Feeds:
Posts
Comments

Archive for the ‘Taxation’ Category

I like the main components of the Trump tax plan, particularly the sweeping reduction in the corporate tax rate.

But, as I say at the beginning of this Fox Business interview, there’s a big difference between proposing a good idea and actually getting legislation approved.

But just because I’m pessimistic, that doesn’t change the fact that a lower tax burden would be good for the country.

Toward the end of the interview, I explained that the most important reason for better tax policy is not necessarily to lower taxes for families, but rather to get more prosperity.

If we can restore the kind of growth we achieved when we had more market-friendly policy in the 1980s and 1990s, that would be hugely beneficial for ordinary people.

That’s the main economic argument for Trump’s plan.

But now I’ve come across what I’ll call the emotionally gratifying argument for Trump’s tax cuts. The Bureau of National Affairs is reporting that European socialists are whining that a lower corporate tax rate in the United States will cause “a race to the bottom.”

U.S. President Donald Trump’s plans to slash corporate taxes by more than half will accelerate a “race to the bottom” and undermine global efforts to combat corporate tax evasion by multinationals, according to a second political group in the European Parliament. The Socialists and Democrats, made up of 190 European Parliament lawmakers, insisted the Trump tax reform, announced April 26, threatens the current work in the Organization for Economic Cooperation and Development and the Group of Twenty to establish a fair and efficient tax system.

As you might expect, the socialists make some nonsensical arguments.

Paul Tang—who heads the Group of the Progressive Alliance of Socialists and Democrats and leads the European Parliament negotiations on the pending EU Common Corporate Tax Base (CCTB) proposal—accused the Trump administration of pursuing a “beggar-they-neighbor policy similar to those in the 1930s.”

Huh?!? Does Mr. Tang think there were tax cuts in the 1930s?

That was a decade of tax increases, at least in the United States!

Or is he somehow trying to equate tax cuts with protectionism? But that makes zero sense. Yes, protectionism was rampant that decade, but higher tariffs mean higher taxes on trade. That’s the opposite of tax cuts.

Mr Tang is either economically illiterate or historically illiterate. Heck, he’s a socialist, so probably both.

Meanwhile, another European parliamentarian complained that the U.S. would become more of a tax haven if Trump’s tax cut was enacted.

Sven Giegold, a European Green Party member and leading tax expert in the European Parliament, told Bloomberg BNA in a April 27 telephone interview that the Trump tax plan further cemented the U.S. as a tax haven. He added the German government must put the issue on the agenda during its current term as holder of the G-20 presidency. …The European Green Party insists the U.S. has become an international tax haven because, among other things, it has not committed to implement the OECD Common Reporting Standard and various U.S. states, including Delaware, Nevada and South Dakota, have laws that allow companies to hide beneficial owners.

He’s right and wrong.

Yes, the United States is a tax haven, but only for foreigners who passively invest in the American economy (we generally don’t tax interest and capital gains received by foreigners, and we also generally don’t share information about the indirect investments of foreigners with their home governments).

Corporate income, however, is the result of direct investment, and that income is subject to tax by the IRS.

But I suppose it’s asking too much to expect politicians to understand such nuances.

For what it’s worth, I assume Mr. Giegold is simply unhappy that a lower corporate tax rate would make America more attractive for jobs and investment.

Moreover, he presumably understands adoption of Trump’s plan would put pressure on European nations to lower their corporate tax rates. Which is exactly what happened after the U.S. dropped its corporate tax rate back in the 1980s.

Which is yet another example of why tax competition is something that should be celebrated rather than persecuted. It forces politicians to adopt better policy even when they don’t want to.

That is what gets them angry. And I find their angst very gratifying.

P.S. You may have noticed at the very end of the interview that I couldn’t resist interjecting a plea to reduce the burden of government spending. That’s not merely a throwaway line. When the Congressional Budget Office released its fiscal forecast earlier this year, I crunched the numbers and showed that we could balance the budget within 10 years and lower the tax burden by $3 trillion (on a static basis!) if politicians simply restrained spending so that it grew 1.96 percent per year.

