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Archive for the ‘Taxation’ Category

Back in 2019, I listed “Six Principles to Guide Policy on Government Spending.”

If I was required to put it all in one sentence (sort of), here’s the most important thing to understand about fiscal policy.

This does not mean, by the way, that we should be anarcho-capitalists and oppose all government spending.

But it does mean that all government spending imposes a burden on the economy and that politicians should only spend money to finance “public goods” that generate offsetting benefits.

Assuming, of course, that the goal is greater prosperity.

I’m motivated to address this topic because Philip Klein wrote a column for National Review about Biden’s new spending. He points out that this new spending is bad, regardless of whether it is debt-financed or tax-financed.

As Democrats race toward squandering another $4.1 trillion — perhaps with some Republican help — we are being told over and over how the biggest stumbling block is figuring out how the new spending will be “paid for.” …Senator Joe Manchin (D., W.Va.), who is trying to maintain his image as a moderate, insisted that he doesn’t believe the spending should be passed if it isn’t fully financed. “Everything should be paid for,” Manchin has told reporters. …Republican members of the bipartisan group have also made similar comments. …But it is folly to consider massive amounts of new spending to be “responsible” as long as members of Congress come up with enough taxes to raise… At some point in the next few weeks, Democrats (and possibly Republicans) will announce that they have reached a deal on some sort of major spending compromise. They will claim that it is fully paid for, and assert that it is fiscally responsible. But there is nothing responsible about adding trillions in new obligations at a time when the nation is already heading for fiscal catastrophe.

Klein is correct.

Biden’s spending binge will be just as damaging to prosperity if it is financed with taxes rather than financed by debt.

The key thing to realize is that we’ll have less growth if more of the economy’s output is consumed by government spending.

Giving politicians and bureaucrats more control over the allocation of resources is a very bad idea (as even the World Bank, OECD, and IMF have admitted).

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It’s presumably not controversial to point out that the Washington Post (like much of the media) leans to the left. Indeed, the paper’s bias has given me plenty of material over the years.

As you can see, what really irks me is when the bias translates into sloppy, inaccurate, or misleading statements.

  • In 2011,the Post asserted that a plan to trim the budget by less than 2/10ths of 1 percent would “slash” spending.
  • Later that year, the Post claimed that the German government was “fiscally conservative.”
  • In 2013, the Post launched an inaccurate attack on the Heritage Foundation.
  • In 2017, the Post described a $71 budget increase as a $770 billion cut.
  • Later that year, the Post claimed a spending cut was a tax increase.
  • In 2018, the Post made the same type of mistake, asserting that a $500 billion increase was a $537 billion cut.
  • This year, the Post claimed Bush and Obama copied Reagan’s fiscal conservatism.
  • Also this year, the Post blamed smugglers for an energy crisis caused by Lebanese price controls.

But, to be fair, the Washington Post occasionally winds up on the right side of an issue.

It’s editorialized in favor of school choice, for instance, and also has opined in favor of privatizing the Postal Service.

And sometimes it has editorials that are both right and wrong. Which is a good description of the Post‘s new editorial on tax policy.

We’ll start with the good news. The Washington Post appears to understand that a wealth tax would be a bad idea, both because it can lead to very high effective tax rates and because it would be a nightmare to administer.

Ms. Warren’s version of the wealth tax, which calls for 2 percent annual levies on net wealth above $50 million, and 3 percent above $1 billion, very rich people would face large tax bills even when they had little or negative net income, forcing them to sell assets to pay their taxes. …huge chunks of private wealth tied up in real estate, rare art and closely held businesses are more difficult — sometimes impossible — to assess consistently. …Such problems help explain why national wealth taxes yielded only modest revenue in the 11 European countries that levied them as of 1995, and why most of those countries subsequently repealed them.

I’m disappointed that the Post overlooked the biggest argument, which is that wealth taxation would reduce saving and investment and thus lead to lower wages.

But I suppose I should be happy with modest steps on the road to economic literacy.

The Post‘s editorial also echoed my argument by pointing out that ProPublica was very dishonest in the way it presented data illegally obtained from the IRS.

ProPublica muddied a basic distinction, which, properly understood, actually fortifies the case against a wealth tax. The story likened on-paper asset price appreciation with actual cash income, then lamented that the two aren’t taxed at the same rate. …ProPublica’s logic implies that, when the stock market goes down, Elon Musk, whose billions are tied up in shares of Tesla, should get a tax cut.

Amen (this argument also applies to the left’s argument for taxing unrealized capital gains).

Now that I’ve presented the sensible portions of the Post‘s editorial, let’s shift to the bad parts.

First and foremost, the entire purpose of the editorial was to support more class-warfare taxation.

But instead of wealth taxes, the Post wants much-higher capital gains taxes – including Biden’s hybrid capital gains tax/death tax.

Fortunately, legitimate goals of a wealth tax can be achieved through other means… This would require undoing not only some of the 2017 GOP tax cuts, but much previous tax policy as well… The higher capital gains rate should be applied to a broader base of investment income… President Biden’s American Families Plan calls for reform of this so-called “stepped-up basis” loophole that would yield an estimated $322.5 billion over 10 years.

The editorial also calls for an expanded death tax, one that would raise six times as much money as the current approach.

…simply reverting to estate tax rules in place as recently as 2004 could yield $98 billion per year, far more than the $16 billion the government raised in 2020.

Last but not least, it argues for these tax increases because it wants us to believe that politicians will wisely use any additional revenue in ways that will increase economic opportunity.

The public sector could use new revenue from stiffer capital gains and estate taxes to expand opportunity.

This is the “fairy dust” or “magic beans” theory of economic development.

Proponents argue that if we give politicians more money, we’ll somehow get more prosperity.

At the risk of understatement, this theory isn’t based on empirical evidence.

Which is the message of a 2017 video from the Center for Freedom and Prosperity. And it’s also the reason I repeatedly ask the never-answered question.

P.S. To make the argument that capital gains taxes and death taxes are better than wealth taxation, the Post editorial cites research from the Paris-based Organization for Economic Cooperation and Development. Too bad the Post didn’t read the OECD study showing that class-warfare taxes reduce overall prosperity. Or the OECD study showing that more government spending reduces prosperity.

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More than 10 years ago, I narrated this video explaining why there should be no capital gains tax.

The economic argument against capital gains taxation is very simple. It is wrong to impose discriminatory taxes on income that is saved and invested.

It’s bad enough that government gets to tax our income one time, but it’s even worse when they get to impose multiple layers of tax on the same dollar.

Unfortunately, nobody told Biden. As part of his class-warfare agenda, he wants to increase the capital gains tax rate from 23.8 percent to 43.4 percent.

Even worse, he wants to expand the capital gains tax so that it functions as an additional form of death tax.

And that tax would be imposed even if assets aren’t sold. In other words, it would a tax on capital gains that only exist on paper (a nutty idea associated with Sens. Ron Wyden and Elizabeth Warren).

I’m not joking. In an article for National Review, Ryan Ellis explains why Biden’s proposal is so misguided.

The Biden administration proposes that on top of the old death tax, which is assessed on estates, the federal government should add a new tax on the deceased’s last 1040 personal-income-tax return. This new, second tax would apply to tens of millions of Americans. …the year someone died, all of their unrealized capital gains (gains on unsold real estate, family farms and businesses, stocks and other investments, artwork, collectibles, etc.) would be subject to taxation as if the assets in question had been sold that year. …In short, what the Biden administration is proposing is to tax the capital gains on a person’s property when they die, even if the assets that account for those gains haven’t actually been sold. …to make matters worse, the administration also supports raising the top tax rate on long-term capital gains from 23.8 percent to 43.4 percent. When state capital-gains-tax rates are factored in, this would make the combined rate at or above 50 percent in many places — the highest capital-gains-tax rate in the world, and the highest in American history.

This sounds bad (and it is bad).

But there’s more bad news.

…that’s not all. After these unrealized, unsold, phantom gains are subject to the new 50 percent double death tax, there is still the matter of the old death tax to deal with. Imagine a 50 percent death tax followed by a 40 percent death tax on what is left, and you get the idea. Karl Marx called for the confiscation of wealth at death, but even he probably never dreamed this big. …Just like the old death tax, the double death tax would be a dream for the estate-planning industry, armies of actuaries and attorneys, and other tax professionals. But for the average American, it would be a nightmare. The death tax we have is bad enough. A second death tax would be a catastrophic mistake.

Hank Adler and Madison Spach also wrote about this topic last month for the Wall Street Journal.

Here’s some of what they wrote.

Mr. Biden’s American Families Plan would subject many estates worth far less than $11.7 million to a punishing new death tax. The plan would raise the total top rate on capital gains, currently 23.8% for most assets, to 40.8%—higher than the 40% maximum estate tax. It would apply the same tax to unrealized capital gains at death… The American Families Plan would result in negative value at death for many long-held leveraged real-estate assets. …Scenarios in which the new death tax would significantly reduce, nearly eliminate or even totally eliminate the net worth of decedents who invested and held real estate for decades wouldn’t be uncommon. …The American Families Plan would discourage long-term investment. That would be particularly true for those with existing wealth who would begin focusing on cash flow rather than long-term investment. The combination of the new death tax plus existing estate tax rates would change risk-reward ratios.

The bottom line is that it is very misguided to impose harsh and discriminatory taxes on capital gains. Especially if the tax occurs simply because a taxpayer dies.

P.S. Keep in mind that there’s no “indexing,” which means investors often are being taxed on gains that merely reflect inflation.

P.P.S. Rather than increasing the tax burden on capital gains, we should copy Belgium, Chile, Costa Rica, Czech Republic, Hungary, Luxembourg, New Zealand, Singapore, Slovenia, Switzerland, and Turkey. What do they have in common? A capital gains tax rate of zero.

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The best news of 2021 almost surely is the big expansion of school choice in several states.

That’s a great development, especially for poor and minority families.

But there’s another positive trend at the state level. As indicated by this map from the Tax Foundation, tax rates have been reduced in several jurisdictions.

I’ve already written about Arizona’s very attractive tax reform, though I also acknowledged that the new law mostly stops the tax system from getting worse (because of a bad 2020 referendum result).

But stopping something bad is an achievement, regardless.

What about other states? The Tax Foundation’s article has all the details you could possibly want, including phase-in times and presence (in some states) of revenue triggers.

For purposes of today’s column, let’s simply focus on what’s happening to top tax rates. Here’s a table with the key results, ranked by the size of the rate reduction.

Kudos to Arizona, of course, but Iowa and Louisiana also deserve praise for significantly dropping their top tax rates.

As these states move in the right direction, keep in mind that some states are shifting (or trying to shift) in the wrong direction.

And bigger differences between sensible states and class-warfare states will increase interstate tax migration – with predictable political consequences.

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I’ve been warning, over and over and over again, that a European-style welfare state means huge tax increases on ordinary people.

Simply stated, there are not enough rich people to finance big government (even Paul Krugman agrees).

This means Joe Biden and Democrats need to make a choice: What matters most, their desire to make government bigger, or their promise not to impose higher taxes on families making less than $400K per year?

We now have the answer to that question, and I hope nobody is surprised to learn that they picked government over taxpayers.

But what is surprising is that they picked the Trump approach of protectionist taxes on global trade.

Here are some excerpts from a report by the New York Times.

Democrats have agreed to include a tax on imports from nations that lack aggressive climate change policies as part of a sweeping $3.5 trillion budget plan… The move to tax imports was made public Wednesday, the same day that the European Union outlined its own proposal for a similar carbon border tax, a novel tool that is designed to protect domestic manufacturing. …skeptics caution that a carbon border tax, which has yet to be implemented by any country, would be difficult to carry out, and could anger trading partners and face a challenge at the World Trade Organization. Unlike the Europeans, who outlined their plan in a 291-page document, Democrats released no details about their tax proposal on Wednesday. Calling it simply a “polluter import fee,” the framework does not explain what would be taxed, at what rate or how much revenue it would expect to generate. …verifying the amount of carbon…produced by foreign manufacturing is tricky, experts say.

It’s always a bad idea to give politicians a new source of revenue.

But it’s a worse idea to give them a new source of revenue that will require bureaucrats to measure the amount of carbon produced by every imported good. As I pointed out a few days ago when discussing the European Union’s version of this protectionist scheme, that’s a huge recipe for cronyism and favoritism.

P.S. I’ll be very curious to see how different international bureaucracies react to these anti-trade proposals. The OECD and IMF, while usually bad on fiscal issues, historically have favored unfettered trade. And the World Trade Organization exists specifically to protect global commerce. But will these organizations now change their position to curry favor with the nations that control their purse strings?

