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What’s the worst possible tax hike, the one that would do the most economic damage?

Raising income tax rates is never a good idea, and there’s powerful evidence from the 1980s about how upper-income taxpayers have considerable ability to change their behavior in response to changes in incentives.

But if you want to know the tax hikes that do the most damage, on a per-dollar raised basis, it’s probably best to focus on levies that boost double taxation of saving and investment.

The Tax Foundation ran some estimates on five different tax increases, for instance, and found that worsening depreciation rules (an arcane part of the tax code dealing with the degree to which new investment is taxed) would do the most damage, followed by a higher corporate tax rate, and then higher individual income tax rates.

But I wonder what they would have found if they also modeled the impact of a higher death tax. That levy is particularly destructive because it directly requires the liquidation of capital. The assets of investors, entrepreneurs, farmers, small business owners, and other victims take a big hit as politicians grab as much as 40 percent of what they’ve worked for during their lives.

This is bad for the economy because it directly reduces the capital stock. Sort of like harvesting apples by cutting down 40 percent of the trees in an orchard. The net result is that the economy’s ability to generate future income is undermined.

But it’s also bad for the economy because it reduces incentives for successful taxpayers to both earn and invest while they’re alive. Why bust your rear end when the government immediately will take at least 39.6 percent (actually more when you consider Medicare taxes, state taxes, and double taxation of interest, dividends, and capital gains) of your income, and then another 40 percent of what you’ve saved and invested when you kick the bucket?

Unfortunately, Hillary Clinton doesn’t seem to care about such matters. She actually just decided to double down on her destructive tax agenda by endorsing an even bigger increase in the death tax.

I’m not joking.

The editorial page of the Wall Street Journal is not exactly impressed by Hillary’s class-warfare poison.

On Thursday she decided that her proposal to raise the death tax to 45% from 40% isn’t enough and endorsed even higher levies that would apply to thousands of estates. Though she defeated Bernie Sanders in the primary, she is adopting the socialist’s death-tax rate structure. She’d tax all estates over $10 million at 50%, apply a 55% rate on estates over $50 million, and go to 65% on assets above $500 million. The 65% rate would be the highest since 1981 and is another example of how she is repudiating the more moderate policies of her husband and the Democrats of the 1990s. …the Sanders plan that Mrs. Clinton is copying did not index exemption levels for inflation. …Mrs. Clinton would also end the “step-up in basis” on stock valuations for many filers, triggering big capital gains taxes for a much broader population.

Wow, this is class warfare on steroids. And the part about this being more like Bernie Sanders than Bill Clinton hits the mark. Economic freedom actually increased in America between 1992 and 2000.

Hillary, by contrast, is a doctrinaire and reflexive statist. I’m not aware of a single position she’s taken that would reduce the burden of government.

By the way, here’s a bit of information that won’t shock anyone familiar with the greed and hypocrisy of the political class.

Hillary and her friends will largely dodge the tax, which mostly will fall on small business owners who lack the ability to create clever structures.

…most of her rich friends will set up foundations, as she and Bill Clinton have, to shelter most of their riches from the estate tax. …In any case, Mrs. Clinton is now promising total tax hikes of $1.5 trillion over a decade if elected President.

Gee, knock me over with a feather.

The Tax Foundation may not have included the death tax when it compared the harm of different tax hikes, but it has looked at how the death tax hurts the economy by discouraging capital formation and capital accumulation.

…an estate tax increase would cause economic production to be allocated away from business equipment, reducing the quantity of business equipment in the economy. …Many of the assets that fall under the estate tax, such as residential structures, commercial structures, and business equipment, enhance productivity, or gross domestic product (GDP) per hour worked. …The relationship between these assets and productivity is the focus of one of the most common models in economics, an equation called the Cobb-Douglas production function, which describes how workers and capital goods together produce economic output. Under this model, more capital increases output or income, even as the number of workers is held constant. It therefore increases GDP per hour worked, making people richer. Under such a model, reallocating economic production away from the capital goods that enhance output would reduce GDP in the long run. This is an effect that one might expect to see in a macroeconomic analysis of the estate tax.

Amen. If you want more output and higher living standards, you need to boost worker pay by increasing the quality and quantity of capital in the economy.

But politicians like Hillary

Here are the estimates of what happens to the economy with a 65 percent death tax.

So what would happen if lawmakers instead did the right thing and abolished this wretched example of double taxation?

The Tax Foundation has crunched the numbers. Here’s the impact on the overall economy.

And here’s what happens to federal revenue over the same period.

By the way, the Wall Street Journal editorial cited above did contain a bit of good news.

Congress is starting to push back against President Obama’s stealth death tax increase. Rep. Warren Davidson (R., Ohio) read our recent editorial about Treasury plans to raise taxes on minority stakes in family businesses by artificially inflating their value, and he’s drafted a bill to stop Treasury’s tax grab as a violation of the separation of powers. …A former owner of several businesses, Mr. Davidson says the U.S. economy needs owners focused on “growing assets, not structuring them for life events.” He explains that many farms in particular may carry high values but hold little cash, and so the death tax triggers land sales to pay the IRS. “The whole concept of a death tax is immoral,” Mr. Davidson says, and he’s right. The tax confiscates assets that have already been taxed once or more when first earned, and it punishes a lifetime of investment and thrift.

I wrote about this issue the other day, so I’m glad to see that there’s pushback against this Obama Administration scheme to unilaterally boost the burden of the death tax.

P.S. Politicians are not the only beneficiaries of the death tax.

 

I like when leftists accidentally make the case for limited government.

