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Archive for the ‘Tax Increase’ Category

If you’re a curmudgeonly libertarian like me, you don’t like big government because it impinges on individual liberty.

Most people, however, get irked with government for the practical reason that it costs so much and fails to provide decent services.

California is a good example. Or perhaps we should say bad example.

The Tax Foundation recently shared data on the relative cost of living in various metropolitan areas. Looking at the 12-most expensive places to live, 75 percent of them are in California.

So what do people get in exchange for living in such expensive areas?

They get great weather and scenery, but they also get lousy government.

Victor Davis Hanson wrote for National Review about his state’s decline.

Might it also have been smarter not to raise income taxes on top tiers to over 13 percent? After 2017, when high earners could no longer write off their property taxes and state income taxes, the real state-income-tax bite doubled. So still more of the most productive residents left the state. Yet if the state gets its way, raising rates to over 16 percent and inaugurating a wealth tax, there will be a stampede. It is not just that the upper middle class can no longer afford coastal living at $1,000 a square foot and $15,000–$20,000 a year in “low” property taxes. The rub is more about what they get in return: terrible roads, crumbling bridges, human-enhanced droughts, power blackouts, dismal schools that rank near the nation’s bottom, half the nation’s homeless, a third of its welfare recipients, one-fifth of the residents living below the poverty level — and more lectures from the likes of privileged Gavin Newsom on the progressive possibilities of manipulating the chaos. California enshrined the idea that the higher taxes become, the worse state services will be.

Even regular journalists have noticed something is wrong.

In an article in the San Francisco Chronicle, Heather Kelly, Reed Albergotti, Brady Dennis and Scott Wilson discuss the growing dissatisfaction with California life.

California has become a warming, burning, epidemic-challenged and expensive state, with many who live in sophisticated cities, idyllic oceanfront towns and windblown mountain communities thinking hard about the viability of a place many have called home forever. For the first time in a decade, more people left California last year for other states than arrived. …for many of California’s 40 million residents, the California Dream has become the California Compromise, one increasingly challenging to justify, with…a thumb-on-the-scales economy, high taxes… California is increasingly a service economy that pays a far larger share of its income in taxes and on housing and food. …Three years ago, state lawmakers approved the nation’s second-highest gasoline tax, adding more than 47 cents to the price of a gallon. …service workers in particular are…paying far more as a share of their income on fuel just to stay employed. …A poll conducted late last year by the University of California at Berkeley found that more than half of California voters had given “serious” or “some” consideration to leaving the state because of the high cost of housing, heavy taxation or its political culture. …Business is booming for Scott Fuller, who runs a real estate relocation business. Called Leaving the Bay Area and Leaving SoCal, the company helps people ready to move away from the state’s two largest metro areas sell their homes and find others.

Niall Ferguson opines for Bloomberg about the Golden State’s outlook.

As my Hoover Institution colleague Victor Davis Hanson put it last month, California is “the progressive model of the future: a once-innovative, rich state that is now a civilization in near ruins.”… It’s not that California politicians don’t know how to spend money. Back in 2007, total state spending was $146 billion. Last year it was $215 billion. …the tax system is one of the most progressive, with a 13.3% top tax rate on incomes above $1 million — and that’s no longer deductible from the federal tax bill as it used to be. …And there’s worse to come. The latest brilliant ideas in Sacramento are to raise the top income rate up to 16.8% and to levy a wealth tax (0.4% on personal fortunes over $30 million) that you couldn’t even avoid paying if you left the state. (The proposal envisages payment for up to 10 years after departure to a lower-tax state.) It is a strange place that seeks to repel the rich while making itself a magnet for illegal immigrants… And the results of all this progressive policy? A poverty boom. California now has 12% of the nation’s population, but over 30% of its welfare recipients. …according to a new Census Bureau report, which takes housing and other costs into account, the real poverty rate in California is 17.2%, the highest of any state. …But that’s not all. The state’s public schools rank 37th in the country… Health care and pension costs are unsustainable. …people eventually vote with their feet. From 2007 until 2016, about five million people moved to California but six million moved out to other states. For years before that, the newcomers were poorer than the leavers. This net exodus is surging in 2020. …Now we know the true meaning of Calexit. It’s not secession. It’s exodus.

It’s not just high taxes and poor services.

George Will indicts California’s politicians for fomenting racial discord in his Washington Post column.

California…progressives…have placed on November ballots Proposition 16 to repeal the state constitution’s provision…forbidding racial preferences in public education, employment and contracting. Repeal, which would repudiate individual rights in favor of group entitlements, is part of a comprehensive California agenda to make everything about race, ethnicity and gender. …Proposition 16 should be seen primarily as an act of ideological aggression, a bold assertion that racial and gender quotas — identity politics translated into a spoils system — should be forthrightly proclaimed and permanently practiced… California already requires that by the end of 2021 some publicly traded companies based in the state must have at least three women on their boards of directors… And by 2022, boards with nine or more directors must include at least three government-favored minorities. …Gov. Gavin Newsom (D) signed legislation requiring all 430,000 undergraduates in the California State University system to take an “ethnic studies” course, and there may soon be a similar mandate for all high school students. “Ethnic studies” is an anodyne description for what surely will be, in the hands of woke “educators,” grievance studies.

Several years ago, I crunched some numbers to show California’s gradual decline.

But there was probably no need for those calculations. All we really need to understand is that people are “voting with their feet” against the Golden State.

Simply stated, productive people are paying too much of a burden thanks to excessive spending, excessive taxes, and excessive regulation.

So they’re leaving.

P.S. Many Californians are moving to the Lone Star State, and if you want data comparing Texas and California, click here, here, herehere, and here.

P.P.S. Some folks in California started talking about secession after Trump’s election. Now that the state’s politicians are seeking a bailout, I expect that talk has disappeared.

P.P.S. My favorite California-themed jokes can be found here, here, and here.

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New Jersey is a tragic example of state veering in the wrong direction.

Back in the 1960s, it was basically like New Hampshire, with no income tax and no sales tax. State politicians then told voters in the mid-1960s that a sales tax was needed, in part to reduce property taxes. Then state politicians told voters in the mid-1970s that an income tax was needed, again in part to reduce property taxes.

So how did that work out?

Well, the state now has a very high sales tax and a very high income tax. And you won’t be surprised that it still have very high property taxes – arguably the worst in the nation according to the Tax Foundation.

But you have to give credit to politicians from the Garden State.

They are very innovative at coming up with ways to make a bad situation even worse.

In an article for City Journal, Steven Malanga reviews the current status of New Jersey’s misguided fiscal policies.

Relative to the size of its budget, New Jersey’s borrowing is by far the largest. Jersey plans to cover most of the cost of its deficit with debt by tapping a last-resort Federal Reserve lending program. New Jersey is already the nation’s most fiscally unsound state, according to the Institute for Truth in Accounting. It bears some $234 billion in debt, including about $100 billion in unfunded pension liabilities. A recent Pew study estimated that, between 2003 and 2017, the state spent $1 for every 91 cents in revenue it collected. …Before the pandemic, Murphy had proposed a $40.7 billion budget for fiscal 2021, a spending increase of 5.4 percent. …The administration has taken only marginal steps to reduce spending by, for instance, delaying water infrastructure projects. Many other cuts Murphy has announced involve simply shelving plans to spend more money.

The very latest development is that the state’s politicians want to exacerbate New Jersey’s uncompetitive tax system by extending the state’s top tax rate of 10.75 percent to a larger group of taxpayers.

The New York Times reports on a new tax scheme concocted by the Governor and state legislature.

New Jersey officials agreed on Thursday to make the state one of the first to adopt a so-called millionaires tax… Gov. Philip D. Murphy, a Democrat, announced a deal with legislative leaders to increase state taxes on income over $1 million by nearly 2 percentage points, giving New Jersey one of the highest state tax rates on wealthy people in the country. …The new tax in New Jersey…is expected to generate an estimated $390 million this fiscal year… With every call for a new tax comes criticism from Republicans and some business leaders who warn that higher taxes will lead to an exodus of affluent residents.

As is so often the case, the Wall Street Journal‘s editorial does a good job of nailing the issue.

New Jersey Gov. Phil Murphy and State Senate President Steve Sweeney struck a deal on Thursday to raise the state’s top marginal tax rate to 10.75% from 8.97% on income of more than $1 million. Two years ago, Democrats increased the top rate to 10.75% on taxpayers making more than $5 million. …New Jersey’s bleeding budget can’t afford to lose any millionaires. In 2018 New Jersey lost a net $3.2 billion in adjusted gross income to other states, including $2 billion to zero-income tax Florida, according to IRS data. More will surely follow now.

The WSJ is right.

As shown by this map, there’s already been a steady exodus of people from the Garden State. More worrisome is that the people leaving tend to have higher-than-average incomes (and it’s been that way for a while since New Jersey’s been pursuing bad policy for a while).

I’ll add one additional point to this discussion. One of the best features of the 2017 tax reform is that there’s now a limit on deducting state and local taxes when filing with the IRS.

This means that people living in high-tax jurisdiction such as California, New York, and Illinois (and, of course, New Jersey) now bear the full burden of state taxes.

In other words, New Jersey’s politicians are pursuing a very foolish policy at a time when federal tax law now makes bad state policy even more suicidal.

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Every single economic school of thought agrees with the proposition that investment is a key factor in driving wages and growth.

Even foolish concepts such as socialism and Marxism acknowledge this relationship, though they want the government to be in charge of deciding where to invest and how much to invest (an approach that has a miserable track record).

Another widely shared proposition is that higher tax rates will discourage whatever is being taxed. Even politicians understand this notion, for instance, when arguing for higher taxes on tobacco.

To be sure, economists will argue about the magnitude of the response (will a higher tax rate cause a big effect, medium effect, or a small effect?).

But they’ll all agree that a higher tax on something will lead to less of that thing.

Which is why I always argue that we need the lowest-possible tax rates on the activities – work, saving, investment, and entrepreneurship – that create wealth and prosperity.

That’s why it’s so disappointing that Joe Biden, as part of his platform in the presidential race, has embraced class-warfare taxation.

And it’s even more disappointing that he specifically supports policies that will impose a much higher tax burden on capital formation.

How much higher? Kyle Pomerleau of the American Enterprise Institute churned through Biden’s proposals to see what it would mean for tax rates on investment and business activity.

Former Vice President and Democratic presidential candidate Joe Biden has proposed several tax increases that focus on raising taxes on business and capital income. Taxing business and capital income can affect saving and investment decisions by reducing the return to these activities and distorting the allocation across different assets, forms of financing, and business forms. Under current law, the weighted average marginal effective tax rate (METR) on business assets is 19.6 percent… Biden’s tax proposals would raise the METR on business investment in the United States by 7.8 percentage points to 27.5 percent in 2021. The effective tax rate would rise on most assets and new investment in all industries. In addition to increasing the overall tax burden on business investment, Biden’s proposals would increase the bias in favor of debt-financed and noncorporate investment over equity-financed and corporate investment.

Here’s the most illuminating visual from Kyle’s report.

The first row of data shows that the effective tax rate just by almost 8 percentage points.

I also think it’s important to focus on the last two rows. Notice that the tax burden on equity increases by a lot while the tax burden on debt actually drops slightly.

This is very foolish since almost all economists will acknowledge that it’s a bad idea to create more risk for an economy by imposing a preference for debt (indeed, mitigating this bias was one of the best features of the 2017 tax reform).

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It’s not easy to identify the worst international bureaucracy.

As you can see, it’s hard to figure out which bureaucracy is the worst.

I’ve solved this dilemma by allowing a rotation. Today, the OECD is at the top of my list.

That’s because the top tax official at that Paris-based bureaucracy, Pascal Saint-Amans, has a new article about goals for future tax policy.

…policy flexibility and agility may be what is needed to help restore confidence. …Governments should seize the opportunity to build a greener, more inclusive and more resilient economy. Rather than simply returning to business as usual, the goal should be to “build back better” and address some of the structural weaknesses that the crisis has laid bare.

So how do we get a “more resilient economy” with less “structural weakness”?

According to the bureaucrats at the OECD, we achieve that goal with higher taxes. I’m not joking. Here are some additional excerpts.

Today, taxes on polluting fuels are nowhere near the levels needed… Seventy percent of energy-related CO2 emissions from advanced and emerging economies are entirely untaxed.

Here’s a chart from the article showing how nations supposedly are under-taxing energy use.

But it’s not just energy taxes.

The OECD wants a bunch of other tax increases, including a digital tax deal that specifically targets America’s high-tech firms.

It’s also disturbing that the bureaucrats want higher taxes on “personal capital income,” particularly since even economists at the OECD have specifically warned that those types of taxes are particularly harmful to prosperity.

Fair burden sharing will also be central going forward. …consideration should be given to strengthening…social protection in the longer run. …Governments will need to find alternative sources of revenues. The taxation of property and personal capital income will have an important role to play… Rising pressure on public finances as well as increased demands for fair burden sharing should provide new impetus for reaching an agreement on digital taxation.

By the way, “social protection” is OECD-speak for redistribution spending. In other words, “fair burden sharing” means a bigger welfare state financed by ever-higher taxes.

The bureaucrats apparently think we should all be like Greece and Italy.

I want to close by revisiting the topic of environmental taxation. If you peruse the above chart, you’ll see that the OECD wants all nations to impose (at a minimum) a €30-per-ton tax on carbon.

What would that imply for American taxpayers? Well, if we extrapolate from estimates by the Tax Policy Center and Tax Foundation, that would be a tax increase of more than $400-per-year for every man, woman, and child in the United States. That’s $1600 of additional tax for each family of four.

P.S. The OECD has traditionally tailored its analysis to favor Democrats, but even I am surprised that Saint-Amans used the Biden campaign slogan of “build back better” in his column. I’m sure that was no accident. The bureaucrats at the OECD must be quite confident that Biden will win. Or they must feel confident that Republicans will be too stupid to exact any revenge if Trump prevails (probably a safe assumption since Republicans gave the bureaucracy lots of American tax dollars even after a top OECD official compared Trump to Hitler).

P.P.S. To add insult to injury, OECD bureaucrats get tax-free salaries, so they have a special exemption from the bad policies they want for the rest of us.

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New York is in trouble from bad economic policy, especially excessive taxing and spending.

This is one of the reasons why there’s been a steady exodus of taxpayers from the Empire State.

The problem is especially acute for New York City, which has been suffering from Mayor Bill De Blasio’s hard-left governance.

To be sure, not all of the city’s problems are self-inflicted. The 2017 tax reform removed the IRS loophole for state and local tax payments, which means people living in places such as NYC no longer can artificially lower their tax liabilities. And the coronavirus hasn’t helped, either, particularly since Governor Cuomo bungled the state’s response.

The net result of bad policy and bad luck is that New York City has serious economic problems. And this leads, as one might expect, to serious fiscal problems.

What’s surprising, however, is that the normally left-leaning New York Times actually wrote an editorial pointing out that fiscal restraint is the only rational response.

New York is facing…a budget hole of more than $5 billion… Mayor Bill de Blasio has asked the State Legislature to give him the authority to borrow… But borrowing to meet operating expenses is especially hazardous. Cities that do so over and over again are at greater risk of the kind of bankruptcy faced by New York in the late 1970s and Detroit in 2013. …Before Mr. de Blasio adds billions to the city’s debt sheet…he needs to find savings. …The city’s budget grew under Mr. de Blasio, to $92 billion last year from about $73 billion in 2014, his first year in office. Complicating matters, the mayor has hired tens of thousands of employees over his tenure, adding significantly to the city’s pension and retirement obligations. …the mayor will have to be creative, make unpopular decisions and demand serious cost-saving measures… One way to begin is with a far stricter hiring freeze. …The mayor will need to do something he has rarely been able to: ask the labor unions to share in the sacrifice. …There are other cuts to be made.

Wow, this may be the first sensible editorial from the New York Times since it called for abolishing the minimum wage in 1987.*

Mayor De Blasio, needless to say, doesn’t want any form of spending restraint. Depending on the day, he either wants to tax-and-spend or borrow-and-spend.

Both of those approaches are misguided.

Kristin Tate explained in a column for the Hill that the middle class suffers most when class-warfare politicians such as De Blasio impose policies that penalize the private sector.

Finance giant JPMorgan is…slowly relocating many of its operations and jobs to lower tax locations in Ohio, Texas, and Delaware. The Lone Star State currently hosts 25,000 of its employees, and Texas will likely surpass the New York portion in coming years. The resulting move will harm the middle earners of New York far more than that of the wealthy… The exodus is part of a trend sweeping traditionally Democratic states over the last several years. …A whopping 1,800 businesses left California in 2016 alone, while manufacturing firm Honeywell moved its headquarters from New Jersey to greener pastures in North Carolina. …the primary losers in this formula are middle class workers. Between the loss of jobs and revenue, these states and cities press even harder on millions of middle income taxpayers to make up the difference. …Many of the Democrats…who are in charge of the blue state economic models…love to preach that their proposals will make the economy fairer by targeting the most productive members of their states and cities. However, the encompassing butterfly effect spells bad news for people like you and me. Every time you vote for a proposition or a candidate promising a repeat of bad policy, just remember that it will ultimately be the middle class that will pay the largest share.

My contribution to this discussion is to point out that New York City’s fiscal problems are the entirely predictable result of politicians spending too much money over an extended period of time.

In other words, they violated my Golden Rule.

Indeed, the burden of government spending has climbed more than three times faster than inflation during De Blasio’s time in office.

If this story sounds familiar, that’s because excessive spending is the cause of every fiscal crisis (as I’ve noted when writing about Cyprus, Alaska, Ireland, Alberta, Greece, Puerto Rico, California, etc).

My final observation is that New York City’s current $5 billion budget shortfall would be a budget surplus of more than $6 billion if De Blasio and the other politicians had adopted a spending cap back in 2015 and limited budget increases to 2 percent annually.

*The New York Times also endorsed the flat tax in 1982, so there have been rare outbursts of common sense.

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There are two reasons why I generally don’t write much about government debt.

  • First, red ink is not desirable, but it’s mostly just the symptom of the far more important problem of excessive government spending.
  • Second, our friends on the left periodically try to push through big tax increases by hypocritically exploiting anxiety about red ink.

The one thing I can state with full certainty, however, is that tax increases are guaranteed to make a bad situation worse.

We’ll get a weaker economy (perhaps much weaker since the left is now fixated on pushing for the kinds of tax increases that do the most damage).

Equally worrisome, the biggest impact of a tax increase is that politicians won’t feel any need to control spending or reform entitlements. Indeed, it’s quite likely that they’ll respond to the expectation of higher revenue by increasing the spending burden.

To complicate matters further, any tax increase probably won’t generate that much additional revenue because of the Laffer Curve.

All of which explains why budget deals that include tax increases usually lead to even higher budget deficits.

This analysis is very timely and relevant since advocates of bigger government somehow claim that the new fiscal forecast from the Congressional Budget Office is proof that we need new taxes.

So I’m doing the same thing today I did back in January (and last August, and in January 2019, and many times before that starting back in 2010). I’ve crunched the numbers to see what sort of policies would be needed to balance the budget without tax increases.

Lo and behold, you can see from this chart that we wouldn’t need draconian spending cuts. All that’s needed for fiscal balance is to limit spending so that it grows slightly less than 1 percent per year (and this analysis even assumes that they get to wait until 2022 before imposing a cap on annual spending increases).

To be sure, politicians would not want to live with that kind of limit on their spending. So I’m not optimistic that we’ll get this type of policy in the near future.

Especially since the major parties are giving voters a choice between big-spender Trump and big-spender Biden.

But the last thing that we should do is worsen the nation’s fiscal outlook by acquiescing to higher taxes.

P.S. It’s worth noting that there was a five-year nominal spending freeze between 2009 and 2014 (back when the Tea Party was influential), so it is possible to achieve multi-year spending restraint in Washington.

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Speculating about tax policy in 2021, with Washington potentially being controlling by Joe Biden, Chuck Schumer, and Nancy Pelosi, there are four points to consider.

  1. The bad news is that Joe Biden has endorsed a wide range of punitive tax increases.
  2. The good news is that Joe Biden has not endorsed a wealth tax, which is one of the most damaging ways – on a per-dollar raised basis – for Washington to collect more revenue.
  3. The worse news is that the additional spending desired by Democrats is much greater than Biden’s proposed tax increases, which means there will be significant pressures for additional sources of money.
  4. The worst news is that the class-warfare mentality on the left means the additional tax increases will target successful entrepreneurs, investors, innovators, and business owners – which means a wealth tax is a very real threat.

Let’s consider what would happen if this odious example of double taxation was imposed in the United States.

Two scholars from Rice University, John Diamond and George Zodrow, produced a study for the Center for Freedom and Prosperity on the economic impact of a wealth tax.

They based their analysis on the plan proposed by Senator Elizabeth Warren, which is probably the most realistic option since Biden (assuming he wins the election) presumably won’t choose the more radical plan proposed by Senator Bernie Sanders.

They have a sophisticated model of the U.S. economy. Here’s their simplified description of how a wealth tax would harm incentives for productive behavior.

The most direct effect operates through the reduction in wealth of the affected taxpayers, including the reduction in accumulated wealth over time. Although such a reduction in wealth is, for at least some proponents of the wealth tax, a desirable result, the associated reduction in investment and thus in the capital stock over time will have deleterious effects, reducing labor productivity and thus wage income as well as economic output. …A wealth tax would also affect saving by changing the relative prices of current and future consumption. In the standard life-cycle model of household saving, a wealth tax effectively increases the price of future consumption by lowering the after-tax return to saving, creating a tax bias favoring current consumption and thus reducing saving. … we should note that the apparently low tax rates under the typical wealth tax are misleading if they are compared to income tax rates imposed on capital income, and the capital income tax rates that are analogous to wealth tax rates are often in excess of 100 percent. …For example, with a 1 percent wealth tax and a Treasury bond earning 2 percent, the effective income tax rate associated with the wealth tax is 50 percent; with a 2 percent tax rate, the effective income tax rate increases to 100 percent.

And here are the empirical findings from the report.

We compare the macroeconomic effects of the policy change to the values that would have occurred in the absence of any changes — that is, under a current law long run scenario… The macroeconomic effects of the wealth tax are shown in Table 1. Because the wealth tax reduces the after-tax return to saving and investment and increases the cost of capital to firms, it reduces saving and investment and, over time, reduces the capital stock. Investment declines initially by 13.6 percent…and declines by 4.7 percent in the long run. The total capital stock declines gradually to a level 3.5 percent lower ten years after enactment and 3.7 percent lower in the long run… The smaller capital stock results in decreased labor productivity… The demand for labor falls as the capital stock declines, and the supply of labor falls as households receive larger transfer payments financed by the wealth tax revenues… Hours worked decrease initially by 1.1 percent and decline by 1.5 percent in the long run. …the initial decline in hours worked of 1.1 percent would be equivalent to a decline in employment of approximately 1.8 million jobs initially. The declines in the capital stock and labor supply imply that GDP declines as well, by 2.2 percent 5 years after enactment and by 2.7 percent in the long run.

Here’s the table mentioned in the above excerpt. At the risk of understatement, these are not favorable results.

Other detailed studies on wealth taxation also find very negative results.

The Tax Foundation’s study, authored by Huaqun Li and Karl Smith, also is worth perusing. For purposes of today’s analysis, I’ll simply share one of the tables from the report, which echoes the point about how “low” rates of wealth taxation actually result in very high tax rates on saving and investment.

The American Action Forum also released a study.

Authored by Douglas Holtz-Eakin and Gordon Gray, it’s filled with helpful information. The part that deserves the most attention is this table showing how a wealth tax on the rich results in lost wages for everyone else.

Yes, the rich definitely lose out because their net wealth decreases.

But presumably the rest of us are more concerned about the fact that lower levels of saving and investment reduce labor income for ordinary people.

The bottom line is that wealth taxes are very misguided, assuming the goal is a prosperous and competitive America.

P.S. One obvious effect of wealth taxation, which is mentioned in the study from the Center for Freedom and Prosperity, is that some rich people will become tax expatriates and move to jurisdictions (not just places such as Monaco, Bermuda, or the Cayman Islands, but any of the other 200-plus nations don’t tax wealth) where politicians don’t engage in class warfare.

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Because of changing demographics and poorly designed entitlement programs, the burden of government spending in the United States (in the absence of genuine reform) is going to increase dramatically over the next few decades.

That bad outlook will get even worse thanks to all the coronavirus-related spending from Washington.

This is bad news for America since more of the economy’s output will be consumed by government, leaving fewer resources for the private sector. And that problem would exist even if all the spending was magically offset by trillions of dollars of unexpected tax revenue.

Many people, however, think the nation’s future fiscal problem is that politicians will borrow to finance  that new spending. I think that’s a mistaken view, since it focuses on a symptom (red ink) rather than the underlying disease (excessive spending).

But regardless of one’s views on that issue, fiscal policy is on an unsustainable path. And that means there will soon be a fight between twho different ways of addressing the nation’s grim fiscal outlook.

  • Restrain the growth of government spending.
  • Divert more money from taxpayers to the IRS.

Fortunately, we now have some new evidence to help guide policy.

A new study from the Mercatus Center, authored by Veronique de Rugy and Jack Salmon, examines what actually happens when politicians try to control debt with spending restraint or tax increases.

Here’s what the authors wanted to investigate.

Fiscal consolidation can take two forms: (1) adopting a debt-reduction package driven primarily by tax increases or (2) adopting a package mostly consisting of spending restraint. …What policymakers might not know is which of these two forms of consolidation tend to be more effective at reining in debt levels and which are less harmful to economic performance: tax-based (TB) fiscal consolidation or expenditure-based (EB) fiscal consolidation.

Here’s their methodology.

Our analysis focuses on large fiscal consolidations, or consolidations in which the fiscal deficit as a share of GDP improves by at least 1.5 percentage points over two years and does not decrease in either of those two years. …A successful consolidation is defined as one in which the debt-to-GDP ratio declines by at least 5 percentage points three years after the adjustment takes places or by at least 3 percentage points two years after the adjustment. …Episodes in which the consolidation is at least 60 percent revenue increases are labeled TB, and episodes in which the consolidation is at least 60 percent spending decreases are labeled EB.

And here are their results.

…of the 45 EB episodes, more than half were successful, while of the 67 TB episodes, less than 4 in 10 were successful. …The results in table 2 show that while in unsuccessful adjustments most (74 percent) of the changes are on the revenue side, in successful adjustments most (60 percent) of the changes are on the expenditure side. In successful adjustments, for every 1.00 percent of GDP increase in revenues, expenditures are cut by 1.50 percent. By contrast, in unsuccessful adjustments, for every 1.00 percent of GDP increase in revenues, expenditures are cut by less than 0.35 percent. From these findings we conclude that successful fiscal adjustments are those that involve significant spending reductions with only modest increases in taxation. Unsuccessful fiscal adjustments, however, typically involve significant increases in taxation and very modest spending reductions.

Table 2 summarizes the findings.

As you can see, tax increases are the least effective way of dealing with the problem. Which makes sense when you realize that the nation’s fiscal problem is too much spending, not inadequate revenue.

In my not-so-humble opinion, I think the table I prepared back in 2014 is even more compelling.

Based on IMF data, it shows nations that imposed mutli-year spending restraint and how that fiscally prudent policy generated very good results – both in terms of reducing the spending burden and lowering red ink.

When I do debates at conferences with my left-wing friends, I almost always ask them to show me a similar table of countries that achieved good results with tax increases.

Needless to say, none of them have ever even attempted to prepare such a list.

That’s because nations that repeatedly raise taxes – as we’ve seen in Europe – wind up with more spending and more debt.

In other words, politicians pull a bait-and-switch. They claim more revenue is needed to reduce debt, but they use any additional money to buy votes.

Which is why advocates of good fiscal policy should adamantly oppose any and all tax increases.

Let’s close by looking at two more charts from the Mercatus study.

Here’s a look at how Irish politicians have mostly chose to restrain spending.

And here’s a look at how Greek politicians have mostly opted for tax increases.

It goes without saying (but I’ll say it anyhow) that the Greek approach has been very unsuccessful.

P.S. For fiscal wonks, one of the best parts of the Mercatus study is that it cites a lot of academic research on the issue of fiscal consolidation.

Scholars who have conducted research find – over and over again – that spending restraint works.

In a 1995 working paper, Alberto Alesina and Roberto Perotti observe 52 efforts to reduce debt in 20 Organisation for Economic Co-operation and Development (OECD) countries between 1960 and 1992. The authors define a successful fiscal adjustment as one in which the debt-to-GDP ratio declines by at least 5 percentage points three years after the adjustment takes place. In successful adjustments, government spending is reduced by almost 2.2 percent of gross national product (GNP) and taxes are increased by less than 0.5 percent of GNP. For unsuccessful adjustments, government expenditure is reduced by less than 0.5 percent of GNP and taxes are increased by almost 1.3 percent of GNP. These results suggest that successful fiscal adjustments are those that cut spending and include very modest increases in taxation.

International Monetary Fund (IMF) economists John McDermott and Robert Wescott, in a 1996 paper, examine 74 episodes of fiscal adjustment in which countries attempted to address their budget gaps. The authors define a successful fiscal adjustment as a reduction of at least 3 percentage points in the ratio of gross public debt to GDP by the second year after the end of an adjustment. The authors then divide episodes of fiscal consolidation into two categories: those in which the deficit was cut primarily (by at least 60 percent) through revenue increases, and those in which it was reduced primarily (by at least 60 percent) through expenditure cuts. Of the expenditure-based episodes of fiscal consolidation, almost half were successful, while of the tax-based episodes, less than one out of six met the criteria for success.

Jürgen von Hagen and Rolf Strauch observe 65 episodes in 20 OECD countries from 1960 to 1998 and define a successful adjustment as one in which the budget balance stands at no more than 75 percent of the initial balance two years after the adjustment period. …it does find that successful consolidations consist of expenditure cuts averaging more than 1.2 percent of GDP, while expenditure cuts in unsuccessful adjustments are smaller than 0.3 percent of GDP. The opposite pattern is true for revenue-based adjustments: successful consolidations consist of increases in revenue averaging around 1.1 percent, while unsuccessful adjustments consist of revenue increases exceeding 1.9 percent.

American Enterprise Institute economists Andrew Biggs, Kevin Hassett, and Matthew Jensen examine over 100 episodes of fiscal consolidation in a 2010 study. The authors define a successful fiscal adjustment as one in which the debt-to-GDP ratio declines by at least 4.5 percentage points three years after the first year of consolidation. Their study finds that countries that addressed their budget shortfalls through reduced spending burdens were far more likely to reduce their debt than countries whose budget-balancing strategies depended upon higher taxes. …the typical successful adjustment consists of 85 percent spending cuts and just 15 percent tax increases.

In a 1998 Brookings Institution paper, Alberto Alesina and coauthors reexamined the research on the economic effects of fiscal adjustments. Using data drawn from 19 OECD countries, the authors assess whether the composition of fiscal adjustments results in different economic outcomes… Contrary to the Keynesian view that fiscal adjustments are contractionary, the results of this study suggest that consolidation achieved primarily through spending reductions often has expansionary effects.

