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Posts Tagged ‘Tax Increase’

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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If some special-interest lobbies give money so that a left-wing group can propose something like a value-added tax to finance bigger government, that’s no surprise.

And if a bunch of subsidy recipients donate money to Barack Obama or some other statist politician because they hope for new programs, that’s also standard procedure in DC.

I’ll fight these initiatives, of course, but I don’t get overly upset when these things happen.

What does drive me crazy, though, is when proponents of big government want to use my money to subsidize left-wing activism.

This is why I’m against taxpayer handouts for groups such as Planned Parenthood and AARP. If they want to endorse bigger government, get voluntary contributions to push that destructive agenda.

All I ask is that you don’t coerce me to subsidize statism.

I get especially upset when international bureaucracies use my money to push for bigger government. And it the past few days, the International Monetary Fund (IMF) and Organization for Economic Cooperation and Development (OECD) have delivered a one-two punch for statism.

And they used our money!

The IMF advocated for more government in their recent survey of the United States.

The recent expansion of Medicaid and the increase in health insurance coverage have been concrete steps whose effect on poverty and health outcomes should become more evident over time. An expansion of the Earned Income Tax Credit—to apply to households without children, to older workers, and to low income youth—would be another effective tool to raise living standards for the very poor. …the minimum wage should be increased. …Action is also needed to achieve a sustained increase in both Federal and State spending on infrastructure paid for by…additional revenues, and an expansion of financing sources… The Federal gas tax should be significantly increased. …Some progress has already been made…through implementation of the Affordable Care Act… Addressing the expected depletion of the social security trust fund will require…increases the ceiling on taxable earnings for social security… In addition, the U.S. should introduce a broad-based carbon tax and move toward the introduction of a Federal-level VAT.

Keep in mind, by the way, that the IMF already has endorsed a giant energy tax on American consumers, as well as a value-added tax.

Though, to be fair, they’re not discriminating against Americans. The IMF has a long track record of pushing for bad policy in other nations.

Meanwhile, the statists at the OECD also are pushing for a wide range of bad policies.

The report encourages close cooperation between businesses and government… The Survey highlights that income inequality is high in the United States. …While this cannot be improved easily, the report praises reforms recently adopted or being considered: health care reform will help vulnerable families access high-quality care; OECD Carbon Obamadealing with mental health will help reduce job loss and disability; preschool education would be a good investment in children’s future and help middle-class parents; and paid maternity leave would help working women. …The OECD recommends introducing an adequate pricing of greenhouse gas emissions and supporting innovation in energy saving and low carbon technology.

Unsurprisingly, the OECD endorses a panoply of tax hikes to enable a bigger and more bloated public sector.

Act toward rapid international agreement and take measures to prevent base erosion and profit shifting… Make the personal tax system more redistributive… The federal government could…develop a social insurance programme for paid leave for all workers funded by a small increase in the payroll tax… Taxing the extraction of non-renewable resources offers the potential to raise revenue… Increase reliance on consumption taxation.

The OECD favors higher taxes for everyone, so it’s not as if they’re targeting Americans.

But it’s nonetheless irritating when a bunch of pampered international bureaucrats take money from American taxpayers and then use those funds to produce “research” calling for even higher tax burdens.

Especially when those bureaucrats are exempt from the income tax!!!

And keep in mind that this isn’t the first time that the OECD has acted as a public relations team for Obama’s statist agenda.

P.S. The one silver lining to the dark cloud of the IMF is that the bureaucrats inadvertently generated some very powerful evidence against the VAT.

P.P.S. And the OECD accidentally produced some data showing the poor results of governments schools in the United States, so that’s a bit of consolation as well.

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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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