The Painful Impact of a Financial Transactions Tax

I was interviewed a couple of days ago about rival tax plans by various Democratic presidential candidates.

It’s the “Class Warfare Olympics,” and even Joe Biden is thinking about going hard left with a tax on financial transactions.

It’s not just Joe Biden’s crazy idea. Other Democratic candidates have endorsed the idea, as has Nancy Pelosi, and CNBC reports that legislation has been introduced in the House and the Senate.

House Democrats are reintroducing their proposal of a financial transaction tax on stock, bond and derivative deals, and this time they’ve signed on a key new supporter: left-wing firebrand Rep. Alexandria Ocasio-Cortez. …“This option would increase revenues by $777 billion from 2019 through 2028, according to an estimate by the staff of the Joint Committee on Taxation,” the Congressional Budget Office’s website says. …The House bill comes on the heels of its companion legislation introduced by Sen. Brian Schatz, D-Hawaii, in the other chamber. Republicans have a 53-47 majority in the Senate.

Needless to say, I’m not surprised to see that AOC is on board. I don’t think there’s a tax she doesn’t want to impose and/or increase.

By the way, I should note that she and other advocates generally are looking at more limited FTTs that would tax transactions only in financial markets, so there wouldn’t necessarily be any direct burden when we write a check or visit the ATM.

But even this more restrained FTT would be very bad news, with significant indirect costs on ordinary people.

Some analysis from the Tax Foundation highlights some of the drawbacks from this tax.

Policymakers should be wary about adopting a financial transactions tax. Like a gross receipts tax, a financial transactions tax results in tax pyramiding. The same economic activity is taxed multiple times. For example, an individual might sell a stock worth $100 to diversify her portfolio and then purchase stock in a new company with that same $100. The $100 is being taxed twice: first, when the individual sells the stock, and then again when the money is used to buy the new security. Imagine this happening thousands of times a day. …That is why this tax would generate nearly $770 billion over a decade. …Supporters, however, argue that the Wall Street Tax Act is needed, because it would reduce volatility in financial markets. It’s not clear that it would reduce volatility. In 2012, the Bank of Canada studied the issue and concluded that “little evidence is found to suggest that an FTT [financial transactions tax] would reduce speculative trading or volatility. In fact, several studies conclude that an FTT increases volatility and bid-ask spreads and decreases trading volume.” …Sweden’s imposition of a financial transactions tax in the 1980s illustrates the challenges perfectly. The country experienced a 60 percent decrease in trading volume as it moved to other markets, as well as a decrease in revenue.

Another report from the Tax Foundation notes the tax can increase volatility and cause direct and indirect revenue losses.

A financial transactions tax would distort asset markets, as types of securities traded more frequently would be taxed much more than assets traded less frequently. This distortion would lead to investors holding certain assets longer than they should in order to avoid the tax. The tax also decreases liquidity and increases transaction costs. …it will also discourage transactions between well-informed investors; furthermore, much of the research on the issue of volatility suggests that higher transaction costs correlate with more volatility, not less. Financial transactions taxes are also not surefire revenue generators. In the 1980s, Sweden imposed a financial transactions tax, and, thanks to the relative mobility of capital markets, 60 percent of trades moved to different markets. Not only did this behavior mean that the financial transactions tax raised little revenue, it also drove down revenue for the capital gains tax, ultimately lowering total government receipts.

A column in the Wall Street Journal notes that such a levy would directly and indirectly hurt ordinary people.

The proposed 0.1% tax on all financial transactions—trades in stocks, bonds, derivatives—may sound small, but it could make markets less stable and hurt small investors. …advocates overlook the breadth of smaller investors… Each day, more than $1 trillion in securities are traded in the U.S., mostly by large investment managers that represent not only wealthy investors, but also 401(k) plans, public pensions and middle-income families. …even a small tax is significant enough to affect trading strategy and raise costs. Such firms…use the minimal cost of automated, high-frequency trading to reduce the need for paid traders, generating savings for investors. …high-frequency traders provide liquidity and have reduced the gap between bid and ask rates in almost every asset class. The disruptive effect of transaction taxes is more than theoretical. The Chinese government has taxed trades since the early 1990s, and its gradual reduction of the tax on certain types of stocks offers an occasion to measure the tax’s effects. A 2014 study by University of Southern California finance professor Yongxiang Wang found that as the tax decreased, affected companies saw corresponding increases in capital investment, innovation and equity financing. …Sweden and France similarly have introduced financial-transactions taxes over the past few decades, resulting in heightened market volatility and declining liquidity, respectively. …Even at a 0.1% rate, the Joint Committee on Taxation estimates the proposed tax would raise $777 billion over 10 years—all taken out of potentially productive private investment. …financial transactions are highly mobile and easy to move to another jurisdiction. Two parties to a financial contract settled in New York can just as easily sign and enforce the contract in the Cayman Islands, for instance, avoiding the tax.

Interestingly, the Washington Post‘s editorial on the topic back in 2016 noted some significant downsides.

It’s worth noting that the United States had a 0.02 percent tax on stock trades in force during the 1920s, and the market still crashed in 1929. If the tax is too high, however, you could stamp out needed price-discovery, hedging and liquidity, thus destroying efficiency and economic growth. Oh, and you also could end up collecting no revenue, or less than you expected, as market activity dried up or fled to more lightly taxed jurisdictions overseas. For these and other reasons, in 1991 Sweden had to repeal a financial transaction tax it had imposed just seven years earlier. An analysis of financial transaction taxes, both actual and proposed, by the nonpartisan Tax Policy Center…shows rapidly diminishing returns once the tax rate exceeds a certain level; a 0.5 percent tax brings in about the same amount of revenue as a 0.1 percent rate.

For what it’s worth, I expect that the Post will do an about-face and embrace the tax as we get closer to the 2020 election.

Though I hope I’m wrong about that.

Let’s close with some excerpts from three substantive studies.

Tim Worstall, in a report for London’s Institute for Economic Affairs, analyzes the harmful effect of a proposed European-wide FTT.

The Robin Hood Tax campaign seems to think that hundreds of billions of dollars can be extracted from the financial markets without anyone really noticing very much: a rather naïve if cute idea. The European Commission is continuing its decades-long campaign to have its ‘own resources’. Under its proposal, FTT revenue would be sent to the Commission, which would thus become less dependent on national governments for its budget. This is neither unusual nor reprehensible in a bureaucracy. It is the nature of the beast that it would like to have its own money to spend without being beholden. …The first and great lesson of tax incidence is that taxes on companies are not paid by companies. …The importance of this effect is still argued over. Various reports from various people with different assumptions about capital openness and so on lead to estimates of 30-70% of corporation tax really being paid by the workers, the rest by the shareholders. One study, Atkinson and Stiglitz (1980), points to the at least theoretical possibility that the incidence on the workers’ wages can be over 100%. That is, that the employees lose in wages more than the revenue raised by the tax. So what will be the incidence of an FTT? … the incidence of the FTT will be upon workers in the form of lower wages, upon consumers of financial products in higher prices and that the incidence, the loss of income resulting from the tax, will be over 100%. The loss will be greater than the revenues raised.

here’s some research from the Committee for Capital Markets Regulation.

For over 300 years, financial transaction taxes (“FTTs”) have been proposed, discussed, and implemented in various forms across global financial markets. And for over 300 years, FTTs have been a failure wherever imposed, frequently failing to raise the promised revenues, while simultaneously damaging the efficiency of the affected markets. Recent proposals for an FTT in the United States would likely have a similar result. …FTT proponents also ignore the empirical evidence from other countries that have imposed FTTs that universally demonstrates that (i) FTTs fall far short of revenue expectations and (ii) securities markets – and by extension the real economy as well as all investors and taxpayers – are significantly harmed by FTTs due to the wide array of beneficial trading activity that is indiscriminately targeted. In fact, many of the G20 countries that have experimented with FTTs in the past, including Germany, Italy, Japan, the Netherlands, Portugal and Sweden, ultimately repealed such taxes due to the damage that they caused.

Last but not least, a study from the Center for Capital Markets Competitiveness has lots of valuable information.

Lower stock prices make it harder for growing businesses to sell stock to raise the capital they need to grow their businesses. At the same time, business borrowing costs through the corporate bond market will go up for the same reason. Lenders will require a higher pre-tax return in order to retain the same after-tax return. …This increase in the cost of capital due to higher interest rates means that businesses will have to spend more in order to raise capital, resulting in less capital investment and fewer jobs. …For example, economists for the European Union conducted a 1,223-page study on the impact of a proposed 0.10% transaction tax under consideration, the same tax rate as that proposed by Sen. Schatz. They found that such a tax would lower GDP by 1.76% while raising revenue of only 0.08% of GDP.26 In other words, the cost to the economy is far more than the revenue raised. …We can learn from U.S. history how little revenue an FTT would raise. When the last FTT was abolished, the rate was approximately 0.4% with a limit of 8 cents per share. Congress estimated that the tax would raise a mere $195 million in 1966. This represents 0.0285% of 1966’s $813 billion GDP. Applying the same percentage to today’s $21 trillion GDP yields an annual revenue of less than $6 billon—less than one-tenth of Sen. Schatz’s projections for such a tax today.

This map from the study is especially helpful.

Just as is the case for wealth taxes, governments have not had positive experiences when they impose this levy.

P.S. Speaking of wealth taxes, I did note in the above interview that those levies are presumably the most destructive because of their negative effect on saving and investment.

P.P.S. If I’m a judge in the Class Warfare Olympics, I’m giving the Gold Medal to Bernie Sanders, the Silver Medal to Elizabeth Warren, and the Bronze Medal to Kamala Harris.

P.P.P.S. As I warned in the interview, the class-warfare taxes won’t collect much revenue, especially compared to the massive spending increases the candidates are proposing. That’s why the middle class is the real target.

P.P.P.P.S. I goofed in the interview when I identified Larry Summers as Obama’s Treasury Secretary. He was Treasury Secretary for Bill Clinton and head of the National Economic Council for Barack Obama.

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The Trump-Obama Approach on Fannie Mae and Freddie Mac Will Lead to Future Financial Instability

The 2008 financial crisis was largely the result of bad government policy, including subsidies for the housing sector from Fannie Mae and Freddie Mac.

This video is 10 years old, but it does a great job of explaining the damaging role of those two government-created entities.

The financial crisis led to many decisions in Washington, most notably “moral hazard” and the corrupt TARP bailout.

But the silver lining to that dark cloud is that Fannie and Freddie were placed in “conservatorship,” which basically has curtailed their actions over the past 10 years.

Indeed, some people even hoped that the Trump Administration would take advantage of their weakened status to unwind Fannie and Freddie and allow the free market to determine the future of housing finance.

Those hopes have been dashed.

Cronyists in the Treasury Department unveiled a plan earlier this year that will resuscitate Fannie and Freddie and recreate the bad incentives that led to the mess last decade.

This proposal may be even further to the left than proposals from the Obama Administration. And, as Peter Wallison and Edward Pinto of the American Enterprise Institute explained in the Wall Street Journal earlier this year, this won’t end well.

…the president’s Memorandum on Housing Finance Reform…is a major disappointment. It will keep taxpayers on the hook for more than $7 trillion in mortgage debt. And it is likely to induce another housing-market bust, for which President Trump will take the blame.The memo directs the Treasury to produce a government housing-finance system that roughly replicates what existed before 2008: government backing for the obligations of the government-sponsored enterprises Fannie Mae and Freddie Mac , and affordable-housing mandates requiring the GSEs to encourage and engage in risky mortgage lending. …Most of the U.S. economy is open to the innovation and competition of the private sector. Yet for no discernible reason, the housing market—one-sixth of the U.S. economy—is and has been controlled by the government to a far greater extent than in any other developed country. …The resulting policies produced a highly volatile U.S. housing market, subject to enormous booms and busts. Its culmination was the 2008 financial crisis, in which a massive housing-price boom—driven by the credit leverage associated with low down payments—led to millions of mortgage defaults when housing prices regressed to the long-term mean.

Wallison also authored an article that was published this past week by National Review.

He warns again that the Trump Administration is making a grave mistake by choosing government over free enterprise.

Treasury’s plan for releasing Fannie Mae and Freddie Mac from their conservatorships is missing only one thing: a good reason for doing it. The dangers the two companies will create for the U.S. economy will far outweigh whatever benefits Treasury sees. Under the plan, Fannie and Freddie will be fully recapitalized… The Treasury says the purpose of their recapitalization is to protect the taxpayers in the event that the two firms fail again. But that makes little sense. The taxpayers would not have to be protected if the companies were adequately capitalized and operated without government backing. Indeed, it should have been clear by now that government backing for private profit-seeking firms is a clear and present danger to the stability of the U.S. financial system. Government support enables companies to raise virtually unlimited debt while taking financial risks that the market would routinely deny to firms that operate without it. …their government support will allow them to earn significant profits in a different way — by taking on the risks of subprime and other high-cost mortgage loans. That business would make effective use of their government backing and — at least for a while — earn the profits that their shareholders will demand. …This is an open invitation to create another financial crisis. If we learned anything from the 2008 mortgage market collapse, it is that once a government-backed entity begins to accept mortgages with low down payments and high debt-to-income ratios, the entire market begins to shift in that direction. …why is the Treasury proposing this plan? There is no obvious need for a government-backed profit-making firm in today’s housing finance market. FHA could assume the important role of helping low- and moderate-income families buy their first home. …Why this hasn’t already happened in a conservative administration remains an enduring mystery.

I’ll conclude by sharing some academic research that debunks the notion that housing would suffer in the absence of Fannie and Freddie.

A working paper by two economists at the Federal Reserve finds that Fannie and Freddie have not increased homeownership.

The U.S. government guarantees a majority of mortgages, which is often justified as a means to promote homeownership. In this paper, we estimate the effect by using a difference-in-differences design, with detailed property-level data, that exploits changes of the conforming loan limits (CLLs) along county borders. We find a sizable effect of CLLs on government guarantees but no robust effect on homeownership. Thus, government guarantees could be considerably reduced,with very modest effects on the homeownership rate. Our finding is particularly relevant for recent housing finance reform plans that propose to gradually reduce the government’s involvement in the mortgage market by reducing the CLLs.

For those who care about the wonky details, here’s the most relevant set of charts, which led the Fed economists to conclude that, “There appears to be no positive effect of the CLL increases in 2008 and no negative effect of the CLL reductions in 2011.”

And let’s not forget that other academic research has shown that government favoritism for the housing sector harms overall economic growth by diverting capital from business investment.

The bottom line is that Fannie and Freddie are cronyist institutions that hurt the economy and create financial instability, while providing no benefit except to a handful of insiders.

As I suggested many years ago, they should be dumped in the Potomac River. Unfortunately, the Trump Administration is choosing Obama-style interventionism over fairness and free markets.

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Why Is The Economist Misleading Readers About Poverty?

I’ve created a new page to showcase various “Poverty Hucksters.”

These are people and institutions that use data about income distribution to mislead and lie about the prevalence of poverty in the United States.

This rogue’s gallery includes:

• The Organization for Economic Cooperation and Development
• The United Nations
• The New York Times
• The Equal Welfare Association
• Germany’s Institute of Labor Economics
• The Obama Administration
• The European Commission
• Professor Noah Smith

What is their dodgy tactic? Here’s how I described the methodology in 2018.

…the bureaucrats…have put together a measure of income distribution and decided that “relative poverty” exists for anyone who has less than 50 percent of the median level of disposable income.

More recently, I explained why this approach is senseless, at least if one wants to measure actual poverty

…an artificial and misleading definition of poverty. One that depends on the distribution of income rather than any specific measure of poverty. Which is insanely dishonest. It means that everyone’s income could double and the supposed rate of poverty would stay the same. Or a country could execute all the rich people and the alleged rate of poverty would decline.

Now we have a new member of this ill-begotten group of hucksters.

Here’s an excerpt from an article in the latest issue of the Economist.

…international comparisons…make…America a true outlier. When assessed on poverty relative to other countries (the share of families making less than 50% of the national median income after taxes and transfers), America is among the worst-performing in the OECD club of mostly rich countries (see chart). Despite its higher level of income, that is not because it starts with a very large share of poor people before supports kick in—it is just that the safety net does not do as much work as elsewhere. On this relative-poverty scale, more than a fifth of American children remain poor after government benefits, compared with 3.6% of Finnish children.

And here’s the accompanying chart.

Needless to say, any chart that purports to show less poverty in Mexico than the United States is laughably inaccurate.

But that’s the kind of perverse outcome that is generated when using a ridiculously dishonest approach.

I suppose the Economist deserves a bit of credit. In both the article and in the chart, they acknowledge (at least for careful readers) that they’re measuring the share of the population with less than 50 percent of a society’s median income, not the share of people living in poverty.

So why, then, do they refer to the “poverty rate”?

I have no idea if the reporter is dishonest or incompetent, but I can say with certainty that the Economist has done a disservice to readers.

P.S. The Economist relied on dodgy data from the Organization for Economic Cooperation and Development. And if you read the columns about the other Poverty Hucksters, you’ll find that most of them also relied on numbers from that left-leaning, Paris-based bureaucracy. Yet another example of why the OECD is the worst international bureaucracy, at least on a per-dollar-spent basis.

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Yes to Globalization, No to Global Governance

I’m a big fan of globalization, so does that make me a globalist?

That depends on what is meant by that term. If it means free trade and peaceful interaction with other nations, the answer is yes.

But if it means global governance by anti-market bureaucracies such as the United Nations, International Monetary Fund, and Organization for Economic Cooperation and Development, the answer is a resounding no.

So I have mixed feelings about this video from Dalibor Rohac of the American Enterprise Institute.

I can’t resist nit-picking on some of his points.

• Brexit was unquestionably a vote about the merits of membership in the European Union. The 2016 presidential election was about a lot of issues (trade, immigration, Hillary Clinton, etc). The United Nations was an asterisk at most.
• A nation can import flags (or anything else) while retaining sovereignty. A nation can also make a sovereign choice to abide by a certain set of trade rules, such as the World Trade Organization.
• In reference to the Hanseatic League and the Holy Roman Empire, trade pacts and military alliances also can be seen as expressions of sovereignty.

While I have disagreements with Dalibor, that definitely doesn’t put me in the same camp as Donald Trump.