Another study that observes which features of fiscal adjustments are more or less likely to predict whether the fiscal adjustment is contractionary or expansionary is by Alesina and Silvia Ardagna. Using data from 20 OECD countries during 1960 to 1994, the authors label an adjustment expansionary if the average GDP growth rate in the period of adjustment and in the two years after is greater than the average value (of G7 countries) in all episodes of adjustment. …The authors conclude, “The composition of the adjustment appears as the strongest predictor of the growth effect: all the non-expansionary adjustments were tax-based and all the expansionary ones were expenditure-based.”

French economists Boris Cournède and Frédéric Gonand adopt a dynamic general equilibrium model to compare the macroeconomic impacts of four debt reduction scenarios. Results from the model suggest that TB adjustments are much more costly than spending restraint when policymakers are attempting to achieve fiscal sustainability. Annual consumption per capita would be 15 percent higher in 2050 if consolidation were achieved through spending reductions rather than broad tax increases.

In a review of every major fiscal adjustment in the OECD since 1975, Bank of England economist Ben Broadbent and Goldman Sachs economist Kevin Daly found that “decisive budgetary adjustments that have focused on reducing government expenditure have (i) been successful in correcting fiscal imbalances; (ii) typically boosted growth; and (iii) resulted in significant bond and equity market outperformance. Tax-driven fiscal adjustments, by contrast, typically fail to correct fiscal imbalances and are damaging for growth.”

Economists Christina and David Romer investigated the impact of tax changes on economic activity in the United States from 1945 to 2007. The authors find that an exogenous tax increase of 1 percent of GDP lowers real GDP by almost 3 percent, suggesting that TB adjustments are highly contractionary.

…the IMF released its annual World Economic Outlook in 2010 and included a study on the effects of fiscal consolidation on economic activity. The results of studying episodes of fiscal consolidation for 15 OECD countries over three decades…reveals that EB fiscal adjustments tend to have smaller contractionary effects than TB adjustments. For TB adjustments, the effect of a consolidation of 1 percent of GDP on GDP is −1.3 percent after two years, while for EB adjustments the effect is just −0.3 percent after two years and is not statistically significant. Interestingly, TB adjustments also raise unemployment levels by about 0.6 percentage points, while EB adjustments raise the unemployment rate by only 0.2 percentage points.

…a 2014 IMF study…estimates the short-term effect of fiscal consolidation on economic activity among 17 OECD countries. The authors of the IMF study find that the fall in GDP associated with EB consolidations is 0.82 percentage points smaller than the one associated with TB adjustments in the first year and 2.31 percentage points smaller in the second year after the adjustment.

Focusing on the fiscal consolidations that followed the Great Recession, Alesina and coauthors…find that EB consolidations are far less costly for economic output than TB adjustments. They also find that TB adjustments result in a cumulative contraction of 2 percent of GDP in the following three years, while EB adjustments generate very small contractions with an impact on output not significantly different from zero.

A study by the European Central Bank in 2018…finds that macroeconomic responses are largely caused by differences in the composition of the adjustment plans. The authors find large and negative multipliers for TB adjustment plans and positive, but close to zero, multipliers for EB plans. The composition of adjustment plans is found to be the largest contributor to the differences in economic performance under the two types of consolidation plans.

The bottom line is that nations enjoy success when they obey fiscal policy’s Golden Rule. Sadly, that doesn’t happen very often because politicians focus mostly on buying votes in the short run rather than increasing national prosperity in the long run.

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New York is ranked dead last for fiscal policy according to Freedom in the 50 States.

But it’s not the worst state, at least according to the Tax Foundation, which calculates that the Empire State is ranked #49 in the latest edition of the State Business Tax Climate Index.

Some politicians from New York must be upset that New Jersey edged them out for last place (and the Garden State does have some wretched tax laws).

So in a perverse form of competition, New York lawmakers are pushing a plan to tax unrealized capital gains, which would be a form of economic suicide for the Empire State and definitely cement its status as the place with the worst tax policy.

Here are some excerpts from a CNBC report.

The tax, part of a new “Make Billionaires Pay” campaign by progressive lawmakers and activists, would impose a new form of capital gains tax on New Yorkers with $1 billion or more in assets. …“It’s time to stop protecting billionaires, and it’s time to start working for working families,” Rep. Alexandria Ocasio-Cortez, D-N.Y., said… Currently, taxpayers pay capital gains tax on assets only when they sell. The new policy would tax any gain in value for an asset during the calendar year, regardless of whether it’s sold. Capital gains are taxed in New York at the same rate as ordinary income, so the rate would be 8.8%.

Given her track record, I’m not surprised that Ocasio-Cortez has embraced this punitive idea.

That being said, the proposal is so radical that even New York’s governor understands that it would be suicidal.

Gov. Andrew Cuomo said raising taxes on billionaires and other rich New Yorkers will only cause them to move to lower-tax states. …“If they want a tax increase, don’t make New York alone do a tax increase — then they just have the people move… Because if you take people who are highly mobile, and you tax them, well then they’ll just move next door where the tax treatment is simpler.”

Actually, they won’t move next door. After all, politicians from New Jersey and Connecticut also abuse and mistreat taxpayers.

Instead, they’ll be more likely to escape to Florida and other states with no income taxes.

In a column for the New York Post, E.J. McMahon points out that residents already have been fleeing.

…there were clear signs of erosion at the high end of New York’s state tax base even before the pandemic. Between 2010 and 2017, according to the Internal Revenue Service, the number of tax filers with incomes above $1 million rose 75 percent ­nationwide, but just 49 percent in New York. …Migration data from the IRS point to a broader leakage. From 2011-12 through 2017-18, roughly 205,220 New Yorkers moved to Florida. …their average incomes nearly doubled to $120,023 in 2017-18, from $63,951 at the start of the period. Focusing on wealthy Manhattan, the incomes of Florida-bound New Yorkers rose at the same rate from a higher starting point— to $244,936 for 3,144 out-migrants in 2017-18, from $124,113 for 3,712 out-migrants in 2011-12.

What should worry New York politicians is that higher-income residents are disproportionately represented among the escapees.

And the author also makes the all-important observation that these numbers doubtlessly will grow, not only because of additional bad policies from state lawmakers, but also because the federal tax code no longer includes a big preference for people living in high-tax states.

These figures are from the ­period ending just before the new federal tax law temporarily virtually eliminated state and local tax deductions for high earners, raising New York’s effective tax rates higher than ever. …soak-the-rich tax sloganeering is hardly a welcome-home signal for high earners now on the fence about their futures in New York.

The bottom line is that it’s a very bad idea for a country to tax unrealized capital gains.

And it’s a downright suicidal idea for a state to choose that perverse form of double taxation. After all, it’s very easy for rich people to move to Florida and other states with better tax laws.

And since the richest residents of New York pay such a large share of the tax burden (Investor’s Business Daily points out that the top 1 percent pay 46 percent of state income taxes), even a small increase in out-migration because of the new tax could result in receipts falling rather than rising.

Another example of “Revenge of the Laffer Curve.”

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There are lots of millionaires in the world. About 20 million of them, including about 6 million of them in the United States.

I’d like those numbers to increase, which is why I’m always advocating pro-market policies. Capitalism is not only superior to socialism, it’s also better than other alternatives (social justice, redistributionism, state planning, etc).

As Walter Williams reminds us, capitalism is a wonderful system in part because people can only become rich by providing value to others.

That means investment, entrepreneurship, innovation, competition and other behaviors that make the rest of us better off – even if we never become millionaires ourselves.

Remember, the normal state of humanity is grinding poverty and material deprivation. It’s only in the past few hundred years that many of us have escaped that fate – thanks to a system of free enterprise that channeled human greed in a productive direction.

The bottom line is that I don’t hate rich people or resent their success. Indeed, I applaud them for improving my life.

Though there are 83 exceptions, at least according to this BBC report.

Some of the world’s richest people have urged governments to raise taxes on the wealthy to help pay for measures aimed at tackling the coronavirus pandemic. A group of 83 millionaires called for “permanent” change… Signatories include heiress Abigail Disney and Ben & Jerry’s co-founder Jerry Greenfield. The letter says: “…we do have money, lots of it. Money that is desperately needed now and will continue to be needed in the years ahead… Government leaders must take the responsibility for raising the funds we need and spending them fairly.”

I’ve actually gone on TV in the past to debate “neurotic” and “guilt-ridden” rich people like this.

My best suggestion is that if they they have too much money, they give their excess cash to me.

But since that doesn’t seem to be a persuasive argument, I now remind them that they don’t have to wait for politicians to impose a tax increase.

They Treasury Department actually has a website for people who want to voluntarily give extra money to Washington.

So they can put their money where their mouths are.

Though you probably won’t be surprised to learn that they don’t take advantage of that opportunity, even when people have shown them exactly how it can be done.

P.S. While they’ve made similar arguments in the past, Warren Buffett and Bill Gates did not sign the letter. It’s unclear if this is a sign they’re becoming more rational.

P.P.S. Leftist politicians may be even worse than guilt-ridden rich people. Not only do they fail to voluntarily pay higher taxes, they do everything they can to minimize their tax burdens. Just look at the Clintons. And John Kerry. And Obama’s first Treasury Secretary. And Obama’s second Treasury Secretary. And Governor Pritzker of Illinois.

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The good news is that Joe Biden has not embraced many of Bernie Sanders’ worst tax ideas, such as imposing a wealth tax or hiking the top income tax rate to 52 percent..

The bad news is that he nonetheless is supporting a wide range of punitive tax increases.

  • Increasing the top income tax rate to 39.6 percent.
  • Imposing a 12.4 percent payroll tax on wages above $400,000.
  • Increasing the double taxation of dividends and capital gains from 23.8 percent to 43.4 percent.
  • Hiking the corporate tax rate to 28 percent.
  • Increasing taxes on American companies competing in foreign markets.

The worst news is that Nancy Pelosi, et al, may wind up enacting all these tax increases and then also add some of Crazy Bernie‘s proposals.

This won’t be good for the U.S. economy and national competitiveness.

Simply stated, some people will choose to reduce their levels of work, saving, and investment when the tax penalties on productive behavior increase. These changes give economists the information needed to calculate the “elasticity of taxable income”.

And this, in the jargon of economists, is a measure of “deadweight loss.”

But now there’s a new study published by the Federal Reserve which suggests that these losses are greater than traditionally believed.

Authored by Brendan Epstein, Ryan Nunn, Musa Orak and Elena Patel, the study looks at how best to measure the economic damage associated with higher tax rates. Here’s some of the background analysis.

The personal income tax is one of the most important instruments for raising government revenue. As a consequence, this tax is the focus of a large body of public finance research that seeks a theoretical and empirical understanding of the associated deadweight loss (DWL). …Feldstein (1999) demonstrated that, under very general conditions, the elasticity of taxable income (ETI) is a sufficient statistic for evaluating DWL. …It is well understood that, apart from rarely employed lump-sum taxes and…Pigouvian taxes, revenue-raising tax systems impose efficiency costs by distorting economic outcomes relative to those that would be obtained in the absence of taxation… ETI can potentially serve as a perfect proxy for DWL…this result is consistent with the ETI reflecting all taxpayer responses to changes in marginal tax rates, including behavioral changes (e.g., reductions in hours worked) and tax avoidance (e.g., shifting consumption toward tax-preferred goods). …a large empirical literature has provided estimates of the individual ETI, identified based on variation in tax rates and bunching at kinks in the marginal tax schedule.

And here are the new contributions from the authors.

… researchers have fairly recently come to recognize an important limitation of the finding that the ETI is a sufficient statistic for deadweight loss… we embed labor search frictions into the canonical macroeconomic model…and we show that within this framework, a host of additional information beyond the ETI is needed to infer DWL …once these empirically observable factors are controlled for, DWL can be calculated easily and in a straightforward fashion as the sum of the ETI and additional terms involving these factors. … We find that…once search frictions are introduced, …DWL can be between 7 and 38 percent higher than the ETI under a reasonable calibration.

To give you an idea of what this means, here are some of their estimates of the economic damage associated with a 1 percent increase in tax rates.

As you peruse these estimates, keep in mind that Biden wants to increase the top income tax rate by 2.6 percentage points and the payroll tax by 12.4 percentage points (and don’t forget he wants to nearly double tax rates on dividends, capital gains, and other forms of saving and investment).

Those are all bad choices with traditional estimates of deadweight loss, and they are even worse choices with the new estimates from the Fed’s study.

So what’s the bottom line?

The political impact will be that “the rich” pay more. The economic impact will be less capital formation and entrepreneurship, and those are the changes that hurt the vast majority of us who aren’t rich.

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This video from the Center for Freedom and Prosperity is nearly 10 years old, so some of the numbers are outdated, but the seven reasons to reject tax increases are still very relevant.

I’m recycling the video because the battle over tax increases is becoming more heated.

Indeed, depending on what happens in November, we may be fighting against major tax-hike proposals in less than one year.

Every single candidate seeking the Democratic nomination (such as Joe Biden, Bernie Sanders, Elizabeth Warren, Michael Bloomberg, Pete Buttigieg, etc) wants Washington to have much more of our money.

And there are plenty of cheerleaders for a bigger welfare state who favor this outcome. Some of them urge class-warfare tax increases. Other admit that lower-income and middle-class people will need to be pillaged to finance bigger government.

The one unifying principle on the left, as illustrated by this column for The Week by Paul Waldman, is the belief that Americans are under-taxed.

…as an American, when it comes to taxes you’ve got it easy. …we pay much lower taxes than most of our peer countries. In the United States, our tax-to-GDP ratio is about 26 percent, far below the 34 percent average of the advanced economies in the Organisation for Economic Co-operation and Development (OECD), and drastically less than some European countries (Denmark tops the list at 46 percent). …We have chosen — whether we did it consciously or not — to create a system that makes it easier for a small number of people to get super-rich, but also makes life more cruel and difficult for everyone else. …We could all pay more, and in return get more from government than we’re getting now. We just have to decide to do it.

This is a very weak argument since a cursory investigation quickly reveals that Americans have much higher living standards than people in other developed nations.

That’s a good thing, not a “cruel and difficult” consequence, though I’m not surprised that folks on the left are impervious to real-world evidence.

However, I am surprised when otherwise sensible people throw in the towel and say it’s time to surrender on the issue of taxes.

The latest example is James Capretta of the American Enterprise Institute.

Here’s some of what he wrote on the topic.

…the GOP commitment, implied and explicit at the same time, to never, ever support a net tax increase, under any circumstance, is making sensible lawmaking far more difficult than it should be. It’s time to break free of this counterproductive constraint. …The no tax hike position got its start in the 1986 tax reform effort. Several business and policy advocacy organizations began asking members of the House and Senate, as well as candidates for seats in those chambers, to sign a pledge opposing a net increase in income tax rates. …The pledge became politically salient in 1992, when then President George H.W. Bush lost his bid for reelection. His loss is widely assumed to have been caused, at least in part, by his acceptance of a large tax hike…after having pledged never to increase taxes… Retaining the GOP’s absolutist position on taxes might be defensible if the party were advancing an agenda that demonstrated it could govern responsibly without new revenue. Unfortunately, Republicans have proved beyond all doubt that they have no such agenda. In fact, the party has gladly gone along with successive bipartisan deals that increased federal spending by hundreds of billions.

For what it’s worth, I don’t think Jim is theoretically wrong.

Heck, even I offered up three scenarios where a tax increase could be an acceptable price in order to achieve much-needed spending reforms. And I’ll even add a fourth scenario by admitting that I would trade a modest tax increase for a Swiss-style spending cap.

