The IMF Is the Doctor Kevorkian of Global Economic Policy

I don’t like giving international bureaucrats tax-free salaries. And it really galls me when they use their privileged positions to promote statism.

So you can understand why I’m not a big fan of the International Monetary Fund.

Dr. Kevorkian: “My assisted suicide campaign would have been much more efficient if I worked at the IMF”

Whether we’re talking more spending, more taxes, more bailouts, or more centralization and harmonization, it seems that the IMF is the Dr. Kevorkian of the global economy.

Or, since Doctor Kevorkian faded from the headlines more than 10 years ago, perhaps it would be better to say that the International Monetary Fund is the Doctor Gosnell of global economic policy.

But I don’t want to get into issues of assisted suicide or post-birth abortions, so let’s just say that the IMF has a very disturbing habit of recommending bad policy. Here are just a few of the items I’ve flagged over the past couple of years.

• Endorsing government cartels to boost tax and regulatory burdens.
• Trying to undermine flat tax systems in Albania and Latvia.
• Encouraging a “collective response” to over-spending in welfare states.
• Pushing for higher tax burdens in Greece.
• Seeking the same destructive policy in Cyprus.
• Advocating for more centralization and bureaucratic rule in Europe.
• Urging higher taxes in El Salvador.
• Supporting “eurobonds” so that taxpayers from other nations can subsidize the profligacy of welfare states such as Greece, Italy, and Spain.

But you need to give the bureaucrats credit for sticking to their guns.

We have more and more evidence with each passing day that Keynesian economics doesn’t work. President Bush imposed a so-called stimulus plan in 2008 and President Obama imposed an even  bigger “stimulus” in 2009. Based upon the economy’s performance over the past five-plus years, those plans didn’t work.

Japan has spent the past 20-plus years imposing one Keynesian scheme after another, and the net effect is economic stagnation and record debt. Going back further in time, Presidents Hoover and Roosevelt dramatically increased the burden of government spending, mostly financed with borrowing, and a recession became a Great Depression.

That’s not exactly a successful track record

Yet the IMF is undaunted. The bureaucrats are pushing Keynesian snake oil and bigger government all across Europe.

Here are some details from a Wall Street Journal report. about the IMF’s promotion of assisted suicide in Central Europe.

The International Monetary Fund is recommending short-term stimulus for much of Central Europe, where economies are going through their roughest patch in years and the recession in the euro zone has dampened hopes for a quick recovery. …Increased government spending to stimulate economic activity and create jobs is therefore warranted, he said. “Short-term economic policies should be geared toward supporting the economy and not creating an additional drag.” …Amid spending cuts, the countries’ fortunes reversed recently.  …the Czech Republic should ease up on fiscal austerity and embark on pro-growth spending, the leader of the IMF’s Czech mission said. …The IMF also has been encouraging looser monetary policy in both Poland and the Czech Republic.

Gee, not just more Keynesianism, but easy money as well!

The IMF also is pushing bad policy on the Brits (though I’m not sure why they’re bothering since the statist government of David Cameron hardly needs any help in that regard).

Here are some details from the EU Observer.

The UK should delay plans to push through further austerity measures worth £10 billion (€12 billion), the International Monetary Fund (IMF) warned on Wednesday. …The extra cuts would “pose headwinds to growth…..at a time when resources in the economy are under-utilised,” said the Washington-based institution. Instead, the IMF urged London to bring forward plans to invest in infrastructure projects… The government “could undertake a reform of property taxes and consider broadening the VAT base” to pay for the measures.

What’s remarkable is that the IMF isn’t even intellectually honest about its Keynesian proclivities. They’re happy to advocate for more spending, but honest Keynesians also should be against tax hikes. Yet the bureaucrats proposed a couple of tax hikes to “pay for the measures.”

In other words, the IMF agenda is bigger government – with more taxes and more spending.

Which raises the question of why all of us are paying for a bloated bureaucracy that simply tells politicians to implement bad policies? Particularly since politicians have demonstrated over and over again that they’re immensely qualified at concocting their own bad policies?

P.S. To be fair, I should admit that there are rare bits of sanity from the economists at the IMF. They’ve acknowledged, for instance, that the Laffer Curve is real and warned that it makes no sense to push taxes too high. And some of the bureaucrats have even admitted that it sometimes makes sense to reduce the burden of government spending. And even though it wasn’t their intention, IMF bureaucrats provided very strong evidence showing why the value-added tax is a destructive money machine for big government.

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Rand Paul Debunks the Shameful Demagoguery against Apple

Senator Rand Paul is perhaps even better than I thought he would be.

The Founding Fathers would be proud

He already is playing a very substantive role on policy, ranging from his actions of big-picture issues, such as his proposed budget that would significantly shrink the burden of government spending, to his willingness to take on lower-profile but important issues such as repealing the Obama Administration’s wretched FATCA law.

But he also plays a very valuable role by articulating the message of liberty and refusing to allow leftist politicians to claim the moral high ground and use false morality to cloak their greed for other people’s money.

And there’s no better example than what he just did at the Senate hearing about Apple’s tax burden.

Wow. I thought I hit on the key issues in my post on the anti-Apple demagoguery, but Senator Paul hit the ball out of the park.

If you want other video examples of Senator Paul in action, click here to see him grill a TSA bureaucrat and click here to see him rip an Obama appointee on whether Americans should be free to choose the light bulb they prefer.

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Four Reasons to Applaud Apple’s Tax Planning

The Senate is holding a Kangaroo Court designed to smear Apple for not voluntarily coughing up more tax revenue than the company actually owes.

Here are four things you need to know.

Apple is fully complying with the tax law. There is no suggestion that Apple has done anything illegal. The company is being berated by politicians for simply obeying the law that politicians have enacted. What’s really happening, of course, is that the politicians are conducting a show trial in hopes of creating an environment more conducive to tax increases on multinational companies (this is in addition to the OECD effort to impose higher tax burdens on multinational firms).

Left-wing whining

It is better for Apple to retain its profits than it is for politicians to grab the money. If Harry Reid, Barack Obama, and the rest of the crowd in Washington are able to use this fake issue as an excuse to raise taxes, the only things that changes is that the tax system becomes more onerous and politicians have more money to spend. Neither of those results are good for growth, particularly compared to the potential benefits of leaving the money in the productive sector of the economy.

Apple shouldn’t pay any tax to the IRS on any of its foreign-source income. A few years ago, Google was criticized for paying “only” 2.4 percent tax on its foreign-source income, but I explained that was 2.4 percentage points too high. Likewise, when Apple earns money overseas, that should not trigger any tax liability to the IRS since the income already is subject to all applicable foreign taxes (much as, say, Toyota pays tax to the IRS on its US-source income). Good tax policy is based on the common-sense notion of “territorial taxation,” which means governments only tax income and activity within their national borders. Unfortunately, the American tax system is partially based on the anti-competitive policy of “worldwide taxation,” which means the IRS gets to tax income that is earned – and already subject to tax – in other nations. Fortunately, we have a policy called “deferral,” which allows companies to postpone this second layer of tax.

If Apple is trying to characterize US-source income into foreign-source income, that’s because the US corporate tax system is anti-competitive. Multinational companies often are accused of “abusing” transfer-pricing rules on intra-company transactions to inappropriately turn US-source income into foreign-source income. To the extent this happens (and always with IRS approval), it is because the American corporate tax rate is now the highest in the developed world (and the second highest in the entire world), so companies naturally would prefer to reduce their tax burdens by declaring income elsewhere. So the only pro-growth solution is lowering the corporate tax rate.

It’s worth noting, by the way, that the Tax Foundation recently estimated that the revenue-maximizing corporate tax rate is 14 percent.

So if the anti-Apple lynch mob actually wants more revenue, they should learn a Laffer Curve lesson and slash the corporate tax rate.*

*I want to maximize growth, not maximize revenue.

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Lucky French Taxpayers Get an Obama-Style Flat Tax

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

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

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

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

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

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

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

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

No wonder successful people are fleeing the country.

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

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

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

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

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

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Question of the Week: Quit Dodging the Issue and Tell Us the Revenue-Maximizing Point on the Laffer Curve

I feel like I’m on the witness stand and I’m being badgered by a hostile lawyers. Readers keep asking me to identify the revenue-maximizing point on the Laffer Curve.

But I don’t like that question. In the past, I’ve explained that the growth-maximizing point on the Laffer Curve is where enough revenue is raised to finance the legitimate – and limited – functions of government.

And one of the earliest posts on this blog explained that we don’t want to maximize tax revenue.

But I still get versions of this question, including a few that accuse me of dodging the issue.

So what the heck, I may as well give an answer to the question. But I won’t give my answer. Instead, I’ll provide the analysis of a Nobel Prize winner.

James Mirrlees won the Nobel Prize in Economics in 1996 and he’s researched this issue, starting with a left-of-center perspective.

Many economists, including Mirrlees, want to use the tax system to achieve a higher degree of equality than would otherwise obtain. This means taking a substantial amount of the additional income of high-income people, which would imply high marginal tax rates on them. But when the government imposes such high marginal tax rates on the highest-income people, it reduces the incentive of the most productive people to be productive. …Economists have long wanted to figure out the optimum, but until Mirrlees’s work no one had been able to solve it.

And what did Mirrlees find? Well, notwithstanding his own preferences, he calculated that the tax rate should be no higher than 20 percent.

Mirrlees started with no presumption against high marginal tax rates. Indeed, he has been an adviser to Britain’s Labour Party, which for decades imposed marginal tax rates in excess of 80 percent. But Mirrlees found that the top marginal tax rate should be only about 20 percent; and moreover, it should be about the same 20 percent for everyone. In short, Mirrlees’s work justified what is now known as a “flat tax,” more appropriately called a “flat tax rate.” Mirrlees wrote, “I must confess that I had expected the rigourous analysis of income taxation in the utilitarian manner to provide arguments for high tax rates. It has not done so.”

Not only a rate of 20 percent, but a flat tax!

Too bad the Labour Party politicians don’t listen to his advice. Heck, the Conservative Party politicians don’t follow his advice either.

But at least we have a rigorous estimate of the revenue-maximizing point on the Laffer Curve.

Though I hasten to add that it’s not the ideal tax rate. As the risk of being repetitive, the tax system should only fund the legitimate functions of government. For much of our history, the government only consumed about 10 percent of economic output and we didn’t need any broad-based tax. So you know where I stand.

That being said, it’s clearly destructive to have tax rates that are above both the growth-maximizing level and the revenue-maximizing level. And that’s where we stand now.

For more information, here’s my video on the Laffer Curve.

And if you want to learn specifically why Obama’s class-warfare agenda is misguided, here’s my Laffer-Curve-lesson-for-Obama post.

P.S. The Tax Foundation has estimated that the revenue-maximizing corporate tax rate is 14 percent.

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UFOs, Faked Moon Landings, and Fiscal Policy

I was very pleased to report the other day that the people of France overwhelmingly favor spending cuts, even when they were asked a biased question that presupposed that Keynesian-style spending increases would “stimulate” the economy.

Now I have some polling data about British voters, though I confess I’m not sure whether to be pleased or worried.

You’ll see below two slides that were presented earlier today at the Bucharest stop on the Free Market Road Show. They’re not from my presentation, but rather from the speech by Matthew Sinclair of the UK-based Taxpayers Alliance.

As you can see from this first slide, the good news is that only 12 percent of British people think government taxes and spends too little.

On the other hand, it’s a bit worrisome that nearly 1-in-5 Brits believe in UFOs.

What a bunch of idiots.

Then again, nearly 1-in-3 Americans believe that higher taxes would be used for deficit reduction instead of more spending, and that’s an even more preposterous conclusion.

So I shouldn’t make fun of our English cousins.

Here’s some more good-news/bad-news polling data.

The good news is that only 12 percent of Brits think that the government can pay promised benefits (and I bet that number would fall even lower if they saw this shocking data on the U.K.’s long-run fiscal outlook).

The bad news is that 13 percent of Brits think the moon landings were faked.

But since 17 percent of Americans actually admit to having positive feelings about the federal government, I’m reluctant to throw stones since my country is a glass house.

Let me close on a positive note. I’ve expressed considerable pessimism about the future of the United Kingdom, and I think the current leadership of the supposed Conservative Party is terrible.

But maybe there’s reason to hope. It wasn’t that long ago that I shared a very encouraging story from England about civil disobedience against a revenue-hungry government.

And now we know from Matthew’s data that the British people have appropriately jaundiced views of their government.

So perhaps if they ever find another Margaret Thatcher, there’s a 5-percent chance that they can pull themselves back from the fiscal abyss.

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OECD Study Admits Income Taxes Penalize Growth, Acknowledges that Tax Competition Restrains Excessive Government

I have to start this post with a big caveat.

OECD bureaucrats get tax-free salaries but urge higher taxes for everyone else

I’m not a fan of the Paris-based Organization for Economic Cooperation and Development. The international bureaucracy is infamous for using American tax dollars to promote a statist economic agenda.

Most recently, it launched a new scheme to raise the tax burden on multinational companies, which is really just a backdoor way of saying that the OECD (and the high-tax nations that it represents) wants higher taxes on workers, consumers, and shareholders.

But the OECD’s anti-market agenda goes much deeper.

• The OECD has allied itself with the nutjobs from the so-called Occupy movement to push for bigger government and higher taxes.
• The OECD, in an effort to promote redistributionism, has concocted absurdly misleading statistics claiming that there is more poverty in the US than in Greece, Hungary, Portugal, or Turkey.
• The OECD is pushing a “Multilateral Convention” that is designed to become something akin to a World Tax Organization, with the power to persecute nations with free-market tax policy.
• The OECD supports Obama’s class-warfare agenda, publishing documents endorsing “higher marginal tax rates” so that the so-called rich “contribute their fair share.”
• The OECD advocates the value-added tax based on the absurd notion that increasing the burden of government is good for growth and employment.

Now that there’s no ambiguity about my overall position, I can admit that the OECD isn’t always on the wrong side. Much of the bad policy comes from its committee system, which brings together bureaucrats from member nations.

The OECD also has an economics department, and they sometimes produce good work. Most recently, they produced a report on the Swiss tax system that contains some very sound analysis – including a rejection of Obama-style class warfare and a call to lower income tax burdens.

Shifting the taxation of income to the taxation of consumption may be beneficial for boosting economic activity (Johansson et al., 2008 provide evidence across OECD economies). These benefits may be bigger if personal income taxes are lowered rather than social security contributions, because personal income tax also discourages entrepreneurial activity and investment more broadly.

I somewhat disagree with the assertion that payroll taxes do more damage than VAT taxes. They both drive a wedge between pre-tax income and post-tax consumption.

But the point about income taxes is right on the mark.

Interestingly, the report also endorses tax competition as a means of restraining the burden of government spending.

Evidence also suggests that tax autonomy may lead to a smaller and more efficient public sector, helping to limit the tax burden and improve tax compliance… Efficiency-raising effects of tax autonomy and tax competition on the public sector have also been reported in empirical research with Norwegian and German data… Tax autonomy generates opportunities to choose the level of public service provision and taxation, although in practice such “voting with your feet” seems mostly limited to young, highly educated and high-income households. Decentralised tax setting also fosters benchmarking of the performance of jurisdictions belonging to the same government level by voters, even in the absence of “voting with your feet”.

The report also notes that tax competition has reduced corporate tax rates.

Tax competition is likely to have contributed significantly to lowering corporate tax rates in Switzerland over the past 25 years. Indeed, empirical evidence shows that the responsiveness of sub-national governments to tax changes of other subnational governments (“tax mimicking”) is the strongest in the case of corporate taxation (Blöchliger and Pinero Campos, 2011). …Progressive corporate income taxes harm incentives for businesses to grow. Since growing businesses are likely to be high performers in terms of productivity, such disincentives are likely to hit high-performing businesses the most, with losses to aggregate productivity performance, which has been modest in Switzerland relative to best-performing high-income countries.

P.S. This isn’t the first time the economists at the OECD have broken ranks with the political hacks that generally control the bureaucracy. In a 1998 Economic Outlook (see page 166), they wrote that “the ability to choose the location of economic activity offsets shortcomings in government budgeting processes, limiting a tendency to spend and tax excessively.”

And in another publication (see page 1), the economists noted that “legal tax avoidance can be reduced by closing loopholes and illegal tax evasion can be contained by better enforcement of tax codes. But the root of the problem appears in many cases to be high tax rates.”

These passages sound like they could have been authored by Pierre Bessard!

P.P.S. I hasten to add that none of this justifies handouts from American taxpayers to the Paris-based bureaucracy any more than occasional bits of rationality from the World Bank (on government spending), IMF (on the Laffer Curve), or United Nations (also on the Laffer Curve) justify subsidies to those organizations.

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Tax and Expenditure Limits: The Challenge of Turning Mitchell’s Golden Rule from Theory into Reality

The main goal of fiscal policy should be to shrink the burden of government spending as a share of economic output. Fortunately, it shouldn’t be too difficult to achieve this modest goal. All that’s required is to make sure the private sector grows faster than the government.

But it’s very easy for me to bluster about “all that’s required” to satisfy this Golden Rule. It’s much harder to convince politicians to be frugal. Yes, it happened during the Reagan and Clinton years, and there also have been multi-year periods of spending discipline in nations such as Estonia, New Zealand and Canada.

But these examples of good fiscal policy are infrequent. And even when they do happen, the progress often is reversed when a new crop of politicians take power. Federal spending has jumped to about 23 percent of GDP under Bush and Obama, for instance, after falling to 18.2 percent of economic output at the end of the Clinton years.

This is why many advocates of limited government argue that some sort of external force is needed to somehow limit the tendency of politicians to over-tax and over-spend.

I’ve argued on many occasions that tax competition is an important mechanism for restraining the greed of the political class. But even in my most optimistic moments, I realize that it’s a necessary but not sufficient condition.

Another option is budget process reform. If you can somehow convince politicians to tie their own hands (in the same way that alcoholics can sometimes be convinced to throw out all their booze), then perhaps rules can be imposed that improve fiscal policy.

But what sort of rules? Europe has “Maastricht” requirements that theoretically limit deficits and debt, and 49 states have some sort of balanced budget requirement, but these policies have been very unsuccessful – perhaps because they mistakenly focus on the symptom of red ink rather than the underlying disease of government spending.

Are there any budget process reforms that do work? Well, I’ve written about Switzerland’s “debt brake,” which has generated some good results over the past 10 years because it actually imposes an annual spending cap.

Some American states also impose expenditure limits. Have they been successful?

Unfortunately, they usually don’t seem to do a good job of controlling spending. Here are some key passages from a new study by Benjamin Zycher from the American Enterprise Institute.

…tax and expenditure limits (TELs) vary substantially in terms of their details, definitions, and underlying structures, but the empirical finding reported here is simple and powerful: TELs are not effective. …The ineffectiveness of TELs is unambiguous in terms of summary statistics, case-study examination of the records of several individual states, and estimation of an econometric model. This model was estimated for both state and local spending combined and state outlays considered alone.

The author finds some positive impact, but it’s unclear whether the results are meaningful…or durable.

In terms of the growth rates of per capita outlays, 20 of the 30 states display a decline in that growth rate during the periods when the respective TELs were effective, but none of those differences is statistically significant. …to the (highly limited) extent that spending limits prove effective, they are likely to be subject to erosion driven by the same political factors that yield the fiscal pressures.

Though three states seem to have generated genuine budgetary savings.

Among the 30 states with TELs in effect during 1970–2010, the econometric analysis finds that only three of those limits had the effect of reducing total outlays, by approximately 4–6.5 percent. This evidence does not provide grounds for optimism that an emphasis on spending limits would prove useful in terms of reducing long-term fiscal pressures.

Looking at all the evidence, Zycher is not very optimistic about expenditure limits, though he does recognize the valuable role of tax competition.

…a TEL is unlikely by itself to reverse the underlying conditions that yield expanding government. In particular, the incentives of interest groups to circumvent and neutralize the effects of TELs are unsurprising; that may be one central lesson from the California and Washington experiences. Future efforts to restrain the growth in government spending may find greater success if they are directed at increasing competition… One obvious way to achieve this is to strengthen the institutions of federalism, thus forcing states and localities to compete with each other.

Other researchers also have looked at tax and expenditure limits, so let’s see whether they have different perspectives.

Matt Mitchell (no relation) has a slightly more optimistic assessment. Here’s some of what he wrote in a study for the Mercatus Center.

…some varieties of TELs can decrease state spending as a share of state income, but the effect is small—in the range of about 2 to 3 percent. …Certain characteristics can make TELs more effective. These include constitutional (as opposed to statutory) codification, a focus on spending rather than on revenue, a provision that automatically and immediately refunds surpluses, and—of particular importance—a provision that requires either a supermajority vote or a public vote for override.

Here are some of his specific findings.

Weak TELs…tend not to impact state spending very much in either low or high-income states. At best, they decrease spending by about 1/10 of one percentage point in low-income states. At worst, they increase spending by less than 1/100 of one percentage point in high-income states. The most-stringent TELs, on the other hand, do have an appreciable impact on state spending. …Those TELs that limit budgets to inflation plus population growth seem to limit combined state and local spending. In states with this variety of TEL, state and local spending as a share of state income is about 6/10 of a percentage point less than in other states (this is a 3-percent difference relative to the average state and local spending share). …This variety of TEL is often favored by advocates of limited government because it is particularly restrictive (the sum of inflation and population growth is typically less than income growth).

Michael New of the University of Michigan-Dearborn also found that the design of a TEL makes a big difference. Here are some excerpts from his study, which was published in the State Politics and Policy Quarterly.

…most TELs have been enacted by state legislatures, and it is not clear that legislators have the incentive to reduce their autonomy by placing meaningful constraints on their own behavior. …Conversely, TELs enacted through citizen initiatives are likely to be drafted by interest groups that actually possess an interest in limiting state spending, giving them considerably greater potential for effectiveness.

Here are some of his results.

Why has Colorado’s TABOR been more effective than other fiscal limits? …the results of Models 2 and 4, which categorize TELs based on how they were adopted, lend considerable support to my hypothesis. These models indicate that TELs enacted by citizen initiative are the most effective at limiting the size of government. Model 2 predicts that after a TEL is passed by a citizen initiative, annual growth in per capita state and local expenditures will be reduced by $35.70. Similarly, Model 4 predicts that the annual growth in per capita state and local revenues will be reduced by $35.64. Both findings are statistically significant.

Professor New’s research shows that it is very important to limit spending so it grows at inflation plus population rather than letting it climb as fast as personal income.

…holding increases in expenditures to increases in personal income is a relatively easy threshold for a state to maintain. …During the early 1990s, however, two states enacted TELs with a lower limit. Both Colorado’s Taxpayer’s Bill of Rights (TABOR) and Washington state’s Initiative 601 (I-601) established a limit of inflation plus population growth. …Table 4 provides further evidence that strong TELs have been able to restrict government growth. Holding other factors constant, strong TELs annually reduce growth in both state expenditures and state revenues by over $100 per capita. …Both the coefficient for TABOR and the coefficient for I-601 are negative in all four regressions and statistically significant in three of the four. …My analysis provided solid evidence that these two TELs were even more effective at restraining expenditures and revenues as demonstrated by both statistical analysis and case studies.

Some people would conclude from the research of Zycher, Mitchell, and New that spending limits are not very effective. But that’s a hasty conclusion. The real lesson is that spending limits work, but only if they actually limit spending so that it grows slower than personal income, just as suggested by my Golden Rule.

In other words, spending limits are like speed limits in school zones. They are only effective if they’re set low enough to actually protect taxpayers and children.

This debate reminds me of the intellectual fight over the starve-the-beast hypothesis. Some have argued that tax cuts are not an effective way of limiting spending. But the research actually shows that tax cuts are an effective way of “starving the beast” if lawmakers don’t subsequently raise taxes.

The bottom line is that expenditure limits – if properly designed and enforced – are an effective way of controlling government spending. That doesn’t mean that politicians won’t figure out ways to over-spend, just like locks on doors don’t always stop burglars. But both are better than the alternative of no limits or no locks.

In prior posts, I’ve shared research showing that the United States today would be very close to a balanced budget if we had implemented something akin to the Swiss Debt Brake.

So far as I know, there’s no legislation to impose a spending cap specifically modeled on the Swiss system, but I’ve previously noted that Senator Corker’s CAP Act and Congressman Brady’s MAP Act both have sequester-enforced spending limits.

And the good news about sequestration is that the savings are real, unlike the gimmicks that you get when the politicians are in charge of “cutting” spending.

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Going Galt: More Americans Vote with their Feet against Obama

I’ve written many times about how investors, entrepreneurs, small business owners and other successful people migrate from high-tax states to low-tax states.

Well, the same thing happens internationally, as France’s greedy politicians are now learning.

It’s a lot harder for Americans to escape our tax system, though, in part because of reprehensible exit taxes that are disturbingly reminiscent of some of the awful policies of past totalitarian regimes.

But it still happens, and that’s a very damning indictment of Obamanomics and a worrying referendum on the future of the United States. Here are some blurbs from a recent Fortune article.

Americans are ditching their U.S. passports in record numbers, a sign of growing frustration with a system that taxes U.S. citizens on their global wealth whether they live in Montana or Mongolia. …on the list, published quarterly by the Internal Revenue Service, is Isabel Getty, the daughter of jet-setting socialite Pia Getty and Getty oil heir Christopher Getty. In total, more than 670 U.S. passport holders gave up their citizenship — and with it, their U.S. tax bills — in the first three months of this year. That is the most in any quarter since the I.R.S. began publishing figures in 1998. And it is nearly three-quarters of the total number for all of 2012, a year in which the wealthy songwriter-socialite Denise Rich (christened “Lady Gatsby” by Yachting magazine) and Facebook co-founder Eduardo Saverin joined more than 932 other Americans in tossing their passports. …Expatriations first picked up pace in 2010, when more than 1,530 Americans dumped their passports.

The problem is particularly serious for Americans who live and work overseas. The United States is one of the few nations (and the only developed nation) to have “worldwide” taxation, which means overseas Americans have to pay tax to the IRS as well as to the nation where they live.

And thanks to laws such as “FATCA,” that burden just became far more onerous.

While dumping citizenship may seem unpatriotic or smack of tax avoidance to some critics, tax lawyers blame the byzantine complexity of American tax regulations. The rules “are confusing, complex, and so complicated that even Americans with good intentions can easily find themselves running afoul of the law,” said Jeffrey Neiman, a former federal prosecutor who was involved in the government’s offshore banking probe and is now in private practice in Fort Lauderdale, Fla. “This very well may explain why we are seeing a record number of Americans renouncing their United States citizenship.”

No wonder more and more people are escaping Obamanomics.

The good news, by the way, is that Senator Rand Paul has introduced legislation to repeal the worst parts of FATCA.

But that’s not going to happen while Obama’s still in the White House, so let’s focus on the Americans who are “going Galt.”

I have mixed feelings about these rich people. Many of them did nothing to help the fight for liberty while they were U.S. citizens.

And notwithstanding my post about where I would go if America suffers a Greek-style fiscal collapse, I suspect I’ll stay in the United States and fight until my last breath. So I get a little bit irked that they escape and leave the rest of us to deal with the mess created by our political elite.

Nonetheless, I strongly believe that all individuals have the right to protect themselves from predatory government.

And when you add up the various forms of double taxation in the internal revenue code (particularly the death tax), it makes little sense for families with high net worth to stay in the United States when there are many jurisdictions around the world that will welcome them with open arms.

In other words, let’s not blame the victims and castigate Americans who redomicile in jurisdictions with better tax policy. Let’s fix the awful internal revenue code with a flat tax.

P.S. I’m ashamed to admit that France has a more pro-liberty policy on tax migration than the United States.

P.P.S. But that may not last too long. Other nations are looking to copy America’s disgraceful worldwide tax approach.

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Following in Geithner’s Footsteps, Treasury Secretary Lew Urges Bad Fiscal Policy in other Nations

Political insiders remember Tim Geithner for his role in promoting the bailout culture and crony capitalism in Washington.

Comedians remember him for the laughable hypocrisy of urging higher taxes for others while cheating on his own tax return.

But I mostly think of him as being the Forrest Gump of international economics.

This was the guy, after all, who unintentionally caused Chinese students to burst out laughing in 2009 when he claimed the Obama Administration supported a strong dollar.

And Europeans told him to get lost when he tried to lecture them on fiscal policy in 2011. But don’t think they were being rude. They already had to endure his bad advice earlier that year and back in 2010 as well.

Well, Geithner’s successor apparently is equally oblivious. He’s badgering the Germans to adopt Keynesian policies to “stimulate” growth, even though the Germans are doing better than most other European nations – in part because they are one of the few nations that have reduced the burden of government spending in recent years!

Here are some blurbs from the EU Observer on Treasury Secretary Lew’s attempt to export bad ideas.

US treasury secretary Jack Lew will repeat calls for Germany to stimulate demand in order to drag the eurozone out of recession, according to US government sources. …The US stance is likely to meet resistance from the German government, which is reluctant to increase wages and stimulate domestic spending, preferring instead to keep wages low to encourage manufacturing and exports. But Berlin is under pressure to reduce its 7 percent export surplus. In April, Lew used his first trip to Berlin as Treasury Secretary to urge counterpart Wolfgang Schaueble to put in place measures to stimulate consumer spending. For his part, Schaueble commented that neither the US or Germany should try to give “lessons” or “grades” to each other.

I’m actually in favor of giving “lessons” and “grades” to governments, but not if it’s a case of the blind leading the blind.

This is not to say that Germany has good fiscal policy. Indeed, the best that can be said about the Merkel government is that it hasn’t moved Germany much further in the wrong direction in recent years.

The Obama Administration, by contrast, is moving the United States in the wrong direction at faster pace, so the last thing the Germans need is advice from Treasury Secretary Lew or anyone else associated with the White House.

P.S. If you want some unintentional humor, the Washington Post referred to Germany as being “fiscally conservative.”

P.P.S. As you can see here and here, there’s little reason to be optimistic about the intellectual climate in Germany.

P.P.P.S. But at least we have some amusing videos involving Germany, as you can see here, here, and here.

P.P.P.P.S. Geithner also should be remembered for pushing through an IRS regulation that forces American banks to put foreign tax law above U.S. tax law.

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Why the So-Called Marketplace Fairness Act Is a Misguided Expansion of Power for State Governments

I’m either a total optimist or a glutton for punishment. I recently explained the benefits of “tax havens” for the unfriendly readers of the New York Times.

Now I’m defending a different form of tax competition for CNN, another news outlet that leans left. In this case, the topic is whether states can reach beyond their borders for tax revenue.

Here’s some of what I wrote about the so-called Marketplace Fairness Act that was just approved by the Senate and presumably will soon be considered by the House. I start by explaining that the powers of governments should be constrained by borders.

Let’s assume you live in Utah, Hawaii or South Carolina, and you go to Nevada for a vacation. While in Las Vegas, you spend some money in the casinos. Gambling is illegal in the state where you live, so should the cops in your home state be able to track your activities and arrest you for what happened in Nevada? The answer, needless to say, is no. Or at least it should be no. Common sense tells us that state laws should only apply to things that happen inside a state’s borders. But this sensible principle is being tossed out the window by the U.S. Senate, which has approved a proposal that would give states the ability to impose their taxes on out-of-state sellers.

I also explain that this issue isn’t about whether the Internet should be taxed. Indeed, as a fan of the flat tax, I don’t want special favors or special penalties in the tax code. Internet profits and Internet sales should face the same (ideally low) taxes as all other sectors of the economy.

Instead, the fight is really about whether a state government has the right to force out-of-state merchants to act as deputy tax collectors. If you believe that borders should limit the power of governments, the answer is no.

But that rubs politicians the wrong way.

…some governors and state legislators don’t like this system because many states don’t bother imposing any tax on sales to out-of-state consumers. And even if states levied taxes on sales to out-of-state consumers, what about the five states that don’t have any sales tax? Wouldn’t those states become “tax havens” for Internet sales? For these reasons, some politicians fret that the Internet will put competitive pressure on them to keep their sales tax rates from getting too high.

But this is exactly why politicians shouldn’t be allowed to tax beyond their borders. We want tax competition in order to limit the greed of the political class.

States with no payroll income taxes, such as Nevada, Florida, Tennessee, Texas and New Hampshire, help restrain the greed of politicians in states that have punitive income tax systems, such as California, Illinois, New York and Massachusetts. And if politicians in the high-tax states refuse to adjust their bad tax policies, then people should have the freedom to escape and earn income in other states. The same principle applies to sales taxes. If politicians in, say, Arizona are worried that consumers will go online or travel across the border to avoid the punitive sales tax, then they should reduce their sales tax rate.

So what’s the bottom line?

Politicians can choose to maintain uncompetitive tax systems, of course, but they also should be prepared to accept the consequences. I don’t think California and Illinois should try to become the France and Greece of America, but that’s something for the voters of those states to figure out for themselves. In any event, they shouldn’t have the right to force out-of-state sellers to act as deputy tax collection officials if they decide to impose bad tax policy. …To be blunt, a sales tax cartel is bad news for tax policy and bad news for privacy. Let’s limit the power of state governments so they can only screw up things inside their own borders.

Let’s close on a light note. Here’s a clever cartoon from Nate Beeler.

I agree with the cartoon’s message, at least to the extent that onerous taxes can be very deadly to an industry. But, as noted above, I don’t want special tax-free status for the Internet.

So the ideal cartoon would show lots of surfers from all industries exercising the freedom to pick the waves with the smallest and least destructive sharks. Some might even call that federalism.

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Huge Value-Added Tax Increases in Europe Show Why Washington Politicians Should Never Be Given a New Source of Tax Revenue

The most important, powerful, and relevant argument against the value-added tax in the short run is that we can balance the budget in just five years by capping spending so it grows at the rate of inflation, a very modest level of fiscal restraint.

The most important, powerful, and relevant argument against the value-added tax in the long run is that more than 100 percent of America’s long-term fiscal problem is too much spending.

So why even consider giving politicians a new source of revenue such as the VAT, particularly since this hidden form of national sales tax helped cause the European fiscal crisis by facilitating a bigger welfare state?*

And now Europeans are doubling down on that failed approach, thus confirming that politicians will rarely make necessary spending reforms if they think more revenue can be squeezed from taxpayers.

Here’s a chart taken from the recent European Commission report on taxation trends in the EU. As you can see, the average VAT rate in Europe has jumped by nearly 2 percentage points in just five years.

As I explained last week, European politicians also have been increasing income tax rates, so taxpayers are getting punished when they earn their income and they’re getting punished when they spend their income.

Which helps to explain why much of Europe is suffering from economic stagnation. Given the perverse incentives created by redistributionist fiscal policy, it makes more sense to climb in the wagon of government dependency.

For more information, here’s my video that describes the VAT and explains why it’s a bad idea.

*The same thing is now happening in Japan.

P.S. I don’t know if you’ll want to laugh or cry, but the tax-free bureaucrats at the Organization for Economic Cooperation and Development actually argue that the VAT is good for jobs and growth.

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Preposterous Waste, Pentagon Style

National defense is one of the few legitimate functions of the federal government, but that doesn’t mean the military should get a blank check to spend unlimited amounts of money.

To make sure taxpayers get the best bang for the buck (no pun intended), there should be a sober assessment of threats to national security and a plan to defend against those threats without adding superfluous expenditures.

That being said, America already accounts for close to 50 percent of world military spending, with another 25 percent of the global total coming from nations that are allied to the United States, so I’m fairly confident that we’re not under-spending on the Pentagon.

That’s one of the reasons I don’t worry that much about the sequester, particularly since military spending actually climbs by about $100 billion over the next 10 years.

But I would like the Defense Department to have some flexibility to reallocate funds so that we spend money on national security rather than boondoggles.

And there are some absurd examples of waste at the Pentagon, including “green” jet fuel that costs 15 times as much as regular fuel. Here are some of the mind-boggling details from the Washington Examiner.

Defense Secretary Chuck Hagel recently warned that sequestration would cause “suspension of important activities, curtailed training, and could result in furloughs of civilian personnel” but the spending cuts haven’t killed the green fuels program, as the Pentagon has continued purchasing renewable fuel at $59 per gallon. “In March, Gevo entered into a contract with the Defense Logistics Agency to supply the U.S. Army with 3,650 gallons of renewable jet fuel to be delivered by the second quarter of 2013,” Gevo announced this week in its first quarter financial report. “This initial order may be increased by 12,500 gallons.

This is even worse than the bizarre $600,000 frog statue than the Defense Department selected to adorn a new $700 million office building.

I realize that the $700 million office building should be the bigger issue, but I can’t help but be irked by the thought that taxpayers are being raped and pillaged for the frog.

In any event, the $700 million for the office building is pocket change compared to the amount of money we misallocate to subsidize Western Europe to protect against a Warsaw Pact military alliance that no longer exists!

Yes, it’s true that America’s main fiscal problem is entitlement spending. And, yes, domestic discretionary spending is a bigger problem than the defense budget.

But wasting money in those areas is not a reason to also have waste at the Pentagon.

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Where Are the European Spending Cuts?

Paul Krugman recently tried to declare victory for Keynesian economics over so-called austerity, but all he really accomplished was to show that tax-financed government spending is bad for prosperity.

More specifically, he presented a decent case against the European-IMF version of “austerity,” which has produced big tax increases.

But what happens if nations adopt the libertarian approach, which means “austerity” is imposed on the government, rather than on taxpayers?

In the past, Krugman’s also has tried to argue that European nations have erred by cutting spending, but this has led to some embarrassing mistakes.

• He asserted that “British growth has stalled” because of “spending cuts,” but he overlooked the elementary fact that government spending in the U.K. was growing twice as fast as inflation.
• And in the case of Estonia, where there actually were genuine spending cuts, he wanted people to somehow think that those cuts in 2009 were responsible for an economic downturn that occurred in 2008.

Now we have some additional evidence about the absence of spending austerity in Europe. A leading public finance economist from Ireland, Constantin Gurdgiev, reviewed the IMF data and had a hard time finding any spending cuts.

…in celebration of that great [May 1] socialist holiday, “In Spain, Portugal, Greece, Italy and France tens of thousands of people took to the streets to demand jobs and an end to years of belt-tightening”. Except, no one really asked them what did the mean by ‘belt-tightening’. …let’s check out expenditure side of Europe’s ‘savage austerity’ story… The picture hardly shows much of any ‘savage cuts’ anywhere in sight.

As seen in his chart, Constantin compared government spending burdens in 2012 to the average for the pre-recession period, thus allowing an accurate assessment of what’s happened to the size of the public sector over a multi-year period.

Here are some of his conclusions from reviewing the data.

Of the three countries that experienced reductions in Government spending as % of GDP compared to the pre-crisis period, Germany posted a decline of 1.26 percentage points (from 46.261% of GDP average for 2003-2007 period to 45.005% for 2012), Malta posted a reduction of just 0.349 ppt and Sweden posted a reduction of 1.37 ppt.

No peripheral country – where protests are the loudest – or France et al have posted a reduction. In France, Government spending rose 3.44 ppt on pre-crisis level as % of GDP, in Greece by 4.76 ppt, in Ireland by 7.74 ppt, in Italy by 2.773 ppt, in Portugal by 0.562 ppt, and in Spain by 8.0 ppt.

Average Government spending in the sample in the pre-crisis period run at 44.36% of GDP and in 2012 this number was 48.05% of GDP. In other words: it went up, not down.

…All in, there is no ‘savage austerity’ in spending levels or as % of GDP.

I’ll add a few additional observations.

Sweden and Germany are among the three nations that have reduced the burden of government spending as a share of GDP, and both of those nations are doing better than their European neighbors.

Switzerland isn’t an EU nation, so it’s not included in Constantin’s chart, but government spending as a share of economic output also has been reduced in that nation over the same period, and the Swiss economy also is doing comparatively well.

The moral of the story is that reducing the burden of government spending is the right recipe for sustainable and strong growth. Growth also is far more likely if lawmakers refrain from class-warfare tax policy and instead seek to collect revenue in ways that minimize the damage to prosperity.

Unfortunately, that’s not happening in Europe…and it’s not happening in the United States.

A few countries are moving in the right direction, such as Canada, but with still a long way to travel.

The best role models are still Hong Kong and Singapore, and it’s no coincidence that those two jurisdictions regularly dominate the top two spots in the Economic Freedom of the World rankings.

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Question of the Week: Are there any Lessons to Be Learned from the Rogoff-Reinhart Kerfuffle?

I’ve received several requests to comment on the controversy surrounding the famous Rogoff-Reinhart study on government debt and economic performance.

For those who haven’t followed this issue, Kenneth Rogoff and Carmen Reinhart wrote an influential paper in 2010 arguing that government debt above 90 percent of GDP was associated with weaker economic performance.

It turns out that the Rogoff and Reinhart made a mistake in their excel spreadsheet and this error was publicized in a recently unveiled article by three other economists.

This has led to a renewed debate about “austerity,” with R&R cast in the role of fiscal hawks and various critics saying that the mistake in their paper discredits that approach and that it’s time for Keynesian policies.

If you’re interested in the broader debate, here’s what Rogoff and Reinhart wrote in the New York Times to defend themselves, and here’s Paul Krugman’s criticism.

But if you want to know my opinion, I’m not a fan of either side. Unlike the Keynesians, I don’t think debt is good for growth. But I also think it doesn’t make sense to myopically focus on red ink.

Which explains why I’m very frustrated by the debate in Europe. On one side, you have the Keynesians advocating higher spending and on the other side you have “austerians” advocating higher taxes.*

No wonder I want both sides to lose!

As I’ve repeated over and over again, the real fiscal problem in most nations is the size of government. Excessive government spending is bad for prosperity, regardless of whether it is financed by taxes or borrowing.

To be sure, governments can accumulate so much debt that investors will get suspicious and demand very high interest rates before lending more money (sometimes referred to as an attack by “bond vigilantes”).

But it’s important to realize that debt is the symptom. The underlying disease is a bloated public sector. That’s true in Greece, Spain, Italy, and other nations that have had trouble borrowing money.

By the way, it’s also true in nations such as France and Belgium. Those countries also have governments that are far too big. They haven’t been hit (at least not yet) by the bond vigilantes, but they’re suffering from economic stagnation as well.

In other words, deficits are bad, but the real problem is spending. I elaborate in this Center for Freedom and Prosperity video.

The wise fiscal policy, needless to say, is to follow Mitchell’s Golden Rule. If the burden of government spending grows slower than the private economy, any nation can climb out of a fiscal ditch. Especially if they lower tax rates and avoid class-warfare tax policy.

*In theory, the “austerians” ” also advocate less spending, but you won’t be surprised to learn which option politicians select when given a choice between higher taxes and less spending.

P.S. You also won’t be surprised that Paul Krugman doesn’t do his homework when he writes about “austerity” in Estonia and the United Kingdom.

P.P.S. Please do not confuse “austerian” economics with “Austrian economics.” The former is a political rationale for tax hikes. The latter is a sensible school of economic thought.

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Explaining to the Kleptocrats on Capitol Hill that Tax Havens Should Be Emulated, not Persecuted

Since I just left Monaco and am now in Geneva, this is an appropriate time to extol the virtues of so-called tax havens.

The name’s Bond….James Bond

But I don’t merely say nice things about low-tax jurisdictions when I’m in friendly environments.

I believe in swinging my sword in the belly of the beast.

That’s why I recently defended tax havens and tax competition for the fiscal heathens who read the New York Times.

In an even bigger display of futile optimism, I also just explained the benefits of tax competition, fiscal sovereignty, and financial privacy for the kleptocrats in Congress.

Here’s some of what I wrote for The Hill, starting with the obvious point that it is preposterous to blame tax havens for the financial crisis.

When the financial crisis hit, politicians from high-tax nations didn’t let the crisis go to waste. Acting through the G-20, they launched an attack on so-called tax havens, asserting that “hot money” from the offshore world somehow had caused the banking system to become unstable.  This campaign against low-tax jurisdictions made no sense. Nobody in the Cayman Islands or Monaco was responsible for the Federal Reserve’s easy money. Nobody in Panama or Singapore had anything to do with the corrupt system of Fannie Mae/Freddie Mac subsidies.

I then explained that tax havens once again are being attacked, though in this case multinational corporations are the main victims of a new scheme by the parasitical bureaucrats at the OECD.

So-called tax havens will suffer collateral damage, though, since big firms use them as very desirable platforms for a significant chunk of cross-border economic activity.

Tax havens are being attacked again… Funded with American tax dollars, the Organization for Economic Cooperation and Development (OECD) published a report on “Addressing Base Erosion and Profit Shifting,” (BEPS) and will follow up in a few months with specific recommendations.  This new OECD scheme is targeting multinational companies for a big tax hike, probably by requiring global tax returns, but that means tax havens are in the cross hairs because their pro-growth tax policies make them attractive locations for cross-border economic activity. Indeed, the OECD specifically has complained that “small jurisdictions act as conduits, receiving disproportionately large amounts of Foreign Direct Investment compared to large industrialised countries and investing disproportionately large amounts in major developed and emerging economies.” …its new campaign isn’t just targeting small tax havens, but will also undermine the relatively attractive fiscal systems in nations such as Ireland, Hong Kong, Switzerland, Slovakia, Singapore, Estonia, and the Netherlands. The burden of this will fall not on companies, but on workers, consumers, and shareholders.

I close with a warning that tax havens and tax competition are one of the few restraints on the greed of the political class. We need to preserve these liberalizing forces if we want to protect ourselves from even worse fiscal policy.

…anti-tax haven demagoguery is perfectly acceptable in political circles since it is seen as expanding the power of government over taxpayers.  The real issue we should be addressing is whether we need some sort of external constraint to protect us from fiscal crises that are triggered by the overspending and overtaxing of the political class.  For a couple of decades following the Reagan and Thatcher tax cuts, governments around the world have been forced by tax competition to lower tax rates, reduce double taxation of saving and investment and reform their tax system.  Defenders of the welfare state and proponents of class-warfare tax policy have resented this liberalizing process and grab any opportunity to demonize tax havens, particularly since these jurisdictions have strong human rights laws that protect the financial privacy of investors.

For further information, I highly recommend the writings of Allister Heath and Pierre Bessard.

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New European Central Bank Study Finds that Government Spending Undermines Growth

The fiscal policy debate often drives me crazy because far too many people focus on deficits.

The Keynesians argue that deficits are good for growth and this leads them to support more government spending.

The “austerity” crowd at places such as the International Monetary Fund, by contrast, argues that deficits are bad for growth and this leads them to support higher taxes.

Then you have institutions such as the Congressional Budget Office that want the worst of all worlds, supporting Keynesian spending in the short run while advocating higher taxes in the long run.

But since I don’t like higher spending or higher taxes, you can see why I want to pull my hair out.

With this in mind, I’m pleased that economists at the European Central Bank have released some new research on “Fiscal Composition and Long-Term Growth” which doesn’t reflexively assume that red ink is the key variable. Instead, they dispassionately look at how several fiscal policy variables impact economic performance.

Here is the general conclusion.

In this study we use a large panel of developed and developing countries for the period 1970-2008. …Specifically, we examine the following issues: the influence of which budgetary components have a stronger influence in affecting (positively or negatively) per capita GDP growth rates… Our evidence suggests that for the full sample…government expenditures appear with significant negative signs.

This makes sense. Whether financed by taxes or borrowing, excessive government expenditures hurt an economy by diverting resources from productive uses.

But not all government spending is created equal. Here are some of the specific findings.

In a nutshell, our results comprise notably: i) for the full sample revenues have no significant impact on growth whereas government expenditures have significant negative effects; ii) the same is true for the OECD sub-sample with the addition that total government revenues have a negative impact on growth; iii) taxes on income are less welcome for growth; iv) public wages, interest payments, subsidies and government consumption have a negative effect on output growth; v) expenditures on social security and welfare are less growth enhancing.

It’s noteworthy that government spending is negatively correlated with economic performance for both developing and advanced nations.

It’s also interesting that taxes on income are bad for growth everywhere, and overall revenue is bad for growth in advanced nations (both of these findings, incidentally, suggest that Obama’s class-warfare tax agenda is quite misguided).

The authors of the study also find that some forms of government spending are particularly harmful for growth. That also makes a lot of sense since I’ve explained in my video on the Rahn Curve that core public goods can be good for growth while other types of government spending undermine prosperity.

So what does all this mean? Simply stated, the fiscal problem in virtually all nations is not red ink. It’s big government. Large deficits aren’t desirable, to be sure, but they’re best understood as side effects of too much spending.

In other words, entitlements need to be reformed and discretionary spending needs to be reduced. Solve these underlying problems and you fix the symptoms of red ink and sluggish growth.

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Privatization Is the Best Response to the FAA’s Deliberate Attempt to Inconvenience Air Passengers

In an interview with Neil Cavuto earlier this month, I mocked proponents of big government for their hysterical predictions of bad things happening under sequestration. And cartoonists had a field day making the same point (see here and here).

The White House obviously wasn’t happy about the sequester, in part because they like bigger government and also because sequestration was a big defeat for the President.

Well, now the Obama Administration sees a chance for revenge and redemption. The President’s appointees, by choosing to furlough air traffic controllers, are seeking to turn air travel into something akin to a visit to the Post Office or DMV. It’s clear that the White House hopes to recreate momentum for a tax hike as an alternative to sequestration.

But they’re not exactly being subtle.

The Wall Street Journal exposes the White House’s political motivated chicanery, starting with the very important point that the FAA’s budget – even after sequestration – is as large as it was in 2010. Yet the White House is manipulating the sequester to cause the maximum amount of inconvenience for taxpayers.

The sequester cuts about $637 million from the FAA, which is less than 4% of its $15.9 billion 2012 budget, and it limits the agency to what it spent in 2010. The White House decided to translate this 4% cut that it has the legal discretion to avoid into a 10% cut for air traffic controllers. Though controllers will be furloughed for one of every 10 working days, four of every 10 flights won’t arrive on time.

The Obama Administration is pretending that it’s merely following the law, but the WSJ editorial debunks that notion.

This is a political pose to make the sequester more disruptive. Legally speaking, the sequester applies at a more general level known as “accounts.” The air traffic account includes 15,000 controllers out of 31,000 employees. The White House could keep the controllers on duty simply by allocating more furlough days to these other non-essential workers. Instead, the FAA is even imposing the controller furlough on every airport equally, not prioritizing among the largest and busiest airports. …ever since Al Gore launched a training initiative to increase the productivity of air traffic controllers in 1998, productivity has continued to fall. A larger workforce is now in charge of a smaller workload as the number of flights has dropped by 23%.

I didn’t realize that controllers were doing less work over time, but I’m not surprised to learn that superfluous bureaucrats at the FAA are being protected.

But the WSJ doesn’t go far enough. My Cato colleague Chris Edwards has a column in the Daily Caller that outlines the inefficiency of the FAA.

The federal budget sequester is interfering with the air traffic control (ATC) system and snarling up air traffic. As usual, politicians are pointing fingers of blame at everybody but themselves. But politicians are the ones who have strapped the ATC system to the chaotic federal budget. And they’re the ones who have insisted on running ATC as a bureaucracy, rather than freeing it to become the high-tech private business that it should be. …Last year Bloomberg reported: “More than one-third of the 30 contracts critical to building a new U.S. air-traffic system are over budget and half are delayed, a government audit concluded.

Chris then takes the logical next step and says the system should be privatized. Which is exactly what happened in his home country of Canada.

To run smoothly and efficiently, our ATC system should be given independence from the government. We should privatize the system, as Canada has done very successfully. …Canada provides an excellent model for U.S. reforms. Canada’s ATC system is run by the nonprofit corporation Nav Canada, which is separate from the government. Like any private business, it raises revenues from its customers to cover its operational costs and capital investments. The company’s financial statements for 2012 show revenues and expenses of $1.2 billion, with $125 million allocated to capital expenditures. Unlike the U.S. system, Nav Canada is self-supporting and not subsidized.

I’ve already written on this topic, citing some good analysis from Canada’s Financial Post, and the evidence is overwhelming that the private system in Canada works much better than the inefficient bureaucracy we have in the United States.

Let’s close with a Michael Ramirez cartoon. The “politics” and “waste” markings are very appropriate.

Lost in this controversy, by the way, is any recognition that sequestration barely makes a dent in the federal budget. There are some small first-year cuts in a few programs, but the wasteful behemoth known as the federal government is barely nicked.

To be more specific, the net effect of the sequester is that the burden of government spending grows by $2.4 trillion over the next 10 years rather than $2.5 trillion.

So don’t pay any attention to the hyperbole and hysteria from the special interest groups in Washington. The sequester is a tiny – and desirable – step in the direction of fiscal responsibility.

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The Revised Bowles-Simpson Tax-Hike Plan Might Be even Worse than the Previous Version

I wrote last September that the budget plan put forward by Erskine Bowles and Alan Simpson was fatally flawed.

There were some positive features in the plan, to be sure, such as lower marginal tax rates. And I suppose it’s worth noting that the burden of government spending didn’t climb as fast under their proposal as it did in Obama’s budget, though that’s hardly an accomplishment.

But there were lots of fatal flaws in the Bowles-Simpson plan. It included a big tax increase, even though America’s fiscal problem is entirely the result of too much spending.

Moreover, the so-called entitlement reform in Bowles-Simpson wasn’t reform. It was basically a random package of means testing and price controls, and we have lots of experience showing that this approach doesn’t yield sustainable savings.

Well, Bowles and Simpson now have a new plan. Have they learned from their past mistakes? Have they responded to earlier criticisms? Have they made a more serious effort to restrain spending? To genuinely reform entitlements? To shut down useless agencies, programs, and department?

Not that you’ll be surprised, but the answer to all those questions is a big fat NO. Ryan Ellis of Americans for Tax Reform has a short analysis of the plan’s shortcomings and here are some of the highlights (though lowlights might be a better word).

The Simpson-Bowles plan headline report says it only raises taxes by $585 billion over a decade by eliminating or limiting tax deductions and credits (beyond what is needed to lower rates). …However, the plan also calls for “Chained CPI,” which the President’s FY 2014 budget says raises taxes by another $100 billion over the decade, and this plan’s Figure 21 (buried deep in the appendix) says will raise taxes by $124 billion. …There’s a third hidden tax increase, again only to be found buried in Figure 21.  This is “program integrity,” which is a polite euphemism for creating a fishing expedition audit slush fund for the IRS.  This is expected to raise another $30 billion by 2023. Put it all together, and the plan raises taxes by $739 billion over the next decade. …All of the tax hikes described above are just the first stage of new tax hikes in the Simpson-Bowles plan.  There’s also a shadowy “Step Four” which calls for even deeper tax increases to “fix” the entitlement crisis.

In other words, the plan is taxes, then more taxes, followed by additional taxes, topped off by a promise of even more taxes.

Ryan also notes that the plan doesn’t do anything about the fiscal disaster of Obamacare and that it also exacerbates the tax code’s punitive bias by increasing double taxation of income that is saved and invested.

Gee, what’s not to love about such a proposal?

Nonetheless, a lot of people feel compelled to say nice things about Bowles-Simpson. I don’t know whether it’s because they blindly assume a “bipartisan” plan must be good.

Or perhaps they think that a plan needs to be “balanced” between tax increases and spending cuts.

I don’t have any objection to bipartisanship, assuming politicians are proposing good ideas, but let’s take a closer look at this notion of “balance.”

1. Why should we raise taxes when the current fiscal mess is the result of the excessive spending of the Bush-Obama years?
2. Why should we raise taxes when the long-run fiscal mess is the result of rising spending caused by poorly designed entitlement programs?
3. Why should we raise taxes when the “spending cuts” we get in exchange are based on dishonest Washington budget math?
4. Why should we raise taxes when bitter experience teaches us that politicians will simply raise spending?

Let’s close by elaborating on this final question. A couple of years ago, a columnist at the New York Times complained that Republicans used to be much more susceptible to getting seduced by these “balanced” budget deals.

But the reporter inadvertently showed that tax-hike deals are a mistake. It turns out that the only budget deal which actually worked was the one in 1997 that lowered taxes instead!

I’m not making an argument for the Laffer Curve, by the way. The fiscal success of the late 1990s was a result of genuine spending restraint, as explained in this video. The lower taxes were simply a bit of icing on the cake.

My main point is that genuine fiscal restraint is far less likely to happen if tax hikes are on the table. After all, why would politicians have any incentive to do the right thing if there’s a possibility of simply siphoning more money from the economy’s productive sector?

We see the same pattern in other nations. When governments such as Canada and New Zealand actually imposed genuine limits on the growth of government spending, good things happened.

But when governments supposedly try to deal with fiscal problems by raising taxes, you get dismal results. Just look at mess in Europe, where tax increases have been nine times larger than spending cuts.

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It’s Tax Freedom Day, So Congratulations (if You Don’t Live in New York, California, New Jersey, Illinois, etc)

It’s time to celebrate.

That’s because we have reached Tax Freedom Day, meaning that – in the aggregate – we have finally earned enough money to pay for all the federal, state, and local taxes that will be imposed on us this year by our political masters.

But we’re not collectivists, so aggregate measures don’t really matter. Our individual tax burdens can vary considerably depending on the level and composition of our income, as well as the state in which we live.

Speaking of that, the good folks of North Dakota are the only ones actually celebrating Tax Freedom Day on this exact date. If you look at the map, Tax Freedom Day is as early as late March for residents of Louisiana and Mississippi, and as late as May for the unfortunate residents of New York, Connecticut, and New Jersey.

You’ll notice, by the way, that Tax Freedom Day is correlated with average state income. That’s one of the reasons why low-income states tend to get better scores. Simply stated, it’s hard to collect a lot of revenue from people who don’t have much money.

And a state that historically has been wealthy, like Connecticut, will probably collect a lot of revenue even if it has a good tax system (though, for the record, Connecticut has veered dramatically in the wrong direction in the past couple of decades).

So if you want to measure whether a state has a good or bad tax system, I recommend the “fiscal” and “tax burden” categories in the “Freedom Index” from the Mercatus Center. Using that measure, South Dakota gets the best score (compared to the 6th-best score using Tax Freedom Day).

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

• Which nations have the most red ink.
• Which nations are money laundering centers (hint, not tax havens).
• A crazy left-wing “Happy Planet” map.
• Another silly map supposedly showing that America is one of the world’s most authoritarian nations.

Here are some good state maps with useful information.

• Which states have no income taxes.
• Which states give the highest welfare payments.
• Which states are in a “death spiral” because of too many takers and too few makers.
• Which states have too many school bureaucrats compared to teachers.

There’s even a local map.

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

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Why Art Laffer’s Unfortunate Endorsement of a State Sales Tax Cartel Is Misguided

Art Laffer has a guaranteed spot in the liberty hall of fame because he popularized the common-sense notion that you can’t make any assumptions about tax rates and tax revenue without also figuring out what happens to taxable income.

Lot’s of people on the left try to denigrate the “Laffer Curve,” but it’s worth noting that even left-wing economists now admit that you don’t maximize revenue with a 100 percent tax rate.*

Indeed, I think the only people who now cling to that absurd view are the bureaucrats at the Joint Committee on Taxation.

But this post isn’t about the Laffer Curve. It’s about a disappointing column that Art Laffer wrote for today’s Wall Street Journal.

The issue is whether states should have the power to impose taxes on sales that take place outside their borders. Art starts the column with a very good point about the link between growth and living standards.

After enjoying an average growth rate above 3.5% per year between 1960 and 1999, Americans have had to make do with less than one-half that pace since 2000. The consequences are already dramatic and will become even more so over time. Overall we are 20% poorer today than we would be had the pre-2000 growth rate persisted.

That’s a great point. I’ve also tried to get people to focus on the importance of long-run growth.

Heck, just look at what’s happened in Hong Kong and Singapore and you’ll agree.

In his column, Art also correctly defines good tax policy.

The principle of levying the lowest possible tax rate on the broadest possible tax base is the way to improve the incentives to work, save and produce—which are necessary to reinvigorate the American economy and cope with the nation’s fiscal problems.

But he then asserts that an Internet sales tax cartel somehow will result in better policy.

…there are reforms that can alleviate the problems associated with declining sales-tax bases and, at the same time, allow the states to move closer to a pro-growth tax system. One such reform would be to have Internet sellers collect the sales taxes that are owed by in-state consumers when they purchase goods over the Web. So-called e-fairness legislation addresses the inequitable treatment of retailers based on whether they are located in-state (either a traditional brick-and-mortar store or an Internet retailer with a physical presence in the state) or out of state (again as a brick-and-mortar establishment or on the Internet). …The exemption of Internet and out-of-state retailers from collecting state sales taxes reduced state revenues by $23.3 billion in 2012 alone, according to an estimate by the National Conference of State Legislatures. The absence of these revenues has not served to put a lid on state-government spending. Instead, it has led to higher marginal rates in the 43 states that levy income taxes.

This is a very disappointing collection of sentences. Let’s review.

1. States have declining sales-tax bases because state lawmakers treat that levy the same way that politicians in Washington treat the income tax – they put in loopholes in exchange for campaign cash and political support. For them to complain about declining sales-tax bases is sort of like the old joke about the guy who murders  his parents and then asks the court for mercy because he’s an orphan.

2. Art offers zero evidence that state governments would use the additional revenue from a state sales tax cartel to reduce income tax rates. What’s next, a column saying we should have a value-added tax because the politicians may use the revenue to get rid of the income tax? Yeah, good luck with that approach.

3. Why is it “inequitable” for there to be different tax policies in different states? That’s another way of describing federalism, and it’s something we should be celebrating and promoting. Particularly since it promotes tax competition, which is one of the most effective ways of restraining the greed of the political class.

4. The Internet sales tax cartel being promoted by Art and various politicians requires that governments have the ability to tax sales that tax place outside their borders. That’s an assault of sovereignty, particularly since out-of-state merchants will be coerced into being tax collectors for a distant government. This is the same dangerous ideology that is used by high-tax governments to promote global anti-tax competition policies.

5. Art offers zero evidence that the absences of a state sales tax cartel has led to higher income tax rates. Yes, some states have raised tax rates in recent years, but others have lowered tax rates.

For more information on why a sales tax cartel among the states would be a bad idea, here’s my short speech to an audience on Capitol Hill.

*This should be an obvious point, but I can’t resist emphasizing that maximizing revenue should not be the goal of fiscal policy.

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New GAO Study Mistakenly Focuses on Make-Believe Tax Expenditures

I’m very leery of corporate tax reform, largely because I don’t think there are enough genuine loopholes on the business side of the tax code to finance a meaningful reduction in the corporate tax rate.

That leads me to worry that politicians might try to “pay for” lower rates by forcing companies to overstate their income.

Based on a new study about so-called corporate tax expenditures from the Government Accountability Office, my concerns are quite warranted.

The vast majority of the $181 billion in annual “tax expenditures” listed by the GAO are not loopholes. Instead, they are provisions designed to mitigate mistakes in the tax code that force firms to exaggerate their income.

Here are the key findings.

In 2011, the Department of the Treasury estimated 80 tax expenditures resulted in the government forgoing corporate tax revenue totaling more than $181 billion. …approximately the same size as the amount of corporate income tax revenue the federal government collected that year. …According to Treasury’s 2011 estimates, 80 tax expenditures had corporate revenue losses. Of those, two expenditures accounted for 65 percent of all estimated corporate revenues losses in 2011 while another five tax expenditures—each with at least $5 billion or more in estimated revenue loss for 2011—accounted for an additional 21 percent of corporate revenue loss estimates.

Sounds innocuous, but take a look at this table from the report, which identifies the “seven largest corporate tax expenditures.”

To be blunt, there’s a huge problem in the GAO analysis. Neither depreciation nor deferral are loopholes.

I wrote a detailed post explaining depreciation earlier this month, citing three different experts on the issue. But if you want a short-and-sweet description, here’s how I described depreciation in my post on corporate jets.

If a company purchases a jet for $20 million, they should be able to deduct – or expense – that $20 million when calculating that year’s taxable income… A sensible tax system defines profit as total revenue minus total costs – including purchases of private jets. But today’s screwy tax code forces them to wait five years before fully deducting the cost of the jet (a process known as depreciation). Given that money today has more value than money in the future, this is a penalty that creates a tax bias against investment (the tax code also requires depreciation for purchases of machines, structures, and other forms of investment).

In other words, businesses should be allowed to immediately “expense” investment expenditures. What the GAO refers to as “accelerated depreciation” is simply the partial mitigation of a penalty, not a loophole.

The same is true about “deferral.” Here’s what I wrote about that issue in February 2010.

Under current law, the “foreign-source” income of multinationals is subject to tax by the IRS even though it already is subject to all applicable tax where it is earned (just as the IRS taxes foreign companies on income they earn in America). But at least companies have the ability to sometimes delay when this double taxation occurs, thanks to a policy known as deferral.

I added to those remarks later in the year.

From a tax policy perspective, the right approach is “territorial” taxation, which is the common-sense notion of only taxing activity inside national borders. It’s no coincidence that all pro-growth tax reform plans, such as the flat tax and national sales tax, use this approach. Unfortunately, America is one of the world’s few nations to utilize the opposite approach of “worldwide” taxation, which means that U.S. companies face the competitive disadvantage of having two nations tax the same income. Fortunately, the damaging impact of worldwide taxation is mitigated by a policy known as deferral, which allows multinationals to postpone the second layer of tax.

Simply stated, the U.S. government should not be trying to tax income earned in other countries. “Deferral” is the mitigation of a penalty, not a loophole.

So why would the GAO make these mistakes? Well, to be fair to the bureaucrats, they simply relied on the analysis of the Treasury Department.

But why does Treasury (and the Joint Committee on Taxation) make these mistakes? The answer is that they use the “Haig-Simons” tax base as a benchmark, and that approach assumes bad policies such as the double taxation of income that is saved and invested. If you want to get deep in the weeds of tax policy, I shared late last year some good analysis on Haig-Simons produced by my colleague Chris Edwards.

By the way, properly defining loopholes also is an issue for reform on the individual portions of the tax code. I’ve previously pointed out the flawed analysis of the Tax Policy Center, which put together a list of the 12 largest “tax expenditure” and included six items that don’t belong.

To conclude, the right tax base is what’s called “consumed income.” But that’s simply another way of saying that the system should only tax income one time, and it’s how income is defined for both the flat tax and national sales tax.

One final comment about GAO. It’s understandable that they used the Treasury Department’s methodology, but they also should have produced a list of tax expenditures based on a consumed-income tax base. That’s basic competence and fairness.

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An Aggravating Reminder of Government Waste on Tax Day

Remember the Spending Quiz from 2010, which asked people to guess whether absurd examples of government waste were true or false?

Well, we have a new video on government waste, though bureaucrats and politicians have become so profligate it doesn’t even bother to trick people with fake examples.

While very well done, I do have two small complaints about the video.

First, it asks whether we should cut spending or raise taxes to deal with the national debt. I think that’s too narrow. We shouldn’t be wasting money even if the budget was balanced and there wasn’t a penny of debt.

In other words, the problem isn’t deficits. Red ink is just a symptom. The real problem is that government is too big.

Second, the video sort of acquiesces to the dishonest Washington terminology by asking whether we should cut spending or raise taxes, implying those are the only two options. I favor genuine spending cuts, of course, but the most accurate way of phrasing the question is to ask whether we should cut spending, restrain spending, or let government grow on auto-pilot.

As I explained earlier this year, we can balance the budget in just 10 years if spending grows “only” 3.4 percent per year. When people understand that detail, there’s almost no support for higher taxes.

But I’m nitpicking. Overall, a very good video.

P.S. If the examples of pork-barrel spending in the video get you angry, you’ll probably have a stroke if you also watch the waste video from the folks at Government Gone Wild.

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Entitlement Spending Is America’s Biggest Fiscal Challenge, but Discretionary Spending Is Still Far too High

If America descends into Greek-style fiscal chaos, there’s no doubt that entitlement programs will be the main factor. Social Security, Medicare, Medicaid, and Disability are all fiscal train wrecks today, and the long-run outlook for these programs is frightful.

Just look at these numbers from the Bank for International Settlements and OECD to see how our fiscal future is bleaker than many of Europe’s welfare states.

If we don’t implement the right kind of entitlement reform, our children and grandchildren at some point will curse our memory.

But that doesn’t mean we shouldn’t worry about other parts of the budget, including the so-called discretionary programs that also have been getting bigger and bigger budgets over time.

That’s why I was a bit perturbed to read Veronique de Rugy’s piece in National Review Online, which implies that these programs are “shrinking” and being subject to a “Big Squeeze.”

…there is another number to look at in that budget. It’s the shrinking share of the budget consumed by discretionary spending (spending on things like defense and infrastructure) to make space for mandatory spending and interest. This is the Big Squeeze. …in FY 2014 mandatory spending plus interest will eat up 67 percent of the budget, leaving discretionary spending with 33 percent of the budget (down from 36 percent in FY 2012). Now by FY 2023, mandatory and interest spending will consume 77 percent of the total budget. Discretionary spending will be left with 23 percent of the budget.

But all that’s really happening here is that entitlement outlays are growing faster than discretionary spending.

Here’s some data from the Historical Tables of the Budget, showing what is happening to spending for both defense discretionary and domestic discretionary. And these are inflation-adjusted numbers, so the we’re looking at genuine increases in spending.

As you can see, defense outlays have climbed by about $100 billion over the past 50 years, while outlays for domestic discretionary programs have more than tripled.

If that’s a “Big Squeeze,” I’m hoping that my household budget experiences a similar degree of “shrinking”!

To be fair, Veronique obviously understands these numbers and is simply making the point that politicians presumably should have an incentive to restrain entitlement programs so they have more leeway to also buy votes with discretionary spending.

But I’d hate to think that an uninformed reader would jump to the wrong conclusion and decide we need more discretionary spending.

Particularly since the federal government shouldn’t be spending even one penny for many of the programs and department that are part of the domestic discretionary category. Should there be a federal Department of Transportation? A federal Department of Housing and Urban Development? A federal Department of Agriculture?

No, NO, and Hell NO. I could continue, but you get the idea.

The burden of federal government spending in the United States is far too high and it should be reduced. That includes discretionary spending and entitlement spending.

P.S. Since I don’t want to get on Veronique’s bad side, let me take this opportunity to call attention to her good work on properly defining austerity,. And if you watch her testimony to a congressional committee, it’s also quite obvious that she also understands that the real problem is bloated and wasteful government spending.

P.P.S. For those who don’t have the misfortune of following the federal budget, “entitlements” are programs that are “permanently appropriated,” which simply means that spending automatically changes in response to factors such as eligibility rules, demographic shifts, inflation, and program expansions. Sometimes these programs (such as Social Security, Medicare, Medicaid, etc) are referred to as “mandatory spending.”

The other big part of the budget is “discretionary spending” or “appropriations.” These are programs funded by annual spending bills from the Appropriations Committees, often divided into the two big categories of “defense discretionary” and “nondefense discretionary.”

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A Tax Haven Primer for the New York Times

I could only use 428 words, but I highlighted the main arguments for tax havens and tax competition in a “Room for Debate” piece for the New York Times.

I hope that my contribution is a good addition to the powerful analysis of experts such as Allister Heath and Pierre Bessard.

I started with the economic argument.

…tax havens are very valuable because they discourage anti-growth tax policy. Simply stated, it is very difficult for governments to impose and enforce confiscatory tax rates when investors and entrepreneurs can shift their economic activity to jurisdictions with better tax policy. Particularly if those nations have strong policies on financial privacy, thus making it difficult for uncompetitive high-tax nations to track and tax flight capital. Thanks to this process of tax competition, with havens playing a key role, top personal income tax rates have dropped from an average of more than 67 percent in 1980 to about 42 percent today. Corporate tax rates also have plummeted, falling from an average of 48 percent to 24 percent. …Lawmakers also were pressured to lower or eliminate death taxes and wealth taxes, as well as to reduce the double taxation of interest, dividends and capital gains. Once again, tax havens deserve much of the credit because politicians presumably would not have implemented these pro-growth reforms if they didn’t have to worry that the geese with the golden eggs might fly away to a confidential account in a well-run nation like Luxembourg or Singapore.

Since I didn’t have much space, here’s a video that elaborates on the economic benefits of tax havens, including an explanation of why fiscal sovereignty is a big part of the debate.

My favorite part of the video is when I quote OECD economists admitting the beneficial impact of tax havens.

I also explain for readers of the New York Times that there’s a critical ethical reason to defend low-tax jurisdictions.

Tax havens also play a very valuable moral role by providing high-quality rule of law in an uncertain world, offering a financial refuge for people who live in nations where governments are incompetent and corrupt. …There are also billions of people living in nations with venal and oppressive governments. To cite just a few examples, tax havens offer secure financial services to political dissidents in Russia, ethnic Chinese in Indonesia and the Philippines, Jews in North Africa, gays in Iran and farmers in Zimbabwe.

To elaborate, here’s my video making the moral case for tax havens.

By the way, many of the issues in this video may not resonate for those of us in “first world” nations, but please remember that the majority of people in the world live in countries where basic human rights are at risk or simply don’t exist.

But that doesn’t mean we shouldn’t worry about the stability of our nations. I close my contribution to the New York Times by warning that the welfare state may collapse.

With more and more nations careening toward fiscal collapse, raising the risk of social chaos and economic calamity, it is more important than ever that there are places where people can protect themselves from bad government. Tax havens should be celebrated, not persecuted.

I didn’t have space to cite the BIS and OECD data showing that most of the world’s big nations – including Germany, the United States, and the United Kingdom – face fiscal problems more significant that Greece is dealing with today. Assuming these nations don’t implement desperately needed entitlement reform, the you-know-what is going to hit the fan at some point. Folks with funds in a tax haven will be in much better shape if, or when, that happens.

For more background information on tax competition, here’s a video explaining the ABCs of the issue.

It’s galling, by the way, that the bureaucrats at the OECD pushing for a global tax cartel get tax-free salaries.

And here’s my video debunking some of the common myths about tax havens.

My favorite part of this video is the revelation that a former John Kerry staffer fabricated a number that is still being used by anti-tax haven demagogues.

And speaking of demagogues misusing numbers, you’ll notice the current resident of 1600 Pennsylvania Avenue has a starring role in this video.

I’ve probably exhausted your interest in videos, but if you’re game for one more, click here to learn more about the Paris-based Organization for Economic Cooperation and Development, a statist international bureaucracy that is active in trying to undermine tax havens as part of it’s efforts to create a global tax cartel to prop up Europe’s welfare states.

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Burden of Government Spending Will Be $2 Trillion Higher in 2023 According to Obama’s Budget

If you include all the appendices, there are thousands of pages in the President’s new budget.

But the first thing I do every year is find the table showing how fast the burden of government spending will increase.

That’s Table S-1 of the budget, and it shows that the President is proposing $41 trillion of spending over the next 10 years.

But perhaps most relevant, he wants the federal budget to be $2 trillion higher in 2023 than it is today.

And this is based on the White House’s dodgy assumptions. The numbers almost certainly will look a bit worse when the Congressional Budget Office re-estimates the President’s budget.

By the way, there’s a reason the above chart looks familiar. It almost identical to the ones I put together last year and the year before. So give Obama points for consistency. Rain or shine, year in and year out, he proposes that government spending should rise by $2 trillion every time he proposes a budget.

He’s also consistent in that he demands higher taxes. Americans for Tax Reform has a list of the “Top 10″ tax hikes in the President’s budget. Most of them are based on the President’s class-warfare ideology, though he also wants to hit lower-income people with a big hike in the tobacco tax.

Another example of unfortunate consistency is that the President whiffs on entitlement reform. Unlike the House of Representatives, there’s no proposal to fix Medicare or Medicaid.

He does have a “chained CPI” proposal that would slightly reduce cost-of-living adjustments for Social Security, but that would be a substitute for the reforms that are needed to both control costs and give workers the option to boost retirement income with personal accounts.

Moreover, chained CPI is a huge tax hike, as explained by my colleague Chris Edwards.

So what’s the bottom line? Well, there isn’t one. We’re going to have gridlock for the foreseeable future. The House has passed a decent budget with some modest entitlement reform, but there’s no way that the Senate will accept that plan.

Similarly, there’s no way (knock on wood!) that the House will acquiesce to the President’s raise-taxes-but-leave-spending-on-autopilot proposal. Or the big-government plan from Senate Democrats.

So neither side will move the ball.

We’ll have some fiscal skirmishes, to be sure, with the debt limit and the FY2014 appropriations bills being obvious examples.

But nothing big will happen until either 2015 (if the Democrats win control of the House) or 2017 (if Republicans win the White House and control of the Senate).

By then, we’ll be two or fours years closer to being the next Greece.

P.S. Actually, I think many other nations are in a position to be the next Greece, though it’s discouraging that some estimates indicate that our long-run fiscal status is worse than basket cases such as Italy and France.

P.P.S. As these cartoons suggest, maybe our real fiscal problem is that the President refuses to admit there’s a problem?

P.P.P.S. But I think this cartoon more accurately shows our real challenge.

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I’ve Obtained a Secret Pre-Release Copy of Obama’s Budget

The President is supposed to release his FY2014 budget tomorrow, more than two months later than required by law.

Based on what it’s rumored to contain, I’ve already explained that nobody should be tricked into thinking that Obama is moving to the center. Though he may not be as far to the left as Senate Democrats.

Not that it would be easy to get to the left of that plan, as cartoonists have ably illustrated.

Anyhow, much of Washington is buzzing about what might be in the President’s proposal.

Well, time to sate your curiosity. I have a leaked copy of the budget for your enjoyment.

We won’t see actual numbers until tomorrow, but I’m guessing that I’ll be sharing something very similar to the analysis I provided last year and the year before.

P.S. If you enjoy political humor, the Glenn McCoy cartoon in this post is a pretty good summary of what Obama will say in his budget message.

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Since the Sequester Has Been in Place for More than One Month, Shouldn’t We All Be Dead from Plane Crashes and Tainted Meat?

Let’s take a moment and enjoy how Obama made himself a laughingstock because of his anti-sequester hysteria.

In spite of his hyperbolic rhetoric, nothing bad has happened. Schools are still open, planes are still flying, and supermarkets aren’t poisoning us with tainted food.

I’ve already shared some very funny cartoons on this topic, which can be viewed here, here, here, here, and here.

Lower down in this post, we have a couple of additional cartoons that deserve a few chuckles, but I also want to share this interview to help make an important policy point about the need to reduce the burden of government spending.

Actually, the sequester was a double victory. Not only did we trim the growth of spending, we also avoided the tax hike that Obama wanted as a replacement.

No wonder he’s so unhappy!

This first cartoon, from Chip Bok, captures his sullen mood.

The second cartoon, by Jerry Holbert, has the same these, showing that the American people have learned to ignore Obama’s demagoguery.

Now the question is what comes next?

I wrote yesterday that Obama is likely to offer a bait-and-switch budget designed to impose more taxes and more spending.

It’s possible, though, that it won’t be as far to the left as the budget approved by the Senate (as cartoonists have ably illustrated).

In any event, there is no possible compromise with the House-approved budget. Or, to be more specific, there’s no possible compromise that would be good for the nation, so we’re looking at stalemate for the near future.

But stalemate is a lot better than moving in the wrong direction.

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Early Details Show Obama Will Propose a Bait-and-Switch Budget Plan Containing Higher Taxes and More Spending

Are we about to see a new kinder-and-gentler Obama? Has the tax-and-spend President of the past four years been replaced by a fiscal moderate?

That’s certainly the spin we’re getting from the White House about the President’s new budget. Let’s look at this theme, predictably regurgitated in a Washington Post report.

President Obama will release a budget next week that proposes significant cuts to Medicare and Social Security and fewer tax hikes than in the past, a conciliatory approach…the document will incorporate the compromise offer Obama made to House Speaker John A. Boehner (R-Ohio) last December in the discussions over the “fiscal cliff” – which included $1.8 trillion in deficit reduction through spending cuts and tax increases. …unlike the Republican budget that passed the House last month, Obama’s budget does not balance within 10 years.

Since America’s fiscal challenge is the overall burden of government spending, I’m not overly worried about the fact that Obama’s budget doesn’t get to balance.

But I am curious whether Obama truly is proposing a “conciliatory” budget. Are the tax hikes smaller? Are the supposed spending cuts larger?

Actually, there are no genuine spending cuts since the President’s budget is based on dishonest baseline budgeting. At best, we’re simply talking about slowing the growth of government.

But since Mitchell’s Golden Rule is based on the very modest goal of having government grow slower than the private sector, it’s possible that Obama may be proposing something worthwhile.

But possible isn’t the same as probable. Indeed, it appears that the budget is predicated on a giant bait-and-switch since the beneficial spending restraint imposed by sequestration would be repealed!

Obama’s budget proposal, however, would eliminate sequestration.

This appears almost as an afterthought in the Washington Post article, but it should be the lead story. The White House wants to get rid of a policy that genuinely limits the growth of spending.

We won’t have the official numbers until the budget is released next Wednesday, but I’ll be very curious to see whether the supposed spending cuts elsewhere in his budget are greater than or less than the spending increases that will occur if sequestration is canceled. Particularly since the President also is proposing lots of new spending on everything from early child education to brain mapping.

Moreover, it seems as though Obama tax numbers are based on dodgy math as well. The White House is claiming that this is a “conciliatory” budget because he’s no longer proposing $1.6 trillion of tax hikes.

The budget is more conservative than Obama’s earlier proposals, which called for $1.6 trillion in new taxes and fewer cuts to health and domestic spending programs. Obama is seeking to raise $580 billion in tax revenue by limiting deductions for the wealthy and closing loopholes for certain industries like oil and gas. Those changes are in addition to the increased tobacco taxes and more limited retirement accounts for the wealthy that are meant to pay for new spending.

Let’s try to disentangle the preceding passage. The President wants $580 billion of new taxes from “deductions” and “loopholes.” But he also wants an unknown pile of revenue from new tobacco taxes and from restricting IRAs. And keep in mind that he already got $600 billion as part of the fiscal cliff.

Until we get official numbers, we can’t say anything with certainty, but I’ll be checking on Wednesday to see how much revenue the President intends to grab as a result of the tobacco and IRA provisions. Suffice to say that I won’t be surprised if the net impact of all his tax hikes is close to $1.6 trillion. Especially since he’s also proposing to manipulate CPI data, a change that would generate another $100 billion in revenues.

In other words, the revenue side of his budget likely will be a bait-and-switch scam, just like the spending side is a joke once you understand that he wants to get rid of sequestration.

I hope I’m wrong, but I fear that my concerns will be validated next Wednesday and we’ll see another budget that has no real entitlement reform and more class-warfare tax hikes.

P.S. The budget approved by the House of Representatives avoided any tax increases and restrained spending to that it will grow by an average of 3.4 percent annually. Not exactly draconian, but that approach does balance the budget in 10 years.

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The Fuse Is Burning Brightly on France’s Fiscal Time Bomb

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

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

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

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

That’s quite an achievement.

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

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

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

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

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

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

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

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

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

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

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

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

“Follow me. We can escape in this direction”

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

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

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

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

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

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

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