Archive for the ‘Economics’ Category

In conversations with statists, I’ve learned that many of them actually believe the economy is a fixed pie. This misconception leads them to think that rich people get rich only by somehow making others poor.

In this simplistic worldview, a bigger slice for one person means less for everyone else.

In reality, though, their fixation on the distribution of income leads them to support policies that hinder growth.

And here’s the ironic part. When you have statist policies such as high taxes and lots of redistribution, the economy weakens and the result is a stagnant pie.

In other words, the zero-sum society they fear only occurs when their policies are in effect!

To improve their understanding (and hopefully to make my leftist friends more amenable to good policy ideas), I oftentimes share two incontestable facts based on very hard data.

1. Per-capita economic output has increased in the world (and in the United States), which obviously means that the vast majority of people are far better off than their ancestors.

2. There are many real-world examples of how nations with sensible public policy enjoy very strong growth, leading to huge increases in living standards in relatively short periods of time.

I think this is all the evidence one needs to conclude that free markets and small government are the right recipe for a just and prosperous society.

But lots of statists are still reluctant to change their minds, even if you get them to admit that it’s possible to make the economic pie bigger.

I suspect in many cases their resistance is because (at least subconsciously) they resent the rich more than they want to help the poor. That’s certainly the conclusion that Margaret Thatcher reached after her years in public life.

So, in hopes of dealing with this mindset, let’s augment the two points listed above.

3. There is considerable income mobility in the United States, which means today’s rich and today’s poor won’t necessarily be tomorrow’s rich and tomorrow’s poor.

Let’s look at some evidence for this assertion.

And we’ll start with businesses. Here’s what Mark Perry of the American Enterprise Institute found when he investigated changes in the Fortune 500.

Comparing the 1955 Fortune 500 companies to the 2015 Fortune 500, there are only 61 companies that appear in both lists… In other words, only 12.2% of the Fortune 500 companies in 1955 were still on the list 60 years later in 2015… The fact that nearly 9 of every ten Fortune 500 companies in 1955 are gone, merged, or contracted demonstrates that there’s been a lot of market disruption, churning, and Schumpeterian creative destruction… The constant turnover in the Fortune 500 is a positive sign of the dynamism and innovation that characterizes a vibrant consumer-oriented market economy, and that dynamic turnover is speeding up in today’s hyper-competitive global economy.

Here’s the list of the companies that have managed to stay at the top over the past six decades.

Now let’s shift from companies to people.

The most famous ranking of personal wealth is put together by Forbes.

Is this a closed club, with the same people dominating the list year after year?

Well, there’s considerable turnover in the short run, as noted by Professor Don Boudreaux.

…21 of the still-living 100 richest Americans of only five years ago are no longer in that group today.  That’s a greater than 20 percent turnover in a mere half-decade.

There’s a lot of turnover – more than 50 percent – in the medium run, as revealed by Mark Sperry.

Of the 400 people in the 2001 Forbes list of the wealthiest Americans, 230 were not in the 1989 list.

And there’s almost wholesale turnover in the long run, as discovered by Will McBride of the Tax Foundation.

Of the original Forbes 400 from the first edition in 1982, only 35 remain on the list. …Of those on the 1987 Forbes 400 list, only 73 remain there in 2013.

In other words, it’s not easy to stay at the top. New entrepreneurs and investors constantly take the place of those who don’t manage to grow their wealth.

So far, we’ve focused on the biggest companies and the richest people.

But what about ordinary people? Is there also churning for the rest of us?

The answer is yes.

Here are some remarkable findings from a New York Times column by Professor Mark Rank of Washington University.

I looked at 44 years of longitudinal data regarding individuals from ages 25 to 60 to see what percentage of the American population would experience these different levels of affluence during their lives. The results were striking. It turns out that 12 percent of the population will find themselves in the top 1 percent of the income distribution for at least one year. What’s more, 39 percent of Americans will spend a year in the top 5 percent of the income distribution, 56 percent will find themselves in the top 10 percent, and a whopping 73 percent will spend a year in the top 20 percent of the income distribution. …This is just as true at the bottom of the income distribution scale, where 54 percent of Americans will experience poverty or near poverty at least once between the ages of 25 and 60…this information casts serious doubt on the notion of a rigid class structure in the United States based upon income.

A thoroughly footnoted study from the National Center for Policy Analysis has more evidence.

…83 percent of adults born into the lowest income bracket exceed their parents’ income as adults. About 40 percent of people in the lowest fifth of income earners in 1986 moved to a higher income bracket by 1996, and roughly half of the people in the lowest income quintile in 1996 moved to a higher income bracket by 2005. …In both the 1970s and 1980s, 8 percent of children born in the bottom fifth of the income distribution rose to the top fifth. About 20 percent of children born in the middle fifth of the income distribution later rose to the top fifth.

And here’s some of Ronald Bailey’s analysis, which I cited last year.

