Feeds:
Posts
Comments

Archive for February, 2017

As part of an otherwise very good tax reform plan, House Republicans have proposed to modify the corporate income tax so that it becomes a “destination-based cash-flow tax.”

For those not familiar with wonky inside-the-beltway tax terminology, there are three main things to understand about this proposal.

  • First, the tax rate on business would drop from 35 percent to 20 percent. This is unambiguously positive.
  • Second, it would replace depreciation with expensing, which is a very desirable change that would eliminate a very counter-productive tax on new investment outlays. This is basically what makes the plan a “cash-flow” tax.
  • Third, any income generated by exports would be exempt from tax but the 20-percent tax would be imposed on all imports. These “border-adjustable” provisions are what makes the plan a “destination-based” tax.

I’m a big fan of the first two provisions, but I’m very hostile to the third item.

I don’t like it because I worry it sets the stage for a value-added tax. I don’t like it because it is designed to undermine tax competition. I don’t like it because it has a protectionist stench and presumably violates America’s trade commitments. I don’t like it because that part of the plan only exists because politicians aren’t willing to engage in more spending restraint. And I don’t like it because politicians should try to reinvent the wheel when we already know the right way to do tax reform.

Heck, I feel like the Dr. Seuss character who lists all the ways he would not like green eggs and ham. Except I can state with complete certainty I wouldn’t change my mind if I was suddenly forced to take a bite of this new tax.

Today, I’m going to augment my economic arguments by noting that the plan also is turning into a political liability. Here are some excerpts from a news report in the Wall Street Journal about opposition in the business community.

A linchpin of the House Republicans’ tax plan, an approach called “border adjustment,” has split Republicans and fractured the business world into competing coalitions before a bill has even been drafted. …There is also global uncertainty: Other countries may retaliate, either by border-adjusting their corporate taxes or by challenging the U.S. plan at the World Trade Organization as too tilted toward American producers.

And The Hill reports that grassroots organizations also are up in arms.

Americans for Prosperity is stepping up its efforts to advocate against a proposal from House Republicans to tax imports and exempt exports, as lawmakers are increasingly raising concerns about the proposal. …AFP has hundreds of volunteers and staff who are making phone calls about the proposal. The group has about 100 meetings set up with Congress members and their staff for next week, while Congress is in recess.

Meanwhile, the Economist reports that the plan is causing uncertainty around the world.

To offset a border-adjusted tax of 20%—the rate favoured by House Republicans—the greenback would need to rise fully 25%, enough to destabilise emerging markets burdened with dollar-denominated debts. If the dollar stayed put and wages and prices rose 25% instead, the Federal Reserve would have to decide how to respond to an unprecedented surge in inflation. Why tolerate such disruption?

Holman Jenkins of the Wall Street Journal has a devastating take on the issue.

Like a European value-added tax, its cost would be deeply hidden in the price of goods, thus easily jacked up over time. Also, compared with the current tax structure, businesses would see less incentive to move abroad in search of lower taxes, eroding a useful pressure on politicians to be fiscally sane. And because the tax would alter the terms of trade, it would be expected to lead to a sharp increase in the dollar. U.S. holders of foreign assets would suffer large paper losses. Since many foreigners borrow in dollars too, a global debt crisis might follow. The tax might also violate World Trade Organization rules, inviting other countries to impose punitive taxes on U.S. exports.

Last but not least, John Tamny outlines some of the political downsides at Real Clear Markets.

…the House of Representatives…is aggressively promoting a…tax on imports. …When we get up and go to work each day, our work is what we exchange for what we don’t have, including voluminous goods and services produced for us around the world.  …Party members are proudly seeking a tax on our work. …Only the “stupid” Party could come up with something so injurious to every American, to the American economy, and to its growth-focused brand.  But that’s where we are at the moment.  The Party that attained majorities with its tax cutting reputation is aggressively seeking to shed its growth brand through the introduction of tax hikes meant to give politicians even more of what we the people produce.  If so, the majority Party can kiss its majority goodbye.  It will have earned its minority status.

For what it’s worth, I think John overstates the case against the plan. The additional revenue from border-adjustable tax provision would be used to cut taxes elsewhere. Heck, the plan is actually a significant net tax cut.

But John is right when you look at the issue through a political lens. If the DBCFT actually began to move through the legislative process, opponents would start running commercials about the “GOP scheme to impose new consumption tax on Americans.” Journalists (most of whom dislike Republicans) would have a field day publicizing reports about the “GOP plan to raise average family tax bill by hundreds of dollars.”

Such charges would be ignoring the other side of the equation, of course, but that’s how politics works.

All of which brings me back to one of my original points. We already know that the flat tax is the gold standard of tax reform. And we already know the various ways of moving the tax code in that direction.

My advice is that Republicans abandon the border-adjustable provision and focus on lowering tax rates, reducing double taxation, and cutting back on loopholes. Such ideas are economically sounder and politically safer.

Read Full Post »

Back in 2014, I shared some data from the Tax Foundation that measured the degree to which various developed nations punished high-income earners.

This measure of relative “progressivity” focused on personal income taxes. And that’s important because that levy often is the most onerous for highly productive residents of a nation.

But there are other taxes that also create a gap between what such taxpayers earn and produce and what they ultimately are able to consume and enjoy. What about the effects of payroll taxes? Of consumption taxes and other levies?

To answer that question, we have a very useful study from the European Policy Information Center on this topic. Authored by Alexander Fritz Englund and Jacob Lundberg, it looks at the total marginal tax rate on each nation’s most productive taxpayers.

They start with some sensible observations about why marginal tax rates matter, basically echoing what I wrote after last year’s Super Bowl.

Here’s what Englund and Lundberg wrote.

The marginal tax rate is the proportion of tax paid on the last euro earned. It is the relevant tax rate when deciding whether to work a few extra hours or accept a promotion, for example. As most income tax systems are progressive, the marginal tax rate on top incomes is usually also the highest marginal tax rate. It is an indicator of how progressive and distortionary the income tax is.

They then explain why they include payroll taxes in their calculations.

The income tax alone does not provide a complete picture of how the tax system affects incentives to work and earn income. Many countries require employers and/or employees to pay social contributions. It is not uncommon for the associated benefits to be capped while the contribution itself is uncapped, meaning it is a de facto tax for high-income earners. Even those social contributions that are legally paid by the employer will in the end be paid by the employee as the employer should be expected to shift the burden of the tax through lower gross wages.

Englund and Lunberg are correct. A payroll tax (sometimes called a “social insurance” levy) will be just as destructive as a regular income tax if workers aren’t “earning” some sort of additional benefit. And they’re also right when they point out that payroll taxes “paid” by employers actually are borne by workers.

They then explain why they include a measure of consumption taxation.

One must also take value-added taxes and other consumption taxes into account. Consumption taxes reduce the purchasing power of wage-earners and thus affect the return to working. In principle, it does not matter whether taxation takes place when income is earned or when it is consumed, as the ultimate purpose of work is consumption.

Once again, the authors are spot on. Taxes undermine incentives to be productive by driving a wedge between pre-tax income and post-tax consumption, so you have to look at levies that grab your income as it is earned as well as levies that grab your income as it is spent.

And when you begin to add everything together, you get the most accurate measure of government greed.

Taking all these taxes into account, one can compute the effective marginal tax rate. This shows how many cents the government receives for every euro of additional employee compensation paid by the firm. …If the top effective tax rate is 75 percent, as in Sweden, a person who contributes 100 additional euros to the economy will only be allowed to keep 25 euros while 75 euros are appropriated by the government. The tax system thus drives a wedge between the social and private return to work. …High marginal tax rates disconnect the private and social returns to economic activity and thereby the invisible hand ceases to function. For this reason, taxation causes distortions and is costly to society. High marginal tax rates make it less worthwhile to supply labour on the formal labour market and more worthwhile to spend time on household work, black market activities and tax avoidance.

Here’s their data for various developed nation.

Keep in mind that these are the taxes that impact each nation’s most productive taxpayers. So that includes top income tax rates, both for the central governments and sub-national governments, as well as surtaxes. It includes various social insurance levies, to the extent such taxes apply to all income. And it includes a measure of estimated consumption taxation.

And here’s the ranking of all the nations. Shed a tear for entrepreneurs in Sweden, Belgium, and Portugal.

Slovakia wins the prize for the least-punitive tax regime, though it’s worth noting that Hong Kong easily would have the best system if it was included in the ranking.

For what it’s worth, the United States does fairly well compared to other nations. This is not because our personal income tax is reasonable (see dark blue bars), but rather because Barack Obama and Hillary Clinton were unsuccessful in their efforts to bust the “wage base cap” and apply the Social Security payroll tax on all income. We also thankfully don’t have a value-added tax. These factors explain why our medium-blue and light-blue bars are the smallest.

By the way, this doesn’t mean we have a friendly system for upper-income taxpayers in America. They lose almost half of every dollar they generate for the economy. And whether one is looking at Tax Foundation numbers, Congressional Budget Office calculations, information from the New York Times, or data from the IRS, rich people in the United States are paying a hugely disproportionate share of the tax burden.

Though none of this satisfies the statists. They actually would like us to think that letting well-to-do taxpayers keep any of their money is akin to a handout.

Now would be an appropriate time to remind everyone that imposing high tax rates doesn’t necessarily mean collecting high tax revenues.

In the 1980s, for instance, upper-income taxpayers paid far more revenue to the government when Reagan lowered the top income tax rate from 70 percent to 28 percent.

Also keep in mind that these calculations don’t measure the tax bias against saving and investment, so the tax burden on some upper-income taxpayers may be higher or lower depending on the degree to which countries penalize capital formation.

P.S. If one includes the perverse incentive effects of various redistribution programs, the very highest marginal tax rates (at least when measuring implicit rates) sometimes apply to a nation’s poor people.

P.P.S. Our statist friends sometimes justify punitive taxes as a way of using coercion to produce more equality, but the net effect of such policies is weaker growth and that means it is more difficult for lower-income and middle-income people to climb the economic ladder. In other words, unfettered markets are the best way to get social mobility.

Read Full Post »

All forms of statism are despicable because they’re morally and practically evil.

They’re morally evil since they’re based on coercion. And they’re practically evil since they deliver such awful results for ordinary people.

The good news is that some forms of statism are widely discredited. Outside of universities, you don’t find many people who defend and advocate communism. And other than a few lonely cranks, you don’t find many people who defend and advocate national socialism and other forms of fascism.

But for some inexplicable reason, you still find some folks who harbor positive feelings about socialism.

To be sure, that opens up a bunch of questions, such as whether they even understand that socialism – at least in theory – involves government ownership and operation of the means of production. Such as the United Kingdom in the post-WWII era.

For what it’s worth, the fans of Bernie Sanders probably don’t understand anything about economics (goes without saying, right?) and they probably think that socialism is simply a system with lots of redistribution. Such as modern Denmark (even though that nation is just as market-oriented as the United States).

I’m not sure how we educate these people, and I doubt these three photos will have much impact on them, but I chuckled when this showed up in my inbox.

I guess the top photo might be Detroit. The second photo could be Cuba. And the last photo might be where Al Gore lives.

If that’s the case, the first is actually an image showing the destructive impact of the welfare state and the third is actually an image the benefits of insider cronyism, but let’s not get hung up on details. The real point is that corrupt insiders are the only real beneficiaries of big government.

P.S. Two of the most popular columns I’ve produced involve semi-amusing stories that highlight the failure of socialism, redistributionism, and collectivism. “The Tax System Explained in Beer” and “Does Socialism Work? A Classroom Experiment” succinctly capture why it’s very shortsighted and misguided to have an economic system that punishes success and rewards sloth.

P.P.S. Yes, socialism breeds misery, but it also generates some clever humor. See here, here, here, here, here, and here.

P.P.P.S. And even though self-proclaimed socialists pontificate about sharing and compassion, their ideology actually promotes a bad kind of selfishness.

Read Full Post »

I’ve written many times that Washington is both a corrupt city and a corrupting city. My point is that decent people go into government and all too often wind up losing their ethical values as they learn to “play the game.”

I often joke that these are people who start out thinking Washington is a cesspool but eventually decide it’s a hot tub.

During the presidential campaign, Trump said he wanted to “drain the swamp,” which is similar to my cesspool example. My concern is that El Presidente may not understand (or perhaps not even care) that shrinking the size and scope of government is the only effective way to reduce Washington corruption.

In any event, we’re soon going to get a very strong sign about whether Trump was serious. With Republicans on Capitol Hill divided on how to deal with this cronyist institution, Trump basically has the tie-breaking vote on the issue.

In other words, he has the power to shut down this geyser of corporate welfare. But will he?

According the Susan Ferrechio of the Washington Examiner, Trump may choose to wallow in the swamp rather than drain it.

President Trump now may be in favor of the Export-Import Bank, according to Republican lawmakers who met with him privately Thursday, even though Trump once condemned the bank as corporate welfare.

Veronique de Rugy of the Mercatus Center is one on the Ex-Im Bank’s most tenacious opponents, and she’s very worried.

…if the reports are true that Trump has decided to support the restoration of the crony Export-Import Bank’s full lending authority, it would be akin to the president deciding to instead happily bathe in the swamp and gargle the muck. …If true, the news is only “great” for Boeing, GE, and the other major recipients of Ex-Im’s corporate welfare. It is also at odds with his campaign promises since much of the way the program works is that it gives cheap loans — backed by Americans all over the country — to foreign companies in China, Russia, Saudi Arabia, and the UAE. Restoring Ex-Im’s full lending-authority powers is renewing the policy to give cheap loans backed by workers in the Rust Belt to companies like Ryanair ($4 billion in guarantee loans over ten years) and Emirates Airlines ($3.9 billion over ten years) so they can have a large competitive advantage over U.S. domestic airlines like Delta and United. It continued to subsidize the large and prosperous state-owned Mexican oil company PEMEX ($9.7 billion over ten years). Seriously? That’s president Trump’s vision of draining the swamp?

Ugh. It will be very disappointing if Trump chooses corporate welfare over taxpayers.

What presumably matters most, though, is whether a bad decision on the Ex-Im Bank is a deviation or a harbinger of four years of cronyism.

In other words, when the dust settles, will the net effect of Trump’s policies be a bigger swamp or smaller swamp?

The New York Times opined that Trump is basically replacing one set of insiders with another set of insiders, which implies a bigger swamp.

Mr. Trump may be out to challenge one establishment — the liberal elite — but he is installing one of his own, filled with tycoons, Wall Street heavyweights, cronies and a new rank of shadowy wealthy “advisers” unaccountable to anyone but him. …Take first the Goldman Sachs crowd. The Trump campaign lambasted global financiers, led by Goldman, as having “robbed our working class,” but here come two of the alleged miscreants: Gary Cohn, Goldman’s president, named to lead the National Economic Council, and Steven Mnuchin, named as Treasury secretary. …Standing in the rain during Mr. Trump’s inaugural speech, farmers and factory workers, truckers, nurses and housekeepers greeted his anti-establishment words by cheering “Drain the Swamp!” even as the new president was standing knee-deep in a swamp of his own.

I’m skeptical of Trump, and I’m waiting to see whether Gary Cohn and Steven Mnuchin will be friends for taxpayers, so I’m far from a cheerleader for the current administration.

But I also think the New York Times is jumping the gun.

Maybe Trump will be a swamp-wallowing cronyist, but we don’t yet have enough evidence (though a bad decision on Ex-Im certainly would be a very bad omen).

Here’s another potential indicator of what may happen to the swamp under Trump’s reign.

Bloomberg reports that two former Trump campaign officials, Corey Lewandowski and Barry Bennett have cashed in by setting up a lobbying firm to take advantage of their connections.

The arrival of a new president typically means a gold rush for Washington lobbyists as companies, foreign governments, and interest groups scramble for access and influence in the administration. Trump’s arrival promises to be different—at least according to Trump. Throughout the campaign, he lambasted the capital as a den of insider corruption and repeatedly vowed to “drain the swamp,” a phrase second only in the Trump lexicon to “make America great again.” …Trump’s well-advertised disdain for lobbying might seem to augur poorly for a firm seeking to peddle influence. …“Business,” Lewandowski says, “has been very, very good.”

This rubs me the wrong way. I don’t want lobbyists to get rich.

But, to be fair, not all lobbying is bad. Many industries hire “representation” because they want to protect themselves from taxes and regulation. And they have a constitutional right to “petition” the government and contribute money, so I definitely don’t want to criminalize lobbying.

But as I’ve said over and over again, I’d like a much smaller government so that interest groups don’t have an incentive to do either the right kind of lobbying (self-protection) or the wrong kind of lobbying (seeking to obtain unearned wealth via the coercive power of government).

Here’s one final story about the oleaginous nature of Washington.

Wells Fargo is giving a big payout to Elaine Chao, the new Secretary of Transportation.

Chao, who joined Wells Fargo as a board member in 2011, has collected deferred stock options —  a compensation perk generally designed as a long-term retention strategy — that she would not be able to cash out if she left the firm to work for a competitor. Her financial disclosure notes that she will receive a “cash payout for my deferred stock compensation” upon confirmation as Secretary of Transportation. The document discloses that the payments will continue throughout her time in government, if she is confirmed. The payouts will begin in July 2017 and continue yearly through 2021. But Wells Fargo, like several banks and defense contractors, provides a special clause in its standard executive employment contract that offers flexibility for awarding compensation if executives leave the bank to enter “government service.” Such clauses, critics say, are structured to incentivize the so-called “reverse revolving door” of private sector officials burrowing into government. …Golden parachutes for executives leaving firms to enter government dogged several Obama administration officials. Jack Lew, upon leaving Citigroup to join the Obama administration in 2009, was given a cash payout as part of his incentive and retention awards that wouldn’t have been paid if he had left the firm to join a competitor or under ordinary circumstances. But Lew’s Citigroup contract stipulated that there was an exception for leaving to work in a “full time high level position with the U.S. government or regulatory body.” Goldman Sachs, Morgan Stanley, and Northrop Grumman are among the other firms that have offered special financial rewards to executives who leave to enter government.

This rubs me the wrong way, just as it rubbed me the wrong way when one of Obama’s cabinet appointees got a similar payout.

But the more I think about it, the real question isn’t whether government officials get to keep stock options and other forms of deferred compensation when they jump to government.

What bothers me much more is why companies feel that it’s in their interest to hire people closely connected to government. What value did Jacob Lew bring to Citigroup? What value did Chao bring to Wells Fargo?

I suspect that the answer has a lot to do with financial institutions wanting people who can can pick up the phone and extract favors and information from senior officials in government.

For what it’s worth, I’m not a fan of Lew because he pushed for statism while at Treasury. By contrast, I am a fan of Chao because she was one of the few bright spots during the generally statist Bush years.

But I don’t want a system where private companies feel like they should hire either one of them simply because they have connections in Washington.

I hope that Trump will change this perverse set of incentives by “draining the swamp.” But unless he reduces the size and scope of government, the problem will get worse rather than better.

Read Full Post »

Back in 2009, I shared the results of a very helpful study by Pierre Bessard of Switzerland’s Liberal Institute (by the way, “liberal” in Europe means pro-market or “classical liberal“).

Pierre ranked the then-30 member nations of the Organization for Economic Cooperation and Development based on their tax burdens, their quality of governance, and their protection of financial privacy.

Switzerland was the top-ranked nation, followed by Luxembourg, Austria, and Canada.

Italy and Turkey were tied for last place, followed by Poland, Mexico, and Germany.

The United States, I’m ashamed to say, was in the bottom half. Our tax burden was (and still is) generally lower than Europe, but there’s nothing special about our quality of governance compared to other developed nations, and we definitely don’t allow privacy for our citizens (though we’re a good haven for foreigners).

Pierre’s publication was so helpful that I’ve asked him several times to release an updated version.

I don’t know if it’s because of my nagging, but the good news is that he’s in the final stages of putting together a new Tax Oppression Index. He just presented his findings at a conference in Panama.

But before divulging the new rankings, I want to share this slide from Pierre’s presentation. He correctly observes that the OECD’s statist agenda against tax competition is contrary to academic research in general, and also contrary to the Paris-based bureaucracy’s own research!

Yet the political hacks who run the OECD are pushing bad policies because Europe’s uncompetitive governments want to prop up their decrepit welfare states. And what’s especially irksome is that the bureaucrats at the OECD get tax-free salaries while pushing for higher fiscal burdens elsewhere in the world.

But I’m digressing. Let’s look at Pierre’s new rankings.

As you can see, Switzerland is still at the top, though now it’s tied with Canada. Estonia (which wasn’t part of the OECD back in 2009) is in third place, and New Zealand and Sweden also get very high scores.

At the very bottom, with the most oppressive tax systems, are Greece and Mexico (gee, what a surprise), followed by Israel and Turkey.

The good news, relatively speaking, is that the United States is tied with several other nations for 11th place with a score of 3.5.

So instead of being in the bottom half, as was the case with the 2009 Tax Oppression Index, the U.S. is now in the top half.

But that’s not because we’ve improved policy. It’s more because the OECD advocates of statism have been successful in destroying financial privacy in other nations. Even Switzerland’s human rights laws on privacy no longer protect foreign investors.

As such, Pierre’s new index basically removes financial privacy as a variable and augments the quality of governance variable with additional data about property rights and the rule of law.

P.S. When measuring the tax burden, the reason that America ranks above most European nations is not because they impose heavier taxes on rich people and businesses (indeed, the U.S. has a much higher corporate tax rate). Instead, we rank above Europe because they impose very heavy taxes on poor and middle-income taxpayers (mostly because of the value-added tax, which helps to explain why I am so unalterably opposed to that destructive levy).

P.P.S. Also in 2009, Pierre Bessard authored a great defense of tax havens for the New York Times.

Read Full Post »

The Index of Economic Freedom is my favorite annual publication from the Heritage Foundation. It’s a rich source of information, using dozens of data sources, about economic liberty around the world.

I first wrote about the Index back in 2010 and shared the bad news that the U.S. score dropped dramatically in Obama’s first year.

Well, the new Index lets us see the net effect of Obama’s entire tenure. The worse news is that the U.S. score has dropped to 75.1 on a 0-100 scale. And the worst news is that this represents America’s lowest score in the twenty-plus years that the Index has been published.

The United States is ranked #17 in the latest Index. We’re only in the “Mostly Free” category, behind Luxembourg and the Netherlands and tied with Denmark.

The top-ranked jurisdiction, once again, is Hong Kong. And what’s really amazing is that Hong Kong actually increased it score. Indeed, all five nations in the “Free” category managed to increase overall economic freedom.

So congratulations also to Singapore, New Zealand, Switzerland, and Australia.

Here’s a map showing the entire world. The worst nations are in red, with North Korea at the very bottom, followed by Venezuela and Cuba.

By the way, Cuba jumped 4.1 points last year, so maybe Fidel’s death is the beginning of some much-needed liberalization.

For more information on the United States, here’s the breakdown of America’s score. As you can see, our worst category is “government size.” In other words, we tax too much and spend too much.

America’s best score is for “regulatory efficiency,” which helps to explain why the U.S. gets a top-10 score from the World Bank’s Doing Business.

Let’s close by comparing the United States with Hong Kong. This charts shows how our scores have changes over time, and also shows the average score for the entire world.

The biggest takeaway is that the U.S. basically is halfway between Hong Kong and the world average.

The great unknown, of course, is whether America’s score will go up or down under Trump.

Read Full Post »

I’m not a big fan of Donald Trump, mostly because I fear his populist instincts will deter him from policies that we need (such as entitlement reform) while luring him to support policies that are misguided (more federal transportation spending).

But I admit it’s too early to tell. Maybe my policy predictions on Trump will be as bad as my political predictions about Trump.

And, for what it’s worth, I’ll freely acknowledge that Trump’s election is having a very good effect on my leftist friends. Because they fear the new occupant of the White House, they’re now much more sympathetic to the notion that there should be limits on the power of the federal government and they’re acknowledging that maybe federalism isn’t such a bad idea after all.

Indeed, some of them are so supportive of limiting the impact of Washington that they’re considering secession! The L.A. Daily News reports on a growing campaign in the Golden State.

“Yes California,” a pro-secession group, filed paperwork with the state attorney general in November for a proposed 2018 ballot measure to strike language in the state constitution binding California to the United States. …If its ballot measure succeeds, Yes California would pursue a 2019 vote to declare the state’s independence. …Talk of California secession is nothing new. But it gained momentum after Donald Trump’s election. Hillary Clinton got 62 percent of California’s vote in defeating Trump… According to Yes California, a path to secession exists through the U.S.-ratified United Nations charter.

By the way, I thought cozying up to Moscow was a bad thing now. But since the Yes California crowd is even trying to establish relations with Putin-land, I guess coziness is in the eye of the beholder.

…the group announced the opening of a “cultural center” in Moscow.

Anyhow, the folks at Salon are somewhat supportive of “CalExit.”

…it’s time for the media to stop dismissing the idea as a zany left coast response to the newly elected Republican federal government. …secession could be a reality in our lifetime. …Californians could expect to initiate advanced-level progress in racial justice…free of restriction an independent California could actually demonstrate the success of progressive values in action… It’s difficult to say whether California’s rich Democrats in coastal enclaves would be down with paying reparations if the independent nation were scrapping its ties to the U.S. and its colonial past.

But a column in the L.A. Times by Conor Friedersdorf says statist values would suffer if California became independent.

Blue America would lose its biggest source of electoral votes in all future elections. The Senate would have two fewer Democrats. The House of Representatives would lose 38 Democrats and just 14 Republicans. The U.S. 9th Circuit Court of Appeals, among the most liberal in the nation, would be changed irrevocably. And the U.S. as a whole would suddenly be a lot less ethnically diverse than it is today. For those reasons, Trump, Senate Majority Leader Mitch McConnell, Speaker of the House Paul Ryan, Republicans with White House ambitions, opponents of legalizing marijuana, advocates of criminalizing abortion and various white nationalist groups might all conclude –– for different reasons –– that they would benefit politically from a separation, even as liberals and progressives across America would correctly see it as a catastrophe.

Which may explain why many folks on the right are cheering for secession. Here are some excerpts from another column in the L.A. Times.

…judging by the letters we’ve received from across the country on the burgeoning secessionist movement known as “Calexit,” some readers would be happy see us go — or at least take pleasure in watching our deep-blue state suffer… I have some advice to the sane citizens of California: Members of the middle class should start planning their own exit. When California loses all those billions from the federal government, the politicians are going to need to find money elsewhere, and you know Hollywood’s millionaires aren’t going to provide it. They’ll move to their mountain homes in Wyoming or elsewhere. You think all those new billionaires in Silicon Valley will eagerly part with their money? Think again. They’ll hide their wealth in tax shelters. The refugees and illegal immigrants on the receiving end of California’s generous benefits aren’t going to provide needed tax revenues, so the politicians will target the middle class.

Of course they’ll target the middle class. That’s what they want in Washington. That’s why they want a value-added tax.

Simply stated, you can’t have a cradle-to-grave welfare state unless the middle class is so over-taxed that they have to rely on government for healthcare, education, retirement, and just about everything else.

But that’s an issue for another day.

Let’s keep our focus on California secession, which I support both as a matter of self-determination and as a matter of public policy.

With regards to policy, I think it will be very interesting to see how a state with huge natural advantages (coast, weather, mineral resources, agricultural land, etc) can endure bad policy.

And there’s already plenty of bad policy in the state.

A big part of the problem is that the public sector in California is wildly overcompensated. Kevin Williamson explains.

State and local government spending adds up to nearly 20 percent of California’s economic output, while thriftier states such as Texas and New Hampshire spend less than 15 percent. …California’s government, like the federal government and most other state and local governments, spends its money on salaries, benefits, pensions, and other forms of employee compensation. The numbers are contentious — for obvious political reasons — but it is estimated that something between half and 80 percent of California’s state and local spending ultimately goes to employee compensation. …The first and smaller problem is that many government workers are paid too much. …The second and larger problem with public-sector workers is that there are a whole lot of them. …When politicians talk about “investments,” we think they mean bridges and research laboratories and canals to bring water to central California. But what they are investing in is dependency. In California, that means creating a lot of full-time jobs for Democrats.

But it’s not just that there are too many bureaucrats and that they are overpaid. They also become a big burden when they retire.

Here’s some additional evidence of the mess in California.

California is already paying $5.38 billion to the California Public Employees’ Retirement System this year, and in fiscal year 2018 the state will need to add at least $200 million more. By fiscal year 2024 the annual tab will increase at least $2 billion from current levels. This all comes on top of increases already scheduled under the system, according to Governor Jerry Brown’s finance department. …California’s revenue is volatile because it draws a large share of taxes from wealthy residents whose incomes are tied closely to the stock market. The top 1 percent of earners — who tend to own shares — accounted for nearly half of the state’s personal income-tax collections in 2014.

And the big tax hikes that will be imposed on the middle class will add to the misery they already suffer. Here’s more evidence of how the middle class is being eviscerated.

…the gap between what Californians pay versus the rest of the country has nearly doubled to about 50%. This translates into a staggering bill. Although California uses 2.6% less electricity annually from the power grid now than in 2008, residential and business customers together pay $6.8 billion more for power than they did then. …“California has this tradition of astonishingly bad decisions,” said McCullough, the energy consultant. “They build and charge the ratepayers. There’s nothing dishonest about it. There’s nothing complicated. It’s just bad planning.”

Victor David Hanson bemoans the outlook for his state.

The state is currently experiencing another perfect storm of increased crime, decreased incarceration, still ongoing illegal immigration, and record poverty. All that is energized by a strapped middle class that is still fleeing the overregulated and overtaxed state, while the arriving poor take their places in hopes of generous entitlements, jobs servicing the elite, and government employment. …Go to a U-Haul trailer franchise in the state. The rental-trailer-return rates of going into California are a fraction of those going out. Surely never in civilization’s history have so many been so willing to leave a natural paradise. …What makes the law-abiding leave California is not just the sanctimoniousness, the high taxes, or the criminality. It is always the insult added to injury. We suffer not only from the highest basket of income, sales, and gas taxes in the nation, but also from nearly the worst schools and infrastructure. We have the costliest entitlements and the most entitled.

Little wonder, as Hans Bader explains, businesses continue to flee the state.

Nestlé USA, “the maker of Häagen-Dazs, Baby Ruth, Lean Cuisine, and dozens of other mass brands,” is moving its U.S. headquarters from California to Virginia. It is among many businesses that have left California in recent years. In 2010, Northrop Grumman Corp. moved its headquarters out of California, leaving the state that gave birth to the aerospace industry without a single major military contractor based there. Last Spring, the parent company of Carl’s Jr., founded in Anaheim, California, 60 years ago, relocated its headquarters to Nashville, Tennessee, where there is no state income tax. …reported the San Jose Mercury News in June 2016. “During the 12 months ending June 30, the number of people leaving California for another state exceeded by 61,100 the number who moved here from elsewhere in the U.S., according to state Finance Department statistics. ‘They are tired of the expense of living here. They are tired of the state of California and the endless taxes here,’ said Scott McElfresh, a certified moving consultant. ‘People are getting soaked every time they turn around.’” …For businesses, the worst is yet to come. California is increasing its minimum wage over the next several years to $15 per hour.  …the increase will ultimately cost California 700,000 jobs. An economist at Moody’s calculated that 31,000 to 160,000 California manufacturing jobs will be lost. California taxes may rise further, to deal with a rising state budget deficit over the next decade. The deficit is rising in part due to California’s unusually high state welfare spending which grew about twice as fast in California in 2016 as in the U.S. as a whole. California also spends its transportation dollars very poorly, and it is wasting billions on a high-speed rail boondoggle that few people will ride.

Indeed, Bader’s column illustrates the real reason why CalExit almost certainly will lead to disaster. People and businesses will vote with their feet.

So unless the politicians in Sacramento decide to erect a barbed wire fence around the border (maybe we shouldn’t joke), the state’s feudalistic economic system will be unsustainable.

Though there is an alternative scenario. Perhaps independence will have a sobering effect on the state’s kleptocrats and they’ll recognize the importance of quasi-sensible policy once California is an independent nation.

This is a big reason why I’m sympathetic to independence movements in place such as Sardinia, Scotland, and Belgium.

When there are lots of competing jurisdictions, there’s pressure on all politicians to be rational stationary bandits rather than predatory roving bandits.

Read Full Post »

Older Posts »

%d bloggers like this: