Feeds:
Posts
Comments

Archive for the ‘Supply-side economics’ Category

The Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) are congressional bureaucracies that wield tremendous power on Capitol Hill because of their role as fiscal scorekeepers and referees.

Unfortunately, these bureaucracies lean to the left. When CBO does economic analysis or budgetary estimates, for instance, the bureaucrats routinely make it easier for politicians to expand the burden of government spending. The accompanying cartoon puts it more bluntly.

And when JCT does revenue estimates, the bureaucrats grease the skids for anti-growth tax policy by overstating revenue losses from lower tax rates and overstating revenue gains from higher tax rates.

Here are some examples of CBO’s biased output.

The CBO – over and over again – produced reports based on Keynesian methodology to claim that Obama’s so-called stimulus was creating millions of jobs even as the unemployment rate was climbing.

CBO has produced analysis asserting that higher taxes are good for the economy, even to the point of implying that growth is maximized when tax rates are 100 percent.

Continuing a long tradition of under-estimating the cost of entitlement programs, CBO facilitated the enactment of Obamacare with highly dubious projections.

CBO also radically underestimated the job losses that would be caused by Obamacare.

When purporting to measure loopholes in the tax code, the CBO chose to use a left-wing benchmark that assumes there should be double taxation of income that is saved and invested.

On rare occasions when CBO has supportive analysis of tax cuts, the bureaucrats rely on bad methodology.

But let’s not forget that the JCT produces equally dodgy analysis.

The JCT was wildly wrong in its estimates of what would happen to tax revenue after the 2003 tax rate reductions.

Because of the failure to properly measure the impact of tax policy on behavior, the JCT significantly overestimated the revenues from the Obamacare tax on tanning salons.

The JCT has estimated that the rich would pay more revenue with a 100 percent tax rate even though there would be no incentive to earn and report taxable income if the government confiscated every penny.

This means the JCT is more left wing than the very statist economists who think the revenue-maximizing tax rate is about 70 percent.

Unsurprisingly, the JCT also uses a flawed statist benchmark when producing estimates of so-called tax expenditures.

Though I want to be fair. Sometimes CBO and JCT produce garbage because they are instructed to put their thumbs on the scale by their political masters. The fraudulent process of redefining spending increases as spending cuts, for instance, is apparently driven by legislative mandates.

But the bottom line is that these bureaucracies, as currently structured and operated, aid and abet big government.

Regarding the CBO, Veronique de Rugy of Mercatus hit the nail on the head.

The CBO’s consistently flawed scoring of the cost of bills is used by Congress to justify legislation that rarely performs as promised and drags down the economy. …CBO relies heavily on Keynesian economic models, like the ones it used during the stimulus debate. Forecasters at the agency predicted the stimulus package would create more than 3 million jobs. …What looks good in the spirit world of the computer model may be very bad in the material realm of real life because people react to changes in policies in ways unaccounted for in these models.

And the Wall Street Journal opines wisely about the real role of the JCT.

Joint Tax typically overestimates the revenue gains from raising tax rates, while overestimating the revenue losses from tax rate cuts. This leads to a policy bias in favor of higher tax rates, which is precisely what liberal Democrats wanted when they created the Joint Tax Committee.

Amen. For all intents and purposes, the system is designed to help statists win policy battles.

No wonder only 15 percent of CPAs agree with JCT’s biased approach to revenue estimates.

So what’s the best way to deal with this mess?

Some Republicans on the Hill have nudged these bureaucracies to make their models more realistic.

That’s a helpful start, but I think the only effective long-run option is to replace the top staff with people who have a more accurate understanding of fiscal policy. Which is exactly what I said to Peter Roff, a columnist for U.S. News and World Report.

…the new congressional leadership should be looking at ways to reform the way the institution does its business – and the first place for it to start is the Congressional Budget Office. Most Americans don’t know what the CBO is, how it was created or what it does. They also don’t know how vitally important it is to the legislative process, especially where taxes, spending and entitlement reform are concerned. As Dan Mitchell, a well-respected economist with the libertarian Cato Institute, puts it in an email, the CBO “has a number-crunching role that gives the bureaucracy a lot of power to aid or hinder legislation, so it is very important for Republicans to select a director who understands the economic consequences of excessive spending and punitive tax rates.”

Heck, it’s not just “very important” to put in a good person at CBO (and JCT). As I’ve written before, it’s a test of whether the GOP has both the brains and resolve to fix a system that’s been rigged against them for decades.

So what will happen? I’m not sure, but Roll Call has a report on the behind-the-scenes discussions on Capitol Hill.

Flush from their capture of the Senate, Republicans in both chambers are reviewing more than a dozen potential candidates to succeed Douglas W. Elmendorf as director of the Congressional Budget Office after his term expires Jan. 3. …The appointment is being closely watched, with a number of Republicans pushing for CBO to change its budget scoring rules to use dynamic scoring, which would try to account for the projected impact of tax cuts and budget changes on the economy.

