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Archive for November, 2017

The Great Depression was an unimaginably miserable period in American history. Income fell, unemployment rose, and misery was pervasive.

But there was still room for political satire in the 1930s. Here’s a cartoon that I shared back in 2012. Based on the notations in the upper right, I gather it’s from the Chicago Tribune, though I don’t know if that’s actually true. And I also don’t know the year.

But I certainly sympathized with the message since Hoover and Roosevelt were big-spending interventionists.

Hoover saddled the economy with taxes (an increase in the top tax rate from 25 percent to 63 percent!), spending, protectionism, regulation, and intervention. Roosevelt then doubled down on almost all of those bad policies, with further tax rate increases (up to 79 percent, and he even pushed for a 100 percent tax rate in the early 1940s!!), more spending, and lots of additional regulation and intervention.

And here’s a cartoon I posted the previous year. Since I don’t know whether public opinion was on the right side, I don’t know if it accurately captures the mood of taxpayers.

But it’s 100-percent accurate about the instinctive response of politicians. For “public choice” reasons, the crowd in Washington has an incentive to buy votes with other people’s money. One might even say they spend like drunken sailors, but that’s actually an understatement.

But I’m beginning to digress, as is my wont. Let’s get back to satire and the Great Depression.

And I’m going to be creative. That’s because I saw a cartoon on Reddit‘s libertarian page that makes a very general point about government causing a mess and politicians then blaming the private sector. But because I’m a goofy libertarian policy wonk, I immediately thought that this is a perfect summary of what happened in the 1930s.  Hoover and Roosevelt hammered the economy with bad policy, the economy stayed in the dumps for an entire decade, yet the political class someone convinced a lot of people it was all the fault of capitalism.

While I will always view this cartoon as the spot-on depiction of what happened in the 1930s, it obviously applies much more broadly.

Consider the recent financial crisis, which was the result of bad monetary policy and corrupt Fannie Mae/Freddie Mac subsidies. Yet countless politicians blamed greedy capitalism.

Maybe what we have is the cartoon version of Mitchell’s Law. That’s because when politicians cause a problem and blame the free market, they inevitably then claim that the problem justifies giving them more power and control. Lather, rinse, repeat.

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Left-wing columnists at the Washington Post have hit upon a theme. In late October, Ruth Marcus wrote a column asserting that tax cuts are “dangerous.”

I explained why her argument was nonsensical, but that clearly didn’t have any impact since Robert Rubin has a new column in the same paper with the same theme. He claims to have identified five “dangers” in the Republican tax plan.

It’s a remarkably weak list, but I guess it merits a response, both because Rubin served as Bill Clinton’s Treasury Secretary and because I feel compelled to once again slap down the claim that tax cuts are dangerous.

I debunk each one of Rubin’s points below, but you’ll also notice that I first restate (fairly, I think) what he’s really trying to say since his writing style is so bureaucratically obtuse.

Rubin Claim #1:

…business confidence would likely be negatively affected by creating uncertainty about future policy and heightening concern about our political system’s ability to meet our economic policy challenges.

What he’s really saying: We don’t know what will happen in the future (“uncertainty”) and it would be good if taxes were higher so politicians could spend more (“ability to meet…challenges”).

Why he’s wrong: Since it’s very difficult for today’s politicians to restrict the behavior of future politicians, it is true that there will be policy uncertainty. But that’s just as true if we leave the corporate tax rate at 35 percent as it will be if the rate is reduced the 20 percent. I’m also unimpressed by his desire for government to have more cash to meet challenges since it’s far more likely that government is the cause of problems rather than the solution.

Rubin Claim #2:

…our country’s resilience to deal with inevitable future economic and geopolitical emergencies, including the effects of climate change, would continue to decline.

What he’s really saying: If there’s a tax cut, politicians will have less money, which means it will be harder (a “decline” in “resilience”) to spend money in the future.

Why he’s wrong: Once again, I feel compelled to point out that very few problems can be solved with more government spending. Indeed, that’s usually a recipe for making a problem worse (the welfare state, for example). But the most glaring flaw with Rubin’s argument about “future…emergencies” is that there’s no long-run tax cut. The GOP tax plan is revenue-neutral after 10 years. So how can a plan that doesn’t lower the long-run revenue baseline impact the government’s ability to do anything?

Rubin Claim #3:

…funds available for public investment, national security and defense spending…would continue to decline as debt rises, because of rising interest costs and the increased risk of borrowing to fund government activities.

What he’s really saying: Less tax money going to Washington could mean higher interest payments (“increased risk of borrowing”), which would displace other forms of spending.

Why he’s wrong: There’s actually some truth to this argument, at least in the first 10 years when there actually is a tax cut. If I was being snarky, I could ask why Rubin wasn’t making the same argument when the faux stimulus was being debated. Or when the Obamacare boondoggle was being discussed. Why does he think deficits are only bad when tax cuts are on the agenda (just like CBO), but deficits are “stimulus” when spending goes up? I may sue for whiplash since folks on the other side keep changing their minds on red ink.

Rubin Claim #4:

Treasury bond interest rates would be highly likely to increase over time because of increased demand for the supply of savings and increased concern about future imbalances.

What he’s really saying: A tax cut will lead to higher deficits, which will lead to higher interest rates (“increased demand for the supply of savings”).

Why he’s wrong: I believe in supply-and-demand curves, so it’s theoretically true that interest rates should increase when government competes against private borrowers. That being said, even big shifts in U.S. deficits are just a drop in the bucket in a world where global capital markets amount to tens of trillions of dollars. Here’s a slide from a speech I gave to the Leadership Program of the Rockies earlier this month in Denver. If I had space, I would have added “but in reality the impact is minimal” to the third sentence.

Rubin Claim #5:

…at some unpredictable point, fiscal conditions…would likely be seen as sufficiently serious to cause severe market and economic destabilization.

What he’s really saying: Tax cuts will mean more red ink, which could ultimately lead to a Greek-style fiscal crisis (“severe..destabilization”).

Why he’s wrong: It’s certainly true that America faces very worrisome long-run fiscal problems, but those challenges are entirely due to a rising burden of government spending. And since the GOP plan is only a tax cut in the first 10 years, it’s absurd to say the GOP plan will have any meaningful impact on that dismal outlook. If Rubin really was concerned about America’s fiscal situation, he would be aggressively arguing for genuine entitlement reform.

I could have shortened that entire section by collapsing his five “dangers” into one teenager-type rant: “OMG, the economy will be in danger with tax cuts and the government won’t be able to spend on good things.”

To which I could have replied: “LOL.”

To be fair, there actually is a semi-serious section in Rubin’s column. He summarizes the left’s economic argument against lower tax rates.

…tax cuts will not increase growth and, given their fiscal effects, would likely have a significant and increasingly negative impact. The nonpartisan Tax Policy Center’s latest report estimated that, over 10 years, the average increase in our growth rate would be roughly zero, counting the crowding out of private investment by increasing deficits but not counting other adverse effects of worsening our fiscal outlook. The Penn Wharton Budget Model, using the same approach, estimates virtually no increase in long-term growth. …These estimates reflect three underlying views held by mainstream economists. First, individual tax cuts will not materially induce people to work more. Second, corporate tax cuts will likely have limited effect on investment or decisions about where to locate business activity, given the many other variables at play. Third, deficit-funded tax cuts will have little short-term effect on growth, except perhaps for some temporary overheating, because we are at roughly full employment.

Now allow me to translate: It is quite possible to generate bad numbers if you build models that, 1) assume lower tax rates have very little impact on incentives to engage in productive behavior, and 2) assume larger deficits cause interest rates to increase significantly and therefore measurably reduce investment.

The real question is whether those theoretical models are correct given so much of the empirical evidence on the other side. After all, what are you going to believe, the models or your lying eyes?

