The Case for Capital Gains Indexing

One of the worst features of the internal revenue code is the pervasive bias against income that is saved and invested.

People who immediately consume their after-tax income are largely untaxed (thankfully, we don’t have a value-added tax), but there are several additional layers of tax on people who set aside income to finance future economic growth.

This is a self-destructive approach since all economic theories – even Marxism and socialism – agree that capital formation is a key to long-run growth and higher living standards.

The ideal answer is fundamental tax reform. For instance, all forms of double taxation are abolished with a flat tax.

But that’s not a realistic option, so what about interim steps?

Interestingly, some progress may be possible. According to a Bloomberg report, the Trump Administration may be on the verge of getting rid of the hidden inflation tax on capital gains.

The White House is developing a plan to cut taxes by indexing capital gains to inflation, according to people familiar with the matter, in a move that…may be done in a way that bypasses Congress. Consensus is growing among White House officials to advance the proposal soon, the people said, to ensure the benefit takes effect before President Donald Trump faces re-election in 2020. Revamping capital gains taxes through a rule or executive order likely would face legal challenges, a concern that reportedly prompted former President George H.W. Bush’s administration to drop a similar plan. …Indexing capital gains would slash tax bills for investors when selling assets such as stock or real estate by adjusting the original purchase price so no tax is paid on appreciation tied to inflation. …The inflation adjustment would amount to a several percentage point tax cut for investors, depending on the type of asset and how long it’s held, according to 2018 estimates from the non-partisan Congressional Research Service. Corporate stock with dividends held for 10 years would be currently be subject to an effective tax rate of 24.3%. That same holding indexed to inflation would be subject to a 21.4% tax rate, CRS said.

Kimberley Strassel of the Wall Street Journal opines that this would be a very desirable reform.

What if President Trump had the authority—on his own—to enact a second powerful tax reform? He does. The momentum is building for him to use it. …forces are aligning behind a plan: a White House order to index capital gains for inflation. It’s a long-overdue move—one that would further unleash the economy and boost GOP election prospects. …At President Reagan’s behest, Congress in the 1980s indexed much of the federal tax code for inflation. Oddly, capital gains weren’t similarly treated. The result is that businesses and individuals pay taxes on the full nominal amount they earn on investments, even though inflation eats up a good chunk of any gain. It’s not unheard of for taxes to exceed real gains after inflation. …the Internal Revenue Code does not require that the “cost” of an asset be measured only as its original price—meaning there is no reason Treasury could not construe it in today’s dollars. …The move would set off an explosion of buying and selling—of which the government would get its cut. The lower tax on capital would also help asset prices grow. All of this would be excellent news for the economy.

This 2010 video from the Center for Freedom and Prosperity elaborates on the reasons for indexing.

I especially like the examples showing how, even with modest levels of inflation, the actual capital gains tax rate can be much higher than official rate.

Remember, it’s the effective marginal tax rate that determines incentives for additional productive activity.

This is why any form of capital gains taxation is wrong. And it’s especially wrong to impose a hidden – and higher – tax simply because of inflation.

Indeed, it’s fundamentally immoral to let the government profit from inflation.

So what would happen if the rumors are true and Trump unilaterally eliminates the tax on inflationary gains?

The Tax Foundation estimated how such a change would affect the economy and the budget. The report includes a helpful example of how this reform would protect investors.

…if an individual purchased an asset for $100 in January 1, 2000 and sold that asset for $200 on July 1, 2018, the nominal capital gain would be $100. However, inflation over that period increased the price level by 49 percent. Under an indexing proposal, the individual would be able to gross up the basis of $100 by the total inflation during that period to $149. As a result, the individual would only be taxed on $51 instead of the full $100.

Here’s a table comparing the status quo with indexing.

Here’s the estimate of the economic benefits.

…indexing capital gains to inflation would increase the long-run size of the economy by 0.11 percent, which is equivalent to about $22 billion in 2018. This provision would primarily boost output by reducing the service price of capital, which would increase the incentive to invest in the United States. We estimate that the service price of capital would be 0.15 percent lower under this proposal. The capital stock would be 0.26 percent larger and the larger capital stock would boost labor productivity leading to 0.08 percent higher wages.

And here’s the accompanying table.

The Tax Foundation also prepared an estimate of the impact on tax revenue.

On a dynamic basis, the revenue loss would be…$148.3 billion over the next ten years. The increase in output due to the lower cost of capital would boost incomes, which would boost payroll revenue and slightly offset individual income tax revenue losses.

The bottom line is that this is not a self-financing reform (that only happens in rare instances), but it is a reform that would help the economy by encouraging more jobs and growth.

And, remember, even small improvements in growth have a meaningful impact over time.

Let’s close with a video from an unlikely supporter of inflation indexing.

Notwithstanding these remarks, I don’t think Schumer will applaud if Trump indexes the capital gains tax. Instead, I suspect he’s now more likely to support measures that would exacerbate this form of double taxation. Though I think he’s still on the right side (at least behind the scenes) on the issue of “carried interest,” so maybe he’s not a totally lost cause.

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The Economic Benefits of Reducing the Regulatory Burden

When I assess President Trump’s economic policy, I generally give the highest grade to his tax policy.

But as I pointed out in this interview from last year, there’s also been some progress on regulatory policy, even if only in that the avalanche of red tape we were getting under Bush and Obama has abated.

But perhaps I need to be even more positive about the Trump Administration.

For instance, I shared a graph last year that showed a dramatic improvement (i.e., a reduction) in the pace of regulations under Trump.

For all intents and purposes, this means the private sector has had more “breathing room” to prosper. Which means more opportunity for jobs, growth, investment, and entrepreneurship.

To what extent can we quantify the benefits?

Writing for the Washington Post, Trump’s former regulatory czar said the administration has lowered the cost of red tape, which is a big change from what happened during the Obama years.

Over the past two years, federal agencies have reduced regulatory costs by $23 billion and eliminated hundreds of burdensome regulations, creating opportunities for economic growth and development. This represents a fundamental change in the direction of the administrative state, which, with few exceptions, has remained unchecked for decades. The Obama administration imposed more than $245 billion in regulatory costs on American businesses and families during its first two years. The benefits of deregulation are felt far and wide, from lower consumer prices to more jobs and, in the long run, improvements to quality of life from access to innovative products and services. …When reviewing regulations, we start with a simple question: What is the problem this regulation is trying to fix? Unless otherwise required by law, we move forward only when we can identify a serious problem or market failure that would be best addressed by federal regulation. These bipartisan principles were articulated by President Ronald Reagan and reaffirmed by President Bill Clinton, who recognized that “the private sector and private markets are the best engine for economic growth.”

But how does this translate into benefits for the American people?

Let’s look at some new research from the Council of Economic Advisers, which estimates the added growth and the impact of that growth on household income.

Before 2017, the regulatory norm was the perennial addition of new regulations.Between 2001 and 2016, the Federal government added an average of 53 economically significant regulations each year. During the Trump Administration, the average has been only 4… Even if no old regulations were removed, freezing costly regulation would allow real incomes to grow more than they did in the past, when regulations were perennially added… The amount of extra income from a regulatory freeze depends on (1) the length of time that the freeze lasts and (2) the average annual cost of the new regulations that would have been added along the previous growth path. …In other words, by the fifth year of a regulatory freeze, real incomes would be 0.8 percent (about $1,200 per household in the fifth year) above the previous growth path. …As shown by the red line in figure 3, removing costly regulations allows for even more growth than freezing them. As explained above, the effect, relative to a regulatory freeze, of removing 20 costly Federal regulations has been to increase real incomes by 1.3 percent. In total, this is 2.1 percent more income—about $3,100 per household per year—relative to the previous growth path.

Here’s the chart showing the benefits of both less regulation and deregulation.

The chart makes the change in growth seem dramatic, but the underlying assumptions aren’t overly aggressive.

What you’re seeing echoes my oft-made point that even modest improvements in growth lead to meaningful income gains over time.

P.S. My role isn’t to be pro-Trump or anti-Trump. Instead, I praise what’s good and criticize what’s bad. While Trump gets a good grade on taxes and an upgraded positive grade on regulation, don’t forget that he gets a bad grade on trade, a poor grade on spending, and a falling grade on monetary policy.

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Is the Massachusetts Flat Tax in Danger?

Regarding fundamental tax reform, there have been some interesting developments at the state level in recent years.

Utah, North Carolina, and Kentucky have all junked their so-called progressive systems and joined the flat tax club.

That’s the good news.

The bad news is that Illinois politicians are desperately trying to gut that state’s flat tax.

And the same thing is true in Massachusetts.

The Tax Foundation has a good explanation of what’s been happening in the Bay State and why it matters for the competitiveness, job creation, and entrepreneurship.

A joint constitutional convention of Massachusetts lawmakers has voted 147-48 to approve H.86, dubbed the Fair Share Amendment, to impose a 4 percent income tax surcharge on annual income beyond $1 million. The new tax would be levied in addition to the existing 5.05 percent flat rate, bringing Massachusetts’ total top rate to 9.05 percent. …Massachusetts requires legislatively-referred constitutional amendments be passed in consecutive sessions, meaning that the same measure would need to be approved in the 2021-2022 legislative session before it would be sent to voters in November of 2022. The millionaires’ tax, though targeted at a wealthy minority of tax filers in the Bay State, would cause broader harm to Massachusetts’ tax structure and economic climate. It would eliminate Massachusetts’ primary tax advantage over regional competitors… The Bay State’s low, flat income tax on individuals and pass-through businesses is the most competitive element of its tax code, giving the Commonwealth a clear strength compared to surrounding states and regional competitors. Income tax rate reductions in recent years have helped shed the moniker of “Taxachusetts” while setting up the Bay State to be a beneficiary of harmful tax rate increases in surrounding states. However, a 9.05 percent top rate would be uncompetitive even in a high-tax region. The amendment would hit Massachusetts pass-through businesses with the sixth-highest tax rate of any state.

Here’s a map showing top tax rates in the region (New Hampshire has an important asterisk since the 5-percent rate only applies to interest and dividends), including where Massachusetts would rank if the new plan ever becomes law.

The Boston Globe reports that lawmakers are very supportive of this scheme to extract more money, while the business community is understandably opposed.

A measure to revive a statewide tax on high earners received a glowing reception on Beacon Hill Thursday, suggesting an easy path ahead despite staunch opposition from business groups. “We are in desperate need for revenue for our districts,” said Senator Michael D. Brady of Brockton, one of the proposal’s more than 100 sponsors and a member of the Joint Committee on Revenue…. “We have tremendous unmet needs in our Commonwealth that are hurting families, hurting our communities, and putting our state’s economic future at risk,” said Senator Jason M. Lewis of Winchester, the lead sponsor of the Senate version of the proposal. …business groups…came armed with arguments that hiking taxes on the state’s highest earners would drive entrepreneurs — and the jobs and tax revenue they create — out of the state, as well as unfairly harm small- and mid-sized business owners whose business income passes through their individual tax returns. “Look, we’re trying to prevent Massachusetts from becoming Connecticut,” said Christopher Anderson, president of the Massachusetts High Technology Council.

Meanwhile, the Boston Herald reports that the Republican governor is opposed to this class-warfare tax.

Gov. Charlie Baker cautioned the Legislature against asking for more money from taxpayers with the so-called millionaire tax… “I’ve said that we didn’t think we should be raising taxes on people and I certainly don’t think we should be pursuing a graduated income tax,” Baker told reporters yesterday. …Members of Raise Up Massachusetts, a coalition of community organizations, religious groups and labor unions, are staunchly supporting the tax that is estimated to raise approximately $2 billion a year. …The Massachusetts Republican Party is sounding the alarm on what they’re calling, “the Democrats’ newest scheme,” to “dump” the state’s flat tax system.

The governor’s viewpoint is largely irrelevant, however, since he can’t block the legislature from moving forward with their class-warfare scheme.

But that doesn’t mean the big spenders in Massachusetts have a guaranteed victory.

Yes, the next session’s legislature is almost certain to give approval, but there’s a final step needed before the flat tax is gutted.

The voters need to say yes.

And in the five previous occasions when they’ve been asked, the answer has been no.

Overwhelmingly no.

Even in 1968 and 1972, proposals for a so-called progressive tax were defeated by a two-to-one margin.

Needless to say, that doesn’t mean voters will make the right choice in 2022.

The bottom line is that if the people of Massachusetts want investors, entrepreneurs, and other job creators to remain in the state, they should again vote no.

But if they want to destroy jobs and undermine the Bay State’s competitiveness, they should vote yes.

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The Economic Damage of “Neutral Taxes”

There’s general agreement among public finance experts that personal income taxes and corporate income taxes, on a per-dollar-collected basis, do the most economic damage.

And I suspect there’s a lot of agreement that this is because these levies often have high marginal tax rates and often are accompanied by a significant bias against income that is saved and invested.

Payroll tax and consumption taxes, by contrast, are thought to be less damaging because they generally don’t have “progressive rates” and they are “neutral,” meaning they rarely involve any double taxation of saving and investment.

But “less damaging” is not the same as “no damage.”

Such taxes still drive a wedge between pre-tax income and post-tax consumption, so they do result in less economic activity (what economists refer to as “deadweight loss“).

And the deadweight loss can be significant if the overall tax burden is sufficiently onerous (as is the case in many European nations).

Interestingly, the (normally pro-tax) International Monetary Fund just released a study on this topic. It looked at the impact of taxes on work in the new member states (NMS) of the European Union. Here’s a summary of what the authors wanted to investigate.

Given demographic and pension pressures facing many EU28 countries amidst low labor market participation rates together with still high tax wedges, the call to review public policies has gained renewed prominence in the EU political debate. …tax wedges remain high and participation rates, while having increased importantly in a few countries over 2000-17 , are still around or below 70 percent in many of them. This hints at the need for addressing structural problems to improve economic fortunes. In this paper we focus our attention on hours worked (per working age population). …At country level, hours worked reflect labor supply decisions and could be thought of a measure of labor utilization. Long-run changes in labor supply are driven by incentives, of which taxes are perceived to be central. Assessing the importance of taxation on hours is key to provide new insights for potential policy actions.

And here’s what they found.

We study the role of taxes in accounting for differences in hours worked across NMS over the 1995-17 period… We find that consumption and labor taxes significantly discourage labor supply and can explain close to 21 percent of the observed variation of hours across NMS. …Higher tax rates reduce households’ net labor income and real purchasing power, inducing them to substitute consumption for leisure, which cannot be taxed. …Our findings show that, conditional on other factors, taxes are an important determinant of hours. Point estimates suggest a high elasticity of hours to taxes (close to 0.5), which is robust to the inclusion of other factors.

What’s interesting about the new member states of Eastern Europe is that many of them have flat taxes and low corporate rates.

So the personal and corporate income taxes are not a major burden.

But they so have relatively high payroll taxes (a.k.a., social insurance taxes) and relatively onerous value-added taxes.

So it’s hardly a surprise that these levies are the ones most associated with deadweight loss.

We find that social security contributions deter hours the most, followed by consumption taxes and, to a lesser extent, personal income taxes. …Consumption and personal income taxes are found to affect hours per worker, but not employment rates. On the other hand, social security contributions are negatively associated with employment rates, but do not seem to affect hours per worker. …In line with the literature, we document that women’s employment rate is more sensitive to changes in tax policies. We find the elasticity of employment rate to social security contributions to be 7 percent larger for women vis-à-vis men.

Here’s one of the charts from the study.

And here’s an explanation of what it means.

Figure 4 shows the evolution of hours and effective taxes. Hours worked increased substantially for Group 1, while it remained stable in Group 2 (Panel (a)). In both groups, the effect of the GFC is noticeable as hours sharply declined after 2008. Panel (b) shows the evolution of the average effective tax rate in each group. Interestingly, countries in Group 1, which observed an increase in hours, had lower effective tax rates (below 40 percent) throughout the period. In addition, we observe a negative correlation between hours and taxes for most of the sample. For Group 1, the large increase in hours – between year 2000 and the GFC – happened at the same time taxes declined

Here’s another chart from the IMF report.

And here’s some of the explanatory text.

Figure 5 depicts the relationship between hours worked and taxes across countries. In Panel (a), we observe a negative correlation between hours and taxes in levels for each group, with the negative correlation being stronger in Group 2 than in Group 1 (it has a steeper slope). Panel (b) shows total log changes in hours and taxes throughout the period. It also displays a negative correlation.

Looking at the conclusion, a key takeaway from the study is that there is a substantial loss of economic activity because of theoretically benign (but in reality onerous) taxes on consumption and labor.

Our modelling exercise shows that taxes influence the long-run trend in hours and our econometric exercise shows that the findings are robust to the inclusion of other labor market determinants. Furthermore, we document an elasticity of hours to overall taxes close to 0.5. We find that differences in tax burden can explain up to 21 percent in the variation of hours worked across NMS. The main takeaway of this study is that excessive tax burden, either in the form of consumption or labor taxes, can lead to substantial deadweight losses in terms of labor supply. .. overall tax burden – and not only labor taxes – should be considered when thinking about incentives from tax schemes.

Yes, incentives do matter.

And it’s good that an IMF report is providing good evidence for lower tax rates.

But I’m not optimistic we’ll get pro-growth changes. There’s been a lack of good reform this decade from the new member states from Eastern Europe. Combined with demographic decline (and the associated pressure for higher tax rates), this does not bode well.

P.S. While the professional economists at the IMF often produce good research and sensible advice, the bureaucracy’s political leaders almost always ignore those findings and instead push for bad tax policy. Including in the new member states from Eastern Europe.

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The Three Most Important Takeaways from CBO’s New Long-Run Fiscal Forecast

The Congressional Budget Office just released its new long-run fiscal forecast.

Most observers immediately looked at the estimates for deficits and debt. Those numbers are important, especially since America has an aging population, but they should be viewed as secondary.

What really matters are the trends for both taxes and spending.

Here are the three things that you need to know.

First, America’s tax burden is increasing. Immediately below are two charts. The first one shows that revenues will consume an addition three percentage points of GDP over the next three decades. As I’ve repeatedly pointed out, our long-run problem is not caused by inadequate revenue.

The second of the two charts shows that most of the increase is due to “real bracket creep,” which is what happens when people earn more income and wind up having to pay higher tax rates.

So even if Congress extends the “Cadillac tax” on health premiums and extends all the temporary provisions of the 2017 Tax Act, the aggregate tax burden will increase.

Second, the spending burden is growing even faster than the tax burden.

And if you look closely at the top section of Figure 1-7, you’ll see that the big problems are the entitlements for health care (i.e., Medicare, Medicaid, and Obamacare).

By the way, the lower section of Figure 1-7 shows that corporate tax revenues are projected to average about 1.3 percent of GDP, which is not that much lower than what CBO projected (about 1.7 percent of GDP) before the rate was reduced by 40 percent.

Interesting.

Third, we have our most important chart.

It shows that the United States is on a very bad trajectory because the burden of government spending is growing faster than the private economy.

In other words, Washington is violating my Golden Rule.

And this leads to all sorts of negative consequences.

• Government consumes a greater share of the economy over time.
• Politicians will want to respond by raising taxes.
• Politicians will allow red ink to increase.

The key thing to understand is that more taxes and more debt are the natural and inevitable symptoms of the underlying disease of too much spending.

We know the solution, and we have real world evidence that it works (especially when part of a nation’s constitution), but don’t hold your breath waiting for Washington to do the right thing.

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The Destructive Economics of Wealth Taxation

I wrote five years ago about the growing threat of a wealth tax.

Some friends at the time told me I was being paranoid. The crowd in Washington, they assured me, would never be foolish enough to impose such a levy, especially when other nations such as Sweden have repealed wealth taxes because of their harmful impact.

But, to paraphrase H.L. Mencken, nobody ever went broke underestimating the foolishness of politicians.

I already wrote this year about how folks on the left are demonizing wealth in hopes of creating a receptive environment for this extra layer of tax.

And some masochistic rich people are peddling the same message. Here’s some of what the Washington Post reported.

A group of ultrarich Americans wants to pay more in taxes, saying the nation has a “moral, ethical and economic responsibility” to ensure that they do. In an open letter addressed to the 2020 presidential candidates and published Monday on Medium, the 18 signatories urged political leaders to support a wealth tax on the richest one-tenth of the richest 1 percent of Americans. “On us,” they wrote. …The letter, which emphasized that it was nonpartisan and not to be interpreted as an endorsement of anyone in 2020, noted that several presidential candidates, including Sen. Elizabeth Warren (D-Mass.), Pete Buttigieg and Beto O’Rourke, have already signaled interest in addressing the nation’s staggering wealth inequality through taxation.

I’m not sure a please-tax-us letter from a small handful of rich leftists merits so much news coverage.

Though, to be fair, they’re not the only masochistic rich people.

Another guilt-ridden rich guy wrote for the New York Times that he wants the government to have more of his money.

My parents watched me build two Fortune 500 companies and become one of the wealthiest people in the country. …It’s time to start talking seriously about a wealth tax. …Don’t get me wrong: I am not advocating an end to the capitalist system that’s yielded some of the greatest gains in prosperity and innovation in human history. I simply believe it’s time for those of us with great wealth to commit to reducing income inequality, starting with the demand to be taxed at a higher rate than everyone else. …let’s end this tired argument that we must delay fixing structural inequities until our government is running as efficiently as the most profitable companies. …we can’t waste any more time tinkering around the edges. …A wealth tax can start to address the economic inequality eroding the soul of our country’s strength. I can afford to pay more, and I know others can too.

When reading this kind of nonsense, my initial instinct is to tell this kind of person to go ahead and write a big check to the IRS (or, better yet, send the money to me as a personal form of redistribution to the less fortunate). After all, if he really thinks he shouldn’t have so much wealth, he should put his money where his mouth is.

But rich leftists like Elizabeth Warren don’t do this, and I’m guessing the author of the NYT column won’t, either. At least if the actions of other rich leftists are any guide.

But I don’t want to focus on hypocrisy.

Today’s column is about the destructive economics of wealth taxation.

A report from the Mercatus Center makes a very important point about how a wealth tax is really a tax on the creation of new wealth.

Wealth taxes have been historically plagued by “ultra-millionaire” mobility. …The Ultra-Millionaire Tax, therefore, contains “strong anti-evasion measures” like a 40 percent exit tax on any targeted household that attempts to emigrate, minimum audit rates, and increased funding for IRS enforcement. …Sen. Warren’s wealth tax would target the…households that met the threshold—around 75,000—would be required to value all of their assets, which would then be subject to a two or three percent tax every year. Sen. Warren’s team estimates that all of this would bring $2.75 trillion to the federal treasury over ten years… a wealth tax would almost certainly be anti-growth. …A wealth tax might not cause economic indicators to tumble immediately, but the American economy would eventually become less dynamic and competitive… If a household’s wealth grows at a normal rate—say, five percent—then the three percent annual tax on wealth would amount to a 60 percent tax on net wealth added.

Alan Viard of the American Enterprise Institute makes the same point in a column for the Hill.

Wealth taxes operate differently from income taxes because the same stock of money is taxed repeatedly year after year. …Under a 2 percent wealth tax, an investor pays taxes each year equal to 2 percent of his or her net worth, but in the end pays taxes each decade equal to a full 20 percent of his or her net worth. …Consider a taxpayer who holds a long term bond with a fixed interest rate of 3 percent each year. Because a 2 percent wealth tax captures 67 percent of the interest income of the bondholder makes each year, it is essentially identical to a 67 percent income tax. The proposed tax raises the same revenue and has the same economic effects, whether it is called a 2 percent wealth tax or a 67 percent income tax. …The 3 percent wealth tax that Warren has proposed for billionaires is still higher, equivalent to a 100 percent income tax rate in this example. The total tax burden is even greater because the wealth tax would be imposed on top of the 37 percent income tax rate. …Although the wealth tax would be less burdensome in years with high returns, it would be more burdensome in years with low or negative returns. …high rates make the tax a drain on the pool of American savings. That effect is troubling because savings finance the business investment that in turn drives future growth of the economy and living standards of workers.

Alan is absolutely correct (I made the same point back in 2012).

Taxing wealth is the same as taxing saving and investment (actually, it’s the same as triple- or quadruple-taxing saving and investment). And that’s bad for competitiveness, growth, and wages.

And the implicit marginal tax rate on saving and investment can be extremely punitive. Between 67 percent and 100 percent in Alan’s examples. And that’s in addition to regular income tax rates.

You don’t have to be a wild-eyed supply-side economist to recognize that this is crazy.

Which is one of the reasons why other nations have been repealing this class-warfare levy.

Here’s a chart from the Tax Foundation showing the number of developed nations with wealth taxes from1965-present.

And here’s a tweet with a chart making the same point.

A reminder that most of the OECD has moved away from wealth taxes. 12 countries had them in 1990, while only 4 levy them today. Most countries found that the tax has high administrative and compliance costs, and didn't meet the goal of redistribution. pic.twitter.com/pHs7Q5ehjL

— Garrett Watson (@GS_Watson) January 24, 2019

 

P.S. I’ve tried to figure out why so many rich leftists support higher taxes. For non-rich leftists, I cite IRS data in hopes of convincing them they should be happy there are rich people.

P.P.S. I’ve had two TV debates with rich, pro-tax leftists (see here and here). Very strange experiences.

P.P.P.S. There are also pro-tax rich leftists in Germany.

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Air Travel and Taxation: A Case Study of Statism in the European Union

I’ve argued for many years that a Clean Brexit is the right step for the United Kingdom for the simple reason that the European Union is a slowly sinking ship.

Part of the problem is demographics. Europe’s welfare states are already very expensive and the relative costs will increase dramatically in coming years because of rising longevity and falling birthrates. So I expect more Greek-style fiscal crises.

The other part of the problem is attitudinal. I’m not talking about European-wide attitudes (though that also is something to worry about, given the erosion of societal capital), but rather the views of the European elites.

The notion of “ever closer union” is not just empty rhetoric in European treaties. It’s the ideological preference of senior European leaders, including in many nations and definitely in Brussels (home of the European Commission and the European Parliament).

In practical terms, this means a relentless effort for more centralization.

• It means unending pressure for European-wide taxes.
• It means unending pressure for tax harmonization.
• It means unending pressure for regulatory harmonization.
• It means unending pressure for a transfer union.

All policies that will accelerate Europe’s decline.

What’s happening with the taxation of air travel is a good example. Here are some excerpts from a story in U.S. News & World Report.

The Netherlands and France are trying to convince fellow European nations at a conference in The Hague to end tax exemptions on jet fuel and plane tickets… In the first major initiative on air travel tax in years, the conference on Thursday and Friday – which will be attended by about 29 countries – will discuss ticket taxes, kerosene levies and value-added tax (VAT) on air travel. …The conference will be attended by European Union economics commissioner Pierre Moscovici and finance and environment ministers. …The conference organizers hope that higher taxes will lead to changes in consumer behavior, with fewer people flying

The politicians, bureaucrats, and environmental activists are unhappy that European consumers are enjoying lightly taxed travel inside Europe.

Oh, the horror!

A combination of low aviation taxes, a proliferation of budget airlines and the rise of Airbnb have led to a boom in intra-European city-trips. …Research has shown that if the price of air travel goes up by one percent, demand will likely fall by about one percent, according to IMF tax policy division head Ruud De Mooij. He said that in a typical tank of gas for a car, over half the cost is tax…”Airline travel is nearly entirely exempt from all tax… Ending its undertaxation would level the playing field versus other modes of transport,” he said. …Environmental NGOs such as Transport and Environment (T&E) have long criticized the EU for being a “kerosene tax haven”.”Europe is a sorry story. Even the U.S., Australia and Brazil, where climate change deniers are in charge, all tax aviation more than Europe does,” T&E’s Bill Hemmings said. …The EU report shows that just six out of 28 EU member states levy ticket taxes on international flights, with Britain’s rates by far the highest at about 14 euros for short-haul economy flights and up to 499 euros for long-haul business class. …Friends of the Earth says there are no easy answers and that the only way to reduce airline CO2 emissions is by constraining aviation trough taxation, frequent flyer levies and limiting the number of flights at airports.

The only semi-compelling argument in the story is that air travel is taxed at preferential rates compared to other modes of transportation.

Assuming that’s true, it would be morally and economically appropriate to remove that distortion.

But not as part of a money-grab by European politicians who want more money and more centralization.

As you can see from this chart, the tax burden in eurozone nations is almost 50 percent higher than it is in the United States (46.2 percent of GDP compared to 32.7 percent of GDP according to OECD data for 2018).

And it’s lower-income and middle-class taxpayers who are paying the difference.

So here’s a fair trade. European nations (not Brussels) can impose additional taxes on air travel if they are willing to lower other taxes by a greater amount. Maybe €3 of tax cuts for every €1 of additional taxes on air travel?

