Global Trends in Economic Freedom

I’m in Vancouver, Canada, for the biennial meeting of the World Taxpayers Associations.

I gave a speech on why tax competition is a valuable force to constrain the greed of the political class, but warned the audience that high-tax governments and international bureaucracies are using financial protectionism to coerce low-tax jurisdictions into weakening their good policies.

But regular readers know that I pontificate far too often on that topic, so today’s column is instead about a presentation by Michael Walker, who was the founding Executive Director at Canada’s Fraser Institute.

Michael’s great contribution to the world was the creation of the Economic Freedom of the World Index, which he developed working with scholars such as Milton Friedman.

I’ve cited the EFW Index many times, particularly to bemoan how America’s score has deteriorated during the Bush-Obama years.

Today, though, we’re going to look at global trends in economic freedom, using some of the slides from Michael’s presentation. And the good news, as you can see from the green line in this first chart, is that there was a significant increase in economic freedom between 1980 and 2010.

The blue line, by the way, shows how much nations differed. A higher blue line means more variation (in other words, some nations with very good scores and some with very bad scores), while a lower blue lines means that nations are converging.

To really understand what’s happening, however, it’s important to look at the component parts of the EFW Index. As I wrote back in 2012:

…a country’s economic performance is governed by a wide range of policies.

Indeed, the research suggests that there are five big factors that determine prosperity, and they’re all equally important.

Rule of law and property rights

Sound money

Fiscal policy

Trade policy

Regulatory policy

So let’s look at what’s been happening in each of these areas. Keep in mind, as we look at the following charts, that 10 is the best score.

We’ll start with fiscal policy. As you can see, policy was moving in the wrong direction from 1970 to 1985, then we got two decades of pro-growth changes, but now policy is again trending in the wrong direction.

We’re still better off than we were 30 years ago, but I’m afraid scores will continue to decline because tax rates are now heading in the wrong direction and the burden of government spending is rising in many nations.

Now let’s look at the regulatory data. The trend may not be dramatic, but it is positive. The green line is gradually rising, showing that governments are easing red tape and reducing intervention.

Moreover, there’s no sign that policy is moving in the wrong direction, at least on a global basis.

Shifting to trade, we have perhaps the biggest success story in global economic policy. Between 1980 and 2010, there was a dramatic increase in the freedom to trade.

We also see some progress on monetary policy, both in that it stopped moving in the wrong direction in 1975 and then moved in the right direction beginning in 1995.

Though I confess some skepticism about this measure. Central banks have created a lot of problems with excess liquidity, but they generally escape blame so long as easy-money policies don’t result in higher consumer prices.

This brings us to our final category. Property rights and the rule of law are very important for market economies, but unfortunately we’ve seen no long-run improvement in these key measures. Positive change between 1975 and 1995 is offset by movement in the wrong direction at other times.

Indeed, if we look at this next chart, which measures the distribution of scores for each category in 2010, you’ll see that nations get their lowest scores on rule of law and property rights.

This aggregate data, while very useful, does not tell the entire story. If you look at various regions, you’ll discover that “first world” nations tend to get decent scores on rule of law and property rights while developing nations get poor scores.

Indeed, this is why the blue line in the rule of law/property rights chart is so much higher than it is for other categories. Simply stated, this is one area where there hasn’t been much convergence.

Which is a big reason why many developing nations are economic laggards, even if they get reasonably good scores in other categories.

Here’s a final chart that emphasizes that point. It shows nations that get the best scores on the size of government (left column), but then shows that many of them get very poor scores for rule of law and property rights (right column).

The fiscal burden of government is very low in nations such as Lebanon and Bangladesh, for instance, but these jurisdictions don’t attract a lot of investment or enjoy much growth because government fails to provide the right environment.

All of which shows why Hong Kong, Singapore, and Switzerland deserve special praise. They have strong rule of law and property rights while simultaneously maintaining reasonable limits on the fiscal burden of the public sector. No wonder they are ranked first, second, and fourth in overall economic freedom.

And it’s worth noting that a few other nations deserve honorable mention for getting good fiscal policy scores while doing a decent job on the rule of law and property rights, specifically Bahamas (#39), Chile (#11), Mauritius (#6), and United Arab Emirates (#5).

By the way, the United States only got a 6.4 for size of government and a 7.1 for rule of law and property rights. No wonder America is only #17 in the overall rankings.

Back in 2000, when the United States ranked #3, we got a 7.0 for size of government and a 9.2 for rule of law and property rights.

So now you now know why I complain so much about Bush and Obama. And you especially know why I’m so concerned about the erosion of the rule of law under Obama.

P.S. A Spanish academic has developed some fascinating historical data on non-fiscal economic freedom, which is very helpful in understanding how the western world has managed to remain somewhat prosperous even though the fiscal burden of government increased dramatically in the 20th Century.

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More Evidence that Big Government Doesn’t Work: Unambiguously Awful Employment Numbers

On many occasions, I’ve explained that economic output is a function of how much labor and capital are productively utilized.

This is why I relentlessly criticize policies that undermine GDP growth by hindering the use of these “factors of production.”

That’s a bit of economic jargon, but it helps to explain why we shouldn’t be discriminating against capital by double taxing income that is saved and invested.

And it helps to explain why we shouldn’t be discouraging labor by subsidizing unemployment and idleness.

But it’s time to issue a very important caveat. The goal of policy should be economic freedom, not maximizing GDP.

There’s nothing wrong with people choosing to be out of the labor force – so long as they’re not expecting taxpayers to pay their expenses.

Many women, for instance, may want to be at home with children, particularly during their younger years.

Moreover, some older workers may want to retire early.

So while I think it’s bad news that labor force participation has dropped under Obama, there’s more than one possible way to look at that data when you factor in the voluntary choices of some segments of the potential workforce.

But it’s very difficult to give any sort of optimistic or positive spin to these numbers from the Senate Budget Committee. They show a very worrisome trend among prime-working-age men.

These are people who should be in the labor force.

Here’s what John Hinderaker at Powerline wrote about these sobering figures.

An unprecedented number of men–one in six–between the ages of 25 and 54, what should be their prime earning years, are either unemployed or out of the work force entirely.

Here’s the breakdown.

One in eight, the highest proportion since record-keeping began in 1955, are out of the labor force… Another 2.9 million men in the 25-54 age group haven’t given up–they are still in the labor force–but are currently unemployed.

And here are the consequences.

…the damage done to a generation of American men (and women too, of course) will not easily be undone. Those who missed a chunk of what should have been their most productive years, or departed the labor force entirely, will suffer from Obamanomics for the rest of their lives. The damage being done by our current, inept economic policies is literally incalculable.

Here’s another chart, this one comparing idleness among men in 2007 and 2014.

So how do we fix this problem, keeping in mind that this is not a partisan issue since the bad trend started under Bush?

The big-picture answer is free markets and small government.

In other words, you create jobs by having Washington get out of the way.

P.S. Over the years, the President has made some remarkable statements.

• In my video on class warfare, I noted that Obama said in 2008 that – for reasons of “fairness” – he wanted to raise the capital gains tax even if the government lost revenue.
• A couple of years ago, he arrogantly remarked that “at some point you have made enough money.”
• In 2011, the President was complaining about bank fees and asserted that, “you don’t have some inherent right just to, you know, get a certain amount of profit…”
• And in 2012, Obama made his infamous “you didn’t build that” statement, which generated some very amusing political cartoons.

With these statements in mind, here’s some Obama humor.

No substantive policy message, I’ll admit, but still funny. Sort of like this t-shirt, this Pennsylvania joke, this Reagan-Obama comparison, this Wyoming joke, this Bush-Obama comparison, this video satire, and this bumper sticker.

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Gun Control and Mass Shootings

Well, another loser killed a bunch of people, this time in Santa Barbara, California.

Which gives gun control zealots an opportunity to seize upon the tragedy to recycle their calls to restrict private firearms ownership and otherwise erode the Second Amendment.

But I’m not too worried that they’ll succeed. The evidence is simply too strong that gun ownership reduces crime. The research shows that criminals are less aggressive when they fear potential victims may be armed.

Moreover, they don’t even have practical proposals. Here’s some of what Jacob Sullum wrote for Reason.

None of the items on the anti-gun lobby’s wish list makes sense as a response to the crimes of Elliot Rodger, the 22-year-old college student who murdered Martinez’s son and five other people on Friday night. …the Isla Vista massacre, which took place in a state with firearm laws that are among the strictest in the nation, exposes the false promise of policies that aim to prevent violence by limiting access to weapons. …The only specific policy Gross mentioned was “expanded background checks.” But California already has those: All gun sales in that state, including private transfers, must be handled by licensed dealers, and every buyer has to be cleared by the California Department of Justice…

Sullum continues.

Rodger passed those background checks because he did not have a disqualifying criminal or psychiatric record. …Yes, Rodger was depressed, socially isolated, and desperately lonely. But how many people who fit that description become mass murderers? The difficulty of predicting which of the world’s troubled oddballs will turn violent is the reason “expanded background checks” cannot stop this sort of crime.

Good point. Heck, if getting rejected by the opposite sex was a predicate for mass murder, I would have been a potential killer in high school.

So what might have worked? Perhaps, in a leftist fantasy world, outright confiscation of 300 million guns. Though that would lead to massive civil disobedience.

Not to mention they would have to impose controls on knives and cars.

One can imagine policies that might have stopped Rodger, but they are neither practical nor constitutional. If the government not only banned guns but somehow managed to confiscate the 300 million or so Americans already own, that would have put a damper on Rodger’s plans, although he used knives to kill half of the victims who died and used his car to injure others.

And here are some excerpts from analysis by the invaluable John Lott. He starts by observing that the already-existing gun control rules in California were utterly ineffective.

As usual, the media news stories got fundamental facts wrong here. Of particular interest, half the people killed here were stabbed to death. Also, you won’t hear this in the news, the magazines that the killer used were also apparently limited to holding no more than 10 rounds (note that the Sheriff said that all the magazines were legal under California law). Obviously neither point fits the gun control check list.

More important, the anti-gun policies in California may have made it easier for the killer.

Santa Barbara County, where the attack occurred, is essentially a gun-free zone. As of February 2014, there were only 53 individuals with a concealed handgun permit in Santa Barbara County. With an adult population of 337,000, that is a rate of just 0.016 percent. The few people allowed to carry are undoubtedly politically well connected individuals who were unlikely to have been in the part of town where this attack occurred. As we have seen over and over again, these multiple victim killers deliberately select locations where victims are unlikely to be able to defend themselves.

Indeed, in another article, Lott notes that the nutjob carefully planned his attack to minimize the chances of being stopped by a law-abiding person with a gun.

Rodger spent over a year and a half meticulously planning his attack. His 141-page “manifesto” makes it clear that he feared someone with a gun could stop him before he was able to kill a lot of people. …Deterrence matters. As my research with Bill Landes at the University of Chicago found, letting people defend themselves doesn’t just prevent these attacks from occurring, it also limits the harm should the attack occur.  At some point, the fact that virtually all these mass shootings take place where victims are defenseless is going to have to matter.

To be sure, there’s no way to fully prevent crazed and evil people from doing bad things. But public policy can tip the scales in one direction or the other.

That’s why we should focus on policies that discourage bad guys by changing their cost-benefit calculations, such as making it easier for victims to defend themselves.

Not that I expect our statist friends to grasp this economic insight. It seems gun control is a faith-based policy, as captured by this amusing image.

The same message can be found in this Chuck Asay cartoon and these satirical images.

P.S. I shouldn’t stereotype all leftists as being naive on firearms and gun control. As you can read here and here, there are some who put reason ahead of ideology.

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France Wipes Out on the Laffer Curve

If you appreciate the common-sense notion of the Laffer Curve, you’re in for a treat. Today’s column will discuss the revelation that Francois Hollande’s class-warfare tax hikes have not raised nearly as much money as predicted.

And after the recent evidence about the failure of tax hikes in Hungary, Ireland, Detroit, Italy, Portugal, the United Kingdom, and the United States, this news from the BBC probably should be filed in the category of “least surprising story, ever.”

The French government faces a 14bn-euro black hole in its public finances after overestimating tax income for the last financial year. French President Francois Hollande has raised income tax, VAT and corporation tax since he was elected two years ago. The Court of Auditors said receipts from all three taxes amounted to an extra 16bn euros in 2013. That was a little more than half the government’s forecast of 30bn euros of extra tax income.

And why have revenues been sluggish, generating barely half as much money as the politicians wanted? For the simple reason that Hollande and the other greedy politicians in France failed to properly anticipate that higher tax rates on work, saving, investment, and entrepreneurship would discourage productive behavior and thus lead to less taxable income.

…economic growth has been inconsistent and the unemployment rate hit a record high of 11% at the end of 2013. The French economy saw zero growth in the first three months of 2014, compared with 0.2% growth three months earlier. The income tax threshold for France’s wealthiest citizens was raised to 75% last year, prompting some French citizens, including the actor Gerard Depardieu, to leave the country and seek citizenship elsewhere in Europe.

But we do have some good news. A French politician is acknowledging the Laffer Curve!

French Prime Minister Manuel Valls, who was appointed in March following the poor showing of Mr Hollande’s Socialists in municipal elections, appeared to criticise the president’s tax policy by saying that “too much tax kills tax”.

By the way, France’s national auditor also admitted that tax hikes were no longer practical because of the Laffer Curve. Heck, taxes in France are so onerous that even the EU’s Economic Affairs Commissioner came to the conclusion that tax hikes were reducing taxable income.

Though here’s the most surprising thing that’s ever been said about the Laffer Curve.

…taxation may be so high as to defeat its object… given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget.

And I bet you’ll never guess who wrote those words. For the answer, go to the 6:37 mark of the video embedded in this post.

P.S. Just in case you’re not convinced by the aforementioned anecdotes, there is lots of empirical evidence for the Laffer Curve.

• Such as this study by economists from the University of Chicago and Federal Reserve.
• Or this study by the IMF, which not only acknowledges the Laffer Curve, but even suggests that the turbo-charged version exists.
• Or this European Central Bank study showing substantial Laffer-Curve effects.
• Or this research from the American Enterprise Institute about the Laffer Curve for the corporate income tax.

P.P.S. For other examples of the Laffer Curve in France, click here and here.

P.P.P.S. To read about taxpayers escaping France, click here and here.

P.P.P.P.S. On a completely different subject, here’s the most persuasive political ad for 2014.

I realize the ad doesn’t include much-needed promises by the candidate to rein in the burden of government, but I’m a bit biased. And in a very admirable way, so is Jack Kingston.

