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 Journalopined 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.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.
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.
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.
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.
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.
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.
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.
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 Journalopined 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.
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.
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.
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.”
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.
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.
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.
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 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 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.
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.
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.
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.
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.
President Biden wants to take the opposite approach.
A few days ago, Dan Balz of the Washington Postprovided 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.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.
It isn’t actually happening (these are my friends who apparently don’t know how to read).
It’s happening, but it doesn’t matter (data from the IRS suggests it actually is significant).
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.
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.
It should be not at all surprising to anyone that which states gained/lost Congressional seats from the latest apportionment tracks very strongly with the state's tax burden pic.twitter.com/DJRcNErNXm
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.
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 Journalopined 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.
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.
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 Outlookdatabase 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.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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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 Journalopined 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 Jesse McKinley.
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.
Second, New York politicians are pushing through a huge tax hike even though the federal tax code no longer allows taxpayers to fully deduct state and local taxes (though they obviously hope to repeal that provision of the 2017 tax reform).
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.
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.
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.
In 2019, an out-of-the-closet socialist admitted a big welfare state requires big tax hikes on lower-income and middle-class people.
Last year, two leftists opined in the Washington Post that ordinary people need to pay much higher taxes to finance bigger government.
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 Postlists some of the insanely expensive spending schemes being pushed on Capitol Hill.
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.
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.
I have a four-part series (here, here, here, and here) about the conceptual downsides of Joe Biden’s class-warfare approach to tax policy.
Now it’s time to focus on the component parts of his agenda. Today’s column will review his plan for a big increase in the corporate tax rate. But since I’ve written about corporate tax rates over and over and over again, we’re going to approach this issue is a new way.
I’m going to share five visuals that (hopefully) make a compelling case why higher tax rates on companies would be a big mistake.
Visual #1
One thing every student should learn from an introductory economics class is that corporations don’t actually pay tax. Instead, businesses collect taxes that are actually borne by workers, consumers, and investors.
There’s lots of debate in the profession, of course, about which group bears what share of the tax. But there’s universal agreement that higher taxes lead to less investment, which leads to less productivity, which leads to lower pay.
Here’s a depiction of the relationship of corporate taxes and worker pay.
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Visual #2
The previous image explains the theory. Now it’s time for some evidence.
Here’s a look at how much faster wages have grown in countries with low corporate tax rates compared to nations with high corporate tax rates.
Biden, for reasons beyond my comprehension, wants America on the red line.
It’s very bad news that Biden wants a big increase in the corporate tax rate, but let’s not forget that the IRS double-taxes corporate income (i.e., that same income is subject to a second layer of tax when shareholders receive dividends).
The combined effect, as shown in this visual, is that the United States will have the dubious honor of having the highest effective corporate tax rate in the entire developed world.
The economic damage of higher corporate tax rates means that there is less taxable income (i.e., we need to remember the Laffer Curve).
Will the damage be so extensive, causing taxable income to fall so much, that the IRS collects less revenue with a higher tax rate?
We’ll learn the answer to that question over time, but we have some very strong evidence from the IMF that lower corporate tax rates don’t lead to less revenue. As you can see from this chart, revenues held steady as tax rates plummeted over the past few decades.
In other words, lower rates led to enough additional economic activity that governments have collected just as much money with lower tax rates. But now Biden wants to run this experiment in reverse.
It’s possible the government will collect more revenue, of course, but only at a very high cost to workers, consumers, and shareholders.
Those pictures probably tell you everything you need to know about this issue.
But let’s add some more analysis. The Wall Street Journalopined today on Biden’s class-warfare agenda. Here are some of the key passages from the editorial.
