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Archive for the ‘Higher Taxes’ Category

When companies want to boost sales, they sometimes tinker with products and then advertise them as “new and improved.”

In the case of governments, though, I suspect “new” is not “improved.”

The British territory of Jersey, for instance, has a very good tax system. It has a low-rate flat tax and it overtly brags about how its system is much better than the one imposed by London.

In the United States, by contrast, the state of New Jersey has a well-deserved reputation for bad fiscal policy. To be blunt, it’s not a good place to live and it’s even a bad place to die.

And it’s about to get worse. A column in the Wall Street Journal warns that New Jersey is poised to take a big step in the wrong direction. The authors start by observing that the state is already in bad shape.

…painless solutions to New Jersey’s fiscal challenges don’t exist. …a massive structural deficit lurks… New Jersey’s property taxes, already the highest in the nation, are being driven up further by the state’s pension burden and escalating health-care costs for government workers.

In other words, interest groups (especially overpaid bureaucrats) control the political process and they are pressuring politicians to divert even more money from the state’s beleaguered private sector.

…politicians seem to think New Jersey can tax its way to budgetary stability. At a debate this week in Newark, the Democratic gubernatorial nominee, Phil Murphy, pledged to spend more on education and to “fully fund our pension obligations.” …But just taxing more would risk making New Jersey’s fiscal woes even worse. …New Jersey is grasping at the same straws. During the current fiscal year, the state’s pension contribution is $2.5 billion, only about half the amount actuarially recommended. The so-called millionaire’s tax, a proposal Gov. Chris Christie has vetoed several times since taking office in 2010, will no doubt make a comeback if Mr. Murphy is elected. Yet it would bring in only an estimated $600 million a year.

The column warns that New Jersey may wind up repeating Connecticut’s mistakes.

Going down that path, however, is a recipe for a loss of high-value taxpayers and businesses.

Let’s look at a remarkable story from the New York Times. Published last year, it offers a very tangible example of how the state’s budgetary status will further deteriorate if big tax hikes drive away more successful taxpayers.

One man can move out of New Jersey and put the entire state budget at risk. Other states are facing similar situations…during a routine review of New Jersey’s finances, one could sense the alarm. The state’s wealthiest resident had reportedly “shifted his personal and business domicile to another state,” Frank W. Haines III, New Jersey’s legislative budget and finance officer, told a State Senate committee. If the news were true, New Jersey would lose so much in tax revenue that “we may be facing an unusual degree of income tax forecast risk,” Mr. Haines said.

Here are some of the details.

…hedge-fund billionaire David Tepper…declared himself a resident of Florida after living for over 20 years in New Jersey. He later moved the official headquarters of his hedge fund, Appaloosa Management, to Miami. New Jersey won’t say exactly how much Mr. Tepper paid in taxes. …Tax experts say his move to Florida could cost New Jersey — which has a top tax rate of 8.97 percent — hundreds of millions of dollars in lost payments. …several New Jersey lawmakers cited his relocation as proof that the state’s tax rates, up from 6.37 percent in 1996, are chasing away the rich. Florida has no personal income tax.

By the way, Tepper isn’t alone. Billions of dollars of wealth have already left New Jersey because of bad tax policy. Yet politicians in Trenton blindly want to make the state even less attractive.

At the risk of asking an obvious question, how can they not realize that this will accelerate the migration of high-value taxpayers to states with better policy?

New Jersey isn’t alone in committing slow-motion suicide. I already mentioned Connecticut and you can add states such as California and Illinois to the list.

What’s remarkable is that these states are punishing the very taxpayers that are critical to state finances.

…states with the highest tax rates on the rich are growing increasingly dependent on a smaller group of superearners for tax revenue. In New York, California, Connecticut, Maryland and New Jersey, the top 1 percent pay a third or more of total income taxes. Now a handful of billionaires or even a single individual like Mr. Tepper can have a noticeable impact on state revenues and budgets. …Some academic research shows that high taxes are chasing the rich to lower-tax states, and anecdotes of tax-fleeing billionaires abound. …In California, 5,745 taxpayers earning $5 million or more generated more than $10 billion of income taxes in 2013, or about 19 percent of the state’s total, according to state officials. “Any state that depends on income taxes is going to get sick whenever one of these guys gets a cold,” Mr. Sullivan said.

The federal government does the same thing, of course, but it has more leeway to impose bad policy because it’s more challenging to move out of the country than to move across state borders.

New Jersey, however, can’t set up guard towers and barbed wire fences at the border, so it will feel the effect of bad policy at a faster rate.

P.S. I used to think that Governor Christie might be the Ronald Reagan of New Jersey. I was naive. Yes, he did have some success in vetoing legislation that would have exacerbated fiscal problems in the Garden State, but he was unable to change the state’s bad fiscal trajectory.

P.P.S. Remarkably, New Jersey was like New Hampshire back in the 1960s, with no income tax and no sales tax. What a tragic story of fiscal decline!

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I’m not a fan of the International Monetary Fund. Like many other international bureaucracies, it pushes a statist agenda.

The IMF’s support for bad policy gets me so agitated that I’ve sometimes referred to it as the “dumpster fire” or “Dr. Kevorkian” of the global economy.

But, in a perverse way, I admire the IMF’s determination to advance its ideological mission. The bureaucrats will push for tax hikes using any possible rationale.

Even if it means promoting really strange theories like the one I just read in the bureaucracy’s most recent Fiscal Monitor.

Welfare-based measures can help policymakers when they face decisions that entail important trade-offs between equity and efficiency. …One way to quantify social welfare in monetary units is to use the concept of equally distributed equivalent income.

And what exactly is “equally distributed equivalent income”?

It’s a theory that says big reductions in national prosperity are good if the net result is that people are more equal. I’m not joking. Here’s more about the theory.

…a welfare-based measure of inequality…with 1 being complete inequality and 0 being complete equality. A value of, say, 0.3 means that if incomes were equally distributed, then society would need only 70 percent (1 − 0.3) of the present national income to achieve the same level of welfare it currently enjoys (in which incomes are not equally distributed). The level of income per person that if equally distributed would enable the society to reach the same level of welfare as the existing distribution is termed equally distributed equivalent income (EDEI).

Set aside the jargon and focus on the radical implications. The IMF is basically stating that “the same level of welfare” can be achieved with “only 70 percent of the present national income” if government impose enough coercive redistribution.

In other words, Margaret Thatcher wasn’t exaggerating when she mocked the left for being willing to sacrifice national well-being and hurt the poor so long as those with higher incomes were subjected to even greater levels of harm.

Not surprisingly, the IMF uses its bizarre theory to justify more class-warfare taxation.

Figure 1.16 shows how the optimal top marginal income tax rate would change as the social welfare weight on high-income individuals increases. Assuming a welfare weight of zero for the very rich, the optimal marginal income tax rate can be calculated as 44 percent, based on an average income tax elasticity of 0.4… Therefore, there would appear to be scope for increasing the progressivity of income taxation…for countries wishing to enhance income redistribution.

But not just higher statutory tax rates.

The bureaucrats also want more double taxation of income that is saved and invested. And wealth taxation as well.

Taxes on capital income play an equally important role in shaping the progressivity of a tax system. …An alternative, or complement, to capital income taxation for economies seeking more progressive taxation is to tax wealth.

The article even introduces a new measure called “progressive tax capacity,” which politicians doubtlessly will interpret as a floor rather than a ceiling.

Reminds me of the World Bank’s “report card” which gave better grades to nations with “high effort” tax systems.

Though I guess I should look at the bright side. It’s good news that the IMF estimates that the “optimal” tax rate is 44 percent rather than 100 percent (as the Congressional Budget Office implies). And I suppose I also should be happy that “progressive tax capacity” doesn’t justify a 100 percent tax rate.

I’m being sarcastic, of course. That being said, there is a bit of genuinely good analysis in the publication. The bureaucrats actually acknowledge that growth is the way of helping the poor, which is a point I’ve been trying to stress for several years.

…many emerging market and developing economies…experienced increases in inequality during periods of strong economic growth. …Although income growth has not been evenly shared in emerging market economies, all deciles of the income distribution have benefited from economic growth, even when inequality has increased. …Benefiting from high economic growth, East and South Asia and the Pacific region, in particular, showed remarkable success in reducing poverty between 1985 and 2015 (Figure 1.8). Likewise, a period of strong growth has led to a sustained decline in absolute poverty rates in sub-Saharan Africa and in Latin America and the Caribbean.

Here are two charts from this section of the Fiscal Monitor. Figure 1.7 shows that the biggest gains for the poor occurred in the emerging market economies that also saw big increases for the rich. And Figure 1.8 shows how global poverty has fallen.

I’m not saying, by the way, that inequality is necessary for growth.

My argument is merely that free markets and small government are a recipe for prosperity. And as a nation becomes richer thanks to capitalism, it’s quite likely that some people will get richer faster than others get richer.

I personally hope the poor get richer faster than the rich get richer, but the other way around is fine. So long as all groups are enjoying more prosperity and poverty is declining, that’s a good outcome.

P.S. My favorite example of rising inequality and falling poverty is China.

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I shared some academic research last year showing that top-level inventors are very sensitive to tax policy and that they migrate from high-tax nations to low-tax jurisdictions.

Now we have some new scholarly research showing that they also migrate from high-tax states to low-tax states.

Let’s look at some of the findings from this new study, which was published by the Federal Reserve Bank of San Francisco. We’ll start with the issue the economists chose to investigate.

…personal taxes vary enormously from state to state. These geographical differences are particularly large for high income taxpayers. …the average tax rate (ATR) component due solely to state individual income taxes for a taxpayer with income at the 99th percentile nationally in 2010…in California, Oregon, and Maine were 8.1%, 9.1%, and 7.7%, respectively. By contrast, Washington, Texas, Florida, and six other states had 0 income tax. Large differences are also observed in business taxes. …Iowa, Pennsylvania, and Minnesota had corporate income taxes rates of 12%, 9.99%, and 9.8%, respectively, while Washington, Nevada, and three other states had no corporate tax at all. And not only do tax rates vary substantially across states, they also vary within states over time. …If workers and firms are mobile across state borders, these large differences over time and place have the potential to significantly affect the geographical allocation of highly skilled workers and employers across the country.

Here’s a map showing the tax rates on these very successful taxpayers, as of 2010. Many of these states (California, Illinois, New Jersey, and Connecticut) have moved in the wrong direction since that time, while others (such as North Carolina and Kansas) have moved in the right direction.

Anyhow, here’s more information about the theoretical issue being explored.

Many states aggressively and openly compete for firms and high-skilled workers by offering low taxes. Indeed, low-tax states routinely advertise their favorable tax environments with the explicit goal of attracting workers and business activity to their jurisdiction. Between 2012 and 2014, Texas ran TV ads in California, Illinois and New York urging businesses and high-income taxpayers to relocate….In this paper, we seek to quantify how sensitive is internal migration by high-skilled workers to personal and business tax differentials across U.S. states. Personal taxes might shift the supply of workers to a state: states with high personal taxes presumably experience a lower supply of workers for given before-tax average wage, cost of living and local amenities. Business taxes might shift the local demand for skilled workers by businesses: states with high business taxes presumably experience a lower demand for workers, all else equal.

And here’s their methodology.

We focus on the locational outcomes of star scientists, defined as scientists…with patent counts in the top 5% of the distribution. Using data on the universe of U.S. patents filed between 1976 and 2010, we identify their state of residence in each year. We compute bilateral migration flows for every pair of states (51×51) for every year. We then relate bilateral outmigration to the differential between the destination and origin state in personal and business taxes in each year. …Our models estimate the elasticity of migration to taxes by relating changes in number of scientists who move from one state to another to changes in the tax differential between the two states.

So what did the economists find? Given all the previous research on this topic, you won’t be surprised to learn that high tax rates are a way of redistributing people.

We uncover large, stable, and precisely estimated effects of personal and business taxes on star scientists’ migration patterns. …For the average tax rate faced by an individual at the 99th percentile of the national income distribution, we find a long-run elasticity of about 1.8: a 1% increase in after-tax income in state d relative to state o is associated with a 1.8 percent long-run increase in the net flow of star scientists moving from o to d. …To be clear: The flow elasticity implies that if after tax income in a state increases by one percent due to a personal income tax cut, the stock of scientists in the state experiences a percentage increase of 0.4 percent per year… We find a similar elasticity for state corporate income tax… In all, our estimates suggest that both the supply of, and the demand for, star scientists are highly sensitive to state taxes.

Wonky readers may appreciate these graphs from the study.

For everyone else, the important lesson from this research is that high tax rates discourage productive behavior and drive away the people who create a lot of value.

Two years ago, I shared some research showing that entrepreneurs flee high-tax nations to low-tax jurisdictions. Now we know the some thing happens with top-level inventors.

And let’s not forget that it’s even easier for investment to cross borders, which is why high corporate tax rates and high levels of double taxation are so damaging to U.S. workers and American competitiveness.

P.S. I don’t expect many leftists to change their minds because of this research. Some of them openly admit they want high tax rates solely for reasons of spite. Sensible people, by contrast, should be even more committed to pro-growth tax reform.

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I’m currently in Iceland for a conference organized by the European Students for Liberty. I spoke earlier today on the case for lower taxes and I made six basic points.

Sadly, not everyone agrees with my views, either in Iceland or the United States.

Regarding the latter, Robert Samuelson expressed a contrary position last month when writing about the tax debate in the Washington Post.

…we need higher, not lower, taxes. …We are undertaxed. Government spending, led by the cost of retirees, regularly exceeds our tax intake.

After reading his column, I thought about putting together a detailed response. I was especially tempted to debunk the carbon tax, which is his preferred way of generating additional tax revenue.

But then it occurred to me that could make an “appeal to authority.” In my Iceland presentation today, I cited very wise words from four former presidents on tax policy. And their statements are all that we need to dismiss Samuelson’s column.

We’ll start with Thomas Jefferson, who argues for small government and against income taxation.

We then take a trip through history so we can see what Grover Cleveland said about the topic.

Simply stated, he viewed any taxes – above what was needed to finance a minimal state – as “ruthless extortion.”

The great Calvin Coolidge said the same thing about four decades later.

Last but not least, the Gipper addresses Samuelson’s point about the difference between taxes and spending.

Reagan is right, of course. The burden of federal spending is the problem whether looking at pre-World War II data or post-World War II data.

Four good points of view from four good Presidents.

The only missing component is that I need to find a President who correctly explains that higher taxes will lead to higher spending and more red ink.

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I argued last year that leftists should be nice to rich people because upper-income taxpayers finance the vast majority of the American welfare state according to government data.

Needless to say, my comment about being “nice” was somewhat sarcastic. But I was making a serious point about the United States having a very “progressive” fiscal system. The top-20 percent basically pay for government and those in the bottom half are net recipients of that involuntary largesse.

I also pointed out a huge difference between the United States and Europe. Governments on the other side of the Atlantic impose much higher burdens on lower-income and middle-class taxpayers.

Here’s some of what I wrote.

…the big difference between the United States and Europe is not taxes on the rich. We both impose similar tax burden on high-income taxpayers, though Europeans are more likely to collect revenue from the rich with higher income tax rates and the U.S. gets a greater share of revenue from upper-income taxpayers with double taxation on interest, dividends, and capital gains (we also have a very punitive corporate tax system, though it doesn’t collect that much revenue). The real difference between America and Europe is that America has a far lower tax burden on lower- and middle-income taxpayers. Tax rates in Europe, particularly the top rate, tend to take effect at much lower levels of income. European governments all levy onerous value-added taxes that raise costs for all consumers. Payroll tax burdens in many European nations are significantly higher than in the United States.

So do this mean European politician don’t like ordinary people?

I could make a snarky comment about the attitudes of the political elite, but I’ll resist that temptation and instead point out that taxes in Europe are much higher for the simple reason that government is much bigger and that means some segment of the population has to surrender more of its income.

But here’s the $64,000 question that we want to investigate today: Why are European governments pillaging lower-income and middle-class taxpayers instead of going after the “evil rich” and “greedy corporations”?

Part of the answer is that there aren’t enough rich people to finance big government. But the most important factor is the Laffer Curve. Politicians can impose higher tax rates on upper-income taxpayers and companies, but that doesn’t necessarily translate into higher revenue. Simply stated, well-to-do taxpayers have considerable ability to earn less income and/or report less income when tax burdens increase, and they do the opposite when tax burdens decrease.

That’s true in the United States, and it’s true in European countries such as Sweden, France, Russia, Denmark, and the United Kingdom.

So even if politicians want to fleece upper-income taxpayers, that’s not a successful method of generating a lot of revenue.

Which is why a shift from a medium-sized welfare state (such as what exists in the United States) to a large-sized welfare state (common in Europe) means huge tax increases on ordinary taxpayers.

I’ve made this point before, but now I have some additional evidence thanks to a new report from the Organization for Economic Cooperation and Development. The Paris-based bureaucracy is probably my least-favorite international organization because of its advocacy for statism, but it collects and publishes lots of useful statistics about fiscal policy in the industrialized world.

And here are three charts from the new study that tell a very persuasive story (and a depressing story for ordinary taxpayers).

First, we can see how the average tax burden has increased substantially over the past 50 years.

And who is paying all that additional money to politicians?

As you can see from this second chart, income tax revenues have become a less-important source of revenue over time while social insurance taxes (mostly paid by lower-income and middle-class taxpayers) have become a more-important source of revenue.

The third chart shows the evolution of the value-added tax burden. This levy takes a big bite out of the paychecks of ordinary people and the rate keeps climbing over time (and if we looked just at European governments that are part of the OECD, the numbers are even more depressing).

Now let’s put this data in context.

The United States now has a medium-sized welfare state financed mostly by upper-income taxpayers.

But because of dramatic demographic changes, we are doomed to have a large-sized welfare state. At least that’s what will happen if we don’t reform entitlement programs.

And if we leave policy on auto-pilot and there’s a substantial increase in the burden of government spending, it’s simply a matter of time before politicians figure out new ways of taking more money from lower-income and middle-class taxpayers.

Yes, they may also impose higher rates on “rich” taxpayers, but that will be mostly for symbolic purposes since those levies won’t generate substantial revenue.

Last but not least, don’t forget that European fiscal burdens will mean anemic European economic performance.

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According to leftists like Bernie Sanders, European nations have wonderfully generous welfare states financed by high tax rates on the rich.

They’re partly right. There are very large welfare states in Europe (though I wouldn’t use “wonderfully” and “generous” to describe systems that have caused economic stagnation and high levels of unemployment).

But they’re wrong about how those welfare states are financed. Yes, tax rates on the rich are onerous, but not that much higher than in the United States. Instead, the big difference between America and Europe is that ordinary people pay much higher taxes on the other side of the Atlantic.

Indeed, I’ve previously cited Tax Foundation data showing that the United States arguably has the most “progressive” tax system in the developed world. Not because we tax the rich more, but simply because we impose comparatively modest burdens on everyone else.

And now we have some new evidence making the same point. Joseph Sternberg of the Wall Street Journal has some very sobering data on how the German tax system imposes a heavy weight on poor and middle-income taxpayers.

Europeans believe their tax codes are highly progressive, giving lower earners a break while levying significant proportions of the income of higher earners and corporations to fund generous social benefits. But that progressivity holds true only for direct taxes on personal and corporate income. Indirect taxes, such as the value-added tax on consumption and social-security taxes (disguised as “contributions”), are a different matter. The VAT disproportionately affects lower earners, who spend a higher proportion of their incomes. And social taxes tend to kick in at lower income levels than income taxes, and extract a higher and more uniform proportion of income. …if you look at the proportion of gross household income paid in all forms of tax, the rate varies by only 25 points. The lowest-earning 5% of households pay roughly 27% of their income in various taxes—mainly VAT—while a household in the 85th income percentile pays total taxes of around 52%, mostly in social-security taxes that amount to nearly double the income-tax bill.

Here’s a chart the WSJ included with the editorial.

As you can see, high payroll taxes and the value-added tax are a very costly combination.

And the rest of Europe is similar to Germany.

…Germany is not unique. The way German total revenues are split among income taxes, social taxes and the consumption tax is in line with the rest of Western Europe, as are its tax rates, according to OECD data. If other countries are more progressive than Germany, it’s only because Germany applies its second-highest marginal income-tax rate of 42% at a lower level of income than most.

Speaking of the OECD, here’s the bureaucracy’s data on the burden of government spending.

Germany is in the middle of the pack, with the public sector consuming 44 percent of economic output (Finland edges out France and Greece for the dubious honor of having the most expensive government).

The overall burden of the public sector is far too high in the United States, but we’re actually on the “low” side by OECD standards.

According to the data, total government spending “only” consumes 37.7 percent of America’s GDP. Only Ireland, Switzerland, and Latvia have better numbers (though my friend Constantin Gurdgiev explains we should be cautious about Irish economic data).

But I’m digressing. The point I want to emphasize is that punitive taxes on poor and middle-income taxpayers are unavoidable once politicians decide to impose a large welfare state.

Which is why I’m so inflexibly hostile to any tax increase, especially a value-added tax (or anything close to a VAT, such as the BAT) that would vacuum up huge amounts of money from the general population. Simply stated, politicians in Washington will have a hard time financing a bigger burden of government if they can only target the rich.

Sternberg makes the same point in his column.

Tax cuts have emerged as an issue ahead of Germany’s national election next month, with both major parties promising various timid tinkers… Not gonna happen. The VAT and social taxes are too important to the modern welfare state. The great lie is that there are a) enough “rich people,” b) who are rich enough, that c) taxing their incomes heavily enough can pay for generous health benefits and an old-age pension at 65. None of those propositions are true, and the third is especially wrong in an era of globally mobile capital and labor. That leaves the lower and middle classes, and taxes concealed in price tags or dolled up as “insurance contributions” to obscure exactly how much voters are paying for the privilege of their welfare states. …reform of the indirect taxes that impose such a drag on European economies awaits a more serious discussion about the proper role of the state overall.

Exactly.

There’s no feasible way to ease the burden on ordinary German taxpayers (or regular people in other European nations) unless there are sweeping reforms to reduce the welfare state.

And the moral of the story for Americans is that we better enact genuine entitlement reform if we don’t want to suffer the same fate.

P.S. If you don’t like German data, for whatever reason, I wrote last year about Belgium and made the same point about how a big welfare state necessarily means a bad tax system.

P.P.S. By the way, even the OECD admitted that European nations would grow faster if the burden of government was reduced.

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The great thing about the Economic Freedom of the World is that it’s like the Swiss Army Knife of global policy. No matter where you are or what issue you’re dealing with, EFW will offer insight about how to generate more prosperity.

Since today’s focus is Central America, let’s look at the EFW data.

As you can see, it’s a mixed bag. Some nations are in the top quartile, such as Costa Rica, Guatemala, and Panama, though none of them get high absolute scores. Mexico, by contrast, has a lot of statism and is ranked only #88, which means it is in the third quartile. And Belize is a miserable #122 and stuck in the bottom quartile (where Cuba also would be if that backwards country would be ranked if it produced adequate statistics).

One of the great challenges for development in central America (as well as other parts of the developing world) is figuring out how to get poor and middle-income nations to make the jump to the next level.

Mary Anastasia O’Grady of the Wall Street Journal has a column on how to get more growth in Central America. She focuses on Guatemala, but what she writes is applicable for all neighboring countries.

…faster economic growth is part of what’s needed for the region… To succeed, it will have to break with the State Department’s conventional wisdom that underdevelopment is caused by a paucity of taxes and regulation. It will also have to climb down from its view that trade is a zero-sum game. Policy makers might start by reading a new report on micro, small and medium-sized businesses in Guatemala by the Kirzner Center for Entrepreneurship at Francisco Marroquin University in Guatemala City. It measures—by way of household surveys in 179 municipalities and interviews with industry experts—“attitudes, activities and aspirations of the entrepreneur.” …the GEM study ranks Guatemala No. 1 for its positive view of entrepreneurship as a career choice. Guatemala also ranks high (No. 9) for the percentage of the population engaged in new businesses, defined as less than 3½ years old. And it ranks 12th in terms of the percentage of the population who “are latent entrepreneurs and who intend to start a business within three years.”

She explains that Guatemalan entrepreneurship is hampered by excessive taxation and regulation.

Yet Guatemalan eagerness to run a business has not translated into prosperity for the nation… The country ranks a lowly 59th in entrepreneurs’ expectations that they will create six or more jobs in five years. It also sinks to near the bottom of the pack (62nd) in creating business-service companies. …The World Bank’s 2017 “Doing Business” survey provides many clues about why the informal economy is so large. Guatemala ranks 88th out of 190 countries world-wide for ease of running an enterprise, but in key categories that make up the index it performs much worse. The survey finds that it takes 256 hours to comply with the tax code. The total tax take is 35.2% of profits. It takes almost 20 days to start a legal enterprise and costs 24% of per capita income. To enforce a contract it takes more than 1,400 days and costs more than 26% of the claim.

The good news is that we know the answers that will generate prosperity. The bad news is that Guatemala gets a lot of bad advice.

The obvious solution is an overhaul of the tax, regulatory and legal systems in order to increase economic freedom. A lower tax rate and a simpler code would give companies an incentive to operate legally, thereby broadening the base and improving access to credit. Instead the Guatemalan authorities—encouraged by the State Department and the International Monetary Fund—spend their resources trying to impose a complex, costly system in an economy of mostly informal businesses with a much-smaller number of legal, productive entrepreneurs. Recently the United Nations International Commission against Impunity in Guatemala recommended a new tax to fight “impunity.” This is no way to attract capital or raise revenue.

Speaking of bad advice, let’s now contrast the sensible recommendations of Ms. O’Grady to the knee-jerk statism of the Organization for Economic Cooperation and Development. In a new report on Costa Rica’s tax system, the OECD urged ever-higher fiscal burdens for the country. Including destructive class warfare.

Costa Rica’s tax revenues are…insufficient to finance the country’s current spending needs. …In addition to raising more tax revenue…, Costa Rica needs to…enhance the redistributive role of its tax system. …the role of the personal income tax (PIT) should be strengthened as it currently raises little revenue and does not contribute to reducing inequality. …Collecting greater revenues from the PIT, by lowering the income threshold above which PIT has to be paid as well as by introducing additional PIT brackets and gradually raising the top PIT rate, could contribute to reducing income inequality.

But the OECD doesn’t merely want to hurt successful taxpayers.

The bureaucracy is proposing other taxes that target everyone in the country. Including a pernicious value-added tax.

Costa Rica does not have a modern VAT system in place. …Costa Rica’s priority should be to introduce a well-designed and broad-based VAT system…to be able to generate additional revenues… There is scope to improve the environmental effectiveness of tax policy while also increasing revenue.

So why is the OECD so dogmatically in favor of higher taxes in Costa Rica?

Are revenues less than 5 percent of GDP, indicating that the country is unable to finance genuine public goods such as rule of law?

Is the government so starved of revenue that Costa Rico can’t replicate the formula – a public sector consuming about 10 percent of economic output – that enabled the western world to become rich?

Of course not. The report openly acknowledges that the Costa Rican tax system already consumes more than 23 percent of GDP.

The obvious conclusion if that the burden of government in Costa Rica should be downsized. And that’s true whether you think that the growth-maximizing size of government, based on the experience of the western world, is 5 percent-10 percent of GDP. Or whether you limit yourself to modern data and think the growth-maximizing size of government, based on Hong Kong and Singapore, is 15 percent-20 percent of economic output.

Here’s another amazing part of the report, as in amazingly bad and clueless.

The OECD actually admits that rising levels of government debt are the result of spending increases.

…significant increases in expenditures have not been matched by increases in tax revenues. …Between 2008 and 2013, overall government spending increased as a result of higher public sector remuneration as well as higher government transfers to finance public sector social programmes.

What’s particularly discouraging, as you just read, is that the higher spending wasn’t even in areas, such as infrastructure, where there might arguably be a potential for some long-run economic benefit.

Instead, the government has been squandering money on bureaucrat compensation and the welfare state.

Here’s another remarkable admission in the OECD report.

The high tax burden is a key driver of the informal economy in Costa Rica. The IMF estimated the size of the informal economy in Costa Rica at approximately 42% of GDP in the early 2000s… Past work from the IMF showed that rigidities in the labor market and the high tax burden were the most important drivers of informality.

Yet does the OECD reach the logical conclusion that Costa Rica needs deregulation and lower tax rates? Of course not.

The Paris-based bureaucrats instead want measures to somehow force workers into the tax net.

Bringing more taxpayers within the formal economy should be a key priority. …the tax burden in Costa Rica is borne by a small number of taxpayers. This puts a limit on the amount of tax revenue that can be raised…and puts a limit to the impact of the tax system in reducing inequality.

Ironically, the OECD report actually includes a table showing why the IMF is right in this instance. As you can see, social insurance taxes create an enormous wedge between what it costs to employ a worker and how much after-tax income a worker receives.

In other words, the large size of the underground economy is a predictable consequence of high tax rates.

Let’s conclude with the sad observation that the OECD’s bad advice for Costa Rica is not an anomaly. International bureaucracies are routinely urging higher tax burdens.

Indeed, I joked a few years ago in El Salvador that the nation’s air force should shoot down any planes with IMF bureaucrats in order to protect the country from bad economic advice.

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