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Archive for the ‘Higher Taxes’ Category

Leftists don’t have many reasons to be cheerful.

Global economic developments keep demonstrating (over and over again) that big government and high taxes are not a recipe for prosperity. That can’t be very encouraging for them.

They also can’t be very happy about the Obama presidency. Yes, he was one of them, and he was able to impose a lot of his agenda in his first two years. But that experiment with bigger government produced very dismal results. And it also was a political disaster for the left since Republicans won landslide elections in 2010 and 2014 (you could also argue that Trump’s election in 2016 was a repudiation of Obama and the left, though I think it was more a rejection of the status quo).

But there is one piece of good news for my statist friends. The tax cuts in Kansas have been partially repealed. The New York Times is overjoyed by this development.

The Republican Legislature and much of Kansas has finally turned on Gov. Sam Brownback in his disastrous five-year experiment to prove the Republicans’ “trickle down” fantasy can work in real life — that huge tax cuts magically result in economic growth and more, not less, revenue. …state lawmakers who once abetted the Brownback budgeting folly passed a two-year, $1.2 billion tax increase this week to begin repairing the damage. …It will take years for Kansas to recover.

And you won’t be surprised to learn that Paul Krugman also is pleased.

Here’s some of what he wrote in his NYT column.

…there was an idea, a theory, behind the Kansas tax cuts: the claim that cutting taxes on the wealthy would produce explosive economic growth. It was a foolish theory, belied by decades of experience: remember the economic collapse that was supposed to follow the Clinton tax hikes, or the boom that was supposed to follow the Bush tax cuts? …eventually the theory’s failure was too much even for Republican legislators.

Another New York Times columnist did a victory dance as well.

The most momentous political news of the past week…was the Kansas Legislature’s decision to defy the governor and raise income taxes… Kansas, under Gov. Sam Brownback, has come as close as we’ve ever gotten in the United States to conducting a perfect experiment in supply-side economics. The conservative governor, working with a conservative State Legislature, in the home state of the conservative Koch brothers, took office in 2011 vowing sharp cuts in taxes and state spending, except for education — and promising that those policies would unleash boundless growth. The taxes were cut, and by a lot.

Brownback’s supply-side experiment was a flop, the author argues.

The cuts came. But the growth never did. As the rest of the country was growing at rates of just above 2 percent, Kansas grew at considerably slower rates, finally hitting just 0.2 percent in 2016. Revenues crashed. Spending was slashed, even on education… The experiment has been a disaster. …the Republican Kansas Legislature faced reality. Earlier this year it passed tax increases, which the governor vetoed. Last Tuesday, the legislators overrode the veto. Not only is it a tax increase — it’s even a progressive tax increase! …More than half of the Republicans in both houses voted for the increases.

If you read the articles, columns, and editorials in the New York Times, you’ll notice there isn’t a lot of detail on what actually happened in the Sunflower State. Lots of rhetoric, but short on details.

So let’s go to the Tax Foundation, which has a thorough review including this very helpful chart showing tax rates before the cuts, during the cuts, and what will now happen in future years (the article also notes that the new legislation repeals the exemption for small-business income).

We know that folks on the left are happy about tax cuts being reversed in Kansas. So what are conservatives and libertarians saying?

The Wall Street Journal opined on what really happened in the state.

…national progressives are giddy. Their spin is that because the vote reverses Mr. Brownback’s tax cuts in a Republican state that Donald Trump carried by more than 20 points, Republicans everywhere should stop cutting taxes. The reality is more prosaic—and politically cynical. …At bottom the Kansas tax vote was as much about unions getting even with the Governor over his education reforms, which included making it easier to fire bad teachers.

And the editorial also explains why there wasn’t much of an economic bounce when Brownback’s tax cuts were implemented, but suggests there was a bit of good news.

Mr. Brownback was unlucky in his timing, given the hits to the agricultural and energy industries that count for much of the state economy. But unemployment is still low at 3.7%, and the state has had considerable small-business formation every year since the tax cuts were enacted. The tax competition across the Kansas-Missouri border around Kansas City is one reason Missouri cut its top individual tax rate in 2014.

I concur. When I examined the data a few years ago, I also found some positive signs.

In any event, the WSJ is not overly optimistic about what this means for the state.

The upshot is that supposedly conservative Kansas will now have a higher top marginal individual income-tax rate (5.7%) than Massachusetts (5.1%). And the unions will be back for another increase as spending rises to meet the new greater revenues. This is the eternal lesson of tax increases, as Illinois and Connecticut prove.

And Reason published an article by Ben Haller with similar conclusions.

What went wrong? First, the legislature failed to eliminate politically popular exemptions and deductions, making the initial revenue drop more severe than the governor planned. The legislature and the governor could have reduced government spending to offset the decrease in revenue, but they also failed on that front. Government spending per capita remained relatively stable in the years following the recession to the present, despite the constant fiscal crises. In fact, state expenditure reports from the National Association of State Budget Officers show that total state expenditures in Kansas increased every year except 2013, where expenditures decreased a modest 3 percent from 2012. It should then not come as a surprise that the state faced large budget gaps year after year. …tax cuts do not necessarily pay for themselves. Fiscal conservatives, libertarians, …may have the right idea when it comes to lowering rates to spur economic growth, but lower taxes by themselves are not a cure-all for a state’s woes. Excessive regulation, budget insolvency, corruption, older demographics, and a whole host of other issues can slow down economic growth even in the presence of a low-tax environment.