  • The IMF, for instance, accidentally put together some solid evidence showing that a value-added tax is a money machine for bigger government.
  • A story in the New York Times, meanwhile, accidentally showed that politicians will hike taxes if they’re not constrained by tax competition.
  • And a statist in Illinois tried to argue that higher taxes don’t enable higher spending, but he accidentally showed that politicians raised taxes so they wouldn’t have to cut spending.
  • Another report in the New York Times accidentally acknowledged that genuine private savings is the best route to obtain a secure retirement.

You can look at more examples here, but you get the point.

And now we have another item for our collection.

Sean Davis of The Federalist must believe in taking candy from babies and in exploiting the weak and defenseless. I’m jumping to this uncharacteristic conclusion because he just body-slammed a very vulnerable target. To be more specific, he mocked Trevor Noah of the Daily Show for some amazingly vapid comments that inadvertently decimated the gun-free-zone argument of Barack Obama and Hillary Clinton.

You should read the whole thing, but here are some of the more relevant portions of Sean’s article.

Trevor Noah, the host of Comedy Central’s The Daily Show, accidentally destroyed the case for gun control during his show on Wednesday night. …The target of Noah’s ire was an ice cream shop owner in a small town southeast of St. Cloud, Minnesota — the site of a mass stabbing at a mall last weekend — who put up a sign outside of his restaurant that read, “Muslims Get Out.”

Sean then does something very unfair (at least in the mind of statists). He directly transcribes part of Noah’s diatribe so we can see his argument for ourselves (he also includes the video if you click through to see the full story from The Federalist). Here’s some of what Mr. Noah said.

…what’s also strange is this man genuinely thought people who go around blowing people up would be stopped by a sign? You realize you’re talking to terrorists, not vampires. They don’t need to be invited in, alright? Or maybe he’s onto something, because if you think about it, we’ve never tried that. We’ve never actually tried to repel terrorists with signs. Yeah, maybe that’s all the airports need is a sign that says “No Terrorists,” yes? Yeah, and then guys are going to be walking going, “Oh, I was going to blow up the airport, but the rules are rules and they said I can’t come in…”

If this was a play-by-play analysis, at this point I would say that Noah taped a sign to his own back that says “kick me.”

So Sean obliges with this understated observation.

Noah probably doesn’t know it, but he just accidentally made an airtight case against gun-free zones in particular and gun control in general. He is 100 percent correct: people hell-bent on murdering as many people as possible don’t really care about silly signs or laws that tell them not to murder people. A sign that says “No Guns” will no more keep a violent jihadi from gunning down a bunch of innocent people than will a sign that says “Muslims Get Out.”

Having exposed the giant flaw in Noah’s logic (if you could call it that), Sean then buries him under a pile of examples.

…how do we know that gun-free zones, nearly always marked with signs designating them as such, don’t deter murderous psychopaths? Because mass shootings, rather than happening at gun ranges or in gun stores, keep happening in gun-free zones. …The Sandy Hook massacre? Gun-free zone. Columbine? Gun-free zone. The Aurora movie theater shooting? Gun-free zone. The shooting last year at an Oregon community college? Gun-free zone. The shooting at a movie theater in Lafayette? Gun-free zone. The attack on a military recruiting center in Chattanooga? Gun-free zone. The Ft. Hood shooting? You guessed it: gun-free zone. The San Bernardino attack? Gun-free zone. And the massacre perpetrated by an ISIS enthusiast at an Orlando night club? Gun-free zone.

Being a generous soul, Sean concludes with some helpful advice.

A sign that says “Muslims Get Out” will do absolutely nothing to prevent radical Islamists from wreaking havoc. Trevor Noah understands this. If only he would learn to apply his logic to the argument from gun controllers that all we need to end violence are a few more signs telling terrorists not to use guns.

Reminds me of lesson contained in this Chuck Asay cartoon. Or in this amusing video.

Speaking of confused leftists, here’s a poster that is especially relevant given the racial unrest in Charlotte and elsewhere.

This young lady apparently is famous for appearing in Internet memes. She also showed up in this example of gun control satire.

Since we’re making fun of statists, let’s enjoy this story from the Boston Globe about a hack politician inadvertently boosting gun sales.

Massachusetts gun dealers sold more than 2,000 military-style rifles Wednesday — nearly one-quarter of the total sold last year — after Attorney General Maura Healey moved to bar semiautomatic rifles that have been altered slightly to evade the state’s assault weapons ban. The 2,251 assault rifles snapped up in a gun-buying frenzy represented a remarkable uptick from the 132 sold Tuesday and the 51 sold Monday, before Healey announced her ban. …The run on assault rifles raised questions about whether a policy designed to keep the high-powered weapons off the streets had instead unleashed a flood of them. …said Greg Malany, owner of GFA Arms TEC in Natick, which stayed open until just before midnight Wednesday to accommodate the line of customers that snaked out the door and onto the street. “We had to turn customers away,” he said.

Wow, makes you wonder whether Healey is actually an investor in the firearms industry.

Ready to repel the French barbarians

Let’s close with some good news on gun from overseas. It seems that there’s been an effort in Switzerland to discourage members of the militia from keeping guns at home. The only problem is that Swiss men don’t seem to share the anti-gun sentiments of “trade unions, churches, pacifists and centre-left parties.” Here’s some background.

All able-bodied Swiss men must do military service and have the option of keeping their army rifle at home. …Anti-gun campaigners have tried – and failed – on several occasions to ban military weapons from Swiss households. In 2011, Swiss voters rejected a controversial initiative on restricting access to firearms.

But a policy was implemented allowing men to store their guns outside their homes.

…since the beginning of 2010, members of the Swiss army have the option of storing their rifles, pistols and other weapons free of charge at arsenals or military barracks when they are not doing their military service.

So how many Swiss households took advantage of this opportunity?

As of the end of June 2016, only 789 army guns out of a total of 170,000 in circulation (0.5%) had been handed in to special military arsenals.

In other words, 99.5 percent of the militia did the equivalent of “voting with their feet” and chose to keep their weapons at home.

Now you can see why I call Switzerland the world’s most sensible nation.

Here’s an interesting issue to ponder. Is corruption rampant in government because the perverse incentive structure of politics turns good people into bad people?

Or do bad people naturally gravitate to government and politics because it’s the easiest (and legal, though generally immoral) way to take money from other people?

I guess this is like a chicken-and-egg question with no clear answer, though Mark Twain preferred the latter interpretation.

Though he was being too narrow. Yes, Congress if filled with people who are willing to use coercion to take money from ordinary people in order to line the pockets of their cronies, but this is also true for politicians and bureaucrats in the executive branch, as well as their counterparts at the state and local level.

Let’s look at a couple of oleaginous examples. We’ll start with a grotesque example of nepotism. Except this isn’t a routine example of daddy giving junior an undeserved job in the family company. In this case, we have Washington-style nepotism. Daddy has ransacked taxpayers to line the pockets of his daughter. The Daily Caller has the unseemly details.

More than $9 million of Department of State money has been funneled through the Peace Corps to a nonprofit foundation started and run by Secretary of State John Kerry’s daughter, documents obtained by The Daily Caller News Foundation show. The Department of State funded a Peace Corps program created by Dr. Vanessa Kerry and officials from both agencies, records show. The Peace Corps then awarded the money without competition to a nonprofit Kerry created for the program. Initially, the Peace Corps awarded Kerry’s group — now called Seed Global Health — with a three-year contract worth $2 million of State Department money on Sept. 10, 2012, documents show. Her father was then the chairman of the Senate Committee on Foreign Relations, which oversees both the Department of State and the Peace Corps. Seed secured a four-year extension in September 2015, again without competition. This time, the Peace Corps gave the nonprofit $6.4 million provided by the Department of State while John Kerry was secretary of state.

What makes this story especially outrageous is that John Kerry is a multi-multi-millionaire, having married in the Heinz family fortune.

Does he really need to pick the pockets of taxpayers to boost his daughter’s finances?

Here’s another example. The Governor of New York, Andrew Cuomo, set up an “economic development program” that predictably turned into a playground for the politically well connected (sort of a state version of the corrupt program in Washington that financed Solyndra and other money-losing schemes).

The New York Times outlines this scandal, though be prepared to shower after reading.

Federal corruption charges were announced on Thursday against two former close aides to Gov. Andrew M. Cuomo, a senior state official and six other people, in a devastating blow to the governor’s innermost circle and a repudiation of how his prized upstate economic development programs were managed. The charges against the former aides, Joseph Percoco and Todd R. Howe, and the state official, Alain Kaloyeros, were the culmination of a long-running federal investigation… The charges stemmed from “two overlapping criminal schemes involving bribery, corruption and fraud in the award of hundreds of millions of dollars in state contracts and other official state benefits,” federal prosecutors said in the complaint. Mr. Percoco, who had served as Mr. Cuomo’s executive deputy secretary, is accused of soliciting and taking more than $315,000 in bribes between 2012 and 2016 from two companies… Until January, when Mr. Percoco left the administration…, he was Mr. Cuomo’s all-purpose body man, political enforcer and shadow.

The good news is that at least some of the people in this disgusting display of cronyism may face legal consequences.

Oh, by the way, Cuomo used to be the head of the Department of Housing and Urban Development when regulations were implemented that required Fannie Mae and Freddie Mac to make more dodgy housing loans. This guy is a walking disaster area.

For the umpteenth time, the moral of the story is that the only way to reduce corruption in government is to reduce the overall amount of taxing, spending, and regulating.

Or you can magically wish that only angelic people will gravitate to the public sector. Maybe I’m a cynic, but I’ll go with the former option.

P.S. I wrote a few days ago about the IMF’s hypocrisy in attacking Trump for his views on trade taxes. The bureaucrats are right that we shouldn’t increase the tax burden on global commerce. My complaint was that sauce for the goose wasn’t sauce for the gander. Hillary’s plan to increase the tax burden on work and investment is an even bigger threat to growth, yet the IMF gives her a free pass.

Anyhow, one of the points I made is that trade taxes currently are quite low, so they presumably cause only a minor amount of damage, whereas tax rates on work and investment are relatively high, meaning that further increases would be especially debilitating to growth. I cited some research from a Spanish academic to show how trade policy has improved over time, but didn’t have specific details on trade taxation.

My buddy Bryan Riley from the Heritage Foundation has come to my rescue, sharing an article that includes this chart on historical tariff rates.

The bottom line is that trade taxes have declined by somewhere between 75 percent and 90 percent since the end of World War II. This has been a great victory for economic liberty.

Trump should be condemned for wanting to halt further progress and/or go in the wrong direction by boosting trade taxes.

But, to echo what I wrote the other day, Hillary also should be condemned for proposing a different set of tax hikes that would cause even more harm to economic liberty.

P.P.S. I wrote a column earlier this month entitled “Anatomy of a Brutal Tax Beating” to highlight how an expert at the Tax Foundation completely dismantled a silly and unlearned article by a writer for Vox.

Well, we now have an “Anatomy of a Brutal Education Beating.” Except it’s not right-on-left violence. It’s left-on-left violence. Jonathan Chait writes for New York magazine and he formerly had stints at The New Republic and The American Prospect, so he’s definitely not a libertarian type.

But he’s ethical and doesn’t have a high level of tolerance for other leftists who launch dishonest ideological attacks on charter schools. Here’s some of what he wrote while debunking an article by some guy named Charles Pierce.

Esquire’s Charles Pierce, a fervent charter critic, …does not dispute the findings that urban charters in Massachusetts provide dramatic education benefits. He simply doesn’t care. …In the sentence, Pierce goes on to assert that the cap on charters serves a vital purpose. But the Brookings study, which I doubt he’s read, shows the opposite. …The cap in Massachusetts is completely perverse, in fact. It allows more students to enroll in charters serving suburban students, where the charters do not outperform the neighborhood schools, and prevents more students from enrolling in urban charters, where the schools do exceed the traditional neighborhood schools. …Presented with evidence that certain schools are providing a clearly better education to low-income urban students, Pierce argues that education should be denied because … somebody is making money off of it. It is more important to him to stick it to the capitalists than to allow low-income, disproportionately nonwhite students to have a chance to have a better life. …What’s even more perverse about Pierce’s argument is that it is factually wrong. Charters in Massachusetts are not for-profit vehicles. State law prohibits for-profit operators from running a public charter school… The notion that charters are “companies” and an “industry” with “profits” — that is, the entire basis for Pierce’s opposition — is a figment of the imagination. …Pierce rails suspiciously against the donors to the anti-cap side. …It is strange to accuse people who are giving away their money to the cause of educating poor children of not “giv[ing] a rat’s ass about educating children in Roxbury or Mattapan”.

Wow. Chait drove over Pierce, then hit the brakes, put the car in reverse, and then drove over him again just for the fun of it.

A perfect example of the difference between a sincere person of the left and a hack who is probably just flacking for teacher unions.

P.P.P.S. I can’t resist returning to John Kerry. It’s not merely that he’s a staggeringly rich guy who nonetheless sees no problem with diverting money from taxpayers to his daughter. It’s also that he does everything possible to minimize the amount of tax that he pays. Everything possible.

P.P.P.P.S. This column focused on corrupt Democrats, but this is a bipartisan problem. Indeed, the worst offenders are probably Republicans.

Because of my disdain for the two statists that were nominated by the Republicans and Democrats, I’m trying to ignore the election. But every so often, something gets said or written that cries out for analysis.

Today is one of those days. Hillary Clinton has an editorial in the New York Times entitled “My Plan for Helping America’s Poor” and it is so filled with errors and mistakes that it requires a full fisking (i.e., a “point-by-point debunking of lies and/or idiocies”).

We’ll start with her very first sentence.

The true measure of any society is how we take care of our children.

I realize she (or the staffers who actually wrote the column) were probably trying to launch the piece with a fuzzy, feel-good line, but let’s think about what’s implied by “how we take care of our children.” It echoes one of the messages in her vapid 1996 book, It Takes a Village, in that it implies that child rearing somehow is a collective responsibility.

Hardly. This is one of those areas where social conservatives and libertarians are fully in sync. Children are raised by parents, as part of families.

To be fair, Hillary’s column then immediately refers to poor children who go to bed hungry, so presumably she is referring to the thorny challenge of how best to respond when parents (or, in these cases, there’s almost always just a mother involved) don’t do a good job of providing for kids.

…no child should ever have to grow up in poverty.

A laudable sentiment, for sure, but it’s important at this point to ask what is meant by “poverty.” If we’re talking about wretched material deprivation, what’s known as “absolute poverty,” then we have good news. Virtually nobody in the United States is in that tragic category (indeed, one of great success stories in recent decades is that fewer and fewer people around the world endure this status).

But if we’re talking about the left’s new definition of poverty (promoted by the statists at the OECD), which is measured relative to a nation’s median level of income, then you can have “poverty” even if nobody is poor.

For the sake of argument, though, let’s assume we’re using the conventional definition of poverty. Let’s look at how Mrs. Clinton intends to address this issue.

She starts by sharing some good news.

…we’re making progress, thanks to the hard work of the American people and President Obama. The global poverty rate has been cut in half in recent decades.

So far, so good. This is a cheerful development, though it has nothing to do with the American people or President Obama. Global poverty has fallen because nations such as China and India have abandoned collectivist autarky and joined the global economy.

And what about poverty in the United States?

In the United States, a new report from the Census Bureau found that there were 3.5 million fewer people living in poverty in 2015 than just a year before. Median incomes rose by 5.2 percent, the fastest growth on record. Households at all income levels saw gains, with the largest going to those struggling the most.

This is accurate, but a grossly selective use of statistics.

If Obama gets credit for the good numbers of 2015, then shouldn’t he be blamed for the bad numbers between 2009-2014? Shouldn’t it matter that there are still more people in poverty in 2015 than there were in 2008? And is it really good news that it’s taken Obama so long to finally get median income above the 2008 level, particularly when you see how fast income grew during the Reagan boom?

We then get a sentence in Hillary’s column that actually debunks her message.

Nearly 40 percent of Americans between the ages of 25 and 60 will experience a year in poverty at some point.

I don’t know if her specific numbers are accurate, but it is true that that there is a lot of mobility in the United States and that poverty doesn’t have to be a way of life.

Hillary then embraces economic growth as the best way of fighting poverty, which is clearly a true statement based on hundreds of years of evidence and experience.

…one of my top priorities will be increasing economic growth.

But then she goes off the rails by asserting that you get growth by spending (oops, I mean “investing”) lots of other people’s money.

I will…make a historic investment in good-paying jobs — jobs in infrastructure and manufacturing, technology and innovation, small businesses and clean energy.

Great, more Solyndras and cronyism.

And fewer jobs for low-skilled workers, if she gets here way, along with less opportunity for women (even according to the New York Times).

And we need to…rais[e] the minimum wage and finally guarantee… equal pay for women.

The comment about equal pay sounds noble, though I strongly suspect it is based on dodgy data and that she really favors the very dangerous idea of “comparable worth” legislation, which would lead to bureaucrats deciding the value of jobs.

Then Hillary embraces a big expansion of the worst government department.

…we also need a national commitment to create more affordable housing.

And she echoes Donald Trump’s idea of more subsidies and intervention in family life.

We need to expand access to high-quality child care and guarantee paid leave.

And, last but not least, she wants to throw good money after bad into the failed Head Start program.

…we will work to double investments in Early Head Start and make preschool available to every 4-year-old.

Wow, what a list. Now perhaps you’ll understand why I felt the need to provide a translation of her big economic speech last month.

The moral of the story, based on loads of evidence, is that making America more like Europe is not a way to help reduce poverty.

P.S. The only other time I’ve felt the need to fisk an entire article occurred in 2012 when I responded to a direct attack to my defense of low-tax jurisdictions.

When writing a few days ago about the newly updated numbers from Economic Freedom of the World, I mentioned in passing that New Zealand deserves praise “for big reforms in the right direction.”

And when I say big reforms, this isn’t exaggeration or puffery.

Back in 1975, New Zealand’s score from EFW was only 5.60. To put that in perspective, Greece’s score today is 6.93 and France is at 7.30. In other words, New Zealand was a statist basket cast 40 years ago, with a degree of economic liberty akin to where Ethiopia is today and below the scores we now see in economically unfree nations such as Ukraine and Pakistan.

But then policy began to move in the right direction, especially between 1985 and 1995, the country became a Mecca for market-oriented reforms. The net result is that New Zealand’s score dramatically improved and it is now comfortably ensconced in the top-5 for economic freedom, usually trailing only Hong Kong and Singapore.

To appreciate what’s happened in New Zealand, let’s look at excerpts from a 2004 speech by Maurice McTigue, who served in the New Zealand parliament and held several ministerial positions.

He starts with a description of the dire situation that existed prior to the big wave of reform.

New Zealand’s per capita income in the period prior to the late 1950s was right around number three in the world, behind the United States and Canada. But by 1984, its per capita income had sunk to 27th in the world, alongside Portugal and Turkey. Not only that, but our unemployment rate was 11.6 percent, we’d had 23 successive years of deficits (sometimes ranging as high as 40 percent of GDP), our debt had grown to 65 percent of GDP, and our credit ratings were continually being downgraded. Government spending was a full 44 percent of GDP, investment capital was exiting in huge quantities, and government controls and micromanagement were pervasive at every level of the economy. We had foreign exchange controls that meant I couldn’t buy a subscription to The Economist magazine without the permission of the Minister of Finance. I couldn’t buy shares in a foreign company without surrendering my citizenship. There were price controls on all goods and services, on all shops and on all service industries. There were wage controls and wage freezes. I couldn’t pay my employees more—or pay them bonuses—if I wanted to. There were import controls on the goods that I could bring into the country. There were massive levels of subsidies on industries in order to keep them viable. Young people were leaving in droves.

Maurice then discusses the various market-oriented reforms that took place, including spending restraint.

What’s especially impressive is that New Zealand dramatically shrank government bureaucracies.

When we started this process with the Department of Transportation, it had 5,600 employees. When we finished, it had 53. When we started with the Forest Service, it had 17,000 employees. When we finished, it had 17. When we applied it to the Ministry of Works, it had 28,000 employees. I used to be Minister of Works, and ended up being the only employee. …if you say to me, “But you killed all those jobs!”—well, that’s just not true. The government stopped employing people in those jobs, but the need for the jobs didn’t disappear. I visited some of the forestry workers some months after they’d lost their government jobs, and they were quite happy. They told me that they were now earning about three times what they used to earn—on top of which, they were surprised to learn that they could do about 60 percent more than they used to!

And there was lots of privatization.

…we sold off telecommunications, airlines, irrigation schemes, computing services, government printing offices, insurance companies, banks, securities, mortgages, railways, bus services, hotels, shipping lines, agricultural advisory services, etc. In the main, when we sold those things off, their productivity went up and the cost of their services went down, translating into major gains for the economy. Furthermore, we decided that other agencies should be run as profit-making and tax-paying enterprises by government. For instance, the air traffic control system was made into a stand-alone company, given instructions that it had to make an acceptable rate of return and pay taxes, and told that it couldn’t get any investment capital from its owner (the government). We did that with about 35 agencies. Together, these used to cost us about one billion dollars per year; now they produced about one billion dollars per year in revenues and taxes.

Equally impressive, New Zealand got rid of all farm subsidies…and got excellent results.

…as we took government support away from industry, it was widely predicted that there would be a massive exodus of people. But that didn’t happen. To give you one example, we lost only about three-quarters of one percent of the farming enterprises—and these were people who shouldn’t have been farming in the first place. In addition, some predicted a major move towards corporate as opposed to family farming. But we’ve seen exactly the reverse. Corporate farming moved out and family farming expanded.

Maurice also has a great segment on education reform, which included school choice.

But since I’m a fiscal policy wonk, I want to highlight this excerpt on the tax reforms.

We lowered the high income tax rate from 66 to 33 percent, and set that flat rate for high-income earners. In addition, we brought the low end down from 38 to 19 percent, which became the flat rate for low-income earners. We then set a consumption tax rate of 10 percent and eliminated all other taxes—capital gains taxes, property taxes, etc. We carefully designed this system to produce exactly the same revenue as we were getting before and presented it to the public as a zero sum game. But what actually happened was that we received 20 percent more revenue than before. Why? We hadn’t allowed for the increase in voluntary compliance.

And I assume revenue also climbed because of Laffer Curve-type economic feedback. When more people hold jobs and earn higher incomes, the government gets a slice of that additional income.

Let’s wrap this up with a look at what New Zealand has done to constrain the burden of government spending. If you review my table of Golden Rule success stories, you’ll see that the nation got great results with a five-year spending freeze in the early 1990s. Government shrank substantially as a share of GDP.

Then, for many years, the spending burden was relatively stable as a share of economic output, before then climbing when the recession hit at the end of last decade.

But look at what’s happened since then. The New Zealand government has imposed genuine spending restraint, with outlays climbing by an average of 1.88 percent annually according to IMF data. And because that complies with my Golden Rule (meaning that government spending is growing slower than the private sector), the net result according to OECD data is that the burden of government spending is shrinking relative to the size of the economy’s productive sector.

P.S. For what it’s worth, the OECD and IMF use different methodologies when calculating the size of government in New Zealand (the IMF says the overall burden of spending is much smaller, closer to 30 percent of GDP). But regardless of which set of numbers is used, the trend line is still positive.

P.P.S. Speaking of statistical quirks, some readers have noticed that there are two sets of data in Economic Freedom of the World, so there are slightly different country scores when looking at chain-weighted data. There’s a boring methodological reason for this, but it doesn’t have any measurable impact when looking at trends for individual nations such as New Zealand.

P.P.P.S. Since the Kiwis in New Zealand are big rugby rivals with their cousins in Australia, one hopes New Zealand’s high score for economic freedom (3rd place) will motivate the Aussies (10th place) to engage in another wave of reform. Australia has some good polices, such as a private Social Security system, but it would become much more competitive if it lowered its punitive top income tax rate (nearly 50 percent!).

I’ve previously written about the bizarre attack that the European Commission has launched against Ireland’s tax policy. The bureaucrats in Brussels have concocted a strange theory that Ireland’s pro-growth tax system provides “state aid” to companies like Apple (in other words, if you tax at a low rate, that’s somehow akin to giving handouts to a company, at least if you start with the assumption that all income belongs to government).

This has produced two types of reactions. On the left, the knee-jerk instinct is that governments should grab more money from corporations, though they sometimes quibble over how to divvy up the spoils.

Senator Elizabeth Warren, for instance, predictably tells readers of the New York Times that Congress should squeeze more money out of the business community.

Now that they are feeling the sting from foreign tax crackdowns, giant corporations and their Washington lobbyists are pressing Congress to cut them a new sweetheart deal here at home. But instead of bailing out the tax dodgers under the guise of tax reform, Congress should seize this moment to…repair our broken corporate tax code. …Congress should increase the share of government revenue generated from taxes on big corporations — permanently. In the 1950s, corporations contributed about $3 out of every $10 in federal revenue. Today they contribute $1 out of every $10.

As part of her goal to triple the tax burden of companies, she also wants to adopt full and immediate worldwide taxation. What she apparently doesn’t understand (and there’s a lot she doesn’t understand) is that Washington may be capable of imposing bad laws on U.S.-domiciled companies, but it has rather limited power to impose bad rules on foreign-domiciled firms.

So the main long-run impact of a more onerous corporate tax system in America will be a big competitive advantage for companies from other nations.

The reaction from Jacob Lew, America’s Treasury Secretary, is similarly disappointing. He criticizes the European Commission, but for the wrong reasons. Here’s some of what he wrote for the Wall Street Journal, starting with some obvious complaints.

…the commission’s novel approach to its investigations seeks to impose unfair retroactive penalties, is contrary to well established legal principles, calls into question the tax rules of individual countries, and threatens to undermine the overall business climate in Europe.

But his solutions would make the system even worse. He starts by embracing the OECD’s BEPS initiative, which is largely designed to seize more money from US multinational firms.

…we have made considerable progress toward combating corporate tax avoidance by working with our international partners through what is known as the Base Erosion and Profit Shifting (BEPS) project, agreed to by the Group of 20 and the 35 member Organization for Economic Cooperation and Development.

He then regurgitates the President’s plan to replace deferral with worldwide taxation.

…the president’s plan directly addresses the problem of U.S. multinational corporations parking income overseas to avoid U.S. taxes. The plan would make this practice impossible by imposing a minimum tax on foreign income.

In other words, his “solution” to the European Commission’s money grab against Apple is to have the IRS grab the money instead. Needless to say, if you’re a gazelle, you probably don’t care whether you’re in danger because of hyenas or jackals, and that’s how multinational companies presumably perceive this squabble between US tax collectors and European tax collectors.

On the other side of the issue, critics of the European Commission’s tax raid don’t seem overflowing with sympathy for Apple. Instead, they are primarily worried about the long-run implications.

Veronique de Rugy of the Mercatus Center offers some wise insight on this topic, both with regards to the actions of the European Commission and also with regards to Treasury Secretary Lew’s backward thinking. Here’s what she wrote about the never-ending war against tax competition in Brussels.

At the core of the retroactive penalty is the bizarre belief on the part of the European Commission that low taxes are subsidies. It stems from a leftist notion that the government has a claim on most of our income. It is also the next step in the EU’s fight against tax competition since, as we know, tax competition punishes countries with bad tax systems for the benefit of countries with good ones. The EU hates tax competition and instead wants to rig the system to give good grades to the high-tax nations of Europe and punish low-tax jurisdictions.

And she also points out that Treasury Secretary Lew (a oleaginous cronyist) is no friend of American business because of his embrace of worldwide taxation and BEPS.

…as Lew’s op-ed demonstrates, …they would rather be the ones grabbing that money through the U.S.’s punishing high-rate worldwide-corporate-income-tax system. …In other words, the more the EU grabs, the less is left for Uncle Sam to feed on. …And, as expected, Lew’s alternative solution for avoidance isn’t a large reduction of the corporate rate and a shift to a territorial tax system. His solution is a worldwide tax cartel… The OECD’s BEPS project is designed to increase corporate tax burdens and will clearly disadvantage U.S. companies. The underlying assumption behind BEPS is that governments aren’t seizing enough revenue from multinational companies. The OECD makes the case, as it did with individuals, that it is “illegitimate,” as opposed to illegal, for businesses to legally shift economic activity to jurisdictions that have favorable tax laws.

John O’Sullivan, writing for National Review, echoes Veronique’s point about tax competition and notes that elimination of competition between governments is the real goal of the European Commission.

…there is one form of European competition to which Ms. Vestager, like the entire Commission, is firmly opposed — and that is tax competition. Classifying lower taxes as a form of state aid is the first step in whittling down the rule that excludes taxation policy from the control of Brussels. It won’t be the last. Brussels wants to reduce (and eventually to eliminate) what it calls “harmful tax competition” (i.e., tax competition), which is currently the preserve of national governments. …Ms. Vestager’s move against Apple is thus a first step to extend control of tax policy by Brussels across Europe. Not only is this a threat to European taxpayers much poorer than Apple, but it also promises to decide the future of Europe in a perverse way. Is Europe to be a cartel of governments? Or a market of governments? A cartel is a group of economic actors who get together to agree on a common price for their services — almost always a higher price than the market would set. The price of government is the mix of tax and regulation; both extract resources from taxpayers to finance the purposes of government. Brussels has already established control of regulations Europe-wide via regulatory “harmonization.” It would now like to do the same for taxes. That would make the EU a fully-fledged cartel of governments. Its price would rise without limit.

Holman Jenkins of the Wall Street Journal offers some sound analysis, starting with his look at the real motives of various leftists.

…attacking Apple is a politically handy way of disguising a challenge to the tax policies of an EU member state, namely Ireland. …Sen. Chuck Schumer calls the EU tax ruling a “cheap money grab,” and he’s an expert in such matters. The sight of Treasury Secretary Jack Lew leaping to the defense of an American company when in the grips of a bureaucratic shakedown, you will have no trouble guessing, is explained by the fact that it’s another government doing the shaking down.

And he adds his warning about this fight really being about tax competition versus tax harmonization.

Tax harmonization is a final refuge of those committed to defending Europe’s stagnant social model. Even Ms. Vestager’s antitrust agency is jumping in, though the goal here oddly is to eliminate competition among jurisdictions in tax policy, so governments everywhere can impose inefficient, costly tax regimes without the check and balance that comes from businesses being able to pick up and move to another jurisdiction. In a harmonized world, of course, a check would remain in the form of jobs not created, incomes not generated, investment not made. But Europe has been wiling to live with the harmony of permanent recession.

Even the Economist, which usually reflects establishment thinking, argues that the European Commission has gone overboard.

…in tilting at Apple the commission is creating uncertainty among businesses, undermining the sovereignty of Europe’s member states and breaking ranks with America, home to the tech giant… Curbing tax gymnastics is a laudable aim. But the commission is setting about it in the most counterproductive way possible. It says Apple’s arrangements with Ireland, which resulted in low-single-digit tax rates, amounted to preferential treatment, thereby violating the EU’s state-aid rules. Making this case involved some creative thinking. The commission relied on an expansive interpretation of the “transfer-pricing” principle that governs the price at which a multinational’s units trade with each other. Having shifted the goalposts in this way, the commission then applied its new thinking to deals first struck 25 years ago.

Seeking a silver lining to this dark cloud, the Economist speculates whether the EC tax raid might force American politicians to fix the huge warts in the corporate tax system.

Some see a bright side. …the realisation that European politicians might gain at their expense could, optimists say, at last spur American policymakers to reform their barmy tax code. American companies are driven to tax trickery by the combination of a high statutory tax rate (35%), a worldwide system of taxation, and provisions that allow firms to defer paying tax until profits are repatriated (resulting in more than $2 trillion of corporate cash being stashed abroad). Cutting the rate, taxing only profits made in America and ending deferral would encourage firms to bring money home—and greatly reduce the shenanigans that irk so many in Europe. Alas, it seems unlikely.

America desperately needs a sensible system for taxing corporate income, so I fully agree with this passage, other than the strange call for “ending deferral.” I’m not sure whether this is an editing mistake or a lack of understanding by the reporter, but deferral is no longer an issue if the tax code is reformed to that the IRS is “taxing only profits made in America.”

But the main takeaway, as noted by de Rugy, O’Sullivan, and Jenkins, is that politicians want to upend the rules of global commerce to undermine and restrict tax competition. They realize that the long-run fiscal outlook of their countries is grim, but rather than fix the bad policies they’ve imposed, they want a system that will enable higher ever-higher tax burdens.

In the long run, that leads to disaster, but politicians rarely think past the next election.

P.S. To close on an upbeat point, Senator Rand Paul defends Apple from predatory politicians in the United States.

I’m not a fan of the International Monetary Fund. The bureaucracy was created in 1944 to manage and coordinate the system of fixed exchange rates created as part of the 1944 Bretton Woods agreement. But once fixed exchange rates disappeared, the over-funded bureaucracy cleverly adopted a new rationale for its existence and its main role now is to bail out insolvent nations (what that really means, of course, is that it exists to bail out big banks that foolishly lend money to profligate third-world governments).

As part of this new mission, the IMF acts like the Pied Piper of tax hikes. The bureaucrats parachute into nations, refinance and restructure the debt of those countries, and insist on a bunch of tax increases in hopes that more revenue will then be available to service the new debt.

Needless to say, this is not exactly a recipe for growth and prosperity. The private sector in these countries gets hammered with tax increases, the big banks in rich nations get indirect bailouts, and the real problem of bloated government generally is left to fester and metastasize.

This is why I’ve referred to the IMF as the Dr. Kevorkian of the global economy. But the bureaucracy is bad for other reasons. It also has decided that it should grade all nations on their economic policies and it routinely uses that self-assigned authority to recommend big tax hikes all over the world. Including lots of tax increases in the United States.

The IMF even tries to interfere with American elections. Just recently, the chief bureaucrat of the organization launched a not-too-subtle attack on Donald Trump.

Though in this case, which involved trade barriers, the IMF actually is on the right side (the bureaucracy generally has a pro-tax bias, but the one big exception is that it favors lower taxes on global trade).

Anyhow, the IMF’s Managing Director warned that additional protectionist taxes on global trade threaten the global economy. And even though she didn’t specifically mention the Republican nominee, you can see from the various headlines I’m sharing that reporters put 2 + 2 together and realized that Ms Lagarde was criticizing Trump.

And he deserves condemnation. The post-World War II shift to lower trade taxes has been a big victory for economic freedom (indeed, tariff reductions have helped offset the damage caused by increasingly bad fiscal policy over the past several decades).

Nonetheless, there is something quite unseemly about an international bureaucracy taking sides in an American election (who do they think they are, the IRS?). Especially since American taxpayers underwrite the biggest share of the IMF’s activities.

Let’s look specifically at an analysis of the IMF’s actions from the UK-based Guardian.

The managing director of the International Monetary Fund, has launched a thinly veiled attack on the anti-free-trade sentiments expressed by US presidential candidate Donald Trump… Lagarde made it clear she strongly opposed the Republican candidate’s policies, which include higher US tariffs and a barrier along the border with Mexico. …“There is a growing risk of politicians seeking office by promising to ‘get tough’ with foreign trade partners through punitive tariffs or other restrictions on trade…” She added that throughout history there had been arguments about trade. “But history clearly tells us that closing borders or increasing protectionism is not the way to go…”

By the way, while I agree with her comments on trade, her comments about a “barrier along the border with Mexico” reek of hypocrisy.

Christine Lagarde criticises his policies including plans for…a US-Mexico border wall.

Those who have visited the IMF’s lavish headquarters can confirm that there is a very heavily guarded barrier separating the IMF from the hoi polloi and peasantry of Washington.

Call me crazy, but a bureaucracy with lots of security to prevent unauthorized people from entering its building is in no position to lecture a nation for wanting security to prevent unauthorized people from crossing its borders. And I say this as someone who generally favors immigration.

But let’s set that issue aside. There’s actually a very serious sin of omission in the IMF’s analysis that needs to be addressed.

The international bureaucracy (correctly) opposes trade taxes and wants to build on the progress of recent decades by further reducing government-imposed barriers to cross-border economic activity. As noted above, this is the right position and I applaud the IMF’s defense of lower tariffs and expanded trade.

That being said, the level of protectionism has fallen significantly in the post-World War II era. In other words, trade taxes already are reasonably low. Yes, it would be better if they were even lower (ideally zero, like in Hong Kong).

My problem (or, to be more accurate, one of my problems) with the IMF is that the bureaucracy acts as if the world economy is hanging in the balance if there’s some sort of increase in the currently low tax burden on trade.

Yet what about the tax burden on behaviors that actually generate the income people use to purchase goods from other nations? Top tax rates on personal income average more than 40 percent in the developed world, dwarfing the average tariffs of trade.

And the burden on income that is saved and invested is even higher because of double taxation, which is especially destructive since all economic theories – including Marxism and socialism – agree that capital formation is a key to long-run growth and higher living standards (i.e., the ability to buy more goods, including those produced in other nations).

So here’s the question that must be asked: If it is bad to have very modest taxes on the share of people’s income that is used to buy goods produced in other nations, then why isn’t it even worse to have very onerous taxes on the productive behaviors that generate that income?

In other words, if the IMF is correct (and it is) to criticize Trump for threatening to increase the modest tax rates that are imposed on global trade, then why doesn’t the IMF criticize Hillary Clinton for threatening to increase the rather harsh tax rates that are imposed on working, saving, and investment?

Maybe Madame Lagarde’s army of flunkies and servants (one of the many perks she gets, in addition to a munificent tax-free salary) can explain that sauce for a goose is also sauce for a gander.

By the way, I can’t resist addressing one final aspect to this story. The Guardian‘s report notes that Lagarde wants to offset the supposedly harmful impact of trade by further increasing the size and scope of government.

…the solution was for governments to provide direct financial support for those with low skills through higher minimum wages, more generous welfare states, investment in education and a crackdown on tax evasion.

Wow, that’s a lot of economic illiteracy packed into one sentence fragment.

Now you understand why I refer to the IMF as the dumpster fire of global economics.

P.S. While the IMF likes to push bad policy for the United States, the bureaucracy’s proposals for China are akin to a declaration of economic warfare.

P.P.S. The IMF’s flip-flop on infrastructure spending reveals a lot about the bureaucracy’s inner workings.

P.P.P.S. While the IMF often produces sloppy and dishonest research, every so often the professional economists on the staff slip something  useful past the political types. Though my all-time-favorite bit of IMF research was the study that inadvertently showed why a value-added tax is so dangerous.

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