But every one of my options is a meaningless fantasy.

In the real world, those acceptable scenarios are not part of the discussion. Instead, two very bad things inevitably happen when tax increases are on the table.

  1. The automatic default assumption is that tax increases should be 50 percent of any budget deal. That’s bad news, but the worse news is that the other 50 percent of the budget deal isn’t even genuine spending cuts. Instead, all we get is reductions (often illusory or transitory) in previously planned increases. The net result is bigger government (and it’s even worse in Europe!). This is why every budget deal in recent history has backfired – except the one that cut taxes in 1997.
  2. Budget deals result in the worst types of tax increases for the simple reason that budget deals get judged by their impact on “distribution tables.” And since the make-believe spending cuts ostensibly will reduce benefits for lower-income and middle-class people, the crowd in Washington demands that the tax increases should target investors, entrepreneurs, business owners, and others with above-average incomes. Yet these are the tax hikes that disproportionately hinder growth.

The bottom line is that tax increases should be a no-go zone. If Washington gets more of our money, that will “feed the beast.”

At the risk of under-statement, Grover Norquist’s no-tax-hike pledge is good policy (and good politics for the GOP). Americans for Tax Reform should double down in its opposition to tax increases.

P.S. I’ve shared five previous “Fiscal Fights with Friends”:

  • In Part I, I defended the flat tax, which had been criticized by Reihan Salam
  • In Part II, I explained why I thought a comprehensive fiscal package from the American Enterprise Institute was too timid.
  • In Part III, I disagreed with Jerry Taylor’s argument for a carbon tax.
  • In Part IV, I highlighted reasons why conservatives should reject a federal program for paid parental leave.
  • In Part V, I warned that “Hauser’s Law” would not protect America from higher taxes and bigger government.

P.P.S. There’s great wisdom on tax policy from these four presidents.

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The most important referendum in 2019 was the effort to get Colorado voters to eviscerate the Taxpayer Bill of Rights. Fortunately, the people of the Centennial State comfortably rejected the effort to bust the state’s successful spending cap.

The most important referendum in 2020 will ask voters in Illinois whether they want to get rid of the state’s flat tax and give politicians the leeway to arbitrarily impose higher rates on targeted taxpayers.

I’ve written many times about how a flat tax is far less destructive than so-called progressive taxation.

And I’ve also written that Illinois’ flat tax, enshrined in the state constitution, is the only decent feature of an otherwise terrible fiscal system.

So if the politicians convince voters to get rid of the flat tax, it will hasten the state’s economic decline (if you want more information, I strongly recommend perusing the numerous reports prepared by the Illinois Policy Institute).

Today, though, I want to focus on politics rather than economics.

To be more specific, I want to expose how supporters of higher taxes are using disingenuous tactics.

For instance, the state’s governor, J.B. Pritzker, warns that he’ll have to impose big spending cuts if voters don’t approve the referendum.

Gov. J.B. Pritzker said the state’s next budget will be balanced, but said if voters don’t approve a progressive income tax in November, he would have to reduce state spending across the board in future years. …the governor said 15 percent cuts in state spending would be needed across the board. …Illinois’ most recent budget called for spending about $40 billion dollars in state money. The state spends another $40 billion of federal tax money. …Pritzker is set to deliver his budget address on Feb. 19. He said he will propose a balanced budget to begin in July without relying on revenue from the proposed progressive income tax.

For what it’s worth, I actually think it would be good news if the state was forced to reduce the burden of government spending.

But that’s actually not the case.

How do I know Pritzker is lying?

Because his own budget documents project that state revenues (highlighted in red) are going to increase by nearly 2 percent annually under current law.

In other words, he wants a tax increase so he can increase overall spending at an even faster pace.

Of course, his tax increase also will increase the pace of taxpayers fleeing the state, which is why the referendum is actually a form of slow-motion fiscal suicide.

But let’s set that aside and examine another lie. Or, to be more accurate, a delayed lie.

The politicians in Illinois already have approved legislation to impose tax increases on the state’s most successful taxpayers, though the higher rates won’t actually become law until and unless the referendum is approved.

In hopes of bribing voters to approve the referendum, supporters assert that the other 97 percent of state taxpayers will get a cut.

That’s true. Most taxpayers will get a tiny reduction compared to the current 4.95 percent tax rate.

But how long will that last? Especially considering that the state’s long-run fiscal outlook is catastrophically bad?

The bottom line is that approving the referendum is like unlocking all the cars in a crime-ridden neighborhood. The expensive models will be the immediate targets, but it’s just a matter of time before everyone’s vehicle gets hit.

Indeed, this warning has such universal application that I’m going to make it my sixth theorem.

By the way, this theorem also applies when an income tax gets imposed, as happened with the United States in 1913 (and also a lesson that New Jersey residents learned in the 1970s and Connecticut residents learned in the 1990s).

P.S. Here are my other theorems.

  • The “First Theorem” explains how Washington really operates.
  • The “Second Theorem” explains why it is so important to block the creation of new programs.
  • The “Third Theorem” explains why centralized programs inevitably waste money.
  • The “Fourth Theorem” explains that good policy can be good politics.
  • The “Fifth Theorem” explains how good ideas on paper become bad ideas in reality.

P.P.S. Pritzker is a hypocrite because he does everything he can to minimize his own tax burden while asking for the power to take more money from everyone else.

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Assuming he was able to impose his policy agenda, I think Bernie Sanders – at best – would turn America into Greece. In more pessimistic moments, I fear he would turn the U.S. into Venezuela.

The Vermont Senator and his supporters say that’s wrong and that the real goal is to make America into a Nordic-style welfare state.

Since those nations mitigate the damage of their large public sectors with very pro-market policies on regulation, trade, and property rights, that wouldn’t be the worst outcome.

Though “Crazy Bernie” is still wrong to view Denmark and Sweden as role models. Why adopt the policies of nations that have less income, lower living standards, and slower growth?

Is Finland a better alternative?

The answer is yes, according to Ishaan Tharoor’s WorldView column in the Washington Post.

Sanders and some of his Democratic competitors are clear about what they want to change in the United States. They call for the building of a robust social democratic state, including programs such as universal healthcare, funded in large part by new taxation on the ultrarich and Wall Street. …Sanders is particularly fond of the “Nordic model” — the social plans that exist in countries such as Denmark, Sweden, Norway and Finland, which deploy higher taxation to provide quality public services and keep inequality at rates lower than the United States. …Across the Atlantic, at least one leading proponent of the Nordic model welcomed its embrace by U.S. politicians. “We feel that the Nordic Model is a success story,” said Finnish Prime Minister Sanna Marin… “I feel that the American Dream can be achieved best in the Nordic countries, where every child no matter their background or the background of their families can become anything, because we have a very good education system,” she said.

I prefer the analysis of a previous Prime Minister, though it’s hard to fault Ms. Marin for extolling the virtues of her nation.

But is Bernie Sanders really talking about turning America into Finland?

Tharoor correctly notes that the Nordic nation tell a very mixed story.

Sanders’s ascent in the past five years has spurred considerable debate over what lessons should be learned from the Nordic countries he celebrates. A cast of centrist and conservative critics note, first, that these Nordic countries are more capitalist than Sanders concedes, with generous pro-business policies and their own crop of billionaires; and, second, that the welfare states in Nordic countries are largely financed by extensive taxes on middle-class wages and consumption.

The last excerpt is key.

The big welfare states in Europe – and specifically in Nordic nations such as Finland – are financed with big burdens on lower-income and middle-class taxpayers.

According to data from the Tax Foundation and OECD, middle-income Finnish taxpayers are forced to surrender about 15 percent more of their income to government.

Why such a big difference?

Because Finland has an onerous value-added tax, punitive payroll taxes, and their income tax imposes high rates on people with modest incomes.

In other words, it’s not the rich who are financing the welfare state. Yet Bernie Sanders never mentions that point.

I’ll close by simply noting that Finland (like other Nordic nations) is not a statist hellhole. As I wrote just two months ago, the nation has some very attractive policies.

Indeed, the country is almost as market-oriented as the United States according to Economic Freedom of the World (and actually ranked above America as recently as 2011).

Bernie Sanders, though, wants to copy the bad features of Finland.

He wants America to have a big welfare state, but doesn’t want Finland’s very strong rule of law or robust property rights for people in the private sector. Nor does he want Finland’s 20 percent corporate tax rate.

And I suspect he doesn’t realize that Finland just learned an important lesson about the downsides of giving people money for nothing.

Most important of all, I’m very confident he doesn’t understand why Americans of Finnish descent generate 47 percent more national income than Finns who stayed home.

P.S.S. Researchers at Finland’s central bank seem to agree with my concern about excessive government spending.

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Given their overt statism, I’ve mostly focused on the misguided policies being advocated by Bernie Sanders and Elizabeth Warren.

But that doesn’t mean Joe Biden’s platform is reasonable or moderate.

Ezra Klein of Vox unabashedly states that the former Vice President’s policies are “far to Obama’s left.”

This is an issue where folks on both ends of the spectrum agree.

In a column for the right-leaning American Spectator, George Neumayr also says Biden is not a moderate.

Biden likes to feed the mythology that he is still a moderate. …This is, after all, a pol who giddily whispered in Barack Obama’s ear that a massive government takeover of health care “was a big f—ing deal,”…and now pronouncing Obamacare only a baby step toward a more progressive future. It can’t be repeated enough that “Climate Change” Joe doesn’t give a damn about the ruinous consequences of extreme environmentalism for Rust Belt industries. His Climate Change plans read like something Al Gore might have scribbled to him in a note. …On issue after issue, Biden is taking hardline liberal stances. …“I have the most progressive record of anybody running.” …He is far more comfortable on the Ellen show than on the streets of Scranton. He has given up Amtrak for private jets, and, like his lobbyist brother and grifter son, has cashed in on his last name.

If you want policy details, the Wall Street Journal opined on his fiscal plan.

Mr. Biden has previously promised to spend $1.7 trillion over 10 years on a Green New Deal, $750 billion on health care, and $750 billion on higher education. To pay for it all, he’s set out $3.4 trillion in tax increases. This is more aggressive, for the record, than Hillary Clinton’s proposed tax increases in 2016, which totaled $1.4 trillion, per an analysis at the time from the left-of-center Tax Policy Center. In 2008 Barack Obama pledged to raise taxes on the rich while cutting them on net by $2.9 trillion. Twice as many tax increases as the last presidential nominee: That’s now the “moderate” Democratic position. …raising the top rate for residents of all states. …a huge increase on today’s top capital-gains rate of 23.8%… This would put rates on long-term capital gains at their highest since the 1970s. …Raise the corporate tax rate to 28% from 21%. This would…vault the U.S. corporate rate back to near the top in the developed world. …the bottom line is big tax increases on people, capital and businesses. There’s nothing pro-growth in the mix.

And the ever-rigorous Peter Suderman of Reason wrote about Biden’s statist agenda.

Biden released a proposal to raise a slew of new taxes, mostly on corporations and high earners. He would increase tax rates on capital gains, increase the tax rate for households earning more than $510,000 annually, double the minimum tax rate for multinational corporations, impose a minimum tax on large companies whose tax filings don’t show them paying a certain percentage of their earnings, and undo many of the tax cuts included in the 2017 tax law. …as The New York Times reports, Biden’s proposed tax hikes are more than double what Hillary Clinton called for during the 2016 campaign. …Hillary Clinton…pushed the party gently to the left. Four years later, before the campaign is even over, the party’s supposed moderates are proposing double or even quadruple the new taxes she proposed.

The former Veep isn’t just a fan of higher taxes and more spending.

He also likes nanny-state policies.

Joe Biden says he is 100% in favor of banning plastic bags in the U.S. …let’s take a quick walk through the facts about single-use plastic bags at the retail level. …the plastic bags typically handed out by retailers make up only 0.6% of visible litter. Or put another way, for every 1,000 pieces of litter, only six are plastic bags. …They make up less than 1% of landfills by weight… 90% of the plastic bags found at sea streamed in from eight rivers in Asia and two in Africa. Only about 1% of all plastic in the ocean is from America. …Thicker plastic bags have to be used at least 11 times before they yield any environmental benefits. This is much longer than their typical lifespans. …Though it might seem almost innocuous, Biden’s support for a bag ban is symptom of a greater sickness in the Democratic Party. It craves unfettered political power.

Let’s not forget, by the way, that Biden (like most politicians in Washington) is corrupt.

Here are some excerpts from a Peter Schweizer column in the New York Post.

Political figures have long used their families to route power and benefits for their own self-enrichment. …one particular politician — Joe Biden — emerges as the king of the sweetheart deal, with no less than five family members benefiting from his largesse, favorable access and powerful position for commercial gain. …Joe Biden’s younger brother, James, has been an integral part of the family political machine… HillStone announced that James Biden would be joining the firm as an executive vice president. James appeared to have little or no background in housing construction, but…the firm was starting negotiations to win a massive contract in war-torn Iraq. Six months later, the firm announced a contract to build 100,000 homes. …A group of minority partners, including James Biden, stood to split about $735 million. …With the election of his father as vice president, Hunter Biden launched businesses fused to his father’s power that led him to lucrative deals with a rogue’s gallery of governments and oligarchs around the world. …Hunter’s involvement with an entity called Burnham Financial Group…Burnham became the center of a federal investigation involving a $60 million fraud scheme against one of the poorest Indian tribes in America, the Oglala Sioux. …the firm relied on his father’s name and political status as a means of both recruiting pension money into the scheme.

I only excerpted sections about Biden’s brother and son. You should read the entire article.

And even the left-leaning U.K.-based Guardian has the same perspective on Biden’s oleaginous behavior.

Biden has a big corruption problem and it makes him a weak candidate. …I can already hear the howls: But look at Trump! Trump is 1,000 times worse! You don’t need to convince me. …But here’s the thing: nominating a candidate like Biden will make it far more difficult to defeat Trump. It will allow Trump to muddy the water, to once again pretend he is the one “draining the swamp”, running against Washington culture. …With Biden, we are basically handing Trump a whataboutism playbook. …his record represents the transactional, grossly corrupt culture in Washington that long precedes Trump.

I’ll close by simply sharing some objective data about Biden’s voting behavior when he was a Senator.

According to the National Taxpayers Union, he finished his time on Capitol Hill with eleven-consecutive “F” scores (hey, at least he was consistent!).

And he also was the only Senator who got a lifetime rating of zero from the Club for Growth.

Though if you want to be generous, his lifetime rating was actually 0.025 percent.

Regardless, that was still worse than Barack Obama, Bernie Sanders, and Elizabeth Warren.

So if Biden become President, it’s safe to assume that America will accelerate on the already-baked-in-the-cake road to Greece.

P.S. Of course, we’ll be on that path even if Biden doesn’t become President, so perhaps the moral of the story is to buy land in Australia.

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I want more people to become rich. That’s why I support free markets.

But a few already-rich people say such silly things that I wonder whether a big bank account somehow can lead to a loss of common sense.

For background information on this issue, there’s a Politico article on some of the recent statements by Bill Gates.

It appears he’s embracing the horribly unworkable notion of taxing unrealized capital gains, and he definitely wants more double taxation of capital gains, a more punitive death tax, and a higher tax rate on capital gains that are part of “carried interest” (even though that becomes irrelevant if the regular capital gains rate is being increased).

And he’s getting closer to endorsing a wealth tax, which – to be fair – would address one of my criticisms in the interview.

Bill Gates…is echoing Democrats’ calls for higher taxes on the rich. …the Microsoft co-founder and philanthropist cites a litany of ways the rich ought to be paying more. …he favors “taxing large fortunes that have been held for a long time (say, ten years or more).” …Capital gains taxes should go up too, “probably to the same level as” ordinary income, he said. The estate tax should be hiked, and loopholes used to duck it ought to be shut down. People should also pay more on “carried interest,” Gates said. He also called for higher state taxes, including the creation of an income tax in his home state of Washington.

An income tax in the state of Washington would be particularly misguided. At least if the state hopes to be competitive and not drive away wealth and entrepreneurship.

A few months ago, Gates was in the news for the same reason.

At the time, I suggested that he should simply write a check to the federal government. After all, there’s nothing to stop him – and other guilt-ridden rich people – from paying extra tax.

But he conveniently says this wouldn’t suffice. To make matters worse, Gates apparently thinks government should be bigger, that there’s more it “needs to do.”

Gates rejected the notion that the wealthy could simply volunteer to pay more. …”Additional voluntary giving will never raise enough money for everything the government needs to do.”

I guess he’s not familiar with the Rahn Curve.

In any event, Bill Gates isn’t the only rich person who feels guilty about their wealth (or strategically pretends to feel guilty in order to either virtue signal or appease the class-warfare crowd).

The New Yorker has an article on the so-called Patriotic Millionaires, a group of masochists who want more of their money confiscated by Washington.

Abigail Disney…is the granddaughter of Roy O. Disney, who founded the Disney company with his younger brother, Walt, in 1923, and her father was a longtime senior executive there. …In 2011, she joined an organization called the Patriotic Millionaires… She began to make public appearances and videos in which she promoted higher taxes on the wealthy. She told me that she realized that the luxuries she and her family enjoyed were really a way of walling themselves off from the world, which made it easier to ignore certain economic realities. …Patriotic Millionaires…now has more than two hundred members in thirty-four states…the group’s mission was initially a simple idea endorsed by a half-dozen rich people: “Please raise our taxes.”

The good news is that only a tiny fraction of the nation’s millionaires have signed up for this self-loathing organization.

To qualify for the group, members must have an annual income of at least a million dollars, or assets worth more than five million dollars. That could include many families who would describe themselves as upper middle class—who, for instance, own homes in cities with hot real-estate markets. When I asked Payne how hard it was to persuade rich people to join, she said, “I think the last time I checked there were about three hundred and seventy-five thousand taxpayers in the country who make a million dollars a year in income”—there are now almost half a million—“and we have a couple hundred members.” She laughed. “If you ever needed a back-of-the-envelope calculation of how many of America’s élite are concerned about the basic well-being of their fellow-citizens, that should give you a rough estimate.”

I’m also happy to see that the article acknowledges a very obvious criticism of Ms. Disney and her fellow travelers.

At a time when political activists are expected to live according to their values, Disney’s role as an ultra-wealthy spokesperson for the underclass makes her a target of vitriol. In late September, someone tweeted at her, “Boy do I despise virtue signaling rich liberal hypocrites living off the money earned by their far better ancestors. Bet you live in a luxury apt in NYC! Why don’t you renounce your corporate grandad’s money and give it ALL away! You never will . . . HYPOCRITE!”

And she is a hypocrite.

Just like the other guilt-ridden rich people I’ve had to debate over the years.

If you want to see hypocrisy in action, there’s a very amusing video showing rich leftists being offered the opportunity to fill out this form and pay extra tax – and therefore atone for their guilt without hurting the rest of us. Needless to say, just like Abigail Disney and Bill Gates, they’re all talk and no action.

P.S. I wasn’t fully responsive in the interview since I was also asked how higher taxes on the rich would affect the economy. I should have pointed out that class-warfare taxes are the most destructive, on a per-dollar-collected basis, because they impose heavy penalties on saving, investment, and entrepreneurship. And that’s very bad news for workers since less innovation translates into lower wages.

P.P.S. Guilt-ridden rich people also exist in Germany.

P.P.P.S. I’m especially nauseated by rich politicians who advocate for higher taxes, yet refuse to put their money where their mouths are. A partial list includes Senator Elizabeth Warren, Senator John Kerry, Bill and Hillary Clinton, Congressman Alan Grayson, Governor J.B. Pritzker, and Tom Steyer.

P.P.P.P.S. If you’re a rich leftist, you can even be a super-hypocrite and utilize tax havens to protect your money.

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I’m currently in London for discussions about public policy, particularly the potential for the right kind of free-trade pact between the United States and United Kingdom.

I deliberately picked this week for my visit so I also could be here for the British election. As a big fan of Brexit, I’m very interested in seeing whether the U.K. ultimately will escape the slowly sinking ship otherwise known as the European Union.

But the election also is an interesting test case of whether people are willing to vote for socialism. The Brits actually made this mistake already, voting for Clement Attlee back in 1945. That led to decades of relative decline, culminating in a bailout from the International Monetary Fund.

Margaret Thatcher then was elected in 1979 to reverse Attlee’s mistakes and she did a remarkable job of restoring the British economy.

But do voters understand this history?

We’ll find out on Thursday because they’ll have the opportunity to vote for the Labour Party, led by Jeremy Corbyn, who is the British version of Bernie Sanders.

And he doesn’t hide his radical vision for state control of economic life. Here’s how the Economist describes Corbyn’s agenda.

…the clear outlines of a Corbyn-led government emerged in the manifesto. Under Labour, Britain would have a larger, deeper state… Its frontiers would expand to cover everything from water supply to broadband to how much a landlord may charge a tenant. Where the state already rules, such as in education or health, the government would go deeper, with the introduction of free child-care for pre-schoolers and a “National Care Service” for the elderly. …The government would spend £75bn on building 100,000 council homes per year, paid for from a £150bn “transformation fund”, a pot of money for capital spending on public services. Rent increases would be capped at inflation. The most eye-catching proposal, a plan to nationalise BT’s broadband operations and then offer the service free of charge… Surviving policies from 2017 include a plan to nationalise utilities, alongside Royal Mail and the rail network, and a range of new rights for workers, from a higher minimum wage to restored collective-bargaining rights. All told, government spending would hit 45.1% of GDP, the highest ratio in the post-war era outside of a recession and more than in Germany… To pay for it all, very rich people and businesses would be clobbered. Corporation tax would rise to 26% (from 19% now), which Labour believes, somewhat optimistically, would raise another £24bn by 2024.

As reported by City A.M., the tax increases target a small slice of the population.

Jeremy Corbyn…is planning to introduce a new 45 per cent income tax rate for those earning more than £80,000 and 50 per cent on those with incomes of £125,000 or more. The IFS…estimates that would affect 1.6m people from the outset, rising to 1.9m people by 2023-24. Labour’s policy would add further burden to the country’s biggest tax contributors, with the top five per cent of income tax payers currently contributing half of all income tax revenues, up from 43 per cent just before the financial crisis.  But the IFS warned the amount this policy would raise was “highly uncertain”, with estimates ranging from a high of £6bn to an actual cost of around £1bn, if the policy resulted in a flight of capital from the UK. Lawyers have previously warned that high net worth individuals are poised to shift billions out of the country in the event of a Corbyn government.

Is that a smart idea?

We could debate the degree to which upper-income taxpayers will have less incentive to be productive.

But the biggest impact is probably that the geese with the golden eggs will simply fly away.

Even the left-leaning Guardian seems aware of this possibility.

The super-rich are preparing to immediately leave the UK if Jeremy Corbyn becomes prime minister, fearing they will lose billions of pounds if the Labour leader does “go after” the wealthy elite with new taxes, possible capital controls and a clampdown on private schools. Lawyers and accountants for the UK’s richest families said they had been deluged with calls from millionaire and billionaire clients asking for help and advice on moving countries, shifting their fortunes offshore and making early gifts to their children to avoid the Labour leader’s threat to tax all inheritances above £125,000. …Geoffrey Todd, a partner at the law firm Boodle Hatfield, said many of his clients had already put plans in place to transfer their wealth out of the country within minutes if Corbyn is elected. …“There will be plenty of people on the phone to their lawyers in the early hours of 13 December if Labour wins. Movements of capital to new owners and different locations are already prepared, and they are just awaiting final approval.” …On Thursday, Corbyn singled out five members of “the elite” that a Labour government would go after in order to rebalance the country. …The shadow Treasury minister Clive Lewis went further than the Labour leader, telling the BBC’s Newsnight programme: “Billionaires shouldn’t exist. It’s a travesty that there are people on this planet living on less than a dollar a day.

Some companies also are taking steps to protect shareholders.

National Grid (NG.) and SSE (SSE) are certainly not adopting a wait-and-see approach to the general election. Both companies have moved ownership of large parts of their UK operations overseas in a bid to soften the blow of potential nationalisation. With the Labour manifesto reiterating the party’s intention to bring Britain’s electricity and gas infrastructure back into public ownership, energy companies (and their shareholders) face the threat of their assets being transferred to the state at a price below market value.

The Corbyn agenda violates the laws of economics.

It also violates the laws of math. The Labour Party, for all intents and purposes, wants a big expansion of the welfare state financed by a tiny slice of the population.

That simply doesn’t work. The numbers don’t add up when Elizabeth Warren tries to do that in the United States. And an expert for the Institute for Fiscal Studies notes that it doesn’t work in the United Kingdom.

The bottom line is that Corbyn and his team are terrible.

That being said, Boris Johnson and the current crop of Tories are not exactly paragons of prudence and responsibility.

They’re proposing lots of additional spending. And, as City A.M. reports, Johnson also is being criticized for promising company-specific handouts and protectionist rules for public procurement.

In a press conference today, Johnson promised to expand Britain’s state aid regime once the UK leaves the EU. “We will back British businesses by introducing a new state aid regime which makes it faster and easier for the government to intervene to protect jobs when an industry is in trouble,” a briefing document said. Head of regulatory affairs at the Institute of Economic Affairs (IEA) Victoria Hewson said support for state aid was “veiled support for cronyism.” …A spokesperson for the Institute of Directors said: “It’s not clear how these proposals will fit with ambitions of a ‘Global Britain’. The Conservatives must be wary of opening a can of worms on state aid, it’s important to have consistent rules in place to resist the impulse of unwarranted protectionism.” Johnson also promised to introduce a buy British rule for public procurement. …IEA economics fellow Julian Jessop said: “A ‘Buy British’ policy is pure protectionism, and it comes with heavy costs.

Perhaps this is why John O’Connell of the Taxpayers Alliance has a rather pessimistic view about future tax policy. Here are excerpts of a column he wrote for CapX.

Theresa May’s government implemented a series of big state, high tax policies. Promises of no strings attached cash for the NHS; new regulations on net zero; tax cuts shelved and the creation of more quangos. After his surprise non-loss in the election, Corbyn shifted even further to the political left, doubling down on his nationalisation plans. All in all, the 2017 election result was terrible for people who believe in a small state. …A report from the Resolution Foundation found that government spending is rising once again, and likely to head back towards the heights of the 1970s over the coming years. The Conservatives’ recent spending review suggests state spending could be 41.3% of GDP by 2023, while Labour’s spending plans could take it to 43.3%. This compares to the 37.4% average throughout the noughties. Based on the manifestos, Labour are working towards a German-sized state, while the Tories’ plan looks more Dutch. Unsurprisingly we see this mirrored by the tax burden, which at 34.6% of GDP has already reached a fifty-year high. It is likely to increase further. …British taxpayers are presented with something of a Hobson’s choice: Boris Johnson will see taxes increase and spending shoot up, while Jeremy Corbyn has £1.2 trillion worth of unfunded spending rises just waiting to become unimaginable tax hikes for everyone. Whoever you vote for, you’ll get higher taxes, the question is just about how high.

Let’s close by looking at the big picture.

Here’s a chart showing the burden of government spending in the United Kingdom since 1900. I’ve augmented the chart to show the awful trend started by Attlee (in red) and then the positive impact of Thatcher (in green).

You can also see that Tony Blair and Gordon Brown did a bad job early this century, followed by a surprisingly good performance by David Cameron.

Now it appears that British voters have to choose between a slow drift in the wrong direction under Boris Johnson or a rapid leap in the wrong direction under Jeremy Corbyn.

Normally I would be rather depressed by such a choice. I’m hoping, however, that Brexit (assuming it actually happens!) will cause Boris Johnson to make smart choices even if he is otherwise tempted to make bad choices.

P.S. Unsurprisingly, Corbyn has been an apologist for thugs and dictators.

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Arthur Okun was a well-known left-of-center economist last century. He taught at Yale, was Chairman of the Council of Economic Advisors for President Lyndon Johnson, and also did a stint at Brookings.

In today’s column, I’m not going to blame him for any of LBJ’s mistakes (being a big spender, creating Medicare and Medicaid).

Instead, I’m going to praise Okun for his honesty. Is his book, Equality and Efficiency: The Big Trade Off, he openly acknowledged that higher taxes and bigger government – policies he often favored – hindered economic performance.

Sadly, some folks on the left today are not similarly honest.

A column in the New York Times by Jim Tankersley looks at the odd claim, put forth by Elizabeth Warren and others, that class-warfare taxes are good for growth.

Elizabeth Warren is leading a liberal rebellion against a long-held economic view that large tax increases slow economic growth… Generations of economists, across much of the ideological spectrum, have long held that higher taxes reduce investment, slowing economic growth. …Ms. Warren and other leading Democrats say the opposite. …that her plans to tax the rich and spend the revenue to lift the poor and the middle class would accelerate economic growth, not impede it. …That argument tries to reframe a classic debate…by suggesting there is no trade-off between increasing the size of the pie and dividing the slices more equitably among all Americans.

Most people, when looking at why some nations grow faster and become more prosperous, naturally recognize that there’s a trade-off.

So what’s the basis of this counter-intuitive and anti-empirical assertion from Warren, et al?

It’s partly based on their assertion that more government spending is an “investment” that will lead to more growth. In other words, politicians ostensibly will allocate new tax revenues in a productive manner.

Ms. Warren wrote on Twitter that education, child care and student loan relief programs funded by her tax on wealthy Americans would “grow the economy.” In a separate post, she said student debt relief would “supercharge” growth. …Ms. Warren is making the case that the economy could benefit if money is redistributed from the rich and corporations to uses that she and other liberals say would be more productive. …a belief that well-targeted government spending can encourage more Americans to work, invest and build skills that would make them more productive.

To be fair, this isn’t a totally absurd argument.

The Rahn Curve, for instance, is predicated on the notion that some spending on core public goods is correlated with better economic performance.

It’s only when government gets too big that the Rahn Curve begins to show that spending has a negative impact on growth.

For what it’s worth, modern research says the growth-maximizing size of government is about 20 percent of economic output, though I think historical evidence indicates that number should be much lower.

But even if the correct figure is 20 percent of GDP, there’s no support for Senator Warren’s position since overall government spending currently consumes close to 40 percent of U.S. economic output.

Warren and others also make the discredited Keynesian argument about government spending somehow kick-starting growth, ostensibly because a tax-and-spend agenda will give money to poor people who are more likely to consume (in the Keynesian model, saving and investing can be a bad thing).

Democrats cite evidence that transferring money to poor and middle-class individuals would increase consumer spending…liberal economists say taxes on high-earners could spur growth even if the government did nothing with the revenue because the concentration of income and wealth is dampening consumer spending.

This argument is dependent on the notion that consumer spending drives the economy.

But that’s not the case. As I explained two years ago, consumer spending is a reflection of a strong economy, not the driver of a strong economy.

Which helps to explain why the data show that Keynesian stimulus schemes routinely fail.

Moreover, the Keynesian model only says it is good to artificially stimulate consumer spending when trying to deal with a weak economy. There’s nothing in the theory (at least as Keynes described it) that suggests it’s good to endlessly expand the public sector.

The bottom line is that there’s no meaningful theoretical or empirical support for a tax-and-spend agenda.

Which is why I think this visual very succinctly captures what Warren, Sanders, and the rest (including international bureaucracies) are proposing.

P.S. By the way, I think Tankersley’s article was quite fair. It cited arguments from both sides and had a neutral tone.

But there’s one part that rubbed me the wrong way. He implies in this section that America’s relatively modest aggregate tax burden somehow helps the left’s argument.

Fueling their argument is the fact that the United States now has one of the lowest corporate tax burdens among developed nations — a direct result of President Trump’s 2017 tax cuts. Tax revenues at all levels of government in the United States fell to 24.3 percent of the economy last year, the Organization for Economic Cooperation and Development reported on Thursday, down from 26.8 percent in 2017. America is now has the fourth lowest tax burden in all of the O.E.C.D.

Huh? How does the fact that we have lower taxes that other nations serve as “fuel” for the left?

Since living standards in the United States are considerably higher than they are in higher-taxed Europe, it’s actually “fuel” for those of us who argue against class-warfare taxation and bigger government.

Though maybe Tankersley is suggesting that America’s comparatively modest tax burden is fueling the greed of U.S. politicians who are envious of their European counterparts?

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I wrote yesterday about Japan’s experience with the value-added tax, mostly to criticize the International Monetary Fund.

The statist bureaucrats at the IMF are urging a big increase in Japan’s VAT even though the last increase was only imposed two months ago (in a perverse way, I admire their ability to stay on message).

Today, I want to focus on a broader lesson regarding the political economy of the value-added tax. Because what’s happened in Japan is further confirmation that a VAT would be a terrible idea for the United States.

Simply stated, the levy would be a recipe for bigger government and more red ink.

Let’s look at three charts. First, here’s a look at how politicians in Japan have been pushing the VAT burden ever higher.

What’s been the result? Have politicians used the money to lower other taxes? Have they used the money to reduce government debt?

Hardly. As was the case in Europe, the value-added tax in Japan is associated with an increase in the burden of spending.

Here’s a chart (based on the IMF’s own data) showing that government is now consuming almost 35 percent of economic output, up from about 30 percent of GDP when the VAT was first imposed.

I’ve added a trend line (automatically generated by Excel) to illustrate what’s been happening. It’s not a big effect, but keep in mind the VAT never climbed above 5 percent until 2014.

Now let’s look at some numbers that are very unambiguous.

Japan’s politicians imposed the VAT in part because they claimed it was a way of averting more red ink.

Yet our final chart shows what’s happened to both gross debt and net debt since the VAT was imposed.

To be sure, the VAT was only one piece of a large economic puzzle. If you want to finger the main culprits for all this red ink, look first at Keynesian spending binges and economic stagnation.

But we also know the politicians were wrong when they said a VAT would keep debt under control

I’ll close with a political observation.

The left wants a value-added tax for the simple reason that it’s the only way to finance European-type levels of redistribution (yes, they also want class-warfare taxes on the rich, but that’s mostly for reasons of spite since even they recognize that such levies don’t actually generate much revenue).

But it’s very unlikely that a VAT will be imposed on the United States by the left. At least not acting alone.

The real danger is that we’ll wind up with a VAT because some folks on the right offer their support. These people don’t particularly want European-type levels of redistribution, but they think that’s going to happen. So one of their motives is to figure out ways to finance a large welfare state without completely tanking the economy.

They are right that a VAT doesn’t impose the same amount of damage, on a per-dollar-collected basis, as higher income tax rates. Or increases in double taxation (though it’s important to realize that it would still penalize productive behavior by increasing the wedge between pre-tax income and post-tax consumption).

But their willingness to surrender is nonetheless very distressing.

The bottom line is that the most important fiscal issue facing America is the need for genuine entitlement reform. Achieving that goal is an uphill battle. But if politicians get a big new source of revenue, that uphill battle becomes an impossible battle.

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Free markets and limited government are a tried-and-true recipe for growth and prosperity.

Indeed, it’s the only way for a poor nation to become a rich nation. Those are the policies that helpd North America and Western Europe become rich in the 1800s and it’s how East Asia became rich in the second half of the 1900s.

By contrast, there’s no poor country that has implemented statist policies and then become rich (which is why none of my left-wing friends have ever come up with a good answer to my two-question challenge).

But that doesn’t stop some international bureaucracies from pushing bad policies on poor nations.

I wrote last year about the International Monetary Fund’s pernicious efforts to impose higher tax burdens in Africa.

Now the Organization for Economic Cooperation and Development is seeking to perpetuate poverty in the world’s poorest continent. The Paris-based bureaucracy actually is arguing that “urgent action” is need to impose higher taxes.

The average tax-to-GDP ratio for the 26 countries participating in the new edition of Revenue Statistics in Africa was…17.2% for the third consecutive year in 2017. …underlining the need for urgent action to enhance domestic revenue mobilisation in Africa. …Overall, the tax structure across participating countries has evolved over the past decade, with VAT and personal income tax (PIT) accounting for a higher proportion of revenue generation in 2017 relative to 2008, on average. However, PIT (15.4% of total tax revenues) and social security contributions (8.1% of total tax revenues) remain low in Africa. Reforms to broaden the personal tax base…and expand social insurance coverage can assist in domestic resource mobilisation efforts while contributing to inclusive growth. …Property taxes are shown to be much lower in Africa than in LAC and in the OECD but have the potential to play a key role.

Before explaining why the OECD’s analysis is wrong, here are a couple of charts for those who want some country-specific details.

Here’s a look at the aggregate tax burdens in various nations.

I’m not surprised that South Africa’snumbers are so bad.

And here’s a look at how tax burdens have changed over the past 10 years.

Kudos to Botswana.

The big question to consider, of course, is why the OECD is pushing for higher taxes in poor nations.

The real reason is that the OECD represents the interest of governments and politicians instinctively want more revenue.

The official reason, though, is that the bureaucrats want people to believe – notwithstanding reams of evidence – that higher taxes are good for prosperity. And it’s not just the OECD pushing this bizarre theory. It’s now routine for international bureaucracies to push this upside-down analysis, based on the anti-empirical notion that economies will prosper if governments can finance more spending.

P.S. Africa’s big economic challenge is not bad fiscal policy. If you peruse the data from Economic Freedom of the World, the continent has huge problems with excessive regulation and poor quality of governance. What’s tragic, though, is that the OECD doesn’t push for good reforms in those area. Instead, it wants to make fiscal policy worse.

P.P.S. To be fair, the OECD doesn’t discriminate. The bureaucrats also advocate higher taxes in other poor regions, such as Latin America and Asia.

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With their punitive proposals for wealth taxes, Bernie Sanders and Elizabeth Warren are leading the who-can-be-craziest debate in the Democratic Party.

But what would happen if either “Crazy Bernie” or “Looney Liz” actually had the opportunity to impose such levies?

At the risk of gross understatement, the effect won’t be pretty.

Based on what’s happened elsewhere in Europe, the Wall Street Journal opined that America’s economy would suffer.

Bernie Sanders often points to Europe as his economic model, but there’s one lesson from the Continent that he and Elizabeth Warren want to ignore. Europe has tried and mostly rejected the wealth taxes that the two presidential candidates are now promising for America. …Sweden…had a wealth tax for most of the 20th century, though its revenue never accounted for more than 0.4% of gross domestic product in the postwar era. …The relatively small Swedish tax still was enough of a burden to drive out some of the country’s brightest citizens. …In 2007 the government repealed its 1.5% tax on personal wealth over $200,000. …Germany…imposed levies of 0.5% and 0.7% on personal and corporate wealth in 1978. The rate rose to 1% in 1995, but the Federal Constitutional Court struck down the wealth tax that year, and it was effectively abolished by 1997. …The German left occasionally proposes resurrecting the old system, and in 2018 the Ifo Institute for Economic Research analyzed how that would affect the German economy. The authors’ baseline scenario suggests that long-run GDP would be 5% lower with a wealth tax, while employment would shrink 2%. …The best argument against a wealth tax is moral. It is a confiscatory tax on the assets from work, thrift and investment that have already been taxed at least once as individual or corporate income, and perhaps again as a capital gain or death tax. The European experience shows that it also fails in practice.

Karl Smith’s Bloomberg column warns that wealth taxes would undermine the entrepreneurial capitalism that has made the United States so successful.

…a wealth tax…would allow the federal government to undermine a central animating idea of American capitalism. …The U.S. probably could design a wealth tax that works. …If a country was harboring runaway billionaires, the U.S. could effectively lock it out of the international financial system. That would make it practically impossible for high-net-worth people to have control over their wealth, even if it they could keep the U.S. government from collecting it. The necessity of this type of harsh enforcement points to a much larger flaw in the wealth tax… Billionaires…accumulate wealth…it allows them to control the destiny of the enterprises they founded. A wealth tax stands in the way of this by requiring billionaires to sell off stakes in their companies to pay the tax. …One of the things that makes capitalism work is the way it makes economic resources available to those who have demonstrated an ability to deploy them effectively. It’s the upside of billionaires. …A wealth tax designed to democratize control over companies would strike directly at this strength. …a wealth tax would penalize the founders with the most dedication to their businesses. Entrepreneurs would be less likely to start businesses, in Silicon Valley or elsewhere, if they think their success will result in the loss of their ability to guide their company.

The bottom line, given the importance of “super entrepreneurs” to a nation’s economy, is that wealth taxes would do considerable long-run damage.

Andy Kessler, in a column for the Wall Street Journal, explains that wealth taxes directly harm growth by penalizing income that is saved and invested.

Even setting comical revenue projections aside, the wealth-tax idea doesn’t stand up to scrutiny. Never mind that it’s likely unconstitutional. Or that a wealth tax is triple taxation… The most preposterous part of the wealth-tax plans is their supporters’ insistence that they would be good for the economy. …a wealth tax would suck money away from productive investments. …liberals in favor of taxation always trot out the tired trope that the poor drive growth by spending their money while the rich hoard it, tossing gold coins in the air in their basement vaults. …So just tax the rich and government spending will create great jobs for the poor and middle class. This couldn’t be more wrong. As anyone with $1 billion—or $1,000—knows, people don’t stuff their mattresses with Benjamins. They invest them. …most likely…in stocks or invested directly in job-creating companies… A wealth tax takes money out of the hands of some of the most productive members of society and directs it toward the least productive uses. …existing taxes on interest, dividends and capital gains discourage the healthy savings that create jobs in the economy. These are effectively taxes on wealth—and we don’t need another one.

Professor Noah Smith leans to the left. But that doesn’t stop him, in a column for Bloomberg, from looking at what happened in France and then warning that wealth taxes have some big downsides.

Studies on the effects of taxation when rates are moderate might not be a good guide to what happens when rates are very high. Economic theories tend to make a host of simplifying assumptions that might break down under a very high-tax regime. …One way to predict the possible effects of the taxes is to look at a country that tried something similar: France, where Piketty, Saez and Zucman all hail from. …France…shows that inequality, at least to some degree, is a choice. Taxes and spending really can make a big difference. But there’s probably a limit to how much even France can do in this regard. The country has experimented with…wealth taxes…with disappointing results. France had a wealth tax from 1982 to 1986 and again from 1988 to 2017. …The wealth tax might have generated social solidarity, but as a practical matter it was a disappointment. The revenue it raised was rather paltry; only a few billion euros at its peak, or about 1% of France’s total revenue from all taxes. At least 10,000 wealthy people left the country to avoid paying the tax; most moved to neighboring Belgium… France lost not only their wealth tax revenue but their income taxes and other taxes as well. French economist Eric Pichet estimates that this ended up costing the French government almost twice as much revenue as the total yielded by the wealth tax.

In other words, the much-maligned Laffer Curve is very real. When looking at total tax collections from the rich, the wealth tax resulted in less money for France’s greedy politicians.

And this chart from the column shows that French lawmakers are experts at extracting money from the private sector.

The dirty little secret, of course, is that lower-income and middle-class taxpayers are the ones being mistreated.

By the way, Professor Smith’s column also notes that President Hollande’s 75 percent tax rate on the rich also backfired.

Let’s close with a report from the Wall Street Journal about one of the grim implications of Senator Warren’s proposed tax.

Elizabeth Warren has unveiled sweeping tax proposals that would push federal tax rates on some billionaires and multimillionaires above 100%. That prospect raises questions for taxpayers and the broader economy… How might that change their behavior? And would investment and economic growth suffer? …The rate would vary according to the investor’s circumstances, any state taxes, the profitability of his investments and as-yet-unspecified policy details, but tax rates of over 100% on investment income would be typical, especially for billionaires. …After Ms. Warren’s one-two punch, some billionaires who generate pretax returns could pay annual taxes that would leave them with less money than they started with.

Here’s a chart from the story (which I’ve modified in red for emphasis) showing that investors would face effective tax rates of more than 100 percent unless they somehow managed to earn very high returns.

For what it’s worth, I’ve been making this same point for many years, starting in 2012.

Nonetheless, I’m glad to see it’s finally getting traction. Hopefully this will deter lawmakers from ever imposing such a catastrophically bad policy.

Remember, a tax that discourages saving and investment is a tax that results in lower wages for workers.

P.S. Switzerland has the world’s best-functioning wealth tax (basically as an alternative to other forms of double taxation), but even that levy is destructive and should be abolished.

P.P.S. Sadly, because their chief motive is envy, I don’t think my left-leaning friends can be convinced by data about economic damage.

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Candidates such as Elizabeth Warren and Bernie Sanders supposedly are competing for hard-left voters, while candidates such as Joe Biden and Pete Buttigieg are going after moderate voters. But a review of Buttigieg’s fiscal policy suggests he may belong in the first category.

In the interview, I focused on Buttigieg’s plan to subsidize colleges. Hopefully, I got across my main point is that students won’t be helped.

Based on what’s happened with the “third-party payer” subsidies that already exist, colleges and universities will simply jack up tuition and fees to capture the value of any new handouts.

I’m not the only person to speculate that Buttigieg is simply a watered down version of Warren.

The Wall Street Journal opined today on Mayor Pete’s statist agenda.

Mr. Buttigieg has risen steadily in the Real Clear Politics polling average to a solid fourth place, with about 7% support. …on Friday he released what he called “An Economic Agenda for American Families.” For a candidate who wants to occupy the moderate lane, Mr. Buttigieg’s policy details veer notably left. …$700 billion—presumably over 10 years, but the plan doesn’t specifically say—for “universal, high-quality, and full-day early learning.” …$500 billion “to make college affordable.” That means free tuition at public universities… $430 billion for “affordable housing.” …$400 billion to top off the Earned Income Tax Credit… A $15 national minimum wage.

At the risk of understatement, that’s not a moderate platform.

This isn’t an economic agenda, and there isn’t a pro-growth item anywhere. It’s a social-welfare spending and union wish list. …Don’t forget the billions more he has allocated to green energy, as well as his $1.5 trillion health-care public option, “Medicare for All Who Want It.” So far Mayor Pete’s agenda totals $5.7 trillion… Mayor Pete’s policy wish list is shorter and cheaper than Elizabeth Warren’s, but it still includes gigantic tax increases to finance a huge expansion of the welfare and entitlement state. Call it Warren lite.

Methinks John Stossel needs to update this video. With $5.7 trillion of new outlays, Buttigieg is definitely trying to win the big-spender contest.

No wonder he’s now embracing class-warfare tax policy. One of his giant tax increases, which I should have mentioned in the interview, is a version of Elizabeth Warren’s “nutty idea” to force people to pay taxes on capital gains even if they haven’t sold assets and therefore don’t actually have capital gains!

And the Washington Post reports that he also wants to increase the capital gains tax rate, even though that will make America less competitive.

By the way, Buttigieg is also a hypocrite. He’s joined with other Democratic candidates in embracing a carbon tax on lower-income and middle-class voters, yet the Chicago Tribune reports that he zips around the country on private jets.

Pete Buttigieg has spent roughly $300,000 on private jet travel this year, more than any other Democrat running for the White House, according to an analysis of campaign finance data. …his reliance on charter flights contrasts sharply with his image as a Rust Belt mayor who embodies frugality and Midwestern modesty. …Buttigieg’s campaign says the distance between its South Bend headquarters and major airports sometimes makes private jet travel necessary. “We are careful with how we spend our money, and we fly commercial as often as possible,” Buttigieg spokesman Chris Meagher said Wednesday. “We only fly noncommercial when the schedule dictates.”

In other words, one set of rules for ordinary people, but exemptions for the political elite.

Though at least he hasn’t proposed to ban hamburgers. At least not yet.

P.S. If you like this cartoon by Gary Varvel, I very much recommend this Halloween cartoon. And he is among the best at exposing the spending-cut hoax in DC, as you can see from this sequester cartoon and this deficit reduction cartoon. This cartoon about Bernie Madoff and Social Security, however, is probably my favorite.

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I give Bernie Sanders and Andrew Yang credit for a bit of honesty. Both of them have proposals to significantly – indeed, dramatically – expand the burden of government spending, and they actually admit their plans will require big tax increases on lower-income and middle-class voters.

Their numbers are still wrong, but at least they recognize you can’t have French-sized government financed by just a tiny sliver of rich people.

This makes them far more honest than other candidates such as Elizabeth Warren and Kamala Harris.

In the past, I’ve pointed out that there’s no nation in the world that finances a big welfare state without high tax burdens on ordinary people – generally steep value-added taxes, along with onerous payroll taxes and high income tax rates on middle-income earners (see, for instanced, this horrifying story from Spain).

And I’ve also periodically shared analysis from honest leftists who admit major tax hikes on the broader population will be inevitable if politicians in the U.S. create European-sized redistribution programs.

Today, we’re going to add to this collection of honest leftists.

There’s an explicitly pro-socialist magazine called Jacobin, in which Doug Henwood has a lengthy article explaining – from his statist perspective – that it’s necessary to have higher taxes on everybody.

We should be clear about what it will take to fund a decent welfare state: not just soaking the rich, but raising taxes across the board… I’m defining social democracy as a large and robust welfare state that socializes a lot of consumption through taxation and spending, compressing the income distribution, …insulating people from the risks of sickness and unemployment, and…it’s a lot bigger than Medicare for All and free college.

He compares the U.S. to other nations, especially the Nordic nations.

For those who want bigger government, America doesn’t spend nearly enough.

In 2017 (the vintage of most of these stats), the US government at all levels (aka general government in fiscal jargon) took in 34 percent of GDP in taxes and spent 38 percent. …Denmark, Norway, and Sweden — spend an average of 50 percent of GDP and take in 53 percent. None is very far from those averages, which are twelve and nineteen points above US levels, respectively. …The fourth graph is where American exceptionalism really comes in — the share of GDP spent on “social protection,” that is, classic welfare state programs. In the OECD’s words, these include “sickness and disability; old age (i.e. pensions); survivors; family and children; unemployment; housing; social exclusion n.e.c. [not elsewhere classified]; [and] R&D social protection.” The United States spends under 8 percent of GDP on these things, less than half the OECD average and a third what the Scandinavians spend.

Here’s a chart from the article showing how the U.S. doesn’t keep pace.

And how do the northern Europeans finance their big welfare states?

Henwood is very honest about the implications. You can tax the rich, but the rest of us need to have our wallets lightened.

How do the Scandinavian states — and others that are more generous social spenders than the United States — finance that spending? Not…by borrowing. Countries with more generous welfare states than ours borrow far less. Instead, they tax. …On some things, like Social Security and personal and corporate income taxes, the United States isn’t an outlier. On others, we are. …At 5 percent of GDP, our taxes on goods and services — mostly value-added taxes (VATs) in other countries… — are less than a third the Scandinavian share of GDP (16 percent)… The difference between the United States and the Scandinavians is over 10 percent of GDP.

In other words, big government means a punitive value-added tax.

That means higher taxes on the poor, as well as the middle class.

But he argues that’s okay because government will take care of everybody.

Yes, VATs are regressive. They’re taxes on consumption that hit the poor harder than the rich because the further down the income scale you go, the larger a portion of your income you consume. But their regressivity is more than compensated for in the Scandinavian countries by spending, which not only takes from the rich and gives to the poor, but takes from the masses and gives it back… It’s a way of socializing consumption to some degree, of taking things out of competitive markets.

Here’s another chart from the article, this one showing that the United States ostensibly doesn’t collect enough taxes from consumption (“goods and services”).

Now let’s take a closer look at the budgetary numbers.

Henwood points out that the usual class-warfare taxes would only finance a portion of the statism wish list.

Peter Diamond and Emmanuel Saez published a widely cited paper arguing that the optimal top tax rate for soaking the rich is 73 percent — optimal in the sense of pulling in the most revenue. …Bernie Sanders’s freshly released wealth tax plan would raise $435 billion a year, according to its designers, Saez and his Berkeley colleague Gabriel Zucman… Combine those two and you get a revenue increase of $520–755 billion, or 2.4–3.5 percent of GDP. Scandinavian revenues are 19 percentage points higher as a share of GDP than the United States’. …these taxes, which are probably what lots of contemporary American leftists have in mind, come only an eighth to a fifth of the way toward closing the gap with the Scandinavians.

His conclusion is very frank and honest.

Some might find it impolitic of me to say all this, but you have to be honest with people, otherwise they’ll turn on you for selling a bill of goods. …if we want a seriously better society of the sort outlined in the Green New Deal, then it’s going to take a lot more — and it won’t “pay for itself.”

My conclusion is that Henwood has profoundly awful policy preferences (Europeans have much lower living standards, for instance), but doesn’t believe in make-believe budgeting.

P.S. The Democrat presidential candidates have embraced one big levy – the carbon tax – that would grab lots of money from lower-income and middle-class people. But they seem to have successful convinced themselves (and maybe voters) that it doesn’t lead to higher tax burdens (even though proponents of such levies, such as the International Monetary Fund, openly acknowledge that consumers will bear the cost).

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Last month, I accused Elizabeth Warren of being a “fiscal fraud” for proposing a multi-trillion dollar government takeover of healthcare.

She then unveiled a plethora of class-warfare taxes. As I discussed yesterday on CNBC, she even wants to tax capital gains even if the gains are only on paper.

By the way, I’m disappointed that I forgot to mention in my final soundbite that school choice would be a very specific and very effective way of helping poor people climb the ladder of opportunity.

But let’s set that aside and focus on Senator Warren’s radical proposal.

Because the idea would be such a nightmare of complexity, I joked in the interview that the Senator must own shares in firms that do tax accounting.

That’s not a novel observation on my part. Earlier this year, the Wall Street Journal opined why this was a bad idea. Not just a bad idea, a ridiculously foolish idea.

Under current law, long-term capital gains are taxed at rates up to 20%—plus a 3.8% ObamaCare surcharge on investment income—only after the asset is sold. Mr. Wyden calls this a loophole. …Mr. Wyden…proposes an annual “mark to market” scheme… As an asset rises in value, its owners would pay tax each year on the incremental gain. This would create an enormous new accounting burden. Mr. Wyden may say that his mark-to-market rule will apply only to the top 1% or 0.1%, but it would still be a bonanza for tax attorneys. How will people in the top 2% know whether they’ve passed the threshold, and how far will they go to avoid it? …Mr. Wyden’s plan would tax gains that exist merely on paper. …And what about illiquid investments, such as private companies or real estate? As with Ms. Warren’s suggested wealth tax, no one knows how Mr. Wyden would go about valuing them. …Would the owner of an apartment building be asked to revalue it every year? Will an art investor be told to mark that Picasso to market? Good luck.

I’ve already written about Senator Wyden’s proposal.

It’s not just absurdly complex. It’s also bad tax policy, as the WSJ noted.

…there are good reasons to tax capital gains at preferential rates, which is why the U.S. has done it for decades under Democrats and Republicans. The lower rate…reduces the harm from double taxation after corporations already pay income taxes. …A lower tax rate is also a matter of fairness. If investors have capital losses, they aren’t allowed to deduct more than $3,000 a year. There’s no inflation adjustment either: If $100 of stock bought in 1999 is sold for $150 today, the difference is taxed even though much of it is an illusory gain caused by dollar erosion.

The final sentence should be emphasized.

Under the Wyden – now Warren – plan, you can have illusory gains that only reflect inflation, and then you can get taxed on those illusory gains even if you don’t actually get them because you haven’t sold the asset.

David Bahnsen, writing for National Review, says the idea is simply nutty.

Senator Ron Wyden of Oregon is the top-ranking member of the Senate’s tax committee... And his recent policy proposal to tax unrealized capital gains is just as extreme, silly, impractical, dangerous, and inane as any of the aforementioned policy whiffs floating around in the leftist hemisphere. …The problems here are almost as severe as the problems with getting a wind-powered ride across the Pacific Ocean in the Green New Deal. First and foremost, the compliance costs would be the biggest boondoggle our nation’s financial system has ever seen. How in the world is illiquid real estate that has not sold supposed to be “valued” each and every year, let alone illiquid businesses, private debt, venture capital, and the wide array of capital assets that make up our nation’s economy but do not fit in the cozy box of “mutual funds”? …Another problem exists for this delusional plan: How do smaller investors pay the tax on an investment that has not yet returned the cash to them? …Underlying all of the mess of this silly proposal from Senator Wyden is the Democrats’ continued lack of understanding about what is most needed in our economy — business investment. The war on capital is a war on jobs, on productivity, on growth, and on wages. Taking bold actions to disincentivize productivity, investment, risk-taking, and capital formation is akin to discouraging diet and exercise for someone trying to lose weight.

Amen.

I’ve repeatedly tried to explain that it is economically self-destructive to impose high – and discriminatorytaxes on income that is saved and invested.

Which is why the right capital gains tax rate is zero.

In other words, instead of worsening the bias against capital, we should be copying nations such as Switzerland, Singapore, Luxembourg, and New Zealand by abolishing the capital gains tax.

For more on that, I recommend this video.

P.S. Don’t forget that Senator Warren also has misguided proposals on many other issues, such as Social Securitycorporate governancefederal spendingcorporate taxationWall Street, etc.

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Last November, voters in some states had the opportunity to accept or reject some very important initiatives, including votes on Colorado’s flat tax, Arizona’s school choice system, and a carbon tax in the state of Washington.

Since 2019 is an off-year election, there aren’t as many initiatives and referendums. But one of them is vitally important. Politicians in Colorado are hoping voters will approve Proposition CC, which would gut the Taxpayer Bill of Rights (TABOR) and thus allow more government spending.

Why is TABOR worth defending? Because it’s far and away the most effective and well-designed fiscal rule in the United States.

It’s basically a spending cap, which is the ideal fiscal policy, and here’s a description of how it works that I shared last year.

Colorado voters adopted The Taxpayer’s Bill of Rights in 1992. TABOR allows government spending to grow each year at the rate of inflation-plus-population. Government can increase faster whenever voters consent. Likewise, tax rates can be increased whenever voters consent. …The Taxpayer’s Bill of Rights requires that excess government revenues be refunded to taxpayers, unless taxpayers vote to let the government keep the revenue.

Proposition CC doesn’t fully repeal TABOR, but it allows politicians to keep – and spend – excess tax revenues.

Thomas Aiello of the National Taxpayers Union wrote last month for the Colorado Springs Gazette about TABOR. He explains why it has been successful.

By guaranteeing refunds of excessive taxes, restricting spending to sensible growth rates, and giving Coloradans the ability to vote on tax increases, TABOR has been instrumental in the state’s booming economy. …Since TABOR limits the amount of money the state is allowed to spend, surplus revenue in excess of the cap must be refunded to Colorado taxpayers. Generally, the revenue cap on the state level grows with inflation plus population increases. …TABOR is working as designed: limiting the growth of government, protecting taxpayers, and ensuring working Coloradans keep more of their hard-earned money. …since 1992 more than $3 billion has been refunded back to taxpayers in the form of lower property, sales, and income taxes.

And he warns about the adverse consequences of Proposition CC.

…in the 2019 legislative session, the Democratic-controlled legislature agreed to place Proposition CC onto the November ballot. If approved by voters, TABOR’s provision for refunds would be gutted, thereby allowing the treasury to retain all excess revenue it is required to return to taxpayers. That means taxpayers would forfeit future refunds from 2019 on. Just put that into perspective: taxpayers will send an extra $1.3 billion to the treasury than what would normally be spent. Instead of giving that money back to you as required by TABOR, lawmakers want Coloradans to forget about overpayments so they can just spend it on other things in the budget.

Writing for the Grand Junction Daily Sentinel, Jay Stooksbury also opines against Proposition CC.

They lied to us in 2005, and they are doubling down on this lie in 2019. Colorado voters were sold a bill of goods with Referendum C in 2005, and it is of the utmost importance that we aren’t fooled again with Proposition CC in 2019. Proponents of Referendum C originally claimed that their measure was “temporary.” The measure was supposed to offer a five-year reprieve from the constitutional limitations created by the Taxpayer’s Bill of Rights (TABOR)… Referendum C proved to be anything but “temporary.” The referendum allowed Colorado’s spendthrift government to permanently augment its spending cap, shortchanging taxpayers on their potential refund year after year since its passing.

He explains that Proposition CC would be far worse.

If passed, this 2019 ballot measure would permanently abolish the state government’s obligation to refund taxpayers. I repeat: permanently. At least this time around, legislators have dropped the pretense that they are bluffing with “temporary” half-measures; when it comes to keeping all of your hard-earned income, these legislators are going all-in, baby. …TABOR is, unfortunately, a shell of its former self. Its effectiveness has been chipped away by a decades-long rebranding campaign that laundered tax revenue by using terms like “fees” and “enterprises.” …Regardless, TABOR is still a vital, one-of-a-kind safeguard that empowers Coloradans against the wastefulness of government. Come November, let’s be certain to keep it that way. Fool us once with C, shame on you; fool us twice with CC, shame on all of us.

I don’t have much to add to these analyses. The real gold standard for good fiscal policy is to make sure government doesn’t grow faster than the private sector, and that’s what TABOR is designed to achieve.

It’s basically the closest thing we have in America to Switzerland’s “debt brake” and Hong Kong’s Article 107.

My only contribution to the discussion is this chart, based on data from the St. Louis Federal Reserve, showing how Coloradans now enjoy more than $4,000 of additional personal income compared to the national average – up from just $526 when TABOR was enacted.

While it’s impossible to precisely explain why income has grown faster in Colorado, I don’t think it is a coincidence that the state gets high scores for economic liberty.

P.S. To see the real-world impact of TABOR, look at what happened after pot legalization produced additional tax revenue.

P.P.S. I’m also paying close attention to Proposition 4 in Texas, which would amend the state constitution to prohibit consideration of a personal income tax.

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I’ve always considered Senator Bernie Sanders to be the most clueless and misguided of all presidential candidates.

But I also think “Crazy Bernie” is actually sincere. He really believes in socialism.

Elizabeth Warren, by contrast, seems more calculating. Her positions (on issues such as Social Securitycorporate governancefederal spendingtaxationWall Street, etc).) are radical, but it’s an open question whether she’s a true believer in statism. It’s possible that she simply sees a left-wing agenda as the best route to winning the Democratic nomination.

Regardless of motive, though, her proposals are economic lunacy. So maybe it’s time to give her “Looney Liz” as a nickname.

Consider, for instance, her new Medicare-for-All scheme. She got hammered for promising trillions of dollars of new goodies without specifying how it would be financed, so she’s put forward a plan that ostensibly fits the square peg in a round hole.

But as Chuck Blahous of the Mercatus Center explains, her plan is a farce.

…presidential candidate Sen. Elizabeth Warren released her proposal to ostensibly pay for the costs of Medicare for All (M4A) without raising taxes on the middle class. As published, the plan would not actually finance the costs of M4A. …the Warren proposal understates M4A’s costs, as quantified by multiple credible studies, by about 34.2%. Another 11.2% of the cost would be met by cutting payments to health providers such as physicians and hospitals. Approximately 20% of the financing is sought by tapping sources that are unavailable for various reasons, for example because she has already committed that funding to other priorities, or because the savings from them was already assumed in the top-line cost estimate. The remaining 34.6% would be met by an array of new and previous tax proposals, most of it consisting of new taxes affecting everyone now carrying employer-provided health insurance, including the middle class.

Here’s a pie chart showing that Warren is relying on smoke and mirrors for more than 50 percent of the financing.

By the way, the supposedly real parts of her plan, such as the new taxes, are a very bad idea.

Brian Riedl of the Manhattan Institute unleashed a flurry of tweets exposing flaws in her proposal.

Since I’m a tax wonk, here’s the one that grabbed my attention.

Wow. Higher taxes on domestic business income, higher taxes on foreign-source business income, higher taxes on business investment, more double taxation of capital gains, a tax on financial transactions, and a very punitive wealth tax (which would be a huge indirect tax on all saving and investment).

If ever enacted, the United States presumably would drop to last place in the Tax Foundation’s competitiveness ranking.

And let’s not forget that Medicare-for-All would dramatically increase the burden of government spending. In one fell swoop, we’d become Greece.

Actually, that probably overstates the damage. Based on my Lassez-Faire Index, I’m guessing we’d be more akin to Spain or Belgium (in other words, falling from #6 in the rankings to the #35-#40 range according to Economic Freedom of the World).

P.S. Don’t forget that Medicare has a massive shortfall already.

P.P.S. Looney Liz’s plan is terrible fiscal policy, but keep in mind it’s also terrible health policy since it would exacerbate the third-party payer problem.

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In some cases, politicians actually understand the economics of tax policy.

It’s quite common, for instance, to hear them urging higher taxes on tobacco because they want to discourage smoking.

I don’t think it’s their job to tell people how to live their lives, but I agree with their economic analysis. The more you tax something, the less you get of it.

One of my many frustrations is that those politicians then conveniently forget that lesson when it comes to taxing things that are good, such as work, saving, production, and investment.

And some countries are more punitive than others. There’s some new research from the European Policy Information Center, Timbro, and the Tax Foundation, that estimates the “effective marginal tax rate” for successful taxpayers for 41 major countries.

And they don’t simply look at the top income tax rates. They quite properly include other taxes that contribute to “deadweight loss” by driving a wedge between pre-tax income and post-tax consumption.

The political discussion around taxing high-earners usually revolves around the income tax, but in order to get a complete picture of the tax burden high-income earners face, it is important to consider effective marginal tax rates. The effective marginal tax rate answers the question, “If a worker gets a raise such that the total cost to the employer increases by one dollar, how much of that is appropriated by the government in the form of income tax, social security contributions, and consumption taxes?” …all taxes that affect the return to work should be taken into account. …Combining data mainly from international accounting firms, the OECD, and the European Commission, we are able to calculate marginal tax rates in the 41 members of the OECD and/or EU.

The main message of this research is that you don’t want to live in Sweden, where you only keep 24 percent of any additional income you produce.

And you should also avoid Slovenia, Belgium, Portugal, Finland, France, etc.

Congratulations to Bulgaria for being the anti-class warfare nation. That’s a smart strategy for a nation trying to recover from decades of communist deprivation.

American readers will be happy to see that the United States looks reasonably good, though New Zealand is the best of the rich nations, followed by Switzerland.

Speaking of which, we need a caveat for nations with federalist systems, such as the U.S., Switzerland, and Canada. In these cases, the top income tax rate is calculated by adding the central government’s top rate with the average top rate for sub-national governments.

So successful entrepreneurs in those countries actually have the ability to reduce their tax burdens if they make wise decisions on where to live (such as Texas or Florida in the case of the United States).

Let’s now shift to some economic analysis. The report makes (what should be) an obvious point that high tax rates have negative economic effects.

Countries should be cautious about placing excessive tax burdens on high-income earners, for several reasons. In the short run, high marginal tax rates induce tax avoidance and tax evasion, and can cause high-income earners to reduce their work effort or hours.

I would add another adverse consequence. Successful taxpayers can move.

That’s especially true in Europe, where cross-border tax migration is much easier than it is in the United States.

But even though there are odious exit taxes for people leaving the United States, we’ll see an exodus if we wind up with some of the crazy tax policies being advocated by Bernie Sanders and Elizabeth Warren.

P.S. Today’s column looks at how nations rank based on the taxation of labor income. For taxation of capital income, the rankings look quite different. For instance, because of pervasive double taxation, the United States gets poor scores for over-taxing dividends, capital gains, and businesses.

P.P.S. If you want to see tax rates on middle-income workers (though it omits value-added taxes), here is some OECD data.

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In a column last week, I noted that Connecticut ranked near the bottom for state tax policy.

And if there was a contest for which state has gone downhill at the fastest pace, the Nutmeg State would likely prevail.

Less than 30 years ago, the state was reasonably competitive, largely because there was no state income tax. But ever since politicians in Hartford got access to that new source of revenue, the state’s finances have spiraled downward.

There are lots of interesting numbers (unfunded pensions, state spending growth, etc) I could share to illustrate the state’s grim outlook.

But sometimes a picture can say 1,000 words.

Some Connecticut communities are having local elections this November. Apparently, based on this horrifying yard sign, Democrats in South Windsor are bragging about “only” imposing a small tax increase.

By the way, they’re not just bragging about a small tax increase rather than a large tax increase. If I read the sign correctly, there have been tax increases every single year for the past decade.

So local Democrats are basically telling voters, “hey, we’re confiscating ever-increasing amounts of your money every year, but you should be grateful since this year’s increase was comparatively small.”

And, given Connecticut’s awful political climate, that’s apparently a winning message!

By the way, I’m not naive. Or at least not hopelessly naive. When I first saw this sign, I thought it was fake. Sort of like this protest sign from the Occupy Wall Street movement.

And since I have been burned before (this doctored Justin Trudeau quote about Brexit), I did some additional research.

I found the Facebook page for the South Windsor Democrats. Lo and behold, there was a campaign video bragging about all the smaller-than-usual tax hike.

They also shared a letter-to-the-editor bragging about how taxes “only” increased 1.9 percent this year.

It’s possible, of course, that someone went through all the trouble of creating fake signs, fake Facebook pages, and fake letters-to-the-editor. But that doesn’t seem to be the case.

This is real. Connecticut is such a mess that candidates try to get votes by bragging about confiscating more money, but at a slower rate of increase.

The only possible advice I have for state residents is to move. Florida would be a good choice.

P.S. South Windsor Democrats might actually have a semi-compelling message if Republicans had been in charge for the previous nine years and had been increasing taxes every year by more than 1.9 percent (and there certainly are plenty of terrible Republicans). But if that was the case, I assume they would have mentioned that in their campaign literature.

P.P.S. Since I’m not partisan, here’s some advice for South Windsor Democrats. Adopt D.C.-type budgeting and build in a “baseline” showing 5 percent annual tax increases. Then, when you “only” raise taxes by 1.9 percent, you can tell voters you actually gave them a 3.1 percent tax cut. You may be thinking that’s ridiculously dishonest and beyond the pale (and it is), but that’s how they do budgeting in Washington.

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In a recent interview, I was asked whether all the new spending schemes proposed by Democratic candidates would lead (as has been the case in Europe) to enormous tax increases on the middle class.

The answer is yes, of course.

But most of the candidates are not honest on this issues (with the partial exception of Crazy Bernie). They’re promising – literally – trillions of dollars in added handouts, but their proposed tax increases only cover a tiny fraction of the cost.

Elizabeth Warren may be the most extreme example of this phenomenon.

She’s embraced every possible tax on higher-income taxpayers, including a sure-to-backfire wealth tax. But all of those tax increases wouldn’t come close to financing her spending agenda – even if one makes the heroic assumption that there’s no adverse economic impact and negative revenue feedback.

The Wall Street Journal opined on her absurd approach.

Tuesday’s Democratic debate…most important news was Senator Elizabeth Warren’s determined refusal to say if her plans would require taxes to increase on the middle class. …South Bend mayor Pete Buttigieg…added, accurately, that “no plan has been laid out to explain how a multi-trillion-dollar hole in this Medicare for All plan that Senator Warren is putting forward is supposed to get filled in.” …Senator Klobuchar…said “at least Bernie’s being honest here and saying how he’s going to pay for this and that taxes are going to go up. And I’m sorry, Elizabeth, but you have not said that, and I think we owe it to the American people to tell them where we’re going to send the invoice.” …this illuminates a problem with Ms. Warren’s agenda and her political character. On Medicare for All, everyone agrees that the cost will be at least $32 trillion over 10 years. Ms. Warren could impose her wealth tax, her higher taxes on capital gains, her higher income taxes on the affluent, and she still wouldn’t come close to paying for Medicare for All. And that’s before her plans for new spending entitlements on child care, pre-K education, free college and so much more. The only way to pay for this is to raise taxes on the middle class, which is where the real money is. That’s how government health care is financed in Europe.

But it’s not just the pro-market crowd at the Wall Street Journal that is raising the issue.

Even writers at Vox find it difficult to rationalize Sen. Warren’s evasive math.

Bernie Sanders…acknowledged that…middle-class taxes would have to go up… It was a rare moment when someone running for the Democratic presidential nomination admitted that their spending ambitions would have to be paid for by taxes that touch not just the wealthiest Americans but taxpayers further down the bracket. …Trying to sell a big progessive agenda on the backs of the rich may be popular. But the admission that middle-class taxes may have to go up is an admission that there may not be enough rich people in America to pay for it all. …Warren…indicated last week that she supports…Medicare-for-All… Such a plan would overhaul the entirety of the US health care system with a single-payer system funded through general revenue and debt. Here the promise of a vast welfare state solely funded by new taxes on the rich runs aground.

It’s gotten to the point that some left-leaning economists are scrambling to help square Warren’s circle.

Here are some excerpts from a report in today’s Washington Post, including some of the horrifying tax increases that her advisers are contemplating.

Internal and external economic policy advisers are trying to help Sen. Elizabeth Warren (D-Mass.) design a way to finance a single-payer Medicare-for-all health-care system…her team faces a challenge in crafting a plan that would bring in large amounts of revenue while not scaring off voters with big middle-class tax increases. The proposal could cost more than $30 trillion over 10 years. Complicating matters, she has already committed all of the money she would raise from a new wealth tax, close to $3 trillion over 10 years, to several other ideas… Robert Pollin, a left-leaning economist at the University of Massachusetts at Amherst who has worked with the Warren and Sen. Bernie Sanders (I-Vt.) teams, …suggests…a $600 billion annual “gross receipts” tax on businesses, …a 3.75 percent sales tax on “nonnecessities” that exempts low-income households, to raise an additional $200 billion; and a 0.38 percent tax on wealth above $1 million, which he says would raise the remaining $200 billion. Robert C. Hockett, a Cornell University professor who has also advised Warren and Sanders, said he has urged Warren’s team to propose financing Medicare-for-all in part with a “public premium” that would function similarly to a tax. …Warren’s team has also received recommendations to adopt a “progressive consumption tax”… This plan would raise trillions of dollars.

Wow, a smorgasbord of French-style tax ideas.

Let’s close with a chart from Brian Riedl of the Manhattan Institute.

As you can see, even if you combine all of the class-warfare taxes, they don’t come close to paying the $30 trillion price tag of Medicare for All.

The only good news, so to speak, is that Sen. Warren is a politician. She’s first and foremost interested in winning office and probably isn’t totally serious about actually creating all sorts of new entitlement schemes (just like I don’t particularly believe Republicans who put forth election-year plans for tax reform).

But that’s hardly a comforting observation since there would be “public choice” pressures to adopt at least some bad policy if she got to the White House.

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While he’s not as outwardly radical as Elizabeth Warren, Bernie Sanders, and Kamala Harris, Andrew Yang has joined together two very bad ideas – universal handouts and a value-added tax.

Needless to say, I was not overflowing with praise when asked to comment.

At the risk of understatement, giving every adult a $12,000-per-year entitlement would be a recipe for bigger government and more dependency.

Even Joe Biden understands that this would erode societal capital.

And the ever-sensible Swiss, in a 2016 referendum, overwhelmingly rejected universal handouts.

Needless to say, it also would be a catastrophic mistake to give Washington several new sources of revenue to finance this scheme. A big value-added tax would be especially misguided.

Let’s take a closer look at Yang’s plan. As I noted in the interview, the Tax Foundation crunched the numbers.

Andrew Yang said he wants to provide each American adult $1,000 per month in a universal basic income (UBI) he calls a “Freedom Dividend.” He argued that this proposal could be paid for with…a combination of new revenue from a VAT, other taxes, spending cuts, and economic growth. …We estimate that his plan, as described, could only fund a little less than half the Freedom Dividend at $1,000 a month. A more realistic plan would require reducing the Freedom Dividend to $750 per month and raising the VAT to 22 percent.

If you’re interested, here are more details about his plan.

…individuals would need to choose between their current government benefits and the Freedom Dividend. As such, some individuals may decline the Freedom Dividend if they determine that their current government benefits are more valuable. The benefits that individuals would need to give up are Supplemental Nutritional Assistance Program (SNAP), Temporary Assistance for Needed Families (TANF), Supplemental Security Income (SSI), and SNAP for Women, Infants, and Child Program (WIC). To cover the additional cost of the Freedom Dividend, Yang would raise revenue in five ways: A 10 percent VAT…A tax on financial transactions…Taxing capital gains and carried interest at ordinary income rates…Remove the wage cap on the Social Security payroll tax…A $40 per metric ton carbon tax.

By the way, Yang has already waffled on some of his spending offsets, recently stating that the so-called Freedom Dividend wouldn’t replace existing programs.

In any event, the economic and budgetary effects would be bad news.

…his overall plan would reduce the long-run size of the economy and the tax base. The three major taxes in his plan (VAT, carbon tax, and payroll tax increase), while efficient sources of revenue, would tend to reduce labor force participation by reducing the after-tax returns to working. Using the Tax Foundation Model, we estimate that the weighted average marginal tax rate on labor income would increase by about 8.6 percentage points. The resulting reduction in hours worked would ultimately reduce output by 3 percent. We estimate that Yang would lose about $124 billion each year in revenue due to the lower output.

Here’s how the Tax Foundation scores the plan.

As you can see, the VAT, the financial transactions tax, the higher capital gains tax, and the increase in the payroll tax burden don’t even cover half the cost of the universal handout.

P.S. When the Tax Foundation say a tax is an “efficient source of revenue,” that means that it would result in a modest level of economic damage on a per-dollar-collected basis. This is why they show a rather modest amount of negative revenue feedback (-$124 billion).

I think they’re being too kind. Extending the Social Security payroll tax to all income would result in a huge increase in marginal tax rates on investors, entrepreneurs, and other high-income taxpayers. As explained a few days ago, those are the people who are very responsive to changes in tax rates.

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