The President is an incoherent mix. He combines odious protectionism with mostly-empty rhetoric about globalism. And he does all that without understanding issues – and, in some cases, his actions are contrary to his rhetoric.

Dan Henninger wrote about these issues two days ago for the Wall Street Journal.

He wisely warns that failures by national governments (most notably unaffordable welfare states and incompetent administrative states) are creating openings for unpalatable alternatives.

Global governance is one distressing possibility. Henninger worries about Chinese-style administrative authoritarianism.

President Trump at the United Nations this week elaborated on his long-running antagonism toward globalism. …There is merit to these concerns, but I think the critics of “globalism,” including most prominently Mr. Trump, underestimate the near-term danger of the serious difficulties appearing today in national democratic governance. Democracies maintain their legitimacy in the public’s eye only if they demonstrate a reasonable capacity to address society’s inevitably complex challenges. …it’s clear that many of the 21st century’s independent nations are having a remarkably difficult time executing their sovereign responsibilities. …Mr. Trump’s concerns about undemocratic governance by remote international bureaucracies are plausible, but the greater threat is more imminent. If the expansion of an increasingly dysfunctional administrative state inside the world’s sovereign democracies is inexorable and unreformable, the future will belong to China’s brand of administrative authoritarianism. …Elizabeth Warren and her multiple plans—heavily dependent on criminal prosecutions and intense oversight—is flirting with a milder version of this future.

Henninger is certainly correct that nations mostly get in trouble because of their own mistakes.

For instance, I’ve pointed out that the fiscal crisis in Europe should not be blamed on the euro.

That being said, global governance often creates moral hazard, which tends to exacerbate and encourage bad policy by national governments.

Let’s now look at an interesting column that John Bolton (Trump’s former National Security Advisor) wrote on global governance for the U.K.-based Times back in 2016. Here are some of the key passages.

He makes the should-be-obvious point that not all international bureaucracies are alike.

…international organisations sometimes act as if they are governments rather than associations of governments and sprout bureaucracies with pretensions beyond those of cosseted elites in national capitals. …International bodies take many different forms, and it serves no analytical purpose to treat them interchangeably. Nato, for example, is not equivalent to the United Nations. Neither is equivalent to the European Union. Each has different objectives, and different implications for constitutional and democratic sovereignty. …Nato is America’s kind of international partnership: a classic politico-military alliance of nation states. It has never purported to assume sovereign functions, and is as distant as is imaginable from the EU paradigm.

He explains that some of them – most notably the IMF – are counterproductive and should be shut down.

Proposals to reform the UN and its affiliated bodies such as the World Bank and the IMF are almost endless. The real question is whether serious, sweeping reform of these organisations…is ever possible. …In 1998, during the Asian financial crisis, the former secretaries of the Treasury William Simon and George Shultz, and Walter Wriston, a former chairman of Citibank, wrote in The Wall Street Journal: “The IMF is ineffective, unnecessary, and obsolete. We do not need another IMF, as Mr. [George] Soros recommends. Once the Asian crisis is over, we should abolish the one we have.” …We should consider privatising all the development banks… We should ask why US taxpayers are compelled to provide subsidised interest rates for loans by international development banks.

Amen.

He also opines about Brexit.

…the Brexit referendum was, above all else, a reassertion of British sovereignty, a declaration of independence from would-be rulers who, while geographically close, were remote from the peasantry they sought to rule. …The Brexit decision was deplored by British and American elites alike… It does not surprise Americans that British elites have not reconciled themselves to losing… London and Washington can fashion a new economic relationship, perhaps involving Canada, with the potential for significant economic growth. Let the EU wallow in strangling economic regulation, and the euro albatross that Britain wisely never joined.

He’s right, especially the final sentence of that excerpt.

I’ll conclude by reiterating my observation that we should distinguish between good globalization and bad globalization.

The good kind involves trade, peaceful interaction, and jurisdictional competition, all of which are consistent with sovereignty.

The bad kind of globalism involves international bureaucracies acting as supranational governments – almost always (as Nobel laureate Edward Prescott observed) with the goal of enabling and facilitating a larger burden of government.

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The Deadly Campaign Against Vaping and E-Cigarettes

Moral panics in Washington are not a recipe for good policy.

That’s why the current attack on vaping (the use of e-cigarettes) is so misguided.

Policy makers want to ban and/or restrict e-cigarettes (especially flavored varieties) for two reasons.

• Consuming e-cigarettes may cause harm to users.
• Vaping may lure some young people into using nicotine.

Both of these concerns are reasonable, at least from a utilitarian perspective.

But if we’re taking that approach, policy makers also should be looking at the other side of the cost-benefit equation (the Food and Drug Administration sadly does a lousy job of comparing costs and benefits).

And the under-appreciated benefit of e-cigarettes is that they reduce tobacco consumption, which is far more risky.

The Wall Street Journal opined recently on this issue.

A campaign against vaping products is moving at land speed records, with the Trump Administration announcing this week it will pull flavored e-cigarettes from the market. This is becoming a political pile on, and regulators risk foreclosing one of the best opportunities in public health, which is to reduce cigarette smoking. …Vaping devices include an array of products from pens to tanks. …The point is to offer the buzz of a cigarette without the combustion of tobacco that releases carcinogens and makes smoking so dangerous. …agencies like Public Health England have said such e-cigs are 95% safer than smokes. …No one wants kids addicted to nicotine, and the question is how to balance these competing equities. It is hardly obvious that banning flavors will keep teens from vaping. …A Juul executive told Congress this summer that a result of exiting convenience stores has been other actors exploiting the vacuum by selling illegal flavor pods. Expect more such unintended consequences. And if the flavor ban doesn’t reduce the number of teen vapers, then what? The next step looks like an even broader ban, which won’t be a net positive to public health. …The question is not whether vaping is healthy—it isn’t—but whether the frenzy against e-cigarettes is moving faster than the evidence. …forgotten in the rush are the 480,000 Americans who die each year from smoking.

In addition to his attacks on the twin scourges of salt and large-sized drinks, Michael Bloomberg is a leading advocate of vaping restrictions.

Jacob Sullum of Reason explains why, if successful, his efforts will cause more death.

Former New York City Mayor Michael Bloomberg, the billionaire busybody who can be counted on to oppose individual freedom in almost every area of life, is launching a prohibition crusade against flavored e-cigarettes. …The premise of Bloomberg’s $160 million campaign, which aims to persuade “at least 20 cities and states” to “pass laws banning all flavored tobacco and e-cigarettes,” is that flavored e-liquids are obviously designed to entice “children,” because only children like them. That is demonstrably false. ..Last year, Vaping360, a site aimed at former smokers who have switched to vaping and current smokers who are thinking about it, surveyed readers about their favorite Juul pod flavors. It got more than 38,000 responses, and the top pick by far was Mango (46 percent), followed by Cool Mint (29 percent), Crème Brulée (11 percent), and Fruit Medley (8 percent). …Surveys of former smokers find that flavor variety plays an important role in the process of switching to vaping. The Food and Drug Administration has acknowledged “the role that flavors…may play in helping some smokers switch to potentially less harmful forms of nicotine delivery.” …Bloomberg has “committed nearly $1 billion to aid anti-tobacco efforts.” Now he is committing $160 million to pro-tobacco efforts, lobbying for laws that will drastically reduce the alternatives to conventional cigarettes, resulting in more smoking-related disease and death.

Robert Verbruggen also explains cost-benefit analysis in his column for National Review.

The Trump administration’s Food and Drug Administration is gearing up to ban e-cigarette flavorings besides the ones that taste like tobacco. It’s unclear if this would have any benefits for public health. …Upstart products such as e-cigarettes, which deliver nicotine without all the tar and other nasty chemicals that cigarettes contain, and are estimated to be 95 percent safer as a result. …even for minors it’s far better to vape than to puff Camels, and it’s not as if no adult enjoys, say, strawberry flavoring. Better taste is one reason to vape instead of smoke for pretty much anyone who has to decide between the two, and if e-cigs are limited to tobacco flavoring, this rule could push some people back toward traditional cigarettes. And if real cigarettes are 20 times as dangerous as e-cigs, it doesn’t take much switching to cancel out the benefit of a reduction in vaping.

But I also like his article because he points out that this is another example of the “administrative state” in action.

…this is not a decision that Congress ever should have left in the executive branch’s hands. …in 2009 Congress, in its infinite wisdom, gave the FDA the authority to regulate tobacco products — except for all the products that were already on the market. This meant that the agency would have authority over upstart products competing with cigarettes, but the rules would not apply to cigarettes themselves. ……Congress should write laws, especially laws that ban entire product categories, not turn that power over to unelected busybodies who will opt for regulation over personal freedom every single time they encounter a choice between the two.

Best of all, he makes the libertarian argument that people should enjoy liberty.

What is clear is that it will be a disaster for personal freedom… Smoking cigarettes is one of those things that we allow adults to do even though it’s obviously bad for them, causing numerous cancers and other health problems. …It’s a free country. …One does not need to be a dyed-in-the-wool libertarian to be disgusted at this affront to personal freedom and responsibility. …Adults should be free to do what they want, so long as they take responsibility for the consequences of their actions. That includes smoking. And it definitely includes the far safer alternative of vaping fruit-flavored e-juice.

Amen.

I think the utilitarian argument for vaping is strong. As this visual from an anti-cancer group in the U.K. notes, it passes a cost-benefit test for savings lives.

But utilitarianism isn’t everything.

I can’t resist also unleashing my inner libertarian as we conclude today’s column.

The bottom line is that people should be allowed to take risks. They should even be allowed to make dumb choices.

That includes drug use, sugary drinks, gambling, over-eating, smoking, voting for socialists, hang gliding, alcohol usage, and standing between a politician and a TV camera.

It’s called freedom.

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Elizabeth Warren’s Reckless Scheme to Expand the Social Security Burden and Undermine American Competitiveness

Social Security is projected to consume an ever-larger share of America’s national income, mostly thanks to an aging population.

Indeed, demographic change is why the program is bankrupt, with an inflation-adjusted cash-flow deficit of more than $42 trillion.

Yet Senator Elizabeth Warren wants to make a bad situation even worse.

In a blatant effort to buy votes, she is proposing a radical expansion in the old-age entitlement program. Here’s how USA Today describes her proposal.

Warren’s strategy would make major changes to Social Security, boosting benefits for all and imposing new taxes on high-income earners to finance them. …Under the proposal, everyone would get a $200 increase in monthly payments from Social Security, including both retirement and disability benefits. …Certain groups would see even larger increases. …In order to cover these benefits and shore up Social Security’s future finances, Warren would impose two new taxes. First, a new payroll tax would apply to wages above $250,000, with employees paying 7.4% and employers matching with 7.4% of their own. This is above the 6.2% employee rate that applies to current wages up to $132,900 in 2019, …Second, individual filers making more than $250,000 or joint filers above $400,000 would owe a heightened net investment income tax at a rate of 14.8%. …The Warren proposal breaks new ground by largely disconnecting the benefits that Social Security pays from the wages on which the program collects taxes.

In a column for the Wall Street Journal, John Cogan of the Hoover Institution explains why the proposal is so irresponsible.

It’s a strange campaign season, loaded with fantastical promises of government handouts for health care, college and even a guaranteed national income. But Sen. Elizabeth Warren ’s Social Security plan takes the cake. With trillion-dollar federal budget deficits and Social Security heading for bankruptcy, Ms. Warren proposes to give every current and future Social Security recipient an additional $2,400 a year. She plans to finance her proposal, which would cost more than $150 billion annually, with a 14.8% tax on high-income individuals. …the majority of Ms. Warren’s proposed Social Security bonanza would go to middle- and upper-income seniors. …The plan would cost taxpayers about $70,000 for each senior citizen lifted out of poverty.

Cogan also explains that Warren’s scheme upends FDR’s notion that Social Security should be an “earned benefit.”

The cornerstone of FDR’s Social Security program is its “earned right” principle, under which benefits are earned through payroll-tax contributions. …in a major break from one of FDR’s main Social Security principles, the plan provides no additional benefits in return for the new taxes. …Such a large revenue stream to fund unearned benefits, aptly called “gratuities” in FDR’s era, would put Social Security on a road to becoming a welfare program. …Ms. Warren’s proposal returns the country to an era when elected officials regularly used Social Security as a vote-buying scheme.

For all intents and purposes, Warren has put forth a more radical version of the plan introduced by Congressman John Larson, along with most of his colleagues in the House Democratic Caucus.

And that plan is plenty bad.

Andrew Biggs of the American Enterprise Institute wrote about the economic damage it would cause.

…the Social Security 2100 Act consists of more than 100% tax increases – because it not only raises payroll taxes to fund currently promised benefits, but increases benefits for all current and future retirees. …Social Security’s 12.4% payroll tax rate would rise to 14.8% while the $132,900 salary ceiling on which Social Security taxes apply would be phased out. Combined with federal income taxes, Medicare taxes and state income taxes, high-earning taxpayers could face marginal tax rates topping 60%. …Economists agree that tax increases reduce labor supply, the only disagreement being whether it’s by a little or a lot. Likewise, various research concludes that middle- and upper-income households factor Social Security into how much they’ll save for retirement on their own. If they expect higher Social Security benefits their personal saving will fall. Since higher labor supply and more saving are the most reliable routes to economic growth, the Social Security 2100 Act’s risk to the economy is obvious. …an economic model created by a team based at the University of Pennsylvania’s Wharton School…projects GDP in 2049 would be 2.0% lower than a hypothetical baseline in which the government borrowed to fund full promised Social Security benefits. The logic is straightforward: when taxes go up people work less; when Social Security benefits go up, people save less. If people work less and save less, the economy grows more slowly.

And the Wall Street Journal opined about the adverse impact of the proposal.

Among the many tax increases Democrats are now pushing is the Social Security 2100 Act sponsored by John Larson of House Ways and Means. The plan would raise average benefits by 2% and ties cost-of-living raises to a highly generous and experimental measure of inflation for the elderly known as CPI-E. The payroll tax rate for Social Security would rise steadily over two decades to 14.8% from 12.4% for all workers, and Democrats would also apply the tax to income above $400,000. …The proposal would also further tilt government spending to the elderly, who in general are doing well. …Democrats are also sneaky in the way they lift the income cap on Social Security taxes. The Social Security tax currently applies only on income up to $132,900, an amount that rises each year with inflation. But the new payroll tax on income above $400,000 isn’t indexed to inflation, which means the tax would ensnare ever more taxpayers over time. …The new 14.8% Social Security payroll-tax rate would come on top of the 37% federal income-tax rate, plus 2.9% for Medicare today (split between employer and employee), plus the 0.9% ObamaCare surcharge on income above $200,000 and 3.8% surcharge on investment income. …As lifespans increase, the U.S. needs more working seniors contributing to the economy. Yet higher Social Security benefits can induce earlier retirement if people think they don’t have to save as much. Higher marginal tax rates on Social Security benefits and income also discourage healthy seniors from working.

Now imagine those bad results and add in the economic damage from a 14.8 percentage point increase in the tax burden on saving and investment, which is the main wrinkle that Senator Warren has added.

Last but not least, using Social Security as an excuse to push higher taxes is not a new strategy. Back in 2008 when he was in the Senate and running for the White House, Barack Obama proposed a Warren-style increase in the payroll tax.

Here’s a video I narrated that year, which discusses the adverse economic effect of that type of class-warfare tax hike.

By the way, Hillary Clinton supported a similar tax increase in 2016.

Though it’s worth noting that neither Obama nor Clinton were as radical as Warren since they didn’t propose to exacerbate the tax code’s bias against saving and investment.

And don’t forget she also wants higher capital gains taxes and a punitive wealth tax.

Her overall tax agenda is unquestionably going to be very bad news for job creation and American competitiveness.

The “rich” are the primary targets of her tax hikes, but the rest of us will suffer the collateral damage.

P.S. Instead of huge tax increases, personal retirement accounts are a far better way of addressing Social Security’s long-run problem. I’ve written favorably about the Australian system, the Chilean system, the Hong Kong system, the Swiss system, the Dutch system, the Swedish system. Heck, I even like the system in the Faroe Islands.

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The “Trump of Brazil” Has a Much Better Understanding of Trade than the Trump of America

According to the most-recent edition of Economic Freedom of the World, Brazil is only ranked #120, which is lower than nations such as Greece, Haiti, and China.

Brazil gets a horrible grade on regulation, and it’s also in the bottom half of all nations when looking at fiscal policy, quality of governance, and trade.

But things may be about to change. Voters elected a president last year, Jair Bolsonaro, who is best known for populist rhetoric, but he also expresses support for market-friendly reforms.

And even though he’s sometimes referred to as the “Brazilian Trump,” President Bolsonaro seems to have a much better understanding of trade than his American counterpart.

At least if this report from the Wall Street Journal is any indication.

President Jair Bolsonaro ’s administration is opening up one of the world’s most closed big economies, slashing import tariffs on more than 2,300 products and exposing local industries long accustomed to protectionism to the challenges of free trade. With little fanfare, the conservative government has since taking office in January eased the entry of ultrasonic scalpels, cancer drugs, heavy machinery and more, in some cases with tariffs reduced to zero from as much as 20%. The tariff cuts…reflect a significant shift in the world’s eighth-largest economy, where duties were twice as high as in Mexico, China and the European Union last year. The new opening is a central feature in Economy Minister Paulo Guedes ’s plans to make the country of 210 million more competitive, part of an effort to rekindle a moribund economy historically shielded from foreign competition and bogged down by bureaucracy. …“Brazil’s model of protectionism has failed,” Deputy Economy Minister for Trade Marcos Troyjo, one of Brazil’s chief trade negotiators, said in an interview. “It’s been 40 years without sustainable economic growth.”

Here are some excerpts about how Brazil has been hurt by trade barriers.

The problems created by protectionism are evident throughout Brazil’s economy. When Mauá University outside São Paulo imported American equipment last year that it couldn’t find in Brazil to upgrade its physics lab, for example, import tariffs doubled the price tag to $70,000, said Francisco Olivieri, a business professor and head of Mauá’s technology department. …Protectionism hurts businesses that need to import supplies or parts and face high tariffs and bureaucracy to do so, which pushes them away from global supply chains. Red tape related to tariffs at Brazilian ports mean imported supplies can take weeks to reach buyers, causing production delays. Fifty-five percent of foreign products require the importing companies to obtain permits from as many as six different government agencies, according to a recent study by the National Confederation of Industry, or CNI, a trade group that represents Brazilian factories. Importers are subject to steep fines if they fail to request a permit, but it is often difficult to determine from which agencies they must seek approval.

In other words, Brazilian companies are hit by a double-whammy of trade barriers and red tape.

This is why liberalization is so important.

Incidentally, the EFW data only captures what happened up through 2017.

And since Brazil (#87) isn’t that far behind the United States (#55) in the trade rankings, I won’t be overly surprised in a few years if Brazil jumps the United States given the combination of Bolsonaro’s good policies and Trump’s bad policies.

P.S. Brazil is also in the process of curtailing pensions and already has adopted a constitutional spending cap.

P.P.S. President Bolsonaro is quite good on gun rights.

P.P.P.S. A few years ago, I fretted Brazil has passed a tipping point of dependency. I’m somewhat hopeful that assessment was too pessimistic.

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Basic Income, Public Choice, and the Slippery Slope

When “basic income” became an issue a few years ago, I was instinctively opposed because I don’t want Uncle Sam sending big checks to everyone in the country.

But I admitted that there were a few reasonable arguments for the idea. Most notably, plans for a basic income usually assumed that these checks would be a substitute for the existing social welfare state.

Since that system has been bad news for both taxpayers and poor people, a swap sounds very tempting.

But I’ve repeatedly warned (over and over again) that any theoretical attributes don’t matter because politicians almost certainly would pull a bait-and-switch by adding a basic income on top of all current redistribution programs.

Andrew Yang is now proving my point. When asked about potential budgetary savings to accompany his proposal for basic income, the candidate for the Democratic Party’s presidential nomination asserted that the new handouts would be in addition to the existing welfare state.

.@cenkuygur asked @AndrewYang what welfare programs he'd end or decrease funding in order to do #UBI

"I would not touch any of our existing programs. The freedom dividend is meant as a complement." #SteakFry #tytlive pic.twitter.com/wAW8TzHUzr

— The Young Turks (@TheYoungTurks) September 22, 2019

At the risk of understatement, Yang has turned his proposal into an expensive joke.

America’s social welfare state already is unaffordable and he wants to make it a larger burden with a big new entitlement.

But fiscal policy isn’t the focus of today’s column.

Instead, I want Yang’s announcement to be a teachable moment about the “slippery slope.”

Simply stated, we should always be wary about the potential downsides of any possible reform. Especially if the wrong people are in charge.

Indeed, this wariness shall be enshrined as our “Fifth Theorem of Government.”

This Theorem is rather useful when contemplating certain issues.

• There are theoretical reasons why a value-added tax (or a national sales tax) might be attractive as a replacement for parts of the income tax, but we need to be aware that future politicians would almost certainly fully restore the income tax and then use the VAT to finance bigger government.
• A carbon tax might be theoretically attractive if it enabled a big reduction in the regulatory burden and the revenues were used to finance a tax cut, but we already have evidence that such a levy would enable a net increase in the size of government.

And now we know it applies to discussions of basic income.

P.S. Here are the other four theorems.

The “First Theorem” explains how Washington really operates.

The “Second Theorem” explains why it is so important to block the creation of new programs.

The “Third Theorem” explains why centralized programs inevitably waste money.

The “Fourth Theorem” explains that good policy can be good politics.

P.P.S. All these theorems are actually just elements of “public choice,” which is the common-sense economic theory that people in the public sector largely are seeking to benefit themselves.

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The IMF, State Capacity, and Spurious Correlation

The International Monetary Fund is infamous for its advocacy of higher taxes.

Heck, it’s not merely advocacy. The international bureaucracy uses bailout money as a tool to coerce politicians into approving higher tax burdens.

This is so reprehensible that I’ve referred to the IMF as the “Dumpster Fire of the Global Economy” and called it the “Doctor Kevorkian of Global Economic Policy.”

The bureaucrats also are quite inventive when it comes to rationalizing tax increases.

For instance, a new report from the IMF suggests that a minimum tax level is critical for achieving rapid growth and development.

Is there a minimum tax to GDP ratio associated with a significant acceleration in the process of growth and development? We give an empirical answer to this question by investigating the existence of a tipping point in tax-to-GDP levels. We use two separate databases: a novel contemporary database covering 139 countries from 1965 to 2011 and a historical database for 30 advanced economies from1800 to 1980. We find that the answer to the question is yes. Estimated tipping points are similar at about 12¾ percent of GDP. For the contemporary dataset we find that a country just above the threshold will have GDP per capita 7.5 percent larger, after10 years. The effect is tightly estimated and economically large.

Here’s a depiction of the IMF’s perspective.

At some level, there is a correlation between prosperity and taxation. For instance, some poor nations in the developing world are so corrupt and incompetent that they are incapable of collecting much tax revenue.

But that doesn’t mean higher taxes would somehow make those nations richer. After all, correlation does not imply causation (i.e., crowing roosters don’t cause the sun to rise).

Professor Bryan Caplan of George Mason University points out the methodological shortcomings is the “state capacity” theory.

In recent years, many social scientists…have fallen in love with the concept of “state capacity.” …To my mind, this is scarcely better than saying, “Good government is good; bad government is bad.” Matters would be different, admittedly, if the state capacity literature showed that good government is the crucial ingredient required for success.  But researchers rarely even try to show this.  Instead, they look at various societies and say, “Look at how well-run the governments in successful countries are – and look at how poorly-run the governments in unsuccessful countries are.”  The casual causal insinuation is palpable. …why not just ditch your premature focus on “state capacity” in favor of an open-minded exploration of social capacity?  Good government might be the crucial ingredient for success.  But maybe good government is a byproduct of wealth, trust, intelligence, freedom, or some cocktail thereof. …While good social outcomes all tend to go together, the state capacity literature fails to show that government is the crucial factor that makes all the others possible.

Two other scholars from George Mason University, Professor Peter Boettke and Rosolino Candela, address the issue in an academic study.

This paper reconceptualizes and unbundles the relationship between public predation, state capacity and economic development. …we argue that to the extent that a causal relationship exists between state capacity and economic development, the relationship is proximate rather than fundamental. State capacity emerges from an institutional context in which the state is constrained from preying on its citizenry in violation of predefined rules limiting its discretion. When political constraints are not established to limit political discretion, then state capacity will degenerate from a means of delivering economic development to a means of predation.

They cite Mancur Olson’s work on “political bandits” to understand the limited conditions that would be necessary for there to be a causal relationship between taxes and growth.

Olson’s famous distinction between a “stationary bandit” and a “roving bandit” provides an illustration of our point regarding the emphasis placed on initial conditions. Olson provides a powerful argument for understanding how the self-interest of a revenue-maximizing ruler will align with the political conditions necessary for wealth maximization, not only for himself, but also for his subjects. In a world of roving banditry, a political ruler will have little incentive to invest in fiscal technologies required for regular taxation and judicial technologies that secure property rights and enforce contracts. Only when a bandit has settled down will he or she be incentivized to invest in the provision of public goods that encourage individuals to accumulate wealth, rather than concealing it from predators. However, by Olson’s own admission, his stationary bandit argument is a necessary, though not a sufficient condition for taming public predation.

Their conclusion is that constitutional constants on government are needed to ensure taxes aren’t a tool for additional predation.

In unbundling the relationship between state capacity and economic development, we have distinguished between the protective state, the productive state and the predatory state. To the extent that expansions in state capacity are consistent with economic development, this is because a credible commitment to a set of rules that constrain political discretion have been established. …Fundamentally, economic development requires a protective state from which state capacity emerges as a byproduct. If, however, political constraints are not established to limit political discretion, then state capacity will degenerate from a means of delivering economic development to a means of predation.

Professor Mark Koyama of George Mason University also has written wisely on this topic.

I’m not an academic, so I have a much simpler way of thinking about this issue.

When the IMF (and other bureaucracies) assert that higher taxes are good for growth, I explain that it’s all based on fairy dust or magic beans.

P.S. In a perverse way, I admire the IMF. The bureaucracy’s rationale for existence (dealing with fixed exchange rates) disappeared decades ago, yet the IMF managed to reinvent itself and is now bigger and more bloated than ever.

P.P.S. You won’t be surprised to learn that IMF bureaucrats receive tax-free salaries while pushing for higher taxes on everyone else.

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To Help the Poor, Focus on Poverty Reduction Rather than Inequality

Here’s a simple quiz to determine whether you should support a candidate like Bernie Sanders or Elizabeth Warren: Would you embrace a policy that increased income for poor Americans by 10 percent if it also happened to increase income for rich Americans by 15 percent?

Normal people automatically say yes. After all, they don’t resent rich people and they want lower-income people to enjoy better living standards.

Some of our left-leaning friends (including at the IMF!), however, are so fixated on inequality that they are willing to deprive the poor so long as higher-income people have even larger losses (Margaret Thatcher nailed them on this issue).

Let’s look at some analysis of this issue.

The Wall Street Journal has an editorial that starts by highlighting some good economic news.

…low- and middle-income folks are reaping more economic benefits than during the Obama years. …Worker earnings increased by 3.4% while the poverty rate declined 0.5 percentage points to 11.8%, the lowest level since 2001. Benefit rolls are shrinking as low-income workers earn more. …the number of full-time, year-round workers increased by 2.3 million in 2018, and employment gains were biggest among minority female-led households. The share of workers in female-led households who worked full-time year-round increased by 4.2 percentage points among blacks and 3.6 percentage points among Hispanics. …The jobless rate for black women last month fell to a historic low of 4.4% and neared a nadir for Hispanic women at 4.2%. …The share of households making less than $35,000 in inflation-adjusted dollars has fallen 1.2 percentage points since 2016 while those earning between $50,000 and $150,000 and more than $200,000 have both increased by 0.8 percentage points.

It then makes to all-important point that policy makers should fixate on growth rather than inequality if the goal is to help he less fortunate.

Democrats focus on income inequality… What really matters for a healthy democratic society, however, are economic opportunity and income mobility. …The Obama policy mix, which Democrats want to return to only more so, put a priority on reducing inequality rather than increasing economic growth. But higher taxes, hyper-regulation and income redistribution resulted in slower growth and more inequality during the Obama Presidency. …This is a lesson for the left and those on the big-government right who want to use tax policy and subsidies to redistribute income to reduce inequality. Policies that hurt growth hurt lower-income workers the most.

José Ponce, in a column for FEE, sagely observes that “Gini” numbers can be very misleading because they tell us nothing about a society’s overall prosperity.

…inequality on its own is insufficient for any means of understanding. By definition, it measures the level of income or wealth that a group of people receive or own relative to another group of people within a society. The key word here is relative. That means it provides no information in regards to whether the bottom quintile has a low or high level of income or about the quality of life… For instance, Cuba, with a Gini index of 0.38 and Liberia with 0.32 have much less inequality than the highly-developed Singapore and Hong Kong, with Gini coefficients of 0.45 and 0.53, respectively. Citizens in a poor country with low inequality are equitably poor. …Elaborating on this point, rising inequality may not necessarily be a negative outcome just as declining inequality may not necessarily be positive. A developing society where both the rich and the poor have growing incomes, but the rich are rising faster than the poor, will experience a surge in inequality. However, since both the rich and the poor have increased incomes, everyone is better off than before.

Let’s close with a chart from Mark Perry showing that ever-greater numbers of Americans are climbing the income ladder.

P.S. This data from China is the most powerful and persuasive that I’ve seen on why growth matters far more than inequality.

P.P.S. This bit of satire also illustrates why inequality numbers are grossly misleading.

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A $3.12 Billion Suggestion for Bill Gates

Maybe I’m just a curmudgeon, but I get rather irked when rich people endorse higher taxes.

Are they trying to curry favor with politicians? Seeking some sort of favoritism from Washington (like Warren Buffett)?

Or do they genuinely think it’s a good idea to voluntarily send extra cash to the clowns in D.C. ?

I’m not sure how Bill Gates should be classified, but the billionaire is sympathetic to a wealth tax according to news reports.

Bill Gates…says he’d be ok with a tax on his assets. In an interview with Bloomberg, Gates was asked if he would support a wealth tax… Gates said he wouldn’t be opposed to such a measure… “I doubt, you know, the U.S. will do a wealth tax, but I wouldn’t be against it,” he said. …This isn’t the first time Gates has hinted at supporting a wealth tax, an idea being pushed by Democratic presidential candidate Sen. Elizabeth Warren (D-Mass.). In February, Gates told The Verge that tax plans solely focused on income are “missing the picture,” suggesting the estate tax and taxes on capital should instead be the subject of more progressive rates.

My reaction is that Gates should lead by example.

A quick web search indicates that Gates is worth $105 billion.

Based on Warren’s proposal for a 3 percent tax on all assets about $1 billion, Gates should put his money where his mouth is and send a $3.12 billion check to Washington.

Or, if Gates really wanted to show his “patriotism,” he could pay back taxes on his fortune.

CNBC helpfully did the calculations.

A recent paper by two economists who helped Warren create her plan — University of California, Berkeley professors Emmanuel Saez and Gabriel Zucman — calculated what effect Warren’s plan would have had on America’s richest, including Gates, if it had been imposed starting in 1982 (the first year Forbes magazine began tracking the net worth of the 400 richest Americans) through 2018. Gates, whose fortune was tallied at $97 billion on 2018′s Forbes 400 list, would have been worth nearly two-thirds less last year — a total of only $36.4 billion — had Warren’s plan been in place for the last three decades. Gates’ current net worth is $105.3 billion, according to Forbes.

In other words, Gates could show he’s not a hypocrite by sending a check for more than $60 billion to Uncle Sam.

Because I’m a helpful guy, I’ll even direct him to the website that the federal government maintains for the knaves and fools who think people like Donald Trump and Nancy Pelosi should have extra money to squander (my two cents is that they’re the ones with the worst incentive to use money wisely).

Needless to say, Gates won’t give extra money to Washington.

Just like he won’t fire the dozens (if not hundreds) of financial advisors that he surely employs to protect his income and assets from the IRS.

The bottom line is that nobody who embraces higher taxes should be taken seriously unless they show us that they’re willing to walk the walk as well as talk the talk.

Based on the behavior of Elizabeth Warren and John Kerry, don’t hold your breath waiting for that to happen.

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The Looming Threat of Higher Capital Gains Taxation

I wrote yesterday about the generic desire among leftists to punish investors, entrepreneurs, and other high-income taxpayers.

Today, let’s focus on one of the specific tax hikes they want. There is near-unanimity among Democratic presidential candidates for higher tax rates on capital gains.

Given the importance of savings and investment to economic growth, this is quite misguided.

The Tax Foundation summarizes many of the key issues in capital gains taxation.

…viewed in the context of the entire tax system, there is a tax bias against income like capital gains. This is because taxes on saving and investment, like the capital gains tax, represent an additional layer of tax on capital income after the corporate income tax and the individual income tax. Under a neutral tax system, each dollar of income would only be taxed once. …Capital gains face multiple layers of tax, and in addition, gains are not adjusted for inflation. This means that investors can be taxed on capital gains that accrue due to price-level increases rather than real gains. …there are repercussions across the entire economy. Capital gains taxes can be especially harmful for entrepreneurs, and because they reduce the return to saving, they encourage immediate consumption over saving.

Here’s a chart depicting how this double taxation creates a bias against business investment.

Here are some excerpts from a column in the Wall Street Journal on the topic of capital gains taxation.

The authors focus on Laffer-Curve effects and argue that higher tax rates can backfire. I’m sympathetic to that argument, but I’m far more concerned about the negative impact of higher rates on economic performance and competitiveness.

…there is a relatively simple and painless way to maintain the federal coffers: Restore long-term capital-gains tax rates to the levels in place before President Obama took office. A reduction in this tax could generate significant additional revenue. …This particular levy is unique in that most of the time the taxpayer decides when to “realize” his capital gain and, consequently, when the government gets its revenue. If the capital-gains tax is too high, investors tend to hold on to assets to avoid being taxed. As a result, no revenue flows to the Treasury. If the tax is low enough, investors have an incentive to sell assets and realize capital gains. Both the investors and the government benefit. …The chance to test that theory came in May 2003, when Congress lowered the top rate on long-term capital gains to 15% from 20%. According to the Congressional Budget Office, by 2005-06 realizations of capital gains had more than doubled—up 151%—from the levels for 2002-03. Capital-gains tax receipts in 2005-06, at an average of $98 billion a year, were up 81% from 2002-03. Tax receipts reached a new peak of $127 billion in 2007 with the maximum rate still at 15%. By comparison, federal capital-gains tax receipts were a mere $7.9 billion in 1977 (the equivalent of about $31 billion in 2017 dollars), according to the Treasury Department. The effective maximum federal capital-gains tax was then 49%. …Using our post-2003 experience as a guide, we can predict a dramatic improvement in realizations and tax receipts if the top capital-gains tax rate is lowered to 15%. …but that’s not the only benefit. Such changes also increase the mobility of capital by inducing investors to realize gains. This allows investment money to flow more freely, particularly to new and young companies that are so important for growth and job creation.

Here’s another chart from the Tax Foundation showing that revenues are very sensitive to the tax rate.

Last but not least, Chris Edwards explains that the U.S. definitely over-taxes capital gains compared to other developed nations.

Democrats are proposing to raise capital gains taxes. …Almost every major Democratic presidential candidate supports taxing capital gains as ordinary income. …These are radical and misguided ideas. …capital gains taxes should be low or even zero. …the United States already has high tax rates compared to other countries. The U.S. federal-state rate on individual long-term gains of 28 percent compared at the time to an average across 34 OECD countries of just 16 percent. …the combined federal-state capital gains tax rates on investments in corporations…includes the corporate-level income tax and the tax on individual long-term gains. …Numerous countries in the OECD study do not tax individual long-term capital gains at all, including Belgium, Chile, Costa Rica, Czech Republic, Hungary, Luxembourg, New Zealand, Singapore, Slovenia, Switzerland, Turkey. The individual capital gains tax rate on long-term investments in those countries is zero. …Raising the federal corporate and individual capital gains tax rates would be a lose-lose-lose proposition of harming businesses and start-ups, undermining worker opportunities, and likely reducing government revenues.

Here’s his chart, showing the effective tax rate caused by double taxation.

As you can see, the 2017 tax reform was helpful, but we still need a much lower rate.

I’ll close by recycling my video on capital gains taxation.

You can also click here to learn about the unfairness of being taxed on gains that are solely due to inflation.

For what it’s worth, Senator Wyden wants to force investors to pay taxes on unrealized gains.

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The Left’s Class-Warfare Numbers Don’t Add Up

I’ve written many times about the perverse and destructive economic impact of class-warfare taxation.

Today, we’re doing to look at the sloppy math associated with the fiscal plans of Bernie Sanders, Kamala Harris, Elizabeth Warren, and the rest of the soak-the-rich crowd.

First, here are some excerpts from a story in the Hill.

The progressive push to raise taxes on the rich is gaining new momentum. Sen. Elizabeth Warren (D-Mass.), who has already proposed a wealth tax to raise funds for a variety of new government programs, on Thursday unveiled a plan to expand Social Security by creating two taxes on wage and investment income for wealthy Americans. …Since the start of the year, much of the debate around taxes among Democrats has been over how much and how best to raise taxes on the rich. …Democratic presidential candidates across the board have proposed ways to increase taxes on the rich. The developments have encouraged liberal groups pressing for higher taxes on the wealthy. …Sanders, the Democratic presidential candidate and Vermont senator, has legislation to expand and extend the solvency of the retirement program that would subject all income above $250,000 to the Social Security payroll tax. Sanders’s bill is co-sponsored in the Senate by two fellow presidential candidates, Sens. Kamala Harris (D-Calif.) and Cory Booker (D-N.J.).

These ideas would do considerable harm to the economy and reduce American competitiveness.

But let’s focus on whether the left’s tax agenda is capable of financing their spending wish lists.

Brian Riedl of the Manhattan Institute just released his Book of Charts. There are dozens of sobering visuals, but here’s the one that’s relevant for today.

The bottom line is that our friends on the left have an enormous list of goodies they want to dispense, yet their proposed tax hikes (even assuming no Laffer Curve) would only pay for a fraction of their agenda.

Which is why lower-income and middle-class taxpayers need to realize that they’re the ones with bulls-eyes on their back.

Just like we’ve seen on the other side of the Atlantic, there’s no way to finance a European-sized welfare state without pillaging ordinary people. Especially since upper-income taxpayers can change their behavior to avoid most tax hikes.

So brace yourselves for a value-added tax, a carbon tax, a financial transactions tax, and higher payroll taxes.

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The Predictably Perverse Impact of Greek Bailouts

There are many reasons to oppose the various bailouts of the Greek government. Here are my two main reasons.

1. I don’t like rewarding investors who make imprudent decisions, and it really galls me to bail out the (mostly) rich people who bought Greek bonds.
2. I don’t like rewarding politicians who make imprudent decisions, and it really galls me since bailouts encourage additional imprudent behavior.

Let’s focus today on the second point.

Here’s Greece’s score for the “Size of Government” component from Economic Freedom of the World. As you can see, bailouts have actually subsidized a decline in fiscal responsibility.

And it’s worth pointing out that Greek politicians have been doing a bad job in other areas.

The burden of red tape has been, and remains, stifling.

Greece ranks at the top in difficulty in setting up and running a business among 75 countries, according to the Global Business Complexity Index for 2019. The difficulty in starting an enterprise in Greece is mainly due to a labyrinth bureaucracy, frequent changes in legislation, differences in taxation and VAT rates in regions and unpredictable treatment of businesses by authorities. Indonesia, Brazil, the United Arab Emirates, Bolivia, and Slovakia follow Greece in the first six places. The easiest state to start and run a business is in the Cayman Islands.

Here are the rankings. Keep in mind that “01” is the worst score and “76” is the best score (kudos to the Cayman Islands for being the most entrepreneur-friendly).

Interestingly, voters ousted a left-wing government earlier this year.

And Bloomberg reports that Greece’s new right-of-center government intends to reduce the burden of government.

Mitsotakis presented his four-year economic agenda in his first plenary speech to parliament since winning national elections on July 7. …The premier’s priority is a reform of Greece’s complex tax system to create a more pro-business environment, necessary for attracting investment to boost the economy’s recovery. Mitsotakis wants to make good on election pledges to alleviate the tax burden for crisis-weary Greeks, specifically for the middle classes who were targeted the most by the previous administration. …Mitsotakis said he will introduce legislation…to reduce the so-called Enfia property tax by as much as 30%, according to the value of properties. …The government plans to reduce the corporate tax rate to 20% in two phases. The first step, in September, will cut the rate to 24% from 28% in 2019 and to 20% in 2020. The tax on dividend payments will be slashed by half to 5%… Also planned is the privatization of Hellenic Petroleum SA and the sale of a 30% stake in Athens Airport.

Indeed, a columnist for the New York Times frets that the new government is hard right.

New Democracy…seems to be a right-wing party… And Mr. Mitsotakis, who promised to unite the country, is following divisive and polarizing policies. …You don’t have to search far for evidence. …Three crucial regulatory agencies — protecting the country’s finances, work force and environment — have been effectively dissolved as part of a bill, recently passed by Parliament, to restructure government. …Domna Michailidou, the vice minister of labor, personifies the cabinet’s ideological agenda. In 2017, she openly praised cuts in wages as “necessary” for the sake of competitiveness. …Greece finished its third and last bailout program last August, but remains shellshocked after nearly a decade of austerity. Official unemployment is at 18 percent; youth unemployment scores a staggering 40 percent. …None of New Democracy’s vaunted policies — to cut corporation taxes and privatize industry in an effort to stimulate economic growth and create “new jobs” — are likely to address the country’s problems. They may well do the opposite.

Some of this sounds good, but I’ll have to see concrete results before I become a believer.

Most supposed right-of-center governments are either very inconsistent (think Trump) or generally bad (think Macri or Sarkozy).

I just focus on results.

Speaking of which this chart, based on the OECD’s fiscal database, shows what happened to revenue (left side) and spending (right side) between 2007 and 2018.

As you can see on the right side, the burden of spending has actually increased.  That’s not my idea of austerity.

The big change that stands out over the past 10 years, though, is that the burden of taxation has jumped. A lot.

In other words taxpayers have been forced to tighten their belts but politicians haven’t tightened government’s belt.

The moral of the story is that tax increases always make a bad fiscal situation worse. Greece has proved that over and over and over again.

P.S. I guess bad results should be expected in a nation where bureaucrats demand stool samples before you can set up an online company. Another sign of Greece’s moral and fiscal bankruptcy is that pedophiles can get disability payments.

P.P.S. To offset the grim message of today’s column, let’s also enjoy some Greek-related humor. This cartoon is quite  good, but this this one is my favorite. And the final cartoon in this post also has a Greek theme.

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

Last but not least, here are some very un-PC maps of how various peoples – including the Greeks – view different European nations.

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The Seen, the Unseen, and the Pitfalls of Business Subsidies

The great French economist from the 1800s, Frederic Bastiat, famously explained that good economists are aware that government policies have indirect effects (the “unseen”).

Bad economists, by contrast, only consider direct effects (the “seen”).

Let’s look at the debate over stadium subsidies. Tim Carney of the American Enterprise Institute narrates a video showing how the “unseen” costs of government favoritism are greater than the “seen” benefits.

Unfortunately, stadium subsidies are just the tip of the cronyism iceberg.

In a column for the Dallas Morning News, Dean Stansel of Southern Methodist University discussed some of his research on the topic.

While state and local economic development incentives may seem to help the local economy, the offsetting costs are usually ignored, so the overall effect is unclear. Furthermore, from the perspective of the nation as a whole, these policies are clearly a net loss. …In a new research paper, my colleague, Meg Tuszynski, and I examined whether there is any relationship between economic development incentive programs and five measures of entrepreneurial activity. Like the previous literature in this area, we found virtually no evidence of a positive relationship. In fact, we found a negative relationship with patent activity, a key measure of new innovation. …A recent study by the Mercatus Center found that 12 states could reduce their corporate income tax by more than 20 percent if incentive programs were eliminated. That includes a 24 percent cut in Texas’ business franchise tax. In six states, it could either be completely eliminated or reduced by more than 90 percent. These are big savings that would provide substantial tax relief to all businesses, both big and small, not just those with political influence. …That would provide a more level playing field in which all businesses can thrive.

And here’s a Wall Street Journal editorial from earlier the year.

Amazon left New York at the altar, turning down a dowry of $3 billion in subsidies. Foxconn’s promised new factory in Wisconsin, enticed with $4 billion in incentives, has fallen into doubt. …Now add General Electric , which announced…it will renege on its plan to build a glassy, 12-story headquarters on Boston’s waterfront. …The company reportedly…pledged to bring 800 jobs to Boston. In exchange, the city and state offered $145 million in incentives, including tax breaks and infrastructure funds. GE’s boss at the time, Jeff Immelt, said not to worry: For every public dollar spent, “you will get back one thousand fold, take my word for it.” …two CEOs later, a beleaguered GE won’t be building that fancy tower at all. There won’t even be 800 jobs. …GE will lease back enough space in two existing brick buildings for 250 employees. …what a failure of corporate welfare.

Let’s wrap this up with a look at some additional scholarly research.

Economists for the World Bank investigated government favoritism in Egypt and found that cronyism rewards politically connected companies at the expense of the overall economy.

This paper presents new evidence that cronyism reduces long-term economic growth by discouraging firms’ innovation activities. …The analysis finds that the probability that firms invest in products new to the firm increases from under 1 percent for politically connected firms to over 7 percent for unconnected firms. The results are robust across different innovation measures. Despite innovating less, politically connected firms are more capital intensive, as they face lower marginal cost of capital due to the generous policy privileges they receive, including exclusive access to input subsidies, public procurement contracts, favorable exchange rates, and financing from politically connected banks. …The findings suggest that connected firms out-rival their competitors by lobbying for privileges instead of innovating. In the aggregate, these policy privileges reduce…long-term growth potential by diverting resources away from innovation to the inefficient capital accumulation of a few large, connected firms.

For economics wonks, here’s Table 2 from the study, showing how subsidies are associated with less innovation.

The World Bank also found awful results because of cronyism in Ukraine.

But this isn’t a problem only in developing nations.

There’s some depressing research about the growing prevalence of cronyism in the United States (ethanol handouts, the Export-Import Bank, protectionism, tax favoritism, bailouts, subsidies, and green energy are just a few examples of how the friends of politicians get unearned wealth).

Cronyism is bad under Democrats and it’s bad under Republicans. Time for separation of business and state!

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The Continuing Tax Migration to Florida

Like most libertarians, I’m a bit quirky.

Most people, if they watch The Great Escape or Rambo II, cheer when American POWs achieve freedom.

I’m happy as well, but I also can’t stop myself from thinking about how I also applaud when a successful taxpayer flees from a high-tax state to a low-tax state.

It’s like an escape from oppression to freedom, though I confess it might not be the best plot for a blockbuster movie.

In any event, here are two recent feel-good stories about this phenomenon.

Here’s a report about two members of the establishment media who are protecting their family’s finances from greedy Connecticut politicians.

After reports that married MSNBC anchors Joe Scarborough and Mika Brzezinski have been mysteriously broadcasting their show from Florida — sources speculated that the location is to benefit Scarborough’s tax situation. The “Morning Joe” anchors have been reportedly on a home set in Jupiter, Fla., but using Washington, DC, backdrops. Sources said the reason for the locale was a “tax dodge” — albeit a completely legal one — since Scarborough has a home in Florida and would need to spend a certain amount of the time there for any tax benefit. …Scarborough, who’s still presently registered to vote in Connecticut., on Oct. 9, 2018 registered to vote in Palm Beach County, Fla. according to public records. …By moving to Florida, he’d reduce his tax burden by roughly $550,000. Scarborough reportedly makes $8 million a year and would pay 6.99-percent state income tax in Connecticut, while there’s no state income tax in Florida, the Post’s Josh Kosman reports. To qualify as a Florida resident, he’d need to be there 183 days a year.

According to the story, Scarborough and Brzezinski are only making the move to be close to aging parents.

That certainly may be part of the story, but I am 99.99 percent confident that they won’t be filing another tax return with the Taxnut State…oops, I mean Nutmeg State.

Meanwhile, another billionaire is escaping from parasitic politicians in New York and moving to zero-income tax in Florida.

Billionaire Carl Icahn is planning to move his home and business to Florida to avoid New York’s higher taxes, according to people familiar with the matter. …The move is scheduled for March 31 and employees who don’t do so won’t have a job… Hedge fund billionaires have relocated to Florida for tax reasons for years — David Tepper, Paul Tudor Jones and Eddie Lampert being among the most prominent. But Florida officials have been aggressively pushing Miami as a destination for money managers since the Republican-led tax overhaul. …Florida is one of seven states without a personal income tax, while New York’s top rate is 8.82%. Florida’s corporate tax rate is 5.5%, compared with 6.5% in New York. Icahn’s move was reported earlier by the New York Post. The difference could mean dramatic savings for Icahn, who is the world’s 47th richest person.

These two stories are only anecdotes. And without comprehensive data, there’s no way of knowing if they are part of a trend.

That’s why the IRS website that reports the interstate movement of money is so useful (it’s not often I give the IRS a compliment!). You can peruse data showing what states are losing income and what states are gaining income.

Though if you want a user-friendly way of viewing the data, I strongly recommend How Money Walks. That website allows you to create maps showing the net change in income and where the income is coming from, or going to.

Since our first story was about Connecticut, here’s a map showing that the Nutmeg State has suffered a net exodus (red is bad) over the 1992-2016 period.

In other words, the state is suffering from fiscal decay.

And here’s a map for New York, where we see the same story.

Now let’s look at the state that is reaping a windfall thanks to tax refugees.

Florida, to put it mildly, is kicking New York’s derrière (green is good).

And you can see on the left side that Florida is also attracting lots of taxpayers from New Jersey, Illinois, Pennsylvania, and Connecticut.

By the way, some of my leftist friends claim this internal migration is driven by weather. I suspect that’s a partial factor, but I always ask them why people (and their money) are also migrating out of California, where the weather is even better.

P.S. Tax migration is part of tax competition, and it’s a big reason why left-wing governments sometimes feel compelled to lower taxes.

P.P.S. When the IRS releases data for 2017 and 2018, I’m guessing we’ll see even more people escaping to Florida, in large part because there’s now a limit on deducting state and local taxes.

P.P.P.S. I also cheer when people escape high-tax nations.

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New Rankings for Economic Liberty: Good News and Bad News for the United States

The folks at the Fraser Institute in Canada have just released a new version of Economic Freedom of the World.

As has been the case for many years, Hong Kong is #1 and Singapore is #2, followed by New Zealand (#3) and Switzerland (#4).

Interestingly, the United States improved one spot, climbing to #5.

Here’s the data for the top two quartiles.

The new version includes 2017, so fans of Trump will be able to claim vindication.

But not much.

As you can see, the EFW data shows that America’s score rose only slightly, from 8.17 to 8.19.

My view, for what it’s worth, is that Trump’s economic policy is somewhat incoherent.

He’s been good on taxes and red tape, but bad on spending and trade. So I’m not surprised we’re mostly treading water.

Now let’s look at the bottom half of the ranking.

In last place, unsurprisingly, we find Venezuela.

Let’s close with two final visuals.

Here’s a chart showing that poor people in the nations with the most economic liberty have much higher incomes that poor people in countries with less economic liberty.

The moral of the story, needless to say, is that people who genuinely want to help the poor should support free markets and limited government.

Last but not least, here are two tables I prepared.

The one on the left shows the nations with the biggest positive and negative changes since 2010, while the one on the right shows the biggest changes since 2000.

In some cases, such as Zimbabwe, a nation improved because it was in such terrible shape that it would have been difficult to do worse.

Though Venezuela seems determined to show that a terrible score can drop even farther.

For what it’s worth, Egypt’s slide toward statism is being subsidized by massive amounts of aid from American taxpayers.

And speaking of America, I’m embarrassed to acknowledge that the United States has suffered the 10-largest drop when looking at changes since 2000. That’s a legacy of the bad policies we got from George W. Bush and Barack Obama. Thanks for nothing, guys!

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Economic Lessons from Ancient Rome

I’ve been in Rome the past few days with my charming and beautiful daughter.

We visited the usual tourists spots, including the Coliseum and other remnants of Ancient Rome.

And I couldn’t help but wonder how such a powerful empire could collapse, driving people from relative prosperity to the economic misery of the Dark Ages.

I briefly addressed this topic in early 2016, but only to make a point about the (myriad) problems of modern Italy.

So let’s take a closer look at this issue and learn how excessive government helped bring down the Roman Empire.

The Foundation for Economic Education has an excerpt of Will Durant’s book, The Story of Civilization, Vol. 3: Caesar and Christ. And here are my excerpts from that article.

Diocletian, with his aides, faced the problems of economic decay. …he substituted a managed economy for the law of supply and demand. …He distributed food to the poor at half the market price or free, and undertook extensive public works to appease the unemployed. To ensure the supply of necessaries for the cities and the armies, he brought many branches of industry under complete state control, beginning with the import of grain… The state had long since owned most quarries, salt deposits, and mines; now it forbade the export of salt, iron, gold, wine, grain, or oil from Italy, and strictly regulated the importation of these articles. …the majority of industrial establishments and guilds in Italy were brought under the control of the corporate state. Butchers, bakers, masons, builders, glass-blowers, ironworkers, engravers, were ruled by detailed governmental regulations. …Such a system could not work without price control. In 301, Diocletian and his colleagues issued an Edictum de pretiis, dictating maximum legal prices or wages for all important articles or services in the Empire. …The weakness of this managed economy lay in its administrative cost. The required bureaucracy was so extensive that Lactantius, doubtless with political license, estimated it at half the population. …To support the bureaucracy, the court, the army, the building program, and the dole, taxation rose to unprecedented peaks of ubiquitous continuity. …Since every taxpayer sought to evade taxes, the state organized a special force of revenue police to examine every man’s property and income; torture was used upon wives, children, and slaves to make them reveal the hidden wealth or earnings of the household.

Torture?!? Let’s not give the IRS any new ideas.

Here’s an excerpt from FEE’s excerpt from Human Action, the classic tome by Ludwig von Mises.

…the Roman Empire in the second century, the age of the Antonines, the “good” emperors, had reached a high stage of the social division of labor and of interregional commerce. …What brought about the decline of the empire and the decay of its civilization was the disintegration of this economic interconnectedness… The policy of the annona, which was tantamount to a nationalization or municipalization of the grain trade…its effects were rather unsatisfactory. Grain was scarce in the urban agglomerations, and the agriculturists complained about the unremunerativeness of grain growing. …The interference of the authorities upset the adjustment of supply to the rising demand. …in the political troubles of the third and fourth centuries the emperors resorted to currency debasement. With the system of maximum prices the practice of debasement completely paralyzed both the production and the marketing of the vital foodstuffs and disintegrated society’s economic organization. …The Roman Empire crumbled to dust because it lacked the spirit of liberalism and free enterprise. The policy of interventionism and its political corollary, the Führer principle, decomposed the mighty empire as they will by necessity always disintegrate and destroy any social entity.

Just in case it’s not clear, Mises was referring to “classical liberalism.”

In a column for FEE, Professor Richard Ebeling explores the impact of government intervention in Rome.

The Roman government also set price controls on wheat. In the fourth century, B.C., the Roman government would buy grain during periods of shortages and sell it at a price fixed far below the market price. In 58 B.C., this was improved upon; the government gave grain away to the citizens of Rome at a zero price, that is, for free. The result was inevitable: farmers left the land… In 45 B.C., Julius Caesar discovered that almost one-third of the Roman citizenry was receiving their grain supply for free from the State. To deal with the financial cost of these supplies of wheat, the Roman government resorted to debasement of the currency, that is, inflation. Pricing-fixing of grain, shortages of supply, rising budgetary problems for the Roman government, monetary debasement and resulting worsening price inflation were a continual occurrence through long periods of Roman history. …In the Greek parts of the Roman Empire, archeologists have found the price tables listing the government-mandated prices. They list over 1,000 individual prices and wages set by the law and what the permitted price and wage was to be for each of the commodities, goods, and labor services.

Sounds like Elizabeth Warren’s platform.

But not all Roman leaders were economic illiterates. Writing for FEE, Marc Hyden has a reasonably favorable assessment of Antoninus Pius.

…most Roman emperors, at least at certain points in their lives, were little more than murderous megalomaniacs too willing to spark wars for their own benefit and chip away at the Romans’ liberties. This is true even for the most revered emperors, including Augustus, Hadrian, and Constantine. …one emperor finally came to mind: Antoninus Pius. While imperfect, for the most part, Antoninus ruled with prudence, restraint, and moderation. He is known as one of the so-called “five good emperors,”… Antoninus often seemed to eschew the grandeur of his office. He sold off imperial lands, reduced or eliminated superfluous salaries, and lived in his own villas rather than imperial estates. …he believed he simply could not justify draining the public treasury for travel. …He conscientiously guarded the public treasury while simultaneously reducing confiscations and his subjects’ tax burden. …He so prudently managed the state’s finances that when he died, he left the public treasury with a massive surplus—a rarity in old Rome. Part of this surplus appears to be related to Antoninus’ aversion to vanity projects and unnecessary wars. …His life is perhaps best summed up by his successor, Marcus Aurelius, who described Antoninus as a grounded, introspective, and humble man who was respectful of others’ liberties.

I guess we can say that Antoninus was the Grover Cleveland of the Roman Empire.

By the way, there is an alternative left-of-center explanation of Rome’s decline. Professor Mark Koyama of George Mason University summarizes that viewpoint.

In the Rise of Western Christendom, [Peter] Brown summarizes the new wisdom on the transition from late antiquity to the early middle ages. …Long distance trade contracted. Cities shrank and emptied out. The division of labor became less complex. Many professions common in the Roman world disappeared. All of this is relatively uncontroversial. At issue is what caused this decline? …according to Brown: “The fault lay with the weakening of the late Roman state. The state had been built up to an unparalleled level in order to survive the crisis of the third century. The “downsizing” of this state, in the course of of the fifth century, destroyed the “command economy” on which the provinces had become dependent.” …Brown contends that the Roman state was the engine of economic growth of late antiquity. …Brown argues that these high taxes were in fact the source of economic dynamism: “High taxation did not ruin the populations of the empire. Rather, high tax demands primed the pump for a century of hectic economic growth.”

He then explains why he is not impressed with that analysis.

This, then, is Brown’s explanation for the decline of the Roman economy. It turns out that when examined one by one each one of these premises is either on shaky grounds factually, economically, or requires us to make implausible assumptions. …For conventional Keynesians, the multiplier on government spending boosts short-run aggregate demand, but aggregate demand is not the binding constraint on long-run growth, supply is; growth depends on the productive capacity of the economy. If anything, the impact of the Roman tax state on the productive capacity of the economy was more likely to be negative rather than positive. Resources were diverted from the private hands of peasants, merchants and small landowners and diverted into the hands of soldiers and officeholders. …Brown’s argument requires that at the margin, peasants preferred additional leisure to the wide array of affordable manufactured consumers goods that were on offer in markets and shops across the Roman empire. This is not impossible. But it is at odds with what we know about peasant behavior in other commercial societies such as early modern Europe. …Brown’s argument requires us to believe that if, for instance, the Roman state stopped spending on armor and weapons in a city, then the blacksmith and armor manufacturer would go out of business. This is a classic case of focusing on the seen and missing the unseen. It neglects the fact that lower taxes would give individuals more disposable income and they would likely spend some of this income to purchase amphora, pottery, textiles or other urban goods that we know the Roman economy was capable of producing. The blacksmith might switch to producing pots and pans rather than swords but he would not then go out of business.

Needless to say (but I’ll say it anyway), I side with Koyama over Brown.

Yes, there is ample evidence that some degree of government is important for a thriving and successful economy.

• A national defense protects a country and gives people confidence to accumulate capital.
• A justice system protects against criminal activity.
• A legal system provides a mechanism of resolving disputes.

Rome prospered and grew when the degree of economic intervention was tolerable.

Over time, though, Roman officials went overboard. There was too much intervention, too much dependency, and too much taxation.

The moral of the story (as we see in modern nations such as Venezuela, Greece, and Argentina) is that nations can move in the wrong direction.

The great challenge, of course, is figuring out a way to confine government so it focuses solely on core “public goods.”

America’s Founders produced such a system, but sadly the courts have failed to protect and preserve the Constitution’s limits on the powers of the central government.

September 14, 2019 Addendum: In response to some of the very good comments below, I fully agree that many other factors contributed to Rome’s decline. This columns focuses solely on the role of economic policy.

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Rent Control: A Triumph of Vote Counting over Sound Economics

Identifying the worst government policy would be a challenge. Would it be minimum wage laws, which deprive low-skilled workers of a chance for employment and upward mobility? Would it be class-warfare tax rates that generate large amounts of economic damage compared to potential (if any) revenue?

Those are tempting choices, but there’s a strong case that nothing is as foolish as rent control.

Here’s a map showing which states impose or allow this destructive form of intervention.

California politicians are very susceptible to bad ideas.

True to form, as reported by the New York Times, they actually want to impose statewide rent control.

California lawmakers approved a statewide rent cap on Wednesday covering millions of tenants, the biggest step yet in a surge of initiatives to address an affordable-housing crunch nationwide. The bill limits annual rent increases to 5 percent after inflation and offers new barriers to eviction… a momentous political swing. For a quarter-century, California law has sharply curbed the ability of localities to impose rent control. Now, the state itself has taken that step. …Economists from both the left and the right have a well-established aversion to rent control, arguing that such policies ignore the message of rising prices, which is to build more housing. Studies in San Francisco and elsewhere show that price caps often prompt landlords to abandon the rental business by converting their units to owner-occupied homes. And since rent controls typically have no income threshold, they have been faulted for benefiting high-income tenants.

I’m glad the article included the evidence from economists, especially since the headline is grossly inaccurate. If we care about evidence, it’s far more accurate to say that rent control will exacerbate the state’s housing problems.

Which is why the Wall Street Journal opined that this type of intervention is especially destructive.

California already boasts the highest housing costs in the country, and even liberals have come around to acknowledging that not enough homes are built to meet demand. The state has added about half as many housing units as needed to accommodate population growth, and more than half of Californians spend 30% of their income on rent.Blame a thousand regulatory burdens. Local governments limit what housing developers can build and where. They layer on permitting fees, and then there are the state’s high labor costs and expensive green-energy mandates and restrictions that opponents can exploit to block projects for years. …The upshot is that an “affordable” housing unit in California costs $332,000 to build and nearly $600,000 in San Francisco, according to state budget figures. Developers can’t turn a profit on low- and middle-income homes… And now Democrats want to constrain housing prices by fiat. Mr. Newsom and Democratic legislators are pushing a law to limit annual rent increases across the state to 5% plus inflation. …Building permits in the first seven months this year have fallen 17% compared to 2018 despite an increase in state subsidies. …California’s progressive regulatory complex is contributing to this housing slowdown by driving businesses and people from the state. More than 700,000 residents have left since 2010.

By the way, the politicians in Albany already made the same mistake.

And, as you might expect, the Wall Street Journal‘s editorial page had the correct response.

Law by law, Gov. Andrew Cuomo and Democrats are chipping away at the policies that made New York City livable after decades of decline… Democrats this week are ramming through rent-control bills that…effectively dictates rents for one million or so rent-regulated apartments and restricts landlords’ ability to evict tenants who don’t pay. …Once a tenant moves out—which doesn’t happen often since folks can pass on the entitlement to friends and relatives—landlords would be required to offer the unit to another tenant at restricted rates. …Nor could they raise rates by more than 2% annually to pay for improvements or evict a nonpaying tenant who “cannot find a similar suitable dwelling in the same neighborhood.” Since landlords would have less incentive to make fixes, more apartments will deteriorate and come to resemble New York City’s squalid public housing. …One result will be less housing investment… Progressives are vindicating CEO Jeff Bezos ’s decision to pull Amazon’s second headquarters out of New York. Don’t be surprised if other businesses follow.

You won’t be surprised to learn that politicians in other nations sometimes make the same mistake.

The U.K.-based Guardian wrote about how rent control has backfired in Sweden.

Half a million are on the waiting list for rent-controlled flats in Stockholm, meaning a two-tier system, bribes and a thriving parallel market… the system is experiencing acute pressures. Building of rental homes almost dried up after a financial crisis in the early 1990s, and there is a dire shortage of properties. Demand is such that it is almost impossible to get a direct contract. With nearly half of all Stockholmers – about 500,000 people – in the queue, it can take 20 or 30 years to get to the top of the pile. …The result is a thriving rental property black market, with bribes of as much as 100,000 kronor per room to obtain a direct contract, McCormac says. Many people sublet space in their rental apartments. …“Rent controls were supposed to enable people to live in central locations, but now it is having the opposite effect,” McCormac says. “People without social connections will have a very hard time finding a flat,” says Kleberg.

And Germany is making the same mistake – even though it should have learned from the mistakes under Hitler’s national socialism and East Germany’s communism.

…the kinds of ideas traditionally associated with planned economies are gaining more and more support all over Germany. …Substantial numbers of people have moved to Germany’s major cities…the supply of housing has failed to keep pace with these significant developments, and this is largely because construction approval processes are so long-winded and the latest environmental regulations have made building prohibitively expensive. …In Germany’s capital, Berlin, …it now takes 12 years to draft and approve a zoning plan, which in many cases is a prerequisite for the development of new dwellings. …An initiative in Berlin calling for the expropriation of private real estate companies has collected three times as many signatures as it needed to initiate a petition for a referendum. …Kevin Kühnert, chairman of the youth organization of the center-left SPD…has gone as far as calling for a complete ban on private property owners renting out their apartments. …Berlin’s Senate approved the main components of a rent freeze in the German capital. …Advocates of such central economic planning react sensitively when they are reminded that it has already been tried… An earlier rent freeze was approved in Germany on April 20, 1936, as a gift from the National Socialist Party to the citizens of Germany on Adolf Hitler’s 47th birthday. The National Socialists’ rent cap was adopted into the GDR’s socialist law by Price Regulation No. 415 of May 6, 1955, and it remained in force until the collapse of the GDR in 1989.

Now let’s review some economic research.

Three Stanford professors researched the issue, looking specifically as San Francisco’s local rent control rules.

Using a 1994 law change, we exploit quasi-experimental variation in the assignment of rent control in San Francisco to study its impacts on tenants and landlords. Leveraging new data tracking individuals’ migration, we find rent control limits renters’ mobility by 20% and lowers displacement from San Francisco. Landlords treated by rent control reduce rental housing supplies by 15% by selling to owner-occupants and redeveloping buildings. Thus, while rent control prevents displacement of incumbent renters in the short run, the lost rental housing supply likely drove up market rents in the long run, ultimately undermining the goals of the law. …In the long run, landlords’ substitution toward owner-occupied and newly constructed rental housing not only lowered the supply of rental housing in the city, but also shifted the city’s housing supply towards less affordable types of housing that likely cater to the tastes of higher income individuals. Ultimately, these endogenous shifts in the housing supply likely drove up citywide rents, damaging housing affordability for future renters…it appears rent control has actually contributed to the gentrification of San Francisco, the exact opposite of the policy’s intended goal. …rent control has contributed to widening income inequality of the city.

To be fair, rent control is just one of several bad policies that mess up the city’s housing market.

Now let’s shift to the other side of the country.

Jeff Jacoby of the Boston Globe shared evidence from a disastrous experiment in Massachusetts.

…a handful of Democratic lawmakers want to bring the horror of rent control… This isn’t happening only in Massachusetts. …Oregon’s governor just signed a statewide rent-control law and efforts to overturn rent-control bans are underway in Illinois, Colorado, and Washington state. …the folly of rent control is so well-established that to deny it requires, as Hillary Clinton might say, a willing suspension of disbelief. Massachusetts and most other states have banned rent control because the harm it causes far outweighs any benefit it confers. When politicians impose a ceiling on rent, the results are invariable: housing shortages, depressed real estate values, increased decay, less new construction. …The longer rent control persists, and the more harshly it is enforced, the worse the problem grows. …in New York City, where strict rent controls date back to World War II, the annual rate at which apartments turn over is less than half the national average, while the share of tenants who haven’t moved in more than 20 years is more than double the national average. …Acknowledging the damage caused by rent control is neither a right- nor left-wing issue. …the communist foreign minister of Vietnam…made…the…point in 1989: “The Americans couldn’t destroy Hanoi,” Nguyen Co Thach remarked, “but we have destroyed our city by very low rents.” …When Massachusetts voters struck down rent control in 1994, it was in the teeth of preposterous fearmongering by hardline tenant activists… What happened in reality was that tens of thousands of apartments were decontrolled with no ill effects… When tenants were analyzed by occupation, it was high-earning professionals and managers who predominated among the beneficiaries of rent control; semi-skilled and unskilled workers lagged far behind. Rent control always ends up benefiting the young, strong, and well-to-do at the expense of the old, weak, and poor.

Meanwhile, Meghan McArdle opined in the Washington Post about the perverse economic consequences of rent control.

…there are a few questions where there’s near unanimity, and rent control is one of them. Pretty much every economist agrees that rent controls are bad. …the policy appears to be making a comeback. …City governments may have to relearn why their predecessors pruned back rent-control policies. Rent control is supposed to protect poor, deserving tenants from the depredations of greedy landlords. And it does, up to a point. …The problem is that rent control doesn’t do anything about the reason that rents are rising, which is that there are more people who want to live in desirable areas than there are homes for them to live in. Housing follows the same basic laws of economics as other goods that consumers need… rent control also reduces the incentive to supply rental housing. …an actual solution to skyrocketing rents: Build more housing, so that the rent controls won’t be necessary… To do that, cities would need to ease the costly land-use regulations that make it so difficult for developers to fill the unmet demand. …Alas, that’s not going to happen… Declining housing stock is just one of the many potential costs of rent controls; others include a deteriorating housing stock as landlords stop investing in their properties, and higher rents. Yes, higher, because rent control creates a two-tier housing market. There are cheap, price-stabilized apartments that rarely turn over, because why would you give up such a great deal? Then there are the uncontrolled apartments, which everyone else in the city has to fight over, bidding up the price. …the people getting the biggest benefit are white, affluent Manhattanites.

By the way, you hopefully have noticed a pattern.

Rich people generally get the biggest benefits under rent control.

Let’s close with a look at how economists from across the philosophical spectrum view rent control

Here’s some survey data from the University of Chicago.

Incidentally, there’s an obvious reason why politicians persist in pushing bad policy. In the case of rent control, it’s because tenants outnumber landlords.

So even if politicians understand that the policy will backfire, their desire to get votes will trump common sense. Especially if they assume they can blame “greedy landlords” for the inevitable housing shortages and then push for government housing subsidies as an ostensible solution.

Another example of Mitchell’s Law.

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Pope Francis Rejects Prosperity for Developing Nations

I first opined about Pope Francis in 2013, when I told a BBC audience why the Pope was wrong on economic policy.

The following year, I expanded on that point, explaining that statist policies are bad for the poor. And I revisited the issue again last year.

I’m not the only one making these arguments. In a column for Reason, Stephanie Slade explained why Pope Francis is deeply misguided.

I’ve had some harsh words to describe Pope Francis. …the pontiff’s ignorance of basic economics has led him to a bad conclusion about which public policies are best able to reduce the crushing yoke of poverty in the world. …as a matter of empirical fact, markets are the single greatest engine for growth and enrichment that humanity has yet stumbled upon. …He seems to be arguing that an outlook that places the individual above “the common good” is morally suspect. …his statements betray a shallowness in his understanding of the philosophy he’s impugning. If he took the time to really engage with our ideas, he might be surprised by what he learned. …what Pope Francis calls an “antisocial” paradigm…is better known by another name: the liberty movement, a cooperative and sometimes even rather social endeavor among people who cherish peaceful, voluntary human interactions.

Sadly, there’s zero evidence that Pope Francis has learned any economics since taking up residence in the Vatican.

For instance, he just visited Mauritius, a small island nation to the east of Madagascar.

His economic advice, as reported by Yahoo, was extremely primitive.

Pope Francis on Monday urged Mauritius, a prosperous magnet for tourists and a global tax haven, to shun an “idolatrous economic model” that excludes the youth and the poor… While the island is a beacon of stability and relative prosperity, Pope Francis honed in on the struggles of the youth… “It is a hard thing to say, but, despite the economic growth your country has known in recent decades, it is the young who are suffering the most. They suffer from unemployment, which not only creates uncertainty about the future, but also prevents them from believing that they play a significant part in your shared history,” said the pope. …Since independence in 1968, Mauritius has developed from a poor, agriculture-based economy, to one of Africa’s wealthiest nations and financial services hub. …General unemployment is low compared to the rest of the continent at 6.9 percent in 2018 according to the World Bank…

I’m glad the article acknowledges that Mauritius has been economically successful.

Though I’m frustrated by the failure to explain why.

So I’ll redress that error of omission by showing that Mauritius dramatically expanded economic liberty in the 1980s and 1990s. The nation’s absolute score jumped from 5.11 in 1980 to 8.07 in the most-recent estimates from Economic Freedom of the World.

It’s done such a good job that Mauritius is now ranked as the world’s 9th-freest economy.

So what has greater economic liberty produced?

More national prosperity.

A lot more. Based on the Maddison data, you can see that living standards (as measured by per-capita GDP) have tripled over the past three-plus decades.

I confess that I’ve never been to Mauritius.

So maybe it’s possible that the country is filled with “idolotrous” folks who think of nothing but money.

But I’m guessing that people in Mauritius are just like the rest of us. But with one key difference in that they’ve been following the recipe for growth and prosperity.

Too bad Pope Francis instead believes in the Peronist model that has wreaked so much havoc in Argentina.

P.S. The Pope should read Stephanie Slade’s column. Walter Williams and Thomas Sowell also should be on his list.

P.P.S. Methinks Pope Francis should have a conversation with Libertarian Jesus. He could start here, here, and here.

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Four Things to Understand about the Taxation of International Businesses

A few years ago, I put together a basic primer on corporate taxation. Everything I wrote is still relevant, but I didn’t include much discussion about international topics.

In part, that’s because those issues are even more wonky and more boring than domestic issues such as depreciation. But that doesn’t mean they’re not important – especially when they involve tax competition. Here are some comments I made in March of last year.

The reason I’m posting this video about 18 months after the presentation is that the issue is heating up.

The tax-loving bureaucrats at the International Monetary Fund have published a report whining about the fact that businesses utilize low-tax jurisdictions when making decisions on where to move money and invest money.

According to official statistics, Luxembourg, a country of 600,000 people, hosts as much foreign direct investment (FDI) as the United States and much more than China. Luxembourg’s $4 trillion in FDI comes out to $6.6 million a person. FDI of this size hardly reflects brick-and-mortar investments in the minuscule Luxembourg economy. …much of it is phantom in nature—investments that pass through empty corporate shells. These shells, also called special purpose entities, have no real business activities. Rather, they carry out holding activities, conduct intrafirm financing, or manage intangible assets—often to minimize multinationals’ global tax bill. …a few well-known tax havens host the vast majority of the world’s phantom FDI. Luxembourg and the Netherlands host nearly half. And when you add Hong Kong SAR, the British Virgin Islands, Bermuda, Singapore, the Cayman Islands, Switzerland, Ireland, and Mauritius to the list, these 10 economies host more than 85 percent of all phantom investments.

That’s a nice list of jurisdictions. My gut instinct, of course, is to say that high-tax nations should copy the pro-growth policies of places such as Bermuda, Singapore, the Cayman Islands, and Switzerland.

The IMF, however, thinks those are bad places and instead argues that harmonization would be a better approach.

…how does this handful of tax havens attract so much phantom FDI? In some cases, it is a deliberate policy strategy to lure as much foreign investment as possible by offering lucrative benefits—such as very low or zero effective corporate tax rates. …This…erodes the tax bases in other economies. The global average corporate tax rate was cut from 40 percent in 1990 to about 25 percent in 2017, indicating a race to the bottom and pointing to a need for international coordination. …the IMF put forward various alternatives for a revised international tax architecture, ranging from minimum taxes to allocation of taxing rights to destination economies. No matter which road policymakers choose, one fact remains clear: international cooperation is the key to dealing with taxation in today’s globalized economic environment.

Here’s a chart that accompanied the IMF report. The bureaucrats view this as proof of something bad

I view it as prudent and responsible corporate behavior.

At the risk of oversimplifying what’s happening in the world of international business taxation, here are four simple points.

1. It’s better for prosperity if money stays in the private sector, so corporate tax avoidance should be applauded. Simply stated, politicians are likely to waste any funds they seize from businesses. Money in the private economy, by contrast, boosts growth.
2. Multinational companies will naturally try to “push the envelope” and shift as much income as possible to low-tax jurisdictions. That’s sensible corporate behavior, reflecting obligation to shareholders, and should be applauded.
3. Nations can address “profit shifting” by using rules on “transfer pricing,” so there’s no need for harmonized rules. If governments think companies are pushing too far, they can effectively disallow tax-motivated shifts of money.
4. A terrible outcome would be a form of tax harmonization known as “global formula apportionment.” This wouldn’t be harmonizing rates, as the E.U. has always urged, but it would force companies to overstate income in high-tax nations.

Why does all this wonky stuff matter?

As I said in my presentation, we will suffer from “goldfish government” unless tax competition exiss to serve as a constraint on the tendency of politicians to over-tax and over-spend.

P.S. Sadly, America’s Treasury Secretary is sympathetic to global harmonization of business taxation.

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Bernie Sanders, Common Sense, and Moral Hazard

Something really strange is happening. Yesterday, I wrote about how I agreed with Trump on a trade issue.

Today, I’m going to agree with Crazy Bernie about a moral hazard issue.

Shocking, but true. The Vermont socialist actually understands that it makes no sense to subsidize new homes in flood-prone areas.

"If people want to rebuild in an area which will be devastated by the next storm, they're certainly not going to get federal assistance from my administration." -Sen. Sanders on changing FEMA rules to spur a retreat from properties suffering repeated losses. #ClimateTownHall pic.twitter.com/BC47QBZupm

— CNN (@CNN) September 5, 2019

I’ll probably never again have a chance to write this next sentence, so it deserves an exclamation point. Bernie is completely correct!

Flood insurance encourages people to take on excessive risk (i.e., it creates moral hazard). And the subsidies often benefit rich people with beachfront homes (which may explain why Senator Sanders is on the right side)

If nothing else, politicians are very clever about doing the wrong thing in multiple ways.

So we’re not merely talking about luring people into flood-prone areas with subsidized insurance.

Sometimes government uses rental subsidies to put people in flood-prone areas.

Here are some excerpts from a story in the New York Times.

When a deadly rainstorm unloaded on Houston in 2016, Sharobin White’s apartment complex flooded in up to six feet of water. She sent her toddler and 6-year-old to safety on an air mattress, but her family lost nearly everything, including their car. When Hurricane Harvey hit the next year, it happened all over again: Families rushed to evacuate, and Ms. White’s car, a used Chevrolet she bought after the last flood, was destroyed. …But Ms. White and many of her neighbors cannot afford to leave. They are among hundreds of thousands of Americans — from New York to Miami to Phoenix — who live in government-subsidized housing that is at serious risk of flooding… But the Department of Housing and Urban Development, which oversees some of the at-risk properties, does not currently have a universal policy against paying for housing in a designated flood zone. …Nationwide, about 450,000 government-subsidized households — about 8 to 9 percent — are in flood plains…

While FEMA and government-subsidized flood insurance wouldn’t even exist in my libertarian fantasy world, I’m willing to acknowledge that government sometimes does things that aren’t completely foolish.

For instances, it’s better to subsidize people to move out of flood-prone areas instead of subsidizing them to rebuild in those areas.

Nashville is trying to move people…away from flood-prone areas. The voluntary program uses a combination of federal, state and local funds to offer market value for their homes. If the owners accept the offer, they move out, the city razes the house and prohibits future development. The acquired land becomes an absorbent creekside buffer, much of it serving as parks with playgrounds and walking paths. …While a number of cities around the country have similar relocation projects to address increased flooding, disaster mitigation experts consider Nashville’s a model that other communities would be wise to learn from: The United States spends far more on helping people rebuild after disasters than preventing problems. …research shows that a dollar spent on mitigation before a disaster strikes results in at least six dollars in savings. There are many reasons more people end up rebuilding in place than moving away. Reimbursement is relatively quick, while FEMA’s buyout programs tend to be slow and difficult to navigate.

While it’s encouraging to see a better approach, we wouldn’t need to worry about the issue if government got out of the business of subsidizing flood insurance.

Which helps to explain why the Wall Street Journal expressed disappointment last year when Republicans blew a golden opportunity to fix the program.

One disappointment you can count on is a GOP failure to fix one of the worst programs in government: taxpayer subsidized flood insurance. …The Federal Emergency Management Agency’s flood insurance program was set to expire on Nov. 30, and Congress rammed through a temporary extension to buy more time. Congress was supposed to deal with the program as part of the end-of-the-year rush. The program runs a $1.4 billion annual deficit, which comes from insurance priced too low to compensate for the risk of building homes near water. Congress last year forgave $16 billion of the program’s $24 billion debt to Treasury, not that anyone learned anything. The program then borrowed another $6 billion. …If Republicans can’t fix this example of failed government because it might upset parochial interests, they deserve some time in the political wilderness.

In other words, Bernie Sanders is better on this issue than last year’s GOP Congress.

I’ve criticized Republicans on many occasions, but this must rank as the most damning comparison.

But let’s set aside politics and partisanship.

What matters is that the federal government is operating an insanely foolish program that puts people at risk, soaks taxpayers, and destroys wealth.

Gee, maybe Reagan was right when he pointed out that government is the problem rather than the solution.

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Rare Agreement with Trump on Trade

At the risk of understatement, I’ve been rather critical of Trump’s protectionism.

But not always. Last year, I praised him for floating the idea of zero taxes on trade between nations (even if I didn’t think he was serious).

And I point out in this interview that he is right about protectionism hurting financial markets.

Just in case you don’t believe me, here’s what Trump actually said, as reported by Business Insider.

President Donald Trump said Wednesday that the Dow Jones Industrial Average would be thousands of points higher if it weren’t for the trade war with China, which he started last year in an attempt to address trade practices that officials said put the US at a disadvantage. “Let me tell you, if I wanted to do nothing with China, my stock market, our stock market, would be 10,000 points higher than it is right now,” Trump told reporters at the White House. “But somebody had to do this. To me, this is much more important than the economy … It was out of control. They were out of control.”

Incidentally, what Trump is saying at the end of the excerpt could be true. There are times when growth should be a secondary concern.

To take an obvious example, it’s perfectly reasonable to have laws prohibiting companies from selling advanced military technology to potentially hostile governments.

My concern is that the president is too fixated on China’s largely irrelevant bilateral trade deficit. After all, that’s simply the flip side of America’s enormous investment surplus with China.

Instead, Trump should be pressuring Beijing to get rid of subsidies, cronyism, and other mercantilist policies (ideally by using the WTO).

Such reforms would help American companies since they would be competing on more of a level playing field.

And China’s economy would benefit even more since there would be less government intervention.

In other words, there’s a potential win-win conclusion to this trade war. But I’m not overly confident that President Trump or President Xi have the right goal in mind.

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Deciphering Brexit Drama

I was interviewed yesterday about the economy. That meant talking about new jobs numbers, as well as speculating on what’s happening with the Federal Reserve.

For today’s column, though, I want to share the part of the interview that focused on the United Kingdom’s vote to leave the European Union.

If “Brexit” actually happens, there will be diminished trade between the United Kingdom and the European Union. That will be bad for both sides.

That being said, I pointed out that the United Kingdom is better positioned to prosper after Brexit. That’s definitely the case in the long run, but I think it could be true even in the short run.

By the way, at the end of this clip, I should have stated that the European Union doesn’t want to strike a mutually beneficial deal.

The crowd in Brussels was more than happy with the Brexit-in-Name-Only pact they imposed on the hapless Theresa May.

But the bureaucrats are so upset with Brexit that they won’t agree to a free trade agreement that would be good for both parties.

Since we’re on the topic of Brexit, here’s a radio interview I did with KABC, one of the big stations in Los Angeles. I had much more time to explore nuances, including the fact that the opposition parties don’t want an election since they fear it will produce a strong majority in favor of a Clean Brexit.

There are three things about the interview worth highlighting.

• First, as I explain starting about 3:15, Brexit is like refinancing a mortgage. It might cost a bit in the short run, but it makes sense because of the long-run savings. Indeed, that was my main argument when I wrote “The Economic Case for Brexit” back in 2016, before the referendum.
• Second, as I explain starting about 6:15, the same people who oppose Brexit were also the ones who wanted the U.K. to be part of the euro (the European Union’s common currency). Given what’s happened since, including bailouts, joining the euro would have been a big mistake.
• Third, starting about 11:50, I put forth an analogy – involving a hypothetical referendum to repeal the income tax in the United States – to illustrate why the issue is arousing so much passion. This is basically the last chance Britons have to reclaim self-government.

By the way, returning to the second point, the anti-Brexit crowd were the ones who tried to scare voters (“Project Fear”) by claiming a vote for Brexit would tip the U.K. into recession.

They were wrong on the euro, they were wrong on the economic response to the Brexit vote, and they’re wrong about actual Brexit.

In America, we say three strikes and you’re out.

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

P.P.S. There’s academic evidence that E.U. membership undermines prosperity.

P.P.P.S. The International Monetary Fund has consistently put out sloppy and biased research in hopes of deterring Brexit.

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The Destructive Impact of Wealth Taxation

When I wrote about the wealth tax early this year, I made three simple points.

• A war on wealth is a war on capital (increased double taxation is needed since rich people have a lot of saving and investment).
• A war on capital is a war on productivity (every economic theory agrees there is no added output without saving and investment).
• A war on productivity is a war on workers (every economic theory agrees that there is a link between wages and how much workers produce).

I obviously have not been very persuasive.

At least in certain quarters.

A story in the Wall Street Journal explores the growing interest on the left in this new form of taxation.

The income tax..system could change fundamentally if Democrats win the White House and Congress. …Democrats want to shift toward taxing their wealth, instead of just their salaries and the income their assets generate. …At the end of 2017, U.S. households had $3.8 trillion in unrealized gains in stocks and investment funds, plus more in real estate, private businesses and artwork… Democrats are eager to tap that mountain of wealth to finance priorities such as expanding health-insurance coverage, combating climate change and aiding low-income households. …The most ambitious plan comes from Sen. Warren of Massachusetts, whose annual wealth tax would fund spending proposals such as universal child care and student-loan forgiveness. …rich would pay whether they make money or not, whether they sell assets or not and whether their assets are growing or shrinking.

The report includes this comparison of current law with various soak-the-rich proposals (click here for my thoughts on the Wyden plan).

The article does acknowledge that there are some critiques of this class-warfare tax proposal.

European countries tried—and largely abandoned—wealth taxes. …For an investment yielding a steady 1.5% return, a 2% wealth levy would be equivalent to an income-tax rate above 100% and cause the asset to shrink. …The wealth tax also has an extra asterisk: it would be challenged as unconstitutional.

The two economists advising Elizabeth Warren, Emmanuel Saez and Gabriel Zucman, have a new study extolling the ostensible benefits of a wealth tax.

I want to focus on their economic arguments, but I can’t resist starting with an observation that I was right when I warned that the attack on financial privacy and the assault on so-called tax havens was a precursor to big tax increases.

Indeed, Saez and Zucman explicitly argue this is a big reason to push their punitive new wealth tax.

European countries were exposed to tax competition and tax evasion through offshore accounts, in a context where until recently there was no cross-border information sharing. …offshore tax evasion can be fought more effectively today than in the past, thanks to recent breakthrough in cross-border information exchange, and wealth taxes could be applied to expatriates (for at least some years), mitigating concerns about tax competition. …Cracking down on offshore tax evasion, as the US has started doing with FATCA, is crucial.

Now that I’m done patting myself on the back for my foresight (not that it took any special insight to realize that politicians were attacking tax competition in order to grab more money), let’s look at what they wrote about the potential economic impact.

A potential concern with wealth taxation is that by reducing large wealth holdings, it may reduce the capital stock in the economy–thus lowering the productivity of U.S. workers and their wages. However, these effects are likely to be dampened in the case of a progressive wealth tax for two reasons. First, the United States is an open economy and a significant fraction of U.S. saving is invested abroad while a large fraction of U.S. domestic investment is financed by foreign saving. Therefore, a reduction in U.S. savings does not necessarily translate into a large reduction in the capital stock used in the United States. …Second, a progressive wealth tax applies to only the wealthiest families. For example, we estimated that a wealth tax above $50 million would apply only to about 10% of the household wealth stock. Therefore increased savings from the rest of the population or the government sector could possibly offset any reduction in the capital stock. …A wealth tax would reduce the financial payoff to extreme cases of business success, but would it reduce the socially valuable innovation that can be associated with such success? And would any such reduction exceed the social gains of discouraging extractive wealth accumulation? In our assessment the effect on innovation and productivity is likely to be modest, and if anything slightly positive.

I’m not overly impressed by these two arguments.

1. Yes, foreign savings could offset some of the damage caused by the new wealth tax. But it’s highly likely that other nations would copy Washington’s revenue grab. Especially now that it’s easier for governments to track money around the world.
2. Yes, it’s theoretically possible that other people may save more to offset the damage caused by the new wealth tax. But why would that happen when Warren and other proponents want to give people more goodies, thus reducing the necessity for saving and personal responsibility?

By the way, they openly admit that there are Laffer Curve effects because their proposed levy will reduce taxable activity.

With successful enforcement, a wealth tax has to deliver either revenue or de-concentrate wealth. Set the rates low (1%) and you get revenue in perpetuity but little (or very slow) de-concentration. Set the rates medium (2-3%) and you get revenue for quite a while and de-concentration eventually. Set the rates high (significantly above 3%) and you get de-concentration fast but revenue does not last long.

Now let’s look at experts from the other side.

In a column for Bloomberg, Michael Strain of the American Enterprise Institute takes aim at Elizabeth Warren’s bad math.

Warren’s plan would augment the existing income tax by adding a tax on wealth. …The tax would apply to fortunes above $50 million, hitting them with a 2% annual rate; there would be a surcharge of 1% per year on wealth in excess of $1 billion. …Not only would such a tax be very hard to administer, as many have pointed out. It likely won’t collect nearly as much revenue as Warren claims. …Under Warren’s proposal, the fair market value of all assets for the wealthiest 0.06% of households would have to be assessed every year. It would be difficult to determine the market value of partially held private businesses, works of art and the like… This helps to explain why the number of countries in the high-income OECD that administer a wealth tax fell from 14 in 1996 to only four in 2017. …It is highly unlikely that the tax would yield the $2.75 trillion estimated by Emmanuel Saez and Gabriel Zucman, the University of California, Berkeley, professors who are Warren’s economic advisers. Lawrence Summers, the economist and top adviser to the last two Democratic presidents, and University of Pennsylvania professor Natasha Sarin…convincingly argued Warren’s plan would bring in a fraction of what Saez and Zucman expect once real-world factors like tax avoidance…are factored in. …economists Matthew Smith, Owen Zidar and Eric Zwick present preliminary estimates suggesting that the Warren proposal would raise half as much as projected.

But a much bigger problem is her bad economics.

…a household worth $50 million would lose 2% of its wealth every year to the tax, or 20% over the first decade. For an asset yielding a steady 1.5% return, a 2% wealth tax is equivalent to an income tax of 133%. …And remember that the wealth tax would operate along with the existing income tax system. The combined (equivalent income) tax rate would often be well over 100%. Underlying assets would routinely shrink. …The tax would likely reduce national savings, resulting in less business investment in the U.S… Less investment spending would reduce productivity and wages to some extent over the longer term.

Strain’s point is key. A wealth tax is equivalent to a very high marginal tax rate on saving and investment.

Of course that’s going to have a negative effect.

Chris Edwards, in a report on wealth taxes, shared some of the scholarly research on the economic effects of the levy.

Because wealth taxes suppress savings and investment, they undermine economic growth. A 2010 study by Asa Hansson examined the relationship between wealth taxes and economic growth across 20 OECD countries from 1980 to 1999. She found “fairly robust support for the popular contention that wealth taxes dampen economic growth,” although the magnitude of the measured effect was modest. The Tax Foundation simulated an annual net wealth tax of 1 percent above $1.3 million and 2 percent above $6.5 million. They estimated that such a tax would reduce the U.S. capital stock in the long run by 13 percent, which in turn would reduce GDP by 4.9 percent and reduce wages by 4.2 percent. The government would raise about $20 billion a year from such a wealth tax, but in the long run GDP would be reduced by hundreds of billions of dollars a year.Germany’s Ifo Institute recently simulated a wealth tax for that nation. The study assumed a tax rate of 0.8 percent on individual net wealth above 1 million euros. Such a wealth tax would reduce employment by 2 percent and GDP by 5 percent in the long run. The government would raise about 15 billion euros a year from the tax, but because growth was undermined the government would lose 46 billion euros in other revenues, resulting in a net revenue loss of 31 billion euros. The study concluded, “the burden of the wealth tax is practically borne by every citizen, even if the wealth tax is designed to target only the wealthiest individuals in society.”

The last part of the excerpt is key.

Yes, the tax is a hassle for rich people, but it’s the rest of us who suffer most because we’re much dependent on a vibrant economy to improve our living standards.

My contribution to this discussion it to put this argument in visual form. Here’s a simply depiction of how income is generated in our economy.

Now here’s the same process, but with a wealth tax.

For the sake of argument, as you can see from the letters that have been fully or partially erased, I assumed the wealth tax would depress the capital stock by 10 percent and that this would reduce national income by 5 percent.

I’m not wedded to these specific numbers. Both might be higher (especially in the long run), both might be lower (at least in the short run), or one of them might be higher or lower.

What’s important to understand is that rich people won’t be the only ones hurt by this tax. Indeed, this is a very accurate criticism of almost all class-warfare taxes.

The bottom line is that you can’t punish capital without simultaneously punishing labor.

But some of our friends on the left – as Margaret Thatcher noted many years ago – seem to think such taxes are okay if rich people are hurt by a greater amount than poor people.

P.S. Since I mentioned foresight above, I was warning about wealth taxation more than five years ago.

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Democratic Candidates Endorse Huge Tax Hikes on Lower-Income and Middle-Class Taxpayers

I’ve warned (over and over and over again) that supporters of larger government want big tax hikes on ordinary people.

But you don’t have to believe me.

CNN hosted a discussion yesterday with the major Democratic candidates about global warming…oops, I mean climate change…no, sorry, the preferred term is now climate crisis.

Shockingly, something newsworthy actually happened. As reported by the New York Times, most of the candidates expressed support for a big carbon tax that would be especially painful for poor and middle-class taxpayers.

…more than half of the 10 candidates at the forum openly embraced the controversial idea of putting a tax or fee on carbon dioxide… Around the country and the world, opponents have attacked it as an “energy tax” that could raise fuel costs, and it has been considered politically toxic in Washington for nearly a decade. …In addition to proposing $3 trillion in spending on environmental initiatives, Ms. Warren also responded “Yes!” when asked by a moderator, Chris Cuomo, if she would support a carbon tax… Senator Kamala Harris of California, who on Wednesday morning released a plan to put a price on carbon, …calling for outright bans on hydraulic fracturing, or fracking, for oil and gas, and on offshore oil and gas drilling. …Mayor Pete Buttigieg of South Bend, Ind., who also released his climate plan on Wednesday, took the stage declaring his support for a carbon tax… The parade of far-reaching plans on display, ranging in cost from $1.7 trillion to $16.3 trillion… Two other candidates who said they would support carbon pricing, Senator Amy Klobuchar of Minnesota and the former housing secretary Julián Castro.

Interestingly, Crazy Bernie didn’t hop on the bandwagon.

Senator Bernie Sanders of Vermont…is one of the few candidates who has not called for a carbon tax.

In this case, his desire to selectively target upper-income taxpayers presumably is even stronger than his desire to grab more revenue to fund bigger government (and the burden of government would be far bigger under the Green New Deal).

By the way, there was a very interesting admission in the article.

The United States generates almost 25 percent of global economic output, yet our share of carbon emissions is much smaller.

…the United States is the world’s largest historic polluter of greenhouse gases, it today produces about 15 percent of total global emissions.

You would think the climate fanatics would be praising America. But they instead want people to believe the U.S. is worse than Cuba.

Anyhow, let’s return to the main topic of today’s column.

What exactly would it mean for ordinary people if politicians imposed a carbon tax?

The Democrats didn’t offer many specifics last night, so we’ll have to use a proxy estimate. In a column for the Hill, Vance Ginn and Elliott Raia highlight how families would get hit if U.S. politicians followed U.N. suggestions.

…travel…could soon be cost-prohibitive, if the U.N.’s Intergovernmental Panel on Climate Change (IPCC) has its way. …Its recommendation: a carbon tax of as much as $200 per ton of carbon dioxide emissions by 2030 to an astonishing $27,000 per ton by 2100. For America families, this could mean the price of gasoline soaring to $240 per gallon. Remember when we thought $4 per gallon was high? …Regardless of the amount, a carbon tax would…disproportionately hurt the poor and middle class, who pay a higher percentage of their incomes for motor fuel and energy. …Concrete, for example, is perhaps one of the most common carbon-intensive products… At the IPCC rate of $200 per ton of carbon dioxide emissions by 2030, the cost of building with concrete would rapidly rise. …Take a new home of 3,000 square feet. A simple slab foundation (with no basement) could use 100 cubic yards of concrete. Adding a $370 tax per cubic yard for a ton of carbon based on the $200 rate above would mean the cost of that home would likely rise $37,000.

For what it’s worth, the statists at the International Monetary Fund endorsed a $1.40 tax increase on a gallon of gas in America, which was part of a proposal to increases taxes on the average household by more than $5,000.

To be fair, I imagine the Democrats – if ever pressed for specifics – will propose taxes lower than what the U.N. or I.M.F. are suggesting.

That being said, it’s also fair to warn that taxes which start small almost always wind up becoming onerous.

Let’s close with a political observation.

At the risk of stating the obvious, people don’t like being saddled with higher taxes. And, as Sterling Burnett explains, they seem especially hostile to energy-related taxes.

From Alberta to Australia, from Finland to France, and beyond, voters are increasingly showing their displeasure with expensive energy policies imposed by politicians in an inane effort to purportedly fight human-caused climate change. …This is what originally prompted protesters in France to don yellow vests and take to the streets in 2018. They were protesting scheduled increases in fuel taxes, electricity prices, and stricter vehicle emissions controls, which French President Emmanuel Macron had claimed were necessary to meet the country’s greenhouse gas reduction commitments… Also in 2018, in part as a reaction against Canadian Prime Minister Justin Trudeau’s climate policies, global warming skeptic Doug Ford was elected as premier of Ontario, Canada’s most populous province. Ford announced he would end energy taxes imposed by Ontario’s previous premier and would join Saskatchewan’s premier in a legal fight against Trudeau’s federal carbon dioxide tax. …in August 2018, Australian Prime Minister Malcolm Turnbull was forced to resign over carbon dioxide restrictions he had planned… In Finland, …the Finns Party, which made the fight against expensive climate policies the central part of its platform, came out the big winner with the second-highest number of seats in Parliament.

I’ve previously written about taxpayer uprisings in France and Australia.

Perhaps the most relevant data, though, is from the state of Washington. Voters in that left-leaning state rejected a carbon tax in 2018 (after rejecting a different version in 2016).

So maybe Crazy Bernie was being Smart Bernie by not embracing the tax. And Joe Biden also chose not to explicitly back the proposed tax hike.

P.S. The parasitical bureaucrats at the OECD also have endorsed higher energy taxes on the United States.

P.P.S. I don’t have an informed opinion on the degree of man-made warming, but I am highly confident that statists are using the issue to promote bad policies that they can’t get through any other way.

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While de Blasio Fiddles, New York City Burns

In 2016, Bernie Sanders was considered very extreme for wanting to transform America into a very expensive European-style welfare state.

If the Democratic Party’s presidential debates this summer are any guide, that radical approach is now mainstream. Almost all the candidates have been competing over who could most quickly turn American into Greece.

The Mayor of New York City, Bill de Blasio, was especially determined to show that he was even more radical than Bernie Sanders. At one point, while watching de Blasio bellow about class-warfare taxes, I thought about a satirical version of the Pizza Hut commercial, with the Vermont Senator exclaiming “No one out-crazies the Bern.”

But give de Blasio credit for tryring. His only signature moment in an otherwise lackluster campaign occurred when he said he wanted to “tax the hell out of the wealthy.”

He even has a www.taxthehell.com website where he outlines his various proposals to cripple investment and entrepreneurship by imposing confiscatory taxes.

In other words, he is like Crazy Bernie in that he seems to really believe in ever-larger government. Consider these excerpts from a Q&A session he did with New York Magazine.

…our legal system is structured to favor private property. I think people all over this city, of every background, would like to have the city government be able to determine which building goes where, how high it will be, who gets to live in it, what the rent will be. I think there’s a socialistic impulse, which I hear every day, in every kind of community, that they would like things to be planned in accordance to their needs. And I would, too. Unfortunately, what stands in the way of that is hundreds of years of history that have elevated property rights… Look, if I had my druthers, the city government would determine every single plot of land, how development would proceed. And there would be very stringent requirements around income levels and rents. That’s a world I’d love to see, and I think what we have, in this city at least, are people who would love to have the New Deal back, on one level. They’d love to have a very, very powerful government, including a federal government… I’m calling for a millionaires tax… need to see the wealthy paying their fair share. It frustrates me greatly that we don’t have the power here to tax the wealthy in this city.

Not only does he talk the talk, he also walks the walk.

Albeit in a bad way.

Here are some excerpts from a news report about one of his attacks on property rights.

Liberal New York City Mayor Bill de Blasio is rolling out a new plan that would potentially allow the city government to seize buildings of landlords who force tenants out — a plan his opponents say amounts to “straight communism.” De Blasio…wants to take action against landlords who try to force tenants out by making the property unliveable — and pulled out an executive order to create a Mayor’s Office to Protect Tenants. He said that in the event the government intervenes, the buildings would then be controlled by a “community nonprofit.” …“My first reaction was: Is this communist Cuba?” state Assemblymember Nicole Malliotakis, who ran against De Blasio in the 2017 mayoral race, told Fox News. “ I can say that as a daughter of Cuban refugees who fled Castro’s Cuba in 1959, this is what happened to her family, she had her home taken, my grandfather had his gas station taken.” “This is extreme even for Mayor de Blasio, because we know that he has socialist leanings, but this is straight communism and I think it’s very scary to America-loving, democracy-loving people.”

By the way, I’m guessing that landlords are in a tough position because of NYC’s rent control laws.

To be fair, many of the problems in New York City didn’t start with de Blasio.

There’s a long history of wasting money.

To be more specific, unfunded pensions are the biggest reason NYC is in deep trouble.

…the city is staring bankruptcy in the face. …but there’s been little talk about one of the main causes of the city’s growing debt: public employee pensions. As of today, nearly 75 percent of the city’s $197.8 billion deficit is due to pension and other retirement liabilities. …Sick of high taxes, residents and businesses are already leaving in droves… NYC offers five different pension plans to its municipal employees, from teachers to members of the school board. These pensions serve as a source of retirement income to former city employees and are defined benefit plans, meaning that benefits are guaranteed by the employer. …it’s no surprise that the pension plans’ funded ratio, which shows the ratio of the plans’ assets to liabilities, has dropped to 71.4 percent for NYCERS and 58.6 percent for TRS—thanks to accumulated debt. …for every dollar spent on NYCERS payroll, 34 cents goes toward pensions, and that number is 10 cents higher for TRS. …Pension contributions make up 11 percent of the city’s total budget and consume 17 percent of the city’s tax revenues. And it’s worth remembering that in the city ranked number one in local tax burden in the United States.

As you might suspect, Mayor de Blasio certainly isn’t doing anything to address this problem.

I’m simply noting that the problem existed before he took office and presumably would still exist with any other mayor.

And there are other officials in New York City who deserve scorn.

Manhattan District Attorney Cy Vance is a traveling man with some high-end tastes. The prosecutor spent $249,716 on meals and work trips to everywhere from the City of Angels to the City of Lights over the past five years, according to records obtained via a Freedom of Information Law request. Vance paid for it all – including a $4,780 roundtrip flight to London and a $2,800 stay at a five-star Paris hotel – with money his office obtained from state-asset forfeiture funds largely tied to big-sum legal settlements with banks, records show. He controls more than $600 million stemming from forfeitures. …the other city district attorneys say they did not use asset forfeiture money to cover their work travel expenses. …Vance also does not skimp when it comes to eating out… He spent $645 at Patroon on East 46th Street to cover dinner… Vance also has expensed five meals at Tribeca’s Odeon for a total of $897… During his Paris visit, he spent $94 at Le Nemrod, $124 at Marco Polo, $72 at Le Saint Regis and $169 at Le Christine, according to the expense reports. …DAs have wide-ranging flexibility on how asset forfeiture money is used. Expenditures must cover “law enforcement” issues — but few other rules exist.

Here’s a map showing Vance’s travel.

By the way, the most outrageous part of this story isn’t the luxury travel or the expensive meals.

What really irks me is that his high-flying lifestyle is made possible by asset forfeiture, which is what happens when the government steals someone’s property – oftentimes without any finding of guilt!

The bottom line is that New York City has a terrible mayor, but the problem goes way beyond one person.

Which is why this final story, from Bloomberg, should be the canary in the coal mine when contemplating the future of the city.

New York leads all U.S. metro areas as the largest net loser with 277 people moving every day — more than double the exodus of 132 just one year ago. Los Angeles and Chicago were next with triple digit daily losses of 201 and 161 residents, respectively. This is according to 2018 Census data on migration flows to the 100 largest U.S. metropolitan areas compiled by Bloomberg News. …While New York is experiencing the biggest net exodus, the blow is being softened by international migrant inflows. From July 2017 to July 2018, a net of close to 200,000 New Yorkers sought a new life outside the Big Apple while the area welcomed almost 100,000 net international migrants. …Some areas are affected by high home prices and local taxes, which are pushing residents out and deterring potential movers from other parts of the country. About 200,000 residents left New York last year. Los Angeles had a decline of nearly 120,000 and Chicago fell by 84,000.

Here’s the map showing the cities losing the most people and gaining the most people.

By the way, it’s no coincidence that most of the fast-growth cities are in states with no income taxes.

P.S. Mayor de Blasio wants to “tax the hell out of the wealthy” in New York City, but fortunately he’s been somewhat frustrated in that goal because of limits on his power.

P.P.S. Because taxpayers in NYC no longer have unlimited ability to deduct their state and local taxes on their federal returns, the 2017 tax law almost certainly is contributing to the exodus from New York City. And every time one of those taxpayers escape, NYC gets closer to fiscal crisis.

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Industrial Policy Is a Recipe for Cronyism and Stagnation

Ronald Reagan must be turning over in his grave.

• A Republican president is pushing protectionist policies that hurt American consumes and taxpayers.
• A Republican president and Congress are spending like drunken sailors (apologies to drunken sailors).
• Now some Republican politicians are promoting a version of central planning called “industrial policy.”

This newfound flirtation with industrial policy, mostly from nationalist conservatives, is especially noxious since you open the door to cronyism and corruption when you give politicians and bureaucrats the power to play favorites in the economy.

I’m going to cite three leading proponents of industrial policy. To be fair, none of them are proposing full-scale Soviet-style central planning.

But it is fair to say that they envision something akin to Japan’s policies in the 1980s.

Some of them even explicitly argue we should copy China’s current policies.

In a column for the New York Times, Julius Krein celebrates the fact that Marco Rubio and Alexandria Ocasio-Cortez both believe politicians should have more power over the economy.

…a few years ago, the phrase “industrial policy” was employed mainly as a term of abuse. Economists almost universally insisted that state interventions to improve competitiveness, prioritize investment in strategic sectors and structure market incentives around political goals were backward policies doomed to failure — whether applied in America, Asia or anywhere in between. …In the wake of the 2008 financial crisis, however, the Reagan-Bush-Clinton neoliberal consensus seems intellectually and politically bankrupt. …a growing number of politicians and intellectuals…are finding common ground under the banner of industrial policy. Even the typically neoliberal Financial Times editorial board recently argued in favor of industrial policy, calling on the United States to “drop concerns around state planning.” …Why now? The United States has essentially experienced two lost decades, and inequality has reached Gilded Age levels. …United States industry is losing ground to foreign competitors on price, quality and technology. In many areas, our manufacturing capacity cannot compete with what exists in Asia.

There are some very sloppy assertions in the above passages.

You can certainly argue that Reagan and Clinton had similar “neoliberal” policies (i.e., classical liberal), but Bush was a statist.

Also, the Financial Times very much leans to the left. Not crazy Sanders-Corbyn leftism, but consistently in favor of a larger role for government.

Anyhow, what exactly does Mr. Krein have in mind?

More spending, more intervention, and more cronyism.

A successful American industrial policy would draw on replicable foreign models as well as take lessons from our history. Some simple first steps would be to update the Small Business Investment Company and Small Business Innovation Research programs — which played a role in catalyzing Silicon Valley decades ago — to focus more on domestic hardware businesses. …Government agencies could also step in to seed investment funds focused on strategic industries and to incentivize commercial lending to key sectors, policies that have proven successful in other countries… the United States needs to invest more in applied research… Elizabeth Warren has also proposed a government-sponsored research and licensing model for the pharmaceutical industry, which could be applied to other industries as well. …Senator Gary Peters, Democrat of Michigan, has called for the creation of a National Institute of Manufacturing, taking inspiration from the National Institutes of Health. …A successful industrial policy would aim to strengthen worker bargaining power while organizing and training a better skilled labor force. Industrial policy also involves, and even depends upon, rebuilding infrastructure.

In other words, if you like the so-called Alexandria Ocasio-Cortez’s Green New Deal and Elizabeth Warren’s corporate cronyism, you’ll love all the other ideas for additional government intervention.

Oren Cass of the Manhattan Institute also wants to give politicians more control over the private economy.

My argument rests on three claims… First, that market economies do not automatically allocate resources well across sectors. Second, that policymakers have tools that can support vital sectors that might otherwise suffer from underinvestment—I will call those tools “industrial policy.” Third, that while the policies produced by our political system will be far from ideal, efforts at sensible industrial policy can improve upon our status quo, which is itself far from ideal. …Our popular obsession with manufacturing isn’t some nostalgic anachronism. …manufacturing is unique for the complexity of its supply chains and the interaction between innovation and production. …the case for industrial policy requires recognition not only of certain sectors’ value, but also that the market will overlook the value in theory and that we are underinvesting in practice. That the free market will not solve this should be fairly self-evident… Manufacturing output is only 12% of GDP in America… Productivity growth has slowed nationwide, even flatlining in recent years. Wages have stagnated. Our trade deficit has skyrocketed.

So what are his solutions?

Like Julius Krein, he wants government intervention. Lots of it.

Fund basic research across the sciences… Fund applied research… Support private-sector R&D and commercialization with subsidies and specialized institutes… Increase infrastructure investment… Bias the tax code in favor of profits generated from the productive use of labor… Retaliate aggressively against mercantilist countries that undermine market competition… Tax foreign acquisition of U.S. assets, making U.S. goods relatively more attractive… Impose local content requirements in key supply chains like communications… Libertarians often posit an ideal world of policy non-intervention as superior to the messy reality of policy action. But that ideal does not exist—messy reality is the only reality… That’s especially the case here, because you can have free trade, or you can have free markets, but you can’t have both.

I’m not sure what’s worse, an infrastructure boondoggle or a tax on inbound investment?

More tinkering with the tax code, or more handouts for industries?

And here are excerpts from a column for the Daily Caller by Robert Atkinson.

When the idea first surfaced in the late 1970s that the United States should adopt a national industrial policy, mainstream “free market” conservatives decried it as one step away from handing the reins of the economy over to a state planning committee like the Soviet Gosplan. But now, …the idea has been getting a fresh look among some conservatives who argue that, absent an industrial strategy, America will be at a competitive disadvantage. …Conservatives’ skepticism of industrial policy perhaps stems from the idea’s origins. It started gaining currency during the Carter administration, with many traditional Democratic party interests, including labor unions and politicians in the Northeast and Midwest, arguing for a strong federal role… However, over the next decade, as economic competitors like Germany and Japan began to challenge the United States in consumer electronics, autos, and even high-tech industries like computer chips, the focus of debates about industrial policy broadened to encompass overall U.S. competitiveness. …There was a bipartisan response…that collectively amounted to a first draft of a national industrial policy… But as the economic challenge from Japan receded…, interest in industrial policies waned. …The newly dominant neoclassical economists preached that the U.S. “recipe” of free markets, property rights, and entrepreneurial spirit inoculated America against any and all economic threats.

As with Krein and Cass, Atkinson wants to copy the failed interventionist policies of other nations.

But that was then and this is now — a now where we face intense competition from China. …Increasingly leaders across the political spectrum are returning to a notion that we should put the national interest at the center of economic policies, and that free-market globalization doesn’t necessarily do that… Conservatives increasingly realize that without some kind of industrial policy the United States will fall behind China, with significant national security and economic implications. …So, what would a conservative-inspired, market-strengthening industrial policy look like? …it would acknowledge that America’s “traded sector” industries are critical to our future competitiveness… The right industrial policy will advance prosperity more than laisse-faire capitalism would. …there are a significant number of market failures around innovation, including externalities, network failures, system interdependencies, and the public-goods nature of technology platforms. …this is why only government can “pick winners.” …It should mean expanding supports for exporters by ensuring the Ex-Im Bank has adequate lending authority… this debate boils down to a fundamental choice for conservatives: small government and liberty versus stronger…government that delivers economic security

What’s a “market-strengthening industrial policy”? Is that like a “growth-stimulating tax increase”? Or a “work-ethic-enhancing welfare program”?

I realize I’m being snarky, but how else should I respond to someone who actually wants to expand the cronyist Export-Import Bank?

Let’s now look at what’s wrong with industrial policy.

In a column for Reason, Veronique de Rugy of the Mercatus Center warns that American politicians who favor industrial policy are misreading China’s economic history.

…calls from politicians on both sides of the aisle to implement industrial policy. …These policies are tired, utterly uninspiring schemes that governments around the world have tried and, invariably, failed at. …As for the notion that “other countries are doing it,” I’m curious to hear what great successes have come out of, say, China’s industrial policies. In his latest book, The State Strikes Back: The End of Economic Reform in China?, Nicholas Lardy of the Peterson Institute for International Economics shows that China’s growth since 1978 has actually been the product of market-oriented reforms, not state-owned programs. …Why should we want America to become more like China? Here’s yet another politician thinking that somehow, the same government that…botched the launch of HealthCare.gov, gave us the Solyndra scandal, and can keep neither Amtrak nor the Postal Service solvent, can effectively coordinate a strategic vision for American manufacturing. …The real problem with industrial policy, economic development strategy, central planning, or whatever you want to call these interventions is that government officials…cannot outperform the wisdom of the market at picking winners. In fact, government intervention in any sector creates distortions, misdirects investments toward politically favored companies, and hinders the ability of unsubsidized competitors to offer better alternatives. Central planning in all forms is poisonous to innovation.

As usual, Veronique is spot one.

I’ve also explained that China’s economy is being held back by statist policies.

Veronique also addressed the topic of industrial policy in a column for the New York Times,

With “Made in China 2025,” Beijing’s 2015 anticapitalist plan for an industrial policy under which the state would pick “winners,” China has taken a step back from capitalism. …China’s new industrial policy has worked one marvel — namely, scaring many American conservatives into believing that the main driver of economic growth isn’t the market but bureaucrats invested with power to control the allocation of natural and financial resources. …I thought we learned this lesson after many American intellectuals, economists and politicians were proven spectacularly wrong in predicting that the Soviet Union would become an economic rival. …government officials cannot outperform the market at picking winners. In practice it ends up picking losers or hindering the abilities of the winners to achieve their greatest potential. Central planning is antithetical to innovation, as is already visible in China. …the United States has instituted industrial policies in the past out of unwarranted fears of other countries’ industrial policies. The results have always imposed great costs on consumers and taxpayers and introduced significant economic distortions. …Conservatives…should learn about the failed United States industrial policies of the 1980s, which were responses to the Japanese government’s attempt to dominate key consumer electronics technologies. These efforts worked neither in Japan nor in the United States. The past has taught us that industrial policies fail often because they favor existing industries that are well connected politically at the expense of would-be entrepreneurs… We shouldn’t allow fear-mongering to hobble America’s free enterprise system.

Amen.

My modest contribution to this discussion is to share one of my experiences as a relative newcomer to D.C. in the late 1980s and early 1990s.

I had to fight all sorts of people who said that Japan was eating our lunch and that the United States needed industrial policy.

I kept pointing out that Japan deserved some praise for its post-WWII shift to markets, but that the country’s economy was being undermined by corporatism, intervention, and industrial policy.

At the time, I remember being mocked for my supposed naivete. But the past 30 years have proven me right.

Now it’s deja vu all over again, as Yogi Berra might say.

Except now China is the bogeyman. Which doesn’t make much sense since China lags behind the United States far more than Japan lagged the U.S. in the 1980s (per-capita output in China, at best, in only one-fourth of American levels).

And China will never catch the U.S. if it relies on industrial policy instead of pro-market reform.

So why should American policy makers copy China’s mistakes?

P.S. There is a separate issue involving national security, where there may be legitimate reasons to deny China access to high-end technology or to make sure American defense firms don’t have to rely on China for inputs. But that’s not an argument for industrial policy.

P.P.S. There is a separate issue involving trade, where there may be legitimate reasons to pressure China so that it competes fairly and behaves honorably. But that’s not an argument for industrial policy.

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Workers and Capitalists of the World, Unite!

I’ve periodically explained that capital formation (more machines, technology, etc) is necessary if we want higher wages.

Simply stated, workers get paid on the basis of what they produce and the most effective way of boosting productivity is to have more saving and investment.

This is (one of the reasons) why I have so much disdain for politicians who try to foment discord and division between workers and capitalists.

To be sure, there will always be a tug of war between investors and employees over which group gets bigger or smaller slices. But so long as we have the right policies, they’ll be bickering over how to divide an ever-growing pie.

That’s a nice problem to have. Especially compared to what happens when politicians intervene – for the ostensible purpose of helping workers – and adopt policies that create economic stagnation.

Think Greece or Venezuela.

Larry Reed of the Foundation for Economic Education wrote with great insight about the link between labor and capital a few years ago. He starts with some basic economics.

…as complementary factors of production, labor and capital are not only indispensable but hugely dependent upon each other as well. Capital without labor means machines with no operators, or financial resources without the manpower to invest in. Labor without capital looks like Haiti or North Korea: plenty of people working but doing it with sticks instead of bulldozers, or starting a small enterprise with pocket change instead of a bank loan. …There may be no place in the world where there’s a shortage of labor but every inch of the planet is short of capital. There is no worker who couldn’t become more productive and better himself and society in the process if he had a more powerful labor-saving machine or a little more venture funding behind him. It ought to be abundantly clear that the vast improvement in standards of living over the past century is not explained by physical labor (we actually do less of that), but rather to the application of capital.

He concludes that we should be celebrating Labor Day and Capital Day.

I’m not “taking sides” between labor and capital. I don’t see them as natural antagonists in spite of some people’s attempts to make them so. Don’t think of capital as something possessed and deployed only by bankers, the college-educated, the rich, or the elite. We workers of all income levels are “capital-ists” too—every time we save and invest, buy a share of stock, fix a machine, or start a business. …I’ve traditionally celebrated labor on Labor Day weekend—not organized labor or compulsory labor unions, mind you, but the noble act of physical labor to produce the things we want and need. …on Labor Day weekend, I’ll also be thinking about the remarkable achievements of inventors of labor-saving devices, the risk-taking venture capitalists who put their own money (not your tax money) on the line and the fact that nobody in America has to dig a ditch with a spoon or cut his lawn with a knife. …Labor Day and Capital Day. I know of no good reason why we should have just one and not the other.

Courtesy of Mark Perry at the American Enterprise Institute, here’s a nice depiction of how labor and capital are interdependent.

P.S. When economists write about the relationship between capital and labor (savings => investment => productivity => wages), some critics assert this is nothing other than “trickle-down economics.”

Yet this is the mechanism for growth under every economic theory – even Marxism and socialism. The only thing that changes under those approaches is that politicians and bureaucrats control investment decisions. And we know that doesn’t work very well.

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A Primer on Tax Competition and the OECD

Speaking in Europe earlier this year, I tried to explain the entire issue of tax competition is less than nine minutes.

To some degree, those remarks were an updated version of a video I narrated back in 2010.

You’ll notice that I criticized the Organization for Economic Cooperation and Development in both videos.

And with good reason. The Paris-based OECD has been trying to curtail tax competition in hopes of propping up Europe’s uncompetitive welfare states (i.e., enabling “goldfish government“).

As I stated in the second video, the bureaucrats sometimes admit this is their goal. In recent years, though, OECD officials have tried to be more clever, even claiming that they’re pushing for higher taxes because that approach somehow is a recipe for higher growth.

Let’s look at a new example of OECD malfeasance.

We’ll start with something that appears to be innocuous. Or even good news. A report from the OECD points out that corporate tax rates are falling.

Countries have used recent tax reforms to lower taxes on businesses… Across countries, the report highlights the continuation of a trend toward corporate income tax rate cuts, which has been largely driven by significant reforms in a number of large countries with traditionally high corporate tax rates. The average corporate income tax rate across the OECD has dropped from 32.5% in 2000 to 23.9% in 2018. …the declining trend in the average OECD corporate tax rate has gained renewed momentum in recent years.

Sounds good, right?

From the OECD’s warped perspective, however, good news for the private sector is bad news for governments.

As a result, the bureaucrats are pushing for policies that would penalize jurisdictions with low tax rates.

The Organisation for Economic Co-operation and Development is going to propose a global minimum tax that would apply country by country before the next meeting of G‑20 finance ministers and central bankers set for 17 Oct. in Washington, DC. …The OECD’s head of tax policy, Pascal Saint-Amans, said a political push was needed to relaunch the discussions and used the case of the Cayman Islands to explain the proposal. “The idea is if a company operates abroad, and this activity is taxed in a country with a rate below the minimum, the country where the firm is based could recover the difference.” …While this framework is based on an average global rate, Saint-Amans said the OECD is working on a country-by-country basis. Critics of the proposal have said that this would infringe on the fiscal sovereignty of countries.

And as I’ve already noted, the U.S. Treasury Department is not sound on this issue.

This would work in a similar way to the new category of foreign income, global intangible low-tax income (GILTI), introduced for US multinationals by the 2017 US tax reform. GILTI effectively sets a floor of between 10.5% and 13.125% on the average foreign tax rate paid by US multinationals.

There are two aspects of this new OECD effort that are especially disturbing.

• First, there’s already an ongoing OECD project to increase the tax burden on the business community.
• Second, even the OECD’s own research shows that lower corporate rates haven’t resulted in less tax revenue.

In a perverse way, I admire the OECD’s aggressiveness.

Whatever is happening, the bureaucrats turn it into a reason why tax burdens should increase.

The inescapable conclusion, as explained by Dominik Feusi of Switzerland, is that the OECD is trying to create a tax cartel.

Under the pretext of taxing the big Internet companies, a working group of the OECD on behalf of the G-20 and circumventing the elected parliamentarians of the member countries to a completely new company taxation. …The competition for a good framework for the economy, including low corporate taxes, will not be abolished, but it will be useless. However, if countries no longer have to take good care of the environment, because they are all equally bad, then they will increase taxes together. …This has consequences, because wages, wealth, infrastructure and social security in Western countries are based on economic growth. Less growth means lower wages. The state can only spend what was first earned in a free economy… The OECD was…once a platform for sharing good economic policy for the common good. This has become today a power cartel of the politicians… They behave as a world government – but without democratic mission and legitimacy.

Veronique de Rugy of the Mercatus Center examined the OECD and decided that American taxpayers should stop subsidizing the Paris-based bureaucracy.

Taxpayers are spending millions of dollars every year funding an army of bureaucrats who advocate higher taxes and bigger government around the globe. Last year, the United States sent $77 million to the Organization for Economic Cooperation and Development, the largest single contribution and fully 21 percent of the Paris-based bureaucracy’s $370 million annual budget. Add to that several million dollars in additional expenses for special projects and the U.S. mission to the OECD. …despite the OECD’s heavy reliance on American taxpayer funds, the organization persistently works against U.S. interests, arguing for international tax cartels, the end of privacy, redistribution schemes and other big-government fantasies. Take its campaign for tax harmonization, begun as a way to protect high-tax nations from bleeding more capital to lower-tax jurisdictions. …The OECD may recognize competition is good in the private sector, but promotes cartelization policies to protect politicians. …The bureaucrats, abetted by the European Union and the United Nations, even started clamoring for the creation of some kind of international tax organization, for global taxation and more explicit forms of tax harmonization.

These articles are spot on.

As you can see from this interview, I’ve repeatedly explained why the OECD’s anti-market agenda is bad news for America.

Which is why, as I argue in this video, American taxpayers should no longer subsidize the OECD.

It’s an older video, but the core issues haven’t changed.

Acting on behalf of Europe’s uncompetitive welfare states, the OECD relentlessly promotes a statist agenda.

That’s a threat to the United States. It’s a threat to Europe. And it’s a threat to every other part of the globe.

P.S. To add more insult to all the injury, the tax-loving bureaucrats at the OECD get tax-free salaries. Must be nice to be exempt from the bad policies they support.

P.P.S. If you’re not already sick of seeing me on the screen, I also have a three-part video series on tax havens and even a video debunking some of Obama’s demagoguery on the topic.

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