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Archive for the ‘Taxation’ Category

I’ve written dozens of articles about the Laffer Curve and most of that verbiage can be summarized in these five points.

  • The Laffer Curve helps to illustrate that excessive tax rates result in less taxable activity.
  • All public finance economists – even those on the left – agree there is a Laffer Curve.
  • The Laffer Curve does not mean tax cuts are self-financing or that tax increases lose revenue.
  • Different types of taxes produce different responses, so there is more than one Laffer Curve.
  • There is a real debate about the shape of the Laffer Curve and the ideal point on the curve.

The fifth point recognizes that well-meaning and knowledgeable people can vigorously disagree.

Do changes in tax policy have big effects or small effects on the economy? How much revenue feedback will occur if there is a change in tax rates?

Just a couple of examples of questions that I have endlessly debated with reasonable folks on the left.

But let’s focus today on the unreasonable left. Or, to be more specific, let’s look at an editorial from the St. Louis Post-Dispatch.

Here are some portions of that newspaper’s simplistic screed.

…the deficit explosion…effectively disproved his theory that cutting taxes on the rich would increase government tax revenue. …Laffer continues to be unchastened…, even as Britain reels from a leadership shuffle caused by the catastrophic application of his very theories. Hand it to Laffer: Seldom does someone who is so often proven wrong have the gumption to maintain he’s right… His famous “Laffer curve” presumes to prove that tax cuts for the rich will spur economic investment, causing such strong economic growth that the government’s tax revenue would actually rise instead of falling. …Yes, the economy was robust in the 1980s after Reagan’s historic tax cuts. But that’s also when the era of big budget deficits began. …congressional Republicans and President Donald Trump in 2017 slashed corporate taxes in what they claimed was a necessary economy-booster… Then-Treasury Secretary Stephen Mnuchin’s famous vow that the tax-cut plan would “pay for itself” in growth — the very definition of Laffer’s theory — has since been exposed as the voodoo it always was.

Almost every sentence in the above excerpt cries out for correction.

For instance, Reagan and his team never claimed that the 1981 tax cuts would be self-financing (though IRS data shows that lower tax rates on the rich did produce more revenue).

There were big deficits because of the 1980-1982 double-dip recession, and that spike in red ink mostly took place before Reagan’s tax cuts went into effect.

And it’s absurd to blame the United Kingdom’s political instability on tax cuts that never occurred.

If Secretary Mnunchin claimed the entire tax cut would pay for itself, he clearly deserves to be mocked, but it’s worth noting that the lower corporate tax rate from the 2017 reform is very close to being self-financing.

Not that we should be surprised. Both the IMF and OECD have research showing that lower corporate tax rates do not necessarily lead to lower corporate tax revenues.

The bottom line is that the editorial board of the St. Louis Post-Dispatch obviously puts ideology above accuracy.

P.S. I can’t resist sharing one other excerpt from the editorial.

“The Kansas Experiment,” was a debacle. The state’s economy didn’t skyrocket, but the deficit did, forcing deep cuts to education before the legislature finally acknowledged defeat and reversed the tax cuts.

Once again, the editors are showing that ideology trumps accuracy. Here’s what really happened in Kansas. I hope we can have more defeats like that! Though I’ll be the first to admit that North Carolina is a much better role model.

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Looking at reforms at the state level, the past two years have produced very good news on education policy and tax policy.

Regarding the latter, many states have lowered tax rates and several of them have junked so-called progressive tax systems and replaced them with simple and fair flat taxes.

But I’m greedy for even bigger improvements.

I want to see some states move not just to Column 2 in my ranking of state tax policy. I want them to be in Column 1.

And that means they need to get rid of income taxes.

The good news is that some states are having that discussion.

Here are some excerpts from an Associated Press report from Mississippi, written by Michael Goldberg.

Mississippi Gov. Tate Reeves promised to push for a full elimination of the state’s income tax during the 2023 legislative session. The move would make Mississippi the 10th state with no income tax. …Mississippi’s Republican-controlled legislature passed legislation in 2022 that will eliminate the state’s 4% income tax bracket starting in 2023. In the following three years, the 5% bracket will be reduced to 4%. …Supporters of the 2022 Mississippi tax cut said it would spur economic growth and attract new residents to Mississippi. …Republican House speaker Philip Gunn has said full elimination of the state income tax is “achievable,” though he hasn’t committed to doing so in the 2023 session. …Tax-cut proposals are a direct effort to compete with states that don’t tax earnings, including Texas, Florida and Tennessee.

And here are portions of an article in National Review about Colorado, authored by Ben Murrey, which also notes that the TABOR spending limit will need to be strengthened if lawmakers are serious about getting rid of the state’s income tax.

When an interviewer recently asked Colorado’s Democratic governor Jared Polis what the state’s income-tax rate should be, he answered without hesitation: “It should be zero.” …The effort to chisel away at the income tax has already gained steam in the state. Last year, voters reduced the tax with Proposition 116 — a ballot initiative that brought the rate from 4.63 percent to 4.55 percent. …Eliminating the tax would provide an enormous direct windfall to Colorado households. …every reduction in income tax will allow Coloradans to keep more of every dollar they earn, and it invites more jobs and opportunities for residents. …To eliminate the income tax entirely, the state would probably need to begin lowering the revenue limit along with the rate reductions in the future. …these two reforms would put the state on a road to zero.

By the way, Colorado voters once again just cut the state’s flat tax in a referendum earlier this month.

Would Mississippi and Colorado be doing the right thing if they joined the zero-income-tax club?

Yes. I cited some evidence on this issue about 10 years ago.

Here’s some updated analysis from Chris Edwards.

The nine states without an individual income tax are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. …What they have in common is providing needed state‐​local services to their residents without complex, anti‐​freedom, and anti‐​growth individual income taxes. Most of the nine run leaner and more efficient governments than most other states. They only partly make up for the income tax revenue gap with other revenues. In terms of overall tax burdens, eight of the nine states are toward the bottom of the 50 states and Washington is in the middle. …Total taxes in the seven states average 8.1 percent of income. The average in the 40 other states is 9.6 percent. Thus, the lack of individual income tax restrains the overall tax burden. …Repealing state individual income taxes is a good goal. …Residents get the state‐​local services they need, but at lower cost. 

Here’s the chart that accompanied Chris’ article. He separates Alaska and Wyoming because they get so much money from energy taxes and are not realistic role models for other states.

The bottom line is that states without an income tax tend to have smaller government.

This is especially true for Florida, Tennessee, South Dakota, and New Hampshire. And Texas may join those states now that it has strengthened its spending cap.

One should-be-obvious conclusion from this data is that states with no income taxes should not make the mistake of adopting that punitive levy. Unless, of course, they want to repeat Connecticut’s unhappy experience.

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Last week, I explained that “supply siders” need to be ardent advocates of spending restraint. After all, there is no chance of good tax policy in the future if the burden of federal spending continues to expand.

I also wrote about “national conservatives” and pointed out that their opposition to entitlement reform means they implicitly embrace massive tax increases.

The bottom line is that the United States has a built-in spending crisis. Democrats are not serious about addressing the problem. So if Republicans bail as well, the nation is doomed to become a decrepit, European-style welfare state.

What does that mean? Nothing good, at least for people in the productive sector of the economy.

In an article for National Review, Philip Klein speculates whether there is any appetite for spending restraint, even among self-described conservatives.

For much of the history of the American conservative movement, limiting the size and scope of government has stood as one of its central goals. …In 2022, such messages were barely anywhere to be found on the campaign trail…conservatives have largely moved on from making the case for reducing the size and power of Washington. In some cases, this shift has been passive. …It has become popular in some circles on the right to mock “zombie Reaganism” and insist that while it may have made sense back in the 1980s to argue for smaller government, such a message is now outdated. …the argument that the battle to limit government has already been lost also neglects to recognize that things could always get worse. That is, even though the federal government has gone through extraordinary growth since the New Deal, it would have grown even larger had there been no conservative movement to push back. One need only look at Europe, where conservative parties long ago made their peace with the welfare state, to see how government agencies have crowded out civil society… There is no way in which a nation with…a ballooning welfare state will be an accommodating place for conservatives in the long run, no matter how much some may fantasize about seizing the dragon and precisely aiming its fire at their enemies during the relatively brief windows in which Republicans have power. Conservatives…should not abandon the fight for limited government.

At the risk of understatement, I fully agree.

I wrote two days ago and also the previous week to make the case for spending restraint.

Those are easy columns to write since it is the same argument I’ve been making my entire life. But what is depressing now is that there is opposition from Republicans as well as Democrats.

Maybe they should all be forced to watch my video series on the economics of government spending.

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In the past couple of months, I’ve repeatedly addressed the fiscal and economic mess in the United Kingdom.

Today, we’re going to zoom out and identify the main cause of all the problems.

If you look at the annual budget numbers published by the Treasury Department in the United Kingdom, the first thing to notice is that there was a big surge of spending for the pandemic.

One can certainly argue that pandemic-related spending was necessary to deal with a one-time emergency.

Indeed, the same thing happened in the United States.

This second chart, however, shows the real problem with fiscal policy in the United Kingdom. Politicians have used the one-time emergency has an excuse to impose a permanent increase in the country’s spending burden.

This is an indictment of former Prime Minister Boris Johnson’s profligacy.

Johnson was then replaced by the short-lived Liz Truss, who proposed lower taxes but offered no plan to restrain spending.

And now the new Prime Minister, Rishi Sunak, seems committed to an ongoing policy of higher taxes to finance permanently larger government.

In an article for Reuters, William Schomberg reports that the Chancellor of the Exchequer (akin to the U.S. Treasury Secretary) apparently thinks higher taxes are needed to save the economy.

British finance minister Jeremy Hunt said he will have to raise taxes in next week’s budget plan in order to fix the public finances and soften a potentially long recession… “This is going to be a big moment of choice for the country and we will put people ahead of ideology,” Hunt told the Sunday Times in an interview. …Hunt and Sunak are trying to prepare their Conservative Party for the tax increases which could reignite tensions in the party… Hunt was also considering a multi-billion-pound package of support to shield pensioners and benefit claimants from higher power bills, the newspaper said.

At the risk of understatement, Jeremy Hunt knows nothing about economics. Or history.

I wish a reporter would ask him to name a single country, at any point in world history, that achieved more prosperity by raising taxes and increasing the burden of government spending.

