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Archive for the ‘Taxation’ Category

The United States has what is arguably the worst business tax system of any nation.

That’s bad for the shareholders who own companies, and it’s also bad for workers and consumers.

And it creates such a competitive disadvantage that many U.S.-domiciled companies are better off if they engage in an “inversion” and shift their corporate charter to a jurisdiction with better tax policy.

Unsurprisingly, the Obama White House doesn’t like inversions (with some suspicious exceptions) because the main effect is to reduce tax revenue.  But the Administration’s efforts to thwart them haven’t been very successful.

The U.K.-based Economist has just published an article on American companies re-domiciling in jurisdictions with better tax law.

A “tax inversion” is a manoeuvre in which a (usually American) firm acquires or merges with a foreign rival, then shifts its domicile abroad to reap tax benefits. A spate of such deals last year led Barack Obama to brand inversions as “unpatriotic”. …The boardroom case for inversions stems from America’s tax exceptionalism.

But this isn’t the good kind of exceptionalism.

The internal revenue code is uniquely anti-competitive.

It levies a higher corporate-tax rate than any other rich country—a combined federal-and-state rate of 39%, against an OECD average of 25%. And it spreads its tentacles worldwide, so that profits earned abroad are also subject to American taxes when they are repatriated.

And that worldwide tax system is extremely pernicious, particularly when combined with America’s punitive corporate tax rate.

Given these facts, the Economist isn’t impressed by the Obama Administration’s regulatory efforts to block inversions.

Making it hard for American firms to invert does precisely nothing to alter the comparative tax advantages of changing domicile; it just makes it more likely that foreign firms will acquire American ones. That, indeed, is precisely what is happening.

So what’s the answer?

If American policymakers really worry about losing out to lower-tax environments, they should get rid of the loopholes that infest their tax rules, drop the corporate-income tax rate and move to a territorial system. …jobs would be less likely to flow abroad.

In a companion article, the Economist lists some of the firms that are escaping from the IRS.

…companies have continued to tiptoe out of America to places where the taxman is kinder and has shorter arms. On August 6th CF Industries, a fertiliser manufacturer, and Coca-Cola Enterprises, a drinks bottler, both said they would move their domiciles to Britain after mergers with non-American firms. Five days later Terex, which makes cranes, announced a merger in which it will move to Finland. For many firms, staying in America is just too costly. Take Burger King, a fast-food chain, which last year shifted domicile to Canada after merging with Tim Horton’s, a coffee-shop operator there.

I’ve previously shared lists of inverting companies, as well as a map of where they go, and this table from the article is a good addition.

So how should Washington react to this exodus? The Economist explains once again the sensible policy response.

The logical way to stem the tide would be to bring America’s tax laws in line with international norms. Britain, Germany and Japan all have lower corporate rates and are among the majority of countries that tax firms only on profits earned on their territory.

But the Obama Administration’s response is predictably unhelpful. And may even accelerate the flight of firms.

…the US Treasury has been trying to make it harder for them to leave. …Despite such speed bumps, inversions still make enormous sense for companies with large overseas operations. If anything, the rule changes have led to more companies looking to get out before it is too late.

The Wall Street Journal opined on this issue earlier this month and reached a similar conclusion.

…a mountain of evidence that an un-competitive tax system has made the U.S. an undesirable location for corporate headquarters and investment. …high tax rates matter a great deal in determining where a company is based and where it grows.

The WSJ also pointed out that taxpayers have a right and an obligation to legally protect themselves from bad tax policy.

Shareholders deserve nothing less from management than the Warren Buffett approach of paying the lowest possible legal tax rate.

But since the White House isn’t very interested in helpful reform, expect more inversions.

Which is one more piece of evidence that punitive corporate taxation isn’t good news for workers.

…absent American tax reform will end up pushing more U.S. companies into foreign hands. …The ultimate losers in all of this aren’t so much the owners as American workers, who often lose their jobs when a company moves abroad. …It’s well past time for our government to stop creating advantages for foreign competitors.

In looking at this issue, it’s easy to be discouraged since the Obama Administration is unwilling to even consider pro-growth policy responses.

As such, the problem will fester until at least 2017.

But it’s possible that there could be pro-reform legislation once a new President takes office.

Particularly since the Senate’s Permanent Subcommittee on Investigations (which used to be chaired by the clownish Sen. Levin, infamous for the FATCA disaster) has produced a very persuasive report on how bad U.S. tax policy is causing inversions.

Here are some excerpts from the executive summary.

The United States has the highest corporate tax rate in the industrialized world, and (alone among its peers) has retained a worldwide system that taxes American companies for the privilege of repatriating their overseas earnings. Meanwhile, most other nations with advanced economies have adopted competitive tax rates and territorial-type tax systems. As a result, U.S. firms too often have a significant incentive to relocate their headquarters overseas. Corporate inversions may be the most dramatic manifestation of that incentive… The lesson policymakers should draw from our findings is straightforward: The high U.S. corporate tax rate and worldwide system of taxation are competitive disadvantages that make it easier for foreign firms to acquire American companies. Those policies also strongly incentivize cross-border merging firms, when choosing where to locate their new headquarters, not to choose the United States. The long term costs of these incentives can be measured in a loss of jobs, corporate headquarters, and revenue to the Treasury.

Those are refreshing and intelligent comments, particularly since politicians were in charge of putting out this report rather than economists.

So maybe there’s some hope for the future.

For more information on inversions and corporate tax policy, here’s a short speech I gave to an audience on Capitol Hill.

P.S. Let’s close with some political satire.

I’ve written about Bernie Sanders being a conventional statist rather than a real socialist.

But that wasn’t meant to be praise. He’s still clueless about economics, as illustrated by this amusing Venn diagram.

Though I’m sure many other politicians would occupy that same space.

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Defenders of Social Security often make a point of stating that the retirement system is a form of “social insurance” because people become eligible for benefits by paying into the system.

Welfare programs, by contrast, give money to people simply as a form of income redistribution.

Proponents of the status quo are right. Sort of.

Social Security is an “earned benefit.” The payroll taxes of workers are somewhat analogous to a premium payment and retirement benefits are somewhat analogous to a monthly annuity payment.

But “somewhat analogous” isn’t the same as real insurance. Money isn’t invested and set aside to pay benefits. Instead, Social Security is a pay-as-you-go program, which means the payroll taxes of current workers are paying for the benefits paid to current retirees.

If a private insurance company did the same thing, its owners would be arrested for operating a Ponzi Scheme.

But the government can get away with this kind of system because it can coerce younger workers to participate.

Or, to be more accurate, the government can get away with this approach so long as there are a sufficient number of new workers who can be forced into the program.

The problem, of course, is that the combination of longer lifespans and fewer births means that Social Security is promising far more than it can deliver.

And we’re talking real money, even by Washington standards. According to the Social Security Trustees, the cash-flow deficit over the next 75 years is approaching $40 trillion. And that’s after adjusting for inflation!

So how can this mess be solved?

At the risk of over-simplifying, there are four options.

1. Do Nothing. Some politicians want to stick their heads in the sand and pretend there isn’t a problem. They argue that the “Trust Fund” can finance promised benefits until the early 2030s. But the so-called Trust Fund has nothing but IOUs, which means that benefits can only be paid by additional government borrowing. As you can imagine, that doesn’t bother most politicians since they don’t think past the next election cycle. But this red-ink approach isn’t a solution because the IOUs will run out in less than 20 years. So what happens at that point? Retirees would have their benefits automatically reduced.

2. Personal Retirement Accounts. The reform solution would allow younger workers to shift their payroll taxes into personal retirement accounts. This “funded” approach is working very well in nations such as Australia, Chile, and the Netherlands. Since there would be less payroll tax revenue going to government, there would be a “transition cost” of financing promised benefits to current retirees and older workers. But this approach would be less expensive than trying to deal with the unfunded liabilities of the current system.

3. Limit Benefits. For those that recognize the problem but don’t want genuine reform, that leaves only two other possible choices. One of those choices is to reduce benefits by modest amounts today to preempt large automatic benefit reductions when there no longer are any IOUs in the Trust Fund. Raising the retirement age would be one way of reducing outlays since people would have to spend more time working and less time collecting benefits in retirement. Another option is means-testing, which means taking away benefits from people whose income from other sources is considered too high.

4. Increase Taxes. The other option for non-reformers is to generate more tax revenue. An increase in the payroll tax rate is a commonly cited option. Politicians have already done that many times, with the payroll tax having climbed from 3 percent when the program started to 12.4 percent today. Another option would be to bust the “wage base cap” and impose the payroll tax on more income. Under current law, because the program is supposed to be analogous to private insurance, there’s a limit on how much income is taxed and a limit on how much benefits are paid. Imposing the tax on all income would break that link and turn the program into an income-redistribution scheme, but it would generate more money.

Now take a guess which of the four options is getting the most interest from Hillary Clinton?

As reported by the Washington Post, Hillary Clinton is signalling that she wants to change Social Security so it is less of a social insurance program and more akin to welfare.

At a town hall here Tuesday, she said she’d be open to a Social Security tax increase proposed by Sen. Bernie Sanders (I-Vt.), her radical rival in the primary. During the 2008 campaign, Clinton had flatly rejected such an increase. Her comments this week could suggest that she has warmed to the idea, or that she is responding to a broader shift to the left among Democrats. …Clinton…described an approach similar to Sanders’s — raising taxes only on the wealthiest earners to avoid an increase for people who consider themselves upper middle class. “We do have to look at the cap, and we have to figure out whether we raise it or whether we raise it a little and then jump over and raise it more higher up,” Clinton said. …Sanders’s proposal — increasing payroll taxes, but only for the wealthiest earners — resembles the one President Obama laid out as a candidate in 2008. …At the time, Clinton opposed the idea. “I’m certainly against one of Senator Obama’s ideas, which is to lift the cap on the payroll tax,” she said in a Democratic primary debate then.