Since Haller mentioned spending, here’s another Tax Foundation chart showing inflation-adjusted state spending in Kansas. Keep in mind that Brownback was elected in 2010. The left argued that he “slashed” spending, but that assertion obviously is empty demagoguery.

Now time for my two cents.

Looking at what happened, there are three lessons from Kansas.

  1. A long-run win for tax cutters. If this is a defeat, I hope there are similar losses all over the country. If you peruse the first chart in this column, you’ll see that tax rates in 2017 and 2018 will still be significantly lower than they were when Brownback took office. In other words, the net result of his tenure will be a permanent reduction in the tax burden, just like with the Bush tax cuts. Not as much as Brownback wanted, to be sure, but leftists are grading on a very strange curve if they think they’ve won any sort of long-run victory.
  2. Be realistic and prudent. It’s a good idea to under-promise and over-deliver. That’s true for substance and rhetoric.
    1. Don’t claim that tax cuts pay for themselves. That only happens in rare circumstances, usually involving taxpayers who have considerable control over the timing, level, and composition of their income. In the vast majority of cases, tax cuts reduce revenue, though generally not as much as projected once “supply-side” responses are added to the equation.
    2. Big tax cuts require some spending restraint. Since tax cuts generally will lead to less revenue, they probably won’t be durable unless there’s eventually some spending restraint (which is one of the reasons why the Bush tax cuts were partially repealed and why I’m not overly optimistic about the Trump tax plan).
    3. Tax policy matters, but so does everything else. Lower tax rates are wonderful, but there are many factors that determine a jurisdiction’s long-run prosperity. As just mentioned, spending restraint is important. But state lawmakers also should pay attention to many other issues, such as licensing, regulation, and pension reform.
  3. Many Republicans are pro-tax big spenders. Most fiscal fights are really battles over the trend line of spending. Advocates of lower tax rates generally are fighting to reduce the growth of government, preferably so it expands slower than the private sector. Advocates of tax hikes, by contrast, want to enable a larger burden of government spending. What happened in Kansas shows that it’s hard to starve the beast if you’re not willing to put government on a diet.

By the way, all three points are why the GOP is having trouble in Washington.

The moral of the story? As I noted when writing about Belgium, it’s hard to have good tax policy if you don’t have good spending policy.

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I don’t like international bureaucracies that push statist policies.

In a perverse way, though, I admire their brassiness. They’re now arguing that higher taxes are good for growth.

This isn’t a joke. They never offer any evidence, of course, but it’s now routine to find international bureaucrats asserting that there will be more prosperity if more resources are taken out of the private sector and given to politicians (see the 3:30 mark of this video for some evidence).

Christine Lagarde, the lavishly paid head of the IMF, is doubling down on this bizarre idea that higher tax burdens are a way to generate more growth for poor nations.

…we are here to discuss an equally powerful tool for global growth — domestic resource mobilization. …taxes, and the improvement of tax systems, can boost development in incredible ways… So today, allow me first to explain the IMF’s commitment to capacity development and second, to outline strategies governments can use to generate stable sources of revenue…the IMF has a third important development mission — capacity development.

Keep in mind that all of the buzz phrases in the preceding passages – “resource mobilization” and “capacity development” – refer to governments imposing and collecting more taxes.

Again, I’m not joking.

…the focus of our event today — enabling countries to raise public tax revenues efficiently.

And there’s plenty of rhetoric about how higher taxes somehow translate into more prosperity.

Resource mobilization can, if pursued wisely, become a key pillar of strong economy… For many developing countries, increased revenue is a necessary catalyst to reach the 2030 Sustainable Development Goals, and can be a driver of inclusive growth. Yet in some countries revenue remains stagnant, as the resources needed to enhance economic and civic life sit on the sidelines.

Wow, money that the government doesn’t grab apparently will just “sit on the sidelines.”

Lagarde’s entire speech was a triumph of anti-empiricism.

For instance, the western world went from poverty to prosperity in the 1800s when government was very small, averaging less than 10 percent of economic output.

Yet Lagarde makes an unsubstantiated assertion that today’s poor nations should have tax burdens of at least 15 percent of GDP (the OECD is even worse, arguing that taxes should consume 25 percent of economic output).

How significant is the resource problem? Developing countries typically collect between 10 to 20 percent of GDP in taxes, while the average for advanced economies is closer to 40 percent. IMF staff research shows that developing countries should aim to collect 15 percent of GDP to improve the likelihood of achieving stable and sustainable growth.

By the way, I should not that the IMF partnered with Oxfam, the radical left-wing pressure group, at the conference where her speech was delivered (sort of like the OECD cooperating with the crazies in the Occupy movement).

Moreover, her support for higher taxes is rather hypocritical since she doesn’t have to pay tax on her munificent salary.

I’ve also written about the various ways the IMF has endorsed higher taxes in the United States.

It’s also worth noting that the IMF boss thinks America should have a bigger welfare state as well. Here’s some of what she said about policy in the United States.

Policies need to help lower income households – including through a higher federal minimum wage, more generous earned income tax credit, and upgraded social programs for the nonworking poor. …There is a need to deepen and improve the provision of reasonable benefits to households… This should include paid family leave to care for a child or a parent, childcare assistance, and a better disability insurance program. I would just note that the U.S. is the only country among advanced economies without paid maternity leave at the national level.

The IMF even figured out a way to criticize the notion of lower corporate taxation in the United States.

The IMF…said that already highly leveraged U.S. companies may not be in a position to translate a cash-flow boost from U.S. Republican tax reform proposals into productive capital investments that can aid sustainable growth. Instead, the Fund said the slug of cash, which is likely to include repatriation of profits held overseas by multinational corporations, could be channelled into risks such as purchases of financial assets, mergers and dividend payouts. Such temptations would be highest in the information technology and health care sectors, according to the report. “Cash flow from tax reforms may accrue mainly to sectors that have engaged in substantial financial risk taking,” the IMF said. “Such risk taking is associated with intermittent large destabilising swings in the financial system over the past few decades.”

Basically, the bureaucrats at the IMF want us to believe that money left in private hands will be poorly used.

That’s a strange theory, but the oddest part of this report is that the IMF actually argued that a small repatriation holiday in 2004 somehow caused the recession of 2008 (almost all rational people put the blame on the Federal Reserve and the duo of Fannie Mae and Freddie Mac).

The report noted that past major tax changes typically were followed by increases in financial risk-taking, including the tax reforms in 1986 and a corporate tax repatriation “holiday” in 2004. In both cases, these led to leverage buildups that were followed by recessions, in 1990 and 2008. …inflation and interest rates could rise more sharply than expected. This could increase market volatility and raise debt service costs for already-stretched corporate balance sheets, the IMF said. …”Tighter financial conditions could lead to distress” for weaker firms, the IMF said, noting that resulting losses would be borne by banks, life insurers, mutual funds, pension funds, and overseas institutions.

But the U.S. isn’t special.

The IMF wants higher tax burdens everywhere. Such as the Caribbean.

Over the past decade, governments in the Caribbean region have introduced the value-added tax (VAT) to modernize their tax system, rapidly mobilize revenue… VAT…has boosted revenues, the VAT has not reached its potential. …The paper also finds that although tax administration reforms can boost revenues, countries have just started… These reforms need to intensify in order to have a more significant impact on compliance and revenue.

Writing for the Weekly Standard, Irwin Stelzer has a very dim assessment of the International Monetary Fund’s actions.

He starts with some background information.

The original vision of the IMF was as an agency attending to global stability… Along with the World Bank, the agency was created at an alcohol-fueled conference of 730 delegates from 44 nations, convened 72 years ago in Bretton Woods, New Hampshire. No matter that the delegates from one of the important attendees, the Soviet Union, did not speak English: Harry Dexter White, the head of the U.S. delegation, was a Soviet agent who kept Moscow informed of the goings-on. …Today’s IMF includes 189 nations, has some 2,700 employees and an annual budget in excess of $1 billion, almost 18 percent of which comes from U.S. taxpayers.

He then points out that the IMF has a bad habit of putting dodgy people in charge.

In 2004 Rodrigo Rato took the top chair and served until 2007, when he resigned to face trial in Spain for a variety of frauds involving over 70 bank accounts, and the amassing of a €27 million fortune in a web of dozens of companies. Sr. Rato was succeeded by Dominique Strauss-Kahn… Strauss-Kahn did a reasonable job until arrested in New York City on charges of imposing himself on a hotel maid whose testimony proved so incredible that all criminal charges were dropped. But DSK did settle her civil suit for a reported $1.5 million… Madame Christine Lagarde, former French finance minister, took over as managing director. …Lagarde now faces a criminal trial in France for approving a 2008 arbitration decision award of £340 million to a major financial supporter of then-president Nicolas Sarkozy that was later reversed by an appeals court.

And he notes that these head bureaucrats are lavishly compensated.

…her job…pays $500,000 per year, tax free, plus benefits and a $75,000 allowance to be paid “without any certification or justification by you, to enable you to maintain, in the interests of the Fund, a scale of living appropriate to your position as Managing Director.” The salary is twice the take-home pay of the American president, who must pay taxes on his $400,000 salary… Vacations and sick leave follow generous European standards.

Last but not least, he points out that IMF economists have a lousy track record.

All of which might be money well spent if the IMF had been reasonably successful in one of its key functions—forecasting the outlook for the international economy. …one can’t help wondering what is going on in the IMF’s highly paid forecasting shop. A study of the 189 IMF members by the Economist finds 220 instances between 1999 and 2014 in which an economy grew one year before sinking the next. “In its April forecasts the IMF never once foresaw the contraction looming in the next year.” The magazine’s random-number generator got it right 18 percent of the time.

If all the IMF did was waste a lot of money producing inaccurate forecasts, I wouldn’t be overly upset.

After all, economists seemingly specialize in getting the future wrong. My problem is that the IMF pushes bad policy.

Let’s close with a defense of the bureaucracy.

Desmond Lachman of the American Enterprise Institute argues that the IMF is needed because of future crises.

A number of recent senior U.S. Treasury nominations, who are known for their antipathy towards the International Monetary Fund, seems to signal that President Trump might want to have a smaller IMF. Before he yields to the temptation of trying to downsize that institution, he might want to reflect on the fact that there is a high probability that during his term he will be confronted with a global economic crisis that will require a large IMF… It is generally not a good idea to think about downsizing the fire brigade on the eve of a major conflagration. In the same way, it would seem that President Trump would be ill-advised to think about reigning in the IMF at a time when there is the real prospect of a global economic crisis during his term of office.

I actually agree with much of what Desmond wrote about the possibility of economic and fiscal crisis in the near future.

The problem, though, is that the IMF is not a fire brigade. It’s more akin to a collection of fiscal pyromaniacs.

P.S. In the interest of fairness, I want to acknowledge that we sometimes get good analysis from the IMF. Economists from that bureaucracy have concluded (two times!) that spending caps are the most effective fiscal rule. They also made some good observations about tax policy earlier this year. And IMF researchers in 2016 concluded that smaller government and lower taxes produce more prosperity. Moreover, an IMF study in 2015 found that decentralized government works better.

P.P.S. On the other hand, I was greatly amused in 2014 when the IMF took two diametrically opposed positions on infrastructure spending in a three-month period. And I also think it’s funny that IMF bureaucrats inadvertently generated some very powerful evidence against the VAT.

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Illinois is a mess. Taxes and spending already are too high, and huge unfunded liabilities point to an even darker future.

Simply stated, politicians and government employee unions have created an unholy alliance to extract as much money as possible from the state’s beleaguered private sector.

That’s not a surprise. Indeed, it’s easily explained by the “stationary bandit” theory of government.

But while the bandit of government may be stationary, the victims are not. At least not in a nation with 50 different states. Indeed, Illinois Policy reports that a growing number of geese with golden eggs decided to fly away after a big tax hike in 2011.

Politicians enacted Illinois’ 2011 income-tax hike during a late-night legislative session in January 2011 and raised the state’s personal income-tax rate to 5 percent from 3 percent. This 67 percent income-tax hike lasted for four years, during which time Illinois experienced record wealth flight. …The short-term increase in tax revenue gained from higher tax rates is offset by the long-term loss of substantial portions of Illinois’ tax base. The average income of taxpayers leaving Illinois rose to $77,000 per year in 2014, according to new income migration data released by the IRS. Meanwhile, the average income of people entering Illinois was only $57,000. …During the four years of the full income-tax hike, prior to its partial sunset in 2015, Illinois lost $14 billion in annual adjusted gross income, or AGI, to other states, on net.

Illinois has always had an unfavorable ratio when comparing the incomes of immigrants and emigrants. But you can see from this chart that there was a radically unfavorable shift after the tax hike.

Here’s a table from the article showing the 10-worst states.

Illinois leads this list of losers by a comfortable margin. Connecticut, meanwhile, has a strong hold on second place (which shouldn’t be a surprise).

The IP report observes that the states benefiting from internal migration have much better fiscal policy. In particular, most of them are on the admirable list of states that don’t impose income taxes.

…the top five states with favorable income differentials were Florida, Wyoming, Nevada, South Carolina and Texas. Notably, 4 of 5 of these states have no income tax, and none of them have a death tax.

It’s worth noting that the high-tax approach is not producing good results.

Instead, as reported by Bloomberg, the Land of Lincoln is the land of red ink.

Illinois had its bond rating downgraded to one step above junk by Moody’s Investors Service and S&P Global Ratings, the lowest ranking on record for a U.S. state… Illinois’s underfunded pensions and the record backlog of bills…are equivalent to about 40 percent of its operating budget. …investors have demanded higher premiums for the risk of owning its debt. Moody’s called Illinois “an outlier among states” after suffering eight downgrades in as many years. …like other states, has no ability to resort to bankruptcy to escape from its debts. A downgrade to junk, though, would add further financial pressure by increasing its borrowing costs.

Amazing, in spite of this ongoing meltdown, the Democrats who control the state legislature are pushing hard to once again increase the income tax.

Heck, they want to increase all sorts of taxes. Including higher burdens on the financial industry.

Kristina Rasumussen, the President of Illinois Policy, warned in the Wall Street Journal that this was not a good recipe.

