States is very persuasive.

P.P.S. Leszek Balcerowicz has the honor of being named this year’s winner of the Cato Institute’s Milton Friedman Prize for Advancing Liberty. He’ll receive his award at a very nice black-tie dinner in New York City on May 21.

P.P.P.S. Speaking of swanky black-tie events, the PotL and I got dressed up last Thursday for the annual CIFA dinner in Monaco.

CIFA0941

She’s a lucky girl, huh?

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I’m in favor of free markets.

That means I’m sometimes on the same side as big business, but it also means that I’m often very critical of big business.

That’s because large companies are largely amoral.

Depending on the issue, they may be on the side of the angels, such as when they resist bad government policies such as higher tax rates and increased red tape.

But many of those same companies will then turn around and try to manipulate the system for subsidies, protectionism, and corrupt tax loopholes.

Today, I’m going to defend big business. That’s because we have a controversy about whether a company has the legal and moral right to protect itself from bad tax policy.

We’re dealing specifically with a drugstore chain that has merged with a similar company based in Switzerland, which raises the question of whether the expanded company should be domiciled in the United States or overseas.

Here’s some of what I wrote on this issue for yesterday’s Chicago Tribune.

Should Walgreen move? …Many shareholders want a “corporate inversion” with the company based in Europe, possibly Switzerland. …if the combined company were based in Switzerland and got out from under America’s misguided tax system, the firm’s tax burden would drop, and UBS analysts predict that earnings per share would jump by 75 percent. That’s a plus for shareholders, of course, but also good for employees and consumers.

Folks on the left, though, are fanning the flames of resentment, implying that this would be an example of corporate tax cheating.

But they either don’t know what they’re talking about (a distinct possibility given their unfamiliarity with the private sector) or they’re prevaricating.

Some think this would allow Walgreen to avoid paying tax on American profits to Uncle Sam. This is not true. All companies, whether domiciled in America or elsewhere, pay tax to the IRS on income earned in the U.S. 

The benefit of “inverting” basically revolves around the taxation of income earned in other nations.

But there is a big tax advantage if Walgreen becomes a Swiss company. The U.S. imposes “worldwide taxation,” which means American-based companies not only pay tax on income earned at home but also are subject to tax on income earned overseas. Most other nations, including Switzerland, use “territorial taxation,” which is the common-sense approach of only taxing income earned inside national borders. The bottom line is that Walgreen, if it becomes a Swiss company, no longer would have to pay tax to the IRS on income that is earned in other nations. 

It’s worth noting, by the way, that all major pro-growth tax reforms (such as the flat tax) would replace worldwide taxation with territorial taxation. So Walgreen wouldn’t have any incentive to redomicile in Switzerland if America had the right policy.

And this is why I’ve defended Google and Apple when they’ve been attacked for not coughing up more money to the IRS on their foreign-source income.

But I don’t think this fight is really about the details of corporate tax policy.

Some people think that taxpayers in the economy’s productive sector should be treated as milk cows that exist solely to feed the Washington spending machine.

…ideologues on the left, even the ones who understand that the company would comply with tax laws, are upset that Walgreen is considering this shift. They think companies have a moral obligation to pay more tax than required. This is a bizarre mentality. It assumes not only that we should voluntarily pay extra tax but also that society will be better off if more money is transferred from the productive sector of the economy to politicians.

Needless to say, I have a solution to this controversy.

…the real lesson is that politicians in Washington should lower the corporate tax rate and reform the code so that America no longer is an unfriendly home for multinational firms.

For more information, here’s the video I narrated on “deferral,” which is a policy that mitigates America’s misguided policy of worldwide taxation. And you’ll see (what a surprise) that the Obama Administration wants to make the system even more punitive.

P.S. On this topic, click here is you want to compare good research from the Tax Foundation with sloppy analysis from the New York Times.

P.P.S. Many other companies already have re-domiciled overseas because the internal revenue code is so punitive. The U.S. tax system is so bad that companies even escape to Canada and the United Kingdom!

P.P.P.S. It also would be a good idea to lower America’s anti-competitive corporate tax rate.

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To put it mildly, I’m not a fan of the so-called Tax Justice Network. In a moment of typical understatement, I referred to the U.K.-based group as “…a bunch of crazy Euro-socialists.”

And to give you an idea of why I don’t like them, here’s some of what I wrote about them two years ago.

…the Tax Justice Network [is] closely allied with governments in left-wing nations such as France, and they share the same goals as statist international bureaucracies such as the Paris-based Organization for Economic Cooperation and Development. If they succeed in crippling tax competition and setting up some sort of global network of tax police, more politicians will raise tax rates, causing more misery, and bringing more nations one step closer to Greek-style fiscal collapse.

With this bit of background, it goes without saying that I very rarely agree with TJN.

But just as a stopped clock is right twice daily, the Tax Justice Network on rare occasions will produce some worthwhile research. For example, here are some passages from my article in the latest issue of the Cayman Financial Review (where I’m a member of the Editorial Board).

…would anybody, if asked to list the world’s 10 biggest tax havens, put together a list that includes Germany, Japan and the United States? Sounds absurd, but that’s precisely what the ideologues at the Tax Justice Network (TJN) asserted in the Financial Secrecy Index (FSI) released last November. …To be fair, though, the methodological approach used in the FSI report is not wholly objectionable. The TJN is seeking to come up with a measure that combines both the degree to which a jurisdiction has “secrecy” laws and the extent to which that jurisdiction attracts global capital. In other words, the TJN’s philosophical leanings are extreme and the organization obviously is motivated by a desire to hinder tax competition and fiscal sovereignty, but the FSI report provides an interesting way of seeing which so-called tax havens play the biggest role in the world economy.

And one of the biggest tax havens – number 6 according to TJN – is the United States.

TJN FSI 2013I have no objection to their choice.

It makes sense to include the United States because there are several attractive policies for global investors, including the non-taxation and non-reporting of certain types of capital income. Moreover, several states have very friendly incorporation laws.

When I’m talking about “friendly incorporation laws,” I’m referring to the fact that states such as Delaware, Nevada, Wyoming, and others make it easy for everyone – particularly foreigners – to set up companies. This is a good thing for business and investment, but it irks statists because many American states don’t require the collection and sharing of information that foreign governments want for purposes of enforcing bad tax law.

So the United States is a de facto tax haven.

But that’s just part of the story. When I discuss the “non-taxation and non-reporting of certain types of capital income,” I’m referring to the fact that the internal revenue code generally does not impose tax on interest and capital gains paid to  foreigners (specifically nonresident aliens). And because we don’t tax those payments, there’s no requirement to report that information to any government. As you can imagine, this irks the left because it means there’s no information to share with foreign governments that want to track – and tax – flight capital.

To reiterate, this makes the United States is a de facto tax haven.

These laws are extremely beneficial to the American economy. To get an idea of why the United States is a big winner from being a “tax haven,” look at this chart showing historical data on the amount of money foreigners have invested in stocks, bonds, and other forms of indirect (sometimes called passive) investment in America.

By any standard, $13 trillion is a lot of money. Those funds boost our financial markets, enable job creation, and increase economic performance. We don’t know how much of that money is invested in the United States because we have a friendly and confidential tax system for nonresident aliens, but it surely helps to explain why there’s so much foreign investment in America.

Let’s be thankful that the United States is a so-called tax haven. Those pro-growth policies help to offset Obama’s bad policies. Indeed, two Canadian economists found that tax havens actually are economically beneficial for high-tax nations.

But that’s not the moral of the story. Yes, I like that America is a tax haven for foreigners, but the real moral of the story is that we should apply the same good policies to Americans.

Let’s get rid of the corrupt internal revenue code and adopt a simple and fair flat tax. That means a low tax rate, of course, but it also means no double taxation of income that is saved and invested.

Which means Americans would get the same pro-growth treatment now reserved for foreigners.

For more information, here’s my video on the economic argument for tax havens.

P.S. You won’t be surprised to learn that hypocritical leftists love using tax havens to protect their money even though they want to deny that freedom to the rest of us.

P.P.S. I’m such an avid defender of tax havens that I almost wound up in a Mexican jail. That’s dedication!

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Last August, I shared a fascinating map from the Tax Foundation.

It showed which states have chased away taxable income and which ones have attracted more taxpayers (along with their taxable income).

In other words, what are the “Golden Geese” doing with their money?

Well, the obvious and unsurprising answer is that they are escaping high-tax states and moving to states that aren’t quite so greedy.

Now we have another map from the Tax Foundation. They’ve just released the latest data on state and local tax burdens as a share of state income. Because of lags in data, we’re looking at 2011 numbers, but that’s not important. The main thing is to notice that the states with the highest tax burdens are very much correlated with the states that suffered the great loss of taxable income.

State-Local Tax

You can tell a few additional things just by looking at the map, most notably that the high-tax states are largely along the Pacific coast, in the upper Midwest, and much of the Northeast.

The rest of the nation seems more reasonable.

If you specifically want to know the best and worst states, I’ve put together a list. But I’ve reversed the order. The state with the lowest tax burden is #1 while the state with the greediest politicians is #50.

Best-worst tax states

A couple of observations on the data.

First, it helps to have no state income tax. The top four states, and seven out of the top 10, avoid that punitive levy.

Second, while it’s no surprise to see which states are at the bottom because of harsh tax burdens, it will be interesting to see how Chris Christie and Scott Walker explain the poor rankings of their respective states should they run for President.

This isn’t to say it’s their fault. After all, New Jersey and Wisconsin were high-tax states when they took office. But it will be incumbent upon them to say what they’ve done to make a bad situation better (or at least to keep a bad situation from getting worse).

Here are some more interesting maps, including international comparisons, national comparisons, and even one local comparison.

Which nations have the most red ink.

Which nations are money laundering centers (hint, not tax havens).

A crazy left-wing “Happy Planet” map.

Another silly map showing that America is supposedly one of the world’s most authoritarian nations.

Here are some good state maps with useful information.

Which states give the highest welfare payments.

In which state is the burden of government spending climbing most rapidly.

Which states are in a “death spiral” because of too many takers and too few makers.

Which states have too many school bureaucrats compared to teachers.

There’s even a local map.

How many of the nation’s richest counties are in the D.C. metro region.

P.S. I wrote recently about the foolishness of anti-money laundering laws, which impose very high costs without having any positive impact in terms of thwarting crime.

Now bureaucrats want to make these laws even worse. Casinos are going to be required to be more intrusive, regardless of whether there’s any evidence or suspicion that customers have done anything wrong. I’m not a gambler, so I don’t worry about the fate of Las Vegas, but even I feel sorry for the casinos since many high rollers from overseas will decide to go to Macau, Monaco, or other locations where they’re not treated poorly because of misguided government.

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Back in the 1980s and 1990s, there was a widespread consensus that high tax rates were economically misguided. Many Democrats, for instance, supported the 1986 Tax Reform Act that lowered the top tax rate from 50 percent to 28 percent (albeit offset by increased double taxation and more punitive depreciation rules).

And even in the 1990s, many on the left at least paid lip service to the notion that lower tax rates were better for prosperity than higher tax rates. Perhaps that’s because the overwhelming evidence of lower tax rates on the rich leading to higher revenue was fresh in their minds.

The modern left, however, seems completely fixated on class-warfare tax policy. Some of them want higher tax rates even if the government doesn’t collect more revenue!

I’ve already shared a bunch of data and evidence on the importance of low tax rates.

A review of the academic evidence by the Tax Foundation found overwhelming support for the notion that lower tax rates are good for growth.

An economist from Cornell found lower tax rates boost GDP.

Other economists found lower tax rates boost job creation, savings, and output.

Even economists at the Paris-based OECD have determined that high tax rates undermine economic performance.

Today, we’re going to augment this list with some fresh and powerful evidence.

Lots of new evidence. So grab a cup of coffee.

The New York Times, for instance, is noticing that high taxes drive away productive people. At least in France.

Here are some excerpts from a remarkable story.

A year earlier, Mr. Santacruz, who has two degrees in finance, was living in Paris near the Place de la Madeleine, working in a boutique finance firm. He had taken that job after his attempt to start a business in Marseille foundered under a pile of government regulations and a seemingly endless parade of taxes. The episode left him wary of starting any new projects in France. Yet he still hungered to be his own boss. He decided that he would try again. Just not in his own country.

What pushed him over the edge? Taxes, taxes, and more taxes.

…he returned to France to work with a friend’s father to open dental clinics in Marseille. “But the French administration turned it into a herculean effort,” he said. A one-month wait for a license turned into three months, then six. They tried simplifying the corporate structure but were stymied by regulatory hurdles. Hiring was delayed, partly because of social taxes that companies pay on salaries. In France, the share of nonwage costs for employers to fund unemployment benefits, education, health care and pensions is more than 33 percent. In Britain, it is around 20 percent. “Every week, more tax letters would come,” Mr. Santacruz recalled.

Monsieur Santacruz has lots of company.

…France has been losing talented citizens to other countries for decades, but the current exodus of entrepreneurs and young people is happening at a moment when France can ill afford it. The nation has had low-to-stagnant economic growth for the last five years and a generally climbing unemployment rate — now about 11 percent — and analysts warn that it risks sliding into economic sclerosis. …This month, the Chamber of Commerce and Industry of Paris, which represents 800,000 businesses, published a report saying that French executives were more worried than ever that “unemployment and moroseness are pushing young people to leave” the country, bleeding France of energetic workers. As the Pew Research Center put it last year, “no European country is becoming more dispirited and disillusioned faster than France.”

But it’s not just young entrepreneurs. It’s also those who already have achieved some level of success.

Some wealthy businesspeople have also been packing their bags. While entrepreneurs fret about the difficulties of getting a business off the ground, those who have succeeded in doing so say that society stigmatizes financial success. …Hand-wringing articles in French newspapers — including a three-page spread in Le Monde, have examined the implications of “les exilés.” …around 1.6 million of France’s 63 million citizens live outside the country. That is not a huge share, but it is up 60 percent from 2000, according to the Ministry of Foreign Affairs. Thousands are heading to Hong Kong, Mexico City, New York, Shanghai and other cities. About 50,000 French nationals live in Silicon Valley alone. But for the most part, they have fled across the English Channel, just a two-hour Eurostar ride from Paris. Around 350,000 French nationals are now rooted in Britain, about the same population as Nice, France’s fifth-largest city. …Diane Segalen, an executive recruiter for many of France’s biggest companies who recently moved most of her practice, Segalen & Associés, to London from Paris, says the competitiveness gap is easy to see just by reading the newspapers. “In Britain, you read about all the deals going on here,” Ms. Segalen said. “In the French papers, you read about taxes, more taxes, economic problems and the state’s involvement in everything.”

Let’s now check out another story, this time from the pages of the UK-based Daily Mail. We have some more news from France, where another successful French entrepreneur is escaping Monsieur Hollande’s 75 percent tax rate.

François-Henri Pinault, France’s third richest man, is relocating his family to London.  Pinault, the chief executive of Kering, a luxury goods group, has an estimated fortune of £9 billion.  The capital has recently become a popular destination for wealthy French, who are seeking to avoid a 75 per cent supertax introduced by increasingly unpopular Socialist President François Hollande. …It has been claimed that London has become the sixth largest ‘French city’ in the world, with more than 300,000 French people living there.

But it’s not just England. Other high-income French citizens, such as Gerard Depardieu and Bernard Arnault, are escaping to Belgium (which is an absurdly statist nation, but at least doesn’t impose a capital gains tax).

But let’s get back to the story. The billionaire’s actress wife, perhaps having learned from all the opprobrium heaped on Phil Mickelson when he said he might leave California after voters foolishly voted for a class-warfare tax hike, is pretending that taxes are not a motivating factor.

But despite the recent exodus of millionaires from France, Ms Hayek insisted that her family were moving to London for career reasons and not for tax purposes.  …Speaking about the move in an interview with The Times Magazine, the actress said: ‘I want to clarify, it’s not for tax purposes. We are still paying taxes here in France.  ‘We think that London has a lot more to offer than just a better tax situation.

And if you believe that, I have a bridge in Brooklyn that I’m willing to sell for a very good price.

Speaking of New York bridges, let’s go to the other side of Manhattan and cross into New Jersey.

It seems that class-warfare tax policy isn’t working any better in the Garden State than it is in France.

Here are some passages from a story in the Washington Free Beacon.

New Jersey’s high taxes may be costing the state billions of dollars a year in lost revenue as high-earning residents flee, according to a recent study. The study, Exodus on the Parkway, was completed by Regent Atlantic last year… The study shows the state has been steadily losing high-net-worth residents since 2004, when Democratic Gov. Jim McGreevey signed the millionaire’s tax into law. The law raised the state income tax 41 percent on those earning $500,000 or more a year. “The inception of this tax, coupled with New Jersey’s already high property and estate taxes, leaves no mystery about why the term ‘tax migration’ has become a buzzword among state residents and financial, legal, and political professionals,” the study, conducted by Regent states. …tax hikes are driving residents to states with lower tax rates: In 2010 alone, New Jersey lost taxable income of $5.5 billion because residents changed their state of domicile.

No wonder people are moving. New Jersey is one of the most over-taxed jurisdictions in America – and it has a dismal long-run outlook.

And when they move, they take lots of money with them.

“The sad reality is our residents are suffering because politicians talk a good game, but no one is willing to step up to the plate,” Americans for Prosperity New Jersey state director Daryn Iwicki said. The “oppressive tax climate is driving people out.” …One certified public accountant quoted in the study said he lost 95 percent of his high net worth clients. Other tax attorneys report similar results. …Michael Grohman, a tax attorney with Duane Morris, LLP, claimed his wealthy clients are “leaving [New Jersey] as fast as they can.” …If the current trend is not reversed, the consequences could be dire. “Essentially, we’ll find ourselves much like the city of Detroit, broke and without jobs,” Iwicki said.

By the way, make sure you don’t die in New Jersey.

The one bit of good news, for what it’s worth, is that Governor Christie is trying to keep matters from moving further in the wrong direction.

Here’s another interesting bit of evidence. The Wall Street Journal asked the folks at Allied Van Lines where wealthy people are moving. Here’s some of the report on that research.

Spread Sheet asked Allied to determine where wealthy households were moving, based on heavy-weight, high-value moves. According to the data, Texas saw the largest influx of well-heeled households moving into the state last year, consistent with move trends overall. South Carolina and Florida also posted net gains. On the flip side, Illinois and Pennsylvania saw more high-value households move out of state than in, according to the data. California saw the biggest net loss of heavy-weight moves. Last year, California had a net loss of 49,259 people to other states, according to the U.S. Census. …Texas had the highest net gain in terms of domestic migration—113,528 more people moved into the state than out last year, census data show. Job opportunities are home-buyers’ top reason for relocating to Texas, according to a Redfin survey last month of 1,909 customers and website users.

The upshot is that Texas has thumped California, which echoes what I’ve been saying for years.

One can only imagine what will happen over the next few years given the punitive impact of the higher tax rate imposed on the “rich” by spiteful California voters.

If I haven’t totally exhausted your interest in this topic, let’s close by reviewing some of the research included in John Hood’s recent article in Reason.

Over the past three decades, America’s state and local governments have experienced a large and underappreciated divergence. …Some political scientists call it the Big Sort. …Think of it as a vast natural experiment in economic policy. Because states have a lot otherwise in common-cultural values, economic integration, the institutions and actions of the federal government-testing the effects of different economic policies within America can be easier than testing them across countries. …And scholars have been studying the results. …t present our database contains 528 articles published between 1992 and 2013. On balance, their findings offer strong empirical support for the idea that limited government is good for economic progress.

And what do these studies say?

Of the 112 academic studies we found on overall state or local tax burdens, for example, 72 of them-64 percent-showed a negative association with economic performance. Only two studies linked higher overall tax burdens with stronger growth, while the rest yielded mixed or statistically insignificant findings. …There was a negative association between economic growth and higher personal income taxes in 67 percent of the studies. The proportion rose to 74 percent for higher marginal tax rates or tax code progressivity, and 69 percent for higher business or corporate taxes.

Here are some of the specific findings in the academic research.

James Hines of the University of Michigan found that “state taxes significantly influence the pattern of foreign direct investment in the U.S.” A 1 percent change in the tax rate was associated with an 8 percent change in the share of manufacturing investment from taxed investors. Another study, published in Public Finance Review in 2004, zeroed in on counties that lie along state borders. …Studying 30 years of data, the authors concluded that states that raised their income tax rates more than their neighbors had significantly slower growth rates in per-capita income. …economists Brian Goff, Alex Lebedinsky, and Stephen Lile of Western Kentucky University grouped pairs of states together based on common characteristics of geography and culture. …Writing in the April 2011 issue of Contemporary Economic Policy, the authors found “strong support for the idea that lower tax burdens tend to lead to higher levels of economic growth.”

By the way, even though this post is about tax policy, I can’t resist sharing some of Hood’s analysis of the impact of government spending.

Of the 43 studies testing the relationship between total state or local spending and economic growth, only five concluded that it was positive. Sixteen studies found that higher state spending was associated with weaker economic growth; the other 22 were inconclusive. …a few Keynesian bitter-enders insist that transfer programs such as Medicaid boost the economy via multiplier effects… Nearly three-quarters of the relevant studies found that welfare, health care subsidies, and other transfer spending are bad for economic growth.

And as I’ve repeatedly noted, it’s important to have good policy in all regards. And Hood shares some important data showing that laissez-faire states out-perform their neighbors.

…economists Lauren Heller and Frank Stephenson of Berry College used the Fraser Institute’s Economic Freedom of North America index to explore state economic growth from 1981 to 2009. They found that if a state adopted fiscal and regulatory policies sufficient to improve its economic freedom score by one point, it could expect unemployment to drop by 1.3 percentage points and labor-force participation to rise by 1.9 percentage points by the end of the period studied.

If you’ve made it this far, you deserve a reward. We have some amusing cartoons on class-warfare tax policy here, here, here, here, here, here, and here.

And here’s a funny bit from Penn and Teller on class warfare.

P.S. Higher tax rates also encourage corruption.

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Last month, I shared a very interesting video from Canada’s Fraser Institute that explored the link between economic performance and the burden of government spending.

There’s now an article in the American Enterprise Institute’s online magazine about this research.

The first half of the article unveils the overall findings, explaining that there is a growth-maximizing size of government (which, when put onto a graph, is shaped like a hump, sort of a spending version of the Laffer Curve).

One recent addition to the mounting evidence against large government is a study published by Canada’s Fraser Institute, entitled “Measuring Government in the 21st Century,” by Canadian economist and university professor Livio Di Matteo. Di Matteo’s analysis confirms other work showing a positive return to economic growth and social progress when governments focus their spending on basic, needed services like the protection of property. But his findings also demonstrate that a tipping point exists at which more government hinders economic growth and fails to contribute to social progress in a meaningful way. …Government spending becomes unproductive when it goes to such things as corporate subsidies, boondoggles, and overly generous wages and benefits for government employees. …Di Matteo examines international data and finds that, after controlling for confounding factors, annual per capita GDP growth is maximized when government spending consumes 26 percent of the economy. Economic growth rates start to decline when relative government spending exceeds this level.

This is standard Rahn Curve analysis and it shows that the public sector is far too large in almost all industrialized nations.