So Hillary’s original position was the do-nothing approach, but now she feels pressured to go with the class-warfare tax-hike approach.

As a side note, I think it’s noteworthy that the article acknowledges that the current “wage base cap” exists because there’s also a cap on benefits.

…the wealthy don’t pay taxes on their earnings above a certain amount each year, it’s important to keep in mind that they also don’t receive benefits on those earnings later on.

But I suspect this kind of detail doesn’t matter to Bernie Sanders, Hillary Clinton, and the rest of the class-warfare crowd.

They simply want to maintain (or even expand!) the social welfare state in America. Vive la France!

For more information, here’s a video I narrated for the Center for Freedom and Prosperity.

And here’s a link to my video on why personal retirement accounts are the ideal option.

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If you took a poll of Washington’s richest and most powerful people, you would probably find more than 90 percent of them support tax increases.

At first glance, this doesn’t make sense. Why would a group of upper-income people want tax hikes? Are they self-loathing and guilt-ridden?

Perhaps, but there’s a better explanation. These are people whose lavish lifestyles are because of big government. And when government gets even bigger, they have more chances to obtain unearned wealth.

So it makes perfect sense for them to support tax increases. They may send an additional 5 percent of their income to the IRS, but their income will be 20 percent higher because of all the money sloshing around Washington.

Once you understand their motivations, it’s easy to understand why Washington insiders are so supportive of “bipartisan budget deals” and why they salivate so much for a value-added tax.

And you can also see why they’re so anxious to get a President who hasn’t signed the no-tax-hike pledge.

Which may explain why Jeremy Scott, the editor of Tax Notes, is upset that Governor Jeb Bush is now expressing opposition to tax hikes. Here’s some of what he wrote for Forbes, starting with a description of Bush’s original open-to-tax-hikes position.

Before announcing his candidacy, former Florida Gov. Jeb Bush said he wouldn’t agree to Grover Norquist’s pledge not to raise taxes, and he hinted that he would, in fact, trade $10 of spending cuts for $1 of tax increases. …he went out of his way earlier this year to talk about his flexibility on fiscal policy.

That part of Mr. Scott’s column is accurate.

I also noticed Gov. Bush’s stance at the time, albeit it caused me to worry because politicians will never impose meaningful spending restraint and reform entitlements if they think tax increases are feasible.

Anyhow, Scott then points out that Gov. Bush seems to have moved to an anti-tax hike position.

At an August 2 conference…, Bush flatly said no when asked if he would accept tax hikes as part of a budget deal. “We’ve raised taxes. What we need to be doing is entitlement reform, curbing the growth of spending, creating a high-growth scenario,” the former governor elaborated.

I’m not sure if what Bush said puts him firmly in the no-tax-hike camp, but it’s certainly true that his rhetoric has moved in the right direction.

Which doesn’t make Scott happy. And here’s where he veers from accurate reporting to sloppy and bizarre assertions.

If Jeb Bush needs to shore up his right flank on taxes, it reveals that the GOP has veered far from its positional flexibility that made the 1980s so successful for tax reform efforts. President Reagan was willing to accept tax increases as part of grand bargains on taxes and fiscal policy. …the GOP…won’t control 60 seats in the upper chamber. That means they will need at least some Democratic support. And no party will want to undertake tax reform without at least some bipartisanship. A Jeb Bush victory in 2016 seemed like the best-case scenario for people who want some kind of broad tax reform. His retreat on a willingness to compromise is a major blow to those hopes.

Wow, that’s a lot of misleading statements in a short excerpt.

Let’s correct some of Mr. Scott’s mistakes.

  1. The 1986 Tax Reform Act was revenue neutral. In other words, it was designed so that the government didn’t get any additional money. Scott is completely wrong to assert that a willingness to raise taxes is a prerequisite for tax reform.
  2. Scott is correct that Reagan acquiesced to some tax increases, but he conveniently fails to share the data showing that “grand bargains” with tax hikes invariably failed to produce good results. The only deal that led to a balanced budget was the 1997 agreement that lowered taxes.
  3. It is incorrect to assert that 60 votes are needed in the Senate to enact major fiscal legislation. Yes, the filibuster still exists, but budget rules explicitly allow “reconciliation” bills that don’t require supermajority support.
  4. A pro-tax hike candidate is only the “best-case scenario” if one thinks that voters should be tricked by using tax reform as a Trojan Horse for tax increases.

The final point is the one that really matters. To reiterate what I stated earlier, the Washington establishment is unified in its support of higher taxes for the obvious reason that more money flowing to Washington is good news for politicians, bureaucrats, consultants, lobbyists, cronyists, special interests, contractors, and other insiders.

Simply stated, a bigger government means they get richer (and they’ve been quite successful, as you can see from this depressing map).

Here’s the bottom line.

Using the term “grand bargain” also doesn’t change the fact that higher taxes will lead to weaker growth, more spending, and larger deficits.

And (mis)using the term “tax reform” doesn’t change the fact that higher taxes will lead to weaker growth, more spending, and larger deficits.

Nor does a reference to “flexibility” change the fact that higher taxes will lead to weaker growth, more spending, and larger deficits.

I could continue, but you get the point.

P.S. Let’s close by shifting to another topic. Many people express disbelief when I argue that politicians such as Barack Obama and Bernie Sanders are not socialists.

In my defense, I’m making a technical point about the economic definition of socialism, which means government ownership of the means of production. And the vast majority of American leftists don’t seem overly interested in having government steel companies, government banks, or government farms. They prefer instead to allow private ownership combined with high levels of taxation and regulation.

If you want to see a real socialist, look on the other side of the Atlantic, where the Labour Party appears poised to elect a complete loon as its leader. The U.K.-based Independent reports that Jeremy Corbyn favors “common ownership” of industry.

…the man who has set alight the leadership race says the party needs to reinstate a clear commitment to public ownership of industry in a move which would reverse one of the defining moments in Labour’s history. …Corbyn reveals that he wants to reinstate Clause Four, the hugely symbolic commitment to socialism scrapped under Tony Blair 20 years ago, in its original wording or a similar phrase that weds the Labour Party to public ownership of industry. …The old Clause Four stated that the party was committed to “common ownership of the means of production, distribution and exchange”

I can’t think of any Democrats who admit to favoring similar language for their party platform.

Though I should acknowledge that we have a government-run rail company in America, a government-run postal service, a government-run retirement system, and a government-run air traffic control system, all of which would be better in the private sector. And I’m sure Obama, Sanders, and many other politicians would be opposed to privatization.

So maybe the most accurate way of describing leftist politicians in America is to say that they’re redistributionists with a side order of socialism.

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I have a very mixed view of the Committee for a Responsible Federal Budget, which is an organization representing self-styled deficit hawks in Washington.

They do careful work and I always feel confident about citing their numbers.

Yet I frequently get frustrated because they seem to think that tax increases have to be part of any budget deal, regardless of the evidence that such an approach will backfire.

So when CRFB published a “Fiscal FactChecker” to debunk 16 supposed budget myths that they expect during this campaign season, I knew I’d find lots of stuff I would like…and lots of stuff I wouldn’t like.

Let’s look at what they said were myths, along with my two cents on CRFB’s analysis.

Myth #1: We Can Continue Borrowing without Consequences

Reality check: CRFB’s view is largely correct. If we leave policy on autopilot, demographic changes and poorly structured entitlement programs  will lead to an ever-rising burden of government spending, which almost surely will mean ever-rising levels of government debt (as well as ever-rising tax burdens). At some point, this will lead to serious consequences, presumably bad monetary policy (i.e., printing money to finance the budget) and/or Greek-style crisis (investors no longer buying bonds because they don’t trust the government will pay them back).

The only reason I don’t fully agree with CRFB is that we could permanently borrow without consequence if the debt grew 1 percent per year while the economy grew 3 percent per year. Unfortunately, given the “new normal” of weak growth, that’s not a realistic scenario.

Myth #2: With Deficits Falling, Our Debt Problems are Behind Us

Reality check: The folks at CRFB are right. Annual deficits have dropped to about $500 billion after peaking above $1 trillion during Obama’s first term, but that’s just the calm before the storm. As already noted, demographics and entitlements are a baked-into-the-cake recipe for a bigger burden of government and more red ink.

That being said, I think that CRFB’s focus is misplaced. They fixate on debt, which is the symptom, when they should be more concerned with reducing excessive government, which is the underlying disease.

Myth #3: There is No Harm in Waiting to Solve Our Debt Problems

Reality check: We have a spending problem. Deficits and debt are merely symptoms of that problem. But other than this chronic mistake, CRFB is right that it is far better to address our fiscal challenges sooner rather than later.

CRFB offers some good analysis of why it’s easier to solve the problem by acting quickly, but this isn’t just about math. Welfare State Wagon CartoonsIt’s also important to impose some sort of spending restraint before a majority of the voting-age population has been lured into some form of government dependency. Once you get to the point when more people are riding in the wagon than pulling the wagon (think Greece), reform becomes almost impossible.

Myth #4: Deficit Reduction is Code for Austerity, Which Will Harm the Economy

Reality check: The folks at CRFB list this as a myth, but they actually agree with the assertion, stating that deficit reduction policies “have damaged economic performance and increased unemployment.” They even seem sympathetic to “modest increases to near-term deficits by replacing short-term ‘sequester’ cuts”, which would gut this century’s biggest victory for good fiscal policy!

There are two reasons for CRFB’s confusion. First, they seem to accept the Keynesian argument about bigger government and red ink boosting growth, notwithstanding all the evidence to the contrary. Second, they fail to distinguish between good austerity and bad austerity. If austerity means higher taxes, as has been the case so often in Europe, then it is unambiguously bad for growth. But if it means spending restraint (or even actual spending cuts), then it is clearly good for growth. There may be some short-term disruption since resources don’t instantaneously get reallocated, but the long-term benefits are enormous because labor and capital are used more productively in the private economy.

Myth #5: Tax Cuts Pay For Themselves

Reality check: I agree with the folks at CRFB. As a general rule, tax cuts will reduce government revenue, even after measuring possible pro-growth effects that lead to higher levels of taxable income.

But it’s also important to recognize that not all tax cuts are created equal. Some tax cuts have very large “supply-side” effects, particularly once the economy has a chance to adjust in response to better policy. So a lower capital gains tax or a repeal of the death tax, to cite a couple of examples, might increase revenue in the long run. And we definitely saw a huge response when Reagan lowered top tax rates in the 1980s. But other tax cuts, such as expanded child credits, presumably generate almost no pro-growth effects because there’s no change in the relative price of productive behavior.

Myth #6: We Can Fix the Debt Solely by Taxing the Top 1%

Reality check: The CRFB report correctly points out that confiscatory tax rates on upper-income taxpayers would backfire for the simple reason that rich people would simply choose to earn and report less income. And they didn’t even include the indirect economic damage (and reductions in taxable income) caused by less saving, investment, and entrepreneurship.

Ironically, the CRFB folks seem to recognize that tax rates beyond a certain level would result in less revenue for government. Which implies, of course, that it is possible (notwithstanding what they said in Myth #5) for some tax cuts to pay for themselves.

Myth #7: We Can Lower Tax Rates by Closing a Few Egregious Loopholes

Reality check: It depends on the definition of “egregious.” In the CRFB report, they equate “egregious” with “unpopular” in order to justify their argument.

But if we define “egregious” to mean “economically foolish and misguided,” then there are lots of preferences in the tax code that could – and should – be abolished in order to finance much lower tax rates. Including the healthcare exclusion, the mortgage interest deduction, the charitable giving deduction, and (especially) the deduction for state and local taxes.

Myth #8: Any Tax Increases Will Cripple Economic Growth

Reality check: The CRFB folks are right. A small tax increase obviously won’t “cripple” economic growth. Indeed, it’s even possible that a tax increase might lead to more growth if it was combined with pro-growth policies in other areas. Heck, that’s exactly what happened during the Clinton years. But now let’s inject some reality into the conversation. Any non-trivial tax increase on productive behavior will have some negative impact on economic performance and competitiveness. The evidence is overwhelming that higher tax rates hurt growth and the evidence is also overwhelming that more double taxation will harm the economy.

The CRFB report suggests that the harm of tax hikes could be offset by the supposed pro-growth impact of a lower budget deficit, but the evidence for that proposition if very shaky. Moreover, there’s a substantial amount of real-world data showing that tax increases worsen fiscal balance. Simply stated, tax hikes don’t augment spending restraint, they undermine spending restraint. Which may be why the only “bipartisan” budget deal that actually led to a balanced budget was the one that lowered taxes instead of raising them.

Myth #9: Medicare and Social Security Are Earned Benefits and Should Not Be Touched

Reality check: CRFB is completely correct on this one. The theory of age-related “social insurance” programs such as Medicare and Social Security is that people pay into the programs while young and then get benefits when they are old. This is why they are called “earned benefits.”

The problem is that politicians don’t like asking people to pay and they do like giving people benefits, so the programs are poorly designed. The average Medicare recipient, for instance, costs taxpayers $3 for every $1 that recipient paid into the program. Social Security isn’t that lopsided, but the program desperately needs reform because of demographic change. But the reforms shouldn’t be driven solely by budget considerations, which could lead to trapping people in poorly designed entitlement schemes. We need genuine structural reform.

Myth #10: Repealing “Obamacare” Will Fix the Debt

Reality check: Obamacare is a very costly piece of legislation that increased the burden of government spending and made the tax system more onerous. Repealing the law would dramatically improve fiscal policy.

But CRFB, because of the aforementioned misplaced fixation on red ink, doesn’t have a big problem with Obamacare because the increase in taxes and the increase in spending are roughly equivalent. So the organization is technically correct that repealing the law won’t “fix the debt.” But it would help address America’s real fiscal problem, which is a bloated and costly public sector.

Myth #11: The Health Care Cost Problem is Solved

Reality check: CRFB’s analysis is correct, though it would have been nice to see some discussion of how third-party payer is the problem.

Myth #12: Social Security’s Shortfall Can be Closed Simply by Raising Taxes on or Means-Testing Benefits for the Wealthy

Reality check: To their credit, CRFB is basically arguing against President Obama’s scheme to impose Social Security payroll taxes on all labor income, which would turn the program from a social-insurance system into a pure income-redistribution scheme.

On paper, such a system actually could eliminate the vast majority of Social Security’s giant unfunded liability. In reality, this would mean a huge increase in marginal tax rates on investors, entrepreneurs, and small business owners, which would have a serious adverse economic impact.

Myth #13: We Can Solve Our Debt Situation by Cutting Waste, Fraud, Abuse, Earmarks, and/or Foreign Aid

Reality check: Earmarks (which have been substantially curtailed already) and foreign aid are a relatively small share of the budget, so CRFB is right that getting rid of that spending won’t have a big impact. But what about the larger question. Could our fiscal mess (which is a spending problem, not a “debt situation”) be fixed by eliminating waste, fraud, and abuse?

It depends on how one defines “waste, fraud, and abuse.” If one uses a very narrow definition, such as technical malfeasance, then waste, fraud, and abuse might “only” amount to a couple of hundred billions dollars per year. But from an economic perspective (i.e., grossly inefficient misallocation of resources), then entire federal departments such as HUD, Education, Transportation, Agriculture, etc, should be classified as waste, fraud, and abuse.

Myth #14: We Can Grow Our Way Out of Debt

Reality check: CRFB is correct that faster growth won’t solve all of our fiscal problems. Unless one makes an untenable assumption that economic growth will be faster than the projected growth of entitlement spending. And even that kind of heroic assumption would be untenable since faster growth generally obligates the government to pay higher benefits in the future.

Myth #15: A Balanced Budget Amendment is All We Need to Fix the Debt

Reality check: CRFB accurately explains that a BBA is simply an obstacle to additional debt. Politicians still would be obliged to change laws to fulfill that requirement. But that analysis misses the point. A BBA focuses on red ink, whereas the real problem is that government is too big and growing too fast. State balanced-budget requirement haven’t stopped states like California and Illinois from serious fiscal imbalances and eroding competitiveness. The so-called Maastricht anti-deficit and anti-debt rules in the European Union haven’t stopped nations such as France and Greece from fiscal chaos.

This is why the real solution is to have some sort of enforceable cap on government spending. That approach has worked well in jurisdictions such as Switzerland, Hong Kong, and Colorado. And even research from the IMF (a bureaucracy that shares CRFB’s misplaced fixation on debt) has concluded that expenditure limits are the only effective fiscal rules.

Myth #16: We Can Fix the Debt Solely by Cutting Welfare Spending

Reality check: The federal government is spending about $1 trillion this year on means-tested (i.e., anti-poverty) programs, which is about one-fourth of total outlays, so getting Washington out of the business of income redistribution would substantially lower the burden of federal spending (somewhat offset, to be sure, by increases in state and local spending). And for those who fixate on red ink, that would turn today’s $500 billion deficit into a $500 billion surplus.

That being said, there would still be a big long-run problem caused by other federal programs, most notably Social Security and Medicare. So CRFB is correct in that dealing with welfare-related spending doesn’t fully solve the long-run problem, regardless of whether you focus on the problem of spending or the symptom of borrowing.

This has been a lengthy post, so let’s have a very simple summary.

We know that modest spending restraint can quickly balance the budget.

We also know lots of nations that have made rapid progress with modest amounts of spending restraint.

And we know that the tax-hike option simply leads to more spending.

So the only question to answer is why the CRFB crowd can’t put two and two together and get four?

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If I asked you what Donald Trump and Bono have in common, the easy and accurate answer is that they both have lots of money.

But if I asked you to identify a shared perspective by the two men, at first glance that would seem to be a much harder question.

After all, it seems like a rock star and a real-estate tycoon are about as different as two people could possibly be.

Yet the answer should be obvious.

I’ll give you a big hint. You probably have the same perspective as well.

At least if you answer “no” to the first question and “yes” to the second question.

  1. Do you ever voluntarily pay extra tax?
  2. Or do you, like John Kerry or Bill and Hillary Clinton, take prudent steps to minimize the amount of your income confiscated by government?

In other words, the perspective shared by Donald Trump and Bono is one that is widely held by every sensible person. Simply stated, your income belongs in your pocket, not in the grasping hands of politicians.

This irks politicians such as David Cameron in the U.K., who seem to think we have some sort of moral obligation to help finance their vote-buying efforts.

But I bet almost all of us agree with Trump’s view. Here are some excerpts from a CNN report.

Trump was unambiguous. “I pay as little as possible,” he said. “I fight like hell to pay as little as possible, for two reasons. Number one, I’m a businessman, and that’s the way you’re supposed to do it, and you put the money back into your company and employees and all of that.” “But the other reason is that I hate the way our government spends our taxes. I hate the way they waste our money. Trillions and trillions of dollars of waste and abuse and I hate it,” Trump said. “And I’ll be probably the first candidate in the history of politics within this country to say, I try — by the way, like every single taxpayer out there — I try to pay as little tax as possible, and again, one of the big reasons is I hate what our country does with the money that we pay.”

Amen.

As an economist, I don’t want tax increases because the economy will be hurt and workers will suffer.

But what upsets me at a visceral level is the notion of sending more money to DC when there’s so much waste, fraud, and abuse.

