However, there are too few rich people to finance a European-sized welfare state.
The above video is a segment from a recent presentation to the Money Show, in which I explained that lower-income and middle-class taxpayers are going to get hit by massive future tax increases.
There are two inescapable reasons for this conclusion.
First, entitlement spending is exploding and, second, there are not enough rich people to pick up the tab. As such, you can’t finance a large welfare state without pillaging ordinary people.
And that’s why I shared the charts in the video. The numbers clearly show that taxes on the rich will not suffice.
There are not enough rich people to finance the current level of government spending.
There are not enough rich people to finance future levels of government spending.
There are not enough rich people to finance the new spending Biden is proposing.
Perhaps the strongest evidence is that even Bernie Sanders recognizes this reality. He favors every possible class-warfare tax increase, but it’s very revealing that he also proposed a massive 11.5 percent payroll tax on the wages of everyone to finance his plan for “free” government-run healthcare.
By the way, let me add one very important point that I didn’t make in the video. I’m sure folks on the left will go for class-warfare tax increases before going after the rest of us.
I’ll start with the caveat that tax policy does not necessarily overlap with 10-year periods. But we can learn by examining significant tax policy changes that occurred (or, in the case of the 1950s, did not occur) during various eras.
For the 1960s, the key change was the Revenue Act of 1964, generally known as the Kennedy tax cuts (proposed by President Kennedy in 1963 and then adopted in 1964 after his assassination).
Here’s what Kennedy proposed, as explained by the JFK library.
Declaring that the absence of recession is not tantamount to economic growth, the president proposed in 1963 to cut income taxes from a range of 20-91% to 14-65% He also proposed a cut in the corporate tax rate from 52% to 47%. …arguing that “a rising tide lifts all boats” and that strong economic growth would not continue without lower taxes.
And here’s what was enacted, as summarized by Wikipedia.
The act cut federal income taxes by approximately twenty percent across the board, and the top federal income tax rate fell from 91 percent to 70 percent. The act also reduced the corporate tax from 52 percent to 48 percent and created a minimum standard deduction.
The good news is that the Kennedy tax cuts were the right kind of tax cuts. Marginal tax rates were reduced on work, saving, investment, and entrepreneurship.
The bad news is that the top tax rate was still confiscatory, though 70 percent obviously was not as bad as 91 percent. And a 48 percent corporate rate was not much of an improvement compared to 52 percent.
That being said, moving in the right direction produced good outcomes.
People often talk about the booming economy in the 1960s. And there is some evidence to support that view since inflation-adjusted economic output grew rapidly as the tax cuts were implemented – by 6.5 percent in 1965 and 6.5 percent in 1966.
But I’m cautious about drawing sweeping conclusions from short-run data, especially since we know many other policies also have an impact on economic performance.
So let’s focus instead on some tax-related variables. Here’s a chart that I shared back in 2015, showing that upper-income taxpayers paid more when tax rates were reduced (the same thing happened in the 1980s).
And here’s another chart from the same publication. This one shows that lower tax rates were associated with rising revenues. Especially as the changes were being implemented.
By the way, this does not mean that the tax cut was self-financing.
The core lesson of the Laffer Curve is not that tax cuts “pay for themselves.” That only happens in rare circumstances.
Instead, the lesson is that lower tax rates encourage more productive behavior, which means more taxable income. It then becomes an empirical question of how much of the revenue lost from lower rates is offset by the revenue gained from more taxable income.
And, in the 1960s, we know there was a big Laffer Curve response from upper-income taxpayers. Why? Because they have considerable control over the timing, level, and composition of this income.
There are some policy fights that focus on technical disagreements (for instance, how much do deadweight losses increase when tax rates go up?) and other policy fights that involve moral disagreements (for instance, should drugs be legalized when that may lead some people to harm themselves?).
Other policy fights, however, involve dishonesty.
Poverty hucksters might be the most irritating example. These are the people who push an utterly dishonest definition of poverty, which I first wrote about back in 2010. But this article from 2019 has the best summary.
…folks on the left have decided to use an artificial and misleading definition of poverty. One that depends on the distribution of income rather than any specific measure of poverty. Which is insanely dishonest. It means that everyone’s income could double and the supposed rate of poverty would stay the same. Or a country could execute all the rich people and the alleged rate of poverty would decline. No wonder the practitioners of this approach often produce absurd data, such as the OECD’s assertion that there’s more poverty in the United States than in basket case economies such as Greece and Italy.
Sadly, the many complaints from me and others have not stopped the poverty hucksters.
Here’s a chart I just downloaded from the Organization for Economic Cooperation and Development, one of the organizations pushing the dishonest measure of poverty.
As you can see, they want people to believe that there’s more poverty in the United States than in nations such as Turkey, Italy, and Greece.
Heck, they also want people to think the wealthy nations of Luxembourg and Switzerland have more poverty than Hungary.
I’m sharing this information because it’s time to add a new member to our collection of poverty hucksters.
Timothy Noah of the New Republic has a column in the Washington Post that utilizes the OECD’s inaccurate definition of poverty. Here are some excerpts from his article.
How can the richest nation on Earth have so much poverty? …The Bible tells us that the poor are always with us. But devout resignation can’t explain why the United States, with the world’s largest economy (gross domestic product: $26.15 trillion) should house more poverty than many much poorer countries. In 2021, the Organization for Economic Cooperation and Development ranked 37 member nations by poverty rate. Costa Rica had the highest rate, followed by Bulgaria, but way up there at No. 10 was the United States. …We may not have the means to eliminate poverty. But we can certainly do better than Estonia.
If you read Noah’s entire article, you’ll quickly see why he uses the OECD’s dishonest data.
Interestingly, many folks on the left also recognize that the NHS has problems. But they claim that long waiting lines and needless deaths are the result of too little money.
For example, in a column for the New York Times, Allyson Pollock and Peter Roderick complain that their country’s government-run health system is being starved of funding.
…you don’t have to work in a hospital to know that Britain’s N.H.S. is in the most serious crisis of its history; you just have to be injured, or ill. Thousands of people are estimated to have died in the last year because of overwhelmed ambulance and emergency services. There are 7.2 million people in England, more than 10 percent of the population, on waiting lists for treatments… That the flagship health care service of one of the wealthiest countries in the world is in such a state is shocking, but not without explanation. Decades of marketization, 10 years of Conservative austerity and a pandemic have hollowed out the N.H.S… A government-commissioned report released last year called the years between 2010 and 2020 the N.H.S.’s “decade of neglect.” …The N.H.S. as Britons have known it — accessible, free at the point of use, cherished — is becoming something else. But as long as there are still people willing to fight for it, it’s not too late to save it.
If you read the full column, you might notice something very odd.
The authors share lots of data about the poor performance of the U.K.’s government-run system. And they share some good data about patient dissatisfaction.
But when they complain about how this is the fault of austerity, they don’t share any numbers.
So I want to the website for the U.K. Office of National Statistics and found the data showing the breakdown of annual government spending and I looked at the numbers for health expenditures.
Lo and behold, there was no austerity.
If you look closely, there was a very brief slowdown in the rate of growth starting in about 2010, but there were never budget cuts.
Indeed, the burden of NHS spending grew by an average of more than 6.7 percent over the past 25 years – much faster than inflation over the same period.
The moral of the story is that the NHS is doing a lousy job, but it’s not because of a shrinking budget.
P.S. I mentioned at the start of the column that I don’t like the current health system in America and that I also don’t like the idea of a British-style system. If you want to know the better approach, click here, here, here, here, here, here, and here.
Back in 2012, I wrote a column for the Wall Street Journal to highlight the success of Switzerland’s spending cap (also known as the “debt brake”).
Swiss voters voted for this spending cap in 2001 and ever since it took effect in 2003, government spending has increased by an average of 2.2 percent annually, only about half as fast as it was growing in the decades before the cap was imposed.
To show the ongoing success of the debt brake, here’s a map comparing changes in the burden of spending in Switzerland and its four major neighbors (France, Germany, Italy, and Austria). As you can see, IMF data reveals that Switzerland has been more responsible.
I even calculated changes in national spending burdens since the start of the pandemic.
You can see that all governments used the virus as an excuse for more spending, but the fiscal damage was most contained in Switzerland.
Professors Steve Hanke and Barry Poulson presumably agree. They have a column in National Review arguing in favor of a similar spending cap for the United States.
President Biden’s budget proposal for 2024 makes it clear that the U.S. needs a budget straitjacket sooner rather than later. …Switzerland has been arguably the most successful country in reining in budget deficits and its debt burden. …The Swiss debt brake requires that expenditures be brought into balance with revenues. A cap is imposed on spending based on expected revenue, and revenue is projected based on long-term trends in the real growth of national income. Expenditures may exceed the cap in response to extraordinary events such as war, but if that’s the case, eventually, revenues from budget surpluses must be generated and set aside to offset this excess expenditure. We propose a debt brake for the U.S. that would initially be more stringent than the Swiss debt brake…a spending limit (read: cap) be calculated each year, and that the cap be reduced by 1 percent.
Interestingly, they want a spending cap that is stricter than the Swiss version.
That would be ideal (the tighter the cap, the greater the progress), but I’d settle for the Swiss approach. Why? Because here’s the data comparing US profligacy and Swiss prudence.
When I contemplate these numbers, my disdain for Bush, Obama, Trump, and Biden becomes even more intense.
P.P.S. There’s plenty of academic evidence for Switzerland’s debt brake. But what’s more surprising are that pro-spending cap studies from the International Monetary Fund (here and here), the Organization for Economic Cooperation and Development (here and here) and the European Central Bank (here and here).
I wrote last week about President Macron’s very modest effort to slow down the growth of the welfare state and started with a chart showing that France has the highest overall burden of government spending in the developed world.
The good news (relatively speaking) is that France is in third place, based on this chart from the OECD, when looking at the burden of government-provided retirement benefits.
To be sure, having the third-highest burden of retirement spending is hardly something to celebrate. And it is not exactly a big achievement to be slightly less worse than Greece and Italy.
This is why President Macron is pushing to increase the retirement age from 62 to 64.
But French voters and French lawmakers have an entitlement mentality and Macron’s initiative was faltering. So the government used executive authority to unilaterally impose the law.
Needless to say, this has triggered a lot of outrage. Here are some details from an article by Rich Noack in the Washington Post.
The French government used its executive powers Thursday to raise the retirement age to 64 and avoid a vote on an unpopular bill, outraging lawmakers who could retaliate with a no-confidence motion… Two-thirds of the French public have opposed the plans, and within minutes of Borne announcing the law’s adoption, demonstrators assembled near Parliament for their ninth day of mobilization, with some of them clashing with authorities. …Macron has been pushing for changes to the country’s pension system since he was elected in 2017… France has a lower minimum retirement age than many of its European neighbors… Germany, for instance, is preparing for an increase in the retirement age from 65 to 67, and lawmakers there have faced little public backlash. …Macron and his allies argue that the retirement age needs to reflect that increase if the country wants to preserve a welfare system that relies on a sufficiently large base of working-age contributors.
Here’s a chart from the article to show the excesses of the French system.
The Wall Street Journalopined this morning on the controversy.
The political difficulty of reforming pensions in Western democracies has been on display in France, with strikes and mass protests against Emmanuel Macron’s modest pension reform. …Give Mr. Macron credit for persistence—and political brass. …Thursday Prime Minister Elisabeth Borne invoked Article 49 of the French constitution, which enabled the Macron government to strong-arm a bill through the National Assembly without a vote. The National Assembly’s remaining recourse to block reform is to pass a motion of no confidence. That would block the legislation, oust Ms. Borne, and dissolve the government. …The opponents are on the populist left and right, including his presidential opponent in 2022, Marine Le Pen, who accused Mr. Macron of choosing “to govern with brutality” and called for Ms. Borne’s ouster. The cold reality is that France needs reform because its pay-as-you-go pension system is unsustainable. The retirement age is 62, one of the youngest in Europe, and Mr. Macron would stretch it only to 64 with some exceptions. The worker-to-retiree ratio has shrunk to 1.7 to 1 from 3 to 1 in 1970. French pensions already consume 14% of the economy.
The second-to-last sentence of the above excerpt deserves some emphasis.
Back in 1970, there were three workers (taxpayers) for every retiree. Now the ratio if 1.7 workers to every retiree, and that situation is going to get much worse over the next few decades (the same problem of demographic change exists in the United States).
So the real-world choice is reform or bankruptcy (especially since taxes already are maxed out).
P.S. Macron’s reform is better than the status quo, but it would be far better to shift to personal retirement accounts – which is something that has happened in dozens of nations.
Last week, I wrote about Biden’s proposed budget, focusing on the aggregate increase in the fiscal burden.
Today, let’s take a closer look at his class-warfare tax proposals. Consider this Part VI in a series (Parts I-V can be found here, here, here, here, and here), and we’ll use data from the folks at the Tax Foundation.
We’ll start with this map, which shows each state’s top marginal tax rate on household income if Biden’s budget is enacted.
The main takeaway is that five state would have combined top tax rates of greater than 50 percent if Biden is successful in pushing the top federal rate from 37 percent to 39.6 percent.
While it is a very bad idea to have high marginal tax rates, it’s also important to look at whether the government is taxing some types of income more than one time.
That’s already a pervasive problem.
Yet the Tax Foundation shows that Biden wants to make the problem worse. Much worse.
His proposed increase in the corporate tax rate is awful, but his proposal to nearly double the tax burden on capital gains is incomprehensiblyfoolish.
I guess we should be happy that Biden didn’t propose to also increase the 40 percent rate imposed by the death tax.
But that’s not much solace considering what Biden would do to American competitiveness. Here’s our final visual for today.
I’ll close by observing that some of my leftist friends defend these taxes since they target the “evil rich.”
I have a moral disagreement with their view that people should be punished simply because they are successful investors, entrepreneurs, or business owners.
Because the central bank’s easy-money policy created artificially low interest rates, but those policies also produced high inflation, and now interest rates are going up as the Fed tries to undo its mistake.
By the way, the center box (higher prices) also includes asset bubble since bad monetary policy sometimes leads to financial bubbles instead of (or in addition to) higher consumer prices.
And higher interest rates can occur for two reasons. Most people focus on the Federal Reserve tightening monetary policy as it tries to reverse its original mistake of easy money. But don’t forget that interest rates also rise once lenders feel the pinch of inflation and insist on higher rates to compensate for the falling value of the dollar.
But let’s not digress too much. The focus of today’s column is that the Fed goofed by creating too much money in 2020 and 2021. That’s what set the stage for big price increases in 2022 and now economic instability in 2023.
Joakim Book of Reason shares my perspective. Here are excerpts from his article.
The Federal Reserve is in the unenviable position of achieving its mandate by crashing the economy. …it’s something that happens as an unavoidable outcome of slowing down an economy littered with excess money and inflation. …This hiking cycle, the fastest that the Fed has embarked upon in a generation, was always likely to break something. And break something they did over the weekend…Silicon Valley Bank (SVB), which faced the second-largest bank run in U.S. history. …this pushes the Fed into a very delicate position: risk systemic bank runs, or roll back the hikes and quantitative tightening that caused this mess, printing money for an even hotter inflation.
The Wall Street Journal also has the right perspective, editorializing that the current mess was largely caused by bad monetary policy.
Cracks in the financial system emerge whenever interest rates rise quickly after an easy-credit mania, and the surprise is that it took so long. …This week’s bank failures are another painful lesson in the costs of a credit mania fed by bad monetary policy. The reckoning always arrives when the Fed has to correct its mistakes. …We saw the first signs of panic in last year’s crypto crash and the liquidity squeeze at British pension funds. …nobody, least of all central bank oracles, should be surprised that there are now bodies washing up on shore as the tide goes out.
This tweet also notes that monetary policy is to blame.
What's the main monetary lesson from SVB?
Wrong: See what inflation-fighting does? It can cause a financial crisis. So give up and adjust the inflation target to 4%.
Right: Inflation must be fought ASAP. The longer the delay, the bigger the pain. P.S. Don't print so much money! pic.twitter.com/2XgkpTXiO0
Finally, I can’t resist sharing some excerpts from Tyler Cowen’s Bloombergcolumn. He pointed out last November that the Austrian School has some insights with regards to the current mess.
The Austrian theory…works something like this: Investors expected that very low real interest rates would hold. They committed resources accordingly, and now forthcoming rates are likely to be much higher. That means the economy is stuck with malinvestment and will need to reconfigure in a painful manner. …The basic story here fits with the work of two economists from Austria, Ludwig Mises and Nobel laureate Friedrich von Hayek, and thus it is called the Austrian theory of the business cycle. The Austrian theory stresses how mistaken expectations about interest rates, brought on by changes in the rate of inflation, will lead to bad and abandoned investment projects. The Austrian theory has often been attacked by Keynesians, but in one form or another it continues to resurface in the economic data.
That’s according to the 2023 edition of the Heritage Foundation’s Index of Economic Freedom.
The bad news is that there are only four nation that enjoy “free” economies.
The worse news is that the global average for economic freedom has declined.
Here are some highlights (or lowlights) from the Index‘s executive summary.
The 2023 Index…reveals a world economy that, taken as a whole, is “mostly unfree.” Regrettably, the global average economic freedom score has fallen from the previous year’s 60.0 to 59.3—the lowest it has been over the past two decades. …fiscal soundness has deteriorated significantly. …only four countries (down from seven in the previous year) recorded economic freedom scores of 80 or more, putting them in the ranks of the economically “free;” 23 countries earned a designation of “mostly free” by recording scores of 70.0 to 79.9… On the opposite side of the spectrum, more than 50 percent of the countries…have registered economic freedom scores below 60. …and 28 countries, including China and Iran, are in the economically “repressed” category.
American readers may be wondering about the United States.
Sadly, the US only ranks #25, which is lower than many European welfare states (which generally have higher fiscal burdens, but are more market-oriented in areas like trade and regulation).
What’s especially depressing is that the United States was economically “free” less than 20 years ago.
It’s also depressing that the United Kingdom has suffered a big fall as well.
In a column for RealClearMarkets, Rainer Zitelmann comments on declining economic liberty in the US and UK.
The United States is in imminent danger of dropping out of the Index of Economic Freedom’s “mostly free.” …In the latest ranking, the U.S. only just scrapes into the second-best of the five categories (“mostly free”). If the United States were to lose just one more point in next year’s ranking, it would find itself in the “moderately free” category… The U.S. has progressively dropped down the rankings in recent years. There are now a total of 16 European countries that are economically freer, i.e. more capitalist, than the United States, such as Switzerland, Ireland, Estonia, Luxembourg, Denmark and Sweden. Even Germany and Austria are considered economically freer than the U.S. …Great Britain has already slipped out of the “mostly free” category and into the “moderately free” group of countries. With its score of 69.9 points, Great Britain has the worst rating since the Index was first calculated way back in 1995. In 2006, Great Britain was still on a respectable 80.4 points!
I’m very disappointed that Bush, Obama, Trump, and Biden have all contributed to America’s deteriorating score. A bipartisan mess.
Just like the bipartisan mess in the United Kingdom – thanks to Blair, Brown, Cameron, May, Johnson, and Sunak.
Reagan and Thatcher must be rolling over in their graves.
P.S. I’m not surprised that North Korea is the most economically “repressed” nation, followed by Cuba and Venezuela.
Back in 2011, I shared a chart comparing economic growth in Chile, Argentina, and Venezuela between 1980 and 2008.
My simple goal was to show that market-oriented nations enjoy very fast growth compared to nations with “mixed economies or socialist economies.
Over the past dozen years, I’ve repeatedly shared that chart and featured it in the “anti-convergence club.”
Having written yesterday about the ongoing economic misery of Venezuela, it dawned on me that is it probably time to update the numbers.
So I went to the International Monetary Fund’s World Economic Outlookdatabase.
What did I find? As you can see from the chart, everything I wrote back in 2011 is still true. Except Chile looks even better and Venezuela looks even worse.
The obvious takeaway is that the longer a nation follows good policy, the better the results. And the longer a nation is subjected to socialism, the worse the results.
If you want numbers, inflation-adjusted per-capita output has nearly tripled in Chile over the past four decades. Call that a reward for good policy.
By contrast, economic growth in Argentina has been very anemic, just 21 percent in 42 years. Call that the price of bad policy.
But Argentina’s anemia looks great compared to Venezuela, where per-capita GDP has suffered a 70 percent collapse. I’m not sure there’s a word to describe such a cataclysmic decline. For lack of a better alternative, we’ll say that’s the “reward” for socialism.
I always challenge my leftist friends to respond to my never-answered question. Maybe I should simplify things and simply ask if they still think Venezuela is a role model.
P.P.S. While Venezuela is the main focus of today’s column, I can’t resist sharing my concerns about Chile. As documented in my six-part series in 2021, Chile elected a socialist president. It is therefore possible that a future version of his chart will show grim news. But hope is not lost. Chilean voters overwhelmingly rejected a proposal for a new constitution based on socialism. And just a few days ago, the legislature rejected a huge, class-warfare tax increase.
By the way, if you somehow think IMF data is suspect, you can also look at the UN’s Human Development Index. Over the past couple of decades, only Syria, Libya, and Yemen performed worse than Venezuela.
In his column for the Miami Herald, Andres Oppenheimer documents Venezuela’s descent into misery.
As Venezuelan dictator Nicolás Maduro celebrates his 10th year in office this week, a reality check shows that his presidency has been much more disastrous than people think. Maduro…has performed an economic miracle in reverse: He has turned what used to be one of Latin America’s richest countries into the poorest one, alongside Haiti. …Venezuela’s gross domestic product has plummeted from $350 billion in 2013 to $60 billion today… Venezuela’s poverty rate has soared from 40% of the population in 2013 to 94% today… Venezuela’s annual inflation rate has risen to nearly 350% this year from 56% in 2013… More than 7.2 million Venezuelans have fled the country during the past decade, according to United Nations estimates. That’s the biggest mass exodus in Latin America’s history.
That’s a depressing indictment.
But there’s more bad news to share. Here are some excerpts from an article by Dominic Wightman for the U.K.-based Critic.
Caracas has grown into one such city from hell. …there’s all-round cynicism, the pongs of death and dank deprivation ubiquitous. …The capital city is flatlining, the flatline only spiked by oases of ill-gotten gains underwritten by Russian gangsters, by wannabe Cuban puppet masters and the Chavistas themselves, whose grip on Venezuela has been transitorily perpetuated by narcodollars… No politics class or textbook can prepare a man for fifteen years viewing first-hand this latest chapter in the failure of socialist doctrine. The descent to hell in Venezuela has been swift and gruesome. …Too often in the West we have discussed Socialism as if it were a cheese on a cheeseboard, some kind of edible mushroom from which we might find nourishment, even as a side dish in a broader menu of political possibilities. The truth is that Socialism is poison, whichever way it is prepared or digested. It is appropriate — no, it is vital — to be so black and white about it.
Wightman’s analysis is particularly persuasive since he is married to a Venezuelan woman and has personally witnessed the nation’s decline over many years.
Our fourth item was probably inspired by Crazy Bernie.
I always save the best for last and this cartoon strip about the Federal Reserve hits the spot.
I’ll end with a serious point. I can understand why the Fed adopted easy-money policies at the start of the pandemic. But I don’t understand why they maintained that approach in the last half of 2021 and all of 2022. That would be a great question the next time Fed Chairman Jerome Powell testifies on Capitol Hill (not that there are many politicians smart enough to pursue that line of questioning).
P.S. You can enjoy additional economics humor here and here.
I could probably write dozens of columns (as I did the past two years) about the many bad policies that Biden is pushing.
For today, though, let’s focus on the aggregate numbers.
We’ll start with the fact that Biden’s budget violates the Golden Rule of fiscal policy. He wants the burden of government spending over the next 10 years to increase at twice the rate of inflation (based on Table S-1 and S-9 of his budget)
If you want raw numbers, Biden wants the spending burden to rise from about $6.4 trillion this year to $10 trillion-plus in 2033.
On the revenue side, he wants the tax burden to jump from $4.8 trillion this year to nearly $8 trillion in 2033.
To be fair, spending and taxes automatically increase every year, thanks to inflation, demographic change, and previously enacted legislation.
You can see those “baseline” numbers in Table S-3 of Biden’s budget.
So if we want to see the net effect of what Biden is proposing, we should compared the “baseline” data to his budget numbers.
And when we do that, we find that he wants an additional $1.85 trillion of spending over the next 10 years. Even more shocking, he wants an additional $4.85 trillion of tax revenue.
I’ll close with a couple of observations.
First, Biden has a giant gimmick in his budget. If you look at the details for his proposed per-child handout (Table S-6 of his budget, bottom of page 142), you’ll notice that he’s only proposing the policy for one year.
Why? Because it is enormously expensive, with an annual cost of more than $250 billion.
Yet we know the White House and congressional Democrats want this policy to be permanent. So if we extended the cost of the per-child handout for the full 10 years, the amount of new spending in Biden’s budget would be much closer to the level of new taxes in his budget.
Second, Biden’s budget shows why supporters of good fiscal policy should not focus on deficits. A myopic fixation on red ink allows a big spender like Biden to claim the moral high ground because his proposed tax increase is even bigger than his proposed spending increase.
The variable that matters is the overall burden of government spending. And the goal should be reducing that burden, regardless of whether it is financed with taxes, borrowing, or printing money.
States such as West Virginia, Arizona, Iowa, and Utah have recently reformed their education policies so that families now have the benefit of choice and competition.
And now we have another reason to celebrate. Arkansas has joined the school choice club.
The Arkansas Democrat-Gazette has a report by Neal Earley.
Gov. Sarah Huckabee Sanders signed her education bill into law Wednesday afternoon, calling it “the largest overhaul of the state’s education system in Arkansas history.” …The law, also known as the LEARNS Act, has been the top priority for Sanders since taking office in January. …Since taking office in January, Sanders has said education will be her top priority as governor, saying she wanted to put an end to a system where students were trapped in failing schools because of their zip code. …The bill would tie education funding to students, giving them 90% of what schools get per student in state funding from the previous school year to attend a private or home school, which would currently amount to $6,672. …The Educational Freedom Account will be phased in over three years beginning with the 2023-2024 school year.
In a story for the Washington Examiner, Jeremiah Poff provides more coverage.
Arkansas Gov. Sarah Huckabee Sanders (R) signed an education reform bill into law Wednesday that makes Arkansas the third state this year to enact a universal school choice program. …The bill phases in a universal school choice program and raises teacher pay… “Arkansas made history today, setting the education model for the nation,” Sanders tweeted after the bill was signed. “The failed status quo is dead, and hope is alive for every kid in our state!” …The new law makes Arkansas the third state this year to enact a universal school choice program after Iowa and Utah enacted similar bills earlier this year. The three states join Arizona and West Virginia as the only states to date that have enacted universal school choice.
By the way, it’s quite possible that more states will join them in the next couple of months. Fingers crossed.
However, that means they want big tax increases on lower-income and middle-class household.
To emphasize this point, I unveiled my Fifteenth Theorem of Government, which drives home the point that you can’t have big government without pillaging ordinary people.
I pontificated on this issue today in a MoneyShow presentation.
There were lots of charts to justify my two theorems, but these six points hopefully are a good summary of my argument.
For what it’s worth, the first five points are basic math.
My final point is where the honest leftists and I have a big disagreement. They think it would be a good thing to copy Europe. But I think that would be crazy since European living standards are much lower because of bloated welfare states.
But even this modest reform is an outrage to some French leftists. In a column for the Washington Post, Rokhaya Diallo denounces the proposed change as an assault on “the French welfare model.”
Like tens of thousands of others, I was proud to be on the Place de la République recently to defend the legacy of the French welfare state. …Across the country, millions have gathered in periodic protests to defend one of the crown jewels of the French welfare model: the pension system. President Emmanuel Macron is determined to reform the pension system and to increase the retirement age from 62 to 64 (he first intended to push it to 65). …According to Macron, the calculus is simple: The French system cannot sustain itself financially, and because life expectancy is increasing, people have to work longer. …Big companies, however, have far more resources at their disposal than individual citizens, and raising corporate taxes would be a fairer way of increasing government revenue. …The fact that we live longer does not mean that we should spend our lives working for companies. Why should we subordinate our lives to the needs of capitalism?
At the risk of being snarky, Ms. Diallo is complaining about the reality of math rather than “the needs of capitalism.”
Though, by proposing higher taxes on French companies, she sort of acknowledges that the status quo is untenable.
So is Ms. Diallo’s proposed policy of higher taxes on workers, consumers, and shareholders a feasible solution to France’s ever-growing fiscal burden? Could all the built-in new spending (12 percentage points of GDP) be financed by a higher corporate tax rate?
No. Not even close. The French corporate tax rate currently is 25.8 percent and it collects about 2.3 percent of GDP according to OECD data.
Given her economic naivete, Ms. Diallo might support a very radical approach, such as doubling the corporate rate to more than 50 percent. And she might think that change would boost receipts from 2.3 percent of GDP to 4.6 percent of GDP.
But she would be wrong. Wildly wrong. As shown by this map from the Tax Foundation, France already has the fourth-highest corporate tax rate in Europe. Any increase (especially a big increase) will simply cause more business activity to leave France and go to nations with less-onerous tax policy.
In other words, a higher rate would not lead to a big increase in revenue. Indeed, it might do so much damage to the business climate that the government would collect less revenue.
And don’t forget that an additional 2.3 percent of GDP in revenue (assuming it magically materialized) is still far less than the built-in spending increase of 12 percent of GDP. So her math is wrong in two ways.
The bottom line is that France has two choices.
Stick with the status quo and eventually suffer a horrific fiscal crisis.
Enact reforms to prevent an ever-growing spending burden.
Macron’s reforms are grossly inadequate, but at least he wants to take a small step in the right direction. Ms. Diallo wants to put her head in the sand.
P.S. In her column, Ms Diallo notes that lower-income workers don’t live as long.
…mortality numbers vary among social classes. Nurses live seven years less than other women: 20 percent of them and 30 percent of nursing assistants retire with disabilities. Blue-collar workers live six years less than executives, so that one-quarter of the poorest men die by age 62, while 94 percent of the rich are still alive at 64. Only 40 percent of the poorest survive to 80, whereas 75 percent of the wealthiest do.
When I put together my first ranking back in 2018, there were 9 states with flat taxes and and 3 states with low-rate graduated tax systems.
Today, there are 11 (soon to be 13) states with flat taxes and 6 states with low-rate graduated systems.
But one thing has not changed.
The ideal state tax policy is to have no income tax and the 9 states in that category have not changed. Indeed, things may even be moving in the wrong direction since politicians in the state of Washington recently imposed a capital gains tax and they hope that the state’s top court somehow will decide it is constitutional.
But there’s now a glimmer of hope that a few states will jettison their income taxes.
We’ll start with an editorial in the Wall Street Journal about tax reform in North Dakota, where the state is about to join the flat tax club and might even phase out the income tax altogether.
The state has five brackets that range from 1.1% to 2.9%. That’s low compared with the 9.85% top rate in big-city Minnesota, but South Dakota doesn’t tax income at all. In the competition to be the best Dakota, this matters… The bill “would put us on a path toward eventually zeroing out our individual income tax,” Mr. Burgum told the House finance committee in January. “We compete for energy workers. Alaska, Texas and Wyoming are three of those eight states that already have zero income tax, and of course our neighbor right next to us in South Dakota.” …Zeroing out North Dakota’s income tax could finally be accomplished via a third bill, also passed by the state House. This plan would automatically cut income taxes by 0.5 percentage point if the state’s revenue targets are exceeded. If the rate starts at 1.5%, as the Governor hopes, the best case scenario is that the income tax could disappear entirely by 2028.
Iowa already has made great progress on tax policy, but may go even further according to this story in the Des Moines Register.
Iowa senators are advancing a bill that would eventually eliminate the state’s income tax. …Sen. Dan Dawson..said economic data since last year’s tax cuts show the state can afford to be even more aggressive. And, he said, Iowa needs to keep cutting taxes to compete with other states that are also lowering their own rates. …[Governor] Reynolds has said she’d like to eliminate the income tax by the end of her current term in office, which would be 2027. …”My goal is to get to zero individual income tax rate by the end of this second term,” she said. …Senate Study Bill 1126 would lower Iowa’s income tax rate to 3.55% in 2026, 2.95% in 2027 and 2.5% in 2028. Beginning in 2030, the bill would transform Iowa’s taxpayer relief fund into an “individual income tax elimination fund” and use the money in the fund to eventually lower the individual income tax rate further until it is eliminated entirely.
There’s also interest in Mississippi, as reported by Michael Goldberg for the Associated Press.
Gov. Tate Reeves promised to push for a full elimination of the state’s income tax during the 2023 legislative session. The move would make Mississippi the 10th state with no income tax. …Mississippi’s Republican-controlled legislature passed legislation in 2022 that will eliminate the state’s 4% income tax bracket starting in 2023. In the following three years, the 5% bracket will be reduced to 4%. …Mississippi’s population has dwindled in the past decade, even as other Sun Belt states are bustling with new residents. Tax-cut proposals are a direct effort to compete with states that don’t tax earnings, including Texas, Florida and Tennessee. “You don’t have to be a geography expert to look at a map and recognize that we have Texas to our west, Florida to our east and Tennessee to the north,” Reeves said. “All three of those states have no income tax, and therefore all three of those states have a competitive advantage when we are recruiting for both businesses and individual talent.”
Last but not least, the Democratic Governor of Colorado wants to abolish his state’s flat tax. Here are some details from a report by Ben Murrey in National Review.
…during his state of the state address last month, Governor Jared Polis suggested using TABOR refunds to decrease the state’s income-tax rate. The address marked the first time Polis had explicitly proposed using TABOR-refund dollars — which come out of state revenue surpluses — to lower the income-tax rate as part of his push to eliminate the state’s income tax altogether. …Discussing tax reform during his address, Polis said, “I was proud to have supported two successful income-tax cuts at the ballot and since I took office our income-tax rate has gone from 4.63 percent to 4.44 percent, helping produce strong economic growth and low unemployment.” …“It’s no secret that I, and most economists, despise the income tax,” Polis added. “I don’t expect that we can fully eliminate the income tax by our 150th anniversary [in 2026], but let’s continue to make progress.” …Polis’s willingness to stand by his support of TABOR refunds and light a path forward for his zero-income-tax agenda in the face of opposition from his own party is laudable.
By the way, “TABOR” refers to the Taxpayer Bill of Rights, which is a spending cap that requires automatic refunds to taxpayers when tax revenues increase faster than inflation plus population.
Leftists in Colorado fantasize about being able to spend those extra revenues, so kudos to Gov. Polis for instead wanting to use them to gradually phase out the income tax.
Another great policy is federalism, and that is the focus of today’s column.
Richard Rahn explained in the Washington Times some reasons why Switzerland is a role model of sensible governance.
The Swiss have developed over the last nine centuries (and particularly since their major constitutional rewrite in 1848) a system most responsive to the needs of the people, including protection of person, property and civil liberties. Most government takes place at the local level (2,172 communes) by democratic consensus. Decisions that cannot be made at the local level are then made at the canton (26 states) level, and the few remaining decisions, such as defense, trade and other treaties, are made at the federal level. At the federal level, there are seven councilors who govern the country as equals with staggered five-year terms and with the principle of collegiality — representing the major political parties. They rotate the title of “president” among them for one-year terms. This system has given the Swiss unparalleled stability and prosperity, and no cult of personality. The collective and forced-tempered decision-making has kept them from doing many of the unwise and destructive things other countries have done.
And the Economist also recognizes advantages of the Swiss approach. Here are some excerpts from an article about the business environment from last May.
Switzerland has prospered as a haven for businesses far beyond what might be expected of a small, landlocked country with few natural resources. It is home to 13 of the top 100 European firms by market capitalisation and 12 of the top 500 worldwide. What is the secret sauce of the Swiss? …a unique political model that mixes federalism and direct democracy, a weak central government, light regulation, top-notch research universities, and rivalry in education and taxation between the cantons that make up the Swiss confederation. …The Swiss have no particular affinity for their compatriots in other cantons. …But they joined together in such a way as to foster self-reliance and responsibility. …This approach makes for light regulation from the top. …Cantons run health care, welfare, education, law enforcement and fiscal policy. That allows them to compete to be attractive to businesses and their workers. Corporate taxes are low.
How low are corporate taxes?
Not as low as places such as Bermuda and the Cayman Islands, where the rate is zero.
But lower than other major nations, as illustrated by this chart that accompanied the article.
The Economist also ran an article on national comity last October.
…at the heart of Europe, one nation in one state is one of the most happily, successfully multilingual places on Earth. Switzerland, which has a population comparable in size to Hungary’s or Austria’s, has four official languages… How can a country so linguistically diverse work, and indeed be one of the richest in the world? …The key to Switzerland’s functioning is its principle of territoriality: in most of the 26 cantons, one language rules. (Three cantons are bilingual in German and French, and Graubünden is trilingual in Italian, Romansh and German.) …Switzerland is the product of fiercely independent cantons joining the confederation for mutual benefit while still considering themselves sovereign. The country must respect localism, or it would not exist. …unity and uniformity are not the same thing.
The October article specifically focused on the benefits of federalism. Sort of unity through diversity.
But notice that the the pro-growth business climate described in the May article is a consequence of federalism.
Last but not least, in a column for the Foundation for Economic Education, Corey Iacono lists some of the reasons why advocates of individual liberty should admire Switzerland.
Switzerland has the fourth-freest economy in the entire world. …the ninth-highest per capita income in the world. …The Swiss have the third-highest median household income in the world… Switzerland has the fourth-lowest level of government spending as a share of the economy among the 34 OECD countries. …The Swiss have genuine federalism and decentralized government. …The Swiss have a long history of armed neutrality…the fourth-highest gun ownership rate in the world. ..Marijuana is decriminalized. …the third-happiest country in the world. …Switzerland just might be one of the most libertarian countries in the world.
To be sure, being the “most libertarian” is not the same as being libertarian Nirvana.
As illustrated by this chart, Switzerland has done a much better job than the United States at preserving federalism, but there has been a trend toward more centralization.
And there are specific policies, such as a wealth tax, that definitely are not consistent with either libertarian principles or good tax policy.
But it’s still better than almost every other place in the world.
P.S. Given Switzerland’s relative success, I’m not surprised that there’s a movement in Sardinia to secede from Italy and become a Swiss canton.
P.P.S. More federalism and decentralization would help ease divisions in nations such as Belgium and Ukraine.
P.P.P.S. Here’s some humor about a possible red-blue divorce in the United States.
Simply stated, the folks who oppose fixing entitlements – including so-called national conservatives and politicians such as Donald Trump – are in favor of giant tax increases on lower-income and middle-class Americans.
This process already is underway in the United Kingdom.
The Conservative Party became recklessly profligate under Boris Johnson, causing a big bump in the country’s (already excessive) spending trajectory.
And bad spending policy is now leading to bad tax policy (the British pound no longer is the world’s reserve currency, so there’s not as much ability to finance ever-expanding spending by endlessly issuing new debt).
As explained in a Wall Street Journaleditorial from last November, Prime Minister Rishi Sunak and his Chancellor of the Exchequer Jeremy Hunt have a tax agenda somewhat akin to Joe Biden’s.
The Chancellor and his boss, Prime Minister Rishi Sunak, are making a particular tax grab at highly mobile workers, especially in financial services, by reducing the threshold for the top 45% income-tax rate to £125,000 from £150,000. The Treasury pretends this will rake in an additional £3.8 billion in revenue over six years… Mr. Hunt is increasing the top corporate tax rate to 25% from 19% and imposing a global minimum tax not even the European Union has managed to implement. …Mr. Sunak’s Conservative Party ditched Ms. Truss’s supply-side tax and regulatory reforms in favor of this plan to tax and spend Britain to prosperity. One of those strategies boasts a proven track record of success and the other has a history of failure. The Tories can explain their choice to voters at the next election.
In a column for CapX, Conor Holohan made similar points, while also pointing out the corporate tax hike won’t raise nearly as much money and Sunak and Hunt are hoping to collect.
Hunt is right to want to balance the books and avoid passing on huge levels of debt to future generations. But to raise corporation tax on such a scale risks turning away those businesses which will be central to the growth and investment we need to generate the receipts that will pay the nation’s bills…. But that static approach doesn’t..reflect the fact that businesses are being discouraged from investing in Britain because of the planned increase in corporation tax. …The TaxPayers’ Alliance (TPA) dynamic tax model..suggests the planned corporation tax rise could cost £30.2bn of lost GDP after a decade. This slower growth would see almost two thirds of the expected revenue from the rise to be lost through lower receipts. …By raising corporation tax on this scale, the Government will be eroding that tax base, and we will see more companies like AstraZeneca deciding that there are more competitive places to be investing.
Steve Entin of the Tax Foundation also did some economic analysis and is not impressed with the Sunak-Hunt tax-and-spend agenda.
…the Sunak-Hunt tax plan will raise labor costs and reduce hours worked. It will increase tax hurdles for new corporate investment, discouraging capital formation. With less labor and capital, real output and employment will fall, increasing the economic pain… The system phases out the untaxed personal allowance for incomes between £100,000 and £125,140, at a rate of £1 for every £2 of income over £100,000. This results in a de facto 60 percent tax band in the middle of the 40 percent band. …The Sunak-Hunt plan…leaves the pending rise in the corporation tax in place. It raises the windfall profits tax on oil and gas producers and imposes a new tax on electricity generation, which will drive up the cost of energy, prompting the government to promise more spending on energy grants to consumers. …The Sunak-Hunt tax plan…estimates another 6 million workers will be pushed onto the tax roles due to the freezes. …History is clear. Lowering budget deficits via spending restraint frees resources for additional private output and jobs. …It is folly to think deficit reduction by means of a corporation tax increase would lower interest rates enough to spur investment despite the direct damage from the tax
Let’s close with a few passages from another Wall Street Journal editorial, this one published just yesterday.
U.K. Prime Minister Rishi Sunak promised economic expertise… British businesses think he needs a refresher. Witness the brewing revolt against the mammoth tax increases Mr. Sunak cooked up with Chancellor Jeremy Hunt. …they want to raise the top corporate tax rate to 25% from 19%; reduce the threshold for the top 45% personal income-tax rate to £125,140 from £150,000; and soak the middle class by freezing tax brackets… The ruling Conservatives have convinced themselves that only a balanced budget can induce businesses to invest in Britain. But…James Dyson of vacuum cleaner fame wrote in the Telegraph in January that the Tory policy of tax hikes and overregulation is “short-sighted” and “stupid.” …Pharma giant AstraZeneca last month said it will build a £320 million factory in low-tax Ireland instead of the U.K. “because the [U.K.] tax rate was discouraging.” Shell is reevaluating $25 billion in oil and gas investments after Mr. Hunt cranked up a windfall-profits tax on top of the regular corporate rate. …The business revolt is a warning that the taxes will be fiscal duds. …That may leave the Tories defending a record of slow growth, high taxes and more deficits and debt at the next election. A party of the right that loses its low-tax, pro-growth economic credibility is headed for defeat.
Some readers may not care about fiscal policy in the United Kingdom.
But today’s column is a warning sign about what will happen in the United States if Republicans surrender on spending and entitlement programs are left on autopilot.
The net result of these three periods is that China did enjoy some growth thanks to partial liberalization. The good news is that the wrenching destitution and suffering of the Mao years is now just an unpleasant memory.
But the bad news is that China is still not a rich nation.
Writing for National Review, Veronique de Rugy noted that Chinese officials are sabotaging the nation with industrial policy – and she warns against similar mistakes in the United States.
…some of us were always skeptical of the notion that China would achieve great economic success after having reversed its move toward market liberalization in 2012 and returned to central planning for its industrial policy. …The idea that a country can become rich through central planning is a myth. …malinvestment, economic distortion, and politically driven policies replete with special-interest-driven handouts, all of which are characteristic features of central planning, eventually inflict a sizeable economic toll that’s impossible to hide. When this happens, the economy slows, companies collapse. …we have a deep historical record that shows repeatedly that state direction of economic activity impoverishes rather than enriches. Many people in America today — on the left and right — still have faith that central planning can work economic marvels, and that we should therefore emulate China’s policies. …Too many politicians, economists, and pundits are invested in the illusion that — equipped with models that can ostensibly predict the future — they can design clever plans to organize the economy.
It’s no surprise that bad policy has bad economic consequences. But it also appears that bad policy has adverse psychological effects as well.
Here are some excerpts from a Washington Postcolumn by Nicholas Eberstadt of the American Enterprise Institute.
China is in the midst of a quiet but stunning nationwide collapse of birthrates. …China’s nosedive in childbearing is a silent alarm. It signals deep disaffection with the bleak future the regime is engineering for its subjects. In this land without democracy, the birth collapse can be read as a landslide vote of no confidence in President Xi Jinping’s rule. …Since 2013 — the year Xi completed his ascent to power — the rate of first marriages in China has fallen by well over half. Headlong flights from both childbearing and marriage are taking place in China today. …Birth shocks of this order almost never occur under stable modern governments during peacetime. …“the birth of a baby,” in the words of the government-run publication People’s Daily, remains “a state affair.” But now Beijing wants more babies from its subjects. A dictatorship may use bayonets to depress birthrates — but it is much trickier to deploy police state tactics to force birthrates up. …The dictatorship has brought this demographic defiance upon itself.
Unhappy and pessimistic people don’t have children.
And some of them also will vote with their feet, as reported by Jason Douglas, Keith Zhai, and Stella Yifan Xie for the Wall Street Journal.
Well-heeled Chinese are leaving China for Singapore, attracted by the city-state’s low taxes and high-quality education, amid anxiety over China’s direction under leader Xi Jinping. …Around 10,800 wealthy Chinese left the country in 2022, according to estimates from New World Wealth, a research firmthat tracks the movements and spending habits of the world’s high-net-worth citizens. …Singapore…has particular attractions for Chinese citizens. It is relatively close to Hong Kong and the Chinese mainland, Mandarin is widely spoken alongside English, and the city boasts excellent schools and a financial sector heavily focused on wealth management. …permanent residency and a fast-track route to Singaporean citizenship are available for those willing to invest at least 2.5 million Singapore dollars ($1.9 million) in new or existing Singapore businesses. …another factor driving Chinese nationals to move abroad is unease over a darkening climate for accumulating wealth in China, as Mr. Xi talks up the need for greater redistribution in his drive for a more egalitarian society.
I’m not surprised that class warfare discourages entrepreneurs. That’s true everywhere in the world.
The exodus from China also was addressed by Li Yuan in an article for the New York Times.
They went to Singapore, Dubai, Malta, London, Tokyo and New York — anywhere but their home country of China, where they felt that their assets, and their personal safety, were increasingly at the mercy of the authoritarian government. …Many of them are still scarred by the last few years, during which China’s leadership went after the country’s biggest private enterprises, vilified its most celebrated entrepreneurs, decimated entire industries with arbitrary regulation… Singapore works because about three million of its citizens, or three-quarters, are ethnic Chinese, and many speak Mandarin. They also like that it is business-friendly and global-minded and, most of all, upholds the rule of law. …For decades, Hong Kong played the role of safe haven for mainland entrepreneurs because of its autonomy from China. That crumbled after Beijing introduced a national security law in the territory in 2020.
I’ll close by observing that China’s economic outlook may be even worse than we think because of dishonest data. And if China follows bad advice from the IMF and OECD, the outlook will become even gloomier.
Sometimes, though, politicians don’t even wait for bad results before coming up with new excuses for bigger government.
Last year, a handful of clueless Republicans in the Senate sided with Democrats to enact Joe Biden’s scheme for industrial policy (the so-called CHIPS Act).
But it also should have been opposed because it opened the door for additional forms of government intervention.
Here’s a tweet from Adam Ozimek that summarizes some of the ways that the Biden Administration is using subsidies as a lure to impose a dirigiste agenda.
Here’s what has happened. Politicians have driven a lot of manufacturing away from the United States because of red tape, mandates, and taxes.
So then politicians figured they could bring production back to American with a big package of subsidies for high-tech companies.
Yet those same politicians are now attaching lots of strings to those subsidies. Companies can only get the handouts if they accept red tape, mandates, and taxes.
Here’s some of the Wall Street Journal‘s editorial on the topic.
Government subsidies are never free, and now we are learning the price U.S. semiconductor firms and others will pay for signing on to President Biden’s industrial policy. They will become the indentured servants of progressive social policy. …the Administration is using the semiconductor subsidies to impose much of the social policy that was in the failed Build Back Better bill. …Start with child care, which chip makers applying for more than $150 million in federal aid will be required to provide to their employees and construction workers. …Chip makers will also have to pay construction workers prevailing wages set by unions and will be “strongly encouraged”—i.e., required—to use project labor agreements (PLAs), which let unions dictate pay, benefits and work rules for all workers. …chip makers will have to describe their “wraparound services to support individuals from underserved and economically disadvantaged communities,” such “as adult care, transportation assistance, or housing assistance.” The Administration is imposing a cradle-to-grave welfare system via corporate subsidies.
The editorial concludes with some very sensible observations about the willful stupidity of the self-styled national conservatives who were cheerleaders for this expansion of government power.
The irony is rich because chip makers have shifted manufacturing to Asia to reduce costs. Producing chips in the U.S. is 40% more expensive than overseas. One reason is the U.S. permitting thicket. But chip makers that receive federal largesse will still have to comply with more regulation under the National Environmental Policy Act. …What a wonderful life if you’re a politician. First, pile on regulation that increase business costs. Then dangle subsidies to drive your social policy… We took a lot of grief from the big-government right for opposing the Chips Act, but these conservatives look like chumps for voting for an industrial policy that is now an engine for progressive policy. And one subsidy is never enough. …Welcome to French industrial policy.
The bottom line is that Biden got a victory, but the American economy suffered a defeat.
Politicians and bureaucrats now have a new tool that they can use to make government a bigger burden on the economy’s productive sector.
At the risk of understatement, that’s not a recipe for economic vitality and competitiveness.
Heck, some libertarians think everything can be privatized.
For today’s column, however, let’s focus on the controversy discussed in the video.
I wrote about this issue twice last year. In the first column, I defended Disney’s privatized governance system (the “Reedy Creek Improvement District”).
As explained in the video, the company had every incentive to operate and maintain its theme park in a safe and efficient manner. The goal was to make money by giving customers the best experience at the best price (a mindset that doesn’t seem to exist when governments are in charge).
In the second column, though, I acknowledged that Disney’s privatized governance system could be considered cronyism because other businesses – including other theme parks – did not get the same treatment.
But I pointed out that there was a simple solution, which was that “private governance could be and should be a tick-the-box exercise. Any and all companies that meet transparent criteria should be allowed to choose a self-governance approach.”
But my preferred approach did not prevail.
Governor Ron DeSantis of Florida has a column in the Wall Street Journal celebrating the demise of Disney’s private governance.
On Monday, I signed the law ending the Walt Disney Co.’s self-governing status over 43 square miles in central Florida… Disney no longer has its own government. …Disney’s special arrangement, which dates to 1967, was an indefensible example of corporate welfare. It provided the company with favorable tax treatment… It exempted Disney from Florida’s building and fire-prevention codes. …For decades, GOP elected officials have campaigned on free-market principles but governed as corporatists—supporting subsidies, tax breaks and legislative carve-outs to confer special benefits on entrenched corporate interests. But policies that benefit corporate America don’t necessarily serve the interests of America’s people and economy.
I fully agree with DeSantis on the downsides of cronyism.
It’s nauseating (and economically harmful) when big business gets in bed with big governance.
I just wish he had picked the tick-the-box strategy for getting rid of favoritism.
Let’s close by looking at something else from Reason. Last July, Scott Shackford defended Disney’s private governance.
DeSantis and Florida’s Republican-controlled legislature took aim at the Reedy Creek Improvement District (RCID), which state lawmakers established in 1967 to give Disney substantial autonomy within the nearly 40 square miles it owns in Orange and Osceola counties. The special district allows Disney to control zoning, construction, infrastructure, emergency services, and taxation to pay for all of it. …While DeSantis and other Florida Republicans seem to view the RCID as an undeserved privilege, it freed Orange and Osceola counties, along with their taxpayers, from responsibility for Disney’s massive park. For instance, Disney pays the Orange County Sheriff’s Office millions of dollars each year for policing services.
It would be nice if this approach had been made universal.
P.S. As explained in the video, DeSantis and other Republicans decided to go after Disney because the company opposed a bill that restricted whether young children could be exposed to issues involving sexual orientation. My defense of Disney’s private governance has nothing to do with that topic (which should be addressed by having school choice so that parents can decide what’s best for their kids).
P.P.S. For those interested in privatized local governance, there are interesting examples in Mexico, South Africa, and Nigeria.
This is why governments should keep tax rates at modest levels.
But as you can see from this map from the Tax Foundation, European governments generally cannot resist the temptation to impose onerous top tax rates on investors, entrepreneurs, business owners, and other successful taxpayers.
Congratulations to Hungary for having the lowest rate, followed by Estonia, the Czech Republic, and Slovakia.
And “congratulations” to Denmark for having the highest top tax rate, followed by France, Austria, and Spain.
At this point, a few caveats are necessary. A nation’s top income tax rate is important, but it’s not the only thing that matters for tax policy.
It’s also important to look at social insurance (payroll) taxes, particularly if they apply to all income.
It’s also important to look at the level of “double taxation” on income that is saved and invested.
It’s also important to look at VATs, which increase the wedge between pre-tax income and post-tax consumption.
Needless to say, other economic policies also matter. A nation might have a good tax system but very dirigiste policies in other areas. Or vice-versa.
For instance, even though Hungary has the lowest top tax rate on personal income and Denmark has the highest, there’s actually more overall economic liberty in Denmark.
Some readers may be wondering how the United States compares to the European nations shown in the above map.
The good news (relatively speaking) is that the top tax rate in the United States is 42.9 percent, so that’s lower than the average in Europe.
The bad news is that the US would have the highest tax rate if Biden’s budget was approved.
However, the top income tax rate in the United States can vary substantially depending on state.
When the central government is small and most government takes place at the state and local level (or, in the case of Switzerland, at the cantonal and municipal level), there is more diversity, choice, and jurisdictional competition.
Today, let’s review some wise – and blunt – analysis from Steven Greenhut.
In an article for Reason, he connects the dots to show that the level of corruption is linked to the size and power of government.
Whenever some astounding corruption scandal explodes onto the front pages, the public is aghast and policymakers cobble together new reforms that promise to keep such outrages from occurring again. …Soon enough, however, we learn about new abuses—or some other scandal grabs the headlines. …corruption is inherent in a system where officials dole out public money and regulate almost everything we do. …The most corrupt nations are, of course, those where dictators, politburos, bureaucrats and security officials can do as they please—and where lowly citizens lack the right to free speech or due process. Our current government may be a far cry from the one the founders designed, but it attempts to limit government power, which is the main source of corruption. …corruption fundamentally is a problem of government power, as official actors use immense powers to help themselves and their allies. If we want less corruption, the solution is obvious: We need less government.
Amen. When government’s footprint is smaller, there’s less opportunity for graft.
The simple message is that budget deficits are not necessarily inflationary. It depends how budget deficits are financed.
If a government finances its budget deficits by selling bonds to private savers and investors, there is no reason to expect inflation.**
But if a government finances its budget deficits by having its central bank create money, there is every reason to expect inflation.
So why would politicians ever choose the second option? For the simple reason that private savers and investors are reluctant to buy bonds from some governments.
Consider the example of Japan. It has been running large deficits for decades, resulting in an enormous accumulation of debt. But Japan has very little inflation by world standards. Why? Because governments bonds are financed by private savers and investors, who are very confident that the Japanese government will not default..
Consider the example of Argentina. It has been running large deficits for decades. But even though its overall debt level if much lower than Japan’s, Argentina suffers from high inflation. Why? Because the nation’s central bank winds up buying the bonds because private savers and investors are reluctant to lend money to the government.
If you want some visual evidence, I went to the International Monetary Fund’s World Economic Outlookdatabase.
Here’s the data for 1998-2022 showing the average budget deficit and average inflation rate in both Japan and Argentina.
The bottom line is that prices are very stable in Japan because the central bank has not been financing Japan’s red ink by creating money.
In Argentina, by contrast, the central bank is routinely used by politicians as a back-door way of financing the government’s budget.
*To make sure that my libertarian credentials don’t get revoked, I should probably point out that all governments are untrustworthy. But some are worse than others, and rule-of-law rankings are probably a good proxy for which ones are partially untrustworthy versus entirely untrustworthy.
**Borrowing from the private sector is economically harmful because budget deficits “crowd out” private investment. Though keep in mind that all the ways of financing government (taxes, borrowing, and money creation) are bad for prosperity.
The easy and correct answer is that both are major problems.
But some people think the problem is that EU nations don’t tax and spend enough.
To make matters worse, this kind of thinking infects the bureaucrats at the European Commission, which has released a new report that reads like a Bernie Sanders campaign screed.
It starts by pretending that that Okun’s tradeoff doesn’t exist.
…taxation can contribute to both social justice and sustainable growth, as well as financing the benefits which underpin the social citizenship contract… Contrary to the rhetoric about the inevitability of a trade-off between social justice and economic growth and a fiscal crisis of the State, the problems of financing the welfare state are far from being inevitable. …everyone should be willing to pay their share of the costs involved, whether individuals or companies.
It then explicitly endorses “pay as you go” as a model for fiscal policy, even though that approach is utterly impractical for a region with aging populations and falling birthrates.
The first specific suggestion is that a PAYG approach is the best way to link the rights and duties of generations over time, in line with the social citizenship contract at the heart of the welfare state.
The report has 21 recommendations. Here are the ones that endorse and embrace new and expanded entitlements.
As you might expect, all that new spending is accompanied by a seemingly endless list of new and expanded taxes.
There are two main options for reforming the taxation of personal income. The first is to expand the tax base by limiting or reducing the many tax breaks that are currently present, from tax credits and tax allowances to tax exemptions and preferential treatment of different sources of income, such as income from capital… The second option for reform is to make the taxation of income more progressive. …Increasing corporate taxation. …As with preferential personal income tax regimes, the EU has an important role to play in levelling the playing field, so eliminating the negative externalities of tax competition and ending the ‘race to the bottom’, as well as making multinationals pay their fair share of tax. …there are a number of arguments for higher taxes on wealth. …Increasing taxes on wealth could help to achieve greater fairness, both in the tax system and in the distribution of resources… A tax on net wealth could complement taxes on income from capital… Indirect taxes…can make it easier to achieve social objectives, as in the case of ‘sin’ taxes… Measures such as the EU carbon tax border adjustment mechanism…can prevent unfair competition… Another option is to tax excess profits… A ‘web tax’ aimed at the excess profits of digital service companies, based on their turnover, could be a transitional step… A levy on financial transactions can also be justified, on grounds of fairness… A further option for Member States is to introduce a new tax, …a surcharge levied at source on all incomes… In summary, there are many options for achieving an adequate, fair, and sustainable means of financing of social protection at both EU and Member State levels.
That’s a frightening list.
And if it looks like it might get implemented, one can only imagine how productive people in Europe would start making plans to escape.
But the bureaucrats recommend Soviet-style exit taxes so they can continue grabbing more money.
Another option would be to tax expatriates for a given number of years after they leave the EU.
Let’s close by looking at one final excerpt.
Nations in the European Union supposedly are bound the “Maastricht Critieria” from something called the Stability and Growth Pact.
These fiscal rules focus on limiting deficits and debt and thus are not nearly as good as the spending cap in Switzerland’s “debt brake.”
But even these weak rules apparently are too stringent according to the report.
…there is widespread agreement on the value of social investment for sustaining the inclusive welfare state in the EU… But…the long-term benefits of social investment constantly come up against short-term pressure for fiscal consolidation. …A new system is needed for monitoring public finances in the EU that would allow policy-makers to identify productive social investment…a golden rule should be applied, allowing borrowing for social investment… A starting point should be to exempt social investment from the new Stability and Growth Pact rules.
The bottom line is that Europe already suffers from excessive fiscal burdens.
Yet the European Commission wants to drive even faster in the wrong direction.
I feel sorry for European taxpayers. Their tax dollars were used to prepare a report that outlines various ways of confiscating an even greater share of their money. That’s adding insult to injury.
All this seems like a strong argument for smaller government. And it is.
But all this data I’ve been sharing may understate the case for economic liberty.
I wrote last October about how satellite-based measures of nighttime light (a proxy for economic vitality) show that nations with less political freedom have a tendency to exaggerate economic performance.
So what happens if we measure the relationship between economic liberty and economic performance using this more-accurate satellite-based data?
Sean P. Alvarez, Vincent Geloso, and Macy Scheck answered that question. Here are some excerpts from their new study.
…the well-documented proclivity of dictators to fudge GDP numbers biases our estimations of the effects of economic freedom on economic development. Since dictatorships are generally also countries with low economic freedom, overstated GDP numbers can fool us into finding more modest effects of economic freedom. To test our argument, we employed newly generated adjustments to GDP numbers based on artificial nighttime light intensity that corrected for the overstatements that dictators made… Swapping unadjusted and adjusted GDP numbers as dependent variables in similar econometric setups allowed us to estimate how large is the bias. For income levels between 1992 and 2013, we find that the true effect of economic freedom is between 1.1 and 1.33 times larger than estimations based on manipulated GDP numbers. For income growth, we find smaller effect for the economic freedom index as a whole but some signs that some components (size of government and the security of property rights) have underestimated positive effects that should not be neglected.
Wonky readers may be interested in the results contained in Table 2 from the study.
And here’s some of the text discussing those results.
…the use of adjusted GDP figures suggests that the effect of economic freedom (i.e., the aggregate index) is roughly 25% larger than estimated with unadjusted GDP figures. For the different components of the index, the use of adjusted GDP figures has an uneven effect. For example, regulation and freedom to trade suggest that the true effects are roughly 20% larger than when using the unadjusted GDP figures. In contrast, the true effects for the component that speaks to the protection of property rights are more than 33% stronger. These are economically significant results that speak to a large bias against finding a pro-development effect of economic freedom.
The bottom line is that economic liberty apparently matters even more than we thought – about 25% more.
So if you want to know why I’ve been so critical of Bush, Obama, Trump, and Biden, that’s part of the answer.
For all intents and purposes, both the current president and his predecessor want to kick the can down the road, which surely is a recipe for massive future tax increases and may cause drastic changes to promised benefits.
Given their advanced ages, they probably won’t be around next decade when the you-know-what hits the fan.
But the rest of us will have to deal with a terrible situation thanks to their selfish approach.
Other nations are more fortunate, with leaders who put the national interest above personal political ambition.
Johan Norberg has a new column in the Wall Street Journal about how Swedish lawmakers adopted personal retirement accounts and undertook other reforms to strengthen their pension system.
President Biden refuses to consider any reforms, and so do many Republicans. But that won’t save the program; it’ll doom it. …Sweden faced the same problem in the early 1990s. The old pay-as-you-go pension system had promised too much. With fewer births and longer lives, projections showed the system would be insolvent a decade later. …Its politicians chose not to deceive the voters. …In 1994 the Social Democrats agreed with the four center-right parties to create an entirely new system based on the principle that pensions should correspond to what the beneficiary pays into the system—a system in which the contribution, not the benefits, is defined. …Sweden introduced partial privatization of the kind the American left derides as a Republican plot… The Swedish government withholds roughly 2.3% of wages and puts it into individual pension accounts. Workers are allowed to choose up to five different funds in which to invest this money…the average Swede has made an impressive average return of roughly 10% a year since its inception in 1995, despite the dot-com crash, the financial crisis and the pandemic. …Sweden’s pension system was recently described as the world’s best by the insurance group Allianz, based on a combination of sustainability and adequacy.
Back in 2018, I wrote about Sweden’s pension reforms, and I cited a study I co-authored back in 2000 for the Heritage Foundation.
Readers who want to learn more about the details of the Swedish system should read those publications.
For purposes of today’s column, though, let’s zoom out and see how Sweden’s system compares to other nations.
We’ll start by looking at a report by Mercer and the Chartered Financial Analyst Institute, which compared retirement systems in 43 developed countries. You can click here to view the full report and full rankings, but let’s focus on the United States and Sweden.
As you can see, Sweden beats America in every category, including a giant lead for integrity.
It’s also worth noting that Sweden is above average in every category while the United States is below average in two of the three categories.
Based on the Mercer/CFA report, we know Sweden’s system is good for workers.
But what about taxpayers?
Here’s a table showing the fiscal burden of old-age programs in European nations, taken from a report by the International Monetary Fund.
As you can see for both the present and the future, Swedish taxpayers face one of the lowest burdens, with old-age spending consuming significantly less than 10 percent of economic output.
I’ll close with a couple of very important observations about the international data.
Sweden is not the top nation in the Mercer/CFA report. It trails Australia, Denmark, Iceland, Israel, Netherlands, and Norway – all of which have systems that are fully or partly based on mandatory private savings.
Sweden does have the lowest spending burden in the IMF. The Baltic nations all do better – and all of those countries have systems that are partly based on mandatory private savings.
It’s almost as if there’s a lesson to be learned, even if Biden and Trump want to bury their heads in the sand.
P.S. Here’s my short video making the case for personal retirement accounts.
I don’t like Joe Biden’s economic policies, though that’s hardly a surprise since I haven’t liked the policies of any president this century (I’ve referred to Bush, Obama, and Trump as the “three stooges of big government“).
Other people have a more sympathetic perspective on the President’s performance.
David Leonhardt of the New York Times wrote an analysis of Joe Biden’s economic record and he lists two failures.
Inflation
Failure to get approval of the so-called Build Back Better plan
And he lists three supposed successes.
Economic recovery
Infrastructure and tech subsidies
Green subsidies
I disagree with much of Leonhardt’s analysis. For instance, his section on inflation does not mention the Federal Reserve. That’s sort of like writing about World War II and not mentioning Germany (other journalists have made the same mistake).
But I want to focus mostly on what Leonhardt wrote about the economy.
His main contention is that Biden is a success because the unemployment rate is low. Yet that overlooks the fact that labor force participation is weak, so I don’t view that as a Biden “success” (and I have been raising this concern since way before Biden took office).
But a far bigger problem with Leonhardt’s analysis about the economy is that he wrote nothing about living standards. I don’t know if that was a deliberate omission, but almost everything his readers should have learned is captured by this chart from the Department of Labor.
In the interest of full disclosure, I highlighted the “0.0” line in orange because I wanted to emphasize that inflation-adjusted worker compensation has been negative for the entirety of the Biden presidency.
By the way, it would be perfectly reasonable for a Biden defender to point out that worker compensation was already dropping when he took office. And it also would be reasonable for a Biden defender (or even a Trump defender) to blame that drop on the pandemic.
A Biden defender also could claim that the trend in recent months has been positive and that we might actually see rising living standards in the future.
However, those caveats don’t change the fact the Leonhardt’s article fails to mention the economic data that arguably matters most to people. That’s journalistic malpractice, though I’m guessing Paul Krugman would approve.
P.S. Leonhardt’s failure to mention living standards is not the worst example of journalistic malpractice at the New York Times. That award goes to the three reporters who wrote a big story about Venezuela’s economic failure and never once mentioned socialism.
So where there is occasional good news, I like to relish the moment.
For instance, I’ve been getting immense enjoyment from the progress on school choice over the past couple of years. Particularly the enactment of state-wide choice programs in West Virginia, Arizona, Iowa, and Utah.
Another area were we’ve seen big progress is state tax rates. I’ve also written about that topic, showing earlier this month how average top personal income tax rates have declined in recent years.
Today, let’s let a couple of maps tell the same story.
Here’s the Tax Foundation’s new map showing top personal tax rates for 2023. At the risk of stating the obvious, it’s best to be grey. But if you’re not grey, it’s good to be a lighter color and bad to be a darker color.
Now compare that map to the 2021 version. You’ll easily notice more dark-colored states.
But since the color schemes for the maps are not exactly the same, the best thing to compare numbers for specific states.
You’ll see some states have made huge progress, most notably Arizona and Iowa, but also incremental progress in most states.
By contrast, only a few states have moved in the wrong direction, most notably Massachusetts (thanks to a terrible referendum last November) and New York.
As you might expect, given the chance to “vote with their feet,” people and businesses are moving from high-tax states to low-tax states.
There are not enough rich people to finance the current level of government spending.
International Liberty 