And if you happen to think that 26 percent overstates the growth-maximizing size of government (as I argued last month), then it’s even more apparent that significant fiscal restraint would be desirable.

But I’m more interested today in the specific topic of Canada and the Rahn Curve. The article has some very interesting data.

For a real-life example of how scaling back government has led to positive and practical economic benefits, Americans should look north. …total government spending as a share of GDP went from 36 percent in 1970 (just over 2 percentage points higher than in the United States) to 53 percent when it peaked in 1992 (14 percentage points higher than in the United States). Spending Canada v US…the federal and many provincial governments took sweeping action to cut spending and reform programs. This led to a major structural change in the government’s involvement in the Canadian economy. The Canadian reforms produced considerable fiscal savings, reduced the size and scope of government, created room for important tax reforms, and ultimately helped usher in a period of sustained economic growth and job creation. This final point is worth emphasizing: Canada’s total government spending as a share of GDP fell from a peak of 53 percent in 1992 to 39 percent in 2007, and despite this more than one-quarter decline in the size of government, the economy grew, the job market expanded, and poverty rates fell dramatically.

Simply stated, none of this should be a surprise.

The Canadian economy had the breathing room to expand when the burden of spending was reduced. Why? Because more labor and capital were available to be allocated by market forces.

This is one of the reasons why Canada now ranks higher than the United States in both Economic Freedom of the World and the Index of Economic Freedom.

And it’s also worth noting that spending restraint has facilitated significant tax cuts in Canada. Indeed, some American companies are moving north of the border!

Here’s my video that includes a discussion of Canada’s dramatically successful period of spending restraint in the 1990s.

P.S. You won’t be surprised to learn that Paul Krugman would rather misrepresent supposed austerity in the United Kingdom rather than address the real success story of Canada.

P.P.S. More generally, I’ve challenged all Keynesians to explain why Canada’s economy enjoyed good growth when there was genuine spending restraint.

P.P.P.S. While I’m a big fan of Canada, I’m not fully confident about the nation’s long-term outlook.

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One of my goals is to convince people that even small differences in long-run growth can have a powerful impact on living standards and societal prosperity.

In other words, the economy is not a fixed pie. The right policies, such as free markets and small government, can create a better life for everybody.

And bad policy, needless to say, can have the opposite impact.

Very few people realize, for instance, that Argentina was one of the world’s 10-richest nations at the end of World War II, but interventionist policies have weakened growth and caused the country to plummet in the rankings.

Hong Kong, by contrast, had a relatively poor economy at the end of the war, but now is one of the globe’s most prosperous jurisdictions.

If you want more examples, check out this chart showing how North Korea and South Korea have diverged over time.

Or how about the chart showing how Chile has out-performed other major Latin American economies.

This comparison of living standards in the United States and Europe also is very compelling.

Here’s a simple guide to highlight the difference between weak growth and strong growth. It shows how long it takes a nation to double economic output depending on annual growth.

As you can see, a nation with 1 percent growth (think Italy) will have to wait 70 years before the economic pie doubles in size.

But a nation that grows 4 percent or faster each year (think Singapore) will double GDP in less than 20 years.

Years to Double GDP

So why am I plowing through all this material?

My answer is simple, but depressing. I’m worried that the United States is becoming more like Europe. During the Bush-Obama years, we’ve seen big increases in the size and scope of government, and it’s no surprise that we’re now suffering from anemic economic performance.

That’s the first point I made in this interview with Michelle Fields of PJTV.

Much of the material in the interview will be familiar to regular readers, but a few points deserve some emphasis.

I say that America becoming more like Europe isn’t the end of the world, but I should elaborate. What I meant is that we can survive 2 percent growth instead of 3 percent growth. We could even survive 1 percent growth.

But if we continue on the current path of ever-growing government and combine that with an aging population and poorly designed entitlement programs, then we will see the end of the world. At least in the sense of fiscal crisis and economic collapse.

All the points I make about jobs, employment, labor force participation, unemployment insurance and disability are simply different ways of saying that it’s not good for the economy when politicians continuously make dependency more attractive than work.

If you want to know more about why the so-called stimulus was a failure, my article in The Federalist is a nice place to start.

The libertarian fantasy world of a small central government is a very good goal, but it’s still possible to make significant progress if politicians follow Mitchell’s Golden Rule.

P.S. You may recognize the host because she narrated a very good video for the Center for Freedom and Prosperity. Michelle explained how the big-government policies of Hoover and Roosevelt deepened and extended the Great Depression.

She also exposed rich leftists as complete hypocrites in this interview.

P.P.S. Since I mentioned above that South Korea has far surpassed North Korea, I should share this powerful nighttime picture of the Korean peninsula.

North Korea v South Korea

Gee, maybe capitalism is better than statism after all.

Unless, of course, you think there’s something really nice about North Korea to offset South Korea’s economic advantages.

Such as malnutrition or enslavement. Or a small carbon footprint, which led some nutjobs to rank Cuba far above America.

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What’s the best state in America?

I’m not sure I can answer that broad question, but I can address the more narrow issue of which state has the most economic freedom. Last month, for instance, I shared some data from the Canada-based Fraser Institute which showed that South Dakota was America’s most laissez-faire state, followed by Tennessee, Delaware, Texas, and Virginia (though all of them trailed the Canadian province of Alberta).

And one year ago, I posted about a fascinating Mercatus study that ranked states based on total freedom (including, interestingly, a “bachelor party” variable). That research put North Dakota at the top, followed by South Dakota, Tennessee, New Hampshire, and Oklahoma.

Now we have another measure of overall economic liberty at the state level. The Texas Public Policy Foundation has put together a “soft tyranny” index that measures total economic oppression, both for the United States and for the 50 states.

As you would suspect, the ranking was constructed with various measures of spending, taxes, and regulation.

Since we’re focusing today on state competitiveness, let’s first look at that data. As you can see, Texas is in the top spot with the lowest burden of government, followed by South Dakota, Nevada, New Hampshire, and Tennessee.

Soft Tyranny States
Since South Dakota and Tennessee appear in the top 5 of all measures, I’m guessing that means they are the best states (and it’s presumably no coincidence that they don’t have broad-based income taxes).

Now let’s review the data for the United States.

Probably the most relevant thing to notice is that economic freedom improved during the Reagan and Clinton years, whereas it worsened under Carter, both Bush Administrations, and Obama.

Soft Tyranny USA

And since America’s last two presidents have imposed a larger burden of government, it’s no surprise that the United States has fallen in both major global measures of economic freedom.

P.S. On a totally separate issue, I’m not surprised to learn that Republicans who are philosophically corrupt sometimes are personally corrupt as well.

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There’s an old joke about two guys camping in the woods, when suddenly they see a hungry bear charging over a hill in their direction. One of the guys starts lacing up his sneakers and his friend says, “What are you doing? You can’t outrun a bear.” The other guys says, I don’t have to outrun the bear, I just need to outrun you.”

That’s reasonably amusing, but it also provides some insight into national competitiveness. In the battle for jobs and investments, nations can change policy to impact their attractiveness, but they also can gain ground or lose ground because of what happens in other nations.

The corporate tax rate in the United States hasn’t been changed in decades, for instance, but the United States has fallen further and further behind the rest of the world because other nations have lowered their rates.

Courtesy of a report in the UK-based Telegraph, here’s another example of how relative policy changes can impact growth and competitiveness.

The paper looks at changes in the burden of welfare spending over the past 14 years. The story understandably focuses on how the United Kingdom is faring compared to other European nations.

Welfare spending in Britain has increased faster than almost any other country in Europe since 2000, new figures show.  The cost of unemployment benefits, housing support and pensions as share of the economy has increased by more than a quarter over the past thirteen years – growing at a faster rate than in most of the developed world. Spending has gone up from 18.6 per cent of GDP to 23.7 per cent of GDP – an increase of 27 per cent, according to figures from the OECD, the club of most developed nations. By contrast, the average increase in welfare spending in the OECD was 16 per cent.

