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Posts Tagged ‘Higher Taxes’

The United Nations is not nearly as bad as other international bureaucracies such as the Organization for Economic Cooperation and Development or the International Monetary Fund.

But that’s because the U.N. tends to be completely ineffective. So even when the bureaucrats push for bad policy, they don’t have much ability to move the ball in the wrong direction.

But just like a blind squirrel occasionally finds an acorn, the United Nations periodically does something that genuinely would expand the power and burden of government.

And that’s what happening this week in Moscow. Under the “leadership” of the U.N.’s World Health Organization, hundreds of bureaucrats have descended on the city for the “Conference of the Parties (COP6) to the WHO Framework Convention on Tobacco Control (WHO FCTC).”

But this isn’t the usual junket. The bureaucrats are pushing to create “guidelines” for tobacco taxation. Most notably, they want excise taxes to be at least 70 percent of the cost of a pack of cigarettes.

I’m not a smoker and never have been, but this is offensive for several reasons.

1. Enabling bigger government.

If there were five gas stations in your town and the owners all met behind closed doors to discuss pricing, would the result be higher prices or lower prices? Needless to say, the owners would want higher prices. After all, the consumer benefits when there is competition but the owners of the gas stations benefit if there’s a cartel. The same is true with government officials. They don’t like tax competition and would prefer that a tax cartel instead. And when tax rates get harmonized, they always go up and never go down. Which is what you might expect when you create an “OPEC for politicians.”   In their minds, if all governments agree that excise taxes must be 70 percent of the cost of cigarettes, they think they’ll got a lot more tax revenue that can be used to buy votes and expand government.

2. Promoting criminal activity.

In the previous paragraph, I deliberately wrote that politicians “think they’ll get” rather than “will get” a lot more tax revenue. That’s because, in the real world, there’s a Laffer Curve. We have lots of evidence that higher tobacco taxes don’t generate revenue and instead are a boon for smugglers, criminal gangs, and others that are willing to go underground and provide cigarettes in the black market. We saw this in Bulgaria and Romania.  We saw in in Quebec and Michigan. And we saw it in Ireland and Washington, DC. As I explained a couple of years ago, “In many countries, a substantial share of cigarettes are black market or counterfeit. They put it in a Marlboro packet, but it’s not a Marlboro cigarette. Obviously it’s a big thing for organized crime.” And if the WHO succeeds, the problem will get far worse.

3. Eroding national sovereignty.

 Or maybe this section should be called eroding democratic accountability and control. In any event, the issue is that international bureaucracies should not be in the position of seeking to impose one-size-fits-all policies on the world. Particularly when you get perverse results, such as bureaucrats from health ministries and departments supplanting the role of finance ministries and treasury departments. Or when the result is earmarked taxes, which even the IMF warns is problematical since, “Earmarking creates pots of money that can invite corruption and, unchecked, it can lead to a plethora of small nuisance taxes.” And keep in mind the WHO operates in a non-transparent and corrupt fashion.

For more information, Brian Garst of the Center for Freedom and Prosperity has a thorough analysis of the dangers of global taxation.

By the way, the health community will argue that globally coerced tobacco tax hikes are a good idea since the money can be used to fund programs that discourage tobacco use.

Yet we have some experience in this area. Many years ago, state politicians bullied tobacco companies into a giant cash settlement, accompanied by promises that much of the money would be used to fight tobacco use.

But, as NPR reports, politicians couldn’t resist squandering the money in other areas.

So far tobacco companies have paid more than $100 billion to state governments as part of the 25-year, $246 billion settlement. …all across the country hundreds of millions of dollars have gone to states, and the states have made choices not to spend the money on public health and tobacco prevention. …Myron Levin covered the tobacco industry for the Los Angeles Times for many years and is also the founder of the health and safety news site Fair Warning. He says talking states into spending settlement money on tobacco prevention is a tough sell.

Even when the politicians are asked to spend only a tiny fraction of the money on anti-smoking programs.

To help guide state governments, in 2007 the Centers for Disease Control and Prevention recommended that states reinvest 14 percent of the money from the settlement and tobacco taxes in anti-smoking programs. But most state governments have decided to prioritize other things.

