Feeds:
Posts
Comments

Archive for the ‘Higher Taxes’ Category

As part of a recent discussion with Gene Tunny in Australia, I explained why I support “Starve the Beast,” which means keeping taxes as low as possible to help achieve the goal of spending restraint.

The premise of Starve the Beast is very simple.

Politicians like to spend money and they don’t particularly care whether that spending is financed by taxes or financed by borrowing (both bad options).

As Milton Friedman sagely observed, that means they will spend every penny they collect in taxes plus as much additional spending financed by borrowing that the political system will allow.

The IMF published a study on this issue about 10 years ago. The authors (Michael Kumhof, Douglas Laxton, and Daniel Leigh) assert that there’s no way of knowing whether Starve the Beast will lead to good or bad results.

…there is no consensus regarding the macroeconomic and welfare consequences of implementing a starve-the-beast approach, henceforth referred to as STB. …it could be beneficial in the ideal case in which it results in cuts in entirely wasteful government spending. In particular, lower spending frees up resources for private consumption, and the associated lower tax rates reduce distortions in the economy. On the other hand, …lower government spending may itself entail welfare losses…if it augments the productivity of private factors of production. …the paper examines whether the principal macroeconomic variables such as GDP and consumption, both in the United States and in the rest of the world, respond positively to this policy. …In addition, the paper assesses how the welfare effects depend on the degree to which government spending directly contributes to household welfare or to productivity.

The authors don’t really push any particular conclusion. Instead, they show various economic outcomes depending on with assumptions one adopts.

Since plenty of research shows that government spending is not a net plus for the economy (even IMF economists agree on that point), and because I think a less-punitive tax system is possible (and desirable) if there’s a smaller burden of government spending, I think the findings shown in Figure 4 make the most sense.

Now let’s shift from academic analysis to policy analysis.

In a piece for National Review back in July 2020, Jim Geraghty notes that Starve the Beast has an impact on government finances at the state level.

…we’re probably not going to see a massive expansion of government at the state level in the coming year or two. …Thanks to the pandemic lockdown bringing vast swaths of the economy to a halt, state tax revenues are plummeting. …So states will have much less tax revenue, constitutional balanced-budget requirements that are not easily repealed, and a limited amount of budgetary tricks to work around it. State governments could attempt to raise taxes, but that’s going to be unpopular and hurt state economies when they’re already struggling. Add it all up and it’s a tough set of circumstances for a dramatic expansion of government, no matter how ardently progressive the governor and state legislatures are.

For what it’s worth, Geraghty warned in the article that fiscal restraint by state governments wouldn’t happen if the federal government turned on the spending spigot.

And that, of course, is exactly what happened.

Now let’s look at the most unintentional endorsement of Stave the Beast.

A couple of years ago, Paul Krugman sort of admitted that cutting taxes was a potentially effective strategy for spending restraint.

…the same Republicans now wringing their hands over budget deficits…blew up that same deficit by enacting a huge tax cut for corporations and the wealthy. …this has been the G.O.P.’s budget strategy for decades. First, cut taxes. Then, bemoan the deficit created by those tax cuts and demand cuts in social spending. Lather, rinse, repeat. This strategy, known as “starve the beast,” has been around since the 1970s, when Republican economists like Alan Greenspan and Milton Friedman began declaring that the role of tax cuts in worsening budget deficits was a feature, not a bug. As Greenspan openly put it in 1978, the goal was to rein in spending with tax cuts that reduce revenue, then “trust that there is a political limit to deficit spending.” …voters should realize that the threat to programs… Social Security and Medicare as we know them will be very much in danger.

In other words, Krugman doesn’t like Starve the Beast because he fears it is effective (just like he also acknowledges the Laffer Curve, even though he’s opposed to tax cuts).

Let’s close by looking at some very powerful real-world evidence. Over the past 50 years, there’s been a massive increase in the tax burden in Western Europe.

Did all that additional tax revenue lead to lower deficits and less debt?

Nope, the opposite happened. European politicians spent every penny of the new tax revenue (much of it from value-added taxes). And then they added even more spending financed by additional borrowing.

To be fair, one could argue that this was an argument for the view of “Don’t Feed the Beast” rather than “Starve the Beast,” but it nonetheless shows that more money in the hands of politicians simply means more spending. And more red ink.

P.S. I had a discussion last year with Gene Tunny about the issue of “state capacity libertarianism.”

Read Full Post »

I wrote back in 2012 that California voters opted for “slow-motion economic suicide” by voting to raise the state’s top income tax rate to 13.3 percent.

Sure enough, having the nation’s highest state income tax rate has been bad news.

More and more companies and households are leaving the (no-longer) Golden State for zero-income-tax states such as Texas, Nevada, and Florida.

Unfortunately, it appears that California politicians aren’t learning any lessons from this exodus.

They’re now pushing for a massive tax increase to fund a government takeover of health care.

The Wall Street Journal opined about the new plan.

California Democrats are busy reviving government-run, single-payer health care, despite its failure in the state five years ago. …Their revived legislation would replace Medicare, Medicaid and private health insurance with a state-run system… Californians would also be entitled to an expansive list of benefits including vision, dental, hearing and long-term care. A board of bureaucrats would control costs—i.e., ration care. …While Californians would technically be entitled to a “free” knee replacement, they might not get one if bureaucrats consider them too old—but the state won’t let people know that’s the reason. …Arizona could soon become a hot destination for medical tourism. …As for the tax increases… Start with a 2.3% excise tax on business with more than $2 million in annual gross receipts… Employers with 50 or more workers would also pay a 1.25% payroll tax, which would be passed onto workers. Workers earning more than $49,900 would pay an additional 1% payroll tax. …would raise the effective income tax on wage earners making more than $61,213 to 11.55%—more than millionaires pay in every state but New York. …An additional progressive surtax would start at 0.5% on income over $149,509 and rise to 2.5% at $2,484,121. …The top marginal rate would rise to 15.8% on unearned income, including capital gains, and 18.05% on wage income.

In a column for Reason, Joe Bishop-Henchman and Andrew Wilford of the National Taxpayers Union explain the likely impact of the proposed tax increases.

As the mad scientist laboratory for bad tax policy in America, California is constantly striving to come up with poorly designed and harmful taxes to pay for ever-increasing spending. But even by its own lofty standards, California has truly outdone itself with its latest proposal to fund a state single-payer health care system. …Not only would the proposed $163 billion in new tax revenue nearly double last year’s total revenue for the tax-happy state, but California would structure these new taxes in such a way as to be even more harmful than doubled tax liabilities already imply. …the 2.3 percent gross receipts tax sticks out. …whether a business has a profit margin of 0.1 percent or 10 percent, it would still have to pay the same percentage of its total revenues. …a rate that is three times the level of the nation’s current highest. …the proposal to institute a payroll tax on businesses with 50 or more employees…would create an obvious disincentive for businesses to hire their 50th employee. …the payroll tax would discourage both hiring employees and paying them higher wages, a disastrous outcome for workers. …individual income tax rates…would effectively be…an 18-bracket tax structure with a top marginal tax rate of 18.05 percent. …a trend that California appears to have its head in the sand about: overtaxed businesses and individuals fleeing for greener pastures.

Let’s elaborate on that final sentence and ask ourselves what the tipping point will be for various taxpayers.

  • Imagine you run a business and you have to pay a 2.3 percent tax on all your receipts, even if you happen to be losing money? Do you leave the state?
  • Imagine if you are a typical employee and government takes more than 10 percent of your income in exchange for bad roads and bad schools? Do you leave the state?
  • Imagine that you are a high-value entrepreneur facing the possibility of having to pay more than 18 percent of your income to state politicians? Do you leave?
  • Imagine being an investor who is thinking about forgoing consumption in order to make an investment that might result in a punitive capital gains tax? Do you leave?

And while you contemplate those questions, remember that California is already very unfriendly to taxpayers, ranking #48 according to the Tax Foundation and ranking #49 according to the Fraser Institute.

Moreover, while California politicians consider a massive tax increase, other states are lowering tax rates.

In other words, California already is in trouble and many state politicians now want to double down on a losing bet.

P.S. California considered a government-run health plan a few years ago and backed off, so maybe there’s hope.

P.P.S. Illinois has been the long-time leader in the poll that asks which state will be the first to suffer political collapse. That may change if this California plan is enacted.

P.P.P.S. When I’m feeling petty and malicious, I sometime hope jurisdictions adopt bad policy because that will give me more evidence showing the adverse consequences of bad policy.

Read Full Post »

The fight over President Biden’s budget, the so-called Build Back Better plan, has revolved around very important issues.

For today’s column, let’s zoom out and look at two charts that highlight the big issue that should be getting more attention.

First, here’s a comparison of projected inflation with baseline spending (the current spending outlook) and Biden’s budget – all based on economic and fiscal estimates from the Congressional Budget Office.

As you can see, spending was growing far too fast even without Biden’s budget. And if Biden’s budget is enacted, the spending burden will rise more than twice the rate of inflation.

Now let’s look at a chart that illustrates why Biden’s spending spree is just a small part of the problem.

To be sure, it’s not good that the President is exacerbating America’s fiscal problems, but you can see that he’s simply adding a few more straws to the camel’s back.

You’ll also notice that I included both the amount of spending that technically is in Biden’s budget plan (the orange part), as well as CBO’s estimate of the additional spending (the gray part) that will happen if the budget gimmicks are removed.

The bottom line is that America’s fiscal problem is too much government spending.

And that spending burden is getting worse over time because spending is growing faster than the private sector, violating the Golden Rule, which is bad news for jobs and growth.

Making the problem worse, as Biden proposes, will further hurt American prosperity.

P.S. Biden’s plan will increase the deficit, which also is not good, but keep in mind that tax-financed spending is no better than debt-financed spending. In either case, you wind up with the same bad result.

P.P.S. This column has two serious visuals to help understand Biden’s fiscal policy. If you prefer satire, here are two other images.

Read Full Post »

Regarding fiscal policy, almost everyone’s attention is focused on Biden’s growth-sapping plan to increase the burden of taxes and spending.

People are right to be concerned. If the President’s plan is approved, the already-grim fiscal outlook for United States will get even worse.

This battle will be decided in next 12 months, hopefully with a defeat for Biden’s dependency agenda.

Regardless of how that fight is resolved, though, we’re eventually going to get to a point where sensible people are back in charge. And when that happens, we’ll have to figure out how to restore the nation’s finances.

That requires figuring out the appropriate goal. Here are two options:

  • Keeping taxes low.
  • Controlling debt.

These are both worthy objectives.

But, as a logic teacher might say, they are necessary but not sufficient conditions.

Here’s a chart showing how a policy of low taxes (the orange line) presumably enables faster growth, but also creates the risk of an eventual economic crisis if nothing is done to control spending and debt climbs too high (think Greece).

By contrast, the chart also shows that it’s theoretically possible to avoid an economic crisis with higher taxes (the blue line), but it means less growth on a year-to-year basis.

The moral of the story is that the economy winds up in the same place with either tax-financed spending or debt-financed spending.

Which is why we should consider a third goal.

  • Limiting spending.

The economic benefits of this approach are illustrated in this second chart. We enjoy faster year-to-year growth. And, because spending restraint is the best way of controlling debt, the risk of a Greek-style economic crisis is averted.

Now for some caveats.

I made a handful of assumptions in the above charts.

  • The economy grows 2.0 percent annually for the next 31 years with tax-financed spending
  • The economy grows 2.5 percent annually with debt-financed spending, but suffers a 10 percent decline in Year 31.
  • The economy grows 3.0 percent annually for the next 31 years with smaller government (thus enabling low taxes and less debt).

Anyone can create their own spreadsheet and make different assumptions.

That being said, there’s a lot of evidence that higher tax burdens hinder growth, that ever-rising debt burdens can lead to crisis, and that less government spending produces stronger growth.

So feel free to make your own assumptions about the strength of these effects, but let’s never lose sight of the fact that spending restraint should be the main goal for post-Biden fiscal policy.

Read Full Post »

Earlier this year, extrapolating from a study by the nonpartisan Congressional Budget Office, Robert O’Quinn (former Chief Economist at the Department of Labor) and I authored a study on the economic impact of Biden’s fiscal plan.

The results are not pretty.

Lost jobs, lost wages, lower living standards, and lost competitiveness.

But those estimates were based on the parameters of Biden’s economic plan in the summer.

His agenda has since been modified, which raises the question of how the current proposal would affect economic performance.

In a piece for Canada’s Fraser Institute (publishers of Economic Freedom of the World and Economic Freedom of North America), Robert and I updated our numbers and explained the implications of Biden’s tax-and-spend agenda.

According to independent experts at the Committee for a Responsible Federal Budget, the actual cost of the president’s policies is closer to $4.9 trillion. Some of this new spending will be financed with red ink, but President Biden also has embraced higher tax rates on work, saving, investment and entrepreneurship. Indeed, if his plan were enacted, the United States would have both the highest corporate tax rate and the highest capital gains tax rate in the developed world. …But how much would the economy be hurt? There are groups such as the Tax Foundation that do excellent work measuring the adverse effects of higher tax rates. But it’s also important to measure the harmful impact of a bigger welfare state. …Based on that CBO study, and using the CBO fiscal and economic baselines, we calculated the following unpalatable outcomes if Build Back Better bill (pushed by the president and Democrats in Congress) becomes law and growth is reduced by 2/10ths of 1 per cent per year.

And here are the results.

The good news is that the latest version of Biden’s plan doesn’t do quite as much damage as what was being discussed earlier this year.

The bad news is that our economy will be much weaker (and our results are in line with other estimates, including those done before the election and since the election).

Not that we should be surprised. If the United States becomes more like Europe, we’ll be more likely so suffer from European-style anemia.

Read Full Post »

Biden’s budget plan is based on fraudulent numbers, but it is also based on the fraudulent idea that a big, European-style welfare state can be financed without fleecing lower-income and middle-class taxpayers.

I’ve repeatedly pointed out that this is not true, but it’s time to turn this fiscal fact into a Theorem of Government.

Some of my friends on the left don’t agree with the first sentence of this Theorem. In some cases, I think they sincerely believe that big government can be entirely financed by going after upper-income taxpayers.

This is why I added the second sentence. After all, surely some of Europe’s welfare states would have figured out how to shield poor and middle-class people from high tax burdens if that was possible.

Yet that’s not the case. As illustrated by this unfortunate Spaniard, ordinary people in Europe get fleeced by their governments.

The good news (sort of) is that there are some honest folks on the left who openly admit a big welfare state means big taxes on ordinary people.

I even include them on my page of “honest leftists.”

And now we have a new member of that club. Congressman Conor Lamb of Pennsylvania recently admitted that his party’s agenda will require taxes on those of us with modest incomes.

Here are some excerpts from a report by Emily Brooks.

Pennsylvania Rep. Conor Lamb acknowledged that enacting all of the Democrats’ sweeping policy visions would require Democrats to raise taxes on the middle class rather than relying on tax increases on the rich. “If we want to propose a lot of new spending and adventurous new government programs in our party, we have to have the confidence to ask … the middle class and people like that to contribute to it. And I think that’s … what we’re missing right now,” Lamb, a Democrat representing a swing district northwest of Pittsburgh, said last week. …”Some of the focus on the billionaires and the ultra-wealthy that people are putting in the news right now — it’s fine, it’s valid, it’s not enough to fund everything we want to do,” Lamb said.

Needless to say, I disagree with Cong. Lamb’s policy agenda. If we adopt European-style fiscal policy, it will mean anemic, European-style economic malaise.

And that will translate into lower living standards for the masses.

But at least he’s being honest about what he wants.

P.S. To elaborate, a small government can be financed by a few rich people. That’s basically the story of Hong Kong. A medium-sized government can be financed in large part by the rich. That’s sort of the story of the United States (though ordinary people pay of a lot of payroll taxes). But there’s no way to finance a Biden-style agenda without going after ordinary taxpayers.

P.P.S. Here are my other Theorems of Government.

Read Full Post »

When President Biden first proposed a global minimum tax on companies, I immediately warned that creating a corporate tax cartel would be very bad news for workers, consumers, and shareholders.

I also warned a BBC audience that proponents would use the agreement as a stepping stone for other statist initiatives to increase the power of politicians.

Simply stated, I’ve been ringing the alarm bells that a tax cartel will lead to ever-higher corporate tax rates. And it will serve as a model for other forms of harmonization.

Well, now that Ireland has capitulated and governments formally adopted the scheme, this is my “I told you so” column.

In a column for the Washington Post, Larry Summers, a former top adviser for Bill Clinton and Barack Obama, celebrates the creation of a global tax cartel.

His column has a laughably inaccurate title, but he starts with some accurate observations about the importance of the agreement.

This agreement is arguably the most significant international economic pact of the 21st century so far. It is built around a profoundly important principle: Countries should cooperate to raise corporate taxation, not compete to reduce it. …It also demonstrates the power of ideas to shape economic policy, as tax scholars have for years been pondering the conundrums of taxing global companies.

I also think the agreement is important, albeit in a very bad way.

And it does show the power of ideas, albeit very bad ideas (though politicians instinctively want more money and power and merely rely on left-leaning academics and policy wonks for after-the-fact rationalizations of statism).

As you might expect, Summers veers from reality to fantasy when discussing the implications of the new tax cartel.

Countries have come together to make sure that the global economy can create widely shared prosperity, rather than lower tax burdens for those at the top. By providing a more durable and robust revenue base, the new minimum tax will help pay for the sorts of public investments that are fundamental to economic success in all countries.

For all intents and purposes, he’s embracing the absurd notion that more growth will materialize if politicians impose higher tax rates and use the money to expand the burden of government.

Proponents of this view conveniently never offer any evidence.

Why? Because there isn’t any.

The scholarly research shows the opposite is true. Free markets and small government are the recipe for growth and prosperity.

I’ll now shift back to a part of the column that is unfortunately accurate.

It is also a template for much more that needs to be done to tackle the adverse side effects of our modern, global capitalism.

What’s accurate about that sentence isn’t the jibe about “adverse side effects” of capitalism (unless, of course, he thinks mass prosperity is a bad thing).

But he’s right about the statists using the global tax cartel as “a template” for further schemes to empower politicians and their cronies.

Summers mentions issues such as public health (I guess he wants to reward the World Health Organization’s corruption and incompetence).

Since I’m a public-finance economist, I’m more worried about cartels that will be created for personal income tax, capital gains tax, dividend tax, wealth tax, etc.

P.S. The corporate tax cartel will lead to higher tax rates, but OECD and IMF data (and U.S. data) show that this doesn’t necessarily mean higher revenue.

Read Full Post »

The good news is that President Biden wants the United States to be at the top. The bad news is that he wants America to be at the top in bad ways.

  • The highest corporate income tax rate.
  • The highest capital gains tax rate.
  • The highest level of double taxation.

We can now add another category, based on the latest iteration of his budget plan.

According to the Tax Foundation, the United States would have the develop world’s most punitive personal income tax.

Worse than France and worse than Greece. How embarrassing.

In their report, Alex Durante and William McBride explain how the new plan will raise tax rates in a convoluted fashion.

High-income taxpayers would face a surcharge on modified adjusted gross income (MAGI), defined as adjusted gross income less investment interest expense. The surcharge would equal 5 percent on MAGI in excess of $10 million plus 3 percent on MAGI above $25 million, for a total surcharge of 8 percent. The plan would also redefine the tax base to which the 3.8 percent net investment income tax (NIIT) applies to include the “active” part of pass-through income—all taxable income above $400,000 (single filer) or $500,000 (joint filer) would be subject to tax of 3.8 percent due to the combination of NIIT and Medicare taxes. Under current law, the top marginal tax rate on ordinary income is scheduled to increase from 37 percent to 39.6 percent starting in 2026. Overall, the top marginal tax rate on personal income at the federal level would rise to 51.4 percent. In addition to the top federal rate, individuals face taxes on personal income in most U.S. states. Considering the average top marginal state-local tax rate of 6.0 percent, the combined top tax rate on personal income would be 57.4 percent—higher than currently levied in any developed country.

Needless to say, this will make the tax code more complex.

Lawyers and accountants will win and the economy will lose.

I’m not sure why Biden and his big-spender allies have picked a complicated way to increase tax rates, but that doesn’t change that fact that people will have less incentive to engage in productive behavior.

What matters is the marginal tax rate on people who are thinking about earning more income.

And they’ll definitely choose to earn less if tax rates increase, particularly since well-to-do taxpayers have considerable control over the timing, level, and composition of their income.

P.S. Based on what happened in the 1980s, we can safely assume that Biden’s class-warfare plan won’t raise much money.

Read Full Post »

After the people of the United Kingdom voted to escape the European Union, I wondered whether the Conservative Party would “find a new Margaret Thatcher” to enact pro-market reforms and thus “take advantage of a golden opportunity” to “prosper in a post-Brexit world.”

The answer is no.

The current Prime Minister, Boris Johnson, deserves praise for turning the Brexit vote into Brexit reality, but his fiscal policy has been atrocious.

Not only is he failing to be another Margaret Thatcher, he’s a bigger spender than left-leaning Tory leaders such as David Cameron and Theresa May.

Let’s look at some British media coverage of how Boris Johnson and Rishi Sunak (the Chancellor of the Exchequer) have sided with government over taxpayers.

Allister Heath of the Telegraph has a brutal assessment of their profligacy.

Rishi Sunak’s message, repeated over and over again, as he unveiled a historic, epoch-defining rise in public spending financed by ruinous tax increases. It was a Labour Budget with a Tory twist and the kind of Spending Review that Gordon Brown would have relished… the cash was sprinkled in every possible direction. Sunak is Chancellor, but he was executing Boris Johnson’s cakeist vision: a meddling, hyperactive, managerialist, paternalistic and almost municipal state which refuses to accept any limits to its ambition or ability to spend. …The scale of the tax increases is staggering. …This will propel the tax burden from 33.5 per cent of GDP before the pandemic to 36.2 per cent by 2026-27, its highest since the early 1950s… The picture on spending is equally grim: we are on course for a new normal of around 41.6 per cent of GDP by 2026-27, the largest sustained share of GDP since the late 1970s. …The Budget and Spending Review are thus a huge victory for Left-wing ideas, even if the shift is being implemented by Right-wing Brexiteers who have forgotten that the economic case for Brexit wasn’t predicated on Britain becoming more like France or Spain. …Labour shouldn’t be feeling too despondent: the party may not be in office, but when it comes to the economy and public spending, they are very much in power.

Writing for CapX, James Heywood explains one of the adverse consequences of big-government Toryism.

Simply stated, the U.K. will go from bad to worse in the Tax Foundation’s International Tax Competitiveness Index.

…in the Cameron-Osborne era, the Conservatives focused on heavily on making Britain competitive and business-friendly, with significant cuts to the headline rate of corporation tax. …in his recent Tory conference speech, Boris Johnson trumpeted the virtues of an ‘open society and free market economy’, promising that his was a government committed to creating a ‘low tax economy’.  Unfortunately, when it comes to UK tax policy the direction of travel is concerningly divorced from the rhetoric. The latest iteration of the US-based Tax Foundation’s annual International Tax Competitiveness Index placed the UK 22nd out of 37 OECD countries when it comes to the overall performance of our tax system. …Nor does the UK’s current ranking factor in the Government’s plans for future tax rises. …the headline rate of corporation tax had fallen to 19% and was set to fall to 17% by 2020. That further fall had already been cancelled during Sajid Javid’s brief stint as Chancellor, in order to pay for additional NHS spending. At the last Budget, Rishi Sunak went much further, setting out plans to gradually raise the rate from 19% to 25% in April 2023. That is a huge tax measure by anyone’s standards… On top of that we have the recently announced Health and Social Care Levy… If we factor all these new measures into the Tax Foundation’s Competitiveness Index, the UK falls to a dismal 30th out of 37 countries.

For what it’s worth, the United Kingdom’s competitiveness decline will be very similar to the drop in America’s rankings if Biden’s fiscal plan is enacted.

In other words, there’s not much difference between the left-wing policy of Joe Biden and the (supposedly) right-wing policy of Britain’s Conservative Party.

No wonder a British cartoonist thought it was appropriate to show Rishi Sunak morphing into Gorden Brown, the high-tax, big-government Chancellor of the Exchequer under Tony Blair.

I’ll close with the observation that conservatives and libertarians in the United Kingdom need to create their own version of the no-tax-hike pledge.

That pledge, organized by Americans for Tax Reform, has helped protect many (but not all) Republicans from politically foolish tax hikes.

It is good politics to have a no-tax pledge, but I’m much more focused on the fact that opposing tax hikes is good policy.

Read Full Post »

The Biden economic agenda can be summarized as follows: As much spending as possible, financed by as much taxation as possible, using lots of dishonest budget gimmicks to glue the pieces together.

But it turns out that higher taxes are not very popular, notwithstanding the delusions of Bernie Sanders, AOC, and the rest of the class-warfare crowd.

If the latest reports are accurate, the left has given up on imposing higher corporate tax rates, higher personal tax rates, and making the death tax more onerous.

That’s the good news.

The bad news is that they’ve revived an awful idea to make capital gains taxes more onerous by taxing people on capital gains that only exist on paper.

In a column for the New York Times, Neil Irwin explains how the new scheme would work..

…congressional Democrats..are looking toward a change in the tax code that would reinvent how the government taxes investments… The Wyden plan would require the very wealthy — those with over $1 billion in assets or three straight years of income over $100 million — to pay taxes based on unrealized gains. …It could create some very large tax bills… If a family’s $10 billion net worth rose to $11 billion in a single year, a capital-gains rate of 20 percent would imply a $200 million tax bill.

In other words, families would be taxed on theoretical gains rather than real gains.

Some have said this scheme is similar to a wealth tax, though it’s more accurate to say it’s a tax on changes in wealth.

Similarly bad consequences, with similarly big problems with complexity, but using a different design.

Mr. Irwin’s column also acknowledges some other problems with this proposed levy.

The proposal raises conceptual questions about what counts as income. When Americans buy assets — shares of stock, a piece of real estate, a business — that become more valuable over time, they owe tax only on the appreciation when they sell the asset. …The rationale is that just because something has increased in value doesn’t mean the owner has the cash on hand to pay taxes. Moreover, for those with complex holdings, like interests in multiple privately held companies, it could be onerous to calculate the change in valuations every year, with ambiguous results. …having a cutoff at which the new capital gains system applies could create perverse incentives… “If you have a threshold, you’re giving people a really strong incentive to rearrange their affairs to keep their income and wealth below the threshold,” said Leonard Burman, institute fellow at the Tax Policy Center.

In other words, this plan would be great news for accountants, lawyers, and other people involved with tax planning.

I support the right of people to minimize their taxes, of course, but I wish we had a simple and fair tax system so that there was no need for an entire industry of tax planners.

But I’m digressing. Let’s continue with our analysis of this latest threat to good tax policy.

Henry Olson opines in the Washington Post that it’s a big mistake to impose taxes on unrealized gains.

The Biden administration’s idea to tax billionaires’ unrealized capital gains…would be an unworkable and arguably unconstitutional mess that could harm everyone. …Tesla founder Elon Musk’s net worth rose by $126 billion last year as his company’s stock price soared, but he surely paid almost no tax on that because he never sold the stock. Biden’s plan would tax all of that rise, netting the federal government about $30 billion. Do the same for all the nation’s billionaires, and the feds could pull in loads of cash… If that sounds too good to be true, it’s because it is. …Privately held companies…are notoriously difficult to value. Rare but valuable items are even more difficult to fix an annual price. …Billionaires are precisely the people with the motive and the means to hire the best tax lawyers to fight the Internal Revenue Service at every step of the way, surely subjecting each tax return to excruciatingly long and expensive audits. …Expensive assets can go down in value, too, and billionaires would rightly insist that the IRS account for those reversals of fortune. …Would the IRS have to issue multi-billion dollar refund checks to return the billionaires’ quarterly estimated tax payments from earlier in the year?

These are all excellent points.

Henry also points out that the scheme may be unconstitutional.

The Constitution may not even permit taxation of unrealized gains. The 16th Amendment authorizes taxation of “income,”… Unrealized gains don’t fit under that rubric because the wealth is on paper, not in the hands of the owner to use as she wants.

And he closes with the all-important point that the current plan may target the richest of the rich, but sooner or later the rest of us would be in the crosshairs.

…it will only be a matter of time before lawmakers apply the tax to ordinary Americans. Anyone who owns a house or has a retirement account has unrealized capital gains. Billionaires get all the attention, but the real money is in the hands of the broader public, as the collective value of real estate and mutual funds dwarfs what the nation’s uber-wealthy hold. The government would love to get 25 percent of your 401(k)’s annual rise.

Amen. This is a point I’ve made in the past.

Simply stated, there are not enough rich people to finance European-sized government. Eventually we’ll all be treated like this unfortunate Spaniard.

I’ll close with a few wonky observations about tax policy.

P.S. Biden, et al, claim we need higher taxes on the rich because the current system is unfair, yet there’s never any recognition that the United States collects a greater share of revenue from the rich than any other developed nations (not because our tax rates on the rich are higher than average, but rather because our tax rates on lower-income and middle-class taxpayers are much lower than average).

P.P.S. The bottom line is that taxing unrealized capital gains is such a crazy idea that even nations such as France and Greece have never tried to impose such a levy.

Read Full Post »

I’m not a fan of the International Monetary Fund (IMF).

Since I work mostly on fiscal issues, I don’t like the fact that the bureaucracy is an avid cheerleader for ever-higher taxes (which is disgustingly hypocritical since IMF employees get lavish, tax-free salaries).

But the biggest problem with the IMF is that it promotes “moral hazard.” More specifically, it provides bailouts for irresponsible governments and for those who foolishly lend to those governments.

The net result is that bad behavior is rewarded, which is a recipe for more bad behavior.

All of which explains why some nations (and their foolish lenders) have received dozens of bailouts.

Oh, and let’s not forget that these endless bailouts also lead to a misallocation of capital, thus reducing global growth.

In an article for the New York Times, Patricia Cohen reports on discussions to expand the IMF’s powers.

Once narrowly viewed as a financial watchdog and a first responder to countries in financial crises, the I.M.F. has more recently helped manage two of the biggest risks to the worldwide economy: the extreme inequality and climate change. …long-held beliefs like the single-minded focus on how much an economy grows, without regard to problems like inequality and environmental damage, are widely considered outdated. And the preferred cocktail for helping debt-ridden nations that was popular in the 1990s and early 2000s — austerity, privatization of government services and deregulation — has lost favor in many circles as punitive and often counterproductive.

There’s a lot to dislike about the above excerpts.

Starting with the article’s title, since it would be more accurate to say that the IMF’s bailout policies encourage fires.

Multiple fires.

Looking at the text, the part about “extreme inequality” is nonsensical, both because the IMF hasn’t done anything to “manage” the issue, other than to advocate for class-warfare taxes.

Moreover, there’s no support for the empty assertion that inequality is a “risk” to the world economy (sensible people point out that the real problem is poverty, not inequality).

Ms. Cohen also asserts that the “preferred cocktail” of  pro-market policies (known as the Washington Consensus) has “lost favor,” which certainly is accurate.

But she offers another empty – and inaccurate – assertion by writing that it was “counterproductive.”

Here are some additional excerpts.

The debate about the role of the I.M.F. was bubbling before the appointment of Ms. Georgieva… But she has embraced an expanded role for the agency. …she stepped up her predecessors’ attention to the widening inequality and made climate change a priority, calling for an end to all fossil fuel subsidies, for a tax on carbon and for significant investment in green technology. …Sustainable debt replaced austerity as the catchword. …The I.M.F. opposed the hard line taken by some Wall Street creditors in 2020 toward Argentina, emphasizing instead the need to protect “society’s most vulnerable” and to forgive debt that exceeds a country’s ability to repay.

The last thing the world needs is “an expanded role” for the IMF.

It’s especially troubling to read that the bureaucrats want dodgy governments to have more leeway to spend money (that’s the real meaning of “sustainable debt”).

And if the folks at the IMF are actually concerned about “society’s most vulnerable” in poorly run nations such as Argentina, they would be demanding that the country copy the very successful poverty-reducing policies in neighboring Chile.

Needless to say, that’s not what’s happening.

The article does acknowledge that not everyone is happy with the IMF’s statist agenda.

Some stakeholders…object to what’s perceived as a progressive tilt. …Ms. Georgieva’s activist climate agenda has…run afoul of Republicans in Congress… So has her advocacy for a minimum global corporate tax.

It would be nice, though, if Ms. Cohen had made the article more balanced by quoting some of the critics.

The bottom line, as I wrote last year, is that the world would be better off if the IMF was eliminated.

Simply stated, we don’t need an international bureaucracy that actually argues it’s okay to hurt the poor so long as the rich are hurt by a greater amount.

P.S. The political leadership of the IMF is hopelessly bad, as is the bureaucracy’s policy agenda. That being said, there are many good economists who work at the IMF and they often produce high-quality research (see here, here, here, here, here, here, here, here, here, and here). Sadly, their sensible analyses doesn’t seem to have any impact on the decisions of the organization’s top bureaucrats.

Read Full Post »

President Biden’s fiscal agenda of higher taxes and bigger government is not a recipe for prosperity.

How much will it hurt the economy?

Last month, I shared the results of a new study I wrote with Robert O’Quinn for the Club for Growth Foundation.

We based our results on a wide range of economic research, especially a scholarly study from the Congressional Budget Office, and found a big drop in economic output, employment and labor income.

Most troubling was the estimate of a long-run drop in living standards, which would be especially bad news for young people.

Today, I want to share some different estimates of the potential impact of Biden’s agenda.

A study for the Texas Public Policy Foundation, authored by  E. J. Antoni, Vance Ginn, and Stephen Moore, found even higher levels of economic damage. Here are some main excerpts.

President Biden and congressional Democrats seek to spend another $6.2 trillion over the next decade, spread across at least two bills that comprise their “Build Back Better” plan. This plan includes heavy taxing, spending, and debt, which contributes to reducing growth rates for GDP, employment, income, and capital stock.  Compared to baseline growth over the next decade, this plan will result in estimated dynamic economic effects of 5.3 million fewer jobs, $3.7 trillion less in GDP, $1.2 trillion less in income, and $4.5 trillion in new debt. …There are many regulatory changes and transfer payments in current legislation whose effects have not been included in this paper but are worth mentioning in closing since they will have many of the same effects as the tax increases discussed in this paper. Extending or expanding the enhanced Child Tax Credit, Earned Income Tax Credit, Child and Dependent Care Tax Credit, and more, disincentivizes working, reducing incomes, investment, and GDP. Just the changes to these three tax credits alone are expected to cause a loss of 15,000 jobs… Permanently expanding the health insurance premium tax credits would similarly have a negative effect… Regulatory changes subsidizing so-called green energy while increasing tax and regulatory burdens on fossil fuels also result in a less efficient allocation of resources.

If we focus on gross domestic product (GDP), the TPPF estimates a drop in output of $3.7 trillion, which is higher than my study, which showed a drop of about $3 trillion.

Part of the difference is that TPPF looked at the impact of both the so-callled infrastructure spending package and Biden’s so-called Build Back Better plan, while the study for the Club for Growth Foundation only looked at the impact of the latter.

So it makes sense that TPPF would find more aggregate damage.

And part of the difference is that economists rarely agree on anything because there are so many variables and different experts will assign different weights to those variables.

So the purpose of sharing these numbers is not to pretend that any particular study perfectly estimates the effect of Biden’s agenda, but rather to simply get a sense of the likely magnitude of the economic damage.

Speaking of economic damage, here’s a table from the TPPF showing state-by-state job losses.

I’ll close by noting that you can also use common sense to get an idea of what will happen if Biden’s agenda is approved.

He wants to make the United States more like Western Europe’s welfare states, so all we have to do is compare U.S. living standards and economic performance to what’s happening on the other side of the Atlantic Ocean.

And when you do that, the clear takeaway is that it’s crazy to “catch up” to nations that are actually way behind.

Read Full Post »

There are lots of reasons (here are five of them) to dislike the version of the Biden tax hike that was approved by the tax-writing committee in the House of Representatives.

From an economic perspective, it is bad for prosperity to penalize work, saving, investment, and productivity.

So why, then, do politicians pursue such policies?

Part of the answer is spite, but I think the biggest reason is they simply want more money to spend.

And if the economy suffers, they don’t worry about that collateral damage so long as their primary objective – getting more money to buy more votes – is achieved.

But the rest of us should care, and a new report from the Tax Foundation offers a helpful way of showing why pro-tax politicians are misguided.

Here’s a table showing that the economy will lose almost $3 of output for every $1 that politicians can use for vote buying.

I added my commentary (in red) to the table.

My takeaway is that it is reprehensible for politicians to cause nearly $3 of foregone prosperity so that they can spend another $1.

Garrett Watson, author of the report, uses more sedate language to describes the findings.

Using Tax Foundation’s General Equilibrium Model, we estimate that the Ways and Means tax plan would reduce long-run GDP by 0.98 percent, which in today’s dollars amounts to about $332 billion of lost output annually. We estimate the plan would in the long run raise about $152 billion annually in new tax revenue, conventionally estimated in today’s dollars, meaning for every $1 in revenue raised, economic output would fall by $2.18. When the model accounts for the smaller economy, it estimates that the plan’s dynamic effects would reduce expected new tax collections to about $112 billion annually over the long run (also in today’s dollars), meaning for every $1 in revenue raised, economic output would fall by $2.96.

This is excellent analysis.

But I think it’s important to specify that political cost-benefit analysis (from the perspective of politicians) is not the same as economic cost-benefit analysis.

From an economic perspective, the foregone economic growth is a cost and the additional tax revenue for politicians also is a cost.

And I’ve augmented the table (again, in red) to show that the additional spending is yet another cost.

In other words, politicians are the main winners from Biden’s tax hike, and some of the interest groups getting additional handouts also might be winners (though I’ve previously pointed out that many of them wind up being losers as well in the long run).

P.S. The Tax Foundation model only measures the economic damage of higher taxes. If you also measure the harmful impact of more spending, the estimates of foregone economic output are much bigger.

Read Full Post »

Biden wants lots of class-warfare tax increases to fund a big increase in the welfare state.

That would be bad news for the economy, but his acolytes claim that voters favor the president’s approach.

Maybe that’s true in the United States, but it’s definitely not the case in Switzerland. By a landslide margin, Swiss voters have rejected a plan to impose higher tax rates on capital.

It’s nice to see that every single canton rejected the class-warfare initiative.

In an article for Swissinfo.ch, Urs Geiser summarizes the results.

Voters in Switzerland have rejected a proposal to introduce a tax on gains from dividends, shares and rents. The left-wing people’s initiative targeted the wealthiest group in the country. Final results show 64.9% of voters and all of the country’s 26 cantons dismissing the proposed constitutional reform, in some cases with up to 77% of the vote. …The Young Socialists who had launched the proposal admitted defeat, accusing the political right and the business community of “scare mongering”… The Young Socialists, supported by the Social Democrats, the Greens and the trade unions had hoped to increase tax on capital revenue by a factor of 1.5 compared with regular income tax. …Opponents argued approval of the initiative would jeopardise Switzerland’s prosperity and damage the sector of small and medium-sized companies, often described as the backbone of the country’s economy.

For what it’s worth, I’m not surprised that the Swiss rejected the proposal. Though I was pleasantly surprised by the margin.

Though perhaps I should have been more confident. After all, the Swiss have a good track record when asked to vote on fiscal and economic topics.

Though not every referendum produces the correct result. In 2018, Swiss voters rejected an opportunity to get rid of most of the taxes imposed by the central government.

P.S. Professor Garett Jones wrote a book, 10% Less Democracy, that makes a persuasive case about limiting the powers of ordinary voters (given my anti-majoritarian biases, I was bound to be sympathetic).

This implies that direct democracy is a bad idea. And when you look at some of the initiatives approved in places such as California and Oregon, Garett’s thesis makes a lot of sense. But the Swiss seem to be the exception that proves the rule.

Read Full Post »

More than 12 years ago, I shared this video containing lots of data and research on the negative relationship between government spending and economic performance.

Since then, I’ve share numerous additional studies showing that bigger government dampens growth, mostly from scholars in academia.

Now it’s time for me to directly contribute to this debate.

In a study just published by the Club for Growth Foundation, co-authored with Robert O’Quinn (former Chief Economist at the Department of Labor), we estimated the likely economic impact of President Biden’s so-called Build Back Better plan to expand the welfare state.

Here are our main findings.

What’s especially noteworthy about our study is that we based our analysis on research published earlier this year by the Congressional Budget Office. In other words, a very establishment source.

And here are some excerpts from what we wrote.

President Biden has proposed to increase the burden of federal spending substantially over the next 10 years, diverting nearly $5.5 trillion from the private sector to the government… Most, but not all, of this new spending would be financed with higher tax rates on work, saving, investment, and entrepreneurship. …Based on scholarly academic research, including new findings from the nonpartisan Congressional Budget Office, Biden’s tax-and-spend agenda contained in his reconciliation bill will accelerate America’s fiscal decline and undermine economic performance. …the Biden’s reconciliation bill, which increases the spending burden by 1.9 percent of GDP, will reduce the economy’s growth rate by about 0.2 percent each year. That…translates into more than $3 trillion less national income over the next decade. And the nation’s economic output will be $613 billion lower in 2031 compared to what it would be in the absence of President Biden’s fiscal agenda. …The cumulative loss of employee income over the next 10 years will exceed $1.6 trillion. Some of that will be in the form of lower wages and some of that will be a consequence of lost jobs. On average, each worker in a nonfarm job will lose $10,391 in total compensation.

These results shouldn’t be a surprise.

Biden’s fiscal agenda would made the United States more like Europe and the economic data unambiguously demonstrate that Europeans suffer from significantly lower living standards.

P.S. I especially like the CBO study because it shows the amount of damage caused by more spending varies based on how the outlays are financed.

As this chart illustrates, class-warfare taxation is the worst way of financing a bigger burden of government.

P.P.S. The good news is that Biden probably won’t be able to convince Congress to approve all of his proposals for new spending and higher tax rates. The bad news is even approving half of the Biden’s plan would cause considerable damage to American prosperity and competitiveness.

P.P.P.S. For policy wonks, there are two main types of research involving the economic impact of government spending. For those focusing on short-run economic results, there’s a debate about Keynesian economics – whether more government spending can artificially generate some growth, particularly if the outlays are financed with debt.

I’m skeptical of the Keynesian argument, but it’s not relevant for today’s column, which focuses on how government spending impacts long-run economic results. And when looking at long-run data, most of the research suggests that government is too big. Indeed, it’s worth noting that there’s even research supporting my view from generally left-leaning international bureaucracies such as the World Bank, the International Monetary Fund, the Organization for Economic Cooperation and Development, and the European Central Bank.

Read Full Post »

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Read Full Post »

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Read Full Post »

The great Margaret Thatcher famously observed that the problem with socialism is that governments eventually “run out of other people’s money.”

But they can do a lot of damage before they reach that point.

We know from U.S. experience that Republicans can be very profligate. Well, the same problem exists with the Conservative Party on the other side of the Atlantic Ocean.

I wrote earlier this year that Boris Johnson was letting the burden of government spending increase much faster than needed to keep pace with inflation.

And when politicians spend too much money, it’s almost inevitable that they will then try to grab more money from taxpayers.

And that’s exactly what the Prime Minister is proposing, as reported by Stephen Castle for the New York Times.

Mr. Johnson is widely expected to break his vow not to increase taxes when he announces a plan to bolster the nation’s social care services… Even before the announcement, the blistering dissent from members of his own Conservative Party has underscored the problems that lie ahead for a government that has ramped up borrowing during the pandemic yet faces huge pressure to spend… Britain’s creaking National Health Service, which was already strained before the pandemic, now has a massive backlog of routine treatment and operations that had to be postponed. On Monday the government announced a cash injection of £5.4 billion, or $7.4 billion, to help deal with that issue. …His proposals are likely to cap the amount any British citizen pays for social care over their lifetime. That would prevent many from having to sell their homes to pay for care, but would also mean investing more public money, mainly through raising taxes.

So what do the actual conservatives in the Conservative Party think about Johnson’s proposal for more taxes and more spending?

They are not happy.

Perhaps the biggest danger for Mr. Johnson is the hostility of fiscal conservatives on the right of his party, who object to any tax being increased, including one senior cabinet minister, Jacob Rees-Mogg. …Mr. Sunak is also anxious to reign in spending, a view that is popular with the right wing of the Conservative Party. “He believes there is a moral and political premium on not raising taxes, not raising spending and getting borrowing under control,” said Professor Bale, who added this was “partly because he knows that this where the beating heart of the Conservative parliamentary party lies.”

Here are some more details about teh fight inside the Conservative Party, as reported by Edward Malnick of the U.K.-based Telegraph.

Senior Conservatives were threatening open warfare over Boris Johnson and Rishi Sunak’s planned tax increase… Ministers, government aides and backbenchers lined up to denounce a planned National Insurance rise which was privately described by senior figures as “idiotic”, with one Cabinet member declaring the proposal “morally, economically and politically wrong”. …Steve Baker, the former Brexit minister, said: “Of all the ways to break manifesto tax pledges to fund the NHS and social care, raising NIC must be the worst. In this time of crisis, we need a zero-based review of what the state does and how it is funded.” …Sir Iain Duncan Smith, the former Tory leader, feared that if Mr Johnson pushed ahead with the move the Conservatives would end up presiding over “the biggest tax rises since Clement Attlee”. …Another Tory MP suggested the Chancellor was concerned about Britain becoming a continental-style economy with unsustainable public spending and state intervention.

So how do Johnson’s allies respond?

With the same language one might have expected from Jeremy Corbyn, the hard-core statist who used to lead the Labor Party.

A government source said: “The NHS needs more money. By the time of the next election there could be 13 million people on waiting lists if we don’t act.”

In other words, the more government fails, the more money it should get (which also could be a description of Joe Biden’s fiscal policy).

P.S. What I wrote earlier this year is worth repeating.

Because of my strong support for Brexit, I was very happy that Boris Johnson won a landslide victory in late 2019. And he then delivered an acceptable version of Brexit, so that worked out well. However, it definitely doesn’t look like he will fulfill my hopes of being a post-Brexit, 21st century version of Margaret Thatcher.

The bottom line is that I wanted an independent United Kingdom to become Singapore on the Thames. Instead, Johnson seems to want his country to be Paris on the Thames.

P.P.S. I never thought I would miss the fiscal policy of two moderate former Prime Ministers, David Cameron and Theresa May.

Read Full Post »

Yesterday’s column cited new scholarly research about the negative economic impact of Biden’s plans to increase capital gains taxation.

In today’s column, let’s start with a refresher on why this tax shouldn’t exist.

But if you don’t want to spend a few minutes watching the video, here are the six reasons why the tax shouldn’t exist.

I highlighted the final reason – fairness – because this is not simply an economic argument.

Yes, it’s foolish to penalize jobs and investment, but I also think it’s morally wrong to impose discriminatory tax rates on people who are willing to defer consumption so that all of us can be richer in the long run.

By the way, I should have included “Less Common Sense” as a seventh reason. That’s because the capital gains tax will backfire on Biden and his class-warfare friends.

To be more specific, investors can choose not to sell assets if they think the tax rate is excessive, and this “lock-in effect” is a big reason why higher rates almost surely won’t produce higher revenues.

In a column earlier this year for the Wall Street Journal, former Federal Reserve Governor Lawrence Lindsey explained this “Laffer Curve” effect.

…43.4% is well above the rate that would generate the most revenue for the government. Congress’s Joint Committee on Taxation, which does the official scoring and is no den of supply siders, puts the revenue-maximizing rate at 28%. My work several decades ago puts it about 10 points lower than that. That means President Biden is willing to accept lower revenue as the price of higher tax rates. The implications for his administration’s economic thinking are mind-boggling. Even the revenue-maximizing rate is higher than would be optimal. As tax rates rise, the activity being taxed declines. The loss to the private side of society increases at a geometric rate (proportional to the square of the tax rate) as rates rise. … The Biden administration is blowing up one of the key concepts that has united the economics profession: maximizing social welfare. It now believes in taxation purely as a form of punishment and is even willing to sacrifice revenue to carry it out.

By the way, Biden’s not the first president with this spiteful mindset. Obama also said he wanted to raise the tax rate on capital gains even if the government didn’t get any more revenue.

Democrats used to be far more sensible on this issue. For instance, Bill Clinton signed into a law a cut in the tax rate on capital gains.

And, as noted in this Wall Street Journal editorial on the topic, another Democratic president also had very sensible views.

Even in the economically irrational 1970s the top capital-gains rate never broke 40%… A neutral revenue code would tax all income only once. But the U.S. also taxes business profits when they are earned, and President Biden wants to raise that tax rate by a third (to 28% from 21%). When a business distributes after-tax income in dividends, or an investor sells the shares that have risen in value due to higher earnings, the income is taxed a second time. …The most important reason to tax capital investment at low rates is to encourage saving and investment. …Tax something more and you get less of it. Tax capital income more, and you get less investment, which means less investment to improve worker productivity and thus smaller income gains over time. As a former U.S. President once put it: “The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital from static to more dynamic situations, the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth of the economy.” That wasn’t Ronald Reagan. It was John F. Kennedy.

For what it’s worth, JFK wasn’t just sensible on capital gains taxation. He had a much better overall grasp of tax policy that many of his successors.

Especially the current occupant of the White House. The bottom line is that Biden’s agenda is bad news for American prosperity and American competitiveness.

P.S. If you’re skeptical about my competitiveness assertion, check out this data.

Read Full Post »

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

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

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

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

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

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

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

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

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

So Prof. Diamond also analyzes the impact of inflation.

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

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

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

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

I’ll conclude with two comments.

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

Read Full Post »

I wrote last month about an encouraging wave of tax cuts at the state level.

I’m particularly impressed by the tax-cutting plan in Arizona, which cleverly reversed a class-warfare scheme designed to enrich teacher unions.

Indeed, I’m a big fan of federalism in large part because good fiscal policy is more likely when state and local governments are forced to compete for jobs and investment.

People can “vote with their feet” by moving from high-tax jurisdictions to low-tax jurisdictions, and politicians are less likely to misbehave when they realize taxpayers can escape.

But “less likely to misbehave” is not the same as “won’t misbehave.”

Notwithstanding the negative consequences, some jurisdictions are contemplating tax increases.

There’s also a plan for a class-warfare tax increase in Washington, DC.

I’m not referring to President Biden’s destructive tax plan (which you can read about here, here, here, and here). Instead, today’s column will focus on the tax increase being considered by the city’s local government.

Here are some excerpt from a report in the Washington Post.

An increasingly left-leaning D.C. Council voted…to raise income taxes on wealthy residents — a victory for advocates seeking tens of millions of dollars to spend…, but a puzzlement to others who saw no need for a tax increase in a year the city is flush with federal grant money. …the 2022 budget…includes generous spending on a long list of programs, mostly funded by the federal grants as well as other sources of local revenue. …The authors of the tax increase proposal…say that wealthy residents who were not financially hurt by the pandemic can afford to pay more.

To see which taxpayers are being penalized, here’s an excerpt from the Tax Foundation’s report on the proposed tax hike.

Interestingly, despite its left-leaning orientation, the Washington Post editorialized against the tax hike.

The council is now intent on ramming through a tax increase on wealthy residents that is driven more by ideology than any need for revenue or sound fiscal strategy. …as opponents of the tax increase pointed out, the District is flush with cash — about $3.2 billion in federal payments and grants, with next year’s local revenue projected to be $162 million more than pre-pandemic times. The proposed $17.5 billion budget already reflects a growth in spending of 3.9 percent over the historically high spending in the current year. …the council’s slapdash approach could have troubling consequences. The District’s tax rates on income and commercial property are already the highest in the region. …states such as Illinois should serve as a cautionary tale: Its high taxes have driven residents and businesses to other states. It’s not hard to imagine that someone making over $1 million — 0.7 percent of D.C. taxpayers, who pay 23.1 percent of the city’s income taxes — might find it more worthwhile to live in Arlington and pay one-third as much in taxes. What then happens…?

This is a remarkable editorial.

Indeed, it sounds like I could have been the author.

  • It highlights excessive growth of government.
  • It highlights how the rich pay the lion’s share of tax.
  • It highlights tax migration across borders.
  • It highlights jurisdictional tax competition.

The difference between me and the Washington Post, though, is that I’m intellectually consistent.

Unlike the editors of that newspaper, I apply the same arguments when analyzing national tax policy as well.

P.S. While the D.C. Council’s plan is very bad tax policy, part of me will be amused if it gets enacted. That’s because Washington is filled with lobbyists, bureaucrats, contractors, and other insiders who get undeserved riches because they have their snouts buried in the federal trough.

Read Full Post »

What motivates the tax-and-spend crowd? Why do they want high tax rates and a big welfare state?

The most charitable answer is that they don’t want anyone to suffer from poverty and they mistakenly think big government can solve problems.

But there’s another answer that may be more accurate.

As Margaret Thatcher observed about three decades ago, it seems that many folks on the left are primarily motivated by jealousy and resentment against their successful neighbors.

I realize I’m making an ugly accusation. But in my defense, I’m simply reporting what they write. Or what they admit to pollsters.

And now we have another example. Christine Emba of the Washington Post opined earlier this year that politicians should somehow put a ceiling on how much wealth any American can create.

The most shocking thing about ProPublica’s extensive report on the leaked tax returns of the super-rich wasn’t what the report contained — it was the fact that we’re barely shocked anymore. …we, as a society, let them do it. …every billionaire is a policy failure. But more than that, every billionaire is a failure of our own moral imagination. …Should we tax capital gains at a higher rate? Raise the corporate tax rate? Create a wealth tax? (I’d vote yes to all three.) But these debates are small bore. …Instead of debating tweaks at the edges of our tax system, what we should be…focused less on what is “allowed”… Such a philosophy already exists. It’s called limitarianism. …Just as there is a poverty line under which we agree that no one should fall, limitarianism holds that one can construct a “wealth line” over which no one should rise, and that the world would be better off for it.

Ms. Emba doesn’t explain how her “limitarian” policy might be implemented.

But since she’s embraced a wealth tax, the simple way to achieve her goal would be adding a 100 percent rate to that levy for any taxpayers who create so much wealth for society that they wind up with assets of $1 billion.

In case you think I’m joking, here’s part of her conclusion.

…the prospect of having “only” $999 million dollars would not stop innovators in their tracks. And even if it did stop some, would the trade-off be so bad?

I’ll close this column by answering her rhetorical question.

The trade-off wouldn’t just be bad, it would be terrible. A wealth tax (or any other possible policy to achiever her “limitarian” utopia) necessarily would reduce saving and investment.

And that would mean less innovation, slower (or negative) productivity growth, and wage stagnation (or decline).

Which is a good excuse to recycle my Eighth Theorem of Government.

Simply stated, here’s little reason to think that the folks who hate their successful neighbors actually care about their poor neighbors.

P.S. The New York Times also has published a column embracing the resentment-fueled limitarian notion.

P.P.S. Plenty of folks on the left explicitly argue that government has first claim on income. And that you’re the beneficiary of a favor if you get to keep some of what you earn. Once again, I’m not joking.

Read Full Post »

I’ve been asked why I periodically mock politicians. The simple answer is that they often deserve our scorn.

It’s not that they’re evil or bad people, but their incentive structure generally leads them to make shallow, short-run, and self-serving decisions.

Such as setting tax rates so high that they even backfire on politicians (i.e., by discouraging economic activity and thus producing less revenue).

It looks like we may have a new example of this phenomenon.

In an article for the Las Vegas Review-Journal, Richard Velotta reports on Chicago’s bungled attempt to attract a big-name casino.

If everything had gone according to plan, we would all be buzzing this week about which company would have the best opportunity to build a casino resort in Chicago. But it hasn’t gone according to plan. …companies have stated that they won’t be bidding. Four of the largest Strip operators — MGM Resorts International, Las Vegas Sands Corp., Wynn Resorts Ltd. and Caesars Entertainment Inc. — have indicated they have no plans to bid on Chicago. …The biggest issue for Las Vegas operators looking at Chicago is the tax rate Illinois would impose on gross gaming revenue from the Chicago resort — 40 percent. By comparison, the maximum rate in Nevada is 6.75 percent.

I guess we shouldn’t be surprised that Illinois politicians would over-tax something.

But I’m amazed they thought they could impose a tax six times higher than the one in Nevada without any negative consequences.

No wonder the big-name casinos aren’t submitting bids. After all, their job is to generate revenue for shareholders, not loot for politicians.

Though there is a silver lining to this dark cloud.

As mentioned in the story, Illinois politicians apparently did realize it wouldn’t work to have a tax rate more than ten times higher than the one in Nevada.

At one time, Illinois floated a tax rate of around 70 percent, but gaming companies persuaded the Illinois Legislature to modify that.

How generous of Illinois politicians to forgo a 70 percent tax rate!

Reminds me of the former French president who “mercifully” chose to limit personal taxes to 80 percent of household income.

P.S. There is a compelling case that Chicago is America’s most poorly governed city. But that’s hard to decide because there’s strong competition from places such as New York, Seattle, Minneapolis, Detroit, and San Francisco.

P.P.S. In this case, though, it’s a state law that is causing the problem. So we should ask whether Illinois is America’s most poorly governed state. There’s certainly evidence for that claim, but New York, California, and New Jersey also would be in the running.

Read Full Post »

Long-time readers know that I periodically pour cold water on the notion that China is an economic superstar.

Yes, China did engage in some economic liberalization late last century, and those reforms should be applauded because they were very successful in reducing severe poverty.

But from a big-picture perspective, all that really happened is that China went from terrible policy (Maoist communism) to bad policy (best described as mass cronyism).

Economic Freedom of the World has the best data. According to the latest edition, China’s score for economic liberty rose from a horrible 3.69 in 1990 to 6.21 in 2018.

That’s a big improvement, but that still leaves China in the bottom quartile (ranking #124 in the world). Better than Venezuela (#162), to be sure, but way behind even uncompetitive welfare states such as Greece (#92), France (#58), and Italy (#51).

And I fear China’s score will get even worse in the near future.

Why? Because it seems President Xi is going to impose class-warfare tax increases.

In an article for the Guardian, Phillip Inman shares some of the details.

China’s president has vowed to “adjust excessive incomes” in a warning to the country’s super-rich that the state plans to redistribute wealth… The policy goal comes amid a sweeping push by Beijing to rein in the country’s largest private firms in industries, ranging from technology to education. …Xi…is expected to expand wealth taxes and raise income tax rates… Some reforms could be far reaching, including higher taxes on capital gains, inheritance and property. Higher public sector wages are also expected to be part of the package.

And here are some excerpts from a report by Jane Li for Quartz.

Chinese president Xi Jinping yesterday sent a stark message to the country’s wealthy: It is time to redistribute their excessive fortunes. …Another reason for the Party’s focus on outsize wealth is to reduce rival centers of power and influence in China, which has also been an impetus for its crackdown on the tech sector… China already has fairly high income tax rates for its wealthiest. That includes a top income tax rate of 45% for those who earn more than 960,000 yuan ($150,000) a year… Upcoming moves could include…a nationwide property tax.

These stories may warm the hearts of Joe Biden and Bernie Sanders, but they help to explain why I’m not optimistic about China’s economy.

If you review the Economic Freedom of the World data, you find that China is especially bad on fiscal policy (“size of government”), ranking #153.

That’s worse than China does even on regulation.

Yet the Chinese government is now going to impose higher taxes to fund even bigger government?!?

Is the goal to be even worse than Venezuela and Zimbabwe?

P.S. Many wealthy people in China (maybe even most of them) achieved their high incomes thanks to government favoritism, so there’s a very strong argument that their riches are undeserved. But the best policy response is getting rid of industrial policy rather than imposing tax increases that will hit both good rich people and bad rich people.

P.P.S. I’ve criticized both the OECD and IMF for advocating higher taxes in China. A few readers have sent emails asking whether those international bureaucracies might be deliberately trying to sabotage China’s economy and thus preserve the dominance of Europe and the United States. Given the wretched track records of the OECD and IMF, I think it’s far more likely that the bureaucrats from those organizations sincerely support those bad policies (especially since they get tax-free salaries and are sheltered from the negative consequences).

Read Full Post »

There are divisions of the right between small-government conservatives, reform conservatives, common-good capitalists, nationalist conservatives, and compassionate conservatives.

There are also divisions on the left, as illustrated by this flowchart, which shows the Nordic Model (a pro-free market welfare state) on one end, and then different versions of hard-core leftism on the other end.

I’m showing these different strains on the left because it will help decipher the editorial position of the Washington Post.

I cited one of their editorials a couple of weeks ago that had some very sensible criticisms of a wealth tax. But it also embraced other class-warfare taxes (higher capital gains taxes and more onerous death taxes).

In other words, the Washington Post is on the left, but not as crazy as Bernie Sanders or Elizabeth Warren.

Now we have another editorial from the Post that illustrates this distinction.

The bad news is that the editorial (once again) endorses class-warfare tax policy.

…inequality of wealth is a serious problem in the United States. …to an unhealthy degree, wealth in the United States is being gained through unproductive activity — “rent-seeking”… Well-designed government interventions can reduce inequality from the top down, through more aggressive taxation of capital gains and estates… …everyone, poor and rich, has a lot to gain from curbing wealth inequality. The policies that can achieve that goal are neither radical nor complicated.

The good news is that the Post understands that there are serious consequences of going too far.

What remains to be considered are the counterarguments. …could a more aggressive attack on wealth inequality undermine incentives and result in an economic pie that is smaller and, inevitably, more difficult to distribute? If too aggressive, of course, at the bottom of that slippery slope lies Venezuela’s bankrupt socialism.

I suppose I should be happy that the editorial acknowledges the danger of hard-core leftism.

But my concern is that going in the wrong direction at 60 miles per hour still gets a nation to the wrong destination.

Yes, going in the wrong direction at 90 miles per hour gets to Venezuela even sooner, so I’d rather delay a very bad outcome.

That being said, it would be nice if the Washington Post (or any other rational leftists) drew some lines in the sand about limiting the size and scope of government.

Both numbers are far too high, of course, but setting some sort of limit would at least show that there is some long-run difference between the rational left and the AOC crowd.

Let’s conclude with some extracts that show why I’m worried that the Post will always be on the wrong side. After acknowledging that there are risks of going too far to the left, the editorial tell us we shouldn’t worry about going that direction.

In fact, too much inequality can undermine growth, too. …the perpetuation of steep inequalities, over generations, can turn into a drag on output…by wasting the potential of those who might have acquired skills or started businesses if not consigned by poverty to society’s margins. …extreme inequality fosters demands for populist policies, which, in turn, damage growth.

To be fair, the Washington Post is at least semi-good on the issue of school choice, so I take somewhat seriously their concerns about not wasting potential.

And it’s also worth noting that the editorial understands that populist policies (which presumably includes lots of anti-market nonsense such as protectionism) would be misguided. Though I’d feel much better about that part if the editorial recognized the difference between moral and immoral inequality.

P.S. The core problem is that our friends on the left don’t appreciate that low-income people will be better off if the focus is on growth rather than inequality.

Read Full Post »

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

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

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

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

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

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

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

Klein is correct.

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

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

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

Read Full Post »

It’s presumably not controversial to point out that the Washington Post (like much of the media) leans to the left. Indeed, the paper’s bias has given me plenty of material over the years.

As you can see, what really irks me is when the bias translates into sloppy, inaccurate, or misleading statements.

  • In 2011,the Post asserted that a plan to trim the budget by less than 2/10ths of 1 percent would “slash” spending.
  • Later that year, the Post claimed that the German government was “fiscally conservative.”
  • In 2013, the Post launched an inaccurate attack on the Heritage Foundation.
  • In 2017, the Post described a $71 budget increase as a $770 billion cut.
  • Later that year, the Post claimed a spending cut was a tax increase.
  • In 2018, the Post made the same type of mistake, asserting that a $500 billion increase was a $537 billion cut.
  • This year, the Post claimed Bush and Obama copied Reagan’s fiscal conservatism.
  • Also this year, the Post blamed smugglers for an energy crisis caused by Lebanese price controls.

But, to be fair, the Washington Post occasionally winds up on the right side of an issue.

It’s editorialized in favor of school choice, for instance, and also has opined in favor of privatizing the Postal Service.

And sometimes it has editorials that are both right and wrong. Which is a good description of the Post‘s new editorial on tax policy.

We’ll start with the good news. The Washington Post appears to understand that a wealth tax would be a bad idea, both because it can lead to very high effective tax rates and because it would be a nightmare to administer.

Ms. Warren’s version of the wealth tax, which calls for 2 percent annual levies on net wealth above $50 million, and 3 percent above $1 billion, very rich people would face large tax bills even when they had little or negative net income, forcing them to sell assets to pay their taxes. …huge chunks of private wealth tied up in real estate, rare art and closely held businesses are more difficult — sometimes impossible — to assess consistently. …Such problems help explain why national wealth taxes yielded only modest revenue in the 11 European countries that levied them as of 1995, and why most of those countries subsequently repealed them.

I’m disappointed that the Post overlooked the biggest argument, which is that wealth taxation would reduce saving and investment and thus lead to lower wages.

But I suppose I should be happy with modest steps on the road to economic literacy.

The Post‘s editorial also echoed my argument by pointing out that ProPublica was very dishonest in the way it presented data illegally obtained from the IRS.

ProPublica muddied a basic distinction, which, properly understood, actually fortifies the case against a wealth tax. The story likened on-paper asset price appreciation with actual cash income, then lamented that the two aren’t taxed at the same rate. …ProPublica’s logic implies that, when the stock market goes down, Elon Musk, whose billions are tied up in shares of Tesla, should get a tax cut.

Amen (this argument also applies to the left’s argument for taxing unrealized capital gains).

Now that I’ve presented the sensible portions of the Post‘s editorial, let’s shift to the bad parts.

First and foremost, the entire purpose of the editorial was to support more class-warfare taxation.

But instead of wealth taxes, the Post wants much-higher capital gains taxes – including Biden’s hybrid capital gains tax/death tax.

Fortunately, legitimate goals of a wealth tax can be achieved through other means… This would require undoing not only some of the 2017 GOP tax cuts, but much previous tax policy as well… The higher capital gains rate should be applied to a broader base of investment income… President Biden’s American Families Plan calls for reform of this so-called “stepped-up basis” loophole that would yield an estimated $322.5 billion over 10 years.

The editorial also calls for an expanded death tax, one that would raise six times as much money as the current approach.

…simply reverting to estate tax rules in place as recently as 2004 could yield $98 billion per year, far more than the $16 billion the government raised in 2020.

Last but not least, it argues for these tax increases because it wants us to believe that politicians will wisely use any additional revenue in ways that will increase economic opportunity.

The public sector could use new revenue from stiffer capital gains and estate taxes to expand opportunity.

This is the “fairy dust” or “magic beans” theory of economic development.

Proponents argue that if we give politicians more money, we’ll somehow get more prosperity.

At the risk of understatement, this theory isn’t based on empirical evidence.

Which is the message of a 2017 video from the Center for Freedom and Prosperity. And it’s also the reason I repeatedly ask the never-answered question.

P.S. To make the argument that capital gains taxes and death taxes are better than wealth taxation, the Post editorial cites research from the Paris-based Organization for Economic Cooperation and Development. Too bad the Post didn’t read the OECD study showing that class-warfare taxes reduce overall prosperity. Or the OECD study showing that more government spending reduces prosperity.

Read Full Post »

More than 10 years ago, I narrated this video explaining why there should be no capital gains tax.

The economic argument against capital gains taxation is very simple. It is wrong to impose discriminatory taxes on income that is saved and invested.

It’s bad enough that government gets to tax our income one time, but it’s even worse when they get to impose multiple layers of tax on the same dollar.

Unfortunately, nobody told Biden. As part of his class-warfare agenda, he wants to increase the capital gains tax rate from 23.8 percent to 43.4 percent.

Even worse, he wants to expand the capital gains tax so that it functions as an additional form of death tax.

And that tax would be imposed even if assets aren’t sold. In other words, it would a tax on capital gains that only exist on paper (a nutty idea associated with Sens. Ron Wyden and Elizabeth Warren).

I’m not joking. In an article for National Review, Ryan Ellis explains why Biden’s proposal is so misguided.

The Biden administration proposes that on top of the old death tax, which is assessed on estates, the federal government should add a new tax on the deceased’s last 1040 personal-income-tax return. This new, second tax would apply to tens of millions of Americans. …the year someone died, all of their unrealized capital gains (gains on unsold real estate, family farms and businesses, stocks and other investments, artwork, collectibles, etc.) would be subject to taxation as if the assets in question had been sold that year. …In short, what the Biden administration is proposing is to tax the capital gains on a person’s property when they die, even if the assets that account for those gains haven’t actually been sold. …to make matters worse, the administration also supports raising the top tax rate on long-term capital gains from 23.8 percent to 43.4 percent. When state capital-gains-tax rates are factored in, this would make the combined rate at or above 50 percent in many places — the highest capital-gains-tax rate in the world, and the highest in American history.

This sounds bad (and it is bad).

But there’s more bad news.

…that’s not all. After these unrealized, unsold, phantom gains are subject to the new 50 percent double death tax, there is still the matter of the old death tax to deal with. Imagine a 50 percent death tax followed by a 40 percent death tax on what is left, and you get the idea. Karl Marx called for the confiscation of wealth at death, but even he probably never dreamed this big. …Just like the old death tax, the double death tax would be a dream for the estate-planning industry, armies of actuaries and attorneys, and other tax professionals. But for the average American, it would be a nightmare. The death tax we have is bad enough. A second death tax would be a catastrophic mistake.

Hank Adler and Madison Spach also wrote about this topic last month for the Wall Street Journal.

Here’s some of what they wrote.

Mr. Biden’s American Families Plan would subject many estates worth far less than $11.7 million to a punishing new death tax. The plan would raise the total top rate on capital gains, currently 23.8% for most assets, to 40.8%—higher than the 40% maximum estate tax. It would apply the same tax to unrealized capital gains at death… The American Families Plan would result in negative value at death for many long-held leveraged real-estate assets. …Scenarios in which the new death tax would significantly reduce, nearly eliminate or even totally eliminate the net worth of decedents who invested and held real estate for decades wouldn’t be uncommon. …The American Families Plan would discourage long-term investment. That would be particularly true for those with existing wealth who would begin focusing on cash flow rather than long-term investment. The combination of the new death tax plus existing estate tax rates would change risk-reward ratios.

The bottom line is that it is very misguided to impose harsh and discriminatory taxes on capital gains. Especially if the tax occurs simply because a taxpayer dies.

P.S. Keep in mind that there’s no “indexing,” which means investors often are being taxed on gains that merely reflect inflation.

P.P.S. Rather than increasing the tax burden on capital gains, we should copy Belgium, Chile, Costa Rica, Czech Republic, Hungary, Luxembourg, New Zealand, Singapore, Slovenia, Switzerland, and Turkey. What do they have in common? A capital gains tax rate of zero.

Read Full Post »

I’ve been warning, over and over and over again, that a European-style welfare state means huge tax increases on ordinary people.

Simply stated, there are not enough rich people to finance big government (even Paul Krugman agrees).

This means Joe Biden and Democrats need to make a choice: What matters most, their desire to make government bigger, or their promise not to impose higher taxes on families making less than $400K per year?

We now have the answer to that question, and I hope nobody is surprised to learn that they picked government over taxpayers.

But what is surprising is that they picked the Trump approach of protectionist taxes on global trade.

Here are some excerpts from a report by the New York Times.

Democrats have agreed to include a tax on imports from nations that lack aggressive climate change policies as part of a sweeping $3.5 trillion budget plan… The move to tax imports was made public Wednesday, the same day that the European Union outlined its own proposal for a similar carbon border tax, a novel tool that is designed to protect domestic manufacturing. …skeptics caution that a carbon border tax, which has yet to be implemented by any country, would be difficult to carry out, and could anger trading partners and face a challenge at the World Trade Organization. Unlike the Europeans, who outlined their plan in a 291-page document, Democrats released no details about their tax proposal on Wednesday. Calling it simply a “polluter import fee,” the framework does not explain what would be taxed, at what rate or how much revenue it would expect to generate. …verifying the amount of carbon…produced by foreign manufacturing is tricky, experts say.

It’s always a bad idea to give politicians a new source of revenue.

But it’s a worse idea to give them a new source of revenue that will require bureaucrats to measure the amount of carbon produced by every imported good. As I pointed out a few days ago when discussing the European Union’s version of this protectionist scheme, that’s a huge recipe for cronyism and favoritism.

P.S. I’ll be very curious to see how different international bureaucracies react to these anti-trade proposals. The OECD and IMF, while usually bad on fiscal issues, historically have favored unfettered trade. And the World Trade Organization exists specifically to protect global commerce. But will these organizations now change their position to curry favor with the nations that control their purse strings?

The theory of “public choice” suggests we shouldn’t be optimistic.

Read Full Post »

Over the past four years, Donald Trump presumably was the biggest threat to global trade.

His ignorant protectionism hurt American consumers and businesses – and undermined the competitiveness of the U.S. economy.

Over the next four years (and beyond), it’s quite likely that the biggest threat to global trade will be the European Union.

More specifically, politicians and bureaucrats in Brussels want to toss a hand grenade into cross-border commerce by imposing trade taxes on nations that don’t impose carbon taxes.

The Wall Street Journal has a must-read editorial about this threat to world commerce.

Western politicians have failed to persuade their own voters to commit economic suicide by banning fossil fuels, and forget about China, Russia or India. The climate lobby’s fallback, which is starting to emerge, is to punish the foreigners and their own consumers with climate tariffs. Bureaucrats at the European Commission are due to unveil the proposed Carbon Border Adjustment Mechanism (CBAM) later this month… Brussels wants to impose tariffs to bring the cost of carbon-dioxide emissions tied to an imported good into line with what a European producer would pay to produce the same good. …a carbon tariff would impose an enormous burden on companies seeking to sell to the EU—even the low-emitting firms—and as a result probably will trigger a trade war. …Under the leaked plan, foreign firms would have to undertake detailed carbon audits to report emissions to EU regulators, and then would have to work out what proportion of the emissions attributable to goods shipped to the EU already were covered by carbon taxes elsewhere. …The choice between costly compliance or a punitive default tariff risks deterring smaller foreign companies from trying to navigate this system.

Needless to say, the so-called carbon audits will create big openings for cronyism and favoritism.

Lobbyists will be fat and happy while businesses and consumers will get hit with higher costs.

The editorial’s conclusion wisely warns that it would be a big mistake for Europeans to trigger a trade war.

Western elites haven’t convinced their voters to pay the price of their climate obsessions. Like Donald Trump, they now want to blame foreigners. In the process they’ll force their consumers to pay more for imports and domestic goods, and they’ll harm their own exporters if countries retaliate. The last thing the world economy needs as it recovers from a pandemic is a climate-change trade war.

Writing for Forbes, Tilak Doshi speculates whether the United States will copy the Europeans.

…the European Parliament overwhelmingly endorsed the creation of a “carbon border adjustment mechanism” (CBAM) that would shield EU companies against cheaper imports from countries with “weaker” climate policies. …Now that the Biden administration has elevated climate change to its highest priority across the whole of government, it would seem that the EU and the US working together with like-minded governments in Canada and the UK would be in a position to set up a “trans-Atlantic climate club”  and thereby impose a global cost on carbon emissions. …Australian Trade Minister Dan Tehan labelled carbon tariffs “a new form of protectionism.” …For most developing countries, “worries of an increasing carbon footprint generated by economic growth are second to worries that growth many not happen at all.” …What sets off this new protectionism from its predecessors is the sheer scope of its application.

I’m actually hopeful on this issue.

Biden and his team doubtlessly are sympathetic to the E.U.’s initiative, but I don’t think Congress will approve a carbon tax on the American people.

And if the U.S. doesn’t have a carbon tax, there wouldn’t be any reason to impose discriminatory taxes on other nations that also don’t have that levy.

That being said, the Biden Administration would have some leeway to cause problems. For instance, would they push for the World Trade Organization to accept the E.U.’s attack on free trade?

When dealing with politicians, I always hope for the best, but assume the worst.

P.S. Here are my seven reasons to support free trade, as well as my eight questions for protectionists.

P.P.S. You shouldn’t be surprised to learn that the French were early advocates of carbon protectionism.

P.P.P.S. Some American politicians have pushed for regulatory protectionism.

Read Full Post »

Older Posts »

%d bloggers like this: