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Archive for the ‘Competitiveness’ Category

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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I’ve applauded China’s economic progress.

It’s economic liberty score jumped from 3.64 in 1980 to 6.46 in the most recent edition of Economic Freedom of the World.

That shift toward markets (which started in a village) helped to dramatically reduce poverty and turn China into a middle-income nation.

That’s the good news.

The bad news is that most of China’s economic liberalization (from 3.64 to 6.15) occurred between 1980 and 2003.

Since that time, China’s score has improved at a glacial pace. Moreover, because other nations have been more aggressive about reducing the burden of government, China’s relative ranking has actually dropped (from #88 to #107) since 2003.

Which is why I’ve warned that China needs another burst of pro-market reform if it wants to become a rich country.

Regarding this issue, the Wall Street Journal has a very interesting report about how China is under-performing.

The country’s state-led growth model is running out of gas. A recession or crisis may not be imminent, but the long-run implications are just as serious. Absent a change in direction, China may never become rich. …First, official statistics probably paint too flattering a picture. Per-capita income may be a quarter lower than reported, based on a study of nighttime light co-authored by Yingyao Hu of Johns Hopkins University. …Second, it doesn’t measure up to the economies China seeks to emulate. Taiwan, South Korea and Japan all opened their economies to global trade and investment, enjoyed superfast growth for several decades… In fact, China seems to be slowing sooner than the others.

Why is China underperforming?

Too much statism. Simply stated, the government has too much control over the allocation of labor and capital.

For 30 years the Communist Party opened ever more of the economy to private enterprise, trade, foreign investment and market forces. Yet it never relinquished its commitment to socialism and Mr. Brandt says that since the mid-2000s the government has tightened control over sectors… An inefficient state sector matters less if the private sector grows fast enough. But in recent years, private firms in China have faced multiple headwinds. State-controlled banks prefer to lend to state-owned enterprises… The domestic private sector’s share of total sales has dropped about 5 percentage points since 2016, according to Goldman, while the state sector’s share has risen roughly as much.

By the way, many observers (from the American Enterprise Institute, Peterson Institute for International Economics, the New York Times, the New York Post, and Investor’s Business Daily) echo the concern about China becoming more statist in recent years.

I’ll make a more restrained point.

I’ll start by sharing this very interesting chart from the WSJ story. It shows how China’s growth, while impressive, has not been as rapid as the growth enjoyed by other Asian economies.

If you look below, you’ll see I’ve now augmented the chart to explain why China has under-performed.

On the right side, I’ve added the historical rankings from Economic Freedom of the World. As you can see (and just as theory and evidence teaches us), the other nations on the chart enjoyed more growth because they had more economic freedom.

These numbers reinforce my argument that China needs more pro-market reform. Though I should add the caveat that EFW has added more nations over time, so this comparison overstates the degree to which China is lagging.

But it is lagging. The bottom line is that China needs to copy Hong Kong and Singapore if it wants to become a rich nation. Or even Taiwan, which is an under-appreciated success story.

P.S. Keep in mind that China also faces demographic decline, which makes good policy even more necessary and important.

P.P.S. Amazingly, both the OECD and IMF are trying to sabotage China’s economy.

P.P.P.S. The WSJ story is an example of good reporting. If you want an example of bad reporting about China, check out this bizarre story from the New York Times.

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The Nordic nations punch above their weight in global discussions of economic policy.

Advocates of bigger government in the United States, such as Bernie Sanders, claim that those countries are proof that socialism can work.

But there’s a big problem with that claim. The Nordic nations don’t have any of the policies – government ownership, central planning, or price controls – that are characteristics of a socialist economy.

But they do have high taxes and big welfare states. And since some politicians seem to think America should copy those policies, let’s see what we can learn by examining the Nordic nations.

NIma Sanandaji, writing for Foreign Policy, highlights what is good – and not so good – about government policy in the region. He starts by looking specifically at Norway.

Erlend Kvitrud, a member of the Norwegian Green Party, links democratic socialist economic policies and Nordic countries’ prosperity. …the left has for decades showcased the Nordic nations as proof that socialism can work not only in theory but also in practice. …Inconveniently for fans of the Nordic welfare model, though, Norway’s actual economic success rests on its wealth of natural resources. …Norway’s oil fund is the world’s largest sovereign wealth fund, worth around $200,000 per citizen. It wasn’t Norway’s social democratic economic policies that created the country’s wealth. It was nature. …The other Nordic countries, which lack Norway’s oil and natural gas riches, have lower living standards than the United States.

He’s certainly correct in highlighting the role of oil wealth in Norway.

And he also points out that Norway became a successful and prosperous nation before the welfare state was imposed.

What’s more, the Nordic countries’ social successes predate their high-tax, high-social spending policies. …economists Anthony Barnes Atkinson and Jakob Egholt Sogaard shows that most of the progress toward income inequality in Norway and Sweden happened before 1970, at a time when the two countries had low tax regimes and less redistributive policies. Similarly, the Nordic countries’ social successes were more pronounced in those years. Relative to the rest of the world, for example, they had a greater advantage in life span and child mortality in 1970 than they do today. In other words, the Nordic model arose after those countries were already prosperous and egalitarian.

These are all good points, but I think Nima actually overlooks one very powerful argument.

Yes, per-capita GDP in Norway is very similar to the United States, but gross domestic product is an imperfect measure of living standards. The data in relatively small economies can be misleading if there is a particular sector that distorts national statistics – such as financial services in Luxembourg or corporations in Ireland.

That’s why, if you want to measure the prosperity of households, it’s best to review the OECD’s data on “actual individual consumption.”

I’ve shared that data for all developed nations in the past, and the Council of Economic Advisers recently did a specific comparison of the United States and Nordic nations.

Norway is still impressive, ranked higher than its neighbors, but not in the same league as the United States.

By the way, in another article, this time for National Review, Nima explains that America actually has more women in management than any of the Nordic nations.

Science Daily once bluntly stated that “the Nordic countries are the most gender equal nations in the world.” There is some truth to this. …A common assumption is that the gender-equality progress of the Nordics is due to their social-democratic welfare policies. …The truth is that Nordic countries have a long history of gender equality, stretching back to the time of the Vikings. …One might expect this to translate into many women reaching the top of the business world. But this clearly is not the case. …the share of women among managers, as recorded by the International Labour Organization, is 43 percent in the United States, compared with 36 percent in Sweden and 28 percent in Denmark. …a pattern emerges: Those with more extensive welfare-state policies have fewer women on top. Iceland, which has a moderately sized welfare state, has the most women managers. Second is Sweden, which has opened up welfare services such as education, health care, and elder care for private-sector competition. Denmark, which has the highest taxes and the biggest welfare state in the modern world, has the lowest share of women in managerial positions. …The true lesson, that a large welfare state actually can impede women’s progress.

Let’s return to the big-picture economic comparisons.

Professor Hannes Gissurason of the University of Iceland authored a report on the Nordic model for the Foundation for European Reform.

It’s a very detailed study covering lots of issues.

The five Nordic countries, Sweden, Denmark, Finland, Norway, and Iceland, are rightly regarded as successful societies. They are affluent, but without a wide gap between rich and poor. They provide social security, but without a significant erosion, it seems, of their freedoms. They are small, but they all enjoy a good reputation around the world as peaceful, civilised democracies. The Nordic nations are healthy and well-educated and the crime rate is low. But what is it that other nations can learn from the Nordic success story?

For today, let’s focus on the third chapter, which look at three distinct eras of Swedish economic history.

…a distinction can be made between three Swedish models. The liberal model was developed in the mid-19th century, when liberal principles of free trade and unfettered competition were generally accepted and implemented in Sweden. The years between 1970 and 1990 were the heyday of the social democratic welfare model, although it had of course started its development much earlier and was to last for a few more years. The third model emerged in the 1990s after the experience of the social democratic model: this was the liberal welfare model.

The first era, which was based on classical liberal principles of free markets and limited government, is when Sweden became rich.

It was the liberal model which made Sweden wealthy, as Swedish economist Nima Sanandaji has well documented. Between 1870 and 1936, Sweden enjoyed the highest growth rate in the industrialised world… What produced the astonishing growth after 1870 was the introduction of economic freedom into a relatively poor society, but with strong traditions of self-reliance, hard work, thriftiness, and respect for the law and a high level of education. Money was sound, with the Swedish krona being on the gold standard… The environment was friendly to business and taxes were relatively low, even after the Social Democrats took over. In 1955, for example, tax revenues in Sweden, as a proportion of GDP, were the same as in the US, 24%.

The second era is when Sweden shifted to what some people call democratic socialism, but more accurately should be called the era of big government.

There were high taxes and lots of redistribution programs. And, not surprisingly, this led to economic stagnation.

…In 1975, tax revenues, as a proportion of GDP, had risen to 39% in Sweden, but was still only 25% in the US… In 2004, 38 of the largest companies in Sweden were entrepreneurial which means that they had been started as privately owned enterprises within the country. …Only two had been formed after 1970. While the public sector grew, the private sector stagnated. Between 1950 and 2000, the Swedish population grew from seven to almost nine million. Incredibly, the net job creation in the private sector during this period was close to zero. All the new jobs were in the public sector. …Many entrepreneurs left the country, including the founders of IKEA, Tetra Pak, and H&M.

Big government undermines initiative and weakens economic performance.

The study includes this data on how Swedes get richer in America than they do back home.

All this bad news created the conditions for the third era, which featured market-based reforms – regardless of which party or parties were in control of government.

Reluctantly, the Social Democrats started some reforms, deregulating credit and foreign exchange markets and changing the tax system, lowering marginal income tax from 73% to 51% and the capital gains tax to 30%. In 1991 a non-socialist government was voted in again. Now it was also anti-socialist, and it immediately abolished the wage earner funds… energy, postal, telephone, railway, and airline markets were all deregulated. …The government introduced school vouchers, sold stateowned companies, and carried out reforms in the labour market, especially designed for small businesses and private job agencies. The government also allowed for some choice in health care and assistance to the elderly. …when the Social Democrats returned to power in 1994…welfare benefits were cut; a new pension system was established, partly with self-funded pensions; collective bargaining was reformed; the inheritance tax was abolished. The centre-right government which was in power 2006–2014 continued liberalising the Swedish economy: the wealth tax was abolished, …property rights were strengthened, and the corporate tax was cut to 22%.

In other words, for the past twenty or so years, Sweden has been a leader in pro-market reforms.

Yes, there’s still a big government. But not as big as it used to be.

Yes, there are still high taxes. But not as high as they used to be.

And what’s the lesson we can learn?

This chart is very persuasive. It shows how Swedish prosperity, measured relative to the United States, declined during the era of big government.

But there’s been some convergence ever since policy makers started liberalizing the Swedish economy.

And we see a similar pattern if we compare Sweden to all other industrialized nations.

P.S. A very interesting study suggests that widespread migration to America made Sweden more statist.

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Regarding fundamental tax reform, there have been some interesting developments at the state level in recent years.

Utah, North Carolina, and Kentucky have all junked their so-called progressive systems and joined the flat tax club.

That’s the good news.

The bad news is that Illinois politicians are desperately trying to gut that state’s flat tax.

And the same thing is true in Massachusetts.

The Tax Foundation has a good explanation of what’s been happening in the Bay State and why it matters for the competitiveness, job creation, and entrepreneurship.

A joint constitutional convention of Massachusetts lawmakers has voted 147-48 to approve H.86, dubbed the Fair Share Amendment, to impose a 4 percent income tax surcharge on annual income beyond $1 million. The new tax would be levied in addition to the existing 5.05 percent flat rate, bringing Massachusetts’ total top rate to 9.05 percent. …Massachusetts requires legislatively-referred constitutional amendments be passed in consecutive sessions, meaning that the same measure would need to be approved in the 2021-2022 legislative session before it would be sent to voters in November of 2022. The millionaires’ tax, though targeted at a wealthy minority of tax filers in the Bay State, would cause broader harm to Massachusetts’ tax structure and economic climate. It would eliminate Massachusetts’ primary tax advantage over regional competitors… The Bay State’s low, flat income tax on individuals and pass-through businesses is the most competitive element of its tax code, giving the Commonwealth a clear strength compared to surrounding states and regional competitors. Income tax rate reductions in recent years have helped shed the moniker of “Taxachusetts” while setting up the Bay State to be a beneficiary of harmful tax rate increases in surrounding states. However, a 9.05 percent top rate would be uncompetitive even in a high-tax region. The amendment would hit Massachusetts pass-through businesses with the sixth-highest tax rate of any state.

Here’s a map showing top tax rates in the region (New Hampshire has an important asterisk since the 5-percent rate only applies to interest and dividends), including where Massachusetts would rank if the new plan ever becomes law.

The Boston Globe reports that lawmakers are very supportive of this scheme to extract more money, while the business community is understandably opposed.

A measure to revive a statewide tax on high earners received a glowing reception on Beacon Hill Thursday, suggesting an easy path ahead despite staunch opposition from business groups. “We are in desperate need for revenue for our districts,” said Senator Michael D. Brady of Brockton, one of the proposal’s more than 100 sponsors and a member of the Joint Committee on Revenue…. “We have tremendous unmet needs in our Commonwealth that are hurting families, hurting our communities, and putting our state’s economic future at risk,” said Senator Jason M. Lewis of Winchester, the lead sponsor of the Senate version of the proposal. …business groups…came armed with arguments that hiking taxes on the state’s highest earners would drive entrepreneurs — and the jobs and tax revenue they create — out of the state, as well as unfairly harm small- and mid-sized business owners whose business income passes through their individual tax returns. “Look, we’re trying to prevent Massachusetts from becoming Connecticut,” said Christopher Anderson, president of the Massachusetts High Technology Council.

Meanwhile, the Boston Herald reports that the Republican governor is opposed to this class-warfare tax.

Gov. Charlie Baker cautioned the Legislature against asking for more money from taxpayers with the so-called millionaire tax… “I’ve said that we didn’t think we should be raising taxes on people and I certainly don’t think we should be pursuing a graduated income tax,” Baker told reporters yesterday. …Members of Raise Up Massachusetts, a coalition of community organizations, religious groups and labor unions, are staunchly supporting the tax that is estimated to raise approximately $2 billion a year. …The Massachusetts Republican Party is sounding the alarm on what they’re calling, “the Democrats’ newest scheme,” to “dump” the state’s flat tax system.

The governor’s viewpoint is largely irrelevant, however, since he can’t block the legislature from moving forward with their class-warfare scheme.

But that doesn’t mean the big spenders in Massachusetts have a guaranteed victory.

Yes, the next session’s legislature is almost certain to give approval, but there’s a final step needed before the flat tax is gutted.

The voters need to say yes.

And in the five previous occasions when they’ve been asked, the answer has been no.

Overwhelmingly no.

Even in 1968 and 1972, proposals for a so-called progressive tax were defeated by a two-to-one margin.

Needless to say, that doesn’t mean voters will make the right choice in 2022.

The bottom line is that if the people of Massachusetts want investors, entrepreneurs, and other job creators to remain in the state, they should again vote no.

But if they want to destroy jobs and undermine the Bay State’s competitiveness, they should vote yes.

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When I wrote a few days ago that the Trump tax reform was generating good results, I probably should have specified that some parts of the country are not enjoying as much growth because of bad state tax policy.

As illustrated by my columns about Texas vs California and Florida vs New York, high-tax states are economic laggards compared to low-tax states.

This presumably helps to explain why Americans are voting with their feet by moving to states where the politicians are (at least in practice) less greedy.

Let’s look at some new evidence on the interaction of federal and state tax policy.

Writing for Forbes, Chuck DeVore of the Texas Public Policy Foundation shares data on how and why lower-tax state are out-performing higher-tax states.

Job growth has been running 80% stronger in low-tax states than in high-tax states since the passage of the Tax Cuts and Jobs Act of 2017 in December 2017. Understanding why holds important lessons for policy, economics, and politics. The new tax law scaled back the federal subsidy for high state and local taxes. …As a result of limiting the SALT deduction to $10,000, income tax filers in high-tax states saw a relatively smaller tax cut, losing out on about $84 billion since the tax code was changed. With $84 billion less to invest, the pace of job creation in the 23 high-tax states has slowed relative to the low-tax states, with the data suggesting a shift of almost 400,000 private sector jobs may have occurred.

Here are some of his numbers.

Prior to the tax reform’s enactment, annualized private sector job growth was 1.9% in the low-tax states from January 2016 to December 2017 compared to 1.4% in the high-tax states, giving the low-tax jurisdictions a comparatively modest advantage of 35% more rapid job growth over the 23-month period. Now, 17 months of federal jobs data suggest that the Tax Cuts and Jobs Act has increased the competitive advantage of 27 low-tax states where the average SALT deduction was under $10,000 in 2016 as compared to 23 high-tax taxes with average SALT deductions greater than $10,000. Private sector job growth is now running 80% faster in the low-tax states, 2% annualized compared to 1.1%, up from just a 35% advantage in the prior 23 months. …For California, the lost employment opportunity adds up to 153,000 positions since December 2017… New York’s employment growth was about 128,000 less than might have been the case had the SALT deduction not been capped.

And here’s his data-rich chart.

Based on previous evidence we’ve examined, these numbers are hardly a surprise.

Chuck suggests the right way for high-tax states to respond.

…if political leaders in states accustomed to taxing and spending far more than their more frugal peers wish to participate in higher rates of job creation, they should reform their own fiscal houses, rather than expect their neighbors to subsidize their high-spending ways.

Sadly, this doesn’t appear to be happening.

Politicians is high-tax states such as Illinois and New Jersey are trying to make their already-punitive systems even worse.

Based on what we’ve seen from Greece, that won’t end well.

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‘Two years ago, I wrote about how Connecticut morphed from a low-tax state to a high-tax state.

The Nutmeg State used to be an economic success story, presumably in large part because there was no state income tax.

But then an income tax was imposed almost 30 years ago and it’s been downhill ever since.

The last two governors have been especially bad news for the state.

As explained in the Wall Street Journal, Governor Malloy did as much damage as possible before leaving office.

The 50 American states have long competed for people and business, and the 2017 tax reform raises the stakes by limiting the state and local tax deduction on federal returns. The results of bad policy will be harder to disguise. A case in point is Connecticut’s continuing economic decline, and now we have even more statistical evidence as a warning to other states. The federal Bureau of Economic Analysis recently rolled out its annual report on personal income growth in the 50 states, and for 2017 the Nutmeg State came in a miserable 44th. …the state’s personal income grew at the slowest pace among all New England states, and not by a little. …The consistently poor performance, especially relative to its regional neighbors, suggests that the causes are bad economic policies… In Mr. Malloy’s case this has included tax increases starting in 2011 and continuing year after year on individuals and corporations… It is a particular tragedy for the state’s poorest citizens who may not be able to flee to other states that aren’t run by and for government employees.

Here’s some of the data accompanying the editorial.

Eric Boehm nicely summarized the main lesson from the Malloy years in a column for Reason.

If it were true that a state could tax its way to prosperity, Connecticut should be on a non-stop winning streak. Instead, state lawmakers are battling a $3.5 billion deficit. Companies including General Electric, Aetna, and Alexion, a major pharmaceutical firm, have left the state in search of a lower tax burden. Connecticut is looking increasingly like the Illinois of New England: A place where tax increases are no longer fiscally or politically realistic, even though budgetary obligations continue to grow and spending is completely out of control.

Unfortunately, the new governor isn’t any better than the old governor. The Wall Street Journal opined on Ned Lamont’s destructive fiscal policy.

Connecticut desperately needs a new economic direction. Unfortunately, the biennial budget soon to be signed by new Gov. Ned Lamont doubles down on policies that have produced abysmal results.The state’s economic indicators are grim. Connecticut routinely ranks near the bottom in surveys of economic competitiveness. Residents and businesses have been voting with their feet. According to the National Movers Study, only Illinois and New Jersey suffered more out-migration in 2018. General Electric left for Boston in 2016. This week, Farmington-based United Technologies Corp. announced it too will move its headquarters… Mr. Lamont’s budget seems designed to accelerate the decline. It increases spending by $2 billion while extending the state’s 6.35% sales tax to everything from digital movies to laundry drop-off services to “safety apparel.” It adds $50 million in taxes on small businesses, raises the minimum wage by 50%, and provides the country’s most generous mandated paid family medical leave. Florida and North Carolina must be licking their lips. …The state employee pension plan is underfunded by $100 billion—$75,000 per Connecticut household. A responsible budget would try to start filling the gap; the Lamont budget underfunds the teachers’ plan by another $9.1 billion, increasing the long-term liability by $27 billion. …Mr. Lamont proposes to slap a 2.25% penalty on people who sell a high-end home and move out of state. Having given up on attracting affluent families, he’s trying to prevent the ones who are here from leaving.

As one might expect, all this bad news is generating bad outcomes. Here are some details from an editorial in today’s Wall Street Journal.

…as a new study documents, more businesses are leaving Connecticut as they get walloped with higher taxes that are bleeding the state. Democrats in 2015 imposed a 20% surtax on top of the state’s 7.5% corporate rate, effectively raising the tax rate to 9%. They also increased the top income tax rate to 6.99% from 6.7% on individuals earning more than $500,000. The state estimated the corporate tax hike would raise $481 million over two years, but revenue increased by merely $323 million… Meantime, the state’s Department of Economic and Community Development, whose job is to strengthen “Connecticut’s competitive position,” in 2016 alone spent $358 million…to induce businesses to stay or move to the state. This means that Connecticut doled out twice as much in corporate welfare as it raked in from the corporate tax increase. …Thus we have Connecticut’s business model: Raise costs for everyone and then leverage taxpayers to provide discounts for a politically favored few. …The state has lost population for the last five years. …The exodus has depressed tax revenue.

And there’s no question that people are voting with their feet, as Bloomberg reports.

Roughly 5 million Americans move from one state to another annually and some states are clearly making out better than others. Florida and South Carolina enjoyed the top economic gains, while Connecticut, New York and New Jersey faced some of the biggest financial drains, according to…data from the Internal Revenue Service and the U.S. Census Bureau. Connecticut lost the equivalent of 1.6% of its annual adjusted gross income, as the people who moved out of the Constitution State had an average income of $122,000, which was 26% higher than those migrating in. Moreover, “leavers” outnumbered “stayers” by a five-to-four margin.

Here’s a chart from the article showing how Connecticut is driving away some of its most lucrative taxpayers.

Here’s a specific example of someone voting with their feet. But not just anybody. It’s David Walker, the former Comptroller General of the United States, and he knows how to assess a jurisdiction’s financial outlook.

…my wife, Mary, and I are leaving the Constitution State. We are saddened to do so because we love our home, our neighborhood, our neighbors, and the state. However, like an increasing number of people, the time has come to cut our losses… current state and local leaders have the willingness and ability to make the tough choices needed to create a better future in Connecticut, especially in connection with unfunded retirement obligations. …Connecticut has gone from a top five to bottom five state in competitive posture and financial condition since the late 1980s. In more recent years, this has resulted in an exodus from the state and a significant decline in home values.

All of this horrible news suggests that perhaps Connecticut should get more votes in my poll on which state will be the first to suffer fiscal collapse.

Incidentally, that raises a very troubling issue.

The former Governor of Indiana, Mitch Daniels, wrote last year for the Washington Post that we should be worried about pressure for a bailout of profligate states such as Connecticut.

…several of today’s 50 states have descended into unmanageable public indebtedness. …in terms of per capita state debt, Connecticut ranks among the worst in the nation, with unfunded liabilities amounting to $22,700 per citizen. …More and more desperate tax increases haven’t cured the problem; it’s possible that they are making it worse. When a state pursues boneheaded policies long enough, people and businesses get up and leave, taking tax dollars with them. …So where is a destitute governor to turn? Sooner or later, we can anticipate pleas for nationalization of these impossible obligations. …Sometime in the next few years, we are likely to go through our own version of the recent euro-zone drama with, let’s say, Connecticut in the role of Greece.

And don’t forget other states that are heading in the wrong direction. Politicians from California, New York, New Jersey, and Illinois also will be lining up for bailouts.

Here’s the bottom line on Connecticut: As recently as 1990, the state had no income tax, which put it in the most competitive category.

But then politicians finally achieved their dream and imposed an income tax.

And in a remarkably short period of time, the state has dug a big fiscal hole of excessive taxes and spending (with gigantic unfunded liabilities as well).

It’s now in the next-to-last category and it’s probably just a matter of time before it’s in the 5th column.

P.S. While my former state obviously has veered sharply in the wrong direction on fiscal policy, I must say that I’m proud that residents have engaged in civil disobedience against the state’s anti-gun policies.

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Because they directly measure economic liberty, my favorite global rankings are Economic Freedom of the World and the Index of Economic Freedom.

But I also like the World Economic Forum’s Global Competitiveness Report and the Institute of Management Development’s World Competitiveness Rankings, both of which basically measure the degree to which a nation is hospitable to business activity (which is correlated with economic liberty).

The United States dominated the IMD rankings until 2010, and America managed to reclaim the top spot for 2017. But according to new numbers from IMD’s World Competitiveness Center, Singapore and Hong Kong are now at the top.

I’m also not surprised to see Switzerland ranked highly.

And it’s worth noting that the Netherlands, Ireland, and Denmark are top-10 nations, similar to their scores in the Human Freedom Index.

Here’s some additional information from the press release.

Singapore has ranked as the world’s most competitive economy for the first time since 2010, according to the IMD World Competitiveness Rankings, as the United States slipped from the top spot… Singapore’s rise to the top was driven by its advanced technological infrastructure, the availability of skilled labor, favorable immigration laws, and efficient ways to set up new businesses. Hong Kong SAR held on to second place, helped by a benign tax and business policy environment and access to business finance. …The IMD World Competitiveness Rankings, established in 1989, incorporate 235 indicators from each of the 63 ranked economies. The ranking takes into account a wide range of “hard” statistics such as unemployment, GDP and government spending on health and education, as well as “soft” data from an Executive Opinion Survey covering topics such as social cohesion, globalization and corruption. This information feeds into four categories – economic performance, infrastructure, government efficiency and business efficiency – to give a final score for each country. There is no one-size-fits-all solution for competitiveness, but the best performing countries tend to score well across all four categories. Switzerland climbed to fourth place from fifth, helped by economic growth, the stability of the Swiss franc and high-quality infrastructure. …The United Arab Emirates – ranked 15th as recently as 2016 – entered the top five for the first time. …Venezuela remains anchored to the bottom of the ranking, hit by inflation, poor access to credit and a weak economy. The South American economy ranks the lowest for three out of four of the main criteria groups – economic performance, government efficiency and infrastructure.

Venezuela in last place? I’m shocked, shocked.

There are two specific items from the report I want to highlight.

First, notwithstanding the bleating from Trump and others about a supposed crisis of inadequate spending, notice that the United States is in first place for that category.

Also, notice that the jurisdictions with high scores for government efficiency are all places with (by modern standards) small government.

This is very similar to the “public sector efficiency” scores from the European Central Bank.

The moral of the story is that small government is the way to get competent government. It’s almost as if there’s a recipe that generates good outcomes.

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Time for another edition of our long-running battle between the Lone Star State and the Golden State.

Except it’s not really a battle since one side seems determined to lose.

For instance, Mark Perry of the American Enterprise Institute often uses extensive tables filled with multiple variables when comparing high-performing states and low-performing states.

But when comparing California and Texas, sometimes all you need is one data source because it makes a very powerful point. Which is what he recently did with that data on one-way U-Haul rental rates between California cities and Texas cities.

There’s a very obvious takeaway from this data, as Mark explains.

…there is a huge premium for trucks leaving California for Texas and a huge discount for trucks leaving Texas for California. …U-Haul’s one-way truck rental rates are market-based to reflect relative demand and relative supply. In California there’s a relatively low supply of trucks available and a relatively high demand for trucks destined for Texas; in Texas there’s a relatively high supply of trucks and a relatively low demand for trucks going to California. Therefore, U-Haul charges 3-4 times more for one-way truck rentals going from San Francisco or LA to Houston or Dallas than vice-versa based on what must be a huge net outflow of trucks leaving California (leading to low inventory) and a net inflow of trucks arriving in Texas (leading to high inventory). …in 2016…the ratios for the same matched cities were much smaller, 2.2 to 2.4 to 1, suggesting that the outbound migration from California to Texas as reflected in one-way U-Haul truck rental rates must have accelerated over the last three years.

So why is California so unattractive compared to Texas?

To answer that question, this map from the Tax Foundation is a good place to start. It shows that California has the most punitive income tax of any state, while Texas is one of the sensible states with no income tax.

By the way, I sometimes get pushback from my leftist friends who point out that California’s 13.3 percent tax rate only applies to millionaires.

I don’t think that’s an effective argument since it makes zero sense to penalize a state’s most productive citizens. Especially when they’re the ones who can easily afford to move (and many of them are doing exactly that).

That being said, California pillages middle-class taxpayers as well. If some trendy young millennial wants to live in San Francisco, I wish that person all the luck in the world – especially since the 8 percent tax rate kicks in at just $44,377.

Now let’s ask the question of whether California residents (rich, poor, or middle class) are getting something for all the taxes they have to pay.

  • Is there any evidence that they are getting better schools? No.
  • How about data showing that they get better health care? No.
  • What about research indicating better infrastructure in the state? No.

Instead, they’re paying for a giant welfare state and for a lavishly compensated collection of bureaucrats.

P.S. There’s also plenty of international data showing big government isn’t the way to get good roads, schools, and healthcare.

P.P.S. If you want more data comparing Texas and California, click herehere, and here.

P.P.P.S. Here’s my favorite California vs Texas joke.

P.P.P.P.S. Comparisons of New York and Florida tell the same story.

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I used to think Texas vs. California was the most interesting and revealing rivalry among states. It was even the source of some clever jokes and cartoons.

But the growing battle between Florida vs. New York may now be even more newsworthy.

I wrote last month about how many entrepreneurs, investors and business owners are escaping bad tax policy by moving from the Empire State to the Sunshine State.

Not that we should be surprised.

Florida ranks #1 for economic freedom while New York languishes in last place.

A big reason for the difference is that Florida has no state income tax, which compares very favorably to the punitive system in New York.

And because the federal tax code no longer provides an unlimited deduction for state and local taxes, I expect the exodus from New York to Florida to accelerate.

What’s especially amusing is that Alexandria Ocasio-Cortez’s mother is one of the tax refugees.

Here are some excerpts from a report in the New York Post.

The mother of soak-the-rich Congresswoman Alexandria Ocasio-Cortez said she was forced to flee the Big Apple and move to Florida because the property taxes were so high. “I was paying $10,000 a year in real estate taxes up north. I’m paying $600 a year in Florida. It’s stress-free down here,” Blanca Ocasio-Cortez told the Daily Mail… Her daughter raised eyebrows with her pitch to hike the top marginal tax rate on income earned above $10 million to 70 percent. She has also gotten behind the so-called Green New Deal, which would see a massive and costly government effort.

The former Governor of Florida (and new Senator from the state) obviously is enjoying the fact that New York politicians are upset.

Here’s some of what Rick Scott wrote in today’s Wall Street Journal.

America is a marketplace where states are competing with each other, and New York is losing. Their loss is Florida’s gain… I would like to tell New Yorkers on behalf of the rest of America that our hearts go out to you for your sagging luxury real-estate market. But you did this to yourself, and you can fix it yourself. If you cut taxes and make state and local government efficient, maybe you can compete… I made more than 20 trips to high-tax states like California, Connecticut, Illinois, New York and Pennsylvania to lure businesses to Florida. The tax-happy leaders of those states were furious, which made the visits all the more enjoyable for me. They called me every name in the book. But they were the ones who raised taxes, and bad decisions have consequences. The elites in New York and Washington should commission a study of Florida to see what happens when conservative ideas are put into practice. …Florida’s economy is thriving, expanding at a record pace. …There’s a reason Rep. Alexandria Ocasio-Cortez’s mom left New York for Florida. And there’s a reason companies are fleeing high-tax states, bringing jobs with them to Florida.

I mentioned above that having no state income tax gives Florida a big advantage over New York.

Courtesy of Mark Perry, here a comprehensive comparison of the two states.

Wow. If this was a tennis tournament, the announcers would be saying “game, set, and match.” And if it was a boxing contest, it would be a knock-out.

The bottom line is that we should expect more rich people to escape New York and move to Florida because they’ll get to keep more of their money.

And we should expect more lower-income and middle-class people to also make the same move because Florida’s better policy means more jobs and more opportunity (sadly, Rep. Ocasio-Cortez has learned nothing from her mother’s move).

P.S. New York actually doesn’t do terribly in nationwide rankings for pension debt, though it is still below Florida.

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I wrote a couple of weeks ago about how New York is committing slow-motion fiscal suicide.

The politicians in Illinois must have noticed because they now want (another “hold my beer” moment?) to accelerate the already-happening collapse of their state.

The new governor, J.B. Pritzker, wants to undo the state’s 4.95 percent flat tax, which is the only decent feature of the Illinois tax system.

And he has a plan to impose a so-called progressive tax with a top rate of 7.95.

Here are some excerpts from the Chicago Tribune‘s report., starting with the actual plan.

Democratic Gov. J.B. Pritzker embarked on a new and potentially bruising political campaign Thursday by seeking to win public approval of a graduated-rate income tax that he contended would raise $3.4 billion by increasing taxes for the wealthy…for his long-discussed plan to replace the state’s constitutionally mandated flat-rate income tax. Currently, all Illinois residents are taxed at 4.95 percent… Pritzker’s proposal is largely reliant on raising taxes significantly on residents making more than $250,000 a year, with those earning $1 million and up taxed at 7.95 percent of their total income. …The corporate tax rate would increase from the current 7 percent to 7.95 percent, matching the top personal rate. …The governor’s proposal would give Illinois the second-highest top marginal tax rate among its neighboring states.

And here’s what would need to happen for the change to occur.

Before Pritzker’s plan can be implemented, three-fifths majorities in each chamber of the legislature must approve a constitutional amendment doing away with the flat tax requirement. The measure would then require voter approval, which couldn’t happen until at least November 2020. …Democrats hold enough seats in both chambers of the legislature to approve the constitutional amendment without any GOP votes. Whether they’ll be willing to do so remains in question. Democratic leaders welcomed Pritzker’s proposal… voters in 2014 endorsed the idea by a wide margin in an advisory referendum.

The sensible people on the Chicago Tribune‘s editorial board are not very impressed, to put it mildly.

…how much will taxes increase under a rate structure Pritzker proposed? You might want to cover your eyes. About $3.4 billion annually… That extraction of dollars from taxpayers’ pockets would be in addition to roughly $5 billion raised annually in new revenue under the 2017 income tax hike. …How did Springfield’s collection of all that new money work out for state government and taxpayers? Here’s how: Illinois remains deeply in debt, continues to borrow to pay bills, faces an insurmountable unfunded pension liability and is losing taxpayers who are fed up with paying more. The flight of Illinoisans to other states is intensifying with 2018’s loss of 45,116 net residents, the worst of five years of consistent, dropping population. …Illinois needs to be adding more taxpayers and businesses, not subtracting them. When politicians raise taxes, they aren’t adding. A switch to a graduated tax would eliminate one of Illinois’ only fishing lures to attract taxpayers and jobs: its constitutionally protected flat income tax. …Pritzker’s proposal, like each tax hike before it, was introduced with no meaningful reform on the spending side of the ledger. This is all about collecting more money. …In fact, the tax hike would come amid promises of spending new billions.

And here’s a quirk that is sure to backfire.

For filers who report income of more than $1 million annually, the 7.95 percent rate would not be marginalized; meaning, it would be applied to every dollar, not just income of more than $1 million. Line up the Allied moving vans for business owners and other high-income families who’ve had a bellyful of one of America’s highest state and local tax burdens.

The Tax Foundation analyzed this part of Pritzker’s plan.

This creates a significant tax cliff, where a person making $1,000,000 pays $70,935 in taxes, while someone earning one dollar more pays $79,500, a difference of $8,565 on a single dollar of income.

That’s quite a marginal tax rate. I suspect even French politicians (as well as Cam Newton) might agree that’s too high.

Though I’m sure that tax lawyers and accountants will applaud since they’ll doubtlessly get a lot of new business from taxpayers who want to avoid that cliff (assuming, of course, that some entrepreneurs, investors, and business owners actually decide to remain in Illinois).

While the tax cliff is awful policy, it’s actually relatively minor compared to the importance of this table in the Tax Foundation report. It shows how the state’s already-low competitiveness ranking will dramatically decline if Pritzker’s class-warfare plan is adopted.

The Illinois Policy Institute has also analyzed the plan.

Unsurprisingly, there will be fewer jobs in the state, with the losses projected to reach catastrophic levels if the new tax scheme is adjusted to finance all of the Pritzker’s new spending.

And when tax rates go up – and they will if states like Connecticut, New Jersey, and California are any indication – that will mean very bad news for middle class taxpayers.

The governor is claiming they will be protected. But once the politicians get the power to tax one person at a higher rate, it’s just a matter of time before they tax everyone at higher rates.

Here’s IPI’s look at projected tax rates based on three different scenarios.

The bottom line is that the middle class will suffer most, thanks to fewer jobs and higher taxes.

Rich taxpayer will be hurt as well, but they have the most escape options, whether they move out of the state or rely on tax avoidance strategies.

Let’s close with a few observations about the state’s core problem of too much spending.

Steve Cortes, writing for Real Clear Politics, outlines the problems in his home state.

…one class of people has found a way to prosper: public employees. …over 94,000 total public employees and retirees in Illinois command $100,000+ salaries from taxpayers…former Chicago Mayor Richard M. Daley, who earned a $140,000 pension for his eight years of service in the Illinois legislature. …Such public-sector extravagance has fiscally transformed Illinois into America’s Greece – only without all the sunshine, ouzo, and amazing ruins.

So nobody should be surprised to learn that the burden of state spending has been growing at an unsustainable rate.

Indeed, over the past 20 years, state spending has ballooned from $34 billion to $86 billion according to the Census Bureau. At the risk of understatement, the politicians in Springfield have not been obeying my Golden Rule.

And today’s miserable fiscal situation will get even worse in the near future since Illinois is ranked near the bottom when it comes to setting aside money for lavish bureaucrat pensions and other retirement goodies.

Indeed, paying off the state’s energized bureaucrat lobby almost certainly is the main motive for Pritzker’s tax hike. As as happened in the past, this tax hike is designed to finance bigger government.

Yet that tax hike won’t work.

Massive out-migration already is wreaking havoc with the state’s finances. And if Pritzker gets his tax hike, the exodus will become even more dramatic.

P.S. Keep in mind, incidentally, that all this bad news for Illinois will almost certainly become worse news thanks to the recent tax reform. Restricting the state and local tax deduction means a much smaller implicit federal subsidy for high-tax states.

P.P.S. I created a poll last year and asked people which state will be the first to suffer a fiscal collapse. Illinois already has a big lead, and I won’t be surprised if that lead expands if Pritzker is able to kill the flat tax.

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According to Freedom in the 50 States, which we reviewed a couple of days ago, New Jersey is in the bottom 10 and has been moving in the wrong direction.

This dismal ranking is not an anomaly. New Jersey also is in the bottom 10 of states according to Economic Freedom of North America, and the Garden State is dead last according the State Business Tax Climate Index and State Fiscal Condition.

In a perverse way, I admire New Jersey’s politicians. They’re not satisfied with the state’s low scores. They want to become even less competitive. If that’s even possible.

As I noted in the interview, the latest proposal for a “rain tax” isn’t necessarily objectionable if examined in isolation.

But in the context of New Jersey’s fiscal deterioration, it’s almost as if politicians are writing another passage in a very long suicide note for the state.

Consider what happened recently with the gas tax, as explained by the Wall Street Journal.

…a silver lining used to be the Garden State’s relatively low gasoline tax of 14.5 cents a gallon—second lowest in the U.S. No more, and therein lies a tale of why taxing the rich to finance government is an illusion. In October 2016, then-Gov. Chris Christie signed a bill raising the gas tax by 22.6 cents to 37.1 cents a gallon…the bill also included a clause that automatically raises the gas tax if it doesn’t produce the expected revenue each year. This is a self-fulfilling economic prophesy. A higher gas tax causes people to drive less, which in turn has meant that revenues have fallen short of the expected $2 billion target. So on Oct. 1 the gas tax will rise another 4.3 cents to 41.4 cents per gallon, which will be the ninth highest in the U.S. …This will be the state’s third tax increase in four months, following June’s increase in income and corporate tax rates. …The larger lesson is that sooner or later the middle class always gets the bill for bigger government. Higher income and corporate taxes drive the affluent out of the state, which means less revenue. That leaves the middle class to pay in higher sales, property and now gasoline taxes.

Needless to say, New Jersey’s taxaholic lawmakers want even more revenue.

Here are some excerpts from a report by Politico.

Gov. Phil Murphy said Wednesday he may propose new tax increases when he unveils his budget in March, saying he’s worried that the state has not done enough to achieve what he called “tax fairness.” …The governor…had sought some $1.7 billion in new taxes… Murphy was met with fierce resistance from fellow Democrats in the Legislature… Murphy ultimately agreed to…$1.6 billion in annual revenue. …Murphy, speaking at a church in Newark where he delivered a speech on his first-year accomplishments, said he needs to leave his options open as he starts to prepare a budget… “I would say everything is on the table. Period, full stop,” he added when pressed again about the idea of new tax increases.

If all this sound worrisome, that’s because it is.

But it gets even worse. As I warned at the end of the interview, the 2017 tax law restricts the ability of federal taxpayers to deduct taxes paid to state and local governments.

And that means the full burden of those taxes is now much more explicit, which means more and more taxpayers in high tax rates are going to “vote with their feet” and move to states with less onerous fiscal regimes.

In other words, New Jersey politicians are making their tax system worse at precisely the moment that the geese with the golden eggs have more incentive to fly away.

Insane.

P.S. Given this grim news, I’m surprised that fewer than 9 percent of people picked New Jersey to be the first state that will suffer fiscal collapse.

P.P.S. What’s really remarkable – albeit in a very sad and tragic sense – is that New Jersey in my lifetime used to be like New Hampshire, with no state income tax and no state sales tax.

P.P.P.S. There is a Jersey with good tax policy, but it’s far away from the American version.

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There were several good features of the 2017 tax bill, including limitations on the state and local tax deduction.

But the 21 percent corporate tax rate was the unquestioned crown jewel of the Tax Cut and Jobs Act. The U.S. system had become extremely anti-competitive thanks to a 35 percent rate that was far above the world average, so reform was desperately needed.

That’s the good news.

The bad news is that Democrats in the House of Representatives already are pushing for a big increase in the corporate rate.

Rep. John Yarmuth, the new House Budget chairman, said his chamber’s budget blueprint will aim to claw back lost revenue by boosting the corporate tax rate from its current 21 percent to as high as 28 percent… he anticipates the budget resolution will envision changes to the 2017 GOP tax overhaul, including raising the corporate tax rate above its current 21 percent. “…We’ll see how much revenue we can get out of it.” The rate was 35 percent before it was cut in the GOP tax bill.

Since Republicans control the Senate and Trump is in the White House, there’s probably no short-term risk of a higher corporate tax rate.

But such an initiative could be a major threat after the 2020 election, so let’s augment our collection of evidence showing why a higher rate would be a very bad idea.

We’ll start with some analysis from the number crunchers at the Tax Foundation.

A corporate tax rate that is more in line with our competitors reduces the incentives for firms to realize their profits in lower-tax jurisdictions and encourages companies to invest in the United States. Raising the corporate income tax rate would dismantle the most significant pro-growth provision in the Tax Cuts and Jobs Act, and carry significant economic consequences. …Raising the corporate income tax rate would reduce economic growth, and lead to a smaller capital stock, lower wage growth, and reduced employment. …Raising the rate to 25 percent would reduce GDP by more than $220 billion and result in 175,700 fewer jobs.

Here’s the table showing the negative effect of a 22 percent rate and a 25 percent rate, so a bit of extrapolation will give you an idea of how the economy will suffer with a 28 percent rate.

By the way, since the adverse impact on wages is one of the main reasons to be against a higher corporate tax rate, I’ll also share this helpful flowchart from the article.

Now let’s look at some research from China, which underscores the importance of low rates if we want more innovation.

Here’s the unique set of data that created an opportunity for the research.

In November 2001, China implemented a tax collection reform on all manufacturing firms established on or after January 2002, which switched the collection of corporate income taxes from the local tax bureau to the state tax bureau. After the reform, similar firms established before or after 2002 could pay very different effective tax rates because of the differences in the management and incentives of those two types of tax bureaus…, resulting in a reduction of effective corporate income tax rates by almost 10% among newly established firms. …the policy change created exogenous variations in the effective tax rate among similar firms established before versus after 2002. We can thus apply a regression discontinuity design (RD) and use the generated variation in the effective tax rate to identify the impact of taxes on firm innovation.

And here are the findings.

Our analysis yields several interesting results. First, we show a strong and robust causal relationship between tax rate and firm innovation. Decreasing the effective tax rate by one standard deviation (0.01) increases the average number of patent application by a significant 5.7% (see Figure 2 for the graphical evidence). The reform also stimulated R&D expenditures and increased the skilled-labour ratio by 14%. Second, a lower tax rate also improves the quality of patents. The impact of tax reform on patent applications mainly comes from its effect on invention and utility patents – decreasing the effective tax rate by one standard deviation improves the probability of having an invention patent application by 4.4% and increases the number of utility patent applications by 4.7%.

Don’t forget that high personal tax rates also discourage innovation, so it’s a pick-your-poison menu.

Here’s a chart from the study, showing the difference in patents between higher-taxed firms and lower-taxed firms.

Last but not least, let’s review some of the findings from a study published by the National Bureau of Economic Research.

We present new data on effective corporate income tax rates in 85 countries in 2004. …In a cross-section of countries, our estimates of the effective corporate tax rate have a large adverse impact on aggregate investment, FDI, and entrepreneurial activity. For example, a 10 percent increase in the effective corporate tax rate reduces aggregate investment to GDP ratio by 2 percentage points. Corporate tax rates are also negatively correlated with growth, and positively correlated with the size of the informal economy. The results are robust to the inclusion of controls for other tax rates, quality of tax administration, security of property rights, level of economic development, regulation, inflation, and openness to trade

And here’s one of the many charts and tables in the study.

The bottom line is that a higher corporate tax rate will be bad for workers for the simple reason that less investment means lower productivity and lower productivity means lower wages.

P.S. It’s also likely that House Democrats will try to increase the top personal tax rate, though hopefully they’re not so crazy as to push for Ocasio-Cortez’s 70 percent rate.

P.P.S. it’s quite possible that an increase in the corporate tax rate would reduce revenues, especially in the long run.

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When I give speeches on the importance of public policy, I frequently share data showing that pro-market nations are relatively prosperous when compared to countries with statist policies.

One of the most dramatic examples is South Korean prosperity versus North Korean deprivation.

It’s not that South Korea is perfect. After all, it only ranks #35 according to Economic Freedom of the World.

But that’s enough economic liberty to be in the “most free” category. And this helps to explain why South Korean living standards have climbed dramatically compared to the economic hellhole of North Korea (and you see something similar if you compare Venezuela and South Korea).

I’m definitely not the only person to notice the difference between the two Koreas. Here are some excerpts from one of Richard Rahn’s columns in 2017.

In 1960, South Korea and North Korea were similar in their poverty. Now, 50-plus years later, South Korea has a per-capita income more than 20 times that of North Korea, at approximately $38,000 per year, which is higher than that of Spain or Italy. South Koreans have gone from a per-capita income in 1970 that was about 10 percent of the average American to almost 70 percent today. …Koreans in both the North and South come from the same genetic stock, speak the same language, and occupy adjoining pieces of land with much of the same topography and limited natural resources. North Korea is the ultimate consequence of socialism, which always contains the seeds of its own destruction. Socialism goes against human nature, requiring its government to become increasingly authoritarian — North Korea being Exhibit A.

But Richard also warned that South Korea can’t rest on its laurels.

While economic growth per year averaged more than 9 percent from 1963 to 1990, it has now slowed down and last year was only 2.8 percent…a sharp drop from earlier decades. There is too much unneeded and counterproductive regulation, including the lack of ease of creating new businesses, barriers to imports and inward foreign investment. By any measure, South Korea has been a great success, but probably not as much as it could have been or can be if it followed more of a classic free trade and more limited-government model as practiced by Hong Kong and others. The country is increasingly exhibiting the disease of most other rich, developed democracies by allowing itself to be slowly seduced into the promise of more government services and attendant regulation, rather than the tougher and more competitive policies that created the wealth. Will South Korea avoid the stagnation of Japan and much of Europe? The jury is still out.

The jury may still be out, but there is growing evidence that South Korea is heading in the wrong direction because the nation’s relatively new President in increasing the burden of government.

Here are some passages from a report in the Japan Times.

Moon Jae-in began his second full year as South Korea’s president with a reminder of what didn’t work in the first — namely his economic policies. …The self-styled “jobs president” has seen his once sky-high poll numbers tumble… Moon, a progressive, was swept into office in 2017 promising a reversal from the conglomerate-focused economic agenda of ousted President Park Geun-hye. But his plan to raise the minimum wage 11 percent disappointed… More than three-quarters of the 30 experts surveyed by Bloomberg News last month predicted that employment growth would slow this year, in part because of the wage hike. …In a speech at his news conference Thursday, Moon…pledged to improve the safety net…and fix what he described as “the worst forms of polarized wealth and economic inequality in the world.” …More than half of South Koreans surveyed in another Gallup poll last month said that the administration needed “to focus on economic growth, rather than income distribution.”

By the way, the article doesn’t even mention that South Korea faces a major demographic challenge.

It has a catastrophically low fertility rate, which means that the tax-and-transfer welfare state will become increasingly unaffordable as the ratio of workers to recipients shifts in the wrong direction.

Entitlement reform is the sensible answer to this problem (see Hong Kong, for example).

But that’s obviously not happening under President Moon. Indeed, he wants to make matters worse by expanding the welfare state.

Some people in South Korea realize that demographics are a problem for their nation.

The U.K.-based Express looks at their attempted solution.

Seoul’s Dongguk and Kyung Hee universities say the courses on dating, sex, love and relationships target a generation which is shunning traditional family lives. …as part of the course, students have to date three classmates for a month each. …The course has expanded to Kyong Hee university, which offers “Love and Marriage” classes and Inha university in Incheon, a specialist engineering college, where students can now sign up to lessons on prioritising success and love. In 2016 the number of marriages hit its lowest since 1977, according to data from the government agency Statistics Korea. …The crude marriage rate – the annual number of marriages per 1,000 people – was 5.5 last year, compared with 295.1 when statistics began in 1970. Seoul has spent about £50 billion trying to boost the birth rate.

I’m skeptical of this approach, regardless of how much money the government spends.

Policy makers should focus instead on things they can control, such as fiscal policy and regulatory policy.

And this is why South Korea’s lurch to the left is so disappointing. Politicians are making things worse rather than better.

Even the New York Times is reporting that Moon’s statist agenda isn’t working.

Under President Moon Jae-in, South Korea has raised taxes and the minimum wage in the name of economic growth. So far, it hasn’t worked out as planned. Growth has slowed, unemployment has risen and small-business owners…are complaining. …With his progressive policies, President Moon is trying to tackle some of the same economic problems that plague the United States and much of the developed world. They include a widening wealth gap, slower growth and stagnant wages. …South Korea’s troubles suggest the limits of the state in solving economic problems, especially without addressing the underlying structural issues. …After his election in May 2017, Mr. Moon undertook a sharp shift in economic policy. He supported higher wages, tighter restrictions on working hours and greater welfare spending, funded by tax increases on companies and high-income earners. …Mr. Moon has paid a steep political price for his agenda. His approval rating has plummeted from 84 percent in mid-2017 to 45 percent in the most recent Gallup poll. …The 2019 budget represents the sharpest increase in spending in a decade… The minimum wage has also gone up again for 2019, by 11 percent.

More taxes, more spending, more regulation, and more intervention. Who does Moon think he is, Barack Obama or Richard Nixon?

On a serious note, it surely says something that even the New York Times is forced to acknowledge that statist policies backfire.

Let’s close by looking at how South Korea’s economic freedom score has evolved over time. As you can see, there was a lot of economic liberalization between 1975-2005. That’s the good news.

The bad news is that economic liberty has declined since the mid-2000s.

The drop is modest, at least in absolute terms. But it’s also important (as I explained when looking at Italy) to look at relative competitiveness.

South Korea’s current score of 7.53 isn’t that much lower than its 7.67 score in 2006. But that slight drop, along with pro-reforms steps that other nations have taken, means that South Korea is now ranked #35 instead of #20.

And the current scores are based on policy in 2016, before Moon moved South Korea in the direction of more statism. This doesn’t bode well.

P.S. I’m not expecting South Korea to become another Hong Kong or Singapore, but it should at least seek incremental progress rather than incremental deterioration. Taiwan is a good example of that approach.

July 29, 2021 Addendum: Here’s a chart showing that both South Korea and Taiwan have easily out-performed the world average in recent decades.

The key question, of course, is whether they will follow the right policies and get continued good performance in the future.

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Today is my last day in Chile, so today’s column will build upon what I wrote last week.

I have three charts that illustrate how Chile’s pro-market reforms have been great news – especially for poor people (or, to be more accurate, for Chileans who used to be poor).

We’ll start with this chart from the most recent issue of Economía y Sociedad, which shows that there’s more mobility in Chile than any other OECD nation.

Honest folks on the left should view this as unambiguously positive.

Similarly, this Gini data (measuring the degree of inequality) should be slam-dunk evidence of progress for all left-of-center people.

For what it’s worth, I don’t care about the Gini coefficient. What matters to me is economic growth so that everyone can get richer.

If rich people happen to get richer faster than poor people (like in China), that’s fine.

And if poor people happen to get richer faster than rich people (like in Chile), that’s fine as well.

What irks me is that folks who fixate on inequality often support policies that retard growth. In other words, they’re so worried about rich people getting richer that they advocate for bigger government, which makes it harder for poor people to become richer.

Economic growth, by contrast, truly is the rising tide that lifts all boats.

Which is why this final chart (based on the Maddison database) is so powerful. It shows 1975-2016 income trends for Chile (red) and other major Latin American economies. As you can see, Chile started near the bottom and is now the region’s richest nation.

Wow, Chile didn’t just converge. It surpassed.

It’s also worth noting how nations such as Argentina, Venezuela, and Cuba have enjoyed very little income growth over the past 40 years.

The bottom line is that those nations are evidence of the costly impact of statism, while Chile is an amazing example of how capitalism generates widely shared prosperity.

P.S. I’m not claiming Chile is a perfect role model. It is #15 in Economic Freedom of the World, so there is considerable room for improvement. But I am arguing it is a successful example of how better policy is great news for all segments of society.

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I’m glad the United States is now ranked #1 in the World Economic Forum’s Global Competitiveness Report, though I point out in this interview that Trump’s performance is mostly a net wash.

His sensible approach to tax and regulation is offset by his weak approach to spending and his problematic view of monetary policy.

I’m embarrassed to admit that I forget to mention protectionism as another area where Trump is pushing in the wrong direction.

But let’s not focus on Trump. Instead, let’s take a closer look at the new data from the World Economic Forum.

And we’ll start with a look at the top 20. You’ll see some familiar jurisdictions, places that always get good grades, such as Singapore, Switzerland, and Hong Kong.

But you’ll also notice that there are several European welfare states with very good scores.

That’s because the GCR – unlike Economic Freedom of the World or the Index of Economic Freedom – does not rank nations based on economic policy. It’s more a measure of the business environment.

But since good policy tends to create a good business environment, there is a connection. Nations such as Germany and the Netherlands, as well as Scandinavian countries, have big welfare states. But the damage of those policies is offset by a very laissez-faire approach to businesses. So the big companies that help put together the GCR understandably give those places good scores.

By the way, it’s also worth mentioning that the 2018 edition uses a revised methodology. And based on this new approach, the United States retroactively gets the top score for 2017 as well.

All that being said, does it matter if a nation is ranked higher rather than lower?

Based on this strong relationship between competitiveness scores and economic output, the answer is yes.

The bottom line is that there’s a very meaningful link between economic liberty and national prosperity.

Now let’s take a closer look at the scores for the United States. As you can see, our top score is mostly due to our market efficiency and innovation environment.

For what it’s worth, I don’t fully agree with the report’s methodology. But that’s mostly because I prefer to look at the degree of economic liberty rather than whether a nation is business friendly. There’s an overlap, of course, but it’s nonetheless important to distinguish between pro-market and pro-business.

In any event, here are a couple of additional findings that caught my eye.

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I recently wrote about the Tax Foundation’s State Business Tax Climate Index, which is a snapshot of current competitiveness (New Jersey is in last place, which shouldn’t surprise anyone).

But what if we want to know which states are moving in the right direction or wrong direction?

If so, the best document to review is Chris Edwards’ Fiscal Policy Report Card on America’s Governors.

The new edition just came out, so I immediately looked at the rankings. The nation’s best governor – by a comfortable margin – is Susana Martinez of New Mexico.

She is joined by four other governors who earned top marks.

Eight governors, including two Republicans, were in the cellar.

The report has some other data worth sharing.

Here’s a chart that shows what has happened to state spending this century. What caught my eye is the boom-bust cycle of excessive spending growth when the economy is growing (and generating lots of revenue) and cutbacks during the downturn.

Yet another argument for spending caps, such as TABOR in Colorado.

Last but not least, the report included some analysis on tax-driven migration (the topic we covered last week).

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Yesterday, I wrote about the newest edition of Economic Freedom of the World, which is my favorite annual publication.

Not far behind is the Tax Foundation’s State Business Tax Climate Index, which is sort of the domestic version of their equally fascinating (to a wonk) International Tax Competitiveness Index.

And what can we learn from this year’s review of state tax policy? Plenty.

…the specifics of a state’s tax structure matter greatly. The measure of total taxes paid is relevant, but other elements of a state tax system can also enhance or harm the competitiveness of a state’s business environment. The State Business Tax Climate Index distills many complex considerations to an easy-to-understand ranking.

That’s the theory, but what about the results?

Here are the best and worst states.

If you pay close attention, there’s a common thread for the best states.

The absence of a major tax is a common factor among many of the top 10 states. …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. Wyoming, Nevada, and South Dakota have no corporate or individual income tax (though Nevada imposes gross receipts taxes); Alaska has no individual income or state-level sales tax; Florida has no individual income tax; and New Hampshire, Montana, and Oregon have no sales tax.

By the way, both Utah and Indiana are among the nine states with flat tax systems, so every top-10 state has at least one attractive feature.

But if you peruse the bottom-10 states, you’ll find that every one of them has an income tax with “progressive” rates that punish people for contributing more to the economy.

Indeed, half of the states on that unfortunate list are part of the “Class-Warfare Graduated Tax” club.

Not a desirable group, assuming the goal is faster growth and more jobs.

The Tax Foundation’s report also is worth reading because it reviews some of the academic evidence about the superiority of pro-growth tax systems.

Helms (1985) and Bartik (1985) put forth forceful arguments based on empirical research that taxes guide business decisions. Helms concluded that a state’s ability to attract, retain, and encourage business activity is significantly affected by its pattern of taxation. Furthermore, tax increases significantly retard economic growth when the revenue is used to fund transfer payments. Bartik concluded that the conventional view that state and local taxes have little effect on business is false. Papke and Papke (1986) found that tax differentials among locations may be an important business location factor, concluding that consistently high business taxes can represent a hindrance to the location of industry. …Agostini and Tulayasathien (2001) examined the effects of corporate income taxes on the location of foreign direct investment in U.S. states. They determined that for “foreign investors, the corporate tax rate is the most relevant tax in their investment decision.” Therefore, they found that foreign direct investment was quite sensitive to states’ corporate tax rates. Mark, McGuire, and Papke (2000) found that taxes are a statistically significant factor in private-sector job growth. Specifically, they found that personal property taxes and sales taxes have economically large negative effects on the annual growth of private employment. …Gupta and Hofmann (2003) regressed capital expenditures against a variety of factors… Their model covered 14 years of data and determined that firms tend to locate property in states where they are subject to lower income tax burdens.

None of this research should come as a surprise.

Businesses aren’t moving from California to Texas because business executives prefer heat and humidity over ocean and mountains.

The bottom line is that tax rates matter, whether we’re looking at state data, national data, or international data.

Let’s close by sharing a map from the report. Simply stated, red is bad and teal (or whatever that color is) is good.

P.S. My one complaint about this report from the Tax Foundation is that it doesn’t include the overall fiscal burden. Alaska and Wyoming score well because they have small populations and easily fund much of their (extravagant) state budgets with energy-related taxes. If data on the burden of state government spending was included, South Dakota would be the best state.

P.P.S. Unsurprisingly, Americans are moving from high-tax states to low-tax states.

P.P.P.S. It’s also no surprise to find New Jersey in last place.

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Assuming elected officials care about the consequences of their actions, the obvious answer to a question isn’t always the right answer.

  • Q: Why should a (sensible) politician oppose the minimum wage, especially since some workers will get a pay hike?

A: Because the bottom rungs of the economic ladder will disappear and marginally skilled people will lose a chance to find employment and develop work skills.

  • Q: Why should a (sensible) politician oppose so-called employment-protection legislation, especially since some employees will be protected from dismissal?

A: Because employers will be less likely to hire workers if they don’t have the freedom to fire them if circumstances change.

  • Q: Why should a (sensible) politician oppose class-warfare taxation, especially since they could redistribute money to 90 percent of voters?

A: Because the short-run benefits of buying votes will be offset by long-run damage to investment, competitiveness, and job creation.

Many politicians are not sensible, of course, which is why bad policy is so common.

So it’s worth noting when someone actually makes the right decision, especially if they do it for the right reason.

With that in mind, President Emmanuel Macron deserves praise for gutting his country’s punitive “exit tax.” The U.K.-based Financial Times has the key details.

French president Emmanuel Macron said that he would remove the so-called exit tax as it was damaging for France’s image as a place to do business. The tax requires those entrepreneurs or investors who hold more than €800,000 in financial assets or at least 50 per cent of a company to pay capital gains up to 15 years after leaving France.  …A finance ministry spokesperson on Saturday confirmed “the removal of the exit tax as it existed.” …”The exit tax sends a negative message to entrepreneurs in France, more than to investors. Why? Because it means that beyond a certain threshold, you are penalised if you leave,” Mr Macron had said… “I don’t want any exit tax. It doesn’t make sense. People are free to invest where they want. I mean, if you are able to attract [investment], good for you, but if not, one should be free to divorce,” added the French president.

Kudos to Macron. He not only points out that such a tax discourages investment and entrepreneurship, but he also makes the moral argument that people should be free to leave a jurisdiction that mistreats them.

To be sure, the proposal isn’t perfect.

Mr Macron has now decided to introduce a new “anti-abuse” tax targeted at assets sold within two years of someone leaving the country. …“The new system will henceforth target divestments occurring shortly after leaving France — two years — to avoid letting people make short trips abroad in order to optimise tax efficiencies,” added the spokesperson.

This is why I gave the plan two-plus cheers instead of three cheers.  Though I understand the political calculation. It would create a lot of controversy if a rich person moved for one year to one of the several European nations that have no capital gains tax (Netherlands, Belgium, Switzerland, etc), sold their assets, and then immediately moved back to France the following year.

The right policy, needless to say, is for there to be no capital gains tax, period.

But let’s not get sidetracked. Here are a few additional details from Reuters.

France imposed the so-called “Exit Tax” in 2011 during the presidency of Nicolas Sarkozy. …Its aim was to stop individuals temporarily changing their tax domicile in order to skirt French taxes but pro-business President Emmanuel Macron says it damages France’s attractiveness as an investment destination.

Yes, you read correctly, the class-warfare policy wasn’t imposed by the hard-left Francois Hollande, but by the Nicolas Sarkozy, the supposed conservative but de-facto leftist who preceded him.

What’s particularly bizarre is that Macron was a senior official for Hollande, yet he is the pro-market reformer who is trying to save France.

P.S. I’m embarrassed to admit that the United States has a very punitive exit tax (which Hillary Clinton wanted to make even worse).

P.P.S. Since one of my three examples at the beginning of today’s column dealt with the perverse consequences of “employment-protection laws,” I suppose it’s worth noting that’s another area where Macron is trying to reduce government intervention.

P.P.P.S. While Macron is a pro-market reformer at the national level, he advocates very bad ideas for the European Union.

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If the goal is higher living standards, then higher levels of productivity are necessary. And that requires entrepreneurship and innovation.

But bad tax policy can be an obstacle to the economic choices that create a better future.

I’ve already shared lots of research showing how punitive tax rates undermine growth, but it never hurts to add to the collection.

Let’s look at a new study by Ufuk Akcigit, John Grigsby, Tom Nicholas, and Stefanie Stantcheva. Here’s the issue they investigated.

…do taxes affect innovation? If innovation is the result of intentional effort and taxes reduce the expected net return from it, the answer to this question should be yes. Yet, when we think of path-breaking superstar inventors from history…we often imagine hard-working and driven scientists, who ignore financial incentives and merely seek intellectual achievement. More generally, if taxes affect the amount of innovation, do they also affect the quality of the innovations produced? Do they affect where inventors decide to locate and what firms they work for? …In this paper, we…provide new evidence on the effects of taxation on innovation. Our goal is to systematically analyze the effects of both personal and corporate income taxation on inventors as well as on firms that do R&D over the 20th century.

To perform their analysis, the economists gathered some very interesting data on the evolution of tax policy at the state level. Such as when personal income taxes were adopted.

By the way, I may have discovered an error. They show Connecticut’s income tax being imposed in 1969, but my understanding is that the tax was first levied less than 30 years ago.

In any event, the authors also show how, over time, states have taxed upper-income households.

They look at 20th-century data. If you want more up-to-date numbers, you can click here.

But let’s not digress. Here are some of the findings from the study.

We use OLS to study the baseline relationship between taxes and innovation, exploiting within-state tax changes over time, our instrumental variable approach and the border county design. On the personal income tax side, we consider average and marginal tax rates, both for the median income level and for top earners. Our corporate tax measure is the top corporate tax rate. We find that personal and corporate income taxes have significant effects at the state level on patents, citations (which are a well-established marker of the quality of patents), inventors and “superstar” inventors in the state, and the share of patents produced by firms as opposed to individuals. The implied elasticities of patents, inventors, and citations at the macro level are between 2 and 3.4 for personal income taxes and between 2.5 and 3.5 for the corporate tax. We show that these effects cannot be fully accounted for by inventors moving across state lines and therefore do not merely reflect “zero-sum” business-stealing of one state from other states.

Here are further details about the statewide impact of tax policy.

A one percentage point increase in either the median or top marginal tax rate is associated with approximately a 4% decline in patents, citations, and inventors, and a close to 5% decline in the number of superstar inventors in the state. The effects of average personal tax rates are even larger. A one percentage increase in the average tax rate at the 90th income percentile is associated with a roughly 6% decline in patents, citations, and inventors and an 8% decline in superstar inventors. For the average tax rate at the median income level, the effects are closer to 10% for patents, citations, and inventors, and 15% for superstar inventors.

At the risk of understatement, that’s clear evidence that class-warfare policy has a negative effect.

The study also looked at several case studies of how states performed after significant tax changes.

…case studies provide particularly clear visual evidence of a strong negative relationship between taxes and innovation. When combined with the macro state-level regressions, the instrumental variable approach and the border county analysis, the results overall bolster the conclusion that taxes were significantly negatively related to innovation outcomes at the state level.

Here’s the example of Delaware.

For what it’s worth, we have powerful 21st-century examples of the consequences of bad tax policy. Just think New JerseyCalifornia, and Illinois.

But I’m digressing again.

Back to the study, were we find that the authors also look at how tax policy affects the decisions of people and companies.

We then turn to the micro-level, i.e., individual firms and inventors. …we find that taxes have significant negative effects on the quantity and quality (as measured by citations) of patents produced by inventors, including on the likelihood of producing a highly successful patent (which gathers many citations). At the individual inventor level, the elasticity of patents to the personal income tax is 0.6-0.7, and the elasticity of citations is 0.8-0.9. …we show that individual inventors are negatively affected by the corporate tax rate, but much less so than by personal income taxes. …We find that inventors are significantly less likely to locate in states with higher taxes. The elasticity to the net-of-tax rate of the number of inventors residing in a state is 0.11 for inventors who are from that state and 1.23 for inventors not from that state. Inventors who work for companies are particularly elastic to taxes.

And here are additional details about the micro findings.

…patenting is significantly negatively affected by personal income taxes. A one percentage point higher tax rate at the individual level decreases the likelihood of having a patent in the next 3 years by 0.63 percentage points. Similarly, the likelihood of having high quality patents with more than 10 citations decreases by 0.6 percentage points for every percentage point increase in the personal tax rate. …We find that a one percentage point increase in the personal tax rate leads to a 1.1 percent decline in the number of patents and a 1.4-1.7 percent decline in the number of citations, conditional on having any. …the likelihood of having a corporate patent also reacts very negatively to the personal tax rate… A one percentage point decrease in the corporate tax rate increases patents by 4% and citations by around 3.5%. The IV results are of similar magnitudes, but again even stronger. According to the IV specification, a one percentage point decrease in the corporate tax rate increases patents by 6% and citations by 5%.

Here are some of the conclusions from the study.

Taxation – in the form of both personal income taxes and corporate income taxes – matters for innovation along the intensive and extensive margins, and both at the micro and macro levels. Taxes affect the amount of innovation, the quality of innovation, and the location of inventive activity. The effects are economically large especially at the macro state-level, where cross-state spillovers and extensive margin location and entry decisions compound the micro, individual-level elasticities. …while our analysis focuses on the relationship between taxation and innovation, our data and approach have much broader implications. We find that taxes have important effects on intensive and extensive margin decisions, on the mobility of people and where inventors and firms choose to locate.

In other words, the bottom line is that tax rates should be as low as possible to produce as much prosperity as possible.

P.S. If you check the postscript of this column, you’ll see that there is also data showing how inventors respond to international tax policy. And there’s similar data for top-level entrepreneurs.

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With the possible exception of a few extreme environmentalists, everyone agrees that robust long-run growth is a key to a better society.

An unprecedented jump in growth, for instance, is what enabled the western world to escape poverty, resulting in the famous “hockey stick” of modern prosperity.

Maintaining growth is an ongoing challenge for developed countries, to be sure, and it’s also vitally important to help developing nations grow and prosper.

Which is why policymakers should focus on the policies that generate good outcomes.

Libek, a think tank in Serbia, has released a study on this topic. They start by pointing out that we now have some good measures of economic liberty in various nations.

…the Economic Freedom in the World Index in 1996 by the Fraser Institute…was the first methodological tool that measured intrusion in functioning of the market process by government entities, either directly through government intervention or indirectly though regulation and market institutions. A similar index, Index of Economic Freedom, produced by the Wall Street Journal and the Heritage Foundation soon followed… Since this very successful tool was invented, it has been widely employed in empirical studies…, the most important were concerning the role of economic freedom in fostering economic growth. …empirical studies mostly concluded that there is a significant connection between economic freedom and economic growth.

Since I’m always citing the Fraser Index and the Heritage Index, I agree that these are very helpful sources of data.

And lots of academics also use those numbers.

So Libek took a close look at this wealth of empirical research.

Libek conducted a metastudy regarding economic freedom in December 2017, with the aim to reexamine the connection between economic freedom and economic growth in published empirical studies. …Using Google scholar mechanism…92 studies…consider the connection between economic freedom and economic growth. Out of these, a predominant majority of 86 studies (93.5%) finds a positive correlation or connection between them, while only 6 studies (6.5%) have less positive results. …This metastudy shows that empirical studies have predominantly found that economic freedom is associated with higher economic growth rates, while there is only one study claim otherwise and results of other 5 are less conclusive. This high rate of concurrence between economists is highly unusual, given the fact that economist tend to often disagree even among theoretically more accepted topics. Therefore, it is conclusively shown that higher level of economic freedom, ceteris paribus, leads to higher economic growth.

The folks at Libek have a big incentive to care about these issues because Serbia is a reform laggard.

Here’s a chart comparing economic freedom in Serbia with other European regions.

And here is why economic reform is so vitally important for the people of Serbia.

Serbia remains one of the poorest countries in Europe, measured by GDP, with just 5 000 euros per capita. These low growth rates do not provide a possibility for development and closing the gap with more advanced European economies. …A study estimated future economic gains through higher economic freedom (Gwartney and Lawson 2004) reporting that 1-point increase in economic freedom (measured on a 1 to 10 scale) would increase long term rate of economic growth for 1.24% of GDP. Therefore, if Serbia would increase its score from the current 6.75 to 7.75 points – the approximately current level of Austria or Germany, Serbian long-term growth rate would increase from the envisaged 2% in 2017 (and estimated by the IMF to stand at 3.5% in 2018 and 2019) to 5.25% in 2020 and afterwards. This growth rate would enable a fast income convergence with other European countries, with GDP level per capita doubling in 14 years.

Amen. Serbia has the capacity to “converge,” but that won’t happen without economic liberalization.

For non-Serbians, the parts of the Libek report that will be of greatest interest deal with examples of nations that are out-performing their neighbors.

The importance of economic freedom is well shown by the most important case studies from different continents: Chile (South America), Singapore and Korea (East Asia), and Botswana (Africa). In all these prominent cases, economic freedom propelled these societies to a high and sustainable economic growth which led them to prosperity, compared to their neighbors.

The report specifically looks at the long-run data for countries that have sharply diverged from regional competitors.

Let’s start by comparing Chile with the rest of South America. As you can see, Chile’s dramatic economic liberalization led to far higher levels of national prosperity.

Now let’s compare Botswana to the rest of Sub-Saharan Africa.

I did something similar back in 2015 and also earlier this year, so this remarkable data is impressive but not surprising.

Last but not least, let’s compare Singapore and South Korea to their neighbors.

Once again, we see a compelling link between economic liberty and economic outcomes.

This is dramatically evident when comparing South Korea and North Korea, but you also see remarkable numbers when comparing Singapore with the United States.

The lesson is not that nations need perfect policy (even Hong Kong has some statism). Instead, the message is that governments should strive to increase economic liberty – hopefully in big ways but even small reforms are helpful – so that there’s more “breathing room” for the economy’s productive sector.

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Two months ago, I shared some data on private gun ownership in the United States and declared that those numbers generated “The Most Enjoyable Graph of 2018.”

Now I have something even better because it confirms my hypothesis about tax competition being the most effective way of constraining greedy politicians.

To set the stage, check out these excerpts from a heartwarming story in the Wall Street Journal.

Last year’s corporate tax cut is reducing U.S. tax collections, as expected. But that change is likely to ripple far beyond the country’s borders in the years ahead, shrinking other countries’ tax revenue… The U.S. tax law will reduce what other countries collect from multinational corporations by 1.6% to 13.5%… Companies will be more likely to put profits and real investment in the U.S. than they were before the U.S. lowered its corporate tax rate from 35% to 21%, according to the paper. That will leave fewer corporate profits for other countries to tax. And as that happens, other countries are likely to chase the U.S. by lowering their corporate tax rates, too, creating the potential for what critics have called a race to the bottom. …Mexico, Japan and the U.K. rank near the top of the paper’s list of countries likely to lose revenue… Corporate tax rates steadily declined over the past few decades as countries competed to attract investment.

Amen. This was one of my main arguments last year for the Trump tax plan. Lower tax rates in America will lead to lower taxes elsewhere.

For instance, look at what’s now happening in Germany.

Ever since Donald Trump last year unveiled deep tax cuts for companies in America, German industry has been wracked with fears over the economic fallout. …“In the long term, Germany cannot afford to have a higher tax burden than other countries,” warned Monika Wünnemann, a tax specialist at German business federation BDI. …the BDI urges Berlin to cut the overall tax burden, including corporate and trade levies, to a maximum 25 percent, compared to 26 percent in the US. …tax competition has clearly heated up within the European Union: France plans to reduce its top corporate rate to 25 percent by 2022 from 34 percent. The UK wants to cut its rate to 17 percent by 2021 from 20 percent today. If it fails to take action, Germany will be stuck with the heaviest corporate tax burden among industrialized countries.

Now let’s peruse a recent study from the International Monetary Fund.

Tax competition and declining corporate income tax (CIT) rates are not new phenomena. However, over the past 30 years, the United States has been an outlier in not reducing tax rates Combined with the worldwide system of taxation, this is widely regarded as having served as an anchor to world CIT rates. Now the United States has cut its rate by 14 percentage points to 26 percent (21 percent excluding state taxes), which is close to the OECD member average of 24 percent (Figure 1). Combined with the (partial) shift toward territoriality, this may intensify tax competition. …Given the combination of highly mobile capital and source-based corporate income taxation, pressures on tax systems are not surprising. …The most clear-cut, and possibly largest, spillovers are still likely to be caused by the cut in the tax rate. …Depending on parameter assumptions, we find that reform will lead to average revenue losses of between 1.5 and 13.5 percent of the MNE tax base. …The paper has also discussed the likely policy reactions of other countries. …tax rates elsewhere also fall (by on average around 4 percentage points based on tentative estimates).

And here’s the chart from the IMF report that sends a thrill up my leg.

As you can see, corporate tax rates have plunged by half since 1980.

And the reason this fills me with joy is two-fold. First, we get more growth, more jobs, and higher wages when corporate rates fall.

Second, I’m delighted because I know politicians hate to lower tax rates. Indeed, they’ve tasked the OECD with trying to block corporate tax competition (fortunately the bureaucrats haven’t been very successful).

And I could add a third reason. The IMF confesses that we have even more evidence of the Laffer Curve.

So far, despite falling tax rates, CIT revenues have held up relatively well.

Game, set, match.

I’m very irked by what Trump is doing on trade, government spending, and cronyism, but I give credit where credit is due. I suspect none of the other Republicans who ran in 2016 would have brought the federal corporate tax rate all the way down to 21 percent. And I’m immensely enjoying how politicians in other nations feel pressure to do likewise.

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Shortly after the fiscal crisis began in Greece, I explained that the country got in trouble because of too much government spending.

More specifically, I pointed out that the country was violating my Golden Rule, which meant that the burden of spending was rising relative to the private economy.

That’s a recipe for trouble.

Unfortunately, thanks in large part to bad advice from the International Monetary Fund, Greek politicians decided to deal with an overspending problem by raising taxes.

Then doing it again.

And raising taxes some more.

And raising them again.

Then adding further tax hikes.

The tax burden is now so stifling that even the IMF admits the country may be on the wrong side of the Laffer Curve.

And establishment media sources are noticing. Here are some excerpts from a report in the Wall Street Journal.

Greece is…raising taxes so high that they are strangling the small businesses that form the backbone of its economy. …The tax increases have left Greece with some of Europe’s highest tax rates across several categories, including 29% on corporate income, 15% on dividends, and 24% on value-added tax (a rough equivalent of U.S. sales tax). Individuals pay as much as 45% income tax, plus an extra “solidarity levy” of up to 10%. Furthermore, workers and employers pay social-security levies of up to 27% of their salaries. …small and midsize businesses and self-employed people…are fighting the government in court over having to pay what they say is up to 80% of their average monthly takings in taxes and levies. Some also have to pay retroactive social-security contributions, to the point where professional associations say some of their members are having to pay more to the state than they make.

Paying more than they make? Francois Hollande will applaud when he learns that another nation has an Obama-style flat tax.

…economists and Greek entrepreneurs say heavy taxation doesn’t help. The tax burden is considered the most problematic factor for doing business in Greece, according to the World Economic Forum. “The tax burden creates a serious disincentive for economic activity. It mainly hits the most productive part of the Greek society… Aris Kefalogiannis, the CEO of olive-oil and food company Gaea, said the fiscal straitjacket is keeping highly qualified executives he would like to hire from coming to Greece. It has also made him more sparing with investments. …“But this abusive taxation is not backed by any actual reforms that would make the state efficient.”

Of course the state hasn’t been made more efficient. Why would politicians shrink government if higher taxes are an option?

It’s not as if Greek voters are poised to elect a Ronald Reagan or Margaret Thatcher, after all.

In any event, all of the tax increases are having predictably bad effects.

Tax evasion has led to higher tax rates on those Greeks who can’t or won’t evade taxes. The so-called gray economy is estimated at 26.5% of GDP… “Overtaxation is a vicious circle, which is not fixing the problem,” said 40-year-old electrician Antonis Alevizakis. “Only a third of customers want a receipt. The incentive to avoid a 24% value-added tax surcharge is big for them.” …More than 100,000 self-employed professionals have closed their businesses since mid-2016, to avoid rising taxation and social-security contributions, according to Finance Ministry data. Some of these people stopped self-employment, while others turned to the gray economy. …tax consultant Chrysoula Galiatsatou said. “A financially active part of the population sees no reason to try to do more.”

Why “try to do more” when the government gets the lion’s share of any additional income?

And why even stay in the country when there are better (less worse) tax systems in neighboring nations? Indeed, Greece is one of the few nations to raise corporate tax rates as the rest of the world is taking the opposite approach.

Here are some of the details. It appears that Bulgaria is a preferred destination for tax exiles.

Greece’s direct competitors for investment in its poorer, southeastern region of Europe have much lower taxes. For that reason, many Greek businesses and professionals are migrating to neighboring countries such as Bulgaria and Cyprus. …Around 15,000 Greek companies are registered in Bulgaria. Greece’s Finance Ministry estimates that 80% of them have a registration number but no activity in Bulgaria, and are only there to avoid Greek taxes. “If I stayed in Greece I would most certainly be in jail by now,” said John Douvis, who used his remaining savings in 2015 to move his family’s furniture factory from Athens to Blagoevgrad in Bulgaria. In Greece, he said, “it’s almost impossible for a company to survive unless it evades tax.”

In other words, the problem is tax rates, not tax evasion.

Lower the rates and evasion falls.

Let’s wrap up today’s column with a final observation. The WSJ story states that there have been spending cuts in addition to tax increases.

That’s basically true, but net effect of the Greek fiscal crisis is that government has become a bigger burden, relative to private economic output. Here’s a chart, based on data from the IMF.

The bottom line is that Greek politicians did way too much spending last decade and now they’re augmenting that mistake with way too much taxing this decade.

P.S. To reward everyone who read to the end, here’s some Greek-related humor.

This cartoon is quite  good, but this this one is my favorite. And the final cartoon in this post also has a Greek theme.

We also have a couple of videos. The first one features a video about…well, I’m not sure, but we’ll call it a European romantic comedy and the second one features a Greek comic pontificating about Germany.

Last but not least, here are some very un-PC maps of how various peoples – including the Greeks – view different European nations. Speaking of stereotypes, the Greeks are in a tight race with the Italians and Germans for being considered untrustworthy.

P.P.S. If you want some unintentional humor, did you know that Greece subsidizes pedophiles and requires stool samples to set up online companies?

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I’ve been in China this week, giving lectures about economic policy at Northeastern University in Shenyang.

I’ve explained that China has enjoyed reasonably impressive growth in recent decades thanks to pro-market reforms. But I’ve also pointed out that further economic liberalization is needed if China wants to avoid the middle-income trap.

That won’t be easy. Simply stated, I don’t think it’s possible to become a rich nation without free markets and small government.

The good news is that China’s economic freedom score has increased dramatically since reforms began, rising from 3.64 in 1980 to 6.40 in the latest edition of Economic Freedom of the World. And there’s been a dramatic increase in prosperity and a dramatic reduction in poverty.

The bad news is that a score of 6.40 means that China is only ranked #112 in the world. That’s way too low. The country needs a new burst of pro-market reform (especially since it also faces serious demographic challenges in the not-too-distant future).

In other words, China should strive to be more like #1 Hong Kong, which has a score of 8.97, or #4 Switzerland, with a score of 8.44.

Or even the #11 United States, which has a score of 7.94, or also #19 Netherlands, with a score of 7.74.

The bottom line is that China won’t become a rich nation so long as it has a score of 6.40 and a ranking of #112.

Fortunately, there is a pre-existing recipe for growth and prosperity. China needs to change the various policies that undermine competitiveness.

Since I’m a public finance economist, I told the students how China’s fiscal score (“size of government”) could be improved.

I recommended a spending cap, of course, but I also said the tax system needed reform to enable more prosperity.

Part of tax reform is low marginal tax rates on productive behavior.

Chinese academic experts agree. As reported by the South China Morning Post, they’re urging the government to significantly reduce the top rate of the personal income tax.

China needs to slash its highest tax levy on the nation’s top income earners in its upcoming individual tax code review, or risk seeing an unprecedented talent exodus, argued eight academics… They called for authorities to scrap the top two tax brackets of 35 per cent and 45 per cent in the current seven brackets progressive tax system on individuals, granting high income earners more leeway with a five tax brackets system that will be capped at 30 per cent.

The scholars pointed out that high tax rates are especially harmful in a world where high-skilled people have considerable labor mobility.

The academics from esteemed mainland universities called for further revision of the code, as the current draft failed…high income earners, a group that is often highly skilled professionals China wants to attract and retain in the global fight for talent. …For the “highly intelligent groups”, remunerations and royalties were likely to surpass the monthly salary, meaning that the combination can add up to a higher taxable income base and “seriously restrain them from” pursuing innovation, the academics argued. “In a global environment [when tax cuts become mainstream], if China maintains its high individual income tax rates … it will push the high-income, high-intelligent group overseas,” they said.

Needless to say, I’ll be very curious to see what happens. I’ve now been to China several times and I think the country has huge potential.

But achieving that potential requires reforms that will reduce the size and scope of government.

Here’s a chart I shared with the students, which shows that Taiwan has much more economic freedom and is much richer (basically an updated version of some numbers I put together in 2014).

The bottom line is that the country can become a genuine “Chinese Tiger” rather than a “paper tiger” with the right policies.

P.S. Some people actually think China should become more statist. Both the Organization for Economic Cooperation and Development and the International Monetary Fund have urged staggering tax increases in China.

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Guided by the principles of a simple and fair flat tax, I’ve been toiling for decades in the vineyard of tax reform. At the risk of mixing my metaphors, I usually feel like Don Quixote, engaged in a futile quest. Convincing politicians to reduce their power is not an easy task, after all.

But it is possible to make incremental progress. I’ve argued, ad nauseam, about the need to lower the corporate tax rate and the benefits of ending the state and local tax deduction, and we actually took big steps in the right direction last year.

Indeed, while the final legislation was far from perfect, it was certainly better than I expected.

But there’s no such thing as a permanent victory in Washington. The debate has now shifted from “is the tax plan a good idea?” to “is the tax plan working?” And that was the focus of my recent CNBC debate with Austan Goolsbee, the former Chairman of Obama’s Council of Economic Advisers.

Interestingly, Austan and I agreed on several issues.

At the risk of digressing, I should have mentioned that Trump’s corporate rate cut, while a big step in the right direction, should be viewed as a first step. As illustrated by this chart, the overall US corporate rate is still higher than the average for other advanced nations.

Let’s now get back to the interview. Goolsbee and I didn’t agree on everything.

  • Austan is fixated on class warfare, which I think is very bad economics because it means high marginal tax rates and/or a heavier tax bias against saving and investment.
  • He also frets about deficits, which is rather ironic since he didn’t seem to worry about red ink when Obama was pushing his failed stimulus scheme. In any event, I pointed out that there is no long-run tax cut.

Last but not least, here are some additional points from the interview

  • I repeatedly expressed concern that good tax policy won’t be very sustainable unless politicians restrain the excessive growth of government spending, both in the short run and long run.
  • I also pointed out that the restriction on the state and local tax deduction will help the national economy if it deters some big states from raising taxes (though that reform certainly isn’t slowing down the big spenders in New Jersey).
  • Even small differences in economic growth, if sustained over time, can make a big difference in living standards.
  • We should be worried that Trump will sabotage his tax cut with protectionism.

The bottom line is that last year’s tax plan resulted in a less-destructive tax code. That doesn’t guarantee fast growth since we also have to look at other policies, but it will help.

P.S. I indirectly tangled with Goolsbee in about taxes in 2010 and about spending in 2012.

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I wrote last month about a new book from the Fraser Institute about demographics and entrepreneurship.

My contribution was a chapter about the impact of taxation, especially the capital gains tax.

At a panel in Washington, I had a chance to discuss my findings.

If you don’t want to watch an 11-minute video, my presentation can be boiled down to four main points.

1. Demographics is destiny – Other authors actually had the responsibility of explaining in the book about the importance of demographic change. But it never hurts to remind people that this is a profound and baked-in-the-cake ticking time bomb.

So I shared this chart with the audience and emphasized that a modest-sized welfare state may have been feasible in the past, but will be far more burdensome in the future for the simple reason that the ratio of taxpayers to tax-consumers is dramatically changing.

And it goes without saying that big-sized welfare states are doomed to collapse. Think Greece and extend it to Italy, France, Japan, and other developed nations (including, I fear, the United States).

2. Entrepreneurship drives growth – Capital and labor are the two factors of production, but entrepreneurs are akin to the chefs who figure out news ways of mixing those ingredients.

For all intents and purposes, entrepreneurs produce the creative destruction that is a prerequisite for growth.

3. The tax code discourages entrepreneurship – The bulk of my presentation was dedicated to explaining that double taxation is both pervasive and harmful.

I shared my flowchart showing how the American tax code is biased against income that is saved and invest, which discourages entrepreneurial activity.

And then showed the capital gains tax burden in developed countries.

The U.S. is probably even worse than shown in the above chart since our capital gains tax is imposed on inflationary gains.

4. The United States need to be more competitive – Last but not least, I pointed out that America’s class-warfare tax policies are the fiscal equivalent of an “own goal” (soccer reference for World Cup fans).

And this chart from my chapter shows how the United States, as of mid-2016, had the highest combined tax rate on capital gains when including the effect of the capital gains tax.

That’s the bad news. The good news is that the Trump tax cuts did produce a lower corporate rate. So in the version below, I’ve added my back-of-the-envelope calculation of where the U.S. now ranks.

But the bottom line is still uncompetitive when looking at the tax burden on investment.

And never forget that this ultimately backfires against workers since it translates into lower pay.

P.S. The Wall Street Journal produced an excellent description of why capital gains taxation is very destructive.

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I’ve written over and over again that changing demographics are a very under-appreciated economic development. I’ve also written about why entrepreneurship is a critical determinant of growth.

But I never thought of combining those topics. Fortunately, the folks at the Fraser Institute had the foresight to do just that, having just published a book entitled Demographics and Entrepreneurship: Mitigating the Effects of an Aging Population.

There are chapters on theory and evidence. There are chapters on specific issues, such as taxes, regulation, migration, financial markets, and education.

It’s basically the literary equivalent of one-stop-shopping. You’ll learn why you should be concerned about demographic change. More important, since there’s not much policy makers can do to impact birthrates, you’ll learn everything you need to know about the potential policy changes that could help nations adapt to aging populations.

This short video is an introduction to the topic.

Let’s look at just a few of the highlights of the book.

In the opening chapter, Robert Murphy offers a primer on the importance of entrepreneurship.

…there is a crucial connection between entrepreneurship and economic prosperity. …There is a growing recognition that a society’s economic prosperity depends…specifically on entrepreneurship. …Two of the top names associated with the theory of entrepreneurship are Joseph Schumpeter and Israel Kirzner… Schumpeter famously invoked the term “creative destruction” to describe the volatile development occurring in a capitalist system… Kirzner has written extensively on entrepreneurship…and how…the alert entrepreneurial class who perceive these misallocations before their more complacent peers, and in the process earn pure profits… Schumpeter’s entrepreneur is a disruptor who creates new products first in his mind and then makes them a reality, whereas Kirzner’s entrepreneur is a coordinator who simply observes the profit opportunities waiting to be grasped. …If the goal is maximum economic efficiency in the long run, to provide the highest possible standard of living to citizens within the unavoidable constraints imposed by nature, then we need bold, innovative entrepreneurs who disrupt existing modes of production by introducing entirely new goods and services, but we also need vigilant, alert entrepreneurs who spot arbitrage opportunities in the existing price structure and quickly move to whittle them away.

Murphy describes in the chapter how there was a period of time when the economics profession didn’t properly appreciate the vital role of entrepreneurs.

But that fortunately has changed and academics are now paying closer attention. He cites some of the recent research.

An extensive literature documents the connection between entrepreneurship and economic growth. The studies vary in terms of the specific measure of entrepreneurship (e.g., small firms, self-employment rate, young firms, etc.) and the size of the economic unit being studied. …Carree et al. (2002) look at 23 OECD countries from 1976 to 1996. …They “find confirmation for the hypothesized economic growth penalty on deviations from the equilibrium rate of business ownership… An important policy implication of our exercises is that low barriers to entry and exit of businesses are necessary conditions for the equilibrium seeking mechanisms that are vital for a sound economic development” …Holtz-Eakin and Kao (2003) look at the birth and death rates of firms across US states, and find that this proxy for entrepreneurship contributes to growth. Similarly, Callejón and Segarra (1999) look at manufacturing firm birth and death rates in Spain from 1980 to 1992, and conclude that this measure of “turbulence” contributes to total factor productivity growth. …Wennekers and Thurik (1999) use business ownership rates as a proxy for “entrepreneurship.” Looking at a sample of 23 OECD countries from 1984 to 1994, they, too, find that entrepreneurship was associated with higher rates of employment growth at the national level.

In a chapter on taxation, Seth Giertz highlights the negative impact of taxes on entrepreneurship, particularly what happens with tax regimes have a bias against saving and investment.

High tax rates discourage both consumption and savings. But, for a given average tax rate, taxes on an income base penalize savings more heavily than taxes on consumption. …a consumption tax base is neutral between the decision to save versus consume. By contrast, an income tax base results in the double taxation of savings. …three major features of tax policy that are important for entrepreneurship. First, capital accumulation and access to capital is essential for innovation to have a big impact. Despite this, tax systems generally tax savings more heavily than consumption….Second, the tax treatment of risk affects incentives for entrepreneurship, since entrepreneurship tends to entail high risk. …progressivity can sometimes discourage entrepreneurship. This is because tax systems do not afford full offsets for losses, making progressivity effectively a tax increase. …Third, tax policy can lead entrepreneurial activity to shift from productive toward unproductive or destructive aims. Productive entrepreneurship tends to flourish when the route to great wealth is achieved primarily through private markets… High taxes reduce the rewards from productive entrepreneurship. All too often, smart, talented, and innovative people are drawn out of socially productive endeavours and into unproductive ones because the private returns from devising an innovative tax scheme—or lobbying government for special tax preferences—are greater than those for building the proverbial better mousetrap.

In a chapter I co-authored with Brian Garst, Charles Lammam, and Taylor Jackson, we look specifically at the negative impact of capital gains taxation on entrepreneurship.

We spend a bit of time reminding readers of what drives growth.

One of the more uncontroversial propositions in economics is that output is a function of labor (the workforce) and capital (machines, technology, land, etc.). Indeed, it is almost a tautology to say that growth exists when people provide more labor or more capital to the economy, or when—thanks to vital role of entrepreneurs—labor and capital are allocated more productively. In other words, labor and capital are the two “factors of production,” and the key for policymakers is to figure out the policy recipe that will increase the quantity and quality of those two resources. …In the absence of taxation, people provide labor to the economy so long as they value the income they earn more than they value the foregone leisure. And they provide capital to the economy (i.e., they save and invest) so long as they value future consumption (presumably augmented by earnings on capital) more than they value current consumption.

And we highlight how entrepreneurs generate the best type of growth.

this discussion also helps illustrate why entrepreneurship is so important. The preceding analysis basically focused on achieving growth by increasing the quantity of capital and labor. Such growth is real, but it has significant “opportunity costs” in that people must forego leisure and/or current consumption in order to have more disposable income. Entrepreneurs, by contrast, figure out how to increase the quality of capital and labor. More specifically, entrepreneurs earn profits by satisfying consumer desires with new and previously unknown or underused combinations of labor and capital. In their pursuit of profit, they come up with ways of generating more or better output from the same amount of labor and capital. This explains why we have much higher living standards today even though we work far fewer hours than our ancestors.

And here’s what we say about the counterproductive impact of capital gains taxation, particularly when combined with other forms of double taxation.

…the effective marginal tax rate on saving and investment is considerably higher than the effective marginal tax rate on consumption. This double taxation is understandably controversial since all economic theories—even Marxism and socialism—agree that capital is critical for long-run growth and higher living standards. …capital gains taxes harm economies in ways unique to the levy. …entrepreneurs play a vital role in the economy since they figure out more efficient ways to allocate labor and capital. …The potential for a capital gain is a big reason for the risk they incur and the effort they expend. Thus, the existence of capital gains taxes discourages some entrepreneurial activity from ever happening. …the capital gains tax is more easily avoidable than other forms of taxation. Entrepreneurs who generate wealth with good ideas can avoid the levy by simply choosing not to sell. This “lock-in effect” is not good for the overall economy… Most governments do not allow taxpayers to adjust the value of property for inflation when calculating capital gains. Even in a low-inflation environment, this can produce perverse results. …taxpayers can sometimes pay tax even when assets have lost value in real terms. …Capital gains taxes contribute to the problem of “debt bias,” which occurs when there is a tax advantage for corporate investments to be financed by debt instead of equity. …Excessive debt increases the probability of bankruptcy for the firm and contributes to systemic risk.

We then cite a lot of academic studies. I strongly encourage folks to peruse that section, but to keep this column manageable, let’s close by looking at two charts that reveal how some nation – including the United States – have uncompetitive tax systems.

Here are long-run capital gains tax rates in developed nations.

By the way, even though the data comes from a 2018 OECD report, it shows tax rates as of July 1, 2016. So not all the numbers will be current. For instance, I assume Macron’s reforms have mitigated France’s horrible score.

Speaking of horrible scores, here are the numbers showing the combined burden of the corporate income tax and capital gains tax. Sadly, the United States was at the top of this list as of July 1, 2016.

The good news is that the recent tax reform means that the United States no longer has the world’s most punitive tax system for new investment.

Though keep in mind that the United States doesn’t allow investors to index capital gains for inflation, so the effective tax rate on capital gains will always be higher than the statutory tax rate.

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I had mixed feeling when I spoke yesterday in Bratislava, Slovakia, as part of the 2018 Free Market Road Show.

Last decade, Slovakia was a reform superstar, shaking off the vestiges of communism with a plethora of very attractive policies – including a flat tax, personal retirement accounts, and spending restraint.

As Marian Tupy explained last year, “…in 1998, Slovaks kicked out the nationalists and elected a reformist government, which proceeded to liberalise the economy, privatise loss-making state-owned enterprises and massively improve the country’s business environment. …In 2005, the World Bank declared Slovakia the “most reformist” country in the world.”

And these policies paid off. According to research from both Europe and the United States, Slovakia has enjoyed reasonably strong growth that has resulted in considerable “convergence” to western living standards.

But in recent years, Slovakia has gradually moved in the wrong direction, which means I have good and bad memories of my visits.

The nation’s strong rise and subsequent slippage can be seen in the data from Economic Freedom of the World.

The drop may not seem that dramatic. And in terms of Slovakia’s absolute score, it “only” fell from 7.63 to 7.31.

But what really matters (as I explained last year when writing about Italy) is the relative score. And if you take a closer look at the data, Slovakia has dropped in the rankings from #20 in 2005 to #53 in 2015.

This relative decline is not good news for a nation that wants to compete for jobs and investment. Moreover, I’m not the only one to be worried about slippage in Slovakia.

Jan Oravec is similarly concerned about a gradual erosion of competitiveness in his country.

…the World Economic forum, which compares the competitiveness of 140 countries around the world, Slovakia ranked 67th. …If we…look at the long-term evolution of the Slovak economy’s competitiveness not only in this, but in other rankings, we realize…a tragic story of a dramatic decline in our competitiveness. Let us start by looking back at our previous scores: In 2000, we ranked 38th, while in 2010 we painfully fell to 60th – today we hold the aforementioned 67th place. …If we take a look at the evolution of Slovakia’s situation from the last 10 years, we come to the conclusion that there has been a significant drop in the ranking of our competitiveness. While 10 years ago we usually ranked in the top third or quarter of the ranked countries, today we usually rank in the bottom half… An explanation to this negative trend is twofold: Other countries have been improving while our business environment has been worsening, or stagnating at best.

There are three glaring examples of slippage in Slovakia.

  • The first is that the flat tax was undone in 2012.
  • The second is that the private social security system was weakened.
  • The third is an erosion of fiscal discipline.

To be sure, it’s not as if Slovakia went hard left. The top tax rate under the new “progressive” system is 25 percent. And as I noted last month, that means high-income workers in Slovakia are still treated rather well compared to their counterparts in other industrialized nations.

And the leftist government in Slovakia weakened – but did not completely reverse – personal retirement accounts.

Jan Oravec explains the good reform that was adopted last decade.

During 2003 two main legislative acts – the Social Insurance Act and the Old-Age Pension Savings Act – were prepared by the reform team. …Prior to reform Slovaks were obliged to pay to the PAYGO system contributions of 28.75 % of their gross wages, and the system promised in exchange to pay an average old-age benefit amounting to 50 % of gross wages. The reform allowed workers to redirect a significant part of their contributions, 9 % of gross wage, to their personal retirement accounts.

Under current law, however, the amount that workers are allowed to place in private accounts has been reduced. Moreover, the government is forcing the accounts to invest in government bonds, which means workers will earn sub-par returns. These are bad changes, but at least personal accounts still exist.

Even the bad news on government spending isn’t horrible news. As you can see from this OECD data, the spending burden (measured as a share of GDP) has climbed to a higher plateau in recent years, wiping out some of the gains that were achieved thanks to a period of strong restraint early last decade. That being said, Slovakia is still in better shape than many other industrialized nations.

So where does Slovakia go from here?

That’s not clear. The Prime Minister that imposed some of the bad policies recently was forced out of office by scandal, but his replacement isn’t any better and there’s not another election scheduled until 2020.

That’s the bad news. The good news is that Slovakia has one of Europe’s best pro-market think tanks, the Institute of Economic and Social Studies. Which hopefully means another wave of reform may happen. Hopefully including some of my favorite policies, such as a pure flat tax as well as some constitutional spending restraint.

P.S. Like other nations in Central and Eastern Europe, Slovakia faces demographic decline. To avert long-term crisis, reform is a necessity, not a luxury.

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Even though I wrote about proposed tax increases in Illinois just 10 days ago, it’s time to revisit the issue because the Tax Foundation just published a very informative article about the state’s self-destructive fiscal policy.

It starts by noting that the aggregate tax burden is higher in Illinois than it is in adjoining states.

Just what are Illinois’ neighbors doing on taxes? They’re taxing less, for starters. In Illinois, state and local taxes account for 9.3 percent of state income. The state and local taxes in Illinois’ six neighboring states account, in aggregate, for 8.0 percent of the income of those states.

Here’s the table showing the gap between Illinois and its neighbors. And it’s probably worth noting that the tax gap is the largest with the two states – Indiana and Missouri – that have the longest borders with Illinois.

While the aggregate tax burden is an important measure, I’ve explained before that it’s also important to focus on marginal tax rates. After all, that’s the variable that determines incentives for productive behavior since it measures how much the government confiscates when investors and entrepreneurs generate additional wealth.

And this brings us to the most important point in the article. Illinois politicians want to move in the wrong direction on marginal tax rates while neighboring jurisdictions are moving in the right direction.

Except for Iowa, all of Illinois’ neighbors have cut their income taxes since Illinois adopted its “temporary” income tax increases in 2011—and Iowa is on the verge of adopting a tax reform package that cuts individual income tax rates… Over the same period, Illinois’ single-rate income tax was temporarily raised from 3 to 5 percent, then allowed to partially sunset to 3.75 percent before being raised to the current 4.95 percent rate. A 1.5 percent surtax on pass-through business income brings the rate on many small businesses to 6.45 percent. Now there are calls to amend the state constitution to allow graduated-rate income taxes, with proposals circulating to create a top marginal rate as high as 9.85 percent (11.35 percent on pass-through businesses).

Here’s the chart showing the top rate in various states in 2011, the top rates today, and where top tax rates could be in the near future.

What’s especially remarkable is that Illinois politicians are poised to jack up tax rates just as federal tax reform has significantly reduced the deduction for state and local taxes.

For all intents and purposes, they’re trying to drive job creators out of the state (a shift that already has been happening, but now will accelerate).

Normally, when I write that a jurisdiction is committing fiscal suicide, I try to explain that it’s a slow-motion process. Illinois, however, could be taking the express lane. No wonder readers overwhelmingly picked the Land of Lincoln when asked which state will be the first to suffer a fiscal collapse.

P.S. Illinois politicians claim they want to bust the flat tax so they can impose higher taxes on the (supposedly) evil rich. High-income taxpayers doubtlessly will be the first on the chopping block, but I can say with 99.99 percent certainty that class-warfare tax increases will be a precursor to higher taxes on everybody.

P.P.S. Illinois residents should move to states with no income taxes. But if they only want to cross one border, Indiana would be a very good choice. And Kentucky just shifted to a flat tax, so that’s another potential option.

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When I did a poll earlier this year, asking which state would be the first to suffer a fiscal crisis, I wasn’t terribly surprised that Illinois wound up in first place.

But I was surprised by the margin. Even though there’s a good case to be made for basket-case jurisdictions such as New Jersey, California, and Connecticut, Illinois not only got a plurality of votes, it received an absolute majority.

Based on what’s happening in the Land of Lincoln, it appears that state politicians want to receive a supermajority of votes. There’s pressure for ever-higher taxes to finance an ever-more-bloated bureaucracy.

And taxpayers are voting with their feet.

The Wall Street Journal editorialized about the consequences of the state’s self-destructive fiscal policy.

Democrats in Illinois ought to be especially chastened by new IRS data showing an acceleration of out-migration. The Prairie State lost a record $4.75 billion in adjusted gross income to other states in the 2015 tax year, according to recently IRS data released. That’s up from $3.4 billion in the prior year. …Florida with zero income tax was the top destination for Illinois expatriates… What’s the matter with Illinois? Too much for us to distill in one editorial, but suffice to say that exorbitant property and business taxes have retarded economic growth. …Taxes may increase as Democrats scrounge for cash to pay for pensions. …Illinois’s unfunded pension liabilities equalled 22.8% of residents’ personal income last year, compared to a median of 3.1% across all states and 1% in Florida. …Illinois’s economy has been stagnant, growing a meager 0.9% on an inflation-adjusted annual basis since 2012—the slowest in the Great Lakes and half as fast as the U.S. overall. This year nearly 100,000 individuals have left the Illinois labor force.

Here’s a chart showing a very depressing decline in the state’s labor force.

By the way, I wonder whether the chart would look even worse if government bureaucrats weren’t included.

The Chicago Tribune has a grim editorial about what’s happening.

From millennials to retirees, …Illinois is losing its promise as a land of opportunity. Government debt and dysfunction contribute to a weak housing market and a stagnant jobs climate. State and local governments face enormous pension and other obligations. Taxes have risen sharply; many Illinois politicians say they must rise more. People are fleeing. Last year’s net loss: 33,703.

In an editorial for the Chicago Tribune, Kristen McQueary correctly worries about the trend.

It’s one thing to harbor natural skepticism toward government. It’s quite another to take the dramatic step of moving your family, your home, your livelihood to another state to escape it. But it’s happening. The naysayers and deniers blame the weather. They eye-roll the U-Haul rebellion. They downplay the dysfunction. Good riddance to those stingy taxpayers, they trumpet. But that is a shallow, ignorant and elitist viewpoint that dismisses the thoughtful and wrenching decisions thousands of once-devoted Illinoisans have made. For four years in a row, Illinois has lost population in alarming numbers. In 2017, Illinois lost a net 33,703 residents, the largest numerical population decline of any state. That’s the size of St. Charles or Woodridge or Galesburg. Wiped off the map. In one year. …Policy choices have consequences. …People are fleeing Illinois. And still, Democratic leaders in Chicago and Cook County, and their supporters, generally deny that high taxes, underfunded pensions, government debt and political dysfunction are the reasons for the exodus — or that it’s acute.

Newspapers in other states have noticed, as evinced by this editorial from the Las Vegas Review-Journal.

When the progressive political class preaches equality and prosperity, but bleeds productive citizens dry by treating them as little more than human ATMs, there should be little surprise when those same citizens take themselves (and their green) to greener pastures. Perhaps no state in the nation is seeing a bigger such exodus than Illinois. …On the flip side, all of the states surrounding Illinois saw their populations increase… Illinois is experiencing a self-inflicted storm of fiscal distress. …While state income taxes in Illinois don’t reach they level impose in states such as New York and California, that’s not for a lack of trying. The state raised its rate by 32 percent over the summer, and Democrats want to even more progressive tax rates to pay for all the goodies they’ve promised to Big Labor in order to grease their re-elections. …Illinois is a financial basket case — which is what you get when you combine political patronage with powerful public-sector unions that control leftist politicians. The state should be a case study for other jurisdictions on how not to conduct public policy. After all, who will pay the bills when the taxpayers flee?

Steve Chapman, in a column for Reason, expects more bad news for Illinois because of pressure for higher taxes.

With the biggest public pension obligations, the slowest personal income growth, and the biggest population loss of any state, it has consistently recorded achievements that are envied by none but educational to all. The state is in the midst of a debilitating fiscal and economic crisis. …Illinois has endured two income tax increases in the past seven years. In 2011, the flat rate on individual income jumped from 3 percent to 5 percent. In 2015, under the original terms, it fell to 3.75 percent—a “cut” that left the rate 25 percent above what it was in 2010. Then last year, over Gov. Bruce Rauner’s veto, the legislature raised the rate to 4.95 percent. None of these changes has ended the state’s economic drought, and it’s reasonable to assume they actually made it drier. …well-paid people can’t generally leave the country to find lower tax rates. They can leave one state for another, and they do. …A 2016 poll by the Paul Simon Public Policy Institute at Southern Illinois University found that nearly half of residents would like to leave the state—and that “taxes are the single biggest reason people want to leave.”

The Wall Street Journal opined on the state’s slow-motion suicide.

The only…restraint…on public union governance in Illinois…the state’s flat income tax. …Democrats in Springfield have filed three constitutional amendments to establish a graduated income tax… Democrats are looking for more revenue to finance ballooning pension costs, which consume about a quarter of state spending. …Connecticut and New Jersey provide cautionary examples. Democrats in both states have soaked their rich time and again, and the predictable result is that both states have fewer rich to soak. Economic growth slowed and revenues faltered. This vicious cycle is already playing out in Illinois amid increasing property, income and business taxes. Over the last four years, Illinois GDP has risen a mere 0.9% per year, half the national average and the slowest in the Great Lakes region. Between 2012 and 2016, Illinois lost $18.35 billion in adjusted gross income to other states. …Democrats claim a progressive income tax will spare the middle-class, but sooner or later they’ll be the targets too because there won’t be enough rich to finance the inexorable demands of public unions. …Once voters approve a progressive tax, Democrats can ratchet up rates as their union lords dictate.

While a bloated and over-compensated bureaucracy (especially unfunded promises for lavish retiree benefits) is the top fiscal drain, the state also loves squandering money in other ways.

Here are some excerpts from a piece in the Belleville News-Democrat.

Illinois is the dependency capital of the Midwest. No other state in the region has more of its population dependent on food stamps… So what’s driving the state’s dependency crisis? State bureaucrats using loopholes and gimmicks to keep more people dependent on welfare. According to the Illinois Department of Human Services, nearly 175,000 able-bodied childless adults are on the program. These are adults in their prime working years — between the ages of 18 and 49 — with no dependent children and no disabilities keeping them from meaningful employment. …the state has relied upon loopholes and gimmicks to trap more and more able-bodied adults in dependency. Federal law allows states to seek temporary waivers of the work requirement in areas with unemployment rates above 10 percent or with a demonstrated lack of job opportunities in the region. …the Illinois Department of Human Services…used old data and it gerrymandered the request in whatever way was necessary to keep more able-bodied adults on welfare. …State bureaucrats have gamed the system and as a result, thousands of able-bodied adults will remain trapped in dependency, with little hope of better lives.

Let’s close with some excerpts from a very depressing column in the Chicago Tribune by Diana Sroka Rickert.

…this is a state government that has been broken for decades. It is designed to reject improvement in every form, at every level. …The Thompson Center…is a near-perfect representation of state government. It is gross, rundown, and nobody cares. …there is a disturbing sense of entitlement among some state employees. …Underperformers aren’t fired; they’re simply transferred to different positions, shuffled elsewhere on the payroll or tucked away at state agencies. …this is a state government that is ranked last by almost every objective and measurable standard. A state government that fails every single one of its residents, day after day — and has failed its residents for decades. A state government that demands more and more money each year, to deliver increasingly less value.

Keep in mind, incidentally, that all this bad news will almost certainly become worse news thanks to last year’s tax reform. Restricting the state and local tax deduction means a much smaller implicit federal subsidy for high-tax states.

P.S. If you want good news on state tax policy, South Dakota may have the nation’s best system. And North Carolina arguably has taken the biggest step in the right direction. Kentucky, meanwhile, has just switched to a flat tax.

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California is a lot like France. They’re both wonderful places to visit.

And they’re both great places to live if you already have a lot of money.

But neither jurisdiction is very friendly to people who want to get rich. And, thanks to tax competition, that’s having a meaningful impact on migration patterns.

I’ve previously written about the exodus of successful and/or aspirational people from France.

Today we’re going to examine the same process inside the United States.

It’s a process that is about to get more intense thanks to federal tax reform, as Art Laffer and Steve Moore explain in a column for the Wall Street Journal.

In the years to come, millions of people, thousands of businesses, and tens of billions of dollars of net income will flee high-tax blue states for low-tax red states. This migration has been happening for years. But the Trump tax bill’s cap on the deduction for state and local taxes, or SALT, will accelerate the pace. …Consider what this means if you’re a high-income earner in Silicon Valley or Hollywood. The top tax rate that you actually pay just jumped from about 8.5% to 13%. Similar figures hold if you live in Manhattan, once New York City’s income tax is factored in. If you earn $10 million or more, your taxes might increase a whopping 50%. …high earners in places with hefty income taxes—not just California and New York, but also Minnesota and New Jersey—will bear more of the true cost of their state government. Also in big trouble are Connecticut and Illinois, where the overall state and local tax burden (especially property taxes) is so onerous that high-income residents will feel the burn now that they can’t deduct these costs on their federal returns. On the other side are nine states—including Florida, Nevada, Texas and Washington—that impose no tax at all on earned income.

Art and Steve put together projections on what this will mean.

Over the past decade, about 3.5 million Americans on net have relocated from the highest-tax states to the lowest-tax ones. …Our analysis of IRS data on tax returns shows that in the past three years alone, Texas and Florida have gained a net $50 billion in income and purchasing power from other states, while California and New York have surrendered a net $23 billion. Now that the SALT subsidy is gone, how bad will it get for high-tax blue states? Very bad. We estimate, based on the historical relationship between tax rates and migration patterns, that both California and New York will lose on net about 800,000 residents over the next three years—roughly twice the number that left from 2014-16. Our calculations suggest that Connecticut, New Jersey and Minnesota combined will hemorrhage another roughly 500,000 people in the same period. …the exodus could puncture large and unexpected holes in blue-state budgets. Lawmakers in Hartford and Trenton have gotten a small taste of this in recent years as billionaire financiers have flown the coop and relocated to Florida. …Progressives should do the math: A 13% tax rate generates zero revenue from someone who leaves the state for friendlier climes.

I don’t know if their estimate is too high or too low, but there’s no question that they are correct about the direction of migration.

And every time a net taxpayer moves out, that further erodes the fiscal position of the high-tax states. Which is why I think one of the interesting questions is which state will be the first to suffer fiscal collapse.

In large part, taxpayers are making a rational cost-benefit analysis. Some states have dramatically increased the burden of government spending. Yet does anyone think that those states are providing better services than states with smaller public sectors? Or that those services are worth all the taxes they have to pay?

Consider, for instance, the difference between New York and Tennessee.

New York spends nearly twice as much on state and local government per person ($16,000) as does economically booming Tennessee ($9,000).

Anyhow, I’m guessing the new restriction on the state and local tax deduction is going to change the behavior of state politicians. At least I hope so.

But nobody ever said politicians were sensible. Ross Marchand of the Taxpayers Protection Alliance explains that Massachusetts and New Jersey are still thinking about more class-warfare taxation.

Massachusetts and New Jersey are currently considering “millionaires’ taxes,” which would significantly increase top rates and spark a “race to the top” for revenue… Instead of helping out the middle class, a millionaires’ tax will result in an exodus from the state, squeezing out opportunities for working Americans. …Prominent millionaires respond to these proposals by threatening to leave, and research shows that the well-to-do regularly follow through on these promises.  …nearly all of the migration that does happen in top brackets has to do with tax changes. Researchers at Stanford University and the Treasury Department estimate that a 10 percent increase in taxes causes a 1 percent bump in migration, assuming no change in any other policy. …If New Jersey and Massachusetts approve new millionaires’ taxes, it is difficult to predict how much will be raised and where these funds will ultimately wind up. But if New York and California are any guide, income surtaxes will be destructive. When it comes to higher taxation, interstate migration is just the tip of the iceberg. Higher-tax states, for instance, see less innovative activity and scientific research according to an analysis by economists at the Federal Reserve and UC Berkeley.

My suggestion is that politicians in Massachusetts and New Jersey should look at what’s happening to California.

CNBC reports on the growing exodus from the Golden State.

Californians may still love the beautiful weather and beaches, but more and more they are fed up with the high housing costs and taxes and deciding to flee to lower-cost states such as Nevada, Arizona and Texas. …said Dave Senser, who lives on a fixed income near San Luis Obispo, California, and now plans to move to Las Vegas. “Rents here are crazy, if you can find a place, and they’re going to tax us to death. That’s what it feels like. At least in Nevada they don’t have a state income tax. And every little bit helps.” …Data from United Van Lines show some of the most popular moving destinations for Californians from 2015 to 2017 were Texas, Arizona, Oregon, Washington and Colorado. Other experts also said Nevada remains a top destination. …Internal Revenue Service data would appear to show that the middle-class and middle-age residents are the ones leaving, according to Joel Kotkin, a presidential fellow in Urban Futures at Chapman University in Orange, California. …Furthermore, Kotkin believes the outmigration from California may start to rise among higher-income people, given that the GOP’s federal tax overhaul will result in certain California taxpayers losing from the state and local tax deduction cap.

The Legislative Analyst’s Office for the California legislature has warned the state’s lawmakers about this trend.

For many years, more people have been leaving California for other states than have been moving here. According to data from the American Community Survey, from 2007 to 2016, about 5 million people moved to California from other states, while about 6 million left California. On net, the state lost 1 million residents to domestic migration—about 2.5 percent of its total population. …Although California generally has been losing residents to the rest of the country, movement between California and some states deviates from this pattern. The figure below shows net migration between California and individual states between 2007 and 2016. California gained, on net, residents from about one-third of states, led by New York, Illinois, and New Jersey.

Here’s the chart showing where Californians are moving. Unsurprisingly, Texas is the main destination.

By the way, state-to-state migration isn’t solely a function of income taxes.

A Market Watch column looks at the impact of property taxes on migration patterns.

Harty’s clients range from first-time buyers with sticker shock to people who’ve lived in and around Chicago all their lives. Each has a different story, but they share a common theme: many believe that Chicago-area property taxes are too high, and relief is just an hour away over the state line. …if all real estate is local, all real estate taxes may be even more so. …Attom’s data show that the average tax burden ranges from $10,612 in the most expensive metro area, Bridgeport-Stamford-Norwalk, Connecticut, to $525 in Montgomery, Alabama. And those are just averages. …taxes are “the icing on the cake” in areas that are seeing strong population inflows… Among the counties that saw the biggest percentage of in-migration in 2017, according to Census data, all are in Texas, Florida, Georgia, or the Carolinas. (Texas doesn’t have particularly low property taxes, but it has no personal income tax, making the overall tax burden much more manageable.) Cook County, where Chicago is located, had the biggest number of people leaving… Blomquist’s analysis of Census data showed that among all counties that had at least a 1% population increase, the average tax bill was $2,706, while in all counties with a least a 1% decline in population, the average was $3,900.

The key sentence in that excerpt is the part about Texas having relatively high property taxes, but making up for that by having no state income tax.

The same thing is true about New Hampshire.

But just imagine what it must be like to live in a state with high income taxes and high property taxes. If this map is any indication, places such as New York and Illinois are particularly awful for taxpayers.

Let’s close with a big-picture look at factors that drive state competitiveness.

Mark Perry takes an up-close look at the characteristics of the five states with the most in-migration and out-migration.

…four of the top five outbound states (Illinois ranked No. 46, Connecticut at No. 49, New Jersey at No. 48, and California at No. 47) were among the five US states with the highest tax burden — New York was No. 50 (highest tax burden). The average tax burden of the top five outbound states was 11.2%, with an average rank of 43.2 out of 50. In contrast, the top five inbound states have an average tax burden of 8.7% and an average rank of 16.6 out of 50. As would be expected, Americans are leaving states with some of the country’s highest overall tax burdens (IL, CT, CA and NJ) and moving to states with lower tax burdens (TN, SC and AZ). …that there are significant differences between the top five inbound and top five outbound US states when they are compared on a variety of measures of economic performance, business climate, tax burdens for businesses and individuals, fiscal health, and labor market dynamism. There is empirical evidence that Americans do “vote with their feet” when they relocate from one state to another, and the evidence suggests that Americans are moving from states that are relatively more economically stagnant, Democratic-controlled fiscally unhealthy states with higher tax burdens, more regulations and with fewer economic and job opportunities to Republican-controlled, fiscally sound states that are relatively more economically vibrant, dynamic and business-friendly, with lower tax and regulatory burdens and more economic and job opportunities.

Here’s Mark’s table, based on 2017 migration data.

As Mark said, people do “vote with their feet” for smaller government.

Which is one of the reasons I’m a big fan of federalism. When there’s decentralization, people can escape bad policy. And that helps to discipline profligate governments.

P.S. I’m writing today’s column from Switzerland, which is a very successful example of genuine federalism.

P.P.S. Americans are free to move from one state to another, and the uncompetitive states can’t stop the process. Unfortunately, the IRS has laws that penalize people who want to move to other nations. In this regard, the U.S. is worse than France.

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