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Archive for September, 2019

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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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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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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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 with 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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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 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 Bankprotectionismtax favoritismbailoutssubsidies, 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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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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