I’ll close with a couple of additional observation.

P.S. I never thought I would be reminiscing fondly about the fiscal policies of David Cameron and Theresa May.

P.P.S. But Margaret Thatcher is still the gold standard for responsible U.K. fiscal policy.

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In yesterday’s column, I explained Republicans are not credible advocates of lower tax rates if they don’t also push for spending restraint.

And, as I explained to the Adam Smith Institute, they will be de facto advocates of higher taxes if they embrace the wrong version of national conservatism.

To understand why I’m concerned, look at the most-recent edition of the Congressional Budget Office’s long-run fiscal forecast.

It shows that the burden of government spending is going to substantially increase over the next three decades – largely due to the unchecked growth of entitlement programs such as Medicare and Medicaid.

Failure to control spending will mean two bad things – either huge tax increases or staggering levels of debt. Probably both.

And if politicians add more spending (as Biden has already done), then those long-run trend lines will get even worse.

My concern is that some national conservatives are unwilling to confront this problem and/or they support policies to make matters worse.

But first, in the interest of fairness, bigger government is not an inherent part of the national conservatism platform. At least based on the statement of principles published by The American Conservative.

That document, signed by the key advocates of national conservatism, lists 10 concepts, most of which are good from a libertarian perspective and only one of which is overtly troubling.

  1. National independence (I cheer for anyone opposed to global governance)
  2. Rejection of imperialism and globalism (they’re opposed to the bad form of globalism)
  3. National government (very akin to “state capacity libertarianism“)
  4. God and public religion (not a role for government, but they’re not pushing bad ideas)
  5. The rule of law (good idea)
  6. Free enterprise (they have a few unnecessary caveats)
  7. Public research (I’m skeptical of this one)
  8. Family and children (not a role for government, but they’re not pushing bad ideas)
  9. Immigration (I’m more sympathetic than they are, but agree on the importance of assimilation)
  10. Race (they want neutrality rather than preferences)

Unfortunately, some national conservatives go beyond this statement of principles and push for bigger government.

But don’t believe me. Bill McGurn of the Wall Street Journal makes similar points.

Mr. Cass’s movement insists (rightly) that purely economic and material measures are limited. But whenever they move beyond rhetoric to specifics, their preferred solutions almost always turn out to be economic interventions, from child tax credits to industrial policy. …Even a cursory glance at the record of the past half-century shows government often doing the most harm to people precisely when it is trying to help them. Federal efforts to promote homeownership ended up encouraging banks to lend people more than they could afford and feeding a housing bubble. Federal college loans helped drive up tuition while leaving Americans $1.6 trillion in debt. As we ought to have learned from the Great Society, well-intentioned government policies can do immense damage to families and communities. Unfortunately, when it comes to getting the toothpaste back in the tube, government has shown much less success.

The bottom line is that national conservatives always seem to advocate bigger government when they develop or endorse specific policies.

And, to the best of my knowledge, none of them have put forth any agenda to deal with the spending problem that already exists.

That’s an agenda that guarantees future tax increases. And, for what it’s worth, one of the advocates already has embraced a tax-the-rich agenda to help finance the national conservative agenda.

If Republicans go down that path, it won’t end well (just as it didn’t end well when they embraced other fads such as compassionate conservatismkinder-and-gentler conservatismcommon-good capitalismreform conservatism, etc).

As I’ve previously noted, there no alternative to Reaganism.

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As part of a recent discussion at the Adam Smith Institute in London, I explained why advocates of sensible taxation in the U.S. and U.K. need to be serious about controlling government spending.

At the risk of stating the obvious, it will be almost impossible to achieve better tax policy if the spending burden continues to increase and we enter an era of endless deficits and debt.

We presumably won’t get needed policy reforms from the Democratic Party (the era of JFK is long gone, and Bill Clinton’s moderate approach also is a distant memory).

But what about Republicans?

In part I of this series, I argued that Trump’s big-government populism was bad politics as well as bad policy.

But I was not arguing for establishment Republicans such as Bush or Romney.

Instead, I think the GOP needs to return to the era of Reagan-style libertarianism.

That means some things that Trumpies want, such as lower tax rates, but it also means genuine spending restraint. Which we didn’t get during the Trump years.

In part II, let’s contemplate whether this is a realistic hope, at least once we get past the Biden years.

If history is any guide, the answer is yes. Here’s another video, from more than 10 years ago, that shows the fiscal discipline the nation enjoyed under both Reagan and Clinton.

If you want more recent evidence, we also had a five-year spending freeze after the so-called Tea Party Republicans took power in 2010.

What about today? Can Republicans sober up and once again become fiscal hawks, morphing into good supply-siders who want better tax policy and spending restraint?

Or are they the bad supply-siders, meaning they spout rhetoric about tax cuts but don’t take the tough steps (such as entitlement reform) that are needed to make lower tax rates realistic?

I’ll close with a very depressing observation. The current fiscal situation is bad, but remember that things will get much worse because of demographic changes such as population aging.

Those who oppose entitlement reform necessarily are embracing huge tax increases and perpetual economic stagnation. Not to mention handing more power to Democrats.

There is no alternative.

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Most election watchers are focused on whether Republicans will take control of the House and/or the Senate in today’s midterm election in the United States.

That’s an interesting topic, and I’ll close today’s column with my predictions, but I’m going to continue my long-standing tradition (2010, 2012, 2016, 2018, 2019, 2020, 2021) of highlighting the year’s most important initiatives and referendums.

1. Regular readers already know that the class-warfare initiative in Massachusetts is at the top of my list. The left-controlled state legislature has placed an initiative on the ballot to replace the state’s 5 percent flat tax with a class-warfare system with a top rate of 9 percent. The Wall Street Journal recently warned, “A proposed millionaire tax would accelerate the exodus of wealth to New Hampshire and Florida” and National Review added that “The Bay State’s economic future is on the ballot.”

2. It has not attracted much attention, but my sentimental favorite is Proposition 132 in Arizona, which would strengthen the state’s constitution by requiring a 3/5ths vote to approve any ballot initiative to increase the tax burden. This would augment the 2/3rds supermajority that already exists for legislatively enacted tax increases.

3. Speaking of taxes, I can’t imagine that anyone is surprised to learn that there’s an initiative to (further) increase California’s top tax rate. The Tax Foundation explained that, “California Proposition 30 would create a 1.75 percentage point surtax on income above $2 million, which would bring the top marginal rate to 15.05 percent. (Separately, the scheduled uncapping of a 1.1 percent payroll tax in 2024, combined with the passage of Proposition 30, would yield a 16.15 percent top rate on wage income.)” This is so extreme that I’m predicting even California’s crazy voters will vote no.

4. Sticking to taxes, there’s a referendum in Colorado, Proposition 121, to lower the state’s flat tax. The Tax Foundation summarizes what’s at stake: “Colorado Proposition 121 would reduce the state’s flat statutory income tax rate from 4.55 percent to 4.4 percent, effective retroactively for tax year 2022.” Not a huge reduction, but a welcome step in the right direction.

5. For those who follow labor issues, there are two initiatives that merit attention. In Illinois, Amendment 1 would further empower and entrench the power of government bureaucrats. As noted by the Illinois Policy Institute, “Amendment 1 would allow government unions to pass their most unpopular demands at the bargaining table, and voters would have no way to hold them accountable.” By contrast, Tennessee voters will get to vote on whether to enshrine “right-to-work” in the state’s constitution.

6. Last but not least, voters in a couple of California communities will have the opportunity to demonstrate whether they understand economics. To be more specific, an article in Reason explains, “The most sweeping rent control initiative up for a vote next Tuesday is Measure H in Pasadena, California. It would cap rent increases at 75 percent of inflation as measured by the Consumer Price Index…A handful of other California cities have ballot initiatives that would tighten pre-existing rent caps.”

P.S. My predictions for Congress (which occasionally are accurate) are for Republicans to take the Senate by a 52-48 margin and the House by a 246-189 margin.

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The Laffer Curve is a very straightforward concept.

It graphically illustrates why politicians are wrong if they think you can double tax revenue by doubling tax rates (or that revenues will drop by 50 percent if tax rates are cut in half).

Simply stated, you also have to look at what happens to taxable income.

In cases where taxpayers have a lot of control over the timing, level, and composition of their income, changes in tax rates may cause big changes in taxable income (or “tax base” in the jargon of economists).

None of this should be controversial. Even Paul Krugman agrees that the Laffer Curve exists.

Today, we are going to see that the pro-tax International Monetary Fund also admits there is a Laffer Curve.

Indeed, a new study authored by David Amaglobeli, Valerio Crispolti, and Xuguang Simon Sheng openly states that politicians should be very cognizant of the fact that some tax policy changes can have a big effect on the “tax base.”

This paper investigates the potential revenue impact of different tax policy changes using the Tax Policy Reform Database (TPRD)… Revenue responses to tax policy changes depend on many factors… However, one of most important factors is the nature of the tax policy change itself. For example, while a tax rate cut will directly lower revenue intake, it could also encourage more economic activity, hence expand the tax base. Estimating the revenue response to a tax policy change, therefore, requires granular information on the nature of this change, including on the tax instrument used (e.g., VAT or personal income tax), the type of change adopted (e.g., tax base, tax rate), and its timing and size.

Here are some of the findings.

We assess the impact of tax policy changes on tax revenues using Jordà (2005)’s local projections method. Our baseline results are based on tax shocks identified in the year when a tax change is announced. Our main empirical findings suggest that the revenue yield of tax policy changes varies significantly across taxes and types of changes, with tax rate changes generally having a more transitory revenue impact than tax base changes for most taxes. Specifically, base broadening changes in PIT, CIT, EXE, and PRO have on average a more significant and long-lasting impact on tax collection than rate changes. At the same time, rate hikes have relatively more significant effects on taxes in the case of VAT and SSC measures.

Most notably, the report finds tax increases hurt prosperity, especially higher marginal tax rates.

Gechert and Groß (2019) conclude that measures to broaden the tax base are less harmful to economic growth than tax hikes. Dabla-Norris and Lima (2018) find that during fiscal consolidations, tax base-broadening measures lead to smaller output and employment declines compared to measures to increase tax rates.

And we learn that it is very foolish to raise corporate tax rates.

Mertens and Ravn (2013) find that…increases in CIT are approximately revenue neutral for the United States. …Announcements of CIT increases are associated with a somewhat transitory rise in tax collection, suggesting that companies have quickly adapted their business to reduce the tax burden.

For wonky readers, here’s a chart from the study. Note how, in many cases, there’s not much difference in revenue between tax increases (blue line) and tax cuts (red lines).

P.S. One big takeaway is that there is not a single Laffer Curve. There are multiple Laffer Curves depending on the tax that’s being changed and the ability of taxpayers to change their behavior.

P.P.S. A less-obvious takeaway is that class-warfare taxes cause the most economic damage, meaning the most harm to ordinary people.

P.P.P.S. You can call it the “Khaldun Curve” if you prefer.

P.P.P.P.S. I have trouble deciding what evidence is most powerful, the views of CPAs or the data from the OECD?

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Because I dedicated last week to European fiscal policy, I didn’t get a chance to write about the Tax Foundation’s latest version of the State Business Tax Climate Index, which was released October 25.

Last year, the top-4 states were Wyoming, South Dakota, Alaska, and Florida. This year’s report, authored by Janelle Fritts and Jared Walczak, says the top-4 states are… (drum roll, please) …exactly the same.

Here’s the map showing how states rank. The best states are blue and the worst states are dark grey.

Coincidentally, the bottom-4 states also stayed constant. New Jersey is in last place, followed by New York, California, and Connecticut.

But there were some very interesting changes if you look at the other 42 states.

Thanks to pro-growth tax reforms, Arizona and Oklahoma both jumped 5 spots in the past year.

The state of Washington suffered a huge fall, dropping 13 spots thanks to the imposition of a capital gains tax (the state constitution supposedly bars any taxes on income – and voters last fall overwhelmingly voted against the capital gains tax – but it appears the state’s politicians and a negligent judiciary may combine to put the state on a very bad path).

It’s also interesting to look at long-run trends. If you compare this year’s Index with the original 2014 Index, you’ll find that three states have jumped by at least 10 spots and three states have dropped by at least 10 spots.

Since I’m a Virginia resident, this is not encouraging news.

P.S. As I’ve noted before, the rankings for Alaska and Wyoming are somewhat misleading. Both states have lots of energy production and their state governments collect enormous amounts of taxes from that sector. This allows them to keep other taxes low while still financing bloated state budgets.

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I discussed Italy’s looming fiscal crisis on Monday and then argued against a potential bailout on Tuesday.

Today, let’s focus on the rest of Europe.

I gave a presentation yesterday in Brussels about “Public Finances in the Eurozone” and used the opportunity to explain that governments are too big in Europe and to warn that demographic changes were going to lead to an even-bigger burden of government in the future.

My assessment is very mainstream, at least with regards to what will happen to national budgets in European nations.

A study from the Organization for Economic Cooperation and Development, authored by Yvan Guillemette and David Turner, examines the long-run fiscal position of member nations.

It warns that government debt levels will increase dramatically if they don’t change current policies.

… secular trends such as population ageing and the rising relative price of services will keep adding pressure on government budgets. Without policy changes, maintaining current public service standards and benefits while keeping public debt ratios stable at current levels would increase fiscal pressure in the median OECD country by nearly 8 percentage points of GDP between 2021 and 2060, and much more in some countries. …governments will need to re-assess long-run fiscal sustainability in the context of higher initial government debt levels…when considering expenditure pressures associated with ageing…, the OECD structural primary balance would deteriorate rapidly and net government debt would more than double as a share of GDP by 2050 (Figure 12).

Here is the aforementioned Figure 12. As you can see, both deficits (left chart) and debt (right chart) are driven by the cost of age-related entitlement programs.

The report also explains that the increase in red ink is being caused by a bigger burden of government spending.

Under a ‘business-as-usual’ hypothesis, in which no major reforms to government programmes are undertaken, public expenditure is projected to rise substantially in most countries… Public health and long-term care expenditure is projected to increase by 2.2 percentage points of GDP in the median country between 2021 and 2060… Public pension expenditure is projected to increase by 2.8 percentage points of GDP in the median country between 2021 and 2060… Other primary expenditures are projected to rise by 1½ percentage points of GDP in the median country between 2021 and 2060 (Figure 13, Panel A). This projection excludes potential new sources of expenditure pressure, such as climate change adaptation.

Here’s Figure 13, mentioned above. Notice the projected increases in spending in most European nations.

So what’s the best response to this slow-motion fiscal disaster?

Since more government spending is the problem, you might think the OECD would recommend ways to restrain budgetary expansion.

But that would be a mistake. As is so often the case, OECD bureaucrats think giving politicians more money is the best approach.

The present study…uses an indicator of long-run fiscal pressure that is premised on the idea that governments would seek to stabilise public debt ratios at projected 2022 levels by adjusting structural primary revenue from 2023 onward. … all OECD governments would need to raise taxes in this scenario to prevent gross government debt ratios from rising over time… The median country would need to increase structural primary revenue by nearly 8 percentage points of GDP between 2021 and 2060, but the effort would exceed 10 percentage points in 11 countries.

To be fair, the authors acknowledge that there might be some complications.

Raising taxes…appears feasible in some countries…, in other countries it may present a substantial challenge. In Belgium, Denmark, Finland and France, for instance, structural primary revenue is already around 50% of GDP… Pushing mainstream taxes on incomes or consumption further up, even by only a few percentage points of GDP, may be politically difficult and fiscally counter-productive if it means reaching the downward-sloping segment of the Laffer curve… Lundberg…identifies five OECD countries where top effective marginal tax rates (accounting for income, payroll and consumption taxes) are already beyond revenue-maximizing levels (Austria, Belgium, Denmark, Finland and Sweden). Thus, if taxes are to rise, it might be necessary to look to other bases, such as housing, capital gains, inheritance or wealth. Recent international efforts to establish a minimum global corporate tax could also enable more revenue to be raised from corporate taxes.

I’m happy that the study acknowledges the Laffer Curve, though that is not much of a concession since even Paul Krugman agrees that it exists.

And even when OECD bureaucrats admit that it may be unwise to increase some taxes, their response is to suggest that other taxes can be increased.

Sigh.

Now you understand why I’ve argued that the OECD may be the world’s worst international bureaucracy. Especially since OECD bureaucrats get tax-free salaries while urging higher taxes on the rest of us.

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Most people don’t know how to define a “tax haven,” but we assume places with no income tax are on the list. And there’s a lot to admire when looking at jurisdictions such as Bermuda, Monaco, and the Cayman Islands.

But what if we want to identify the opposite of a tax haven. What is a “tax hell” and how can they be identified?

A new study for the 1841 Foundation undertakes that task and it lists 12 nations that deserve this unflattering label. Belarus is the worst of the worst, followed by Venezuela, Argentina, and Russia.

But this isn’t just a list of places with high tax burdens.

To be a tax hell, a nation has to have punitive taxation and a lousy government. Here’s how the report describes the methodology.

The Tax Hells Index is an in-depth look at both the qualitative and quantitative data that is released annually by both the IMF and The World Bank. By drawing out critical insights from this data, The 1841 Foundation was able to create a comprehensive index and critically examine 94 countries against a stringent framework. …we believe that a “Tax Hell” is not only a country with high taxes, but rather a country with a weak rule of law and where the rights to privacy and property are not enforced or protected as required. …Therefore, when considering the results, countries with high government quality and economic and legal stability may have high taxes (i.e., Denmark), but are very far from being considered Tax Hells. In fact, there are countries with both low and high taxes in the Top-12 tax hells; all of them, however, have low quality of government, high levels of corruption and discretion, poor economic management, and weak institutions.

By the way, the report identified 12 tax hells, but also lists 14 other nations that are “risky.”

These are countries that should be perceived as high risk.

I’ll close by noting that the report only considers nations in North America, Europe, and South America. If subsequent editions include Asia and Africa, I’m sure there will be more tax hells and more risky jurisdictions.

P.S. The five best-scoring nations are Ireland, Denmark, San Marino, Switzerland, and Luxembourg. Remember, these are not necessarily low-tax jurisdictions. Indeed, Denmark is a high-tax nation. But all of these jurisdictions at least provide high-quality governance.

P.P.S. If you want a defense of tax havens, click here, here, and here.

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In the case of business taxation, the most visually powerful evidence for the Laffer Curve is what happened to corporate tax revenue in Ireland after the corporate tax rate was slashed from 50 percent to 12.5 percent.

Tax revenue increased dramatically. Not just in nominal terms. Not just in inflation-adjusted terms.

Corporate receipts actually climbed as a share of GDP.

And this was during the decades when economic output was rapidly expanding.

In other words, the Irish government got a much bigger slice of a much bigger pie after tax rates were dramatically lowered.

Now let’s look at some evidence from a new study. Three professors from the University of Utah (Jeffrey Coles, Elena Patel, and Nather Seegert), and a Treasury Department economist (Matthew Smith) estimated what happens to taxable income for U.S. companies when there is a change in the corporate tax rate.

In response to a 10% increase in the expected marginal tax rate, private U.S. firms decrease taxable income by 9.1%, which indicates a discernibly more elastic response than prevailing estimates. This response reflects a decrease in taxable income of 3.0% arising from real economic responses to a firm’s scale of operations and 6.1% arising from accounting transactions via (for example) revenue and expense timing. Responsiveness to the corporate tax rate is more elastic if a firm uses cash (9.9%) rather than accrual accounting (7.4%), if the firm is small (9.9%) rather than large (8.6%), and if the firm discounts future cash flows at a lower rate.

The paper is filled with equation, graphs, and jargon, but the above excerpt tells us everything we need to know.

When tax rates go up, taxable income goes down (both because there is less economic activity and because companies have more incentive to manipulate the tax code).

Thus confirming what I wrote back in 2016 about taxable income being the key variable.

By the way, this does not mean that lower tax rates lead to more revenue. Or that higher tax rate produce less revenue.

Such big swings only happen in rare circumstances.

But it does mean that politicians will not grab as much money as they hope when they increase tax rates. And that they won’t lose as much revenue as they fear when they lower tax rates (and we saw that most recently with the 2017 tax reform).

I’ll close by noting that this is additional evidence for why we should be thankful that Biden’s proposal for higher corporate tax rates was not enacted.

P.S. The chart at the beginning of this column may be the most visually powerful evidence for the corporate Laffer Curve. The most empirically powerful evidence, however, comes from very unlikely sources – the pro-tax IMF and the pro-tax OECD.

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There is not a lot of suspense when the Tax Foundation releases its annual International Tax Competitiveness Index.

The “improbable success” of Estonia once again ranks #1. Just like in 2021, 2020, 2019, etc, etc.

Its Baltic neighbor Latvia is #2, followed by New Zealand and Switzerland.

It’s also worth noting that France is continuing its proud tradition of being in last place.

The United States, for what it is worth, has a mediocre #22 rank, dragged down by a horrible score – last among developed nations – for “cross-border tax rules” (but helped by a good score for consumption taxes since the U.S. has not made the mistake of imposing a value-added tax).

If you want to understand the Tax Foundation’s methodology, here’s a description from the report.

The structure of a country’s tax code is a determining factor of its economic performance. …The International Tax Competitiveness Index (ITCI) seeks to measure the extent to which a country’s tax system adheres to two important aspects of tax policy: competitiveness and neutrality. A competitive tax code is one that keeps marginal tax rates low. …businesses will look for countries with lower tax rates on investment to maximize their after-tax rate of return. If a country’s tax rate is too high, it will drive investment elsewhere, leading to slower economic growth. In addition, high marginal tax rates can impede domestic investment and lead to tax avoidance. …Separately, a neutral tax code…means that it doesn’t favor consumption over saving, as happens with investment taxes and wealth taxes. It also means few or no targeted tax breaks for specific activities carried out by businesses or individuals.

If you’re interested in which nations got better and worse over the past year, Greece and Turkey tied for the biggest improvement, both climbing four spots (easier for Greece since it started near the bottom of the rankings).

Ireland suffered the biggest decline, dropping seven spots, in part because of depreciation laws that penalize investment.

I’ll close with a wish that the report eventually gets expanded to include jurisdictions such Bermuda, Hong Kong, Monaco, Liechtenstein, Singapore, and the Cayman Islands. It would be very interesting to see if all of those places are ahead of Estonia.

It also would be interesting if the Tax Foundation augmented the report by speculating about potential big developments. For instance, how much would the U.S. score have declined if Biden’s tax plan had been adopted? And how much would the U.K. score have increased if Prime Minister Truss’ original tax plan was approved?

P.S. The Tax Foundation has very interesting comparative data showing international tax burdens on saving and investment.

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Because of her support for lower tax rates, I was excited when Liz Truss became Prime Minister of the United Kingdom.

Especially since her predecessor, Boris Johnson, turned out to be an empty-suit populist who supported higher taxes and a bigger burden of government spending.

But I’m not excited anymore.

Indeed, it’s more accurate to say that I’m despondent since the Prime Minister is abandoning (or is being pressured to abandon) key parts of her pro-growth agenda.

For details, check out this Bloomberg report, written by Julian Harris, about the (rapidly disappearing) tax-cutting agenda of the new British Prime Minister.

Westminster’s most hard-line advocates of free markets and lower taxes are looking on in despair as their agenda crumbles… When Liz Truss became prime minister just over five weeks ago, she promised to deliver a radical set of policies rooted in laissez-faire economics — an attempt to boost the UK‘s sluggish rate of growth. Yet her chancellor of the exchequer, Kwasi Kwarteng, faced a quick reality check when his mini-budget, packed with unfunded tax cuts and unaccompanied by independent forecasts, …triggered mayhem… Truss fired Kwarteng and replaced him with Jeremy Hunt as she was forced into a dramatic u-turn over her tax plans. …Truss conceded…and dropped her plan to freeze corporation tax. …Still, some believers are sticking by “Trussonomics”…Patrick Minford,..a professor at Cardiff University, said..“Liz Truss’s policies for growth are absolutely right, and to be thrown off them by a bit of market turbulence is insane.” …Eamonn Butler, co-founder of the Adam Smith Institute, similarly insisted that Truss “is not the source of the problem — she’s trying to cure the problem.”

Eamonn is right.

The United Kingdom faces serious economic challenges. But the problems are the result of bad government policies that already exist rather than the possibility of some future tax cuts.

In a column for the Telegraph, Allister Heath says the U.K.’s central bank deserves a big chunk of the blame.

Liz Truss and Kwasi Kwarteng have been doubly unlucky. While almost everybody else in Britain remained in denial, they correctly identified this absurd game for the con-trick that it truly was, warned that it was about to implode and pledged to replace it with a more honest system. Instead of a zombie economy based on rising asset prices and fake, debt-fuelled growth, their mission was to encourage Britain to produce more real goods and services, to work harder and invest more by reforming taxes and regulation. What happened next is dispiriting in the extreme. …Truss and her Chancellor moved too quickly and, paradoxically, given their warnings about the rottenness of the system, ended up pulling out the last block from the Jenga tower, sending all of the pieces tumbling down. …they didn’t crash the economy – it was about to come tumbling down anyway – but they had the misfortune of precipitating and accelerating the day of reckoning. …Andrew Bailey, the Governor of the Bank of England…, has been deeply unimpressive in all of this, helping to keep interest rates too low… The idea, now accepted so widely, that the price of money must be kept extremely low and quantitative easing deployed at every opportunity has undermined every aspect of the economy and society. …Too few people realise how terribly the easy money, high tax, high regulation orthodoxy has failed.

Allister closes with some speculation about possible alternatives. If the Tories in the U.K. decide to reject so-called “free-market fundamentalism,” what’s their alternative?

He thinks the Labour Party will take control, and with very bad results. Jeremy Corbyn will not be in charge, but his economic policies will get enacted.

If Truss is destroyed, the alternative won’t even be social democracy: it will be Labour, the hard Left, the full gamut of punitive taxation, including of wealth and housing, and even more spending, culminating rapidly in economic oblivion.

That is an awful scenario. Basically turning the United Kingdom into Greece.

I want to take a different approach, though, and contemplate what will happen if the Conservative Party rejects the Truss approach and embraces big-government conservatism.

Here are some questions I’d like them to answer:

  • Do you want improved competitiveness and more economic growth?
  • If you want more growth, which of your spending increases will lead to those outcomes?
  • Which of your tax increases will lead to more competitiveness or more prosperity?
  • Will you reform benefit programs to avert built-in spending increases caused by an aging population?
  • If you won’t reform entitlements, which taxes will you increase to keep debt under control?
  • If you don’t plan major tax increases, do you think the economy can absorb endless debt?

I’m asking these questions for two reasons. First, there are no good answers and I’d like to shame big-government Tories into doing the right thing.

Second, these questions are also very relevant in the United States. Even since the Reagan years, opponents of libertarian economic policies have flitted from one trendy idea to another (national conservatism, compassionate conservatism, kinder-and-gentler conservatismcommon-good capitalism, reform conservatism, etc).

To be fair, they usually don’t try to claim their dirigiste policies will produce higher living standards. Instead, they blindly assert that it will be easier to win elections if Republicans abandon Reaganism.

So I’ll close by observing that Ronald Reagan won two landslide elections and his legacy was strong enough that voters then elected another Republican (the same can’t be said for big-government GOPers like Nixon, Bush, Bush, or Trump).

Switching back to the United Kingdom, Margaret Thatcher repeatedly won election and her legacy was strong enough that voters then elected another Conservative.

The bottom line is that good policy can lead to good political outcomes, whereas bad policy generally leads to bad political outcomes.

P.S. To be sure, there were times when Reagan’s poll numbers were very bad. And the same is true for Thatcher. But because they pursued good policies, economic growth returned and they reaped political benefits. Sadly, it appears that Truss won’t have a chance to adopt good policy, so we will never know if she also would have benefited from a similar economic renaissance.

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A big division among economists is whether taxes have a big or small impact on incentives.

If taxpayers are very responsive, that means more economic damage (to use the profession’s jargon, a greater level of deadweight loss).

If you’re wondering which economists are right, there’s a lot of evidence that taxpayers are sensitive to changes in tax rates, Especially upper-income taxpayers, in part because they have significant control over the timing, levels, and composition of their income.

This is why entrepreneurs, innovators, inventors, and investors respond to difference in tax rates.

And athletes also make decisions based on tax policy. Here’s a tweet about Tyreek Hill, one of the best wide receivers in the National Football League. When deciding which team to sign with for this year, he picked the Miami Dolphins, located in a state with no income tax.

Mr. Hill also had the option to sign with the New York Jets.

But that would have meant letting greedy politicians in either New York or New Jersey (where the Jets play their home games) grab almost 11 percent of each additional dollar he earns.

According to this map, star athletes should be big fans of gray states and steer clear of dark-brown (or is that maroon?) states.

There’s research, incidentally, showing that teams based in low-tax states actually win more games.

P.S. I’ll close by reiterating my caveat about taxes being just one piece of the puzzle. After all, I speculated many years ago that taxes may have played a role in LeBron James going from Cleveland to Miami. But he then migrated to high-tax California. Though many pro athletes have moved away from the not-so-Golden States, so the general points is still accurate.

P.P.S. I feel sorry for Cam Newton, who paid a marginal tax rate of nearly 200 percent on his bonus for playing in the 2016 Super Bowl.

P.P.P.S. Taxes also impact choices on how often to box and where to box.

P.P.P.P.S. Needless to say, these principles also apply in other nations.

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A wealth tax is an extraordinarily destructive way for governments to generate revenue.

It violates the principles of sensible tax policy and it does a lot of damage since people have less incentive to save and invest. It’s unadulterated double taxation. Or, in some cases, triple or quadruple taxation.

And it’s unfair.

These factors explain why many nations in Europe have abolished their wealth taxes. This map from the Tax Foundation shows the holdouts that still pursue this senseless version of class warfare.

You’ll notice that Spain is one of the few countries that still has this punitive levy. And if you want to learn more about the Spanish version of this levy, you can click here and here for thorough summaries.

But one thing that everyone should understand is that politicians are always capable of making a bad situation worse.

And as you can see from this story by Grace Dean for Business Insider, that’s precisely what the Spanish government is doing by imposing a second wealth tax on the country.

Spain has introduced a second wealth tax amid soaring inflation, adding an extra 3.5% tax on top of wealth over $10 million. …To avoid people being double-taxed, the tax will only apply to the part of people’s assets not already taxed by their autonomous community, the government said. People will be taxed at a rate of 1.7% on assets between 3 and 5 million euros, 2.1% on assets between 5 and 10 million euros, and 3.5% on assets of more than 10 million euros (around $9.76 million). The government said that it was a temporary state tax for 2023 and 2024… The government is also raising taxes on companies with at least 200 million euros in annual income and expects to bring in an additional 200 million euros by increasing taxes on capital gains above 200,000 euros.

The title of today’s column asks “what fiscal policy is worse than a wealth tax”?

The obvious answer is two wealth taxes.

Though I’m not sure why people are referring to this levy as a second wealth tax when it could be considered an expansion of the existing wealth tax.

But semantics don’t matter. What is important is that this levy will backfire.

I explained back in 2019 that a wealth tax is basically a back-door way of increasing the tax burden on income that is saved and invested.

This is a very bad idea in theory, for reasons explained here and here, but most people do not realize how bad it is in practice.

It can result in effective tax rates of more than 100 percent.

That’s already happened to some French taxpayers.

And it almost surely will happen to some Spanish taxpayers, particularly since financial markets are not exactly enjoying a good year.

Hardly a recipe for improved competitiveness and faster growth.

But also hardly a surprise given the harsh ideological perspective of the leftist parties governing Spain.

P.S. I predict Andorra will be the big winner.

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It is disappointing that the bureaucrats at the International Monetary Fund routinely advocate for higher taxes and bigger government in nations from all parts of the world (for examples, see here, here, here, here, here, and here).

It is disturbing that the IMF engages in bailouts that encourage bad fiscal policy by governments and reckless lending policies by financial institutions.

And it is disgusting that those IMF bureaucrats get tax-free salaries and are thus exempt from the damaging consequences of those misguided policies.

One set of rules for the peasants and one set of rules for the elite.

The latest example of IMF misbehavior revolves around the bureaucracy’s criticism of recently announced tax cuts in the United Kingdom.

A BBC report by Natalie Sherman and Tom Espiner summarizes the controversy.

The International Monetary Fund has openly criticised the UK government over its plan for tax cuts…In an unusually outspoken statement, the IMF said the proposal was likely to increase inequality and add to pressures pushing up prices. …Chancellor Kwasi Kwarteng unveiled the country’s biggest tax package in 50 years on Friday. But the £45bn cut has sparked fears that government borrowing could surge along with interest rates. …Lord Frost, the former Brexit minister and close ally of Prime Minister Liz Truss, criticised the IMF’s statement. …”The IMF has consistently advocated highly conventional economic policies. It is following this approach that has produced years of slow growth and weak productivity. The only way forward for Britain is lower taxes, spending restraint, and significant economic reform.” …Moody’s credit rating agency said on Wednesday that the UK’s plan for “large unfunded tax cuts” was “credit negative” and would lead to higher, persistent deficits “amid rising borrowing costs [and] a weaker growth outlook”. Moody’s did not change the UK’s credit rating.

So what should be done about the IMF’s misguided interference?

Writing for the Spectator in the U.K., Kate Andrews has some observations about the underlying philosophical and ideological conflict..

…the International Monetary Fund has weighed in on the UK’s mini-Budget, offering a direct rebuke of Liz Truss and Kwasi Kwarteng’s tax cuts. …its spokesperson said…‘Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture’… But this rebuke from the IMF is the kind of battle the Truss camp might be happy to have. …The IMF takes a political stance on inequality, viewing its reduction as a good thing in itself. Truss and Kwarteng reject this premise – summed up in the Chancellor’s statement last Friday when he called for the end of redistribution politics – and think it’s far more important to focus on ‘growing the size of the pie.’ The IMF’s ‘intervention’ is likely to become an example of the ‘Treasury orthodoxy’ that Truss was so vocal about during the leadership campaign: her belief that a left-wing economic consensus will not tolerate any meaningful shake-up of the tax code or supply-side reform.

Truss and Kwarteng are correct to reject the IMF’s foolish – and immoral – fixation on inequality.

All you really need to know is that the IMF publishes research implying it is okay to hurt poor people if rich people are hurt by a greater amount.

Let’s close by addressing whether tax cuts are bad for Britain’s currency and financial markets

Paul Marshall explained the interaction (and non-interaction) of fiscal and monetary policy in a column for the U.K.-based Financial Times.

Since 2010, the G7 policy framework has been one of tight fiscal and loose monetary policy. …This combination of fiscal austerity and monetary largesse has not been a success. Austerity has not prevented government debt ratios steadily climbing to historic highs. …Meanwhile quantitative easing has fuelled asset inflation for the super-rich and has more or less abolished risk pricing in financial markets. And…it has produced inflation which is still out of control. But now the global policy consensus is in the process of pivoting… A distinctive feature of the UK’s fiscal pivot is the emphasis on reducing the burden of tax on work and business. This is sensible. …the bigger problem for Liz Truss’s government is the Bank of England. It seems that the governor, Andrew Bailey, did not get the memo. Our central bank has been behind the curve since inflation first started to rise sharply in 2021. …The Bank of England effectively lost control of the UK bond market last Thursday when it raised interest rates by 50 basis points, instead of the 75bp that the US Federal Reserve and the European Central Bank raised by. Its timidity is now having an impact on both the gilt market and sterling. That is the essential context for the market reaction to the mini-Budget. Once you lose market confidence, it is doubly hard to win it back. …a more muscular stance from the BoE to underpin financial market confidence in the UK, even at the expense of some short-term pain.

He is right.

The Bank of England should be focused on trying to unwind its mistaken monetary policy that produced rising prices. That’s the approach that will strengthen the currency.

And Truss and Kwarteng should continue their efforts for better tax policy so the economy can grow faster.

But better tax policy needs to be accompanied by much-need spending restraint, which is what the United Kingdom enjoyed not only during the Thatcher years, but also under Prime Ministers Cameron and May.

P.S. The IMF also interfered in British politics when it tried to sabotage Brexit.

P.P.S. One obvious takeaway is that the IMF should be eliminated.

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I strongly supported Brexit in part because I wanted the United Kingdom to have both the leeway and the incentive to adopt pro-market policies.

Imagine my disappointment, then, when subsequent Conservative Prime Ministers did nothing (Theresa May) or expanded the burden of government (Boris Johnson).

Where was the reincarnation of Margaret Thatcher? Didn’t the Tory Party understand the need to restrain big government?

Perhaps my prayers have finally been answered. After jettisoning Boris Johnson (albeit for scandal rather than bad policy), the Tories elected Liz Truss to lead the nation.

And she appointed Kwasi Kwarteng to be Chancellor of the Exchequer (akin to U.S. Treasury Secretary). The two of them have just unveiled some major changes in U.K. fiscal policy.

Allister Heath’s editorial for the Telegraph has a celebratory tone.

…the best Budget I have ever heard a British Chancellor deliver, by a massive margin. The tax cuts were so huge and bold, the language so extraordinary, that at times, listening to Kwasi Kwarteng, I had to pinch myself to make sure I wasn’t dreaming, that I hadn’t been transported to a distant land that actually believed in the economics of Milton Friedman and FA Hayek. …The neo-Brownite consensus of the past 20 years, the egalitarian, redistributionist obsession, the technocratic centrism, the genuflections at the altar of a bogus class war, the spreadsheet-wielding socialists: all were blown to smithereens by Kwarteng’s stunning neo-Reaganite peroration. …All the taboos have been defiled: the fracking ban, the performative 45pc tax rate, the malfunctioning bonus cap, the previous gang’s nihilistic corporation tax and national insurance raids. The basic rate of income tax is being cut, as is stamp duty, that dumbest of levies. …Reforms of this order of magnitude should really have happened after the referendum in 2016, or after Boris Johnson became Prime Minister in 2019… Truss..has a fighting chance to save Britain, and her party, from oblivion.

The Wall Street Journal‘s editorial has a similarly hopeful tone while also explaining the difference between good supply-side policies and failed Keynesian demand-side policies.

This is a pro-growth agenda that is very different than the tax-and spend Keynesianism that has dominated the West’s economic policies for nearly two decades. …Mr. Kwarteng axed the 2.5-percentage-point increase in the payroll tax imposed by former Prime Minister Boris Johnson, and canceled a planned increase in the corporate income tax rate to 26% from 19%. …Kwarteng also surprised by eliminating the 45% tax rate on incomes above £150,000. The top marginal rate now will be 40%… A frequent complaint is that there’s no evidence tax cuts for corporations or higher earners will boost demand. Maybe not, but that’s also not the point. Britain doesn’t need a Keynesian demand-side stimulus. It needs the supply-side jolt Ms. Truss is trying to deliver by changing incentives to work and invest. A parallel complaint from the same crowd is that Ms. Truss’s policies—which they just said won’t stimulate demand—will stimulate so much demand the policies will stoke inflation. This has been the experience with debt-fueled fiscal blowouts since the pandemic, but Ms. Truss’s plan is different. She’s not throwing around money to fund consumption. She’s using the tax code to spur production.

The editorial concludes with a key observations.

Britain has become the most important economic experiment in the developed world because Ms. Truss is the only leader willing to abandon a stale Keynesian policy consensus that has produced stagflation everywhere.

Here’s a tweet that captures the current approach, with “liberal” referring to pro-market classical liberalism.

This is the “Singapore-on-Thames” approach that I’ve been promoting for years. Finally!

In a column for Reason, Robert Jackman gives a relatively optimistic libertarian assessment of what to expect from Truss.

…will her arrival in Downing Street bring an end to the big-state, big-spending style of her predecessor? …Within the Westminster village, Truss has long been regarded as a torchbearer for liberty—a reputation that stretches back to her days working at various small-state think tanks. Since entering Parliament in 2010, she has been a member of the Free Enterprise Group… As trade secretary, Truss was responsible for delivering on the good bit of Brexit—jetting around the world to sign tariff-busting trade deals. She was good at it too, quickly securing ambitious agreements with Australia and Japan. …But will Liz Truss’ premiership put Britain back on track to a smaller state? Some things aren’t that simple. …Truss has long been an advocate of relaxing Britain’s punitive planning laws, which would make it easier to build much-needed homes and energy infrastructure.

As you might expect, the analysis from the U.K.-based Economist left much to be desired.

