It’s Wrong for Federal Tax Deductions to Encourage Bad Fiscal Policy by State and Local Governments

I have a handful of simple rules for good tax policy.

• Keep government small, since it’s impossible to have a reasonable tax system with a bloated welfare state.
• Keep tax rates low to minimize penalties against income, production, and wealth creation.
• Since capital formation is critical for long-run growth, don’t double-tax income that is saved and invested.
• Eliminate corrupt and distorting loopholes that encourage people to make decisions that are economically irrational.

Some of these principles are interrelated. I don’t like loopholes in part because of the reasons I just listed. But I also don’t like them because politicians often claim that they need to boost tax rates to make up for the fact that they lose revenue due to various deductions, credits, exemptions, and preferences.

And sometimes a deduction in the tax code even leads to bad policy by state and local government. Today, I want to discuss preferences in the internal revenue code for state and local taxes. And I’m motivated to address this issue because some of the politicians on Capitol Hill have pointed out an inequity, but they want to fix it in the wrong way.

Under current law, state and local income taxes are fully deductible, but state and local sales taxes are only temporarily deductible. The right policy is to get rid of any deductibility for any state and local tax. But since that would create a windfall of new tax revenue for the spendaholics in Washington, every penny of that revenue should be used to lower tax rates.

Not surprisingly, the crowd in Washington doesn’t take this approach. Instead, they want to extend deductibility for the sales tax. And they may even be amenable to raising other taxes to impose that policy.

Here are some excerpts from a story in The Hill.

More than five dozen House members are pressing leaders of a tax panel to preserve a deduction for state and local sales taxes. The bipartisan group of lawmakers say it would be unfair to voters in their states not to extend the sales tax deduction, given that taxpayers would still be able to deduct state and local income taxes. …Eight states in all — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming — currently use a sales tax, but either don’t have or have a very limited state income tax. …The letter comes as many lawmakers hope to finish off an extenders package once Congress returns to Washington after November’s elections. Lawmakers will have to grapple with expiring Bush-era tax rates — just one part of the so-called fiscal cliff — when they return, and tax extenders could be tacked on to a broader package. The Senate Finance Committee has already passed an extenders package of its own, which included a two-year extension — at a cost of an estimated $4.4 billion over a decade — of the sales tax deduction.

I have some sympathy for these members of Congress. They represent states that have wisely decided not to impose income taxes, yet the federal tax system rewards profligate high-tax states such as New York and California with a permanent deduction for state and local income taxes.

This is a very misguided policy. It means that greedy politicians such as Governor Brown of California or Governor Cuomo of New York can raise tax rates and tell voters not to get too upset because they can deduct that additional burden. This means that a $1 tax hike results in a loss of take-home pay of as little as 65 cents.

This is what a fair tax code looks like

But you don’t cure one bad policy with another bad policy. A deduction for state and local sales taxes just augments the IRS-enforced preference for bigger government at the state and local level.

The right answer is the flat tax. Put in place the lowest-possible tax rate, which is feasible because all loopholes are wiped out.

In the case of state and local tax deductibility (or lack thereof, with any luck), that’s a win-win-win situation.

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The Regal Lifestyle of King Barack and the Rest of Washington’s Gilded Class

Way back in 2010, I savaged Prince Charles for being the ultimate Limousine Liberal. He lives off the taxpayers while traveling on private jets so he can pontificate about the need for ordinary people to live bleaker lives in order to appease the environmental gods.

And if someone asked me about the taxpayer cost of maintaining England’s royal family compared to the equivalent numbers for President Obama and his family, I would have guessed the royal family was more expensive.

I would have been wrong. Here’s an excerpt from a story in the Daily Caller.

Taxpayers spent $1.4 billion dollars on everything from staffing, housing, flying and entertaining President Obama and his family last year, according to the author of a new book on taxpayer-funded presidential perks. In comparison, British taxpayers spent just $57.8 million on the royal family. Author Robert Keith Gray writes in “Presidential Perks Gone Royal” that Obama isn’t the only president to have taken advantage of the expensive trappings of his office. But the amount of money spent on the first family, he argues, has risen tremendously under the Obama administration and needs to be reined in. Gray told The Daily Caller that the $1.4 billion spent on the Obama family last year is the “total cost of the presidency,” factoring the cost of the “biggest staff in history at the highest wages ever,” a 50 percent increase in the numbers of appointed czars and an Air Force One “running with the frequency of a scheduled air line.”

I hope that these numbers are wrong. Indeed, it wouldn’t be fair to add the policy staff of the White House (even though I’m sure it could be cut in half) when making comparisons of the care and upkeep of the Obamas and the royal family.

“Send out the Sheriff of Nottingham to collect more tribute”

But there’s definitely a big kernel of truth to the charge that politicians are leading lives of privilege and elitism compared to the peasants that finance their pampered existence.

To add insult to injury, they exempt themselves from the laws they impose on the rest of us, such as the decision that some White House vehicles will be exempt from Obama’s directive that the federal government purchase only green cars.

Keep in mind, though, that it’s not just Obama. The Bush White House also was guilty of extravagance, albeit perhaps at a lower level.

But the big numbers, in terms of the burden on taxpayers, come from the giant army of overcompensated federal bureaucrats. And you need to consider the mass of lobbyists and consultants that also are part of the corrupt Washington machine.

No wonder, as shown in this map, most of the richest counties in America are those surrounding Washington.

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Blue Moon Rising: Dan Mitchell Endorses a Tax Hike

I wrote earlier this year that I could accept a tax hike if there was a deal that actually resulted in a permanent reduction in the burden of government spending.

In reality, however, we will never get an acceptable deal. Instead, the politicians want us to accept deeply flawed packages like the Simpson-Bowles tax-hike.

But maybe I have to moderate my views. When a group of people loudly say we need higher taxes, then perhaps we should agree. But since they’re the ones saying taxes should go up, we should stick them with the tax hike.

Glenn Reynolds, the Instapundit, has been suggesting that it’s time to repeal the Hollywood tax cuts. After all, that crowd is always pontificating for statism. So let them put their money where their mouths are.

I’m thinking of a different group. Based on their penchant for supporting tax hikes, maybe it’s time to raise taxes on corporate executives. Here are some relevant blurbs from a Wall Street Journal story.

A coalition of anti-deficit groups has tapped businesses and foundations and raised more than $29 million… They are planning to run “fix the debt” ads after the election. …And they are building a roster of big-company chief executives, thus far numbering about 70. These executives are alarmed by the degree of dysfunction in Washington and have pledged to speak out about the urgency of addressing deficits… The “fix the debt” campaign, as it is called, is coordinated by deficit worrywarts in Washington… The effect that CEOs have on Congress depends on who they are and what they actually do. Former Sen. Sam Nunn (D., Ga.), who is leading a group of retired congressmen to build support for a deficit deal, says Democrats need CEOs to organize grass-roots support for a deficit compromise among their workers. And Republicans need business cover for agreeing to raise taxes in exchange for restraints on the growth of health-care spending. CEOs enlisting in the fix-the-debt campaign see no alternative to both cutting benefit spending and raising taxes, despite campaign rhetoric to the contrary. “It’s going to entail sacrifice by every American, every company, every entity,” says Mr. Oberhelman. “I, for one, believe that revenue has to increase. I think every American would pay more if they thought spending was going to be cut and the budget brought to balance.”

At the risk of disagreeing with Mr. Oberhelman, it goes without saying that higher taxes will lead to more spending rather than less.

Corporate executives probably understand tax hikes don’t work, but they want to “play ball” with the politicians – probably because many of them are crony capitalists.

But regardless of their motives, the obvious response is to ask them to cough up some of their cash.

A hike in the corporate income tax wouldn’t be the right approach, though, since that would penalize shareholders, workers, and consumers.

Increasing personal income tax rates also would be the wrong approach since that would punish every successful person, not just wayward corporate executives.

I’m guessing that the best approach is to impose a special excise tax on the fringe benefits and salaries of CEOs at publicly traded companies.

True, that will also punish corporate executives who aren’t guilty of sucking up to the political class, but that will have a positive impact in that the good CEOs will pressure the statist CEOs to stop being suck-up a$$holes.

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Chile’s Amazing School Choice Revolution

I wrote back in July about the remarkable transformation of Chile into a prosperous market economy.

In that post, I noted that Chile was a pioneer in the shift from unsustainable tax-and-transfer entitlement schemes to savings-based personal retirement accounts. And with good reason. That system, which has been in place for more than three decades, is hugely successful.

We should do the same thing in America, and we should do it yesterday, if not sooner.

But Chile’s success is driven by more than just pension reform. And I want to mention something remarkable about what’s happening with school choice in that country.

Jose Pinera – Freedom Fighter

First, some background. I’m currently at a Cato Institute donor retreat, where I had the chance to talk to Jose Pinera, who is now the Co-chairman of Cato’s Project on Social Security Choice, but who also was the person who implemented the pension reforms in his home country of Chile.

I knew Chile had a school choice program, and I wrote a brief post about those reforms back in 2010.

But I was stunned when Jose told me yesterday that about 60 percent of Chilean kids – of all ages – now attend private schools.

That’s far better than Sweden, which also has nationwide school choice, but has only about 20 percent of high school-age kids in private schools.

Jose thinks that it is just a matter of time before more than 80 percent of Chilean kids are in private schools. Why? Because people like freedom and choice.

He often brags – and rightly so – that more than 95 percent of workers chose personal retirement accounts when given the option of staying with the old government-run pension system. So it shouldn’t be a surprise that parents also choose wisely when deciding how to get the best possible education option for their kids.

Now, if we can just figure out how to expand school choice in America…

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Another Push for Global Taxation from the United Nations

I spoke at the United Nations back in May, explaining that more government was the wrong way to help the global economy.

But I guess I’m not very persuasive. The bureaucrats have just released a new report entitled, “In Search of New Development Finance.”

As you can probably guess, what they’re really searching for is more money for global redistribution.

But here’s the most worrisome part of their proposal. They want the U.N. to be in charge of collecting the taxes, sort of a permanent international bureaucracy entitlement.

I’ve written before about the U.N.’s desire for tax authority (on more than one occasion), but this new report is noteworthy for the size and scope of taxes that have been proposed.

Here’s the wish list of potential global taxes, pulled from page vi of the preface.

Here’s some of what the report had to say about a few of the various tax options. We’ll start with the carbon tax, which I recently explained was a bad idea if imposed inside the U.S. by politicians in Washington. It’s a horrible idea if imposed globally by the kleptocrats at the United Nations.

…a tax of $25 per ton of CO2 emitted by developed countries is expected to raise $250 billion per year in global tax revenues. Such a tax would be in addition to taxes already imposed at the national level, as many Governments (of developing as well as developed countries) already tax carbon emissions, in some cases explicitly, and in other cases, indirectly through taxes on specific fuels.

Notice that the tax would apply only to “developed countries,” so this scheme is best characterized as discriminatory taxation. If Obama is genuinely worried about jobs being “outsourced” to nations such as China (as he implies in his recent attack on Romney), then he should announce his strong opposition to this potential tax.

But don’t hold your breath waiting for that to happen.

Next, here’s what the U.N. says about a financial transactions tax.

A small tax of half a “basis point” (0.005 per cent) on all trading in the four major currencies (the dollar, euro, yen and pound sterling) might yield an estimated $40 billion per year. …even a low tax rate would limit high-frequency trading to some extent. It would thus result in the earning of a “double dividend” by helping reduce currency volatility and raising revenue for development. While a higher rate would limit trading to a greater extent, this might be at the expense of revenue.

This is an issue that already has attracted my attention, and I also mentioned that it was a topic in my meeting with the E.U.’s Tax Commissioner.

But rather than reiterate some of my concerns about taxing financial consumers, I want to give a back-handed compliment the United Nations. The bureaucrats, by writing that “a higher rate…might be at the expense of revenue,” deserve credit for openly acknowledging the Laffer Curve.

By the way, this is an issue where both the United States and Canada have basically been on the right side, though the Obama Administration blows hot and cold on the topic.

Now let’s turn to the worst idea in the U.N. report. The clowns want to steal wealth from rich people. But even more remarkable, they want us to think this won’t have any negative economic impact.

…the least distorting, most fair and most efficient tax is a “lump sum” payment, such as a levy on the accumulated wealth of the world’s richest individuals (assuming the wealthy could not evade the tax). In particular, it is estimated that in early 2012, there were 1,226 individuals in the world worth $1 billion or more, 425 of whom lived in the United States, 90 in other countries of the Americas, 315 in the Asia-Pacific region, 310 in Europe and 86 in Africa and the Middle East. Together, they owned $4.6 trillion in assets, for an average of $3.75 billion in wealth per person.21 A 1 per cent tax on the wealth of these individuals would raise $46 billion in 2012.

I’ll be the first to admit that you can’t change people’s incentives to produce in the past. So if you steal wealth accumulated as the result of a lifetime of work, that kind of “lump sum” tax isn’t very “distorting.”

But here’s a news flash for the nitwits at the United Nations. Rich people aren’t stupid (or at least their financial advisers aren’t stupid). So you might be able to engage in a one-time act of plunder, but it is deliberate naiveté to think that this would be a successful long-run source of revenue.

For more information, I addressed wealth taxes in this post, and the argument I was making applies to a global wealth tax just as much as it applies to a national wealth tax.

Now let’s conclude with a very important warning. Some people doubtlessly will dismiss the U.N. report as a preposterous wish list. In part, they’re right. There is virtually no likelihood of these bad policies getting implemented at any point in the near future.

But the statists have been relentless in their push for global taxation, and I’m worried they eventually will find a way to impose the first global tax. And if you’ll forgive me for going overboard on metaphors, once the camel’s nose is under the tent, it’s just a matter of time before the floodgates open.

The greatest threat is the World Health Organization’s scheme for a global tobacco tax. I wrote about this issue back in May, and it seems my concerns were very warranted. The bureaucrats recently unveiled a proposal – to be discussed at a conference in South Korea in November – that would look at schemes to harmonize tobacco taxes and/or impose global taxes.

Here’s some of what the Washington Free Beacon wrote.

The World Health Organization (WHO) is considering a global excise tax of up to 70 percent on cigarettes at an upcoming November conference, raising concerns among free market tax policy analysts about fiscal sovereignty and bureaucratic mission creep. In draft guidelines published this September, the WHO Framework Convention on Tobacco Control indicated it may put a cigarette tax on the table at its November conference in Seoul, Korea. …it is considering two proposals on cigarette taxes to present to member countries. The first would be an excise tax of up to 70 percent. …The second proposal is a tiered earmark on packs of cigarettes: 5 cents for high-income countries, 3 cents for middle-income countries, and 1 cent for low-income countries. WHO has estimated that such a tax in 43 selected high-/middle-/low-income countries would generate $5.46 billion in tax revenue. …Whichever option the WHO ends up backing, “they’re both two big, bad ideas,” said Daniel Mitchell, a senior tax policy fellow at the Cato Institute. …Critics also argue such a tax increase will not generate more revenue, but push more sales to the black market and counterfeit cigarette producers. “It’s already huge problem,” Mitchell said. “In many countries, a substantial share of cigarettes are black market or counterfeit. They put it in a Marlboro packet, but it’s not a Marlboro cigarette. Obviously it’s a big thing for organized crime.” …The other concern is mission creep. Tobacco, Mitchell says, is easy to vilify, making it an attractive beachhead from which to launch future vice tax initiatives.

It’s my final comment that has me most worried. The politicians and bureaucrats are going after tobacco because it’s low-hanging fruit. They may not even care that their schemes will boost organized crime and may not raise much revenue.

They’re more concerned about establishing a precedent that international bureaucracies can impose global taxes.

I wrote the other day about whether Americans should escape to Canada, Australia, Chile, or some other nation when the entitlement crisis causes a Greek-style fiscal collapse.

But if the statists get the power to impose global taxes, then what choice will we have?

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Obama’s Phony Economic Patriotism

I despise protectionism. Mostly because it is bad economic policy, but also because politicians often use protectionism as a way of diverting attention from their own failures.

So when I appeared on Neil Cavuto’s show to comment on President Obama’s criticism of “outsourcing,” I was a tad bit critical.

I think my opening comments were effective. I wanted to help viewers understand that cross-border investment is a big net plus for the American economy. Indeed, this is why I’m so critical of laws such as FATCA that discourage foreigners from making job-creating investments in the United States.

And I hope people understood the moral point I made about how it’s not our business what private citizens do with their own money, but it is our business when politicians squander taxpayer money.

Though perhaps I should have asked the folks at Fox to put this cartoon on the screen.

I also got to take a jab at the failed Keynesian stimulus. And I explained that big government facilitates corruption and that excessive government spending undermines growth, so I’m generally happy with my remarks.

But not completely happy. I should have said that the average corporate tax rate around the world is 15 to 17 percentage points below the American level, not 15 to 17 percent, but hopefully people understood the point I was trying to make.

P.S. Romney’s been engaging in some China bashing, so he also deserves some criticism.

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Two More Funny (and Accurate) Posters about Gun Control

I did a post two days ago with a series of signs and images making fun of gun-free zones.

I’m personally more partial to t-shirts and bumper stickers, such as the ones you can view here, here, and here, but folks seem to really enjoy the posters. Indeed, here are two more that were shared by readers.

The first one is self-explanatory.

Though I suppose the message in the poster is not completely accurate. As an economist, I do think laws – on the margin – can discourage both gun ownership and pot smoking. It’s simply a matter of the likelihood of getting caught and the severity of the punishment (which was the theory behind the famous $1 million fine for speeding in Sweden).

That being said, it’s foolish to have bad laws – such as ones that restrict the freedom of people to engage in peaceful behavior that doesn’t infringe on the rights of others.

Speaking of laws, I think the message in this poster is perfect.

Indeed, this is a pretty good way of looking at much of what the government does.

Anti-money laundering laws, for instance, require banks (at great expense) to snoop on the financial transactions of customers in the theory that a few bad guys might get caught. As even the World Bank has noted, totally innocent poor people are some of the biggest victims of this policy.

Just an law-abiding people are the ones most hurt by gun control laws.

By the way, if you can’t get enough anti-gun control info, here are some videos I’ve posted over the past couple of years.

• Ted Nugent talking about gun ownership and the right of self defense.
• A look at the Switzerland’s strong gun culture and the importance of self defense as a protection against oppression.
• And some very powerful testimony to some weasels on Capitol Hill (make sure to pay attention around the 5:00 mark).
• Ice-T talking about the real reason to defend and support the 2nd Amendment.
• A heartwarming Christmas story.

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Economic Conservatives and Traditional Conservatives Are – or Should Be – Natural Allies in the Fight against a Bloated Federal Government

It’s not uncommon for there to be debate and discussion about the degree to which libertarians and social conservatives are allies and enemies.

I think they’re mostly allies, in part because there is wide and deep agreement on the principle of individual responsibility. They may focus on different ill effects, but both camps understand that big government is a threat to a virtuous and productive citizenry.

That being said, I also realize that a libertarian who thinks drug legalization is the most important issue in the world is probably not going to feel much kinship with a social conservative who focuses on spiritual treatment of drug addiction (even though I would argue they should share policy views).

I’m contemplating this topic because of a recent New York Times column by David Brooks. He is concerned that traditional conservatives (which I think would overlap with, but not be identical to, social conservatives) have lost influence in the conservative movement and Republican Party. Let’s start with this excerpt.

…the conservative movement…was a fusion of two different mentalities. On the one side, there were the economic conservatives. …there was another sort of conservative, who would be less familiar now. This was the traditional conservative, intellectual heir to Edmund Burke, Russell Kirk, Clinton Rossiter and Catholic social teaching. This sort of conservative didn’t see society as a battleground between government and the private sector. Instead, the traditionalist wanted to preserve a society that functioned as a harmonious ecosystem, in which the different layers were nestled upon each other: individual, family, company, neighborhood, religion, city government and national government. …they were intensely interested in creating the sort of social, economic and political order that would encourage people to work hard, finish school and postpone childbearing until marriage.

So far, so good. As a self-described libertarian, I like these concepts. Indeed, I support liberty in part because I think it will both enable and encourage people to experience good lives in the kind of ecosystem David describes.

But then he has a sentence that rubs me the wrong way.

Ronald Reagan embodied both sides of this fusion, and George W. Bush tried to recreate it with his compassionate conservatism.

Let me first stipulate that it’s unfair to equate “compassionate conservatism” with “big government conservatism.” That may have been the end result, but the goal – as was explained to me on several occasions – was to reform the way government did things, not to make it bigger.

But even if we accept that goal, I think Reagan and Bush represented different strains of conservatism. Reagan wanted to shrink the federal government because he viewed Washington as a threat to David’s “harmonious ecosystem.” In other words, Reagan-style conservatism is (was?) based on the notion that Washington could only make things worse, not better.

The Bush people, by contrast, had a more optimistic view of the federal government’s capabilities.

Indeed, Brooks is explicitly willing to make government bigger in hopes of achieving certain goals.

There are few people on the conservative side who’d be willing to raise taxes on the affluent to fund mobility programs for the working class. There are very few willing to use government to actively intervene in chaotic neighborhoods, even when 40 percent of American kids are born out of wedlock. There are very few Republicans who protest against a House Republican budget proposal that cuts domestic discretionary spending to absurdly low levels. The results have been unfortunate. Since they no longer speak in the language of social order, Republicans have very little to offer the less educated half of this country. …The Republican Party has abandoned half of its intellectual ammunition. It appeals to people as potential business owners, but not as parents, neighbors and citizens.

Here’s where I think he lets hope triumph over experience. What makes him think that the federal government is capable of successfully creating and operating “mobility programs”? It’s been operating dozens of such programs and they’ve all failed.

Or why does he think the federal government can reduce out-of-wedlock births when the evidence suggests that the welfare state has played a non-trivial role in enabling such misguided behavior?

Brooks also makes a ridiculous claim about what’s happened to domestic discretionary outlays. Here’s the data, adjusted for inflation, from the Historical Tables of the Budget.

Granted, David is talking about the plans in the Republican budget, not what’s actually happened. But the most the GOP wants to achieve is to put domestic discretionary spending back at 2008 levels. That’s not exactly an “absurdly low level,” particularly compared to existing post-stimulus outlays.

The more relevant question is why he thinks federal spending is associated with good results. There’s certainly no positive evidence from Obama’s stimulus. We also know the War on Poverty backfired. And entitlements are a ticking time bomb in the absence of reform.

By the way, this doesn’t negate what Brooks says about the GOP’s inability to articulate a message that resonates with (as he calls them) the “less educated half of this country.”

All I’m arguing is that results should matter. If we care about making life better for these people and we want the “harmonious ecosystem” David mentions, then we should be making government smaller rather than larger.

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Evidence from England Shows that If You Want to “Soak the Rich,” Keep Tax Rates Low

I’ve pulled evidence from IRS publications to show that rich people paid a lot more to Uncle Sam after Reagan reduced the top tax rate from 70 percent to 28 percent.

The good ol’ days

But the Gipper wasn’t the only one to unleash the Laffer Curve. The United Kingdom saw similar dramatic results when Margaret Thatcher lowered the top tax rate from 83 percent to 40 percent. Allister Heath explains.

During the 1970s, when the tax system specialised in inflicting pain, the top one per cent of earners contributed 11pc of income tax. By 1986-87, with the top rate down to 60pc, that had increased to 14pc. After the top rate fell to 40pc in 1988, the top 1pc’s share jumped, reaching 21.3pc by 1999-2000, 24.4pc in 2007-08 and 26.5pc in 2009-10. Lower taxes fuelled a hard-work culture and an entrepreneurial revolution. Combined with globalisation and the much greater rewards available for skilled workers, Britain’s most successful individuals earned a lot and paid a lot in tax.

In other words, Margaret Thatcher’s supply-side tax rate reductions paid big dividends, both for the economy and for the Treasury.

Unfortunately, just as American politicians have forgotten (or decided to ignore) the lessons of the Reagan era, British politicians also have gravitated to a class-warfare approach. Allister points out that this is having a negative impact.

Yet times are changing, and not just because of the recession. HMRC recently slashed its forecasts for revenues from the top 1pc. It now believes the number of people expected to report £500,000 or more in earnings will fall by a tenth this year; those on £2m are set to drop by a third.

Why have the numbers headed in the wrong direction? There are almost certainly lots of factors, but tax policy has moved in the wrong direction and presumably deserves part of the blame. The top income tax rate is now 45 percent. The value-added tax has jumped to 20 percent. Allister provides more details.

Capital gains tax is too high. Luxury homes transactions are falling because of higher stamp duty. Britain is now a high tax economy; this is distorting work and investment decisions, gradually shifting talent and capital overseas. The overwhelming majority of high earners are already contributing disproportionately to the exchequer; tightening the screws further will be disastrously counter-productive. The lesson of the past 30 years is clear: the best way to entice the rich to pay even more tax is to keep rates low and allow them to get even richer.

I have to admit that I don’t want anyone to pay more tax, but I’m even less happy about punitively high tax rates. So I’m reluctantly willing to let the clowns in government have more money in exchange for a tax system that is more conducive to economic growth.

Here’s my Laffer Curve video, which explains more about the relationship of tax rates, taxable income, and tax revenue.

The ultimate goal, of course, is to shrink the central government so that the legitimate functions of the state can be financed at very low tax rates. Heck, if the United States and the United Kingdom had the kind of limited governments that existed 100 years ago, neither nation would even need a flat tax. A few user fees and excise taxes would suffice. Now that’s hope and change.

P.S. I periodically share two great Reagan videos, which can be seen here and here, but I also have a couple of inspiring videos of Thatcher in action, which can be viewed here and here.

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An Amusing Look at Gun-Free Zones

I’ve shared a very clever Chuck Asay cartoon about gun-free zones, so let’s now enjoy four posters on the topic.

Let’s begin with a good jab at one of the anti-Second Amendment groups.

But remember the serious point. If you’re a bad guy and know that a potential victim is sure to be unarmed, does that make you happy or sad?

I realize that an anti-gun zealot will respond by arguing that they want a world where the thugs and crooks also will be disarmed, but how likely is it that such people will turn in their weapons? In any event, most criminals are young men and potential victims need guns to compensate for the inability to match the physical strength of their attackers.

Next let’s look at a poster showing the kind of instructions that statists such as Mayor Bloomberg should post in public places.

These clowns expect us to have blind faith in the ability of public authorities, but the odds of a cop being immediately available when trouble strikes are almost nonexistent.

Here’s a poster that captures the blind naiveté of anti-gun activists. I don’t think I need to add any commentary.

Last but not least, here’s a sign that all anti-gun leftists – assuming they have the courage to publicly celebrate their beliefs – should post outside their homes.

If you enjoy these posters, you can view previous editions here, here, here, here, and here.

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Assuming You’re Intellectually Lazy, there’s a Very Strong Argument for Command-and-Control Regulation

Even though I’m a fiscal policy economist, I often get hit with questions on other topics. This frequently happens when I’m overseas and I’m put in the position of defending every nuance of free market policy.

I don’t mind pontificating on other issues, but I get frustrated with myself for sometimes not having the specific knowledge to make the best possible case. I was recently asked, for instance, whether the private sector was capable of protecting the health and safety of workers.

I knew enough to discuss the overall cost of regulation, the amount of valuable time diverted to comply with red tape, and some of the research on regulation and job creation.

Moreover, I made the generic argument about how employers have a profit-maximizing incentive to protect the health and safety of their workforce.

But when the person asserted to me that the creation of the Occupational Safety and Health Administration (OSHA) was followed by safer workplaces, all I could do was mumble something about the sun doesn’t rise because roosters crow and that we would need hypotheticals and counterfactuals.

Fortunately, I work at the Cato Institute where there are experts about almost every policy issue, so I was able to track down some analysis about OSHA in the Cato Handbook for Congress.

This then led me to the National Safety Council, where I discovered that the person who was asking me about regulation was correct. As seen in this chart, workplace deaths have fallen significantly since OSHA was created.

There is a discontinuity in the data in 1992 because of a change in methodology, but I’ll stipulate that this doesn’t weaken in any way the argument that the creation of OSHA was followed by lower death rates in the workplace.

But it also turns out that my cop-out response about roosters and sunrises was right on the mark.

Let’s now look at the same chart, but this time we will include data going all the way back to 1933. What we find is that the workplace deaths were falling before OSHA and they continued to fall after OSHA.

Now for some caveats. This chart doesn’t prove OSHA is completely ineffective. Moreover, I”m sure there were state-based workplace regulations in effect in the pre-OSHA era, and I assume the federal government also had some health and safety regulations as well, perhaps through the Labor Department.

My argument is simply the more limited hypothesis that regulations impose considerable costs, which should be taken into account, and that businesses have a profit-maximizing incentive to promote health and safety in the workplace, which is increasingly important as society becomes richer.

So let me put the onus back on the pro-regulation crowd. Given the charts above, shouldn’t there be some sort of obligation to show that regulation has had a positive impact, particularly when costs are added to the equation.

And don’t give me a lazy argument about “even if we save just one life,” because I’ve already shown that a heavy regulatory burden can have a deadly impact.

P.S. Let’s also remember that OSHA generates some bone-headed regulatory choices, such as the crazy example recounted by Dave Barry and this nutty bit of regulatory excess uncovered by my colleague Walter Olson.

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America Isn’t (Yet) a Divided Nation of “Makers” and “Takers,” but some on the Left Are Pushing Dependency as a Political Strategy

I’m part of a just-posted online Debate Club sponsored by U.S. News & World Report which asks “Is the United States a Nation of ‘Makers and Takers?'”

My contribution to the discussion is basically a reworked version of what I wrote last week about Romney and the infamous 47 percent remark, so there’s no need to regurgitate those remarks. Suffice to say that I gave an answer of “No” because Americans don’t (yet!) share the European belief that it is government’s responsibility to provide the basics of life.

What’s interesting is that the two other participants in the debate (Phil Kerpen and Scott Winship) who are closest to my views answered “Yes,” while the three leftists sided with me and voted “No.”

But not because the leftists agreed with me on policy, or because I disagreed with Phil or Scott. I think the strange divergence is a result of me being very literal (some would say pedantic) about the question that was asked while the rest of the participants addressed the broader issue of whether there’s too much or too little means-tested redistribution.

So allow me to take a moment to elaborate on my remarks. My answer was driven by my belief that American exceptionalism – limited government, self reliance, and personal responsibility – is still real. I linked above to one poll comparing American and European attitudes, but I also invite you to review very important polling data here and here.

But I’m not under any illusions that this is a permanent feature of the U.S. political landscape. People can be lulled into dependency. Indeed, some leftists are very honest about admitting their desire to turn more and more Americans into wards of the state. Bill Clinton’s pollster wrote a book in the 1990s in which he explicitly acknowledged that part of the debate over Hillarycare was about the degree to which the middle class would have to rely on the federal government.

And a recording of Barack Obama from 1998 has recently surfaced, and it reveals both an ideological and a political desire to expand government dependency. Here’s an excerpt from the Daily Caller.

The Daily Caller has obtained a complete audio recording of the October 19, 1998 Loyola College forum on community organizing and policymaking during which a future President Barack Obama said he favored the government redistribution of wealth. …Obama also said he viewed welfare recipients and “the working poor” as “a majority coalition” that could be mobilized to help advance progressive policies and elect their champions. …The full recording reveals that Obama saw welfare recipients and the working poor in Chicago as a “majority coalition” who could be leveraged politically.“What I think will re-engage people in politics is if we’re doing significant, serious policy work around what I will label the ‘working poor,’” he said… “They are struggling. And to the extent that we are doing research figuring out what kinds of government action would successfully make their lives better, we are then putting together a potential majority coalition to move those agendas forward.”

Set aside the policy arguments here about redistribution undermining progress in the fight against poverty and making it difficult for the less fortunate to climb the economic ladder.

What’s significant is the extent to which Clinton’s pollster and Obama both explicitly talk about redistribution as a political tool. Take money from a minority (i.e., class-warfare tax policy) and give it to enough voters to create a political majority.

I hate to admit it, but the evidence from Europe shows this can be a successful political strategy.

The only downside – as shown in this parable about beer and this great Chuck Asay cartoon – is that the scam only works so long as there are people willing to get fleeced.

I once argued on TV that leftists should be careful not to be too greedy because it doesn’t make sense for parasites to kill their host animals. And Michael Barone made the same point in a more eloquent fashion.

But I think this analysis is flawed. The Greek politicians who created the welfare state were very successful in buying votes. They’re now out of office, either dead or retired with fat pensions, as the house of cards is collapsing.

So if you’re Obama or some other current-day politician (and assuming you don’t care about the future), what’s the downside of expanding the burden of government spending?

P.S. You can vote for who had the best Debate Club argument, so please don’t hesitate to click the up arrow. Presumably thanks to readers of International Liberty, I’ve prevailed in previous debates on double taxation, European fiscal policy, flat tax, Internet taxation, and Obamanomics.

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Should Advocates of Small Government Escape to Canada?

Back in 2010, I wrote about the Free State Project, which is based on the idea that libertarians should all move to New Hampshire and turn the state into a free market experiment.

I was impressed when I spoke at one of their conferences and gave them a plug, but more recently I’m running into people who are so discouraged about America’s fiscal outlook that they’re thinking of moving to some other nation.

Wealthy people seem to prefer Switzerland and the Cayman Islands, while middle-class people mostly talk about Australia and Latin America (mainly Costa Rica or Panama).

But maybe Canada is the place to go. It’s now the 5th-freest economy in the world, while the United States has dropped to 18th place.

I’m a big fan of Canada’s fiscal reforms. On several occasions, I’ve explained how Canadian lawmakers boosted economic and fiscal performance by restraining the growth of government spending.

Indeed, Canada is my main example when I explain why the United States should follow my Golden Rule of fiscal policy.

By allowing the private sector to grow faster than the government, Canada has also been able to implement big tax cuts. Heck, they even privatized their air traffic control system.

Canada’s reforms got some positive attention in today’s Wall Street Journal from Mary Anastasia O’Grady.

Former Canadian Prime Minister Paul Martin has a stern warning for the U.S. political class: Get real about the gap between federal revenues and spending, or get ready for disaster. Mr. Martin knows of what he speaks. In 1993, when he was Canada’s finance minister, his country faced a daunting fiscal crisis. …When the Liberal Party government of Prime Minister Jean Chrétien took power in October 1993, Mr. Martin was charged with pulling his nation out of the fiscal death spiral. He did it with deep cuts in federal spending over two years that amounted to 10% of the budget, excluding interest costs. Nothing was spared. Even federal transfers to the provinces to fund Canada’s sacred national health-care system got hit. The federal government also cut and block-granted money for welfare programs to the provinces, giving them almost full control over how the money would be spent. In the 1997 election, the Liberals increased their majority in parliament. The Chrétien government followed with tax cuts starting in 1998 and one of the largest tax cuts—both corporate and personal—in the history of the country in 2000. The Liberals won again in 2000.

In the U.S., by contrast, we’ve degenerated to the point where the central bank is now financing a disturbingly large share of the deficit.

 Market discipline doesn’t exist in Washington, which has the “privilege” of an accommodating central bank issuing the world’s reserve currency. The big spenders don’t need to pay attention to pesky numbers. …the Fed bought 77% of all new federal debt last year. It is doing so at rock-bottom interest rates. By holding the short-term fed-funds rate low while it buys up long-term securities, Mr. Bernanke is helping our political class ignore the real cost of rising federal indebtedness.

This doesn’t mean we’re at near-term risk of becoming another Argentina or Zimbabwe, but I definitely don’t like the trend. No wonder the Canadian dollar is now stronger than the dollar.

But that’s a separate issue. This post is mostly about fiscal policy and Canada’s outlook.

In the short run, Canada’s a good bet. Reforms have been implemented, and they happened under a left-of-center government and have been continued more recently by a right-of-center government.

We’ve had bipartisanship in the United States as well, but the wrong kind. For the past 12 years, we’ve endured big spenders from both parties. No wonder Canada now ranks higher.

In the long run, though, I’m not sure Canada’s the right choice. I joke about the cold weather, but I’m more concerned about the fact that the burden of government spending remains too high, consuming about 42 percent of economic output. And even though Canada has implemented some pension reforms, it has a government-run healthcare system that will become a greater burden on taxpayers as the population ages.

This doesn’t mean I’m optimistic about the long-run outlook in the United States. Yes, we can fix our fiscal problems if we cap the growth of spending and implement entitlement reform to address the long-run problem, but I’m not holding my breath expecting those policies.

So I’m back to my original plan of finding somebody to give me millions of dollars so I can escape to the Cayman Islands.

P.S. If you’re thinking of sending me a big check, give me some advance notice. To avoid nasty headaches with the IRS, I should go to the Cayman Islands first and then have somebody give me millions of dollars.

P.P.S. On a more serious note, here’s my video highlighting nations – including Canada – that successfully restrained government spending.

P.P.P.S. The Canadian government also deserves praise for resisting global schemes to raise taxes on the banking sector.

P.P.P.P.S. But there are bad people in Canada, such as the politician who escaped to the U.S. for surgery while leaving ordinary Canadians stuck in long waiting lines.

P.P.P.P.P.S. To close on a light note, here’s a satirical article about American leftists trying to escape to Canada after the 2010 elections.

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Should We Give Politicians a Carbon Tax as a New Source of Revenue?

I’ve written many times about the dangers of a value-added tax. I obviously think it’s a bad idea as an add-on tax, but I also think it’s dangerous as a replacement tax.

Not because it’s a horrible tax from a theoretical perspective (like the flat tax and national sales tax, it’s a single-rate system with no double taxation of income that is saved and invested), but instead because I don’t trust politicians.

The VAT in Europe, for instance, almost surely played a role in enabling the huge expansion in the burden of government spending – thus helping to set the stage for the current fiscal crisis.

All these arguments also are equally relevant to the debate about imposing a carbon tax.

As with the VAT, there are features of a carbon tax that make it a less-destructive alternative when compared to other forms of taxation. The problem is that politicians wouldn’t permanently lower or eliminate any other tax, and the new revenues would be used to further expand the size and scope of the federal government.

Andy Quinlan of the Center for Freedom and Prosperity discusses the issue in a column for Forbes. Here are some key excerpts.

With the economy sputtering toward what can at best be described as a meager recovery, it seems like an obviously poor time to consider raising taxes on any form of energy. …Yet that is also precisely what an unholy coalition of big spending liberals and misguided conservative economists is proposing – to raise taxes on carbon and send the economy spiraling toward another recession. Last month, Rep. Jim McDermott (D-WA) introduced the “Managed Carbon Price Act of 2012,” a bill that would require greenhouse gas emissions to be reduced by 80% from 2005 levels over the next 42 years – ultimately leaving the United States with per capita emissions levels lower than that of Haiti today. …At the fifth annual National Clean Energy Summit held in Las Vegas last month, Senate Majority Leader Harry Reid expressed his hope of enacting a carbon tax by next year. Senate Environment and Public Works Chairman Barbara Boxer went as far as to say that she would like to see it included in a year-end budget deal. …The motives of the left in pushing for a tax are easy to understand, they want more “revenue” to spend. A recent paper from the MIT Global Change Institute estimated one carbon tax proposal would generate $1.5 trillion over ten years, and politicians and the media immediately began to salivate at the idea of using such a tax as an excuse to further expand the burden of government spending. …If the political climate was such that cap-and-trade or other big government carbon regulations were on the horizon, proffering a more economically efficient carbon tax as an alternative might not be a bad strategy from a do-the-wrong-thing-in-the-least-destructive-fashion perspective. But that is not the case. …More generally, the very idea of offering a new tax in exchange for lower rates elsewhere is flawed. Even if leftists agree to lower taxes on income to keep a new carbon tax revenue neutral, there’s nothing to stop them from raising rates in the future. On the other hand, given the love politicians have for taxes, eliminating an entire tax would be much harder. A similar logic can be seen in the experience of Europe, where less economically destructive value-added taxes did not replace income taxes, but instead helped usher in the bloated, unsustainable European welfare states which are today circling the drain.

Wow, Reid, Boxer, and McDermott. That’s like the Three Stooges of Statism.

But this isn’t a laughing matter. Politicians would love to get their greedy hands on $1.5 trillion of new tax revenue. And Quinlan points out in the article that some Republicans are sympathetic to the idea.

Keep in mind, by the way, that $1.5 trillion would be the floor, not the ceiling. As we’re seeing in Japan, politicians can’t resist boosting the rate whenever they want to spend more money.

P.S. Read this if you want to see what happens when politicians get a new source of revenue.

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Tax Havens like the Cayman Islands Have Better Fiscal Policy…and More Diligent Enforcement of Laws against Dirty Money and Terrorist Financing

Since I’m probably the foremost defender of tax havens in the United States, I tend to get a lot of press inquiries whenever something happens that brings attention to these low-tax jurisdictions.

In recent months, almost all of the media calls have been because (gasp!) Mitt Romney engaged in sound business practices and used tax havens to boost earnings while also legally minimizing the amount of money siphoned off by the buffoons in Washington.

I’ve explained that prominent Democrats routinely utilize tax havens for business and investment purposes, including as Bill Clinton, John Kerry, John Edwards, Robert Rubin, Peter Orszag, and Richard Blumenthal. I’ve also discussed the issue for the Wall Street Journal’s online interview program, and I slammed ABC News for empty and biased reporting on the issue.

Most recently, I got interviewed by NBC’s big station in New York City. They inexplicably seemed to think it was a big scoop that they were able to form a company in Nevis, though at least they gave me an opportunity to explain that taxpayers benefited from tax havens and tax competition.

But I don’t want to focus on my rather generic comments. Instead, I want to address the explicit assumption in the story that it is bad for Nevis (or any other jurisdiction) to have a simple and efficient process for forming companies.

Notwithstanding the news report, this is a good thing, a practice that should be applauded rather than condemned. Indeed, the World Bank highlights the importance of easy company formation in their important “Doing Business” project.

Moreover, there’s an implicit assumption in the story that not only is company formation somehow a sketchy thing, but that it’s only an issue for small Caribbean islands in the “offshore” world.

That’s completely inaccurate. Indeed, even leftists have acknowledged that Delaware is one of the premiere jurisdictions in the world for company formation, and I’ve explained that the U.S. has very attractive laws for international investors that have attracted trillions of dollars to the American economy.

Interestingly, we now have some very good evidence from three academics that the “offshore” world is much stricter about enforcing laws than the “onshore” world. Here’s what they did.

This paper reports the results of an experiment soliciting offers for these prohibited anonymous shell corporations. Our research team impersonated a variety of low- and high-risk customers, including would-be money launderers, corrupt officials, and terrorist financiers when requesting the anonymous companies. Evidence is drawn from more than 7,400 email solicitations to more than 3,700 Corporate Service Providers that make and sell shell companies in 182 countries. The experiment allows us to test whether international rules are actually effective when they mandate that those selling shell companies must collect identity documents from their customers.

And here’s what they found about so-called tax havens compared to high-tax nations. As you can see, the rules are much more likely to be obeyed in the low-tax jurisdictions that are always getting smeared.

A finding that runs directly counter to the conventional wisdom is that rich countries in the Organization of Economic Cooperation and Development (OECD) are worse at enforcing the rules on corporate transparency than are poor countries (see Figure 2). For developing countries the Dodgy Shopping Count is 12, while for developed countries it is 7.8 (and tax havens are much higher at 25.2, as discussed below). The significance of this finding is that it does not seem to be particularly expensive to enforce the rules on shell companies, given that poor nations do better than rich countries. This suggests that the relatively lackluster performance in rich countries reflects a simple unwillingness to enforce the rules, rather than any incapacity. One of the biggest surprises of the project was the relative performance of rich, developed states compared with poorer, developing countries and tax havens (see Figure 3). The overwhelming policy consensus, strongly articulated in G20 communiqués and by many NGOs, is that tax havens provide strict secrecy and lax regulation, especially when it comes to shell companies. This consensus is wrong. The Dodgy Shopping Count for tax havens is 25.2, which is in fact much higher than the score for rich, developed countries at 7.8 – meaning it is more than three times harder to obtain an untraceable shell company in tax havens than in developed countries. Some of the top-ranked countries in the world are tax havens such as Jersey, the Cayman Islands and the Bahamas, while some developed countries like the United Kingdom, Australia, Canada and the United States rank near the bottom of the list. It is easier to obtain an untraceable shell company from incorporation services (though not law firms) in the United States than in any other country save Kenya.

These are remarkable findings, but now let me take a moment to explain the correct interpretation of these results. Some people will argue that this data shows that there should be harsher rules imposed on the “onshore”  company formation business.

Au contraire. The goal should be to ease the regulatory burden everywhere. Simply stated, it is foolish to fight terrorism, corruption, and money laundering with costly rules that require the monitoring of countless legal actions.

Indeed, I’ve already explained how anti-money laundering rules are ineffective – or perhaps even counterproductive – in the fight against crime, largely because they generate a haystack of information, thus putting law enforcement in the unenviable position of searching for needles.

From a cost-benefit perspective, law enforcement should focus on actual criminal behavior. It wouldn’t make sense, after all, to have the government spy on everyone who buys a car merely because some people use autos when committing crime.

But that’s pretty much a good description of the mentality behind rules and regulations that target the company formation business.

P.S. For more information on the beneficial impact of so-called tax havens, Pierre Bessard wrote a great column about the topic for the New York Times.

P.P.S. I don’t want to overlook my statist friends. Here are a couple of short anti-tax haven videos from left wingers. The first one is tedious and amateurish, but I found the second one reasonably entertaining.

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Here’s What’s Wrong with the Simpson-Bowles Deficit-Reduction Plan

Many people want to believe in Unicorns, the Loch Ness Monster, and Bigfoot. I think those people are rational and reasonable compared to the folks in Washington that spend their days dreaming of “bipartisan” and “balanced” plans to fix the budget mess.

Here are the two things you should understand. First, you need to grab your Washingtonese-to-English dictionary so you can learn that “bipartisan” and “balanced” are almost always code words for “higher taxes.” Second, budget deals with higher taxes (as the New York Times accidentally admitted) don’t “fix” anything.

The Simpson-Bowles budget plan is a good example of why taxpayers should be quite skeptical. Put together by a former Republican Senator from Wyoming and Bill Clinton’s former Chief of Staff as part of President Obama’s Fiscal Commission, the Simpson-Bowles proposal is viewed by the inside-the-beltway crowd as fiscal Nirvana.

Unsurprisingly, Simpson and Bowles are quite fond of their plan. Here’s their key assertion from a column they recently wrote for USA Today.

The Simpson-Bowles commission offered a reasonable, responsible, comprehensive and bipartisan solution that won the support of a majority of Democrats and Republicans on the commission. Most importantly, it would reduce the deficit by $4 trillion over the next decade — enough to put the debt on a clear downward path relative to the economy.

Gee, sounds nice, but let’s look at the details, all of which can be seen by downloading their report.

A main problem is that Simpson and Bowles misdiagnose the problem. I think it’s fair to say that their focus, as they explicitly state in their report, is to “…stabilize and then reduce the national debt.” But as I explain in this video, the real problem is a federal government that is too big and spending too much. Red ink is just a symptom of that problem.

Moreover, the report even includes Keynesian policy, stating that “…budget cuts should start gradually so they don’t interfere with the ongoing economic recovery.”

But let’s set aside rhetorical sins and grade the plan.

Restraining Spending: C+

• The plan does impose some restraint on the budget, but the plan – even after being in place for 10 years – assumes that the federal government should grow by about $1.5 trillion and consume nearly 22 percent of economic output. This is far above the 18.2 percent of GDP when Clinton left office, which should be the minimum target for policymakers.

But the components of the plan make me think they won’t even achieve the plan’s anemic targets.

Eliminating Departments and Programs: D

• The Simpson-Bowles plan does not call for shutting down a single program, agency, or department. Not even cesspools of waste and inefficiency such as the Department of Education or Department of Housing and Urban Development.

Reforming Entitlements: C-

• There are real change in the plan, but they’re the wrong kind of changes. Instead of the structural reforms to Medicare and Medicaid contained in the Ryan budget, the Simpson-Bowles report basically calls for price fixing and means testing – policies that have a track record of ineffectiveness.

Reducing Bureaucratic Bloat: B

• In terms of controlling spending, this is the part of the report that is most admirable. It calls for a three-year freeze on excessive compensation and urges reductions in bureaucratic bloat – albeit only through attrition.

Controlling the Tax Burden and Reforming the Tax Code: C-

The best policy, needless to say, is getting rid of the corrupt tax system and replacing it with a simple and fair flat tax. That obviously wasn’t what Simpson and Bowles decided to propose, but the flat tax is a benchmark that allows us to judge the components of their plan.

They basically get two policies right and two policies wrong. If they were major league baseball players, a .500 average would make them superstars. In Dan Mitchell’s policy world, they’re below average.

Lowering Tax Rates: A-

• This is the best feature of all the revenue provisions. The Simpson-Bowles report proposes a top tax rate of between 23 percent-28 percent, significantly below the current top rate of 35 percent (and well below the 39.6 percent top rate that is part of President Obama’s class-warfare proposal). The corporate tax rate also would be reduced.

Reducing Double Taxation: D

• The plan would increase the double taxation of dividends and capital gains. The U.S. already has a very anti-competitive system and this would be a step in the wrong direction (though ameliorated by a lower corporate tax rate).

Limiting the Tax Burden: D-

• The plan assumes that laws should be changed to increase the federal tax burden to 21 percent of GDP from the long-run average of 18 percent of economic output. That’s unfortunate, but it’s even worse than it seems since the tax burden already is scheduled to rise to record levels because of what’s called “real bracket creep.” The Simpson-Bowles tax hikes would be an additional burden on taxpayers.

Eliminating Corrupt Loopholes: B

• The good news is that some deductions are curtailed and a few are eliminated. The best components are the repeal of the deduction for state and local income and property taxes. So no more indirect preferences that reward profligate states such as California and Illinois. The healthcare exclusion also is capped, which would be a nice step on the long – but important – task of dealing with the third-party payer crisis in the healthcare sector.

I’m not a fan of the Simpson-Bowles plan, but I do give them credit. They decided to focus on the wrong variable and they have some bad policies, but at least it’s a real proposal.

It’s not anywhere close to the Ryan budget, but it’s a heck of a lot better than what the Senate Democrats have produced (nothing) and what the President has proposed (kicking the can down the road).

But doing a better job than the remedial students is damning with faint praise. Just in case you’re tempted to grade them on a curve, just remember that balancing the budget without tax increases doesn’t require any heavy lifting. All policymakers have to do is limit the growth of spending so it grows by an average of 2.5 percent annually over the next decade.

Other nations, such as New Zealand and Canada, got great results when imposing multi-year periods of fiscal restraint. Certainly it’s not asking too much to expect American lawmakers to exercise similar levels of prudence?

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The Wall Street Journal’s Primer on Capital Gains Taxation

One of the principles of good tax policy and fundamental tax reform is that there should be no double taxation of income that is saved and invested. Such a policy promotes current consumption at the expense of future consumption, which is simply an econo-geek way of saying that it penalizes capital formation.

This isn’t very prudent or wise since every economic theory agrees that capital formation is key to long-run growth and higher living standards. Even Marxist and socialist theory is based on this notion (they want government to be in charge of investing, so they want to do the right thing in a very wrong way – think Solyndra on steroids).

To help explain this issue, the Wall Street Journal today published a very good primer on taxing capital gains.

The editors begin with an uncontroversial proposition.

The current Democratic obsession with raising the capital gains tax comes from a mistaken belief that the preferential rate applied to the sale of a family business, farm or financial asset is a “loophole” that mainly benefits the rich.

They offer three reasons why this view is wrong, starting with a basic inequity in the tax code.

Far from being a loophole, the low tax rate applied to capital gains is beneficial and fair for several reasons. First, under current tax rules, all gains from investments are fully taxed, but all losses are not fully deductible. This asymmetry is a disincentive to take risks. A lower tax rate helps to compensate for not being able to write-off capital losses.

Next, the editors highlight the unfairness of not letting investors take inflation into account when calculating capital gains. As explained in this video, this can lead to tax rates of more than 100 percent on real gains.

Second, capital gains aren’t adjusted for inflation, so the gains from a dollar invested in an enterprise over a long period of time are partly real and partly inflationary. It’s therefore possible for investors to pay a tax on “gains” that are illusory, which is another reason for the lower tax rate.

This may not seem like an important issue today, but just wait ’til Bernanke gets to QE24 and assets are rising in value solely because of inflation.

The final – and strongest argument – is that any capital gains tax is illegitimate because it is double taxation. I think this flowchart is very helpful for those who want to understand the issue, but the WSJ’s explanation is very good as well.

Third, since the U.S. also taxes businesses on profits when they are earned, the tax on the sale of a stock or a business is a double tax on the income of that business. When you buy a stock, its valuation is the discounted present value of the earnings. The main reason to tax capital investment at low rates is to encourage saving and investment. If someone buys a car or a yacht or a vacation, they don’t pay extra federal income tax. But if they save those dollars and invest them in the family business or in stock, wham, they are smacked with another round of tax.

There’s also good research to back up this theory – some produced by prominent leftists.

Many economists believe that the economically optimal tax on capital gains is zero. Mr. Obama’s first chief economic adviser, Larry Summers, wrote in the American Economic Review in 1981 that the elimination of capital income taxation “would have very substantial economic effects” and “might raise steady-state output by as much as 18 percent, and consumption by 16 percent.”

Summers is talking about more than just the capital gains tax, so his estimate is best viewed as the type of growth that might be possible with a flat tax that eliminated all double taxation.

Nobel laureate Robert Lucas also thinks that such a reform would have large beneficial effects.

Almost all economists agree—or at least used to agree—that keeping taxes low on investment is critical to economic growth, rising wages and job creation. A study by Nobel laureate Robert Lucas estimates that if the U.S. eliminated its capital gains and dividend taxes (which Mr. Obama also wants to increase), the capital stock of American plant and equipment would be twice as large. Over time this would grow the economy by trillions of dollars.

So why aren’t these reforms happening, either the medium-sized goal of getting rid of the capital gains tax, or the larger goal of junking the corrupt internal revenue code for a simple and fair flat tax?

A big obstacle is that too many politicians believe in class-warfare tax policy, even though lower-income people are among the biggest victims when the economy is weak.

For more information, here’s my video explaining that the right capital gains tax rate is zero.

P.S. Some of you may be wondering why I didn’t make a Laffer Curve argument for a lower capital gains tax. The main reason is because I have no interest in maximizing revenue for the government. I simply want good policy, which is why the rate should be zero.

P.P.S. I also didn’t bother to make a competitiveness argument, mostly because the WSJ’s editorial didn’t focus on that subtopic. But check out this post to see how Obama’s policy is putting America at a significant disadvantage.

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Have Fun with Both Anti-Obama Jokes and Anti-Romney Jokes

I can’t think of a better way to begin a weekend than by abusing the clowns who want to control our lives.

So, courtesy of News-max.com, here are some of the one-liners bashing the political elite from the late-night talk shows.

Jay Leno (the 5th joke reminds me of this amusing poster)

• It’s been a rough week for Mitt Romney. Former Minnesota Governor Tim Pawlenty has quit as co-chair of Mitt Romney’s presidential campaign. I think the technical term is “jumping ship.”
• I saw a guy today scraping a Romney bumper sticker off his car. It was Paul Ryan.
• Political pundits are taking Mitt Romney to task, saying his latest gaffe was not “presidential.” Vice presidential, sure. That’s Joe Biden territory.
• According to the Labor Department, unemployment fell from 8.3 percent to 8.1 percent last month. But that’s because 368,000 Americans gave up looking for work. Today, President Obama said that’s a step in the right direction, and he is encouraging more Americans to give up looking for work.
• Bill Clinton said that President Obama inherited a deeply damaged economy. And if he’s re-elected he’ll inherit an even more deeply damaged economy.
• President Obama’s re-election campaign said that this year they’ll knock on 150 percent more doors than they did in 2008. Well, of course they will. They have to. There’s so many foreclosures it’s tough to tell where people live.
• I’m very excited; we have Ron Paul on the show tonight. Unlike the Republicans, we’re actually going to let him speak.
• A man in Florida has been arrested for wearing a President Obama mask while robbing a McDonald’s. To show you how good this guy’s disguise was, instead of a holdup note he was reading from a teleprompter.
• This Obama robber made some pretty scary threats to the McDonald’s employees. He said, “Give me your money, or else my economic plan will have you working here for the rest of your life.”
• According to The New York Times, more than half of President Obama’s Twitter followers are fake. They don’t even exist. Which is actually a good thing because if they did exist there wouldn’t be any jobs for them.
• President Obama is seeking to make his case with first-time voters. Well, you can understand why. Second-time voters have graduated and can’t find a job.
• It looks like Hurricane Isaac has delayed the Republican convention for one day. This is a big storm. In fact, Isaac has scared more senior citizens than Paul Ryan.
• Some of the Republicans, I think, are over-reacting to Hurricane Isaac — like today Rick Santorum was seen gathering up two of every animal.
• Herman Cain was in Tampa. When a reporter asked him if Isaac reminded him of Katrina, he said, “I never even met the woman.”

David Letterman

• Leaves are falling, temperatures are falling, Romney’s poll numbers are dropping. It must be autumn.
• Happy birthday to New Jersey Gov. Chris Christie, who is 50 years old. They had a cake for him. He blew out the candles and then he wished for another cake.
• Are you excited about Labor Day weekend? That’s a holiday where Americans take three days off from looking for a job.

Conan

• A lot of people are commenting that Mitt Romney is looking extremely tan lately. In fact, if Romney gets any darker he’s not going to vote for himself.
• Mitt Romney is trailing in the polls. After being accused of being too vague, Romney’s campaign team says they will start being more specific. When asked when, they said, “Soon-ish.”
• New polling shows President Obama has a 10-point lead in Mitt Romney’s home state of Michigan. Although in Obama’s home state of Hawaii, Romney has a 10-house lead.
• Early this morning in Los Angeles police were involved with a high-speed chase with a suspect drawing a crowd by throwing money out the window. Is it me or is Mitt Romney getting desperate?
• In Yemen, a U.S. drone strike has killed al-Qaida’s number two leader, the sixth second in command the U.S. has killed. This is one area where Obama can say he definitely is creating jobs.
• Over the weekend Mitt Romney made an appearance at a NASCAR race in Virginia. There was an awkward moment when he asked a NASCAR driver why he didn’t just hire a chauffeur.
• Mitt Romney released another ad that features Hispanic voters speaking in Spanish. The ad ends with him saying, “I’m Mitt Romney, and I have no idea what these people are saying.”
• Today Scarlett Johansson, Kerry Washington, and Eva Longoria all spoke at the Democratic convention. This means that Obama has all but clinched the crucial 13-year-old boy vote.
• If you’re a donor to President Obama’s campaign, you were promised exclusive access to Joe Biden — and for an extra $10,000 absolutely no access to Joe Biden.
• A group of coal miners in Ohio said that their bosses forced them to attend a Mitt Romney campaign event. You know you’re boring when people would rather dig coal than listen to you speak.

Jimmy Kimmel

• Mitt Romney was on “Live With Kelly and Michael.” At one point Mitt was asked what he wears to bed. He said as little as possible. It’s the same philosophy that Mitt has in regard to paying taxes.

Jimmy Fallon (his next-to-last joke reminds me of this classic from Craig Ferguson)

• On Saturday, Mitt Romney took some time off from campaigning to watch his grandson’s soccer game. Though it got awkward when one team pulled their goalie and Romney was like, “Look at that — another job lost under President Obama.”
• Yesterday in Nevada, President Obama said he’ll win the election if the turnout is anything like it was in 2008. While voters said he’d win if he were anything like he was in 2008.
• Actually, members of Mitt Romney’s own party are starting to criticize him for being too vague. When asked if that bothers him, Romney said, “Maybe.”
• A new CNN poll shows that President Obama now has a six-point lead over Mitt Romney. You can tell Romney’s depressed — last night he just sat on his couch and bought the Häagen-Dazs corporation.
• Yesterday, Paul Ryan said that he and Mitt Romney won’t reveal their tax plan to the public until after the election. Other politicians couldn’t believe it. They were like, “At least do the honorable thing and lie.”
• A new poll shows that President Obama has expanded his lead over Mitt Romney since the Democratic National Convention. Of course, it didn’t help Obama as much as that other event — the Republican National Convention.
• There are reports that nine of the hotels being used for politicians at the Democratic National Convention have bedbugs. When asked what it’s like to have to deal with thousands of ruthless bloodsuckers, the bedbugs were like, “Eh, it’s OK.”
• Over the weekend, a chef in Minnesota created the world’s largest bacon cheeseburger, weighing in at over 2,000 pounds. And if you want to hear what it tasted like, you’ll just have to wait until I interview Chris Christie.

Craig Ferguson

• Over the weekend, Vice President Joe Biden hung out with a biker gang in Ohio. I don’t know if that’s wise. It’s not always a good idea to be associating with shady characters. So next time, think twice, bikers.
• Former Democratic nominee John Kerry is going to give a speech about foreign policy. It will be like Clint Eastwood’s speech except this time the empty chairs will be in the audience.
• At the convention tonight, the surprise speaker was Clint Eastwood. What’s more surprising than a grumpy old white guy at the Republican convention?
• I can’t wait to see the debate between Ryan and Joe Biden. Biden is said to be already trying out different strategies. So far the one that Obama likes is where Biden pretends to have food poisoning and they cancel the debate.

As always, here are previous editions of the jokes from the late-night talk show hosts: here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, and here.

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Why Romney’s Remarks on 47 Percent Dependency Are Wrong, Wrong, and Right

Mitt Romney is catching a lot of flak for his surreptitiously recorded remarks about 47 percent of voters automatically being in the Obama column because they don’t pay federal income tax and thus see themselves as beneficiaries of big government.

Since I’ve warned about dependency and raised the alarm that we risk becoming another Greece unless entitlements are reformed, one might think I agree with the former Massachusetts governor.

Not quite. I think Romney raised an important issue, but he cited the wrong statistic and drew an unwarranted conclusion.

Here’s what I said to Neil Cavuto about the controversy.

To augment on those remarks, here’s where Romney was wrong.

Yes, we have almost half of households not paying federal income tax, and I recognize that there’s a risk on an unhealthy political dynamic if people begin to think they get government for free, but those people are not necessarily looking for freebies from government. Far from it. Many of them have private sector jobs and believe in self reliance and individual responsibility. Or they’re students, retirees, or others who don’t happen to have enough income to pay taxes, but definitely don’t see themselves as wards of the state.

If Romney wanted to be more accurate, he should have cited the share of households receiving goodies from the government. That number also is approaching 50 percent and it probably is much more correlated with the group of people in the country who see the state as a means of living off their fellow citizens. But even that correlation is likely to be very imprecise since some government beneficiaries – such as Social Security recipients – spent their lives in the private sector and are taking benefits simply because they had no choice but to participate in the system.

Moreover, there are some people who pay tax and don’t receive programmatic benefits, yet are part of the proverbial moocher class. Many government bureaucrats obviously would be on that list, as would some union members, trial lawyers, etc.

However, even though Romney picked the wrong statistic and overstated the implications, he indirectly stumbled on a key issue. As seen in both BIS and OECD data, the U.S. is at risk of Greek-style fiscal chaos at some point in the not-too-distant future because of a rising burden of government spending.

I have no idea what share of the population today actually is part of the dependency class that Mitt Romney inarticulately described, but I don’t think I’m going out on limb to say that it has grown during the Bush-Obama years and it will continue to expand.

If we want to maintain American exceptionalism (both in theory and reality), it would be a very good idea to figure out how to avoid having more people trapped in lives of government dependency.

P.S. Here are two amusing cartoons about the dependency mindset, a great Chuck Asay cartoon showing what happens when there’s nothing left to steal, as well as the famous riding-in-the-wagon cartoons produced by a former Cato intern.

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Lucky French Taxpayers: All Hail Francois the Merciful!

I realize it’s wrong, but I can’t help cheering for France’s socialist president. Francois Hollande seems determined to raise every tax, expand every program, and augment every bit of red tape that afflicts the French economy.

“Let them eat cake with the 20 percent I generously allow them to keep”

I fully expect this to end poorly, but at the risk of admitting that I’m chauvinistically concerned first and foremost with the United States, I think it will be helpful to have France as an example of why class-warfare tax policy is a bad idea.

In other words, even though I’m quite fond of many of the French people I’ve met, I’m willing to sacrifice the people of France to save the people of America.

Having explained what’s at stake, now let’s mock Hollande’s latest bright idea. I’ve previously highlighted his support for a 75 percent income tax rate on the so-called rich. Well, he also wants to increase the wealth tax so that the French government arbitrarily seizes as much as 1.8 percent of a household’s assets every year.

Some people – doubtlessly selfish and evil libertarians – have pointed out that the combination of these two levies could result in someone having an annual tax bill equal to 90 percent, 95 percent, or even more than 100 percent of annual income!

But here’s where Monsieur Hollande shows that he is a magnanimous and thoughtful soul. He has decided, out of the kindness of his heart and with generosity of spirit, that no taxpayer will ever have to pay more than 80 percent of their annual income to the government. All hail Francois the Merciful. He puts the Sun King to shame.

Here’s the relevant excerpt from a Tax-news.com report.

The government is therefore planning to restore the ISF tax to the scale that was applied prior to former French President Nicolas Sarkozy’s 2011 reform. Prior to the reform last year, the tax scale comprised six tax rates varying between 0.55% and 1.8%. This compares with the current simplified ISF tax of 0.25% imposed on assets of between EUR1.3m and EUR3m and 0.5% on assets in excess of EUR3m. The government forecasts additional fiscal revenues from the measure of around EUR1.3bn. Given the constraints that it has been working under, the government aims to re-establish a cap of 80% of income, to ensure that taxpayers do not pay more than 80% of their income in ISF, income tax or social contributions.

But there’s one point I don’t understand. Like Vice President Biden, Hollande has asserted that entrepreneurs, investors, small business owners, and other “rich” taxpayers should welcome high tax rates so they can express their patriotism. So why, then, is he limiting their love of government country to 80 percent?

Monsieur Hollande is also boosting the minimum wage, so I guess it will also be patriotic to be unemployed.

And his predecessor, the de facto socialist Sarkozy, also had an interesting way of looking at the world. When he launched an initiative to clamp down on welfare fraud, he wasn’t talking about going after the people who illegitimately mooch off the government. He was targeting taxpayers who objected to paying for the fraud. Those unpatriotic scoundrels!

Just goes to show that Obama will have to try much harder if he wants America to be more statist than France.

P.S. Hollande’s policies already are having an impact. France’s richest person apparently isn’t very “patriotic” and has decided to move where he will be allowed to keep more than 20 percent of his annual income.

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Just as “Fair Trade” Means Protectionism for the Benefit of Special Interests, “Fair Tax Competition” Means Tax Harmonization for the Benefit of Politicians

Very few people are willing to admit that they favor protectionism. After all, who wants to embrace a policy associated with the Great Depression?

But people sometimes say “I want free trade so long as it’s fair trade.” In most cases, they’re simply protectionists who are too clever to admit their true agenda

In the Belly of the Beast at the European Commission

There’s a similar bit of wordplay that happens in the world of international taxation, and a good example of this phenomenon took place on my recent swing through Brussels.

While in town, I met with Algirdas Šemeta, the European Union’s Tax Commissioner, as part of a meeting arranged by some of his countrymen from the Lithuanian Free Market Institute.

Mr. Šemeta was a gracious host and very knowledgeable about all the issues we discussed, but when I was pontificating about the benefits of tax competition (are you surprised?), he assured me that he felt the same way, only he wanted to make sure it was “fair tax competition.”

But his idea of “fair tax competition” is that people should not be allowed to benefit from better policy in low-tax jurisdictions.

Allow me to explain. Let’s say that a Frenchman, having earned some income in France and having paid a first layer of tax to the French government, decides he wants to save and invest some of his post-tax income in Luxembourg.

In an ideal world, there would be no double taxation and no government would try to tax any interest, dividends, or capital gains that our hypothetical Frenchman might earn. But if a government wants to impose a second layer of tax on earnings in Luxembourg, it should be the government of Luxembourg. It’s a simple matter of sovereignty that nations get to determine the laws that apply inside their borders.

But if the French government wants to track – and tax – that flight capital, it has to coerce the Luxembourg government into acting as a deputy tax collector, and this generally is why high-tax governments (and their puppets at the OECD) are so anxious to bully so-called tax havens into emasculating their human rights laws on financial privacy.

Now let’s see the practical impact of “fair tax competition.” In the ideal world of Mr. Šemeta and his friends, a Frenchman will have the right to invest after-tax income in Luxembourg, but the French government will tax any Luxembourg-source earnings at French tax rates. In other words, there is no escape from France’s oppressive tax laws. The French government might allow a credit for any taxes paid to Luxembourg, but even in the best-case scenario, the total tax burden on our hypothetical Frenchman will still be equal to the French tax rate.

Imagine if gas stations operated by the same rules. If you decided you no longer wanted to patronize your local gas station because of high prices, you would be allowed to buy gas at another station. But your old gas station would have the right – at the very least – to charge you the difference between its price and the price at your new station.

Simply stated, you would not be allowed to benefit from lower prices at other gas stations.

So take a wild guess how much real competition there would be in such a system? Assuming your IQ is above room temperature, you’ve figured out that such a system subjects the consumer to monopoly abuse.

Which is exactly why the “fair tax competition” agenda of Europe’s welfare states (with active support from the Obama Administration) is nothing more than an indirect form of tax harmonization. Nations would be allowed to have different tax rates, but people wouldn’t be allowed to benefit.

For more information, here’s my video on tax competition.

And if you want information about the beneficial impact of “tax havens,” read this excellent column by Pierre Bessard and watch my three-part video series on the topic.

P.S. The Financial Transaction Tax also was discussed at the meeting, and it appears that the European actually intend on shooting themselves in the foot with this foolish scheme. Interestingly, when presented by other participants with some studies showing how the tax was damaging, Mr. Šemeta asked why we he should take those studies seriously since they were produced by people opposed to the tax. Since I’ve recently stated that healthy skepticism is warranted when dealing with anybody in the political/policy world (even me!), I wasn’t offended by the insinuation. But my response was to ask why we should act like the European Commission studies are credible since they were financed by governments that want a new source of revenue.

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A Romantic and Political European Comedy: The Break Up

There are several reasons why I’m glad that there are Europeans.

From a serious perspective, the decentralized and competitive states of Europe gave us great gifts such as the rule of law, the enlightenment, and the industrial revolution.

From a policy perspective, today’s Europe gives us examples of policies to emulate and policies to avoid (and also confusing mish-mashes of good and bad policies).

And from a comedic perspective, it’s generally still okay to make fun of Europeans – even if it (gasp!) involves stereotypes.

• Such as this cartoon involving Greece.
• And this terrorism-alert humor from the U.K.
• The French get mocked in this cartoon.
• Here’s a video showing that Der Fuehrer is unhappy about the downgrade.
• We have some very funny maps showing how various countries view their European counterparts.
• And, for those who like dark humor, this list of European leaders denying that the fiscal crisis will spread.

Now we can add this video, showing the challenges of a transnational couple, to the list.

I would have preferred if the video had an ideological message, of course, but I guess one of the messages is that the Greek guy is a bum who has no intention of pulling his weight.

If you want a serious video about the fiscal mess in Europe, here’s one narrated by an Italian woman.

And here’s another video about the European crisis. I don’t agree with some of the conclusions, but it’s quite clever.

P.S. If you want some American humor about Europe, I recommend this Dave Barry column and this Michael Ramirez cartoon.

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Just in Case You Need another Reason to Support the Flat Tax

I’ve done thorough blog posts highlighting the economic benefits of the flat tax, but I find that most people are passionate about tax reform because they view the current system as being unfair and corrupt.

They also don’t like the IRS, in part because it has so much arbitrary power to ruin lives.

But it’s not just that is has the power to ruin lives. That can be said about the FBI, the DEA, the BATF, and all sorts of other enforcement agencies.

What irks people about the IRS is that it has so much power combined with the fact that the internal revenue code is a nightmare of complexity that can overwhelm even the most well-intentioned taxpayer. Just spend a couple of minutes watching this video if you don’t believe me.

I’ve already shown depressing charts on the number of pages in the tax code and the number of special breaks in the tax law. To make matters worse, not even the IRS understands how to interpret the law. According to a recent GAO report, the IRS gave the wrong answers on matters of tax law more than 530,000 times in 2010.

Yet if you use inaccurate information from the IRS when filing your taxes, you’re still liable. To add insult to injury (or perhaps injury to injury is the right phrase), you’re then guilty until you prove yourself innocent – notwithstanding the Constitution’s guarantee of presumption of innocence.

Now we have some new information showing the difficulty of complying with a bad tax system.

A new report from the Treasury Department reveals that volunteers (who presumably have the best of intentions) make mistakes in more than 50 percent of cases.

Here are some key excerpts from the report.

Of the 39 tax returns prepared for our auditors, 19 (49 percent) were prepared correctly and 20 (51 percent) were prepared incorrectly. The accuracy rate should not be projected to the entire population of tax returns prepared at the Volunteer Program sites. Nevertheless, if the 20 incorrect tax returns had been filed: 12 (60 percent) taxpayers would not have been refunded a total of $3,996 to which they were entitled, one (5 percent) taxpayer would have received a refund of $303 more than the amount to which he or she was entitled, one (5 percent) taxpayer would have owed $165 less than the amount that should have been owed, and six (30 percent) taxpayers would have owed an additional total of $1,483 in tax and/or penalties. …The IRS also conducted 53 anonymous shopping visits during the 2012 Filing Season. Volunteers prepared tax returns for SPEC function shoppers with a 60 percent accuracy rate.

So here’s the bottom line. We have a completely corrupt tax system that is impossibly complex. Yet every year politicians add new provisions to please their buddies from the lobbyist community.

Wouldn’t it be nice if we could rip up all 72,000 pages and instead have a simple and fair tax system?

Sadly, tax reform is an uphill battle for four very big reasons.

• Politicians don’t want tax reform since it reduces their power to micro-manage the economy and to exchange loopholes for campaign cash.
• The IRS doesn’t want tax reform since there are about 100,000 bureaucrats with comfy jobs overseeing the current system.
• Lobbyists obviously don’t want to reform since that would mean fewer clients paying big bucks to get special favors.
• And the interest groups oppose the flat tax because they want a tilted playing field in order to obtain unearned wealth.

But there are now about 30 nations around the world that have adopted this simple and fair system, so reform isn’t impossible. But it will only happen when voters can convince politicians that they will lose their jobs if they don’t adopt the flat tax.

P.S. I’ll also take a national sales tax, like the Fair Tax, as a replacement. But since I don’t trust politicians, that option requires that we first replace the 16th Amendment with something so ironclad that not even Chief Justice John Roberts would be able to rationalize that an income tax was permissible.

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Can We Envision a World without a Central Bank?

I’ve expressed concern about QE3 and other decisions by the Federal Reserve about monetary policy, but I have also admitted that it’s difficult to know the right monetary policy because it requires having a good idea about both the demand for money and the supply of money.

But this raises a bigger issue. The only reason we expect the Fed to “know the right monetary policy” is because it’s been assigned a monopoly role in the economy. But not just a monopoly role, we also expect the Fed to be some sort of omniscient central planner, knowing when to step on the gas and when to hit the brakes.

And we also are asked to suspend reality and assume that the folks at the Fed will be good central planners and never be influenced by their political masters. Yeah, good luck with that.

With so many difficult – or perhaps impossible – demands placed upon them, no wonder the Fed has a lousy track record (as documented in this powerful George Selgin video).

So let’s ask a fundamental question. Is the Fed necessary? Are we stuck with a central-planning monopoly because there’s no alternative? Professor Larry White says no in this new video from Learn Liberty.

This is one of the best videos I’ve ever seen, so I strongly encourage everyone to share this post widely.

Professor White effectively demonstrates how private markets can replace the five different roles of the Fed. But his arguments are not just based on theory. He shows that the private sector used to handle those roles in the past.

And I especially like his point about how a decentralized market system would operate. Indeed, I would have stressed even more how such a system overcomes the knowledge problem that exists with a monopoly central planner.

Here’s my video on the Fed. I focus more on how central banks developed, but you’ll see some common themes in the two videos.

P.S. Here’s a video with 10 reasons to dislike the Fed.

P.P.S. If you want some Fed humor, we have a Who-is-Ben-Bernanke t-shirt, this Fed song parody, some special Federal Reserve toilet paper, Ben Bernanke’s hacked Facebook page, and the famous “Ben Bernank” video.

P.P.P.S. Professor White’s video shows how we can improve monetary policy, but let’s also be aware that there are proposals that would lead to even worse monetary policy.

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Debunking Myth after Myth in Financial Times Column by Former Clinton White House Economist

Even though I have remarked on many occasions that the burden of government was reduced during the Clinton years, that doesn’t mean Bill Clinton was in favor of smaller government. And it definitely doesn’t mean that his appointees believed in economic liberty.

Consider the case of Laura Tyson, who served as Chair of Clinton’s Council of Economic Advisers. She recently penned a column for the UK-based Financial Times that is riddled with disingenuous assertions.

Even though it deserves to be ignored, I can’t resist the temptation to make corrections.

Tyson myth:

“Even after the economy recovers, current tax policies will not generate enough revenue to cover future spending on social security, health, defence and debt interest, let alone basic government operations and investments. In 2012, federal tax revenues are likely to be less than 16 per cent of gross domestic product, compared with an average of more than 18 per cent in the 20 years before the crisis hit in 2008.”

Factual correction:

I already corrected this myth earlier this year when I debunked some disingenuous comments by Obama’s former CEA Chairman.

Just take a look at this chart, which assumes that all the 2001 and 2003 tax cuts expire and that millions of additional taxpayers will get nailed by the alternative minimum tax.

But even if you assumed that the tax cuts were made permanent and the AMT was constrained, federal tax revenues would jump to above 25 percent of GDP.

As you can see, tax revenues are projected to climb well above the long-run average of 18 percent of GDP. In other words, a rising burden of government spending is responsible for more than 100 percent of America’s long-run fiscal challenge.

Tyson myth:

…there is scant evidence that taxes as a share of GDP and economic growth are negatively correlated. Indeed, there is a small positive correlation between income per capita and tax revenue as a share of GDP.

Factual correction:

Ms. Tyson is trying to take advantage of the paradox of Wagner’s Law, which is that wealthy nations tend to adopt welfare states. And even though the welfare state slows growth, these nations are still richer than some developing countries that have smaller burdens of government.

These posts about Sweden and Denmark show why she’s wrong, but I would also call your attention to this World Bank research that unambiguously shows – using apples-to-apples comparisons – that larger governments reduce prosperity.

Tyson myth:

…tax reform should not come at the expense of progressivity. Income inequality is greater in the US than in the other developed countries of the OECD. The US tax system is considerably less progressive than it was a few decades ago and it does less to counteract pre-tax income inequality than other OECD systems.

Factual correction:

As explained by Veronique de Rugy, America’s tax system actually is more progressive than European tax systems.

But not because we tax rich people more. Instead, our system is more progressive because we don’t screw over lower-income and middle-income taxpayers with policies like the value-added tax.

That’s one of the reasons why the burden of government isn’t as high in the United States – which is very much one of the reasons why there’s so much more prosperity, as shown in this chart, in America than on the other side of the Atlantic.

Tyson myth:

A more efficient and progressive way to pay for a lower corporate tax rate would be to increase taxes on dividends and capital gains. This would shift more of the burden towards capital owners and away from labour, which bears the burden in the form of fewer jobs and lower wages. Mr Obama proposes to raise rates on capital gains and dividends for the top 2 per cent of taxpayers. Most capital gains and dividends go to this group.

Factual correction:

This actually isn’t a myth. She’s simply making an assertion that it would be desirable to increase the double taxation of dividends and capital gains.

America already has pervasive double taxation, as illustrated by this flowchart, and this post shows that Obama’s policies would make a bad situation even worse.

Does anybody think American competitiveness will improve if we have the highest capital gains tax in the industrialized world?

Tyson myth:

The US economy needs efficient and progressive tax reform and it needs more revenues for deficit reduction. Revenue increases have been a significant component of all major deficit-reduction packages enacted over the past 30 years.

Factual correction:

This is remarkable. I assume Ms. Tyson reads the New York Times, so perhaps she overlooked or deliberate forgot the column that inadvertently revealed that the only successful deficit-reduction package in recent memory was the one that cut taxes instead of raising them.

Interestingly, that successful package was implemented during the Clinton years, but only after she left office.

During Tyson’s tenure at CEA, we did get a tax increase rather than a tax cut. But the Clinton Administration admitted 18 months later that the tax hike was a failure and was not going to balance the budget.

Yet she wants to push the same failed class-warfare tax policy today.

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The United States Plummets to 18th in New Economic Freedom of the World Rankings

Wow. I wasn’t surprised to learn that the United States dropped in the new rankings unveiled today in Economic Freedom of the World.

But I’m somewhat shocked to learn that we fell from 10th last year all the way down to 18th this year, as can be seen on the chart (click to enlarge).

Last year, the U.S. fell from 7th to 10th, and I though dropping three spots was bad. But falling by eight spots this past year is a stunning decline.

Who would have thought that Scandinavian welfare states such as Denmark and Finland would rank higher than the United States? Or that Ireland, with all its problems, would be above America?

But since I’m not a misery-loves-company guy, I’m happy to see some nations doing well. I’ve previously highlighted the good policies in Hong Kong and Singapore. And I’ve trumpeted the good policies in Switzerland and Australia, as well as Canada, Chile, and Estonia.

So kudos to the leaders in those nations.

American politicians, by contrast, deserve scorn. Let’s update the chart I posted when last year’s report was issued.

As you can see, it’s an understatement to say that the United States is heading in the wrong direction. We’re still considerably ahead of interventionist welfare states such as France and Italy, though I’m afraid to think about what the U.S. score will be five years from now.

Here’s what the authors of the report had to say about America’s decline.

The United States, long considered the standard bearer for economic freedom among large industrial nations, has experienced a substantial decline in economic freedom during the past decade. From 1980 to 2000, the United States was generally rated the third freest economy in the world, ranking behind only Hong Kong and Singapore. After increasing steadily during the period from 1980 to 2000, the chainlinked EFW rating of the United States fell from 8.65 in 2000 to 8.21 in 2005 and 7.70 in 2010. The chain-linked ranking of the United States has fallen precipitously from second in 2000 to eighth in 2005 and 19th in 2010 (unadjusted ranking of 18th).

For those interested in why the United States has dropped, the “size of government” score has fallen from 8.65 in 2000 to 7.70 in the latest report. That’s not a surprise since the burden of government spending has exploded during the Bush-Obama years.

But the trade score also dropped significantly over the same period, from 8.78 to 7.65. So the protectionists should be happy, even though the rest of us have less prosperity.

The most dramatic decline, though, was the in the “legal system and property rights” category, where the U.S. plummeted from 9.23 in 2000 down to 7.12 in the new report. We’re not quite Argentina (3.76!), to be sure, but the trend is very troubling.

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In the “Opposing View” Column, I Explain Why USA Today Is Wrong about Bailouts

I think it’s a mistake to bail out profligate governments, and I have the same skeptical attitude about bailouts for mismanaged banks and inefficient car companies.

Simply stated, bailouts reward past bad behavior and make future bad behavior more likely (what economists call moral hazard).

But some folks think government was right to put taxpayers on the hook for the sloppy decisions of private companies. Here’s the key passage in USA Today’s editorial on bailouts.

Put simply, the bailouts worked. True, in some cases the government did not do a very good job with the details, and taxpayers are out $142 billion in connection with the non-TARP takeovers of housing giants Fannie Mae and Freddie Mac. But it’s time for the economic purists and the Washington cynics to admit that government can occasionally do something positive, at least when faced with a terrifying crisis.

Well, I guess I’m one of those “economic purists” and “Washington cynics,” so I’m still holding firm to the position that the bailouts were a mistake. In my “opposing view” column, I argue that the auto bailout sets a very bad precedent.

Unfortunately, the bailout craze in the United States is a worrisome sign cronyism is taking root. In the GM/Chrysler bailout, Washington intervened in the bankruptcy process and arbitrarily tilted the playing field to help politically powerful creditors at the expense of others. …This precedent makes it more difficult to feel confident that the rule of law will be respected in the future when companies get in trouble. It also means investors will be less willing to put money into weak firms. That’s not good for workers, and not good for the economy.

If I had more space (the limit was about 350 words), I also would have dismissed the silly assertion that the auto bailout was a success. Yes, GM and Chrysler are still in business, but the worst business in the world can be kept alive with sufficiently large transfusions of taxpayer funds.

And we’re not talking small amounts. The direct cost to taxpayers presently is about $25 billion, though I noted as a postscript in this otherwise humorous post that experts like John Ransom have shown the total cost is far higher.

And here’s what I wrote about the financial sector bailouts.

The pro-bailout crowd argues that lawmakers had no choice. We had to recapitalize the financial system, they argued, to avoid another Great Depression. This is nonsense. The federal government could have used what’s known as “FDIC resolution” to take over insolvent institutions while protecting retail customers. Yes, taxpayer money still would have been involved, but shareholders, bondholders and top executives would have taken bigger losses. These relatively rich groups of people are precisely the ones who should burn their fingers when they touch hot stoves. Capitalism without bankruptcy, after all, is like religion without hell. And that’s what we got with TARP. Private profits and socialized losses are no way to operate a prosperous economy.

The part about “FDIC resolution” is critical. I’ve explained, both in a post criticizing Dick Cheney and in another post praising Paul Volcker, that policymakers didn’t face a choice of TARP vs nothing. They could have chosen the quick and simple option of giving the Federal Deposit Insurance Corporation additional authority to put insolvent banks into something akin to receivership.

Indeed, I explained in an online debate for U.S. News & World Report that the FDIC did handle the bankruptcies of both IndyMac and WaMu. And they could have used the same process for every other poorly run financial institution.

But the politicians didn’t want that approach because their rich contributors would have lost money.

I have nothing against rich people, of course, but I want them to earn money honestly.

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Tax Rates Impact Economic Performance, but other Policies also Matter

I’m a big fan of fundamental tax reform, in part because I believe in fairness and want to reduce corruption.

But I also think the flat tax will boost the economy’s performance, largely because lower tax rates are the key to good tax policy.

There are four basic reasons that I cite when explaining why lower rates improve growth.

1. They lower the price of work and production compared to leisure.
2. They lower the price of saving and investment relative to consumption.
3. They increase the incentive to use resources efficiently rather than seek out loopholes.
4. They attract jobs and investment from other nations.

As you can see, there’s nothing surprising or unusual on my list. Just basic microeconomic analysis.

Yet some people argue that lower tax rates don’t make a difference. And if lower tax rates don’t help an economy, then presumably there is no downside if Obama’s class-warfare tax policy is implemented.

Many of these people are citing David Leonhardt’s column in Saturday’s New York Times. The basic argument is that Bush cut tax rates, but the economy stunk, while Clinton increased tax rates and the economy did well.

The defining economic policy of the last decade, of course, was the Bush tax cuts. President George W. Bush and Congress, including Mr. Ryan, passed a large tax cut in 2001, sped up its implementation in 2003 and predicted that prosperity would follow. The economic growth that actually followed — indeed, the whole history of the last 20 years — offers one of the most serious challenges to modern conservatism. Bill Clinton and the elder George Bush both raised taxes in the early 1990s, and conservatives predicted disaster. Instead, the economy boomed, and incomes grew at their fastest pace since the 1960s. Then came the younger Mr. Bush, the tax cuts, the disappointing expansion and the worst downturn since the Depression. Today, Mitt Romney and Mr. Ryan are promising another cut in tax rates and again predicting that good times will follow. …Mr. Romney and Mr. Ryan would do voters a service by explaining why a cut in tax rates would work better this time than last time.

While I’ll explain below why I think he’s wrong, Leonhardt’s column is reasonably fair. He gives some space to both Glenn Hubbard and Phil Swagel, both of whom make good points.

“To me, the Bush tax cuts get too much attention,” said R. Glenn Hubbard, who helped design them as the chairman of Mr. Bush’s Council of Economic Advisers and is now a Romney adviser. “The pro-growth elements of the tax cuts were fairly modest in size,” he added, because they also included politically minded cuts like the child tax credit. Phillip L. Swagel, another former Bush aide, said that even a tax cut as large as Mr. Bush’s “doesn’t translate quickly into higher growth.” Why not? The main economic argument for tax cuts is simple enough. In the short term, they put money in people’s pockets. Longer term, people will presumably work harder if they keep more of the next dollar they earn. They will work more hours or expand their small business. This argument dominates the political debate.

I hope, by the way, that neither Hubbard nor Swagel made the Keynesian argument that tax cuts are pro-growth because “they put money in people’s pockets.” Leonhardt doesn’t directly attribute that argument to either of them, so I hope they’re only guilty of proximity to flawed thinking.

But that’s besides the point. Several people have asked my reaction to the column, so it’s time to recycle something I wrote back in February. It was about whether a nation should reform its tax system, but the arguments are the same if we replace “a flat tax” with “lower tax rates.”

…even though I’m a big advocate for better tax policy, the lesson from the Economic Freedom of the World Index…is that adopting a flat tax won’t solve a nation’s economic problems if politicians are doing the wrong thing in other areas.

There are five major policy areas, each of which counts for 20 percent of a nation’s grade.

1. Size of government
2. Regulation
3. Monetary Policy
4. Trade
5. Rule of Law/Property Rights

Now let’s pick Ukraine as an example. As a proponent of tax reform, I like that lawmakers have implemented a 15 percent flat tax.

But that doesn’t mean Ukraine is a role model. When looking at the mix of all policies, the country gets a very poor score from Economic Freedom of the World Index, ranking 125 out of 141 nations.

Conversely, Denmark has a very bad tax system, but it has very free market policies in other areas, so it ranks 15 out of 141 countries.

In other words, tax policy isn’t some sort of magical elixir. The “size of government” variable accounts for just one-fifth on a country’s grade, and keep in mind that this also includes key sub-variables such as the burden of government spending.

Yes, lower tax rates are better for economic performance, just as wheels matter for a car’s performance. But if a car doesn’t have an engine, transmission, steering wheel, and brakes, it’s not going to matter how nice the wheels are.

Not let’s shift from theory to reality. Here’s the historical data for the United States from Economic Freedom of the World. As you can see, overall economic policy moved in the right direction during the Clinton years and in the wrong direction during the Bush-Obama years.

To be more specific, the bad policy of higher tax rates in the 1990s was more than offset by good reforms such as lower trade barriers, a lower burden of government spending, and less regulation.

Similarly, the good policy of lower tax rates last decade was more than offset by bad developments such as a doubling of the federal budget, imposition of costly regulations, and adoption of two new health entitlements.

This is why I have repeatedly challenged leftists by stating that I would be willing to go back to Bill Clinton’s tax rates if it meant I could also go back to the much lower levels of spending and regulation that existed when he left office.

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No, I’m Not Corrupt, but It’s a Fair Question

I get criticized all the time, usually because of my support for limited government (though sometimes because people think I’m not sufficiently radical).

Sometimes I even get attacked because I cite someone else’s work, as happened when a bunch of Keynesians went after me for posting some data on Reaganomics vs. Obamanomics put together by Richard Rahn.

Just last week, though, I was attacked from a completely different perspective. Some guy named Stan Sewitch, in an article for the San Diego Daily Transcript, questioned my motives rather than my views.

He started out with an innocuous description of a speech I gave.

These days, the harbingers of doom no longer include hippies or even youth. The “protest” movement that may be growing in our country now is known for its natty fashion sense and belief in free markets… It winds its way to the offices of lobbyists and politicians. It acts a great deal behind the scenes, and uses the educated, articulate voices of “think tank” gurus to make the points. Daniel Mitchell is a senior fellow at the Cato Institute, a nonprofit economics and policy research organization that promotes “libertarian” philosophies, i.e., small government, free markets and individual rights. I heard him speak recently about how the United States could avoid “becoming the next Greece.” As he described the lengthening list of ills that our country has inflicted upon itself, Mitchell acknowledged that neither party has a consistent track record of doing the “right thing” to keep our gross domestic product growing faster than our government spending rate. …In that sense, the Cato Institute does seem to represent a nonpartisan view of our national and international state of affairs.

Since I think America faces a very grim fiscal future in the absence of entitlement reform, and since I also blame Bush as much as I blame Obama, I can’t quibble with anything he wrote.

But then he starts to speculate about my (grossly inadequate) salary.

But as he continued to describe the litany of calamity that will befall us under current conditions, I asked myself, “Gee, I wonder who pays Mitchell’s salary? Can’t be cheap.” So I did a little looking on the Web, and I found the 2011 annual report for the Cato Institute. They brought in about $33 million in revenue last year, spent about $22 million and showed net assets of $63 million. Well, it looks like they practice what they preach, spending less than they earn. And they earn a lot.

Where’s he going with this, I wonder. But I suppose I could have guessed that he would focus on rich people and corporations.

The Cato Institute doesn’t list its individual benefactors or corporations that provide the funding, but their board of directors includes David and Charles Koch. The Kochs founded the Cato Institute and have contributed millions to it. Combined, the Koch brothers are worth roughly $50 billion. Their company, Koch Industries, generates about $100 billion in annual revenue and is the second-largest private company in the United States. Other like-minded, wealthy individuals undoubtedly make up the financial support for the Cato Institute, along with corporations, the sale of Cato Institute books and the speaking fees that Cato scholars receive for their expert punditry.

My Sewitch obviously doesn’t know that Cato hasn’t received support from the Kochs in recent years, much less that the Cato Board and the Koch brothers had a big fight about the future of Cato, but that’s an understandable mistake since the average person would have no reason to follow a squabble inside the libertarian movement.

But his point is generically true. Occasional large contributions from wealthy people can play a non-trivial role in the budget of any non-profit group.

So what’s the point? Well, here’s where he gets to the part about my motives.

Whether or not one subscribes to the shiny and attractive ideals of small government, free markets and individual liberty, one has to follow the money, the economics of any given viewpoint to be able to evaluate the veracity of the opinion. The money behind Mitchell’s capacity to publicly opine comes from business people who want to affect policy at the federal and state level toward outcomes that they believe are in the collective best interests. It also doesn’t hurt that those same people benefit personally and financially from the promoted policies and research results that the Cato Institute generates. …So if someone is earning their living by preaching, whether for God or free markets, I have to find out who’s paying them to tell me this stuff, and I immediately discount the value of the sermon by 84 percent.

Gee, I guess I should be happy that my opinions are worth 16 percent rather than zero.

But now for my serious point. Washington is filled with people who say things, write things, and do things solely because they’re getting paid. I often write about the sleazy behavior of such people, particularly Republicans who do the wrong thing just to fatten their bank accounts.

So I can’t complain when someone questions my motives. Everyone in Washington should be viewed with suspicion. It is, after all, a pervasively corrupt town.

That being said, I invite the world to comb through everything I’ve ever done, everything I’ve ever said, and everything I’ve ever written to find the slightest shred of evidence that I am motivated by anything other than a principled belief in liberty.

Do I get paid to do all these things? Of course, which is why I consider myself to be a very lucky person. I’m getting a salary to do what I would be doing anyhow.

And if we count the non-pecuniary satisfaction of fighting for liberty, I’m one of the richest people in DC.

You can’t deposit non-pecuniary satisfaction in a bank, to be sure, but I wouldn’t trade places with any of the multimillionaire lobbyists. That would be like watching It’s a Wonderful Life and wanting to be like Mr. Potter instead of George Bailey.

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Middle-Class and Poor People Shouldn’t Subsidize the Mortgages of Rich People

I don’t like coercive redistribution. But I really hate redistribution from ordinary people to rich and powerful vested interests, and I even developed an “ethical bleeding heart” rule to express my disdain for this approach.

Especially since programs that redistribute from the poor to the rich almost always involve corruption – often involving morally bankrupt Republicans.

For whatever reasons, the housing sector has a disproportionate amount of this type of redistribution. Here are some sordid details from a Reuters report about how housing subsidies are lining the pockets of the rich.

In Santa Clara County, the center of the global tech industry and one of the wealthiest places in the United States, most home buyers get help from the government, an analysis of government lending data shows. The same is true in other wealthy enclaves such as Nassau County, outside New York, and Arlington County, outside Washington, the analysis of more than 50 million loans finds. ..What the analysis by Reuters makes clear is the extent to which government programs have helped some of the nation’s most well-to-do communities.

The story provides an example, showing how the government is coercing the rest of us into subsidizing rich people.

Julie Wyss earns $330,000 a year selling real estate in Silicon Valley. When the time came to look for a new home for herself, Wyss settled on a four-bedroom, three-bathroom house in Los Gatos, California, an enclave of young technology entrepreneurs. It has about 2,400 square feet of floor space, four sets of French doors and a price tag of $1.45 million. When she bought the house in June, her main financing was a $625,500 mortgage from Wells Fargo guaranteed by government-backed Fannie Mae. The benefit to Wyss was an interest rate, of 4.125 percent, that was lower than she could have gotten on a loan that was not guaranteed by the government. “It’s a totally sweet deal,” Wyss said.

As happens so often, the government expanded bad policy when problems developed as a result of previous bad policy – sort of Mitchell’s Law on steroids in the case of housing.

Before the financial crisis, the limit on loans guaranteed by Fannie Mae and Freddie Mac was $417,000. But in 2008, …Congress changed the rules so that the companies could back mortgages of up to $729,750 in high-priced areas like Santa Clara. The result is that the government guaranteed 89 percent of U.S. mortgages taken out in the first half of 2012, up from 85 percent in 2011 and 30 percent in 2006, according to data compiled by Inside Mortgage Finance. Big banks still offer mortgages without government backing, but interest rates are higher, standards are more stringent and most people don’t even consider them, said Dave Walsh, a realtor based in San Jose, California. …In 2006, the two entities guaranteed only about one-third of new mortgages in the 20 highest-income mortgage markets in the country. By 2010, that share had risen to about three in four, the data showed.

In other words, we have lots of rich people now sucking on the government teat. This is bad housing policy, bad fiscal policy, and bad social policy (and, as this cartoon illustrates, you eventually hit a point when there’s nothing left to steal).

I have nothing against rich people. But I utterly despise people who get rich using the state. If they earn their money honestly, I’ll defend them to my last breath and I’ll fight against those who want to seize their earnings via class-warfare tax policy.

Sadly, we may be getting to the point where there are more of the wrong kind of rich people in America. That may represent a very dangerous turning point for society, sort of a bizarre version of the famous riding-in-the-wagon cartoons.

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