Proponents here call it the “privilege tax.” …The Illinois bill would put a 20% levy on fees earned by investment advisers. It passed the state Senate in a 32-24 vote Tuesday, and backers are hoping to get it through the House before the legislative session ends May 31. The new tax is pitched as a way to squeeze more revenue—as much as $1.7 billion a year—from hedge funds and private-equity firms… An earlier version of the Illinois proposal included a provision so that the 20% tax would take effect only if and when New York, New Jersey and Connecticut enacted similar measures. But the bill as written now would impose the tax regardless, and lawmakers will simply have to hope other states follow suit. Yet who says financiers can’t do their jobs just as well in Palm Beach, Fla.—or London, Zurich or Hong Kong? The progressives peddling this idea don’t understand that Chicago competes for these businesses not only with New York and Greenwich, Conn., but with anywhere that can offer cellphone service and an internet connection. …Railing against supposed “fat cats” might satisfy progressive groups, but lawmakers shouldn’t be in the business of hounding the people who help connect capital with new opportunities for growth. …Rather than focus on how to make everyone miserable together, policy makers should work to increase their states’ competitiveness. A start would be to rally against this proposed privilege tax and instead fix the spiraling pension costs and outdated labor rules that are dragging Illinois and other blue states down.

Let’s hope the governor continues to reject any and all tax increases.

If he does hold firm, he’ll have allies.

Including the Chicago Tribune, which recently editorialized about the state’s dire position

Illinois legislators fumble repeated attempts to send a balanced budget to Gov. Bruce Rauner; while the stack of Illinois’ unpaid bills climbs by the minute; while our leaders prioritize politics over policy… Employers and other taxpayers are hopping over Illinois’ borders with alarming regularity. …What an embarrassment. What a dereliction of duty. …Illinois, boasting the lowest credit rating and the highest population loss of any state in the country, has doubled down. State government is in a full-blown crisis. Again. Since January, Democrats have discussed plans to raise income taxes and borrow money to pay down bills. They approved bills that would make Illinois a less attractive place to do business; under one proposal, Illinois would have the highest minimum wage of all its neighboring states.

This is some very sensible analysis from a newspaper that endorsed Obama in both 2008 and 2012.

Even more important, the state’s taxpayers are mostly on the correct side.

Illinoisans feel the strain of the state’s two-year budget impasse, but they are emphatic that tax hikes should not be part of any budget deal. These are the findings of a new poll of likely Illinois voters… Only 31 percent of survey respondents support raising the state income tax to end the budget impasse. An increase in the state sales tax is even more unpopular, with 76 percent of survey respondents opposed. Another key takeaway from the poll: A plurality (49 percent) of respondents who are directly affected by the state budget impasse prefer a cuts-only, no-tax-hike budget. …Survey respondents were also asked what they think of political candidates who support raising taxes to end the budget impasse. The poll found that likely Illinois voters will be unforgiving of candidates for governor or the General Assembly who raise the state income tax or sales tax.

I suspect taxpayers realize that higher taxes will simply lead to more spending.

Indeed, a leftist in the state inadvertently admitted that the purpose of tax hikes is to enable more spending.

If there is to be any hope for the future in Illinois, Governor Rauner needs to hold firm. So long as Republicans in the state legislature hold firm, he can use his veto power to stop any tax hikes.

Or he can be Charlie Brown.

P.S. Illinois is invariably near the bottom in comparisons of state fiscal policy. The one saving grace is that the state has a flat tax. If the statists ever succeed in replacing that system with a so-called progressive tax, it will just be a matter of time before the state passes New York and California in the real race to the bottom.

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As far as I’m concerned, no sentient human being could look at what happened in the United States in the 1980s and not agree that high tax rates on upper-income taxpayers are foolish and self-destructive.

Not only did the economy grow faster after Reagan lowered rates, but the IRS even collected more revenue (a lot more revenue) because rich people earned and reported so much additional income.

That should be a win-win for all sides, though there are some leftists who hate the rich more than they like additional revenue.

Anyhow, I raise this example because there are politicians today who think it’s a good idea to go back to the punitive tax policy that existed in the 1970s.

Hillary Clinton proposed big tax hikes in last year’s campaign. And now, as reported by the U.K.-based Times, the Labour Party across the ocean is openly embracing a soak-the-rich agenda.

Labour’s tax raid on the country’s 1.3 million highest earners could raise less than half the £4.5 billion claimed by the party, experts said last night. The policy was announced by Jeremy Corbyn as part of plans to raise £48 billion through tax increases. …At the manifesto’s heart are plans to lower the threshold for the 45p tax rate from £150,000 to £80,000 and introduce a 50p tax band for those earning more than £123,000 a year. …Labour said that the increases could raise as much as £6.4 billion to help to fund giveaways such as the scrapping of tuition fees and more cash for the NHS, schools and childcare.

Here’s a chart from the article, showing who gets directly hurt by Corbyn’s class-warfare scheme.

But here’s the amazing part of the article.

The Labour Party, which has become radically left wing under Corbyn, openly acknowledges that the Laffer Curve is real and that there will be negative revenue feedback.

Under Labour’s calculation, if no one changed their behaviour as a result of the tax changes, a future government would raise an extra £6.4 billion a year. In its spending commitments the party is assuming that the new measures would bring in about £4.5 billion.

This is remarkable. The hard-left Labour Party admits that about 30 percent of the tax increase will disappear because taxpayers will respond by earning and/or reporting less taxable income.

That’s a huge concession to the real world, which is more than Barack Obama or Hillary Clinton ever did. Welcome to the supply side, Jeremy Corbyn!

Moreover, establishment organizations such as the Institute for Fiscal Studies also incorporate the Laffer Curve in their analysis. But even more so.

They say Labour’s class-warfare tax hike would – at best – raise less than half as much as the static revenue estimate.

The IFS said that even this reduced figure looked optimistic and the changes were more likely to raise £2 billion to £3 billion — about half the amount claimed. “The amount of extra revenue these higher tax rates would raise is very uncertain,” Paul Johnson, director of the IFS, said. “What we do know is that raising tax levels on those people earning over £150,000 does not bring in additional revenues because the kind of people on these kinds of incomes are significantly more able to work around the tax system.

Now let’s compared the enlightened approach in the United Kingdom to the more primitive approach in the United States.

The official revenue-estimating body on Capitol Hill, the Joint Committee on Taxation, has only taken baby steps in the direction of dynamic scoring (which is an improvement over their old approach of static scoring, but they still have a long way to go).

Fortunately, there are some private groups who do revenue estimates, similar to the IFS in the UK.

The Committee for a Responsible Federal Budget put together this very useful table comparing how the Tax Foundation and the Tax Policy Center “scored” the Better Way Plan.

The key numbers are in the dark blue rows. As you can see, the Tax Foundation assumes about 90 percent revenue feedback while the left-leaning Tax Policy Center only projects about 22 percent revenue feedback.

Since not all tax cuts/tax increases are created equal, the 22-percent revenue feedback calculation by the Tax Policy Center does not put them to the left of the Labour Party, which assumed 30-percent revenue feedback.

Indeed, the Labour Party’s tax hike is focused on upper-income taxpayers, who do have more ability to respond when there are changes in tax policy, so a high number is appropriate. However, there are some very pro-growth provisions in the Better Way Plan, such as a lower corporate tax rate, expensing, death tax repeal, etc, so I definitely think the Tax Foundation’s projections are closer to the truth.

For policy wonks, Alan Cole of the Tax Foundation explained why their numbers tend to differ.

The bottom line is that we are slowly but surely making progress on dynamic scoring. Even folks on the left openly acknowledge that higher tax rates impose at least some damage. You know what they say about a journey of a thousand miles.

P.S. None of this changes the fact that I still don’t like the BAT, but I freely admit that the economy would grow much faster if the overall Better Way Plan was enacted.

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As I’ve written before, our fight to restrain the size and scope of government will be severely hamstrung – perhaps even mortally wounded – if the crowd in Washington ever succeeds in getting a value-added tax as a new source of revenue.

This is why many statists are pushing so hard for the VAT. It’s a money machine for big government.

But what makes this battle especially frustrating is that there are some otherwise sensible people who are on the wrong side of the issue. I was stunned, for instance, when Rand Paul and Ted Cruz included VATs as part of their presidential tax plans.

And I’ve been less surprised, but still disappointed, to find support for a VAT from people such as Tom Dolan, Greg Mankiw, and Paul Ryan, as well as Kevin Williamson, Josh Barro, and Andrew Stuttaford. And I wrote that Mitch Daniels, Herman Cain, and Mitt Romney were not overly attractive presidential candidates because they expressed openness to the VAT (methinks it is time to create a VAT Hall of Shame).

Now I have three more people to add to the list.

In a column for the Washington Times, Professor Peter Morici argues for a VAT instead of the income tax.

The current system imposes terribly high rates and a myriad of special-interest credits and deductions. It requires expensive record keeping that drives taxpayers mad and complex auditing functions at the Internal Revenue Service that have proven susceptible to political abuse… The most effective reform would be to simply junk the personal and corporate income taxes in favor of a VAT. The Treasury annually collects about $2 trillion through personal and corporate taxes. This could be replaced by an 11 percent national sales tax on all private purchases and payments.

This is good in theory, but it’s a high-risk fantasy. The politicians in DC who want a VAT are not proposing to get rid of other taxes. Instead, they want the VAT in addition to income taxes.

So unless Morici has some plan to fully repeal income taxes (and to amend the Constitution to prohibit income taxes from being imposed in the future), his support for a VAT plays into the hands of those who want a new levy to finance bigger government (which is exactly what happened in Europe).

Even more troubling, he confirms my fears that the border-adjustable tax serves as a stalking horse for a VAT.

Several House Republicans, led by Ways and Means Chairman Kevin Brady, propose to do essentially this for the corporate but not the personal income tax. …This proposal has…flaws. …The answer is simple — generalize Mr. Brady’s reforms to include the personal income tax as well. Junk it and impose a VAT of 11 percent on all economic activities.

Maybe now people will appreciate my concerns about the BAT.

Last but not least, I can’t resist pointing out that Morici is flat wrong about the VAT and trade. Heck, even Paul Krugman agrees with me on that topic.

Foreign governments rely more on value-added taxes (VAT), which approximates a national sales tax. Those are rebatable on exports and applied to imports under World Trade Organization rules… This places U.S.-based businesses at a competitive disadvantage.

Now let’s look at another column with a misguided message.  Writing for The Hill, Jim Carter of Emerson and former Congressman Geoff Davis argue for a VAT.

…enact a payroll tax holiday similar to the one Americans enjoyed in 2011 and 2012. Only this time the tax holiday would be permanent. …How can the government make up for the revenue lost from the payroll tax cut? One idea: eliminate the deduction that businesses get for the wages and benefits they pay their employees. …this would generate a massive $11.6 trillion in revenue over 10 years.

Call me crazy, but I get very nervous about plans that generate “massive…revenue” for Washington. Especially when the plan proposed by Carter and Davis is actually a subtraction-method VAT.

And just like Morici, they think the House Better Way Plan paves the way for that pernicious levy.

Abolishing labor deductibility also generates enough revenue to lower the tax rates on business income five percentage points below the rates envisioned by the House Republican “blueprint” for tax reform… Add the House blueprint’s other provisions…this modified House blueprint would be roughly revenue-neutral.

Moreover, Carter and Davis don’t even pretend that the income tax might be abolished. They prefer instead to go after the payroll tax, which is far less damaging.

Moreover, they want to add other statist policies to their VAT scheme.

Add President Trump’s childcare proposals and a Republican commitment to link tax reform to additional infrastructure funding, and congressional Democrats would have little excuse not to work with Republicans.

Of course Democrats would be interested. They would be getting the VAT they desperately need if they want to take entitlement reform off the table. And they also are being offered bad childcare policy and bad infrastructure policy as a bonus.

Now let’s look at a Washington Post column by Alan Murray.

…in tax policy, as in health-care policy, the United States is notoriously ineffective and inefficient. As the world’s richest nation, the United States has more capacity to tax than any other country. But…we rank near the bottom of industrialized nations in our effectiveness at doing so. …Reid…devotes a chapter to the value-added tax, which he calls “the most successful taxation innovation of the last sixty years.” …it turns out to be relatively easy to enforce. …Reid quotes former Federal Reserve chairman Alan Greenspan saying a VAT is the “least worst” way to raise taxes. “It has been adopted in every major nation on earth and in most small nations as well,” he says.

Yes, you read correctly. He’s grousing that the federal government isn’t demonstrating “effectiveness” when it comes to maximizing its “capacity to tax.”

This is the same statist mentality that led the World Bank to rank the United States near the bottom for “tax effort.”

For what it’s worth, I’m grateful that America hasn’t copied Europe by trying to squeeze every possible penny from taxpayers. And I’m specifically thankful that we haven’t copied them by imposing a VAT to finance bigger government.

I was amused by this passage in Murray’s column.

Critics of Reid’s plan, of course, won’t be hard to find. …Conservatives will attack the value-added tax as a money machine that leads to bigger government.

Of course supporters of limited government will make that complaint. That’s why statists want a VAT. Heck, Murray’s column openly states that the VAT would boost America’s “capacity to tax.”

For those who favor restraints on government, the last thing we want is a government that figures out ways to extract more revenue from the economy’s productive sector.

Let’s close by citing some research published last year.

Writing for the Wall Street Journal, Professor Ed Lazear of Stanford University warns that a VAT, even if part of an otherwise attractive tax plan, almost surely will lead to an increased burden of government spending.

…keeping a value-added tax low and substituting it for other more-regressive taxes has proven almost impossible. All 34 countries in the Organization for Economic Cooperation and Development, except the U.S., have a VAT. …26 countries have higher VATs now than they did when they first instituted the tax. …The U.K., Italy and Denmark have all raised their VATs by 10 percentage points or more. The VAT, wherever it has been implemented, has been a money machine for big government.

What about the notion that VATs simply replace other taxes?

Unfortunately, that’s not the case.

…for every 1 percentage point that the VAT increases, the tax burden rises by about 0.8 of a percentage point. Were it a pure substitute tax, raising the VAT would have no effect on total taxes collected because other taxes would be reduced by a corresponding amount. Unfortunately, that hardly ever happens. …America may be headed toward a European-style VAT tax and ever-larger government.

Prof. Lazear has some additional data posted at the Hoover Institution website. Here’s a chart that should frighten every fiscally responsible person.

And don’t forget the chart I shared showing how the VAT has jumped significantly in Europe in the past few years.

To conclude, here’s my video on why the value-added tax is so dangerous to good fiscal policy.

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

P.P.S. And my clinching argument is that Reagan opposed a VAT and Nixon supported a VAT. That tells you everything you need to know.

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The recipe for growth and prosperity isn’t very complicated.

Adam Smith provided a very simple formula back in the 1700s.

For folks who prefer a more quantitative approach, the Fraser Institute’s Economic Freedom of the World uses dozens of variables to rank nations based on key indices such as rule of law, size of government, regulatory burden, trade openness, and stable money.

