Mirror, Mirror, on the Wall, What State Has the Best Tax Policy of All?

Because I dedicated last week to European fiscal policy, I didn’t get a chance to write about the Tax Foundation’s latest version of the State Business Tax Climate Index, which was released October 25.

Last year, the top-4 states were Wyoming, South Dakota, Alaska, and Florida. This year’s report, authored by Janelle Fritts and Jared Walczak, says the top-4 states are… (drum roll, please) …exactly the same.

Here’s the map showing how states rank. The best states are blue and the worst states are dark grey.

Coincidentally, the bottom-4 states also stayed constant. New Jersey is in last place, followed by New York, California, and Connecticut.

But there were some very interesting changes if you look at the other 42 states.

Thanks to pro-growth tax reforms, Arizona and Oklahoma both jumped 5 spots in the past year.

The state of Washington suffered a huge fall, dropping 13 spots thanks to the imposition of a capital gains tax (the state constitution supposedly bars any taxes on income – and voters last fall overwhelmingly voted against the capital gains tax – but it appears the state’s politicians and a negligent judiciary may combine to put the state on a very bad path).

It’s also interesting to look at long-run trends. If you compare this year’s Index with the original 2014 Index, you’ll find that three states have jumped by at least 10 spots and three states have dropped by at least 10 spots.

Since I’m a Virginia resident, this is not encouraging news.

P.S. As I’ve noted before, the rankings for Alaska and Wyoming are somewhat misleading. Both states have lots of energy production and their state governments collect enormous amounts of taxes from that sector. This allows them to keep other taxes low while still financing bloated state budgets.

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More Academic Evidence for School Choice

Since teacher unions care more about lining their pockets and protecting their privileges rather than improving education, I’ll never feel any empathy for bosses like Randi Weingarten.

That being said, the past couple of years have been bad news for Ms Weingarten and her cronies.

Not only is school choice spreading – especially in states such as Arizona and West Virginia, but we also are getting more and more evidence that competition produces better results for schoolkids.

In a study published by the National Bureau of Economic Research, Professors David N. Figlio, Cassandra M.D. Hart & Krzysztof Karbownik found that school choice led to benefits even for kids who remained stuck in government schools.

They enjoyed better academic outcomes, which is somewhat surprising, but even I was pleasantly shocked to see improved behavioral outcomes as well.

School choice programs have been growing in the United States and worldwide over the past two decades, and thus there is considerable interest in how these policies affect students remaining in public schools. …the evidence on the effects of these programs as they scale up is virtually non-existent. Here, we investigate this question using data from the state of Florida where, over the course of our sample period, the voucher program participation increased nearly seven-fold. We find consistent evidence that as the program grows in size, students in public schools that faced higher competitive pressure levels see greater gains from the program expansion than do those in locations with less competitive pressure. Importantly, we find that these positive externalities extend to behavioral outcomes— absenteeism and suspensions—that have not been well-explored in prior literature on school choice from either voucher or charter programs. Our preferred competition measure, the Competitive Pressure Index, produces estimates implying that a 10 percent increase in the number of students participating in the voucher program increases test scores by 0.3 to 0.7 percent of a standard deviation and reduces behavioral problems by 0.6 to 0.9 percent. …Finally, we find that public school students who are most positively affected come from comparatively lower socioeconomic background, which is the set of students that schools should be most concerned about losing under the Florida Tax Credit Scholarship program.

It’s good news that competition from the private sector produces better results in government schools.

But it’s great news that those from disadvantaged backgrounds disproportionately benefit when there is more school choice.

Wonkier readers will enjoy Figure A2, which shows the benefits to regular kids on the right and disadvantaged kids on the left.

Since the study looked at results in Florida, I’ll close by observing that Florida is ranked #1 for education freedom and ranked #3 for school choice.

P.S. Here’s a video explaining the benefits of school choice.

P.P.S. There’s international evidence from Sweden, Chile, Canada, and the Netherlands, all of which shows superior results when competition replaces government education monopolies.

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European Fiscal Policy Week, Part VI: The Swiss Spending-Cap Solution

As part of “European Fiscal Policy Week,” I’ve complained about bad Italian fiscal policy, bad Europe-wide fiscal policy, bad British fiscal policy, and also the unhelpful role of the European Union.

But I want to end the week on an optimistic note, so let’s take a look at Switzerland‘s spending cap.

Known as the “debt brake,” the rule was approved by 84.7 percent of voters back in 2001 and took effect with the 2003 fiscal year.

And if you want to know whether it has been successful, here’s a comparison of average spending increases before the debt brake and after the debt brake.

The above data comes directly from the database of the IMF’s World Economic Outlook.

There are some caveats, to be sure.

• The IMF data cited above is not adjusted for inflation, though inflation has not been a problem in Switzerland.
• The IMF numbers also show total government spending rather than just the outlays of the central government, but most cantons also have spending caps.

The bottom line is that Swiss fiscal policy dramatically improved after the spending cap took effect.

Switzerland’s Federal Finance Administration has a nice English-language description of the policy.

The debt brake is a simple mechanism for managing federal expenditure. …Expenditure is limited to the level of structural, i.e. cyclically adjusted, receipts. This allows for a steady expenditure trend and prevents a stop-and-go policy. …The debt brake has passed several tests since its introduction in 2003… The binding guidelines of the debt brake helped to swiftly balance the federal budget when it was introduced. The debt brake prevented the high tax receipts from the pre-2009 economically strong years from being used for additional expenditure. Instead, it was possible to build up surpluses and reduce debt. …s public finances are well positioned when compared internationally. Aside from the Confederation, most of the cantons have a debt brake too.

Here’s a chart from the report. It shows that debt is on a downward trajectory, especially when measured as a share of economic output (the right axis).

For what it’s worth, I’m glad the debt brake reduced debt, but I care more about controlling government spending. That being said, the Swiss spending cap also is a success on that basis.

The burden of spending as a share of GDP was increasing before the debt brake was approved. And since 2003, it’s been on a downward trajectory.

Here’s what Avenir Suisse, a Swiss think tank, wrote back in 2017.

Since the early 2000’s, Switzerland’s fiscal institutions have been successful in keeping the overall levels of taxation and spending at moderate levels. The country’s high fiscal strength is based on…Switzerland’s debt brake, a key institutional mechanism for managing public finances which subjects the Confederation’s fiscal policy to a binding rule…and contributes significantly to the country’s fiscal discipline. …Switzerland’s spending cap has helped the country avoid the fiscal crisis affecting so many other European nations. …The Swiss debt brake is the ideal model for other countries lacking fiscal discipline to embrace. …The Swiss debt brake’s most important contribution, however, cannot be measured in figures… In the early 1990s fiscal policy was oriented more towards the demands of the public sector… Today, however, the administration, the government and the parliaments believe it is self-evident that expenditures must develop in the medium term in line with revenue. Fiscal federalism, as an important element in the cantons, protects against overcrowding access to the tax side.

That last sentence deserves some elaboration. The authors are noting (“overcrowding access to the tax side”) that it is possible to increase spending by increasing taxes, but that’s not an easy option in Switzerland because voters can use direct democracy to reject tax hikes (as they have in the past).

P.S. The Debt Brake has an opt-out clause that allows more spending in an emergency. And, during the pandemic, spending did jump by more than 12 percent in just one year. But there’s also a claw-back provision that requires lawmakers to be extra frugal in subsequent years. And that policy seems to be successful. The big spending surge in 2020 was followed by two years of zero spending growth (with another year of no spending growth projected for 2023).

P.P.S. Look at this map if you want to see how much better Switzerland is than the rest of Europe.

P.P.P.S. Look at these charts if you want to see how Switzerland is doing better than the United States.

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European Fiscal Policy Week, Part V: The European Union, Centralization, and Redistribution

The European Union started as a good idea (unfettered free trade between member nations) and has morphed into a troubling idea (a super-state based on centralization, harmonization, and bureaucratization).

And I fear it is heading further in the wrong direction since many European politicians want European-wide taxes and spending to facilitate more redistribution (on top of all the taxes and spending by member nations!).

Even if it means breaking existing EU rules in order to make government bigger.

Today, as part of “European Fiscal Policy Week,” let’s assess whether the EU is a positive or negative force.

And I’ll start by observing that the economic data is unfavorable when compared to the United States. Not only are living standards lower in EU nations, but those countries also are continually falling further behind.

It’s possible, of course, that these countries would be even further behind if there was no European Union, but the academic evidence points in the other direction.

In an article for Law & Liberty, Douglas Carswell questions the very existence of the European Union.

Instead of asking if Europe can hold together, we should be asking if Europe should be held together at all. Why is it felt necessary to unify Europe’s disparate peoples in the first place? What is it that compels European leaders to support pan-European systems of governance at all? It is not as if European integration has been a success. …If the Euro was supposed to give Europe a competitive edge, how come the Eurozone lags behind the rest of the world by almost every measure of output and innovation? …The urge to integrate came about, it is often suggested, to prevent Germany from becoming overbearing… Seriously? Does anyone really believe that if it was not for an army of bureaucrats in Brussels these past thirty years, Germany might have invaded France again? …Maastricht, and indeed the various subsequent EU treaties, need to be seen for what they are: a power grab by Europe’s political elites. …Thirty years after Maastricht, the European Union is no more capable of making the kind of reforms it needs to save itself than it was back then. Rather like the Habsburg Empire, to which it is in many ways the successor, the European Union will stumble on, lurching from crisis to crisis, bits of it breaking away from time to time, as a once-great civilization becomes a cultural and economic backwater.

In a way that appeals to me, Liam Warner explains in National Review that the European Union represents the wrong type of globalism.

The 1957 Treaty of Rome established the European Economic Community, for example, was a customs union by which member countries agreed to trade freely with one another and maintain common external tariffs. With the 1993 Treaty of Maastricht, which established the EU, and its subsequent amendments, European integration began to look less like a cooperation of equals and more like a submission to a supranational authority. …internationalism in its modern form has often been a means of…imposing on the world a stultifying monotony… The deep flaws of the present system having been exposed, European leaders must give up their dream…and revisit their ancestors’ healthier forms of globalism.

That “healthier form of globalism” should be based on jurisdictional competition and mutual recognition.

Is that remotely feasible?

A few European leaders realize that there’s too much centralization. Kai Weiss highlighted the views of the Dutch Prime Minster in a column for CapX.

In his Strasbourg speech on the future of Europe, Mark Rutte struck a markedly different tone and delivered an entirely different message to Macron and others. The Prime Minister of the Netherlands has recently come to the fore as one of Europe’s more sceptical voices. Speaking in front of the European Parliament, he once again made it clear that for him, more and more EU is simply not the answer to today’s problems. “For some, ‘ever closer union’ is still a goal in itself. Not for me,” Rutte said… Instead of finding ever new competences and tasks, Rutte argued that Brussels should hold onto the “original promise of Europe”, the “promise of sovereign member states working together to help each other achieve greater prosperity…” For Rutte, this means focusing on the core benefit of the EU: free trade. …the emergence of the Netherlands, as well as Nordic and Baltic states, as vocal critics of Macron’s federalist plans should be the source of much hope for Europe’s future.

I applaud that there are a few leaders and a few governments trying to block further centralization.

But I have three reasons for being a pessimist about the European Union.

• First, I don’t think there’s any hope for achieving any decentralization. Indeed, the more sensible people in Europe will face endless battles to stop bad ideas.
• Second, Europe’s demographics are terrible. And that will specifically mean lots of pressure for redistribution by imposing EU-wide taxes and spending.
• Third, public policy is moving in the wrong direction at the national level. This compounds the damage of bad policies imposed by EU bureaucrats in Brussels.

Here’s a chart, based on the latest edition of Economic Freedom of the World, showing how economic liberty is declining in the nations that dominate the European Union.

P.S. For amusement value, here’s a cartoon showing the future of the European Union.

P.P.S. If you like European-themed satire, click here, here, here, here, here, here, and here.

P.P.P.S. On a related note, Brexit-themed humor can be found here, here, here, and here.

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European Fiscal Policy Week, Part IV: Bad U.K. Monetary Policy Leads to Bad U.K. Fiscal Policy

I was excited about the possibility of pro-growth tax policy during the short-lived reign of Liz Truss as Prime Minister of the United Kingdom.

However, I’m now pessimistic about the nation’s outlook. Truss was forced to resign and big-government Tories (akin to big-government Republicans) are back in charge.

As part of my “European Fiscal Policy Week,” let’s take a closer look at what happened and analyze the pernicious role of the Bank of England (the BoE is their central bank, akin to the Federal Reserve in the U.S.).

Let’s start with a reminder that the Bank of England panicked during the pandemic and (like the Federal Reserve and the European Central Bank) engaged in dramatic monetary easing.

That was understandable in the spring of 2020, perhaps, but it should have been obvious by the late summer that the world was not coming to an end.

Yet the BoE continued with its easy-money policy. The balance sheet kept expanding all of 2020, even after vaccines became available.

And, as shown by the graph, the easy-money approach continued into early 2021 (and the most-recent figures show the BoE continued its inflationary policy into mid-2021).

Needless to say, all of that bad monetary policy led to bad results. Not only 10 percent annual inflation, but also a financial system made fragile by artificially low interest rates and excess liquidity.

So how does any of this relate to fiscal policy?

As the Wall Street Journal explained in an editorial on October 10, the BoE’s bad monetary policy produced instability in financial markets and senior bureaucrats at the Bank cleverly shifted the blame to then-Prime Minster Truss’ tax plan.

Bank of England Governor Andrew Bailey is trying to stabilize pension funds, which are caught on the shoals of questionable hedging strategies as the high water of loose monetary policy recedes. …The BOE is supposed to be tightening policy to fight inflation at 40-year highs and claims these emergency bond purchases aren’t at odds with its plans to let £80 billion of assets run off its balance sheet over the next year. But BOE officials now seem confused about what they’re doing. …No wonder markets doubt the BOE’s resolve on future interest-rate increases. Undeterred, the bank is resorting to the familiar bureaucratic imperative for self-preservation. Mr. Cunliffe’s letter is at pains to blame Mr. Kwarteng’s fiscal plan for market ructions. His colleagues Jonathan Haskel and Dave Ramsden —all three are on the BOE’s policy-setting committee—have picked up the theme in speeches that blame market turbulence on a “U.K.-specific component.” This is code for Ms. Truss’s agenda. …Mr. Bailey doesn’t help his credibility or the bank’s independence by politicizing the institution.

In a column for Bloomberg, Narayana Kocherlakota also points a finger at the BoE.

And what’s remarkable is that Kocherlakota is the former head of the Minneapolis Federal Reserve and central bankers normally don’t criticize each other.

Markets didn’t oust Truss, the Bank of England did — through poor financial regulation and highly subjective crisis management. …The common wisdom is that financial markets “punished” Truss’s government for its fiscal profligacy. But the chastisement was far from universal. Over the three days starting Sept. 23, when the Truss government announced its mini-budget, the pound fell by 2.2% relative to the euro, and the FTSE 100 stock index declined by 2.2% — notable movements, but hardly enough to bring a government to its knees. The big change came in the price of 30-year UK government bonds, also known as gilts, which experienced a shocking 23% drop. Most of this decline had nothing to do with rational investors revising their beliefs about the UK’s long-run prospects. Rather, it stemmed from financial regulators’ failure to limit leverage in UK pension funds. …The Bank of England, as the entity responsible for overseeing the financial system, bears at least part of the blame for this catastrophe. …the Truss government…was thwarted not by markets, but by a hole in financial regulation — a hole that the Bank of England proved strangely unwilling to plug.

Last but not least, an October 18 editorial by the Wall Street Journal provides additional information.

When the history of Britain’s recent Trussonomics fiasco is written, make sure Bank of England Governor Andrew Bailey gets the chapter he deserves. …The BOE has been late and slow fighting inflation… Mr. Bailey’s actions in the past month have also politicized the central bank…in a loquacious statement that coyly suggested the fiscal plan would be inflationary—something Mr. Kwarteng would have disputed. …Meanwhile, members of the BOE’s policy-setting committee fanned out to imply markets might be right to worry about the tax cuts. If this was part of a strategy to influence fiscal policy, it worked. …Mr. Bailey may have been taking revenge against Ms. Truss, who had criticized the BOE for its slow response to inflation as she ran to be the Conservative Party leader this summer. Her proposed response was to consider revisiting the central bank’s legal mandate. The BOE’s behavior the past month has proven her right beyond what she imagined.

So what are the implications of the BoE’s responsibility-dodging actions?

• First, we should learn a lesson about the importance of good monetary policy. None of this mess would have happened if the BoE had not created financial instability with an inflationary approach.
• Second, we should realize that there are downsides to central bank independence. Historically, being insulated from politics has been viewed as the prudent approach since politicians can’t try to artificially goose an economy during election years. But Bailey’s unethical behavior shows that there is also a big downside.

Sadly, all of this analysis does not change the fact that tax cuts are now off the table in the United Kingdom. Indeed, the new Prime Minister and his Chancellor of the Exchequer have signaled that they will continue Boris Johnson’s pro-tax agenda.

That’s very bad news for the United Kingdom.

P.S. There used to be at least one sensible central banker in the United Kingdom.

P.P.S. But since sensible central bankers are a rare breed, maybe the best approach is to get government out of the business of money.

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European Fiscal Policy Week, Part III: A Continent-Wide Spending Problem

I discussed Italy’s looming fiscal crisis on Monday and then argued against a potential bailout on Tuesday.

Today, let’s focus on the rest of Europe.

I gave a presentation yesterday in Brussels about “Public Finances in the Eurozone” and used the opportunity to explain that governments are too big in Europe and to warn that demographic changes were going to lead to an even-bigger burden of government in the future.

My assessment is very mainstream, at least with regards to what will happen to national budgets in European nations.

A study from the Organization for Economic Cooperation and Development, authored by Yvan Guillemette and David Turner, examines the long-run fiscal position of member nations.

It warns that government debt levels will increase dramatically if they don’t change current policies.

… secular trends such as population ageing and the rising relative price of services will keep adding pressure on government budgets. Without policy changes, maintaining current public service standards and benefits while keeping public debt ratios stable at current levels would increase fiscal pressure in the median OECD country by nearly 8 percentage points of GDP between 2021 and 2060, and much more in some countries. …governments will need to re-assess long-run fiscal sustainability in the context of higher initial government debt levels…when considering expenditure pressures associated with ageing…, the OECD structural primary balance would deteriorate rapidly and net government debt would more than double as a share of GDP by 2050 (Figure 12).

Here is the aforementioned Figure 12. As you can see, both deficits (left chart) and debt (right chart) are driven by the cost of age-related entitlement programs.

The report also explains that the increase in red ink is being caused by a bigger burden of government spending.

Under a ‘business-as-usual’ hypothesis, in which no major reforms to government programmes are undertaken, public expenditure is projected to rise substantially in most countries… Public health and long-term care expenditure is projected to increase by 2.2 percentage points of GDP in the median country between 2021 and 2060… Public pension expenditure is projected to increase by 2.8 percentage points of GDP in the median country between 2021 and 2060… Other primary expenditures are projected to rise by 1½ percentage points of GDP in the median country between 2021 and 2060 (Figure 13, Panel A). This projection excludes potential new sources of expenditure pressure, such as climate change adaptation.

Here’s Figure 13, mentioned above. Notice the projected increases in spending in most European nations.

So what’s the best response to this slow-motion fiscal disaster?

Since more government spending is the problem, you might think the OECD would recommend ways to restrain budgetary expansion.

But that would be a mistake. As is so often the case, OECD bureaucrats think giving politicians more money is the best approach.

The present study…uses an indicator of long-run fiscal pressure that is premised on the idea that governments would seek to stabilise public debt ratios at projected 2022 levels by adjusting structural primary revenue from 2023 onward. … all OECD governments would need to raise taxes in this scenario to prevent gross government debt ratios from rising over time… The median country would need to increase structural primary revenue by nearly 8 percentage points of GDP between 2021 and 2060, but the effort would exceed 10 percentage points in 11 countries.

To be fair, the authors acknowledge that there might be some complications.

Raising taxes…appears feasible in some countries…, in other countries it may present a substantial challenge. In Belgium, Denmark, Finland and France, for instance, structural primary revenue is already around 50% of GDP… Pushing mainstream taxes on incomes or consumption further up, even by only a few percentage points of GDP, may be politically difficult and fiscally counter-productive if it means reaching the downward-sloping segment of the Laffer curve… Lundberg…identifies five OECD countries where top effective marginal tax rates (accounting for income, payroll and consumption taxes) are already beyond revenue-maximizing levels (Austria, Belgium, Denmark, Finland and Sweden). Thus, if taxes are to rise, it might be necessary to look to other bases, such as housing, capital gains, inheritance or wealth. Recent international efforts to establish a minimum global corporate tax could also enable more revenue to be raised from corporate taxes.

I’m happy that the study acknowledges the Laffer Curve, though that is not much of a concession since even Paul Krugman agrees that it exists.

And even when OECD bureaucrats admit that it may be unwise to increase some taxes, their response is to suggest that other taxes can be increased.

Sigh.

Now you understand why I’ve argued that the OECD may be the world’s worst international bureaucracy. Especially since OECD bureaucrats get tax-free salaries while urging higher taxes on the rest of us.

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European Fiscal Policy Week, Part II: The Right Response to Italy’s Fiscal Crisis

I wrote yesterday to speculate about a possible fiscal crisis in Italy.

Today, here are my thoughts on why there should not be a bailout if/when a crisis occurs.

I have moral objections to bailouts, but let’s focus in this column on the practical impact.

And let’s start with this chart, which shows debt levels in Portugal, Italy, Greece, and Spain (the so-called PIGS) ever since the misguided bailout of Greece about a dozen years ago.

As you can see, OECD data reveals that there’s been no change in these poorly governed nations. They have continued to over-spend and accumulate ever-higher levels of debt.

This certainly seems like evidence of failure, in part because of Greece’s continued bad policy.

But I’m equally concerned about how other Mediterranean nations did not change their behavior.

So why did those nations accumulate more debt, even though they had an up-close look at Greece’s fiscal collapse?

I suspect they figured they could get bailouts, just like Greece. In other words, the IMF and others created a system corrupted by moral hazard.

Defenders of bailouts assert that Greece was forced to engage in “austerity” as a condition of getting a bailout.

I have two problems with that argument.

• First, notice how Greece’s debt has continued to go up. If that’s a success, I would hate to see an example of failure.
• Second, the main effect of the so-called austerity is a much higher tax burden and a somewhat higher spending burden.

If there’s a bailout of Italy (or any other nation), I suspect we’ll see the same thing happen. Higher taxes, higher spending, and higher debt.

I’ll close by acknowledging that there are costs to my approach. If Italy is not given a bailout, the country may have a “disorderly default,” meaning the government simply stops honoring its commitments to pay bondholders.

That is bad for individual bondholders, but it also could hurt – or even bankrupt – financial institutions that foolishly decided to buy a lot of Italian government bonds.

But there should be consequences for imprudent choices. Especially if the alternative is bailouts that misallocate global capital and encourage further bad behavior.

The bottom line is that the long-run damage of bailouts is much greater than the long-run damage of defaults.

P.S. Just like it’s a bad idea to provide bailouts to national governments, it’s also a bad idea to provide bailouts to state governments. Or banks. Or student loan recipients.

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European Fiscal Policy Week, Part I: Italy’s Looming Fiscal Crisis

I’m in Europe to give a couple of speeches about fiscal policy, so I’m going to spend all week commenting on the continent’s (mostly miserable) fiscal policy.

Let’s start with comments about Italy, the nation most likely to suffer a crisis.

Normally, I tell people to focus on government spending rather than red ink. After all, the economy is hurt whether spending is financed by taxes or borrowing (or printing money).

But I’ve also noted that governments sometimes spend so much money and incur so much debt that investors decide it is very risky to buy or hold debt from those governments. In other words, they begin to fear default.

When investors (sometimes known as “bond vigilantes”) reach that stage, they probably try to get rid of their holdings and definitely refuse to buy more debt. The net result is that profligate governments have to offer much higher interest rates to compensate for the risk of a possible default.

That happened earlier this century in Greece.

And if peruse this data from the OECD, you find that Italian government debt has jumped to levels that may be unsustainable.

So why has Italy avoided a crisis?

As noted in this article by Desmond Lachman, published by Inside Sources, the nation is being propped up by the European Central Bank.

In Europe, when the European Central Bank (ECB) soon dials back its bond-buying program, we are likely to find out that it is the Italian economy that has been swimming naked. This should be of deep concern for the Eurozone and world economies. While the Italian economy might be too large for its Eurozone partners to allow it to fail, it also might prove to be too large for them to bail it out. …The main factor that has allowed the Italian government to finance its ballooning budget deficit on favorable terms has been the ECB’s massive government bond-buying…the ECB used its emergency bond-buying program to more than fully finance the Italian government’s borrowing needs. …it must be only a matter of time before we have another round of the Italian sovereign debt crisis. …no longer being able to count on ECB bond-buying, the Italian government will have to increasingly finance itself in the market. It will have to do so with its public finances in a worse state than they were in during the 2012 debt crisis.

In the article, Lachman thinks a crisis is all but inevitable because the ECB is unwinding its pandemic-era money creation.

I agree about the ECB’s harmful role, but I fear the central bankers in Frankfurt will continue to do the wrong thing.

P.S. I mentioned demographics at the start of the video. Here’s some more information about how aging populations are contributing to fiscal meltdown.

P.P.S. Italy can solve its problems, but I doubt it will choose the only effective solution.

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Another Guilt-Ridden Neurotic Leftist

At the risk of sounding like a “snowflake,” there are some things that “trigger” me.

It drives me crazy, for instance, when rich leftists support tax increases, particularly since many of them (Elizabeth Warren, Joe Biden, Bill and Hillary Clinton, John Kerry, etc, etc, etc, etc, etc, etc) lower their tax bills by using expensive lawyers and accountants.

If they really think politicians in Washington should have more money, they can easily volunteer extra money via a website maintained by the Treasury Department.

But they never seem to do that. Instead, all their moral posturing is focused on raising other people’s taxes.

This is not just a problem in the United States.

Indeed, Emma Bubola of the New York Times recently reported on one of these neurotic people from Europe.

By the time her extraordinarily wealthy grandmother died last month, Marlene Engelhorn already knew who she wanted to be the ultimate beneficiary of the enormous inheritance coming her way: the tax man. “The dream scenario is I get taxed,” said Ms. Engelhorn, the co-founder of a group called Tax Me Now. …For more than a year, Ms. Engelhorn has been campaigning for tax policies that would redistribute her eight-figure windfall — and anyone else’s. …she entered the orbit of groups of pro-tax millionaires, whose members meet in person or on video calls to discuss their privileges — and how to get the state to strip them away. …members are expected to share how they are engaged in what they typically term “reparations” to society. …Its policy goal is to implement or to increase inheritance and wealth taxes (Austria, where Ms. Engelhorn lives, abolished its inheritance tax in 2008). …Ms. Engelhorn’s multiple radio and TV appearances have resulted in dozens of people reaching out to ask her directly for financial help. She said it wrecks her to say no, but she believes it should not be on her to decide who gets her money. “I would like tax justice to take this impossible decision off my hands,” she said.

This type of nonsense triggers three reactions from me.

• First, I’m sure European governments have provisions in their law to accept voluntary payments. Strange how Ms. Engelhorn is not taking advantage of the opportunity.
• Second, she seems completely oblivious to the research showing how rich entrepreneurs (like her ancestors) created wealth – most of which goes to other people.
• Third, I didn’t know whether to laugh or cry when I read how it “wrecks her” to say no to people suffering hardship. She must be a sad joke of a person.

Though there was one part of the story that produced a genuine smile on my face.

It seems one of Ms. Engelhorn’s ancestors cleverly (and appropriately) did the German version of a corporate inversion.

It is not the first time a member of Ms. Engelhorn’s family has made headlines with tax-related issues. When her great-uncle and archaeology donor Curt Engelhorn sold Boehringer Mannheim, German tax authorities didn’t collect a dime because he had previously moved the company’s legal seat abroad.

Let’s close by looking at a different perspective.

In a column for the Foundation for Economic Education, Rainer Zitelmann opined on the existence of guilt-ridden rich people.

I know hundreds of multimillionaires and plenty of billionaires and conducted in-depth interviews with 45 of them for my doctoral dissertation The Wealth Elite. But I have yet to meet anyone who felt they weren’t paying enough tax. The 100 millionaires and billionaires from nine countries who have signed the latest letter asking to pay more tax might sound like a lot, but there are 2,755 billionaires around the world. There are also more than 20 million millionaires in the world, so 100 is equivalent to 0.0005 percent.

Though I’m not sure I fully embrace Rainer’s optimistic numbers.

After all, there’s strong evidence that rich people are now a reliable leftist voting bloc. At least in the United States.

P.S. You can see me debate guilt-ridden neurotic leftists by clicking here and here.

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The World’s Worst “Tax Hells”

Most people don’t know how to define a “tax haven,” but we assume places with no income tax are on the list. And there’s a lot to admire when looking at jurisdictions such as Bermuda, Monaco, and the Cayman Islands.

But what if we want to identify the opposite of a tax haven. What is a “tax hell” and how can they be identified?

A new study for the 1841 Foundation undertakes that task and it lists 12 nations that deserve this unflattering label. Belarus is the worst of the worst, followed by Venezuela, Argentina, and Russia.

But this isn’t just a list of places with high tax burdens.

To be a tax hell, a nation has to have punitive taxation and a lousy government. Here’s how the report describes the methodology.

The Tax Hells Index is an in-depth look at both the qualitative and quantitative data that is released annually by both the IMF and The World Bank. By drawing out critical insights from this data, The 1841 Foundation was able to create a comprehensive index and critically examine 94 countries against a stringent framework. …we believe that a “Tax Hell” is not only a country with high taxes, but rather a country with a weak rule of law and where the rights to privacy and property are not enforced or protected as required. …Therefore, when considering the results, countries with high government quality and economic and legal stability may have high taxes (i.e., Denmark), but are very far from being considered Tax Hells. In fact, there are countries with both low and high taxes in the Top-12 tax hells; all of them, however, have low quality of government, high levels of corruption and discretion, poor economic management, and weak institutions.

By the way, the report identified 12 tax hells, but also lists 14 other nations that are “risky.”

These are countries that should be perceived as high risk.

I’ll close by noting that the report only considers nations in North America, Europe, and South America. If subsequent editions include Asia and Africa, I’m sure there will be more tax hells and more risky jurisdictions.

P.S. The five best-scoring nations are Ireland, Denmark, San Marino, Switzerland, and Luxembourg. Remember, these are not necessarily low-tax jurisdictions. Indeed, Denmark is a high-tax nation. But all of these jurisdictions at least provide high-quality governance.

P.P.S. If you want a defense of tax havens, click here, here, and here.

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Military Spending and Economic Performance, Part I

Domestic programs are the main reason that the burden of government spending is expanding, with so-called entitlement outlays deserving the lion’s share of the blame.

But this does not mean that advocates of limited government should give the Pentagon a free pass.

As with all types of spending, there should be a cost-benefit assessment of whether a particular program or activity makes sense.

One of the costs (of military spending and every other type of spending) is that resources are diverted from the productive sector of the economy.

That means that reducing the Pentagon’s budget – holding everything else equal – will boost growth.

By how much? Anthony Mayberry of the University of Oklahoma has some new research that measures the economic impact of lower military expenditures.

This paper analyzes the implications of demilitarization on economic growth. I create a new dataset of military transitions since 1960 and measure the effect of demilitarization in countries that reduced their military capabilities and subsided aggressive or violent behavior. Semiparametric difference-in-difference and instrumental variable estimates predict that on average, demilitarization is associated with a 1% higher annual GDP per capita than if the country had remained militarized. Dynamic analysis shows that on average, GDP per capita is 15-20% higher 20 years after transition. Increases in foreign direct investment and international trade flows, as well as a reallocation of resources to more economically productive outlets, following demilitarization are found to contribute to growth. These findings provide empirical evidence in support of a Peace Dividend.

And if the reduction in military spending is significant, as seen in Figure 5 from the study, the economic gains can be remarkably significant.

To be sure, there are caveats, some of which are discussed in the study.

One obvious complication is that a country may be able to lower military outlays because some external threat has dissipated.

In that scenario, how much of the subsequent growth is because the threat has diminished and how much is because there is a lower burden of government spending?

The answer presumably is different for every real-world case study. But the bottom line is that it is good to lower military spending just like it is good to reduce domestic spending.

I’ll close by acknowledging that advocates of military spending should base their arguments on cost-benefit analysis.

Don’t make silly Keynesian arguments about multiplier effects. Don’t make exaggerated claims about spin-off benefits. Instead, make a clear-headed case that the cost of military spending can be justified because it provides a national security benefit (against an imperialist Soviet Union forty years ago, or perhaps an expansionist China today).

P.S. It would be helpful if supporters of a strong military opposed some of the many ways that politicians insert waste, fraud, inefficiency, and pork in the Pentagon’s budget.

P.P.S. The U.S. experience after World War II is a good example of how lower military spending triggers more growth.

P.P.P.S. My three-part series on the economics of war can be read here, here, and here.

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Corporate Tax Rates and Taxable Income

In the case of business taxation, the most visually powerful evidence for the Laffer Curve is what happened to corporate tax revenue in Ireland after the corporate tax rate was slashed from 50 percent to 12.5 percent.

Tax revenue increased dramatically. Not just in nominal terms. Not just in inflation-adjusted terms.

Corporate receipts actually climbed as a share of GDP.

And this was during the decades when economic output was rapidly expanding.

In other words, the Irish government got a much bigger slice of a much bigger pie after tax rates were dramatically lowered.

Now let’s look at some evidence from a new study. Three professors from the University of Utah (Jeffrey Coles, Elena Patel, and Nather Seegert), and a Treasury Department economist (Matthew Smith) estimated what happens to taxable income for U.S. companies when there is a change in the corporate tax rate.

In response to a 10% increase in the expected marginal tax rate, private U.S. firms decrease taxable income by 9.1%, which indicates a discernibly more elastic response than prevailing estimates. This response reflects a decrease in taxable income of 3.0% arising from real economic responses to a firm’s scale of operations and 6.1% arising from accounting transactions via (for example) revenue and expense timing. Responsiveness to the corporate tax rate is more elastic if a firm uses cash (9.9%) rather than accrual accounting (7.4%), if the firm is small (9.9%) rather than large (8.6%), and if the firm discounts future cash flows at a lower rate.

The paper is filled with equation, graphs, and jargon, but the above excerpt tells us everything we need to know.

When tax rates go up, taxable income goes down (both because there is less economic activity and because companies have more incentive to manipulate the tax code).

Thus confirming what I wrote back in 2016 about taxable income being the key variable.

By the way, this does not mean that lower tax rates lead to more revenue. Or that higher tax rate produce less revenue.

Such big swings only happen in rare circumstances.

But it does mean that politicians will not grab as much money as they hope when they increase tax rates. And that they won’t lose as much revenue as they fear when they lower tax rates (and we saw that most recently with the 2017 tax reform).

I’ll close by noting that this is additional evidence for why we should be thankful that Biden’s proposal for higher corporate tax rates was not enacted.

P.S. The chart at the beginning of this column may be the most visually powerful evidence for the corporate Laffer Curve. The most empirically powerful evidence, however, comes from very unlikely sources – the pro-tax IMF and the pro-tax OECD.

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The Hidden Cost of China’s Statism

I wrote many years ago that China did not have a “tiger economy.”

Indeed, I subsequently pointed out that China’s growth is not impressive when compared to East Asian nations that did enjoy rapid growth.

My goal was to convince people that the U.S. should not cite China to justify bad ideas such as industrial policy.

But there’s now evidence that I was understating my argument.

Check out this tweet about how the Chinese government has exaggerated the nation’s economic output.

The above tweet comes from a fascinating article in the Economist that analyzes how authoritarian governments can’t be trusted to report accurate economic data.

It turns out that China is one of the worst offenders.

Dictators are often seen as ruthless but effective. Official gdp figures support this view. Since 2002 average reported economic growth in autocracies has been twice as fast as in democracies. But…dictators’ economic stewardship may not be as effective as they claim. New research finds that autocrats greatly overstate their countries’ economic growth. …The data showed that dictators’ reported gdp tended to grow much faster than satellite images of their countries would suggest. …cumulative gdp growth between 2002 and 2021 in countries “not free” is nearly cut in half: from 147% to 76%. …In a related study Jeremy Wallace, a researcher, found misreporting by Chinese provinces, too. As he notes, a leaked American diplomatic cable from 2007 revealed the view of Li Keqiang, the prime minister, then a provincial party secretary. He had said, with a smile, that gdp figures were “for reference only”

Here’s a more detailed version of the above image.

The gray circle near the top right is what the Chinese government is telling the world. The red circle much lower on the graph shows the real performance of the Chinese economy based on satellite data.

This data is bad news for the Chinese people. And it’s an indictment of President Xi, who is pushing China in the wrong direction – toward more statism and more government control.

So I’m not surprised that the geese with the golden eggs are escaping.

But I continue to be amazed that some of the fools in Washington want to copy bad Chinese policy.

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Congratulations to Estonia (Again)

There is not a lot of suspense when the Tax Foundation releases its annual International Tax Competitiveness Index.

The “improbable success” of Estonia once again ranks #1. Just like in 2021, 2020, 2019, etc, etc.

Its Baltic neighbor Latvia is #2, followed by New Zealand and Switzerland.

It’s also worth noting that France is continuing its proud tradition of being in last place.

The United States, for what it is worth, has a mediocre #22 rank, dragged down by a horrible score – last among developed nations – for “cross-border tax rules” (but helped by a good score for consumption taxes since the U.S. has not made the mistake of imposing a value-added tax).

If you want to understand the Tax Foundation’s methodology, here’s a description from the report.

The structure of a country’s tax code is a determining factor of its economic performance. …The International Tax Competitiveness Index (ITCI) seeks to measure the extent to which a country’s tax system adheres to two important aspects of tax policy: competitiveness and neutrality. A competitive tax code is one that keeps marginal tax rates low. …businesses will look for countries with lower tax rates on investment to maximize their after-tax rate of return. If a country’s tax rate is too high, it will drive investment elsewhere, leading to slower economic growth. In addition, high marginal tax rates can impede domestic investment and lead to tax avoidance. …Separately, a neutral tax code…means that it doesn’t favor consumption over saving, as happens with investment taxes and wealth taxes. It also means few or no targeted tax breaks for specific activities carried out by businesses or individuals.

If you’re interested in which nations got better and worse over the past year, Greece and Turkey tied for the biggest improvement, both climbing four spots (easier for Greece since it started near the bottom of the rankings).

Ireland suffered the biggest decline, dropping seven spots, in part because of depreciation laws that penalize investment.

I’ll close with a wish that the report eventually gets expanded to include jurisdictions such Bermuda, Hong Kong, Monaco, Liechtenstein, Singapore, and the Cayman Islands. It would be very interesting to see if all of those places are ahead of Estonia.

It also would be interesting if the Tax Foundation augmented the report by speculating about potential big developments. For instance, how much would the U.S. score have declined if Biden’s tax plan had been adopted? And how much would the U.K. score have increased if Prime Minister Truss’ original tax plan was approved?

P.S. The Tax Foundation has very interesting comparative data showing international tax burdens on saving and investment.

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Defending (sort of) European Economic Policy

I write frequently about the economic damage caused by European fiscal policy, but today let’s comment on the (comparatively) good policies that exist on the other side of the Atlantic.

We’ll start with this video excerpt from a presentation last month.

If you don’t have time to watch the video, everything you need to know is captured in this data from Economic Freedom of the World. As you can see, European nations (circled in red) dominate the top half.

Indeed, it’s safe the say that Europe dominates the top quartile (the blue nations, categorized as “mostly free”).

As I noted in the video, this does not mean these nations have great policy. Or even good policy.

But it does mean that European nations generally enjoy more economic liberty than countries from other parts of the world (or, if you like looking at the glass as half empty, they suffer from less economic repression).

If you dig into the details, what you will find is that Europeans nations generally have bad fiscal policy, but they tend to score highly in other areas (i.e., good rule of law, low levels of red tape, etc).

To be sure, not all European nations are the same. There’s a big difference between laissez-faire Switzerland and dirigiste Greece, for instance.

But I’ll close be reiterating a comment from the above video, which is that that there’s a much bigger gap between Greece and Venezuela than there is between the United States and Greece.

P.S. A new edition of Economic Freedom of the World has been released, but there were only minor changes for the United States (down one spot) and Europe. And if you look at the latest edition of the Heritage Foundation’s Index of Economic Freedom, the United States is only #25, lagging behind 17 European nations. Including all of the supposedly socialist welfare states in Scandinavia.

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Nigeria and the Cost of Bad Government

In a recent column about Haiti, I cited a New York Times column and expressed puzzlement that the author could write about that nation’s poverty and barely mention the role of economic policy.

Today, we’re going to focus on Nigeria.

Just like two days ago, let’s start by laying out some facts about the quality (or lack thereof) of the country’s economic policy.

We’ll begin with some very bad numbers from the Heritage Foundation’s Index of Economic Freedom. As you can see, Nigeria ranks #124, with failing grades in many key area.

To be sure, ranking #124 is not as bad as being North Korea, which is in last place at #177. Or Venezuela, or Cuba, which are the next-to-last jurisdictions.

But we can safely say that Nigeria is a country with very little economic liberty.

And the Fraser Institute’s Economic Freedom of the World tells a similar story. Nigeria is mired in the next-to-last quartile and ranks #92 (out of 165) in the world.

The country is especially bad on trade policy and the rule of law (legal system and property rights).

So why am I citing all this data?

Because I just read an article in Foreign Affairs about that nation’s economic misery and – just like the article about Haiti – it cries out for correction.

In this case, though, the article actually focuses on the role of economic policy, but from a very misguided perspective.

Authored by Amaka Anku, it tells readers that the problem in Nigeria is that government is not strong enough or active enough.

…despite having the world’s ninth- and tenth-largest natural gas and crude oil reserves, respectively; one of the world’s largest swaths of arable land; and a young and entrepreneurial population, Nigeria has fallen far behind peer countries such as Indonesia and South Korea when it comes to gross national income, GDP per capita, and industrial production. …the state is unable to stimulate broad-based economic growth. …the view that a strong and capable state is required to create the conditions for economic transformation is slowly gaining ground. …Nigeria must aspire to much more…to strengthen the federal government… A better resourced civil service…would make it easier to attract talent and help transform an inefficient bureaucracy into one that can stimulate and effectively regulate local industry. …

Ms. Anku makes several bold assertions, such as the value of “a strong and capable state” and a supposed need “to strengthen the federal government,” in part via “a better-resourced civil service.”

There is an attempt to justify the aforementioned statements.

She claims that nations such as Singapore are the role model. Or even the United States in the 1800s.

…although the role of a strong state in stimulating the economic transformation of newly industrializing countries such as China, Singapore, and South Korea is relatively well understood, ideological blinkers have prevented many Western scholars and policymakers from acknowledging that a strong central government played a similar role in the United States’ own economic takeoff. …Among the most important federal interventions—but by no means the only ones—were extensive subsidies for national transport infrastructure, strategic investments in emerging technologies, and strong support for fair labor and other redistributive policies that ensured a level playing field and improved worker productivity.

I have a semi-friendly response to Anku’s article and a…well, let’s call it a skeptical reaction.

The sympathetic response is that it’s good to have a small-but-competent government. Indeed, that’s the argument made by “state-capacity libertarians” and others who argue that the U.S. had such a system in the 1800s.

Nowadays, Singapore often is a role model for these people. So if Anku is suggesting that Nigeria should copy Singapore (the world’s second-freest economy), I’ll be the first to applaud.

But I suspect that’s not what she has in mind. For instance, Ms. Anku expresses support for “redistributive policies.”

That’s not consistent with Singapore’s approach. And South Korea has a relatively small welfare state compared to other OECD nations. Heck, the United States had no welfare state back in the 1800s.

Sadly, I fear Ms. Anku’s concept of “a strong and capable state” is probably akin to what the IMF and other international bureaucracies are peddling.

In  other words, higher taxes and bigger government based on the anti-empirical notion that this will magically deliver prosperity.

Needless to say, that’s bunk.

P.S. I also can’t resist pointing out that it’s silly for Ms. Anku to equate China, Singapore, and South Korea. Singapore and South Korea are examples of “tiger” economies. But China lags well behind because it does not have the pro-market policies that enabled the other two nations (as well as places like Hong Kong and Taiwan) to become very rich very fast.

P.P.S. Trump also misinterpreted U.S. policy in the 1800s.

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The Big Question for Tories (and Republicans): What’s the Alternative to “Free-Market Fundamentalism”?

Because of her support for lower tax rates, I was excited when Liz Truss became Prime Minister of the United Kingdom.

Especially since her predecessor, Boris Johnson, turned out to be an empty-suit populist who supported higher taxes and a bigger burden of government spending.

But I’m not excited anymore.

Indeed, it’s more accurate to say that I’m despondent since the Prime Minister is abandoning (or is being pressured to abandon) key parts of her pro-growth agenda.

For details, check out this Bloomberg report, written by Julian Harris, about the (rapidly disappearing) tax-cutting agenda of the new British Prime Minister.

Westminster’s most hard-line advocates of free markets and lower taxes are looking on in despair as their agenda crumbles… When Liz Truss became prime minister just over five weeks ago, she promised to deliver a radical set of policies rooted in laissez-faire economics — an attempt to boost the UK‘s sluggish rate of growth. Yet her chancellor of the exchequer, Kwasi Kwarteng, faced a quick reality check when his mini-budget, packed with unfunded tax cuts and unaccompanied by independent forecasts, …triggered mayhem… Truss fired Kwarteng and replaced him with Jeremy Hunt as she was forced into a dramatic u-turn over her tax plans. …Truss conceded…and dropped her plan to freeze corporation tax. …Still, some believers are sticking by “Trussonomics”…Patrick Minford,..a professor at Cardiff University, said..“Liz Truss’s policies for growth are absolutely right, and to be thrown off them by a bit of market turbulence is insane.” …Eamonn Butler, co-founder of the Adam Smith Institute, similarly insisted that Truss “is not the source of the problem — she’s trying to cure the problem.”

Eamonn is right.

The United Kingdom faces serious economic challenges. But the problems are the result of bad government policies that already exist rather than the possibility of some future tax cuts.

In a column for the Telegraph, Allister Heath says the U.K.’s central bank deserves a big chunk of the blame.

Liz Truss and Kwasi Kwarteng have been doubly unlucky. While almost everybody else in Britain remained in denial, they correctly identified this absurd game for the con-trick that it truly was, warned that it was about to implode and pledged to replace it with a more honest system. Instead of a zombie economy based on rising asset prices and fake, debt-fuelled growth, their mission was to encourage Britain to produce more real goods and services, to work harder and invest more by reforming taxes and regulation. What happened next is dispiriting in the extreme. …Truss and her Chancellor moved too quickly and, paradoxically, given their warnings about the rottenness of the system, ended up pulling out the last block from the Jenga tower, sending all of the pieces tumbling down. …they didn’t crash the economy – it was about to come tumbling down anyway – but they had the misfortune of precipitating and accelerating the day of reckoning. …Andrew Bailey, the Governor of the Bank of England…, has been deeply unimpressive in all of this, helping to keep interest rates too low… The idea, now accepted so widely, that the price of money must be kept extremely low and quantitative easing deployed at every opportunity has undermined every aspect of the economy and society. …Too few people realise how terribly the easy money, high tax, high regulation orthodoxy has failed.

Allister closes with some speculation about possible alternatives. If the Tories in the U.K. decide to reject so-called “free-market fundamentalism,” what’s their alternative?

He thinks the Labour Party will take control, and with very bad results. Jeremy Corbyn will not be in charge, but his economic policies will get enacted.

If Truss is destroyed, the alternative won’t even be social democracy: it will be Labour, the hard Left, the full gamut of punitive taxation, including of wealth and housing, and even more spending, culminating rapidly in economic oblivion.

That is an awful scenario. Basically turning the United Kingdom into Greece.

I want to take a different approach, though, and contemplate what will happen if the Conservative Party rejects the Truss approach and embraces big-government conservatism.

Here are some questions I’d like them to answer:

• Do you want improved competitiveness and more economic growth?
• If you want more growth, which of your spending increases will lead to those outcomes?
• Which of your tax increases will lead to more competitiveness or more prosperity?
• Will you reform benefit programs to avert built-in spending increases caused by an aging population?
• If you won’t reform entitlements, which taxes will you increase to keep debt under control?
• If you don’t plan major tax increases, do you think the economy can absorb endless debt?

I’m asking these questions for two reasons. First, there are no good answers and I’d like to shame big-government Tories into doing the right thing.

Second, these questions are also very relevant in the United States. Even since the Reagan years, opponents of libertarian economic policies have flitted from one trendy idea to another (national conservatism, compassionate conservatism, kinder-and-gentler conservatism, common-good capitalism, reform conservatism, etc).

To be fair, they usually don’t try to claim their dirigiste policies will produce higher living standards. Instead, they blindly assert that it will be easier to win elections if Republicans abandon Reaganism.

So I’ll close by observing that Ronald Reagan won two landslide elections and his legacy was strong enough that voters then elected another Republican (the same can’t be said for big-government GOPers like Nixon, Bush, Bush, or Trump).

Switching back to the United Kingdom, Margaret Thatcher repeatedly won election and her legacy was strong enough that voters then elected another Conservative.

The bottom line is that good policy can lead to good political outcomes, whereas bad policy generally leads to bad political outcomes.

P.S. To be sure, there were times when Reagan’s poll numbers were very bad. And the same is true for Thatcher. But because they pursued good policies, economic growth returned and they reaped political benefits. Sadly, it appears that Truss won’t have a chance to adopt good policy, so we will never know if she also would have benefited from a similar economic renaissance.

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Haiti and the Cost of Bad Government

There are some Caribbean jurisdictions that are very rich and successful, such as the Cayman Islands. There are others that have middle-of-the-road track records, such as Barbados.

Then there’s the basket case of Haiti.

Here’s data from the World Bank about per-capita economic output, showing how these three jurisdictions compare to both the United States and the world average.

And if you want another perspective, the United Nations’ Human Development Index also shows big gaps (the Cayman Islands is a territory of the United Kingdom rather than an independent nation, so it’s not part of the UN’s dataset).

So why am I citing this data?

Because Lydia Polgreen has a column about Haiti in the New York Times that contains a lot of fascinating history about that unfortunate nation, including the reign of left-wing firebrand Jean-Bertrand Aristide earlier this century.

But I was especially interested in her analysis about the current crisis and what may happen in the future.

Haiti is in free fall. …Gangs, most of which have ties to political and business leaders, have all but shut down Haiti’s economy by cutting off the flow of fuel and food. Hunger is bearing down on many families. Cholera, which once killed around 10,000 people here, is again spreading. …For all its seeming complexity, the current upheaval turns on the same question that has driven almost every crisis on this island for the past 230 years: Who will rule Haiti? …Haiti has long had independence, but where was its true freedom? …What does the world owe Haiti today? First and foremost to leave it alone. To give Haitians the time, space and support to imagine a different future for their own country. ..Over the past dozen years, Haitian politics has grown ever more fractured as the country has been battered by a shattering earthquake and a series of storms and hurricanes. The political scene has been dominated by American-backed center-right leaders… In the absence of a modern industrial economy, the country quickly stratified. There is a mercantile class that makes most of its money importing goods and selling them to everybody else — desperately poor people surviving on subsistence wages and remittances from a thriving diaspora in the United States, Canada, France and beyond. …The first step to helping Haiti fulfill its destiny, to be the independent Black republic its revolution promised, may be for the rest of us to get out of its way.

I’m in favor of Haiti having a stronger and better democracy. That hopefully would lead to improvements in the “rule of law.”

But I fear that Haiti’s economy is mostly being held back by statist economic policy.

The Heritage Foundation’s Index of Economic Freedom ranks Haiti a lowly #150 (out of 177 nations), with failing scores in many categories.

The Fraser Institute’s Economic Freedom of the World gives Haiti a somewhat better score (though still a dismal #96 out of 165).

But notice that the nation’s overall level of economic liberty today is lower than it was in the early 2000s, when Aristide was in power.

So if Haiti has been “dominated by American-backed center-right leaders” in recent years, as Ms. Polgreen writes in her column, they obviously are not center-right on economic policy.

The bottom line is that we know the recipe that makes nations economically successful. And we also know that Haiti has not been following that recipe (other than perhaps looking at what works and then choosing the opposite).

So even if the nation somehow achieves perfect democracy, don’t hold your breath expecting a big jump in living standards.

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America’s Best and Worst Governors

What’s the reward for a governor who replaces a discriminatory and punitive system with a simple and fair flat tax, particularly in a year when many other states also are enacting better tax policy?

The reward for Kim Reynolds of Iowa is the top score in the Fiscal Policy Report Card on America’s Governors 2022, authored by Chris Edwards.

But it’s not just pro-growth tax reform. Iowa’s governor also scored highly because “Iowa general fund spending has risen at just a 2.3 percent annual average rate under Reynolds.”

Chris Sununu of New Hampshire was in second place, followed by the governors of Nebraska, Idaho, and Arizona (which also enacted sweeping tax reform).

And what’s the penalty for being a tax-hiking big spender?

Well, if “general fund spending expanded at an annual average rate of 6.3 percent between 2013 and 2022” and you were governor during those years, then you deserve to be known as the worst of the worst.

Especially if you also pushed big tax increases and you routinely try to sabotage your state’s constitutional ban on income taxes.

So “congratulations” to Jay Inslee. The governor of Washington definitely deserves his F.

Gavin Newsom of California is the nation’s second-worst governor (hardly a surprise).

The governors of Oregon, New Jersey, Michigan, Illinois, Pennsylvania, and Minnesota also received failing grades (I am surprised anytime New Jersey and Illinois avoid last place).

For those interested, here are the rest of the governors. Roy Cooper of North Carolina is the highest-scoring Democrat, followed by Michelle Lujan Grisham of New Mexco.

Bill Lee of Tennessee is the lowest-scoring Republican. Other Republicans with bad grades include the governors of Vermont, Alabama, and Missouri.

For those who follow high-profile officials, Governors Ron DeSantis, Kristi Noem, and Greg Abbott all received unremarkable C grades.

P.S. At the risk of stating the obvious, fiscal policy is not the only thing that matters. Readers who want to assess the overall level of economic liberty in different states should peruse Economic Freedom of North America and Freedom in the 50 States.

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Brett Favre, Redistribution, Welfare Reform, and Government-Enabled Corruption

I have repeatedly opined that big government enables corruption.

And I have also asserted over and over again that big government is a racket for the benefit of insiders.

So you can understand why I get upset when the rich and powerful use the coercive power of government to line their pockets at the expense of ordinary taxpayers.

Now I have a new reason to be angry.

Reporting for the New York Times, Neil MacFarquhar describes a scandal involving Mississippi bigwigs feeding at the public trough.

John Davis, who served as executive director of the Mississippi Department of Human Services under former Gov. Phil Bryant, pleaded guilty to both federal and state charges of embezzling federal welfare funds. Millions of dollars were transferred to friends and relatives, court documents say. According to a lawsuit filed by the state in May, around $5 million was diverted to Ted DiBiase, a flamboyant retired wrestler once known as “The Million Dollar Man,” and two of his sons… Much of the money went to fictitious services, bogus jobs, first-class travel arrangements and even one son’s stay at a luxury rehab center in Malibu, Calif., that cost $160,000, the suit claims. Similarly, the state claims that Marcus Dupree, a former high school football phenom and professional running back, who was paid to act as a celebrity endorser and motivational speaker, did not perform any contractual services toward the $371,000 he received to purchase and live in a sprawling residence with a swimming pool and adjacent horse pastures in a gated community. Mr. Favre, who earned more than $140 million in his Hall of Fame career, was paid $1.1 million for speeches he never gave, the suit said. He also orchestrated more than $2 million in government funds being channeled to a biotechnology start-up in which he had invested, according to the suit. …The case follows a state audit released in May 2020 suggesting that as much as $94 million of TANF funds might have gone astray.

Sounds like a typical story about big government and corruption, right?

That’s certainly true, but some of our friends on the left argue that it is also evidence that Bill Clinton’s welfare reform backfired.

Experts said the fraud was rooted in changes enacted in such programs in 1996, when cash benefits paid to poor families were replaced by block grants issued to states.

Since I have defended Clinton’s welfare reform (along with some of his other good policies), the above excerpt caught my attention.

So I looked for more information.

In a piece for the American Enterprise Institute, Angela Rachidi explains the underlying issues.

A scandal involving former NFL quarterback Brett Favre and the federal welfare program Temporary Assistance for Needy Families (TANF) exploded…following new revelations that Mississippi officials, including the former governor, misdirected federal TANF money to enrich themselves, their celebrity friends, and other well-connected individuals. …the scandal draws attention to the TANF program. Critics have partly blamed the welfare reform law from 1996, which created TANF, for allowing such fraud. …Instead of an entitlement where government officials distribute money to all eligible people, TANF is a block grant provided… As awful as this scandal is, the fraud and abuse on display in Mississippi is not unique to TANF and not caused by its block grant structure. The Government Accountability Office (GAO) estimated that from 2015–2017 the annual average amount of Supplemental Nutrition Assistance Program (SNAP) benefits (or food stamps) “trafficked,” meaning retailers taking a fraudulent profit, was $1.2 billion. The GAO also found that improper payments in Medicaid, including payments for services not provided, totaled $36.7 billion in 2017. Earlier this month, the Department of Justice charged a nonprofit organization in Minnesota with a $250 million scheme that took federal pandemic-relief money earmarked for a child nutrition program and instead pocketed the funds.

In other words, corruption is an inherent part of government programs, whether the money is distributed as block grants or sent directly to recipients.

But not all government spending is created equal. Some ways of spending money do more damage than other ways of spending money.

Ms. Rachidi points out that welfare reform produced good results.  I don’t know if it saved money for taxpayers, but it led to progress as measured by variables such as labor force participation and child poverty.

None of this excuses what happened in Mississippi, but the context is important. Welfare reform, which created TANF, transformed a broken entitlement program—Aid to Families with Dependent Children—into a more effective system that gives states flexibility to address the underlying causes of poverty, including limited employment and unmarried parenthood. These reforms have significantly reduced dependence on cash welfare and increased employment among single mothers, which helped dramatically lower child poverty over the past two decades.

The obvious takeaway, as I pointed out back in 2015, is that we should we should be expanding on Bill Clinton’s success by replacing other federal entitlements with block grants.

The federal government maintains a Byzantine maze of redistribution programs, so there are lots of opportunities for progress. Medicaid is an obvious example, along with food stamps. Especially since both programs are riddled with fraud.

P.S. Unsurprisingly, Joe Biden wants to move in the wrong direction.

P.P.S. In my libertarian fantasy world, the federal government would have neither entitlements nor block grants. That also happens to the world envisioned by America’s Founders (and the reality Americans enjoyed up until the 1930s).

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The Most Important Ballot Referendum of 2022

Post-Election Addendum: Sadly, Massachusetts voters narrowly approved this class-warfare scheme.

While most people pay attention to which political party enjoys success when there’s an election, I think it’s also important to look at ballot initiatives.

• In 2021, voters in the left-leaning state of Washington overwhelmingly registered their opposition to capital gains taxation.
• In 2020, voters in the deep-blue state of Illinois said no to the big spenders by voting to preserve the state’s flat tax.
• In 2019, voters in left-leaning Colorado also said no to the big spenders by voting to protect the state’s spending cap.

But, as we’ve seen in California and Oregon, not every referendum produces a sensible result.

Today, we’re going to look at the most important ballot initiative of 2022. But before looking at the details, here’s a map showing the states gaining and losing population when Americans move across borders.

You’ll notice that Massachusetts is one of the top states for outbound migration, which means people are “voting with their feet” against the Bay State.

But bad news can become worse news. And that will definitely be the case if voters in Massachusetts approve a referendum next month to junk the state’s flat tax and replace it with a class-warfare system that has a top rate of 9 percent.

Jeff Jacoby wrote last year about the idea in a column for the Boston Globe.

A century-old provision of the Massachusetts Constitution commands that if the commonwealth taxes income, it must do so at a “uniform rate.” Five times in the modern era — in 1962, 1968, 1972, 1976, and 1994 — tax-and-spend liberals have invited voters to discard that rule and make it legal to soak the rich at higher tax rates. Five times voters have said no. …There is considerable arrogance in the way advocates of the surtax blithely disregard the voters’ repeated refusal to overturn the constitutional ban. Their attitude seems to be that no matter how many times the people uphold the uniform-rate rule, there is no reason to take them seriously. …more than 150 Massachusetts businesses representing almost 16,000 workers sent lawmakers an open letter imploring them not to hobble the state’s economy with a stiff new tax, and expressing “alarm” at the proposed constitutional amendment. They…know that a surtax aimed at millionaires is bound to injure countless people who will never earn anywhere close to a million bucks.

The Wall Street Journal has editorialized against the proposal.

…progressives in Boston want to join New York and other nearby states in a high-tax arms race. …Bay State ballots in November will give voters the choice to place a 4% surtax on incomes above $1 million, bringing the top rate to 9% from 5%. The proposal would amend the state constitution to remove its flat-tax mandate. Passing the measure would rocket Massachusetts to seventh from 31st on the list of states with the highest marginal income-tax rates. …A $2.3 billion revenue surplus shows that the state is already taxing more than it needs. This year’s tax haul was so big it triggered a largely forgotten state law that caps revenue. Residents may soon receive checks that refund a portion of last year’s taxes. …Approving the tax would speed up a wealth exodus already under way. The Pioneer Institute last year noted that Massachusetts’ tax base has been eroding, and there’s no surprise about where the escapees are going. The top two destinations are Florida and New Hampshire, both of which lack an income tax. …The constitution’s flat rate mandate is a crucial limit on the demands of interest groups for ever-more spending. If tax rates rise and the revenue cap goes away, spending will soar to snatch the new revenue and soon the politicians will return to seek even higher rates, as they always do.

The economic consequences of class-warfare taxation are never positive.

And that will be true in Massachusetts. A study from the Beacon Hill Institute in Massachusetts estimates the economic damage that the surtax would cause.

…we find, using our in-house computer model (MA-STAMP) that the effects on the economy will be as follows: In its first year of implementation, the amendment will cause the state to lose 4,388 working families due to outmigration. This outmigration plus a reduction in labor hiring and labor-force participation will cause a loss of 9,329 jobs. …the state economy, real (inflation-adjusted) gross domestic product, will shrink by $431 million… Advocates of the measure claim that it will make possible a $2 billion annual in state spending. …Instead, we find that the revenue yield of the tax will be far less, the result of the expected shrinkage in economic activity. (See Table E-2.) In its first year of implementation, combined state and local revenues will rise by only about $1.2 billion.

Here’s a table showing some of the negative effects.

Alex Brill of the American Enterprise Institute also estimated that revenues would be lower than expected once the effects of the Laffer Curve are incorporated into the analysis.

Here are some excerpts from his article in the Hill.

Modifying the revenue forecast to incorporate evidence from the academic literature about likely behavioral changes yields a significantly lower estimated revenue pickup. I estimate that about 400 of the 22,000 taxpayers affected by the surtax would exit the state and many others would reduce work or shift and relabel their income to avoid the tax. By my estimate, the surtax would generate approximately $1.5 billion in 2023, since these behavioral responses would offset 32 percent of the revenue gain that would occur if taxpayers kept their behavior unchanged. Using a similar approach, Tufts University’s Center for State Policy Analysis recently estimated that the proposed surtax would generate only $1.3 billion in 2023.

Last but not least, the Tax Foundation crunched the numbers and also found the surtax would cause significant economic damage.

…while no one would mistake Massachusetts for a low-tax state, it has carved out a place as a competitive area to live and work within the Northeast corridor. …but consider the Commonwealth’s ranking on the Tax Foundation’s State Business Tax Climate Index…in 2022, the Bay State still ranked 34th overall on the Index—well below the median. …Massachusetts’ competitive tax advantage in New England is primarily due to its individual income and sales tax systems, which rank 11th and 12th on the Index, respectively. With regard to its neighbors, only New Hampshire has a better overall Index ranking than Massachusetts. …In 2007, Christina Romer and David Romer, professors of economics at the University of California Berkeley, conducted a study to determine the impact of legislated tax changes on the economy. …The study found that a tax increase equal to 1 percent of gross domestic product (GDP) resulted in an estimated 3 percent decline in GDP after three years. …If the Romer and Romer study were applied to the Massachusetts surtax it would result in a 0.942 percent decline in GDP after three years. In other words, the Commonwealth’s total economic output could contract by $5.98 billion by the end of 2025.

Here’s a table from the report, showing that zero-income tax New Hampshire and Florida already are big winners when people escape Massachusetts.

If the referendum is approved, we can easily predict that future versions of this chart will show much bigger numbers.

Simply stated, some of the geese with the golden eggs will fly away (while the ones that stay will decide to produce fewer eggs – as well as figure out ways to protect the eggs that remain).

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Politician of the Year

Because of their despicable tendency to buy votes with our money, I view politicians with considerable disdain. But when a politician goes above and beyond the call of duty by doing something laughably awful, I give them special recognition.

Here are some past winners of my “Politician of the Year” award.

• Gavin Newsom, Eric Garcetti, and Stacey Abrams
• Elizabeth Warren
• Richard Blumenthal
• Nancy Pelosi and Mayor Jim Kenney
• D.C. Councilman Jack Evans
• Malaysia’s Prime Minister
• France’s President
• President of the Philippines

Today’s column adds someone to this rogue’s gallery. Congratulations to the Mayor of New York City, Eric Adams.

In a story for the New York Post, Susan Edelman reveals a cozy and corrupt arrangement between the Mayor and one of his top appointees.

Schools Chancellor David Banks quietly promoted Mayor Adams’ girlfriend to a top job at the Department of Education, just months after Adams hired Banks’ girlfriend as a deputy mayor, The Post has learned. Banks named Tracey Collins — Adams’ longtime partner and NYC’s unofficial First Lady — the DOE’s “senior advisor to the deputy chancellor of school leadership,” Desmond Blackburn. She started the new job in July, and got a giant, 23% raise to $221,597 a year, records show. Hizzoner named Banks’ girlfriend, Sheena Wright, and four other women deputy mayors last Dec. 21. Deputy mayors made $251,982 in FY 21. …David Bloomfield, a Brooklyn College and CUNY Grad Center education professor, said, “It’s not only a bad look, smacking of favoritism and cronyism. It displays a degree of insularity and groupthink that’s adverse to organizational effectiveness.”

Needless to say, everyone involved claims that the appointments were based on merit.

DOE spokesman Nathaniel Styer said Collins, “a veteran educator with 30 years of experience,” replaced another senior advisor, Mariano Guzman, who retired. Styer said Collins “went through a rigorous process that did not include City Hall’s oversight. …City Hall spokesman Fabien Levy said, “Mayor Adams was not involved in the hiring for this position and has a strict firewall when it comes to any matters involving her employment.”

Needless to say, these claims don’t pass the laugh test. Anyone with an IQ above room temperature understands that Mayor Adams and Chancellor Banks are helping to enrich themselves at the expense of taxpayers.

But I want to make a different point.

If you paid close attention to the above excerpts, you noticed that the girlfriend of Mayor Adams is making more than $221K to serve as “senior advisor to the deputy chancellor of school leadership.”

I realize this is just a stab in the dark, but that job should not even exist, just like the job of “deputy chancellor of school leadership” should not exist (and the same is true if there’s a “chancellor of school leadership”).

In other words, all of these slots are sad examples of the self-serving bureaucuratization of government schools.

And let’s not forget about the girlfriend of Chancellor Banks, who is getting nearly $252K to be one of a plethora of deputy mayors.

Once again, I’m going to take a wild guess and assert that none of the deputy mayors serve any necessary function. These slots almost surely are patronage appointments that allow insiders to get fatter and richer at the expense of taxpayers.

That’s the real scandal, financed by you and me.

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Socialism Humor

I’ve only had two columns (here and here) mocking socialism this year, so time to pick up the pace with five new items for our collection.

Our first example cleverly captures the staggering naivete of some young people.

(By the way, there is a potential antidote for youthful socialism.)

Next we have a classic example of how coerced equality is the go-to solution anytime socialists identify a problem.

But don’t overlook the fact that the supposed solution doesn’t work. Which is always the case with socialism.

Our third item is some satire from Babylon Bee and I’ve picked the best five.

• 2) The Borg Collective: Like a more efficient Federation that tears through freedom-loving planets and subjects them to the will of the collective.
• …4) In John Lennon’s “Imagine”: Everything works perfectly when you imagine it! Even marriage to Yoko Ono.
• 5) Smurf Village: Cheerful workers in a heavily regulated population. Just like China.
• …9) An ant farm: It worked great until a kid came and shook it up.
• 10) Whatever South American country Che Guevara ruled: We’re sure socialism worked there, otherwise people wouldn’t still be wearing the shirt

Next we have a contribution from AOC.

I always save the best for last and regular readers will understand why this fifth item is my favorite.

If it sounds like an exaggeration to take away $7, just think about Senor Alvarez in Spain.

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What Can We Learn by Comparing Relative Living Standards in OECD Nations?

Because of my libertarian proclivities, I don’t like when people assert that the United States should have European-sized government.

But this is not merely a question of ideology.

I’ve repeatedly pointed out that there is a relationship between national prosperity and economic liberty. And I’ve shared plenty of data showing that ordinary Americans have significantly higher living standards that their counterparts on the other side of the Atlantic Ocean.

So why “catch up” with countries that are lagging behind?

One of my favorite ways of illustrating the gap is the “actual individual consumption” data from the Paris-based Organization for Economic Cooperation and Development.

Here are the latest numbers, with show that the United States is more than 50 percent above the average for OECD nations.

I’m not surprised that Luxembourg ranks second since it is a tax haven. And it’s also not surprising that oil-rich Norway is in third place or that market-friendly Switzerland is in fourth place.

But notice that Europe’s most famous welfare states, France (102.5) and Sweden (104.7), are barely above average.

More important, notice that the United States is nearly 50 percent higher than those supposedly more enlightened nations.

Seems like there’s a lesson to be learned about what type of economic policy delivers the best results for ordinary people.

P.S. The United States has been at the top of these rankings for as long as I’ve been sharing the OECD’s AIC data, but other countries have suffered big falls or enjoyed big increases.

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Traffic Cameras and Greedy Government

Local politicians can be just as greedy and callous as state politicians and national politicians.

Even if it means mistreating poor people.

Perhaps the best evidence for the preceding sentence is the way that traffic cameras are used to generate revenue.

Indeed, local politicians use cameras as a way of grabbing more money even if the net result is more traffic accidents!.

Let’s start with a report in Reason earlier this year. Written by Julian Verdon, it documents how government greed is the main motive for speed cameras.

Pete Buttigieg’s new National Roadway Safety Strategy (NRSS) promotes speed cameras nationwide… But research shows that speed cameras are subject to error and actually end up serving as a means to generate government revenue. …In Chicago, where speed cameras are abundant, the camera program improperly gave out over $2.4 million in fines from 2013 to 2015. Using a random sample analysis, the Chicago Tribune estimated the number of bad tickets to be somewhere around 110,000. …In Washington, D.C., a 2014 report from the D.C. Office of Inspector General found that ticket writers made arbitrary decisions when a camera captured more than one vehicle, and they didn’t know which one was speeding. …Unsurprisingly, the misuse of speed cameras has also become a massive source of revenue for local government.

These are all good points, but they overlook the bigger issue, which is that the cameras usually are placed on streets where speed limits are set at absurdly low levels.

At the risk of stating the obvious, that’s a scam to grab money.

I’m more sympathetic to cameras that catch people running red lights since that behavior can endanger others.

But it seems governments are incapable of doing the right thing for the right reason. Such cameras are designed to maximize revenue for politicians by shortening yellow lights – even even that that approach causes more crashes.

It’s also worth noting that the companies that set up traffic cameras frequently bribe local politicians.

As one might expect, Chicago is the epicenter of sleaze, as reported by Scott Shackford for Reason.

Illinois State Sen. Emil Jones III (D-Chicago) was indicted in September on federal charges of bribery and lying to the FBI. He’s accused of accepting $5,000 and the promise of a job for an associate from a person connected to SafeSpeed, a red-light camera company. …At this point, we should not be surprised at accusations of corruption and bribery concerning the extremely active revenue-generating cameras in the Chicago area. …Mayor Lori Lightfoot even arranged to have the cameras hit cars traveling just six miles per hour over the speed limit to help boost the city’s revenue. …In 2016, a former Chicago official was sentenced to 10 years in federal prison for taking $2 million in bribes from a different red light camera company…four other local officials who have faced charges in the past for misconduct connected to SafeSpeed’s work in the Chicago suburbs. …Oakbrook Terrace’s former mayor, Tony Ragucci,…pleaded guilty in May to pocketing close to $90,000 in exchange for allowing SafeSpeed to operate red-light cameras in the town. …”We all know it’s about money. Revenue. Legal or illegal. That’s why these cameras are there,” Oak Brook Village Trustee Mike Manzo said.

We all know traffic cameras are about revenue rather than safety, but it’s good that Mr. Manzo confirms our suspicions.

That’s why you should watch this video to see why Jay Beeber is a hero.

And it’s why we should cheer this anonymous hero as well.

Since I’m handing out plaudits, the people of Arizona also deserve applause, along with Houston’s voters.

P.S. There are even some good people in other countries.

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The Rahn Curve (Armey Curve) and the Quantity/Quality of Government Spending

At the end of last month, I wrote about the growth-maximizing size of government, citing a study that estimated that the public sector in Sudan should not consume more than 11.17 percent of the nation’s economic output.

I realize that very few people care about Sudanese fiscal policy, but the research gave me an opportunity to condemn the OECD, IMF, and UN for peddling the nonsensical argument that more government spending would promote faster growth in poor nations.

Today, I want to cite another study, in this case about the growth-maximizing size of government in India. But, once again, I’m citing some research to make a bigger point.

First, here are the findings from the study, written by Neha Jain and Niharika Sinha.

The present study aims to examine the relationship between government size and economic growth in India for the period from 1961 to 2018. Additionally, as a novel contribution, the current study also attempts to examine the existence of Armey curve and estimate the threshold level of government size in India. …The result of the study confirms…the existence of Armey curve and supports the Armey curve hypothesis in India. There exists a positive impact of government size till the threshold level, and beyond the threshold level, the coefficient of economic growth tends to decrease. The estimated optimal government size is 11.89% for India…the findings of the study also suggest that a large size of the government can be harmful for the efficiency of economic growth; thus, adjusting the government at its optimum is crucial to the economy.

By the way, the Armey Curve is the Rahn Cure and the Rahn Curve is the Armey Curve (there’s ongoing discussion of who was the first to visually depict the upside-down-U-shaped relationship between the size of government and economic performance).

But let’s set aside that discussion. Regardless of who deserves credit, it’s vitally important that policymakers understand that excessive government spending is very harmful for prosperity.

That’s true in India, and that’s true in the United States (especially since government is too big right now and is expected to become a bigger burden in the future).

But while it’s good to have a discussion on the quantity of government spending, let’s not forget that the quality of government spending also matters.

To be more precise, some types of government spending can be helpful to growth and other types of spending are usually harmful to growth.

• Rule-of-law spending – If done effectively, spending for pure public goods such as administration of justice and enforcement of contracts can create a favorable environment for more growth.
• Physical capital spending – The growth impact (or anti-growth impact) depends on whether money for ports, roads, etc, is spent efficiently, thus offsetting the cost of diverting resources from the economy’s productive sector.
• Human capital spending – The growth impact (or anti-growth impact) depends on whether money for education, training, etc, is spent efficiently, thus offsetting the cost of diverting resources from the economy’s productive sector.
• Defense/military spending – May be necessary for national survival, but otherwise bad for growth since labor and capital are diverted from the economy’s productive sector to government.
• Social welfare spending – May be compassionate (or dependency inducing), but otherwise bad for growth since labor and capital are diverted from the productive sector to government.

The purpose of today’s column is to conceptually explain how different types of government spending may or many not affect economic performance, but I can’t resist noting that the United States does a terrible job of spending money on human capital and physical capital.

And I can’t resist observing that the vast majority of America’s federal budget is for social welfare spending.

P.S. Developing nations do a bad job of providing rule of law, but I have near-zero faith that more government spending will lead to improvements. Instead, more spending will be a vehicle for ruling elites to cement their power by buying votes.

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In a Tweet, Everything You Need to Know about Taxes and Incentives

A big division among economists is whether taxes have a big or small impact on incentives.

If taxpayers are very responsive, that means more economic damage (to use the profession’s jargon, a greater level of deadweight loss).

If you’re wondering which economists are right, there’s a lot of evidence that taxpayers are sensitive to changes in tax rates, Especially upper-income taxpayers, in part because they have significant control over the timing, levels, and composition of their income.

This is why entrepreneurs, innovators, inventors, and investors respond to difference in tax rates.

And athletes also make decisions based on tax policy. Here’s a tweet about Tyreek Hill, one of the best wide receivers in the National Football League. When deciding which team to sign with for this year, he picked the Miami Dolphins, located in a state with no income tax.

Mr. Hill also had the option to sign with the New York Jets.

But that would have meant letting greedy politicians in either New York or New Jersey (where the Jets play their home games) grab almost 11 percent of each additional dollar he earns.

According to this map, star athletes should be big fans of gray states and steer clear of dark-brown (or is that maroon?) states.

There’s research, incidentally, showing that teams based in low-tax states actually win more games.

P.S. I’ll close by reiterating my caveat about taxes being just one piece of the puzzle. After all, I speculated many years ago that taxes may have played a role in LeBron James going from Cleveland to Miami. But he then migrated to high-tax California. Though many pro athletes have moved away from the not-so-Golden States, so the general points is still accurate.

P.P.S. I feel sorry for Cam Newton, who paid a marginal tax rate of nearly 200 percent on his bonus for playing in the 2016 Super Bowl.

P.P.P.S. Taxes also impact choices on how often to box and where to box.

P.P.P.P.S. Needless to say, these principles also apply in other nations.

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Has Free Enterprise Produced More Prosperity or More Suffering?

I have a multi-part series making the case for capitalism (Part I, Part II, Part III, Part IV, Part V, and Part VI), and I’ve shared lots of long-run data showing how some people began to enjoy unimaginable prosperity as capitalism emerged and monarchism, feudalism, and mercantilism began to fade.

For those interested in this remarkable story of human enrichment, Don Boudreaux and Deirdre McCloskey have must-watch videos on how capitalism enabled (some) nations to escape poverty.

But not everybody understands or appreciates the benefits of capitalism.

MSN has an article, authored by Claire Conway, about new research that ostensibly shows that capitalism has been bad news for people.

…a study recently published in World Development…provided three conclusions. They found that extreme poverty was not, in fact, a normal or universal condition prior to the 19th century. …The second conclusion is that the rise and expansion of capitalism saw a dramatic deterioration in human welfare. …The third conclusion reached is that recovery from this prolonged period of immiseration occurred only recently. Progress in human welfare did not begin until the late 19th century in Northwest Europe and not until the mid-20th century in the global South. Researchers point out that this coincides with the rise of the labor movement, de-colonization, and socialist political parties.

At the risk of understatement, these results are very shocking.

So I tracked down the study, authored by Dylan Sullivan and Jason Hickel, which can be read here. Here are some highlights from the research.

The common notion that extreme poverty is the “natural” condition of humanity and only declined with the rise of capitalism rests on income data that do not adequately capture access to essential goods. Data on real wages suggests that, historically, extreme poverty was uncommon and arose primarily during periods of severe social and economic dislocation, particularly under colonialism. The rise of capitalism from the long 16th century onward is associated with a decline in wages to below subsistence, a deterioration in human stature, and an upturn in premature mortality. ..Where progress has occurred, significant improvements in human welfare began only around the 20th century. These gains coincide with the rise of anti-colonial and socialist political movements.

Yes, shocking results. But, having read the article, they are not accurate results.

Some of the mistakes are fundamental, such as blaming capitalism for bad results under colonialism.

Other mistakes are the result of data manipulation, such as the authors arbitrarily deciding that poverty only exists during times of famine.

But I want to focus on one of the study’s final points, which is that human progress is correlated with the rise of socialism.

Here are some further excerpts from the study.

The European data, then, does not support the standard poverty narrative. …The rise of capitalism, rather than delivering improvements in human welfare, was associated with plummeting wages… Progress did not begin until the 1880s in the European core, and the 20th century in the European periphery…The evidence reviewed here suggests that, where poverty has declined, it was not capitalism but rather progressive social movements and public policies…that freed people from deprivation. …Poverty alleviation and gains in human health have historically been linked to socialist political movements and public action, not to capitalism.

Is this true? Were people in Western Europe just as poor in 1875 as they were in 1575? Or perhaps even worse off? Did living standards only increase after government started to intervene and redistribute?

Let’s go to Our World in Data, operated by Max Roser and his team at Oxford University.

Here’s a chart on major European economies (along with the United States, for the benefit of U.S. readers). As you can see, it does appear that almost all the growth has occurred very recently.

But we just looked at a linear chart, which is considered inferior when measuring and understanding long-run trends.

What happens if we look at a logarithmic chart?

As you can see, rapid growth began well before 1900. Before income taxes. Before the welfare state. And long before anything resembling socialism.

In other words, Sullivan and Hickel have a very shaky hypothesis that collapses like a house of cards when you examine real-world data.

But we don’t need to rely on numbers from 100 years ago or 200 years ago. My “anti-convergence club” is based on dozens of comparisons over recent decades and in every case we see that market-oriented nations easily out-perform countries with more bigger and more intrusive governments.

The bottom line is that Sullivan and Hickel have no good answer to my never-answered question.

P.S. The authors assert that there’s more statism today than in the 1800s, probably because they are focused on fiscal policy. But that may not be true because of big, offsetting improvements in other policy areas.

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What Fiscal Policy Is Worse than a Wealth Tax?

A wealth tax is an extraordinarily destructive way for governments to generate revenue.

It violates the principles of sensible tax policy and it does a lot of damage since people have less incentive to save and invest. It’s unadulterated double taxation. Or, in some cases, triple or quadruple taxation.

And it’s unfair.

These factors explain why many nations in Europe have abolished their wealth taxes. This map from the Tax Foundation shows the holdouts that still pursue this senseless version of class warfare.

You’ll notice that Spain is one of the few countries that still has this punitive levy. And if you want to learn more about the Spanish version of this levy, you can click here and here for thorough summaries.

But one thing that everyone should understand is that politicians are always capable of making a bad situation worse.

And as you can see from this story by Grace Dean for Business Insider, that’s precisely what the Spanish government is doing by imposing a second wealth tax on the country.

Spain has introduced a second wealth tax amid soaring inflation, adding an extra 3.5% tax on top of wealth over $10 million. …To avoid people being double-taxed, the tax will only apply to the part of people’s assets not already taxed by their autonomous community, the government said. People will be taxed at a rate of 1.7% on assets between 3 and 5 million euros, 2.1% on assets between 5 and 10 million euros, and 3.5% on assets of more than 10 million euros (around $9.76 million). The government said that it was a temporary state tax for 2023 and 2024… The government is also raising taxes on companies with at least 200 million euros in annual income and expects to bring in an additional 200 million euros by increasing taxes on capital gains above 200,000 euros.

The title of today’s column asks “what fiscal policy is worse than a wealth tax”?

The obvious answer is two wealth taxes.

Though I’m not sure why people are referring to this levy as a second wealth tax when it could be considered an expansion of the existing wealth tax.

But semantics don’t matter. What is important is that this levy will backfire.

I explained back in 2019 that a wealth tax is basically a back-door way of increasing the tax burden on income that is saved and invested.

This is a very bad idea in theory, for reasons explained here and here, but most people do not realize how bad it is in practice.

It can result in effective tax rates of more than 100 percent.

That’s already happened to some French taxpayers.

And it almost surely will happen to some Spanish taxpayers, particularly since financial markets are not exactly enjoying a good year.

Hardly a recipe for improved competitiveness and faster growth.

But also hardly a surprise given the harsh ideological perspective of the leftist parties governing Spain.

P.S. I predict Andorra will be the big winner.

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The Cost of Big Government in France

I often cite the OECD’s data on “actual individual consumption” to show that the average American enjoys higher living standards than the average European.

In this clip from a recent presentation, I compare the United States and France.

I’m motivated to write on this topic because of a recent tweet from Arnaud Bertrand.

I don’t know who he is, but he shares some very depressing data about the well-being of ordinary people in France.

The above data, according to Monsieur Bertrand, is before taxes on income.

Which makes me curious, of course, so I went to the OECD’s data on “Taxing Wages.”

Here is the data from Table 3.1, showing the tax burden on lower-income and middle-class taxpayers in France and the United States.

As you can see, the tax burden is much higher in France for every type of household. It doesn’t matter whether the household is single or married, the level of income, or the amount of children.

Indeed, the tax burden in France in every case is above the OECD average and the tax burden in the US is below average.

And don’t forget that average Americans also have much higher incomes than their French counterparts.

The bottom line is that Americans earn more and keep more. Something the keep in mind the next time one of our leftist friends agitates to make America more like Europe.

P.S. From the perspective of French taxpayers, the only good news is that nobody seems to be treated as poorly as the Spanish government treats Senor Alvarez.

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