A Horrifying Socialist Future for America?

The debate over socialism shouldn’t even exist. Everywhere big government has been tried, it has failed.

And we have reams of evidence that free-market economies dramatically out-perform statist economies.

Yet the siren song of socialism still appeals to a subsection of the population, either because of naiveté or an unseemly lust to exercise power over others.

So let’s once again wade into this debate that shouldn’t be happening.

Writing for the Dallas Morning News, former Texas A&M economics professor Svetozar Pejovich explains that adding “democratic” to “socialism” doesn’t change anything. What really matters is that Sanders and his supporters want bigger government. And that never ends well.

Sanders’ policies…are…incompatible with the American tradition of self-responsibility, self-determination and limited government under a rule of law. …putting those premises into practice requires the acceptance of two institutions: the redistribution of income initiated and monitored by federal government, and the attenuation of private property rights.

And these policies don’t lead to good results, something that Professor Pejovich understands very well given that he was born in the former Yugoslavia.

Of course, the lunch is not free. The short-run consequence of redistributive policies is erosion of the link between performance and reward, which, in turn, reduces economic efficiency and the pie available for redistribution. The long-run cost is the transformation of the American culture of self-responsibility and self-determination into the culture of dependence on the state. …Sanders’ democratic socialism bribes people to voluntarily accept the erosion of private property rights…via laws and regulations. Those law and regulations (such as reducing the right of employers to fire workers at will, giving tenants rights at the expense of apartment owners, granting special privileges to some rent seeking groups, etc.) transfer some decision-making rights from owners to public decision makers, or non-owners. …In the end, the attenuation of private property rights impedes the flow of resources to higher-valued uses and reduces economic efficiency of the economy.

Allow me to augment Professor Pejovich’s analysis by elaborating on how these policies hurt the economy. The redistributionism doesn’t lead to immediate disaster, but it inevitably lures a larger share of the population into dependency over time and the higher taxes required to finance the growing welfare burden gradually erode incentives for work, saving, investment, and entrepreneurship. The combination of those factors slowly but surely dampens the economy’s growth. And as I’ve repeatedly explained, even small difference in growth have enormous long-run implications for a nation’s prosperity.

And there comes a point, particularly given modern demographics, that the system breaks down.

The erosion of property rights has a similar effect, largely by causing a reduction in both the level of investment and the quality of investment. And since every economic theory agrees that capital formation is a key to long-run growth, the net effect of “democratic socialism” it to further weaken potential growth.

What’s especially frustrating is that leftists then point to reduced growth rates as an argument for even bigger government.

I’m not joking. Robert Kuttner of the American Prospect argues that young people are attracted to Sanders because their economic outlook is so grim.

Bernie Sanders has…broad and enthusiastic support, especially among the young…voters who say they are attracted rather than repelled by Sanders’s embrace of socialism. …this is the stunted generation—young adults venturing into a world of work, loaded with student debt, unable to find stable jobs or decent careers.

I basically agree that the economic situation for young people is tepid, but I’m baffled that this is an argument for bigger government since the statist policies of both Bush and Obama deserve much of the blame for today’s sub-par economy.

In other words, we’re seeing Mitchell’s Law in action. Politicians have adopted bad policies that have led to stagnation and now they’re using the resulting economic malaise as an argument for even bigger government. And young people, who are among the biggest victims, are getting seduced.

I’m tempted to simply say young people are too stupid to be allowed to vote, but instead let’s take a serious look at why so many of them are misguided.

Christine Emba of the Washington Post has a column pointing out young people openly embrace socialism.

…it seems that socialism is cool. …socialism does seem to have become the political orientation du jour among voters of a certain (read: young) age. …A January YouGov poll asked respondents whether they had a “favorable or unfavorable” view of socialism and capitalism. While capitalism rated significantly higher overall, those younger than 30 gave socialism higher marks: Forty-three percent viewed it very or somewhat favorably, compared with only 32 percent for capitalism.

The problem is that both Ms. Emba and a lot of young people apparently believe the nonsense spouted by people like Robert Kuttner. They actually blame capitalism for the economic weakness caused by government intervention.

…simple economics have pushed a younger generation of voters to embrace what used to be a dirty word. The past 10 years – for many millennials, the formative years of adulthood – have eroded the credibility of economic [classical] liberalism. The financial crisis and recession weakened youths’ faith in markets… Yet they were also told that the solution to the these problems was more [classical] liberal capitalism. But those solutions haven’t delivered… Underemployment, excessive debt, out-of-reach health care and delayed life goals are young peoples’ defining concerns, and the traditional assumption – that free markets and limited state intervention lead to good outcomes – just doesn’t ring true to them.

Wow, it’s bad enough that people blame free markets for a government-caused financial crisis, but Ms. Emba (and perhaps others) think that we’ve tried capitalist “solutions” after the crisis.

What planet is she on? Can she identify one thing that Obama has done that would count as a free-market response to the financial crisis? The fake stimulus? Obamacare? Dodd-Frank?

By the way, she points out that young people presumably have no idea what socialism actually entails. They just want traditional welfare-state redistributionism.

…for many millennials, “socialism” is simply shorthand for “vaguely Scandinavian in the best way” – free health care, free education and subsidized child care, a state that supports its citizens rather than leaving them at the mercy of impersonal corporations bent on profit. …the socialism that most millennials want is simply a return to a more muscular form of traditional liberalism, one that would have felt right at home in the administration of FDR.

Given that President Roosevelt was either malicious or ignorant, and given that his policies lengthened and deepened the Great Depression, I’m not exactly encouraged that millennials merely want traditional liberal (as opposed to classical liberal) policies.

Though it’s worth noting (in a very depressing sense) that a lot of young people are embracing more totalitarian versions of socialism. Here are some brief excerpts from a longer article in Vox.

Jacobin has in the past five years become the leading intellectual voice of the American left, the most vibrant and relevant socialist publication in a very long time. …That’s an opportunity that Jacobin is seizing to great effect, even if Sanders isn’t far enough left for their taste. The Sanders campaign “could begin to legitimate the word ‘socialist,’ and spark a conversation around it, even if Sanders’s welfare-state socialism doesn’t go far enough,” Sunkara wrote earlier this year. …Jacobin…now boasts a print circulation of about 20,000 and has gained about 400 more subscribers a week since Bernie started his ascent in November. …even if Bernie fades, there’s still a constituency for socialist ideas — a fact that could turn out to be much more important than the Sanders campaign itself.

And they really, really mean socialism. With all its warts.

“It is unapologetic about its interests in political economy and Marxism…,” Brooklyn College professor Corey Robin, a longtime leftist writer who signed on early and is now a contributing editor at Jacobin, says. …any Jacobin editor would be the first to tell you, Sanders is a normal labor liberal, or at most a social democrat. He doesn’t go far enough. …What we really need, Sunkara insists, is democratic worker control of the means of production. …A number of Jacobin’s contributors are members of the International Socialist Organization (ISO), the largest Trotskyist group in North America. …Sunkara’s allegiances…lie with Democratic Socialists of America (DSA). …Frase recalls working with the Freedom Road Socialist Organization, a post-Maoist group, while in high school.

I’m not sure to be more amazed that some people really believe this evil nonsense or more worried that Jacobin may actually represent the future of the left in America.

Time for some good news.

My Cato colleague Emily Ekins writes that young people are not hopeless idiots, at least not all of them. Though she phrases her argument in a much nicer fashion in a column she wrote for the Washington Post.

She starts with grim polling data.

A national Reason-Rupe survey found that 53 percent of Americans under 30 have a favorable view of socialism compared with less than a third of those over 30. Moreover, Gallup has found that an astounding 69 percent of millennials say they’d be willing to vote for a “socialist” candidate for president — among their parents’ generation, only a third would do so.

But she notes that for the most part they don’t actually believe in real socialism.

…millennials tend to reject the actual definition of socialism — government ownership of the means of production, or government running businesses. Only 32 percent of millennials favor “an economy managed by the government,” while, similar to older generations, 64 percent prefer a free-market economy. …what does socialism actually mean to millennials? Scandinavia. …In contrast with the 1960s and ’70s, college students today are not debating whether we should adopt the Soviet or Maoist command-and-control regimes that devastated economies and killed millions.

In other words, the nutjobs at Jacobin are still a minority on the left.

Best of all, young people are capable of learning lessons from the real world.

…as millennials age and begin to earn more, their socialistic ideals seem to slip away. …millennials become averse to social welfare spending if they foot the bill. As they reach the threshold of earning $40,000 to $60,000 a year, the majority of millennials come to oppose income redistribution, including raising taxes to increase financial assistance to the poor. …When tax rates are not explicit, millennials say they’d prefer larger government offering more services (54 percent) to smaller government offering fewer services (43 percent). However when larger government offering more services is described as requiring high taxes, support flips and 57 percent of millennials opt for smaller government with fewer services and low taxes, while 41 percent prefer large government.

And she explains that previous generations also have shifted away from big government.

In the 1980s, the same share (52 percent) of baby boomers also supported bigger government, and so did Generation Xers (53 percent) in the 1990s. Yet, both baby boomers and Gen Xers grew more skeptical of government over time and by about the same magnitude. Today, only 25 percent of boomers and 37 percent of Gen Xers continue to favor larger government.

My two cents, for what it’s worth, is that the infatuation with socialism (however defined) among the young underscores why it is so important to “win the narrative” about the causes of the financial crisis and the resulting weak economy.

To the extent that voters actually think capitalism caused the mess in 2008, they will be susceptible to statist ideologies.

In some sense, this is history repeating itself. The Great Depression largely was caused by misguided policies from Hoover and Roosevelt. Yet the left very cleverly peddled the story that capitalism had failed. As a result, generations of voters were more sympathetic to big government.

Thank goodness there are places such as the Cato Institute that are working to correct the narrative, not only about the Great Depression, but also with regards to the financial crisis.

Let’s close with a clever description of the difference between various strains of statism.

I put forth a similar analysis back in 2014, but I confess it wasn’t as clever as the above image. Or as clever as the sign I recently shared.

And let’s not forget the famous two-cow explanation of various ideologies.

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A Learning Moment about Government Greed for Yale’s Cloistered Academics

Even though it’s theoretically possible to design a desirable budget deal that includes a tax increase, I’m a big advocate of the no-tax-hike pledge for the simple reason that – in the real world – support for genuine spending restraint and real entitlement reform evaporates once politicians think higher revenues are an option.

Heck, bumping into the Loch Ness Monster while riding my unicorn is more likely than an acceptable budget deal including tax hikes.

Though I confess that my anti-tax resolve sometimes gets a bit wobbly when I think about unsavory tax breaks such as the ethanol credit, the state and local tax deduction, and the healthcare exclusion. I have to remind myself that while these provisions are very odious, they should be repealed as part of tax reform rather than as part of some deal that gives politicians more money to waste.

Now there’s another example of a tax that is very tempting, and it comes from my home state of Connecticut.

When I was growing up, the Nutmeg State didn’t have an income tax and it was a refuge for overtaxed New Yorkers. But then an income tax was imposed in 1991. And ever since politicians got their hands on this new source of revenue, the burden of spending has skyrocketed and Connecticut has become a fiscal dystopia.

So you would think I’d be reflexively hostile to additional tax hikes by the politicians in Hartford. And I should be, but I’m perversely intrigued by a new levy they’re considering. The Wall Street Journal opines on the proposal.

…most Yale University professors are proud to be progressives. Well, they are now getting the chance to live their convictions as Connecticut Democrats attempt to soak Yale’s rich endowment. Democrats in Hartford have proposed taxing the unspent earnings of university endowments with more than $10 billion in assets. Only Yale’s $25.6 billion endowment—the country’s second largest after Harvard—fits the tax bill. Yale’s tax-exempt investments earned $2.6 billion last year, eight times more than the University of Connecticut’s $384 million endowment. Oh, the inequality! …Hartford is already taxing anything that moves. Last year Democrats raised the top individual tax rate to 6.99% and extended a 20% corporate surtax. The tax hikes precipitated General Electric’s decision in January to move its headquarters to Boston. Between 2010 and 2015, Connecticut lost 105,000 residents to other states. For the last five years, it has recorded zero real GDP growth.

Nobody should be double taxed on income that is saved and invested, so my mind tells me that the right approach is to give all taxpayers the treatment now reserved for places like Yale.

But my heart tells me the opposite because it’s galling that Yale is dominated by statists who presumably want higher taxes on the rest of us, so maybe it’s time they swallow some of their own bitter medicine.

But the way, it’s not just state politicians that are salivating to pillage Yale. It’s now being reported that city politicians want a slice of the action.

The mayor of New Haven is backing a push to revisit an 1834 Connecticut statute affecting taxes for Yale University, saying new guidelines are needed to assess liability for the institution… “Since taxing real estate and other property is the only form of municipal taxation allowed by state law, more modern guidelines as to what’s taxable and what’s tax exempt are essential,” New Haven Mayor Toni Harp said this week in testimony supporting the legislation. …The Ivy League university has strongly objected to proposal.

Gee, I wonder if Yale also “strongly objected” to the various big tax hikes that have savaged the state’s investors, entrepreneurs, and small businesses? Or is their battlefield conversion against tax hikes solely a selfish gesture.

Needless to say, I’m sure it’s the latter, which is why part of me is thinking it would be rough justice if the jackals in state and local government descended on Yale.

That being said, I certainly don’t like the idea of these profligate politicians getting their greedy hands on even more money. So if they do impose taxes on Yale, I hope the university will consider a very thoughtful invitation from the Governor of Florida.

Gov. Rick Scott…issued a statement calling on the Ivy League institution to pick up stakes and move on down to sunny Florida. “We would welcome a world-renowned university like Yale to our state and I can commit that we will not raise taxes on their endowment,” Governor Scott said

Hmmm…. Better weather and no state income tax. Sounds like a good deal to me.

And since Florida doesn’t double tax anybody, Yale’s leftist professors could sleep easier at night since they no longer would be hypocrites who work at a school that enjoys tax-free status on its investments while neighbors are being taxed.

P.S. I should add Yale’s anti-tax leftists to my collection of statist hypocrites.

P.P.S. I might be willing to accept a tax hike if it somehow could be designed so that it only applied to advocates of higher taxes.

P.P.P.S. While some tax distortions are destructive, some are simply bizarre.

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Tax-the-Rich Delusions from Hillary and Bernie

Hillary Clinton and Bernie Sanders are basically two peas in a pod on economic policy. The only difference is that Sanders wants America to become Greece at a faster rate.

Folks on the left may get excited by whether we travel 60 mph in the wrong direction or 90 mph in the wrong direction, but this seems like a Hobson’s choice for those of us who would prefer that America become more like Hong Kong or Singapore.

Consider the issue of taxation. Clinton and Sanders both agree that they want to raise tax rates on investors, entrepreneurs, small business owners, and other “rich” taxpayers. The only difference is how high and how quickly.

Scott Winship of the Manhattan Institute has a must-read column on this topic in today’s Wall Street Journal.

He starts by speculating whether there’s a rate high enough to satisfy the greed of these two politicians.

Here is a question to ask Hillary Clinton and Bernie Sanders: What is the best tax rate to impose on high-income earners…? Perhaps they think it is 83%, a rate that economists Thomas Piketty and Emmanuel Saez hypothesized in 2014… Or maybe it is 90%, which Sen. Sanders told CNBC last May was not out of the question.

He then points out that there were very high tax rates in America between World War II and the Reagan era.

…the U.S. had such rates in the past. From 1936 to 1980, the highest federal income-tax rate was never below 70%, and the top rate exceeded 90% from 1951 to 1963. …The discussion of these rates can easily create the impression that the federal government collected far more money from “the rich” before the Reagan administration.

But rich people aren’t fatted calves awaiting slaughter. They generally are smart enough to figure out ways to avoid high tax rates. And if they’re not smart enough, they know to hire bright lawyers, lobbyists, and accountants who figure out ways to protect their income.

Which is exactly what happened.

The effective tax rates actually paid by the highest income earners during the 1950s and early ’60s were far lower than the highest marginal rates. …In the 1960s, for example, the average rate paid by the top 0.1% of tax filers—the top 10th of the top 1%—ranged from 26.5% to 29.5%, according to a 2007 study by Messrs. Piketty and Saez. Even during the 20 years after the Reagan tax cuts, the top 10th of the top 1% paid an average rate of 23.7% to 33%—essentially the same as in the 1960s.

Gee, sounds like Hauser’s Law – a limit on how much governments can tax – is true, at least for upper-income taxpayers.

And Winship provides some data showing that high tax rate are not the way to collect more revenue.

When average tax rates went up from 27.6% in 1965 to 34% in 1975, revenues went down, from 0.6% to 0.5% of the sum of GDP plus capital gains. When average tax rates declined to 23.7% over the second half of the 1970s and the ’80s, tax revenues from the top went up, reaching 0.8% of GDP plus capital gains in 1990. …in the early 1990s, Presidents George H.W. Bush and Bill Clinton raised average tax rates at the top, and revenue from the top 0.1% eventually skyrocketed. But the flood of revenue overwhelmingly reflected not the increase in rates but the stock market’s takeoff… Consider: If the higher top tax rates had caused the growth in revenue, then revenues should have fallen when Mr. Clinton cut the top tax rate on capital gains to 20% from 28% in 1997. But revenues from the top 0.1% kept pouring in.

And if you want more detail, check out the IRS data from the 1980s, which shows that rich taxpayers paid a lot more tax when the top rate was dropped from 70 percent to 28 percent.

That was a case of the Laffer Curve on steroids!

No wonder some leftists admit that spite is their real reason for supporting confiscatory tax rates on the rich, not revenue.

But what if the high tax rates are imposed on a much bigger share of the population, not just the traditional target of the “top 1 percent”?

Well, even hardcore statists who favor punitive tax policy admit that this would be a recipe for economic calamity.

Mr. Piketty said, “I firmly believe, that imposing a 70% or 80% marginal rate on large segments of the population (say, 25% of the population, or even 10%, or even a few percentage points) would lead to an economic disaster.” In other words, sayonara increased tax revenue.

Heck, even the European governments with the biggest welfare states rarely impose tax rates at those levels.

And when they do (as in the case of Hollande’s 75 percent tax rate in France), they suffer severe consequences.

Which is why the real difference in taxation between the United States and Europe isn’t the way the rich are taxed. Government is bigger in Europe because of higher tax burdens on the poor and middle class, specifically onerous value-added taxes and top income tax rates that take effect at relatively modest levels of income.

In other words, the rich already pay the lion’s share of tax in the United States. But not because we have 1970s-style tax rates, but because the tax burden is relatively modest for lower- and middle-income people.

Which brings us to Winship’s final point.

Proposals to soak the rich by raising their tax rates are unlikely to yield the revenue windfall that Mr. Sanders or Mrs. Clinton are dangling before voters. Leveling with the American people means…admitting that they will have to raise the money from tax hikes on middle-class voters.

Though he “buried the lede,” as they say in the journalism business. The most important takeaway from his column is that the redistribution agenda being advanced by Clinton and Sanders necessarily will require big tax hikes on the middle class.

Indeed, the “tax-the-rich” rhetoric they employ is simply a smokescreen to mask their real goals.

Which is why I included that argument in my video that provided five reasons why class-warfare taxation is a bad idea.

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Pfizer’s Inversion Is Good News for American Workers, American Consumers, and American Shareholders

I’m never surprised when politicians make absurd statements, but I’m still capable of being shocked when other people make outlandish assertions.

Like the leftist policy wonk who claimed that capitalism is actually coercion, even though free markets are based on voluntary exchange. Or the statist columnist who argued people aren’t free unless they’re entitled to other people’s money, even though that turns some people into unfree serfs.

Now I have another example of upside-down thinking. It deals with the “inversion” issue, which involves American-chartered companies choosing to redomicile overseas.

A column in the Huffington Post implies that Pfizer is some sort of economic traitor for making a sensible business decision to protect the interests of workers, consumers, and shareholders.

Pfizer…wants to turn its back on America by claiming to be an Irish company through an offshore merger, giving it access to Ireland’s low tax rates. The change would only be on paper. The company would still be run from the United States, enjoying all the benefits of being based in America—such as our taxpayer-supported roads, public colleges, and patent protections—without paying its part to support them.

There’s a remarkable level of inaccuracy in that short excerpt. Pfizer wouldn’t be claiming to be an Irish company. It would be an Irish company. And it would still pay tax to the IRS on all U.S.-source income. All that changes with an inversion is that the company no longer would have to pay tax to the IRS on non-U.S. income. Which is money the American government shouldn’t be taxing in the first place!

Here’s more from the article.

Pfizer could walk out on its existing U.S. tax bill of up to $35 billion if its Irish tax maneuver goes forward. That’s what it already owes the American people on about $150 billion in profits it has stashed offshore, much of it in tax havens.

Wrong again. The extra layer of tax on foreign-source income only applies if the money comes back to the United States. Pfizer won’t “walk out” on a tax liability. Everything the company is doing is fully compliant with tax laws and IRS rules.

Here’s another excerpt, which I think is wrong, but doesn’t involve misstatements.

When corporations dodge their taxes, the rest of us have to make up for what’s missing. We pay for it in higher taxes, underfunded public services, or more debt.

The “rest of us” aren’t losers when there’s an inversion. All the evidence shows that we benefit when tax competition puts pressure on governments.

By the way, the author wants Obama to arbitrarily and unilaterally rewrite the rules .

President Obama can stop Pfizer’s biggest cash grab: that estimated $35 billion in unpaid taxes it wants to pocket by changing its mailing address. There are already Treasury Department rules in place to prevent this kind of overseas tax dodge. As now written, however, they wouldn’t apply to Pfizer’s cleverly-crafted deal. The Obama Administration needs to correct those regulations so they cover all American companies trying to exploit the loophole Pfizer is using. It already has the authority to do it.

Needless to say, Pfizer can’t “grab” its own money. The only grabbing in this scenario would be by the IRS. Since I’m not an international tax lawyer, I have no idea if the Obama Administration could get away with an after-the-fact raid on Pfizer, but I will note that the above passage at least acknowledges that Pfizer is obeying the law.

Now let’s look at some analysis from someone who actually understands the issue. Mihir Desai is a Harvard professor and he recently explained the reforms that actually would stop inversions in a column for the Wall Street Journal.

Removing the incentive for American companies to move their headquarters abroad is a widely recognized goal. To do so, the U.S. will need to join the rest of the G-7 countries and tax business income only once, in the country where it was earned. …Currently, the U.S. taxes the world-wide income of its corporations at one of the highest rates in the world, but defers that tax until the profits are repatriated. The result is the worst of all worlds—a high federal statutory rate (35%) that encourages aggressive transfer pricing, a significant restriction on capital allocation that keeps cash offshore, very little revenue for the Treasury, and the loss of U.S. headquarters to countries with territorial tax systems.

In other words, America should join the rest of the world and adopt a territorial tax system. And Prof. Desai is right. If the U.S. government stopped the anti-competitive practice of “worldwide” taxation, inversions would disappear.

That’s a lesson other nations seem to be learning. There’s only a small handful of countries with worldwide tax systems and that group is getting smaller every year.

Japan in 2009 and the United Kingdom in 2010 shifted to a territorial tax regime and lowered their statutory corporate rates. The U.K. did so to stop companies from moving their headquarters abroad; Japan was primarily interested in encouraging its multinationals to reinvest foreign earnings at home.

Professor Desai closes with a broader point about how it’s good for the American economy with multinational firms earn market share abroad.

…it is mistaken to demonize the foreign operations of American multinationals as working contrary to the interests of American workers. Instead the evidence, including research by C. Fritz Foley, James R. Hines and myself, suggests that U.S. companies succeeding globally expand at home—contradicting the zero-sum intuition. Demonizing multinational firms plays to populist impulses today. But ensuring that the U.S. is a great home for global companies and a great place for them to invest is actually the best prescription for rising median wages.

Amen. You don’t get higher wages by seizing ever-larger amounts of money from employers.

This is why we should have a territorial tax system and a much lower corporate tax rate.

Which is what Wayne Winegarden of the Pacific Research Institute argues for in Forbes.

…why would a company consider such a restructuring? The answer: the uncompetitive U.S. corporate income tax code. Attempts to punish companies that are pursuing corporate inversions misdiagnose the problem and, in so doing, make a bad situation worse. The problem that needs to be solved is the uncompetitive and overly burdensome U.S. corporate income tax code. The U.S. corporate income tax code puts U.S. companies at an unsustainable competitive disadvantage compared to their global competitors. The corporate income tax code in the U.S. imposes the highest marginal tax rate among the industrialized countries (a combined federal and average state tax rate of 39.1 percent), is overly-complex, difficult to understand, full of special interest carve-outs, taxes the same income multiple times, and taxes U.S. companies based on their global income.

Mr. Winegarden also makes the key point that a company that inverts still pays tax to the IRS on income earned in America.

…a corporate inversion does not reduce the income taxes paid by U.S. companies on income earned in the U.S. Following a corporate inversion, the income taxes owed by the former U.S. company on its income earned in the U.S. are precisely the same. What is different, however, is that the income that a company earns outside of the U.S. is no longer taxable.

Let’s now return to the specific case of Pfizer.

Veronique de Rugy of the Mercatus Center explains in National Review why the entire inversion issue is a classic case of blame-the-victim by Washington.

Almost 50 companies have chosen to “invert” over the last ten years. More than in the previous 20 years. …there are very good reasons for companies to do this. …for American businesses operating overseas, costs have become increasingly prohibitive. …Europe now sports a corporate-tax rate below 24 percent, while the U.S. remains stubbornly high at 35 percent, or almost 40 percent when factoring in state taxes. …it’s the combination with America’s worldwide taxation system that leaves U.S.-based corporations so severely handicapped. Unlike almost every other nation, the U.S. taxes American companies no matter where their income is earned. …So if a U.S.-based firm does business in Ireland they don’t simply pay the low 12.5 percent rate that everyone else pays, but also the difference between that and the U.S. rate.

Veronique explains why Pfizer made the right choice when it recently merged with an Irish company.

That’s a sensible reason to do what Pfizer has done recently with its attempt to purchase the Irish-based Allergan and relocate its headquarters there. The move would allow them to compete on an even playing field with every other company not based in the U.S. Despite the impression given by critics, they’ll still pay the U.S. rate when doing business here.

And she takes aim at the politicians who refuse to take responsibility for bad policy and instead seek to blame the victims.

…politicians and their ideological sycophants in the media wish to cast the issue as a moral failure on the part of businesses instead of as the predictable response to a poorly constructed corporate-tax code. …Clinton wants to stop the companies from moving with an “exit tax.” Clinton isn’t the first to propose such a silly plan. Lawmakers and Treasury officials have made numerous attempts to stop businesses from leaving for greener pastures and each time they have failed. Instead, they should reform the tax code so that businesses don’t want to leave.

Let’s close with an observation about the Pfizer controversy.

Perhaps the company did make a “mistake” by failing to adequately grease the palms of politicians.

Consider the case of Johnson Controls, for instance, which is another company that also is in the process of redomiciling in a country with better tax law.

Brent Scher of the Washington Free Beacon reports that the company has been a big donor to the Clinton Foundation, which presumably means it won’t be targeted if she makes it to the White House.

Hillary Clinton has spent the past few months going after Johnson Controls for moving its headquarters overseas, but during a campaign event on Monday, her husband Bill Clinton said that it is one of his “favorite companies.” …He described Johnson Controls as “one of my favorite companies” and praised the work it had done in the clean energy sector during an event in North Carolina on Monday. …Johnson Controls has contributed more than $100,000 to the Clinton Foundation and also partnered with it on numerous projects over the past eight years and as recently as 2015. Some of the Clinton Foundation projects included multi-million commitments from Johnson Controls. Bill Clinton pointed out in his speech that his foundation has done business with Johnson Controls—something that Hillary Clinton is yet to mention.

For what it’s worth, the folks at Johnson Controls may have made a wise “investment” by funneling money into the Clinton machine, but they shouldn’t delude themselves into thinking that this necessarily protects them. If Hillary Clinton ever decides that it is in her interest to throw the company to the wolves, I strongly suspect she won’t hesitate.

Though it’s worth pointing out that Burger King didn’t get attacked very much by the White House when it inverted to Canada, perhaps because Warren Buffett, a major Obama ally, was involved with the deal.

But wouldn’t it be nice if we had a reasonable tax code so that companies didn’t have to worry about currying favor with the political class?

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Statist Arguments Are Especially Weak When Using Apples-to-Apples Comparisons

While there are many things I admire about Scandinavian nations, I’ve never understood why leftists such as Bernie Sanders think they are great role models.

Not only are income levels and living standards higher in the United States, but the data show that Americans of Swedish origin in America have much higher incomes than the Swedes who still live in Sweden. And the same is true for other Nordic nations.

The Nordics-to-Nordics comparisons seem especially persuasive because they’re based on apples-to-apples data. What other explanation can there be, after all, if the same people earn more and produce more when government is smaller?

The same point seems appropriate when examining how people of Chinese origin earn very high incomes in Hong Kong, Singapore, Taiwan, and the United States (all places with reasonably high levels of economic liberty), but are relatively poor in China (where there is still far too much government control over economic affairs).

Again, what possible explanation is there other than the degree of economic freedom?

Let’s now look at two other examples of how leftist arguments fall apart when using apples-to-apples comparisons.

A few years ago, there was a major political fight in Wisconsin over the power of unionized government bureaucracies. State policy makers eventually succeeded in curtailing union privileges.

Some commentators groused that this would make Wisconsin more like non-union Texas. And the Lone Star States was not a good role model for educating children, according to Paul Krugman.

This led David Burge (a.k.a., Iowahawk) to take a close look at the numbers to see which state actually did a better job of educating students. And when you compare apples to apples, it turns out that Longhorns rule and Badgers drool.

…white students in Texas perform better than white students in Wisconsin, black students in Texas perform better than black students in Wisconsin, Hispanic students in Texas perform better than Hispanic students in Wisconsin. In 18 separate ethnicity-controlled comparisons, the only one where Wisconsin students performed better than their peers in Texas was 4th grade science for Hispanic students (statistically insignificant), and this was reversed by 8th grade. Further, Texas students exceeded the national average for their ethnic cohort in all 18 comparisons; Wisconsinites were below the national average in 8… Not only did white Texas students outperform white Wisconsin students, the gap between white students and minority students in Texas was much less than the gap between white and minority students in Wisconsin. In other words, students are better off in Texas schools than in Wisconsin schools – especially minority students.

This is what I call a devastating debunking.

Though Krugman routinely invites mockery, and I’ve enjoyed exposing his disingenuous, sloppy, and dishonest use of data on issues such as Obamanomics, California jobs, American fiscal policy, Greek economics, U.S. and U.K. austerity, German fiscal policy, Estonian economics, British fiscal policy, inflation, European austerity, the financial crisis, and the Heritage Foundation.

Gee, with all these examples, I wonder if there’s a pattern?

Our second example showing the value of apples-to-apples comparisons deals with gun control.

Writing for PJ Media, Clayton Cramer compares murder rates in adjoining American states and Canadian provinces. he starts by acknowledging that a generic US-v.-Canada comparison might lead people to think gun rights are somehow a factor in more deaths.

…for Canada as a whole, murder rates are still considerably lower than for the United States as a whole. For 2011, Canada had 1.73 homicides per 100,000 people; the United States had 4.8 murders and non-negligent homicides per 100,000 people.

But he then makes comparisons that suggest guns are not a relevant factor.

…look at murder rates for Canadian provinces and compare them to their immediate American state neighbors. When you do that, you discover some very curious differences that show gun availability must be either a very minor factor in determining murder rates, or if it is a major factor, it is overwhelmed by factors that are vastly more important.

Gun ownership is easy and widespread in Idaho, for instance, but murder rates are lower than in many otherwise similar Canadian provinces.

I live in Idaho.  In 2011, our murder rate was 2.3 per 100,000 people.  We have almost no gun-control laws here. You need a permit to carry concealed in cities, but nearly anyone who may legally own a firearm and is over 21 can get that permit.  We are subject to the federal background check on firearms, but otherwise there are no restrictions. Do you want a machine gun? And yes, I mean a real machine gun, not a semiautomatic AR-15. There is the federal paperwork required, but the state imposes no licensing of its own.  I have friends with completely legal full-automatic Thompson submachine guns. Surely with such lax gun-control laws, our murder rate must be much higher than our Canadian counterparts’ rate. But this is not the case: I was surprised to find that not only Nunavut (21.01) and the Northwest Territories (6.87) in Canada had much higher murder rates than Idaho, but even Nova Scotia (2.33), Manitoba (4.24), Saskatchewan (3.59), and Alberta (2.88) had higher murder rates.

The same is true for other states (all with laws that favor gun ownership) that border Canada.

What about Minnesota? It had 1.4 murders per 100,000 in 2011, lower than not only all those prairie provinces, but even lower than Canada as a whole.  Montana had 2.8 murders per 100,000, still better than four Canadian provinces and one Canadian territory.  When you get to North Dakota, another one of these American states with far less gun control than Canada, the murder rate is 3.5 per 100,000, still lower than Manitoba, Saskatchewan, the Northwest Territories, and Nunavut.  And let me emphasize that Minnesota, Montana, and North Dakota, like Idaho, are all shall-issue concealed-weapon permit states: nearly any adult without a felony conviction or a domestic violence misdemeanor conviction can obtain a concealed weapon permit with little or no effort.

The takeaway from this evidence (as well as other evidence I have shared) is that availability of guns doesn’t cause murders.

Other factors dominate.

P.S. Regarding the gun control data shared above, some leftists might be tempted to somehow argue that American states with cold weather somehow are less prone to violence. That doesn’t make sense since the Canadian provinces presumably are even colder. Moreover, that argument conflicts with this bit of satire comparing murder rates in chilly Chicago and steamy Houston.

P.P.S. In his role as Iowahawk, David Burge has produced some great political satire, including extortion by Obama’s teleprompter, the bible according to Obama, mockery of the Obama campaign’s life-of-Julia moocher, and (my favorite) the video about a government-designed car.

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Mr. President, the only Thing We Can Learn from Communism Is that It Doesn’t Work

Over the years, Barack Obama has made some statements that indicate a very statist worldview.

• 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…”
• In 2012, Obama made his infamous “you didn’t build that” statement, which generated some very amusing political cartoons.

Now he may have added to that list. Check out this excerpt from a report in the Daily Caller.

President Barack Obama downplayed the differences between capitalism and communism, claiming that they are just “intellectual arguments.” …Obama said…”I think for your generation, you should be practical and just choose from what works.”

It’s hard to object to the notion that people should choose “what works,” so perhaps there’s not a specific quote that I can add to my collection. However, the President’s implication that there’s some kind of equivalence between capitalism and communism, which both systems having desirable features, is morally offensive. Sort of like saying that we should “choose from what works” in Hitler’s national socialism.

Communism is a disgusting system that butchered more than 100,000,000 people.

It is a system that leads to starvation and suffering.

Communism produces Nazi-level horrors of brutality.

So what exactly “works” in that system, Mr. President? If you watch Obama’s speech, you’ll notice there’s not a lot of substance. There is a bit of praise for Cuba’s decrepit government-run healthcare system (you can click here, here, and here if you want to learn why the system is horrifying and terrible for ordinary citizens). And he also seems to think it’s some sort of achievement that Cuba has schools.

So let’s take a closer look at what Cuba actually has to offer. Natalie Morales is a Cuban-American actor, writer, and filmmaker. Here’s some of what she wrote about her country and her relatives still trapped on the island.

…we send money, medicine or syringes for the diabetic aunt (since the hospital doesn’t have any unused disposable ones), baby clothes, adult clothes, shoes, or food… a doctor, a lawyer, or another similar profession that is considered to be high-earning everywhere else in the world will make about twenty to thirty dollars per month in Cuba. Yet shampoo at the store still costs three dollars. This is because everything is supposed to be rationed out to you, but the reality is that they’re always out of most things, and your designated ration is always meager. …if you’re a farmer and you’ve raised a cow, and you’re starving, and your family is also starving, and you decide to kill that cow and eat it? You’ll be put in jail for life. Because it’s not “your” cow, it’s everyone’s cow. That’s good ol’ Communism in practice.

Ms. Morales is especially irritated by Americans who fret that capitalism will “ruin” Cuba.

…picture me at any dinner party or Hollywood event or drugstore or press interview or pretty much any situation where someone who considers themselves “cultured” finds out I’m Cuban. I prepare myself for the seemingly unavoidable…“I have to go there before it’s ruined!”…I will say some version of this: “What exactly do you think will ruin Cuba? Running water? Available food? Freedom of speech? Uncontrolled media and Internet? Access to proper healthcare? You want to go to Cuba before the buildings get repaired? Before people can actually live off their wages? Or before the oppressive Communist regime is someday overthrown?”

Here’s more about Cuba’s communist paradise, including her observations of the healthcare system that Obama admires.

The very, very young girls prostituting themselves are not doing it because they can’t get enough of old Canadian men, but because it pays more than being a doctor does. Hospitals for regular Cuban citizens are not what Michael Moore showed you in Sicko. …That was a Communist hospital for members of the Party and for tourists… There are no janitors in the hospitals because it pays more money to steal janitorial supplies and sell them on the street than it does to actually have a job there. Therefore, the halls and rooms are covered in blood, urine, and feces, and you need to bring your own sheets, blankets, pillows, towels, and mattresses when you are admitted. Doctors have to reuse needles on patients. My mom’s aunt had a stroke and the doctor’s course of treatment was to “put her feet up and let the blood rush back to her head.”

She closes with a PG-13 request for idiotic westerners.

…for God’s sake, please don’t wear a fucking Che t-shirt.

Very well said.

By the way, none of this means we shouldn’t normalize relations with Cuba. There’s no longer a Soviet Union, so Cuba doesn’t represent a strategic threat. So, yes, relax restrictions on trade and travel, just like we have for China, Zimbabwe, Vietnam, Russia, Venezuela, and other nations that have unsavory political systems.

But the opening of relations doesn’t mean we should pretend that other systems are somehow good or equivalent to capitalism and classical liberalism.

Let’s close by sharing some news from another garden spot of communism.

If North Korea’s reputation as a place of hunger, hardship and repression was not bad enough, scientists have now discovered that it is too grim even for vultures. …Eurasian black vultures are no longer bothering to stop over in North Korea as they fly from their breeding grounds in Mongolia to their winter homes in South Korea. They concluded that food is so short under the communist regime that even the world’s best-known carrion birds cannot feed themselves. …Lee Han Su, of the institute, said: “This seems to happen because in North Korea the vultures can barely find animal corpses, which are major food resources for them.” Under the draconian regime of Kim Jong Un the country is unable to feed itself. International aid agencies report chronic malnutrition in some regions. …wild animals face the risk of being eaten by people. Defectors describe how victims of the famine were driven to eat dogs, cats, rats, grasshoppers, dragonflies, sparrows and crows. Vultures, for the time being at least, are off the menu.

I’m not sure what American leftists will say we can learn from North Korea. Even PETA presumably won’t be happy that starving North Koreans are eating sparrows and grasshoppers.

The bottom line is that there is zero moral equivalence between communism and capitalism. The former is based on servility to the state and the latter is based on liberty.

But if you’re amoral and simply want to know what works, compare the performance of North Korea and South Korea. Or look at the difference between Cuba and Hong Kong.

Very compelling evidence.

But this isn’t an issue that should be decided on the basis of utilitarian comparisons. What should matter most is that communism is evil.

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Japan’s Descent into Keynesian Parody

It’s very hard to be optimistic about Japan. I’ve even referred to the country as a basket case.

But my concern is not that the country has been mired in stagnation for the past 25 years. Instead, I’m much more worried about the future. The main problem is that Japan has the usual misguided entitlement programs that are found in most developed nations, but has far-worse-than-usual demographics. That’s not a good long-term combination.

As I repeatedly point out in my speeches and elsewhere, a modest-sized welfare state can be sustained in a nation with a population pyramid. But even a small welfare state is a challenge for a country with a population cylinder. And it’s a crisis for a jurisdiction such as Japan that will soon have an upside-down pyramid.

To make matters worse, Japanese politicians don’t seem overly interested in genuine entitlement reform. Instead, most of the discussion (egged on by the tax-free bureaucrats at the OECD) seems focused on how to extract more money from the private sector to finance an ever-growing public sector.

But the icing on the cake of bad policy is that Japanese politicians are addicted to Keynesian economics. For two-plus decades, they’ve enacted one “stimulus package” after another. None of these schemes have succeeded. Indeed, the only real effect has been a quadrupling of the debt burden.

The Wall Street Journal shares my pessimism. Here’s some of what was stated in an editorial late last year.

Japan is in recession for the fifth time in seven years, and the…Prime Minister who promised to end his country’s stagnation is failing at the task. …Mr. Abe’s economic plan consisted of three “arrows,” starting with fiscal spending and monetary easing. The result is a national debt set to hit 250% of GDP by the end of the year. The Bank of Japan is buying bonds at a $652 billion annual rate, a more radical quantitative easing than the Federal Reserve’s. …The third arrow, structural economic reform, offered Japan the only hope of sustained economic growth. …But for every step Mr. Abe takes toward reform, one foot remains planted in the political economy of Japan Inc. In April 2014, Mr. Abe acquiesced to a disastrous three percentage-point increase in the value-added tax, to 8%, pushing Japan into its first recession on his watch. More recently, he has pushed politically popular but economically ineffectual spending measures on child care and help for the elderly. …only 25% of the population now believes Abenomics will improve the economy. Reality has a way of catching up with political promises.

You might think that even politicians might learn after repeated failure that big government is not a recipe for prosperity.

But you would be wrong.

Notwithstanding the fact that Keynesian economics hasn’t worked, Japanese politicians are doubling down on the wrong approach.

According to a report from Bloomberg, American Keynesians (when they’re not busing giving bad advice to Greece) are telling Japan to dig a deeper hole.

Paul Krugman urged Japanese Prime Minister Shinzo Abe to…expand fiscal stimulus to revive the economy.

Reuters filed a similar report.

U.S. economist Paul Krugman said on Tuesday he advised Japan’s Prime Minister Shinzo Abe to…boost fiscal spending… Krugman’s advice was the same as that which fellow U.S. economist Joseph Stiglitz gave Abe last week.

Indeed, there apparently was a consensus for bigger government.

Every one of the economists that Prime Minister Shinzo Abe has invited here for a series of meetings with policymakers has recommended that Japan let loose government spending… When Abe asked why consumer spending has remained feeble since the 2014 consumption tax increase, the U.S. academic suggested the answer lies in expectations that fiscal stimulus will end. …Abe’s government…appears to be seeking to rally the G-7 for aggressive fiscal policy.

So why did the Japanese government create an echo chamber of Keynesianism?

Perhaps because politicians want an excuse to buy votes with other people’s money.

With an upper house election looming in July, ruling coalition lawmakers also are eager to dole out massive public spending.

And it appears that Japanese politicians are happy to take advice when it’s based on their spending vice ostensibly being a fiscal virtue.

That’s not too shocking, but the Keynesian scheme that’s being prepared is a parody even by Krugmanesque standards.

Japan’s government is considering handing out gift certificates to low-income young people in a supplementary budget for fiscal 2016 as consumer spending remains sluggish on a slow wage recovery, the Sankei Shimbun newspaper reported Thursday. Government officials believe certificates for purchasing daily necessities would lead to spending, unlike cash handouts which could be saved… The additional fiscal program would follow a similar measure for seniors and the ruling coalition would use it to gain voter support before the Upper House election expected in July, the daily said.

Maybe the politicians will succeed in buying votes, but they shouldn’t expect better economic performance. Giving people gift certificates won’t alter incentives to work, save, and invest (the behaviors that actually result in more economic output).

Indeed, on the margin these handouts may lure a few additional people out of the labor force.

The plan is foolish even from a Keynesian perspective. Since money is fungible, do these people really think gift certificates will encourage more spending that cash handouts?

By the way, another reason to be pessimistic about Japan is that there apparently aren’t any politicians who understand economics. Or at least there aren’t any that want good policy. The opposition party isn’t opposed to Keynesian foolishness. Instead, it’s leader is only concerned about who gets the goodies.

Katsuya Okada, the leader of the main opposition Democratic Party of Japan, said in parliamentary debate in January. “Elderly people are not the only ones who are suffering. Among the working generation, only a limited number of people are feeling the fruit of Abenomics.”

The bottom line is that Japan will become another Greece at some point. I’m not smart enough to know whether that will happen in five years or twenty-five years, but barring a radical reversal in government policy, the nation is in deep long-run trouble.

P.S. Though I have to give the Japanese government credit for being so incompetent that it introduced a giveaway program that was so poorly designed that nobody signed up for the handout.

P.P.S. And Japan also wins the prize for what must be the world’s oddest regulation.

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When Local Governments Are Greedy and Corrupt, Don’t Expect Honest and Efficient Law Enforcement

While I’m a big fan of federalism, this isn’t because I have a starry-eyed view of non-Washington politicians. Of course there is plenty of grotesque misbehavior by state and local governments.

And it’s most troubling when it involves law enforcement and the legal system.

David French of National Review has a very powerful and compelling article about thuggery at the local level.

…my experience with small-town government…pushed me in a libertarian direction before I even knew what a libertarian was. The public schools were dreadful. Focused on patronage more than education, the school system was a public jobs program… Our local government’s core mission was dispensing favors. If you were part of the local elite, the normal rules of life simply didn’t apply. Speeding tickets? No problem. You need a conditional use permit? You got it! …if you were poor or lacked connections, “the rules” applied to you with a vengeance. After all, someone had to pay the city’s bills. There was no escaping speeding tickets, zoning officials were ruthless, and each interaction with the unyielding authorities carried with it the threat of immediate escalation, sometimes without justification.

Some of the folks who protest police mistreatment see the issue through the prism of race, but maybe the real problem is that cops are expected to generate revenue for local politicians.

…It is entirely possible to believe (as I do) that the evidence indicates that “hands up, don’t shoot” is a fiction, even a malicious fiction, while also believing that the evidence indicates that Ferguson’s government was corrupt in exactly the way that government is typically corrupt.  We often take for granted the rule of law. If you are blessed to live in a town where the officials are relatively clean, or if you’re among the class of people that officials fear to cross, then public institutions seem benign — helpful, even. But there are millions of our fellow citizens who live a different reality, under the authority of different kinds of public officials — officials who view them as virtual ATMs, regardless of their ability to pay. And when the government imposes that mindset on police officers, forcing men and women who are trained to respond to (and anticipate) the most violent incidents to essentially become the armed tax collectors of a corrupt system, then that government is unjust.

Amen. Eric garner is dead today because New York City has cops act as deputy tax collectors.

Speaking of mistreatment and abuse, Debra Saunders has a must-read account of California’s immoral system for pillaging drivers.

California is filled with people who are one traffic ticket away from losing their means of independent transportation. They get a ticket for a busted tail light or a small-change moving violation. On paper, the fine is $100, but with surcharges, it’s more like $490. People who cannot pay often do not show up in court — which drives up the cost. According to the Judicial Council of California, about 612,000 Californians have suspended driver’s licenses because they didn’t pay fines. In 2013, more people — 510,811 — had their licenses suspended for not paying fines than the 150,366 who lost their licenses for drunken driving. “For a lot of people, the car is the only asset they own in this whole damn world,” noted Mike Herald of the Western Center on Law and Poverty. …“We’ve turned too many of the police into tax collectors and wonder why they don’t have strong relations with the community,” Norquist said.

This is disgusting, particularly because of how the system is a nightmare for poor people.

I’m about as far from an advocate of class warfare as is possible, but I can’t help but be sympathetic to the notion that traffic fines should be tied to income. Maybe if the middle class and the rich had to pay fines that confiscated huge chunks of their disposable income, there would be pressure to fix this horrid system.

And what’s really outrageous is how the government adds all sorts of fees to the cost of a ticket.

It’s deceptive advertising: a $100 fine fronts for an extra $390 in add-ons. The price tag can grow exponentially if unpaid and lead to losing one’s license. The penalty is harsh and crushing on the poor, but these fees also are undeserved for the middle class. If Sacramento wants to levy a $490 fine for moving violations, let lawmakers put honest numbers on their legislation — instead of pretending that the fine is $100. Alas, the Legislature has found that hidden fees are a handy way to finance the court system without voting to raise tax revenue. …If a private corporation advertised a $100 payment for something that really cost $500, California Attorney General Kamala Harris probably would go after the corporation for false advertising. If a credit card company boosted its fees the way the courts do, activists would call those practices usury. If the police yanked people’s driver’s licenses because they didn’t pay a $100 fine, the public would regard such a harsh penalty as excessive force. Yet Sacramento has codified a system that commits all three sins and it’s perfectly legal. Really, is there anything more brutal than government.

The good news is that the state is offering an amnesty, allowing some drivers the ability to clean up their record at a reduced cost.

But there’s a catch. You have to pay a hidden fee!

…there is a $50 amnesty program fee. That’s right — if you want to pay off unpaid traffic fines that have ballooned because of hidden fees, first you have to pay another…hidden fee.

I guess coughing up $50 is a good deal if that can reduce other fines by a greater amount, but isn’t this typical of government. Making you give them some money in order to give them more money.

Low-income communities also bear the brunt of dubious police tactics.

The Washington Post has an in-depth report on how cops are conducting raids against residences even in the absence of any evidence of criminal wrongdoing.

Sallie Taylor was sitting in her apartment in Northeast Washington one evening in January 2015 watching “Bible Talk” when…D.C. police officers smashed through her door, a shotgun was pointed at her face and she was ordered to the floor. …Taylor, a soft-spoken 63-year-old grandmother who was dressed in a white nightgown and said she has never had even a speeding ticket. The heavily armed squad thought they were searching the residence of a woman arrested two miles away the previous night for carrying a half-ounce vial of PCP. …The search warrant executed at Taylor’s apartment cited no evidence of criminal activity there. Instead, in an affidavit to a judge, police argued that they should be able to search for drugs there based on their “training and experience” investigating the drug trade. They relied on an address they found in a court-records system for the woman arrested with PCP.

In other words, the government can bust into someone’s home, notwithstanding the lack of any evidence, simply because some cop has a hunch based on “training and experience’?

I suspect America’s Founding Fathers would not be pleased with this reinterpretation of the Constitution.

The Fourth Amendment to the U.S. Constitution protects citizens from “unreasonable searches,” generally requiring government agents to obtain a warrant from a judge by showing they have probable cause to think that they will find a specific item at a specific location. In recent decades, police have been given wide latitude by the courts… Attorney Alec Karakatsanis, of the nonprofit group D.C.-based Equal Justice Under Law, said warrants that rely on training and experience as justification for a search subject the black community to abusive police intrusion based on flimsy investigative work.

To make matters worse, the government oftentimes doesn’t bother to confirm addresses before launching these raids.

Failure to properly verify an address led police to the home of Patricia Dandridge on Jan. 27, 2015. She returned from work to find her apartment in Southeast ransacked. The door was beaten in and her bed frame was broken, she said. Clothes and personal papers were strewn across the floor. “I thought I’d been robbed, but my neighbor told me it was the police,” said Dandridge, 45. …Three officers had forced their way in to look for firearms. They left empty-handed. The warrant was based on a drug complaint at a housing complex in Southeast more than five miles from Dandridge’s apartment, according to the affidavit police used to justify the search. …Palmer lived down the hall with his parents in Apartment 103. Dandridge lives in 102. “103 does not look like 102,” Dandridge said. The apartments are on opposite ends of the building.

Last but not least, Kevin Williamson weighs in at National Review with a withering look at police misconduct and corruption.

Is it really so difficult to believe that there is widespread wrongdoing, and widespread lying about it, among U.S. law-enforcement agencies, particularly those in big, Democrat-run cities infamous for the corruption of their other municipal institutions? Why do conservatives find it so plausible — obvious, even — that the IRS and the EPA and the Atlanta public schools are corrupt and self-serving, but somehow believe that the Baltimore police department isn’t?

He has lots of examples.

There are a great many investigations of police misconduct in Baltimore, where the local police behave more like the militia of a third-world warlord than a police agency. …Today, it is the Los Angeles sheriff. Before that, it was the Los Angeles Police Department, whose anti-gang task force became a rolling crime wave of its own, with 70 officers eventually implicated in unlawful shootings, bank robbery, drug dealing, theft, planting false evidence, framing suspects, destroying evidence of their wrongdoing and the usual perjury, perjury, and perjury. Then came Louis Eppolito and Stephen Caracappa, NYPD detectives convicted in 2006 on a raft of charges — racketeering, extortion, drug-dealing, murder and conspiracy to commit murder, running an illegal gambling ring, obstruction of justice — as part of a 20-year crime spree that ranged from New York to Las Vegas. …In Fairview, Tenn., a new police detective was just fired after responding to a prostitution ad. An NYPD officer was awarded $15 million in damages for being kidnapped and beaten inside his own home by other NYPD officers with a score to settle. Honolulu announced that in 2015 it fired a record number of officers for misconduct.

Corruption, malfeasance, and misbehavior seem to be a natural part of the system.

…facts suggest that our police departments have the same problems as our other government agencies, exacerbated by the fact that police are, inevitably, in the business of violence. It isn’t a few scattered misdeeds when it’s the NYPD, the LAPD, the Baltimore PD, the Los Angeles sheriff’s department, and more. That’s not a few bad apples — that’s the orchard. And it needs pruning.

Kevin’s argument is very compelling, particularly his appeal to conservatives about being skeptical of all parts of government at all times.

This is similar to the argument I made that it’s especially important to monitor and resist government wrongdoing when “the good guys” are in power.

In other words, calling for the elimination of the Department of Education or the Department of Housing and Urban Development while Obama is in office is (or should be) the easy part.

By contrast, fighting against such wasteful programs when Bush was in the White House was much harder. Many supposed fiscal conservatives suddenly went silent, and that sin of omission helps to explain why the burden of federal spending increased so rapidly.

Yes, police protection is a legitimate function of government, so the issue isn’t whether police forces should be abolished (though Camden, New Jersey, got good results by doing exactly that). But skepticism of police budgets and police behavior is still very appropriate. Indeed, one obvious takeaway from Kevin’s article is that it’s especially important for “law and order” conservatives to be vigilant to make sure police forces operate honestly and efficiently (thus making life easier for the majority of cops who simply want to do a good job and protect their communities).

And that also means getting rid of laws that don’t make sense.

Just as defense hawks should be the ones most critical of wasteful spending by the Pentagon or misguided military commitments by politicians.

P.S. You can enjoy some police-related humor here, here, and here.

P.P.S. And don’t forget cops generally are on the right side on guns.

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In One Phrase, Everything that You Need to Know about the Failure of Big Government

I realize it’s presumptuous, but I periodically make grandiose claims that a single column will tell readers “everything” they need to know about a topic. I’ve used that tactic when writing about tax loopholes, entitlements, fiscal policy, bureaucracy (twice), tax evasion, France, Greece, corporate inversions, and economic policy.

Sometimes I even claim a single image, chart, or cartoon provides a reader with “everything” needed to understand an issue. Examples include the minimum wage, economic policy, the welfare state, supply-side economics, the tax code, Europe’s fiscal crisis, Social Security reform, demographics, overpaid bureaucrats, healthcare economics, inequality, fiscal policy, and the Ryan budget (twice).

Needless to say, I don’t actually think these columns give readers “everything” on a topic. But I do hope the information makes a compelling and informative point about an issue.

So it’s time to expand this tactic and present one sentence that tells readers “everything” they need to know about the failure of big government. And it’s not even the full sentence, just the bolded portion in this excerpt from a BuzzFeed story about how Belgium is trying to deal with terrorism.

One Belgian counterterrorism official told BuzzFeed News last week that due to the small size of the Belgian government and the huge numbers of open investigations…virtually every police detective and military intelligence officer in the country was focused on international jihadi investigations. …the official, who spoke on condition of anonymity because he was not authorized to speak to the media, said. “It’s literally an impossible situation.”

When I read that sentence, my jaw dropped to the floor. Belgium has one of the biggest and most bloated governments in the world.

You don’t have to take my word for it. Go to the OECD’s collection of data and click on Table 25 and you’ll see that the public sector in Belgium consumes almost 54 percent of the nation’s economy. That’s bigger even than the size of government in Sweden and Italy.

So the notion that fighting terrorism is hampered by the “small size of the Belgian government” is utterly absurd.

The real problem is that politicians and bureaucrats have become so focused on redistributing money to various interest groups that there’s not enough attention given to fulfilling the few legitimate functions of government. Not just in Belgium, but all over the world. Here’s what I wrote on this issue back in 2012.

…today’s bloated welfare state interferes with and undermines the government’s ability to competently fulfill its legitimate responsibilities. Imagine, for instance, if we had the kind of limited federal government envisioned by the Founding Fathers and the “best and brightest” people in government – instead of being dispersed across a vast bureaucracy – were concentrated on protecting the national security of the American people. In that hypothetical world, I’m guessing something like the 9-11 attacks would be far less likely.

What I said about America back then is even more true about Belgium today. Big governments are clumsy and ineffective, and bigger governments are even more incompetent. There’s even scholarly research confirming that larger public sectors are associated with higher levels of inefficiency.

And the same point has been made by folks such as Mark Steyn and Robert Samuelson (though David Brooks inexplicably reaches the opposite conclusion).

The good news is that the American people have an instinctive understanding of the problem. When asked to describe the federal government, you’ll notice that “effective” and “efficient” are not the words people choose.

P.S. On a related note, I argued in a column from 2014 that the federal government should be much smaller so it could more effectively focus on genuine threats such as the Ebola virus.

P.S. It’s worth pointing out that Israel, which faces far greater security challenges than Belgium, manages to do a better job with a government that is not nearly as large.

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Dissecting Trumponomics

At this stage, it’s quite likely that Donald Trump will be the Republican presidential nominee. Conventional wisdom suggests that this means Democrats will win in November. On the other hand, conventional wisdom also told us that Trump would never get this far.  So it’s unclear what will happen in the general election, particularly given the ethical cloud surrounding the presumptive Democratic nominee.

So let’s contemplate what a potential Trump Administration would mean for economic liberty and American prosperity. Would the United States become more like Hong Kong, with a smaller burden of government and less intervention? Or more like France, with higher taxes and spending, along with additional cronyism and red tape?

The honest answer is that I don’t know. He has put forth a giant tax cut that is reasonably well designed, so that implies more prosperity, but is he serious about the plan? And does he have a plan for the concomitant spending reforms needed to make his tax proposal viable?

He also has lots of protectionist rhetoric, including a proposal for a 45 percent tax on Chinese products, which implies harmful dislocation to the American economy. Is he actually serious about risking a global trade war, or is his saber rattling just a negotiating tool, as some of his defenders claim?

And what about entitlement programs, which arguably represent the greatest long-term threat to America’s economy? Trump certainly gives the impression that he thinks Social Security, Medicare, and Medicaid don’t need to be reformed. Is he really serious when he makes this claim?

If we take what he says seriously, Trump is more statist than every Republican who sought the GOP nomination but less statist than both Hillary Clinton and Bernie Sanders.

Though I confess I’m basing that opinion solely on whether I agreed with the candidates, as measured by the I-Side-With political quiz.

So let’s see what others have to say.

My colleague David Boaz, writing for National Review, is not impressed.

Without even getting into his past support for a massive wealth tax and single-payer health care, his know-nothing protectionism, or his passionate defense of eminent domain, I think we can say that this is a Republican campaign that would have appalled Buckley, Goldwater, and Reagan.

Speaking of National Review, Kevin Williamson argues that Trump represents the worst of cronyism.

The Tea Party’s fundamental complaint, which was the same complaint put forward by Occupy Wall Street minus the Maoist daydreaming, is that there exists a corrosive and distasteful relationship between certain politically connected businesses and the politicians who are both their patrons and their clients. Donald Trump is the face of that insalubrious relationship, a lifelong crony capitalist who brags about buying political favors.

Last but not least, my former UGA economics professor Paul Rubin (now at Emory), in a column for the Wall Street Journal, explains that Trump (and Sanders) incorrectly thinks the economy is a fixed pie.

Messrs. Trump and Sanders have been led astray by zero-sum thinking, or the assumption that economic magnitudes are fixed when they are in fact variable. If the world is zero-sum, then the number of jobs is fixed, as is gross domestic product. In Mr. Trump’s mind, if there are more Mexican workers in the U.S., then American workers must lose their jobs. In the real, positive-sum world where Mr. Trump doesn’t live, Mexican workers also consume, thus increasing GDP and creating new jobs. …Similar arguments apply to Mr. Trump’s analysis of Chinese imports. In a world of fixed GDP and prices, imports of goods from China merely replace goods that otherwise would have been produced by American workers. In the real world, imports reduce prices and increase GDP, so workers, who are also consumers, benefit from imports of lower-cost goods and increase their consumption of other goods. …Zero-sum thinking persists because it is superficially appealing. Mr. Trump’s policies would in theory benefit Americans and increase jobs. …In the actual, positive-sum world we live in, their policies…would, if adopted, lead to an economic depression that would make the 1930s look prosperous.

I actually think Prof. Rubin overstates his conclusion. It took a lot of truly awful policies by Herbert Hoover and Franklin Roosevelt to produce the Great Depression.

Barack Obama didn’t come close to Hoover and Roosevelt with his bad policies and I suspect even the bad version of Donald Trump would (thankfully) fall short as well.

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Obama’s Scheme to Cede Internet Governance to the Keystone Cops at the United Nations

I’m not a fan of international bureaucracies. Simply stated, they routinely promote statism, which translates into less freedom and prosperity.

But not all international bureaucracies are created equal. Most of my ire is directed at the International Monetary Fund and the Organization for Economic Cooperation and Development for the simple reason that those two institutions actually have some ability to subsidize or coerce bad policy.

The United Nations, by contrast, is largely ineffective and corrupt (or absurd, as seen by the effort to make taxpayer-funded birth control a “human right”). So while its even more left-leaning than the IMF and OECD, it doesn’t do as much damage.

Though that may change if the UN succeeds in its multi-year plan to seize control of the Internet, something that may happen because of feckless choices by the Obama Administration (if you think his FCC scheme to turn the Internet into a public utility is misguided, you’ll love what’s now happening).

Let’s review the situation. Here’s some background information from an article by James Glassman.

…the Internet has been governed by the people who use it. In a bottom-up process remarkably free of political interference, the system brings together businesses, engineers, research institutions, civil society groups, and governments to make decisions by consensus. …this “multi-stakeholder model,” as it’s called, actually works, with real transparency and accountability. Rooted in the principles of seamless cross-border networks and freedom of expression, the Internet has been adopted faster than any other means of communication in history.

But the attitude of politicians and bureaucrats seems to be that if something works, it’s time to break it.

…the Internet’s good-governance model faces a serious threat. …the United Nations General…will consider new ways to govern the Internet, and authoritarian countries are pushing to give governments a bigger stake in decision-making. …Regimes like those in Russia, China, and Iran are themselves under serious threat, with their own Internet users criticizing government and uncovering corruption. What they want is a U.N.-style model, where every country has a vote, and those votes will boost the power of the governments casting them. One result could be a balkanized Internet where threatening speech, or commercial competition, is squelched at the border.

That’s not good news, as I can personally attest having been severely limited in my Internet access during a recent trip to China.

Surely the United States will oppose this agenda, right? That may have been true years ago, but not now.

…the United States has been a fervent supporter of the multi-stakeholder process. But last year, the Obama administration announced it would give up…now ICANN is up for grabs. It could end up being not just a manager of addresses but the main governing institution for the entire Internet.

And that means the heavy foot of government.

Consider the filing by the Group of 77 plus China — a coalition…that…says “… the overall authority for Internet related public policy issues is the sovereign right of States.” …Russia’s filing is even worse: “We consider it necessary [the document’s italics] to consecutively increase the role of governments in the Internet governance…”

The bottom line is that decisions by the Obama Administration have made it more likely that governments will compromise the efficiency and openness of the Internet.

In past meetings of this sort, the U.S. has managed to keep the authoritarians at bay, but the administration’s ICANN decision — another case of attempting to lead from behind — won’t help. ICANN is a tempting prize for China and other countries. …The real problem is that with WSIS+10, the United Nations has gained official acceptance as the arbiter of Internet governance. …the conference itself amplifies the danger of a takeover by forces that see a free Internet as an existential threat.

Glassman’s article was published in December. It’s now March.

What’s happened over the past few months?

We have a new column in the Wall Street Journal by Gordon Crovitz, and the developments have been in the wrong direction.

Two years after President Obama decided to give up U.S. protection of the open Internet, his administration is now considering how to give away power to other governments, most of which want a closed, censored Internet. …The plan was supposed to ensure that U.S. control could never be replaced “with a government-led or intergovernmental organization solution.” Yet it does precisely that, giving foreign governments new powers over the Internet Corporation for Assigned Names and Numbers, or Icann, and a path to full control. …Robin Gross…filed a dissent with Icann against upgrading the government role “from an advisory to a decisional role over Icann’s policies, operations and corporate governance matters.”

And here’s what this may mean.

The main risk of government control is to the root zone of the Internet, currently protected by the U.S. government through its contract with Icann. If authoritarian governments can get access to the underlying website names and addresses globally, they could disable sites they don’t like everywhere in the world, not just in their own countries. In secret planning discussions last year leaked to me, the Russian representative told other authoritarian governments that full government control over Internet stakeholders is a topic that “needs to be further examined” only after the U.S. withdraws, creating a vacuum of power.

So is there any way of stopping Obama from surrendering the Internet?

Crovitz explains that there is hope.

Congress has used budget bills to defund any action by the Obama administration to end the U.S. contract with Icann, at least through this September. …A new president should decide the wisdom of abandoning the Internet before it is given up with no chance of return. The Obama administration doesn’t like to acknowledge American exceptionalism, but the open Internet reflects the American values of free speech and open innovation. The Internet as we know it won’t survive if other governments get their way.

I suppose a key issue is whether Congress can extend the funding ban until next year, at which point there may (or may not!) be a President interested in protecting the Internet.

P.S. If the busybodies at the United Nations simply need a topic to keep them occupied, perhaps they should deal with the ongoing scandal of sexual abuse by their own bureaucrats.

Here are but a few of the recent examples of UN personnel abusing their position:

• Just in the last few weeks, more children have come forward to allege sexual abuse by UN peacekeepers in the Central African Republic.

• In Haiti, UN personnel traded goods for sexual favors, exploiting several hundred women and girls.

• In the Ivory Coast, ten UN peacekeepers reportedly gang raped a 13-year-old girl.

• In Liberia, UN peacekeepers gave goods and presents in exchange for sex.

• In Bosnia, some UN personnel not only patronized brothels featuring kidnapped women and victims of war, but also allegedly helped procure women for brothels.

This is just the tip of the iceberg.

P.P.S. I confessed years ago to a fantasy involving the United Nations.

P.P.P.S. But when I read about the UN’s efforts for gun control, global taxation, UN-imposed taxes, a world currency, the Law of the Sea Treaty, tax harmonization, restrictions on American sovereignty, and climate-change statism, my real fantasy is to raze the building.

P.P.P.P.S. I actually participated in a conference at the UN a few years ago, sort of a personal Daniel-in-the-lion’s-den experience.

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A Laffer-Curve Relationship between Welfare Spending and Poverty

The welfare state is bad news. It’s bad for taxpayers and it’s bad for recipients.

It’s also bad for the economy since prosperity is in part a function of the quantity of labor that is productively employed. As such, government programs that lure people into dependency obviously reduce national economic output.

We can get a sense of how the nation is being hurt by reviewing some of the scholarly literature.

Writing for the Cato Journal, Lowell Gallaway and Daniel Garrett explore the relationship between redistribution spending and poverty reduction.

They start by pointing out that more welfare spending used to be associated with reductions in poverty. But when President Johnson launched his so-called War on Poverty and dramatically increased the level of redistribution, the link between welfare spending and poverty reduction substantially weakened.

…the real per capita cost in the United States of federal public aid rose 70 percent in the 11 years between 1953—the first year the federal government reported an official poverty rate—and Johnson’s 1964 remarks. In the 11 years that followed, however, that same real per capita cost increased by an astonishing 434 percent—that is, more than six times faster than in 1953–64. …in 1953–64, every 10 percentage point increase in public aid was associated with a 1 percentage point drop in the official poverty rate. Compare that with the experience of the 11 years following the outbreak of hostilities in the War on Poverty. During that interval, every 1 percentage point fall in the poverty rate was accompanied by a 50 percentage point increase in real public aid. …the relationship between public aid and the poverty rate is subject to the principle of diminishing returns.

Not just a diminishing return. There’s a point at which more redistribution actually leads to an increase in poverty.

Just like there’s a point at which higher tax rates lead to less revenue. And the authors recognize this link.

This is a Laffer Curve type relationship, which is to say that while public aid initially decreases poverty, there eventually comes a point at which additional increases in public aid increase poverty. …the effectiveness of additional real public aid expenditures, as a policy instrument designed to reduce the poverty rate, had been exhausted by the mid-1970s. Indeed, any additional public aid beyond the mid-1970s levels would result in an increase, not a decrease, in the poverty rate.

Gallaway and Garrett crunch the numbers.

…to calculate the impact of public aid expenditures on the incidence of poverty in the United States. The greatest poverty-reducing effect occurs at $1,291 of per capita expenditures on public aid, which produces a 6.07 percentage point reduction in the overall poverty rate. However, as the level of real per capita public aid rises beyond $1,291, the poverty reducing effect is eroded. …at $2,407 of per capita public aid, all of the initial reductions in the poverty rate have disappeared. …By 2010, real per capita aid stood at $2,697—a level that produces a 2.52 percentage point increase in the poverty rate. Thus, the impact of per capita public aid in 2010 being $1,406 greater than the optimal, poverty-reducing level was to increase the poverty rate by 8.59 percentage points, according to our analysis.

Here’s the relevant table from their article.

Unfortunately, they didn’t create a hypothetical curve to show these numbers, so we don’t have the welfare/poverty version of the Laffer Curve.

But they do estimate the negative human impact of excessive redistribution spending.

Since the official poverty rate in 2010 was 15.1 percent, this implies that in the absence of that extra $1,406 of per capita public aid, the official poverty rate in 2010 would have been 6.5 percent. …Taking dynamic factors into consideration would probably lower the figure to less than 6 percent. This implies that the actual poverty rate in 2010 was more than two and-one-half times higher than it could have been were it not for the excessive use of public aid income transfers as an instrument of policy. In other words, it may be argued that public aid overreach was responsible for approximately 30 million extra people living in poverty in 2010.

And children are among the biggest victims.

…one in every eight American children is living below the poverty line because public aid payments exceed the level that would minimize the poverty rate.

Ugh, this is terrible news. Children raised in government-dependent households are significantly more likely to suffer adverse life outcomes, in large part because of very poor social capital.

Last but not least, the authors also speculate that excessive redistribution may be one of the reasons why the distribution of income has shifted.

…up to the mid- 1970s, government cash income transfers (public aid) were increasing the incomes of those in the bottom quintile of the income distribution by more than work-disincentive effects were reducing them. The result was a reduction in the official poverty rate. …However, as the volume of public aid payments continued to increase, the work-disincentive effect more than offset the income enhancements generated by the flow of public aid. As this happened, the poverty rate began to drift upward and the percentage share of all income received by those in the bottom quintile of the income distribution began what would turn out to be a long and steady decline.

By the way, I don’t think that there’s a “correct” or “proper” level of income distribution. That should be a function of what people contribute to economic output. I’m concerned instead with boosting growth so everyone has a chance to rise.

Which is why it is especially tragic that redistribution spending is trapping less-fortunate people in long-term government dependency by undermining their incentives to earn income.

The bottom line is that it’s time to reduce – and ideally eliminate – the Washington welfare state.

Though that involves a major challenge since the real beneficiaries of the current system are the “poverty pimps” in Washington.

P.S. This Wizard-of-Id parody contains a lot of insight about labor supply and government-distorted incentives. As does this Chuck Asay cartoon and this Robert Gorrell cartoon.

P.P.S. If you want to see sloppy and biased analysis (paid for with your tax dollars), take a look at efforts to rationalize that redistribution is good for growth from the International Monetary Fund and Organization for Economic Cooperation and Development.

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Trump, Sanders, and the Snake-Oil Economics of Protectionism

John Cowperthwaite deserves a lot of credit for Hong Kong’s prosperity. As a British appointee, he took a hands-off policy and allowed the colony’s economy to thrive. He didn’t even want the government to collect statistics since that would give interventionists data that might be used to argue for interventionism.

I have mixed feelings about that approach. I constantly use statistics because they so often show that free markets and small government produce the best outcomes. I even use data to show that Hong Kong’s economy should be emulated.

On the other hand, there are some statistics that cause a lot of mischief.

I’ve argued, for instance, that we should focus on how national prosperity is generated (gross domestic income) rather than how it is allocated (gross domestic product). If we changed the focus to GDI, the debate would more naturally focus on pro-growth policies to boost wages, small business income, and corporate profits rather than the misguided policies (such as Keynesian economics) that are enabled by a focus on GDP.

That being said, there’s a good argument that the worst government statistic is the “trade deficit.”

This is a very destructive piece of data because people instinctively assume a “deficit” is bad. Yet I have a trade deficit every year with my local grocery store. I’m always buying things from them and they never buy anything from me. Does that mean I’m a “loser”? Of course not. Voluntary exchange, by definition, means that both parties gain from any transaction. And this principle applies when voluntary exchange occurs across national borders.

Moreover, people oftentimes don’t realize that the necessary and automatic flip side of a “trade deficit” is a “capital surplus.” In other words, when foreign companies acquire dollars by selling to American consumers, they frequently decide that investing in the American economy is the best use of that money. And the huge amount of investment from overseas is a sign of comparative prosperity and vitality, not a sign of weakness.

And for any readers who nonetheless think protectionism might be a good idea, I challenge them to answer these eight questions.

I’m confident that both Donald Trump and Bernie Sanders wouldn’t be able to successfully answer any of them. Yet it appears they’ve gained some traction with voters by calling for protectionism.

That’s quite unfortunate. If the pro-trade policy consensus in America breaks down, that would create dangerous opportunities for politicians and bureaucrats to rig the game in favor of special interests while also imposing higher costs of taxpayers and consumers.

Let’s dig into the issue.

In a column for the Wall Street Journal, Mort Kondracke and Matthew Slaughter combine to produce a strong defense of trade.

…the four leading presidential candidates…oppose the U.S. ratifying the Trans-Pacific Partnership. All four demonize trade the same way. …Where is the leader with the courage to tell the truth? To say that trade made this nation great, and that trade barriers will destroy far more jobs than they can ever “save.” …America’s exporters and importers are among the country’s most dynamic companies, paying their workers about 15%-20% more than workers earn elsewhere in the economy. The overall gains are large. Trade and related activities—spurred by accords such as the North American Free Trade Agreement, or Nafta, have boosted annual U.S. income today by about 10 percentage points of GDP relative to what it would have been otherwise. This translates into an aggregate gain of about $1.8 trillion in 2015—thousands of dollars per U.S. household every year. …creative destruction—the movement of people and capital from weaker businesses to stronger ones and new opportunities—is how many of the gains from trade arise. …For generations, American presidents of both parties have spoken about the benefits of trade. “Economic isolation and political leadership are wholly incompatible,” warned John Kennedy. “A creative, competitive America is the answer to a changing world,” said Ronald Reagan. “We should always remember: protectionism is destructionism.”

By the way, I think Kondracke and Slaughter paint with too broad a brush. Both Cruz and Clinton are far less protectionist than Trump and Sanders. Though the authors are correct in noting that they’ve been reluctant (especially in the case of Clinton) to vigorously defend free trade.

The great legal scholar Richard Epstein (also my former debating partner) writes about the dangers of protectionism.

There are of course major difference between the insidious Trump and buffoonish Sanders. …Still, the real selling point of each boils down to one issue: In the indecorous language of the pollster, Pat Caddell, Americans feel “they have been screwed” by free trade. …free trade is in retreat as protectionism becomes the common thread across the both political parties. It is as though the economic unwisdom of the 1930 Smoot-Hawley Tariff Act is back.

Richard makes a very important point that politicians often support protectionism in an attempt to hide the damage they do with other misguided policies.

Free trade offers an uncompromising indictment of, and a powerful corrective for, America’s unsound economic policies. …the reason that local businesses outsource from the United States is the same reason why foreign businesses are reluctant to expand operations here. Our regulatory and labor environment is hostile to economic growth and there are no signs of that abating anytime soon. …the steady decline in freedom and productivity inside the United States has continued apace. Ironically, the strong likelihood that the next American president will expand protectionist practices will only make matters worse: firms, both foreign and domestic, are more reluctant to invest in the United States…free trade gives the federal government and the individual states strong incentives to clean up their act so that they can once again be attractive to foreign investment.

My buddy Ross Kaminsky explains in the American Spectator that free trade is good because it is part of the competitive process that boosts living standards, particularly for the poor.

…in trade, as in any economic endeavor, there are losers in the short run. Capitalism is, after all, fundamentally a system of creative destruction. But if there is any area of agreement among economists of all political stripes…it is that free trade provides large net benefits to the societies that engage in it, even if other nations do not lower trade barriers to the same degree. Furthermore, the benefits of trade accrue in large measure to the lower economic echelons of society in an extension of Schumpeter’s profound observation that “the capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort.”

And Ross echoes Richard Epstein’s point about the real problem being anti-growth policies that make America less competitive.

Trade is complex and like all complex things politicians will dumb it down in a way that benefits them, generally by lying to the public and creating a frothy anger against those “damn furiners” instead of pointing fingers at the true culprits: unions, regulators, and politicians of all stripes.

Ross and Richard are right. If politicians really want more jobs in America, they should be adopting policies to boost U.S. competitiveness.

And we don’t need giant steps. Yes, a flat tax would be great, but even incremental reforms such as a lower corporate tax rate or the right tax treatment of business investment would yield big dividends.

Let’s add a few more voices to the discussion.

In an editorial, the Wall Street Journal debunks Donald Trump’s protectionist tirade against China.

The real-estate developer recently added Japan to his most-wanted list of job killers… “They’re killing us. You know what we sell to Japan? Practically nothing.” Is $116 billion worth of annual goods and services exports to Japan practically nothing? Japan is the fourth largest U.S. export market in goods after Canada, Mexico and China. …The best way to boost American exports is to remove trade barriers with new trade agreements. U.S. farm producers would particularly benefit from the Trans-Pacific Partnership with Japan and 10 other countries. Japanese tariffs on beef would fall to 9% in the 16th year of the deal from 38.5% while the 20% tariff on ground pork would be eliminated in six years. Japan’s 21.3% levy on poultry and eggs would be abolished in six to 13 years.

Writing for the Washington Post, David Ignatius defends trade in general and trade agreements in particular.

…the revolt against free trade that has captured both parties could do the most long-term damage. …there’s strong evidence that trade has benefited the U.S. economy and created whole new industries in which the United States is dominant. That’s the essence of the “creative destruction” that makes a market economy so potent: It relentlessly pushes innovation and change. …The bipartisan protectionism of Trump and Sanders has focused its attacks on the Trans-Pacific Partnership… Robert Z. Lawrence and Tyler Moran estimate that between 2017 and 2026, when TPP would have its major impact, the costs to displaced workers would be 6 percent of the benefits to the economy — or an 18-to-1 benefit-to-cost ratio. …David Autor, David Dorn and Gordon Hanson…noted that the pact would promote trade in knowledge industries where the United States has a big advantage and that “killing the TPP would do little to bring factory work back to America.”

Ignatius also makes a very important observation that protectionists want us to be scared of nations that have much bigger problems than the United States.

Trump, the businessman, seems weirdly out of touch with real economic trends. He speaks of Japan as though it were an economic powerhouse, when it has actually suffered a two-decades-long slump; he describes a surging China, when the numbers show its growth is sagging.

Amen. Japan has huge problems and China still has quite a way to go before it becomes a developed nation.

Let’s close with some good news. Politicians may be engaging in anti-trade demagoguery, and there may be some voters that are motivated by hostility to voluntary exchange, but that doesn’t mean the protectionists have won.

Indeed, pro-trade sentiment has never been higher by some measures. Here’s some amazingly positive polling data from Gallup.

P.S. One final point. The growing burden of government spending and taxation since World War II have been very unfortunate, but the good news is that we have strong evidence that the economic damage of worsening fiscal policy has been offset by the economic gains from trade liberalization. It would be tragic to see that reversed.

P.P.S. Fans of Richard Epstein may enjoy this video of him reminiscing about Barack Obama’s undistinguished tenure at the University of Chicago Law School, as well as this video of him dismantling George Soros in a debate that took place at Cato.

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When Picking the Correct Size of Government, the Choice Isn’t Anarchy or Greece

Back in 2011, I shared a video that mocked libertarians by claiming that Somalia was their ideal no-government paradise.

I pointed out, of course, that the argument was silly. Sort of like claiming that North Korea is the left’s version of policy paradise.

But the video was very clever, and I’m more than willing to disseminate anti-libertarian humor if it’s clever and well done.

Some folks on the left, however, confuse satire with serious argument.

Consider the recent New York Times column by Nicholas Kristof. He wants his readers to think that advocates of small government somehow should be saddled with the blame for the dysfunctional nightmare of South Sudan. Seriously.

After hearing Republican presidential candidates denounce big government and burdensome regulation, I’d like to invite them to spend the night here in the midst of the civil war in South Sudan. You hear gunfire, competing with yowls of hyenas, and you don’t curse taxes. Rather, you yearn for a government that might install telephones, hire a 911 operator and dispatch the police. …Ted Cruz…is clamoring for: weaker government, less regulation… In some sense, you find the ultimate extension of all that right here.

Gee, isn’t Kristof clever. If you don’t support a bankrupt entitlement state and inane over-regulation, then you must want chaos and civil war.

Just in case you think I’m taking him out of context to make his argument look foolish, here are more excerpts.

No regulation! No long lines at the D.M.V., because there is no D.M.V. in the conflict areas. In practice, no taxes or gun restrictions. No Obamacare. No minimum wage. No welfare state to breed dependency. …In a place that might seem an anti-government fantasy taken to an extreme, people desperately yearn for all the burdens of government…that Americans gripe about. …One lesson of South Sudan is that government and regulations are like oxygen: You don’t appreciate them until they’re not there.

Notice how he wants to make it seem like the choice is South Sudan on one hand versus “all the burdens of government” on the other.

To be fair, Kristof does attempt a serious argument later in his column.

Two political scientists, Jacob Hacker and Paul Pierson, argue that America’s achievements rest on a foundation of government services… “We are told that the United States got rich in spite of government, when the truth is closer to the opposite,” they write. Every country that journeyed from mass illiteracy and poverty to modernity and wealth did so, they note, because of government instruments that are now often scorned. …What we Americans excel at are our institutions. We have schools, laws, courts, police, regulators, bureaucracies, safety nets — arms of a government that is often frustrating but always indispensable. These institutions are the pillars of our standard of living. …Government, laws and taxes are a burden, indeed, but they are also the basis for civilization.

I haven’t read the work of Hacker and Pierson, but there’s been extensive research about the factors that produce economic growth. So if Hacker and Pierson are merely claiming that certain things traditionally provided by governments – such as rule of law, protection of property rights, enforcement of contracts, courts and police, and national defense – are associated with economic growth, then we’re on the same page.

But that’s an argument for a small state. Indeed, I’ve pointed that the United States (and other nations in the western world) became rich in the 1800s when there was a limited government providing these core “public goods.”

And at the time, there was virtually no redistribution. Not only in the United States, but in other developed nations as well.

The problem is that Kristof and other statists want large welfare states with lots of redistribution. And those are the policies that lead to less prosperity. And perhaps even fiscal chaos.

Indeed, that’s the argument behind the Rahn Curve. A small amount of (properly focused) government is associated with growth. But once the public sector gets too large, then government spending saps a nation’s economy.

To conclude, perhaps there is common ground. If Kristof is willing to admit that a bloated welfare states is misguided, then I’ll be willing to say that no government can lead to South Sudan.

P.S. There are serious scholars who argue “public goods” can be provided privately. Click here for a good introduction to the issue.

P.P.S. Leftists like to share the quote from Justice Oliver Wendell Holmes about “taxes are the price we pay for a civilized society.” This statement is even etched in stone at the headquarters of the internal revenue service.

What folks conveniently forget, though, is that Holmes reportedly made that statement in 1904, nine years before there was an income tax, and then again in 1927, when federal taxes amounted to only $4 billion and the federal government consumed only about 5 percent of economic output.

As I wrote in 2013, “I’ll gladly pay for that amount of civilization.”

P.P.P.S. In his column, Kristof uses Trump as a foil even more than Cruz. Since I’m unconvinced that Trump believes in smaller government, I didn’t include those excerpts (while Cruz, even while he has some views I don’t like, seems to be a sincere and principled advocate of economic liberty).

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Trump, Sanders, and Political Humor

After yesterday’s ponderous and detailed discussion of tax compliance, it’s time for some levity.

So let’s have some fun with Bernie Sanders and Donald Trump.

And we’ll start with the crazy Senator from Vermont. I’m surprised that I haven’t seen more Sanders-specific humor. I’m probably missing some examples, but a quick look through my archives reveals only the cartoon at the bottom of this post and the satirical poster included in this post.

A guy this crazy deserves more attention.

So here’s the Sanders version of the monopoly game, courtesy of Mark Perry, the must-read economist at the American Enterprise Institute.

The best part of the game is the description of how everyone decides the best option is to stop being productive and wait for handouts.

Sort of the same message from this Wizard-of-Id parody.

By the way, I have lots of material mocking socialism (see here and here), so we can count that as being anti-Sanders humor (even if he’s not even a real socialist).

Now let’s shift to “The Donald.” I don’t know how to classify him from a philosophical perspective (probably because he doesn’t have a coherent set of principles), but he is an entertaining figure.

That being said, I think I’ve only had one column that included Trump humor.

So let’s atone for that oversight. This World-according-to-Trump map is quite clever (January 15, 2018 update: The previous link no longer works, so I’ve inserted another version).

Very similar to the very amusing how-the-Greeks-see-Europe map I shared back in 2011.

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Everything You ever Needed to Know about Why Low Tax Rates Are the Best Way to Reduce Evasion

Why do many people engage in civil disobedience and decide not to comply with tax laws?

Our leftist friends (the ones who think that they’re compassionate because they want to spend other people’s money) assert that those who don’t obey the revenue demands of government are greedy tax evaders who don’t care about society.

And these leftists support more power and more money for the Internal Revenue Service in hopes of forcing higher levels of compliance.

Will this approach work? Are they right that governments should be more aggressive to obtain more obedience?

To answer questions of how to best deal with tax evasion, we should keep in mind three broad issues about the enforcement of any type of law:

1. Presumably there should be some sort of cost-benefit analysis. We don’t assign every person a cop, after all, even though that presumably would reduce crime. Simply stated, it wouldn’t be worth the cost.

2. We also understand that crime reduction isn’t the only thing that matters. We grant people basic constitutional rights, for instance, even though that frequently makes is more difficult to get convictions.

3. And what if laws are unjust, even to the point of leading citizens to engage in jury nullification? Does our legal system lose moral legitimacy when it is more lenient to those convicted of child pornography than it is to folks guilty of forgetting to file paperwork?

Now let’s consider specific tax-related issues.

I’ve written before that “tough on crime” is the right approach, but only if laws are legitimate. And that leads to a very interesting set of questions.

4. Is it appropriate to track down every penny, even if it results in absurdities such as the German government spending 800,000 euros to track down 25,000 euros of unpaid taxes on coffee beans ordered online?

5. Or what about the draconian FATCA law imposed by the United States government, which is only projected to raise $870 million per year, but will impose several times as much cost on taxpayers, drive investment out of American, and also causing significant anti-US resentment around the world?

6. And is there perhaps a good way of encouraging compliance?

The purpose of today’s (lengthy) column is to answer the final question.

More specifically, the right way to reduce tax evasion is to have a reasonable and non-punitive tax code that finances a modest-sized, non-corrupt government. This make tax compliance more likely and more just.

Here’s some of what I wrote back in 2012.

I don’t blame people from France for evading confiscatory taxation. I don’t blame people in corrupt nations such as Mexico for evading taxation. I don’t blame people in dictatorial nations such as Venezuela for evading taxation. But I would criticize people in Singapore,Switzerland, Hong Kong, or Estonia for dodging their tax liabilities. They are fortunate to live in nations with reasonable tax rates, low levels of corruption, and good rule of law.

Let’s elaborate on this issue.

And we’ll start by citing the world’s leading expert, Friedrich Schneider, who made these important points about low tax rates in an article for the International Monetary Fund.

…the major driving forces behind the size and growth of the shadow economy are an increasing burden of tax and social security payments… Several studies have found strong evidence that the tax regime influences the shadow economy. …In the United States, analysis shows that as the marginal federal personal income tax rate increases by one percentage point, other things being equal, the shadow economy grows by 1.4 percentage points.

With this bit of background, let’s look at the magnitude of non-compliance.

The Wall Street Journal reports on the history of dodging greedy governments.

Tax evasion has been around since ancient Mesopotamia, when the Sumerians were cheerfully working the black market. …The Romans were the most efficient tax collectors of all. Unfortunately Emperor Nero (ruling from A.D. 54 to 68) abandoned the high growth, low-tax policies of his predecessors. In their place he created a downward spiral of inflationary measures coupled with excessive taxation. By the third century, widespread tax evasion forced economically stressed Rome to practice expropriation. …Six hundred years later, during the Heian period (794-1185), Japan’s aristocracy acted in a similar manner and with similar consequences. …China’s Qing Dynasty (1644-1912) waged a harsh war against the tax-dodging gentry.

These same fights between governments and taxpayers exist today.

In a column published by the New York Times, we got some first-hand knowledge of the extraordinary steps people take to protect themselves from taxation in China.

In China, businesses have to give out invoices called fapiao to ensure that taxes are being paid. But the fapiao — the very mechanism intended to keep businesses honest — is sometimes the key to cheating on taxes. …My company would disguise my salary as a series of expenses, which would also save me from paying personal income tax. But to show proof of expenses, the accountant needed fapiao. It was my responsibility to collect the invoices. …But evading taxes in China was harder than I expected because everyone else was trying to evade taxes, too. …Though businesses are obligated to give out fapiao, many do not unless customers pester them. They are trying to minimize the paper trail so they too can avoid paying taxes on their true income. …some people are driven to buy fake invoices. It’s not hard; scalpers will sell them on the street, and companies that specialize in printing fake fapiao proliferate.

The author had mixed feelings about the experience.

I couldn’t figure out whether what I was doing was right or wrong. By demanding a fapiao, I was forcing some businesses to pay taxes they would otherwise evade. But all of this was in the service of helping my own company evade taxes. In this strange tale, I was both hero and villain. To me, tax evasion seemed intractable. Like a blown-up balloon, if you push in one part, another swells.

Meanwhile, Leonid Bershidsky, writing for Bloomberg, reviews what people do to escape the grasping hand of government in Greece.

In gross domestic product terms, Greece has the second biggest shadow economy among European Union countries without a Communist past…unreported revenue accounts for 23.3 percent of GDP, or $55.3 billion. …Had it been subject to taxes — at the prevailing 40 percent rate — the shadow economy would have contributed $22 billion to the government’s coffers.

Bershidsky cites some new academic research.

…researchers used loan application data from a big Greek bank. …The bank…regards the reported income figure as a fiction, as do many other banks in eastern and southern Europe. As a result, it uses estimates of “soft” — untaxed — income for its risk-scoring model. Artavanis, Tsoutsoura and Morse recreated these estimates and concluded that the true income of self-employed workers in Greece is 75 percent to 84 percent higher than the reported one.

Greek politician have tried to get more money from the shadow economy but haven’t been very successful.

Even the leftist government of former Prime Minister Alexis Tsipras, which came up with unworkable schemes to crack down on tax evasion — from using housewives and tourists to inform on small businesses to a levy on cash withdrawals — failed.

Bershidsky notes that some have called for indirect forms of taxation that are harder to evade.

The researchers suggest the government should sell occupation licenses through the powerful professional associations: a harsh but effective way to collect more money.

Though his conclusion rubs me the wrong way.

The shadow economy — and particularly the contributions of professionals — is an enormous potential resource for governments.

At the risk of editorializing, I would say that the untaxed money is “money politicians would like to use to buy votes” rather than calling it “an enormous potential resource.” Which is a point Bershidsky should understand since he wrote back in 2014 that European governments have spent themselves into a fiscal ditch.

Now let’s shift to the academic world. What do scholars have to say about tax compliance?

Two economists from the University of Rome have authored a study examining the role of fiscal policy on the underground economy and economic performance. They start by observing that ever-higher taxes are crippling economic performance in Europe.

…most European economies have been experiencing feeble growth and increasing levels of public debt. Compliance with the Stability and Growth Pact, and in particular with the primary deficit clause, has required many governments to raise taxes to exceptional high levels, thus hindering business venture and economic recovery.

And those high tax burdens don’t collect nearly as much money as politicians want because taxpayers have greater incentives to dodge the tax collectors.

…between a country’s tax system and the size of its shadow economy is a two-way relationship. …there exists a positive relationship between the dimension of the tax burden on economic activity and the size of the informal economy. …various tax reform scenarios, recently advocated in economic and policy circles as a means to promote growth, such as…ex-ante budget-neutral tax shifts involving reductions of distortionary taxes on labor and business compensated by an increase in the consumption tax or counterbalanced by decreases of government spending. We will see that all these fiscal reforms give rise to a resource reallocation effect from underground to official production or vice versa and have rather different implications in terms of output, fiscal solvency and welfare.

The authors look at the Italian evidence and find that lower tax rates would create a win-win situation.

Our main results can be summarized as follows. …the dimension of the underground sector is substantially decreased by fiscal interventions envisaging sizeable labor tax wedge reductions. Finally, all the considered tax reforms have positive effects on the fiscal consolidation process due to a combination of larger tax revenues and positive output growth. …consider the case in which the decrease of the business tax is met by a public spending cut…an expansionary effect on output, consumption and investments, and, despite the overall reduction of tax revenues, the public-debt-to-output ratio falls. However, we notice that the expansionary effects are…magnified on consumption and investments. In this model, in fact, public spending is a pure waste that crowds out the private component of aggregate demand, therefore it comes as no surprise that a tax cut on business, counterbalanced by a public spending reduction, is highly beneficial for both consumption and investments. …the underground sector shrinks.

The benefits of lower tax rates are especially significant if paired with reductions in the burden of government spending.

When the reduction of the business tax, personal income tax, and employers’ SSC tax rates are financed through a cut in public spending…we observe positive welfare effects… The main difference…is that consumption is significantly higher…due to the fact that this reform leaves the consumption tax unchanged, while public spending is a pure waste that crowds out private consumption. …all the policy changes that lower the labor tax wedge permanently reduce the dimension of the underground sector. Finally, all the considered tax reforms positively contribute to the fiscal consolidation process.

Let’s now look at some fascinating research produced by some other Italian economists.

They look at factors that lead to higher or lower levels of compliance.

…a high quality of the services provided by the State, and a fair treatment of taxpayers increase tax morale. More generally, a high level of trust in legal and political institutions has a positive effect on tax morale. …two further institutional characteristics that are likely to negatively affect an individual’s tax morale: corruption and complexity of the tax system.

By the way, “tax morale” is a rough measure of whether taxpayers willingly obey based on their perceptions of factors such as tax fairness and waste and corruption in government.

And that measure of morale naturally varies across countries.

…we examine how people from different countries react to varying tax rates and levels of efficiency. …We focus our analysis on three countries: Italy, Sweden and UK. …these three countries show differences concerning the two institutional characteristics we are focused on. Italy and Sweden show a high tax burden while UK shows a low one. Whereas, Sweden and UK can be considered efficient states, Italy is not.

By the way, I don’t particularly consider the United Kingdom to be a low-tax jurisdiction. And I don’t think it’s very efficient, especially if you examine the government-run healthcare system.

But everything is relative, I guess, and the U.K. is probably efficient compared to Italy.

Anyhow, here are the results of the study.

Experimental subjects react to institution incentives, no matter the country. More specifically, tax compliance increases as efficiency increases and decreases as the tax rate increases. However, although people’s reaction to changes in efficiency is homogeneous across countries, subjects from different countries react with a different degree to an increase in the tax rate. In particular, participants who live in Italy or Sweden – countries where the tax burden is usually high – react more strongly to an increase in the tax rate than our British subjects. At the same time, subjects in Sweden – where the efficiency of the public service is high – react less to tax rate increases than Italian subjects.

So low tax rates matter, but competent and frugal government also is part of the story.

In all 3 countries, higher tax rates imply lower compliance. This is in line with experimental evidence: as Alm (2012, p. 66) affirms: “most (but not all) experimental studies have found that a higher tax rate leads to less compliance” and “The presence of a public good financed by voluntary tax payments has been found to increase subject tax compliance”. …The stronger negative reaction of Italian subjects to an increase in the tax rate may be due to the fact that in everyday life they suffer from high tax rates combined with inefficiency and corruption. …In fact, in the final questionnaire, 67.5% of Italian participants state that people would be more likely to pay taxes if the government were more efficient (vs 34.4% and 30.3% in UK and Sweden respectively) and 54.6% would comply with their fiscal obligations if they had some control over how tax money were spent (vs 30.8% and 25.8% in UK and Sweden respectively)… No way to impose a high tax burden on citizens if the tax revenue is wasted through inefficiency and corruption.

Here’s one additional academic study from Columbia University. The author recognizes the role of tax rates in discouraging compliance, but focuses on the impact of tax complexity.

Here’s what he wrote about the underlying theory of tax compliance.

The basic theoretical framework for tax evasion was derived…from the Becker model of crime. This approach views tax evasion as a gamble. …when tax evasion is successful, the taxpayer gains by not paying taxes. In other cases, tax evasion is uncovered by tax authorities, and the taxpayer has to pay taxes due and fines. The taxpayer compares the expected gain to the expected loss. …This approach highlights a number of factors that determine whether and to what extent taxes are evaded. These are: the magnitude of potential savings (which, on the margin, is simply equal to the tax rate)… This model therefore highlights…natural policy parameters that can affect evasion. …the marginal gains from tax evasion could be reduced by imposing lower marginal tax rates.

Interestingly, he doesn’t see much difference between (illegal) evasion and (legal) avoidance.

The ideal compliance policy should target both tax avoidance and tax evasion. While there is a legal distinction between the two, from the economic point of view the difference is less explicit. Both types of activity involve a loss of revenue and both involve a loss of economic welfare.

He then brings tax complexity into the equation.

…the appropriate extent of tax enforcement critically depends on the underlying tax structure. In particular, the role of complexity in the tax system as a factor influencing the size of the tax gap, as well as legal but undesirable tax avoidance, are highlighted. Two principal implications of tax complexity are stressed here. First, complexity permits additional ways to shield income from tax and, consequently, complexity increases the overall cost of taxation. … Reasonable simplification can more adequately combat tax evasion and avoidance than traditional enforcement measures.

Here are some of his findings.

Tax avoidance is a function of ambiguity in the tax system. …Administrative investment in enforcement becomes more important when the tax system is more distortionary. One way to reduce the need for costly tax enforcement is to reduce distortions. … Higher complexity induces tax avoidance and other types of substitution responses. A tax system that allows for many different types of avoidance responses is likely to cause stronger behavioral effects and therefore higher excess burden. …Shutting down extra margins of response can be loosely summarized as expanding the tax base by eliminating preferential treatment of some types of income, deductions, and exemptions. …One of the consequences of complexity is that it makes it difficult for honest taxpayers to fulfill their obligations. …The bottom line is that complexity makes relying on penalties a much less appealing approach to enforcement. …From the complexity point of view, itemized deductions add a multitude of tax avoidance and evasion opportunities. …They stimulate avoidance by introducing extra margins with differential tax treatment.

Sounds to me like an argument for a flat tax.

Incidentally (and importantly), he acknowledges that greater enforcement may not be a wise option if the underlying tax law (such as the code’s harsh bias against income that is saved and invested) is overly destructive.

…tax avoidance—letting well enough alone—may be a simple and practical way of addressing shortcomings of an inefficient tax structure. For example, suppose that, as much of the optimal taxation literature suggests, capital incomes should not be taxed, or should only be taxed lightly. In that case, the best policy response would be cutting tax rates imposed on capital income. If it is not politically feasible to pursue such policies explicitly, a similar outcome can be accomplished by reducing enforcement or increasing avoidance opportunities in this area. …The preferred way of dealing with compliance problems is fixing the tax code.

Amen. Many types of tax evasion only exist because the politicians in Washington have saddled us with bad tax policy.

And when tax policy moves in the right direction, compliance improves. Consider what happened in the 1980s when Reagan’s reforms lowered the top tax rate from 70 percent to 28 percent. Rich people paid five times as much to the IRS, in large part because they declared 10 times as much income.

But it’s very unlikely that they actually earned 10 times as much income. Some non-trivial portion of that gain was because of less evasion and less avoidance.

Simply stated, it makes sense to comply with the tax system when rates are low.

Let’s close by addressing one of the ways that leftists want to improve compliance. They want to destroy financial privacy and give governments near-unlimited ability to collect and share financial information about taxpayers, all for the purpose of supposedly bolstering tax compliance.

This agenda, if ultimately successful, will cripple tax competition as a liberalizing force in the global economy.

This would be very unfortunate. Tax rates have fallen in recent decades, for instance, largely because governments have felt pressure to compete for jobs and investment.

That has led to tax systems that are less punitive. And politicians really can’t complain about being pressured to lower tax rates since these reforms generally led to more growth, which generated significant revenue feedback. In other words, the Laffer Curve works.

There’s even some evidence that tax competition leads to less government spending.

But these are bad things from a statist perspective.

This helps to explain why politicians from high-tax governments want to eviscerate tax competition and create some sort of global tax cartel. An “OPEC for politicians” would give them more leeway to impose class-warfare tax policy and buy votes.

The rhetoric they’ll use will be about reducing tax evasion. The real goal will be bigger government.

I’m not joking. Left-wing international bureaucracies such as the Organization for Economic Cooperation and Development have justified their anti-tax competition efforts by asserting that jurisdictional rivalry “may hamper the application of progressive tax rates and the achievement of redistributive goals.”

I suppose we should give them credit for being honest about their ideological agenda. But for those who want good tax policy (and who also understand why that’s the right way to boost tax compliance), it’s particularly galling that the OECD is being financed with American tax dollars to push in the other direction.

P.S. I don’t know if you’ll want to laugh or cry, but here are some very odd examples of tax enforcement.

P.P.S. Here’s more evidence that high tax rates and tax complexity facilitate corruption.

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Hoisting Socialists on their Own Petard

Like communism, Nazism, and other forms of statism, socialism is an evil ideology that is based on the notion that human freedom should be suppressed and restricted.

Modern socialists may not have the totalitarian impulses of their national socialist and international socialist cousins, but their underlying philosophy is based on a near-criminal ignorance of economics and human nature.

That’s why I always ask socialists to identify a single successful socialist jurisdiction. It’s fun to watch them struggle and sputter.

They certainly can’t pick the nations, such as Cuba, Venezuela, and North Korea, that practice real socialism (i.e., government ownership of the means of production).

They generally aren’t stupid enough to pick collapsing and stagnant welfare states in Europe, such as France, Italy, and Greece.

Like Bernie Sanders, they generally point to nations such as Denmark and Sweden, though they never have a good response when you point out that: a) these nations became rich when government was very small, and b) they compensate for today’s bad fiscal policy with ultra-free market policies in other areas.

But I’m not interested in a serious discussion about the flaws of socialism. Been there, done that, as the old saying goes.

Instead, I want to share some great satire (h/t: Greg Mankiw)

Hilarious, though one wonders whether a Sanders supporter is even capable of understanding the message that class warfare isn’t that much fun when you’re on the receiving end.

Sort of like the message in this clever Penn & Teller video.

P.S. On a lighter note, here’s the “bread-ish” difference between socialism and capitalism.

P.P.S. Regarding European socialism, we have great (although technically inaccurate) cartoons from Glenn Foden and Michael Ramirez.

P.P.P.S. Here’s socialism for kids, though it’s really class warfare for kids.

P.P.P.P.S. And here’s what happens when you try socialism in the classroom.

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Lessons for the United States (and other Nations) from Estonia: Fight Corruption by Shrinking Government

I’m a big fan of Estonia.

According to both the Fraser Institute and the Heritage Foundation, it has considerable economic freedom.

It has a low-rate flat tax, meaning that investors, entrepreneurs, and small-business owners aren’t punished for contributing more to the nation’s economic output.

It responded to the 2008 crisis by cutting spending rather than engaging in a Keynesian spending binge (which also led to an exploding cigar for Paul Krugman).

Now I have another reason to like Estonia.

It’s a role model for how to reduce corruption by shrinking the size and scope of government.

First, some background.

Neil Abrams and Professor Steven Fish have a column in the Washington Post about the seemingly intractable problem of boosting the rule of law in developing and transition economies.

Western aid agencies and scholars agree that the rule of law is required before developing countries can reduce poverty and corruption. For decades, they have supported aid programs designed to help developing countries establish law-based states. …In a rule-of-law state, the rules apply even to the rulers, not just the ordinary folks. The rule of law is not the same as democracy. Scores of developing countries have demonstrated that establishing democracy is the easy part. The rule of law is harder to attain. From India and the Philippines to Argentina, democracy coexists with endemic corruption, and elites remain largely exempt from the rules.

They then explain that its well-nigh impossible to create the rule of law in a society that has a big government.

…our research suggests that they have the sequence backward. Before urging governments to adopt the rule of law, they must first advise reformers to take one key step: eliminating the government subsidies that sustain criminal elites and replacing the compromised bureaucrats who patronize them.

Now for the big takeaway from their column: Estonia is the role model for how this can happen.

Our research shows that a few good policies can pave the way for the rule of law. For instance, Estonia’s clean and capable state administration represents a model of post-communist success. But this was not always the case. In 1991, when communism collapsed, Estonia, like other post-Soviet countries, had almost no working institutions and a burgeoning class of economic predators, nor was Estonia economically privileged. In the early post-Soviet years, its income per capita was only 10 to 20 percent higher than that of Russia and Romania and 20 to 30 percent lower than that of Croatia, Slovakia and Hungary. But Estonian leaders acted boldly. …early Estonian governments ended practically all subsidies to state and private enterprises. …in developing countries, state subsidies almost always benefit corrupt elites more than ordinary people. This policy cut off the budding economic criminals who profit from state largesse rather than entrepreneurial aptitude — and made it possible for real entrepreneurs to thrive. Deprived of subsidies, old-guard enterprise directors and crony capitalists could not muster enough political influence to hold governments hostage.

Sadly, other nations are not copying Estonia, in part because the international bureaucracies and national agencies that dispense foreign aid don’t support policies to shrink government in recipient nations.

Unfortunately, Estonia is the exception and not the rule. That’s  not for lack of trying on the part of the West. The United States, the European Union, the World Bank, the European Bank for Reconstruction and Development and the United Nations have spent billions of dollars for the express purpose of helping countries build a rule of law. …But they’re stumbling. The Western effort assumes that the rule of law will flourish only if developing countries receive enough education, guidance, training and money. In fact, a growing body of research throws such optimism into doubt.

In other words, foreign aid – at best – is useless. And it may be harmful by financing a bigger role for recipient governments.

The authors close by emphasizing the need (assuming genuine rule of law is the goal) to prune the bureaucracy and public sector.

Scholars often treat the rule of law as a prerequisite for market-oriented economic policies such as liberalizing prices and trade and eradicating wasteful subsidies. They’re getting it backward. Instead, first eliminate the subsidies and purge the compromised bureaucrats who stand in the rule of law’s way. This is hard to do. It will provoke tremendous resistance from those who profit from the status quo. But it’s far more realistic and effective than simply encouraging countries to adopt the rule of law.

So what are the implications of this analysis for the United States?

Given that America now ranks below Estonia for rule of law, and given that rule of law is gradually eroding in the United States, the obvious lesson is that the public sector in America needs to shrink.

The real challenge, though, is convincing politicians to give up power.

Professor Glenn Reynolds of the University of Tennessee Law School explains in USA Today that a larger government is good for politicians because it creates opportunities for graft.

The explanation for why politicians don’t do all sorts of reasonable-sounding things usually boils down to “insufficient opportunities for graft.” And, conversely, the reason why politicians choose to do many of the things that they do is … you guessed it, sufficient opportunities for graft. That graft may come in the form of bags of cash, or shady real-estate deals, or “consulting” gigs for a brother-in-law or child, but it may also come in broader terms of political support.

Glenn notes that there’s an entire school of thought in economics that analyzes this unfortunate tendency of politicians to conspire with interest groups at the expense of taxpayers and consumers.

…there’s a whole field of economics based on this view, called “Public Choice Economics.” Nobel prize winning economist James Buchanan referred to public choice economics as “politics without romance.” Instead of being selfless civil servants motivated solely by the public good, public choice economics assumes that politicians are, like other human beings, heavily influenced by self-interest. …You pick a car because it’s the best car for you that you can afford. Politicians pick policies because they’re the best policies — for them — that they can achieve. …the entire system is designed — by politicians, naturally — to make it harder for voters to keep track of what politicians are doing. The people who have a bigger stake in things — the real estate developers or construction unions — have an incentive to keep track of things, and to influence them.

Having received my Ph.D. from George Mason University, home of the Center for the Study of Public Choice, I echo Glenn’s comments about the value of this theory.

So what’s the moral of the story?

As summarized by Professor Reynolds, bigger government means more corruption and smaller government means less corruption.

The more the government does and the more decisions that are relegated to bureaucrats, “guidance” and other forms of decisionmaking that are far from the public eye, the more freedom politicians have to pursue their own interest at the expense of the public — all while, of course, claiming to do just the opposite.

Now let’s look at some real-world examples from Washington.

By the way, I’m not writing to specifically condemn Obama and his team, even though I’m quite confident that the Chicago machine produces people who excel at unethical behavior.

Republicans also get their hands dirty by steering undeserved wealth to special interests, as explained here, here, and here.

That being said, most Washington corruption today seems associated with the Democrat Party for the simple reason that Democrats control the bureaucracy.

For instance, here are some of the key points from a New York Times report.

The State Department, under Secretary Hillary Rodham Clinton, created an arrangement for her longtime aide and confidante Huma Abedin to work for private clients as a consultant while serving as a top adviser in the department. Ms. Abedin did not disclose the arrangement — or how much income she earned — on her financial report. It requires officials to make public any significant sources of income.

To be blunt, this stinks to high heaven.

…the picture that emerges from interviews and records suggests a situation where the lines were blurred between Ms. Abedin’s work in the high echelons of one of the government’s most sensitive executive departments and her role as a Clinton family insider. While continuing her work at the State Department, in the latter half of 2012, she also worked for Teneo, a strategic consulting firm, which was founded by Doug Band, a former adviser to President Bill Clinton. Teneo has advised corporate clients like Coca-Cola and MF Global, the collapsed brokerage firm run by Jon S. Corzine, a former governor of New Jersey.

The Daily Caller also has been doing some first-rate work on the cronyism and corruption inside Washington.

One of their stories, for instance, exposed the left-wing connections of the supposedly “apolitical” bureaucrat at the heart of the IRS scandal.

IRS Exempt Organizations Division director Lois G. Lerner, who has been described as “apolitical” in mainstream press coverage of the IRS scandal, is married to tax attorney Michael R. Miles, a partner at the law firm Sutherland Asbill & Brennan.

And why does that matter?

The 400-attorney firm hosted an organizing meeting at its Atlanta office for people interested in helping with voter registration for the Obama re-election campaign. …Lerner personally signed the tax-exemption approval for a shady charity run by Obama’s half-brother, after an inexplicably brief one-month application process.

Time to wrap this up.

I enjoy Mark Steyn for his biting humor, but he makes a very serious and relevant point is his latest column.

A civil “civil service” requires small government. Once government is ensnared in every aspect of life a bureaucracy grows increasingly capricious. The U.S. tax code ought to be an abomination to any free society, but the American people have become reconciled to it because of a complex web of so-called exemptions that massively empower the vast shadow state of the permanent bureaucracy. Under a simple tax system, your income is a legitimate tax issue. Under the IRS, everything is a legitimate tax issue: The books you read, the friends you recommend them to. There are no correct answers, only approved answers.

I made a similar point, arguing that you can’t have a competent government unless it’s a small government.

But as the public sector expands, effective management becomes much harder.

And, as discussed in an interview with John Stossel, you also get corruption, mixed with incompetence and thuggery.

Let’s close by re-issuing my video explaining how big government enables pervasive corruption. It’s never been more timely and appropriate.

P.S. There are some countries with big governments that are not plagued by corruption. The Nordic nations, for instance, rank at or near the top in many economic indications, including high-quality rule of law. Though it’s worth noting that these jurisdictions scored highly in these areas before the burden of government was expanded.

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Dodd-Frank: A Wall Street-Supported Law Imposing Heavy Costs, Enabling Future Bailouts

Politicians specialize in bad policy, but they go overboard during election years.

It’s especially galling to hear Bernie Sanders and Hillary Clinton compete to see who can make the most inane comments about the financial sector.

This is why I felt compelled last month to explain why the recent financial crisis had nothing to do with the absence of “Glass-Steagall” regulations.

Today, I want to address Dodd-Frank, the legislation that was imposed immediately after the crisis by President Obama and the Democrat-controlled Congress.

I’m tempted to focus on the fact that the big boys on Wall Street, such as Goldman-Sachs, supported the law. It’s galling, after all, to hear politicians claim Dodd-Frank was anti-Wall Street legislation.

But there are more important points to consider, including the fact that the law doesn’t prevent or preclude bailouts.

Writing for today’s Wall Street Journal, Emily Kapur and John Taylor identify key problems with the Dodd-Frank bailout legislation.

Sen. Sanders and others on both sides of the aisle have a point. The 2010 Dodd-Frank financial law, which was supposed to end too big to fail, has not. Dodd-Frank gave the Federal Deposit Insurance Corp. authority to take over and oversee the reorganization of so-called systemically important financial institutions whose failure could pose a risk to the economy. But no one can be sure the FDIC will follow its resolution strategy… Neel Kashkari, now president of the Federal Reserve Bank of Minneapolis, says government officials are once again likely to bail out big banks and their creditors.

Most important, they propose a new Chapter 14 of the bankruptcy code so that insolvent institutions – regardless of their size – are liquidated.

The solution is not to break up the banks or turn them into public utilities. Instead, we should do what Dodd-Frank failed to do: Make big-bank failures feasible without tanking the economy by writing a process to do so into the bankruptcy code… Chapter 14 would impose losses on shareholders and creditors while preventing the collapse of one firm from spreading to others. …the court would convert the bank’s eligible long-term debt into equity, reorganizing the bankrupt bank’s balance sheet without restructuring its operations. …Other reforms, such as higher capital requirements, may yet be needed to reduce risk and lessen the chance of financial failure. But that is no reason to wait on bankruptcy reform. A bill along the lines of the chapter 14 that we advocate passed the House Judiciary Committee on Feb. 11. Two versions await action in the Senate. Let’s end too big to fail, once and for all.

Amen. When big institutions go under, shareholders and bondholders should be the ones to bear the costs, not taxpayers.

Unfortunately, unless a new Chapter 14 of the bankruptcy code is created, it’s quite likely that regulators and politicians will simply opt for more TARP-style bailouts if big firms get in trouble.

So Dodd-Frank didn’t really do the one thing that was necessary.

But it did do a lot of things that make the system more costly and clunky.

Hester Pierce of the Mercatus Center explains that Dodd-Frank expanded regulation based on the theory that regulators can understand and plan the financial sector.

Dodd-Frank—built on the premise that markets fail, but regulators do not—places great faith in regulators to identify and stop problems before they develop into a crisis. …Dodd-Frank, despite language to the contrary, keeps the door open for future bailouts. …Dodd-Frank includes many provisions that are not related to financial stability, but fails to deal with key problems made evident by the crisis. …Dodd-Frank’s drafters chose to leave many key decisions to regulators. The contours of systemic risk, for example, were left to regulators to define. Moreover, because the prevailing narrative of the crisis focused on market failure, Dodd-Frank expanded regulators’ authority to shape the financial system. In addition to their substantial rule-writing responsibilities, under Dodd-Frank regulators now play a central role in monitoring, planning, and managing the financial markets.

Most worrisome, Hester notes that Dodd-Frank has provisions that benefit the big firms and may make them more likely to get bailouts.

Dodd-Frank gives FSOC broad powers to designate nonbank financial institutions and financial market utilities (such as derivatives clearinghouses) systemically important. …Designated firms are likely to be perceived as the firms the government is likely to rescue… Dodd-Frank was supposed to mark the end of taxpayer bailouts of financial firms. This pledge is undermined in several ways by the statute’s other provisions and the regulatory-centric approach that cuts across the whole statute. …The pressure on regulators to conduct bailouts is likely to be particularly strong with respect to systemically important institutions. …Regulatory failure played an important role in the last crisis by concentrating resources in the housing sector, encouraging reliance on credit-rating agencies, and driving financial institutions to concentrate their holdings in mortgage-backed securities. Dodd-Frank gives regulators more authority and broad discretion to shape the financial sector and the firms operating within it. When the regulators fail at this ambitious mission, they will again face internal and external pressure to cover those failures with a taxpayer-funded bailout.

Two other Mercatus experts, Patrick McLaughlin and Oliver Sherouse, show that regulators were among the biggest beneficiaries of the law. The law has led to a massive explosion in red tape.

The statute, which itself was 848 pages long, directed dozens of regulatory agencies to revise or create new regulations addressing the financial system in the United States. Those agencies responded with hundreds of new rules that will govern financial markets, on a scale that vastly exceeds any previous regulation of financial markets, and dwarfs the regulations that accompanied all other legislation enacted during the Obama administration. …Dodd-Frank…is associated with more than five times as many new restrictions as any other law passed since January 2009, for a total of nearly 28,000 new restrictions. In fact, it is associated with more new restrictions than all other laws passed during the Obama administration put together.

Here’s a rather sobering chart from the report.

Amazingly, the red tape generated by Dodd-Frank is roughly equal to all the regulation generated by every other law that’s been imposed during the Obama years.

Including the notoriously Byzantine Obamacare legislation.

All these new rules actually create a competitive advantage for big financial institutions.

Peter Wallison of the American Enterprise Institute has a must-read study on how Dodd-Frank imposes disproportionately heavy costs on small banks and small businesses.

…the reason for the slow recovery is the Dodd-Frank Act, enacted in 2010, which placed heavy regulatory costs and new restrictive lending standards on small banks. This in turn reduced the ability of these banks to finance small businesses, particularly the start-up businesses which are the engine of employment and economic growth. Large businesses have not been subject to the same restrictions because they have access to the capital markets, and their growth has been in line with prior recoveries. …recoveries after financial crises tend to be sharper than other recoveries, not slower as some have suggested. It is likely that, without the repeal or substantial reform of Dodd-Frank, the U.S. economy will continue to grow only slowly into the future. ……whatever regulatory costs are imposed on banking organizations— whether they be $2 trillion banks like JPMorgan Chase, $50 billion banks or $50 million banks— the larger the bank the more easily it will be able to adjust to these costs.

What’s especially frustrating is that the law was imposed because of a fundamental misunderstanding of what caused the crisis.

…the incoming administration of Barack Obama and the Democratic supermajority in Congress blamed the crisis on insufficient regulation of the private financial sector. This narrative, although factually unsupported, gave rise to the Dodd-Frank Act, which imposed significant new regulation on the US financial system but did virtually nothing to reform the government policies that gave rise to the financial crisis. …In developing and adopting the Dodd-Frank Act, Congress and the administration did not appear to be concerned about placing additional regulatory costs on the financial system.

Here’s the bottom line. Regulation is no replacement for market discipline.

And bankruptcy needs to be part of that discipline. After all, capitalism without bankruptcy is like religion without hell.

P.S. To give you an idea of how unserious politicians are, the Dodd-Frank law didn’t end bailouts, but it did create new racial and sexual quotas. So I guess we can take comfort in the fact that the bureaucracy will reflect all of America the next time they rip off taxpayers.

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Krugman, Higher Education, and the Myth of Spending Restraint

When I accuse my left-wing friends of deciding policy on the basis of feelings, intentions, and ideology, that’s not because I think those are bad motives.

After all, I’m also guided by many of these factors. I have empathy for others, especially the disadvantaged. My goals are to have a more peaceful and prosperous society. And I’m guided by the libertarian non-aggression principle.

What makes libertarians different is that we also think evidence matters. For instance, I like lower taxes and believe that the right kind of tax cuts produce revenue feedback, but I openly admit that the vast majority of tax cuts nonetheless lose revenue.

And I’m even willing to admit that some types of government spending may be associated with better economic performance.

Leftists, by contrast, seem very dogmatic. Government is good, they reflexively think, so more government is always better. And because they’re so committed to bigger government, they are prone to cross the line from fact to exaggeration and then from exaggeration to untruth.

For instance, when an article in the New York Times asserted that “public schools are starved of funding” back in 2012, I couldn’t help but point out that this was utter, complete, and ridiculous nonsense.

Leftists also think that higher education is starved of funding, which is perversely ironic since they created all the subsidies and handouts that have given colleges and universities carte blanche to dramatically increase tuition and fees.

As you might expect, any effort to restrain government spending on higher education is treated like the end of the world. Paul Krugman, for instance, claims that there’s not enough money being diverted to finance the school where he teaches.

Here’s some of what he recently wrote in the New York Times.

Governor Cuomo’s sudden proposal, seemingly out the blue, to cut half a billion dollars in state funding for CUNY and shift the burden to the city…would be a terrible idea. …CUNY as an institution is doing such obvious good, especially in an era of growing inequality and hardening class lines, that it’s hard to understand why anyone who isn’t the hardest of hard-line conservatives would want to undermine it. …If you look at the student body today, you see a portrait of the American dream in action: hundreds of thousands of students, roughly 40 percent of whom are their family’s first generation in college, come from households with income less than $20,000, or both, all getting an affordable education that leaves them far less burdened by debt than all too many of their contemporaries.

But it’s absurd to argue that politicians have been stingy with taxpayer funding of higher education. There have been large increases in recent decades.

Indeed, politicians have created a third-party-payer-fueled explosion in college costs because of all the subsidies and handouts.

Here are the federal numbers, as calculated by the College Board. And keep in mind these are inflation-adjusted numbers.

And here are the state numbers, also in real dollars.

To be fair, Krugman’s specific complaint is about the amount of money being spent on CUNY, so it’s possible that this institution is the exception that proves the rule.

But I would be utterly shocked if the long-run numbers showed that CUNY was being weaned off the dole. Indeed, if anybody can show a reduction (even using inflation-adjusted numbers) in the amount of government-provided handouts to CUNY over the past 10 or 20 years, I’ll commit to doing something utterly disgusting and unpleasant, such as posting a picture of myself wearing a Florida Gators cap.

It’s not just that statists are wrong about the amount of spending on education. They also appear to be remarkably unconcerned about the quality of such expenditures. For all intents and purposes, they fixate on inputs and are oblivious to outputs.

For instance, we know that a big chunk of the additional money that’s been funneled to colleges and universities has been used for bureaucratic empire building rather than classroom instruction.

One would think that this would upset folks like Krugman, at least if he’s serious about what he wrote about places such as CUNY being a “portrait of the American dream in action.”

But good luck finding a column where he criticizes a bureaucracy for squandering money. That would not be consistent with a polemical career based on feelings, intentions, and ideology.

By the way, this isn’t the first time that Krugman has pushed an agenda that’s inconsistent with real-world evidence.

• Earlier this year, Krugman asserted that America was outperforming Europe because our fiscal policy was more Keynesian, yet the data showed that the United States had bigger spending reductions and less red ink.
• Last year, he asserted that a supposed “California comeback” in jobs somehow proved my analysis of a tax hike was wrong, yet only four states at the time had a higher unemployment rate than California.
• And here’s my favorite: In 2012, Krugman engaged in the policy version of time travel by blaming Estonia’s 2008 recession on spending cuts that took place in 2009.

And if you enjoyed those examples, you can find more of the same by clicking here,here, here, here, here, here, here, and here.

P.S. For what it’s worth, I think libertarians are very intellectually honest. Most of us think that government should be providing national defense and legal protection, for instance, but that doesn’t stop us from pointing out that the Pentagon wastes money or that local police forces can be inefficient or unjust.

Unlike leftists, we go out of our way to demand accountability and performance from government, especially for programs we think are necessary.

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Hong Kong and the Miracle of Compounding Long-Run Growth

Hong Kong is a truly remarkable jurisdiction.

Can you name, after all, another government in the world that brags about how little it spends on redistribution programs and how few people are dependent on government?

And how many jurisdictions adopt private Social Security systems to help make sure the burden of government spending doesn’t climb above 20 percent of GDP?

No wonder Hong Kong routinely is at the top of the rankings in both Economic Freedom of the World and the Index of Economic Freedom.

Here is some additional evidence of Hong Kong’s sensible approach. Below is a slide from a presentation by Hong Kong government officials, quoting the current Financial Secretary and all his predecessors, covering both the period of Chinese sovereignty and British sovereignty. As you can see, the one constant theme is free markets and small government.

For additional background, let’s enjoy the insight of one of these men.

In a column for Reason, my Cato Institute colleague Marian Tupy reminisces on his meeting with John Cowperthwaite, one of the British-appointed economic advisers.

…a young Scottish civil servant named John Cowperthwaite arrived in the colony to oversee its economic development. Some 50 years later, I met Cowperthwaite in St Andrews, Scotland, where I was a student and he was enjoying his retirement. As he told me, “I came to Hong Kong and found the economy working just fine. So, I left it that way.” …Of all the policies that we discussed, one stands out in my mind. I asked him to name the one reform that he was most proud of. “I abolished the collection of statistics,” he replied. Cowperthwaite believed that statistics are dangerous, because they enable social engineers of all stripes to justify state intervention in the economy. At some point during our first conversation I managed to irk him by suggesting that he was chiefly known “for doing nothing.” In fact, he pointed out, keeping the British political busy-bodies from interfering in Hong Kong’s economic affairs took up a large portion of his time.

I especially like Cowperthwaite’s insight about the downside risk of letting governments collect a lot of data.

Something that’s worth considering in a world where governments want to engage in massive data collection and data sharing for purposes of imposing and enforcing bad global tax policy.

But let’s not get sidetracked. Economic freedom in Hong Kong is today’s topic. With that in mind, here’s a chart from Marian’s column. It shows that Hong Kong used to be much poorer than the United Kingdom. But after decades of faster growth (thanks to good policy), Hong Kong is now more prosperous than its former colonial master.

In other words, Hong Kong didn’t just converge with one of the world’s richest countries, which by itself would be a remarkable and unusual achievement. It actually became richer.

This is tremendous evidence on the benefits of good policy and the importance of strong, long-run growth.

Let’s close by looking at this issue of growth and development. Here’s a video from Marginal Revolution, narrated by Professor Alex Tabarrok of George Mason University. You should watch it from start to finish, but if you’re pressed for time, make sure to at least watch the first 2:10.

There are two things that are worth emphasizing from the video.

The productivity of workers (and therefore the pay of workers) is dependent on the quantity and quality of capital.

Entrepreneurs play a key role in figuring out the best ways of mixing labor and capital and this innovation boosts productivity.

By the way, there are two sins of omission in the video. If you watch the whole thing, you’ll notice it mentions that strong economic performance is linked to the rule of law, property rights, free trade, and sensible regulation.

All that is true. But what about a stable monetary system? And what about a reasonable tax regime and a modest burden of government spending?

But I’m nitpicking. Let’s close with another video from Marginal Revolution. You should once again watch the entire video, but for those in a rush, I adjusted the settings so it starts at the most important part.

The video uses GDP data that is adjusted for both inflation and population, which is a very useful approach. But the key lesson, as Professor Tabarrok explained, is that even small sustained changes in growth have enormous implications for long-run prosperity.

Indeed, that’s why Hong Kong is now richer than the United Kingdom. And it’s also worth noting that Hong Kong (and Singapore) are passing the United States.

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Hillary, Bernie, and the Fixed-Pie Fallacy

I don’t know whether it’s because I’m dedicated or masochistic, but I woke up at 3:00 AM in Serbia to live-tweet the Democratic presidential debate.

In retrospect, staying in bed would have been a better choice. This debate was basically the same as the others, with both Hillary Clinton and Bernie Sanders competing on who could turn America into Greece at the fastest rate.

Both candidates argued for higher tax rates on evil rich people, as well as sinister corporations, ostensibly because bigger government will make America more equal.

For those who care about the real world, however, this isn’t such a good idea.

Larry Lindsey, a former Governor at the Federal Reserve, writes in the Wall Street Journal that leftist policies actually cause inequality.

…when you look at performance and not rhetoric, the administrations of political progressives have made the distribution of income more unequal than their adversaries, who supposedly favor the wealthy. …inequality rose more under Bill Clinton than under Ronald Reagan. And it wasn’t even close. While the inequality increase as measured by the Gini index was only slightly more during Clinton’s two terms, the Theil index and mean log deviation increased two and three times as much, respectively. Barack Obama’s administration follows this pattern… The Gini index rose more than three times as much under Mr. Obama than under Mr. Bush. The Theil index increased sharply during the Obama administration, while it fell slightly under Bush 43.

Larry explains what drove these results.

And two big factors are easy-money monetary policies that artificially push up the value of financial assets (thus helping the rich) and redistribution policies that make dependency more attractive than work (thus hurting the poor).

Democratic presidents presided over bubble economies fueled by easy monetary policy. There is no better way to make the rich richer than to run policies that push up the price of financial assets. Cheap money is a boon to those who have access to it. …Transfer payments under Mr. Obama increased by $560 billion. By contrast private-sector wages and salaries grew by $1.1 trillion. So for every $2 in extra wages, about $1 was paid out in extra transfer payments—lowering the relative reward to work. …the effective tax rate on the extra earnings—including lost government benefits such as food stamps, the earned-income tax credit, and medical support payments—is between 50% and 80%. This phaseout of the ever increasing array of benefits has created a “working-class trap” instead of a “poverty trap” that is increasing inequality and keeping the income of these households lower than they might otherwise be.

I especially like Larry’s conclusion.

He points out that statist policies have a long history of failure. The only real beneficiaries are members of the parasite class in Washington.

None of this should really be surprising. If the socialist ideal of “from each according to his ability, to each according to his need” worked in practice, the Berlin Wall might still be standing. …Redistribution through the political process is not costless—even in a perfect world there would be a large bureaucracy to feed. Special-interest elites also emerge when so much money is being moved around. They take their cut, introducing even more inefficiency into the system. …voters who think the progressives running today are going to reduce inequality are falling into the same trap as people entering fifth or sixth marriages—the triumph of hope over experience.

So why do our friends on the left have such an anti-empirical approach to the issue of inequality?

Instead of fixating on inequality, why don’t they focus on policies that will actually help poor people?

Some of them probably don’t care. They simply view class warfare as a way of creating resentment and getting votes.

But many leftists are doubtlessly sincere and genuinely want to help the less fortunate.

The problem is that they suffer from the fixed-pie fallacy.

My Cato Institute colleague Chelsea German explains this fundamentally flawed understanding of the world.

“The rich are getting richer and the poor are getting poorer.” Senator Bernie Sanders first said those words in 1974 and has been repeating them ever since. …A simple logical error underlies Sanders’ belief. If we assume that wealth is a fixed pie, then the more slices the rich get, the fewer are left over for the poor. In other words, people can only better themselves at the expense of others. In the world of the fixed pie, if we observe the rich becoming richer, then it must be because other people are becoming poorer. Fortunately, in the real world, the pie is not fixed. US GDP is growing, and it’s growing faster than the population.

Amen.

And it’s not just the U.S. data on how all income classes are climbing over time. Check out the “hockey stick” showing how the entire world is becoming richer.

Last but not least, Kyle Smith also addresses the topic of inequality in his New York Post column. He starts by explaining there isn’t a problem.

…there is no inequality crisis. …The US is only 42nd (out of 117 countries measured) in income inequality, according to the World Bank. We’re only 16th when it comes to the wealth held by the top 1%.

He then makes a far more important point, which is that it’s good to have an economy and a society where people can become rich by providing goods and services that the rest of us value.

Inequality is to some extent a residual effect of success: If there weren’t any billionaires or millionaires, inequality would be vastly diminished. America attracts and breeds success so brilliantly that we nearly beat the rest of the world combined in some respects: 42% of the world’s millionaires are Americans, and 49% of those with $50 million or more in assets. The American tendency to respect, and expect, success runs counter to the progressive plan to tax it away.

He basically reaches the same conclusion as Larry Lindsey.

In other words the left’s favorite policies help Washington insiders and hurt poor people.

A cap on incomes above, say, $100,000 would massively increase both equality and poverty as millions of middle-class people whose jobs depend on the rich in one way or another found themselves unemployed. …People tend to suspect, rightly, that government intervention in the name of fighting inequality will lead to exactly what’s happened in the Obama era: more inequality, with bureaucrats and their cronies standing to gain.

By the way, here’s a satirical Jonathan Swift version of what happens when you get rid of “rich” people.

P.S. Here’s my video on class warfare, featuring the clip of then-candidate Obama saying he favored a tax hike even if it imposed so much economic damage that the government collected no tax revenue.

P.P.S. The President isn’t the only leftist to have this spite-driven mentality.

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Unless the Goal Is Lower Living Standards, Bernie Sanders Has Learned the Wrong Lesson from Europe

I wrote yesterday that many European nations are doomed to demographics and fiscal chaos, but a lot of people don’t care that much about the future.

Bernie Sanders, for instance, looks at nations such as Denmark and Sweden today and says that America should copy their expansive welfare states.

Is he right?

Well, it depends on the parameters. If, for some reason, somebody was holding a gun to my head and demanding that we copy the policies of a nation from the European Union, the Nordic countries would be among my top choices. Yes, their welfare states are too large, but they somewhat compensate for that mistake by having very pro-free market policies in other areas.

That being said, Ireland and the United Kingdom have the most economic freedom among EU nations, and Switzerland would be at the top if the choice was broadened to non-EU nations in Europe.

But I’m digressing. Let’s get back to whether people in places such as Denmark (or anywhere else in Europe) enjoy more prosperity than their American counterparts.

Mark Perry of the American Enterprise Institute has put together some apples-to-apples data suggesting the answer is no. At least if the goal is more economic output and higher living standards.

…most European countries (including Germany, Sweden, Denmark and Belgium) if they joined the US, would rank among the poorest one-third of US states on a per-capita GDP basis, and the UK, France, Japan and New Zealand would all rank among America’s very poorest states, below No. 47 West Virginia, and not too far above No. 50 Mississippi. Countries like Italy, S. Korea, Spain, Portugal and Greece would each rank below Mississippi as the poorest states in the country.

And here’s the table Mark prepared.

As a quick caveat, it’s worth noting that there’s not a one-to-one link between gross domestic product and actual living standards.

Some of the economic activity in energy-rich states such as North Dakota, for instance, translates into income for shareholders living elsewhere in America.

But if you look at the U.S. average ($54,629), it obviously is higher than economic output in European nations.

And if you prefer direct measures of living standards, then data on consumption from the OECD also shows that America is considerably more prosperous.

None of this suggests that policy in America is ideal (it isn’t), or that European nations are failures (they still rank among the wealthiest places on the planet).

I’m simply making the modest – yet important – argument that Europeans would be more prosperous if the fiscal burden of government wasn’t so onerous.

And I’m debunking the argument that we should copy nations such as Denmark by allowing a larger government in the United States (though I do want to copy Danish policies in other areas, which generally are more pro-economic liberty than what we have in America).

Shifting to a different topic, Mark Perry also takes a shot at Donald Trump, who seems to think that other nations are “winning” over America because of trade.

…maybe we should remind him that Mexico and China, as US states, would both be far below our poorest state — Mississippi — by 51% and 62% respectively for GDP per capita; and Japan would be barely above our poorest state — Mississippi. Using GDP per capita as a measure of both economic output per person and of a country’s standard of living, America is winning quite handsomely.

Excellent point. It’s a sign of American prosperity that we can afford to buy more from other nations than they can afford to buy from us.

It’s also a sign of prosperity that, when they do earn American dollars, foreigners often choose to invest those funds in the American economy (remember, the necessary flip side of a “trade deficit” is a “capital surplus”).

P.S. Speaking of European prosperity, here’s a fascinating map I saw on Twitter. The reporter from the Wall Street Journal who shared it remarked that “Purple areas are rich as US states. Yellow areas poorer than Mexico.” In other words, The few dark areas (a handful in Germany and one each in a few other nations) are the only parts of Europe that are economically equal to the U.S.

P.P.S. Here’s another map, concentrating just on Northern Europe.

I don’t have a policy lesson. Simply an observation that the United Kingdom has one really rich region (Greater London) and quite few relatively poor regions.

P.P.P.S One final comment. Long-run growth matters. Hong Kong and Singapore, for instance, used to be a poor jurisdictions. But free markets and small government have produced decades of strong growth. And now these places are among the richest places on the planet. Richer not only than Europe, but even more prosperous than the United States.

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Demographics + Entitlements = Europe’s Doom

The most depressing data about America’s economy is not the top tax rate, the regulatory burden, or the level of wasteful of government spending.

Those numbers certainly are grim, but I think they’re not nearly as depressing as America’s demographic outlook.

As you can see from this sobering image, America’s population pyramid is turning into a population cylinder.

There’s nothing a priori wrong with an aging population and a falling birthrate, of course, but those factors create a poisonous outlook when mixed with poorly designed entitlement programs.

The lesson is that a modest-sized welfare state is sustainable (even if not advisable) when a nation has a population pyramid. But even a small welfare state becomes a problem when a nation has a population cylinder. Simply stated, there aren’t enough people to pull the wagon and there are too many people riding in the wagon.

But if America’s numbers are depressing, the data from Europe should lead to mass suicide.

The Wall Street Journal has a new story on the utterly dismal fiscal and demographic data from the other side of the Atlantic Ocean.

State-funded pensions are at the heart of Europe’s social-welfare model, insulating people from extreme poverty in old age. Most European countries have set aside almost nothing to pay these benefits, simply funding them each year out of tax revenue. Now, European countries face a demographic tsunami, in the form of a growing mismatch between low birthrates and high longevity, for which few are prepared. …Looking at Europeans 65 or older who aren’t working, there are 42 for every 100 workers, and this will rise to 65 per 100 by 2060, the European Union’s data agency says. …Though its situation is unusually dire, Greece isn’t the only European government being forced to acknowledge it has made pension promises it can ill afford. …Across Europe, the birthrate has fallen 40% since the 1960s to around 1.5 children per woman, according to the United Nations. In that time, life expectancies have risen to roughly 80 from 69. …Only a few countries estimate the total debt burden of the pension promises they have made.

The various nations is Europe may not produce the data, but one of the few good aspects of international bureaucracies is that they generate such numbers.

I’ve previously shared projections from the IMF, BIS, and OECD, all of which show the vast majority of developed nations will face serious fiscal crises in the absence of reforms to restrain the burden of government spending.

New we can add some data from the European Commission, which has an Ageing Report that is filled with some horrifying demographic and fiscal information.

First, here are the numbers showing that most parts of the world (and especially Europe) will have many more old people but a lot fewer working-age people.

Looking specifically at the European Union, here’s what will happen to the population pyramid between 2013 and 2060. As you can see, the pyramid no longer exists today and will become an upside-down pyramid in the future.

Now let’s look at data on the ratio between old people and working-age people in various EU nations.

Dark blue shows the recent data, medium blue is the dependency ratio in 2030, and the light blue shows the dependency ration in 2060.

The bottom line is that it won’t be long before any two working-age people in the EU will be expected to support themselves plus one old person. That necessarily implies a very onerous tax burden.

But the numbers actually are even more depressing than what is shown in the above chart.

In the European Commission’s Ageing Report, there’s an estimate of the “economic dependency ratio,” which compares the number of workers with the number of people supported by those workers.

The total economic dependency ratio is a more comprehensive indicator, which is calculated as the ratio between the total inactive population and employment (either 20-64 or 20-74). It gives a measure of the average number of individuals that each employed “supports”.

And here are the jaw-dropping numbers.

These numbers are basically a death knell for an economy. The tax burden necessary for this kind of society would be ruinous to an  economy. A huge share of productive people in these nations would decide not to work or to migrate where they would have a chance to keep a decent share of their earnings.

So now you understand why I wrote a column identifying safe havens that might remain stable while other nations are suffering Greek-style fiscal collapse.

Having shared all this depressing data, allow me to close with some semi-optimistic data.

I recently wrote that Hong Kong’s demographic outlook is far worse than what you find in Europe, but I explained that this won’t cause a crisis because Hong Kong wisely has chosen not to adopt a welfare state. People basically save for their own retirement.

Well, a handful of European nations have taken some steps to restrain spending. Here’s a table from the EC report on countries which have rules designed to adjust outlays as the population gets older.

These reforms are better than nothing, but the far better approach is a shift to a system of private retirement savings.

As you can see from this chart, Denmark, Sweden, and the Netherlands already have a large degree of mandatory private retirement savings, and a handful of other countries have recently adopted private Social Security systems that will help the long-run outlook.

I’ve already written about the sensible “pre-funded” system in The Netherlands, and there are many other nations (ranging from Australia to Chile to the Faroe Islands) that have implemented this type of reform.

Given all the other types of government spending across the Atlantic, Social Security reform surely won’t be a sufficient condition to save Europe, but it surely is a necessary condition.

Here’s my video explaining why such reform is a good idea, both in America and every other place in the world.

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In One Cartoon Strip, Everything You Need to Know about the Minimum Wage

Every so often, I see visuals that do a great job of illustrating various economic principles.

This Wizard-of-Id parody contains a lot of insight about labor economics. As does this Chuck Asay cartoon and this Robert Gorrell cartoon.

If you want to understand Keynesian economics, this Scott Stantis cartoon is a gem, as is the house-on-fire image in this post.

Regarding tax policy, the philoso-raptor explains supply-side economics and Paul Bunyan helps to illustrate why double taxation is so destructive.

You can also get clear messages about why a welfare state is economically destructive in this classic from Chuck Asay, as well as these home-made cartoons on riding the wagon vs pulling the wagon.

Regarding the minimum wage, I think Henry Payne effectively shows – in this cartoon and this cartoon – how mandating above-market wages is very bad news for those with limited skills. But this cartoon strip from Red Panels deserves special praise because it shows both what some people think and what actually happens.

Amen. I’ve always been mystified why some people don’t understand that jobs are only created when an employee is expected to generate net revenue.

In other words, there are no “magic boats.” Especially in the long run, companies will shed workers that hurt the bottom line.

P.S. Here are some of my favorites images that don’t involve economic principles.

• The real fight is looters vs. producers, not rich vs poor.
• The U.S. population pyramid becoming a cylinder.
• Pizza slices and the inequality paradox.

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Socialism: Evil and Stupid

Of the 4,000-plus columns I’ve produced since starting International Liberty in 2009, two of the most popular posts involve semi-amusing stories that highlight the failure of socialism, redistributionism, and collectivism.

“The Tax System Explained in Beer” is the third-most-viewed post of all time, and “Does Socialism Work? A Classroom Experiment” is the fourth-most-viewed post. At the risk of oversimplifying, I think these columns are popular because they succinctly capture why it’s very shortsighted and misguided to have an economic system that punishes success and rewards sloth.

For those who want details, I have dozens of columns about real-world socialist failure, looking at both the totalitarian version in places like Cuba, China, Venezuela, and North Korea, as well as the majoritarian version in nations such as France, Italy, and Greece.

And for those that want to get technical, I even have several columns explaining that the pure version of socialism involves government ownership of the means of production (government factories, state farms, etc), whereas the “democratic socialism” in Europe is actually best viewed as extreme versions of redistributionism (while the pervasive interventionism favored by the left actually is a form of fascism).

Yet notwithstanding the horrible track record of every version of socialism, we actually have a presidential candidate in America who actually calls himself a socialist. Though, as pointed out by my colleague Marian Tupy in The Atlantic, he’s more of a redistributionist than a socialist.

Socialism was an economic system where the means of production (e.g., factories), capital (i.e., banks), and agricultural land (i.e., farms) were owned by the state. …Sanders is not a typical socialist. Sure, he believes in a highly regulated and heavily taxed private enterprise, but he does not seem to want the state to own banks and make cars. …Senator Sanders is not a proponent of socialism, and that is a good thing, for true socialism, whenever and wherever it has been tried, ended in disaster.

Here’s an article about real socialism by Mark Perry that’s more than 20 years old, but its analysis is just as accurate today as it was in 1995.

Socialism is the Big Lie of the twentieth century. While it promised prosperity, equality, and security, it delivered poverty, misery, and tyranny. Equality was achieved only in the sense that everyone was equal in his or her misery. …Socialism does not work because it is not consistent with fundamental principles of human behavior. …it is a system that ignores incentives. …A centrally planned economy without market prices or profits, where property is owned by the state, is a system without an effective incentive mechanism to direct economic activity. By failing to emphasize incentives, socialism is a theory inconsistent with human nature and is therefore doomed to fail.

Ben Domenech, writing for Commentary, analyzes the current version of socialism, which – particularly in the (feeble) minds of young people – is simply more middle-class entitlements financed by high tax rates on evil rich people.

Sanders holds massive events populated by kids who think what he is preaching is very cool. …When did it become acceptable for Americans to back an avowed socialist? …For Americans today, the visible and unmistakable connection between socialism and totalitarianism has faded dramatically. …For America’s young, socialism’s definition isn’t to be found in the desperate, sad reality of peoples held captive by regimes that proudly declare themselves socialist. It’s more of a vague ideal… This makes it easier for someone like Sanders to say that socialism just means middle-class entitlements… It is…Barack Obama…that we have to thank for socialism’s rise in 2016. Republicans…have been describing President Obama’s domestic program as socialist… The takeaway for today’s younger voters seems to be: If everything Obama is trying to do is socialism, …then perhaps we need to go full socialist to actually get things done.

The final part of the excerpt is very insightful.

Young people have no idea about the real nature of socialism. They don’t know that communism was an ideology of international socialism. They don’t know Nazism was a form of national socialism.

Heck, they don’t even understand the modern-day failure of socialism in Venezuela or North Korea.

To them, socialism is simply bigger government.

Which is very offensive to people who actually have suffered under socialism. Garry Kasparov, the chess champion turned Russian dissident, doesn’t mince words in his response to the Sanders crowd.

Let’s close with something amusing. Or at least ironic.

It’s the socialism version of this communism image.

And it’s something young people should think about because socialism fails every place it is tried. As Mark Perry explained, it’s grossly inconsistent with human nature.

That’s true whether we’re looking at the totalitarian version of the majoritarian version.

The latter version is preferable, of course, though the end result is still economic misery.

P.S. Here’s a very clever video that asks college kids whether they would like a socialist grading system. Unsurprisingly, they say no. Though the video was put together before Bernie Sanders attracted a cult-like following, so perhaps today’s students would answer differently.

P.P.S. Speaking of videos, I’m guessing this bit of satire won’t be very popular with Bernie’s supporters.

P.P.P.S. There are several rather amusing Obama/socialism cartoons. You can see my favorites here, here, and here.

P.P.P.P.S. You can also use two cows to teach about socialism, as well as other theories.

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A Primer on Growth, Politics, and Taxation

About one year ago, Scott Hodge authored a report explaining the mechanics and utility of the Tax Foundation’s Taxes and Growth Dynamic Model. He made a very persuasive argument about the need to modernize and improve the Joint Committee on Taxation’s antiquated revenue-estimating process by estimating the degree to which changes in tax policy impact economic performance. The use of “dynamic scoring,” Scott explained, would produce more accurate data than “static scoring,” which is based on rather bizarre and untenable assumption that the economy’s output is unaffected by taxation.

Conventional scoring treats this process as an exercise in arithmetic, whereas dynamic scoring makes the process an exercise in economics.

Since I’m a proponent of the Laffer Curve, I obviously applaud the Tax Foundation’s superb work on this issue.

And for those who doubt the value of dynamic scoring, I challenge them to come up with an alternative explanation for why rich people paid five times as much tax after Reagan lowered the top tax rate from 70 percent to 28 percent in the 1980s.

But the Laffer Curve isn’t the focus of today’s column. Instead, I want to address the argument that supply-side tax policy (i.e., lower marginal tax rates, less tax bias against saving and investment) is no longer important or desirable.

Writing for Slate, Reihan Salam argues that Donald Trump’s success is a sign that the traditional tax-cutting agenda no longer is relevant.

Why can’t his GOP opponents convince Republican voters that they would do a far better job than Trump of defending middle-class economic interests? …Trump has demonstrated its weakness and the failure of its stale policy agenda to resonate with voters. …The GOP can no longer survive as the party of tax cuts for the rich. …If Republicans are to win the trust of working- and middle-class voters who’ve grown deeply skeptical of their economic nostrums, they will have to do something dramatic: It’s time for the GOP to abandon its near-obsessive devotion to tax cuts that disproportionately benefit upper-income households. …The GOP elite has also yet to grasp that most voters simply don’t care as much about taxes as they did in the Reagan era. …the share of voters who consider their federal tax burden their top priority is a mere 1 percent. To break out of their tax trap, Republicans…should continue to back tax cuts for the middle class, and in particular for middle-class parents. But until the country sees large and sustained budget surpluses, there should be no tax cuts for households earning $250,000 or more.

I’m not an expert on politics, so I won’t pretend to have any insight on whether tax policy motivates voters. But from an economic perspective, assuming the goal is a faster-growing economy that creates broadly shared prosperity, it would be very unfortunate if Republicans abandoned supply-side tax policy.

In the Tax Foundation study, Scott succinctly summarized the issue.

The primary goal of comprehensive tax reform is economic growth. …It is critically important that lawmakers make the right choices that lift everyone’s standards of living.

And here’s what I recently wrote, specifically addressing the assertion that proponents of good policy simply want to help the “rich.”

…It’s not that we lose any sleep about the average tax rate of successful people. We just don’t want to discourage highly productive investors, entrepreneurs, and small business owners from doing things that result in more growth and prosperity for the rest of us.

But what are those “right choices” that “result in more growth and prosperity for the rest of us”?

The Tax Foundation points us in the right direction. Let’s look at some charts (updated versions of the ones in Scott’s report), starting with this estimate of how various tax cuts affect overall economic output.

As you can see, expanded child credits don’t have any positive impact on growth for the simple reason that they don’t alter incentives to work, save, or invest (they may be desirable for other reasons, however). Lower marginal tax rates lead to some added growth, particularly if the top rate is reduced since upper-income taxpayers have far greater control of the timing, level, and composition of their income. But the biggest growth effects come from lowering the corporate tax rate and reducing the tax code’s bias against new investment.

Now let’s take the next step.

If changes in tax policy lead to increases in economic output, that also means a greater amount of taxable income.

So the Tax Foundation also can tell us the degree to which the aforementioned tax cuts will change revenue after 10 years. As you can see, most tax cuts result in less revenue, but in some cases there’s a considerable amount of revenue feedback. And if policy makers shift toward expensing, the long-run effect is more tax revenue.

Now let’s look from the other perspective.

What happens to the economy if various tax hikes are imposed?

As you can see, some tax increases have relatively modest effects on economic output while others significantly discourage productive behavior.

And when you feed the growth effects back into the model, you then can see the likely real-world effect of those tax increases on tax revenue.

So if policy makers impose a relatively benign tax hike, such as scaling back the state and local tax deduction, they will collect a considerable amount of revenue. But if they increase top tax rates on personal income or corporate income, a lot of the projected revenue evaporates. And if they exacerbate the tax bias against new investment, the net effect is less revenue.

By the way, these charts show why the class-warfare tax policies of Hillary Clinton and Bernie Sanders are so misguided. The amount of economic damage per dollar collected would be ridiculous.

Such tax increases wouldn’t be good for rich people, of course, but the real lesson is that the rest of us will be adversely affected because of a slower-growing economy.

The bottom line is that poor people and middle-class people have much more opportunity and prosperity with a Hong Kong-style tax system instead of a punitive French-style tax system.

To conclude, let’s now consider a few caveats.

If you examine the broad measures of what causes prosperity, tax policy is just one piece of the puzzle. The burden of government spending also is important, as is trade policy, regulatory policy, monetary policy, property rights, and the rule of law.

So it’s possible for a nation to be relatively prosperous with bad tax policy so long as it has free-market policies in other areas. It’s also possible for a nation with a good tax system to be poor and stagnant if other economic policies are statist and interventionist.

But if the goal is faster growth and more broadly shared prosperity, why not seek good policy in all areas?

The bottom line is that supply-side tax policies can contribute to better economic performance. In an ideal world, those policies also are politically popular. But even if they aren’t, the policy-making community should strive to educate the populace on what works, not abandon good policy for the sake of short-term political expediency.

P.S. Even international bureaucracies acknowledge the Laffer Curve, which means they understand that changes in tax policy can lead to changes in taxable income.

• Such as  this study from the OECD acknowledging that lower tax rates can lead to more taxable income.
• 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 the United Nations admitting that the Laffer Curve limits the feasible amount of taxes that can be imposed.

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Learning from New Jersey’s Bad Tax Policy

Federalism is a great idea, and not just because America’s Founders wanted a small and limited central government.

It’s also a good idea because states are laboratories that teach us about the benefits of good policy and the costs of bad policy.

And when we specifically look at New Jersey, we can learn a lot about the negative consequences of excessive taxation.

Lesson Number 1: Don’t adopt new taxes.

Just fifty years ago, New Jersey was like New Hampshire with no income tax and no sales tax. It was a fast-growing and prosperous refuge for people escaping high tax burdens in New York and elsewhere.

But then a state sales tax was adopted in 1966, followed by the enactment of a state income tax in 1976. Not surprisingly, politicians used those revenue sources to finance an orgy of new spending, to such an extent that New Jersey is now in last place in a ranking of state fiscal conditions.

And ever since new taxes were adopted, politicians have routinely and repeatedly increased the rates, diverting ever-greater amounts of money from the state’s private sector.

The net result, as demonstrated by the Tax Foundation’s State Business Tax Climate Index, is that New Jersey now has the worst tax system in the entire nation.

A very high income tax burden is a major reason why New Jersey is so uncompetitive.

After thriving for centuries with no state income tax, it only took state politicians a few decades to create a very punitive system with the fifth-highest rate in the nation. Once again, the Tax Foundation has the data.

No wonder so many investors, entrepreneurs, and business owners are escaping New Jersey.

And this is exactly what’s been happening, with very negative effects on New Jersey’s economy. Here’s some of what I shared back in 2010.

More than $70 billion in wealth left New Jersey between 2004 and 2008 as affluent residents moved elsewhere, according to a report…Conducted by the Center on Wealth and Philanthropy at Boston College… The exodus of wealth, then, local experts and economists concluded, was a reaction to a series of changes in the state’s tax structure — including increases in the income, sales, property and “millionaire” taxes. “This study makes it crystal clear that New Jersey’s tax policies are resulting in a significant decline in the state’s wealth,” said Dennis Bone, chairman of the New Jersey Chamber of Commerce and president of Verizon New Jersey. …the report reinforces findings from a similar study he conducted in 2007 with fellow Rutgers professor Joseph Seneca, which found a sharp acceleration in residents leaving the state. That report, which focused on income rather than wealth, found the state lost nearly $8 billion in gross income in 2005.

Wow, that’s the Atlantic version of California.

By the way, politicians often impose taxes or increase tax rates using the excuse that they will lower other taxes.

And it hasn’t been uncommon for New Jersey politicians to tell voters that tax hikes will enable lower property taxes.

Yet if you look at this data from the Tax Foundation, the Garden State has the highest property tax burden in the nation.

The only “good news” is that New Jersey’s 6.97 percent state sales tax is only the 24th-highest in the United States.

Yet when you consider that there was no state sales tax until 1966, that’s hardly a sign of fiscal restraint.

Lesson Number 2: Get rid of taxes that are especially destructive.

New Jersey is one of only two states that impose both an inheritance tax and a death tax. The death tax is particularly pernicious since very successful taxpayers obviously have considerable ability to migrate to states with better policy.

But here’s where we might have a bit of good news. New Jersey may be about to eliminate its death tax.

A state Senate committee on Monday passed…bipartisan proposals to eliminate the estate tax… Proponents of the tax changes say people are leaving New Jersey to avoid its low thresholds on taxing inherited wealth and retirement income. More than 2 million people left New Jersey between 2005 and 2014, costing the state $18 billion in net adjusted income and $11.4 billion in economic activity, according to the New Jersey Business and Industry Association, which blames high taxes for the exodus. …State Sen. Steve Oroho (R-Sussex) said he expects the money New Jersey reaps from people who stay here will pay for the lost tax revenue. The bill (S1728) was approved 9-0 with four abstentions.

This is amazing evidence of the liberalizing impact of tax competition. New Jersey’s state legislature is dominated by leftists, yet even they realize that they won’t get any loot if their intended victims can move across states lines (a lesson that French politicians have a very hard time understanding).

Lesson Number 3: Politicians waste much of the revenue they collect.

Politicians generally like higher taxes because they can buy support and votes by redistributing other people’s money (though some leftists like higher taxes solely for reasons of spite).

So it’s also important to look at what’s happening on the spending side of the budget. And it turns out that New Jersey wastes a lot of money.

I’ve already written about state bureaucrats being grossly overpaid (see here and here for some jaw-dropping examples).

But now let’s look at New Jersey’s “rate of return” or “efficiency” on transportation spending. This great video from Reason tells you everything you need to know.

And one of the reasons I shared this video is because New Jersey politicians want to boost the gas tax so they can spend even more money. Indeed, they may even hold the death tax hostage to get what they want.

Democrats have said they hope to leverage these tax cuts into a deal with Gov. Chris Christie to raise the gas tax.

I rhetorically asked back in 2010 whether Chris Christie could save New Jersey. We now know the answer is no, but maybe he can partially redeem himself by winning the death tax fight without surrendering on the gas tax.

P.S. Another formerly low-tax state, Connecticut, decided to copy New Jersey and the results are similarly dismal. Let’s hope other states, especially Alaska and Washington, are paying attention.

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Trudeau-nomics: Squandering Canada’s Fiscal Legacy, Risking Canada’s Economic Progress

In recent weeks, the bureaucrats at both the International Monetary Fund and the Organization for Economic Cooperation and Development have recommended that politicians should have a green light to supposedly stimulate growth by increasing the burden of government spending.

Since the lavish (and tax-free) salaries for IMF and OECD bureaucrats are made possible by those same politicians, it’s hardly a surprise that the international bureaucracies cranked out their justifications for bigger government.

Now it’s time to see which nations actually decide to roll the dice with a Keynesian spending binge, and it looks like Canada is at the top of the list.

As reported by Bloomberg, the new Prime Minister thinks more spending will “stimulate” growth.

Canadian Prime Minister Justin Trudeau is urging global leaders to rely more on government spending…to spur growth… He also defended his plan to go willingly into the red. …Trudeau’s arrival on the global scene and his endorsement of deficits marks a sharp about face from his predecessor, Stephen Harper. Along with German Chancellor Angela Merkel and U.K. Prime Minister David Cameron, Harper championed the budget austerity alliance within the Group of Seven that often clashed with the U.S. on fiscal policy.

Needless to say, the former Canadian Primer Minister was right and Obama was – and still is – wrong.

And while they certainly aren’t advocates of small government, Angela Merkel and David Cameron also were wise to impose a modest bit of spending restraint in recent years.

Now we’ll see what happens to Canada as government gets bigger.

Here are some of the specific details about Trudeau’s proposed spending binge.

Trudeau, 44, hinted he is considering expanding on pledges that have his country on pace for a deficit of nearly C$30 billion ($22.3 billion) in the fiscal year that begins April 1. Having promised C$10.5 billion in new spending during the campaign…”we need to be investing intelligently in infrastructure, in money in the pockets of the middle class, to grow the economy,” Trudeau said of the fiscal situation.

And he explicitly invokes the discredited Keynesian argument that a larger burden of government spending somehow boosts economic performance.

Statistics Canada reported that output grew just 1.2 percent in 2015, down from 2.5 percent in 2014. To Trudeau, that’s a reason to spend more instead of tightening up to eliminate the deficit, as Harper had argued in last year’s election campaign. “Cuts would have been terrible for the economy,” Trudeau said.

What makes the Canadian developments so tragic is that the country has been a comparative success story in recent decades.

Canada is now one of the world’s most economically free nations thanks to relatively sensible policies involving spending restraint, corporate tax reform, bank bailouts, the tax treatment of saving, regulatory restraint, and privatization of air traffic control. Heck, Canada even has one of the lowest levels of welfare spending among developed nations.

Most remarkable, the country’s biggest progress on spending actually took place when Trudeau’s party was in charge in the 1990s.

And now Trudeau wants to reverse course and put Canada’s progress at risk.

P.S. It’s good news (or, to be more accurate, a lesser form of bad news) that Trudeau’s Keynesian agenda involves infrastructure spending since there’s at least a possibility that such outlays may generate a positive return. If he was proposing a lot of redistribution spending, by contrast, that would represent bad policy from both a micro and macro perspective.

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The Obama-Rubio “Healthcare Mandate” Controversy

My colleague Michael Cannon has been a tireless advocated for market-based health reform. His research has helped pave the way for good Medicare and Medicaid reform proposals on Capitol Hill and he is justifiably famous for his dogged opposition to Obamacare.

With that glowing introduction, you may be surprised to learn that Michael has stirred up a hornet’s nest among conservatives by asserting that Marco Rubio’s healthcare reform legislation contains an Obama-like mandate.

…where is conservative outrage over Marco Rubio’s health plan, which actually contains an individual mandate? …The centerpiece of Rubio’s proposal… If you purchase a government-approved health plan, you could save, for example, $2,000 on your taxes. If you don’t, you pay that $2,000 to the government. That is exactly how Obamacare’s individual mandate works.

As you might expect, this rubs a lot of people the wrong way.

Writing for Forbes, Ryan Ellis argues that tax preferences aren’t mandates.

By this twisted, Orwellian logic, there is a government mandate to have kids (child tax credit), buy a house (mortgage interest deduction) and save for retirement (401(k) plans).

James Capretta is similarly critical in his column for National Review.

Cannon’s logic is absurd. Senator Rubio…wants to make sure that all Americans get a comparable tax break for health insurance, regardless of whether or not they get their insurance through their place of work. …No one would be required to do anything.

Grace-Marie Turner, in her column for Forbes, echoes those statements.

The Rubio plan does not and would not involve a mandate, and there are no enforcement penalties for not taking the credit. …Claiming that the Rubio plan is at least as bad as Obamacare is an irresponsible position.

Wow, Michael is apparently twisted, absurd and irresponsible. And these are statements from his friends and allies! When I get slammed, by contrast, it’s by leftists.

So what gives? At the risk of sounding like a mealy-mouthed politician, I’m going to argue that both Michael and his critics are right and that this fight is not really about a “mandate” but instead is a battle over whether (and how) government should use fiscal policy to induce certain healthcare decisions.

First, let me explain why Michael is right. His core argument, as captured by this excerpt from his article, is very straightforward.

Rubio’s tax credit would…give the federal government as much power to force you to purchase unwanted coverage as Obamacare does.

And he’s basically right. Under Obamacare, you can choose to buy a health insurance policy in order to pay less to the IRS. Under Rubio’s plan, you can choose to buy a health insurance policy in order to pay less to the IRS.

To be sure, the mechanisms are different. Under Obamacare, you pay less to the IRS because you’re not being fined. Under Rubio’s plan, you pay less to the IRS because you’re taking advantage of a tax credit. But the net result is still somewhat similar, at least from an economic perspective.

Now here’s why Michael’s critics are right. Notwithstanding a degree of economic equivalence, most people do not think a penalty and a bribe are the same.

The average person probably won’t get offended if you tell them they can have $1,000 if they touch a hot stove. They may say yes or they may say no, and they may think you’re weird for making the offer, but there presumably won’t be hard feelings.

On the other hand, if you tell the average person that you will coercively deprive them of $1,000 if they don’t touch a hot stove, they will probably be upset that you’re putting them in an unpleasant position. And regardless of what they choose, they’ll resent you.

This helps to explain why many people don’t like Obamacare. It forces them to choose between two things they may not want.

But in Rubio’s plan, the choice is whether you should choose something in order to get something. That’s a more pleasing scenario.

Now let’s shift to the real issue, which is the degree to which fiscal policy should be used to encourage health insurance.

Michael is an advocate of large health savings accounts and most everyone else prefers tax credits (and they prefer refundable credits, akin to the EITC, which means Uncle Sam would give money to people who don’t earn enough to pay tax).

Digging into that issue is not the goal of today’s column. Suffice to say that if your long-run goal is to get government out of the health sector, you’ll probably be more sympathetic to Michael’s view. If you think getting government out of the health sector is a pipe dream, you’ll probably be more sympathetic to tax credits.

The bottom line is that this isn’t a fight between good guys and bad guys. It’s a tactical disagreement among people who realize that government intervention has screwed up our healthcare system and don’t fully agree on how to get the toothpaste back in the tube.

P.S. Shifting to a different topic, it’s time to savor a rare victory. Regular readers may recall the postscript in a column last year about the IRS stealing the bank account of a guy who runs a convenience store in North Carolina. That was horrible and disgusting (and there are many other examples of similar misbehavior by the feds). But the good news is that the bureaucrats have been forced to return the money.

But remember that this is just a victory in one battle. We won’t win the war until the disgusting practice of civil asset forfeiture is abolished.

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