Liz Truss, Britain’s new prime minister, is now implementing Reaganomics…comprising tax cuts worth perhaps £30bn ($34bn) per year (1.2% of gdp)… The fuel that fiscal stimulus will inject into the economy will almost certainly lead the boe to raise interest rates… No matter, say Ms Truss’s backers, because tax cuts will boost productivity. Didn’t inflation fall and growth surge under Reagan? …Ms Truss’s cheerleaders seem to have read only the first chapter of the history of Reaganomics. The programme’s early record was mixed. The tax cuts did not stop a deep recession, yet by March 1984 annual inflation had risen back to 4.8% and America’s ten-year bond yield was over 12%, reflecting fears of another upward spiral in prices. Inflation was anchored only after Congress had raised taxes. By 1987 America’s budget, excluding interest payments, was nearly balanced. By 1993 Congress had raised taxes by almost as much as it had cut them in 1981.

By the way, the article’s analysis of Reaganomics is laughably inaccurate.

Meanwhile, a report in the New York Times, writtten by Eshe Nelson, Stephen Castle and , also has a skeptical tone.

But I’m surprised and impressed that they admit Thatcher’s policies worked in the 1980s.

Britain’s new prime minister, Liz Truss, gambled on Friday that a heavy dose of tax cuts, deregulation and free-market economics would reignite her country’s growth — a radical shift in policy… the new chancellor of the Exchequer, Kwasi Kwarteng, abandoned a proposed rise in corporate taxation and, in a surprise move, also abolished the top rate of 45 percent of income tax applied to those earning more than 150,000 pounds, or about $164,000, a year. He also cut the basic rate for lower earners and cut taxes on house purchases. …It is hard to overstate the magnitude of the policy shift from Mr. Johnson’s government, which just one year ago had announced targeted tax increases to offset its increased public spending… The chancellor’s statement in Parliament on Friday underscored the free-market, small-state, tax-cutting instincts of Ms. Truss, who has modeled herself on Margaret Thatcher, who was prime minister from 1979 to 1990. Thatcher’s economic revolution in the 1980s turned the economy around.

The article includes 11 very worrisome words.

…so far there has been no indication of corresponding spending cuts.

Amen. Tax cuts are good for growth, but their effectiveness and durability will be in question if there is not a concomitant effort to restrain the burden of spending.

Truss and Kwarteng also should have announced a spending cap, modeled on either the Swiss Debt Brake or Colorado’s TABOR.

P.S. In addition to worrying about whether Truss will copy Thatcher’s track record on spending, I’m also worried about her support for misguided energy subsidies.

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Every American school kid presumably learns about the Boston Tea Party and other events that culminated with the United States gaining independence from from the rule of King George III.

Think of it as America’s first tax revolt.

But that’s not the only interesting story regarding taxes and English royalty.

I wrote in both 2017 and 2020 that Prince Harry and Meghan Markle (now the Duke and Duchess of Sussex) were going to suffer some adverse tax consequences by residing in the United States.

The recent death of Queen Elizabeth II gives us another opportunity to comment about tax policy. It seems the royal family has some very nice tax preferences.

For some background, Jyoti Mann reported on the topic for Business Insider.

King Charles III..spent half a century turning his royal estate into a billion-dollar portfolio and one of the most lucrative moneymakers in the royal family business. …Over the past decade, he has assembled a large team of professional managers who increased his portfolio’s value and profits by about 50 percent. …The conglomerate’s holdings are valued at roughly $1.4 billion, compared with around $949 million in the late queen’s private portfolio. These two estates represent a small fraction of the royal family’s estimated $28 billion fortune. …The growth in the royal family’s coffers and King Charles’s personal wealth over the past decade came at a time when Britain faced deep austerity budget cuts. …the Duchy of Cornwall…has funded his private and official spending, and has bankrolled William, the heir to the throne, and Kate, William’s wife. It has done so without paying corporation taxes like most businesses in Britain are obliged to, and without publishing details about where the estate invests its money. …leaked financial documents known as the Paradise Papers revealed that Charles’s duchy estate had invested millions in offshore companies, including a Bermuda-registered business.

Before continuing, I can’t resist making two comments.

First, the United Kingdom has not “faced deep austerity” or “budget cuts.” The most that can be said is that spending “only” grew at the rate of inflation when David Cameron and Theresa May were in charge.

Second, it is not newsworthy that the royal family uses so-called offshore companies. It’s probably safe to say that 99 percent of people with cross-border investments (including people like you and me with IRAs and 401(k)s) benefit from some form of financial interaction with tax-neutral jurisdictions such as Bermuda and the Cayman Islands.

Now let’s peruse a story for the New York Times by Jane Bradley and 

King Charles will not have to pay inheritance tax on the Duchy of Lancaster estate he inherited from the Queen due to a rule allowing assets to be passed from one sovereign to another. Charles automatically inherited the estate, the monarch’s primary source of income… The new king will avoid inheritance tax on the estate worth more than $750 million due to a rule introduced by the UK government in 1993 to guard against the royal family’s assets being wiped out if two monarchs were to die in a short period of time… The clause means that, to help protect its assets, members of the royal family do not have to pay the 40% levy on property valued at more than £325,000 ($377,000) that non-royal UK residents do. …The Queen began voluntarily paying income and capital gains tax on the estate in 1993 and Charles may decide to follow suit.

Let’s focus specifically on the death tax.

Is it unfair for the royal family to benefit from good tax policy (such as no death tax) when other residents of the United Kingdom don’t get the same treatment? The answer is yes, of course.

But the right way to deal with that inequity is for the U.K. to eliminate its death tax, not to extend it to Kings, Queens, and Princes.

Let’s focus, though, on a passage from the article that deserves a lot of attention. We are told that the exemption from the death tax was designed to “guard against the royal family’s assets being wiped out if two monarchs were to die in a short period of time.”

Technically, the assets wouldn’t be wiped out. But that scenario would result in a loss of nearly 65 percent of the family’s wealth.

I’m not expecting anyone to shed many tears about the plight of British royalty.

Instead, I want everyone to think about investors, entrepreneurs, and business owners in the United Kingdom. Is it okay for them to lose 65 percent of their money simply because there are two deaths “in a short period of time”?

The answer is no. The death tax is an evil and destructive tax. That’s true for royalty.

And, notwithstanding predictably bad analysis from the OECD,  it’s true for us peasants as well.

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I celebrate when my friends on the left stumble into economic insights.

For instance, many of them sound like Milton Friedman when they pontificate in favor of higher tobacco taxes because they want people to smoke fewer cigarettes.

As a libertarian, I don’t think it’s government’s job to control our private lives, but I applaud when people understand that higher taxes on something will lead to less of that thing.

I get frustrated, of course, that they don’t apply that insight in other areas.

After all, if higher taxes on tobacco leads to less smoking, surely it is true that higher taxes on employment leads to less work.

Or less investment, less innovation, less entrepreneurship, etc, etc.

Let’s consider a new example of how this works in the case of sin taxes.

The New York Times has an article by Ted Alcorn about whether higher taxes on alcohol are an appropriate way of dealing with the damage caused by excessive drinking.

Here are some excerpts.

Oregon also has among the highest prevalence of problem drinking in the country. Last year, 2,153 residents died of causes attributed to alcohol, according to the Oregon Health Authority — more than twice the number of people killed by methamphetamines, heroin and fentanyl combined. …policies that experts consider most effective at curbing excessive drinking have been ignored. For example, even as alcohol-related deaths soared to record highs in the last few years, alcohol taxes have fallen to the lowest rates in a generation. …The U.S. Community Preventive Services Task Force, an independent group of experts, has endorsed measures to deter excess drinking, including raising the price of alcohol. …One way that governments can influence the price of alcohol is by taxing its producers or sellers, who pass the cost on to consumers. This is comparable to taxes on tobacco, which scores of studies show to be a powerful tool for reducing smoking. A large body of evidence shows that higher alcohol taxes are associated with less excessive drinking and lower rates of disease and injury deaths.

This all sounds reasonable.

Raise taxes and you save lives.

But it’s not that simple, as J.D. Tuccille explained in Reason a few years ago.

…you don’t need an outright ban on alcohol to fuel the production of bathtub gin and its equivalents. A new report shows that the same result has been achieved in many countries through the imposition of excessively high taxes… World Health Organization (WHO) research, published in 2014 (PDF), …”illicit and informally produced alcohol accounts for nearly a quarter of the alcohol consumed globally.” …What’s the attraction of drinking the local equivalent of bathtub gin when commercially produced products are widely available? “Unrecorded alcoholic beverages are generally less costly than recorded alcohol,” WHO dryly acknowledged in 2014. The IARD report goes into a bit more detail as to why that might be, noting that “these beverages are untaxed and outside of regulated production that can increase cost,” which means there “is often a significant price difference between illicit and legitimate products, driving demand.”

In other words, governments can impose lots of taxes on alcohol, but one consequence is to encourage the black market.

My two cents on this issues is that all taxes should be low, including so-called sin taxes. That is not because I’m oblivious to the damage of drinking, smoking, drugs, or sugar.

My opposition is driven by three factors.

  1. I don’t want politicians having more money to waste.
  2. Sin taxes will encourage problematic black markets..
  3. People should have the freedom to make dumb choices.

I’ll close by addressing a common counter-argument, which is that people who make dumb choices can impose costs on the rest of society.

But if people drive while drunk or stoned, focus on penalizing the people who make those bad choices so that they will have an incentive for more responsible behavior.

And if smokers and gluttons impose high costs on government health programs, maybe that’s yet another reason for restoring free markets in health care.

Simply stated, the answer almost always is less government rather than more government.

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This probably does not quite belong in my collection of “most depressing charts,” but it is definitely very bad news that taxes now impose a greater burden on the average American household than the combined cost of food, clothing, education, and health care.

This is remarkable, especially since education and health care are needlessly expensive because of government intervention.

The dismal numbers in this chart come from an article in Reason by Elizabeth Nolan Brown.

There are not numbers she pulled out of the air. They are from a new report by the Bureau of Labor Statistics.

Here are some excerpts from Ms. Brown’s article.

New consumer spending data from the Bureau of Labor Statistics (BLS) provides some sobering perspective on how much Americans are paying in taxes. …Overall, taxes accounted for about 25 percent of average consumer spending. …On average, each “consumer unit” paid more than $16,000 in taxes last year. This outpaces average spending on food, clothing, education, and health care combined. …This included $8,561.46 in federal income tax, $2,564.14 in state and local income taxes, $2,475.18 in property taxes, $5,565.45 in Social Security deductions, and $105.21 in other taxes.

Ms. Brown’s article says the total tax burden is more than $16,000 while my chart shows that the average tax burden is approaching $19,000. The difference is that she subtracts out so-called stimulus payments, but I think it is more accurate to view those as handouts rather than as tax rebates.

Regardless, the real burden for the average household is actually higher than either number thanks to an absurdly complex tax system.

Household have to spend time, energy, and money to figure out their taxes. And they also pay indirectly because businesses have to pass on their even-higher tax compliance costs to households.

Finally, we should be asking ourselves whether we are getting the same value from coercive taxes that we get from our voluntary spending on food, clothing, education, and health care. All it takes is one trip to McDonald’s and my answer is no.

Heck, given the grotesque inefficiency of government and the economic harm caused by excessive spending, we get negative value from our taxes.

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It is easy to criticize the many types of bad tax policy in the United States.

But let’s not forget other nations have bad policy as well. I have written many times, for example, about the stunning greed of many European nations (including effective tax rates of more than 100 percent!).

Today, though, let’s look at a couple of examples from the developing world.

We’ll start in Afghanistan, where we learn that bad tax policy helped bring the Taliban back to power. Here’s some of what Ashley Jackson wrote for CapX.

When the Taliban dramatically gained control of Afghanistan in August 2021, they used bombs and guns to swiftly overcome state security forces. But they also had another valuable and effective weapon at their disposal: taxes. Long before the withdrawal of US troops, the Taliban had developed a remarkably state-like system of taxing citizens on everyday goods like cigarettes and perfume. The money raised turned out to be an essential part of the Taliban’s military strategy… Many of the Afghans we spoke to felt that the Taliban’s taxes were fairer than those imposed by the government, which often involved bribery and complex bureaucracy. By being relatively less onerous and less corrupt, the Taliban exploited widespread Afghan frustration with government incompetence. …One truck driver told us that unlike with the Taliban, he had “to pay a bribe to pay tax to the Afghan government”. …when Afghanistan’s major border crossings and several provincial capitals fell in July 2021, many wondered why they fell so quickly and with relatively little violence. It quickly emerged that local business owners…were motivated to encourage a quick and orderly handover.

One obvious takeaway is that the Taliban tax people are smarter than the ISIS tax people.

Now let’s travel to Africa, where we learn about how high tax burdens make private car ownership well nigh impossible.

Here are some excerpts from Emmanuel Igunza’s report for the BBC.

Owning a car for many Ethiopians – even those with ready cash to spend in one of the world’s fastest-growing economies – remains a pipe dream. “I have been saving for nearly four years now, and I still can’t afford to buy even the cheapest vehicle here,” a frustrated Girma Desalegn tells me….they are prohibitively expensive because the government classifies cars as luxury goods. This means even if a vehicle is second hand, it will be hit with import taxes of up to 200%. …the Toyota Vitz..cost about $16,000 in Ethiopia; in neighbouring Kenya the same car costs not more than $8,000. It seems little wonder that Ethiopia has the world’s lowest rate of car ownership, with only two cars per 1,000 inhabitants… The Ethiopian Revenues and Customs Authority says both commercial and private vehicles imported into the country can be subjected to five different types of taxes.

The story contains a picture with a caption that is universally applicable.

This sentences matches perfectly with the sentence I shared earlier this month.

P.S. If you want other odd examples of international taxation, click here, here, here, here, here, here, here, and here.

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What accounts for Switzerland’s “improbable success“? How did a small, land-locked nation with few natural resources become so successful?

Switzerland routinely ranks very high in international comparisons of economic liberty, so that means that there are many good policies.

But since I’m a public finance economist, I think this map from the Tax Foundation helps to explain why Switzerland is a role model. As you can see, the tax burden on workers is dramatically lower than in other European nations. Indeed, Switzerland is almost 10 percentage points lower than the next-closest country.

The map shows the tax burden on a single worker with no dependents, but you find a similarly large gap when looking at the tax burden on a four-person household.

By the way, Switzerland’s value-added tax is far lower than any other European nation, so ordinary workers aren’t being indirectly pillaged (and tax “progressivity” is very low in Switzerland, so high-income workers are not being pillaged, either).

How does Switzerland succeed in maintaining a relatively low tax burden?

Well, it’s easy to keep taxes under control when there are limits on the burden of government spending.

And, thanks to the nation’s very effective spending cap, you can see from this OECD chart that Switzerland is in a far stronger position than most European nations.

So kudos to Switzerland, which is sometimes thought to be the world’s most libertarian nation.

P.S. The Swiss also deserve praise for maintaining federalism, as well as their private retirement system.

P.P.S. Ireland also is a success story, but it’s not as good as suggested by the above chart.

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Back in 2014, I shared a meme with a motto that was perfect for Washington, DC.

Today, let’s do something similar. But instead of a motto specifically for America’s unsavory capital, how about one sentence that summarizes the mentality of all governments.

I used a fill-in-the-blank format because there are so many possible answers.

After all, people in government value taxes more than growth, jobs, competitiveness, and all sorts of other factors.

And one of those other factors is public health, as we can see in this report by Rachel Pannett and Julia Mio Inuma in the Washington Post.

Japanese officials, worried about shifting demographics and a sharp decline in sin tax revenue, have come up with an unusual fix for their fiscal woes: encouraging young people to drink more. …Liquor tax revenue in the fiscal 2020 year was about $8.4 billion, a plunge of more than $813 million from the previous year, according to government data. That was the largest decline in three decades — and a cause for alarm for a government facing broad fiscal challenges. …The unorthodox push by bureaucrats to “revitalize the liquor industry” has faced a backlash…on Twitter. …“As long as they can collect taxes, I guess people’s health doesn’t matter.”

When I first saw this story, I thought it was a good fit for one of my columns highlighting “Great Moments in Foreign Government.”

But the final sentence of the excerpt caught my eye and motivated me to take a different approach.

Though the story gets added to my collection of “Strange Moments in Japanese Governance”:

Yet another reminder that you’ve asked a very strange question if more government is the answer.

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Whenever I discuss the varying types of double taxation on saving and investment (capital gains tax, dividend tax, corporate income tax, death tax, wealth tax, etc), I always emphasize that such levies discourage capital (machinery, tools, technology, etc) which leads to lower levels of productivity.

And lower levels of productivity mean less compensation for workers.

Some of my left-leaning friends dismiss this as “trickle-down economics,” but the relationship between capital and wages is a core component of every economic theory.

Even socialists and Marxists agree that investment is a key to rising wages (though they foolishly think government should be charge of making investments).

I’m providing this background because today’s column explains that politicians made a mistake when they included a tax on “stock buybacks” in the misnamed Inflation Reduction Act.

I’ve written once on this topic, mostly to explain that buybacks should be applauded. They are a way for companies to distribute profits to owners (shareholders) and have the effect of freeing up money for better investment opportunities.

Let’s look at some more recent analysis.

In a column for today’s Wall Street Journal, two Harvard Professors, Jesse Fried and Charles Wang, debunk the anti-buyback hysteria.

A 1% tax on stock buybacks is poised to become law as part of the Inflation Reduction Act just passed by the Senate. This is a victory for critics… But those critics are dead wrong. If anything, American corporations should be repurchasing more stock. Taxing buybacks will increase corporate bloat, lead to higher CEO pay, harm employees and reduce innovation in the economy. …A tax on buybacks will harm shareholders. It creates an incentive for managers to hoard cash, leading to even more corporate bloat and underused stockholder capital. Because CEO pay is tied closely to a firm’s size, this bloating will drive up executive compensation, further hurting investors. …Taxing buybacks will harm employees as well. …Our research shows that 85% of this value flows to employees below the top executive level. Increasing the tax burden will tend to lower equity pay, to the detriment of workers. …A tax that inhibits buybacks will also reduce the capital available to smaller private firms. The cash from shareholder payouts by public companies often flows to private ones, such as those backed by venture capital or private equity. These private firms account for half of nonresidential fixed investment, employ almost 70% of U.S. workers, are responsible for nearly half of business profit, and have been important generators of innovation and job growth. Bottling up cash in public companies will reduce the capital flowing to private ventures—and thus their ability to invest, innovate and hire more workers.

Professor Tyler Cowen of George Mason University makes similar points, in a very succinct manner.

This is flat out a new tax on capital, akin to a tax on dividends. …Are you worried about corporations being too big and monopolistic?  This makes it harder for them to shrink!  Think of it also as a tax on the reallocation of capital to new and growing endeavors.

Catherine Rampell of the Washington Post is far from a libertarian, but even she warned that the hostility to stock buybacks makes no sense.

You’ve probably heard some ranting recently about “stock buybacks,” the term for when a public company repurchases shares of its own stock on the open market. …Why do Democrats hate buybacks so much? …they proposed legislation to ban buybacks. They excoriated companies for returning cash to shareholders… Share buybacks themselves aren’t necessarily bad — particularly when the alternative is wasting investor money… Yelling at companies to stop their buybacks won’t cause them to increase investment… In fact, some policy measures Democrats are considering, ostensibly to discourage firms from returning so much cash to shareholders, would do the opposite.

The only good news to share is that the tax being enacted by Democrats is just 1 percent, so the damage will be somewhat limited (the main economic damage will be because of another provision in the legislation, the tax on “book income“).

Though I suppose we should be aware that a small tax can grow into a big tax (the original 1913 income tax had a top rate of just 7 percent and we all know that the internal revenue code has since morphed into an anti-growth monstrosity).

The bottom line is that the crowd in Washington has made a bad tax system even worse.

P.S. Since we have been discussing how taxes on capital are bad for workers, this is an opportunity to share an old cartoon from the British Liberal Party (meaning “classical liberal,” of course). The obvious message is that labor and capital are complementary factors of production.

And the obvious lesson is that you can’t punish capital without simultaneously punishing labor. Sadly, I’m not holding my breath waiting for Washington to enact sensible tax policy.

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Yesterday’s column explained that lobbyists are big winners when the size and scope of government increases.

  • For instance, a bigger budget means special interests hire lobbyists to obtain ever-larger slices of pork.
  • Moreover, added red tape means lobbyists get more clients seeking to manipulate the regulatory process.

And Biden’s grossly misnamed Inflation Reduction Act will make both of those problems worse, enabling more corruption.

But there’s a third problem to consider. Biden’s agenda also calls for a massive expansion of special tax privileges.

From a libertarian perspective, I like when the law allows people to keep more of their money.

As an economist, however, I don’t like when people are lured into make inefficient choices simply because of a convoluted tax system.

And, as a decent human being, I despise a process that enriches lobbyists, politicians, and other insiders. This corrupt process is succinctly captured in this flowchart put together by my former colleague Chris Edwards.

Chris’ main point is that we should be reforming and simplifying the tax code rather than dramatically expanding the budget of a corrupt Internal Revenue Service.

You can’t argue with that goal (assuming you want what’s best for the nation). Even folks on the left should agree.

The bottom line is that a complicated and convoluted tax code is great for lobbyists and a boon for corruption.

P.S. If you want to know the world’s most surprising loophole, click here.

P.P.S. Assuming loopholes are properly defined, the ideal policy is to eliminate them in tandem with enactment of lower tax rates.

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Back in 2009, I narrated a video about the downsides of class-warfare tax policy.

But if you don’t want to spend eight minutes watching the video (or 14 minutes watching this video), here’s a visual that summarizes why high tax rates discourage people from engaging in productive behavior.

The most important thing to understand is that a high marginal tax rate (i.e., the tax rate on earning more money) has a big effect on incentives to work, save, invest, and be entrepreneurial.

But how big is that effect?

Let’s review some new research from Professor Charles Jones.

The classic tradeoff in the optimal income tax literature is between redistribution and the incentive effects that determine the “size of the pie.” …However, what is in some ways the most natural effect on the size of the pie has not been adequately explored. …To the extent that top income taxation distorts…innovation, it can impact not only the income of the innovator but also the incomes of everyone else in the economy. …High incomes are a prize that partly motivates entrepreneurs to turn basic insights into a product or process that ultimately benefits consumers. High marginal tax rates deter this effort and therefore reduce innovation and overall GDP. …For example, consider raising the top marginal tax rate from 50% to 75%. …the change raises about 2.5% of GDP in revenue before the behavioral response. In the baseline calibration…, this increase in the top tax rate reduces innovation and lowers GDP per person in the long run by around 7 percent. …even redistributing the 2.5% of GDP to the bottom half of the population would leave them worse off on average: the 7% decline in their incomes is not offset by the 5% increase from redistribution. In other words, raising the top marginal rate from 50% to 75% reduces social welfare…the rate that incorporates innovation and maximizes the welfare of workers is much lower: the benchmark value is just 9%.

Here’s a table from the study showing how the optimum tax rate is very low if the goal is to help workers and society rather than politicians.

If you want more evidence, there’s a never-ending supply.

But if we want to be concise, start with this list.

Heck, higher tax rates can even hurt your favorite sports team.

P.S. Joe Biden wants people to think that it’s patriotic to pay more tax, though he exempts himself with clever tax planning.

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The capital gains tax is double taxation, and that’s a bad idea (assuming the goal is faster growth and higher wages).

Let’s consider how it discourages investment. People earn money, pay tax on that money, and then need to decide what to do with the remaining (after-tax) income.

If they save and invest, they can be hit with all sorts of additional taxes. Such as the capital gains tax.

If you want to be wonky, a capital gain occurs when an asset (like shares of stock) climbs in value between when it is purchased and when it is sold.

But stocks rise in value when the market expects a company will generate more income in the future.

Yet that income gets hit by both the corporate income tax and the personal income tax (the infamous double tax on dividends).

So a capital gains tax is a version of triple taxation.

Now that I’ve whined about capital gains taxation, let’s see what happens when a country moves in the right direction.

Professor Terry Moon, from the University of British Columbia, authored a study on the impact of a partial cut in South Korea’s capital gains tax. His abstract succinctly summarizes the results.

This paper assesses the effects of capital gains taxes on investment in the Republic of Korea (hereafter, Korea), where capital gains tax rates vary at the firm level by firm size. Following a reform in 2014, firms with a tax cut increased investment by 34 log points and issued more equity by 9 cents per dollar of lagged revenue, relative to unaffected firms. Additionally, the effects were larger for firms that appeared more cash constrained or went public after the reform. Taken together, these findings are consistent with the “traditional view” predicting that lower payout taxes spur equity-financed investment by increasing marginal returns on investment.

There are several interesting charts and graphs in the study.

But this one is particularly enlightening since we can see big positive results for the firms that were eligible for lower tax rates compared to the ones that still faced higher tax rates.

Richard Rahn wrote about capital gains taxation late last year.

Here are some excerpts from his column in the Washington Times.

Would you vote for a tax that frequently taxes people at an effective rate of 100% or more, misallocates investment, reduces economic growth and job creation, often becomes almost impossible to calculate, and in many cases reduces, rather than increases, revenue for the government? …So-called “capital gains” are price changes most often caused by inflation, which, of course, is caused by incompetent or corrupt governments. …Some countries explicitly allow for the indexing of a capital gain for inflation. Other countries have no capital gains tax at all because they recognize what a destructive tax it is. …The current maximum federal capital gains tax is 23.8%. …“Build Back Better” (BBB) bill would push the top rate to 31.8%…and…citizens of states with high state income tax rates like California, New York, and New Jersey would find themselves paying destructive rates from 43 to 45%.

Needless to say, it is a bad idea to impose a 43 percent-45 percent tax on any type of productive behavior.

But it is downright crazy to impose that type of tax on economic activity (investment) that also gets hit by other forms of tax.

Let’s close with this map from the Tax Foundation. As you can see, some European nations have punitive rates, but countries such as Belgium, Slovakia, Luxembourg, the Czech Republic, and Switzerland wisely have chosen not to impose a capital gains tax..

P.S. For more information, I invite people to watch the video I narrated on the topic. And this editorial from the Wall Street Journal also is a good summary of the issue.

P.P.S. Biden wants America to have the world’s worst capital gains tax. To learn why that’s a bad idea, click here and here.

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The Congressional Budget Office has released its new long-run fiscal forecast. Like I did last year (and the year before, and the year before, etc), let’s look at some very worrisome data.

We’ll start with projections over the next three decades for taxes and spending, measured as a share of economic output (gross domestic product). As you can see, the tax burden is increasing, but the spending burden is increasing even faster.

By the way, some people think America’s main fiscal problem is the gap between the two lines. In other words, they worry about deficits and debt.

But the real problem is government spending. And that’s true whether the spending burden is financed by taxes, borrowing, or printing money.

So why is the burden of government spending projected to get larger?

As you can see from Figure 2-2, entitlement programs deserve the lion’s share of the blame. Social Security spending is expanding as a share of GDP, and health entitlements (Medicare, Medicaid, and Obamacare) are expanding even faster.

Now let’s confirm that the problem is not on the revenue side.

As you can see from Figure 2-7, taxation is expected to consume an ever-larger share of economic output in future decades. And that’s true even if the Trump tax cuts are made permanent.

Having shared three charts from CBO’s report, it’s now time for a chart that I created using CBO’s long-run data.

My chart shows that America’s main fiscal problem is that we are not abiding by fiscal policy’s Golden Rule. To be more specific, the burden of government is projected to grow faster than the economy.

So long as the burden of government is expanding faster than the private sector, that’s a recipe for higher taxes, more debt, and reckless monetary policy.

All of those options lead to the same bad outcome.

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To begin Part III of this series (here’s Part I and Part II), let’s dig into the archives for this video I narrated back in 2007.

At the risk of patting myself on the back, all of the points hold up very well. Indeed, the past 15 years have produced more evidence that my main arguments were correct.

The good news is that all these arguments helped produce a tax bill that dropped America’s federal corporate tax rate by 14 percentage points, from 35 percent to 21 percent.

The bad news is that Biden and most Democrats in Congress want to raise the corporate rate.

In a column for CapX, Professor Tyler Goodspeed explains why higher corporate tax rates are a bad idea. He’s writing about what’s happening in the United Kingdom, but his arguments equally apply in the United States.

…the more you tax something, the less of it you get. …plans to raise Corporation Tax and end relief on new plant and machinery will result in less business investment – and steep costs for households. …Treasury’s current plans to raise the corporate income tax rate to 25% and end a temporary 130% ‘super-deduction’ for new investment in qualifying plant and machinery would lower UK investment by nearly 8%, and reduce the size of the UK economy by more than 2%, compared to making the current rules permanent. …because the economic costs of corporate taxation are ultimately borne both by shareholders and workers, raising the rate to 25% would permanently lower average household wages by £2,500. …the macroeconomic effects of raising the Corporation Tax rate to 25% would alone offset 40% of the static revenue gain over a 10-year period, and as much as 90% over the long run.

To bolster his argument for good policy on that side of the Atlantic Ocean, he then explains that America’s lower corporate tax rate has been a big success.

Critics of corporate tax reform should look to the recent experience of the United States… At the time, I predicted that these changes would raise business investment in new plant and equipment by 9%, and raise average household earnings by $4,000 in real, inflation-adjusted terms. …By the end of 2019, investment had risen to 9.4% above its pre-2017 level. Investment by corporate businesses specifically was up even more, rising to 14.2% above its pre-2017 trend in real, inflation-adjusted terms. Meanwhile, in 2018 and 2019 real median household income in the United States rose by $5,000 – a bigger increase in just two years than in the entire 20 preceding years combined. …What about corporate income tax revenues? …corporate tax revenue as a share of the US economy was substantially higher than projected, at 1.7% versus 1.4%.

If you want more evidence about what happened to corporate tax revenue in America after the Trump tax reform, click here.

Another victory for the Laffer Curve.

Not that we should be surprised. Even pro-tax bureaucracies such as the International Monetary Fund and Organization for Economic Cooperation and Development have found that lower corporate rates produce substantial revenue feedback.

So let’s hope neither the United States nor the United Kingdom make the mistake of undoing progress.

P.S. The specter of a higher corporate tax in the United Kingdom is especially bizarre. Voters chose Brexit in part to give the nation a chance to break free of the European Union’s dirigiste approach. But instead of adopting pro-growth policies (the Singapore-on-Thames approach), former Prime Minister Boris Johnson opted to increase the burden of taxes and spending. Hopefully the Conservative Party will return to Thatcherism with a new Prime Minister (and hopefully American Republicans will return to Reaganism!).

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