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Working the world of public policy, I’m used to surreal moments.

Such as the assertion that there are trillions of dollars of spending cuts in plans that actually increase spending. How do you have a debate with people who don’t understand math?

Or the oft-repeated myth that the Reagan tax cuts for the rich starved the government of revenue. How can you have a rational discussion with people who don’t believe IRS data?

And let’s not overlook my personal favorite, which is blaming so-called tax havens for the financial crisis, even though places such as the Cayman Islands had nothing to do with the Fed’s easy-money policy or with Fannie Mae and Freddie Mac subsidies.

These are all example of why my hair is turning gray.

But I’ll soon have white hair based on having to deal with the new claim from European bureaucrats that countries are guilty of providing subsidies if they have low taxes for companies.

I’m not joking. This is basically what’s behind the big tax fight between Apple, Ireland, and the European Commission.

Here’s what I said about this issue yesterday.

There are three things about this interview are worth highlighting.

  • First, the European Commission is motivated by a desire for more tax revenue. Disappointing, but hardly surprising.
  • Second, Ireland has benefited immensely from low-tax policies and that’s something that should be emulated rather than punished.
  • Third, I hope Ireland will respond with a big corporate tax cut, just as they did when their low-tax policies were first attacked many years ago.

I also chatted with the folks from the BBC.

I’ll add a few comments on this interview as well.

Here’s an interview from the morning, which was conducted by phone since I didn’t want to interrupt my much-needed beauty sleep by getting to the studio at the crack of dawn.

Once again, here are a few follow-up observations.

  • First, I realize I’m being repetitive, but it’s truly bizarre that the European Commission thinks that low taxes are a subsidy. This is the left-wing ideology that the government has first claim on all income.
  • Second, it’s a wonky point, but Europe’s high-tax nations can use transfer pricing rules if they think that Apple (or other companies) are trying to artificially shift income to low-tax countries like Ireland.
  • Third, the U.S. obviously needs to reform its wretched corporate tax system, but that won’t solve this problem since it’s about an effort to impose more tax on Apple’s foreign-source income.

The Wall Street Journal opined wisely on this issue, starting with the European Commission’s galling decision to use anti-trust laws to justify the bizarre assertion that low taxes are akin to a business subsidy.

Even by the usual Brussels standards of economic malpractice, Tuesday’s €13 billion ($14.5 billion) tax assault on Apple is something to behold. …Apple paid all the taxes it owed under existing tax laws around the world, which is why it hasn’t been subject to enforcement proceedings by revenue authorities. …Brussels now wants to use antitrust law to tell Ireland and other low-tax countries how to apply their own tax laws. …Brussels is deploying its antitrust gnomes to claim that taxes that are “too low” are an illegal subsidy under EU state-aid rules.

This is amazing. A subsidy is when government officials use coercion to force taxpayers (or consumers) to pay more in order to line the pockets of a company or industry. The Export-Import Bank would be an example of this odious practice, as would ethanol handouts.

Choosing to tax at a lower rate is not in this category. It’s a reduction in government coercion.

That doesn’t necessarily mean we’re necessarily talking about good policy since there are plenty of preferential tax laws that should be wiped out as part of a shift to a simple and fair flat tax.

I’m simply pointing out that lower taxes are not “state aid.”

The WSJ also points out that it’s not uncommon for major companies to seek clarification rulings from tax authorities.

Brussels points to correspondence between Irish tax officials and Apple executives to claim that Apple enjoyed favors not available to other companies, which would be tantamount to a subsidy. But all Apple received from Dublin, in 1991 and 2007, were letters confirming how the tax authorities would treat various transactions under the Irish laws that applied to everyone. If anyone in Brussels knew more about tax law, they’d realize such “comfort letters” are common practice around the world.

Indeed, the IRS routinely approves “advance pricing agreements” with major American taxpayers.

This doesn’t mean, by the way, that governments (the U.S., Ireland, or others) treat all transactions appropriately. But it does mean that Ireland isn’t doing something strange or radical.

The editorial also makes the much-needed point that the Obama White House and Treasury Department are hardly in a position to grouse, particularly because of the demagoguery and rule-twisting that have been used to discourage corporate inversions.

As for the U.S., the Treasury Department pushed back against these tax cases, which it rightly views as a protectionist threat to the rule of law. But it’s hard to believe that Brussels would have pulled this stunt if Treasury enjoyed the global respect it once did. President Obama and Treasury Secretary Jack Lew have also contributed to the antibusiness political mood by assailing American companies for moving to low-tax countries.

Amen.

It’s also worth noting that the Obama Administration has been supportive of the OECD’s BEPS initiative, which also is designed to increase corporate tax burdens and clearly will disadvantage US companies.

A story from the Associated Press reveals the European Commission’s real motive.

The European Commission says…it should help protect countries from unfair tax competition. When one country’s tax policy hurts a neighbor’s revenues, that country should be able to protect its tax base.

Wow, think about what this implies.

We all recognize, as consumers, the benefits of having lots of restaurants competing for our business. Or several cell phone companies. Or lots of firms that make washing machines. Competition helps us by leading to lower prices, higher quality, and better service. And it also boosts the overall economy because of the pressure to utilize resources more efficiently and productively.

So why, then, should the European Commission be working to protect governments from competition? Why is it bad for a country with low tax rates to attract jobs and investment from nations with high tax rates?

The answer, needless to say, is that tax competition is a good thing. Ever since the Reagan and Thatcher tax cuts got the process started, there have been major global reductions in tax rates, both for households and businesses, as governments have competed with each other (sadly, the US has fallen way behind in the contest for good business taxation).