The theory of “public choice” suggests we shouldn’t be optimistic.

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Almost everybody (even, apparently, Paul Krugman) agrees that you don’t want to be on the downward-sloping part of the Laffer Curve.

That’s where higher tax rates do so much economic damage that government collects even less revenue.

But I would argue that tax increases that produce more revenue also are a bad idea.

Sometimes they are even a terrible idea. For instance, there are tax increases that would destroy $5 of private income for every $1 of revenue they collect.

That would not be a good deal, at least for those of us who aren’t D.C. insiders.

Heck, according to research from economists at the University of Chicago and Federal Reserve, there are some tax increases that would destroy even greater levels of private income for every additional dollar that politicians got to spend.

The simple way of thinking about this is that you don’t want to be at the revenue-maximizing point of the Laffer Curve.

Because the closer you get to that point, the greater the damage to the private sector compared to any revenue collected.

To help understand this key point, let’s review a new study from Spain’s central bank. Authored by Nezih Guner, Javier López-Segovia and Roberto Ramos, it investigates the impact of higher tax rates.

They first look at what happens when progressivity (τ) is increased.

In the first experiment, we…change…the entire tax schedule, so that all households below the mean labor income face lower average taxes, while those above the mean income face higher average taxes. Since…richer individuals face higher taxes, all else equal, the government collects more taxes. All else, however, is not equal since more progressive taxes lower incentives to work and save. As a result, a higher τ might result in lower, not higher, revenue. The question is where the top of the Laffer curve is. We find that the tax revenue from labor income is maximized with τ = 0 .19. The increase in tax collection is, however, very small: the tax revenue from labor income increases only by 0.82% (or about 0.28% of the GDP). The tax revenue from labor income is, however, only one part of the total tax collection. There are also taxes on capital and consumption. With τ = 0 .19, while the tax collection from labor income is maximized, the total tax collection declines by 1.55%. This happens since with a higher τ, the aggregate labor, capital and output decline significantly. Indeed, the total tax collection falls for any increase in τ, and the level of τ that maximizes total tax revenue is much lower, τ = 0 .025, than its benchmark value.

The key takeaway is that more progressivity puts Spain on the wrong (downward-sloping) side of the Laffer Curve.

Here’s Table 6, which shows big declines in output, labor supply, and investment as progressivity increases.

Here’s some of the accompanying explanation.

The upper panel of Table 6 shows that capital, effective labor and output decline monotonically with τ. Hence, as the economy moves from τ = 0 .1581 to τ = 0 .19, the government is collecting higher taxes from labor, but the aggregate labor supply and output decline. For τ higher than 0.19, the decline in labor supply dominates and tax collection from labor income is lower. …The level of τ that maximizes the total tax collection is 0.025, which implies significantly less progressive taxes than in the benchmark economy. …In the economy with τ = 0 .025, the aggregate capital, labor and output increase significantly. The steady state output, for example, is almost 11 percentage points higher than the benchmark economy. As a result, the government is able to collect higher taxes despite lowering taxes on the top earners.

The authors also put together an estimate of Spain’s Laffer Curve, with the red-dashed line showing total tax revenue.

The authors also looked at what happens if politicians simply increase top tax rates.

They found that there are scenarios that would enable the Spanish government to collect more revenue.

We find that it is possible to generate higher total tax revenue by increasing taxes on the top earners.The main message of our quantitative exercises is that…the extra revenue is not substantial. Higher progressivity has significant adverse effects on output and labor supply, which limits the room for collecting higher taxes. As a result, the only way to generate substantial revenue is with significant increases in marginal tax rates for a large group

But notice that those higher taxes would have “significant adverse effects on output and labor supply.”

Which brings us back to the earlier discussion about the desirability of causing a lot of damage to the private economy in order to give politicians a bit more money to spend.

The authors have a neutral tone, but the rest of should be able to draw the logical conclusion that higher taxes would be a big mistake for Spain.

And since the underlying economic principles apply in all nations, we also should conclude that higher taxes would be a big mistake for the United States.

P.S. We conducted a very successful experiment in the 1980s involving lower tax rates. Biden now wants to see what happens if we try the opposite approach.

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The best referendum result of 2020 (indeed, the best policy development of the year) was when the people of Illinois voted to preserve their flat tax, thus delivering a crushing defeat to the Prairie State’s hypocritical governor, J.B. Pritzker.

The worst referendum result of 2020 was when the people of Arizona voted for a class-warfare tax scheme that boosted the state’s top tax rate from 4.5 percent to 8 percent.

In one fell swoop, Arizona became a high-tax state for investors, entrepreneurs, innovators, and business owners. That was a very dumb choice, especially since there are zero-income tax states in the region (Nevada, Texas, and Wyoming), as well as two flat-tax states (Utah and Colorado).

You can see Arizona’s problem in this map from the Tax Foundation. It’s great to be grey and good to be yellow, but bad to be orange (like Arizona), red, or maroon.

That’s the bad news.

The good news is that lawmakers in have just approved a plan that will significantly lower tax rates and restore the state’s competitiveness.

The Wall Street Journal opined this morning about this positive development.

Arizona currently taxes income under a progressive rate structure, starting at 2.59% up to 4.5%. The ballot last November carried an initiative to add a 3.5% surtax on earnings above $250,000 for single filers. It narrowly passed, meaning the combined top rate was set to hit 8%, higher than all of Arizona’s neighbors except California. …Mr. Ducey’s budget will cut rates for all taxpayers. The Legislature can’t repeal the voter-approved surtax, so above the 2.5% flat rate, there will still be a second bracket on income over $250,000. But the budget also has a provision adjusting the flat tax downward for those Arizonans, so no one will pay a top rate above 4.5%. …the same as today. …No Arizonan will have to pay the threatened 8% rate, since the provisions forestalling it are immediate. …“Every Arizonan—no matter how much they make—wins with this legislation,” Mr. Ducey said. “It will protect small businesses from a devastating 77 percent tax increase…and it will help our state stay competitive so we can continue to attract good-paying jobs.” That’s worth celebrating.

A story from the Associated Press gave the development a much more negative spin.

After slashing $1.9 billion in income taxes mainly benefiting upper-income taxpayers and shielding them from higher taxes approved by voters in an initiative last year, the Republican-controlled House returned Friday and passed more legislation targeting Proposition 208. The House approved the creation of a new tax category for small business, trusts and estates that will eliminate even more of the money that the measure approved by voters in November was designed to raise for schools. The proposal passed despite unified opposition from minority Democrats. …The governor has expressed disdain for the voter-approved tax, saying it would hurt the state’s economy and vowing in March to see it gutted either though Legislation or the courts. …The budget-approved tax cuts set a flat 2.5% tax on all income levels that will be phased in over several years once revenue projections are met, with those subject to the new education tax paying 4.5% at most.

If nothing else, an amusing example of bias from AP.

I have two modest contributions to this discussion.

First, it’s not accurate to say that Arizona adopted a flat tax. Maybe I’m old fashioned, but a flat tax has to have only one rate. Arizona’s reform is praiseworthy, but it doesn’t fulfill that key equality principle.

Second, the main takeaway is not that lawmakers did something good. It’s more accurate to say that they protected the state from something bad.

I’ve updated this 2018 visual to show how the referendum would have pushed Arizona into Column 5, which is the worst category, but the reform keeps the state in column 3.

P.S. North Carolina made the biggest shift in the right direction in recent years, followed by Kentucky, while Kansas flirted with a big improvement and settled for a modest improvement. Meanwhile, Mississippi is thinking about making a huge positive jump.

P.P.S. Since Arizona voters made a bad choice and Arizona lawmakers made a wise choice, this is evidence for Prof. Garett Jones’ hypothesis that too much democracy is a bad thing.

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I’ve been arguing against Biden’s proposed increase in business taxation by pointing out that higher corporate taxes will be bad news for workers, consumers, and shareholders.

Everyone agrees that shareholders get hurt. After all, they’re the owners of the businesses. Higher corporate taxes directly reduce the amount of money available to be paid as dividends.

But we also should recognize that higher corporate taxes can be passed along to consumers, so they also lose. Even more important, we should recognize that higher tax burdens also reduce incentives for business investment, and this can have a negative impact on worker compensation.

A 2017 study from the Tax Foundation, authored by Steve Entin, thoroughly explored this question and included a table summarizing the academic research.

Alex Durante updated the Tax Foundation’s summary of the research in a just-released report.

Here are the results of two new studies.

In a large study of German municipalities over a 20-year period, Fuest et al. (2018) find that slightly more than half of the corporate tax burden falls on workers. …Baker et al. (2020) find that consumers could also be impacted by corporate tax changes. Looking at specific product prices with linked survey and administrative data at the state level, the authors found that a 1 percentage-point increase in the corporate tax rate increased retail prices by 0.17 percent. Combining this estimate with the wage response estimated in Fuest et al., the authors calculated that 31 percent of the corporate tax incidence falls on consumers, 38 percent on workers, and 31 percent on shareholders.

If you want more information about the German study, I wrote about it a couple of years ago. Solid research.

Here’s my two cents on the issue: Shareholders pay 100 percent of the direct costs of the corporate tax. But we need to also consider the indirect costs, most notably who bears the burden when there’s less investment and slower wage growth.

If you ask five economists for their estimates of indirect costs, you’ll probably get nine different answers. So it’s no surprise that there’s no agreement about magnitudes in the academic research cited above.

But they all agree that workers lose when corporate rates increase, and that’s a big reason why we can confidently state that Biden’s class-warfare agenda is bad for ordinary people.

The bottom line is that the person (or business) writing a check to the IRS isn’t the only person who suffers because of a tax.

And the lesson to learn is that we should be lowering the corporate, not increasing it.

P.S. Here’s my primer on the overall issue of corporate taxation.

P.P.S. Here’s some research about the link between corporate tax and investment.

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Yesterday’s column explained why Biden’s proposed global cartel for corporate taxation was a bad idea.

In this clip from a recent panel hosted by the Austrian Economics Center in Vienna, I speculated on whether the plan would become reality.

I encourage you to watch the 4-minute video, but all you really need to know is that there are lots of obstacles to a cartel. Most notably, countries with pro-growth business tax regimes (such as Ireland, Estonia, and Switzerland in Europe) have big incentives to say no.

And if legislation is required in the United States, I assume that won’t be an easy sell, at least for GOP members.

But, as I warn in the video, the other side has hundreds of bureaucrats at the OECD and various finance ministries and treasury departments. And these taxpayer-financed mandarins have both the time and patience to chip away until they achieve their goals.

So it is critical that economists such as myself do a good job of educating policy makers about the adverse consequences of a tax cartel.

Which is why people should read this column by Veronique de Rugy of the Mercatus Center. Here are some key excerpts.

For several decades now, politicians around the world have tried to curtail tax competition to make it easier for them to increase the tax burdens on their citizens without them fleeing to other lower-tax jurisdictions. The best way to achieve their goal is to create a global high-tax cartel. …It’s no mystery why politicians don’t like tax competition. …The ability to shift residences and operations from country to country puts pressure on governments to keep taxes on income, investment, and wealth lower than politicians would like. Politicians in each country fear that raising taxes will prompt high-income earners and capital to move away. …Academic research shows that the imposition of higher corporate taxes is a highly destructive way to collect revenue because it lowers investment and, in turn, workers’ wages. It also increases consumer prices. Also, let’s face it, no nation has ever become wealthier and better through higher taxes and wealth redistribution.

This column for Prof. Bruce Yandle also is very informative. Here’s some of what he wrote.

It was with a feeling of deep disappointment…that I read Treasury Secretary Janet Yellen is…pushing to form an international cartel of governments that would implement a minimum corporate income tax rate across borders. …Efforts to cartelize taxation among nations will…, all else equal, lead to a higher-cost world economy. …Instead of searching high and low for ways to raise costs in the hope that more federal revenue and spending will follow, we should hope that our national leaders work harder to find better, more efficient ways to govern and serve the people. Doing so will give more people a much better chance at prosperity.

Amen. Tax harmonization was most accurately described by a former member of the European Parliament, who said it was a “thieves’ cartel.”

P.S. One of the worst aspects of the proposed tax cartel is that it will make it more difficult for poor countries to use good policy to improve living standards for their people.

P.P.S. Click here for my primer on tax competition.

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When governments have to compete with each other, we get lower tax rates. That’s good for taxpayers and good for growth.

But politicians hate limits on their taxing power, which is why Biden has proposed a global tax cartel. Here are some of my remarks made yesterday on this topic.

If you don’t have time to watch the video, here are the key points I made when asked about the impact of Biden’s scheme.

