Feeds:
Posts
Comments

Archive for the ‘Taxation’ Category

Back in 2020, I warned that then-Mayor Bill de Blasio was setting the stage for fiscal crisis.

During his eight years in office, he violated fiscal policy’s golden rule by increasing the burden of government spending at three times the rate of inflation.

And all that spending requires lots of taxes, which helps to explain why residents were escaping New York City even before the pandemic.

But the pandemic accelerated the exodus, and that is turning a bad fiscal situation into a terrible fiscal situation for the new Mayor, Eric Adams.

Reporting for the New York Times, Nicole Hong and  write about how rich people (and their tax revenue) have been escaping New York City.

…roughly 300,000 New York City residents left during the early part of the pandemic… Now, new data from the Internal Revenue Service shows that the residents who moved to other states by the time they filed their 2019 taxes collectively reported $21 billion in total income, substantially more than those who departed in any prior year on record. …a potential loss that could have long-term effects on a city that relies heavily on its wealthiest residents to support schools, law enforcement and other public services. …The top 1 percent of earners, who make more than $804,000 a year, contributed 41 percent of the city’s personal income taxes in 2019. …The exodus to Florida was especially robust, and not just for the retiree crowd. …The pandemic accelerated the relocation of several New York-based financial firms to new offices or headquarters in Florida. …The Manhattan residents who moved to Palm Beach County had an average income of $728,351, IRS data showed.

So why are people leaving the City?

Some of it was temporary, caused by the pandemic.

But it’s very likely that most high-income emigrants won’t return. Why? Because New York City has bad governance. Everything from big problems like crummy schools to small problems like regulatory overkill.

So why pay lots of taxes when you get very little in return?

In a column last year for the New York Post, Nicole Gelinas warned about job losses in the financial industry.

…the city’s financial-industry jobs (not including real estate) were down 5 percent, to 338,800, compared with pre-COVID August 2019. Commercial-banking jobs are down 7 percent, to 67,300. Investment-related jobs are also down 7 percent, to 177,600. If we weren’t distracted by huge, double-digit percentage losses in other parts of the city’s economy, like arts and entertainment, these would be big numbers. …Some of this job destruction is a gain for other states. In Florida, financial jobs…are up 6 percent since August 2019, to 422,000. …yet another small investment firm, ARK, said it would close its New York headquarters and move…, with most of its dozens of workers going. …We used to fret about what happened when Wall Street crashed; now, we should fret that we have these woes when Wall Street hasn’t crashed.

When jobs are lost, that’s bad news for politicians because they miss out on tax revenue. And that’s true if jobs simply disappear and it’s true if the jobs move to low-tax states like Florida.

And it’s a big problem because Mayor Adams inherited a big mess. Simply stated, revenues are running away at the same time that spending is going up.

Emma Fitzsimmons wrote for the New York Times that the former Mayor’s legacy is a bloated city budget, which is connected to an ever-expanding bureaucracy.

Bill de Blasio will be remembered for many things…But one central element of his administration has received less attention: his passion for spending money. Under Mr. de Blasio, the city’s budget has soared to a record $102.8 billion, and the city work force rose to more than 325,000 employees, its highest level ever. His final budget, more than $25 billion higher than his first budget in 2014… Mr. de Blasio’s spending spree could create problems for Mr. Adams… The city work force…quickly began to rise…after Mr. de Blasio took office — pleasing the city’s municipal unions, some of which were major donors to the mayor’s political endeavors. …The increases to the city work force will create long-term costs for the city for health care, pensions and retiree benefits.

I can say “I told you so” because I warned that de Blasio was bad news when he was running for office in 2013.

Now the chickens are coming home to roost.

P.S. Just as many states compete to be the worst, the same is true for cities. Yes, New York City is a mess, but is it better or worse than places such as Chicago, SeattleMinneapolisDetroit, and San Francisco?

Read Full Post »

Yesterday’s column discussed Caterpillar’s decision to move its headquarters from high-tax Illinois to low-tax Texas.

Today, we have more bad news for the Prairie State.

A major investment fund, Citadel, also has decided to leave Illinois.

Is the company moving to a different high-tax state, perhaps California or New York? Maybe Connecticut or New Jersey?

Nope. Citadel is going to Florida, a state famous for having no income tax.

The Wall Street Journal opined this morning about Citadel’s move.

The first step to recovery is supposed to be admitting you have a problem. But Illinois Gov. J.B. Pritzker still won’t, even after billionaire Ken Griffin on Thursday said he’s moving his Citadel hedge fund and securities trading firm to Miami from Chicago. …Meantime, Democrats in Springfield continue to threaten businesses and citizens with higher taxes… It’s no wonder so many companies and people are leaving, and mostly to low-tax states. …In 2020, $2.4 billion in net adjusted gross income moved to Florida from Illinois, about $298,000 per tax filer. …Mr. Griffin has spent tens of millions of his personal fortune trying to rescue Illinois from bad progressive governance. Maybe he figures it’s time to cut his losses.

Other (former) Illinois residents cut their losses last decade.

Scott Shackford of Reason shared grim data at the end of 2020 about the ongoing exodus from Illinois.

For the seventh year in a row, census figures show residents moving out of Illinois in significant numbers. …Perhaps demanding that your excessively taxed residents give the government even more money is not the best way to keep those residents in your state… Over the course of the last decade, Illinois lost more than a quarter-million people…not even California…has seen Illinois’ population loss. …Government leaders have responded not with better fiscal management (the state’s powerful unions blocked pension reforms), but with more taxes and fees, even as residents leave.

The bottom line is that Illinois is currently losing people and businesses.

Just as it lost people and businesses last decade.

And you can see from this map that taxpayers also were fleeing the state earlier this century.

I’m guessing the state’s hypocritical governor probably thinks this is a good thing because the people who left probably didn’t vote for tax-and-spend politicians.

But that’s a very short-sighted viewpoint.

After all, parasites need a healthy host. If you’re a flea or a tick, it’s bad news if you’re on a dog that dies.

As Michael Barone noted many years ago, that’s a lesson that Illinois politicians haven’t learned.

Read Full Post »

I wrote a couple of days ago about California’s grim future.

But now I’ll share some good news. No matter how bad California gets, the Golden State probably won’t have to worry about people and businesses fleeing to Illinois.

That’s because the Prairie State is an even bigger mess. If California is committing “slow motion suicide,” Illinois is opting for the quickest-possible fiscal demise.

Politicians in Springfield (the Illinois capital) have a love affair with higher taxes. A very passionate love affair.

But the state’s productive people have a different point of view. More and more of them have been escaping.

And they are now being joined by the state’s most-famous company, as Matt Paprocki of the Illinois Policy Institute explains in a column for the Washington Post.

When Boeing announced last month that it was moving its headquarters from Chicago to Arlington, Va., it sent shudders through the Illinois business community and state capital. But last week, when the heavy-equipment manufacturer Caterpillar said it was moving its headquarters to Texas, it felt more like a bulldozer ramming into the news. …If you’re an Illinois business owner or resident, as I am, the economics of staying are tough and the enticements to move away are many. …According to the U.S. Census Bureau, last year the state had the third-largest loss of residents due to domestic migration in the nation (-122,460), trailing only California and New York.

It’s easy to understand why people and businesses are leaving.

In 2017, Illinois lawmakers raised the personal income tax rate to 4.95 percent, from 3.75 percent, and hiked the corporate rate to 7 percent, from 5.25 percent. When J.B. Pritzker took office as governor in 2019, he passed another 24 tax and fee hikes costing taxpayers over $5 billion. …With 278,475 regulatory restrictions and requirements — double the national average — Illinois has the third most heavily regulated environment in the country. …Illinois owes over $139 billion in state pension debt as of last year, and local governments owe about $75 billion, which is the primary driver for Illinois’ spiraling property taxes, second-highest in the nation.

Mr. Paprocki offers all sorts of suggestions for reform, including a spending cap.

But the chances of pro-growth reform are effectively zero. The governor is a hard-core leftist (as well as a hypocrite) and the state legislature is controlled by government employee unions.

So if you’re hoping for a TABOR-style spending cap, there’s little reason to be optimistic.

And if you’re hoping for reforms that will improve the state’s “least friendly” tax climate, don’t hold your breath.

Read Full Post »

Based on research from the Congressional Budget Office, I’ve shared estimates of the potential economic damage from the fiscal plan Joe Biden unveiled last year.

But now he has a new budget. So what if we simply focus on the tax portion of that plan and ignore all the new spending?

The Tax Foundation has crunched the numbers from Biden’s tax agenda and has published some very sobering numbers about this latest version of the President’s class-warfare proposals.

What caught my attention was this chart showing the United States (light-blue bars) already is out of whack with major competitors and trading partners (green bars) – and Joe Biden wants to make a bad situation much worse (red bars).

And when I write “out of whack,” that’s not an idle statement.

it turns out that the United States would have the highest income tax rates in the world.

Higher than Greece. Higher than France. Higher than Italy. Here are some of the grim details.

…the tax increases in the Build Back Better Act (BBBA)…would raise revenues by $4 trillion on a gross basis over the next decade. The Biden tax increases in the budget and BBBA would come at the cost of economic growth, harming investment incentives and productive capacity… The budget proposes several new tax increases on high-income individuals and businesses, which combined with the BBBA would give the U.S. the highest top tax rates on individual and corporate income in the developed world… Taxing capital gains at ordinary income tax rates would bring the combined top marginal rate in the U.S. to 48.9 percent, up from 29.2 percent under current law and well-above the OECD average of 18.9 percent. …Raising the corporate income tax rate to 28 percent would once again bring the U.S. near the top of the OECD at a combined rate of 32.3 percent, versus 25.8 percent under current law and an OECD average (excluding the U.S.) of 22.8 percent.

The good news, relatively speaking, is that the United States would not have the highest aggregate tax burden (taxes as a share of economic output).

And the U.S. would not have the highest tax burden on consumption (no value-added tax in America, fortunately).

But with all of Biden’s new spending (along with the built-in expansions of government that already have been legislated), it may just be a matter of time before the U.S. copies those features of Europe’s stagnant welfare states.

The net result is lower living standards for the American people. The only open question is how far we drop.

Read Full Post »

I’ve already shared the “feel-good story” for 2022, so today I’m going to share this year’s feel-good map.

Courtesy of the Tax Foundation, here are the states that have lowered personal income tax rates and/or corporate income tax rates in 2021 and 2022. I’ve previously written about these reforms (both this year and last year), but more and more states and lowering tax burdens, giving us a new reason to write about this topic.

The map is actually even better than it looks because there are several states that don’t have any income taxes, so it’s impossible for them to lower rates. I’ve labelled them with a red zero.

And when you add together the states with no income tax with the states that are reducing income tax rates, more than half of them are either at the right destination (zero) or moving in that direction.

That’s very good news.

And here’s more good news from the Tax Foundation. The flat tax club is expanding.

I prefer the states with no income taxes, but low-rate flat taxes are the next best approach.

P.S. According to the Tax Foundation, New York and Washington, D.C. have moved in the wrong direction. Both increased income tax burdens in 2021. No wonder people are moving away.

P.P.S. If I had to pick the states with the best reforms, I think Iowa and Arizona belong at the top of the list.

Read Full Post »

Good tax policy should strive to solve the three major problems that plague today’s income tax.

  1. Punitive tax rates on productive behavior.
  2. Double taxation of saving and investment
  3. Corrupt, complex, and inefficient loopholes.

Today, let’s focus on the second item. If the goal is to minimize the economic damage of taxation, both labor and capital should be taxed at the lowest-possible rate.

But, as illustrated by the chart, the internal revenue code imposes widespread “double taxation” on income that is saved and invested.

Actually, it’s more than double taxation. Between the capital gains tax, corporate income tax, double tax on dividends, and death tax, there are multiple layers of tax on income from saving and investment.

So even if statutory tax rates are low, effective tax rates can be very high when you consider how the IRS gets several bites at the apple.

This is why good tax reform plans eliminate the tax bias against capital.

But we don’t want the perfect to be the enemy of the good. Simply lowering tax rates on capital also would be a step in the right direction.

And such an approach would produce meaningful economic benefits, as explained in a new Federal Reserve study by Saroj Bhattarai, Jae Won Lee, Woong Yong Park, and Choongryul Yang.

…capital tax cuts, as expected, have expansionary long-run aggregate effects on the economy. For instance, with a permanent reduction of the capital tax rate from 35% to 21%, output in the new steady state, compared to the initial steady state, is greater by 4.24%… A reduction in the capital tax rate leads to a decrease in the rental rate of capital, raising demand for capital by firms. This stimulates investment and capital accumulation. A larger amount of capital stock, in turn, makes workers more productive, raising wages and hours. Finally, given the increase in the factors of production, output expands.

This is all good news.

But our left-leaning friends might not be happy because some people get richer faster than other people get richer.

This aggregate expansion however, is coupled with worsening…inequality in our model. For instance, skilled wages increase by 4.66% while unskilled wages increases by only 0.56%, driven by capital-skill complementarity.

For what it is worth, I agree with Margaret Thatcher about adopting policies that help all groups enjoy higher living standards.

Here’s a chart for wonky readers. It shows how quickly the economy grows depending on how lower capital taxes are offset.

 

And here’s some of the explanatory text.

The main takeaway if that you get the most growth when you also lower the burden of redistribution spending.

The three financing schemes under consideration…produce different effects on aggregate output because each scheme influences workers’ labor supply decisions differently. …lump-sum transfer cuts…boosts unskilled hours and in turn, contributes to greater aggregate output… In comparison, a rise in the labor or consumption tax rate decreases the effective wage rate (as is well-understood) and additionally, weakens the wealth effect for the unskilled household. These two mechanisms work together to generate a smaller aggregate expansion under the distortionary tax adjustments. …we show that the capital tax cut has different welfare implications for each type of household depending on time horizon and policy adjustments. …The tax reform benefits the skilled households the most when transfers adjust, whereas the unskilled households prefer distortionary financing to avoid a significant reduction in transfer incomes.

The secondary takeaway from this research is that it would be bad for the economy (and bad for both rich people and poor people) if Joe Biden’s class-warfare tax policy was enacted.

But if you read this, this, this, and this, you already knew that.

Read Full Post »

Back in 2018, I shared some academic research on the relationship between state tax rates and the performance of professional football teams.

The main takeaway is that teams based in high-tax states did not win as many games, on average, as teams based in low-tax states.

So if you want your favorite team to win, support better tax policy.

Though there are no guarantees. A team from high-tax California just won the Super Bowl, so it goes without saying that taxes are not the only factor that determines team success.

But it presumably means that teams in states like California and New York have to overcome a built-in disadvantage.

Let’s take a look at some new research on this issue. Professor Erik Hembre of the University of Illinois at Chicago authored a study that’s been published by International Tax and Public Finance.

Here’s the question he wanted to answer.

Do higher state income taxes harm firms? …This paper examines the state income tax burden in a unique market, professional sports, where teams—the capital in question—are highly immobile and players—the labor—are highly mobile to test whether higher state income tax hinders team performance. Anecdotal evidence suggests higher state income taxes disadvantage professional sports teams. Across the four major US sports leagues, of the forty-nine franchises with long championship droughts, only four are from states that do not have an income tax, while twenty are from the highest taxed states.

Here’s his methodology, which takes advantage of the fact that free agency gave players new-found ability to play where they could keep more of their earnings.

To test the link between state income taxes and team performance, this paper analyzes team performance in the four major US professional sports leagues: the National Basketball Association (NBA), the National Football League (NFL), the National Hockey League (NHL), and Major League Baseball (MLB). To address concerns that the association between team performance and income tax rates may be coincidental, I examine how the tax rate effect changed with the adoption of free agency. Achieving free agency has been a milestone for players’ associations, paramount both for increasing player mobility across teams and for forcing teams to compete for player services without restrictions.

Since athletes respond to incentives (just like entrepreneurs, inventors, and scientists), we should not be surprised that Prof. Hembre found that teams in lower-tax states now enjoy more success.

I compare the link between tax rates and team winning percentage before and after the introduction of free agency in each league using within-team variation in top state marginal income tax rates. Prior to free agency, there was a small positive association between income tax rates and winning. After the introduction of free agency, changes in state income tax rates significantly influence team performance. Each percentage point increase in the top marginal income tax rate is associated with a 0.70 percentage point decrease in win percentage. The tax rate effect on team performance is robust to a variety of specifications, such as controlling for sales and property taxes or alternative tax rate measures. Changing the outcome measure to be championships or finals appearances also yields similar results. The estimated effect size is non-trivial. The main analysis effect size of − 0.70 means that a one standard deviation increase in tax rate will result in 2.05 fewer wins over an 82 game season. …Figure 3 presents the annual point estimates (훽2) and 95% confidence intervals of the income tax rate effects between 1980 and 2017. …in all 9 years prior to any league having free agency, there was a positive income tax effect estimate. This relationship changed shortly after the introduction of free agency and since 1990 the annual income tax effect has remained negative.

Here’s the aforementioned Figure 3 for my wonky readers.

As a fan of better tax policy, I like Prof. Hembre’s findings.

As a fan of the New York Yankees, I don’t like his findings

P.S. Here’s one final tidbit that will appeal to fans of the Raiders.

Considering an extreme case, the recent relocation of the Oakland Raiders from a high income tax state (California) to a no income tax state (Nevada) projects a winning percentage increase of 8.6 percentage points or about 1 game per NFL season

P.P.S. I’ll close by reiterating my caveat about taxes being just one piece of the puzzle. After all, I speculated that taxes may have played a role in LeBron James going from Cleveland to Miami many years ago. But he has since 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.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.P.S. Taxes also impact choices on how often to box and where to box.

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

Read Full Post »

Trump had some economically illiterate tweets about trade during his presidency, including the infamous one about being “Tariff Man.”

I think Joe Biden must be feeling envious that Trump got so much attention, so he has issued a tweet showing that he also suffers from economic illiteracy.

Or maybe Biden’s problem is dishonesty because his tweet is based on a make-believe number about the the average tax rate paid by billionaires.

For what it’s worth, this isn’t the first time that Biden has issued a tweet based on fake numbers.

In the previous instance, he deliberately confused the distinction between the financial concept of book income and and cash-flow concept of taxable income.

What accounts for his most recent error?

Reporting for the Wall Street Journal, Richard Rubin and Rachel Louise Ensign explain how the Biden Administration concocted this number.

What do the wealthy pay in federal taxes? On paper, the top marginal income-tax rate is 37% on ordinary income and 23.8% on capital gains. Government estimates put high-income filers’ average rates in the mid-20s. A new Biden administration analysis, however, pegs the average tax rate for the 400 wealthiest households at 8.2% from 2010 to 2018. …It’s far below traditional estimates from government number crunchers… Recent estimates of a broader group of rich people from the Congressional Budget Office, Treasury Department and the Joint Committee on Taxation fall between 23% and 26%.

So how does the Biden Administration get a number that is radically different than other sources?

By artificially inflating the income of rich people by asserting that changes in wealth should count as income.

White House…economists Greg Leiserson and Danny Yagan..include increases in unrealized capital gains. That is the change in the value of assets, including stocks, that haven’t been sold. …Conventional analyses and the current income-tax law don’t include unrealized gains.

At the risk of making a wonky point, “conventional analysis” and “income-tax law” don’t include unrealized capital gains as income because, well, changes in net worth are not income.

And the fact that some folks on the left want to tax people on unrealized capital gains doesn’t change that reality.

To understand why that would be wretched policy, let’s cite examples that apply to those of us who, sadly, are not billionaires.

  • Imagine filing your taxes next year and having to pay more money to the IRS simply because Zillow estimated that your house rose in value.
  • Imagine that you’re filling out your 1040 form next year and you have to pay more money to the IRS  simply because your IRA or 401(k) rose in value.

Both of these examples sound absurd because they would be absurd. And if a policy is absurd and unfair for regular people, it’s also absurd and unfair for rich people.

Since I’m a fiscal wonk, I’ll close by making the point that the Biden Administration wants to take a bad tax (capital gains tax) and make it worse (by taxing paper gains in addition to actual gains).

The net result is that we would have a backdoor wealth tax – a approach that is so anti-growth that even most European governments have repealed those levies.

But since Joe Biden is motivated by class warfare (see here, here, here, and here), he apparently doesn’t care about the economic consequences.

P.S. Biden once claimed that it is “patriotic” to pay higher taxes, but he then played Benedict Arnold with his own tax return.

Read Full Post »

When I first started writing this daily column, the Congressional Budget Office was infamous for dodgy economics.

That was the bad news.

The good news is that CBO is more of a mainstream organization today.

It’s far from being libertarian, to be sure, but it no longer seems to have the left-leaning bias that plagued the bureaucracy in the past (it had gotten so bad that I advised Republicans not to cite CBO numbers even when they seemed helpful to the cause of less government).

For instance, I grudgingly acknowledged a few years ago that CBO was better (but still not good) when analyzing potential repeal of Obamacare.

And I was actually impressed last year when CBO published a report showing that a bigger burden of government spending would reduce growth.

And now we have another report that reaches similar conclusions.

The new study, released last month, considers what would happen if lawmakers decided to control red ink by either raising taxes of by restraining spending.

A perpetually rising debt-to-GDP ratio is unsustainable over the long term because financing deficits and servicing the debt would consume an ever-growing proportion of the nation’s income. In this report, CBO analyzes the effects of measures that policymakers could take to prevent debt as a percentage of GDP from continuing to climb. Policymakers could restrain the growth of spending, raise revenues, or pursue some combination of those two approaches. …or this analysis, CBO examined two simplified policies. The first would raise federal tax rates on different types of income proportionally. The second would cut spending for certain government benefit programs—mostly for Social Security, Medicare, and Medicaid. Under each of the two stylized policy options, debt as a percentage of GDP would be fully stabilized 10 years after the changes were implemented.

By the way, I would have greatly preferred if CBO estimated the impact of genuine entitlement reforms.

Trimming spending for existing programs is better than nothing, of course, but the goal should be to achieve both structural reforms and budgetary savings.

But I’m digressing. Let’s get back to what was actually in the report. Here’s what CBO projects if policy makers choose to raise taxes.

…the higher tax rates that would be required if implementation of the policy was delayed would reduce after-tax wages, which would discourage work and lower the aggregate supply of labor. Those reductions in capital stock and the labor supply would cause GDP to be lower… As a result, GDP would be 0.9 percent lower in 2051 if implementation of the policy was delayed by 5 years and 2.6 percent lower if it was delayed by 10 years.

And here’s what happens if they decide to trim benefits.

…a drop in benefits would reduce people’s income and induce some people to work more to, at least partially, maintain their standard of living, thereby increasing the aggregate labor supply. …a drop in expected future retirement benefits would induce workers to save more before they retired, and that increased saving would, in turn, increase the aggregate capital stock.

Figure 3 from the report allows readers to compare how the different options affect the economy’s output.

In other words, we get lower living standards if taxes go up and higher living standards if spending is restrained.

How big is the difference? As you can see, the tax increase options (light green) cause significant long-run reductions in gross domestic product.

Trimming benefits by contrast (the dark green lines) actually lead to a slight increase in economic output.

The report accurately explains why the two policy choices produce such different results.

…GDP would be lower after an increase in income tax rates than it would be after cuts in benefit payments… Whereas benefit cuts strengthen people’s incentives to work and save, tax increases weaken those incentives and thus reduce the capital stock, the labor supply, and output.

In other words, it’s not a good idea to copy nations such as France, Italy, and Greece.

Which is a good description of Biden’s so-called plan to Build Back Better.

Read Full Post »

As part of my (reality-based) opposition to a value-added tax, I testified to the Ways & Means Committee back in 2011.

My primary argument against the VAT is that it would enable a bigger burden of government spending.

I frequently share this chart, for instance, that shows that the nations in Western Europe were quite similar to the United States back in the 1960s, with government budgets that consumed about 30 percent of economic output.

That was before they enacted VATs.

But once European politicians got that new source of revenue, the spending burden diverged, with the welfare state becoming a much larger burden in Western Europe than in the United States.

In other words, the VAT was a money machine for big government.

That argument is just as accurate today as it was back in 2011.

For today’s column, however, I want to focus on what I said in the last minute of my testimony (beginning about 4:00).

I pointed out that VAT supporters are wrong when they claim that adoption of this new tax would enable reductions in the income tax.

And if you peruse my written testimony, you’ll see that I included several charts showing how tax burdens changed between 1965 and 2008. In every case, I showed that European politicians actually increased the burden of income taxes after they enacted their VATs.

Is that still true?

Of course.

Here’s an updated version of the chart showing that the overall tax burden dramatically increased after VATs were imposed.

In the United States, by contrast, the overall tax burden only increased during this time period from 23.6 percent of GDP to 25 percent of GDP.

Still bad news, but nowhere near as bad as Western Europe, where the overall tax burden jumped by more than 13 percentage points.

Now let’s peruse the updated version of the chart showing what happened to taxes on income and profits.

As you can see, European governments definitely did not use VAT revenues to lower other taxes.

In the United States, by contrast, the tax burden on income and profits only increased during this time period from 11.3 percent of GDP to 11.6 percent of GDP.

Still bad news, but nowhere near as bad as Western Europe, where the tax burden on income and profits jumped by nearly 5 percentage points.

Now let’s peruse the updated version of the chart showing what happened to taxes on corporations (this chart is especially important because there are very naive people in the business community who think that they can avoid higher taxes on their companies if they surrender to a VAT).

As you can see, governments in Europe have been grabbing more money from corporations since VATs were imposed.

In the United States, by contrast, the tax burden on corporations actually decreased during this time period from 3.9 percent of GDP to 1.3 percent of GDP.

By every possible measure, the value-added tax is a big mistake (as even the IMF inadvertently shows).

Unless, of course, politicians first get rid of the income tax – including repealing the 16th Amendment and replacing it with an ironclad prohibition against any future income tax.

But that’s about as likely as me playing the outfield for the New York Yankees in this year’s World Series.

P.S. I mentioned at the very end of my testimony that we did not have clear evidence from other nations that subsequently adopted VATs. In the case of Japan, we now do have data showing how the VAT is financing bigger government.

P.P.S. Some VAT advocates actually claim the levy is good for growth. That’s a nonsensical claim. VATs drive a wedge between pre-tax income and post-tax consumption. What they really mean to say is that VATs don’t do as much damage, on a per-dollar-raised basis, as conventional income taxes (with punitive rates and double taxation).

P.P.P.S. You can enjoy some good anti-VAT cartoons herehere, and here.

Read Full Post »

About 14 years ago, I narrated this video about the flat tax and national sales tax (sometimes referred to as a “Fair Tax”).

I used the video as an opportunity to explain that both plans effectively rip up the current internal revenue code. And both would solve the major problems that plague today’s income tax.

As I stated in the video, the only big difference between a flat tax and national sales tax is the collection point.

A flat tax is collected as income is earned. A sales tax, or Fair Tax, is collected as income is spent.

But the economic benefits of both plans are identical because the core features of both plans are identical.

Sadly, big-picture tax reform no longer is a major issue. Proponents of good policy are mostly focused today on stopping plans that would make a bad tax code even worse.

But maybe it is time to think about going on offense.

In a column for the New York Sun, John Childs makes the case for replacing the current mess with the national sales tax.

There is a better way — replace the entire income tax monstrosity with a national consumption tax, i.e. a national sales tax. Let Walmart and Amazon be the tax collectors. Odds are they will be vastly more efficient than the IRS, which at this point can’t even return the phone calls of bewildered taxpayers. All retailers already perform sales tax collection services for state governments. So it is hardly a leap of faith to ask them to do it for the Feds. …This would be bad news for tax lawyers and accountants. As some of the brightest minds in the country now devote themselves to crafting fiendishly clever tax avoidance schemes, though, imagine what an unexpected dividend would flow from redirecting all of that creativity to productive activities.

I agree that a national sales tax would be much better than the current system.

That’s why I’ve promoted the idea on many occasions.

But always with the very big caveat that I mentioned in the video, which is that any sort of direct consumption tax (sales tax, Fair Tax, value-added tax) has to be a total replacement for the income tax.

However, that’s just one must-have requirement. Since politicians are untrustworthy, we also should not allow a direct consumption tax until and unless the 16th Amendment is repealed and replaced with a new amendment that unambiguously prohibits any future Congress from reinstating an income tax.

The bad news is that I don’t think either of these requirements will be met. And this is why I am more focused on supporting the flat tax.

After all, the worst thing that happens with a flat tax is that future politicians reinstate the current system.

But the worst thing that happens with a national sales tax is that future politicians have a new source of revenue to fuel bigger government (sort of what happened in Europe when value-added taxes financed a major expansion in the burden of government spending).

P.S. The same principles apply at the state level. Policymakers should use consumption taxes to help finance the repeal of income taxes.

P.P.S. A Fair Tax (or any form of national sales tax) will reduce the underground economy, but not by a greater amount than the flat tax.

P.P.P.S. Here are very succinct explanations of major tax reforms proposals.

Read Full Post »

A few months ago, I reiterated my opposition to Biden’s proposed corporate tax cartel as part of a longer discussion with Australia’s Gene Tunny.

The main takeaway is that the proposed “minimum global tax” is an agreement by politicians for the benefit of politicians.

As I stated in the discussion. companies do not bear the burden of corporate taxes. Those costs are borne by workers, consumers, and shareholders.

Sadly, those costs will increase if the agreement is finalized. Politicians openly admit they are pushing this cartel to undermine jurisdictional tax competition.

At the risk of stating the obvious, their plan is to give themselves more leeway to increase tax rates.

I’m sharing the above interview and rehashing some of these basic arguments because Barack Obama’s former top economist, Jason Furman, has a column in today’s Wall Street Journal.

Here’s some of what he wrote in favor of the scheme.

Policy makers have the best chance in generations to reform and improve this system while bringing the rest of the world along. Treasury Secretary Janet Yellen has already helped craft an international agreement signed by more than 130 countries. Congress now needs to do its part and lock it in. …The arguments for…fixing Mr. Trump’s reforms were already strong, but the global agreement secured by Ms. Yellen makes them much stronger. In particular, the global agreement removes the main objection to more aggressively taxing overseas income because other countries have all agreed to adopt similar systems. The concerns that U.S. companies would be less competitive or would try to avoid U.S. taxes by incorporating overseas are considerably smaller than they would otherwise be. …The global minimum tax agreement signals the dawn of a new era of international economic cooperation. It will be good for the countries involved and…relatively minimal in only establishing a 15% rate floor.

Notice that Mr. Furman openly acknowledges that the goal is to create a cartel so that politicians will feel less constrained by the liberalizing force of tax competition.

For what it’s worth, I think Professor Bruce Gilley had better analysis in his column, which appeared in the WSJ earlier this year..

World leaders announced a new global corporate minimum tax to great fanfare last year. …The contorted language of the guidance, as well as political foot-dragging in several countries, makes clear that the ballyhooed global tax plan would be a great and expensive flop. Better to let this hydra-headed monster die. The agreement was always a tax grab. …Europe wanted to raise revenue by taxing U.S. companies. The Biden administration has cheered the agreement along with familiar claims that big companies should “pay their fair share.” …Digital multinationals like Amazon, Google, Airbnb and Meta are the target. …the agreement…seeks to establish a 15% minimum global tax rate for international companies… The only plausible way the tax leads to more revenue for the U.S. is if it is used as a cover to raise corporate taxes here, which was perhaps why the Biden administration joined. …According to an International Monetary Fund study, 45% to 75% of the burden of corporate taxes is recouped through lower employee wages.

The bottom line is that the proposal for a global minimum tax is being sold as a way to go after big business and rich shareholders, but ordinary people will be the biggest victims.

We will pay more for products because as the higher taxes filter through the economy and we will have less disposable income because of a diminished job market.

P.S. I have written several times about the utterly fraudulent argument that supposedly profitable companies do not pay corporate taxes.

So this is a good opportunity to share this part of Professor Gilley’s column, which notes that companies are (currently) required to keep two different sets of books (which demagogues then deliberately mix up to advance their false claims).

Public companies already have to keep two sets of books, one for the Securities and Exchange Commission and one for the Internal Revenue Service. The first tells shareholders how well the business is doing; the second tells the government how much is owed and to whom. The new global tax would require multinationals to keep a third set of books to avoid being the target of tax raids by, say, France. The agreement would create many new jobs for accountants and lawyers.

Needless to say, requiring companies to keep a third set of books is a remarkably bad idea.

P.P.S. Here’s a primer on corporate taxation.

P.P.P.S. The bureaucrats at the OECD are big advocates of a global minimum tax. I wonder whether they are so pro-tax because they get tax-free salaries and thus are protected from the awful policies they pursue?

Read Full Post »

April 15 is usually the worst day of the year, giving Americans ample reasons to both laugh and cry.*

Because of a holiday in Washington, D.C., however, tax returns this year are due on April 18.

So let’s celebrate (or commiserate) this awful day by wading into the debate about whether the Internal Revenue Service should have a bigger budget.

Proponents usually claim the IRS is under-funded by comparing today’s budget to how much the bureaucracy received in 2011.

But that was a one-year spike because of all the money in Obama’s failed stimulus package. If you review long-run data, you can see that the IRS’s budget has increased significantly.

And these numbers are adjusted for inflation.

But perhaps proponents are right, even if they use deceptive numbers.

The Washington Post has a new editorial on this topic, arguing that the bureaucracy needs more money.

The IRS is currently limping along without enough staff or funding. Congress, especially Republicans, needs to face up to reality. …It’s not a mystery how the IRS deteriorated. …the core problem is that Republicans slashed the IRS budget about 18 percent in the past decade. That’s not belt-tightening, it’s gutting an agency. …The Biden administration is rightly asking for a big increase for 2023 (a request of $14.1 billion). This isn’t some Democratic wish list item; it’s about restoring the basic functions of America’s tax collection agency.

When this topic was being debated last year, Ryan Ellis explained that the IRS will target small businesses if it gets a bigger budget.

Here are some excerpts from his piece in National Review.

…the idea is that if taxpayers fund the IRS to the tune of $40 billion over the next decade, the IRS will step up audits and collect an additional $100 billion in tax revenue, penalties, and interest. This is lauded as a good because of the supposed “tax gap,”… Apparently, it doesn’t occur to anyone that the IRS, which is seeking this extra $40 billion in taxpayer funding, has every incentive in the world to exaggerate this “tax gap” and to make wild promises about the new money that additional enforcement will yield for the Treasury. …Giving money to IRS bureaucrats to conduct fishing expedition audits on millions of honest self-employed people? The same IRS behind the Lois Lerner scandal a decade ago, when the IRS inappropriately targeted conservative political groups during the 2012 election season, when Obama was running for reelection?

Ryan is right to point out that the IRS is undeserving because of bad behavior.

He mentions the Lois Lerner/Tea Party scandal. I think the recent leak of taxpayer data is equally reprehensible.

Advocates of more funding will argue that the bureaucracy’s malfeasance is a separate issue and that more employees and more audits are needed regardless of whether criminals at the IRS are caught and punished.

But this brings us to another important topic, which is whether it would be best to fix the underlying tax laws instead of throwing more money at the IRS.

In a column for the Louisville Courier-Times, we get this point of view from Richard Williams of George Mason University’s Mercatus Center.

…money won’t fix this problem. …Another approach would be drastically reducing the complexity of federal taxes. …The Tax Foundation estimates that we give up 3.24 billion hours and $37 billion to comply with federal taxes each year. Given the headaches and anxiety that come with this, Americans don’t need more IRS workers. We need a leaner agency…individual filers and small businesses represent a huge proportion of the public who would gain from simplification. …There is no need to hire more people to oversee a reformed system. What’s not to like?

Amen.

When proponents say the IRS needs more money, they implicitly are arguing for the current, convoluted tax system.

They want the IRS to be in the business of collecting revenue. But that’s just one role.

And that’s just a brief list of the things that the IRS now does in addition to generating revenue.

Get rid of these added roles, ideally as part of a total replacement of the tax code with a flat tax, and the discussion would be about how much money could be saved by reducing the IRS’s budget.

But that means less power for politicians, so don’t hold your breath waiting for genuine tax reform.

That being said, supporters of good policy should feel no obligation to help prop up the current system by shoveling more money to the IRS.

An underfunded corrupt IRS administering a bad tax code is better than a well-funded corrupt IRS administering a bad tax code.

*April 15 may be the worst day of the year, but there’s an argument to be made that October 3 is the worst day in history.

P.S. From my archives, here are some examples of the bureaucrats who will benefit from a bigger IRS budget.

P.P.P.S. And since we’re recycling some oldies but goodies, here’s my collection of IRS humor, including a new Obama 1040 form, a death tax cartoon, a list of tax day tips from David Letterman, a cartoon of how GPS would work if operated by the IRS, an IRS-designed pencil sharpener, two Obamacare/IRS cartoons (here and here), a sale on 1040-form toilet paper (a real product), a song about the tax agency, the IRS’s version of the quadratic formula, and (my favorite) a joke about a Rabbi and an IRS agent.

Read Full Post »

Thomas Piketty is a big proponent of class-warfare tax policy because he views inequality as a horrible outcome.

But a soak-the-rich policy agenda, echoed by many other academics such as Emmanuel Saez and Gabriel Zucman, is fundamentally misguided. If people really care about helping the poor, they should focus instead on reforms that actually have a proven track record of reducing poverty.

The fact that they fixate on inequality makes me wonder about their motives.

And it also leads me to find their work largely irrelevant. I don’t care if they produce detailed long-run data on changes in inequality.

I prefer detailed long-run data on changes in poverty.

That being said, it appears that some of Piketty’s data is sloppy.

I shared some evidence about his bad numbers back in 2014. And, in a column for the Wall Street Journal, Phil Magness of the American Institute for Economic Research and Professor Vincent Geloso of George Mason University expose another glaring flaw

…the Piketty-Saez theory is less a matter of history than an accounting error caused by their misunderstanding of World War II-era tax statistics. …It’s true that income inequality declined in the early part of the 20th century, but the cause had more to do with the economic devastation of the Great Depression than the New Deal tax regime. …they failed to account properly for historical changes in how the Internal Revenue Service reported income-tax statistics. As a result, their numbers systematically overstate the levels of top income concentrations by as much as a third …Between 1943 and 1944 the tax collection agency shifted from tracking “net income” to “adjusted gross income,” or AGI…a truer depiction of annual earnings… Yet Messrs. Piketty and Saez didn’t bring pre-1944 IRS records into line with AGI accounting standards. Instead, they applied a fixed and arbitrary adjustment to all years before the AGI accounting change that conveniently scaled upward to the highest income brackets. …They used the wrong accounting definition for personal income and neglected to adjust their data for wartime distortions on tax reporting. When we corrected these problems, something stunning happened. The overall level of top income concentration flattened, and the timing of its leveling shifted away from the World War II-era tax rates that Messrs. Piketty and Saez place at the center of their story.

Here’s a chart that accompanied the column, showing how accurate data changes the story.

Since today’s column debunks sloppy class warfare, let’s travel back to 2014, when Deirdre McCloskey reviewed Pikittey’s tome for the Erasmus Journal of Philosophy and Economics.

She also thought his fixation on envy was misguided.

…in Piketty’s tale the rest of us fall only relatively behind the ravenous capitalists. The focus on relative wealth or income or consumption is one serious problem in the book. …What is worrying Piketty is that the rich might possibly get richer, even though the poor get richer too. His worry, in other words, is purely about difference, about the Gini coefficient, about a vague feeling of envy raised to a theoretical and ethical proposition. …Piketty and much of the left…miss the ethical point…of lifting up the poor…by the dramatic increase in the size of the pie, which has historically brought the poor to 90 or 95 percent of “enough”, as against the 10 or 5 percent attainable by redistribution without enlarging the pie. …the main event of the past two centuries was…the Great Enrichment of the average individual on the planet by a factor of 10 and in rich countries by a factor of 30 or more.

But she also explained that he doesn’t understand how the economy works.

The fundamental technical problem in the book…is that Piketty the economist does not understand supply responses. In keeping with his position as a man of the left, he has a vague and confused idea about how markets work, and especially about how supply responds to higher prices. …Piketty, it would seem, has not read with understanding the theory of supply and demand that he disparages, such as in Smith (one sneering remark on p. 9), Say (ditto, mentioned in a footnote with Smith as optimistic), Bastiat (no mention), Walras (no mention), Menger (no mention), Marshall (no mention), Mises (no mention), Hayek (one footnote citation on another matter), Friedman (pp. 548-549, but only on monetarism, not the price system). He is in short not qualified to sneer at self-regulated markets…, because he has no idea how they work.

And she concludes with a reminder that some of our left-wing friends seem most interested in punishing rich people rather than helping poor people.

The left clerisy such as…Paul Krugman or Thomas Piketty, who are quite sure that they themselves are taking the ethical high road against the wicked selfishness…might on such evidence be considered dubiously ethical. They are obsessed with first-act changes that cannot much help the poor, and often can be shown to damage them, and are obsessed with angry envy at the consumption of the uncharitable rich, of which they personally are often examples, and the ending of which would do very little to improve the position of the poor. They are very willing to stifle through taxing the rich the market-tested betterments which in the long run have gigantically helped the rest of us.

Amen. If you want to know what Deirdre means by “betterment,” click here and watch her video.

P.S. Click herehere, here, and here for my four-part series on poverty and inequality. Though what Deirdre wrote in 2016 may be even better.

P.P.S. I also can’t resist calling attention to the poll of economists at the end of this column.

Read Full Post »

As a fan of sensible tax policy and tax competition, I could not resist the opportunity to visit Andorra on my current trip to Europe (as part of the Free Market Road Show).

Here’s a chart that will tells you everything you need to know. Andorra’s top tax rate is just 10 percent, while its neighbors (Spain and France) have top tax rates of more than 40 percent.

Not as good as the Cayman Islands and Monaco, to be sure, but it is obviously better to keep 90 percent of the income you earn rather than only about 50 percent in Spain or France.

Actually, you probably only get to benefit from the use of about 40 percent of your income in those two nations when you factor in the value-added tax.

Lawrence Reed of the Foundation for Economic Education recently wrote about the virtues of Andorra, including its superior tax regime.

…one of Europe’s seven “micro-states,” quaint and tiny nations which are political holdovers from the distant past. The other six are San Marino, Liechtenstein, Luxembourg, Monaco, Malta, and Vatican City. Andorra is landlocked and sandwiched in the eastern Pyrenees Mountains between France and Spain. …Micro-states are fascinating and among the freest enclaves in the world. …Freedom House ranks Andorra in its highest category—a “Free” country scoring an impressive 93 on a 100-point scale of political and civil liberties. …“The legal and regulatory framework,” the survey reports, “is generally supportive of property rights and entrepreneurship, and there are few undue obstacles to private business activity in practice.” …writes Guy Sharp, a native Andorran financial advisor…“you get many of the benefits of Europe without the high taxes.” …The maximum personal income tax rate, as well as the capital gains rate, is just 10 percent. …Most goods are subject to a modest value-added tax rate of less than five percent.

I can vouch for the fact that everything is more affordable in Andorra. That nation’s 4.5 percent value-added tax is akin to a modest sales tax in American states. When I’m in Spain, France, or other European countries, by contrast, you definitely feel the pain of 20 percent-plus VATs.

That being said, it’s the low-rate income tax that is a magnet for jobs and investment. The nation’s tax system is even attracting Spanish tax exiles.

Especially entrepreneurs who are making money online. Miodrag Pepic reports for the Valencian.

When the famous YouTube star ElRubius announced last month that he is permanently moving to Andorra, the Spanish public became aware for the first time that the most popular YouTubers are leaving the country, taking their earnings with them as well. The reason is very simple – Andorra has become a tax haven for this type of activity…many Spanish YouTubers have moved there. But ElRubius is one of the most famous. …In Spain, he would have paid up to 54% of his income in taxes, while in Andorra, the top income tax is only 10%. …The decision of ElRubius was criticised in the Spanish media as unpatriotic. …his popularity on YouTube remained undeterred, and in fact, his subscription base even grew. …There are quite a few other countries that have begun to lose their top earners, notably France and the Netherlands

Predictably, the Spanish government is not amused, as reported by Aida Pelaez-Fernandez of Reuters.

Spain’s tax agency said on Monday it would start using “big data” to track wealthy individuals who pretend to reside abroad for tax purposes. The crackdown comes after some of Spain’s most popular YouTube personalities moved their residency to Andorra, a wealthy microstate perched in the Pyrenees mountains between France and Spain, with lower tax rates than its larger neighbours. …In Spain, anyone who earns above 300,000 euros per year must pay income tax of 47%, compared with a 10% flat rate charged by Andorra on earnings of more than 40,000 euros.

As you might expect, the Spanish government is not considering lower tax rates, which would be the best way of retaining successful entrepreneurs.

Instead, politicians are pushing tax policy in the wrong direction.

P.S. Here’s my tourist shot from Andorra.

P.P.S. Of the seven European micro-states mentioned by Lawrence Reed, I’ve now visited San Marino, Liechtenstein, Luxembourg, Monaco, and Vatican City. I still need to get to Malta.

Read Full Post »

I wrote a few days ago about Biden’s plan to impose punitive double taxation on dividends.

But that’s not an outlier in his budget. As you can see from this table from the Tax Foundation, he wants to violate the principles of sensible fiscal policy by having high tax rates on all types of income.

What’s especially disappointing is that he wants tax rates in the United States to be much higher than in other developed nations.

At the risk of understatement, that’s not a recipe for jobs and investment.

The Wall Street Journal editorialized about Biden’s taxaholic preferences.

Mr. Biden…is proposing $2.5 trillion in new taxes that would give the U.S. the highest or near-highest tax rates in the developed world. …The biggest jump is in taxes on capital gains, as the top combined rate would rise to 48.9% from 29.2% today. That’s a 67% increase in the government’s take on long-term capital investments. The new top rate would be more than 2.5 times the OECD average of 18.9%. Nothing like reducing the U.S. return on capital to get people to invest elsewhere. Mr. Biden would also lift the top combined tax rate on corporate income to 32.3% from 25.8%. That would leap over Australia and Germany, which have top rates of 30% and 29.9% respectively, and it would crush the 22.8% OECD average. …Mr. Biden would also put the U.S. at the top of the noncompetitive list for personal income taxes, with multiple increases that would put the combined American rate at 57.3%. Compare that with 42.9% today and an average of 42.6% across the OECD.

The WSJ‘s editorial contained this chart.

The United States would be on top for corporate tax rates if Biden’s plan is adopted (which actually means on the bottom for competitiveness).

The bottom line is that Biden wants the U.S. to have the highest corporate rate, highest double taxation of dividends, and highest double taxation of capital gains.

To reiterate, not a smart way of trying to get more jobs and investment.

P.S. The “good news” is that the United States would not be at the absolute bottom for international tax competitiveness.

Read Full Post »

Modern tax systems tend to have three major deviations from good fiscal policy.

  1. High marginal tax rates on productive behavior like work and entrepreneurship.
  2. Multiple layers of taxation on income that is saved and invested.
  3. Distortionary loopholes that reward inefficiency and promote corruption.

Today, let’s focus on an aspect of item #2.

The Tax Foundation has just released a very interesting map (at least for wonks) showing the total tax rate on dividends in European nations, including both the corporate income tax and the double-tax on dividends.

Because it has a reasonably modest corporate income tax rate, some of you may be surprised that Ireland has the most onerous overall burden on dividends. But that’s because there are high tax rates on personal income and households have to pay those high rates on any dividends they receive (even though companies already paid tax on that income).

It’s less surprising that Denmark is the second worst and France is the third worst.

Meanwhile, Estonia and Latvia have the least-onerous systems thanks to low rates and no double taxation.

But what about the United States?

There’s a different publication from the Tax Foundation that shows the extent – a maximum rate of 47.47 percent – of America’s double taxation.

The bottom line is that the United States would rank #7, between high-tax Belgium and high-tax Germany, if it was included in the above map.

That’s not a very good spot, at least if the goal is more jobs and more competitiveness.

To make matters worse, Joe Biden wants America to be #1 on the list. I’m not joking.

I’ve already written about his plan for a higher corporate tax rate.

But he wants an even-bigger increases in the second layer of tax on dividends.

How much bigger?

Pinar Cebi Wilber of the American Council for Capital Formation shared the unpleasant details in a column last year for the Wall Street Journal.

The Biden administration has released a flurry of tax proposals, including a headline-grabbing tax hike on capital gains that would apply retroactively from April. Dividends would be subject to the same treatment, according to a recently released Treasury Department document. …the proposal would tax qualified dividends—dividends from shares in domestic corporations and certain foreign corporations that are held for at least a specified minimum period of time—at income-tax rates (currently up to 40.8%) rather than the lower capital-gains rates (23.8%).

I also like that the column includes references to some academic research.

A 2005 paper by economists Raj Chetty and Emmanuel Saez looked at the effect of the 2003 dividend tax cuts on dividend payments in the U.S. The authors “find a sharp and widespread surge in dividend distributions following the tax cut,” after a continuous two-decade decrease in distributions. …Princeton’s Adrien Matray and co-author Charles Boissel looked at the issue the other way around. In a 2019 study, they found that an increase in French dividend taxes led to decreased dividend payments. …Another study from 2011, looking at America’s major competitor, reached the same directional conclusion: A 2005 reduction in China’s dividend tax rate led to an increase in dividend payments.

Not that anyone should be surprised by these results. The academic literature clearly shows that it’s not smart to impose high tax rates on productive behavior such as work, saving, investment, and entrepreneurship.

Unless, of course, you want more people dependent on government.

P.S. Biden also wants American to be #1 for capital gains taxation. So at least he is consistent, albeit in a very perverse way.

Read Full Post »

I’ve already written that massive spending increases for various bureaucracies is the most offensive part of Biden’s new budget.

But I explicitly noted that these huge budgetary increases (well above the rate of inflation, unlike what’s happening to incomes for American families) were not the most economically harmful feature of Biden’s plan.

That dubious honor belongs to either his massive expansion of the welfare state or his big tax increases.

In today’s column, we’re going to focus on his tax plan.

The Wall Street Journal editorialized a couple of days ago about what the president is proposing.

A President’s budget is a declaration of priorities, so it’s worth underscoring that President Biden’s new budget for fiscal 2023 proposes $2.5 trillion in tax increases over 10 years. His priority is taking money from the private economy and giving it to politicians to spend. …Raising the top income-tax rate to 39.6% from 37% would raise $187 billion. Raising capital-gains taxes, including taxing gains like ordinary income for taxpayers earning more than $1 million would snatch $174 billion. Raising the top corporate tax rate to 28% from 21%—a tax on workers and shareholders—would raise $1.3 trillion. Fossil fuels are hit up for $45 billion. We could go on… Let’s hope none of these tax-increases pass, but the Democratic appetite for your money really is insatiable.

That’s a damning indictment.

But the WSJ actually understates the problems with Biden’s tax agenda.

That’s because the White House also is being dishonest, as explained by Alex Brill of the American Enterprise Institute.

The budget proposes $2.5 trillion in net tax hikes, almost entirely from businesses and high-income households, and touts policies that would “reduce deficits by more than $1 trillion” over the next decade. But a short note in the preamble to the Treasury Department’s report on the budget reveals a sleight of hand: “The revenue proposals are estimated relative to a baseline that incorporates all revenue provisions of Title XIII of H.R. 5376 (as passed by the House of Representatives on November 19, 2021), except Sec. 137601.”In other words, the budget pretends that the failed effort to enact President Biden’s Build Back Better Act was a success and considers new budget proposals in addition to those policies. But you won’t find the price of the Build Back Better (BBB) Act (including its roughly $1 trillion in net tax hikes) in the budget tables.

I’m going to use this trick during my next softball tournament. I’m going to assume at the start that I’ve already had 20 at-bats and that I got an extra-base hit each time.

So even if I have a crummy performance during my real at-bats, my overall average and slugging percentage will still seem impressive.

Needless to say, my teammates would laugh at me, just as serious budget people understand that Biden’s budget is a joke.

But there is some good news. Barring something completely unexpected, Congress is not going to approve the president’s farcical plan.

P.S. Don’t fully celebrate. As I noted in my “Hopes and Fears for 2022” column, there is a risk that some sort of tax-and-spend plan might get approved. The only silver lining to that dark cloud is that it wouldn’t be nearly as bad as Biden’s full budget.

P.P.S. If that prospect gets you depressed, here are a couple of humorous images depicting Biden’s fiscal agenda.

Read Full Post »

How do we know people don’t like taxes?

  • They tend to reject candidates who support higher taxes, as George H.W. Bush and other politicians have learned.
  • Then tend to vote against higher taxes when given an opportunity (though they sometimes will vote to tax other people)
  • They tend to migrate from high-tax jurisdictions to low-tax jurisdictions for direct and indirect reasons.

Today, we’re going to elaborate on the final reason.

Let’s start with this chart from one of the daily missives from the Committee to Unleash Prosperity. As you can see, it’s not just people that move. It’s their money as well.

The bottom line is that the two states – California and New York – with ultra-high tax rates are losing the most taxable income.

Let’s call this the revenge of the Laffer Curve because it shows us that high tax rates can backfire.

Jon Miltimore addressed this topic in a new column for the Foundation for Economic Education.

Here are some of the highlights, starting with some data on how some poorly governed cities are losing residents.

Three of the top five metros that saw sharp declines between July 1, 2020, and July 1, 2021 were in California. Leading the way was the Los Angeles-Long Beach metropolitan area, which lost 176,000 residents, a 1.3 percent drop. Next was the San Francisco-Oakland-Berkeley metro, which saw a decline of 116,000 residents (2.5 percent decline), followed by San Jose-Sunnyvale-Santa Clara, which shed some 43,000 residents (2.2 percent drop). …The New York-Newark-New Jersey metropolitan area saw a decline of 328,000 residents, the highest in the nation in raw numbers. The Chicago area, meanwhile, saw a decline of some 92,000 residents.

Here’s a chart from his article.

I’m definitely not surprised to see New York, San Francisco, and Chicago on the list. After all those cities have crummy governments.

The other two cities, by contrast, just have the misfortune of being in a poorly governed state.

Jon explains a big reason why this domestic migration is taking place.

…the reasons people choose to migrate tend to be complex and varied… However, we can see the US flight from its largest metropolitan is part of a bigger trend. North American Van Lines (NAVL), a trucking company based in Indiana, puts out an annual report that tracks migration patterns in the United States. The states with the most inbound migration in 2021 were South Carolina, Idaho, Tennessee, North Carolina, and Florida. The leading outbound states were Illinois, California, New Jersey, Michigan, and New York. The pattern here is clear. Americans are fleeing highly-regulated, highly taxed states. They are flocking to freer states. …We heard a great deal about “the Great Reset” during the pandemic. …It may be that “the reset” involves Americans abandoning high-tax, high-regulatory cities and states for freer ones.

To be sure, there are factors other than taxation. And there are factors other than government policy (people really like California’s wonderful climate, for instance, but they will escape when policy becomes unbearable).

The bottom line is that people are slowly but surely voting with their feet against statism. They are choosing red states over blue states. There’s a lesson for Joe Biden, though he’s probably not listening.

Read Full Post »

The economics of taxation is simple. The more you tax of something, the less you get of it.

In some cases, such as taxing tobacco, people sometimes argue this is a good result. In other cases, such as taxing work, entrepreneurship, and investment, it seems crazy.

The morality of taxation, by contrast, is more challenging. At least for me.

I’m not an anarcho-capitalist, so I can’t unilaterally declare that all taxes are evil and unjustified. And I’m definitely not a statist who thinks all of our incomes belong to the government.

At the risk of oversimplifying matters, I agree with Calvin Coolidge.

Taxes that are used to finance genuine “public goods” are justifiable. Taxes used to finance the schemes of vote-buying politicians are immoral.

Regarding morality, there’s another issue that’s worth discussing.

Consider this story from Governing.

Across the country, states that are flush with cash are cutting taxes on income, sales and Social Security benefits. …But good times never last forever. Some fiscal experts are worried that states are setting themselves up for a fall. …“I see this as a temporary increase in revenues that we’re likely going to see dry up in the next year or two,” says Kim Rueben, director of the State and Local Finance Initiative at the Urban-Brookings Tax Policy Center.

What’s galling about the story is that the focus is on whether governments can do without extra revenue.

But what about taxpayers? You know, the people who have to earn and produce before politicians can seize and squander?

That’s why I very much appreciate a recent column in the Washington Post by former Indiana Governor Mitch Daniels.

A newspaper account early this year reported on pending legislation that would “slash billions of dollars worth of taxes” in my home state of Indiana. The article was more interesting for its word choices than for its content. Twice, it stated that the proposal would “cost the state” money. Twice, it warned that the state would “lose out” on large sums. …The article simply showed the implicit biases now thoroughly ingrained across what these days is referred to as the corporate press. …property in a free society belongs not to the state but to its people, and it should be expropriated by the state only for truly necessary purposes, in truly necessary amounts. It’s more than just a matter of money, because every act of taxation imposes a diminution of freedom.

Kudos to Daniels for channeling Coolidge.

The bottom line is that taxes diminish freedom. Politicians should never take our money unless proposed spending is for the general welfare – as defined by the Founding Fathers and as authorized by the Constitution.

Now that we’ve discussed the economics of taxation and the morality of taxation, here’s a final observation about the math of taxation.

Tax cuts are not a “cost” to government, they’re a “savings” to taxpayers. This is why provisions in the tax code that allow taxpayers to keep more of their money should not be referred to as “tax expenditures.” Even if they are bad policy.

P.S. By modern political standards, Mitch Daniels is on the right side. But that doesn’t mean he is a poster boy for libertarianism. At one point, he flirted with the notion of a value-added tax, so I was happy when he decided against a presidential race. He also presided over irresponsible spending increases when he was head of the Office of Management and Budget for President George W. Bush.

Read Full Post »

I’ve identified seven reasons to oppose tax increases, but explain in this interview that the biggest reason is that it would be a mistake to give politicians more money to finance an ever-larger burden of government spending.

I had two goals when responding this question (part of a longer interview).

First, I wanted to help viewers understand that America’s fiscal problem is too much government spending and that red ink is simply a symptom of that problem.

Over the years, I’ve concocted all sorts of visuals to make this point. Like this one.

And this one.

And this one.

Second, I wanted viewers to understand that higher taxes will simply make a bad situation even worse.

From my perspective, the biggest problem with tax increases is that they will enable a bigger burden of government spending.

But even the folks who fixate on red ink should adopt a no-tax increase position.

Why? Because politicians who want big tax increases want even bigger spending increases.

Joe Biden is pushing for a massive tax increase, for instance, but his proposed spending increase is far larger.

We also have decades of evidence from Europe. There’s been a huge increase in the tax burden in Western Europe since the 1960s (largely enabled by the enactment of value-added taxes).

Did that massive increase in revenue lead to less red ink?

Nope, just the opposite, as I showed in both 2012 and 2016.

If you don’t agree with me on this issue, maybe you should heed the words of these four former presidents.

P.S. Some people warn that endlessly increasing debt is a recipe for an eventual crisis. They’re probably right. Which is why it is important to oppose tax-increase deals that wind up saddling us with more red ink. Besides, the long-run damage of tax-financed spending is very similar to the long-run damage of debt-financed spending.

P.P.S. As I mention in the interview, the only real solution is spending restraint. And a spending cap is the best way of enforcing that approach.

Read Full Post »

I regularly share reports that measure how states rank for economic policy.

Now we can augment this collection.

A website called Money Geek has issued a report, authored by Jeff Ostrowski, which ranks states that are most friendly and least friendly to a hypothetical middle-class family.

This map has the details. The best states (led by Wyoming, Nevada, and Alaska) are dark blue, while the worst states (led by Illinois, Connecticut, and New Jersey) are dark grey.

Here are some of the main findings, including the fact that people “vote with their feet” by moving to low-tax states.

Illinois has the highest tax burden in the U.S., with an estimated tax amount of $13,894 for the hypothetical family. Wyoming only imposes approximately $3,279 for the same family, making it the top state in terms of tax-friendliness. 4 out of 5 of the most tax-friendly states saw population growth at or above the national average (Wyoming, Nevada, Florida and Tennessee). Illinois and Connecticut received a grade of E for being the least tax-friendly states in the nation. Illinois experienced a population decline, while Connecticut’s population grew by just 0.1% — lower than the national average of 0.2%.

Interesting results. First and foremost, we have more evidence that Illinois is a basket case.

And it has a governor who wants to make a bad situation even worse.

I also think it’s worth noting that all the best states have no income tax.

The reports has lots of interesting data, but it doesn’t tell us everything we should know.

Before I explain why the numbers should be taken with a grain of salt, read the report’s methodology.

To calculate the least and most tax-friendly states, we researched income, sales and property tax rates by state. Using expenditure and income data from the Bureau of Labor Statistics’ Consumer Expenditure Survey, we constructed a hypothetical family with one dependent, gross income of $82,852, and a home worth $349,400 (the median new home price at the time we conducted our research). We then estimated the state taxes this hypothetical family would pay in each state. We ranked the states based on…the size of the tax payment.

There’s nothing wrong with this methodology, assuming the goal is simply to measure the tax burden on a particular type of household.

But if the goal is to rank tax systems, there are three reasons why the report is incomplete or misleading.

First, it is not a measure of how tax systems affect economic performance. The most bizarre results in the report is that California, with a very punitive, class-warfare tax system, ranks above Texas, which has no income tax.

Why is this misleading? Because it’s important not only to measure how much of a family’s income is grabbed by government, but also whether a government has policies that make it more difficult to earn money in the first place.

In other words, there’s a reason that taxpayers and businesses are moving from California to Texas, notwithstanding the results from Money Geek.

Second, it doesn’t tell us anything about whether states are providing good services in exchange for the taxes that are being collected.

In an ideal world, states would use tax revenues to finance genuine “public goods.” In reality, taxes often are used to funnel undeserved money to powerful constituencies such as state and local bureaucrats.

And it’s worth noting that there are big differences in how states perform on basic functions such as education, infrastructure, and crime control (and the same is true for cities).

Third, it is not adjusted for the cost of living in different states. A family in Nebraska with a $350,000 house and about $83,000 of income obviously lives much better than a similar family in New Jersey. Why? Because money goes much farther in states with a lower cost of living.

This map from the Tax Foundation shows that red and orange states can be much more expensive than green and blue states.

P.S. If you want a ranking of economic liberty for metropolitan areas, click here.

P.P.S. Click here if you want a ranking of states based on occupational licensing (a form of employment protectionism).

Read Full Post »

I wrote two months ago about Iowa lawmakers voting for a simple and fair flat tax.

I explained how this reform would make the state more competitive, but I want to build upon that argument with some of the Tax Foundation’s data.

Starting with this map from the State Business Tax Climate Index, which shows Iowa in 38th place for individual income taxes.

That low ranking is where the state’s tax code was as of July 1, 2021, so it obviously doesn’t reflect the reforms enacted earlier this year.

So where will the state rank with the new flat tax?

The Tax Foundation crunched the data and shows the state will jump to #15 in the rankings.

The above table shows that the jump is even more impressive when you factor in some modest pro-growth changes that took place a few years ago.

What a huge improvement over just a few years. The only state that may beat Iowa for fastest and biggest increase in tax competitiveness is North Carolina, which jumped 30 spots in just one year.

P.S. Politicians in New York must be upset that there’s no way for them to drop lower than #50. But at least they can take comfort in the fact that they are worse than California.

Read Full Post »

I’ve been writing a series of columns about the failure of Bidenomics (see here, here, and here), but let’s switch gears today and focus on some remarkably bad behavior by the bureaucrats at the Organization for Economic Cooperation and Development (OECD).

Regular readers know that I’m not a big fan of this Paris-based international bureaucracy. Yes, there are some economists at the OECD who do solid research, but the organization routinely advocates for higher taxes and bigger government, often by using dishonest data.

But even I was surprised to receive this email from the OECD, which explicitly urged a giant tax increase on the relatively impoverished people of Mexico.

And “giant” is not a throwaway adjective.

Joe Biden wants a massive tax increase for the United States, but his proposal to increases tax revenue by 1.3 percent of GDP makes him seem like a rabid libertarian compared to the OECD’s plan to increase taxes by nearly three times as much in Mexico.

What’s especially amazing is that the OECD is urging this huge tax increase in a report that supposedly shares “recommendations for improving medium-term growth prospects.”

While I’m shocked by the size of the OECD’s proposed tax increase, I’m not surprised that the bureaucrats are claiming that higher taxes and bigger government are good for growth.

They’ve done it before and I’m sure they’ll do it again.

In China. In Africa. Everywhere.

So at least they are consistent, albeit in a very bad way.

I’ll close by noting that Mexico actually is in desperate need of “recommendations for improving medium-term growth prospects.”

But if you peruse the data for Mexico in the most-recent edition of the Fraser Institute’s Economic Freedom of the World, you’ll see that the country’s economy is being hampered by bad scores for rule of law, monetary policy, trade, and regulation.

So it’s baffling that the OECD’s bureaucrats somehow decided to focus on pushing for bad fiscal policy.

P.S. For those who want more information, you can click here to access the OECD’s report, along with other accompanying materials.

P.P.S. Incidentally, OECD bureaucrats are exempt from paying tax on the very lavish salaries they receive.

P.P.P.S. Adding insult to injury, American taxpayers finance the largest share of the OECD’s budget.

Read Full Post »

When I compare the United States and Europe, it’s usually because I want to make the point that people on the other side of the Atlantic have lower living standards in large part because there is a more onerous fiscal burden of government.

Simply stated, America’s medium-sized welfare state doesn’t do as much damage as the large-sized welfare states in Europe.

But I also use US-vs.-Europe comparisons to make another point, namely that big welfare states mean big tax burdens for lower-income and middle-class households.

To be more specific, most of Europe’s redistribution spending is financed by high tax burdens on regular people.

Yes, European politicians impose onerous burdens on upper-income taxpayers, but there simply are not nearly enough rich people to finance big government.

So those politicians have responded by pillaging everyone else as well (onerous payroll taxes, harsh value-added taxes, high income tax rates on modest incomes, etc).

The United States takes a different approach. We also impose onerous burdens on upper-income taxpayers (as confirmed by IRS data), but we impose comparatively modest taxes on everyone else.

Indeed, the net result, as shown in the table, is that the United States actually has the most “progressive” tax system among OECD nations.

Today, let’s look at some research that makes similar points.

Three academics at the Paris School of Economics authored a study for the World Inequality Lab that uses a new database to measure redistribution and inequality.

Their main conclusion is that there are differences between the United States and Europe, but redistribution policies don’t have a big impact on inequality.

This article addresses…substantive and methodological issues by constructing distributional national accounts for twenty-six European countries from 1980 to 2017. To our knowledge, this is the first attempt at doing so. …our series are fully comparable with recently produced US distributional national accounts, allowing us to compare the dynamics of inequality and redistribution in the two regions in great detail. Two key findings emerge from the analysis of our new database. First, we show that, over the past four decades, inequality has increased in nearly all European countries as well as in Europe as a whole, both before and after taxes, but much less than in the United States. …Second, the main reason for Europe’s relative resistance to the rise of inequality has little to do with the direct impact of taxes and transfers. While Western and Northern European countries redistribute a larger fraction of output than the US (about 47% of national income is taxed and redistributed in Europe versus 35% in the US), the distribution of taxes and transfers does not explain the large gap between Europe and US posttax inequality levels. Quite the contrary: after accounting for all taxes and transfers, the US appears to redistribute a greater fraction of its national income to the poorest 50% than any European country.

What drives these results?

Simply stated, the most salient feature of European fiscal policy is that nations tax the middle class and have programs that benefit the middle class.

The United States, by contrast, focuses more on taxing the rich and giving benefits to the poor.

Look at what the study says about tax progressivity.

Figure Vb ranks European countries and the United States according to a simple measure of tax progressivity: the ratio of the total tax rate faced by the top 10% to that of the bottom 50%. The composition of bars correspond to the composition of taxes paid by the top 10%. The US stands out as the country with the highest level of tax progressivity: the top decile faces a tax rate that is more than 70% higher than that of the poorest half of the population. By this measure, the European country with the most progressive tax system is the United Kingdom, followed by Norway, the Czech Republic, and France. Many European countries have values close to 1 on this indicator, corresponding to relatively flat tax systems, in which top income groups face a tax rate approximately equal to that of the bottom 50%. …the US also stands out as one of the countries where the top 10% pay the largest share of their pretax income in the form of income and wealth taxes.

And here’s Figure V, which shows how the U.S. has (far and away) the most “progressive” tax system.

Again, I want to emphasize that this is not because the U.S. imposes higher taxes on the rich. The so-called progressivity of the American system is driven by the fact that there are low taxes on everyone else.

What about on the spending side of the fiscal ledger?

The study finds that the the United States has the most redistribution to lower-income people.

…the US tax-and-transfer system appears to be unequivocally more progressive. The bottom 50% in the US received a positive net transfer of 6% of national income in 2017, compared to about 4% in Western and Northern Europe and less than 3% in Eastern Europe. Meanwhile, the top 10% saw their average income decrease by 8% of national income in the US after taxes and transfers, compared to about 4% in Western and Northern Europe and 3% in Eastern Europe. …Figure VIIb represents the net transfer received by the bottom 50% in all European countries and the United States in 2017. Again, the US stands out as the country that redistributes the greatest fraction of national income to the bottom 50%.

Here’s the aforementioned Figure VII.

I’ll close by observing that there are multiple interpretations of this data. I suspect that authors want readers to conclude that there should be higher taxes and more redistribution. Both in Europe and the United States.

My big takeaway is that this research confirms why people with modest incomes in the United States have a better life than their counterparts in Europe.

Not only do they enjoy higher levels of income, but they also pay much lower tax burdens.

P.S. One other point to emphasize is that it’s wrong to fixate on inequality. In part, that’s because there’s nothing wrong with rich people getting richer (assuming they earn their money rather than getting special favors from politicians). But also because ethical people should be concerned about improving the lives of the less fortunate rather than tearing down the successful.

Read Full Post »

It is not difficult to understand the economics of taxation. Simply stated, the more you tax of something, the less you get of it.

You can show the adverse impact of taxation with supply-and-demand curves (very helpful for understanding “deadweight loss“).

But you don’t need to be an economist to grasp the essential idea that we shouldn’t impose excessive penalties on productive behavior.

This is why I endlessly argue for lower tax rates on things that are very good for society, such as work, saving, investment, and entrepreneurship. Simply stated, governments should minimize barriers to the creation of wealth and prosperity.

But what about using the tax code to punish things that are bad for society?

Consider, for instance, taxes that are designed to discourage obesity. I personally don’t think politicians and bureaucrats should try to dictate our lifestyle choices, so I’m not overly sympathetic to imposing special taxes on things like sugar.

But I also recognize that people do respond to incentives, so maybe such taxes would work.

Though it’s also possible that we might get unintended consequences, which is the message of Baylen Linnekin’s new article for Reason.

A new study is pouring cold beer on Seattle’s soda tax. …since the city I call home adopted a soda tax in 2018, residents have swapped out soda and replaced that soda with beer. Pointedly, the study says Seattle’s soda tax “induced” consumers to buy more beer. …The PLoS study, by University of Illinois-Chicago researchers Lisa M. Powell and Julien Lader, compared sales of beer in Seattle both before and since adoption of the soda tax with comparable sales in nearby Portland, Oregon, which has no soda tax. “At two-years post-tax implementation, [the] volume sold of beer in Seattle relative to Portland increased by 7%,” the authors report. Though supporters of soda taxes claim (largely without evidence) that they’re a successful tool to combat obesity, the authors of the PLoS study note that the dangers of “excess alcohol consumption [include] higher risk of motor accidents/deaths, liver cirrhosis, sexually transmitted diseases, crime and violence, and workplace accidents.” Also: obesity. …”It’s hard to overstate the abject failure of soda taxes to deliver on their promised benefits,” Reason Foundation’s Guy Bentley wrote several years ago… “Nowhere in the world, let alone the United States, have soda taxes reduced obesity.”

Here’s a link to the study for those interested.

The obvious takeaway is that imposing an anti-obesity tax may not be very effective if consumers can easily switch to a different product with some of the same characteristics (i.e., lots of calories).

And such a tax may wind up making society worse off if the original problem (obesity) isn’t solved and new problems (drunk driving, etc) are created.

So what’s the solution? Politicians presumably will look at the results of the study and argue that beer taxes also should be increased.

And then when they learn that people will drive to different cities to buy beer and soda (as happened when Philadelphia imposed such a tax), they’ll argue for statewide tax harmonization. And when that leads to cross-state shopping, they’ll push for federal harmonization.

Maybe, just maybe, they should leave people alone. In a free society, you should have the right to control your own life, even if it means making decisions that some people don’t like.

P.S. Nobody should be surprised when Seattle politicians enact bad policy.

P.P.S. Since we now know that soda taxes backfire, you also won’t be surprised to learn that marijuana taxes backfire. And tobacco taxes.

P.P.P.S. To the extent these taxes are successful, we get more evidence of the Laffer Curve. That happened in Berkeley. And it happened in Mexico.

Read Full Post »

State Tax Progress

Last year I shared a very encouraging map, which identified the many states that have been cutting tax rates.

After the November elections, I wrote a couple of encouraging columns about voters making sensible decisions when given the ability to vote for higher or lower taxes.

Later that month, I updated my five-column table showing which states have the best and worst tax systems.

And I ended the year with a look at the Tax Foundation’s State Tax Business Climate Index.

All things considered, not a bad year. At least at the state level.

Well, we may see more progress this year.

Grover Norquist of Americans for Tax Reform has a column in the Wall Street Journal about an ongoing revolution of pro-growth tax cuts at the state level.

…in the 50 states there is a dramatic increase in tax competition to provide the best government at the lowest cost. …Americans have noticed that high-tax states don’t provide better roads, education or other services. Florida (with 22 million residents) has no income tax and the state spends half as much as New York (20 million residents). New York has a top state income tax of 8.82% (soon rising to 10.9%) and was the only state to raise its personal income-tax rate during the pandemic. …state leaders have discovered that…marginal income-tax rate…reduction is enabled by spending restraint. North Carolina provided the best example of this strategy over the past seven years. …Louisiana, under the leadership of Senate Majority Leader Sharon Hewitt, has set a path to reduce its income tax every year triggers are met. These triggers could take Louisiana’s income tax to zero by 2034… Ten other states have begun the march to a zero rate.

The column also mentions other states, such as Iowa, that hopefully will replace discriminatory regimes with simple and fair flat taxes.

Not everyone is happy about these developments.

In a column for the Washington Post, Catherine Rampell points out that some of the tax cutting was enabled by Biden’s big handouts to state governments.

Democrats in Congress have made it much easier for state-level Republicans to slash taxes this year… That’s because Democrats have shoveled a ton of federal money onto the states… Big budget surpluses have inspired the governors of Missouri, South Carolina and Iowa to propose cuts to their income tax rates. Utah’s Senate recently approved a $160 million tax cut, with its state House of Representatives expected to make the proposal even more expansive. And Mississippi is working to cut taxes on food sales and car tags — and to phase out its income tax entirely. …Even blue and purple states may jump on the traditionally conservative tax-cut bandwagon, too. …after President Biden took office, Democrats decided to go big with their stimulus bill… Democrats sent states and localities an additional $500 billion, including direct state and local covid relief grants, plus separate funding for education, transit and other programs. …many states have more cash than they know what to do with. …total state and local receipts were 26 percent higher in 2021 than they were in 2019.

Here’s the part she doesn’t like.

Republicans are taking these deficit-financed federal dollars, passing them on to constituents in the form of lower taxes and reaping the political benefits — all while being able to blame Democrats for the enormous cost they add to the federal debt. …perhaps red states reasonably assume that Democrats won’t learn their lesson — and will keep the federal dollars flowing, even if doing so hands Republicans home-state political victories.

Interestingly, congressional Democrats recognized this might be a problem.

But the anti-tax cut language they included in their handout legislation has not been effective.

Democrats did include legislative language that forbade any pandemic relief funds from being used to “either directly or indirectly” finance tax cuts. But enforcing that provision was always going to be difficult… Federal judges have already blocked Treasury from enforcing the no-tax-cut provision in at least 15 states… More litigation is pending, but these developments have emboldened Republicans, who are eager to use Democrats’ sloppy bill design against them.

All of this may be a quandary for libertarians and conservatives.

Biden’s boondoggle stimulus was bad legislation. And the same can be said for major parts of Trump’s pandemic emergency spending bills.

Yet one fortunate side effect is that state governments have had so much money that some of them have been cutting taxes.

But some of them also have been spending more money, and that won’t lead to good results.

All things considered, this really shouldn’t be a quandary. We got two bad things (more federal spending and more spending in some states) and one good thing (tax cuts in some states).

P.S. At some point, the politicians in Washington will have to restore some fiscal sanity, but I’m not holding my breath for good policy.

P.P.S. I suspect we’ll see even more interstate tax migration over the next few years. Simply stated, many people would rather live in libertarian-oriented states rather than greed-oriented states.

Read Full Post »

More than 11 years ago, the Center for Freedom and Prosperity released this video about the OECD, a Paris-based bureaucracy subsidized by American taxpayers.

As outlined in the video, there are many reasons to dislike the Organization for Economic Cooperation and Development.

As a fan of tax competition, I don’t like the OECD because the bureaucrats persecute jurisdictions with low tax burdens.

But the bureaucracy’s pro-tax harmonization campaign is a symptom of a broader problem, which is that the OECD relentlessly advocates for higher taxes.

Consider the recent publication entitled “Fighting Tax Crime – The Ten Global Principles.” As you can see, nine of those ten principles involve more power and authority for government.

Since I’m not an anarcho-capitalist, I realize some taxation is necessary (ideally only the amount needed to finance genuine public goods).

As such, I don’t necessarily condemn enforcement policies.

But I am irked by a big sin of omission. If the bureaucrats at the OECD should have added an 11th principle about modest tax rates.

Why?

Because the academic literature very clearly shows that low tax rates are correlated with better tax compliance.

And those low tax rates also are better for prosperity, which is something that should be of interest to a bureaucracy with the words “economic” and “development” as part of its name.

Heck, some OECD economists have written about these benefits of low tax rates.

But none of that now matters. The bureaucrats today are totally fixated on carrying water for the world’s uncompetitive, high-tax governments.

Which is why I’m a big fan of defunding the OECD.

P.S. I suppose we should be happy that the bureaucrats acknowledge that taxpayers should have rights.

P.P.S. In the interest of fairness, I’ll acknowledge that the OECD occasionally produces good work. I’ve even favorably cited research from the bureaucracy on issues such as government spending and expenditure limits.

Read Full Post »

The Laffer Curve is a method for illustrating the relationship between tax rates, taxable income, and tax revenue.

But it’s important to realize that there are actually lots of varieties.

The Laffer Curve for capital gains taxes, for instance, will look different than the Laffer Curve for payroll taxes. Or corporate taxes. Or marijuana taxes.

In every case, the shape of the curve will depend on what’s being taxed and the ability of affected taxpayers to alter their behavior.

And the shape of the Laffer Curve also will depend on whether one is measuring the short-run revenue impact of tax changes or the long-run impact of tax changes.

Given all these varieties, no wonder so many people, both right and left, sometimes misstate its meaning.

Let’s try to expand our understanding of the Lafffer Curve by looking at some new research.

Professor Aaron Hedlund of the University of Missouri authored a study on the Laffer Curve for the Show Me Institute.

Here’s what he wants to understand.

Empirically, recent research provides a variety of estimates for the revenue-maximizing and welfare-maximizing tax rates, but one lesson that emerges is that analyses that only take into account the response of hours worked to tax increases are bound to greatly overestimate the amount of new revenue that can be raised while underestimating the economic damage from lost GDP growth and wages. This paper examines the relationship between tax rates and revenue by taking a broader view that encompasses the responses of skill acquisition, entrepreneurship, innovation, and the labor market behavior of dual-earner families. The bottom line that emerges is that these additional margins of adjustment imply significantly lower revenue-maximizing and welfare-enhancing tax rates.

He then explains that some economists fail to look at all possible behavioral responses.

Traditionally, much of the economic analysis aimed at finding this peak rate has focused on how the income tax rate affects an individual’s willingness to work, both with regard to hours worked and the decision to enter the labor force at all. Moreover, until the recent arrival of better data, much of the academic research considered only the response of heads of households. …This assumption of tax rate insensitivity led economists Peter Diamond and Emmanuel Saez to conclude that the optimal—revenue maximizing—top income tax rate is 73%. Moreover, in an analysis that also considers the social insurance benefits of progressive taxation—specifically, the ability of redistribution to soften the blow of unexpected economic hardship—economists Fabian Kindermann and Dirk Krueger provide justification for a top rate that approaches 90%. However, both studies omit the many other margins of behavioral adjustment that accompany any significant change to tax rates.

When all behavioral responses are measured, it turns out that the revenue-maximizing rate is much lower.

In one study that accounts for the sensitivity of entrepreneurs to tax rates, increasing the progressivity of the income tax code leads to a revenue-maximizing top rate of only 33%. Furthermore, in this case revenues only increase by 5%—amounting to less than one percentage point of GDP. Another study finds even starker results when looking at the subset of superstar entrepreneurs. In an analysis that incorporates the positive spillovers of ideas and innovation on economic growth, economist Charles Jones finds that the revenue-maximizing tax rate may even be as low as 29%. Furthermore, he shows that raising the top income tax rate to 75% could reduce GDP by over 8%, which would greatly blunt the impact on revenues by shrinking the tax base.

Figure 5 from the study shows how the revenue-maximizing rate varies depending on which factors are included in the study.

My two cents on this issue is to remind readers that we don’t want to maximize revenue for politicians.

As such, I don’t care if the revenue-maximizing rate in 29 percent or 73 percent.

I want to be at the growth-maximizing rate, which is where the government only collects the amount of money that is necessary to finance genuine public goods.

Needless to say, that means tax rates (and spending burdens) far lower than today.

P.S. Tax accountants have a very good understanding of the Laffer Curve.

P.P.S. Heck, even the thugs from ISIS understand the Laffer Curve.

P.P.P.S. Sadly, it doesn’t matter if some leftists understand the Laffer Curve.

Read Full Post »

A key principle of economics is convergence, which is the notion that poorer nations generally grow faster than richer nations.

For instance, battle-damaged European nations grew faster than the United States in the first few decades after World War II.

But, starting in the 1980s, that convergence stopped. And not because Europe reached American levels of prosperity. Even the nations of Western Europe never came close to U.S. levels of per-capita economic output.

Moreover, European countries then began to lose ground for the rest of the 20th century.

And that process is continuing. Here’s a recent tweet from Robin Brooks, the Chief Economist of the Institute of International Finance, which shows that the United States was growing faster than Europe before the pandemic and is now growing faster than Europe after the pandemic.

In other words, we’re seeing divergence.

Sven Larson addressed this same issue in a new article on this topic for European Conservative.

Over the 20 years from 2000 to 2019, the U.S. economy outgrew the 27-member European Union by a solid 19%, adjusted for inflation. These numbers…are quite impressive, especially considering that during President Obama’s eight years in office, annual growth in gross domestic product, GDP, never reached 3%. …From 2010 to 2019, U.S. unemployment averaged 6.3%, dropping below 3.7% in the last year before the pandemic. By contrast, the EU economy never dropped below 6.7% unemployment (in 2019) with an average of 9.5% for the entire decade. …These differences between America and Europe are significant, and should be the subject of debate in Europe: what is it that the Americans are doing that Europeans could do better? Over time, even small differences in economic growth compound into large differences in the standard of living.

Here’s his chart showing the divergence.

So why is Europe falling behind the United States when it should be growing faster because of lower living standards?

Sven has a very good explanation.

There are many candidates for explaining this difference, but there is one that stands out compared to all the others: the size of government. Between 2010 and 2019, government spending in the European Union was equal to 48.3% of GDP, on average, compared to 37.1% in the U.S. economy. …The most hard-hitting impact does not come through taxes, as conventional wisdom suggests, but through spending. …government operates under a form of central economic planning. Its outlays are not based on the mechanisms and prices of free markets: instead, its spending is governed by ideological preferences… While government spending inflicts the most damage on the economy, taxes are not insignificant. Here, again, the U.S. comes out more competitive than its European counterpart, and it is not a new problem. …For the past 20 years, European governments in general have taxed their economies 10-12 percentage points higher, as a share of GDP, than is the case in America.

Having crunched the data from Economic Freedom of the World, I think Sven is correct.

With regards to factors other than fiscal policy, European nations have just as much economic liberty (or, if you’re a glass-half-empty type, just as little economic liberty) as the United States. Heck, many of them rank above the United States when just considering factors such as trade, red tape, monetary policy, and rule of law.

Yet the United States nonetheless earns a better overall score.

Why? Because the United States does much better on fiscal policy (or, to be more accurate, doesn’t do as poorly).

P.S. Both Europe and the United States are moving in the wrong direction with regard to fiscal policy. Almost as if there’s a contest to see who can be the most profligate. Let’s call it the Keynesian Olympics. Whoever wins a gold medal is the first to suffer a fiscal crisis.

Read Full Post »

Older Posts »

%d bloggers like this: