Feeds:
Posts
Comments

Archive for the ‘Taxation’ Category

Our statist friends like high taxes for many reasons. They want to finance bigger government, and they also seem to resent successful people, so high tax rates are a win-win policy from their perspective.

They also like high tax rates to micromanage people’s behavior. They urge higher taxes on tobacco because they don’t like smoking. They want higher taxes on sugary products because they don’t like overweight people. They impose higher taxes on “adult entertainment” because…umm…let’s simply say they don’t like capitalist acts between consenting adults. And they impose higher taxes on tanning beds because…well, I’m not sure. Maybe they don’t like artificial sun.

Give their compulsion to control other people’s behavior, these leftists are very happy about what’s happened in Berkeley, California. According to a study published in the American Journal of Public Health, a new tax on sugary beverages has led to a significant reduction in consumption.

Here are some excerpts from a release issued by the press shop at the University of California Berkeley.

…a new UC Berkeley study shows a 21 percent drop in the drinking of soda and other sugary beverages in Berkeley’s low-income neighborhoods after the city levied a penny-per-ounce tax on sugar-sweetened beverages. …The “Berkeley vs. Big Soda” campaign, also known as Measure D, won in 2014 by a landslide 76 percent, and was implemented in March 2015. …The excise tax is paid by distributors of sugary beverages and is reflected in shelf prices, as a previous UC Berkeley study showed, which can influence consumers’ decisions. …Berkeley’s 21 percent decrease in sugary beverage consumption compares favorably to that of Mexico, which saw a 17 percent decline among low-income households after the first year of its one-peso-per-liter soda tax that its congress passed in 2013.

I’m a wee bit suspicious that we’re only getting data on consumption by poor people.

Why aren’t we seeing data on overall soda purchases?

And isn’t it a bit odd that leftists are happy that poor people are bearing a heavy burden?

I’m also amused by the following passage. The politicians want to discourage people from consuming sugary beverages. But if they are too successful, then they won’t collect all the money they want to finance bigger government.

In Berkeley, the tax is intended to support municipal health and nutrition programs. To that end, the city has created a panel of experts in child nutrition, health care and education to make recommendations to the City Council about funding programs that improve children’s health across Berkeley.

In other words, one of the lessons of the Berkeley sugar tax and the 21-percent drop in consumption is that the Laffer Curve applies to so-called sin taxes just like it applies to income taxes.

But the biggest lesson to learn from this episode is that it confirms the essential insight of supply-side economics. Simply stated, when you tax something, you get less of it.

Which is something that statists seem to understand when they urge higher “sin taxes,” but they deny when the debate shifts to taxes on work, saving, entrepreneurship, and investment.

I’m not joking. I debate leftists all the time and they will unabashedly argue that it’s okay to have higher tax rates on labor income and more double taxation on capital income because taxpayers supposedly don’t care about taxes.

Oh, and the same statists who say that high tax burdens don’t matter because people don’t change their behavior get all upset about “tax havens” and “tax competition” because…well, because people will change their behavior by shifting their economic activity where tax rates are lower.

It must be nice not to be burdened by a need for intellectual consistency.

Speaking of which, Mark Perry used the Berkeley soda tax as an excuse to add to his great collection of Venn Diagrams.

P.S. On the issue of sin taxes, a brothel in Austria came up with an amusing form of tax avoidance. The folks in Nevada, by contrast, believe in sin loopholes. And the Germans have displayed Teutonic ingenuity and efficiency.

Read Full Post »

I have a love-hate relationship with corporations.

On the plus side, I admire corporations that efficiently and effectively compete by producing valuable goods and services for consumers, and I aggressively defend those firms from politicians who want to impose harmful and destructive forms of taxes, regulation, and intervention.

On the minus side, I am disgusted by corporations that get in bed with politicians to push policies that undermine competition and free markets, and I strongly oppose all forms of cronyism and coercion that give big firms unearned and undeserved wealth.

With this in mind, let’s look at two controversies from the field of corporate taxation, both involving the European Commission (the EC is the Brussels-based bureaucracy that is akin to an executive branch for the European Union).

First, there’s a big fight going on between the U.S. Treasury Department and the EC. As reported by Bloomberg, it’s a battle over whether European governments should be able to impose higher tax burdens on American-domiciled multinationals.

The U.S. is stepping up its effort to convince the European Commission to refrain from hitting Apple Inc. and other companies with demands for possibly billions of euros… In a white paper released Wednesday, the Treasury Department in Washington said the Brussels-based commission is taking on the role of a “supra-national tax authority” that has the scope to threaten global tax reform deals. …The commission has initiated investigations into tax rulings that Apple, Starbucks Corp., Amazon.com Inc. and Fiat Chrysler Automobiles NV. received in separate EU nations. U.S. Treasury Secretary Jacob J. Lew has written previously that the investigations appear “to be targeting U.S. companies disproportionately.” The commission’s spokesman said Wednesday that EU law “applies to all companies operating in Europe — there is no bias against U.S. companies.”