  • The tax cartel is a naked grab for more revenue.
  • Higher taxes on businesses arguably are the worst way to collect more tax revenue. Indeed, both the IMF and OECD have research showing the destructive impact of higher corporate tax burdens.
  • The global minimum tax will lead to a couple of additional bad consequences. 1) The 15 percent rate will be increased, and 2) Cartels will be created for other taxes.

I was then asked about whether there are better ways of generating revenue, particularly by having economic policies that lead to more growth.

This presumably was an opportunity for me to pontificate about the Laffer Curve, but I decided to make a more fundamental point about how politicians should not have more money.

I closed my remarks by pointing out that the world enjoyed an era of falling tax rates, which began when Reagan and Thatcher slashed tax rates about 40 years ago.

The average top personal tax rate in the developed world dropped from nearly 70 percent to just a bit over 40 percent.

The average corporate tax rate in industrialized nations dropped from nearly 50 percent to less than 25 percent.

Other nations didn’t copy the U.S. and U.K. because politicians were reading my boring articles about marginal tax rates. Instead, they only did the right thing because they were worried about losing jobs and investment.

One point I forgot to make (particularly in response to the second question) is that I should have explained that tax revenues as a share of GDP did not fall when tax rates were reduced.

Indeed, OECD data shows that tax revenues on income and profits (as a share of GDP) actually have risen during the period of falling tax rates.

The bottom line is that we need tax competition to protect us from “stationary bandits” who would produce “goldfish government.”

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When studying the economic of taxation, one of the most important lessons is that there should be low marginal tax rates on work, saving, investment, and entrepreneurship.

That’s also the core message of this video from Prof. John Cochrane.

I wrote a primer on marginal tax rates back in 2018. I wanted to help people understand that the incentive to engage in additional productive behavior is impacted by how much people get to keep if they earn additional income.

So what matters isn’t the tax on income that’s already been generated. The key variable is the marginal tax on the additional increment of income. As illustrated by the accompanying visual.

I’ve shared real-life examples of how the American tax system can result in very high marginal tax rates, especially when you include the extra layers of tax on income that is saved and invested (producing extremely high effective marginal tax rates).

For today’s column, let’s look at a real-world example from the other side of the Atlantic Ocean.

The U.K.-based Telegraph has a story illustrating how marginal tax rates often can be much higher than the official statutory tax rate.

More than a third of a million people now face paying income tax at a rate of 60pc because of government stealth tax policies… 336,000 people earned between £100,000 and £125,000 in 2018-19, the last year for which data was available. …This group is meant to pay income tax at a rate of 40pc, but risks falling foul of a costly trap which results in their earnings being subject to effective income tax rates that are far higher. The trap is sprung once someone starts to earn more than £100,000, as this is the point at which the Government begins to withdraw the £12,570 tax-free personal allowance. For every £1 earned over £100,000, the state reduces the allowance by 50p. The result is that each additional £1 of income effectively incurs 60p of income tax… Once National Insurance is factored in, the true rate is even higher.

Here’s a chart that was part of the article.

It shows that anyone earning £50,000 or above is losing at least 40 percent to the tax authorities. That statutory rate is both punitive and excessive.

But you also can see how the marginal tax rate jumps to 60 percent once taxpayers hit £100,000 on income.

At the risk of understatement, high marginal tax rates are bad news for the economy.

That’s true in the United Kingdom, the United States, and everyplace else in the world.

To use economic jargon, “deadweight losses” grow exponentially as tax rates are increased.

In regular English, this simply means that class-warfare tax policy (ever-higher tax rates on the so-called rich) causes the most economic damage. Even the left-leaning OECD agrees with this analysis.

You may be wondering why a supposedly conservative government in the United Kingdom allows such a destructive policy.

Sadly, there is no good answer. As you can see from this excerpt, Boris Johnson’s government sounds a lot like what the U.K. would have experienced if Jeremy Corbyn won the last election.

The Government said it was aware of the effect of the 60pc tax trap but said it had to take a “balanced approach”. “We want to keep taxes low to support working people to keep more of what they earn, but it’s only fair that those with the broadest shoulders bear the biggest burden as we rebuild the public finances and fund public services,” a spokesman said.

P.S. If President Biden’s tax plan is any indication, our friends on the left seem to be motivated by spite and envy, so they don’t care that high tax rates have negative consequences.

P.P.S. A wealth tax could easily result in marginal tax rates of more than 100 percent.

P.P.P.S. The politicians in Washington also believe in very high implicit tax rates on low-income people.

P.P.P.P.S. The various plans for per-child handouts would create another big spike in marginal tax rates for a large cohort of American taxpayers.

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The IRS played partisan politics during the Obama years by targeting taxpayer organizations such “Tea Party” groups. Now the IRS is at it again, this time leaking the tax returns of selected rich people to advance Biden’s class-warfare agenda.

There are two logical responses.

  1. Cut the IRS budget so the bureaucrats learn a very important lesson that corruption is bad.
  2. Reform the tax code with a simple and fair flat tax so the IRS can be dramatically downsized.

I suspect most Americans would select both options.

But the crowd in Washington has a different perspective. Most of them like the IRS because it’s the bureaucracy that generates the money that they use to buy votes.

Many of them want to reward the IRS with more money (including plenty of brain-dead Republicans), which is bad enough, but what’s really troubling is that some of them even want to turn the IRS budget into an entitlement.

In an article for Reason, Eric Boehm explains that Elizabeth Warren is leading the charge for this reckless proposal.

Sen. Elizabeth Warren (D–Mass.) says her plan to more than double the annual IRS budget would allow the federal government to collect an extra $1.75 trillion over the next 10 years. …her plan seems based on little more than a hunch and some bad math. …Warren’s “Restoring the IRS Act of 2021” would hike the agency’s budget from $11.9 billion to $31.5 billion. …It would also…move the IRS from the…federal budget’s discretionary side…to the mandatory portion of the budget, alongside Social Security and other programs that run on autopilot. …In practice, that means giving the IRS a big budgetary boost and giving the agency the authority to dig through bank accounts and transaction records.

The Wall Street Journal also is not impressed with the idea of rewarding a corrupt tax bureaucracy.

Here are some excerpts from its recent editorial, which notes that the Biden Administration also wants to turn IRS funding into an entitlement  .

The Internal Revenue Service leak of taxpayer returns to left-leaning media outlet ProPublica is a prime example of why Congress should refuse to give the tax agency more money and power. That includes President Biden’s little-noticed but politically consequential plan to put IRS funding on autopilot. …Like so much else in the Biden Presidency, this follows the Elizabeth Warren model. …The IRS would essentially become another mandatory budget program like Social Security and Medicare. …without the risk of having to answer to Congressional appropriators for its budget, the tax agency would have little to worry about. …Their plan would make sure the IRS doesn’t have to pay a price in the future for politically targeting taxpayers or leaking returns. The potential for abuse would grow since Mr. Biden’s plan would also give the IRS access to bank account inflows and outflows. …a tax collection agency shielded from Congressional budget supervision is one definition of tyranny.

All of this is true.

But let’s also remember that the case for more IRS funding (whether as appropriations or as an entitlement) is based on nonsensical and self-serving estimates of the supposed tax gap.

P.S. For those who want to understand the technical differences between entitlement spending and appropriated spending, click here.

P.P.S. Entitlement spending is America’s top long-run fiscal challenge, so it’s incomprehensibly foolish to expand such programs.

P.P.P.S. The bad news is that Senator Warren is an unreconstructed statist (see here, here, here, here, here, here, here, and here).

P.P.P.P.S. The good news is that she is the impetus for some clever humor (see here, here, here, and here).

P.P.P.P.P.S. And she’s a hypocrite who doesn’t abide by her own policies.

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The bad news is that federalism has declined in the United States as politicians in Washington have expanded the size and scope of the national government.

The good news is that some federalism still exists and this means Americans have some ability to choose the type of government they prefer by “voting with their feet.”

  1. They can choose states that tax a lot and spend a lot.
  2. They can choose states with lower fiscal burdens.

You won’t be surprised to learn that people generally prefer option #2.

Researchers have found a significant correlation between state fiscal policy and migration patterns.

And it’s still happening.

In a column for the Wall Street Journal a few days ago, Allysia Finley and Kate LaVoie discuss some research based on IRS data about taxpayer migration patterns.

Here’s some of what they wrote.

New IRS data compiled by research outfit Wirepoints illustrate the flight from high- to low-tax states. …Retirees in the Midwest and Northeast are flocking to sunnier climes. But notably, states with no income tax (Florida, Nevada, Tennessee and Wyoming) made up four of the 10 states with the largest income gains. On the other hand, five of the 10 states with the greatest income losses (NY, Connecticut, New Jersey, Minnesota, California) ranked among the top 10 states with the highest top marginal income tax rates. …Florida gained a whopping $17.7 billion in AGI including $3.4 billion from New York, $1.2 billion from California, $1.9 billion from Illinois, $1.7 billion from New Jersey and $1 billion from Connecticut. California, on the other hand, lost $8.8 billion including $1.6 billion to Texas, $1.5 billion to Nevada, $1.2 billion to Arizona and $700 million to Washington.

Here’s a very informative visual, showing the share of income that either left a state (top half of the chart) or entered a state (bottom half of the chart).

Our friends on the left say that this data merely shows that retirees move to states with nicer climates.

That is surely a partial explanation, but it doesn’t explain why California – the state with the nation’s best climate – is losing people and businesses.

Heck, I even have a seven-part series (March 2010February 2013April 2013October 2018June 2019, December 2020, and February 2021) on the exodus from California to Texas.

Let’s return to the Finley-LaVoie column, because there’s some additional data that deserves attention. They point out that states with better policy are big net winners when you look at the average income of migrants.

The average taxpayer who moved to Florida from the other 49 states had an AGI of $110,000… By contrast, the average taxpayer who left Florida had an AGI of just $66,000. In sum, high-tax states aren’t just losing more taxpayers—they are losing higher-income ones. Similarly, low and no income states are generally gaining more taxpayers who also earn more. …When blue states lose high earners, their tax base shrinks, but their cost base continues to grow due to rich government employee pay, pensions and other benefits. …The result is that low-tax states are getting richer while those that impose higher taxes are getting poorer.

As you can see, Florida is a big beneficiary.

And I shared data a few years ago showing that states such as Illinois are big net losers.

Let’s conclude by asking why some politicians, such as the hypocritical governor of Illinois, don’t care when they’re on the losing side of these trends?

I don’t actually know what they’re thinking, of course, but I suspect the answer has something to do with the fact that departing taxpayers probably are more libertarian and conservative. So if you’re a big-spending politician, you probably are not very upset when migration patterns mean your state becomes more left-leaning over time.

That’s a smart political approach.

Until, of course, those states no longer have enough productive people to finance big government.

In other words, every government is limited by Margaret Thatcher’s famous warning.

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I sometimes try to go easy on the IRS. After all, our wretched tax system is largely the fault of politicians, who have spent the past 108 years creating a punitive and corrupt set of tax laws.

But there is still plenty of IRS behavior to criticize. Most notably, the tax agency allowed itself to be weaponized by the Obama White House, using its power to persecute and harass organizations associated with the “Tea Party.”

That grotesque abuse of power largely was designed to weaken opposition to Obama’s statist agenda and make it easier for him to win re-election.

Now there’s a new IRS scandal. In hopes of advancing President Biden’s class-warfare agenda, the bureaucrats have leaked confidential taxpayer information to ProPublica, a left-wing website.

Here’s some of what that group posted.

ProPublica has obtained a vast trove of Internal Revenue Service data on the tax returns of thousands of the nation’s wealthiest people, covering more than 15 years. …ProPublica undertook an analysis that has never been done before. We compared how much in taxes the 25 richest Americans paid each year to how much Forbes estimated their wealth grew in that same time period. We’re going to call this their true tax rate. …those 25 people saw their worth rise a collective $401 billion from 2014 to 2018. They paid a total of $13.6 billion in federal income taxes in those five years, the IRS data shows. That’s a staggering sum, but it amounts to a true tax rate of only 3.4%.

Since I’m a policy wonk, I’ll first point out that ProPublica created a make-believe number. We (thankfully) don’t tax wealth in the United States.

So Elon Musk’s income is completely unrelated to what happened to the value of his Tesla shares. The same is true for Jeff Bezos’ income and the value of his Amazon stock.*

And the same thing is true for the rest of us. If our IRA or 401(k) rises in value, that doesn’t mean our taxable income has increased. If our home becomes more valuable, that also doesn’t count as taxable income.

The Wall Street Journal opined on this topic today and made a similar point.

There is no evidence of illegality in the ProPublica story. …ProPublica knows this, so its story tries to invent a scandal by calculating what it calls the “true tax rate” these fellows are paying. This is a phony construct that exists nowhere in the law and compares how much the “wealth” of these individuals increased from 2014 to 2018 compared to how much income tax they paid. …what Americans pay is a tax on income, not wealth.

Some journalists don’t understand this distinction between income and wealth.

Or perhaps they do understand, but pretend otherwise because they see their role as being handmaidens of the Biden Administration.

Consider these excerpts from a column by Binyamin Appelbaum of the New York Times.

Jeff Bezos…added an estimated $99 billion in wealth between 2014 and 2018 but reported only $4.22 billion in taxable income during that period. Warren Buffett, who amassed $24.3 billion in new wealth over those years, reported $125 million in taxable income. …some of the wealthiest people in the United States essentially live under a different system of income taxation from the rest of us.

Mr. Appelbaum is wrong. The rich have a lot more assets than the rest of us, but they operate under the same rules.

If I have an asset that increases in value, that doesn’t count as taxable income. And it isn’t income. It’s merely a change in net wealth.

And the same is true if Bill Gates has an asset that increases in value.

Now that we’ve addressed the policy mistakes, let’s turn our attention to the scandal of IRS misbehavior.

The WSJ‘s editorial addresses the agency’s grotesque actions.

Less than half a year into the Biden Presidency, the Internal Revenue Service is already at the center of an abuse-of-power scandal. …ProPublica, a website whose journalism promotes progressive causes, published information from what it said are 15 years of the tax returns of Jeff Bezos, Warren Buffett and other rich Americans. …The story arrives amid the Biden Administration’s effort to pass the largest tax increase as a share of the economy since 1968. …The timing here is no coincidence, comrade. …someone leaked confidential IRS information about individuals to serve a political agenda. This is the same tax agency that pursued a vendetta against conservative nonprofit groups during the Obama Administration. Remember Lois Lerner? This is also the same IRS that Democrats now want to infuse with $80 billion more… As part of this effort, Mr. Biden wants the IRS to collect “gross inflows and outflows on all business and personal accounts from financial institutions.” Why? So the information can be leaked to ProPublica? …Congress should also not trust the IRS with any more power and money than it already has.

And Charles Cooke of National Review also weighs in on the implications of a weaponized and partisan IRS.

We cannot trust the IRS. “Oh, who cares?” you might ask. “The victims are billionaires!” And indeed, they are. But I care. For a start, they’re American citizens, and they’re entitled to the same rights — and protected by the same laws — as everyone else. …Besides, even if one wants to be entirely amoral about it, one should consider that if their information can be spilled onto the Internet, anyone’s can. …A government that is this reckless or sinister with the information of men who are lawyered to the eyeballs is unlikely to worry too much about being reckless or sinister with your information. …The IRS wields an extraordinary amount of power, and there will always be somebody somewhere who thinks that it should be used to advance their favorite political cause. Our refusal to indulge their calls is one of the many things that prevents us from descending into the caprice and chaos of your average banana republic. …Does that bother you? It should.

What’s especially disgusting is that the Biden Administration wants to reward IRS corruption with giant budget increases, bolstered by utterly fraudulent numbers.

Needless to say, that would be a terrible idea (sadly, Republicans in the past have been sympathetic to expanding the size of the tax bureaucracy).

*Financial assets such as stocks generally increase in value because of an expectation of bigger streams of income in the future (such as dividends). Those income streams are taxed (often multiple times) when (and if) they actually materialize.

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Biden’s tax agenda – especially the proposed increase in the corporate rate – would be very bad for American competitiveness.

We know this is true because the Administration wants to violate the sovereignty of other nations with a scheme that would require all nations to impose a minimum corporate tax rate of 15 percent.

Indeed, the White House openly says it wants to export bad policy to other nations “so that foreign corporations aren’t advantaged and foreign countries can’t try to get a competitive edge.”

Other big nations (the infamous G-7) just announced they want to participate in the proposed tax cartel.

I was just interviewed on this topic by the BBC World Service and I’ve extracted my most important quotes.

But I encourage you to listen to the full discussion, which starts with (predictably awful) comments from the French Finance Minister, followed by a couple of minutes of my sage observations.

For what it’s worth, “reprehensible” doesn’t begin to capture my disdain for what the politicians are trying to achieve.

What’s particularly irritating is that politicians want us to think that companies are engaging in rogue tax avoidance. Yet, as I noted in the interview, national governments already have the ability to reject overly aggressive forms of tax planning by multinational firms.

Here’s some of what was reported about the proposed cartel by the Associated Press.

The Group of Seven wealthy democracies agreed Saturday to support a global minimum corporate tax of at least 15%… U.S. Treasury Secretary Janet Yellen said the agreement “provides tremendous momentum” for reaching a global deal that “would end the race-to-the-bottom in corporate taxation…” The endorsement from the G-7 could help build momentum for a deal in wider talks among more than 135 countries being held in Paris as well as a Group of 20 finance ministers meeting in Venice in July. …The Group of 7 is an informal forum among Canada, France, Germany, Italy, Japan, the UK and the United States. European Union representatives also attend. Its decisions are not legally binding, but leaders can use the forum to exert political influence.

As you just read, the battle is not lost. Hopefully, the jurisdictions with good corporate tax policy (Ireland, Bermuda, Hong Kong, Cayman Islands, Switzerland, etc) will resist pressure and thus cripple Biden’s cartel.

I’ll close by emphasizing that the world needs tax competition as a necessary check on the greed of politicians. Without any sort of constraint, elected officials will over-tax and over-spend.

Which is why they’re trying to impose a tax cartel. They don’t want any limits on their ability to buy votes with other people’s money.

And we can see from Greece what then happens.

P.S. The Trump Administration also was awful on the issue of tax competition.

P.P.S. Here’s my most-recent column about the so-called “race to the bottom.”

P.P.P.S. As noted in the interview, both the IMF and OECD have research showing the destructive impact of higher corporate tax burdens.

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While Paul Krugman sometimes misuses and misinterprets numbers for ideological reasons (see his errors regarding the United States, France, Canada, the United States, Estonia, Germany, the United States, and the United Kingdom), he isn’t oblivious to reality.

At least not totally.

He’s acknowledged, for instance, that there is a Laffer Curve and that tax rates can become so onerous that tax revenues actually decline.

