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Archive for the ‘Competitiveness’ Category

In the world of public finance, Ireland is best known for its 12.5 percent corporate tax rate.

That’s a very admirable policy, as will be momentarily discussed, but my favorite Irish policy was the four-year spending freeze in the late 1980s.

I discussed that fiscal reform in a video about 10 years ago, and I subsequently shared data on how spending restraint reduced the overall burden of government in Ireland and also lowered red ink.

It’s a great case study showing the beneficial impact of my Golden Rule.

Spending restraint also paved the way for better tax policy, and that’s a perfect excuse to discuss Ireland’s pro-growth corporate tax system. The Wall Street Journal opined last week about that successful supply-side experiment.

Democrats want a high global minimum tax that would end national tax competition and reduce the harm from their huge tax increase on U.S. business. But tax competition has been a boon to global growth and investment, as Ireland’s famous low-tax policy makes clear. Far from a “race to the bottom,” Ireland adopted policies that were ahead of their time and helped its economy grow from a backwater into a Celtic tiger. …in the late 1990s …an EU mandate led Dublin to…pioneer…a new strategy: Apply the same low tax rate to every business. Policy makers settled on 12.5%, which was a tax increase for some companies but a cut for others. This was a classic flat-tax reform… Ireland has reaped the benefits. Between 1986 and 2006, the economy grew to nearly 140% of the EU average from a mere two-thirds. Employment nearly doubled to two million, and the brain drain of the 1970s and 1980s reversed. …Oh and by the way: After Ireland slashed its rate and broadened the corporate-tax base, tax revenue soared. Except for the post-2008 recession and its aftermath, corporate-profits taxes in some years account for about 13% of total revenue and exceed 3% of GDP. That’s up from as low as 5% of revenue and less than 2% of GDP before the current tax rate was introduced.

That’s a lot of great information, particularly the last couple of sentences about how Ireland collected more revenue when the corporate tax rate was slashed.

Indeed, I discussed that remarkable development in Part II of my video series on the Laffer Curve (and it’s not just an Irish phenomenon since both the IMF and OECD have persuasive global data on lower corporate tax rates and revenue feedback).

Though higher revenue is not necessarily a good thing.

I complained back in 2011, for example, about how Irish politicians began to spend too much money once a booming economy began to generate a lot of tax revenue.

Which is a good argument for a Swiss-style spending cap in Ireland.

Let’s wrap up by considering some fiscal lessons from Ireland. Here are four things everyone should know.

  1. Spending restraint is a powerful tool to achieve smaller government..
  2. Lower tax rates on productive behavior lead to jobs and prosperity.
  3. Lower corporate tax rates can generate substantial revenue feedback.
  4. A spending cap is needed to maintain long-run fiscal discipline.

Good rules for Ireland. Good rules for any nation.

P.S. Ireland has definitely prospered in recent decades, but GNI data gives a more accurate picture than GDP data.

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As explained here, here, here, and here, I don’t like Biden’s class-warfare tax policy.

I’m especially concerned about his approach to business taxation.

  1. He wants to penalize American-based companies with the highest corporate tax rate among all developed nations.
  2. He wants to export that bad policy to the rest of the world with a “global minimum tax” – sort of an OPEC for politicians.
  3. He wants to handicap American multinational companies with taxes that don’t apply to foreign-based firms.

Regarding the third point, I wrote a column on that topic for the Orange County Register.

Here’s how I described Biden’s proposal.

Biden has proposed several tax increases that specifically target American firms that compete in world markets. Most notably, the Administration has proposed to double the tax rate on “global intangible low-tax income” (GILTI) from 10.5 percent to 21 percent. Translated from tax jargon to English, this is largely a tax on the income American firms earn overseas from intellectual property, most notably patents and royalties. Keep in mind, by the way, that this income already is subject to tax in the nations where it is earned. Most other nations do not handicap their companies with similar policies, so this means that American firms will face a big competitive disadvantage – especially when fighting for business in low-tax jurisdictions such as Hong Kong, Ireland, Singapore, Switzerland, and most of Eastern Europe.

And here are some additional reasons why it is very bad news.

…let’s simply look at the bottom-line impact of what Biden is proposing. The Tax Foundation estimates that, “The proposal would impose a 9.4 percent average surtax on the foreign activities of U.S. multinationals above and beyond the taxes levied by foreign governments” and “put U.S. multinationals at a competitive disadvantage relative to foreign corporations.” …a stagging $1.2 trillion tax increase on these companies. …This is not just bad for the competitiveness of American-based companies, it is also bad policy. Good fiscal systems, such as the flat tax, are based on “territorial taxation,” which is the common-sense notion that countries only tax economic activity inside their borders. …Many other nations follow this approach, which is why they will reap big benefits if Biden’s plan to hamstring American companies is approved. The key thing to understand is that the folks in Washington have the power to raise taxes on American companies competing abroad, but they don’t have the ability to raise taxes on the foreign companies in those overseas markets.

The Wall Street Journal‘s editorial page has been sounding the alarm on this issue as well.

Here are some excerpts from an editorial back in April.

…the tax on global intangible low-tax income, known as Gilti, which was created by the 2017 tax reform. …Gilti was flawed from the start…but Mr. Biden would make it worse in every respect. …The 2017 tax law set the statutory Gilti rate at…10.5%. Mr. Biden would increase that to 21%… the effective rate companies actually pay is higher. This is because Gilti embedded double taxation in the tax code. …Gilti allows a credit of only 80% of foreign taxes, with no carry-forwards or carry-backs. …Raising the statutory rate to 21% increases that effective rate to 26.25%. This new Biden effective minimum tax would be higher than the statutory tax rates in most countries even in Western Europe… The Biden plan would further increase the effective Gilti rate by expanding the tax base on which it’s paid. …A third Biden whammy would require companies to calculate tax bills on a country-by-country basis. …Requiring companies to calculate taxable profits and tax credits individually for every country in which a company operates will create a mountain of compliance costs for business and work for the Internal Revenue Service. …The Biden Administration and its progressive political masters have decided they don’t care about the global competitiveness of American companies.

Let’s close with some international comparisons.

According to the most-recent International Tax Competitiveness Index, the United States ranks #21 out of 35 nations, which is a mediocre score.

But the United States had been scoring near the bottom, year after year, before the Trump tax reform bumped America up to #21. So there was some progress.

If the Biden plan is approved, however, it is a near-certainly that the U.S. will be once again mired at the bottom. And this bad policy will lead to unfortunate results for American workers and American competitiveness.

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Way back in 2007, I narrated this video to explain why tax competition is very desirable because politicians are likely to overtax and overspend (“Goldfish Government“) if they think taxpayers have no ability to escape.

The good news is that tax competition has been working.

As explained in the above video, there have been big reductions in personal tax rates and corporate tax rates. Just as important, governments have reduced various forms of double taxation, meaning lower tax rates on dividends and capital gains.

Many governments have also reduced – or even eliminated – death taxes and wealth taxes.

These pro-growth tax reforms didn’t happen because politicians read my columns (I wish!). Instead, they adopted better tax policy because they were afraid of losing jobs and investment to countries with better fiscal policy.

Now for the bad news.

There’s been an ongoing campaign by high-tax governments to replace tax competition with tax harmonization. They’ve even conscripted international bureaucracies such as the Organization for Economic Cooperation and Development (OECD) to launch attacks against low-tax jurisdictions.

And now the United States is definitely on the wrong side of this issue.

Here’s some of what the Biden Administration wants.

The United States can lead the world to end the race to the bottom on corporate tax rates. A minimum tax on U.S. corporations alone is insufficient. …President Biden is also proposing to encourage other countries to adopt strong minimum taxes on corporations, just like the United States, so that foreign corporations aren’t advantaged and foreign countries can’t try to get a competitive edge by serving as tax havens. This plan also denies deductions to foreign corporations…if they are based in a country that does not adopt a strong minimum tax. …The United States is now seeking a global agreement on a strong minimum tax through multilateral negotiations. This provision makes our commitment to a global minimum tax clear. The time has come to level the playing field and no longer allow countries to gain a competitive edge by slashing corporate tax rates.

As Charlie Brown would say, “good grief.” Those passages sound like they were written by someone in France, not America

And Heaven forbid that  countries “gain a competitive edge by slashing corporate tax rates.” Quelle horreur!

There are three things to understand about this reprehensible initiative from the Biden Administration.

  1. Tax harmonization means ever-increasing tax rates – It goes without saying that if politicians are able to create a tax cartel, it will merely be a matter of time before they ratchet up the tax rate. Simply stated, they won’t have to worry about an exodus of jobs and investment because all countries will be obliged to have the same bad approach.
  2. Corporate tax harmonization will be followed by harmonization of other taxes – If the scheme for a harmonized corporate tax is imposed, the next step will be harmonized (and higher) tax rates on personal income, dividends, capital gains, and other forms of work, saving, investment, and entrepreneurship.
  3. Tax harmonization denies poor countries the best path to prosperity – The western world became rich in the 1800s and early 1900s when there was very small government and no income taxes. That’s the path a few sensible jurisdictions want to copy today so they can bring prosperity to their people, but that won’t be possible in a world of tax harmonization.

P.S. If you want more information, here’s a three-part video series on tax havens, and even a video debunking some of Obama’s demagoguery on the topic.

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The state of New York is an economic disaster area.

  • New York is ranked #50 in the Economic Freedom of North America.
  • New York is ranked #48 in the State Business Tax Climate Index.
  • New York is ranked #50 in the Freedom in the 50 States.
  • New York is next-to-last in measures of inbound migration.
  • New York is ranked #50 in the State Soft Tyranny Index.

The good news is that New York’s politicians seem to be aware of these rankings and are taking steps to change policy.

The bad news is that they apparently want to be in last place in every index, so they’re looking at a giant tax increase.

The Wall Street Journal opined on the potential tax increase yesterday.

…lawmakers in Albany should be shouting welcome home. Instead they’re eyeing big new tax increases that would give the state’s temporary refugees to Florida—or wherever—one more reason to stay away for good. …Here are some of the proposals… Impose graduated rates on millionaires, up to 11.85%. …Since New York City has its own income tax, running to 3.88%, the combined rate would be…a bigger bite than even California’s notorious 13.3% top tax, and don’t forget Uncle Sam’s 37% share. …The squeeze is worse when you add the new taxes President Biden wants. A second factor: In 2017 the federal deduction for state and local taxes was capped at $10,000, so New Yorkers will now really feel the pinch. As E.J. McMahon of the Empire Center for Public Policy writes: “The financial incentive for high earners to move themselves and their businesses from New York to states with low or no income taxes has never—ever—been higher than it already is.”

The potential deal also would increase the state’s capital gains tax and the state’s death tax, adding two more reasons for entrepreneurs and investors to escape.

Here are some more details from a story in the New York Times by Luis Ferré-Sadurní and .

Gov. Andrew M. Cuomo and New York State legislative leaders were nearing a budget agreement on Monday that would make New York City’s millionaires pay the highest personal income taxes in the nation… Under the proposed new tax rate, the city’s top earners could pay between 13.5 percent to 14.8 percent in state and city taxes, when combined with New York City’s top income tax rate of 3.88 percent — more than the top marginal income tax rate of 13.3 percent in California… Raising taxes on the rich in New York has been a top policy priority of the Democratic Party’s left flank… The business community has warned that raising income taxes could prompt millionaires who have left the state during the pandemic and are working remotely to make their move permanent, damaging the state’s tax base. Currently, the top 2 percent of the state’s highest earners pay about half of the state’s income taxes. …The corporate franchise tax rate would also increase to 7.25 percent from 6.5 percent.

There are two things to keep in mind about this looming tax increase.

That second item is a big reason why so many taxpayers already have escaped New York and moved to states with better tax policy (most notably, Florida).

And even more will move if tax rates are increased, as expected.

Indeed, if the left’s dream agenda is adopted, I wouldn’t be surprised if every successful person left New York. In a column for the Wall Street Journal, Mark Kingdon warns about other tax hikes being considered, especially a wealth tax.

Legislators in Albany are considering two tax bills that could seriously damage the economic well-being and quality of life in New York for many years to come: a wealth tax and a stock transfer tax. …Should New York enact a 2% wealth tax, a wealthy New Yorker could wind up paying a 77% tax on short-term stock market profits. And that’s a conservative estimate: It assumes that stocks return 9% a year. If the return is 4.4% or less, the tax would be more than 100%. …65,000 families pay half of the city’s income taxes, and they won’t stay if the taxes become unreasonable… The trickle of wealthy émigrés out of New York has become a steady stream… It will be a flood if New York enacts a wealth tax with an associated tax on unrealized gains, which would lower, not raise, tax revenues, as those who leave take with them jobs and related services, such as legal and accounting. …The geese who have laid golden eggs for years see what is happening in Albany, and they’ll fly south to avoid being carved up.

The good news – at least relatively speaking – is that a wealth tax is highly unlikely.

But that a rather small silver lining on a very big dark cloud. The tax increases that will happen are more than enough to make the state even more hostile to private sector growth.

I’ll close with a few observations.

There are a few states that can get away with higher-than-average taxes because of special considerations. California, for instance, has climate and scenery. In the case of New York, it can get away with some bad policy because some people think of New York City as a one-of-a-kind place. But there’s a limit to how much those factors can be exploited, as both California and New York are now learning.

What politicians don’t realize (or don’t care about) is that people look at a range of factors when deciding where to live. This is especially true for successful entrepreneurs, investors, and business owners, who have both resources and knowledge to assess the costs and benefits of different locations. The problem for New York is that it looks bad on almost all policy metrics.

If the tax increases is enacted, expect to see a significant drop in taxable income as upper-income taxpayers either leave the state or figure out other ways of protecting their income. I don’t know if the state will be on the downward-sloping portion of the Laffer Curve, but it’s safe to assume that revenues over time will fall far short of projections. And it’s very safe to assume that the economic damage will easily offset any revenues that are collected.

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I have a four-part series (here, here, here, and here) about the conceptual downsides of Joe Biden’s class-warfare approach to tax policy.

Now it’s time to focus on the component parts of his agenda. Today’s column will review his plan for a big increase in the corporate tax rate. But since I’ve written about corporate tax rates over and over and over again, we’re going to approach this issue is a new way.

I’m going to share five visuals that (hopefully) make a compelling case why higher tax rates on companies would be a big mistake.

Visual #1

One thing every student should learn from an introductory economics class is that corporations don’t actually pay tax. Instead, businesses collect taxes that are actually borne by workers, consumers, and investors.

There’s lots of debate in the profession, of course, about which group bears what share of the tax. But there’s universal agreement that higher taxes lead to less investment, which leads to less productivity, which leads to lower pay.

Here’s a depiction of the relationship of corporate taxes and worker pay.

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Visual #2

The previous image explains the theory. Now it’s time for some evidence.

Here’s a look at how much faster wages have grown in countries with low corporate tax rates compared to nations with high corporate tax rates.

Biden, for reasons beyond my comprehension, wants America on the red line.

And his staff economists apparently don’t understand (or don’t care about) the link between investment and wages.

Visual #3

Here’s some more evidence.

And it comes from an unexpected source, the pro-tax Organization for Economic Cooperation and Development (OECD).

Even economists at that Paris-based bureaucracy have produced studies confirming that lower tax rates lead to higher disposable income for people.

Needless to say, if lower tax rates lead to more disposable income, then higher tax rates will lead to less disposable income.

We should have learned during the Obama years that ordinary people pay the price when politicians practice class warfare.

Visual #4

It’s very bad news that Biden wants a big increase in the corporate tax rate, but let’s not forget that the IRS double-taxes corporate income (i.e., that same income is subject to a second layer of tax when shareholders receive dividends).

The combined effect, as shown in this visual, is that the United States will have the dubious honor of having the highest effective corporate tax rate in the entire developed world.

Call me crazy, but I don’t think that’s a recipe for jobs and investment in America.

Visual #5

The economic damage of higher corporate tax rates means that there is less taxable income (i.e., we need to remember the Laffer Curve).

Will the damage be so extensive, causing taxable income to fall so much, that the IRS collects less revenue with a higher tax rate?

We’ll learn the answer to that question over time, but we have some very strong evidence from the IMF that lower corporate tax rates don’t lead to less revenue. As you can see from this chart, revenues held steady as tax rates plummeted over the past few decades.

In other words, lower rates led to enough additional economic activity that governments have collected just as much money with lower tax rates. But now Biden wants to run this experiment in reverse.

It’s possible the government will collect more revenue, of course, but only at a very high cost to workers, consumers, and shareholders.

By the way, there’s OECD data showing the exact same thing.

Those pictures probably tell you everything you need to know about this issue.

But let’s add some more analysis. The Wall Street Journal opined today on Biden’s class-warfare agenda. Here are some of the key passages from the editorial.

The bill for President Biden’s agenda is coming due, starting with Wednesday’s proposal for the largest corporate tax increase in decades. …Mr. Biden’s corporate increase amounts to the restoration of the Obama-era corporate tax burden, only much more so. …Mr. Biden wants to raise the corporate rate back up to 28%, but that’s the least of his proposals. He also wants to add penalties that would make inversions punitive, and he’d impose a global minimum corporate tax of 21%. This would shoot the tax burden on U.S. companies back toward the top of the developed world list. …The larger Biden goal is to end global tax competition… “The United States can lead the world to end the race to the bottom on corporate tax rates,” says the White House fact sheet. Mr. Biden says he wants “other countries to adopt strong minimum taxes on corporations” so nations like Ireland can no longer compete for capital with lower tax rates. This has long been the dream of the French and Germans, working through the Organization for Economic Cooperation and Development. …All of this is in addition to the looming Biden tax increases on dividends, capital gains and other investment income. …Mr. Biden’s corporate tax increases will hit the middle class hard—in the value of their 401(k)s, the size of their pay packets, and what they pay for goods and services.

Amen.

Let’s conclude with some gallows humor.

This meme shows how some of our leftist friends will celebrate if the tax increase is imposed.

P.S. Here’s a depressing final observation. Decades of experience have led me to conclude that many folks on the left support class-warfare tax policy because they are primarily motivated by a spiteful desire to punish success rather than provide upward mobility for the poor.

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Thanks to globalization (as opposed to globalism), jobs and investment are now very mobile. This means the costs of bad policy are higher than ever before, and it also means the benefits of good policy are higher than ever before.

Which is why it’s very useful to look at various competitiveness rankings, most notably the ones that are comprehensive (most notably Economic Freedom of the World and the Index of Economic Freedom).

But since my specialty is public finance, I’m also interested in measures of fiscal competitiveness (best tax system, worst tax system, costliest welfare state, etc).

Today, let’s narrow our focus and look at business tax competitiveness. This is an area where the United States traditionally has lagged, both because we used to have one of the world’s highest corporate tax rates and because onerous tax rules put U.S.-based companies at an added disadvantage.

Trump lowered the federal corporate tax rate from 35 percent to 21 percent, which definitely helped, but now Biden wants to push the rate back up to 28 percent.

What will that mean for U.S. competitiveness?

It’s not good news.

The Tax Foundation calculated the combined tax rate on business income (including the double tax on dividends) for various developed nations.

As you can see, America will have the most onerous tax regime if Biden is successful.

What if we look only at the corporate tax rate? And what if we consider every jurisdiction in the world?

Professor Robert McGee pulled together all the numbers and ranked nations from #1 to #223.

The United States currently is in the bottom half, which isn’t good since we’re below average. But you can see from these two tables that Biden will drop America to the bottom 10 percent.

Needless to say, it’s not good to rank below France.

But let’s think of the glass as being 1/10th full rather than 9/10ths empty. At least the U.S. beats Venezuela!

The bottom line is that it will not be good news if Biden’s plan is enacted.

P.S. From Professor McGee’s study, here are the jurisdictions tied for 1st place.

P.P.S. Needless to say, politicians from high-tax nations resent the 15 jurisdictions that don’t have a corporate income tax.

Indeed, that’s why many of those politicians are pushing the “global minimum tax” that I wrote about yesterday.

Those politicians basically want to turn back the clock and reverse the progress depicted in this set of charts from the Tax Foundation.

P.P.S. This is why it’s important to defend the liberalizing process of tax competition.

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I repeatedly write about the importance of economic growth, usually citing data about gross domestic product (GDP), which is defined as “a monetary measure of the market value of all the final goods and services produced in a specific time period.”

And I frequently use that GDP data when comparing long-run performance for various nations in order to demonstrates that you get more economic output with free markets and limited government.

Critics sometimes respond by arguing that GDP is an abstract measure that doesn’t necessarily capture the actual well-being of people.

I’ve addressed this concern in the past by pointing out that you find the same relationship between prosperity and economic liberty when looking at the OECD’s data on “actual individual consumption.”

But Max Roser of Oxford University recently shared some data (from Our World in Data) that may be even more useful because it shows that GDP is strongly correlated with median daily expenditure.

There are a couple of obvious takeaways from this data, most notably that nations in the top-right portion of the chart have much higher levels of economic liberty that countries in the bottom-left portion.

We also see that the United States does very well compared to most other developed nations, though we shouldn’t be surprised to see that Switzerland does even better.

And I assume the dot in the top-right corner is hyper-free market Singapore.

The moral of the story is that there’s a tried-and-true recipe for growth and prosperity based on free markets and limited government.

For those who doubt that assertion, please identify a country – from anywhere in the world and from any period of history – that became rich with statist policies?

I won’t be holding my breath waiting for an answer.

P.S. One important thing to understand is that the vertical axis in the above chart is based on “median” daily expenditure, which means the spending of the hypothetical person in each nation who is better off than 50 percent of the population and worse off than 50 percent of the population.

The “mean” average, by contrast, is calculated by dividing total expenditure by population.

Both median and mean are legitimate ways of figuring out an average, but median is often viewed as a better way of showing the person in the middle while mean is viewed as a better way of capturing aggregate conditions.

For what it’s worth, the U.S. bubble in the above chart presumably would be even higher if the vertical axis was based on mean rather than median daily expenditure. That’s because of a large number of very successful people with very high expenditure levels in America.

P.P.S. By the way, I should point out that Our World in Data is not a libertarian site or conservative site. Indeed, I suspect the academics who run it lean to the left.

Just consider this bit of editorializing in the site’s discussion about economic growth: “While in the US, for example, most of the income gains went to the richest members of society this is not true of other countries where economic growth was widely shared among all.”

It’s certainly true the rich have enjoyed large income gains in the United States, so there’s nothing technically inaccurate about that gratuitous bit of class warfare.

But people who work closely with economic data surely understand that you don’t just want to focus on how the pie is sliced. You also want to know the size of the pie.

When you look at both types of data, you learn that ordinary Americans are much better off than ordinary people in other nations – which is the opposite of what is implied by the quote.

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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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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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If you ask normal people about the biggest thing that happened in 2020, they’ll probably pick coronavirus, though some might say the 2020 election.

But if you ask a policy wonk, you may get a different answer. Especially if we’re allowed to tweak the question a bit and contemplate the most under-appreciated development of 2020.

In which case, my answer would be interstate tax migration.

I’ve been writing about this topic for years, but it seems that there’s been an acceleration. And, as illustrated by this map, people are moving from high-tax states to low-tax states.

The map comes from an article by Scott Sumner of the Mercatus Center, and here’s some of his analysis.

The movement of these industries is toward three states that have one thing in common—no state income tax. …Progressives often discount the supply side effects of tax changes, pointing to examples such as Kansas where tax cuts had little effect. But Kansas…tax cuts were relatively modest. If you are looking for a low tax state on the Great Plains, South Dakota has no state income tax at all. The top rate in Kansas (5.7%) is higher than in Massachusetts (5.0%). That won’t get the job done. …I’m certainly not a rabid supply sider who thinks that tax rates are all important. But a person would have to be pretty blind to ignore the migration of firms from places like New York, New Jersey and California, to lower tax places. …Washington State has no income tax, which is unique for a northern state with a big city. Washington is also home to the two of the three richest people on the planet (the other–Elon Musk–just announced he’s moving from California to Texas.) …Washington is also experiencing rapid population growth, which is also unique for a northern state with a big city. …last year more that half of the US population growth occurred in just two states—Texas and Florida. …Add in Tennessee and Washington and you are at nearly two thirds of the nation’s population growth.

Wow, four states (all with no income tax) accounted for the bulk of America’s population growth. That’s a non-trivial factoid.

And I also think his observations about Kansas are spot on. Yes, the state improved it’s tax system, but it should have been bolder, like North Carolina.

The Washington Examiner recently opined on internal migration and also noted that people are escaping high-tax states.

…the state of Illinois has been a laggard in population growth. It has lost eight congressional districts since the 1950s. But new census estimates show that this decade, something very special has happened. …the land of Lincoln has lost a net 308,000 residents over the last seven years… And Illinois’s rapid shrinkage is occurring even as the United States grew by nearly 7% since the last census. …Illinois is not alone. The same census data point to two other big states that are also driving away residents with similarly impractical, ideologically leftist policies ⁠— California and New York. …New York, as a consequence, has also lost about 42,000 residents in the last decade. Its population peaked in 2015, and in the time since, it has lost about 320,000. A similar phenomenon is occurring in California, …with about 70,000 net residents vanishing in 2020. …residents are actually giving up and abandoning its beautiful, scenic inhabited areas. …the same census numbers show that people are gravitating toward states that have low or no income tax.

The mess in jurisdictions such as New York, California, Illinois, New Jersey, and Connecticut is so severe that I wasn’t sure how to vote in the first-to-bankruptcy poll.

And a recent editorial in the Wall Street Journal echoed these findings.

California’s population shrank for the first time as far back as records go (-69,532). According to a separate state government survey, a net 261,000 residents moved to other states during the period…many large businesses are shifting workforces to other states. …Last year Charles Schwab announced it is relocating its corporate headquarters to the Dallas region from San Francisco. Apple is building a new campus in Austin. Facebook this fall bought REI’s headquarters outside of Seattle. Oracle and Hewlett Packard Enterprise recently announced relocations to Texas. …Over the last decade, Illinois has lost 243,102 in population, about the size of Peoria and Naperville combined. …Democratic states in the Northeast last year lost population, led by New York (-126,355), Connecticut (-9,016) and New Jersey (-8,887). …By raising taxes again and again to pay for generous collective-bargained benefits, public unions are making Democratic states less competitive.

The final sentence is the above excerpt is especially insightful.

Among the states facing fiscal challenges, a common theme is that politicians and bureaucrats have a very cozy and corrupt relationship resulting in absurdly lavish (and unaffordable) compensation levels.

Let’s close with a bit of humor from the great cartoonist, Eric Allie. With all the interstate migration that happened last year, no wonder Santa Claus had some problems.

P.S. I also recommend this Lisa Benson cartoon, this Redpanels cartoon strip, and this Steven Breen Cartoon.

P.P.S. Even though it would be a massive tax cut for the rich, Democrats want to restore the state and local tax deduction. Even if they are successful, though, I suspect that change would only slow down the decline of blue states.

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After November’s election, I figured we would have gridlock. Biden would propose some statist ideas, but they would be blocked by Republicans in the Senate.

All things considered, not a bad outcome.

But Democrats won the run-off elections yesterday for both Georgia Senate seats, which means they now have total control of Washington.

And that means, as I recently warned, a much bigger threat that Biden’s proposed tax increases may get enacted.

That won’t be good news for America’s economy or American competitiveness.

Today, let’s focus on the biggest tax increase that the President Elect is proposing.

In an article for National Review, Joseph Sullivan writes about the adverse impact of Biden’s increase in the corporate tax rate.

Biden’s corporate-tax proposal is remarkable. …If the U.S. adopted Biden’s proposed federal tax rate, its overall corporate-tax rate would not be “in line” with the rest of the G7. Assuming U.S. state and local corporate taxes stayed the same, Biden’s proposal would result in nearly the highest overall corporate-tax rate in the G7, according to data from the OECD. The U.S. would be tied with France. …The average overall corporate rate among the G7 has fallen to 25 percent… With the G7 average trending in one direction, Biden would move the U.S. in the opposite direction.

In other words, while the Biden team claims that a higher corporate tax won’t be too damaging because it will be similar to the rate in other major nations, the U.S. actually will be tied with France once you include the impact of state corporate tax burdens.

Here’s the chart included with the article.

And don’t forget that there are many other economies where the corporate tax rate is well below the G7 average.

The bottom line is that the United States currently ranks only #19 out of 35 nations in the Tax Foundation’s competitiveness ranking for OECD nations.

The good news is that being #19 is much better than being #31, which is where the U.S. was in 2016.

The bad news is that Biden wants to undo much of the 2017 reform, as well as impose other tax increases. And that means a much lower competitiveness score in the future.

Which ultimately means lower wages for American workers.

P.S. Although the proposed increase in the corporate rate is theoretically the biggest revenue raiser in Biden’s tax plan, I will safely predict that it won’t raise nearly as much revenue as projected by static revenue estimates. I wasn’t able to educate Obama on this issue, and I’m even less hopeful of getting through to Biden.

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I asked a couple of years ago, “How long can California survive big government?”

Based on migration patterns, the answer is “Not much longer.” Simply stated, bad fiscal and regulatory policy have produced a long-run decline for the Golden State. So we shouldn’t be surprised that people are fleeing.

And it appears Californians like escaping to Texas, a state with no personal or corporate income tax.

I’ve written several times about the divergent performance of the two states.

So let’s make today’s column the sixth edition of Texas vs. California.

We’ll start with a column in the Wall Street Journal by Joe Lonsdale, a venture capitalist who explains why he and his company are moving to Texas.

I love California…and have spent most of my adult life in the San Francisco Bay Area, founding technology companies like Palantir and Addepar and investing in many others. In 2011 I founded 8VC, a venture-capital firm that today manages more than $3.6 billion in committed capital. …I am moving myself and dozens of my 8VC colleagues to a new land of opportunity: Texas. The harsh truth is that California has fallen into disrepair. Bad policies discourage business and innovation, stifle opportunity and make life in major cities ugly and unpleasant. …That’s not all. The California government is beholden to public-employee unions and spending is out of control. A broken environmental review process means it takes a decade of paying lawyers to build anything. Legislation makes it impossible for businesses to hire contractors without an exemption—granted by friends in the legislature, as with the music industry, or won by spending hundreds of millions on a referendum, as gig-economy companies with drivers just did. This isn’t how business is done in developed countries. …It’s tragic that California is no longer hospitable to that mission, but beautiful that Texas is. Our job as entrepreneurs and investors is to build the future, and I know of no better place to do so than Texas.

In a report for CNBC, Ari Levy and Lora Kolodny write about Elon Musk’s looming escape to the Lone Star State.

Tesla CEO Elon Musk put his California houses on the market this year while he was sparring with state lawmakers over Covid-19 restrictions. He’s simultaneously been expanding operations in Texas and cozying up to Republican Gov. Greg Abbott. Now, several of his close friends and associates say that Musk has told them he’s planning to move to the Lone Star State. …California, often condemned by the super rich for its high tax rates and stiff regulations, has seen an exodus of notable tech names… In May, as businesses across California were forced to remain closed because of the pandemic, Musk tweeted that he was moving Tesla’s headquarters and future development from California to Texas and Nevada. Getting out of California, with the highest income tax in the country, and into Texas, which has no state income tax, could save Musk billions of dollars.

Meanwhile, Hewlett Packard already has made the move, as reported by the Associated Press.

Tech giant Hewlett Packard Enterprise said it is moving its global headquarters to the Houston area from California, where the company’s roots go back to the founding of Silicon Valley decades ago. …”As we look to the future, our business needs, opportunities for cost savings, and team members’ preferences about the future of work, we are excited to relocate HPE’s headquarters to the Houston region,” CEO Antonio Neri said in a written statement… moving out of Northern California is a loss, at least symbolically, for the tech industry that electronics pioneers William Hewlett and David Packard helped start in a Palo Alto garage in 1939. A plaque outside the home where they worked on their first product, an audio oscillator, calls it the birthplace of Silicon Valley, the “world’s first high-technology region.”

To be sure, the three stories shared above are anecdotes.

But if you look at comprehensive data on both people and income, there’s a very clear pattern. Simply stated, Texas is winning and California is losing.

No, this doesn’t mean Texas is perfect. Or that California is always bad (it’s much better than Texas with regards to asset forfeiture, for instance).

But it’s hard to feel much optimism about the Golden State.

P.S. My favorite California-themed jokes (not counting the state’s elected officials) can be found hereherehere, and here. And here’s some tongue-in-cheek advice for California from the recently departed Walter Williams.

P.P.S. If you prefer comparisons of New York and Florida, click here, here, here, and here.

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When examining state public policy, big jurisdictions such as California, Texas, New York, and Florida get a lot of attention.

But what about Mississippi? It has mediocre scores for overall economic policy.

And the Magnolia State also isn’t winning any prizes when looking specifically at tax policy.

But the state may be about to take a big step in the right direction.

The governor wants to get rid of his state’s progressive income tax and instead join the no-income-tax club.

The Associated Press reports on the proposal.

Mississippi Gov. Tate Reeves said Monday that the state should phase out its individual income tax by 2030 to attract new residents and businesses that could boost economic growth. …Mississippi’s population has grown slowly this year after declining in recent years. Florida, Texas and Tennessee, which do not have an individual income tax, have grown rapidly. “Let’s eliminate the income tax, which is one huge speed bump to long-term economic growth and recovery for Mississippi,” Reeves said.

Analyzing the proposal for the Tax Foundation, Katherine Loughead points out a big logistical challenge.

The income tax currently generates a big chunk of revenues for the state’s budget, so abolition of that levy will require serious spending restraint and/or offsetting tax increases.

Mississippi Governor Tate Reeves (R), in his budget proposal for fiscal year (FY) 2022, has announced his goal of phasing out the state’s income tax by 2030. Mississippi’s income tax currently has three marginal rates of 3 percent, 4 percent, and 5 percent. …Under legislation adopted in 2016, the first marginal rate is already being phased out. …Gov. Reeves’ proposal seeks to build upon the ongoing phaseout of the 3 percent rate by also eliminating the 4 percent rate within five years. Then, subject to revenue availability, the governor hopes to eliminate the 5 percent rate so that, by 2030, Mississippi will join the ranks of the states with no income tax. …Mississippi’s income tax generated nearly 43 percent of the state’s total tax collections in FY 2019, with nearly $1.9 billion coming from the individual income tax and $644 million from the corporate income tax. The state will need to see continued revenue gains over the next decade to phase out the income tax without increasing other taxes. …Even if full income tax repeal is out of reach, however, the state could certainly reduce tax liability, particularly for lower-income residents, by continuing to increase the amount of income that is exempt from taxation, eliminating the first two brackets so a single-rate tax remains, and then reducing the rate below 5 percent.

A flat tax would be a step in the right direction, but state lawmakers should be aggressive and push for total elimination of the income tax. Which probably means the state will need a TABOR-style spending cap to make the numbers work.

The bottom line is that Mississippi is a relatively poor state by American standards (roughly akin to the United Kingdom or New Zealand, for those who prefer international comparisons) and needs bold reforms to catch up to the rest of the nation.

Abolishing the income tax definitely would qualify as a big move. Revisiting the chart from above, which I created in 2018, abolishing the income tax would vault the state to the top quintile of tax policy.

P.S. I also modified the chart to show that Arizona will drop from the middle quintile to the bottom quintile because voters foolishly voted for a class-warfare tax hike earlier this month.

P.P.S. The last southern governor to propose total repeal of the income tax didn’t make any progress.

P.P.P.S. Even though the people of Mississippi are the least likely of any state to read my columns, I hope they soon enjoy the benefits of living in a no-income-tax jurisdiction.

P.P.P.P.S. There’s also a proposal to get rid of the Nebraska state income tax.

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Whether we’re examining Economic Freedom of the World, Index of Economic Freedom, World Competitiveness Ranking, the Global Competitiveness Report, or the World Bank’s Doing Business, publications that endeavor to give us apples-to-apples comparisons of economic policy provide useful measuring sticks.

I’m especially interested in comparisons that focus on fiscal policy.

So I was very interested to see that the Tax Foundation just released its annual International Tax Competitiveness Index, which measures the quality of tax policy of nations that are part of the Organization for Economic Cooperation and Development.

Here are highlights from the report, starting with some background.

The structure of a country’s tax code is an important determinant of its economic performance. A well-structured tax code is easy for taxpayers to comply with and can promote economic development… In contrast, poorly structured tax systems can be costly, distort economic decision-making, and harm domestic economies. Many countries have recognized this and have reformed their tax codes. Over the past few decades, marginal tax rates on corporate and individual income have declined significantly… Not all recent changes in tax policy among OECD countries have improved the structure of tax systems; some have made a negative impact. …The International Tax Competitiveness Index (ITCI) seeks to measure the extent to which a country’s tax system adheres to two important aspects of tax policy: competitiveness and neutrality. …To measure whether a country’s tax system is neutral and competitive, the ITCI looks at more than 40 tax policy variables. These variables measure not only the level of tax rates, but also how taxes are structured.

The ITCI is a very useful publication. Indeed, I’d like it to be expanded. When writing about last year’s edition, I mentioned it should cover more nations and also include the aggregate tax burden as one of the variables.

But let’s not make the perfect the enemy of the good. With regards to this year’s version, what nations have the best and worst tax regimes?

Estonia ranks #1 (not a big surprise) and Italy is at the bottom (also not a big surprise).

For the seventh year in a row, Estonia has the best tax code in the OECD. Its top score is driven by four positive features of its tax system. First, it has a 20 percent tax rate on corporate income that is only applied to distributed profits. Second, it has a flat 20 percent tax on individual income that does not apply to personal dividend income. Third, its property tax applies only to the value of land, rather than to the value of real property or capital. Finally, it has a territorial tax system… Italy has the least competitive tax system in the OECD. It has a wealth tax, a financial transaction tax, and an estate tax. Italy also has a high compliance burden associated with its individual tax system. It takes businesses an estimated 169 hours to comply with the individual income tax.

American readers presumably are most interested in the United States, so here’s the data showing that the United States has a mediocre grade, ranking #21 out of 36 nations.

If you dig through the details, the good news is that the United States has a very high score for “consumption taxes,” which largely is because we haven’t copied the mistake of other nations and imposed a value-added tax.

The U.S. also gets credit for “expensing,” though the report notes that policy is scheduled to expire.

The bad news, by contrast, is that America ranks below average for corporate taxes and individual taxes and way below average for property taxes and international tax rules.

The report also notes that America’s “progressive tax” is a weakness that undermines competitiveness.

But let’s look at the glass as being half full rather than half empty. When the Tax Foundation launched this publication back in 2014, the United States was a lowly #32 out of 34 nations. And we were still mired near the bottom in 2016, ranked #31 out of 35 countries.

Thanks to the Trump tax reform, however, the United States has subsequently enjoyed the biggest improvement of any nations. There’s still plenty of policy mistakes that need to be addressed, but at least we’re moving in the right direction.

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I’ve written favorably about the pro-growth policies of low-tax states such as Texas, Florida, and Tennessee, while criticizing the anti-growth policies of high-tax states such as Illinois, California, and New York.

Does that mean we should conclude that “red states” are better than “blue states”? In this video for Prager University, Steve Moore says the answer is yes.

The most persuasive part of the video is the data on people “voting with their feet” against the blue states.

There’s lots of data showing a clear relationship between the tax burden and migration patterns. Presumably for two reasons:

  1. People don’t like being overtaxed and thus move from high-tax states to low-tax states.
  2. More jobs are created in low-tax states, and people move for those employment opportunities.

There’s a debate about whether people also move because they want better weather.

I’m sure that’s somewhat true, but Steve points out in the video that California has the nation’s best climate yet also is losing taxpayers to other states.

Since we’re discussing red states vs blue states, let’s look at some excerpts from a column by Nihal Krishan of the Washington Examiner.

States run by Republican governors on average have economically outperformed states run by Democratic governors in recent months. …Overall, Democratic-run states, particularly those in the Northeast and Midwest, had larger contractions in gross domestic product than Republican-run states in the Plains and the South, according to the latest state GDP data for the second quarter of 2020, released by the Commerce Department on Friday. Of the 20 states with the smallest decrease in state GDP, 13 were run by Republican governors, while the bottom 25 states with the highest decrease in state GDP were predominantly Democratic-run states. …Republican-controlled Utah had the second-lowest unemployment rate in the country in August at 4.1%, and the second-lowest GDP drop, at just over 18% in the second quarter. Nevada, run by Democrats, had the highest unemployment rate, at 13.2%. It was closely followed by Democratic-run Rhode Island, 12.8%, and New York, 12.5%.

Krishan notes that this short-run data is heavily impacted by the coronavirus and the shutdown policies adopted by various states, so it presumably doesn’t tell us much about the overall quality (or lack thereof) of economic policy.

I wrote about some multi-year data last year (before coronavirus was a problem) and found that low-tax states were creating jobs at a significantly faster rate than high-tax states.

But even that data only covered a bit more than three years.

I prefer policy comparisons over a longer period of time since that presumably removes randomness. Indeed, when comparing California, Texas, and Kansas a few years ago, I pointed out how a five-year set of data can yield different results (and presumably less-robust and less-accurate results) than a fifteen-year set of data.

P.S. What would be best is if we had several decades of data that could be matched with rigorous long-run measures of economic freedom in various states – similar to the data I use for my convergence/divergence articles that compare nations. Sadly, we have the former, but don’t have the latter (there are very good measures of economic freedom in the various states today, but we don’t have good historical estimates).

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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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My view of the U.S. economic policy often depends on whether I’m writing about absolute levels of laissez-faire or relative levels of laissez-faire.

If my column is about the former, I generally complain about excessive spending, punitive taxation, senseless red tape, easy-money monetary policy, and trade protectionism.

But if I’m writing about relative levels of economic liberty, I often turn into a jingoistic, pro-American flag-waver.

That because – with a few exceptions such as Singapore, Hong Kong, New Zealand, and Switzerland – the United States enjoys more economic freedom than other nations.

And because of the relationship between policy and prosperity, this means that Americans tend to have much higher living standards than their counterparts in other nations. Even when compared to people in other developed countries.

(Which is why it’s so disappointing that many American politicians want to make the U.S. more like Europe.)

Let’s examine some data. In a column for National Review, Joseph Sullivan compares recent increases in living standards for major nations.

If you want to answer questions about how economic wellbeing for individuals in a country has evolved, the actual change in the value of real GDP per capita may tell you more than the rate of its change. Why? Individuals buy goods and services with dollars and cents — not the rates of change that economists, politicians, and pundits tend to focus on when it comes to growth. …By this metric, between 2016 and 2019, economic growth in the U.S. was the best in its class. …The U.S. surpasses…its peers…by no small margin. It bests the silver medalist in this category, Finland, by $1,100. That is almost as big as the $1,160 that separates the runner-up from the peer country that comes in dead last, Sweden.

Here’s the chat from his article.

The key takeaway is that Americans started the period with more per-capita GDP and the U.S. lead expanded.

That’s one way of looking at the data.

A 2017 report from the Pew Research Center also has some fascinating numbers about the relative well-being of the middle class in different nations.

…the middle class in a country consists of adults living in households with disposable incomes ranging from two-thirds to double the country’s own median disposable household income (adjusted for household size). This definition allows middle-class incomes to vary across countries, because national incomes vary across countries. …That raises a question: What shares of adults in Western European countries have the same standard of living as the American middle class? …When the Western European countries the Center analyzed are viewed through the lens of middle-class incomes in the U.S., the share of adults who are middle class decreases in most of them. …In most Western European countries studied, applying the U.S. standard shrinks the middle-class share by about 10 percentage points… Applying U.S. incomes as the middle-class standard also boosts the estimated shares of adults who are in the lower-income tier in most Western European countries… Overall, regardless of how middle class fortunes are analyzed, the material standard of living in the U.S. is estimated to be better than in most Western European countries examined.

The main thing to understand is that there’s a big difference between being middle class in a rich country and being middle class in a not-so-rich country.

And if you peruse the chart from the Pew Report, you’ll notice that a lot of middle-class Europeans would be lower-income if they lived in the United States.

And if you looked at the issue from the other perspective, as I did last year, many poor Americans would be middle class if they lived in Europe.

Let’s augment that analysis by looking at a graphic the Economist put together several years ago. It’s based on the OECD’s Better-Life Index, which is a bit dodgy since it includes measures such as the Paris-based bureaucracy’s utterly dishonest definition of poverty.

That being said, notice that the bottom 10 percent of Americans would be middle class (or above!) if they lived in other nations.

I’ll close with the data on Actual Individual Consumption from the OECD, which are the numbers that (I believe) most accurately measure relative living standards between nations (indeed, I shared data from this source in 2010, 2014, and 2017).

As you can see, the United States easily surpasses other industrialized nations, with a score of 145.9 in 2017 (compared to the average of 100).

My final observation is that all this data is contrary to traditional convergence theory, which assumes that poor nations should grow faster than rich nations.

In other words, Europe should be catching up to the United States.

Indeed, that actually happened for a couple of decades after World War II, but then many European nations expanded welfare states in the 1960s and 1970s, while the U.S. for more economic freedom under both Ronald Reagan and Bill Clinton in the 1980s and 1990s.

And since policies diverged, convergence stalled.

The bottom line is that rich nations can consistently out-perform poor nations if they have allow more economic freedom.

P.S. Not only do ordinary Americans have a big edge over their European counterparts, they also enjoy much lower taxes.

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New York is ranked dead last for fiscal policy according to Freedom in the 50 States.

But it’s not the worst state, at least according to the Tax Foundation, which calculates that the Empire State is ranked #49 in the latest edition of the State Business Tax Climate Index.

Some politicians from New York must be upset that New Jersey edged them out for last place (and the Garden State does have some wretched tax laws).

So in a perverse form of competition, New York lawmakers are pushing a plan to tax unrealized capital gains, which would be a form of economic suicide for the Empire State and definitely cement its status as the place with the worst tax policy.

Here are some excerpts from a CNBC report.

The tax, part of a new “Make Billionaires Pay” campaign by progressive lawmakers and activists, would impose a new form of capital gains tax on New Yorkers with $1 billion or more in assets. …“It’s time to stop protecting billionaires, and it’s time to start working for working families,” Rep. Alexandria Ocasio-Cortez, D-N.Y., said… Currently, taxpayers pay capital gains tax on assets only when they sell. The new policy would tax any gain in value for an asset during the calendar year, regardless of whether it’s sold. Capital gains are taxed in New York at the same rate as ordinary income, so the rate would be 8.8%.

Given her track record, I’m not surprised that Ocasio-Cortez has embraced this punitive idea.

That being said, the proposal is so radical that even New York’s governor understands that it would be suicidal.

Gov. Andrew Cuomo said raising taxes on billionaires and other rich New Yorkers will only cause them to move to lower-tax states. …“If they want a tax increase, don’t make New York alone do a tax increase — then they just have the people move… Because if you take people who are highly mobile, and you tax them, well then they’ll just move next door where the tax treatment is simpler.”

Actually, they won’t move next door. After all, politicians from New Jersey and Connecticut also abuse and mistreat taxpayers.

Instead, they’ll be more likely to escape to Florida and other states with no income taxes.

In a column for the New York Post, E.J. McMahon points out that residents already have been fleeing.

…there were clear signs of erosion at the high end of New York’s state tax base even before the pandemic. Between 2010 and 2017, according to the Internal Revenue Service, the number of tax filers with incomes above $1 million rose 75 percent ­nationwide, but just 49 percent in New York. …Migration data from the IRS point to a broader leakage. From 2011-12 through 2017-18, roughly 205,220 New Yorkers moved to Florida. …their average incomes nearly doubled to $120,023 in 2017-18, from $63,951 at the start of the period. Focusing on wealthy Manhattan, the incomes of Florida-bound New Yorkers rose at the same rate from a higher starting point— to $244,936 for 3,144 out-migrants in 2017-18, from $124,113 for 3,712 out-migrants in 2011-12.

What should worry New York politicians is that higher-income residents are disproportionately represented among the escapees.

And the author also makes the all-important observation that these numbers doubtlessly will grow, not only because of additional bad policies from state lawmakers, but also because the federal tax code no longer includes a big preference for people living in high-tax states.

These figures are from the ­period ending just before the new federal tax law temporarily virtually eliminated state and local tax deductions for high earners, raising New York’s effective tax rates higher than ever. …soak-the-rich tax sloganeering is hardly a welcome-home signal for high earners now on the fence about their futures in New York.

The bottom line is that it’s a very bad idea for a country to tax unrealized capital gains.

And it’s a downright suicidal idea for a state to choose that perverse form of double taxation. After all, it’s very easy for rich people to move to Florida and other states with better tax laws.

And since the richest residents of New York pay such a large share of the tax burden (Investor’s Business Daily points out that the top 1 percent pay 46 percent of state income taxes), even a small increase in out-migration because of the new tax could result in receipts falling rather than rising.

Another example of “Revenge of the Laffer Curve.”

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When looking at which nations have the best economic policy, the best options are the Fraser Institute’s Economic Freedom of the World and the Heritage Foundation’s Index of Economic Freedom.

But I also look forward to other measures, including the annual competitiveness ranking from the Swiss-based IMD business school, which was just released this month.

We’ll start with a look at the top nations. Singapore remains the most competitive nation, while Denmark made a big jump to #2, and Switzerland climbed a notch to #3.

The United States, which was 3rd last year, dropped to #10.

Only 63 nations are part of the survey, and no sentient being should be surprised about Venezuela being in that final spot. Nor should there be much surprise that Argentina is next-to-last.

Here are some highlights from the accompanying article.

The annual rankings, now in their 32nd year, have been released unlocking a wealth of data on the performance of 63 economies across the globe. Singapore was number one for the second year in a row. In second to fifth place, in order, came: Denmark, Switzerland, the Netherlands and Hong Kong SAR. A marked pattern in this year’s results, which are an amalgam of hard data taken from 2019 and survey responses from early 2020, is the strength of smaller economies. …The number of small economies – broadly defined as such by their GDP –  in the top ten is striking. However, this is not to say that we are seeing a triumph of democracies. Singapore, Hong Kong and the UAE remain in the top ten, whilst some democracies (such as Argentina) sit at the bottom of the scale.

Here are some of the more interesting observations about specific nations.

China this year dropped to 20th position from 14th last year.

My two cents is that China is still overrated.

But I sadly concur that the trendline for Hong Kong is not overly encouraging.

While Hong Kong SAR came in at 5th, this is a far cry from 2nd which it enjoyed last year. The decline can be attributed to a decline in its economic performance, social turmoil in Hong Kong as well as the rub-on effect of the Chinese economy.

It’s worth noting that Brexit is helping the United Kingdom, which is exactly what I predicted.

The UK climbed from 23rd to 19th… One interpretation is that Brexit may have created the sentiment of a business-friendly environment in the making. The UK ranked 20th on the business efficiency measure, compared to 31st least year.

But I take no satisfaction in my predictions that Trump’s protectionism would backfire on the United States.

…For the second year in a row, the USA failed to fight back having been toppled from its number one spot last year by Singapore, and coming in at 10th …Trade wars have damaged…the USA.

In a column for Forbes, Stuart Anderson elaborates on America’s decline.

America used to be number one but not anymore, according to the 2020 rankings of the world’s most competitive economies from the Institute for Management Development (IMD) in Switzerland. The Trump administration’s trade policies are the primary reason given for why America fell from 2018, when it was ranked number one, and from 2019, when it was ranked number three. …Christos Cabolis, IMD’s chief economist and an author of the report, told Fortune that Trump’s trade policies are the main reason for the significant drop in American competitiveness. “One of the pillars of competitiveness is how open an economy is, and we measure that in different ways, from the perceptions of executives, to trade [statistics],” said Cabolis. The trade war Donald Trump initiated with China “brings some of the results we see in how the numbers of the U.S. went down,” he said.

Let’s close with a closer look at IMD’s estimates of what’s good and bad about the United States.

We get very good (though declining in this year’s ranking) scores for economic performance and infrastructure (suggesting, by the way, that we don’t need a new boondoggle package from Washington).

But we’re not quite as impressive when looking at business efficiency and we’re mediocre when measuring government efficiency.

For what it’s worth, I’m not optimistic about America’s trajectory. If Trump gets reelected, I don’t expect big developments in the policy areas where he’s good (taxes and red tape), but I wouldn’t be surprised to see new initiatives in the areas where he is bad (trade and spending).

Biden, meanwhile, has a very statist policy agenda. So if he gets elected, we have to cross our fingers that he doesn’t really believe in his Bernie-lite agenda.

P.S. It is possible, of course, for a nation to adopt additional bad policy and still climb in the rankings. All that’s required is for other nations to adopt an even-greater amount of bad policy. Needless to say, that’s not the ideal way to climb a few spots. Which is why we should consider absolute and relative measures of economic liberty.

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As part of my recent presentation to IES Europe, here’s what I said (and what I’ve said many times before) about the relationship between economic policy and national prosperity.

My remarks focused in part on the difference between absolute economic liberty and relative economic liberty.

  • The absolute level of economic liberty is the degree to which a nation relies on markets or statism (see, for instance, the Fraser Institute’s Economic Freedom of the World).
  • The relative level of economic liberty is a measure of whether one country is more market-oriented than another country (basically a measure of national competitiveness).

Understanding these two concepts explains why it is possible to criticize nations in North America and Western Europe for having too much government while also recognizing that those same nations tend to have better policies than most countries in other parts of the world.

An obvious example is Denmark. It certainly has some foolish and misguided government policies, but it is very pro-market when compared to the 90 percent of nations that have even lower levels of economic liberty (a distinction that Bernie Sanders has never grasped).

The obvious takeaway is that economic liberty matters, regardless of whether we’re looking at absolute levels or relative levels.

During my remarks, the audience got to see a two-question challenge, which asks our friends on the left to give an example of their dirigiste policies generating good economic outcomes.

But I’ve never been happy with the clunky wording of that challenge (just as I wasn’t happy with the original wording of fiscal policy’s Golden Rule).

So here’s a new version, which I’m now calling “The Never-Answered Question.”

I frequently unveil this question during debates.

And it’s quite common that my opponent will claim Sweden.

But as I noted in the above video clip, Sweden became a rich nation when government was very small. It didn’t have an income tax until 1902, and the welfare state was tiny until the 1960s. And I then explain that Sweden’s economic performance has been inversely correlated with the size and scope of government.

Unsurprisingly, the same is true for every other prosperous country in Europe and North America.

The bottom line is that my leftist friends will never successfully answer this question.

P.S. When considering the second part of The Never Answered Question, I don’t want a cherry-picked one- or two-year period. I want several decades of data, so we can be sure of a real trend. Much as I’ve done when making comparisons.

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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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I looked last year at how Florida was out-competing New York in the battle to attract successful taxpayers, and then followed up with another column analyzing how the Sunshine State’s low-tax policies are attracting jobs, investment, and people from the Empire State.

Time for Round #3.

A new article in the Wall Street Journal explains how successful investors, entrepreneurs, and business owners can save a massive amount of money by escaping states such as New York and moving to zero-income-tax states such as Florida.

This table has the bottom-line numbers.

As explained in the article, taxpayers are discovering that the putative benefits of living in a high-tax state such as New York simply aren’t worth the loss of so much money to state politicians (especially now that the 2017 tax reform sharply reduced the tax code’s implicit subsidy for high-tax states).

There’s a way for rich homeowners to potentially shave tens of thousands of dollars from their tax bills. They can get that same savings the next year and the following years as well. They can cut their taxes even further after they die. What’s the secret? Moving to Florida, a state with no income tax or estate tax. Plenty of millionaires and billionaires have been happy to ditch high-tax states like New York, New Jersey, Connecticut and California. …A New York couple filing jointly with $5 million in taxable income would save $394,931 in state income taxes by moving to Florida… If they had moved from Boston, they’d save $252,500; from Greenwich, Conn., they’d knock $342,700 off their tax bill. …Multimillionaires aren’t just moving their families south, they are taking their businesses with them, says Kelly Smallridge, president and CEO of the Business Development Board of Palm Beach County. “We’ve brought in well over 70 financial-services firms” in the past few years, she says. “The higher the taxes, the more our phone rings.”

An article in the Wall Street Journal late last year explained how states such as Florida are big beneficiaries of tax migration.

David Tepper, Paul Tudor Jones and Barry Sternlicht are among the prominent transplants who have pulled up roots in New York, New Jersey or Connecticut in recent years for Florida. New Yorker Carl Icahn has said he is moving his company to Miami next year. …The loss of the super-wealthy isn’t just a matter of reputation. The exodus of billionaires can crimp state budgets. …The SALT cap has widened the gap between Florida and other states with no income tax, such as Wyoming, and New York City, where residents can owe income taxes at rates that approach 13%.

In a column for National Review, Kevin Williamson analyzes the trade-offs for successful people…and the implications for state budgets.

…one of the aspects of modern political economy least appreciated by the class-war Left: Rich people have options. …living in Manhattan or the nice parts of Brooklyn comes with some financial burdens, but for the cool-rich-guy set, the tradeoff is worth it. …metaphorically less-cool guys are in Florida. They have up and left the expensive, high-tax greater New York City metropolitan coagulation entirely. …Florida has a lot going for it…: Lower taxes, better governance, superior infrastructure… The question is not only the cost, but what you get for your money. Tampa is not as culturally interesting as New York City. …the governments of New York City and New York State both are unusually vulnerable to the private decisions of very wealthy households, because a relatively small number of taxpayers pays an enormous share of New York’s city and state taxes: 1 percent of New Yorkers pay almost half the taxes in the state, and they know where Florida is. New York City has seen some population loss in recent years, and even Andrew Cuomo, one of the least insightful men in American politics, understands that his state cannot afford to lose very many millionaires and billionaires. “God forbid if the rich leave,” he has said. New York lost $8.4 billion in income to other states in 2016 because of relocating residents.

Earlier in 2019, the WSJ opined on the impact of migration on state budgets.

Democrats claim they can fund their profligate spending by taxing the rich, but affluent New Yorkers are now fleeing to other states. The state’s income-tax revenue came in $2.3 billion below forecast for December and January. Mr. Cuomo blamed the shortfall on the 2017 federal tax reform’s $10,000 limit on state-and-local tax deductions. But the rest of the country shouldn’t have to subsidize New York’s spending, and Mr. Cuomo won’t cut taxes.

To conclude, this cartoon cleverly captures the mentality of politicians in high-tax states.

Needless to say, grousing politicians in high-tax states have no legitimate argument. If they don’t provide good value to taxpayers, they should change policies rather than whining about out-migration.

By the way, this analysis also applies to analysis between nations. Why, for instance, should successful people in France pay so much money to their government when they can move to Switzerland and get equivalent services at a much-lower cost.

Heck, why move to Switzerland when you can move to places where government provides similar services at even lower cost (assuming, of course, that anti-tax competition bureaucracies such as the OECD don’t succeed in their odious campaign to thwart the migration of people, jobs, and money between high-tax nations and low-tax nations).

P.S. If you want to see how states rank for tax policy, click here, here, here, and here.

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I’m currently in London for discussions about public policy, particularly the potential for the right kind of free-trade pact between the United States and United Kingdom.

I deliberately picked this week for my visit so I also could be here for the British election. As a big fan of Brexit, I’m very interested in seeing whether the U.K. ultimately will escape the slowly sinking ship otherwise known as the European Union.

But the election also is an interesting test case of whether people are willing to vote for socialism. The Brits actually made this mistake already, voting for Clement Attlee back in 1945. That led to decades of relative decline, culminating in a bailout from the International Monetary Fund.

Margaret Thatcher then was elected in 1979 to reverse Attlee’s mistakes and she did a remarkable job of restoring the British economy.

But do voters understand this history?

We’ll find out on Thursday because they’ll have the opportunity to vote for the Labour Party, led by Jeremy Corbyn, who is the British version of Bernie Sanders.

And he doesn’t hide his radical vision for state control of economic life. Here’s how the Economist describes Corbyn’s agenda.

…the clear outlines of a Corbyn-led government emerged in the manifesto. Under Labour, Britain would have a larger, deeper state… Its frontiers would expand to cover everything from water supply to broadband to how much a landlord may charge a tenant. Where the state already rules, such as in education or health, the government would go deeper, with the introduction of free child-care for pre-schoolers and a “National Care Service” for the elderly. …The government would spend £75bn on building 100,000 council homes per year, paid for from a £150bn “transformation fund”, a pot of money for capital spending on public services. Rent increases would be capped at inflation. The most eye-catching proposal, a plan to nationalise BT’s broadband operations and then offer the service free of charge… Surviving policies from 2017 include a plan to nationalise utilities, alongside Royal Mail and the rail network, and a range of new rights for workers, from a higher minimum wage to restored collective-bargaining rights. All told, government spending would hit 45.1% of GDP, the highest ratio in the post-war era outside of a recession and more than in Germany… To pay for it all, very rich people and businesses would be clobbered. Corporation tax would rise to 26% (from 19% now), which Labour believes, somewhat optimistically, would raise another £24bn by 2024.

As reported by City A.M., the tax increases target a small slice of the population.

Jeremy Corbyn…is planning to introduce a new 45 per cent income tax rate for those earning more than £80,000 and 50 per cent on those with incomes of £125,000 or more. The IFS…estimates that would affect 1.6m people from the outset, rising to 1.9m people by 2023-24. Labour’s policy would add further burden to the country’s biggest tax contributors, with the top five per cent of income tax payers currently contributing half of all income tax revenues, up from 43 per cent just before the financial crisis.  But the IFS warned the amount this policy would raise was “highly uncertain”, with estimates ranging from a high of £6bn to an actual cost of around £1bn, if the policy resulted in a flight of capital from the UK. Lawyers have previously warned that high net worth individuals are poised to shift billions out of the country in the event of a Corbyn government.

Is that a smart idea?

We could debate the degree to which upper-income taxpayers will have less incentive to be productive.

But the biggest impact is probably that the geese with the golden eggs will simply fly away.

Even the left-leaning Guardian seems aware of this possibility.

The super-rich are preparing to immediately leave the UK if Jeremy Corbyn becomes prime minister, fearing they will lose billions of pounds if the Labour leader does “go after” the wealthy elite with new taxes, possible capital controls and a clampdown on private schools. Lawyers and accountants for the UK’s richest families said they had been deluged with calls from millionaire and billionaire clients asking for help and advice on moving countries, shifting their fortunes offshore and making early gifts to their children to avoid the Labour leader’s threat to tax all inheritances above £125,000. …Geoffrey Todd, a partner at the law firm Boodle Hatfield, said many of his clients had already put plans in place to transfer their wealth out of the country within minutes if Corbyn is elected. …“There will be plenty of people on the phone to their lawyers in the early hours of 13 December if Labour wins. Movements of capital to new owners and different locations are already prepared, and they are just awaiting final approval.” …On Thursday, Corbyn singled out five members of “the elite” that a Labour government would go after in order to rebalance the country. …The shadow Treasury minister Clive Lewis went further than the Labour leader, telling the BBC’s Newsnight programme: “Billionaires shouldn’t exist. It’s a travesty that there are people on this planet living on less than a dollar a day.

Some companies also are taking steps to protect shareholders.

National Grid (NG.) and SSE (SSE) are certainly not adopting a wait-and-see approach to the general election. Both companies have moved ownership of large parts of their UK operations overseas in a bid to soften the blow of potential nationalisation. With the Labour manifesto reiterating the party’s intention to bring Britain’s electricity and gas infrastructure back into public ownership, energy companies (and their shareholders) face the threat of their assets being transferred to the state at a price below market value.

The Corbyn agenda violates the laws of economics.

It also violates the laws of math. The Labour Party, for all intents and purposes, wants a big expansion of the welfare state financed by a tiny slice of the population.

That simply doesn’t work. The numbers don’t add up when Elizabeth Warren tries to do that in the United States. And an expert for the Institute for Fiscal Studies notes that it doesn’t work in the United Kingdom.

The bottom line is that Corbyn and his team are terrible.

That being said, Boris Johnson and the current crop of Tories are not exactly paragons of prudence and responsibility.

They’re proposing lots of additional spending. And, as City A.M. reports, Johnson also is being criticized for promising company-specific handouts and protectionist rules for public procurement.

In a press conference today, Johnson promised to expand Britain’s state aid regime once the UK leaves the EU. “We will back British businesses by introducing a new state aid regime which makes it faster and easier for the government to intervene to protect jobs when an industry is in trouble,” a briefing document said. Head of regulatory affairs at the Institute of Economic Affairs (IEA) Victoria Hewson said support for state aid was “veiled support for cronyism.” …A spokesperson for the Institute of Directors said: “It’s not clear how these proposals will fit with ambitions of a ‘Global Britain’. The Conservatives must be wary of opening a can of worms on state aid, it’s important to have consistent rules in place to resist the impulse of unwarranted protectionism.” Johnson also promised to introduce a buy British rule for public procurement. …IEA economics fellow Julian Jessop said: “A ‘Buy British’ policy is pure protectionism, and it comes with heavy costs.

Perhaps this is why John O’Connell of the Taxpayers Alliance has a rather pessimistic view about future tax policy. Here are excerpts of a column he wrote for CapX.

Theresa May’s government implemented a series of big state, high tax policies. Promises of no strings attached cash for the NHS; new regulations on net zero; tax cuts shelved and the creation of more quangos. After his surprise non-loss in the election, Corbyn shifted even further to the political left, doubling down on his nationalisation plans. All in all, the 2017 election result was terrible for people who believe in a small state. …A report from the Resolution Foundation found that government spending is rising once again, and likely to head back towards the heights of the 1970s over the coming years. The Conservatives’ recent spending review suggests state spending could be 41.3% of GDP by 2023, while Labour’s spending plans could take it to 43.3%. This compares to the 37.4% average throughout the noughties. Based on the manifestos, Labour are working towards a German-sized state, while the Tories’ plan looks more Dutch. Unsurprisingly we see this mirrored by the tax burden, which at 34.6% of GDP has already reached a fifty-year high. It is likely to increase further. …British taxpayers are presented with something of a Hobson’s choice: Boris Johnson will see taxes increase and spending shoot up, while Jeremy Corbyn has £1.2 trillion worth of unfunded spending rises just waiting to become unimaginable tax hikes for everyone. Whoever you vote for, you’ll get higher taxes, the question is just about how high.

Let’s close by looking at the big picture.

Here’s a chart showing the burden of government spending in the United Kingdom since 1900. I’ve augmented the chart to show the awful trend started by Attlee (in red) and then the positive impact of Thatcher (in green).

You can also see that Tony Blair and Gordon Brown did a bad job early this century, followed by a surprisingly good performance by David Cameron.

Now it appears that British voters have to choose between a slow drift in the wrong direction under Boris Johnson or a rapid leap in the wrong direction under Jeremy Corbyn.

Normally I would be rather depressed by such a choice. I’m hoping, however, that Brexit (assuming it actually happens!) will cause Boris Johnson to make smart choices even if he is otherwise tempted to make bad choices.

P.S. Unsurprisingly, Corbyn has been an apologist for thugs and dictators.

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I’ve written many columns about Sweden and Denmark over the past 10-plus years, and I’ve also written several times about Norway and Iceland.

But I’ve mostly neglected Finland, other than some analysis of the country’s experiment with “basic income” in 2017 and 2018.

Now, thanks to a very interesting column in the New York Times, it’s time to rectify that oversight. According to the authors, Anu Partanen and , Finland is a great place with lots of goodies provided by taxpayers.

Finland, of course, is one of those Nordic countries that we hear some Americans, including President Trump, describe as unsustainable and oppressive — “socialist nanny states.”…We’ve now been living in Finland for more than a year. The difference between our lives here and in the States has been tremendous… What we’ve experienced is an increase in personal freedom. …in Finland, we are automatically covered, no matter what, by taxpayer-funded universal health care… Our child attends a fabulous, highly professional and ethnically diverse public day-care center that amazes us with its enrichment activities and professionalism. The price? About $300 a month — the maximum for public day care, because in Finland day-care fees are subsidized for all families. …if we stay here, …College would also be tuition free. If we have another child, we will automatically get paid parental leave, funded largely through taxes, for nearly a year… Compared with our life in the United States, this is fantastic.

Interestingly, the authors are not clueless Bernie Sanders-style leftists.

They fully understand and appreciate that Finland (like all Nordic nations) is not a socialist country.

…surely, many in the United States will conclude, Finnish citizens and businesses must be paying a steep price in lost freedoms, opportunity and wealth. …In fact, a recent report by the chairman of market and investment strategy for J.P. Morgan Asset Management came to a surprising conclusion: The Nordic region is not only “just as business-friendly as the U.S.” but also better on key free-market indexes, including greater protection of private property, less impact on competition from government controls and more openness to trade and capital flows. …What to make of all this? For starters, politicians in the United States might want to think twice about calling the Nordics “socialist.” …in Finland, you don’t really see the kind of socialist movement…, especially around goals such as curtailing free markets and even nationalizing the means of production. The irony is that if you championed socialism like this in Finland, you’d get few takers. …a 2006 study by the Finnish researchers Markus Jantti, Juho Saari and Juhana Vartiainen demonstrates…throughout the 20th century Finland remained — and remains to this day — a country and an economy committed to markets, private businesses and capitalism.

This is a very accurate assessment. Finland is more market-oriented than the United States in many categories.

Moreover, the country is ranked #21 for economic freedom out of 162 nations in Economic Freedom of the World, with a score of 7.80. That’s just .05 behind Taiwan and .09 behind Chile.

That being said, the burden of taxes and spending is rather onerous.

…after World War II, …Finnish capitalists also realized that it would be in their own long-term interests to accept steep progressive tax hikes. …the nation’s commitment to providing generous and universal public services…buffered and absorbed the risks and dislocations caused by capitalist innovation. …Visit Finland today and it’s obvious that the much-heralded quality of life is taking place within a bustling economy of upscale shopping malls, fancy cars and internationally competitive private companies. …Yes, this requires capitalists and corporations to pay fairer wages and more taxes than their American counterparts currently do.

The column concludes by suggesting that American capitalists follow the same model.

Right now might be an opportune moment for American capitalists to pause and ask themselves what kind of long-term cost-benefit calculation makes the most sense.

So should the United States copy Finland, as the authors suggest?

People would get lots of taxpayer-financed freebies, but there would be a heavy price. Taxes consume nearly 50 percent of an average family’s income (even higher according to some measures).

That’s compared to about 30 percent in the United States.

And there’s a very Orwellian aspect of the Finnish tax system. As the New York Times reported last year, everyone in the country has the right to know how much income you earn.

Pamplona can boast of the running of the bulls, Rio de Janeiro has Carnival, but Helsinki is alone in observing “National Jealousy Day,” when every Finnish citizen’s taxable income is made public at 8 a.m. sharp. The annual Nov. 1 data dump is the starting gun for a countrywide game of who’s up and who’s down. …Finland is unusual, even among the Nordic states, in turning its release of personal tax data — to comply with government transparency laws — into a public ritual of comparison. …A large dosage of Thursday’s reporting concerned the income of minor celebrities… The country’s best-known porn star, Anssi “Mr. Lothar” Viskari, was reported to have earned 23,826 euros (about $27,000).

Given the onerous level of Finnish taxes, it’s probably safe to say that “Mr. Lothar” is getting screwed more than he’s…um….well, you get the point.

So what’s the bottom line? Should America be more like Finland? Is the country reasonably successful because of high taxes, or in spite of high taxes?

The U.S. should not mimic Finland, at least if the goal is higher living standards. Finland has some advantages over the United States (including better business taxation), but the United States has more overall economic liberty.

And that presumably helps to explain why, based on data from the Organization for economic Cooperation and Development, the average American enjoys 40 percent higher living standards than the average Finn.

But the most compelling piece of data, for those who prefer apples-to-apples comparison, is that Americans of Finnish descent produce 47 percent more than Finns in Finland.

Is Finland a relatively rich nation? Yes.

Is Finland a relatively free nation? Definitely.

Is Finland a good example of western civilization? Unquestionably.

The bottom line is that Finland seems like a great country (I’ve never visited). All I’m saying is that Americans would not be as prosperous if we had Finnish-style taxation and Finnish-style spending.

P.S. Researchers at Finland’s central bank seem to agree with my concern.

P.P.S. And Finland’s former Prime Minister understood the downside of an excessive public sector.

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The World Bank has released its annual report on the Ease of Doing Business.

Unsurprisingly, the top spots are dominated by market-oriented jurisdictions, with New Zealand, Singapore, and Hong Kong (at least for now!) winning the gold, silver, and bronze. The United States does reasonably well, finishing in sixth place.

It’s also worth noting that Nordic nations do quite well. Denmark even beats the United States, and Norway and Sweden are both in the top 10.

Georgia gets a very good score, as does Taiwan. And I’m sure Pope Francis will be irked to see that Mauritius ranks highly.

I’m surprised, though, to see Russia at #28 and China at #31. That’s better than France!

And I’m even more surprised that normally laissez-faire Switzerland is down at #36.

What economic lessons can we learn from the report? First, the authors remind us that less red tape means more prosperity.

Research demonstrates a causal relationship between economic freedom and gross domestic product (GDP) growth, where freedom regarding wages and prices, property rights, and licensing requirements leads to economic development. … The ease of doing business score serves as the basis for ranking economies on their business environment: the ranking is obtained by sorting the economies by their scores. The ease of doing business score shows an economy’s absolute position relative to the best regulatory performance, whereas the ease of doing business ranking is an indication of an economy’s position relative to that of other economies.

By the way, here’s a simple depiction of the World Bank’s methodology.

It’s also worth noting that less intervention means less corruption.

There are ample opportunities for corruption in economies where excessive red tape and extensive interactions between private sector actors and regulatory agencies are necessary to get things done. The 20 worst-scoring economies on Transparency International’s Corruption Perceptions Index average 8 procedures to start a business and 15 to obtain a building permit. Conversely, the 20 best-performing economies complete the same formalities with 4 and 11 steps, respectively. Moreover, economies that have adopted electronic means of compliance with regulatory requirements—such as obtaining licenses and paying taxes—experience a lower incidence of bribery.

Poor countries, not surprisingly, have more red tape.

An entrepreneur in a low-income economy typically spends around 50 percent of the country’s per-capita income to launch a company, compared with just 4.2 percent for an entrepreneur in a high-income economy. It takes nearly six times as long on average to start a business in the economies ranked in the bottom 50 as in the top 20. There’s ample room for developing economies to catch up with developed countries on most of the Doing Business indicators. Performance in the area of legal rights, for example, remains weakest among low- and middle-income economies.

Africa and Latin America are especially bad.

Sub-Saharan Africa remains one of the weak-performing regions on the ease of doing business with an average score of 51.8, well below the OECD high-income economy average of 78.4 and the global average of 63.0. …Latin America and the Caribbean also lags in terms of reform implementation and impact. …not a single economy in Latin America and the Caribbean ranks among the top 50 on the ease of doing business.

I’m disappointed, by the way, that Chile is only ranked #59.

Now let’s shift to some very important graphs about the relationship between economic freedom and national prosperity.

We’ll start with a look at the relationship between employment regulation and per-capita income. Not surprisingly, countries that make it hard to hire workers and fire workers have lower levels of prosperity.

Here’s a chart showing the relationship between employment regulation and the underground economy.

The moral of the story is that lots of red tape drives employers and employees to the black market.

Perhaps most important, there’s a very clear link between good regulatory policy and overall entrepreneurship.

Here’s a bit of good news.

Developing nations have reduced the burden of red tape in some areas, in part because Ease of Doing Business puts pressure on governments.

We can see the results in this chart.

I’ll close with a look at the regulatory burden in the United States, which also can be considered good news.

Here’s the annual score for the past five years (a higher number is better).

I’m frequently critical of this White House, but I also believe in giving credit when it’s deserved. The bottom line is that Trump’s policies have been a net plus for businesses.

In other words, lower tax rates and less red tape have more than offset the pain of protectionism.

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Following their recent assessment of the best and worst countries, the Tax Foundation has published its annual State Business Tax Climate Index, which is an excellent gauge of which states welcome investment and job creation and which states are unfriendly to growth and prosperity.

Here’s the list of the best and worst states. Unsurprisingly, states with no income tax rank very high, as do states with flat taxes.

It’s also no surprise to see New Jersey in last place. The state has fallen dramatically, especially considering that it was like New Hampshire as recently as the 1960s, with no state income tax and no state sales tax.

And the bad scores for New York, California, and Connecticut also are to be expected. The Nutmeg State is an especially sad story. There was no state income tax 30 years ago. Once politicians got that additional source of revenue, however, Connecticut suffered a big economic decline.

Here’s a description of the methodology, along with the table showing how different factors are weighted.

…the Index is designed to show how well states structure their tax systems and provides a road map for improvement.The absence of a major tax is a common factor among many of the top 10 states. Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: the corporate income tax, the individual income tax, or the sales tax. …This does not mean, however, that a state cannot rank in the top 10 while still levying all the major taxes. Indiana and Utah, for example, levy all of the major tax types, but do so with low rates on broad bases.The states in the bottom 10 tend to have a number of afflictions in common: complex, nonneutral taxes with comparatively high rates. New Jersey, for example, is hampered by some of the highest property tax burdens in the country, has the second highest-rate corporate income tax in the country and a particularly aggressive treatment of international income, levies an inheritance tax, and maintains some of the nation’s worst-structured individual income taxes.

For those who want to delve into the details, here are all the states, along with their rankings for the five major variables.

If you want to know which states are making big moves, Georgia enjoyed the biggest one-year jump (from #36 to #32) and Kansas suffered the biggest one-year decline (from #27 to #34). Keep in mind that it’s easier to climb if you’re near the bottom and easier to fall if you’re near the top.

Looking over a longer period of time, the states with the biggest increases since 2014 are North Carolina (+19, from #34 to #15), Wisconsin (+12, from #38 to #26), Kentucky (+9, from #35 to #24), Nebraska (+8, from #36 to #28), Delaware (+7, from #18 to #11), and Rhode Island (+6, from #45 to #39).

The states with the biggest declines are Kansas (-9, from #25 to #34), Hawaii (-8, from #29 to #37), Massachusetts (-8, from #28 to #36), and Idaho (-6, from #15 to #21).

We’ll close with the report’s map, showing the rankings of all the states.

P.S. My one quibble with the Index is that there’s no variable to measure the burden of government spending, which would give a better picture of overall economic liberty. This means that states that finance large public sectors with energy severance taxes (which also aren’t included in the Index) wind up scoring higher than they deserve. As such, I would drop Wyoming and Alaska in the rankings and instead put South Dakota at #1 and Florida at #2.

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The Tax Foundation churns out lots of good information, but I especially look forward to their International Tax Competitiveness Index.

It shows how nations rank based on key tax variables such as corporate taxation, personal income tax, and international tax rules.

The latest edition shows good news and bad news for the United States. The good news, as you see in this chart, is that the 2017 tax reform improved America’s ranking from 28 to 21.

The bad news is that the United States is still in the bottom half of industrialized nations.

We should copy Estonia, which has been in first place for six consecutive years.

For the sixth year in a row, Estonia has the best tax code in the OECD. Its top score is driven by four positive features of its tax code. First, it has a 20 percent tax rate on corporate income that is only applied to distributed profits. Second, it has a flat 20 percent tax on individual income that does not apply to personal dividend income. Third, its property tax applies only to the value of land, rather than to the value of real property or capital. Finally, it has a territorial tax system that exempts 100 percent of foreign profits earned by domestic corporations from domestic taxation, with few restrictions. …For the sixth year in a row, France has the least competitive tax system in the OECD. It has one of the highest corporate income tax rates in the OECD (34.4 percent), high property taxes, a net tax on real estate wealth, a financial transaction tax, and an estate tax. France also has high, progressive, individual income taxes that apply to both dividend and capital gains income.

Here are some other important observations from the report, including mostly positive news on wealth taxation as well as more information on France’s fiscal decay.

…some countries like the United States and Belgium have reduced their corporate income tax rates by several percentage points, others, like Korea and Portugal, have increased them. Corporate tax base improvements have been put in place in the United States, United Kingdom, and Canada, while tax bases were made less competitive in Chile and Korea. Several EU countries have recently adopted international tax regulations like Controlled Foreign Corporation rules that can have negative economic impacts. Additionally, while many countries have removed their net wealth taxes in recent decades, Belgium recently adopted a new tax on net wealth. …Over the last few decades, France has introduced several reforms that have significantly increased marginal tax rates on work, saving, and investment.

For those who like data, here are the complete rankings, which also show how countries score in the various component variables.

Notice that the United States (highlighted in red) gets very bad scores for property taxation and international tax rules. But that bad news is somewhat offset by getting a very good score on consumption taxation (let’s hope politicians never achieve their dream of imposing a value-added tax!).

And it’s no big surprise to see countries like New Zealand and Switzerland get high scores.

P.S. My only complaint about the International Tax Competitiveness Index is that I would like it to include even more information. There presumably would be challenges in finding apples-to-apples comparative data, but I’d be curious to find out whether Hong Kong and Singapore would beat out Estonia. And would zero-tax jurisdictions such as Monaco and the Cayman Islands get the highest scores of all? Also, what would happen if a variable on the aggregate tax burden was added to the equation? I’m guessing some nations such as Sweden and the Netherlands might fall, while other countries such as Chile and Poland (and probably the U.S.) would climb.

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According to the most-recent edition of Economic Freedom of the World, Brazil is only ranked #120, which is lower than nations such as Greece, Haiti, and China.

Brazil gets a horrible grade on regulation, and it’s also in the bottom half of all nations when looking at fiscal policy, quality of governance, and trade.

But things may be about to change. Voters elected a president last year, Jair Bolsonaro, who is best known for populist rhetoric, but he also expresses support for market-friendly reforms.

And even though he’s sometimes referred to as the “Brazilian Trump,” President Bolsonaro seems to have a much better understanding of trade than his American counterpart.

At least if this report from the Wall Street Journal is any indication.

President Jair Bolsonaro ’s administration is opening up one of the world’s most closed big economies, slashing import tariffs on more than 2,300 products and exposing local industries long accustomed to protectionism to the challenges of free trade. With little fanfare, the conservative government has since taking office in January eased the entry of ultrasonic scalpels, cancer drugs, heavy machinery and more, in some cases with tariffs reduced to zero from as much as 20%. The tariff cuts…reflect a significant shift in the world’s eighth-largest economy, where duties were twice as high as in Mexico, China and the European Union last year. The new opening is a central feature in Economy Minister Paulo Guedes ’s plans to make the country of 210 million more competitive, part of an effort to rekindle a moribund economy historically shielded from foreign competition and bogged down by bureaucracy. …“Brazil’s model of protectionism has failed,” Deputy Economy Minister for Trade Marcos Troyjo, one of Brazil’s chief trade negotiators, said in an interview. “It’s been 40 years without sustainable economic growth.”

Here are some excerpts about how Brazil has been hurt by trade barriers.

The problems created by protectionism are evident throughout Brazil’s economy. When Mauá University outside São Paulo imported American equipment last year that it couldn’t find in Brazil to upgrade its physics lab, for example, import tariffs doubled the price tag to $70,000, said Francisco Olivieri, a business professor and head of Mauá’s technology department. …Protectionism hurts businesses that need to import supplies or parts and face high tariffs and bureaucracy to do so, which pushes them away from global supply chains. Red tape related to tariffs at Brazilian ports mean imported supplies can take weeks to reach buyers, causing production delays. Fifty-five percent of foreign products require the importing companies to obtain permits from as many as six different government agencies, according to a recent study by the National Confederation of Industry, or CNI, a trade group that represents Brazilian factories. Importers are subject to steep fines if they fail to request a permit, but it is often difficult to determine from which agencies they must seek approval.

In other words, Brazilian companies are hit by a double-whammy of trade barriers and red tape.

This is why liberalization is so important.

Incidentally, the EFW data only captures what happened up through 2017.

And since Brazil (#87) isn’t that far behind the United States (#55) in the trade rankings, I won’t be overly surprised in a few years if Brazil jumps the United States given the combination of Bolsonaro’s good policies and Trump’s bad policies.

P.S. Brazil is also in the process of curtailing pensions and already has adopted a constitutional spending cap.

P.P.S. President Bolsonaro is quite good on gun rights.

P.P.P.S. A few years ago, I fretted Brazil has passed a tipping point of dependency. I’m somewhat hopeful that assessment was too pessimistic.

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My primary job is dealing with misguided public policy in the United States.

I spend much of my time either trying to undo bad policies with good reform (flat tax, spending restraint, regulatory easing, trade liberalization) or fighting off additional bad interventions (Green New Deal, protectionism, Medicare for All, class warfare taxes).

Seems like there is a lot to criticize, right?

Yes, but sometimes the key to success is being “less worse” than your competitors. So while I’m critical of many bad policies in the United States, it’s worth noting that America nonetheless ranks #6 for overall economic liberty according to the Fraser Institute.

As such, it’s not surprising that America has higher living standards than most other developed nations according to the “actual individual consumption” data from the Organization for Economic Cooperation and Development.

And America’s advantage isn’t trivial. Our consumption levels are more than 46 percent higher than the average for OECD member nations.

The gap is so large that I’ve wondered how lower-income people in the United States would rank compared to average people in other countries.

Well, the folks at Just Facts have investigated precisely this issue using World Bank data and found some remarkable results.

…after accounting for all income, charity, and non-cash welfare benefits like subsidized housing and Food Stamps—the poorest 20% of Americans consume more goods and services than the national averages for all people in most affluent countries. …In other words, if the U.S. “poor” were a nation, it would be one of the world’s richest. …The World Bank publishes a comprehensive dataset on consumption that isn’t dependent on the accuracy of household surveys and includes all goods and services, but it only provides the average consumption per person in each nation—not the poorest people in each nation. However, the U.S. Bureau of Economic Analysis published a study that provides exactly that for 2010. Combined with World Bank data for the same year, these datasets show that the poorest 20% of U.S. households have higher average consumption per person than the averages for all people in most nations of the OECD and Europe… The high consumption of America’s “poor” doesn’t mean they live better than average people in the nations they outpace, like Spain, Denmark, Japan, Greece, and New Zealand. …Nonetheless, the fact remains that the privilege of living in the U.S. affords poor people with more material resources than the averages for most of the world’s richest nations.

There are some challenges in putting together this type of comparison, so the folks at Just Facts are very clear in showing their methodology.

They’ve certainly come up with results that make sense, particularly when comparing their results with OECD AIC numbers.

Here’s one of the charts from the report.

You can see that the bottom 20 percent of Americans do quite well compared to the average persons in other developed nations.

By the way, the report from Just Facts also criticizes the New York Times for dishonest analysis of poverty. Since I’ve felt compelled to do the same thing, I can definitely sympathize.

The bottom line is that free markets and limited government are the best way to help lower-income people enjoy more prosperity.

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I periodically mock the New York Times when editors, reporters, and columnists engage in sloppy and biased analysis.

Now we have another example.

Check out these excerpts from a New York Times column by Steven Greenhouse.

The United States is the only advanced industrial nation that doesn’t have national laws guaranteeing paid maternity leave. It is also the only advanced economy that doesn’t guarantee workers any vacation, paid or unpaid, and the only highly developed country (other than South Korea) that doesn’t guarantee paid sick days. …Among the three dozen industrial countries in the Organization for Economic Cooperation and Development, the United States has the lowest minimum wage as a percentage of the median wage — just 34 percent of the typical wage, compared with 62 percent in France and 54 percent in Britain. It also has the second-highest percentage of low-wage workers among that group… All this means the United States suffers from what I call “anti-worker exceptionalism.” …America’s workers have for decades been losing out: year after year of wage stagnation.

Sounds like the United States is some sort of Dystopian nightmare for workers, right?

Well, if there’s oppression of labor in America, workers in other nations should hope and pray for something similar.

Here’s a chart showing per-capita “actual individual consumption” for various nations that are part of the Organization for Economic Cooperation and Development. As you can see, people in the United States have much higher living standards.

By the way, I can’t resist pointing out another big flow in Greenhouse’s NYT column.

He wrote that the U.S. has “the second-highest percentage of low-wage workers.” That sounds like there’s lots of poverty in America. Especially since the U.S. is being compared to a group of nations that includes decrepit economies such as Mexico, Turkey, Italy, and Greece.

But this statement is nonsense because it is based on OECD numbers that merely measure the percent of workers in each nation that earn less than two-thirds of the national median level. Yet since median income generally is much higher in the United States, it’s absurd to use this data for international comparisons.

In other words, Greenhouse is relying on data that deliberately confuse absolute living standards and relative living standards. Why? Presumably to try to make the United States look bad and/or to advance a pro-redistribution agenda.

P.S. You can find similarly dishonest ways of measuring poverty from the United Nations, the Equal Welfare Association, Germany’s Institute of Labor Economics, the Obama Administration, and the European Commission.

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