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Archive for the ‘Fiscal Policy’ Category

The Biden Administration’s approach to tax policy is awful, as documented here, here, here, and here.

We’ve now reached the stage where bad ideas are being turned into legislation. Today’s analysis looks at what the House Ways & Means Committee (the one in charge of tax policy) has unveiled. Let’s call this the Biden-Pelosi plan.

And we’re going to use some great research from the Tax Foundation to provide a visual summary of what’s happening.

We’ll start with a very depressing look at the decline in American competitiveness if the proposal becomes law (the good news is that we’ll still be ahead of Greece!).

Next, let’s look at the Tax Foundation’s map of capital gains tax rates if the plan is approved.

Unsurprisingly, this form of double taxation will be especially severe in California.

Our third visual is good news (at least relatively speaking).

Biden wanted the U.S. to have the developed world’s highest corporate tax rate. But the plan from the House of Representatives would “only” put America in third place.

Here’s another map, in this case looking at tax rates on non-corporate businesses (small businesses and other entities that get taxed by the 1040 form).

This is not good news for America’s entrepreneurs. Especially the ones unfortunate enough to do business in New York.

Last but not least, here’s the Tax Foundation’s estimate of what will happen to the economy if the Biden-Pelosi tax plan is imposed on the nation.

There are two things to understand about these depressing growth numbers.

  • First, small differences in growth rates produce very large consequences when you look 20 years or 30 years into the future. Indeed, this explains why Americans enjoy much higher living standards than Europeans (and also why Democrats are making a big economic mistake to copy European fiscal policy).
  • Second, the Tax Foundation estimated the economic impact of the Biden-Pelosi tax plan. But don’t forget that the economy also will be negatively impacted by a bigger burden of government spending. So the aggregate economic damage will be significantly larger when looking at overall fiscal policy.

One final point. In part because of the weaker economy (i.e., a Laffer Curve effect), the Tax Foundation also estimated that the Biden-Pelosi tax plan will generate only $804 billion over the next 10 years.

P.S. Here’s some background for those who are not political wonks. Biden proposed a budget with his preferred set of tax increases and spending increases. But, in America’s political system (based on separation of powers), both the House and Senate get to decide what they like and don’t like. And even though the Democrats control both chambers of Congress, they are not obligated to rubber stamp what Biden proposed. The House will have a plan, the Senate will have a plan, and they’ll ultimately have to agree on a joint proposal (with White House involvement, of course). The same process took place when Republicans did their tax bill in 2017.

P.P.S. It’s unclear whether the Senate will make things better or worse. The Chairman of the Senate Finance Committee, Ron Wyden, has some very bad ideas about capital gains taxation and politicians such as Elizabeth Warren are big proponents of a wealth tax.

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When I discuss class-warfare tax policy, I want people to understand deadweight loss, which is the term for the economic output that is lost when high tax rates discourage work, saving, investment, and entrepreneurship.

And I especially want them to understand that the economic damage grows exponentially as tax rates increase (in other words, going from a 30 percent tax rate to a 40 percent tax rate is a lot more damaging than going from a 10 percent tax rate to a 20 percent tax rate).

But all of this analysis requires a firm grasp of supply-and-demand curves. And most people never learned basic microeconomics, or they forgot the day after they took their exam for Economics 101.

So when I give speeches about the economics of tax policy, I generally forgo technical analysis and instead appeal to common sense.

Part of that often includes showing an image of a “philoso-raptor” pondering whether the principle that applies to tobacco taxation also applies to taxes on work.

Almost everyone gets the point, especially when I point out that politicians explicitly say they want higher taxes on cigarettes because they want less smoking.

And if you (correctly) believe that higher taxes on tobacco lead to less smoking, then you also should understand that higher taxes on work will discourage productive behavior.

Unfortunately, these common-sense observations don’t have much impact on politicians in Washington. Joe Biden and Democrats in Congress are pushing a huge package of punitive tax increases.

Should they succeed, all taxpayers will suffer. But some will suffer more than others. In an article for CNBC, Robert Frank documents what Biden’s tax increase will mean for residents of high-tax states.

Top earners in New York City could face a combined city, state and federal income tax rate of 61.2%, according to plans being proposed by Democrats in the House of Representatives. The plans being proposed include a 3% surtax on taxpayers earning more than $5 million a year. The plans also call for raising the top marginal income tax rate to 39.6% from the current 37%. The plans preserve the 3.8% net investment income tax, and extend it to certain pass-through companies. The result is a top marginal federal income tax rate of 46.4%. …In New York City, the combined top marginal state and city tax rate is 14.8%. So New York City taxpayers…would face a combined city, state and federal marginal rate of 61.2% under the House plan. …the highest in nearly 40 years. Top earning Californians would face a combined marginal rate of 59.7%, while those in New Jersey would face a combined rate of 57.2%.

You don’t have to be a wild-eyed “supply-sider” to recognize that Biden’s tax plan will hurt prosperity.

After all, investors, entrepreneurs, business owners, and other successful taxpayers will have much less incentive to earn and report income when they only get to keep about 40 cents out of every $1 they earn.

Folks on the left claim that punitive tax rates are necessary for “fairness,” yet the United States already has the developed world’s most “progressive” tax system.

I’ll close with the observation that the punitive tax rates being considered will generate less revenue than projected.

Why? Because households and businesses will have big incentives to use clever lawyers and accountants to protect their income.

Looking for loopholes is a waste of time when rates are low, but it’s a very profitable use of time and energy when rates are high.

P.S. Tax rates were dramatically lowered in the United States during the Reagan years, a policy that boosted the economy and led to more revenues from the rich. Biden now wants to run that experiment in reverse, so don’t expect positive results.

P.P.S. Though if folks on the left are primarily motivated by envy, then presumably they don’t care about real-world outcomes.

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In an ideal world, Americans would have personal retirement accounts, just like workers in Australia, Sweden, Chile, Hong Kong, Israel, Switzerland, and a few dozen other nations.

But we’re not in that ideal world. We are forced to participate in a Ponzi Scheme known as Social Security.

By the way, that’s not necessarily a disparaging description. A Ponzi Scheme can work if there are always enough new people in the system to pay off the old people.

But because of demographic changes (increasing lifespans and decreasing birthrates), that’s not what we have in the United States.

And this is why Social Security faces serious long-run problems.

How serious? The Social Security Administration finally released the annual Trustees Report. This document has a wealth of data on the program’s financial condition, and Table VI.G9 is where the rubber meets the road.

As you can see from this chart, there will be an ever-increasing burden of Social Security taxes and spending over the next 75 years. And these numbers are adjusted for inflation!

The good news (relatively speaking) is that the economy also will be growing over the next 75 years, both in nominal terms and inflation-adjusted terms.

The bad news is that spending on Social Security will grow at a faster rate, so the program will consume a larger share of the economy’s output.

And because Social Security spending is growing faster than the economy (and also faster than tax revenue), this next chart shows there is going to be more and more red ink in the future. Once again, you’re looking at inflation-adjusted data.

As indicated by the chart’s title, the cumulative shortfall over the next 75 years is nearly $48 trillion. That’s a lot of money, even by Washington standards.

And with each passing year, the problem seems to worsen. The 75-year shortfall was $44.7 trillion according to the 2020 report and $42.1 trillion according to the 2019 report.

I’ll conclude by observing that today’s column focuses on the big-picture fiscal problems with Social Security.

But let’s not forget the program’s second crisis, which is the fact that Americans are deprived of the ability to enjoy much higher levels of retirement income.

Certain groups are particularly harmed by this aspect of the current program, including minorities, women, older workers, and low-income workers.

P.S. Our friends on the left argue that the program’s fiscal problems (the first crisis) can be solved with tax increases. Perhaps that is true, but it will mean a weaker economy and it will exacerbate the second crisis by forcing workers to pay more to get less.

P.P.S. I once made a $16 trillion dollar mistake on national TV when discussing Social Security’s shaky finances.

P.P.P.S. Much of the news coverage about the Trustees Report has focused on the year the Social Security Trust Fund supposedly runs out of money. But this is sloppy journalism since the Trust Fund has nothing but IOUs (as illustrated by this joke).

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Public finance theory teaches us that the capital gains tax should not exist. Such a levy exacerbates the bias against saving and investment, which reduces innovation, hinders economic growth, and lowers worker compensation.

All of which helps to explain why President Biden’s proposals to increase the tax burden on capital gains are so misguided.

Thanks to some new research from Professor John Diamond of Rice University, we can now quantify the likely damage if Biden’s proposals get enacted.

Here’s some of what he wrote in his new study.

We use a computable general equilibrium model of the U.S. economy to simulate the economic effects of these policy changes… The model is a dynamic, overlapping generations, computable general equilibrium model of the U.S. economy that focuses on the macroeconomic and transitional effects of tax reforms. …The simulation results in Table 1 show that GDP falls by roughly 0.1 percent 10 years after reform and 0.3 percent 50 years after reform, which implies per household income declines by roughly $310 after 10 years and $1,200 after 50 years. The long run decline in GDP is due to a decline in the capital stock of 1.0 percent and a decline in total hours worked of 0.1 percent. …this would be roughly equivalent to a loss of approximately 209,000 jobs in that year. Real wages decrease initially by 0.2 percent and by 0.6 percent in the long run.

Here is a summary of the probable economic consequences of Biden’s class-warfare scheme.

But the above analysis should probably be considered a best-case scenario.

Why? Because the capital gains tax is not indexed for inflation, which means investors can wind up paying much higher effective tax rates if prices are increasing.

And in a world of Keynesian monetary policy, that’s a very real threat.

So Prof. Diamond also analyzes the impact of inflation.

…capital gains are not adjusted for inflation and thus much of the taxable gains are not reflective of a real increase in wealth. Taxing nominal gains will reduce the after-tax rate of return and lead to less investment, especially in periods of higher inflation. …taxing the nominal value will reduce the real rate of return on investment, and may do so by enough to result in negative rates of return in periods of moderate to high inflation. Lower real rates of return reduce investment, the size of the capital stock, productivity, growth in wage rates, and labor supply. …Accounting for inflation in the model would exacerbate other existing distortions… An increase in the capital gains tax rate or repealing step up of basis will make investments in owner-occupied housing more attractive relative to other corporate and non-corporate investments.

Here’s what happens to the estimates of economic damage in a world with higher inflation?

Assuming the inflation rate is one percentage point higher on average (3.2 percent instead of 2.2 percent) implies that a rough estimate of the capital gains tax rate on nominal plus real returns would be 1.5 times higher than the real increase in the capital gains tax rate used in the standard model with no inflation. Table 2 shows the results of adjusting the capital gains tax rates by a factor of 1.5 to account for the effects of inflation. In this case, GDP falls by roughly 0.1 percent 10 years after reform and 0.4 percent 50 years after reform, which implies per household income declines by roughly $453 after 10 years and $1,700 after 50 years.

Here’s the table showing the additional economic damage. As you can see, the harm is much greater.

I’ll conclude with two comments.

P.S. If (already-taxed) corporate profits are distributed to shareholders, there’s a second layer of tax on those dividends. If the money is instead used to expand the business, it presumably will increase the value of shares (a capital gain) because of an expectation of higher future income (which will be double taxed when it occurs).

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Back in 2019, I listed “Six Principles to Guide Policy on Government Spending.”

If I was required to put it all in one sentence (sort of), here’s the most important thing to understand about fiscal policy.

This does not mean, by the way, that we should be anarcho-capitalists and oppose all government spending.

But it does mean that all government spending imposes a burden on the economy and that politicians should only spend money to finance “public goods” that generate offsetting benefits.

Assuming, of course, that the goal is greater prosperity.

I’m motivated to address this topic because Philip Klein wrote a column for National Review about Biden’s new spending. He points out that this new spending is bad, regardless of whether it is debt-financed or tax-financed.

As Democrats race toward squandering another $4.1 trillion — perhaps with some Republican help — we are being told over and over how the biggest stumbling block is figuring out how the new spending will be “paid for.” …Senator Joe Manchin (D., W.Va.), who is trying to maintain his image as a moderate, insisted that he doesn’t believe the spending should be passed if it isn’t fully financed. “Everything should be paid for,” Manchin has told reporters. …Republican members of the bipartisan group have also made similar comments. …But it is folly to consider massive amounts of new spending to be “responsible” as long as members of Congress come up with enough taxes to raise… At some point in the next few weeks, Democrats (and possibly Republicans) will announce that they have reached a deal on some sort of major spending compromise. They will claim that it is fully paid for, and assert that it is fiscally responsible. But there is nothing responsible about adding trillions in new obligations at a time when the nation is already heading for fiscal catastrophe.

Klein is correct.

Biden’s spending binge will be just as damaging to prosperity if it is financed with taxes rather than financed by debt.

The key thing to realize is that we’ll have less growth if more of the economy’s output is consumed by government spending.

Giving politicians and bureaucrats more control over the allocation of resources is a very bad idea (as even the World Bank, OECD, and IMF have admitted).

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Back in 2009, there was strong and passionate opposition to Bush’s corrupt TARP scheme and Obama’s fake stimulus boondoggle – both of which had price tags of less than $1 trillion.

Today, Biden has already squandered $1.9 trillion on his version of “stimulus” and has asked Congress to expand the federal government’s budgetary burden by another $3.5 trillion (plus about $600 billion for so-called infrastructure).

Yet there doesn’t seem to be the same intensity of opposition, even though Biden is proposing policies that are far more costly.

Is this simply because Republicans were corrupted by Trump’s profligacy and are now comfortable with big government?

Or are they distracted by cultural battles over issues such as critical race theory?

I don’t know, but I’m very worried that insufficient opposition may result in Biden’s dependency agenda getting enacted.

And I’m even more worried because we now know that the left intends to increase the spending burden by a lot more than $3.5 trillion. Especially since Bernie Sanders is Chairman of the Senate Budget Committee.

The Wall Street Journal opined on this topic a couple of days ago.

Democrats have provided few details of what they plan to include in Sen. Bernie Sanders’s $3.5 trillion budget proposal, and now we know why. The real cost is $5 trillion or more… Their plan is to include every program but start small and pretend they’re temporary. This will let them skirt the budget-reconciliation rule that spending can’t add to the deficit outside a 10-year budget window without triggering a 60-vote threshold to pass. The nonprofit Committee for a Responsible Federal Budget examined the budget outline… Assuming the major provisions will be made permanent and continue through the 10-year budget window, the group says, the “policies under consideration could cost between $5 trillion and $5.5 trillion over a decade.” …All of this false accounting will let Democrats pretend the overall cost of their budget spending is lower than it really is… Any way you add it up, Democrats are attempting to pass the biggest expansion of government since the 1960s with narrow majorities and no electoral mandate. No wonder they want to disguise its real cost.

By the way, it’s not just Democrats who play this game. Some provisions of the Trump tax cut expire in 2025 because Republicans also finagled to get around restrictions that govern the 10-year budget process.

That being said, I don’t think there’s moral equivalency between proposals to let people keep their own money and the Biden-Bernie scheme to buy votes with other people’s money.

Anyhow, here’s the relevant table from the Committee for a Responsible Federal Budget’s report.

P.S. This battle is not just an issue of dollars and cents. Some of the Biden-Bernie proposals, such as per-child handouts, would increase dependency by undoing Bill Clinton’s welfare reform.

P.P.S. Don’t forget all the debilitating taxes that will accompany all the new spending.

P.P.P.S. But at least we’ll “catch up” with Europe if Biden-Bernie agenda is enacted.

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President Biden pushed through $1.9 trillion of new spending earlier this year, but that so-called stimulus plan was mostly for one-time giveaways. As I warn in this recent discussion on Denver’s KHOW, we should be much more worried about his proposals to permanently expand the welfare state.

When I first got to Washington, I would be upset that politicians wanted to add billions of dollars to the burden of government.

Well, those were the good ol’ days. Biden is proposing to divert trillions of dollars from the private sector to expand the welfare state.

Even worse, he wants to make more Americans dependent on the federal government.

Maybe that’s a smart way of buying votes, but it will erode societal capital.

John Cogan and Daniel Heil of the Hoover Institution warned about the consequences of this dependency agenda in a column for the Wall Street Journal.

The federal government’s system of entitlements is the largest money-shuffling machine in human history, and President Biden intends to make it a lot bigger. His American Families Plan—which he recently attempted to tie to a bipartisan infrastructure deal—proposes to extend the reach of federal entitlements to 21 million additional Americans, the largest expansion since Lyndon B. Johnson’s Great Society. …more than half of working-age households would be on the entitlement rolls if the plan were enacted in its current form. …57% of all married-couple children would receive federal entitlement benefits, and more than 80% of single-parent households would be on the entitlement rolls.

Many of the handouts would go to people with middle-class incomes.

And higher.

…The American Families Plan proposes several new entitlement programs. One promises students the government will pick up the entire cost of community-college tuition; another promises families earning 1.5 times their state’s median income that Washington will cover all daycare expenses above 7% of family income for children under 5; still another promises workers up to 12 weeks of federally financed wage subsidies to take time off to care for newborns or sick family members. …Two-parent households with two preschool-age children and incomes up to $130,000 would qualify for federal cash assistance for daycare. Single parents with two preschoolers and incomes up to $113,000 would qualify. And some families with incomes over $200,000 would be eligible for health-insurance subsidies. Other parts of the plan, such as paid leave and free community college, have no income limits at all.

The Wall Street Journal opined on this issue last month. Here are the key passages from their editorial.

The entitlements are by far the biggest long-term economic threat from the Biden agenda. …entitlements that spend automatically based on eligibility are nearly impossible to repeal, or even reform, and they represent a huge tax-and-spend wedge far into the future. …We’d highlight two points. First is the dishonesty about costs. Entitlements always start small but then soar. The Biden Families Plan is even more dishonest than usual. For example, it pretends the child tax credit ends in 2025, so its cost is $449 billion over the 10-year budget window that is used for reconciliation bills that require only 51 votes to pass the Senate. But a future Congress will never repeal the credit. …Second, these programs aren’t intended as a “safety net” for the poor or those temporarily down on their luck. They are explicitly designed to make the middle class dependent on government handouts.

The editorial explicitly warns that the United States will economically suffer if politicians copy Europe’s counterproductive redistributionism.

…on present trend the U.S. is falling into the same entitlement trap as Western Europe. Entitlement spending requires higher taxes, which grab 40% or more of GDP. Economic growth declines as more money flows to transfer payments instead of investment. The entitlement state becomes too large to afford but also too politically entrenched to reform. …Only a decade ago the Tea Party fought ObamaCare. Now most Beltway conservatives worry more about Big Tech than they do Big Government. If the Biden Families Plan passes, these conservatives will find themselves spending the rest of their careers as tax collectors for the entitlement state.

Amen. I’m baffled when folks on the left argue that we should “catch up” with Europe.

Are they not aware that American living standards are far higher? Do they not understand that low-income people in the United States often have more income than middle-class people on the other side of the Atlantic Ocean?

P.S. As I mentioned in the interview, the 21st century has been bad news for fiscal policy, with two big-government Republicans and two big-government Democrats.

For what it’s worth, the $3,000-per-child handouts are Biden’s most damaging idea. In one fell swoop, he would create a trillion-dollar entitlement program and repeal the successful Clinton-Gingrich welfare reform.

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I’m not optimist about America’s fiscal future. Thanks primarily to entitlement programs, the long-run outlook shows an ever-increasing burden of government spending.

And rather than hit the brakes, Biden wants to step on the gas with new giveaways, especially his plan to gut Bill Clinton’s welfare reform by creating new per-child handouts that would subsidize idleness and family dissolution.

But that doesn’t mean the problems can’t be fixed. We simply need to replace fiscal profligacy with spending restraint.

To set the stage for this discussion, here’s a look at what’s happened to the budget over the past several decades.  You can see how the burden of federal spending has steadily increased, with noticeable one-time bumps in 2008-2009 (TARP and Obama’s so-called stimulus) and 2020-2021 (coronavirus).

The chart also includes projections between 2021 and 2031, based on new numbers from the Congressional Budget Office.

For today’s column, I want to focus on the next 10 years and show how the current fiscal mess can be averted with some modest spending restraint.

This second chart shows that spending actually drops over the next two years as coronavirus-related spending comes to an end. But once we get to 2023, the orange line shows that “baseline” spending (what happens to the budget if things are left on autopilot) climbs rapidly, more than twice the rate needed to keep pace with inflation.

But if there’s any sort of fiscal restraint (a freeze or some sort of spending cap), then the numbers look much better.

More specifically, a freeze or a 1-percent spending cap would actually produce a budget surplus by the year 2031.

But I’m not fixated on getting to a balanced budget. What’s more important is that the burden of government spending shrinks when the budget grows slower than the private sector.

In other words, we get good results when policy makers follow fiscal policy’s Golden Rule.

P.S. While it’s difficult to convince politicians to support spending restraint, it’s worth noting that the nation enjoyed a five-year spending freeze between 2009-2014.

P.P.S. In the long run, a spending freeze almost certainly requires genuine entitlement reform.

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Almost everybody (even, apparently, Paul Krugman) agrees that you don’t want to be on the downward-sloping part of the Laffer Curve.

That’s where higher tax rates do so much economic damage that government collects even less revenue.

But I would argue that tax increases that produce more revenue also are a bad idea.

Sometimes they are even a terrible idea. For instance, there are tax increases that would destroy $5 of private income for every $1 of revenue they collect.

That would not be a good deal, at least for those of us who aren’t D.C. insiders.

Heck, according to research from economists at the University of Chicago and Federal Reserve, there are some tax increases that would destroy even greater levels of private income for every additional dollar that politicians got to spend.

The simple way of thinking about this is that you don’t want to be at the revenue-maximizing point of the Laffer Curve.

Because the closer you get to that point, the greater the damage to the private sector compared to any revenue collected.

To help understand this key point, let’s review a new study from Spain’s central bank. Authored by Nezih Guner, Javier López-Segovia and Roberto Ramos, it investigates the impact of higher tax rates.

They first look at what happens when progressivity (τ) is increased.

In the first experiment, we…change…the entire tax schedule, so that all households below the mean labor income face lower average taxes, while those above the mean income face higher average taxes. Since…richer individuals face higher taxes, all else equal, the government collects more taxes. All else, however, is not equal since more progressive taxes lower incentives to work and save. As a result, a higher τ might result in lower, not higher, revenue. The question is where the top of the Laffer curve is. We find that the tax revenue from labor income is maximized with τ = 0 .19. The increase in tax collection is, however, very small: the tax revenue from labor income increases only by 0.82% (or about 0.28% of the GDP). The tax revenue from labor income is, however, only one part of the total tax collection. There are also taxes on capital and consumption. With τ = 0 .19, while the tax collection from labor income is maximized, the total tax collection declines by 1.55%. This happens since with a higher τ, the aggregate labor, capital and output decline significantly. Indeed, the total tax collection falls for any increase in τ, and the level of τ that maximizes total tax revenue is much lower, τ = 0 .025, than its benchmark value.

The key takeaway is that more progressivity puts Spain on the wrong (downward-sloping) side of the Laffer Curve.

Here’s Table 6, which shows big declines in output, labor supply, and investment as progressivity increases.

Here’s some of the accompanying explanation.

The upper panel of Table 6 shows that capital, effective labor and output decline monotonically with τ. Hence, as the economy moves from τ = 0 .1581 to τ = 0 .19, the government is collecting higher taxes from labor, but the aggregate labor supply and output decline. For τ higher than 0.19, the decline in labor supply dominates and tax collection from labor income is lower. …The level of τ that maximizes the total tax collection is 0.025, which implies significantly less progressive taxes than in the benchmark economy. …In the economy with τ = 0 .025, the aggregate capital, labor and output increase significantly. The steady state output, for example, is almost 11 percentage points higher than the benchmark economy. As a result, the government is able to collect higher taxes despite lowering taxes on the top earners.

The authors also put together an estimate of Spain’s Laffer Curve, with the red-dashed line showing total tax revenue.

The authors also looked at what happens if politicians simply increase top tax rates.

They found that there are scenarios that would enable the Spanish government to collect more revenue.

We find that it is possible to generate higher total tax revenue by increasing taxes on the top earners.The main message of our quantitative exercises is that…the extra revenue is not substantial. Higher progressivity has significant adverse effects on output and labor supply, which limits the room for collecting higher taxes. As a result, the only way to generate substantial revenue is with significant increases in marginal tax rates for a large group

But notice that those higher taxes would have “significant adverse effects on output and labor supply.”

Which brings us back to the earlier discussion about the desirability of causing a lot of damage to the private economy in order to give politicians a bit more money to spend.

The authors have a neutral tone, but the rest of should be able to draw the logical conclusion that higher taxes would be a big mistake for Spain.

And since the underlying economic principles apply in all nations, we also should conclude that higher taxes would be a big mistake for the United States.

P.S. We conducted a very successful experiment in the 1980s involving lower tax rates. Biden now wants to see what happens if we try the opposite approach.

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The best referendum result of 2020 (indeed, the best policy development of the year) was when the people of Illinois voted to preserve their flat tax, thus delivering a crushing defeat to the Prairie State’s hypocritical governor, J.B. Pritzker.

The worst referendum result of 2020 was when the people of Arizona voted for a class-warfare tax scheme that boosted the state’s top tax rate from 4.5 percent to 8 percent.

In one fell swoop, Arizona became a high-tax state for investors, entrepreneurs, innovators, and business owners. That was a very dumb choice, especially since there are zero-income tax states in the region (Nevada, Texas, and Wyoming), as well as two flat-tax states (Utah and Colorado).

You can see Arizona’s problem in this map from the Tax Foundation. It’s great to be grey and good to be yellow, but bad to be orange (like Arizona), red, or maroon.

That’s the bad news.

The good news is that lawmakers in have just approved a plan that will significantly lower tax rates and restore the state’s competitiveness.

The Wall Street Journal opined this morning about this positive development.

Arizona currently taxes income under a progressive rate structure, starting at 2.59% up to 4.5%. The ballot last November carried an initiative to add a 3.5% surtax on earnings above $250,000 for single filers. It narrowly passed, meaning the combined top rate was set to hit 8%, higher than all of Arizona’s neighbors except California. …Mr. Ducey’s budget will cut rates for all taxpayers. The Legislature can’t repeal the voter-approved surtax, so above the 2.5% flat rate, there will still be a second bracket on income over $250,000. But the budget also has a provision adjusting the flat tax downward for those Arizonans, so no one will pay a top rate above 4.5%. …the same as today. …No Arizonan will have to pay the threatened 8% rate, since the provisions forestalling it are immediate. …“Every Arizonan—no matter how much they make—wins with this legislation,” Mr. Ducey said. “It will protect small businesses from a devastating 77 percent tax increase…and it will help our state stay competitive so we can continue to attract good-paying jobs.” That’s worth celebrating.

A story from the Associated Press gave the development a much more negative spin.

After slashing $1.9 billion in income taxes mainly benefiting upper-income taxpayers and shielding them from higher taxes approved by voters in an initiative last year, the Republican-controlled House returned Friday and passed more legislation targeting Proposition 208. The House approved the creation of a new tax category for small business, trusts and estates that will eliminate even more of the money that the measure approved by voters in November was designed to raise for schools. The proposal passed despite unified opposition from minority Democrats. …The governor has expressed disdain for the voter-approved tax, saying it would hurt the state’s economy and vowing in March to see it gutted either though Legislation or the courts. …The budget-approved tax cuts set a flat 2.5% tax on all income levels that will be phased in over several years once revenue projections are met, with those subject to the new education tax paying 4.5% at most.

If nothing else, an amusing example of bias from AP.

I have two modest contributions to this discussion.

First, it’s not accurate to say that Arizona adopted a flat tax. Maybe I’m old fashioned, but a flat tax has to have only one rate. Arizona’s reform is praiseworthy, but it doesn’t fulfill that key equality principle.

Second, the main takeaway is not that lawmakers did something good. It’s more accurate to say that they protected the state from something bad.

I’ve updated this 2018 visual to show how the referendum would have pushed Arizona into Column 5, which is the worst category, but the reform keeps the state in column 3.

P.S. North Carolina made the biggest shift in the right direction in recent years, followed by Kentucky, while Kansas flirted with a big improvement and settled for a modest improvement. Meanwhile, Mississippi is thinking about making a huge positive jump.

P.P.S. Since Arizona voters made a bad choice and Arizona lawmakers made a wise choice, this is evidence for Prof. Garett Jones’ hypothesis that too much democracy is a bad thing.

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I’ve been arguing against Biden’s proposed increase in business taxation by pointing out that higher corporate taxes will be bad news for workers, consumers, and shareholders.

Everyone agrees that shareholders get hurt. After all, they’re the owners of the businesses. Higher corporate taxes directly reduce the amount of money available to be paid as dividends.

But we also should recognize that higher corporate taxes can be passed along to consumers, so they also lose. Even more important, we should recognize that higher tax burdens also reduce incentives for business investment, and this can have a negative impact on worker compensation.

A 2017 study from the Tax Foundation, authored by Steve Entin, thoroughly explored this question and included a table summarizing the academic research.

Alex Durante updated the Tax Foundation’s summary of the research in a just-released report.

Here are the results of two new studies.

In a large study of German municipalities over a 20-year period, Fuest et al. (2018) find that slightly more than half of the corporate tax burden falls on workers. …Baker et al. (2020) find that consumers could also be impacted by corporate tax changes. Looking at specific product prices with linked survey and administrative data at the state level, the authors found that a 1 percentage-point increase in the corporate tax rate increased retail prices by 0.17 percent. Combining this estimate with the wage response estimated in Fuest et al., the authors calculated that 31 percent of the corporate tax incidence falls on consumers, 38 percent on workers, and 31 percent on shareholders.

If you want more information about the German study, I wrote about it a couple of years ago. Solid research.

Here’s my two cents on the issue: Shareholders pay 100 percent of the direct costs of the corporate tax. But we need to also consider the indirect costs, most notably who bears the burden when there’s less investment and slower wage growth.

If you ask five economists for their estimates of indirect costs, you’ll probably get nine different answers. So it’s no surprise that there’s no agreement about magnitudes in the academic research cited above.

But they all agree that workers lose when corporate rates increase, and that’s a big reason why we can confidently state that Biden’s class-warfare agenda is bad for ordinary people.

The bottom line is that the person (or business) writing a check to the IRS isn’t the only person who suffers because of a tax.

And the lesson to learn is that we should be lowering the corporate, not increasing it.

P.S. Here’s my primer on the overall issue of corporate taxation.

P.P.S. Here’s some research about the link between corporate tax and investment.

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Back in 2009 and 2010, when I had less gray hair, I narrated a four-part series on the economic burden of government spending.

Here’s Part II, which discusses the theoretical reasons why big government reduces prosperity.

I provide eight examples to illustrate how and why government spending can hinder economic growth.

The last item is what I called the “stagnation cost,” which is the tendency of politicians and bureaucrats to throw good money after bad because there is no incentive to adapt.

When giving speeches, I usually refer to this as the “inertia cost.”

But, regardless of what I call it, I explain that every government program has a group of beneficiaries that are strongly motivated to keep their gravy train moving even if money is being wasted.

And since politicians like getting votes from those beneficiaries, it’s very difficult to derail programs.

In an article for National Review, Sean-Michael Pigeon offers one very plausible explanation for why this happens.

He says politicians fall victim to the fallacy of sunk costs.

…we need an understanding of government inefficiency… One reason government spending is so needlessly costly is somewhat paradoxical: The state is wasteful precisely because people are so concerned about wasting money. …This is a classic sunk-cost fallacy: Costs that can’t be recovered are “sunk,” and therefore irrelevant for future decision-making. But while this fallacy is well known in economics, sunk costs are a big deal in the practical world of politics. Nobody wants to waste money, and politicians don’t want to cause waste directly. No member of Congress wants to be publicly responsible for a half-built bridge, especially when they have to tell taxpayers they still have to foot the bill for it. …Congress’s unwillingness to cut the funding of poorly run projects is a significant reason government projects always spend too much. …Politicians are nervous about cutting ongoing projects because they don’t want to leave taxpayers empty-handed, but stomaching sunk costs is worth it. Not only is it economically sound to stop government agencies from bleeding money, but it also sets the precedent that shoddy work will be held accountable. …to save money, sometimes you have to lose money.

In other words, it would be good to stop the bleeding.

But that’s not politically easy. Mr. Pigeon has examples in his column, but he should have included California’s (supposed) high-speed rail project.

That boondoggle has been draining money from state and federal coffers for about a decade. Cost estimates have exploded (something that almost always happens with government projects), yet construction has barely started.

Yet now Biden wants to increase federal subsidies for that money pit, along with other long-distance rail schemes.

And you won’t be surprised that a big argument from supporters is that we’ve already wasted billions and billions of dollars on the project, so therefore we should continue to waste even more money (sort of like hitting yourself on the head with a hammer because it feels good when you stop).

The big-picture bottom line is that the burden of federal spending should be reduced so that politicians have less ability to waste money.

And that also means that Americans will be able to enjoy more growth and more prosperity.

The targeted bottom line is that we should get Washington out of infrastructure.

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While Paul Krugman sometimes misuses and misinterprets numbers for ideological reasons (see his errors regarding the United States, France, Canada, the United States, Estonia, Germany, the United States, and the United Kingdom), he isn’t oblivious to reality.

At least not totally.

He’s acknowledged, for instance, that there is a Laffer Curve and that tax rates can become so onerous that tax revenues actually decline.

Now he’s had another encounter with the real world.

In a column that was mostly a knee-jerk defense of Biden’s class-warfare tax policy, Krugman confessed yesterday that big government ultimately means big tax increases for lower-income and middle-class people.

…is trying to “build back better” by taxing only the very affluent feasible? Is it wise? …There’s a good case that the kind of society progressives want us to become, with a very strong social safety net, can’t be paid for just by taxing the rich. A country like Denmark, for example, does have a high top tax rate… But Denmark also has very high middle-class taxation, in particular a 25 percent value-added tax, effectively a national sales tax. …the fact that even the Nordic countries feel compelled to raise a lot of money from the middle class suggests that there are limits…to how much you can raise just by taxing the rich. So if you want Medicare for all, Nordic levels of support for child care and families in general, and so on, just raising taxes on the 400K-plus elite won’t get you there.

It may not happen often, but Krugman is completely correct.

European-sized government requires European-style taxes on everyone. And that means a big value-added tax, as Krugman notes. And it almost certainly also means big energy taxes, higher payroll taxes, and much higher income tax rates on middle-class taxpayers.

This chart from Brian Riedl shows that government spending already was on track to become a bigger burden for the American economy, and Biden is proposing to go even faster in the wrong direction.

The growing gap between the blue lines and red lines implies giant tax increases. At the risk of understatement, there’s no way to finance that ever-expanding government by just pillaging upper-income taxpayers.

By the way, Krugman is right about big government leading to higher taxes on ordinary people, but he’s wrong about the desirability of that outcome.

He wants us to think that big government means a “better America,” but all the economic data tells a different story. A bigger fiscal burden means much lower living standards.

P.S. If you want another example of Krugman being right on a fiscal issue, click here.

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In the world of public finance, Ireland is best known for its 12.5 percent corporate tax rate.

That’s a very admirable policy, as will be momentarily discussed, but my favorite Irish policy was the four-year spending freeze in the late 1980s.

I discussed that fiscal reform in a video about 10 years ago, and I subsequently shared data on how spending restraint reduced the overall burden of government in Ireland and also lowered red ink.

It’s a great case study showing the beneficial impact of my Golden Rule.

Spending restraint also paved the way for better tax policy, and that’s a perfect excuse to discuss Ireland’s pro-growth corporate tax system. The Wall Street Journal opined last week about that successful supply-side experiment.

Democrats want a high global minimum tax that would end national tax competition and reduce the harm from their huge tax increase on U.S. business. But tax competition has been a boon to global growth and investment, as Ireland’s famous low-tax policy makes clear. Far from a “race to the bottom,” Ireland adopted policies that were ahead of their time and helped its economy grow from a backwater into a Celtic tiger. …in the late 1990s …an EU mandate led Dublin to…pioneer…a new strategy: Apply the same low tax rate to every business. Policy makers settled on 12.5%, which was a tax increase for some companies but a cut for others. This was a classic flat-tax reform… Ireland has reaped the benefits. Between 1986 and 2006, the economy grew to nearly 140% of the EU average from a mere two-thirds. Employment nearly doubled to two million, and the brain drain of the 1970s and 1980s reversed. …Oh and by the way: After Ireland slashed its rate and broadened the corporate-tax base, tax revenue soared. Except for the post-2008 recession and its aftermath, corporate-profits taxes in some years account for about 13% of total revenue and exceed 3% of GDP. That’s up from as low as 5% of revenue and less than 2% of GDP before the current tax rate was introduced.

That’s a lot of great information, particularly the last couple of sentences about how Ireland collected more revenue when the corporate tax rate was slashed.

Indeed, I discussed that remarkable development in Part II of my video series on the Laffer Curve (and it’s not just an Irish phenomenon since both the IMF and OECD have persuasive global data on lower corporate tax rates and revenue feedback).

Though higher revenue is not necessarily a good thing.

I complained back in 2011, for example, about how Irish politicians began to spend too much money once a booming economy began to generate a lot of tax revenue.

Which is a good argument for a Swiss-style spending cap in Ireland.

Let’s wrap up by considering some fiscal lessons from Ireland. Here are four things everyone should know.

  1. Spending restraint is a powerful tool to achieve smaller government..
  2. Lower tax rates on productive behavior lead to jobs and prosperity.
  3. Lower corporate tax rates can generate substantial revenue feedback.
  4. A spending cap is needed to maintain long-run fiscal discipline.

Good rules for Ireland. Good rules for any nation.

P.S. Ireland has definitely prospered in recent decades, but GNI data gives a more accurate picture than GDP data.

July 29, 2021 Addendum: This chart shows the growth Ireland has experienced since starting to adopt pro-market policies in the mid-1980s.

Even though the nation got hit hard by the financial crisis, it is still far ahead of where it was before reforms.

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There are many things to dislike about President Biden’s budget plan to expand the burden of government.

There will be ample opportunity to write about these issues in the coming weeks. For today, however, let’s identify and highlight the biggest problem.

Simply stated, Biden wants to permanently and significantly increase the burden of government spending. Here’s a chart, based on data from Table S.1 of the President’s budget, augmented by data from Table 1.3 of the Budget’s Historical Tables.

The budget had reached $4 trillion before the pandemic. It then skyrocketed for coronavirus-related spending.

But now that the emergency is receding, Biden is not going to let the burden of government fall back to prior levels. Instead, he’s proposing a $6 trillion budget for the upcoming fiscal year.

And that’s just the starting point. He wants spending to then climb rapidly – at almost twice the rate of inflation – up to $8 trillion by 2031.

By the way, this horrifying data doesn’t tell the entire story.

Biden’s budget doesn’t include some of his new spending giveaways. Brian Riedl addressed this fiscal gimmickry in a column for today’s New York Post.

…this budget does not even include additional spending and debt proposals that are coming later. …They account only for the recently-enacted “stimulus,” a massive discretionary spending hike, and the trillions in (creatively-defined) “infrastructure” spending proposed by the President over the past two months. However, during last fall’s campaign, Biden also proposed trillions in new spending for health care, Social Security, Supplemental Security Income, climate change, college aid, and other priorities. The White House has signaled that these new spending initiatives are still in the pipeline. Including these forthcoming proposals, the President would push spending and deficits far above any levels that have ever been sustained.

And don’t forget all this spending, both proposed and in the pipeline, is in addition to all the entitlement spending that is going to burden the economy over the next several decades.

Here’s one final point to underscore and emphasize the radical nature of Biden’s budget.

I’ve taken the previous chart and added a trendline showing what spending would be if Biden has simply followed the trajectory based on the actual spending levels of every President from Carter to Trump.

In other words, we’re looking at trillions of dollars of additional money being diverted from the productive sector of the economy and being put under the control of politicians and bureaucrats.

That does not bode well for American prosperity. Even the Congressional Budget Office recognizes this means lower living standards for our nation.

The bottom line is that if you adopt European-style fiscal policy, you get anemic European-style levels of income.

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I’ve shared all sorts of online quizzes that supposedly can detect things such as whether you’re a pure libertarian.

Or even whether you’re a communist.

Today, courtesy of the folks at the Committee for a Responsible Budget, you can agree or disagree with 24 statements to determine your “budget personality.”

I have some quibbles about some of the wording (for instance, I couldn’t answer “neither” when asked to react to: “The government should spend more money on children than on seniors”).

But I can’t quibble with the results. Given the potential outcomes, I’m glad to be a “Minimalist” who is “in favor of smaller government.”

Though I’m disappointed that I apparently didn’t get a perfect score on “Size of Government.”

And I need to explain why I got a mediocre score on the topic of “Fiscal Responsibility.”

The budget geeks at the Committee for a Responsible Federal Budget (CRFB) have a well-deserved reputation for rigorous analysis. I regularly cite their numbers and appreciate the work that they do.

That being said, they mistakenly focus on deficits and debt when the real problem is too much government.

I agree with Milton Friedman, who wisely observed that ““I would rather have government spend one trillion dollars with a deficit of a half a trillion dollars than have government spend two trillion dollars with no deficit.”

The folks at CRFB would disagree.

Indeed, they are so fixated on red ink that they would welcome tax increases.

At the risk of understatement, that would be a very bad approach.

The evidence from Europe shows that higher taxes simply lead to higher spending. And more debt.

Indeed, Milton Friedman also commented on this issue, warning that, “History shows that over a long period of time government will spend whatever the tax system raises plus as much more as it can get away with.”

The bottom line is that CRFB not only has the wrong definition of “Fiscal Responsibility,” but they also support policies that would make matters worse – even from their perspective!

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About one week ago, I shared some fascinating data from the Tax Foundation about how different nations penalize saving and investment, with Canada being the worst and Lithuania being the best.

I started that column by noting that there are three important principles for sensible tax policy.

  1. Low marginal tax rates on productive behavior
  2. No tax bias against capital (i.e., saving and investment)
  3. No tax preferences that distort the economy

Today, we’re going to focus on #1, specifically the tax burden on the average worker.

And, once again, we’ll be citing some of the Tax Foundation’s solid research. Here are their numbers showing the tax burden on the average worker in OECD nations. As you can see, Belgium is the worst place to be, followed by Germany, Austria, and France.

Colombia has the lowest tax burden on average workers, though that’s mostly a reflection of low earnings in that relatively poor nation.

Among advanced nations, Switzerland has the lowest tax burden when value-added taxes are part of the equation, while New Zealand is the best when looking just at income taxes and payroll taxes.

Here’s some of what the Tax Foundation wrote in its report, which was authored by Cristina Enache.

Average wage earners in the OECD have their take-home pay lowered by two major taxes: individual income and payroll (both employee and employer side). …The average tax burden among OECD countries varies substantially. In 2020, a worker in Belgium faced a tax burden seven times higher than that of a Chilean worker. …Accounting for VAT and sales tax, the average tax burden on labor in 2020 was 40.1 percent, 5.5 percentage points higher than when only income and payroll taxes are considered. …The tax burden on labor is referred to as a “tax wedge,” which simply refers to the difference between an employer’s cost of an employee and the employee’s net disposable income. …Tax wedges are particularly high in European countries—the 23 countries with the highest tax burden in the OECD are all European. …Chile and Mexico are the only countries that do not provide any tax relief for families with children but they keep the average tax wedge low.

Here’s a look at which countries in the past two decades that have made the biggest moves in the right direction and wrong direction. Kudos to Hungary and Lithuania.

And you can also see why I’m not overly optimistic about the long-run outlook for Mexico and South Korea.

The report also has a map focusing on tax burdens in Europe. The darker the nation, the more onerous the tax (notice how Switzerland is a light-colored oasis surrounded by dark-colored tax hells).

The report also notes that average tax wedges only tell part of the story. If you want to understand a tax system’s impact on incentives for productive behavior, it’s important to look at marginal tax rates.

The average tax wedge is…the combined share of labor and payroll taxes relative to gross labor income, or the tax burden. The marginal tax wedge, on the other hand, is the share of labor and payroll taxes applicable to the next dollar earned and can impact individuals’ decisions to work more hours or take a second job. The marginal tax wedge is generally higher than the average tax wedge due to the progressivity of taxes on labor across countries—as workers earn more, they face a higher tax wedge on their marginal dollar of earnings. …a drastic increase in the marginal tax wedge…might deter workers from pursuing additional income and working extra hours.

And here’s Table 1 from the report, which shows that marginal tax rates can be very high, even at relatively modest levels of income.

In what could be a world record for understatement, this data led Ms. Enache to conclude that Italy’s tax system “might” deter workers.

In 2020 an Italian worker making €38,396 (US $56,839) faced a marginal tax wedge as high as 117 percent on a 1 percent increase in earnings. Such marginal tax wedges might deter workers from pursuing additional income and working extra hours.

Though that’s not the most absurd example of over-taxation. Let’s not forget that thousands of French taxpayers have had tax bills that were greater than their entire income.

Sort of like an Obama-style flat tax, but in real life rather than a joke.

P.S. As I’ve previously noted, Belgium is an example of why a country can’t simultaneously have a big government and a good tax system.

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Tax increases are bad fiscal policy, but that doesn’t necessarily mean that they are politically unpopular.

Indeed, many voices in the establishment press are citing favorable polling data in hopes of creating an aura on inevitably for President Biden’s proposed tax hikes.

That’s a very worrisome prospect. If Biden succeeds, the United States could wind up toppling Canada for the dubious honor of having the world’s highest tax burden on saving and investment.

That would be bad news for American workers.

But are Biden’s media cheerleaders correct? Are tax increases popular?

According to a new scholarly working paper from the Federal Reserve (authored by Andrew C. Chang, Linda R. Cohen, Amihai Glazer, and Urbashee Paul), the answer is no.

At least if we judge politicians by what they do in election years. Here’s part of the study’s abstract.

We use new annual data on gasoline taxes and corporate income taxes from U.S.states to analyze whether politicians avoid tax increases in election years. These data contain 3 useful attributes: (1) when state politicians enact tax laws, (2) when state politicians implement tax laws on consumers and firms, and (3) the size of tax changes. Using a pre-analysis research plan that includes regressions of tax rate changes and tax enactment years on time-to-gubernatorial election year indicators, we find that elections decrease the probability of politicians enacting increases in taxes and reduce the size of implemented tax changes relative to non-election years. We find some evidence that politicians are most likely to enact tax increases right after an election. These election effects are stronger for gasoline taxes than for corporate income taxes and depend on no other political, demographic, or macroeconomic conditions.

For wonkier readers, Figure 7 has some of the major results of their statistical analysis. I’ve highlighted (in red) the most important conclusion of the research.

For regular readers, the main takeaway is that politicians almost always want more tax revenue. That’s what gives them the ability to distribute goodies and buy votes.

But notwithstanding their never-ending hunger to grab more money, they are very likely to reject tax increases in election years. They even reject higher corporate taxes, which are supposed to be popular (at least according to some in the establishment media).

Yet if tax increases were politically popular, we should see the opposite result.

I’ll close with the somewhat depressing observation that these results do not imply that voters want libertarian policy. It’s probably more accurate to say that people want goodies from the government, but they don’t want to pay for them. Politicians simply respond to those preferences (which brings to mind Garett Jones’ hypothesis that we have too much democracy).

Which is how Greece became a basket case. Which is why Italy is in the process of becoming a basket case. And it’s why the United States may not be that far behind (with states such as Illinois serving as early-warning signs).

P.S. The above-cited research should be a reminder of why a no-tax-hike pledge is important. Voters seem to be on the right side on the big-picture question of “Should taxes be higher?”, but if they think tax increases are going to happen, it’s quite likely that they will support the most economically damaging types of class-warfare levies.

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There are three important principles for sensible tax policy.

  1. Low marginal tax rates on productive behavior
  2. No tax bias against capital (i.e., saving and investment)
  3. No tax preferences that distort the economy

Today, let’s focus on #2.

I’ve written many times about why double taxation is a bad idea. This occurs when governments – thanks to capital gains taxes, dividend taxes, death taxes, etc – impose harsher tax burdens on income that is saved and invested compared to income that is immediately consumed.

Which is a bad idea since wages for workers are linked to productivity, which is linked to the amount of capital.

Which countries imposes the heaviest tax burdens on capital? According to a new report from the Tax Foundation, Canada is the worst of the worst (somewhat surprising), followed by Denmark (no surprise) and France (also no surprise).

The nations of Eastern Europe, along with Ireland, win the prize for the lowest tax burdens on capital.

The authors of the report, Jacob Lundberg and Johannes Nathell, make a much-needed point about why governments should not penalize saving and investment.

…capital should not be taxed at all. Taxing capital distorts individuals’ savings decisions. By reducing the return on savings, capital taxes penalize those who postpone their consumption rather than consuming their income as it is earned. Due to compounding interest, capital taxation penalizes saving more the longer the saving horizon is. For long saving horizons, the distortion is very large. This leads to lower saving, a lower capital stock, and lower GDP. Therefore, not taxing capital is in the interest of everyone, even those who spend everything they earn.

The report also contains this fascinating map comparing capital taxation in European nations.

At the risk of stating the obvious, it’s better to be a lighter-colored nation.

This is fascinating data for tax wonks, but it might not perfectly capture the relative attractiveness (or unattractiveness) of various countries. I think two caveats are warranted.

First, it’s quite likely that some Western European nations accumulated lots of capital and generated lots of wealth back in the 1800s and early 1900s when the burden of government was very small and taxes were very low. If some of the capital from that period is still generating returns (and thus tax revenue), it may overstate the tax burden on current saving and investment.

Second, the methodology looks at capital revenues as a percentage of capital income. This perfectly reasonable approach overlooks the fact that tax rates have an effect on the amount of income that is both earned and reported. This is the core insight of the Laffer Curve and it could mean that some countries show high levels of revenue in part because tax burdens are modest (and vice-versa).

That being said, I wouldn’t expect major changes in the rankings, even if there was a way to address these concerns.

The bottom line is that we know how to define good tax policy, but very few governments have an interest in maximizing liberty and prosperity. The challenge is that politicians 1) usually want more money so they can buy more votes, but 2) sometimes let envy trump their desire for more revenue.

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The United States conducted an experiment in the 1980s. Reagan dramatically lowered the top tax rate on households, dropping it from 70 percent to 28 percent.

Folks on the left bitterly resisted Reagan’s “supply-side” agenda, arguing that “the rich won’t pay enough” and “the government will be starved of revenue.”

Fortunately, we can look at IRS data to see what happened to tax payments from those making more than $200,000 per year.

Lo and behold, it turns out that Reaganomics was a big success. Uncle Sam collected five times as much money when the rate was slashed.

As I’ve previously written, this was the Laffer Curve on steroids. Even when you consider other factors (population growth, inflation, other reforms, etc), there’s little doubt that we got a big “supply-side effect” from Reagan’s tax reforms.

Now Biden wants to run this experiment in reverse.

Based on basic economics, his approach won’t succeed. But let’s augment theory by examining what actually happened when Hoover and Roosevelt raised tax rates in the 1930s.

Alan Reynolds reviewed tax policy in the 1920s and 1930s, but let’s focus on what he wrote about the latter decade. He starts with some general observations.

Large increases in marginal tax rates on incomes above $50,000 in the 1930s were almost always matched by large reductions in the amount of high income reported and taxed… An earlier generation of economists found that raising tax rates on incomes, profits, and sales in the 1930s was inexcusably destructive. In 1956, MIT economist E. Cary Brown pointed to the “highly deflationary impact” of the Revenue Act of 1932, which pushed up rates virtually across the board, but notably on the lower‐​and middle‐​income groups.

He then gets to the all-important issue of higher tax rates leading to big reductions in taxable income.

In Figure 1, the average marginal tax rate is an unweighted average of statutory tax brackets applying to all income groups reporting more than $50,000 of income. After President Hoover’s June 1932 tax increase (retroactive to January) the number of tax brackets above $50,000 quadrupled from 8 to 32, ranging from 31 percent to 63 percent. The average of many marginal tax rates facing incomes higher than $50,000 increased from 21.5 percent in 1931 to 47 percent in 1932, and 61.9 percent in 1936. One of the most striking facts in Figure 1 is that the amount of reported income above $50,000 was almost cut in half in a single year—from $1.31 billion in 1931 to $776.7 million in 1932.

Here’s the aforementioned Figure 1. You can see that taxable income soared when tax rates were slashed in the 1920s.

But when tax rates were increased in the 1930s, taxable income collapsed and never recovered.

What’s the lesson from this chart? As Alan explained, the lesson is that high tax rates lead to rich people earning and declaring less taxable income (they still have that ability today).

In the eight years from 1932 to 1939, the economy was in cyclical contraction for only 28 months. Even in 1940, after two huge increases in income tax rates, individual income tax receipts remained lower ($1,014 million) than they had been in the 1930 slump ($1,045 million) when the top tax rate was 25 percent rather than 79 percent. Eight years of prolonged weakness in high incomes and personal tax revenue after tax rates were hugely increased in 1932 cannot be easily brushed away as merely cyclical, rather than a behavioral response to much higher tax rates on additional (marginal) income. Just as income (and tax revenue) from high‐​income taxpayers rose spectacularly after top tax rates fell from 1921 to 1928, high incomes and revenue fell just as spectacularly in 1932 when top tax rates rose.

One big takeaway is that Hoover and FDR were two peas in a pod.

Both imposed bad tax policy.

From 1930 to 1937, unlike 1923–25, virtually all federal and state tax rates on incomes and sales were repeatedly increased, and many new taxes were added, such as the Smoot‐​Hawley tariffs in 1930, taxes on alcoholic beverages in December 1933, and a Social Security payroll tax in 1937. Annual growth of per capita GDP from 1929 to 1939 was essentially zero. …To summarize: all the repeated increases in tax rates and reductions of exemptions enacted by presidents Hoover and Roosevelt in 1932–36 did not even manage to keep individual income tax collections as high in 1939–40 (in dollars or as a percent of GDP) as they had been in 1929–30. The experience of 1930 to 1940 decisively repudiated any pretense that doubling or tripling marginal tax rates on a much broader base proved to be a revenue‐​maximizing plan.

Alan closes with an observation that should raise alarm bells.

It turns out that the higher tax rates on the rich were simply the camel’s nose under the tent. The real agenda was extending the income tax to those with more modest incomes.

The most effective and sustained changes in personal taxes after 1931 were not the symbolic attempts to “soak the rich,” but rather the changes deliberately designed to convert the income tax from a class tax to a mass tax. The exemption for married couples was reduced from $3,500 to $2,500 in 1932, $2,000 in 1940, and $1,500 in 1941. Making more low incomes taxable quadrupled the number of tax returns from 3.7 million in 1930 to 14.7 million in 1940… The lowest tax rate was also raised from 1.1 percent to 4 percent in 1932, 4.4 percent in 1940, and 10 percent in 1941.

The same thing will happen today if Biden succeeds in raising taxes on the rich. Those tax hikes won’t collect much revenue, but politicians will increase spending anyhow. They’ll then use high deficits as an excuse for higher taxes on lower-income and middle-class taxpayers (some of the options include financial taxes, carbon taxes, and value-added taxes).

Lather, rinse, repeat. Until the United States is Europe. And that will definitely be bad news for ordinary people.

P.S. Here’s what we can learn about tax policy in the 1920s. And the 1950s.

P.P.S. The 1920s and 1930s also can teach us an important lesson about growth and inequality.

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As an economist, I strongly oppose the wealth tax (as well as other forms of double taxation) because it’s foolish to impose additional layers of tax that penalize saving and investment.

Especially since there’s such a strong relationship between investment and worker compensation.

The politicians may tell us they’re going to “soak the rich,” but the rest of us wind up getting wet.

That being said, there are also administrative reasons why wealth taxation is a fool’s game. One of them, which I mentioned as part of a recent tax debate, is the immense headache of trying to measure wealth every single year.

Yes, that’s not difficult if someone has assets such as stock in General Motors or Amazon. Bureaucrats from the IRS can simply go to a financial website and check the value for any given day.

But the value of many assets is very subjective (patents, royalties, art, heirlooms, etc), and that will create a never-ending source of conflict between taxpayers and the IRS if that awful levy is ever imposed.

Let’s look at a recent dispute involving another form of destructive double taxation. The New York Times has an interesting story about a costly dispute involving the death tax to be imposed on Michael Jackson’s family.

Michael Jackson died in 2009… But there was another matter that has taken more than seven years to litigate: Jackson’s tax bill with the Internal Revenue Service, in which the government and the estate held vastly different views about what Jackson’s name and likeness were worth when he died. The I.R.S. thought they were worth $161 million. …Judge Mark V. Holmes of United States Tax Court ruled that Jackson’s name and likeness were worth $4.2 million, rejecting many of the I.R.S.’s arguments. The decision will significantly lower the estate’s tax burden… In a statement, John Branca and John McClain, co-executors of the Jackson estate, called the decision “a huge, unambiguous victory for Michael Jackson’s children.”

I’m glad the kids won this battle.

Michael Jackson paid tax when he first earned his money. Those earnings shouldn’t be taxed again simply because he died.

But the point I want to focus on today is that a wealth tax would require these kinds of fights every single year.

Given all the lawyers and accountants this will require, that goes well beyond adding insult to injury. Lots of time and money will need to be spent in order to (hopefully) protect households from a confiscatory tax that should never exist.

P.S. The potential administrative nightmare of wealth taxation, along with Biden’s proposal to tax unrealized capital gains at death, help to explain why the White House is proposing to turbo-charge the IRS’s budget with an additional $80 billion.

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Good fiscal policy means low tax rates and spending restraint.

And that’s a big reason why I’m a fan of Reaganomics.

Unlike other modern presidents (including other Republicans), Reagan successfully reduced the tax burden while also limiting the burden of government spending.

President Biden wants to take the opposite approach.

A few days ago, Dan Balz of the Washington Post provided some “news analysis” about Biden’s fiscal agenda. Some of what he wrote was accurate, noting that the president wants to increase spending by an additional $6 trillion over the next 10 years.

…the scope and implications of his domestic agenda have come sharply into focus. Together they represent the most dramatic shift in federal economic and social welfare policy since Ronald Reagan was elected 40 years ago. …The politics of redistribution, which are at the heart of what Biden is proposing, could test decades of assumptions that Democrats should be afraid of being tagged as the party of big government. …Together, the already approved coronavirus relief plan, the infrastructure proposal that was unveiled a few weeks ago and the newly proposed plan to invest in social welfare programs would total roughly $6 trillion.

But Mr. Balz then decided to be either sloppy or dishonest, writing that we’ve had decades of Reagan-style policies that have squeezed domestic spending and disproportionately lowered tax burden for rich people.

Reagan’s small-government philosophy resulted in a decades-long squeeze on the federal government, especially domestic spending, and on tax policies that mainly benefited the wealthiest Americans. …Government spending on social safety-net programs has been reduced compared with previous years.

Balz is wrong, wildly wrong.

You don’t have to take my word for it. Here’s a chart, taken from an October 2020 report by the Congressional Budget Office. As you can see, people in the lowest income quintile have been the biggest winners,, with their average tax rate dropping from about 10 percent to about 2 percent..

Here’s a chart showing marginal tax rates from a January 2019 CBO report. As you can see, Reagan lowered marginal tax rates for everyone, but Balz’s assertion that the rich got the lion’s share of the benefits is hard to justify considering that people in the bottom quintile now have negative marginal tax rates.

Balz’s mistakes on tax policy are significant.

But his biggest error (or worst dishonesty) occurred when he wrote about a “decades-long squeeze” on domestic spending and asserted that “spending on social safety-net programs has been reduced.”

A quick visit to the Office of Management and Budget’s Historical Tables is all that’s needed to debunk this nonsense. Here’s a chart, based on Table 8.2, showing the inflation-adjusted growth of entitlements and domestic discretionary programs.

Call me crazy, but I’m seeing a rapid increase in domestic spending after Reagan left office.

P.S. There’s a pattern of lazy/dishonest fiscal reporting at the Washington Post.

P.P.S. I also can’t resist noting that Balz wrote how Biden wants to “invest” in social welfare programs, as if there’s some sort of positive return from creating more dependency. Reminds me of this Chuck Asay cartoon from the Obama years.

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When I ask my left-leaning friends what they think about the flight of investors, entrepreneurs, and business owners from high-tax states, I tend to get three responses.

  1. It isn’t actually happening (these are my friends who apparently don’t know how to read).
  2. It’s happening, but it doesn’t matter (data from the IRS suggests it actually is significant).
  3. It’s happening, but high-tax states will be better off without these selfish and greedy people.

The folks making the third point actually have a decent argument, at least in terms of short-run political outcomes. Democrats rarely have to worry about retaining control of states like California, New York, Illinois, and New Jersey now that many Republican-leaning voters have moved away.

But sometimes short-run benefits are exceeded by long-run costs, and the recent data on congressional redistricting from the Census Bureau is a good example.

As you can see, there’s a continuing shift of political power – as measured by seats in Congress – from blue states to red states.

Patrick Gleason of Americans for Tax Reform explains what this means in a column for Forbes.

Over the past decade Americans have been voting with their feet in favor of states with lower overall tax burdens… As a result, high tax states…are set to lose congressional clout for the next decade, to the benefit of low tax states… the seven states that will lose congressional seats due to stagnant population growth have higher top income tax rates and greater overall tax burdens, on average, than do the six states gaining seats. In fact, the average top personal income tax rate for states losing seats in congress is 6.5%, which is 46% greater than the 4.45% average top income tax rate for states gaining seats.

Some people may want to dismiss Mr. Gleason’s column since he works for a group that supports smaller government.

But you can find the same analysis in this column in the Washington Post by Aaron Blake.

…what does the new breakdown mean from a partisan perspective? All told, five seats will migrate from blue states to red ones — owing to population shifts from the Rust Belt, the Northeast and California to the South and other portions of the West. Five of the seven seats being added also go to states under complete GOP control of redistricting, with three of seven being taken away coming from states in which Democrats have some measure of control over the maps. …That should help Republicans… The Cook Political Report estimates the shifts are worth about 3.5 seats… As for the electoral college in future presidential elections, …Michigan and Pennsylvania…are states Democrats probably need to win in the near future, meaning it’s probably a bigger loss for them. …If we reran the 2020 electoral college with the new electoral votes by state, Biden’s margin would shrink from 306-232 to 303-235. That seems negligible. But if you overlay the 2000 presidential results — three reapportionments ago — on the current electoral vote totals, George W. Bush’s narrow win with 271 electoral votes becomes a much more decisive win with 290. That gives you a sense where things have trended.

Let’s now return to the hypothesis that tax-motivated migration is playing a role.

Here’s an instructive tweet from Andrew Wilford of the National Taxpayers Union.

I’ll wrap up today’s column by augmenting the data in Mr. Wilford’s tweet.

Because not only are there, on average, lower tax burdens in the states gaining congressional seats, but every one of them has some very desirable feature of its tax code.

To be sure, not all of the state-to-state migration is due to tax policy. There are all sorts of other policies that determine whether a state is an attractive place for people looking to relocate.

And there are other factors (family, climate, etc) that have nothing to do with public policy.

All things considered, however, being a low-tax state means more jobs, growth, and people, at least when compared with being a high-tax state.

P.S. If you’re interested in seeing how states rank in various indices, click here, here, and here.

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Because of the negative impact on competitiveness, productivity, and worker compensation, it’s a very bad idea to impose double taxation of saving and investment.

Which is why there should be no tax on capital gains, and a few nations sensibly take this approach.

But they’re outnumbered by countries that do impose this pernicious form of double taxation. For instance, the Tax Foundation has a new report about the level of capital gains taxation in Europe, which includes this very instructive map.

As you can see, some countries, such as Denmark (gee, what a surprise), have very punitive rates.

However, other nations (such as Switzerland, Belgium, Czech Republic, Slovakia, Luxembourg, and Slovenia) wisely don’t impose this form of double taxation.

If the United States was included, we would be in the middle of the pack. Actually, we would be a bit worse than average, especially when you include the Obamacare tax on capital gains.

But if Joe Biden succeeds, the United States soon will have the dubious honor of being the worst of the worst.

The Wall Street Journal opined this morning about the grim news.

Biden officials leaked that they will soon propose raising the federal tax on capital gains to 43.4% from a top rate of 23.8% today. …Mr. Biden will tax capital gains for taxpayers who earn more than $1 million at the personal income tax rate, which he also wants to raise to 39.6% from 37%. Add the 3.8% ObamaCare tax on investment, and you get to 43.4%. And that’s merely the federal rate. Add 13.3% in California and 11.85% in New York (plus 3.88% in New York City), which also tax capital gains as regular income, and you are heading toward the 60% rate range. Keep in mind this is on the sale of gains that are often inflated as assets are held for years without adjustment for inflation. Oh, and Mr. Biden also wants to eliminate the step-up in basis on capital gains that accrues at death.

Beating out Denmark for the highest capital gains tax rate is bad.

But it’s even worse when you realize that capital gains often occur because investors expect an asset to generate more future income. But that future income gets hit by the corporate income tax (as well as the tax on dividends) when it actually materializes.

So the most accurate way to assess the burden on new investment is to look at the combined rate of corporate taxation and capital gains (as as well as the combined rate of corporate taxation and dividend taxation).

By that measure, the United States already has one of the world’s most-punitive tax regimes, And Biden wants to increase all of those tax rates.

Sort of a class-warfare trifecta, and definitely not a recipe for good economic results.

For those interested in more details, here’s a video I narrated on the topic back in 2010.

And I also recommend these columns (here, here, and here) for additional information on why we should be eliminating the capital gains tax rather than increasing it.

P.S. Don’t forget that there’s no indexing to protect taxpayers from having to pay tax on gains that are due only to inflation.

P.P.S. And also keep in mind that some folks on the left want to impose tax on capital gains that only exist on paper.

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As part of my recent interview about European economic policy with Gunther Fehlinger, I pontificated on issues such as Convergence and Wagner’s Law.

I also explained why a Swiss-style spending cap could have saved Greece and Italy from fiscal crisis. Here’s that part of the discussion.

For those not familiar with spending caps, this six-minute video tells you everything you need to know.

Simply stated, this policy requires politicians to abide by fiscal policy’s Golden Rule, meaning that – on average – government spending grows slower than the private economy.

And that’s a very effective recipe for a lower burden of spending and falling levels of red ink.

One of the points I made in the video is that spending caps would prevented the fiscal mess in Greece and Italy.

To show what I mean, I went to the International Monetary Funds World Economic Outlook database and downloaded the historical budget data for those two nations. I then created charts showing actual spending starting in 1988 compared to how much spending would have grown if there was a requirement that the budget could only increase by 2 percent each year.

Here are the shocking numbers for Greece.

The obvious takeaway is that there never would have been a fiscal crisis if Greece had a spending cap.

That also would be true even if the spending cap allowed 3-percent budget increases starting in 1998.

And it would be true if the 2-percent spending cap didn’t start until 2000.

There are all sorts of ways of adjusting the numbers. The bottom line is that any reasonable level of spending restraint could have prevented the horrible misery Greece has suffered.

Here are the numbers for Italy.

As you can see, the government budget has not increased nearly as fast in Italy as it did in Greece, but the burden of spending nonetheless has become more onerous – particularly when compared to what would have happened if there was a 2-percent spending cap.

I’ve written many times (here, here, here, and here) about Italy’s looming fiscal crisis. As I said in the interview, I don’t know when the house of cards will collapse, but it won’t be pretty.

And tax reform, while very desirable, is not going to avert that crisis. At least not unless it is combined with very serious spending restraint.

P.S. For those who want information about real-world success stories, I shared three short video presentations back in 2015 about the spending caps in Switzerland, Hong Kong, and Colorado.

P.P.S. It’s also worth noting that the United States would be in a much stronger position today if we had enacted a spending cap a couple of decades ago.

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In my lifetime, the only good president has been Ronald Reagan, whose policies restored America’s economy and led to the end of the Soviet Union’s evil empire.

But if we look at the past 100 years, Calvin Coolidge might rank even higher.

Amity Shlaes was the right person to narrate that video. She’s written the definitive biography of Coolidge.

Indeed, I’ve previously cited her expertise on Coolidge’s fiscal restraint, as well as Silent Cal’s wisdom on tax policy.

Given the tendency of politicians to buy votes with other people’s money, I’m especially impressed by his frugality. He followed my Golden Rule about 90 years before I ever proposed the concept.

Let’s further investigate his performance.

Larry Reed of the Foundation for Economic Education has two must-read articles about Coolidge’s track record.

First, to illustrate Coolidge’s admirable philosophy of fiscal restraint, he shares these key passages from his 1925 inauguration.

I favor the policy of economy, not because I wish to save money, but because I wish to save people. The men and women of this country who toil are the ones who bear the cost of the Government. Every dollar that we carelessly waste means that their life will be so much the more meager. Every dollar that we prudently save means that their life will be so much the more abundant. Economy is idealism in its most practical form. The wisest and soundest method of solving our tax problem is through economy…The collection of any taxes which are not absolutely required, which do not beyond reasonable doubt contribute to the public welfare, is only a species of legalized larceny. They do not support any privileged class; they do not need to maintain great military forces; they ought not to be burdened with a great array of public employees…. I am opposed to extremely high rates, because they produce little or no revenue, because they are bad for the country, and, finally, because they are wrong. …The wise and correct course to follow in taxation and all other economic legislation is not to destroy those who have already secured success but to create conditions under which everyone will have a better chance to be successful.

Magnificent.

And you should also see what he said in 1926, when celebrating the 150th anniversary of America’s independence.

Larry Reed also debunked the silly notion that Coolidge was responsible for the Great Depression of the 1930s.

So-called “progressives” tell us that Calvin Coolidge was a bad president because the Great Depression started just months after he left office. …Should Coolidge get any of the blame for the Great Depression? The Federal Reserve’s expansion of money and credit in the 1920s certainly set the country up for at least a mild fall, but that wasn’t Coolidge’s fault. He saw the Fed as the “independent” entity it was supposed to be and didn’t meddle with it. At least once he expressed concern that the Fed might be fostering a bubble but he otherwise didn’t make a stink about it. “Not my bailiwick,” he believed. We can legitimately say that Coolidge should have criticized the Fed’s easy money policy more loudly. …In any event, far worse than the Fed’s inflation was its deflation, which didn’t begin in earnest until the final weeks of the Coolidge administration. …Every good economist concedes that erratic monetary policy at the Fed was at least a minor cause of the 1920s boom and surely a major cause of the 1930s bust. You can’t blame that on Coolidge.

If you want more information about the Fed’s role in causing economic turmoil, I recommend this video presentation from George Selgin.

Larry’s column points out that both Herbert Hoover and Franklin Roosevelt then imposed policies that lengthened and deepened the downturn.

Markets were, in fact, making a comeback in the spring of 1930 and unemployment had not yet hit double digits. Not until June 1930, when Congress and President Hoover raised tariffs and triggered an international trade war, did recession cascade into depression. Two years later, they flattened just about everybody who was still standing by doubling the income tax. …Franklin Roosevelt…then delivered…absurd interventions kept the economy in depression for another seven years.

What especially tragic about the Great Depression is that Warren Harding showed, just a decade earlier, how to quickly put an end to a deep downturn.

I’ll close with by emphasizing this quote from Coolidge’s inaugural address. Every supporter of limited government should withhold support from any politician who is unable to echo this sentiment today.

P.S. There is another president that I admire, though the number of good presidents is greatly outnumbered by the motley – and bipartisancollection of bad presidents.

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My views on the value-added tax are very straightforward.

These points are worth contemplating because I am increasingly worried that we’ll get a VAT because of misguided conservatives rather than because of tax-and-spend leftists.

Consider, for instance, Alan Viard of the American Enterprise.

He wrote a column last November arguing that we should let politicians in Washington have this new source of tax revenue, and I explained why his arguments were wrong.

But I’m obviously not very persuasive since he just reiterated his support for a VAT in an interview with the Dallas Federal Reserve Bank. Here are some of the highlights (lowlights might be a better term).

…tax increases on corporations and high-income households as well as benefit cuts could be part of a debt-reduction package…such tax increases would have limited revenue potential. …a VAT should—and undoubtedly would—be accompanied by rebates to offset the tax burden on low-income households. The Tax Policy Center estimated that a 7.7 percent VAT with rebates, which would raise the same net revenue as a 5 percent VAT without rebates, would generally be progressive. …the VAT would be only one component of the federal tax system. Individual and corporate income taxes would continue to add progressivity.

There are two remarkable admissions in the above excerpts.

  1. He’s basically admitting a VAT would be accompanied by class-warfare tax hikes on companies and households – thus undermining the usual argument that the VAT is needed to avert these other types of tax increases.
  2. He’s basically admitting a VAT would be accompanied by a new entitlement program of “rebates” – thus undermining the argument that VAT revenues would be used to reduce deficits and debt.

But what I found particularly amazing is that Viard never tries to empirically justify his main argument that, a) debt is a problem, and b) the VAT is part of a solution.

I don’t particularly object to the first part (though I would argue the real problem is spending). But the assertion that a VAT will solve that problem is contrary to real-world evidence.

For instance, government debt has continued to grow ever since Japan adopted a VAT.

Moreover, the evidence from Europe, which shows not only that the burden of government spending increased after the VAT was adopted beginning (see chart at start of column), but also that government debt subsequently exploded (see nearby chart).

And that data doesn’t even include all the additional red ink accumulated in recent years!

P.S. The clinching argument is that one of America’s best presidents opposed a VAT and one of America’s worst presidents supported a VAT. That tells you everything you need to know.

P.P.S. The pro-tax International Monetary Fund inadvertently produced a study showing why the VAT is a money machine for big government.

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

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Way back in 2007, I narrated this video to explain why tax competition is very desirable because politicians are likely to overtax and overspend (“Goldfish Government“) if they think taxpayers have no ability to escape.

The good news is that tax competition has been working.

As explained in the above video, there have been big reductions in personal tax rates and corporate tax rates. Just as important, governments have reduced various forms of double taxation, meaning lower tax rates on dividends and capital gains.

Many governments have also reduced – or even eliminated – death taxes and wealth taxes.

These pro-growth tax reforms didn’t happen because politicians read my columns (I wish!). Instead, they adopted better tax policy because they were afraid of losing jobs and investment to countries with better fiscal policy.

