I’m not overly excited about the 2012 presidential race, especially since the major choices at this point are three candidates who don’t seem to have much commitment to economic freedom and individual liberty.
So when someone sent me this cartoon, I immediately decided it had to be my next blog post.
Too bad we can’t turn the clock back 11 years. I’m not joking when I say I would gladly go back to Bill Clinton. No, he wasn’t a libertarian, but economic freedom increased during his tenure. And I care about results.
Back in 2010, I crunched the numbers from the Congressional Budget Office and reported that the budget could be balanced in just 10 years if politicians exercised a modicum of fiscal discipline and limited annual spending increases to about 2 percent yearly.
Well, the new CBO 10-year forecast was released this morning. I’m going to give you three guesses about what I discovered when I looked at the numbers, and the first two don’t count.
Yes, you guessed it. As the chart illustrates, balancing the budget doesn’t require any tax increases. Not does it require big spending cuts (though that would be a very good idea).
Even if we assume that the 2001 and 2003 tax cuts are made permanent, all that is needed is for politicians to put government on a modest diet so that overall spending grows by about 2 percent each year. In other words, make sure the budget doesn’t grow faster than inflation.
Tens of millions of households and businesses manage to meet this simple test every year. Surely it’s not asking too much to get the same minimum level of fiscal restraint from the crowd in Washington, right?
At this point, you may be asking yourself whether it’s really this simple. After all, you’ve probably heard politicians and journalists say that deficits are so big that we have no choice but to accept big tax increases and “draconian” spending cuts.
But that’s because politicians use dishonest Washington budget math. They begin each fiscal year by assuming that spending automatically will increase based on factors such as inflation, demographics, and previously legislated program changes.
This creates a “baseline” and if they enact a budget that increases spending be less than the baseline, that increase magically becomes a cut. This is what allowed some politicians to say that last year’s Ryan budget cut spending by trillions of dollars even though spending actually would have increased by an average of 2.8 percent each year.
Needless to say, proponents of big government deliberately use dishonest budget math because it tilts the playing field in favor of bigger government and higher taxes.
There are two important caveats about these calculations.
2. We should be focusing on the underlying problem of excessive government, not the symptom of too much red ink. By pointing out the amount of spending restraint that would balance the budget, some people will incorrectly conclude that getting rid of deficits is the goal.
Last but not least, here is the video I narrated in 2010 showing how red ink would quickly disappear if politicians curtailed their profligacy and restrained spending growth.
Other than updating the numbers, the video is just as accurate today as it was back in 2010. And the concluding message – that there is no good argument for tax increases – also is equally relevant today.
P.P.S. Some people will say that the CBO baseline is unrealistic because it assumes the sequester will take place. They may be right if they’re predicting politicians are too irresponsible and profligate to accept about $100 billion of annual reductions from a $4,000 billion-plus budget, but that underscores the core message that there needs to be a cap on total spending so that the crowd in Washington isn’t allowed to turn America into Greece.
Back during the 1990s, President Clinton cleverly began to refer to his spending initiatives as “investments.” He obviously hoped that voters could somehow be tricked into supporting bigger government by playing a bait-and-switch game with words.
But he did win reelection in 1996, and that may be why President Obama has adopted the same tactic, using some derivation of “invest” about ten times in his big speech last week.
If that sounds like overkill, the good news is that he didn’t use the term as much as he did in 2011. He was so repetitive that year that Chuck Asay produced this cartoon. Needless to say, it is equally funny when applied to this year’s speech.
I’ve stated before that Chuck Asay is a great cartoonist. If you want to see more of his work, click here, here and here.
Macroeconomic and microeconomic modeling studies based on data for several countries suggest that the major driving forces behind the size and growth of the shadow economy are an increasing burden of tax and social security payments… The bigger the difference between the total cost of labor in the official economy and the after-tax earnings from work, the greater the incentive for employers and employees to avoid this difference and participate in the shadow economy. …Several studies have found strong evidence that the tax regime influences the shadow economy.
Indeed, it’s worth noting that international studies find that the jurisdictions with the highest rates of tax compliance are the ones with reasonable tax systems, such as Hong Kong, Switzerland, and Singapore.
Now there’s a new study confirming these findings. Authored by two economists, one from the University of Wisconsin and the other from Jacksonville University, the new research cites the impact of tax burdens as well as other key variables.
According to the results provided in Table 2, the coefficient on the average effective federal income tax variable (AET) is positive in all three estimates and statistically significant for the overall study periods (1960-2008) at beyond the five percent level and statistically significant at the one percent level for the two sub-periods (1970-2007 and 1980-2008). Thus, as expected, the higher the average effective federal income tax rate, the greater the expected benefits of tax evasion may be and hence the greater the extent of that income tax evasion. This finding is consistent with most previous studies of income tax evasion using official data… In all three estimates, [the audit variable] exhibits the expected negative sign; however, in all three estimates it fails to be statistically significant at the five percent level. Indeed, these three coefficients are statistically significant at barely the 10 percent level. Thus it appears the audit rate (AUDIT) variable, of an in itself, may not be viewed as a strong deterrent to federal personal income taxation [evasion].
Translating from economic jargon, the study concludes that higher tax burdens lead to more evasion. Statists usually claim that this can be addressed by giving the IRS more power, but the researchers found that audit rates have a very weak effect.
The obvious conclusion, as I’ve noted before, is that lower tax rates and tax reform are the best way to improve tax compliance – not more power for the IRS.
Incidentally, this new study also finds that evasion increases when the unemployment rate increases. Given his proposals for higher tax rates and his poor track record on jobs, it almost makes one think Obama is trying to set a record for tax evasion.
The study also finds that dissatisfaction with government is correlated with tax evasion. And since Obama’s White House has been wasting money on corrupt green energy programs and a failed stimulus, that also suggests that the Administration wants more tax evasion.
…the coefficient of public spending inefficiency remains negative and highly significant. …We find that tax morale is higher when the taxpayer perceives and observes that the government is efficient; that is, it provides a fair output with respect to the revenues.
On the other hand, tax evasion apparently is correlated with real per-capita gross domestic product. And since the economy has suffered from anemic performance over the past three years, that blows a hole in the conspiratorial theory that Obama wants more evasion.
All joking aside, I’m sure the President wants more tax compliance and more prosperity. And since I’m a nice guy, I’m going to help him out. Mr. President, this video outlines a plan that would achieve both of those goals.
Given his class-warfare rhetoric, I’m not holding my breath in anticipation that he will follow my sage advice.
Heck, I’ve even done NPR interviews about this unseemly Washington practice.
So I like to think I’m reasonably knowledgeable about the system. But even I’m shocked to learn how a former Massachusetts Congressman has taken graft to the next level.
And I’m slightly happy that he’s been caught with his hand in the cookie jar and feels compelled to give up his share of the loot.
A former congressman who became a lobbyist has abandoned his plans to collect $90,000 from working on an energy project that he helped finance through Congress. …An apologetic Mr. Delahunt told town officials he wanted to eliminate the “black mark” created by questions of a possible financial conflict, Patrick Cannon, chairman of the Hull Light Board, said on Saturday. …Mr. Delahunt, a Democrat who retired from Congress last year, had faced criticism for the last week from legal and ethics specialists over the unusual lobbying arrangement he had struck with the town, which is seeking federal help to build an offshore wind energy plant at a cost of more than $60 million. While in Congress, Mr. Delahunt earmarked $1.7 million for the same project, and he was to be paid 80 percent of his monthly consulting fees out of that same pot of money. …Mr. Delahunt and executives at his firm did not respond to e-mails Saturday seeking further comment on the decision.
Wow. For all intents and purposes, Congressman Delahunt directly pilfered the Treasury for personal gain.
This is amazing. But what’s remarkable isn’t that he stole money. After all, the federal budget is largely a big scam enabling various groups of people to obtain unearned loot.
The noteworthy thing about this story is that he didn’t launder the money.
In most cases, politicians do earmarks as part of a corrupt quid pro quo. They direct money to a certain group of beneficiaries and, in exchange, get campaign contributions from both the lobbyists who facilitated the deal and the interest groups that receive the taxpayer funds.
But Delahunt cut out one of the middlemen. He created an earmark, and then became one of the lobbyists pocketing the cash.
So it is poetic justice that this unsavory deal has become public knowledge and the former Congressman has been shamed into giving up his fees.
But don’t be deluded into thinking this is a victory.
The earmark is still there. Money is still being wasted. Delahunt is still a lobbyist. Government is still too big. And corruption is still rampant.
And if you think the former Congressman is genuinely apologetic….well, please get in touch with me. I’m selling a bridge in Brooklyn and need a gullible buyer – i.e., the kind of person who doesn’t think there’s anything wrong with this unseemly example of sleaze.
Even when the results coincide with my views, I have a jaundiced view of polling data. In large part, this is because the answers often depend on how a question is framed.
That being said, I periodically link to polling data about economic policy if I think we can glean some insight from the data.
I assume, for instance, that trends can be accurately detected if the same question is asked year after year, regardless of whether the question is fair or slanted.
I also like multi-country polls. Whether the questions are straightforward or tilted, you can at least learn something about differences in national attitudes.
I’m not sure, though, how to react to this latest survey data. Published in the New York Times, it shows widespread global support for more regulation. Here are the results (click the image to enlarge).
The only bit of good news, at least for American chauvinists, is that people in the United States are more likely than others to think there is “too much” regulation.
But if you look at the data from a different perspective, people in Singapore and Sweden are least likely to say there’s “not enough” regulation.
People keep emailing and complaining that I must be an Obama supporter since I periodically post critical information about Romney and Gingrich.
In response, I say that it’s my role to simply tell the truth and dispassionately analyze public policy.
But being disappointed in the leading Republicans doesn’t mean I’m deluded about Obama and his agenda. This cartoon nicely captures my view of the President’s track record.
But neither one of those policies are popular, so the President largely ignored them during his state-of-the-union address and instead focused on using the tax code to promote “fairness.”
The President’s home state of Illinois is a good test case of this approach. The politicians rammed through a big tax increase early last year, supposedly to stabilize state finances.
Unfortunately, Obamanomics isn’t working very well in Illinois. The state just got downgraded by Moody’s and ranks below even California.
But a tiny handful of states, led by Illinois, are moving in the wrong direction. Here’s a very powerful chart produced by the Illinois Policy Institute. The tax hike is about one-year old, and we’re already seeing strong evidence that jobs are fleeing the state.
Now close your eyes and envision a different map. Instead of American states, imagine a map of the world. And think what it will look like if Obama succeeds in imposing all the tax increases he had endorsed.
I suppose it won’t look as bad as this map because there are plenty of other nations engaging in suicidal tax policy. But it doesn’t take a vivid imagination to understand that Obama’s class-warfare approach would drive jobs and investment to the nations with better tax policies.
France’s solidarity tax on wealth (l’impôt de solidarité sur la fortune – ISF), which was radically reformed by the government in June last year, has served to yield much greater fiscal revenues for the state than initially predicted. …the government agreed that the solidarity tax on wealth would in future comprise of only two tax brackets: a 0.25% tax rate imposed on individuals with net taxable wealth in excess of EUR1.3m (USD1.7m), and a 0.5% tax rate levied on individuals with net taxable assets above EUR3m. Previously, the entry threshold at which wealth tax was applied was EUR800,000, with the rates varying between 0.55% and 1.8%. To alleviate any threshold effects, a discount mechanism was also instated applicable to wealth of between EUR1.3m and EUR1.4m, as well as to wealth of between EUR3m and EUR3.2m. Although the new provisions provide for lower tax rates and for the abolition of the first tax bracket, effectively exempting around 300,000 taxpayers from the tax, according to latest government figures, the tax yielded around EUR4.3bn in 2011, almost EUR60m more than originally forecast in the collective budget.
This is not to say that France is an example to follow. There shouldn’t be any wealth tax, and income tax rates are still far too high.
And it’s also worth remembering that tax policy is just one of many factors that determine economic performance.
That being said, nations that shift from terrible tax policy to bad tax policy will enjoy better economic performance, just as nations that go from good policy to great policy also will reap benefits.
But I’m not sure what my reaction is to Newt’s latest brain fart. For lack of anything clever, let’s just say I’m bemused by his proposed galactic boondoggle.
Newt Gingrich wants to colonize the moon. …“By the end of my second term, we will have the first permanent base on the moon and it will be American,” Gingrich said… It’s just the kind of Gingrich big-think for which he has been ridiculed by others in the GOP field, including Mitt Romney. But Wednesday’s speech — which Gingrich himself called “grandiose” — could actually resonate politically in Florida, where space exploration is good politics… Gingrich even envisions a moon state. “When we have 13,000 Americans living on the moon, they can petition to become a state,” he said, drawing laughter from the crowd. …But Gingrich’s space fantasies don’t stop at the moon. He wants to see trips to Mars by 2020. “By the end of 2020, we will have the first continuous propulsion system in space capable of getting to Mars in a remarkably short time because I am sick of being told we have to be timid and I am sick of being told we have to be limited in technologies that are 50 years old,” he said.
But I’m not just bemused. To use Newt’s rhetoric, I am sick of politicians coming up with new ways to spend my money and I am sick of being told by the clowns in Washington that my wallet is a pinata to fund their grandiose dreams.
If Newt likes space travel and wants a base on the moon and trips to Mars, then he should take some of the money he “earned” as Freddie Mac’s “historian” and invest it in a space company.
Perhaps the title of this post is a bit unfair since the International Monetary Fund is good on some issues, such as reducing subsidies. And some of the economists at the IMF even produce good research.
But I can’t help but get agitated that this behemoth global bureaucracy wants more money when it has a dismal track record of promoting, enabling, and subsidizing bigger government.
The IMF’s Christine Lagarde delivered a speech in Berlin Monday warning that, without dramatic action, the world risked another Great Depression. …”We estimate a global potential financing need of $1 trillion,” she said. “To play its part, the IMF would aim to raise up to $500 billion in additional lending resources.” …Perhaps an IMF managing director with sound ideas about what makes an economy grow might deserve a raise. The first thing such a director would demand would be to cut the Fund’s size in half, not double it.
The WSJ’s editors are right to criticize the IMF. The folks in charge at the international bureaucracy, depending on the circumstances, have a nasty habit of supporting Keynesian spending and class-warfare tax hikes.
Let’s look at two very recent news reports to prove this point.
Our first example is from Europe, where there’s a discussion of how to address the fiscal crisis. Remarkably, the IMF has staked out a position to the left of Germany, arguing that more government spending will boost growth in Europe. Consider these excerpts from a Washington Post article.
Germany, the economic engine of Europe, is afraid it could get stuck paying much of the cost to bail out its weaker European neighbors. It is pushing instead for budget cuts, which the IMF says could weaken growth further and undermine market confidence. The IMF is already lending to the region’s bailout fund and has a lead role in monitoring the progress that nations such as Greece make in reducing their government deficits. Germany, meanwhile, is also a large contributor to the bailout fund. …If Europe doesn’t take several steps recommended by the IMF, such as reducing its emphasis on budget cuts, the 17 nations that share the euro could contract at a much faster pace, the fund said. That could possibly plunge the rest of the world into recession.
We have another story that is equally upsetting. IMF bureaucrats get tax-free salaries, yet they frequently urge governments to impose higher taxes. And they have a very troubling habit of undermining tax reform.
The International Monetary Fund may require Hungary to change its flat personal income tax as part of a bailout agreement, according to a person familiar with the Washington-based lender’s preparations for the talks. The flat tax will be an important part in any program discussion, said the person, who declined to be identified because official talks haven’t started. The IMF is in general opposed to flat-tax systems.
I’ll confess that I’m not overly sympathetic to Hungary’s plight. The government is in a mess because it keeps overspending.
But if the IMF is going to foolishly provide a bailout, wouldn’t it be better if the bureaucrats made the money contingent on implementing good policy rather than bad policy?
People have a right to be statist, but the question we have to decide is whether American taxpayers should subsidize that destructive mindset. Not surprisingly, I say no. Indeed, the IMF may even be worse than the OECD, another international bureaucracy that promotes a statist agenda.
I’m biased, of course, so I’ll understand if you discount what I say. But I hope you’ll agree that my colleagues have put together an excellent video response to the President’s state-of-the-union speech.
After a night’s sleep, here are a few additional observations on the President’s remarks.
I was disappointed, but not surprised, that he repeated the economically foolish assertion that Warren Buffett pays a lower tax rate than his secretary.
I also was not surprised that he didn’t say much about jobs and the economy. These four charts show he doesn’t have much to brag about.
It was also noteworthy that he didn’t spend much time talking about Obamacare, which suggests that White House pollsters understand that government-run healthcare isn’t very popular.
It was equally revealing that he didn’t spend much time on the so-called income inequality issue. Redistribution was implicit in what he said, to be sure, but the Occupy-Wall-Street crowd is probably disappointed that he didn’t explicitly embrace their agenda. More evidence that the pollsters played a big role in this speech.
And I was stunned that he could talk about the housing meltdown and mortgage crisis without mentioning the Federal Reserve, Fannie Mae, or Freddie Mac. Sort of like analyzing World War II and pretending Germany and Japan didn’t exist.
I even was a bit disappointed in Governor Daniels’ remarks. He focused a lot on means-testing for entitlements, but that’s the wrong way of reforming the programs. Such policies impose higher implicit marginal tax rates on people who save and invest during their working years.
I like the folks over at Americans for Tax Reform because of the no-tax-hike pledge.
As I’ve previously explained, that pledge is a necessary tool in our battle to restrain the burden of government spending.
But the people at ATR also have a good sense of humor, the latest example of which is the Bingo game they’ve developed for tonight’s State-of-the-Union speech.
They’ve put together five cards, each containing buzzwords that Obama is almost sure to use in his remarks. As you can see from the example I’ve included, don’t be surprised if someone wins within the first five minutes of the speech.
On a more serious note, I’ll be live-blogging the President’s address tonight, along with several of my colleagues. You can follow along at Cato-at-Liberty, starting about 9:00 EST.
We don’t know, of course, what the President will say tonight. But based on press reports, this would be my response.
Last night’s GOP debate did nothing to change my sour opinion of Mitt Romney.
During a discussion about tax reform, he attacked Newt Gingrich for the supposed crime of not wanting to double tax capital gains. Here’s how Politico reported the exchange.
Newt Gingrich joked about Romney’s 15 percent tax rate, saying: “I’m prepared to describe my flat tax as the Mitt Romney flat tax.” Romney jumped in to ask: Do you tax capital gains at 15 percent or zero percent? Gingrich’s answer: Zero. “Under that plan, I’d have paid no taxes in the last two years,” Romney said, alluding to the fact that all his income is from investments.
Romney’s remarks are amazingly misguided. Getting rid of the capital gains tax doesn’t result in a tax rate of zero. It simply means that there is no second layer of tax on top of the punitive 35 percent corporate income tax.
In addition to being wrong on policy, Romney also is politically tone deaf. By demagoguing against Gingrich’s tax plan, he lends credibility to the dishonest claims that his personal tax rate is “too low.”
In a column for today’s Wall Street Journal, John Berlau and Trey Kovacs of the Competitive Enterprise Institute explain how the GOP candidates should deal with this issue.
The former Bain Capital CEO and Massachusetts governor caused a brouhaha last week when he estimated the tax rate on his investment income at 15%. “How unfair!” pundits exclaimed, noting that the top marginal rate for wage income is more than 30%. The tax rate on investors is unfair, but for the opposite reason. Our tax code layers taxation of dividends and capital gains on top of a top corporate tax rate of 35%—which even President Obama acknowledges is one of the highest in the world. …This double taxation brings the effective tax rate on investment income to as much as 44.75%. In other words, after the combined top tax rates hit $100 of corporate income, $55.25 remains for the investor. And this figure doesn’t even include various state and local taxes, or the death tax. Moreover, like the rest of us, Mr. Romney paid income taxes before investing… Mr. Romney and other presidential candidates should use the opportunity of releasing their tax returns to make an important policy statement. They should include not only their individual returns, but information about the taxes their corporations pay. …In this way the candidates can help explode the myth of the U.S. as a low-tax nation. As Cato Institute tax experts Chris Edwards and Daniel J. Mitchell write in their book, “Global Tax Revolution,” while the U.S.’s “overall tax burden . . . is lower than in many other nations,” the country “imposes more punishing taxes on savings and investment than many advanced economies.” The most popular tax reforms—from the “9-9-9 plan” of former candidate Herman Cain to flat tax proposals—all have in common the reduction or elimination of double taxation on investment. …If the traditional disclosure of tax returns is elevated into a “teachable moment” about the burdens of double taxation, all Americans could be winners.
The authors are very kind to reference the book Chris and I wrote, but I mostly like this article because it does such a good job of explaining double taxation.
As illustrated by this chart, double taxation is a serious self-inflicted barrier to American growth and competitiveness. Too bad Republicans are too short-sighted to address this issue intelligently.
I’m perfectly willing to give my opponents credit when they do something clever and/or effective.
I posted this video making fun of libertarians, for instance, because it is genuinely funny. People like me, I will confess, sometimes are so allergic to government that we do things that make us easy targets for satire.
Well, here’s a video parody of Mitt Romney and the Cayman Islands, obviously designed to resemble the Corona beer commercials. I’m not impressed.
Indeed, here’s an old video attacking tax havens, and I think it’s sufficiently amusing that I just uploaded it onto my Youtube channel because it’s worth sharing and I couldn’t find it online.
Both of these leftist videos make silly and inaccurate points, but the anti-Romney video is simplistic and the entire premise is false. He’s not hiding anything. Intelligent satire uses the truth as a starting point. This video doesn’t.
The anti-Cheney video, by contrast, has some big mistakes, but at least it is based on the accurate premise that companies legally try to reduce their taxes. Moreover, the Jimmy Buffett music is a nice touch.
I also mocked the Post last March, when a reporter hysterically claimed that a proposal to trim $6 billion from a $3,600 billion budget would “slash” government.
Entitled “Five Myths about Barack Obama,” it’s in the opinion section, where people are supposed to present a point of view.
So I’m not going to complain about bias, but I am going to disagree about some of his judgments. Here are the five supposed myths, along with my two cents on whether Alter is correct.
Myth 1. Obama is a socialist.
I basically agree with Alter. As I explained two years ago, a true socialist wants “government ownership of the means of production.” To be sure, most self-avowed socialists today have given up on that goal and instead focus on redistribution. And since Obama also is a redistributionist, I understand why people call him a socialist. Nonetheless, it is much more accurate to call him a statist or corporatist.
I’m not sure what to say about this assertion. I don’t find his pedantic ramblings effective or persuasive, but I’m not the target audience.
Myth 4. Obama’s stimulus failed.
This is Alter’s most absurd assertion. To bolster his claim, he cites a handful of institutions that have Keynesian models, including the laughably inaccurate crowd at the Congressional Budget Office. Wow, what a revelation. Keynesians support Keynesianism. What’s next, a poll of Obama campaign staff showing that people support the President’s reelection? Read this post for a good explanation of how Keynesianism has failed.
Myth 5. Obama is a weak leader.
This isn’t my area of expertise, but I mostly agree with Alter’s assessment. For better or worse (and you know how I feel), the President put everything on the line to enact Obamacare. That was bad for the nation, but I suppose it required effective leadership.
In closing, the Washington Post does deserve some credit for having diversity on the opinion page. Yes, Alter’s column has a leftist perspective, but the paper routinely carries people like George Will, Robert Samuelson, and Charles Krauthammer.
That doesn’t excuse the Post for displaying bias in news articles, as I mentioned above, but I think it’s better than the New York Times (damning with faint praise).
Lastly, it’s worth noting that the Post’s editorials are dogmatically statist (though it does support Postal Service privatization, perhaps because that affects the paper’s bottom line).
The economic illiterates in the press sometimes say the fight in Europe is between austerity and Keynesianism, but that’s not accurate. It’s really a battle between those who think big government should be financed by taxes and those who think big government should be funded by taxes and debt.
And it doesn’t help that the supposedly conservative governments in places such as Spain, Germany, France, and the United Kingdom are run by statists.
The good news is that some people understand the real problem. The bad news is that they generally don’t live in Europe. Writing for the Australian, Professor Judith Sloan cites the Rahn Curve as she explains the need to reduce the size and scope of the public sector.
The real question that a number of European and other countries should be asking themselves is this: what should be the role of government in terms of providing an environment for economic prosperity and security? There is absolutely no doubt that the size of the public sector and the intrusion of government have grown to excessive proportions in a number of these countries. A pervading sense of entitlement – on the part of retirees, welfare recipients, parents, university students, public servants and others – has been encouraged by these governments, but now threatens to block reform. …What is required is a complete rethink of the role of government. …According to the Rahn curve, the rate of economic growth initially increases with government spending (as a proportion of gross domestic product). Establishing and funding a quality judicial system, defending a country, ensuring the safety of citizens, funding (but not necessarily providing) some basic services: these are legitimate functions of government. But beyond a certain point (about 20-25 per cent of GDP) long-term economic growth tends to fall as government spending rises. This is the zone – well above 25 per cent in most instances – in which EU countries find themselves. …There are a number of reasons why the size of government really matters. After all, government spending has to be paid for by taxes, and almost all taxes reduce rewards for effort. …Moreover, government spending is often not subject to rigorous cost-benefit analysis in the same way private spending is.
To be fair, some people in Europe understand this issue, including economists at the European Central Bank who recently produced a study finding that, “…using a long time span running from 1970-2008, and employing different proxies for government size… Our results show a significant negative effect of the size of government on growth.”
And Swedish economists also have acknowledged the negative relationship between government spending and economic performance, writing that, “…there is a negative correlation between total government size and growth. It appears fair to say that an increase in total government size of ten percentage points in tax revenue or expenditure as a share of GDP is on average associated with an annual lower growth rate of between one-half and one percentage point.”
But these are lonely voices in Europe.
I’ve also weighed in on the topic from this side of the Atlantic, having produced this paper when I worked at the Heritage Foundation, and I also narrated this video for the Center for Freedom and Prosperity.
They’re still spending like there’s no tomorrow. I just hope American politicians won’t be foolish enough to provide a bailout when the house of cards comes tumbling down.
As a human being, though, my primary concern is the way redistribution saps the spirit of self reliance and traps people into lives of dependency. That’s the very first point I make in this debate on CNBC.
By the way, my opponent in the debate is Jared Bernstein, who is infamous for being the co-author of the Obama Administration claim that enacting the s0-called stimulus would keep the unemployment rate from rising above 8 percent.
Two days ago, I explained that tax increases are bad policy.
More specifically, I warned that giving more money to government exacerbates fiscal problems because politicians respond to the expectation of more revenue by spending more than otherwise would be the case. And since they usually over-estimate how much revenue a tax hike will generate, that creates an even bigger fiscal mess.
Not surprisingly, I cited Europe to bolster my case. The tax burden has increased enormously in Europe over the past several decades, but that obviously hasn’t prevented a fiscal crisis in nations such as Greece and Portugal. And tax hikes haven’t precluded deteriorating conditions in countries such as Belgium and France.
But I also cited Illinois, which just got downgraded by Moody’s – even though state politicians just imposed a record tax hike.
This caused some angst for a lefty blogger in Illinois, who wrote that, “Operational spending is down since the Illinois tax hike.”
I gather he thinks this is some sort of gotcha moment, but two sentences later he admits that, “If Illinois hadn’t increased its taxes, it would’ve had to cut $7 billion more from spending to balance its budget.”
In other words, his post confirms my point about higher taxes translating into higher spending. He openly admits that the tax hike was a substitute for spending restraint.
What makes his concession so remarkable is that my argument wasn’t even based on one-year fiscal decisions. I”m much more concerned with trend lines, and you can see from the chart that Illinois politicians have been promiscuously profligate in recent years.
Indeed, I developed “Mitchell’s Golden Rule” to underscore the importance of restraining the burden of government so that, over time, it grows slower than the private economy. That obviously hasn’t been happening in Illinois in recent decades – and it’s not likely to happen in future decades if politicians figure out ways of grabbing more revenue.
Speaking of revenue, my accidental friend from Illinois also tries to debunk my point about the Laffer Curve by writing that, “The Commission on Government Forecasting and Accountability has repeatedly said this year that revenues from the tax increase are coming in as the ‘politicians’ expected.”
Well, I don’t know about you, but this is not exactly a rigorous rebuttal. He doesn’t provide a revenue forecast from the pre-tax-hike era or a more recent forecast from the post-tax-hike era, so we can’t make any comparisons. Instead, we’re supposed to blindly accept vague assurances from some Commission.
This doesn’t mean that forecasts don’t exist or that the bureaucrats were wrong about their short-run projections. But that’s not the main issue. The key question is what will happen to revenue over a period of years, particularly once entrepreneurs, investors, and businesses have time to adjust their behavior in response to the more onerous tax regime.
It will take a few years before we have a decent idea about the consequences of the Illinois tax hike. But since Illinois is copying European-style fiscal policy, don’t be too surprised if the result is European-style economic malaise.
The German Chancellor and French President have put together a plan to boost growth. Sounds like a good goal, but what specifically are they proposing?
But those are only obvious ideas if you want a growth plan that actually leads to…(drum roll, please)…more growth.
Merkel and Sarkozy must have some other objective in mind, because they’ve proposed a plan comprised of new taxes, higher taxes, and tax harmonization.
This is beyond satire. Even if I was trying to make fun of the French and Germans (perish the thought), I wouldn’t be able to make up something this absurd.
A six-point plan drafted by France and Germany has suggested corporate tax “co-ordination,” an EU financial transactions tax and the re-deployment of EU funds in troubled countries as ways to spur growth and jobs. …Paris and Berlin have teamed up once more and drafted a six-page paper called “Ways out of the crisis – strengthen growth now!” …The financial transactions tax – a pet project of French President Nicolas Sarkozy ahead of his re-election bid in April – features among the six proposals under “efforts to reinforce the framework of financial market.” …plans for “tax co-ordination” and another Franco-German proposal to be put forward by end of February on the “convergence of their corporate tax.” “European institutions and member states should accelerate the process of tax coordination in order to foster growth” …Apart from the Tobin tax, both leaders want to speed up EU legislation on an energy tax and a “common consolidated corporate tax base.”
Even Obama is not this blind to reality. He’s a big fan of higher taxes, of course, but at least the President realizes you don’t pass the laugh test if you tell people that higher taxes will “spur jobs and growth.”
Returning to Merkel and Sarkozy, the dynamic duo of statism also have some bizarre ideas on the spending side of the fiscal ledger. Here are a couple of additional passages from the story.
…proposal would have 25 percent of unspent EU regional funds in countries under a bail-out program or under serious economic difficulties redirected to a special “fund for growth and competitiveness.” …As for employment-boosting measures, one of Sarkozy’s make-or-break campaign themes, the document asks governments to instruct employment agencies to make an offer to every unemployed person – be it for a job, an apprenticeship or further training.
The notion that bureaucrats and politicians can boost prosperity with some sort of “fund for growth and competitiveness” is hardly worth a rebuttal. I’ll just wish them luck as they create European versions of Solyndra.
The other idea, though, is worth a bit more analysis. If the article is correct, the Merkozy twins are going to wave a magic wand and direct employment agencies to make an offer to everybody.
Gee, isn’t that wonderful. While they’re at it, why don’t they turbo-charge the wand and insist that all the offers be for jobs making twice the national wage. With this kind of magical thinking, it’s just a matter of time before 90 percent of the population is part of the top-10 percent.
You may be thinking the previous sentence doesn’t make sense, but that’s probably because you’re one of those crazy libertarians who doesn’t understand how higher taxes boost economic performance.
In previous posts, I’ve expressed some pessimism about the future of Europe. After considerable reflection, I want to retract those statements and instead say that the outlook is hopeless. If you’re reading this from Europe, get out while you still can.
Every so often, though, I come across a story that is so absurd that it demands attention. Some bureaucrats in Utah, for instance, have decided that it would be inappropriate to use cougars as a school mascot. I’m not joking. Here’s an excerpt.
One Utah school district believes a cougar mascot would be insensitive to women. The Canyons School District overrode the students top choice of a cougar mascot for their high school that is to be completed in 2013. Would-be Corner Canyon High School students chose the Cougars as their mascot — a name principal Mary Bailey said carries an ugly connotation that is disrespectful to women.
My first though was to wonder whether these morons will now assert that Brigham Young University has to change the name of its football team. After all, the BYU Cougars could send the wrong message about inter-generational relationships.
My second thought was to wonder why “cougar” is a disrespectful term. I don’t pretend to know what women think, regardless of their age, but I’m guessing that women in the relevant age ranges would be at least somewhat flattered that young guys find them sexually appealing.
I’m mystified, though, why some Republicans are willing to walk into such a trap. If you were playing chess against someone, and that person kept pleading with you to make a certain move, wouldn’t you be a tad bit suspicious that they weren’t trying to help you win?
When I talk to the Republicans who are open to tax hikes, they sometimes admit that their party will suffer at the polls, but they say it’s the right thing to do because of red ink.
I suppose that’s a noble sentiment, though I find that most GOPers who are open to tax hikes also tend to be big spenders, so I question their sincerity (with Senator Coburn being an obvious exception).
But even if we assume that all of them are genuinely motivated by a desire to control deficits and debt, shouldn’t they be asked to provide some evidence that higher taxes are an effective way of fixing the fiscal policy mess?
I’m not trying to score debating points. This is a serious question.
European nations, for instance, have been raising taxes for decades, almost always saying that higher taxes were necessary to balance budgets and control red ink. Yet that obviously hasn’t worked. Europe’s now in the middle of a fiscal crisis.
Run up spending and debt, raise taxes in the naming of balancing the budget, but then watch as deficits rise and your credit-rating falls anyway. That’s been the sad pattern in Europe, and now it’s hitting that mecca of tax-and-spend government known as Illinois. …Moody’s downgraded Illinois state debt to A2 from A1, the lowest among the 50 states. That’s worse even than California. …This wasn’t supposed to happen. Only a year ago, Governor Pat Quinn and his fellow Democrats raised individual income taxes by 67% and the corporate tax rate by 46%. They did it to raise $7 billion in revenue, as the Governor put it, to “get Illinois back on fiscal sound footing” and improve the state’s credit rating. So much for that. …And—no surprise—in part because the tax increases have caused companies to leave Illinois, the state budget office confesses that as of this month the state still has $6.8 billion in unpaid bills and unaddressed obligations.
In other words, higher taxes led to fiscal deterioration in Illinois, just as tax increases in Europe have been followed by bad outcomes.
Whenever any politician argues in favor of a higher tax burden, just keep these two points in mind.
1. Higher taxes encourage more government spending.
The combination of these two factors explains why higher taxes make things worse rather than better. And they explain why Europe is in trouble and why Illinois is in trouble.
The relevant issue is whether the crowd in Washington should copy those failed examples. As this video explains, higher taxes are not the solution.
I don’t agree with the editorializing that was added above this cartoon. I’ve always been partial to the welfare-dependency-wagon cartoons produced by a former Cato intern.
And readers have made this cartoon the most-viewed post in the history of this blog.
Nonetheless, this is definitely worth sharing.
The last line, though, is exactly right. For all intents and purposes, government is legalized plunder.
Exactly 10 days ago, I predicted that the press would attack Mitt Romney for using tax havens. In that post, I wrote that, “…based on the questions, it appears that the establishment media wants to hit Romney for utilizing tax havens… As far as I can tell, none of these reporters have come out with a story. …But I think it’s just a matter of time.”
Sure enough, like the swallows returning to Capistrano, it’s happened. Two hacks at ABC News, Brian Ross and Megan Chuchmach, revealed (brace yourself for a real scoop) that Mitt Romney is a rich guy and some of his investments are based in funds domiciled in the Cayman Islands (gasp!).
Wow, what a revelation! This must be Pulitzer Prize material. Pray tell, what wrongdoing did the story uncover? Well, let’s excerpt the key passages from the article.
Mitt Romney has millions of dollars of his personal wealth in investment funds set up in the Cayman Islands, a notorious Caribbean tax haven. A spokesperson for the Romney campaign says Romney follows all tax laws and he would pay the same in taxes regardless of where the funds are based. …Romney has as much as $8 million invested in at least 12 funds listed on a Cayman Islands registry. Another investment, which Romney reports as being worth between $5 million and $25 million, shows up on securities records as having been domiciled in the Caymans. …Romney campaign officials and those at Bain Capital tell ABC News that the purpose of setting up those accounts in the Cayman Islands is to help attract money from foreign investors, and that the accounts provide no tax advantage to American investors like Romney. Romney, the campaign said, has paid all U.S. taxes on income derived from those investments. …Bain officials called the decision to locate some funds offshore routine, and a benefit only to foreign investors who do not want to be subjected to U.S. taxes.
You’re probably thinking you missed something, because there’s nothing to the story. But that’s because the reporters don’t have anything. And if you think I excerpted unfairly, feel free to read the whole article.
The only thing you’ll discover is that Ross and Chuchmach are biased hacks. Because not only did they write a story about nothing, they also quoted two left-wingers, Jack Blum and Rebecca Wilson, and failed to give the other side even an inch of column space.
Blum is a former John Kerry staffer who is most famous for making unsubstantiated claims (which he later admitted were fabricated) that tax havens resulted in $100 billion of lost revenue to the Treasury each year.
And Rebecca Wilson works for Citizens for Tax Justice, a union-funded group so radical that even congressional Democrats usually are reluctant to work with them.
But what about the other side of the story?
Did the article quote me, since I’ve been working on these issues for more than a decade? No.
Did the article quote anybody from the Center for Freedom and Prosperity, the organization most active in the fight to defend low-tax jurisdictions? No.
Did the article quote Richard Rahn, the Cato Institute Fellow who was a Board Member of the Cayman Islands Monetary Authority? No.
Did the article quote any of the academic scholars who have written about so-called tax havens, such as Jim Hines of the University of Michigan or Andrew Morriss of the University of Alabama? No.
Did the article quote Bob Bauman, the former Congressman and offshore expert who serves as Legal Counsel of the Sovereign Society? No.
Fair and competent journalists would have done those things, but not the dynamic duo from ABC News.
Instead, they quote two hard-core lefts. And in a gross display of editorializing, they also referred to the Cayman Islands as a “notorious tax haven.”
Yet what is “notorious” about being a prosperous multiracial society with living standards considerably above American levels?
Moreover, Cayman has a tax treaty with the United States and an overwhelming share of the investment in the jurisdiction is completely legal institutional money – just like the Romney investment funds.
But I guess a place like the Cayman Islands must be bad, at least to biased people from the press. After all, a place with no income taxes, no capital gains taxes, no payroll taxes, and no death taxes must be condemned.
I’m not a Romney fan, as you can see by reading this post, but I believe in honest and intelligent debate. Too bad ABC doesn’t.
I’m currently in the British Virgin Islands to speak at a conference. As you can see from this photo (taken from my satellite office), I’m having to endure hardship conditions.
As you can probably guess, I’m speaking about tax competition. But I write about that issue so much that there’s no need for me to reiterate my remarks.
Instead, I want to focus on the speech given this morning by Sir Richard Branson, founder and head of the Virgin business empire.
Why does Branson get higher billing than me?!?
Sir Richard is a tax resident of BVI (which is a smart step since there’s no income tax here and the top tax rate in the U.K. is 50 percent), and most of his speech focused on business and development advice for his adopted home.
But he also spent several minutes talking about the damaging and destructive impact of the War on Drugs. And I’m proud to say that he cited data from a Cato Institute report on the successful decriminalization policy in Portugal.
I suspect Branson isn’t willing to give up his day job running the Virgin Group, but we’re happy to have him as a volunteer publicist for our studies and the cause of liberty.
Incidentally, he’s not the only one who has commented on this development. The Economist also has noted the positive impact of Portugal’s pro-liberty policy.
But at least some U.K. elected officials are willing to stand up for tax competition and fiscal sovereignty by defending low-tax jurisdictions. In previous posts, I’ve applauded Dan Hannan and Godfrey Bloom for great speeches at the European Parliament.
There are also some sensible people in the U.K. Parliament, most notably Mark Field.
A conservative MP has spoken out in defence of tax havens and against what he called “a one-sided debate that demonstrates a fundamental lack of understanding of their role in the global financial market”. …In an attempt to balance the “one-sided” debate on international finance centres (IFCs), Mr Field…advised the UK government to think twice before imposing more regulation on these jurisdictions. …In a bid to dismiss the age-old belief that tax havens attract investors purely because of their tax regimes, Mr Field argued that it is a combination of their political stability, familiar legal systems, quality of service, lack of foreign exchange controls, and tax and legal neutrality that make them ideal locations to deposit money.The current financial crisis, he continued, had more to do with poor regulation and mistakes made onshore rather than offshore, and if the EU pressed ahead with its intention to harmonise tax systems across international borders “it could potentially represent the end for healthy tax competition… Tax harmonisation and cooperation, added Mr Field, was simply Brussels-speak for exporting high tax models on continental Europe to low tax jurisdictions.
These issues are just as relevant for the United States, but how many American politicians stand up and defend free markets and jurisdictional competition as a means of restraining the political predators in Washington?
I’m re-posting my video on The Economic Case for Tax Havens below, for those who haven’t seen it. But I also want to call your attention to this chart from the Treasury Department.
You’ll have to click and enlarge it. You’ll see that it shows the amount of capital invested in America from various parts of the world. The “C” category shows that more money is invested in America via Caribbean banking centers such as the Cayman Islands than from any other source.
So when Obama climbs into bed with the Europeans to push a global network of tax police, he’s pushing policies that ultimately will do great damage to American competitiveness.
Let’s close by returning to the original theme of wise and astute Englishmen. If you want a good defense of tax competition and tax havens, read what Allister Heath wrote last year.
I’ve written several times about a proposed IRS regulation that would force American banks to put foreign law above U.S. law. I’ve repeatedly warned that the scheme, which would force financial institutions to report the deposit interest they pay to foreigners, is bad economic policy, bad regulatory policy, and bad banking policy.
My arguments have included:
Explaining that this onerous regulatory scheme will result in capital fleeing to other nations, needlessly harming the financial sector and putting American banks at risk.
Explaining why the proposal is a threat to human rights since many foreigners keep money in the United States because they live in nations with unstable and/or repressive governments.
But these points don’t seem to matter to the Obama Administration, which is ideologically committed to the anti-tax competition agenda of Europe’s welfare states. This is why the White House supports all sorts of destructive policies, including not only this misguided regulation, but also the creation of something akin to a world tax organization that will have power to block free-market tax policy.
Early last year the Treasury Department published its “Guidance on Reporting Interest Paid to Nonresident Aliens,” which would require banks to report to the Internal Revenue Service the interest paid to foreign depositors with a U.S. bank account. While the Treasury and the regulatory apparatus insist that the cost and inconvenience of adhering to this regulation is next to nothing, the rule may cost the U.S. banking system hundreds of billions of dollars in lost deposits, in turn costing our economy billions of dollars, while providing no discernible benefit to banks, depositors, taxpayers, or the U.S. economy. …a much bigger problem—for banks and the economy—than the compliance costs is the threat of a massive capital flight. The United States is a very popular place for foreigners to park their savings, for a variety of reasons. For starters, we offer a stable government that can be trusted to keep its hands off deposits—something that appeals greatly to residents of Venezuela, Argentina, Ecuador, and any number of other unstable countries. …As a result, a staggeringly large amount of savings from abroad is currently held in U.S banks. While the Treasury asserts that “deposits held by nonresident alien individuals are a very small percentage of the [total] deposits held by U.S. financial institutions,” that very small percentage amounts to more than $3.7 trillion, according to a 2011 Bureau of Economic Analysis report, hardly a pittance. The massive amount of foreign savings here is a boon to the U.S. economy. Banks lend against these deposits, mainly to companies here in the United States. Jay Cochran, an economist at George Mason University, studied the impact that the more limited 2002 reporting requirements would have had on the banking system, estimating that it would have resulted in nearly $100 billion in deposits leaving the U.S. banking system. A reporting regulation that covers all foreign accounts would likely result in two to three times more capital flight. The impact would be harmful not just for the banks but for the broader economy. The decline in profits in the banking sector alone from a roughly quarter-trillion-dollar capital flight would be in the range of $5-10 billion—which makes a mockery of the notion that the costs of the regulation are under $100,000.
For more information about this wretched proposal, here’s a video I narrated on the topic.
To put it bluntly, the Obama Administration is pushing this regulation because it thinks the anti-tax competition agenda of Europe’s welfare states is so important that it is willing to risk the health of the American economy, undermine the soundness of U.S. financial institutions, disregard the rule of law, and abuse the regulatory process.
And that’s saying something, because with each passing day, it is more and more obvious that FATCA is a destructive law that will significantly harm the American economy. But at least it’s a law, one that was approved by Congress and signed by the President. And the costly FATCA regulations being developed by the IRS are for the purpose of enforcing the law.
The interest-reporting IRS regulation is also costly and destructive, to be sure, but what makes it so perverse is that it is – at best – completely gratuitous. It is being advanced solely for reasons of ideology, regardless of the law and consequences be damned.
International Liberty 