This map from the story shows how welfare spending has changed in various nations, with darker colors indicating a bigger expansion in the welfare state.

Welfare Spending - Europe

American readers, however, may be more interested in this excerpt.

In the developed world, only the United States and the stricken eurozone states of Ireland, Portugal and Spain – which are blighted by high unemployment – have increased spending quicker than Britain.

Yes, you read correctly. The United States expanded the welfare state faster than almost every European nation.

Here’s another map, but I’ve included North America and pulled out the figures for the countries that suffered the biggest increases in welfare spending. As you can see, only Ireland and Portugal were more profligate than the United States.

Welfare Spending - NA + WE

Needless to say, this is not a good sign for the United States.

But the situation is not hopeless. The aforementioned numbers simply tell us the rate of change in welfare spending. But that doesn’t tell us whether countries have big welfare states or small welfare states.

That’s why I also pulled out the numbers showing the current burden of welfare spending – measured as a share of economic output – for countries in North America and Western Europe.

This data is more favorable to the United States. As you can see, America still has one of the lowest overall levels of welfare spending among developed nations.

Welfare Spending - NA + WE -Share GDP

Ireland also is in a decent position, so the real lesson of the data is that the United States and Ireland must have been in relatively strong shape back in 2000, but the trend over the past 14 years has been very bad.

It’s also no surprise that France is the most profligate of all developed countries.

Let’s close by seeing if any nations have been good performers. The Telegraph does note that Germany has done a good job of restraining spending. The story even gives a version of Mitchell’s Golden Rule by noting that good policy happens when spending grows slower than private output.

Over the thirteen years from 2000, Germany has cut welfare spending as a share of GDP by 1.5 per cent… Such reductions are possible by increasing welfare bills at a lower rate than growth in the economy.

But the more important question is whether there are nations that get good scores in both categories. In other words, have they controlled spending since 2000 while also having a comparatively low burden of welfare outlays?

Welfare Spending - The Frugal FiveHere are the five nations with the smallest increases in welfare spending since 2000. You can see that Germany had the best relative performance, but you’ll notice from the previous table that Germany is not on the list of five nations with the smallest overall welfare burdens. Indeed, German welfare spending consumes 26.2 percent of GDP, so Germany still has a long way to go.

The nation that does show up on both lists for frugality is Switzerland. Spending has grown relatively slowly since 2000 and the Swiss also have the third-lowest overall burdens of welfare spending.

Hmmm…makes you wonder if this is another sign that Switzerland’s “debt brake” spending cap is a policy to emulate.

By the way, Canada deserves honorable mention. It has the second-lowest overall burden of welfare spending, and it had the sixth-best performance in controlling spending since 2000. Welfare outlays in our northern neighbor grew by 10 percent since 2000, barely one-fourth as fast as the American increase during the reckless Bush-Obama years.

No wonder Canada is now much higher than the United States in measures of economic freedom.

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The business pages are reporting that Chrysler will be fully owned by Fiat after that Italian company buys up remaining shares.

I don’t know what this means about the long-term viability of Chrysler, but we can say with great confidence that the company will be better off now that the parent company is headquartered outside the United States.

This is because Chrysler presumably no longer will be obliged to pay an extra layer of tax to the IRS on any foreign-source income.

Italy, unlike the United States, has a territorial tax system. This means companies are taxed only on income earned in Italy but there’s no effort to impose tax on income earned – and already subject to tax – in other nations.

Under America’s worldwide tax regime, by contrast, U.S.-domiciled companies must pay all applicable foreign taxes when earning money outside the United States – and then also put that income on their tax returns to the IRS!

And since the United States imposes the highest corporate income tax in the developed world and also ranks a dismal 94 out of 100 on a broader measure of corporate tax competitiveness, this obviously is not good for jobs and growth.

No wonder many American companies are re-domiciling in other countries!

Maybe the time has come to scrap the entire corporate income tax. That’s certainly a logical policy to follow based on a new study entitled, “Simulating the Elimination of the U.S. Corporate Income Tax.”

Written by Hans Fehr, Sabine Jokisch, Ashwin Kambhampati, Laurence J. Kotlikoff, the paper looks at whether it makes sense to have a burdensome tax that doesn’t even generate much revenue.

The U.S. Corporate Income Tax…produces remarkably little revenue – only 1.8 percent of GDP in 2013, but entails major compliance and collection costs. The IRS regulations detailing corporate tax provisions are tome length and occupy small armies of accountants and lawyers. …many economists…have suggested that the tax may actually fall on workers, not capitalists.

Regarding who pays the tax, shareholders bear the direct burden of the corporate tax, of course, but economists believe workers are the main victims because the levy reduces investment, which then means lower productivity and lower wages.

Statists would like us to believe that capitalists and workers are enemies, but that’s utter nonsense. Both prosper by cooperating. There’s a very strong correlation between a nation’s capital stock (the amount of investment) and the compensation of its workers.

So it’s no surprise to see that’s precisely what the authors found in their new research.

This paper posits, calibrates, and simulates a multi-region, life-cycle dynamic general equilibrium model to study the impact of U.S. and global corporate tax reforms. …when wage taxation is used as the substitute revenue source, eliminating the U.S. corporate income tax, holding other countries’ corporate tax rates fixed, engenders a rapid and sustained 23 to 37 percent higher capital stock… Higher capital per worker means higher labor productivity and, thus, higher real wages.

The impact is significant, both for worker compensation and overall economic output.

…real wages of unskilled workers wind up 12 percent higher and those of skilled workers 13 percent higher. …on balance, output rises – by 8 percent in the short term, 10 percent in the intermediate term, and 8 percent in the long term… The economy’s endogenous expansion expands existing tax bases, with the increased revenue making up for roughly one third the loss in revenue from the corporate income tax’s elimination.

By the way, the authors bizarrely then write that “we find no Laffer Curve,” but that’s presumably because they make the common mistake of assuming the Laffer Curve only exists if a tax cut fully pays for itself.

laffer curveBut that’s only true for the downward-sloping side of the Laffer Curve.

In other cases (such as found in this study), there is still substantial revenue feedback.

And I guess we shouldn’t be surprised that full repeal of the corporate income tax doesn’t raise revenue. The Tax Foundation, after all, estimates that the revenue-maximizing rate is about 14 percent.*

Now that I’m done nit-picking about the Laffer Curve, let’s now look at one additional set of results from this new study.

…each generation, including those initially alive, benefits from the reform, with those born after 2000 experiencing an 8 to 9 percent increase in welfare.

I should point out, incidentally, that economists mean changes in living standards when they write about changes in “welfare.” It’s a way of measuring the “well being” of society, sort of like what the Founders meant when they wrote about “the general welfare” in the Constitution.

But, once again, I’m digressing.

Let’s focus on the main lesson from the paper, which is that the corporate income tax imposes very high economic costs. Heck, even the Paris-based Organization for Economic Cooperation and Development (which is infamous for wanting higher tax burdens on companies) admitted that the levy undermines prosperity.

The study even finds that workers would be better off if the corporate income tax was replaced by higher wage taxes!

To learn more about the topic, here’s a video I narrated many years ago about cutting the corporate income tax. There was less gray in my hair back then, but my analysis still holds today.

* For the umpteenth time, I want to emphasize that the goal should not be to maximize revenue for politicians. Instead, we should strive to be on the growth-maximizing point of the Laffer Curve.

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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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There’s a tendency in public life to exaggerate the positive or negative implications of any particular policy.

This is why I try to be careful not to overstate the potential benefits of reforms I like, such as the flat tax. Yes, we would get better growth and there would be less corruption in Washington, but tax reform would not be a panacea for every ill. Many other policies also need to be fixed to generate sustained prosperity.

Likewise, I’m obviously not a fan of Obamacare, but I try to remind people that our system was already messed up even before Obama was elected. As such, repealing Obamacare – while the right thing to do – is just one of many things that need to happen to restore a competitive and efficient healthcare system.

Now that I’ve warned about the risks of overstatement, I’m going out on a limb to say that we may be at the point where France is taxing itself to the point of economic ruin.

One French budget expert warned that, “the spiraling welfare debt was particularly abnormal and particularly dangerous” and that “The strategy of fixing the system by collecting new revenue is reaching its limits.”

And even a European Union Commissioner thinks France has gone too far. As one newspaper reported, “Tax increases imposed by the Socialist-led government in France have reached a ‘fatal level’, the European Union’s commissioner for economic affairs said today. Olli Rehn warned that a series of tax hikes since the Socialists took power…threatens to ‘destroy growth and handicap the creation of jobs'”

You know you’re taxing too much when even Euro-crats in Brussels think the fiscal burden is excessive!

I’ve certainly added my two cents to this discussion, but I suspect people will be more willing to believe someone who endures the French fiscal regime every day.

And that’s our topic for today. A woman from France has written a very powerful indictment of France’s coercive and confiscatory economic system. Here are some excerpts from the UK-based Telegraph.

More than 70 per cent of the French feel taxes are “excessive”, and 80 per cent believe the president’s economic policy is “misguided” and “inefficient”. …Worse, after decades of living in one of the most redistributive systems in western Europe, 54 per cent of the French believe that taxes – of which there have been 84 new ones in the past two years, rising from 42 per cent of GDP in 2009 to 46.3 per cent this year – now widen social inequalities instead of reducing them.

Some of you may be wondering why French voters elected a socialist if they overwhelmingly think taxes are too high, but keep in mind that the former President was just as much of a statist.

I’m curious, by the way, about the data on taxes and social equality. Why do the French think higher taxes increase inequality? Is it that they think the higher taxes are being imposed on the middle class and the poor? Do they think that high taxes stifle growth and prevent upward mobility? Is it some combination of these factors, or something else altogether?

One thing we can say with certainty is that all these taxes have led to a bloated public sector.

By 2014, France’s public expenditure will overtake Denmark’s to become the world’s highest: 57 per cent of GDP. In effect, just to keep in the same place, like a hamster on a wheel, and ensure that the European Central Bank in Frankfurt isn’t too unhappy with us, Hollande now needs cash. …finance minister Pierre Moscovici recently admitted that he “understood” the French’s “exasperation” with their heavy tax burden. This earned him a sharp rap on the fingers from the president… “It’s not only that people don’t like to be treated like criminals just because they’re successful,” says a French banker friend who has recently moved to London. “But this uncertainty in every aspect of the tax system means it is impossible to do business: you don’t know what your future costs are, or your customer’s. You can’t buy, you can’t sell, you can’t hire, you can’t fire.”

Not surprisingly, this hostility to achievement is having a predictable impact.

…tax has been the clincher that sent hundreds, possibly thousands of French citizens abroad: not just “the rich”, whom Hollande, during his victorious campaign, said he personally “disliked”, …but also the ambitious young, who feel that their own country will turn on them the minute they achieve any measure of personal success. …one out of four French university graduates wants to emigrate, “and this rises to 80 per cent or 90 per cent in the case of marketable degrees”, says economics professor Jacques Régniez, who teaches at both the Sorbonne and the University of New York in Prague. “In one of my finance seminars, every single French student intends to go abroad.

Heck, a majority of French people have said they would be interested in escaping to the United States if they had the opportunity.

However, those are the productive and ambitious young people of France. Unfortunately, there’s another group of young French people, and they have different dreams.

…young people, and many of their parents, dream of getting any kind of state or local administration post…which ensures complete job security, unrelated to the economic situation, the market, or their own performance. More than a quarter of the French workforce is employed by some public body or other: schools, hospitals, local and regional councils, the police, the civil service proper – or those new subsidised public-service jobs the Hollande government is so keen on.

We have people like that in the United States as well.

What matters for a society, though, it whether there are too many people living off the government. When the moochers and looters outnumber (and out-vote) the people who are producing, the conditions exist for an economic death spiral.

Simply stated, the folks riding in the wagon keep voting to impose heavier burdens on those pulling the wagon. That eventually leads to economic ruin, and it leads to trouble even faster when the people pulling the wagon have the opportunity to move across borders.

Which is what is happening in France.

P.S. Here’s a powerful comparison of France and Switzerland.

P.P.S. More than 8,000 French households last year got to experience the Obama-version of a flat tax.

P.P.P.S. Americans shouldn’t feel superior to France since our tax code is worse in certain ways.

P.P.P.P.S. That being said, we’re not as bad as France, and even Obama won’t be able to change that.

P.P.P.P.P.S. I endorsed the current socialist President of France, but for a strategic reason.

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I’ve always had a soft spot in my heart for Bill Clinton. In part, that’s because economic freedom increased and the burden of government spending was reduced during his time in office.

Partisans can argue whether Clinton actually deserves the credit for these good results, but I’m just happy we got better policy. Heck, Clinton was a lot more akin to Reagan that Obama, as this Michael Ramirez cartoon suggests.

Moreover, Clinton also has been the source of some very good political humor, some of which you can enjoy here, here, here, here, and here.

Most recently, he even made some constructive comments about corporate taxation and fiscal sovereignty.

Here are the relevant excerpts from a report in the Irish Examiner.

It is up to the US government to reform the country’s corporate tax system because the international trend is moving to the Irish model of low corporate rate with the burden on consumption taxes, said the former US president Bill Clinton. Moreover, …he said. “Ireland has the right to set whatever taxes you want.” …The international average is now 23% but the US tax rate has not changed. “…We need to reform our corporate tax rate, not to the same level as Ireland but it needs to come down.”

Kudos to Clinton for saying America’s corporate tax rate “needs to come down,” though you could say that’s the understatement of the year. The United States has the highest corporate tax rate among the 30-plus nations in the industrialized world. And we rank even worse – 94th out of 100 countries according to a couple of German economists – when you look at details of how corporate income is calculated.

And I applaud anyone who supports the right of low-tax nations to have competitive tax policy. This is a real issue in Europe. I noted back in 2010 that, “The European Commission originally wanted to require a minimum corporate tax rate of 45 percent. And as recently as 1992, there was an effort to require a minimum corporate tax rate of 30 percent.” And the pressure remains today, with Germany wanting to coerce Ireland into hiking its corporate rate and the OECD pushing to undermine Ireland’s corporate tax system.

All that being said – and before anyone accuses me of having a man-crush on Bill and/or of being delusional – let me now issue some very important caveats.

When Clinton says we should increase “the burden on consumption taxes,” that almost surely means he would like to see a value-added tax.

This would be a terrible idea, even if at first the revenue was used to finance a lower corporate tax rate. Simply stated, it would just be a matter of time before the politicians figured out how to use the VAT as a money machine to finance bigger government.

Indeed, it’s no coincidence that the welfare state in Europe exploded in the late 1960s/early 1970s, which was also the time when the VAT was being implemented. And it’s also worth noting that VAT rates in recent years have jumped significantly in both Europe and Japan.

Moreover, Clinton’s position on fiscal sovereignty has been very weak in the past. It was during his tenure, after all, that the OECD – with active support from the Clinton Treasury Department – launched its “harmful tax competition” attack against so-called tax havens.

In other words, he still has a long way to go if he wants to become an Adjunct Fellow at the Cato Institute.

P.S. Just in case anyone want to claim that the 1993 Clinton tax hike deserves credit for any of the good things that happened in the 1990s, look at this evidence before embarrassing yourself.

P.P.S. There’s very little reason to think that Hillary Clinton would be another Bill Clinton.

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The Tax Foundation in Washington does some great work on fiscal issues, but I also admire their use of maps when they want to show how various states perform on key indicators.

They’re best known for “Tax Freedom Day,” which measures how long people have to work each year before they’ve earned enough to satisfy the tax demands of federal, state, and local government. And they have a map so you can easily see how your state ranks.

But my favorite map from the Tax Foundation is the one showing that the geese with the golden eggs are moving from high-tax states to low-tax states. That’s tax competition in action!

I also like their map showing which states have done the best and worst jobs of controlling the burden of government spending, as well as their map showing which states steal the biggest share of economic output from taxpayers.

So it should go without saying that I’m going to share their new State Business Tax Climate Index. And the accompanying map.

Tax Foundation State Tax Ranking

What are some important takeaways from this ranking? Five things caught my eye.

1. It’s a very good idea for a state to not impose an income tax. The top six states all avoid this punitive levy and every no-income tax state is in the top 15. And you won’t be surprised to learn that these states grow faster and create more jobs.

2. It’s just a matter of time before states such as New York and California are beset by fiscal crisis. When a jurisdiction has something special – like California’s climate or the appeal (to some) of New York City – it can get away with imposing higher tax burdens. But there’s a limit, and migration patterns show that productive people are voting with their feet.

3. Scott Walker and Chris Christie often are mentioned as serious 2016 presidential candidates, and both have become well known for trying to deal with the problem of over-compensated state bureaucrats. But they both preside over states in the bottom 10 of this ranking, and presumably should address this problem if they want to demonstrate that they’re on the side of taxpayers.

4. It’s possible for a state to make a dramatic jump. North Carolina currently is one of the bottom 10, but that will soon change because of reforms – including a flat tax – that were enacted this year. As the Tax Foundation noted: “While the state remains ranked 44th for this edition, it will move to as high as 17th as these reforms take effect in coming years.”

5. States also can move dramatically in the wrong direction. Connecticut is now one of America’s least-competitive states, in large part because politicians managed to push through a state income tax in the early 1990s.

P.S. If you like maps, here are some interesting ones, starting with some international comparisons.

Here are some good state maps with useful information.

There’s even a local map.

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We have an amazing man-bites-dog story today.

Let’s begin with some background information. A member of the European Commission recently warned that:

“Tax increases imposed by the Socialist-led government in France have reached a “fatal level”…[and] that a series of tax hikes since the Socialists took power 14 months ago – including €33bn in new taxes this year – threatens to “destroy growth and handicap the creation of jobs”.

Given the pervasive statism of the European Commission, that was a remarkable admission.

But the Commissioner who issued that warning, Olli Rehn, is Finnish, so French politicians presumably don’t listen to his advice any more than they listen to the thoughtful, well-meaning, and generous suggestions I make.

Indeed, based on the actions of the current President and the former President, we can say with great confidence that French politicians compete over who can pursue the most misguided policies.

But maybe, just maybe, there are some people inside France who realize the house of cards is in danger of collapse.

Here are some excerpts from a story I never thought I would read. At least one senior official in France has woken up to the dangers of ever-rising taxes and an always-growing burden of government spending.

France’s state auditor urged the government Tuesday to redouble efforts to limit spending rather than increases taxes… The head of the state auditor, Didier Migaud, said the interruption in deficit reduction stemmed primarily from lower-than-expected tax revenue, due to the weak economy. Yet, he said “the spiraling welfare debt was particularly abnormal and particularly dangerous.” During his first year in power, President François Hollande relied on large tax increases to plug holes in public finances, including social programs such as pensions, unemployment benefits and health care. But economic stagnation in 2012, coupled with a mild recession at the start of 2013, has waylaid the plan, while both companies and households are crying foul over what some have called “a tax overdose.” Mr. Migaud added his voice, saying: “The strategy of fixing the system by collecting new revenue is reaching its limits.”

Before any further analysis, I have to make one correction to the story. Hollande’s plan was not “waylaid” by a recession. Instead, his policies doubtlessly helped cause a recession. You don’t impose huge tax hikes on productive behavior without some sort of negative impact on economic performance.

So the “holes in public finances” are at least partially a result of the Laffer Curve. As I’ve repeatedly warned, higher tax rates rarely – if ever – collect as much money as politicians expect.

Returning to the specific case of France, the fiscal variable that should set off the most alarm bells is that the burden of government spending has soared to 57 percent of GDP. And based on projections from the BIS, OECD, and IMF, that number is going to get even worse in the future.

This is the data that presumably has convinced Monsieur Migaud that France is approaching the point of no return on taxes and spending.

Interestingly, the French people may be ahead of their politicians. Polling data from 2010 and 2013 show that ordinary people very much understand the need to limit the size and scope of government.

Heck, a majority of French people have said they would be interested in escaping to the United States if they had the opportunity. And successful people already have been leaving the country because of punitive tax rates.

But I’m not sure I believe the aforementioned polls. If the French people genuinely have sound views, why do they keep electing bad politicians? Of course, the same thing could be said about the United States, so perhaps I shouldn’t throw stones in my glass house.

P.S. My favorite example of government running amok in France is the law threatening three years in jail if you say your husband is a fat slob or if you accuse your wife of being a nag.

P.P.S. The most vile French official may be the current Prime Minister, who actually had the gall to complain that some of his intended victims weren’t quietly entering the slaughterhouse.

P.P.P.S. Just in case you think I’m exaggerating about France being a fiscal hellhole, more than 8,000 households last year were subjected to a tax burden of more than 100 percent . Obama must be very envious.

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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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Maybe this means I’m not a nice person (notwithstanding my high score for tenderness in a recent test), but I can’t help but be happy when I read bad news about fiscal policy in high-tax welfare states.

And because I’m a huge fan of tax competition, I get even happier when I find out that bloated governments are in trouble because people are escaping to places where government isn’t quite so greedy.

With that in mind, I smiled when I read what the Washington Examiner just wrote about tax competition and tax migration inside the United States.

States like California…can’t afford to be hospitable to business while also funding massive public employee entitlements. …job-creating businesses flee big-government Blue States for limited-government Red States. In short order, Blue States find themselves in financial straits. …between 2000 and 2010, the big Blue States of New York, California, and Illinois chased off hundreds of thousands of residents taking billions in income with them ($45.6 billion, $29.4 billion, and $20.4 billion respectively). Each of these states have highly progressive, high-marginal rate tax codes. California, for example, has 10 income tax brackets and a top rate of 13.3 percent. New York has eight brackets and an 8.82 percent top rate. Where did all those formerly Blue State income go? To low-tax, Red State jurisdictions, including Florida (no income tax), Texas (no income tax), and Arizona (4.54 percent top rate). Those three alone raked in $67.3 billion, $17.7 billion, and $17.6 billion, respectively.

Indeed, there have been studies looking at how specific states are driving high-income taxpayers to emigrate. And that means big Laffer-Curve effects.

Which is good news because even politicians are probably capable of learning – sooner or later – that high tax rates won’t raise much revenue if the geese that lay the golden eggs decide to fly away.

And since a picture tells a thousand words, here’s the map of taxable income migration put together by the Tax Foundation using IRS data.

Tax Foundation Income Migration Map

Before closing, I want to highlight one other passage from the Examiner column that touches on a very critical point.

Thanks to the few federalist principles that are still protected in the Constitution, Americans remain free to vote with their feet and escape economically suffocating places like California in order to move to the vastly more hospital economic climates found in Red States like Texas.

Amen. Federalism is a very valuable way of protecting people from statism. We see it when people move from New York. We see it when they escape from California. We see it from a big-picture perspective in the Tax Foundation map.

Federalism enables to producers to escape the looters and moochers.

But federalism has been weakened over the years by the expansion of federal government. If we want to bolster competition among the states – and therefore constrain the greed of the political class, we need to devolve programs from Washington.

This is why welfare reform during the Clinton years was such a good idea. And it’s why block-granting Medicaid is so desirable (above and beyond the fiscal need to implement good entitlement reform).

P.S. It’s rather appropriate that I’m writing about federalism since I’m now in Lausanne, Switzerland, for the 2013 Liberty Conference and Switzerland is probably the world’s best example of genuine federalism.

P.P.S. One small correction to the Examiner’s piece. Illinois is a high-tax state. Illinois is a big-government state. Illinois is a state heading toward fiscal collapse. There are many things wrong with the Land of Lincoln, but it hasn’t compounded those other mistakes with a “progressive” tax that discriminates against those who add more to economic output. Indeed, the fact that Illinois has a flat tax helps to explain why politicians had such a hard time pushing through a tax hike a couple of  years ago. They eventually succeeded, but the politicians faced an uphill battle because they couldn’t play the divide-and-conquer game of raising taxes on a limited segments of the population.

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The United States is suffering through the weakest economic expansion since the Great Depression, which is a damning indictment of Obamanomics.

But that doesn’t mean the United States has the world’s worst-performing economy. Japan’s statist economy has been mired in stagnation for more than 20 years, which is about what you might expect in a nation where the government is so omnipresent that it even regulates coffee enemas.

But if you really want to feel good about America’s economy (at least in relative terms), then a comparison to Europe is probably akin to snorting cocaine.

The welfare states on the other side of the Atlantic are in such poor shape that they celebrate even the tiniest glimmer of good news. Here are some blurbs from a story in the EU Observer.

The eurozone economy has moved out of recession, according to unexpectedly strong data published on Wednesday (14 August) by Eurostat, the EU’s statistical agency.

So what is this “strong data” mentioned in the story? Did eurozone economies grow at a 4 percent annual pace? 5 percent?

Well….not exactly.

Economic output rose by 0.3 percent across both the euro area and the EU28 during the second quarter of 2013, compared with the previous quarter. Surprisingly, it was Portugal which, despite recent social unrest and political turmoil over its bailout programme, saw the biggest jump in growth, with its economy growing by 1.1 percent. Finland and Germany recorded growth of 0.7 percent, while, France recorded a 0.5 percent growth rate, which will dampen concerns that the country’s economy will remain stagnant in 2013. The statistics indicate that the European economy is recovering faster than expected and could post an overall growth rate for 2013.

Huh, 0.3 percent is something to celebrate?!? These are quarterly numbers, so you should multiply by four to get annual rates, but even that doesn’t translate into “strong data.”

Moreover, if you look at the actual report from eurostat, you’ll see that the year-over-year numbers still show recession. So it’s far from clear that one quarter of anemic growth should be considered the start of a recovery.

Yet the expectations are so low in these over-taxed and over-regulated welfare states that the mandarins at the European Commission are breaking out the champagne.

In a statement, EU eurozone commissioner Olli Rehn described the news as “encouraging” and said that “the European economy is gradually gaining momentum.”

I guess the European economy is gaining momentum if you use a glacier as your benchmark.

I’m not trying to mock Europeans just for the heck of it. The serious point in this post is that the United States has been gradually moving in the direction of becoming a French-style welfare state during the statist Bush-Obama years.

And even though I like to think of America as being special, the consequences of more spending, more taxes, and more regulation are just as bad on this side of the ocean as they are on the other side of the ocean.

As you can see from the chart, America has enjoyed a big advantage over Europeans if you look at living standards. And maybe we always will maintain an advantage if they move even farther in the wrong direction at the same time that the United States is adopting counterproductive policies.

But why would we want to copy the misguided policies of nations that are collapsing?

Particularly when we have examples of jurisdictions that are now more prosperous than the United States and they lead the world in maintaining the tried-and-true recipe of free markets and small government.

P.S. If you look at the EU data, you’ll see that the Baltic nations are doing better than average, which is at least somewhat due to the fact that they have pursued better policy than their European neighbors.

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It’s probably not an exaggeration to say that the United States has the world’s worst corporate tax system.

We definitely have the highest corporate tax rate in the developed world, and we may have the highest corporate tax rate in the entire world depending on how one chooses to classify the tax regime in an obscure oil Sheikdom.

But America’s bad policy goes far beyond the rate structure. We also have a very punitive policy of “worldwide taxation” that forces American firms to pay an extra layer of tax when competing for market share in other nations.

And then we have rampant double taxation of both dividends and capital gains, which discourages business investment.

No wonder a couple of German economists ranked America 94 out of 100 nations when measuring the overall treatment of business income.

So if you’re an American company, how do you deal with all this bad policy?

Well, one solution is to engage in a lot of clever tax planning to minimize your taxable income. Though that’s probably not a successful long-term strategy since the Obama Administration is supporting a plan by European politicians to create further disadvantages for American-based companies.

Another option is to somehow turn yourself into a foreign corporation. You won’t be surprised to learn that politicians have imposed punitive anti-expatriation laws to make that difficult, but the crowd in Washington hasn’t figured out how to stop cross-border mergers and acquisitions.

And it seems that’s a very effective way of escaping America’s worldwide tax regime. Let’s look at some excerpts from a story posted by CNBC.

Some of the biggest mergers and acquisitions so far in 2013 have involved so-called “tax inversions” – where a US acquirer shifts overseas, to Europe in particular, to pay a lower rate.

The article then lists a bunch of examples. Here’s Example #1.

Michigan-based pharmaceuticals group Perrigo has said its acquisition of Irish biotech company Elan will lead to re-domiciling in Ireland, where it has given guidance it expects to pay about 17 per cent in tax, rather than an estimated 30 per cent rate it was paying in the US. Deutsche Bank estimates Perrigo will achieve tax savings of $118m a year as a result.

And Example #2.

New Jersey-based Actavis’s acquisition of Warner Chilcott in May – will also result in a move to Ireland, where Actavis’s tax rate will fall to about 17 per cent from an effective rate of 28 per cent tax, and enable it to save an estimated $150m over the next two years.

Then Example #3.

US advertising company Omnicom has said its $35bn merger with Publicis will result in the combined group’s headquarters being located in the Netherlands, saving about $80m in US tax a year.

Last but not least, Example #4.

Liberty Global’s $23bn acquisition of Virgin Media will allow the US cable group to relocate to the UK, and pay its lower 21 per cent tax rate of corporation tax.

And we can expect more of these inversions in the future.

M&A advisers say the number of companies seeking to re-domicile outside the US after a takeover is rising. …Increased use of tax inversion has coincided with an intensifying political debate on US tax – with Democrats, Republicans and the White House agreeing that the current code, which imposes a top rate of 35 per cent but offers a plethora of tax breaks, is in need of reform.

I’ll close with a very important point.

It’s not true that the current code has a “plethora of tax breaks.” Or, to be more specific, there are lots of tax breaks, but the ones that involve lots of money are part of the personal income tax, such as the state and local tax deduction, the mortgage interest deduction, the charitable contributions deduction, the muni-bond exemption, and the fringe benefits exclusion.

There are some corrupt loopholes in the corporate income tax, to be sure, such as the ethanol credit for Big Ag and housing credits for politically well-connected developers. But if you look at the Joint Committee on Taxation’s list of so-called tax expenditures and correct for their flawed definition of income, it turns out that there’s not much room to finance a lower tax rate by getting rid of unjustified tax breaks.

So does this mean there’s no way of fixing the problems that cause tax inversions?

If lawmakers put themselves in the straitjacket of “static scoring” as practiced by the Joint Committee on Taxation, then a solution is very unlikely.

But if they choose to look at the evidence, they’ll see that there are big Laffer-Curve effects from better tax policy. A study from the American Enterprise Institute found that the revenue-maximizing corporate tax rate is about 25 percent while more recent research from the Tax Foundation puts the revenue-maximizing tax rate for companies closer to 15 percent.

I should hasten to add that the tax code shouldn’t be designed to maximize revenues. But when tax rates are punitively high, even a cranky libertarian like me won’t get too agitated if politicians wind up with more money as a result of lowering tax rates.

You might think that’s a win-win situation. Folks on the right support lower tax rates to get more growth and folks on the left support the same policy to raise more tax revenue.

But there’s at least one person on Washington who wants high tax rates even if they don’t raise additional revenue.

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