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Archive for the ‘Class warfare’ Category

Who benefits most from the death tax?

There are two obvious answers.

First, politicians presumably benefit since they get more money to spend. Yes, it’s true that the tax discourages capital formation and may actually lose revenue in the long run, but politicians aren’t exactly famous for thinking past the next election cycle.

Second, there are some statists who are motivated by envy and resentment. These are the folks who make class-warfare arguments about the death tax being necessary to prevent the “rich” from accumulating more wealth, even though evidence shows large family fortunes dissipate over time.

Both of those answers are correct, but they don’t fully explain why this pernicious levy still exists.

Tim Carney of the Washington Examiner has a must-read piece for the American Enterprise Institute. He reveals the groups that actually are spending time and money to defend this odious version of double taxation.

…about two-thirds of Americans tell pollsters that they oppose the death tax. …But some segments of the population feel differently — most notably, the estate-planning industry. A survey by an industry magazine in 2011 found that 63 percent of estate-planning attorneys opposed repeal of the estate tax. That’s fitting. The death tax forces people to engage in complex and expensive estate planning. Lobbying disclosure forms show that the insurance industry is lobbying on the issue these days. The Association for Advanced Life Underwriting, which represents companies that sell estate-planning products, lobbied on the issue last year, as it has for years. Last decade, AALU funded a group called the Coalition for America’s Priorities, which attacked estate tax repeal as a tax break for Paris Hilton. …When the estate tax was last before Congress, the life insurance industry revved up the troops, spending $10 million a month on lobbying in the first half of 2010. In that stretch, only three industries spent more, according to data from the Center for Responsive Politics.

I concur with Tim.

Indeed, I remember giving a speech back in the 1990s to a group of estate-planning professionals. In my youthful naiveté, I expected that these folks would very much appreciate my arguments against the death tax.

Instead, the reception was somewhat frosty.

Though not nearly as hostile, I must confess, as the treatment I got when speaking about the flat tax to a group of tax lobbyists for big corporations.

In both cases, I was surprised because I mistakenly assumed that my audiences actually cared about the best interests of their clients or employers.

In reality, they cared about what made them rich instead (economists and other social scientists call this the principal-agent problem).

But I’m digressing. Let’s look at more of Tim’s article. He cites the Clintons to make a key point about rich people being able to avoid the tax so long as they cough up enough money to the estate-planning industry.

Those same techniques, however, often are not available to farmers, small business owners, and others who are victimized by the levy.

The Clintons may be stupid-rich, but they aren’t stupid — they’re using estate-planning techniques to avoid the estate tax. Bloomberg News reported in 2014 that the Clinton family home has been divided, for tax purposes, into two shares, and those shares have been placed in a special trust that will shield Chelsea from having to pay the estate tax on the full value of the home when she inherits it. Also, the Clintons have created a life insurance trust — a common tool wealthy people use to provide liquidity for heirs to pay the estate tax. The Clintons’ games, and the estate-planning industry’s interest in the tax, highlights how the tax fails at its stated aims of preventing the inheritance of wealth and privilege. Instead, the estate tax forces the wealthy to play games in order to pass on their wealth. These games don’t add anything to the economy, they just enrich the estate-planning industry. Those whose wealth is tied up in a small or medium-sized business, on the other hand, aren’t always capable of playing the estate planning games. They’re the victims.

The bottom line is that the tax should be abolished for reasons of growth.

But it also should be repealed because it’s unfair to newly successful entrepreneurs, investors, and business owners, all of whom generally lack access to the clever tax-planning tools of those with established wealth.

And it should be repealed simply because it would be morally satisfying to reduce the income of those who benefit from – and lobby for – bad government policy.

P.S. The U.S. death tax is more punitive than the ones imposed by even France and Venezuela.

P.P.S. It’s particularly hypocritical for the Clintons to support the death tax on others while taking steps to make sure it doesn’t apply to them.

P.P.P.S. In a truly repugnant development, there are efforts in the U.K. to apply the death tax while people are still alive.

P.P.P.P.S. On a more positive note, a gay “adoption” in Pennsylvania helped one couple reduce exposure to that state’s death tax.

P.P.P.P.P.S. If you live in New Jersey, by contrast, the best choice is to move before you die.

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I’ve sometimes asserted, only half-jokingly, that statists believe all of our income belongs to the government and that we should be grateful if we’re allowed to keep any slice of what we earn.

This is, at least in part, the mentality behind the “tax expenditure” concept, which creates a false equivalence between spending programs and provisions of the tax code that allow people to keep greater amounts of their own income.

Here’s how I characterized this moral blindness when criticizing a Washington Post columnist back in 2013.

Hiatt presumably thinks that the government’s decision not to impose double taxation is somehow akin to a giveaway. But that only makes sense if you assume that government has a preemptive claim to all private income. …Hiatt wants us the think that there’s no moral, ethical, or economic difference between giving person A $5,000 of other people’s money and person B being allowed to keep $5,000 of his or her own money.

Today, I have a particularly absurd real-world illustration of this statist mindset.

Two writers for the Wonkblog section of the Washington Post recently wrote an article entitled, “The rich get government handouts just like the poor. Here are 10 of them.”

Did their list of 10 “handouts” include the Export-Import Bank, which lines the pockets of big corporations? Nope.

Did it include agriculture subsidies, which provide unearned goodies for big agribusiness firms? Nope.

Did it the TARP bailout, which shielded Wall Street fatcats from capitalism? Nope.

And how about subsidized terrorism insurance, ethanol goodies, and green energy subsidies? Nope, nope, and nope.

Or the handouts in Obamacare for major pharmaceutical companies and big insurance companies? Nope and nope.

Instead, every single “handout” that the rich “get” from government is nothing more than a provision of the tax code that lets people keep more of their own money.

I’m not joking. Here’s the list, followed by my two cents.

1. The mortgage interest deduction for big houses and second homes.

As I’ve previously explained, I don’t think the tax code should be tilted in favor of residential real estate. But a handout is when the government takes money from Person A and gives it to Person B.

2. The yacht tax deduction.

There actually isn’t a yacht tax deduction, but if you can live in something, it can be eligible for a mortgage interest deduction. I don’t think that’s wise tax policy, but it’s not an example of government taking from Person A and giving to Person B.

3. Rental property.

The authors appear to be upset that people running a business get to subtract costs from gross income when calculating net income. But that’s exactly how businesses are supposed to be taxed. And even if one thought, for some odd reason, that gross income was the right tax base, this still isn’t an example of government taking from Person A to give to Person B.

4. Fancy business meals.

As just noted, businesses should be taxed on profits rather than gross receipts. Well, profits are the difference between total income and total costs, including the cost of business-related meals. And even if one thinks that folks in business are lying and mischaracterizing personal meals, they’re not spending other people’s money. No funds are being taken from Person A and being given to Person B.

5. The capital gains tax rate.

In a good tax system, there’s no double taxation of income that is saved and invested, so the capital gains tax should be abolished. As such, the “preferential” rate in the current system is more accurately characterized as a mitigation of a penalty. But even if one believes that saving and investment should be double taxed, a lower capital gains tax rate doesn’t take money from Person A to give to Person B.

6. The estate tax.

The death tax is triple taxation, so it also should be abolished. Regardless, letting a family hold onto its own money is not the same as taking from Person A to give to Person B.

7. Gambling loss deductions.

The government taxes gamblers on their net winnings (if any), which is the proper approach. And even if the government gave a deduction for net losses (which isn’t the case), this wouldn’t be an example of taking from Person A and giving to Person B.

8. The Social Security earnings limit.

The Social Security system is supposed to be social insurance, and one of the implications of this approach is that there’s a limit on the benefits one can receive and the payments one has to make. As such, it’s silly to assert that the “wage base cap” is somehow improper. But even if one believed in turning Social Security into a pure redistribution scheme, the existing earnings limit simply means a cap on what the government takes. There’s no coerced handout from Person A to Person B.

9. Retirement plans.

The bad news is that we have pervasive double taxation in the internal revenue code. The good news is that some forms of retirement savings, such as IRAs and 401(k)s, are protected from double taxation. That protection does not require any money being taken from Person A and given to Person B.

10. Tax prep.

I’m not a fan of companies like H&R Block that benefit from an unfair and convoluted tax code. Under a simple and fair system like the flat tax, they would go out of business. But a deduction for tax preparation costs simply allows a taxpayer to keep more of his or her income. There’s no handout from Person A to Person B.

In case you didn’t notice, there’s a strong moral component to my argument. The leftists think you’re getting a handout if you get to keep more of your own money.

I think that’s absurd.

And it’s also economically illiterate when applied to provisions of the tax code that make sense, such as companies getting to subtract expenses when calculating taxable income.

Or individuals not being subjected to double taxation.

P.S. Here’s some pro-Second Amendment humor, which cleverly uses the left’s “undocumented” terminology for illegal aliens and applies it in a much better fashion.

And if you like pro-gun humor, you can find lots of good links by clicking here.

P.P.S. Since I mentioned immigration, here’s a fascinating graphic that shows immigration trends over the past two centuries.

There’s no policy lesson of philosophical point. I just think this graphic is very informative and well designed.

But if you want my two cents, I like immigration but want to make sure we attract people who want to work and assimilate rather than scroungers (and worse) who want welfare and handouts.

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When writing about the Organization for Economic Cooperation and Development, an international bureaucracy based in Paris, my life would be simpler if I created some sort of automatic fill-in-the-blanks system.

Something like this.

The OECD, subsidized by $____ million from American taxpayers, has just produced a new _________ that advocates more power for governments over the _________ sector of the economy.

But this may not be sufficiently descriptive.

So maybe I should create a multiple choice exercise. Sort of like when students take tests and get asked to circle the most appropriate answer.

The bureaucrats at the Paris-based OECD, working in cooperation with union bosses/class-warfare advocates/other tax-free international bureaucrats/politicians, have released a new report/study/paper urging more power/control/authority for governments in order to increase regulation/taxes/spending/redistribution/intervention.

You may think I’m trying to be funny, but this is totally serious.

How else would you describe a bureaucracy that consorts and cooperates with leftist groups like Occupy Wall Street and the AFL-CIO and routinely published propaganda in favor of Obama’s agenda on issues such as global warming, government-run healthcare, so-called stimulus, and class-warfare taxation.

And never forget that American taxpayers finance the biggest chunk of this bureaucracy’s budget.

Adding insult to injury, the bureaucrats at the OECD get tax-free salaries, which makes their relentless support for higher taxes on the rest of us even more obnoxious.

Now we have some new examples of the OECD’s statist mischief.

Here’s some of what the Center for Freedom and Prosperity recently uncovered.

At its sixth annual conference, the George Soros-founded Institute for New Economic Thinking will feature prominent left-wing economists Thomas Piketty, Joseph Stiglitz, and self-described Marxist and Greek Finance Minister, Yanis Varoufakis. By itself that wouldn’t be remarkable, but the meeting will come with the implicit endorsement of the U.S. taxpayer thanks to the sponsorship of the Organization for Economic Cooperation and Development (OECD), which gets over 20 percent of its funding from the United States.

So why is the OECD subsidizing a left-wing gabfest and giving publicity to way-out-of-the-mainstream characters like Piketty?

Part of the answer, one suspects, is that the bureaucracy has a bloated budget.

But the bigger reason is presumably that the bureaucrats want to push a statist ideological agenda.

…tax collectors have hijacked the OECD… Over the last decade and a half, they have threatened and cajoled low-tax jurisdictions into counter-productive reforms that make their economies less attractive to those suffering under the excessive taxes required to fund European welfare states. …They have essentially turned the OECD into a global tax cartel, or an OPEC for politicians.

None of this is a surprise because it’s part of a bigger pattern.

The OECD gets its money from governments. Most of those governments are European welfare states. The bureaucrats at the OECD get very generous tax-free salaries.

So of course they’re going to pump out whatever propaganda is needed to please their political (and pay) masters.

Here are some other recent examples, both of which were disseminated by the OECD’s Washington Center, which mostly exists to make sure that Congress and the White House maintain the gravy train of handouts to Paris.

Our first example of economic malpractice is this nonsense about a so-called gender wage gap. Note that the OECD is forced to admit the numbers are “unadjusted.”

That’s because lots of research shows that the wage gap disappears once you adjust for factors such as hours worked, types of professions, and work history.

By the way, just in case you think I’m only citing pro-market sources, it’s very much worth noting that even one of President Obama’s economic advisers confessed that the left’s gender-gap numbers are bogus.

Now let’s look at another chart.

I’ve previously explained that what matters most for the poor is economic growth.

Yet statists prefer to focus on the rich-v-poor gap because they want to mislead folks into thinking the economy is a fixed pie (as depicted here) and the income of the rich is at the expense of the poor.

And that’s the purpose of this OECD chart.

This very much reminds me of the OECD’s laughably dishonest research on poverty, which purports to show that there is more poverty in the United States than there is in economically distressed nations such as Greece, Turkey, Hungary, and Portugal.

As you can see from this video, statism is now the OECD’s chief product.

Which is why Republicans in Congress, if they actually on the side of taxpayers, should defund this destructive bureaucracy.

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In 1729, Jonathan Swift authored a satirical essay with the unwieldy title of A Modest Proposal for Preventing the Children of Poor People From Being a Burthen to Their Parents or Country, and for Making Them Beneficial to the Publick. He suggested that the destitute Irish could improve their lot in life by selling their children as food for the rich.

I’m personally glad this was merely a tongue-in-cheek proposal since some of my ancestors immigrated to America from Ireland in the 1800s.

But maybe it’s time for a new “modest proposal” to make our leftist friends happy.

They’re constantly griping about the rich, asserting that the “top 1 percent” or “top 10 percent” are making too much money. Indeed, folks on the left want us to believe that “income inequality” is a big issue and a threat to the country.

So why not update Jonathan Swift’s idea and simply consume all the rich people? Indeed, P.J. O’Rourke actually wrote a book entitled Eat the Rich.

But we don’t really need to feed them to anyone. Just dump their bodies in a mass grave or bury them at sea.

In one fell swoop, income inequality could be dramatically reduced. Sure, those of us left would wind up being equally poor, like in Cuba or North Korea, but you can’t make an omelet without breaking a few eggs!

But some of you probably think arbitrary executions of rich people is a step too far. After all, it would be unseemly to mimic France’s Reign of Terror or Stalin’s extermination of the Kulaks.

That’s why we should instead look at a watered-down “modest proposal” put forward by David Azerrad of the Heritage Foundation. Here’s some of what he wrote for Real Clear Politics.

…consider the following bold proposal to solve our inequality problem once and for all: exile the top 0.1% of income earners. Round up all 136,080 taxpayers who make more than $2.16 million a year and ship ’em off to whatever country will accept them. Presto. Problem solved. …The 0.1 percenters, whose growing incomes have been fueling the rise in inequality over the past several decades, will have vanished overnight.

Though Azerrad does point out that exile has many of the same economic downsides as execution.

..it will put a serious dent in the government’s finances. Almost one in every five tax dollars that the government collects comes from the 0.1 percent. To make up for the shortfall, we should probably also confiscate all their assets before exiling them. What about the jobs the 0.1 percenters create and the value they add to the economy? …we’d be losing all but twelve of the CEOs from the 300 largest companies in the country. The show business industry would collapse overnight with all the star talent in exile. Gone too would be the best investment bankers, financial consultants, surgeons and lawyers. One third of the NFL’s roster and well over half of the NBA’s roster would also be culled.

Heck, we’re already confiscating some of the assets of rich people who emigrate, so part of Azerrad’s satire is disturbingly close to reality.

But let’s stick with the more farcical parts of his column. To deal with potential loss of tax revenue, Azerrad proposes to have the government sell America’s rich people to other countries.

…we will need to generate more revenue. That could be done rather easily by auctioning off the top-earning Americans to the highest foreign bidder.

That makes sense. There are still a few places in the world – such as Switzerland, Cayman, Hong Kong, Bermuda, etc – where the political class actually understands it is good to have wealth creators.

By the way, Azerrad points out that there will be a tiny little downside to this proposal. Contrary to the fevered assertions of Elizabeth Warren and Paul Krugman, penalizing the rich won’t do anything to help the less fortunate.

Mind you, life prospects will not have improved for a single poor child born into a broken community with failing schools. Or for a single recent college grad crushed by debt and facing dim job prospects. Or for a single family struggling to make ends meet. …It won’t be any easier to start a business or to find a job. Four in 10 children will still be born out of wedlock. Our entitlements will still face unfunded liabilities of almost $50 trillion. …We will however be able to boldly proclaim that we have addressed “the defining challenge of our time.” Our country will in no way be better off. But we will have satiated our lust for equality.

Actually, our country will be far worse off. Jobs, investment, and growth will all collapse.

So while the poor may wind up with a larger share of the pie, the overall size of the pie will be much smaller.

And this is perhaps the moment to stop with the satire and take a more serious look at the issue of income inequality.

I’ve repeatedly argued that the focus should be growth, not redistribution. To cite just one example, it’s better to be a poor person in Singapore than in Jamaica.

But let’s look at what others are saying. Professor Don Boudreaux of George Mason University addresses the issue (or non issue, as he argues) in a column for the Pittsburgh Tribune-Review.

I’ve never worried about income inequality. …Income inequality — like the color of my neighbor’s car or the question of the number of pigeons in Central Park — just never dawns on me as an issue worthy of a moment’s attention.

Don then speculates about why some people are fixated on inequality.

I wonder: What makes someone worry about income inequality? One personal characteristic that plausibly sparks obsession with inequality is envy. …Another characteristic…that likely gives rise to concerns over income inequality is a mistaken conviction that the amount of wealth in the world is fixed. …A third personal characteristic that prompts anxiety over income inequality is fear that the “have-nots” will rape and pillage society until and unless they get more from the “haves.” …This third characteristic is widespread today. The risk that the “have-nots” in modern First World economies will organize themselves using social media and then grab their electric carving knives to storm the wine bars and day spas of the “haves”.

I think all three hypotheses are correct, though people in the public policy world rarely admit that they’re motivated by envy.

But, for what it’s worth, I think many leftists genuinely think the economy is a fixed pie. And if you have that inaccurate mindset, then extra income or wealth for a rich person – by definition – means less income and wealth for the rest of us. This is why they support class-warfare tax policy.

The challenge, for those of us who believe in economic liberty, is to educate these people about how even small differences in growth can yield remarkable benefits to everyone in society within relatively short periods.

A lot of establishment Republicans, meanwhile, seem to implicitly believe that redistribution is desirable as a tactic to “buy off” the masses. They’ll privately admit the policies are destructive (both to the economy and to poor people), but they think there’s no choice.

When dealing with these people, our challenge is to educate them that big government undermines social capital and makes it far more likely to produce the kind of chaos and social disarray we’ve seen in Europe’s deteriorating welfare states.

P.S. For a humorous explanation of why the redistribution/class-warfare agenda is so destructive, here’s the politically correct version of the fable of the Little Red Hen.

And the socialism-in-the-classroom example, which may or may not be an urban legend, makes a similar point. As does the famous parable about taxes and beer.

P.P.S. I still think Margaret Thatcher has the best explanation of why the left is wrong on inequality. And if you want to see a truly disturbing video of a politician with a different perspective, click here.

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One of the most important bulwarks of a just society is equal justice under law.

That principle is even etched in stone above the entrance to the Supreme Court.

My belief in equal treatment is one of the reasons I support the flat tax. As an economist, I like the pro-growth impact of tax reform. But as someone who believes in justice, I also support the flat tax because I don’t like class-warfare policies that punish some taxpayers and corrupt loopholes that give preferential status to other taxpayers.

Indeed, my support for equality of law is so strong that I even object to policies that benefit me, such as special TSA lines in airports for frequent flyers.

But sometimes it’s not clear how a principle should be applied. So let’s revive the “you be the judge” series, which asks thorny questions about the workings of a free society, and explore the case of income-based traffic fines.

Check out these excerpts from a BBC story.

Finland’s speeding fines are linked to income, with penalties calculated on daily earnings, meaning high earners get hit with bigger penalties for breaking the law. So, when businessman Reima Kuisla was caught doing 103km/h (64mph) in an area where the speed limit is 80km/h (50mph), authorities turned to his 2013 tax return, the Iltalehti newspaper reports. He earned 6.5m euros (£4.72m) that year, so was told to hand over 54,000 euros. …Mr Kuisla might be grateful he doesn’t earn more. In 2002, an executive at Nokia was slapped with a 116,000-euro fine for speeding on his Harley Davidson motorbike. His penalty was based on a salary of 14m euros.

So is this a case of greedy government targeting people for the sin of success?

Well, I’m sure the government is greedy, but what about the morality of income-based fines?

The driver isn’t happy, but others argue that deterrence doesn’t work unless the actual impact of the fine is the same for rich and poor alike.

The scale of the fine hasn’t gone down well with Mr Kuisla. “Ten years ago I wouldn’t have believed that I would seriously consider moving abroad,” he says on his Facebook page. “Finland is impossible to live in for certain kinds of people who have high incomes and wealth.” There’s little sympathy from his fellow Finns on social media. …person says: “Small fines won’t deter the rich – fines have to ‘bite’ everyone the same way.”

At the risk of sounding like a soft-headed leftist, I’m not overly sympathetic to Mr. Kuisla’s position.

Simply stated, if the goal of traffic fines is deterrence, then the penalties should vary with income.

I remember when I was young, living on a paycheck-to-paycheck basis, a traffic fine sometimes would chew up a non-trivial part of my disposable income. That affected my behavior.

Now that I’m older and making more money (and especially since my kids are mostly done with their schooling!), a traffic fine is just a nuisance (though I still sometimes get very upset).

Though this discussion wouldn’t be complete without also considering the fact that traffic laws and enforcement oftentimes are motivated by revenue rather than safety.

The most compelling evidence comes from Ferguson, Missouri. It seems that what’s driving the mistreatment of black people is government greed.

Here’s some of what Ian Tuttle wrote on the topic for National Review.

The Department of Justice’s “Investigation of the Ferguson Police Department,” released this week…what the material in the report reveals is less a culture of racial animus than one of predatory government: “Ferguson’s law enforcement practices,” states the report, “are shaped by the City’s focus on revenue rather than by public safety needs.” …myriad municipal regulations that, rigorously enforced, nickel-and-dime the citizenry to the local government’s benefit. This is the injustice on which the Justice Department has stumbled, which helps to explain the city’s racial tensions — and which merits urgent correction.

I fully understand why many blacks in Ferguson are angry.

Imagine if you had a modest income and you were constantly being hit with $50 and $100 fines (oftentimes then made much larger thanks to the scam of “court fees”).

This can wreck a family’s budget when it doesn’t have much money. So wouldn’t you be upset?

Particularly since “predatory government” is a very good description of the Ferguson bureaucracy.

In 2010, the city’s finance director encouraged Ferguson police chief Thomas Jackson to “ramp up” ticket-writing to help mitigate an anticipated sales-tax shortfall. …One stop can yield six or eight citations, and officers have been known to compete to set single-stop records. Indeed, within Ferguson Police Department, because opportunities for promotion have been tied to “productivity” — that is, enthusiasm for ticket-writing — officers have perverse incentives to issue citations, and in concert with police and prosecutors, municipal courts regularly enforce the payment of fines in a way that compounds what a single defendant owes.

Now let’s connect Ferguson with Finland.

Our Finnish driver is upset by his giant fine, but at least he probably can relate to the poor people of Ferguson.

But the more successful people of Ferguson, to the extent that they are even targeted by the local cops, have almost nothing to worry about.

…this practice — of police and prosecutors and courts together — disproportionately affects black communities not because they are black, but because they are poor. They do not have the means to escape the justice apparatus, unlike the comparatively wealthy, who can pay a fine and be done with the matter — or hire an attorney, and inconvenience courts that prefer the ease of collecting fees to the challenge of arbitrating cases.

Here’s the bottom line.

If we want a just society, there should be few laws and they should be enforced on the basis of protecting public safety rather than enriching the bureaucracy.

In such a system, income-based fines and penalties are a reasonable way of making sure deterrence applies equally to rich and poor.

Unfortunately, we have far too many laws and they are used as back-door taxes on the citizenry.

So if we adopt income-based fines, the politicians will simply have more money to spend and even less incentive to scale back excessive and thuggish government.

Heck, just look at how asset-forfeiture laws and money-laundering laws have turned into revenue scams for Leviathan.

P.S. Since today’s post ended with a depressing conclusion, let’s share some a bit of offsetting good news.

As reported by The Hill, the spirit of civil disobedience lives even in Washington!

From sledding to snowball fights, dozens of children and their parents took to Capitol Hill Thursday afternoon to protest a controversial sledding ban. Capitol Police have refused to lift the sledding ban, but some parents organized a “sled in” on the west lawn of the Capitol to put a spotlight on the unpopular rule. …Capitol Police pointed out that more than 20,000 sledding injuries occur in the U.S. each year…, but officers on the ground also refused to enforce it. …It’s turning into a public relations nightmare for those who oppose sledding and support the ban.

You’ll doubtlessly be horrified to learn that illegal sledding is – gasp! – a gateway crime to other forms of misbehavior.

…the children were not only sledding but also climbing trees, building snowmen and throwing snowballs at one another.

Oh My God, unlicensed snowmen, unregistered tree climbing, and illegal snowballs! Freedom is obviously too dangerous.

Next thing you know, these kids will grow up to engage in other forms of civil disobedience, just like Arizona drivers and Connecticut gun owners.

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On the issue of so-called progressive taxation, our left-wing friends have conflicting goals. Some of them want to maximize tax revenue in order to finance ever-bigger government.

But others are much more motivated by a desire to punish success. They want high tax rates on the “rich” even if the government collects less revenue.

Some of them simply pretend there isn’t a conflict, as you might imagine. They childishly assert that the Laffer Curve doesn’t exist and that upper-income taxpayers are fiscal pinatas, capable of generating never-ending amounts of tax revenue.

But more rational leftists admit that the Laffer Curve is real. They may argue that the revenue-maximizing rate is up around 70 percent, which is grossly inconsistent with the evidence from the 1980s, but at least they understand that successful taxpayers can and do respond when tax rates increase.

So the question for grown-up leftists is simple: What’s the answer if they have to choose between collecting more revenue and punishing the rich with class-warfare taxation?

And here’s some new research looking at this tradeoff. Authored by economists from the University of Oslo in Norway, École polytechnique de Lausanne in France, and the University of Pennsylvania, they look at “Tax progressivity and the government’s ability to collect additional tax revenue.”

The recent massive expansion of public debt around the world during the Great Recession raises the question how much debt a government can maximally service by raising the level of taxes. Or, to phrase this classic public finance question differently, how much additional tax revenue can the government generate by increasing income taxes?

And since they’re part of the real world (unlike, say, the Joint Committee on Taxation or the Obama Administration), they recognize that higher tax rates impose costs on the economy that lead to feedback effects on tax revenue.

Our research (Holter et al. 2014) investigates how tax progressivity and household heterogeneity impacts the Laffer curve. We argue that a more progressive labour income tax schedule significantly reduces the maximal amount of tax revenues a government can raise…under progressive taxes heterogeneous workers will face different average and marginal tax rates. …the answer to our question is closely connected to the individual (and then properly aggregated) response of labour supply to taxes. The microeconometric literature, as surveyed e.g. by Keane (2011), has found that both the intensive and extensive margins of labour supply (the latter especially for women), life-cycle considerations, and human capital accumulation are important determinants of these individual responses. …households make a consumption–savings choice and decide on whether or not to participate in the labour market (the extensive margin), how many hours to work conditional on participation (the intensive margin), and thus how much labour market experience to accumulate (which in turn partially determines future earnings capacities).

The above passage has a bit of economic jargon, but it’s simply saying that taxpayers respond to incentives.

They also provide estimates of tax progressivity for various developed nations. They’re only looking at the personal income tax, so these numbers don’t include, for instance, the heavy burden of the value-added tax on low-income people in Europe.

The good news (at least relatively speaking) is that the American income tax is not as punitive as it is in many other nations.

But the key thing to consider, at least in the context of this new research, is the degree to which so-called progressivity comes with a high price.

Here is some additional analysis from their research.

Why does the degree of tax progressivity matter for the government’s ability to generate labour income tax revenues…? changes in tax progressivity typically affects hours worked…increasing tax progressivity induces differential income and substitution effects on the workers in different parts of the earnings distribution. …a more progressive tax system may disproportionately reduce labour supply for high earners and lead to a reduction in tax revenue. …more progressive taxes will reduce the incentives for young agents to accumulate labour market experience and become high (and thus more highly taxed) earners.

Now let’s look at some of the results.

Remarkably, they find that the best way of maximizing revenue is to minimize the economic damage of the tax system. And that means…drum roll, please…a flat tax.

For its current choice of progressivity (the green line), the US can sustain a debt burden of about 330% of its benchmark GDP, by increasing the average tax rate to about 42%. Thus, according to our findings the US is currently still nowhere close to its maximally sustainable debt levels…we also observe that larger public debt can be sustained with a less progressive tax system. Converting to a flat tax system (the black line) increases the maximum sustainable debt to more than 350% of benchmark GDP, whereas adopting Danish tax progressivity lowers it to less than 250% of benchmark GDP.

Here are a couple of charts from their study, both of which underscore that punitive tax rates are very counterproductive, assuming the goal is to either maximize revenue or to sustain a larger public sector.

Notice that if you want to punish “the rich” and impose Danish-type levels of progressivity (the dashed line), you’ll get less revenue and won’t be able to sustain as much debt.

Now let’s shift from discussing intellectual quandaries for the left and talk about challenges for believers in limited government.

We like a flat tax because it treats people equally and it raises revenue in a relatively non-destructive manner.

But because it is an “efficient” form of taxation, it’s also an “efficient” way to generate revenues to finance bigger government.

Indeed, this was one of the findings in a 1998 study by Professors Gary Becker and Casey Mulligan.

So does this mean that instead of supporting a flat tax, we should a loophole-riddled system based on high tax rates solely because that system will be so inefficient that it won’t generate revenue?

Of course not. At the risk of stating the obvious, this is why my work on fundamental tax reform is intertwined with my work on constitutional and legal mechanisms to limit the size and scope of government.

And it’s also why Obama’s class-warfare approach is so perversely destructive. If you think I’m exaggerating, watch this video – especially beginning about the 4:30 mark.

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The most compelling graph I’ve ever seen was put together by Andrew Coulson, one of my colleagues at the Cato Institute. It shows that there’s been a huge increase in the size and cost of the government education bureaucracy in recent decades, but that student performance has been stagnant.

But if I had to pick a graph that belongs in second place, it would be this relationship between investment and labor compensation.

The clear message is that workers earn more when there is more capital, which should be a common-sense observation. After all, workers with lots of machines, technology, and equipment obviously will be more productive (i.e., produce more per hour worked) than workers who don’t have access to capital.

And in the long run, worker compensation is tied to productivity.

This is why the President’s class-warfare proposals to increase capital gains tax rates, along with other proposals to increase the tax burden on saving and investment, are so pernicious.

The White House claims that the “rich” will bear the burden of the new taxes on capital, but the net effect will be to discourage capital investment, which means workers will be less productive and earn less income.

Diana Furchtgott-Roth of Economics 21 has some very compelling analysis on the issue.

President Obama will propose raising top tax rates on capital gains and dividends to 28 percent, up from the current rate of 24 percent. Prior to 2013, the rate was 15 percent. Mr. Obama seeks to practically double capital gains and dividend taxes during the course of his presidency, a step that would have negative effects on investment and economic growth. …the middle class would be harmed by higher capital gains tax rates, because capital would be more likely to go offshore. …[a] higher rate would have negative effects on the economy by reducing U.S. investment or driving it overseas. If firms pay more in capital gains taxes in America, they would make fewer investments — especially in the businesses or projects that most need capital — and they would hire fewer workers, many of them middle-class. Higher capital gains taxes would reduce economic activity, especially financing for private companies, innovators, and small firms getting off the ground. Taxes on U.S. investment would be higher compared with taxes abroad, so some investment capital is likely to move offshore.

At this point, I want to emphasize that the point about higher taxes in America and foregone competitiveness isn’t just boilerplate.

According to Ernst and Young, as well as the Organization for Economic Cooperation and Development, the United States has one of the highest tax rates on capital gains in the entire developed world.

The only compensating factor is that at least these destructive tax rates aren’t imposed on foreign investors. Yes, it’s irritating that our tax code treats U.S. citizens far worse than foreigners, but at least we benefit from all the overseas capital being invested in the American economy.

By the way, Diana also points out that higher capital gains tax rates may actually lose revenue for the simple reason that investors can decide to hold assets rather than sell them.

Here’s some of what she wrote, accompanied by a chart from the Tax Foundation.

…higher capital gains tax rates rarely result in more revenue, because capital gains realizations can be timed.  When rates go up, people hold on to their assets rather than selling them, expecting that rates will go down at some point. …Capital gains tax revenues rose after 1997, when the rate was reduced from 28 percent to 20 percent, and again after 2003, when rates were reduced further to 15 percent… The decline in rates resulted in higher tax receipts from owners of capitals, as they sold assets, giving funds to Uncle Sam.

Yes, the Laffer Curve is alive and well.

Not that Obama cares. If you pay close attention at the 4:20 mark of this video, you’ll see that he wants higher capital gains tax rates for reasons of spite.

But I don’t care about the revenue implications. I care about good tax policy. And in an ideal tax system, there wouldn’t be any tax on capital gains.

It’s a form of double taxation with pernicious effects, as the Wall Street Journal explained back in 2012.

…the tax on the sale of a stock or a business is a double tax on the income of that business. When you buy a stock, its valuation is the discounted present value of the earnings. …If someone buys a car or a yacht or a vacation, they don’t pay extra federal income tax. But if they save those dollars and invest them in the family business or in stock, wham, they are smacked with another round of tax. Many economists believe that the economically optimal tax on capital gains is zero. Mr. Obama’s first chief economic adviser, Larry Summers, wrote in the American Economic Review in 1981 that the elimination of capital income taxation “would have very substantial economic effects” and “might raise steady-state output by as much as 18 percent, and consumption by 16 percent.” …keeping taxes low on investment is critical to economic growth, rising wages and job creation. A study by Nobel laureate Robert Lucas estimates that if the U.S. eliminated its capital gains and dividend taxes (which Mr. Obama also wants to increase), the capital stock of American plant and equipment would be twice as large. Over time this would grow the economy by trillions of dollars.

John Goodman also has a very cogent explanation of the issue.

…why tax capital gains at all? …The companies will realize their actual income and they will pay taxes on it. If the firms return some of this income to investors (stockholders), the investors will pay a tax on their dividend income. If the firms pay interest to bondholders, they will be able to deduct the interest payments from their corporate taxable income, but the bondholders will pay taxes on their interest income. …Eventually all the income that is actually earned will be taxed when it is realized and those taxes will be paid by the people who actually earned the income. ……why not avoid all these problems by reforming the entire tax system along the lines of a flat tax? The idea behind a flat tax can be summarized in one sentence: In an ideal system, (a) all income is taxed, (b) only once, (c) when (and only when) it is realized, (d) at one low rate.

And if you want to augment all this theory with some evidence, check out the details of this comprehensive study published by Canada’s Fraser Institute.

For more information, here’s the video I narrated for the Center for Freedom and Prosperity, which explains why the capital gains tax should be abolished.

P.S. These posters were designed by folks fighting higher capital gains taxes in the United Kingdom, but they apply equally well in the United States. And since we’re referencing our cousins on the other side of the Atlantic, you’ll be interested to know that Labor Party voters share Obama’s belief in jacking up tax rates even if the economic damage is so severe that the government doesn’t collect any revenue.

P.P.S. Don’t forget that the capital gains tax isn’t indexed for inflation, so the actual tax rate almost always is higher than the statutory rate. Indeed, for folks that have held assets for a long time, the effective tax rate can be more than 100 percent. Mon Dieu!

P.P.P.S. In the past 20-plus years, I’ve seen all sorts of arguments for class-warfare taxation. These include:

I suppose leftists deserve credit for being adaptable. Just about anything is an excuse for soak-the-rich tax hikes. The sun is shining, raise taxes! The sky is cloudy, increase tax rates!

Or, in this case, Obama is giving a speech, so we know higher tax rates are on the agenda.

P.P.P.P.S. You deserve a reward if you read this far. You can enjoy some amusing cartoons on class-warfare tax policy by clicking here, here,here, here, here, here, and here.

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