Archive for the ‘Economics’ Category

While the overall issue of immigration is highly controversial and emotional, I’ve explained before that everyone should be able to agree that it’s a very good idea to bring in people who can be expected to increase per-capita economic output.

The good news is that we have some policies designed to make this happen, including the H-1B visa for skilled workers and the EB-5 visa for job-creating investors. And if the data on median income for certain immigrant groups is any indication, we’re getting some good results.

Today, motivated in part by the fact that I’ll be participating next month in a conference in London on the topic of “economic citizenship” and therefore having to prepare for that discussion,  let’s take a closer look at the EB-5 policy and why it’s a smart approach (by the way, I’m allowed to share a few discounted registrations since I’m a speaker, so contact me if you’re interested in the London event).

To put things in context, we’ll begin by reviewing a four-author study published by the National Bureau of Economic Research that looks at the growing effort by many nations to attract highly productive and capable immigrants.

Highly skilled workers play a central and starring role in today’s knowledge economy. Talented individuals make exceptional direct contributions—including breakthrough innovations and scientific discoveries—and coordinate and guide the actions of many others, propelling the knowledge frontier and spurring economic growth. In this process, the mobility of skilled workers becomes critical to enhancing productivity. …In the 2013 World Population Policies report, 40 percent of countries reported policies to raise immigration of high-skilled workers, a large increase from 22 percent in 2005. …For recipient countries, high-skilled immigration is often linked to clusters of technology and knowledge production that are certainly important for local economies and are plausibly important at the national level. …When it comes to talented foreigners, a number of countries…implement recruiting programs. …Canada has been very active in targeting skilled migrants who are denied or frustrated by the H-1B visa system in the United States, even taking out ads on billboards in the United States to attract such migrants.

By the way, I can’t resist observing that the authors recognize that highly talented (and therefore highly compensated) people are very important for economic growth. Based on the tax policies they advocate, that’s something politicians such as Hillary Clinton have a hard time understanding. Heck, upper-income taxpayers are the ones who finance the lion’s share of big government, so you’d think leftist politicians would be slapping them on their backs rather than across their faces.

But I digress. Let’s look at what the study says about migration by those most capable of producing growth.

Observed migration flows are the result of a complex tangle of multinational firms and other employers pursuing scarce talent, governments and other gatekeepers trying to manage these flows with policies, and individuals seeking their best options given the constraints imposed upon them. …The number of migrants with a tertiary degree rose nearly 130 percent from 1990 to 2010, while low skilled (primary educated) migrants increased by only 40 percent during that time. A pattern is emerging in which these high-skilled migrants are departing from a broader range of countries and heading to a narrower range of countries—in particular, the United States, the United Kingdom, Canada, and Australia. …More than half of the high-skilled technology workers and entrepreneurs in Silicon Valley are foreign-born. …host countries may end up with high concentrations of high-skilled immigrants in particular occupations. For example, immigrants account for some 57 percent of scientists residing in Switzerland, 45 percent in Australia, and 38 percent in the United States (Franzoni et al. 2012). In the United States, 27 percent of all physicians and surgeons and over 35 percent of current medical residents were foreign born in 2010. Immigrants also accounted for over 35 percent of recent enrollments in STEM fields, with very high proportions in specific areas like Electrical Engineering (70 percent), Computer Science (63 percent) and Economics (55 percent)… The global migration of inventors and the resulting concentration in a handful of countries have been particularly well documented. …the global migration rate of inventors in 2000 stood at 8.6 percent, at least 50 percent greater in share terms than the average for high-skilled workers as a whole. Figure 4 builds on WIPO global patent filings from 2001-2010. The United States has received an enormous net surplus of inventors from abroad.

The authors then consider the policies that different nations adopt in their search for GDP-enhancing immigrants.

…we then review the “gatekeepers” for global talent flows. At the government level, we compare the points-based skilled migration regimes as historically implemented by Canada and Australia with the employment-based policies used in the United States through mechanisms like the H-1B visa program. …The exceptional rise in the number of high-skilled migrants to OECD countries is the result of several forces, including increased efforts to attract them by policymakers as they recognize the central role of human capital in economic growth, positive spillovers generated by skill agglomeration, declines in transportation and communication costs, and rising pursuit of foreign education by young people. Among the resulting effects are the doubling of the share of the tertiary-educated in the labor force and fierce competition among countries hoping to attract talent. …One can explain certain aspects of current high-skilled migration patterns using this model. For example, the United States has a very wide earnings distribution and low tax levels and progressivity, especially compared to most source countries, including many high-income European countries. As a result, we can see why the United States would attract more high-skilled migrants…relative to other high-income countries.

By the way, I can’t resist making one minor correction. While we generally have lower taxes than other developed nations, we actually have a very “progressive” tax system. But US-style progressivity is the result of very low taxes on lower- and middle-income workers (no value-added tax, for instance), not unusually steep taxes on higher-income workers.

Returning to our main topic , the authors explain that developed nations either use a points-based system or an employment-based system when seeking to facilitate more high-skilled immigration.

Here’s how the the points-based system works.

Canada and Australia are prominent examples of countries that implement points-based systems for skilled migration. These programs select individuals based upon their observable education, language skills, work experience, and existing employment arrangements. …In the Canadian example, migrants need to collect 67 points across six categories. In terms of education, for example, 15 points are awarded for one-year post-secondary diploma, trade certificate or apprenticeship, compared to 25 for a doctorate degree. With regards work experience, six or more years of applicable experience receive 15 points, compared to 9 points for just one year of experience.

And here’s information on the employment-based approach, with the US being an obvious example.

The United States is the most cited example of a country that uses an employer-driven program for highskilled immigration, with the H-1B and L1 visas as primary categories (Kerr et al. 2015a). The H-1B visa allows US companies to temporarily employ skilled foreigners in “specialty occupations,” defined to be those demanding application of specialized knowledge like engineering or accounting. …Virtually all H-1B holders have a bachelor’s degree or higher and about 70% of the visas in recent years went to STEM-related occupations. India is by far the largest source country, accounting for about two-thirds of H-1B recipients in recent years. …most real-world regimes combine different features of points-based and employment-driven systems.

But the study notes that America also has a special system for bringing in ostensible superstars. Sort of a points system for the super talented.

Superstar talent rarely competes for H-1B visas, for example, but instead gains direct access to the United States through O1 temporary visas for extraordinary ability and direct green card applications of the EB-1 level for those with even more exceptional talent. …In effect, the US operates a points system for individuals with truly exceptional talents such as Nobel Prize winners, superstar athletes and musicians.

Now let’s turn the EB-5 program, which is another way that the United States seeks to attract those capable of making big economic contributions.

In part because the natural inefficiency of government creates opportunities for corruption in implementation, the EB-5 program has become very controversial. Some lawmakers even want the entire program to lapse when its authorization expires in December.

At the risk of understatement, I hope they don’t throw the baby out with the bathwater.

The Brookings Institution notes that Senators Chuck Grassley (R-IA) and Patrick Leahy (D-VT) want to impose stricter rules and micro-manage how the investment occurs.

It also raises the minimum investment amount to $800,000 within a [targeted employment area] and $1.2 million otherwise. Most important for reaching the program’s economic development goals, however, are the bill’s new rules on defining TEAs. …The bill would revise the TEA definition to include rural areas, closed military bases, or single census tracts within metro areas with an unemployment rate at 150 percent of the national average. To further increase the effect of EB-5 financing, at least 50 percent of the job creation would have to be within the metro area, or within the county in which a rural TEA is located.

The business community doesn’t object to some stricter standards, as reported by The Hill, but wants the program to remain and wants it made permanent.

A coalition of business groups is pushing Congress to permanently renew a controversial investor visa program before it expires in September. …In a letter shared with The Hill on Thursday, those groups called on lawmakers to renew the EB-5 investor visa program with bolstered security and anti-fraud checks, adjustments to highly criticized investment incentives and streamlined visa processing. “Congress must not let this important job-creating program lapse, in large measure because of the immediate negative consequences to U.S. businesses and projects counting on EB-5 investment to create jobs for Americans,” wrote the groups to the Senate and House Judiciary committees. …The EB-5 program is responsible for more than $15 billion in investment and 100,000 jobs between 2005 and 2010, the coalition says.

Ike Brannon, writing for the Weekly Standard, worries that politicians will undermine the positive impact of the program with some back-door central planning.

That EB-5 program has succeeded at its intended purpose is not in dispute: A Brookings Institution study estimated that the program has created nearly 100,000 jobs along with over $5 billion of new investment since its inception. The current EB-5 program technically consists of two different pieces: The first is the original EB-5 visa program, which Congress enacted in 1990. Its intent was to help American business compete for foreign investment with countries like Canada and Australia, which had similar investor programs in place. …The overriding intent of the program has always been about job creation, anywhere and everywhere. Senator Paul Simon, a sponsor of the original EB-5 program, took care to emphasize that its purpose was first and foremost to attract entrepreneurs and spur job creation, noting that “neither the Senate nor the House bill established any sort of criteria about the type of business investment…As long as the employment goal is met, it is unnecessary to needlessly regulate the type of business or the character of the investment.”

But politicians love the “needlessly regulate,” so the EB-5 system has lots of red tape and Ike fears it may get even more.

Congress nonetheless attempted to spur some sort of geographic balance-cum-urban development with the creation of Target Employment Areas [TEAs], which consist of areas with high unemployment rates or rural areas outside the boundary of any city or town with a population over 20,000. In a TEA, the necessary investment need only be $500,000, so long as it creates the requisite number of jobs. …The problem with a federal top-down approach of this sort is that such a constraint could limit the efficacy of the program. …imposing a new rule that restricts how states designate Targeted Employment Areas will only make EB-5 more of a political football than it already is. Creating a welter of restrictions about where such investment can and cannot go would likely dampen the economic impact of the program.

A columnist for Forbes explains why the program should continue.

The EB-5 immigration visa may be the best immigration program the U.S. has to offer. Foreign investors…are putting up a minimum of $500,000 to renew and rebuild rundown urban areas and create jobs. It’s a legal way in for the kind of immigrant, a fortunate one, that tends to contribute to the neighborhood by bringing in money and jobs. …“EB-5 has economic benefits that doesn’t stop at the five hundred thousand dollars they need to invest to participate,” says Julian Montero, a partner in the Miami law office of Arnstein & Lehr. “It’s just the beginning of a more significant investment that will be made by these families when the come here. They’re going to private schools. They’re making good income. They’re paying taxes. And most of them start other businesses once here.” …The EB-5 has become a way for developers to attract foreign capital at low, project finance-style structured interest rates because the people giving the money are getting a prize: the right to live, work and study in the United States.

Perhaps most notably, even the International Monetary Fund recognizes the advantages of this type of program.

…economic residency programs were recently launched across a wide range of (generally much larger) European countries, including Bulgaria, France, Hungary, Ireland, the Netherlands, Portugal, and Spain. Almost half of EU member states now have a dedicated immigrant investor route. Also known as golden visa programs, these arrangements give investors residency rights…some advanced economies, such as Canada, the United Kingdom, and the United States, have had immigrant investor programs since the late 1980s or early 1990s, offering a route to citizenship in exchange for specific investment conditions… The inflows of funds to countries from these programs can be substantial, with far-reaching macroeconomic implications for nearly every sector.

The IMF article includes a helpful summary of nations that have programs to attract investors.

The bottom line is that there are many high-income and high-wealth people in the world (including the “super-entrepreneurs“) who would like to move to places that offer more stability, security, and opportunity. This creates a potential win-win situation for both the people migrating and the recipient nations.

The United States is already a big beneficiary of economic-based migration, but we could reap even greater benefits with a more sensible, streamlined, and expanded EB-5 system.

P.S. Zooming out to the broader issue of immigration and whether people want to come to the United States for the wrong reason, Professor Tyler Cowen of George Mason University has a very intriguing proposal to have open immigration with nations such as Denmark that have bigger welfare states than America.

P.P.S. Today’s column is about economic-based immigration. There’s also the issue of economic-based emigration. Sadly, the United States policy on allowing people to leave is even worse than France’s system.

P.P.P.S. If you want to enjoy some migration-related humor, we have a video about Americans emigrating to Peru and a story about American leftists escaping to Canada.

P.P.P.P.S. Remember to contact me if you’re interested in the London conference.

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Since I’ve referred to the International Monetary Fund as both “the Dumpster Fire of the Global Economy” and “the Dr. Kevorkian of Global Economic Policy,” readers can safely conclude that I’m not a fan of the international bureaucracy. My main gripe is that senior bureaucrats routinely make the mistake of bailing out profligate governments (often as a back-door way of bailing out banks that foolishly lent to those governments), and they compound that mistake by then insisting on big tax hikes.

But as I’ve noted when writing about international bureaucracies, the professional economists who work for these organizations often produce very good work.

And that’s true even for the IMF. The bureaucracy published a study a few years ago entitled “The Size of Government and U.S.–European Differences in Economic Performance” and it has some useful and interesting conclusions. Here are some excerpts, along with my observations. We’ll start with the question the authors want to answer.

How much of a drag is the modern welfare state on economic performance? … One standard approach has been to estimate the disincentive effects of taxes and deduce that lower taxes would imply higher welfare. However, in the context of modern democracies, this argument begs the question why voters prefer an inferior economic outcome (a higher tax burden) instead of voting for parties that would minimize taxes.

Actually, we don’t need to “beg the question.” We get bad policy because voters get seduced into voting for politicians who promise to pillage the “rich” and give goodies to everyone else. And since voters generally don’t understand that this approach leads to “an inferior economic outcome,” the process can continue indefinitely (or until the ratio between those pulling the wagon and those riding in the wagon gets too imbalanced).

But I’m digressing. Let’s get back to the main focus of the study. The authors note that Europe isn’t converging with the United States, which is what standard economic theory says should be happening.

The academic debate over the long-term failure of European countries to catch up with U.S. economic performance also points to the need for a better assessment of the economic effects of large governments. Over the last three decades, European countries have not made inroads in closing a gap in per capita income vis-à-vis the US. …This paper focuses on…the role of the size of the public sector… The literature studying the impact of government on economic performance is large. Theory has focused on welfare effects—stressing the distortionary impact of taxation and government spending… observed government sizes generally tend to be too large, thus depressing welfare in many countries, or actual policies depart from allocationally optimal ones, especially in the “Rhineland-model” European economies.

And here are some of the results.

… a higher tax wedge results in lower hours worked. Moreover, the equation can be used to predict hours worked as a function of the tax wedge. …based on these calibrations, and using the welfare measure described in Appendix II, the steady-state welfare effects of varying the size of government can be analyzed. Table 2 provides the results of two such thought experiments: (i) to cut the marginal tax rate by five percentage points and (ii) to adopt U.S. taxation levels (in both accompanied by offsetting changes in spending), with the welfare change measured in the incremental consumption equivalent of the tax cuts. For example, had Belgium between 1990–99 cut marginal income tax rates by five percentage points, it would have reaped a welfare gain equivalent to 7⅓ percent of aggregate consumption (or of 21 percent if it had adopted US tax levels). These are large potential welfare gains from cutting back government.

Here’s a table from the study showing the theoretical gains from lowering tax rates, either by 5-percentage points, or all the way down to American levels.

But the authors note that their model is incomplete, with some countries doing better than what’s implied by their fiscal systems.

The basic model has considerable difficulties in accounting for labor supply in very high-tax countries, which it frequently underpredicted (e.g., the Nordic countries, excluding Norway…). …One group comprising Sweden and Denmark… Both countries are often singled out as countries with large government, but, as seen in the previous, both also have higher than predicted labor supply in the baseline model.

The study tries to explain such differences by considering whether some governments spend money in an effective manner on “active labor market policies” that produce higher levels of labor supply.

Perhaps that’s a partial explanation, but I think there’s a much simpler way of making sense of the data. The Nordic nations, as I’ve repeatedly written, have strongly pro-market policies once fiscal policy is taken out of the equation.

So if you just look at fiscal policy, they should be way behind the United States. But since they are more market-oriented than America in other areas (trade, rule of law, regulation, and monetary policy), that shrinks the gap.

That being said, I’m not going to be too critical of the IMF study since it does reach a very sensible conclusion.

…the size of government does play a significant role in explaining lower European labor supply…the size of European governments appears to imply large welfare costs. …Moreover, government policies that do not directly increase the size of government, e.g., regulation, are observed to also impart significant costs.

By the way, don’t assume this IMF study is an outlier. When economists at international bureaucracies are free to do real research without interference by their political masters, it’s not uncommon for them to produce sensible results.

Last but not least, here’s the video I narrated on the “Rahn Curve” and the growth-maximizing size of government.

Now if we could just get Hillary Clinton and Donald Trump to understand this research, we’ll be in good shape (actually, since those two are poster children for the theory of Public Choice, who am I kidding?).

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A couple of days ago, I wrote about the new rankings from the World Economic Forum’s Global Competitiveness Report and noted that America’s private sector is considered world class but that our public sector ranks poorly compared to many other developed nations.

To elaborate on the depressing part of that observation, let’s now look at the Tax Foundation’s recently released International Tax Competitiveness Index.

Lots of data and lots of countries. Estonia gets the top score, and deservedly so. It has a flat tax and many other good policies. It’s also no surprise to see New Zealand and Switzerland near the top.

If you’re curious about America’s score, you’ll have to scroll way down because the United States ranks #31, below even Belgium, Spain, and Mexico.

If you look at how the U.S. ranks in the various categories, we have uniformly poor numbers for everything other than “Consumption Taxes.” So let’s be very thankful that the United States doesn’t have a value-added tax (VAT). If we did, even France would probably beat us in the rankings (I hope Rand Paul and Ted Cruz are paying attention to this point).

And if you wonder why some nations with higher top tax rates rank above the U.S. in the “Individual Taxes” category, keep in mind that there are lots of variables for each category. And the U.S. does poorly in many of them, such as the extent to which there is double taxation of dividends and capital gains.

By the way, there is some “good” news. Compared to the 2014 ranking, the United States is doing “better.” Back then, there were only two nations with lower scores, Portugal and France. In the new rankings, the U.S. still beats those two nations, and also gets a better score than Greece and Italy.

But we’re only “winning” this contest of weaklings because the scores for those nations are falling faster than America’s score.

Here’s the 2014-2016 data for the United States. As you can see, we’ve dropped from 54.6 to 53.7.

P.S. The Tax Foundation’s International Tax Competitiveness Index is superb, but I hope they make it even better in the future by adding more jurisdictions. As of now, it only includes nations that are members of the OECD. That’s probably because there’s very good and comparable data for those countries (the OECD pushes very bad policy, but also happens to collect very detailed numbers for its member nations). Nonetheless, it would be great to somehow include places such as Hong Kong, Singapore, Bermuda, and the Cayman Islands (all of which punch way above their weight in the international economy). It also would be desirable if the Tax Foundation added an explicit size-of-government variable. Call me crazy, but Sweden probably shouldn’t be ranked #5 when the nation’s tax system consumes 50.4 percent of the economy’s output (this size-of-government issue is also why I asserted South Dakota should rank above Wyoming in the Tax Foundation’s State Business Tax Climate Index).

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As part of her collection of class-warfare tax proposals, Hillary Clinton wants a big increase in the death tax.

This is very bad tax policy. In a good system, there shouldn’t be any double taxation of income that is saved and invested, especially since that approach means a smaller capital stock (i.e., less machinery, technology, equipment, tools, etc). And every single economic school of thought – even Marxism and socialism – agrees that this means lower productivity for workers and therefore lower wages.

In a must-read column for the Wall Street Journal, Steven Entin of the Tax Foundation elaborates on why the death tax is pointlessly destructive. He starts by explaining that the tax is unfair.

…estate taxes are always double taxation. Estates are built with savings that have already been taxed as income, or soon will be. …The superrich can afford to give away assets during their lives or hire estate planners to help minimize the tax. …The main victims of the death tax are middle-income savers and small-business owners who die before transferring ownership to their children.

And because the tax reduces investment and wages, the revenue gained from imposing the tax is largely offset by lower income tax and payroll tax receipts.

The estate tax…produces so little revenue, only $19 billion last year. But because the tax has recoil effects, even this revenue is illusory. Because the tax reduces the stock of capital, it lowers the productivity of labor and reduces wages and employment. Much of the burden of the tax is shifted to working people. Research suggests that the estate tax depresses wages and employment enough to actually lower total federal revenue over time.

He then reports on some of the Tax Foundation’s analysis of the good things that happen if the tax is repealed.

…to eliminate the estate tax…would raise GDP by 0.7% over 10 years and create 142,000 full-time equivalent jobs. After-tax incomes for the bottom four-fifths of Americans would rise by 0.6% to 0.7%, mainly due to wage growth. …Revenue losses in the first six years would be almost entirely offset by gains later in the decade, with more gains thereafter. Both the public and the government would be net winners.

But he also warns of the bad things that will happen if Hillary’s class-warfare scheme is enacted.

Mrs. Clinton plans to lower the exempt amount to $3.5 million for estates and $1 million for gifts. She would raise the top rate to 45% for assets over $3.5 million, with further increases up to 65% for individual estates above $500 million. …Mrs. Clinton’s plan would lower GDP by 1% over 10 years and cost 194,000 full-time equivalent jobs. After-tax incomes for the bottom four-fifths of Americans would fall by 0.9% to 1%, due to slower wage growth. …the public and the government would be net losers.

So what’s the bottom line?

The revenue numbers cited here also do not take into account increased efforts to avoid the tax. If these imaginative and highly productive people plan ahead to direct their assets to causes they deem worthy, rather than cede their wealth by default to the government, Washington will not see a dime from an estate-tax increase. …Mrs. Clinton’s plan would not so much redistribute wealth as destroy it. Everyone would lose except estate lawyers and life insurers.

Over the years, I’ve shared other research on the death tax, including a recent column on Hillary’s grave-robber plan, as well as my own modest efforts to impact the overall debate in print and on TV.

But my favorite bit of research on the death tax comes from Australia, where repeal of the tax created a natural experiment and scholars found that death rates were affected as successful people lived longer so they could protect family money from the tax collector.

Now there’s research from another natural experiment.

An economist from the University of Chicago produced a study examining a policy change in Greece to determine what happens when taxes are reduced on the transfer of assets. Here’s a bit about her methodology.

I exploit a 2002 tax reform in Greece that reduced succession tax rates for transfers of limited liability companies to family members from 20% to less than 2.4%. …In the quasi-experimental setting made possible by the tax policy change, I employ two different methodologies to measure the effect of this policy change on investment. …by comparing the two groups before and after the tax reform, the analysis disentangles the effect of the identity of the new owner (family or unrelated) from the effect of the succession tax.

And here are her results. As you can see, there’s a notable negative impact on investment.

…estimates reveal a negative effect of transfer taxes on post-succession investment for firms that are transferred within the family. In the presence of higher succession taxes, investment drops from 17.6% of property, plant, and equipment (PPE) the three years before succession to 9.7% of PPE the two years after. This impact of succession taxes on investment is economically large: the implied fall in the investment ratio (0.079) is approximately 40% of the pre-transition level of investment. For those firms, successions are also associated with a depletion of cash reserves, a decline in profitability, and slow sales growth. Note that to the extent that entrepreneurs can plan ahead for the succession and the related tax liability, the estimates I report in the paper provide an underestimate of the true effect of succession taxes.

Even academics who seem to support the death tax for ideological reasons admit that it undermines economic performance, as seen in this study published by the National Bureau of Economic Research.

…aggregate capital and income go up as the estate tax is lowered. When the labor income tax is used to balance the government budget constraints, for given prices, reducing estate taxation does not reduce the rate of return to savings for anyone in the population and still increases the return to leaving a bequest… As a result, aggregate capital goes up a bit more…and so does aggregate output.

By the way, the economists who produced this study constrained their analysis by assuming other taxes would have to be increased to compensate for any reduction in the death tax. To my knowledge, there’s not a single lawmaker who wants to raise other taxes while reducing or eliminating the tax. As such, the results in the above study almost certainly understate the economic benefits of reform.

If you don’t like reading academic studies and dealing with equations and jargon, here’s what you really need to know.

  • Rich people aren’t idiots, or at least the tax advisors they have aren’t idiots.
  • Those upper-income taxpayers have tremendous ability to manage their finance.
  • Rich people (and their smart advisors) figure out how to protect themselves from tax.
  • The death tax is a voluntary tax it can be avoided by people with substantial assets.
  • But the various means of avoidance all tend to result in a less dynamic economy.

In other words, when politicians shoot at rich taxpayers, the rich taxpayers manage to dodge much of the incoming fire, but ordinary people like you and me suffer collateral damage.

Let’s close by shifting from economics to morality.

The death tax is odious in part because it is a pure (in a bad sense) form of double taxation, but it also is bad because the government shouldn’t be imposing double taxation simply because someone dies.

Actually, let’s add one more wrinkle to the discussion. If it’s immoral to impose tax simply because of a death, then it’s doubly immoral to impose such taxes while simultaneously (and hypocritically) taking steps to dodge the tax.

Which is a good description of Hillary’s behavior, as reported by the Washington Examiner.

Bill and Hillary, like most millionaires whose wealth is mostly in housing and liquid assets, have engaged in sophisticated estate planning to avoid the death tax. …the Clintons placed their Chappaqua home — the one that housed the secret servers Hillary used to evade transparency laws — into two separate trusts. For complex reasons, this protects Chelsea from having to pay the estate tax when she inherits the house. …The Clintons also hold five life insurance policies, worth somewhere around $2 million. This is “designed to transfer assets outside of the estate,” one estate planner told Time. Life insurance payouts are generally exempt from death taxes.

Oh, and you probably won’t be surprised to learn that Hillary has close ties to the special interest cronyists who profit from the death tax.

The death tax brings in a paltry sum for Uncle Sam, but it provides a windfall for a couple of tiny segments of the economy: estate planners, and well-funded investors who buy out the family businesses threatened by the death tax. Jeff Ricchetti is a longtime Clinton confidant, a revolving-door corporate lobbyist on K Street, and a donor to all of Hillary Clinton’s campaigns. …Jeff has spent two decades lobbying to preserve and expand the death tax. In 1999, When Jeff cashed out of the Clinton administration, he joined the Podesta Group, co-founded by Clinton’s current campaign manager John Podesta. One client there: the American Council of Life Insurers, where Ricchetti lobbied in favor of taxing inheritances. …Life insurers, such as the members of ACLI and AALU, sell estate-planning products that could become worthless — or at least worth less — if parents were simply able to hand the fruits of their life’s work to their children. That’s why in April, TheTrustAdvisor.com ran a piece headlined “Estate Tax Repeal: Has Hillary Become the Estate Planner’s Best Friend?”

I’m shocked, shocked.

By the way, one of the main practitioners of cronyism is Hillary’s political ally, Warren Buffett.

Buffett advocates the death tax because it has been so very good to him over the years. To fully understand the depth of Buffett’s cynicism and self-interest, let’s take a look at how one might avoid paying the death tax. If you’re a wealthy person and want to steer clear of this tax, you have three options: Set up complicated trust arrangements, which mostly serve to enrich lawyers and merely delay and shift a tax that must eventually be paid; arrange for your estate to make tax-deductible contributions to charitable organizations; or plow your wealth into life insurance before you die. By law, when your heirs are paid the life-insurance disbursement, it’s tax-free. It doesn’t take a genius to see how certain industries could make a tidy profit off these death-tax escape hatches. In fact, some of the most ardent opponents of permanent death-tax repeal are (surprise, surprise) estate lawyers (who set up the trusts), charities (who fear their spigots of money turning off), and the life-insurance lobby (which does all it can to preserve its tax loopholes). Buffett has major investments in companies that sell life insurance. The death tax has helped make him rich while it has made other families poor. What’s sad and ironic is that it takes families with the resources of the Buffetts (and the Hiltons and the Kardashians) to set up the trusts and life-insurance schemes that are necessary to avoid paying the death tax.

Once again, I’m shocked, shocked.

P.S. Our death tax is even more punitive that the ones imposed by left-wing hell-holes such as Greece and Venezuela.

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Most folks in Washington are still digesting last night’s debate between Tweedledee and Tweedledum. If that’s what you care about, you can see my Twitter commentary, though I was so busy addressing specific issues that I failed to mention the most disturbing part of that event, which was the total absence of any discussion about the importance of liberty, freedom, and the Constitution.

But let’s set aside the distasteful world of politics and contemplate U.S. competitiveness. Specifically, let’s examine America’s position in the latest edition of the World Economic Forum’s Global Competitiveness Report. This Report is partly a measure of policy (sort of like Economic Freedom of the World) and partly a measure of business efficiency and acumen.

The bad news is that we used to be ranked #1 and now we’re #3.

The good news is that being #3 is still pretty good, and it’s hard to beat Switzerland and Singapore because they have such good free-market policies. And that’s where America falls short.

Indeed, if you look at the top-10 nations and the three major measurements, you’ll notice that the United States ranks extremely high in “efficiency enhancers” and “innovation and sophistication factors,” both of which have a lot to do with the private sector’s competitiveness. But we have a mediocre (at least for developed nations) score for “basic requirements,” the area where government policy plays a big role.

Moreover, if you look at the the biggest obstacles to economic activity in the United States, the top 4 deal with bad government policy.

The tax treatment of companies is easily the main problem, as you might expect since we rank #94 out of 100 nations in a study of business tax policy.

Let’s now look at the indices where the United States scored especially low out of the 138 nations that were ranked.

America’s lowest scores were for exports (#130) and imports (#134), though I take issue with the Report‘s methodology, which is based on trade flows as a share of GDP. The problem with that approach is that the United States has a huge internal market, equal to about 22 percent of the world’s economic output. That’s why our trade flows aren’t very large relative to GDP. Being surrounded by two major oceans also probably has some dampening effect on cross-border trade flows. Yes, America is guilty of some protectionism, but I think our ranking for trade tariffs (#33) is the more appropriate and accurate measure of the degree to which there is a problem.

America also got a very bad score (#128) for government debt, though at least we beat Italy (#135), Greece (#137), and Japan (#138). In case you’re wondering, Hong Kong was #1, as you might expect from a well-run jurisdiction with small government and a flat tax.  Though I must say that it is rather disappointing that the Report doesn’t include rankings for the overall burden of government spending. After all, government debt is basically a symptom of an underlying problem of a bloated public sector.

And there also was a very low score for the business cost of terrorism (#104), which is probably an unavoidable consequence of being the world’s leading superpower (and therefore a target for crazies). That being said, I imagine America’s score could be improved if we weren’t engaging in needless intervention – and thus generating needless animosity – in places such as Syria and Libya.

Here are two indices that deserve special attention. As you can see the United States gets a poor score for wasteful spending and a terrible score for the punitive taxation of profits.

With this information in mind, let’s now remind ourselves about last night’s debate. Did either candidate propose to control spending and reduce pork-barrel programs? Nope.

Did either candidate put forth a realistic plan to lower the corporate tax rate? Hillary’s plan certainly doesn’t qualify since she wants a bunch of class-warfare tax hikes. And while Trump’s plan includes a lower corporate rate, it’s not a serious proposal since he is too timid to put forth a plan to restrain government outlays.

And since neither candidate intends to address America’s looming fiscal crisis, it will probably be just a matter of time before America drops in the rankings.

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One of the great flaws of Keynesian economics is that proponents assume policy makers are angels who are motivated solely by a desire to help people by boosting the economy when there’s a downturn.

Needless to say, that’s an absurd assumption. To cite just one real-world example, we can see how Obama’s stimulus scheme was simply an opportunity for politicians and interest groups to do what they like doing regardless of the economy’s performance, which is to have fun with other people’s money. Think scams like Solyndra, but expanded to almost all parts of the federal budget.

This sober-minded assessment of how government really works is sometimes categorized as being part of “public choice economics.”

Here’s what I wrote about this theory earlier this year, as part of a column explaining why politicians will keep spending even if they know it will lead to disaster.

…there’s an entire school of thought in economics, known as “public choice,” which is based on making real-world assumptions about the self-interested behavior of politicians and interest groups. …In other words, both voters and politicians can have an incentive for ever-larger government, even if the end result is Greek-style fiscal chaos because taxes and spending reach ruinous levels. I call this “Goldfish Government” because some think that a goldfish lacks the ability to control its appetite and therefore will eat itself to death when presented with unlimited food. …America’s Founding Fathers had the right solution. They set up a democratic form of government, but they strictly limited the powers of the central government. This system worked remarkably well for a long period, but then the Supreme Court decided that the enumerated powers listed in the Constitution were just a suggestion.

One of the key insights of public choice theory is that we often get excessive government because the people getting handouts from any particular program have a very strong incentive to lobby for those goodies while the average taxpayer often does not have the time, knowledge, energy, or incentive to to either learn what’s happening or to figure out how best to fight against the various counterproductive redistribution programs.

Here’s a video from Learn Liberty that explains how “concentrated benefits” and “dispersed costs” produce bad outcomes (and if you have any doubts that this is true, just think about the Export-Import Bank or farm subsidies).

By the way, I hope everyone noticed, in the hypothetical law that was discussed, that half the money collected from taxpayers would be burned.

This is an under-appreciated reason why redistribution is so damaging. I’ve tried to make this point by talking about how federal spending involves taxing people around the nation, carrying the money in a leaky bucket to Washington, pouring some of it down a toilet, and then carrying it in a leaky bucket back to interest groups in various parts of the nation.

Building on these concepts, Professor Ben Powell uses the example of farm subsidies to explain how we get bad policy (think ethanol).

Kudos to Ben (who also narrated a great video on “sweatshops”). I particularly like his explanation of how interest groups recycle money back to politicians.

Indeed, it’s no exaggeration to say that the federal government is a racket that lines the pockets of insiders at the expense of taxpayers.

Last but not least, here’s Professor Mark Pennington from the University of London discussing public choice, market failure, and government failure.

If you’re interested, I recommend that you also watch Part II, Part III, and Part IV of Mark’s presentation.

At this stage, you may be thinking that fixing the mess in Washington is hopeless. After all, if it’s in the self interest of politicians to expand the burden of government to buy votes and win their next elections, then aren’t we doomed to have “goldfish government”?

That’s certainly what’s happened in nations such as Greece that presumably have reached and surpassed a “tipping point” of too much government dependency.

But here’s why I think there’s still hope for the United States.

…asking politicians to reduce government is like asking burglars to be in favor of armed homeowners. …we know politicians generally have bad incentives. But it’s not hopeless. While I certainly enjoy mocking politicians, they’re not totally immoral or even amoral people. Many of them do understand there’s a problem. Indeed, I would argue that recent votes for entitlement reform are an example of genuine patriotism – i.e., doing the right thing for the country. So is there a potential solution? Maybe. Let’s use an analogy from Greek mythology. Many politicians generally can’t resist the siren song of a go-along-to-get-along approach. But like Ulysses facing temptation from sirens, they recognize that this is a recipe for a bad outcome. So they realize that some sort of self-imposed constraint is desirable. And that’s why I’m somewhat hopeful that we can get them to impose binding spending caps. We know there are successful reforms by looking at the evidence. And we know there is growing support from fiscal experts. And we even see that normally left-leaning international bureaucracies such as theOECD and IMF acknowledge that spending caps are the only effective fiscal rule. So if Ulysses can bind himself to the mast and resist the sirens, perhaps we can convince politicians to tie their own hands with a Swiss-style spending cap.

P.S. Though whenever I think about the 2016 election, I confess that’s it’s hard to be optimistic.

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If nothing else, Belgian politicians deserve credit for perseverance. One year ago, the nation was considering a “tax shift” that would reduce taxes on labor and increase taxes on consumption.

I pointed out that this didn’t make much sense since it wouldn’t alter the wedge between pre-tax income and post-tax consumption. In other words, the government might not take as much when you earned your income, but it would compensate by taking more when you consumed your income, so there would be no improvement in your living standards and therefore no incentive to be more productive and earn more money.

Now the government in Belgium is considering a different “tax shift.” Here are some excerpts from a report in the Financial Times.

The Belgian government is rolling out a “tax shift” policy that Charles Michel, the country’s 40 year-old prime minister, says is aimed…to support people on low to medium incomes by reducing the taxes and social security charges on labour — some of the highest in Europe — and to make up the shortfall by boosting taxes on capital.

I’m underwhelmed by this approach.

Though let’s start with what’s good. The government should be lowering taxes on work. As the article notes, employees in Belgium are treated worse than medieval serfs, who only had to surrender one-third of their output to the Lord of the Manor.

…according to 2015 OECD data, is that an unmarried Belgian worker without children faced the highest “tax wedge” as a proportion of income of any citizen in the 35-country club. It stood at 55.3 per cent, compared with an average of 35.9 per cent. The burden results from a combination of high social security charges and a 50 per cent tax rate kicking in at a relatively low level — around €38,000.

Here’s one of the charts from the article. As you can see, greedy politicians get the lion’s share of the money when a Belgian worker chooses to earn income.

At the risk of understatement, the overall tax burden in Belgium is stifling.

Here’s another chart, this one showing how long European workers must toil before satisfying the tax demands of their governments.

I don’t know if the methodology is similar to the Tax Freedom Day calculations for the United States, and it’s unclear whether this is just a measure of the tax burden on labor income, or whether it also captures other taxes that workers pay (corporate income tax, value-added tax, excise taxes, etc). But it’s clear than Belgian workers have a terrible system.

Now for the bad news. Belgian politicians want to cut taxes on workers, but they say they want to compensate by imposing higher taxes on saving and investment.

That’s not a good idea since the productivity – and therefore compensation – of workers is very much linked to the amount of machinery, tools, and technology that’s available. So when politicians increase the tax burden on saving and investment, that reduces an economy’s stock of capital, and workers wind up with less pre-tax income than they would have earned otherwise.

Let’s see what Belgium’s government is trying to achieve. Here’s another blurb from the article.

Some changes, including a new financial speculation tax, were driven through last year and there are more to come. One of Mr Michel’s coalition partners, the Flemish Christian Democrats, is even pushing for a French-style wealth tax. …The speculation tax is estimated to bring in only about €20m this year, considerably less than the €34m initially predicted by the government. Also, there is little support for a more comprehensive inheritance tax. To Michel Maus, a tax law professor at Brussels Free University, the government’s efforts so far to increase taxation of capital amount to “window dressing” and “a bit political propaganda”.

I suppose the relative dearth of specific tax hikes on saving and investment is the good news inside the bad news.

Indeed, while the government did impose a tax on “speculation” (and discovered a Laffer Curve-effect when revenues came in below projections), there actually are some proposals to reduce the tax burden on saving and investment. For instance, the government has announced a move to lower the nation’s 33.99 percent corporate tax rate.

Under Minister Van Overtveldt’s current plan, the corporate tax rate would be reduced to 28% in 2017, 24% in 2018 and 20% in 2020, and would ultimately apply to companies of all sizes. At 20%, Belgium’s corporate tax rate would fall just below the EU average and would place the country in a more competitive – but not a leading – position within its peer group. …In addition, the Finance Minister is considering abolishing the Fairness Tax as well as the minimum tax on capital gains on shares, as advocated by the Chamber. The plan also includes a full tax deduction on qualifying dividends received from subsidiaries, as is the case in the Netherlands and Luxembourg, in lieu of the current deduction of 95%.

There are some offsetting tax hikes in this new plan, so this proposal presumably isn’t as good as it sounds, but it’s hard to argue with an initiative that drops the corporate rate by almost 14 percentage points.

So while I don’t like the theoretical concept of a tax shift from labor to capital, the net effect of all the tax changes in Belgium may be positive for the simple reason that the anti-growth part of the shift isn’t happening.

But regardless of what eventually happens, it is unlikely that Belgium will make much long-run progress because the country is burdened by one of the largest public sectors in the world.

Here some data from the OECD on the burden of government spending in Western Europe (and the United States). As you can see, Belgium isn’t as bad as France, but it’s worse than Greece, Sweden, and Italy.

The bottom line is that you can’t have a non-punitive tax system when government is consuming half of what the private sector produces.

So I think I’m semi-happy with what Belgian politicians are doing in the short run (reserving the right to change my mind as more details are unveiled), but I don’t have much long-term hope in the absence of effective reforms to shrink the burden of government spending.

But hope springs eternal. Maybe the government will adopt a Swiss-style spending cap.

P.S. Here’s a story that tells you everything you need to know about Belgium’s bloated public sector.

P.P.S. And if you look at America’s long-run fiscal projections, the problems in Belgium today will be problems in the United States in the not-too-distant future.

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