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Posts Tagged ‘Tax Increases’

I’m currently in Paris for my final stop on the Free Market Road Show. In other words, I’m in the belly of the beast of big-government statism.

So you would think I might be depressed, but I’m actually in a good mood.

Not because I’m surrounded by millions of socialists, but because voters in my home state just punished a couple of entrenched incumbent Republican politicians who sided with special interest groups and voted to rape and pillage taxpayers.

Here are some bring-a-smile-to-your-face details from a Washington Post report.

Two 20-year veterans of Virginia’s House of Delegates lost their seats Tuesday, falling to GOP primary challengers who assailed their support for a tax-heavy transportation funding overhaul. Del. Joe T. May (Loudoun) and Del. Beverly J. Sherwood (Frederick) lost to political newcomers who railed against the transportation plan, which imposes a $1.2-billion-a-year tax increase. … No sitting Republican delegate had faced a primary challenge since 2005, when activists went after some of those who supported a $1.5-billion-a-year tax hike pushed by then-Gov. Mark Warner (D).

You probably won’t be surprised to learn that these Republican-in-name-only lawmakers claimed tax hikes were necessary because there was no room to cut spending.

But the real problem is that too many Republicans in Richmond decided that the cesspool of big government was actually a hot tub. So rather than drain the swamp (yes, I’m mixing my metaphors), they decided they wanted more money to waste.

So, over the past several years, the burden of spending rose. Not just rose. It climbed twice as fast as inflation.

But they needed more money to maintain and support bigger government. So they disregarded their anti-tax promises.

And two of them paid the price at the polls. That may not sound like much since 34 GOP lawmakers sided with the left and voted for the tax hike.

But remember that it’s very hard to defeat incumbent politicians. So when a pair of 20-year incumbents lose, you can be sure that other lawmakers now will be far less likely to side with the political class instead of the people back home.

By the way, what makes the story in Virginia so pathetic is that Republicans normally get seduced into tax increases because of stupidity. As the Charlie Brown parody indicates, they get tricked into believing higher revenues will be used to lower deficits.

But in this case, the RINO Republicans openly admitted that they wanted more revenue to expand the state budget.

Heck, they didn’t just deserve to lose. They should have been tarred-and-feathered.

The no-tax-hike position is a line in the sand that shouldn’t be crossed.

The starve-the-beast rejection of tax hikes isn’t a sufficient condition to control big government, but it darn sure is a necessary condition.

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New 10-year budget projections have been released by the Congressional Budget Office, so it’s time once again for me to show how easy it is to balance the budget with modest spending restraint (though never forget that our goal should be smaller government, not fiscal balance).

The new numbers show the path is even easier. The budget can be balanced in 5 years if spending grows at the rate of inflation (the green line) and in just 10 years if spending is limited so that it grows 3.4 percent annually (the light blue line).

Budget Balance CBO 2013

Today’s path to balance is even easier because of better 10-year growth numbers, and also because of projections that the recent tax increase will generate more revenue (the dark blue line shows total projected revenue over the decade).

Because of Laffer Curve reasons, I’m skeptical about whether all that additional revenue will materialize, so both the chart and the underlying numbers are a bit speculative.

But what they do show is that the nation’s fiscal problems easily can be addressed with some modest spending restraint. Sort of a practical application of Mitchell’s Golden Rule.

Here’s my video explaining the importance of spending restraint. The numbers are now outdated, but the concept is still completely relevant.

As noted at the beginning of the post, I’m much more concerned about reducing the burden of government spending. Balancing the budget is a secondary concern.

That’s why we should impose genuine budget cuts and not just restrain the growth of spending. That would also make it easier to adopt good tax policy.

Maybe, in a parallel universe where politicians are motivated by liberty, we can even get entitlement reform and a flat tax.

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To save America from the supposedly “savage” and “draconian” budget cuts caused by sequestration, President Obama has instead asked Congress to approve an alternative fiscal package containing additional tax increases.

So why is the sequester so bad? Does it slash the budget by 50 percent? Does it shut down departments, programs, and agencies?

Sounds good to me. We need to reduce the burden of government spending, so some genuine budget cuts would be very desirable.

The pro-spending lobbies in Washington certainly are acting as if spending would be “cut to the bone.” As documented by my colleague Tad DeHaven, they’re claiming horrible things will happen.

So what’s the real story? Well, the Congressional Budget Office today released its annual Budget and Economic Outlook, and Tables 1-1 and 1-5 allow us to see the “brutal” impact of the sequester.

As you can see from this chart, the sequester will “cut” spending so much that the budget will grow by “only” $2.4 trillion over the next 10 years.

Sequester 2013

Rather anticlimactic, I admit. No widows dying in snowbanks. No blood flowing in the streets.

So you can let the women and children back in the room. It turns out that all the hyperbole and hysteria about the sequester is based on the dishonest Washington definition of a budget cut – i.e., when spending doesn’t rise as fast as projected in some artificial baseline.

Yes, some parts of the budget are disproportionately impacted, such as defense. But even the defense budget climbs over the 10-year period and the United States will still account for close to 50 percent of global military outlays when the dust settles.

The bottom line is that there’s no reason to worry about the sequester and there’s certainly no reason to go along with Obama’s plan to replace the sequester with a tax-heavy budget deal.

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There aren’t many fiscal policy role models in Europe.

Switzerland surely is at the top of the list. The burden of government spending is modest by European standards, in part because of a very good spending cap that prevents politicians from overspending when revenues are buoyant. Tax rates also are reasonable. The central government’s tax system is “progressive,” but the top rate is only 11.5 percent. And tax competition among the cantons ensures that sub-national tax rates don’t get too high. Because of these good policies, Switzerland completely avoided the fiscal crisis plaguing the rest of the continent.

The Baltic nations of Estonia, Lithuania, and Latvia also deserve some credit. They allowed spending to rise far too rapidly in the middle of last decade – an average of nearly 17 percent per year between 2002 and 2008! But they have since moved in the right direction, with genuine spending cuts (unlikely the fake cuts that characterize fiscal policy in nations like the United States and United Kingdom). Yes, the Baltic countries did raise some taxes, which undermined the positive effects of spending reductions, but at least they focused primarily on spending and preserved their attractive flat tax systems. No wonder growth has rebounded in these nations.

The situation in the rest of Europe is more bleak, particularly for the so-called PIIGS. To varying degrees, Portugal, Italy, Ireland, Greece, and Spain have lost the ability to borrow, received bailouts, and been mired in recession.

The silver lining is that the fiscal crisis has forced them to finally cut spending. All of those nations implemented real spending cuts in 2011 according to European Commission data, bringing spending below 2010 levels. Final figures for 2012 aren’t available, of course, but the International Monetary Fund estimates that spending will drop in every nation other than Italy (where it will climb by less than 1 percent).

That’s the good news. The public sector finally is being subjected to some long-overdue fiscal discipline.

The bad news is that politicians also imposed very significant tax increases on the private sector. Income tax rates have been increased. Value-added taxes have been hiked, and other taxes have climbed as well. These penalties on productive activity undermine potential growth.

The politicians say that this is a “balanced approach,” but this view is misguided, First, as Veronique de Rugy has shown, it generally means lots of new taxes and very little spending restraint. Second, it is based on the IMF view of “austerity,” which mistakenly focuses on the symptom of red ink rather than the underlying disease of too much spending.

What Europe really needs is a combination of lower spending and lower tax rates.

Portugal may actually be moving in that direction, according to a report in the Wall Street Journal.

The Portuguese government is seeking to cut its corporate tax rate for new businesses to one of the lowest in Europe as part of a plan to attract investment and revitalize ailing industries, the minister of economy said. The government is in talks with the European Commission’s competition agency in Brussels to get approval to cut the tax on corporate income for new investors to 10% from the current 25%, the minister, Alvaro Santos Pereira, said in an interview. …”We want to make Portugal one of the most attractive countries in Europe for new investment,” Mr. Santos Pereira said. “We believe that by providing very strong fiscal incentives to new investments we will safeguard the budget side and at the same time become a lot more competitive,” he added. …While wealthy euro-zone countries and the IMF are beginning to recognize the need for measures to boost growth in austerity-hit countries, they have been reluctant to endorse tax cuts in countries under bailout programs. If implemented, the proposed tax cut would be a departure from a series of tax increases that countries including Portugal, Greece and Spain were forced to take as part their bailout conditions.

Before getting too excited, it’s important to note that the Portuguese proposal is a bit gimmicky. It’s not a corporate tax rate of 10 percent, it’s a special rate of 10 percent for new investment, however that’s defined.

But at least it might be a small step in the right direction. As the article indicates, it “would be a departure from a series of tax increases.” And Portugal definitely has been guilty in recent years of raping and pillaging the private sector.

To be fair, though, this chart shows that government spending in Portugal did decline last year. And the IMF is projecting that it will fall again this year and next year.

Portugal Fiscal Policy

But the key to good fiscal policy is reducing government spending as a share of economic output. And if tax increases keep the private economy in the dumps, then the actual burden of government spending doesn’t change much even when nominal outlays decline.

A pro-growth policy is needed to boost economic performance. Portugal’s corporate tax rate proposal, by itself, won’t make much of a difference. But if it’s the start of a trend, that could be significant.