As you can imagine, I have a number of thoughts about this spat.

  • First, don’t give the Obama Administration too much credit for being on the right side of the issue. The Treasury Department is motivated in large part by a concern that higher taxes imposed by European governments would mean less ability to collect tax by the U.S. government.
  • Second, complaints by the US about a “supra-national tax authority” are extremely hypocritical since the Obama White House has signed the Protocol to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, which effectively would create a nascent World Tax Organization (the pact is thankfully being blocked by Senator Rand Paul).
  • Third, hypocrisy by the US doesn’t change the fact that the European Commission bureaucrats are in the wrong because their argument is based on the upside-down notion that low tax burdens are a form of “state aid.”
  • Fourth, Europeans are in the wrong because the various national governments should simply adjust their “transfer pricing” rules if they think multinational companies are playing games to under-state profits in high-tax nations and over-state profits in low-tax nations.
  • Fifth, the Europeans are in the wrong because low corporate tax rates are the best way to curtail unproductive forms of tax avoidance.
  • Sixth, some European nations are in the wrong if they don’t allow domestic companies to enjoy the low tax rates imposed on multinational firms.

Since we’re on the topic of corporate tax rates and the European Commission, let’s shift from Brussels to Geneva and see an example of good tax policy in action. Here are some excerpts from a Bloomberg report about how a Swiss canton is responding in the right way to an attack by the EC.

When the European Union pressured Switzerland to scrap tax breaks for foreign companies, Geneva had most to lose. Now, the canton that’s home to almost 1,000 multinationals is set to use tax to burnish its appeal. Geneva will on Aug. 30 propose cutting its corporate tax rate to 13.49 percent from 24.2 percent…the new regime will improve the Swiss city’s competitive position, according to Credit Suisse Group AG. “I could see Geneva going up very high in the ranks,” said Thierry Boitelle, a lawyer at Bonnard Lawson in the city. …A rate of about 13 percent would see Geneva jump 13 places to become the third-most attractive of Switzerland’s 26 cantons.

This puts a big smile on my face.

Geneva is basically doing the same thing Ireland did many years ago when it also was attacked by Brussels for having a very low tax rate on multinational firms while taxing domestic firms at a higher rate.

The Irish responded to the assault by implementing a very low rate for all businesses, regardless of whether they were local firms or global firms. And the Irish economy benefited immensely.

Now it’s happening again, which must be very irritating for the bureaucrats in Brussels since the attack on Geneva (just like the attack on Ireland) was designed to force tax rates higher rather than lower.

As a consequence, in one fell swoop, Geneva will now be one of the most competitive cantons in Switzerland.

Here’s another reason I’m smiling.

The Geneva reform will put even more pressure on the tax-loving French.

France, which borders the canton to the south, east and west, has a tax rate of 33.33 percent… Within Europe, Geneva’s rate would only exceed a number of smaller economies such as Ireland’s 12.5 percent and Montenegro, which has the region’s lowest rate of 9 percent. That will mean Geneva competes with Ireland, the Netherlands and the U.K. as a low-tax jurisdiction.

Though the lower tax rate in Geneva is not a sure thing.

We’ll have to see if local politicians follow through on this announcement. And there also may be a challenge from left-wing voters, something made possible by Switzerland’s model of direct democracy.

Opposition to the new rate from left-leaning political parties will probably trigger a referendum as it would only require 500 signatures.

Though I suspect the “sensible Swiss” of Geneva will vote the right way, at least if the results from an adjoining canton are any indication.

In a March plebiscite in the neighboring canton of Vaud, 87.1 percent of voters backed cutting the corporate tax rate to 13.79 percent from 21.65 percent.

So I fully expect voters in Geneva will make a similarly wise choice, especially since they are smart enough to realize that high tax rates won’t collect much money if the geese with the golden eggs fly away.

Failure to agree on a competitive tax rate in Geneva could result in an exodus of multinationals, cutting cantonal revenues by an even greater margin, said Denis Berdoz, a partner at Baker & McKenzie in Geneva, who specializes in tax and corporate law. “They don’t really have a choice,” said Berdoz. “If the companies leave, the loss could be much higher.”

In other words, the Laffer Curve exists.

Now let’s understand why the development in Geneva is a good thing (and why the EC effort to impose higher taxes on US-based multinational is a bad thing).

Simply stated, high corporate tax burdens are bad for workers and the overall economy.

In a recent column for the Wall Street Journal, Kevin Hassett and Aparna Mathur of the American Enterprise Institute consider the benefits of a less punitive corporate tax system.

They start with the theoretical case.

If the next president has a plan to increase wages that is based on well-documented and widely accepted empirical evidence, he should have little trouble finding bipartisan support. …Fortunately, such a plan exists. …both parties should unite and demand a cut in corporate tax rates. The economic theory behind this proposition is uncontroversial. More productive workers earn higher wages. Workers become more productive when they acquire better skills or have better tools. Lower corporate rates create the right incentives for firms to give workers better tools.

Then they unload a wealth of empirical evidence.

What proof is there that lower corporate rates equal higher wages? Quite a lot. In 2006 we co-wrote the first empirical study on the direct link between corporate taxes and manufacturing wages. …Our empirical analysis, which used data we gathered on international tax rates and manufacturing wages in 72 countries over 22 years, confirmed that the corporate tax is for the most part paid by workers. …There has since been a profusion of research that confirms that workers suffer when corporate tax rates are higher. In a 2007 paper Federal Reserve economist Alison Felix used data from the Luxembourg Income Study, which tracks individual incomes across 30 countries, to show that a 10% increase in corporate tax rates reduces wages by about 7%. In a 2009 paper Ms. Felix found similar patterns across the U.S., where states with higher corporate tax rates have significantly lower wages. …Harvard University economists Mihir Desai, Fritz Foley and Michigan’s James R. Hines have studied data from American multinational firms, finding that their foreign affiliates tend to pay significantly higher wages in countries with lower corporate tax rates. A study by Nadja Dwenger, Pia Rattenhuber and Viktor Steiner found similar patterns across German regions… Canadian economists Kenneth McKenzie and Ergete Ferede. They found that wages in Canadian provinces drop by more than a dollar when corporate tax revenue is increased by a dollar.

So what’s the moral of the story?

It’s very simple.

…higher wages are relatively easy to stimulate for a nation. One need only cut corporate tax rates. Left and right leaning countries have done this over the past two decades, including Japan, Canada and Germany. Yet in the U.S. we continue to undermine wage growth with the highest corporate tax rate in the developed world.

The Tax Foundation echoes this analysis, noting that even the Paris-based OECD has acknowledged that corporate taxes are especially destructive on a per-dollar-raised basis.

In a landmark 2008 study Tax and Economic Growth, economists at the Organization for Economic Cooperation and Development (OECD) determined that the corporate income tax is the most harmful tax for economic growth. …The study also found that statutory corporate tax rates have a negative effect on firms that are in the “process of catching up with the productivity performance of the best practice firms.” This suggests that “lowering statutory corporate tax rates can lead to particularly large productivity gains in firms that are dynamic and profitable, i.e. those that can make the largest contribution to GDP growth.”

Sadly, there’s often a gap between the analysis of the professional economists at the OECD and the work of the left-leaning policy-making divisions of that international bureaucracy.

The OECD has been a long-time advocate of schemes to curtail tax competition and in recent years even has concocted a “base erosion and profit shifting” initiative designed to boost the tax burden on businesses.

In a study for the Institute for Research in Economic and Fiscal Issues (also based, coincidentally, in Paris), Pierre Bessard and Fabio Cappelletti analyze the harmful impact of corporate taxation and the unhelpful role of the OECD.

…the latest years have been marked by an abundance of proposals to reform national tax codes to patch these alleged “loopholes”. Among them, the Base Erosion and Profit Shifting package (BEPS) of the Organization for Economic Cooperation and Development (OECD) is the most alarming one because of its global ambition. …The OECD thereby assumes, without any substantiation, that the corporate income tax is both just and an efficient way for governments to collect revenue.

Pierre and Fabio point out that the OECD’s campaign to impose heavier taxes on business is actually just a back-door way of imposing a higher burden on individuals.

…the whole value created by corporations is sooner or later transferred to various individuals, may it be as dividends (for owners and shareholders), interest payments (for lenders), wages (for employees) and payments for the provided goods and services (for suppliers). Second, corporations as such do not pay taxes. …at the end of the day the burden of any tax levied on them has to be carried by an individual.

This doesn’t necessarily mean there shouldn’t be a corporate tax (in nations that decide to tax income). After all, it is administratively simpler to tax a company than to track down potentially thousands – or even hundreds of thousands – of shareholders.

But it’s rather important to consider the structure of the corporate tax system. Is it a simple system that taxes economic activity only one time based on cash flow? Or does it have various warts, such as double taxation and deprecation, that effectively result in much higher tax rates on productive behavior?

Most nations unfortunately go with the latter approach (with place such as Estonia and Hong Kong being admirable exceptions). And that’s why, as Pierre and Fabio explain, the corporate income tax is especially harmful.

…the general consensus is that the cost per dollar of raising revenue through the corporate income tax is much higher than the cost per dollar of raising revenue through the personal income tax… This is due to the corporate income tax generating additional distortions. … Calls by the OECD and other bodies to standardize corporate tax rules and increase tax revenue in high-tax countries in effect would equate to calls for higher prices for consumers, lower wages for workers and lower returns for pension funds. Corporate taxes also depress available capital for investment and therefore productivity and wage growth, holding back purchasing power. In addition, the deadweight losses arising from corporate income taxation are particularly high. They include lobbying for preferential rates and treatments, diverting attention and resources from production and wealth creation, and distorting decisions in corporate financing and the choice of organizational form.

From my perspective, the key takeaway is that income taxes are always bad for prosperity, but the real question is whether they somewhat harmful or very harmful. So let’s close with some very depressing news about how America’s system ranks in that regard.

The Tax Foundation has just produced a very helpful map showing corporate tax rates around the world. All you need to know about the American system is that dark green is very bad (i.e., a corporate tax rate that is way above the average) and dark blue is very good.

And to make matters worse, the high tax rate is just part of the problem. A German think tank produced a study that looked at other major features of business taxation and concluded that the United States ranked #94 out of 100 nations.

It would be bad to have a high rate with a Hong Kong-designed corporate tax structure. But we have something far worse, a high rate with what could be considered a French-designed corporate tax structure.

Read Full Post »

If you get into the weeds of tax policy and had a contest for parts of the internal revenue code that are “boring but important,” depreciation would be at the top of the list. After all, how many people want to learn about America’s Byzantine system that imposes a discriminatory tax penalty on new investment? Yes, it’s a self-destructive policy that imposes a lot of economic damage, but even I’ll admit it’s not a riveting topic (though I tried to make it culturally relevant by using ABBA as an example).

In second place would be a policy called “deferral,” which deals with a part of the law that allows companies to delay an extra layer of tax that the IRS imposes on income that is earned – and already subject to tax – in other countries. It is “boring but important” because it has major implications on the ability of American-domiciled firms to compete for market share overseas.

Here’s a video that explains the issue, though feel free to skip it and continue reading if you already are familiar with how the law works.

The simple way to think of this eye-glazing topic is that “deferral” is a good policy that partially mitigates the impact of a bad policy known as “worldwide taxation.”

Unfortunately, good policy tends to be unpopular in Washington. This is why deferral (and related issues such as inversions, which occur for the simple reason that worldwide taxation creates a huge competitive disadvantage for U.S.-domiciled companies) is playing an unusually large role in the 2016 election and concomitant tax debates.

Consider the tax controversy involving Apple. The CEO does not want to surrender money that belongs to shareholders to the government.

Apple CEO Tim Cook struck back at critics of the iPhone maker’s strategy to avoid paying U.S. taxes, telling The Washington Post in a wide ranging interview that the company would not bring that money back from abroad unless there was a “fair rate.”

Since the discussion is about income that Apple has earned in other nations (and therefore about income that already has been subject to all applicable taxes in other nations), the only “fair rate” from the United States is zero.

That’s because good tax systems are based on “territorial taxation” rather than “worldwide taxation.”

Though a worldwide tax system might not impose that much damage if a nation had a low corporate tax rate.

Unfortunately, that’s not a good description of the U.S. system, which has a very high rate, thus creating a big incentive to hold money overseas to avoid having to pay a very hefty second layer of tax to the IRS on income that already has been subject to tax by foreign governments.

Along with other multinational companies, the tech giant has been subject to criticism over a tax strategy that allows them to shelter profits made abroad from the U.S. corporate tax rate, which at 35 percent is among the highest in the developed world.

“Among”? I don’t know if this is a sign of bias or ignorance on the part of CNBC, but the U.S. unquestionably has the highest corporate tax rate among developed nations.

Indeed, it might even be the highest in the entire world.

Anyhow, Mr. Cook points out that there’s nothing patriotic about needlessly paying extra tax to the IRS, especially when it would mean a very punitive tax rate.

…a few particularly strident critics have lambasted Apple as a tax dodger. …While some proponents of the higher U.S. tax rate say it’s unpatriotic for companies to practice inversions or shelter income, Cook hit back at the suggestion. “It is the current tax law. It’s not a matter of being patriotic or not patriotic,” Cook told The Post in a lengthy sit-down. “It doesn’t go that the more you pay, the more patriotic you are.” …Cook added that “when we bring it back, we will pay 35 percent federal tax and then a weighted average across the states that we’re in, which is about 5 percent, so think of it as 40 percent. We’ve said at 40 percent, we’re not going to bring it back until there’s a fair rate. There’s no debate about it.”

Cook may be right that there’s “no debate” about whether it’s sensible for a company to keep money overseas to guard against bad tax policy.

But there is a debate about whether politicians will make the law worse in a grab for more revenue.

Senator Ron Wyden, for instance, doesn’t understand the issue. He wrote an editorial asserting that Apple is engaging in a “rip-off.”

…the heart of this mess is the big dog of tax rip-offs – tax deferral. This is the rule that encourages American multinational corporations to keep their profits overseas instead of investing them here at home, and it does so by granting them $80 billion a year in tax breaks. This policy…defies common sense. …some of the most profitable companies in the world can put off paying taxes indefinitely while hardworking Americans must pay their taxes every year. …that system creates a perverse incentive to keep corporate profits overseas instead of investing here at home.

I agree with him that the current system creates a perverse incentive to keep money abroad.

But you don’t solve that problem by imposing unconstrained worldwide taxation, which would create a perverse incentive structure that discourages American-domiciled firms from competing for market share in other nations.

Amazingly, Senator Wyden actually claims that making the system more punitive would help make America a better place to do business.

…ending deferral is a necessary step in making sure…the U.S. maintains its position as the best place to do business.

Wow, this rivals some of the crazy things that Barack Obama and Hillary Clinton have said.

Though I guess we need to give Wyden credit for honesty. He admits that what he really wants is for Washington to have more money to spend.

Ending deferral will also generate money from existing deferred taxes to pay for rebuilding our country’s crumbling infrastructure. …This is a priority that almost all tax reform proposals have called for.

By the way, can you guess which presidential candidate agrees with Senator Wyden and wants to impose full and immediate worldwide taxation?

If you answered Hillary Clinton, you’re right. But if you answered Donald Trump, that also would be a correct answer.

This is a grim example of why I refer to them as the Tweedledee and Tweedledum of statism.

Though to be fair, Trump’s plan at least contains a big reduction in the corporate tax rate, which would substantially reduce the negative impact of a worldwide tax system.

The Wall Street Journal opines on the issue and is especially unimpressed by Hillary Clinton’s irresponsible approach on the issue.

Mrs. Clinton is targeting so-called inversions, where U.S.-based companies move their headquarters by buying an overseas competitor, as well as foreign takeovers of U.S. firms for tax considerations. These migrations are the result of a U.S. corporate-tax code that supplies incentives to migrate… The Democrat would impose what she calls an “exit tax” on businesses that relocate outside the U.S., which is the sort of thing banana republics impose when their economies sour. …Mrs. Clinton wants to build a tax wall to stop Americans from escaping. “If they want to go,” she threatened in Michigan, “they’re going to have to pay to go.”

Ugh, making companies “pay to go” is an unseemly sentiment. Sort of what you might expect from a place like Venezuela where politicians treat private firms as a source of loot for their cronies.

The WSJ correctly points out that the problem is America’s anti-competitive worldwide tax regime, combined with a punitive corporate tax rate.

…the U.S. taxes residents—businesses and individuals—on their world-wide income, not merely the income that they earned in the U.S. …the U.S. taxes companies headquartered in the U.S. far more than companies based in other countries. Thirty-one of the 34 OECD countries have cut corporate taxes since 2000, leaving the U.S. with the highest rate in the industrialized world. The U.S. system of world-wide taxation means that a company that moves from Dublin, Ohio, to Dublin, Ireland, will pay a rate that is less than a third of America’s. A dollar of profit earned on the Emerald Isle by an Irish-based company becomes 87.5 cents after taxes, which it can then invest in Ireland or the U.S. or somewhere else. But if the company stays in Ohio and makes the same buck in Ireland, the after-tax return drops to 65 cents or less if the money is invested in America.

In other words, the problem is obvious and the solution is obvious.

But there are too many Barack Obamas and Elizabeth Warrens in Washington, so it’s more likely that policy will move in the wrong direction.

Read Full Post »

If I had to summarize my views on fiscal policy in just two sentences, here’s what I would say.

  1. Government spending undermines growth by diverting labor and capital from more productive uses to less productive uses.
  2. Tax rates on productive economic behaviors such as work, saving, investment, and entrepreneurship should be as low as possible.

So you can imagine that I’m not overly enthused about Hillary Clinton’s embrace of class-warfare tax policy to finance an ever-growing burden of government spending.

Here’s a story that’s giving me heartburn. The Washington Examiner reports that Hillary is “going where the money is.”

Hillary Clinton promised Tuesday that she would pay for her ambitious White House agenda by hitting up the wealthy. “I’ll tell you how we’re going to pay for it,” she said Tuesday in Pennsylvania, referring specifically to her economic agenda. “We’re going where the money is. We are going after the super wealthy, we are going after corporations, we are going after Wall Street so they pay their fair share.”

So what does it mean for various groups to “pay their fair share”?

Well, since even the IRS has admitted that upper-income taxpayers finance a hugely disproportionate share of the federal government, logic tells us that these supposedly evil rich people should get a tax cut.

But that’s not what Hillary means. She wants voters to adopt and us-vs-them mentality, so she demonizes successful people and implies that their wealth is somehow illegitimate.

In part, she is perpetuating the traditional leftist myth that the economy is a fixed pie and that the rest of us have less because someone like Bill Gates has more.

But I also think she wants to imply that upper-income people somehow don’t deserve their money. Maybe they are a bunch of Paris Hilton types with trust funds, living indolent lives while the rest of us have to work.

That’s never been a compelling argument to me. If Paris Hilton’s family earned money honestly (and already paid tax on the money when it was first earned), it’s their right to give it to their children without all sorts of punitive extra layers of taxation.

But this stereotype isn’t even accurate in the first place. James Pethokoukis of the American Enterprise Institute shows that people like the late Steve Jobs are more the norm. In other words, rich people are rich because they are innovating and creating, building new businesses and new products that make the rest of our lives better.

Since innovation, risk-taking, investment, entrepreneurship, and hard work are the keys to long-run growth, it certainly seems that the tax code shouldn’t be punishing those things.

Yet that’s what Hillary has in mind when she demagogues about the “super wealthy.”

Interestingly, another New York Democrat seems to understand the negative relationship between taxes and good outcomes, at least on a selective basis. Larry O’Connor explains.

Without the teeniest sense of irony, Sen. Chuck Schumer (D-NY) has proposed that America’s Olympic medal winners should not have to pay taxes on the cash prizes they are awarded with their medals. Schumer’s reasoning behind lifting the tax? Because “hard work” and excellence shouldn’t be punished.

The problem, of course, is that Senator Schumer routinely supports higher taxes.

Indeed, the only tax hike he doesn’t favor, to my knowledge, is the Trump-Clinton plan to hike the capital gains tax on “carried interest.” But Schumer’s only good on that issue because of the money he gets from the private-equity folks on Wall Street, not because he actually understands or favors good tax policy.

But Schumer’s make-believe support for lower taxes on Olympic medal winners is good news, if for no other reasons than it gave Mark Perry an excuse to produce another one of his famous Venn diagrams.

Let’s close by contemplating Hillary’s statement that she wants to go “where the money is.”

That statement rang a bell. Someone else said almost the exact same thing.

And then I remembered. It was an infamous bank robber named Willie Sutton, who is widely reported to have said he robbed banks because “That’s where the money is.”

Needless to say, I don’t want to imply that there’s some moral equivalence between Hillary Clinton and Willie Sutton. Perish the thought!

After all, I’m sure Willie Sutton never expected gratitude from his victims.

P.S. In my role as the Don Quixote of fiscal policy, I have helpfully shared evidence with Mrs. Clinton about the consequences of higher tax burdens in both Europe and various American states.

Read Full Post »

I don’t like election years because the policy debate tends to revolve around the various proposals put forth by candidates. And since those ideas generally don’t make much sense, it’s a frustrating period.

But the silver lining to that dark cloud is that it does create opportunities to comment on what the candidates are saying…and hopefully steer the discussion in a more productive direction.

For instance, I just authored a column about Trump’s plan for Time. I pointed out what’s good (such as a lower corporate rate and death tax repeal), what’s bad (pork-barrel infrastructure and a whiff on entitlement reform), and what’s ugly (protectionism and a new loophole for childcare costs).

But my biggest complaint, which was part of the “bad” section, dealt with Trump’s failure to produce any plan to control the size of government. And echoing a point I made late last year, a big tax cut simply isn’t viable unless it’s accompanied by a credible proposal to rein in Leviathan.

It will be very hard to have a tax cut of any size unless Trump also has some sort of plan to limit the growth of government spending. Unfortunately, outside of vague rhetoric about “waste, fraud, and abuse,” it’s unclear that he is serious about the spending side of the fiscal ledger.

I also made similar points in this CNBC interview, which covered all of the main features of Trump’s economic agenda.

You’ll notice in the interview that I said Trump should propose some sort of spending cap.

Well, maybe my wish will be granted. A story published by Bloomberg looks at Trump’s flirtation with a specific form of spending cap known as the Penny Plan.

Donald Trump on Tuesday revisited a budget-trimming measure called the “penny plan” in response to fresh questions about how he’d finance his agenda. “Well, we’re cutting back, I mean whether it’s a penny plan—which is something that, as simple as it is, I’ve always sort of liked,” the Republican presidential nominee said on Fox Business… Trump remained short on further specifics about how he’d pay for his proposals.

But let’s say he goes beyond sympathetic comments and actually embraces the Penny Plan. The article gives some detail of the proposal.

In variations of the “penny plan,” …one cent is cut per dollar in the federal budget over a period of six or seven years and a spending cap is imposed until the budget is balanced. Different programs can see greater than 1 percent cuts—or no cuts—as long as overall spending is reduced by 1 percent each year… The math generally works out, the nonpartisan fact-checking website PolitiFact found in 2012 when analyzing a Republican lawmaker’s version of the proposal.

And for further detail, Justin Bogie and Romina Boccia have a column in the Daily Signal.

Last week, a House Budget Committee member, Rep. Mark Sanford, R-S.C., and the Senate Budget Committee chairman, Sen. Mike Enzi, R-Wyo., introduced the “Penny Plan,” which would implement an aggregate spending cap beginning in 2017 and “would cut a single penny from every dollar the federal government spends.” Under this plan, for fiscal year 2017, the cap would be $3.6 trillion for total noninterest outlays minus 1 percent. For each subsequent year through 2021, outlays would be capped at the previous year’s level (not including net interest payments) minus 1 percent.

Wow, this is hard-core spending restraint.

I have written favorably about the Penny Plan, but I normally promote the Swiss Debt Brake, which is a spending cap that has allowed government spending to grow each year by an average of 2 percent.

I must be a big-government squish!

Here are more details on the Penny Plan. Most important, it is enforced by sequestration.

…spending reductions necessary to arrive at the capped level would be enforced by sequestration. Unlike the current form of sequestration applied to the Budget Control Act spending caps, the Penny Plan would not exempt any of the programs listed under the Balanced Budget and Emergency Deficit Control Act of 1985, except payments for net interest. …Spending caps, enforced with automatic cuts, serve to motivate Congress to prioritize among competing demands for resources. Designed properly, caps can curb excessive spending growth over the long run.

The bottom line, according to Bogie and Boccia, is that a sequester-enforced spending cap is critical for good long-run fiscal policy.

The Penny Plan takes a step toward consideration of a statutory spending cap to limit the growth in government and improve the nation’s fiscal course. Congress must put the country’s budget on a sustainable path to secure prosperity for current and future generations, and a spending cap is one important tool to get there.

My bottom line is similar. I’m a huge fan of spending caps (which have a much better track record than balanced budget requirements).

The key is to make sure that government grows slower than the private sector. And the more spending is restrained (especially if it’s actually cut 1 percent each year), the quicker and better the results.

There’s lots of evidence of nations getting good results when they cap spending. I don’t know if Donald Trump is serious about a spending cap (or whether he’s serious about the policies needed to make sure overall spending stays within a cap), but I know it’s the right policy.

Read Full Post »

Okay, I’ll admit the title of this post is an exaggeration. There are lots of things you should know – most bad, though some good – about international bureaucracies.

That being said, regular readers know that I get very frustrated with the statist policy agendas of both the International Monetary Fund and the Organization for Economic Cooperation and Development.

I especially object to the way these international bureaucracies are cheerleaders for bigger government and higher tax burdens. Even though they ostensibly exist to promote greater levels of prosperity!

I’ve written on these issues, ad nauseam, but perhaps dry analysis is only part of what’s needed to get the message across. Maybe some clever image can explain the issue to a broader audience (something I’ve done before with cartoons and images about the rise and fall of the welfare state, the misguided fixation on income distribution, etc).

It took awhile, but I eventually came up with (what I hope is) a clever idea. And when a former Cato intern with artistic skill, Jonathan Babington-Heina, agreed to do me a favor and take the concept in my head and translate it to paper, here are the results.

I think this hits the nail on the head.

Excessive government is the main problem plaguing the global economy. But the international bureaucracies, for all intents and purposes, represent governments. The bureaucrats at the IMF and OECD need to please politicians in order to continue enjoying their lavish budgets and exceedingly generous tax-free salaries.

So when there is some sort of problem in the global economy, they are reluctant to advocate for smaller government and lower tax burdens (even if the economists working for these organizations sometimes produce very good research on fiscal issues).

Instead, when it’s time to make recommendations, they push an agenda that is good for the political elite but bad for the private sector. Which is exactly what I’m trying to demonstrate in the cartoon,

But let’s not merely rely on a cartoon to make this point.

In an article for the American Enterprise Institute, Glenn Hubbard and Kevin Hassett discuss the intersection of economic policy and international bureaucracies. They start by explaining that these organizations would promote jurisdictional competition if they were motivated by a desire to boost growth.

…economic theory has a lot to say about how they should function. …they haven’t achieved all of their promise, primarily because those bodies have yet to fully understand the role they need to play in the interconnected world. The key insight harkens back to a dusty economics seminar room in the early 1950s, when University of Michigan graduate student Charles Tiebout…said that governments could be driven to efficient behavior if people can move. …This observation, which Tiebout developed fully in a landmark paper published in 1956, led to an explosion of work by economists, much of it focusing on…many bits of evidence that confirm the important beneficial effects that can emerge when governments compete. …A flatter world should make the competition between national governments increasingly like the competition between smaller communities. Such competition can provide the world’s citizens with an insurance policy against the out-of-control growth of massive and inefficient bureaucracies.

Using the European Union as an example, Hubbard and Hassett point out the grim results when bureaucracies focus on policies designed to boost the power of governments rather than the vitality of the market.

…as Brexit indicates, the EU has not successfully focused solely on the potentially positive role it could play. Indeed, as often as not, one can view the actions of the EU government as being an attempt to form a cartel to harmonize policies across member states, and standing in the way of, rather than advancing, competition. …an EU that acts as a competition-stifling cartel will grow increasingly unpopular, and more countries will leave it.

They close with a very useful suggestion.

If the EU instead focuses on maximizing mobility and enhancing the competition between states, allowing the countries to compete on regulation, taxation, and in other policy areas, then the union will become a populist’s dream and the best economic friend of its citizens.

Unfortunately, I fully expect this sage advice to fall upon deaf ears. The crowd in Brussels knows that their comfortable existence is dependent on pleasing politicians from national governments.

And the same is true for the bureaucrats at the IMF and OECD.

The only practical solution is to have national governments cut off funding so the bureaucracies disappear.

But, to cite just one example, why would Obama allow that when these bureaucracies go through a lot of effort to promote his statist agenda?

Read Full Post »

When I wrote last year about “Hillary Clinton’s Plan to Increase the Cost of College,” I explained that colleges and universities boost tuition when the government hands out more subsidies to students, so the main effect is to make higher education even more expensive.

Today, let’s look at Donald Trump’s plan to increase the cost of childcare. And this is a very easy column to write because the economic consequences of Trump’s plan to make childcare expenses deductible are the same as Hillary’s misguided plan to subsidize tuition.

Let’s start with a caveat. We don’t know a lot about Trump’s new scheme. All we know is that he said in his big speech to the Economic Club of Detroit earlier today that “My plan will also help reduce the cost of childcare by allowing parents to fully deduct the average cost of childcare spending from their taxes.”

From an economic perspective, Trump’s statement doesn’t make sense. At best, creating a big deduction for childcare expenses simply creates the illusion of lower cost because of the tax loophole.

But that’s the best-case scenario. The actual result will be to increase costs and make the tax code even more convoluted.

When income is shielded from taxation, either based on how it is earned or how it is spent, that creates an incentive for taxpayers to make economically irrational decisions solely to benefit from the special tax preference. And just as the healthcare exclusion has led to ever-higher prices and ever-greater levels of bureaucracy and inefficiency in the health sector, a deduction for childcare expenses will have similar effects in that sector of the economy. Providers will boost prices to capture much of the benefit (much as colleges have jacked up tuition to capture the value of government-provided loans and grants).

Creating a new distortion in the tax code also will have a discriminatory impact. The tax loophole will only have value for parents who use outside care for their kids. Parents who care for their own kids get nothing. Moreover, the new loophole also won’t have any value for the millions of people who don’t earn enough to have any tax liability. Yet these people will be hurt when childcare providers increase their prices to capture the value of the deduction for parents with higher levels of income.

And that will probably lead politicians to make the tax loophole “refundable,” which is a wonky way of saying that people with low levels of income will get handouts from the government (in other words, “refundable” tax breaks are actually government spending laundered through the tax code, just like much of the EITC).

So we’d almost certainly be looking at a typical example of Mitchell’s Law, where one bad policy leads to another bad policy.

And when the dust settles, government is bigger, the tax code is more convoluted, and the visible foot of government crowds out another slice of the invisible hand of the market.

Remember, bigger government and more intervention is a mistake when Republicans do it, and it’s a mistake when Democrats do it.

I want fewer favors in the tax code, not more. I want rationality to guide economic decisions, not distorting tax preferences. Most of all, I don’t want politicians to have more power over the economy. I wish Trump listened to Ben Carson when putting together a tax plan.

Read Full Post »

Older Posts »

Follow

Get every new post delivered to your Inbox.

Join 3,268 other followers

%d bloggers like this: