We’ve now reached the stage where bad ideas are being turned into legislation. Today’s analysis looks at what the House Ways & Means Committee (the one in charge of tax policy) has unveiled. Let’s call this the Biden-Pelosi plan.
And we’re going to use some great research from the Tax Foundation to provide a visual summary of what’s happening.
We’ll start with a very depressing look at the decline in American competitiveness if the proposal becomes law (the good news is that we’ll still be ahead of Greece!).
Next, let’s look at the Tax Foundation’s map of capital gains tax rates if the plan is approved.
Our third visual is good news (at least relatively speaking).
Biden wanted the U.S. to have the developed world’s highest corporate tax rate. But the plan from the House of Representatives would “only” put America in third place.
Here’s another map, in this case looking at tax rates on non-corporate businesses (small businesses and other entities that get taxed by the 1040 form).
This is not good news for America’s entrepreneurs. Especially the ones unfortunate enough to do business in New York.
Last but not least, here’s the Tax Foundation’s estimate of what will happen to the economy if the Biden-Pelosi tax plan is imposed on the nation.
There are two things to understand about these depressing growth numbers.
First, small differences in growth rates produce very large consequences when you look 20 years or 30 years into the future. Indeed, this explains why Americans enjoy much higher living standards than Europeans (and also why Democrats are making a big economic mistake to copy European fiscal policy).
Second, the Tax Foundation estimated the economic impact of the Biden-Pelosi tax plan. But don’t forget that the economy also will be negatively impacted by a bigger burden of government spending. So the aggregate economic damage will be significantly larger when looking at overall fiscal policy.
One final point. In part because of the weaker economy (i.e., a Laffer Curve effect), the Tax Foundation also estimated that the Biden-Pelosi tax plan will generate only $804 billion over the next 10 years.
P.S. Here’s some background for those who are not political wonks. Biden proposed a budget with his preferred set of tax increases and spending increases. But, in America’s political system (based on separation of powers), both the House and Senate get to decide what they like and don’t like. And even though the Democrats control both chambers of Congress, they are not obligated to rubber stamp what Biden proposed. The House will have a plan, the Senate will have a plan, and they’ll ultimately have to agree on a joint proposal (with White House involvement, of course). The same process took place when Republicans did their tax bill in 2017.
P.P.S. It’s unclear whether the Senate will make things better or worse. The Chairman of the Senate Finance Committee, Ron Wyden, has some very bad ideas about capital gains taxation and politicians such as Elizabeth Warren are big proponents of a wealth tax.
More than 10 years ago, I wrote about President Obama’s disingenuous strategy of pretending that spending increases were tax cuts.
Politicians in Washington have come up with something far more impressive than turning lead into gold or water into wine. Using self-serving budget rules, they can increase the burden of government spending and say they are cutting taxes instead. This bit of legerdemain is made possible…by adopting or expanding refundable tax credits. But in this case, “refundable” does not mean the government is returning money to taxpayers. Instead, it means that money is being redistributed to people who do not earn enough to be subject to the income tax. This is hardly a trivial issue. …the amount of income redistribution being laundered through the tax code is now so large that the bottom 40 percent of the population has a negative “effective” income tax rate.
Indeed, the IRS is now the biggest redistribution agency in the world, in charge of giving away a massive amount of money.
Far more than is spent on traditional welfare (what used to be called aid to families with dependent children and was reclassified as temporary aid to needy families), as illustrated by the chart.
The so-called earned income tax credit is the biggest redistribution program, though there’s also a large amount of spending on child credits.
And the cost of the so-called child credits is going to explode if President Biden’s plan for per-child handouts is approved.
Matt Weidinger of the American Enterprise Institute opined on Biden’s version of political alchemy.
Democrats are fond of saying their massive $3.5 trillion spending bill includes significant “tax cuts.” They are referring to the effects of continuing the expanded child tax credit… President Biden said it was “one of the largest-ever single tax cuts for families with children.” …The facts say otherwise. …Such payments to those who do not owe federal income taxes are known as “refundable” credits, or in budget terms “outlays” — the same as benefits provided under welfare, Medicaid, food stamps, and similar spending programs. The outlay portions of these tax credits are not “tax cuts” for the simple reason that the payments exceed any taxes the recipient owed in the first place. Put another way, it is impossible to “cut taxes” if you do not owe taxes.
And here’s the relevant table from the Joint Committee on Taxation.
By the way, note how the spending estimates decline after 2025.
This is a budget gimmick. To make Biden’s expansion of the welfare state seem less extravagant, supporters designed the proposal so the expanded per-child handouts disappear in 2026.
But they openly argue that they will be extended because of the assumption that many Americans will get hooked on “free” money from Washington.
P.S. I’m not a fan of child credits, even for families that pay taxes. Simply stated, there are other types of tax cuts that will do a much better job of boosting after-tax family income.
The Fraser Institute in Canada has released its latest edition of Economic Freedom of the World, an index that measure and ranks nations based on whether they follow pro-growth policy.
You may be wondering how Hong Kong is still ranked #1.
In this summary of the findings, the authors explain that EFW is based on 2019 data. In other words, before Beijing cracked down. This means Hong Kong will probably not be the most-free jurisdiction when future editions are released.
The most recent comprehensive data available are from 2019. Hong Kong remains in the top position. The apparent increased insecurity of property rights and the weakening of the rule of law caused by the interventions of the Chinese government during 2020 and 2021 will likely have a negative impact on Hong Kong’s score, especially in Area 2, Legal System and Property Rights, going forward. Singapore, once again, comes in second. The next highest scoring nations are New Zealand, Switzerland, Georgia, United States, Ireland, Lithuania, Australia, and Denmark.
The United States was #6 in last year’s edition and it remains at #6 this year.
Perhaps the most discouraging development is that Chile dropped to #29, a very disappointing result (and perhaps a harbinger of further decline in the nation that used to be known as the Latin Tiger).
And it’s also bad news that Canada has deteriorated over the past five years, dropping from #6 to #14.
The good news is that the world, on average, is slowly but surely moving in the right direction. Not as rapidly as it did during the era of the “Washington Consensus,” but progress nonetheless.
By the way, the progress is almost entirely a consequence of better policy in developing nations, especially the countries that escaped the tyranny of Soviet communism.
Policy has drifted in the wrong direction, by contrast, in the United States and Western Europe.
Indeed, the United States currently would be ranked #3 if it still enjoyed the level of economic liberty that existed in 2000.
In other words, the Bush–Obama–Trump years have been somewhat disappointing.
Let’s look at another chart from the report. I’ve previously pointed out that there’s a strong relationship between economic freedom and national prosperity.
Well, here’s some additional evidence.
Let’s close by considering some of the nations represented by the red bar in the above chart.
You probably won’t be surprised to learn that Venezuela is once again ranked last. Though it is noteworthy that its score dropped from 3.31 to 2.83. I guess Maduro and the other socialists in Venezuela have a motto, “when you’re in a hole, keep digging.”
Argentina isn’t quite as bad as Venezuela, but I also think it’s remarkable that its score dropped from 5.88 to 5.50. That’s a big drop from a nation that already has a bad score.
Given these developments (as well as what’s happening in Chile), it’s not easy to be optimistic about Latin America.
P.S. There isn’t enough reliable data to rank Cuba and North Korea, so it’s quite likely that Venezuela doesn’t actually have the world’s most-oppressive economic policies.
When I discuss class-warfare tax policy, I want people to understand deadweight loss, which is the term for the economic output that is lost when high tax rates discourage work, saving, investment, and entrepreneurship.
And I especially want them to understand that the economic damage grows exponentially as tax rates increase (in other words, going from a 30 percent tax rate to a 40 percent tax rate is a lot more damaging than going from a 10 percent tax rate to a 20 percent tax rate).
But all of this analysis requires a firm grasp of supply-and-demand curves. And most people never learned basic microeconomics, or they forgot the day after they took their exam for Economics 101.
So when I give speeches about the economics of tax policy, I generally forgo technical analysis and instead appeal to common sense.
Almost everyone gets the point, especially when I point out that politicians explicitly say they want higher taxes on cigarettes because they want less smoking.
And if you (correctly) believe that higher taxes on tobacco lead to less smoking, then you also should understand that higher taxes on work will discourage productive behavior.
Unfortunately, these common-sense observations don’t have much impact on politicians in Washington. Joe Biden and Democrats in Congress are pushing a huge package of punitive tax increases.
Should they succeed, all taxpayers will suffer. But some will suffer more than others. In an article for CNBC, Robert Frank documents what Biden’s tax increase will mean for residents of high-tax states.
Top earners in New York City could face a combined city, state and federal income tax rate of 61.2%, according to plans being proposed by Democrats in the House of Representatives. The plans being proposed include a 3% surtax on taxpayers earning more than $5 million a year. The plans also call for raising the top marginal income tax rate to 39.6% from the current 37%. The plans preserve the 3.8% net investment income tax, and extend it to certain pass-through companies. The result is a top marginal federal income tax rate of 46.4%. …In New York City, the combined top marginal state and city tax rate is 14.8%. So New York City taxpayers…would face a combined city, state and federal marginal rate of 61.2% under the House plan. …the highest in nearly 40 years. Top earning Californians would face a combined marginal rate of 59.7%, while those in New Jersey would face a combined rate of 57.2%.
You don’t have to be a wild-eyed “supply-sider” to recognize that Biden’s tax plan will hurt prosperity.
After all, investors, entrepreneurs, business owners, and other successful taxpayers will have much less incentive to earn and report income when they only get to keep about 40 cents out of every $1 they earn.
Folks on the left claim that punitive tax rates are necessary for “fairness,” yet the United States already has the developed world’s most “progressive” tax system.
I’ll close with the observation that the punitive tax rates being considered will generate less revenue than projected.
Why? Because households and businesses will have big incentives to use clever lawyers and accountants to protect their income.
Looking for loopholes is a waste of time when rates are low, but it’s a very profitable use of time and energy when rates are high.
Just like I’ve never had (until recently) any reason to define capitalism, I also have never felt any need to define libertarianism.
Some people use the non-aggression principle, but that strikes me as more of a statement about how we should behave.
What if we’re trying to define the rules for libertarian governance?
In that case, my definition is very much based on property rights. What’s mine is mine and what’s yours is yours, and we both have the right to engage (or to not engage) in voluntary exchange.
I realize that’s not the most elegant or comprehensive statement of principles, but I think it provides a useful framework for the debate over vaccine mandates.
Regarding that issue, I’m glad that private companies had the expertise and opportunity to develop vaccines against the coronavirus, and I got vaccinated as soon as possible.
That being said, I definitely don’t think government should force anyone to make that choice.
But I also think that people who opt against vaccination should accept the non-governmental consequences.
What if private businesses decide that customers are only allowed if they prove they’ve been vaccinated? From a libertarian perspective, guided by core principles such as property rights and freedom of association, that should be totally acceptable. And that’s true even if we think the owners of the businesses are making silly choices. After all, it’s their property.
Written by Andrew Egger, it starts by pointing out that there’s a political fight in South Dakota because a private company has announced that all employees must be vaccinated.
South Dakota’s largest employer is Sanford Health, a hospital and health care system that employs nearly 10,000 people in the eastern half of the state. On July 22, Sanford, which operates in both Dakotas and Minnesota, announced it would begin requiring all its employees to get vaccinated for COVID by November 1. Within weeks, two Republican members of the state House, Reps. Jon Hansen and Scott Odenbach, had introduced legislation punching back. The COVID-19 Vaccine Freedom of Conscience Act would give South Dakotans “the right to be exempt from any COVID-19 vaccination mandate, requirement, obligation, or demand on the basis that receiving a COVID-19 vaccination violates his or her conscience.” …By the end of August, state House Speaker Spencer Gosch had come aboard the mandate ban effort as well. …The only problem: Noem doesn’t support the legislation.
Why is Governor Kristi Noem against the legislation?
For a very libertarian reason. She doesn’t think the government has the right to tell a private company how to operate.
…the laissez-faire approach that made Noem a conservative folk hero in last year’s fights has gotten her crosswise with her fellow Republicans on the issue of vaccine mandate bans. “Frankly, I don’t think businesses should be mandating that their employees should be vaccinated,” she said in a video posted to Twitter last week. “And if they do mandate vaccines to their employees, they should be making religious and other exemptions available to them. But I don’t have the authority as governor to tell them what to do.”
Amen.
If you believe in private property, the owners of a business should have the right to decide whom they employ and whom they do business with.
Just as consumers can choose where to shop and workers can choose to leave jobs they don’t like.
Here’s a final excerpt from the article.
“Nobody is stopping you from making that decision [not to get vaccinated], but you don’t have a right to a particular job,” Noem spokesman Ian Fury told The Dispatch. “The business owner has the right to his business. You do not have a right to an individual job, because you don’t own that business.” …Philosophically, that puts Noem firmly in the camp of free-market Republicans past: largely content to preside passively over a state economy in which companies are free to set their own standards of conduct and employees are free to work for companies that share their values—and quit jobs if they don’t.
The bottom line is that libertarians (and small-government conservatives) should not be upset about private companies making private decisions.
Instead, we should get irked when politicians try to mandate those decisions.
In a column for the Washington Examiner, Quin Hillyer condemns Joe Biden’s recent declaration that companies either must require vaccination or conduct constant testing.
President Joe Biden’s decision to require large private employers to ensure their workers are vaccinated or tested for the coronavirus is problematic not just in terms of the Constitution, statutes, and liberty interests, but it is also highly impractical. …This is crazy. If the onus is on the businesses, what are businesses to do if employees refuse to comply? Fire them all? …This rule is a recipe for lawsuits. Will businesses be caught in a bind — penalized for unvaccinated workers but also charged with unfair labor practices if they evade the mandate by reducing payrolls below 100? …If massive new testing is required as a mere screening method, even for those feeling perfectly healthy, how will medical personnel keep up? Who will keep administrative tabs on all this? And if businesses are required to provide time off for workers to get tested, how will their own efficiency and productivity suffer?
Given the fact that Biden is a career politician with no experience in the private sector, I guess we shouldn’t be surprised by this White House proposal.
After all this is an Administration that thinks copying the failed fiscal policies of Greece, France, and Italy is how you “build back better.”
Time to update our series on “great moments in foreign government.”
We’ll start with Jersey. I wrote a few years ago about the (relatively) good tax laws in that British dependent territory off the coast of France.
But there are two ways those laws could be improved. First, officials could abolish its income tax because a zero income tax is better than a flat tax.
And with tax policy heading in the wrong direction in the United Kingdom, that would further enhance Jersey’s competitive advantage.
Sadly, the island’s lawmakers haven’t opted for that choice.
But they did approve a second reform. As reported by the New York Times, Jersey has joined the 20th century.
Lawmakers on the island of Jersey have approved scrapping a decades-old law that prevented married women from talking to the tax authorities without the permission of their husband or filing taxes under their own names… a popular tax haven, …its financial laws have not always kept up with the times: Under its current tax law, introduced in 1928, only the husband in a heterosexual marriage can pay taxes, with his wife’s earnings considered part of his income. …Things became a bit more modern in 2013, when a box appeared on income tax forms that husbands could tick rather than giving written permission. When civil unions and same-sex marriages became legal on the island, the law allowed the older partner to take the role of “husband” and the younger “wife.” …Under the proposal backed by a majority of lawmakers on Tuesday, taxpayers would be considered as individuals. …Legislation to bring in the changes will be drafted later this year and should come into effect in 2021.
Next, we’ll visit Indonesia, where the guy who drafted a law actually got some first-hand experience with how the law is implemented. The Daily Mail has the amusing details.
An Indonesian man working for an organisation which helped draft strict religious laws ordering adulterers to be flogged has himself been whipped after he was caught having an affair with a married woman. Mukhlis, who is a member of the Aceh Ulema Council and only goes under one name like many Indonesians, was beaten 28 times with a rattan cane in the provincial capital of Banda Aceh on Thursday. Mukhlis grimaced and flinched during the punishment, before his married companion was brought to the stage and flogged some 23 times.
But, as reported by the Economist, that nation’s politicians have some weird ideas. Such as a strategic coffee reserve.
The 15 big Swiss coffee retailers, roasters and importers, such as Nestlé, are required by law to store heaps of raw coffee. Together, these mandated coffee reserves amount to about 15,000 tonnes—enough for three months’ consumption. The government finances the storage costs through a levy on imports of coffee. All 15 companies are in favour of maintaining the coffee reserve—as long as they are paid for it. IG Kaffee, a lobby group, asks why the government wants to scrap a stockpile that has served Switzerland so well.
But BBC reports that it also should be known for military incompetence.
A Venezuelan navy coastal patrol boat sank in the Caribbean after allegedly ramming a cruise ship that it had ordered to change direction. …The incident took place near La Tortuga Island, a Venezuelan federal dependency, on 30 March.Columbia Cruise Services, which operates the Resolute, said the cruise ship had been carrying out routine engine maintenance in international waters…shortly after midnight, the Naiguata radioed the Resolute, questioning its intentions, and ordered the captain to follow it to a port on Isla Margarita, to the east. “While the master was in contact with the head office, gunshots were fired and, shortly thereafter, the navy vessel approached the starboard side at speed… and purposely collided with the RCGS Resolute,” it added. “The navy vessel continued to ram the starboard bow in an apparent attempt to turn the ship’s head towards Venezuelan territorial waters.” …the patrol boat began taking on water.
The moral of all these stories is that governments piss away money in very interesting and novel ways.
But while these stories are somewhat entertaining, they also confirm that it’s never a good idea to give politicians more money when they’ve repeatedly shown that they squander the revenues they already have.
But this clip from Yes Minister also captures how bureaucracies operate.
And if you want another reason why bureaucrats don’t like initiative, this cartoon provides the answer.
Our third item shows that you need the correct angle to understand the life of bureaucrats (sort of like these six images).
Our next item shows featherbedding in action.
Never hire one person when you can make it a three-person job (or a lot more if you’re in California).
My final (and favorite) item is this cartoon strip. I don’t know if it’s a parody (like this one) or real, but it does show how bureaucratic pay scales operate.
But it’s also very bad news for poor people, in part because various redistribution programs can lure them out of the productive economy and into total dependency on government (and this will become an even bigger problem if Biden’s per-child handouts are approved).
But it’s also bad news because redistribution programs can result in very high implicit tax rates for low-income people who try to improve their lives by climbing the economic ladder.
I shared an example back in 2012, which showed how a single mother in Pennsylvania would be worse off with $57,000 of income instead of $29,000.
In other words, she would be dealing with a de facto marginal tax rate of more than 100 percent.
If you want to understand how this happens, Professors Craig Richardson and Richard McKenzie wrote about this topic in an article for The Library of Economics and Liberty.
…by expanding public assistance programs, the President’s plan will unavoidably impose a higher, hidden tax rate—known as an “implicit marginal income tax rate” (which we shorten to implicit tax rate)—on low-wage workers who receive welfare benefits. Those workers will pay an implicit tax rate because many welfare benefits are reduced as earnings rise. Ironically, the poorest Americans often pay implicit tax rates that are far higher than the IRS’s explicit marginal income-tax rates imposed on the country’s highest income earners. …Consider a household that receives benefits from only two welfare programs, with one tapering off at 20 cents for each added dollar earned and another tapering off at 40 cents for each added dollar earned. Those cuts create an implicit tax rate of 60 percent, which means the worker has only 40 cents in additional spendable income for each added dollar earned. This implicit tax rate can be expected to affect work incentives in much the same way that a federal income tax rate does.
The authors cite a real-world example.
…consider a real-life, low-income single mother of two children in Forsyth County, North Carolina earning $10 an hour in a full-time job, which means she has a monthly earned income of $1,600 (or $19,200 annually). Suppose the single mother receives monthly benefits from five welfare programs: $425 in food stamps, $1,471 in subsidized childcare, $370 in housing subsidies, $180 in WIC benefits, and $493 in an earned income tax credit (EITC). Her monthly welfare benefits will total $2,939 (or $35,271 a year). Now, suppose the single mother takes a new job paying $15 an hour, a 50 percent increase. Her monthly earned income will rise by $800 to $2,400 (with her annual income rising to $28,800 a year, an annual earnings increase of $9,600). However, she will face decreases in four out of her five monthly benefit streams, with each benefit reduction based on the same $800-increase in earnings (a problem known among welfare researchers as the “cumulative stacked effect”). The single mother will lose $231 in food stamps, $80 in childcare benefits, $216 in housing benefits, and $166 in EITC. Her total decrease in monthly benefits will reach $694 (which means her annual benefit total will drop by $8,328).4 Her implicit tax rate on her added monthly earnings of $800 is 87 percent—more than two times the highest explicit marginal tax rate proposed for the rich. …In addition, the single mother will be required to pay an added $185 a month in federal and state income taxes on her added earned monthly income of $800, which is an explicit tax rate of 23 percent. Adding the 87 percent implicit tax rate to the 23 percent explicit tax rate leads to an overall tax rate of 110 percent. Her raise has left her $79 per month poorer in lost wages and benefits—surely a strong disincentive for her to take the higher paying job.
Here’s a table showing those results.
If you want more evidence, check out Chart 7 from this column and Figure 8 from this column.
And the same problem exists in other nations as well.
Whether they are based on 10 questions or 144 questions, I can’t resist taking quizzes that supposedly identify one’s political or economic philosophy.
And, based on the quiz I shared most recently, I’m a “minimalist” who is “in favor of smaller government.”
I certainly won’t argue with those results.
For today’s column, we’re going to look at a quiz on hypothetical political parties that Lee Drutman put together for yesterday’s New York Times. You can click here to take it.
Here are my results.
Given the various alternatives, I’m not surprised that I’m part of the “Growth and Opportunity Party.”
But I don’t like this description of this group.
The Growth and Opportunity Party is the socially moderate, pro-business wing of the Republican Party. It is the heir to the old moderate “Rockefeller Republican,” the East Coast wing of the G.O.P. Its potential leaders include Larry Hogan, Charlie Baker, Mitt Romney, John Kasich and Michael Bloomberg. Based on data from the Democracy Fund’s VOTER survey, this party would be the best fit for about 14 percent of the electorate.
My objections are partly historical (I was a “Reaganite” in my youth rather than a big-government “Rockefeller Republican”) and partly based on the politicians listed as political leaders.
I don’t know enough about Larry Hogan and Charlie Baker to have an opinion, but Mitt Romney, John Kasich, and Michael Bloomberg are definitely proponents of bigger government.
I’ll close by grousing about a couple of the questions.
For instance, should you “agree” or “disagree” with this question? I definitely want to decrease the scope of police work if that means less enforcement of victimless crimes such as drugs, gambling, and prostitution, but I don’t want to decrease the scope of police work in fighting genuine crime.
I also wasn’t sure how to answer this next question. Does it mean creating more opportunities to come to the United States, especially for people that are unlikely to become dependent on government handouts? Or does it mean allowing limitless illegal border crossing?
Because the wording was not very clear, I basically punted on these two question.
First, here’s the abstract from a study by Jordan Nickerson from MIT and David Solomon from Boston College.
Since 1977, U.S. states have passed laws steadily raising the age for which a child must ride in a car safety seat. These laws significantly raise the cost of having a third child, as many regular–sized carscannot fit three child seats in the back. Using census data and state–year variation in laws, we estimate that when womenhavetwo children of ages requiring mandated car seats,theyhave a lower annual probability of giving birth by 0.73percentage points. Consistent with a causal channel, this effect is limited to third child births, is concentrated in households with access to a car,andis larger when a male is present (whenboth front seats are likely tobe occupied). We estimate that these laws prevented only 57 car crash fatalities of children nationwide in 2017. Simultaneously, theyledto a permanent reduction of approximately 8,000births in the same year, and 145,000 fewer birthssince 1980, with 90% of this decline beingsince 2000.
This raises all sorts of challenging questions, such as what’s the value of a life saved compared to the value of lives that might have existed (a philosopher might have a different answer than an actuary at the Social Security Administration!).
For what it’s worth, I think parents should get to decide whether they need a car seat for a 7-year old (and thus have more children), but I’m not going to pretend there are no negative consequences.
Let’s look at another example.
In a post for Marginal Revolution, Prof. Alex Tabarrok of George Mason University points out that you can save lives in India by selling cars with abysmally low safety ratings.
These cars are very inexpensive. A Renault Kwid, for example, can be had for under $4000. In the Indian market these cars are competing against motorcycles. Only 6 percent of Indian households own a car but 47% own a motorcycle. Overall, there are more than five times as many motorcycles as cars in India. Motorcycles are also much more dangerous than cars. …The GNCAP worries that some Indian cars don’t have airbags but forgets that no Indian motorcycles have airbags. Even a zero-star car is much safer than a motorcycle. Air bags cost about $200-$400…and are not terribly effective. (Levitt and Porter, for example, calculated that air bags saved 550 lives in 1997 compared to 15,000 lives saved by seatbelts.) At $250, airbags would increase the cost of a $5,000 car by 5%. A higher price for automobiles would reduce the number of relatively safe automobiles and increase the number of relatively dangerous motorcycles and thus an air bag requirement could result in more traffic fatalities.
Unlike the issue of car seats for kids, there’s no moral ambiguity on this topic.
Indians should be allowed to buy “unsafe” cars because there will be far fewer fatalities and serious injuries.
By the way, cost-benefit analysis is not a panacea. Benjamin Zycher of the American Enterprise Institute wrote a few years ago that such analysis can be counterproductive if you have a biased and ideologically driven bureaucracy such as the Environmental Protection Agency.
But even halfway competent and fair cost-benefit analysis would be very helpful in the world of public policy.
But they can do a lot of damage before they reach that point.
We know from U.S. experience that Republicans can be very profligate. Well, the same problem exists with the Conservative Party on the other side of the Atlantic Ocean.
I wrote earlier this year that Boris Johnson was letting the burden of government spending increase much faster than needed to keep pace with inflation.
And when politicians spend too much money, it’s almost inevitable that they will then try to grab more money from taxpayers.
And that’s exactly what the Prime Minister is proposing, as reported by Stephen Castle for the New York Times.
Mr. Johnson is widely expected to break his vow not to increase taxes when he announces a plan to bolster the nation’s social care services… Even before the announcement, the blistering dissent from members of his own Conservative Party has underscored the problems that lie ahead for a government that has ramped up borrowing during the pandemic yet faces huge pressure to spend… Britain’s creaking National Health Service, which was already strained before the pandemic, now has a massive backlog of routine treatment and operations that had to be postponed. On Monday the government announced a cash injection of £5.4 billion, or $7.4 billion, to help deal with that issue. …His proposals are likely to cap the amount any British citizen pays for social care over their lifetime. That would prevent many from having to sell their homes to pay for care, but would also mean investing more public money, mainly through raising taxes.
So what do the actual conservatives in the Conservative Party think about Johnson’s proposal for more taxes and more spending?
They are not happy.
Perhaps the biggest danger for Mr. Johnson is the hostility of fiscal conservatives on the right of his party, who object to any tax being increased, including one senior cabinet minister, Jacob Rees-Mogg. …Mr. Sunak is also anxious to reign in spending, a view that is popular with the right wing of the Conservative Party. “He believes there is a moral and political premium on not raising taxes, not raising spending and getting borrowing under control,” said Professor Bale, who added this was “partly because he knows that this where the beating heart of the Conservative parliamentary party lies.”
Here are some more details about teh fight inside the Conservative Party, as reported by Edward Malnick of the U.K.-based Telegraph.
Senior Conservatives were threatening open warfare over Boris Johnson and Rishi Sunak’s planned tax increase… Ministers, government aides and backbenchers lined up to denounce a planned National Insurance rise which was privately described by senior figures as “idiotic”, with one Cabinet member declaring the proposal “morally, economically and politically wrong”. …Steve Baker, the former Brexit minister, said: “Of all the ways to break manifesto tax pledges to fund the NHS and social care, raising NIC must be the worst. In this time of crisis, we need a zero-based review of what the state does and how it is funded.” …Sir Iain Duncan Smith, the former Tory leader, feared that if Mr Johnson pushed ahead with the move the Conservatives would end up presiding over “the biggest tax rises since Clement Attlee”. …Another Tory MP suggested the Chancellor was concerned about Britain becoming a continental-style economy with unsustainable public spending and state intervention.
So how do Johnson’s allies respond?
With the same language one might have expected from Jeremy Corbyn, the hard-core statist who used to lead the Labor Party.
A government source said: “The NHS needs more money. By the time of the next election there could be 13 million people on waiting lists if we don’t act.”
In other words, the more government fails, the more money it should get (which also could be a description of Joe Biden’s fiscal policy).
P.S. What I wrote earlier this year is worth repeating.
The bottom line is that I wanted an independent United Kingdom to become Singapore on the Thames. Instead, Johnson seems to want his country to be Paris on the Thames.
P.P.S. I never thought I would miss the fiscal policy of two moderate former Prime Ministers, David Cameron and Theresa May.
In the real world, the relevant question is the degree of regulation and intervention. Especially compared to other nations, which is why the the Employment Flexibility Index is a useful measuring stick.
The Employment Flexibility Index is a quantitative comparison of regulatory policies on employment regulation in EU and OECD countries. …Higher values of the Employment Flexibility Index reflect more flexible labor regulations.
The good news, for American workers and American companies, is that the United States has the second-best system among developed nations, trailing only Denmark (another reason why pro-market people should appreciate that Scandinavian nation).
It’s hardly a surprise that France is in last place, notwithstanding President Macron’s attempt to push policy in the right direction.
It’s worth noting that the United States has much less regulation of labor markets than the average European nation. Which may help to explain why American living standards are so much higher.
Let’s review some academic research on the issue of employment regulation.
In an article for the Harvard Journal of Law & Public Policy, Professor Gail Heriot of the University of San Diego Law School explains how regulations discourage job creation and also may encourage discrimination.
… there’s a demographic out there that we ought to be worrying about, it is young people, the perennial newcomers to the economy. Well-meaning employment laws primarily benefit those who already have jobs, often at the expense of those who do not. …For low-skilled young people trying to get their first jobs, the most immediate threat may be the steep minimum wage hikes adopted recently in various cities.…young people even with great educational credentials are unknown quantities to employers and, hence, risky to hire, especially in a legal environment in which employee terminations can lead to costly legal disputes. …he best way for employers to avoid being wrongly accused of a Title VII violation is to avoid hiring someone who could turn out to be litigious if things do not work out. That creates a perverse incentive to avoid hiring the first African American or the first woman in a particular business or department. …A law that was intended to end discrimination in hiring, thus, ends up encouraging it instead.
In a Cambridge University working paper, Maarten de Ridder and Damjan Pfajfar found that wage rigidities, which are driven in part by red tape, are correlated with greater levels of economic damage when there is an adverse policy shock.
We find considerable variation in downward nominal wage rigidities across states and over time. Our estimates of nominal rigidities are positively related to state minimum wages, unionization,union bargaining power, and the size of services and government in employment and negatively to labor mobility. …We therefore focus on nominal wage rigidities when assessing the transmission of policy shocks. We find that states with greater downward nominal wage rigidities experience larger and more persistent increases in unemployment and declines in output after monetary policy shocks. …Similar results also hold for exogenous changes in taxes… States with higher nominal rigidities experience larger increases in unemployment and declines in output after a tax increase compared to states that are more flexible. We further show that institutional factors that could drive wage rigidities—like minimum wages and right-to-work-legislation—have a similar effect. States with a higher minimum to median wage ratio and those without right-to-work legislation experience larger and more persistent effects of monetary and tax policy shocks. Combined, these results firmly corroborate the hypothesis that resistance to wage cuts deepens policy shocks.
And in an article for Regulation, Warren Meyer explains that red tape and intervention is particularly bad news for unskilled workers.
The government makes it too difficult, in far too many ways, to try to make a living employing unskilled workers. …In the 1950s, 1960s, and 1970s, there was a wave of successful large businesses built on unskilled labor (e.g., ServiceMaster, Walmart, McDonalds). Today, investment capital and innovation attention is all going to companies that create large revenues per employee with workers who have college educations and advanced skills. …the mass of government labor regulation is making it harder and harder to create profitable business models that employ unskilled labor. For those without the interest or ability to get a college degree, the avoidance of the unskilled by employers is undermining those workers’ bridge to future success
Let’s close by looking at a chart from a 2018 presentation by Martin Agerup.
He shows that red tape doesn’t even provide meaningful job security for those who are already employed.
The bottom line is that so-called employment protection legislation is very bad news for those who are looking for jobs while offering no measurable benefit for those who have jobs (especially if we compare living standards across nations).
Next we have a Venn Diagram that tells you how to identify libertarians (and if you want to determine the specific kind of libertarian, here’s a guide to all 24 versions).
Though there are easier ways to identify libertarians.
Like this helpful hint for Facebook.
Next, libertarians pride themselves in being skeptical of all activities of government, including the parts that conservatives usually like.
Which is why border collies apparently are part of the movement.
Last but not least, here’s my favorite item from today’s collection. The Libertarian Dork strikes again!
Nobody can say we’re not dedicated!
P.S. Previous iterations of the Libertarian Dork can be viewed here, here, here, here, and here.
Today, we’re going to consider an updated version, focusing on whether Ireland can save the world economy from Joe Biden’s plan for a global tax cartel.
This should be a slam-dunk issue. Ireland transformed itself from “The Sick Man of Europe” to the “Celtic Tiger” in part by adopting a 12.5 percent corporate tax rate.
How much of a tiger? Look at this data comparing per-capita gross domestic product in Ireland and France.
For what it’s worth, the Maddison data on gross domestic product makes Ireland look richer than it actually is (a result driven by largely by all the corporate activity).
So I also used World Bank data on gross national income to create a chart that tells a similar story, but with numbers that presumably are a closer match to actual economic conditions.
The bottom line is that Ireland’s policy on corporate taxation has been a success.
But that success has produced envy. High-tax nations such as France are big supporters of Joe Biden’s scheme to force all jurisdictions to have a corporate tax rate of at least 15 percent.
And that minimum rate inevitably will increase if politicians are able to create a cartel (indeed, some nations already are pushing for the rate to be 25 percent or above).
That’s the bad news.
The good news is that Ireland (as well as other nations such as Hungary and Estonia) presumably can block Biden’s tax cartel by using their “national veto” and preventing the European Union from being a participant.
But that means standing up to pressure.
For instance, the Associated Pressrecently reported on how France is trying to cajole Ireland into joining the cartel.
Emmanuel Macron was in Dublin for a one-day visit on Thursday, his first trip to Ireland since entering office. The State is facing calls from the French government to sign up to global tax reform. The country is one of only a handful of nations not to agree to a major Organisation for Economic Co-operation and Development (OECD) agreement on tax, which is backed by more than 130 countries worldwide, as well as the EU. …At a press conference in Dublin on Thursday, Mr Macron denied that he was putting pressure on the State on the issue. “This is for you to lead. This is not for France to put pressure. But I think the OECD framework works in the context,” Mr Macron said. “It makes sense in terms of co-operation. It makes sense in terms of the EU. …He said that the Irish economy had achieved “tremendous results” in recent decades and acknowledged that a low corporate tax base had been a crucial part of that success. “What you have managed to do in past decades is unique,” Mr Macron said. But he said that things had to change.
Saul Zimet and Dan Sanchez, writing for the Foundation for Economic Education, explained why Ireland should defends its fiscal sovereignty.
132 countries, including the twenty most powerful economies in the world, have all agreed to institute a minimum global corporate tax of 15 percent. …But, one hold-out is threatening to spoil the scheme. …Ireland has long had a 12.5 percent corporate tax… And this relatively low tax rate has drawn Facebook, Apple, Google, Pfizer, and many other corporate giants to set up regional headquarters or manufacturing hubs there instead of in countries with higher tax rates. …the flow of corporate wealth and opportunity into Ireland has resulted in enormous GDP growth and job growth for the nation in recent decades… Lower corporate taxes mean a bigger capital stock which means new jobs, higher wages, and more goods and services. That is why Ireland’s low corporate taxes have not just been good for multinational corporations, but for Irish workers, consumers, and entrepreneurs. …Jurisdictional competition, like market competition, is a good thing. It places a check on how tyrannical a government can be… So kudos to Ireland for bravely refusing to join what amounts to a 132-government tax cartel. By standing up for itself, it stood up for us all.
In a column for the Wall Street Journal, former Congressman Mick Mulvaney also opined in favor of Ireland.
The premise behind the minimum global corporate tax is simple: Most governments around the world are looking to raise money. But they don’t like taxing the middle class, as this tends to result in lost elections, and there aren’t enough rich people to soak to raise the necessary funds. That means that governments have started to look to corporations as piggy banks they can raid. …the Irish…rode a 12.5% corporate tax rate to an economic boom that has left many other European countries green with envy. …The Irish know what should be obvious to everyone: Their OECD partners can’t raise their corporate rates unless low-tax Ireland agrees to give up one of its largest competitive advantages in the global marketplace. …if you are losing a competition, there are two ways you can respond. One is to get better. The other is to prevent the competition from happening. …Ireland is on the front line of that battle today. Should it lose, the fight will be coming to our shores soon.
Mulvaney’s point about competition is spot on.
Joe Biden wants to raise the federal corporate tax rate from 21 percent to 28 percent, a policy that would give the United States (once again) the developed world’s most punitive system.
I don’t know if Biden is cognizant of the consequences, but his Treasury Secretary clearly understands that this means the United States will lose the battle for jobs and investment.
Which explains why the Biden Administration wants “to prevent the competition from happening.”
I’m a big believer in focusing on results rather than reputation or rhetoric. For instance, many Republican politicians talk a good game about spending restraint. But when you crunch the numbers, it turns out that they often increase spending even faster than Democrats.
What’s true about politicians (the gap between reputation and reality) can also be true about countries.
Folks on the left seem to think Denmark is a big-government paradise, while many people on the right now think Hungary is a beacon of freedom.
But if you look at the data from the latest edition of Economic Freedom of the World, it turns out the Denmark (#11) ranks much higher for economic liberty than Hungary (#53).
Veronique de Rugy of the Mercatus Center wrote an interesting article for Reason about the strange way that some Americans have decided to embrace the two nations.
Yet she explains Denmark is hardly a socialist role model.
Sen. Bernie Sanders (I–Vt.) on the left and Fox News host Tucker Carlson on the right…have recently pointed to pet foreign countries as exemplars of what America should strive to be. Yet Sanders and Carlson are each misled by a superficial understanding of what these countries are really about. …Let’s look more closely at Denmark: Yes, the country has some big government policies… That said, not only is Denmark more economically free than it is socialist, but the country has also spent the last 30 years running away from the socialism that Sanders wants the United States to run toward.
And she notes that Hungary is hardly a hotbed of laissez-faire policy.
Orban…has created a patronage economy where licenses and aid are handed to businesses that are friendly to his administration. He even passed a law that gives the state considerable control over churches and other religious institutions. …these policies…could backfire spectacularly on these conservatives. Once the limits on state power are gone, if the progressive left truly gets into power, it will have a much easier time implementing the very agenda that these conservatives fear the most. …I wonder what we are to make of these conservatives who have become the biggest cheerleaders for many progressive spending programs.
Since Veronique mentioned government spending, I decided to peruse the IMF’s World Economic Outlook Database to see whether Hungary’s right-leaning government has adopted right-leaning spending policies during Viktor Orban’s time in power.
Compared to Denmark, the answer is no. As you can see from the chart, nominal spending has increased four times faster in Hungary.
By the way, inflation was higher in Hungary during the period, but a comparison based on inflation-adjusted numbers would make Denmark’s performance look even better since there was almost no “real” growth in the burden of spending last decade (yes, Denmark has followed my Golden Rule).
For what it’s worth, the goal of today’s column is not to denigrate Hungary, which has some very attractive policies (such as a 9 percent corporate tax rate).
That being said, I’m not going to laud Hungary as a role model when it should be (and could be) doing a much better job of limiting the size and scope of government.
Let’s close by also seeing how Denmark compares to Hungary in the latest edition of the Heritage Foundation’s Index of Economic Freedom. As you can see, Denmark (#10) does much better than Hungary (#55).
P.S. Supporters can argue, with some merit, that it’s not completely fair to compare Denmark and Hungary because the latter is still hamstrung by having to overcome decades of communist tyranny. But it’s worth noting that other nations that emerged from Soviet enslavement, such as Georgia and the Baltic countries, have managed to achieve much higher levels of economic freedom.
Instead, I point out that all decent human beings should be libertarian because unconstrained government has the power to abuse people and wreck their lives.
Consider “civil asset forfeiture,” as described in this video.
When I read about some of the real-world cases involving asset forfeiture, it gets my blood boiling.
Let’s look at two odious examples of asset forfeiture that took place this year.
First, the Wall Street Journaleditorialized earlier this year about a case in California, in which the FBI decided that it had the right to steal assets from safe deposit boxes simply because the financial institution was charged with crimes.
…the FBI raided U.S. Private Vaults in Beverly Hills in March, it did so after the business had been indicted for conspiring to launder money, sell drugs and other crimes. But the FBI also took control of $86 million in cash and valuables it found in the safe deposit boxes of people who haven’t been accused of a crime. Some of these folks have sued… The Institute for Justice is representing seven plaintiffs in this case. Their argument is that they have done nothing wrong and should not have to go through the cumbersome civil forfeiture process to prove that their cash, jewelry or precious metals are legitimately theirs. …the Fifth Amendment guarantees the right to due process before property can be taken. …The FBI forfeiture list on the contents of the seized boxes reports 14 that each held more than $1 million. Perhaps some of this comes from illegal sources, but the mere possession of cash is not proof of guilt. If the FBI and U.S. Attorney have proof of wrongdoing, bring it on. But the burden for depriving an American of property is on the government to prove guilt, not on the targeted to prove innocence.
Amen, America’s Founders gave us a Constitution to protect against this kind of abuse.
Second, we have a report from yesterday’s Washington Post about how cops stole $87,000 from a veteran.
Stephen Lara…was on his way to visit his daughters in Northern California…he had “a lot” of cash in his car. As he stood on the side of the road, police searched the vehicle, pulling nearly $87,000 in a zip-top bag from Lara’s trunk and insisting a drug-sniffing dog had detected something on the cash. Police found no drugs, and Lara, 39, was charged with no crime. But police left with his money… “I left there confused. I left there angry,” Lara said in an interview with The Washington Post. “And I could not believe that I had just been literally robbed on the side of the road by people with badges and guns.” It was only after Lara got a lawyer, sued and talked with The Washington Post about his ordeal that the government said it would return his money.
The article cites some of the critics, including the freedom fighters at the Institute for Justice.
…the case shows how the federal government abuses its asset forfeiture authority, by requiring those whose property is taken to prove their innocence to get it back. …“This is an inherently abusive power that state and local law enforcement should not have,” said Wesley Hottot, a lawyer representing Lara with the Institute for Justice, which advocates against civil asset forfeiture. “What we see almost exclusively are people like Stephen who — perhaps had quirky banking practices — but they’re not guilty of any crime. And yet, in the nation’s airports, on the nation’s roads, they’re treated by police as though a large amount of cash by itself is criminal. And that power is too dangerous to give every police officer on the street.” …Former U.S. attorney Joyce Vance said…“You can’t just take people’s stuff because you happen to find them with cash,” Vance said. “We still live in a country where people are innocent until they’re proven guilty.”
Attorney General Eric Holder curtailed use of the practice in the Obama administration, but Attorney General Jeff Sessions restored it under President Donald Trump. Though Attorney General Merrick Garland has rolled back many Trump-era changes at the Justice Department, he has not taken action on asset forfeiture.
By contrast, there’s nothing positive to say about what happened under the Trump Administration.
If you want to understand how bad Trump was on this issue, watch this video.
Even more promising, there are hopeful signs that the Supreme Court may rule that the practice is unconstitutional.
P.S. Just like intrusive and ineffective money-laundering laws, wretched asset forfeiture laws are largely the result of the foolish War on Drugs. One bad policy generates another bad policy. Lather, rinse, repeat.
By the way, that’s not necessarily a disparaging description. A Ponzi Scheme can work if there are always enough new people in the system to pay off the old people.
How serious? The Social Security Administration finally released the annual Trustees Report. This document has a wealth of data on the program’s financial condition, and Table VI.G9 is where the rubber meets the road.
As you can see from this chart, there will be an ever-increasing burden of Social Security taxes and spending over the next 75 years. And these numbers are adjusted for inflation!
The good news (relatively speaking) is that the economy also will be growing over the next 75 years, both in nominal terms and inflation-adjusted terms.
The bad news is that spending on Social Security will grow at a faster rate, so the program will consume a larger share of the economy’s output.
And because Social Security spending is growing faster than the economy (and also faster than tax revenue), this next chart shows there is going to be more and more red ink in the future. Once again, you’re looking at inflation-adjusted data.
As indicated by the chart’s title, the cumulative shortfall over the next 75 years is nearly $48 trillion. That’s a lot of money, even by Washington standards.
And with each passing year, the problem seems to worsen. The 75-year shortfall was $44.7 trillion according to the 2020 report and $42.1 trillion according to the 2019 report.
I’ll conclude by observing that today’s column focuses on the big-picture fiscal problems with Social Security.
But let’s not forget the program’s second crisis, which is the fact that Americans are deprived of the ability to enjoy much higher levels of retirement income.
P.P.S. I once made a $16 trillion dollar mistake on national TV when discussing Social Security’s shaky finances.
P.P.P.S. Much of the news coverage about the Trustees Report has focused on the year the Social Security Trust Fund supposedly runs out of money. But this is sloppy journalism since the Trust Fund has nothing but IOUs (as illustrated by this joke).
By the way, I should have included “Less Common Sense” as a seventh reason. That’s because the capital gains tax will backfire on Biden and his class-warfare friends.
To be more specific, investors can choose not to sell assets if they think the tax rate is excessive, and this “lock-in effect” is a big reason why higher rates almost surely won’t produce higher revenues.
In a column earlier this year for the Wall Street Journal, former Federal Reserve Governor Lawrence Lindsey explained this “Laffer Curve” effect.
…43.4% is well above the rate that would generate the most revenue for the government. Congress’s Joint Committee on Taxation, which does the official scoring and is no den of supply siders, puts the revenue-maximizing rate at 28%. My work several decades ago puts it about 10 points lower than that. That means President Biden is willing to accept lower revenue as the price of higher tax rates. The implications for his administration’s economic thinking are mind-boggling. Even the revenue-maximizing rate is higher than would be optimal. As tax rates rise, the activity being taxed declines. The loss to the private side of society increases at a geometric rate (proportional to the square of the tax rate) as rates rise. … The Biden administration is blowing up one of the key concepts that has united the economics profession: maximizing social welfare. It now believes in taxation purely as a form of punishment and is even willing to sacrifice revenue to carry it out.
Democrats used to be far more sensible on this issue. For instance, Bill Clinton signed into a law a cut in the tax rate on capital gains.
And, as noted in this Wall Street Journaleditorial on the topic, another Democratic president also had very sensible views.
Even in the economically irrational 1970s the top capital-gains rate never broke 40%… A neutral revenue code would tax all income only once. But the U.S. also taxes business profits when they are earned, and President Biden wants to raise that tax rate by a third (to 28% from 21%). When a business distributes after-tax income in dividends, or an investor sells the shares that have risen in value due to higher earnings, the income is taxed a second time. …The most important reason to tax capital investment at low rates is to encourage saving and investment. …Tax something more and you get less of it. Tax capital income more, and you get less investment, which means less investment to improve worker productivity and thus smaller income gains over time. As a former U.S. President once put it: “The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital from static to more dynamic situations, the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth of the economy.” That wasn’t Ronald Reagan. It was John F. Kennedy.
Especially the current occupant of the White House. The bottom line is that Biden’s agenda is bad news for American prosperity and American competitiveness.
P.S. If you’re skeptical about my competitiveness assertion, check out this data.
Thanks to some new research from Professor John Diamond of Rice University, we can now quantify the likely damage if Biden’s proposals get enacted.
Here’s some of what he wrote in his new study.
We use a computable general equilibrium model of the U.S. economy to simulate the economic effects of these policy changes… The model is a dynamic, overlapping generations, computable general equilibrium model of the U.S. economy that focuses on the macroeconomic and transitional effects of tax reforms. …The simulation results in Table 1 show that GDP falls by roughly 0.1 percent 10 years after reform and 0.3 percent 50 years after reform, which implies per household income declines by roughly $310 after 10 years and $1,200 after 50 years. The long run decline in GDP is due to a decline in the capital stock of 1.0 percent and a decline in total hours worked of 0.1 percent. …this would be roughly equivalent to a loss of approximately 209,000 jobs in that year. Real wages decrease initially by 0.2 percent and by 0.6 percent in the long run.
Here is a summary of the probable economic consequences of Biden’s class-warfare scheme.
But the above analysis should probably be considered a best-case scenario.
So Prof. Diamond also analyzes the impact of inflation.
…capital gains are not adjusted for inflation and thus much of the taxable gains are not reflective of a real increase in wealth. Taxing nominal gains will reduce the after-tax rate of return and lead to less investment, especially in periods of higher inflation. …taxing the nominal value will reduce the real rate of return on investment, and may do so by enough to result in negative rates of return in periods of moderate to high inflation. Lower real rates of return reduce investment, the size of the capital stock, productivity, growth in wage rates, and labor supply. …Accounting for inflation in the model would exacerbate other existing distortions… An increase in the capital gains tax rate or repealing step up of basis will make investments in owner-occupied housing more attractive relative to other corporate and non-corporate investments.
Here’s what happens to the estimates of economic damage in a world with higher inflation?
Assuming the inflation rate is one percentage point higher on average (3.2 percent instead of 2.2 percent) implies that a rough estimate of the capital gains tax rate on nominal plus real returns would be 1.5 times higher than the real increase in the capital gains tax rate used in the standard model with no inflation. Table 2 shows the results of adjusting the capital gains tax rates by a factor of 1.5 to account for the effects of inflation. In this case, GDP falls by roughly 0.1 percent 10 years after reform and 0.4 percent 50 years after reform, which implies per household income declines by roughly $453 after 10 years and $1,700 after 50 years.
Here’s the table showing the additional economic damage. As you can see, the harm is much greater.
I’ll conclude with two comments.
First, inflation is obviously bad for citizens. But as I wrote more than 10 years ago, it’s profitable for governments.
Second, even seemingly small differences in economic growth produce big differences in long-run living standards.
P.S. If (already-taxed) corporate profits are distributed to shareholders, there’s a second layer of tax on those dividends. If the money is instead used to expand the business, it presumably will increase the value of shares (a capital gain) because of an expectation of higher future income (which will be double taxed when it occurs).
I wrote last month about an encouraging wave of tax cuts at the state level.
I’m particularly impressed by the tax-cutting plan in Arizona, which cleverly reversed a class-warfare scheme designed to enrich teacher unions.
Indeed, I’m a big fan of federalism in large part because good fiscal policy is more likely when state and local governments are forced to compete for jobs and investment.
People can “vote with their feet” by moving from high-tax jurisdictions to low-tax jurisdictions, and politicians are less likely to misbehave when they realize taxpayers can escape.
But “less likely to misbehave” is not the same as “won’t misbehave.”
Notwithstanding the negative consequences, some jurisdictions are contemplating tax increases.
A continuing campaign to reverse the flat tax in Massachusetts
There’s also a plan for a class-warfare tax increase in Washington, DC.
I’m not referring to President Biden’s destructive tax plan (which you can read about here, here, here, and here). Instead, today’s column will focus on the tax increase being considered by the city’s local government.
Here are some excerpt from a report in the Washington Post.
An increasingly left-leaning D.C. Council voted…to raise income taxes on wealthy residents — a victory for advocates seeking tens of millions of dollars to spend…, but a puzzlement to others who saw no need for a tax increase in a year the city is flush with federal grant money. …the 2022 budget…includes generous spending on a long list of programs, mostly funded by the federal grants as well as other sources of local revenue. …The authors of the tax increase proposal…say that wealthy residents who were not financially hurt by the pandemic can afford to pay more.
To see which taxpayers are being penalized, here’s an excerpt from the Tax Foundation’s report on the proposed tax hike.
Interestingly, despite its left-leaning orientation, the Washington Posteditorialized against the tax hike.
The council is now intent on ramming through a tax increase on wealthy residents that is driven more by ideology than any need for revenue or sound fiscal strategy. …as opponents of the tax increase pointed out, the District is flush with cash — about $3.2 billion in federal payments and grants, with next year’s local revenue projected to be $162 million more than pre-pandemic times. The proposed $17.5 billion budget already reflects a growth in spending of 3.9 percent over the historically high spending in the current year. …the council’s slapdash approach could have troubling consequences. The District’s tax rates on income and commercial property are already the highest in the region. …states such as Illinois should serve as a cautionary tale: Its high taxes have driven residents and businesses to other states. It’s not hard to imagine that someone making over $1 million — 0.7 percent of D.C. taxpayers, who pay 23.1 percent of the city’s income taxes — might find it more worthwhile to live in Arlington and pay one-third as much in taxes. What then happens…?
This is a remarkable editorial.
Indeed, it sounds like I could have been the author.
It highlights excessive growth of government.
It highlights how the rich pay the lion’s share of tax.
It highlights tax migration across borders.
It highlights jurisdictional tax competition.
The difference between me and the Washington Post, though, is that I’m intellectually consistent.
Unlike the editors of that newspaper, I apply the same arguments when analyzing national tax policy as well.
But I also recognize that most people aren’t that excited about nerdy economic-themed articles.
Which is why I also use satire as a weapon against collectivism. And updating our collection of collectivism humor is the focus of today’s column.
Our first item combines economic issues such as tax rates and redistribution with basic notions of fairness (properly defined).
Our second item points out how socialists are generally huge hypocrites.
Once they accumulate some money, they magically decide that their knee-jerk policy of “tax the rich” somehow only applies to the people who have even more than they do.
Needless to say, they almost never voluntarily give away their money, either to government or directly to poor people.
Our third bit of humor for today’s column shows how our statist friends are at war with facts, evidence, and the real world.
Speaking of real-world evidence, @iowahawkblog brags that the Chicago Cubs have a better track record than socialists.
Per tradition, I’ve saved the best for last.
Here’s a meme showing that socialism is capable of solving one societal problem.
Wow. No wonder people have overwhelmingly voted that it is the state most likely to go bankrupt.
As illustrated by the collection of links, there certainly is a lot of data to support the notion that Illinois is in a downward spiral.
But sometimes an anecdote can help drive home the point. The Wall Street Journal just published a story about the country in Illinois that has suffered the largest decline in population of anyplace in the United States.
What struck me most about the report was that it “buried the lede.” More specifically, it’s not until the 17th paragraph that we learn about the factor that is probably responsible for a big chunk of the out-migration.
This must be the journalistic equivalent of “Other than that, Mrs. Lincoln, how was the play?”
Though I’m sure the other factors listed in the article also are relevant.
I’ll close with some speculation about an oft-seen pattern in blue states, which is the way rural areas and poor urban areas keep falling farther and farther behind well-to-do suburbs and wealthy downturn business districts.
Is it random results or a consequence of policy choices? Do politicians in California only care about preserving quality of life for coastal elites? Do politicians in Illinois merely care about Chicago and its suburban counties? Do politicians in New York not care about upstate residents?
The editorial page of the Wall Street Journal has been sounding the alarm.
In a recent column, Professor Josef Joffe contemplates the impact of more dependency on America’s economy.
America is the land of “predatory capitalism,” German chancellor Helmut Schmidt liked to say. …President Biden’s tax plans might soon make Europe look like a capitalist heaven by comparison. …The middle class will pay the bill. …Reversing course won’t be easy because gifts, once given, are hard to take back, whether in the U.S. or in Europe. …As government expands and hands out more goodies, it also tightens its grip on the economy. It shrinks the private sector, the engine of U.S. wealth creation. It is no accident that Europe has grown more slowly over the past 40 years as government spending, regulations and taxes have increased.
Prof. Joffe’s point about the durability of entitlements (“once given, are hard to take back”) is vitally important.
The club Mr. Biden is joining…is one the U.S. has stayed out of since World War II. That is the club known as the European welfare state. It is the government-directed system of lifetime paternalism built up by the nations of Western Europe after 1945. …Public welfare has never been America’s reason for being, notwithstanding our substantial spending on social support programs. Despite the entitlement creations of FDR’s New Deal and LBJ’s Great Society, the U.S., unlike Europe, has remained a nation driven and led by capitalist initiative. For current-generation Democrats, that fact is anathema. …The March stimulus bill already had one foot inside the economic club of Europe’s door.
Let’s not quibble about that point, though, because Henninger has another observation that is spot on.
Biden’s agenda is a recipe for big tax increases on the middle class.
Europe became famous for its perpetual-motion tax machine, which suppressed the continent’s entrepreneurial instincts. Besides income taxes, Europe relies heavily on the collection of notoriously high value-added taxes…total tax revenue from all governments in the U.S. as a percentage of GDP is 24%, compared with an average of more than 40% in seven European nations… Those European tax levels will never fall. Their governments gotta have the money. Mr. Biden purports that his proposed $3 trillion in tax increases hit only corporations and “the wealthiest.” But if his entitlements become law, European levels of middle-class taxation—perhaps a VAT or carbon tax—are inevitable. Mr. Biden’s plans to increase Internal Revenue Service audits lay the groundwork for that.
Amen.
Honest folks on the left openly admit that this is true.
I’ll close with two final points.
First, it would be a mistake to copy Europe’s welfare states, but there are worse things that could happen. Those nations may lag the United States, but they are generally richer than other parts of the world.
But I’m not sure “better than Venezuela” is a persuasive selling point.
The most charitable answer is that they don’t want anyone to suffer from poverty and they mistakenly think big government can solve problems.
But there’s another answer that may be more accurate.
As Margaret Thatcher observed about three decades ago, it seems that many folks on the left are primarily motivated by jealousy and resentment against their successful neighbors.
I realize I’m making an ugly accusation. But in my defense, I’m simply reporting what they write. Or what they admit to pollsters.
And now we have another example. Christine Emba of the Washington Postopined earlier this year that politicians should somehow put a ceiling on how much wealth any American can create.
The most shocking thing about ProPublica’s extensive report on the leaked tax returns of the super-rich wasn’t what the report contained — it was the fact that we’re barely shocked anymore. …we, as a society, let them do it. …every billionaire is a policy failure. But more than that, every billionaire is a failure of our own moral imagination. …Should we tax capital gains at a higher rate? Raise the corporate tax rate? Create a wealth tax? (I’d vote yes to all three.) But these debates are small bore. …Instead of debating tweaks at the edges of our tax system, what we should be…focused less on what is “allowed”… Such a philosophy already exists. It’s called limitarianism. …Just as there is a poverty line under which we agree that no one should fall, limitarianism holds that one can construct a “wealth line” over which no one should rise, and that the world would be better off for it.
Ms. Emba doesn’t explain how her “limitarian” policy might be implemented.
But since she’s embraced a wealth tax, the simple way to achieve her goal would be adding a 100 percent rate to that levy for any taxpayers who create so much wealth for society that they wind up with assets of $1 billion.
In case you think I’m joking, here’s part of her conclusion.
…the prospect of having “only” $999 million dollars would not stop innovators in their tracks. And even if it did stop some, would the trade-off be so bad?
I’ll close this column by answering her rhetorical question.
The trade-off wouldn’t just be bad, it would be terrible. A wealth tax (or any other possible policy to achiever her “limitarian” utopia) necessarily would reduce saving and investment.
It looks like we may have a new example of this phenomenon.
In an article for the Las Vegas Review-Journal, Richard Velotta reports on Chicago’s bungled attempt to attract a big-name casino.
If everything had gone according to plan, we would all be buzzing this week about which company would have the best opportunity to build a casino resort in Chicago. But it hasn’t gone according to plan. …companies have stated that they won’t be bidding. Four of the largest Strip operators — MGM Resorts International, Las Vegas Sands Corp., Wynn Resorts Ltd. and Caesars Entertainment Inc. — have indicated they have no plans to bid on Chicago. …The biggest issue for Las Vegas operators looking at Chicago is the tax rate Illinois would impose on gross gaming revenue from the Chicago resort — 40 percent. By comparison, the maximum rate in Nevada is 6.75 percent.
But I’m amazed they thought they could impose a tax six times higher than the one in Nevada without any negative consequences.
No wonder the big-name casinos aren’t submitting bids. After all, their job is to generate revenue for shareholders, not loot for politicians.
Though there is a silver lining to this dark cloud.
As mentioned in the story, Illinois politicians apparently did realize it wouldn’t work to have a tax rate more than ten times higher than the one in Nevada.
At one time, Illinois floated a tax rate of around 70 percent, but gaming companies persuaded the Illinois Legislature to modify that.
How generous of Illinois politicians to forgo a 70 percent tax rate!
Reminds me of the former French president who “mercifully” chose to limit personal taxes to 80 percent of household income.
P.S. There is a compelling case that Chicago is America’s most poorly governed city. But that’s hard to decide because there’s strong competition from places such as New York, Seattle, Minneapolis, Detroit, and San Francisco.
P.P.S. In this case, though, it’s a state law that is causing the problem. So we should ask whether Illinois is America’s most poorly governed state. There’s certainly evidence for that claim, but New York, California, and New Jersey also would be in the running.
The real threat to free enterprise and economic liberty is from redistributionism, the notion that politicians should play Santa Claus and give us a never-ending stream of cradle-to-grave goodies.
For purposes of today’s column, though, I want to focus on a small slice of the presentation (beginning about 2:00).
And many other supporters of genuine economic liberty have been making this point for much longer.
Or more recently. In a new article for City Journal, Luigi Zingales emphasizes that being pro-market does not mean being pro-business.
The first time I visited the Grand Canyon many years ago, I was struck…by a sign that said, “Please don’t feed the wild animals.” Underneath was an explanation: you shouldn’t feed them because it’s not good for them. …We should post something of this kind on Capitol Hill as well—with the difference being that the sign would read, “Please don’t feed the businesses.” That’s not because we don’t like business. Quite the opposite: we love business so much that we don’t want to create a situation where business is so dependent on…a system of subsidies, that it is unable to compete and succeed… This is the…difference between being pro-market and being pro-business. If you are pro-business, you like subsidies for businesses; you want to make sure that they make the largest profits possible. If, on the other hand, you are pro-markets, you want to behave like the ranger in the Grand Canyon: …ensuring that markets remain competitive and…preventing businesses from becoming too dependent on a crony system to survive.
Amen.
Cronyism is bad economic policy because government is tilting the playing field and luring people and businesses into making inefficient choices.
But I also despise cronyism because some people mistakenly think it is a feature of free enterprise (particularly the people who incorrectly assume that being pro-market is the same as being pro-business).
P.S. There’s one other point from Prof. Zingales’ article that deserves attention.
He gives us a definition of capitalism (oops, I mean free enterprise).
We use the term “free markets” so often that we sometimes forget what it actually means. If you look up “free markets” in the dictionary, you might see “an economy operating by free competition,” or better, “an economic market or system in which prices are based on competition among private businesses and not controlled by a government.”
For what it’s worth, I did the same thing for my presentation (which was to the New Economic School in the country of Georgia).
Here’s what I came up with.
By the way, the last bullet point is what economists mean when they say things are “complementary.”
In other words, capital is more valuable when combined with labor and labor is more valuable when combined with capital – as illustrated by this old British cartoon (and it’s the role of entrepreneurs to figure out newer and better ways of combining those two factors of production).
One takeaway from this is that Marx was wrong. Capital doesn’t exploit labor. Capital enriches labor (just as labor enriches capital).
But from a big-picture perspective, all that really happened is that China went from terrible policy (Maoist communism) to bad policy (best described as mass cronyism).
That’s a big improvement, but that still leaves China in the bottom quartile (ranking #124 in the world). Better than Venezuela (#162), to be sure, but way behind even uncompetitive welfare states such as Greece (#92), France (#58), and Italy (#51).
And I fear China’s score will get even worse in the near future.
Why? Because it seems President Xi is going to impose class-warfare tax increases.
In an article for the Guardian, Phillip Inman shares some of the details.
China’s president has vowed to “adjust excessive incomes” in a warning to the country’s super-rich that the state plans to redistribute wealth… The policy goal comes amid a sweeping push by Beijing to rein in the country’s largest private firms in industries, ranging from technology to education. …Xi…is expected to expand wealth taxes and raise income tax rates… Some reforms could be far reaching, including higher taxes on capital gains, inheritance and property. Higher public sector wages are also expected to be part of the package.
And here are some excerpts from a report by Jane Li for Quartz.
Chinese president Xi Jinping yesterday sent a stark message to the country’s wealthy: It is time to redistribute their excessive fortunes. …Another reason for the Party’s focus on outsize wealth is to reduce rival centers of power and influence in China, which has also been an impetus for its crackdown on the tech sector… China already has fairly high income tax rates for its wealthiest. That includes a top income tax rate of 45% for those who earn more than 960,000 yuan ($150,000) a year… Upcoming moves could include…a nationwide property tax.
If you review the Economic Freedom of the World data, you find that China is especially bad on fiscal policy (“size of government”), ranking #153.
That’s worse than China does even on regulation.
Yet the Chinese government is now going to impose higher taxes to fund even bigger government?!?
Is the goal to be even worse than Venezuela and Zimbabwe?
P.S. Many wealthy people in China (maybe even most of them) achieved their high incomes thanks to government favoritism, so there’s a very strong argument that their riches are undeserved. But the best policy response is getting rid of industrial policy rather than imposing tax increases that will hit both good rich people and bad rich people.
P.P.S. I’ve criticized both the OECD and IMF for advocating higher taxes in China. A few readers have sent emails asking whether those international bureaucracies might be deliberately trying to sabotage China’s economy and thus preserve the dominance of Europe and the United States. Given the wretchedtrack records of the OECD and IMF, I think it’s far more likely that the bureaucrats from those organizations sincerely support those bad policies (especially since they get tax-free salaries and are sheltered from the negative consequences).
Like most libertarians, I favor drug legalization for the simple reason that people should have control over their own bodies, even if they’re doing something stupid.
But I’ve never claimed legalization is a zero-cost policy. Instead, as I wrote in 2018, “I think the social harm of prohibition is greater than the social harm of legalization.”
These two flowcharts both make the same point about why the War on Drugs is foolish.
Apparently, voters and politicians are beginning to get the message. More and more states have moved in the direction of legalization.
Have the results been positive?
In an article for National Review, Aron Ravin has a very critical assessment of legalization.
…the old-fashioned, party-pooper folk with whom I find myself sympathizing tend to fall back on one point: Weed is unhealthy. Since 2002, the proportion of Americans twelve and older who reported having used marijuana in the last year has increased by over 60 percent. …Pot smoke can cause lung cancer in the same way tobacco can, and secondhand marijuana smoke may have even more carcinogens than cigarettes. Marijuana smoke can also compromise the immune system, and there’s a growing amount of scientific literature indicating a significant correlation between any form of cannabis consumption and psychosis.
As a non-user, I’m very sympathetic to the health argument.
Regularly drawing any kind of smoke into one’s lungs simply can’t be healthy.
That being said, regularly eating big mounds of french fries also can’t be healthy, but that’s not an argument for criminalization.
Ravin then asserts that legalization is a failure because there are still black markets.
Advocates claimed that legalization would cripple the black market and weaken Mexican cartels. They argued that legalizing weed would reduce children’s access to it, as licensed distributors would have a greater incentive to card than criminal dealers, and that users would actually be healthier, as the government would be better able to regulate and inspect the stuff they were smoking. …Top that all off with the Cato Institute’s promises of billions of dollars in new tax revenue and billions more in law-enforcement expenses saved, and you’d have to be silly to disagree. But the libertarians got it wrong.
And he has some good evidence about the continued presence of illegal sales.
…the predicted benefits rested on one assumption: that legal weed would render criminal dealers obsolete much in the same way that repealing prohibition weakened bootlegging mobsters. But that has not happened. It has been nearly a decade since Colorado became the first state to legalize recreational marijuana, and the state is dealing with a larger black market than ever before. …Upwards of 80 percent of all of California’s marijuana sales go through the black market. Massachusetts (70 percent) isn’t faring much better, and Nevada is growing desperate. …Legal dispensaries simply cannot match the low prices offered by their criminal competition when they’re being stifled by so much regulation and taxation, legalization advocates say. Yet weren’t generating tax revenue and protecting users major arguments for legalization in the first place?
I will admit that Ravin makes one very strong point. If libertarians were arguing that legalization would simultaneously deliver lots of tax revenue and also eliminate the black market, that doesn’t make sense.
Simply stated, excessive taxation means illegal sellers will stay in business because their prices will be much lower than their legal (but highly taxed) competitors.
That being said, at least one libertarian (ahem, me) explicitly pointed out that generating additional tax revenue was actually an argument against legalization (I included this issue in my collection of Libertarian Quandaries).
Let’s look at another perspective on legalization.
Jacob Sullum has a largely upbeat assessment of what’s happened, though he agrees that excessive taxation is a problem.
…when it comes to taxes, New York legislators do not seem very keen on helping the industry—or consumers. …The THC levy may amount to a tax as high as 30 percent, depending on costs, THC content, and product type. That’s on top of a 13 percent marijuana sales tax, which is in addition to general state and local sales taxes that can run as high as 8.9 percent. New Jersey plans to impose an excise tax ranging from less than 3 percent to more than 30 percent, depending on the average retail price per ounce… The state also will allow local governments to collect multiple taxes from growers, manufacturers, wholesalers, and retailers… New Mexico’s marijuana sales tax is simple and modest by comparison: 12 percent initially, rising gradually to 18 percent by July 2030. States such as Alaska, Illinois, Maine, Massachusetts, and Michigan tax marijuana even more lightly. These states seem to recognize that heavy taxes make it harder for licensed retailers to compete with black-market dealers. It’s a lesson that some politicians will have to learn all over again.
A 2018 Bloombergarticle is a good primer on the issue of pot taxation.
What’s the optimal tax rate on legal marijuana if the goal is to eliminate the black market? …There are signs that California, with its longstanding pot culture and thriving black market, is taxing weed too much, while Washington state has already moved to lower its rate. …Lawmakers debating the issue are typically trying to balance two goals: generating revenue to boost state coffers while also creating a legal market that will put street dealers out of business. …The economics of elastic demand hold that consumers will buy less of a product as it gets more expensive, and the theory is being tested in the various legal markets around the U.S. …Oregon and California…have struggled to eliminate the black market, in part because high tax rates and regulatory red tape have made it attractive for some producers, sellers and customers to stay underground. …Light taxation and liberal licensing under Colorado’s adult-use law slashed the black market to 33 percent of cannabis sales last year, Adams said. In contrast, illicit sales were 78 percent of California cannabis sales and were even higher this year under adult-use laws that imposed extraordinary taxes and regulatory hurdles.
For those interested, I’ve written a few times (here, here, here, and here) about California’s over-taxation of marijuana.
I also have two columns (here and here) about Colorado’s experience.
So what’s the bottom line?
I fully expect that politicians in most states will continue to set tax rates too high, which means black market sales of marijuana will remain strong.
Why will they make this mistake? For the same reason they have excessively high tax rates on income, on sales, on property, on booze, and everything else.
Greedy politicians can’t resist the temptation to over-tax anything and everything in hopes of getting their hands on more money to buy more votes.
That’s America’s real (and bipartisan) addiction problem.
For our next item, there’s an interesting policy debate about the bias of big social media companies, with some conservatives abandoning their alleged pro-market sympathies and demanding regulation. Or even the use of counterproductive antitrust laws.
Libertarians, by contrast, have a very benign view of private companies.
Which makes them vulnerable to this kind of satire.
But when the debate shifts to defunding the police, libertarians have a more comprehensive attitude (by the way, this meme has a naughty word, so you have to click to see it).
This next item is very clever.
Libertarians are big on the idea of self-ownership, so…
Our final bit of satire touches a nerve with me because I worry a lot about a potential descent into Greek-style fiscal chaos (and, since the US is too big for a bailout, that presumably will be followed by social disarray).
So you can understand why this is my favorite bit of humor from today’s collection.
For today’s topic, though, I want to call attention to a recent report by the Democratic staff of the Joint Economic Committee. It relies on the sloppiest and most disingenuous analysis imaginable.
To recycle a term from 2015, let’s call it primitive Keynesianism.
Here’s the relevant excerpt.
The Treasury Department released information on how much money went to each state, which allows us to estimate the impact of the newly expanded CTC on local economies. Using an estimated multiplier of 1.25—or how much additional spending each $1 in CTC payments will generate, as people use their funds to buy goods and services that in turn generate income for other people and businesses—implies that the expanded CTC will generate nearly $19.3 billion in spending in local economies each month. This increased economic activity is a boon to local businesses, creating jobs in communities across the United States.
Honest Keynesians acknowledge that there’s no magic money tree. They know the government can’t put money in our right pocket without first removing from our left pocket.
So they make arguments about things such as the “marginal propensity to consume.”