By the way, it’s amusing to see that one of the bureaucrats from the European Commission is pouring cold water on the plan, implying that a decision to take less money from a company somehow is akin to government assistance.

“We would want to be sure that anything proposed would help the competitiveness of the economy,” said spokesman Simon O’Connor, “but at the same time it would have to be in line with state aid rules,” referring to EU regulations that limit the assistance governments can give to the private sector. “There really isn’t any scope for them to reduce revenue,” he added.

But I guess that’s not too surprising. Along with their tax-free colleagues at the Organization for Economic Cooperation and Development, the European Commission has been trying to undermine tax competition and make it easier for nations to impose bad tax policy.

Returning to our main topic, what’s next for Portugal?

Your guess is as good as mine, but Portugal’s leaders already have acknowledged that Keynesian fiscal policy is ineffective. Perhaps they’ve gotten to the point where they realize punitive tax systems also are destructive.

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I recently did a post explaining five policy reasons and five political reasons why Republicans should maintain a firm no-tax-hike position.

Realizing I left out a powerful argument, I then added another political argument in this post.

But the GOP isn’t taking my advice. But why?

Is it because they’re well-meaning doofuses, as suggested by this Chuck Asay cartoon?

Cartoon GOP Poker

Or are they co-conspirators, as suggested by this Michael Ramirez cartoon?

Cartoon GOP Dem Pickpocket

Since I’ve already explained that politicians are a combination of good and evil, I actually think both cartoons are accurate.

All I know is that I would like to force these clowns to spend a couple of minutes watching this video from Mattie Duppler of Americans for Tax Reform. They would then realize there is no legitimate argument for Obama’s class-warfare policy.

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Augmented by some amusing cartoons, I’ve already warned that the hysteria about the fiscal cliff is basically a ploy by the politicians to extract more revenue to finance bigger government.

Obama Fiscal Manual

Elaborating on this concern, I wrote a column for today’s New York Daily News. I started with a description of the three issues that are getting lumped together.

…we face the threat of higher tax rates for some or all taxpayers on Jan. 1. …there’s also a possibility of a “sequester” — automatic budget cuts that also are scheduled to take place on Jan. 1. And politicians have been spending so much money that we’re about to bump up against the nation’s debt limit. So it’s likely that all these issues will get joined as President Obama and congressional leaders attempt to negotiate a deal.

I then outlined what might happen if the 2001 and 2003 tax cuts expire.

The higher tax rate portion of the fiscal cliff exists because 2001 and 2003 tax cuts are scheduled to expire at the end of the year. All taxpayers would see more of their earnings confiscated by the IRS beginning in January if Washington fails to act. All tax brackets would increase, taxes on dividends and capital gains would rise… The total yearly hike would be in the range of $400 billion. This could have profound implications, both because of immediate reductions in take-home pay and the negative long-run impact of economic stagnation.

And I explained how the problem should be solved, but warned that the biggest stumbling block is President Obama’s fixation on class-warfare tax policy.

Many are worried about these potential changes, with Congressional Budget Director Doug Elmendorf warning that Americans should expect a “significant recession” and the loss of some 2 million jobs. From my point of view, all the tax cuts should be made permanent. The bad news, to me, is that Obama wants to raise rates on investors, entrepreneurs, small business owners and other “rich” taxpayers. The sequester should be replaced by a more targeted set of fiscal reforms to restrain the growth of the entitlement state. Finally, the debt limit should be raised in exchange for a workable and enforceable cap on government spending.

I originally included an explanation of why the CBO estimate is flawed because of Keynesian methodology, but those sentences fell victim to space constraints. Nonetheless, it’s worth noting that even folks on the left think big tax hikes aren’t a good idea (though they’re perfectly happy to have a series of small tax hikes that get you to the same Greek destination).

But set that aside. Is there any chance of seeing my solution adopted? Well, there’s no chance of a spending cap. The sequester will be stopped, but it won’t be replaced by better reforms.

The great unknown is what will happen on the tax side. I fear GOPers will surrender, even though they won the very same battle back in 2010 when they didn’t even control the House and had fewer seats in the Senate.

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President Obama supports higher taxes, but he usually claims he only wants higher tax rates on evil rich people as part of his class-warfare agenda. Heck, he promised back in 2008 that, “no family making less than $250,000 a year will see any form of tax increase.  Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.”

I guess we’re supposed to forget the higher tax burdens that were imposed on the middle class by Obamacare in 2010 and the SCHIP legislation in 2009.

Obama’s other rhetorical trick is to claim he wants a “balanced approach.” Translated from Washington-speak to English, that means he wants more of our money. But it’s a soothing way to demand more money. After all, who’s against “balance”?

I actually agree with Obama – but only if one uses honest math. Needless to say, Obama wants to use Washington math, where spending increases get redefined as spending cuts if the burden of government spending doesn’t rise as fast as was projected in some artificial baseline.

This is why the budget deals put together by politicians almost always are awful. In order to protect the goodies they hand out to various special interests, the politicians use fake numbers to pretend they’re restraining spending, but when the dust settles, it turns out that the only real result is that taxpayers are forking over more of their hard-earned cash to the clowns in Washington.

Actually, that statement is incomplete. We need to remember that taxpayers in other nations also get screwed by the political elite. Take a look at this stunning chart that was shown at yesterday’s Cato Institute conference on “Europe’s Crisis and the Welfare State.” Put together by Veronique de Rugy of the Mercatus Center, it shows that politicians across the Atlantic have imposed nine euro of higher taxes for every one euro of spending cuts.

And keep in mind, as Veronique noted in her comments, that many of these so-called spending cuts were merely reductions in planned increases!

This matters because I’m getting increasingly worried that gullible Republicans will get seduced into some sort of budget summit designed to trick them into supporting the Simpson-Bowles tax-hike package.

As I’ve previously explained, this would be a terrible idea. It means a big tax hike with, particularly an increase in the double taxation of income that is saved and invested. It also relies on gimmicks rather than real entitlement reform.

I don’t like higher taxes, but I wouldn’t be completely upset if at least we got some permanent reforms to control the growth of government. But that’s definitely not the case with Simpson-Bowles. And, as Veronique showed, it’s not the case in Europe either.

P.S. It’s rather ironic that the New York Times inadvertently revealed that the only budget deal that worked was the one in 1997 that cut taxes rather than raising taxes.

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I wrote earlier this year that I could accept a tax hike if there was a deal that actually resulted in a permanent reduction in the burden of government spending.

In reality, however, we will never get an acceptable deal. Instead, the politicians want us to accept deeply flawed packages like the Simpson-Bowles tax-hike.

But maybe I have to moderate my views. When a group of people loudly say we need higher taxes, then perhaps we should agree. But since they’re the ones saying taxes should go up, we should stick them with the tax hike.

Glenn Reynolds, the Instapundit, has been suggesting that it’s time to repeal the Hollywood tax cuts. After all, that crowd is always pontificating for statism. So let them put their money where their mouths are.

I’m thinking of a different group. Based on their penchant for supporting tax hikes, maybe it’s time to raise taxes on corporate executives. Here are some relevant blurbs from a Wall Street Journal story.

A coalition of anti-deficit groups has tapped businesses and foundations and raised more than $29 million… They are planning to run “fix the debt” ads after the election. …And they are building a roster of big-company chief executives, thus far numbering about 70. These executives are alarmed by the degree of dysfunction in Washington and have pledged to speak out about the urgency of addressing deficits… The “fix the debt” campaign, as it is called, is coordinated by deficit worrywarts in Washington… The effect that CEOs have on Congress depends on who they are and what they actually do. Former Sen. Sam Nunn (D., Ga.), who is leading a group of retired congressmen to build support for a deficit deal, says Democrats need CEOs to organize grass-roots support for a deficit compromise among their workers. And Republicans need business cover for agreeing to raise taxes in exchange for restraints on the growth of health-care spending. CEOs enlisting in the fix-the-debt campaign see no alternative to both cutting benefit spending and raising taxes, despite campaign rhetoric to the contrary. “It’s going to entail sacrifice by every American, every company, every entity,” says Mr. Oberhelman. “I, for one, believe that revenue has to increase. I think every American would pay more if they thought spending was going to be cut and the budget brought to balance.”

At the risk of disagreeing with Mr. Oberhelman, it goes without saying that higher taxes will lead to more spending rather than less.

Corporate executives probably understand tax hikes don’t work, but they want to “play ball” with the politicians – probably because many of them are crony capitalists.

But regardless of their motives, the obvious response is to ask them to cough up some of their cash.

A hike in the corporate income tax wouldn’t be the right approach, though, since that would penalize shareholders, workers, and consumers.

Increasing personal income tax rates also would be the wrong approach since that would punish every successful person, not just wayward corporate executives.

I’m guessing that the best approach is to impose a special excise tax on the fringe benefits and salaries of CEOs at publicly traded companies.

True, that will also punish corporate executives who aren’t guilty of sucking up to the political class, but that will have a positive impact in that the good CEOs will pressure the statist CEOs to stop being suck-up a$$holes.

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Even though I have remarked on many occasions that the burden of government was reduced during the Clinton years, that doesn’t mean Bill Clinton was in favor of smaller government. And it definitely doesn’t mean that his appointees believed in economic liberty.

Consider the case of Laura Tyson, who served as Chair of Clinton’s Council of Economic Advisers. She recently penned a column for the UK-based Financial Times that is riddled with disingenuous assertions.

Even though it deserves to be ignored, I can’t resist the temptation to make corrections.

Tyson myth:

“Even after the economy recovers, current tax policies will not generate enough revenue to cover future spending on social security, health, defence and debt interest, let alone basic government operations and investments. In 2012, federal tax revenues are likely to be less than 16 per cent of gross domestic product, compared with an average of more than 18 per cent in the 20 years before the crisis hit in 2008.”

Factual correction:

I already corrected this myth earlier this year when I debunked some disingenuous comments by Obama’s former CEA Chairman.

Just take a look at this chart, which assumes that all the 2001 and 2003 tax cuts expire and that millions of additional taxpayers will get nailed by the alternative minimum tax.

But even if you assumed that the tax cuts were made permanent and the AMT was constrained, federal tax revenues would jump to above 25 percent of GDP.

As you can see, tax revenues are projected to climb well above the long-run average of 18 percent of GDP. In other words, a rising burden of government spending is responsible for more than 100 percent of America’s long-run fiscal challenge.

Tyson myth:

…there is scant evidence that taxes as a share of GDP and economic growth are negatively correlated. Indeed, there is a small positive correlation between income per capita and tax revenue as a share of GDP.

Factual correction:

Ms. Tyson is trying to take advantage of the paradox of Wagner’s Law, which is that wealthy nations tend to adopt welfare states. And even though the welfare state slows growth, these nations are still richer than some developing countries that have smaller burdens of government.

These posts about Sweden and Denmark show why she’s wrong, but I would also call your attention to this World Bank research that unambiguously shows – using apples-to-apples comparisons – that larger governments reduce prosperity.

Tyson myth:

…tax reform should not come at the expense of progressivity. Income inequality is greater in the US than in the other developed countries of the OECD. The US tax system is considerably less progressive than it was a few decades ago and it does less to counteract pre-tax income inequality than other OECD systems.

Factual correction:

As explained by Veronique de Rugy, America’s tax system actually is more progressive than European tax systems.

But not because we tax rich people more. Instead, our system is more progressive because we don’t screw over lower-income and middle-income taxpayers with policies like the value-added tax.

That’s one of the reasons why the burden of government isn’t as high in the United States – which is very much one of the reasons why there’s so much more prosperity, as shown in this chart, in America than on the other side of the Atlantic.

Tyson myth:

A more efficient and progressive way to pay for a lower corporate tax rate would be to increase taxes on dividends and capital gains. This would shift more of the burden towards capital owners and away from labour, which bears the burden in the form of fewer jobs and lower wages. Mr Obama proposes to raise rates on capital gains and dividends for the top 2 per cent of taxpayers. Most capital gains and dividends go to this group.

Factual correction:

This actually isn’t a myth. She’s simply making an assertion that it would be desirable to increase the double taxation of dividends and capital gains.

America already has pervasive double taxation, as illustrated by this flowchart, and this post shows that Obama’s policies would make a bad situation even worse.

Does anybody think American competitiveness will improve if we have the highest capital gains tax in the industrialized world?

Tyson myth:

The US economy needs efficient and progressive tax reform and it needs more revenues for deficit reduction. Revenue increases have been a significant component of all major deficit-reduction packages enacted over the past 30 years.

Factual correction:

This is remarkable. I assume Ms. Tyson reads the New York Times, so perhaps she overlooked or deliberate forgot the column that inadvertently revealed that the only successful deficit-reduction package in recent memory was the one that cut taxes instead of raising them.

Interestingly, that successful package was implemented during the Clinton years, but only after she left office.

During Tyson’s tenure at CEA, we did get a tax increase rather than a tax cut. But the Clinton Administration admitted 18 months later that the tax hike was a failure and was not going to balance the budget.

Yet she wants to push the same failed class-warfare tax policy today.

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Now that new numbers have been released by the Congressional Budget Office, it’s time once again for me to show how easy it is to balance the budget with modest spending restraint (though please remember our goal should be smaller government, not fiscal balance).

  • I first did this back in September 2010, and showed that we could balance the budget in 10 years if federal spending was limited so it grew by 2 percent annually.
  • I repeated the exercise in January 2011 after new CBO numbers were released, and re-confirmed that a spending cap of 2 percent would eliminate red ink in just 10 years.
  • In August of that year, following the release of the CBO Update, I showed again that the budget could be balanced by limiting spending so it climbed by 2 percent per year.
  • Most recently, back in January after CBO produced the new Economic and Budget Outlook, I crunched the numbers again and showed how a spending cap of 2 percent would balance the budget.

I’m happy to say that the new numbers finally give me some different results. We can now balance the budget if spending grows 2.5 percent annually.

In other words, spending can grow faster than inflation and the budget can be balanced with no tax hikes.

And here’s the video I narrated almost two years ago on this topic. The numbers have changed a bit, but the analysis is exactly the same.

In other words, ignore the politicians, bureaucrats, lobbyists, and special interests when they say we have to raises taxes because otherwise the budget would have to be cut by trillions of dollars. They’re either stupid or lying (mostly the latter, deliberately using the dishonest version of Washington budget math).

Modest fiscal restraint is all that we need, though it would be preferable to make genuine cuts in the burden of government spending.

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For years, I’ve been warning that a value-added tax (VAT) would be a terrible idea. Simply stated, politicians would have no reason to control spending or reform entitlements if they had a new source of tax revenue.

In this video, I explain why this European-style national sales tax is a money machine for bigger government.

Japan’s politicians are confirming my argument. Here are some details from a new report in the Wall Street Journal.

Japan’s parliament passed a landmark tax bill Friday, finalizing the legal framework to double the nation’s sales tax by 2015 as a step toward fiscal reconstruction. The upper house enactment of the contentious bill marks the end of Prime Minister Yoshihiko Noda’s tortuous 12-month road to raise the tax to 8% in April 2014 and 10% in October 2015. …The sales tax hike will be the first since 1997, when the rate was raised to the current 5% from 3%.

Wow, more than tripling the tax between 1997 and 2015. I wonder how long it will take Japan’s political class to boost the rate to 20 percent?

But that’s only part of the story.

Mr. Noda also had to promise to dissolve the lower house “in the near term” in exchange for…endorsement of the bill in the opposition-controlled upper house.

Wow, if I’m reading that passage correctly, it sounds like Prime Minister Noda is willing to lose power in order to impose this new tax. This shows an amazing amount of greed for new revenue.

I’m surprised, though, that his party didn’t kick him out and elect a new leader. They must be as politically incompetent as the supposedly right-wing party in Slovakia that surrendered power to the socialists in order to get support for the Greek bailout.

However, the WSJ article also suggests that the tax is not a done deal.

The bill includes a provision making an “economic upturn” a condition for implementing the rate hike. The government refused to specify in the bill exactly what an upturn entails, and lawmakers have different interpretations. DPJ tax policy chief Hirohisa Fujii told Dow Jones that only an economic shrinkage of 3% or more should prevent the tax increase from taking place.

Isn’t that remarkable. This onerous tax hike can only go into effect if there’s an “economic upturn,” and one of the sleazy politicians from the ruling party is defining an economic contraction of -2.99 percent as meeting that test.

Sound like Mr. Fujii should become friends with the Obama Administration officials who relied on Keynesian economic theory to concoct an infamous prediction that unemployment would never rise above 8 percent if Washington squandered more than $800 billion on a faux stimulus.

But if he’s smart, Mr. Fujii will grab as much loot as possible and emigrate. Japan’s long-term finances are a disaster, and the VAT increase is a pretty good sign that politicians have no intention of turning the ship of state before it rams the fiscal iceberg.

And now you’ll understand even more why I’m worried about the pro-VAT sympathies of Mitt Romney and Paul Ryan.

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I’ve commented before about entrepreneurs, investors, and small business owners migrating from high tax states such as California to low-tax states such as Texas and nobody gets upset.

Indeed, I just appeared on Fox Business Network to talk about a new study showing an exodus from Maryland following the imposition of some class warfare tax hikes (which simply confirms earlier analysis showing the same trend), and at no point was there any discussion about whether the state’s taxpayers had some sort of moral obligation to stay put and get fleeced by Obama-style tax policy.

But when a successful taxpayer decides to move from the United States to Singapore, there’s a different reaction. All of a sudden, that person becomes selfish, greedy, and unpatriotic.

Even though I’ve defended the right of people to protect themselves from greedy governments by moving across national borders, I can sort of understand why people tend to react in a negative fashion.

Simply stated, we self-identify as Americans (if we have any patriotism) and don’t have instinctive loyalty to individual states. So we don’t think there’s anything wrong when an American flees from New Jersey to Florida. But it rubs us the wrong way when American citizens renounce their citizenship. Even when we rationally understand that they are making the best possible choice for their families.

This issue has become hot again now that another big name has decided to escape the IRS, and I discuss the issue on Fox News. In my first soundbite, I warn that expatriation is driven by a combination of punitive tax policy and a growing perception that America will suffer a Greek-style fiscal crisis thanks to poorly designed entitlement programs.

At this point, I can’t resist a detour. Shepard Smith goofed big time when he remarked that taxpayers would “lose” because of Denise Rich’s expatriation. Nonsense. If my neighbor puts locks on his doors and bars on his windows and no longer is being robbed, that doesn’t impose any cost on me. Indeed, I’m probably helped because thieves may get discouraged and decide to live honestly instead. And even if thieves now target me because my neighbor’s house is less vulnerable, that’s not the fault of my neighbor. We should always remember that the blame should fall on the thieves. Or, in this case, the politicians. As if there’s a difference.

Now, back to the main topic, Fox did the same report at a different point in the day, but they used a different soundbite. In my second appearance (only an excerpt, not the entire segment), I explain that it doesn’t make sense to drive the geese with the golden eggs out of the country.

Interestingly (or perhaps I should say disturbingly), even France has a better approach to tax expatriation than the U.S. government. That tells us something about how American policy has veered in the wrong direction.

The big picture, as I’ve noted before, is that we want people to have the freedom to cross borders as a means of disciplining politicians who will over-tax and over-spend if they think taxpayers have no choice but to meekly submit.

Which is why all of us should be very happy that tax havens exist. Imagine how high taxes would be if politicians didn’t have to worry that people had escape options.

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I’m not a big fan of government conspiracy theories, largely because the people in Washington are too bloody incompetent to do anything effectively. Heck, sometimes they can’t even waste money properly even though they have lots of practice.

But it recently crossed my mind that maybe President Obama was born in Denmark. Not in a serious way, of course, but you’ll understand my thought process when you read this passage from a report by the government-appointed Danish Economic Council. It doesn’t mention the Laffer Curve, but the report openly states that an increase in the top tax rate would lose revenue because of changes in taxpayer behavior.

…increased taxation on high income earners in Denmark at best is revenue neutral, and may even reduce total tax revenue. This result applies whether one considers the top 10, the top 5 or the top 1 per cent income group. …Using the base estimate of the elasticity of taxable labour income of 0.2, the conclusion is thus that the existing Danish tax system implies an effective tax rate on high income earners that is above – though close to – the tax rate that generates the highest tax revenue. …As an example, the revenue effect of an increase in the marginal tax rate by 6 percentage points for high-income earners is calculated. Using the base estimate of the behavioural response to taxation, this leads to a revenue loss of about ½ billion DKK. …Overall, the scope for acquiring extra tax revenue from high income earners in Denmark is very limited.

Yet there are some politicians in Denmark who want to raise tax rates, even though the damage to the economy will be so significant that the government loses revenue!

If you’re thinking this sounds familiar, you probably remember President Obama’s infamous statement during the 2008 campaign that he wanted to raise the capital gains tax rate for reasons of “fairness” regardless of whether tax revenues decreased (if you think I’m somehow exaggerating or distorting his words, just go to the 4:20 mark of this video).

By the way, the Danish study probably understates how much revenue the government would lose. Their base estimate about the elasticity of taxable labor income (economist jargon for how sensitive labor income is to changes in tax rates) is much lower than Alan Reynolds reported in his recent Wall Street Journal column.

Rich people, unlike the rest of us, have tremendous ability to change the timing, composition, and level of their income, which is a big reason why upper-income taxpayers paid much more to the IRS in the 1980s after President Reagan slashed the top tax rate from 70 percent to 28 percent.

I’m constantly amazed – in a bad way – that politicians and bureaucrats have been so successful in resisting the insights of the Laffer Curve. The U.S. Treasury Department, for instance, is to the left of the Danish Economic Council and basically assumes that tax policy has no impact on economic performance. The same can be said about the Joint Committee on Taxation on Capitol Hill.

This has to be a case of leftist ideology trumping reality, because the evidence for the Laffer Curve is quite powerful – some of it even being produced by international bureaucracies.

None of this is to suggest that “all tax cuts pay for themselves.” That only happens in unusual cases where a group of taxpayers – such as wealthy entrepreneurs and investors – have considerable flexibility in their economic affairs.

In most cases, the government will collect more revenue when tax rates increase. This is because the impact of the change in the tax rate is larger than the impact of the change in taxable income.

But the real question is whether it is ever a good idea to reduce private economic output in order to give politicians more money to spend. To sensible people, that’s the most important insight of the Laffer Curve.

P.S. While this discussion has focused on the foolishness of setting tax rates so high that the government loses revenue, this does not mean politicians should seek the revenue-maximizing tax rate. The ideal point on the Laffer Curve is the growth-maximizing tax rate.

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Back in April, I explained that I would accept a tax increase if “the net long-run effect is more freedom, liberty, and prosperity.”

I even outlined several specific scenarios where that might occur, including giving the politicians more money in exchange for a flat tax or giving them additional revenue in exchange for real entitlement reform.

But I then pointed out that all of those options are unrealistic. And I’ve expanded on that thesis in a new article. Here’s some of what I wrote for The Blaze.

The no-tax pledge of Americans for Tax Reform generates a lot of controversy. With record levels of red ink, the political elite incessantly proclaims that all options must be “on the table.” This sounds reasonable. And when some Republicans say no tax hikes under any circumstances, there’s a lot of criticism about dogmatism. Theoretically, I agree with the elitists.

So does that make me a squish, the fiscal equivalent of Chief Justice John Roberts?

Nope, because I’m tethered to the real world. I know that there is zero chance of getting a good agreement. Once you put taxes “on the table,” any impetus for spending restraint evaporates.

But even though I’m theoretically open to a tax hike, I am a de facto opponent of tax increases for the simple reason that we will never get a good deal. We won’t get sustainable spending cuts. Not even in our dreams. We won’t get real entitlement reforms. Even if we hold our breath ‘til we turn blue. And we won’t get the “Simpson-Bowles” tax reform swap, where taxpayers give up $2 of deductions in exchange for $1 of lower tax rates. Let’s not kid ourselves. In other words, reality trumps theory. Yes, there are tax-hike deals that would be good, but they’re about as realistic as me speculating on whether I’d be willing to play for the New York Yankees, but only if they guarantee me $5 million per year.

I then point out that a budget deal inevitably would lead to bad policy – just as we saw in 1982 and 1990.

Here’s the bottom line: There is no practical way to get a good deal from either the Democrats in the Senate or the Obama Administration. Notwithstanding the good intentions of some people, any grand bargain would be a failure that leads to higher spending and more red ink, just as we saw after the 1982 and 1990 budget deals. The tax increases would not be relatively benign loophole closers. Instead, the economy would be hit by higher marginal tax rates on work, savings, investment, and entrepreneurship. And the entitlement reform would be unsustainable gimmicks rather than structural changes to fix the underlying programs. Ironically, when a columnist for the New York Times complained that Republicans were being unreasonable for opposing tax hikes, she inadvertently revealed that the only successful budget deal was the one in 1997 – the one that had no tax hikes!

The last sentence is worth some additional commentary. As I explained in a previous post, the only bipartisan budget agreement that generated a balanced budget was the 1997 pact – and that deal lowered taxes rather than increasing them.

Some people try to argue that Bill Clinton’s 1993 tax hike deserves some of the credit, but I previously showed that the Administration’s Office of Management and Budget admitted – 18 months later! – that the nation would have triple-digit budget deficits for the foreseeable future.

What changed (and this is where Bill Clinton deserves credit) is that the nation enjoyed a multi-year period of spending restraint in the mid-1990s.

And when policy makers addressed the underlying disease of too much government spending, they solved the symptom of red ink.

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Being a libertarian, I’m used to disappointment. So when something actually goes according to plan, I get very happy.

On that basis, I should be utterly and deliriously overjoyed about my endorsement of Francois Hollande to be President of France.  I wanted him to win, in part because he would engage in statist experiments that would help discredit bad policy.

Well, all my dreams are being fulfilled. Here’s some of a new report in the Wall Street Journal.

French Socialist President François Hollande is set to increase the minimum wage by more than inflation, betting consumers will help revive the country’s stalling economy, while his government levies more taxes on the wealthy and large corporations in a bid to reduce the budget deficit. …The government also is preparing to unveil tax increases to make good on its pledge to reduce the budget deficit to 4.5% of yearly output this year and 3% in 2013. The list includes a new tax on dividends, a new top income-tax bracket of 75% for people earning more than €1 million a year, and increases in the wealth and inheritance taxes.

It’s not terribly surprising that Hollande’s going the fully Monty with higher taxes. Indeed, I’ve already mocked those plans.

But I’m surprised that he’s pushing a higher minimum wage as well, particularly with unemployment already at high levels. This video explains why minimum wages undermine job creation and hurt the less fortunate, but Hollande apparently thinks his plan will stimulate growth.

Other European nations have become more rational and now understand that labor markets need to be more flexible.

The Smic increase and the fiscal plan are in line with Mr. Hollande’s election promises but position France at odds with most other euro-zone nations, which are seeking to keep a lid on labor costs to improve their competitiveness and rein in their budget deficits through spending cuts rather than tax increases.

The comment about “spending cuts” is nonsensical, however. Even though traditionally left-leaning organizations such as the World Bank have concluded that government is far too big in Europe, most governments have imposed huge tax increases. Only the Baltic nations have focused on spending cuts.

As such, we can expect more news like this in France.

In France, economic growth has evaporated, with national statistical office Insee forecasting a further rise in the jobless rate, from 10%. Flag carrier Air France last week said it needs to shed more than 5,000 jobs, around 10% of its workforce, by the end of next year.

The nation’s dwindling productive class, meanwhile, will get even smaller since we’re already seeing evidence that investors and entrepreneurs are going to escape to other nations with less punitive tax regimes.

I joked last month that Obama would never be able to make America as socialist as France, and Hollande is confirming that tongue-in-cheek prediction with his crazy policies.

But I should state that I don’t actually want the French people to suffer. But if they elect bad people who impose bad policy, then I want to make lemonade out of lemons and at least help the rest of the world learn from their mistakes.

As my friend (and soon-to-be American citizen) Veronique de Rugy explained in a video, we don’t want America to become more like France.

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When Republicans maintain a no-tax-hike position, good things happen. We saw this in 2010 when Senate GOPers held firm and Obama was forced to extend for two years all of the 2001 and 2003 tax cuts.

We’re having the same fight this year, and again Republicans (with some unfortunate exceptions) are standing strong against the President’s class-warfare tax proposals.

This approach is paying dividends, as you can see from these excerpts from a report by The Hill.

At least seven Democratic senators have declined to rule out supporting a temporary extension of the Bush-era income tax rates, breaking with party leaders who have called for letting the rates expire for people earning more than $1 million per year. That gives Senate Republicans a chance to push a temporary extension similar to the deal Minority Leader Mitch McConnell (R-Ky.) struck with President Obama in December of 2010. …Extending all income tax rates for only one year would undercut the Democratic leadership’s plan to use their imminent expiration as leverage to move Republicans to accept some tax increases.

The article also notes that many of these Democrats are willing to support higher tax rates, but only if they seduce gullible Republicans into providing political cover by also saying yes.

I touch on some of these issues in this CNBC debate with Stan Collender. We both agree that America faces short-term and long-term fiscal challenges, but a key difference is that Stan wants higher taxes to facilitate a bigger burden of government spending.

From a viewer perspective, I think this was a very good interview. Stan and I both had an opportunity to get our points across. Neither one of us tried to hog all the air time. And we both pointed out areas of disagreement. When I compare this debate to the one I posted last week, there’s no comparison.

That being said, I hope what I said was more persuasive, particularly my points about the long-term entitlement problem, the unfortunate impact of too many people being exempt from the income tax, the fact that America doesn’t suffer from inadequate taxation, the role of Bush’s reckless big-government fiscal policy, and the fact that higher taxes lead to more spending rather than lower deficits. I even got to cite Estonia’s successful spending cuts.

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I am sometimes at a loss for words to describe the stupidity of the Republican Party.

Let’s use an analogy to explain what I mean. Imagine you were playing a game of chess and your opponent openly stated that he wanted you to move your rook to a certain point on the board.

If your IQ was above room temperature, you would probably be suspicious that he wasn’t trying to help you win the game.

Well, the same thing happens in fiscal policy. I quoted the Hill newspaper last year when some Democrats admitted that their top political goal was to seduce the GOP into a tax increase.

Now we have more evidence.

The Democrats’ counter-strategy is a bit more subtle, but has essentially been to find ways to make it very uncomfortable for Republicans to maintain such a rigid anti-tax orthodoxy — to ultimately force Republicans to break their anti-tax pledges and badly splinter their party. That’s what the Buffett Rule is about; that why Dems insist they won’t dismantle the so-called “sequester” — big cuts to defense and even to Medicare — unless Republicans agree to tackle deficits in a balanced way, i.e. by supporting significant new tax revenues. The results have been mixed. They’ve won a small number of GOP votes here and there, and vulnerable members are nowadays more likely to trash or dismiss Grover Norquist in the press than they were last year. But at a very high level within the Democratic Party, there’s a recognition that breaking the GOP on taxes is an absolutely crucial strategic imperative for defending safety net programs over the long term.

That’s a pretty clear statement. We have folks on the left who say they want higher taxes both to prop up big government and to cause internal damage to the GOP.

So we’re now left with a rather strange puzzle. Why would any Republicans (most recently Sen. Lindsey Graham and Jeb Bush) want to help the Democrats achieve those goals?!?

Unless, of course, they’re motivated by a belief in bigger government (high likely) or a suicidal desire to harm their own electoral prospects (highly unlikely since even I don’t think GOPers are that stupid).

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Even though America’s fiscal problem is entirely the result of too much government spending, I wrote earlier this year that there were all sorts of scenarios where I would agree to a tax increase.

But I then pointed out that all of those scenarios were total fantasies and that it would be more realistic to envision me playing center field for the New York Yankees.

The fundamental problem is that politicians never follow through on promises to reduce spending – even if you use the dishonest Washington definition that a spending cut occurs whenever the budget doesn’t rise as fast as previously planned.

And to make matters worse, they always seem to want class-warfare tax hikes that do heavy economic damage rather than the loophole closers that at least get rid of some of the inefficient corruption in the tax code.

That’s why I like the anti-tax pledge of Americans for Tax Reform. You don’t solve America’s fiscal problems by saying no to all tax increases, but at least you don’t move in the wrong direction at a faster rate.

Notwithstanding the principled and pragmatic arguments against putting tax increases on the table, some Republicans – in a triumph of hope over experience – are preemptively acquiescing to tax hikes.

Here’s what Jeb Bush said.

Jeb Bush, the former Florida governor, said Friday that he could back a broad deficit plan that increased taxes, a stance that puts him at odds with other prominent Republicans. Bush told a House panel he could get behind a plan that combined 10 dollars in spending cuts for every dollar of new revenue… “The problem is the 10 never materializes,” [Congressman Paul] Ryan said after Bush said he could support a revenue-increasing deficit deal. Norquist also has criticized deficit deals crafted in 1982 and 1990 – the latter agreed to by then-President George H.W. Bush, Jeb’s father – for failing to deliver on the spending side.

Kudos to Paul Ryan for making the obvious point about make-believe spending cuts. And Grover is correct about the failure of previous budget deals.

Indeed, I cited a New York Times column that inadvertently revealed that the only budget deal that worked was the 1997 pact that cut taxes rather than raised them.

Jeb Bush isn’t the only apostate. Here’s what Senator Graham had to say.

Sen. Lindsey Graham (R-S.C.) said Tuesday he believed Republicans should consider eliminating loopholes in the tax code even if they aren’t replaced by additional tax cuts, a move that would break with an anti-tax pledge many GOP lawmakers have signed with activist Grover Norquist. “When you eliminate a deduction, it’s OK with me to use some of that money to get us out of debt. That’s where I disagree with the pledge,” Graham told ABC News. …”I’m willing to move my party, or try to, on the tax issue. I need someone on the Democratic side being willing to move their party on structural changes to entitlements.” Graham said, for instance, he would support a plan that included $4 in spending cuts for every $1 in tax increases. During a Republican debate last August, all eight Republican candidates in attendance said they would reject a proposal to trade $10 in spending cuts for even $1 in tax increases.

In some sense, Senator Graham’s comments are reasonable. With real spending cuts and less-damaging forms of tax hikes, an acceptable deal is possible. But only in Fantasia, not in Washington.

In the real world, all that Senator Graham has done is to move the debate slightly to the left.

I’ve noted that tax increases are political poison for the Republican Party, but I don’t lose sleep worrying about the GOP.

But I do have nightmares about government getting even bigger, and that’s why I don’t want tax increases on the table. I don’t even want them in the room. Or the house. Or the neighborhood.

That’s why Jeb Bush and Lindsey Graham are the newest winners of the Charlie Brown Award. They’ve put blood in the water. I wonder if they’ll act surprised when hungry sharks show up looking for a meal?

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I’m not a big fan of international bureaucracies, mostly because they always seem to promote bad policy such as higher tax rates.

To add insult to injury, the bureaucrats who work at these organizations have created very comfortable lives for themselves while the rest of us pick up the tab, as documented here and here.

But the ultimate insult is that the overpaid and pampered bureaucrats receive tax-free salaries while they jet-set around the world pushing for higher taxes.

Yes, you read correctly. They demand higher taxes for everyone else, but their bloated salaries are exempt!

Here’s some of what the UK-based Guardian just reported about the head of the IMF.

“Taxes for thee, but not for me”

Christine Lagarde, the IMF boss who caused international outrage after she suggested in an interview with the Guardian on Friday that beleaguered Greeks might do well to pay their taxes, pays no taxes, it has emerged. As an official of an international institution, her salary of $467,940 (£298,675) a year plus $83,760 additional allowance a year is not subject to any taxes. …Lagarde, 56, receives a pay and benefits package worth more than American president Barack Obama earns from the United States government, and he pays taxes on it. The same applies to nearly all United Nations employees.

To make matters worse, these globe-trotting bureaucrats have figured out all sorts of ways of padding their pay.

Base salaries range from $46,000 to $80,521. Senior salaries range between $95,394 and $123,033 but these are topped up with adjustments for the cost of living in different countries. A UN worker based in Geneva, for example, will see their base salary increased by 106%, in Bonn by 50.6%, Paris 62% and Peshawar 38.6%. Even in Juba, the capital of South Sudan, one of the poorest areas of the world, a UN employee’s salary will be increased by 53.2%. Other benefits include rent subsidies, dependency allowances for spouses and children, education grants for school-age children and travel and shipping expenses, as well as subsidised medical insurance. For many years critics have complained that IMF, World Bank, and United Nations employees are able to live large at international taxpayers’ expense.

So how do these bureaucrats justify their lavish salaries and gold-plated benefits?

Officials from the various organisations have long maintained that the high salaries are a way of attracting talent from the private sector. In fact, most senior employees are recruited from government posts.

Kudos to the Guardian for exposing this nonsense, particularly the fraudulent claim that lavish compensation packages are need to attract and retain these incompetent bureaucrats.

But let me add to the Guardian’s analysis. In a recent email exchange with several people, I addressed this issue, specifically commenting on whether the head of the IMF, Ms. Lagarde, should get a giant salary because she could earn more money in the private sector. I wrote that there were two responses to this assertion.

1. She has genuine skills as a wealth creator. In which case, we should force her out of the IMF as soon as possible so her talents can be used productively rather than destructively.

2. She can get big bucks by trading on her connections and entering the world of corporatism. Work for KPMG, or the Carlyle Group, or some other entity that specializes in getting favorable deals for the elite. That’s not the private sector.

In either case, her salary in her current position should be zero. Unless we think she should be paid the value of her marginal product, in which case she probably owes the world’s taxpayers several hundred billion dollars.

In other words, it doesn’t matter whether Ms. Largarde’s ability to earn lots of money is the result of genuine ability or cronyism. Since the IMF is pursuing bad policy, her value in that position is below zero.

My Cato colleague Richard Rahn was correct when he wrote that it is the ultimate hypocrisy for tax-free bureaucrats to lobby for higher taxes on the rest of us.

And that’s why defunding these parasitic international bureaucracies is not just good fiscal policy and good economic policy, it’s also the morally just policy.

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In a post last week, I explained that Obama has been a big spender, but noted his profligacy is disguised because TARP outlays caused a spike in spending during Bush’s last fiscal year (FY2009, which began October 1, 2008). Meanwhile, repayments from banks in subsequent years count as “negative spending,” further hiding the underlying trend in outlays.

When you strip away those one-time factors, it turns out that Obama has allowed domestic spending to increase at the fastest rate since Richard Nixon.

I then did another post yesterday, where I looked at total spending (other than interest payments and bailout costs) and showed that Obama has presided over the biggest spending increases since Lyndon Johnson.

Looking at the charts, it’s also rather obvious that party labels don’t mean much. Bill Clinton presided during a period of spending restraint, while every Republican other than Reagan has a dismal track record.

President George W. Bush, for instance, scores below both Clinton and Jimmy Carter, regardless of whether defense outlays are included in the calculations. That’s not a fiscally conservative record, even if you’re grading on a generous curve.

This leads Jonah Goldberg to offer some sage advice to the GOP.

Here’s a simple suggestion for Mitt Romney: Admit that the Democrats have a point. Right before the Memorial Day weekend, Washington was consumed by a debate over how much Barack Obama has spent as president, and it looks like it’s picking up again. …all of these numbers are a sideshow: Republicans in Washington helped create the problem, and Romney should concede the point. Focused on fighting a war, Bush — never a tightwad to begin with — handed the keys to the Treasury to Tom DeLay and Denny Hastert, and they spent enough money to burn a wet mule. On Bush’s watch, education spending more than doubled, the government enacted the biggest expansion in entitlements since the Great Society (Medicare Part D), and we created a vast new government agency (the Department of Homeland Security). …Nearly every problem with spending and debt associated with the Bush years was made far worse under Obama. The man campaigned as an outsider who was going to change course before we went over a fiscal cliff. Instead, when he got behind the wheel, as it were, he hit the gas instead of the brakes — and yet has the temerity to claim that all of the forward momentum is Bush’s fault. …Romney is under no obligation to defend the Republican performance during the Bush years. Indeed, if he’s serious about fixing what’s wrong with Washington, he has an obligation not to defend it. This is an argument that the Tea Party — which famously dealt Obama’s party a shellacking in 2010 — and independents alike are entirely open to. Voters don’t want a president to rein in runaway Democratic spending; they want one to rein in runaway Washington spending.

Jonah’s point about “fixing what’s wrong with Washington” is not a throwaway line. Romney has pledged to voters that he won’t raise taxes. He also has promised to bring the burden of federal spending down to 20 percent of GDP by the end of a first term.

But even those modest commitments will be difficult to achieve if he isn’t willing to gain credibility with the American people by admitting that Republicans helped create the fiscal mess in Washington. Especially since today’s GOP leaders in the House and Senate were all in office last decade and voted for Bush’s wasteful spending.

It actually doesn’t even take much to move fiscal policy in the right direction. All that’s required is to restrain spending so that is grows more slowly than the private sector (with the kind of humility you only find in Washington, I call this “Mitchell’s Golden Rule“). The entitlement reforms in the Ryan budget would be a good start, along with some much-needed pruning of discretionary spending.

And if you address the underlying problem by limiting spending growth to about 2 percent annually, you can balance the budget in about 10 years. No need for higher taxes, notwithstanding the rhetoric of the fiscal frauds in Washington who salivate at the thought of another failed 1990s-style tax hike deal.

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I’ve mocked France on several occasions, and I thought Sarkozy was so bad that I figured (in the long run) the election of Hollande was a step in the right direction.

But in certain ways, France isn’t as bad as the United States.

The New York Times has a big story about French entrepreneurs and investors looking to escape looming class-warfare tax hikes. Here are a few excerpts

Benoît Pous-Bertran de Balanda, the descendant of a French general who fought for the Americans, is trying to help his wealthy countrymen escape what he calls the tyranny of a new Socialist government primed to severely tax the rich. …Well-heeled French citizens are scouring real estate opportunities in neighboring countries like Britain and Switzerland. The United States — particularly New York and Miami— is also drawing French investors looking to pick up rental properties or pieds-à-terre, brokers say. The French buyers most active in recent months are generally looking at properties between $500,000 and $5 million, brokers say. What the French are so concerned about is Mr. Hollande’s campaign vow to tax income over 1 million euros at a 75 percent rate. …it will also raise the tax rate on capital gains to the same level as the tax on ordinary income.

Normally, this type of story would be an excuse for me to write about the Laffer Curve and the foolishness of penalizing success.

But I want to focus instead on the right to emigrate. Specifically, there are two ways in which France has better policy than the United States.

1. France, like almost every other civilized nation, does not have worldwide taxation. So when French citizens move to Switzerland, Hong Kong, or the United States, they pay tax to those nations. But they’re no longer subject to French taxes on this foreign-source income. Sadly, that is not true for overseas Americans, who are subject to tax in the nations where they live AND the IRS. Their only choice, if they want to escape this punitive and unfair form of double taxation, is to give up U.S. citizenship.

2. But when Americans like Eduardo Saverin decide to surrender their passports, they are hit by punitive exit taxes. This is the type of policy normally associated with some of the world’s most odious regimes, such as Nazi Germany and the Soviet Union. France, I am told, is not perfect in this regard, but the tax treatment of people re-domiciling in another country is not nearly so onerous (especially if they go to another EU nation).

I want good tax policy, like the flat tax, regardless of what’s happening in other nations. But it says a lot (and none of it good) when one of the world’s most statist nations has better policy than America.

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President Obama’s fiscal policy is a dismal mixture. On spending, he wants a European-style welfare state. On taxes, he is fixated on class-warfare tax policy.

If we want to know the consequences of that approach, we can look at the ongoing collapse of Greece. Or, if we don’t like overseas examples, we can look at California.

If the (formerly) Golden State is any example, it turns out that having high tax rates doesn’t necessarily translate into high tax revenues. Here’s a blurb from an editorial in today’s Wall Street Journal.

California Controller John Chiang reported last week that April tax collections were a gigantic 20.2%, or $2.44 billion, below 2012-13 budget projections. …Among the biggest surprises is a 21.5% or nearly $2 billion decline in personal income tax payments from what Governor Jerry Brown had anticipated. This reinforces the point that when states rely too heavily on the top 1% of taxpayers to pay the bills, fiscal policy is a roller coaster ride. California is suffering this tax drought even as most other states enjoy a revenue rebound. State tax collections were up nationally by 8.9% last year, according to the Census Bureau, and this year revenues are up by double digits in many states. The state comptroller reports that Texas is enjoying 10.9% growth in its sales taxes (it has no income tax), while California can’t seem to keep up despite one of the highest tax rates in the land.

The WSJ editorial suggests a supply-side response, but you won’t be surprised to learn that the state’s kleptomaniac governor is pushing an Obama-style soak-the-rich tax hike.

This would seem to suggest that California should try cutting tax rates to keep more people and business in the state, but Sacramento is intent on raising them again. Governor Brown and the public-employee unions are sponsoring a ballot initiative in November to raise the state sales tax by a quarter point to 7.5% and to raise the top marginal income-tax rate to 13.3% from 10.3%. This will make the state even more reliant on the fickle revenue streams provided by the rich. Meanwhile, an analysis by Joseph Vranich, who studies migration of businesses from one state to another, finds that since 2009 the flight of businesses out of California “has increased fivefold due to high taxes and regulatory costs.”

I’ll be very curious to see what happens this November when the people of California vote in the referendum. Will they be like the morons in Oregon, who approved a class-warfare tax hike? Or will they be like the voters of Switzerland and reject class warfare?

Sadly, I suspect Oregon will be their role model – even though that decision hurt the Beaver State’s economy.

But while voters can impose higher taxes, they can’t repeal the laws of economics. So if California voters do the wrong thing, they will learn a hard lesson about the Laffer Curve.

And then, as this cartoon demonstrates, they’ll learn the ultimate lesson about not biting the hand that you mooch from.

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Last year, as part of the fight over the debt limit, Congress created a “super-committee” that was designed to produce at least $1.2 trillion of “deficit reduction.”

The statists saw this super-committee as a vehicle to seduce Republicans into a tax hike. They knew that some GOPers are perpetually gullible and would be susceptible to the siren song of a “balanced approach” – even though that inevitably means higher taxes and never-fulfilled promises of future spending restraint.

But they also had a back-up plan. They got Republicans to agree that there would be automatic spending cuts – known as sequestration – if the super-committee failed to produce an agreement. And they convinced GOPers that half of these automatic cuts would come from the defense budget, even though military spending is only about one-fourth of total federal spending.

The left figured that the threat of a military sequester would scare some pro-defense GOPers into supporting a tax hike. Maybe not as part of the super-committee deliberations, but perhaps as we got closer to January 1, 2013, which is when the sequester was scheduled to take effect.

Well, the super-committee thankfully didn’t reach an agreement because not enough Republicans were foolish enough to support a tax hike. But now the left’s back-up plan is being implemented. Senator Harry Reid, supported by the White House, is saying that the sequester will go into effect unless GOPers surrender to a tax hike. Here’s some of what the Associated Press reported.

President Barack Obama’s top Democratic ally in the Senate said Wednesday that he won’t block much-feared automatic spending cuts to the Pentagon and Medicare providers from taking effect unless Republicans show more flexibility on cutting the budget deficit. Majority Leader Harry Reid, D-Nev., said that $110 billion in automatic cuts coming due in January were designed to force both Republicans and Democrats to bargain over a “balanced approach” — including tax increases… The automatic cuts, known as a sequester, are the result of the failure of a deficit “supercommittee” to reach agreement last year. “Republicans refused to be reasonable. They refused to raise even a penny of new revenue, or ask millionaires to contribute their fair share to help reduce our deficit and our debt,” Reid said. “It is their intransigence — their refusal to compromise — that leaves us facing the threat of the sequester, and its difficult but balanced cuts.” Republicans controlling the House are seeking to undo the automatic cuts by substituting cuts to domestic programs like food aid, Obama’s health care law and social services like Meals on Wheels. …The White House proposed lifting the automatic cuts in its February budget, which called for tax increases on wealthier people and closing numerous tax breaks enjoyed by corporations. Even as Defense Secretary Leon Panetta has warned the sequester would lead to a “hollowed out” military, White House officials have taken a hard line against incremental efforts to switch off the cuts.

So we are facing a big game of chicken. Democrats are holding the defense budget hostage and telling Republicans they have to raise taxes.

GOPers should tell them to go jump in a lake. A defense sequester would not be the end of the world. Far from it.

All that being said, I’m very sympathetic to Republicans who are seeking to replace some of the defense savings by trimming the growth of domestic programs.

After all, national defense is one of the few legitimate functions of the federal government. So even if the defense budget is bloated and the U.S. is wasting money on nation building, why not focus first on reducing and eliminating domestic programs that shouldn’t exist?

But even if you don’t care about the Constitution and enumerated powers, it certainly doesn’t seem right to make one-fourth of the budget swallow one-half of the savings. Why not make the sequester apply equally to all parts of the budget?

Those are good questions, but they’re not relevant in the hard-ball world of Washington politics. The real issue is what Republicans will do if (and when) Democrats don’t go along with the GOP plan. Will they then surrender to a tax hike?

That would be an unmitigated disaster. If the left knows that Republicans can be bullied into tax hikes by holding the defense budget hostage, then a tax hike today would simply be a down payment. Every time the statists want more money to feed a bloated welfare state, they’ll simply tell GOPers that the only alternative is “deep defense cuts.”

Republicans have a reputation for being the “stupid party.” I guess we’ll find out for sure if they allow themselves to get maneuvered into a tax hike. The first of many, by the way.

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I’ve explained that it is silly for Obama and others to think it is easy to squeeze more money from rich taxpayers, and I’ve also provided evidence from the 1980s to show that upper-income people have considerable ability to respond to changes in tax rates by shifting the timing, level, and composition of their income.

But I haven’t specifically responded to some recent studies which make rather outlandish claims that the revenue-maximizing tax rate is 70 percent or above.

Fortunately, my Cato colleague Alan Reynolds has stepped forward. His column in today’s Wall Street Journal decimates these assertions.

President Obama and others are demanding that we raise taxes on the “rich,” and two recent academic papers that have gotten a lot of attention claim to show that there will be no ill effects if we do. The first paper, by Peter Diamond of MIT and Emmanuel Saez of the University of California, Berkeley, appeared in the Journal of Economic Perspectives last August. The second, by Mr. Saez, along with Thomas Piketty of the Paris School of Economics and Stefanie Stantcheva of MIT, was published by the National Bureau of Economic Research three months later. Both suggested that federal tax revenues would not decline even if the rate on the top 1% of earners were raised to 73%-83%.

How do they arrive at such high numbers? Alan explains.

The authors arrive at their conclusion through an unusual calculation of the “elasticity” (responsiveness) of taxable income to changes in marginal tax rates. According to a formula devised by Mr. Saez, if the elasticity is 1.0, the revenue-maximizing top tax rate would be 40% including state and Medicare taxes. That means the elasticity of taxable income (ETI) would have to be an unbelievably low 0.2 to 0.25 if the revenue-maximizing top tax rates were 73%-83% for the top 1%. The authors of both papers reach this conclusion with creative, if wholly unpersuasive, statistical arguments.

Is this assumption warranted? Hardly. Alan elaborates, making the same points I’ve made about rich people being different than the rest of us.

But the ETI for all taxpayers is going to be lower than for higher-income earners, simply because people with modest incomes and modest taxes are not willing or able to vary their income much in response to small tax changes. So the real question is the ETI of the top 1%. Harvard’s Raj Chetty observed in 2009 that “The empirical literature on the taxable income elasticity has generally found that elasticities are large (0.5 to 1.5) for individuals in the top percentile of the income distribution.” In that same year, Treasury Department economist Bradley Heim estimated that the ETI is 1.2 for incomes above $500,000 (the top 1% today starts around $350,000).

Alan cites other studies as well, all of which show that Saez, Piketty, Diamond, and Stantcheva, are well outside the mainstream.

For all intents and purposes, they cherry-picked data and made unrealistic assumptions in order to justify class-warfare tax policies.

That’s why you’re much better off looking at this research from economists at the University of Chicago and the Federal Reserve. Heck, even the IMF is acknowledging that it’s self-defeating to raise tax rates in a nation like Greece – and top tax rates there are less than 50 percent.

P.S. Lest I forget, it’s also worth mentioning that it’s a very bad idea to be at the revenue-maximizing spot on the Laffer Curve. The economic damage, per dollar raised, is enormous. And that’s true whether the revenue-maximizing rate is 20 percent or 70 percent.

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Even though he is a foolish statist, I wanted Francois Hollande to win the French presidency. Sarkozy was a statist as well, after all, and my “Richard Nixon Disinfectant Rule” says that it’s better to have the out-of-the-closet statist prevail in such contests in hopes that the supposedly right-of-center party can then regroup and offer voters a true choice in the next election.

But I have another reason for wanting Monsieur Hollande. Simply stated, we need role models. Not only role models to show the effects of good policy (like Estonia and Hong Kong), but also clear-cut examples of nations that do the wrong thing.

I fully expect France to be that kind of role model over the next few years. Particularly if Hollande follows through on his scheme to push the top tax rate to 75 percent.

I’ve already written about the experiment America conducted in the 1980s, when Reagan lowered the top tax rate from 70 percent to 28 percent. Hollande wants to conduct a similar experiment, but in reverse.

Indeed, we’re already seeing the potential impact of class-warfare tax policy in France. Here are the key passages from a report in the Financial Times.

Wealthy French people are looking to London as a refuge from fresh taxes on high earners pledged by candidates in the country’s presidential elections. The “soak the rich” rhetoric that has punctuated the presidential campaign has prompted a sharp rise in the numbers weighing a move across the Channel, according to London-based wealth managers, lawyers and property agents specialising in French clients. François Hollande, the Socialist candidate…, wants to impose a tax rate of 75 per cent on income above €1m… Inquiries from French clients had risen by roughly 40 per cent since the speech, says David Blanc, a partner at Vestra Wealth, a London-based wealth manager. …The prospect of a Gallic diaspora of high earners was backed up by Knight Frank, the property agent, which said numbers of French web users searching online for its prime London properties online in the past three months had risen 19 per cent compared with the same period last year. The equivalent figure for Europe as a whole fell 9 per cent. …Mr Blanc says some French clients were even contemplating acquiring British or other nationality in order to safeguard assets from fears that France could move to collect more tax from citizens overseas. “A lot of people are extremely worried,” he said. Alexandre Terrasse, a partner in corporate and property law at Jeffrey Green Russell, says he had seen a 25 per cent rise in activity from French clients over the past six months, “The 75 per cent tax is clearly a sign that the politicians will hit the wealthy and they don’t want to have to deal with that.”

In other words, just a productive people “vote with their feet” by escaping from high-tax hell-holes like California to zero-income-tax states such as Texas, the same phenomenon exists for people crossing national borders.

This means Mr. Hollande is going to learn an interesting math lesson: 75 percent of zero is a very small number.

The Laffer Curve lives! And left wingers who pretend it doesn’t exist learn very unhappy lessons.

P.S. Here’s a good joke about Texas and California, and here’s a serious post about the differences between the two states.

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I periodically explain the principles of the Laffer Curve, particularly in hopes that I will educate lawmakers that higher tax rates are a bad idea – even if they wind up generating additional revenue.

Obama’s proposed class-warfare tax hikes, for instance, might pull in some extra loot for the political class to redistribute. But is it a good idea to give the politicians more money if the economy loses $5 of private output for every $1 of added tax revenue?

This is why it is never a good idea to even think about setting tax rates near the revenue-maximizing level.

Sadly, many leftists don’t recognize this tradeoff. They act as if the private sector is some never-ending pinata that is forever capable of disgorging more money if subjected to enough beatings.

But parts of the federal government are waking up to reality. Here’s some of what the Government Accountability Office discovered when investigating the impact of some tobacco tax hikes implemented a few years ago.

Monthly sales of pipe tobacco increased from approximately 240,000 pounds in January 2009 to over 3 million pounds in September 2011, while roll-your-own tobacco dropped from about 2 million pounds to 315,000 pounds. For the same months, large cigar sales increased from 411 million to over 1 billion cigars, while small cigars dropped from about 430 million to 60 million cigars. According to government, industry, and nongovernmental organization representatives, many roll-your-own tobacco and small cigar manufacturers shifted to the lower-taxed products after CHIPRA to avoid paying higher taxes. …GAO estimates that federal revenue losses due to market shifts from roll-your-own to pipe tobacco and from small to large cigars range from about $615 million to $1.1 billion for the same period.

Since the government supposedly was going to get an extra $6 billion-plus from the legislation, this is not one of those rare examples of a tax increase leading to less revenue. But the government is losing 10 percent-20 percent of the extra loot that politicians initially expected.

This chart, from the GAO study, shows the dramatic impact of the tax hike on specific segments of the tobacco market.

To summarize, big tax hikes on cigarettes, roll-your-own tobacco, and small cigars turned out to be good news for sellers of pipe tobacco and large cigars.

Or, to be more precise, it is good short-run news. It’s probably just a matter of time before the politicians focus on this “loophole” that enables some consumers to protect themselves against federal rapaciousness. Indeed, the GAO study recommended to Congress that

…it should consider modifying tobacco tax rates to eliminate significant tax differentials between similar products. Specifically, Congress should consider equalizing tax rates on roll-your-own and pipe tobacco and, in consultation with Treasury, also consider options for reducing tax avoidance due to tax differentials between small and large cigars.

Needless to say, if lawmakers decide to “eliminate significant tax differentials” and “equaliz[e] tax rates,” you can safely bet that they’ll decide that some tax rates should go up.

What about solving the alleged problem by lowering the tax rates that are high? Those of you who have followed my writings on international tax policy already know the answer to that question.

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I’ve written before how “The Value-Added Tax Would Be a Money Machine for Big Government.”

Writing for Bloomberg, Josh Barro has a piece entitled, “Value-Added Tax Would Raise Tons for U.S. Coffers.”

So you might think we see eye to eye on this issue, but that would be a rash assumption. While I see a giant new tax as a dangerous step on the road to serfdom, Josh thinks it’s a necessary and desirable reform.

…it is time to reconsider a VAT. It would be both substantively better and more politically palatable. Here’s why: A value-added tax raises a ton of money. The base (the total amount of goods that would be subject to tax) would range from one-third to one-half of gross domestic product. U.S. tax revenue, meanwhile, is running well below the long-term trend — by about 3 percent of GDP. A 10 percent VAT with a relatively broad base could raise $750 billion a year, enough to pay for about a fifth of the federal budget.

This is the point where I could make a snarky comment about how I want to cut “a fifth of the federal budget, ” not figure out how to pay for it, but that would take away from much more important concerns.

What really worries me about a VAT is that it will enable politicians to increase the burden of government spending. And that’s not good for the economy, regardless of whether that new spending is financed by the VAT, by income taxes, by borrowing, or by energy taxes. Heck, even if the spending is financed by little green men from outer space, more government spending will undermine prosperity by causing resources to be allocated to less productive uses.

I also think Josh is a bit naive in thinking that a VAT will enable reductions to other taxes. The European experience suggests that VATs are associated with higher tax burdens of income and profits (in part because VAT increases are matched with class-warfare tax hikes to make sure “the rich” pay their fair share).

I touch on some of these issues in this short video on the value-added tax.

For further information, I would suggest perusing my testimony to the House Ways & Means Committee.

George Will and Robert Samuelson also have written good columns on the issues.

I’ll close with a rhetorical question that helps explain my skepticism: We know that entitlement reform is desperately needed to save America from becoming like Europe, but do we think such reform will be more likely or less likely if politicians are given a new tax that generates lots of revenue and is easy to raise because the cost is hidden from taxpayers?

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I’ve complained endlessly that America’s fiscal problem is too much spending, and that deficits and debt are best understood as symptoms of that underlying disease.

So I’m obviously a big fan of this new video from the folks at Learn Liberty.

I like how they use several types of measurements to show that there’s plenty of tax revenue. Indeed, the best line, near the end of the video, is when the narrator points out that higher taxes will simply exacerbate the spending problem (as I have noted).

Two final items. First, the folks from the Institute for Humane Studies have a bunch of great videos as part of the Learn Liberty series. I’ve already highlighted the one on free trade vs. protectionism, and I include eight challenging questions for those who think it is a good idea to give politicians and bureaucrats power to interfere with our freedom of exchange.

Second, the video in this post focuses solely on the math question, for lack of a better term. If you want some economic analysis of the consequences of big government, here’s a link to a post with my videos that analyze that issue.

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Many years ago, before it became associated with foreign intervention, neo-conservatism was simply a term for former liberals who migrated to the right. It was said that they had been “mugged by reality.”

We may need a new term, perhaps “Holly-tarians,” for folks in the entertainment industry who have begun to realize the downside of excessive government. I’ve already favorably cited Clint Eastwood for his pro-flat tax views and dismissed Arnold Schwarzenegger on national TV as a de facto statist, but there are other actors who deserve some attention.

I don’t know whether Jon Lovitz is a budding Hollywood libertarian, but (in addition to being a very funny character actor) he certainly seems a bit upset with Obama’s class-warfare approach to fiscal policy.

Since I couldn’t figure out how to embed the file, click on his image and it will take you to an audio file of him ripping Obama, high taxes, and occupy poseurs. Warning, there are plenty of naughty words, including ubiquitous F-bombs.

I will make one correction to his rant. He says that middle-income people have the same deductions that are available to rich people. That’s not really true. Rich people, as I have explained before, don’t rely on wage and salary income like the rest of us. Instead, they earn capital income and business income, which opens the door to a much larger degree of tax planning.

For what it’s worth, this is why Obama’s proposed tax increases won’t raise nearly as much money as projected.

But since politicians doubtlessly will increase spending in anticipation of higher receipts, the net effect will be bigger government and more red ink. In other words, business as usual in Washington.

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With the clock ticking ever closer to the tax-filing deadline, this is the time of year we should be especially cognizant of America’s awful tax system.

Disdain for the corrupt tax code certainly motivates me. As such, even though the panel was stacked against me with three proponents of Obama’s class warfare approach, I hope I did a decent job of defending good tax policy against the statists in this debate on government-subsidized TV.

My most effective moment (I think) was when I explained that “rich” taxpayers declared much more income and paid much higher taxes after Reagan reduced the top tax rate from 70 percent to 28 percent.

I also had a couple of good lines when discussing the value-added tax.

Nonetheless, I think I was disadvantaged by the editing process since many of my comments from our hour-long taping got cut out. If you are sufficiently masochistic, you can listen to the entire program at this link.

I’ll close with an observation. If you support freedom and liberty and work in public policy, you better get used to being outnumbered. When I testified to the Ways & Means Committee about the VAT, I was a lone voice against this pernicious tax while the other four witnesses supported making America more like Greece.

And when I appeared on an English-language French TV program to debate tax havens, I had to battle three statists.

But at least I have truth on my side, so that compensates.

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