P.P.S. It’s worth remembering that the “race to the bottom” is actually a race to better policy and more growth. And politicians should be comforted by the fact that this doesn’t necessarily mean less revenue.

Read Full Post »

If I had to pick my least-favorite tax loophole, the economist part of my brain would select the healthcare exclusion. After all, that special preference creates a destructive incentive for over-insurance and contributes (along with Medicare, Medicaid, Obamacare, etc) to the third-party payer crisis that is crippling America’s healthcare system.

But if I based my answer on the more visceral, instinctive portion of my brain, I would select the deduction for state and local taxes. As I’ve previously noted, that odious tax break enables higher taxes at the state and local level. Simply stated, greedy politicians in a state like California can boost tax rates and soothe anxious state taxpayers by telling them that they can use their higher payments to Sacramento as a deduction to reduce their payments to Washington.

What’s ironic about this loophole is that it’s basically a write-off for the rich. Only 30 percent of all taxpayers utilize the deduction for state and local taxes. But they’re not evenly distributed by income. Here’s a sobering table from a report by the Tax Foundation.

The beneficiaries also aren’t evenly distributed by geography.

Here’s a map from the Tax Foundation showing in dark blue that only a tiny part of the country benefits from this unfair loophole for high-income taxpayers.

As you can see from the map, the vast majority of the nation deducts less than $2,000 in state and local taxes.

But if you really want to see who benefits, don’t simply look at the dark blue sections. After all, most of those people would happily give up the state and local tax deduction in exchange for some of the other policies that are part of tax reform – particularly lower tax rates and less double taxation.

And I suspect that’s even true for the people who hugely benefit from the deduction. The biggest beneficiaries of this loophole are concentrated in a tiny handful of wealthy counties in New York, California, New Jersey, and Connecticut.

As you can see, they reap enormous advantages from the state and local tax deduction, though I suspect these same people also would benefit if tax rates were lowered and double taxation was reduced.

Regardless of who benefits and loses, there’s a more fundamental question. Should federal tax law be distorted to subsidize high tax burdens at the state and local level?

Kevin Williamson of National Review says no.

…the deduction of state taxes against federal tax liabilities creates a subsidy and an incentive for higher state taxes. California in essence is able to capture money that would be federal revenue and use it for its own ends, an option that is not practically available to low-tax (and no-income-tax) states such as Nevada and Florida. It makes sense to allow the states to compete on taxes and services, but the federal tax code biases that competition in favor of high-tax jurisdictions.

The Governor of New York, by contrast, argues that the tax code should subsidize his profligacy.

It would be “devastating on the state of New York, California, et cetera, if you didn’t allow the people of this state to deduct their state and local taxes,” Cuomo told reporters… State and local governments have been working to preserve the deduction, and they argue that doing away with the preference would hurt states and localities’ flexibility to make tax changes.

By the way, I noticed how the reporter displays bias. Instead of being honest and writing that that the loophole enables higher taxes, she writes that the loss of the preference “would hurt states and localities’ flexibility to make tax changes.”

Gee, anyone want to guess how that “flexibility” is displayed?

Though at least the reporter acknowledged that the deduction is primarily for rich people in blue states.

…the deduction…is viewed as disproportionately benefiting wealthy people. It also tends to be used in areas that lean Democratic.

And that’s confirmed by a 2016 news report from the Wall Street Journal.

Repealing the federal deduction for state and local taxes would make 23.6% of U.S. households pay an average of $2,348 more to the Internal Revenue Service for 2016. But those costs—almost $1.3 trillion over a decade—aren’t evenly spread… Ranked by the average potential tax increase, the top 13 states (including Washington, D.C.), as well as 16 of the top 17, voted twice for President Barack Obama. …And nearly one-third of the cost would be paid by residents of California and New York, two solidly Democratic states. …President Ronald Reagan tried repealing the deduction as part of the tax-code overhaul in 1986, but he was rebuffed by congressional Democrats and state officials. …Republicans argue that the break subsidizes high state taxes, because governors and legislators know they can raise income taxes on their citizens and have the federal government pick up part of the tab. …half the cost of repealing the deduction would be borne by households making $100,000 to $500,000, using a broad definition of income. Another 30% would be borne by households making more than $1 million. Under the GOP plans, residents of high-tax states wouldn’t necessarily pay more in federal taxes than they do now. They would benefit from tax-rate cuts.

Here’s one final image that underscores the unfairness of the deduction.

The Tax Policy Center has a report on the loophole for state and local taxes and they put together this chart showing that rich people are far more likely to take advantage of the deduction. And it’s worth much more for them than it is for lower-income Americans.

How much more? Well, more than 90 percent of taxpayers earning more than $1 million use the deduction and their average tax break is more than $260,000. By contrast, only a small fraction of taxpayers earning less than $50 thousand annually benefit from the deduction and they only get a tax break of about $3,800.

Yet leftists who complain about rich people manipulating the tax system usually defend this tax break.

It’s enough to make you think their real goal is bigger government.

I’ll close by calling attention to the mid-part of this interview. I shared it a couple of days ago as part of a big-picture discussion of Trump’s tax plan. But I specifically address the state and local tax deduction around 3:00 and 4:30 of the discussion.

P.S. In addition to the loophole that encourages higher taxes at the state and local level, there’s also a special tax preference that encourages higher spending at the state and local level. Sigh.

P.P.S. Now, perhaps, people will understand why I want to rip up the current system and replace it with a simple and fair flat tax.

Read Full Post »

I expressed pessimism yesterday about Trump’s tax plan. Simply stated, I don’t think Congress is willing to enact a large tax cut given the nation’s grim fiscal outlook.

In this Fox Business interview, I elaborated on my concerns while also pointing out that the plan would be very good if it somehow got enacted.

We now have some preliminary numbers that illustrate why I’m concerned.

The Committee for a Responsible Federal Budget put together a quick guess about the revenue implications of Trump’s new plan. Their admittedly rough estimate is that federal revenues would be reduced by close to $6 trillion over 10 years.

Incidentally, these revenue estimates are very inaccurate because they are based on “static scoring,” which is the antiquated notion that major changes in tax policy have no impact on economic performance.

But these numbers nonetheless are useful since the Joint Committee on Taxation basically uses that approach when producing official revenue estimates that guide congressional action.

In other words, it doesn’t matter, at least for purposes of enacting legislation, that there would be substantial revenue feedback in the real world (the rich actually paid more, for instance, when Reagan dropped the top tax rate from 70 percent to 28 percent). Politicians on Capitol Hill will point to the JCT’s static numbers, gasp with feigned horror, and use higher deficits as an excuse to vote no (even though those same lawmakers generally have no problem with red ink when voting to expand the burden of government spending).

That being said, they wouldn’t necessarily have that excuse if the Trump Administration was more aggressive about trying to shrink the size and scope of the federal government. So there’s plenty of blame to go around.

Until something changes, however, I don’t think Trump’s tax cut is very realistic. So if you want my prediction on what will happen, I’m sticking to the three options I shared yesterday.

  1. Congress and the White House decide to restrain spending, which easily would create room for a very large tax cut (what I prefer, but I won’t hold my breath for this option).
  2. Congress decides to adopt Trump’s tax cuts, but they balance the cuts with dangerous new sources of tax revenue, such as a border-adjustment tax, a carbon tax, or a value-added tax (the option I fear).
  3. Congress and the White House decide to go for a more targeted tax cut, such as a big reduction in the corporate income tax (which would be a significant victory).

By the way, the Wall Street Journal editorialized favorably about the plan this morning, mostly because it reflects the sensible supply-side view that it is good to have lower tax rates on productive behavior.

While the details are sparse and will have to be filled in by Congress, President Trump’s outline resembles the supply-side principles he campaigned on and is an ambitious and necessary economic course correction that would help restore broad-based U.S. prosperity. …Faster growth of 3% a year or more is possible, but it will take better policies, and tax reform is an indispensable lever. Mr. Trump’s modernization would be a huge improvement on the current tax code that would give the economy a big lift, especially on the corporate side. …The Trump principles show the President has made growth his highest priority, and they are a rebuke to the Washington consensus that 1% or 2% growth is the best America can do.

But the WSJ shares my assessment that the plan will not survive in its current form.

…the blueprint is being assailed from both the left and the balanced-budget right. The Trump economic team acknowledges that their plan would mean less federal revenue than current law… Mr. Trump’s plan is an opening bid to frame negotiations in Congress, and there are plenty of bargaining chips. Perhaps the corporate rate will rise to 20%… Budget rules and Democratic opposition could force Republicans to limit the reform to 10 years.

For what it’s worth, if the final result is a 15 percent or 20 percent corporate tax rate, I’ll actually be quite pleased. That reform would be very good for the economy and national competitiveness. And regardless of what JCT projects, there would be substantial revenue feedback.

Read Full Post »

I want tax cuts. I support tax cuts. I relish tax cuts.

  • I like tax cuts because I’m a curmudgeonly libertarian and I think people should have the first claim on the money they earn.
  • I like tax cuts because I’m an economist and we’ll get more growth if penalties on productive behavior are reduced.
  • I like tax cuts because the academic research supports the “starve-the-beast” theory of less revenue leading to less spending.

This is why I wrote favorably about Trump’s campaign tax plan, and this is why I like Trump’s new tax plan (with a few exceptions).

But I confess that my heart’s not in it. Simply stated, I don’t think the new plan is serious.

If Trump really wanted a big tax cut, he would have a comprehensive plan to restrain the growth of government spending. He doesn’t.

If Trump genuinely wanted lower taxes, he would be aggressively pushing for genuine entitlement reform. He isn’t.

And Congress isn’t much better. At least in the absence of leadership from the White House.

It’s not merely that I’m concerned lawmakers won’t put the brakes on spending. And it’s not just that I fear they won’t enact much-needed entitlement reform. I worry they’ll actually increase the burden of federal spending. Just look what’s happening as Congress and the White House negotiate a spending bill for the remainder of the 2017 fiscal year. The pending deal would trade more defense spending for more Obamacare subsidies. Everyone wins…except taxpayers.

In this profligate environment, it’s hard to be optimistic about tax cuts.

By the way, I fully agree we would get more growth if Trump’s tax plan was enacted. But the Laffer Curve doesn’t say that all tax cuts pay for themselves with faster growth. That only happens in rather rare circumstances.

Yes, the lower corporate tax rate would have a big supply-side impact (and there’s plenty of evidence from overseas to support that notion), but many of the other provisions of his plan are sure to reduce revenue.

Again, I don’t lose sleep about the prospect of less money going to Washington. But you can be sure that politicians pay attention to that issue.

Which is why I’m pessimistic. I don’t think Congress is willing to approve a big tax cut.

The bottom line is that there are three possible outcomes.

  1. Congress and the White House decide to restrain spending, which easily would create room for a very large tax cut (what I prefer, but I won’t hold my breath for this option).
  2. Congress decides to adopt Trump’s tax cuts, but they balance the cuts with dangerous new sources of tax revenue, such as a border-adjustment tax, a carbon tax, or a value-added tax (the option I fear).
  3. Congress and the White House decide to go for a more targeted tax cut, such as a big reduction in the corporate income tax (which would be a significant victory).

Ultimately, I want to completely junk our corrupt system and replace it with a simple and fair flat tax. But for 2017, I’ll be happy if we simply slash the corporate rate.

Read Full Post »

Fundamental tax reform such as a flat tax should accomplish three big goals.

The good news is that almost all Republicans believe in the first two goals and at least pay lip services to the third goal.

The bad news is that they nonetheless can’t be trusted with tax reform.

Here’s why. Major tax reform is based on the assumption that achieving the first two goals will lower tax revenue and achieving the third goal will generate tax revenue. A reform plan doesn’t have to be “revenue neutral,” of course, but politicians would be very reluctant to vote for a package that substantially reduced tax revenue. So serious proposals have revenue-raising provisions that are roughly similar in magnitude to the revenue-losing provisions.

Here’s the problem.   Notwithstanding lip service, Republicans are not willing to go after major tax loopholes like the healthcare exclusion. And that means that they are looking for other sources of revenue. In some cases, such as the proposal in the House plan to put debt and equity on a level playing field, they come up with decent ideas. In other cases, such as the border-adjustment tax, they come up with misguided ideas.

And some of them are even talking about very bad ideas, such as a value-added tax or carbon tax.

This is why it would be best to set aside tax reform and focus on a more limited agenda, such as a plan to lower the corporate tax rate. I discussed that idea a few weeks ago on Neil Cavuto’s show, and I echoed myself last week in another appearance on Fox Business.

Lest you think I’m being overly paranoid about Republicans doing the wrong thing, here’s what’s being reported in the establishment press.

The Hill is reporting that the Trump Administration is still undecided on the BAT.

The most controversial aspect of the House’s plan is its reliance on border adjustability to tax imports and exempt exports. …the White House has yet to fully embrace it. …If the administration opts against the border-adjustment proposal, it would have to find another way to raise revenue to pay for lowering tax rates.

While I hope the White House ultimately rejects the BAT, that won’t necessarily be good news if the Administration signs on to another new source of revenue.

And that’s apparently under discussion.

The Washington Post last week reported that the White House was looking at other ideas, including a value-added tax and a carbon tax… Even if administration officials are simply batting around ideas, it seems clear that Trump’s team is open to a different approach.

The Associated Press also tries to read the tea leaves and speculates whether the Trump Administration may try to cut or eliminate the Social Security payroll tax.

The administration’s first attempt to write legislation is in its early stages and the White House has kept much of it under wraps. But it has already sprouted the consideration of a series of unorthodox proposals including a drastic cut to the payroll tax, aimed at appealing to Democrats.

I’m not a big fan of fiddling with the payroll tax, and I definitely worry about making major changes.

Why? Because it’s quite likely politicians will replace it with a tax that is even worse.

This would require a new dedicated funding source for Social Security. The change, proposed by a GOP lobbyist with close ties to the Trump administration, would transform Brady’s plan on imports into something closer to a value-added tax by also eliminating the deduction of labor expenses. This would bring it in line with WTO rules and generate an additional $12 trillion over 10 years, according to budget estimates.

Last but not least, the New York Times has a story today on the latest machinations, and it appears that Republicans are no closer to a consensus today than they were the day Trump got inaugurated.

…it is becoming increasingly unlikely that there will be a simpler system, or even lower tax rates, this time next year. The Trump administration’s tax plan, promised in February, has yet to materialize; a House Republican plan has bogged down, taking as much fire from conservatives as liberals… Speaker Paul D. Ryan built a tax blueprint around a “border adjustment” tax… With no palpable support in the Senate, its prospects appear to be nearly dead. …The president’s own vision for a new tax system is muddled at best. In the past few months, he has called for taxing companies that move operations abroad, waffled on the border tax and, last week, called for a “reciprocal” tax that would match the import taxes other countries impose on the United States.

The report notes that Trump may have a personal reason to oppose one of the provisions of the House plan.

Perhaps the most consequential concern relates to a House Republican proposal to get rid of a rule that lets companies write off the interest they pay on loans — a move real estate developers and Mr. Trump vehemently oppose. Doing so would raise $1 trillion in revenue and reduce the appeal of one of Mr. Trump’s favorite business tools: debt.

From my perspective, the most encouraging part of the story is that the lack of consensus may lead Republicans to my position, which is simply to cut the corporate tax rate.

With little appetite for bipartisanship, many veterans of tax fights and lobbyists in Washington expect that Mr. Trump will ultimately embrace straight tax cuts, with some cleaning up of deductions, and call it a victory.

And I think that would be a victory as well, even though I ultimately want to junk the entire tax code and replace it with a flat tax.

P.S. In an ideal world, tax reform would be financed in large part with spending restraint. Sadly, Washington, DC, isn’t in the same galaxy as that ideal world.

P.P.S. To further explain why Republicans cannot be trusted, even if they mean well, recall that Rand Paul and Ted Cruz both included VATs in the tax plans they unveiled during the 2016 presidential campaign.

Read Full Post »

Since I’ve written that the International Monetary Fund is the Dumpster Fire of the Global Economy” and “the Dr. Kevorkian of Global Economic Policy,” I don’t think anyone could call me a fan of that international bureaucracy.

But I’ve also noted that the real problem with organizations like the IMF is that they have bad leadership. The professional economists at international bureaucracies often produce good theoretical and empirical work. That sensible research doesn’t make much difference, though, since the actual real-world policy decisions are made by political hacks with a statist orientation.

For instance, the economists at the IMF have produced research on the benefits of smaller government and spending caps. But the political leadership at the IMF routinely ignores that sensible research and instead has a dismal track record of pushing for tax increases.

Hope springs eternal, though, so I’m going to share some new IMF research on tax policy that is very sound. It’s from the second chapter of the bureaucracy’s newest Fiscal Monitor. Here are some excerpts, starting with an explanation of why the efficient allocation of resources is so important for prosperity.

A top challenge facing policymakers today is how to raise productivity, the key driver of living standards over the long term. …The IMF’s policy agenda has therefore emphasized the need to employ all policy levers, and in particular to promote growth-friendly fiscal policies that will boost productivity and potential output. Total factor productivity (TFP) at the country level reflects the productivity of individual firms…aggregate TFP depends on firms’ individual TFP and also on how available resources (labor and capital) are allocated across firms. Indeed, the poor use of existing resources within countries—referred to here as resource misallocation—has been found to be an important source of differences in TFP levels across countries and over time. …What is resource misallocation? Simply put, it is the poor distribution of resources across firms, reducing the total output that can be obtained from existing capital and labor.

The chapter notes that creative destruction plays a vital role in growth.

Baily, Hulten, and Campbell (1992) find that 50 percent of manufacturing productivity growth in the United States during the 1980s can be attributed to the reallocation of factors across plants and to firm entry and exit. Similarly, Barnett and others (2014) find that labor reallocation across firms explained 48 percent of labor productivity growth for most sectors in the U.K. economy in the five years prior to 2007.

And a better tax system would enable some of that growth by creating a level playing field.

Simply stated, you want people in the private sector to make decisions based on what makes economic sense rather than because they’re taking advantage of some bizarre quirk in the tax code.

Potential TFP gains from reducing resource misallocation are substantial and could lift the annual real GDP growth rate by roughly 1 percentage point. …Upgrading the design of their tax systems can help countries chip away at resource misallocation by ensuring that firms’ decisions are made for business and not tax reasons. Governments can eliminate distortions that they themselves have created. …For instance, the current debt bias feature of some tax systems not only distorts financing decisions but hampers productivity as well, especially in the case of advanced economies. …Empirical evidence shows that greater tax disparity across capital asset types is associated with higher misallocation.

One of the main problems identified by the IMF experts is the tax bias for debt.

And since I wrote about this problem recently, I’m glad to see that there is widespread agreement on the economic harm that is created.

Corporate debt bias occurs when firms are allowed to deduct interest expenses, but not returns to equity, in calculating corporate tax liability. …Several options are available to eliminate the distortions arising from corporate debt bias and from tax disparities across capital asset types, including the allowance for corporate equity system and a cash flow tax. …In the simplest sense, a CFT is a tax levied on the money entering the business less the money leaving the business. A CFT entails immediate expensing of all investment expenditures (that is, 100 percent first-year depreciation allowances) and no deductibility of either interest payments or dividends. Therefore, if it is well designed and implemented, a CFT does not affect the decision to invest or the scale of investment, and it does not discriminate across sources of financing.

By the way, regular readers may notice that the IMF economists favor a cash-flow tax, which is basically how the business side of the flat tax operates. There is full expensing in that kind of system, and interest and dividends are treated equally.

This is also the approach in the House Better Way tax plan, so the consensus for cash-flow taxation is very broad (though the House wants a destination-based approach, which is misguided for several reasons).

But let’s not digress. There’s one other aspect of the IMF chapter that is worthy of attention. There’s explicit discussion of how high tax rates undermine tax compliance, which is music to my ears.

Several studies have shown that tax policy and tax administration affect the prevalence of informality and thus productivity. Colombia provides an interesting case study on the effect of taxation on informality. A 2012 tax reform that reduced payroll taxes was found to incentivize a shift of Colombian workers out of informal into formal employment. Leal Ordóñez (2014) finds that taxes and regulations play an important role in explaining informality in Mexico. For Brazil, Fajnzylber, Maloney, and Montes-Rojas (2011) show that tax reductions and simplification led to a significant increase in formal firms with higher levels of revenue and profits. While a higher tax burden contributes to the prevalence of informality… For 130 developing countries, a higher corporate tax rate is found to increase the prevalence of cheats among small manufacturing firms, lowering the share of sales reported for tax purposes.

In closing, I should point out that the IMF chapter is not perfect.

For instance, even though it cites research about how high tax rates reduce compliance, the chapter doesn’t push for lower rates. Instead, it endorses more power for national tax authorities. Makes me wonder if the political folks at the IMF imposed that recommendation on the folks who wrote the chapter?

Regardless, the overall analysis of the chapter is quite sound. It’s based on a proper understanding that growth is generated by the efficient allocation of labor and capital, and it recognizes that bad tax policy undermines that process by distorting incentives for productive behavior.

The next step is convince Ms. Lagarde and the rest of the IMF’s leadership to read the chapter. They get tax-free salaries, so is it too much to ask that they stop pushing for higher taxes on the rest of us?

Read Full Post »

The recipe for growth and prosperity isn’t very complicated.

Adam Smith provided a very simple formula back in the 1700s.

For folks who prefer a more quantitative approach, the Fraser Institute’s Economic Freedom of the World uses dozens of variables to rank nations based on key indices such as rule of law, size of government, regulatory burden, trade openness, and stable money.

One of the heartening lessons from this research is that countries don’t need perfect policy. So long as there is simply “breathing room” for the private sector, growth is possible. Just look at China, for instance, where hundreds of millions of people have been lifted from destitution thanks to a modest bit of economic liberalization.

Indeed, it’s remarkable how good policy (if sustained over several decades) can generate very positive results.

That’s a main message in this new video from the Center for Freedom and Prosperity.

The first part of the video, narrated by Abir Doumit, reviews success stories from around the world, including Hong Kong, Singapore, Chile, Estonia, Taiwan, Ireland, South Korea, and Botswana.

Pay particular attention to the charts showing how per-capita economic output has grown over time in these jurisdictions compared to other nations. That’s the real test of what works.

The second part of the video exposes the scandalous actions of international bureaucracies, which are urging higher fiscal burdens in developing nations even though no poor nation has ever become a rich nation with bigger government. Never.

Yet bureaucracies such as the United Nations, the International Monetary Fund, and the Organization for Economic Cooperation and Development are explicitly pushing for higher taxes in poor nations based on the anti-empirical notion that bigger government is a strategy for growth.

I’m not joking.

As Ms. Doumit remarks in the video, these bureaucracies never offer a shred of evidence for this bizarre hypothesis.

And what’s especially frustrating is that the big nations of the western world (i.e., the ones that control the international bureaucracies) all became rich when government was very small.

And while the bureaucracies never provide any data or evidence, the Center for Freedom and Prosperity’s video is chock full of substantive information. Consider, for instance, this chart showing that there was almost no redistribution spending in the western world as late as 1930.

Unfortunately, the burden of government spending in western nations has metastasized starting in the 1930s. Total outlays now consume enormous amounts of economic output and counterproductive redistribution spending is now the biggest part of national budgets.

But at least western nations became rich first and then made the mistake of adopting bad fiscal policy (fortunately offset by improvements in other areas such as trade liberalization).

The international bureaucracies are trying to convince poor nations, which already suffer from bad policy, that they can succeed by imposing additional bad fiscal policy and then magically hope that growth will materialize.

And having just spent last week observing two conferences on tax and development at the United Nations in New York City, I can assure you that this is what they really think.

Read Full Post »

Older Posts »

%d bloggers like this: