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Archive for the ‘Class warfare’ Category

I’m not a big fan of the Organization for Economic Cooperation and Development. Simply stated, the Paris-based international bureaucracy represents the interests of governments, and that means the OECD often pushes policies that serve the interests of politicians at the expense of taxpayers and consumers.

I’m particularly irked that OECD bureaucrats spend so much time and effort persecuting low-tax jurisdictions. And some of their work on issues such as poverty and inequality is grotesquely dishonest and sloppy.

But there are some good economists at the OECD. They’re apparently not allowed to have any role in policy, much to my dismay, but they occasionally produce very good research studies.

Such as the 2016 study that showed how many European welfare states would enjoy big increases in prosperity if they reduced the burden of government spending.

And the pair of studies that concluded spending caps were the most effective rule for sensible fiscal policy.

Or the study admitting that competition between governments leads to better tax policy.

Today, let’s look at another example of sensible analysis by OECD economists.

In a study published in late 2017, Oguzhan Akgun, Boris Cournède and Jean-Marc Fournier examined how different types of taxes impacted economic performance.

Lo and behold, they found that it’s good to have lower tax rates on businesses and it’s good to have lower tax rates on workers.

The present paper looks at the long-term effects of tax shifts on inequality and output for an unchanged size of government. …This study uses econometric analysis to provide estimates of distributional and output effects that can be expected based on the track record in OECD countries. …The main findings emerging from the analysis are: …Higher marginal effective rates of corporate income taxation are linked with significantly lower long-term output levels. …Greater progressivity in the upper half of the income distribution, in the form of higher tax wedges on above average income earners, is linked with lower long-term output. …taxes on net wealth are found to be associated with lower output levels, in line with the literature on their distortive effects.

These finding are not a surprise, particularly for people who read the Tax Foundation’s research back in 2016.

Here’s the key visual from the OECD study. The top half shows how many nations could enjoy significant gains in disposable income if tax rates were lowered on workers with above-average incomes. The lower half shows how many nations also could enjoy gains in disposable income

The obvious takeaway is that the study shows that Biden’s class-warfare tax agenda will be bad for American competitiveness and American prosperity.

There are many other findings in the study, not all of which I like, and not all of which make sense.

For instance, the authors want us to believe that death taxes may actually have a positive impact on the economy.

Greater reliance on inheritance and gift taxes…appears to be output-enhancing by comparison with other revenue sources.

I realize the study is only claiming that such taxes are less damaging than other taxes, but it still doesn’t make sense since death taxes directly drain capital out of the economy’s productive sector.

The study also look at the impact of various tax changes on “inequality,” leading the authors to give a negative assessment to some tax cuts even if those reforms would increase the well-being of those with lower incomes (thus confirming Margaret Thatcher’s warning that some folks on the left are willing to hurt the poor if the rich are hurt by a greater amount).

I’ll close with two other findings from the study, both of which are more to my liking.

First, we find that consumption taxes (such as the value-added tax) hurt the economy, but not as much as income taxes.

Consumption taxes entail some disincentive effects, which are generally found to be weaker than those of income taxes.

Second, green taxes hurt the poor more than they hurt the rich.

…environmental taxes can increase inequality.

Given all the rich hypocrites on this issue, this doesn’t surprise me. They know they won’t be the main victims.

For what it’s worth, the OECD nonetheless wants a big energy tax on American families (thus confirming once again that there’s a disconnect between the left-leaning political types who are in charge and the professional economists who do real research).

P.S. Even if some OECD economists do good work, American taxpayers should not be subsidizing the group.

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When politicians target “the rich” with class-warfare schemes like wealth taxes, it’s often ordinary people that bear the costs.

For a painful example of how this works in the real world, check out the first 42 seconds of this video.

From an economic perspective, this is a story about secondary or indirect effects. Or, as noted in the video, there are unintended consequences.

In most cases, the fundamental problem with class-warfare taxes is that they penalize saving and investment with double taxation. This is bad for workers because there’s a strong link between the level of capital (i.e., machines, tools, technology) and productivity.

And since there’s also a strong link between productivity and pay, this explains why ordinary people generally don’t enjoy much opportunity in societies with spite-driven tax laws.

Now let’s consider the case of the luxury tax, which was part of President George H.W. Bush‘s disastrous 1990 tax increase.

Rather than being a broad tax on saving and investment, it was an excise tax on a group of products (the levy on expensive boats got most of the attention).

Let’s see what actually happened, and we’ll start with some excerpts from this 1993 column in the Washington Post by James Glassman.

Rich people aren’t happy about paying this extra money. Even if they can afford it, they think it’s unfair. And in some cases, they’re refusing to pay it — simply by refusing to buy new boats and planes. Of course, rich people don’t have to buy a new 90-foot Broward… So the federal government doesn’t get the tax money — and, worse, Broward doesn’t sell its yacht and various boat builders get put out of work. As a result, in its first year and a half, the yacht tax raised a pathetic $12,655,000 for the Treasury. …Meanwhile, the tax has contributed to the general devastation of the American boating industry — as well as the jewelers, furriers and private-plane manufacturers that were also targets of the excise tax… What went wrong with the luxury tax was that, in trying to go after the rich guys’ toys, Congress put the toymakers out of business. The rich guys, meanwhile, bought other toys (including foreign-made ones) not covered by the tax; or they bought used toys and refurbished them; or they simply saved the money, waiting to spend it another day.

The government still collected some money from the tax on the “toys,” but it’s also important to understand that it lost money when the “toymakers” lost their jobs.

So there was a Laffer Curve-type effect.

The great, late, Walter Williams opined on this issue more recently. Here are segments of his 2011 column.

Let’s look at what happened when…George H.W. Bush signed the Omnibus Budget Reconciliation Act of 1990 and broke his “read my lips” vow not to agree to new taxes. When Congress imposed a 10 percent luxury tax on yachts, private airplanes and expensive automobiles, Sen. Ted Kennedy and then-Senate Majority Leader George Mitchell crowed publicly about how the rich would finally be paying their fair share of taxes. What actually happened…In the first year, one-third of U.S. yacht-building companies stopped production, and according to a report by the congressional Joint Economic Committee, the industry lost 7,600 jobs. When it was over, 25,000 workers had lost their jobs building yachts, and 75,000 more jobs were lost in companies that supplied yacht parts and material. …Jobs shifted to companies in Europe and the Bahamas.

Walter explicitly explains why the government lost revenue.

The U.S. Treasury collected zero revenue from the sales driven overseas. …Congress told us that the luxury tax on boats, aircraft and jewelry would raise $31 million in revenue a year. Instead, …job losses cost the government a total of $24.2 million in unemployment benefits and lost income tax revenues. The net effect of the luxury tax was a loss of $7.6 million in fiscal 1991. …Why did congressional dreams of greater revenues turn into a nightmare? Kennedy, Mitchell and their congressional colleagues simply assumed that the rich would act the same after the imposition of the luxury tax as they did before and that the only difference would be more money in the government’s coffers. Like most politicians then and now, they had what economists call a zero-elasticity vision of the world, a fancy way of saying they believed that people do not respond to price changes. People always respond to price changes. The only debatable issue is how much and over what period.

And Walter’s analysis also applies to Joe Biden’s proposed tax increases.

It’s quite possible that the government will collect more money if Biden’s fiscal plan is enacted, but not as much as politicians think. More important, there will be lots of collateral economic damage.

Call me crazy, but I don’t want ordinary people to lose jobs simply because greedy politicians want more money so they can try to buy more votes.

P.S. If it’s any consolation, politicians from other nations can be equally foolish and short-sighted. Both France and Italy suffered when governments went after yachts.

P.P.S. You won’t be surprised to learn that pro-tax former Senator John Kerry avoided taxes on his yacht.

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I repeatedly write about inequality, largely in hopes of helping people, especially my left-leaning friends, understand that we should instead focus on other issues, such as economic opportunity and poverty reduction. In other words, let’s try to help the less fortunate rather than tear down successful people

I specifically try to convince them that they shouldn’t be bothered if someone gets rich (assuming wealth is being earned rather than the result of handouts, bailouts, and subsidies from politicians). What matters is “growing the pie” so all of us have a chance to enjoy more prosperity.

But what if someone gets rich because of good luck? In other words, instead of becoming wealthy because of hard work, intelligence, or entrepreneurship, what if someone is simply the beneficiary of being attractive? Or being tall?

As captured by this tweet from Rob Henderson, this is not mere speculation.

I actually referenced Prof. Mankiw’s work when writing about this issue back in 2010.

And I periodically come across new research on the economic advantages enjoyed by attractive folks.

Highly attractive women’s salaries are one-tenth higher than the average even at similar education and competence levels, a low attractivity means a loss of 4 percent, according to a study presented by sociologist Petra Anyzova at a workshop based on a job market research project today. …Anyzova said that the results are similar to the findings of other studies and the trend suggests that men are disadvantaged if they display more feminine traits and women are disadvantages if they display more masculine traits.In the case of men, the impact of physical attractiveness on being able to secure a higher socio-economic status is significant.

And here’s another study Henderson tweeted about.

So what are the policy implications of this research? And the other research that I cited back in 2018 and 2019?

As far as I’m concerned, there aren’t any.

Yes, some people are very lucky because of their looks or their height and they wind up with extra income because of those random characteristics, but that shouldn’t be a reason for government-coerced redistribution.

The same thing is true for those fortunate enough to be born into the right families.

As I wrote two years ago.

…taller people and better-looking people earn more money and have better lives. That’s genuine unfairness, just like having better parents is a source of genuine unfairness. Yet not even Bernie Sanders or AOC have proposed taxes to equalize those sources of real unfairness.

Yes, the research suggests that life isn’t fair.

But government intervention isn’t the answer, as I explained back in 2011.

The real issue is whether this discrimination is real and whether it justifies government intervention. …I don’t doubt that “lookism” exists. …But does that mean we should have some sort of government bureaucracy with the power to sue, fine, arrest, or otherwise harass based on whether people claim they didn’t get promotions because of their appearance?

Just imagine, for instance, if government tried to redistribute sexual opportunities, as suggested by this example of Elizabeth Warren satire?

I’ll conclude with the observation that if we don’t try to address inequalities caused by random luck, such as looks and height, then why would we want politicians to impose taxes and redistribution to deal with inequalities that are the result of attributes over which we have considerable control, such as diligence, productivity, responsibility, and effort?

P.S. For what it’s worth, research suggests conservatives generally are viewed as more attractive and stronger than folks on the left (though that research also suggests that libertarians generally are perceived as being dorks).

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I periodically criticize pro-statism stories and columns in outlets such as the New York Times and Washington Post.

But I’ve only written one column specifically on the topic of whether the press is slanted. In that article, I pointed out that media bias rarely is based on lies.

Even when stories are overtly misleading (as is often the case with reports about poverty, for instance), journalists almost always are clever enough to avoid crossing a line to outright dishonesty.

In practice, media bias is largely about what gets covered and what doesn’t.

Media bias very rarely involves dishonesty. Deception yes, but not inaccuracies. It’s almost always about story selection and what gets emphasized.

Today, I want to share an example of this phenomenon.

A left-leaning group called the International Equalities Institute recently published a report claiming that lower tax rates on upper-income taxpayers don’t lead to faster growth.

The London-based group isn’t well known and neither are the two authors (David Hope and Julian Limberg), yet this study received a massive amount of attention.

To cite just a few examples, it got major coverage from the Washington Post.

It received a fawning write-up from CBS.

It was featured by Bloomberg.

Bloomberg liked it so much that there was a second story.

Many other news outlets also publicized the story, in many cases by simply republishing the stories from the above outlets.

Here’s the report from Al Jazeera.

Esquire even ran a puff piece on the study.

Here’s the headline from MSN.

Various CBS local stations recycled the network report.

Here’s an example from Oklahoma.

And an example from North Carolina.

The Gulf News wrote about the study.

And Business Insider also gave it lots of attention.

Even the New York Post featured the study.

The reason this report got so all this attention, in my humble opinion, is that it gave reporters an excuse to advance a pro-statism message.

And that meant writing press releases about the report rather than practicing real journalism. They praised the study as “comprehensive” and “sophisticated,” though presumably none of them know anything about its methodology.

And they certainly didn’t seek out any contrary views.

So allow me to point out a few problems with the Hope-Limberg report. Feel free to read the entire study, but I think these passages fairly summarize the two main arguments (tax cuts help the rich and tax cuts don’t help the economy) in the publication.

…it remains an open empirical question how cutting taxes on the rich affects economic outcomes. In this paper, we use data from 18 OECD countries covering the last fifty years to investigate the effects of major tax cuts for the rich on income inequality, economic growth, and unemployment. …Our results show that…major tax cuts for the rich increase the top 1% share of pre-tax national income in the years following the reform… The magnitude of the effect is sizeable; on average, each major reform leads to a rise in top 1% share of pre-tax national income of 0.8 percentage points. The results also show that economic performance, as measured by real GDP per capita and the unemployment rate, is not significantly affected by major tax cuts for the rich.

Regarding the two arguments, I’m not sure what point Hope and Limberg think they’re making with their first point about lower tax rates leading the rich to earn more income.

At the risk of stating the obvious, that’s one of the main selling points for better tax policy. Supporters of lower tax rates explicitly want entrepreneurs, investors, business owners, and other successful people to have better incentives to earn and report taxable income.

So the Hope-Limberg data actually confirm that lower tax rates on upper-income taxpayers are a great way of getting them to be more productive. Art Laffer would give them an A+ if they were students.

But what about the second argument? Is it true that there’s no positive impact when tax rates are reduced on work, saving, investment, risk-taking, and entrepreneurship?

Let’s examine their conclusions. Here’s the chart showing when selected nations reduced tax rates (in red). Hope and Limberg then calculated whether those countries enjoyed a bump in jobs and growth over the following five years and want us to accept their argument that there was no positive impact.

Since the report doesn’t include the underlying data or the model used to generate the results, we’re supposed to accept their results at face value.

At the risk of being the skunk at the garden party, I’m unconvinced. Hope and Limberg are political scientists rather than economists, but it seems like they overlooked some very important issues.

Most important, why didn’t they factor in the impact of other government policies (trade, regulation, government spending, monetary policy, etc)? Taxation is just one small piece of the economic policy puzzle. Maybe they covered these concerns in their undisclosed model and data, but estimating economic performance by looking solely at tax policy is like trying to figure out the score of a baseball game by just comparing the performance of shortstops.

And there are a couple of other concerns I have, such as why did they pick these 18 countries and ignore other nations? And why not examine economic performance beyond five years?

I’ll conclude by also noting that their study doesn’t pass the smell test.

The bottom line is that better tax policy isn’t some sort of elixir that guarantees prosperity. Especially if other policies in a nation are misguided.

That being said, lower tax rates are better for prosperity than higher tax rates (as illustrated by academic studies from economists). And since even small differences in economic performance can lead to big long-run benefits, the main takeaway is that it’s a good idea to enact policies to expand the economic pie.

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I’ve shared three reasons why Biden’s tax plan is misguided (the tax code is biased against rich taxpayers, the tax hike would have Laffer-Curve implications, and it would saddle America with the world’s highest corporate tax burden).

For Part IV of the series, let’s explain why every piece of his plan will backfire.

There are three main arguments for higher taxes, though I don’t find any of them convincing.

  1. Spite and envy against successful entrepreneurs, investors, innovators, and business owners.
  2. Bringing more money to Washington to finance a larger burden of government spending.
  3. Bringing more money to Washington to ostensibly lower the burden of deficits and debt.

For what it’s worth, Biden’s proposed spending increases are far larger than his proposed tax increases, so we can rule out reason #3.

So we have to ask ourselves whether reasons #1 and #2 are compelling.

And when considering those two arguments, we also should ask whether those reasons are sufficiently compelling to justify throwing millions of Americans into unemployment and reducing the nation’s competitiveness.

The answer should be a resounding no.

In a column in the Wall Street Journal from last July, Philip DeMuth elaborated on the damage that would be inflicted by Biden’s class-warfare agenda.

Mr. Biden has proposed to reinstate the Obama tax rates for top earners while simultaneously imposing an unlimited 12.4% Social Security payroll tax on earnings over $400,000. …Mr. Biden proposes to eliminate the capital gains reset to fair market value at death. For long-term holdings, much of that gain is merely inflation, created by the government’s failure to maintain price stability, so this is effectively a tax on a tax. The remaining gains are usually from corporate earnings, which were already taxed once, when they came in the door. It will be difficult to keep your business or farm in the family if the Biden scheme forces it to be liquidated to pay the death taxes. …If a President Biden has his way, the top capital-gains tax rate will be 39.6%—the same as for ordinary income. This could be a triple whammy: cutting the estate tax exemption in half, eliminating the capital gains reset to fair market value, and then doubling the capital-gains tax rate. A small step for the government, a giant loss for the American family. …The former vice president’s ambitious spending programs would more than offset any new revenue from his tax proposals. …This isn’t a debate between growing the pie vs. redistributing the pie; it is about everyone settling for a smaller pie.

The final two sentences deserve extra attention.

First, nobody should be deluded that tax increases will be used to reduce red ink. Yes, Biden is proposing to collect a lot more money, but he’s proposing about $2 of new spending for every $1 of projected tax revenue.

Brian Riedl’s Chartbook has the grim details on Biden’s spending agenda.

Second, the point about “growing the pie” is critically important since even a very small reduction in long-run growth will have a surprisingly large impact on household finances within a few decades.

The bottom line is that living standards in the United States are significantly higher than living standards in Europe, in large part because fiscal burdens are not as onerous in America.

Biden’s plan to make America more like France, Italy, and Greece is not a good idea.

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In Part I of this series, I explained that President-Elect Biden’s soak-the-rich agenda didn’t make sense because the internal revenue code already is very biased against upper-income taxpayers. Indeed, the U.S. tax system is even more weighted against the rich than the tax codes of nations such as France and Sweden.

In Part II of this series, I explained that Biden’s proposed reincarnation of Obamanomics would not be a recipe for increased federal revenues. Simply stated, higher tax rates on productive behavior will lead to macro-economic and micro-economic responses that have the effect of producing lower-than-expected revenues.

For today’s addition to the series, I want to focus on how Biden’s tax agenda will discourage investment and undermine competitiveness by saddling the United States with the developed world’s highest effective tax rate on corporate income – as measured by the combined burden of the corporate income tax and the additional layer of tax when dividends are paid to shareholders.

Everything you need to know is captured by this new data from the Tax Foundation.

Needless to say, American policy makers should be striving to make our business tax system more like the one in Estonia.

Instead, Biden wants to go from America being worse than average to America being the absolute worst.

When faced with this data, my friends on the left usually respond in one of two ways.

Some of them simply assert that there is no double taxation. I don’t know if they are ignorant or if they are dishonest.

The others (either more honest or more knowledgeable) will agree with the numbers but assert it is okay because any economic damage will be modest and the benefits of new spending will be significant.

But if higher taxes and more spending are somehow beneficial, why is the United States so much more prosperous than the nations that do have higher taxes and more spending?

P.S. While Biden’s proposals, if enacted, will result in the United States having a very bad tax system for companies, the U.S. will still have some big fiscal advantages over other nations.

P.P.S. Adding everything together, the biggest difference between the United States and other developed nations is that lower-income and middle-class taxpayers in America enjoy far lower tax burdens.

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Early last decade, when writing about Spain’s fiscal crisis, I pointed out that the country got in trouble for the same reason Greece got in trouble.

Simply stated, government spending grew faster than the private economy. And when nations violate fiscal policy’s Golden Rule, that means a growing fiscal burden and – if maintained for a long-enough period of time – a recipe for chaos.

Spain managed to get past that crisis, thanks to indirect bailouts and some belated spending restraint.

But some politicians in the country didn’t learn from that experience. The nation now has a hard-left government that is going to test how long it takes to create another fiscal crisis.

And even establishment-oriented experts are worried. In an article last June for the Bulwark, Desmond Lachman and John Kearns warned that Spanish politicians were putting the nation in a precarious fiscal position.

Spain’s economy was painfully slow to recover from its 2008 economic recession, which saw its GDP drop by 4 percent. …Over the past decade, a major reason for Spain’s poor economic performance was its need to mend its public finances, which were seriously compromised by the collapse of its housing bubble… Spain’s coronavirus-induced recession could now make the 2008 housing market collapse look like a minor speed bump. …Spain’s GDP is projected to contract by almost 13 percent. As in 2008, Spanish public finances will be sure to suffer… the country’s public-debt-to-GDP ratio will by the end of this year jump to 120 percent—a level appreciably above its 2010 peak. …Another disturbing projection is the toll that the recession will take on its banking system… It does not inspire confidence that Spanish banks entered the present crisis with among the slimmest capital reserves in Europe.

At the risk of understatement, no sensible person should have confidence in any aspect of Spain’s economy, not just the banking system.

A few days ago, Daniel Raisbeck authored a column for Reason about the country’s downward spiral to statism.

The PSOE-Podemos coalition is not only Spain’s most left-wing government since the country restored democracy after dictator Francisco Franco’s death in 1975; currently, it’s also the most leftist government in the entire European Union (E.U.). As you would expect, this has brought about a barrage of progressive pet projects…a torrent of debt, public spending, and tax increases. …The government’s budget for 2021 also includes record levels of spending after the executive raised the ceiling on non-financial expenditures by over 50 percent. …The Spanish government has also taken advantage of the current crisis to impose drastic tax hikes. These include a “tax harmonization” scheme—a euphemism for getting rid of fiscal competition—that would end the freedom of autonomous communities, the largest political and administrative units in Spain, to set their own policies in terms of wealth, inheritance, and income taxes, the last of which consist of both a national and a regional rate.

Let’s now look at a few additional passages from the article.

One of the reasons I oppose fiscal centralization in Europe is that it will subsidize more bad policy. Which is now happening.

Spain’s spending spree will be subsidized with €140 billion ($172 billion) of E.U. money, part of a “recovery fund” agreed upon last July at an emergency summit in Brussels.

It’s also worth noting that higher taxes don’t necessarily produce more revenue.

This is a lesson Spanish politicians already should have learned because of mistakes by the central government.

They also have evidence at the regional level. Catalonia has a bigger population than Madrid and imposes higher tax rates, but it collects less revenue.

…although Madrid…charges some of the country’s lowest rates for inheritance and income taxes, the region raises €900 million ($1.1 billion) more in taxes per year than the far more interventionist Catalonia according to economist José María Rotellar.

As you might expect, politicians in Catalonia grouse that Madrid’s lower tax rates are “fiscal dumping” and they argue in favor of tax harmonization.

Madrid’s leading lawmaker has a very deft response.

…the Republican Left of Catalonia, the pro-Catalan independence party that allowed Sánchez to become president, recently accused Madrid of practicing “fiscal dumping.” …Isabel Díaz Ayuso, the Popular Party president of the Community of Madrid, stated that “if Catalonia wants fiscal harmonization, they should reduce their own taxes,” a reference to that region’s notoriously high taxation levels.

Touche!

Let’s close by returning to the big-picture topic of whether it’s a good idea for Spain’s government to expand the nation’s fiscal burden.

The leftists politicians currently in charge make the usual class-warfare arguments about helping the poor and penalizing the rich. Whenever I hear that kind of nonsense, I’m reminded of this jaw-dropping story about how people with modest incomes are being strangled by statism.

Imagine only making €1000 per month and losing two-thirds of your income to government?!?

No wonder Spaniards come up with clever ways of lowering their tax burdens.

P.S. The current government of Spain may be naive (or malicious) about taxes, but there are some sensible economists at the country’s central bank who have written about the negative impact of higher tax rates.

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As illustrated by my recent three-part series (here, here, and here), I care about helping the poor rather then hurting the rich.

More broadly, I want a bigger economic pie so that everyone can have a larger slice. And I don’t particularly care if some people get richer faster than other people get richer (assuming they are earning money honestly and not relying on government favoritism).

In other words, it doesn’t bother me if someone like Bill Gates is getting richer faster than I’m getting richer, so long as there’s an economic environment that gives both of us a chance to prosper based on how much value we are providing to others.

But some folks are fixated on how the pie is sliced.

For instance, the Peterson Institute for International Economics recently tweeted that there is too much inequality in the United States (compared to Europe) and that something should be done to “fix” this supposed problem.

This type of data irks me because some people will assume that rising levels of income for the rich somehow imply falling levels of income for everyone else.

That may be true in nations with despotic socialist governments, such as Cuba, North Korea, and Venezuela, where the ruling class lines it pockets at the expense of the general population.

However, let’s focus on the United States and Europe, since the Peterson Institute wants readers to think that politicians in Washington should “fix” the distribution of income in America so that we resemble our friends on the other side of the Atlantic Ocean.

But first we must answer two very important questions: Are the non-rich in the United States suffering because rich people are doing well? And are the non-rich in Europe better off than the non-rich in America?

Earlier today, I answered those questions with three tweets.

I started with this tweet pointing out that average living standards are far higher in the United States than they are in Europe.

I then shared this tweet pointing out that the bottom 10 percent of people in America would be middle class compared to their counterparts in Europe.

I then concluded with this tweet showing that the bottom 20 percent of people in the United States have incomes higher than the average income in most European countries.

The moral of this story is that ordinary people are better off in America.

And that’s almost certainly because there’s generally more economic freedom in the United States – including lower tax burdens and less enervating redistribution.

P.S. While the Peterson Institute is very misguided on the tradeoff between inequality and growth, it is quite good on trade-related issues (see here, here, here, here, here, here, and here).

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I don’t like higher taxes, whether looking at levies on income, capital gains, payroll, death, or consumption. But if asked to identify the worst way of hiking taxes, the wealth tax might lead the list because of the economic damage caused per dollar collected.

If you don’t want to spend two minutes watching the video, which is excerpted from an online debate organized by my left-leaning friends at TaxCOOP, everything I said can be boiled down to the following four points.

  1. A wealth tax might reduce inequality, but only because the rich would suffer even greater losses than the poor.
  2. Punishing saving and investing is a bad idea since all economic theories agree capital formation is key to long-run prosperity.
  3. A wealth tax is a huge tax increase on saving and investment, perhaps equal to a 50 percent or 100 percent marginal tax rate.
  4. A wealth tax would be an administrative nightmare, requiring a bigger IRS, since many assets are difficult to measure.

I first addressed the issue back in 2012 and 2014, but I’m now writing more often about the wealth tax because it’s evolved from being a bad idea to being a real threat.

Joe Biden didn’t include a wealth tax in his class-warfare campaign manifesto, but Bernie Sanders and Elizabeth Warren both pushed for the idea. And there are plenty of other Democrats in Congress who also support this punitive levy.

So let’s add to our arguments.

In a report for the Manhattan Institute, Allison Schrager and Beth Akers summarize why a wealth tax is misguided.

Wealth taxes are inefficient and ineffective because wealth is inherently more difficult to measure. Privately held companies, for example, are not traded in public markets, which means that there are no stock prices by which one can objectively gauge their value. Also, financial assets can be hidden or moved abroad with the click of a mouse or converted into other assets that are hard to value. A dozen European countries had a wealth tax in 1990, but most abandoned them because they were ineffective and expensive to administer. In part, the taxes failed to raise much revenue because wealthy individuals easily moved their assets across borders to avoid taxation. …Wealth taxes distort behavior in a way that is harmful to economic growth and national prosperity. By taking a fraction of people’s wealth each year, the tax reduces the return to investing and discourages saving. This can reduce growth because investing and capital accumulation are critical to innovation. …think of it as a tax on capital income. And when you put the tax in income terms, 2% can be enormous. For example, if your assets return 4%, a 2% wealth tax is equivalent to a 50% tax on capital income! 

Writing for National Review, Philip Cross highlights why a wealth tax is economic malpractice.

The temptation to adopt a wealth tax will grow in the aftermath of record budget deficits resulting from the pandemic-induced recession. …However, the case for a wealth tax rests on questionable or unfounded assumptions. …Proponents argue that wealth taxes generate substantial net revenues… However, Europe’s experiment with wealth taxes yielded little revenue. …wealth taxes raised only 1.0 percent of GDP in Spain and Switzerland, 0.4 percent in Norway, and 0.2 percent in France in 2017, not enough to significantly affect either government finances or wealth distribution. As a result, most European nations abandoned wealth taxes years ago. …A wealth tax is rife with administrative problems because it creates the incentive to minimize reported wealth. …Besides, taxpayers can easily circumvent a wealth tax. Canada’s former Prime Minister Jean Chretien warned that “there is nothing more nervous than a million dollars — it moves very fast, and it doesn’t speak any language.” …Compounding the mobility of capital is the willingness of people to move to avoid or minimize taxes. One study of estate taxes found that 21.4 percent of the 400 richest Americans moved from states levying an estate tax to a state without one, while only 1.2 percent did the reverse. …A wealth tax also distorts economic incentives, encouraging consumption while penalizing the savings and investments that foster higher long-term growth. This is especially true when wealth taxes are layered on top of taxes on the capital income that wealth generates.

Even folks who might otherwise be sympathetic are throwing cold water on the idea of a wealth tax.

In a column for Bloomberg, Ferdinando Giugliano points out that it would be foolish to impose big taxes on coronavirus-weakened economies.

A growing number of economists are recommending a one-off wealth tax… In its latest World Economic Outlook, the International Monetary Fund has…recommended higher taxes on richer individuals — including taxing high-end property, capital gains and wealth — to reduce public debt. …I can see why a government would want to introduce a one-off levy on the rich after an extraordinary shock such as a pandemic or a war. …The main problem right now is that it’s too soon to be talking about a wealth tax. …A wealth tax would simply depress spending at a time of shrinking economic output. …There will be a time for redistribution. But…governments must focus on…growth now — and come back to that wealth tax later.

Mr. Giugliano is wrong, of course, to imply or think that there’s ever a good time for a wealth tax.

And he’s also wrong to make the Keynesian argument (that a wealth tax would depress spending), when the correct argument is that it would depress savings and investment, which then leads to foregone wages and lower living standards.

But I wanted to cite his column largely to give me an excuse to criticize the International Monetary Fund.

It galls me that a bunch of bureaucrats recommend tax increases on the rest of us – particularly since they are not only lavishly compensated, but also because they get tax-free salaries.

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In Part I of this series, I expressed some optimism that Joe Biden would not aggressively push his class-warfare tax plan, particularly since Republicans almost certainly will wind up controlling the Senate.

But the main goal of that column was to explain that the internal revenue code already is heavily weighted against investors, entrepreneurs, business owners and other upper-income taxpayers.

And to underscore that point, I shared two charts from Brian Riedl’s chartbook to show that the “rich” are now paying a much larger share of the tax burden – notwithstanding the Reagan tax cuts, Bush tax cuts, and Trump tax cuts – than they were 40 years ago.

Not only that, but the United States has a tax system that is more “progressive” than all other developed nations (all of whom also impose heavy tax burdens on upper-income taxpayers, but differ from the United States in that they also pillage lower-income and middle-class residents).

In other words, Biden’s class-warfare tax plan is bad policy.

Today’s column, by contrast, will point out that his tax increases are impractical. Simply stated, they won’t collect much revenue because people change their behavior when incentives to earn and report income are altered.

This is especially true when looking at upper-income taxpayers who – compared to the rest of us – have much greater ability to change the timing, level, and composition of their income.

This helps to explain why rich people paid five times as much tax to the IRS during the 1980s when Reagan slashed the top tax rate from 70 percent to 28 percent.

When writing about this topic, I normally use the Laffer Curve to help people understand why simplistic assumptions about tax policy are wrong (that you can double tax revenue by doubling tax rates, for instance). And I point out that even folks way on the left, such as Paul Krugman, agree with this common-sense view (though it’s also worth noting that some people on the right discredit the concept by making silly assertions that “all tax cuts pay for themselves”).

But instead of showing the curve again, I want to go back to Brian Riedl’s chartbook and review his data on of revenue changes during the eight years of the Obama Administration.

It shows that Obama technically cut taxes by $822 billion (as further explained in the postscript, most of that occurred when some of the Bush tax cuts were made permanent by the “fiscal cliff” deal in 2012) and raised taxes by $1.32 trillion (most of that occurred as a result of the Obamacare legislation).

If we do the math, that means Obama imposed a cumulative net tax increase of about $510 billion during his eight years in office

But, if you look at the red bar on the chart, you’ll see that the government didn’t wind up with more money because of what the number crunchers refer to as “economic and technical reestimates.”

Indeed, those reestimates resulted in more than $3.1 trillion of lost revenue during the Obama years.

I don’t want the politicians and bureaucrats in Washington to have more tax revenue, but I obviously don’t like it when tax revenues shrink simply because the economy is stagnant and people have less taxable income.

Yet that’s precisely what we got during the Obama years.

To be sure, it would be inaccurate to assert that revenues declined solely because of Obama’s tax increase. There were many other bad policies that also contributed to taxable income falling short of projections.

Heck, maybe there was simply some bad luck as well.

But even if we add lots of caveats, the inescapable conclusion is that it’s not a good idea to adopt policies – such as class-warfare tax rates – that discourage people from earning and reporting taxable income.

The bottom line is that we should hope Biden’s proposed tax increases die a quick death.

P.S. The “fiscal cliff” was the term used to describe the scheduled expiration of the 2001 and 2003 Bush tax cuts. According to the way budget data is measured in Washington, extending some of those provisions counted as a tax cut even though the practical impact was to protect people from a tax increase.

P.P.S. Even though Biden absurdly asserted that paying higher taxes is “patriotic,” it’s worth pointing out that he engaged in very aggressive tax avoidance to protect his family’s money.

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During the campaign, Joe Biden proposed a massive tax increase, far beyond what either Barack Obama or Hillary Clinton put forth when they ran for the White House.

Some people speculate that Biden isn’t actually that radical, and that his class-warfare agenda was simply a tactic to fend off Bernie Sanders, so it will be interesting to see how much of his political platform winds up as actual legislative proposals in 2021.

That being said, we can safely assume three things.

  1. Biden will propose higher taxes.
  2. Those tax increases will target upper-income taxpayers such as entrepreneurs, investors, and business owners.
  3. Those tax increases will be a very bad idea.

The main argument that Biden and his supporters will use to justify such a plan is that “rich” taxpayers are not paying their fair share.

More specifically, we’ll be told that upper-income households are not pulling their weight thanks to the cumulative impact of the Reagan tax cuts, the Bush tax cuts, and the Trump tax cuts.

There’s just one problem with this argument. As shown by this multi-decade data from Brian Riedl’s chartbook, it’s wildly, completely, and utterly inaccurate. The richest 20 percent are now shouldering a much greater share of the tax burden.

Every other group, by contrast, is now paying a smaller share of the tax burden.

Some folks on the left assert that the above chart is misleading. They say the chart merely shows that the rich have been getting richer and everyone else is falling behind.

The solution, they argue, is to catch up with the rest of the world by making the tax system more “progressive.”

Their assertions about income trends are wrong, but let’s leave that for another day and focus on so-called progressivity.

Once again, Riedl’s chartbook is the go-to source. As shown in this chart, it turns out that rich people pay a higher share than their counterparts in every other developed nation.

Please notice, by the way, the additional explanation in the lower-left portion of the chart, The numbers displayed do not include the value-added taxes that are imposed by every other nation, which are regressive or proportional depending on the time horizon. This means that the overall American tax code is far more tilted against the rich than shown by this chart.

But the key point to understand, as I’ve noted before, is that difference between Europe and the United States is not the taxation of the rich. The real reason that America has the most progressive tax system is that European nations impose much heavier taxes on lower-income and middle-class taxpayers.

P.S. At the risk of stating the obvious, this is not desirable since class-warfare taxes generally cause the most economic damage on a per-dollar-collected basis.

P.P.S. It’s also worth remembering that higher tax rates on the rich don’t necessarily lead to higher tax revenues.

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I wrote last year about Democrats favoring certain tax breaks that overwhelmingly benefit the rich.

The state and local tax deduction is an obvious example, but Democrats also are big fans of the tax exemption for municipal bond interest and other provisions that primarily reduce tax liabilities for upper-income taxpayers.

One interpretation is that Democrats don’t like the rich, but they’re even more interested in enabling more taxes and spending by state and local governments.

But I’m also beginning to wonder whether Democrats are becoming pro-rich (or less anti-rich) for the simple reason that upper-income people are a key constituency.

For instance, they control all 20 of the richest congressional districts in America, as explained by Terry Jeffrey.

Each of the nation’s 20 wealthiest congressional districts, when measured by median household income, …held by Democrats… Seven are in or near New York City. Five are in the San Francisco Bay Area. Four are in suburbs of Washington, D.C. Two are in Southern California. One is near Boston. And another — the only one in the middle of the continent — sits west of Chicago.

And John Fund reports that Biden is overwhelmingly the candidate of Wall Street.

Joe Biden is scooping up the lion’s share of big-money contributions from finance leaders on Wall Street. People in the financial industry have given well over $50 million to back Biden, according to the nonpartisan Center for Responsive Politics, compared with some $10 million for Trump. Biden has benefited from large contributions from leaders at Blackstone, JPMorgan Chase, The Carlyle Group, and Kohlberg Kravis Roberts, among other firms.

Ramesh Ponnuru opines that Democrats also are the party of the near-rich.

…the Democrats’ solicitude for the interests of the affluent in this case may not be the aberration it appears to be. It reflects the party’s long-term movement up the socioeconomic ladder — and shows why Democrats may find it impossible to reclaim their historical identity as a working-class party. …In the 2008 election, Republican John McCain did 11 points better among voters making more than $50,000 a year than among voters making less than that. He did one point better among those with college degrees than those without. By 2016, education had become a sharper dividing line between the parties. Trump did seven points better among those making more than $50,000 than among those making less. He did nine points better among those who lacked college degrees than among those who have them. …distressingly for the left’s true believers, the shift erodes the moral credibility of their historical self-presentation as the champion of the downtrodden.

Democrats are also the party of the Ivy League, based on the revealing data contained in this tweet.

Last but not least, here are some excerpts from a column for Reason, authored by Ira Stoll.

Maybe it’s time to rebrand the Democrats as the party of the rich. …”J.B.” Pritzker…governor of Illinois. Pritzker, an heir to the Hyatt hotel fortune, is worth an estimated $3.2 billion…Edward M. “Ned” Lamont Jr., …Connecticut governor…an heir to the J.P. Morgan banking fortune of his great-grandfather Thomas Lamont…governor of Colorado, Jared Polis, filed financial disclosure forms as a member of the House of Representatives indicating estimated wealth of more than $300 million. …all Democrats. …as a professor of political science at Williams College, Darrel Paul, put it after analyzing wealthy congressional districts, “the big story of the 2018 election is the swing of the rich toward the Democrats.” …Maybe it wouldn’t be a bad thing for the country, though, if wealthy voters do become a swing constituency to be courted by both political parties, rather than a group to be insulted, scapegoated, or taken for granted. …The sweet spot is for politicians to be rich enough that they understand and appreciate wealth creation, but not so rich that they are entirely remote from the reality of ordinary Americans.

Now for my two cents.

Based on what I see when I drive around the rich neighborhoods of Northern Virginia, the reports cited above are accurate. I mostly see Biden signs in the yards of people with multi-million dollar homes. But when I drive to poorer areas of the state, the situation is reversed and Trump signs dominate.

The interesting question is why? What accounts for rich people shifting to the left, especially since Democrats still support a wide range of policies (higher income tax rateshigher capital gains taxeshigher Social Security taxeshigher death taxes, a new wealth tax, etc) that target upper-income taxpayers?

I don’t pretend to know the answer, but here are a few possibilities:

Social issues are more important than economic issues – This is the theory that rich voters care mostly about what candidates think about issues such as abortion, climate, and gay marriage. In other words, they’ll accept higher taxes to get their preferred policies in other areas.

Class identification is more important that economic self-interest – This is the theory that people are very reluctant to break ranks with the prevailing view of their social group. For example, since Trump is viewed as a blowhard by the elite, they must side with Democrats.

Ignorance – This is the theory that rich people want to help the poor, perhaps because they feel guilty about their comfortable lives, and simply don’t understand that the policies pushed by Democrats actually make it harder for the less fortunate to climb the economic ladder.

Republicans are all talk but no (or negative) action – This is the theory that Republicans don’t actually do pro-growth things when they get power (think Nixon, Bush I, and Bush II), so why bother supporting the GOP.

Government-imposed credentialing helps the rich – This is the theory that a range of government-imposed and government-encouraged policies (everything from licensing requirements to degree requirements) create economic advantages for privileged people.

Add your speculation and guesses in the comment section. I’d be interested to see what everyone else thinks.

P.S. I guess we shouldn’t overlook the possibility that rich leftists are simply a bunch of hypocrites who have no intention of abiding by the policies they impose on everyone else.

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Bernie Sanders was considered a hard-core leftist because his platform was based on higher taxes and higher spending.

Elizabeth Warren also was considered a hard-core leftist because she advocated a similar agenda of higher taxes and higher spending.

And Joe Biden, even though he is considered to be a moderate, is currently running on a platform of higher taxes and higher spending.

Want to know who else is climbing on the economically suicidal bandwagon of higher taxes and higher spending? You probably won’t be surprised to learn that the pro-tax International Monetary Fund just published its World Economic Outlook and parts of it read like the Democratic Party’s platform.

Here are some of the ways the IMF wants to expand the burden of government spending.

Investments in health, education, and high-return infrastructure projects that also help move the economy to lower carbon dependence… Moreover, safeguarding critical social spending can ensure that the most vulnerable are protected while also supporting near-term activity, given that the outlays will go to groups with a higher propensity to spend their disposable income… Some fiscal resources…should be redeployed to public investment—including in renewable energy, improving the efficiency of power transmission, and retrofitting buildings to reduce their carbon footprint. …social spending should be expanded to protect the most vulnerable where gaps exist in the safety net. In those cases, authorities could enhance paid family and sick leave, expand eligibility for unemployment insurance, and strengthen health care benefit coverage…social spending measures…strengthening social assistance (for example, conditional cash transfers, food stamps and in-kind nutrition, medical payments for low-income households), expanding social insurance (relaxing eligibility criteria for unemployment insurance…), and investments in retraining and reskilling programs.

And here’s a partial list of the various class-warfare taxes that the IMF is promoting.

Although adopting new revenue measures during the crisis will be difficult, governments may need to consider raising progressive taxes on more affluent individuals and those relatively less affected by the crisis (including increasing tax rates on higher income brackets, high-end property, capital gains, and wealth) as well as changes to corporate taxation that ensure firms pay taxes commensurate with profitability. …Efforts to expand the tax base can include reducing corporate tax breaks, applying tighter caps on personal income tax deductions, instituting value-added taxes.

Oh, by the way, if nations have any rules that protect the interests of taxpayers, the IMF wants “temporary” suspensions.

Where fiscal rules may constrain action, their temporary suspension would be warranted

Needless to say, any time politicians have a chance to expand their power, temporary becomes permanent.

When I discuss IMF malfeasance in my speeches, I’m frequently asked why the bureaucrats propose policies that don’t work – especially when the organization’s supposed purpose is to promote growth and stability.

The answer is “public choice.” Top IMF officials are selected by politicians and are given very generous salaries, and they know that the best way to stay on the gravy train is to support policies that will please those politicians.

And because their lavish salaries are tax free, they have an extra incentive to curry favor with politicians.

P.S. I wish there was a reporter smart enough and brave enough to ask the head of the IMF to identify a single nation – at any point in history – that became rich by expanding the size and cost of government.

P.P.S. There are plenty of good economists who work for the IMF and they often write papers pointing out the economic benefits of lower taxes and smaller government (and spending caps as well!). But the senior people at the bureaucracy (the ones selected by politicians) make all the important decisions.

 

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One of the best political cartoons I’ve ever seen was this gem from Glenn McCoy.

It very effectively captures how greedy local governments breed resentment and create conflict by using the law to fleece residents (and it definitely will be featured if I ever do another political cartoonist contest).

This is not a trivial topic. I’ve previously written about how fees, fines and charges can wreck the lives of the less fortunate.

So how do we solve this problem?

, in a column for the New York Times, argues we should impose much higher fines on rich people.

For people living on the economic margins, even minor offenses can impose crushing financial obligations, trapping them in a cycle of debt and incarceration for nonpayment. …Across America, one-size-fits-all fines are the norm… Other places have saner methods. Finland and Argentina, for example, have tailored fines to income for almost 100 years. The most common model, the “day fine,” scales sanctions to a person’s daily wage. A small offense like littering might cost a fraction of a day’s pay. A serious crime might swallow a month’s paycheck. Everyone pays the same proportion of their income. …Finland…handed a businessman a $67,000 speeding ticket for going 14 miles per hour above the limit.

He argues this is a matter of fairness.

…scaling fines to income is a matter of basic fairness. …The flat fine threatens poor people with financial ruin while letting rich people break the law without meaningful repercussions. Equity requires punishment that is equally felt. …while punishment is supposed to prevent undesirable conduct from happening in the first place, flat fines deter the wealthy less than everyone else. …That’s particularly true in cities like Ferguson that went easy on wealthier residents but treated poor people like cash cows. After all, the city would get more bang for its buck pulling over a rich driver with a blown blinker.

I think Schierenbeck is both right and wrong.

He’s correct that his approach would be more fair. An income-based speeding ticket would be akin to a flat tax – i.e., take the same proportion of everyone’s income. For what it’s worth, I made this argument with regard to traffic offenses back in 2015.

But that approach won’t do anything to help poor people (to be fair, the author doesn’t claim it would).

If we want to protect low-income people from greedy governments, that are several options.

  • Have fewer nuisance laws that lead to fines, fees, and charges.
  • Have income-based fines, but at a low level for rich and poor alike.
  • Perhaps most important, control government spending so politicians have less incentive to grab more money from people.

The bottom line is that I don’t want government to screw over poor people, just as I don’t want government to screw over middle-class people or rich people.

P.S. My point about higher fines on the rich not helping the poor is the same an my argument that class-warfare taxes on upper-income taxpayers don’t do anything to help the less fortunate. Indeed, poor people actually suffer collateral damage because of diminished prosperity.

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New Jersey is a tragic example of state veering in the wrong direction.

Back in the 1960s, it was basically like New Hampshire, with no income tax and no sales tax. State politicians then told voters in the mid-1960s that a sales tax was needed, in part to reduce property taxes. Then state politicians told voters in the mid-1970s that an income tax was needed, again in part to reduce property taxes.

So how did that work out?

Well, the state now has a very high sales tax and a very high income tax. And you won’t be surprised that it still have very high property taxes – arguably the worst in the nation according to the Tax Foundation.

But you have to give credit to politicians from the Garden State.

They are very innovative at coming up with ways to make a bad situation even worse.

In an article for City Journal, Steven Malanga reviews the current status of New Jersey’s misguided fiscal policies.

Relative to the size of its budget, New Jersey’s borrowing is by far the largest. Jersey plans to cover most of the cost of its deficit with debt by tapping a last-resort Federal Reserve lending program. New Jersey is already the nation’s most fiscally unsound state, according to the Institute for Truth in Accounting. It bears some $234 billion in debt, including about $100 billion in unfunded pension liabilities. A recent Pew study estimated that, between 2003 and 2017, the state spent $1 for every 91 cents in revenue it collected. …Before the pandemic, Murphy had proposed a $40.7 billion budget for fiscal 2021, a spending increase of 5.4 percent. …The administration has taken only marginal steps to reduce spending by, for instance, delaying water infrastructure projects. Many other cuts Murphy has announced involve simply shelving plans to spend more money.

The very latest development is that the state’s politicians want to exacerbate New Jersey’s uncompetitive tax system by extending the state’s top tax rate of 10.75 percent to a larger group of taxpayers.

The New York Times reports on a new tax scheme concocted by the Governor and state legislature.

New Jersey officials agreed on Thursday to make the state one of the first to adopt a so-called millionaires tax… Gov. Philip D. Murphy, a Democrat, announced a deal with legislative leaders to increase state taxes on income over $1 million by nearly 2 percentage points, giving New Jersey one of the highest state tax rates on wealthy people in the country. …The new tax in New Jersey…is expected to generate an estimated $390 million this fiscal year… With every call for a new tax comes criticism from Republicans and some business leaders who warn that higher taxes will lead to an exodus of affluent residents.

As is so often the case, the Wall Street Journal‘s editorial does a good job of nailing the issue.

New Jersey Gov. Phil Murphy and State Senate President Steve Sweeney struck a deal on Thursday to raise the state’s top marginal tax rate to 10.75% from 8.97% on income of more than $1 million. Two years ago, Democrats increased the top rate to 10.75% on taxpayers making more than $5 million. …New Jersey’s bleeding budget can’t afford to lose any millionaires. In 2018 New Jersey lost a net $3.2 billion in adjusted gross income to other states, including $2 billion to zero-income tax Florida, according to IRS data. More will surely follow now.

The WSJ is right.

As shown by this map, there’s already been a steady exodus of people from the Garden State. More worrisome is that the people leaving tend to have higher-than-average incomes (and it’s been that way for a while since New Jersey’s been pursuing bad policy for a while).

I’ll add one additional point to this discussion. One of the best features of the 2017 tax reform is that there’s now a limit on deducting state and local taxes when filing with the IRS.

This means that people living in high-tax jurisdiction such as California, New York, and Illinois (and, of course, New Jersey) now bear the full burden of state taxes.

In other words, New Jersey’s politicians are pursuing a very foolish policy at a time when federal tax law now makes bad state policy even more suicidal.

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Every single economic school of thought agrees with the proposition that investment is a key factor in driving wages and growth.

Even foolish concepts such as socialism and Marxism acknowledge this relationship, though they want the government to be in charge of deciding where to invest and how much to invest (an approach that has a miserable track record).

Another widely shared proposition is that higher tax rates will discourage whatever is being taxed. Even politicians understand this notion, for instance, when arguing for higher taxes on tobacco.

To be sure, economists will argue about the magnitude of the response (will a higher tax rate cause a big effect, medium effect, or a small effect?).

But they’ll all agree that a higher tax on something will lead to less of that thing.

Which is why I always argue that we need the lowest-possible tax rates on the activities – work, saving, investment, and entrepreneurship – that create wealth and prosperity.

That’s why it’s so disappointing that Joe Biden, as part of his platform in the presidential race, has embraced class-warfare taxation.

And it’s even more disappointing that he specifically supports policies that will impose a much higher tax burden on capital formation.

How much higher? Kyle Pomerleau of the American Enterprise Institute churned through Biden’s proposals to see what it would mean for tax rates on investment and business activity.

Former Vice President and Democratic presidential candidate Joe Biden has proposed several tax increases that focus on raising taxes on business and capital income. Taxing business and capital income can affect saving and investment decisions by reducing the return to these activities and distorting the allocation across different assets, forms of financing, and business forms. Under current law, the weighted average marginal effective tax rate (METR) on business assets is 19.6 percent… Biden’s tax proposals would raise the METR on business investment in the United States by 7.8 percentage points to 27.5 percent in 2021. The effective tax rate would rise on most assets and new investment in all industries. In addition to increasing the overall tax burden on business investment, Biden’s proposals would increase the bias in favor of debt-financed and noncorporate investment over equity-financed and corporate investment.

Here’s the most illuminating visual from Kyle’s report.

The first row of data shows that the effective tax rate just by almost 8 percentage points.

I also think it’s important to focus on the last two rows. Notice that the tax burden on equity increases by a lot while the tax burden on debt actually drops slightly.

This is very foolish since almost all economists will acknowledge that it’s a bad idea to create more risk for an economy by imposing a preference for debt (indeed, mitigating this bias was one of the best features of the 2017 tax reform).

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In 2018, I shared a video from Professor Russ Roberts (a.k.a., @econtalker) on the economic status of the middle class, followed by a video last year on whether the rich are the only ones earning more income.

Today, we’ll look at his video on household income and mobility.

All of his videos are models of clarity, but nonetheless they require close attention because they are filled with so much useful information.

You’ll learn that some people manipulate numbers to paint a grim picture about economic mobility in America. But when you do honest apples-to-apples comparisons, you’ll see that capitalism is capable of delivering big benefits to ordinary people so long as it has enough breathing room to function.

In other words, we’re getting richer – as I wrote last year.

And, as I pointed out in an interview on CNBC, we should care about growth and opportunity instead of fretting whether some people get richer faster than other people get richer.

I’m writing on this topic today because there’s a new report from the Brookings Institution, authored by Stephen Rose, that looks at income trends. And it’s methodologically sound because it follows the same people over time, thus allowing the all-important apples-to-apples comparisons.

…the PSID panel data follow the experiences of the same respondents year after year. Even from one year to the next, many individuals’ incomes change significantly. This is particularly true at the tails of the distribution: nearly one-third of individuals in the bottom and top income quintiles are there temporarily because of an unexpected positive or negative event (Rose 1994). Multiyear incomes are therefore more equal than single-year incomes. …Piketty and Saez…argue that middle-class incomes have been stagnating. But their cross-sectional approach does not reflect individual experiences because they are comparing “similarly-situated people” and not looking at the experiences of the same individuals over time.

And what does Professor Rose find?

He points out that there are now a lot more “upper middle class” people in America (his data are adjusted for inflation, which is another way of ensuring apples-to-apples comparisons).

…the higher income classes expanded significantly during the first period. Between 1967 and 1981, the upper middle class tripled in size (from 6% to 18%) and the MMC grew by 3 percentage points (from 47% to 50%). Offsetting these gains were a corresponding shrinkage of the lower middle class (LMC) from 31% to 20% and the poor/near-poor (PNP) from 16% to 11%. In the later period (2002 to 2016), the changes were in the same direction, but more modest. The upper middle class (UMC) grew by 4 percentage points, the size of the MMC declined by 3 points, while the shares of the LMC and PNP were largely unchanged. In previous work, I argued that the differences between the UMC and those with lower incomes were the key driver of rising inequality.

Since Brookings is a left-of-center think tank, it’s not a surprise that Rose has a somewhat negative interpretation (“rising inequality”) of this data.

But he’s actually giving us good news.

Robert Samuelson, in his column for the Washington Post, wrote about Professor Rose’s new study and put together a table based on his data.

And I’ve augmented the table with some arrows to call attention to what’s happened in the 50 years between 1967 and 2016. The bottom line that America now has fewer lower-income and middle-income people and a lot more upper-income people.

Perhaps it is true that we have more inequality today than we did in 1967, but only very twisted people (such as those who work for the IMF) would want to erase all the gains we’ve enjoyed since that time.

To be sure, all income groups could do even better with pro-growth policies such as tax reform and spending restraint. And we also could adopt policies that are especially beneficial for the less fortunate, such as school choice and licensing reform.

Sadly, the politicians who rant and rave about inequality are more interested in punishing the rich rather than helping the poor.

P.S. Margaret Thatcher debunked the left’s view of inequality in her farewell remarks to Parliament.

P.P.S. With apologies to Jonathan Swift, here’s David Azerrad’s “modest proposal” to end inequality.

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Speculating about tax policy in 2021, with Washington potentially being controlling by Joe Biden, Chuck Schumer, and Nancy Pelosi, there are four points to consider.

  1. The bad news is that Joe Biden has endorsed a wide range of punitive tax increases.
  2. The good news is that Joe Biden has not endorsed a wealth tax, which is one of the most damaging ways – on a per-dollar raised basis – for Washington to collect more revenue.
  3. The worse news is that the additional spending desired by Democrats is much greater than Biden’s proposed tax increases, which means there will be significant pressures for additional sources of money.
  4. The worst news is that the class-warfare mentality on the left means the additional tax increases will target successful entrepreneurs, investors, innovators, and business owners – which means a wealth tax is a very real threat.

Let’s consider what would happen if this odious example of double taxation was imposed in the United States.

Two scholars from Rice University, John Diamond and George Zodrow, produced a study for the Center for Freedom and Prosperity on the economic impact of a wealth tax.

They based their analysis on the plan proposed by Senator Elizabeth Warren, which is probably the most realistic option since Biden (assuming he wins the election) presumably won’t choose the more radical plan proposed by Senator Bernie Sanders.

They have a sophisticated model of the U.S. economy. Here’s their simplified description of how a wealth tax would harm incentives for productive behavior.

The most direct effect operates through the reduction in wealth of the affected taxpayers, including the reduction in accumulated wealth over time. Although such a reduction in wealth is, for at least some proponents of the wealth tax, a desirable result, the associated reduction in investment and thus in the capital stock over time will have deleterious effects, reducing labor productivity and thus wage income as well as economic output. …A wealth tax would also affect saving by changing the relative prices of current and future consumption. In the standard life-cycle model of household saving, a wealth tax effectively increases the price of future consumption by lowering the after-tax return to saving, creating a tax bias favoring current consumption and thus reducing saving. … we should note that the apparently low tax rates under the typical wealth tax are misleading if they are compared to income tax rates imposed on capital income, and the capital income tax rates that are analogous to wealth tax rates are often in excess of 100 percent. …For example, with a 1 percent wealth tax and a Treasury bond earning 2 percent, the effective income tax rate associated with the wealth tax is 50 percent; with a 2 percent tax rate, the effective income tax rate increases to 100 percent.

And here are the empirical findings from the report.

We compare the macroeconomic effects of the policy change to the values that would have occurred in the absence of any changes — that is, under a current law long run scenario… The macroeconomic effects of the wealth tax are shown in Table 1. Because the wealth tax reduces the after-tax return to saving and investment and increases the cost of capital to firms, it reduces saving and investment and, over time, reduces the capital stock. Investment declines initially by 13.6 percent…and declines by 4.7 percent in the long run. The total capital stock declines gradually to a level 3.5 percent lower ten years after enactment and 3.7 percent lower in the long run… The smaller capital stock results in decreased labor productivity… The demand for labor falls as the capital stock declines, and the supply of labor falls as households receive larger transfer payments financed by the wealth tax revenues… Hours worked decrease initially by 1.1 percent and decline by 1.5 percent in the long run. …the initial decline in hours worked of 1.1 percent would be equivalent to a decline in employment of approximately 1.8 million jobs initially. The declines in the capital stock and labor supply imply that GDP declines as well, by 2.2 percent 5 years after enactment and by 2.7 percent in the long run.

Here’s the table mentioned in the above excerpt. At the risk of understatement, these are not favorable results.

Other detailed studies on wealth taxation also find very negative results.

The Tax Foundation’s study, authored by Huaqun Li and Karl Smith, also is worth perusing. For purposes of today’s analysis, I’ll simply share one of the tables from the report, which echoes the point about how “low” rates of wealth taxation actually result in very high tax rates on saving and investment.

The American Action Forum also released a study.

Authored by Douglas Holtz-Eakin and Gordon Gray, it’s filled with helpful information. The part that deserves the most attention is this table showing how a wealth tax on the rich results in lost wages for everyone else.

Yes, the rich definitely lose out because their net wealth decreases.

But presumably the rest of us are more concerned about the fact that lower levels of saving and investment reduce labor income for ordinary people.

The bottom line is that wealth taxes are very misguided, assuming the goal is a prosperous and competitive America.

P.S. One obvious effect of wealth taxation, which is mentioned in the study from the Center for Freedom and Prosperity, is that some rich people will become tax expatriates and move to jurisdictions (not just places such as Monaco, Bermuda, or the Cayman Islands, but any of the other 200-plus nations don’t tax wealth) where politicians don’t engage in class warfare.

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I participated in a debate yesterday on “tax havens” for the BBC World Service. If you read last month’s two-part series on the topic (here and here), you already know I’m a big defender of low-tax jurisdictions.

But it’s always interesting to interact with people with a different perspective (in this case, former Obama appointee David Carden and U.K. Professor Rita de la Feria).

As you might imagine, critics generally argue that tax havens should be eliminated so politicians have greater leeway to increase tax rates and finance bigger government. And if you listen to the entire interview, that’s an even bigger part of their argument now that there’s lots of coronavirus-related spending.

But for purposes of today’s column, I want to focus on what I said beginning at 49:10 of the interview.

I opined that it’s reasonably to issue debt to finance a temporary emergency and then gradually reduce the debt burden afterwards (similar to what happened during and after World War II, as well as during other points in history).

The most important part of my answer, however, was the discussion about how revenues didn’t decline when tax rates were slashed beginning in 1980.

Let’s first take a look at what happened to top tax rates for 24 industrialized nations from North America, Western Europe, and the Pacific Rim. As you can see, there’s been a big reduction in tax rates since 1980.

In the interview, I mentioned OECD data about taxes on income and profits, which can be found here (specifically data series 1000). So let’s see what happened to revenues during the period of falling tax rates.

Lo and behold, it turns out that revenue went up. Not just nominal revenues. Not just inflation-adjusted revenues. Tax revenues even increased as a share of gross domestic product.

In part, this is the Laffer Curve in action. Lower tax rates meant better incentives to engage in productive behavior. That meant higher levels of taxable income (the variable that should matter most).

For what it’s worth, I suspect that the lower tax rates – by themselves – did not cause tax revenue to rise. After all, there are many policies that determine the overall vitality of an economy.

But there’s no question that there’s a lot of “revenue feedback” when tax rates are changed.

The bottom line is that the folks advocating higher tax rates shouldn’t expect a windfall of tax revenue if they succeed in imposing class-warfare tax policy.

P.S. For the folks on the left who are motivated by spite rather than greed, it doesn’t matter if higher tax rates generate more money.

P.P.S. Interestingly, both the IMF and OECD have admitted, at least by inference, that lower corporate tax rates don’t result in lower tax revenues.

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There are lots of millionaires in the world. About 20 million of them, including about 6 million of them in the United States.

I’d like those numbers to increase, which is why I’m always advocating pro-market policies. Capitalism is not only superior to socialism, it’s also better than other alternatives (social justice, redistributionism, state planning, etc).

As Walter Williams reminds us, capitalism is a wonderful system in part because people can only become rich by providing value to others.

That means investment, entrepreneurship, innovation, competition and other behaviors that make the rest of us better off – even if we never become millionaires ourselves.

Remember, the normal state of humanity is grinding poverty and material deprivation. It’s only in the past few hundred years that many of us have escaped that fate – thanks to a system of free enterprise that channeled human greed in a productive direction.

The bottom line is that I don’t hate rich people or resent their success. Indeed, I applaud them for improving my life.

Though there are 83 exceptions, at least according to this BBC report.

Some of the world’s richest people have urged governments to raise taxes on the wealthy to help pay for measures aimed at tackling the coronavirus pandemic. A group of 83 millionaires called for “permanent” change… Signatories include heiress Abigail Disney and Ben & Jerry’s co-founder Jerry Greenfield. The letter says: “…we do have money, lots of it. Money that is desperately needed now and will continue to be needed in the years ahead… Government leaders must take the responsibility for raising the funds we need and spending them fairly.”

I’ve actually gone on TV in the past to debate “neurotic” and “guilt-ridden” rich people like this.

My best suggestion is that if they they have too much money, they give their excess cash to me.

But since that doesn’t seem to be a persuasive argument, I now remind them that they don’t have to wait for politicians to impose a tax increase.

They Treasury Department actually has a website for people who want to voluntarily give extra money to Washington.

So they can put their money where their mouths are.

Though you probably won’t be surprised to learn that they don’t take advantage of that opportunity, even when people have shown them exactly how it can be done.

P.S. While they’ve made similar arguments in the past, Warren Buffett and Bill Gates did not sign the letter. It’s unclear if this is a sign they’re becoming more rational.

P.P.S. Leftist politicians may be even worse than guilt-ridden rich people. Not only do they fail to voluntarily pay higher taxes, they do everything they can to minimize their tax burdens. Just look at the Clintons. And John Kerry. And Obama’s first Treasury Secretary. And Obama’s second Treasury Secretary. And Governor Pritzker of Illinois.

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Not all bad city governments are alike. In places like Chicago, local politicians generally impose bad policy because they’re buying votes (especially the votes of bureaucrats), not because they’re motivated by ideology.

But as you can see from this video, some Seattle politicians are genuinely crazy.

And those crazy local lawmakers are very serious about their class-warfare tax agenda.

The Wall Street Journal recently opined on the proposed tax hike in Seattle.

Seattle’s…City Council has decided this is the perfect moment to slap businesses with a large new tax on employment. …Recall that in 2018 Seattle passed a $47 million annual “head tax,” only to repeal it after a furious public realized it penalized job creation. No matter, the socialists who dominate the City Council passed a new iteration this week that’s more than four times bigger and punishes employers for paying good wages. Beginning next year, some 800 businesses with a payroll over $7 million will pay a tax of between 0.7% and 2.4% on all salaries over $150,000. …Councilwoman Teresa Mosqueda says the tax will create a “more robust and resilient economy,” but how taxing job creation accomplishes that is a mystery. The tax will stifle economic upward mobility, since employers will have an incentive not to raise pay above $150,000. …the new tax has veto-proof support on the City Council, which passed it 7-2.

What’s especially absurd, as explained by Brad Polumbo in a column for the Foundation for Economic Education, is that Seattle’s politicians want to exempt government bureaucrats from the tax.

…the tax could seriously hurt the economy… “As the region enters a deep recession and faces near-record job losses, the city council will be sending tax bills to companies across multiple sectors that have their doors closed and have been forced to layoff employees,” the business organization Downtown Seattle Association said… in an infuriating but sadly typical twist, the Seattle City Council exempted all government employees from their new tax. That’s right: The supposedly benevolent socialist city officials who thrust this upon their constituents made sure to carve out a giant exception for their peers on the taxpayer dime. …the city council’s new tax is…imposed on working people by politicians who made sure to spare the government class from sharing any of the burden.

By the way, this is a repeat fight.

Seattle lawmakers tried to impose a similar tax back in 2018 but were thwarted by opposition from private-sector workers and businesses (it’s also unclear whether such a tax would survive a legal challenge since the state’s constitution bars taxes on income).

If the tax ultimately is approved and implemented, it’s easy to predict the consequences. Businesses and workers will migrate to surrounding communities without the tax.

Not all of them, of course, but enough to make a difference. And that difference will get bigger with the passage of time.

What Ms. Mosqueda and Ms. Sawant don’t understand is that this cartoon only partially explain why socialism doesn’t work.

To be fully accurate, it also needs a door called “Escape” for the geese that fly away with their golden eggs.

I realize this is a perverse thought, but part of me wants this tax hike to be implemented just so we’ll have some powerful new evidence about why statism is a bad idea.

P.S. The proposed tax hike is just one reason why investors, entrepreneurs and business owners should be leery about creating jobs in Seattle. There’s also the big increase in the minimum wage and the recent (failed) experiment in autonomous socialism.

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I’ve already written that state governments shouldn’t get a bailout from Washington.

Today, let’s specifically focus on California, a beautiful state that – as explained in this video – is being ruined by an even-worse-than-average collection of politicians.

This video was produced in 2018, so it goes without saying that California is in even worse shape today, in part because of a coronavirus-caused economic downturn.

But the Golden State also is in trouble because the politicians in Sacramento have been spending like drunken sailors (with apologies to drunken sailors for that unfair comparison).

That’s only part of the problem. California also imposes onerous taxes, an approach that is causing a steady exodus of households and business to states with better policy.

And when you consider other policies, the net result is that the Golden State is ranked only #48 out of 50 for overall economic freedom.

Should this bad track record be rewarded?

Writing yesterday in the Wall Street Journal, Gerald Parsky is willing to give a bailout if strings are attached.

California is facing a $54 billion budget deficit… To help address the shortfall, Gov. Gavin Newsom wants billions of federal dollars. Not so fast. Any bailout should come with strings attached. Washington should tie assistance to tax reform… California’s finances are too dependent on the personal income tax, which is the most volatile form of taxation. California’s revenues from personal income taxes amount to about 67% of all state revenues (up from 11% in 1950). Moreover, less than 1% of taxpayers contribute more than 50% of the tax revenue. The result is that when the economy softens and people earn less—or move out of the state—tax revenue plunges. …A survey of California residents showed that 53% of them are considering leaving.

Here’s Mr. Parsky’s specific proposal.

…these developments underscore the need for dramatic tax reform. …the California Legislature created a bipartisan commission, which I chaired… The commission recommended that California reduce its dependence on the personal income tax by…dropping the top rate from 9.3% to 6.5% and reducing or eliminating many deductions. The commission also recommended eliminating the corporate and sales-and-use taxes, replacing them with a broad new “business net receipts tax.” …A few years later, Gov. Jerry Brown and state policy makers did the opposite…they put forward a statewide initiative that raised the top marginal rate to 13.3%, thus making state revenues even more dependent on a volatile tax and California’s income-tax rate the highest in the nation. …there is an opportunity for the Trump administration to link any federal assistance to an overhaul of the way California taxes its residents.

For all intents and purposes, the author wants to extort California into adopting better (or less-worse) tax policy.

And if Trump (being a big spender) decided to bail out the states, it would be good to attach requirements so that there would be a silver lining to that dark cloud.

But here’s a better approach: Tell the politicians in Sacramento that they caused the mess and it’s their responsibility to fix it. Taxpayers elsewhere in America shouldn’t have to cough up cash to keep California from committing suicide.

Especially since it would simply be a matter of time before the Golden State’s politicians reneged on the deal and re-imposed class-warfare tax policy.

The bottom line, as illustrated by this cartoon from Michael Ramirez, is that California is on a downward trajectory and I don’t see any feasible way of reversing the trend.

P.S. Ramirez has a comfortable lead (as of today) in the best-political-cartoonist contest.

P.P.S. Paul Krugman attacked me a few years ago for being pessimistic about California. He was wrong then and he’s even more wrong today.

P.P.P.S. Some leftists in California have advocated for secession. I wonder if they still have that view.

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The good news is that Joe Biden has not embraced many of Bernie Sanders’ worst tax ideas, such as imposing a wealth tax or hiking the top income tax rate to 52 percent..

The bad news is that he nonetheless is supporting a wide range of punitive tax increases.

  • Increasing the top income tax rate to 39.6 percent.
  • Imposing a 12.4 percent payroll tax on wages above $400,000.
  • Increasing the double taxation of dividends and capital gains from 23.8 percent to 43.4 percent.
  • Hiking the corporate tax rate to 28 percent.
  • Increasing taxes on American companies competing in foreign markets.

The worst news is that Nancy Pelosi, et al, may wind up enacting all these tax increases and then also add some of Crazy Bernie‘s proposals.

This won’t be good for the U.S. economy and national competitiveness.

Simply stated, some people will choose to reduce their levels of work, saving, and investment when the tax penalties on productive behavior increase. These changes give economists the information needed to calculate the “elasticity of taxable income”.

And this, in the jargon of economists, is a measure of “deadweight loss.”

But now there’s a new study published by the Federal Reserve which suggests that these losses are greater than traditionally believed.

Authored by Brendan Epstein, Ryan Nunn, Musa Orak and Elena Patel, the study looks at how best to measure the economic damage associated with higher tax rates. Here’s some of the background analysis.

The personal income tax is one of the most important instruments for raising government revenue. As a consequence, this tax is the focus of a large body of public finance research that seeks a theoretical and empirical understanding of the associated deadweight loss (DWL). …Feldstein (1999) demonstrated that, under very general conditions, the elasticity of taxable income (ETI) is a sufficient statistic for evaluating DWL. …It is well understood that, apart from rarely employed lump-sum taxes and…Pigouvian taxes, revenue-raising tax systems impose efficiency costs by distorting economic outcomes relative to those that would be obtained in the absence of taxation… ETI can potentially serve as a perfect proxy for DWL…this result is consistent with the ETI reflecting all taxpayer responses to changes in marginal tax rates, including behavioral changes (e.g., reductions in hours worked) and tax avoidance (e.g., shifting consumption toward tax-preferred goods). …a large empirical literature has provided estimates of the individual ETI, identified based on variation in tax rates and bunching at kinks in the marginal tax schedule.

And here are the new contributions from the authors.

… researchers have fairly recently come to recognize an important limitation of the finding that the ETI is a sufficient statistic for deadweight loss… we embed labor search frictions into the canonical macroeconomic model…and we show that within this framework, a host of additional information beyond the ETI is needed to infer DWL …once these empirically observable factors are controlled for, DWL can be calculated easily and in a straightforward fashion as the sum of the ETI and additional terms involving these factors. … We find that…once search frictions are introduced, …DWL can be between 7 and 38 percent higher than the ETI under a reasonable calibration.

To give you an idea of what this means, here are some of their estimates of the economic damage associated with a 1 percent increase in tax rates.

As you peruse these estimates, keep in mind that Biden wants to increase the top income tax rate by 2.6 percentage points and the payroll tax by 12.4 percentage points (and don’t forget he wants to nearly double tax rates on dividends, capital gains, and other forms of saving and investment).

Those are all bad choices with traditional estimates of deadweight loss, and they are even worse choices with the new estimates from the Fed’s study.

So what’s the bottom line?

The political impact will be that “the rich” pay more. The economic impact will be less capital formation and entrepreneurship, and those are the changes that hurt the vast majority of us who aren’t rich.

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What’s the most poorly governed city in the United States?

Those are all good options, but Seattle may deserve this award. Following municipal elections last November, the City Council is controlled by hard-left members who want to impose the local version of “democratic socialism.”

In a National Review article from February, Christopher Rufo describes their agenda.

Seattle has effectively become the nation’s laboratory for socialist policies. Since the beginning of the year, the socialist faction on the Seattle City Council has proposed a range of policies on taxes, housing, homelessness, and criminal justice that put into practice the national democratic-socialist agenda. In the most recent session, socialist councilwoman Kshama Sawant and her allies have proposed massive new taxes on corporations, unprecedented regulations on landlords (including rent control and a ban on “winter evictions”), the mandated construction of homeless encampments, and the gradual dismantling of the criminal justice system, beginning with the end of cash bail. …In order to consolidate their newfound power, the progressive-socialists have begun to manipulate the democratic process in their own favor: first, by providing all Seattle voters with $100 in taxpayer-funded “democracy vouchers,” which are easily collected by unions, activists, and socialist groups; and second, by implementing a ban on corporate spending in local elections… the progressive-socialists are no longer interested in gaining reasonable concessions; they intend to overthrow capitalism itself.

The Wall Street Journal opined this week on the latest development in Seattle’s suicidal approach.

The economy is on life support, but that isn’t stopping the Seattle City Council from trying to soak employers with a new tax on hiring. …The proposal is a reprise of the council’s 2018 tax on each new hire that was repealed amid public opposition. The new proposal “is 10 times larger than the 2018 version, and it’s also in an economy that’s about 1,000 times worse,” says James Sido of the Downtown Seattle Association…a 1.3% payroll tax on most Seattle businesses with $7 million or more in payroll. …Businesses would be assessed based on the prior year’s payroll, but revenue has cratered this year amid the pandemic. …businesses on the margin that have been forced to lay off or furlough employees may not bring them back if it means crossing that $7 million payroll threshold. The tax would discourage smaller companies from growing in Seattle. …Seattle is the hardest hit city in the U.S., with unemployment rising 105.92% between January and March. Only a socialist would think now is the time to further punish job creation.

Good points.

Though I would add that it’s never a good time to raise taxes and punish job creation.

Here’s what the greedy members of the City Council don’t understand (or pretend not to understand):

It’s complicated and difficult to move out of a country.

It’s a potentially expensive hassle to move out of a state.

It’s relatively easy to move out of a city.

And that’s why Seattle’s experiment with socialism is bound to fail.

If the socialists on the City Council impose this tax, there inevitably will be an out-migration of entrepreneurs and businesses to surrounding suburbs. That will be bad for ordinary people in the city (a point that workers in the economy’s productive sector already understand).

And when that happens, I wonder if they’ll learn that it is possible to run out of other people’s money?

P.S. Seattle’s politicians already have destroyed jobs and ruined businesses with a big increase in the minimum wage.

P.P.S. The constitution of the state of Washington prohibits an income tax, so there’s an ongoing debate whether Seattle’s tax grab – if enacted – would survive a court challenge.

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At the risk of understatement, I’m not a fan of the International Monetary Fund (IMF).

The international bureaucracy is the “Johnny Appleseed” of moral hazard, using bailouts to reward profligate governments and imprudent lenders.

The IMF also is infamous for encouraging higher tax burdens, which is especially outrageous since its cossetted employees are exempt from paying tax on their lavish salaries.

In recent years, the IMF has been using inequality as a justification for statist policies. Most recently, the lead bureaucrat at the IMF, Kristalina Georgieva, cited that issue as a reason for governments to impose higher taxes to fund bigger welfare states.

…inequality has become one of the most complex and vexing challenges in the global economy. Inequality of opportunity. Inequality across generations. Inequality between women and men. And, of course, inequality of income and wealth. …The good news is we have tools to address these issues… Progressive taxation is a key component of effective fiscal policy. At the top of the income distribution, our research shows that marginal tax rates can be raised without sacrificing economic growth. …Gender budgeting is another valuable fiscal tool in the fight to reduce inequality…. The ability to scale up social spending is also essential… A cornerstone of our approach to issues of economic inclusion is our social spending strategy.

What’s especially remarkable is that the IMF has claimed that the punitive policies actually will lead to more growth, in stark contrast to honest people on the left who have always acknowledged the equity-efficiency tradeoff.

The economics editor at the left-leaning Guardian, Larry Elliott, is predictably delighted with the IMF’s embrace of Greek-style fiscal policy.

Raising income tax on the wealthy will help close the growing gap between rich and poor and can be done without harming growth, the head of the International Monetary Fund has said. Kristalina Georgieva, the IMF’s managing director, said higher marginal tax rates for the better off were needed as part of a policy rethink to tackle inequality. …The IMF managing director, who succeeded Christine Lagarde last year, said higher taxes on the better off…would help fund government spending to expand opportunities for those “communities and individuals that have been falling behind.” …Georgieva said the IMF recognised that social spending policies are increasingly relevant in tackling inequality. …She added that many less well-off countries needed to scale up social spending.

Ironically, the IMF actually has admitted that this approach is bad for prosperity.

It has produced research on something called “equally distributed equivalent income” to justify lower levels of income so long as economic misery is broadly shared.

I’m not joking. You can click here to see another example of the IMF embracing poverty if it means the rich disproportionately suffer.

In other words, negative-sum economics. Though Margaret Thatcher was more eloquent in her description of this awful ideology.

At first, this column was going to be a run-of-the-mill anti-IMF diatribe.

But as I contemplated how the people fixated on inequality are willing to treat the poor like sacrificial lambs, it occurred to me that this is a perfect opportunity to unveil my Eighth Theorem of Government.

P.S. Here are my other theorems of government.

  • The “First Theorem” explains how Washington really operates.
  • The “Second Theorem” explains why it is so important to block the creation of new programs.
  • The “Third Theorem” explains why centralized programs inevitably waste money.
  • The “Fourth Theorem” explains that good policy can be good politics.
  • The “Fifth Theorem” explains how good ideas on paper become bad ideas in reality.
  • The “Sixth Theorem” explains an under-appreciated benefit of a flat tax.
  • The “Seventh Theorem” explains how bigger governments are less competent.

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The folks who don’t want to let a crisis go to waste have been very busy in the era of coronavirus, pushing an ever-expanding menu of bad ideas.

Now we have another bad idea to add to the list.

A professor from Yale Law School, Daniel Markovits, argues in a column in the New York Times that the virus is a great excuse to impose a wealth tax.

Our extraordinary battle against the pandemic should draw on the immense reserves that the most privileged among us have accumulated over decades of abundance. To achieve this goal, America should institute a wealth tax. …the relief effort should be funded through a one-time wealth tax imposed on the richest Americans… An exemption for the first $2.5 million of household wealth would exclude the bottom 95 percent from paying any tax at all and leave the top 5 percent with total taxable wealth of roughly $40 trillion. A 5 percent tax on the richest 5 percent of households could thus raise up to $2 trillion. …this one-time wealth tax…appeal ought to cross partisan lines. …A wealth tax would fund the relief effort in a way that gives meaning to shared sacrifice in the face of a universal threat.

My initial suggestion for Professor Markovits is the same one I put forth for Bill Gates. He should lead by example and donate a big chunk of his income, as well as the bulk of his savings and investments, to the IRS.

As an Ivy League professor, I’m sure he’s comfortably positioned as a member of the infamous “top 1 percent” of taxpayers, so he can be a guinea pig for his idea. To make things easy, the government has a website for him to use.

But let’s set aside snark and focus on the economic consequences. This issue deserves serious attention, not only because it is a threat in the United States, but also because it’s becoming an issue in other nations.

Such as Argentina.

Argentine Economy Minister Martin Guzman has backed the idea of a wealth tax on the country’s rich…to…find money to help cope with the Covid-19 pandemic. The tax would affect 11,000 people with fortunes of at least $2 million, Guzman said… He spoke in an interview with journalist Horacio Verbitsky, published on the website El Cohete a la Luna. President Alberto Fernandez, in a separate interview, spoke of the need for wealth redistribution.

And South Africa.

The South African government will consider a proposal for a one-off wealth tax during an economic recovery planning meeting… Such a tax could assist Africa’s most industrialized economy as it bounces back from the coronavirus outbreak and a five-week lockdown that is scheduled to be lifted on 30 April. The proposal comes from a group of economists, led by former South African National Treasury budget chief Michael Sachs.

The big problem with all of these proposals is that they ignore the crippling economic impact of wealth taxation.

The important thing to understand is that such taxes impose very punitive implicit tax rates on saving and investment. As seen in the accompanying chart, the actual tax rate depends on how well affected taxpayers are investing their money.

And it doesn’t take extreme assumptions to see that many taxpayers will face implicit tax rates of more than 100 percent!

And since all economic theories – even foolish ones such as socialism – agree that saving and investment are vitally important if we want higher living standards, any sort of wealth tax is a big mistake.

Actually, that’s an understatement.

In a normal economy, a wealth tax is a big mistake. But we’re now dealing with the very painful economic fallout from the coronavirus.

We will have a desperate need for lots of private capital if we want to restore prosperity as fast as possible, which is why imposing a wealth tax nowadays (in addition to other forms of double taxation that already exist) would be a catastrophic blunder.

And if the class-warfare crowd succeeds in their campaign to punish the rich, poor people will suffer the most.

P.S. Some people argue that a one-time wealth tax, similar to what Prof. Markovitz proposes and what South Africa is considering, wouldn’t have adverse economic effects because it penalizes productive behavior in the past (and there’s no way for people to reduce work, saving, and investment that already took place). But as I explained when debunking IMF arguments for a one-time wealth tax, this assertion is flawed because a) people will adjust their behavior when such a tax is discussed, b) people won’t trust it is a one-time tax, and c) the money will be used to finance a larger burden of government spending.

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Back in 2013, I talked to the BBC about Pope Francis and his bizarre hostility to free enterprise.

Sadly, it doesn’t appear that the Pope took my advice (though I think it’s amusing that at least someone in the Vatican is paying attention).

There’s a wealth of evidence that markets are the best way of helping the poor. But the Pope wants more government.

Moreover, there’s also plenty of data showing that higher tax rates and more spending hurt the poor. Yet the Pope wants more government.

And there’s lots of research on capitalism and upward mobility for the less fortunate. Nonetheless, the Pope wants more government.

For instance, he’s once again advertising his ignorance about economics, development, and fiscal policy.

Pope Francis blasted the practice of tax cuts for the rich as part of a “structure of sin” and lamented the fact that “billions of dollars” end up in “tax haven accounts” instead of funding “healthcare and education.” Speaking at the seminar set up by the Pontifical Academy for Social Sciences  the Pope criticized “the richest people” for receiving “repeated tax cuts” in the name of “investment and development.” These “tax haven accounts” impede “the possibility of the dignified and sustained development of all social agents,” claims the Pope.  He added that “the poor increase around us” as poverty is rising around the world. This poverty can be ended if the wealthiest gave more.

Wow. Sounds more like Bernie Sanders or Alexandria Ocasio-Cortez rather than a religious leader.

Libertarian Jesus must be very disappointed.

In an attempt to add some rigorous analysis to the discussion, Professors Antony Davies and James Harrigan wrote a column for the Foundation for Economic Education on capitalism and its role in global poverty reduction.

Galileo ran afoul of the Inquisition in 1633 when he was found “vehemently suspect of heresy.” …One might think that being this profoundly wrong about something well outside the realm of theology would cause the magisterium, and the pope specifically, to tread very carefully even 386 years later. But one would be wrong. Because here comes Pope Francis yet again, offering economic opinions from the bulliest of pulpits about something he understands no better than a garden-variety college freshman. …According to the pontiff, “the logic of the market” keeps people hungry. But “the market” has no logic. The market isn’t a thing, let alone a sentient thing. “The market” is the sum total of individual interactions among billions of people. …Whenever a trade occurs, both sides are better off for having made it. We know this because if they weren’t, the trade wouldn’t occur. …Not surprisingly to anyone but perhaps Pope Francis, some of the first financial speculation in which humans ever engaged involved food. Financial speculation and its more evolved cousins, options and futures contracts, evolved precisely as a means to fight hunger. …speculators took some of the risk of price fluctuations off the backs of farmers, and this made it possible for farmers to plant more food.

Davies and Harrigan inject some hard data into the debate.

If these arguments are too esoteric for Francis, there is also overwhelming evidence. Economic freedom measures the degree to which a country’s government permits and supports the very sorts of markets against which Francis rails. …If we list societies according to their economic freedom, the same pattern emerges again and again and again. Whether comparing countries, states, or cities, societies that are more economically free exhibit better social and economic outcomes than those that are less economically free. …even Francis should be able to see it quite clearly from his Vatican perch. …Extreme poverty rates for the half of countries that are less economically free are around seven times the extreme poverty rates for the half of countries that are more economically free.

Here’s one of the charts from their column.

As you can see, the state-controlled economies on the left have much higher levels of poverty than the market-driven economies on the right.

They also share some economic history.

…if the world around Francis doesn’t provide enough compelling evidence, the world prior to Francis certainly does. At the turn of the 18th century, around 95 percent of humans lived in extreme poverty. That was at the advent of the Industrial Revolution and of capitalism. …the extreme poverty rate fell from 95 percent to below ten percent. With the flourishing of capitalism, the extreme poverty rate fell tenfold at the same time that the number of humans grew tenfold.

Amen. Videos by Deirdre McCloskey and by Don Boudreaux confirm how the world went from near-universal poverty to mass prosperity (at least in the nations that embraced free markets and the rule of law).

By contrast, there’s not a single example of a nation that became rich and reduced poverty with big government.

P.S. Mauritius is a good test case of why Pope Francis is wrong. Very wrong.

P.P.S. To learn more about why Pope Francis is off base, I also recommend the wise words of Thomas Sowell and Walter Williams.

P.P.P.S. To be fair, there was plenty of bad economics in the Vatican before Francis became Pope. And also some sound thinking.

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One of the most significant developments in 2020 politics is how Democratic presidential candidates have embraced hard-left economic policies.

Prominent analysts on the left have noted that even Joe Biden, ostensibly the most moderate of the candidates, has a very statist economic platform when compared to Barack Obama.

And “Crazy Bernie” and “Looney Liz” have made radicalism a central tenet of their campaigns.

So where does Michael Bloomberg, the former mayor of New York City, fit on the spectrum?

The New York Times has a report on Bloomberg’s tax plan. Here are some of the key provisions, all of which target investors, entrepreneurs, small business owners, and other high-income taxpayers.

Former Mayor Michael R. Bloomberg of New York unveiled a plan on Saturday that would raise an estimated $5 trillion in new tax revenue… The proposal includes a repeal of President Trump’s 2017 tax cuts for high earners, along with a new 5 percent “surcharge” on incomes above $5 million per year. It would raise capital gains taxes for Americans earning more than $1 million a year and…it would partially repeal Mr. Trump’s income tax cuts for corporations, raising their rate to 28 percent from 21 percent. …Mr. Bloomberg’s advisers estimate his increases would add up to $5 trillion of new taxes spread over the course of a decade, in order to finance new spending on health care, housing, infrastructure and other initiatives. That amount is nearly 50 percent larger than the tax increases proposed by the most fiscally moderate front-runner in the race, former Vice President Joseph R. Biden Jr. …Mr. Bloomberg’s advisers said it was possible that he would propose additional measures to raise even more revenue, depending on how his other domestic spending plans develop.

These are all terrible proposals. And you can see even more grim details at Bloomberg’s campaign website.

Every provision will penalize productive behavior.

But there is a bit of good news.

Though it would be more accurate to say that there’s a partial absence of additional bad news.

Bloomberg hasn’t embraced some of the additional bad ideas being pushed by other Democratic candidates.

It would…maintain a limit on federal deductions of state and local tax payments set under the 2017 law, which some Democrats have pushed to eliminate. …the plan notably does not endorse the so-called wealth tax favored by several of the more liberal candidates in the race, like Senators Elizabeth Warren and Bernie Sanders.

I’m definitely happy he hasn’t embraced a wealth tax, and it’s also good news that he doesn’t want to restore the state and local tax deduction, which encouraged profligacy in states such as California, New Jersey, and Illinois.

It also appears he doesn’t want to tax unrealized capital gains, which is another awful idea embraced by many of the other candidates.

But an absence of some bad policies isn’t the same as a good policy.

And if you peruse his website, you’ll notice there isn’t a single tax cut or pro-growth proposal. It’s a taxapalooza, what you expect from a France-based bureaucracy, not from an American businessman.

To add insult to injury, Bloomberg wants all these taxes to finance an expansion in the burden of government spending.

For what it’s worth, this is my estimate of what will happen to America’s tax burden (based on the latest government data) if Bloomberg is elected and he successfully imposes all his proposed tax increases. We’ll have a more punitive tax system that extracts a much greater share of people’s money.

P.S Take these numbers with a grain of salt because they assume that Bloomberg’s tax increases will actually collect $5 trillion of revenue (which won’t happen because of the Laffer Curve) and that GDP won’t be adversely affected (which isn’t true because there will be much higher penalties on productive behavior).

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I’ve written about some of Elizabeth Warren’s statist proposals, but watching last night’s Democratic debate convinced me that I need to pay more attention to Bernie Sanders’ agenda.

When he ran for president last time, I warned that his platform of $18 trillion of new spending over 10 years would be “very expensive to your wallet.”

This time, “Crazy Bernie” has decided that his 2016 agenda was just a down payment. He now wants nearly $100 trillion of new spending!

Even CNN acknowledges that his platform has a staggering price tag.

…the new spending programs Sen. Bernie Sanders has proposed in his presidential campaign would at least double federal spending over the next decade… The Vermont independent’s agenda represents an expansion of government’s cost and size unprecedented since World War II… Sanders’ plan, though all of its costs cannot be precisely quantified, would increase government spending as a share of the economy far more than the New Deal under President Franklin Roosevelt, the Great Society under Lyndon Johnson or the agenda proposed by any recent Democratic presidential nominee, including liberal George McGovern in 1972, according to a historical analysis shared with CNN by Larry Summers, the former chief White House economic adviser for Barack Obama… Summers said in an interview. “The Sanders spending increase is roughly 2.5 times the size of the New Deal and the estimated fiscal impact of George McGovern’s campaign proposals.

My former colleague Brian Riedl has the most detailed estimates of the new fiscal burdens that Sanders is proposing.

Here’s some of what he wrote last year for City Journal.

All told, Sanders’s current plans would cost as much as $97.5 trillion over the next decade, and total government spending at all levels would surge to as high as 70 percent of gross domestic product. Approximately half of the American workforce would be employed by the government. …his Medicare For All plan would increase federal spending by “somewhere between $30 and $40 trillion over a 10-year period.” He pledges to spend $16.3 trillion on his climate plan. And his proposal to guarantee all Americans a full-time government job paying $15 an hour, with full benefits, is estimated to cost $30.1 trillion. …$3 trillion to forgive all student loans and guarantee free public-college tuition—plus $1.8 trillion to expand Social Security, $2.5 trillion on housing, $1.6 trillion on paid family leave, $1 trillion on infrastructure, $800 billion on general K-12 education spending, and an additional $400 billion on higher public school teacher salaries. …Such spending would far exceed even that of European social democracies. …Sanders’s tax proposals would raise at most $23 trillion over the decade. …Tax rates would soar. Sanders would raise the current 15.3 percent payroll tax to 27.2 percent… Sanders proposes a top federal income-tax rate of 52 percent…plus a 10 percent net investment-income surtax for the wealthy.

By the way, class-warfare taxes won’t pay for all these promises.

Not even close, as you can see from this chart Brian put together.

By the way, the above chart is a static snapshot. In the real world, there’s no way to collect 4.7 percent of GDP (red bar on the left) with confiscatory taxes on the rich.

if Sanders ever had a chance to impose all his class-warfare tax ideas, the economy would tank, so revenues as a share of GDP would decline.

And here’s another one of his visuals, looking at the spending proposals that Democratic candidates are supporting.

Senator Sanders, needless to say, favors all of these proposals.

As Brian noted in his article, the Sanders fiscal agenda is so radical that America would have a bigger burden of government spending than decrepit European welfare states such as Greece, France, and Italy.

To his credit, Bernie acknowledges that all his new spending can’t be financed by class-warfare levies (unlike the serially dishonest Elizabeth Warren).

But the new taxes he proposes would finance only a tiny fraction of his spending agenda. If Washington ever tried to adopt even part of his platform, it inevitably would mean a European-style value-added tax.

P.S. Even if tens of trillions of dollars of revenue magically floated down from Heaven, bigger government would still be bad for the economy since politicians and bureaucrats would be in charge of (mis)allocating a much greater share of labor and capital.

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I wrote last week about the ongoing shift of successful people from high-tax states to low-tax states.

And I’ve periodically confirmed this trend by doing comparisons of high-profile states, such as Texas vs. California and Florida vs. New York.

Today, I’m going to focus on Connecticut.

I actually grew up in the Nutmeg State and I wish there was some good news to share. But Connecticut has been drifting in the wrong direction ever since an income tax was imposed about 30 years ago.

And the downward trend may be accelerating.

A former state lawmaker has warned that the golden geese are escaping the state.

A former state representative says wealthy Connecticut residents are leaving the state at “an alarming pace.” Attorney John Shaban says when he returned to private practice in Greenwich in 2016, one of his most popular services became helping some of the state’s top earners relocate to places like Florida… “Connecticut started to thrive 20, 30 years ago because people came here. We were a tax haven, we were a relatively stable regulatory and tax environment, and we were a great place to live,” says Shaban. …Shaban says many small businesses now require little more than a laptop to operate, and that’s making it easier for small business owners to relocate out of state.

The exodus of rich people has even caught the attention of the U.K.-based Economist.

Greenwich, Connecticut, with a population of 60,000, has long been home to titans of finance and industry. …It has one of America’s greatest concentrations of wealth. …You might think a decade in which rich Americans became richer would have been kind to Greenwich. Not so. …the state…raised taxes, triggering an exodus that has lessons for the rest of America…  Connecticut increased income taxes three times. It then discovered the truth of the adage “easy come, easy go”. …Others moved to Florida, which still has no income tax—and no estate tax. …Between 2015 and 2016 Connecticut lost more than 20,000 residents—including 2,050 earning more than $200,000 per year. The state’s taxable-income base shrank by 1.6% as a result… Its higher income taxes have bitten harder since 2018, when President Donald Trump limited state and local tax deductions from income taxable at the federal level to $10,000 a year.

For what it’s worth, the current Democratic governor seems to realize that there are limits to class-warfare policy.

Connecticut Governor Ned Lamont said he opposes higher state income tax rates and he linked anemic growth with high income taxes. …when a caller to WNPR radio on Tuesday, January 7 asked Lamont why he doesn’t support raising the marginal tax rate on the richest 1 percent of Connecticut residents, Lamont responded: “In part because I don’t think it’s gonna raise any more money. Right now, our income tax is 40 percent more than it is in neighboring Massachusetts. Massachusetts is growing, and Connecticut is not growing. We no longer have the same competitive advantage we had compared to even Rhode Island and New York, not to mention, you know, Florida and other places. So I am very conscious of how much you can keep raising that incremental rate. As you know, we’ve raised it four times in the last 15 years.” …Connecticut has seven income tax rate tiers, the highest of which for tax year 2019 is 6.99 percent on individuals earning $500,000 or more and married couples earning $1 million or more. That’s 38.4 percent higher than Massachusetts’s single flat-tax rate for calendar year 2019, which is 5.05 percent.

I suppose it’s progress that Gov. Lamont understands you can’t endlessly pillage a group of people when they can easily leave the state.

In other words, he recognizes that “stationary bandits” should be cognizant of the Laffer Curve (i.e., high tax rates don’t lead to high tax revenues if taxable income falls due to out-migration).

But recognizing a problem and curing a problem are not the same. Lamont opposes additional class-warfare tax hikes, but I see no evidence that he wants to undo any of the economy-sapping tax increases imposed in prior years.

So don’t be surprised if Connecticut stays near the bottom in rankings of state economic policy.

P.S. The last Republican governor contributed to the mess, so I’m not being partisan.

P.P.S. Though even I’m shocked by the campaign tactics of some Connecticut Democrats.

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