And I suspect tens of millions of other Americans agree that it would be foolish to reward the wasteful antics of Washington politicians with more of our money.

Which is why almost all of us also agree with Bono’s view. As reported by the U.K.-based Mirror, Bono says it is very “sensible” to minimize tax and that it would be “stupid” to behave otherwise.

Members of U2 have hit back at claims they shield millions of pounds in overseas tax havens – claiming they are just “being sensible”. In an interview with Sky News, lead singer Bono insisted the band pays a fortune in tax and it was the right decision to move some of their business to the Netherlands. “It is just some smart people we have working for us trying to be sensible about the way we are taxed,” he said. …“Because you’re good at philanthropy and because I am an activist people think you should be stupid in business and I don’t run with that.”

Bingo, he’s exactly right.

Indeed, even though I’ve praised Bono’s economic analysis in the past, I suspect he doesn’t even understand how right he is.

Because he’s not just doing what’s right from his band’s perspective, he’s also doing what’s right for the rest of us as well.

P.S. While I’m glad lots of leftists seek to minimize their tax burdens, it would be better if they weren’t such total hypocrites.

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When giving speeches outside the beltway, I sometimes urge people to be patient with Washington. Yes, we need fundamental tax reform and genuine entitlement reform, but there’s no way Congress can make those changes with Obama in the White House.

But there are some areas whether progress is possible, and people should be angry with politicians if they deliberately choose to make bad decisions.

For instance, the corrupt Export-Import Bank has expired and there’s nothing that Obama can do to restore this odious example of corporate welfare. It will only climb from the grave if Republicans on Capitol Hill decide that campaign cash from big corporations is more important than free markets.

Another example of a guaranteed victory – assuming Republicans don’t fumble the ball at the goal line – is that there’s no longer enough gas-tax revenue coming into the Highway Trust Fund to finance big, bloated, and pork-filled transportation spending bills. So if the GOP-controlled Congress simply does nothing, the federal government’s improper and excessive involvement in this sector will shrink.

Unfortunately, Republicans have no desire to achieve victory on this issue. It’s not that there’s a risk of them fumbling the ball on the goal line. By looking for ways to generate more revenue for the Trust Fund, they’re moving the ball in the other direction and trying to help the other team score a touchdown!

The good news is that Republicans backed away from awful proposals to increase the federal gas tax.

But the bad news is that they’re coming up with other ideas to transfer more of our income to Washington. Here’s a look at some of the revenue-generating schemes in the Senate transportation bill.

Since the House and Senate haven’t agreed on how to proceed, it’s unclear which – if any – of these proposals will be implemented.

But one thing that is clear is that the greed for more federal transportation spending is tempting Republicans into giving more power to the IRS.

Republicans and Democrats alike are looking to the IRS as they try to pass a highway bill by the end of the month. Approving stricter tax compliance measure is one of the few areas of agreement between the House and the Senate when it comes to paying for an extension of transportation funding. …the Senate and House are considering policy changes for the IRS ahead of the July 31 transportation deadline. …With little exception, the Senate bill uses the same provisions that were in a five-month, $8 billion extension the House passed earlier this month. The House highway bill, which would fund programs through mid-December, gets about 60 percent of its funding from tax compliance measures. …it’s…something of a shift for Republicans to trust the IRS enough to back the new tax compliance measures. House Republicans opposed similar proposals during a 2014 debate over highway funding, both because they didn’t want to give the IRS extra authority and because they wanted to hold the line on using new revenues to pay for additional spending.

Gee, isn’t it swell that Republicans have “grown in office” since last year.

But this isn’t just an issue of GOPers deciding that the DC cesspool is actually a hot tub. Part of the problem is the way Congress operates.

Simply stated, the congressional committee system generally encourages bad decisions. If you want to understand why there’s no push to scale back the role of the federal government in transportation, just look at the role of the committees in the House and Senate that are involved with the issue.

Both the authorizing committees (the ones that set the policy) and the appropriating committees (the ones that spend the money) are among the biggest advocates of generating more revenue in order to enable continued federal government involvement in transportation.

Why? For the simple reason that allocating transportation dollars is how the members of these committees raise campaign cash and buy votes. As such, it’s safe to assume that politicians don’t get on those committees with the goal of scaling back federal subsidies for the transportation sector.

And this isn’t unique to the committees that deal with transportation.

It’s also a safe bet that politicians that gravitate to the agriculture committees have a strong interest in maintaining the unseemly system of handouts and subsidies that line the pockets of Big Ag. The same is true for politicians that seek out committee slots dealing with NASA. Or foreign aid. Or military bases.

The bottom line is that even politicians who generally have sound views are most likely to make bad decisions on issues that are related to their committee assignments.

So what’s the solution?

Well, it’s unlikely that we’ll see a shift to random and/or rotating committee assignments, so the only real hope is to have some sort of overall cap on spending so that the various committees have to fight with each other over a (hopefully) shrinking pool of funds.

That’s why the Gramm-Rudman law in the 1980s was a step in the right direction. And it’s why the spending caps in today’s Budget Control Act also are a good idea.

Most important, it’s why we should have a limit on all spending, such as what’s imposed by the so-called Debt Brake in Switzerland.

Heck, even the crowd at the IMF has felt compelled to admit spending caps are the only effective fiscal tool.

Maybe, just maybe, a firm and enforceable spending cap will lead politicians in Washington to finally get the federal government out of areas such as transportation (and housing, agriculture, education, etc) where it doesn’t belong.

One can always hope.

In the meantime, since we’re on the topic of transportation decentralization, here’s a map from the Tax Foundation showing how gas taxes vary by states.

This data is useful (for instance, it shows why drivers in New York and Pennsylvania should fill up their tanks in New Jersey), but doesn’t necessarily tell us which states have the best transportation policy.

Are the gas taxes used for roads, or is some of the money siphoned off for boondoggle mass transit projects? Do the states have Project Labor Agreements and other policies that line the pockets of unions and cause needlessly high costs? Is there innovation and flexibility for greater private sector involvement in construction, maintenance, and operation?

But this is what’s good about federalism and why decentralization is so important. The states should be the laboratories of democracy. And when they have genuine responsibility for an issue, it then becomes easier to see which ones are doing a good job.

So yet another reason to shut down the Department of Transportation.

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I’m very fond of Estonia, and not just because of the scenery.

Back in the early 1990s, it was the first post-communist nation to adopt a flat tax.

More recently, it showed that genuine spending cuts were the right way to respond to the 2008 crisis (notwithstanding Paul Krugman’s bizarre attempt to imply that the 2008 recession was somehow caused by 2009 spending cuts).

This doesn’t mean Estonia is perfect. It is ranked #22 by Economic Freedom of the World, which is a respectable score, but that puts them not only behind the United States (#12), but also behind Switzerland (#4), Finland (#10), the United Kingdom (#12), Ireland (#14), and Denmark (#19).

And you can see from the chart that Estonia’s overall score has dropped slightly since 2006.

But I don’t believe in making the perfect the enemy of the good. Estonia is still a reasonably good role model for reform, particularly for nations that emerged from decades of communist enslavement.

You can see how good policy makes a difference, for instance, by comparing Estonia with Croatia (#70). At the time of the breakup of the Soviet Empire, living standards in Croatia were low, but they were about twice as high as they were in Estonia. Today, though, per-capita economic output in Estonia is about $4000 higher than in Croatia.

That’s a dramatic turnaround and it shows that markets are much better for people than statism. Sort of like the lesson we learn by comparing Poland (#48) and Ukraine (#122).

Let’s now take a closer look at one of the policies that has helped Estonia prosper. The flat tax was first adopted in 1994 and the rate was 26 percent. Since then, the rate has been gradually reduced and is now 20 percent.

For some people, the most amazing aspect of the Estonian flat tax is its simplicity, as noted by Kyle Pomerleau of the Tax Foundation.

Republican Presidential hopeful Jeb Bush claimed that it only takes 5 minutes to file taxes in Estonia. This claim was confirmed by a number of reporters and tax authorities in Estonia. For those of us that do our taxes by hand, this sounds like a dream. Depending on your situation, filing your taxes can tax a significant amount of time and due to the numerous steps involved (especially if you are claiming credits) may lead some to make errors. According to the IRS, it takes an average taxpayer with no business income 8 hours to fill out their 1040 and otherwise comply with the individual income tax. Triple that for those with business income.

For those keeping score, this means Estonia is kicking America’s derriere.

But Kyle is even more impressed by other features of the Estonian system.

…that it is not the best part of the Estonian tax code. The best part of the Estonian tax code has more to do with its tax base (what it taxes) rather than how fast people can pay their taxes. Specifically, the Estonian tax code has a fully-integrated individual and corporate income tax. This means that corporate income is taxed only once either at the entity level or at the individual level.

And this means Estonia’s flat tax is far better for growth than America’s system, which suffers from pervasive and destructive double taxation.

In total, the tax rate on corporate income is 20 percent in Estonia. Compare this to the integrated tax rate on corporate profits of 56 percent in the United States. Even more, this tax system provides de facto full expensing for capital investments because the corporate tax is only levied on the cash distributed to shareholders, which is also a significant boon to investment and economic growth.

Wow. No double taxation and expensing of business investment.

There is a lot to admire about Estonia’s sensible approach to business taxation.

Particularly when compared to America’s masochistic corporate income tax, which ranks below even the Greek, Italian, and Mexican systems.

Having the world’s highest statutory corporate tax rate is part of the problem. But as Kyle pointed out, the problem is actually far worse when you calculate how the internal revenue code imposes extra layers of tax on business income.

That’s why, at a recent tax reform event at the Heritage Foundation, I tried to emphasize why it’s economically misguided to have a tax bias against saving and investment.

The bottom line is that high taxes on capital ultimately lead to lower wages for workers.

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