Those worried about rising income inequality also often make the mistake of assuming that each income quintile contains the same households. They don’t. …In 2009, two economists from the Office of Tax Analysis in the U.S. Treasury compared income mobility in two periods, 1987 to 1996 and 1996 to 2005. The results, published in the National Tax Journal, revealed that “over half of taxpayers moved to a different income quintile and that roughly half of taxpayers who began in the bottom income quintile moved up to a higher income group by the end of each period.” …The Treasury researchers updated their analysis of income mobility trends in a May 2013 study for the American Economic Review, finding that about 75 percent of taxpayers between 35 and 40 years of age in the second, middle and fourth income quintiles in 1987 had moved to a different quintile by 2007.

Last but not least, let’s look at some of Scott Winship’s recent work.

…for today’s forty-somethings who grew up in the middle fifth around 1970…19 percent ended up in the top fifth, 23 percent in the middle fifth, and 14 percent in the bottom fifth… Among those raised in the bottom fifth, 43 percent remain there as adults. …30 percent made it to the top three-fifths… Mobility among today’s adults raised in the top fifth displays the mirror image: 40 percent remain at the top, 37 percent fall to the bottom three-fifths.

The bottom line is that there is considerable income mobility in the United States.

To be sure, different people can look at these numbers and decide that there needs to be even more churning.

My view, for what it’s worth, is that the correct distribution of income is whatever naturally results from voluntary exchange in an unfettered market economy.

I’m far more concerned with another economic variable. Indeed, it’s so important that we’ll close by adding to the three points above.

4. For those who genuinely care about the living standards of the less fortunate, the only factor that really matters in the long run is economic growth.

This is why, like Sisyphus pushing the rock up a hill, I keep trying to convince my leftist friends that growth is the best way to help the poor. I routinely share new evidence and provide real-world data in hopes that they will realize that good results are more important than good intentions.

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I may have to change my mind. When asked a few years ago to pick which department in Washington most deserved to be eliminated, I chose the Department of Housing and Urban Development.

And HUD unquestionably is a cesspool of waste, so it certainly should be shuttered.

But the more I read about the bizarre handouts and subsidies showered on big agribusiness producers by the Department of Agriculture, the more I think there’s a very compelling argument that it should be at top of my list.

Indeed, these giveaways are so disgusting and corrupt that not only should the department be abolished, but the headquarters should be razed and then the ground should be covered by a foot of salt to make sure nothing ever springs back to life.

That’s a bit of hyperbole, I realize, but you’ll hopefully feel the same way after today. That’s because we’re going to look at a few examples of the bad results caused by government intervention.

To get an idea of the Soviet-style nonsense of American agricultural programs, a Reuters report on the peanut programs reveals how subsidies and intervention are bad news for taxpayers and consumers. Here’s the big picture.

A mountain of peanuts is piling up in the U.S. south, threatening to hand American taxpayers a near $2-billion bailout bill over the next three years, and leaving the government with a big chunk of the crop on its books. …experts say it is the unintended consequence of recent changes in farm policies that create incentives for farmers to keep adding to excess supply.

And here’s a description of the perverse and contradictory interventions that have been created in Washington.

First, the U.S. Department of Agriculture (USDA) is paying farmers most of the difference between the “reference price” of $535 per ton (26.75 cents per lb) and market prices, now below $400 per ton. A Nov. 18 report to Congress estimates such payments this year for peanuts exceed those for corn and soybeans by more than $100 per acre. Secondly, government loan guarantees mean once prices fall below levels used to value their crops as collateral, farmers have an incentive to default on the loans and hand over the peanuts to the USDA rather than sell them to make the payments.

Gee, what a nice scam. Uncle Sam tells these farmers welfare recipients that they can take out loans and then not pay back the money if peanut prices aren’t at some arbitrary level decided by the commissars politicians and bureaucrats in Washington.

In other words, assuming the peanut lobbyists have cleverly worked the system (and unfortunately they have), it’s a license to steal money from the general population by over-producing peanuts. And we’re talking a lot of peanuts.

Through forfeitures, the USDA amassed 145,000 tons of peanuts from last year’s crop, its largest stockpile in at least nine years, according to data compiled by Reuters. …That stockpile is enough to satisfy the average annual consumption of over 20 million Americans – more than the population of Florida – and puts the administration in a bind. …As peanut carryover inventories are forecast to hit a record of 1.4 million tons by end-July 2016 and as loans begin to come due next summer, farmers are expected to fork over more peanuts to the USDA.

Moreover, because the perverse interaction of the various handouts, there’s no solution (other than…gasp!…allowing a free market to operate).

Storing the peanuts in shellers’ and growers’ warehouses comes at a cost. Selling them could depress the market further and in turn would add to the price subsidy bill.

Now let’s shift gears and look at another sleazy and corrupt example of agricultural welfare.

The Des Moines Register is reporting that corn growers and other beneficiaries of the ethanol program are working to cement their place at the public trough.

Iowa’s billion-dollar ethanol industry is turning up the heat… America’s Renewable Future, a bipartisan political group backed by top Iowa elected officials and people in agriculture and the ethanol industry, is in the midst of a million-dollar ad campaign to exert pressure on candidates ahead of the Iowa caucuses, supporting candidates who back the Renewable Fuel Standard and criticizing those who denounce it.

Ethanol is a particularly evil handout, encompassing regulatory mandates, special tax preferences, trade barriers, and other forms of subsidies.

All this is necessary because it makes no economic sense to turn corn into fuel. But with the right amount of goodies from Washington, dumb things suddenly become “profitable.”

And to maintain the flow of undeserved loot, the moochers are applying pressure.

Patty Judge, co-chair of America’s Renewable Future and a former Iowa agriculture secretary, said the group has signed up 45,000 people who have pledged to look closely at how the candidates stand on the Renewable Fuel Standard when they vote in the Iowa caucuses. …Iowa is the nation’s largest ethanol producer, churning out 3.9 billion gallons in 2014.

While the stories about peanuts and ethanol make for grim reading, now it’s time to get really depressed.

That’s because we’re going to take a look at a New York Times story on how Washington is dealing with ag subsidies.

In April, Republicans newly in control of Congress celebrated their agreement on a plan to save $5 trillion — that’s trillion, with a “T” — and balance the budget in a decade. …Yet as the year closes, Congress instead is planning to repeal one of the few spending cuts it has passed into law since approving that budget resolution: $3 billion over a decade from subsidies for crop insurers. …Republican leaders agreed to hold a vote next month to delete the savings after lawmakers from agricultural states complained…the agriculture committees, like most others, had no intention of turning budget-balancing numbers into policy reality by voting for cuts that would anger constituents, contributors and influential interest groups — not the $20 billion that the budget resolution recommended, nor even the $3 billion reduction from crop insurers, a cut that administration officials and Republican leaders tucked into the bipartisan budget deal Congress passed in October.

By the way, to get further depressed, this means that the terrible agreement to bust the spending caps just became even worse.

So now you’ll understand why the Department of Agriculture deserves to be eliminated.

P.S. You probably won’t be surprised to learn that the disgraced and convicted former House Speaker, Denny Hastert, had his filthy hands in the ethanol business.

P.P.S. And don’t forget that the wasteful food stamp program is part of the Department of Agriculture, largely to create an unholy alliance of rural moochers and urban moochers.

P.P.P.S. Last but not least, the clowns in Washington not only muck up how food is produced, they also can’t resist interfering in how food is consumed.

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When people think about government regulation, it’s understandable that they focus on things that impact their everyday lives.

Most of us, for instance, are irked by government’s war against modern life. Bureaucratic pinheads in Washington think they have the right to plague us with crummy dishwashers, inferior light bulbssubstandard toilets, and inadequate washing machines.

But what matters more is the way that onerous regulation throws sand in the gears of the economy, slowing growth and undermining job creation. And no matter how you slice the data, there’s no escaping the conclusion that American competitiveness is suffocating because of red tape and regulation from Washington.

Here are some very depressing bits of information I’ve shared in the past.

So what’s President Obama’s plan to deal with this regulatory morass?

Well, he wants to make matters worse. I’m not joking. Here are some excerpts from a report in The Hill.

President Obama is moving to complete scores of regulations as he looks to cement key parts of his legacy… The White House quietly released its formal rulemaking schedule late last week, revealing the administration’s latest plans for regulations currently in the works at agencies across the federal government. …Obama has no intentions of slowing down the process during his final year in office. …Critics, however, say the President has already issued far too many burdensome regulations. …the administration has finalized about one rule a day since Obama took office and estimates the compliance costs associated with those rules to total about $700 billion.

What makes this so depressing is that the Mercatus Center has new research showing that the regulatory burden is especially harmful to entrepreneurs and small businesses.

Here are some of the findings from this new study.

…a 10 percent increase in the intensity of regulation as measured by the RegData index leads to a statistically significant 0.5 percent decrease in overall firm births. …regulation deters hiring overall. A 10 percent increase in regulation is associated with a statistically significant 0.9 percent decrease in hiring. …Regulation leads to a statistically significant reduction in hiring and firm births for firms overall and for small firms. …our results suggest that from 1998 to 2011, increased federal regulation reduced the entry of new firms by 1.2 percent and reduced hiring by 2.2 percent. That result implies that returning to the level of regulation in effect in 1998 would lead to the creation of 30 new firms and the hiring of 530 new employees every year for an average industry.

So who benefits from red tape?

Other than bureaucrats and lobbyists, the big winner is big business.

…we find that large incumbents are actually less likely to die when their industry becomes more regulated. That finding suggests that incumbents, in particular, benefit from increasing levels of regulation and provides support for the idea that incumbents might actively seek increasing regulation to deter entry and limit competition (consistent with capture theory).

The good news is that a growing number of people are recognizing the need to deal with excessive regulation.

I don’t think many people would accuse Professor Noah Smith of Stony Brook University of being a libertarian, yet he makes a strong case for regulatory relief in a recent Bloomberg column.

Republicans should stop focusing so much on taxes and devote more attention to deregulation. …Although it’s very difficult to measure the amount of regulation across the economy, there are more and more areas that are cause for concern. For example, the scope of occupational licensing, which economists mostly believe is a drag on growth, is startling, and seems to have no good reason behind it. …Another concern is environmental regulation…local development opponents are often able to use costly environmental reviews to block needed infrastructure. A third area is zoning. As the incentives for density have risen, zoning regulation has become an increasing burden on growth.

He lists additional items, such as the approval process at the FDA for new drugs and all the Byzantine red tape required by the Sarbanes-Oxley law, and he also makes the very important point that cost-benefit analysis is necessary since not all regulations are created equal.

So what’s the solution to this mess?

Research from the folks at Mercatus points to some possible solution.

First and foremost, cut the budgets for regulatory agencies. If there’s less money, there will be fewer bureaucrats with fewer resources.

Here’s a very persuasive chart from a Mercatus report showing the correlation between regulatory budgets and the burden of red tape.

By the way, notice how regulatory spending exploded during the Bush years. Yet another bit of data showing that statist Republicans can be even worse for the economy than statist Democrats.

But I’m digressing. Let’s now look at another potential way of reining in the regulatory state.

Another study from Mercatus looks at a policy in Canada that put an aggregate cap on red tape.

Canada recently became the first country in the world to legislate a cap on regulation. The Red Tape Reduction Act, which became law on April 23, 2015, requires the federal government to eliminate at least one regulation for every new one introduced. Remarkably, the legislation received near-unanimous support across the political spectrum: 245 votes in favor of the bill and 1 opposed.

The nationwide legislation was based on an experiment in British Columbia.

When the BC government first introduced the Reform Policy in 2001, two regulatory requirements had to be eliminated for every one introduced. …today the policy calls for eliminating one requirement for every new one introduced. …requiring regulators to…eliminate…regulatory requirements for every new one introduced represented a dramatic change in thinking about regulation in BC: It put the onus on the government to…reduce the total amount of regulation.

And this policy apparently was very successful.

There is no question that BC’s economic performance improved markedly after 2001 in contrast to the “dismal decade” of the 1990s. The province went from being one of the worst performing in the country to being among the best. …economic growth in BC was 1.9 percentage points below the Canadian average between 1994 and 2001 but 1.1 percentage points above the Canadian average between 2002 and 2006. BC’s real GDP growth was lower than Canada’s as a whole in six of the nine years between 1992 and 2000, but BC’s GDP grew faster than Canada’s every year between 2002 and 2008.

What’s the key takeaway lesson?

Well, just as a spending cap is the right approach to fiscal policy, a regulatory cap also is the right way to deal with red tape.

…a hard cap on the total amount of regulatory requirements…has forced a discipline that did not previously exist, a discipline that has helped change the culture within government to one where regulators see their job as focusing on the most important rules.

Gee, what a radical idea. Requiring the folks in Washington to set priorities and make tradeoffs!

P.S. I guess we can add regulatory reform to our good-things-we-can-learn-from-Canada collection, along with spending restraint, corporate tax reform, bank bailouts, reducing double taxation, and privatization of air traffic control. Heck, Canada even has one of the lowest levels of welfare spending among developed nations.

P.P.S. Since we just reviewed research on how big corporations can benefit by supporting regulations that will disproportionately hurt their small competitors, you probably won’t be surprised to learn that some of those same big companies support tax hikes that will be especially damaging to small businesses.

P.P.P.S. While I suspect America wins the prize for worst regulatory agency and most despicable regulatory practice, Japan almost surely wins the prize for the oddest regulation.

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Here we go again.

The politicians in Washington are whining and complaining that “evil” and “greedy” corporations are bring traitors by engaging in corporate inversions so they can leave America.

The issue is very simple. The United States has a very unfriendly and anti-competitive tax system. So it’s very much in the interest of multinational companies to figure out some way of switching their legal domicile to a jurisdiction with better tax law. There are two things to understand.

First, the United States has the world’s highest corporate tax rate, which undermines job creation and competitiveness in America, regardless of whether there are inversions.

Second, the United States has the most punitive “worldwide” tax system, meaning the IRS gets to tax American-domiciled companies on income that is earned (and already subject to tax) in other nations.

Unfortunately, the White House has no desire to address these problems.

This means American companies that compete in global markets are in an untenable position. If they’re passive, they’ll lose market share and be less able to compete.

And this is why so many of them have decided to re-domicile, notwithstanding childish hostility from Washington.

The Wall Street Journal is reporting, for instance, that the long-rumored inversion of Pfizer is moving forward.

Pfizer Inc. and Allergan PLC agreed on a historic merger deal worth more than $150 billion that would create the world’s biggest drug maker and move one of the top names in corporate America to a foreign country. …The takeover would be the largest so-called inversion ever. Such deals enable a U.S. company to move abroad and take advantage of a lower corporate tax rate elsewhere… In hooking up with Allergan, Pfizer would lower its tax rate below 20%, analysts estimate. Allergan, itself the product of a tax-lowering inversion deal, has a roughly 15% tax rate.

While there presumably will be some business synergies that will be achieved, tax policy played a big role. Here are some passages from a WSJ story late last month.

Pfizer Inc. Chief Executive Ian Read said Thursday he won’t let potential political fallout deter him from pursuing a tax-reducing takeover that could move the company’s legal address outside the U.S… Mr. Read…said he had a duty to increase or defend the value of his company, which he said is disadvantaged by the U.S. tax system.

And the report accurately noted that the United States has a corporate tax system that is needlessly and destructively punitive.

The U.S. has the highest corporate tax rate—35% — in the industrialized world, and companies owe taxes on all the income they earn around the world, though they can defer U.S. taxes on foreign income until they bring the money home. In other countries, companies face lower tax rates and few if any residual taxes on moving profits across borders.

And when I said America’s tax system was “needlessly and destructively punitive,” that wasn’t just empty rhetoric.

The Tax Foundation has an International Tax Competitiveness Index, which ranks the tax systems of industrialized nations. As you can see, America does get a good grade.

The United States places 32nd out of the 34 OECD countries on the ITCI. There are three main drivers behind the U.S.’s low score. First, it has the highest corporate income tax rate in the OECD at 39 percent (combined marginal federal and state rates). Second, it is one of the few countries in the OECD that does not have a territorial tax system, which would exempt foreign profits earned by domestic corporations from domestic taxation. Finally, the United States loses points for having a relatively high, progressive individual income tax (combined top rate of 48.6 percent) that taxes both dividends and capital gains, albeit at a reduced rate.

Here’s the table showing overall scores and ranking for major categories.

You’ll have to scroll to the bottom portion to find the United States. And I’ve circled (in red) America’s ranking for corporate taxation and international tax rules. So perhaps it’s now easy to understand why Pfizer will be domiciled in Ireland.

By the way, while I’m a huge admirer of the Tax Foundation, I don’t fully agree with this ranking because there’s no component score for aggregate tax burden.

I don’t say that because it would boost America’s score (though that would help bump up the United States), but rather because I think it’s important to have some measure showing the degree to which resources are being diverted from the economy’s productive sector to government.

But I’m digressing. Let’s now return to the main issue of Pfizer and corporate inversions.

Our friends on the left have a blame-the-victim approach to this issue. Here’s what the Wall Street Journal wrote in September, before the Pfizer-Allergan merger.

Remember last year when the Obama Treasury bypassed federal rule-making procedures to stop U.S. companies from moving overseas? It didn’t work. …Watching U.S. firms skedaddle, President Obama might have thought that perhaps the U.S. should stop taxing earnings generated outside its borders, since almost no one else on the planet does. Or he might have pondered whether the industrialized world’s highest corporate income tax rate is good for business. Being Barack Obama, the President naturally sought to bar companies from leaving. And his Treasury, being part of the Obama Administration, naturally skipped the normal process of proposing new rules and allowing the public to comment on them.

But even this lawless administration hasn’t been able to block inversions by regulatory edict.

…in the year since the Treasury Department “tightened its rules to reduce the tax benefits of such deals, six U.S. companies have struck inversions, compared with the nine that did so the year before.” Meanwhile, foreign takeovers of U.S. firms, which have the same effect of preventing the IRS from capturing world-wide earnings, are booming. These acquisitions exceed $379 billion so far this year, …far above any recent year before Treasury acted against inversions. So the policy won’t generate the revenue that Mr. Obama wants to collect, but it is succeeding in moving control of U.S. businesses offshore.

This should be an argument for a different approach, but Obama is too ideological to compromise on this issue.

And his leftist allies also don’t seem open to reason. Here’s some of what Jared Bernstein wrote a couple of days ago for the Washington Post.

There are three parts of his column that cry out for attention. First, he gives away his real motive by arguing that Washington should have more money.

…an eroding tax base is a bad thing. …we will need more, not less, revenue in the future.

In the context of inversions, he’s saying that it’s better for politicians to seize business earnings rather than to leave the funds in the private sector.

He then makes two assertions that simply are either untrue or misleading.

For instance, he puts forth an Elizabeth Warren-type argument that firms that engage in inversions are dodging their obligation to “contribute” to the system that allows them to earn money.

…the main thing the inverting company changes here is its tax mailbox and thus where it books its profits, not its actual location. So it’s still taking advantage of our infrastructure, our markets, and our educated workforce — it’s just significantly cutting what it contributes to them.

Utter nonsense. Every inverted company (and every foreign company of any kind) pays tax to the IRS on income earned in the United States.

All that happens with an inversion is that a company no longer pays tax to the IRS on income that is earned in other nations (and already subject to tax by governments in those nations!).

But that’s income that the United States shouldn’t be taxing in the first place.

Jared than argues that America’s corporate tax rate isn’t very high if you look at average tax rates.

…isn’t the problem that when it comes to corporate taxes, we’re the high-tax country? Not really. Our statutory corporate tax rate (35 percent) may be higher than that in many other countries, but because of all these tax avoidance schemes, the effective corporate rate is closer to 20 percent.

Once again, he’s off base. What matters most from an economic perspective is the marginal tax rate. Because that 35 percent marginal rate is what impacts incentives to earn more income, create more jobs, and expand investments.

And that marginal tax rate is what’s important for purposes of a company competing with a foreign competitor.

Here’s a briefing I gave to Capitol Hill staffers last year. The issues haven’t changed, so it’s still very appropriate for today’s debate.

Now perhaps you’ll understand why I’m a big fan of this poster.

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In early 2013, a reader asked me the best place to go if America suffered a Greek-style economic collapse.

I suggested Australia might be the best option, even if I would be too stubborn to take my own advice.

Perhaps because of an irrational form of patriotism, I’m fairly certain that I will always live in the United States and I will be fighting to preserve (or restore) liberty until my last breath.

But while I intend to stay in America, there is one thing that would make me very pessimistic about my country’s future.

Simply stated, if politicians ever manage to impose a value-added tax on the United States, the statists will have won a giant victory and it will be much harder to restrain big government.

But you don’t have to believe me. Folks on the left openly admit that a VAT is necessary to make America more like Europe.

Check out these excerpts from an article in Foreign Affairs by Professor Lane Kenworthy of the University of Arizona. He explicitly wants bigger government and recognizes the VAT is the only way to finance a European-sized welfare state.

…modern social democracy means a commitment to the extensive use of government…U.S. policymakers will recognize the benefits of a larger government role… Americans will need to pay more in taxes.The first and most important step would be to introduce a national consumption tax in the form of a value-added tax (VAT)… Washington…cannot realistically squeeze an additional ten percent of GDP in tax revenues solely from those at the top.

Pay special attention to the final sentence in that excerpt. Kenworthy is an honest statist. He knows that the Laffer Curve is real and that taxing the rich won’t generate the amount of revenue he wants.

That’s why the VAT is the key to financing bigger government. Heck, even the International Monetary Fund inadvertently provided very powerful evidence that a VAT is the recipe for bigger government.

Want more proof? Well, check out the recent New York Times column by John Harwood (the same guy who was criticized for being a biased moderator of CNBC’s GOP debate).

He starts by pointing out that Senators Cruz and Paul are proposing European-type value-added taxes.

Senator Ted Cruz of Texas and Senator Rand Paul of Kentucky do it most explicitly by proposing variations on “value-added tax” systems used by European countries.

But here’s the part that should grab your attention. He cites some folks on the left who admit that there’s no way to finance big expansions of the welfare state without a VAT.

Democratic economists…say…income trends…complicate their ability to raise enough revenue to finance government programs without increasing burdens on the middle class as well as the affluent. “We’ve come close to maxing out the amount of progressivity we can get from the existing tax system,” said Peter Orszag, President Obama’s first budget director. …as looming baby boomer retirements promise to swell Social Security and Medicare expenses beyond the current tax system’s ability to finance them, is in new thinking that expands the scope of possible solutions. “There’s no way we can keep the promises we’ve made to senior citizens and others without a new revenue source,” said Mr. Burman of the Tax Policy Center.

So if the statists are salivating for a VAT to make government bigger, why on earth are some otherwise sensible people pushing for this pernicious new tax?!?

Some journalists have asked this same question. Here are some passages from a Slate report.

…conservative policy thinkers…worry that it might accidentally set the stage for much, much higher taxes in the future should Democrats ever take back control of Washington. …Cruz would impose a new, roughly 19 percent “business flat tax.” This is his campaign’s creative rebranding of what the rest of the world typically calls a “value-added tax,” or VAT. And…it scares the living hell out of some conservatives.

The article notes that Cruz and Paul have decent intentions.

…for Cruz—and for Rand Paul, who…would similarly like to combine a VAT and flat income tax—the main appeal is that it could theoretically raise a lot of money to finance tax cuts elsewhere.

But good intentions don’t necessarily mean good results.

And just like you don’t give matches to a child, you don’t give a giant new tax to Washington.

How much could Cruz’s proposal net the government? The conservative-leaning Tax Foundation thinks $25.4 trillion over 10 years. … in the hands of a Democratic president, it could become a hidden money-making machine for the government. Passing a national sales tax would be hard, they say. But once it’s in place, slowly ratcheting it up to pay for additional spending would be relatively easy. “To be blunt, unless there’s a magic guarantee that principled conservatives such as Rand Paul and Ted Cruz (and their philosophical clones) would always hold the presidency, a VAT would be a very risky gamble,” Daniel Mitchell, a senior fellow at the libertarian Cato Institute, wrote recently. …The ironic thing here is that Ted Cruz, anti-tax preacher, may be doing his best to craft a tax plan that leaves Americans in the dark about the actual cost of running their government. Simultaneously, he might be making political room for Democrats to start talking about a VAT tax of their own.

By the way, this isn’t the first time that a Republican has broached the idea of a VAT.

One of the worst Presidents in American history, Richard Nixon, wanted a VAT to finance bigger government. Here are some passages from an article in the 1972 archives of Congressional Quarterly.

President Nixon…asked both the Advisory Commission on Intergovernmental Relations and his Commission on School Finance, a group he appointed in 1970, to study and report on a proposal for a value added tax. …The tax had the advantages that…it yielded relatively large amounts of revenue. …Two major reasons were apparent for the Nixon administration’s consideration of a value added tax. The first was the condition of federal finances. …Projected costs of existing and proposed programs were expected to absorb all revenues from existing taxes and other sources. This meant that no new programs could be inaugurated without new taxes to finance them or reduction of existing programs to release funds. Though initially pledged for education, revenues from an expanding value added tax might provide future funding for other programs.

My colleague, Chris Edwards, deserves credit for unearthing this disturbing bit of fiscal history. Here’s some of what he wrote about Nixon’s sinister effort.

Richard Nixon appears to have been the first U.S. leader to push for a VAT, which is not surprising given that he was perhaps the most statist GOP president of the 20th century. …Thankfully, the Nixon proposal went nowhere in Congress, the ACIR came out against it, and it was dropped. America’s economy dodged a bullet. If Nixon had been successful, the rate would probably have soared over time from an initial 3 percent to maybe 20 percent today—just as rates in Europe have risen—and that would have fueled growth in new and expanded entitlement programs. 

Amen. Chris hits the nail on the head.

It doesn’t really matter what the initial rate is. The VAT is an easy tax to raise because it’s so non-transparent.

Moreover adopting a VAT is a sure-fire way of enabling higher income tax rates because the statists will say it’s “unfair” to raise the VAT burden on lower-income and middle-income taxpayers unless there’s a concomitant increase in the income tax burden on the evil rich.

Which is exactly what happens in Europe. Look at how recent VAT hikes have been paired with higher income tax rates.

But here’s the chart that should scare any sensible person.

The bottom line is that the VAT is the Ebola Virus of big government.

P.S. You can enjoy some good VAT cartoons by clicking here, here, and here.

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Federalism is great for many reasons. When you have dozens of states with the freedom to choose different policies, you get lots of innovation and diversity, which helps identify policies that work.

You also can minimize the cost of mistakes. When a policy error occurs in one state (for example, government-run healthcare in Vermont), it quickly becomes obvious and the damage can be contained and maybe even reversed. But when a mistake is made nationally (such as Obamacare), it’s not as easy to pinpoint why the economy is weakening and fixing the error thus becomes more difficult.

And it should go without saying that federalism is desirable because it facilitates and enables competition among jurisdictions. And that limits the power of governments to impose bad policy.

These are some of the reasons why I’m a huge fan of the Tax Foundation’s State Business Tax Climate Index. It’s a rigorous publication that calculates the good and bad features of every state’s tax system. It then add together all that data to generate a very helpful ranking of the nation’s best and worst state tax systems.

And since that’s what people care most about, let’s cut to the chase and look at the states at the top and the bottom of the Index.

There are a couple of things which should be obvious from these two lists.

First, it’s a very good idea to be part of the no-income-tax club. It’s no coincidence that 7 out of the top 10 states don’t have that pernicious levy.

Second, perhaps the biggest lesson from the states in the bottom 10 is that it’s basically impossible for a state with a big government to have a good tax system.

Third (and here’s where I’m going to be a contrarian), I’m not sure that Wyoming and Alaska really deserve their high rankings. Both states use energy severance taxes to finance relatively large public sectors. And while it’s true that energy severance taxes don’t do as much damage to a state’s competitiveness as other revenue sources, I nonetheless think there should be an asterisk next to those two states.

So I actually put South Dakota in first place (though I realize I’m implicitly incorporating government spending into the equation while the Tax Foundation is only measuring the tax environment for business).

Now that we’ve hit the main highlights, here’s some explanatory information from the Index.

…the Index is designed to show how well states structure their tax systems, and provides a roadmap for improvement. …The absence of a major tax is a common factor among many of the top ten states. …This does not mean, however, that a state cannot rank in the top ten while still levying all the major taxes. Indiana and Utah, for example, levy all of the major tax types, but do so with low rates on broad bases. The states in the bottom 10 tend to have a number of afflictions in common: complex, non-neutral taxes with comparatively high rates.

And here’s some details about the Index’s methodology.

The Index…comparing the states on over 100 different variables in the five major areas of taxation (corporate taxes, individual income taxes, sales taxes, unemployment insurance taxes, and property taxes)… Using the economic literature as our guide, we designed these five components to score each state’s business tax climate…The five components are not weighted equally… This improves the explanatory power of the State Business Tax Climate Index as a whole. …this edition is the 2016 Index and represents the tax climate of each state as of July 1, 2015, the first day of fiscal year 2016 for most states.

Here’s a map showing the ranking of every state.

Top-10 states are in blue and bottom-10 states are in orange. At the risk of repeating myself, notice how zero-income tax states rank highly.

The Wall Street Journal editorial page combed through the report for highlights. The biggest success story in recent years is North Carolina, which joined the flat tax club.

…North Carolina, which in 2013 slashed its top 7.75% income tax to a flat 5.75% and its corporate rate to 5% from 6.9%. The former 44th is now ranked 15th.

Given Martin O’Malley’s horrible record in Maryland, I’m surprised that he hasn’t picked up more support from crazy lefties in the Democratic Party.

As Governor of Maryland from 2007 to 2015, Democrat Martin O’Malley increased some 40 taxes including the corporate rate to 8.25% from 7% and the sales tax to 6% from 5%.

And here’s some good news from an unexpected place.

The trophy for most-improved this year goes to Illinois, which jumped to 23rd from 31st… The Tax Foundation notes that the leap occurred “due to the sunset of corporate and individual income tax increases”… First-year Republican Governor Bruce Rauner has let the income-tax rate lapse to 3.75% from 5% and the corporate rate to 7.75% from 9.5%, though Democrats are trying to push them back up.

Given how the tax hike backfired, let’s hope the Governor holds firm in this fight.

Now let’s return to some of the analysis in the Tax Foundation’s Index. Here’s some of the academic evidence on the importance of low tax burdens.

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 (1989) provides strong evidence that taxes have a negative impact on business startups. He finds specifically that property taxes, because they are paid regardless of profit, have the strongest negative effect on business. Bartik’s econometric model also predicts tax elasticities of –0.1 to –0.5 that imply a 10 percent cut in tax rates will increase business activity by 1 to 5 percent. …Agostini and Tulayasathien (2001)…determined that for “foreign investors, the corporate tax rate is the most relevant tax in their investment decision.” …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. …the consensus among recent literature is that state and local taxes negatively affect employment levels. Harden and Hoyt conclude that the corporate income tax has the most significant negative impact on the rate of growth in employment. Gupta and Hofmann (2003)…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.

The message is that all the major revenue sources – income, sales, and property – can have negative effects.

Which explains, of course, why it’s important to control state government spending.

And one final point to make is that we should do everything possible to shrink the size of the central government in Washington and transfer activities to the private sector or states. This isn’t because states don’t make mistakes, but rather because competition between states will produce far better results than a one-size-fits-all approach from Washington.

P.S. A study from German economists finds that decentralization limits economically harmful redistribution outlays.

P.P.S. And a study from the IMF reveals that decentralized government is more competent and efficient.

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Whatever happened to Elizabeth Warren?

A couple of years ago, she was the pin-up girl for the crazy left thanks to fatuous statements about “you didn’t build that.”

But now she’s faded into the background and other politicians are getting more attention for their absurd statements (yes, I’m thinking of Hillary and Bernie).

So what accounts for Warren’s decline? Is that because even statists are embarrassed by her use of fake claims of Indian ancestry to climb the career ladder? Is it because the self-styled fighter against corporate fat cats revealed herself to be a hypocritical fraud after choosing to support the corrupt dispenser of subsidies that is otherwise known as the Export-Import Bank?

I don’t know the answer to those questions, but I suspect Senator Warren wants to get back in the spotlight. After all, that’s the only logical explanation for her recent upside-down comments about corporate taxation.

And “upside-down” doesn’t even begin to capture the absurdity of what she said, which revealed she has no clue that there’s not a linear relationship between tax rates and tax revenue. Here are some excerpts from a remarkable report in The Hill.

Sen. Elizabeth Warren (D-Mass.) says the big issue with the U.S. corporate tax code is not that taxes are too high — it’s that the revenue generated from the taxes is too low. …“Only one problem with the over-taxation story: It’s not true,” Warren said at the National Press Club on Wednesday. …Warren laid out…principles for corporate tax reform: Permanently increase the share of long-term revenues paid by large corporations.


When I read this story, something seemed very familiar.

And then I realized that I read a very similar statement a few years ago in the Washington Post. Writing about fiscal woes in Detroit, a reporter apparently thought it was a mystery that “tax collections are down 20 percent and income tax collections are down by more than a third…despite some of the highest tax rates in the state.”

What Senator Warren and some journalists fail to understand is that there are cases when tax revenues are very low because tax rates are high.

That’s clearly the case with the corporate tax. The United States has the second-highest corporate tax rate in the entire world.

And to add icing on this distasteful cake, we also have arguably the world’s worst worldwide tax system, combined with one of the world’s worst corporate tax structures.

Which makes this statement from Senator Warren particularly laughable.

“Our tax code should protect jobs and investments at home, period,” she said.

I’m almost speechless. Our tax treatment of business already is punitive and Warren wants to make it even worse (who does she think she is, an OECD bureaucrat?), yet she has the gall to pontificate about promoting jobs and investment in the United States?!?

Sort of like murdering your parents and then asking a judge for mercy because you’re an orphan.

In any event, here’s a video that Senator Warren should watch if she actually wants to understand corporate taxation (though I won’t hold my breath).

P.S. Switching to a completely different topic, I’m the first to admit that economists are easy to mock, especially the ones who think they know enough to fine tune the economy.

But it turns out that we’re not total dorks. If a report from the New York Times is accurate (a risky assumption, to be sure), we actually have pretty good social skills.

But I don’t think this means I suddenly have the ability to go into a bar and successfully chat up some ladies (which would be an untenably risky proposition, anyhow, because the PotL has a fiery temper).

What this actually means is that we economists supposedly have decent verbal and communications skills.

P.P.S. Let’s return to the original topic. I don’t claim to be overly clever or creative when it comes to economic humor, but I think I modified this famous sarcastic statement in a very accurate fashion.

Not as good as my Uncle Fester/sequestration cartoon, but it does capture Sen. Warren’s mindset.

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