So who will it be? The Wall Street Journal weighs in, pointing out that CBO has been a tool for the expansion of government.

…the budget rules are rigged to expand government and hide the true cost of entitlements. CBO scores aren’t unambiguous facts but are guesses about the future, biased by the Keynesian assumptions and models its political masters in Congress instruct it to use. Republicans who now run Congress can help taxpayers by appointing a new CBO director, as is their right as the majority. …The Tax Foundation’s Steve Entin would be an inspired pick.

I disagree with one part of the above excerpt. Steve Entin is superb, but he would be an inspired pick for the Joint Committee on Taxation, not the CBO.

But I fully agree with the WSJ’s characterization of the budget rules being used to grease the skids for bigger government.

In a column for National Review, Dustin Siggins writes that Bill Beach, my old colleague from my days at the Heritage Foundation, would be a good choice for CBO.

…few Americans may realize  that the budget process is at least as twisted as the budget itself. While one man can’t fix it all, Republicans who want to be taken seriously about budget reform should approve Bill Beach to head the Congressional Budget Office (CBO). Putting the right person in charge as Congress’s official “scorekeeper” would be an important first step in proving that the party is serious about honest, transparent, and efficient government. …CBO has several major structural problems that a new CBO director should fix.

Hmm… Entin at JCT and Beach at CBO. That might even bring a smile to my dour face.

But it doesn’t have to be those two specific people. There are lots of well-regarded policy scholars who could take on the jobs of reforming and modernizing the work of JCT and CBO.

But that will only happen if Republicans are willing to show some fortitude. And that means they need to be ready to deal with screeching from leftists who want to maintain their control of these institutions.

For example, Peter Orszag, a former CBO Director who then became Budget Director for Obama (an easy transition), wrote for Bloomberg that he’s worried GOPers won’t pick someone with his statist views.

The Congressional Budget Office should be able to celebrate its 40th anniversary this coming February with pride. …The occasion will be ruined, however, if the new Republican Congress breaks its long tradition of naming an objective economist/policy analyst as CBO director, when the position becomes vacant next year, and instead appoints a party hack.

By the way, it shows a remarkable lack of self-awareness for someone like Orszag to complain about the possibility of a “party hack” heading up CBO.

In any event, that’s just the tip of the iceberg. I fully expect we’ll also see editorials very soon from the New York Times, Washington Post, and other statist outlets about the need to preserve the “independence” of CBO and JCT.

Just keep in mind that their real goal is to maintain their side’s control over the process.

P.S. There’s another Capitol Hill bureaucracy, the Congressional Research Service, that also generates leftist fiscal policy analysis. Fortunately, the CRS doesn’t have any scorekeeper or referee role, so it doesn’t cause nearly as much trouble. Nonetheless, any bureaucracy that produces “research” about higher taxes being good for the economy needs to be abolished or completely revamped.

P.P.S. This video explains the Joint Committee on Taxation’s revenue-estimating methodology. Pay extra attention to the section beginning around the halfway point, which deals with a request my former boss made to the JCT.

P.P.P.S. If you want to see some dramatic evidence that lower tax rates don’t necessarily lead to less revenue, check out this amazing data from the 1980s.

Read Full Post »

Every so often, I see a cartoon or image that provides a teachable moment about economics.

This Wizard-of-Id parody, for instance, contains a lot of insight about labor economics. As does this Chuck Asay cartoon and this Robert Gorrell cartoon.

And if you want to understand Keynesian economics, this Scott Stantis cartoon is a gem, as is the third image in this post (and while there’s no economic substance, this Lisa Benson cartoon about Keynesianism is worth sharing simply because it’s funny).

Regarding the minimum wage, Henry Payne effectively shows – in this cartoon and this cartoon – how mandating above-market wages is very bad news for those with limited skills.

You can also get clear messages about why a welfare state is economically destructive in this classic from Chuck Asay, as well as these home-made cartoons on riding the wagon vs pulling the wagon, which have received more views than anything else I’ve ever posted.

Surprisingly, though, I haven’t seen many cartoons about the economics of tax policy or supply-side economics.

I’ve shared lots of cartoons (see here, here, here, here, here, and here) and one image about class warfare, but they invariably seem to make philosophical or political points.

Same for the cartoons about the value-added tax (here, here, and here). They’re funny, but they’re not teaching any economics.

The only tax-oriented cartoons that have some economic education include this Chuck Asay cartoon includes some basic observations on incentives, but his main point is about vote-buying rather than economics.

The second cartoon in this post makes a good point about taxes driving away economic activity, but it’s probably best categorized as mockery rather than economic education. And these cartoons about corporate inversions also could be categorized that way.

So I’m delighted to share this image a reader sent to me.

I’m not sure why it uses a dinosaur, but it perfectly summarizes the case for supply-side economics.

I’m a big fan of this image for two reasons.

First, I almost always use this example when giving speeches about tax policy. Just about everyone in an audience will understand that politicians commonly argue that we need higher tobacco taxes to discourage smoking. I tell them I don’t think it’s government’s job to dictate our private behavior, but I also tell them the politicians are right: The more you tax of something, the less you get of it. I then point out that the same principle applies to taxes on productive behavior such as work, saving, and investment, which is why tax rates should be as low as possible.

Second, even leftists admit (when it suits their purpose) that taxes impact incentives. President Obama’s former chief economist, for instance, wrote that “all taxes discourage something. Why not discourage bad things…rather than good things, such as working and saving.” Of course, he somehow forgot these insights when Obama was pushing for class-warfare tax hikes as part of the fiscal cliff deal.

P.S. I’m not sure whether these qualify as economically educational, but I heartily recommend this Chuck Asay cartoon on regime uncertainty and this A.F. Branco cartoon on Obama’s hostility to entrepreneurship.

P.P.S. I do have a couple of stories that make insightful and educational points about taxation. And they tend to be very popular. This story on “the tax system explained in beer” is my second-most-viewed post. And the “socialism in the classroom” example about the perils of redistribution is my fifth-most-viewed post.

Read Full Post »

I’m a big advocate of the Laffer Curve.

Simply stated, it’s absurdly inaccurate to think that taxpayers and the economy are insensitive to changes in tax policy.

Yet bureaucracies such as the Joint Committee on Taxation basically assume that the economy will be unaffected and that tax revenues will jump dramatically if tax rates are boosted by, say, 100 percent.

In the real world, however, big changes in tax policy can and will lead to changes in taxable income. In other words, incentives matter. If the government punishes you more for earning more income, you will figure out ways to reduce the amount of money you report on your tax return.

This sometimes means that people will choose to be less productive. Why bust your derrière, after all, if government confiscates a big chunk of your additional earnings? Why make the sacrifice to set aside some of your income when the government imposes extra layers of tax on saving and investment? And why allocate your money on the basis of economic efficiency when you can reduce your taxable income by dumping your investments into something like municipal bonds that escape the extra layers of tax?

Or people can decide to hide some of the money they earn from the grasping claws of the IRS. Contractors can work off the books. Workers can take wages under the table. Business owners can overstate their expenses in order to reduce taxable income.

To reiterate, people respond to incentives. And that means you can’t estimate what will happen to tax revenues simply by looking at changes in tax rates. You also need to look at what’s happening to the amount of income people are willing to both earn and report.

Which is why I’m interested in some new research from two Canadian economists, one from the University of Toronto and one from the University of British Columbia. They looked at how rich people in Canada responded when their tax rates were altered.

Here are some excerpts from the study, published by the National Bureau of Economic Research.

In this paper we estimate the elasticity of reported income using the sub-national variation across Canadian provinces. …Comparing across provinces and through time, we find that elasticities are large for incomes at the top of the income distribution… The provincial tax rates for high earners vary strongly across the country, ranging from a low of 10 percent in Alberta to a high of 25.75 in Quebec. …at the top of the income distribution…these taxpayers have access to substantial financial advice that may facilitate tax avoidance. …We pay particular attention to the categories for $250,000 and those that report income between $150,000 and $250,000 as that income range is the closest to the P99 cutoff on which we focus.

Interestingly, the economists state that upper-income taxpayers should be less sensitive to tax rates today because less of their income is from investments.

…the source of incomes among those at the top has shifted substantially over the last half century from capital income toward earned income. All else equal, this change would tend to make income shifting or tax avoidance more difficult now than in earlier times.

Yet their results suggest that the taxable income of highly productive Canadians (those with incomes in the top 1 percent or the top 1/10th of 1 percent) is very sensitive to changes in tax rates.

The third column has the results for the bottom nine tenths of the top one percent, P99 to P99.9. Here, the estimate is a positive and significant 0.364. Finally, the top P99.9 percentile group shows an elasticity of 1.451, which is highly significant and large. …our estimate of 0.689 for P99 is high, and 1.451 for P99.9 very high.

And because rich people can raise or lower their taxable income in response to changing tax rates, this has big Laffer Curve implications.

According to the research, the revenue-maximizing tax rate for the top 1 percent is 44.4 percent and the revenue-maximizing tax rate for the even more successful top 1/10th of 1 percent is 27.5 percent!

The magnitude of our estimates can be put into context by calculating the revenue-maximizing tax rate τ∗, which is the rate corresponding to the peak of the so-called ‘Laffer Curve’. At this point, an incrementally higher rate will raise no further net revenue as the mechanical effect of the tax increase will be completely offset by the behavioural response of lower taxable income. …Plugging a = 1.81 and e = 0.689 into equation (8) yields an estimate for τ∗ of 44.4 percent. In Figure 1, four provinces have a top marginal tax rate for 2013 under 44.4 percent and six provinces are higher. Using the P99.9 estimate of 1.451, the revenue maximizing tax rate τ∗ would be only 27.5 percent. If true, this would suggest all provinces could increase revenue by lowering the tax rate for those in income group P99.9.

By the way, you read correctly, the revenue-maximizing tax rate for the super rich is lower than the revenue-maximizing tax rate for the regular rich.

This almost certainly is because very rich taxpayers get a greater share of their income from business and investment sources, and thus have more control over the timing, level, and composition of their earnings. Which means they can more easily suppress their income when tax rates go up and increase their income when tax rates fall.

That’s certainly what we see in the U.S. data and I assume Canadians aren’t that different.

But now it’s time for a big caveat.

I don’t want to maximize revenue for the government. Not from the top 1/10th of 1 percent. Not from the top 1 percent. I don’t want to maximize the amount of revenue coming from any taxpayers. If tax rates are near the revenue-maximizing point, it implies a huge loss of private output per additional dollar collected by government.

As I’ve repeatedly argued, we want to be at the growth-maximizing point on the Laffer Curve. And that’s the level of tax necessary to finance the few legitimate functions of government.

That being said, the point of this blog post is to show that Obama, Krugman, and the rest of the class-warfare crowd are extremely misguided when they urge confiscatory tax rates on the rich.

Unless, of course, their goal is to punish success rather than to raise revenue.

P.S. Check out the IRS data from the 1980s on what happened to tax revenue from the rich when Reagan dropped the top tax rate from 70 percent to 28 percent.

I’ve used this information in plenty of debates and I’ve never run across a statist who has a good response.

P.P.S. I also think this polling data from certified public accountants is very persuasive.

I don’t know about you, but I suspect CPAs have a much better real-world understanding of the impact of tax policy than the bureaucrats at the Joint Committee on Taxation.

Read Full Post »

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.

And it’s become apparent, with even the New York Times taking notice, that high tax rates drive away high-achieving people.

We’re going to augment this list with some additional evidence.

In a study published by a German think tank, three economists from the University of Copenhagen in Denmark look at the impact of high marginal tax rates on Danish economic performance.

Here’s what they set out to measure.

…taxation distorts the functioning of the market economy by creating a wedge between the private return and the social return to a reallocation of resources, leaving socially desirable opportunities unexploited as a result. …This paper studies the impact of taxation on the mobility and allocation of labor, and quantifies the efficiency loss from misallocation of labor caused by taxation. …labor mobility responses are fundamentally different from the hours-of-work responses of the basic labor supply model… Our analysis builds on a standard search theoretic framework… We incorporate non-linear taxation into this setting and estimate the structural parameters of the model using employer-employee register based data for the full Danish population of workers and workplaces for the years 2004-2006. The estimated model is then used to examine the impact of different changes in the tax system, thereby characterizing the distortionary effects of taxation on the allocation of labor.

They produced several sets of results, including a look at the additional growth and output generated by moving to a system of lump-sum taxation (which presumably eliminates all disincentive effects).

But even when they looked at more modest reforms, such as a flat tax with a relatively high rate, they found the Danish economy would reap significant benefits.

…it is possible to reap a very large part of the potential efficiency gain by going “half the way”and replace the current taxation with a ‡at tax rate of 30 percent on all income. This shift from a Scandinavian tax system with high marginal tax rates to a level of taxation in line with low-tax OECD countries such as the United States increases total income by 20 percent and yields an efficiency gain measured in proportion to initial income of 10 percent. …a transition from a Scandinavian system with high marginal taxes to a system along the lines of low-tax OECD countries such as the United States. This reduces the rate of non-employment by around 10 percentage points, increases aggregate income by almost 20 percent (relative to the Scandinavian income level), and gives an efficiency gain measured in proportion to income of 9.9 percent. Thus, almost 80 percent of the efficiency loss from marginal taxation (9.7% divided by 12.4%) would be eliminated by shifting from a Scandinavian tax system to the system of a low-tax OECD country according to these estimates.

The authors also confirmed that lower tax rates would generate revenue feedback. In other words, the Laffer Curve exists.

We may also use the reform experiment to compute the marginal excess burden of taxation as described above. When measured in proportion to the mechanical loss of tax revenue, we obtain an estimate of 87 percent. …this estimate also corresponds to the degree of self-financing of the tax cut. Thus, the increase in tax revenue from the behavioral response is 87 percent of the mechanical loss in tax revenue.

Too bad we can’t get the Joint Committee on Taxation in Washington to join the 21st Century. Those bureaucrats still base their work on the preposterous assumption that taxes have no impact on overall economic performance.

Since we just looked at a study of the growth generated by reducing very high tax rates, let’s now consider the opposite scenario. What happens if you take medium-level tax rates and raise them dramatically?

The Tax Foundation looks at precisely this issue. The group estimated the likely results if lawmakers adopted the class-warfare policies proposed by Thomas Piketty.

Piketty suggests higher taxes on the wealthiest among us. He calls for a global wealth tax, and he recommends establishing a top income tax rate of 80 percent, with a next-to-top income tax rate of 50 or 60 percent for the upper-middle class. …This study…provides quantitative estimates of what his proposed tax rates would mean for capital formation, jobs, the level of income, and government revenue. This study also estimates how Piketty’s proposed income tax rates would affect the distribution of income in the United States.

Piketty, of course, thinks that even confiscatory levels of taxation have no negative impact on economic performance.

Piketty claims people (or at least the upper-income people he would tax so heavily) are totally insensitive to marginal tax rates. In his world view, upper-income taxpayers will work and invest just as much as before even if dramatically higher taxes reduce their after-tax rewards to a fraction of what they were previously. …Piketty’s vision of the world strains credulity.

When the Tax Foundation crunched the numbers, though, its experts found that Piketty’s proposal would be devastating.

Under Piketty’s 55 and 80 percent tax brackets, people in the new, ultra-high tax brackets will work and invest less because they will be able to keep so little of the reward from the last hour of work and the last dollar of investment. …As the supplies of labor and capital in the production process decline, the economy’s output will also contract. Although it is only people with upper incomes who will directly pay the 55 and 80 percent tax rates, people throughout the economy will indirectly bear some of the tax burden. For example, the average person’s wages will be lower than otherwise because middle-income workers will have less equipment and software to enhance their productivity, and wages depend on productivity. Similarly, people throughout the economy will have fewer employment opportunities and will lose desirable goods and services, because businesses will grow more slowly and be less innovative.

The magnitude of the damage would depend on whether the higher tax rates also applied to dividends and capital gains. Here’s what the Tax Foundation estimated would happen to the economy if dividends and capital gains were not hit with Piketty-style tax rates.

These are some very dismal numbers.

But now look at the results if tax rates also are increased on dividends and capital gains. The dramatic increase in double taxation (dwarfing what Obama wanted) would have catastrophic consequences for overall investment (the “capital stock”). This would lead to a big loss in jobs and a dramatic reduction in overall economic output.

The Tax Foundation then measures the impact of these policies on the well-being of people in various income classes.

Needless to say, upper-income taxpayers suffer substantial losses. But the rest of us also suffer as well.

…the poor and middle class would also lose. They would suffer a large, but indirect, tax burden as a result of the smaller economy. Their after-tax incomes would fall over 3 percent if capital gains and dividends retain their current-law tax treatment and almost 17 percent if capital gains and dividends are taxed like ordinary income.

And since I’m sure Piketty and his crowd would want to subject capital gains and dividends to confiscatory tax rates, the 17 percent drop is a more realistic assessment of their economic agenda.

Though, to be fair, Piketty-style policies would make society more “equal.” But, as the Tax Foundation notes, some methods of achieving equality are very bad for lower-income people.

…a reasonable question to ask is whether a middle-income family is made better off if their income drops 3.2 percent while the income of a family in the top 1 percent drops 21.0 percent, or their income plummets 16.8 percent while the income of a family in the top 1 percent plummets 43.3 percent.

Of course, if Margaret Thatcher is correct, the left has no problem with this outcome.

But for those of us who care about better lives for ordinary people, this is confirmation that envy isn’t – or at least shouldn’t be – a basis for tax policy.

Sadly, that’s not the case. We’ve already seen the horrible impact of Hollande’s Piketty-style policies in France. And Obama said he would be perfectly content to impose higher tax rates even if the resulting economic damage is so severe that no additional revenue is collected.

Read Full Post »

I wrote a column for the Wall Street Journal last week about the policy debate over whether it’s better to lower tax rates or to provide targeted tax cuts for parents.

Since this meant I was wading into a fight between so-called reform conservatives (or “reformicons”) and traditional conservatives (or “supply-siders”), I wasn’t surprised to learn that not everyone agreed with my analysis.

James Pethokoukis of the American Enterprise Institute, for instance, doesn’t approve of what I wrote.

…why are some folks on the right against giving middle-class families a big tax cut and letting them keep more of what they earn? …Cato’s Dan Mitchell, in a Wall Street Journal commentary today, concedes Stein’s idea would indeed help middle-class families right now… Yet Mitchell still thinks cutting marginal tax rates is the better idea.

Pethokoukis accurately notes that I want lower marginal tax rates because, from my perspective, faster long-run growth would be even more beneficial to middle-class families.

He disagrees and offers five counter-arguments. Here they are (summarized fairly, I hope), along with my response.

1.) House Ways and Means Chairman Dave Camp has put forward tax reform with a top rate of 25% vs. 40% today. Yet his plan would likely increase the economy’s size by less than 1% over the next decade, according to the Joint Tax Committee. …This is not to say lower tax rates aren’t good for economic growth. But marginal rates at those levels are almost certainly already deep on the good side of the Laffer Curve.

I have a couple of reactions.

First, the top tax rate in the Camp plan is 35 percent rather than 25 percent, so we shouldn’t be surprised that the plan doesn’t generate much additional growth.

Second, the JCT’s model is flawed and it should not be given credibility by any supporter of good tax policy. The Tax Foundation has a much better model.

Though it doesn’t really matter in this case because the Tax Foundation analysis of the Camp plan also shows a very weak growth response, largely because the slightly lower tax rates in the Camp plan are “paid for” by increasing the tax burden on saving and investment. Which is why I also wrote that the plan was disappointing.

Regarding the point about the Laffer Curve, the Tax Foundation responded to the Pethokoukis criticism of my column by noting “the Laffer Curve refers to tax revenue, not economic growth. It says there is a tax rate at which tax revenue is maximized. The tax rate at which economic growth is maximized is almost certainly well below that.”

Needless to say, I fully agree. I want to maximize growth, not tax revenue.

Now let’s move to his second point.

2.) And consider this: just how would the GDP gains, such as they are, from cutting top marginal rates be distributed in an economy where middle-wage jobs are disappearing and income gains are tilted toward the highly skilled and educated? The US economy needs to grow faster, but faster growth alone in the Age of Automation may not substantially increase living standards for a larger swath of the American people. That reality is a big difference between the 2010s economy and the 1980s economy, one many on the right have yet to grasp. Cranking up GDP growth is necessary but not sufficient.

If I understand correctly, Pethokoukis is saying that faster growth doesn’t guarantee good jobs for everyone.

I don’t disagree with this point, but I’m not sure why this is a criticism of lower marginal tax rates. Isn’t it better to get some extra growth rather than no extra growth?

Now let’s address the third point from the Pethokoukis column.

3.) Mitchell asserts, “Tax-credit conservatives generally admit that child-oriented tax cuts have few, if any, pro-growth benefits.” That’s not true. …expanding the child tax credit would serve as a sort of human-capital gains tax cut for worker creators (also known as families). It might just be nudge enough for financially-stressed families to have another kid… Modern pro-growth policymakers should fret as much about the nation’s birthrate as productivity and labor-force participation rates. …A younger American society with a higher birth rate, helped by a tax code that offsets anti-family government policy, would be more dynamic, creative, and entrepreneurial.

I’m less than overwhelmed by this argument.

Yes, we have a demographic problem, but more population is merely a way of increasing total GDP, not per-capita GDP. And it’s the latter than matters if we want higher living standards.

In his fourth point, Pethokouis notes that both supply-siders and reformicons agree on policies to reduce the tax burden on saving and investment.

4.) To give Mitchell some credit here, he does acknowledge there is more to the conservative-reform tax agenda than the child tax credit.

Since we both agree, there’s no need to rebut this part of the column.

And I don’t think there’s anything for me to rebut in Pethokoukis’ final point.

5.) Let me add that there is more to the conservative reform agenda for the middle class than just tax reform, including regulatory, health care, K-12, and higher-education reform. And there should be more to the supply-side, pro-growth agenda than cutting marginal tax rates, including reducing crony capitalist barriers — such as Too Big To Fail megabank subsidies… American needs more growth, and worker creators (strong families) are just as important to achieving that as job creators (strong companies). Let’s have both.

Since I’m among the first to acknowledge that fiscal policy is only about 20 percent of what determines a nation’s prosperity, this is an area where I’m on the same page as Pethokoukis.

Reformicon Founding Fathers

Indeed, I wrote last year that there’s much to admire about the agenda of the reformicons.

I just think that they don’t have sufficient appreciation for the value of even small increases in long-run growth.

Let’s close by looking at one sentence from some supposed analysis by Matt O’Brien in the Wonkblog section of the Washington Post.

His column is dedicated to the proposition that Republicans are overly fixated on cutting taxes for the rich. That might be a defensible hypothesis, but I doubt O’Brien has much credibility since he misrepresents my position.

 Daniel Mitchell of the Cato Institute downplays the idea that giving middle-class families more money even helps them, and says Republicans should keep focusing on cutting tax rates.

Just for the record, here’s what I actually wrote about middle-class families in my WSJ piece.

Child-based tax cuts are an effective way of giving targeted relief to families with children… The more effective policy—at least in the long run—is to boost economic growth so that families have more income in the first place. Even very modest changes in annual growth, if sustained over time, can yield big increases in household income. … If good tax policy simply raised annual growth to 2.5%, it would mean about $4,500 of additional income for the average household within 25 years. This is why the right kind of tax policy is so important. …since more saving and investment will lead to increased productivity, workers will enjoy higher wages, including households with children.

Does any of that sound like I’m indifferent to middle-class families? And the first sentence of that excerpt specifically says that the reformicon approach would mean relief to families with kids.

And the entire focus of my column is that supply-side tax policy would be even more beneficial to those households in the long run.

But accurately reporting what I wrote would have ruined O’Brien’s narrative. Sigh.

P.S. I wrote a couple of days ago that France was is a downward spiral because of high-tax statism. A few people have pointed out that French President Francois Hollande has picked a new industry and economy minister, Emmanuel Macron, who famously said that the new 75 percent top tax rate meant that France was “Cuba without the sun.”

Does this change my opinion, these folks have asked. Doesn’t this signal that taxes will start going down?

The answer is no. At best, I think it simply means that Hollande won’t push policy further to the left. But that doesn’t mean we’ll see genuine liberalization and a reduction in the fiscal burden of government.

If you think I’m being pessimistic, just keep in mind this excerpt from a Bloomberg story.

Macron apologized yesterday for his “exaggerated reputation” for free-market thinking.

I hope I’m wrong, but that doesn’t sound like the words of someone committed to smaller government?

Read Full Post »

Some folks on the right in Washington, generally known as reformicons (short for reform conservatives), want the Republican Party to de-emphasize marginal tax rate reductions and instead focus on providing tax relief to parents.

There are many leaders in this movement and, if you want to learn more about the tax proposals being discussed, I specifically recommend the writings of Robert Stein, James Capretta, James Pethokoukis, Ramesh Ponnuru, Yuval Levin, Charles Blahous, Jason Fichtner, and Reihan Salam (and I’m sure I’m unintentionally leaving off many other worthy contributions).

I explained last year what I like (and don’t like) about reform conservatism, but I haven’t specifically analyzed the tax agenda of the reformicons.

Time to rectify that oversight. The Wall Street Journal was kind enough to give me some space so I could share my thoughts on this topic.

I start by outlining the debate, albeit in simplified form because of space constraints.

There’s a policy debate among conservatives in Washington about the best way to cut taxes and reform the tax code. The supply-siders want to replicate the success of Reaganomics with lower marginal tax rates. But there’s also a camp who call themselves “reform conservatives” who want income tax credits or payroll tax cuts explicitly for the purpose of reducing tax liabilities for middle-class parents. The supply-siders argue that if you want to encourage more work, saving, investment and entrepreneurship, then it is a good idea to reduce marginal tax rates on productive behavior. …Those in the other camp…don’t necessarily disagree with the supply-siders. They note that it was important to lower marginal tax rates in 1980 when the top personal tax rate was a confiscatory 70%. But now that the top rate is “only” about 40%, they argue, lower tax rates won’t deliver nearly as much bang for the buck.

The reformicons are right. Dropping the top tax rate from 40 percent will help the economy, but the pro-growth effect won’t be enormous. At least not compared to what happened during the Reagan years when the top tax rate was slashed from 70 percent to 28 percent.

And, as this leftist cartoon suggests, many Republicans act as if across-the-board tax rate reductions are an elixir for every ill.

But can reformicons suggest a better way of cutting and/or reforming taxes?

I’m not convinced that their agenda of child-oriented tax relief is the right answer.

In my column, I note that many of their policies have already been implemented, yet there’s little if any evidence that these tax cuts have generated positive outcomes.

…reform conservatives say it’s time for new ideas. That’s a nice concept, but Republicans already have enacted many of their proposed policies. The child tax credit was adopted in the 1990s and expanded during the Bush years. The earned income credit also funnels a lot of money (in the form of tax relief or cash payments) to families with children, and that provision also has been significantly expanded over the years. These policies have worked, at least in the sense that households with children now face lower tax liabilities. There is little evidence, though, to suggest positive economic or social outcomes. Were families strengthened? Did the economy grow faster? Did middle-income households feel more secure?

The reformicons often argue that their tax proposals are politically more appealing.

That may be true, but that doesn’t mean they are political winners, particularly if reformicons are trying to appease the class-warfare left, which will simply argue that tax cuts targeted at families making less than, say, $100,000 will be even “fairer” if they are targeted at families making less than $50,000.

Or maybe targeted at households who pay no tax, which means more transfer spending through the tax code!

The tax-credit reformers also argue that their proposals are much less susceptible to class-warfare demagoguery that is the supply-side approach, since tax relief flows to lower- and middle-income voters. …But here’s the downside: Conservatives can bend over backward to appease the class-warfare crowd, but they can never outflank them. …Once conservatives have accepted the left’s premise that tax policy should be based on static distribution tables, they won’t have a ready answer for the left’s gambit.

But as far as I’m concerned, the real issue is how to raise take-home pay.

The reformicons want to make families more secure by reducing how much the IRS takes from their paychecks.

I certainly like the idea of boosting post-tax income, but I contend that it would be even better to focus on policies that increase pre-tax income.

The most commonly cited reason for family-based tax relief is to raise take-home pay. That’s a noble goal, but it overlooks the fact that there are two ways to raise after-tax incomes. Child-based tax cuts are an effective way of giving targeted relief to families with children… The more effective policy—at least in the long run—is to boost economic growth so that families have more income in the first place. Even very modest changes in annual growth, if sustained over time, can yield big increases in household income. … long-run growth will average only 2.3% over the next 75 years. If good tax policy simply raised annual growth to 2.5%, it would mean about $4,500 of additional income for the average household within 25 years. This is why the right kind of tax policy is so important.

In other words, our economy is under-performing and that is the greatest threat to the financial security of families.

Folks on the left say it is the fault of “secular stagnation” and that the burden of government should be further expanded, but both reformicons and supply-siders agree that we’ll get far better results by focusing on tax cuts.

But which tax cuts?

I end my column with some glass-half-full analysis. The reformicons may not be thrilled by lower income tax rates and the supply-siders may not be excited by child-oriented tax cuts, but both camps are quite sympathetic to tax reforms that address the punitive double taxation of income that is saved and invested.

While the camps disagree on lower individual income tax rates vs. child-oriented tax relief, both agree that the tax code’s bias against capital formation is very misguided. The logical compromise might be to focus on reforms that boost saving and investment, such as lowering the corporate tax rate, reducing the double taxation of dividends and capital gains, and allowing immediate expensing of business investment. These reforms would have strong supply-side effects. And since more saving and investment will lead to increased productivity, workers will enjoy higher wages, including households with children.

To be sure, some critics will say this type of tax agenda is too “business friendly,” which is an indirect way of saying that average voters may not understand how they benefit from tax reforms that don’t have a big and fast impact on their paychecks.

So maybe the right answer is to rip up the entire tax code and replace it with a simple and fair flat tax.

Read Full Post »

If you appreciate the common-sense notion of the Laffer Curve, you’re in for a treat. Today’s column will discuss the revelation that Francois Hollande’s class-warfare tax hikes have not raised nearly as much money as predicted.

And after the recent evidence about the failure of tax hikes in Hungary, Ireland, Detroit, Italy, Portugal, the United Kingdom, and the United States, this news from the BBC probably should be filed in the category of “least surprising story, ever.”

The French government faces a 14bn-euro black hole in its public finances after overestimating tax income for the last financial year. French President Francois Hollande has raised income tax, VAT and corporation tax since he was elected two years ago. The Court of Auditors said receipts from all three taxes amounted to an extra 16bn euros in 2013. That was a little more than half the government’s forecast of 30bn euros of extra tax income.

And why have revenues been sluggish, generating barely half as much money as the politicians wanted? For the simple reason that Hollande and the other greedy politicians in France failed to properly anticipate that higher tax rates on work, saving, investment, and entrepreneurship would discourage productive behavior and thus lead to less taxable income.

…economic growth has been inconsistent and the unemployment rate hit a record high of 11% at the end of 2013. The French economy saw zero growth in the first three months of 2014, compared with 0.2% growth three months earlier. The income tax threshold for France’s wealthiest citizens was raised to 75% last year, prompting some French citizens, including the actor Gerard Depardieu, to leave the country and seek citizenship elsewhere in Europe.

But we do have some good news. A French politician is acknowledging the Laffer Curve!

French Prime Minister Manuel Valls, who was appointed in March following the poor showing of Mr Hollande’s Socialists in municipal elections, appeared to criticise the president’s tax policy by saying that “too much tax kills tax”.

By the way, France’s national auditor also admitted that tax hikes were no longer practical because of the Laffer Curve. Heck, taxes in France are so onerous that even the EU’s Economic Affairs Commissioner came to the conclusion that tax hikes were reducing taxable income.

Though here’s the most surprising thing that’s ever been said about the Laffer Curve.

…taxation may be so high as to defeat its object… given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget.

And I bet you’ll never guess who wrote those words. For the answer, go to the 6:37 mark of the video embedded in this post.

P.S. Just in case you’re not convinced by the aforementioned anecdotes, there is lots of empirical evidence for the Laffer Curve.

  • Such as this study by economists from the University of Chicago and Federal Reserve.
  • Or this study by the IMF, which not only acknowledges the Laffer Curve, but even suggests that the turbo-charged version exists.
  • Or this European Central Bank study showing substantial Laffer-Curve effects.
  • Or this research from the American Enterprise Institute about the Laffer Curve for the corporate income tax.

P.P.S. For other examples of the Laffer Curve in France, click here and here.

P.P.P.S. To read about taxpayers escaping France, click here and here.

P.P.P.P.S. On a completely different subject, here’s the most persuasive political ad for 2014.

I realize the ad doesn’t include much-needed promises by the candidate to rein in the burden of government, but I’m a bit biased. And in a very admirable way, so is Jack Kingston.

Read Full Post »

Older Posts »

Follow

Get every new post delivered to your Inbox.

Join 2,508 other followers

%d bloggers like this: