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Archive for the ‘Competitiveness’ Category

When companies want to boost sales, they sometimes tinker with products and then advertise them as “new and improved.”

In the case of governments, though, I suspect “new” is not “improved.”

The British territory of Jersey, for instance, has a very good tax system. It has a low-rate flat tax and it overtly brags about how its system is much better than the one imposed by London.

In the United States, by contrast, the state of New Jersey has a well-deserved reputation for bad fiscal policy. To be blunt, it’s not a good place to live and it’s even a bad place to die.

And it’s about to get worse. A column in the Wall Street Journal warns that New Jersey is poised to take a big step in the wrong direction. The authors start by observing that the state is already in bad shape.

…painless solutions to New Jersey’s fiscal challenges don’t exist. …a massive structural deficit lurks… New Jersey’s property taxes, already the highest in the nation, are being driven up further by the state’s pension burden and escalating health-care costs for government workers.

In other words, interest groups (especially overpaid bureaucrats) control the political process and they are pressuring politicians to divert even more money from the state’s beleaguered private sector.

…politicians seem to think New Jersey can tax its way to budgetary stability. At a debate this week in Newark, the Democratic gubernatorial nominee, Phil Murphy, pledged to spend more on education and to “fully fund our pension obligations.” …But just taxing more would risk making New Jersey’s fiscal woes even worse. …New Jersey is grasping at the same straws. During the current fiscal year, the state’s pension contribution is $2.5 billion, only about half the amount actuarially recommended. The so-called millionaire’s tax, a proposal Gov. Chris Christie has vetoed several times since taking office in 2010, will no doubt make a comeback if Mr. Murphy is elected. Yet it would bring in only an estimated $600 million a year.

The column warns that New Jersey may wind up repeating Connecticut’s mistakes.

Going down that path, however, is a recipe for a loss of high-value taxpayers and businesses.

Let’s look at a remarkable story from the New York Times. Published last year, it offers a very tangible example of how the state’s budgetary status will further deteriorate if big tax hikes drive away more successful taxpayers.

One man can move out of New Jersey and put the entire state budget at risk. Other states are facing similar situations…during a routine review of New Jersey’s finances, one could sense the alarm. The state’s wealthiest resident had reportedly “shifted his personal and business domicile to another state,” Frank W. Haines III, New Jersey’s legislative budget and finance officer, told a State Senate committee. If the news were true, New Jersey would lose so much in tax revenue that “we may be facing an unusual degree of income tax forecast risk,” Mr. Haines said.

Here are some of the details.

…hedge-fund billionaire David Tepper…declared himself a resident of Florida after living for over 20 years in New Jersey. He later moved the official headquarters of his hedge fund, Appaloosa Management, to Miami. New Jersey won’t say exactly how much Mr. Tepper paid in taxes. …Tax experts say his move to Florida could cost New Jersey — which has a top tax rate of 8.97 percent — hundreds of millions of dollars in lost payments. …several New Jersey lawmakers cited his relocation as proof that the state’s tax rates, up from 6.37 percent in 1996, are chasing away the rich. Florida has no personal income tax.

By the way, Tepper isn’t alone. Billions of dollars of wealth have already left New Jersey because of bad tax policy. Yet politicians in Trenton blindly want to make the state even less attractive.

At the risk of asking an obvious question, how can they not realize that this will accelerate the migration of high-value taxpayers to states with better policy?

New Jersey isn’t alone in committing slow-motion suicide. I already mentioned Connecticut and you can add states such as California and Illinois to the list.

What’s remarkable is that these states are punishing the very taxpayers that are critical to state finances.

…states with the highest tax rates on the rich are growing increasingly dependent on a smaller group of superearners for tax revenue. In New York, California, Connecticut, Maryland and New Jersey, the top 1 percent pay a third or more of total income taxes. Now a handful of billionaires or even a single individual like Mr. Tepper can have a noticeable impact on state revenues and budgets. …Some academic research shows that high taxes are chasing the rich to lower-tax states, and anecdotes of tax-fleeing billionaires abound. …In California, 5,745 taxpayers earning $5 million or more generated more than $10 billion of income taxes in 2013, or about 19 percent of the state’s total, according to state officials. “Any state that depends on income taxes is going to get sick whenever one of these guys gets a cold,” Mr. Sullivan said.

The federal government does the same thing, of course, but it has more leeway to impose bad policy because it’s more challenging to move out of the country than to move across state borders.

New Jersey, however, can’t set up guard towers and barbed wire fences at the border, so it will feel the effect of bad policy at a faster rate.

P.S. I used to think that Governor Christie might be the Ronald Reagan of New Jersey. I was naive. Yes, he did have some success in vetoing legislation that would have exacerbated fiscal problems in the Garden State, but he was unable to change the state’s bad fiscal trajectory.

P.P.S. Remarkably, New Jersey was like New Hampshire back in the 1960s, with no income tax and no sales tax. What a tragic story of fiscal decline!

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Back in 2013, when I was still doing a “question of the week” column, I suggested that Australian was the best option for those contemplating a new home in the event of some sort of Greek-style fiscal collapse in the United States.

I pointed out that America wasn’t in any immediate danger, though I can understand why some people are interested in the question since our long-run outlook is rather grim.

Anyhow, I picked Australia for several reasons, including its geographic position (no unstable welfare states on the border, which is why I didn’t select Switzerland), its private social security system (unfunded liabilities are small compared to the $44 trillion shortfall in America’s government-run system), and its relatively high level of economic freedom.

I’m not the only person to notice that Australia is a good place to live. A recent Bloomberg column noted that millionaires are moving Down Under.

They’re all going to the land Down Under. Australia is luring increasing numbers of global millionaires, helping make it one of the fastest growing wealthy nations in the world… Over the past decade, total wealth held in Australia has risen by 85 percent compared to 30 percent in the U.S. and 28 percent in the U.K., aided by the fact that Australia has gone 25 years without a recession. As a result, the average Australian is now significantly wealthier than the average American or Briton. …At the end of 2016 individuals held about $192 trillion of wealth worldwide…, with 13.6 million millionaires holding $69 trillion of this. There were 522,000 multi-millionaires, having net assets of $10 million or more.

The number of millionaires moving to Australia is especially impressive when looking at global data.

Here’s a map showing the nations with the most incoming and outgoing rich people (h/t: Steve Hanke). Maybe it’s because there’s no death tax in Australia, but it’s remarkable that a nation with less than one-tenth the population of the United States manages to attract more millionaires.

But not everybody is cheerful about Australia’s economic position.

I’m currently in Brisbane for a couple of speeches. I spoke earlier today about how market-oriented jurisdictions grow much faster over the long run when compared to nations with statist economic policy.

But I don’t want to focus on my remarks (much of which will be old news to regular readers). Instead, let’s look at the some of the information in a speech by Professor Tony Makin of Griffith University.

Two of his slides caught my attention. Let’s start with a depressing look at how Australia has declined in the global competitiveness rankings put together each year by the World Economic Forum.

This is not a good trend.

That being said, I think Economic Freedom of the World is a more accurate measure and it shows that Australia (whether looking at its absolute score or its relative ranking) has suffered only a small decline.

Here’s another chart that is depressing as well. It shows that the per-capita burden of taxes and spending has continuously increased even after adjusting for inflation.

To be fair, the numbers aren’t quite as bad when looking at taxes and spending as a share of gross domestic product.

Nonetheless, the trend isn’t favorable, which is a point I made back in 2014.

None of this changes my view that Australia is still a good choice for emigrating Americans. But it does leave me worried about whether it will still be the top choice in 10 years or 20 years.

For what it’s worth, the main recommendation in my speech was for Australia to adopt a spending cap, similar to the ones that exist in Hong Kong and Switzerland. I also should have suggested sweeping decentralization since the government actually is open to that idea.

P.S. One of the most disappointing things about Australia is that the country’s foreign aid bureaucrats are trying to bribe/coerce Vanuatu’s government into adopting an income tax.

P.P.S. Professor Makin was the author of the report I recently cited about the failure of Australia’s Keynesian spending binge.

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I shared some academic research last year showing that top-level inventors are very sensitive to tax policy and that they migrate from high-tax nations to low-tax jurisdictions.

Now we have some new scholarly research showing that they also migrate from high-tax states to low-tax states.

Let’s look at some of the findings from this new study, which was published by the Federal Reserve Bank of San Francisco. We’ll start with the issue the economists chose to investigate.

…personal taxes vary enormously from state to state. These geographical differences are particularly large for high income taxpayers. …the average tax rate (ATR) component due solely to state individual income taxes for a taxpayer with income at the 99th percentile nationally in 2010…in California, Oregon, and Maine were 8.1%, 9.1%, and 7.7%, respectively. By contrast, Washington, Texas, Florida, and six other states had 0 income tax. Large differences are also observed in business taxes. …Iowa, Pennsylvania, and Minnesota had corporate income taxes rates of 12%, 9.99%, and 9.8%, respectively, while Washington, Nevada, and three other states had no corporate tax at all. And not only do tax rates vary substantially across states, they also vary within states over time. …If workers and firms are mobile across state borders, these large differences over time and place have the potential to significantly affect the geographical allocation of highly skilled workers and employers across the country.

Here’s a map showing the tax rates on these very successful taxpayers, as of 2010. Many of these states (California, Illinois, New Jersey, and Connecticut) have moved in the wrong direction since that time, while others (such as North Carolina and Kansas) have moved in the right direction.

Anyhow, here’s more information about the theoretical issue being explored.

Many states aggressively and openly compete for firms and high-skilled workers by offering low taxes. Indeed, low-tax states routinely advertise their favorable tax environments with the explicit goal of attracting workers and business activity to their jurisdiction. Between 2012 and 2014, Texas ran TV ads in California, Illinois and New York urging businesses and high-income taxpayers to relocate….In this paper, we seek to quantify how sensitive is internal migration by high-skilled workers to personal and business tax differentials across U.S. states. Personal taxes might shift the supply of workers to a state: states with high personal taxes presumably experience a lower supply of workers for given before-tax average wage, cost of living and local amenities. Business taxes might shift the local demand for skilled workers by businesses: states with high business taxes presumably experience a lower demand for workers, all else equal.

And here’s their methodology.

We focus on the locational outcomes of star scientists, defined as scientists…with patent counts in the top 5% of the distribution. Using data on the universe of U.S. patents filed between 1976 and 2010, we identify their state of residence in each year. We compute bilateral migration flows for every pair of states (51×51) for every year. We then relate bilateral outmigration to the differential between the destination and origin state in personal and business taxes in each year. …Our models estimate the elasticity of migration to taxes by relating changes in number of scientists who move from one state to another to changes in the tax differential between the two states.

So what did the economists find? Given all the previous research on this topic, you won’t be surprised to learn that high tax rates are a way of redistributing people.

We uncover large, stable, and precisely estimated effects of personal and business taxes on star scientists’ migration patterns. …For the average tax rate faced by an individual at the 99th percentile of the national income distribution, we find a long-run elasticity of about 1.8: a 1% increase in after-tax income in state d relative to state o is associated with a 1.8 percent long-run increase in the net flow of star scientists moving from o to d. …To be clear: The flow elasticity implies that if after tax income in a state increases by one percent due to a personal income tax cut, the stock of scientists in the state experiences a percentage increase of 0.4 percent per year… We find a similar elasticity for state corporate income tax… In all, our estimates suggest that both the supply of, and the demand for, star scientists are highly sensitive to state taxes.

Wonky readers may appreciate these graphs from the study.

For everyone else, the important lesson from this research is that high tax rates discourage productive behavior and drive away the people who create a lot of value.

Two years ago, I shared some research showing that entrepreneurs flee high-tax nations to low-tax jurisdictions. Now we know the some thing happens with top-level inventors.

And let’s not forget that it’s even easier for investment to cross borders, which is why high corporate tax rates and high levels of double taxation are so damaging to U.S. workers and American competitiveness.

P.S. I don’t expect many leftists to change their minds because of this research. Some of them openly admit they want high tax rates solely for reasons of spite. Sensible people, by contrast, should be even more committed to pro-growth tax reform.

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The Republican tax plan is based on some very attractive principles.

Unfortunately, the GOP isn’t planning to completely fix these policies, largely because there’s no commitment to control government spending. But any shift toward better tax policy will be good for the nation.

Another goal to add to the above list is that Republicans want to create a level playing field for American-based firms by replacing “worldwide taxation” of business income with “territorial taxation” of business income.

For those who have wisely avoided the topic of international business taxation, here’s all you need to know: Worldwide taxation means a company that earns income in another country is taxed both by the government where the income is earned and by the government back home. Territorial taxation, by contrast, is simply the common-sense notion that income is taxed only by the government where the income is earned.

In a column for the Wall Street Journal, two authors explain how America’s anti-competitive system of worldwide taxation undermines U.S.-domiciled companies.

…earlier this month Iconix , the U.S.-based company that owns the rights to Charles Schulz’s comic characters, announced it will sell them to Canada’s DHX Media. That makes Charlie Brown America’s latest expatriate. It’s a clear signal that U.S. corporate taxes are nudging business elsewhere. …why? In part because the U.S. corporate tax system hampers U.S.-based businesses by subjecting them to world-wide taxation. Canada’s aggregate corporate taxes are about 10 percentage points lower. …America’s high corporate tax rate and its practice of taxing international income is out of step with the rest of the world. The solution is so clear even a cartoon character should grasp it: Cut tax rates and adopt a system for taxing international income that more closely resembles those used by the country’s international competitors.

Indeed, it’s worth noting that the entire “inversion” controversy only exists because of America’s worldwide tax regime.

Simply stated, American-domiciled multinationals have a big competitive disadvantage compared to their foreign rivals. So it’s understandable that many of them try to protect shareholders, workers, and consumers by arranging (usually through a merger) to become foreign companies.

That’s the bad news.

The good news is that the Republican tax reform plan ostensibly will shift America to a territorial tax system. As explained above, this is the sensible notion of letting other nations tax income earned inside their borders while the IRS would tax the income earned by companies in the United States.

This would be good for competitiveness, particularly since the United States is one of only a handful of nations that impose a worldwide tax burden on domestic firms.

But not everybody likes the idea of territorial taxation.

One reason for opposition is that some people see corporations primarily as sources of tax revenue. So when there are discussions of international tax, their mindset is nations should compete on grabbing the most money. I’m not joking.

European Union regulators’ tax crackdown on Amazon.com Inc. — like the EU’s case against Apple Inc. — should spur U.S. policy makers to address companies’ aggressive offshore tax-avoidance strategies before it’s too late, experts said. …“Really, what we are seeing is a race by the different taxing jurisdictions to claim a share of the tax prize represented by the largely untaxed streams of income that U.S. multinationals have engineered for themselves,’’ said Ed Kleinbard, a professor at the University of Southern California and the former chief of staff for Congress’s Joint Committee on Taxation. “If the United States doesn’t join the race, it will just lose tax revenue to more aggressive host countries around the world.’’ The EU rulings “do make it clear that if we are not interested in protecting our corporate tax base, other countries will be more than happy to tax the income,’’ said Kimberly Clausing, a professor of economics at Reed College in Portland, Oregon.

Call me crazy, but I think American policymakers should be in a race to create jobs, boost investment, and increase wages. And that means doing the opposite of what these supposed experts want.

Unsurprisingly, left-wing groups also are opposed to territorial taxation. Here are some passages from a report published by the Hill.

One hundred organizations, including a number of progressive groups and labor unions, are urging Congress to reject a major international tax change proposed in Republicans’ framework for a tax overhaul. In a letter dated Monday, the groups speak out against the framework’s move toward a “territorial” tax system that would largely exempt American companies’ foreign profits from U.S. tax. …”Ending taxation of offshore profits would give multinational corporations an incentive to send jobs offshore, thereby lowering U.S. wages,” they wrote.

Both assertions in that excerpt are wrong and/or misleading.

First, territorial taxation doesn’t mean that profits are exempt from tax. It simply means that the IRS doesn’t impose an additional layer of tax on income that already has been subject to the tax system of another country.

And other countries impose plenty of tax on American firms operating overseas.

Second, the incentive to shift job overseas is caused by America’s high corporate tax rate. That’s what makes it attractive for firms to operate in other nations.

Worldwide taxation is not the way to fix that bias since foreign-domiciled companies wouldn’t be impacted and they easily can sell into the American market.

By the way, the Republican tax plan doesn’t even create a real territorial tax system. Returning to the Bloomberg story cited above, the GOP proposal basically copies a very bad idea that was being pushed a few years ago by the Obama Administration.

…the GOP tax framework contemplates a so-called “minimum foreign tax’’ on multinationals’ future earnings that would apply in cases where a company’s effective tax rate fell below a pre-determined threshold.

To be fair, the Republican approach is less punitive that what Obama wanted.

Nonetheless, I worry that if Republicans adopt some sort of global minimum tax, it will just be a matter of time before that rate increases. In which case a shift toward territoriality actually plants a seed for a more onerous worldwide system!

Without knowing what will happen in the future, there’s no right or wrong answer, but I’m wondering whether the smart approach is to simply leave the current system in place. Yet, it’s based on worldwide taxation, but at least companies have deferral, which creates de facto territoriality for firms that manage their affairs astutely.

Such a shame that the GOP isn’t capable of simply doing the right thing.

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For months, I’ve been arguing that the big reduction in the corporate tax rate is the most important part of Trump’s tax agenda.

But not because of politics or anything like that. Instead, my goal is to enable additional growth by shifting to a system that doesn’t do as much damage to investment and job creation. A lower rate is consistent with good theory, and there’s also recent research from Australia and Germany to support my position.

Especially since the United States is falling behind the rest of the world. America now has the highest corporate tax rate in the developed world and arguably may have the highest rate in the entire world.

Needless to say, this is a self-inflicted wound on U.S. competitiveness.

But since the numbers I’ve been sharing are now a few year’s old, let’s now update some of this data.

Check out these four charts from a new OECD annual report on tax policy changes (the some one that I cited a few days ago when explaining that European-sized government means a suffocating tax burden on the poor and middle class).

Here’s the grim data on the corporate income tax rate (the vertical blue bars). As you can see, the United wins the booby prize for having the highest rate.

But here’s some “good news.” When you add in the second layer of tax on corporate income, the United States is “only” in third place, about where we were back in 2011.

France imposes the highest combined rate on corporate and dividend income (no surprise since the nation’s national sport is taxation), while Ireland is in second place (the corporate rate is very low, but personal rates are high and dividends receive no protection from double taxation).

For what it’s worth, I think it’s incredibly bad policy when governments are skimming 30 percent, 40 percent, 50 percent, and even 60 percent of the income being generated by business investment.

Particularly since high rates don’t translate into high revenue. Check out this third chart. You’ll notice that revenues are relatively low in the United States even though (or perhaps because) the tax rate is very high.

But our final chart provides the strongest evidence. Just like the IMF, the OECD is admitting that tax revenues have remained constant over time, even though (or because) corporate tax rates have plunged.

In other words, the Laffer Curve is alive and well.

Incidentally, the global shift to lower tax rates hasn’t stopped. I wrote back in May about plans for lower corporate tax burdens in Hungary and the United Kingdom and I noted last November that Croatia was lowering its corporate rate.

And, thanks to liberalizing effect of tax competition, more and more nations are hopping on the tax cut bandwagon.

Consider what’s happening in Sweden.

Sweden’s center-left minority government is proposing a corporate tax cut to 20 percent from 22 percent, Finance Minister Magdalena Andersson and Financial Markets Minister Per Bolund said on Monday… “With the proposals we want to strengthen competitiveness and create a more dynamic business climate,” they said… The proposed corporate tax cut would be…implemented on July 1, 2018.

Or what’s taking place in Belgium.

…government ministers finally reached agreement on a number of reforms to the Belgian tax and employment systems. …Belgium is to slash corporation tax from 34% to 29% next year. By 2020 corporation tax will have been cut to 25%. …Capital gains tax on the first 627 euros of dividends from shares disappears, a measure intended to encourage share ownership.

Or what’s looming in Germany.

Germany will likely need to make changes to its corporation tax system in coming years in response to growing tax competition from other countries, Finance Minister Wolfgang Schaeuble said on Wednesday… “I expect there will be a need to take action on corporation tax in coming years because in some countries, from the U.S. to Britain, but also on other continents, there are many considerations where we can’t simply say we’ll ignore them,” Schaeuble told a real estate conference.

This bring a smile to my face. Greedy politicians are being pressured to cut tax rates, even though they would prefer to do the opposite. Let’s hope the United States joins this “race to the bottom” before it’s too late.

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In my research and travels, I come across all sorts of strange stories about tax policy.

While I’m quite amused by these oddball examples, I actually prefer writing about overseas tax policies that provide teachable moments about big issues such as the Laffer Curve, taxes and growth, tax competition, and how higher tax burdens “feed the beast” by enabling more government spending.

Let’s look at some new examples and see what we can learn about politicians and fiscal policy.

We’ll start with a Bloomberg story from the Ukraine, where taxpayers go above and beyond to escape extortionary taxes on foreign vehicles.

Take a close look at the cars crawling through Kiev’s traffic-laden streets and you’ll notice something odd: a surprisingly large number of them aren’t registered in Ukraine. The explanation isn’t a sudden inflow of tourists, but rather a work-around by local drivers who crave foreign-made vehicles and refuse to pay restrictively high import duties to buy them. Instead, schemes have popped up where buyers effectively acquire cars from nearby nations and bring them across the border on temporary arrangements. They must then leave and re-enter Ukraine every year, or sometimes more frequently. “It’s amazing,” said Oleksandr Zadnipryaniy, a 30-year old entrepreneur who paid about $3,000 for a second-hand Opel Vectra from Lithuania. “Taxes are exorbitant. Why must poorer Ukrainians pay three times as much as richer Europeans?”

The answer to Mr. Zadnipryaniy’s question is that they don’t pay the tax. At least not if this chart is any indication.

Needless to say, I’m on the side of taxpayers and don’t have sympathy for the politicians, who are motivated by a desire to extract revenue and curry favor with domestic interest groups.

Such cars represent a headache for the government. Dodging import duties trims budget revenue… Cracking down is also tricky. …Drivers blame the government, accusing it of pandering to local car lobbies by setting high import duties.

Now let’s shift to another story about tax avoidance, though this one doesn’t have a happy ending.

The BBC reports that a big tax hike may put an end to “booze cruises” from Finland to Estonia

The Estonian government is set to impose a 70% rise in taxation on alcoholic drinks in July, Finnish broadcaster YLE reports. It’s a blow to drinkers from Finland who, since Estonian independence in 1991, have taken the short 54-mile (87km) ferry trip from Helsinki to Tallinn to enjoy prices which are less than half of those back home. …a 12-euro crate of beer will increase to 18 euros, making the concept of the money-saving “booze cruise” much less inviting.

But fortunately Finns still have an option.

Finnish tourist Erno Sjogren said that the tax rise might make him think again – but not on giving up the concept. Speaking to Helsingin Sanomat as he loaded his car outside an Estonian supermarket, he said he would consider taking his trade to Latvia instead – a 2.5-hour drive cross-country from the ferry port in the Estonian capital. The Latvian town of Ainazi is already benefitting, Helsingen Sanomat says, with the appropriately named SuperAlko store visible from the Estonian border and offering cheaper prices than its Baltic neighbours.

Let’s toast to tax competition!

Last but not least, I’m a giant fan of decentralization and a partial fan of secession (done properly and for good reasons), but you don’t automatically get results.

Consider what’s happening in Scotland, as reported by the U.K.-based Times.

Nicola Sturgeon has given her clearest indication to date that Scots will be in line for substantial income tax rises next year. In an interview due to be published today the first minister dismissed suggestions that a high-tax agenda would deter businesses, arguing instead that paying for good public services could be just as attractive to investors and people as low taxes. Ms Sturgeon’s comments came as the Scottish parliament backed a motion calling for higher taxes to pay for public services.

Ugh. I’m sympathetic to Scottish independence, but stories like this make me pessimistic about what will happen if politicians like Sturgeon are in charge of an independent nation.

Assuming, of course, she’s actually ignorant enough to believe that investors want higher taxes.

And I haven’t written about whether Catalonia should be independent of Spain, but this blurb from the EU Observer leaves a sour taste in my mouth.

Catalonia’s regional government said Monday that increases in staff at the tax office, from 321 to 800, have made the Spanish region ready to collect taxes for an independent Catalonia if citizens vote for independence on 1 October. A law to organise the referendum will be to a vote on Wednesday, but the national government in Madrid has dismissed the bill as a way to “cheat democracy”.

Technically, this won’t be bad news if the 479 new tax bureaucrats replace a similar number (or larger number) of officials that formerly harassed people on behalf of the national government in Madrid.

But I’m automatically suspicious that politicians and bureaucrats will maneuver to be the winners of any change. This isn’t an argument against secession, but it is a warning that independence won’t yield economic benefits if there’s no reduction in the burden of government.

Advocates of an independent Catalonia should first and foremost be making plans to unleash the private sector, to make themselves the Hong Kong or Singapore of Europe.

Assuming, of course, that they would want their new country to be highly ranked by Economic Freedom of the World.

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Earlier this year, I pointed out that Trump and Republicans could learn a valuable lesson from Maine Governor Paul LePage on how to win a government shutdown.

Today, let’s look at a lesson from North Carolina on how to design and implement pro-growth tax policy.

In today’s Wall Street Journal, Senator Thom Tillis from the Tarheel State explains what happened when he helped enact a flat tax as Speaker of the State House.

In 2013, when I was speaker of the state House, North Carolina passed a serious tax-reform package. It was based on three simple principles: simplify the tax code, lower rates, and broaden the base. We replaced the progressive rate schedule for the personal income tax with a flat rate of 5.499%. That was a tax-rate cut for everyone, since the lowest bracket previously was 6%. We also increased the standard deduction for all tax filers and repealed the death tax. We lowered the 6.9% corporate income tax to 6% in 2014 and 5% in 2015. …North Carolina’s corporate tax fell to 3% in 2017 and is on track for 2.5% in 2019. We paid for this tax relief by expanding the tax base, closing loopholes, paring down spending, reducing the cost of entitlement programs, and eliminating “refundable” earned-income tax credits for people who pay no taxes.

Wow, good tax policy enabled by spending restraint. Exactly what I’ve been recommending for Washington.

Have these reforms generated good results?  The Senator says yes.

More than 350,000 jobs have been created, and the unemployment rate has been cut nearly in half. The state’s economy has jumped from one of the slowest growing in the country to one of the fastest growing.

What about tax revenue? Has the state government been starved of revenue?

Nope.

…a well-mobilized opposition on the left stoked fears that tax reform would cause shrinking state revenues and require massive budget cuts. This argument has been proved wrong. State revenue has increased each year since tax reform was enacted, and budget surpluses of more than $400 million are the new norm. North Carolina lawmakers have wisely used these surpluses to cut tax rates even further for families and businesses.

Senator Tillis didn’t have specific details on tax collections in his column. I got suspicious that he might be hiding some unflattering numbers, so I went to the Census Bureau’s database on state government finances. But it turns out the Senator is guilty of underselling his state’s reform. Tax revenue has actually grown faster in the Tarheel State, compared the average of all other states (many of which have imposed big tax hikes).

Another example of the Laffer Curve in action.

And here’s a chart from North Carolina’s Office of State Budget and Management. As you can see, revenues are rising rather than falling.

By the way, I’m guessing that the small drop in 2014 and the big increase in 2015 were caused by taxpayers delaying income to take advantage of the new, friendlier tax system. We saw the same thing in the early 1980s when some taxpayer deferred income because of the multi-year phase-in of the Reagan tax cuts.

But I’m digressing. Let’s get back to North Carolina.

Here’s what the Tax Foundation wrote earlier this year.

After the most dramatic improvement in the Index’s history—from 41st to 11th in one year—North Carolina has continued to improve its tax structure, and now imposes the lowest-rate corporate income tax in the country at 4 percent, down from 5 percent the previous year. This rate cut improves the state from 6th to 4th on the corporate income tax component, the second-best ranking (after Utah) for any state that imposes a major corporate tax. (Six states forego corporate income taxes, but four of them impose economically distortive gross receipts taxes in their stead.) An individual income tax reduction, from 5.75 to 5.499 percent, is scheduled for 2017. At 11th overall, North Carolina trails only Indiana and Utah among states which do not forego any of the major tax types.

And in a column for Forbes, Patrick Gleason was even more effusive.

…the Republican-controlled North Carolina legislature enacted a new budget today that cuts the state’s personal and corporate income tax rates. Under this new budget, the state’s flat personal income tax rate will drop from 5.499 to 5.25% in January of 2019, and the corporate tax rate will fall from 3% to 2.5%, which represents a 16% reduction in one of the most harmful forms of taxation. …This new budget, which received bipartisan support from a three-fifths super-majority of state lawmakers, builds upon the Tar Heel State’s impressive record of pro-growth, rate-reducing tax reform. …It’s remarkable how much progress North Carolina has made in improving its business tax climate in recent years, going from having one of the worst businesses tax climates in the country (ranked 44th), to one of the best today (now 11th best according to the non-partisan Tax Foundation).

Most importantly, state lawmakers put the brakes on spending, thus making the tax reforms more political and economically durable and successful.

Since they began cutting taxes in 2013, North Carolina legislators have kept annual increases in state spending below the rate of population growth and inflation. As a result, at the same time North Carolina taxpayers have been allowed to keep billions more of their hard-earned income, the state has experienced repeated budget surpluses. As they did in 2015, North Carolina legislators are once again returning surplus dollars back to taxpayers with the personal and corporate income tax rate cuts included in the state’s new budget.

Last but not least, I can’t resist sharing this 2016 editorial from the Charlotte Observer. If nothing else, the headline is an amusing reminder that journalists have a hard time understanding that higher tax rates don’t necessarily mean more revenue and that lower tax rates don’t automatically lead to less revenue.

A curious trend you might have noticed of late: North Carolina’s leaders keep cutting taxes, yet the state keeps taking in more money. We saw it happen last year, when the state found itself with a $400 million surplus, despite big cuts in personal and corporate tax rates. …Now comes word that in the first six months of the 2016 budget year (July to December), the state has taken in $588 million more than it did in the same period the previous year. …the overall surge in tax receipts certainly shouldn’t go unnoticed, especially since most of the increased collections for the 2016 cycle so far come from higher individual income tax receipts. They’re up $489 million, 10 percent above the same period of the prior year.

Though the opinion writers in Charlotte shouldn’t feel too bad. Their counterparts at the Washington Post and Wall Street Journal have made the same mistake. As did a Connecticut TV station.

P.S. My leftist friends doubtlessly will cite Kansas as a counter-example to North Carolina. According the narrative, tax cuts failed and were repealed by a Republican legislature. I did a thorough analysis of what happened in the Sunflower State earlier this year. I pointed out that tax cuts are hard to sustain without some degree of spending restraint, but also noted that the net effect of Brownback’s tenure is a permanent reduction in the tax burden. If that’s a win for the left, I hope for similar losses in Washington. It’s also worth comparing income growth in Kansas, California, and Texas if you want to figure out what tax policies are good for ordinary people.

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