The bill for President Biden’s agenda is coming due, starting with Wednesday’s proposal for the largest corporate tax increase in decades. …Mr. Biden’s corporate increase amounts to the restoration of the Obama-era corporate tax burden, only much more so. …Mr. Biden wants to raise the corporate rate back up to 28%, but that’s the least of his proposals. He also wants to add penalties that would make inversions punitive, and he’d impose a global minimum corporate tax of 21%. This would shoot the tax burden on U.S. companies back toward the top of the developed world list. …The larger Biden goal is to end global tax competition… “The United States can lead the world to end the race to the bottom on corporate tax rates,” says the White House fact sheet. Mr. Biden says he wants “other countries to adopt strong minimum taxes on corporations” so nations like Ireland can no longer compete for capital with lower tax rates. This has long been the dream of the French and Germans, working through the Organization for Economic Cooperation and Development. …All of this is in addition to the looming Biden tax increases on dividends, capital gains and other investment income. …Mr. Biden’s corporate tax increases will hit the middle class hard—in the value of their 401(k)s, the size of their pay packets, and what they pay for goods and services.
Amen.
Let’s conclude with some gallows humor.
This meme shows how some of our leftist friends will celebrate if the tax increase is imposed.
My response is easy. I care about results rather than rhetoric. And while GOP politicians often pay lip service to the principles of limited government, they usually increase spending even faster than Democrats.
This is bad news because it means the burden of government expands when Republicans are in charge.
And, as Gary Abernathy points out in a column for the Washington Post, Republicans then don’t have the moral authority to complain when Democrats engage in spending binges.
President Biden is proposing another $3 trillion in spending… There are objections, but none that can be taken seriously. …Republicans had lost their standing as the party of fiscal responsibility when most of them succumbed to the political virus of covid fever and rubber-stamped around $4 trillion in “covid relief,”… With Trump out and Biden in, Republicans suddenly pretended that their 2020 spending spree happened in some alternate universe. But the GOP’s united opposition to Biden’s $1.9 trillion package won’t wash off the stench of the hypocrisy. …I noted a year ago that we had crossed the Rubicon, that our longtime flirtation with socialism had become a permanent relationship. Congratulations, Bernie Sanders. The GOP won’t become irrelevant because of its association with Trump, as some predict. It will diminish because it is bizarrely opposing now that which it helped make palatable just last year. Fiscal responsibility is dead, and Republicans helped bury it. Put the shovels away, there’s no digging it up now.
For what it’s worth, I hope genuine fiscal responsibility isn’t dead.
Maybe it’s been hibernating ever since Reagan left office (like Pepperidge Farm, I’m old enough to remember those wonderful years).
Subsequent Republican presidents liked to copy Reagan’s rhetoric, but they definitely didn’t copy his policies.
Spending restraint was hibernating during the presidency of George H.W. Bush.
Spending restraint also was hibernating during the presidency of George W. Bush.
And spending restraint was hibernating during the presidency of Donald Trump.
I’m not the only one to notice GOP hypocrisy.
Here are some excerpts from a 2019 column in the Washington Post by Fareed Zakaria.
In what Republicans used to call the core of their agenda — limited government — Trump has been profoundly unconservative. …Trump has now added more than $88 billion in taxes in the form of tariffs, according to the right-leaning Tax Foundation. (Despite what the president says, tariffs are taxes on foreign goods paid by U.S. consumers.) This has had the effect of reducing gross domestic product and denting the wages of Americans. …For decades, conservatives including Margaret Thatcher and Ronald Reagan preached to the world the virtues of free trade. But perhaps even more, they believed in the idea that governments should not pick winners and losers in the economy… Yet the Trump administration…behaved like a Central Planning Agency, granting exemptions on tariffs to favored companies and industries, while refusing them to others. …In true Soviet style, lobbyists, lawyers and corporate executives now line up to petition government officials for these treasured waivers, which are granted in an opaque process… On the core issue that used to define the GOP — economics — the party’s agenda today is state planning and crony capitalism.
Zakaria is right about Republicans going along with most of Trump’s bad policies (as illustrated by this cartoon strip).*
The bottom line is that Republicans would be much more effective arguing against Biden’s spending orgy had they also argued for spending restraint when Trump was in the White House.
And we’re getting more stimulus spending on stimulus.
But not the economic kind of stimulus. Paul Bedard of the Washington Examinerreports that people are using handout cash for interesting purchases.
An analysis of spending on Amazon following the distribution of the latest coronavirus stimulus, a massive $1.9 trillion package, suggests that people are using it to let off some steam. The global e-commerce firm Pattern said that the biggest surges in sales were for the PlayStation 5 and a female sex toy called the “Rose Flower Sex Toy.” …Rose’s sales (check Amazon for the description) shot up 334%. …“Distribution of stimulus checks on Wednesday, March 17…may have represented an opportunity for some retail therapy,” said the company.
I’m sure there’s probably some interesting social commentary to make about guys playing video games and neglecting their wives and girlfriends.
The problem is much bigger than the humorous/irritating example discussed above.
In a column for the Foundation for Economic Education, Brad Polumbo shares some big-picture data on how politicians have squandered our money.
Whenever the government spends money, a significant portion is lost to bureaucracy, waste, and fraud. But the…unprecedented scope of federal spending in response to the COVID-19 pandemic—an astounding $6 trillion total—has led to truly unthinkable levels of fraud. Indeed, a new report shows that the feds potentially lost $200 billion in unemployment fraud alone. …More than $200 billion of unemployment benefits distributed in the pandemic may have been pocketed by thieves… To put that $200 billion figure in context, it is equivalent to $1,400 lost to fraud per federal taxpayer. (There goes your stimmy check!) Or, comparing it to the $37 billion the federal government spent on vaccine and treatment development, it’s more than five times more lost to fraud than went to arguably the most crucial COVID initiative of all. That’s just scratching the surface. According to the American Enterprise Institute, “unemployment fraud” now ranks as the 4th biggest federal COVID expenditure out of more than 17 different categories.
If you’re a taxpayer, hundreds of billions of dollars in fraud sounds like a bad outcome.
But if you’re a Keynesian economist, it’s not a problem. All they care about is having the government borrow and spend a bunch of money. They think that making government bigger automatically generates benefit for the economy, even if the money goes to thieves and crooks.
I’m not joking. This is why people like Paul Krugman said a fake attack by space aliens would be good for the economy because Washington would spend a bunch of money in response.
And it’s why Nancy Pelosi actually said the economy benefits if we subsidize joblessness.
That’s true if you look at average levels of consumption in different nations, but the most compelling data is the fact that lower-income people in the United States generally enjoy living standards that are equal to or even higher than those for middle-class people in most European countries.
A bigger burden of government is not just a theoretical concern. President Biden has already pushed through a $1.9 trillion spending bill that includes some temporary provisions – such as per-child handouts – that, if made permanent, could add several trillion dollars to the burden of government spending.
And the White House has signaled support for $3 trillion of additional spending for items such as infrastructure, green energy, and other boondoggles.
So what will it mean for America if our medium-sized welfare state morphs into a European-style large welfare state?
The answer to that question is rather unpleasant, at least if some new research from the Congressional Budget Office is any indication. The study, authored by Jaeger Nelson and Kerk Phillips, considers the impact on growth based on six different scenarios (based on how much the spending burden increases and what taxes are increased).
If permanent spending is financed by new or increased taxes, then those taxes influence people’s decisions about how much to work and save. Those decisions then affect how much the economy produces and businesses invest and, ultimately, how much people can consume. Different types of taxes have different economic effects. Taxes on labor income reduce after-tax wages, so they reduce the return on each additional hour worked. …Higher taxes on capital income, such as dividends and capital gains, lower the average after-tax rate of return on private wealth holdings (or the return on investment), which reduces the incentive to save and invest and leads to reductions in saving, investment, and the capital stock. …we compare the effects of raising additional revenues through three illustrative tax policies: a flat tax on labor income, a flat tax on all income (including both labor and capital income), and a progressive tax on all income. The additional revenues generated by these policies are in addition to the revenues raised by taxes that already exist and are used to finance two specific increases in government spending. The two increases in government spending are set to 5 percent and 10 percent of GDP in 2020.
Here are some of the key results, as illustrated by the chart.
The least-worst result (the blue line) is a decline in GDP of about 3 percent, and that happens if the spending burden expand by 5-percentage points of GDP and is financed by a flat tax.
The worst-worst result (dashed red line) is a staggering decline in GDP of about 10 percent, and that happens if the spending burden climbs by 10-percentage points and is financed by a progressive tax.
Here’s some additional analysis, including a description of why progressive taxes impose the most damage.
This paper shows that flat labor and flat income tax policies have similar effects on output; labor taxes reduce the labor supply more, and income taxes reduce the capital stock more. For all three policies, the decline in income contracts the tax base considerably over time. As a result, to continuously generate enough revenues to finance the increase in government spending in each year, tax rates must steadily increase over time to account for the decline in the tax base. Moreover, labor and capital taxes put upward pressure on interest rates by reducing the capital-to-labor ratio over time… The largest declines in economic activity among the financing methods considered occur with the progressive tax on all income. Those declines occur because high-productivity workers reduce their hours worked and because higher taxes on asset income reduce the incentive to save and invest relatively more than under the two flat taxes.
There’s lots of additional information in the study, but I definitely want to draw attention to Table 4 because it shows that lower-income people will suffer big reductions in living standards if there’s an increase in the burden of government spending (circled in red).
What makes these results especially remarkable is that the authors only look at the damage caused by higher taxes.
Yet we know from other research that the economy also will suffer because of the higher spending burden. This is because of the various ways that growth is reduced when resources are diverted from the productive sector to the government.
For background, here’s a video on the theoretical reasons why government spending hinders growth.
And here’s a video with some of the scholarly evidence.
P.S. The CBO study also points out that financing new spending with a value-added tax wouldn’t avert economic damage.
…by reducing the cost of time spent not working for pay relative to other goods, a consumption tax could reduce hours worked through a channel like that of a tax on labor.
And since it’s comparatively easy to control the timing, level, and composition of that income, class-warfare taxes generally backfire.
Heck, well-to-do taxpayers can simply shift all their investments into tax-free municipal bonds (that’s bad for the rest of us, by the way, since it’s better for growth if they invest in private businesses rather than buying bonds from state and local governments).
Or, they can simply buy growth stocks rather than dividend stocks because politicians (thankfully) haven’t figured out how to tax unrealized capital gains.
Some of my left-leaning readers probably think that my analysis can be ignored or dismissed because I’m a curmudgeonly libertarian.
But I’m simply recycling conventional economic thinking on these issues.
And to confirm that point, let’s review a study on taxes and growth that the International Monetary Fund published last December. Written by Khaled Abdel-Kader and Ruud de Mooij, there are passages that sound like they could have been written by yours truly.
Such as the observation that taxes hinder prosperity by reducing economic output (what economist refer to as deadweight loss).
…public finance…theories teach us some important lessons about efficient tax design. By transferring resources from the private to the public sector, taxes inescapably impose a loss on society that goes beyond the revenue generated. …deadweight loss (or excess burden) is what determines a tax distortion. Efficient tax design aims to minimize the total deadweight loss of taxes. The size of this loss depends on two main factors. First, losses are bigger the more responsive the tax base is to taxation. Second, the loss increases more than proportionately with the tax rate: adding a distortion to an already high tax rate is more harmful than adding it to a low tax rate. Two prescriptions for efficient tax policy follow: (i) it is efficient to impose taxes at a higher rate if things are in inelastic demand or supply; and (ii) it is best to tax as many things as possible to keep rates low. …empirical studies on the growth impact of taxes…generally find that income taxes are more distortive for economic growth than taxes on consumption.
There are several parts of the above passage that deserve extra attention, such as the observation about elasticity (similar to the point I made in the video about why higher tax rates on upper-income taxpayers are so destructive).
But the most important thing to understand is what the authors wrote about how “the [deadweight] loss increases more than proportionately with the tax rate.”
In other words, it’s more damaging to increase top tax rates.
This observation, which is almost certainly universally recognized in the economics profession, tells us why class-warfare taxes do the most economic damage, on a per-dollar-collected basis.
The IMF study also has worthwhile observations on different types of taxes, such as why it’s a good idea to have low income tax rates on people.
Optimal tax theory emphasizes the trade-off between equity and efficiency. …This requires balancing the revenue gain from a higher marginal top PIT rate at the initial base against the revenue loss induced by behavioral responses that a higher tax rate would induce—such as reduced labor effort, avoidance or evasion—measured by the elasticity of taxable income. …high marginal rates cause other adverse economic effects, e.g. on innovation and entrepreneurship, and thus create larger economic costs than is sometimes assumed.
Capital income—interest, dividends and capital gains—is used for future consumption so that taxes on it correspond to a differentiated consumption tax on present versus future consumption—one that compounds if the time horizon expands. Prudent people who prefer to postpone consumption to later in life (or transfer it to their heirs) will thus be taxed more than those who do not, even though they have the same life-time earnings. This violates horizontal equity principles. Moreover, it causes a distortion by encouraging individuals to substitute future with current consumption, i.e. they reduce savings. The tax is therefore also inefficient. A classical result, formalized by Chamley (1986) and Judd (1985), is that the optimal tax on capital is zero.
Indeed, the study even asks whether there should be a corporate income tax when the same income already is subject to dividend taxation when distributed to shareholders.
…capital income taxes can be levied directly on the people that ultimately receive that income, i.e. shareholders and creditors. So: why is there a need for a CIT? It is hard to justify a CIT on efficiency grounds. As explained before, the incidence of the CIT in a small open economy falls largely on workers, not on the firm or its shareholders. Since it is more efficient to tax labor directly than indirectly, the optimal CIT is found to be zero. …CIT systems…in most countries…create two major economic distortions. First, by raising the cost of capital on equity they distort investment decisions. This hurts economic growth and adversely affects efficiency. Second, by differentiating between debt and equity, they induce a bias toward debt finance. This not only creates an additional direct welfare loss, but also threatens financial stability. Both distortions can be eliminated by…cash-flow taxes, which allow for full expensing of investment instead of deductions for tax depreciation
And I like the fact that the study makes very sensible points about why there should not be a pro-debt bias in tax codes and why there should be “expensing” of business investment costs.
I’ll close by noting that the IMF study is not a libertarian document.
The authors are simply describing the economic costs of taxation and acknowledging the tradeoffs that exist when politicians impose various types of taxes (and the rates at which those taxes are imposed).
But that doesn’t mean the IMF is arguing for low taxes.
There are plenty of sections that make the (awful) argument that it’s okay to impose higher tax rates and sacrifice growth in order to achieve more equality.
And there are also sections that regurgitate the IMF’s anti-empirical argument that higher taxes can be good for growth if politicians wisely allocate the money so it is spent on genuine public goods.
Politicians doing what’s best for their countries rather than what’s best for themselves? Yeah, good luckwith that.
And most of the people who have written about the report also have focused – incorrectly – on the rising levels of debt.
That’s the bad news.
The good news is that the report also contains lots of data on the variables – the spending burden and the tax burden – that should command our attention.
Here are four visuals from the report. We’ll start with Figure 7, which shows what will happen to spending and taxes over the next three decades. I’ve highlighted in red the most important numbers.
The right-most column gives you the big picture. The main takeaway (and it’s been this way for a while) is that more than 100 percent of America’s long-run fiscal problem is driven by the fact that government spending (“total outlays”) will consume a much greater share of our economic output.
The top-left of Figure 7 shows the growth of entitlement programs (which captures the fiscal problems of Social Security, Medicare, and Medicaid).
So lot’s look at Figure 9, which presents the same data in a different way.
Why did I write above that government spending is responsible for “more than 100 percent of America’s long-run fiscal problem”?
Because, as depicted in Figure 11, there’s a built-in tax increase over the next three decades.
In other words, the fiscal mess in Washington is not the result of inadequate tax revenue.
Last but not least, Figure 13 is worth sharing because it shows how small differences in some variables can make a big difference over time. I’m especially interested in the top chart, which shows how slight differences in productivity (which determines the all-important variable of per-capita growth) have a big impact on long-run debt.
It would be preferable, of course, if the CBO report showed how greater productivity impacts both revenue and spending. We would see that faster growth generates more tax revenue (without raising tax rates) and reduces spending (people with good jobs are less likely to be dependent on government redistribution programs).
P.S. Yes, government debt matters. It matters in the short run because it’s a measure of how much private saving is being diverted to finance government. And it matters in the long run because excessive red ink can trigger a fiscal crisis when investors decide that a government no longer can be trusted to pay back lenders (see Greece, for instance). But we should never forget that it is excessive spending that drives the debt. Cure the disease of excessive spending and it is all but certain that you eliminate the symptom of red ink.
P.P.S. For what it’s worth, the United States is not Greece. At least not yet.
The good news is that there is still a simple solution to America’s fiscal problems. According to the just-released Budget and Economic Outlook from the Congressional Budget Office, tax revenues will grow by an average of 4.2 percent over the next decade. So we can make progress, as illustrated by this chart, if there’s some sort of spending cap so that outlays grow at a slower pace.
But even if we have more modest aspirations (avoiding future tax increases, avoiding a future debt crisis), it’s worth noting how modest spending restraint generates powerful results in a short period of time. And the figures in the chart assume the spending restraint doesn’t even start until the 2023 fiscal year.
The main takeaway is that the budget could be balanced by 2031 if spending grows by 1.5 percent per year.
But progress is possible so long as the cap limits spending so that it grows by less than 4.2 percent annually. The greater the restraint, of course, the quicker the progress.
In other words, there’s no need to capitulate to tax increases (which, in any event, almost certainly would make a bad situation worse).
P.S. The solution to our fiscal problem is simple, but that doesn’t mean it will be easy. Long-run spending restraint inevitably will require genuine reform to deal with the entitlement crisis. Given the insights of “public choice” theory, it will be a challenge to find politicians willing to save the nation.
P.P.S. Here are real-world examples of nations that made rapid progress with spending restraint.
But I have some good news. The GOP is finding religion and is once again fretting about big government.
The bad news is that many of them are total hypocrites.
The only reason that they’re now beating their chests about fiscal responsibility is that there’s now a Democrat in the White House pushing for big government rather than a Republican in the White House pushing for big government.
Talking a few days ago with Politifact, I remarked on the GOP’s battlefield conversion.
“The very narrow Democratic majorities in the House and Senate will make big policy changes difficult for Biden,” said Daniel Mitchell, a conservative economist with decades of experience in Washington. “Republicans were big spenders under Trump, but they’ll dust off their fiscal conservatism rhetoric with Biden in the White House. …”There will be unanimous, or near-unanimous, GOP opposition to the tax increases,” Mitchell said. That could make passage difficult.
I’m not the only one to notice Republicans change their spots when Democrats are in charge.
In her Washington Postcolumn, Catherine Rampell also notes their hypocrisy.
It’s almost like clockwork. As soon as a Democrat enters the White House, Republicans pretend to care about deficits again. …And so Republicans laid the groundwork for blocking the Biden administration’s request for more covid-19 fiscal relief, on the grounds that further spending is not merely unnecessary but also irresponsible. …These foul-weather fiscal hawks neglect to mention, …before the coronavirus pandemic — the Republican-controlled Senate passed and President Donald Trump signed spending bills that added…$2 trillion to deficits.
If Ms. Rampell’s column focused solely on Republicans behaving inconsistently, I would fully applaud.
Unfortunately, she also used the opportunity to make some assertions that deserve some pushback. Beginning with what she said about the 2017 tax reform.
It is true that the legislation is a short-run tax cut, but there’s no long-run revenue reduction because many of the provisions expire at the end of 2025.
And, as Brian Riedl made clear in this chart, the tax cuts only play a tiny role even if all the provisions ultimately are made permanent.
Ms. Rampell then makes a Keynesian argument that more spending would be stimulative.
…the U.S. economy actually needs more federal spending, and President Biden has proposed a $1.9 trillion plan… Republicans objecting to Biden’s proposal…seem to be writing off the need for more relief entirely, at least now that a Democrat is president.
Is she right about Republican hypocrisy? Yes.
Is she right that bigger government produces growth? No.
If Biden and the Democrats were simply arguing that some level of handouts are needed and justified to compensate for government-mandated shutdowns, I wouldn’t be happy, but I also wouldn’t complain.
But I do object to the mechanistic argument that government can magically produce prosperity by borrowing money from the economy’s left pocket and putting it in the economy’s right pocket.
She also engages in a bit of historical revisionism about Obama’s failed stimulus from 2009.
This is, not coincidentally, almost exactly what they did about a decade ago. …Republicans suddenly demanded to turn off fiscal (and monetary) spigots once Barack Obama was elected.
In reality, Republicans didn’t control either the House or Senate in Obama’s first two years. He was able to adopt his so-called stimulus. And the economy was stagnant.
Republicans did win the House at the end of 2010 and were somewhat successful in controlling spending for the next few years. And that’s when the economy did better.
P.S. I wish Politicifact had identified me as a libertarian. I’m only willing to be called a conservative if that means Reaganism, but I worry it now means Trumpism.
I’ve shared three reasons why Biden’s tax plan is misguided (the tax code is biased against rich taxpayers, the tax hike would have Laffer-Curve implications, and it would saddle America with the world’s highest corporate tax burden).
For Part IV of the series, let’s explain why every piece of his plan will backfire.
There are three main arguments for higher taxes, though I don’t find any of them convincing.
Spite and envy against successful entrepreneurs, investors, innovators, and business owners.
Bringing more money to Washington to finance a larger burden of government spending.
Bringing more money to Washington to ostensibly lower the burden of deficits and debt.
For what it’s worth, Biden’s proposed spending increases are far larger than his proposed tax increases, so we can rule out reason #3.
So we have to ask ourselves whether reasons #1 and #2 are compelling.
In a column in the Wall Street Journal from last July, Philip DeMuth elaborated on the damage that would be inflicted by Biden’s class-warfare agenda.
Mr. Biden has proposed to reinstate the Obama tax rates for top earners while simultaneously imposing an unlimited 12.4% Social Security payroll tax on earnings over $400,000. …Mr. Biden proposes to eliminate the capital gains reset to fair market value at death. For long-term holdings, much of that gain is merely inflation, created by the government’s failure to maintain price stability, so this is effectively a tax on a tax. The remaining gains are usually from corporate earnings, which were already taxed once, when they came in the door. It will be difficult to keep your business or farm in the family if the Biden scheme forces it to be liquidated to pay the death taxes. …If a President Biden has his way, the top capital-gains tax rate will be 39.6%—the same as for ordinary income. This could be a triple whammy: cutting the estate tax exemption in half, eliminating the capital gains reset to fair market value, and then doubling the capital-gains tax rate. A small step for the government, a giant loss for the American family. …The former vice president’s ambitious spending programs would more than offset any new revenue from his tax proposals. …This isn’t a debate between growing the pie vs. redistributing the pie; it is about everyone settling for a smaller pie.
The final two sentences deserve extra attention.
First, nobody should be deluded that tax increases will be used to reduce red ink. Yes, Biden is proposing to collect a lot more money, but he’s proposing about $2 of new spending for every $1 of projected tax revenue.
Brian Riedl’s Chartbook has the grim details on Biden’s spending agenda.
The bottom line is that living standards in the United States are significantly higher than living standards in Europe, in large part because fiscal burdens are not as onerous in America.
Biden’s plan to make America more like France, Italy, and Greece is not a good idea.
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.
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.
International Liberty 