Pro-Growth Tax Reform: Evidence from Canadian Provinces

In the past few years, I’ve bolstered the case for lower tax rates by citing country-specific research from Italy, Australia, Germany, Sweden, Israel, Portugal, South Africa, the United States, Denmark, Russia, France, and the United Kingdom.

Now let’s look to the north.

Two Canadian scholars investigated the impact of provincial tax policy changes in Canada. Here are the issues they investigated.

The tax cuts introduced by the provincial government of British Columbia (BC) in 2001 are an important example… The tax reform was introduced in two stages. In an attempt to make the BC’s economy more competitive, the government reduced the corporate income tax (CIT) rate initially by 3.0 percentage points with an additional 1.5 percentage point reduction in 2005. The government also cut the personal income tax (PIT) rate by about 25 percent. …The Canadian provincial governments’ tax policies provide a good natural experiment for the study of the effects of tax rates on growth. …The principal objective of this paper is to investigate the effects of taxation on growth using data from 10 Canadian provinces during 1977-2006. We also explore the relationship between tax rates and total tax revenue. We use the empirical results to assess the revenue and growth rate effects of the 2001 British Columbia’s incentive-based tax cuts.

And here are the headline results.

The results of this paper indicate that higher taxes are associated with lower private investment and slower economic growth. Our analysis suggests that a 10 percentage point cut in the statutory corporate income tax rate is associated with a temporary 1 to 2 percentage point increase in per capita GDP growth rate. Similarly, a 10 percentage point reduction in the top marginal personal income tax rate is related to a temporary one percentage point increase in the growth rate. … The results suggest that the tax cuts can result in significant long-run output gains. In particular, our simulation results indicate that the 4.5 percentage point CIT rate cut will boost the long-run GDP per capita in BC by 18 percent compared to the level that would have prevailed in the absence of the CIT tax cut. …The result indicates that a 10 percentage point reduction in the corporate marginal tax rate is associated with a 5.76 percentage point increase in the private investment to GDP ratio. Similarly, a 10 percentage point cut in the top personal income tax rate is related to a 5.96 percentage point rise in the private investment to GDP ratio.

The authors look specifically at what happened when British Columbia adopted supply-side tax reforms.

…In this section, we attempt to gauge the magnitude of the growth effects of the CIT and PIT rate cuts in BC in 2001… the growth rate effect of the tax cut is temporary, but long-lasting. Figure 2 shows the output with the CIT rate cut relative to the no-tax cut output over the 120 years horizon. Our model indicates that in the long-run per capita output would be 17.6 percent higher with the 4.5 percentage point CIT rate cut. …We have used a similar procedure to calculate the effects of the five percentage point reduction in the PIT rate in BC. …The solid line in Figure 3 shows simulated relative output with the PIT rate cut compared to the output with the base line growth rate of 1.275. Our model indicates that per capita output would be 7.6 percent higher in the long run with the five percentage point PIT rate cut.

Here’s their estimate of the long-run benefits of a lower corporate tax rate.

And here’s what they found when estimating the pro-growth impact of a lower tax rate on households.

In both cases, lower tax rates lead to more economic output.

Which means that lower tax rates result in more taxable income (the core premise of the Laffer Curve).

The amount of tax revenue that a provincial government collects depends on both its tax rates and tax bases. Thus one major concern that policy makers have in cutting tax rates is the implication of tax cuts for government tax receipts. …The true cost of raising a tax rate to taxpayers is not just the direct cost of but also the loss of output caused by changes in taxpayers’ economic decisions. The Marginal Cost of Public Funds (MCF) measures the loss created by the additional distortion in the allocation of resources when an additional dollar of tax revenue is raised through a tax rate increase. …if…government is on the negatively-sloped section of its present value revenue Laffer curve…, a tax rate reduction would increase the present value of the government’s tax revenues.

And the Canadian research determined that, measured by present value, the lower corporate tax rate will increase tax revenue.

…computations indicate that including the growth rate effects substantially raises our view of the MCF for a PIT. Our computations therefore support previous analysis which indicates that it is much more costly to raise revenue through a PIT rate increase than through a sales tax rate increase and that there are potentially large efficiency gains if a province switches from an income tax to a sales tax. When the growth rate effects of the CIT are included in the analysis, …a CIT rate reduction would increase the present value of the government’s tax revenues. A CIT rate cut would make taxpayers better off and the government would have more funds to spend on public services or cut other taxes. Therefore our computations provide strong support for cutting corporate income tax rates.

Needless to say, if faced with the choice between “more funds to spend” and “cut other taxes,” I greatly prefer the latter. Which is why I worry that people learn the wrong lesson when I point out that the rich paid a lot more tax after Reagan lowered the top rate in the 1980s.

The goal is to generate more prosperity for people, not more revenue for government. So if a tax cut produces more revenue, the immediate response should be to drop the rate even further.

But I’m digressing. The point of today’s column is simply to augment my collection of case studies showing that better tax policy produces better economic performance.

P.S. The research from Canada also helps to explain the positive effect of decentralization and federalism. British Columbia had the leeway to adopt supply-side reforms because the central government in Canada is somewhat limited in size and scope. That’s even more true in Switzerland (where we see the best results), and somewhat true about the United States.

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Economic Boom from the Trump Tax Cuts? A Pro-Con Analysis

Earlier this month, I talked about the economy’s positive job numbers. I said the data is unambiguously good, but warned that protectionism and wasteful spending will offset some of the good news from last year’s tax reform.

This is what’s frustrating about the Trump presidency.

Good policies in some areas are being offset by bad policies in other areas, so it’s not easy assigning an overall grade.

And it’s also difficult to predict the effect on economic performance. If you look at the formula for a prosperous economy, there’s no way of predicting whether Trump is a net positive or a net negative. At least in my humble opinion.

As such, I’ll be very curious to see what happens to America’s score in subsequent issues of Economic Freedom of the World.

It would be nice if the United States got back into the Top 10. For what it’s worth, I’m guessing America’s score won’t measurably improve.

That being said, if there was a pro-con debate on Trump’s performance, some people would be quite confident about declaring victory.

Mike Solon, a former budget staffer on Capitol Hill, offers the “pro” assessment in the Wall Street Journal.

Are low taxes key to a booming economy? Their success is harder than ever to deny after Friday’s report that the U.S. economy grew 4.1% in the second quarter, bringing the average quarterly growth rate during the Trump presidency to 2.9%. …In the first five quarters of the Trump presidency, growth has been almost 40% higher than the average rate during the Obama years, and per capita growth in gross domestic product has been 63% faster. …The CBO now projects that additional revenue from this economic surge will offset 88.2% of the estimated 10-year cost of the tax cut. …The CBO’s April revision projected an extra $6.1 trillion in GDP over the next decade—more than $18,000 of growth for every man, woman and child in America. …the Labor Department reports that worker bonuses have hit the highest level ever recorded. The Commerce Department reports that wages and salaries are growing almost 25% faster under President Trump than under Mr. Obama.

Since I have great confidence that lower tax rates are good for growth and that Laffer Curve-type feedback effects are real, I want to applaud what Mike wrote.

And since I’ve also dissed the idea of “secular stagnation,” I also like this part of his column.

Perhaps the most important narrative discredited by the economic revival is the “secular stagnation” excuse. Throughout the Obama years, progressive economists said Americans had become too old, lazy and complacent to achieve the growth that was regular before 2009. But somehow American workers overcame all of these supposed weaknesses when Mr. Trump changed federal policy. The problem was not our people but our government. Stagnation is not fate but a political choice.

Amen to that final sentence. Stagnation is the result of bad policy.

But my problem is that Trump has some bad policies that are offsetting his good tax reform. So I can’t help but think Mike is being too optimistic.

Let’s look at another perspective. It would be an exaggeration to state that Jimmy Pethokoukis of the American Enterprise Institute is in the “con” camp, but he definitely is skeptical.

GOP hot takes will come as fast and furious as the economic growth. “The tax cuts worked!” “Trumponomics rocks!” …Celebrating a stronger economy is not a bad thing, of course. Over the long run, sustainable economic growth is what generates higher living standards and greater social mobility. But drawing sweeping conclusions from a single three-month period is problematic…it doesn’t necessarily tell you a whole lot about where the economy is heading. There were eight quarters of 3 percent growth or faster scattered across the Obama presidency, including four of 4 percent or faster and one of 5.2 percent. But there was never much follow-through, and overall the expansion muddled through at roughly a 2 percent annual pace. …even a very strong report won’t tell us whether the Trump tax cuts, passed in December, are “working.” It’s just too soon. …that process will play out over a numbers of years.

This is a very sensible perspective. I’ve repeatedly warned not to overstate the importance of short-run data. And I also fully agree that there’s often a time lag between the adoption of good policy and the evidence of good results.

But I have the same complaint about the Pethokoukis column as I did about the Solon column. There’s a sin of omission because both focused on the tax reform.

As I noted above, we also need to consider the other policies that have changed in the last 18 months.

I don’t know the answer, but maybe this image will illustrate why we should hesitate before making sweeping assessments.

And also keep in mind that we have no way of knowing whether there’s a Fed-created bubble in the economy. As I said in the interview, what if 2018 is akin to 2006? Back then, most people underestimated the possibility that easy money and Fannie-Freddie subsidies had created an unsustainable housing boom.

But even if we ignore that wild card, I can’t help but wonder whether Trump’s pro-growth polices and Trump’s anti-growth policies are resulting in a wash.

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Rich Nations that Enact Big Government Don’t Remain Rich

Move over, Crazy Bernie, you’re no longer the left’s heartthrob. You’ve been replaced by Alexandria Ocasio-Cortez, an out-of-the-closet socialist from New York City who will enter Congress next January after beating a member of the Democratic leadership.

Referring to the boomlet she’s created, I’ve already written about why young people are deluded if they think bigger government is the answer, and I also pointed out that Norway is hardly a role model for “Democratic socialism.”

And in this brief snippet, I also pointed out she’s wrong to think that you can reduce corporate cronyism by giving government even more power over the economy.

But there’s a much bigger, more important, point to make.

Ms. Ocasio-Cortez wants a radical expansion in the size of the federal government. But, as noted in the Washington Examiner, she has no idea how to pay for it.

Consider…how she responded this week when she was asked on “The Daily Show” to explain how she intends to pay for her Democratic Socialism-friendly policies, including her Medicare for All agenda. “If people pay their fair share,” Ocasio-Cortez responded, “if corporations paid — if we reverse the tax bill, raised our corporate tax rate to 28 percent … if we do those two things and also close some of those loopholes, that’s $2 trillion right there. That’s $2 trillion in ten years.” She should probably confer with Democratic Socialist-in-arms Sen. Bernie Sanders, I-Vt., whose most optimistic projections ($1.38 trillion per year) place the cost of Medicare for All at roughly $14 trillion over a ten-year period. Two trillion in ten years obviously puts Ocasio-Cortez a long way away from realistically financing a Medicare for All program, which is why she also proposes carbon taxes. How much she expects to raise from this tax she didn’t say.

To be fair, Bernie Sanders also didn’t have a good answer when asked how he would pay for all the handouts he advocated.

To help her out, some folks on the left have suggested alternative ways of answering the question about financing.

I used to play basketball with Chris Hayes of MSNBC. He’s a very good player (far better than me, though that’s a low bar to clear), but I don’t think he scores many points with this answer.

I think a good answer for "How will you pay for your agenda?" is "We're a very rich country. We'll figure it out."

— Chris Hayes (@chrislhayes) July 27, 2018

Indeed, Professor Glenn Reynolds of the University of Tennessee Law School required only seven words to point out the essential flaw in Hayes’ approach.

https://twitter.com/instapundit/status/1023011580718587904

Simply stated, there’s no guarantee that a rich country will always stay rich.

I wrote earlier this month about the importance of long-run economic growth and pointed out that the United States would be almost as poor as Mexico today if growth was just one-percentage point less every year starting in 1895.

That was just a hypothetical exercise.

There are some very sobering real-world examples. For instance, Nima Sanandaji pointed out this his country of Sweden used to be the world’s 4th-richest nation. But it has slipped in the rankings ever since the welfare state was imposed.

Venezuela is another case study, as Glenn Reynolds noted.

Indeed, according to NationMaster, it was the world’s 4th-richest country, based on per-capita GDP, in 1950.

For what it’s worth, I’m not familiar with this source, so I’m not sure I trust the numbers. Or maybe Venezuela ranked artificially high because of oil production.

But even if one uses the Maddison database, Venezuela was ranked about #30 in 1950, which is still impressive.

Today, of course, Venezuela is ranked much lower. Decades of bad policy have led to decades of sub-par economic performance. And as Venezuela stagnated, other nations become richer.

So Glenn’s point hits the nail on the head. A relatively rich nation became a relatively poor nation. Why? Because it adopted the statist policies favored by Bernie Sanders and Alexandria Ocasio-Cortez.

I want to conclude, though, with an even better example.

More than seven years ago, I pointed out that Argentina used to be one of the world’s richest nations, ranking as high as #10 in the 1930s and 1940s (see chart to right).

Sadly, decades of Peronist policies exacted a heavy toll, which dropped Argentina to about #45 in 2008.

Well, I just checked the latest Maddison numbers and Argentina is now down to #62. I was too lazy to re-crunch all the numbers, so you’ll have to be satisfied with modifications to my 2011 chart.

The reverse is true as well. There are many nations that used to be poor, but now are rich thanks to the right kind of policies.

The bottom line is that no country is destined to be rich and no country is doomed to poverty. It’s simply a question of whether they follow the right recipe for growth and prosperity.

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Greek Politicians Exacerbate a Spending Problem with Never-Ending Tax Increases

Shortly after the fiscal crisis began in Greece, I explained that the country got in trouble because of too much government spending.

More specifically, I pointed out that the country was violating my Golden Rule, which meant that the burden of spending was rising relative to the private economy.

That’s a recipe for trouble.

Unfortunately, thanks in large part to bad advice from the International Monetary Fund, Greek politicians decided to deal with an overspending problem by raising taxes.

Then doing it again.

And raising taxes some more.

And raising them again.

Then adding further tax hikes.

The tax burden is now so stifling that even the IMF admits the country may be on the wrong side of the Laffer Curve.

And establishment media sources are noticing. Here are some excerpts from a report in the Wall Street Journal.

Greece is…raising taxes so high that they are strangling the small businesses that form the backbone of its economy. …The tax increases have left Greece with some of Europe’s highest tax rates across several categories, including 29% on corporate income, 15% on dividends, and 24% on value-added tax (a rough equivalent of U.S. sales tax). Individuals pay as much as 45% income tax, plus an extra “solidarity levy” of up to 10%. Furthermore, workers and employers pay social-security levies of up to 27% of their salaries. …small and midsize businesses and self-employed people…are fighting the government in court over having to pay what they say is up to 80% of their average monthly takings in taxes and levies. Some also have to pay retroactive social-security contributions, to the point where professional associations say some of their members are having to pay more to the state than they make.

Paying more than they make? Francois Hollande will applaud when he learns that another nation has an Obama-style flat tax.

…economists and Greek entrepreneurs say heavy taxation doesn’t help. The tax burden is considered the most problematic factor for doing business in Greece, according to the World Economic Forum. “The tax burden creates a serious disincentive for economic activity. It mainly hits the most productive part of the Greek society… Aris Kefalogiannis, the CEO of olive-oil and food company Gaea, said the fiscal straitjacket is keeping highly qualified executives he would like to hire from coming to Greece. It has also made him more sparing with investments. …“But this abusive taxation is not backed by any actual reforms that would make the state efficient.”

Of course the state hasn’t been made more efficient. Why would politicians shrink government if higher taxes are an option?

It’s not as if Greek voters are poised to elect a Ronald Reagan or Margaret Thatcher, after all.

In any event, all of the tax increases are having predictably bad effects.

Tax evasion has led to higher tax rates on those Greeks who can’t or won’t evade taxes. The so-called gray economy is estimated at 26.5% of GDP… “Overtaxation is a vicious circle, which is not fixing the problem,” said 40-year-old electrician Antonis Alevizakis. “Only a third of customers want a receipt. The incentive to avoid a 24% value-added tax surcharge is big for them.” …More than 100,000 self-employed professionals have closed their businesses since mid-2016, to avoid rising taxation and social-security contributions, according to Finance Ministry data. Some of these people stopped self-employment, while others turned to the gray economy. …tax consultant Chrysoula Galiatsatou said. “A financially active part of the population sees no reason to try to do more.”

Why “try to do more” when the government gets the lion’s share of any additional income?

And why even stay in the country when there are better (less worse) tax systems in neighboring nations? Indeed, Greece is one of the few nations to raise corporate tax rates as the rest of the world is taking the opposite approach.

Here are some of the details. It appears that Bulgaria is a preferred destination for tax exiles.

Greece’s direct competitors for investment in its poorer, southeastern region of Europe have much lower taxes. For that reason, many Greek businesses and professionals are migrating to neighboring countries such as Bulgaria and Cyprus. …Around 15,000 Greek companies are registered in Bulgaria. Greece’s Finance Ministry estimates that 80% of them have a registration number but no activity in Bulgaria, and are only there to avoid Greek taxes. “If I stayed in Greece I would most certainly be in jail by now,” said John Douvis, who used his remaining savings in 2015 to move his family’s furniture factory from Athens to Blagoevgrad in Bulgaria. In Greece, he said, “it’s almost impossible for a company to survive unless it evades tax.”

In other words, the problem is tax rates, not tax evasion.

Lower the rates and evasion falls.

Let’s wrap up today’s column with a final observation. The WSJ story states that there have been spending cuts in addition to tax increases.

That’s basically true, but net effect of the Greek fiscal crisis is that government has become a bigger burden, relative to private economic output. Here’s a chart, based on data from the IMF.

The bottom line is that Greek politicians did way too much spending last decade and now they’re augmenting that mistake with way too much taxing this decade.

P.S. To reward everyone who read to the end, here’s some Greek-related humor.

This cartoon is quite  good, but this this one is my favorite. And the final cartoon in this post also has a Greek theme.

We also have a couple of videos. The first one features a video about…well, I’m not sure, but we’ll call it a European romantic comedy and the second one features a Greek comic pontificating about Germany.

Last but not least, here are some very un-PC maps of how various peoples – including the Greeks – view different European nations. Speaking of stereotypes, the Greeks are in a tight race with the Italians and Germans for being considered untrustworthy.

P.P.S. If you want some unintentional humor, did you know that Greece subsidizes pedophiles and requires stool samples to set up online companies?

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Falling Corporate Tax Rates Are Good News for the World’s Workers, Consumers, and Shareholders

I generally don’t chortle with joy when I read the Washington Post. This is the newspaper, after all, that often slants the news in ways that irk me.

• Deceptive reporting about Medicaid.
• Deceptive reporting about the budget.
• Deceptive reporting about Obamacare.
• Deceptive reporting about appropriations.
• Deceptive reporting about Germany.

Though maybe, in one or two instances, I should accuse the paper of sloppiness rather than dishonesty. Regardless, I still shake my head with disdain.

But not today. A recent story about corporate taxation brought a big smile to my face. Here are some passages that warmed my heart.

Taxes on corporations are plummeting across the globe… The average corporate tax rate globally has fallen by more than half over the past three decades, from 49 percent in 1985 to 24 percent in 2018, the study found. …The international decline in corporate taxes threatens to drain governments of a source of funding for health care and other social welfare programs.

And here are some examples.

Republicans in Congress slashed the U.S. federal corporate tax rate from 35 percent to 21 percent. …the United States was joining a crowded party. In Japan and China, corporate tax rates have fallen by about a quarter since 2003. Rates are down about 30 percent over the same period across all of Europe, by 36 percent in Israel and by 27 percent in Canada. …Hungary…has lowered its corporate tax rate from 18 percent to 9 percent.

But I’m not happy simply because corporate tax rates are being reduced.

And I’m not smiling just because tax competition is pressuring politicians to do the right thing (though that does send a tingle up my leg).

I’m also overcome with schadenfreude because advocates of bad policy are chagrined by these developments.

“Corporate taxes are going to die in 10 to 20 years at this rate,” Ludvig Wier, an economist at the University of Copenhagen and a co-author of the study, said in an interview. “Without drastic collective action, you can see we’re nearing the end of it.” …academics say the falling tax rates…reflect a race to the bottom… The falling corporate tax rate represents a “collective action problem,” Wier argued, as each country has a strong incentive to lower its own tax rate, although when that is done the globe suffers.

I guess we know Mr. Wier’s perspective. There’s a “collective action problem” and “the globe suffers” because corporate tax rates are falling.

Perhaps he hasn’t read the substantial academic literature showing that lower rates are good for growth?

Fortunately, some academics are focused on measuring the real-world impact of policy changes. Professor Juan Carlos Suárez Serrato of Duke University crunched some numbers for the National Bureau of Economic Research and found that jobs and investment both decline when companies can’t protect their income from government.

…eliminating firms’ access to tax havens has unintended consequences for economic growth. We analyze a policy change that limited profit shifting for US multinationals, and show that the reform raised the effective cost of investing in the US. Exposed firms respond by reducing global investment and shifting investment abroad – which lowered their domestic investment by 38% – and by reducing domestic employment by 1.0 million jobs. We then show that the costs of eliminating tax havens are persistent and geographically concentrated, as more exposed local labor markets experience declines in employment and income growth for over 15 years.

The moral of the story is that workers and investors benefit when money stays in the private sector.

This means pushing corporate tax rates as low as possible, while also allowing companies to utilize low-tax jurisdictions for their cross-border transactions.

That’s a win-win for the economy, and the angst on the left is a fringe benefit.

I’ll close with this chart I put together showing how the average corporate rate has decline in developed nations.

P.S. Individual rates also have declined since 1980, thanks if large part by the virtuous cycle of tax competition unleashed by Reagan and Thatcher. Sadly, the left has been somewhat successful in curtailing tax havens, and this has given politicians leeway to push tax rates higher in recent years.

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China, Tax Reform, and Competitiveness

I’ve been in China this week, giving lectures about economic policy at Northeastern University in Shenyang.

I’ve explained that China has enjoyed reasonably impressive growth in recent decades thanks to pro-market reforms. But I’ve also pointed out that further economic liberalization is needed if China wants to avoid the middle-income trap.

That won’t be easy. Simply stated, I don’t think it’s possible to become a rich nation without free markets and small government.

The good news is that China’s economic freedom score has increased dramatically since reforms began, rising from 3.64 in 1980 to 6.40 in the latest edition of Economic Freedom of the World. And there’s been a dramatic increase in prosperity and a dramatic reduction in poverty.

The bad news is that a score of 6.40 means that China is only ranked #112 in the world. That’s way too low. The country needs a new burst of pro-market reform (especially since it also faces serious demographic challenges in the not-too-distant future).

In other words, China should strive to be more like #1 Hong Kong, which has a score of 8.97, or #4 Switzerland, with a score of 8.44.

Or even the #11 United States, which has a score of 7.94, or also #19 Netherlands, with a score of 7.74.

The bottom line is that China won’t become a rich nation so long as it has a score of 6.40 and a ranking of #112.

Fortunately, there is a pre-existing recipe for growth and prosperity. China needs to change the various policies that undermine competitiveness.

Since I’m a public finance economist, I told the students how China’s fiscal score (“size of government”) could be improved.

I recommended a spending cap, of course, but I also said the tax system needed reform to enable more prosperity.

Part of tax reform is low marginal tax rates on productive behavior.

Chinese academic experts agree. As reported by the South China Morning Post, they’re urging the government to significantly reduce the top rate of the personal income tax.

China needs to slash its highest tax levy on the nation’s top income earners in its upcoming individual tax code review, or risk seeing an unprecedented talent exodus, argued eight academics… They called for authorities to scrap the top two tax brackets of 35 per cent and 45 per cent in the current seven brackets progressive tax system on individuals, granting high income earners more leeway with a five tax brackets system that will be capped at 30 per cent.

The scholars pointed out that high tax rates are especially harmful in a world where high-skilled people have considerable labor mobility.

The academics from esteemed mainland universities called for further revision of the code, as the current draft failed…high income earners, a group that is often highly skilled professionals China wants to attract and retain in the global fight for talent. …For the “highly intelligent groups”, remunerations and royalties were likely to surpass the monthly salary, meaning that the combination can add up to a higher taxable income base and “seriously restrain them from” pursuing innovation, the academics argued. “In a global environment [when tax cuts become mainstream], if China maintains its high individual income tax rates … it will push the high-income, high-intelligent group overseas,” they said.

Needless to say, I’ll be very curious to see what happens. I’ve now been to China several times and I think the country has huge potential.

But achieving that potential requires reforms that will reduce the size and scope of government.

Here’s a chart I shared with the students, which shows that Taiwan has much more economic freedom and is much richer (basically an updated version of some numbers I put together in 2014).

The bottom line is that the country can become a genuine “Chinese Tiger” rather than a “paper tiger” with the right policies.

P.S. Some people actually think China should become more statist. Both the Organization for Economic Cooperation and Development and the International Monetary Fund have urged staggering tax increases in China.

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Donald Trump Is Right and Wrong about Trade with China

President Trump is a protectionist. He doesn’t understand the principle of “comparative advantage.” And he’s wrong about the implications of a “trade deficit.”

But that doesn’t mean everything he says about trade is wrong.

He frequently accuses other nations of “unfair” treatment of American products and China is one of his favorite targets.

Well, there’s some truth behind Trump’s bluster.

Here’s the World Trade Organization’s data on tariff rates imposed by the United States and China. As you can see, the United States has lower taxes on trade, which should be viewed as a net plus for the American economy (though we should be at 0.0, like Hong Kong).

Now let’s look at the trade data from the Fraser Institute’s Economic Freedom of the World.

As you can see, China moved substantially in the right direction in order to qualify for WTO membership in the early 2000s. And the American score has declined slightly since the 1980s.

Nonetheless, the United States still ranks higher.

So Trump is right, at least on the narrow issue of China being more protectionist.

But bad policy by China doesn’t justify bad policy by the United States. Especially when the main victims of Trump’s tariffs will include American consumers, workers, manufacturers, taxpayers, and exporters.

Instead, I explained in March that the United States should use the World Trade Organization to push China in the right direction.

The Tax Foundation has a similar perspective.

There is wide agreement that these concerns should be addressed, but the administration’s broad application of tariffs is not likely to change Chinese government policy, and will cause significant harm to the U.S. economy. The World Trade Organization’s Dispute Settlement Process is an alternative way to address trade disputes, rather than imposing unilateral actions, like tariffs, that damage economic growth and invite retaliation. …If an offending nation does not conform with the decision, the nation being harmed can request authorization for suspension of concession, meaning approval to increase its own tariffs, but only enough to make up for the damages caused. This avoids unilateral punishments and retaliations… The World Trade Organization’s Dispute Settlement Process should not be overlooked as an effective tool against harmful foreign trade practices. …The U.S. has allies in the IP dispute against China, and even some anti-dumping duties can be defended under WTO rules. But instead, the administration is pursuing a path of broad tariffs that invite retaliation, cause economic uncertainty, and damage economic growth.

Christine McDaniel of the Mercatus Center has a column in the Hill also explaining that the WTO option is far superior to unilateral tariffs.

…tariffs do self-inflicted harm. Imagine being in a gunfight in an old wooden ship, with every shot fired at your enemy putting a hole in your own hull. Eventually, you start to sink. …as for taking our complaints to the WTO, this is a decent bet. We have won most of the cases we have brought, including those against China, which does eventually oblige.

But Ms. McDaniel wants to be even bolder. She’s urging market-oriented nations to create a broad free-trade agreement that goes above and beyond the WTO. China would then feel significant pressure to fix its bad policies to be part of this new club.

…best option is to…Team up with our allies, who are just as frustrated with China as we are. Form a pact in which signatories commit to open trade and investment regimes, sufficiently strong intellectual property rights and enforcement, and legal recourse mechanisms. Most importantly, signatories commit to not engage in trade or investment with state-owned enterprises or those with close ties to state-owned enterprises. This would effectively leave China the odd man out. …China should implement reforms…: a more open trade and investment regime, phasing out state-owned enterprises, stronger patent rights, and legal recourse mechanisms. These policy shifts — a shift in thinking, really — would help put China on a more sustainable path to economic growth.

She’s right that China would benefit. But such a free-trade agreement also would put other participating nations on a better growth trajectory.

The United States is far from perfect on trade, after all, and the same is true of most of our allies.

So if we all formed a free-trade pact to encourage better policy in China, an indirect benefit would be better policy in America and other nations.

That kind of win-win scenario would be great news for the global economy. And it would be much better than a potentially dangerous tit-for-tat trade war, which seems to be where we’re heading now.

P.S. The United States also is more free-trade oriented than the European Union.

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World Bank Compares Chile and Venezuela

I’m in China this week, giving various lectures at Northeastern University in Shenyang. My topic today was “Real-World Examples,” which gave me an opportunity to share many of the charts I’ve developed showing how market-oriented nations enjoy much more long-run success.

One of the charts shows how Chile has enjoyed strong growth since it shifted to free markets, especially compared to Venezuela, which is burdened by a vicious form of statism.

But I noticed that I created that chart back in 2011 and it only shows data for the years between 1980 and 2008. And I thought that might lead students to think I was deliberately omitting recent years because the data somehow contradicts my message about free markets and small government.

So it’s time for me to update my comparison of Chile and Venezuela. And I’m going to have lots of evidence to share because the World Bank published a lengthy report on Puzzles of Economic Growth just a couple of years ago. And chapter 7 specifically compares the two countries we’re examining today.

Chile and República Bolivariana de Venezuela are South American countries of similar size and population. They…share a similar history, cultural heritage and comparable social structures. In 1971, they recorded a similar level of per capita income, that is, $6,603 (chained dollars with a base year of 20001) in Chile and $7,231 in República Bolivariana de Venezuela.

The report explains how neither country enjoyed much success in the 1970s, though oil-rich Venezuela at least benefited from rising energy prices.

What’s most relevant, at least for today’s discussion, is how Chile then jumped over Venezuela thanks to pro-market reforms,

In 2003, this value was nearly twice as high in Chile ($12,140) as in República Bolivariana de Venezuela ($6,253). …Chile became a stellar economic growth example in the region and has been outperforming República Bolivariana de Venezuela ever since. The ratio of GDP per capita in Chile and in República Bolivariana de Venezuela changed from 0.75 in 1983 to 1.94 in 2003.

Here’s a chart from the report, showing how Chile’s economy grew rapidly while Venezuela languished.

The report is filled with lots of data.

One item that caught my attention (in part because of Trump’s short-sighted policies in America) is how Chile dramatically reduced trade barriers while Venezuela was more protectionist.

From 1979, Chile’s economy was characterized by the lowest level of tariff restrictions in all of Latin America (10 percent) and a lack of nontariff barriers… República Bolivariana de Venezuela increased its trade restrictions to force consumers to purchase goods produced by the nationalized industries.

But Chile’s success goes well beyond trade policy.

Here’s a table looking quality of governance and red tape.

And here’s some data looking at obstacles to entrepreneurship. As you can see, it took almost four times longer to open a business in Venezuela in 1999.

I assume the numbers are even worse today. Assuming, of course, than anyone even wanted to open a business in that sad country.

Here are some excerpts from the conclusion of the World Bank report. This is a pretty good summary of how Chile reversed its descent to socialism while Venezuela doubled down on bad policy.

In 1971–2003, both Chile and República Bolivariana de Venezuela experienced periods of growing statism in their economic policy. In Chile, however, it was only a short episode (Allende’s socialist experiment in 1971–73), while in República Bolivariana de Venezuela this policy direction was maintained nearly for the entire period covered by the analysis (with its culmination being Chávez’s populist administration elected in 1998). During these periods, state-owned enterprises grew in both countries; market mechanisms were additionally disturbed by administrative price controls and restrictions imposed on freedom of entry into the market—and constrained business activity in many sectors of the economy… Furthermore, severe restrictions on foreign trade and capital flows were imposed. In Chile, the statist experiment was interrupted after three years—once it had driven the economy into a state of profound imbalance with a giant deficit and unchecked inflation. A radical program of economic stabilization and reforms broadening the scope of economic freedom was initiated. This dramatic change in economic orientation produced positive results. From the second half of the 1980s until the end of the analyzed period (2003), Chile was the fastest-growing country in South America.

Now it’s time for me to share an updated version of my chart (though I’m removing Argentina so we can focus just on Chile and Venezuela). As you can see, the updated numbers from the Maddison database tell the exact same story as my 2011 chart.

And why has Chile grown so much faster? As I told the students here in China, it’s because there’s more liberty to engage in voluntary exchange.

In the latest report from Economic Freedom of the World, Chile is ranked #15 while Venezuela is at the very bottom.

P.S. Some people have tried to portray Chile as a failure, but such assertions are easily debunked.

P.P.S. Kudos to the World Bank for publishing a very substantive report. For what it’s worth, it’s the international bureaucracy most likely to produce sensible publications.

• The negative economic impact of government spending.
• How money-laundering laws hurt the poor.
• How tax complexity breeds corruption.
• The benefits of privatized Social Security systems.
• The superb reports on Doing Business.
• How free markets produce better outcomes.

P.P.P.S. The only bad World Bank study I’ve encountered equated high tax burdens with a good report card.

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The Unpalatable Consequences of a Nationwide Carbon Tax

I’ve been writing about proposed carbon taxes since 2012.

My message is simple and straightforward. It’s possible to design a carbon tax that is theoretically appealing. Simply use all the revenue to get rid of some other tax that causes greater economic harm, such as the corporate income tax.

Which is basically the same argument that leads some folks to like the value-added tax.

But my argument against the carbon tax (like my argument against the VAT) is that we shouldn’t give politicians a new source of revenue without some sort of up-front, non-reversible repeal of an existing tax.

And since that’s not possible, the only good carbon tax is a dead carbon tax. However, it’s not very easy to kill this tax.

Columbia University’s Center on Global Energy Policy, working with several other organizations, just released four studies to boost the carbon tax.

Study #1.

Study #2.

Study #3.

Study #4.

And below you’ll see the most relevant table, which comes from study #4. It shows – in theory – what politicians might do with the additional money.

To add my two cents, I augmented the chart by numbering the options (in red) and then providing a short critique (in green).

In large part, I’m pointing out that “theory” may not resemble reality. For instance, how likely is it that politicians would impose this huge tax hike and allow all the funds to be used for deficit reduction (Option #3) instead of using a big chunk of the cash to buy votes?

Unfortunately, it’s not just academics and think tank people who are interested in this new tax.

The Wall Street Journal reports that a Republican congressman is pushing this levy.

A Florida Republican is set to propose a carbon-tax bill in Congress… The plan from Rep. Carlos Curbelo, who represents a Miami-area district…, would replace the federal gasoline tax with a tax on businesses including refineries, power plants and steel mills based on how much oil, coal and other fossil fuels they buy. The carbon tax would likely add three to 11 cents to the average pump price for a gallon of gasoline… he also views it as an infrastructure bill—it is crafted to raise additional revenue for bridges, roads and other projects—and as something he can sell as tax reform because it eliminates the gasoline tax. …Mr. Curbelo’s proposal would price carbon at $24 a metric ton and increase that every year by 2% plus the rate of inflation. It replaces the gasoline tax, which Mr. Cubelo frames as a version of tax overhaul. If enacted, his plan would raise an additional $57 billion to $106 billion a year.

Since Congressman Curbelo largely wants the new tax to fund bigger government, he’s proposing a version of Option #5.

Alex Brill of the American Enterprise Institute wants a different type of carbon tax.

One worthy candidate for the next tax reform effort is a cut in the most distortionary taxes in exchange for a tax on carbon emissions, combined with permanent carbon deregulation of the energy sector. …here are the three key components of a deregulatory carbon tax reform… Roll back burdensome carbon-related regulations. …The motivation is not disregard for the environment or climate, but distrust in the regulatory state as an efficient instrument. …A transparent carbon tax would…raise the price of certain consumer goods, including electricity and gasoline. That is a reality… It is, in fact, the policy’s intent. …a carbon tax would generate revenue that could be used to offset the cost of eliminating other taxes that impose greater harm on the economy. …Turning carbon tax revenues into universal welfare payments, as some have suggested, would not promote long-run economic growth.

The good news is that Alex wants Option #4 and is opposed to Option #2.

But that still doesn’t make it a good idea since Congress would never get rid of the corporate income tax.

Writing for the Washington Examiner, Michael Marlow also wants advocates of smaller government to support a carbon tax.

…conservatives should embrace the political opportunity it presents to reduce the harmful distortions imposed by other taxes and shrink the regulatory morass of federal agencies such as the Environmental Protection Agency. …conservatives can achieve these goals with a well-crafted revenue-neutral carbon tax. …Because it would trade “good” policy (a carbon tax) for “bad” policy (regulations and taxes with high excess burdens), it would make government more efficient. And packaging together the benefits from deregulation and tax reform would compensate the public for any adverse economic impact… Ensuring that a carbon tax would not simply finance more government spending requires a strict commitment by conservatives that any legislation establishing a tax on carbon emissions must also include, first, an equal tax cut, preferably targeting existing taxes that impose the highest excess burdens on the economy, and second, a significant rollback of carbon regulations. On these points, conservatives should not negotiate.

Like Alex Brill, Michael Marlow is proposing to do the wrong thing in the best way.

But Option #4 would only be acceptable if the corporate tax is being totally abolished. And that’s not what he’s proposing.

Which is why many sensible voices are explaining that there’s no acceptable argument for a carbon tax.

The Wall Street Journal, for instance, opined on this issue last year.

…never changing is the call from some Republicans to neutralize the issue by handing more economic power to the federal government through a tax on carbon. …George Shultz and James Baker…have joined a group of GOP worthies for a carbon tax… They propose a gradually increasing tax that would be redistributed to Americans as a “dividend.” This tax on fossil fuels would replace the Obama Administration’s Clean Power Plan and a crush of other punitive regulations. …A carbon tax would be better than bankrupting industries by regulation and more efficient than a “cap-and-trade” emissions credit scheme. Such a tax might be worth considering if traded for radically lower taxes on capital or income.

The WSJ shares my concern that Option #4 eventually would turn into Option #2 or Option #5.

…in the real world the Shultz-Baker tax is likely to be one more levy on the private economy. Even if a grand tax swap were politically possible, a future Congress might jack up rates or find ways to reinstate regulations. Another problem is the “dividend.” …the purpose of taxes is to fund government services, not shuffle money from one payer to another. No doubt politicians would take a cut to funnel into renewable energy or some other vote-buying program. The rebates would also become a new de facto entitlement… all methods of calculating a price for carbon are susceptible to political manipulation. The Obama Administration spent years fudging “social cost of carbon” estimates to justify its regulatory agenda. The tax rate would also be influenced by international climate models that have overestimated the increase in global temperature for nearly two decades.

A column in National Review is similarly skeptical.

…a small but persistent group of Republicans are trying to persuade conservatives to abandon…principles and embrace a national energy tax. …the Climate Leadership Council, a group led by James Baker and George Shultz…recently met with the Trump administration to encourage the adoption of a $40-per-ton carbon tax. …There is nothing free-market about their massive new tax hike… A carbon tax would punish users of natural gas, oil, and coal, which make up 80 percent of the energy we consume. This means that all American families would face higher electricity bills and gasoline prices. In fact, it’s estimated that the Council’s carbon tax would hike gasoline prices by 36 cents per gallon. …these hikes would have a disproportionate impact on poor and middle-class families, who spend a higher percentage of their income on energy.

The column discusses a specific plan that envisions a new entitlement (Option #2), warning that it eventually would trigger other types of new spending (Option #5).

Shultz and Halstead want to offset the tax by redistributing to the American people the $300 billion in anticipated revenue from the carbon tax. This is not practical in the real world. The idea that Washington politicians would perpetually refund a massive new revenue stream is incredibly naïve… The more likely scenario is that the government would eventually begin to spend the new revenue… Carbon taxes make energy more expensive. They also destroy jobs, particularly in the manufacturing sector.

Benjamin Zycher of AEI also has a skeptical assessment.

The view is widespread among economists that a (Pigouvian) tax on emissions would be more efficient than the regulatory approach because regulations impose a rough, one-size-fits-all framework for reducing emissions, while a tax allows each emitter to find the least expensive method of achieving its emissions goal. …The central problem with the consensus view is straightforward: The emissions goal is not fixed. Instead, it must be chosen. …Once government derives revenues from a system of carbon taxes, with ensuing political competition for those revenues, it is not difficult to predict that under a broad range of conditions the emissions reduction goal will be inefficiently stringent. That is, the tax rate will be too high.

And what about the notion that at least the revenues can be used to reduce other taxes?

Fanciful thinking, Zycher explains.

Why should we predict that the interests benefiting from the reduction in the corporation income tax would prove to be the marginal members of whatever congressional coalition imposes the carbon tax? That certainly is possible, but other outcomes seem far more likely. Some industries and geographic regions will bear disproportionate burdens attendant upon the carbon tax, and their votes will be necessary to enact it, particularly in the US Senate. …The list of potential supplicants is long indeed, each comprising some combination of constituencies to protect and campaign contributions and votes to offer.

For all intents and purposes, he’s explaining that “public choice” will turn a bad idea into a really bad reality.

Paul Blair of Americans for Tax Reform summarizes another new proposal for a carbon tax, which is largely a version of Option #2.

Just last month, seven-figure swamp lobbyists Trent Lott and John Breaux rolled out their support for a “simple and elegant” tax on carbon dioxide emissions. Realizing the insufficient appetite for a new “tax,” the former senators disingenuously relabeled it as a “fee.” Their $40 per ton carbon tax would immediately result in a 36 cent per gallon increase in the gas tax. Proponents of the tax admit that the price of home heating would increase by 22 percent and coal would increase by an average of 264 percent. The revenue generated from this tax would constitute the largest tax increase in U.S. history. To offset some of these astronomical increases in energy costs, the plan would create a new national federally managed welfare program, paying the average family of four $2,000 a year…a program of that scale would greatly exceed the size of Obamacare, giving Uncle Sam the responsibility of managing another $1.7 trillion over a decade.

His conclusion is not subtle.

It’s a plan designed to harm American manufacturers, raise prices for every single American consumer, and prop up uncompetitive expensive sources of energy like solar and wind. It places trust in the federal government to manage yet another massive welfare program, while giving the Left a significant opportunity to extract more and more money from taxpayers. Killing a carbon tax dead in its tracks isn’t only good policy, it’s a basic IQ test for modern day conservatives.

Since Republicans have failed many IQ tests in recent years (see here, here, and here), this doesn’t leave me overflowing with optimism.

Last but not least, Ryan Ellis opines on Cong. Curbelo’s carbon tax.

Rep. Carlos Curbelo, R-Fla., will introduce a costly carbon tax bill on manufacturers… Curbelo’s own press release indicate that his carbon tax is structured to be a net tax increase. While it will eliminate the $0.184 per gallon federal tax on gasoline, the carbon tax will raise taxes higher (on net?) to the tune of $57 billion to $106 billion per year. Over a decade that’s a trillion dollar tax increase… Structurally, the Curbelo carbon tax is typical tax-and-spend liberalism. With the extra resources from the net tax increase, the plan proposes throwing money at so-called “infrastructure projects,” which comes right out of the 2009 Obama stimulus playbook.

As you can see, Ryan is not a fan of what Curbelo is proposing, which is a version of Option #5.

And Ryan also doesn’t want to enrich and empower the swamp.

While the bill by statute includes coal, petroleum, and natural gas, the EPA administrator is also given free rein to expand this carbon taxable list of industries at will. Imagine what an Obama administration would have done with that kind of power. …the Curbelo carbon tax also creates a United Nations NGO-style “National Climate Commission.” If that doesn’t sound scary enough, it also empowers this commission with an unlimited authorization to procure the services of “experts and consultants.” This section of the bill might as well be called the “DC swamp deep state full employment act.” How many of these taxpayer-funded “consultants” would an Obama-like administration use to enforce left-wing policies on the rest of us?

This is a long column, so let me conclude by noting that my opposition to a new tax has nothing to do with partisan politics. I’ve criticized Republicans for backing a carbon tax and I’ve also skewered Democrats for supporting that levy.

Heck, I’ve even gone after self-styled libertarians who advocate for this new tax. Especially when they pull a bait and switch, claiming initially that the revenue from a carbon tax could be used to lower other taxes, but then later admitting that they’re willing to acquiesce to a huge net tax increase.

Which confirms all my fears that a carbon tax would wind up being a gusher of money that would trigger an orgy of new spending in Washington.

P.S. I hope nobody will be surprised to learn that both the International Monetary Fund and the Organization for Economic Cooperation and Development support higher energy taxes for the United States.

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Great Moments in British Government

A couple of days ago, citing bizarre government policies in India, Belgium, Malaysia, Romania, and Spain, I wrote about some “great moments in foreign government.”

Today, we’re going to give special attention to the United Kingdom.

I’m not claiming there’s an above-average level of government stupidity in the United Kingdom (though that’s distinctly possible). Instead, I suspect I simply get exposed to more stories from the U.K.

Whatever the reason, let’s start with this report from the Times.

Plastic stirrers and cotton buds are to be banned alongside straws… The move, expected to come into force as early as next year, is designed to curb “society’s addiction” to throwaway products, the environment secretary writes… The UK uses 13.2 billion cotton buds a year, more than any other member of the EU, as well as 44.1 billion stirrers and 42 billion straws, according to the World Wide Fund for Nature. …Mr Gove initiated plans last month to require retailers to impose a deposit on plastic bottles and has extended the 5p tax on plastic bags to smaller shops. Moves for an industry levy aimed at reducing the use of products such as takeaway food cartons are also underway in the Treasury.

Apparently, the supposedly conservative government in the United Kingdom thinks this type of green virtue signalling is a way of wooing the tiny collection of misguided Tories who oppose Brexit.

Mr Gove is said to believe that the issue helps reconnect the Conservatives with former supporters angry over Brexit.

Switching topics, here’s a bizarre story from the BBC.

Chelsea Russell, 19, from Liverpool posted the lyric from Snap Dogg’s I’m Trippin’ to pay tribute to a boy who died in a road crash, a court heard. Russell argued it was not offensive… Prosecutors said her sentence was increased from a fine to a community order “as it was a hate crime.” She was charged after Merseyside Police were anonymously sent a screenshot of her update. …The words Russell used on her account contained a racial label which some people find extremely offensive. …Prosecutor Angela Conlan said Russell’s defence also argued her profile “wasn’t public, but it had been proved in court that anyone could access it and “see the offensive language”. Russell was found guilty… She was given an eight-week community order, place on an eight-week curfew and told to pay costs of £500 and an £85 victim surcharge.

Given my utter lack of cultural awareness, I’ve never heard of Snap Dogg. I’m guessing he’s black, but I could be wrong.

In any event, this absurd story raises a couple of points.

• First, people should have the right to say offensive things.
• Second, it appears that there was no offensive intent.
• Third, this shouldn’t be an issue for government.

I’m sure that there’s still real racism in British society. I hope there is widespread scorn for people who practice that odious version of collectivism. I also support boycotts of private measures to punish unambiguous racists (the ideal goal is to have their minds changed by kindness).

Government should only step in when there’s a threat to life, liberty, or property.

Sadly, the British government is policing speech, perhaps even speech that should be considered totally benign.

Which is a good excuse to post this funny-yet-sad item from Libertarian Reddit.

Speaking of things that are funny and sad, here’s a Reason column on the latest development in the battle to leave Brits totally vulnerable to crime.

It turns out that when you pass laws disarming people in an attempt to prevent violence, criminals who habitually disregard all laws don’t make exceptions for the new rules. In London, crime still thrives despite the U.K.’s tight gun controls and the British political class is now desperately turning its attention to restricting knives. …Firearms are strictly restricted in the U.K., including a near-total ban on handguns. Nevertheless, “[i]n the 12 months to October 2017, there were 2,500 offences involving guns: a 16 per cent increase on the previous year and a 44 per cent increase on 2014,”… Criminals, it seems, are not averse to committing crimes—including the illegal acquisition of tools that help them commit more crimes. Besides illegal guns, British criminals also use edged weapons… Having failed to disarm criminals with gun controls that they defy, British politicians are now turning their attention to implementing something new and different: knife control. Because criminals will be much more respectful of knife laws than of those targeted at firearms, I guess. …Poundland (the British equivalent of a dollar store) announced last week that it will no longer sell kitchen knives in any of its 850 stores. Similar stores are being slapped with fines for selling knives to minors. British politicians propose banning home delivery of knives and police promote street-corner bins for the surrender of knives.

If you outlaw knives, only outlaws will have knives (in America, we apply that lesson to tanks).

And they’ll also have acid, as noted on Libertarian Reddit.

The cops don’t have the time and energy to concentrate on these real crimes.

Instead, they bust a girl for benignly quoting a bad word. Or they bust homeowners for harming robbers. Or harass employers who commit discrimination by advertising for “reliable” workers.

And apparently Brits also are on guard against the scourge of eggs in the hands of kids. And flour.

How embarrassing.

Today’s collection is even worse than the ones I shared in February and April.

P.S. And let’s not forget the U.K.’s creepy statism and ghoulish government-run healthcare.

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Academic Studies Confirm that More Money for Politicians = More Corruption

When I argue against tax increases, I generally rely on two compelling points.

1. Higher taxes will undermine prosperity by penalizing productive behavior.
2. More money for politicians will trigger more spending, so red ink will increase.

When I argue against centralization and urge Swiss-style federalism, I also rely on two very strong points.

1. Local governments will be more responsible if they raise and spend their own funds.
2. Competition among local jurisdictions will encourage better public policy.

Now let’s mix these issues together by looking at some academic research on what happens when politicians get a windfall of revenue from a  centralized source.

Well, according to new research from Italy’s central bank, bigger government means more corruption.

…large financial transfers from a central unit of government to lower levels of government…come with the risk of exacerbating the agency problem due to the fact that the funds are collected at a higher level and then managed locally with typically little transparency on the actual amount of resources received by each local area. This moral hazard problem may increase incentives for local administrators to extract rents from the funds received. …growing evidence suggests that illegal practices and rent seeking are still often associated with the receipt of transfers from a central government. …we investigate the relationship between financial transfers from a central level of government to local administrations and the coincident occurrence of white collar crimes at the same local level drawing from the case of EU funding to Southern Italy. …The South of Italy has been one of the largest recipients of EU funds: in the most recent programming period it received 25 billion euro out of the 35 billion total allocated to Italy and managed at the local level. The empirical analysis exploits a unique administrative dataset of criminal episodes in Italy and matches them to the records of all the transfers from the EU to each single municipality over the period 2007-2014. We find evidence of a significant positive relationship between EU funds and the occurrence of corruption and fraudulent behaviors in the recipient municipality in the same year. …the robustness analysis we performed provided evidence that the correlation between transfers and corruption that we estimate is likely not just spurious or due to confounding effects

As far as I’m concerned, these results belong in the “least surprising” category. Of course you get more corruption when government gets bigger.

Now let’s look at another study. A few years ago, academic scholars produced even more compelling research from Brazil.

The paper studies the effect of additional government revenues on political corruption and on the quality of politicians, both with theory and data. The theory is based on a version of the career concerns model of political agency with endogenous entry of political candidates. The evidence refers to municipalities in Brazil, where federal transfers to municipal governments change exogenously according to given population thresholds. We exploit a regression discontinuity design to test the implications of the theory and identify the causal effect of larger federal transfers on political corruption and the observed features of political candidates at the municipal level. In accordance with the predictions of the theory, we find that larger transfers increase political corruption and reduce the quality of candidates for mayor. …The empirical findings accord well with the implications of the theory. Specifically, an (exogenous) increase in federal transfers by 10% raises the incidence of a broad measure of corruption by 12 percentage points (about 17% with respect to the average incidence), and the incidence of a more restrictive measure—including only severe violation episodes—by 10.1 percentage points (about 24%).

By the way, this persuasive research isn’t just an argument for smaller government and fewer transfers.

It’s also why foreign aid generally has harmful effects on recipient countries. Handouts line the pockets of the political elite and enable a bigger burden of government.

It’s also one of the reasons why I’ve referred to the International Monetary Fund as a “dumpster fire.” That bureaucracy leverages its money (the U.S. is the biggest backer) to encourage higher tax burdens and more redistribution in countries that already are suffering from too much bad policy.

The two studies we’ve reviewed today are simply an exclamation point.

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Trump and the Danger of Hoover-Style Trade Policy

There were many policy mistakes that contributed to the Great Depression.

Monetary Policy presumably deserves the lion’s share of the blame, but politicians also increased the fiscal burden of government and radically expanded the amount of regulatory intervention.

And a tit-for-tat trade war, mostly caused by the United States (Hoover’s Smoot-Hawley tariff), also contributed to the economic destruction of the 1930s.

Sadly, history may be repeating itself, at least with regard to trade. That was my message in this recent discussion with Charles Payne.

This is why Trump’s protectionism is so alarming.

Let’s explore this issue.

Peter Coy, in a column for Bloomberg, explains the dangers of Trump’s approach. Simply stated, it’s not a good idea to let the protectionist genie out of its bottle.

…the president has instigated a trade war…his actions are eroding trust among both allies and rivals. Once gone, trust is hard to reestablish… U.S. corporate leaders soft-pedaled their criticisms of his trade policies in the past because they hoped he’d come around to their point of view. …Now they worry that waiting for the squall to pass may be a mistake because real damage could be done in the meantime. …the threats and counter threats create uncertainty that may induce businesses to hold back investment in new plants and equipment, known as capital spending, or capex.

We’re already seeing some blowback against the United States. But as I stated in the interview, the big concern is what comes next. The economic damage can be significant.

And all bets are off if the trade war goes hot. Fink warned that stocks could fall 10 percent to 15 percent if the Trump administration approves tariffs on an additional $200 billion of Chinese imports. …In the longer term, trade barriers make the global economy permanently less efficient because sheltered economies produce things that could be made more cheaply elsewhere. …if countries restored their tariff rates to their 1990 levels, wiping out almost 30 years of reductions, world average living standards in 2060 would end up about 14 percent lower.

Sadly, Trump seems oblivious to these concerns. So, just like 80 years ago, we’re heading down the tit-for-tat path.

What’s instructive for today is how the U.S. extracted itself from the beggar-thy-neighbor spiral that started with the Smoot-Hawley Tariff Act of 1930 and helped deepen the Great Depression. President Franklin Roosevelt lobbied for and got the Reciprocal Trade Agreement Act of 1934, in which Congress ceded some authority over international commerce to the president… To Dartmouth College economist Douglas Irwin, a historian of free trade, one lesson of the 1930s is that “it’s not as easy to snap back as you think” from a trade war.

Irwin’s argument is similar to the point I made in the interview about needing an adult to take charge before things spiral out of control.

P.S. Since I’ve referenced the Great Depression, I can’t resist reminding people that FDR was so awful that he actually tried to impose a 100 percent tax rate by executive fiat.

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Politician of the Year?

Back in 2016, I had an informal “politician of the year” contest. The three candidates were:

• The Prime Minister of Malaysia, who took normal cronyist corruption and added several zeroes to the total.
• The president of the Philippines, because he announced to voters that none of his mistresses would be on the public payroll.
• The follicly-challenged President of France, Francois Hollande, who squandered more than $100,000 per year on a hair stylist.

As a proud American, I was chagrined that no Americans made the list.

So I’m delighted to report that our first contestant in the 2018 race is from the United States.

Courtesy of the Washingtonian, let’s look at a very strong candidate for this year’s award.

Parking laws in the District can seem like a mess, but as any DC driver can note, confusion is not an excuse for breaking the law—unless you’re DC Councilmember Jack Evans. Evans, whose free-form approach to parking regulations has been well-documented, was spotted in his car Saturday morning, idling in a no-parking zone in Georgetown… Evans is hardly the first member of the DC Council to be criticized or spotlighted for flouting the District’s traffic and parking rules. …But of all of these, Evans is the council’s best-known parking-law skeptic. As it turns out, he has a point: In 2002, the DC Council granted itself the same legal immunity that members of Congress enjoy in the District, allowing them to park in bus zones, crosswalks, and residential permit zones when on official city business.

But the mere fact that there are special rules for insiders isn’t what qualifies Mr. Evans for an award.

If that was the case, the folks on Capitol Hill would deserve an award for wanting exemptions from the Obamacare law that they imposed on the country. Or we could give a giant prize to the bureaucrats at the OECD, who get tax-exempt salaries while pushing higher taxes on the rest of us.

What makes Mr. Evans worthy is the remarkable logic that he used when confronted by a lowly voter.

Kmetz says he first noticed Evans’ car parked at the corner of 32nd and Q streets, Northwest, while on his way to the post office. …Kmetz approaching Evans and asking the councilmember if he knows he is parking illegally. “Can I ask you something? Why do you care?” Evans responds. “Because if I parked illegally, I would get a ticket,” Kmetz says. “If I park illegally, that opens up a spot for you,” Evans says.

That’s some impressive sophistry.

But I’m wondering if Mr. Evans missed a golden opportunity. Instead of being snarky, he should have expressed fake empathy and told Mr. Kmetz that he would “solve” the problem the by submitting a bill to provide chauffeur-driven limousines to all members of the DC Council.

And he could even demonstrate his “frugality” by buying second-hand limos from the federal government’s massive fleet.

P.S. Since I’m mocking politicians, here’s an amusing joke that a reader shared with me.

Though I would amend the joke by removing “bipartisan.” As we saw with TARP, or the budget deal earlier this year, it’s almost always bad news for taxpayers when the Evil Party and Stupid Party agree on something.

P.P.S. Here’s a good link if you enjoy anti-politician jokes.

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Great Moments in Foreign Government

Given the routine corruption and reckless spending in Washington, I frequently get asked how I keep my sanity.

It’s possible, as some of my friends argue, that I’m not actually sane. That would explain why I try to put my finger in the dyke of big government as more and more new leaks keep developing. Only a crazy person would fight against big government when politicians and bureaucrats have a “public choice” incentive to do the wrong thing.

Moreover, if “victory” is restoring the kind of limited government envisioned by the Founding Fathers, then there’s a 99.99 percent chance all my efforts will be wasted.

But allow me to offer a reason for optimism. What if we decide that “victory” is simply hindering the growth of government so that the private sector has enough “breathing room” to continue making our lives richer and better?

That’s the basic message of Human Progress, Marian Tupy’s website showing how the world is constantly improving. And we see good long-run developments from Economic Freedom of the World.

In other words, we don’t need to achieve Libertarian Nirvana. We just need to throw sand in the gears of government.

And that’s why I don’t think my life is pointless. To be sure, I haven’t given up on my dream of replacing the odious internal revenue code with a flat tax, but if the only thing I achieve is to protect America from a value-added tax, I’ll nonetheless go to my grave feeling like I did something very valuable for my country.

But there’s something else that keeps me sane. I also enjoy laughing at government. I regularly write about “great moments” in government and point out that incompetence and stupidity is a regular feature of the federal government, of state governments, and of local governments.

And I also enjoy mocking the spectacular screw-ups and bizarre blunders that are a feature of foreign governments as well.

And that’s our topic for today. So let’s start with this story from India about a very unusual example of vote buying.

A south Indian state has become possibly the first in the world to offer publicly-funded breast implants, its health minister arguing, “Why should beauty treatment not be available to the poor?” The Tamil Nadu state health department on Wednesday launched the free service at a clinic in the capital Chennai. …The clinic had already been providing breast reconstruction surgery for cancer patients, but was now extending the service for people who wished to alter the size of their breasts for other health or cosmetic reasons. The head of plastic surgery at the clinic, Dr V Ramadevi, said some of her patients…sought to augment or shrink their breasts for a boost in confidence. “There is a psychological benefit. Many girls who have larger breasts don’t like to go out. There is no reason this surgery should be restricted from the poor.” The procedure would also be available to men, she said. …Tamil Nadu’s government is known for its largesse, particularly under former chief minister Jayalalithaa, who pioneered free food canteens and doled out wedding jewellery and venues to the poor.

I’ve previously reported on crazy examples of government policy in India, so I suppose this story shouldn’t surprise me.

And since taxpayer-financed cosmetic surgery exists in the United Kingdom and the United States, Indian taxpayers can take solace that they’re not alone.

Now let’s go to Belgium, where there’s apparently a problem with rogue royalty.

Prince Laurent of Belgium has had his monthly allowance docked for a year, after a vote by the country’s federal parliament. The sanction was imposed after the prince attended a Chinese embassy reception last year without government permission, in full naval uniform. Lawmakers voted for a 15% cut to his €307,000 (£270,000; $378,000) annual allowance. …Prince Laurent, who is the younger brother of King Philippe, wrote a lengthy emotional letter to parliament before the vote on his endowment, arguing that, as a royal, he is unable to work for a living. He described the vote as “the trial of my life” and said it would “likely cause me serious prejudice” if MPs went against him. …The prince, 54, said the royal family had obstructed his attempts to be financially independent. …Lawmakers ultimately rejected his claim that no citizen of their country had been so exploited, voting to cut his stipend by 93 to 23 votes. …He had previously been criticised for attending meetings in Libya when the late Muammar Gaddafi was still in power, and making an unsanctioned 2011 trip to the Democratic Republic of Congo, a former Belgian colony.

I suppose this is a feel-good story in that politicians actually voted to cut spending.

Though we should never forget that this is the country where the public sector consumes half of economic output but officials actually complained that it’s hard to fight terrorism because of “the small size of the Belgian government.”

Now it’s time for ar stop in Malaysia, where corrupt politicians spent the country into debt and now they want taxpayers to voluntarily cough up extra money.

When Malaysian Prime Minister Mahathir Mohamad unexpectedly won his bid for office in May, he pledged to…get the country’s $250 billion worth of debt under control. And this week, he announced the government had found a way to at least get started: crowdfunding. Within 24 hours, the “Malaysia Hope Fund” raised almost $2 million, the BBC reported. “The rakyat (people) voluntarily want to share their earnings with the government to help ease the burden,” the finance ministry said in a statement, announcing that it would be accepting donations to a special fund set up to help relieve the country’s debt. …The crowdfunding idea started with a 27-year-old named Nik Shazarina Bakti, who recently launched a private crowdfunding initiative to help relieve Malaysia’s debt.  She raised around $3,500 before the government stepped in. In a sense, the effort is a version of what she said Malaysians did during their struggle for independence from Britain, when they donated jewelry, money and valuables. It’s also similar to what South Korea did as it attempted to pull itself out of economic crisis in the late 1990s, and regular citizens lined up to donate their most prized possessions to the government, including wedding rings and trophies.

Hmmm…, $2 million raised to pay off $250 billion of debt. Methinks they won’t meet their goal.

Though this story reminds me that politicians like Elizabeth Warren want the rest of us to pay more tax, yet she conveniently doesn’t participate in her state’s version of voluntary crowdfunding.

Here’s an amazing story from Romania.

He’s a dead man walking and the court ruling is final. A Romanian court has rejected a man’s claim that he is still very much alive, after he was officially registered as deceased, the Associated Press reports. Constantin Reliu, 63, lost his case in Vasului because he appealed too late on the ruling, a court spokeswoman said Friday. The story goes that Reliu had traveled to Turkey in 1992 for work and lost contact with his family. Since his wife had not heard from her husband in years, she acquired a death certificate for him in 2016, the AP reports. However, since Reliu was discovered by Turkish authorities this year with expired papers, he was deported back to Romania. That’s when he discovered he had been declared dead.

Wow. I thought American courts generated some outlandish decisions, but this belies belief.

Last but not least, here’s a report from Spain that should leave you skeptical about the efficacy of additional NATO spending.

An attempt to deploy a new submarine for Spain’s navy has run aground again, after it emerged it cannot fit in its dock, Spanish media report. The S-80 boat was redesigned at great expense after an earlier mistake meant it had problems floating, and it was lengthened to correct the issue. Spanish newspaper El País now reports that after the changes, the docks at Cartagena can no longer fit the vessel. The cost for each has almost doubled, the newspaper said. …The original problem with the submarine dates back to 2013, when it was discovered that it was about 100 tons heavier than it needed to be. That caused a problem for its buoyancy – so it could submerge, but might not come back up again. A former Spanish official told the Associated Press at the time that someone had put a decimal point in the wrong place, and “nobody paid attention to review the calculations”. …the base at Cartagena will have to be dredged and reshaped to accommodate the now-floating longer vessel, the El País report said. Spain’s Defence Minister Margarita Robles, speaking on Spanish radio, admitted that “there have been deficiencies in the project”.

Call me crazy, but “deficiencies” doesn’t really describe what happened. Almost makes the Pentagon look frugal. Almost makes the German intelligence service look competent.

For previous examples of great moments in foreign government, click here, here, here, here, here, here, here, here, here, and here.

P.S. In other words, my “government in cartoons” collection applies equally no matter where you travel.

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Fake Poverty Data from the European Commission and New York Times

If you look at the top of your screen on my home page, you’ll notice that I have a collection of special pages such as the Bureaucrat Hall of Fame and examples of what happens when you mix government and sex.

I’m thinking of creating a new page, but I need a pithy way of describing leftists who lie about poverty. And there are plenty of them.

• The United Nations.
• The Organization for Economic Cooperation and Development.
• The Equal Welfare Association.
• Germany’s Institute of Labor Economics.
• The Obama Administration.

Today, we identify some additional members who are eligible for this disreputable club.

And we’ll start with the European Commission.

Here’s a chart from a recent report that supposedly shows poverty rates in various European nations.

If you compare the “at-risk-of-poverty rate” for various nations, you’ll notice some very odd outcomes.

For instance, the tiny tax haven of Luxembourg is one of the world’s wealthiest nations, yet it supposedly has more poverty than Hungary. And super-rich Switzerland has more poverty than Slovakia. And oil-rich Norway has more poverty than the Czech Republic.

Are all those rich nations in Western Europe really suffering from higher poverty rates than some of the Eastern European countries still recovering from communist rule?

Of course not. The chart is based on a big, fat lie.

And I know it’s a lie because if you look in the glossary at the end of the long report, you’ll see that the bureaucrats openly admit that their so-called poverty chart has nothing to do with poverty and nothing to do with living standards (I’ve underlined the most important parts).

Interestingly, the bureaucrats in Brussels included a chart in the study revealing the level of inaccuracy for each country.

Here’s a look at the dishonest poverty rate (the blue diamond) compared to a measure of “severe material deprivation” that presumably does a better job of showing the real number of poor people (the red diamond).

By the way, I’m not a huge fan of the European Commission’s measure of “severe material deprivation” since it includes variables such as having a car, a color TV, and the money to take a one-week vacation.

But that’s a separate story.

Let’s look at other new members of our club.

An Eduardo Porter column in the New York Times also used the dishonest definition of poverty.

How can it be that the United States spends so much money fighting poverty and still suffers one of the highest child poverty rates among advanced nations? One in five American children is poor by the count of LIS, a data archive tracking well-being and deprivation around the world. …the United States tolerated more child poverty in 2012 than 30 of the 35 countries in the Organization for Economic Cooperation and Development, a grouping of advanced industrialized nations. The percentage of children who are poor is more than three times as high in the United States as it is in Norway or the Netherlands. America has a larger proportion of poor children than Russia.

And here’s a chart from the article that definitely makes the United States look bad.

But, unless you read the column carefully, you would have missed this all-important detail.

…international standards that set the poverty line at one-half the income of families on the middle rung of the income ladder.

In other words, everything in the article, and all the numbers in the chart, have nothing to do with actual poverty. Instead, we’re simply looking at an indirect measure of income distribution.

And the United States is made to look bad because our median income is generally much higher than it is in other nations.

How absurd.

You’ll think I’m joking, but you can dramatically reduce “poverty,” based on this dishonest definition, if you randomly kill rich people.

Let’s conclude by looking at the U.K.-based Guardian‘s article about supposed poverty in Hong Kong.

A record number of Hong Kong residents live in poverty, with one fifth of the population falling below the poverty line despite economic growth, according to new government figures. The number of people living below the poverty line rose to 1.35 million in 2016, about 20% of the city’s population. The number is the highest number of poor since the government began publishing statistics in 2009. Despite opulent wealth, Hong Kong is a deeply unequal society. …The number of poor rose despite the government raising the poverty line last year. For single person households it is set at HK$4,000 (£388). It is HK$9,000 (£873) for a two person home and HK$15,000 (£1,455) for a family of three.

There’s a small problem and big problem with this article. The small problem is that it states that the number of poor people increased “despite” an increase in the poverty line.

Huh?!?

If the government raises the threshold, of course it will seem like more people are poor. The article should replace “despite” with “because.”

Tom Worstall, writing for CapX, explains the big problem in the article.

One of the great injustices of our age is, as The Guardian reported…, that 20 per cent of the people in Hong Kong, one of the richest places on the planet, live in poverty. …The Guardian [is] waxing indignant over things it doesn’t understand. …there’s an important underlying point: inequality – not poverty – is being measured here. The international definition of poverty is less than $1.90 a day. There’s no one in Hong Kong on this at all, therefore there’s no poverty. …we’re told that the poverty line in Hong Kong is HK $4,000 per month (roughly £380) for an individual which certainly doesn’t seem like much. Yet when we plug that into a comparison of global incomes we find that, accounting for price differences across geography, it’s firmly in the top fifth of all global incomes. In other words, the poorest 20 per cent in Hong Kong are still find themselves in the richest 20 per cent of all humans.

Given the praise I’ve heaped on Hong Kong, I also can’t resist sharing this excerpt even though it’s a separate topic.

As Hong Kong so vividly demonstrates, the…economy in which the poverty line is defined as being rather rich by global standards must have something going for it. According to the World Bank’s figures, back in 1960 Hong Kong was at around the average level of income for the planet, with GDP per capita at a little over $400 (in 1960 dollars). Today the figure is slightly over $40,000 per head while the global average has only struggled up to $10,000 or so. An over performance by a factor of four isn’t that bad over half a century, is it?

Amen.

If we actually care about reducing genuine poverty, there’s no substitute for the miracle of compounding growth.

Which is why our friends on the left, if they actually cared about poor people (and I think most of them genuinely do care), should focus on growth rather than being fixated on redistribution.

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The Economic Cost of Protectionism

I get offended when I hear people argue that Donald Trump is another Ronald Reagan. I’m not saying that out of animosity to the President. I also got offended when people compared Bush 41 or Bush 43 to Reagan.

I realize Reagan was not perfect, but I think he genuinely believed in free enterprise and he moved the country in that direction. Other GOPers, not so much.

That’s especially true on the issue of trade. Reagan’s goal was to expand markets. Trump, by contrast, seems inspired by Herbert Hoover.

So when CNBC asked for my thoughts on the President’s protectionism, I wasn’t overly optimistic.

Based on eight simple questions, I explained the economy-wide argument for free trade back in 2011. Simply stated, if it’s bad for prosperity for governments to impose taxes, regulation, and intervention on trade inside a country, then it’s also bad for prosperity for government to impose taxes, regulation, and intervention on trade that crosses national borders.

But maybe the case for free trade is easier to understand if we consider how various specific groups are harmed by protectionism.

Taxpayers – Tariffs are taxes. So when Trump imposes $13 billion of tariffs on Canada and $37 billion of tariffs on China, what’s really happening is that he’s increasing taxes by those amounts on American consumers. Trade taxes technically are paid by importers, but the real burden is borne by individuals, just as individuals bear the cost when a business writes a check for the corporate income tax.

Workers – The “seen” effect of protectionism is that a few jobs are saved in a certain sector. But because the economy-wide cost of saving those jobs is so high, the “unseen” effect of protectionism is that overall employment falls. To cite just one example, Trump’s proposed taxes on auto imports are projected to reduce net employment by 195,000-624,000 jobs.

Consumers – When tariffs are imposed, selected special interests are shielded from competition and they respond by raising prices. This is bad news for households. Consider the case of washing machines. In the opening salvo of his war on trade, Trump imposed higher taxes on imported machines earlier this year. This headline from Mark Perry at AEI shows the consequences.

Retailers – As trade taxes ripple through the economy, one obvious adverse effect is that stores have to raise prices, which leads to lower sales. But that microeconomic impact just part of the damage. The combination of trade taxes and higher prices also put a dent in household budgets, and this macroeconomic impact leads to less overall spending on other items.

Exporters – When Trump unilaterally imposes higher taxes on trade, other nations almost always respond with tit-for-tat protectionism. And when these other nations target American products, that necessarily reduces exports.

Manufacturers – One of the big buzz phrases in business is “global supply chains,” which is simply a way of saying that companies have developed intricate networks to ensure the best inputs at the best prices. Trump’s tariffs have disrupted these networks by raising the prices of certain inputs. But the damage isn’t just higher prices.

Investors – At the end of the interview, I said Trump’s latest protectionist measures were akin to going from 1 month pregnant to 3 months pregnant. Except we’re talking about Rosemary’s Baby, not a bundle of joy. At the risk of mixing my cinematic references, continued 1930s-style protectionism eventually could produce Chucky after 9 months.

Hmmm…., maybe I should stick to economics and let movie critics develop analogies.

Since investors were my last category of victims, it’s very appropriate that we conclude today’s analysis by looking at some passages from a very good column by the Chief U.S. Economist for Morgan Stanley in the New York Times.

A protracted, escalating cycle of trade tensions has begun. In the latest action, the United States has proposed a 10 percent tariff on $200 billion in Chinese goods. …Even if all the proposed actions don’t go into effect, prolonged uncertainty alone can have a measurable impact on economic growth, and we should not underestimate the risks. …Just the threat of trade actions, even if there is no follow-through, is enough to dent business sentiment and investment. …roughly half of the growth we are seeing now is a result of a side effect of trade tensions — “doomsday prepping.” Global companies are stockpiling raw materials, intermediate goods and finished goods before tariffs take effect and raise the prices of those goods.

But the damage of protectionism will show up in other ways as well.

While the most direct effects will likely come from retaliatory measures that dent American exports, those impacts are just a fraction of what should be considered. Economists also need to consider the indirect effects of tariffs on consumer demand. Of the first $50 billion of announced tariffs, less than 2 percent apply to consumer goods. So the spillover effect on consumer demand — tariffs passed on as higher prices to consumers — should be quite small. But consumer goods represent more than 30 percent of the latest round of tariffs…firms can absorb the tariffs and cut costs elsewhere, but labor is the largest line item, which means layoffs or slower hiring. …At some point, investors will start to question whether global supply chains can withstand the escalating pressures from multiple rounds of tariffs, and financial markets may start to react.

In other words, there are no winners in a protectionist battle. Except, of course, for the army of lobbyists who get fat contracts to manipulate the system. So the swamp wins, but the rest of us lose.

P.S. As I noted in the interview, I don’t buy the argument that Trump is using protectionism to fight protectionism.

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The Second Social Security Crisis

If you did man-on-the-street interviews across America and asked people about Social Security, I suspect most of them would have some degree of understanding about the program’s looming fiscal crisis.

Since they’re not policy wonks, they presumably wouldn’t know the magnitude of the problem (not that I blame them since I once underestimated the shortfall by $16 trillion).

I also doubt many of them would be able to explain why the so-called Trust Fund is an accounting fiction, which is understandable since even supposedly knowledgeable people pretend IOUs are real assets.

But at least they know the program’s finances are a giant mess and that we face a fiscal crisis.

That being said, there’s a second crisis in the program that doesn’t get nearly as much attention. Simply stated, the program is a rotten deal for workers.

I explained both crises in this video I narrated for the Center for Freedom and Prosperity.

Today, thanks to a new report from the Heritage Foundation, we have a great opportunity to peruse up-to-date numbers on the second Social Security crisis.

Here’s the problem, succinctly defined.

With Social Security consuming such a large component of workers’ paychecks and offsetting their own private savings, it is important that workers receive a valuable benefit from Social Security—one at least as good as they, as a whole, could obtain from saving on their own. This analysis looks across the United States and across generations to see if Social Security does in fact provide that.

Sadly, Social Security does a crummy job of giving workers a decent amount of retirement income.

Taking an average of all 50 states and the District of Columbia, the average worker receives significantly less from Social Security than he would have if he had conservatively invested his Social Security payroll taxes in the market. …Individuals with lower life expectancies often lose greatly. This occurs because they receive little or nothing in benefits and cannot pass along all their lost contributions to their surviving family members. …Younger workers face lower, and even negative, returns from Social Security compared to older workers. This comes as a result of paying higher average Social Security tax rates over their lifetimes, coupled with a two-year increase in Social Security’s normal retirement age—as well as the benefit cuts that will occur.

The bottom line is that the implicit rate of return from Social Security is very inadequate compared to the genuine rate of return that could be obtained if workers could invest their payroll taxes in personal retirement accounts.

Here’s the key table from the Heritage study, showing rates of return for today’s young workers based on how long they live.

You have to wonder why so many young people are intrigued by socialism when they’re the ones getting screwed by big government!

Anyhow, there are 12 tables in the report showing lots of additional data, including breakdowns based by state. The entire study is worth a look.

But for those short on time, the conclusion is a very clear summary of why we need to fix Social Security’s rate-of-return crisis as well as the program’s fiscal crisis.

The results are overwhelmingly clear. Americans would be better off keeping their payroll tax contributions and saving them in private retirement accounts than having to sacrifice them to the government’s broken Social Security system. Social Security’s design has, over the decades, presumed that many Americans are too incompetent to make informed decisions for themselves, but few Americans believe that the government knows better than they do what is best for them and their families. Moreover, Social Security’s financial structure effectively guarantees that workers will receive extremely low, or even negative, returns on their payroll taxes.

P.S. Fixing Social Security is simple, but it won’t be easy. Benefits would have to be preserved for current retirees and older workers, so there would be a “transition cost” as we shift to a “funded” system of personal accounts.

P.P.S. But reform is possible. If you want real-world role models of retirement systems based on private saving, take a look at the Australian system, the Chilean system, the Hong Kong system, the Swiss system, the Dutch system, the Swedish system, or even the system in the Faroe Islands.

P.P.P.S. Our friends on the left have a solution – albeit misguided – for Social Security’s fiscal crisis. But their approach would greatly worsen the rate-of-return crisis.

P.P.P.P. S. You can enjoy some Social Security cartoons here, here, and here. And we also have a Social Security joke if you appreciate grim humor.

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Protecting Taxpayers with Supermajority Requirements

The best budget rule in the United States is Colorado’s Taxpayer Bill of Rights. Known as TABOR, this provision in the state’s constitution says revenues can’t grow faster than population plus inflation. Any revenue greater than that amount must be returned to taxpayers.

Combined with the state’s requirement for a balanced budget, this means Colorado has a de facto spending cap (similar to what exists in Switzerland and Hong Kong).

The second-best budget rule is probably a requirement that tax increases can’t be imposed without a supermajority vote by the legislature.

The underlying theory is very simple. It won’t be easy for politicians to increase the burden of government spending if they can’t also raise taxes. Particularly since states generally have some form of rule requiring a balanced budget.

Basically a version of “Starve the Beast.”

Anyhow, according to the National Council of State Legislatures, 14 states have some type of supermajority requirements.

And more states are considering this reform.

Here are some excerpts from a column in the Washington Post.

Florida Republicans are pursuing a plan to make it harder for lawmakers to raise taxes in the state, adding new hurdles for Democrats hoping to enact bold social programs such as “Medicare for all” and more robust education spending. …Florida’s Republican lawmakers have approved a ballot measure that, if approved by the voters, would require a two-thirds “supermajority” of the legislature to enact any new taxes. …In…additional states — …Oregon and North Carolina — conservative lawmakers and business groups are currently advancing similar measures… The supermajority requirements have proved effective at keeping taxes low in the states where they have been implemented, said Joel Griffith of the American Legislative Exchange Council… “These supermajority rules make policymaking incredibly difficult,” said Elaine Maag, senior research associate at the Tax Policy Center, a nonpartisan think tank. “If a state can’t increase spending because of these very high bars for raising taxes, they can’t expand programs.”

Dean Stansel crunched the numbers in 1998 and got some encouraging data.

There is some evidence that supermajority requirements have at least helped to restrain the growth of taxes. From 1980 to 1996, state tax burdens as a share of personal income increased by 1.1 percent in states with supermajority requirements. Taxes rose five times faster in states without such requirements. In 10 states, residents face higher top personal income tax rates today than they did in 1990. None of those states require supermajority approval for tax hikes. None of the 13 supermajority states have higher top rates today than they did in 1990, and three of them have lowered their top rate in the 1990s.

Academic experts also have found positive effects.

In a 1990 study published in the William and Mary Law Review, Jim Miller and Mark Crain found some evidence of modest spending restraint.

Seven states require approval of tax proposals by a super-majority vote in the legislature. …According to this hypothesis, the amount of revenue available to politicians resembles a budget constraint, and when this constraint shifts, government spending consequently changes. …the tax-and-spend literature suggests a causal connection that should be controlled. This variable is expected to produce a negative coefficient because in making an increase in revenues more difficult, the requirement tightens the total constraint on spending options. …The super-majority required to increase taxes variable is negative, as expected, although it is significant at only the 10% level in the three models.

In a 2000 study published in the Journal of Public Economics, Brian Knight also determined that supermajority provisions limited taxation.

This paper measures the effect of state-level supermajority requirements for tax increases on tax rates. …A model is presented in which legislatures controlled by a pro-tax party adopt a supermajority requirement to reduce the majority party agenda control. The propensity of pro-tax states to adopt supermajority requirements results in an underestimate of the true effect of these requirements on taxes. To correct this identification problem, the paper first uses fixed effects to control for unobserved attitudes and then employs instruments that measure the difficulty of amending state constitutions. The paper concludes that supermajority requirements have significantly reduced taxes.

In a 2014 study published in State Politics & Policy Quarterly, Soomi Lee concluded that a supermajority has restrained the fiscal burden in California.

My article examines whether supermajority vote requirements (SMVR) to raise taxes in California’s constitution suppresses state tax burdens. The rationale behind the rule is to contain the growth of government by making it costly to form a winning coalition to raise taxes. …I take a different approach from extant literature and estimate the causal effect of SMVR by using synthetic control methods. The results show that, from 1979 to 2008, SMVR reduced the state nonproperty tax burden by an average of $1.44 per $100 of personal income, which is equivalent to 21% of the total tax burden for each year. The effect…has abated over time.

This last study is remarkable. The long-run fiscal outlook is quite grim in California, so just imagine how much worse it would be if the supermajority requirement didn’t exist.

I’ll close with this amateurish visual that I created.

Though the evidence from California shows the kitten shouldn’t be peacefully sleeping if there is a supermajority requirement.

The best way to think of such a provision is that it is akin to putting locks on your doors in a crime-ridden neighborhood. The crooks may figure out how to mug you on the street or break through your windows, so you’re still in danger.

But having locks on your doors is definitely better than not having them.

P.S. It’s not a fiscal rule, but the best tax policy for a state is to have a zero income tax. The second best rule is for a state to have a flat tax.

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Is Norway a Role Model for “Democratic Socialism”?

Earlier this year, I explained why Nordic nations are not socialist. Or, to be more precise, I wrote that if they are socialist, then so is the United States.

And my slam-dunk evidence was this chart from the Fraser Institute’s Economic Freedom of the World., which shows that there is almost no difference in overall economic liberty when comparing the United States with Finland, Norway, Sweden, and Denmark.

This doesn’t mean, incidentally, that we have identical policies. I pointed out that the United States gets a better (less worse) score on fiscal policy, but also reiterated that Nordic nations are more market oriented than America when looking at other variables (especially rule of law).

The net effect, though, is that we wind up with near-identical scores.

I’m rehashing this old data because there’s a column in The Week that celebrates Norway as an example of “democratic socialism.”

The spectacular upset victory of Alexandria Ocasio-Cortez in her recent New York congressional primary election has catapulted the topic of democratic socialism to the top of America’s political discussion. …we have a country that very closely approximates the democratic socialist ideal. It’s a place that is…considerably more successful than the United States on virtually every social metric one can name. I’m talking about Norway. …Norwegian workers are heavily protected, with 70 percent of workers covered by union contracts, and over a third directly employed by the government. The Norwegian state operates a gigantic sovereign wealth fund, and its financial assets total 331 percent of its GDP… Meanwhile, its state-owned enterprises are worth 87 percent of GDP. Of all the domestic wealth in Norway, the government owns 59 percent, and fully three-quarters of the non-home wealth.

I don’t know if those specific statistics are true, but I certainly don’t disagree with the assertion that Norway has a large public sector.

But here are a couple of passages that don’t pass the laugh test.

Norway is unquestionably more socialist than Venezuela… Indeed, it is considerably more socialist than supposedly-communist China.

This is absurdly inaccurate. If there was a thermonuclear version of wrong, you would be seeing a giant mushroom cloud.

Here’s the data on overall economic freedom for Norway, Venezuela, and China. As you can see, Norway is far more market oriented.

So how does the author, Ryan Cooper, rationalize his fantastical assertion of Norwegian super-socialism?

If you read the article, he has a tortured definition of democratic socialism. One of his variables is government ownership, which normally would be a reasonable piece of data to include.

But it’s an artificial number when looking at Norway since the government controls the nation’s oil and also has a big sovereign wealth fund that was financed by oil revenue.

In other words, Norway is geographically lucky because all that oil boosts Norwegian GDP. It makes Norwegians relatively prosperous. And it definitely helps partially offset the economic damage of big government.

But it’s nonsensical to argue that oil-rich Norway somehow provides evidence for overall notion of democratic socialism. It’s sort of like looking at data for Kuwait and asserting that the best economic system is a hereditary sheikdom.

Yet he wants people to support socialism simply because of Norway, as illustrated by this final excerpt.

…when it comes to building a decent place to live, Norway is completely blowing America out of the water. So while conservatives have been pointedly ignoring the most obvious and relevant piece of evidence in their spittle-flecked tirades against socialism, Norwegians can and do point to the United States as an example of what happens when you let capitalism run wild.

But there’s one itsy-bitsy, teeny-weeny problem. As you can see from the chart, Norway and the United States have almost identical levels of economic liberty.

So if America is “capitalism run wild,” then so is Norway. Or if Norway is “socialism,” then so is the United States.

The bottom line is that both the United States and Norway are admirable nations by global standards. We both rank in the top-20 percent for overall economic freedom.

But we’re not Hong Kong or Singapore, so we both obviously should do a better job of following the recipe for greater prosperity.

For additional information about what’s good and bad about Norway and other countries in the region, I recommend these columns from January 2015 and June 2015.

For additional information about why socialism is bad (both democratic and totalitarian versions), just open your eyes and look at world evidence. Or you can also peruse these columns from June 2017 and August 2017.

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Trade, Farm Subsidies, and Mitchell’s Law

A couple of days ago, I shared a segment from a TV interview about trade and warned that retaliatory tariffs were a painful consequence of Trump’s protectionism.

I also was asked in that interview about the negative effect on farmers. I speculated that farmers (and many other groups) were giving Trump the benefit of the doubt in hopes that this process might actually lead to trade liberalization – sort of like what Trump suggested at the G7 meeting.

While I was depressed and glum in that interview, it turns out that things are worse than I thought.

Instead of keeping their fingers crossed for trade liberalization, farmers may be nonplussed by protectionism because President Trump’s expansion of bad trade policy may also wind up being the pretext for an expansion of bad agricultural policy.

The Wall Street Journal opines on the upside-down logic of Washington.

When pork prices collapsed amid a global trade war during the Great Depression, the Roosevelt Administration in 1933 had an idea—slaughter six million piglets. Put a floor under prices by destroying supply. It didn’t work. Now the Trump Administration may try its own version of Depressionomics by using the Commodity Credit Corporation (CCC) to support crop prices walloped by the Trump tariffs: Hurt farmers and then put them on the government dole.

Given the economic misery of the 1930s, it should be obvious that copying the awful policies of Hoover or Roosevelt is never a good idea.

But that’s not stopping the crowd in Washington.

In 2012 Congress put limits on CCC purchases of surplus commodities and on price supports after the Obama Administration used it for a costly 2009 disaster program without Congressional approval. But then out of the blue this year, Congress lifted the limits on CCC’s power to remove surplus crops from the market to support prices. Republicans made that change because the Trump Administration wants to use the CCC to mitigate the damage to U.S. crop prices from the Trump trade war. In a June 25 USA Today op-ed, Agriculture Secretary Sonny Perdue wrote that the Administration is ready to “begin fulfilling our promise to support producers, who have become casualties of these disputes.” Too bad these U.S. casualties were caused by friendly fire.

And don’t be surprised if today’s handouts wind up becoming permanent entitlements.

The bigger danger is that the need for Mr. Perdue’s “help” is unlikely to be temporary. …With the higher tariff, Beijing will turn even more to Brazil and Argentina for soy and grains; Australia and Chile for fruit, nuts and wine; and Canada and the European Union for some or all. …The CCC is a relic of Dust Bowl America. Today the American farmer is high-tech, productive and eager to compete. Mr. Trump’s trade policy is creating a problem that didn’t exist and next he may create another one to ease the pain he has caused.

In other words, one bad government policy is being used the justify another bad government policy.

This is a classic example of Mitchell’s Law, otherwise known as the lather-rinse-repeat cycle of government failure.

We see it when government over-spending is used as an excuse for big tax increases.

We see it when government-run healthcare is used as an excuse to impose nanny-state policies.

We see it when government drug-war failures are used as an excuse to push for gun control.

And now we’re seeing it when bad trade policy is leading to more bad farm subsidies.

I realize this is pure fantasy, but wouldn’t it be nice to have the reverse approach? How about we simultaneously eliminate trade barriers and get rid of the Department of Agriculture?

Given the inherent corruption of Washington, I won’t hold my breath for that outcome. I’ll have more luck waiting for this fantasy to become reality.

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A Primer on Marginal Tax Rates, Part I

Three years ago, I shared two videos explaining taxation and deadweight loss (i.e., why high tax burdens are bad for prosperity).

Today, I have one video on another important principle of taxation. To set the stage for this discussion, here are two simple definitions

• The “average tax rate” is the share of your income taken by government. If you earn $50,000 and your total tax bill is $10,000, then your average tax rate is 20 percent.
• The “marginal tax rate” is the amount of money the government takes if you earn more income. In other words, the additional amount government would take if your income rose from $50,000 to $51,000.

These definitions are important because we want to contemplate why and how a tax cut helps an economy.

But let’s start by explaining that a tax cut doesn’t boost growth because people have more money to spend.

I want people to keep more of their earnings, to be sure, but that Keynesian-style explanation overlooks the fact that the additional “spending power” for taxpayers is offset when the government borrows more money to finance the tax cut.

Instead, when thinking about taxes and prosperity, here are the three things you need to know.

1. Economic growth occurs when we increase the quantity and/or quality of labor and capital.

2. Taxes increase the cost of whatever is being taxed, and people respond by doing less of whatever is being taxed.

3. To get more prosperity, lower tax rates on productive behaviors such as work, saving, investment, and entrepreneurship.

All this is completely correct, but there’s one additional point that needs to be stressed.

4. The tax rate that matters is the marginal tax rate, not the average tax rate.

I discussed the importance of marginal tax rates in 2016, pointing out that Cam Newton of the Carolina Panthers was going to lose the Super Bowl (from a financial perspective) because the additional tax he was going to pay was going to exceed the additional income he would earn. In other words, his marginal tax rate was more than 100 percent.

Mon Dieu!

But I also included an example that’s more relevant to the rest of us, looking at our aforementioned hypothetical taxpayer with a 20 percent average tax rate on annual earnings of $50,000. I asked about incentives for this taxpayer to earn more money if the marginal tax rate on additional income was 0 percent, 20 percent, or 100 percent.

Needless to say, as shown in this expanded illustration, the incentive to earn $51,000 will be nonexistent if all of the additional $1,000 goes to government.

That’s why “supply-side economics” is focused on marginal tax rates. If we want more productive behavior, we want the lowest-possible marginal tax rates so people have the greatest-possible incentive to generate more prosperity.

Here’s a very short video primer on this issue.

One very important implication of this insight is that not all tax cuts (or tax increases) are created equal. For instance, as I explained in a three-part series (here, here, and here), there will be very little change in incentives for productive activity if the government gives you a tax credit because you have kids.

But if the government reduces the top tax rate or lowers the tax bias against saving and investment, the incentive for additional productive behavior will be significant.

And this helps to explain why the country enjoyed such positive results from the supply-side changes to tax policy in the 1920s, 1960s, and 1980s.

Let’s close with some good news (at least relatively speaking) for American readers. Compared to other industrialized countries, top marginal tax rates in the United States are not overly punitive.

Admittedly, this is damning with faint praise. Our tax system is very unfriendly if you compare it to Monaco, Hong Kong, or Bermuda.

But at least we’re not France, where there’s a strong argument to be made that the national sport is taxation rather than soccer.

P.S. I’m not saying tax preferences for kids are wrong. But I am saying they’re not pro-growth.

P.P.S. I mentioned above that Cam Newton – based on his personal finances – lost the Super Bowl even before the opening kickoff. Well, there’s scholarly evidence that teams in high-tax states actually win fewer games.

P.P.P.S. Today’s analysis focuses on the individual income tax, but this analysis also applies to corporate taxation. A company with clever lawyers and accountants may have the ability to lower its average tax rate, but the marginal tax rate is what drives the incentive to earn more income. Which is why reducing the federal corporate rate from 35 percent to 21 percent was the best part of last year’s tax bill.

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The Miracle of Compounding Growth

When I give speeches about public policy issues, people sometimes ask about the impact of various policies on economic growth.

• What will happen to growth if the death tax is repealed?
• How much will GDP be hurt by Trump’s protectionism?
• If HUD is abolished, will there be a growth dividend?

I always respond with a giant caveat about economists being lousy forecasters, and I also warn that there are many policies that determine prosperity, which makes it inherently difficult to estimate the impact of one policy.

But when pressed, I’ll toss out a number – say 2/10ths of 1 percent. And that type of answer almost always seems to disappoint the audience. It’s as if there’s a collective assessment that we shouldn’t waste time fighting for or against certain policies if the impact on growth is so trivially small.

And if you’re planning on dying in the next six months, then maybe it isn’t worth it.

In reality, though, even small differences in growth can make a big difference to prosperity if they can be sustained. This chart, which starts with the Commerce Department’s estimate of GDP for 2017 and is then adjusted for the Census Bureau’s population projections, shows how a “trivial” increase in the growth rate over the next 25 years winds up generating big increases in per-capita GDP.

Maybe I’m not a big and bold thinker, but this kind of improvement is worth fighting for.

Back in 2014, I tried to make this same point with a chart showing how long it takes an economy to double in size based on different growth rates.

It seems obvious that it’s better to be at the top of that chart, like Hong Kong and Singapore, instead of the bottom, like Italy or Greece.

And Veronique de Rugy, in a column for National Review, shared a more sophisticated version of the chart. At the risk of stating the obvious, you want the big circles to happen faster.

Let’s share one more chart, and I put it together because I’m sometimes asked about the potential impact on growth if all libertarian policies were adopted?

Once again, I give a standard caveat about economists and forecasting. And I also explain the principle of convergence so the audience understands it’s more difficult for a rich country to achieve very high growth rates.

But eventually I’ll speculate that an ideal set of policies might increase growth by 1 percent annually.

Which, once again, doesn’t seem to impress people.

In the future, though, I’m going to share this chart, showing historical numbers for U.S. and Mexican per-capita GDP from the Maddison database, augmented by a second (yellow) line showing where America would be if per-capita GDP increased by one-percentage point less each year.

In other words, an additional percentage point of growth may not sound amazingly impressive, but over time it generates amazingly impressive outcomes.

The bottom line is that even trivial pro-growth reforms are worth the effort. Even if it takes a few years for the growth to materialize or if the growth only lasts for a limited period of time.

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Payback’s a B*tch: Americans Suffer Blowback from Trump’s Protectionism

The theoretical case against protectionism is very straightforward. Economic growth suffers when politicians interfere with markets.

The empirical case against protectionism also is very straightforward since there’s lots of data showing that it’s a job killer.

There’s also a political case against protectionism because governments almost always respond to protectionism with protectionism.

I try to summarize those concerns in this short segment from a recent interview with Neil Cavuto.

Unfortunately, retaliation by our trading partners already is causing problems.

Let’s look at a sampling of recent stories.

How about this headline for the Wall Street Journal?

Or this headline from Missouri?

And this headline from CNBC?

Here’s another headline from the Wall Street Journal.

How about this headline from Utah?

And here’s part of a headline from the New York Times.

There are hundreds of such headlines that could be shared, so maybe it’s time to look at the issue from another perspective.

Here’s a map showing the retaliation against American exporters. And it’s only showing the retaliation against Trump’s steel and aluminum tariffs.

But I don’t want to be too depressing.

So let’s consider some good news. Most trade is still unaffected, at least based on this interesting data from the Washington Post.

Though maybe this is also bad news since it shows how much additional damage Trump can do to the global economy.

My nightmare scenario is that Trump imposes additional trade taxes, which leads other nations to respond with their own trade taxes. Trump then gets offended by those responses by levying another layer of taxes, which triggers more retaliation by other nations.And so on and so on.

Lather, rinse, repeat, all the way to a global downturn (a repeat of the Great Depression is unlikely since that would require big increases in income taxes and many other bad policies as well).

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Statism in Five Images

Last month, we summarized libertarianism in five images.

In the interest of fairness, now let’s give equal time to the other side. After all, statists deserve an opportunity to present their case.

And we’ll start with this image, which makes the same point about coercion found in the “two-sentences” column I shared two months ago.

Unfortunately for our leftist friends, coercion doesn’t lead to effectiveness.

So this next image aptly captures the inherent problem of statist solutions.

So now you understand why Santa Claus sometimes has a problem.

And what happens when you mix the coercive nature of government with the fantasy world of government-provided goodies? Well, President Eisenhower already gave us the answer, but here’s the visual version.

But let’s not forget somebody has to pay for this collectivist utopia.

And that brings us to the joy of taxation.

“And then men with guns take money from your parents and give it to me.”
byu/Anen-o-me inlibertarianmeme

Last but not least, we’ll close with an image that illustrates how statism works in practice, which is why the message in this poster is so painfully true.

Having now presented five images for libertarianism and five images for statism, I suppose I could put together a poll to see which philosophy has more support.

But since libertarians are against untrammeled majoritarianism, that somehow doesn’t seem right. So instead I’ll simply recycle this bit of humor on the difference between the public sector and the private sector. Actually, there’s a scene from Ghostbusters that tells us everything we need to know.

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5000 Columns

Although the original goal for my blog was to periodically share information with congressional staffers and journalists, the audience has expanded and the site has now become the primary outlet for my work on public policy.

And today is a milestone of sorts since it is my 5,000th column, something I would not have predicted when I posted my first entry back on March 29, 2009.

So that gives me an excuse to update the readership data from 2015.

Back then, based on visits as a share of population, I noted that I was most popular in Washington, DC. Though perhaps “most popular” would be the wrong term since I’m sure some readers from that corrupt city do not like my message.

In any event, those numbers were not surprising since DC is filled with people who work on public policy, so they have a reason to read my work. And I also wasn’t surprised that Virginia as in second place since that’s the home of many people who work in DC-related public policy.

And that hasn’t changed based on these updated numbers showing where I get the most readers and fewest readers.

For what it’s worth, I’ll make the claim that Colorado is the most libertarian-leaning state based on this data. The folks in the Centennial State read my writings without having a work-related reason. So I hope they all paid close attention to my column about TABOR.

And New Hampshire would be in second place based on that analysis, which probably isn’t too surprising since it’s the home of the Free State crowd.

The data on international readership is even more interesting, in part because I have access to data on both visits and page views. Here are the numbers, both expressed as a percentage of the jurisdiction’s population.

The most striking result is that Vatican CIty (which wasn’t even in the top-20 three years ago) is where I have the highest percentage of readership. Though I definitely don’t think this means “most popular” since my columns about the economic views of Pope Francis have been less than flattering (see here, here, here, here, and here).

Measured by page views, however, the Cayman Islands and Monaco take the top two spots. Given my work on tax havens and tax competition, I’m guessing that these readers actually like my writings.

Indeed, you’ll notice that “offshore” jurisdictions are very well represented, whether based on visits or page views.

The second-most striking result is that Iceland appears on both lists and even ranks above the United States for page views. In my fantasies, I’ll assume the striking women of Iceland are avid readers. In reality, it’s more likely to be the burly fishermen.

Another odd outcome is that there’s a high level of page views from the Faroe Islands. Are they big fans of their private Social Security system? My writings on Australian pension reform may also explain the high level of visits from Down Under.

Since I’m writing a narcissistic column today, I’ll close with by sharing my recent interview with “Spanish Libertarian.” He asked several very good questions about the challenges of trying to expand freedom.

P.S. There are some places where people don’t appreciate my work. I’ve never had a single visit or page view from Niue, Norfolk Island, Svalbard, or Tokelau. Given the very small populations of those obscure jurisdictions, I’ll try not to take it personally. Oh, and I’ve also never had a visitor or page view from North Korea. But I’m assuming that nation’s totalitarian government blocks access so citizens don’t get exposed to this or this.

P.P.S. I’m no Cal Ripken or Lou Gehrig, but I have a personal streak. I’ve written a column every day since November 10, 2009. I realize the world won’t end if I skip a day, but maintaining this streak is a way of forcing myself to stay productive. Now I have to figure out how to be effective.

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Debating Trump’s Tax Reform

Guided by the principles of a simple and fair flat tax, I’ve been toiling for decades in the vineyard of tax reform. At the risk of mixing my metaphors, I usually feel like Don Quixote, engaged in a futile quest. Convincing politicians to reduce their power is not an easy task, after all.

But it is possible to make incremental progress. I’ve argued, ad nauseam, about the need to lower the corporate tax rate and the benefits of ending the state and local tax deduction, and we actually took big steps in the right direction last year.

Indeed, while the final legislation was far from perfect, it was certainly better than I expected.

But there’s no such thing as a permanent victory in Washington. The debate has now shifted from “is the tax plan a good idea?” to “is the tax plan working?” And that was the focus of my recent CNBC debate with Austan Goolsbee, the former Chairman of Obama’s Council of Economic Advisers.

Interestingly, Austan and I agreed on several issues.

• We both agreed that the short-run effects (bonuses and stock buybacks) are comparatively minor.
• We both agreed that the lower corporate tax will boost international competitiveness.
• We both agreed that the job market under Trump is doing reasonably well, but is not noticeably better than it was under Obama.
• We both agreed that the higher growth produced by the tax bill will mostly occur because of increased investment.

At the risk of digressing, I should have mentioned that Trump’s corporate rate cut, while a big step in the right direction, should be viewed as a first step. As illustrated by this chart, the overall US corporate rate is still higher than the average for other advanced nations.

Let’s now get back to the interview. Goolsbee and I didn’t agree on everything.

• Austan is fixated on class warfare, which I think is very bad economics because it means high marginal tax rates and/or a heavier tax bias against saving and investment.
• He also frets about deficits, which is rather ironic since he didn’t seem to worry about red ink when Obama was pushing his failed stimulus scheme. In any event, I pointed out that there is no long-run tax cut.

Last but not least, here are some additional points from the interview

• I repeatedly expressed concern that good tax policy won’t be very sustainable unless politicians restrain the excessive growth of government spending, both in the short run and long run.
• I also pointed out that the restriction on the state and local tax deduction will help the national economy if it deters some big states from raising taxes (though that reform certainly isn’t slowing down the big spenders in New Jersey).
• Even small differences in economic growth, if sustained over time, can make a big difference in living standards.
• We should be worried that Trump will sabotage his tax cut with protectionism.

The bottom line is that last year’s tax plan resulted in a less-destructive tax code. That doesn’t guarantee fast growth since we also have to look at other policies, but it will help.

P.S. I indirectly tangled with Goolsbee in about taxes in 2010 and about spending in 2012.

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The Western World’s Second-Most Depressing Chart

Last week, I shared very grim data, going all the way back to 1880, on the growth of the welfare state.

I even claimed that the accompanying graph was the “western world’s most depressing chart” because it showed the dramatic increase in the burden of government spending for redistribution programs.

And I didn’t even mention that the numbers likely will get even worse because of changing demographics.

Now it’s time for the western world’s second-most depressing chart. Like the first chart, the data for this second chart comes from “Our world in data,” only this time it shows the relentless and astounding (in a depressing way) expansion in tax burdens starting in 1868. It only shows four countries, but other western nations would show the same pattern.

What isn’t shown in this chart is that the tax burden used to be reasonable because governments generally did not have income taxes.

The United Kingdom was an early adopter, but France, Sweden, and the United States didn’t impose that onerous levy until the 1900s. And it’s no coincidence that the tax burden exploded once politicians learned to exploit that source of revenue.

An obvious lesson is that it is never a good idea to give politicians a new source of revenue. We see in the above chart what happened once nations imposed income taxes. We’ve also seen increases in fiscal burdens in nations that imposed value-added taxes (which is why Americans should fight to their dying breaths before allowing that levy in the United States).

From the perspective of politicians, they like new sources of revenue because that increases “tax capacity,” which is an Orwellian term that describes their ability to grab more money from the economy’s productive sector.

And here’s another chart from “Our world in data” showing how income taxes and VATs (along with income-tax withholding) have become ubiquitous.

Very depressing trends. Reminds me of the biased grading of tax regimes from the World Bank.

Let’s close with the tiny bit of good news from the website. Here’s a chart showing how top rates for the personal income tax dropped substantially between 1979 and 2002.

This happened, needless to say, because of tax competition. As globalization expanded, it became easier and easier for taxpayers to move themselves and/or their money from high-tax nations to low-tax jurisdictions.

Politicians thus were forced to lower tax rates so the geese with the golden eggs didn’t fly away.

Sadly, updated versions of this chart now show top tax rates heading in the wrong direction, in large part because tax havens have been weakened and politicians no longer feel as much competitive pressure.

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Calvin Coolidge, the Declaration of Independence, and Limits on the Power of Government

To keep with tradition, it’s time to expand my collection of 4th-of-July columns.

• In 2010, I contemplated the issue of libertarians and patriotism. My view, for what it’s worth, is captured by this t-shirt.
• In 2011, I pondered research about the partisan implications of patriotism and also created a satirical Declaration of Dependency for my left-wing friends.
• In 2012, I shared an inspirational video about freedom and individualism from Ronald Reagan.
• In 2013, I discussed the proper meaning of patriotism in the aftermath of revelations about NSA snooping.
• In 2014, I decided on a humorous approach with one a Remy video about government being “up in your grill.”
• In 2015, I waded into the controversial topic of what happens when flag burning meets the modern regulatory state.
• In 2016, I looked at how government has increased the cost of celebrating Independence Day.
• In 2017, I explained the difference between the statist vision of “positive liberty” and the libertarian vision of “negative liberty.”

Today, we’re going to commemorate a great speech by one of America’s best Presidents.

In 1926, Calvin Coolidge spoke on the 150th anniversary of the signing of the Declaration of Independence. Here’s some of what he said.

When we come to examine the action of the Continental Congress in adopting the Declaration of Independence in the light of what was set out in that great document and in the light of succeeding events, we can not escape the conclusion that it had a much broader and deeper significance than a mere secession of territory and the establishment of a new nation. …It was not because it was proposed to establish a new nation, but because it was proposed to establish a nation on new principles, that July 4, 1776, has come to be regarded as one of the greatest days in history. …In its main features the Declaration of Independence is a great spiritual document. It is a declaration not of material but of spiritual conceptions. Equality, liberty, popular sovereignty, the rights of man — these are not elements which we can see and touch. They are ideals. …It was in the contemplation of these truths that the fathers made their declaration and adopted their Constitution. It was to establish a free government, which must not be permitted to degenerate into the unrestrained authority of a mere majority or the unbridled weight of a mere influential few. …These are our guaranties of liberty. As a result of these methods enterprise has been duly protected from confiscation, the people have been free from oppression.

If you have the time, click on the link and read the entire speech.  But if you don’t have time, I hope the passages I excerpted reveal Coolidge’s appreciation for the philosophy of American independence.

I also like how he links those principles to economics, which is nicely captured in the last sentence.

Sadly, the Supreme Court no longer protects our economic liberties (John Roberts providing the most recent example), but it was nice while it lasted.

Speaking of which, here’s a great conversation between James Buchanan and Walter Williams on the meaning and importance of the Constitution. But that’s just the tip of the iceberg. They cover lots of additional material, including spending limits, tax reform, and free trade.

For what it’s worth, my favorite part of the conversation is about how markets are mutually beneficial, whereas government is a zero-sum, or negative-sum game.

Let’s close with a celebration of the great American tradition of civil disobedience against the state.

Sadly, with the likely exception of gun owners, we no longer seem to have the same ornery attitude as our ancestors. Though Charles Murray has a plan to recreate a culture of civil disobedience.

P.S. Here’s a first-hand account of what patriotism means.

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Young People and the Socialist Delusion

In 2016, I posed a rhetorical question about whether young people are so stupid that they shouldn’t be allowed to vote. After all, many of them thought Bernie Sanders would make a good president (of America, not Greece or Venezuela).

Well, maybe we really should increase the voting age. It seems 2016 was not an anomaly. Millennials are dangerously ignorant.

Here’s some analysis from CNN.

Millennials are…bringing a distinctly Millennial approach to policy and governing. And that might include Democratic socialism. Case in point: Alexandria Ocasio-Cortez, the 28-year-old Democratic socialist who won her primary in New York Tuesday in an upset over a 10-term incumbent. More than any other generation before them, Millennials are OK with socialism. A 2016 Gallup poll found 55% of those then aged 18-29 said they had a positive view of it (it’s worth noting 57% supported capitalism and 78% supported free enterprise). …Bernie Sanders’ presidential campaign was instrumental in mainstreaming Democratic socialism.

What’s particularly galling is that young people are pessimistic about their economic future and they’ve decided to blame capitalism for problems that exist because of excessive government!

Millennials’ economic situation also plays a role. …A recent study by the Federal Reserve Bank of St. Louis found Millennials born in the ’80s have a net worth 34% below what was expected. And student debt since 2009 has doubled to $1.4 trillion… For many cash-strapped Millennials in debt, Democratic socialism isn’t radical, it’s a way to fix a system they believe failed them.

In other words, young people want to make Mitchell’s Law a never-ending reality.

Let’s look at another example. Here’s some of what Michelle Goldberg wrote in a fawning column in the New York Times.

…all over the nation, people, particularly women, are working with near supernatural energy to rebuild democracy from the ground up… For younger people who see Donald Trump’s election as the apotheosis of a rotten political and economic system, it often means trying to remake that party as a vehicle for democratic socialism. …Alexandria Ocasio-Cortez, a 28-year-old democratic socialist, shook the Democratic Party by toppling Joseph Crowley, a 19-year incumbent, chairman of the Queens County Democratic Party and potential heir to House minority leader Nancy Pelosi. …the real red wave may be democratic socialism’s growing political influence, especially among young people. …The D.S.A., to which Ocasio-Cortez belongs, is the largest socialist organization in America. Its growth has exploded since the 2016 election… Many of the D.S.A.’s goals, reflected in Ocasio-Cortez’s platform, are indistinguishable from those of progressive democrats. But if the D.S.A. is happy to work alongside liberals, its members are generally serious about the “socialist” part of democratic socialist. Its constitution envisions “a humane social order based on popular control of resources and production, economic planning, equitable distribution, feminism, racial equality and non-oppressive relationships.”

In other words, these cranks are real socialists. They actually want government to own and manage the means of production (“popular control of resources and production” and “economic planning”).

This is a problem for the non-crazy left.

Talk of popular control of the means of production is anathema to many older Democrats, even very liberal ones. …After Ocasio-Cortez’s win, Pelosi denied Republican claims that socialism is ascendant in the Democratic Party. It’s hard to blame her for being defensive, since for generations “socialist” was considered a slur, and it’s one that’s hurled at Democrats indiscriminately.

But young people seem prone to fantasy.

…one recent survey shows that 61 percent of Democrats between 18 and 34 view socialism positively. The combination of the Great Recession, the rising cost of education, the unreliability of health insurance and the growing precariousness of the workplace has left young people with gnawing material insecurity. They have no memory of the widespread failure of Communism, but the failures of capitalism are all around them.

Needless to say, Ms. Goldberg doesn’t list the “failures of capitalism,” but it’s a very safe bet that she’s blaming free markets for problems caused by government (a common theme in US economic history).

No wonder young people are so deeply confused. This is probably what they’re taught in government schools.

But there is a silver lining. Courtesy of Libertarian Reddit, we can enjoy some humor poking fun at Ms. Ocasio-Cortez’s overly earnest form of socialism.

Amusing, but very unfair to religion. After all, we can’t go back in time to confirm details from the bible.

But we can look today at countries like Cuba, Greece, Venezuela, and North Korea to confirm the utter insanity of supporting any type of socialism.

Let’s close with a video from 2013. It’s about Obamanomics and young people, but it’s really about why big government makes it hard for young people to get ahead.

I especially like the explanation of how young people are big losers because of the entitlement state.

Makes me wonder if Ms. Ocasio-Cortez will take the lead on, say, Social Security reform when she gets to Congress?

Needless to say, I won’t be holding my breath.

P.S. Young people aren’t a (totally) lost cause. They may not like capitalism, perhaps because they confuse it with cronyism, but they are sympathetic to “free enterprise.”

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New Jersey Doubles Down on Class Warfare and Big Government

New Jersey is a fiscal disaster area.

It’s in last place in the Tax Foundation’s index that measures a state’s business tax climate.

It’s tied for last place in the Mercatus Center’s ranking of state fiscal conditions.

And it ranks in the bottom-10 in measures of state economic freedom and measures of unfunded liabilities for bureaucrat pensions.

All of this led me, last October, to warn that the state was suffering from fiscal decay.

Then, two months ago, James Freeman of the Wall Street Journal wrote about how New Jersey’s uncompetitive fiscal system was encouraging highly productive taxpayers to leave the state.

The Garden State already has the third largest overall tax burden and the country’s highest property tax collections per capita. Now that federal reform has limited the deduction for state and local taxes, the price of government is surging again among high-income earners in New Jersey and other blue states. Taxpayers are searching for the exits. …says Jeffrey Sica, founder of Circle Squared, an alternative investments firm. “We structure real estate deals for family offices and high-net-worth individuals and at a record pace those family offices and individuals are leaving the TriState for lower-tax states. Probably a dozen this year at least,”…In the decade ending in 2016, real economic growth in New Jersey clocked in at a compound annual percentage rate of 0.1, just slightly higher than John Blutarsky’s GPA and less than a tenth of the national average for economic growth. The Tax Foundation ranks New Jersey dead last among the 50 states for its business tax climate. …Steven Malanga calls Mr. Murphy’s plan “the U-Haul Budget” for the new incentives it gives New Jersey residents to flee.

You would think that New Jersey politicians would try to stop the bleeding, particularly given the impact of federal tax reform.

But that assumes logic, common sense, and a willingness to put the interests of people above the interests of government. Unfortunately, all of those traits are in short supply in the Garden State, so instead the politicians decided to throw gasoline on the fire with another big tax hike.

The Wall Street Journal opines today on the new agreement from Trenton.

Governor Phil Murphy and State Senate leader Steve Sweeney have been fighting over whether to raise tax rates on individuals or businesses, and over the weekend they decided to raise taxes on both. Messrs. Murphy and Sweeney agreed to raise the state’s income tax on residents making more than $5 million to 10.75% from 8.97% and the corporate rate on companies with more than $1 million in income to 11.5% from 9%. This will give New Jersey the fourth highest marginal income tax rate on individuals and the second highest corporate rate after Iowa.

New Jersey is pursuing class warfare, but the politicians don’t seem to realize that the geese with the golden eggs can fly away.

The two Democrats claim this will do no harm because about 0.04% of New Jersey taxpayers will get smacked. But those taxpayers account for 12.5% of state income-tax revenue and their investment income is highly mobile. The state treasurer said in 2016 that a mere 100 filers pay more than 5.5% of all state receipts. Billionaire David Tepper escaped from New Jersey for Florida in 2015, and other hedge fund managers could follow. Between 2012 and 2016 a net $11.9 billion of income left New Jersey, according to the IRS. The flight risk will increase with the new limit of $10,000 on deducting state and local taxes on federal tax returns. …About two-thirds of New Jersey’s $3.5 billion income outflow last year went to Florida, which doesn’t have an income tax. …The fair question is why any rational person or business that can move would stay in New Jersey.

That’s not merely a fair question, it’s a description of what’s already happening. And it’s going to accelerate – in New Jersey and other uncompetitive states – when additional soak-the-rich schemes are imposed (unless politicians figure out a way to put fences and guard towers at the border).

A few months ago, I conducted a poll on which state would be the first to suffer a fiscal collapse. For understandable reasons, Illinois was the easy “winner.” But I won’t be surprised if there are a bunch of new votes for New Jersey. Simply stated, the state is committing fiscal suicide.

P.S. What’s amazing (and depressing) is that New Jersey was like New Hampshire as recently as the 1960s, with no state sales tax and no state income tax.

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