I’ve been very critical of Obama’s class-warfare ideology because it leads to bad fiscal policy. But perhaps it is time to give some attention to other arguments against high tax rates.
Robert Samuelson, a columnist for the Washington Post, has a very important insight about tax rates and sleaze in Washington.
His column is mostly about Obama’s anti-tax reform agenda, but it includes this very important passage.
…many politicians support tax breaks for favored groups (the elderly, the poor, small business) and causes (homeownership, attending college, “green” industries). This enhances their power. The man who really pronounced the death sentence for the Tax Reform Act of 1986 was Bill Clinton, who increased the top rate to 39.6 percent rather than broadening the base. As the top rate rose, so did the value of generating new tax breaks. Ironically, many of the people who complain the loudest about Washington influence-peddling and lobbying are the same people who support higher tax rates, which stimulate more influence-peddling and lobbying.
The last sentence is key. Higher tax rates are good news for the politicians, interest groups, bureaucrats, and lobbyists that dominate Washington.
Here’s a simple example. Let’s pretend we have a modest tax rate of 20 percent. Now imagine you are part of an industry with $200 million in profits and you want a special tax break. How much are you willing to pay to get that loophole?
Well, with a 20 percent tax, the most you can save (assuming the loophole is huge and you wipe out all your tax liability) is $40 million.
So how much would you spend on lobbyists, campaign contributions, etc, in order to get that loophole? That’s hard to answer, because it would require some estimate of the probability of success. But one thing we can safely assume is that the industry would never spend more than $40 million.
But let’s now assume you live in a world with 50 percent tax rates. Does that change the incentive for influence peddling in Washington? Of course it does. The industry’s tax bill is now $100 million, so it now has an incentive to spend up to that amount to get special treatment.
So now let’s consider a couple of additional hypothetical questions.
- First, imagine you’re a lobbyist. Do you think you will get more business if tax rates are high, or if tax rates are low?
- Second, imagine you are a politician. Do you think you will get more campaign contributions if tax rates are high, or if tax rates are low?
The answers are obvious, and so are the implications. Yes, higher tax rates are bad for growth and competitiveness. And, yes, they are unfair and discriminatory.
But they also foment and encourage sleaze in D.C., and that’s something that honest leftists should hate as much as the rest of us.
For more information, here’s my video on the link between big government and corruption, including a section on how a loophole-ridden tax system benefits Washington insiders.
And here’s the video on the flat tax, which explains why low tax rates are good for economic performance.
Both videos have good information (at least I like to think), but kudos to Samuelson for drawing an important link between high tax rates and corruption.
P.S. Robert Samuelson is hard to pin down on the philosophical spectrum. He’s written very good columns denouncing Obama’s manipulation of welfare statistics and criticizing the President’s flirtation with the value-added tax. But he’s also had a couple of columns where he identifies a very real problem, but fails to reach the right conclusion, including this piece that should have been an argument for Austrian economics and this piece on health care inefficiency that should have pinned the blame on third-party payer.
[…] This is true for tax policy. […]
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[…] bottom line is that a complicated and convoluted tax code is great for lobbyists and a boon for […]
[…] Higher tax rates on the rich will encourage tax complexity. […]
[…] Higher tax rates on the rich will encourage tax complexity. […]
[…] is true for tax […]
[…] also explains why I get so upset about Obama’s class-warfare policies. High tax rates facilitate corruption and it’s the less fortunate who wind up […]
[…] Higher tax rates on the rich will encourage tax complexity. […]
[…] Higher tax rates on the rich will encourage tax complexity. […]
[…] Higher tax rates on the rich will encourage tax complexity. […]
[…] swamp is pulsating with excitement. For the lobbying community, tax reform is like Christmas. No matter what happens, they win because of lucrative retainers and fat […]
[…] Indecipherable complexity and corruption. […]
[…] Indecipherable complexity and corruption. […]
[…] Indecipherable complexity and corruption. […]
[…] Here’s more evidence that high tax rates and tax complexity facilitate […]
[…] incentives for work, saving, investment, and entrepreneurship (not to mention tax compliance and good government), then supply-side economics should be non-controversial. See this piece by Alan Reynolds for more […]
[…] h) More corruption? […]
[…] h) More corruption? […]
[…] not everyone is on board, The class-warfare crowd will never like a flat tax. And Washington insiders hate tax reform because it undermines their […]
[…] not everyone is on board, The class-warfare crowd will never like a flat tax. And Washington insiders hate tax reform because it undermines their […]
[…] not everyone is on board, The class-warfare crowd will never like a flat tax. And Washington insiders hate tax reform because it undermines their […]
[…] Politicians enormously benefit from the current corrupt and complex system since they can auction off tax loopholes for campaign cash and use the tax code to reward friends […]
[…] tax system (because it is corrupt, because it doesn’t treat people equally, because it provides unearned wealth for insiders, etc), my main arguments are based on […]
[…] also explains why I get so upset about Obama’s class-warfare policies. High tax rates facilitate corruption and it’s the less fortunate who wind up […]
[…] also explains why I get so upset about Obama’s class-warfare policies. High tax rates facilitate corruption and it’s the less fortunate who wind up […]
[…] P.S. Higher tax rates also encourage corruption. […]
[…] that’s shorthand for high marginal tax rates, and that type of class-warfare policy is a gateway to corruption and is also damaging to growth (see here, here, here, here, and […]
Scottrade reduced my Total Asset Value by the amount of the AGNC dividend on the ex-dividend date September 19, 2012. I was reimbursed the amount of this dividend on dividend distribution day, October 26, 2012. As it turns out, I paid my own dividend! When Scottrade reduced my Total Asset Balance by the amount of the declared dividend on the ex-dividend date, where did the money go; what account was holding my money? I owned 100 shares of AGNC with a declared dividend of $1.25 per share. I was short $125.00 in my Scottrade account on the ex-dividend date until it was credited back to my account on the dividend payment date. I have been told that these are the rules of the stock exchange and nothing can be done about it. So, should I conclude that all dividends distributions are a sham?
Everybody should monitor their dividend yielding stocks to determine if their net asset value decreases on the ex-dividend date by the amount of the dividend and then increases on the settlement date by the same amount.
Go to finance.yahoo.com, type in one of your dividend yielding stock symbols and then select Historical Prices and monitor the change of the price of the stock on the ex-dividend date!
My closest friend is experiencing this same hoax and his broker agreed that this is how it works!
And dividends are taxable to boot!!
Dennis Riley
PS: AGNC never recovered to its pre ex-dividend price!
[…] https://danieljmitchell.wordpress.com/2012/12/08/the-link-between-high-tax-rates-and-corruption/ […]
[…] […]
[…] The Link Between High Tax Rates and Corruption Simple arithmetic proves the case; empiricacal evidence is overwhelming. couple of additional hypothetical questions. […]
With this logic, if we removed automobiles from society traffic accidents would go down and so the the unethical, but legal practice of being a douche-bag driver. Moreover, we would have less people preparing themselves for being douche-bag drivers. Awesome logic!
@ John – The issue stems from differing definitions of “corruption.” The Transparency report is about *illegal* activities. The context of this piece is the economic incentive for lobbying for special treatment, which isn’t necessarily illegal, but is still corrupt. Denmark may not be as “dirty” as Nigeria, but it’s still corrupt if taxpayers have a personal incentive to lobby for special treatment. One is legal, one isn’t, but they’re both still corrupt.
[…] Higher tax rates encourage dishonesty and corruption in DC. Think of all the revolving door lobbyists working for special interests and the loopholes devised by Congress to accommodate their donors. International Liberty; […]
[…] Source […]
Just look at the state gov’ts in IL, CA, MA, RI if you need any further persuasion. Utter corruptocracy.
John’s criticism rests on his self-described “two-minute” look at Transparency International’s Corruption Index and finding low correlations between high-tax countries and the CPI index. But CPI’s ratings of corruption may have more to do with the degree of its expression than with its prevalence in a given nation. For example, outright bribery of government officials may point to a higher corruption score than, say, discussions of the virtues of “sustainable energy” policy over drinks at the Capitol Grille. One of Transparency International’s topics of investigation is “climate change.” My own two-minute perusal of the subtopics thereunder revealed no questions asked about whether the entire field of climate science and its relation to politics and taxpayer funding might have the slightest whiff of “corruption.” But Mr. Mitchell is pointing out that incentives created by higher tax rates will result in corruption of policy making, although perhaps in ways more subtle than those that earn high corruption scores on the CPI index, or perhaps more subtle than that index even recognizes. It depends largely on the definition of corruption, John, and the fact European politicians may not be taking bribes as blatantly as the leaders of the Sudan does not weaken Mr. Mitchell’s point.
Reblogged this on Spin, strangeness, and charm and commented:
Robert Samuelson: higher marginal tax rates means more incentive for corruption and influence peddling (lfor loopholes, special tax breaks,…). And of that which you incentivize you get more,,,
Even Milton Friedman showed that small business creating jobs is unprovable because of survival bias (J Eco Lit, Vol. 30, No. 4, pp. 2129-2132). Small business is all about sociopath atomists who want to break the law by being on their own so no one sees them, but they want their wives to work for the government just to get the benefits, like healthcare. J K Galbraith was right that the best way is big business, big labor and big government.
[…] Dan Mitchell, referring to the above excerpt from Samuelson, explains how this works: […]
John, where did you learn about statistics and taxes? High revenues = High rates. No. .R squared = .53 is strong correlation. Wow. Where did you study? I will avoid that institution.
I agree with the premise of the essay, however, I think many of you are missing commenter John’s point: it’s more convincing to see data backing it up. I agree with him. I also think his quick analysis is interesting, but really needs to be a multivariate analysis. For example, it doesn’t seem to consider size (population) – total tax revenues are pretty meaningless without it; not sure about the corruption index, but it should be considered on a per capita basis. As others have pointed out, enforcement seems important, too. But John shouldn’t be attacked for faulty analysis – rather, the essay author should take it to heart and consider doing some actual data analysis next time. I too would find it more convincing.
Actually In Stats any correlation coefficient lower than 80% is worth absolutely nothing AND the process assumes the data have a random distribution, It is quite obvious that neither of your datasets has anything like a random distribution. Human behavior is difficult subject and stats need rigor as any sociologist can tell you.
As usual, statistics FAIL from the non-scientist. Go back to school please.
David, my problem with The Fair Tax, and any sales (consumption) tax is that they get into your pocket in small increments. You are less aware of the tax bite than with my plan, which hits you with four big bites (quarterly payments), rather than sales tax’ “death by a thousand small cuts”.
No tax on business??!! Well, where but from you does a business get the money to pay taxes? Think what zero business tax would do to make American labor competitive in the world market. Eliminates loop holes as there’s no tax to avoid. Without loopholes, all (businesses) are create equal. Deductions for the three things that make individuals productive: health care, education and savings (investment). High tax rate but also a high personal exemption. Setting the budget based on previous year;s earnings guarantees surplus whenever economy expands (as it does almost every year, thus paying down debt over many years) Replace welfare with negative income tax. Replace Social Security with up to 150% personal exemption for seniors. Have you a more comprehensive reform?
This is why Fair Tax has no deductions. None at all, only a pre-bate. Imagine a world in which no amount of lobbying would change the tax code: The lobbyists would all go away.
Lobbyists exist when there are special favors to be had. Complexity breeds lobbying, because their output hides in the pages of law.
Simplify, simplify, simplify. The simpler the code, the less impact lobbyists will have.
Want a fair plan for government’s role i the economy? Try this: The federal government shall collect no taxes other than provided in this act and make no payment except in return for goods or services rendered to it, or as provided for in this act. There shall be no federal tax any business.
All persons shall come together in households to report all income and to receive federal benefits. They need not be related, need not reside together, and a household may consist of as few as one person.
Each year congress shall set a “minimum wage” and a “tax rate”, which in turn will be applied to the previous year’s reported incomes to determine the budget of the government.
The following income shall be exempt from taxation:
An amount equal to a year’s earnings at the minimum wage rate, for adults (age 20-65), decreasing 10% per year to 50% at age 15, and increasing 10% per year to 150% at age 70.
Payments for necessary health care including pharmaceuticals prescribed by a recognized health care professional, and vision and hearing aids. Health care insurance premiums may be deducted but not health care expense paid for by such insurance.
Educational expense including day care, that portion of state and local taxes identified as spent on education, that portion of parochial school expenses identified as going for non-sectarian education, and private school education at any level.
Income saved into an account from which investments may be made. All withdrawals from this account for the benefit of any member of the household are taxable. Withdrawals that are not for a members’ benefit are exempt from taxation.
The “tax rate” shall be applied to any income over and above the deductions listed above, regardless of amount. When deductions exceed income, the government shall make payment to the household equal to the tax rate times the deficiency.
Study it! Even addresses gay marriage issue in establishing households.
I don’t think of it as ironic as much as playing both ends against the middle.
[…] Via Dan Mitchell at International Liberty: […]
>>Obviously higher tax revenues indicates higher rates and more room for manipulation (or at least following your reasoning).<<
No John. "Obviously" LOWER tax rates produce higher revenues. Plenty of empirical evidence (see JFK, Reagan, W.Bush tax cuts). Higher rates may or may not.
It is *not* higher revenues that cause corruption; rather, it is higher rates due to the greater cost/benefit of manipulation. "Escaping" the higher rates by "legal" loopholes or other means is the incentive. The desire (and benefits) of avoiding higher tax rates and massive increases in costly regulation – often with dubious benefits – have led to the immense increase in lobbying.
John, perhaps your erudite complaining has obscured from your view a good business opportunity. Why not propose to Cato Institute a multiday seminar about descriptive and inferential statistics? You could charge, say, $195/person.This price might seem too low, but, after all, you’re trying to establish a beach head in the industry of correcting the unwashed masses of their ignorance of Statistics, which, as every scientist knows, is a tool of economic research that trumps all others.
You’re a smart guy, so you probably know that repetitio mater memoriae. So why not have also a refresher seminar that lasts one day? Price? $95/person. The refresher seminar would be 3 to 4 months after the three day seminar.
Of course, these prices do not include expenses for your travel, lodging, and meals. A nice feature of the business is that CI experiences turnover among its staff. So with the passage of enough time you will have good reason to propose yet another three day seminar and the one day refresher seminar to supplement it.
Expect the terms of the deal to obligate you to demonstrate an understanding of the Laffer curve and what, if any, evidence there is to corroborate it.
” I got a correlation coefficient of 0.53. Anything above 0.5 is considered a strong correlation. In short, there is strong evidence against your hypothesis and zero empirical evidence in favor of it.”
Your correlation coefficient explains exactly 25% of the variance between CPI and tax revenues. That’s not strong evidence! Correlation indicates a relationship between variables, which may or may not have any material relevance.
Another instance of someone trying to use correlation as causation.
@ John. No, what you failed to account for is the fact that lower tax revenues as a percentage of GDP indicate one of two things, occasionally both: 1) tax rates are low; and/or, 2) the level of corruption in tax avoidance is high. High tax rates coupled with high compliance rates in Europe, the U.S., Japan, etc., makes it appear there is less corruption among politicians and business/NGOs/etc than is the case in other economies. That is not necessarily true. A simple correlation between “x” and “y” may or may not show what is happening in the background.
“honest leftists”? Oh, that’s rich.
Those were good points, though, about the perverse incentives associated with high rates of taxation. There is one small bright spot, however. Higher tax rates do not necessarily mean higher revenues for government, and when government obtains less than it could have obtained, that’s a good outcome.
The same logic applies to any concentration of power or money in the central government.
Geez. Isn’t this all so obvious. Years ago I heard Ralph Nader complaining about the dramatic rise in lobbying in Wash. D.C. It was much, much worse he maintained than when he had begun his efforts as a “consumer advocate.”
Duh… So, as the govt passes more and more regulations on business, what did Mr. Nader expect?
More power in D.C., more special interests will seek special deals. Business, unions, voting blocks, single issue types, etc.
There is a solution, but I won’t mention it.
[…] DAN MITCHELL: The Link Between High Tax Rates and Corruption. […]
>>Obviously higher tax revenues indicates higher rates<<
There's your sign.
Why not use some facts to investigate your claim? For example, compare the correlation between taxation and corruption in various countries. I spent two minutes comparing the data for Transparency International’s Corruption Index and the Heritage Foundation’s figures for tax revenue as a percentage of GDP. The CPI is a score on a ten point scale, with ten indicating lower levels of corruption and one indicating very high levels. Obviously higher tax revenues indicates higher rates and more room for manipulation (or at least following your reasoning). According to your thesis, the higher the tax revenue, the lower the CPI score should be. That would mean the CPI and tax revenue percentages should be negatively correlated. However, for the 174 countries that I have data on, the CPI score and tax revenue are positively correlated. Strongly so. I got a correlation coefficient of 0.53. Anything above 0.5 is considered a strong correlation. In short, there is strong evidence against your hypothesis and zero empirical evidence in favor of it. This article doesn’t even pass the sniff test. Maybe instead of telling these superficially convincing stories with no factual or empirical basis, Cato should try using some evidence on occasion. Jeez you guys have gone downhill over the past few years. The quality of your work has become very disappointing.
Reblogged this on Public Secrets and commented:
And it’s not just “breaking the law”-type corruption: high tax rates encourage people and corporations to seek loopholes and special privileges written into the code that the rest of us have no access to. Better to have lower, flatter rates with no incentive to rig the system.
Thanks for giving me yet another angle to bash tax hikes—they increase the benefits and the motivation for that darned 1% to create tax loopholes.