Needless to say, nobody in Brussels – or in national capitals – is contemplating such a swap. The discussion is entirely focused on extracting more tax revenue.

P.S. There’s some compelling academic evidence that the European Union has undermined the continent’s economic performance. Which is sad since the EU started as a noble idea of a free trade area and instead has become a vehicle for statism.

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An Oakland Cop Joins the Bureaucrat Hall of Fame

The Bureaucrat Hall of Fame recognizes government employees who go above and beyond the call of duty in terms of getting over-paid or being under-worked.

Or both.

Adding insult to injury, many recipients of this award are employed by bureaucracies that shouldn’t even exist.

Today we’re going to look at the Oakland police department, which is a part of the government that presumably should exist (though Camden, NJ, shows that maybe we shouldn’t make that assumption).

The Oakland PD is notorious for being over-compensated, but one cop stands out.

Eric Boehm of Reason has the sordid details.

When Oakland, California, police officers are needed at Golden State Warriors basketball games and other special events, Malcolm Miller is the officer in charge of making those assignments. Often, he assigns himself. As a result, Miller has become one of the highest paid officers in the department. He’s earned nearly $2.5 million over the past five years—most of it overtime pay—according to data collected by Transparent California, a watchdog group.

What a scam.

It’s highly likely that Mr. Miller is a basketball fan, so he’s figured out a great racket.

He basically gets a big pile of money for going to the games.

He and his colleagues are making out like bandits.

…he’s hardly the only officer to take advantage of poor oversight and a general lack of accountability. According to the audit, 217 officers worked roughly 520 hours of overtime last year, helping to cost the department more than $30 million in overtime pay—about twice as much as had been budgeted. Over the past four years, overtime expenditures have ranged from $28 million to $31 million. Proper documentation of overtime work was lacking in 83 percent of cases, the auditors found.

Though Officer Miller might not be the worst of the group.

One officer was paid for more than 2,600 hours of overtime—equal to 108 days of round-the-clock work—in just a single year.

So how do cops get away with this scam?

Simple, they make sure to negotiate contracts that have sweetheart provisions that they can exploit.

And why does Oakland agree to such contracts?

Well, as Michael Ramirez illustrated, bureaucrat unions give lots of money to state and local politicians, and those politicians then conspire with the unions to give them contracts with the sweetheart provisions.

Let’s close by looking at an example of this kind of scam.

Perhaps the most stunning part of the audit is the explanation of a department-wide policy that allows Oakland cops to accrue 1.5 hours of “comp time” for every hour of overtime worked. When an officer cashes in that comp time and isn’t working, other officers have to work overtime to fill the gap. That creates a cascade of additional overtime pay—10 hours of overtime creates 15 hours of comp time, which some other cop has to work, earning 22.5 hours of comp time (if they’re also working overtime), and so on.

Here’s the accompanying illustration.

How ridiculous. Extra money for overtime, combined with being able to work fewer hours in the future. Which then gives other cops an opening to rack up more overtime pay.

Everyone wins…except for taxpayers.

P.S. Some bureaucrats earn admission to the Bureaucrats Hall of Fame by misbehaving. Often in very strange ways.

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Evidence from the States: Higher Taxes = Fewer Jobs

When I wrote a few days ago that the Trump tax reform was generating good results, I probably should have specified that some parts of the country are not enjoying as much growth because of bad state tax policy.

As illustrated by my columns about Texas vs California and Florida vs New York, high-tax states are economic laggards compared to low-tax states.

This presumably helps to explain why Americans are voting with their feet by moving to states where the politicians are (at least in practice) less greedy.

Let’s look at some new evidence on the interaction of federal and state tax policy.

Writing for Forbes, Chuck DeVore of the Texas Public Policy Foundation shares data on how and why lower-tax state are out-performing higher-tax states.

Job growth has been running 80% stronger in low-tax states than in high-tax states since the passage of the Tax Cuts and Jobs Act of 2017 in December 2017. Understanding why holds important lessons for policy, economics, and politics. The new tax law scaled back the federal subsidy for high state and local taxes. …As a result of limiting the SALT deduction to $10,000, income tax filers in high-tax states saw a relatively smaller tax cut, losing out on about $84 billion since the tax code was changed. With $84 billion less to invest, the pace of job creation in the 23 high-tax states has slowed relative to the low-tax states, with the data suggesting a shift of almost 400,000 private sector jobs may have occurred.

Here are some of his numbers.

Prior to the tax reform’s enactment, annualized private sector job growth was 1.9% in the low-tax states from January 2016 to December 2017 compared to 1.4% in the high-tax states, giving the low-tax jurisdictions a comparatively modest advantage of 35% more rapid job growth over the 23-month period. Now, 17 months of federal jobs data suggest that the Tax Cuts and Jobs Act has increased the competitive advantage of 27 low-tax states where the average SALT deduction was under $10,000 in 2016 as compared to 23 high-tax taxes with average SALT deductions greater than $10,000. Private sector job growth is now running 80% faster in the low-tax states, 2% annualized compared to 1.1%, up from just a 35% advantage in the prior 23 months. …For California, the lost employment opportunity adds up to 153,000 positions since December 2017… New York’s employment growth was about 128,000 less than might have been the case had the SALT deduction not been capped.

And here’s his data-rich chart.

Based on previous evidence we’ve examined, these numbers are hardly a surprise.

Chuck suggests the right way for high-tax states to respond.

…if political leaders in states accustomed to taxing and spending far more than their more frugal peers wish to participate in higher rates of job creation, they should reform their own fiscal houses, rather than expect their neighbors to subsidize their high-spending ways.

Sadly, this doesn’t appear to be happening.

Politicians is high-tax states such as Illinois and New Jersey are trying to make their already-punitive systems even worse.

Based on what we’ve seen from Greece, that won’t end well.

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A Lesson for Bernie Sanders and Alexandria Ocasio-Cortez from the International Monetary Fund

I don’t think either Senator Bernie Sanders or Representative Alexandria Ocasio-Cortez actually understand that socialism is an economic system based on government ownership of the means of production, augmented by central planning, and price controls.

For what it’s worth, I think Crazy Bernie and AOC are just knee-jerk statists. They reflexively support more taxes, more spending, more regulation, and more intervention.

But since they both describe themselves as socialists, maybe it would be a good idea if they examined how the system works in the real world.

And I won’t even use a hellhole like Venezuela as an example.

Instead, let’s look at some recent research from the International Monetary Fund.

The bureaucrats looked at the legacy of socialism in Eastern Europe, specifically the extent to which governments still own and run businesses. Here are some of their findings.

…the former socialist countries of Central, Eastern, and Southeastern Europe (CESEE) have made tremendous progress in becoming full-fledged market economies and raising income levels. …Although the state’s role in the economy has diminished dramatically in the region, state ownership still remains significant in many countries and sectors. …there is now growing interest in whether an enhanced role for state-owned enterprises and banks (SOEs and SOBs) could be an important source of growth, or whether they would just impose a further drag on the economy. …in a new study, prepared in collaboration with the European Bank for Reconstruction and Development, the IMF examines the current footprint of state-owned enterprises and state-owned banks in the region, how they are performing… State companies now account for between 2 percent and 15 percent of total employment in the CESEE countries… They are especially prevalent in sectors such as mining, energy, and transport.

Here’s a look at the extent of government ownership in various nations of Eastern Europe.

Darker blue means more legacy socialism.

Kudos to the Baltic nations and Romania for largely getting the government out of the business of running businesses.

But other countries are laggards. And what can we say about the economic impact of their government-run companies?

The results are not good.

Our analysis finds that state-owned enterprises systematically underperform relative to private sector counterparts in nearly all countries. They tend to hoard labor, pay more generously, and generate less revenue per employee than private sector peers. Unsurprisingly, they turn out to be less productive and less profitable. Potentially large output gains would be achieved if productivity of state-owned enterprises could be raised to private sector levels. A similar picture emerges for state-owned banks, which in most countries make less-sound lending decisions than private counterparts and have lower profitability, often associated with higher shares of problem loans. …the analysis finds little evidence that the inefficiencies arising from state ownership can be justified by noneconomic objectives. The study does, however, point to significant shortcomings in governance and oversight of state companies.

Here’s a chart showing that government-run firms earn lower profits.

Because politicians are a de facto part of management, it’s no surprise that there’s also above-market pay at government-run firms.

And here are some specific numbers for the banking sector.

Once again, thanks to a combination of political interference and lack of a profit motive, we see inferior results.

So what does the IMF suggest?

Unlike fiscal policy, where the IMF has a very poor track record, the bureaucracy has the right instincts on private ownership vs government ownership.

…countries should take a fresh look at the rationale for existing state ownership, taking into account the costs, benefits, and risks of state ownership… Privatization (or bankruptcy) will sometimes be appropriate choices… At a time when growth-enhancing policies can be hard to identify, improving the performance of existing state-owned entities, or exiting in favor of the private sector where appropriate, could provide much-needed support for the economy.

I’ll close by elaborating on why government-run companies undermine prosperity.

Simply stated, it means that politicians are misallocating labor and capital in ways that reduce overall economic output.

Yes, a few insiders benefit (such as the workers who get above-market wages and the managers appointed by the government to run the firms), but the vast majority of citizens are net losers.

So why do governments in Eastern Europe maintain such self-destructive policies?

For the same “public choice” reason that we maintain policies – such as agriculture subsidies the Export-Import Bank, and occupational licensing – that reward narrow interest groups in the United States.

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A Tribute to Art Laffer

I’m a big fan of the Laffer Curve, which is simply a graphical representation of the common-sense notion that punitively high tax rates can result in less revenue because of reductions in the economy-wide level of work, saving, investment, and entrepreneurship.

This insight of supply-side economics is so obviously true that even Paul Krugman has acknowledged its veracity.

What’s far more important, though, is that Ronald Reagan grasped the importance of Art’s message. And he dramatically reduced tax rates on productive behavior during his presidency.

And those lower tax rates, combined with similar reforms by Margaret Thatcher in the United Kingdom, triggered a global reduction in tax rates that has helped boost growth and reduce poverty all around the world.

In other words, Art Laffer was a consequential man.

So it was great news that President Trump yesterday awarded Art with the Presidential Medal of Freedom.

Let’s look at some commentary on this development, starting with a column in the Washington Examiner by Fred Barnes.

When President Trump announced he was awarding the Presidential Medal of Freedom to economist Arthur Laffer, there were groans of dismay in Washington… Their reaction was hardly a surprise. Laffer is everything they don’t like in an economist. He’s an evangelist for tax cuts. He believes slashing tax rates is the key to economic growth and prosperity. And more often than not, he’s been right about this. Laffer emerged as an influential figure in the 1970s as the champion of reducing income tax rates. He was a key player in the Reagan cuts of 1981 that touched off an economic boom lasting two decades. …Laffer, 78, is not a favorite of conventional, predominantly liberal economists. Tax cuts leave the job of economic growth to the private sector. Liberal economists prefer to give government that job. Tax cuts are not on their agenda. Tax hikes are. …His critics would never admit to Laffer envy. But they show it by paying attention to what he says and to whom he’s affiliated. They rush to criticize him at any opportunity. …Laffer was right…about tax cuts and prosperity.

And here are some excerpts from a Bloomberg column by Professor Karl Smith of the University of North Carolina.

Most important, he highlights how supply-side economics provided a misery-minimizing way of escaping the inflation of the 1970s.

President Donald Trump’s decision to award Arthur Laffer the Presidential Medal of Freedom has met with no shortage of criticism… Laffer was a policy entrepreneur, and his..boldness was crucial in the development of what came to be known as the “Supply Side Revolution,” which even today is grossly underappreciated. In the 1980s, the U.S. economy avoided the malaise that afflicted Japan and much of Western Europe. The primary reason was supply-side economics. …Reducing inflation with minimal damage to the economy was the central goal of supply-side economics. …most economists agreed that inflation could be brought down with a severe enough recession. …Conservative economists argued that the long-term gain was worth that level of pain. Liberal economists argued that inflation was better contained with price and income controls. Robert Mundell, a future Nobel Laureate, argued that there was third way. Restricting the money supply, he said, would cause demand in the economy to contract, but making large tax cuts would cause demand to expand. If done together, these two strategies would cancel each other out, leaving room for supply-side factors to do their work. …Laffer suggested that permanent reductions in taxes and regulations would increase long-term economic growth. A faster-growing economy would increase foreign demand for U.S. financial assets, further raising the value of the dollar and reducing the price of foreign imports. These effects would speed the fall in inflation by increasing the supply of goods for sale. In the early 1980s, the so-called Mundell-Laffer hypothesis was put to the test — and it was, by and large, successful.

I’ve already written about how taming inflation was one of Reagan’s great accomplishments, and this column adds some meat to the bones of my argument.

And it’s worth noting that left-leaning economists thought it couldn’t be done. Professor Bryan Caplan shared this quote from Paul Samuelson.

Today’s inflation is chronic.  Its roots are deep in the very nature of the welfare state.  [Establishment of price stability through monetary policy would require] abolishing the humane society [and would] reimpose inequality and suffering not tolerated under democracy.  A fascist political state would be required to impose such a regime and preserve it.  Short of a military junta that imprisons trade union activists and terrorizes intellectuals, this solution to inflation is unrealistic–and, to most of us, undesirable.

It’s laughable to read that today, but during the Keynesian era of the 1970s, this kind of nonsense was very common (in addition to the Samuelson’s equally foolish observations on the supposed strength of the Soviet economy).

The bottom line is that Art Laffer and supply-side economics deserve credit for insights on monetary policy in addition to tax policy.

But since Art is most famous for the Laffer Curve, let’s close with a few additional observations on that part of supply-side economics.

Many folks on the left today criticize Art for being too aggressive about the location of the revenue-maximizing point of the Laffer Curve. In other words, they disagree with him on whether certain tax cuts will raise revenue or lose revenue.

While I think there’s very strong evidence that lower tax rates can increase revenue, I also think it doesn’t happen very often.

But I also think that debate doesn’t matter. Simply stated, I don’t want politicians to have more revenue, which means that I don’t want to be at the revenue-maximizing point of the Laffer Curve.

Moreover, there’s a lot of economic damage that occurs as tax rates approach that point, which is why I often cite academic research confirming that one additional dollar of tax revenue is associated with several dollars (or more!) of lost economic output.

Call me crazy, but I’m not willing to destroy $5 or $10 of private-sector income in order to increase Washington’s income by $1.

The bottom line is that the key insight of the Laffer Curve is that there’s a cost to raising tax rates, regardless of whether a nation is on the left side of the curve or the right side of the curve.

P.S. While I’m a huge fan of Art Laffer, that doesn’t mean universal agreement. I think he’s wrong in his analysis of destination-based state sales taxes. And I think he has a blind spot about the danger of a value-added tax.

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Connecticut’s Fiscal Decay

‘Two years ago, I wrote about how Connecticut morphed from a low-tax state to a high-tax state.

The Nutmeg State used to be an economic success story, presumably in large part because there was no state income tax.

But then an income tax was imposed almost 30 years ago and it’s been downhill ever since.

The last two governors have been especially bad news for the state.

As explained in the Wall Street Journal, Governor Malloy did as much damage as possible before leaving office.

The 50 American states have long competed for people and business, and the 2017 tax reform raises the stakes by limiting the state and local tax deduction on federal returns. The results of bad policy will be harder to disguise. A case in point is Connecticut’s continuing economic decline, and now we have even more statistical evidence as a warning to other states. The federal Bureau of Economic Analysis recently rolled out its annual report on personal income growth in the 50 states, and for 2017 the Nutmeg State came in a miserable 44th. …the state’s personal income grew at the slowest pace among all New England states, and not by a little. …The consistently poor performance, especially relative to its regional neighbors, suggests that the causes are bad economic policies… In Mr. Malloy’s case this has included tax increases starting in 2011 and continuing year after year on individuals and corporations… It is a particular tragedy for the state’s poorest citizens who may not be able to flee to other states that aren’t run by and for government employees.

Here’s some of the data accompanying the editorial.

Eric Boehm nicely summarized the main lesson from the Malloy years in a column for Reason.

If it were true that a state could tax its way to prosperity, Connecticut should be on a non-stop winning streak. Instead, state lawmakers are battling a $3.5 billion deficit. Companies including General Electric, Aetna, and Alexion, a major pharmaceutical firm, have left the state in search of a lower tax burden. Connecticut is looking increasingly like the Illinois of New England: A place where tax increases are no longer fiscally or politically realistic, even though budgetary obligations continue to grow and spending is completely out of control.

Unfortunately, the new governor isn’t any better than the old governor. The Wall Street Journal opined on Ned Lamont’s destructive fiscal policy.

Connecticut desperately needs a new economic direction. Unfortunately, the biennial budget soon to be signed by new Gov. Ned Lamont doubles down on policies that have produced abysmal results.The state’s economic indicators are grim. Connecticut routinely ranks near the bottom in surveys of economic competitiveness. Residents and businesses have been voting with their feet. According to the National Movers Study, only Illinois and New Jersey suffered more out-migration in 2018. General Electric left for Boston in 2016. This week, Farmington-based United Technologies Corp. announced it too will move its headquarters… Mr. Lamont’s budget seems designed to accelerate the decline. It increases spending by $2 billion while extending the state’s 6.35% sales tax to everything from digital movies to laundry drop-off services to “safety apparel.” It adds $50 million in taxes on small businesses, raises the minimum wage by 50%, and provides the country’s most generous mandated paid family medical leave. Florida and North Carolina must be licking their lips. …The state employee pension plan is underfunded by $100 billion—$75,000 per Connecticut household. A responsible budget would try to start filling the gap; the Lamont budget underfunds the teachers’ plan by another $9.1 billion, increasing the long-term liability by $27 billion. …Mr. Lamont proposes to slap a 2.25% penalty on people who sell a high-end home and move out of state. Having given up on attracting affluent families, he’s trying to prevent the ones who are here from leaving.

As one might expect, all this bad news is generating bad outcomes. Here are some details from an editorial in today’s Wall Street Journal.

…as a new study documents, more businesses are leaving Connecticut as they get walloped with higher taxes that are bleeding the state. Democrats in 2015 imposed a 20% surtax on top of the state’s 7.5% corporate rate, effectively raising the tax rate to 9%. They also increased the top income tax rate to 6.99% from 6.7% on individuals earning more than $500,000. The state estimated the corporate tax hike would raise $481 million over two years, but revenue increased by merely $323 million… Meantime, the state’s Department of Economic and Community Development, whose job is to strengthen “Connecticut’s competitive position,” in 2016 alone spent $358 million…to induce businesses to stay or move to the state. This means that Connecticut doled out twice as much in corporate welfare as it raked in from the corporate tax increase. …Thus we have Connecticut’s business model: Raise costs for everyone and then leverage taxpayers to provide discounts for a politically favored few. …The state has lost population for the last five years. …The exodus has depressed tax revenue.

And there’s no question that people are voting with their feet, as Bloomberg reports.

Roughly 5 million Americans move from one state to another annually and some states are clearly making out better than others. Florida and South Carolina enjoyed the top economic gains, while Connecticut, New York and New Jersey faced some of the biggest financial drains, according to…data from the Internal Revenue Service and the U.S. Census Bureau. Connecticut lost the equivalent of 1.6% of its annual adjusted gross income, as the people who moved out of the Constitution State had an average income of $122,000, which was 26% higher than those migrating in. Moreover, “leavers” outnumbered “stayers” by a five-to-four margin.

Here’s a chart from the article showing how Connecticut is driving away some of its most lucrative taxpayers.

Here’s a specific example of someone voting with their feet. But not just anybody. It’s David Walker, the former Comptroller General of the United States, and he knows how to assess a jurisdiction’s financial outlook.

…my wife, Mary, and I are leaving the Constitution State. We are saddened to do so because we love our home, our neighborhood, our neighbors, and the state. However, like an increasing number of people, the time has come to cut our losses… current state and local leaders have the willingness and ability to make the tough choices needed to create a better future in Connecticut, especially in connection with unfunded retirement obligations. …Connecticut has gone from a top five to bottom five state in competitive posture and financial condition since the late 1980s. In more recent years, this has resulted in an exodus from the state and a significant decline in home values.

All of this horrible news suggests that perhaps Connecticut should get more votes in my poll on which state will be the first to suffer fiscal collapse.

Incidentally, that raises a very troubling issue.

The former Governor of Indiana, Mitch Daniels, wrote last year for the Washington Post that we should be worried about pressure for a bailout of profligate states such as Connecticut.

…several of today’s 50 states have descended into unmanageable public indebtedness. …in terms of per capita state debt, Connecticut ranks among the worst in the nation, with unfunded liabilities amounting to $22,700 per citizen. …More and more desperate tax increases haven’t cured the problem; it’s possible that they are making it worse. When a state pursues boneheaded policies long enough, people and businesses get up and leave, taking tax dollars with them. …So where is a destitute governor to turn? Sooner or later, we can anticipate pleas for nationalization of these impossible obligations. …Sometime in the next few years, we are likely to go through our own version of the recent euro-zone drama with, let’s say, Connecticut in the role of Greece.

And don’t forget other states that are heading in the wrong direction. Politicians from California, New York, New Jersey, and Illinois also will be lining up for bailouts.

Here’s the bottom line on Connecticut: As recently as 1990, the state had no income tax, which put it in the most competitive category.

But then politicians finally achieved their dream and imposed an income tax.

And in a remarkably short period of time, the state has dug a big fiscal hole of excessive taxes and spending (with gigantic unfunded liabilities as well).

It’s now in the next-to-last category and it’s probably just a matter of time before it’s in the 5th column.

P.S. While my former state obviously has veered sharply in the wrong direction on fiscal policy, I must say that I’m proud that residents have engaged in civil disobedience against the state’s anti-gun policies.

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The Trump Tax Reform Is Generating Good Results

The crown jewel of the 2017 tax plan was the lower corporate tax rate.

I appeared on CNBC yesterday to debate that reform, squaring off against Jason Furman, who served as Chairman of Obama’s Council of Economic Advisers.

Here are a couple of observations on our discussion.

• Jason Furman thinks it would be crazy to raise the corporate tax rate back to 35 percent. Yes, he wants to rate to be higher, but rational folks on the left know it would be very misguided to fully undo that part of the tax plan. That signifies a permanent victory.
• Based on his comments about expensing and interest deductibility, he also seems to have a sensible view on properly and neutrally defining corporate income. These are boring and technical issues, but they have very important economic implications.
• Critics say the lower corporate rate is responsible for big increases in red ink, but it’s noteworthy that the corporate rate was reduced by 40 percent and revenue is down by only 8.7 percent (a possible Laffer-Curve effect?). Here’s the relevant chart from the latest Monthly Budget Report from the Congressional Budget Office.

• There’s a multi-factor recipe that determines prosperity, so it’s extremely unlikely that any specific reform will have a giant effect on growth, but even a small, sustained uptick in growth can be hugely beneficial for a nation.
• There’s a big difference between a pro-market Democrat like Bill Clinton and some of the extreme statists currently seeking the Democratic nomination (just like there’s a big difference between Ronald Reagan and some of today’s big-government Republicans).
• I close the discussion by explaining why “double taxation” is a profound problem with the current tax code. For all intents and purposes, we are punishing the savers and investors who generate future growth.

P.S. This wasn’t addressed in the interview, but I can’t resist pointing out that overall revenues for the current fiscal year have increased 2.2 percent, which is faster than needed to keep pace with inflation. So why has the deficit increased? Because spending has jumped by 5.8 percent. We have a spending problem in America, not a deficit problem. Fortunately, there’s a very practical solution.

P.P.S. It also wasn’t mentioned, but the other crown jewel of tax reform was the restriction on the state and local tax deduction.

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Welcome Instapundit readers! Thanks, Glenn

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The Middle Class in America Is Benefiting from “Almost Capitalism”

The candidates for the 2020 Democratic nomination are competing to offer the most statist agenda, with Crazy Bernie, Elizabeth Sanders, and Kamala Harris being obvious examples.

But let’s not overlook Mayor Pete Buttigieg. He has a moderate demeanor, but he’s been advocating hard-left policies.

And he justifies his class-warfare agenda by arguing against Reaganomics and claiming that incomes have been stagnant since the 1980s.

South Bend Mayor Pete Buttigieg, a 2020 Democratic presidential hopeful, said the governing philosophy of Republicans such as former President Ronald Reagan, who signed across-the-board tax rate cuts to grow the economy, should not be repeated in the future. “What we’ve seen is that the rising tide rose, right? GDP went up. Growth went up. Productivity went up — big numbers went up and most of our boats didn’t budge. For 90 percent of Americans, you start the clock right around the time I’m born. Income didn’t move at all — so lower to middle income, really, almost all of us,” Buttigieg said.

Is this true? Have Americans been on a treadmill?

We can easily answer that question because I was at “FEEcon” this past weekend, an annual conference organized by the Foundation for Economic Education.

There were plenty of great presentations (including, I hope, my remarks on the economics of protectionism).

I was most impressed, however, by Professor Antony Davies, who gave some upbeat remarks about living standards.

Here’s one of his slides, which shows some headlines that echo the pessimistic view of Mayor Pete.

But do those headlines reflect reality?

If we look at cash wages since 1979, it seems that there hasn’t been much growth.

But cash is only part of total compensation.

Professor Davies showed that total compensation is up by a significantly greater amount.

By the way, I don’t think this is unalloyed good news.

A big reason for the difference between cash income and total compensation is that we have an exclusion in the tax code that encourages the over-provision of fringe benefits (which, in turn, contributes to the third-party payer problem).

But I don’t want to digress too much. The key point is that workers have seen healthy increases in compensation, notwithstanding the fact that I wish it was more in the form of wages.

Now let’s look at some more headlines from Davies’ presentation.

According to many news sources, the middle class is in trouble.

Is that true?

Professor Davies goes back to 1970 and (after adjusting for inflation) shows the distribution of households in America by income.

And then he shares the same data for every five-year period since 1970 to show that the middle class has shrunk.

But it shrank because a greater share of the population became rich.

Let’s close with two more slides, both of which look at 100 years of data.

This chart shows take-home pay for three types of workers.

And, more importantly, here’s a chart showing how much those three workers could buy based on hours of work.

As you can see, even a minimum-wage worker is much better off today than an average worker 100 years ago (with the exception of movie tickets).

Since we just looked at long-run data, let’s close today’s column with some short-run numbers.

In a column for the U.K.-based Guardian, Michael Strain of the American Enterprise Institute explains that capitalism currently is delivering some very positive results for ordinary people.

This is a strange time to be debating whether capitalism is broken, at least in the United States. The economy has added jobs every month since October 2010 for a total of over 20m net new payroll jobs. The unemployment rate is below 4%, lower than it has been since 1969. Wage growth is finally accelerating, clocking in at a rate well above 3% a year for typical workers. The workforce participation rate for people ages 25 to 54 has increased by 1.6 percentage points since 2015, wiping out half a decade of decline. There are more job openings than unemployed workers in the US. …So much for a stagnant economy. …Since 2016, weekly earnings for the bottom 10% of full-time workers have grown more than 50% faster than for workers at the median. The unemployment rate for adults without a high school degree is further below its long-term average than the rate for college-educated workers.

By the way, I’m not trying to be a Pollyanna with rose-colored glasses.

We have numerous bad policies that are hindering prosperity. If we reduced the size and scope of Washington, we could enjoy even greater levels of prosperity.

But we shouldn’t make the perfect the enemy of the good. The United States is one of the world’s most market-oriented nations.

This tweet nicely captures the choice we face in the real world. We have “almost capitalism,” which has made the U.S. a rich nation.

Some politicians, such as Mayor Pete and Crazy Bernie, would prefer to move the nation toward “almost socialism.”

They don’t intend (I hope!) to go too far in that direction, but incremental moves in the wrong direction will cause incremental weakening of American prosperity.

And they’re dead wrong on the issue of income growth.

P.S. Many of the Democrats say we should copy the statist policies of various European nations. I wish a journalist would ask them why we should copy the policies of nations that have lower living standards.

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A George Orwell Award for Most Absurd Rhetoric about Taxation?

Proponents of bigger government sometimes make jaw-dropping statements.

I even have collections of bizarre assertions by both Hillary Clinton and Barack Obama.

What’s especially shocking is when statists twist language, such as when they claim all income is the “rightful property” of government and that people who are allowed to keep any of their earnings are getting “government handouts.”

A form of “spending in the tax code,” as they sometimes claim.

Maybe we should have an “Orwell Award” for the most perverse misuse of language on tax issues.

And if we do, I have two potential winners.

The governor of Illinois actually asserted that higher income taxes are needed to stop people from leaving the state.

Gov. J.B. Pritzker…blamed the state’s flat income tax for Illinois’ declining population. …“The people who have been leaving the state are actually the people who have had the regressive flat income tax imposed upon them, working-class, middle-class families,” Pritzker said. Pritzker successfully got the Democrat-controlled state legislature to pass a ballot question asking voters on the November 2020 ballot if Illinois’ flat income tax should be changed to a structure with higher rates for higher earners. …Pritzker said he’s set to sign budget and infrastructure bills that include a variety of tax increases, including a doubling of the state’s gas tax, increased vehicle registration fees, higher tobacco taxes, gambling taxes and other tax increases

I’ve written many times about the fight to replace the flat tax with a discriminatory graduated tax in Illinois, so no need to revisit that issue.

Instead, I’ll simply note that Pritzker’s absurd statement about who is escaping the state not only doesn’t pass the laugh test, but it also is explicitly contradicted by IRS data.

In reality, the geese with the golden eggs already are voting with their feet against Illinois. And the exodus will accelerate if Pritzker succeeds in killing the state’s flat tax.

Another potential winner is Martin Kreienbaum from the German Finance Ministry. As reported by Law360.com, he asserted that jurisdictions have the sovereign right to have low taxes, but only if the rules are rigged so they can’t benefit.

A new global minimum tax from the Organization for Economic Cooperation and Development is not meant to infringe on state sovereignty…, an official from the German Federal Ministry of Finance said Monday. The OECD’s work plan…includes a goal of establishing a single global rate for taxation… While not mandating that countries match or exceed it in their national tax rates, the new OECD rules would allow countries to tax the foreign income of their home companies if it is taxed below that rate. …”We respect the sovereignty for states to completely, freely set their tax rates,” said Martin Kreienbaum, director general for international taxation at the German Federal Ministry of Finance. “And we restore sovereignty of other countries to react to low-tax situations.” …”we also believe that the race to the bottom is a situation we would not like to accept in the future.”

Tax harmonization is another issue that I’ve addressed on many occasions.

Suffice to say that I find it outrageous and disgusting that bureaucrats at the OECD (who get tax-free salaries!) are tying to create a global tax cartel for the benefit of uncompetitive nations.

What I want to focus on today, however, is how the principle of sovereignty is being turned upside down.

From the perspective of a German tax collector, a low-tax jurisdiction is allowed to have fiscal sovereignty, but only on paper.

So if a place like the Cayman Islands has a zero-income tax, it then gets hit with tax protectionism and financial protectionism.

Sort of like having the right to own a house, but with neighbors who have the right to set it on fire.

P.S. Trump’s Treasury Secretary actually sides with the French and supports this perverse form of tax harmonization.

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If Bernie Sanders Is Right, Why not Make Socialism Voluntary?

As reported by the Washington Examiner, Crazy Bernie thinks the American people will be happy to pay more taxes in exchange for more goodies from Washington.

Presidential candidate Bernie Sanders said more taxes would be necessary in order to pay for things like universal healthcare and tuition-free college. …”a lot of people in the country would be delighted to pay more in taxes if they had comprehensive healthcare as a human right,” Sanders said. …Sanders, an independent senator from Vermont, said there is a “tradeoff” but he believes “most people will believe they will be better off…when they have healthcare as a human right and they have affordable housing, decent retirement security, and most Americans will understand that that is a good deal.”

I’m very skeptical of this claim.

When people are given the opportunity to voluntarily pay additional tax, whether to the federal government or state governments, they almost never cough up additional money.

Supporters of Bernie Sanders might claim that I’m being unfair. After all, he’s claiming that people would be happy to pay additional tax for additional spending, not additional tax for the current level of spending.

That’s a fair point.

So I’m willing to meet Crazy Bernie at the halfway point.

He says people would be happy to pay more tax and I think that’s wrong. How can we figure out which one of us is correct?

Simple. Let people choose. There are two ways to make this happen.

1. Make socialism voluntary. If Crazy Bernie is correct about people wanting to pay more to get more, why not create a system where people can opt in or opt out? That shouldn’t be too difficult. Just create two tax systems, one for people who want to pay more to get more goodies, and another for people who don’t want that option. Heck, we could even create a third system for people (like me) who would like to opt out of existing redistribution and social insurance programs.
2. Comprehensive federalism. Let’s basically repeal the Washington-centric welfare state and let states decide whether to impose such programs. If people like paying high taxes in exchange for big government, I’m sure politicians in New Jersey, California, and Illinois will be happy to oblige. But if Crazy Bernie is wrong, maybe people will vote with their feet and migrate to states that presumably would forego the opportunity to replicate the programs currently imposed from D.C.

Needless to say, I very much doubt whether Crazy Bernie or any of his supporters will go for either choice.

They know that voluntary socialism inevitably breaks down.

And folks on the left favor tax and spending harmonization precisely because they know that federalism and decentralization will lead to a smaller welfare state.

Which is why, notwithstanding Crazy Bernie’s claim, I described this tweet as perfectly capturing “the essential difference between libertarians and statists.”

Amen.

Statists don’t support choice. They don’t like federalism. The bottom line is that they know their intended victims will opt out.

Crazy Bernie is bluffing. He knows people don’t favor higher taxes. This cartoon explains everything.

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The Right-Wing Debate Between Classical Liberalism and Bigger Government

I wrote yesterday about the debate among leftists, which is partly a contest between Bernie Sanders-style socialists and Elizabeth Warren-style corporatists.

Now let’s look at the debate on the right.

There’s an ongoing argument over what it means to be conservative, especially when thinking about the role of the federal government.

You can view this debate – if you peruse this “political compass test” – as being a battle over whether it is best for conservatism to be represented by Friedrich Hayek or Angela Merkel? By Donald Trump or Gary Johnson?

As far as I’m concerned, it’s a debate between whether the right believes in the principles of small-state classical liberalism or whether it thinks government should have the power to steer society.

Representing the latter view, here’s some of what Henry Olsen wrote for the Washington Post.

…libertarian-minded opinion leaders have criticized Trump… For these people, Trump was…an apostate whose heresies had to be cast out of the conservative church. Trump’s overwhelming victory in the primaries should have shocked them out of their ideological slumber. …the market fundamentalists seem to see nothing— absolutely nothing — about today’s capitalism to dislike. …National Review’s founder, William F. Buckley, famously wrote that…the federal government’s proper peacetime duties are solely to “protect its citizens’ lives, liberty, and property.” With respect to its efforts to do anything else, “we are, without reservation, on the libertarian side.” But that dog don’t hunt politically. ..libertarian-conservatives remain oblivious or intentionally in denial… The New Deal’s intellectual core, that the federal government should vigorously act to correct market failures, remains at the center of what Americans expect from Washington. Trump’s nomination and election proved beyond a shadow of a doubt that even a majority of Republicans agree. Less doctrinaire conservative thinkers understand this. Ramesh Ponnuru noted in his National Review essay that…capitalism “require[s] invigoration” as a result. The American Enterprise Institute’s Yuval Levin goes further, noting that “sometimes our economic policy has to be determined by more than purely economic considerations.” Other factors, such as social order and family formation, are also worthy goals to which pure economic efficiency or growth must bend at times. …this debate is fundamental to the future of conservatism and perhaps of the United States itself.

And here’s the beginning of a history-filled article by Joshua Tait in the National Interest.

When FOX television host Tucker Carlson recently attacked conservative faith in free market economics, he probably surprised a number of his viewers. For too long, Carlson charged, libertarians and social conservatives have ignored the fundamental part economic structures play in undermining communities. Families are crushed beneath market forces. Disposable goods—fueled by consumer culture—provide little salve for drug addiction and suicide. Markets are a “tool,” Carlson said, not a “religion.” “You’d have to be a fool to worship” them. Carlson put a primetime spin on an argument that has been brewing for some time on the right. Just as the 2008 economic collapse and the national prominence of Bernie Sanders have begun to shift the Democratic Party’s stance toward socialism, so the long effects of the downturn and Trump’s election have caused a rethinking of conservative commitment to free markets.

Last but not least, Jonah Goldberg examines a slice of this divide in a column for National Review.

The idea holding together the conservative movement since the 1960s was called “fusionism.” The concept…was that freedom and virtue were inextricably linked. …Today, conservative forces concerned with freedom and virtue are pulling apart. The catalyst is a sprawling coalition of self-described nationalists, Catholic integralists, protectionists, economic planners, and others who are increasingly rallying around something called “post-liberal” conservativism. By “liberal,” they…mean classical liberalism, the Enlightenment worldview held by the Founding Fathers. What the post-liberals want is hard to summarize beyond generalities. They seek a federal government that cares more about pursuing the “highest good” than protecting the “libertarian” (their word) system of individual rights and free markets. …On the other side are…conservatives who…still rally to the banner of classical liberalism and its philosophy of natural rights and equality under the law. …this intellectual mudfight really is…about what conservatism will mean after Trump is gone from the scene. …the so-called post-liberals now want Washington to dictate how we should all pursue happiness, just so long as it’s from the right. …Where the post-liberals have a point is that humans are happiest in communities, families and institutions of faith. The solution to the culture wars is to allow more freedom for these “little platoons” of civil society… What America needs is less talk of national unity — from the left or the right — and more freedom to let people live the way they want to live, not just as individuals, but as members of local communities. We don’t need to move past liberalism, we need to return to it.

For what it’s worth, I prefer Jonah’s analysis.

But I’ll also make three additional points.

First, if we care about maximizing freedom and prosperity, there’s no substitute for classical liberalism.

In my lifetime, there have been various alternatives to free markets. There was pre-Reagan Rockefeller Republicanism, post-Reagan “kinder and gentler,” George W. Bush’s so-called compassionate conservatism, reform conservatism, and now various strains of Trumpism and populism.

It may very well be true that some of these alternatives are more politically palatable (though I’m skeptical given the GOP’s unparalleled electoral success with an anti-big government message in 1980, 1994, 2010, and 2014).

But even if some alternatives are more popular, the associated policies will hurt people in the long run. That’s a point I made when arguing for supply-side tax cuts over family-friendly tax cuts.

In other words, you demonstrate compassion by giving people opportunity to prosper, not by giving them other people’s money.

Second, there’s nothing about classical liberalism or capitalism that suggests people should be selfish and atomistic.

Indeed, I pointed out, starting at the 3:36 point of this interview, that a libertarian society is what allows family, neighborhood, and community to flourish.

And, as Jonah explained, the “platoons” of “civil society” are more likely to thrive in an environment where the central government is constrained.

My third and final point is that I’m pessimistic.

The debate on the left is basically about how to make government bigger and how fast that process should occur.

Unfortunately, there isn’t a similar debate on the right, featuring different theories of how to shrink the size and scope of government.

Instead, the Reaganite-oriented classical liberals are the only ones who want America to become more like Hong Kong, while all the competing approaches basically envision government getting bigger, albeit at a slower rate than preferred by folks on the left.

In other words, we’re in a political environment where everyone on the left is debating how quickly to become Mexico and many people on the right are debating how quickly to become France.

No wonder I’ve identified an escape option if America goes down the wrong path.

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The Left-Wing Debate Between Socialism and Corporatism

When writing about Bernie Sanders back in 2016, I put together a flowchart to identify different strains of statism.

In part, I wanted to show that genuine socialists, with their advocacy of government ownership, central planning, and price controls, aren’t really the same as other leftists (and I’ve made the unconventional claim that “Crazy Bernie” isn’t a true socialist – at least based on his policy positions).

I’m not the only one to notice that not all leftists have the same approach.

Writing for the Washington Post about the battle between Bernie Sanders and Elizabeth Warren for the Democratic nomination, Elizabeth Bruenig opines on the difference between two strains of statism.

What is the difference between Sanders (I-Vt.) and Sen. Elizabeth Warren (D-Mass.)? …much of it comes down to the matter of regulation vs. revolution. For Warren, the solution to our economic ills already exists in well-regulated capitalism. “I believe in markets,”… Warren believes today’s socioeconomic ills are the result of high concentrations of power and wealth that can be resolved with certain regulatory tools and interventions. …for Sanders, those solutions come up short. ,,,Instead, he aims to transfer power over several key segments of life to the people — by creating a set of universal economic rights that not only entitle citizens to particular benefits (such as medical care, education and child care) but also give those citizens a say in how those sectors are governed: in short, democratic socialism.

They both sound like “stationary bandits” to me, but there are some nuances.

Elizabeth Warren basically favors private ownership but she explicitly wants politicians and bureaucrats to have the power to dictate business decisions.

Thomas Sowell points out this economic philosophy is fascism. But I’ll be more polite and refer to it as corporatism.

By contrast, as a self-declared socialist, Bernie Sanders should be in favor of nationalizing companies.

But, as reported by the New York Times, he actually sees himself as another Franklin Roosevelt.

Senator Bernie Sanders of Vermont offered a vigorous defense of the democratic socialism that has defined his five decades in political life on Wednesday… Mr. Sanders cast himself at times in direct competition with President Trump, contrasting his own collectivist views against what he called the “corporate socialism” practiced by the president and the Republican Party. And Mr. Sanders, 77, declared that his version of socialism was a political winner, having lifted Mr. Roosevelt to victory four times… Mr. Sanders…presented his vision of democratic socialism not as a set of extreme principles but as a pathway to “economic rights,”… He argued that his ideology is embodied by longstanding popular programs, including Social Security, Medicare and Medicaid, that Republicans have labeled socialist. …Mr. Sanders called for a “21st-century economic Bill of Rights,” which he said would address health care, wages, education, affordable housing, the environment and retirement.

I’ll make two points.

First, FDR may have won four times, but he was an awful President. His policies deepened and lengthened the Great Depression.

And his proposed “economic bill of rights” would have made a bad situation even worse. He basically said everyone has a right to lots of freebies without ever stopping to think about the impact such policies would have on incentives to lead productive lives.

For all intents and purposes, we wanted to turn this cartoon into reality.

Second, I don’t actually think there’s a significant difference between Sanders and Warren. Yes, their rhetoric is different, but they both want higher taxes, more regulation, additional spending, and more intervention.

Heck, if you examine their vote ratings from the Club for Growth or the National Taxpayers Union, it’s hard to find any real difference.

At the risk of making a radical understatement, neither of them is a friend to taxpayers.

But thinking about this issue has motivated me to modify my statism flowchart. Here’s the new version.

As you can see, I created a much-needed distinction between totalitarian statism and democratic statism.

And while Warren is on the corporatist side and Sanders is on the socialist side, I also put both of them relatively close to the Venezuela-style track of “incoherent statism.” In other words, I think they’re guided by vote buying rather than a cohesive set of principles.

P.S. I wrote last week about the emerging “anti-socialist” wing of the Democratic Party. Presumably they would be the “rational leftists” on the flowchart.

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An Important Lesson on Spending Restraint from the United Kingdom

I wrote yesterday about the leadership race for the Conservative Party in the United Kingdom.

The most important goal is to find a leader who will deliver a “clean Brexit,” but I also pointed out that it would be very desirable to select a Prime Minister who will support much-needed supply-side reforms to make the U.K. more attractive for jobs and investment.

Today, let’s turn our attention to the spending side of the fiscal ledger.

The accompanying table of data (from page 65 of HM Treasury’s Statistical Analyses of Public Expenditure) shows annual spending in nominal and inflation-adjusted terms, as well as the burden of spending as a share of economic output.

If you look at trends, you’ll notice a bit of progress in the 1980s under Margaret Thatcher and then some backsliding last decade when Tony Blair and Gordon Brown were in charge.

But the most surprising results can be found this decade.

Starting in 2011, there’s been some impressive spending restraint. Nominal outlays have increased by an average of 1.7 percent annually.

And since the private sector has grown at a faster pace, that means the overall burden of government spending – measured as a share of gross domestic product – has declined.

I’ve never thought of David Cameron (Prime Minister from 2010-2016) or Theresa May (Prime Minister since 2016) as fiscal conservatives, but they deserve credit for keeping spending under control.

(Too bad we can’t say the same thing about Donald Trump!)

In any event, the new leader of the Conservative Party should maintain this approach. Or, better yet, go one step further by institutionalizing some sort of Swiss-style spending cap.

There’s also a lesson for the rest of us.

What’s happened in the United Kingdom is additional confirmation that my Golden Rule is the right approach to fiscal policy.

Nations with multi-year periods of spending restraint always get good fiscal results.

We even had such an experience in the United States (back when Republicans pretended to care about spending).

Let’s close with this chart, based on IMF data, showing what’s happened this decade in the United Kingdom.

P.S. Unsurprisingly, Paul Krugman got everything backwards when he examined U.K. fiscal policy earlier this decade.

P.P.S. While they did a surprisingly good job on spending restraint, that doesn’t change the fact that Cameron was bad on tax policy and May was a failure on Brexit.

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Can Tories Find a New Margaret Thatcher to Lead the U.K. to Post-Brexit Prosperity?

The Conservative Party in the United Kingdom is in the process of selecting a new leader to replace the disastrous Theresa May as Prime Minister.

The most important goal for the Tories is to find someone who will deliver a clean Brexit and thereby extricate the country from a decrepit and declining European Union.

But once Brexit does happen, adopting pro-growth policies will be very important – especially if the European Union petulantly tries to make the transition painful by rejecting a free trade agreement.

The good news is that the United Kingdom is ranked #9 for overall economic liberty according to the latest edition of Economic Freedom of the World, so it has a strong foundation for competitiveness.

The bad news is that the U.K. is only ranked #120 for fiscal policy.

Since that’s the weak spot, let’s see what can be done to move in the right direction.

Let’s look at the tax side of the fiscal equation. According to the Tax Foundation’s International Tax Competitiveness Index, the U.K. is in the bottom half (almost in the bottom third). And I’ve circled the country’s dismal ranking for individual taxes.

By the way, I don’t think this Index is a perfect measure. As I pointed out back in 2016, it needs to include a size-of-government variable.

Nonetheless, it’s a great place to start.

Now let’s consider the fiscal plans of various candidates for Tory leader.

The U.K.-based Mirror has a helpful summary.

Frontrunner Boris Johnson has promised a massive income tax cut for Britain’s richest people – by raising the 40p threshold from £50,000 to £80,000. …Meanwhile Home Secretary Sajid Javid has said he would partially reverse swingeing Tory cuts to the police and recruit 20,000 police officers. He also planned a tax cut for the richest 1% of taxpayers in the UK by removing the 45p rate of income tax, if it pays off overall. …Michael Gove has pledged to scrap VAT replacing it with a simpler sales tax. …Meanwhile Esther McVey has vowed to cut taxes – without saying which – and slash £7billion from the foreign aid budget and spend it on school and police. …Former Brexit Secretary Dominic Raab…promised to shrink the state and slash public spending by reducing the basic rate of income tax from 20p to 15p over time – including a 1p drop “straight away”. …Foreign Secretary Jeremy Hunt wants to cut corporation tax further to 12.5%. That would make the UK’s tax rate by far the lowest in the G20 and turn the country into a tax haven. …Rory Stewart has himself already said he would double spending on climate change and the environment as he warned the UK must do more in the face of an “environmental cataclysm”. Former Leader of the House Andrea Leadsom…is committed to “low taxes, incentives for enterprise and strong employment opportunities”.

A mixed bag.

Rory Stewart seems to have the most statist mindset (he’s also very weak on Brexit), but it’s not clear who has the best fiscal plan.

Let’s look at more data. The Wall Street Journal opined this morning on this topic.

The editorial starts with an indictment of the current system.

Britain’s Byzantine tax system still drags on investment, productivity and growth despite important recent improvements. The top corporate rate has fallen to 19% from 30% since 2007 and is due to hit 17% next year. But the top personal rate, paid on incomes above £150,000, has fallen only to 45% from 50%. Coupled with abrupt income cutoffs in eligibility for allowances and credits, British taxpayers in practice can experience a marginal rate as high as 60% for each additional pound of income between £100,000 and £124,000, and 65% for families with three children earning between £50,000 and £60,000, according to the Institute for Fiscal Studies. Add taxes on pension contributions at higher incomes and some workers pay marginal rates above 100% on parts of their income—paying more than a pound in tax for each additional pound they earn. …Social-insurance and property taxes add more burdens.

And this doesn’t even include the fact that the U.K. has above-average death taxes and higher-than average levels of double taxation.

How do Tory candidates propose to deal with these problems?

The best Conservative leadership proposals so far come from Foreign Secretary Jeremy Hunt and Home Secretary Sajid Javid.Mr. Hunt pledges to reduce the corporate rate to 12.5% to match Ireland’s low rate… Mr. Javid would cut the top individual rate to 40%. …Frontrunner Boris Johnson promises to increase the threshold at which the 40% rate kicks in, to £80,000 from £50,000. The 4.2 million people estimated to see their taxes reduced won’t complain. But tweaking brackets does nothing to fix the current tax code’s bad rate incentives for top earners—the entrepreneurs and investors post-Brexit Britain needs to attract. …Brexit hardliner Dominic Raab would cut the lower personal rate for earners between £12,500 and £50,000 to 15% from 20%. Any rate cut is welcome, but this would help many households that already receive more in benefits than they pay in tax. Environment Secretary Michael Gove would replace the 20% value-added tax with a lower-rate U.S.-style sales tax, which would be a boon to low-income households. But neither would fix broken incentives to work and invest as incomes rise.

As you can see, it’s a mix of mediocre-to-good ideas.

Much like when Republicans generated a bunch of plans when competing for the nomination in 2016.

Of course, let’s also keep in mind that Jeremy Corbyn of the Labour Party also has a tax plan, which is a poisonous collection of class-warfare provisions that would make the U.K. less attractive for jobs and investment.

Which means it is especially important, as the WSJ concludes, to have a compelling case for growth instead of redistribution.

…the only way Britain can prosper post-Brexit is by becoming a magnet for investment and human talent. If voters want the party of income redistribution, they’ll choose Labour. Tories have to be the credible party of growth, with a leader willing and able to make the reform case.

In other words, is there another Margaret Thatcher somewhere in the mix?

P.S. If you want to enjoy some Brexit-themed humor, click here and here.

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Singapore and Hong Kong Surpass the United States in Competitiveness Ranking

Because they directly measure economic liberty, my favorite global rankings are Economic Freedom of the World and the Index of Economic Freedom.

But I also like the World Economic Forum’s Global Competitiveness Report and the Institute of Management Development’s World Competitiveness Rankings, both of which basically measure the degree to which a nation is hospitable to business activity (which is correlated with economic liberty).

The United States dominated the IMD rankings until 2010, and America managed to reclaim the top spot for 2017. But according to new numbers from IMD’s World Competitiveness Center, Singapore and Hong Kong are now at the top.

I’m also not surprised to see Switzerland ranked highly.

And it’s worth noting that the Netherlands, Ireland, and Denmark are top-10 nations, similar to their scores in the Human Freedom Index.

Here’s some additional information from the press release.

Singapore has ranked as the world’s most competitive economy for the first time since 2010, according to the IMD World Competitiveness Rankings, as the United States slipped from the top spot… Singapore’s rise to the top was driven by its advanced technological infrastructure, the availability of skilled labor, favorable immigration laws, and efficient ways to set up new businesses. Hong Kong SAR held on to second place, helped by a benign tax and business policy environment and access to business finance. …The IMD World Competitiveness Rankings, established in 1989, incorporate 235 indicators from each of the 63 ranked economies. The ranking takes into account a wide range of “hard” statistics such as unemployment, GDP and government spending on health and education, as well as “soft” data from an Executive Opinion Survey covering topics such as social cohesion, globalization and corruption. This information feeds into four categories – economic performance, infrastructure, government efficiency and business efficiency – to give a final score for each country. There is no one-size-fits-all solution for competitiveness, but the best performing countries tend to score well across all four categories. Switzerland climbed to fourth place from fifth, helped by economic growth, the stability of the Swiss franc and high-quality infrastructure. …The United Arab Emirates – ranked 15^th as recently as 2016 – entered the top five for the first time. …Venezuela remains anchored to the bottom of the ranking, hit by inflation, poor access to credit and a weak economy. The South American economy ranks the lowest for three out of four of the main criteria groups – economic performance, government efficiency and infrastructure.

Venezuela in last place? I’m shocked, shocked.

There are two specific items from the report I want to highlight.

First, notwithstanding the bleating from Trump and others about a supposed crisis of inadequate spending, notice that the United States is in first place for that category.

Also, notice that the jurisdictions with high scores for government efficiency are all places with (by modern standards) small government.

This is very similar to the “public sector efficiency” scores from the European Central Bank.

The moral of the story is that small government is the way to get competent government. It’s almost as if there’s a recipe that generates good outcomes.

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Venezuela and the Socialism Slide

How do we measure the cost of Venezuelan socialism?

• Is it people eating household pets?
• Is it people dying of malnourishment?
• Is it women selling their bodies?

Actually, it’s all of the above.

And there’s plenty of additional evidence. All of which shows that more socialism results in more misery.

Let’s review some examples.

Venezuela has the largest oil reserves in the world. But with government running the industry, producing petroleum products has been a challenge. To put it mildly.

Venezuela — home to the world’s largest oil reserves — has started introducing in some areas to tackle extreme fuel shortages. …for ordinary Venezuelans, it is a cruel joke without a punchline — a driver recently died of a heart attack after waiting in line for days to fill his tank. …Lopez had been waiting in line to fill her tank for six hours in Lara’s capital Barquisimeto, but had to leave without getting any fuel because she had to go search for medicine for her ailing brother, who suffers from meningitis. “It’s a joke!” she fumed again as she left the gas station empty-handed, despite the fact that between state-regulated gas prices, hyper-inflation and black-market dollar exchange rates, a dollar could technically buy almost 600 million liters of fuel. …According to the Organization of Petroleum Exporting Countries (OPEC), Venezuela’s oil output has dropped from 3.2 million barrels per day a decade ago to 1.03 million barrels in April this year. Other estimates put that output as low as 768,000 barrels per day.

Here’s another sign of Venezuela’s descent into third-world status.

…the Center for Malaria Studies in Caracas..is not immune to Venezuela’s economic crisis and is struggling to treat patients. This is a country that lacks 85 percent of the medicines it needs, according to the pharmaceuticals industry. …Scientists who would later work for this clinic contributed in 1961 to helping Venezuela become the first country to eradicate malaria. However, there was a resurgence seven years ago, worsening to become an epidemic in 2016, according to the Red de Epidemiologia NGO. Today the clinic is in a sorry state: yellowed microscopes, a dishwasher stained by purple chemicals, refrigerators corroded by rust. …According to the World Health Organization, Venezuela registered more than 400,000 malaria cases in 2017, making it one of the hardest-hit countries in the Americas. Noya, though, believes the true extent of the epidemic is “close to two million” people affected.

I have no idea if Juan Guaido, the putative leader of the opposition, has what it takes to lead Venezuela out of the dark ages (maybe he’s another Macri rather than a Thatcher). But he’s definitely getting some first-hand experience with socialism.

On Thursday, Juan Guaido woke up and doused himself with a bucket of water. It was his shower. Like millions of Venezuelans, the man who dozens of countries recognize as the legitimate leader of his broken country can’t rely on the taps to run. …“It’s going to get worse” before things turn, he warned.

Reuters reports on how parts of Venezuela are descending into autarky and barter.

At the once-busy beach resort of Patanemo, tourism has evaporated over the last two years as Venezuela’s economic crisis has deepened and deteriorating cellphone service left visitors too afraid of robbery to brave the isolated roads. …These days, its Caribbean shoreline flanked by forested hills receives a different type of visitor: people who walk 10 minutes from a nearby town carrying rice, plantains or bananas in hopes of exchanging them for the fishermen’s latest catch. With bank notes made useless by hyperinflation, and no easy access to the debit card terminals widely used to conduct transactions in urban areas, residents of Patanemo rely mainly on barter. It is just one of a growing number of rural towns slipping into isolation as Venezuela’s economy implodes amid a long-running political crisis. …In the mountains of the central state of Lara, residents of the town of Guarico this year found a different way of paying bills – coffee beans. Residents of the coffee-growing region now exchange roasted beans for anything from haircuts to spare parts for agricultural machinery.

One can only wonder, by the way, why the collapse of trade isn’t creating more jobs and prosperity. Could it be that Trump is wrong on the issue?

But I’m digressing. Let’s get back to our main topic.

What can you say about a country that’s so poor that even criminals are suffering?

Venezuela’s crippling economic spiral is having a negative impact on an unlikely group in society: criminals, who are struggling to afford bullets, and unable to find things to steal as the country’s wealth declines rapidly. …While bullets are widely available on the black market, many muggers cannot afford the $1 price tag anymore, a criminal known as “Dog” told the news organization. …Another gangster, “El Negrito,” who leads a gang called Crazy Boys, has found it increasingly hard to support his wife and daughter with assaults. Firing a bullet is a luxury now, he said. …homicide rate…went down by nearly 10% last year— though Venezuela remains one of the most violent countries in the world. The non-profit, which aggregates the data from morgues and media reports, partly attributes this decrease to the reduction in muggings — because there is nothing to steal. …Shoemaker Yordin Ruiz told The Washington Post: “If they steal your wallet, there’s nothing in it.”

What a perfect symbol of socialism! People are so poor that there’s nothing left to steal.

I want to conclude by emphasizing a point that I’ve made before about greater levels of socialism being associated with greater levels of misery.

As you can see from this chart (based on EFW data), Hong Kong has the most freedom, though it isn’t perfect.

Then you have nations such as the United States and Denmark, that have some statist characteristics but are mostly market oriented. Followed by France, which has a lot more socialist characteristics, and then Greece, which presumably can be described as a socialist nation.

But Venezuela is an entirely different category. It’s in the realm of near-absolute statism.

P.S. Cuba and North Korea presumably rank below Venezuela, but they’re not part of the EFW rankings because of inadequate and/or untrustworthy data.

P.P.S. It’s hard to believe, given the pervasive statism that now exists, but Venezuela in 1970 was ranked in the top 10 for economic liberty.

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The Federal Reserve, Inflation, and Asset Bubbles

Having been exposed to scholars from the Austrian school as a graduate student, I have a knee-jerk suspicion that it’s not a good idea to rely on the Federal Reserve for macroeconomic tinkering.

In this interview from yesterday, I specifically warn that easy money can lead to economically harmful asset bubbles.

 

Since I don’t pretend to be an expert on monetary policy, I’ll do an appeal to authority.

Claudio Borio of the Bank for International Settlements is considered to be one of the world’s experts on the issue.

Here are some excerpts from a study he recently wrote along with three other economists. I especially like what they wrote about the risks of looking solely at the price level as a guide to policy.

The pre-crisis experience has shown that, in contrast to common belief, disruptive financial imbalances could build up even alongside low and stable, or even falling, inflation. Granted, anyone who had looked at the historical record would not have been surprised: just think of the banking crises in Japan, the Asian economies and, going further back in time, the US experience in the run-up to the Great Depression. But somehow the lessons had got lost in translation… And post-crisis, the performance of inflation has repeatedly surprised. Inflation…has been puzzlingly low especially more recently, as a number of economies have been reaching or even exceeding previous estimates of full employment. …the recent experience has hammered the point home, raising nagging doubts about a key pillar of monetary policymaking. …Our conclusion is that…amending mandates to explicitly include financial stability concerns may be appropriate in some circumstances.

Here’s a chart showing that financial cycles and business cycles are not the same thing.

The economists also point out that false booms instigated by easy money can do a lot of damage.

Some recent work with colleagues sheds further light on some of the possible mechanisms at work (Borio et al (2016)). Drawing on a sample of over 40 countries spanning over 40 years, we find that credit booms misallocate resources towards lower-productivity growth sectors, notably construction, and that the impact of the misallocations that occur during the boom is twice as large in the wake of a subsequent banking crisis. The reasons are unclear, but may reflect, at least in part, the fact that overindebtedness and a broken banking system make it harder to reallocate resources away from bloated sectors during the bust. This amounts to a neglected form of hysteresis. The impact can be sizeable, equivalent cumulatively to several percentage points of GDP over a number of years.

Here’s a chart quantifying the damage.

And here’s some more evidence.

In recent work with colleagues, we examined deflations using a newly constructed data set that spans more than 140 years (1870–2013), and covers up to 38 economies and includes equity and house prices as well as debt (Borio et al (2015)). We come up with three findings. First, before controlling for the behaviour of asset prices, we find only a weak association between deflation and growth; the Great Depression is the main exception. Second, we find a stronger link with asset price declines, and controlling for them further weakens the link between deflations and growth. In fact, the link disappears even in the Great Depression (Graph 4). Finally, we find no evidence of a damaging interplay between deflation and debt (Fisher’s “debt deflation”; Fisher (1932)). By contrast, we do find evidence of a damaging interplay between private sector debt and property (house) prices, especially in the postwar period. These results are consistent with the prevalence of supply-induced deflations.

I’ll share one final chart from the study because it certainly suggest that the economy suffered less instability when the classical gold standard was in effect before World War I.

I’m not sure we could trust governments to operate such a system today, but it’s worth contemplating.

P.S. I didn’t like easy money when Obama was in the White House and I don’t like it with Trump in the White House. Indeed, I worry the good economic news we’re seeing now could be partly illusory.

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Screwing Up Healthcare with Government-Created Third-Party Payer

In addition to speaking on tax competition at the European Resource Bank in Moldova, I also appeared on a panel about healthcare.

I used the opportunity to explain how government-created “third-party payer” has crippled market forces in the United States and produced inefficiency and needlessly high costs.

There are two visuals from my presentation I want to highlight.

First, I took Milton Friedman’s explanation of the how people care about cost and quality depending on whether they’re spendingf their own money and whether they’re buying for themselves, and I then showed how it applies to America’s healthcare system.

Ideally, purchases are made in quadrant 1. Thanks to government distortions, however, most health spending in America occurs in quadrants 2, 3, and 4.

When purchases occur in quadrant 1, buyers and sellers directly interact and there are incentives on both sides to get the most value.

That’s not the case, though, with purchases in the other quadrants.

I illustrated the problem with a slide that looks at the layers that exist between health consumers and health providers.

I also shared data on how third-party payer causes higher prices in every sector where it exists and also pointed out that we see falling prices in the few parts of the healthcare sector where people actually buy with their own money.

But that’s old news.

Let look at some new information.

Doctor Scott Atlas, in a column for today’s Wall Street Journal, concisely explains the problem of government-created third-party payer.

In an effort to bring down the costs of medical care, the Trump administration wants to make prices visible to patients, and it’s moving aggressively to make that happen. …A new executive order will require providers paid by Medicare to post prices for a range of procedures. Meanwhile, the Centers for Medicare and Medicaid Services recently finalized its mandate requiring pharmaceutical manufacturers to disclose the list price of prescription drugs in direct-to-consumer television advertisements. …Yet these moves won’t be enough to bring down prices. Transparency, though essential, is not sufficient. Nor does it always need to be legislated. Laws aren’t required to force sellers of food, computers or clothing to post prices. That information is driven by consumers who actively seek value for their money. …But patients typically don’t even ask about prices, because they figure “it’s all covered by insurance.” The harmful U.S. model is unfortunately that insurance should minimize any out-of-pocket payment. Health care may be the only good or service in America that is bought and used without knowing its cost. Unfortunately, the Affordable Care Act instilled even broader coverage requirements and added counterproductive subsidies that encouraged more-widespread adoption of bloated insurance, reinforcing a model of coverage that prevents patients from caring about prices.

How do we fix the problem?

Dr. Atlas says people need to have control over their healthcare dollars.

To bring prices down, …patients must have stronger incentives to consider price. …But as long as insurance minimizes the patient’s share of cost, the patient won’t bother price shopping. For price-transparency to have the most impact, it must increase visibility of the only price relevant to patients—out-of-pocket costs at the time of purchase. Cheaper insurance policies with higher deductibles, coupled with large, liberalized-use, permanently owned health savings accounts, are also important to motivate consideration of price. …We can make medical care more affordable without moving to a single-payer system. Centralized models uniformly regulate costs by restricting health-care use, generating lengthy delays for needed care, limiting access to important drugs and technology, and ultimately resulting in worse disease outcomes. The better path will involve reducing the cost of medical care itself by creating the conditions that bring down prices in every other area of the economy: incentivizing empowered consumers and increasing the supply of medical care to stimulate competition among providers.

Amen.

That means reforming Medicare and Medicaid, where the government directly creates third-party payer.

And it means reforming the tax code, where the government indirectly creates third-party payer with a big preference for over-insurance.

At the risk of upsetting some people, it even means defending the “Cadillac tax,” a provision of Obamacare.

And even agreeing with the Washington Post, which opined today in favor of that provision.

Consider the House supermajority, made up of Democrats and Republicans favoring repeal of the excise tax on high-cost health insurance plans, which would otherwise take effect in 2022. …the bill is backed by a potent lobbying coalition including insurance companies, labor unions — and even ExxonMobil. …Known as the “Cadillac tax” because it applies to especially generous “Cadillac” health plans, the tax equals 40 percent of the value of private-sector health benefits exceeding $11,200 for single coverage and $30,150 for family coverage in 2022. Albeit indirectly, the tax chips away at one of the largest subsidies in the health-insurance system, the tax exclusion for employer-paid health insurance… A wide consensus of economists identifies the tax exclusion as a major source of distortion in the U.S. system, building a higher floor under costs… The Cadillac tax would curb these tendencies… killing the Cadillac tax… The United States’ already out-of-whack health-care system will become more so, and bipartisan profligacy and pandering will have triumphed again.

Let’s close with a bit of dark humor.

One of my many frustrations is that people blame the free market for the various government-caused problems in healthcare. Here’s a way of visualizing it.

Government intervenes, which causes problems, and those problems are then used as an excuse for additional intervention. Sort of a turbo-charged version of Mitchell’s Law.

Ultimately, this process may lead politicians to adopt something really crazy, such as “Medicare for All.”

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Debating Fiscal Policy and Red Ink for USA Today

The folks at USA Today invited me to opine on fiscal policy, specifically whether the 2017 tax cut was a mistake because of rising levels of red ink.

Here’s some of what I wrote on the topic, including the all-important point that deficits and debt are best understood as symptoms of the real problem of too much spending.

Now that there’s some much needed tax reform to boost American competitiveness, we’re supposed to suddenly believe that red ink is a national crisis. What’s ironic about all this pearl clutching is that the 2017 tax bill actually increases revenue beginning in 2027, according to the Joint Committee on Taxation. …This isn’t to say that America’s fiscal house is in good shape, or that President Donald Trump should be immune from criticism. Indeed, the White House should be condemned for repeatedly busting the spending caps as part of bipartisan deals where Republicans get more defense spending, Democrats get more domestic spending and the American people get stuck with the bill. …The real lesson is that red ink is bad, but it’s only the symptom of the real problem of a federal budget that is too big and growing too fast.

I also pointed out that the only good solution for our fiscal problems is some sort of spending cap, similar to the successful systems in Hong Kong and Switzerland.

Heck, even left-leaning international bureaucracies such as the OECD and IMF have pointed out that spending caps are the only successful fiscal rule.

Now let’s look at a different perspective. USA Today also opined on the same topic (I was invited to provide a differing view). Here are excerpts from their editorial.

…more than anyone else, Laffer gave intellectual cover to the proposition that politicians can have their cake and eat it, too. …Laffer argued — on a cocktail napkin, according to economic lore, and elsewhere — that tax reductions would pay for themselves. These “supply side” cuts would stimulate growth so much, revenue would rise even as tax rates declined. This is, of course, rubbish. In the wake of the massive 2017 tax cuts, …the budget deficit is projected to run a little shy of $1 trillion… To run such large deficits a decade into a record economy recovery, is a massive problem because they will soar to dangerous heights the next time a recession strikes.

I think the column misrepresents the Laffer Curve, but let’s set that issue aside for another day.

The editorial also goes overboard in describing the 2017 tax cut as “massive.” As I noted in my column, that legislation actually raises revenue starting in 2027.

That being said, the main shortcoming of the USA Today editorial is that it doesn’t acknowledge that America’s long-run fiscal challenge (even for those who fixate on deficits and debt) is entirely driven by excessive spending growth.

Indeed, all you need to know is that nominal GDP is projected to grow by an average of about 4.0 percent annually over the next 30 years while the federal budget is projected to grow 5.2 percent per year.

This violates the Golden Rule of sensible fiscal policy.

And raising taxes almost certainly would make this bad outlook even worse since the economy would be weaker and politicians would jack up spending even further.

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Australia, Donald Trump, and Limited Government: Part II

I had a chance to write about several interesting topics (Australian politics and policy, the economics of government spending, the structure of taxation) on my recent trip Down Under.

I also appeared on The Outsiders, one of Australia’s most popular political programs.

Here are a few links for those who want more information on some of the topics that were discussed.

• Societal capital – I fear that there is a tipping point and that nations are doomed once people decide that it’s morally acceptable to use government coercion to live off the effort of others.
• Demographics – Many nations face a built-in crisis because their redistribution programs are unaffordable now that people are living longer and having fewer children.
• Social Security reform – It’s not pure libertarianism, but Australia’s system of private retirement accounts is vastly superior to America’s bankrupt tax-and-transfer Social Security system.
• Socialism – It’s very troubling that many young people support the poisonous ideology of socialism, but I offered an optimistic spin that this doesn’t necessarily mean support for coercive statism.
• Tax reform – Citing globalization as a driving factor, I couldn’t resist the temptation to spread the supply-side gospel of lower marginal tax rates on productive economic activity.
• Donald Trump – As I’ve repeatedly pointed out, America’s president is an incoherent mix of good policies on tax and regulation mixed with bad policies on spending and trade.
• Trade and protectionism – Speaking of trade, I argued that the trade deficit doesn’t matter and also suggested a sensible approach for dealing with China.

P.S. This interview was an encore performance. I also appeared on The Outsiders in 2017. Part of my plan to curry favor so that I can escape to Australia if (when?) America suffers Greek-style chaos.

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Texas vs. California

Time for another edition of our long-running battle between the Lone Star State and the Golden State.

Except it’s not really a battle since one side seems determined to lose.

For instance, Mark Perry of the American Enterprise Institute often uses extensive tables filled with multiple variables when comparing high-performing states and low-performing states.

But when comparing California and Texas, sometimes all you need is one data source because it makes a very powerful point. Which is what he recently did with that data on one-way U-Haul rental rates between California cities and Texas cities.

There’s a very obvious takeaway from this data, as Mark explains.

…there is a huge premium for trucks leaving California for Texas and a huge discount for trucks leaving Texas for California. …U-Haul’s one-way truck rental rates are market-based to reflect relative demand and relative supply. In California there’s a relatively low supply of trucks available and a relatively high demand for trucks destined for Texas; in Texas there’s a relatively high supply of trucks and a relatively low demand for trucks going to California. Therefore, U-Haul charges 3-4 times more for one-way truck rentals going from San Francisco or LA to Houston or Dallas than vice-versa based on what must be a huge net outflow of trucks leaving California (leading to low inventory) and a net inflow of trucks arriving in Texas (leading to high inventory). …in 2016…the ratios for the same matched cities were much smaller, 2.2 to 2.4 to 1, suggesting that the outbound migration from California to Texas as reflected in one-way U-Haul truck rental rates must have accelerated over the last three years.

So why is California so unattractive compared to Texas?

To answer that question, this map from the Tax Foundation is a good place to start. It shows that California has the most punitive income tax of any state, while Texas is one of the sensible states with no income tax.

By the way, I sometimes get pushback from my leftist friends who point out that California’s 13.3 percent tax rate only applies to millionaires.

I don’t think that’s an effective argument since it makes zero sense to penalize a state’s most productive citizens. Especially when they’re the ones who can easily afford to move (and many of them are doing exactly that).

That being said, California pillages middle-class taxpayers as well. If some trendy young millennial wants to live in San Francisco, I wish that person all the luck in the world – especially since the 8 percent tax rate kicks in at just $44,377.

Now let’s ask the question of whether California residents (rich, poor, or middle class) are getting something for all the taxes they have to pay.

• Is there any evidence that they are getting better schools? No.
• How about data showing that they get better health care? No.
• What about research indicating better infrastructure in the state? No.

Instead, they’re paying for a giant welfare state and for a lavishly compensated collection of bureaucrats.

P.S. There’s also plenty of international data showing big government isn’t the way to get good roads, schools, and healthcare.

P.P.S. If you want more data comparing Texas and California, click here, here, and here.

P.P.P.S. Here’s my favorite California vs Texas joke.

P.P.P.P.S. Comparisons of New York and Florida tell the same story.

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Trump’s Self-Sabotaging Trade Taxes

What’s worse, a politician who knowingly supports bad policy or a politician who actually thinks that bad policy is good policy?

I was very critical of the Bush Administration (I’m referring to George W. Bush, but the same analysis applies to George H.W. Bush) because there were many bad policies (education centralization, wasteful spending, TARP, etc) and the people in the White House knew they were bad policies.

For what it’s worth, I think it’s reprehensible when politicians knowingly hurt the country simply because they think there’s some temporary political benefit.

I’m also critical of many of Trump’s policies. But at least in the case of protectionism, he genuinely believes in what he’s doing.

But that doesn’t change the fact that protectionism is bad policy. Higher taxes on trade hurt prosperity, just like higher taxes on work, saving, investment, and other forms of economic activity are harmful.

And, according to the National Taxpayers Union, Trump’s various tax hikes on trade cumulatively represent a giant tax increase.

The Trump administration has imposed 25 percent taxes on $234.8 billion in imports from China under Section 301 of the Trade Act of 1974. This represents a nominal tax hike of as much as $58.7 billion — the third-largest in inflation-adjusted dollar terms since World War II ended. But things could soon get much worse. President Trump plans to impose a 5 percent tariff on imports from Mexico starting on June 10, possibly increasing to 25 percent by October 1. He is also considering adding a 25 percent tariff to an additional $300 billion in imports from China. Tariffs on washing machines, solar goods, steel, and aluminum add billions of dollars more to the burden on U.S. taxpayers. If the Trump administration follows through on all its tariff threats, the combined result will be far and away the largest tax increase in the post-war era in real dollar terms. …tax increases of this scale threaten to undermine the economic expansion that has driven unemployment down to levels not seen since 1969.

Here’s a chart from the NTU report. They have two ways of measuring Trump’s trade taxes. In either case, the transfer of money from taxpayers to politicians is bigger than any previous tax hikes.

The National Bureau of Economic Research also has some estimates of how Trump’s protectionism has undermined the U.S. economy.

Two new NBER working papers analyze how this “trade war” has affected U.S. households and firms. The recent tariffs, which represent the most comprehensive protectionist U.S. trade policy since the 1930 Smoot-Hawley Act and 1971 tariff actions, ranged from 10 to 50 percent on about $300 billion of U.S. imports — about 13 percent of the total. Other countries responded with similar tariffs on about $100 billion worth of U.S. exports. In The Impact of the 2018 Trade War on U.S. Prices and Welfare (NBER Working Paper No. 25672), Mary Amiti, Stephen J. Redding, and David Weinstein find that the costs of the new tariff structure were largely passed through as increases in U.S. prices, affecting domestic consumers and producers who buy imported goods rather than foreign exporters. The researchers estimate that the tariffs reduced real incomes by about $1.4 billion per month. …Pablo D. Fajgelbaum, Pinelopi K. Goldberg, Patrick J. Kennedy, and Amit K. Khandelwal adopt a different methodological approach to address the welfare effect of recent tariffs. They also find complete pass-through of U.S. tariffs to import prices. In The Return to Protectionism (NBER Working Paper No. 25638), they estimate that the new tariff regime reduced U.S. imports by 32 percent, and that retaliatory tariffs from other countries resulted in an 11 percent decline of U.S. exports. … They estimate that higher prices facing U.S. consumers and firms who purchased imported goods generated a welfare loss of $68.8 billion, which was substantially offset by the income gains to U.S. producers who were able to charge higher prices ($61 billion). The researchers estimate the resulting real income decline at about $7.8 billion per year.

Here’s one of the charts from NBER.

That is not a pretty picture.

Especially since Trump is using the damage he’s causing as an excuse to adopt additional bad policies.

Here’s some of what George Will recently wrote for the Washington Post.

The cascading effects of U.S. protectionism on U.S. producers and consumers constitute an ongoing tutorial about…“iatrogenic government.” In medicine, an iatrogenic ailment is one inadvertently caused by a physician or medicine. Iatrogenic government — except the damage it is doing is not inadvertent — was on display last week. The Trump administration unveiled a plan to disburse $16 billion to farmers as balm for wounds — predictable and predicted — from the retaliation of other nations, especially China, against U.S. exports in response to the administration’s tariffs. …The evident sincerity of his frequently reiterated belief that exporters to the United States pay the tariffs that U.S. importers and consumers pay is more alarming than mere meretriciousness would be. …So, taxpayers who are paying more for imported goods covered by the administration’s tariffs (which are taxes Americans pay) are also paying to compensate some other Americans for injuries inflicted on them in response to the tariffs that are injuring the taxpayers. …Protectionism is yet another example of government being the disease for which it pretends to be the cure.

A tragic example of Mitchell’s Law in action.

The trade issue is also another example of hypocrisy in action.

Back in 2016, I applauded the IMF for criticizing Trump’s protectionist trade taxes, but simultaneously asked why the bureaucrats weren’t also criticizing Hillary Clinton’s proposed tax increases on work, saving, and investment.

Now I spend a lot of time wondering why Republicans, who claim to be on the side of taxpayers, somehow forget about their anti-tax principles when Trump is unilaterally imposing higher taxes on American consumers and producers.

What’s ironic about this mess is that Trump very well may be sabotaging his own reelection campaign. As he imposes more and more taxes on trade (and as foreign governments then impose retaliation), the cumulative economic damage may be enough to completely offset the benefits of his tax reform plan.

If he winds up losing in 2020, I wonder if “Tariff Man” will have second thoughts about the wisdom of protectionism?

Since he’s a true believer in trade barriers, he may think it was worth it. I doubt other Republicans in Washington will have the same perspective.

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An Emerging Anti-Socialist Wing of the Democratic Party?

Since I’m a policy economist, I rarely comment on political matters.

But I am worried that the Democratic Party is veering too far to the left. Bernie Sanders, an out-of-the-closet socialist is leading the way, followed closely by other leading Democrats with hard-left policy agendas, such as Kamala Harris and Elizabeth Warren.

But not every 2020 candidate is hopping on the socialism bandwagon. Some of the major candidates, such as Joe Biden, have avoided saying anything favorable about socialism.

And two of the candidates have explicitly rejected the poisonous ideology.

Interestingly, they’re both from Colorado.

CNN reports that the former governor, John Hickenlooper. received a very hostile reception when he rejected socialism.

The welcoming cheers 2020 presidential hopeful John Hickenlooper received when he first graced the stage at California’s Democratic Convention quickly crumbled into boos and jeers after he rejected socialism as the answer to Democrats’ problems. “If we want to beat Donald Trump and achieve big progressive goals, socialism is not the answer,” Hickenlooper said to a crowd of more than 4,500 delegates and observers on Saturday.Before he could get finish his next sentence, a chorus of boos…overtook his speech, lasting for more than 30 seconds. …The former Colorado governor is one of 15 Democratic candidates to address the San Francisco crowd, which is known to be home to some of the party’s furthest left progressives.

And, as reported by the Hill, one of the state’s U.S. Senators, Michael Bennet, also condemned socialism for being contrary to American ideals.

Sen. Michael Bennet (D-Colo.), a 2020 presidential hopeful, said on Sunday that his dismissal of socialism as a solution for America is not out of the mainstream for the Democratic Party. “I don’t think I’m out of step,” Bennet told ABC’s “This Week.” “I think we have 230 years of being the longest-lived democracy on the planet. That’s something we need to preserve.” …Bennett made the comments in response to a viral moment in which his fellow Democratic presidential candidate, former Colorado Gov. John Hickenlooper, was booed at the California Democratic Convention over the weekend …Bennet…is on the moderate end of the Democratic primary field.

I hope Joe Biden and other Democrats join Hickenlooper and Bennet.

In my fantasy world, the next Democratic president will turn out to be another Bill Clinton who presides (either intentionally or unintentionally) over an expansion of economic freedom in the United States.

But at the very least, I don’t want the country to take a big step toward statism, which was the mistake the United Kingdom made under Clement Attlee after World War II.

P.S. I realize many Democrats today don’t really have a firm understanding of socialism. Many of them don’t realize it implies government ownership, central planning, and price controls. Heck, some of them probably think the market-oriented Nordic welfare states (which have similar levels of economic freedom as the United States) are socialist. Regardless, they definitely want government to get bigger at a faster rate, so I’m hoping they’re not the majority of the Democratic Party.

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Obama, Brazil, and Guns

I have a confession. I miss Obama. On the issue of guns, at least.

He was so wrong, yet so ineffective, that it was almost funny.

Heck, it was funny.

Fortunately, he’s decided to make an encore performance. So there’s a new opportunity to puncture his pious pronouncements.

Writing for the Federalist, Ryan Cleckner debunks Obama’s fatuous statements about gun control at a recent speech in Brazil.

On May 30, former president Barack Obama was a keynote speaker at an event in Brazil. …During a conversation with a host on stage during the digital innovation event, Obama took the opportunity to speak negatively about U.S. gun laws. He said, “Our gun laws in the United States don’t make much sense. Anybody can buy any weapon, any time, without much, if any, regulation. They can buy [guns] over the internet, they can buy machine guns.” His statement to a foreign audience includes six lies about our gun laws.

Here are Obama’s six lies, with the concomitant corrections.

1. Anybody Can Buy a Firearm

There are three major federal restrictions on who may purchase firearms in the United States… The first category of persons who may not purchase firearms under federal law is based on age.  Persons under 21 years of age may not purchase handguns from a gun dealer, and persons under 18 years of age may not purchase rifles nor shotguns. The second category of persons who may not purchase firearms under federal law are referred to as “prohibited persons.” This category includes, among others…Felons, Those convicted of domestic violence, Unlawful users of controlled substances, Illegal aliens, Those subject to certain restraining orders, Those adjudicated as mental defectives or committed to mental institutions, Fugitives, and Veterans with dishonorable discharges… The third major category includes non-U.S. citizens.

2. Any Firearm Can Be Purchased

Under federal law, machine guns made after 1986 may not be purchased by civilians (more on this under lie No. 5 below). Also, the National Firearms Act of 1934 (NFA) regulates other firearms which may be purchased, but clearly not in the way insinuated by Obama’s comments (more on this under lie No. 3 below).

3. A Firearm Can Be Purchased at Any Time

When purchasing a firearm from a federally licensed gun dealer (FFL), background-check requirements must be satisfied. In most cases, this includes a background check being run through the federal National Instant Criminal Background Check System (NICS). …Federal background checks may only be run between 8 a.m. and 1 a.m. Eastern… Within the statement that a firearm can be purchased at any time is also the inference that a firearm may be purchased anywhere. This is also false. For example, handguns many only be purchased in a person’s state of residence. Therefore, if a person wants to purchase a handgun while he out of his home state, that is a time at which he is not permitted to purchase a firearm. For the class of firearms covered by the NFA, such as short-barreled rifles, a purchaser must wait until certain paperwork is approved by the Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF). This wait time is often up to 10 months.

4. Firearms Can Be Purchased with Few Regulations

…the United States has many regulations on the purchase and possession of firearms.

5. Firearms Can Be Purchased Over the Internet

It seems clear that Obama wants people to think that a gun can be purchased online and shipped straight to a purchaser’s home like any other online purchase. This is not true. It is technically true that firearms may be purchased online. However, when a person purchases a firearm online from an out-of-state retailer, the firearm must first be shipped to a local FFL, where the purchaser must appear in person to fill out the federally required paperwork and satisfy the background check requirements.

6. Anyone Can Purchase a Machine Gun

…machine guns made after 1986 may not be purchased nor possessed by an ordinary civilian. These machine guns may only be purchased or possessed by FFLs or government entities. Machine guns made before 1986 are still NFA firearms and may only be purchased after the extensive paperwork and wait times that accompany all NFA firearm purchases. Additionally, some local laws outright ban the possession of any machine guns.

It’s unclear whether Obama actually knew he was lying.

I suspect he actually thinks he was being truthful. After all, he lives in a bubble and probably never hears any voices other than those from the leftist echo chamber.

Regardless, what makes this episode especially amusing is that Brazil is moving in the right direction on civil rights for gun owners.

Here are some excerpts from a CNN report in May.

Brazil’s President Jair Bolsonaro has signed an executive order relaxing gun rules in the country, making it easier to import guns and increasing the amount of ammunition a person can buy in a year. Bolsonaro announced the signing of the decree at a Tuesday news conference, arguing “it is an individual right of the one who may want to have a firearm or seek the possession of a firearm… obviously respecting and fulfilling some requirements.”The conservative provocateur…appears to delivering on his campaign promise to loosen gun laws. …Among the other changes, it simplifies the procedure to transfer the ownership of a firearm, and eases import restrictions on firearms,”allowing free initiative, stimulating competition, rewarding quality and safety, as well as economic freedom, so privileged by the Lord,” the Brazilian government wrote in a statement. …Bolsonaro had previously signed a decree in January making it easier to own a gun in the South American country.

I’m glad that law-abiding people in Brazil now have a better chance of protecting themselves from criminals.

Combined with the spending cap adopted a few years ago, there’s some small reason to hope that Brazil could become the next Chile.

Though we’ll have to wait and see if the country enacts some desperately needed pension reform.

In the meantime, kudos to Bolsonaro for doing the right thing on guns.

And too bad nobody in Brazil asked Obama why Brazil wasn’t following his empty advice.

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