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Archive for the ‘Taxation’ Category

Since I’ve accused the Congressional Budget Office of “witch doctor economics and gypsy forecasting,” it’s obvious I’m not a big fan of the organization’s approach to fiscal analysis.

I’ve even argued that Republicans shouldn’t cite CBO when the bureaucrats reach correct conclusions on policy (at least when such findings are based on bad Keynesian methodology).

So nobody should be surprised that I think the incoming Republican majority should install new leadership at CBO (and the Joint Committee on Taxation as well).

So why, then, are some advocates of smaller government – such as Greg Mankiw, Keith Hennessey, Alan Viard, and Michael Strain – arguing that Republicans should keep the current Director, Doug Elmendorf, who was appointed by the Democrats back in 2009?

Before answering that question, let’s look at some of what was written today for the Washington Post’s Wonkblog.

After a series of highly-regarded conservatives voiced their support for Doug Elmendorf, the director of the Congressional Budget Office whose term is up in January, Elmendorf haters fired back on Friday, urging Republicans to jettison the Democratic appointee as soon as possible. …This argument is advanced most forcefully in an open letter to GOP congressional leaders by Grover Norquist of Americans for Tax Reform, who…is most famous as the author of the anti-tax pledge that binds virtually every Republican in Congress never to vote to raise taxes. So why is Norquist against Elmendorf? For one thing, because CBO, under Elmendorf, has not demonized higher taxes. Instead, the agency promotes a “Failed Keynesian Economic Analysis,” Norquist says, that asserts that “higher taxes are good for the economy, even to the point of implying that growth is maximized when tax rates are 100 percent.”

And where did Grover get the idea that CBO believes that ever-higher taxes lead to more growth?

Umm…well, from something I wrote.

As evidence, Norquist points to a 2010 post by the Cato Institute’s Dan Mitchell, titled “Congressional Budget Office Says We Can Maximize Long-Run Economic Output with 100 Percent Tax Rates.” “I hope the title of this post is an exaggeration,” Mitchell writes, “but it’s certainly a logical conclusion based on” CBO’s claim that paying down the national debt — regardless of whether it’s through higher taxes or lower government spending — would be a good thing for the economy. “There’s nothing necessarily wrong with CBO’s concern about deficits,” Mitchell goes on. But “what’s missing from CBO’s analysis is any recognition or understanding that the real problem is excessive government spending.” In other words, what’s missing is conservative ideology about fiscal policy.

I have two reactions, one minor and one major.

My minor point is that the author of the piece is supposed to be a neutral, even-handed reporter, yet she refers to opponents of Elmendorf as “haters” and she implies that we’re simply upset because CBO’s analysis is missing “conservative ideology about fiscal policy.”  Given that she was writing for Wonkblog, which is more akin to an editorial page, there’s nothing wrong with being opinionated. But ask yourself whether someone with such hostility can be impartial when doing straight news stories.

My major point is about policy. Why is my concern about the size of government characterized as “ideology” while we’re supposed to believe CBO’s analysis is “scrupulously impartial” even though it produced analysis which implies you maximize growth with 100 percent tax rates?!?

If my views are blind ideology, then why is there research showing the economic damage of excessive government from international bureaucracies such as the World Bank and European Central Bank? And why are there studies about the harmful economic impact of government spending from the International Monetary Fund and the Organization for Economic Cooperation and Development? Nobody has ever accused these institutions of being hotbeds of libertarian thought.

But perhaps I’m not being fair to CBO. Did the bureaucrats really imply, as part of their analysis on what would happen to the economy if the Bush tax cuts were allowed to expire, that you maximize growth with 100 percent tax rates?

You can read my original post, which holds up very well four years later. And here’s some of what I wrote yesterday to someone who asked me to justify my views on the issue.

…let’s focus on the “subsequent years,” when CBO projectst that GDP would be lower with extended tax cuts. …I’m happy to be corrected, but my reading is that CBO was stating that fiscal balance is the tail that wags the economic dog. The extended tax cuts cause larger deficits, and CBO says that these larger deficits will divert national saving from productive investment and lead to lower output. But if the tax burden is higher, as in the baseline forecast, then deficits are lower and more saving is available for productive investment and output is higher. As far as I’m aware, CBO didn’t have any limiting language back then to suggest that higher tax rates led to growth, but only up to X point. So I think I was on solid ground in asserting the CBO’s analysis implied that ever-higher tax rates led to ever-higher growth.

Seems reasonable. Moreover, I strongly suspect the Wonkblog reporter would have found several people to condemn me had I over-stated the implications of CBO’s analysis.

Now let’s return to the issue of whether Mr. Elmendorf should be re-appointed. Which fiscal conservatives are correct, the ones who want to keep him or the ones who want him replaced?

I’m in the latter category, as explained here, but Elmendorf’s defenders make plenty of good points.

The bottom line is that he is a nice guy (based on my limited interactions), a thoughtful economist, and he has been a big improvement over his predecessor. Indeed, he’s almost certainly the best CBO Director ever appointed by Democrats.

Here’s an analogy that may help make sense of this issue. Elmendorf’s predecessor was a doctrinaire leftist named Peter Orszag. If Orszag’s policy views were a country, they would be France or Greece. By contrast, I’m guessing that Elmendorf would be like Sweden or Germany.

In other words, he wants more government than I do, but at least Elmendorf basically understands that there’s no such thing as a free lunch. He realizes 2+2=4, and he’s aware that there are tradeoffs. And since his arrival, CBO has been much better on issues such as the adverse impact of higher marginal tax rates and the debilitating effect of higher transfer payments.

That being said, while it’s much better to be Sweden rather than Greece, I obviously would prefer to be Hong Kong (or, even better, pre-1913 America).

Though, to continue the analogy, the best I can probably hope for is that Republicans appoint someone akin to Australia or Switzerland.

P.S. For more information about the economics of deficits and fiscal balance, here’s a video I narrated for the Center for Freedom and Prosperity.

P.P.S. The Congressional Research Service made the same argument about higher taxes being pro-growth, asserting in 2010 that “The expiration of the tax cuts would nevertheless reduce the budget deficit, absent other policy changes, which economic theory predicts would have a positive effect on the economy in the long run.”

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Tax competition is a very important tool for constraining the greed of the political class. Simply stated, politicians are less likely to impose bad tax policy if they are afraid that jobs and investment (and accompanying tax revenue) will move to jurisdictions with better tax policy.

This works to limit revenue grabs by politicians at the state level and it works to control the craving for money on the part of politicians at the national level.

But this doesn’t mean all forms of tax competition are equally desirable.

If a country lowers overall tax rates on personal income or corporate income in hopes of attracting business activity, that’s great for prosperity. If a jurisdiction seeks faster growth by reducing double taxation – such as lowering the tax rate on capital gains or abolishing the death tax, that’s also very beneficial.

Some politicians, however, try to entice businesses with special one-off deals, which means one politically well-connected company gets a tax break while the overall fiscal regime for other companies stays the same (or even gets worse).

That’s corrupt cronyism, not proper tax competition.

With this in mind, let’s consider the growing controversy about tax planning by multinational companies. There’s lot of controversy, both in the United States and in Europe, about whether companies are gaming the system.

The most recent kerfuffle deals with Luxembourg, which is accused of having a very friendly regime for business taxation.

Syed Kamall, a Tory member of the European Parliament, has a column in the Wall Street Journal Europe about the right kind of corporate tax competition.

It seems to have come as a great shock to many in the European Parliament that Luxembourg may have encouraged multinational companies to domicile there to pay lower taxes. I’m not sure where these members of parliament have been living for the past 20 years.

What worries Syed is that many European politicians want to use the news from Luxembourg as an excuse to push tax harmonization.

…an agenda of EU-wide tax harmonization…is rapidly gaining popularity in some quarters despite being exactly the wrong prescription for Europe. …tax harmonization…would hang the “Closed for Business” sign at Europe’s border. Tax competition across the single market helps keep tax rates competitive and drives inward investment. The Organization for Economic Co-operation and Development has said that “the ability [of companies] to choose the location of economic activity offsets shortcomings in government budgeting processes, limiting a tendency to spend and tax excessively.”

By the way, the OECD is a big proponent of tax harmonization, so it’s especially noteworthy that even those bureaucrats admitted that tax competition constrains greedy government.

You can click here for further examples of OECD economists admitting that tax competition is necessary and desirable, notwithstanding the anti-market policies being advocated by the political appointees who run the institution.

And since we’re discussing the merits of tax competition, we should point out that Mr. Kamall also mentioned those benefits.

The clearest example of that came with the tax reductions enacted by Margaret Thatcher and Ronald Reagan in the 1980s. Those tax-rate cuts in the U.K. and U.S. forced other industrialized nations to cut their average top marginal rate for personal income to 42% today from more than 67% in 1980 simply to remain competitive, according to the Adam Smith Institute. Tax competition has driven down the average top rate for corporate income in the developed world to less than 27% today from 48% in 1980. Tax competition in Europe encouraged many EU members from the former Soviet bloc to enact flat taxes, which have benefitted them substantially. …it’s important for leaders to keep making the case that tax-policy competition within the single market has been good for Europe.

And he correctly warns that tax harmonization would be a vehicle for higher tax burdens.

Imposing uniform rates under a harmonized system would turn the EU into a convoy that can move only as fast as the slowest ship. Europe’s tax rate would be only as low as the highest-taxing member. …A harmonized tax system would encourage companies and investors to seek new solutions outside the EU in order to avoid paying what would inevitably be higher, French-style levels of European taxation.

And if you don’t believe Mr. Kamall, just look at what’s happened over the past couple of years in Europe.

Last but not least, Syed points out that there is a pro-growth way of improving tax compliance.

The best way to cut down on tax avoidance is to cut tax rates and simplify tax codes. That way people and companies would be willing and able to pay their money to Europe’s exchequers, rather than paying accountants to find loopholes.

But that would require politicians to be responsible, so don’t hold your breath.

So what’s the bottom line? Is there a good way of identifying the desirable forms of tax competition that should be defended.

The simple answer is that it’s always a good idea to compete with lower tax rates that apply to all taxpayers. That’s true for tax rates on companies and households.

The more complex (but equally important) answer is that it’s also good to compete by having a properly designed tax system. On the business side, that means expensing instead of depreciation and territorial taxation rather than worldwide taxation. For households, it means having the proper definition of income so that there’s no longer pernicious discrimination against saving and investment.

Misguided tax competition, by contrast, exists when there are very narrow preferences that apply to a small handful of powerful taxpayers.

For more information on the general topic, here’s my video on the virtues of tax competition.

P.S. My support for tax competition is so intense that I even try to bring the message to unfriendly audiences, such as Capitol Hill and the New York Times.

P.P.S. Heck, my support for tax competition is so intense that I almost got tossed in a third-world jail. That’s true dedication!

P.P.P.S. In you admire hypocrisy, you’ll be very impressed that many rich statists utilize tax havens to protect their money even though they want you to give more of your income to government.

P.P.P.P.S. Speaking of hypocrisy, the main anti-tax competition international organization gives its bureaucrats tax-free salaries.

P.P.P.P.P.S. Since I just mentioned the OECD, I should note that it has a project to curtail business tax competition. They claim that their intention is to go after misguided forms of tax competition, but I’m not surprised that the real goal is to simply extract more money from companies.

P.P.P.P.P.P.S. I’m not sure how to classify this final bit of information, but it’s surely worth mentioning that Bill Clinton defends corporate tax competition. As does Bono.

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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.

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I don’t pretend that tax reform, by itself, will create economic Nirvana.

After all, the experts who measure economic policy and economic performance say that only about 20 percent of a nation’s prosperity is determined by fiscal policy.

Nonetheless, I’m a big fan of simple and fair tax systems such as the flat tax. Not only because I think we will get more growth, but also because I want to rein in the power of the IRS and reduce corruption in Washington.

So did the Republican wave in the mid-term elections make reform more likely?

Interestingly, the normally left-leaning Washington Post editorial page seems to have the right attitude about the issue.

There is broad agreement that the Internal Revenue Code is an unfair, inefficient mess and that the solution is to lower marginal rates and apply them to a broader base of income. A simpler code, purged of its market-distorting loopholes, would foster economic equality and economic growth, both of which the United States desperately needs.

So does the election make reform more likely?

Does the rise of a newly elected Republican Senate change that calculus? We’d say that it might… To be sure, Democrats want tax reform to raise money; Republicans want cuts. Still, a good deal of work has already been done on basic principles of a tax overhaul by Democrats and Republicans in both houses of Congress. …With a strong push from Mr. Obama, early in the new Congress, they might just be willing to finish the job their predecessors started.

I suspect the Washington Post is being far too optimistic about bipartisan compromise.

Not only would lawmakers have to overcome the big divide over whether reform should produce more revenue for Washington or less money for Washington, but there’s also a big divide on how to properly measure income.

And don’t forget that Obama (unlike the Washington Post) wants higher marginal tax rates because of his class-warfare ideology.

But maybe I’m just being a pessimist.

Scott Hodge of the Tax Foundation, for instance, also offers a semi-optimistic assessment about the possibility of reform.

One of the most obvious questions from Tuesday’s election results is: what does this mean for tax reform? I think it certainly enhances the prospects of Congress and the president reaching a grand bargain on overhauling the tax code… Starting in January 2015, expect the new chairmen of the House Ways and Means Committee and the Senate Finance Committee begin holding a series of hearings on various aspects of reforming the tax system and the numerous “off-the-shelf” options available to them—such as the Flat Tax, X-Tax, FairTax, Cash Flow Tax, and the Camp draft. …Considering the energy to reform the tax code in both the House and Senate, it is quite possible that lawmakers could deliver a comprehensive tax reform bill to President Obama’s desk in 2015.

Scott makes several other points, including the long-overdue need to reform the biased revenue-estimating methodology of the Joint Committee on Taxation.

However, he also acknowledges that President Obama very likely would veto good tax reform. So even though our economy needs a less-destructive tax code, folks shouldn’t hold their breath expecting it to happen in the next two years.

I also addressed the topic as part of a recent forum at the Heritage Foundation, and I outlined several issues that have to be addressed if there is a serious effort to pursue tax reform. Here’s my part of the presentation.

But if you don’t want to watch me pontificate for ten-plus minutes, particularly since the video quality isn’t that great, here are my key points:

1. The tax base matters. If you don’t fix the double taxation of saving and investment, you may as well not even bother.

2. Bold beats timid. This is why I think a pure flat tax actually is more realistic than a proposal, such as Lee-Rubio, that makes compromises in hopes of being more politically realistic.

3. Highlight international competitiveness. Simply stated, globalization increases the benefits of good policy and increases the costs of bad policy.

4. International bureaucracies hinder good policy. Good tax reform is based on taxing income only once and only taxing income earned inside national borders, yet the OECD wants to impose global rules based on extra-territorial double taxation.

5. Good tax reform is good health reform. The biggest genuine loophole in the tax code is for fringe benefits, and this is a big reason for the third-party-payer crisis in healthcare.

6. Fix the biased scorekeeping of the JCT. The Joint Committee on Taxation uses methodology that it farther to the left than Paul Krugman.

7. Growth trumps fairness. The left will always use class-warfare arguments against good policy and the only effective counter-argument is that economic growth benefits all taxpayers.

One final point. Folks often ask me about plans – such as the Fair Tax – that would abolish the income tax and instead collect revenue with a national sales tax.

That approach is theoretically sound, but I have some practical concerns based on my distrust of politicians.

P.S. Here’s some humorous fallout from the election. Hitler learns that Democrats lost the Senate.

Hitler parody videos have appeared many places in recent years. Here are my favorites.

The head of the National Socialist Workers Party gets a double-dose – here and here – of bad news about Obamacare.

Here’s Hitler learning about Europe being downgraded.

And here’s the Fuehrer finding out that Scott Walker prevailed in his fight against government bureaucrats in Wisconsin.

P.P.S. I shared some cartoons before the election with the theme that Obama has been bad news for the Democratic Party.

Now that the election is over, that theme is even more appropriate.  Here’s Glenn McCoy’s assessment of the change Obama delivered.

Robert Ariail has a similar perspective.

In other words, as I suggested back in 2012, lots of non-leftist people should be happy that Obama got reelected.

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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.

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Wow, Barack Obama and the Democrats suffered a thermonuclear butt kicking. This was 1994 and 2010 put together.

When the dust settles after recounts and run-offs, it appears that the GOP will have picked up 9 Senate seats. That’s one more than I predicted, and I thought I was probably overstating the GOP wave.

The House results are equally remarkable. There are a handful of close races that haven’t yet been decided, but it seems that Republicans will control at least 246 seats and may even hit or exceed my prediction of 249 seats. And that estimate at the time was way too high, based on what almost all the experts were predicting.

So what lessons, if any, can we learn from these results (other than that I do a decent job of predicting mid-term elections)?

1. Obama has been a disaster for his party. At their high point in 2009, Democrats controlled 60 seats in the Senate and 257 seats in the House of Representatives. But thanks to unpopular and misguided policies such as Obamacare and the faux stimulus, the President created conditions for GOP landslides in 2010 and 2014. And don’t forget that Republicans also have made huge gains in state legislatures during Obama’s presidency. I already joked that libertarians were going to give the President a “man of the year” award for reawakening interest in the principles of liberty, but Republicans may want to give him an even bigger award and make it official rather than satirical.

2. Obamacare is still deeply unpopular. It appears that at least 17 Democratic Senators since 2010 have been replaced by anti-Obamacare Republicans. That’s a remarkably large number of casualties. And don’t forget what happened to House Democrats in 2010. Some advocates of government-run healthcare claim that voters are no longer agitated about Obamacare and that Republicans didn’t make it a big issue. But if that’s the case, why did Republicans dramatically increased their focus on Obamacare as the elections got closer?

If you want an example of whistling past the graveyard, considering this blurb from an article in The Hill last April.

White House senior adviser Dan Pfeiffer on Sunday rejected the suggestion that Republicans will take control of the Senate in the midterm elections, saying that the GOP argument to repeal ObamaCare is a “political loser.”

I wonder what he would say if asked about Obamacare today?

3. The government shutdown was almost certainly a net plus for the GOP. Back in 2011, I explained that Republicans could play hard ball, largely based on what really happened during the 1995 government shutdown. And in 2013, I again defended a shutdown, pointing out that voters probably wouldn’t even notice that some government offices were closed, but they would remember that the GOP was branding itself as the anti-Obamacare party. The establishment, by contrast, thought the shutdown was a disaster for Republicans. Here’s some of what one academic wrote last October.

…the shutdown leveled the House playing field in a rather unexpected manner. …in a Congressional election today, Democrats would retake the House with >90% probability and a 50-seat margin.

And remember that many establishment Republicans felt the same way, excoriating Senator Cruz and others who wanted a line-in-the-sand fight over government-run healthcare. The moral of the story isn’t that shutdowns necessarily are politically desirable, but rather that it’s very important for a political party to find visible ways of linking itself to popular causes (such as ending Obamacare, fighting big government, etc).

4. Voters still hate taxes. I’m stunned that Governor Brownback won reelection in Kansas, but I’m even more surprised that pro-tax Democrat gubernatorial candidates lost in deep-blue states such as Maryland, Illinois, and Massachusetts. The one common theme is that voters – when given a real option – generally prefer candidates who will let them keep more of their money. We also can learn something by reviewing the outcome of various ballot initiatives. By a 2-1 margin, Tennessee voters amended their constitution to prohibit an income tax from every being adopted. And by a 3-1 margin, Georgia voters made sure the top tax rate could never be raised. On the other hand, more than 60 percent of voters in Illinois voted for an advisory referendum that called for a class-warfare tax hike (even though they voted for a governor who will block that from happening).

A few other observations.

Scott Walker’s victory, along with the outcome of gubernatorial races in places such as Michigan and Illinois, suggests that unionized state bureaucrats no longer have carte blanche to pillage taxpayers. Or at least they no longer have the necessary political muscle to endlessly line their pockets at the expense of the overall electorate.

Rand Paul gets points for the most clever political satire of the evening, popularizing the #hillaryslosers hashtage along with some amusing images. Here’s the one for Kentucky.

Let’s close by reveling in some Schadenfreude. Here are some excerpts from a story in the Washington post in early 2013.

President Obama…is taking the most specific steps of his administration in an attempt to ensure the election of a Democratic­-controlled Congress in two years. …Obama, fresh off his November reelection, began almost at once executing plans to win back the House in 2014, which he and his advisers believe will be crucial to the outcome of his second term and to his legacy as president. …Obama has committed to raising money for fellow Democrats, agreed to help recruit viable candidates, and launched a political nonprofit group dedicated to furthering his agenda and that of his congressional allies. The goal is to flip the Republican-held House back to Democratic control, allowing Obama to push forward with a progressive agenda on gun control, immigration, climate change and the economy during his final two years in office… Obama has committed to eight fundraisers for the Democratic Congressional Campaign Committee this year… The president has also pledged to put his formidable campaign organization, now known as Organizing for Action, behind Democratic House candidates and to find ways to share its rich trove of voter data with the party’s campaign committee. …“If 2012 was a referendum on President Obama, then 2014 will be a referendum on the tea party Congress,” Israel said. “And the president and House Democrats are joined at the hip on this.”

Gee, things didn’t exactly turn out the way Obama hoped.

But Congressman Israel was right. Obama and the Democrats were joined at the hip.

Now the big question is whether voters will get a clear choice between big government and small government in 2016. If they do, this hypothetical poll shows the outcome.

But if it’s another Tweedle Dee vs Tweedle Dum election, then Washington’s ruling class will win regardless.

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According to the bean counters at Ernst and Young, the United States has one of the highest capital gains tax rates in the world.

But if you don’t trust the numbers from a big accounting firm, then you can peruse a study from the pro-tax Organization for Economic Cooperation and Development that reaches the same conclusion.

But does this really matter? Is the United States harmed by having a high tax rate?

The Wall Street Journal certainly makes a compelling case that high tax rates on capital gains are self-destructive.

And this remarkable chart shows that workers are victimized when there is less investment.

Let’s add to all this evidence.

Jason Clemens, Charles Lammam, and Matthew Lo have produced a thorough study for the Fraser Institute about the economic impact of capital gains taxation.

A capital gain (or loss) generally refers to the price of an asset when it is sold compared to its original purchase price. A capital gain occurs if the value of the asset at the time of sale is greater than the initial purchase price. …Capital gains taxes, of course, raise revenues for government but they do so with considerable economic costs. Capital gains taxes impose costs on the economy because they reduce returns on investment and thereby distort decision making by individuals and businesses. This can have a substantial impact on the reallocation of capital, the available stock of capital, and the level of entrepreneurship.

It turns out that there are many reasons why the capital gains tax harms economic performance. Clemens, Lammam, and Lo explain the “lock-in effect.”

Capital gains are taxed on a realization basis. This means that the tax is only imposed when an investor opts to withdraw his or her investment from the market and realize the capital gain. One of the most significant economic effects is the incentive this creates for owners of capital to retain their current investments even if more profitable and productive opportunities are available. Economists refer to this result as the “lock-in” effect. Capital that is locked into suboptimal investments and not reallocated to more profitable opportunities hinders economic output. …Peter Kugler and Carlos Lenz (2001)…examined the experience of regional governments (“cantons”) in Switzerland that eliminated their capital gains taxes. The authors’ statistical analysis showed that the elimination of capital gains taxes had a positive and economically significant effect on the long-term level of real income in seven of the eight cantons studied. Specifically, the increase in the long-term level of real income ranged between 1.1 percent and 3.0 percent, meaning that the size of the economy was 1 percent to 3 percent larger due to the elimination of capital gains taxes.

Then the authors analyze the impact of capital gains taxes on the “user cost” of capital investment.

Capital gains taxes make capital investments more expensive and therefore less investment occurs. …Several studies have investigated the link between the supply and cost of venture capital financing and capital gains taxation, and found theoretical and empirical evidence suggesting a direct causality between a lower tax rate and a greater supply of venture capital. …Kevin Milligan, Jack Mintz, and Thomas Wilson (1999) sought to estimate the sensitivity of investment to changes in the user cost of capital…and found that decreasing capital gains taxes by 4.0 percentage points leads to a 1.0 to 2.0 percent increase in investment.

Next, they investigate the impact on entrepreneurship.

Capital gains taxes reduce the return that entrepreneurs and investors receive from the sale of a business. This diminishes the reward for entrepreneurial risk-taking and reduces the number of entrepreneurs and the investors that support them. The result is lower levels of economic growth and job creation. …Analysing the stock of venture capital and tax rates on capital gains from 1972 to 1994, Gompers and Lerner found that a one percentage point increase in the rate of the capital gains tax was associated with a 3.8 percent reduction in venture capital funding.

Last but not least, the authors also discuss the impact of capital gains taxation on compliance costs, administrative costs, and tax avoidance. They also look at the marginal efficiency cost of capital gains taxation and report on some of the research in that area.

Dale Jorgensen and Kun-Young Yun (1991)…estimate the marginal efficiency costs of select US taxes and find that capital-based taxes (such as capital gains taxes) impose a marginal cost of $0.92 for one additional dollar of revenue compared to $0.26 for consumption taxes. …Baylor and Beausejour find that a $1 decrease in personal income taxes on capital (such as capital gains, dividends, and interest income) increases society’s well-being by $1.30; by comparison, a similar decrease in consumption taxes only produces a $0.10 benefit. …the Quebec government’s Ministry of Finance…found that a reduction in capital gains taxes yields more economic benefits than a reduction in other types of taxes such as sales taxes. Reducing the capital gains tax by $1 would yield a $1.21 increase in the GDP.

Here’s my video on the topic, which explains that the right capital gains tax rate is zero.

The bottom line is that the United States is shooting itself in the foot.

Or, to be more accurate, politicians are hobbling America’s productive sector  and undermining U.S. competitiveness with senseless class-warfare taxation.

And don’t forget that the United States compounds the damage with the world’s highest corporate tax rate, pervasive double taxation of dividends, and a punitive death tax.

So while some countries are doing the right thing and abolishing their capital gains taxes, the United States is languishing in the international contest for more investment.

The only “good news” is that a few other nations also impose foolish policies as well.

P.S. It’s worth noting that all good tax reforms, such as the flat tax, completely abolish the capital gains tax.

P.P.S. This is yet another example of first-rate research from the Fraser Institute. They’re the publishers of Economic Freedom of the World, as well as some excellent research on the harmful impact of excessive government spending.

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