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Archive for the ‘Fiscal Policy’ Category

Before our depressing discussion today about the fiscal impact of entitlement programs (Social Security, Medicare, Medicaid, EITC, Food Stamps, welfare, and Obamacare, etc), here’s a video of how it all began.

I think this is a great introduction to the issue, particularly since you learn how “public choice” (i.e., politicians engaging in self-serving behavior) played a key role in the development of today’s welfare state.

But if you don’t have the time to watch a long video, here are four key things to understand.

  1. Entitlements (budget geeks sometimes use the term “mandatory spending”) are programs that automatically give people money if they meet certain requirements (such as reaching a certain age or having income below a certain level).
  2. Since these programs automatically give people money, they are not part of the annual appropriations process (the “discretionary spending” parts of the budget that are determined on a yearly basis).
  3. Some entitlement programs are “means tested” and designed to funnel money to low-income individuals. This type of spending is sometimes referred to as “unearned benefits.”
  4. Some entitlement programs are “social insurance” since people pay specific tax in exchange for specific benefits. This type of spending is sometimes referred to as “earned benefits” (though in many cases recipient receive much more than they paid).

By the way, there’s one additional thing to understand.

Indeed, it may be the most important thing to understand if you care about America’s fiscal and economic future.

5.  Entitlement programs are a slow-motion fiscal train wreck.

Let’s look at a new study authored by James Capretta of the America Enterprise Institute. He also has some sobering observations on the history of entitlement programs.

The growing expense of entitlement programs has occurred steadily for more than a half century and is reflected in the shifting distribution of federal spending activity. …by the early 1960s, two-thirds of all spending continued to require approval by the House and Senate appropriations committees each year, and less than a third was spent on entitlement programs. … By 2019, nearly two-thirds of all spending in the budget was for entitlement programs, and less than a third went to annually appropriated accounts.

If you prefer this information visually, here are a couple of pie charts from the study.

While there are dozens of entitlement programs, the big three are Social Security, Medicare, and Medicaid.

The largest entitlement programs are Social Security, Medicare, and Medicaid. Together, they now make up nearly half of all federal spending. Their combined growth over the past half century is the primary source of intensifying fiscal pressure. …In 2019, combined federal spending on them was 9.8 percent of GDP, up from 3.7 percent in 1970. CBO expects them to cost 17.2 percent of GDP in 2050, which is almost equal to the average annual revenue collected by the federal government from 1970 to 2019.

And here’s how they’ve been consuming ever-larger shares of America’s economic output.

What’s driving this ever-increasing fiscal burden?

In part, it’s because we have more and more old people and they are living longer.

So what does all this mean?

Capretta points out that uncontrolled entitlement spending may lead to a debt crisis.

I don’t disagree, but I think that’s a secondary concern. The real problem is that government spending will become an ever-larger economic burden. And that will hinder growth whether it’s financed by borrowing or taxes.

Speaking of taxes, here’s the chart from the study that deserves our close attention. It shows the relationship between demographics, benefit generosity, and tax burdens.

Here’s how Capretta describes the relationship.

…for each of the stipulated replacement rates (25, 50, and 75 percent), the tax rate necessary to keep the program solvent rises with increases in the aged dependency ratio. This explains why social insurance taxes in many aging societies have been increased to high levels in recent decades.

I’ve taken the liberty of augmenting the chart to show how these factors interact (though the order of #1 and #2 doesn’t matter).

The bottom line is that the United States is on track to become a high-tax, European-style welfare state if fiscal policy is left on autopilot.

In other words, unless there’s genuine entitlement reform, future Americans will be condemned to lower living standards.

P.S. Here’s some more history. In a column for the American Institute for Economic Research, Richard Ebeling looked at British history to explain how the private sector played a role in social insurance before being displaced by government.

Throughout the 19th century, a primary means for the provision of what today we call the “social safety nets” was by the private sector outside of government. The British Friendly Societies were mutual assistance associations that emerged to provide death benefits for the wives and children of the breadwinner who had passed away. But they soon offered a wide array of other mutual insurance services, including health care coverage, retirement pension programs, unemployment insurance, savings clubs to purchase a family house, and a variety of others. …by the end of the 19th century around two-thirds to three-quarters of the entire British population was covered by one or more of their programs and insurances. The research also discovered that a large majority of the subscribers were in the lower income brackets of the time… What stands out is that these were all private and voluntary associations and exchanges, in which the government paid little or no role.

On a related note, here’s an excellent short video on the English “poor laws” from the 1800s.

P.P.S. In addition to the fiscal burden of entitlement programs, there’s also a major problem in the way these programs discourage work.

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The good news is that Joe Biden has not embraced many of Bernie Sanders’ worst tax ideas, such as imposing a wealth tax or hiking the top income tax rate to 52 percent..

The bad news is that he nonetheless is supporting a wide range of punitive tax increases.

  • Increasing the top income tax rate to 39.6 percent.
  • Imposing a 12.4 percent payroll tax on wages above $400,000.
  • Increasing the double taxation of dividends and capital gains from 23.8 percent to 43.4 percent.
  • Hiking the corporate tax rate to 28 percent.
  • Increasing taxes on American companies competing in foreign markets.

The worst news is that Nancy Pelosi, et al, may wind up enacting all these tax increases and then also add some of Crazy Bernie‘s proposals.

This won’t be good for the U.S. economy and national competitiveness.

Simply stated, some people will choose to reduce their levels of work, saving, and investment when the tax penalties on productive behavior increase. These changes give economists the information needed to calculate the “elasticity of taxable income”.

And this, in the jargon of economists, is a measure of “deadweight loss.”

But now there’s a new study published by the Federal Reserve which suggests that these losses are greater than traditionally believed.

Authored by Brendan Epstein, Ryan Nunn, Musa Orak and Elena Patel, the study looks at how best to measure the economic damage associated with higher tax rates. Here’s some of the background analysis.

The personal income tax is one of the most important instruments for raising government revenue. As a consequence, this tax is the focus of a large body of public finance research that seeks a theoretical and empirical understanding of the associated deadweight loss (DWL). …Feldstein (1999) demonstrated that, under very general conditions, the elasticity of taxable income (ETI) is a sufficient statistic for evaluating DWL. …It is well understood that, apart from rarely employed lump-sum taxes and…Pigouvian taxes, revenue-raising tax systems impose efficiency costs by distorting economic outcomes relative to those that would be obtained in the absence of taxation… ETI can potentially serve as a perfect proxy for DWL…this result is consistent with the ETI reflecting all taxpayer responses to changes in marginal tax rates, including behavioral changes (e.g., reductions in hours worked) and tax avoidance (e.g., shifting consumption toward tax-preferred goods). …a large empirical literature has provided estimates of the individual ETI, identified based on variation in tax rates and bunching at kinks in the marginal tax schedule.

And here are the new contributions from the authors.

… researchers have fairly recently come to recognize an important limitation of the finding that the ETI is a sufficient statistic for deadweight loss… we embed labor search frictions into the canonical macroeconomic model…and we show that within this framework, a host of additional information beyond the ETI is needed to infer DWL …once these empirically observable factors are controlled for, DWL can be calculated easily and in a straightforward fashion as the sum of the ETI and additional terms involving these factors. … We find that…once search frictions are introduced, …DWL can be between 7 and 38 percent higher than the ETI under a reasonable calibration.

To give you an idea of what this means, here are some of their estimates of the economic damage associated with a 1 percent increase in tax rates.

As you peruse these estimates, keep in mind that Biden wants to increase the top income tax rate by 2.6 percentage points and the payroll tax by 12.4 percentage points (and don’t forget he wants to nearly double tax rates on dividends, capital gains, and other forms of saving and investment).

Those are all bad choices with traditional estimates of deadweight loss, and they are even worse choices with the new estimates from the Fed’s study.

So what’s the bottom line?

The political impact will be that “the rich” pay more. The economic impact will be less capital formation and entrepreneurship, and those are the changes that hurt the vast majority of us who aren’t rich.

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As indicated by one of my columns last week, I’m a big believer in federalism.

Indeed, I’ve even proposed that Washington shouldn’t operate any social programs. No food stamps. No Medicaid. No redistribution programs of any kind.

Such programs, to the extent they should exist, should be handled by state and local governments.

The welfare reform legislation under Bill Clinton is an example of how to move in the right direction. A top-down program from Washington was turned into a block grant, and then state and local governments got the freedom to choose policies that might actually help the poor become self-sufficient instead of being trapped in dependency.

Not pure libertarianism, of course, but still an example of progress. And we got good results.

Given this track record, I was very interested to see a column in today’s New York Times by Ezekial Emanuel and Rahm Emanuel on the topic of federal-state fiscal relations.

Medicaid and unemployment insurance…need permanent institutional reform and modernization. …the next stimulus package…should then be…a…federal-state Grand Bargain would solve festering problems in health care and unemployment assistance Years of political experience show that no matter how imperative and sensible, a policy’s chances of success are diminished unless it delivers political benefits. This bargain would create a victory for both parties.

This sounds intriguing. And potentially even desirable.

There’s no question, after all, that the current Medicaid system desperately needs reform. And the unemployment program also is a mess, luring people into joblessness.

So what exactly are the Emanuel brothers proposing? What is the “Grand Bargain” that offers benefits for both sides?

Sadly, it turns out that their bipartisan rhetoric is just an excuse for bigger government.

The bargain, which we call American Modernization Initiative…the federal government to assume the costs and administration of Medicaid and unemployment insurance, the states would have to agree to use freed up resources — a quarter of a trillion dollars per year — to invest in education and infrastructure. …The Grand Bargain is not only good policy, but good politics. …Governors would no longer be responsible for large programs… With the American Modernization Initiative, the constant, bitter battles over cutting state programs to fund growing Medicaid costs will disappear.

Yes, you read correctly. Their idea of a “bargain” is that the federal government agrees to spend more money so that that state governments will then have the ability to spend more money.

Even Republicans aren’t stupid enough to go along with that kind of deal.

So I’ll propose an alternative.

According to Chris Edwards, there are now nearly 1,400 programs involving some sort of link or overlap between the federal government and state governments.

The biggest of these programs is Medicaid, accounting for 56 percent of the overall spending.

So why not give the states a choice: They either take full responsibility for Medicaid – including the financing after some transition period. Or they take responsibility for the other 1,385 programs (probably more by now) programs – assuming, again, they are responsible for the financing after a transition period.

Regardless of their choice, the end result would be a system where there’s a reasonably significant shift toward federalism. And perhaps we would add a bit of clarity to the blurry line that currently sets the boundary between what’s Washington’s job and what’s the role of state governments.

And maybe, just maybe, there wouldn’t be as much wasteful leakage as we have now.

P.S. For what it’s worth, there’s strong academic evidence that decentralized governments produce better outcomes.

P.P.S. Federalism doesn’t only apply to income-redistribution programs. We also should eliminate any role for Washington in areas like education and transportation.

P.P.P.S. Here’s the data on the history of redistribution spending in developed nations.

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Should high-tax states such as California and New York get a bailout?

I explained last month why that would be a mistake, in large part because bailouts would reward states for irresponsible fiscal policy (similar to my argument that countries like Austria and the Netherlands shouldn’t be bullied into providing bailouts for Italy and Spain).

And I’ve shared two videos (here and here) for those who want more information about how bailouts encourage “moral hazard.” And this is true for banks (think TARP) as well as governments.

Today, though, I want to focus on some numbers that show what’s really causing fiscal problems in some states.

Adam Michel and David Ditch of the Heritage Foundation have generated some startling data on state government finances.

Instead of waiting on a handout from Washington, states should clear the way for a more robust economic recovery by addressing their unsustainable finances. States and local government spending has increased over the recent past… After adjusting for inflation and increases in population, state and local spending (in constant 2019 dollars) has grown from $5,596 per person in 2000 to $7,268 per person in 2019. That amounts to a 30% increase in the real cost of state and local government over just two decades, even without the thousands of dollars per person the federal government sends to states and localities through a wide variety of programs. …not all states spend equally. As of 2017, Florida, Georgia, and Arizona spent about $5,800 per person on state and local governments, but New York spent more than $11,700 per person.

The most important number is the above excerpt is that there’s been a 30 percent increase in per-capita state spending after adjusting for inflation.

That’s a very worrisome trend.

But not all states are created equal. Or, to be more precise, they’re not all equally profligate. Here’s the chart that starkly illustrates why some states are in trouble.

At the risk of understatement, California and New York have not complied with the Golden Rule for fiscal policy.

Needless to say, there’s no justification for the notion that taxpayers in well-run states such as Texas and Florida should be coerced into providing bailouts for politicians in poorly run states.

And now we have a compelling visual that settles the argument.

P.S. Over the past several years, I’ve done multiple columns comparing Texas and California and also several columns comparing New York and Florida, all of which underscore that blue states have created their own problems by taxing too much and spending too much.

P.P.S. Thankfully, people can vote with their feet by moving from high-tax states to low-tax states. Let’s hope that Congress doesn’t enact a bailout so they’re forced to subsidize the states that drove them away.

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Margaret Thatcher was the British version of Ronald Reagan, a leader who resuscitated a nation by rolling back the size and scope of government.

She also is famous for one of the most accurate observations ever made about fiscal policy.

Her warning proved prophetic when the Soviet Bloc collapsed.

Her wise words also could be applied to what happened about a decade ago in Greece. And what’s about to happen in Italy.

But let’s not forget that the United States isn’t immune to the problem of excessive government. The Wall Street Journal has a sobering editorial on the pro-spending sentiment that dominates the nation’s capital.

…in Washington the politicians are debating how to spend another few trillion dollars in the name of virus relief. …Mrs. Pelosi’s House bill promises another $3 trillion for her various constituencies on top of the $2.7 trillion or so Congress has already spent on the pandemic. The goal is income redistribution… This political strategy may work since Republicans, as usual, are divided and defensive. …Mr. Trump…seems torn about what to support and is thinking only as far as November. This is a recipe for another deal on Democratic terms… Sooner or later the pandemic will end. The question is what kind of economy will be left. A second Cares Act would leave a legacy of vastly larger government that would mean slower growth and take years to overcome.

Yes, the spending binge will mean slower growth.

But I’m even more worried about what will happen in the future. Here are three things to keep in mind.

  1. Largely because of Bush, Obama, and Trump, the federal budget has tripled since 1980 (Reagan and Clinton were comparatively frugal). Keep in mind that the increase in the accompanying chart shows the growth in spending after adjusting for inflation.
  2. The burden of federal spending is projected to skyrocket in future years because of the combination of demographic changes and poorly designed entitlement programs. In other words, our fiscal outlook is grim even if politicians don’t approve an additional penny of new spending.
  3. However, politicians are spending more money. A lot more.  As shown in the accompanying chart, this has caused a huge spike in per-capita outlays. And the crowd in Washington wants to make the red portion much bigger.

Given all this bad news, does Thatcher’s warning about running out “of other people’s money” apply to the United States?

As bad as the numbers are, my two cents is that the U.S. won’t suffer a fiscal crisis anytime soon. As I noted at the end of this interview, Washington can probably continue with business-as-usual fiscal policy for several more decades (Adam Smith observed that it usually takes a lot of bad policy over a long period of time to cause economic ruin).

But that doesn’t mean it’s a good idea to travel down that path.

Here’s an analogy. Smoking three packs of cigarettes a day presumably won’t kill someone within the first 10 years, but it’s definitely not a recipe for long-run health and vitality. Sooner or later, there will be consequences.

A mature and sensible people (like the Swiss) take steps to avoid the fiscal version of those bad consequences.

For what it’s worth, similar reforms have been proposed for the United States. Unfortunately, too many American politicians and consumed by self-interest and don’t think past the next election.

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The good news is that there will be a record reduction next year in the burden of government spending. Unfortunately, the bad news is that this reduction will only occur because of gigantic spending increases this year.

In this webinar, I explain how fiscal policy is being affected by coronavirus, and then explain why a spending cap is the way to restore fiscal sanity.

You can watch the full webinar, organized by Lebanon’s Modern University for Business and Science, by clicking here.

But if you don’t want to watch the entire event, or even my 11-minute presentation, all you really need to understand is that red ink is exploding this year. Not just in the United States, but in other nations as well.

The fiscal wreckage, as illustrated in this chart I shared for the audience, is greater than the world experienced during the financial crisis/great recession.

For what it’s worth, I wish the chart specified how much of the debt is caused by additional spending and how much is caused by declining tax revenues.

It’s also worth noting that these numbers will probably deteriorate even further over the next few months. Politicians are likely to approve more handouts and subsidies. And if there’s not a rapid economic recovery (I express doubt about that outcome in my remarks), tax revenue will continue to fall far short of baseline estimates.

The sad reality is that we don’t know the full degree of the coronavirus-caused fiscal wreckage. That being said, it’s safe to assume that – sooner or later – there will be a big debate in Washington over how to reverse the damage. And in other nations as well.

In my presentation, I explained why a Swiss-style spending cap is the right approach. In other words, simply impose a limit so that government grows slower than the private economy – i.e., fiscal policy’s Golden Rule.

I’d like to be able to specifically show how a spending cap would undo the current mess, but that’s not possible because we can only make wild guesses about the full extent of the fiscal fallout.

That being said, I’ll share two pieces of evidence to show the value of a spending cap.

First, here’s an estimate I prepared earlier this year to show how America’s fiscal situation would have been much stronger today if a spending cap had been imposed back in 2000.

Needless to say, it would have been nice if the U.S. had big surpluses when the coronavirus hit.

Our second piece of evidence is the experience of the U.S., France, and the U.K. in the decades before World War I.

All three nations had enormous debt burdens as a result of previous conflicts.

And all three countries dramatically reduced debt by using the same strategy of long-run spending restraint.

The bottom line is that spending restraint has worked in the past and it can work in the future.

Unfortunately, I doubt that either Donald Trump or Joe Biden is interested in that approach.

P.S. One thing we can say for certain is that responding with tax increases almost surely will make a bad situation even worse.

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I’ve explained the economics of taxation, which is based on the common-sense notion that you get less productive economic activity when taxes drive a bigger wedge between pre-tax income and post-tax consumption.

Simply stated, the more you tax of something, the less you get of it, and this applies to taxes on labor and taxes on capital.

Today, let’s examine some empirical evidence. I’ve done that before (see here, here, here, here, here, here, here, here, and here), but it’s always good to expand the collection.

Three Italian professors, in a new working paper for the Centre for Economic and International Studies, investigated the relationship between taxes and growth.

We’ll start with a description of the methodology.

In this paper, we revisit a traditional issue in the empirics of growth and economic policy: whether taxation has long-lasting effects on real GDP dynamics. …we focus on the impact that taxes may have on the rates of physical and human capital accumulation. …our main departure from the existing literature is the use of a semi-parametric technique, which allows for countries’ unobserved heterogeneity in the input effects on per capita GDP. …we test our model, using a sample of 21 OECD countries over the period 1965-2010.

Here are the key findings.

Our main finding is that taxation negatively affect per capita GDP growth rates, both directly and indirectly, via physical and human capital saving rates. …Our cross-country analysis makes a clear point on this, at least for our sample of OECD countries: on average, tax cuts produce a beneficial impact on GDP dynamics but of modest size. In our baseline specification, a cut by 10% in personal income tax rate generates an change in the real per capita GDP growth rate of +1% while a cut by 10% in corporate income tax rate increases the rate of growth of real per capita GDP by 0.9%. …The main message of our empirical exercise is that, across various samples and specifications, taxes are harmful for growth.

These are very strong results.

Though I find it very interesting that the authors say they are “of modest size.”

I guess that depends on expectations and perspective. I’ll simply repeat the point I made two years ago about the importance of even small increases in the long-run growth rate.

The bottom line is that future Americans would enjoy significantly greater prosperity with better tax policy.

That’s a desirable outcome at any point in time, and it’s even more important today as we consider how to recover from the economic wreckage caused by the coronavirus.

Interestingly, the study ends with some interesting estimates on the impact of lower tax rates on labor and capital.

Table 10 reports the results of a “what if”exercise, in which we compute the change in GDP growth rate generated by a ceteris paribus cut by 10 % in τw and τk.

And here is the aforementioned Table 10 (“τw” is the tax rate on labor and “τk” is the tax rate on capital).

There are two big takeaways from this research.

First, it’s further evidence that Trump’s tax reform, which lowered the corporate tax rate from 35 percent to 21 percent, was a very good step for the American economy.

Second, it’s further evidence that it’s a big mistake for Biden and other folks on the left to push for higher tax rates, including big increases in tax rates on personal income.

P.S. Just in case those last two sentences sound overly favorable to Trump, I’ll remind people that reckless spending increases – sooner or later – will lead to punitive tax increases. In other words, if Biden wins and there are big tax hikes, Trump will deserve some of the blame (just as Bush’s irresponsible policies set the stage for some of Obama’s irresponsible policies).

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I’ve warned that the budgetary impact of the coronavirus may trigger another fiscal crisis in Europe.

Especially Italy.

But what about the United States? Will we reach a point, as Margaret Thatcher famously warned, of running out of other people’s money?

We probably still have a couple of decades before that happens, as I speculated at the end of a recent interview, but that doesn’t mean we should continue down our current path.

The Wall Street Journal opined on this topic yesterday, citing newly released estimates from the Congressional Budget Office.

Friday’s Congressional Budget Office report on the federal fisc for April…usually a surplus month as tax payments roll in, but the Treasury postponed tax day this year until July 15. We are grateful for such small government favors. Spending more than doubled in April from the year before and revenue fell by 55%. …we are all apparently supposed to be converts to Modern Monetary Theory. This is the view that governments can spend whatever they like because the Federal Reserve can monetize it without economic harm. We may get to test this proposition. …the damage from so much spending will come in two ways. First, in resources misallocated to government rather than into private hands to invest. Second, in the tax increases that the political class will eventually impose, perhaps starting as early as 2021.

As is so often the case, the WSJ is correct in its analysis.

The fiscal crisis won’t be too much red ink. That’s merely the symptom of the real disease, which is that government is getting far too big.

As the editorial warns, this undermines prosperity because resources get diverted from the economy’s productive sector.

And as that spending burden increases, it means more and more pressure for tax increases, which further penalize growth. I’ve already noted that politicians will try to exploit the crisis by imposing a wealth tax, but I think the real prize – in the mind of statists – is a money-gobbling value-added tax.

I’ll close by sharing a chart from Brian Riedl of the Manhattan Institute, which estimates the per-capita burden of inflation-adjusted federal spending in the United States.

The red portion of the chart is coronavirus-related spending, plus future interest payments on the additional borrowing for all that spending, and the blue portion is spending in prior years plus estimates of future spending (already on an upward trajectory because of poorly designed entitlement programs).

That chart does not paint a pretty picture, but Brian’s numbers may be too optimistic. He assumes that the coronavirus-related emergency spending is just temporary and that additional interest on a bigger debt is the only long-run impact.

But if politicians make some of that spending permanent (which will be in their self-interest), then we’ll be traveling even faster in the wrong direction.

All the more reason to impose a spending cap, which is the only major fiscal reform with a track record of success.

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I’m not an optimist about Europe’s economic future.

Most nations have excessive welfare states and punitive taxes, which is hardly good news. You then have to consider demographic trends such as aging populations (i.e., more people relying on government) and falling birthrates (i.e., fewer future taxpayers).

That’s a very grim combination.

Indeed, this is a big reason why I favored Brexit. Yes, it was largely about escaping an increasingly dirigiste European bureaucracy in Brussels, but it was also about not being chained to a continent with a dismal long-run outlook.

More than one year ago, before there were any concerns about a coronavirus-instigated economic crisis, Vijay Victor, an economist from Szent Istvan University in Hungary, expressed concern about Europe’s fiscal future in a column for the Foundation for Economic Education.

The debt crisis in the Eurozone is getting no better, even in the wake of the new year. The five countries in the Eurozone with the highest debt-to-GDP ratio in the third quarter of 2018 were Greece, Italy, Portugal, Belgium, and Spain. The total debt of Greece is around 182.2 percent of its GDP and that of Italy is 133 percent… Dawdling economic growth coupled with low-yield investment options are dragging these indebted economies toward insolvency… Unemployment rates, for example, are still very high in most of these highly indebted European economies. Despite the recurrent monetary assistance and policy support, job creation is weak, which might imply that the debt financing is channelized in a nonproductive direction.

By the way, I can’t resist taking this opportunity to remind people that debt is a problem, but it also should be viewed as a symptom of en even-bigger problem, which is an excessive burden of government spending.

A bloated welfare state is a drag on economic performance, whether it’s financed by borrowing or taxes.

Though nations that try to finance big government with red ink eventually spend their way into crisis (as defined by potential default).

And we may be reaching that point.

Desmond Lachman of the American Enterprise has authored a very grim assessment, focusing primarily on Italy, for the National Interest.

Today, with Italy at the epicenter of the world coronavirus epidemic, it would seem to be only a matter of time before the durability of the Euro is again tested by another full-blown Italian sovereign debt crisis. …even before the coronavirus epidemic struck its economy was weak while its public finances and banking system were in a state of poor health. After having experienced virtually no economic growth over the past decade, the Italian economy again entered into a recession by end-2019. At the same time, at 135 percent its public debt to GDP ratio was higher than it was in 2012 while its banks’ balance sheets remained clogged with non-performing loans and Italian government bonds. …the coronavirus epidemic will seriously damage both Italy’s public finances and its banking system…by throwing the country into its deepest economic recession in the post-war period. That in turn is bound to cause Italy’s budget deficit to balloon and its banking system’s non-performing loans to skyrocket as more of its households and companies file for bankruptcy. …all too likely that the Italian economy will shrink by at least 10 percent in 2020.

All this matters because the people and institutions that purchase government debt may decide that Italy’s outlook is so grim that they will be very reluctant to buy the country’s bonds (i.e., they’ll be very hesitant about lending money to the Italian government because of a concern that they won’t get paid back).

This means that the Italian government will have to pay much higher interest rates in order to compensate lenders for the risk of a potential default.

So what are the implications? Will Italy default, or will there be some sort of bailout?

If the latter, Lachman predicts it will be huge.

One way to gauge the amount of public money that might be needed to prop up Italy is to consider that over the past decade it took around US$300 billion in official support to keep Greece in the Euro. Given that the Italian economy is around ten times the size of that of Greece, this would suggest that Italy might very well need around $3 trillion in official support to keep Italy in the Euro. …Meanwhile, Italy’s US$4 trillion banking system could very well need at least US$1 trillion in official support to counter the capital flight and the spike in non-performing loans that are all too likely to occur in the event of a deep Italian recession.

For what it’s worth, Lachman thinks a bailout would be desirable.

I disagree. Default is a better choice because it will discipline the Italian government (it would mean an overnight balanced budget requirement since nobody will lend money to the government) and also discipline foolish lenders who thought Italian politicians were a good bet.

Simply stated, we should minimize moral hazard.

I also think it’s worth noting that Italy isn’t the only government at risk of fiscal crisis. Here’s the OECD data for major nations, including a few non-European examples.

Japan wins the prize for the most red ink, though this doesn’t mean Japan is most vulnerable to a default, at least in the short run.

A fiscal crisis is driven by investor sentiment (i.e., when will people and institutions decide they no longer trust a government to pay back loans). And that depends on a range of factors, including trust.

The bottom line is that investors trust the Japanese government and they don’t trust the Italian government.

That being said, I think all of the PIGS (Portugal, Italy, Greece, and Spain) are very vulnerable.

And politicians in Ireland, Belgium, and France should be nervous as well.

I’ll close by sharing some calculations, based on the aforementioned OECD data, showing which nations used last decade’s economic recovery to improve their balance sheets.

Congratulations to Germany and Switzerland for fiscal responsibility, and mild applause for the Netherlands and Sweden.

I’ve highlighted (in red) the nations that were most reckless.

Though keep in mind that you want to look at both the trend for debt (far-right column) and the existing level of debt (the next-to-far-right column). So I’m not overly worried about Australia. Debt is still comparatively low, even though it almost doubled last decade.

But all of the PIGS are in trouble.

So if economic conditions deteriorate in Europe, the fallout could be significant.

P.S. The United Kingdom, like Japan, benefits from a high level of trust – presumably in part because the country paid off enormous debts from the Napoleonic wars and World War II. That being said, the numbers for the U.K. are worrisome, which hopefully will lead to a renewed commitment to spending restraint by Boris Johnson’s government.

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The race for the Democratic nomination is very depressing. All the candidates – even supposed moderates such as Biden and Buttigieg – are openly advocating a much bigger burden of government.

I’m hoping some of their proposals are simply election-year pandering, that they really don’t believe in statism, and that they would be reasonable if they got to the White House.

We got a good bit of economic liberalization under Bill Clinton, for instance, even though he didn’t campaign as any sort of libertarian.

Some people speculate that Michael Bloomberg, the former New York City mayor, might be this year’s closet moderate. A few people have even sent me this CNN article as proof of his underlying rationality.

…when he was mayor of New York City, Bloomberg twice compared Social Security to a “Ponzi scheme” and repeatedly said cuts to that program as well as Medicare and Medicaid had to be part of any serious solution to reducing the federal deficit. …if there’s ever a Ponzi scheme, people say Madoff was the biggest? Wrong. Social Security is, far and away,” Bloomberg said in a January 2009 appearance… “We are giving monies out with the next guy’s money coming in and at the end of — when the music stops — it’s just not gonna be enough chairs for everybody,” Bloomberg said. …Bloomberg’s past comments are at odds with the mainstream positions within the Democratic Party. …During other radio appearances, Bloomberg called for passing Simpson-Bowles, the deficit cutting plan named after former Wyoming Republican Sen. Alan Simpson and former Clinton White House chief of staff Erskine Bowles.

I have mixed feelings after reading that article.

The good news is that Bloomberg at one point was semi-rational about entitlements.

  • He understood Social Security is a Ponzi scheme, meaning that the system is only made possible by having new people enter the scheme to finance promises made to people who joined earlier.
  • He recognized that some sort of corrective action was needed on entitlements because of enormous unfunded promises, driven by demographic change and poorly designed programs.

The bad news is that Bloomberg never supported the right policies that would address both Social Security’s gigantic fiscal shortfall and the fact that the program is a really bad deal for younger workers. Instead, he supported plans such as Simpson-Bowles that would merely make people pay more to get less.

The worst news is that Bloomberg has abandoned his semi-rational view and is now urging higher taxes and program expansions. He’s presumably not as bad as some of the other candidates, but that’s damning with faint praise.

Here’s a simple way of thinking about Social Security. First, are people actually connected to reality? Do they understand math and demographics? If yes, they’re on the rational (left) side of this 2×2 matrix.

But even if people are rational and recognize there’s a problem, do they support the right type of reform (top half), which is personal retirement accounts?

As you can see, Bloomberg used to be in the bottom-left quadrant, which is bad but rational. Now he’s in the bottom-right quadrant, which is bad and irrational.

A politician who is good and rational will be in top-left quadrant.

P.S. Social Security technically isn’t a Ponzi scheme. That’s because people have the freedom to reject a con artist peddling a pyramid scam. With Social Security, by contrast, participants are legally required to be part of the scheme.

P.P.S. The logical assumption is that the top-right quadrant is empty other than a question mark. After all, any politicians who supports good policy presumably would also recognize there’s a problem. That being said, Trump could be the exception. He doesn’t think we have an entitlement problem, so he obviously belongs on the right side of the matrix. But if he decided to support individual accounts (Trump is very inconsistent on policy, but that does mean he is good on some issues), he could replace the question mark.

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This video from the Center for Freedom and Prosperity is nearly 10 years old, so some of the numbers are outdated, but the seven reasons to reject tax increases are still very relevant.

I’m recycling the video because the battle over tax increases is becoming more heated.

Indeed, depending on what happens in November, we may be fighting against major tax-hike proposals in less than one year.

Every single candidate seeking the Democratic nomination (such as Joe Biden, Bernie Sanders, Elizabeth Warren, Michael Bloomberg, Pete Buttigieg, etc) wants Washington to have much more of our money.

And there are plenty of cheerleaders for a bigger welfare state who favor this outcome. Some of them urge class-warfare tax increases. Other admit that lower-income and middle-class people will need to be pillaged to finance bigger government.

The one unifying principle on the left, as illustrated by this column for The Week by Paul Waldman, is the belief that Americans are under-taxed.

…as an American, when it comes to taxes you’ve got it easy. …we pay much lower taxes than most of our peer countries. In the United States, our tax-to-GDP ratio is about 26 percent, far below the 34 percent average of the advanced economies in the Organisation for Economic Co-operation and Development (OECD), and drastically less than some European countries (Denmark tops the list at 46 percent). …We have chosen — whether we did it consciously or not — to create a system that makes it easier for a small number of people to get super-rich, but also makes life more cruel and difficult for everyone else. …We could all pay more, and in return get more from government than we’re getting now. We just have to decide to do it.

This is a very weak argument since a cursory investigation quickly reveals that Americans have much higher living standards than people in other developed nations.

That’s a good thing, not a “cruel and difficult” consequence, though I’m not surprised that folks on the left are impervious to real-world evidence.

However, I am surprised when otherwise sensible people throw in the towel and say it’s time to surrender on the issue of taxes.

The latest example is James Capretta of the American Enterprise Institute.

Here’s some of what he wrote on the topic.

…the GOP commitment, implied and explicit at the same time, to never, ever support a net tax increase, under any circumstance, is making sensible lawmaking far more difficult than it should be. It’s time to break free of this counterproductive constraint. …The no tax hike position got its start in the 1986 tax reform effort. Several business and policy advocacy organizations began asking members of the House and Senate, as well as candidates for seats in those chambers, to sign a pledge opposing a net increase in income tax rates. …The pledge became politically salient in 1992, when then President George H.W. Bush lost his bid for reelection. His loss is widely assumed to have been caused, at least in part, by his acceptance of a large tax hike…after having pledged never to increase taxes… Retaining the GOP’s absolutist position on taxes might be defensible if the party were advancing an agenda that demonstrated it could govern responsibly without new revenue. Unfortunately, Republicans have proved beyond all doubt that they have no such agenda. In fact, the party has gladly gone along with successive bipartisan deals that increased federal spending by hundreds of billions.

For what it’s worth, I don’t think Jim is theoretically wrong.

Heck, even I offered up three scenarios where a tax increase could be an acceptable price in order to achieve much-needed spending reforms. And I’ll even add a fourth scenario by admitting that I would trade a modest tax increase for a Swiss-style spending cap.

But every one of my options is a meaningless fantasy.

In the real world, those acceptable scenarios are not part of the discussion. Instead, two very bad things inevitably happen when tax increases are on the table.

  1. The automatic default assumption is that tax increases should be 50 percent of any budget deal. That’s bad news, but the worse news is that the other 50 percent of the budget deal isn’t even genuine spending cuts. Instead, all we get is reductions (often illusory or transitory) in previously planned increases. The net result is bigger government (and it’s even worse in Europe!). This is why every budget deal in recent history has backfired – except the one that cut taxes in 1997.
  2. Budget deals result in the worst types of tax increases for the simple reason that budget deals get judged by their impact on “distribution tables.” And since the make-believe spending cuts ostensibly will reduce benefits for lower-income and middle-class people, the crowd in Washington demands that the tax increases should target investors, entrepreneurs, business owners, and others with above-average incomes. Yet these are the tax hikes that disproportionately hinder growth.

The bottom line is that tax increases should be a no-go zone. If Washington gets more of our money, that will “feed the beast.”

At the risk of under-statement, Grover Norquist’s no-tax-hike pledge is good policy (and good politics for the GOP). Americans for Tax Reform should double down in its opposition to tax increases.

P.S. I’ve shared five previous “Fiscal Fights with Friends”:

  • In Part I, I defended the flat tax, which had been criticized by Reihan Salam
  • In Part II, I explained why I thought a comprehensive fiscal package from the American Enterprise Institute was too timid.
  • In Part III, I disagreed with Jerry Taylor’s argument for a carbon tax.
  • In Part IV, I highlighted reasons why conservatives should reject a federal program for paid parental leave.
  • In Part V, I warned that “Hauser’s Law” would not protect America from higher taxes and bigger government.

P.P.S. There’s great wisdom on tax policy from these four presidents.

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Back in 2012, when America had a budget deficit above $1 trillion, Investor’s Business Daily opined that America’s fiscal mess could have been avoided if politicians had simply adopted a TABOR-style spending cap starting in 1998.

As illustrated by the accompanying chart, IBD showed how a giant deficit would have become very manageable if politicians simply limited spending so it grew no faster than population plus inflation.

What makes this alternative history so bittersweet is that there are places – such as Switzerland and Hong Kong – that already have successful spending caps that deliver positive results.

Indeed, spending caps have such a good track record that even left-leaning international bureaucracies like the International Monetary Fund and the Organization for Economic Cooperation and Development have acknowledged that they are the most effective fiscal rule.

To understand the benefits of spending caps, especially since we’re now back in an environment of $1 trillion-plus deficits, let’s replicate the IBD exercise.

Here’s a chart showing actual spending (orange line) and revenue (blue line) over the past 20 years, along with what would have happened to spending with a 3-percent cap on annual spending increases (grey line).

The net result is that today’s $1 trillion surplus would be a budget surplus of nearly $500 billion.

More important, the burden of spending today would be much lower, which means more resources being allocated by the productive sector of the economy. And that would mean more jobs and more prosperity.

P.S. While a spending cap is simple and effective, that doesn’t mean it’s easy. Abiding by a cap would force politicians to set priorities, which is a constraint they don’t like. In the long run, complying with a cap also would require some much-need entitlement reform, which also won’t be popular with the interest groups that control Washington.

P.P.S. We would need a spending cap of 1.7 percent to balance the budget over the next 10 years.

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Trump’s new budget was released yesterday and almost every media outlet wrote about supposed multi-trillion dollar spending cuts when, in reality, the President’s budget actually calls for nearly $2 trillion of additional spending over the next 10 years.

The bottom line is that Trump is more akin to a big-government Republican rather than a Reagan-style conservative.

Today, let’s take a look at Table 3.2 of the Historical Tables of the Budget to assess how Trump’s record on spending compares to other modern presidents.

I’ve done this exercise in the past, starting in 2012 and most recently in 2017, but this is the first year we have enough data to include Trump’s performance.

And if we simply look at overall spending numbers (adjusted for inflation, of course), we get the shocking result that Obama increased spending at the slowest rate.

This surprising outcome is due in part to factors such as falling interest rates, a slowdown in military expenditures, and the fiscal impact of the 2010 elections (in other words, gridlock can be beneficial).

Trump, meanwhile, is near the bottom of the list (though not as bad as George W. Bush and LBJ).

What happens, though, if we remove interest payments from the data? After all, those outlays truly are uncontrollable (barring a default) and they mostly reflect spending decisions of prior administrations.

So if we want to judge a president’s fiscal policy, we should look at “primary spending,” which is the term used by budget geeks when looking at non-interest spending.

This measure doesn’t radically alter the results, but some presidents wind up looking better and others fall.

Another way of looking at the numbers is to remove the fiscal impact of bailouts, such as TARP (and also the savings & loan bailouts of the late 1980s).

The reason for this alteration is that the bailouts cause a big spike in spending when they occur, and then cause a drop afterwards because repayments actually are considered “negative spending,” as are the premiums that banks pay each year (I’m not kidding).

So presidents who are in office when the bailouts occur wind up looking worse, even though their policies may not have contributed to the problem. And the presidents who are in office when the repayments occur (remember, those count as negative spending) wind up looking better than they really are.

Here are the adjusted rankings (calculated by subtracting rows 46, 50, and 51 of Table 3.2). As you can see, Obama takes a bit of a tumble and Reagan is now the most fiscally prudent president.

Last but not least, now let’s also remove defense spending so we can see which presidents did the best (and the worst) when it comes to social welfare spending.

This is the most important category for those of us who believe the federal government should get out of the business of income redistribution and social insurance.

Reagan easily tops the list, limiting outlays to 0.5 percent annual growth. The other thing that’s remarkable is that every other Republican was worse than Bill Clinton, Jimmy Carter, and Barack Obama.

For what it’s worth, Trump is the best of the non-Reagan Republicans, though that is damning with very faint praise.

The first President Bush was awful on spending, and Nixon was catastrophically terrible.

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I would prefer not to write about President Trump’s new budget, largely because I know it’s not a serious proposal.

Even before he was elected, I pointed out that Trump was a big-government Republican who had no intention of dealing with serious fiscal issues such as the rising burden of entitlement spending.

So I wasn’t surprised that he capitulated to swamp-friendly budget deals in 2017, 2018, and 2019. And I’m depressingly confident that the same thing will happen this year.

That being said, I want to comment on how the media is covering his latest budget.

Take a look at some of the headlines that are dominating the news this morning.

From Reuters.

From New York magazine.

From the Washington Times.

From NBC.

From the Associated Press.

From Bloomberg.

From International Business Times.

From Fox.

From the Wall Street Journal.

All of these headlines make is seem like Trump is proposing a Reagan-style budget with lots of cuts, especially with regards to domestic programs.

All of that would be great news…if it was true.

In reality, here’s what Trump is projecting for total spending over the next 10 years.

Can you find the spending cuts?

And here’s what’s happening with domestic spending (mandatory outlays plus domestic discretionary) according to Trump’s budget.

Can you find the spending cuts?

Last but not least, here’s Trump’s plan for domestic discretionary spending.

Can you find the spending cuts?

So why is there such a big disconnect in the media? Why are there headlines about cutting and slashing when government is growing by every possible measure?

For the simple reason that the budget process in Washington is pervasively dishonest, as I’ve explained in interviews with John Stossel and Judge Napolitano. Here are the three things you need to know.

  1. The politicians created a system that automatically assumes big increases in annual spending, called a baseline.
  2. When there’s a proposal to have spending grow slower than the baseline, the gap between the proposal and the baseline is called a cut.
  3. It’s like being on a diet and claiming progress because you’re gaining two pounds each month rather than five pounds.

Defenders of this system argue that programs should get built-in increases because of things such as inflation, or because of more old people, which leads to more spending for programs such as Social Security and Medicare.

It’s certainly reasonable for them to argue that budgets should increase for these reasons.

But they should be honest. Be forthright and assert that “Spending should climb X percent because…”

Needless to say, that won’t happen. The pro-spending politicians and interest groups like the current approach because it allows them to scare voters by warning about “savage” and “draconian” spending cuts.

Remember how Obama said the sequester would wreak havoc because of massive cuts? Except there weren’t any cuts, massive or otherwise. As Thomas Sowell pointed out, Obama was trying to deceive voters.

P.S. The British also use dishonest budgeting.

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One of the most significant developments in 2020 politics is how Democratic presidential candidates have embraced hard-left economic policies.

Prominent analysts on the left have noted that even Joe Biden, ostensibly the most moderate of the candidates, has a very statist economic platform when compared to Barack Obama.

And “Crazy Bernie” and “Looney Liz” have made radicalism a central tenet of their campaigns.

So where does Michael Bloomberg, the former mayor of New York City, fit on the spectrum?

The New York Times has a report on Bloomberg’s tax plan. Here are some of the key provisions, all of which target investors, entrepreneurs, small business owners, and other high-income taxpayers.

Former Mayor Michael R. Bloomberg of New York unveiled a plan on Saturday that would raise an estimated $5 trillion in new tax revenue… The proposal includes a repeal of President Trump’s 2017 tax cuts for high earners, along with a new 5 percent “surcharge” on incomes above $5 million per year. It would raise capital gains taxes for Americans earning more than $1 million a year and…it would partially repeal Mr. Trump’s income tax cuts for corporations, raising their rate to 28 percent from 21 percent. …Mr. Bloomberg’s advisers estimate his increases would add up to $5 trillion of new taxes spread over the course of a decade, in order to finance new spending on health care, housing, infrastructure and other initiatives. That amount is nearly 50 percent larger than the tax increases proposed by the most fiscally moderate front-runner in the race, former Vice President Joseph R. Biden Jr. …Mr. Bloomberg’s advisers said it was possible that he would propose additional measures to raise even more revenue, depending on how his other domestic spending plans develop.

These are all terrible proposals. And you can see even more grim details at Bloomberg’s campaign website.

Every provision will penalize productive behavior.

But there is a bit of good news.

Though it would be more accurate to say that there’s a partial absence of additional bad news.

Bloomberg hasn’t embraced some of the additional bad ideas being pushed by other Democratic candidates.

It would…maintain a limit on federal deductions of state and local tax payments set under the 2017 law, which some Democrats have pushed to eliminate. …the plan notably does not endorse the so-called wealth tax favored by several of the more liberal candidates in the race, like Senators Elizabeth Warren and Bernie Sanders.

I’m definitely happy he hasn’t embraced a wealth tax, and it’s also good news that he doesn’t want to restore the state and local tax deduction, which encouraged profligacy in states such as California, New Jersey, and Illinois.

It also appears he doesn’t want to tax unrealized capital gains, which is another awful idea embraced by many of the other candidates.

But an absence of some bad policies isn’t the same as a good policy.

And if you peruse his website, you’ll notice there isn’t a single tax cut or pro-growth proposal. It’s a taxapalooza, what you expect from a France-based bureaucracy, not from an American businessman.

To add insult to injury, Bloomberg wants all these taxes to finance an expansion in the burden of government spending.

For what it’s worth, this is my estimate of what will happen to America’s tax burden (based on the latest government data) if Bloomberg is elected and he successfully imposes all his proposed tax increases. We’ll have a more punitive tax system that extracts a much greater share of people’s money.

P.S Take these numbers with a grain of salt because they assume that Bloomberg’s tax increases will actually collect $5 trillion of revenue (which won’t happen because of the Laffer Curve) and that GDP won’t be adversely affected (which isn’t true because there will be much higher penalties on productive behavior).

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Is Greece the international version of New Jersey or is New Jersey the American version of Greece?

Is New Jersey the national version of Chicago, or is Chicago the the local version of New Jersey?

The answer is yes, regardless of how the question is phrased because – in all cases – we’re talking about examples of how politicians (and short-sighted voters) create “Goldfish Government.”

Let’s examine Chicago to see how this process works.

The Washington Post noted early last year that the new mayor was going to face an enormous fiscal challenge because of the reckless choices made by previous generations of politicians.

The city has been underfunding its pensions for decades, with dire results. Chicago’s pension plans collectively have only about a quarter of the assets they’ll need to pay benefits, one of the worst funding ratios in the nation. To put that hole in dollar terms, Chicago is about $28 billion short of what it needs, even under relatively favorable assumptions about future returns, or about $10,000 for every man, woman and child living in the city. …radical surgery still needed. Within a few years, pension contributions are projected to suck up more than 20 percent of the city’s budget. And Chicago can’t count on much help from the state, which is dealing with its own, equally severe case of pension underfunding. …what’s happening in Illinois is merely the earliest and most extreme manifestation of a quandary that will soon be dominating the public conversation in many states: how to pay for retirement promises to public employees without entering a fiscal death spiral. …shoddy accounting allowed generations of politicians all over the country to curry favor with public-sector workers by offering them ever-fatter pension packages, gaining immediate benefit while deferring the political cost of paying for all those benefits until much later. Later is now arriving. …Chicago has been losing lower- and middle-class residents for years, in part because of its heavily regressive tax burden. And when Chicago and Illinois both start raising the rates on upper earners — as they will have to, and soon — they run the risk that those people ,too, will start trickling away, either to smaller cities without the burdensome pension-legacy costs.

Megan McArdle pointed out that Chicago is a mess because of “public choice” – i.e., politicians make short-sighted and irresponsible decisions in order to maximize votes and power.

Throw in a recession sometime in the next couple of years, and Chicago is going to be in a full-blown crisis. …it’s the fault of generations of politicians before them who promised an ever-richer array of benefits to government workers. Particularly, they liked to raise the retirement benefits. …The whole point of giving workers pension benefits instead of cash was that you didn’t have to pay for them; you could promise the benefits now and gather up the votes that the grateful workers tossed at your feet, all without costing current taxpayers a single dime. …Future taxpayers mostly weren’t voting in 1982 municipal elections. …Chicagoans, welcome to “later.” The municipal pensions only have about 25 percent of the assets they’ll need to cover projected benefits, a shortfall of roughly $28 billion. …If you use a more cautious method, you come up with a shortfall of more than $40 billion. …Moody’s Investors Service rates the city’s general obligation debt as junk bonds. …Chicago is now approaching the point where the growth of its obligations will outpace the growth of any possible revenue stream it might use to cover them. It’s a few steps from there to municipal bankruptcy.

Unsurprisingly, Chicago’s relatively new mayor wants to keep the scam going.

As reported by the Chicago Tribune, she wants to extract more money from taxpayers.

Chicago Mayor Lori Lightfoot…said there’s “no question” residents will need to pay more in taxes or fees to plug a looming city budget shortfall… “There’s no question we’re going to have to come to the taxpayers and ask for additional revenue.” …Lightfoot did not specify what sort of revenue she expects to raise — whether it would come in the form of new taxes, a property tax hike or increased fees. …referring to her campaign promise to seek cuts before asking taxpayers for more money, Lightfoot added, “I meant what I said on the course of the campaign: We have a lot of hard choices we’re going to have to make regarding city finances.”

Like previous mayors, she’s buying votes with other people’s money.

The Wall Street Journal opined last year about her surrender to the teacher unions (a Chicago tradition, as illustrated by the adjacent cartoon by Lisa Benson).

Except it wasn’t really a surrender since she was already on their side (as perfectly captured by this Ramirez cartoon).

So the net result is a combination of bad fiscal policy and bad education policy.

Chicago Mayor Lori Lightfoot and the Chicago Teachers Union on Thursday struck an agreement to end an 11-day strike, and by the looks of it the union was bargaining with itself. The mayor is touting the new contract as the most generous in Chicago history, and she’s right. …The new contract includes a 16% raise over five years (not including raises based on longevity), a three-year freeze on health insurance premiums, lower copays, …and more than 450 new social workers and nurses. …you can bet it will be expensive. Last week the mayor proposed a slew of tax increases including levies on ride-hailing services and restaurant meals. This week her staff suggested that property taxes may have to increase . . . again. Michelle Obama the other day complained that white people were leaving the city to escape minorities who are moving in. No, they’re fleeing Chicago’s high taxes and lousy schools—and so are minorities.

This story from Reason is a powerful (and nauseating) example of how a money-hungry city is making life miserable for ordinary people.

Chicago police pulled Spencer Byrd over for a broken turn signal. Byrd says his signal wasn’t broken, but that detail would soon be the least of his worries. …Byrd was giving a client, a man he says he had never met before, a ride… Police pulled both of them out of the car and searched them. Byrd was clean, but in his passenger’s pocket was a bag of heroin… Police released Byrd after a short stint in an interrogation room without charging him with a crime. But when Byrd went to retrieve his car, he found out the Chicago Police Department had seized and impounded it. …The program impounds cars when the owner beats a criminal case or isn’t charged with a crime in the first place. It impounds cars even when the owner isn’t even driving, like when a child is borrowing a parent’s car. …Byrd calls his car his “livelihood,” and he has been fighting for close to two years now to recover it. He says he has $3,500-worth of tools locked in the trunk, and he can’t retrieve them. …Like tens of thousands of other Chicagoans, Byrd was a victim of years of the city’s fiscal negligence. …to try and nickel-and-dime…out of these massive budget gaps. …The result is a uniquely punitive impound system, in which Chicago profits off restricting the ability of its residents to drive.

Amazingly, Chicago’s politicians want to dig an even deeper hole.

The Wall Street Journal has a new editorial examining a scheme to borrow even more money in hopes of keeping the gravy train rolling.

Chicago has been seeking to take advantage of historically low interest rates by refinancing debt—even as its credit rating has deteriorated amid swelling budget deficits and pension payments. …In 2017 state and city politicians contrived a shell scheme to lower the city’s borrowing costs. The city essentially sold off sales-tax revenue that it receives from the state to a corporation specially created to pay creditors. …Voila, Chicago’s financial magicians spun junk into gold. …Chicago’s budget woes are mounting, and financial alchemists are diluting the claims of existing creditors. If the city were to renege on its $8 billion in GO debt, those bondholders would surely demand a slice of the sales-tax revenue now pledged to other creditors. This is what happened in Puerto Rico. …Chicago’s population has declined for each of the past four years, and taxpayers are getting tapped out. On top of a $50 million increase in property taxes this year, Mayor Lori Lightfoot has imposed a new “congestion” fee on Uber and taxi rides, doubled the tax on restaurant meals, and raised a special personal property tax on computer cloud software. Yet a recession would probably blow a gigantic hole in its budget and could cause its pension funds to run dry. Does anyone think that city politicians wouldn’t prioritize public workers over bondholders?

So when will this house of cards collapse?

I have no idea. There’s a famous quote from the late economist Rudiger Dornbusch, who observed that, “In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could.”

The people buying bonds from Chicago are betting that the collapse won’t happen in the near future.

But that was the same mentality of the people who bought Greek bonds in, say, 2005.

I’ll simply observe that what’s happening in Chicago is confirmation of my “First Theorem of Government.”

And I’ll also make an easy prediction that the people buying Chicago bonds will want a bailout when the you-know-what hits the fan.

Needless to say, the answer should be a resounding no.

P.S. If you want to know all my Theorems of Government, click here.

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When the Congressional Budget Office released its Budget and Economic Outlook yesterday, almost everyone in Washington foolishly fixated on the estimate of $1 trillion-plus annual deficits.

What’s far more important – and much more worrisome – is that the burden of government spending is projected to relentlessly increase, violating the Golden Rule of fiscal policy.

More specifically, the federal budget currently is consuming 21 percent of gross domestic product, but will consume 23.4 percent of economic output in 2030 if fiscal policy is left on autopilot.

Here is a chart, based on CBO’s new data, that shows why we should be very concerned.

By the way, last year’s long-run forecast from CBO shows the problem will get even worse in the following decades, especially if there isn’t genuine entitlement reform.

We’re in trouble today because government has been growing too fast, and we’ll be in bigger trouble in the future for the same reason.

But the situation is not hopeless. The problem can be fixed with some long-overdue and much-needed spending restraint.

We don’t even need to cut spending, though that would be very desirable.

As this next chart illustrates, our budgetary problems can be solved if there’s some sort of spending cap.

The grey line shows the current projection for federal spending and the orange line shows how much tax revenue Washington expects to collect (assuming the Trump tax cut is made permanent). There’s a big gap between those two lines (the $1 trillion-plus deficits everyone else is worried about).

My contribution to the discussion is to show we can have a budget surplus by 2028 if spending only grows by 1 percent annually and we can balance the budget by 2030 if spending grows by 1.7 percent per year.

Needless to say, I’m not fixated on balancing the budget and eliminating red ink.

The real goal is to change budgetary trend lines with a spending cap so that the fiscal burden of government begins to shrink as a share of the nation’s economy.

The bottom line is that modest spending restraint (government growing at 1.7 percent annually, nearly as fast as projected inflation) would slowly but surely achieve that goal by gradually reversing the big-government policies of Bush, Obama, and Trump.

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About 10 years ago, the Center for Freedom and Prosperity released this video to explain that America’s real fiscal problem is too much spending and that red ink is best viewed as a symptom of that problem.

I wrote a primer on this issue two years ago, but I want to revisit the topic because I’m increasingly irked when I see people – over and over again – mistakenly assume that “deficit neutrality” or “budget neutrality” is the same thing as good fiscal policy.

  • For instance, advocates of a carbon tax want to use the new revenues to finance bigger government. Their approach (at least in theory) would not increase the deficit. Regardless, that’s a plan to increase to overall burden of government, which is not sound fiscal policy.
  • Just two days ago, I noted that Mayor Buttigieg wants the federal government to spend more money on health programs and is proposing an even-greater amount of new taxes. That’s a plan to increase the overall burden of government, which is not sound fiscal policy.
  • Back in 2016, a columnist for the Washington Post argued Hillary Clinton was a fiscal conservative because her proposals for new taxes were larger than her proposals for new spending. That was a plan to increase the overall burden of government, which is not sound fiscal policy.
  • And in 2011, Bruce Bartlett argued that Obama was a “moderate conservative” because his didn’t raises taxes and spending as much as some on the left wanted him to. Regardless, he still increased the overall burden of government, which is not sound fiscal policy.

To help make this point clear, I’ve created a simple 2×2 matrix and inserted some examples for purposes of illustration.

At the risk of stating the obvious, good fiscal policy is in the top-left quadrant and bad fiscal policy is in the bottom-two quadrants.

Because of “public choice,” there are no real-world examples in the top-right quadrant. Why would politicians collect extra taxes, after all, if they weren’t planning to use the money to buy votes?

P.S. In 2012, I created a table showing the differences on fiscal policy between supply-siders, Keynesians, the IMF, and libertarians.

P.P.S. I also recommend Milton Friedman’s 2×2 matrix on spending and incentives.

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I’m part of the small minority that thinks the big news from the United Kingdom is that “Brexit” will finally happen, thanks to Boris Johnson’s landslide victory last month.

Most everyone else seems more focused on the latest development with the royal family. The Duke and Duchess of Sussex, better known as Harry and Meghan, have decided to partially extricate themselves from the cloistered world of the monarchy – in part so they can take advantage of “the freedom to make a professional income.”

More power to them, I guess, if they can monetize their celebrity status.

The U.K.-based Economist expects that they’ll rake in lots of money.

In stepping down as “senior royals” while pronouncing that they “value the freedom to make a professional income” the Duke and Duchess threaten to unleash the spirit of capitalism on the very core of the monarchy. …The Sussexes are determined to turn themselves into a global brand. Their first move after they announced that they were stepping down from many of their royal duties was to unveil the name of their brand, Sussex Royal… Various branding experts have pronounced that Harry and Meghan have “a ready-made brand” that could earn them as much as £500m in their first year. InfluencerMarketingHub, a website, points out that, with 10m Instagram followers, they could expect $34,000 for a sponsored post. …They will need more than Prince Harry’s inheritance, which is estimated at £20m-30m, to keep up with the global super-rich.

I don’t have a rooting interest in their financial success. Indeed, I suspect they’ll wind up being annoying hypocrites like Harry’s dim-bulb father, lecturing us peasants about our carbon footprints while they fly around the world in private jets.

That being said, I am interested in the intricacies of international taxation.

And that will be a big issue for the couple according to Town and Country.

Now that Meghan and Harry intend to retreat from their royal roles, attain “financial independence,” and live part-time in North America, Meghan and Archie’s tax and citizenship plans are a little up in the air. …Meghan is still a US citizen, and therefore required to pay US taxes on her worldwide income. Prince Harry could technically elect to be treated as a US tax payer and file jointly with Meghan, but “he would never do that,” explains Dianne Mehany, a lawyer specializing in international tax planning. …When Meghan and Harry announced their engagement back in 2017, Harry’s communications team confirmed to the BBC that Meghan “intends to become a UK citizen and will go through the process of that.” …Once gaining UK citizenship, Meghan could elect to relinquish her US citizenship, and save herself the trouble and expense of filing US tax returns. “The only problem there is, she would have to pay the exit tax,” Mehany notes…regardless of what type of employment or contract work Meghan pursues, it will be taxable in the US. …”The real tricky thing,” Mehany notes, “is to make sure they don’t spend too much time in the United States, so that Harry becomes a resident of the United States, at which point his entire worldwide wealth would become subject to US taxation, which I know they want to avoid.”

For all intents and purposes, Meghan and Harry will face the same challenges as a multinational company.

  • Multinational companies have to figure out where to be “domiciled” just as Meghan and Harry have to figure out the best place to reside.
  • Multinational companies have to figure out where to conduct business, just as Meghan and Harry have to figure out where they will work.
  • Multinational companies have to figure out how to protect their income from taxes, just as Meghan and Harry will try to protect their income.

For what it’s worth, the Royal couple already is being smart.

As reported by the U.K.-based Telegraph, they’re minimizing their exposure to the rapacious California tax system.

The Duchess of Sussex has moved her business to a US state used by the super-rich to protect their interests from scrutiny. The Duchess’s company Frim Fram Inc was moved out of California in December and incorporated in Delaware, which tax experts suggest could be done to avoid being hit with tax liabilities in California. …the move was made on New Year’s Eve…”You would want to do it on New Year’s Eve simply because if you go one minute into the next year you would owe some taxes to California for the year of 2020,” said Alan Stachura, from financial services firm Wolters Kluwer. …Mr Stachura, who helps companies incorporate in Delaware, added that the state offers “a tax benefit for items like trademarks and royalties”. …Experts say there are several benefits in moving a corporation to Delaware, including the state’s flexible business laws and its low personal income tax rates. …A source said that as the Duchess is no longer resident in California it was appropriate for the registration to be moved.

I can’t resist commenting on the last line of the excerpt. The fact that Meghan is no longer a resident of California is irrelevant.

After all, she’s not becoming a resident of Delaware.

Instead, she and her husband are being rational by seeking to minimize the amount of their money that will be diverted to politicians (the same is true of everyone with any sense in the United Kingdom, whether they are on the right or on the left).

It’s a shame Meghan and Harry feel too insecure to acknowledge that reality.

P.S. The Town and Country article noted that Prince Harry “would never” allow himself to become a tax resident of the United States because he wants “to avoid” America’s worldwide tax system. That’s completely understandable. He probably learned about the nightmare of FATCA after marrying Meghan and wants to make sure he’s never ensnared by America’s awful internal revenue code.

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I’ve written about some of Elizabeth Warren’s statist proposals, but watching last night’s Democratic debate convinced me that I need to pay more attention to Bernie Sanders’ agenda.

When he ran for president last time, I warned that his platform of $18 trillion of new spending over 10 years would be “very expensive to your wallet.”

This time, “Crazy Bernie” has decided that his 2016 agenda was just a down payment. He now wants nearly $100 trillion of new spending!

Even CNN acknowledges that his platform has a staggering price tag.

…the new spending programs Sen. Bernie Sanders has proposed in his presidential campaign would at least double federal spending over the next decade… The Vermont independent’s agenda represents an expansion of government’s cost and size unprecedented since World War II… Sanders’ plan, though all of its costs cannot be precisely quantified, would increase government spending as a share of the economy far more than the New Deal under President Franklin Roosevelt, the Great Society under Lyndon Johnson or the agenda proposed by any recent Democratic presidential nominee, including liberal George McGovern in 1972, according to a historical analysis shared with CNN by Larry Summers, the former chief White House economic adviser for Barack Obama… Summers said in an interview. “The Sanders spending increase is roughly 2.5 times the size of the New Deal and the estimated fiscal impact of George McGovern’s campaign proposals.

My former colleague Brian Riedl has the most detailed estimates of the new fiscal burdens that Sanders is proposing.

Here’s some of what he wrote last year for City Journal.

All told, Sanders’s current plans would cost as much as $97.5 trillion over the next decade, and total government spending at all levels would surge to as high as 70 percent of gross domestic product. Approximately half of the American workforce would be employed by the government. …his Medicare For All plan would increase federal spending by “somewhere between $30 and $40 trillion over a 10-year period.” He pledges to spend $16.3 trillion on his climate plan. And his proposal to guarantee all Americans a full-time government job paying $15 an hour, with full benefits, is estimated to cost $30.1 trillion. …$3 trillion to forgive all student loans and guarantee free public-college tuition—plus $1.8 trillion to expand Social Security, $2.5 trillion on housing, $1.6 trillion on paid family leave, $1 trillion on infrastructure, $800 billion on general K-12 education spending, and an additional $400 billion on higher public school teacher salaries. …Such spending would far exceed even that of European social democracies. …Sanders’s tax proposals would raise at most $23 trillion over the decade. …Tax rates would soar. Sanders would raise the current 15.3 percent payroll tax to 27.2 percent… Sanders proposes a top federal income-tax rate of 52 percent…plus a 10 percent net investment-income surtax for the wealthy.

By the way, class-warfare taxes won’t pay for all these promises.

Not even close, as you can see from this chart Brian put together.

By the way, the above chart is a static snapshot. In the real world, there’s no way to collect 4.7 percent of GDP (red bar on the left) with confiscatory taxes on the rich.

if Sanders ever had a chance to impose all his class-warfare tax ideas, the economy would tank, so revenues as a share of GDP would decline.

And here’s another one of his visuals, looking at the spending proposals that Democratic candidates are supporting.

Senator Sanders, needless to say, favors all of these proposals.

As Brian noted in his article, the Sanders fiscal agenda is so radical that America would have a bigger burden of government spending than decrepit European welfare states such as Greece, France, and Italy.

To his credit, Bernie acknowledges that all his new spending can’t be financed by class-warfare levies (unlike the serially dishonest Elizabeth Warren).

But the new taxes he proposes would finance only a tiny fraction of his spending agenda. If Washington ever tried to adopt even part of his platform, it inevitably would mean a European-style value-added tax.

P.S. Even if tens of trillions of dollars of revenue magically floated down from Heaven, bigger government would still be bad for the economy since politicians and bureaucrats would be in charge of (mis)allocating a much greater share of labor and capital.

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I gave a speech this past weekend about the economy and fiscal policy, and I made my usual points about government being too big and warned that the problem would get much worse in the future because of demographic change and poorly designed entitlement programs.

Which is probably what the audience expected me to say.

But then I told the crowd that a balanced budget requirement is neither necessary nor sufficient for good fiscal policy.

Which may have been a surprise.

To bolster my argument, I pointed to states such as IllinoisCalifornia, and New Jersey. They all have provisions to limit red ink, yet there is more spending (and more debt) every year. I also explained that there are also anti-deficit rules in nations such as GreeceFrance, and Italy, yet those countries are not exactly paragons of fiscal discipline.

To help explain why balanced budget requirements are not effective, I shared this chart showing annual changes in revenue over the past two decades for the federal government (Table 1.1 of OMB’s Historical Tables).

It shows that receipts are very volatile, primarily because they grow rapidly when the economy is expanding and they contract – sometimes sharply – when there’s an economic downturn.

I pointed out that volatile revenue flows make it very difficult to enforce a balanced budget requirement.

Most important, it’s extremely difficult to convince politicians to reduce spending during a recession since that’s when they feel extra pressure to spend more money (whether for Keynesian reasons of public-choice reasons).

Moreover, a balanced budget requirement doesn’t impose any discipline when the economy is growing. If revenues are growing by 8%, 10%, or 12% per year, politicians use that as an excuse for big increases in the spending burden.

Needless to say, those new spending commitments then create an even bigger fiscal problem when there’s a future downturn (as I’ve noted when writing about budgetary problems in jurisdictions such as Cyprus, Alaska, Ireland, Alberta, Greece, Puerto Rico, California, etc).

So what, then, is the right way of encouraging or enforcing prudent fiscal policy?

I told the audience we need a federal spending cap, akin to what exists in Switzerland, Hong Kong, and Colorado. Allow politicians to increase spending each year, preferably at a modest rate so that there’s a gradual reduction in the fiscal burden relative to economic output.

I’ve modified the above chart to show how a 2% spending cap would work. Politicians could increase spending when revenues are falling, but they wouldn’t be allowed to embark on a spending spree when revenues are rising.

Spending caps create a predictable fiscal environment. And limiting spending growth produces good outcomes.

If you’re still not convinced, this video hopefully will make a difference.

P.S. Spending caps work so well that even left-leaning international bureaucracies such as the OECD and IMF have acknowledged that they are the only effective fiscal rule.

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I’m currently in London for discussions about public policy, particularly the potential for the right kind of free-trade pact between the United States and United Kingdom.

I deliberately picked this week for my visit so I also could be here for the British election. As a big fan of Brexit, I’m very interested in seeing whether the U.K. ultimately will escape the slowly sinking ship otherwise known as the European Union.

But the election also is an interesting test case of whether people are willing to vote for socialism. The Brits actually made this mistake already, voting for Clement Attlee back in 1945. That led to decades of relative decline, culminating in a bailout from the International Monetary Fund.

Margaret Thatcher then was elected in 1979 to reverse Attlee’s mistakes and she did a remarkable job of restoring the British economy.

But do voters understand this history?

We’ll find out on Thursday because they’ll have the opportunity to vote for the Labour Party, led by Jeremy Corbyn, who is the British version of Bernie Sanders.

And he doesn’t hide his radical vision for state control of economic life. Here’s how the Economist describes Corbyn’s agenda.

…the clear outlines of a Corbyn-led government emerged in the manifesto. Under Labour, Britain would have a larger, deeper state… Its frontiers would expand to cover everything from water supply to broadband to how much a landlord may charge a tenant. Where the state already rules, such as in education or health, the government would go deeper, with the introduction of free child-care for pre-schoolers and a “National Care Service” for the elderly. …The government would spend £75bn on building 100,000 council homes per year, paid for from a £150bn “transformation fund”, a pot of money for capital spending on public services. Rent increases would be capped at inflation. The most eye-catching proposal, a plan to nationalise BT’s broadband operations and then offer the service free of charge… Surviving policies from 2017 include a plan to nationalise utilities, alongside Royal Mail and the rail network, and a range of new rights for workers, from a higher minimum wage to restored collective-bargaining rights. All told, government spending would hit 45.1% of GDP, the highest ratio in the post-war era outside of a recession and more than in Germany… To pay for it all, very rich people and businesses would be clobbered. Corporation tax would rise to 26% (from 19% now), which Labour believes, somewhat optimistically, would raise another £24bn by 2024.

As reported by City A.M., the tax increases target a small slice of the population.

Jeremy Corbyn…is planning to introduce a new 45 per cent income tax rate for those earning more than £80,000 and 50 per cent on those with incomes of £125,000 or more. The IFS…estimates that would affect 1.6m people from the outset, rising to 1.9m people by 2023-24. Labour’s policy would add further burden to the country’s biggest tax contributors, with the top five per cent of income tax payers currently contributing half of all income tax revenues, up from 43 per cent just before the financial crisis.  But the IFS warned the amount this policy would raise was “highly uncertain”, with estimates ranging from a high of £6bn to an actual cost of around £1bn, if the policy resulted in a flight of capital from the UK. Lawyers have previously warned that high net worth individuals are poised to shift billions out of the country in the event of a Corbyn government.

Is that a smart idea?

We could debate the degree to which upper-income taxpayers will have less incentive to be productive.

But the biggest impact is probably that the geese with the golden eggs will simply fly away.

Even the left-leaning Guardian seems aware of this possibility.

The super-rich are preparing to immediately leave the UK if Jeremy Corbyn becomes prime minister, fearing they will lose billions of pounds if the Labour leader does “go after” the wealthy elite with new taxes, possible capital controls and a clampdown on private schools. Lawyers and accountants for the UK’s richest families said they had been deluged with calls from millionaire and billionaire clients asking for help and advice on moving countries, shifting their fortunes offshore and making early gifts to their children to avoid the Labour leader’s threat to tax all inheritances above £125,000. …Geoffrey Todd, a partner at the law firm Boodle Hatfield, said many of his clients had already put plans in place to transfer their wealth out of the country within minutes if Corbyn is elected. …“There will be plenty of people on the phone to their lawyers in the early hours of 13 December if Labour wins. Movements of capital to new owners and different locations are already prepared, and they are just awaiting final approval.” …On Thursday, Corbyn singled out five members of “the elite” that a Labour government would go after in order to rebalance the country. …The shadow Treasury minister Clive Lewis went further than the Labour leader, telling the BBC’s Newsnight programme: “Billionaires shouldn’t exist. It’s a travesty that there are people on this planet living on less than a dollar a day.

Some companies also are taking steps to protect shareholders.

National Grid (NG.) and SSE (SSE) are certainly not adopting a wait-and-see approach to the general election. Both companies have moved ownership of large parts of their UK operations overseas in a bid to soften the blow of potential nationalisation. With the Labour manifesto reiterating the party’s intention to bring Britain’s electricity and gas infrastructure back into public ownership, energy companies (and their shareholders) face the threat of their assets being transferred to the state at a price below market value.

The Corbyn agenda violates the laws of economics.

It also violates the laws of math. The Labour Party, for all intents and purposes, wants a big expansion of the welfare state financed by a tiny slice of the population.

That simply doesn’t work. The numbers don’t add up when Elizabeth Warren tries to do that in the United States. And an expert for the Institute for Fiscal Studies notes that it doesn’t work in the United Kingdom.

The bottom line is that Corbyn and his team are terrible.

That being said, Boris Johnson and the current crop of Tories are not exactly paragons of prudence and responsibility.

They’re proposing lots of additional spending. And, as City A.M. reports, Johnson also is being criticized for promising company-specific handouts and protectionist rules for public procurement.

In a press conference today, Johnson promised to expand Britain’s state aid regime once the UK leaves the EU. “We will back British businesses by introducing a new state aid regime which makes it faster and easier for the government to intervene to protect jobs when an industry is in trouble,” a briefing document said. Head of regulatory affairs at the Institute of Economic Affairs (IEA) Victoria Hewson said support for state aid was “veiled support for cronyism.” …A spokesperson for the Institute of Directors said: “It’s not clear how these proposals will fit with ambitions of a ‘Global Britain’. The Conservatives must be wary of opening a can of worms on state aid, it’s important to have consistent rules in place to resist the impulse of unwarranted protectionism.” Johnson also promised to introduce a buy British rule for public procurement. …IEA economics fellow Julian Jessop said: “A ‘Buy British’ policy is pure protectionism, and it comes with heavy costs.

Perhaps this is why John O’Connell of the Taxpayers Alliance has a rather pessimistic view about future tax policy. Here are excerpts of a column he wrote for CapX.

Theresa May’s government implemented a series of big state, high tax policies. Promises of no strings attached cash for the NHS; new regulations on net zero; tax cuts shelved and the creation of more quangos. After his surprise non-loss in the election, Corbyn shifted even further to the political left, doubling down on his nationalisation plans. All in all, the 2017 election result was terrible for people who believe in a small state. …A report from the Resolution Foundation found that government spending is rising once again, and likely to head back towards the heights of the 1970s over the coming years. The Conservatives’ recent spending review suggests state spending could be 41.3% of GDP by 2023, while Labour’s spending plans could take it to 43.3%. This compares to the 37.4% average throughout the noughties. Based on the manifestos, Labour are working towards a German-sized state, while the Tories’ plan looks more Dutch. Unsurprisingly we see this mirrored by the tax burden, which at 34.6% of GDP has already reached a fifty-year high. It is likely to increase further. …British taxpayers are presented with something of a Hobson’s choice: Boris Johnson will see taxes increase and spending shoot up, while Jeremy Corbyn has £1.2 trillion worth of unfunded spending rises just waiting to become unimaginable tax hikes for everyone. Whoever you vote for, you’ll get higher taxes, the question is just about how high.

Let’s close by looking at the big picture.

Here’s a chart showing the burden of government spending in the United Kingdom since 1900. I’ve augmented the chart to show the awful trend started by Attlee (in red) and then the positive impact of Thatcher (in green).

You can also see that Tony Blair and Gordon Brown did a bad job early this century, followed by a surprisingly good performance by David Cameron.

Now it appears that British voters have to choose between a slow drift in the wrong direction under Boris Johnson or a rapid leap in the wrong direction under Jeremy Corbyn.

Normally I would be rather depressed by such a choice. I’m hoping, however, that Brexit (assuming it actually happens!) will cause Boris Johnson to make smart choices even if he is otherwise tempted to make bad choices.

P.S. Unsurprisingly, Corbyn has been an apologist for thugs and dictators.

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With their punitive proposals for wealth taxes, Bernie Sanders and Elizabeth Warren are leading the who-can-be-craziest debate in the Democratic Party.

But what would happen if either “Crazy Bernie” or “Looney Liz” actually had the opportunity to impose such levies?

At the risk of gross understatement, the effect won’t be pretty.

Based on what’s happened elsewhere in Europe, the Wall Street Journal opined that America’s economy would suffer.

Bernie Sanders often points to Europe as his economic model, but there’s one lesson from the Continent that he and Elizabeth Warren want to ignore. Europe has tried and mostly rejected the wealth taxes that the two presidential candidates are now promising for America. …Sweden…had a wealth tax for most of the 20th century, though its revenue never accounted for more than 0.4% of gross domestic product in the postwar era. …The relatively small Swedish tax still was enough of a burden to drive out some of the country’s brightest citizens. …In 2007 the government repealed its 1.5% tax on personal wealth over $200,000. …Germany…imposed levies of 0.5% and 0.7% on personal and corporate wealth in 1978. The rate rose to 1% in 1995, but the Federal Constitutional Court struck down the wealth tax that year, and it was effectively abolished by 1997. …The German left occasionally proposes resurrecting the old system, and in 2018 the Ifo Institute for Economic Research analyzed how that would affect the German economy. The authors’ baseline scenario suggests that long-run GDP would be 5% lower with a wealth tax, while employment would shrink 2%. …The best argument against a wealth tax is moral. It is a confiscatory tax on the assets from work, thrift and investment that have already been taxed at least once as individual or corporate income, and perhaps again as a capital gain or death tax. The European experience shows that it also fails in practice.

Karl Smith’s Bloomberg column warns that wealth taxes would undermine the entrepreneurial capitalism that has made the United States so successful.

…a wealth tax…would allow the federal government to undermine a central animating idea of American capitalism. …The U.S. probably could design a wealth tax that works. …If a country was harboring runaway billionaires, the U.S. could effectively lock it out of the international financial system. That would make it practically impossible for high-net-worth people to have control over their wealth, even if it they could keep the U.S. government from collecting it. The necessity of this type of harsh enforcement points to a much larger flaw in the wealth tax… Billionaires…accumulate wealth…it allows them to control the destiny of the enterprises they founded. A wealth tax stands in the way of this by requiring billionaires to sell off stakes in their companies to pay the tax. …One of the things that makes capitalism work is the way it makes economic resources available to those who have demonstrated an ability to deploy them effectively. It’s the upside of billionaires. …A wealth tax designed to democratize control over companies would strike directly at this strength. …a wealth tax would penalize the founders with the most dedication to their businesses. Entrepreneurs would be less likely to start businesses, in Silicon Valley or elsewhere, if they think their success will result in the loss of their ability to guide their company.

The bottom line, given the importance of “super entrepreneurs” to a nation’s economy, is that wealth taxes would do considerable long-run damage.

Andy Kessler, in a column for the Wall Street Journal, explains that wealth taxes directly harm growth by penalizing income that is saved and invested.

Even setting comical revenue projections aside, the wealth-tax idea doesn’t stand up to scrutiny. Never mind that it’s likely unconstitutional. Or that a wealth tax is triple taxation… The most preposterous part of the wealth-tax plans is their supporters’ insistence that they would be good for the economy. …a wealth tax would suck money away from productive investments. …liberals in favor of taxation always trot out the tired trope that the poor drive growth by spending their money while the rich hoard it, tossing gold coins in the air in their basement vaults. …So just tax the rich and government spending will create great jobs for the poor and middle class. This couldn’t be more wrong. As anyone with $1 billion—or $1,000—knows, people don’t stuff their mattresses with Benjamins. They invest them. …most likely…in stocks or invested directly in job-creating companies… A wealth tax takes money out of the hands of some of the most productive members of society and directs it toward the least productive uses. …existing taxes on interest, dividends and capital gains discourage the healthy savings that create jobs in the economy. These are effectively taxes on wealth—and we don’t need another one.

Professor Noah Smith leans to the left. But that doesn’t stop him, in a column for Bloomberg, from looking at what happened in France and then warning that wealth taxes have some big downsides.

Studies on the effects of taxation when rates are moderate might not be a good guide to what happens when rates are very high. Economic theories tend to make a host of simplifying assumptions that might break down under a very high-tax regime. …One way to predict the possible effects of the taxes is to look at a country that tried something similar: France, where Piketty, Saez and Zucman all hail from. …France…shows that inequality, at least to some degree, is a choice. Taxes and spending really can make a big difference. But there’s probably a limit to how much even France can do in this regard. The country has experimented with…wealth taxes…with disappointing results. France had a wealth tax from 1982 to 1986 and again from 1988 to 2017. …The wealth tax might have generated social solidarity, but as a practical matter it was a disappointment. The revenue it raised was rather paltry; only a few billion euros at its peak, or about 1% of France’s total revenue from all taxes. At least 10,000 wealthy people left the country to avoid paying the tax; most moved to neighboring Belgium… France lost not only their wealth tax revenue but their income taxes and other taxes as well. French economist Eric Pichet estimates that this ended up costing the French government almost twice as much revenue as the total yielded by the wealth tax.

In other words, the much-maligned Laffer Curve is very real. When looking at total tax collections from the rich, the wealth tax resulted in less money for France’s greedy politicians.

And this chart from the column shows that French lawmakers are experts at extracting money from the private sector.

The dirty little secret, of course, is that lower-income and middle-class taxpayers are the ones being mistreated.

By the way, Professor Smith’s column also notes that President Hollande’s 75 percent tax rate on the rich also backfired.

Let’s close with a report from the Wall Street Journal about one of the grim implications of Senator Warren’s proposed tax.

Elizabeth Warren has unveiled sweeping tax proposals that would push federal tax rates on some billionaires and multimillionaires above 100%. That prospect raises questions for taxpayers and the broader economy… How might that change their behavior? And would investment and economic growth suffer? …The rate would vary according to the investor’s circumstances, any state taxes, the profitability of his investments and as-yet-unspecified policy details, but tax rates of over 100% on investment income would be typical, especially for billionaires. …After Ms. Warren’s one-two punch, some billionaires who generate pretax returns could pay annual taxes that would leave them with less money than they started with.

Here’s a chart from the story (which I’ve modified in red for emphasis) showing that investors would face effective tax rates of more than 100 percent unless they somehow managed to earn very high returns.

For what it’s worth, I’ve been making this same point for many years, starting in 2012.

Nonetheless, I’m glad to see it’s finally getting traction. Hopefully this will deter lawmakers from ever imposing such a catastrophically bad policy.

Remember, a tax that discourages saving and investment is a tax that results in lower wages for workers.

P.S. Switzerland has the world’s best-functioning wealth tax (basically as an alternative to other forms of double taxation), but even that levy is destructive and should be abolished.

P.P.S. Sadly, because their chief motive is envy, I don’t think my left-leaning friends can be convinced by data about economic damage.

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Ever since the bureaucrats at the Organization for Economic Cooperation and Development launched their attack on so-called harmful tax competition back in the 1990s, I’ve warned that the goal has been to create a global tax cartel.

Sort of an “OPEC for politicians.”

Supporters of the initiative said I was exaggerating, and that the OECD, acting on behalf of the high-tax nations that dominate its membership, simply wanted to reduce tax evasion. Indeed, some advocates even said that the effort could lead to lower tax rates.

That was a nonsensical claim. I actually read the various reports issued by the Paris-based bureaucracy. It was abundantly clear that the effort was based on a pro-tax harmonization theory known as “capital export neutrality.”

And, as I documented in my first study on the topic back in 2000, the OECD basically admitted the goal of the project was to enable higher taxes and bigger government.

  • Low-tax policies “unfairly erode the tax bases of other countries and distort the location of capital and services.”
  • Tax competition is “re-shaping the desired level and mix of taxes and public spending.”
  • Tax competition “may hamper the application of progressive tax rates and the achievement of redistributive goals.”

The OECD’s agenda was so radical that it even threatened low-tax jurisdiction with financial protectionism if they didn’t agree to help welfare states enforce their punitive tax laws.

At first, there was an effort to push back against the OECD’s tax imperialism – thanks in large part to the creation of the pro-competition Center for Freedom and Prosperity, which helped low-tax jurisdictions fight back (I almost got thrown in a Mexican jail as part of the fight!).

But then Obama got to the White House and sided with Europe’s big welfare states. Lacking the ability to resist the world’s most powerful nations, low-tax jurisdictions around the world were forced to weaken their human rights laws on privacy so it would be easier for high-tax countries to track and tax flight capital.

Once that happened, was the OECD satisfied?

Hardly. Any victory for statism merely serves as a springboard for the next campaign to weaken tax competition and prop up big government.

Indeed, the bureaucrats are now trying to impose minimum corporate tax rates. Let’s look at some excerpts from a report in the U.K.-based Financial Times.

…large multinationals could soon face a global minimum level of corporate taxation under new proposals from the OECD… The Paris-based organization called…for the introduction of a safety net to enable home countries to ensure their multinationals cannot escape taxation, even if other countries have offered them extremely low tax rates. …The proposals would…reduce incentives for countries to lower their tax rates… The OECD said: “A minimum tax rate on all income reduces the incentive for…tax competition among jurisdictions.”

Sadly, the Trump Administration is not fighting this pernicious effort.

Indeed, Trump’s Treasury Department is largely siding with the OECD, ostensibly because a one-size-fits-all approach is less bad than the tax increases that would be imposed by individual governments (but also because the U.S. has a bad worldwide tax system and our tax collectors also want to reach across borders to grab more money).

In any event, we can safely (and sadly) assume that this effort will lead to a net increase in the tax burden on businesses.

And that means bad news for workers, consumers, and shareholders.

Moreover, if this effort succeeds, then the OECD will move the goalposts once again and push for further forms of tax harmonization.

I’ll conclude by recycling a couple of videos produced by the Center for Freedom and Prosperity. Here’s my analysis of the OECD.

By the way, the OECD bureaucrats, who relentlessly push for higher taxes on you and me, get tax-free salaries!

And here’s my explanation of why tax competition should be celebrated rather than persecuted.

I also recommend this short speech that I delivered earlier this year in Europe, as well as this 2017 TV interview.

Last but not least, here are two visuals that help to explain why the OECD’s project is economically misguided.

First, here’s the sensible way to think about the wonky issue of “capital export neutrality.”

Yes, it would be nice if people could make economic decisions without having to worry about taxes. And sometimes people make inefficient decisions that only make sense because they don’t want governments to grab too much of their money.

But the potential inefficiencies associated with tax planning are trivial compared to the economic damage caused by higher tax rates, more double taxation, and a bigger burden of government spending.

Now let’s consider marginal tax rates. Good policy says they should be low. The OECD says they should be high.

Needless to say, people will be less prosperous if the OECD succeeds.

That’s why I fight on this issue, notwithstanding personal attacks.

P.S. Senator Rand Paul is one of the few lawmakers in Washington fighting on the right side of this issue.

P.P.S. If you want even more information, about 10 years ago, I narrated a three-part video series on tax havens, and even a video debunking some of Obama’s demagoguery on the topic.

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Last month, I accused Elizabeth Warren of being a “fiscal fraud” for proposing a multi-trillion dollar government takeover of healthcare.

She then unveiled a plethora of class-warfare taxes. As I discussed yesterday on CNBC, she even wants to tax capital gains even if the gains are only on paper.

By the way, I’m disappointed that I forgot to mention in my final soundbite that school choice would be a very specific and very effective way of helping poor people climb the ladder of opportunity.

But let’s set that aside and focus on Senator Warren’s radical proposal.

Because the idea would be such a nightmare of complexity, I joked in the interview that the Senator must own shares in firms that do tax accounting.

That’s not a novel observation on my part. Earlier this year, the Wall Street Journal opined why this was a bad idea. Not just a bad idea, a ridiculously foolish idea.

Under current law, long-term capital gains are taxed at rates up to 20%—plus a 3.8% ObamaCare surcharge on investment income—only after the asset is sold. Mr. Wyden calls this a loophole. …Mr. Wyden…proposes an annual “mark to market” scheme… As an asset rises in value, its owners would pay tax each year on the incremental gain. This would create an enormous new accounting burden. Mr. Wyden may say that his mark-to-market rule will apply only to the top 1% or 0.1%, but it would still be a bonanza for tax attorneys. How will people in the top 2% know whether they’ve passed the threshold, and how far will they go to avoid it? …Mr. Wyden’s plan would tax gains that exist merely on paper. …And what about illiquid investments, such as private companies or real estate? As with Ms. Warren’s suggested wealth tax, no one knows how Mr. Wyden would go about valuing them. …Would the owner of an apartment building be asked to revalue it every year? Will an art investor be told to mark that Picasso to market? Good luck.

I’ve already written about Senator Wyden’s proposal.

It’s not just absurdly complex. It’s also bad tax policy, as the WSJ noted.

…there are good reasons to tax capital gains at preferential rates, which is why the U.S. has done it for decades under Democrats and Republicans. The lower rate…reduces the harm from double taxation after corporations already pay income taxes. …A lower tax rate is also a matter of fairness. If investors have capital losses, they aren’t allowed to deduct more than $3,000 a year. There’s no inflation adjustment either: If $100 of stock bought in 1999 is sold for $150 today, the difference is taxed even though much of it is an illusory gain caused by dollar erosion.

The final sentence should be emphasized.

Under the Wyden – now Warren – plan, you can have illusory gains that only reflect inflation, and then you can get taxed on those illusory gains even if you don’t actually get them because you haven’t sold the asset.

David Bahnsen, writing for National Review, says the idea is simply nutty.

Senator Ron Wyden of Oregon is the top-ranking member of the Senate’s tax committee... And his recent policy proposal to tax unrealized capital gains is just as extreme, silly, impractical, dangerous, and inane as any of the aforementioned policy whiffs floating around in the leftist hemisphere. …The problems here are almost as severe as the problems with getting a wind-powered ride across the Pacific Ocean in the Green New Deal. First and foremost, the compliance costs would be the biggest boondoggle our nation’s financial system has ever seen. How in the world is illiquid real estate that has not sold supposed to be “valued” each and every year, let alone illiquid businesses, private debt, venture capital, and the wide array of capital assets that make up our nation’s economy but do not fit in the cozy box of “mutual funds”? …Another problem exists for this delusional plan: How do smaller investors pay the tax on an investment that has not yet returned the cash to them? …Underlying all of the mess of this silly proposal from Senator Wyden is the Democrats’ continued lack of understanding about what is most needed in our economy — business investment. The war on capital is a war on jobs, on productivity, on growth, and on wages. Taking bold actions to disincentivize productivity, investment, risk-taking, and capital formation is akin to discouraging diet and exercise for someone trying to lose weight.

Amen.

I’ve repeatedly tried to explain that it is economically self-destructive to impose high – and discriminatorytaxes on income that is saved and invested.

Which is why the right capital gains tax rate is zero.

In other words, instead of worsening the bias against capital, we should be copying nations such as Switzerland, Singapore, Luxembourg, and New Zealand by abolishing the capital gains tax.

For more on that, I recommend this video.

P.S. Don’t forget that Senator Warren also has misguided proposals on many other issues, such as Social Securitycorporate governancefederal spendingcorporate taxationWall Street, etc.

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Last November, voters in some states had the opportunity to accept or reject some very important initiatives, including votes on Colorado’s flat tax, Arizona’s school choice system, and a carbon tax in the state of Washington.

Since 2019 is an off-year election, there aren’t as many initiatives and referendums. But one of them is vitally important. Politicians in Colorado are hoping voters will approve Proposition CC, which would gut the Taxpayer Bill of Rights (TABOR) and thus allow more government spending.

Why is TABOR worth defending? Because it’s far and away the most effective and well-designed fiscal rule in the United States.

It’s basically a spending cap, which is the ideal fiscal policy, and here’s a description of how it works that I shared last year.

Colorado voters adopted The Taxpayer’s Bill of Rights in 1992. TABOR allows government spending to grow each year at the rate of inflation-plus-population. Government can increase faster whenever voters consent. Likewise, tax rates can be increased whenever voters consent. …The Taxpayer’s Bill of Rights requires that excess government revenues be refunded to taxpayers, unless taxpayers vote to let the government keep the revenue.

Proposition CC doesn’t fully repeal TABOR, but it allows politicians to keep – and spend – excess tax revenues.

Thomas Aiello of the National Taxpayers Union wrote last month for the Colorado Springs Gazette about TABOR. He explains why it has been successful.

By guaranteeing refunds of excessive taxes, restricting spending to sensible growth rates, and giving Coloradans the ability to vote on tax increases, TABOR has been instrumental in the state’s booming economy. …Since TABOR limits the amount of money the state is allowed to spend, surplus revenue in excess of the cap must be refunded to Colorado taxpayers. Generally, the revenue cap on the state level grows with inflation plus population increases. …TABOR is working as designed: limiting the growth of government, protecting taxpayers, and ensuring working Coloradans keep more of their hard-earned money. …since 1992 more than $3 billion has been refunded back to taxpayers in the form of lower property, sales, and income taxes.

And he warns about the adverse consequences of Proposition CC.

…in the 2019 legislative session, the Democratic-controlled legislature agreed to place Proposition CC onto the November ballot. If approved by voters, TABOR’s provision for refunds would be gutted, thereby allowing the treasury to retain all excess revenue it is required to return to taxpayers. That means taxpayers would forfeit future refunds from 2019 on. Just put that into perspective: taxpayers will send an extra $1.3 billion to the treasury than what would normally be spent. Instead of giving that money back to you as required by TABOR, lawmakers want Coloradans to forget about overpayments so they can just spend it on other things in the budget.

Writing for the Grand Junction Daily Sentinel, Jay Stooksbury also opines against Proposition CC.

They lied to us in 2005, and they are doubling down on this lie in 2019. Colorado voters were sold a bill of goods with Referendum C in 2005, and it is of the utmost importance that we aren’t fooled again with Proposition CC in 2019. Proponents of Referendum C originally claimed that their measure was “temporary.” The measure was supposed to offer a five-year reprieve from the constitutional limitations created by the Taxpayer’s Bill of Rights (TABOR)… Referendum C proved to be anything but “temporary.” The referendum allowed Colorado’s spendthrift government to permanently augment its spending cap, shortchanging taxpayers on their potential refund year after year since its passing.

He explains that Proposition CC would be far worse.

If passed, this 2019 ballot measure would permanently abolish the state government’s obligation to refund taxpayers. I repeat: permanently. At least this time around, legislators have dropped the pretense that they are bluffing with “temporary” half-measures; when it comes to keeping all of your hard-earned income, these legislators are going all-in, baby. …TABOR is, unfortunately, a shell of its former self. Its effectiveness has been chipped away by a decades-long rebranding campaign that laundered tax revenue by using terms like “fees” and “enterprises.” …Regardless, TABOR is still a vital, one-of-a-kind safeguard that empowers Coloradans against the wastefulness of government. Come November, let’s be certain to keep it that way. Fool us once with C, shame on you; fool us twice with CC, shame on all of us.

I don’t have much to add to these analyses. The real gold standard for good fiscal policy is to make sure government doesn’t grow faster than the private sector, and that’s what TABOR is designed to achieve.

It’s basically the closest thing we have in America to Switzerland’s “debt brake” and Hong Kong’s Article 107.

My only contribution to the discussion is this chart, based on data from the St. Louis Federal Reserve, showing how Coloradans now enjoy more than $4,000 of additional personal income compared to the national average – up from just $526 when TABOR was enacted.

While it’s impossible to precisely explain why income has grown faster in Colorado, I don’t think it is a coincidence that the state gets high scores for economic liberty.

P.S. To see the real-world impact of TABOR, look at what happened after pot legalization produced additional tax revenue.

P.P.S. I’m also paying close attention to Proposition 4 in Texas, which would amend the state constitution to prohibit consideration of a personal income tax.

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In some cases, politicians actually understand the economics of tax policy.

It’s quite common, for instance, to hear them urging higher taxes on tobacco because they want to discourage smoking.

I don’t think it’s their job to tell people how to live their lives, but I agree with their economic analysis. The more you tax something, the less you get of it.

One of my many frustrations is that those politicians then conveniently forget that lesson when it comes to taxing things that are good, such as work, saving, production, and investment.

And some countries are more punitive than others. There’s some new research from the European Policy Information Center, Timbro, and the Tax Foundation, that estimates the “effective marginal tax rate” for successful taxpayers for 41 major countries.

And they don’t simply look at the top income tax rates. They quite properly include other taxes that contribute to “deadweight loss” by driving a wedge between pre-tax income and post-tax consumption.

The political discussion around taxing high-earners usually revolves around the income tax, but in order to get a complete picture of the tax burden high-income earners face, it is important to consider effective marginal tax rates. The effective marginal tax rate answers the question, “If a worker gets a raise such that the total cost to the employer increases by one dollar, how much of that is appropriated by the government in the form of income tax, social security contributions, and consumption taxes?” …all taxes that affect the return to work should be taken into account. …Combining data mainly from international accounting firms, the OECD, and the European Commission, we are able to calculate marginal tax rates in the 41 members of the OECD and/or EU.

The main message of this research is that you don’t want to live in Sweden, where you only keep 24 percent of any additional income you produce.

And you should also avoid Slovenia, Belgium, Portugal, Finland, France, etc.

Congratulations to Bulgaria for being the anti-class warfare nation. That’s a smart strategy for a nation trying to recover from decades of communist deprivation.

American readers will be happy to see that the United States looks reasonably good, though New Zealand is the best of the rich nations, followed by Switzerland.

Speaking of which, we need a caveat for nations with federalist systems, such as the U.S., Switzerland, and Canada. In these cases, the top income tax rate is calculated by adding the central government’s top rate with the average top rate for sub-national governments.

So successful entrepreneurs in those countries actually have the ability to reduce their tax burdens if they make wise decisions on where to live (such as Texas or Florida in the case of the United States).

Let’s now shift to some economic analysis. The report makes (what should be) an obvious point that high tax rates have negative economic effects.

Countries should be cautious about placing excessive tax burdens on high-income earners, for several reasons. In the short run, high marginal tax rates induce tax avoidance and tax evasion, and can cause high-income earners to reduce their work effort or hours.

I would add another adverse consequence. Successful taxpayers can move.

That’s especially true in Europe, where cross-border tax migration is much easier than it is in the United States.

But even though there are odious exit taxes for people leaving the United States, we’ll see an exodus if we wind up with some of the crazy tax policies being advocated by Bernie Sanders and Elizabeth Warren.

P.S. Today’s column looks at how nations rank based on the taxation of labor income. For taxation of capital income, the rankings look quite different. For instance, because of pervasive double taxation, the United States gets poor scores for over-taxing dividends, capital gains, and businesses.

P.P.S. If you want to see tax rates on middle-income workers (though it omits value-added taxes), here is some OECD data.

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In a column last week, I noted that Connecticut ranked near the bottom for state tax policy.

And if there was a contest for which state has gone downhill at the fastest pace, the Nutmeg State would likely prevail.

Less than 30 years ago, the state was reasonably competitive, largely because there was no state income tax. But ever since politicians in Hartford got access to that new source of revenue, the state’s finances have spiraled downward.

There are lots of interesting numbers (unfunded pensions, state spending growth, etc) I could share to illustrate the state’s grim outlook.

But sometimes a picture can say 1,000 words.

Some Connecticut communities are having local elections this November. Apparently, based on this horrifying yard sign, Democrats in South Windsor are bragging about “only” imposing a small tax increase.

By the way, they’re not just bragging about a small tax increase rather than a large tax increase. If I read the sign correctly, there have been tax increases every single year for the past decade.

So local Democrats are basically telling voters, “hey, we’re confiscating ever-increasing amounts of your money every year, but you should be grateful since this year’s increase was comparatively small.”

And, given Connecticut’s awful political climate, that’s apparently a winning message!

By the way, I’m not naive. Or at least not hopelessly naive. When I first saw this sign, I thought it was fake. Sort of like this protest sign from the Occupy Wall Street movement.

And since I have been burned before (this doctored Justin Trudeau quote about Brexit), I did some additional research.

I found the Facebook page for the South Windsor Democrats. Lo and behold, there was a campaign video bragging about all the smaller-than-usual tax hike.

They also shared a letter-to-the-editor bragging about how taxes “only” increased 1.9 percent this year.

It’s possible, of course, that someone went through all the trouble of creating fake signs, fake Facebook pages, and fake letters-to-the-editor. But that doesn’t seem to be the case.

This is real. Connecticut is such a mess that candidates try to get votes by bragging about confiscating more money, but at a slower rate of increase.

The only possible advice I have for state residents is to move. Florida would be a good choice.

P.S. South Windsor Democrats might actually have a semi-compelling message if Republicans had been in charge for the previous nine years and had been increasing taxes every year by more than 1.9 percent (and there certainly are plenty of terrible Republicans). But if that was the case, I assume they would have mentioned that in their campaign literature.

P.P.S. Since I’m not partisan, here’s some advice for South Windsor Democrats. Adopt D.C.-type budgeting and build in a “baseline” showing 5 percent annual tax increases. Then, when you “only” raise taxes by 1.9 percent, you can tell voters you actually gave them a 3.1 percent tax cut. You may be thinking that’s ridiculously dishonest and beyond the pale (and it is), but that’s how they do budgeting in Washington.

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This week featured lots of angst-ridden headlines about the annual budget deficit for the 2019 fiscal year (which ended on September 30) jumping to $984 billion, an increase of more than $200 billion.

For reasons I’ve previously outlined, I don’t lose too much sleep about the level of government borrowing. What’s far more important is the burden of government spending.

Whether the budget is financed by taxes or borrowing, the level of spending is what really matters. Simply stated, that number measures the amount of money that politicians divert from the economy’s productive sector.

That being said, it’s sometimes very illuminating to look at why red ink goes up and down.

So I went to the Treasury Department’s most-recent Monthly Treasury Statement and looked at the raw numbers. What did I find?

Lo and behold, the deficit jumped to $984 billion because outlays are increasing twice as fast as revenue.

Perhaps even more discouraging, the burden of spending is rising more than four times faster than needed to keep pace with inflation.

These are very discouraging numbers, especially when you keep in mind that this is the calm before the storm. Because of poorly designed entitlement programs and an ageing population, our fiscal situation will deteriorate even faster in the future.

Unless there’s much-needed reform.

But I’m not holding out much hope. Trump is a big spender and Congress is filled with big spenders.

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Following their recent assessment of the best and worst countries, the Tax Foundation has published its annual State Business Tax Climate Index, which is an excellent gauge of which states welcome investment and job creation and which states are unfriendly to growth and prosperity.

Here’s the list of the best and worst states. Unsurprisingly, states with no income tax rank very high, as do states with flat taxes.

It’s also no surprise to see New Jersey in last place. The state has fallen dramatically, especially considering that it was like New Hampshire as recently as the 1960s, with no state income tax and no state sales tax.

And the bad scores for New York, California, and Connecticut also are to be expected. The Nutmeg State is an especially sad story. There was no state income tax 30 years ago. Once politicians got that additional source of revenue, however, Connecticut suffered a big economic decline.

Here’s a description of the methodology, along with the table showing how different factors are weighted.

…the Index is designed to show how well states structure their tax systems and provides a road map for improvement.The absence of a major tax is a common factor among many of the top 10 states. Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: the corporate income tax, the individual income tax, or the sales tax. …This does not mean, however, that a state cannot rank in the top 10 while still levying all the major taxes. Indiana and Utah, for example, levy all of the major tax types, but do so with low rates on broad bases.The states in the bottom 10 tend to have a number of afflictions in common: complex, nonneutral taxes with comparatively high rates. New Jersey, for example, is hampered by some of the highest property tax burdens in the country, has the second highest-rate corporate income tax in the country and a particularly aggressive treatment of international income, levies an inheritance tax, and maintains some of the nation’s worst-structured individual income taxes.

For those who want to delve into the details, here are all the states, along with their rankings for the five major variables.

If you want to know which states are making big moves, Georgia enjoyed the biggest one-year jump (from #36 to #32) and Kansas suffered the biggest one-year decline (from #27 to #34). Keep in mind that it’s easier to climb if you’re near the bottom and easier to fall if you’re near the top.

Looking over a longer period of time, the states with the biggest increases since 2014 are North Carolina (+19, from #34 to #15), Wisconsin (+12, from #38 to #26), Kentucky (+9, from #35 to #24), Nebraska (+8, from #36 to #28), Delaware (+7, from #18 to #11), and Rhode Island (+6, from #45 to #39).

The states with the biggest declines are Kansas (-9, from #25 to #34), Hawaii (-8, from #29 to #37), Massachusetts (-8, from #28 to #36), and Idaho (-6, from #15 to #21).

We’ll close with the report’s map, showing the rankings of all the states.

P.S. My one quibble with the Index is that there’s no variable to measure the burden of government spending, which would give a better picture of overall economic liberty. This means that states that finance large public sectors with energy severance taxes (which also aren’t included in the Index) wind up scoring higher than they deserve. As such, I would drop Wyoming and Alaska in the rankings and instead put South Dakota at #1 and Florida at #2.

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