Mirror, Mirror, on the Wall, Which Nation Punishes Success Most of All?

Marginal tax rates (how much you are taxed for earning additional money) have a big impact on incentives to engage in productive activity such as work, saving, investment, and entrepreneurship.

This is why governments should keep tax rates at modest levels.

But as you can see from this map from the Tax Foundation, European governments generally cannot resist the temptation to impose onerous top tax rates on investors, entrepreneurs, business owners, and other successful taxpayers.

Congratulations to Hungary for having the lowest rate, followed by Estonia, the Czech Republic, and Slovakia.

And “congratulations” to Denmark for having the highest top tax rate, followed by France, Austria, and Spain.

At this point, a few caveats are necessary. A nation’s top income tax rate is important, but it’s not the only thing that matters for tax policy.

• It’s also important to look at social insurance (payroll) taxes, particularly if they apply to all income.
• It’s also important to look at the level of “double taxation” on income that is saved and invested.
• It’s also important to look at VATs, which increase the wedge between pre-tax income and post-tax consumption.

Needless to say, other economic policies also matter. A nation might have a good tax system but very dirigiste policies in other areas. Or vice-versa.

For instance, even though Hungary has the lowest top tax rate on personal income and Denmark has the highest, there’s actually more overall economic liberty in Denmark.

Some readers may be wondering how the United States compares to the European nations shown in the above map.

The good news (relatively speaking) is that the top tax rate in the United States is 42.9 percent, so that’s lower than the average in Europe.

The bad news is that the US would have the highest tax rate if Biden’s budget was approved.

However, the top income tax rate in the United States can vary substantially depending on state.

A resident of New York or California, for instance, will face a much higher top tax rate than a resident of a zero-income-tax state such as Texas or Florida.

The same thing is even more true in Switzerland, where top tax rates vary substantially.

A successful taxpayer in Zug pays a top tax rate of 22.22 percent, less than half as much as a similar taxpayer in Geneva.

I’ll close by noting that this map is another example of the advantages of genuine federalism.

When the central government is small and most government takes place at the state and local level (or, in the case of Switzerland, at the cantonal and municipal level), there is more diversity, choice, and jurisdictional competition.

That type of federalism still exists in Switzerland, but unfortunately is eroding in the United States.

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More Government = More Corruption

My Democratic friends correctly argue that Republicans have a corruption problem and my GOP friends correctly argue that Democrats have a corruption problem.

I wish both sides would recognize that the real problem is big government.

As I wrote last year, “unethical people are naturally drawn to politics and unethical interest groups naturally seek to obtain unearned wealth (a process known as “rent seeking“).”

And I shared lots of examples.

• This is true for tax policy.
• And I mean very true for tax policy.
• This is true for trade policy.
• This is true for bailout policy.
• This is true for regulatory policy.
• This is true for spending policy.
• This is true for health policy.
• This is true for business policy.
• And it’s true for environment policy.

Today, let’s review some wise – and blunt – analysis from Steven Greenhut.

In an article for Reason, he connects the dots to show that the level of corruption is linked to the size and power of government.

Whenever some astounding corruption scandal explodes onto the front pages, the public is aghast and policymakers cobble together new reforms that promise to keep such outrages from occurring again. …Soon enough, however, we learn about new abuses—or some other scandal grabs the headlines. …corruption is inherent in a system where officials dole out public money and regulate almost everything we do. …The most corrupt nations are, of course, those where dictators, politburos, bureaucrats and security officials can do as they please—and where lowly citizens lack the right to free speech or due process. Our current government may be a far cry from the one the founders designed, but it attempts to limit government power, which is the main source of corruption. …corruption fundamentally is a problem of government power, as official actors use immense powers to help themselves and their allies. If we want less corruption, the solution is obvious: We need less government.

Amen. When government’s footprint is smaller, there’s less opportunity for graft.

The moral of the story is that Washington’s revolving door of legal corruption needs to be welded shut.

Thought that may be too much to hope for.

So maybe a more realistic goal is to simply not add more grease to the door so it spins even faster.

Perhaps we can learn from Estonia?

P.S. Today’s column focus on what small government is a good goal if we want less corruption, but don’t forget that there is also a very strong economic case for smaller government.

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Deficit Spending and Inflation

In this segment from a December interview, I explain that budget deficits are most likely to produce inflation in countries with untrustworthy governments.*

The simple message is that budget deficits are not necessarily inflationary. It depends how budget deficits are financed.

If a government finances its budget deficits by selling bonds to private savers and investors, there is no reason to expect inflation.**

But if a government finances its budget deficits by having its central bank create money, there is every reason to expect inflation.

So why would politicians ever choose the second option? For the simple reason that private savers and investors are reluctant to buy bonds from some governments.

And if those politicians can’t get more money by borrowing, and they also have trouble collecting more tax revenue, then printing money (figuratively speaking) is their only option (they could restrain government spending, but that’s the least-preferred option for most politicians).

Let’s look at two real-world examples.

• Consider the example of Japan. It has been running large deficits for decades, resulting in an enormous accumulation of debt. But Japan has very little inflation by world standards. Why? Because governments bonds are financed by private savers and investors, who are very confident that the Japanese government will not default..
• Consider the example of Argentina. It has been running large deficits for decades. But even though its overall debt level if much lower than Japan’s, Argentina suffers from high inflation. Why? Because the nation’s central bank winds up buying the bonds because private savers and investors are reluctant to lend money to the government.

If you want some visual evidence, I went to the International Monetary Fund’s World Economic Outlook database.

Here’s the data for 1998-2022 showing the average budget deficit and average inflation rate in both Japan and Argentina.

The bottom line is that prices are very stable in Japan because the central bank has not been financing Japan’s red ink by creating money.

In Argentina, by contrast, the central bank is routinely used by politicians as a back-door way of financing the government’s budget.

*To make sure that my libertarian credentials don’t get revoked, I should probably point out that all governments are untrustworthy. But some are worse than others, and rule-of-law rankings are probably a good proxy for which ones are partially untrustworthy versus entirely untrustworthy.

**Borrowing from the private sector is economically harmful because budget deficits “crowd out” private investment. Though keep in mind that all the ways of financing government (taxes, borrowing, and money creation) are bad for prosperity.

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European Commission Recommends Economic Suicide

What’s the main fiscal and/or economic problem in the European Union?

• Is it that the burden of taxes and spending is very onerous today?
• Or is it that the burden of taxes and spending will become more onerous in the future?

The easy and correct answer is that both are major problems.

But some people think the problem is that EU nations don’t tax and spend enough.

To make matters worse, this kind of thinking infects the bureaucrats at the European Commission, which has released a new report that reads like a Bernie Sanders campaign screed.

It starts by pretending that that Okun’s tradeoff doesn’t exist.

…taxation can contribute to both social justice and sustainable growth, as well as financing the benefits which underpin the social citizenship contract… Contrary to the rhetoric about the inevitability of a trade-off between social justice and economic growth and a fiscal crisis of the State, the problems of financing the welfare state are far from being inevitable. …everyone should be willing to pay their share of the costs involved, whether individuals or companies.

It then explicitly endorses “pay as you go” as a model for fiscal policy, even though that approach is utterly impractical for a region with aging populations and falling birthrates.

The first specific suggestion is that a PAYG approach is the best way to link the rights and duties of generations over time, in line with the social citizenship contract at the heart of the welfare state.

The report has 21 recommendations. Here are the ones that endorse and embrace new and expanded entitlements.

As you might expect, all that new spending is accompanied by a seemingly endless list of new and expanded taxes.

There are two main options for reforming the taxation of personal income. The first is to expand the tax base by limiting or reducing the many tax breaks that are currently present, from tax credits and tax allowances to tax exemptions and preferential treatment of different sources of income, such as income from capital… The second option for reform is to make the taxation of income more progressive. …Increasing corporate taxation. …As with preferential personal income tax regimes, the EU has an important role to play in levelling the playing field, so eliminating the negative externalities of tax competition and ending the ‘race to the bottom’, as well as making multinationals pay their fair share of tax. …there are a number of arguments for higher taxes on wealth. …Increasing taxes on wealth could help to achieve greater fairness, both in the tax system and in the distribution of resources… A tax on net wealth could complement taxes on income from capital… Indirect taxes…can make it easier to achieve social objectives, as in the case of ‘sin’ taxes… Measures such as the EU carbon tax border adjustment mechanism…can prevent unfair competition… Another option is to tax excess profits… A ‘web tax’ aimed at the excess profits of digital service companies, based on their turnover, could be a transitional step… A levy on financial transactions can also be justified, on grounds of fairness… A further option for Member States is to introduce a new tax, …a surcharge levied at source on all incomes… In summary, there are many options for achieving an adequate, fair, and sustainable means of financing of social protection at both EU and Member State levels.

That’s a frightening list.

And if it looks like it might get implemented, one can only imagine how productive people in Europe would start making plans to escape.

But the bureaucrats recommend Soviet-style exit taxes so they can continue grabbing more money.

Another option would be to tax expatriates for a given number of years after they leave the EU.

Let’s close by looking at one final excerpt.

Nations in the European Union supposedly are bound the “Maastricht Critieria” from something called the Stability and Growth Pact.

These fiscal rules focus on limiting deficits and debt and thus are not nearly as good as the spending cap in Switzerland’s “debt brake.”

But even these weak rules apparently are too stringent according to the report.

…there is widespread agreement on the value of social investment for sustaining the inclusive welfare state in the EU… But…the long-term benefits of social investment constantly come up against short-term pressure for fiscal consolidation. …A new system is needed for monitoring public finances in the EU that would allow policy-makers to identify productive social investment…a golden rule should be applied, allowing borrowing for social investment… A starting point should be to exempt social investment from the new Stability and Growth Pact rules.

The bottom line is that Europe already suffers from excessive fiscal burdens.

Yet the European Commission wants to drive even faster in the wrong direction.

I feel sorry for European taxpayers. Their tax dollars were used to prepare a report that outlines various ways of confiscating an even greater share of their money. That’s adding insult to injury.

P.S. The report discussed today is terrible, but probably not as bad as the European Commission’s lies about poverty or attempted brainwashing of children.

P.P.S. That being said, the EC will never be the worst international bureaucracy. The OECD and IMF compete for that honor.

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The (Even-Stronger-than-We-Thought) Relationship Between Economic Liberty and National Prosperity

I frequently call attention to the “anti-convergence club” because of the many real-world examples showing that nations with free markets and limited governments enjoy much better economic performance.

Here are just a few case studies.

• North Korea vs South Korea
• Botswana vs neighbors
• Chile vs Cuba
• West Germany vs East Germany

All this seems like a strong argument for smaller government. And it is.

But all this data I’ve been sharing may understate the case for economic liberty.

I wrote last October about how satellite-based measures of nighttime light (a proxy for economic vitality) show that nations with less political freedom have a tendency to exaggerate economic performance.

So what happens if we measure the relationship between economic liberty and economic performance using this more-accurate satellite-based data?

Sean P. Alvarez, Vincent Geloso, and Macy Scheck answered that question. Here are some excerpts from their new study.

…the well-documented proclivity of dictators to fudge GDP numbers biases our estimations of the effects of economic freedom on economic development. Since dictatorships are generally also countries with low economic freedom, overstated GDP numbers can fool us into finding more modest effects of economic freedom. To test our argument, we employed newly generated adjustments to GDP numbers based on artificial nighttime light intensity that corrected for the overstatements that dictators made… Swapping unadjusted and adjusted GDP numbers as dependent variables in similar econometric setups allowed us to estimate how large is the bias. For income levels between 1992 and 2013, we find that the true effect of economic freedom is between 1.1 and 1.33 times larger than estimations based on manipulated GDP numbers. For income growth, we find smaller effect for the economic freedom index as a whole but some signs that some components (size of government and the security of property rights) have underestimated positive effects that should not be neglected.

Wonky readers may be interested in the results contained in Table 2 from the study.

And here’s some of the text discussing those results.

…the use of adjusted GDP figures suggests that the effect of economic freedom (i.e., the aggregate index) is roughly 25% larger than estimated with unadjusted GDP figures. For the different components of the index, the use of adjusted GDP figures has an uneven effect. For example, regulation and freedom to trade suggest that the true effects are roughly 20% larger than when using the unadjusted GDP figures. In contrast, the true effects for the component that speaks to the protection of property rights are more than 33% stronger. These are economically significant results that speak to a large bias against finding a pro-development effect of economic freedom.

The bottom line is that economic liberty apparently matters even more than we thought – about 25% more.

So if you want to know why I’ve been so critical of Bush, Obama, Trump, and Biden, that’s part of the answer.

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Biden and Trump Should Learn from Sweden’s Social Security Reform

Some American politicians, such as Joe Biden and Donald Trump, are very much opposed to dealing with Social Security, even though the current system has a massive $56 trillion cash-flow deficit.

For all intents and purposes, both the current president and his predecessor want to kick the can down the road, which surely is a recipe for massive future tax increases and may cause drastic changes to promised benefits.

Given their advanced ages, they probably won’t be around next decade when the you-know-what hits the fan.

But the rest of us will have to deal with a terrible situation thanks to their selfish approach.

Other nations are more fortunate, with leaders who put the national interest above personal political ambition.

Johan Norberg has a new column in the Wall Street Journal about how Swedish lawmakers adopted personal retirement accounts and undertook other reforms to strengthen their pension system.

President Biden refuses to consider any reforms, and so do many Republicans. But that won’t save the program; it’ll doom it. …Sweden faced the same problem in the early 1990s. The old pay-as-you-go pension system had promised too much. With fewer births and longer lives, projections showed the system would be insolvent a decade later. …Its politicians chose not to deceive the voters. …In 1994 the Social Democrats agreed with the four center-right parties to create an entirely new system based on the principle that pensions should correspond to what the beneficiary pays into the system—a system in which the contribution, not the benefits, is defined. …Sweden introduced partial privatization of the kind the American left derides as a Republican plot… The Swedish government withholds roughly 2.3% of wages and puts it into individual pension accounts. Workers are allowed to choose up to five different funds in which to invest this money…the average Swede has made an impressive average return of roughly 10% a year since its inception in 1995, despite the dot-com crash, the financial crisis and the pandemic. …Sweden’s pension system was recently described as the world’s best by the insurance group Allianz, based on a combination of sustainability and adequacy.

Back in 2018, I wrote about Sweden’s pension reforms, and I cited a study I co-authored back in 2000 for the Heritage Foundation.

Readers who want to learn more about the details of the Swedish system should read those publications.

For purposes of today’s column, though, let’s zoom out and see how Sweden’s system compares to other nations.

We’ll start by looking at a report by Mercer and the Chartered Financial Analyst Institute, which compared retirement systems in 43 developed countries. You can click here to view the full report and full rankings, but let’s focus on the United States and Sweden.

As you can see, Sweden beats America in every category, including a giant lead for integrity.

It’s also worth noting that Sweden is above average in every category while the United States is below average in two of the three categories.

Based on the Mercer/CFA report, we know Sweden’s system is good for workers.

But what about taxpayers?

Here’s a table showing the fiscal burden of old-age programs in European nations, taken from a report by the International Monetary Fund.

As you can see for both the present and the future, Swedish taxpayers face one of the lowest burdens, with old-age spending consuming significantly less than 10 percent of economic output.

I’ll close with a couple of very important observations about the international data.

• Sweden is not the top nation in the Mercer/CFA report. It trails Australia, Denmark, Iceland, Israel, Netherlands, and Norway – all of which have systems that are fully or partly based on mandatory private savings.
• Sweden does have the lowest spending burden in the IMF. The Baltic nations all do better – and all of those countries have systems that are partly based on mandatory private savings.

It’s almost as if there’s a lesson to be learned, even if Biden and Trump want to bury their heads in the sand.

P.S. Here’s my short video making the case for personal retirement accounts.

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Journalistic Malpractice at the New York Times?

I don’t like Joe Biden’s economic policies, though that’s hardly a surprise since I haven’t liked the policies of any president this century (I’ve referred to Bush, Obama, and Trump as the “three stooges of big government“).

Other people have a more sympathetic perspective on the President’s performance.

David Leonhardt of the New York Times wrote an analysis of Joe Biden’s economic record and he lists two failures.

1. Inflation
2. Failure to get approval of the so-called Build Back Better plan

And he lists three supposed successes.

1. Economic recovery
2. Infrastructure and tech subsidies
3. Green subsidies

I disagree with much of Leonhardt’s analysis. For instance, his section on inflation does not mention the Federal Reserve. That’s sort of like writing about World War II and not mentioning Germany (other journalists have made the same mistake).

Moreover, I also think the failure of Build Back Better was good for the nation. And also good for Biden’s political prospects since it is less likely the economy will be sluggish as we approach the 2024 election.

Switching to the so-called successes, I don’t think the passage of the boondoggle infrastructure bill will have a positive effect. The same is true for the handouts to the semiconductor industry or the green lobby.

But I want to focus mostly on what Leonhardt wrote about the economy.

His main contention is that Biden is a success because the unemployment rate is low. Yet that overlooks the fact that labor force participation is weak, so I don’t view that as a Biden “success” (and I have been raising this concern since way before Biden took office).

But a far bigger problem with Leonhardt’s analysis about the economy is that he wrote nothing about living standards. I don’t know if that was a deliberate omission, but almost everything his readers should have learned is captured by this chart from the Department of Labor.

In the interest of full disclosure, I highlighted the “0.0” line in orange because I wanted to emphasize that inflation-adjusted worker compensation has been negative for the entirety of the Biden presidency.

By the way, it would be perfectly reasonable for a Biden defender to point out that worker compensation was already dropping when he took office. And it also would be reasonable for a Biden defender (or even a Trump defender) to blame that drop on the pandemic.

A Biden defender also could claim that the trend in recent months has been positive and that we might actually see rising living standards in the future.

However, those caveats don’t change the fact the Leonhardt’s article fails to mention the economic data that arguably matters most to people. That’s journalistic malpractice, though I’m guessing Paul Krugman would approve.

P.S. Leonhardt’s failure to mention living standards is not the worst example of journalistic malpractice at the New York Times. That award goes to the three reporters who wrote a big story about Venezuela’s economic failure and never once mentioned socialism.

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More Evidence of State Tax Progress

It usually is not fun writing about public policy, given my libertarian sentiments.

After all, politicians have a natural tendency to expand their powers and diminish our liberties.

So where there is occasional good news, I like to relish the moment.

For instance, I’ve been getting immense enjoyment from the progress on school choice over the past couple of years. Particularly the enactment of state-wide choice programs in West Virginia, Arizona, Iowa, and Utah.

Another area were we’ve seen big progress is state tax rates. I’ve also written about that topic, showing earlier this month how average top personal income tax rates have declined in recent years.

Today, let’s let a couple of maps tell the same story.

Here’s the Tax Foundation’s new map showing top personal tax rates for 2023. At the risk of stating the obvious, it’s best to be grey. But if you’re not grey, it’s good to be a lighter color and bad to be a darker color.

Now compare that map to the 2021 version. You’ll easily notice more dark-colored states.

But since the color schemes for the maps are not exactly the same, the best thing to compare numbers for specific states.

You’ll see some states have made huge progress, most notably Arizona and Iowa, but also incremental progress in most states.

By contrast, only a few states have moved in the wrong direction, most notably Massachusetts (thanks to a terrible referendum last November) and New York.

As you might expect, given the chance to “vote with their feet,” people and businesses are moving from high-tax states to low-tax states.

Yet that’s not stopping politicians in some high-tax states from agitating to push policy even further in the wrong direction. A very strange form of slow-motion economic suicide.

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Lessons from the Texas Budget

I shared some data last month from the National Association of State Budget Officers to show that Texas lawmakers have been more fiscally responsible than California lawmakers over the past couple of years.

California politicians were more profligate in 2021 when politicians in Washington were sending lots of money to states because of the pandemic.

And California politicians also increased spending faster in 2022 when conditions (sort of) returned to normal.

These results are not a surprise given California’s reputation for profligacy.

What may be a surprise, however, is that (relative) frugality in Texas has only existed for a handful of years. Here are some excerpts from a report written for the Texas Public Policy Foundation by Vance Ginn and Daniel Sánchez-Piñol.

Over the last two decades, Texas’ total state biennial budget growth has had two different phases. The first phase had budget growth above the rate of population growth plus inflation for five of the six budgets from 2004–05 to 2014–15. The second phase…had budget growth below this rate… Figure 1 shows the average biennial growth rates for the six state budgets passed before 2015 and for the four since then. The average biennial budget growth rate in the former period was 12% compared with the rate of population growth plus inflation of 7.4%. In the latter period, the average biennial growth rate of the budget was cut by more than half to 5.2%, which was well below the estimated rate of population growth plus inflation of 9.4%. This improved budget picture must be maintained to correct for the excessive budget growth in the earlier period. …there could be a $27 billion GR surplus at the end of the current 2022–23 biennium. …the priority should be to effectively limit or, even better, freeze the state budget. Texas should use most, if not all, of the resulting surplus to reduce…property tax collections…these taxes could be cut substantially by restraining spending and using the surplus to reduce school district M&O property taxes to ultimately eliminate them over time.

The article has this chart, which is a good illustration of the shift to fiscal restraint in Texas.

For all intents and purposes, Texas in 2016 started abiding by fiscal policy’s Golden Rule.

And this means the burden of government is slowly but surely shrinking compared to the private sector.

That approach is paying big dividends. Spending restraint means there is now a big budget surplus, which is enabling a discussion of how to reduce property taxes (Texas has no income tax).

P.S. I shared data back in 2020 looking at the fiscal performance of Texas and Florida compared to New York and California.

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The IMF’s Dirigiste Tax Agenda, Part II

Yesterday’s column reviewed a new report from the International Monetary Fund and criticized that bureaucracy for celebrating how the world’s most-powerful governments are going to take more money from the private sector thanks to a corporate tax cartel.

But that’s not the worst part of the IMF document.

The report also asserts that low-income countries (LICs) can grow faster if they increase their fiscal burdens.

This is not April Fool’s Day. I’m not joking. The bureaucrats at the IMF apparently want readers to believe that higher taxes and more spending are a route to prosperity.

Let’s look at some excerpts from the report, which was authored by Ruud de Mooij, Alexander Klemm, and Christophe Waerzeggers.

Global revenue from the 2-pillar reform…might rise to around 0.4 percent of GDP in the longer term. If a proportional share of this revenue flows to LICs, this would provide a welcome contribution to their revenue objective. However, the impact is dwarfed by the…expenditure needs in LICs of nearly 16 percent of GDP (and a significant share of this will need to come from taxation)… Estimates…suggest a potential revenue increase in LICs of 8 percent of GDP. …compared with that in emerging market economies as an aspirational level…suggests a revenue potential of around 5 percent of GDP. …Several options present themselves to raise revenues in LICs, both in tax policy and revenue administration. …Some promising avenues in tax policy include: Value-Added Tax (VAT)…specific excises…on select products such as alcohol, tobacco, unhealthy foods, passenger vehicles, fuel, and carbon emissions. …Strengthening the progressive personal income tax… Making greater use of recurrent real property taxes.

Here’s a chart from the study which shows how much bigger the IMF thinks government should be in poor nations (the second column) compared to various potential sources of revenue (columns 1, 3, and 4).

For those not familiar with the jargon, “SDG” is the abbreviation for “sustainable development goals,” as defined by the United Nations.

And the UN now robotically asserts that more taxes are needed to government can boost growth with more spending (other international bureaucracies sing from the same songsheet).

I actually went to the United Nations a few years ago and explained why this “magic beans” theory of government-led economic development is wrong.

Simply stated, there are two parts of the world that have become rich and in both cases prosperity arose when government was far smaller than what the IMF and UN want us to believe is necessary.

• First, empirical data shows that some western nations became rich in the 1800s when fiscal burdens were trivially small.
• Second, some East Asian nations became rich after World War II when their fiscal burdens were very modest.

I’ll close by challenging folks from the IMF or UN (as well as other people who agree with their agenda) to answer this very simple question.

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The IMF’s Dirigiste Tax Agenda, Part I

Thanks in large part to the pro-growth agendas of Margaret Thatcher and Ronald Reagan, but also giving credit to policymakers in nations like Ireland and Switzerland, businesses (and their workers, consumers, and shareholders) have benefited from four decades of tax competition.

How much have they benefited?

As shown by this chart, average corporate tax rates have dropped by about half since the early 1980s.

Not everybody is happy that corporate tax rates have declined.

Politicians in high-tax nations have always resented tax competition and they have been working through left-leaning international bureaucracies to push for various forms of tax harmonization.

Unfortunately, they have been partially successful.

Over the past 20 years, the human right of financial privacy has been substantially eroded so that uncompetitive governments can track – and tax – money that migrates to low-tax jurisdictions.

As a result, politicians recently have been raising personal income tax rates.

And they want to also raise corporate income tax rates, which is why many pro-tax politicians (including Joe Biden) are supporting a global tax cartel on business income.

The International Monetary Fund has a new report praising this effort. Authored by Ruud de Mooij, Alexander Klemm, and Christophe Waerzeggers, it celebrates the fact that politicians will be diverting more money from the productive sector of the economy

P1 is estimated to reallocate about 2 percent of total profits of MNEs, mainly from low-tax investment hubs to other countries, raising global Corporate Income Tax (CIT) revenue by $12 billion. …P2 would raise global CIT revenues by 5.7 percent, which is before any behavioral responses by firms (Figure 1b). According to staff simulations, 18.5 percent of global profit of MNEs is taxed below 15 percent ($1.47 trillion in 2019). On average, the current tax rate on these profits is 5 percent, so that profits exceeding the substance-based income exclusion would be subjected to a average top-up tax of 10 percent. …An additional positive revenue impact from P2 could come from reduced competition over corporate tax rates, which could boost global CIT revenues by an extra 8.1 percent. …a 1 percentage point increase in the world average CIT rate will, on average, induce a country to raise its own rate by 0.6 percentage points. By putting a floor of 15 percent, the simulations above suggest that 18.5 percent of MNE profit will indeed face a higher CIT burden, implying that countries will feel less pressure to keep their own tax rates low. Using simulations of the tax competition model, we find that the average CIT rate would rise from 22.2 to 24.3 percent due to the global minimum tax. The associated boost in global CIT revenues would be 8.1 percent, exceeding the direct effect on revenue.

By the way P1 is Pillar 1, which is the proposal to give powerful nations a bigger claim on the taxable income of big companies. By contrast, P2 is Pillar 2, which is the proposal for a mandatory minimum tax of at least 15 percent on corporate income.

In other words, a tax cartel.

As you can see from this next chart, most of the additional revenue is the result of the scheme for a 15 percent tax cartel.

I’ll close with two observations about this depressing data.

First, the IMF’s own research shows that reductions in corporate tax rates have not resulted in lower revenues. But I guess they now want to ignore the Laffer Curve since politicians want to grab more money.

Second, we should all be outraged that IMF bureaucrats (including the authors of the paper cited above) receive tax-free salaries while pushing for higher taxes on the rest of us.

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Should America Copy Estonia’s Pro-Growth Flat Tax?

The Baltic nation of Estonia is an improbable success.

After breaking free from the horror of Soviet communism, leaders adopted pro-market reforms.

• Including a low-rate flat tax for households.
• Including a pro-growth tax system for companies.
• Including widespread economic deregulation.
• Including periodic episodes of spending restraint.

Is Estonia a laissez-faire paradise? No. But it ranks #8 in the world for economic liberty.

And having decent policy means poverty has plummeted and it has been quickly closing the gap with European nations that did not suffer from decades of communist enslavement.

Estonia’s experience with regards to tax policy may provide some lessons for the United States. The Tax Foundation has a new report that measures the potential benefits of replacing America’s nightmarish income tax with the Estonian system.

Other countries have proven that sufficient tax revenue can be collected in a less frustrating and more efficient manner. A particularly compelling example is Estonia’s tax system, where taxes are so simple they are typically filed online in about five minutes. …Drawing on the Estonian experience and building on ideas from our initial study on reform options, we present here a plan for reforming the U.S. tax code… The reforms include: A flat tax of 20 percent on individual income combined with a generous family allowance to protect low-income households. …A distributed profits tax of 20 percent… Elimination of taxes at death and simplified treatment of capital gains.

Here’s how the U.S. would benefit.

By simplifying the federal tax code, the reform would substantially reduce compliance costs, potentially saving U.S. taxpayers more than $100 billion annually. By improving work and investment incentives and eliminating the double taxation of business income, we estimate the reform would boost long-run GDP by 2.3 percent, grow wages by 1.3 percent, and add 1.3 million full-time equivalent jobs. The plan would increase average after-tax incomes by 0.3 percent in the long run on a conventional basis. When including the benefit of higher economic output, average after-tax incomes would rise by 2.1 percent in the long run.

A bigger economy, more investment, higher wages, and more jobs.

Hard to argue with these results.

Though, to be fair, you can argue with these results. The Tax Foundation’s analysis assumes that government should collect as much money with an Estonian-style flat tax as it does with the current internal revenue code.

That means poor people benefit (generous exemptions) and rich people benefit (lower tax rates) but middle-class people would wind up with less after-tax income.

That’s not a recipe for political success.

Which allows me to re-emphasize what I wrote in 2021, which is that you can’t have a good tax system without spending restraint.

That’s true for the flat tax. That’s true for the national sales tax. And it’s true for anybody and everybody who does not want massive future tax increases.

P.S. You can click here to read about Paul Krugman’s big mistake about Estonia.

P.P.S. And you can click here to read about the OECD’s campaign to undermine Estonian prosperity.

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The Simple (but Definitely not Easy) Way to Avert America’s Fiscal Crisis

Every six months or so, the Congressional Budget Office produces a 10-year forecast and most fiscal experts focus on the projections for deficit and debt.

Those are important (and worrisome) numbers, but I first look at the data showing what will happen to taxes and spending.

And you can see from this chart that the fiscal burden of the federal government is projected to grow at a very rapid pace over the next decade.

Other fiscal experts fret that deficits and debt are increasing between now and 2033, but the above chart shows that the real problem is that the spending burden is rising faster than the tax burden.

The real fiscal fight in Washington is how to close the gap between the red spending line and the green revenue line (supporters of Modern Monetary Theory say we can just print money to finance big government, but let’s ignore them for purposes of today’s column).

Since I think Washington is spending far too much, I want to close the gap by restraining the growth of government.

So here’s a second chart illustrating what would happen if there was some sort of spending cap. As you can see, a spending freeze (like we had from 2009-2014) would balance the budget by 2030.

And spending would have to be limited to 1.3 percent annual growth if the goal is to balance the budget within 10 years,

We can solve the problem. That’s the good news.

The bad news is that politicians don’t want to restrain spending.

And, even if they did want to do the right thing, adhering to a 1.3 percent spending cap would require serious entitlement reform. So don’t hold your breath hoping for immediate progress.

P.S. The numbers are out of date, but here’s a video that explains how spending restraint is the key to fiscal balance. And here’s a video on how some other nations made enormous progress with multi-year spending restraint.

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A Case Study on Corporate Tax and Competitiveness

Last year’s three-part series on corporate tax rates (here, here, and here) primarily focused on the case for low rates in the United States.

Today, we’re going to look at why the United Kingdom should have a low corporate tax rate.

Though the arguments don’t change simply because we cross the Atlantic Ocean.

A low corporate tax rate is a good idea because it means more investment, higher productivity, and better wages.

That’s true in the U.S., it’s true in the U.K., and its true in every other nation.

If you want evidence, Phil Radford’s article for CapX explains why the U.K.’s pharmaceutical industry has contracted while Ireland’s has expanded.

AstraZeneca’s plan to build a $350m pharmaceuticals factory in Ireland rather than the UK was 100% predictable. …the long-term failure of UK pharma highlights how UK policy discussion is light years behind our competitors when it comes to understanding what drives prosperity. …The trend kicked off back in 2011, when US-based Pfizer shifted its Viagra-making plant from Sandwich in Kent to Ringaskiddy, near Cork. This event marked the start of a five-year plunge in UK pharma manufacturing and exports… According to ONS, output in UK pharma manufacturing declined by roughly one-third from 2010 to 2015. Gross value added actually halved. Where did the manufacturing go? Ireland… What’s caused this malady? In a word: taxation. …corporate taxation levels appear to exert a dominating effect on where pharmaceuticals companies locate their factories. …Ireland’s corporate tax rate fell from 40% in 1996 to 12.5%n 2003, and it has stayed at that level for the past 19 years. Meanwhile, the UK’s corporate taxation rate was 30% 20 years ago, and from 2008 it began a gentle drift downwards to 19% where it will remain until April this year, when it will increase to 25%. This means, from AstraZeneca’s point of view, the investment equation is a no-brainer. Even if Ireland is forced to raise its rate to 15%, the country will shortly regain its general comparative level of between one-half and two-thirds the UK rate.

The data in Radford’s article is a damning indictment of the supposedly conservative government in the United Kingdom.

A few years ago, the corporate tax rate was 19 percent and expected to drop to 17 percent. Now, thanks to an unwillingness to control spending, the rate is jumping to 25 percent.

And, as noted in the article, the U.K. lost a $350 million factory. As well as all the jobs and taxable income that it would have generated.

Politicians are winning and people are losing.

P.S. Biden wants to make the same mistake.

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Michigan Shows the Wrong Way to Cut Taxes

The economics of tax policy is largely the economics of incentives. When governments impose high tax rates on something, you get less of that thing.

My left-leaning friends acknowledge this is true, but only selectively. They openly agitate for higher taxes on things like tobacco (or sugar, or energy) and they correctly argue that higher tax rates will lead to less smoking.

As a libertarian, I don’t want to control other people’s lives, so I’m not a big fan of such taxes, but the underlying economic analysis is correct.

Unfortunately, my friends on the left often forget economic analysis when looking at tax rates on productive behaviors such as work, saving, investment, and entrepreneurship.

It is also important to realize that not all taxes are created equal. Whether politicians are cutting taxes or increasing taxes, the economic consequences will vary depending on the details.

For instance, even though I just stated that I don’t favor higher “sin taxes,” raising the tax burden on things like cigarettes will do less economic damage than increasing marginal tax rates on labor and capital.

There are also good and not-so-good ways of lowering taxes, and we have an example of this from Michigan.

As reported by Craig Mauger and Candice Williams of the Detroit News, there’s a big budget surplus in Michigan and politicians are debating whether to reduce the rate of the state’s flat tax or to give one-time tax rebates. Here are some excerpts from the story.

Michigan Gov. Gretchen Whitmer and the Democratic leaders of the Legislature are preparing a sweeping tax relief proposal they say will reduce tax bills by more than $1 billion and include rebate checks that could be issued directly to residents. The Friday agreement focuses on a plan to ease taxes on retirement income, boost a tax credit for low-wage workers and issue “inflation relief checks” in place of a potential cut in the state’s personal income tax, which was expected to be triggered by growing revenues, according to a source familiar with the plan. …as the state sits on a surplus of more than $9 billion, Republicans in the House and Senate have called for a broad tax cut for Michiganians and the preservation of the potential automatic drop in the personal income tax rate, which is being caused by language in a 2015 law. That policy tied the income tax, currently at 4.25%, to revenues for the state’s general fund. …based on preliminary fiscal year 2022 revenue figures, the revenue trigger would be activated and lower the income tax rate for the 2023 tax year from 4.25% to 4.05%. …“The Democrats’ proposal is a head fake intended to hide their attempt to rob Michigan taxpayers of an income tax cut in favor of funding a corporate welfare slush fund — prioritizing big corporations over Michigan families,” said Sarah Anderson, executive director of the Michigan Freedom Fund.

Michigan Democrats want more than rebates. They also favor “an exemption for public pensions” and “economic development subsidies for businesses.”

At the risk of stating the obvious, a lower rate for the flat tax will be far more beneficial to the state than one-time rebates and special favors for bureaucrats (who already enjoy higher compensation than workers in the private sector).

And a lower rate on the flat tax also would be far preferable to special handouts for businesses (which inevitably translates into corrupt cronyism).

I’ll close with a final point about overall fiscal policy. The Michigan tax fight is also a spending fight. Democrats are focusing on tax rebates in part because they are a one-off event. They’ll return some money to taxpayers this year, but there are no long-run savings.

By contrast, a cut in the state’s flat tax produces long-run savings for people. As the story noted, “Rebates are typically one-time spending bursts, while cuts in the income tax rate usually are kept in place for multiple years.”

Needless to say, politicians who want to spend more money prefer one-time rebates over permanent tax cuts.

P.S. Pursuing sub-optimal tax policy is not just a left-wing problem. Some folks on the right favor things such as child credits. That kind of tax cut will reduce tax liabilities for families, but those families quite likely would be better off in the long run with growth-oriented reductions in marginal tax rates on labor and capital.

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A New Member for the Bureaucrat Hall of Fame

My primary problem with bureaucrats is that they often work for agencies and departments that should not exist.

My secondary problem is that they generally get overcompensated compared to workers in the economy’s productive sector.

And my tertiary problem with government employees is that they have job protections that encourage bad behavior – everything from sloth to crime.

When selecting new members for the Bureaucrat Hall of Fame, I usually pick from that final group.

And that’s the purpose of today’s column. We have a bureaucrat from Washington, DC, who deserves to be honored.

But he’s not a federal bureaucrat. He’s a cop with the DC metropolitan police. Here are some details of his misdeeds, as reported by Amanda Michelle Gomez.

The former vice chair of D.C. Police Union, Medgar Webster Sr., was arrested on Saturday for allegedly defrauding the D.C. government by working a second job at Whole Foods Market while reporting as on duty for the Metropolitan Police Department. …MPD paid Webster $33,845, including overtime and holiday pay, for hours he was simultaneously on the clock at Whole Foods, according to an arrest affidavit. Webster allegedly worked at two locations for the grocery chain between January 2021 and April 2022, and earned $45,946 at one of those stores along H Street Southeast. …Webster earned an hourly rate of $53.11 as an officer, which was adjusted to $79.67 for overtime work, per the affidavit.

If nothing else, I guess we can say he’s not lazy. I imagine other cops don’t bother doing any work, but they’re probably home napping instead of working a second job.

So congratulations…sort of.

But here’s the part of the story that definitely makes Mr. Webster a Hall of Famer.

He was caught double-dipping only because he got in trouble for sexual harassment at his second job.

The police spokesperson says agents discovered Webster was allegedly working a second job while on the clock at MPD during an “unrelated [Internal Affairs Division] investigation.” Webster was being investigated for engaging in an “unwanted sexual contact” with an individual at the Whole Foods.

Apparently he was trying to double-dip in more than one way.

Seems like he has something in common with Mr. Geary.

P.S. My all-time favorite example of anti-bureaucrat satire is this video, though this top-10 list from David Letterman is a close second.

P.P.S. Since we’re making fun of bureaucrats, here’s a good jab at the Post Office from Jimmy Kimmel and a clever one-liner from Craig Ferguson. And to see how government operates, we have the Fable of the Ant. But this Pearls before Swine cartoon strip is very clever. Also, here’s a new element discovered inside the bureaucracy, and a letter to the bureaucracy from someone renewing a passport.

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Government vs. Poor People

My Fourteenth Theorem of Government explains that when government intervenes for the ostensible purpose of providing help to poor people in the short run, it is all but inevitable that such policies will hurt poor people in the long run.

It is hardly a revelation that bigger government causes problems, but it is particularly discouraging when such policies victimize the least fortunate members of society.

I’m discussing this issue today because I recently discovered a 2018 article by Brian Balfour.

Published by the Foundation for Economic Education, the article lists seven ways that government traps people in poverty.

At the risk of over-simplifying, four of those policies directly hurt poor people.

1. The “quicksand effect” of the welfare state, which discourages self-advancement.
2. Minimum wage laws that remove the bottom rungs of the economic ladder.
3. Green energy policies that make basic utilities needlessly expensive.
4. Protectionist trade policies that increase the price of essential products.

And three of those policies indirectly hurt poor people.

1. Punitive tax policies that discourage job creation and productivity advances.
2. Regulatory policies that impose high costs and cause inefficiency.
3. Inflationary monetary policies by central banks that cause higher prices.

There’s nothing in the article that’s wrong, but I’m going to conclude today’s column by pointing out a big sin of omission.

The author’s list should have included the government education monopoly. Especially since poor families tend to live in the areas with the worst-performing government schools.

Failing government schools have a very direct and very negative impact on the life prospects of low-income kids.

So I’ll end by noting that I’m very excited that school choice is beginning to sweep the nation.

P.S. There are many other government policies that have a disproportionately negative impact on poor people. Everything from Social Security to revenue policing, but don’t forget government lotteries, licensing laws, and nanny state protections (all of which may help to explain why poor people are skeptical about the supposed benefits of bigger government).

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The Case Against Biden’s Class-Warfare Tax Policy, Part V

In 2020 and 2021, I wrote a four-part series (here, here, here, and here) about Biden’s class-warfare tax agenda.

And I also wrote a series of columns about some of his worst ideas.

• Biden wants America to have the developed world’s highest capital gains tax rate.
• Biden wants America to have the developed world’s highest tax burden on business investment.
• Biden wants America to have the developed world’s highest personal income tax rates.

He even proposed taxes that don’t exist anywhere else in the world.

The main purpose of those columns was to explain why it would be economically harmful to impose punitive tax rates on productive behaviors such as work, saving, investment, and entrepreneurship.

Unsurprisingly, Biden still wants all these tax increases, even though Democrats lost control of the House of Representatives.

Today, let’s look at his awful proposal to tax unrealized capital gains (an idea so absurd that no other nation has enacted this destructive levy).

Eric Boehm’s article in Reason debunks Biden’s proposal (the president calls it a billionaire’s tax).

Say what you will about the Biden administration’s approach to tax-the-rich populism: It’s creative. …Taxpayers with net wealth above $100 million would have to pay a minimum effective tax rate of 20 percent on an expanded measure of income that adds unrealized capital gains to more conventional sources of income, like wages, business income, and investment income. …By raising the effective tax rate on capital gains, the proposal would reduce U.S. saving, discourage entrepreneurship, and decrease economic output. …An annual tax on paper gains would be conspicuously complex. The largest administrative problems relate to valuing non-tradable assets like privately held businesses and taxing illiquid taxpayers with large gains on paper but little cash on hand to pay a minimum tax bill. …Given these problems, it’s unsurprising the idea hasn’t caught on around the world.

And the Wall Street Journal has an editorial about this class-warfare scheme.

After the November midterm election, President Biden was asked what he would change in his last two years. “Nothing,” he said, and…he proved it by reproposing…enormous tax increases that he couldn’t get through even a Democratic Congress. Start with a reprise of his “billionaire minimum tax.” …For starters, it isn’t a billionaire tax and it isn’t an income tax. It would apply to households worth more than $100 million in accumulated assets, and its target is wealth. …if your assets rise in value during a year, you will pay taxes on that increase even if you realized no actual gains through a sale. …If your assets fell in value, you would not be able to deduct the full loss from your overall income. Heads the government wins, tails you lose.

The bottom line is that the capital gains tax is an awful levy.

But rather than abolishing the tax to boost American competitiveness, Biden has latched on to an idea to make a bad tax even worse.

And that’s in addition to his other proposals to make the capital gains tax more burdensome!

P.S. I guess we shouldn’t be surprised at bad ideas since the president is infamous for economically illiterate tax tweets.

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New York vs. Florida, Round #5

The first four rounds of my New York vs. Florida contest (available here, here, here, and here) largely focused on Florida’s superior economic policies and superior economic results.

So you won’t be surprised to learn that Round #5 continues that tradition.

We’ll start today’s column with a remarkable comparison put together by the Wall Street Journal.

Notice that Florida now has more population (thanks in large part to interstate migration), yet New York’s budget is twice as big.

That means a much higher tax burden.

And New York’s onerous fiscal burden doubtlessly helps to explain why Florida has been growing so much faster, and also has a much lower unemployment rate.

The Wall Street Journal connected the dots as part of its editorial.

Comparative governance is a useful course of study, not least because bad governance is so costly to people and prosperity. We often write about the migration from the Northeast to Florida and other states, but sometimes the contrast is best illuminated with some data. …As recently as 2013 the two states had similar populations, but so many people have moved to the Sunshine State that it’s now roughly 2.6 million people larger. Yet, believe it or not, Florida’s state budget as measured in the latest proposals from the two governors, is only half the size of New York’s. This is in part a reflection of their tax burden, which in Florida is much smaller. …Florida has no state income tax, while New York’s top tax rate is 10.9%. In New York City, the top rate is 14.8%, while in Miami it’s zero. …Florida’s jobless rate was 2.5% in December, well below the January national 3.4% rate. New York’s rate was 4.3%, tied with Alaska and Michigan for fifth worst in the country… State GDP growth in Florida in 2012 dollars from 2016-2021 was more than double New York’s—17% to 8%. These comparative statistics…show that better governance yields better fiscal and economic results.

Amen.

I’ve written that there’s a link between national policy and national prosperity.

The same is true for state policy and state prosperity.

P.S. A reader sent me a fill-in-the-blanks essay generator for leaving New York. It focuses on quality of life rather than public policy, but I nonetheless made some choices.

P.P.S. Another Florida advantage is a lower cost of living.

P.P.P.S. New York’s absurd Medicaid spending (presumably enabled by this type of scam) is yet another reason to reform that money-pit program.

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Joe Biden Supports Massive Tax Increases on Middle-Class Americans

I wrote a two-part series (here and here) about Donald Trump supporting massive middle-class tax increases.

Trump does not admit that is his policy, of course, but that is an unavoidable outcome since he opposes entitlement reform.

In the interest of fairness and bipartisanship, I should explain that Joe Biden also favors huge tax increases on ordinary people.

Like Trump, he does not admit this is his agenda. But, once again, that will be the unavoidable result since he also is against entitlement reform.

But this does not mean Trump and Biden are exactly the same on fiscal policy (like they are on trade policy).

Biden has proposed two additional policies to expand the size and scope (and economic damage) of the federal government.

1. Expanding entitlement programs, including per-child handouts.
2. Class-warfare tax increases, targeting upper-income taxpayers.

Just in case someone thinks I am unfairly characterizing Biden’s policies, let’s look at some excerpts from a report by Jim Tankersley of the New York Times.

There were no economic pivots in President Biden’s first State of the Union address to a Republican House. He did not pare back his push to raise taxes on high earners or to spend big on new government programs. …The president renewed his calls for trillions of dollars of new federal programs, including for child care and community college… He did not name a single federal spending program he was willing to cut. …It was a no-quarter recommitment to a campaign theme…centered on expanding government…he called for raising taxes on corporations and the wealthy… His proposals included an expanded tax on stock buybacks and what would effectively be a sort of wealth tax on billionaires.

Let’s conclude by considering whether it is possible for Biden to impose sufficiently large taxes on rich people so that there would be no need for big middle-class tax increases.

For that to be the case, Biden’s class warfare tax increases would have to raise enough money to achieve two objectives.

• Collect enough money to finance the built-in expansions of current entitlement programs caused by demographic change.
• Collect enough money to finance his proposals for trillions of dollars of spending on new entitlement programs.

The answer is no. Not even close.

Even if you took all of Biden’s taxes and then added some other class-warfare proposals, that would not be enough to finance built-in spending for the next 10 years.

And that means no revenue to finance Biden’s proposals for additional spending.

Not to mention the built-in spending caused by demographic changes over the next 30 years.

The bottom line is that there are not enough rich people to finance big government.

All of which brings me back to where I started, namely that there will be giant tax increases on lower-income and middle-class households if we don’t figure out a way to restrain and reform entitlements.

P.S. In addition to Trump and Biden, the so-called national conservatives also support huge tax increases on American workers.

P.P.S. Even if there were more rich people, higher class-warfare taxes to finance bigger government would be a big mistake, as acknowledged even by generally left-leaning international bureaucracies such as the World Bank, the International Monetary Fund, the Organization for Economic Cooperation and Development, and the European Central Bank.

P.P.P.S. Biden and other folks on the left sometimes are very open about tax increases on ordinary people, though they have different terms for those tax hikes – such as carbon fees and import barriers.

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The War Against Cash, Part VI: The Case Against a Central Bank Digital Currency

While I have profound worries about the future of fiscal policy, I wonder if developments in monetary policy are an even greater threat to individual liberty.

More specifically, I’ve written a five-part series about governments and their “War Against Cash.”

• In Part I, I explained that politicians and bureaucrats want to get rid of cash so that governments could increase taxes.
• In Part II, I warned that abolition of cash would enable a further shift to irresponsible and inflationary monetary policy.
• In Part III, I showed why proponents are dishonest when they claim that a cashless society will somehow reduce criminal activity.
• In Part IV, I debunked the arguments made by Kenneth Rogoff, a Harvard professor and leading advocate for cash prohibition.
• In Part V, I pointed out how the Canadian government abused its power to restrict access to money for political opponents.

Let’s build upon those arguments by reviewing some additional material.

In a column yesterday for the Wall Street Journal, Sean Fieler warns that abolishing cash will empower government.

Neel Kashkari, president of the Minneapolis Federal Reserve, questioned why Americans would support a CBDC. “If they want to monitor every one of your transactions . . . you can do that with a central bank digital currency,” Mr. Kashkari said at a conference last year. “I get why China would be interested. Why would the American people be for that?” …For Democrats, the party of big government, the appeal is obvious. A CBDC would allow the federal government to spend more money, manage outcomes… It’s naive to think that a government that is currently combing through individual financial information will stop doing so when it has the formidable power of a CBDC. …Policy makers in Washington have a choice between preserving a bloated federal government or putting America back on a path to limited government. By uniting to stop a CBDC, Republicans can take the side of the American people.

Well stated, though I have learned through painful experience not to rely on Republicans to protect freedom.

Writing last year for the Foundation for Economic Education, Brad Polumbo also warns against digital currency.

…many governments have floated the idea of a “central bank digital currency,”…and new reporting suggests the Biden Administration may soon press forward with efforts to create a so-called “digital dollar.” …At first glance, government getting in on the crypto craze might sound fun, novel, or harmless. But it’s actually cause for serious alarm. …it would offer governments new, unprecedented ways to control citizens. To call the idea rife for abuse is an extreme understatement. After all, a central bank digital currency would allow the government to track your every purchase. It could also be easily used to restrict purchases. For example, imagine a future government deciding that gasoline must be rationed in order to address climate change. Your “digital dollars” could be made to stop working at the gas pump once you’ve purchased a certain amount of gasoline in a week. …If any of this sounds extreme, fantastical, or otherwise far-fetched… well, just look at China.

Last but not least, here are some excerpts from Elaine Ou’s 2016 column for Bloomberg.

…in a cashless society every transaction must pass through a financial gatekeeper. …This means that politically unpopular organizations could easily be deprived of economic access. Past attempts to curb money laundering have already inadvertently cut off financial services for legitimate individuals, businesses, and charities. The removal of paper currency would undoubtedly leave similar collateral damage. The crime-fighting case against cash is overstated. …if we’re going to cite unlawful transactions as a rationale for banning cash, it only makes sense to ban banks and accounting firms first. The one benefit of replacing cash with claims on cash is that a claim can be discounted, canceled or seized. That doesn’t sound terribly beneficial to most people, but this attribute is attractive to a growing contingent that wants to send interest rates into negative territory. …Physical currency gets in the way of negative-interest-rate policy because people who don’t want to accrue negative interest can simply store their cash in a safe. By confining the national currency to regulated account holdings, the government can impose a tax on savings in the name of monetary policy.

The last sentence in that excerpt should be etched in stone. Replacing cash with a digital currency gives governments the ability to engage in “financial repression.”

Is it possible that politicians and central bankers to get hold of this power and not abuse it?

Yes, that’s theoretically possible, but it’s very unlikely.

All too often, the history of government is to grab and abuse power during times of crisis.

And the ultimate insult to injury is that governments almost always instigate crises in the first place.

P.S. If you want a sneak preview at how governments would abuse power, it is very instructive to take a quick look at how India hurt ordinary people as part of that government’s war against cash.

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The Adverse Economic Consequences of Busting Social Security’s Wage Base Cap

Today we are going to look at proposals to expand the burden of Social Security payroll taxes, and let’s start by recycling this 2008 video.

All of the analysis in the video is still accurate, but two of the numbers need to be updated.

• Social Security’s long-run deficit is now $56 trillion rather than $24.9 trillion as was the case back in 2008.
• Social Security payroll taxes now apply to income up to $162K rather than $102K as was the case back in 2008.

If you don’t have time to watch a 9-minute video, I can summarize the issue by noting that Social Security was designed as an “earned benefit,” which means workers contribute to the system in exchange for future benefits. The more you earn, the more you pay, and the more benefits you receive.

But because Social Security is supposed to be akin to an insurance program, there’s a limit on both the amount of benefits any retiree can receive and the amount of taxes that any worker must pay (the same principle applies in many other nations).

Some politicians want to get rid of the limit (the “wage base cap”) on the amount of taxes workers must pay. Instead of applying the 12.4 percent Social Security payroll tax on the first $162,000 of income, they want to impose the tax on all income.

In some cases, they want this big increase in marginal tax rates in order to prop up the Social Security system while in other cases they actually want to expand the program.

In either case, the economic consequences would be very bad.

In today’s Wall Street Journal, Travis Nix explains why this would be counterproductive.

…lawmakers in both parties are mulling the idea of lifting the payroll tax cap. The resulting increase in revenue would do little more than delay the inevitable by extending the program’s life a few more years. …European countries cap payroll taxes at much lower incomes than the U.S. does. Germany caps payroll taxes for health insurance at about $62,000 and the Netherlands caps theirs for social security at $40,370. Uncapping the payroll tax in the U.S. would only widen the disparity and make America a less attractive country in which to work and invest. …Uncapping the payroll tax would raise the top tax rate on Americans’ labor income—income and employee payroll tax combined—to as high as 43.2%. This excludes state taxes and the employer payroll tax, which make the rate even higher. The U.S. hasn’t seen labor tax rates that high since before Ronald Reagan. …European countries that cap their payroll taxes at relatively low incomes understand that you can’t fund a social-safety net without providing an incentive to work. The U.S. should too.

Let’s also look at what Mark Warshawsky of the American Enterprise Institute wrote last year.

…imposing a massive tax increase — 12.4 percentage points — on the earnings of about 10 million highly productive, mostly middle-class workers earning more than $160,200 would have several notable consequences. It would reduce their support for the program, severely discourage their labor market participation, and encourage payroll tax avoidance through converting earnings to incentive stock options and other forms of employee stock ownership. …In many instances, these workers would have their wages taxed at federal, state and local levels at rates exceeding 70 percent. …almost 20 percent of current and future covered workers are projected to earn above the taxable maximum in any one year.

And here is some of Allison Schrager’s analysis from 2020.

When it comes to financing the future of Social Security, many Democrats have a simple and wrong solution: lift the cap on earnings subject to the payroll tax. …there are costs to these plans. A 12.4% marginal tax increase is significant. If the cap is eliminated, an individual who makes $250,000 a year would see their Social Security tax liability increase by 88%. …many households—especially those in states with high state taxes—will be paying more than 60% in federal, state, and local income and payroll taxes… only 6% of the population earns more than the cap. But income varies over people’s lives: 36% of Americans will be in the top 5% of earners at least one year of their career.

I’ll close by observing that it we’ve had big fights under Bush, Obama, Trump, and Biden about whether the top personal income tax rate should go up by about 3 percentage points or down by 3 percentage points.

Since keeping marginal tax rates low helps encourage productive behavior, those were important fights.

Now we face a fight that should be far more important since some politicians want to raise the marginal tax rate by 12.4 percentage points.

It is true that Social Security is in deep financial trouble, but propping up (or expanding) the current system would be bad news for the economy and it would produce a bleaker future for young people.

It would be far better to begin a transition to personal retirement accounts.

P.S. Chile and Australia have created personal retirement accounts. You can also learn about reforms in Switzerland, Hong Kong, Netherlands, the Faroe Islands, Denmark, Israel, and Sweden.

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A Prosperity Contest Between the U.S. and Europe

My biggest economic concern is that the United States, because of population aging and poorly designed entitlement programs, is slowly but surely going to become a European-style welfare state.

To help convince people that this is a bad outcome, I frequently share data showing how ordinary people in the United States have higher living standards than their European counterparts.

And I also like to share data showing that lower-income Americans often are better off than average-income Europeans.

Sounds convincing, right?

Well, I recently wound up in a discussion with a left-leaning fellow who claimed my data must be misleading because of the difference between “mean” and “median.”

For those not familiar with these terms, the “mean” is the overall average of a group and the “median” is the midpoint. Here are two examples that show the differences.

• If you have five people making $80,000, $90,000, $100,000, $110,000, and $120,000, the “mean” income is $100,000 and the “median” income is also $100,00.
• If you five people making $10,000, $20,000, $30,000, $40,000, and $300,000, the “mean” income is still $100,000 but the “median” income is only $30,000.

As you might suspect, folks on the left think the United States is like the second example – i.e., a very unequal society. They seem to think that America has high levels of “mean” income mostly because of a few really rich people.

So it was fortuitous that I saw a tweet this morning that addresses this issue. Here’s a look at “median” household income in OECD nations.

Lo and behold, the midpoint household in the United States is richer than almost every household in the western world.

Only the tiny tax haven of Luxembourg ranks higher than the United States. And oil-rich Norwegians are the only others who are close.

The bottom line is that Americans are richer than Europeans, no matter how the data is sliced. And the U.S. advantage almost surely is the result of having more economic freedom and smaller government.

But if we no longer have better policy in the United States, there’s no reason to think that Americans will continue to be more prosperous.

P.S. Based on data from some Nordic nations, I’m guessing Norwegian-Americans and Luxembourg-Americans are far richer than their cousins back in Europe.

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Donald Trump Supports Massive Tax Increases on Middle-Class Americans, Part II

Regular readers know that I generally don’t get overly agitated about government debt (I get far more upset about counterproductive spending, regardless of how it is financed).

But even I recognize that there is a point where debt becomes excessive.

So let’s start today’s column with the simple observation that America’s current fiscal trajectory is unsustainable.

The burden of federal spending is projected to jump over the next several decades up to 30 percent of GDP while taxes “only” increase to about 19 percent of GDP.

It is inconceivable that all that new spending will be – or can be – financed by borrowing. Simply stated, domestic and international investors will decide that bonds from Uncle Sam are too risky.

So that leaves only two options.

1. Spending restraint, inevitably requiring entitlement reform.
2. Massive tax increases, inevitably targeting middle-class Americans.

Regarding those two choices, Donald Trump supports massive tax increases.

He’s not overtly admitting that agenda, but that’s the unavoidable outcome based on what Joshua Green of Bloomberg recently reported about his opposition to entitlement reform.

Trump is hoping to reverse his fortunes and revive his moribund presidential campaign with a…short video message. …he looks straight to camera and declares, “Under no circumstances should Republicans vote to cut a single penny from Medicare or Social Security.” …In fact, he has been remarkably consistent and outspoken over the years in his attacks on Republican efforts to cut Social Security and Medicare. …he was viewed as the least conservative Republican nominee in decades. He favored lots of infrastructure spending…and he made a big deal about protecting Social Security and Medicare.

The story also explains that Trump was the big-government candidate among Republicans in 2016 (as I noted at the time) and suggests he will hold to that position as the 2024 race develops.

Trump’s position set him apart from the other 16 Republican presidential candidates, who generally shared Ryan’s belief, prevalent among House Republicans, that cutting Social Security and Medicare was a fiscal imperative. That’s where DeSantis comes in. …DeSantis was also one of the founding members of the House Freedom Caucus, which drove the effort to cut entitlements when he was in Congress. DeSantis voted repeatedly — in 2013, 2014, and 2015 — for budgets that slashed spending on Social Security and Medicare

By the way, the article is flat-out wrong on a few points.

It is grossly inaccurate to assert that the Ryan budgets “slashed spending.” Overall spending increased in the budgets that Ryan, DeSantis, and other Tea Party Republicans supported back in 2013, 2014, and 2015.

All that happened is that spending would not have been allowed to grow as fast as previously planned.

Also, while the Ryan budgets included genuine Medicare reform (and much-needed spending restraint), they did not address Social Security reform. So the report was wrong on that as well.

But I’m digressing. The key thing to understand is that Ryan, DeSantis and other Republicans in the House last decade tried to do the right thing.

Donald Trump, by contrast, did the wrong thing. And he wants to do the wrong thing in the future. And that means huge future tax increases on you and me.

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The Political Argument Against the Fair Tax

I have repeatedly defended the national sales tax for the simple reason that it has the same desirable attributes as a flat tax.

• The tax rate is low.
• There is no double taxation.
• There are no loopholes.

Indeed, the flat tax and a national sales tax (such as the Fair Tax) are basically different sides of the same coin.

The only big difference is the collection point. A flat tax takes a piece of your income as you earn it while a national sales tax grabs a piece of your income as you spend it.

Using the jargon of public-finance economists, both the flat tax and national sales tax are “consumption base” systems.

But that does not mean a tax that is collected at the cash register. Instead, it simply means a system where there is no double taxation of saving and investment (i.e., a system where all saving and investment receives IRA/401(k)-type protection).

But just because two tax plans are economically similar does not mean that they have the same political appeal.

Over the past few decades, I’ve explained to many politicians the best arguments for both the flat tax and national sales tax. I’ve also warned them about the most likely attacks and how to respond.

Suffice to say that it’s much easier to sell the flat tax and defend it from demagoguery (usually revolving around class warfare or itemized deductions).

Which is why some pro-tax reform folks are trying to discourage House Republicans from supporting the Fair Tax.

Here are excerpts from a Wall Street Journal editorial.

House Republicans may be…set to vote on a national sales tax that won’t become law but will give Democrats a potent campaign issue. The plan is called the Fair Tax and its premise is simple: Replace every existing federal tax with a new national tax on sales. …the true rate would be about 30%. The Fair Tax rate would be on top of state sales taxes. …It would also eliminate the Internal Revenue Service, but…replace it with a new Sales Tax Bureau and Excise Tax Bureau. …The Fair Tax is based on the reasonable theory that levies on consumption distort the economy less than our current taxes on work and investment. Killing the income tax also sounds good until you realize that a future Congress could restore it if the Constitution’s 16th Amendment isn’t repealed. …The point is that a consumption tax might make sense if Congress were writing the tax code from scratch. But it isn’t, and we could end up with both a national income and sales tax, the later of which could evolve over time into a value-added tax. …the Fair Tax has hurt GOP candidates before. When tea party Republicans ran on the idea in 2010, Democratic groups ran ads that blasted the sales tax… Few voters listen to a second sentence after they hear about a 30% tax on everything they buy.

Opining for National Review, Ramesh Ponnuru is even more critical.

Any House Republican who backs this bill can accurately be accused of voting for the following things: raising the price of everything by a huge amount at a time when inflation is already high; shifting more of the tax burden to the middle class; instituting a large new wealth tax on senior citizens; increasing federal spending by a massive amount; increasing the deficit; and creating large black markets. …FairTax supporters have answers for most of these charges. They are not…persuasive answers. But even if they were right, Republicans who vote for the bill would be taking on a formidable amount of defensive work. Those in competitive seats, especially, should know what they are getting themselves into.

Last but not least, Grover Norquist of Americans for Tax Reform argues against the Fair Tax in an article for the Atlantic.

The bill proposes to abolish the Internal Revenue Service and eliminate the federal income tax. So far, so good. Unfortunately, the bill would replace the income tax with a 30 percent national sales tax on all goods and services and establish a giant new entitlement program. …Under the bill’s plan, all households would receive a monthly check from the federal government regardless of earned income. …In all but name, in fact, the Fair Tax’s “prebate” system would establish a universal basic income, one of the left’s favorite policies. …Fair Tax proponents make two good points. They understand the need to end the double taxation of savings and investment in the present system, and they want to depoliticize the IRS workforce… None of this has stopped Democrats from seizing the opportunity to claim that Republicans now want to raise taxes on the poor and middle class. …the Fair Tax Act has a long record of proving politically toxic.

P.S. While I recognize that a national sales tax has political vulnerabilities, I actually think its biggest problem is the risk that politicians would not actually get rid of the income tax. Or, maybe they would get rid of the income tax, but then reinstate that awful levy after a few years. This is why, in this video, I explain that a national sales tax only should be considered after the 16th Amendment is repealed and replaced with something that unambiguously prohibits the income tax from ever again plaguing the nation.

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The Political Argument for the Fair Tax

I’m a long-time proponent of tax reform and I mostly focus on the flat tax, but as I wrote last month, a national sales tax also is a good option.

Here’s some of what I said on the topic back in 2007.

The key thing to understand is that the flat tax and sales tax are different sides of the same coin.

What differs is the collection point. A flat tax takes a slice of your income when you earn it while a sales tax gets a slice of your income when you spend it.

But otherwise the two plans have a lot of similarities. Both tax at a low rate. Both get rid of double taxation (in the jargon of economists, this means a “consumption base” system). And both eliminate corrupt and distorting loopholes.

Those are the main economic arguments, though it’s also worth noting that either version of tax reform would allow a dramatic downsizing of the IRS.

I don’t know whether that should be a victory over bureaucracy or a victory for civil liberties, but it would be a good outcome.

In a column for today’s Wall Street Journal, Professor John Cochrane of the Hoover Institution makes the economic case for reform. Here are some excerpts.

…t“Fair Tax” bill…eliminates the personal and corporate income tax, estate and gift tax, payroll (Social Security and Medicare) tax and the Internal Revenue Service. It replaces them with a single national sales tax. Business investment is exempt, so it is effectively a consumption tax. Each household would get a check each month, so that purchases up to the poverty line are effectively not taxed. …our income and estate tax system is broken. It has high statutory rates with a Swiss cheese of exemptions, immense cost, unfairness and distortion. …A consumption tax, with none of the absurd complexity of our current taxes, is the answer. It funds the government with the least economic distortion. …A range of implicit subsidies will disappear. Good. Subsidies should be transparent. Money for electric cars, health insurance, housing, and so forth should be appropriated and sent as checks, not hidden as tax deductions or credits.

The bottom line is that we would have a much less destructive system with a national sales tax.

That being said, there is a very relevant debate about whether a sales tax is the politically smart way of trying to fix tax code.

In the video above, Bruce Bartlett argued that incremental reforms could solve almost all of the problems in the current system. That’s technically true, but tinkering with the tax code over the past 110 years is what’s produced the current mess.

So is it realistic to think that tinkering in the future will yield good results?

Regardless of our strategy, the odds of a good outcome are not favorable, but my two cents is that our best bet is to advocate for big changes like either a flat tax or national sales tax.

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The Most Uplifting Chart (so far) of 2023

I wrote in both 2021 and 2022 about states enacting lower tax rates.

And that includes several states (Iowa, Idaho, Arizona) adopting flat taxes.

Today, let’s quantify these developments. Our friends at the Tax Foundation just published a chart showing how top tax rates at the state level have declined since 2010.*

The decline is not enormous, but it’s encouraging to see a downward trend (particularly if the alternative is an upward trend!).

Will we see further progress this year? Yes, notwithstanding last November’s terrible ballot initiative in Massachusetts, there are already some pre-approved reductions in tax rates. So the average will fall in 2023 and 2024.

After that, my fingers will be crossed.

But I am confident that we will see continued migration from high-tax states to low-tax states. And this will happen for two reasons.

• First, some people will move because they are tired to paying high tax rates, especially since they live in states that do a rotten job of providing basic services (high tax burdens generally get diverted to bureaucrat salaries and pensions).
• Second, other people might not earn enough to directly care about high tax rates, but they nonetheless will move because low-tax states create more jobs and offer greater opportunities for economic advancement.

Let’s close with some speculation about what might happen in the future.

I’m guessing that folks on the left don’t like this shift to lower tax rates at the state level, much as they didn’t like the global shift to lower tax rates after Ronald Reagan and Margaret Thatcher instigated a virtuous cycle of tax competition about 40 years ago.

In the case of global tax competition, high-tax nations have been using the OECD as a vehicle to curtail the shift to better tax policy. The OECD pressured so-called tax havens with financial protectionism and is now pressing governments to increase corporate tax burdens.

Unsurprisingly, global tax rates are now creeping upwards.

Is it possible that there will be similar efforts inside the United States?

I hope not. I can’t imagine sensible states like Texas and Florida agreeing to any sort of state tax cartel.

And I also don’t think there’s any immediate threat of Congress imposing a Washington-created cartel.

But it doesn’t hurt to be vigilant. Remember, the great thing about tax competition is that it pressures politicians to do the right thing when they generally would prefer to do the wrong thing.

*The “mean” is the average of all 50 states and the “median” is the rate in the state that is lower than half the states and higher in half the states.

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Bernie Sanders Humor

I’m going to start today’s column by admitting that I lied. That might be expected since much of my work takes place in the sleazy environment of Washington, DC.

But my lie was innocent. Back in 2020, when he was defeated by Joe Biden for the Democratic presidential nomination, I wrote what I thought would be a “Farewell-and-Good-Riddance Edition of Bernie Sanders Humor.”

I figured there would no longer be a need to mock Crazy Bernie (or is he Evil Bernie?).

But then I saw this tweet, highlighting how gullible idiots are being charged as much as $95 to attend Bernie’s lecture about the supposed evils of capitalism. And it included this amusing meme.

I don’t know if Bernie’s the one reaping the profits from this scam. But since he owns three homes and is part of the top-1 percent, I wouldn’t be surprised (sort of like this cartoon).

And since we’re kicking around Bernie one more time (or is this truly the last time?), here are a few other items.

Mao probably killed more people than anybody else in world history, so he’s definitely evil, whereas we can laugh our you-know-whats-off about Bernie.

(By the way, if we’re measuring evil by the percentage of the population that was butchered, than the communist dictator of Cambodia was worse than Mao.)

For our third item, the Babylon Bee put together an entirely plausible Bernie Sanders anti-poverty plan.

I am once again asking for your support in eradicating systemic poverty from the face of the earth. America can do it, but we won’t because America is immoral and Elon Musk has all the money. Horrible! I have a simple ten-step plan that is foolproof — and I should know because I’ve been to the Soviet Union and it’s a paradise over there, let me tell you!

The article lists 10 reasons, but 2-6 were the best in my opinion.

2. Tax rich people until they’re poor: If everyone is poor then no one will be.
3. Give everyone money until they become middle class: We cannot rest until Tom Hanks and John Doe are shopping at the same grocery store. Then maybe I can get an autograph.
4. Drop Elon Musk off the Empire State Building: This is how we win, America!
5. Print more money: Unexpected expenses can be paid for with a giant savings account everyone can access. The beauty of it is that if it’s overdrawn we can just print more money! Why haven’t we done this yet.
6. Offload our health care to Cuba: Sailing to Cuba for treatment will also build muscle, making you healthier overall! Is there anything Cuba can’t do?

This next one is basically a different version of a meme I shared in 2019.

As usual, I save the best for last. Here we have Bernie showing the socialist philosophy at a pot-luck dinner.

All take and no give. Sort of the mealtime version of this classic cartoon.

I’ll close by noting we mock Crazy Bernie for his overt hurry-up socialism. Well, the incremental version isn’t much better since you eventually wind up in the same bad place.

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