Needless to say, governments around the world will behave like state governments in America. Any additional tax revenue will be used to expand the burden of government spending.

Let’s close with some big-picture analysis. Bureaucracies inevitably seem drawn to mission creep, which occurs when agencies and departments get involved in more and more areas in order to get more staffing and bigger budgets.

But when that happens, the core mission tends to get less attention. For many bureaucracies, that probably doesn’t matter since the core mission probably doesn’t have any value (HUD, anyone?).

But presumably there is a legitimate government role in preventing something like infectious diseases. So why isn’t WHO focused solely on things such as Ebola and SARS rather than engaging in ideological campaigns to expand the size and scope of government?

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I’m not a big fan of international bureaucracies.

Regular readers know that the Organization for Economic Cooperation and Development is the worst institution from my perspective, followed by the International Monetary Fund.

Some folks ask why the United Nations isn’t higher on the list?

My answer is simple. The UN has a very statist orientation and it routinely advocates bad policy, but it is too incompetent to do much damage.

The OECD and IMF, by contrast, have some capacity to undermine global growth by encouraging more statism.

That being said, the UN occasionally does something that is so obnoxious that I can’t resist commenting. Especially since my tax dollars pay a big share of that bureaucracy’s bloated budget.

What has me irked is that the United Nations Conference on Trade and Development just released its annual Trade and Development Report.

You would think an institution that focuses on trade and development would be advocating free markets and small government.

But UNCTAD takes the opposite approach.

Here’s how the bureaucrats frame the issue in the report. Keep in mind that “market liberalism” is their term for free markets (in other words, classical liberalism).

Back in 1964, the international community recognized that “If privilege, extremes of wealth and poverty, and social injustice persist, then the goal of development is lost”. Yet, almost everywhere in recent years, the spread of market liberalism has coincided with highly unequal patterns of income and wealth distribution. A world where its 85 wealthiest citizens own more than its bottom three and a half billion was not the one envisaged 50 years ago. …the past three decades have demonstrated that delivery is unlikely with a one-size-fits-all approach to economic policy that cedes more and more space to the profitable ambitions of global firms and market forces. …the moment is right to propose another international “New Deal” that can realize the promise of “prosperity for all”.

But not only does UNCTAD utilize class-warfare rhetoric, they also try to support their ideological agenda with historical illiteracy.

I’ve pointed out that the western world became rich when government was very small and markets were liberated.

But the statists at the UN want us to think that big government deserves the credit.

None of today’s developed countries depended on market forces for their structural transformation and its attendant higher levels of employment, productivity and per capita incomes. Rather, they adopted country-specific measures to manage those forces, harnessing their creative side to build productive capacities and provide opportunities for dynamic firms and entrepreneurs, while guiding them in a more socially desired direction. They also used different forms of government action to mitigate the destructive tendencies of those same market forces. This approach of managing the market, not idolizing it, was repeated by the most rapidly growing emerging market economies − from the small social democratic economies of Northern Europe to the giant economies of East Asia − in the decades following the end of the Second World War.

Wow. They even want us to think big government deserves the credit for prosperity in Hong Kong and Singapore.

So you know the bureaucrats are either very stupid or very dishonest. I suspect the latter, but it doesn’t matter. All we need to know is that they are willing to make very preposterous claims to advance their agenda.

And what is their agenda? Well, a major theme is that politicians in developing nations need “policy space” to enable bigger government.

For instance, UNCTAD doesn’t like free trade but does like industrial policy (aka, crony capitalism).

Policy space is…reduced by free trade agreements… Along with the proliferation of trade agreements and their expansion into trade-related areas, there has been a global revival of interest in industrial policy.

But a big focus of the report is that tax competition is a threat to the “policy space” of politicians.

