Big Government vs. “Trickle-Down Economics”

If nothing else, Biden’s big-government agenda is triggering a debate about fundamental issues, such as whether it’s a good idea to make America’s economy more like Singapore or more like Italy.

In making the case for the Italian approach of higher taxes and bigger government during his speech to Congress, President Biden exclaimed that “trickle-down economics has never worked.”

But we need to realize that Biden is using a straw-man definition. In his mind, “trickle-down economics” is giving a tax cut to rich people under the assumption that some of that cash eventually will wind up in other people’s pockets.

However, if you actually ask proponents of pro-growth tax policy what they support, they will explain that they want lower tax rates for everyone in order to reduce penalties on productive behaviors such as work, saving, investment, and entrepreneurship.

And they will be especially interested in getting rid of the tax code’s bias against saving and investment.

Why? Because every economic theory – even socialism, even Marxism – agrees that saving and investment are a key to long-run growth and rising living standards.

Which is why there’s such a strong relationship in the data between the amount of capital and workers’ wages.

Indeed, it’s almost a tautology to say that this form of “trickle-down taxation” leads to higher productivity, which leads to higher wages for workers.

As Stanford Professor John Shoven observed several decades ago:

The mechanism of raising real wages by stimulating investment is sometimes derisively referred to as “trickle-down” economics. But regardless of the label used, no one doubts that the primary mechanism for raising the return to work is providing each worker with better and more numerous tools. One can wonder about the length of time it takes for such a policy of increasing saving and investments to have a pronounced effect on wages, but I know of no one who doubts the correctness of the underlying mechanism. In fact, most economists would state the only way to increase real wages in the long run is through extra investments per worker.

In other words, everyone agrees with the “trickle-down economics” as a concept, but people disagree on other things.

• Such as socialists who say government should be in charge of allocating major investments.
• Such as “supply-siders” who supposedly say lower tax rates are all that is needed for growth.
• Such as honest redistributionists who say we should forgo some growth to have more equality.

So I guess it depends on how the term is defined. If it simply means tax cuts while ignoring other policies (or making those other policies worse, like we saw during the Bush years or Trump years), then you can make an argument that trickle-down economics has a mediocre track record.

But if the term is simply shorthand for a broader agenda of encouraging more saving and investment with an agenda of small government and free markets, then trickle-down economics has a great track record.

For instance, here’s a chart from the most-recent edition of Economic Freedom of the World. Nations with market-oriented economies are far more prosperous than countries with state-controlled economies.

By the way, Biden is not an honest redistributionist.

Instead of admitting that higher taxes and bigger government will lead to less economic output (and justifying that outcome by saying incomes will be more equal), Biden actually wants people to believe that bigger government somehow will lead to more prosperity.

To be fair, he’s not the only one to make this argument. Bureaucracies such as the International Monetary Fund, the United Nations, and the Organization for Economic Cooperation and Development also have claimed that there will be more prosperity if governments get more control over the economy.

I call this the “magic beans” theory of economic development.

Which is why I always ask people making this argument to cite a single example – anywhere in the world, at any point in history – of a nation that has prospered by expanding the burden of government.

In other words, I want a response to my never-answered question.

The response is always deafening silence.

To be sure, I don’t expect Joe Biden to answer the question. Or to understand economics. Heck, I don’t even expect him to care. He’s just trying to buy votes, using other people’s money.

But there are plenty of smart folks on the left, and none of them have a response to the never-answered question, either. Heck, none of them have ever given me a good reason why we should copy Europe when incomes are so much lower on that side of the Atlantic Ocean.

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School Choice and 2021’s Tweet of the Year

After three columns on the topic in the past five weeks (see here, here, and here), I wasn’t expecting to write again about school choice anytime soon, but this speech by State Senator Justin Wayne of Nebraska must be watched.

Nebraska Senator Justin Wayne (D) tells his colleagues he'll vote against the school choice bill if they agree to send their own kids to public schools. pic.twitter.com/JzvS7iW6FE

— Corey A. DeAngelis, school choice evangelist (@DeAngelisCorey) April 28, 2021

What a great idea! All politicians who vote against school choice have to send their kids to the crummy government schools in their states and districts.

That wouldn’t be good news for hypocrites like Barack Obama (and his Secretary of Education), Elizabeth Warren, Democratic congressional candidates, and the head of a teacher union.

Heck, we could create a giant list of all the rich leftists who exercise choice for their own children while voting to deny similar opportunities for kids from families that don’t have lots of money.

And this is why I’m overjoyed that we have seen a lot of progress on the issue this year.

And it’s continuing. Here are excerpts from an editorial in the Wall Street Journal about recent steps to expand choice in Florida.

Florida already has among the most expansive school-choice offerings in the nation, and this week the Legislature expanded private-school vouchers to more families. …The bill increases the eligible household income cap from 300% to 375% of the poverty level—about $100,000 for a family of four—though it prioritizes households under 185%. The enrollment cap will continue to escalate by 1% of public-school enrollment annually, allowing roughly 28,000 new students each year. …One of the bill’s biggest boons is extending scholarships to students already in private school. …Florida is a haven for overtaxed northerners, but it’s also an education refuge for low- and middle-income families.

Also in the Wall Street Journal, Paul Peterson of Harvard has a column on how government lockdowns have created an opening for expanded educational freedom.

President Biden wants credit for opening up the nation’s schools within 100 days of taking office. …The big news at the 100-day mark isn’t school opening but the revival of the school-choice movement. …school-choice advocates have scored big victories around the country. Indiana enlarged its voucher program. Montana lifted caps on charter schools. Arkansas now offers tax-credit scholarships to low-income students. West Virginia and Kentucky have funded savings accounts that help parents pay tuition at private schools. Florida, a movement leader, has enlarged its tax-credit scholarship programs. Even Rhode Island Gov. Dan McKee promises to veto a moratorium on new charter schools. …The pandemic is the driving force. The failure of the public schools to educate children in the past year has angered parents and policy makers. …the loss of learning and social connectivity produced by school closures has been devastating, especially for low-income minority children. …Survey data show a rise in the level of support over the past two years for vouchers, charters and tax-credit scholarships. Political leaders sense a change in the public mood. After aggressive unions and bewildered school boards shut down schools for a year, the choice bandwagon has begun to roll.

Let’s hope that choice bandwagon rolls further. It will be great for kids.

And, given the importance of quality education for competitiveness, it will be great for the nation as well.

P.S. I’m disgusted by the hypocritical politicians who send their kids to private schools while voting against school choice for the rest of us. But I’m even more disgusted – and baffled – that the NAACP opposes school choice when minority children have the most to gain.

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The “American System” Is Big Government?!?

We can learn a lot by looking at economic history.

It’s instructive to note, for instance, that the United States evolved from agricultural poverty to middle-class prosperity in the 1800s – during a time when the burden of government spending was trivially small.

Federal spending that century, on average, consumed less than 5 percent of the country’s economic output, meaning we had a public sector far smaller that what is found today in supposedly small-government jurisdictions such as Hong Kong and Singapore.

There’s a lesson to be gleaned from America’s rise to prosperity, in my humble opinion, as well as from similar experiences in Western Europe.

But not everybody sees history the same way. Earlier this month, David Brooks opined in the New York Times in favor of Biden’s spending binge.

Given his long-standing opposition to libertarianism/small-government conservatism, that’s not a big surprise. But what is noteworthy is that he argued Biden’s statism is part of the American tradition.

What is the quintessential American act? It is the leap of faith. …The early days of the Biden administration are nothing if not a daring leap. …What is this thing, Bidenomics? …democracy needs to remind the world that it, too, can solve big problems. Democracy needs to stand up and show that we are still the future. …Cecilia Rouse, the chair of Biden’s Council of Economic Advisers, …said…“the private sector…is not best suited to deliver certain public goods like work force training and infrastructure investment,” she told me. “These are places where there is market failure, which creates a role for government.” …Some people say this is like the New Deal. I’d say this is an updated, monster-size version of “the American System,” the 19th-century education and infrastructure investments inspired by Alexander Hamilton, championed by Henry Clay and then advanced by the early Republicans, like Abraham Lincoln. That was an unabashedly nationalist project, made by a youthful country, using an energetic government to secure two great goals: economic dynamism and national unity.

The column concludes that we have to make this leap to deal with a threat from China.

Sometimes you take a risk to shoot forward. The Chinese are convinced they own the future. It’s worth taking this shot to prove them wrong.

But Mr. Brooks is wrong. We’re not taking a daring leap into the unknown with Biden’s agenda.

We’re copying Western Europe.

And that means we have lots of data showing what that means for our future. Unfortunately, it means Americans will enjoy less income and suffer from lower living standards.

At the risk of understatement, that doesn’t seem like a good idea.

P.S. I also can’t resist pointing out that there are several small points in Brooks’ column that cry out for correction, such as the anti-empirical assertions that government job training is a good idea or that government intervention in the 1800s produced good results.

P.P.S. I’m also baffled that so many people view China as a successful economic model when living standards in that nation are only about one-fifth of American levels.

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The Political Consequences of Tax Migration

When I ask my left-leaning friends what they think about the flight of investors, entrepreneurs, and business owners from high-tax states, I tend to get three responses.

1. It isn’t actually happening (these are my friends who apparently don’t know how to read).
2. It’s happening, but it doesn’t matter (data from the IRS suggests it actually is significant).
3. It’s happening, but high-tax states will be better off without these selfish and greedy people.

The folks making the third point actually have a decent argument, at least in terms of short-run political outcomes. Democrats rarely have to worry about retaining control of states like California, New York, Illinois, and New Jersey now that many Republican-leaning voters have moved away.

But sometimes short-run benefits are exceeded by long-run costs, and the recent data on congressional redistricting from the Census Bureau is a good example.

As you can see, there’s a continuing shift of political power – as measured by seats in Congress – from blue states to red states.

Patrick Gleason of Americans for Tax Reform explains what this means in a column for Forbes.

Over the past decade Americans have been voting with their feet in favor of states with lower overall tax burdens… As a result, high tax states…are set to lose congressional clout for the next decade, to the benefit of low tax states… the seven states that will lose congressional seats due to stagnant population growth have higher top income tax rates and greater overall tax burdens, on average, than do the six states gaining seats. In fact, the average top personal income tax rate for states losing seats in congress is 6.5%, which is 46% greater than the 4.45% average top income tax rate for states gaining seats.

Some people may want to dismiss Mr. Gleason’s column since he works for a group that supports smaller government.

But you can find the same analysis in this column in the Washington Post by Aaron Blake.

…what does the new breakdown mean from a partisan perspective? All told, five seats will migrate from blue states to red ones — owing to population shifts from the Rust Belt, the Northeast and California to the South and other portions of the West. Five of the seven seats being added also go to states under complete GOP control of redistricting, with three of seven being taken away coming from states in which Democrats have some measure of control over the maps. …That should help Republicans… The Cook Political Report estimates the shifts are worth about 3.5 seats… As for the electoral college in future presidential elections, …Michigan and Pennsylvania…are states Democrats probably need to win in the near future, meaning it’s probably a bigger loss for them. …If we reran the 2020 electoral college with the new electoral votes by state, Biden’s margin would shrink from 306-232 to 303-235. That seems negligible. But if you overlay the 2000 presidential results — three reapportionments ago — on the current electoral vote totals, George W. Bush’s narrow win with 271 electoral votes becomes a much more decisive win with 290. That gives you a sense where things have trended.

Let’s now return to the hypothesis that tax-motivated migration is playing a role.