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The Department of Agriculture Deserves the Death Penalty

I believe in free markets and small government, and I’m also against Washington corruption.

Which is why I want to abolish the Department of Agriculture.

And I suspect all sensible people will agree after reading excerpts from these three articles.

We’ll start with Damon Cline, who produced a searing indictment of farm welfare for the Augusta Chronicle.

Alexis de Tocqueville posited in the 19th century that America’s undoing would occur once “politicians realize they can bribe the people with their own money.” That’s exactly what the Farm Bill allows politicians to do – loot the treasury on behalf of the lobbyists, special interest groups and voting blocs who keep them fat and happy in Washington Wonderland. …The bill continues a legacy of waste that started 60 years ago when campaign contribution-sniffing politicians realized they could make the Great Depression’s temporary, emergency measures permanent. At $956 billion – a figure which outporks the infamous 2009 “stimulus” package by $200 billion – the Farm Bill is four-fifths food stamps and one-fifth agribusiness subsidies. It’s a swindle easily marketed to the masses. …Republicans from conservative farm districts forged an unholy alliance with and Democrats from liberal-leaning urban ones to funnel goodies to their core constituencies with minimal bickering. …American agriculture is dominated by sophisticated family corporate enterprises and Fortune 500 companies such as Archer Daniels Midland, Tyson Foods and Pilgrims Pride Corp. …Net profits were $131 billion last year, and the average farmer’s household income ($104,525 last year) far exceeds the U.S. average. …[A farmer] can earn up to $900,000 per year and still qualify for benefits that guarantee his revenues never fall below 86 percent of his previous years’ peak earnings. On top of that, taxpayers pay 62 percent of his business-insurance premiums. …The most heavily subsidized crops – corn, cotton, wheat, soybeans and rice – have their own lobby groups, as do many non-subsidized commodities, whose producers hope to get rolled into future farm bills (as U.S. catfish and maple syrup producers managed to do this year).

Ugh. What a disgusting scam.

Now let’s look at two different examples of how federal intervention produces awful results.

The first is from Daniel Payne’s column in The Federalist. He writes about how a discrimination case became an excuse to loot taxpayers.

The USDA is blessed with an ample amount of time and a great deal of money, which means it must forever be inventing new ways to spend the billions and billions of dollars allocated to it every year… the department has a history of both vicious incompetence, remorseless fraud and sulky hostility… The incompetence and fraud are both well-documented; perhaps the greatest combination of the two can be found in the Pigford v. Glickman case. Pigford was a class action lawsuit leveled against the USDA by black farmers who claimed they had been discriminated against while seeking federal loans from the department; the lawsuit quickly ballooned to an enormous number of claimants seeking redress for racial discrimination, which, as the New York Times reported, resulted in USDA employees finding reams of suspicious claims, from nursery-school-age children and pockets of urban dwellers, sometimes in the same handwriting with nearly identical accounts of discrimination.These are not “suspicious” claims but openly false and fraudulent ones, as any capable, mildly-intelligent adult can immediately discern. …The USDA responded to these grim revelations by cheerfully going along with the terms of the settlement: in one instance, they paid out nearly $100 million to sixteen zip codes in which “the number of successful claimants exceeded the total number of farms operated by people of any race;” in one town in North Carolina, “the number of people paid was nearly four times the total number of farms.” Was there no sensible, principled person within the entire Department willing to put an end to such absurdity? Was there anybody sitting around that might have mounted some kind of aggressive campaign to combat such naked deceit? Don’t count on it. This is the same bureaucracy, after all, that has paid out tens of millions of dollars to dead farmers. Last year alone the department’s whiz kids made over $6 billion in improper payments. Nearly 66% of improper food stamp payments were “agency-caused.”

And here’s Jim Bovard, writing in the Wall Street Journal about America’s Soviet-style central planning rules for raisins.

Under current law, the 1930s-era federally authorized Raisin Administrative Committee can commandeer up to half of a farmer’s harvest as a “reserve”—to purportedly stabilize markets and prevent gluts. …The Agricultural Marketing Agreement Act of 1937 authorized the secretary of Agriculture to appoint farmer-dominated committees to control production. The subsequent crop marketing orders were based on the New Deal philosophy of “managed abundance”—prosperity through “universal monopoly and universal scarcity.” …But the parity index was concocted by government agricultural economists in the 1920s to justify federal aid to farmers. “Parity” was based on a set ratio of farm prices to nonfarm prices, in correlation with the ratio that prevailed in 1910-14, a boom time for farmers. Because production costs for both farm and nonfarm goods radically changed, it never made any economic sense to rely on “parity” but it was a popular political ploy. …the raisin committee’s sweeping powers have failed to prevent vast swings in prices farmers receive. Many California farmers have shifted their land to other crops; the acreage devoted to raisin production has plunged since 2000. …economic illiteracy can vest boundless power in bureaucracies.

In his column, Jim also discusses a legal challenge to this insane system, so maybe there’s a glimmer of hope that this corrupt and inefficient system could be eliminated, or at least curtailed.

For what it’s worth, I still think the Department of Housing and Urban Development should be the first big bureaucracy in DC to be eliminated. But I sure won’t cry if the Department of Agriculture winds up on the chopping block first.

As P.J. O’Rourke famously advised, “Drag the thing behind the barn and kill it with an ax.”

P.S. I’ve shared many examples of anti-libertarian humor (several links available here), in part because I appreciate clever jokes and in part because I think libertarians should be self-confident about the ideas of liberty.

That being said, I definitely like to share examples of pro-libertarian humor, such as Libertarian Jesus.

And here’s the latest item for my collection.

Maybe not as good as the libertarian version of a sex fantasy, but still quite amusing.

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The Perplexing Durability of Keynesian Economics

Keynesian economics is a failure.

It didn’t work for Hoover and Roosevelt in the 1930s. It didn’t work for Japan in the 1990s. And it didn’t work for Bush or Obama in recent years.

No matter where’s it’s been tried, it’s been a flop.

So why, whenever there’s a downturn, do politicians resuscitate the idea that bigger government will “stimulate” the economy?

I’ve tried to answer that question.

Keynesian economics is the perpetual motion machine of the left. You build a model that assumes government spending is good for the economy and you assume that there are zero costs when the government diverts money from the private sector. …politicians love Keynesian theory because it tells them that their vice is a virtue. They’re not buying votes with other people’s money, they’re “stimulating” the economy!

I think there’s a lot of truth in that excerpt, but Sheldon Richman, writing for Reason, offers a more complete analysis. He starts by identifying the quandary.

You can’t watch a news program without hearing pundits analyze economic conditions in orthodox Keynesian terms, even if they don’t realize that’s what they’re doing. …What accounts for this staying power?

He then gives his answer, which is the same as mine.

I’d have said it’s because Keynesianism gives intellectual cover for what politicians would want to do anyway: borrow, spend, and create money. They did these things before Lord Keynes published his The General Theory of Employment, Interest, and Money in 1936, and they wanted to continue doing those things even when trouble came of it.

Makes sense, right?

But then Sheldon digs deeper, citing the work of Professor Larry White of George Mason University, and suggests that Keynesianism is popular because it provides hope for an easy answer.

Lawrence H. White of George Mason University, offers a different reason for this staying power in his instructive 2012 book The Clash of Economic Ideas: The Great Policy Debates and Experiments of the Last Hundred Years: namely, that Keynes’s alleged solution to the Great Depression offered hope, apparently unlike its alternatives. …White also notes that “Milton Friedman, looking back in a 1996 interview, essentially agreed [that the alternatives to Keynesianism promised only a better distant future]. Academic economists had flocked to Keynes because he offered a faster way out of the depression, as contrasted to the ‘gloomy’ prescription of [F.A.] Hayek and [Lionel] Robbins that we must wait for the economy to self-correct.” …Note that the concern was not with what would put the economy on a long-term sustainable path, but rather with what would give the short-term appearance of improvement.

In other words, Keynesian economics is like a magical weight-loss pill. Some people simply want to believe it works.

Which is understandably more attractive than the gloomy notion the economy has to go through a painful adjustment process.

But perhaps the best insight in Sheldon’s article is that painful adjustment processes wouldn’t be necessary if politicians didn’t make mistakes in the first place!

A related aspect of the Keynesian response to the Great Depression—this also carries on to the current day—is the stunning lack of interest in what causes hard times. Modern Keynesians such as Paul Krugman praise Keynes for not concerning himself with why the economy fell into depression in the first place. All that mattered was ending it. …White quotes Krugman, who faulted economists who “believed that the crucial thing was to explain the economy’s dynamics, to explain why booms are followed by busts.” …why would you want to get bogged down trying to understand what actually caused the mass unemployment? It’s not as though the cause could be expected to shed light on the remedy.

This is why it’s important to avoid unsustainable booms, such as the government-caused housing bubble and easy-money policy from last decade.

Hayek, Robbins, and Mises, in contrast to Keynes, could explain the initial downturn in terms of the malinvestment induced by the central bank’s creation of money and its low-interest-rate policies during the 1920s. …you’d want to see the mistaken investments liquidated so that ever-scarce resources could be realigned according to consumer demand… And you’d want the harmful government policies that set the boom-bust cycle in motion to end.

Gee, what a radical notion. Instead of putting your hope in a gimmicky weight-loss pill, simply avoid getting too heavy in the first place.

For further information, here’s my video on Keynesian economics.

P.S. Here’s some clever humor about Keynesian economics.

P.P.S. If you like humor, but also want some substance, here’s the famous video showing the Keynes v. Hayek rap contest, followed by the equally entertaining sequel, which features a boxing match between Keynes and Hayek. And even though it’s not the right time of year, this satirical commercial for Keynesian Christmas carols is right on the mark.

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Will Chile’s Politicians Ruin the Latin Tiger?

There aren’t any nations with pure libertarian economic policy, but there are a handful of jurisdictions that deserve praise, either because they have comparatively low levels of statism or because they have made big strides in the right direction.

Hong Kong and Singapore are examples of the former, and Switzerland deserves honorable mention.

And if we look at nations that have moved in the right direction, then Chile is definitely a success story.

The free-market revolution in Chile is remarkable. If you look at the Economic Freedom of the World rankings, Chile was in last place in 1970 and third from the bottom in 1975. But then reforms began. It climbed to 60th place in 1980, 40th place in 1985, 28th place in 2000, and Chile now has one of the world’s freest economies, hovering around 10th place.

And the results are amazing. Now known as the Latin Tiger, Chile has become the richest nation in the region, thanks to a big increase in economic liberty. Many people know about that nation’s very successful system of personal retirement accounts (discussed here by Jose Pinera), but Chile’s economic renaissance is much deeper than private pensions.

The country has an admirable system of school choice, for instance, and 60 percent of students now attend private schools.

Most remarkable, the poverty rate has plummeted, showing that free markets and small government are the best way of helping the less fortunate.

But there’s no such thing as permanent success, and it appears that Chilean politicians may try to kill the geese that are laying the golden eggs.

Here are some excerpts from a Wall Street Journal report, starting with a description of the class-warfare tax plan proposed by the nation’s socialist leader.

Chile’s leftist government is proposing a controversial overhaul of its tax code that business leaders say threatens to reverse the gains that have made this country Latin America’s most prosperous nation. …The government says the tax reform will increase the tax haul by three percentage points of annual economic output, or by about $8.2 billion annually. The proposed overhaul includes an increase in the corporate tax rate to 25% from the current rate of 20% and the elimination of a popular tax exemption program that allows businesses that reinvest profits, known as the FUT. …Ms. Bachelet, a 62-year-old Socialist Party member, said Wednesday that the changes are required to fund a plan to improve the quality of the schools system.

The FUT system sounds like expensing, which is how the tax code should treat business investment, not a loophole.

In any event, we definitely know that the tax plan would significantly boost the tax burden.

And that has wealth creators worried.

The plan to raise the corporate tax rate and close an exemption that companies use to reinvest profits has stirred up an ideologically-charged debate at a time when economic growth has weakened to its slowest level in four years. …many of the company’s 450 business clients in Chile are reconsidering investment plans. “They are watching this with a lot of concern.” …business groups say they will try to pressure the government to rethink the tax overhaul. Juan Pablo Swett, the head of Chile’s association of small businesses, said that some 250,000 small-business owners could protest if the government doesn’t save the FUT. “Chile is going down the road of Latin American populism,” added Axel Kaiser, an economist and executive director at the Foundation for Progress, a conservative Chilean think tank.

The story notes that economic reform has been very positive for Chile.

This mineral-rich, long sliver of a country that hugs the Pacific Ocean has long been a laboratory for economic innovation. Starting in the mid-1970s, when much of Latin America had closed their economies from international trade, Chile went the other way, embarking on a program to liberalize trade, deregulate and even create a private pension system. Since 1990, successive governments, most of them left-leaning, oversaw business-friendly policies that turned it into the region’s most stable and wealthiest nation. …The robust economic growth, coined the “Chilean Miracle,” led to a decline in poverty to 15% in 2011 from almost 40% in 1990, according to the World Bank. During the same period, Chile’s gross domestic product per capita rose from less than $5,000 to more than $20,000, the highest in Latin America.

And since reform has produced such good results, that leaves us with two issues.

First, why do the politicians want to ruin a good thing? These people presumably are educated and well-traveled. They must realize how Chile has prospered relative to other nations in the region. So why tinker with success? Are they really so short-sighted that they’re willing to condemn their nation to slower growth just so they have the ability to buy votes with a temporary increase in tax revenue?

Second, why did voters elect these politicians? Don’t they realize that they’ve benefited from the pro-market reforms? Though I suspect the answer is that previous left-of-center governments haven’t done anything bad, while the recently ousted right-of-center government didn’t do anything good, so maybe voters didn’t realize that the new left-leaning government intended to make radical changes.

Regardless, it will be tragic if these reforms are imposed and Chile sinks back into economic stagnation.

The world in general – and Latin America in particular – already has plenty of basket case economies such as Cuba, Venezuela, and Argentina. The last thing we need is another statist economy.

I realize this may sound like whining, but it would make my job easier to have more examples of jurisdictions that can be role models for free markets and small government.

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Let Markets Work, even for Folks Who Want to Buy and Sell Human Organs

Back in 2011, I shared a video making the moral argument that adults should be allowed to buy and sell kidneys.

After all, if one person is made better off by selling a kidney and another person is made better off by buying a kidney, why should the rest of us be allowed to ban that voluntary exchange?

In a new video looking at anti-market bias, Professor Bryan Caplan of George Mason University uses kidney sales as an example of how capitalism yields great results.

So why is it against the law to buy and sell kidneys, particularly when the actual buyers and sellers – by definition – both benefit?

In 2010, I speculated that a knee-jerk fixation on the wrong kind of equality might be part of the answer. The current system, with long waiting lines and thousands of needless deaths, may be bad, but at least rich people suffer just as much as poor people.

…it is perplexing that statists are so viscerally opposed. The only interpretation I can come up with – which I admit is very uncharitable – is that they are willing to let people die because they are myopically fixated on equity. No system is acceptable, in their minds, unless it results in equal death rates by income class and equal kidney donations by income class.

In reality, a free market would benefit both rich and poor. Not only would some poor people get a lot of money by selling their spare kidneys, but poor people on dialysis would be far more likely to get transplants since private charities would be able to raise money to save their lives.

P.S. Professor Caplan is the creator of the “libertarian purity quiz.” I only got 94 out of 160 possible points, which doesn’t sound that impressive, but it was enough to get me classified as “hard core.”

P.P.S. In my posts about unemployment benefits, I’ve argued that there’s a big downside to giving people money on the condition that they don’t have a job. Simply stated, you trap people in unemployment.

And I’ve cited lots of academic evidence to support that hypothesis. And for those who prefer anecdotes, check out this story from Michigan and this example from Ohio.

I’ve even cited left-wing economists who admit that unemployment benefits translate into more joblessness. And this Michael Ramirez cartoon on the issue is both amusing and persuasive.

But one thing I haven’t done is share data from actual people without jobs. So here’s some data from a national scientific poll of unemployed Americans.

…80 percent agree that it “is giving me time to find the right position.” …82 percent of those receiving benefits said if their unemployment compensation were to run out prior to their finding a job, they would “search harder and wider for a job.” …48 percent agree that they “haven’t had to look for work as hard” thanks to unemployment compensation.

Gee, what a shocker. Endless unemployment benefits enable people to be less diligent about finding work. That may not be a big problem if people are out of the labor force for two months. But when politicians keep extending jobless benefits, you create permanent unemployment.

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Unofficial Death Panels at the VA Show Where Obamacare Will Lead

In hopes of warning people about the dangers of Obamacare, I’ve shared horror stories from the United Kingdom about patients languishing on waiting lists and being left to die.

Now, thanks to whistleblowers, we have horror stories from America. The government-run system operated by the Veterans Administration has maintained secret waiting lists that have led to lots of delayed care and numerous deaths.

The Wall Street Journal opines on the scandal.

The real story of the VA scandal is the failure of what liberals have long hailed as the model of government health care. Don’t take our word for it. As recently as November 2011, Paul Krugman praised the VA as a triumph of “socialized medicine,” as he put it… What the egalitarians ignore, however, is that a government system contains its own “perverse incentives,” such as rationing that leads to treatment delays and preventable deaths, which the bureaucracy then tries to cover up. This isn’t an accident or one-time error. It is inherent in a system that allocates resources by political force rather than individual consumer choices. The VA is ObamaCare’s ultimate destination. …As in every government-run system, the only way the VA can provide universal, low-cost health care is by rationing. At the VA, this means long waiting lists to see doctors and get the “free” treatment veterans are entitled to.

Here is some of the evidence.

A retired doctor at a veterans hospital in Phoenix last month charged that staff concealed months-long delays for as many as 1,600 veterans, allegedly resulting in 40 preventable deaths. Excessive wait-times have also been reported in Fort Collins, Durham, Cheyenne, Austin and Chicago, among others. A new Inspector General report is all but certain to reaffirm the conclusions from its 2005, 2007 and 2012 reports. To wit, VA centers fudge their data. The VA has consistently boasted in its performance reviews that more than 90% of patients receive appointments within 14 days of their “desired date.” Yet according to the IG’s 2012 report, the measures “had no real value”… Maintaining long backlogs can help VA centers procure more funding. Like other government institutions, VA centers have a financial incentive to keep services in-house.

The key issue is whether policy makers draw the right conclusions.

Unfortunately, the WSJ almost surely is right that the statists will assert that this is simply a sign that the VA needs more money (just as they argue that the government’s education monopoly needs more money, even though we have decades of evidence that more money doesn’t work).

The inevitable liberal defense—it’s coming, we guarantee it—will be that Congress isn’t spending enough money. Yet as the nearby charts show, funding soared by 106% to $57.3 billion in 2013 from $27.7 billion in 2003. Yet over the same period the number of VA patients has increased by only 30%. …throwing more money at the VA hasn’t improved accountability, and neither have Congressional attempts at reform dating to the 1980s. …rearranging the deck chairs won’t fix the VA’s core problem, which is that a government-run system inevitably leads to wait lists and reduced access to quality care. The modern VA is a vestige of the flood of veterans coming out of World Wars I and II, but it is as unnecessary as a health-care system dedicated solely to police or firefighters. The best solution is to privatize the system.

The last couple of sentences are key. Why do we have a separate system of government-operated medical care for one segment of the population?

This isn’t to say that veterans shouldn’t receive care, particularly if they have medical conditions tied to their military service. National defense is a legitimate function of the federal government, and healthcare can be an appropriate form of deferred compensation.

But why isolate veterans in a substandard system? Just give them vouchers or some other form of subsidy, and then they can pick the care that is best for them.

But let’s look at the bright side. The scandal is already generating some very good political cartoons.

Here’s A.F. Branco making the obvious link between the VA mess and the looming Obamacare mess.

Glenn McCoy, meanwhile, warns us that some monsters are real.

Henry Payne also connects the dots between the VA and Obamacare.

And Robert Ariail does the same thing, using the train wreck theme.

Last but not least, Lisa Benson mocks the President, who never seems to realize bad things are happening in his Administration until he reads the newspapers.

P.S. Since the final cartoon also incorporated the IRS because of its scandalous actions to suppress political speech, this is an opportunity to share some good news. The tax-collection bureaucracy has backed down, at least temporarily, in its efforts to systematically regulate and constrain some of our First Amendment rights to participate in the political arena. Here are some blurbs from a story in the New York Times.

The Internal Revenue Service said Thursday that it has delayed and is revamping new rules intended to curb political activity by tax-exempt groups and that were proposed after the agency was accused last year of targeting Tea Party groups. The I.R.S. said it made the decision after receiving 150,000 comments — both positive and negative — about the proposal, the biggest public response to any proposed rule in its history. …“Today’s decision is a long overdue step in the right direction,” Senator Orrin Hatch, Republican of Utah, said in a statement. He said the proposed rules, as they now stood, “threatened free speech and the rights of all American citizens to participate in the democratic process.”

To be sure, delay is not the same as victory, and I have little doubt that the IRS – and its political masters in the White House – still would like to move forward with this scheme to distort the political process.

But at least the bureaucrats have been forced to temporarily retreat. Maybe we can do real tax reform at some point and have a permanent win over the IRS.

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The Most Frugal President over the Past 50 Years Is…Obama?!?

Two years ago, there was a flurry of excitement because some guy named Rex Nutting crunched annual budget numbers and concluded that Barack Obama was the most fiscally conservative President since at least 1980.

I looked at the data and found a few mistakes, such as a failure to adjust the numbers for inflation, but Nutting’s overall premise was reasonably accurate.

As you can see from the tables I prepared back in 2012, Obama was the third most frugal President based on the growth of total inflation-adjusted spending.

And he was in first place if you looked at primary spending, which is total spending after removing net interest payments (a reasonable step since Presidents can’t really be blamed for interest payments on the debt accrued by their predecessors).

So does this mean Obama is a closet conservative, as my old – but misguided – buddy Bruce Bartlett asserted?

Not exactly. A few days after that post, I did some more calculations and explained that Obama was the undeserved beneficiary of the quirky way that bailouts and related items are measured in the budget.

It turns out that Obama supposed frugality is largely the result of how TARP is measured in the federal budget. To put it simply, TARP pushed spending up in Bush’s final fiscal year (FY2009, which began October 1, 2008) and then repayments from the banks (which count as “negative spending”) artificially reduced spending in subsequent years.

So I removed TARP, deposit insurance, and other bailout-related items, on the assumption that such one-time costs distort the real record of various Administrations.

And that left me with a new set of numbers, based on primary spending minus bailouts. And on this basis, Obama’s record is not exactly praiseworthy.

Instead of being the most frugal President, he suddenly dropped way down in the rankings, beating only Lyndon Baines Johnson.

Which explains why I accused him in 2012 of being a big spender – just like his predecessor.

But the analysis I did two years ago was based on Obama’s record for his first three fiscal years.

So I updated the numbers last year and looked at Obama’s record over his first four years. And it turns out that Obama did much better if you look at the average annual growth of primary spending minus bailouts. Instead of being near the bottom, he was in the middle of the pack.

Did this mean Obama moved to the right?

That’s a judgement call. For what it’s worth, I suspect that Obama’s ideology didn’t change and the better numbers were the result of the Tea Party and sequestration.

But I don’t care who gets credit. I’m just happy that spending didn’t grow as fast.

I’m giving all this background because I’ve finally cranked the most-recent numbers.  And if we look at overall average spending growth for Obama’s first five years and compare that number to average spending growth for other Presidents, he is the most frugal. Adjusted for inflation, the budget hasn’t grown at all. That’s a very admirable outcome.

But what about primary spending? By that measure, we have even better results. There’s actually been a slight downward trend in the fiscal burden of government during the Obama years.

This doesn’t necessarily mean, to be sure, that Obama deserves credit. Maybe the recent spending restraint in Washington is because of what’s happened in Congress.

I’ve repeatedly argued, for instance, that sequestration was a great victory over the special interests. And Obama vociferously opposed those automatic budget cuts, even to the point of making himself a laughingstock.

But don’t forget that TARP-type expenses can mask important underlying trends. So now let’s look at the numbers that I think are most illuminating. Here’s the data for average inflation-adjusted growth of primary spending minus bailouts.

As you can see, Obama no longer is in first place. But he’s jumped to third place in this category, which is an improvement over prior years and puts him ahead of every Republican other than Reagan. Given that all those other GOPers were statists, that’s not saying much, but it does highlight that party labels don’t necessarily mean much.

My Republican friends are probably getting irritated, so I’ll share one last set of numbers that may make them happy.

I cranked the numbers for average spending growth, but subtracted interest payments, bailouts, and defense outlays. What’s left is domestic spending, and here are the rankings based on those numbers.

Reagan easily did the best job of restraining overall domestic discretionary and entitlement outlays. Bill Clinton came in second place, showing that Democrats can preside over reasonably good results. And Richard Nixon came in last place, showing that Republicans can preside over horrible numbers.

Obama, meanwhile, winds up in the middle of the pack. Which is probably very disappointing for the President since he wanted to be a transformational figure who pushed the nation to the left, in the same way that Reagan was a transformational figure who pushed the nation to the right.

Instead, Obama’s only two legacies may turn out to be a failed healthcare plan and a tongue-in-cheek award for being a great recruiter for the cause of libertarianism.

P.S. Historical numbers sometimes change slightly because the government’s data folks massage and re-measure both inflation and spending. Though I confess I’m not sure why the 2013 calculation for Nixon’s primary spending minus bailouts is somewhat different from the 2012 and 2014 numbers. Perhaps I screwed up when copying some of the numbers, which has been known to happen. But since Nixon’s performance isn’t the focus of this post, I’m not going to lose any sleep about the discrepancy.

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Four Great Moments in Foreign Government Stupidity…and some Embarrassing Political Correctness in America

While I mostly focus on bad government policy in the United States, I also think we can learn lessons from what’s happening in other nations.

In some cases, I share positive stories, such as the success of privatized Social Security in Australia, nationwide school choice in Sweden, and genuine spending cuts in the Baltic nations.

In most cases, though, I’m pointing out bad policy.

Some topics deserve special treatment, such as the ongoing horror story of government-run healthcare in the United Kingdom.

In other cases, though, I share one-off stories about government incompetence and stupidity.

*Such as taxpayer-financed friends for mass murderers in Norway.

*Financing a giant “Burger Boy” in the United Kingdom.

*Promoting welfare tourism in the European Union.

*Spending $30 to collect $1 of tax in Germany.

*Regulation of coffee enemas in Japan.

Today, we’re going to share more stories of feckless behavior by foreign politicians and bureaucrats.

From Canada, we learn that the government of Manitoba is micro-managing daycare lunches in such bizarre ways that a family was fined because “grains” weren’t included in their kids’ meals.

Kristin Barkiw of Rossburn, Manitoba, Canada brought two of her children home from Little Cub’s Den daycare when she saw that her kids were sent home with a note. …the message told the mom she had failed to provide a nutritionally balanced lunch for her children, 5-year-old Logan and 3-year-old Natalie.  Not only that, Kristin was fined $10, $5 per child, for missing grains in their lunch of leftover roast beef, carrots, potatoes, an orange and milk. Further, the note said that the daycare staff gave Logan and Natalie Ritz crackers to fulfill the nutritional requirement of grains, which some see as a less than nutritious option. The nutritional regulation for daycare lunches is actually law in the province. The Manitoba government’s Early Learning and Child Care lunch regulations state that daycare programs must ensure children are given a lunch with a meat, a grain, a milk product and two servings of fruit and vegetables and any missing food groups must be supplemented by the care provider.

Heaven forbid that parents actually be in charge of what their kids eat!

You won’t be surprised to learn that France is on the list. It appears the government’s rail system is staffed by numbskulls.

France’s SNCF rail company has ordered 2,000 trains for an expanded regional network that are too wide for many station platforms, entailing costly repairs, the national rail operator said on Tuesday. A spokesman for the RFF national rail operator confirmed the error, first reported by satirical weekly Canard Enchaine in its Wednesday edition. …Construction work has already begun to displace equipment and widen hundreds of train platforms to accommodate the new trains, but hundreds more remain to be fixed, he added. …The RFF only gave the dimensions of platforms built less than 30 years ago, but most of France’s 1,200 platforms were built more than 50 years ago. Repair work has already cost 80 million euros ($110 million).

I guess I’m not surprised by that story since the French once built an aircraft carrier with a flight deck that was too small.

In Sweden, a novelty tourist hotel made of ice will have to install fire alarms.

The Ice Hotel, which is rebuilt every year in northern Sweden out of enormous chunks of ice from the Torne River in Jukkasjärvi, Kiruna, will this year come equipped with fire alarms – and the irony isn’t lost on the staff. “We were a little surprised when we found out,” hotel spokeswoman Beatrice Karlsson told The Local. …While it might sound crazy that a building made of water needs to be equipped with fire alarms, the fact that the hotel is built from scratch every year means it needs to abide by the rules that apply to every new building, rules set by the National Housing Board (Boverket).

If I had to pick a prize from today’s list, this might win the prize. It’s a stunning display of government in action. Though probably not as bad as the time it took a local government in the U.S. two days to notice a dead body in a community swimming pool.

And from Germany, we have a story about massive cost overruns incurred by a pan-European bureaucracy that supposedly helps encourage fiscal discipline.

“Do as we say, not as we do”

It was meant to cost £420m of European taxpayers’ money but the bill for the new headquarters of the European Central Bank (ECB) has more than doubled to £960m and could rise even further. The bank is the key enforcer of austerity measures in the troubled eurozone nations, but appears to be having trouble keeping its own finances in order. The 45-storey glass and steel building, made up of two joined towers, will be more than 600ft tall when it is finished. But it has already been under construction for a decade and is three years behind schedule.

Of course, it goes without saying that cost overruns and delays are par for the course with government.

Just in case anyone thinks I’m picking on foreigners, here’s a story that makes me ashamed to be American. Or, to be more precise, it makes me ashamed that we have some of the world’s most pathetic bureaucrats.

Honors Night at Cole Middle School is no more. Parents got an email from Principal Alexis Meyer over the weekend saying some members of the school community “have long expressed concerns related to the exclusive nature of Honors Night.” The email goes on to say students will be recognized in other ways. …Parents and students are not happy with the change. “How else are they suppose to learn coping skills, not just based on success, but relative failure, it might not be failure, but understand what it takes to achieve high levels,” said parent Joe Kosloski. …“That made me wanna work harder and a lot of other people work harder, so just the fact you can’t work towards it anymore then there is no goal,” said 8th grade student Kaitlyn Kosloski. Changes are also being made to the middle school’s sports awards.

You read correctly. They also won’t recognize athletic success.

I guess everyone gets a participation medal.

Except, of course, we still single out kids who commit horrible crimes in school. Such as having toy army men, eating a pop tart the wrong way, building a motion detector for a school science experiment, or countless other “offenses” that trigger anti-gun lunacy by brainless bureaucrats.

The moral of these stories, both from America and around the world, it that government is not the answer. Unless, of course, you’ve asked a really strange question.

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Mocking Politicians and Government

Regular readers know that I like to mock big government and the hacks who are drawn to politics.

This explains why I’ve always enjoyed cartoons that portray the state as a blundering, often-malicious, overweight nitwit. You can see some of my favorite examples here, here, here, here, here, here, here, here, here, here, and here.

So in that tradition, let’s set aside serious issues today and enjoy some much-deserved satire.

We’ll start with this cartoon from Townhall that captures the essence of government.

Here are a couple of quotes that were forwarded to me by Richard Rahn, who is semi-famous for the Rahn Curve.

I have no idea if the attributions are accurate, but the sentiments sure hit a bullseye.

I know I’ve heard P.J. O’Rourke use the following line, but who knows where it originated.

Speaking of parasites, let’s close with another cartoon from Townhall.

If you like mocking the political class, I have lots of other material for you to enjoy. You can read about how the men and women in DC spend their time screwing us and wasting our money. We also have some examples of what people in Montana, Louisiana, Nevada, and Wyoming think about big-spending politicians.

This little girl has a succinct message for our political masters, here are a couple of good images capturing the relationship between politicians and taxpayers, and here is a somewhat off-color Little Johnny joke. Speaking of risqué humor, here’s a portrayal of a politician and lobbyist interacting.

Returning to G-rated material, you can read about the blind rabbit who finds a politician. And everyone enjoys political satire, as can be found in these excerpts from the always popular Dave Barry.

Let’s not forgot to include this joke by doctors about the crowd in Washington. And last but not least, here’s the motivational motto of the average politician.

Now that we’ve enjoyed lots of jokes, let’s close with a serious point. There are several reasons to be against big government.

You can oppose it because it undermines economic performance.

You can oppose it because it foments corruption.

You can oppose it because it violates the Constitution.

You can oppose it because it is inconsistent with a free society.

You can oppose it because it victimizes innocent people.

But as Mark Steyn wrote, using both humor and sound analysis, you can also oppose it for the simple utilitarian reason that small government is more likely to be competent government.

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Sensible Swiss Voters Crush Proposed Minimum Wage Mandate

I’m beginning to think that people from some nations are smarter and more rational than others.

That may explain, for instance, why voters in Estonia support fiscal restraint while voters in France foolishly think the gravy train can continue forever.

But I’m not making an argument about genetic ability. Instead, what I’m actually starting to wonder is whether some political cultures yield smarter and more rational decisions.

Switzerland is a good example. In a referendum this past weekend, an overwhelming majority of voters rejected a proposal to impose a minimum wage. Here are some excerpts from a BBC report.

Swiss voters have overwhelmingly rejected a proposal to introduce what would have been the highest minimum wage in the world in a referendum. Under the plan, employers would have had to pay workers a minimum 22 Swiss francs (about $25; £15; 18 euros) an hour. …critics argued that it would raise production costs and increase unemployment. The minimum wage proposal was rejected by 76% of voters. Supporters had argued it would “protect equitable pay” but the Swiss Business Federation said it would harm low-paid workers in particular. …unions are angry that Switzerland – one of the richest countries in the world – does not have a minimum pay level while neighbouring France and Germany do.

Every single Swiss Canton voted against the minimum wage.

That means the French-speaking cantons voted no, even though the French-speaking people in France routinely support politicians who favor bad policy.

That means the German-speaking cantons voted no, even though the German-speaking people in Germany routinely support politicians who favor bad policy.

And it means that the Italian-speaking canton voted no, even though the Italian-speaking people in Italy routinely support politicians who favor bad policy.

So why is it that the same people, genetically speaking, make smart decisions in Switzerland and dumb decisions elsewhere?

I don’t have an answer, but here’s some more evidence. As you can see from these passages in a New York Times story, the Swiss have a lot more common sense than their neighbors.

“A fixed salary has never been a good way to fight the problem,” said Johann Schneider-Ammann, the economic minister. “If the initiative had been accepted, it would have led to workplace losses, especially in rural areas where less-qualified people have a harder time finding jobs. The best remedy against poverty is work.” …“Switzerland, especially in popular votes, has never had a tradition of approving state intervention in the labor markets,” said Daniel Kubler, a professor of political science at the University of Zurich. “A majority of Swiss has always thought, and still seems to think, that liberal economic principles are the basis of their model of success.”

Even the non-Swiss in Switzerland are rational. Check out this blurb from a story which appeared before the vote in USA Today.

…some who would be eligible for the higher wage worry that it may do more harm than good. Luisa Almeida is an immigrant from Portugal who works in Switzerland as a housekeeper and nanny. Almeida’s earnings of $3,250 a month are below the proposed minimum wage but still much more than she’d make in Portugal. Since she is not a Swiss citizen, she cannot vote but if she could, “I would vote ‘no’,” she says. “If my employer had to pay me more money, he wouldn’t be able to keep me on and I’d lose the job.”

Heck, I’m wondering if Ms. Almeida would be willing to come to Washington and educate Barack Obama. She obviously has enough smarts to figure out the indirect negative impact of government intervention, so her counsel would be very valuable in DC.

But if Ms. Almeida isn’t available, we have another foreigner who already has provided advice on the issue of minimum wages. Here’s Orphe Divougny, originally from Gabon, with a common-sense explanation of why it doesn’t make sense to hurt low-skilled workers.

By the way, this isn’t the first time the Swiss have demonstrated common sense when asked to vote of key economic policy issues.

In 2001, 85 percent of voters approved a plan to cap the growth of government spending.

In 2010, 59 percent of voters rejected an Obama-style class-warfare tax plan.

No wonder there are many reasons why Switzerland ranks above the United States.

P.S. I wrote earlier this month about Pfizer’s potential merger that would allow the company to reduce its onerous tax burden to the IRS by redomiciling in the United Kingdom.

Well, Jeff Jacoby of the Boston Globe has weighed in on the issue and I can’t resist sharing this excerpt.

…the outrage isn’t the wish of an American corporation to lower its tax bill. It is a US tax code so punitive and counterproductive that it can drive a company like Pfizer, which was launched in Brooklyn in 1849, to turn itself into a foreign corporation. The United States has the highest corporate tax rate in the developed world. That puts American companies at a serious competitive disadvantage, since their rivals elsewhere are able to channel more of their profits into new investment, hiring, and productivity. What’s worse, ours is the only country that enforces a system of “worldwide” taxation, which means that American firms have to pay tax to the IRS not only on income earned in the United States but on their foreign earnings as well. Other nations content themselves with “territorial” taxation — they only tax income earned within their national borders. US corporations like Pfizer that have significant earnings overseas are thus taxed on those earnings twice: first by the government of the country where the money was earned, and then by the IRS.

Amen, amen, and amen.

Our tax system imposes a very punitive corporate tax rate.

It then augments the damage with worldwide taxation.

And the system is riddled with onerous rules that cause America to rank a lowly 94th out of 100 nations for business “tax attractiveness.”

In other words, when greedy politicians complain about Pfizer’s possible inversion, it’s a classic case of blaming the victim.

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Obamacare Could Cause Two Million additional Adults to Leave Labor Force and Become Trapped in Government Dependency

What’s the worst economic development during Obama’s reign?

Some would say it’s the higher tax burden.

Some would say it’s the wasteful faux stimulus.

Others would say it’s the fiscal nightmare of Obamacare.

And others would say it’s the loss of millions of workers from the labor force.

I suppose there’s no objective way to pick the most ill-conceived policy, but if you think the biggest problem is either Obamacare or falling labor force participation, then I have some very grim news that will confirm your fears.

According to new research, it appears Obamacare will drive many more people from the labor force. More specifically, the Medicaid expansion will alter – in a very destructive way – the tradeoff between labor and leisure.

Researchers Laura Dague, Thomas DeLeire, and Lindsay Leininger argue in a National Bureau of Economic Research working paper that Medicaid enrollment will lead to significant and lasting reductions in employment among childless adults. …Dague and her colleagues conclude that if the Medicaid expansion enrolls about 21 million additional adults, anywhere from 511,000 to 2.2 million fewer people will be employed. Furthermore, they argue that the Medicaid expansion will knock almost a full point off of today’s labor force participation rate — or share of the civilian population that is working — a measure of economic health that is already at its lowest point since 1977. …This research provides strong evidence for the contention that enrolling in Medicaid traps people in poverty and makes it harder for them to make their way into the middle class. Furthermore, it links the Medicaid expansion to the weakening of our nation’s economy.

By way of background, Medicaid is the federal government’s healthcare entitlement for (supposedly) poor people, while Medicare is the entitlement for old people. And, as part of Obamacare, the eligibility rules for Medicaid were dramatically weakened.

But the new research cited above shows that if you give people “free” health care, that makes them less likely to work.

Particularly when you combine that freebie with food stamps, housing subsidies, welfare, and other handouts.

That’s obviously bad news for taxpayers, who bear the direct cost of a bloated welfare state.

But it’s also bad for the less fortunate. They get trapped in a web of dependency, both because handouts reduce the incentive to work (humorously depicted here and here), band also because they face very high implicit marginal tax rates if they actually try to escape government dependency.

But Obama and other leftists probably see this as a feature, not a bug.

After all, those who are lured into being dependent on government presumably have an incentive to vote for those who give them the most goodies.

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Using the 1st Amendment to Protect the 2nd Amendment

I’ve explained on several occasions (here, here, and here) that we can be optimistic about the fight to preserve our rights to keep and bear arms.

Simply stated, politicians are increasingly scared to go after gun owners and we keep seeing more and more evidence that Second Amendment freedoms make society safer.

And courts are beginning to do a better job of upholding the Constitution. A recent example comes from Arizona, where the government was trying to simultaneously undermine both the First Amendment and Second Amendment.

The latest example comes from Arizona, where a pro-gun group won a legal fight to post notices about firearms training. A controversial gun-safety ad campaign is about to return to Phoenix, after the city lost its attempt to censor the project sponsored by a gun-safety training group, TrainMeAZ, LLC. The Goldwater Institute’s Scharf-Norton Center for Constitutional Litigation, which represented TrainMeAZ, LLC, was granted summary judgment for its client Thursday by the Arizona Court of Appeals, preventing Phoenix from blocking the ads. …Officials at the time told Alan Korwin, owner of TrainMeAZ, that the message was too controversial and had garnered a complaint, and so had to be removed or changed. …“Gun-rights advocates nationwide are fond of saying the Second Amendment protects the First Amendment, which is totally true,” Korwin said. “In this case, however, it’s the other way around — free speech and the First Amendment have protected our right to keep and bear arms, and in particular, our right to train our selves and our precious families in real gun safety.”

This is welcome news, particularly since the court ruled unanimously against the government’s attempt to censor.

P.S. Back in 2012, I shared an IQ test for criminals and liberals. The test had only one question, which was whether criminals would be more likely to rob the house of a gun owner or a anti-gun activist.

Here’s a humorous sign sent to me by the Princess of the Levant. I hope it’s photo-shopped, simply because I like to think no homeowner is dumb enough to invite burglars.

 

And if you like this kind of humor, here are more examples.

P.P.S. While there have been some positive developments in the fight for firearms freedom, the news isn’t all positive. We continue to get jaw-dropping examples of anti-gun political correctness from government schools.

P.P.P.S. On a totally separate topic, I’ve already created a Moocher Hall of Fame, but I think I need to also set up a Bureaucrat Hall of Fame.

I already have a list of potential members, but there’s an overpaid drone at the Environmental Protection Agency who surely deserves to be one of the charter members.

Just how much porn does a person have to watch on their computer at work to get fired from the Environmental Protection Agency? Apparently two to six hours a day will let you hold onto your job….the employee confessed to spending, on average, between two and six hours per day viewing pornography while at work. Apparently, the employee, whose identity has not been revealed, earns about $120,000 a year and has still not been fired.

Though perhaps we should be applauding this bureaucrat. After all, if you look at some of the things EPA bureaucrats do when they’re “working” (see here, here, here, and here), the country may be safer if they spend more time watching porn.

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From No Government to All Government: How Do You Score on the Circle Test?

It’s not as sophisticated as Professor Bryan Caplan’s Purity Quiz and it doesn’t have the simple elegance of the World’s Smallest Political Quiz, but at least you don’t need to answer any questions to see where you stand in this Venn Diagram that my intern shared with me.

We don’t know who created it, but it’s a clever shortcut to help people to identify their philosophical alignment based on what they think are the proper roles of government.

I’ll do a bit of nit-picking later in this column, but my immediate observation is that I belong in the “Minarchism” camp but that I’m willing to settle for “Classical Liberalism.”

Now it’s time to quibble.

1. There’s no scope for federalism in this Venn diagram, and that may affect the answers of some people. I am completely against the notion that Washington should have any role in our education system, for instance, but I wouldn’t lose much sleep if state and local governments operated school choice systems. Does this mean I’m in the “modern conservatism” camp?

2. I’m also not clear why the person who created the Diagram decided that buses and subways are part of “classical liberalism.” I don’t consider transportation to be a core function of the state. Though this may be another issue where federalism plays a role. I’m not going to get overly agitated if the taxpayers of New York City want to tax themselves (and only themselves) to operate mass transit. Just don’t ask me to pay for it.

3. For reasons I’ve explained before, there’s a difference between socialism (government ownership of the means of production) and redistributionism (government taxing some to give things to others). So at the risk of being pedantic, I would reclassify the big red circle as “total statism.”

But let’s not make the perfect the enemy of the good. This Venn Diagram/Circle Test is very well done.

P.S. The worst political quiz I ever took was the one that pegged me as a “moderate” with “few strong opinions.”

P.P.S. Reason’s political candidate quiz, by contrast, produced a much more logical conclusion.

P.P.P.S. I’ve written a few times about the politicized corruption at the IRS. Building on recent revelations, Kevin Williamson has a superb column at National Review on this topic.

The first excerpt notes that the IRS engaged in an ideological witch hunt.

…the evidence, now conclusive and irrefutable, that the Internal Revenue Service, under the direction of senior leaders affiliated with the Democratic party, was used as a political weapon from at least 2010 through the 2012 election. …the IRS targeted these conservative groups categorically, regardless of whether there was any evidence that they were not in compliance with the relevant regulations. Simply having the words “tea party,” “patriot,” or “9/12”…in the name was enough. Also targeted were groups dedicated to issues such as taxes, spending, debt, and, perhaps most worrisome, those that were simply “critical of the how the country is being run.” Organizations also were targeted based on the identity of their donors. Their applications were delayed, their managements harassed, and the IRS demanded that they answer wildly inappropriate questions, such as the content of their prayers.

Our second excerpt explains that the witch hunt was directed by partisans in Washington.

…the direction came from Washington and was, in the words of the agency’s own e-mails, “coordinated with” a senior manager there, Rob Choi, director of rulings and agreements. This began at the behest of Democratic officeholders, including Senator Carl Levin of Michigan, who requested that the IRS disclose to him information about tea-party groups that it would have been illegal for the IRS to disclose.

In our final excerpt, Kevin explains why this is – or at least should be – very troubling for anyone who thinks America should have the rule of law.

The IRS is not just a revenue agency — it is a law-enforcement agency, a police agency with far greater powers of investigation and coercion that any normal police force. Its actions in this matter are not only inappropriate — they are illegal. Using government resources for political ends is a serious crime, as is conspiring to mislead investigators about those crimes. …The most important question that must be answered in this matter does not involve the misbehavior of IRS officials and Democratic officeholders, though those are important. Nor is it the question of free speech, vital and fundamental as that is. The question here is nothing less than the legitimacy of the United States government. When law-enforcement agencies and federal regulators with extraordinary coercive powers are subordinated to political interests rather than their official obligations — to the Party rather than to the law — then the law itself becomes meaningless, and the delicate constitutional order we have enjoyed for more than two centuries is reduced to a brutal might-makes-right proposition. …The IRS investigation is no mere partisan scandal, but a moral challenge for the men and women who compose the government of this country.

Amen.

Unconstrained government enables corruption and oppression.

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No More Stealing by Government? A Long-Overdue Attack on Asset Forfeiture

Since I’m a public finance economist, I realize I’m supposed to focus on big-picture issues such as tax reform and entitlement reform. And I do beat those issues to death, so I obviously care about controlling the size and power of government.

But I like to think I’m also a decent human being. And this is why I get even more agitated when politicians and bureaucrats engage in thuggish behavior against comparatively powerless citizens.

Some of the worst examples of government thuggery are the result of “asset forfeiture,” which happens when governments confiscate the property of people who haven’t been convicted of any crime. Heck, sometimes they’re not even charged with any crime.

*Such as when the government wanted to steal someone’s truck because a different person was arrested for drunk driving.

*Such as when the government tried to steal the bond money a family has collected to bail out a relative.

*Such as when the government seized nearly $400,000 of a business owner’s money because it was in the possession of an armored car company suspected of wrongdoing.

*Such as when the government sought to confiscate an office building from the owner because a tenant was legally selling medical marijuana.

*Such as when the government killed a man as part of an anti-gambling investigation undertaken in hopes of using asset forfeiture to steal other people’s cash.

But we do have a bit of good news. All these horror stories seem to be causing a backlash.

Fox News has a very revealing article on how this system is under assault. The story begins by explaining how asset forfeiture is an open invitation for abuse and grossly inconsistent with the Constitution.

Civil forfeiture is when police and prosecutors seize property, cars or cash from someone they suspect of wrongdoing. …authorities don’t have to prove guilt, file charges or obtain a conviction before seizing private property. Critics say it is a process ripe for abuse, and one which leaves citizens little means of fighting back. “You breed a culture of ‘take first, ask questions later,’” Larry Salzman, an attorney with the Institute for Justice, told FoxNews.com. “It’s thuggish behavior.” …civil forfeitures represent a dangerous area of the U.S. justice system where, by law, a person is supposed to be presumed innocent until proven guilty and not the other way around.

The report from Fox cites a couple of reasons why asset forfeiture is misguided. One major problem is that it gives cops a budgetary incentive to steal.

In Tennessee, local law enforcement agencies get to keep 100 percent of all property seized through civil forfeiture – an incentive some say can tempt police to go after property for the wrong reasons.

Fortunately, people are now fighting this horrible procedure. The story explains that a former law enforcement official who is now a state lawmaker, Barrett Rich, is trying to reform Tennessee’s awful bill.

And Minnesota actually has eliminated this odious tactic. Here are some excerpts from a Forbes column.

In a big win for property rights and due process, Minnesota Gov. Mark Dayton signed a bill yesterday to curb an abusive—and little known—police practice called civil forfeiture. Unlike criminal forfeiture, under civil forfeiture someone does not have to be convicted of a crime, or even charged with one, to permanently lose his or her cash, car or home. …Now the government can only take property if it obtains a criminal conviction or its equivalent, like if a property owner pleads guilty to a crime or becomes an informant. The bill also shifts the burden of proof onto the government, where it rightfully belongs.

Wyoming’s state legislature also is considering reform, so there are positive developments in many different states.

For more information, click here for a very good introductory video about civil asset forfeiture.

If you like videos, click here for a horrifying video about the government stealing $17,000 from an innocent man.

And here’s another video, this one about the government stealing money from a family grocery store.

Last but not least, if you want to get more upset, here are some additional examples of non-forfeiture related government thuggery.

• A story of vicious IRS persecution.
• A woman jailed overnight because she let her kids play outside.
• Threatening to send a woman to jail because someone whistled at a whale.
• A video about how the EPA tried – and fortunately failed – to destroy a family.
• A story about the Justice Department’s discriminatory attack on a hapless homeowner.
• The government treating child molesters more leniently than people who accidentally omit irrelevant info from forms.
• Bureaucrats in Indiana conducting a spite-motivated legal attack against a family that saved a baby deer.
• A local government in Virginia unfairly trying to destroy an organic farmer.
• Statists must dislike organic farms because Texas bureaucrats conducted a paramilitary raid on one of them.
• Park Service bureaucrats threatening a business if it allowed tourists to use bathroom facilities.
• Last but not least, don’t forget all the nutty – and often thuggish – examples of anti-gun political correctness in schools.

Gee, it’s almost enough to make a person a libertarian!

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Copy Sweden or Greece? Learning from the Global Economic Experiment

While theory is important, I suspect most people are more likely to be convinced by real-world evidence.

This is why I frequently compare nations when arguing that free markets and small government are the best way of generating prosperity.

Simply stated, I want people to understand that economic liberty produces faster growth, and that faster growth can make a huge difference, particularly when looking at several decades of data.

Most recently, I showed how Poland is out-pacing Ukraine.

I’ve compared South Korea and North Korea.

The data for Chile, Argentina, and Venezuela is very powerful.

I’ve shown how Singapore has eclipsed Jamaica.

Hong Kong has caught up with the United States.

After looking at these examples, you’ll understand why I’m very happy to share this new video from one of Sweden’s free-market think tanks. It looks at how nations with more economic freedom get better results.

And I particularly like the comparisons of nations that are moving in the right direction versus those that are degenerating toward more statism.

Another good part of the video is that it shows how the European Union could have a very free economy if all nations simply copied the European nation with the best policy in the five major categories of economic liberty (rule of law, fiscal policy, trade, regulation, and monetary policy).

And it turns out that Denmark is the best in three of the categories (rule of law, trade, and regulation), which is why that nation manages to remain very competitive even though it does very poorly in fiscal policy.

The moral of the story is that trendlines matter. Better policy leads to faster growth, and sustained faster growth is immensely important to long-run living standards.

This appreciation for trendlines is also why I’m so fixated on controlling the long-run growth of government spending.

Indeed, my Golden Rule is a combination of two trend lines. If government spending grows at a slow rate and the private economy grows at a rapid rate, that’s a wonderful combination that could cure the fiscal nightmare of any nation. Even France and Greece.

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Free Markets vs. Racism

Although I play basketball (poorly), I’m not a fan of the NBA. As such, I don’t pretend to have much interest in the Donald Sterling controversy.

Some people have wondered whether his rights to free speech are being infringed, but I disagree. He obviously has the right to say whatever he wants, even if he makes himself look like an idiot.

But the National Basketball Association is an organization that has certain rules, and it presumably has the right – by virtue of the contract among team owners – to impose disciplinary measures.

In other words, Sterling has free speech, but that doesn’t mean he is free from consequences if he says something dumb. Just as I have free speech at the Cato Institute, but also would suffer consequences if I said something offensive about a particular group (or, for that matter, if I started supporting tax hikes, bigger government, and statism).

And that’s a good thing. As a libertarian, I don’t want the government policing speech, but there’s nothing wrong with private sector penalties on racists.

And that’s the topic of today’s column. The free market is a powerful and under-appreciated tool for punishing racism and rewarding color-blind behavior.

Here’s some of what Walter Williams wrote on the topic for the Washington Examiner. He starts by pointing out that Sterling certainly wasn’t racist when making decisions about what basketball players to employ.

Though Sterling might be a racist, there’s an important “so what?” Does he act in ways commonly attributed to racists? Let’s look at his employment policy. This season, Sterling paid his top three players salaries totaling over $46 million. His 20-person roster payroll totaled over $73 million. Here are a couple of questions for you: What race are the players whom racist Sterling paid the highest salaries? What race dominated the 20-man roster? The fact of business is that Sterling’s highest-paid players are black, and 85 percent of Clippers players are black.

Walter draws the obvious conclusions, and he cites the path-breaking research of the late Gary Becker on the economics of discrimination.

How does one explain this? …Let’s use a bit of simple economics… First, professional basketball is featured by considerable market competition. …There’s open competition in joining both high-school and college teams. You just sign up for tryouts in high school and get noticed by college scouts. Then there’s considerable competition among the NBA teams in the acquisition of the best college players. Minorities and less preferred people always do better when there are open markets instead of regulated markets. Recently deceased Nobel Prize-winning economist Gary Becker pointed this phenomenon out some years ago in his path-breaking study “The Economics of Discrimination.” Many people think that it takes government to eliminate racial discrimination, but economic theory predicts the opposite. Market competition imposes inescapable profit penalties on for-profit enterprises when they make employment decisions on any basis other than worker productivity.

In other words, the free market pushes people to make decisions on the basis of ability rather than race.

The takeaway from the Sterling affair is that we should mount not a moral crusade but an economic liberty crusade. In other words, eliminate union restrictions, wage controls, occupational and business licensure, and other anti-free market restrictions. Make opportunity depend on one’s productivity.

And as you can imagine, Walter speaks with authority on these issues. And he’s right that the free market is a weapon against racism.

By contrast, when government gets involved with race issues, you often get nonsensical results, such as EEOC penalties against companies trying to weed out criminals, or legal harassment of financial institutions for trying to make sensible loans.

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The Economics of Creative Destruction, Part I

In the battle of ideas, supporters of capitalism and economic liberty sometimes face an uphill climb because of a perception of heartlessness.

When companies get in trouble, we’re the mean people who don’t want to give bailouts.

When workers are laid off, we’re the Scrooges who don’t want perpetual unemployment checks.

And when some workers aren’t earning much money, we’re the scoundrels who don’t want to boost the minimum wage.

Our “problem” is that we care about good results rather than good intentions. Motivated by the wisdom of Frederic Bastiat, we look at indirect effects and long-run consequences. And this is why we routinely reject statist proposals.

The challenge, of course, is educating others so that they understand that small government and free markets are the best way of providing more opportunity and better lives – particularly for those on the lower rungs of the economic ladder.

This is why I was very happy to see this new video from Learn Liberty. It basically explains the process of “creative destruction” to show how progress and prosperity are undermined when politicians try to “protect jobs.”

I also like the video because it makes the point that our living standards are the result of how much we produce, not the number of jobs.

In other words, we don’t want people employed for the sake of being employed. We want them doing things that add value to the economy.

That’s one of the reasons why many government jobs are wasteful. People who could be creating wealth are instead imposing costs.

But let’s shift back to the topic of “creative destruction.” In my speeches, I’ll sometimes make the point that progress can be painful. Consider these examples:

The invention of the light bulb was very bad news for the candle making sector.

The invention of the automobile was a grim development for the horse and buggy industry.

The invention of the personal computer devastated typewriter companies.

In every case, these inventions made society much richer, but they also caused the destruction of thousands of jobs and bankrupted many firms. These were very real tragedies for certain people.

With the benefit of hindsight, however, we know that it was good that this “creative destruction” took place. We even know that the descendents of the candle makers, buggy builders, and typewriter producers are better off because our economy is so much more productive.

Just as the video explains that we’re much better off because 90 percent of the population no longer has to work on farms.

Yet we’re still faced with the paradox that supporters of capitalism are called heartless even though we’re the ones that support policies that create wealth and lift people from poverty.

P.S. On a separate topic, I criticized the World Bank in 2012 for putting together a “tax effort” scorecard that gave nations higher scores for heavier tax burdens.

Well, international bureaucracies must be in love with higher taxes (probably because they’re exempt from having to pay tax) and you won’t be surprised to learn that the International Monetary Fund has now published a similar report.

The nation that gets the highest score (i.e., the nation with the worst tax system) is Italy, with an average of almost 99 percent, though France (97 percent) is probably very envious and I wouldn’t be surprised if they asked for a recount.

The nation with the lowest “tax effort” is Guinea-Bissau, with a “failing” grade of about 32. I doubt this means they have a good tax system. I suspect it simply means nobody complies and the government doesn’t expend much “effort” on trying to collect.

Among developed nations, Singapore got the lowest score, with an average of 38. Which means, of course, that they have a very good tax system.

Though there were no grades for places such as Hong Kong, Liechtenstein, Monaco, and the Cayman Islands, so the report is not complete.

The United States, for what it’s worth, got a 70. So we’re not nearly as bad as countries such as France and Italy. But we’re much more onerous that Singapore.

We also have a higher “tax effort” than officially communist nations such as China and Vietnam. Gee, I guess that means we can be proud of the IRS, huh?

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A Taxapalooza: More Taxpayer-Subsidized Agitation for Class Warfare by the OECD

I’ve already written about how the Paris-based Organization for Economic Cooperation and Development (OECD), which is heavily subsidized by American taxpayers, is advocating for bigger government.

I’m especially irked that the OECD has gotten in bed with nutjobs from the Occupy movement and also joined forces with the union bosses to push for statist policies.

So I guess I shouldn’t be surprised that the bureaucrats are now acting as cheerleaders for Thomas Piketty and class-warfare tax policy.

This is evident in a new report on “Top Incomes and Taxation in OECD Countries.” The bias is evident on the very first page, with the report asserting that “the very richest in society are accumulating an ever-increasing proportion of national incomes.” Yet this language inaccurately implies the economic pie is fixed in size and it is rather revealing that it uses “accumulating” rather than “earning.”

But that’s trivial compared to the assertion, also on the opening page, that the goal is to “identify concrete policy options to ensure a fairer distribution of resources.” In other words, the focus is on re-slicing the pie, not making it bigger.

But the problem is not merely bad rhetoric. The report concludes with a long list of potential tax hikes, all of which supposedly are justified because “historically high levels and the sustained rise in the share of top income recipients in total income are often taken as signs that top earners’ “capacity to pay” tax has increased. Furthermore, this coincides with a period where public finances are tight and governments are seeking new sources of revenue.”

I guess we shouldn’t be surprised that a bureaucracy representing governments has a list of policies designed to increase government power. But that doesn’t change the fact that class-warfare policies are destructive.

The OECD lists a smorgasbord of tax hikes, beginning with higher top tax rates.

A most direct way to ensure that top income earners pay a higher share of taxes is to raise marginal tax rates on income as well as other taxes which affect them. While there may be some concerns that such measures may not be as effective as intended with regard to raising tax revenues, some recent analysis suggests that there is still some scope to increase top tax rates to maximise tax revenues.

I supposed I should be happy that the bureaucrats are at least acknowledging that higher tax rates may not be “effective” because of Laffer Curve reasons, but it’s nonetheless disturbing that they think the goal should be revenue maximization.

That implies imposing a lot of economic damage to collect very small amounts of revenue. As Professor Martin Feldstein observed:

Why look for the rate that maximizes revenue? As the tax rate rises, the “deadweight loss” (real loss to the economy rises) so as the rate gets close to maximizing revenue the loss to the economy exceeds the gain in revenue…. I dislike budget deficits as much as anyone else. But would I really want to give up say $1 billion of GDP in order to reduce the deficit by $100 million? No. National income is a goal in itself. That is what drives consumption and our standard of living.

Looking specifically at an Obama proposal to boost payroll tax rates, Lawrence Lindsey admitted that the government would get more money, but at very high cost.

We should also keep in mind that the economic well-being of the country is not measured by how much taxes the government can collect, or even the size of the deficit. Rather, it is measured by the country’s productive capacity. …It is shocking to think that we have a presidential candidate who would make the private sector $5 poorer in order to make the government $1 richer.

And here’s what I wrote about some research from the European Central Bank.

…this study implies that the government would reduce private-sector taxable income by about $20 for every $1 of new tax revenue. Does that seem like good public policy? Ask yourself what sort of politicians are willing to destroy so much private sector output to get their greedy paws on a bit more revenue.

Here’s the remaining list of suggested tax hikes, followed by my parenthetical observations.

• Abolishing or scaling back a wide range of those tax deductions, credits and exemptions which benefit high income recipients disproportionately; (I want to get rid of loopholes, assuming we use the right definition, but only if the money is used to finance lower tax rates).

• Taxing as ordinary income all remuneration, including fringe benefits, carried interest arrangements and stock options; (I want to tax fringe benefits, but only as part of good tax reform and good health reform, not to give politicians more money).

• Considering shifting the tax mix towards a greater reliance on recurrent taxes on immovable property; (I already don’t like Fairfax County raping me for property taxes, so I sure don’t want the federal government doing the same thing).

• Reviewing other forms of wealth taxes such as inheritance taxes; (On a per-dollar-collected basis, a wealth tax might be the most destructive levy).

• Examining ways to harmonise capital and labour income taxation; (This means increased double taxation of income that is saved and invested).

• Increasing transparency and international cooperation on tax rules to minimise “treaty shopping” (when high-income individuals and companies structure their finances to take account of favourable tax provisions in different countries) and tax optimisation; (Is anyone shocked that the OECD is endorsing its own campaign to impose higher tax burdens on multinational companies?).

• Broadening the tax base of the income tax, so as to reduce avoidance opportunities and thereby the elasticity of taxable income; (Perhaps I’m missing something, but how is this different from the aforementioned point about credits, deductions, and exemptions?).

• Developing policies to improve transparency and tax compliance, including continued support of the international efforts, led by the OECD, to ensure the automatic exchange of information between tax authorities. (In other words, undermine tax competition to enable and facilitate higher tax burdens).

By the way, there’s one group that doesn’t have to worry very much about all these proposed tax hikes. OECD bureaucrats get tax-free salaries, which may explain why they seem oblivious to the real-world impact of their proposed policies.

Interestingly, the report inadvertently acknowledges that lower tax rates are good for capital formation and tax compliance.

The decline in top rates of income tax leads to a reduction in the tax burden carried by high earners and thus increases their post-tax income. Higher disposable income makes it easier for individuals to save and accumulate capital which eventually increases incomes further. Reducing top rates of income tax reduces the incentive to engage in tax planning to avoid or evade tax, so leads to more income being declared for income tax purposes.

Though this accidental bit of insight certainly didn’t have any impact on the OECD’s policy recommendations.

P.S. I periodically cite data from the IMF, BIS, and OECD to show that rising burdens of government spending are sewing the seeds of fiscal crisis in most industrialized nations.

We now have updated numbers from the OECD. The good news, so to speak, that America’s need for “budgetary consolidation” appears to have dropped from about 9.5 percent of GDP to 9 percent of GDP. But we’re still one of nations with the biggest long-run challenge, which is why I’m a broken record on the need for real entitlement reform.

The numbers for Greece and Portugal have gotten much worse in the past couple of years. I’m tempted to say that this is evidence that all the tax increases in those two nations have backfired. But I suspect it’s more a function of the OECD statistics people being wildly off base a couple of years ago.

P.P.S. If you were asked about the policies needed to promote more growth in Malaysia and Indonesia, you would probably suggest copying the high-growth economies in the region such as Hong Kong and Singapore.

But if you were an OECD bureaucrat, you would instead put out a report about “Rising tax revenues: A key to economic development in emerging Asian countries.”

And you would make this absurd assertion.

Increased domestic resource mobilisation is widely accepted as crucial for countries to successfully meet the challenges of development and achieve higher living standards for their people. Additional tax revenues enable governments to simultaneously strengthen infrastructure development, enhance the quality of education and promote social cohesion.

But don’t be surprised. The OECD made the exact same recommendation for higher taxes to finance bigger government when looking at Latin American economies. So at least they’re consistent.

Too bad the OECD bureaucrats are so in love with higher taxes that they never suggest the policies that enabled Western Europe to become rich.

P.P.P.S. The OECD report focuses on “taxing the rich,” but always remember that politicians use that as a strategic gimmick in order to justify higher taxes on the rest of us.

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Like Father, Like Son: Thanks in Part to a Disastrous Tax-Hike Deal, the First President Bush Was a Statist

The establishment fervently believes that more money should come to Washington so that politicians have greater ability to buy votes.

That’s why statists from both parties are so viscerally hostile to Grover Norquist’s no-tax-hike pledge. They view it as an obstacle to bigger government.

And it also explains why politicians who raise taxes are showered with praise, especially when they are Republicans who break their promises and betray taxpayers.

Which is why President George H.W. Bush was just awarded a “profiles in courage” award for raising taxes and breaking his read-my-lips promise by the crowd at Harvard’s Kennedy School.

Here’s some of what was reported by the Dallas News.

Former President George H.W. Bush was honored Sunday with a Kennedy “courage” award for agreeing to raise taxes to confront a spiraling deficit, jeopardizing his presidency that ended after just one term. …The budget deal enacted “responsible and desperately needed reforms” at the expense of Bush’s popularity and his chances for re-election, Schlossberg said. “America’s gain was President Bush’s loss, and his decision to put country above party and political prospects makes him an example of a modern profile in courage that is all too rare,” he said.

I’m not surprised, by the way, that Mr. Schlossberg praised Bush for selling out taxpayers.

But I am disappointed that the Dallas News reporter demonstrated either incompetency or bias by saying that Bush raised taxes to “confront a spiraling deficit.”

If you look at the Congressional Budget Office forecast from early 1989, you’ll see that deficits were on a downward path.

In other words, Bush had the good fortune of inheriting a reasonably strong fiscal situation from President Reagan.

Spending was growing slower than the private economy, thanks in part to the Gramm-Rudman law that indirectly limited the growth of spending.

So Bush 41 simply had to maintain Reagan’s policies to achieve success.

But instead he raised taxes. That got him an award from the Kennedy School this year…and it resulted in bigger government in the early 1990s.

Writing for National Review, Deroy Murdock is justly irked that President George H.W. Bush was given an award for doing the wrong thing.

…former president George Herbert Walker Bush received the Profile in Courage Award from the John F. Kennedy Library Foundation. What intrepid achievement merited this emolument? Believe it or not, breaking his word to the American people and hiking taxes by $137 billion in 1990.  …Bush’s tax hike was a political betrayal for Republicans and other voters who believed him when he pledged to the 1988 GOP National Convention: “Read my lips: No new taxes.” …Bush violated his promise and hiked the top tax rate from 28 percent to 31. Bush also imposed a luxury tax on yachts and other items. This led to a plunge in domestic boat sales and huge job losses among carpenters, painters, and others in the yacht-manufacturing industry.

The worst result, though, was that the tax hike enabled and facilitated more government spending.

Here are the numbers I calculated a couple of years ago. If you look at total spending (other than net interest and bailouts), you see that Bush 41 allowed inflation-adjusted spending to grow more than twice as fast as it did under Reagan.

And if you remove defense spending from the equation, you see that Bush 41’s bad record was largely the result of huge and counterproductive increases in domestic spending.

With such a bad performance, you won’t be surprised to learn that market-oriented fiscal experts do not remember the Bush years fondly.

Deroy cites some examples, including a quote from yours truly.

“Bush’s tax hike repealed the real spending restraint of Gramm-Rudman and imposed a big tax hike that facilitated a larger burden of government spending,” says Cato Institute scholar Dan Mitchell. “No wonder the statists . . . are applauding.” …“Of course the Left wants to celebrate Bush’s broken tax promise,” Moore says. ”It is what cost Republicans the White House and elected Bill Clinton…” says Grover Norquist, president of Americans for Tax Reform. “This is an award for stupidly throwing away the presidency to the Democrats…” Norquist further laments: “You never see a Democrat get a ‘courage’ award for saying ‘No’ to the spending-interest lobby.”

The moral of the story is that Washington tax-hike deals are always a mechanism for bigger government.

And President George H.W. Bush should be remembered for being a President who made Washington happy by making America less prosperous. As I wrote last year, “He increased spending, raised tax rates, and imposed costly new regulations.”

Hmmm…an establishment Republican President who increased the burden of government. If that sounds familiar, just remember the old saying, “Like father, like son.”

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Repeal the Gas Tax…and Get Rid of the Department of Transportation

More than three years ago, I wrote that the Department of Transportation should be dismantled for the simple reason that we’ll get better roads at lower cost with the federalist approach of returning responsibility to state and local governments.

I echoed those sentiments in this CNBC interview.

Since there’s only an opportunity to exchange soundbites in these interviews, let me elaborate on some of the reasons why transportation should be a state and local responsibility.

1. Washington involvement is a recipe for pork and corruption. Lawmakers in Congress – including Republicans – get on the Transportation Committees precisely because they can buy votes and raise campaign cash by diverting taxpayer money to friends and cronies.

2. Washington involvement in transportation is just the tip of the iceberg. As I said in the interview, the federal budget is mostly a scam where endless streams of money are shifted back and forth in leaky buckets. This scam is great for insiders and bad news for taxpayers.

3. Washington involvement necessarily means another layer of costly bureaucracy. And this is not a trivial issues since the Department of Transportation is infamous for overpaid bureaucrats.

4. Washington involvement gives state and local politicians an excuse to duck responsibility for low-quality infrastructure. Why make adult decisions, after all, when you can shift the blame to DC for not providing enough handouts.

While I think I made some decent points in the interview, I should have addressed the assertion that our infrastructure is falling apart. My colleague at the Cato Institute, Chris Edwards, effectively dealt with this scare tactic in his recent Congressional testimony.

I also should have pointed out that a big chunk of the gas tax is diverted to boondoggle mass transit projects.

Last but not least, I’m disappointed that I failed to connect some very important dots. Gov. Rendell and the CNBC host both fretted that the current system isn’t producing a desirable outcome, but they’re the ones advocating for a continuation of the status quo! Heck, they want even more of the system that they admit doesn’t work.

Sigh.

P.S. While I obviously want to get rid of the Department of Transportation, it’s not at the top of my list for the most wasteful and counterproductive federal bureaucracy.

P.P.S. On a completely separate topic, I can’t resist sharing this Ramirez cartoon.

And since we’re making fun of our Statist-in-Chief, here’s some satire about the award Obama received from Steven Spielberg.

The teleprompters are a nice touch, reminiscent of some very amusing jokes here, here, here, and here.

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The Slow-Motion Train Wreck of Entitlement Programs

The Census Bureau just released a report on America’s aging population.

The big takeaway is that our population will be getting much older between now and 2050.

And since I’m a baby boomer, I very much like the fact that we’re expected to live longer.

But as a public finance economist, I’m not nearly as happy.

As I explain in this interview with the Wall Street Journal’s Digital Network (and as confirmed by BIS, OECD, and IMF data), the United States is going to get deluged by a tsunami of entitlement spending.

I mentioned that it’s important to focus on the ratio of workers to retirees. This “dependency ratio” matters because economic output largely is a function of an economy’s working-age population.

To cite my famous cartoons, you need a sufficient number of people pulling the wagon to support those riding in the wagon.

Here’s a chart from the Census report to help you understand the magnitude of the problem. As you can see, both in the United States and other nations, the increase in the dependency ratio is almost entirely the result of aging populations.

This is why I said that we face a slow-motion train wreck because of poorly designed entitlement programs.

But the good news is that there is time to reform those programs and avert a crisis.

Which explains why I probably sound like a broken record about the need for genuine entitlement reform.

In a column citing the new private pension system in the Faroe Islands, I gave the arguments for modernizing Social Security with personal retirement accounts.

But we also need to deal with the health entitlements.

Here’s how to fix Medicare.

And here’s how to fix Medicaid.

By the way, some of the damaging provisions of Obamacare can be de facto repealed by including them in the Medicaid block grant, so it’s a critically important reform.

Needless to say, I think these reforms are far better for the economy than the big tax hike Obama has endorsed to deal with the giant financing gap.

P.S. For a clever look at the worker-dependency ratio, check out the party ship produced by a Danish think tank.

P.P.S. The interviewer also mentioned that America’s racial composition is changing, which gives me an excuse to point out that Social Security reform is particularly beneficial for blacks because of differences in life expectancy.

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Laughing at another Spectacular Obamacare Failure

As you can imagine, there’s a lot to choose from in the contest for the most spectacular waste of tax dollars.

But the politicians in Oregon must really want the prize, because they managed to flush several hundred million dollars down a rat hole by putting together a state-run Obamacare website that has to be abandoned because it is so dysfunctional.

And if the Oregon website is so bad that it’s switching to the much-derided Washington Obamacare website, it must be a disaster of unparalleled dimensions!

Here are some excerpts from an AP report.

After months of trying to get its problem-plagued online health exchange to work, Oregon on Friday officially gave up on the state portal… Officials say fixing the existing system would be too costly at $78 million and would take too long. …Oregon’s exchange is seen as the worst in more than a dozen states that developed their own online health insurance marketplaces. The general public still can’t use Cover Oregon’s website to sign up for coverage in one sitting. Instead, Oregonians must use a time-consuming hybrid paper-online process to sign up for insurance — despite $134 million the state paid Oracle Corp. to build the online exchange. …In March, the federal Government Accountability Office announced an investigation of Oregon’s exchange, including looking at whether the federal government can reclaim grant money given to Cover Oregon if taxpayer funds were mismanaged.

Heck, it’s not just the GAO that’s investigating.

The FBI reportedly is probing the failed launch of Oregon’s ObamaCare insurance exchange, joining several other agencies looking into the multimillion-dollar program that was scrapped last month.  …the FBI has interviewed several people as part of the inquiry. The Oregonian reported that the bureau held a 90-minute meeting with a former Republican lawmaker who detailed potential wrongdoing — including suspicions that the state showed the feds a misleading demonstration to keep money flowing. …A U.S. House committee already is probing the Oregon debacle, as is the Government Accountability Office. The state received more than $300 million in federal grants to launch and operate the health care system. Much of what it has spent so far has gone to Oracle Corp.

But let’s be fair. Not all of the $300 million was squandered on the failed website.

The politicians also coughed up $3 million for this video, which presumably was supposed to lure people to the non-working website but probably just made people think Oregon is infested by patchouli-soaked deadbeats.

The video almost stands by itself as a form of left-wing self parody.

But what makes it especially amusing is that it generated this amusing segment on one of HBO’s programs.

Well done.

I don’t watch TV, so I don’t know if the guy who did this segment is on the right, the left, or somewhere in between.

But it would be nice to have a talk show host who is willing to go after all sides, unlike Colbert and Stewart who clearly bend over backwards to curry favor with the White House.

Anyhow, if you like videos that use humor to mock government-run healthcare, here are some good options.

*The head of the National Socialist Workers Party finds out he can’t keep his health plan.

*A creepy version of Uncle Sam wants to know about your sex life.

*Young people discover that they’re screwed by Obamacare.

*One of the biggest statists of the 20th century is angry that the Obamacare exchanges don’t work.

*A cartoon video showing how to buy coffee in an Obamacare world.

But never forget that this is a serious issue. Government has screwed up the healthcare system, yet politicians then use the mess they create to justify even more intervention.

The only effective solution is economic liberty.

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The Growing Threat of a Wealth Tax

Allister Heath, the superb economic writer from London, recently warned that governments are undermining incentives to save.

And not just because of high tax rates and double taxation of savings. Allister says people are worried about outright confiscation resulting from possible wealth taxation.

It is clear that individuals, when at all possible, need to accumulate more financial assets. …Tragically, it won’t happen. A lack of trust in the system is one important explanation. People simply don’t believe the government – and politicians of all parties – when it comes to long-terms savings and pensions. They worry, with good reason, that the rules will keep changing; they are afraid that savers are an easy target and that they will eventually be hit by a wealth tax.

Are savers being paranoid? Is Allister being paranoid?

Well, even paranoid people have enemies, and this already has happened in countries such as Poland and Argentina. Moreover, it appears that plenty of politicians and bureaucrats elsewhere want this type of punitive levy.

Here are some passages from a Reuters report.

Germany’s Bundesbank said on Monday that countries about to go bankrupt should draw on the private wealth of their citizens through a one-off capital levy before asking other states for help.

Since data from the IMF, OECD, and BIS show that almost every industrialized nation will face a fiscal crisis in the next decade or two, people with assets understandably are concerned that their necks will be on the chopping block when politicians are scavenging for more cash to prop up failed welfare states.

Though to be fair, the Bundesbank may simply be sending a signal that German taxpayers don’t want to pick up the tab for fiscal excess in nations such as France and Greece. And it also acknowledged such a tax would harm growth.

“(A capital levy) corresponds to the principle of national responsibility, according to which tax payers are responsible for their government’s obligations before solidarity of other states is required,” the Bundesbank said in its monthly report. …the Bundesbank said it would not support an implementation of a recurrent wealth tax, saying it would harm growth.

Other German economists, however, openly advocate for wealth taxes on German taxpayers.

…governments should consider imposing one-off capital levies on the rich… In Germany, for example, two thirds of the national wealth belongs to the richest 10% of the adult population. …a one-time capital levy of 10% on personal net wealth exceeding 250,000 euros per taxpayer (€500,000 for couples) could raise revenue of just over 9% of GDP. …In the other Eurozone crisis countries, it would presumably be possible to generate considerable amounts of money in the same way.

The pro-tax crowd at the International Monetary Fund has a similarly favorable perspective, relying on absurdly unrealistic conditions to argue that a wealth tax wouldn’t hurt growth. Here’s some of what the IMF asserted in its Fiscal Monitor last October.

The sharp deterioration of the public finances in many countries has revived interest in a “capital levy”— a one-off tax on private wealth—as an exceptional measure to restore debt sustainability. The appeal is that such a tax, if it is implemented before avoidance is possible and there is a belief that it will never be repeated, does not distort behavior (and may be seen by some as fair).

The IMF even floats a trial balloon that governments could confiscate 10 percent of household assets.

The tax rates needed to bring down public debt to precrisis levels…are sizable: reducing debt ratios to end-2007 levels would require (for a sample of 15 euro area countries) a tax rate of about 10 percent on households with positive net wealth.

Many people condemned the IMF for seeming to endorse theft by government.

The IMF’s Deputy Director of Fiscal Affairs then backpedaled a bit the following month. He did regurgitate the implausible notion that a wealth tax won’t hurt the economy so long as it only happens once and it is a surprise.

To an economist, …it’s close to an ideal form of taxation, since there is nothing you can now do to reduce, avoid, or evade it—the holy grail of what economists call a non-distorting tax. …Such a levy would entail a one-off charge on capital assets, the precise base being a matter for choice, but generally larger than cash left on kitchen tables. Added to the efficiency advantage of such a tax, many see an equity appeal in that such a charge would naturally fall most heavily on those with the most assets.

But he then felt obliged to point out some real-world concerns.

…governments have rarely implemented capital levies, and they have almost never succeeded. And there are very good reasons for that. …to be non-distorting the tax must be both unanticipated and believed certain not to be repeated. These are both very hard things to achieve. Introducing and implementing any new tax takes time, and governments can rarely do it in entire secrecy (even leaving aside transparency issues). And that gives time for assets to be moved abroad, run down, or concealed. The risk of future levies can be even more damaging; they discourage the saving and investment that generate future capital assets.

Though these practical flaws and problems don’t cause much hesitation on the left.

Here’s what Joann Weiner recently wrote in the Washington Post about the work of Thomas Piketty, a French economist who apparently believes society will be better if higher taxes result in everyone being equally poor.

A much higher tax on upper income — say 80 percent — coupled with a significant tax on wealth — say 10 percent — would go a long way toward making America’s income distribution more equitable than it is now. …capital is the chief culprit… Piketty has another pretty radical, at least for the United States, way to shrink the share of wealth at the top — introduce a global tax on all capital. This means taxes on not just stocks and bonds, but also land, homes, machines, patents — you name it; if it’s wealth or if it generates what tax authorities call “unearned income,” then it should be taxed. One other thing. All countries have to adopt the tax to keep capital from fleeing to tax havens.

Writing in the New York Times back in January, Thomas Edsall also applauds proposals for a new wealth tax.

…worsening inequality is an inevitable outcome of free market capitalism. …The only way to halt this process…is to impose a global progressive tax on wealth – global in order to prevent (among other things) the transfer of assets to countries without such levies. A global tax, in this scheme, would restrict the concentration of wealth and limit the income flowing to capital.

Not surprisingly, there’s support in academia for confiscating other people’s money. One professors thinks the “impossible dream” of theft by government could become reality.

…this article proposes a yearly graduated tax on the net wealth of all individuals in excess of $100 million. The rate would be 5% on the excess up to $500 million and then 10% thereafter. …Such taxes are attacked as “class warfare” that runs counter to America’s libertarian and capitalist traditions. However…the time may once again be ripe for adopting a new tax to combat the growing wealth inequality in the nation. …wealth inequality harms the very social fabric of society. …The purpose of the proposed Equality Tax would not be to raise general revenue, although revenue would be raised. Instead it would be focused on establishing a societal value that for the health of society, no individual should accrue wealth beyond a certain point. Essentially, once an individual has $100 million of assets, …further wealth accumulation harms society while providing little economic benefit or incentive to the individual. …At a minimum such a tax would raise
at least $140 billion a year.

Let’s close by looking at the real economic consequences of wealth taxation. Jan Schnellenbach of the Walter Eucken Intitut in Germany analyzed this question.

Are there sound economic reasons for the net wealth tax, as an instrument to tax stocks of physical and financial capital, to be levied in addition to taxes on capital incomes?

Before even addressing that issue, the author points out that policy actually has been moving in the right direction, presumably because of tax competition.

There has been a wave of OECD countries abolishing their personal net wealth taxes recently. Examples are Spain (abolished in 2008), Sweden (2007) as well as Finland, Iceland and Luxembourg (all 2006). Nevertheless, the net wealth tax repeatedly surfaces again in the public debate.

So what about the economics of a wealth tax? Schnellenbach makes the critical point that even a small levy on assets translates into a very punitive rate on actual returns.

…every tax on domestic wealth needs to be paid out of the returns on wealth, every net wealth tax with a given rate is trivially equivalent to a capital income tax with a substantially higher rate. …even an – on aggregate – non-confiscatory wealth tax may at least temporarily actually have confiscatory effects on individuals in periods where they realize sufficiently low returns on their capital stock.

He then looks at the impact on incentives.

…a net wealth tax will have similar distortionary effects as a capital income tax. …Introducing a comprehensive net wealth tax would then, through the creation of new incentives for tax avoidance and evasion, also diminish the base of the income tax. Scenarios with even a negative overall revenue effect would be conceivable. There is thus good reason to cast doubt on the popular belief that a net wealth tax combines little distortions and large amounts of revenue. …A wealth tax aggravates the distortions and the incentives to evade that already exist due to a pre-existing capital income tax.

And he closes by emphasizing that this form of double taxation undermines property rights.

The intrusion into private property rights may be far more severe for a wealth tax compared to an income tax. …It takes hold of a stock of wealth that consists of saved incomes which have already been subject to an income tax in the past… Our discussion has shown that economically, the wealth tax walks on thin ice.

In other words, a wealth tax is a very bad idea. And that’s true whether it’s a permanent levy or a one-time cash grab by politicians.

Some may wonder whether a wealth tax is a real threat. The answer depends on the time frame. Could such a levy happen in the next year or two in the United States?

The answer is no.

But the wealth tax will probably be a real threat in the not-too-distant future. America’s long-run fiscal outlook is very grim because of a rising burden of government spending.

This necessarily means there will be a big fiscal policy battle. On one side, libertarians and small-government advocates will push for genuine entitlement reform. Advocates of big government, by contrast, will want new revenues to enable and facilitate the expansion of the public sector.

The statists will urge higher income tax rates, but sober-minded folks on the left privately admit that the Laffer Curve is real and that they can’t collect much more money with class-warfare tax policy.

That’s why there is considerable interest in new revenue sources, such as energy taxes, financial transaction taxes, and the value-added tax.

And, of course, a wealth tax.

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Corporate Tax, Media Bias, and Gary Becker (with a Cameo Appearance by Warren Buffett)

Perhaps there is an occasional exception, but when someone in a public policy debate mentions a “race to the bottom,” they always seem to favor bigger government and punitive taxation.

Here are a few examples:

The Organization for Economic Cooperation and Development, a bureaucracy based in Paris, wants to rewrite international tax norms for business income because “failure to collaborate … could be damaging in terms of … a race to the bottom with respect to corporate income taxes.”

The International Monetary Fund also prefers cartels over competition. As the UK-based Guardian reported, “Instead of a race to the bottom where countries compete with each other to offer the lowest rate of corporate tax, it urges co-operation.”

Whether the issue is welfare reform of Medicaid block grants, opponents of federalism complain about decentralization “creating a ‘race to the bottom’ as states slashed funding on services for the poor.”

One of the cranks from the Occupy movement was given a platform by the OECD to complain that, “Tax havens and secrecy jurisdictions bring governments into a harmful race to the bottom.”

And Jeffrey Sachs, writing for the Financial Times, hyperventilated about “a runaway social crisis in many high-income countries. …governments are now in a race to the bottom with regard to corporate taxation”

As you can see, “race to the bottom” is a term that statists use when advocating policies to increase the size, scope, and power of government.

They certainly have the right choose their rhetoric, even though I wish (in the case of the OECD and IMF) that they weren’t being subsidized with my money to push their destructive agenda.

And it makes sense for statists to use this strategy. After all, a “race to the bottom” sounds like a bad thing.

So you can understand that I get irked when the establishment press, which is supposed to be neutral, adopts the left’s rhetoric. Consider this headline from a report in the Financial Times.

The article itself is not nearly as bad as the headline, so this may be the bias of an editor rather than the bias of a reporter.

Regardless, it sets the tone and obviously would lead an unwitting reader to think it is a good thing that nations aren’t lowering tax rates as much as they did in previous years.

My main point of today’s column is to complain about media bias, but since our example is about the supposed “race to the bottom,” this is also an opportunity to cite the work of the great Nobel Prize-winning economist, Gary Becker, who just passed away.

…competition among nations tends to produce a race to the top rather than to the bottom by limiting the ability of powerful and voracious groups and politicians in each nation to impose their will at the expense of the interests of the vast majority of their populations.

Amen. Tax competition encourages better policy by reducing the power of government.

With regards to bad policy, I want a race to the bottom. That’s what creates a race to the top for prosperity.

P.S. Since we’re on the topic of tax and whether people should pay more or pay less, remember the “Buffett Rule” from the 2012 campaign?

President Obama said every rich person should cough up at least 30 percent of their income to the IRS.

And Warren Buffett volunteered to be Obama’s prop, even distorting his own tax data to facilitate the President’s class-warfare agenda.

Well, it seems that Mr. Buffett is a bit of a hypocrite. Read some of what the Wall Street Journal opined this morning.

…the Berkshire Hathaway CEO seems to have adapted his famous Buffett Rule of taxation when it applies to his own company. …it was fascinating to hear Mr. Buffett explain that his real tax rule is to pay as little as possible, both personally and at the corporate level. “I will not pay a dime more of individual taxes than I owe, and I won’t pay a dime more of corporate taxes than we owe. And that’s very simple,” Mr. Buffett told Fortune magazine in an interview last week. …The billionaire was even more explicit about his goal of reducing his company’s tax payments. “I will do anything that is basically covered by the law to reduce Berkshire’s tax rate,” he said. …Too bad Mr. Buffett didn’t share this rule with voters in 2012.

Tax minimization is both the legal right and the moral responsibility of every citizen.

Unless, of course, you think – ignoring both theory and evidence – that the crowd in Washington spends money more wisely than the private sector.

P.S. Mr. Buffett should be happy he’s an American rather than a Brit. If he lived in London, the supposedly conservative-led government would probably condemn him for legally keeping his taxes as low as possible.

P.P.S. As shown in this clever video, lots of other rich leftists share Mr. Buffett’s hypocrisy.

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Taiwan Is the Success Story, not China

Which nation is richer, Belarus or Luxembourg?

If you look at total economic output, you might be tempted to say Belarus. The GDP of Belarus, after all, is almost $72 billion while Luxembourg’s GDP is less than $60 billion.

But that would be a preposterous answer since there are about 9.5 million people in Belarus compared to only about 540,000 folks in Luxembourg.

It should be obvious that what matters is per-capita GDP, and the residents of Luxembourg unambiguously enjoy far higher living standards than their cousins in Belarus.

This seems like an elementary point, but it has to be made because there have been a bunch of misleading stories about China “overtaking” the United States in economic output. Look, for instance, at these excerpts from a Bloomberg report.

China is poised to overtake the U.S. as the world’s biggest economy earlier than expected, possibly as soon as this year… The latest tally adds to the debate on how the world’s top two economic powers are progressing. Projecting growth rates from 2011 onwards suggests China’s size when measured in PPP may surpass the U.S. in 2014.

There are methodological issues with PPP data, some of which are acknowledged in the data, and there’s also the challenge of whether Chinese numbers can be trusted.

But let’s assume these are the right numbers. My response is “so what?”

I’ve previously written that the Chinese tiger is more akin to a paper tiger. But Mark Perry of the American Enterprise Institute put together a chart that is far more compelling than what I wrote. He looks at the per-capita numbers and shows that China is still way behind the United States.

To be blunt, Americans shouldn’t worry about the myth of Chinese economic supremacy.

But that’s not the main point of today’s column.

Instead, I want to call attention to Taiwan. That jurisdiction doesn’t get as much attention as Hong Kong and Singapore, but it’s one of the world’s success stories.

And if you compare Taiwan to China, as I’ve done in this chart, there’s no question which jurisdiction deserves praise.

Yes, China has made big strides in recent decades thanks to reforms to ease the burden of government. But Taiwan is far above the world average while China has only recently reached that level (and only if you believe official Chinese numbers).

So why is there a big difference between China and Taiwan? Well, if you look at Economic Freedom of the World, you’ll see that Taiwan ranks among the top-20 nations while China ranks only 123 out of 152 countries.

By the way, Taiwan has a relatively modest burden of government spending. The public sector only consumes about 21.5 percent of economic output. That’s very good compared to other advanced nations.

Moreover, Taiwan is one of the nations that enjoyed considerable progress by adhering to Mitchell’s Golden Rule. Between 2001 and 2006, total government spending didn’t grow at all.

During this period of fiscal restraint, you won’t be surprised to learn that the burden of government spending fell as a share of GDP.

And it should go without saying (but I’ll say it anyhow) that because politicians addressed the underlying disease of government spending, that also enabled big progress is dealing with the symptom of government borrowing.

Look at what happened to spending and deficits between 2001 and 2006.

P.S. You probably didn’t realize that it was possible to see dark humor in communist oppression.

P.P.S. But at least some communists in China seem to understand that the welfare state is a very bad idea.

P.P.P.S. Some business leaders say China is now more business-friendly than the United States. That’s probably not good news for America, but my goal is to have a market-friendly nation, not a business-friendly nation.

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Greedy Politicians Get their Comeuppance as Taxpayers Escape

If you’re a regular reader, you already know I’m a big supporter of tax competition and tax havens.

Here’s the premise: Politicians almost always are focused on their next election and this encourages them to pursue policies that are designed to maximize votes and power within that short time horizon. Unfortunately, this often results in very short-sighted and misguided fiscal policies that burden the economy, such as class-warfare tax policy and counterproductive government spending.

So we need some sort of countervailing force that will make such policies less attractive to the political class. We don’t have anything that inhibits wasteful spending,* but we do have something that discourages politicians from class-warfare tax policy. Tax competition and tax havens give taxpayers some ability to escape extortionate tax policies.

Now we have a couple of new – and very high-profile – examples of this process.

First, a big American drug company is seeking to redomicile in the United Kingdom.

The New York Times has a thorough (and fair) analysis of the issues.

Pfizer proposed a $99 billion acquisition of its British rival AstraZeneca that would allow it to reincorporate in Britain. Doing so would allow Pfizer to escape the United States corporate tax rate and tap into a mountain of cash trapped overseas, saving it billions of dollars each year and making the company more competitive with other global drug makers. …the company wishes to effectively renounce its United States citizenship. …a deal would allow it to follow dozens of other large American companies that have already reincorporated abroad through acquiring foreign businesses. They have been drawn to countries like Ireland and the Netherlands that have lower corporate rates, as well as by the ability to spend their overseas cash without being highly taxed. At least 50 American companies have completed mergers that allowed them to reincorporate in another country, and nearly half of those deals have taken place in the last two years. …American businesses have long complained about the corporate tax rate, arguing that in today’s global marketplace, they are left at a competitive disadvantage.

You can click here if you want some of those additional examples.

To get an idea of why companies want to redomicile, here’s another excerpt from the story.

…the British corporate tax rate is currently 21 percent and will soon fall to 20 percent. Analysts at Barclays estimated that for each percentage point less Pfizer paid in taxes, it would save about $200 million a year by reincorporating. People briefed on Pfizer’s discussions said that figure could be substantially higher. That means that Pfizer would be saving at least $1 billion a year in taxes alone. And moving to a lower-tax jurisdiction would allow Pfizer to tap cash that it holds overseas without paying a steep tax to bring it back to the United States. Of the company’s $49 billion in cash, some 70 to 90 percent of that is estimated to be held overseas.

I’m encouraged, by the way, that reporters for the New York Times are smart enough to figure out the destructive impact of worldwide taxation. Too bad the editors at the paper don’t have the same aptitude.

By the way, it’s worth pointing out that Pfizer’s expatriation doesn’t have any negative impact on America.

Pfizer points out that it would retain its corporate headquarters here and remain listed on the New York Stock Exchange. …Pfizer’s chief executive, Ian C. Read, a Briton, said Pfizer found it was hard to compete with other acquirers while saddled with “an uncompetitive tax rate.” Still, he added that even as a reincorporated British company, “we will continue to pay tax bills” in the United States.

The only meaningful change is that the redomiciled company no longer would pay tax to the IRS on foreign-source income, but that’s income that shouldn’t be taxed anyhow!

The Wall Street Journal opined on this issue and made what should be very obvious points about why this is happening.

…because the combined state-federal corporate income tax rate in the U.S. is nearly 40%, compared to the 21% rate in the U.K.

Amen. America’s punitive corporate tax rate is a self-inflicted wound.

But it’s not the just the statutory tax rate. The WSJ also points out that the United States also wants companies to pay tax to the IRS on foreign-source income even though that income already has been subject to tax by foreign governments!

The U.S., almost alone among the world’s governments, demands to be paid on a company’s world-wide profits whenever those profits are brought back to the U.S.

It’s for reasons like this that America’s corporate tax system came in 94th place (out of 100!) in a ranking of the degree to which national tax systems impacted competitiveness.

Now let’s look at the second example of a high-profile tax-motivated corporate migration.

Toyota is moving the heart of its American operation from high-tax California to zero-income tax Texas.

And the Wall Street Journal correctly explains the lesson we should learn. Or, to be more accurate, the lesson that politicians should learn.

In addition to its sales headquarters, Toyota says it plans to move 3,000 professional jobs to the Dallas suburb… Toyota’s chief executive for North America Jim Lentz…listed the friendly Texas business climate…as well as such lifestyle benefits as affordable housing and zero income tax.

This isn’t the first time this has happened.

In 2006, Nissan moved its headquarters from Gardena—north of Torrance—to Franklin, Tennessee. CEO Carlos Ghosn cited Tennessee’s lower business costs.

The bottom line is that greedy California politicians are trying to seize too much money and are driving away the geese that lay the golden eggs.

According to the Tax Foundation, the state-local tax burden is more than 50% higher in California than in Tennessee and Texas, which don’t levy a personal income tax. California’s top 13.3% marginal rate is the highest in the country. …Since 2011 more than two dozen California companies including Titan Laboratories, Xeris Pharmaceuticals, Superconductor Technologies, Pacific Union Financial and Med-Logics have relocated in Texas. Dozens of others such as Roku, Pandora and Oracle have expanded there.

No wonder, as I wrote a few years ago, Texas is thumping California.

The real puzzle is why most high-tax governments don’t learn the right lessons. Are the politicians really so short-sighted that they’ll drive away their most productive people?

But notice I wrote most, not all. Because we do have some very recent examples of very left-wing states doing the right thing because of tax competition.

Here are some excerpts from a column in Forbes.

Maryland is the latest state to make its estate tax less onerous, and it’s significant because it’s a staunchly Democratic state indicating that easing the pain of the death tax isn’t just a Republican issue. Today the Maryland Senate passed the measure, already passed by the House, gradually raising the amount exempt from the state’s estate tax to match the generous federal estate tax exemption.

And other blue jurisdictions seem to be learning the same lesson.

In New York, Gov. Andrew Cuomo’s budget calls for increasing the state’s estate tax exemption from $1 million to match the federal exemption, and lowering the top rate from 16% down to 10% by fiscal 2017.  …A commission on tax reform in the District of Columbia recently recommended raising D.C.’s estate tax exemption from $1 million to the federal level. …In Minnesota, Democratic Governor Mark Dayton has proposed doubling the state estate tax exemption from $1 million to $2 million as part of a bigger tax package.

This is why tax competition is such a wonderful thing. There’s no question that politicians in states such as New York don’t want to lower the burden of the death tax.

But they’re doing it anyhow because they know that successful taxpayers will move to states without this awful form of double taxation.

Just like European politicians reduced corporate tax rates even though they would have preferred to keep high tax rates.

Tax competition isn’t a sufficient condition for good policy, but it sure is a necessary condition!

*There are spending caps that restrain wasteful government spending, such as the debt brake in Switzerland and TABOR in Colorado, but those are policies rather than processes.

P.S. Here’s a joke about California, Texas, and a coyote.

P.P.S. And supporters of the Second Amendment will appreciate this Texas vs. California joke.

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A Decent but Underwhelming Jobs Report

The headlines from today’s employment report certainly seem positive.

The unemployment rate has dropped to 6.3 percent and there are about 280,000 new jobs.*

But if you dig into the details of the latest numbers from the Bureau of Labor Statistics, you find some less-than-exciting data.

First, here is the chart showing total employment over the past 10 years.

This shows a positive trend, and it is good that the number of jobs is climbing rather than falling.

But it’s disappointing that we still haven’t passed where we were in 2008.

Indeed, the current recovery is miserable and lags way behind the average of previous recoveries.

But the really disappointing news can be found by examining the data on how many working-age people are productively employed.

The Bureau of Labor Statistics has two different data sets that measure the number of people working as a share of the population.

Here are the numbers on the labor force participation rate.

As you can see, we fell down a hill back in 2008 and there’s been no recovery.

The same is true for the employment-population ratio, which is the data I prefer for boring, technical reasons.

Though I should acknowledge that the employment-population ratio does show a modest uptick, so perhaps there is a glimmer of good news over the past few years.

But it’s still very disappointing that this number hasn’t bounced back since our economic output is a function of how much labor and capital are productively utilized.

In other words, the official unemployment rate could drop to 4 percent and the economy would be dismal if that number improved for the wrong reason.

* Perhaps the semi-decent numbers from last month are tied to the fact that Congress finally stopped extending subsidies paid to people for staying unemployed?

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