Politicians understandably don’t like this liberalizing process, but the tax competition-induced drop in tax rates is one of the reason why the stagflation of the 1960s and 1970s was replaced by comparatively strong growth in the 1980s and 1990s.

Let’s close by looking at one final story.

Bloomberg has a report on the Apple-Ireland-EC controversy. Here are some relevant passages.

Irish Finance Minister Michael Noonan on Tuesday vowed to fight a European Commission ruling… The country’s corporate tax regime is a cornerstone of its economic policy, attracting Google Inc. and Facebook Inc. to Dublin. …While the Apple ruling doesn’t directly threaten the 12.5 percent rate, the government has promised to stand by executives it says are helping the economy. “To do anything else, it would be like eating the seed potatoes,” Noonan told broadcaster RTE on Tuesday, adding a failure to fight the case would hurt future generations.

Kudos to Noonan for understanding that a short-term grab for more revenue will be bad news if the tradeoff is a more onerous tax system that reduces future growth.

I wish Hillary Clinton was capable of learning the same lesson.

Also, it’s worth noting that Apple is just the tip of the iceberg. If the EC succeeds, many other American companies will be under the gun.

The iPhone-maker is one of more than 700 U.S. companies that have units there, employing a combined 140,000 people, according to the American Chamber of Commerce in Ireland.

And when politicians – either here or overseas – raise taxes on companies, never forget that they’re actually raising taxes on worker, consumers, and shareholders.

P.S. Just in case you think the Obama Administration is sincere about defending Apple and other American companies, don’t forget that these are the folks who included a global corporate minimum tax scheme in the President’s most recent budget.

Our statist friends like high taxes for many reasons. They want to finance bigger government, and they also seem to resent successful people, so high tax rates are a win-win policy from their perspective.

They also like high tax rates to micromanage people’s behavior. They urge higher taxes on tobacco because they don’t like smoking. They want higher taxes on sugary products because they don’t like overweight people. They impose higher taxes on “adult entertainment” because…umm…let’s simply say they don’t like capitalist acts between consenting adults. And they impose higher taxes on tanning beds because…well, I’m not sure. Maybe they don’t like artificial sun.

Give their compulsion to control other people’s behavior, these leftists are very happy about what’s happened in Berkeley, California. According to a study published in the American Journal of Public Health, a new tax on sugary beverages has led to a significant reduction in consumption.

Here are some excerpts from a release issued by the press shop at the University of California Berkeley.

…a new UC Berkeley study shows a 21 percent drop in the drinking of soda and other sugary beverages in Berkeley’s low-income neighborhoods after the city levied a penny-per-ounce tax on sugar-sweetened beverages. …The “Berkeley vs. Big Soda” campaign, also known as Measure D, won in 2014 by a landslide 76 percent, and was implemented in March 2015. …The excise tax is paid by distributors of sugary beverages and is reflected in shelf prices, as a previous UC Berkeley study showed, which can influence consumers’ decisions. …Berkeley’s 21 percent decrease in sugary beverage consumption compares favorably to that of Mexico, which saw a 17 percent decline among low-income households after the first year of its one-peso-per-liter soda tax that its congress passed in 2013.

I’m a wee bit suspicious that we’re only getting data on consumption by poor people.

Why aren’t we seeing data on overall soda purchases?

And isn’t it a bit odd that leftists are happy that poor people are bearing a heavy burden?

I’m also amused by the following passage. The politicians want to discourage people from consuming sugary beverages. But if they are too successful, then they won’t collect all the money they want to finance bigger government.

In Berkeley, the tax is intended to support municipal health and nutrition programs. To that end, the city has created a panel of experts in child nutrition, health care and education to make recommendations to the City Council about funding programs that improve children’s health across Berkeley.

In other words, one of the lessons of the Berkeley sugar tax and the 21-percent drop in consumption is that the Laffer Curve applies to so-called sin taxes just like it applies to income taxes.

But the biggest lesson to learn from this episode is that it confirms the essential insight of supply-side economics. Simply stated, when you tax something, you get less of it.

Which is something that statists seem to understand when they urge higher “sin taxes,” but they deny when the debate shifts to taxes on work, saving, entrepreneurship, and investment.

I’m not joking. I debate leftists all the time and they will unabashedly argue that it’s okay to have higher tax rates on labor income and more double taxation on capital income because taxpayers supposedly don’t care about taxes.

Oh, and the same statists who say that high tax burdens don’t matter because people don’t change their behavior get all upset about “tax havens” and “tax competition” because…well, because people will change their behavior by shifting their economic activity where tax rates are lower.

It must be nice not to be burdened by a need for intellectual consistency.

Speaking of which, Mark Perry used the Berkeley soda tax as an excuse to add to his great collection of Venn Diagrams.

P.S. On the issue of sin taxes, a brothel in Austria came up with an amusing form of tax avoidance. The folks in Nevada, by contrast, believe in sin loopholes. And the Germans have displayed Teutonic ingenuity and efficiency.

Way back in 2009, some folks on the left shared a chart showing that national expenditures on healthcare compared to life expectancy.

This comparison was not favorable to the United States, which easily spent the most money but didn’t have concomitantly impressive life expectancy.

At the very least, people looking at the chart were supposed to conclude that other nations had better healthcare systems.

And since the chart circulated while Obamacare was being debated, supporters of that initiative clearly wanted people to believe that the U.S. somehow could get better results at lower cost if the government played a bigger role in the healthcare sector.

There were all sorts of reasons to think that chart was misleading (higher average incomes in the United States, more obesity in the United States, different demographics in the United States, etc), but my main gripe was that the chart was being used to advance the cause of bigger government when it actually showed – at least in part – the consequences of government intervention.