Now for the bad news.

There’s been an ongoing campaign by high-tax governments to replace tax competition with tax harmonization. They’ve even conscripted international bureaucracies such as the Organization for Economic Cooperation and Development (OECD) to launch attacks against low-tax jurisdictions.

And now the United States is definitely on the wrong side of this issue.

Here’s some of what the Biden Administration wants.

The United States can lead the world to end the race to the bottom on corporate tax rates. A minimum tax on U.S. corporations alone is insufficient. …President Biden is also proposing to encourage other countries to adopt strong minimum taxes on corporations, just like the United States, so that foreign corporations aren’t advantaged and foreign countries can’t try to get a competitive edge by serving as tax havens. This plan also denies deductions to foreign corporations…if they are based in a country that does not adopt a strong minimum tax. …The United States is now seeking a global agreement on a strong minimum tax through multilateral negotiations. This provision makes our commitment to a global minimum tax clear. The time has come to level the playing field and no longer allow countries to gain a competitive edge by slashing corporate tax rates.

As Charlie Brown would say, “good grief.” Those passages sound like they were written by someone in France, not America

And Heaven forbid that  countries “gain a competitive edge by slashing corporate tax rates.” Quelle horreur!

There are three things to understand about this reprehensible initiative from the Biden Administration.

  1. Tax harmonization means ever-increasing tax rates – It goes without saying that if politicians are able to create a tax cartel, it will merely be a matter of time before they ratchet up the tax rate. Simply stated, they won’t have to worry about an exodus of jobs and investment because all countries will be obliged to have the same bad approach.
  2. Corporate tax harmonization will be followed by harmonization of other taxes – If the scheme for a harmonized corporate tax is imposed, the next step will be harmonized (and higher) tax rates on personal income, dividends, capital gains, and other forms of work, saving, investment, and entrepreneurship.
  3. Tax harmonization denies poor countries the best path to prosperity – The western world became rich in the 1800s and early 1900s when there was very small government and no income taxes. That’s the path a few sensible jurisdictions want to copy today so they can bring prosperity to their people, but that won’t be possible in a world of tax harmonization.

P.S. If you want more information, here’s 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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The state of New York is an economic disaster area.

  • New York is ranked #50 in the Economic Freedom of North America.
  • New York is ranked #48 in the State Business Tax Climate Index.
  • New York is ranked #50 in the Freedom in the 50 States.
  • New York is next-to-last in measures of inbound migration.
  • New York is ranked #50 in the State Soft Tyranny Index.

The good news is that New York’s politicians seem to be aware of these rankings and are taking steps to change policy.

The bad news is that they apparently want to be in last place in every index, so they’re looking at a giant tax increase.

The Wall Street Journal opined on the potential tax increase yesterday.

…lawmakers in Albany should be shouting welcome home. Instead they’re eyeing big new tax increases that would give the state’s temporary refugees to Florida—or wherever—one more reason to stay away for good. …Here are some of the proposals… Impose graduated rates on millionaires, up to 11.85%. …Since New York City has its own income tax, running to 3.88%, the combined rate would be…a bigger bite than even California’s notorious 13.3% top tax, and don’t forget Uncle Sam’s 37% share. …The squeeze is worse when you add the new taxes President Biden wants. A second factor: In 2017 the federal deduction for state and local taxes was capped at $10,000, so New Yorkers will now really feel the pinch. As E.J. McMahon of the Empire Center for Public Policy writes: “The financial incentive for high earners to move themselves and their businesses from New York to states with low or no income taxes has never—ever—been higher than it already is.”

The potential deal also would increase the state’s capital gains tax and the state’s death tax, adding two more reasons for entrepreneurs and investors to escape.

Here are some more details from a story in the New York Times by Luis Ferré-Sadurní and .

Gov. Andrew M. Cuomo and New York State legislative leaders were nearing a budget agreement on Monday that would make New York City’s millionaires pay the highest personal income taxes in the nation… Under the proposed new tax rate, the city’s top earners could pay between 13.5 percent to 14.8 percent in state and city taxes, when combined with New York City’s top income tax rate of 3.88 percent — more than the top marginal income tax rate of 13.3 percent in California… Raising taxes on the rich in New York has been a top policy priority of the Democratic Party’s left flank… The business community has warned that raising income taxes could prompt millionaires who have left the state during the pandemic and are working remotely to make their move permanent, damaging the state’s tax base. Currently, the top 2 percent of the state’s highest earners pay about half of the state’s income taxes. …The corporate franchise tax rate would also increase to 7.25 percent from 6.5 percent.

There are two things to keep in mind about this looming tax increase.

That second item is a big reason why so many taxpayers already have escaped New York and moved to states with better tax policy (most notably, Florida).

And even more will move if tax rates are increased, as expected.

Indeed, if the left’s dream agenda is adopted, I wouldn’t be surprised if every successful person left New York. In a column for the Wall Street Journal, Mark Kingdon warns about other tax hikes being considered, especially a wealth tax.

Legislators in Albany are considering two tax bills that could seriously damage the economic well-being and quality of life in New York for many years to come: a wealth tax and a stock transfer tax. …Should New York enact a 2% wealth tax, a wealthy New Yorker could wind up paying a 77% tax on short-term stock market profits. And that’s a conservative estimate: It assumes that stocks return 9% a year. If the return is 4.4% or less, the tax would be more than 100%. …65,000 families pay half of the city’s income taxes, and they won’t stay if the taxes become unreasonable… The trickle of wealthy émigrés out of New York has become a steady stream… It will be a flood if New York enacts a wealth tax with an associated tax on unrealized gains, which would lower, not raise, tax revenues, as those who leave take with them jobs and related services, such as legal and accounting. …The geese who have laid golden eggs for years see what is happening in Albany, and they’ll fly south to avoid being carved up.

The good news – at least relatively speaking – is that a wealth tax is highly unlikely.

But that a rather small silver lining on a very big dark cloud. The tax increases that will happen are more than enough to make the state even more hostile to private sector growth.

I’ll close with a few observations.

There are a few states that can get away with higher-than-average taxes because of special considerations. California, for instance, has climate and scenery. In the case of New York, it can get away with some bad policy because some people think of New York City as a one-of-a-kind place. But there’s a limit to how much those factors can be exploited, as both California and New York are now learning.

What politicians don’t realize (or don’t care about) is that people look at a range of factors when deciding where to live. This is especially true for successful entrepreneurs, investors, and business owners, who have both resources and knowledge to assess the costs and benefits of different locations. The problem for New York is that it looks bad on almost all policy metrics.

If the tax increases is enacted, expect to see a significant drop in taxable income as upper-income taxpayers either leave the state or figure out other ways of protecting their income. I don’t know if the state will be on the downward-sloping portion of the Laffer Curve, but it’s safe to assume that revenues over time will fall far short of projections. And it’s very safe to assume that the economic damage will easily offset any revenues that are collected.

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It’s simple to mock Democrats like Joe Biden, Alexandria Ocasio-Cortez, and Bernie Sanders. One reason they’re easy targets is they want people to believe that America can finance a European-style welfare state with higher taxes on the rich.

That’s nonsensical. Simply stated, there are not enough rich people and they don’t earn enough money (and they have relatively easy ways of protecting themselves if their tax rates are increased).

Some folks on the left admit this is true. I’ve shared many examples of big-government proponents who openly acknowledge that lower-income and middle-class people will need to be pillaged as well.

I disagree with these people on policy, but I applaud them for being straight shooters. They get membership in my “Honest Leftists” club.

And we have a new member of that group.

Catherine Rampell opines in the Washington Post that President Biden should openly embrace tax increases on everybody.

President Biden is trying to address…big, thorny problems…with one hand tied behind his back. Yet he’s the one who tied it, with a pledge to bankroll every solution solely by soaking the rich. …Some have compared Biden’s efforts to Franklin D. Roosevelt’s New Deal, Lyndon B. Johnson’s Great Society or other ambitious endeavors of the pre-Reagan era — when government was more commonly seen as a solution rather than the problem. …Like many Democrats before him, Biden has promised to pay for government expansions by raising taxes only on corporations and the “rich,” everyone else spared. Exactly who counts as “rich” is an ever-shrinking sliver of the population. Barack Obama defined it as households making $250,000 or more a year; now, Biden says it’s anyone making $400,000 or more. …more than 95 percent of Americans are excluded from helping to foot the bill… But…there aren’t enough ultrarich people and megacorporations out there to fund the massive new economic investments and social services Democrats say they want… Democrats sometimes point to Sweden or Denmark as examples of generous, successful welfare states. But in those countries, taxes are higher and broader-based. Here, the middle class pays much lower taxes… Here’s the argument I wish Biden would make: These new spending projects are worth doing. …we should all be financially invested in their success, at least a little. Taxation is the price we pay for a civilized society, as Supreme Court Justice Oliver Wendell Holmes Jr. put it. …If Biden wants to permanently transform the role of government, that may need to be his trajectory.

Needless to say, I fundamentally disagree with Ms. Rampell’s support for an even bigger welfare state, regardless of which taxpayers are being pillaged.

But at least she wants to pay for it and knows that means the IRS reaching into all of our pockets. And kudos to her for acknowledging the high tax burdens on lower-income and middle-class people in nations such as Sweden and Denmark.

Though I can’t resist commenting on the quote (“Taxation is the price we pay for a civilized society”) from Oliver Wendell Holmes.

People on the left love to cite that sentence, but they conveniently never explain that Holmes reportedly made that statement in 1904, nine years before there was an income tax, and then again in 1927, when federal taxes amounted to only $4 billion and the federal government consumed only about 5 percent of economic output.

As I wrote in 2013, “I’ll gladly pay for that amount of civilization.”

Let’s close with a couple of tweets that underscore how Democrats are pushing for giant spending increases, well beyond what can be financed by confiscating more money from the rich.

First, a reporter from the Washington Post lists some of the insanely expensive spending schemes being pushed on Capitol Hill.

I assume the “recurring checks” is a reference to the new per-child handouts in Biden’s so-called American Rescue Plan.

And “SALT change” refers to restoring the state and local tax deduction, which is supported by many Democrats from high-tax states even though (or perhaps because) it is a huge tax break for the rich.

Next we have a couple of tweets from Brian Riedl of the Manhattan Institute. He correctly points out that Democrats are using just about every available class-warfare tax scheme, yet that money will only finance a fraction of their spending wish list.

Brian is right.

What tax increases (on the rich) will be left when the left want to push their “green new deal“? Or the “public option” for Medicare? Or any of the other spending schemes circulating in Washington.

The bottom line is that – sooner or later – politicians will follow Ms. Rampell’s advice and squeeze you and me.

P.S. It’s not a good idea to turn America into a European-style welfare state – unless the goal is much lower living standards.

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