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I’m currently in Tokyo for an Innovation Summit. Perhaps because I once referred to Japan as a basket case, I’ve been asked to speak about policies that are needed to boost the nation’s competitiveness.

That sounds like an easy topic since I can simply explain that free markets and small government are the universal recipe for growth and prosperity.

But then I figured I should be more focused and look at some of Japan’s specific challenges. So I began to ponder whether I should talk about Japan’s high debt levels. Or perhaps the country’s repeated (and failed) attempts to stimulate the economy with Keynesianism. And Japan’s demographic crisis is also a very important issue.

But since I only have 20 minutes (not even counting Q&A), I don’t really have time for a detailed examination on any of those topics. So I was still uncertain of how best to illustrate the need for pro-market reforms.

My job suddenly got a lot easier, though, because Eduardo Porter of the New York Times wrote a column today that includes a graph very effectively illustrating why Japan is in trouble. Simply stated, the country is on a very bad trajectory of ever-higher taxes.

To elaborate, Japan used to have a relatively modest tax burden, as least compared to other industrialized nations. But then, thanks in part to the enactment of a value-added tax, the aggregate tax burden began to climb. It has jumped from about 18 percent of economic output in 1965 to about 32 percent of gross domestic product in 2015.

Even the French didn’t raise taxes that dramatically!

By the way, I feel compelled to digress and point out that Mr. Porter’s column was not designed to warn about rising taxes in Japan. Instead, he was whining about non-rising taxes in the United States. I’m not joking.

American tax policy must stand as one of the great mysteries of the global political economy. In 1969…federal, state and local governments in the United States raised about the same in taxes, as a share of the economy, as the government of the average industrialized country: 26.6 percent of gross domestic product, against 27 percent among the nations in the Organization for Economic Cooperation and Development. Nearly 50 years later, the tax picture has changed little in the United States. By 2015, …the figure was 26.4 percent of G.D.P. But across the market democracies of the O.E.C.D., the share had climbed by an average of more than seven percentage points. …Americans are paying dearly as a result, as their comparatively small government has proved incapable of providing an adequate safety net…there is no credible evidence that countries with higher tax rates necessarily grow less.

Americans are “paying dearly”? Are we “paying dearly” because our living standards are so much higher? Are we “paying dearly” because our growth rates are higher and Europe is failing to converge? Are we “paying dearly” because America’s poorest states are rich compared to European countries.

Now that I got that off my chest, let’s get back to our discussion about Japan.

Looking at the data from Economic Freedom of the World, Japan ranked among the world’s 10-freest economies as recently as 1990. Today, it ranks #39. That is a very unfortunate development, though I should point out that the nation’s relative decline isn’t solely because of misguided fiscal policy.

I’ll close by noting that even the good news from Japan isn’t that good. Yes, the government did slight lower its corporate tax rate so it no longer has the highest burden among developed nations. But having the second-highest corporate tax rate is hardly something to cheer about.

P.S. Since today’s column looks at the most depressing Japanese chart, I should remind people that I shared the most depressing Danish PowerPoint slide back in 2015. I may need to create a collection.

P.P.S. I doubt anyone will be surprised to learn that the OECD and IMF have been encouraging bad policy for Japan.

P.P.P.S. If I had to guess, I would say that Japan’s government is probably more competent than average. But that doesn’t mean it’s incapable of some bone-headed policies, such as a regulatory regime for coffee enemas and a giveaway program that was so convoluted that no companies asked for the free money.

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Inequality is now a major dividing line in the world of public policy.

Supporters of limited government think it’s not a big issue and instead focus on the policies that are most likely to generate growth. Simply stated, they tend not to care if some people get richer faster than other people get richer (assuming, of course, that income is honestly earned and not the result of cronyism).

Folks on the left, by contrast, think inequality is inherently bad. It’s almost as if they think that the economy is a fixed pie and that a big slice for the “rich” necessarily means smaller slices for the rest of us. They favor lots of redistribution via punitive taxes and an expansive welfare state.

When talking to such people, my first priority is getting them to understand that it’s possible for an economy to grow and for all income groups to benefit. I explain how even small differences in long-run growth make a big difference over just a few decades and that it is very misguided to impose policies that will discourage growth by penalizing the rich and discouraging the poor.

I sometimes wonder how vigorously to present my argument. Is it actually true, as Thatcher and Churchill argued, that leftists are willing to hurt poor people if that’s what is necessary to hurt rich people by a greater amount?

Seems implausible, so when I recently noticed this amusing humor on Reddit‘s libertarian page, I was not going to share it. After all, it presumes that our friends on the left genuinely would prefer equal levels of poverty rather than unequal levels of prosperity.

But, after reading a new study from the International Monetary Fund, I’m wondering if I’m underestimating the left’s fixation with inequality and the amount of economic damage they’re willing to inflict to achiever greater equality of outcomes.

Here are some introductory passages to explain the goal of the research.

…it is worth reemphasizing some lessons from the “old masters” in economics who addressed this topic a few decades ago—including Arthur M. Okun and Anthony B. Atkinson in the 1970s. Their lessons—on how to elicit people’s views on inequality and how to summarize societal welfare using a monetary indicator encompassing both average incomes and their distribution—remain relevant for fiscal policymakers today. …a satisfactory theory of welfare must recognize that welfare depends on both the size and the distribution of national income. …This primer seeks to encourage more widespread use by policymakers of the tools developed by welfare theory. …the primer provides an in-depth, step-by-step refresher on two specific tools chosen because of their simplicity and intuitive appeal: Okun’s “leaky bucket” and Atkinson’s “equally-distributed-equivalent income.”

Please note that the IMF explicitly is saying that it wants policymakers to change laws based on what’s in the study.

And, as you continue reading, it should become obvious that the bureaucrats are pushing a very radical agenda (not that we should be surprised given the IMF’s track record).

Here’s the bureaucracy’s take on Okun and his pro-redistribution agenda.

Okun (1975) proposed a thought experiment capable of eliciting people’s attitudes toward the trade -off between equality and efficiency: Okun asked the reader to consider five families: a richer one making $45,000 (in 1975) and four poorer ones making $5,000. Would the reader favor a scheme that taxed the rich family $4,000 and transferred the proceeds to the poorer families? In principle, each poorer family would receive $1,000. But what if 10 percent leaked out, with only $900 reaching the recipients? What would the maximum acceptable leak be? The leak represented not only the administrative costs of tax-and-transfer programs (and, one might add, potential losses due to corruption), but also the fact that such programs reduce the economic incentives to work. …Okun reported his own answers to the specific exercise he proposed (his personal preference was for a leakage of no more than 60 percent). ….Okun was willing to accept that a $4,000 tax on the rich household [would] translate, with a 60 percent leakage, into a $400 transfer to each of the four poor households.

The only good part about Okun’s equity-efficiency tradeoff is that he acknowledges that redistribution harms the economy. The disturbing part is that he was willing to accept 60 percent leakage in order to take money from some and give it to others.

It gets worse. When the IMF mixes Okun with Atkinson, that’s when things head in the wrong direction even faster. As I noted last month, Atkinson has a theory designed to justify big declines in national income if what’s left is distributed more equally. I’m not joking.

And that IMF wants to impose this crazy theory on the world.

Atkinson (1970) showed that under the assumptions above and having identified a coefficient of aversion to inequality, it becomes easy to summarize the well-being of all households in an economy with a single, intuitive measure: the equally-distributed-equivalent income (EDEI), i.e., the income that an external observer would consider just as desirable as the existing income distribution. …The percentage loss in mean income—compared with the initial situation—that an observer would find acceptable to have a perfectly equal distribution of incomes was introduced by Atkinson (1970) as a measure of inequality.

The study then purports to measure “aversion to inequality” in order to calculate equally-distributed-equivalent income (EDEI).

The greater the observers’ aversion to inequality, the lower the EDEI. Table (2) reports for a few alternative ε coefficients, for the example above.

Here’s a table from the study, which is based on a theoretical rich person with $45,000 and a theoretical poor person with $5,000 of income. A society that isn’t very worried about inequality (ε = 0.2) is willing to sacrifice about $4,000 on overall income to achieve the desired EDEI. But a nation fixated on equality of outcomes might be willing to sacrifice $32,000 (more than 60 percent of overall income!).

I’ve augmented the table with a few of the aggregate income losses in red.

In other words, nations that have a higher aversion to inequality are the ones that prefer lots of misery and deprivation so long as everyone suffers equally.

Another use of this data is that it allows the IMF to create dodgy data on income (sort of like what the OECD does with poverty numbers).

It appears the bureaucrats want to use EDEI to claim that poorer nations have more income than richer nations.

…the ranking of countries based on the EDEI often differs significantly from that based on mean income alone. For instance, South Africa’s mean income is more than double that of the Kyrgyz Republic, and substantially above that of Albania. However, those countries’ lower inequality implies that their EDEI is significantly higher than South Africa’s. …Similarly, the United States’ mean income is considerably above that of the United Kingdom or Sweden. However, for an inequality aversion coefficient of ε=1.5, Sweden’s EDEI is above that of the United States, and for ε=2.0 also the United Kingdom’s EDEI is above that of the United States.

Here’s a table from the study and you can see how the United States becomes a comparatively poor nation (highlighted in red) when there’s an “aversion” to inequality.

In other word, even though the United States has much higher living standards than European nations, the IMF is peddling dodgy numbers implying just the opposite.

But the real tragedy is that low-income people will be much more likely to remain poor with the policies that the IMF advocates.

P.S. Fans of satire may appreciate this “modest proposal” to reduce inequality. I imagine the IMF would approve so long as certain rich people are excluded.

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Over the past few weeks, I’ve written several columns about the 100th anniversary of communism. I’ve looked at that evil ideology’s death toll, and I’ve written about the knaves and fools who defended and promoted communism in the west (included, sad to say, some economists). And I’ve even shared some anti-communist humor to offset the dour material in the other columns.

Let’s continue that series today by looking at the very practical question of what happens when a nation breaks free from communist enslavement?

Professor James Gwartney and Hugo Montesinos from Florida State University analyzed the economic performance of former Soviet Bloc nations (they refer to them as formerly centrally planned – or FCP – countries) over the past 20 years.

The good news is that these countries have been growing, especially if they get decent scores from Economic Freedom of the World.

The economic record of the FCP countries during 1995-2015 was impressive. This was particularly true for the seven FCP countries that moved the most toward economic liberalization. The average growth of real per capita GDP of these seven countries exceeded 5 percent during 1995-2015. Real per capita GDP more than doubled in six of the seven countries during the two decades. …While the real GDP growth of the middle group was slower, it was still impressive. The population weighted annual real growth of per capita GDP of the middle group was 3.78 percent.

And to elaborate on the good news, growth rates in FCP nations has been faster than growth rates in rich countries.

But that’s to be expected. Convergence theory tells us that poorer places should grow faster than richer places (at least in the absence of unusual circumstances).

But government policy can be a wild card. As you can see from Table 14 of the report, Gwartney and Montesinos parsed the data and found that the FCP nations that adopted the most pro-market reforms have enjoyed the fastest growth rates, while growth rates were less impressive in the FCP countries with lesser amounts of economic liberalization (relative growth rates highlighted in red below).

The goal, of course, is for FCP nations to catch up with rich nations.

And there has been a decent amount of convergence.

…the relative income increases are impressive. The ratio of the mean per capita GDP of the most economically free group compared to the high-income economies more than doubled, soaring from 19.9 percent in 1995 to 40.6 percent in 2015. The parallel ratio for the middle group increased by approximately 50 percent from 36.9 percent in 1995 to 53.0 percent in 2015. Finally, the ratio for the bottom group increased from 13.0 percent in 1995 to 24.6 percent in 2015, an increase of 90 percent. The largest increases in relative income were registered by Georgia, Lithuania, Latvia, Armenia, Albania, Kazakhstan, Azerbaijan, and Bosnia and Herzegovina. The ratio for each of these countries more than doubled between 1995 and 2015. Note that five of these eight countries are in the group with the highest 2015 EFW ratings.

There’s country-specific data in Table 13 of the report.

And you can see, once again, that the nations with the most economic freedom and enjoying the fastest convergence rates. From the top group, I’ve highlighted both Georgia and the Baltic countries for their impressive results. And I also highlighted Poland and Slovakia from the second group because both countries have converged at a rapid pace thanks to some good policies.

Looking at the bottom group, it’s sad to see Ukraine doing so poorly, but that’s a predictable result given the near-total absence of economic freedom in that unfortunate country.

The obvious moral of the story is that nations will grow faster and generate more prosperity if they follow the recipe of free markets and limited government.

So let’s take a look at that recipe by examining how FCP nations have performed when looking at the various ingredients. More specifically, Economic Freedom of the World looks at five major policy areas: fiscal, trade, money, regulation, and legal.

And it’s that final category (which measures factors such as property rights, the rule of law, and government corruption) where these countries have not done a good job.

…the FCP countries…have a major shortcoming: their legal systems are weak and little progress has been made in this area. Given their historic background, this is not surprising. Under socialism, legal systems are designed to serve the interests of the government. Judges, lawyers, and other judicial officials are trained and rewarded for serving governmental interests. Protection of the rights of individuals and private businesses and organizations is unimportant under socialism.

Here’s some fascinating data from Table 17, which shows how scores for the five major categories have changed over time in both FCP nations and countries from Western Europe. You’ll see that FCP countries have liberalized policy and closed the gap in Area 3 (money), Area 4 (trade), and Area 5 (regulation). And you’ll also see how the FCP nations do a better job in Area 1 (fiscal), which I’ve highlighted in red. But the most startling – and depressing – result in the absence of progress in Area 2 (legal), which is also highlighted in red.

These results, for all intents and purposes, are a much more detailed version of an article I wrote for the Alliance of Conservatives and Reformers in Europe earlier this year.

Unfortunately, even though we have the same diagnosis, we don’t really have an easy solution. In this final excerpt, the authors explain that it’s not that easy to change the culture of a nation’s political class.

It is a major challenge to convert a socialist legal system into one that enforces contracts in an unbiased manner, protects property rights, permits markets to direct economic activity, and operates under rule of law principles. …Economists have provided policy-makers with step by step directions about how to achieve monetary and price stability, liberalized trade regimes, and adopt tax structures more consistent with growth and prosperity. …But, a recipe for developing a sound legal system is largely absent. We know what a sound legal system looks like, but we have failed to explain how it can be achieved.

I don’t even thank socialism deserves the full blame (though it deserves the blame for many bad things). There are many nations in many regions of the world that get very bad scores because of inadequate rule of law and weak property rights. But I fully agree that it’s not easy to fix.

But I’ll close with a very upbeat observation that all of the FCP nations are better off because the Soviet Union collapsed and communism is fading from the world. Liberal socialism may not be good for an economy, but it’s paradise compared to Marxist socialism.

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There’s an amusing ritual that takes place in Washington every time there’s a big debate about tax policy. A bunch of rich leftists will sign a letter or hold a press conference to announce that they should be paying higher taxes rather than lower taxes.

I’ve debated some of these people in the past, pointing out that they are “neurotic” and “guilt-ridden.”

But they apparently didn’t take my criticisms seriously and go into therapy, They’re now back and the Washington Post provides very favorable coverage to their latest exercise in masochism.

More than 400 American millionaires and billionaires are sending a letter to Congress this week urging Republican lawmakers not to cut their taxes. The wealthy Americans — including doctors, lawyers, entrepreneurs and chief executives — say the GOP is making a mistake by reducing taxes on the richest families… Instead of petitioning tax cuts for the wealthy, the letter tells Congress to raises taxes on rich people like them. …The letter was put together by Responsible Wealth, a group that advocates progressive causes. Signers include Ben & Jerry’s Ice Cream founders Ben Cohen and Jerry Greenfield, fashion designer Eileen Fisher, billionaire hedge fund manager George Soros… Most of the signers of the letter come from California, New York and Massachusetts.

Earlier in the month, I would have told these “limousine liberals” not to worry because I was pessimistic about the chances of a tax bill getting enacted. But then the Senate GOP unveiled a better-than-expected plan and I’m now semi-hopeful that something will make its way through the process.

That doesn’t mean, however, that these rich leftists should be despondent.

Because I’m a nice guy, today’s column is going to let them know that they don’t have to accept a tax cut. The Treasury Department has a website that they can use to voluntarily send extra money to Washington. It’s called “gifts to reduce the public debt,” and people like George Soros can have their accountants and lawyers calculate the value of any tax cut and then use this form to send that amount of money to D.C.

And if these guilt-ridden rich people take my advice and send extra money to Washington, I surely won’t object if they want to give me a modest commission.

But I don’t think I’ll get any money for the simple reason that these wealthy statists already have been exposed for being hypocrites. When given the option to pay extra to Washington, they run for the hills. In other words, they talk the talk, but won’t walk the walk.

It’s the same at the state level. Massachusetts also gives people the option to pay more to government, yet Elizabeth Warren has never volunteered to cough up extra cash.

By the way, if there was a prize for the most economically illiterate comment in the article, it would go to Bob Crandall, who apparently doesn’t realize that the money he puts in a bank is then lent to entrepreneurs and others who then invest the funds.

“I have a big income. If my income gets bigger, I’m not going to invest more. I’ll just save more,” said Crandall, who is retired.

Remarkable. I’m at a loss for words.

And I can’t resist sharing one final blurb from the article.

Former labor secretary Robert Reich…also signed the letter.

Huh, how did he become eligible to sign? He certainly never contributed to growth in the private sector, and I’m not aware that he inherited a bunch of money. Well, upon closer inspection, it turns out that fretting about inequality is a good way of becoming part of the top-1 percent.

P.S. Germany also has guilt-ridden leftists who push for higher taxes.

P.P.S. It’s not just that rich leftists don’t pay extra tax. They also go out of their way to figure out how to pay lower taxes. Just look at the Clintons. And Warren Buffett. And John Kerry. Or any of the other rich leftists who want higher taxes for you and me while engaging in very aggressive tax avoidance.

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In my decades of trying to educate policy makers about the downsides of class-warfare tax policy, I periodically get hit with the argument that high tax rates don’t matter since America enjoyed a golden period of prosperity in the 1950s and early 1960s when the top tax rate was more than 90 percent.

Here’s an example from Politico of what I’m talking about.

Well into the 1950s, the top marginal tax rate was above 90%. …both real GDP and real per capita GDP were growing more than twice as fast in the 1950s as in the 2000s.

This comparison grates on me in part because both Bush and Obama imposed bad policy, so it’s no surprise that the economy did not grow very fast when they were in office.

But I also don’t like the comparison because the 1950s were not a halcyon era, as Brian Domitrovic explains.

…you may be thinking, “But wait a minute. The 1950s, that was the greatest economic era ever. That’s when everybody had a job. Those jobs were for life. People got to live in suburbia and go on vacation and do all sorts of amazing things. It was post-war prosperity, right?” Actually, all of these things are myths. In the 1950s, the United States suffered four recessions. There was one in 1949, 1953, 1957, 1960 — four recessions in 11 years. The rate of structural unemployment kept going up, all the way up to 8% in the severe recession of 1957-58. …there wasn’t significant economic growth in the 1950s. It only averaged 2.5 percent during the presidency of Dwight D. Eisenhower.

For today’s purposes, though, I want to focus solely on tax policy. And my leftist friends are correct that the United States had a punitive top tax rate in the 1950s.

This chart from the Politico story shows the top tax rate beginning on that dark day in 1913 when the income tax was adopted. It started very low, then jumped dramatically during the horrible presidency of Woodrow Wilson, followed by a big reduction during the wonderful presidency of Calvin Coolidge. Then it jumped again during the awful presidencies of Herbert Hoover and Franklin Roosevelt. The rate stayed high in the 1950s before the Kennedy tax cuts and Reagan tax cuts, which were followed by some less dramatic changes under George H.W. Bush, Bill Clinton, George W. Bush, and Barack Obama.

What do we know about the impact of the high tax rates put in place by Hoover and Roosevelt? We know the 1930s were an awful period for the economy, we know the 1940s were dominated by World War II, and we know the 1950s was a period of tepid growth.

But we also know that high tax rates don’t result in high revenues. I don’t think Hauser’s Law always applies, but it’s definitely worked so far in the United States.

This is because highly productive taxpayers have three ways to minimize and/or eliminate punitive taxes. First, they can simply choose to live a more relaxed life by reducing levels of work, saving, and investment. Second, they can engage in tax evasion. Third, they can practice tax avoidance, which is remarkably simple for people who have control over the timing, level, and composition of their income.

All these factors mean that there’s not a linear relationship between tax rates and tax revenue (a.k.a., the Laffer Curve).

And if you want some evidence on how high tax rates don’t work, Lawrence Lindsey, a former governor at the Federal Reserve, noted that extortionary tax rates are generally symbolic – at least from a revenue-raising perspective – since taxpayers will arrange their financial affairs to avoid the tax.

…if you go back and look at the income tax data from 1960, as a place to start, the top rate was 91 percent. There were eight — eight Americans who paid the 91 percent tax rate.

Interestingly, David Leonhardt of the New York Times inadvertently supported my argument in a recent column that was written to celebrate the era when tax rates were confiscatory.

A half-century ago, a top automobile executive named George Romney — yes, Mitt’s father — turned down several big annual bonuses. He did so, he told his company’s board, because he believed that no executive should make more than $225,000 a year (which translates into almost $2 million today). …Romney didn’t try to make every dollar he could, or anywhere close to it. The same was true among many of his corporate peers.

I gather the author wants us to think that the CEOs of the past were somehow better people than today’s versions.

But it turns out that marginal tax rates played a big role in their decisions.

The old culture of restraint had multiple causes, but one of them was the tax code. When Romney was saying no to bonuses, the top marginal tax rate was 91 percent. Even if he had accepted the bonuses, he would have kept only a sliver of them. The high tax rates, in other words, didn’t affect only the post-tax incomes of the wealthy. The tax code also affected pretax incomes. As the economist Gabriel Zucman says, “It’s not worth it to try to earn $50 million in income when 90 cents out of an extra dollar goes to the I.R.S.”

By the way, Zucman is far from a supply-sider (indeed, he’s co-written with Piketty), yet he’s basically agreeing that marginal tax rates have a huge impact on incentives.

The only difference between the two of us is that he thinks it is a good idea to discourage highly productive people from generating more income and I think it’s a bad idea.

Meanwhile, Leonhardt also acknowledges the fundamental premise of supply-side economics.

For more than 30 years now, the United States has lived with a top tax rate less than half as high as in George Romney’s day. And during those same three-plus decades, the pay of affluent Americans has soared. That’s not a coincidence.

But he goes awry by then assuming (as is the case for many statists) the economy is a fixed pie. I’m not joking. Read for yourself.

..,the most powerful members of organizations have fought to keep more money for themselves. They have usually won that fight, which has left less money for everyone else.

A market economy, however, is not a zero-sum game. It is possible for all income groups to become richer at the same time.

That’s why lower tax rates are a good idea if we want more prosperity – keeping in mind the important caveat that taxation is just one of many policies that impact economic performance.

P.S. Unbelievably, President Franklin Roosevelt actually tried to impose a 100 percent tax rate (and that’s not even the worst thing he advocated).

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