Dishonest Pimping for a Global Wealth-Tax Cartel

Everything you need to know about wealth taxation can be summarized in two sentences.

• The biggest problem with most tax systems is the pervasive tax bias against income that is saved and invested, which discourages the accumulation of capital that helps to finance future growth.
• Wealth taxes would dramatically increase the tax bias against saving and investment and easily could result in implicit marginal tax rates on capital of more than 100 percent.

Unfortunately, economic arguments don’t matter to the class-warfare crowd. They mistakenly think the economy is a fixed pie, so if Jeff Bezos and Elon Musk have a lot of money, then the rest of us have less money.

This is empirically nonsensical.

Or perhaps they simply resent people who are very successful. There’s certainly a good amount of evidence that folks on the left have a hate-and-envy mentality.

I don’t know Prof. Gabriel Zucman’s motives, but he’s a big advocate of a global wealth tax. Here are some passages from his recent column in the New York Times.

…the ultrawealthy consistently avoid paying their fair share in taxes. …Why do the world’s most fortunate people pay among the least in taxes, relative to the amount of money they make? The simple answer is that while most of us live off our salaries, tycoons like Jeff Bezos live off their wealth. In 2019, when Mr. Bezos was still Amazon’s chief executive, he took home an annual salary of just $81,840. But he owns roughly 10 percent of the company, which made a profit of $30 billion in 2023. …Unless Mr. Bezos, Warren Buffett or Elon Musk sell their stock, their taxable income is relatively minuscule. …There is a way to make tax dodging less attractive: a global minimum tax. …The idea is simple. Let’s agree that billionaires should pay income taxes equivalent to a small portion — say, 2 percent — of their wealth each year. …the proposal would allow countries to collect an estimated $250 billion in additional tax revenue per year, which is even more than what the global minimum tax on corporations is expected to add.

There are many problems with Zucman’s analysis.

One concern is that it’s a bad idea to finance bigger government, which is a goal of the class-warfare crowd.

Another problem is that Zucman never acknowledges or addresses the disincentive effect of higher taxes on saving and investment.

Here are some excerpts from the Wall Street Journal‘s editorial on the topic.

In our new socialist age, the demand to tax and redistribute income is insatiable. The latest brainstorm arrives in a proposal by four countries in the G-20 group of nations to impose a 2% wealth tax on the world’s billionaires. …As you might expect, this would principally be a tax raid on Americans, who are the most numerous billionaires. It would also be taxation without representation, since it would be a body of global elites attempting to impose a tax without having passed Congress. …Once a global wealth tax is in place, you can be sure that billionaires won’t be the last target. …the G-20 is becoming a vehicle for the world’s left-wing governments to gang up on the U.S. …For this crowd, taxing American billionaires to redistribute income around the world is all too imaginable.

By the way, Zucman’s problem is not merely bad economics.

He also uses misleading numbers. Phil Magness of the Independent Institute exposes his dodgy manipulations in a thread on Twitter (now called X).

There are dozens of tweets in his thread, but here’s his summary if you don’t have time to read everything.

P.S. Another French economist, Thomas Piketty, also uses dodgy numbers while pushing for class-warfare taxes. Seems to be a pattern on the left (as illustrated by one of Biden’s tweets that was based on make-believe numbers).

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Recovery for the PIGS?

Just a few months ago, I wrote about Germany’s fiscal decay.

Over the past eight years, government spending has grown much faster than the private sector, thus violating the Golden Rule of fiscal policy.

Given the shift to bad policy in Germany, I was very interested to see that the New York Times has a report by Liz Alderman and Melissa Eddy that explains how Germany no longer is the economic engine in Europe.

Here are some excerpts.

Something extraordinary is happening to the European economy: Southern nations that nearly broke up the euro currency bloc during the financial crisis in 2012 are growing faster than Germany… In a reversal of fortunes, the laggards have become leaders. Greece, Spain and Portugal grew in 2023 more than twice as fast as the eurozone average. Italy was not far behind. …southern European countries made crucial changes that have attracted investors, revived growth and…reversed record-high unemployment. Governments cut red tape and corporate taxes to stimulate business and pushed through changes to their once-rigid labor markets, including making it easier for employers to hire and fire workers.

It’s encouraging to read about some pro-market reforms in Southern Europe.

It’s also encouraging that the New York Times seems to be acknowledging that free markets are the way to achieve more growth.

That being said, I’m not ready to declare that the PIGS (Portugal, Italy, Greece, and Spain) are the new role models for economic policy.

For instance, the NYT story is based on just one year of economic data. And I’ve warned that it is risky to draw big conclusions without seeing decades of evidence.

But a journey of a thousand miles begins with a first step. Given my interest in fiscal policy, I looked at the IMF data to see which countries have been most responsible over the past few years.

Lo and behold, Greece and Italy have been doing a decent job.

Three years of fiscal restraint may not seem like much, but it’s worth noting that the burden of government spending in Greece has declined by more than 10 percentage points of GDP.

And the spending burden in Italy has been reduced by nearly 7 percentage points of GDP.

Keep that up for 5-10 more years, and those countries could become Switzerland.

Do it for 10-20 years, and they can become Singapore or Taiwan.

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Italy’s Absurd Boondoggle Giveaway

I wrote a two-part series (here and here) in 2022 predicting that Italy was at risk of suffering a fiscal crisis.

If and when it occurs, it will be because investors decide that Italy’s government might default (i.e., be unable to make payments on its debt). Interest rates would spike, financial markets would get shaky, banks would be a risk, and there would be a lot of pressure for a Greek-style bailout.

Should that happen, my role will be to point out that the real problem is that the burden of government spending in Italy is excessive (same message I delivered a dozen years ago).

As shown by OECD data, it’s one of the most profligate nations in Europe.

And I suppose it’s worth mentioning that Italy’s demographic outlook is very grim, thus increasing medium- and long-run fiscal risks.

That’s the macro outlook.

Now let’s look at a specific example of why Italy is a fiscal mess. The Economist recently reported on a government giveaway that has become a nightmare.

…a home-improvements subsidy…has turned into the fiscal equivalent of King Kong: a monster running amok, wreaking havoc… Mr Giorgetti revealed that claims of the subsidy, known as the “superbonus”, made in the four years that the scheme has been running, together with claims of another that offsets the cost of renovating façades, would eventually drain the treasury of €219bn ($233bn). That is almost 10% of Italy’s GDP last year. …a left-populist coalition…introduced the superbonus in 2020… The idea was to stimulate the stricken economy… The government offered to pay homeowners 110% of the price of energy-saving renovations. …The cash was not to be reimbursed directly, but in the form of tax credits that could be sold on. …the superbonus has proved wildly popular. That should not have been a surprise: what is not to like about being repaid more than you have spent? Or not spent: since the tax credits are tradeable, many homeowners simply passed them on to their builders without having to part with a euro. A second reason is outright fraud. Last August Giorgia Meloni, Italy’s prime minister, said that contracts falsified to claim the subsidies constituted the biggest-ever rip-off of the Italian state. That was when they amounted to a mere €12bn; since then, the figure has risen to €16bn. A third problem is overpricing. Because the superbonus refund is greater than the outlay, actual or theoretical, it is in the interests of both the builder and the homeowner to inflate the cost of the work.

At the risk of understatement, this is one of the dumbest spending programs I’ve ever read about.

To put this in an American context, it’s sort of like adding together the fraud of the Trump-Biden pandemic spending, the perverse incentives created by Fannie Mae and Freddie Mac, and the third-party payer problem caused by government in the health sector.

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Norway’s Class-Warfare Tax Policy is Backfiring

Class-warfare tax policy is bad news.

Last year, I warned that, “rich people are not sheep, patiently waiting to be sheared. If their fiscal torture is too extreme, they will leave.”

Norway is a powerful example. Here’s a chart showing the rate at which Norwegians are moving to Switzerland.

You may be wondering what caused the sudden change after 2022.

The above chart comes from a Bloomberg report by Ott Ummelas, and he explains what happened after Norway “increased the wealth tax burden by 55%.”

Steep increases in wealth and dividend taxes by Norway’s left-leaning government have prompted dozens of the Nordic nation’s rich to move to another prosperous, mountainous country to the south. …the small but significant migration by wealthy entrepreneurs could become permanent, bolstering Switzerland’s status as a low-tax haven. …Eighty-two rich Norwegians with a combined net wealth of about 46 billion kroner ($4.3 billion) left the country in 2022-2023, with 34 moving out last year alone, according to data from the Finance Ministry. More than 70 of those have moved to Switzerland… Swiss taxation varies by canton, but the overall effect is a significantly lower percentage of wealth and income than most other European nations. …Hollup said…”it’s a two-fold issue of losing tax revenue for Norway and the risk that a lot of brain capital has left the country.”

I started today’s column by observing that rich people are not sheep.

Instead, they are geese. Or, to be more specific, they are golden geese that have flown away.

P.S. This is primarily a column about misguided wealth taxation by Norway. But tax competition produces winners and losers, so this is also a story about the economic success of Switzerland.

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Trump and the Flat Tax?

There’s going to be a big tax fight in Washington next year, regardless of who wins the House, the Senate, and/or the presidency. That’s because major portions of Trump’s 2017 Tax Cuts and Jobs Act will expire on December 31, 2025.

Will those tax cuts be extended? Will they be expanded? Will they be curtailed? Politicians will be forced to choose.

In general, I’m rather pessimistic about the outcome for the simple reason that there’s been a huge increase in the burden of government spending.

I wrote about that problem two days ago and highlighted how politicians used the pandemic as an excuse to permanently increase the cost of government.

One result of all that wasteful spending is that we now have enormous deficits. And even though I don’t worry much about red ink (the real problem is spending, not how it’s financed), the practical reality is that it is well nigh impossible to have good tax policy when there is bad spending policy.

But that doesn’t mean we shouldn’t try. In an article for Bloomberg, Stephanie Lai, Amanda L Gordon, and Enda Curran write about the advice Trump is getting on tax policy.

Donald Trump is under pressure from economists in his circle to embrace a flat tax rate… The efforts demonstrate how people around the former president are already lobbying for their preferred economic policies ahead of a potential second term where both taxes and tariffs will be top priorities. …Forbes said…he is advocating for Trump to support a flat 17% tax rate for all income brackets with “generous” exemptions… For a family of four, he said, he would suggest the first $54,000 of income be exempt from federal income tax. …Whoever wins the White House in November will be forced to negotiate a tax deal next year because key portions of Trump’s 2017 tax cuts — including individual rates — expire at the end of 2025. That will set up a complex negotiation — particularly if control of Washington is split between Republicans and Democrats… Trump has not detailed what his tax plan would look like.

I’m glad that people are pushing Trump to be bold on taxes, but that advice needs to be augmented by a big push to make him better on spending.

Alas, that’s one of his worst areas.

Not as bad as he is on trade, but he record on spending is nonetheless mediocre. And that was the case even before the pandemic spending orgy.

The bottom line is that Trump needs to change his mind on entitlements if we want to have any hope of better tax policy. I won’t be holding me breath.

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Everything You Need to Know About America’s Decaying Fiscal Status

There was a lot of wasteful spending during the pandemic.

That was bad news, but what’s far more worrisome is that politicians used the pandemic as an excuse to permanently increase the spending trendline.

Here’s a chart based on CBO’s historical data and future projections. I added a yellow line to show the trend line based on spending growth from 2000 to 2019.

As you can see, spending soared above the trend line during the pandemic, came down slightly in 2022 and 2023, but now is projected to stay way above pre-pandemic levels.

At the risk of understatement, this added spending burden is the main reason America is in fiscal trouble.

To get an idea of how much spending has exploded in recent years, it makes 2008-2010 (Bush’s corrupt TARP bailout and Obama’s failed stimulus) look like a tiny blip by comparison.

Now I’ll add a caveat. Even without the pandemic spending orgy, America’s budgetary was on track to deteriorate. The retirement of the baby boom generation, combined with poorly designed old-age entitlements, translates to a higher spending trend line.

That being said, Trump and Biden combined to make a bad situation much worse.

Another caveat is that the headline on this column is an exaggeration. I simply like using everything-you-need-to-know as a rhetorical device when I have a very compelling visual or example.

I’ll close with the optimistic observation that it’s still relatively simple to solve America’s fiscal problems. All that is required is multi-year spending restraint.

P.S. The United Kingdom is suffering from the same problem of temporary emergency spending morphing into a permanent increase in the burden of government.

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Everything You Need to Know about the Value-Added Tax

While in Sweden last week, I wrote several columns (here, here, and here) about that nation’s fiscal policy.

But I also had a discussion about American fiscal policy with one of the tax experts at the Confederation of Swedish Enterprise. That included a discussion of the value-added tax (VAT).

If you don’t want to spend a few minutes watching the video, I made two theoretical observations and two practical observations.

Here are my theoretical points.

1. VATs tend to be less destructive than income taxes, largely because they don’t have “progressive” tax rates and also don’t exacerbate the tax bias against saving and investment.
2. A VAT has the same “tax base” as a flat tax. The structural difference is that a flat tax takes a slice of your income as you earn and a VAT takes a slice of your income as you spend.

So if there ever was an opportunity to swap the income tax for a VAT, I would take that trade (assuming, of course, repeal of the 16th Amendment so politicians couldn’t pull a bait-and-switch scam). Just like I would swap the income tax for a national sales tax.

But we’ll never be given a chance to make that swap.

Instead, some people claim that we are facing a different type of choice. Should we finance our (baked-in-the-cake) expanding burden of government with class-warfare taxes or a value-added tax?

The right answer, needless to say, is to restrain spending. But if someone is holding a gun to your head and demanding that you choose a tax increase, which one do you pick?

Seems like a VAT would be the less-harmful approach, but this is a good opportunity to raise my two practical points.

1. In the real world, adoption of a VAT almost surely will lead to more class warfare taxes because politicians will want to balance the harm to lower-income people by also imposing taxes that hurt higher-income people.
2. In the real world, the level of government spending is not exogenous. More specifically, VATs have been money machines to finance bigger government in Europe and the same thing likely will happen in the United States.

If you want evidence for my first point, this chart is very compelling.

And if you want evidence for my second point, this chart tells you what you need to know.

P.S. You can enjoy some amusing – but also painfully accurate – cartoons about the VAT by clicking here, here, and here.

P.P.S. VAT rates tend not to be as high as income tax rates, but they are nonetheless very onerous.

P.P.P.S. In 2016, I debunked some VAT myths.

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The Pandemic and Swedish Fiscal Policy

When I wrote about long-run policy lessons from the pandemic, I mostly focused on the incompetence of the bureaucrats at the FDA and CDC.

I also wrote that Sweden had a very sensible approach. Politicians did not panic. They advised prudence, but kept schools open and did not mandate lockdowns.

Interestingly, Sweden also had better fiscal policy during the pandemic. Trump squandered $2 trillion-plus in 2020 and Biden squandered $1 trillion-plus in 2021.

According to IMF data, by contrast, Swedish fiscal policy was much more responsible, with the burden of government spending increasing at a much slower pace. And that’s true whether looking at the change between 2019 and 2020 or the change between 2019 and 2021.

Sweden even did a better than Switzerland, the country that usually has the best fiscal policy in Europe. Swiss politicians increased spending by 12 percent in 2020, more than twice as fast as overall spending increased in Sweden that year.

But, thanks to its spending cap, Switzerland is doing much better over time. If you look at the past five years, it easily wins the prize for fiscal responsibility (the “debt brake” allowed a big emergency spending increase in 2020, but it also has required extra spending restraint in subsequent years to compensate).

By the way, nobody will be surprised to learn that Switzerland was much more prudent than the United States during the pandemic.

P.S. Sweden had a very good period of spending restraint in the 1990s.

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Fiscal Patriotism

Given what I recently wrote about America’s long-fun fiscal outlook, it is easy to understand why I expressed pessimism as part of a conversation with David McIntosh of the Club for Growth.

The presidential candidates are a big reason for my dour outlook. Joe Biden and Donald Trump have chosen to ignore  the massive long-run fiscal problems with Social Security and other entitlement programs.

Their kick-the-can-down-the-road approach is a recipe for fiscal chaos in the future. The result would be either massive tax increases, massive debt increases, or massive money printing.

Probably all three.

Given the track record (Barack Obama and Hillary Clinton both embraced big tax increases), I’m not surprised that Biden and congressional Democrats are bad on the issue.

And since Trump is a big-government populist rather than a Reaganite, his approach also is predictable.

But I have wondered whether congressional Republicans would take the same head-in-the-sand approach.

Fortunately, it appears many of them have – as I noted in the above interview – a more patriotic perspective. Andrew Biggs of the American Enterprise Institute wrote about a new budget proposal from the House Republican Study Committee. Here are some excerpts.

To the RSC’s credit – and, honestly, to my own surprise – the RSC took on the dangerous issue of reforming Social Security, standing up not only to Democrats looking to demagogue the issue but to former President Trump’s efforts to duck the issue. The RSC’s proposals “include modest and delayed changes to the Primary Insurance Amount PIA) benefit formula, the retirement age, auxiliary benefits for high income earners, and gradually moving towards a flat benefit.” If you don’t want the biggest tax increase in history, those are the sorts of things you have to do. …cheers for the RSC: They’ve stood up to Congressional Democrats by at least putting a plan on the table. And, more importantly, they’ve stood up to Donald Trump’s position that Social Security reform can be ignored or hand-waved away.

If you want to learn more about the Republican Study Committee’s plan, click here and here.

It also includes Medicaid reform and Medicare reform.

So kudos to the RSC members. They want to do what’s best for the nation, even if it means exposing themselves to demagoguery.

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The Economic Consequences of Biden’s Budget

The good news is that there is very little risk that President’s new budget – which is very similar to his previous budgets – will be approved by Congress.

The bad news is that his budget is filled with terrible policy. Big expansions in the burden of spending and big increases in tax rates.

At the risk of understatement, the economic consequences of those policies would be unfortunate.

Given my interest in competitiveness, I think this visual from the Tax Foundation is the most important thing to understand. Biden wants tax rates in the United States to go from dark blue to light blue.

What makes this visual so disappointing is when you compare tax rates in the United States to other industrialized nations.

Tax rates in America already are high compared to those other countries, especially when looking at the taxation of saving and investment.

But the most shocking results are when you compare tax rates in other nations to Biden’s proposed tax rates. The United States would be shooting itself in the foot.

Given those terrible policies, this set of numbers from the Tax Foundation is hardly a surprise. Government would get more money and households would lose money.

I’ll close by observing that the Tax Foundation’s model is based on how higher tax rates discourage productive behavior. And there’s lots of academic evidence to support that approach.

As far as I know, though, the Tax Foundation does not quantify or estimate the economic damage from higher spending. So the actual consequences of Biden’s proposed budget surely would be even worse (the case for smaller government is bolstered by research from the Congressional Budget Office, as well as from generally left-leaning international bureaucracies such as the OECD, World Bank, ECB, and IMF).

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Fiscal Fights with Friends: Tax Increases Don’t Improve National Well-Being

Last year, I filled out a do-it-yourself federal budget prepared by the Washington Post and another one put together by the Committee for a Responsible Federal Budget.

In both cases, my main complaint was that they did not give enough options to shut down counterproductive departments and/or offer enough proposals for much-needed entitlement reform.

Today, I’m going to write about a do-it-yourself budget from the American Enterprise Institute. But I’m not going to bother to share my results because I think the model has a fatal flaw.

To illustrate, here is the model’s baseline estimate for national well-being (in this case, “welfare” refers to the overall prosperity of the nation rather than redistribution spending). As you can see, the model assumes that national well-being eventually begins to shrink if we leave government policy on autopilot.

Because the burden of government spending is projected to dramatically increase in coming decades, I don’t have any problem with the assumption that living standards will begin to decline.

After all, if America becomes a European-style welfare state, it’s perfectly reasonable to expect European-style economic malaise.

But here’s where things go awry. To show how the model is messed up, I made these two choices.

• The biggest-possible increase in income taxes.
• The biggest-possible increase in payroll taxes.

I then clicked “run model” and here are the results. In every single year, it shows that national well-being improves with these two big tax increases.

Before explaining how and why this is wrong, here is an explanation of the model’s methodology.

In our October 2023 working paper, we…explain, justify, and show the results of our macroeconomic projection model of the U.S. economy and federal budget. …As a companion to our working paper, we have developed a dashboard which allows users to adjust assumptions and implement their own policies to reduce future levels of debt and improve welfare for generations to come. By adjusting the sliders on the left-hand side of the screen, users can, e.g., increase income taxes, increase levels of investment, reduce Social Security benefits, and change projected health care elasticities. …Users can adjust various assumptions or implement policy changes using the sliders on the left, then click “Run Model” to produce new projections using this new set of assumptions. For example, to reduce deficits, one could increase income and Social Security payroll tax rates by one percentage point each, cut non-health federal spending by ten percent, and increase the average Social Security replacement rate by five percentage points. New projections after making these changes are shown… The solid circles continue to show baseline assumptions while the empty circles represent outcomes under the new set of assumptions.

So why does the modal produce screwy results?

Here’s what you need to know.

…welfare improves as, in our model (based on assumptions made by CBO), deficits crowd out investment, reduce capital, and slow economic growth, so efforts to reduce the deficit will generally improve welfare.

There is nothing wrong with that bit of analysis, but it’s fatally incomplete.

It fails to account for how tax increases would negatively impact national well-being. And it also fails to account for how a rising burden of government spending will adversely impact national well-being.

To put it in simple terms, projecting the economy based solely on what happens to deficits and debt is like predicting the outcome of a baseball game by looking at what happened in the 2nd inning. That’s part of the answer, but grossly inadequate.

Which is an analogy I should have used in this video from 2009, which explains that spending is the problem, not red ink.

If you don’t want to spend a few minutes with the video, this short column tells you why fixating solely on deficits leads to absurd results. And this column is a must-read for people who think tax-financed spending somehow is less harmful than debt-financed spending.

P.S. I write about “Fiscal Fights with Friends” when I think someone is well meaning but is pushing bad policy or bad analysis. Previous editions have focused on Medicaid reform, tax increases, parental leave, the value-added tax, fiscal policy, the flat tax, and the carbon tax (twice),

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More Good News Thanks to Colorado’s TABOR Spending Cap

Colorado has the best fiscal rule in the United States. The Taxpayer Bill of  Rights (TABOR) limits state government spending so that it cannot grow faster than inflation plus population.

Does Colorado’s spending cap work perfectly? Of course not.

Politicians in the Centennial State have spent decades coming up with ways evade and avoid TABOR’s restrictions.

But let’s not make the perfect the enemy of the good.

A study published last year shows that TABOR has saved taxpayers $8.2 billion.

And taxpayers in Colorado may soon keep even more of their money according to an article by Brian Eason in the Colorado Sun. Here are the relevant excerpts.

…the budget will be squeezed primarily by two seemingly minor factors. One, U.S. Census estimates now say the state’s population grew by less than the state’s demographer had anticipated. That means the state revenue cap under the Taxpayer’s Bill of Rights, which tracks inflation and population growth, can only increase by 5.8% this budget year rather than the 6.1% legislative forecasters were expecting. Two, the state is now expected to collect $185 million more in road usage fees and retail delivery charges this year than last, under the legislative staff estimates. Taken together, the two forecast changes mean state lawmakers could have to issue larger than expected TABOR refunds to Coloradans next year, leaving the state with fewer General Fund tax dollars to spend… That would translate to a nearly $400 refund for the average single-filer in 2025 under the current refund formula, which is tiered based on income.

I’m tempted to call this the feel-good story of 2024. Politicians get less money to waste and taxpayers get more of their money returned.

No wonder TABOR is the gold standard for good fiscal policy at the state level. And Switzerland shows that spending caps also are very effective at the national level.

By contrast, there is very little evidence that balanced-budget rules produce good results.

P.S. Perhaps the best evidence for TABOR is that the pro-spending lobbies in Colorado are always trying to trick voters into approving ballot initiatives that would allow more spending. But as we saw in 2013, 2019, and 2023, the voters of left-leaning Colorado keep voting to to maintain their spending cap.

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Beware Bad Budget Deals, Part III

I’ve already written two columns (here and here) about why a “bipartisan” budget deal would be a recipe for higher taxes and bigger government.

To start our third installment in this series, here’s a clip from my recent appearance on Vance Ginn’s Let People Prosper.

Simply stated, America’s long-run fiscal problems are entirely the result of government being too big and growing too fast.

So there is no need to make our bad tax system even worse with tax increases. Especially since (as I explained in the above video clip) politicians almost surely would spend any extra revenue.

By the way, my opposition to “putting taxes on the table” is practical rather than ideological. Back in 2012, I wrote that I would accept a big tax increase, but only if the other side would accept various changes to control the burden of government spending.

Needless to say, none of those options are acceptable to the big spenders in Washington. Not in 2012 and not today.

Since I’m focusing on practicality, I’ll share two additional pieces of evidence against having a pro-tax increase fiscal commission.

1. In 2011, a reporter from the New York Times inadvertently showed that the only budget deal that actually led to a balanced budget was the 1997 agreement that cut taxes. All the other budget deals raised taxes and the net result was more spending and continued red ink.
2. Tax burdens in Europe have dramatically increased over the past 50-plus years, usually because politicians claimed people needed to surrender more money in order to reduce red ink. But over that same time period, government debt more than doubled because politicians spent all the new revenue.

Given all this data, you might think I’m happy about this tweet from a Bloomberg reporter.

But I’m only half-happy. I’m glad the Speaker of the House is ruling out tax increases.

However, his anti-tax position is not credible when he also says that entitlement programs can’t be touched.

That’s the Biden–Trump view and it’s a recipe for fiscal chaos and – sooner or later – huge tax increases on lower-income and middle-class Americans.

The bottom line is that there’s an unavoidable choice to be made in the United States. We either reform the entitlement programs or we agree to let politicians take more of our money.

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The 2024 Version of America’s Dismal Fiscal Future

The Congressional Budget Office has released its new Long-Term Budget Outlook and I will continue my annual tradition (see 2018, 2019, 2020, 2021, 2022, 2023) of sharing some very bad news about America’s fiscal future.

Most budget wonks focus on what CBO says about deficits and debt. And those numbers are grim.

But it’s much more important to focus on the underlying problem of excessive spending. After all, red ink is merely one of the symptoms of a government that is too big.

So here’s CBO’s forecast of spending and revenue over the next three decades. As you can see, both taxes and spending are becoming bigger burdens.

The bad news is that the tax burden is rising over time

The worse news is that the spending burden also is rising over time. And the worst news is that the spending burden is rising even faster than the tax burden in rising.

Here’s what CBO wrote in the report.

In the Congressional Budget Office’s projections, deficits…grow larger over the next 30 years because…spending…increases faster than revenues over the subsequent 30 years. Both federal spending and federal revenues equal a larger percentage of the nation’s gross domestic product (GDP) in coming years than they did, on average, over the past 50 years. Under current law, total federal outlays would equal 23.1 percent of GDP in 2024, remain near that level through 2028, and then increase each year as a share of the economy, reaching 27.3 percent in 2054… From 1974 to 2023, outlays averaged 21 percent of GDP; over the 2024–2054 period, projected outlays average about 25 percent of GDP… The key drivers of that increase over the next 30 years are higher net interest costs, which result from rising interest rates and growing federal debt, and growth in spending on major health care programs, particularly Medicare, which is caused by the rising cost of health care and the aging of the population.

To elaborate on that final sentence, our next visual is CBO’s forecast for both health entitlements and Social Security.

You can see that Social Security is becoming a bigger burden, but programs such as Medicare and Medicaid are easily the nation’s main budget problem.

By the way, this chart is why there is an inevitable and unavoidable choice to make.

We either have entitlement reform or we have massive tax increases. Sadly, the two main presidential candidates in 2024 prefer the wrong option.

P.S. Here’s one final excerpt from the report. CBO acknowledges that higher tax burdens will be bad for growth.

The agency’s economic projections…incorporate the effects of changes in federal tax policies scheduled under current law, including the expiration of certain provisions of the 2017 tax act. Under current law, tax rates on individuals’ income are scheduled to increase at the end of 2025, when those provisions are scheduled to expire. Those changes aside, as income rises faster than inflation, more income is pushed into higher tax brackets over time. That real bracket creep results in higher effective marginal tax rates on labor income and capital. Higher marginal tax rates on labor income reduce people’s after-tax wages and weaken their incentive to work. Likewise, an increase in the marginal tax rate on capital income lowers people’s incentives to save and invest, thereby reducing the stock of capital and, in turn, labor productivity. In CBO’s projections, that reduction in labor productivity puts downward pressure on wages. All told, less private investment and a smaller labor supply decrease economic output and income in CBO’s extended baseline projections.

This may seem obvious, especially for people familiar with the academic research on this topic, but CBO used to have some very silly views on tax policy.

P.P.S. CBO also used to produce some very silly analysis on spending policy, but in recent years has been much better.

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Washington’s Fiscal Ponzi Scheme

My book on fiscal policy, co-authored with Les Rubin, is now officially published.

I wrote a sneak-peak column about The Greatest Ponzi Scheme on Earth last week.

There are three main takeaways from our book.

• The problem is spending
• The problem is spending
• The problem is spending

Okay, I’ll admit those bullet points are an oversimplification.

But there’s a reason for that.

Our book does show how we got into our current fiscal mess (because of too much spending).

And it shows why things will get worse in the future if we leave government on autopilot (because of too much spending).

Moreover, we have lots of evidence for the right way to avert a fiscal disaster. Richard Rahn wrote about our book in his Washington Times column.

In a new book, “The Greatest Ponzi Scheme: How the U.S. Can Avoid Economic Collapse,” Leslie A. Rubin and Daniel J. Mitchell provide a well-written and informative history of how much of the world and particularly the United States managed to get into the current fiscal mess. …British Prime Minister Margaret Thatcher said it best: “The problem with socialism is that you eventually run out of other people’s money.” Before World War I, government spending in almost every country was a small share of gross domestic product. …In the United States, things began to change in the 1930s with the development of welfare programs… Mr. Rubin and Mr. Mitchell review many of the so-called entitlement programs that are the real budget busters. The payments from these programs consistently grow faster than the economy or tax revenue and now consume the bulk of the federal budget. Anyone who can do basic math can quickly understand the problem. When a country reaches the point where it is borrowing just to pay interest on the debt, game over.

That’s the bad news in the book. And Richard captures some of that bad news with this table showing how the burden of government spending has significantly increased over the past 100-plus years.

But our book also has good news, as Richard explains.

Fortunately, there are a number of success stories that serve as role models of what to do. …Switzerland is perhaps the best model for fiscal responsibility in a highly developed country, in that for the most part the Swiss keep government spending growing no more rapidly than the private sector.

As you might expect, I like his conclusion.

Mr. Rubin and Mr. Mitchell have done a great service in providing a highly understandable book, outlining the disaster about to engulf us if we do not change quickly, but equally important, a road map for getting out. Every policymaker and concerned citizen ought to buy this book and refer to it often — an economic bible of sin and salvation.

I want you to buy the book, but if you are a regular reader of this column, you already know the only practical way of averting a fiscal crisis in the United States. Simply follow the Golden Rule. And, because of its spending cap, Switzerland is a good role model.

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In One Image, Everything You Need to Know about California’s Fiscal Troubles

Two days ago, I shared some California humor. Today, we’re going to look at some California tragedy.

I’ve often explained that the most important variable in fiscal policy is the the growth of government, More specifically, good fiscal policy occurs when the burden of government spending over time grows slower than the private sector.

As you can see from this chart (based on data from the National Association of State Budget Officers), California has the opposite of good fiscal policy.

At the risk of understatement, it’s not good when government grows more than twice as fast as inflation.

I was motivated to create this chart after reading this article in National Review.

Written by Will Swaim, it discusses how California got in trouble. It starts by looking at how red ink forecasts have dramatically worsened ins a very short period of time.

In the summer of 2022, California governor Gavin Newsom, apparently high on the smell of cash, announced that California had just smashed through the state-budget equivalent of the first four-minute mile: a one-year surplus of $100 billion. …Just one year later, Newsom announced — this time without the trumpet blasts, chest-thumping and press tour — that California was $32 billion in the red. Today, the governor is staring into the business end of a $78 billion deficit. You didn’t have to be a prophet to see the financial chaos coming. In this state’s notoriously mercurial tax system, which depends largely on revenue from just 150,000 wealthy Californians and massive, occasional paydays to investors in the state’s tech sector, what went up in 2022 was certain to fall hard, fast, and soon.

But volatile tax revenues are not the problem.

California is in trouble because of too much spending. Governor Newsom and other politicians in Sacramento can’t resist buying votes in every possible way.

…back in 2022, when Newsom was still feeling like the casino’s biggest whale, he spent as if there’d be money forever, boosting spending to $308 billion, more than double Jerry Brown’s last, 2019 budget of $140 billion. In the Year of the Historic Surplus, there were gifts for almost everyone and a soundtrack of Vegas slots paying off. …He announced that the state will pay $5 billion to cover health-care insurance for illegal immigrants. And though he has already spent a remarkable $20 billion to reduce homelessness — while the number of people on the street continues to grow — Newsom asked voters on March 5 to approve a $6.4 billion bond program that would feed California’s voracious homelessness–industrial complex but almost no one else.

I did a poll back in 2018 about which state will be the first to go bankrupt. Illinois has a big lead, for understandable reasons. But you won’t be surprised to see that California is in second place, ahead of even the basket case of New Jersey.

P.S. The NR article discussed the volatility of tax revenues. Because of its class warfare-based tax system, California is especially vulnerable to big swings in tax revenue (and big revenue losses because of successful people fleeing the state). But this is also a nationwide challenge, which helps to explain why a spending cap (like Colorado’s TABOR) is a much better policy than a balanced budget rule.

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The 2024 Version of Do-It-Yourself Budgeting

Last year, the Committee for a Responsible Federal Budget (CRFB) released an online budget game called “Fix the National Debt.”

I would have preferred a game called “Reduce the Size of the Federal Government,” since that would have put the focus on the real problem.

But I dutifully answered all the questions, got my results, and then had two big complaints.

1. There were not nearly enough options to restrain and/or cut spending and zero options for shutting down departments (such as  Education, Energy, HUD, Agriculture, and Transportation).
2. There was no data on what happens to the burden of government spending as a share of GDP, which is a more important indicator of good policy than what happens to debt as a share of GDP).

We now have a 2024 version of the CRFB game.

Unfortunately, it still focuses on the symptom of red ink rather than the real problem of excessive spending.

But I can’t resist this kind of budget exercise. So, once again, I went through all the options and picked the reforms that would be good policy.

Here’s CRFB’s starting point.

And here are the debt levels based on my choices.

Since CRFB wants lower levels of debt, both by 2034 and 2050, I supposedly failed.

But the criticisms I made last year still apply. If more options had existed to reduce or eliminate counterproductive programs, I easily would have reached CRFB’s debt benchmarks.

More important, I would have substantially reduced the burden of government spending, thus allowing much greater prosperity.

By the way, here’s the breakdown of my choices. I had a small net tax cut and opted for just about every possible spending cut (keep in mind that CRFB uses the dodgy Washington definition of a budget cut).

I’ll make two final observations.

First, the “investments” category deals with spending on education and infrastructure. Since the federal government has a horrible track record in those areas, such spending is more accurately characterized as “mal-investments.”

Second, the CRFB game assumes that fiscal policy has no impact on the economy. You get zero credit even if you dramatically reduce the burden of taxes and spending. Likewise, there’s no penalty for people who choose more spending and higher tax burdens.

At the risk of understatement, that grossly unrealistic.

Then again, CRFB would probably choose an inaccurate feedback mechanism (based on levels of red ink), so maybe it’s good they don’t have any economic assumptions.

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Understanding Biden’s New Budget in Three Tweets

I wrote yesterday to announce my new book on America’s fiscal crisis.

Today, let’s look at how Joe Biden’s new budget will make that bad problem even worse.

I’m going to start with two charts. The first one shows that government spending in recent years has climbed above the trendline (and the trendline showed excessive spending growth even before the fiscal orgy that took place under Trump and Biden).

The second chart shows that taxes also are above the trendline.

These two charts come from a tweet by Brian Wesbury.

And they basically tell you everything we need to know about our current fiscal mess.

But there’s more bad news to share.

Next, here’s a tweet from Preston Brashers about Biden’s plan to further bloat the IRS budget in order to have more audits of families and small businesses.

Biden’s proposal is based on the notion that a massive expansion of the IRS will magically generate additional tax revenue to finance ever-larger government.

History tells us that this perpetual-motion-machine approach won’t work.

Last but not least, we have this tweet from Steven Moore about Biden’s preposterous claim that he has reduced red ink.

All politicians lie. They are not good people. But Biden is an extreme example.

Here’s what really happened: Yes, the deficit fell in 2022, but only because there was a massive amount of one-time pandemic spending in 2021.

But if you look at the actual effect of Biden’s policies, he has increased red ink in every single year.

P.S. Remember that our real fiscal problem is too much spending. Red ink is merely one of the symptoms of that problem (as are punitive tax burdens and money printing).

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Must-Read Book on Fiscal Policy

I’ve been complaining for decades about excessive and wasteful government spending. I’ve also been grousing for just as long about counterproductive, class-warfare tax policy.

Thanks to profligacy in Washington, we’re stumbling and bumbling our way into becoming a sl0w-growth, European-style welfare state.

So I finally decided to do something about it. Or, to be more accurate, I said yes when my friend Les Rubin decided we should co-author a book about America’s fiscal crisis.

So here it is, The Greatest Ponzi Scheme on Earth. Officially released on March 19.

We didn’t write this book to become rich. If we actually sell enough copies to earn royalties, I’ll be delighted.

Not because of the money, but rather because that will actually show there’s some interest in saving the country from fiscal decay.

To help introduce the book, Les and I just wrote a column for the Foundation for Economic Education. Here are some highlights.

The United States is in fiscal trouble. The burden of government spending has increased by nearly $3 trillion over the past 10 years—nearly doubling in just one decade! And that…is bad news whether the spending is financed by taxes, borrowing, or money printing. To make matters worse, the burden of spending will get even heavier in the coming decades, mostly because politicians have saddled the nation with poorly designed entitlement programs… To raise the alarm, we’ve written a book, The Greatest Ponzi Scheme on Earth, that explains America’s fiscal mess. It explains how we…will suffer an economic crisis if we leave policy on autopilot. That’s the bad news. The good news is that our book shows that the…reasonable solution…is for government spending to grow slower than the economy. …Politicians could still increase spending, but only by modest amounts. Maybe 2 percent annual spending increases rather than the 7+ percent spending increases that we’ve seen over the past 10 years. In our book, we show examples of countries that have long-run spending restraint (super-successful economies such as Switzerland and Singapore). But we also show examples of nations that dug themselves out of fiscal trouble merely by having multi-year periods of spending restraint. And if countries such as New Zealand, Canada, and Sweden can address their fiscal problems, surely we should demand the same from the crowd in Washington.

As you might expect, we also show how countries like Greece got in trouble.

We also describe the entitlement reforms that are needed to save America from that fate.

And it goes without saying (but I’ll say it anyhow) that we explain how a Swiss-style or TABOR-style spending cap is needed to impose some discipline on reckless, self-serving politicians.

I’ve never used my daily columns to raise money for my group, the Center for Freedom and Prosperity, but peddling the book is different because it will be a tangible and mutually beneficial exchange. Isn’t the free market wonderful?

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In One Image, Everything You Need to Know about Supply-Side Economics

When trying to educate someone about the importance of low marginal tax rates, what’s the most-convincing visual?

• A supply-and-demand graph?
• A philoso-raptor meme?
• A cartoon with two doors?
• A Dan Mitchell hypothetical?

I’m partial to the image I created, of course, but let’s look at a real-world example that is very compelling.

In an article about Tory tax policy for the U.K.-based Telegraph, Charlotte Gifford included a graph showing that a family with two children can have more disposable income with an income of £99,000 rather than an income of £144,000.

In other words, there’s a de facto 100 percent tax rate on the additional £45,000.

At the risk of understatement, there’s not much incentive to earn more income if the government imposes a de facto 100 percent tax rate.

That’s the kind of policy you expect to see in France, not the United Kingdom.

So why is it happening? Ms. Gifford explains.

High-earning parents are better off only working four days a week as bizarre tax rules mean it no longer pays to work. …One of the biggest distortions in the tax system occurs once a parent earns more than £100,000. …One reader told The Telegraph they were considering shortening their working week from five days to four after realising they would keep more of their pay by earning £92,000 as opposed to £115,000. Reducing the working week makes perfect financial sense for many parents earning £100,000 or more. By working fewer days they would not only dodge the tax trap but also cut their childcare costs, which currently average at £285 per week full-time, or £13,695 a year.

If you want details, the de facto 100 percent-plus tax rate is the combined result of three factors.

1. A statutory tax rate of 40 percent.
2. The government’s clawback of the value of the personal allowance, pushing the effective marginal tax rate up to 60 percent. As stated in the article, “Once someone’s salary hits £100,000 they lose the personal allowance at a rate of £1 for every £2 until it disappears at £125,140.”
3. The loss of a government handout. As Ms. Gifford wrote, “…once a parent earns more than £100,000…they lose their entitlement to free childcare… This creates a perverse incentive for parents earning £99,000 to turn down a pay rise so they can hold on to the government benefit.”

The moral of the story is that people respond to incentives.

When the government makes it less attractive for people to be more productive and earn more income, they respond by…drum roll, please…being less productive and not earning more income.

Which means less taxable income for the government (hello, Laffer Curve).

That’s the simple lesson of supply-side economics.

P.S. American readers should know that there are also examples of implicit 100 percent-plus effective marginal tax rates in the United States.

P.P.S. The United Kingdom has bad tax policy because it has bad spending policy.

P.P.P.S. To avoid these problems, nations should have flat taxes and limited government.

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America’s Top Fiscal Problem Is…?

I narrated a six-minute video in 2009 to explain why America’s fiscal problem is spending rather than red ink. Here’s the same message in just 51 seconds.

If 51 seconds is too much, here’s a visual I created using the latest long-run forecast from the Congressional Budget Office.

The key thing to understand is causality. America’s ever-growing burden of government spending is causing rising levels of debt.

This is a point I’ve made several times in the past.

But there are two reasons why I’m revisiting the issue today.

First, Mark Warshawsky of the American Enterprise Institute has a new article explaining that the federal government’s deficit is much bigger if you use accrual accounting rather than cash-flow accounting. Here are some excerpts.

Last week, the Treasury Department released…the massive Financial Report (FR) of the US Government. Using an accrual accounting basis, rather than a cash basis, the FR shows a much poorer picture of the current finances of the federal government than the conventional budget. …The budget deficit under the conventional cash-basis terms increased from $1.4 trillion in 2022 to $1.7 trillion in 2023, or about 6.2 percent of GDP… The alternative measure presented in the FR of…$3.4 trillion in 2023…was double the cash basis deficit.

In other words, the symptom of red ink, measured on an accrual basis, is twice as bad as shown in the official numbers.

But I point this out because the real lesson to be learned is that our spending problem is worse than what is shown in the official numbers (blame entitlements).

Second, I want to again share this visual from 2021. It shows that debt-financed spending is bad for prosperity, but also shows that tax-financed spending and inflation-financed spending are similarly bad.

One takeaway from this little flowchart is that replacing debt-financed spending with tax-financed spending doesn’t solve the problem.

If we correctly identify spending as the problem, by contrast, then the only practical solution is to restrain spending.

P.S. This analysis is why a spending cap amendment (like TABOR or the Swiss Debt Brake) is much better than a balanced budget amendment.

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The Practical Case Against Higher Taxes

As clearly shown by the Congressional Budget Office, America’s long-run fiscal challenge is an ever-growing burden of federal spending. Particularly entitlement programs.

Moreover, because the tax burden is projected to gradually increase (largely because of “real bracket creep“), it is accurate to say that more than 100 percent of America’s fiscal problem is excessive government spending. And it’s been that way for a long time.

This is one reason why tax increases would be bad public policy. Why increase the burden on American families when the problem is excessive spending by politicians?

Especially since we can deal with the symptom of red ink with some modest spending restraint.

Unfortunately, some Republicans get seduced into thinking that if they surrender on the tax issue, Democrats may get serious about spending restraint.

These are members of what I call the Charlie Brown Club.

The latest example is Congressman Jodey Arrington of Texas. Here are some excerpts from a Semafor report by Kadia Goba.

The chair of the House Budget Committee has a message for his fellow Republicans: If they ever want to fix Washington’s finances, they’ll have to talk about raising taxes. “It’s only fair to have both revenue and expenditures on the table,” Rep. Jodey Arrington, R-Texas recently told Semafor… The fiscal commission he’s championed would be charged with crafting a plan to stabilize the federal debt as a share of the economy… Washington has seen versions of this movie before. The blue ribbon Simpson-Bowles commission famously failed to approve its own plan in 2010… Arrington argues…pressure for a bipartisan budget solution… “Without discussing the revenue side, you will never have a commission and you will never have Democrats show up for a consensus solution,” he said.

I’ve already explained why Arrington is wrong. We have a spending problem, not a revenue problem.

But the Texas Congressman obviously is convinced we have a deficit problem, and this misplaced focus leads him to think Republicans need to surrender on the tax issue.

Today, I won’t to show why he’s wrong. And we’ll start by accepting his misguided premise that America’s fiscal challenge is too much red ink.

There are two scenarios for how to reduce deficits and debt:

1. With divided government, have a bipartisan budget deal based on higher taxes and spending restraint.
2. Wait for GOP control and resuscitate something akin to the Ryan budget, based on entitlement reform.

From a practical perspective, even if the only goal is controlling red ink, the second option is the way to go. Republicans were pushing such an approach last decade.

The first option, by contrast, is a recipe for a bigger fiscal mess.

This is because tax-hiking budget deals have a terrible track record. Simply stated, they don’t reduce red ink. There are three big reasons why that happens.

• The economy suffers because of the tax increases, and that means less taxable income. So the projected tax increases don’t raise as much revenue as politicians think.
• Once tax increases are part of the discussion, any hope of genuine spending restraint goes out the window. Indeed, politicians usually respond with spending increases.
• The supposed spending cuts aren’t real spending cuts, just reductions in previously planned increases. And the likelihood of structural reform is vanishingly small.

I’ll close by (sort of) contradicting everything I just wrote.

As I explained way back in 2012, I would accept a big tax hike. But only if taxpayers got a major benefit in exchange such as real entitlement reform, eliminating wasteful departments, and/or enacting a flat tax.

Today, I’ll add a fourth potential item for trade. I’ll accept a big tax hike in exchange for an ironclad spending cap, sort of like the one that has been so successful in Switzerland.

Needless to say, the odds of getting any of these four things from Joe Biden or Chuck Schumer are the same as the odds of me playing centerfield this year for the New York Yankees.

P.S. If you want an example of failed bipartisan deals, check out the Simpson-Bowles package.

P.P.S. I admit that GOP control won’t solve the problem if the president is a big spender like Trump.

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The Negative Consequences of Big-Government Toryism

I was very optimistic about the United Kingdom less than five years ago. The Conservative Party had just won a landslide election and that presumably would lead to an acceptable form of Brexit, followed by some form of Singapore-on-Thames.

Well, the Tories did deliver on Brexit, but everything else want awry.

Instead of restraining spending and lowering tax rates, the Conservative Party went in the opposite direction: Higher taxes and a bigger spending burden.

We have witnessed the triumph of big-government conservatism.

But good news for “wet” Tories has been bad news for the people of the United Kingdom. Making Britain more like France has produced economic anemia.

And that means the Labour Party probably wins the next election in a landslide – which means even more bad policy.

The Wall Street Journal has an editorial about the envervating statism of the Conservative Party.

…the Tories have no one to blame but themselves. At least their predicament is a warning for others. ….Prime Minister Rishi Sunak…and Chancellor of the Exchequer Jeremy Hunt…rode into office promising a more “responsible” path to economic growth built around balancing the government budget. This became a plan by Mr. Hunt to tax the economy back into growth, which is the sort of nonsense voters expect from parties of the left. …Now British voters are stuck with high taxes and slow or no growth. Tax revenue at 36% of GDP is the highest since the immediate aftermath of World War II. ….The Tories have squandered former Prime Minister Boris Johnson’s 2019 majority because they fell for the idea that tax-and-spend policies and onerous climate regulation would appeal to a coalition of working-class voters in the north and urban Tory wets. …They have earned their looming political demise.

That’s a very grim assessment.

However, writing for the U.K.-based Telegraph, Allister Heath is even more pessimistic.

We are an increasingly impoverished and indebted nation… We crave French-style levels of “free” public services… We have lost interest in working hard, in deferred gratification, in getting up in the morning even when we don’t feel like it, but want to retain our triple-locked pension, subsidised public transport and generous welfare state, policies backed by Tories and Labour alike. …we feel able to spend even more on the NHS and constantly hike the minimum wage. We want to spend and spend and spend yet more, encouraged by demagogic politicians who tell us that we can have it all, but have forgotten that the world doesn’t owe us a living. With no economic growth, and a dire outlook caused by 25 years of social-democratic idiocy, …The tax take is already at its highest level since the late 1940s, and yet the state is incapable of delivering its core functions. …Meanwhile, billions are being spent on the rush to net zero, on “free” museums for the middle classes, on rocketing benefits bills and on endless woke madness. …In 1972, there were 4.5 workers per pensioner, today, it’s 3.3 and by 2072 there will only be 1.9 workers per pensioner.

As you can see, Allister isn’t just worried about bad policy.

He’s worried about the perfect (in a negative way) storm of bad policy, eroding societal capital, and demographic decline.

I realize that some readers may not care about the future of the United Kingdom. That being said, there are some ominous parallels with the United States.

Big-government Republicans haven’t copied all the mistakes of the big-government Tories, but there are enough similarities that we should be worried.

P.S. Some Tory apologists argued that at least you get managerial competence when the Conservative Party is in charge. If you read this, this, and this, you’ll be disabused of that notion. The failure of the NHS, after being showered with more tax dollars, is a perfect (in a bad way) example.

P.P.S. Those apologists also say that bad policy is sometimes necessary for political reasons. But it appears that Tories will suffer a giant defeat in the next election, so perhaps they should have tried good policy rather than claiming that the era of “free-market fundamentalism” was over.

P.P.P.S. At the risk of understatement, the U.K. needs another Margaret Thatcher.

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Three Cheers (so far) for Argentina’s Libertarian President

The world’s most sensible political leader is President Javier Milei of Argentina.

But that doesn’t mean he will succeed in rescuing his nation’s Peronism-warped economy. Especially since left-leaning parties control the legislature.

But he’s definitely trying.

Let’s start with some good news. Here’s a tweet from Daniel Di Martino.

This is a remarkable achievement. Using his executive powers, he unilaterally clamped down on the growth of government.

And by having government grow slower than the private sector (the Golden Rule of fiscal policy), he’s quickly made progress.

Here are some excerpts from a report in Barron‘s.

The Argentine government in January saw its first monthly budget surplus in nearly 12 years, as new President Javier Milei continues to push for strong spending cuts, the Economy Ministry announced. January was the first full month in office for Milei, a far-right libertarian who took office in December, and it ended with a positive balance for public-sector finances of $589 million at the official exchange rate, the government said late Friday. The figure includes payment of interest on the public debt. …Milei, an economist, has advocated sharp cuts in spending and a reduction of public debt on the way to a dollarization of the economy. ..The year 2023, the final year of the center-left government of Alberto Fernandez, ended with a 211 percent inflation rate. With poverty affecting 45 percent of the population, Milei has predicted an economic rebound within three months.

Now for some bad news. What you just read is a report on the initial skirmish in a long war.

Given my unfamiliarity with Argentina’s fiscal system, I don’t know how much progress he’s made. But I’m guessing he only solved 5-10 percent of the problem with his executive actions.

The main battle will involve whether Milei can now somehow convince a hostile legislature to approve structural reforms. And that won’t be easy.

That being said, he presumably has some ability to veto budgets (do they have “government shutdowns” in Argentina?).

And he arguably has the ability to “dollarize“, which in the long run would be very important since the government would lose the ability to finance the budget by printing money.

Fingers crossed that President Milei can save his country.

P.S. I was going to speculate whether Milei could be the Ronald Reagan or Margaret Thatcher of Argentina, but he faces a much bigger challenge. If he succeeds, he will be the global role model for how to deliver an economic renaissance.

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The Laffer Curve’s Latest Victim: California

The Laffer Curve is the common-sense notion that people respond to incentives.

And even Paul Krugman admits this has implications for tax revenue.

For instance, if tax rates increase, people may decide to earn and/or report less taxable income. When that happens, revenue won’t increase by as much as politicians hope.

And the reverse is true (in some cases, dramatically true) if tax rates decrease.

For today’s column, let’s look at a real-world example of the Laffer Curve.

Joshua Rauh of Stanford and Ryan Shyu of Amazon have new research that looks at what happened after California voters approved a big class-warfare tax increase in 2012.

Here are some excerpts from their study.

In this paper we study the question of the elasticity of the tax base with respect to taxation…on the universe of California taxpayers around the implementation of major 2012 ballot initiative, Proposition 30. …The Proposition 30 ballot initiative increased marginal income tax rates…by 3 percentage points for singles with over $500,000 in taxable income (married couples with over $1 million)…, the highest state-level marginal tax rate in the nation. …We…document a substantial onetime outflow of high-earning taxpayers from California in response to Proposition 30. …For those earning over $5 million, the rate of departures spiked from 1.5% after the 2011 tax year to 2.125% after the 2012 tax year, with a similar effect among taxpayers earning $2-5 million in 2012. …California top-earners on average report $522,000 less in taxable income in 2012, $357,000 less in 2013, and $599,000 less in 2014; this is relative to a baseline mean income of $4.15 million amongst our defined group of California top-earners in 2011. Compared to counterfactuals in similarly high-tax states, California top-earners on average report $352,000 less in taxable income in 2012, $373,000 less in 2013, and $481,000 less in 2014.

So some upper-income taxpayers moved and others (unsurprisingly) earned/reported less taxable income.

Did that have an impact on tax revenue?

The answer is yes.

…we assess the implications of our estimates for tax revenue in the context of California Proposition 30. A back of the envelope calculation based on our econometric estimates finds that the intensive and extensive margin responses to taxation combined to undo 45.2% of the revenue gains from taxation that otherwise would have accrued to California in the absence of behavioral responses within the first year and 60.9% within the first two years.

Wow, more than 60 percent of projected revenue evaporated within two years.

By the way, these estimates are based on data only through the middle of last decade. And something significant happened after that: The state and local tax deduction was curtailed as part of the Trump tax package.

The authors speculate that this will have very important implications.

…the “Tax Cuts and Jobs Act” (TCJA). Under this law, the top rate is 37% for single and head-of-household filers earning over $500,000, and for married filers earning over $600,000. Despite this nominal cut to top rates, the legislation on net increased rates on top earners because it capped state and local deductions at $10,000 total. … we use our top line intensive margin elasticity estimate to provide a ballpark quantification of the federal tax revenue implications of TCJA for the particular set of California high earners in our treatment group. …Consider a married California taxpayer earning $4.15 million of wage income. In 2017, this taxpayer pays a federal tax bill of $1,431,305. In 2018, incorporating the 8.6% income decrease, this taxpayer pays a federal tax bill of $1,333,946. This amounts to a 6.8% decrease in tax revenue, putting the TCJA on the wrong side of the Laffer Curve for high-earning individuals in California. … the TCJA increased incentives (in terms of the level of the average tax rate gap) to leave California for zero-tax states by 2.15 times the amount of Proposition 30 for those earning over $5 million, and by a factor of 2.43 for those earning from $2-5 million. Based on these scaling factors, we would predict an out-migration effect of 1.46% of those earning $2-5 million, and 1.51% of those earning $5 million.

None of this should be a surprise.

Indeed, I wrote back in 2012 that bad things would happen when Proposition 30 was approved.

I feel safe in stating that this measure is going to accelerate California’s economic decline. Some successful taxpayers are going to tunnel under the proverbial Berlin Wall and escape to states with better (or less worse) fiscal policy. …It goes without saying, of course, that California’s politicians…will act surprised when revenues fall short of projections because of the Laffer Curve.

To be fair, I don’t know if California politicians are genuinely surprised. I suspect many of them privately understand the adverse consequences of class-warfare tax policy. But they nonetheless support bad policy because they are motivated by a selfish desire to maximize votes.

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Washington’s Spending Problem

Three days ago, I explained that modest spending restraint could solve America’s fiscal problems.

In today’s column, let’s expand on that topic. We’ll start with this clip from a recent interview.

If you don’t want to spend a couple of minutes watching the interview, I made six points.

1. We have a long-run fiscal problem.
2. Spending is the problem, not red ink.
3. A spending cap is the solution.
4. Entitlement reform is needed.
5. The alternative is massive tax hikes.
6. Ordinary Americans will be pillaged,

For purposes of today’s column, I want to build on the second point.

Here are two charts based on data from the Congressional Budget Office.

The first chart shows what has happened to federal spending over the past six decades. It shows a steadily increasing burden, punctuated with one-time spending sprees for the financial crisis (2008-2009) and the pandemic (2020-2021).

The second chart adds CBO’s projections for spending over the next 10 years, assuming the budget is left on autopilot.

As you can see, a bad situation will get much worse.

These are sobering charts.

But not necessarily frightening charts. If you adjust the numbers for inflation, the spending increase doesn’t look quite as bad.

And if you measure spending relative to the economy (share of GDP), the upward trend is further muted.

So the budget numbers are grim, but we have not passed a point of no return.

Heck, I wrote back in 2015 that Greece’s problems were solvable. And it that’s the case, then the same must be true in the United States.

We just need to spendaholics in Washington to comply with the Golden Rule.

But that rosy scenario assumes politicians will try to solve the problem with spending restrain rather than making it worse with new spending burdens.

Sometimes I feel optimistic about achieving the former. But then I look at who is running for president (the Tweedledum and Tweedledee of big government) and it is much more realistic to expect the latter.

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Spending Restraint Is the Simple Answer to America’s Fiscal Woes

Way back in 2010, and then over and over again in subsequent years, I have showed that it is very simple to balance the budget.

All that is necessary is some reasonable spending restraint, sort of like what happened during the Tea Party era in the early part of last decade.

Today, let’s see if that’s still true. The Congressional Budget Office just released its Economic and Budget Outlook, which includes a 10-year forecast of what will happen if spending and revenue are left on autopilot.

As I almost always do when that happens, I calculate what amount of spending restraint would be necessary to balance the budget over 10 years.

As you can see in the chart, limited spending so it grows by 1.4 percent yearly is all that is needed to balance the budget.

The budget can be balanced much quicker with a spending freeze. And the deficit can be largely eliminated if spending grows by 2 percent annually.

By the way, CBO projects that inflation will average close to 2 percent over the next decade.

So the main takeaway is that we can basically eliminate red ink if the federal budget grows slightly less than the rate of inflation.

There are two points worth mentioning.

• There is no need for any tax increases. Revenues already are projected to grow by 4.2 percent yearly, nearly twice the estimated rate of inflation. Plus, tax increases would surely give politicians an excuse to increase spending.
• Spending restraint is a simple concept, but it would not be politically easy. Interest groups want to leave spending on autopilot, or have it grow even faster. Plus, some entitlement reform almost surely would be necessary.

One further point is that the CBO baseline assumes that the Trump tax cuts expire at the end of 2025. Extending those tax cuts would lower the revenue baseline, thus requiring additional spending restraint to achieve a balanced budget over the 10-year window.

P.S. Balancing the budget is a good idea, but spending restraint should be the main goal of fiscal policy. Fortunately, the evidence shows that spending restraint is the only effective way of achieving fiscal balance (whereas tax increases have a track record of failure).

P.P.S. The ideal long-run policy is a spending cap.

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Mexico’s Irresponsible Populist President Proposes Election-Year Giveaway

I’ve written many columns about Venezuela, Chile, and Argentina, but only one column specifically about Mexico.

Since I’m currently in Mexico City doing some meetings and research about Mexico’s economic policy, time to make up for that lack of attention.

The first thing I did when preparing for my trip was the check the IMF’s database to see what’s been happening to the burden of government spending.

Sadly, policy has moved in the wrong direction ever since leftist/populist President Andrés Manuel López Obrador (AMLO) was elected in 2018.

That’s the bad news.

If you’re waiting for me to share some good news, that’s not going to happen.

Instead, I’ll augment the bad news with some worse news.

Mark Stevenson of the Associated Press reported two days ago that “AMLO” has a new vote-buying scheme that would be economically ruinous.

Mexico’s president said Monday he will propose guaranteeing people pensions equal to their full salaries at the time they retire, something done by no other country, not even those much richer than Mexico. It…has almost no hope of getting passed in the eight months he has left in office, but which could be part of a bid to attract voters in the June 2 presidential elections. …In announcing the measures Monday, the president claimed it was an attempt “to recover holy rights, guaranteed to Mexicans by God.” It was among a package of reforms that included guaranteed annual increases in payments to the elderly and increases in the minimum wage and above the rate of inflation. …To cover the whole population with something approaching a ‘full wage,’ López Obrador’s program would have to increase the Afore pension fund by 2.5 times to meet the median wage, and then double it again to cover informal workers.

This is spectacularly bad policy. It makes Biden’s costly per-child handout scheme seem cheap by comparison.

Almost every nation in the world is in fiscal trouble because of aging populations and falling birthrates.

Responsible governments are trying to figure out how to curtail old-age entitlements.

AMLO, however, cares about buying votes rather than about Mexico’s economic future.

P.S. As you might expect, the tax-free bureaucrats at the Organization for Economic Cooperation and Development have been recommending huge tax increases in Mexico. But if AMLO’s proposal is ever enacted, even the pro-tax bureaucrats in Paris would be hard pressed to propose enough tax hikes to keep pace with that radical expansion in the burden of government.

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The Case for a Flat Tax

I explained the benefits of a flat tax in a video 14 years ago. And I’ve since shared two videos (here and here) of Steve Forbes arguing for a flat tax.

If those are not enough, here’s a recent presentation I made about tax reform for Argentina’s Fundacion Internacional Bases.

I was one of three speakers and I encourage everyone to watch the entire one-hour program.

My role was to explain the three main features of the flat tax.

• A low tax rate on productive economic behavior.
• No double taxation of income that is saved and invested.
• Elimination of unfair and corrupt loopholes.

I’ve written many times on all of those topics, especially the first two.

So, for today’s column, let’s focus on the third point.

And I don’t even need to do a lot of writing because the most persuasive evidence about our complicated and unfair tax code can be found on this IRS webpage.

As of today, 2,883 forms are needed to theoretically comply with America’s nightmarish internal revenue code.

By the way, I wrote “theoretically” because many taxpayers have no idea whether they are accurately complying. The tax code is too much of a Byzantine mess.

As an economist, I want a flat tax so we can enjoy faster growth.

As a human being, I want a simple system to get rid of unfairness and complexity.

P.S. Sadly, some folks on the left don’t understand the flat tax.

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Stifling VAT Burdens in Europe

I wrote 10 days ago about why a value-added tax would be a mistake for the United States.

To help reinforce that argument, here’s a new map from the Tax Foundation showing VAT rates on the other side of the Atlantic Ocean.

With a few exceptions (notably Switzerland), these hidden taxes are enormous burden. Indeed, the average EU VAT rate is approaching 22 percent, a huge increase over the past five decades.

From a tax policy perspective, high VAT rates are misguided since they increase the gap between pre-tax income and post-tax consumption. And lower-income households are especially disadvantaged.

But high VAT rates also are misguided since they enable bigger burdens of government spending.

Here’s a chart based on OECD tax data and OECD spending data. As you can see, when compared to the United States, higher VAT burdens among EU/OECD members are associated with higher spending burdens.

The bottom line is that the VAT is a money machine for bigger government.

As such, American politicians should not impose this levy and make the US more like Europe.

Unless, of course, the goal is slower growth and less prosperity.

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