The real problem, I argued, was third-party payer. Thanks to programs such as Medicare and Medicaid, government already was paying for nearly 50 percent of all heath spending in the United States (indeed, the U.S. has more government spending for health programs than some nations with single-payer systems!).

But that’s just party of the story. Thanks to a loophole in the tax code for fringe benefits (a.k.a., the healthcare exclusion), there’s a huge incentive for both employers and employees to provide compensation in the form of very generous health insurance policies. And this means a big chunk of health spending is paid by insurance companies.

The combination of these direct and indirect government policies is that consumers pay very little for their healthcare. Or, to be more precise, they may pay a lot in terms of taxes and foregone cash compensation, but their direct out-of-pocket expenditures are relatively modest.

And this is why I said the national health spending vs life expectancy chart was far less important than a chart I put together showing the relentless expansion of third-party payer. And the reason this chart is so important is that it helps to explain why healthcare costs are so high and why there’s so much inefficiency in the health sector.

Simply stated, doctors, hospitals, and other providers have very little market-based incentive to control costs and be efficient because they know that the overwhelming majority of consumers won’t care because they are buying care with other people’s money.

To get this point across, I sometimes ask audiences how their behavior would change if I told them I would pay 89 percent of their dinner bill on Friday night. Would they be more likely to eat at McDonald’s or a fancy steakhouse? The answer is obvious (or should be obvious) since they are in box 2 of Milton Friedman’s matrix.

So why, then, would anybody think that Obamacare – a program that was designed to expand third-party payer – was going to control costs?

Though I guess it doesn’t matter what anybody thought at the time. The sad reality is that Obamacare was enacted. The President famously promised healthcare would be more affordable under his new system, both for consumers and for taxpayers.

So what happened?

Well, the law’s clearly been bad news for taxpayers.

But let’s focus today on households, which have borne the brunt of the President’s bad policies. The Wall Street Journal had a report a few days ago about what’s been happening to the spending patterns of middle-class households.

The numbers are rather grim, at least for those who thought Obamacare would control health costs.

A June Brookings Institution study found middle-income households now devote the largest share of their spending to health care, 8.9%… By 2014, middle-income households’ health-care spending was 25% higher than what they were spending before the recession that began in 2007, even as spending fell for other “basic needs” such as food, housing, clothing and transportation, according to an analysis for The Wall Street Journal by Brookings senior fellow Diane Schanzenbach. …Workers aren’t the only ones feeling the pain of rising health-care costs. Employers still typically pay roughly 80% of individual health-insurance premiums… In 2015, 8% of Americans’ household spending went toward health care, up from 5.8% in 2007, according to the Labor Department.

Here’s a chart from the story. It looks at data from 2007-2014, so it surely wouldn’t be fair to say Obamacare caused all the increase. But it would be fair to say that the law hasn’t delivered on the empty promise of lower costs.

Let’s close with a few important observations.

First, there’s a very strong case to repeal Obamacare, but nobody should be under the illusion that this will solve the myriad problems in the health sector. It would be a good start, but never forget that the third-party payer problem existed before Obamacare.

Second, undoing third-party payer will be like putting toothpaste back in a tube. Even though there are some powerful examples of how healthcare costs are constrained when genuine market forces are allowed to operate, consumers will be very worried about shifting to a system where they pay directly for a greater share of their healthcare costs.

Third, there’s one part of Obamacare that shouldn’t be repealed. The so-called Cadillac Tax may not be the right way to deal with the distorting impact of the healthcare exclusion, but it’s better than nothing.

Actually, we could add one final observation since the Obama era will soon be ending. When historians write about his presidency, will his main legacy be the Obamacare failure? Or will they focus more on the failed stimulus? Or maybe the economic stagnation that was caused by his policies?

While I’m depressed about the election and America’s economic future, the news isn’t completely grim. Advocates of personal freedom are winning on the issue of guns.

Gun ownership has become more pervasive and legal protections for the Second Amendment have expanded, all of which is very good news for those of us who want a more law-abiding society.

And we also get lots of clever humor on the issue. Though I must confess that I’ve been negligent about collecting and sharing examples of anti-gun control humor in recent months. I did have an amusing comparison of how Texans and Europeans fight terrorism last month, but otherwise you have to go back to 2015 (see here, here, here, here, and here) and earlier.

So it’s time to atone for this oversight with some new humor targeting the pro-gun control crowd.

We’ll start with a visit to the University of Texas, which has been the scene of protests because a handful of students are upset that the law has been reformed to allow concealed carry on campus.

David French of National Review looks at this issue with an appropriately sarcastic piece that mocks the left-wing students for their silly tactics.

On January 16, 2002, a former student at Appalachian Law School walked into the office of the school’s dean and opened fire. His rampage ultimately took the lives of the dean, a professor, and a student. As the shots rang out, most bystanders ran for their lives, but not all. Three students approached the shooter. One, a Marine veteran, was unarmed. The other two had raced to their personal vehicles the instant they heard shots fired and returned with their dildos. Wait. No. That’s not what happened. Sorry. They returned with their guns. As two students held the shooter at gunpoint, the Marine tackled him, ending the threat. The cost was still high: Three people died, and three more lay wounded. But at the end of the day, a bad guy with a gun was stopped by good guys with guns. I thought of this story while reading the fawning media coverage of Texas students protesting a new state law permitting license-holders to carry concealed firearms on campus. Students are out in force, waving . . . sex toys. The inevitable hashtag? #CocksNotGlocks.

Yes, you read correctly.

The protesting students think that brandishing dildos will somehow persuade the general population that law-abiding students should be denied the right to bear arms.

Mr. French points out the silliness of their anti-gun position.

…if University of Texas protesters, teachers, and officials believe that until classes started yesterday UT was, in fact, a gun-free campus, they’ve lost their minds. Before this new law, there were two types of people who had guns on campus: criminals and the handful of law-enforcement officers scattered across a vast university. Every single other responsible, law-abiding citizen was disarmed — utterly dependent on officers who could be minutes away. …if one a person thinks that a licensed concealed-carry holder makes the UT’s campus more dangerous, they’ve lost their minds. Let’s make this concrete. Imagine you’re teaching a class, and you know that Amy, a student in the front row, has a concealed-carry permit. Sitting next to her is Roxanne, who does not. You have no idea if either one of them is actually armed. Who’s more likely to shoot the teacher? Roxanne, and it’s not even close. Who’s more likely to save your life? Amy, and it’s not even close. …If you are in a classroom, and a criminal opens fire, would you rather have a dildo on your desk or a revolver in your backpack?

Gee, that’s a tough question. Maybe a really skilled student could use a dildo like a Jedi light saber and deflect bullets, right?

By the way, if you’re wondering why Mr. French is so bold in his claim that Amy is likely to save lives with her concealed-carry weapon, that’s because John Lott of the Crime Prevention Research Center has crunched the numbers and determined that people with concealed-carry permits are about the most law-abiding group of people in the nation.

Here are some excerpts from a story in The National Interest.

Concealed-carry permit holders are nearly the most law-abiding demographic of Americans, a new report by the Crime Prevention Research Center says… “Indeed, it is impossible to think of any other group in the U.S. that is anywhere near as law-abiding,” says the report, titled “Concealed Carry Permit Holders Across the United States 2016.”

So what group in the nation is better about obeying the law?

The article doesn’t say, though my guess is nuns.

If you guessed police officers, you’d be wrong.

The study compared permit holders to police, who committed 703 crimes from 2005 to 2007, and 113 of those were firearm violations. “With about 685,464 full-time police officers in the U.S. from 2005 to 2007, we find that there were about 103 crimes per hundred thousand officers,” the report reads. “For the U.S. population as a whole, the crime rate was 37 times higher—3,813 per hundred thousand people.” …“We find that permit holders are convicted of misdemeanors and felonies at less than a sixth the rate for police officers,” the report says. “Among police, firearms violations occur at a rate of 16.5 per 100,000 officers. Among permit holders in Florida and Texas, the rate is only 2.4 per 100,000.10. That is just one-seventh of the rate for police officers.”

In other words, the folks in Texas (like the hypothetical Amy in David French’s article) are statistically the one most likely to obey the law and protect against crime.

So the protesters at the University of Texas should be thankful the law has been changed and their campus is no longer a “gun-free zone,” which means that only law-abiding people are disarmed.

Rather than carrying dildos as a form of protest, they should therefore use their sex toys for other purposes (particularly if they have Pajama Boy-type partners).

Speaking of gun-free zones, here’s a very clever video exposing why signs don’t keep people safe.

I’ll have to add this to my collection of humorous anti-gun control videos.

Let’s close by addressing the leftist argument that the Second Amendment only applies to the weapons that existed in the late 1700s.

I addressed that issue earlier this year in a tweet, but this poster does it far more effectively.

Amen.

P.S. The best evidence that we’re winning on the issue of gun control is that more and more and more leftists are now admitting that private gun ownership is a good idea.

Statists occasionally get very angry about some of my views.

My support for “tax havens” periodically seems to touch a raw nerve, for instance, though I guess I shouldn’t be too surprised since some people are so crazy that they have even urged military action against these low-tax jurisdictions.

I also get some angry responses when I praise Ronald Reagan’s achievements. I’ve even had a few leftists get all agitated simply because I occasionally share a hypothetical poll from 2013 showing that Reagan would beat Obama in a landslide.

But what really gets these folks angry is when I argue that recipients of welfare and redistribution should feel shame and embarrassment. As far as they’re concerned, I’m being a heartless jerk who wants to inflict emotional pain on vulnerable people.

Though, to be fair, their anger usually dissipates when I explain that my real goal is to protect people from long-term dependency on government. And it’s also hard for them to stay agitated when I point out that I’m basically making the same argument as Franklin Roosevelt, who famously warned about welfare being “a narcotic” and “a subtle destroyer of the human spirit.”

In other words, I don’t like the welfare state because I care about both the best interests of taxpayers and also about the best interests of poor people. And this is why I repeatedly share data showing how American was making impressive progress against poverty before there was a welfare state. But once the federal government declared a “War on Poverty,” the poverty rate stopped falling.

But that’s only part of my argument. I also think there are very worrisome implications for overall society when people start thinking that they have a “right” to welfare and redistribution. At the risk of sounding like a cranky libertarian, I fear that any nation will face a very grim future once too many people lose the ethic of self-reliance and think it’s morally and ethically acceptable to be moochers.

Indeed, my theory of “Goldfish Government” is based in part on what happens when a sufficient number of voters think it’s okay to steal from their neighbors, using government as a middleman. Short-sighted politicians play a big role in this self-destructive process, of course, along with unfavorable demographic changes.

And when people want examples, I just point to nations such as Greece, Italy, and France. Or states such as California and Illinois.

At this stage, a clever leftist will usually interject and argue I’m being unfair. They’ll say that Nordic nations such as Denmark and Sweden are proof that a big welfare state is compatible with a prosperous and stable society.

Au contraire, as our French friends might say. Yes, the Nordic nations may be relatively successful big-government countries, but there are three very important things to understand.

  1. The Nordic nations became comparatively rich in the 1800s and early 1900s when economic policy was dominated by free markets and small government.
  2. The adoption of high taxes and big welfare states (particularly an explosion in the burden of government spending starting in the 1960s) weakened economic performance.
  3. In recent years, Nordic nations have sought to undo the damage of big government with pro-market reforms and limits on the fiscal burden of government.

But let’s specifically focus today on whether the Nordic nations are somehow an exception to the rule that welfare and redistribution have a pernicious impact on a society. In other words, does welfare in nations such as Denmark and Sweden undermine “social capital”? Is there a negative impact on the work ethic and spirit of self-reliance?

Fortunately, we have some very good data from a new, must-read book by Nima Sanandaji, who grew up in Sweden. Entitled Debunking Utopia: Exposing the Myth of Nordic Socialism, Nima’s book is a comprehensive analysis of public policy in that part of the world, both what’s good and what needs improvement.

One of his 11 chapters is about “The Generous Welfare Trap” and it’s filled with very valuable information about the human and societal cost of the welfare state.

Though I can’t resist pointing out that he starts his analysis by citing President Roosevelt.

Franklin D. Roosevelt…was concerned that the institution he was fostering…might destroy the spirit of self-reliance. Two years into his presidency, he held a speech to Congress…the president warned that…”continued dependence upon relief induces a spiritual and moral disintegration fundamentally destructive to the national fibre. To dole out relief in this way is to administer a narcotic, a subtle destroyer of the human spirit.” …In today’s political climate, Franklin D. Roosevelt’s view on public benefits would seem quite harsh.

Nima then looks at whether the Nordic nations somehow might be proof that FDR was wrong.

Yet there has been a persistent conviction among the modern proponents of welfare states that it is indeed-somehow-possible to create stable systems with generous benefits and high taxes. The main line of reasoning is based on the Nordics. The welfare states in this part of the world seem to, at least at first glance, succeed in providing extensive services and generous cash benefits without eroding personal responsibility. If generous welfare works in Sweden and Denmark, why not also in the rest of the world?

The problem, as Nima points out, is that these policies don’t work in his part of the world.

And not just because of the fiscal burden. His main point is that the welfare state is weakening people’s integrity.

…the World Values Survey shows that erosion of norms is very much a thing in the Nordics. In the beginning of the 1980s, 82 percent of Swedes and 80 percent of Norwegians agreed with the statement “Claiming government benefits to which you are not entitled is never justifiable.” …However, as the population adjusted their behavior to new economic policies, benefit morale dropped steadily. In the survey conducted between 2005 and 2008, only 56 percent of Norwegians and 61 percent of Swedes believed  that it was never right to claim benefits to which they were not entitled. The survey conducted between 2010 and 2015 only included Sweden out of the Nordic countries. It found that benefit morale had continued to fall, as merely 55 percent of Swedes answered that it was never right to overuse benefits. …Over time even the Nordic people have changed their attitudes as social democratic policies have made it less rewarding to work hard and more rewarding to live off the government.

By the way, at the risk of nit-picking, I would have advised Nima to use the term “benefit morality” rather than “benefit morale.” Though I assume almost all readers will understand the point he’s making.

Returning to our topic, Nima also cites some scholarly research that basically echoes my “Theorem of Societal Collapse.”

Martin Halla, Mario Lackner, and Friedrich G. Schneider performed an empirical analysis of the dynamics of the welfare state. They explained that…”the disincentive effects may materialize only with considerable time lags.” ..However, after some time the expansion of welfare programs leads to a deterioration of benefit morale. The three researchers concluded that “the welfare state destroys its own (economic) foundation and we have to approve the hypothesis of the self-destructive welfare state.”

The bottom line, he explains, is that the Nordic nations have been the best possible example of how a welfare state can operate.

But even in these nations, the narcotic of government dependency has slowly but surely done its damage.

Although Nordic welfare states seemed initially able to avoid this moral hazard, today we know beyond doubt that this was not the case. Even the northern European welfare states-founded in societies with exceptionally strong working ethics and emphasis on individual responsibility-have with time caught up to Roosevelt’s harsh predictions.

The good news is that Nordic nations are trying to undo the damage of the welfare state. Many governments in the region are scaling back the generosity of handouts and trying to restore the work ethic.

I don’t want to give away too much information. You need to buy his book to learn more. And the other 10 chapters are just as enlightening.

I’ll close by simply observing that Calvin Coolidge (as quoted by Ronald Reagan) understood today’s topic way back in the 1920s.

P.S. I’ve also cited Nima’s great work on how people of Nordic descent in America are much more productive than their cousins who remained in Scandinavia, as well as his work showing that Nordic nations originally became rich because of Hong Kong-style economic policy. And I’ve also shared some of his fascinating research on the policies that generate super-entrepreneurs.

I have a love-hate relationship with corporations.

On the plus side, I admire corporations that efficiently and effectively compete by producing valuable goods and services for consumers, and I aggressively defend those firms from politicians who want to impose harmful and destructive forms of taxes, regulation, and intervention.

On the minus side, I am disgusted by corporations that get in bed with politicians to push policies that undermine competition and free markets, and I strongly oppose all forms of cronyism and coercion that give big firms unearned and undeserved wealth.

With this in mind, let’s look at two controversies from the field of corporate taxation, both involving the European Commission (the EC is the Brussels-based bureaucracy that is akin to an executive branch for the European Union).

First, there’s a big fight going on between the U.S. Treasury Department and the EC. As reported by Bloomberg, it’s a battle over whether European governments should be able to impose higher tax burdens on American-domiciled multinationals.

The U.S. is stepping up its effort to convince the European Commission to refrain from hitting Apple Inc. and other companies with demands for possibly billions of euros… In a white paper released Wednesday, the Treasury Department in Washington said the Brussels-based commission is taking on the role of a “supra-national tax authority” that has the scope to threaten global tax reform deals. …The commission has initiated investigations into tax rulings that Apple, Starbucks Corp., Amazon.com Inc. and Fiat Chrysler Automobiles NV. received in separate EU nations. U.S. Treasury Secretary Jacob J. Lew has written previously that the investigations appear “to be targeting U.S. companies disproportionately.” The commission’s spokesman said Wednesday that EU law “applies to all companies operating in Europe — there is no bias against U.S. companies.”

As you can imagine, I have a number of thoughts about this spat.

  • First, don’t give the Obama Administration too much credit for being on the right side of the issue. The Treasury Department is motivated in large part by a concern that higher taxes imposed by European governments would mean less ability to collect tax by the U.S. government.
  • Second, complaints by the US about a “supra-national tax authority” are extremely hypocritical since the Obama White House has signed the Protocol to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, which effectively would create a nascent World Tax Organization (the pact is thankfully being blocked by Senator Rand Paul).
  • Third, hypocrisy by the US doesn’t change the fact that the European Commission bureaucrats are in the wrong because their argument is based on the upside-down notion that low tax burdens are a form of “state aid.”
  • Fourth, Europeans are in the wrong because the various national governments should simply adjust their “transfer pricing” rules if they think multinational companies are playing games to under-state profits in high-tax nations and over-state profits in low-tax nations.
  • Fifth, the Europeans are in the wrong because low corporate tax rates are the best way to curtail unproductive forms of tax avoidance.
  • Sixth, some European nations are in the wrong if they don’t allow domestic companies to enjoy the low tax rates imposed on multinational firms.

Since we’re on the topic of corporate tax rates and the European Commission, let’s shift from Brussels to Geneva and see an example of good tax policy in action. Here are some excerpts from a Bloomberg report about how a Swiss canton is responding in the right way to an attack by the EC.

When the European Union pressured Switzerland to scrap tax breaks for foreign companies, Geneva had most to lose. Now, the canton that’s home to almost 1,000 multinationals is set to use tax to burnish its appeal. Geneva will on Aug. 30 propose cutting its corporate tax rate to 13.49 percent from 24.2 percent…the new regime will improve the Swiss city’s competitive position, according to Credit Suisse Group AG. “I could see Geneva going up very high in the ranks,” said Thierry Boitelle, a lawyer at Bonnard Lawson in the city. …A rate of about 13 percent would see Geneva jump 13 places to become the third-most attractive of Switzerland’s 26 cantons.

This puts a big smile on my face.

Geneva is basically doing the same thing Ireland did many years ago when it also was attacked by Brussels for having a very low tax rate on multinational firms while taxing domestic firms at a higher rate.

The Irish responded to the assault by implementing a very low rate for all businesses, regardless of whether they were local firms or global firms. And the Irish economy benefited immensely.

Now it’s happening again, which must be very irritating for the bureaucrats in Brussels since the attack on Geneva (just like the attack on Ireland) was designed to force tax rates higher rather than lower.

As a consequence, in one fell swoop, Geneva will now be one of the most competitive cantons in Switzerland.

Here’s another reason I’m smiling.

The Geneva reform will put even more pressure on the tax-loving French.

France, which borders the canton to the south, east and west, has a tax rate of 33.33 percent… Within Europe, Geneva’s rate would only exceed a number of smaller economies such as Ireland’s 12.5 percent and Montenegro, which has the region’s lowest rate of 9 percent. That will mean Geneva competes with Ireland, the Netherlands and the U.K. as a low-tax jurisdiction.

Though the lower tax rate in Geneva is not a sure thing.

We’ll have to see if local politicians follow through on this announcement. And there also may be a challenge from left-wing voters, something made possible by Switzerland’s model of direct democracy.

Opposition to the new rate from left-leaning political parties will probably trigger a referendum as it would only require 500 signatures.

Though I suspect the “sensible Swiss” of Geneva will vote the right way, at least if the results from an adjoining canton are any indication.

In a March plebiscite in the neighboring canton of Vaud, 87.1 percent of voters backed cutting the corporate tax rate to 13.79 percent from 21.65 percent.

So I fully expect voters in Geneva will make a similarly wise choice, especially since they are smart enough to realize that high tax rates won’t collect much money if the geese with the golden eggs fly away.

Failure to agree on a competitive tax rate in Geneva could result in an exodus of multinationals, cutting cantonal revenues by an even greater margin, said Denis Berdoz, a partner at Baker & McKenzie in Geneva, who specializes in tax and corporate law. “They don’t really have a choice,” said Berdoz. “If the companies leave, the loss could be much higher.”

In other words, the Laffer Curve exists.

Now let’s understand why the development in Geneva is a good thing (and why the EC effort to impose higher taxes on US-based multinational is a bad thing).

Simply stated, high corporate tax burdens are bad for workers and the overall economy.

In a recent column for the Wall Street Journal, Kevin Hassett and Aparna Mathur of the American Enterprise Institute consider the benefits of a less punitive corporate tax system.

They start with the theoretical case.

If the next president has a plan to increase wages that is based on well-documented and widely accepted empirical evidence, he should have little trouble finding bipartisan support. …Fortunately, such a plan exists. …both parties should unite and demand a cut in corporate tax rates. The economic theory behind this proposition is uncontroversial. More productive workers earn higher wages. Workers become more productive when they acquire better skills or have better tools. Lower corporate rates create the right incentives for firms to give workers better tools.

Then they unload a wealth of empirical evidence.

What proof is there that lower corporate rates equal higher wages? Quite a lot. In 2006 we co-wrote the first empirical study on the direct link between corporate taxes and manufacturing wages. …Our empirical analysis, which used data we gathered on international tax rates and manufacturing wages in 72 countries over 22 years, confirmed that the corporate tax is for the most part paid by workers. …There has since been a profusion of research that confirms that workers suffer when corporate tax rates are higher. In a 2007 paper Federal Reserve economist Alison Felix used data from the Luxembourg Income Study, which tracks individual incomes across 30 countries, to show that a 10% increase in corporate tax rates reduces wages by about 7%. In a 2009 paper Ms. Felix found similar patterns across the U.S., where states with higher corporate tax rates have significantly lower wages. …Harvard University economists Mihir Desai, Fritz Foley and Michigan’s James R. Hines have studied data from American multinational firms, finding that their foreign affiliates tend to pay significantly higher wages in countries with lower corporate tax rates. A study by Nadja Dwenger, Pia Rattenhuber and Viktor Steiner found similar patterns across German regions… Canadian economists Kenneth McKenzie and Ergete Ferede. They found that wages in Canadian provinces drop by more than a dollar when corporate tax revenue is increased by a dollar.

So what’s the moral of the story?

It’s very simple.

…higher wages are relatively easy to stimulate for a nation. One need only cut corporate tax rates. Left and right leaning countries have done this over the past two decades, including Japan, Canada and Germany. Yet in the U.S. we continue to undermine wage growth with the highest corporate tax rate in the developed world.

The Tax Foundation echoes this analysis, noting that even the Paris-based OECD has acknowledged that corporate taxes are especially destructive on a per-dollar-raised basis.

In a landmark 2008 study Tax and Economic Growth, economists at the Organization for Economic Cooperation and Development (OECD) determined that the corporate income tax is the most harmful tax for economic growth. …The study also found that statutory corporate tax rates have a negative effect on firms that are in the “process of catching up with the productivity performance of the best practice firms.” This suggests that “lowering statutory corporate tax rates can lead to particularly large productivity gains in firms that are dynamic and profitable, i.e. those that can make the largest contribution to GDP growth.”

Sadly, there’s often a gap between the analysis of the professional economists at the OECD and the work of the left-leaning policy-making divisions of that international bureaucracy.

The OECD has been a long-time advocate of schemes to curtail tax competition and in recent years even has concocted a “base erosion and profit shifting” initiative designed to boost the tax burden on businesses.

In a study for the Institute for Research in Economic and Fiscal Issues (also based, coincidentally, in Paris), Pierre Bessard and Fabio Cappelletti analyze the harmful impact of corporate taxation and the unhelpful role of the OECD.

…the latest years have been marked by an abundance of proposals to reform national tax codes to patch these alleged “loopholes”. Among them, the Base Erosion and Profit Shifting package (BEPS) of the Organization for Economic Cooperation and Development (OECD) is the most alarming one because of its global ambition. …The OECD thereby assumes, without any substantiation, that the corporate income tax is both just and an efficient way for governments to collect revenue.

Pierre and Fabio point out that the OECD’s campaign to impose heavier taxes on business is actually just a back-door way of imposing a higher burden on individuals.

…the whole value created by corporations is sooner or later transferred to various individuals, may it be as dividends (for owners and shareholders), interest payments (for lenders), wages (for employees) and payments for the provided goods and services (for suppliers). Second, corporations as such do not pay taxes. …at the end of the day the burden of any tax levied on them has to be carried by an individual.

This doesn’t necessarily mean there shouldn’t be a corporate tax (in nations that decide to tax income). After all, it is administratively simpler to tax a company than to track down potentially thousands – or even hundreds of thousands – of shareholders.

But it’s rather important to consider the structure of the corporate tax system. Is it a simple system that taxes economic activity only one time based on cash flow? Or does it have various warts, such as double taxation and deprecation, that effectively result in much higher tax rates on productive behavior?

Most nations unfortunately go with the latter approach (with place such as Estonia and Hong Kong being admirable exceptions). And that’s why, as Pierre and Fabio explain, the corporate income tax is especially harmful.

…the general consensus is that the cost per dollar of raising revenue through the corporate income tax is much higher than the cost per dollar of raising revenue through the personal income tax… This is due to the corporate income tax generating additional distortions. … Calls by the OECD and other bodies to standardize corporate tax rules and increase tax revenue in high-tax countries in effect would equate to calls for higher prices for consumers, lower wages for workers and lower returns for pension funds. Corporate taxes also depress available capital for investment and therefore productivity and wage growth, holding back purchasing power. In addition, the deadweight losses arising from corporate income taxation are particularly high. They include lobbying for preferential rates and treatments, diverting attention and resources from production and wealth creation, and distorting decisions in corporate financing and the choice of organizational form.

From my perspective, the key takeaway is that income taxes are always bad for prosperity, but the real question is whether they somewhat harmful or very harmful. So let’s close with some very depressing news about how America’s system ranks in that regard.

The Tax Foundation has just produced a very helpful map showing corporate tax rates around the world. All you need to know about the American system is that dark green is very bad (i.e., a corporate tax rate that is way above the average) and dark blue is very good.

And to make matters worse, the high tax rate is just part of the problem. A German think tank produced a study that looked at other major features of business taxation and concluded that the United States ranked #94 out of 100 nations.

It would be bad to have a high rate with a Hong Kong-designed corporate tax structure. But we have something far worse, a high rate with what could be considered a French-designed corporate tax structure.

While economists are famous for their disagreements (and their incompetent forecasts), there is universal consensus in the profession that demand curves slope downward. That may be meaningless jargon to non-economists, but it simply means that people buy less of something when it becomes more expensive.

And this is why it makes no sense to impose minimum wage requirements, or to increase mandated wages where such laws already exist.

If you don’t understand this, just do a thought experiment and imagine what would happen if the minimum wage was $100 per hour. The answer is terrible unemployment, of course, which means it’s a very bad idea.

So why, then, is it okay to throw a “modest” number of people into the unemployment line with a “small” increase in the minimum wage?

Yet some politicians can’t resist pushing such policies because it makes them seem like Santa Claus to low-information voters. Vote for me, they assert, because I’ll get you a pay raise!

All of this sounds good, and it may even be the final result for some workers. But there’s overwhelming evidence that you get more unemployment when politicians boost the minimum wage.

There are no “magic boats.” In the real world, businesses only hire workers when they expect that additional employees will generate more than enough revenue to offset their costs. So when politicians artificially increase the cost of hiring workers, there will be some workers (particularly those with low skills) who become redundant.

And that’s exactly what we’re seeing in cities that have chosen to mandate higher minimum wages.

The Wall Street Journal opines on Seattle’s numbers.

Seattle’s increase last year seems to be reducing employment. That’s the finding of a new report by researchers at the University of Washington. The study compared nine months of 2015 in Seattle, where the wage is ticking up gradually and hit $13 an hour in January, with similar areas elsewhere in Washington. …The researchers found that the ordinance decreased the low-wage employment rate by about one-percentage point. …The ordinance “modestly held back” employment of low-wage earners, and hours worked “lagged behind” regional trends, on average four hours each quarter (or 19 minutes a week). Many such individuals moved to take jobs outside the city at “an elevated rate compared to historical patterns,” says the report. …None of this will surprise anyone who understands that increasing the cost of something will reduce the demand for it. Then again, that concept seems to elude both major presidential candidates, who have floated national minimum-wage increases.

By the way, it’s not just Trump and Clinton supporting this destructive policy. Mitt Romney also was on the wrong side back in 2012.

And it goes without saying that Obama has been a demagogue on the issue.

Sigh.

Let’s examine evidence from another city. Mark Perry of the American Enterprise Institute looks at what has been happening in Washington, DC.

Since the DC minimum wage increased in July 2015 to $10.50 an hour, restaurant employment in the city has increased less than 1% (and by 500 jobs), while restaurant jobs in the surrounding suburbs increased 4.2% (and by 7,300 jobs). An even more dramatic effect has taken place since the start of this year – DC restaurant jobs fell by 1,400 jobs (and by 2.7%) in the first six months of 2016 between January and July – that’s the largest loss of District food jobs during a 6-month period in 15 years. Perhaps some of those job losses were related to the $1 an hour minimum wage hike on July 1, bringing the city’s new minimum wage to $11.50 an hour. In contrast, restaurant employment outside the city grew at a 1.6% rate in the suburbs (and by 2,900 jobs) during the January to July period. …While it might take several more years to assess the full impact, the preliminary evidence so far suggests that DC’s minimum wage law is having a negative effect on staffing levels at the city’s restaurants. At the same time that suburban restaurants have increased employment levels by nearly 3,000 new positions since January, restaurants in the District have shed jobs in five out of the last six months, with a total loss of 1,400 jobs during that period (an average of nearly 8 jobs lost every day). The last time DC experienced restaurant job losses in five out of six consecutive months was 25 years ago in 1991, and the last time 1,400 jobs were lost over any six-month period was 15 years ago during the 2001 recession.

Here’s a chart looking at how restaurant employment in DC and the suburbs used to be closely correlated, but how there’s been a divergence since the city hiked the minimum wage.

As Mark noted, we’ll know even more as time passes, but the net result so far is predictably negative.

For additional background info, this video is a succinct explanation of why minimum-wage mandates are such a bad idea.

Let’s close with something rather amusing. It turns out that the State Department, during Hillary Clinton’s tenure, actually understood that higher minimum wages destroy jobs. Indeed, her people were even willing to fight against such job-killing measures.

But in Haiti rather than America, as Politifact reports.

Memos from 2008 and 2009 obtained by Wikileaks strongly suggest…that the State Department helped block the proposed minimum wage increase. The memos show that U.S. Embassy officials in Haiti clearly opposed the wage hike and met multiple times with factory owners who directly lobbied against it to the Haitian president. …media outlets assessed the cables and found, among many other revelations, that the “U.S. Embassy in Haiti worked closely with factory owners contracted by Levi’s, Hanes, and Fruit of the Loom to aggressively block a paltry minimum wage increase” for workers in apparel factories. …Deputy Chief of Mission David Lindwall put it most bluntly, when he said the minimum wage law “did not take economic reality into account but that appealed to the unemployed and underpaid masses.” …The U.S. Embassy, meanwhile, continued to lament the hike… USAID studies found that a 200 gourdes minimum wage “would make the sector economically unviable and consequently force factories to shut down.”

Hmmm…., I wonder if some of those textile companies made contributions to the Clinton Foundation?

P.S. People in Switzerland obviously understand this issue, overwhelmingly voting against a minimum-wage mandate in 2014.

P.P.S. As Walter Williams has explained, minimum wage laws are especially harmful for blacks.

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