Here’s an instructive tweet from Andrew Wilford of the National Taxpayers Union.

It should be not at all surprising to anyone that which states gained/lost Congressional seats from the latest apportionment tracks very strongly with the state's tax burden pic.twitter.com/DJRcNErNXm

— Andrew Wilford (@PolicyWilford) April 26, 2021

I’ll wrap up today’s column by augmenting the data in Mr. Wilford’s tweet.

Because not only are there, on average, lower tax burdens in the states gaining congressional seats, but every one of them has some very desirable feature of its tax code.

To be sure, not all of the state-to-state migration is due to tax policy. There are all sorts of other policies that determine whether a state is an attractive place for people looking to relocate.

And there are other factors (family, climate, etc) that have nothing to do with public policy.

All things considered, however, being a low-tax state means more jobs, growth, and people, at least when compared with being a high-tax state.

P.S. If you’re interested in seeing how states rank in various indices, click here, here, and here.

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Communism Humor

Communism has a horrible track record of murder and brutality. It also leads to economic disaster wherever it is implemented.

And its founder, Karl Marx, was a despicable excuse for a human being.

But the tiny silver lining to that awful dark cloud is that at least we have endless opportunities to mock this evil ideology.

So let’s augment our collection of anti-communism humor.

We’ll start with this story about how dinosaurs went extinct, along with what might cause the world’s next mass extinction.

Our second item speculates that vapid young people will cast off their silly views once they get a job.

Of course, this may not be true if they get the wrong kind of job.

Next is a look at how China has created a modern version of Mary Shelley’s literary classic.

Reminds me of this gem from 2010.

Next we have a satirical tweet.

A Marxist is someone who reads Marx.

An anti-Marxist is someone who reads the history of Marxism.

— Alice Smith (@TheAliceSmith) April 22, 2021

Per tradition, I’ve saved the best for last.

All communists are bad, though for different reasons. Some are guilty of stupidity. Some are motivated by hate and resentment against success. And some are psychological misfits that are attracted to brutality.

This next item mocks the Marxists, like the Chavez family in Venezuela who use it as a scam to line their own pockets.

Any resemblance to Bernie Sanders, of course, is purely coincidental.

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More Good News on School Choice

I’m pessimistic about the direction of public policy, especially on fiscal issues such as taxes and spending.

But there is a silver lining to this dark cloud of statism. We’re seeing continuing progress on school choice, most notably a big expansion of educational freedom in West Virginia.

It appears more and more state and local policy makers are reaching the inevitable conclusion that government schools operate for the benefit of teacher unions rather than students.

And this is motivating many legislators to push for school choice, especially since there’s more and more evidence that school choice improves educational outcomes.

For instance, the Wall Street Journal opined last week about a new victory in Indiana.

Ten years ago in these columns, we hailed Indiana for its leadership in establishing one of America’s most ambitious school voucher programs. On Thursday the Indiana Legislature built on that achievement by approving a budget that will take the program to 48,000 students a year from about 37,000. …The teachers unions are unhappy. Their beef is that money to expand choice is taken from traditional public schools. And this year they lobbied local school boards to pass resolutions opposed to school choice. But that common union line about choice robbing public schools isn’t true. …92% of Indiana students will be in traditional public schools, and 93% of all education funding will go to these schools. …Since 2011, when Indiana pushed through its first voucher plan, more than a quarter-million Hoosier students have benefited. In an interview with Today’s Catholic, former Gov. Mitch Daniels explains the moral logic of choice this way: “Providing poor and minority families the same choice of schools that their wealthier neighbors enjoy is the purest example of ‘social justice’ in our society today.”

Meanwhile, Arkansas may be on the verge of adding to the good news.

Here are some excerpts from an article by Jason Bedrick in National Review.

In response to families demanding more educational options, six states have already passed new choice policies or expanded existing ones this year, and similar bills are still making their way through more than a dozen other state legislatures. …the Arkansas state senate…passed Senate Bill 680, which has the support of Governor Asa Hutchinson and the Arkansas Department of Education, by an overwhelming margin. Although only half the size of the previous proposal and limited only to low-income children, the bill still represents a major step toward providing broad access to educational choice. The Arkansas House now has another opportunity to do right by Arkansas families desperate for more educational options. …the Arkansas House Revenue and Taxation Committee voted to recommend that the full House pass the bill.

The superintendents of government schools are fighting to preserve the status quo. Their main argument is that choice will hurt outcomes for students stuck in their schools.

But competition encourages everyone to do better, and Jason shares some of the evidence about government schools doing better when there is school choice .

The research about the effects of educational-choice policies on public schools…overwhelmingly finds that such policies benefit not only participating students, but also the students who remain in their assigned district schools. Out of 27 studies, 25 find that students attending district schools improve their performance on standardized tests after the introduction of a choice program, while only one study found a negative effect, and one found no visible effect. …a recent study by the University of Arkansas found that states with robust educational-choice policies saw significant improvements on the National Assessment of Educational Progress (known as the “Nation’s Report Card”) over the last two decades. …The sky isn’t falling in any of the 29 states that have some form of private-school-choice program. Indeed, the sun is still shining on their public-school systems, which have not only not collapsed but are actually performing better than before.

Fingers crossed that Arkansas lawmakers do what’s right for kids rather than siding with the education bureaucracy.

Let’s conclude with this video from the Institute of Justice, which makes the point that school choice is especially critical for those with low incomes and other challenging backgrounds.

I shared a similar video back in 2016 as part of a column about why school choice is critical for black children.

P.S. If you want to learn more about school choice, I recommend this video.

P.P.S. It’s uplifting to see very successful school choice systems operate in nations such as Canada, Sweden, Chile, and the Netherlands.

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Waste, Fraud, and Federalism

Today we’re going to mix two things that seem disconnected.

Our first topic is federalism, which is the sensible principle that deciding things at the local level, or even state level, is better than being ruled by faraway politicians and a big, centralized bureaucracy.

You can still get awful policies from local politicians and state politicians, of course, but at least it is easier to monitor their actions, remove them from power, or move away if necessary.

A big reason I’m a fan of federalism because it creates competition among governments. For instance, I cheer when businesses, investors, and entrepreneurs escape from high-tax states like California and New York and move to zero-income tax states such as Florida and Texas.

When programs are centralized in Washington, by contrast, you simply add another layer of bureaucracy and expense.

But it’s not just a money issue. When Washington is in charge, you get a one-size-fits-all approach. That means there’s no room for innovation and diversity, which makes it much less likely that policy makers can learn what works and what doesn’t work.

Our second topic involves a story about record-setting levels of waste in California.

In a column published by Reason, Steven Greenhut describes how the unemployment insurance program in the Golden State has experienced jaw-dropping levels of fraud.

This is one of the most infuriating scandals ever to plague our state. The department, which is responsible for paying out unemployment insurance claims, has been incapable of paying legitimate claims even as it has paid as much as $31 billion in fraudulent ones, often to inmates. …Here’s a desk-pounder from CBS Los Angeles: “A Fresno girl who just celebrated her first birthday is collecting $167 per week in unemployment benefits after a claim was filed on her behalf stating that she was an unemployed actor.” The Southern California News Group reported last month that one man “is suspected of using the identities of 23 inmates and others to obtain more than $3 million in state unemployment benefits.” Approximately 10 percent of the paid claims have been fraudulent, with another 17 percent under suspicion. This will be “the largest fraud investigation in the history of America,” according to one expert.

I suspect that we’ll discover that most of the suspicious payments also were fraudulent, which means one-fourth of the money went to crooks.

Meanwhile, the same bureaucrats who blindly sent out checks to the wrong people also managed to ignore inquiries from the right people.

The department’s call center only answered 1 percent of calls that Californians had made to check on their claim status.

Amazingly, the Biden Administration has decided that the person in charge of all this waste and fraud should be rewarded.

Julie Su, the state labor secretary who was responsible for the department, may receive a big promotion…to serve as President Joe Biden’s pick for deputy secretary of the federal department of labor.

I fully agree with Mr. Greenhut’s concluding observation.

Welcome to…government, where no good deed goes unpunished and no level of incompetence goes unrewarded.

At this point, you may be wondering about the connection between our two topics.

To show how they are related, I’ll ask this rhetorical question: Why aren’t people in California upset about losing at least $31 billion to fraud, especially since the entire state budget is about $134 billion?

The answer is that they’re not wasting their own money!

The vast majority of the pandemic-related unemployment funds were provided by Washington, most notably (1) extended benefits under existing UI, (2) pandemic expansion of UI to cover people not normally eligible for UI, and (3) bonus payments.

So we shouldn’t be surprised that California bureaucrats didn’t care how much of the money was lost to fraud. As Milton Friedman wisely pointed out, there’s no incentive to be responsible when spending other people’s money on other people.

Now I’ll ask another rhetorical question: What would have happened if California was in charge of not only spending the money, but also was in charge of raising the money?

I’m sure there would have been plenty of waste and fraud, but even profligate California officials would have figured out it wasn’t a good idea to squander $31 billion of their own money.

After all, consider the case of Vermont, which quickly retreated from a proposal for single-payer health care once they realized the implications if they paid for it themselves.

The bottom line is you get better outcomes when there’s genuine decentralization. Simply stated, politicians have to be at least semi-responsible when they have to raise the money that they spend. It’s called accountability.

Which is why even the left-leaning OECD and left-leaning IMF have produced research confirming superior results with real federalism.

P.S. Switzerland is a great example of genuine federalism, whereas our system in the United States has been substantially eroded.

P.P.S. Big chunks of the federal budget should be wiped out and transferred back to state and local governments, including redistribution, health care, transportation, and education.

P.P.P.S. To see what Hayek and Mises wrote about federalism, click here.

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Biden Wants America to Have the World’s Highest Tax Burden on Capital Gains

Because of the negative impact on competitiveness, productivity, and worker compensation, it’s a very bad idea to impose double taxation of saving and investment.

Which is why there should be no tax on capital gains, and a few nations sensibly take this approach.

But they’re outnumbered by countries that do impose this pernicious form of double taxation. For instance, the Tax Foundation has a new report about the level of capital gains taxation in Europe, which includes this very instructive map.

As you can see, some countries, such as Denmark (gee, what a surprise), have very punitive rates.

However, other nations (such as Switzerland, Belgium, Czech Republic, Slovakia, Luxembourg, and Slovenia) wisely don’t impose this form of double taxation.

If the United States was included, we would be in the middle of the pack. Actually, we would be a bit worse than average, especially when you include the Obamacare tax on capital gains.

But if Joe Biden succeeds, the United States soon will have the dubious honor of being the worst of the worst.

The Wall Street Journal opined this morning about the grim news.

Biden officials leaked that they will soon propose raising the federal tax on capital gains to 43.4% from a top rate of 23.8% today. …Mr. Biden will tax capital gains for taxpayers who earn more than $1 million at the personal income tax rate, which he also wants to raise to 39.6% from 37%. Add the 3.8% ObamaCare tax on investment, and you get to 43.4%. And that’s merely the federal rate. Add 13.3% in California and 11.85% in New York (plus 3.88% in New York City), which also tax capital gains as regular income, and you are heading toward the 60% rate range. Keep in mind this is on the sale of gains that are often inflated as assets are held for years without adjustment for inflation. Oh, and Mr. Biden also wants to eliminate the step-up in basis on capital gains that accrues at death.

Beating out Denmark for the highest capital gains tax rate is bad.

But it’s even worse when you realize that capital gains often occur because investors expect an asset to generate more future income. But that future income gets hit by the corporate income tax (as well as the tax on dividends) when it actually materializes.

So the most accurate way to assess the burden on new investment is to look at the combined rate of corporate taxation and capital gains (as as well as the combined rate of corporate taxation and dividend taxation).

By that measure, the United States already has one of the world’s most-punitive tax regimes, And Biden wants to increase all of those tax rates.

Sort of a class-warfare trifecta, and definitely not a recipe for good economic results.

For those interested in more details, here’s a video I narrated on the topic back in 2010.

And I also recommend these columns (here, here, and here) for additional information on why we should be eliminating the capital gains tax rather than increasing it.

P.S. Don’t forget that there’s no indexing to protect taxpayers from having to pay tax on gains that are due only to inflation.

P.P.S. And also keep in mind that some folks on the left want to impose tax on capital gains that only exist on paper.

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GDP, GDI, and Economic Analysis

Way back in 2010, I shared this video explaining how “gross domestic product” and “gross domestic income” are basically the same number, but warning that the former leads to sloppy thinking (including the Keynesian myth that consumer spending drives the economy).

Since President Biden is seeking to resuscitate Keynesian Economics, let’s revisit this topic.

The first thing I want to do is to reassure skeptical readers that there’s nothing remotely controversial about my assertion that GDP and GDI are equivalent measures. It’s simply the common-sense recognition that total spending in a country is going to closely match total income.

If you really want to get into the technical weeds, the Bureau of Economic Analysis has a very detailed document showing how all the measurements fit with each other. Feel free to read that material by clicking here.

But if you don’t have the time or inclination to wade through all that material, here are two charts from the document that capture what’s important, at least for purposes of our discussion about macroeconomic policy.

First, here’s a chart showing that GDP and GDI are two ways of arriving at the same number (though never exactly identical because of statistical discrepancies).

And if you really want to be a wonk, here’s the BEA’s depiction of GDP and GDI, along with a bunch of other measures of economic output.

And if all that boring background doesn’t convince you that it’s okay to equate GDP and GDI, let’s go back to 2018 and look at a column in the Wall Street Journal by Jason Furman, who was Chairman of the Council of Economic Advisers for President Obama

…the data aren’t perfect. …GDP is not measured directly. Instead, the BEA sums up economy-wide expenditures from dozens of data sources, covering consumption, investment, government spending, net exports and more. …the underlying data are noisy and incomplete, meaning that revisions to GDP growth estimates can be large and often confusing. …Drawing on more data can cancel out some of this noise and produce a more accurate figure that requires smaller revisions. Specifically, the BEA separately gauges the size of the economy by adding up all the different sources of income, such as wages and profits. This figure is called gross domestic income, or GDI… Ultimately, GDI should be identical to GDP, since all money spent is money earned.

With all that out of the way, now let’s move to some analysis that actually is controversial (not in my mind, of course, but my left-leaning friends probably won’t agree with me).

As explained in the video, and as I wrote back in 2013, people without much knowledge about economics draw inaccurate conclusions when using data on GDP .

But don’t take my word for it. Professor Alexander William Salter of Texas Tech University described, in an article for National Review, how GDP accounting equations are mistakenly interpreted to justify more government spending.

The most egregious abuses of economics that we see today start with an accounting identity — a true statement or equation — but end with an absurd economic claim. …Here’s an example: If you’ve taken an introductory economics course, this equation is probably familiar to you: Y=C+I+G+(X-IM). In plain English: Gross Domestic Product (GDP, in this equation ‘Y’) is the sum of consumption (C), investment (I), government spending (G), and net exports (X-IM). This is the foundation of national-income accounting, and it’s true by construction. GDP is defined as the sum of these things. Nothing in this equation tells us how the economy actually works. …often it’s misused. Here’s a case from the Left: Because government expenditures enter positively into GDP, increased government spending raises GDP. Simple, right? Not so fast. …Uncle Sam spending more doesn’t increase the size of the economic pie. It just redistributes existing slices to Uncle Sam, or to whomever Uncle Sam finances. More public-sector consumption means less private-sector consumption.

That’s a look at theory.

He also applies theory to reality, most recently in a column for the Wall Street Journal about Biden’s supposed infrastructure plan.

Whether public or private, spending doesn’t cause growth. Mr. Stiglitz and his allies have it backward: Consumption is downstream from production. Growth is about increasing the supply of goods over time; you can’t spend if the goods haven’t been produced. Production grows as technology and production processes improve. Such improvement requires saving and investing rather than consuming. …all the financing in the world won’t boost productivity if it isn’t channeled correctly. More-efficient producers, not partisan spending, create economic flourishing. Though the president’s plans will consume plenty, they’ll produce only disappointment.

That last sentence is an apt summary. A bigger government means a smaller economy.

The empirical evidence shows that nations with smaller fiscal burdens economically out-perform countries with large welfare states. Simply stated, there’s an incentive for efficiency in the private sector, whereas people in Washington are governed by the perverse incentives described by “public choice” theory.

I’ll close with a relevant caveat that was mentioned in the above video. It is possible for a nation to consume more than it produces. But only if it borrows from overseas, and only at the cost of having to sacrifice future income to service the additional debt.

P.S. If you want more information, here’s my video on Keynesian Economics, and here’s my 4-part series on the economics of government spending.

P.P.S. I also wrote about GDP vs. GDI in 2017, in part to debunk some grotesquely dishonest reporting by Time.

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The $1 Trillion “Tax Gap” Is a Self-Serving and Shoddy Make-Believe Number from the IRS

Whenever I’m asked about the “tax gap,” I point to the academic evidence, from multiple sources, and explain that lower tax rates and tax reform are the best way to get higher levels of tax compliance.

Indeed, even the pro-tax International Monetary Fund has published research clearly identifying punitive tax policy as the leading cause of tax evasion and tax avoidance.

It’s time to take another look at this issue because the Biden Administration is trying to create a competing narrative.

The head of the IRS says that we need huge increases in the IRS’s budget in order to deal with a supposedly crisis of tax cheating.

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

The United States is losing approximately $1 trillion in unpaid taxes every year, Charles Rettig, the Internal Revenue Service commissioner, estimated on Tuesday, arguing that the agency lacks the resources to catch tax cheats. …Most of the unpaid taxes are the result of evasion by the wealthy and large corporations, Mr. Rettig said. “We do get outgunned,” Mr. Rettig said during a Senate Finance Committee hearing… Senator Ron Wyden of Oregon, the Democratic chairman of the committee, called the $1 trillion tax gap a “jaw-dropping figure.” …The size of I.R.S.’s enforcement division has declined sharply in recent years, Mr. Rettig said, with its ranks falling by 17,000 over the last decade. The spending proposal that the Biden administration released last week asked for a 10.4 percent increase above current funding levels for the tax collection agency, to $13.2 billion.

There are a couple of points that cry out for correction.

First, the IRS is cherry picking data to make it seem like it is starved of resources. The bureaucrats got a record pile of money in 2010, so they use that year when making comparisons.

But if you look at long-run data, you can see that the IRS budget has almost doubled over the past four decades.

And that’s after adjusting for inflation.

Second, the $1 trillion figure is a make-believe number, more than twice as high as the IRS’s last official estimate.

Commissioner Rettig may as well have said $2 trillion. Or $5 trillion. After all, he’s simply pulling a number out of the air in an effort to convince Congress to give the IRS an even bigger budget.

By the way, since I mentioned the IRS’s official estimate, here’s a look at those numbers, which were published in September 2019. What deserves special attention is that there’s very little underpaying by corporations.

Indeed, it’s only 9 percent of the total (circled in red).

So where are the big sources of evasion?

It’s mostly small businesses. The IRS assumes modest-sized companies (especially family-owned firms) play lots of games so they can underreport income and overstate deductions.

So if the bureaucrats get a big budget increase, it basically means more IRS agents harassing lots of mom-and-pop businesses.

Can that approach shake loose some more money for the government? I’m sure the answer is yes, but I want to close by returning to my original point about why it would be better to instead focus on good tax policy.

Let’s take a look at a recent study from Mai Hassan and Friedrich Schneider (the world’s leading scholar on the underground economy). Here are some of their findings.

The shadow economy includes all of the economic activities that are deliberately hidden from official authorities for various reasons. …Monetary reasons include avoiding paying taxes and/or social security contributions… Given the purpose of our study, the shadow economy reflects mostly the legal economic and productive activities that, if recorded, should contribute to the national GDP. Therefore, the definition of the shadow economy in our study tries to avoid illegal or criminal activities …It is widely accepted in the literature that the most important cause leading to the proliferation of the shadow economy is the tax burden. The higher the overall tax burden, the stronger are the incentives to operate informally in order to avoid paying the taxes.

The study looks at all sorts of variables to see what else has an impact on tax evasion.

Considering the result of our MIMIC estimations…we clearly see that the tax burden has a positive (theoretically expected) sign and is statistically significant at the 5% confidence level. The regulatory burden variable (size of government) has also the theoretically expected sign and is highly statistically significant at the 1% confidence level. The estimated coefficient of the unemployment rate is also highly statistically significant and has the expected positive sign. The economic freedom index has the expected negative sign and is at the 10% confidence level statistically significant.

In other words, it’s not just tax policy, though that plays the biggest role.

But the part of the study that is relevant for today is that the United States has the world’s 2nd-highest level of tax compliance, trailing only Switzerland.

Here are the top-10 nations.

The obvious takeaway is that there’s no crisis. Not even close.

By all means, we can try to jump Switzerland and move into first place. But let’s increase tax compliance the smart way – by lowering tax rates and reforming the tax code.

P.S. The Biden Administration and the IRS are feeding us garbage data for self-interested reasons (a classic case of “public choice” in action).

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Preventing Fiscal Meltdowns with a Spending Cap

As part of my recent interview about European economic policy with Gunther Fehlinger, I pontificated on issues such as Convergence and Wagner’s Law.

I also explained why a Swiss-style spending cap could have saved Greece and Italy from fiscal crisis. Here’s that part of the discussion.

For those not familiar with spending caps, this six-minute video tells you everything you need to know.

Simply stated, this policy requires politicians to abide by fiscal policy’s Golden Rule, meaning that – on average – government spending grows slower than the private economy.

And that’s a very effective recipe for a lower burden of spending and falling levels of red ink.

One of the points I made in the video is that spending caps would prevented the fiscal mess in Greece and Italy.

To show what I mean, I went to the International Monetary Funds World Economic Outlook database and downloaded the historical budget data for those two nations. I then created charts showing actual spending starting in 1988 compared to how much spending would have grown if there was a requirement that the budget could only increase by 2 percent each year.

Here are the shocking numbers for Greece.

The obvious takeaway is that there never would have been a fiscal crisis if Greece had a spending cap.

That also would be true even if the spending cap allowed 3-percent budget increases starting in 1998.

And it would be true if the 2-percent spending cap didn’t start until 2000.

There are all sorts of ways of adjusting the numbers. The bottom line is that any reasonable level of spending restraint could have prevented the horrible misery Greece has suffered.

Here are the numbers for Italy.

As you can see, the government budget has not increased nearly as fast in Italy as it did in Greece, but the burden of spending nonetheless has become more onerous – particularly when compared to what would have happened if there was a 2-percent spending cap.

I’ve written many times (here, here, here, and here) about Italy’s looming fiscal crisis. As I said in the interview, I don’t know when the house of cards will collapse, but it won’t be pretty.

And tax reform, while very desirable, is not going to avert that crisis. At least not unless it is combined with very serious spending restraint.

P.S. For those who want information about real-world success stories, I shared three short video presentations back in 2015 about the spending caps in Switzerland, Hong Kong, and Colorado.

P.P.S. It’s also worth noting that the United States would be in a much stronger position today if we had enacted a spending cap a couple of decades ago.

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Celebrating Calvin Coolidge

In my lifetime, the only good president has been Ronald Reagan, whose policies restored America’s economy and led to the end of the Soviet Union’s evil empire.

But if we look at the past 100 years, Calvin Coolidge might rank even higher.

Amity Shlaes was the right person to narrate that video. She’s written the definitive biography of Coolidge.

Indeed, I’ve previously cited her expertise on Coolidge’s fiscal restraint, as well as Silent Cal’s wisdom on tax policy.

Given the tendency of politicians to buy votes with other people’s money, I’m especially impressed by his frugality. He followed my Golden Rule about 90 years before I ever proposed the concept.

Let’s further investigate his performance.

Larry Reed of the Foundation for Economic Education has two must-read articles about Coolidge’s track record.

First, to illustrate Coolidge’s admirable philosophy of fiscal restraint, he shares these key passages from his 1925 inauguration.

I favor the policy of economy, not because I wish to save money, but because I wish to save people. The men and women of this country who toil are the ones who bear the cost of the Government. Every dollar that we carelessly waste means that their life will be so much the more meager. Every dollar that we prudently save means that their life will be so much the more abundant. Economy is idealism in its most practical form. …The wisest and soundest method of solving our tax problem is through economy…The collection of any taxes which are not absolutely required, which do not beyond reasonable doubt contribute to the public welfare, is only a species of legalized larceny. …They do not support any privileged class; they do not need to maintain great military forces; they ought not to be burdened with a great array of public employees…. I am opposed to extremely high rates, because they produce little or no revenue, because they are bad for the country, and, finally, because they are wrong. …The wise and correct course to follow in taxation and all other economic legislation is not to destroy those who have already secured success but to create conditions under which everyone will have a better chance to be successful.

Magnificent.

And you should also see what he said in 1926, when celebrating the 150th anniversary of America’s independence.

Larry Reed also debunked the silly notion that Coolidge was responsible for the Great Depression of the 1930s.

So-called “progressives” tell us that Calvin Coolidge was a bad president because the Great Depression started just months after he left office. …Should Coolidge get any of the blame for the Great Depression? The Federal Reserve’s expansion of money and credit in the 1920s certainly set the country up for at least a mild fall, but that wasn’t Coolidge’s fault. He saw the Fed as the “independent” entity it was supposed to be and didn’t meddle with it. At least once he expressed concern that the Fed might be fostering a bubble but he otherwise didn’t make a stink about it. “Not my bailiwick,” he believed. We can legitimately say that Coolidge should have criticized the Fed’s easy money policy more loudly. …In any event, far worse than the Fed’s inflation was its deflation, which didn’t begin in earnest until the final weeks of the Coolidge administration. …Every good economist concedes that erratic monetary policy at the Fed was at least a minor cause of the 1920s boom and surely a major cause of the 1930s bust. You can’t blame that on Coolidge.

If you want more information about the Fed’s role in causing economic turmoil, I recommend this video presentation from George Selgin.

Larry’s column points out that both Herbert Hoover and Franklin Roosevelt then imposed policies that lengthened and deepened the downturn.

Markets were, in fact, making a comeback in the spring of 1930 and unemployment had not yet hit double digits. Not until June 1930, when Congress and President Hoover raised tariffs and triggered an international trade war, did recession cascade into depression. Two years later, they flattened just about everybody who was still standing by doubling the income tax. …Franklin Roosevelt…then delivered…absurd interventions kept the economy in depression for another seven years.

What especially tragic about the Great Depression is that Warren Harding showed, just a decade earlier, how to quickly put an end to a deep downturn.

I’ll close with by emphasizing this quote from Coolidge’s inaugural address. Every supporter of limited government should withhold support from any politician who is unable to echo this sentiment today.

P.S. There is another president that I admire, though the number of good presidents is greatly outnumbered by the motley – and bipartisan – collection of bad presidents.

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Another Victim of Government Thuggery

Even though I think economic growth is very important for human flourishing and strongly support the laissez-faire policies that will generate more prosperity, I’m mostly a libertarian because of moral reasons.

Simply stated, I hate when government bullies people like Jerry Johnson.

As explained in the video, Jerry is a victim of asset forfeiture, a policy that literally allows bureaucrats to steal from citizens.

I wish I was joking or exaggerating.

Moreover, this isn’t something that only happens in very rare instances. It’s so pervasive that in some years, bureaucrats actually steal more from people than burglars!

Indeed, the law actually gives cops an incentive to steal. That’s why it’s known as “policing for profit.”

The silver lining to this dark cloud is that America’s best Supreme Court Justice wants to end this awful scam.

P.S. I’m tempted to create a Victims of Thuggery Hall of Fame. If so, Jerry Johnson will be a member along with these other people who have been abused by government.

• Andy Johnson
• Anthony Smelley
• The Hammond family
• Charlie Engle
• Tammy Cooper
• Nancy Black
• Russ Caswell
• Jacques Wajsfelner
• Jeff Councelller
• Eric Garner
• Martha Boneta
• Corey Statham
• James Slatic
• Carole Hinders
• Salvatore Culosi
• James Lieto
• the Sierra Pacific Company
• The Meitev family
• Dimitrios Patlias

P.P.S. It’s worth noting the first two people in charge of the federal government’s asset forfeiture program have since announced their opposition to this despicable practice.

P.P.P.S. Just like intrusive and ineffective money-laundering laws, wretched asset forfeiture laws are largely the result of the foolish War on Drugs. One bad policy generates another bad policy. Lather, rinse, repeat.

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Libertarian Humor

It hasn’t even been a month since I shared the most-recent collection of libertarian humor, but I’ve received so many clever items that it’s time augment our collection.

Our first item is this cartoon strip about children getting drawn into the movement.

Speaking of children, the second item for today’s collection is this story from the Babylon Bee.

…local mom Shirley Wood had a surprise when she picked up her three-year-old to tell him it was time for bed. “Am I being detained?” shouted the toddler at the top of his lungs, greatly befuddling Mrs. Wood. …Confused, Mrs. Wood did put him down and tried to figure out what was going on. “Oh, I’ve been teaching him libertarian principles,” explained Mrs. Wood’s husband, Fred Wood. …“Then you get him to bed.” Mr. Wood approached Zach to try to non-violently persuade him to go to bed. “Hey, buddy. Seems like it’s time to sleep now.” “Can’t sleep,” replied Zach. “Fed still out there. Need to audit the Fed.” …Eventually, Mr. Wood was able to persuade Zach to go to bed with the promise of reading him a bedtime story about cryptocurrency.

Having raised three kids, I can vouch for the fact that they are natural libertarians at bedtime.

For our next item, someone made the mistake of asking a libertarian about disdain for government. Nearly two hours later…

If you wonder why it takes so much time for a libertarian to explain the flaws of government, this primer from the Babylon Bee may give you a good idea.

Libertarianism is the only logically consistent political philosophy, and it’s held primarily by crazy people. …The Bee is here to set the record straight once and for all about our weird, drug and Bitcoin-obsessed friends with this handy explainer. …Beliefs: It’s mostly about wanting to smoke weed and run around naked while shooting guns in the air, we think. …Prominent proponents: Ron Paul, that weird guy who’s always smoking weed in your drama class… Prominent critics: Republicans, Democrats, anyone who loves war and hates freedom. …Key texts: Atlas Shrugged (we think, no one’s actually ever read it)… How do you spot a Libertarian? …look for guys carting around books from the 1700s and shouting, “AM I BEING DETAINED?!” at everyone from police officers to Arby’s cashier

I’ve saved the best for last.

We libertarians think of ourselves as freedom fighters. In our Walter Mitty-style fantasies, we’re waging big fights for big principles. That doesn’t match our real lives.

But, however dorky we are in real life, at least we have our own anthem.

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The Value-Added Tax: A Recipe for More Spending…and More Debt

My views on the value-added tax are very straightforward.

• Washington taxes too much today and wastes too much money today.
• Giving D.C. politicians even more tax revenue will encourage more fiscal profligacy.
• It is profoundly naive to think a VAT will lead to lower deficits and less debt.
• It is profoundly naive to think politicians will use VAT revenues to lower other taxes.

These points are worth contemplating because I am increasingly worried that we’ll get a VAT because of misguided conservatives rather than because of tax-and-spend leftists.

Consider, for instance, Alan Viard of the American Enterprise.

He wrote a column last November arguing that we should let politicians in Washington have this new source of tax revenue, and I explained why his arguments were wrong.

But I’m obviously not very persuasive since he just reiterated his support for a VAT in an interview with the Dallas Federal Reserve Bank. Here are some of the highlights (lowlights might be a better term).

…tax increases on corporations and high-income households as well as benefit cuts could be part of a debt-reduction package…such tax increases would have limited revenue potential. …a VAT should—and undoubtedly would—be accompanied by rebates to offset the tax burden on low-income households. The Tax Policy Center estimated that a 7.7 percent VAT with rebates, which would raise the same net revenue as a 5 percent VAT without rebates, would generally be progressive. …the VAT would be only one component of the federal tax system. Individual and corporate income taxes would continue to add progressivity.

There are two remarkable admissions in the above excerpts.

1. He’s basically admitting a VAT would be accompanied by class-warfare tax hikes on companies and households – thus undermining the usual argument that the VAT is needed to avert these other types of tax increases.
2. He’s basically admitting a VAT would be accompanied by a new entitlement program of “rebates” – thus undermining the argument that VAT revenues would be used to reduce deficits and debt.

But what I found particularly amazing is that Viard never tries to empirically justify his main argument that, a) debt is a problem, and b) the VAT is part of a solution.

I don’t particularly object to the first part (though I would argue the real problem is spending). But the assertion that a VAT will solve that problem is contrary to real-world evidence.

For instance, government debt has continued to grow ever since Japan adopted a VAT.

Moreover, the evidence from Europe, which shows not only that the burden of government spending increased after the VAT was adopted beginning (see chart at start of column), but also that government debt subsequently exploded (see nearby chart).

And that data doesn’t even include all the additional red ink accumulated in recent years!

P.S. The clinching argument is that one of America’s best presidents opposed a VAT and one of America’s worst presidents supported a VAT. That tells you everything you need to know.

P.P.S. The pro-tax International Monetary Fund inadvertently produced a study showing why the VAT is a money machine for big government.

P.P.P.S. You can enjoy some amusing – but also painfully accurate – cartoons about the VAT by clicking here, here, and here.

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Laughing about Taxes and the IRS

Just like last year, April 15 isn’t the official deadline this year for filing your annual tax return. But we’re still going to “celebrate” with some memes about the income tax and the IRS.

We’ll start with something that has always bothered me, which is the fact that many people look forward to filing their taxes because they get a refund.

Yet that simply means that they gave the government free use of their money because of excessive withholding!

It also galls me when IRS documents refer to customer service when none of us are voluntary participants.

That’s the point of this next meme.

And since we’re mocking our friends at the IRS, here’s another item worth sharing.

But we should have some sympathy for tax collectors.

They sometimes have a challenging job.

For our final IRS-focused bit of satire, let’s turn to the Babylon Bee‘s report on taxation in outer space.

President Trump’s new Space Force has been stealing the imagination of the public… Not to be outdone, the Democrats are now trying to show they can also look to the future with their new proposal: Space IRS. “We also are inspired by watching shows such as Star Wars,” Nancy Pelosi told the press, “and seeing someone like Han Solo, a smuggler who is obviously avoiding taxes. …there has to be a way to follow someone like that and see how much he’s spending at cantinas and sabacc tables and know that he’s hiding income. That’s the job of Space IRS.”

Now let’s shift to some satire about the economics of taxation.

Starting with this look at the Biden Administration’s philosophy.

Next we have a woman with a Bernie Sanders mindset. I suspect the guy is about to learn an important lesson about incentives and marginal tax rates.

Here’s a visual depiction of double taxation.

Here’s some tax satire from the left about companies using international tax rules to minimize their fiscal burdens.

I can’t resist pointing out two things in response.

1. If the corporate tax rate is low, companies have less incentive to utilize existing preferences in the tax code or lobby for the creation of new ones.
2. Our friends on the left don’t seem to realize that the foreign-source income of American-based companies is subject to tax by foreign governments.

As usual, I’ve saved the best (in my humble opinion) for last.

Biden recently attacked the 2nd Amendment, and some clever person applied his thinking to the 16th Amendment.

P.S. My archive of IRS humor features a new Obama 1040 form, a death tax cartoon, a list of tax day tips from David Letterman, a Reason video, a cartoon of how GPS would work if operated by the IRS, an IRS-designed pencil sharpener, two Obamacare/IRS cartoons (here and here), a collection of IRS jokes, a sale on 1040-form toilet paper (a real product), a song about the tax agency, the IRS’s version of the quadratic formula, and (my favorite) a joke about a Rabbi and an IRS agent.

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Vaccines and Cost-Benefit Analysis (and Individual Liberty)

I’ve written many times about the value of cost-benefit analysis for government policy.

My go-to example is that a nationwide 5-mph speed limit would reduce traffic fatalities, but the resulting economic damage would be so pervasive that there would a net reduction in life expectancy.

In other words, the indirect effects would outweigh the direct effects.

But that’s just a theoretical example.

We now have a real-world case study thanks to a remarkably short-sighted decision about the Johnson & Johnson vaccine by bureaucrats at the Food and Drug Administration (FDA).

Ronald Bailey of Reason is very blunt about the deadly consequences.

The U.S. Centers for Disease Control and Prevention (CDC) and the Food and Drug Administration (FDA) issued a statement today “recommending a pause in the use” of Johnson & Johnson’s COVID-19 vaccine…based on six cases of a rare blood clot disorder in people who had been inoculated with the one-dose vaccine. There have been six cases out of 6.8 million people who have already been inoculated with the vaccine. The blood clot incidents all occurred in women between the ages of 18 and 48. Those odds amount to one in 1.13 million, which is comparable to your annual chances of being struck by lightning (1 in 1.22 million). For comparison, a November 2020 meta-analysis in The Lancet found that more than one in five very ill hospitalized and post-mortem* COVID-19 patients experienced venous thromboembolism—that is, blood clots in their veins. A 2010 study in the Journal of American Preventive Medicine reported that the annual incidence of thromboembolism between the ages of 15 and 44 was about 1.5 cases per 1,000 people. In addition, the risk of blood clots from taking oral contraceptives is about 1 in 1,000 annually. …By focusing on the not-yet-proven, very low risk of blood clots versus the known risks of the increased misery, hospitalizations, and deaths that the Johnson & Johnson vaccine would have prevented, our overly cautious public health bureaucrats will likely cause more sickness and deaths among Americans than would otherwise have occurred.

Just in case you’re tempted to dismiss the above article because of Reason‘s libertarian perspective, Philip Bump’s article in the Washington Post makes the same point about tradeoffs.

It’s easy to imagine the internal debate at the Centers for Disease Control and Prevention upon learning that six cases of a rare, dangerous blood clot have been found in women who received the Johnson & Johnson vaccine. Allowing the vaccine to be distributed while experts reviewed the cases risks exposing more people to the possible problem. Pausing distribution, though, runs a different risk… Given that about 6.8 million doses of the Johnson & Johnson vaccine have been administered and that there have been only six such incidents, the rate at which those red dots occur is about 1 in 1.1 million vaccinations. …By way of comparison, every year about 12 in 100,000 Americans die in a car crash. …more than 561,000 people in the United States have died of covid-19, the disease caused by the virus. That’s about 1.8 percent of the 31.2 million people who have contracted it. Given the effectiveness of the Johnson & Johnson vaccine in preventing serious illness and death, vaccinating 6.8 million people could have…protected millions of people probably prevented thousands of deaths — with six problematic incidents.

Mr. Bump makes the broader point that each of us make cost-benefit decisions every day.

Nearly everything we do is a balance between risk and reward. Driving down the street, as mentioned above. Walking outside, where a meteorite could suddenly slam into your skull. Sitting on your couch, where your floor could give way or an electrical fire could break out or a bear could crash through your window. None of these things is likely, so we don’t worry about them, but they could. We draw a balance.

The people on Twitter who can do math (regardless of ideology) were united in their disdain for what the bureaucrats did.

Such as:

And:

And:

And:

And:

And:

And that’s just a very small sampling.

For my modest contribution to this discussion, I want people to have liberty to take the J&J vaccine, regardless of the shameful actions of the bureaucrats in Washington (or their counterparts at the state level).

Indeed, I also want them to have the freedom to take the AZ vaccine.

Let adults make their own choices about costs and benefits, about risks and rewards.

That means they can choose vaccines (or not), as well as whether to vape, to own a gun, to donate/sell organs, or to try experimental treatments.

Liberty is not only a good principle, it also generates the best health outcomes.

P.S. To learn more about the harmful policies of the FDA, click here and here.

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The Pointless Burden of Anti-Money Laundering Laws

Back in 2010, I narrated this video on money laundering for the Center for Freedom and Prosperity, mostly to help people understand that governments are imposing huge costs on both industry and consumers without any offsetting benefits (such as reductions in crime).

As you can tell from the video, I’m not a big fan of anti-money laundering (AML) laws and know-your-customer (KYC) regulations.

And in the 11-plus years since the video was released, I’ve shared lots of additional data about the costly futility of the government anti-money laundering laws and regulations.

• They are pointless.
• They are expensive.
• They are intrusive.
• They are discriminatory.
• They are ineffective.
• They disproportionately hurt poor people.

That’s the bad news.

The good news (sort of) is that more people are noticing that the current approach is an expensive failure. Even some folks from the establishment media are waking up to the problem, as illustrated by an article in the latest edition of the Economist.

…banks remain the Achilles heel in the global war on money-laundering, despite the reams of regulations aimed at turning them into front­line soldiers in that conflict. However, closer examination suggests that the global anti-money-laundering (AML) system has serious structural flaws, largely because governments have outsourced to the private sector much of the policing they should have been doing themselves. …Money-laundering was not even a crime across much of the world until the 1980s. Since then countries from Afghanistan to Zambia have been arm-twisted, particularly by America, into passing laws. …This has turned AML compliance into a huge part of what banks do and created large new bureaucracies. It is not unusual for firms such as HSBC or JPMorgan Chase to have…more than 20,000 overall in risk and compliance.

Here’s some of the evidence cited in the article.

A study published last year…concluded that the global AML system could be “the world’s least effective policy experiment”, and that compliance costs for banks and other businesses could be more than 100 times higher than the amount of laundered loot seized. A report based on a survey of professionals, published last year by LexisNexis, an analytics firm, found that worldwide spending on AML and sanctions compliance by financial institutions (including fund managers, insurers and others, as well as banks) exceeds $180bn a year. …the numbers tell of a war being lost. …Statistics on how much is intercepted by authorities are patchy. A decade-old estimate by the United Nations Office on Drugs and Crime put it at just 0.2% of the total. In 2016 Europol estimated the confiscation rate in Europe to be a higher but still paltry 1.1%.

Sounds like a damning indictment right?

But I wrote that the article was only “sort of” good news. That’s because the writers at the Economist fail to reach the logical conclusion.

Instead of junking the current system, they want to double down on failure.

…governments need to work harder collectively to make the AML system fit for purpose.

This is akin to looking at welfare programs, realizing that they create dependency and weaken families, but then supporting even more redistribution.

Sadly, I suspect the new evidence cited in the article won’t lead to more sensible thinking in Washington, either.

• Democrats don’t care if the current approach is failing since they see anti-money laundering laws as a way of destroying financial privacy, which they think is necessary to collect more tax revenue.
• Republicans don’t care if the current approach is failing because they mindlessly support a tough-on-crime approach, regardless of whether it actually produces positive results.

Indeed, politicians in DC recently expanded AML laws.

I guess the moral of the story is that politicians can always take a bad situation and make it worse.

P.S. I’m batting .500 in my career as a global money launderer.

P.P.S. Here’s Barack Obama’s satirical encounter with AML laws and KYC rules.

P.P.P.S. Speaking of Obama and money laundering, I fear Biden will resuscitate his reprehensible “Operation Chokepoint.”

P.P.P.P.S. I also fear Biden will continue support for asset forfeiture, another disgusting policy that is a part of money-laundering policy.

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Moral Inequality and Immoral Inequality

While debunking OECD and IMF research on inequality, I explained that it’s important to distinguish between income that is earned honestly and loot that is obtained thanks to government cronyism.

That’s also the message of this video from the Hoover Institution.

In the video, David Henderson contrasts how our lives are improved when an entrepreneur develops a new product.

The entrepreneur almost surely gets richer faster than we get richer, but we all wind up better off. Indeed, there’s a clear relationship between the share of rich people in a society and overall prosperity.

And that’s a good description of what has actually happened in market-oriented nations such as the United States.

Heck, it even happened to some degree in China when there was partial reform.

By contrast, government favoritism is a recipe for inefficiency and stagnation (and since LBJ was an awful president, I like that David used him for the example of corrupt cronyism).

In a column for CapX, Andrew Lilico correctly differentiates between moral inequality and immoral inequality.

The only legitimate questions about the distribution of wealth concern whether it is truly the property of those that possess it, as opposed to having stolen or extorted it. …Wealth is property. If it has been innocently acquired, people should be able to enjoy their property without censure or the (quite incorrect) suggestion that their flourishing causes others harm.

Not only is it incorrect to suggest that one person’s flourishing causes harm to others, it is completely wrong.

As pointed out in the video, Nobel Prize-winning economist William Nordhaus calculated that entrepreneurs only capture a tiny fraction (2.2 percent) of the wealth they create for society. That means 97.8 percent for the rest of us.

And other academic scholars have produced similar results.

The bottom line is that the recipe for growth and prosperity is the same recipe for helping the less fortunate.

P.S. As you can see from his Wikipedia page, Professor Nordhaus is not a libertarian or conservative, so it should be clear he wasn’t trying to come up with a number to justify capitalism.

P.P.S. I also recommend my four-part series (see here, here, here, and here) on why we should care about poverty reduction rather than pushing for coerced equality, as well as my two-part series (here and here) on how statist policies produce the immoral type of inequality.

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A Limited Defense of Vaccine Passports

There’s a growing controversy about whether the various coronavirus-lockdown rules should be relaxed for people who have been vaccinated (as opposed to being relaxed for hypocritical politicians).

And if those restrictions are relaxed, vaccinated people presumably will need some sort of proof, like a “vaccine passport.”

Many people understandably are hesitant about this concept, particularly if government is involved. After all, we have many examples of seemingly innocuous ideas becoming nightmarish mistakes (such as adopting the income tax).

And the last thing any of us would want (I hope!) is something that could devolve into an authoritarian, Chinese-style system for monitoring and controlling private life.

But what if government isn’t involved? What if private businesses decide that customers are only allowed if they prove they’ve been vaccinated?

From a libertarian perspective, guided by core principles such as property rights and freedom of association, that should be totally acceptable.

And that’s true even if we think the owners of the businesses are making silly choices. After all, it’s their property.

Some conservatives, however, either don’t understand libertarian principles or they’re willing to abandon those principles for political convenience.

For instance, Will Wilkinson observes that many Republicans are forgetting the libertarian principle of freedom of association.

Conservatives have been freaking out about the mere possibility of vaccine passports… The idea is that the ability to credibly prove vaccination status will speed the restoration of normal social and economic life. This works by allowing businesses, schools, sports leagues, etc. to discriminate against those who haven’t been vaccinated. …one of the bright lines dividing American liberals and conservatives concerns the limits of freedom of association. Conservatives, and especially those with a libertarian streak, are far more likely to be absolutists about the right to exclude anyone from your property, business, or private club or association for any reason. …If the Civil Rights Act is problematic because it infringes on freedom of association, the permissibility of discriminating against customers who might carry a fatal infection is a total no-brainer. Right? Ha! …there is no actual principle at work here. Conservatives are consistent only in their opportunistic incoherence.

Moreover, in his column for the Atlantic, David Frum notes that the GOP is hypocritically abandoning its support for property rights.

Whether vaccine passports ever will exist remains highly uncertain. A lot of questions remain about the technology required—and about whether the concept makes any business sense. …For now, then, the discussion about vaccine passports remains theoretical—which makes the discussion all the more impassioned and embittered. DeSantis and others are loudly advertising that with COVID-19, …their version of freedom puts greater priority on right-wing cultural folkways than on rights of property and ownership. …To appease those cultural blocs, Republican politicians must be willing to sacrifice everything, including what used to be the party’s foundational principles. …to avoid contradicting the delusions of anti-vaccine paranoiacs, property rights must give way, freedom to operate a business must yield. …with COVID-19, …the new post-Trump message from the post-Trump GOP is: Private property is socialism; state expropriation is freedom. It’s a strange doctrine for a party supposedly committed to liberty and the Constitution, but here we are.

I think it’s fair to say that neither Wilkinson nor Frum are libertarians, or even conservatives, but I also think they are correct in pointing out that there is a lot of hypocrisy and incoherence.

That being said, I am glad that there’s lots of resistance to the idea of vaccine passports. Why? Because if businesses impose such rules and there’s no pushback, that probably increases the likelihood that politicians will try something similar.

And that’s where libertarians should be drawing the line, as Professor Don Boudreaux has noted.

After all, if a business does something we don’t like, we are free to patronize competitors. But if government does something we don’t like, there’s the horrible choice of obey or go to jail (or get a fake passport on the black market).

For what it’s worth, I hope this becomes a moot point. After all, once everybody who wants to get vaccinated has been vaccinated, there’s no plausible argument for maintaining any more restrictions on normal life.

P.S. But if it does become a real issue, it will probably generate new jokes, cartoons, and memes, all of which will require me to expand my collection of coronavirus-themed humor.

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IMF Goes All-In for Class Warfare

The International Monetary Fund’s dogmatic support for higher taxes and bigger government makes it “the dumpster fire of the global economy.”

Wherever IMF bureaucrats go, it seems they push for high-tax policies that will weaken growth.

• That’s true in the United States.
• That’s true in Africa.
• That’s true in the Mediterranean.
• That’s true in South Asia.
• That’s true in Western Europe.
• That’s true in Eastern Europe.
• That’s true in the Middle East.
• That’s true in China.
• That’s true in Latin America.

Call me crazy, but I’m baffled that the IMF seems to think nations will grow faster and be more prosperous if politicians seize more money from the economy’s productive sector.

Unfortunately, the IMF has been especially active in recent months..

In a column for the U.K.-based Guardian, Larry Elliott writes about the IMF using the pandemic as an excuse to push for higher taxes.

…the IMF called for domestic and international tax changes that would boost the money available to expand public services, make welfare states more generous… “To help meet pandemic-related financing needs, policymakers could consider a temporary Covid-19 recovery contribution, levied on high incomes or wealth,” the fiscal monitor said. …Paolo Mauro, the deputy director of the IMF’s fiscal affairs department, said there had been an “erosion” of the taxes paid by those at the top of the income scale, with the pandemic offering a chance to claw some of the money back. “Governments could consider higher taxes on property, capital gains and inheritance,” he said. “One specific option would be a Covid-19 recovery contribution – a surcharge on personal tax or corporate income tax.”

Mr. Mauro, like most IMF bureaucrats, is at “the top of the income scale,” but he doesn’t have to worry that he’ll be adversely impact if politicians seek to “claw some of the money back.”

Why? Because IMF officials get tax-free salaries (just like their counterparts at other international bureaucracies).

Writing for the IMF’s blog, Mr. Mauro is joined by David Amaglobeli and Vitor Gaspar in supporting higher taxes on other people.

Breaking the cycle of inequality requires both predistributive and redistributive policies. …The COVID-19 crisis has demonstrated the vital importance of a good social safety net that can be quickly activated to provide lifelines to struggling families. …Enhancing access to basic public services will require additional resources, which can be mobilized, depending on country circumstances, by strengthening overall tax capacity. Many countries could rely more on property and inheritance taxes.  Countries could also raise tax progressivity as some governments have room to increase top marginal personal income tax rates… Moreover, governments could consider levying temporary COVID-19 recovery contributions as supplements to personal income taxes for high-income households.

Needless to say, the IMF is way off base in fixating on inequality instead of trying to reduce poverty.

Meanwhile, Brian Cheung reports for Yahoo Finance about the IMF’s cheerleading for a global tax cartel.

The International Monetary Fund (IMF) says it backs a U.S. proposal for a global minimum corporate tax. IMF Chief Economist Gita Gopinath said that the fund has been calling for international cooperation on tax policy “for a long time,” adding that different corporate tax rates around the world have fueled tax shifting and avoidance. “That reduces the revenues that governments collect to do the needed social and economic spending,” Gopinath told Yahoo Finance Tuesday. “We’re very much in support of having this kind of global minimum corporate tax.” …Gopinath also backed Yellen’s push forward on an aggressive infrastructure bill… As the IMF continues to encourage countries with fiscal room to continue spending through the recovery, its chief economist said investment into infrastructure is one way to boost economic activity.

Based on the above stories we can put together a list of the tax increases embraced by the IMF, all justified by what I call “fairy dust” economics.

• Higher income tax rates.
• Higher property taxes.
• More double taxation of saving/investment.
• Higher death taxes.
• Wealth taxes.
• Global tax cartel.
• Higher consumption taxes.

And don’t forget the IMF is a long-time supporter of big energy taxes.

All supported by bureaucrats who are exempt from paying tax on their own very-comfortable salaries.

P.S. I feel sorry for two groups of people. First, I have great sympathy for taxpayers in nations that follow the IMF’s poisonous advice. Second, I feel sorry for the economists and other professionals at the IMF (who often produce high–quality research). They must wince with embarrassment every time garbage recommendations are issued by the political types in charge of the bureaucracy.

P.P.S. But since they’re actually competent, they will easily find new work if we shut down the IMF to protect the world economy.

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Convergence, Wagner’s Law, and the Path to Prosperity

In this clip from a recent interview with Gunther Fehlinger, I explore the connection between two very important important economic concepts: Convergence and Wagner’s Law.

Before launching into further discussion, let’s nail down two very important definitions.

• Convergence is the notion that poor countries should grow faster than rich countries and eventually attain a similar level of prosperity.
• Wagner’s Law is the seemingly paradoxical observation that richer nations tend to have larger fiscal burdens than poorer nations.

These two concepts deserve elaboration because many people either fail to recognize the implications or they draw the wrong conclusions.

For instance, convergence is a sensible theory, but the rate of convergence (or divergence!) is very dependent on the degree to which nations have good policy (or bad policy).

Moreover, Wagner’s Law shows that politicians figure out how to extract more money and fund bigger government once nations become rich, but some people reverse the causality and assert that big government somehow caused nations to become rich.

The key takeaway from these observations, as I explained in the interview, is that poor nations that want convergence need to copy the policies that rich nations had when they became rich (in the interview at about 0:56, I mistakenly said “were rich” rather than “became rich”).

And I’ve written many times to show that the rich nations of the western world made the leap to industrial prosperity in the 1800s and early 1900s – at a time when they had no welfare states and very low fiscal burdens (indeed most of them didn’t have any income taxes during that period).

Which gives me another excuse to re-issue my never-answered challenge: Please show me an example, from any point in world history, of a country became rich after adopting big government.

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The 2nd Amendment and the Individual Right to Gun Ownership

Back in 2012, I shared a video clip of Ice-T defending the 2nd Amendment, but that video is now dead, so I’m glad to see that Prager University has added his comments as a prologue to this defense of gun rights by Prof. Eugene Volokh.

Ice-T and Prof. Volokh make for a good combination, one dispensing common sense and the other sharing academic analysis.

In the case of Prof. Volokh, he walks through the language of the Constitution and succinctly explains why the 2nd Amendment clearly was designed to protect the individual right to keep and bear arms.

And that’s the view that consistent with the liberty-focused attitude of the Founding Fathers, who correctly saw government as a potential source of tyranny.

But there’s another part of the video that also deserves attention. Shortly before the 4:00 mark of the video, Volokh explains that the Founders gave people – through their legislators – the option of amending the Constitution (the great Thomas Sowell has made the same point).

And that does happen, sometimes with bad consequences.

But there’s been no serious effort to undo the 2nd Amendment for the simple reason that people value their constitutional liberties.

Indeed, states have been taking steps to expand and enshrine gun rights.

P.S. A British writer argued that defending gun rights was akin to defending slavery. In reality, the 2nd Amendment has been especially valuable for blacks.

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Three Reasons to Reject Biden’s Tax Harmonization Scheme for “Global Minimum Taxation”

Way back in 2007, I narrated this video to explain why tax competition is very desirable because politicians are likely to overtax and overspend (“Goldfish Government“) if they think taxpayers have no ability to escape.

The good news is that tax competition has been working.

As explained in the above video, there have been big reductions in personal tax rates and corporate tax rates. Just as important, governments have reduced various forms of double taxation, meaning lower tax rates on dividends and capital gains.

Many governments have also reduced – or even eliminated – death taxes and wealth taxes.

These pro-growth tax reforms didn’t happen because politicians read my columns (I wish!). Instead, they adopted better tax policy because they were afraid of losing jobs and investment to countries with better fiscal policy.

Now for the bad news.

There’s been an ongoing campaign by high-tax governments to replace tax competition with tax harmonization. They’ve even conscripted international bureaucracies such as the Organization for Economic Cooperation and Development (OECD) to launch attacks against low-tax jurisdictions.

And now the United States is definitely on the wrong side of this issue.

Here’s some of what the Biden Administration wants.

The United States can lead the world to end the race to the bottom on corporate tax rates. A minimum tax on U.S. corporations alone is insufficient. …President Biden is also proposing to encourage other countries to adopt strong minimum taxes on corporations, just like the United States, so that foreign corporations aren’t advantaged and foreign countries can’t try to get a competitive edge by serving as tax havens. This plan also denies deductions to foreign corporations…if they are based in a country that does not adopt a strong minimum tax. …The United States is now seeking a global agreement on a strong minimum tax through multilateral negotiations. This provision makes our commitment to a global minimum tax clear. The time has come to level the playing field and no longer allow countries to gain a competitive edge by slashing corporate tax rates.

As Charlie Brown would say, “good grief.” Those passages sound like they were written by someone in France, not America

And Heaven forbid that  countries “gain a competitive edge by slashing corporate tax rates.” Quelle horreur!

There are three things to understand about this reprehensible initiative from the Biden Administration.

1. Tax harmonization means ever-increasing tax rates – It goes without saying that if politicians are able to create a tax cartel, it will merely be a matter of time before they ratchet up the tax rate. Simply stated, they won’t have to worry about an exodus of jobs and investment because all countries will be obliged to have the same bad approach.
2. Corporate tax harmonization will be followed by harmonization of other taxes – If the scheme for a harmonized corporate tax is imposed, the next step will be harmonized (and higher) tax rates on personal income, dividends, capital gains, and other forms of work, saving, investment, and entrepreneurship.
3. Tax harmonization denies poor countries the best path to prosperity – The western world became rich in the 1800s and early 1900s when there was very small government and no income taxes. That’s the path a few sensible jurisdictions want to copy today so they can bring prosperity to their people, but that won’t be possible in a world of tax harmonization.

P.S. If you want more information, here’s 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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New York’s Fiscal Suicide

The state of New York is an economic disaster area.

• New York is ranked #50 in the Economic Freedom of North America.
• New York is ranked #48 in the State Business Tax Climate Index.
• New York is ranked #50 in the Freedom in the 50 States.
• New York is next-to-last in measures of inbound migration.
• New York is ranked #50 in the State Soft Tyranny Index.

The good news is that New York’s politicians seem to be aware of these rankings and are taking steps to change policy.

The bad news is that they apparently want to be in last place in every index, so they’re looking at a giant tax increase.

The Wall Street Journal opined on the potential tax increase yesterday.

…lawmakers in Albany should be shouting welcome home. Instead they’re eyeing big new tax increases that would give the state’s temporary refugees to Florida—or wherever—one more reason to stay away for good. …Here are some of the proposals… Impose graduated rates on millionaires, up to 11.85%. …Since New York City has its own income tax, running to 3.88%, the combined rate would be…a bigger bite than even California’s notorious 13.3% top tax, and don’t forget Uncle Sam’s 37% share. …The squeeze is worse when you add the new taxes President Biden wants. A second factor: In 2017 the federal deduction for state and local taxes was capped at $10,000, so New Yorkers will now really feel the pinch. As E.J. McMahon of the Empire Center for Public Policy writes: “The financial incentive for high earners to move themselves and their businesses from New York to states with low or no income taxes has never—ever—been higher than it already is.”

The potential deal also would increase the state’s capital gains tax and the state’s death tax, adding two more reasons for entrepreneurs and investors to escape.

Here are some more details from a story in the New York Times by Luis Ferré-Sadurní and Jesse McKinley.

Gov. Andrew M. Cuomo and New York State legislative leaders were nearing a budget agreement on Monday that would make New York City’s millionaires pay the highest personal income taxes in the nation… Under the proposed new tax rate, the city’s top earners could pay between 13.5 percent to 14.8 percent in state and city taxes, when combined with New York City’s top income tax rate of 3.88 percent — more than the top marginal income tax rate of 13.3 percent in California… Raising taxes on the rich in New York has been a top policy priority of the Democratic Party’s left flank… The business community has warned that raising income taxes could prompt millionaires who have left the state during the pandemic and are working remotely to make their move permanent, damaging the state’s tax base. Currently, the top 2 percent of the state’s highest earners pay about half of the state’s income taxes. …The corporate franchise tax rate would also increase to 7.25 percent from 6.5 percent.

There are two things to keep in mind about this looming tax increase.

• First, New York politicians are ramming it through even though the state is getting all sorts of money from Washington thanks to Biden’s blue-state bailout (a big part of the so-called American Rescue Plan).
• Second, New York politicians are pushing through a huge tax hike even though the federal tax code no longer allows taxpayers to fully deduct state and local taxes (though they obviously hope to repeal that provision of the 2017 tax reform).

That second item is a big reason why so many taxpayers already have escaped New York and moved to states with better tax policy (most notably, Florida).

And even more will move if tax rates are increased, as expected.

Indeed, if the left’s dream agenda is adopted, I wouldn’t be surprised if every successful person left New York. In a column for the Wall Street Journal, Mark Kingdon warns about other tax hikes being considered, especially a wealth tax.

Legislators in Albany are considering two tax bills that could seriously damage the economic well-being and quality of life in New York for many years to come: a wealth tax and a stock transfer tax. …Should New York enact a 2% wealth tax, a wealthy New Yorker could wind up paying a 77% tax on short-term stock market profits. And that’s a conservative estimate: It assumes that stocks return 9% a year. If the return is 4.4% or less, the tax would be more than 100%. …65,000 families pay half of the city’s income taxes, and they won’t stay if the taxes become unreasonable… The trickle of wealthy émigrés out of New York has become a steady stream… It will be a flood if New York enacts a wealth tax with an associated tax on unrealized gains, which would lower, not raise, tax revenues, as those who leave take with them jobs and related services, such as legal and accounting. …The geese who have laid golden eggs for years see what is happening in Albany, and they’ll fly south to avoid being carved up.

The good news – at least relatively speaking – is that a wealth tax is highly unlikely.

But that a rather small silver lining on a very big dark cloud. The tax increases that will happen are more than enough to make the state even more hostile to private sector growth.

I’ll close with a few observations.

There are a few states that can get away with higher-than-average taxes because of special considerations. California, for instance, has climate and scenery. In the case of New York, it can get away with some bad policy because some people think of New York City as a one-of-a-kind place. But there’s a limit to how much those factors can be exploited, as both California and New York are now learning.

What politicians don’t realize (or don’t care about) is that people look at a range of factors when deciding where to live. This is especially true for successful entrepreneurs, investors, and business owners, who have both resources and knowledge to assess the costs and benefits of different locations. The problem for New York is that it looks bad on almost all policy metrics.

If the tax increases is enacted, expect to see a significant drop in taxable income as upper-income taxpayers either leave the state or figure out other ways of protecting their income. I don’t know if the state will be on the downward-sloping portion of the Laffer Curve, but it’s safe to assume that revenues over time will fall far short of projections. And it’s very safe to assume that the economic damage will easily offset any revenues that are collected.

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Dishonest Tax Analysis from the New York Times

There are two big policy debates about business profits.

The first is whether profits are good or evil. I pick the former. Profits are something to applaud, assuming they are earned honestly (i.e., not the result of subsidies, industrial policy, protectionism, or other forms of cronyism).

The second is how profits should be taxed, and that’s the focus of today’s column.

My perfect-world answer is that there should be no tax on profits because we have a government that is so small that there’s no need for any type of income tax. But I’m in the United States rather than a fiscal paradise such as Bermuda, Monaco, or the Cayman Islands. So if we start with the assumption that a corporate income tax is going to exist, how should it operate?

To answer that question, let’s start with this simple example of a kid’s lemonade stand. Here’s how much money it spent and how much revenue it generated (before it was shut down by overzealous bureaucrats).

How much profit did our budding entrepreneur make?

The correct answer, of course, is that the business didn’t earn any profits. Indeed, it lost $2. So there obviously should not be any tax.

But some people don’t understand the difference between taxable income (which is largely based on cash flow in one year) and “book income” (which is largely a backward-looking, accrual-based estimate of profits to help inform shareholders about the overall financial condition of a corporation).

Or, maybe they do understand and simply prefer to engage in dishonest demagoguery. For instance, let’s look at a recent report by Patricia Cohen in the New York Times.

…a new study finds that at least 55 of America’s largest paid no taxes last year on billions of dollars in profits…thanks to a range of legal deductions and exemptions that have become staples of the tax code, according to the analysis. Salesforce, Archer-Daniels-Midland and Consolidated Edison were among those named in the report, which was done by the Institute on Taxation and Economic Policy, a left-leaning research group in Washington. …Twenty-six of the companies listed, including FedEx, Duke Energy and Nike, were able to avoid paying any federal income tax for the last three years even though they reported a combined income of $77 billion. Many also received millions of dollars in tax rebates.

Sounds terrible, right.

Except if you read the fine print, in which case you’ll find out the report discussed in the article isn’t based on company tax returns. Instead, the leftist group, the Institute on Taxation and Economic Policy (ITEP), used financial statements to make up some numbers.

And ITEP’s use of book income meant it didn’t properly measure things such as business investment expenditures and net operating losses, which are necessary to determine whether a company has an actual cash-flow profit.

Ms. Cohen never should have written a story about ITEP’s shoddy and dishonest report, though at least she acknowledged that there are reasons to question the findings.

A provision in the 2017 tax bill allowed businesses to immediately write off the cost of any new equipment and machinery. The $2.2 trillion CARES Act…included a provision that temporarily allowed businesses to use losses in 2020 to offset profits earned in previous years, according to the institute. …many deductions and credits are there for good reason — to encourage research and development, to promote expansion and to smooth the ups and downs of the business cycle, taking a longer view of profit and loss than can be calculated in a single year.

The bottom line is that the ITEP report is garbage.

There’s no reason to expect taxable income to match up with financial statements or “book income.”

Indeed, the differences between those measures is why there are also companies that – according to ITEP’s sloppy methodology – pay tax when they supposedly have losses.

For those who actually care about the truth, the top half of this visual shows how a proper business tax system should work (i.e., one that taxes profits when they actually occur).

P.S. The issue of “depreciation” is probably the main reason why we get all sorts of silly tax controversies, involving everything from corporate jets to ABBA’s stage outfits.

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Gun Control Humor

Time to add to our collection of satire about the foolishness of gun control.

We’ll start with a comparison of the logic of those who believe in the 2nd Amendment and those who believe only the government should have guns.

The obstacle course isn’t as elaborate as my regulation obstacle course, but maybe that’s because the anti-gun crowd doesn’t have the fortitude of business owners.

For the next item in today’s collection, this headline from the Babylon Bee basically needs to commentary, but I’ll add that the War on Poverty also has been a costly failure.

Feel free to draw the obvious conclusion about government competency (or lack thereof).

This next item doesn’t just apply to Democratic gun control “logic,” but also to the cognitive shortcomings of any Republican or independent who thinks disarming law-abiding people is the right solution to criminal behavior.

Sort of like getting rid of your refrigerator because your neighbor is too heavy.

This following meme is a clever twist on an old theme.

And I like this next bit of satire because the bottom frame captures the mindset of naive leftists who think passing a law will magically achieve a certain result.

Seems like the 911 operator read the wrong fairy tale as a kid.

Last but not least, here’s my favorite because it cleverly shows the real consequences of gun control. The people who obey such laws are never threats to society. Meanwhile, anti-gun laws are almost no barrier to bad people.

And remember that life is much better for criminals when there are fewer guns in the hands of law-abiding people.

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The Boondoggle of Long-Distance Passenger Rail

Infrastructure often is a good thing. Government-financed infrastructure is a questionable thing. Infrastructure financed by Uncle Sam is a bad thing. Those three rules guide my thinking and make for a perfect introduction to this must-watch video from Reason on high-speed rail.

The core message from the video is that Californian’s disastrous experience with high-speed rail should be a warning for the entire nation.

Simply stated, the government is incapable of doing infrastructure without jaw-dropping cost overruns.

But even if – by some impossible miracle – the government spent the money wisely and efficiently, long-distance rail doesn’t make sense.

Why? Well, if I do a tweet-of-the-year contest for 2021, this entry from Rory Cooper would be an early favorite to win the prize.

Instead of expanding the federal government role, it’s time to end Washington’s involvement.

That means shutting down the entire Department of Transportation.

But let’s focus specifically on Amtrak. Chris Edwards wrote wisely on the topic for the Foundation for Economic Education.

The federal government does a lot of things poorly… After the government helped ruin private passenger rail in the post-WWII years, it took over the remaining passenger rail routes in the 1970s under the Amtrak brand. Amtrak was supposed to become self-supporting, but it has consumed tens of billions of taxpayer dollars over the years. …Amtrak operates 44 routes on 21,000 miles of track in 46 states. Amtrak owns the trains, but freight rail companies own nearly all the track. A Pew analysis found that Amtrak loses money on 41 of its 44 routes… The few routes that earn positive returns are in the Northeast, and the biggest money losers are the long-distance routes. …the best fit for the future would be a privatized Amtrak. Privatization would allow for innovation and cost-cutting to improve service and make rail more financially viable. A private rail company (or companies) could…end harmful union rules. It would be able to close the routes that are losing the most money and shift resources to the core routes to improve service quality.  Congress should get out of the passenger rail business and give rail the private-sector flexibility it needs to better compete against other transportation modes.

Amen. If inter-city rail travel makes sense, it can and will attract funding from the private sector.

Sadly, President Biden wants to move in the opposite direction. His so-called infrastructure plan makes taxpayers foot the bill.

The White House wants $80 billion for rail, though it’s unclear how much money would be allocated specifically to Amtrak compared to other rail projects.

What is clear, by contrast, is that the money will be wasted and America’s economy will be harmed.

P.S. Biden’s “stimulus” boondoggle included a bailout for mass transit, but no funds for intercity rail travel.

P.P.S. If you’re transportation wonk, here’s a very informative 45-minute video on rail and highway transportation.

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Another Honest Leftist Admits Big Government Requires Big Tax Hikes on the Middle Class

It’s simple to mock Democrats like Joe Biden, Alexandria Ocasio-Cortez, and Bernie Sanders. One reason they’re easy targets is they want people to believe that America can finance a European-style welfare state with higher taxes on the rich.

That’s nonsensical. Simply stated, there are not enough rich people and they don’t earn enough money (and they have relatively easy ways of protecting themselves if their tax rates are increased).

Some folks on the left admit this is true. I’ve shared many examples of big-government proponents who openly acknowledge that lower-income and middle-class people will need to be pillaged as well.

• The editors at the New York Times endorsed higher taxes on the middle class in 2010.
• The then-House Majority Leader Steny Hoyer also gave a green light that year to higher taxes on the middle class.
• In 2012, MIT professor and former IMF official Simon Johnson argued that the middle class should pay more tax.
• The Washington Post also called for higher taxes on the middle class a few years ago, as did Vice President Joe Biden’s former economist.
• A New York Times columnist also called for broad-based tax hikes on the middle class in 2012.
• A Senior Fellow from Demos also argued for higher taxes on all Americans that year, specifically targeting the middle class.
• In 2013, the New York Times again editorialized in favor of higher tax burdens on the middle class.
• In 2017, two UCLA law professors endorsed big tax increases on ordinary people.
• Also that year, a columnist for US News & World Report urged higher taxes on middle-income people.
• In 2019, an out-of-the-closet socialist admitted a big welfare state requires big tax hikes on lower-income and middle-class people.
• Last year, two leftists opined in the Washington Post that ordinary people need to pay much higher taxes to finance bigger government.

I disagree with these people on policy, but I applaud them for being straight shooters. They get membership in my “Honest Leftists” club.

And we have a new member of that group.

Catherine Rampell opines in the Washington Post that President Biden should openly embrace tax increases on everybody.

President Biden is trying to address…big, thorny problems…with one hand tied behind his back. Yet he’s the one who tied it, with a pledge to bankroll every solution solely by soaking the rich. …Some have compared Biden’s efforts to Franklin D. Roosevelt’s New Deal, Lyndon B. Johnson’s Great Society or other ambitious endeavors of the pre-Reagan era — when government was more commonly seen as a solution rather than the problem. …Like many Democrats before him, Biden has promised to pay for government expansions by raising taxes only on corporations and the “rich,” everyone else spared. Exactly who counts as “rich” is an ever-shrinking sliver of the population. Barack Obama defined it as households making $250,000 or more a year; now, Biden says it’s anyone making $400,000 or more. …more than 95 percent of Americans are excluded from helping to foot the bill… But…there aren’t enough ultrarich people and megacorporations out there to fund the massive new economic investments and social services Democrats say they want… Democrats sometimes point to Sweden or Denmark as examples of generous, successful welfare states. But in those countries, taxes are higher and broader-based. Here, the middle class pays much lower taxes… Here’s the argument I wish Biden would make: These new spending projects are worth doing. …we should all be financially invested in their success, at least a little. Taxation is the price we pay for a civilized society, as Supreme Court Justice Oliver Wendell Holmes Jr. put it. …If Biden wants to permanently transform the role of government, that may need to be his trajectory.

Needless to say, I fundamentally disagree with Ms. Rampell’s support for an even bigger welfare state, regardless of which taxpayers are being pillaged.

But at least she wants to pay for it and knows that means the IRS reaching into all of our pockets. And kudos to her for acknowledging the high tax burdens on lower-income and middle-class people in nations such as Sweden and Denmark.

Though I can’t resist commenting on the quote (“Taxation is the price we pay for a civilized society”) from Oliver Wendell Holmes.

People on the left love to cite that sentence, but they conveniently never explain that Holmes reportedly made that statement in 1904, nine years before there was an income tax, and then again in 1927, when federal taxes amounted to only $4 billion and the federal government consumed only about 5 percent of economic output.

As I wrote in 2013, “I’ll gladly pay for that amount of civilization.”

Let’s close with a couple of tweets that underscore how Democrats are pushing for giant spending increases, well beyond what can be financed by confiscating more money from the rich.

First, a reporter from the Washington Post lists some of the insanely expensive spending schemes being pushed on Capitol Hill.

I assume the “recurring checks” is a reference to the new per-child handouts in Biden’s so-called American Rescue Plan.

And “SALT change” refers to restoring the state and local tax deduction, which is supported by many Democrats from high-tax states even though (or perhaps because) it is a huge tax break for the rich.

Next we have a couple of tweets from Brian Riedl of the Manhattan Institute. He correctly points out that Democrats are using just about every available class-warfare tax scheme, yet that money will only finance a fraction of their spending wish list.

Brian is right.

What tax increases (on the rich) will be left when the left want to push their “green new deal“? Or the “public option” for Medicare? Or any of the other spending schemes circulating in Washington.

The bottom line is that – sooner or later – politicians will follow Ms. Rampell’s advice and squeeze you and me.

P.S. It’s not a good idea to turn America into a European-style welfare state – unless the goal is much lower living standards.

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Five Visuals that Explain Why Higher Corporate Income Tax Rates Are Bad for America

I have a four-part series (here, here, here, and here) about the conceptual downsides of Joe Biden’s class-warfare approach to tax policy.

Now it’s time to focus on the component parts of his agenda. Today’s column will review his plan for a big increase in the corporate tax rate. But since I’ve written about corporate tax rates over and over and over again, we’re going to approach this issue is a new way.

I’m going to share five visuals that (hopefully) make a compelling case why higher tax rates on companies would be a big mistake.

Visual #1

One thing every student should learn from an introductory economics class is that corporations don’t actually pay tax. Instead, businesses collect taxes that are actually borne by workers, consumers, and investors.

There’s lots of debate in the profession, of course, about which group bears what share of the tax. But there’s universal agreement that higher taxes lead to less investment, which leads to less productivity, which leads to lower pay.

Here’s a depiction of the relationship of corporate taxes and worker pay.

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Visual #2

The previous image explains the theory. Now it’s time for some evidence.

Here’s a look at how much faster wages have grown in countries with low corporate tax rates compared to nations with high corporate tax rates.

Biden, for reasons beyond my comprehension, wants America on the red line.

And his staff economists apparently don’t understand (or don’t care about) the link between investment and wages.

Visual #3

Here’s some more evidence.

And it comes from an unexpected source, the pro-tax Organization for Economic Cooperation and Development (OECD).

Even economists at that Paris-based bureaucracy have produced studies confirming that lower tax rates lead to higher disposable income for people.

Needless to say, if lower tax rates lead to more disposable income, then higher tax rates will lead to less disposable income.

We should have learned during the Obama years that ordinary people pay the price when politicians practice class warfare.

Visual #4

It’s very bad news that Biden wants a big increase in the corporate tax rate, but let’s not forget that the IRS double-taxes corporate income (i.e., that same income is subject to a second layer of tax when shareholders receive dividends).

The combined effect, as shown in this visual, is that the United States will have the dubious honor of having the highest effective corporate tax rate in the entire developed world.

Call me crazy, but I don’t think that’s a recipe for jobs and investment in America.

Visual #5

The economic damage of higher corporate tax rates means that there is less taxable income (i.e., we need to remember the Laffer Curve).

Will the damage be so extensive, causing taxable income to fall so much, that the IRS collects less revenue with a higher tax rate?

We’ll learn the answer to that question over time, but we have some very strong evidence from the IMF that lower corporate tax rates don’t lead to less revenue. As you can see from this chart, revenues held steady as tax rates plummeted over the past few decades.

In other words, lower rates led to enough additional economic activity that governments have collected just as much money with lower tax rates. But now Biden wants to run this experiment in reverse.

It’s possible the government will collect more revenue, of course, but only at a very high cost to workers, consumers, and shareholders.

By the way, there’s OECD data showing the exact same thing.

Those pictures probably tell you everything you need to know about this issue.

But let’s add some more analysis. The Wall Street Journal opined today on Biden’s class-warfare agenda. Here are some of the key passages from the editorial.

The bill for President Biden’s agenda is coming due, starting with Wednesday’s proposal for the largest corporate tax increase in decades. …Mr. Biden’s corporate increase amounts to the restoration of the Obama-era corporate tax burden, only much more so. …Mr. Biden wants to raise the corporate rate back up to 28%, but that’s the least of his proposals. He also wants to add penalties that would make inversions punitive, and he’d impose a global minimum corporate tax of 21%. This would shoot the tax burden on U.S. companies back toward the top of the developed world list. …The larger Biden goal is to end global tax competition… “The United States can lead the world to end the race to the bottom on corporate tax rates,” says the White House fact sheet. Mr. Biden says he wants “other countries to adopt strong minimum taxes on corporations” so nations like Ireland can no longer compete for capital with lower tax rates. This has long been the dream of the French and Germans, working through the Organization for Economic Cooperation and Development. …All of this is in addition to the looming Biden tax increases on dividends, capital gains and other investment income. …Mr. Biden’s corporate tax increases will hit the middle class hard—in the value of their 401(k)s, the size of their pay packets, and what they pay for goods and services.

Amen.

Let’s conclude with some gallows humor.

This meme shows how some of our leftist friends will celebrate if the tax increase is imposed.

P.S. Here’s a depressing final observation. Decades of experience have led me to conclude that many folks on the left support class-warfare tax policy because they are primarily motivated by a spiteful desire to punish success rather than provide upward mobility for the poor.

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