One of the heartening lessons from this research is that countries don’t need perfect policy. So long as there is simply “breathing room” for the private sector, growth is possible. Just look at China, for instance, where hundreds of millions of people have been lifted from destitution thanks to a modest bit of economic liberalization.

Indeed, it’s remarkable how good policy (if sustained over several decades) can generate very positive results.

That’s a main message in this new video from the Center for Freedom and Prosperity.

The first part of the video, narrated by Abir Doumit, reviews success stories from around the world, including Hong Kong, Singapore, Chile, Estonia, Taiwan, Ireland, South Korea, and Botswana.

Pay particular attention to the charts showing how per-capita economic output has grown over time in these jurisdictions compared to other nations. That’s the real test of what works.

The second part of the video exposes the scandalous actions of international bureaucracies, which are urging higher fiscal burdens in developing nations even though no poor nation has ever become a rich nation with bigger government. Never.

Yet bureaucracies such as the United Nations, the International Monetary Fund, and the Organization for Economic Cooperation and Development are explicitly pushing for higher taxes in poor nations based on the anti-empirical notion that bigger government is a strategy for growth.

I’m not joking.

As Ms. Doumit remarks in the video, these bureaucracies never offer a shred of evidence for this bizarre hypothesis.

And what’s especially frustrating is that the big nations of the western world (i.e., the ones that control the international bureaucracies) all became rich when government was very small.

And while the bureaucracies never provide any data or evidence, the Center for Freedom and Prosperity’s video is chock full of substantive information. Consider, for instance, this chart showing that there was almost no redistribution spending in the western world as late as 1930.

Unfortunately, the burden of government spending in western nations has metastasized starting in the 1930s. Total outlays now consume enormous amounts of economic output and counterproductive redistribution spending is now the biggest part of national budgets.

But at least western nations became rich first and then made the mistake of adopting bad fiscal policy (fortunately offset by improvements in other areas such as trade liberalization).

The international bureaucracies are trying to convince poor nations, which already suffer from bad policy, that they can succeed by imposing additional bad fiscal policy and then magically hope that growth will materialize.

And having just spent last week observing two conferences on tax and development at the United Nations in New York City, I can assure you that this is what they really think.

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I sometimes feel like a broken record about entitlement programs. How many times, after all, can I point out that America is on a path to become a decrepit European-style welfare state because of a combination of demographic changes and poorly designed entitlement programs?

But I can’t help myself. I feel like I’m watching a surreal version of Titanic where the captain and crew know in advance that the ship will hit the iceberg, yet they’re still allowing passengers to board and still planning the same route. And in this dystopian version of the movie, the tickets actually warn the passengers that tragedy will strike, but most of them don’t bother to read the fine print because they are distracted by the promise of fancy buffets and free drinks.

We now have the book version of this grim movie. It’s called The 2017 Long-Term Budget Outlook and it was just released today by the Congressional Budget Office.

If you’re a fiscal policy wonk, it’s an exciting publication. If you’re a normal human being, it’s a turgid collection of depressing data.

But maybe, just maybe, the data is so depressing that both the electorate and politicians will wake up and realize something needs to change.

I’ve selected six charts and images from the new CBO report, all of which highlight America’s grim fiscal future.

The first chart simply shows where we are right now and where we will be in 30 years if policy is left on autopilot. The most important takeaway is that the burden of government spending is going to increase significantly.

Interestingly, even CBO openly acknowledges that rising levels of red ink are caused solely by the fact that spending is projected to increase faster than revenue.

And it’s also worth noting that revenues are going up, even without any additional tax increases.

The bottom part of this chart shows that revenues from the income tax will climb by about 2 percent of GDP. In other words, more than 100 percent of our long-run fiscal mess is due to higher levels of government spending. So it’s absurd to think the solution should involve higher taxes.

This next image digs into the details. We can see that the spending burden is rising because of Social Security and the health entitlements. By the way, the top middle column on “other noninterest spending” shows one thing that is real, which is that defense spending has fallen as a share of GDP since the mid-1960s, and one thing that may not be real, which is that politicians somehow will limit domestic discretionary spending over the next three decades.

This bottom left part of the image also gives the details on built-in growth in revenues from the income tax, further underscoring that we don’t have a problem of inadequate revenue.

Here’s a chart that shows that our main problem is Medicare, Medicaid, and Obamacare.

Last but not least, here’s a graphic that shows the amount of fiscal policy changes that would be needed to either reduce or stabilize government debt.

I think that’s the wrong goal, and that instead the focus should be on reducing or stabilizing the burden of government spending, but I’m sharing this chart because it shows that spending would have to be lowered by 3.1 percent of GDP to put the nation on a good fiscal path.

Some folks think that might be impossible, but I’ll simply point out that the five-year de facto spending freeze that we achieved from 2009-2014 actually reduced the burden of government spending by a greater amount. In other words, the payoff from genuine spending restraint is enormous.

The bottom line is very simple.

We need to invoke my Golden Rule so that government grows slower than the private sector. In the long run, that will require genuine entitlement reform.

Or we can let America become Greece.

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