Fiscal space goes hand in hand with policy space. …strengthening government revenues is key. …This…allows for higher growth-enhancing public spending… The need for reclaiming and expanding fiscal space faces particular challenges in an increasingly globalizing economy. …A major problem is that globalization has affected the ability of governments to mobilize domestic revenues. …the increased mobility of capital and its greater use of fiscal havens have considerably altered the conditions for taxing income − both personal and corporate − and wealth. The dominant agenda of market liberalism has led to a globalized economy that encourages tax competition among countries, at times pushing them to a “race to the bottom”.

Gasp, how horrible! Politicians don’t have as much “policy space” to impose punitive taxes.

That’s the best advertisement for tax competition I’ve ever read, even if it is unintentional.

So what do the UN bureaucrats want to solve this supposed problem? Simple, just destroy financial privacy and fiscal sovereignty so that politicians have carte blanche to expand taxes.

…a number of developments aimed at improving transparency and exchange of information for tax purposes have taken place. They include a declaration by G20 leaders to promote information sharing… an OECD Action Plan on base erosion and Profit Shifting (BEPS), increased monitoring by several national tax authorities…and numerous bilateral tax treaties (BTTs) and tax information exchange agreements (TIEAs). …these initiatives are steps in the right direction.

With BEPS, indiscriminate information sharing, and more power for national tax police, UNCTAD has put together a trifecta of bad policies.

And to add insult to injury, all the bureaucrats at the UN get tax-free salaries while they concoct schemes to enable higher taxes on the rest of us.

Geesh, no wonder I sometimes have perverse fantasies about them.

And I’m very grateful that Senator Rand Paul is leading the fight against their evil ideas.

P.S. On a more pleasant topic, the “Beltway Bandits” just played in the softball world series in Las Vegas. We competed in the 55+ grouping and finished with three wins and two losses.

Not bad, but not good enough to win any trophies. But we got to play in replica Major League stadiums, which was a fun experience.

I can now say I’ve hit home runs in Dodger Stadium and Wrigley Field, and also doubled off the Green Monster at Fenway. Sounds impressive so long as nobody asks any follow-up questions!

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P.P.S. Here’s something else that I found amusing.

Bill Clinton not only understands the inversion issue, but he’s also willing to publicly explain why Obama is wrong.

During an interview with CNBC on Tuesday, former President Bill Clinton called to cut corporate taxes and give companies a break on money stashed overseas, dinging President Barack Obama’s latest effort to combat corporate tax-dodging. When asked what should be done about corporate inversion transactions, Clinton responded with a host of GOP talking points about the tax burden on big business. “America has to face the fact that we have not reformed our corporate tax laws,” Clinton told CNBC, according to a transcript. “We have the highest overall corporate tax rates in the world. And we are now the only OECD country that also taxes overseas earnings on the difference between what the companies pay overseas and what they pay in America.”

But I guess we shouldn’t be surprised. This isn’t the first time he’s had sensible things to say on the issue of corporate taxation.

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I’m a big advocate of the Laffer Curve.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

But now it’s time for a big caveat.

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

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

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

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

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

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

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

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

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

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

An economist from Cornell found lower tax rates boost GDP.

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

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

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

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

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

Here’s what they set out to measure.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

These are some very dismal numbers.

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

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

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

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

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

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

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

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

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

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

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It’s remarkable to read that European politicians are agitating to spend more money, supposedly to make up for “spending cuts” and austerity.

To put it mildly, their Keynesian-based arguments reflect a reality-optional understanding of recent fiscal policy on the other side of the Atlantic.

Here’s some of what Leonid Bershidsky wrote for Bloomberg.

Just as France’s and Italy’s poor economic results prompt the leaders of the euro area’s second and third biggest economies to step up their fight against fiscal austerity, it might be appropriate to ask whether they even know what that is.

An excellent question. As I’ve already explained, austerity is a catch-all phrase that includes bad policy (higher taxes) and good policy (spending restraint).

But with a few notable exceptions, European nations have been choosing the wrong kind of austerity (even though Paul Krugman doesn’t seem to know the difference).

As a result, the real problem of bloated government keeps getting worse.

Government spending in the European Union, and in the euro zone in particular, is now significantly higher than before the 2008 financial crisis. …Among the 28 EU members, public spending reached 49 percent of gross domestic product in 2013, 3.5 percentage points more than in 2007.

Here’s a chart showing how the burden of government spending has become more onerous since 2007.

As you can see, all the big nations of Western Europe have moved in the wrong direction.

Only a small handful of countries in Eastern Europe that have trimmed the size of the public sector.

Bershidsky does explain that the numbers today are slightly better than they were at the peak of the economic downturn, though not because of genuine fiscal restraint.

The spending-to-GDP-ratio first ballooned by 2009, exceeding 50 percent for the EU as a whole, and then shrank a little… That, however, was not the result of government’s austerity efforts: Rather, the spending didn’t go down as much as the economies collapsed, and then didn’t grow in line with the modest rebound.

Here are some examples he shared.

I suppose France deserves a special shout out for managing to expand the size of government between 2009 and 2013. That’s what you call real commitment to statism!

The article also cites an example that is both amusing and tragic, at least in the sense that there’s no genuine seriousness about reforming hte public sector.

Even when spending cuts are made…, the whole public spending system’s glaring inadequacy is not affected. …The ushers at the Italian Parliament, whose job is to carry messages in their imposing gold-braided uniforms, made $181,590 a year by the time they retired, but will only make as much as $140,000 after Renzi’s courageous cut. If you wonder what on earth could be wrong with getting rid of them altogether and just using e-mail, you just don’t get European public expenditure.

I particularly embrace Bershidsky’s conclusion.

There is no rational justification for European governments to insist on higher spending levels than in 2007. The post-crisis years have shown that in Italy, and in the EU was a whole, increased reliance on government spending drives up sovereign debt but doesn’t result in commensurate growth. The idea of a fiscal multiplier of more than one — every euro spent by the government coming back as a euro plus change in growth — obviously has not worked. In fact, increased government interference in the economy, in the form of higher borrowing and spending as well as increased regulation, have led to the shrinking of private credit.  …Unreformed government spending is a hindrance, not a catalyst for growth.

Amen.

Politicians will never want to hear this message, but government spending undermines economic performance by diverting resources from the the economy’s productive sector.

Here’s my video on the theoretical evidence against government spending.

And here’s the video looking at the empirical evidence against excessive spending.

P.S. Other Europeans who have correctly analyzed Europe’s spending problem include Constantin Gurdgiev and Fredrik Erixon.

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Since I’m an economist, I generally support competition.

But it’s time to admit that competition isn’t always a good idea. Particularly when international bureaucracies compete to see which one can promote the most-destructive pro-tax policies.

For instance, I noted early last year that the bureaucrats at the Organization for Economic Cooperation and Development (OECD) were pushing a new scheme to increase the global tax burden on the business community.

Then I wrote later in the year that the International Monetary Fund was even more aggressive about pushing tax hikes, earning it the label of being the Dr. Kevorkian of the world economy.

That must have created some jealousy at the OECD, so those bureaucrats earlier this year had a taxpalooza party and endorsed a plethora of class-warfare tax hikes.

Now the IMF has responded to the challenge and is pushing additional tax increases all over the world.

For example, the bureaucrats want much higher taxes on energy use, both in the United States and all around the world.

This chart from the IMF shows how much the bureaucracy thinks that the tax should be increased just on coal consumption.

The chart doesn’t make much sense, particularly if you don’t know anything about “gigajoules.” Fortunately, Ronald Bailey of Reason translates the jargon and tells us how this will impact the average American household.

The National Journal reports that the tax rate would be $8 per gigajoule of coal and a bit over $3 per gigajoule of natural gas. Roughly speaking a ton of coal contains somewhere around 25 gigajoules of energy, which implies a tax rate of $200 per ton. …The average American household uses about 11,000 kilowatt hours annually, implying a hike in electric rates of about $1,100 per year due to the new carbon tax. Since the average monthly electric bill is about $107, the IMF’s proposed tax hike on coal would approximately double how much Americans pay for coal-fired electricity. A thousand cubic feet (mcf) of natural gas contains about 1 gigajoule of energy. The average American household burns about 75 mcf of natural gas annually so that implies a total tax burden of $225 per residential customer.

To be fair, the IMF crowd asserts that all these new taxes can be – at least in theory – offset by lower taxes elsewhere.

…we are generally talking about smarter taxes rather than higher taxes. This means re-calibrating tax systems to achieve fiscal objectives more efficiently, most obviously by using the proceeds to lower other burdensome taxes. The revenue from energy taxes could of course also be used to pay down public debt.

Needless to say, I strongly suspect that politicians would use any new revenue to finance a larger burden of government spending. That’s what happened when the income tax was enacted. That’s what happened when the payroll tax was enacted. That’s what happened when the value-added tax was enacted.

If you think something different would happen following the implementation of an energy tax, you win the grand prize for gullibility.

But let’s give the IMF credit. The bureaucrats are equal opportunity tax hikers. They don’t just want higher taxes in the United States. They give the same message everywhere in the world.

Here are some excerpts from an editorial about Spanish fiscal policy in the Wall Street Journal.

Madrid last month cut corporate and personal tax rates, simplified Spain’s personal-income tax system and vowed to close loopholes. That’s good news… So leave it to the austerity scolds at the International Monetary Fund to call for tax increases. …Specifically, the Fund wants Spain to raise value-added taxes, alcohol and tobacco excise taxes, tourism taxes, and various environmental and energy levies: “It will be critical to protect the most vulnerable by increasing the support system for them via the transfer and tax system.”

Gee, I suppose that we should be happy the IMF didn’t endorse higher income taxes as well.

The good news is that the Spanish government may have learned from previous mistakes that tax hikes don’t work.

Rather than heed this bad advice, Prime Minister Mariano Rajoy and Finance Minister Cristobal Montoro are cutting government spending and eliminating wasteful programs to reduce pressure on the public fisc. Public spending amounted to 44.8% of GDP in 2013, which is still too high but down from 46.3% in 2010. The government projects it will fall to 40% by 2017.Madrid has also made clear that it believes private growth is the real answer to its fiscal woes. …In other words, economic growth spurred by low taxes and less state intervention yields more revenue over time. If Mr. Montoro can pursue the logic of that insight, there’s hope for Spain’s beleaguered economy.

I’m not overly confident about Spain’s future, but it is worth noting that, according to IMF data, government spending has basically been flat since 2010 (after rising by an average of about 10 percent annually in the previous three decades).

So if the politicians can maintain fiscal discipline by following my Golden Rule, maybe Spain can undo decades of profligacy and become the success story of the Mediterranean.

Let’s hope so. In any event, we know some Spanish taxpayers have decided that they’re tired of being fleeced.

We have one final example of the IMF’s compulsive tax-aholic instincts.

Allister Heath explains that the bureaucracy is pushing for a plethora of new taxes on the U.K. economy.

The IMF wants an increase in the VAT burden.

…the IMF wants to get rid or significantly reduce the zero-rated exemption on VAT, which covers food, children’s clothes and the rest. While it is true that the exemptions reduce economic efficiency, ditching them would necessitate a big hike in benefits and a major uplift in the minimum wage, which would be far more damaging to the economy’s performance and ability to create jobs for the low-skilled. It’s a stupid idea and one which would destroy any government that sought to implement it, with zero real net benefit. It would be a horrendous waste of precious political capital that ought instead to be invested in real reform of the public sector.

And an increase in energy taxes.

The report also calls for a greater reliance on so-called Pigouvian taxes, which are supposed to discourage externalities and behaviour which inflicts costs on others. It mentions higher taxes on carbon and on congestion as examples. But what this really means is that the IMF is advocating a massive tax increase on motorists, even though there is robust evidence which suggests that they already pay much more, in the aggregate, than any sensible measure of the combined cost of road upkeep and development, pollution and congestion.

And higher property taxes.

It gets worse: these days, one cannot read a document from an international body that doesn’t call for greater taxes on property. This war on homeowners is based on the faulty notion that taxing people who own their homes doesn’t affect their behaviour, which is clearly ridiculous. This latest missive from the IMF doesn’t disappoint on this front: it calls for the revaluation of property for tax purposes, which is code for a massive increase in council tax for millions of homes, especially in London and the home counties.

Understandably, Allister is not thrilled by the IMF’s proposed tax orgy.

The tax burden is already too high; increasing it further would be a terrible mistake. The problem is that spending still accounts for an excessively large share of the economy, and the political challenge is to find a way of re-engineering the welfare state to allow the state to shrink and the private sector to expand. The model should be Australia, Switzerland or Singapore, countries that boast low taxes and high quality services.

And I particularly like that Allister correctly pinpoints the main flaw in the IMF’s thinking. The bureaucrats look at deficits and they instinctively think about how to close the gap with tax hikes.

That’s flawed from a practical perspective, both because of the Laffer Curve and because politicians will respond to the expectation of higher revenue by boosting spending.

But it’s also flawed from a theoretical perspective because the real problem is that the public sector is far too large in all developed nations. So replacing debt-financed spending with tax-financed spending doesn’t address the real problem (even if one heroically assumes revenues actually materialize and further assumes politicians didn’t exacerbate the problem with more spending).

Here’s a remedial course for politicians, international bureaucrats, and others who don’t understand fiscal policy.

P.S. Wise people have speculated that international bureaucrats are quick to urge higher taxes because they don’t have to pay taxes on their lavish salaries.

P.P.S. This isn’t the first time the IMF has proposed massive tax hikes on energy consumption.

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It’s a bad idea when governments demand information on your bank accounts and investments so they can impose economically destructive double taxation.

It’s a worse idea when they also demand the right to tax economic activity in other jurisdictions (otherwise known as “worldwide taxation“).

And it’s the worst possible development when governments decide that they should impose a global network of data collection and dissemination as part of a scheme of worldwide double taxation.

Yet that’s exactly what’s happening. High-tax nations, working through the Paris-based Organization for Economic Cooperation and Development, want to impose a one-size-fits-all system of “automatic information exchange” that would necessitate the complete evisceration of financial privacy.

David Burton of the Heritage Foundation explains the new scheme for giving governments more access to peoples’ private financial information.

…the Organization for Economic Cooperation and Development released the full version of the global standard for automatic exchange of information. The Standard for Automatic Exchange of Financial Account Information in Tax Matters calls on governments to obtain detailed account information from their financial institutions and exchange that information automatically with other jurisdictions on an annual basis.

I think this is bad policy, regardless. It is based on imposing and enforcing bad tax policy.

But David goes one step farther. He warns that this global network of tax police includes many unsavory nations.

It is one thing to exchange financial account information with Western countries that generally respect privacy and are allied with the United States. It is an entirely different matter to exchange sensitive financial information about American citizens or corporations with countries that do not respect Western privacy norms, have systematic problems with corruption or are antagonistic to the United States. States that fall into one of these problematic categories but are participating in the OECD automatic exchange of information initiative include Colombia, China and Russia. …The Obama administration enthusiastically supports the OECD initiative.

Moreover, David wisely does not believe we should trust the Obama Administration’s hollow assurances that other nations won’t misuse the data.

…even the administration has realized important privacy issues at are stake. Robert B. Stack, Deputy Assistant Secretary of the Treasury for International Tax Affairs, has testified that “the United States will not enter into an information exchange agreement unless the Treasury Department and the IRS are satisfied that the foreign government has strict confidentiality protections…” Leaving these determinations to a tax agency with little institutional interest in anything other than raising tax revenue is dangerous. There is little doubt sensitive financial information about American citizens and businesses can and will be used by some governments for reasons that have nothing to do with tax administration, such as identifying political opponents’ financial resources or industrial espionage. In addition, individuals in corrupt governments may use the information for criminal purposes such as identity theft, to access others’ funds or to identify potential kidnapping victims. It is naïve to think otherwise. …The Senate should not ratify this protocol. The risks to American citizens and American businesses are too great.

David is exactly right, but too restrained and polite in his assessment.

Richard Rahn, my colleague at Cato, is more blunt in his analysis. Here’s some of what he wrote for the Washington Times.

Do you want the Obama administration sharing all of your financial information with the Russian, Chinese and Saudi Arabian governments? You may be thinking, not even President Obama would go that far. Not so… The rationale behind this despicable idea is to more effectively enable governments, such as that of France and the United States, to identify tax evaders. This might sound like a good idea until one realizes that every individual and business will be stripped of all of their financial privacy if this becomes the law of the land… all of the information that financial institutions now report to the U.S. government to try to ensure income-tax compliance, including your account balances, interest, dividends, proceeds from the sale of financial assets — would be shared with foreign governments. This would apply not only for individuals, but also for both financial and nonfinancial businesses, plus trust funds and foundations. 

Richard then explains that we can’t even trust the bureaucrats at the IRS.

The United States and other governments will, of course, claim that your sensitive financial information will remain confidential — and that you can trust the governments. After the recent Internal Revenue Service scandals — which recur every decade or so — why would anyone believe anything the IRS says? Remember, the IRS leaked information on some of Mitt Romney’s donors during the 2012 presidential campaign. It was blatantly illegal, and the IRS (i.e., you the taxpayer) paid a small fine, but no one went to jail. Many U.S. presidents have misused the IRS, starting at least as far back as Franklin Roosevelt, and the American people are always told “never again,” which is the beginning of the new lie.

And he logically concludes it would be even more foolish to trust foreign tax bureaucracies.

Particularly the tax authorities of the many nations that abuse human rights and persecute minorities, as well the tax police in nations that are too incompetent to be trusted with sensitive data.

…just think what is going to happen when all of those corrupt officials in foreign governments get ahold of it. Some will use the information for identity theft and to raid bank accounts, others for industrial espionage, some to identify potential kidnapping victims and some for political purposes. The potential list goes on and on. The U.S. Treasury Department says it will insist on strict confidentiality protections. (Lois Lerner, please call your office.) If you are a Ukrainian-American who donates to Ukrainian free-market and democratic causes, would you really think that Vladimir Putin’s team, having your financial information, would not misuse it? If you are an American Jew who donates to Israeli causes, do you really think that all of those in the Saudi government who now have full access to your confidential financial information are not going to misuse it? The Chinese are well known for using malware against their opponents. Just think of all the mischief they could cause if they had access to all of the sensitive financial information of human rights advocates in America.

Richard draws the appropriate conclusion. Simply stated, there’s no way we should have a global regime of automatic information exchange simply because a handful of high-tax nations want to remake global tax policy so they can prop up their decrepit welfare states.

As Lord Acton famously reminded us, governments are prone to misuse information and power. The instrument behind this information-sharing ploy is the OECD, which started out as a statistical collection and dissemination agency to promote free trade among its members. It has now morphed into an international agency promoting big government and higher taxes, and the destruction of financial freedom — while at the same time, by treaty, its staff salaries are tax-exempt. No hypocrisy there. Thinking Republicans and Democrats should unite around opposition to this terrible treaty and defund the OECD. Those who vote for it will deservedly be easy marks for their political opponents.

And kudos to Richard for urging the defunding of the OECD. It is absurd that American tax dollars are funding a Paris-based bureaucracy that constantly urges policies that would undermine the U.S. economy.

Especially when they’re insulated from the negative effects of the policies they push. Since they’re on the public teat, they don’t suffer when the private economy is battered. And they don’t even have to pay tax on their very generous salaries.

P.S. I’m very glad to report that at least one lawmaker is doing the right thing. Senator Rand Paul is leading the fight to block proposals that would put Americans at risk by requiring the inappropriate collection and sharing of private financial information.

P.P.S. By way of background, the OECD scheme is part of an effort to cripple tax competition so that high-tax nations can impose higher tax rates and finance bigger government. To learn more about tax competition (and tax havens), watch this four-part video series.

P.P.P.S. The OECD scheme is basically a multilateral version of the horrid “FATCA” legislation signed by Obama back in 2010.

P.P.P.P.S. Maybe I’m old-fashioned, but I think a global tax database is even worse than an Obamacare database on our sex lives.

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