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Posts Tagged ‘Fiscal Policy’

I had a very bad lunch today.

But not because of what I ate. My lunch was unpleasant because I moderated a noontime panel on Capitol Hill featuring Senator Ron Johnson of Wisconsin and my Cato colleague Chris Edwards.

And I should hasten to add that they were splendid company. The unpleasant part of the lunch was the information they shared.

The Senator, in particular, looked at budgetary projections over the next 30 years and basically confirmed for the audience that an ever-expanding burden of federal spending is going to lead to a fiscal crisis.

To be blunt, he showed numbers that basically matched up with this Henry Payne cartoon.

Here’s a chart from his presentation. It shows the average burden of spending in past years, compared to various projections of how much bigger government will be – on average – over the next three decades.

The Senator warned that the most unfavorable projection (i.e., “CBO ALT FISC”) was also the most realistic one. In other words, federal spending will consume a much larger share of economic output over the next three decades than it has over the past two decades.

But our fiscal outlook is actually even worse than what you see in his slide.

The Senator’s numbers are based on average spending levels over the 2015-2044 period. That’s very useful – and sobering – data, but if you look at the annual numbers, you’ll see that the trendline gives us additional reasons to worry.

More specifically, spending for the major entitlement programs (Social Security and Medicare, as well as Medicaid) is closely tied to the aging population. So as more and more baby boomers retire over the next couple of decades, spending on these programs will become more burdensome.

In other words, our fiscal problem will be much larger in 2040 than it will be in 2020.

Here are the long-run numbers from the Congressional Budget Office. The blue line is federal spending on various programs and the pink line is total spending (i.e., programmatic spending plus interest payments). And keep in mind that these numbers don’t include state and local government spending, which presumably will chew up another 15 percent of our economic output!

In other words, America will become Greece.

And don’t delude yourself into thinking that CBO must be wrong. I’m not a big fan of the Congressional Budget Office (particularly CBO’s economic analysis), but these numbers are driven by demographics.

Moreover, CBO’s grim outlook is matched by similarly dismal numbers from the IMF, BIS, and OECD.

By the way, CBO doesn’t do projections once federal government debt exceeds 250 percent of GDP, so the gray-colored trendline beginning about 2048 is not an official projections. It’s merely an estimate of the total spending burden assuming that the federal budget is left on autopilot.

Of course, we’ll never reach that level. We will suffer a fiscal crisis before that point. But when it happens to us, the IMF won’t be there to bail us out for the simple reason that the IMF’s credibility is based on the backing of American taxpayers.

And we’ll already have been bled dry!

So unless we find some very rich Martians (who are also stupid enough to bail out profligate governments), it won’t be a pretty situation. I’m not sure we’ll have riots, such as the ones that have taken place in Europe, but there will be plenty of suffering.

Fortunately, there is a solution. All we need is a modest bit of fiscal restraint so that government grows slower than the private sector. That would completely reverse Senator Johnson’s dismal long-run numbers.

And some countries have shown that multi-year periods of fiscal restraint are possible.

The real question, though, is whether politicians in America would be willing to adopt the entitlement reforms that are needed to control the long-run growth of spending.

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Let’s enjoy some semi-good news today.

We’ve discussed many times why Obamacare is bad news, whether we’re looking at it from the perspective of the healthcare system, taxpayers, or workers.

But it could be worse. Writing in the Washington Post, Robert Samuelson explains that two-dozen states have refused the lure of expanding Medicaid (the means-tested health care program) in exchange for “free” federal money.

From 1989 to 2013, the share of states’ general funds devoted to Medicaid has risen from 9 percent to 19 percent, reports the National Association of State Budget Officers. Under present law, the squeeze will worsen. The White House report doesn’t discuss this. …To the White House, the right-wing anti-Obamacare crusade is mean-spirited partisanship at its worst. The 24 non- participating states are sacrificing huge amounts of almost-free money… Under the ACA, the federal government pays all the cost of the Medicaid expansion through 2016 and, after that, the reimbursement rate drops gradually to a still-generous 90 percent in 2020.

But that “almost-free money” isn’t free, of course. It’s simply money that the federal government (rather than state governments) is diverting from the productive sector of the economy.

So the 24 states that have rejected Medicaid expansion have done a huge favor for America’s taxpayers. To be more specific, Nic Horton of Watchdog.org explains that these states have lowered the burden of federal spending (compared to what it would have been) by almost $90 billion over the next three years.

By not expanding Medicaid, 24 states are saving taxpayers $88 billion over the next three years. That is $88 billion that will not be added to the national debt — debt that will not be passed on to future generations of taxpayers. On the other hand, states that have expanded Medicaid through Obamacare are adding roughly $84 billion to the national debt through 2016.

Returning to Samuelson’s column, he would like a grand bargain between states and the federal government, with Washington agreeing to pay for all of Medicaid (currently, states pay a portion of the bill) in exchange for states taking over all spending for things such as roads and education.

We could minimize this process for states and localities by transferring all Medicaid costs to Washington (or at least the costs of the elderly and disabled). To pay for it, Washington would reduce transportation and education grants to states. Let Washington mediate among generations. Let states and localities concentrate on their traditional roles of education, public safety and roads. Spare them the swamp of escalating health costs. This is the bargain we need — and probably won’t get.

I like half of that deal. I want to transfer education, law enforcement, and roads back to the state level (or even the local level).

But I don’t want Washington taking full responsibility for Medicaid. Instead, that program also should be sent down to the states as well. This video explains why that reform is so desirable.

P.S. Since we’re on the topic of Obamacare, this Chip Bok cartoon perfectly captures the essence of the Hobby Lobby decision. The left wants the mandate that contraception and abortifacients be part of health insurance packages.

Rather than exacerbate the damage of using insurance to cover routine costs, wouldn’t it make more sense to have employers simply give their workers more cash compensation and then allow the workers to use their money as they see fit?

That way there’s no role for those evil, patriarchal, oppressive, and misogynistic bosses!

I realize this might upset Sandra Fluke, but at least she has the comfort of knowing that her narcissistic statism generated some good jokes (here, here, and here).

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I wrote a few weeks ago about the hidden economic damage of Obamacare, particularly the harm to the job market.

Today, let’s get further depressed by looking at the ever-worsening fiscal damage of the law.

Here’s some of what Chuck Blahous of Mercatus wrote about this costly new entitlement.

The ACA was enacted in 2010 with the promise of reducing the federal budget deficit while expanding health insurance coverage. Nearly lost amid the recent press cheerleading over ACA enrollment figures is that this promise has disintegrated, and now no one…can say how much fiscal damage the ACA will ultimately cause. …CBO currently estimates that the ACA’s coverage provisions will cost the federal government $92 billion a year by FY2015. This is roughly 0.5 percent of projected U.S. economic output for 2015, well exceeding the relative costs of Social Security and Medicaid at similar points in their histories. (The amount falls just short of the proportion of GDP absorbed by all of early Medicare.) Worse, the federal fiscal position was far weaker when the ACA was passed than when Social Security, Medicare, and Medicaid were created.

That’s bad news, but things will get even worse in coming years.

Troubling though the ACA’s startup costs are, they represent only the tip of the fiscal iceberg that will be the fully phased-in law. CBO projects that its annual costs will hit $200 billion by FY2020, or nearly 0.9 percent of GDP. Yet this assumes that lawmakers will be content to allow the ACA’s health insurance subsidies to grow more slowly than low-income beneficiaries’ health care costs, as the law now stipulates. Thus there is every reason to believe that the ACA’s eventual costs will far exceed initial estimates, as happened with Social Security, Medicare, and Medicaid. …Also unclear is whether the ACA’s reinsurance and “risk corridor” provisions will produce unexpected federal budget costs; these provisions were included in the ACA to protect insurers… the Obama administration continues to promise both participating health insurers and taxpayers that they will each be protected from loss under the risk corridor provisions.

The potential bailout for insurance companies is bad news for taxpayers, but it’s even more upsetting for moral and practical reasons.

The big insurance companies got into bed with the White House, figuring it was a good idea for the federal government to coerce Americans into buying their product. As far as I’m concerned, they should swallow heavy losses.

But in Washington, there’s rarely a downside for doing the wrong thing. Instead, this could be like TARP. A reward for bad behavior.

By the way, it’s not just policy wonks who are concerned about the fiscal burden of Obamacare. According to Roll Call, the Congressional Budget Office has – for all intents and purposes – given up trying to estimate the fiscal burden of the legislation.

For Democratic lawmakers who were hesitant to sign onto the sweeping 2010 health care law, one of the most powerful selling points was that the Affordable Care Act would actually reduce the federal budget deficit…the answer to that question has become something of a mystery. In its latest report on the law, the Congressional Budget Office said it is no longer possible to assess the overall fiscal impact of the law. That conclusion came as a surprise to some fiscal experts in Washington and is drawing concern. …In a little-noticed footnote to a report issued in April, “Updated Estimates of the Effects of the Insurance Coverage Provisions of the Affordable Care Act,” the CBO wrote that it and the Joint Committee on Taxation “can no longer determine exactly how the provisions of the ACA that are not related to the expansion of health insurance coverage have affected their projections of direct spending and revenues.”

Translated into plain English, Obamacare is a budgetary black hole.

If only somebody could have predicted that this would happen. But actually, many people did. The history of entitlement programs is that they are bad news in theory and even worse news in reality.

Indeed, even I warned that Obamacare was going to be a bigger fiscal nightmare than originally predicted, as seen in this video.

This Eric Allie cartoon doesn’t focus on the fiscal problems of Obamacare, but it’s worth sharing because the entire law is a mess.

Too bad the American people are the guinea pigs for this experiment in statism.

Wouldn’t it be nice if instead we had the freedom to experiment with market-based healthcare?

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I’ve shared lots of data and evidence about the harmful economic impact of government spending.

Simply stated, budgetary outlays divert resources from more productive uses. And this results in labor and capital being misallocated, leading to less economic output.

The damage is even more pronounced when you look at how politicians finance the budget. Whether they use taxes or borrowing (or even printing money), there are additional distortions that hinder the private sector.

Today, we’re going to look at the economic impact of a particular type of government spending. A new working paper by two academics at the University of Miami has revealed a negative relationship between government consumption spending and economic growth.

But before digging into the details, what do public finance economists mean when they talk about “consumption spending”? At the risk of over-simplifying, it’s the part of the budget used to purchase goods and services. Everything from soldiers to housing and from jails to education.

It’s basically the so-called discretionary portion of the federal budget, minus “investment spending” (which would be things like roads).

Anyhow, here are some of the key findings.

This paper tests the Mundellian hypothesis that too much government spending reduces economic growth… In this paper, we analyze annual panel data from 1999 to 2011 for 31 OECD countries to examine the role of government spending in determining economic growth. In particular, we will focus our attention on government consumption spending on non-market goods such as defense and justice for collective consumption and its effect on growth in real GDP growth. …We find that government consumption spending on non-market goods signifi cantly reduces economic growth. A one percentage point increase in government consumption of non-market goods as a percent of GDP is associated with a 0.86 percentage lower growth rate in GDP. …This result is compatible with Barro (1990)’s fi nding for the Summers and Heston database, but suggests a stronger negative eff ect of government consumption on economic growth.

That’s a big number, which implies that we’re definitely on the downward-sloping portion of the Rahn Curve.

By the way, just in case you’re wondering why Obama’s “stimulus” was such a flop, the study also notes that “the 2009 American Reinvestment and Recovery Act envisaged less than 5% spending on public investment, and over 95% on consumption.”

In other words, Obama increased the type of government spending with the worst impact on the economy. Something to keep in mind when politicians, lobbyists, interest groups, and other insiders argue that there’s no need to cut back on discretionary spending.

But it’s also important to note that the study has some findings that may distress libertarians and small-government conservatives. It finds, for instance, that “government investment spending is positively related to growth.”

Also, it’s important to realize that the study is limited to only certain forms of discretionary spending. As the authors explain, they examine, “the impact of government consumption spending net of health, education and housing service.”

But even with those caveats, we have another strong piece of evidence that our economy would grow much faster if we reduced the burden of government spending.

And if you need more evidence on the harmful effect of government spending (either generally or specific types of outlays), allow me to call your attention to research even from normally left-leaning international bureaucracies such as the Organization for Economic Cooperation and Development, International Monetary Fund, World Bank, and European Central Bank.

And you can find similar findings in the work of scholars from all over the world, including the United States, Finland, Australia, Sweden, Italy, Portugal, and the United Kingdom.

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Obamacare resulted in big increases in the fiscal burden of government (ironically, it would be even worse if Obama hadn’t unilaterally suspended parts of the law).

The legislation increased government spending, mostly for expanded Medicaid and big subsidies for private insurance.

There were also several tax hikes, with targeted levies on medical device makers and tanning beds, as well as some soak-the-rich taxes on upper-income taxpayers.

These various policies are bad news for economic performance, but the damage of Obamacare goes well beyond these provisions.

Writing for Real Clear Markets, Professor Casey Mulligan of the University of Chicago explains that Obamacare contains huge implicit tax hikes on work and other forms of productive behavior.

…can we begin to take seriously the idea that the fiscal policies and regulations hidden in the Affordable Care Act are shrinking our economy? …Politicians and journalists use the term tax more narrowly than economists do, but the economic definition is needed to understand the economic effects of the ACA. …Withholding benefits from people who work or earn is hardly different than telling them to pay a tax. For this reason, economists refer to benefits withheld as “implicit taxes.” What really matters for labor market performance is the reward to working inclusive of implicit taxes, and not the amount of revenue delivered to the government treasury… The ACA…is full of implicit taxes. Many of them have remained hidden in the “fog of controversy” surrounding the law and their effects excluded from economic analyses of it.

In other words, his basic message is that the government reduces incentives to be more productive and earn more money when it provides handouts that are based on people earning less money.

Indeed, click here to see a remarkable chart showing how redistribution programs discourage work.

And speaking of charts, here’s one from Professor Mulligan’s article, and it shows the nation’s largest tax hikes based on what happened to the marginal tax rate on working.

Wow. No wonder we’re suffering from a very anemic recovery.

Professor Mulligan elaborates.

During a period that included more than a dozen tax increases, the ACA is arguably the largest as a single piece of legislation, adding about six percentage points to the marginal tax rate faced, on average, by workers in the economy. The only way to cite larger marginal tax increases would be to combine multiple coincident laws, such as the Revenue Acts of 1950 and 1951 and the new payroll tax rate that went into effect in 1950. Even with these adjustments, the ACA is still the third largest marginal tax rate hike during the seventy years. …Let’s not be surprised that, as we implement a new law that taxes jobs and incomes, we are ending up with fewer jobs and less income.

By the way, other academics also have found that Obamacare will lure many people out of the workforce and into government dependency.

The White House actually wants us to believe this is a good thing, as humorously depicted by this Glenn McCoy cartoon.

But rational people understand that our economic output is a function of how much labor and capital are being productively utilized.

In other words, Obamacare is a mess. It’s hurting the economy and should be repealed as the first step in a long journey back to market-based healthcare.

P.S. Mulligan’s chart also re-confirms that unemployment benefits increase unemployment. Heck, that’s such a simple and obvious concept that it’s easily explained in this Wizard-of-Id parody and this Michael Ramirez cartoon.

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

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

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

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

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

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

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

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

EU Report Total Tax

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

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

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

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

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

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

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

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

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

EU Report Personal Income Tax

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

But not in all regards.

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

EU Report Corporate Income Tax

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

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

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

EU Report VAT

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

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

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

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

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

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

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

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

Dismal European Economy

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

But compared to Europe, we’re Hong Kong.

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

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

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

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Imagine how weird it would be if the Cato Institute and Americans for Tax Reform praised Barack Obama for fiscal responsibility.

And think how inconceivable it would be for the Heritage Foundation and the National Taxpayers Union to applaud Tim “Turbotax” Geithner for economic stewardship.

But the Canadian version of that happened while I was at the conference of the World Taxpayers Association in Vancouver two weeks ago.

The event was organized by the Canadian Taxpayers Federation and the main speaker was Paul Martin of the Liberal Party, who served as Finance Minister from 1993-2002 and Prime Minister from 2003-2006.

And I should add, for context, that the Liberal Party in Canada is not a classical liberal party with a track record of free markets and small government.

But Paul Martin was honored because he was responsible, while Finance Minister, for one of the best records of fiscal restraint of any policy maker in recent history (click here for international comparisons).

I’ve pointed out that the burden of spending fell under Bill Clinton, and I’ve even acknowledged that the federal budget hasn’t grown much under Obama, at least once you get past his first couple of years.

But Paul Martin was far more frugal. And since Canada has a parliamentary system, there’s no ambiguity about who deserves credit. He restrained spending when his party had control.

What happened to generate the good results? For all intents and purposes, he imposed a spending freeze. And I’m talking a nominal spending freeze, not the kind of fake fiscal discipline you get when politicians make “cuts” off an inflated baseline.

And because the budget was successfully restrained, that addressed both the problem of too much spending and the symptom of red ink.

In his speech, Martin won me over when he bragged that the burden of government spending fell to its lowest point in 50 years.

And my man crush became even more pronounced when he said they allowed agencies to ask for more funds, but only if they identified offsetting cuts elsewhere.

What a novel concept! A government that actually looked at tradeoffs and prioritized outlays. Sort of like a household or business.

Paul Martin DiscussionI asked the former Prime Minister a couple of questions.

I was specifically interested in why the Liberal Party didn’t behave like other left-wing parties and raise taxes to enable bigger government.

Martin said there were some in his party who wanted that approach, but that there were two reasons for good policy.

First, enough people understood that Canada has a spending problem rather than a debt problem. And second, there was concern that financial markets would react poorly if policy makers simply pushed for higher taxes and ignored the size of government.

Wow, I wish the average Republican had the same sophisticated understanding of fiscal policy.

No wonder Canada got such good results. They imposed austerity on the public sector, rather than trying to squeeze the private sector (a distinction that seems to escape Paul Krugman).

To give you an idea of what Paul Martin accomplished, here’s a video prepared by the Canadian Taxpayers Federation, which features laudatory comments by representatives of major market-oriented think tanks.

At the risk of stating the obvious, I don’t think there will ever be a video like this about Obama.

Very well done, even though I think it focused too much on red ink and not enough on the real accomplishment of spending restraint.

My Cato colleague, Chris Edwards, has produced some very good data on what’s happened to the burden of government spending in his home country.

For further information on that topic, here’s my video on international examples of spending restraint. Canada, you’ll notice, is one of the prominent case studies.

P.S. If you know any Keynesians, you can have some fun by asking them why Canada’s economy grew when the burden of government spending was reduced.

P.P.S. It’s also very impressive that Canada has one of the lowest levels of welfare spending of any developed nation.

P.P.P.S. No wonder Canada now ranks above the United States for economic freedom and the freest jurisdiction in North America is actually a Canadian province.

P.P.P.P.S. To end on a humorous note, Canadians should fortify their border to avoid an influx of American leftists.

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

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

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

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

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

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

So why has the United Kingdom experienced this economic rebound?

Lower corporate tax rates are key, Warner explains.

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

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

Now let’s connect the dots.

More economic activity means more income for taxpayers.

And more income means a bigger tax base.

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

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

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

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

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

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

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

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

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

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

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

This is remarkable.

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

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

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

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

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

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

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

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Regular readers know that good fiscal policy takes place when government spending grows slower than the private economy.

Nations that maintain this Golden Rule for extended periods of time shrink the relative burden of government spending, thus enabling more growth by freeing up resources for the productive sector of the economy and creating leeway for lower tax rates.

And when countries deal with the underlying disease of too much spending, they automatically solve the symptom of red ink, so it’s a win-win situation whether you’re a spending hawk or a so-called deficit hawk.

With this in mind, let’s look at some interesting new research from the Heritage Foundation. They’ve produced a report entitled Europe’s Fiscal Crisis Revealed: An In-Depth Analysis of Spending, Austerity, and Growth.

It focuses on fiscal policy over the past few years and is an important contribution in two big ways. First, it shows that the Keynesian free-lunch approach is counterproductive. Second, it shows that the right kind of fiscal consolidation (i.e., spending restraint) generates superior results.

Here are some excerpts from the chapter by Professor Alberto Alesina of Harvard of Veronique de Rugy of the Mercatus Center. They look at some of the academic evidence.

The debate over the merits of austerity (the implementation of debt-reduction packages) is frustrating. Most people focus only on deficit reduction, but that can be achieved in many different ways. Some ways, such as raising taxes, deeply hurt growth… The data show that austerity has been implemented in Europe. However, with some rare exceptions, the forms of austerity were heavy on tax increases and far from involving savage spending cuts. …spending-based adjustments are more likely to reduce the debt-to-GDP ratio, regardless of whether fiscal adjustments are defined in terms of improvements in the cyclically adjusted primary budget deficit or in terms of premeditated policy changes designed to improve a country’s fiscal outlook. …Other research has found that fiscal adjustments based mostly on the spending side are less likely to be reversed and, as a result, have led to more long-lasting reductions in debt-to-GDP ratios. …successful fiscal adjustments are often rooted in reform of social programs and reductions in the size and pay of the government workforce rather than in other types of spending cuts. …tax increases failed to reduce the debt and were associated with large recessions. …growing evidence suggests that private investment tends to react more positively to spending-based adjustments. For instance, data from Alesina and Ardagna and from Alesina, Favero, and Giavazzi show that private-sector capital accumulation increases after governments cut spending.

The basic message of the Alesina-de Rugy chapter is that bad outcomes are largely unavoidable when nations spend themselves into fiscal trouble, but the damage can be minimized if policy makers impose spending restraint.

The Heritage Foundation’s Salim Furth is the editor of the report, and here’s some of what he wrote in Chapter 3, which looks at what’s happened in recent years as countries dealt with fiscal crisis.

Tax austerity is very harmful to growth, while spending cuts are partially replaced by private-sector activity, making them less harmful. …Estimating growth effects on private GDP, the difference between tax and spending multipliers grows predictably. A two-dollar decline in private GDP is associated with every dollar of tax increases, but spending cuts are associated with no change in private GDP.  …fiscal consolidation that relied 60 percentage points more on spending cuts was associated with 3.1 percentage points more GDP growth from 2009 to 2012, when average growth was just 3.3 percent over the entire period. In other words, a country that had a fiscal consolidation composed of 80 percent of spending cuts and 20 percent of tax increases would grow much more rapidly than a country in which only 20 percent of the consolidation was spending cuts and 80 percent was tax increases. The association is slightly stronger for private GDP.

Salim then cites a couple of powerful examples.

…the difference between Germany’s 8 percent growth from 2009 to 2012 and the 1 percent growth in the Netherlands is largely accounted for by Germany’s cut-spending, cut-taxes approach and the Netherlands’ raise-spending, raise-taxes approach. The U.K. and Italy enacted similarly-sized austerity packages, but Italy’s was half tax increases while the U.K. favored spending cuts. Neither country excelled, but over half of the gap between the U.K.’s 3 percent growth and Italy’s negative growth is explained by Italy’s tax increases.

By the way, it’s not as if Germany and the United Kingdom are stellar examples of fiscal restraint. It’s just that they’re doing better than nations that traveled down the path of even bigger government.

Regarding supposed Keynesian stimulus, Salim makes a very important point that more government spending seems positive in the short run, sort of like the fiscal version of a sugar high.

But that sugar high produces a bad hangover. Nations that try Keynesianism quickly fall behind countries with more prudent policy.

Government spending boosts GDP instantly and then crowds out private spending slowly. The incentive effects of taxation may take effect over several years, but they are permanent and especially pronounced in investment. If anything, this recent crisis shows how brief the short run is: Countries whose spending-focused stimulus put them one step ahead in 2010 were already two steps behind in 2012.

There’s a lot more in the report, so I encourage readers to give it a look.

I particularly like that it emphasizes the importance of properly defining “austerity” and “fiscal consolidation.” These are issues that I highlighted in my discussion with John Stossel.

Another great thing about the report is that it has all sorts of useful data.

Though much of it is depressing. Here’s Chart 2-9 from the report and it shows all the countries that have increased top marginal tax rates between 2007 and 2013.

Portugal wins the booby prize for the biggest tax hike, though many nations went down this class-warfare path. Including the United States thanks to Obama’s fiscal cliff tax increase.

The United Kingdom is an interesting case. It raised its top rate by 10 percentage points, but then cut the rate by 5 percentage points after it became apparent that the higher rate wasn’t collecting any additional revenue.

We should give credit to the handful of nations that have lowered tax rates, several of which replaced discriminatory systems with simple and fair flat taxes.

Though it’s also important to keep in mind where each nation started. Switzerland lowered it’s top rate by only 0.4 percentage points, which seems small compared to Denmark, which dropped its top rate by 6.7 percentage points.

But Switzerland started with a much lower rate, whereas Denmark has one of the world’s most punitive tax regimes (though, paradoxically, it is very laissez-faire in areas other than fiscal policy).

Let’s look at the same data, but from a different perspective. Chart 2-10 shows how many nations (from a list of 37) raised top rates or lowered top rates each year.

The good news is that tax cutters out-numbered tax-hikers in 2008 and 2009.

The bad news is that tax increases have dominated ever since 2010.

Many of these post-2009 tax hikes were enabled by a weakening of tax competition, which underscores why it is so important to preserve the right of jurisdictions to maintain competitive tax systems.

And don’t forget that tax policy will probably get even worse in the future because of aging populations and poorly designed entitlement programs.

Let’s close with some more numbers.

Here’s Table 2-5 from the report. It shows changes in the value-added tax (VAT) beginning in December 2008.

The key thing to notice is that there’s no column for decreases in the VAT. That’s because no nation lowered that levy. Practically speaking, this hidden form of a national sales tax is a money machine for bigger government.

But you don’t have to believe me. The International Monetary Fund unintentionally provided the data showing that VATs are the most effective tax for financing bigger government.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And that has wealth creators worried.

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

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

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

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

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

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

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

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

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

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The establishment fervently believes that more money should come to Washington so that politicians have greater ability to buy votes.

That’s why statists from both parties are so viscerally hostile to Grover Norquist’s no-tax-hike pledge. They view it as an obstacle to bigger government.

And it also explains why politicians who raise taxes are showered with praise, especially when they are Republicans who break their promises and betray taxpayers.

Which is why President George H.W. Bush was just awarded a “profiles in courage” award for raising taxes and breaking his read-my-lips promise by the crowd at Harvard’s Kennedy School.

Here’s some of what was reported by the Dallas News.

Former President George H.W. Bush was honored Sunday with a Kennedy “courage” award for agreeing to raise taxes to confront a spiraling deficit, jeopardizing his presidency that ended after just one term. …The budget deal enacted “responsible and desperately needed reforms” at the expense of Bush’s popularity and his chances for re-election, Schlossberg said. “America’s gain was President Bush’s loss, and his decision to put country above party and political prospects makes him an example of a modern profile in courage that is all too rare,” he said.

I’m not surprised, by the way, that Mr. Schlossberg praised Bush for selling out taxpayers.

But I am disappointed that the Dallas News reporter demonstrated either incompetency or bias by saying that Bush raised taxes to “confront a spiraling deficit.”

If you look at the Congressional Budget Office forecast from early 1990, you’ll see that deficits were on a downward path.

CBO 1990 Deficit Forecast

In other words, Bush had the good fortune of inheriting a reasonably strong fiscal situation from President Reagan.

Spending was growing slower than the private economy, thanks in part to the Gramm-Rudman law that indirectly limited the growth of spending.

So Bush 41 simply had to maintain Reagan’s policies to achieve success.

But instead he raised taxes. That got him an award from the Kennedy School this year…and it resulted in bigger government in the early 1990s.

Writing for National Review, Deroy Murdock is justly irked that President George H.W. Bush was given an award for doing the wrong thing.

…former president George Herbert Walker Bush received the Profile in Courage Award from the John F. Kennedy Library Foundation. What intrepid achievement merited this emolument? Believe it or not, breaking his word to the American people and hiking taxes by $137 billion in 1990.  …Bush’s tax hike was a political betrayal for Republicans and other voters who believed him when he pledged to the 1988 GOP National Convention: “Read my lips: No new taxes.” …Bush violated his promise and hiked the top tax rate from 28 percent to 31. Bush also imposed a luxury tax on yachts and other items. This led to a plunge in domestic boat sales and huge job losses among carpenters, painters, and others in the yacht-manufacturing industry.

The worst result, though, was that the tax hike enabled and facilitated more government spending.

Here are the numbers I calculated a couple of years ago. If you look at total spending (other than net interest and bailouts), you see that Bush 41 allowed inflation-adjusted spending to grow more than twice as fast as it did under Reagan.

And if you remove defense spending from the equation, you see that Bush 41’s bad record was largely the result of huge and counterproductive increases in domestic spending.

With such a bad performance, you won’t be surprised to learn that market-oriented fiscal experts do not remember the Bush years fondly.

Deroy cites some examples, including a quote from yours truly.

“Bush’s tax hike repealed the real spending restraint of Gramm-Rudman and imposed a big tax hike that facilitated a larger burden of government spending,” says Cato Institute scholar Dan Mitchell. “No wonder the statists . . . are applauding.” …“Of course the Left wants to celebrate Bush’s broken tax promise,” Moore says. ”It is what cost Republicans the White House and elected Bill Clinton…” says Grover Norquist, president of Americans for Tax Reform. “This is an award for stupidly throwing away the presidency to the Democrats…” Norquist further laments: “You never see a Democrat get a ‘courage’ award for saying ‘No’ to the spending-interest lobby.”

The moral of the story is that Washington tax-hike deals are always a mechanism for bigger government.

And President George H.W. Bush should be remembered for being a President who made Washington happy by making America less prosperous. As I wrote last year, “He increased spending, raised tax rates, and imposed costly new regulations.”

Hmmm…an establishment Republican President who increased the burden of government. If that sounds familiar, just remember the old saying, “Like father, like son.”

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More than three years ago, I wrote that the Department of Transportation should be dismantled for the simple reason that we’ll get better roads at lower cost with the federalist approach of returning responsibility to state and local governments.

I echoed those sentiments in this CNBC interview.

Since there’s only an opportunity to exchange soundbites in these interviews, let me elaborate on some of the reasons why transportation should be a state and local responsibility.

1. Washington involvement is a recipe for pork and corruption. Lawmakers in Congress – including Republicans – get on the Transportation Committees precisely because they can buy votes and raise campaign cash by diverting taxpayer money to friends and cronies.

mitchells-first-theorem-of-government2. Washington involvement in transportation is just the tip of the iceberg. As I said in the interview, the federal budget is mostly a scam where endless streams of money are shifted back and forth in leaky buckets. This scam is great for insiders and bad news for taxpayers.

3. Washington involvement necessarily means another layer of costly bureaucracy. And this is not a trivial issues since the Department of Transportation is infamous for overpaid bureaucrats.

4. Washington involvement gives state and local politicians an excuse to duck responsibility for low-quality infrastructure. Why make adult decisions, after all, when you can shift the blame to DC for not providing enough handouts.

While I think I made some decent points in the interview, I should have addressed the assertion that our infrastructure is falling apart. My colleague at the Cato Institute, Chris Edwards, effectively dealt with this scare tactic in his recent Congressional testimony.

I also should have pointed out that a big chunk of the gas tax is diverted to boondoggle mass transit projects.

Last but not least, I’m disappointed that I failed to connect some very important dots. Gov. Rendell and the CNBC host both fretted that the current system isn’t producing a desirable outcome, but they’re the ones advocating for a continuation of the status quo! Heck, they want even more of the system that they admit doesn’t work.

Sigh.

P.S. While I obviously want to get rid of the Department of Transportation, it’s not at the top of my list for the most wasteful and counterproductive federal bureaucracy.

P.P.S. On a completely separate topic, I can’t resist sharing this Ramirez cartoon.

And since we’re making fun of our Statist-in-Chief, here’s some satire about the award Obama received from Steven Spielberg.

The teleprompters are a nice touch, reminiscent of some very amusing jokes here, here, here, and here.

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The Census Bureau just released a report on America’s aging population.

The big takeaway is that our population will be getting much older between now and 2050.

And since I’m a baby boomer, I very much like the fact that we’re expected to live longer.

But as a public finance economist, I’m not nearly as happy.

As I explain in this interview with the Wall Street Journal’s Digital Network (and as confirmed by BIS, OECD, and IMF data), the United States is going to get deluged by a tsunami of entitlement spending.

I mentioned that it’s important to focus on the ratio of workers to retirees. This “dependency ratio” matters because economic output largely is a function of an economy’s working-age population.

To cite my famous cartoons, you need a sufficient number of people pulling the wagon to support those riding in the wagon.

Here’s a chart from the Census report to help you understand the magnitude of the problem. As you can see, both in the United States and other nations, the increase in the dependency ratio is almost entirely the result of aging populations.

Census Dependency Ratio

This is why I said that we face a slow-motion train wreck because of poorly designed entitlement programs.

But the good news is that there is time to reform those programs and avert a crisis.

Which explains why I probably sound like a broken record about the need for genuine entitlement reform.

In a column citing the new private pension system in the Faroe Islands, I gave the arguments for modernizing Social Security with personal retirement accounts.

But we also need to deal with the health entitlements.

Here’s how to fix Medicare.

And here’s how to fix Medicaid.

By the way, some of the damaging provisions of Obamacare can be de facto repealed by including them in the Medicaid block grant, so it’s a critically important reform.

Needless to say, I think these reforms are far better for the economy than the big tax hike Obama has endorsed to deal with the giant financing gap.

P.S. For a clever look at the worker-dependency ratio, check out the party ship produced by a Danish think tank.

P.P.S. The interviewer also mentioned that America’s racial composition is changing, which gives me an excuse to point out that Social Security reform is particularly beneficial for blacks because of differences in life expectancy.

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Allister Heath, the superb economic writer from London, recently warned that governments are undermining incentives to save.

And not just because of high tax rates and double taxation of savings. Allister says people are worried about outright confiscation resulting from possible wealth taxation.

It is clear that individuals, when at all possible, need to accumulate more financial assets. …Tragically, it won’t happen. A lack of trust in the system is one important explanation. People simply don’t believe the government – and politicians of all parties – when it comes to long-terms savings and pensions. They worry, with good reason, that the rules will keep changing; they are afraid that savers are an easy target and that they will eventually be hit by a wealth tax.

Are savers being paranoid? Is Allister being paranoid?

Well, even paranoid people have enemies, and this already has happened in countries such as Poland and Argentina. Moreover, it appears that plenty of politicians and bureaucrats elsewhere want this type of punitive levy.

Here are some passages from a Reuters report.

Germany’s Bundesbank said on Monday that countries about to go bankrupt should draw on the private wealth of their citizens through a one-off capital levy before asking other states for help.

Since data from the IMF, OECD, and BIS show that almost every industrialized nation will face a fiscal crisis in the next decade or two, people with assets understandably are concerned that their necks will be on the chopping block when politicians are scavenging for more cash to prop up failed welfare states.

Though to be fair, the Bundesbank may simply be sending a signal that German taxpayers don’t want to pick up the tab for fiscal excess in nations such as France and Greece. And it also acknowledged such a tax would harm growth.

“(A capital levy) corresponds to the principle of national responsibility, according to which tax payers are responsible for their government’s obligations before solidarity of other states is required,” the Bundesbank said in its monthly report. …the Bundesbank said it would not support an implementation of a recurrent wealth tax, saying it would harm growth.

Other German economists, however, openly advocate for wealth taxes on German taxpayers.

…governments should consider imposing one-off capital levies on the rich… In Germany, for example, two thirds of the national wealth belongs to the richest 10% of the adult population. …a one-time capital levy of 10% on personal net wealth exceeding 250,000 euros per taxpayer (€500,000 for couples) could raise revenue of just over 9% of GDP. …In the other Eurozone crisis countries, it would presumably be possible to generate considerable amounts of money in the same way.

The pro-tax crowd at the International Monetary Fund has a similarly favorable perspective, relying on absurdly unrealistic conditions to argue that a wealth tax wouldn’t hurt growth. Here’s some of what the IMF asserted in its Fiscal Monitor last October.

The sharp deterioration of the public finances in many countries has revived interest in a “capital levy”— a one-off tax on private wealth—as an exceptional measure to restore debt sustainability. The appeal is that such a tax, if it is implemented before avoidance is possible and there is a belief that it will never be repeated, does not distort behavior (and may be seen by some as fair).

The IMF even floats a trial balloon that governments could confiscate 10 percent of household assets.

The tax rates needed to bring down public debt to precrisis levels…are sizable: reducing debt ratios to end-2007 levels would require (for a sample of 15 euro area countries) a tax rate of about 10 percent on households with positive net wealth.

Many people condemned the IMF for seeming to endorse theft by government.

The IMF’s Deputy Director of Fiscal Affairs then backpedaled a bit the following month. He did regurgitate the implausible notion that a wealth tax won’t hurt the economy so long as it only happens once and it is a surprise.

To an economist, …it’s close to an ideal form of taxation, since there is nothing you can now do to reduce, avoid, or evade it—the holy grail of what economists call a non-distorting tax. …Such a levy would entail a one-off charge on capital assets, the precise base being a matter for choice, but generally larger than cash left on kitchen tables. Added to the efficiency advantage of such a tax, many see an equity appeal in that such a charge would naturally fall most heavily on those with the most assets.

But he then felt obliged to point out some real-world concerns.

…governments have rarely implemented capital levies, and they have almost never succeeded. And there are very good reasons for that. …to be non-distorting the tax must be both unanticipated and believed certain not to be repeated. These are both very hard things to achieve. Introducing and implementing any new tax takes time, and governments can rarely do it in entire secrecy (even leaving aside transparency issues). And that gives time for assets to be moved abroad, run down, or concealed. The risk of future levies can be even more damaging; they discourage the saving and investment that generate future capital assets.

Though these practical flaws and problems don’t cause much hesitation on the left.

Here’s what Joann Weiner recently wrote in the Washington Post about the work of Thomas Piketty, a French economist who apparently believes society will be better if higher taxes result in everyone being equally poor.

A much higher tax on upper income — say 80 percent — coupled with a significant tax on wealth — say 10 percent — would go a long way toward making America’s income distribution more equitable than it is now. …capital is the chief culprit… Piketty has another pretty radical, at least for the United States, way to shrink the share of wealth at the top — introduce a global tax on all capital. This means taxes on not just stocks and bonds, but also land, homes, machines, patents — you name it; if it’s wealth or if it generates what tax authorities call “unearned income,” then it should be taxed. One other thing. All countries have to adopt the tax to keep capital from fleeing to tax havens.

Writing in the New York Times back in January, Thomas Edsall also applauds proposals for a new wealth tax.

…worsening inequality is an inevitable outcome of free market capitalism. …The only way to halt this process…is to impose a global progressive tax on wealth – global in order to prevent (among other things) the transfer of assets to countries without such levies. A global tax, in this scheme, would restrict the concentration of wealth and limit the income flowing to capital.

Not surprisingly, there’s support in academia for confiscating other people’s money. One professors thinks the “impossible dream” of theft by government could become reality.

…this article proposes a yearly graduated tax on the net wealth of all individuals in excess of $100 million. The rate would be 5% on the excess up to $500 million and then 10% thereafter. …Such taxes are attacked as “class warfare” that runs counter to America’s libertarian and capitalist traditions. However…the time may once again be ripe for adopting a new tax to combat the growing wealth inequality in the nation. …wealth inequality harms the very social fabric of society. …The purpose of the proposed Equality Tax would not be to raise general revenue, although revenue would be raised. Instead it would be focused on establishing a societal value that for the health of society, no individual should accrue wealth beyond a certain point. Essentially, once an individual has $100 million of assets, …further wealth accumulation harms society while providing little economic benefit or incentive to the individual. …At a minimum such a tax would raise
at least $140 billion a year.

Let’s close by looking at the real economic consequences of wealth taxation. Jan Schnellenbach of the Walter Eucken Intitut in Germany analyzed this question.

Are there sound economic reasons for the net wealth tax, as an instrument to tax stocks of physical and financial capital, to be levied in addition to taxes on capital incomes?

Before even addressing that issue, the author points out that policy actually has been moving in the right direction, presumably because of tax competition.

There has been a wave of OECD countries abolishing their personal net wealth taxes recently. Examples are Spain (abolished in 2008), Sweden (2007) as well as Finland, Iceland and Luxembourg (all 2006). Nevertheless, the net wealth tax repeatedly surfaces again in the public debate.

So what about the economics of a wealth tax? Schnellenbach makes the critical point that even a small levy on assets translates into a very punitive rate on actual returns.

…every tax on domestic wealth needs to be paid out of the returns on wealth, every net wealth tax with a given rate is trivially equivalent to a capital income tax with a substantially higher rate. …even an – on aggregate – non-confi scatory wealth tax may at least temporarily actually have confi scatory eff ects on individuals in periods where they realize sufficiently low returns on their capital stock.

He then looks at the impact on incentives.

…a net wealth tax will have similar distortionary e ffects as a capital income tax. …Introducing a comprehensive net wealth tax would then, through the creation of new incentives for tax avoidance and evasion, also diminish the base of the income tax. Scenarios with even a negative overall revenue eff ect would be conceivable. There is thus good reason to cast doubt on the popular belief that a net wealth tax combines little distortions and large amounts of revenue. …A wealth tax aggravates the distortions and the incentives to evade that already exist due to a pre-existing capital income tax.

And he closes by emphasizing that this form of double taxation undermines property rights.

The intrusion into private property rights may be far more severe for a wealth tax compared to an income tax. …It takes hold of a stock of wealth that consists of saved incomes which have already been subject to an income tax in the past… Our discussion has shown that economically, the wealth tax walks on thin ice.

In other words, a wealth tax is a very bad idea. And that’s true whether it’s a permanent levy or a one-time cash grab by politicians.

Some may wonder whether a wealth tax is a real threat. The answer depends on the time frame. Could such a levy happen in the next year or two in the United States?

The answer is no.

But the wealth tax will probably be a real threat in the not-too-distant future. America’s long-run fiscal outlook is very grim because of a rising burden of government spending.

This necessarily means there will be a big fiscal policy battle. On one side, libertarians and small-government advocates will push for genuine entitlement reform. Advocates of big government, by contrast, will want new revenues to enable and facilitate the expansion of the public sector.

The statists will urge higher income tax rates, but sober-minded folks on the left privately admit that the Laffer Curve is real and that they can’t collect much more money with class-warfare tax policy.

That’s why there is considerable interest in new revenue sources, such as energy taxes, financial transaction taxes, and the value-added tax.

And, of course, a wealth tax.

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Perhaps there is an occasional exception, but when someone in a public policy debate mentions a “race to the bottom,” they always seem to favor bigger government and punitive taxation.

Here are a few examples:

The Organization for Economic Cooperation and Development, a bureaucracy based in Paris, wants to rewrite international tax norms for business income because “failure to collaborate … could be damaging in terms of … a race to the bottom with respect to corporate income taxes.”

The International Monetary Fund also prefers cartels over competition. As the UK-based Guardian reported, “Instead of a race to the bottom where countries compete with each other to offer the lowest rate of corporate tax, it urges co-operation.”

Whether the issue is welfare reform of Medicaid block grants, opponents of federalism complain about decentralization “creating a ‘race to the bottom’ as states slashed funding on services for the poor.”

One of the cranks from the Occupy movement was given a platform by the OECD to complain that, “Tax havens and secrecy jurisdictions bring governments into a harmful race to the bottom.”

And Jeffrey Sachs, writing for the Financial Times, hyperventilated about “a runaway social crisis in many high-income countries. …governments are now in a race to the bottom with regard to corporate taxation”

As you can see, “race to the bottom” is a term that statists use when advocating policies to increase the size, scope, and power of government.

They certainly have the right choose their rhetoric, even though I wish (in the case of the OECD and IMF) that they weren’t being subsidized with my money to push their destructive agenda.

And it makes sense for statists to use this strategy. After all, a “race to the bottom” sounds like a bad thing.

So you can understand that I get irked when the establishment press, which is supposed to be neutral, adopts the left’s rhetoric. Consider this headline from a report in the Financial Times.

FT Race to Bottom Headline(1)

The article itself is not nearly as bad as the headline, so this may be the bias of an editor rather than the bias of a reporter.

Regardless, it sets the tone and obviously would lead an unwitting reader to think it is a good thing that nations aren’t lowering tax rates as much as they did in previous years.

My main point of today’s column is to complain about media bias, but since our example is about the supposed “race to the bottom,” this is also an opportunity to cite the work of the great Nobel Prize-winning economist, Gary Becker, who just passed away.

…competition among nations tends to produce a race to the top rather than to the bottom by limiting the ability of powerful and voracious groups and politicians in each nation to impose their will at the expense of the interests of the vast majority of their populations.

Amen. Tax competition encourages better policy by reducing the power of government.

With regards to bad policy, I want a race to the bottom. That’s what creates a race to the top for prosperity.

P.S. Since we’re on the topic of tax and whether people should pay more or pay less, remember the “Buffett Rule” from the 2012 campaign?

President Obama said every rich person should cough up at least 30 percent of their income to the IRS.

And Warren Buffett volunteered to be Obama’s prop, even distorting his own tax data to facilitate the President’s class-warfare agenda.

Well, it seems that Mr. Buffett is a bit of a hypocrite. Read some of what the Wall Street Journal opined this morning.

…the Berkshire Hathaway CEO seems to have adapted his famous Buffett Rule of taxation when it applies to his own company. …it was fascinating to hear Mr. Buffett explain that his real tax rule is to pay as little as possible, both personally and at the corporate level. “I will not pay a dime more of individual taxes than I owe, and I won’t pay a dime more of corporate taxes than we owe. And that’s very simple,” Mr. Buffett told Fortune magazine in an interview last week. …The billionaire was even more explicit about his goal of reducing his company’s tax payments. “I will do anything that is basically covered by the law to reduce Berkshire’s tax rate,” he said. …Too bad Mr. Buffett didn’t share this rule with voters in 2012.

Tax minimization is both the legal right and the moral responsibility of every citizen.

Unless, of course, you think – ignoring both theory and evidence – that the crowd in Washington spends money more wisely than the private sector.

P.S. Mr. Buffett should be happy he’s an American rather than a Brit. If he lived in London, the supposedly conservative-led government would probably condemn him for legally keeping his taxes as low as possible.

P.P.S. As shown in this clever video, lots of other rich leftists share Mr. Buffett’s hypocrisy.

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Which nation is richer, Belarus or Luxembourg?

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

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

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

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

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

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

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

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

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

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

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

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

China v Taiwan

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

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

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

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

Taiwan Spending Freeze

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

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

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

Taiwan Fiscal Restraint Benefits

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This isn’t the first time this has happened.

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

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

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

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

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

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

Here are some excerpts from a column in Forbes.

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

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

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

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

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

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

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

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

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

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

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What happens when you mix something good with something bad?

To be more specific, what happens when you have a big success story, like the spending cap in Switzerland that has dramatically slowed the growth of government, and then expect intelligent and coherent coverage by a government-run media outfit that presumably wants a bigger public sector?

Well, the answer is that you get a very muddled story.

Here’s some of what Swiss Info, which is part of the Swiss Broadcasting Corporation, wrote about that nation’s “debt brake.”

The mind-boggling…debt racked up by governments…has turned some heads towards Switzerland’s successful track record… Swiss voters approved a so-called ‘debt brake’ on federal public finances in 2001, which was put into operation in 2003. A decade later, the mountain of government debt – that soared to dangerous levels during the 1990s and early 2000s – has been reduced by CHF20 billion ($23 billion) from its 2005 peak. The ratio of debt to annual economic output (gross domestic product or GDP)…fell from 53% to 37% between 2005 and the end of 2012.

There’s nothing wrong with that passage. Indeed, you could almost say that Swiss Info was engaging in boosterism.

Moreover, the story points out that other nations have been going in the wrong direction while Switzerland was enjoying success.

…as Switzerland was chipping away at its mountain of debt, other countries were building theirs up. …Since the middle of 2007 public sector debt alone has soared 80% to $43 trillion, according to the Bank for International Settlements.

And the story even notes that other nations are beginning to copy Switzerland.

The Swiss debt brake is the perfect model for other countries to embrace… Germany applied its own version of the Swiss debt brake in 2009, followed by Spain and other European countries.  …“Switzerland came up with the blueprint for what I am sure will be the standard fiscal model of the future,” said Müller-Jentsch.

So why, then, do I think the story has a muddled message?

The answer is that there is no explanation of how the debt brake works and therefore no explanation of why it is a success.

A reader will have no idea, for instance, that the debt brake is actually a spending cap. Readers also will have no way of knowing that red ink has been controlled because the law properly focuses on limiting the growth of spending.

By the way, it wouldn’t have required much research for Swiss Info to include that relevant data. If you do a Google search for “Swiss debt brake,” the first item that appears is the column I wrote in 2012 for the Wall Street Journal.

In that piece, I explained that “Switzerland’s debt brake limits spending growth to average revenue increases over a multiyear period” and I added that “Before the law went into effect in 2003, government spending was expanding by an average of 4.3% per year. Since then it’s increased by only 2.6% annually.”

So why didn’t Swiss Info mention any of this very relevant information? Is it because it tilts to the left like other government-owned media outfits, and the journalists didn’t want to acknowledge that spending restraint is a successful fiscal policy?

I have no idea whether that’s the case, but there is a definite pattern. When I appear on PBS, the deck is usually stacked in favor of statism. Moreover, you won’t be surprised to learn that I’ve had similar experiences with government-run TV in France. And it goes without saying that the BBC in the United Kingdom also leans left (though at least they seem to believe in fair fights).

This video from Swiss Info is similarly vague. It’s a favorable portrayal, but people who watch the video won’t know how the debt brake works or why it has been successful.

P.S.  I don’t know the details about the German version of the debt brake, but it’s probably having some positive impact. The burden of government spending has not increased in that nation since 2009, at least when measured as a share of GDP. Though the Germans also weren’t as profligate as other nations (including the United States) in the years before they adopted a debt brake, so I’ll have to do more research to ascertain whether the German approach is as good as the Swiss approach.

P.P.S. In any event, the moral of the story is that good fiscal policy should be based on the Golden Rule of having government grow slower than the productive sector of the economy.

P.P.S. The Princess of the Levant and I continued our tour of the French Riviera. This photo is from Les Jardins Exotiques at Chateau d’Eze.

photo1(5)

As part of my travels, I’ve learned that the unluckiest people in the world are from Menton and Roquebrune in France. That’s because they were part of Monaco until 1860.

So now, instead of enjoying an income tax of zero under Monegasque rule, they are part of France’s wretched fiscal system.

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I’m ecumenical on tax reform. I’ll support any plan that rips up the internal revenue code and instead lowers tax rates, reduces double taxation, and cuts out distorting loopholes.

And as I explain in this interview, both the flat tax and national sales tax have a low tax rate. They also get rid of double taxation and they both wipe out the rat’s nest of deductions, credits, exclusions, preferences, and exemptions.

You’ll notice, however, that I wasn’t very optimistic in the interview about the possibility of replacing the IRS with a simple and fair tax system.

But perhaps I’m being needlessly gloomy. New polling data from Reason-Rupe show that there’s very strong support for reform. At least if you favor a flat tax.

This doesn’t mean we can expect genuine tax reform tomorrow or the next day.

President Obama is viscerally committed to class-warfare tax policy, for instance, and special interest groups would vigorously resist if there was a real possibility (they would say threat) of scrapping the current tax code.

But it does suggest that tax reform – at least in the form of a flat tax – could happen if there was real leadership in Washington.

So maybe my fantasies will become reality!

And one of the best arguments for reform is that the internal revenue code is an unfair mess.

Consider how rich people are treated by the tax code. The system is so complicated that we can’t tell whether they’re paying too much (because of high rates and pervasive double taxation) or paying too little (because of special preferences and tax shelters).

Regardless, we do know that they can afford lots of lobbyists, lawyers, and accountants. So even though they are far more likely to be audited, they have ample ability to defend themselves.

But the real lesson, as I explain in this CNBC interview, is that the right kind of tax reform would lead to a simple system that treats everyone fairly.

I’m also glad I used the opportunity to grouse about the IRS getting politicized and corrupted.

But I wish there had been more time in the interview so I could have pointed out that IRS data reveal that you get a lot more revenue from the rich when tax rates are more reasonable.

And I also wish I had seen the Reason-Rupe poll so I could have bragged that there was strong support for a flat tax.

Unfortunately, I wouldn’t have been able to make the same claim about the national sales tax. I haven’t seen any recent public opinion data on the Fair Tax or other similar plans, but a poll from last year failed to find majority support for such a proposal.

And a Reason-Rupe poll from 2011 showed only 33 percent support for a national sales tax.

That won’t stop me from defending the national sales tax. After all, it is based on the same principles as a flat tax.

But the polls do suggest (as do anecdotes from the campaign trail) that a flat tax is a more politically viable option for reformers.

The moral of the story is that it makes more sense to push for the flat tax. After all, if I have an easy route and a hard route to get to the same destination, why make life more difficult?

Though the ultimate libertarian fantasy is shrinking government back to what the Founding Fathers had in mind. Then we wouldn’t need any broad-based tax of any kind.

P.S. Here’s my choice for the strangest-loophole award.

P.P.S. Since I shared a poll today with good news, I may as well link to a tax poll that left me somewhat depressed.

P.P.P.S. Let’s end with some IRS humor.

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In the pre-World War I era, the fiscal burden of government was very modest in North America and Western Europe.

Total government spending consumed only about 10 percent of economic output, historical-size-of-govtmost nations were free from the plague of the income tax, and the value-added tax hadn’t even been invented.

Today, by contrast, every major nation has an onerous income tax and the VAT is ubiquitous. These punitive tax systems exist largely because – on average –  the burden of government spending now consumes more than 40 percent of GDP.

To be blunt, fiscal policy has moved dramatically in the wrong direction over the past 100-plus years. And thanks to demographic change and poorly designed entitlement programs, things are going to get much worse according to BIS, OECD, and IMF projections.

Long-Run GDPWhile these numbers, both past and future, are a bit depressing, they also present a challenge to advocates of small government. If taxes and spending are bad for growth, why did the United States (and other nations in the Western world) enjoy considerable prosperity all through the 20th Century?

I sometimes get asked this question after speeches or panel discussions on fiscal policy. In some cases, the person making the inquiry is genuinely curious. In other cases, it’s a leftist asking a “gotcha” question.

I’ve generally had two responses.

1. The European fiscal crisis shows that the chickens have finally come home to roost. More specifically, the private economy can withstand a lot of bad policy, but there is a tipping point at which big government leads to massive societal damage.

2. Bad fiscal policy has been offset by good reforms in other areas. More specifically, I explain that there are five major policy factors that determine economic performance and I assert that bad developments in fiscal policy have been offset by improvements in trade policy, regulatory policy, monetary policy, and rule of law/property rights.

I think the first response is reasonably effective. It’s hard for statists to deny that big government has created a fiscal and economic nightmare in many European nations.

But I’ve never been satisfied with the second response because I haven’t had the necessary data to prove my assertion.

However, thanks to Professor Leandro Prados de la Escosura in Madrid, that’s no longer the case. He’s put together some fascinating data measuring economic freedom in North America and Western Europe from 1850-present. And since he doesn’t include fiscal policy, we can see the degree to which there have been improvements in other areas that might offset the rising burden of taxes and spending.

Here’s one of his charts, which shows the growth of economic freedom over time. For obvious reasons, he doesn’t include the periods surrounding World War I and World War II, but those gaps don’t make much of a difference. You can clearly see that non-fiscal economic freedom has improved significantly over the past 150-plus years.

Economic Freedom 1850-2007

Most of the improvement took place in two stages, before 1910 and after 1980.

It’s also worth noting that things got much worse during the 1930s, so it appears the developed world suffered from the same bad policies that Hoover and FDR were imposing in the United States.

Indeed, here’s another chart, which highlights various periods and shows which policies were moving in the right direction or wrong direction.

Economic Freedom Changes 1850-2007

As you can see, the West enjoyed the biggest improvements between 1850-1880 and after 1980 (let’s give thanks to Reagan and Thatcher).

There also were modest improvements in 1880-1910 and 1950-1960. But there was a big drop in freedom between the World War I and World War II, and you can also see policy stagnation in the 1960s and 1970s.

By the way, I wonder what we would see if we had data from 2007-2014. Based on the statist policies of Bush and Obama, as well as bad policy in other major nations such as France and Japan, it’s quite likely that the line would be heading in the wrong direction.

But I’m digressing. Let’s get back to the main topic.

The moral of the story is that we’ve been lucky. Bad fiscal policy has been offset by better policy in other areas. We’re suffering from bigger government, but at least we’ve moved in the direction of free markets.

That being said, we may now be in an era when bad fiscal policy augments bad policy in other areas.

For further information, this video explains the components of economic success.

P.S. I’ve written before that government bureaucrats don’t work as hard as folks employed in the economy’s productive sector.

Well, that’s becoming official policy in some parts of Sweden.

A section of employees of the municipality of Gothenburg will now work an hour less a day… The measure is being self-consciously conceived of as an experiment, with a group of municipal employees working fewer hours and a control group working regular hours – all on the same pay. …Mats Pilhem, the city’s Left-wing deputy mayor, told The Local Sweden that he hoped “staff members would take fewer sick days and feel better mentally and physically after working shorter days”.

Heck, if you want fewer sick days, just tell them they never have to show up for work. And I’m sure they’ll “feel better mentally and physically” with that schedule.

I’m also amused by this passage from the article.

Anna Coote, Head of Social Policy at the New Economics Foundation, a UK-based think tank, welcomed the proposals. “Shorter working hours create a more committed and stable workforce,” Ms Coote told The Telegraph.

Gee, what a surprise. If you overpay a group of people and tell them they can spend more time at home, they’ll be very anxious to keep those jobs.

Sounds like a great deal…unless you’re a taxpayer.

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My tireless (and probably annoying) campaign to promote my Golden Rule of spending restraint is bearing fruit.

The good folks at the editorial page of the Wall Street Journal allowed me to explain the fiscal and economic benefits that accrue when nations limit the growth of government.

Here are some excerpts from my column, starting with a proper definition of the problem.

What matters, as Milton Friedman taught us, is the size of government. That’s the measure of how much national income is being redistributed and reallocated by Washington. Spending often is wasteful and counterproductive whether it’s financed by taxes or borrowing.

So how do we deal with this problem?

I’m sure you’ll be totally shocked to discover that I think the answer is spending restraint.

More specifically, governments should be bound by my Golden Rule.

Ensure that government spending, over time, grows more slowly than the private economy. …Even if the federal budget grew 2% each year, about the rate of projected inflation, that would reduce the relative size of government and enable better economic performance by allowing more resources to be allocated by markets rather than government officials.

I list several reasons why Mitchell’s Golden Rule is the only sensible approach to fiscal policy.

A golden rule has several advantages over fiscal proposals based on balanced budgets, deficits or debt control. First, it correctly focuses on the underlying problem of excessive government rather than the symptom of red ink. Second, lawmakers have the power to control the growth of government spending. Deficit targets and balanced-budget requirements put lawmakers at the mercy of economic fluctuations that can cause large and unpredictable swings in tax revenue. Third, spending can still grow by 2% even during a downturn, making the proposal more politically sustainable.

The last point, by the way, is important because it may appeal to reasonable Keynesians. And, in any event, it means the Rule is more politically sustainable.

I then provide lots of examples of nations that enjoyed great success by restraining spending. But rather than regurgitate several paragraphs from the column, here’s a table I prepared that wasn’t included in the column because of space constraints.

It shows the countries that restrained spending and the years that they followed the Golden Rule. Then I include three columns of data. First, I show how fast spending grew during the period, followed by numbers showing what happened to the overall burden of government spending and the change to annual government borrowing.

Golden Rule Examples

Last but not least, I deal with the one weakness of Mitchell’s Golden Rule. How do you convince politicians to maintain fiscal discipline over time?

I suggest that Switzerland’s “debt brake” may be a good model.

Can any government maintain the spending restraint required by a fiscal golden rule? Perhaps the best model is Switzerland, where spending has climbed by less than 2% per year ever since a voter-imposed spending cap went into effect early last decade. And because economic output has increased at a faster pace, the Swiss have satisfied the golden rule and enjoyed reductions in the burden of government and consistent budget surpluses.

In other words, don’t bother with balanced budget requirements that might backfire by giving politicians an excuse to raise taxes.

If the problem is properly defined as being too much government, then the only logical answer is to shrink the burden of government spending.

Last but not least, I point out that Congressman Kevin Brady of Texas has legislation, the MAP Act, that is somewhat similar to the Swiss Debt Brake.

We know what works and we know how to get there. The real challenge is convincing politicians to bind their own hands.

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I’m a supporter of a single-rate tax regime, especially if there’s no double taxation of income that is saved and invested.

That’s why I like the flat tax.

But I’ve expressed concern about the national sales tax, even though it’s basically the same as a flat tax (the only real difference is that the flat tax takes a bite out of your income when it is earned, while the sales tax takes a bite of your income as it is spent).

The reason for my skepticism is that I don’t trust politicians. I fear that they will adopt a sales tax, but never replace the income. As a result, we’ll wind up like Europe, with much bigger government.

And also much more red ink – even though politicians claim tax hikes and new taxes will lead to balanced budgets.

I’m not just being paranoid. Not only is this what occurred in Europe, the same thing is now happening in Japan.

Here’s some of what the Wall Street Journal has to say about “reforms” to the value-added tax in the land of the rising sun.

Japan on Tuesday increased its consumption tax to 8% from 5%. An increase to 10% is written into the law for next year, and don’t imagine for a minute that this will be the last. Welcome to the value-added-tax ratchet, which only goes in one direction—up. Tokyo first imposed a 3% consumption tax in 1989, after politicians had tried for a decade to enact one. …The new tax was billed as part of a tax reform, but the reform never materialized.

And as I warned in a prior column, the VAT has become a recipe for bigger government in Japan.

The new tax didn’t solve Japan’s deficit woes, as the debt to GDP ratio climbed to 50%, so in 1997 politicians increased the rate to 5%. Again politicians promised the increase would be offset by income-tax reforms. Again the reform proved illusory. …The additional revenue still didn’t satisfy Tokyo’s spending ambitions, and debt has since climbed well above 200% of GDP despite the VAT increase. …So now the rate is going up again in the name of, you guessed it, shoring up government finances as the population ages.

The OECD likes this development, which is hardly a surprise, but it’s bad news for those of us who favor growth and opportunity.

Japan’s experience points up the broader political problem with a value-added tax wherever it has been imposed. Economists tout the VAT for generating revenue without creating disincentives to work and invest. But in practice the consumption levy merely becomes one more tax in addition to current taxes and thus one more claim by the political class on the private economy. …The lesson for tax reformers elsewhere, not least in America, is to beware the VAT because once it is imposed it is only going up.

And it’s worth noting that the Europeans also have been increasing the VAT in recent years.

Simply stated, this is a levy to finance bigger government.

I elaborate in my video on the VAT.

P.S. You can see some amusing – but also painfully accurate – cartoons about the VAT by clicking here, here, and here.

P.P.S. I also very much recommend what George Will wrote about the value-added tax.

P.P.P.S. I’m also quite amused that the IMF accidentally provided key evidence against the VAT.

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Congressman Paul Ryan, the Republican Chairman of the House Budget Committee, has unveiled the GOP’s latest budget plan.

Is this proposal deserving of applause or criticism? The answer is yes and yes, with a bit of emphasis on the former.

Let’s start with some depressing news. The Ryan budget has gotten weaker each year.

Three years ago, he put forth a budget that limited spending so that it grew 2.8 percent per year.

Two years ago, he put forth a budget that limited spending so that it grew 3.1 percent per year.

Last year, he put forth a budget that limited spending so that it grew 3.4 percent per year.

His latest budget continues this slide in the wrong direction. Here are the numbers from the new budget, showing that the burden of government spending will rise by an average of 3.5 percent annually over the next 10 years.

And this is during a time when inflation is projected to be about 2 percent per year!

Ryan FY2015 Budget

Since it would be foolish to ever expect perfection from the political process, let’s now look at the positive features of the Ryan budget.

1. Spending may be growing, but it would grow at a slower rate than the President’s proposed budget.

2. Spending may be growing, but it would grow at a slower rate than nominal economic output, thus satisfying Mitchell’s Golden Rule.

3. Perhaps most important, the budget contains genuine and structural reform of both Medicare and Medicaid, so it at least partially solves the long-run fiscal crisis.

4. The budget also foresees tax reform, including lower tax rates for households, a 25 percent corporate tax rate, and a move toward territorial taxation.

Now let’s close with some hard-to-judge news.

The tax reform would be “revenue neutral,” so it’s difficult to accurately assess the proposal without knowing the “revenue raisers” that would offset the “revenue losers” listed above (particularly since lawmakers would be bound by static scoring).

If lower tax rates are financed by getting rid of distortions such as the healthcare exclusion, the net effect is very positive.

But if lower tax rates are financed with increased double taxation (a major shortcoming of the Cong. Camp tax plan), then it’s unclear whether policy has improved.

One final comment. I’m disappointed that the House Budget Committee’s report approvingly cites Congressional Budget Office analysis to suggest that the Ryan budget would boost economic performance.

I think that’s a tactically and morally dubious approach. It’s tactically misguided because the Ryan budget supposedly hurts growth from 2015-2017 according to CBO’s short-term Keynesianism.

And it’s morally dubious because it’s wrong to use bad arguments to advance good policy. The supposed added growth beginning in 2018 is based on the assumption that interest rates are the significant determinant of economic growth – which is the same thinking displayed in the left-wing debt video I shared yesterday.

Paul Ryan and the House GOP can legitimately claim that the proposed budget is good for growth. But improved economic performance would be the result of a smaller burden of government spending and a potentially less destructive tax system. Those are the policies that free up labor and capital for the productive sector and boost incentives to utilize those resources efficiently.

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Based on what’s happened in Greece and other European nations, we know from real-world evidence that even nations from the developed world can spend themselves into debt trouble.

This has led to research that seeks to pinpoint when debt reaches a dangerous level.

Where’s the point where investors stop buying the debt? Where’s the point when interest on the debt becomes too much of a burden?

Most famously, a couple of economists crunched numbers and warned that nations may reach a tipping point when debt is about 90 percent of GDP.

I was not persuaded by this research for two reasons.

First, I think it’s far more important to focus on the underlying disease of too much government, and not get fixated on the symptom of too much borrowing. If I go see a doctor because of headaches and he discovers I have a brain tumor, I want him to address that problem and not get distracted by the fact that head pain is one of the symptoms.

Second, there are big differences between nations, and those differences have a big effect on whether investors are willing to buy government bonds. The burden of debt is about 240 percent of GDP in Japan and the nation’s economy is moribund, for instance, yet there’s no indication that the “bond vigilantes” are about to pounce. On the other hand, investors are understandably leery about buying Argentinian government debt, even though accumulated red ink is less than 40 percent of economic output.

So what about America, where government borrowing from the private sector now accounts for 82 percent of GDP? Have we reached a danger point for government debt?

According to Matthew Yglesias (who says I’m insane and irrational), the answer is no.

I have several comments on this video.

1. Some people have complained that the video is deceptive because it focuses on debt held by the public rather than the gross federal debt. The video could have been more explicit and explained why that choice was made, but I have no objection to the focus on publicly-held debt. After all, that’s the measure of what government has borrowed from the private sector. The gross federal debt, by contrast, also includes money the government owes itself (such as the IOUs in the Social Security Trust Fund), but that type of debt is merely a bookkeeping entry.

2. The video asserts that inflation is low and therefore we don’t have to worry that government might have to “print money” at some point to finance additional debt. I don’t think there’s any immediate danger that the Fed will be put in a position of financing the federal government, but I nonetheless don’t like this logic. It’s sort of like saying it wouldn’t be a problem to start eating ten pizzas per day because you currently aren’t heavy. The simple truth is that low inflation now doesn’t mean low inflation in the future.

3. I also reject the assumption in the video that interest rates drive the economy. Indeed, it’s probably more accurate to say that the economy drives interest rates, not the other way around. Suffice to say that the video is based on the same thinking that led the Congressional Budget Office to imply that you maximize growth by putting tax rates at 100 percent.

4. The video also warns that politicians shouldn’t raise taxes or reduce government benefits since either policy would “take money out of people’s pockets.” This is Keynesian economic theory, which I’ve explained many times doesn’t make sense. No need to regurgitate those arguments here.

5. Which brings us to the main problem of the video. It ignores the problem of unfunded liabilities. More specifically, it doesn’t address the fact that politicians have made commitments to spend far too much money in the future, largely because of poorly designed entitlement programs. And it is these built-in promises to spend money that give America a very grim fiscal future, as show by this BIS, OECD, and IMF data.

Here’s the video, produced by the Center for Prosperity, that accurately puts all this information together (the data is now several years out of date, but the analysis is still spot on).

Remember, the problem – both today and in the future – is the burden of government spending.

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As much as I condemn American politicians for bad policy, things could be worse.

We could be Greek citizens, which would be very depressing. Indeed, you’ll understand why I put Obamaland in the title after you read today’s column.

Simply stated, Greece is a cesspool of statism. The people seem to be wonderful (at least outside of polling booths), but government intervention is pervasive and atrocious.

Here’s an example. As I was coming in a taxi from the airport to the city yesterday, we passed some sort of protest. There were a couple of hundred people at the rally and probably about 50 riot cops.

I naturally wondered about the situation, expecting that it was radical statists or some of the crazies from Golden Dawn. But the cab driver explained that it was pharmacists.

So why are pharmacists protesting? I found out from some of the locals at the Free Market Road Show that this is a heavily regulated and protected sector of the Greek economy.

The government has rules, for instance, that products such as aspirin and other painkillers can only be purchased at pharmacies. The bureaucracy also rigs all the prices to preclude competition. And there are even government policies that make it very difficult for new pharmacies to compete against the established firms.

When special interests have that much power, no wonder Greece is in trouble.

Thought there are some sectors of the business community, such as online entrepreneurs, that are treated like crap. Literally.

Here’s another example from a Wall Street Journal report, albeit one where a modest bit of progress has been achieved.

For the first time in more than a hundred years, Greece is sacking public servants. In 1911, Greece introduced jobs for life under Prime Minister Eleftherios Venizelos. Now, a century later, his descendant, Kyriakos Mitsotakis, Greece’s minister for administrative reform, is faced with the delicate task of slimming down the massive public sector this law helped create. …In exchange for…aid, Greece has promised to cut the government workforce by at least 150,000 by 2015 through attrition, and to lay off an additional 15,000 outright by the end of this year. Another 25,000 would be placed in the temporary labor pool. Of those goals, the first has been reached: Greece had 713,000 government workers at the end of 2012, down 122,000 from the end of 2010. …But the labor pool is still a work in progress. Last July, the first 4,000 employees were put in that pool, while another 8,000 or so followed a few months later. Few of them are expected to be rehired. And with Greece’s unemployment rate already close to 30%, few expect to find jobs in the private sector.

I actually feel a bit sorry for some of these people.

They probably took jobs in the bureaucracy without ever thinking about who was paying their salaries and without giving any thought to the featherbedding and waste that accompany most public sector positions.

But I bet they voted for the politicians that dramatically expanded the number of bureaucrats, so it’s hard to feel too much sympathy.

In any event, they’re understandably worried now that the gravy train is being derailed.

Or maybe the gravy is still there, but in different forms.

It appears that there’s still taxpayer money floating around that can be wasted in interesting ways.

Here are some excerpts from the Guardian about EU-funded “anger management” for some of Greece’s senior tax bureaucrats.

Until Greece’s economic meltdown, anger management was an alien concept at the country’s finance ministry. …Today these are the buzzwords flying around the ground-floor training room at 1 Handris Street. For tax inspectors attending mandatory seminars at the government building, anger management, like patience and politesse, are now seen as essential prerequisites of an increasingly stressful job. “Today, in Greece, everyone is either unhappy or angry when they have to go and pay at the tax office,” Fotis Kourmouris, a senior official at the finance ministry’s public revenues department said. “There is a lot of negative emotion … in the framework of better customer service, classes in psychological and emotional intelligence had become necessary.”

I wouldn’t call it “negative emotion.”

This is a long-overdue revolt of the Greek tax slaves.

…inspectors have found themselves at the sharp end of popular rage. In recent months visiting auditors have been chased out of remote villages, hounded out of towns and booted off islands by an increasingly desperate populace. “We’ve had multiple cases of violence at tax offices by angry members of public, including physical assaults; shots were fired in one case, and one attacker came with an axe,” said Trifonas Alexiadis, vice-chairman of the national association of employees at state financial services.

But when you read how the Greek government is trying to rape and pillage taxpayers, you can understand the anger.

A series of new tax laws has further fuelled public anger. Since the outbreak of the crisis, close to 30 new levies have been introduced by governments desperate to augment empty state coffers. “Too much pressure is being put on people who can’t pay,” said Alexiadis, who suggested that in such circumstances the classes were not only ill-conceived but “juvenile and unnecessary”. …accountant Heracles Galanakopoulos agreed. “They produce a law that nobody understands and then produce another three to explain it. By the time people get here they are really very angry,” he lamented… “I spend at least five or six hours a day reading up on all these new laws and still can’t keep up. Anger management is a nice idea but in a system that is so absurd it’s not going to make a jot of difference.”

Amen. As I’ve argued before, Greece’s problem is high tax rates. Evasion is simply a function of a bad tax code.

Let’s close with some Greek-related humor.

I very much recommend this very funny video from a Greek comedian and this politically incorrect map of how the Greeks view the rest of Europe.

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

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

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

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

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

An economist from Cornell found lower tax rates boost GDP.

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

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

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

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

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

Here are some excerpts from a remarkable story.

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

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

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

Monsieur Santacruz has lots of company.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And what do these studies say?

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

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

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

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

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

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

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

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

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

P.S. Higher tax rates also encourage corruption.

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Back in 2010, I shared a video that predicted a catastrophic end to the welfare state.

I said it was an example of “Libertarian Porn” because:

…it is designed for the dark enjoyment of people who think the government is destroying the nation. If you don’t like bloated government and statist intervention and you think that the policies being imposed by Washington are going to lead to hyperinflation and societal collapse, then you will get a certain level of grim satisfaction by watching the video.

While I also stated in that post that I thought the video was far too dour and pessimistic, I don’t automatically reject the hypothesis that the welfare state will lead to societal chaos.

UK RiotsIndeed, I’ve specifically warned that America might experience European-type disarray because of big government and I even wrote about which nations that might be good escape options if the welfare state causes our country to unravel.

Moreover, I’ve speculated about the possible loss of democracy in Europe and specifically said that people should have the right to be well armed just in case society goes you-know-where in a handbasket.

So I’m definitely not a Pollyanna.

I’ve given this background because here’s another video for those of you who revel in the glass being nine-tenths empty. It’s about the United Kingdom, but these numbers from the BIS, OECD, and IMF show that the long-term spending problem is equally severe in the United States.

Be warned, though, that it’s depressing as well as long. And I gather it’s also designed to sell a magazine, so you can ignore that (particularly if you’re not British).

Now that I’ve shared the video, I’ll add a couple of my own observations.

First and foremost, no country is past the point of no return, at least based on the numbers. It doesn’t matter whether we’re talking about the United Kingdom, the United States, Greece, or France. Politicians always have the option of reforming entitlements and restraining the burden of government spending. So long as they follow Mitchell’s Golden Rule over an extended period of time, they can dig out of the mess.

That’s why I’m a big fan of Switzerland’s spending cap, That policy, technically known as the debt brake, imposes a rolling cap on budgetary growth and has been very effective. Colorado also has a spending cap that has been somewhat effective in restraining the cost of the public sector.

My second observation, however, is that some nations may be past the psychological point of return. This is not easy to measure, but it basically means that there’s good reason to be pessimistic when the majority of citizens in a country think it’s morally acceptable to have their snouts in the public trough and to live off the labor of others. When you have too many people riding in the wagon (or riding in the party ship), then it’s difficult to envision how good policy is implemented.

Indeed, the video includes some discussion of how a growing number of people in the United Kingdom now live off the state. And if you add together the votes of people like NatailijaTraceyAnjem, Gina, and Danny, perhaps the United Kingdom has reached a grim tipping point. Especially since welfare spending has dramatically increased in recent years!

A third and final point about the video. I think it focuses too much on deficits and debt. Red ink is a serious issue, to be sure, but it’s very important to understand that too much borrowing is merely a symptom of too much spending.

P.S. On a totally separate matter, everyone should read the USA Today column by Glenn Reynolds. He explains how government is perverting our criminal justice system.

Here are some of the most important passages, but you should read the whole thing.

Here’s how things all-too-often work today: Law enforcement decides that a person is suspicious (or, possibly, just a political enemy). Upon investigation into every aspect of his/her life, they find possible violations of the law, often involving obscure, technical statutes that no one really knows. They then file a “kitchen-sink” indictment involving dozens, or even hundreds of charges, which the grand jury rubber stamps. The accused then must choose between a plea bargain, or the risk of a trial in which a jury might convict on one or two felony counts simply on a “where there’s smoke there must be fire” theory even if the evidence seems less than compelling.

This is why, Glenn explains, there are very few trials. Almost everything gets settled as part of plea bargains.

But that’s not a good thing, particularly when there are no checks and balances to restrain bad behavior by the state.

…although there’s lots of due process at trial — right to cross-examine, right to counsel, rules of evidence, and, of course, the jury itself, which the Framers of our Constitution thought the most important protection in criminal cases — there’s basically no due process at the stage when prosecutors decide to bring charges. Prosecutors who are out to “get” people have a free hand; prosecutors who want to give favored groups or individuals a pass have a free hand, too.When juries decide not to convict because doing so would be unjust, it’s called “jury nullification,” and although everyone admits that it’s a power juries have, many disapprove of it. But when prosecutors decide not to bring charges, it’s called “prosecutorial discretion,” and it’s subject to far less criticism, if it’s even noticed.

Here’s the bottom line.

…with today’s broad and vague criminal statutes at both the state and federal level, everyone is guilty of some sort of crime, a point that Harvey Silverglate underscores with the title of his recent book, Three Felonies A Day: How The Feds Target The Innocent, that being the number of felonies that the average American, usually unknowingly, commits. …The combination of vague and pervasive criminal laws — the federal government literally doesn’t know how many federal criminal laws there are — and prosecutorial discretion, plus easy overcharging and coercive plea-bargaining, means that where criminal law is concerned we don’t really have a judicial system as most people imagine it. Instead, we have a criminal justice bureaucracy that assesses guilt and imposes penalties with only modest supervision from the judiciary, and with very little actual accountability.

Glenn offers some possible answers.

…prosecutors should have “skin in the game” — if someone’s charged with 100 crimes but convicted of only one, the state should have to pay 99% of his legal fees. This would discourage overcharging. (So would judicial oversight, but we’ve seen little enough of that.) Second, plea-bargain offers should be disclosed at trial, so that judges and juries can understand just how serious the state really thinks the offense is. …And finally, I think that prosecutors should be stripped of their absolute immunity to suit — an immunity created by judicial activism, not by statute — and should be subject to civil damages for misconduct such as withholding evidence. If our criminal justice system is to be a true justice system, then due process must attach at all stages. Right now, prosecutors run riot. That needs to change.

Amen to all that. And you can read more on this topic by clicking here.

The Obama years have taught us that dishonest people can twist and abuse the law for ideological purposes.

Obamacare rule of law cartoonWhether we’re talking about the corruption of the IRS, the deliberate disregard of the law for Obamacare, or the NSA spying scandal, the White House has shown that it’s naive to assume that folks in government have ethical standards.

And that’s also true for the law enforcement bureaucracy, as Glenn explained. Simply stated, people in government abuse power. And jury nullification, while a helpful check on misbehavior, only works when there is a trial.

Indeed, I’m now much more skeptical about the death penalty for many of the reasons Glenn discusses in his column. To be blunt, I don’t trust that politically ambitious prosecutors will behave honorably.

That’s why, regardless of the issue, you rarely will go wrong if you’re advocating fewer laws and less government power.

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I generally get very suspicious when rich people start pontificating on tax policy.

People like Warren Buffett, for instance, sometimes advocate higher taxes because they’re trying to curry favor with the political elite. Or maybe they feel compelled to say silly things to demonstrate that they feel guilty about their wealth.

Tax SystemRegardless, I don’t like their policy proposal (as you can see from TV debates here and here).

That being said, I also realize that stereotypes can be very unfair, so it’s important to judge each argument on the merits and not to reject an idea simply because it comes from a rich guy.

That’s why I was very interested to see that Bill Gates, the multi-billionaire software maker, decided to add his two cents to the discussion of tax reform.

Here’s what Gates said at an American Enterprise Institute forum (transcript here and video here).

…economists would have said that a progressive consumption tax is a better construct, you know, at any point in history. What I’m saying is that it’s even more important as we go forward.

He doesn’t really expand on those remarks other than to say that it’s important to reduce the tax on labor.

That part of Gates’ remarks doesn’t make much sense for the simple reason that workers are equally harmed whether the government takes 20 percent of their income when it’s earned or 20 percent of their income when it’s spent.

But his embrace of a “progressive consumption tax” is very intriguing.

I don’t like the “progressive” part because that’s shorthand for high marginal tax rates, and that type of class-warfare policy is a gateway to corruption and is also damaging to growth (see here, here, here, here, and here).

But the “consumption” part is one of the key features of all good tax reform plans.

For all intents and purposes, a “consumption tax” is any system that avoids the mistake of double-taxing income that is saved and invested.

Both the national sales tax and the value-added tax, for instance, are examples of consumption-based tax systems.

But the flat tax also is a consumption tax. It isn’t collected at the cash register like a sales tax, but it has the same “tax base.”

Under a flat tax, income is taxed – but only one time – when it is earned. Under a sales tax, income is taxed – but only one time – when it is spent. They’re different sides of the same coin.

Most important, neither the flat tax nor the sales tax has extra layers of tax on saving and investment. And that’s what makes them “consumption” taxes in the wonky world of public finance economists.

This means no death tax, no capital gains tax, no double taxation of interest or dividends. And businesses get a common-sense cash-flow system of taxation, which means punitive depreciation rules are replaced by “expensing.”

So Bill Gates is halfway on the path to tax policy salvation. His endorsement of so-called progressivity is wrong, but his support for getting rid of double taxation is right.

If you like getting into the weeds of tax policy, it’s interesting to note that Gates is advocating the opposite of the plan that was proposed by Congressman Dave Camp.

Camp wants to go in the right direction regarding rates, but he wants to exacerbate the tax code’s bias against capital. Here’s what I said to Politico.

Dan Mitchell, an economist at the libertarian Cato Institute, said he didn’t see it as an individual versus business issue, but rather took issue with Camp’s punitive treatment of savings and investment. “The way Camp is extracting more money from businesses — more punitive depreciation and the like — is he is making the tax system more biased against savings and investment,” said Mitchell, who worked for Republican Sen. Bob Packwood after the historic 1986 tax act that Packwood helped negotiate as chair of the Finance Committee.

By the way, this doesn’t mean Camp’s plan is bad. You have to do a cost-benefit analysis of the good and bad features.

Just like that type of analysis was appropriate in 1986, when the bad provisions that increased taxes on saving and investment were offset by a big reduction in marginal tax rates.

The 1986 law did take aim at some popular business benefits, including a lucrative investment tax credit. But the reward was a lot sweeter. “At least then, we got a big, big reduction in tax rates in exchange,” Mitchell said.

Here’s an interview I did with Blaze TV on Congressman Camp’s plan. If you pay attention near the beginning (at about the 2:00 mark), you’ll see my matrix on how to grade tax reform plans.

Now let’s circle back to the type of tax system endorsed by Bill Gates.

We obviously don’t know what he favors beyond a “progressive consumption tax,” but that bit of information allows us to say that he wants something at least somewhat similar to the old “USA Tax” that was supported by folks such as former Senators Sam Nunn and Pete Domenici.

Is that better than the current tax system?

Probably yes, though we can’t say for sure because it’s possible they may want to increase tax rates by such a significant amount that the plan becomes a net minus for the economy.

Not that any of this matters since I doubt we’ll get tax reform in my lifetime.

P.S. Speaking of taxes and the rich, you’ll enjoy this very clever interview exposing the hypocrisy of wealthy leftists.

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