Feeds:
Posts
Comments

Archive for the ‘Donald Trump’ Category

Back in March, I wrote a 50-day assessment on Trump’s presidency.

I listed six questions and mostly concluded that there wasn’t enough information to give accurate answers. In other words, if Trump was a student, he would have received an “I” for incomplete.

Now that we’re at the 100-day point, I’m tempted to say that his grade hasn’t changed.

We still don’t know what he’ll do on issues such as the entitlement crisis, the border-adjustable tax, infrastructure, and red tape.

But I feel compelled to issue another report card, so here’s my take on the Trump’s economic performance, based on the five big categories from Economic Freedom of the World.

  • Fiscal Policy – Trump has proposed a good tax cut, though I fear it won’t go anywhere because a sufficient number of squeamish Republicans will feign concern about deficits. That excuse wouldn’t exist if the White House and congressional GOPers were more serious about spending restraint, so there’s plenty of blame to go around. Though I’m nonetheless hopeful that the corporate tax rate will be reduced. Trump Grade: B
  • Trade – Trump has moved policy in the wrong direction, but I’m weirdly relieved that he’s being somewhat restrained. He decided China is not a currency manipulator and he decided that the U.S. should remain part of NAFTA. In other words, he been doing a lot of saber-rattling, but fortunately not drawing too much blood. That being said, he is imposing new burdens on consumers and taxpayers. Trump Grade: D
  • Regulation – This is Trump’s best issue area. He’s rolled back some Obama-era regulations, which is a good start. And he’s made some very sensible appointments, which means there’s hope of ameliorating the statist orientation of bureaucracies such as the FDA and the FCC. Trump Grade: B
  • Monetary Policy – I have no idea how to assign a grade. Trump hasn’t said anything, much less done anything, on monetary policy. Trump Grade: I
  • Rule of Law – Trump has been aggressive with executive orders, which worries me even if I happen to agree with the underlying policy. The White House hasn’t tried to flout court decisions, however, so that’s a good sign. The appointment and confirmation of Justice Gorsuch also bodes well (assuming he doesn’t “grow in office” like Justice Roberts). Trump Grade: B

Overall, Trump’s GPA is better than I would have predicted before the election, so I’m pleasantly surprised. But there’s still a long way to go before final exams.

P.S. Trump also has generated some first-rate political humor, which is always appreciated. In that sense, he’s no different than his predecessor.

Read Full Post »

I expressed pessimism yesterday about Trump’s tax plan. Simply stated, I don’t think Congress is willing to enact a large tax cut given the nation’s grim fiscal outlook.

In this Fox Business interview, I elaborated on my concerns while also pointing out that the plan would be very good if it somehow got enacted.

We now have some preliminary numbers that illustrate why I’m concerned.

The Committee for a Responsible Federal Budget put together a quick guess about the revenue implications of Trump’s new plan. Their admittedly rough estimate is that federal revenues would be reduced by close to $6 trillion over 10 years.

Incidentally, these revenue estimates are very inaccurate because they are based on “static scoring,” which is the antiquated notion that major changes in tax policy have no impact on economic performance.

But these numbers nonetheless are useful since the Joint Committee on Taxation basically uses that approach when producing official revenue estimates that guide congressional action.

In other words, it doesn’t matter, at least for purposes of enacting legislation, that there would be substantial revenue feedback in the real world (the rich actually paid more, for instance, when Reagan dropped the top tax rate from 70 percent to 28 percent). Politicians on Capitol Hill will point to the JCT’s static numbers, gasp with feigned horror, and use higher deficits as an excuse to vote no (even though those same lawmakers generally have no problem with red ink when voting to expand the burden of government spending).

That being said, they wouldn’t necessarily have that excuse if the Trump Administration was more aggressive about trying to shrink the size and scope of the federal government. So there’s plenty of blame to go around.

Until something changes, however, I don’t think Trump’s tax cut is very realistic. So if you want my prediction on what will happen, I’m sticking to the three options I shared yesterday.

  1. Congress and the White House decide to restrain spending, which easily would create room for a very large tax cut (what I prefer, but I won’t hold my breath for this option).
  2. Congress decides to adopt Trump’s tax cuts, but they balance the cuts with dangerous new sources of tax revenue, such as a border-adjustment tax, a carbon tax, or a value-added tax (the option I fear).
  3. Congress and the White House decide to go for a more targeted tax cut, such as a big reduction in the corporate income tax (which would be a significant victory).

By the way, the Wall Street Journal editorialized favorably about the plan this morning, mostly because it reflects the sensible supply-side view that it is good to have lower tax rates on productive behavior.

While the details are sparse and will have to be filled in by Congress, President Trump’s outline resembles the supply-side principles he campaigned on and is an ambitious and necessary economic course correction that would help restore broad-based U.S. prosperity. …Faster growth of 3% a year or more is possible, but it will take better policies, and tax reform is an indispensable lever. Mr. Trump’s modernization would be a huge improvement on the current tax code that would give the economy a big lift, especially on the corporate side. …The Trump principles show the President has made growth his highest priority, and they are a rebuke to the Washington consensus that 1% or 2% growth is the best America can do.

But the WSJ shares my assessment that the plan will not survive in its current form.

…the blueprint is being assailed from both the left and the balanced-budget right. The Trump economic team acknowledges that their plan would mean less federal revenue than current law… Mr. Trump’s plan is an opening bid to frame negotiations in Congress, and there are plenty of bargaining chips. Perhaps the corporate rate will rise to 20%… Budget rules and Democratic opposition could force Republicans to limit the reform to 10 years.

For what it’s worth, if the final result is a 15 percent or 20 percent corporate tax rate, I’ll actually be quite pleased. That reform would be very good for the economy and national competitiveness. And regardless of what JCT projects, there would be substantial revenue feedback.

Read Full Post »

I want tax cuts. I support tax cuts. I relish tax cuts.

  • I like tax cuts because I’m a curmudgeonly libertarian and I think people should have the first claim on the money they earn.
  • I like tax cuts because I’m an economist and we’ll get more growth if penalties on productive behavior are reduced.
  • I like tax cuts because the academic research supports the “starve-the-beast” theory of less revenue leading to less spending.

This is why I wrote favorably about Trump’s campaign tax plan, and this is why I like Trump’s new tax plan (with a few exceptions).

But I confess that my heart’s not in it. Simply stated, I don’t think the new plan is serious.

If Trump really wanted a big tax cut, he would have a comprehensive plan to restrain the growth of government spending. He doesn’t.

If Trump genuinely wanted lower taxes, he would be aggressively pushing for genuine entitlement reform. He isn’t.

And Congress isn’t much better. At least in the absence of leadership from the White House.

It’s not merely that I’m concerned lawmakers won’t put the brakes on spending. And it’s not just that I fear they won’t enact much-needed entitlement reform. I worry they’ll actually increase the burden of federal spending. Just look what’s happening as Congress and the White House negotiate a spending bill for the remainder of the 2017 fiscal year. The pending deal would trade more defense spending for more Obamacare subsidies. Everyone wins…except taxpayers.

In this profligate environment, it’s hard to be optimistic about tax cuts.

By the way, I fully agree we would get more growth if Trump’s tax plan was enacted. But the Laffer Curve doesn’t say that all tax cuts pay for themselves with faster growth. That only happens in rather rare circumstances.

Yes, the lower corporate tax rate would have a big supply-side impact (and there’s plenty of evidence from overseas to support that notion), but many of the other provisions of his plan are sure to reduce revenue.

Again, I don’t lose sleep about the prospect of less money going to Washington. But you can be sure that politicians pay attention to that issue.

Which is why I’m pessimistic. I don’t think Congress is willing to approve a big tax cut.

The bottom line is that there are three possible outcomes.

  1. Congress and the White House decide to restrain spending, which easily would create room for a very large tax cut (what I prefer, but I won’t hold my breath for this option).
  2. Congress decides to adopt Trump’s tax cuts, but they balance the cuts with dangerous new sources of tax revenue, such as a border-adjustment tax, a carbon tax, or a value-added tax (the option I fear).
  3. Congress and the White House decide to go for a more targeted tax cut, such as a big reduction in the corporate income tax (which would be a significant victory).

Ultimately, I want to completely junk our corrupt system and replace it with a simple and fair flat tax. But for 2017, I’ll be happy if we simply slash the corporate rate.

Read Full Post »

Fundamental tax reform such as a flat tax should accomplish three big goals.

The good news is that almost all Republicans believe in the first two goals and at least pay lip services to the third goal.

The bad news is that they nonetheless can’t be trusted with tax reform.

Here’s why. Major tax reform is based on the assumption that achieving the first two goals will lower tax revenue and achieving the third goal will generate tax revenue. A reform plan doesn’t have to be “revenue neutral,” of course, but politicians would be very reluctant to vote for a package that substantially reduced tax revenue. So serious proposals have revenue-raising provisions that are roughly similar in magnitude to the revenue-losing provisions.

Here’s the problem.   Notwithstanding lip service, Republicans are not willing to go after major tax loopholes like the healthcare exclusion. And that means that they are looking for other sources of revenue. In some cases, such as the proposal in the House plan to put debt and equity on a level playing field, they come up with decent ideas. In other cases, such as the border-adjustment tax, they come up with misguided ideas.

And some of them are even talking about very bad ideas, such as a value-added tax or carbon tax.

This is why it would be best to set aside tax reform and focus on a more limited agenda, such as a plan to lower the corporate tax rate. I discussed that idea a few weeks ago on Neil Cavuto’s show, and I echoed myself last week in another appearance on Fox Business.

Lest you think I’m being overly paranoid about Republicans doing the wrong thing, here’s what’s being reported in the establishment press.

The Hill is reporting that the Trump Administration is still undecided on the BAT.

The most controversial aspect of the House’s plan is its reliance on border adjustability to tax imports and exempt exports. …the White House has yet to fully embrace it. …If the administration opts against the border-adjustment proposal, it would have to find another way to raise revenue to pay for lowering tax rates.

While I hope the White House ultimately rejects the BAT, that won’t necessarily be good news if the Administration signs on to another new source of revenue.

And that’s apparently under discussion.

The Washington Post last week reported that the White House was looking at other ideas, including a value-added tax and a carbon tax… Even if administration officials are simply batting around ideas, it seems clear that Trump’s team is open to a different approach.

The Associated Press also tries to read the tea leaves and speculates whether the Trump Administration may try to cut or eliminate the Social Security payroll tax.

The administration’s first attempt to write legislation is in its early stages and the White House has kept much of it under wraps. But it has already sprouted the consideration of a series of unorthodox proposals including a drastic cut to the payroll tax, aimed at appealing to Democrats.

I’m not a big fan of fiddling with the payroll tax, and I definitely worry about making major changes.

Why? Because it’s quite likely politicians will replace it with a tax that is even worse.

This would require a new dedicated funding source for Social Security. The change, proposed by a GOP lobbyist with close ties to the Trump administration, would transform Brady’s plan on imports into something closer to a value-added tax by also eliminating the deduction of labor expenses. This would bring it in line with WTO rules and generate an additional $12 trillion over 10 years, according to budget estimates.

Last but not least, the New York Times has a story today on the latest machinations, and it appears that Republicans are no closer to a consensus today than they were the day Trump got inaugurated.

…it is becoming increasingly unlikely that there will be a simpler system, or even lower tax rates, this time next year. The Trump administration’s tax plan, promised in February, has yet to materialize; a House Republican plan has bogged down, taking as much fire from conservatives as liberals… Speaker Paul D. Ryan built a tax blueprint around a “border adjustment” tax… With no palpable support in the Senate, its prospects appear to be nearly dead. …The president’s own vision for a new tax system is muddled at best. In the past few months, he has called for taxing companies that move operations abroad, waffled on the border tax and, last week, called for a “reciprocal” tax that would match the import taxes other countries impose on the United States.

The report notes that Trump may have a personal reason to oppose one of the provisions of the House plan.

Perhaps the most consequential concern relates to a House Republican proposal to get rid of a rule that lets companies write off the interest they pay on loans — a move real estate developers and Mr. Trump vehemently oppose. Doing so would raise $1 trillion in revenue and reduce the appeal of one of Mr. Trump’s favorite business tools: debt.

From my perspective, the most encouraging part of the story is that the lack of consensus may lead Republicans to my position, which is simply to cut the corporate tax rate.

With little appetite for bipartisanship, many veterans of tax fights and lobbyists in Washington expect that Mr. Trump will ultimately embrace straight tax cuts, with some cleaning up of deductions, and call it a victory.

And I think that would be a victory as well, even though I ultimately want to junk the entire tax code and replace it with a flat tax.

P.S. In an ideal world, tax reform would be financed in large part with spending restraint. Sadly, Washington, DC, isn’t in the same galaxy as that ideal world.

P.P.S. To further explain why Republicans cannot be trusted, even if they mean well, recall that Rand Paul and Ted Cruz both included VATs in the tax plans they unveiled during the 2016 presidential campaign.

Read Full Post »

On major economic issues, it does not appear that Republican control of Washington makes much of a difference.

  • Efforts to repeal Obamacare have bogged down because GOPers are willing to deal with the fiscal wreckage of that law, but don’t seem very comfortable about undoing the interventions and regulations that have caused premiums to skyrocket.
  • Efforts to cut taxes and reform the tax code don’t look very promising because House Republicans have proposed a misguided border-adjustment tax and the White House seems hopelessly divided on how to proceed.
  • Efforts to restrain government spending haven’t gotten off the ground. A full budget is due next month, but it’s not overly encouraging that Trump’s proposed domestic cuts would be used to expand the Pentagon’s budget.

Let’s see whether we get a different story when we examine regulatory issues.

We’ll start with some good news? Well, sort of. It seems the United States has the largest and 4th-largest GDPs in the world.

You may think that makes no sense, but this is where we have to share some bad news on the regulatory burden from the Mercatus Center.

Economic growth has been reduced by an average of 0.8 percent per year from 1980 to 2012 due to regulatory accumulation. Regulations force companies to invest less in activities that enhance productivity and growth, such as research and development, as companies must divert resources into regulatory compliance and similar activities. …Compared to a scenario where regulations are held constant at levels observed in 1980, the study finds that the difference between the economy we are in and a hypothetical economy where regulatory accumulation halted in 1980 is approximately $4 trillion. …The $4 trillion dollars in lost GDP associated with regulatory accumulation would be the fourth largest economy in the world—larger than major countries like Germany, France, and India.

By the way, this data from Mercatus gives me an opportunity to re-emphasize the importance of even small variations in economic growth. It may not make that much difference if the economy grows 0.8 percent faster or slower in one year.

But, as just noted, a loss of 0.8 percent annual growth over 32 years has been enormously expensive to the U.S. economy.

The Competitive Enterprise Institute has a depressing array of data on America’s regulatory burden. Here’s the chart that grabbed my attention.

And here’s a video on the burden of red tape from the folks at CEI.

Who deserves the blame for this nightmare of red tape?

The previous president definitely added to the regulatory morass. The Hill reported last year on a study by the American Action Forum.

The Obama administration issues an average of 81 major rules, those with an economic impact of at least $100 million, on a yearly basis, the study found. That’s about one major rule every four to five days, or, as the American Action Forum puts it, one rule for every three days that the federal government is open. “It is a $2,294 regulatory imposition on every person in the United States,” wrote Sam Batkins, director of regulatory policy at the American Action Forum, who conducted the study.

And there was a big effort to add more red tape in Obama’s final days, as noted by Kimberly Strassel of the Wall Street Journal.

Since the election Mr. Obama has broken with all precedent by issuing rules that would be astonishing at any moment and are downright obnoxious at this point. This past week we learned of several sweeping new rules from the Interior Department and the Environmental Protection Agency, including regs on methane on public lands (cost: $2.4 billion); a new anti-coal rule related to streams ($1.2 billion) and renewable fuel standards ($1.5 billion).

As you might expect, the net cost of Obama’s regulatory excess is significant. Here’s some of what the Washington Examiner wrote during the waning days of Obama’s tenure.

According to new information from the White House, finally released after a two year wait, the total burden of federal government paperwork is more than 11.5 billion man-hours a year. That’s almost 500 million man-days, or 1.3 million man-years. More importantly, it’s 35 hours every person in the country (on average) has to spend doing federal paperwork every year, on average. …Time is money, and paperwork time alone costs the country almost $2 trillion a year, or about 11 percent of GDP.

But it’s not solely Obama’s fault. Not even close.

Both parties can be blamed for this mess, as reported by the Economist.

The call to cut red tape is now an emotive rallying cry for Republicans—more so, in the hearts of many congressmen, than slashing deficits. Deregulation will, they argue, unleash a “confident America” in which businesses thrive and wages soar, leaving economists, with their excuses for the “new normal” of low growth, red-faced. Are they right?

They may be right, but they never seem to take action when they’re in charge.

Between 1970 and 2008 the number of prescriptive words like “shall” or “must” in the code of federal regulations grew from 403,000 to nearly 963,000, or about 15,000 edicts a year… The unyielding growth of rules, then, has persisted through Republican and Democratic administrations… The endless pile-up of regulation enrages businessmen. One in five small firms say it is their biggest problem, according to the National Federation of Independent Business.

Though I would point out that President Reagan was the exception to this dismal rule.

That being said, who cares about finger pointing? What matters is that the economy is being stymied by excessive red tape.

So what can be done about this? President Trump has promised a 2-for-1 deal, saying that his Administration will wipe out two existing regulations for every new rule that gets imposed.

Susan Dudley opines on this proposal, noting that Trump hasn’t put any meat on the bones.

Like pebbles tossed in a stream, each individual regulation may do little economic harm, but eventually the pebbles accumulate and like a dam, may block economic growth and innovation. A policy of removing two regulations for every new one would provide agencies incentives to evaluate the costs and effectiveness of those accumulated regulations and determine which have outlived their usefulness. Mr. Trump’s statement doesn’t provide details on how this new policy would work.

Ms. Dudley points out, however, that other nations have achieved some success with similar-sounding approaches.

…his team could look to experiences in other countries for insights. The Netherlands, Canada, Australia and the United Kingdom have all adopted similar requirements to offset the costs of new regulations by removing or modifying existing rules of comparable or greater effect. …The Netherlands program established a net quantitative burden reduction target that reduced regulatory burdens by 20% between 2003 and 2007. It is currently on track to save €2.5 billion in regulatory burden between 2012 and 2017 by tying the introduction of new regulations “to the revision or scrapping of existing rules.” Under Canada’s “One-for-One Rule,” launched in 2012, new regulatory changes that increase administrative burdens must be offset with equal burden reductions elsewhere. Further, for each new regulation that imposes administrative burden costs, cabinet ministers must remove at least one regulation. Similarly, Australia’s policy is that “the cost burden of new regulation must be fully offset by reductions in existing regulatory burden.” The British began with a “One-in, One-out” policy, requiring any increases in the cost of regulation to be offset by deregulatory measures of at least an equivalent value. In 2013, it moved to “One-in, Two-out” (OITO) and more recently to a “One-in, Three-out” policy in an effort to cut red tape by £10 billion.

The bottom line is that progress will depend on Trump appointing good people. And on that issue, the jury is still out.

The legislative branch also could get involved.

In a column for Reason, Senator Rand Paul explained that the REINS Act could make a big difference.

…13 of the 15 longest registers in American history have been authored by the past two presidential administrations (Barack Obama owns seven of the top eight, with George W. Bush filling in most of the rest)…federal lawmakers should pass something called the REINS Act—the “Regulations from the Executive in Need of Scrutiny Act. The REINS Act would require every new regulation that costs more than $100 million to be approved by Congress. As it is now, agencies can pass those rules unilaterally. Such major rules only account for about 3 percent of annual regulations, but they are the ones that cause the most headaches for individuals and businesses. …the REINS Act did pass the House on four occasions during the Obama administration. Lack of support in the Senate and the threat of a presidential veto kept it from ever reaching Obama’s desk.

But would it make a difference if Congress had to affirm major new rules?

Given how agencies will lie about regulatory burdens, it wouldn’t be a silver bullet.

But,based on the hysterical opposition from the left, I’m betting the REINS Act would be very helpful.

REINS would fundamentally alter the federal government in ways that could hobble federal agencies during periods when the same party controls Congress and the White House — and absolutely cripple those agencies during periods of divided government. Many federal laws delegate authority to agencies to work out the details of how to achieve relatively broad objectives set by the law itself. …REINS, however, effectively strips agencies of much of this authority.

That sounds like good news to me. If the crazies at Think Progress are this upset about the REINS Act, it must be a step in the right direction.

Let’s close with a bit of evidence that maybe, just maybe, Republicans will move the ball in the right direction. Here are some excerpts from a Bloomberg story.

The White House estimates it will save $10 billion over 20 years by having rescinded 11 Obama-era regulations under a relatively obscure 1996 law that lets Congress fast-track repeal legislation with a simple majority. …In all, the law has been used to repeal 11 rules, with two more awaiting the president’s signature… About two dozen measures with CRA’s targeting them remain, but because the law can only be used on rules issued in the final six months of the previous administration, Congress only has only a few more weeks to use the procedure.

Before getting too excited, remember that the annual cost of regulation is about $2 trillion and the White House is bragging about actions that will reduce red tape by $10 billion over two decades. Which means annual savings of only $500 million.

Which, if my math is right, addresses 0.025 percent of the problem.

I’ll take it, but it should be viewed as just a tiny first step on a very long journey.

P.S. The Congressional Review Act was signed into law by Bill Clinton. Yet another bit of evidence that he was a surprisingly pro-market President.

P.P.S. If you want some wonky analysis of regulation, I have some detailed columns here, here, here, here, here, here, and here.

Read Full Post »

For three decades, I’ve been trying to convince politicians to adopt good policy. I give them theoretical reasons why it’s a good idea to have limited government. I share with them empirical evidence demonstrating the superiority of free markets over statism. And I’m probably annoyingly relentless about disseminating examples of good and bad policy from around the world (my version of “teachable moments”).

But if you want to get a politician to do the right thing, you need more than theory, data, and real-world case studies. You need to convince them – notwithstanding my Second Theorem of Government – that good policy won’t threaten their reelection.

My usual approach is to remind them that Ronald Reagan adopted a bunch of supposedly unpopular policies, yet he got reelected in a landslide because reducing the burden of government allowed the private sector to grow much faster. George H.W. Bush, by contrast, became a one-term blunder because his tax increase and other statist policies undermined the economy’s performance.

I’m hoping this argument will resonate with some of my friends who are now working in the White House. And I don’t rely on vague hints. In this clip from a recent interview, I bluntly point out that good policy is good politics because a faster-growing economy presumably will have a big impact on the 2020 election.

Here’s another clip from that same interview, where I point out that the GOP’s repeal-and-replace legislation was good news in that it got rid of a lot of the misguided taxes and spending that were part of Obamacare.

But the Republican plan did not try to fix the government-imposed third-party-payer distortions that cause health care to be so expensive and inefficient. And I pointed out at the end of this clip that Republicans would have been held responsible as the system got even more costly and bureaucratic.

Now let’s shift to fiscal policy.

Here’s a clip from an interview about Trump’s budget. I’m happy about some of the specific reductions (see here, here, and here), but I grouse that there’s no attempt to fix entitlements and I’m also unhappy that the reductions in domestic discretionary spending are used to benefit the Pentagon rather than taxpayers.

The latter half of the above interview is about the corruption that defines the Washington swamp. Yes, it’s possible that Trump could use the “bully pulpit” to push Congress in the right direction, but I wish I had more time to emphasize that shrinking the overall size of government is the only way to really “drain the swamp.”

And since we’re talking about good policy and good politics, here’s a clip from another interview.

Back when the stock market was climbing, I suggested it was a rather risky move for Trump to say higher stock values were a referendum on the benefits of his policies. After all, what goes up can go down.

The hosts acknowledge that the stock market may decline in the short run, but they seem optimistic in the long run based on what happened during the Reagan years.

But this brings me back to my original point. Yes, Reagan’s policies led to a strong stock market. His policies also produced rising levels of median household income. Moreover, the economy boomed and millions of jobs were created. These were among the reasons he was reelected in a landslide.

But these good things weren’t random. They happened because Reagan made big positive changes in policy. He tamed inflation. He slashed tax rates. He substantially reduced the burden of domestic spending. He curtailed red tape.

In other words, there was a direct connection between good policy, good economy, and good political results. Indeed, let’s enshrine this relationship in a “Fourth Theorem of Government.”

For what it’s worth, Reagan also demonstrated leadership, enacting all those pro-growth reforms over the vociferous opposition of various interest groups.

Will Trump’s reform be that bold and that brave? His proposed 15-percent corporate tax rate deserves praise, and he seems serious about restraining the regulatory state, but he will need to do a lot more if he wants to be the second coming of Ronald Reagan. Not only will he need more good policies, but he’ll also need to ditch some of the bad policies (childcare subsidies, infrastructure pork, carried-interest capital gains tax hike, etc) that would increase the burden of government.

The jury is still out, but I’m a bit pessimistic on the final verdict.

Read Full Post »

The multi-faceted controversy over Donald Trump’s taxes has been rejuvenated by a partial leak of his 2005 tax return.

Interestingly, it appears that Trump pays a lot of tax. At least for that one year. Which is contrary to what a lot of people have suspected – including me in the column I wrote on this topic last year for Time.

Some Trump supporters are even highlighting the fact that Trump’s effective tax rate that year was higher than what’s been paid by other political figures in more recent years.

But I’m not impressed. First, we have no idea what Trump’s tax rate was in other years. So the people defending Trump on that basis may wind up with egg on their face if tax returns from other years ever get published.

Second, why is it a good thing that Trump paid so much tax? I realize I’m a curmudgeonly libertarian, but I was one of the people who applauded Trump for saying that he does everything possible to minimize the amount of money he turns over to the IRS. As far as I’m concerned, he failed in 2005.

But let’s set politics aside and focus on the fact that Trump coughed up $38 million to the IRS in 2005. If that’s representative of what he pays every year (and I realize that’s a big “if”), my main thought is that he should move to Italy.

Yes, I realize that sounds crazy given Italy’s awful fiscal system and grim outlook. But there’s actually a new special tax regime to lure wealthy foreigners. Regardless of their income, rich people who move to Italy from other nations can pay a flat amount of €100,000 every year. Note that we’re talking about a flat amount, not a flat rate.

Here’s how the reform was characterized by an Asian news outlet.

Italy on Wednesday (Mar 8) introduced a flat tax for wealthy foreigners in a bid to compete with similar incentives offered in Britain and Spain, which have successfully attracted a slew of rich footballers and entertainers. The new flat rate tax of €100,000 (US$105,000) a year will apply to all worldwide income for foreigners who declare Italy to be their residency for tax purposes.

Here’s how Bloomberg/BNA described the new initiative.

Italy unveiled a plan to allow the ultra-wealthy willing to take up residency in the country to pay an annual “flat tax” of 100,000 euros ($105,000) regardless of their level of income. A former Italian tax official told Bloomberg BNA the initiative is an attempt to entice high-net-worth individuals based in the U.K. to set up residency in Italy… Individuals paying the flat tax can add family members for an additional 25,000 euros ($26,250) each. The local media speculated that the measure would attract at least 1,000 high-income individuals.

Think about this from Donald Trump’s perspective. Would he rather pay $38 million to the ghouls at the IRS, or would he rather make an annual payment of €100,000 (plus another €50,000 for his wife and youngest son) to the Agenzia Entrate?

Seems like a no-brainer to me, especially since Italy is one of the most beautiful nations in the world. Like France, it’s not a place where it’s easy to become rich, but it’s a great place to live if you already have money.

But if Trump prefers cold rain over Mediterranean sunshine, he could also pick the Isle of Man for his new home.

There are no capital gains, inheritance tax or stamp duty, and personal income tax has a 10% standard rate and 20% higher rate.  In addition there is a tax cap on total income payable of £125,000 per person, which has encouraged a steady flow of wealthy individuals and families to settle on the Island.

Though there are other options, as David Schrieberg explained for Forbes.

Italy is not exactly breaking new ground here. Various countries including Portugal, Malta, Cyprus and Ireland have been chasing high net worth individuals with various incentives. In 2014, some 60% of Swiss voters rejected a Socialist Party bid to end a 152-year-old tax break through which an estimated 5,600 wealthy foreigners pay a single lump sum similar to the new Italian regime.

Though all of these options are inferior to Monaco, where rich people (and everyone else) don’t pay any income tax. Same with the Cayman Islands and Bermuda. And don’t forget Vanuatu.

If you think all of this sounds too good to be true, you’re right. At least for Donald Trump and other Americans. The United States has a very onerous worldwide tax system based on citizenship.

In other words, unlike folks in the rest of the world, Americans have to give up their passports in order to benefit from these attractive options. And the IRS insists that such people pay a Soviet-style exit tax on their way out the door.

Read Full Post »

Older Posts »

%d bloggers like this: