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Archive for the ‘Class warfare’ Category

Back in 2014, I shared some data from the Tax Foundation that measured the degree to which various developed nations punished high-income earners.

This measure of relative “progressivity” focused on personal income taxes. And that’s important because that levy often is the most onerous for highly productive residents of a nation.

But there are other taxes that also create a gap between what such taxpayers earn and produce and what they ultimately are able to consume and enjoy. What about the effects of payroll taxes? Of consumption taxes and other levies?

To answer that question, we have a very useful study from the European Policy Information Center on this topic. Authored by Alexander Fritz Englund and Jacob Lundberg, it looks at the total marginal tax rate on each nation’s most productive taxpayers.

They start with some sensible observations about why marginal tax rates matter, basically echoing what I wrote after last year’s Super Bowl.

Here’s what Englund and Lundberg wrote.

The marginal tax rate is the proportion of tax paid on the last euro earned. It is the relevant tax rate when deciding whether to work a few extra hours or accept a promotion, for example. As most income tax systems are progressive, the marginal tax rate on top incomes is usually also the highest marginal tax rate. It is an indicator of how progressive and distortionary the income tax is.

They then explain why they include payroll taxes in their calculations.

The income tax alone does not provide a complete picture of how the tax system affects incentives to work and earn income. Many countries require employers and/or employees to pay social contributions. It is not uncommon for the associated benefits to be capped while the contribution itself is uncapped, meaning it is a de facto tax for high-income earners. Even those social contributions that are legally paid by the employer will in the end be paid by the employee as the employer should be expected to shift the burden of the tax through lower gross wages.

Englund and Lunberg are correct. A payroll tax (sometimes called a “social insurance” levy) will be just as destructive as a regular income tax if workers aren’t “earning” some sort of additional benefit. And they’re also right when they point out that payroll taxes “paid” by employers actually are borne by workers.

They then explain why they include a measure of consumption taxation.

One must also take value-added taxes and other consumption taxes into account. Consumption taxes reduce the purchasing power of wage-earners and thus affect the return to working. In principle, it does not matter whether taxation takes place when income is earned or when it is consumed, as the ultimate purpose of work is consumption.

Once again, the authors are spot on. Taxes undermine incentives to be productive by driving a wedge between pre-tax income and post-tax consumption, so you have to look at levies that grab your income as it is earned as well as levies that grab your income as it is spent.

And when you begin to add everything together, you get the most accurate measure of government greed.

Taking all these taxes into account, one can compute the effective marginal tax rate. This shows how many cents the government receives for every euro of additional employee compensation paid by the firm. …If the top effective tax rate is 75 percent, as in Sweden, a person who contributes 100 additional euros to the economy will only be allowed to keep 25 euros while 75 euros are appropriated by the government. The tax system thus drives a wedge between the social and private return to work. …High marginal tax rates disconnect the private and social returns to economic activity and thereby the invisible hand ceases to function. For this reason, taxation causes distortions and is costly to society. High marginal tax rates make it less worthwhile to supply labour on the formal labour market and more worthwhile to spend time on household work, black market activities and tax avoidance.

Here’s their data for various developed nation.

Keep in mind that these are the taxes that impact each nation’s most productive taxpayers. So that includes top income tax rates, both for the central governments and sub-national governments, as well as surtaxes. It includes various social insurance levies, to the extent such taxes apply to all income. And it includes a measure of estimated consumption taxation.

And here’s the ranking of all the nations. Shed a tear for entrepreneurs in Sweden, Belgium, and Portugal.

Slovakia wins the prize for the least-punitive tax regime, though it’s worth noting that Hong Kong easily would have the best system if it was included in the ranking.

For what it’s worth, the United States does fairly well compared to other nations. This is not because our personal income tax is reasonable (see dark blue bars), but rather because Barack Obama and Hillary Clinton were unsuccessful in their efforts to bust the “wage base cap” and apply the Social Security payroll tax on all income. We also thankfully don’t have a value-added tax. These factors explain why our medium-blue and light-blue bars are the smallest.

By the way, this doesn’t mean we have a friendly system for upper-income taxpayers in America. They lose almost half of every dollar they generate for the economy. And whether one is looking at Tax Foundation numbers, Congressional Budget Office calculations, information from the New York Times, or data from the IRS, rich people in the United States are paying a hugely disproportionate share of the tax burden.

Though none of this satisfies the statists. They actually would like us to think that letting well-to-do taxpayers keep any of their money is akin to a handout.

Now would be an appropriate time to remind everyone that imposing high tax rates doesn’t necessarily mean collecting high tax revenues.

In the 1980s, for instance, upper-income taxpayers paid far more revenue to the government when Reagan lowered the top income tax rate from 70 percent to 28 percent.

Also keep in mind that these calculations don’t measure the tax bias against saving and investment, so the tax burden on some upper-income taxpayers may be higher or lower depending on the degree to which countries penalize capital formation.

P.S. If one includes the perverse incentive effects of various redistribution programs, the very highest marginal tax rates (at least when measuring implicit rates) sometimes apply to a nation’s poor people.

P.P.S. Our statist friends sometimes justify punitive taxes as a way of using coercion to produce more equality, but the net effect of such policies is weaker growth and that means it is more difficult for lower-income and middle-income people to climb the economic ladder. In other words, unfettered markets are the best way to get social mobility.

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Since I can’t even keep track of schools of thought on the right (libertarians, traditional conservatives, neocons, reform conservatives, compassionate conservatives, Trump-style populists, etc), I’m not going to pretend to know what’s happening on the left.

But it does appear that something significant – and bad – is happening in the statist community.

Traditionally, folks on the left favored a conventional welfare state, which revolved around two components.

  1. Means-tested programs for the ostensible purpose of alleviating poverty (e.g.., Medicaid, food stamps, welfare, etc).
  2. Social-insurance programs for the ostensible purpose of alleviating sickness, unemployment, and aging (e.g., Social Security, Medicare, unemployment insurance, etc).

This agenda was always a bad idea for both macro and micro reasons, and has become a very bad idea because of demographic changes.

But now the left has expanded its goals to policies that are far more radical. Instead of a well-meaning (albeit misguided) desire to protect people from risk, they now want coerced equality.

And this agenda also has two components.

  1. A guaranteed and universal basic income for everyone.
  2. Taxes and/or earnings caps to limit the income of the rich.

Taking a closer look at the idea of basic income, there actually is a reasonable argument that the current welfare state is so dysfunctional that it would be better to simply give everyone a check instead.

But as I’ve argued before, this approach would also create an incentive for people to simply live off taxpayers. Especially if the basic income is super-generous, as was proposed (but fortunately rejected by an overwhelming margin) in Switzerland.

I discuss the pros and cons in this interview.

By the way, one thing that I don’t mention in the interview is my fear that politicians would create a basic income but then not fully repeal the existing welfare state (very similar to my concern that politicians would like to have a national sales tax or value-added tax without fully eliminating the IRS and all taxes on income).

Now let’s shift to the left’s class-warfare fixation about penalizing those with high incomes.

This isn’t a new phenomenon, of course. We’ve had ideologues such as Bernie Sanders, Thomas Piketty, and Matt Yglesias arguing  in recent years for confiscatory tax rates. It appears some modern leftists actually think the economy is a fixed pie and that high incomes for some people necessitate lower incomes for the rest of us.

And because of their fetish for coerced equality, some of them even want to explicitly cap incomes for very valuable people.

The nutcase leader of the U.K. Labour Party, for instance, recently floated that notion. Here are some excerpts from a report in the Guardian.

Jeremy Corbyn has called for a maximum wage for the highest earners… The Labour leader would not give specific figures, but said radical action was needed to address inequality. “I would like there to be some kind of high earnings cap, quite honestly,” he told BBC Radio 4’s Today programme on Tuesday. When asked at what level the cap should be set, he replied: “I can’t put a figure on it… It is getting worse. And corporate taxation is a part of it. If we want to live in a more egalitarian society, and fund our public services, we cannot go on creating worse levels of inequality.” Corbyn, who earns about £138,000 a year, later told Sky News he anticipated any maximum wage would be “somewhat higher than that”. “I think the salaries paid to some footballers are simply ridiculous, some salaries to very high earning top executives are utterly ridiculous. Why would someone need to earn more than £50m a year?”

This is so radical that even other members of the Labour Party have rejected the idea.

Danny Blanchflower, a former member of Corbyn’s economic advisory committee, said he would have advised the Labour leader against the scheme. In a tweet, the former member of the Bank of England’s monetary policy committee said it was a “totally idiotic, unworkable idea”. …Labour MPs expressed reservations… Reynolds also expressed some uncertainty. “I’m not sure that I would support that,” she told BBC News. “I would like to see the detail. I think there are other ways that you can go about tackling income inequality… Instinctively, I don’t think [a cap] probably the best way to go.”

The good news, relatively speaking, is that Crazy Corbyn has been forced to backtrack.

Not because he’s changed his mind, I’m sure, but simply for political reasons. Here’s some of what the U.K.-based Times wrote.

Jeremy Corbyn’s attempt to relaunch his Labour leadership descended into disarray yesterday as he backtracked on a wage cap… The climbdown came after members of the shadow cabinet refused to back the idea of a maximum income while former economic advisers to Mr Corbyn criticised it as absurd.

There don’t seem to be many leftists in the United States who have directly embraced this approach, though it is worth noting that Bill Clinton’s 1993 tax hike included a provision disallowing deductibility for corporate pay over $1 million.

And that policy was justified using the same ideology that politicians should have the right to decide whether some people are paid too much.

In closing, I can’t help but wonder whether my statist friends have thought about the implications of their policies. They want the government to give everyone a guaranteed basic income, yet they want to wipe out high-income taxpayers who finance the lion’s share of redistribution.

I’m sure that work marvelously in the United States. Just like it’s producing great outcomes in place like Greece and Venezuela.

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Back in 2010, I shared a cartoon video making a very important point that there’s a big downside when class-warfare politicians abuse and mistreat highly productive taxpayers.

Simply stated, the geese with the golden eggs may fly away. And this isn’t just theory. As revealed by IRS data, taxpayer will move across borders to escape punitive taxation.

It’s harder to move across national borders, of course, but it happens. Record numbers of Americans have given up their passports, including some very high-profile rich people.

Some folks on the left like to argue that taxes don’t actually lead to behavioral changes. Whenever there’s evidence of migration from high-tax jurisdictions to low-tax jurisdictions, they argue other factors are responsible. The rich won’t move just because tax rates are high, they contend.

Oh, really?

Here are some excerpts from a new Research Brief from the Cato Institute. Authored by economists from Harvard, the University of Chicago, and Italy’s Einaudi Institute, the article summarizes some scholarly research on how top-level inventors respond to differences in tax rates. Here’s what they did.

According to World Intellectual Property Organization data, inventors are highly mobile geographically with a migration rate of around 8 percent. But what determines their patterns of migration, and, in particular, how does tax policy affect migration? …Our research studies the effects of top income tax rates on the international migration of inventors, who are key drivers of technological progress. …We use a unique international data set on all inventors from the U.S. and European patent offices to track the international location of inventors since the 1970s. …We combine these inventor data with international top effective marginal tax rates data. Particularly interesting are “superstar” inventors, those with the most abundant and most valuable innovations. …We define superstar inventors as those in the top 1 percent of the quality distribution, and similarly construct the top 1–5 percent, the top 5–10 percent, and subsequent quality brackets. The evidence presented suggests that the top 1 percent superstar inventors are well into the top tax bracket.

And here’s what they ascertained about the behavioral response of the superstar inventors.

We start by documenting a negative correlation between the top tax rate and the share of top quality foreign inventors who locate in a country, as well as the share of top quality domestic inventors who remain in their home country. …We find that the superstar top 1 percent inventors are significantly affected by top tax rates when choosing where to locate. …the elasticity of the number of foreign top 1 percent superstar inventors to the net-of-tax rate is much larger, with corresponding values of 0.63, 0.85, and 1.04. The far greater elasticity for foreign relative to domestic inventors makes sense since, when a given country adjusts its top tax rate, it potentially affects inventor migration from all other countries.

And they point out a very obvious lesson.

…if the economic contribution of these key agents is important, their migratory responses to tax policy might represent a cost to tax progressivity. … An additional relevant consideration is that inventors may have strong spillover effects on their geographically close peers, making it even more important to attract and retain them domestically

And don’t forget the research I shared last year showing that superstar entrepreneurs are more likely to be found in lower-tax jurisdictions.

P.S. Seems to me, given that upper-income taxpayers shoulder most of the nation’s fiscal burden, that our leftist friends should be applauding the rich rather than demonizing them.

P.P.S. Let’s close with some more election-related humor.

Saw this very clever item on Twitter today.

And connoisseurs of media bias will have to double check to confirm this is satire rather than reality.

Regular readers know I’m skeptical about whether Trump will seek to control big government, but one thing I can safely say is that we’ll have an opportunity to enjoy some amusing political humor for the next four years.

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In just 10 days, voters will go to the polls and deal with the rather distasteful choice of Donald Trump and Hillary Clinton.

In some states, they also will have an opportunity to vote for or against various ballot initiatives and referendums.

Here are the five proposals that would do the most damage in my humble opinion.

ColoradoCare (Amendment #69) – Apparently learning nothing from what happened in Vermont, advocates of big government in Colorado have a proposal to impose a 10 percent payroll tax to finance statewide government-run healthcare. The Tax Foundation points out that, if this scheme is approved, Colorado’s score in the State Business Tax Climate index “would plummet from 16th overall to 34th,” while the Wall Street Journal opines that “California would look like the Cayman Islands by tax comparison” if Colorado voters say yes.

Oregon Gross Receipts Tax (Measure #97) – Back in 2010, presumably guided by the notion that it’s okay to steal via majoritarianism, Oregon voters approved a class-warfare tax hike on upper-income taxpayers. Now they’re about to vote on a scheme to pillage the state’s businesses with a gross receipts tax, which is sort of like a value-added tax but with no credit for taxes paid earlier in the production process, which means the burden “pyramids” as goods and services are created. The Tax Foundation warns that this levy could lead to “a 25 percent increase in the Oregon state budget” and that “Oregon’s corporate tax climate would be the worst in the nation.”

Maine Income Tax Hike (Question #2) – Voters are being asked whether to boost the state’s top income tax rate to 10.15, which would be the second-highest in the nation. According to the Tax Foundation, the Pine Tree State “would drop to 45th overall” in the State Business Tax Climate Index (down from #30) if this class-warfare scheme is enacted. The National Taxpayers Union warns that the ” tax would make the state a less competitive place in which to do business.”

Oklahoma Sales Tax Increase (Question #779) – Sales taxes don’t do as much damage, per dollar raised, as income taxes, but it’s still a foolish idea to impose a big tax hike in order to finance bigger government. And that’s what will happen if voters in the state agree to boost the state sales tax by one-percentage point. The Tax Foundation notes that “Question 779 would give the Sooner State the second highest combined state and local sales tax rate in the nation, after only Louisiana.

California Tax-Hike Extension (Proposition #55) – One of worst ballot initiatives in 2012 was California’s Proposition 30, which imposed a big, class-warfare tax hike on upper-income residents and gave the Golden State the nation’s highest income tax rate. One of the arguments in favor of Prop 30 was that the tax increase was only temporary, lasting until the end of 2018. Well, as Milton Friedman famously observed, there’s nothing so permanent as a temporary government program. And that apparently applies to “temporary” taxes as well.  Proposition #55 would extend the tax until 2030.

Unfortunately, there aren’t a lot of ballot initiatives that would move policy in the right direction. Here’s the one that probably matters most.

Massachusetts Charter Schools (Question #2) – Much to the dismay of teacher unions (and presumably the hacks at the NAACP as well), this initiative would expand charter schools. It’s remarkable that even the very left-leaning Boston Globe is embracing Question 2, opining that “the proposal would create new opportunities for the 32,000 students, predominantly black and Latino, who are now languishing on waiting lists hoping for a spot at a charter school” and that “Students in all Massachusetts charter schools gain the equivalent of 36 more days of learning per year in reading and 65 more days of learning in math.”

A related measure is Amendment #1 in Georgia.

Now let’s shift to a ballot initiative that is noteworthy, though I confess I don’t have a very strong opinion about the ideal outcome.

Washington Revenue-Neutral Carbon Tax (Initiative #732) – The bad news is that a carbon tax would be imposed. This means, according to the Tax Foundation, that the “average household would pay $225 more per year for gasoline under the proposal, and $64 more for electricity.” The good news is that the sales tax would drop by one cent and the state’s gross receipts tax would almost disappear. So is this a good deal? Part of me says no because it’s never a good idea to give politicians a new source of tax revenue. But the fact that the measure is opposed by many hard-left green groups suggests that the idea probably has some merit.

For what it’s worth, I would vote against I-732 because of concerns that it eventually will lead to a net increase in the burden of government.

Last but not least, I’ll also be following the results on initiatives dealing with marijuana and tobacco.

States Voting for Marijuana Legalization (and Taxation) – Voters in Arizona, California, Maine, Massachusetts, and Nevada will have an opportunity to fully or partly legalize marijuana. These initiatives also include buzz-kill provisions to levy hefty taxes on producers and consumers.

States Voting for Tobacco Tax Increases – Politicians in California, Colorado, Missouri, and North Dakota all hope that voters will approve tax hikes that target smokers (and, in some cases, vapers). In every case, the tax hikes will fund bigger government.

P.S. I can’t resist adding that I’m also keeping my fingers crossed that other voters in Fairfax County will join me in rejecting a scheme to add a 4 percent tax on restaurant meals. Not just because it’s a tax hike to fund bigger government, but also because the hacks in the county government are using dishonest and reprehensible arguments to push the tax.

P.P.S. I will be updating my prediction for the presidential election, and also making predictions for the House and Senate, the morning of November 8.

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Based on what she’s been saying during the campaign, Hillary Clinton is a big fan of class warfare. She has put forth a series of “soak-the-rich” tax hikes designed to finance bigger government.

Her official plan includes provisions such as an increase (“surcharge”) in the top tax rate, the imposition of the so-called Buffett Rule, an increase in the tax burden on capital gains (including carried interest), and a more onerous death tax.

The Tax Foundation explains that this plan won’t be good for the economy or the budget.

Hillary Clinton’s tax plan would reduce the economy’s size by 1 percent in the long run. The plan would lead to 0.8 percent lower wages, a 2.8 percent smaller capital stock, and 311,000 fewer full-time equivalent jobs. …If we account for the economic impact of the plan, it would end up raising $191 billion over the next decade.

Here’s a table showing the static revenue impact for the various provisions, followed by the estimated economic impact, which then allows the Tax Foundation to calculate the real-world, dynamic revenue impact.

So what does all this mean?

Well, the Congressional Budget Office estimates that tax revenue over the next 10 years will be $41,658 billion based on current law. Hillary’s plan will add $191 billion to that total, an increase of 0.46 percent.

Which means that she’s willing to lower our incomes by 0.80 percent to increase the government’s take by 0.46 percent. A good deal for her and her cronies, but bad for America.

But it gets worse. Hillary’s official tax plan doesn’t include her biggest proposed tax hike. As I’ve warned before, and as Andrew Biggs of the American Enterprise explains in a new article, she has explicitly stated her support for huge tax hikes to bail out Social Security.

…she has endorsed both of the main tax increases included in Sanders’ Social Security plan: imposing the Social Security tax on earnings above the current $118,500 cap and applying Social Security taxes to investment income in addition to wages.

Andrew warns that busting the wage-base cap may boost payroll tax receipts, but such a policy will lead to lower revenues from other sources.

Eliminating the payroll tax ceiling would require workers and employers to each pay an additional 6.2% tax on all earnings above the ceiling, currently $118,500. Both the SSA actuaries and the Congressional Budget Office assume that when employers are hit with an additional payroll tax they will over time reduce employees’ wages to cover the increased cost, consistent with economists’ view that employees ultimately “pay” for employer-provided benefits through lower wages. Those lost wages would then no longer be subject to federal income taxes, Medicare payroll taxes or state government income taxes. If the average marginal tax rate on earnings above the current payroll tax ceiling is 48% – say, the top earned income tax rate of 39.6%, plus the 3.8% top Medicare payroll tax rate, plus a roughly 5% state income tax – then federal and state tax revenues would fall by 26 cents for each additional dollar of Social Security taxes collected.

And this estimate is based solely on the reduction in taxable income that occurs as businesses give their employees less take-home buy because of the higher payroll tax.

To be accurate, you also have to consider how workers will react (and rest assured that upper-income taxpayers have plenty of ability to alter the timing, level, and composition of their income). Andrew looks at the potential impact.

…revenue losses occur even if individual earners themselves make no adjustments to their earnings in response to higher tax rates. They’re purely a function of employers adjusting wages to compensate for their payroll tax bills. But if affected earners react to higher tax rates by reducing their earnings, either though less work or by tax avoidance strategies, then net revenue losses would be even higher. A 2010 literature survey by economists Emmanuel Saez, Joel Slemrod, and Seth Giertz found that high earners reduce their earnings by between 0.12% and 0.40% for each 1% increase in their taxes. These estimates imply that total revenues gained by eliminating the Social Security tax max would fall one-third to one-half below the static assumptions that Social Security reforms rely upon. Other credible academic studies find even higher sensitivities of taxable income to tax rates.

For more information, here’s a video I narrated on the issue for the Center for Freedom and Prosperity.

Let’s close on a grim note. If Hillary Clinton goes forward with her plan to bust the wage base cap and change Social Security from an actuarially bankrupt social insurance program into a conventional tax-and-spend redistribution program, she won’t collect very much tax revenue because of the way workers and employers will react.

But from Hillary’s perspective, she won’t care. Under the budget rules governing Washington, she’ll still be able to increase spending (i.e., buy votes) based on how much revenue the Joint Committee on Taxation inaccurately predicts will materialize based on primitive “static scoring” estimates.

In other words, the Laffer Curve will prevail, but – other than the ability to say “I told you so” – proponents of good policy won’t have any reason to be happy.

And when, in the real world, the long-run fiscal and economic outlook weakens because of her misguided policies, Mrs. Clinton will just propose additional tax hikes to deal with the “unexpected” shortfalls. Lather, rinse, repeat, until we become Greece.

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What’s the worst possible tax hike, the one that would do the most economic damage?

Raising income tax rates is never a good idea, and there’s powerful evidence from the 1980s about how upper-income taxpayers have considerable ability to change their behavior in response to changes in incentives.

But if you want to know the tax hikes that do the most damage, on a per-dollar raised basis, it’s probably best to focus on levies that boost double taxation of saving and investment.

The Tax Foundation ran some estimates on five different tax increases, for instance, and found that worsening depreciation rules (an arcane part of the tax code dealing with the degree to which new investment is taxed) would do the most damage, followed by a higher corporate tax rate, and then higher individual income tax rates.

But I wonder what they would have found if they also modeled the impact of a higher death tax. That levy is particularly destructive because it directly requires the liquidation of capital. The assets of investors, entrepreneurs, farmers, small business owners, and other victims take a big hit as politicians grab as much as 40 percent of what they’ve worked for during their lives.

This is bad for the economy because it directly reduces the capital stock. Sort of like harvesting apples by cutting down 40 percent of the trees in an orchard. The net result is that the economy’s ability to generate future income is undermined.

But it’s also bad for the economy because it reduces incentives for successful taxpayers to both earn and invest while they’re alive. Why bust your rear end when the government immediately will take at least 39.6 percent (actually more when you consider Medicare taxes, state taxes, and double taxation of interest, dividends, and capital gains) of your income, and then another 40 percent of what you’ve saved and invested when you kick the bucket?

Unfortunately, Hillary Clinton doesn’t seem to care about such matters. She actually just decided to double down on her destructive tax agenda by endorsing an even bigger increase in the death tax.

I’m not joking.

The editorial page of the Wall Street Journal is not exactly impressed by Hillary’s class-warfare poison.

On Thursday she decided that her proposal to raise the death tax to 45% from 40% isn’t enough and endorsed even higher levies that would apply to thousands of estates. Though she defeated Bernie Sanders in the primary, she is adopting the socialist’s death-tax rate structure. She’d tax all estates over $10 million at 50%, apply a 55% rate on estates over $50 million, and go to 65% on assets above $500 million. The 65% rate would be the highest since 1981 and is another example of how she is repudiating the more moderate policies of her husband and the Democrats of the 1990s. …the Sanders plan that Mrs. Clinton is copying did not index exemption levels for inflation. …Mrs. Clinton would also end the “step-up in basis” on stock valuations for many filers, triggering big capital gains taxes for a much broader population.

Wow, this is class warfare on steroids. And the part about this being more like Bernie Sanders than Bill Clinton hits the mark. Economic freedom actually increased in America between 1992 and 2000.

Hillary, by contrast, is a doctrinaire and reflexive statist. I’m not aware of a single position she’s taken that would reduce the burden of government.

By the way, here’s a bit of information that won’t shock anyone familiar with the greed and hypocrisy of the political class.

Hillary and her friends will largely dodge the tax, which mostly will fall on small business owners who lack the ability to create clever structures.

…most of her rich friends will set up foundations, as she and Bill Clinton have, to shelter most of their riches from the estate tax. …In any case, Mrs. Clinton is now promising total tax hikes of $1.5 trillion over a decade if elected President.

Gee, knock me over with a feather.

The Tax Foundation may not have included the death tax when it compared the harm of different tax hikes, but it has looked at how the death tax hurts the economy by discouraging capital formation and capital accumulation.

…an estate tax increase would cause economic production to be allocated away from business equipment, reducing the quantity of business equipment in the economy. …Many of the assets that fall under the estate tax, such as residential structures, commercial structures, and business equipment, enhance productivity, or gross domestic product (GDP) per hour worked. …The relationship between these assets and productivity is the focus of one of the most common models in economics, an equation called the Cobb-Douglas production function, which describes how workers and capital goods together produce economic output. Under this model, more capital increases output or income, even as the number of workers is held constant. It therefore increases GDP per hour worked, making people richer. Under such a model, reallocating economic production away from the capital goods that enhance output would reduce GDP in the long run. This is an effect that one might expect to see in a macroeconomic analysis of the estate tax.

Amen. If you want more output and higher living standards, you need to boost worker pay by increasing the quality and quantity of capital in the economy.

But politicians like Hillary

Here are the estimates of what happens to the economy with a 65 percent death tax.

So what would happen if lawmakers instead did the right thing and abolished this wretched example of double taxation?

The Tax Foundation has crunched the numbers. Here’s the impact on the overall economy.

And here’s what happens to federal revenue over the same period.

By the way, the Wall Street Journal editorial cited above did contain a bit of good news.

Congress is starting to push back against President Obama’s stealth death tax increase. Rep. Warren Davidson (R., Ohio) read our recent editorial about Treasury plans to raise taxes on minority stakes in family businesses by artificially inflating their value, and he’s drafted a bill to stop Treasury’s tax grab as a violation of the separation of powers. …A former owner of several businesses, Mr. Davidson says the U.S. economy needs owners focused on “growing assets, not structuring them for life events.” He explains that many farms in particular may carry high values but hold little cash, and so the death tax triggers land sales to pay the IRS. “The whole concept of a death tax is immoral,” Mr. Davidson says, and he’s right. The tax confiscates assets that have already been taxed once or more when first earned, and it punishes a lifetime of investment and thrift.

I wrote about this issue the other day, so I’m glad to see that there’s pushback against this Obama Administration scheme to unilaterally boost the burden of the death tax.

P.S. Politicians are not the only beneficiaries of the death tax.

 

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Based on the title of this column, you may think I’m going to write about oppressive IRS behavior or punitive tax policy.

Those are good guesses, but today’s “brutal tax beating” is about what happens when a clueless leftist writes a sophomoric column about tax policy and then gets corrected by an expert from the Tax Foundation.

The topic is the tax treatment of executive compensation, which is somewhat of a mess because part of Bill Clinton’s 1993 tax hike was a provision to bar companies from deducting executive compensation above $1 million when compiling their tax returns (which meant, for all intents and purposes, an additional back-door 35-percent tax penalty on salaries paid to CEO types). But to minimize the damaging impact of this discriminatory penalty, particularly on start-up firms, this extra tax didn’t apply to performance-based compensation such as stock options.

In a good and simple tax system, which taxes income only one time (including business income), the entire provision would be repealed.

But when Alvin Chang, a graphics reporter from Vox, wrote a column on this topic, he made the remarkable claim that somehow taxpayers are subsidizing big banks because the aforementioned penalty does not apply to performance-based compensation.

…the government doesn’t tax performance-based pay for…any…top bank executive in America. Unlike regular salaries — where the government takes out taxes to pay for Medicare, Social Security, and all other sorts of things — US tax code lets banks deduct the big bonuses they give to their executives. … The solution most Americans want is to either heavily tax CEO pay over a certain amount, or to set a strict cap on how much CEOs can make, relative to their workers. As long as this loophole is open, though, it makes sense for banks to continue paying executives these huge sums. ..for now, taxpayers are still ponying up to help make wealthy bankers even wealthier, because the US tax code encourages it.

Since Mr. Chang is a graphics reporter, you won’t be surprised that he included several images to augment his argument.

Here’s one making the case that companies should pay a 35 percent tax on performance-based pay for CEO types. Keep in mind, as you peruse this image, that recipients of performance-based pay have to declare that income on their 1040s and pay 39.6 percent individual income tax.

And here’s Chang’s look at how much money the IRS could have collected from big banks in recent years if the anti-CEO tax penalty was extended to performance-based pay.

When I look at these images, my gut reaction is to be offended that Chang equates “taxpayers” with the federal government.

So I would change the caption of the first image so it ended, “…this pile would be diverted from shareholders to politicians.”

And the caption in the second image would read, “This is the amount it saved taxpayers.”

But Chang’s argument is also flawed for much deeper reasons. Scott Greenberg of the Tax Foundation debunks his entire column. Not just debunks. Eviscerates. Destroys.

Here are some of the highlights.

…the article contains several factual errors and misleading claims about how CEOs are taxed in America. The article begins by making an incorrect claim: that the federal government does not tax performance-based CEO pay… This is simply untrue. Under the U.S. tax code, households are generally required to pay individual income taxes on the value of the stock options and bonuses that they receive…up to 39.6% on the performance-based pay… The article continues with another false assertion…it claims that CEO performance-based pay is not subject to the same Social Security and Medicare payroll taxes as “regular salaries.” In fact, all employee compensation, including CEO pay, is subject to Medicare payroll taxes, and high-income individuals actually pay a higher Medicare payroll tax rate than most other employees. …it claims that U.S. businesses are allowed to deduct CEO pay but are not allowed to deduct “regular salaries.” This is patently incorrect. Under the U.S. tax code, businesses are allowed to deduct virtually all compensation to employees. In fact, the only major exception to this rule is that businesses are only allowed to deduct $1 million in non-performance-based salaries to CEOs. This means that the U.S. tax code gives the same, if not worse, treatment to CEO compensation as “regular salaries.”

Scott also addresses the silly assertion that deductions for CEO compensation are some sort of subsidy.

You probably wouldn’t claim that taxpayers are subsidizing the restaurant worker’s salary, because the deduction for employee compensation is a regular, structural feature of the tax code. In general, businesses in the U.S. are taxed on their revenues minus their expenses, and the salary paid to the worker is a business expense like any other. The same argument applies for CEO compensation. When a business pays a CEO $155 million, it has increased its expenses and decreased its profits. The normal logic of U.S. tax law dictates that the business be allowed to deduct the CEO’s compensation from its taxable income. Then, the CEO is required to pay individual income taxes on the compensation.

The bottom line, as Scott points out, is that Bill Clinton’s provision means that CEO pay is penalized rather than subsidized.

…wages and salaries of CEOs are penalized relative to the wages and salaries of regular employees, while performance-based compensation is taxed in the same manner as regular wages and salaries. In sum, it is simply wrong to say that the federal tax code subsidizes CEO pay.

Game, set, and match. Mr. Chang should stick to graphics rather than tax policy.

And policy makers should resist tax policies based on envy and resentment since the net result is a tax code that is needless complex and pointlessly destructive.

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