President Obama is stubbornly clinging to his ideological agenda of bigger government and class warfare. Wasteful programs magically become “investments” for growth, and higher tax rates get turned into “shared sacrifice.”
Interestingly, we already know what eventually happens with this approach. Europe’s welfare states are now dealing with the wreckage of Obamanomics-type policies and the results are not pretty.
We already know about the fiscal crises in nations such as Greece and Portugal, and it’s probably just a matter of time before Spain, Italy, and Belgium face similar problems (and because of demographics, even the market-oriented welfare states of Northern Europe may be on borrowed time).
To put it bluntly, European nations have spent themselves into a fiscal ditch and they’re now trying to figure out how to deal with the carnage.
But while there’s been lots of attention paid to the spending crisis in Europe, there’s also a very interesting – albeit under-reported – story on the revenue side of the budget ledger.
Europeans appear to be learning, slowly but surely, that it is a mistake to saddle an economy with punitive tax rates. Here’s a chart from a recently released European Commission report. It shows average top tax rates for European Union nations (the top line is for the subset of nations that use the euro currency and the bottom line shows the average of all EU nations).
As you can see, the average top tax rate in Europe has dropped by about 10 percentage points since 1995. Perhaps most remarkable, the average top tax on individuals is now down to about 37 percent – lower than the 39.6 percent rate that Obama wants for the United States. And that doesn’t even count the higher payroll tax rate endorsed by the President!
Even the Euro-zone nations have dropped their average top tax rates by about seven percentage points during the period. But what may be most noteworthy is that these nations have been reluctant to rely on class warfare taxes in response to the fiscal crisis. Yes, the overall top tax rate has crept up by one percentage point in recent years, largely thanks to increases in nations such as Greece and Portugal, but that’s an amazingly restrained response – particularly compared to how politicians would have tried to rape and pillage the “rich” if the fiscal crisis happened twenty or thirty years ago.
While it’s a bit risky to draw long-term conclusions from any set of data, it does seem as if the European political elite have finally realized that economic damage caused by class-warfare taxation is greater than any political benefits of pursuing those soak-the-rich policies.
Maybe they’ve learned because there is growing evidence for the Laffer Curve (why raise tax rates, after all, if you don’t get more money to waste?). Or maybe they’ve learned because of tax competition (why raise tax rates if that causes the geese with the golden eggs to fly across the border?).
All we can say for sure, however, is that those same lessons have not been learned in America.
I’m curious, how do EU rates compare on Cap Gains?
One more question. If the Golden Geese flee, why didn’t they all already flee Europe and come to the US in the 90s and 00’s?
Hey Ben, I think, and this is purely speculative on my part based on my limited “education” on such matters, it may have something to do with the over-regulation in America on business opportunities. The proverbial geese don’t fly here, they fly to places like India, Pakistan, China, Mexico, etc. What do you think? Make sense? Anyone?
Yes, you are right, they at least move their laying Hens (metaphor taken too far) to places like India, Pakistan and China. I don’t think this is related to taxes in those countries but more with the under-regulation you mentioned and more so, low wages.
Do those low wages exist as a result of under-regulation? Perhaps. I’m sure it costs more to make factories safe for employees, and it costs more to have workers only working 8 hour shifts, and it certainly costs more to dispose of chemical waste etc in a responsible way, versus just dumping it into rivers or the ocean. And in most other countries the employer doesn’t have to provide health insurance. (Not that all of ours do, but many) But at the end of the day, they just have a gazillion people, so they work cheap!
It is also beneficial to have the workers under control, as in China, where they can’t really read about conditions in other developed countries and they can’t organize. American companies benefit from their lack of a free press.
CEOs definitely don’t relocate to these countries though! They stay in developed countries where their taxes have paid for clean water, safe buildings and solid infrastructure etc. Granted China is starting to beat us in all of these areas but environment, but so far the money likes to stay in the developed countries.
I guess I just rambled, didn’t make a succinct point.
http://www.westernyouth.org/the-dagger/denmark-saves-billions-by-slashing-immigration/
Stats on incarceration:
http://www.examiner.com/law-enforcement-in-national/criminal-alien-statistics-arrests-incarcerations-and-costs?fb_comment=32873421
http://www.nationmaster.com/graph/gov_cor-government-corruption
The American middle class is being bamboozled into waging war against itself. And history tells us that this is a war that it will loose.
The main difference in taxation between the US and Europe is not how much the rich are taxed but how much the middle and upper-middle class is taxed. It is thus the middle and upper-middle class that is considerably less taxed in America compared to Europe (top tax rates in Europe typically kick in at 2 times average income while in the US top tax rates do not kick in until about 7 times average income, plus Europeans are taxed through VAT 20-25% on everything they buy whether rich or poor) and thus this American middle-upper income group is ultimately where Washington will (inevitably must) turn to in order to raise revenue.
When it comes to the rich, taxes on the wealthy are already comparable on both continents, especially if one includes state taxes. Both continents have already taxed their rich at or near the top of even the **short term** Laffer Curve (the, more important, long term Laffer Curve, peaks earlier than the short term one, and the even more important Prosperity Maximizing Laffer Curve even earlier). As Europe has proved – and the US is about to prove – taxation is way past the long-term Prosperity Maximizing Laffer Curve, as demonstrated by the anemic 1-2% European growth trendlines in a world growing by 4-5% on average.
Others have used better words than I can come up with to describe what amounts to being the pivotal difference between:
a) Short Term Laffer Curves,
b) Long Term Laffer Curves
c) Prosperity Maximizing Laffer Curves
“
Greg Mankiw: My guess is that that the short-run answer and the long-run answer are quite different. For example, if you raised the top rate from 35 to, say, 60 percent, you might raise revenue in the short run. Over time, however, you would get lower economic growth, so the additional revenues would fall off and eventually decline below what they would have been at the lower rate…. I will pass on offering a specific number, as it would require more time and thought than I can offer just now, but I will opine that I think the long-run answer is actually more important for policy purposes than the short-run answer.
Martin Feldstein: Why look for the rate that maximizes revenue? As the tax rate rises, the “deadweight loss” (real loss to the economy rises) so as the rate gets close to maximizing revenue the loss to the economy exceeds the gain in revenue….
“
Or, in my own words,
After 60 years of communism the amount of revenue that a 28% rate collected on the $50,000 average American income, dwarfed the revenue that the 90% Soviet rate collected on the average $5,000 Russian income (*)
… which also points to the stupidity of using tax revenue maximization to set tax policy, since the overriding element in the above comparison is obviously the misery of the $5,000 Soviet vs. $50,000 American income, not the amount of money gathered by the state for collective endeavors.
So when it comes to prosperity we are back to the all overriding principle I posted last time:
In the long term, slow growth rates dwarf whatever short gains the majority believes they can gain by class warfare, as well as all macroeconomic gimmicks intended to increase prosperity through lower incentives to produce.
(*) These are by no means exact numbers, inflation adjusted etc. but you get the point.
“One more question. If the Golden Geese flee, why didn’t they all already flee Europe and come to the US in the 90s and 00′s?”
They did, but severe restrictions in immigration policy prevented the manifestation of what would have been a much more widespread phenomenon.
More interestingly, most Europeans who migrated to the US, did so not to avoid taxes (since many of the European migrants were simply middle class, but aspiring ambitious people) but rather to thrive in the fertile entrepreneurial and prosperity generating environment that lower taxation fosters.
Many of those very European immigrants (many of whom I still socialize with to this day – but admittedly with increasing difficulty since 2008), start lamenting the absence of a welfare American state soon after setting foot on this continent, unaware (or unwilling to admit) that the absence of mandatory compassion is what propelled this country of otherwise mediocre people (sorry Americans) to the top of the prosperity scale, placing the American middle class in the top 10% of worldwide wealth, and being the very reason why the American environment became attractive to these aspiring European immigrants in the first place.
Needless to say, these types of immigrants do not like me that much at their Martini parties…
As I have said before, for the more systemically mediocre Americans, unfortunately, the marrying of the typical Average American’s competence with French incentives to produce will not even equal France (as if France’s path of constant decline were an enviable thing). The end result for Americans will be something more along the lines of Spain or Greece. Temporary backlash, and the occasional election of a Tea Partier here and there will do little other than temporarily forestall this ultimate destiny. It is too late to fundamentally change course for America. I see that in the beliefs of most Americans I encounter. They are oblivious to what made this country prosperous in the first place. So, the tipping point has passed. 2008 will be retrospectively labeled in history as: “American Prosperity, Last exit”. Alas Americans stayed on the HopeNChange freeway to Francification.
Back @ Ben: I think you made a perfectly valid point. That’s the blessing of living in the information age with all of our modern technological advances. The guy making the big money and the big decision for his business doesn’t have to leave the lap of luxury that is provided in a developed nation in order to manage said company. He can send minions to those places and manage via electronic communications.
@ Zorba: Wow look at the big brain on you. I’m impressed. I wish I had the knowledge to lay it out like that. Very informative. Thank you.
Good discussion. Thanks to both of you.
Yes, good discussion. Zorba you do really lay it out well!
And TexasBound I think it is a blessing and a curse that we can send work overseas and manage here. As someone in the software industry, I can tell you it was more enjoyable to create things than it is to clean up after foreign coders that can code but have trouble communicating. And most companies won’t let them communicate with customers because they are afraid of backlash if the customer knew the work was off-shored.
We have heard for years that this is better for our economy, but I have not been convinced yet. As we run high unemployment numbers here, something like a half a million jobs have been created by US corps in developing countries. On top of that, a lot of tech companies are abusing the visa program to get get cheap labor here. I have to wonder what our middle class jobs are going to be in 10-20 years! Is it our goal to be able to compete with China?
As this article states: “We make stuff overseas because the Chinese are paid 1/30th of our median manufacturing salaries. (Attn. “China’s Cheap Currency Is Stealing Our Jobs” Crowd: That’s not a ratio that you can wipe out with a few years of currency appreciation.)
Read the full story at http://finance.yahoo.com/news/How-Much-Would-iPad-2-Cost-If-atlantic-2073967027.html?x=0
I have to say, every time I comment on a Cato/Mitchell story, the conversations never get ugly. And I generally come from a left of center position, (but with an open mind). It’s remarkable. Maybe my experience is not indicative of all but it is nice!
Paul Craig Roberts on the consequences of offshoring and free trade:
Sorry for the coding error above. Click HERE for that PCR article.
Wow, I’ve never heard it summarized so well!! Thanks.
That article was excellent and I cannot believe it came from a magazine called American Conservative!! It criticized reducing costs by outsourcing AND exploiting natural resources?!? Do any conservatives read this magazine? 🙂
The bottom line is:
If Americans want to have an exceptional standard of living compared to the rest of the world, then they must have some exceptional productivity to show for.
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There are many ways that express the above principle in economic terms. However, apart from being obvious, it is also such a ubiquitous canon that one might as well call it
“The Principle of Conservation of Wealth”.
The principle, does not represent a statement of relative morality or a manifesto of how the world ought to be according to some ethical code. It is something much more fundamental and immutable to political and economic beliefs, laws policies and regulations. It is simply a fixed law of wealth, akin to the conservation of energy in nature. It cannot be circumvented and it is utterly delusional to believe that this principle can somehow be bypassed by legislation, macroeconomic manipulation, capitalism, socialism, communism, libertarianism or whatever other political system or beliefs. Complaining about the universal existence of this principle would be akin to griping about the existence of gravity or the inexistence of perpetual motion machines.
This does not mean that a nation must produce the very products and services it consumes but it must, in anything but the very short term, produce total goods and services EQUAL in VALUE to what it consumes, the value being determined by how difficult something is to produce (how many resources, natural, human, innovative, entrepreneurial etc. it takes to make it) and the value worldwide consumers place on the product or service. I.e. the proverbial equilibrium of supply and demand.
There seems to be a widespread politico-economic urban legend that countries CAN, or somehow HAVE in the past, achieved prosperity without producing. This is flatly a misconception which, when properly understood, enables one to recognize many of the fundamentally deceiving arguments that politicians use to bamboozle their electorates with promises of perpetual motion machines which create wealth through effortless production. Believing that there are nations that somehow achieve outstanding prosperity without exceptional production is akin to believing that somewhere in someone’s garage, the principle of conservation of energy is being routinely violated.
Indicative of how true this “The Principle of Conservation of Wealth” is, note that even relatively small imbalances in value of goods consumed vs. value of goods produced mathematically lead to great problems sooner rather than later. Even outlier extreme countries that allegedly violate this principle in the mind of the American electorate, such as the much maligned Greeks, can only do so to a minor extent and not for very long. Greeks simply consumed about 15% more than they produced in the last decade. In other words, they lived a life that was 15% richer than their productivity could support. Thus Greece’s delusional attempt to scarcely circumvent that principle and the attempt to live a very modest 15% better than their production justified, caught up with the bamboozled nation in catastrophic consequences within a mere 10 years. Similarly, the much ballyhooed American trade deficit means that Americans live a life that is a mere 5% above what their productivity would support. While even a perpetual 5% deficit will make a difference after a decade or so (because other people in the world become unwilling to perpetually support even an additional 5% complementary standard of living), it hardly means that Americans (or Greeks for that matter) live at the expense of other nations in anything but a nearly trivial extent.
In summary, a nation always has and always will enjoy the wealth created by its production. Trying to legislate or convince people that there are economic or governing gimmicks that will somehow endow Americans to live a life that is 6 times better than the world average while producing the same stuff that now 3+ billion people are learning how to produce in their newly acquired economic freedom, is simply delusional. It gets you nowhere, and is also detrimental because it diverts resources and hope to circumventing an unyielding principle of arithmetic.
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In conclusion, if Americans want to maintain prosperity, they must posses something unique, something that cannot be copied. Alternative energy? It can be copied. Highways, bridges, educational systems, schools etc. they can all be copied. What cannot be copied?
The temptation to use the ballot box as a redistribution machine to easier prosperity.
Why can it not be copied? Because it is simply human nature to do so if you can. It is human nature to be tempted into stifling the prosperity of your baseline growth for the short term benefits of redistribution.
For reasons that I will refrain from entering into in this already long post, Americans had been endowed with a culture of self reliance that was adverse to this very natural but economically pernicious class warfare. No more so apparently. Now that Americans have finally reverted to the world average and embraced class warfare, it is time for America’s unique prosperity to also converge to the worldwide average.
There is no imperical evidence to support the Laffer curve. In fact, what we see is that each time ( Reagan & Bush 2) when marginal rates on top bracket were lowered, pulic deficits ballooned!
Also, all of these bogus arguments fail to recognize a key factor in the US Tax Code, and that is the very generous tax deductions and credits that are largely designed to benefit the top tax earners. The reality is that these marginal tax rates greatly overstate the actual tax rate that is actually paid by the top income earners.
As for class warfare, this is total nonsense, unless you feel that the hanging on to their privileged treatment under the US tax code is a form of “let them eat cake.”
Flat tax is the fairest system, but the rich will not support a system that reduces their ability to manipulate the tax code via political contributions for tax breaks.
Many people have asked me why, of all the detrimental things that government does I tend to concentrate on class warfare. Because, redistribution provides the moral backing and justification for most of the other pernicious things that government does.
This is not only true for the government, but for voters themselves. Government and politicians in most cases are simply reinforcers and impementors of this basic voter morality. Thus, most voters understand that nearly all of the central planning activities taken up by government are disproportionately financed by a minority of people. So when the government builds more roads, more schools or delusionally goes against economic fundamentals by giving subsidies etc. people understand that these things are primarily financed by a minority of more productive, more capable, or plain harder working people. Most people, even if perhaps not entirely convinced, can sense that central planning is ultimately inefficient and detrimental. However, to the extent that such central planning is necessary as an indirect means of redistribution, people are willing to go along with it.
And so it is this redistributive effect that makes central planning so appealing to the voting public. I think voters understand this both consciously and subconsciously. This is perhaps the fundamental reason why Thomas Jefferson famously warned that the natural order of things was for liberty to yield and for government to advance. Because people want it! People want and exploit the redistributive effects majoritarian power yields over more exceptional people who, almost by definition, are a minority.
All these forces have, of course, played in the Old World for a long time, in countries whose citizens are overall more capable than Americans. Americans, through the unique historical serendipity of having discovered a virgin continent and the fortuity of an early English influence, had been largely spared that mentality and fate and, as a consequence, achieved great prosperity in spite of their world renowned simplicity.
So, now that Americans have reverted to the world average and embraced class warfare, they must be forewarned of their naiveté in unleashing the irreversible pernicious forces all too familiar to those of us who were born and grew up in the Old World, before coming to America. They are unleashing the economic inefficiency of central planning (together, to some extent with some inevitable corruption) and are also severely hampering the incentives to produce in a vicious cycle of
[Redistribution] –> [Less incentives to produce]–>[Economic distress and desperation] –> [Vote for more redistribution] –> [Get even less production] etc.
The urge to produce is stifled by redistribution for obvious reasons. At the high end of the productivity scale people are discouraged from working by the fact that they have to spend a significant proportion of their day working not for their families, but for some distant allegedly needy unknowns — while at the low end of the productivity scale, people relax more into mediocrity since they feel that through their vote they will somehow be shielded from the consequences of mediocrity.
But it is a fallacious belief. Because in the end, when it comes to prosperity, the only thing that matters in the longer term is economic growth. A low economic growth, in the end, will dwarf whatever temporary comforts the redistribution of class warfare can afford.
So even without the effect of a lower growth rate, there is simply not enough income amongst the rich to finance all the central planning aspirations the electorate votes for themselves in pursuit of this inefficient redistribution. So, in the end, it will be voters themselves who inevitably must, sooner rather that later, end up paying for their own welfare states, except with the government now acting as the middleman – and a middleman with monopoly of power at that. This is basically what has happened in Europe where in essence the most competent amongst peoples in the world languish squandering their superior abilities in the low incentives of the welfare state — saddled with perpetual low growth rates of decline. Europe has already taxed its rich people into the Laffer Curve and thus the middle class was inevitably called upon, long ago, to essentially pay for their own benefits in an inefficient, innovation and labor supply stifling way.
This last step where the middle class is ultimately tapped to pay for their own benefits has not yet happened in America. But it is about to happen, hence talk about VAT and other covert taxes that will enable the government to act as the permanent welfare middleman.
As I said, the unique thing about Americans is that, through historical fortuity, they had rejected this human tendency at democratic redistribution and, as a result, achieved unparalleled prosperity in spite of their simplicity. That was the one unique thing that other nations and cultures could not copy because they could not override and refrain from their fundamental human impulse of redistribution at the polls. With Americans now reverting to the worldwide average cultural norm, their prosperity will also, one way or another, converge to the average worldwide norm. There will be many distractions on the road to decline, but this will be the central theme and the seminal historical event of the early 21st century: America’s decline and regression to the worldwide average.