Now he’s had another encounter with the real world.

In a column that was mostly a knee-jerk defense of Biden’s class-warfare tax policy, Krugman confessed yesterday that big government ultimately means big tax increases for lower-income and middle-class people.

…is trying to “build back better” by taxing only the very affluent feasible? Is it wise? …There’s a good case that the kind of society progressives want us to become, with a very strong social safety net, can’t be paid for just by taxing the rich. A country like Denmark, for example, does have a high top tax rate… But Denmark also has very high middle-class taxation, in particular a 25 percent value-added tax, effectively a national sales tax. …the fact that even the Nordic countries feel compelled to raise a lot of money from the middle class suggests that there are limits…to how much you can raise just by taxing the rich. So if you want Medicare for all, Nordic levels of support for child care and families in general, and so on, just raising taxes on the 400K-plus elite won’t get you there.

It may not happen often, but Krugman is completely correct.

European-sized government requires European-style taxes on everyone. And that means a big value-added tax, as Krugman notes. And it almost certainly also means big energy taxes, higher payroll taxes, and much higher income tax rates on middle-class taxpayers.

This chart from Brian Riedl shows that government spending already was on track to become a bigger burden for the American economy, and Biden is proposing to go even faster in the wrong direction.

The growing gap between the blue lines and red lines implies giant tax increases. At the risk of understatement, there’s no way to finance that ever-expanding government by just pillaging upper-income taxpayers.

By the way, Krugman is right about big government leading to higher taxes on ordinary people, but he’s wrong about the desirability of that outcome.

He wants us to think that big government means a “better America,” but all the economic data tells a different story. A bigger fiscal burden means much lower living standards.

P.S. If you want another example of Krugman being right on a fiscal issue, click here.

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Back in 2013, the Tax Foundation published a report that reviewed 26 academic studies on taxes and growth.

That scholarly research produced a very clear message: The overwhelming consensus was that higher tax rates were bad news for prosperity.

Especially soak-the-rich tax increases that reduced incentives for productive activities such as work, saving, investment, and entrepreneurship.

That compilation of studies was very useful because then-President Obama was a relentless advocate of class-warfare tax policy.

And he partially succeeded with an agreement on how to deal with the so-called “fiscal cliff.”

Well, as Yogi Berra might say, it’s “deju vu all over again.” Joe Biden is in the White House and he’s proposing a wide range of tax increases.

It’s unclear whether Biden will gain approval for his proposals, but I’ve already produced a four-part series on why they are very misguided.

  • In Part I, I showed that the tax code already is biased against upper-income taxpayers.
  • In Part II, I explained how the tax hike would have Laffer-Curve implications, meaning politicians would not get a windfall of tax revenue.
  • In Part II, I pointed out that the plan would saddle America with the developed world’s highest corporate tax burden.
  • In Part IV, I shared data on the negative economic impact of higher taxes on productive behavior.

The bottom line is that the United States should not copy France by penalizing entrepreneurs, innovators, investors, and business owners.

Particularly since the rest of us are usually collateral damage when politicians try to punish successful taxpayers.

So it’s serendipity that the Tax Foundation has just updated it’s list of research with a new report looking at seven new high-level academic studies.

Here’s some of what the report says about class-warfare tax policy.

With the Biden administration proposing a variety of new taxes, it is worth revisiting the literature on how taxes impact economic growth. …we review this new evidence, again confirming our original findings: Taxes, particularly on corporate and individual income, harm economic growth. …We investigate papers in top economics journals and National Bureau of Economic Research (NBER) working papers over the past few years, considering both U.S. and international evidence. This research covers a wide variety of taxes, including income, consumption, and corporate taxation.

And here’s the table summarizing the impact of lower tax rates on economic performance, so it’s easy to infer what will happen if tax rates are increased instead.

Some of these findings may not seem very significant, such as changes in key economic indicators of 0.2%, 0.78%, or 0.3%.

But remember that even small changes in economic growth can lead to big changes in national prosperity.

P.S. In an ideal world, Washington would be working to boost living standards by adopting a flat tax. In the real world, the best-case scenario is simply avoiding policies that will make America less competitive.

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As explained here, here, here, and here, I don’t like Biden’s class-warfare tax policy.

I’m especially concerned about his approach to business taxation.

  1. He wants to penalize American-based companies with the highest corporate tax rate among all developed nations.
  2. He wants to export that bad policy to the rest of the world with a “global minimum tax” – sort of an OPEC for politicians.
  3. He wants to handicap American multinational companies with taxes that don’t apply to foreign-based firms.

Regarding the third point, I wrote a column on that topic for the Orange County Register.

Here’s how I described Biden’s proposal.

Biden has proposed several tax increases that specifically target American firms that compete in world markets. Most notably, the Administration has proposed to double the tax rate on “global intangible low-tax income” (GILTI) from 10.5 percent to 21 percent. Translated from tax jargon to English, this is largely a tax on the income American firms earn overseas from intellectual property, most notably patents and royalties. Keep in mind, by the way, that this income already is subject to tax in the nations where it is earned. Most other nations do not handicap their companies with similar policies, so this means that American firms will face a big competitive disadvantage – especially when fighting for business in low-tax jurisdictions such as Hong Kong, Ireland, Singapore, Switzerland, and most of Eastern Europe.

And here are some additional reasons why it is very bad news.

…let’s simply look at the bottom-line impact of what Biden is proposing. The Tax Foundation estimates that, “The proposal would impose a 9.4 percent average surtax on the foreign activities of U.S. multinationals above and beyond the taxes levied by foreign governments” and “put U.S. multinationals at a competitive disadvantage relative to foreign corporations.” …a stagging $1.2 trillion tax increase on these companies. …This is not just bad for the competitiveness of American-based companies, it is also bad policy. Good fiscal systems, such as the flat tax, are based on “territorial taxation,” which is the common-sense notion that countries only tax economic activity inside their borders. …Many other nations follow this approach, which is why they will reap big benefits if Biden’s plan to hamstring American companies is approved. The key thing to understand is that the folks in Washington have the power to raise taxes on American companies competing abroad, but they don’t have the ability to raise taxes on the foreign companies in those overseas markets.

The Wall Street Journal‘s editorial page has been sounding the alarm on this issue as well.

Here are some excerpts from an editorial back in April.

…the tax on global intangible low-tax income, known as Gilti, which was created by the 2017 tax reform. …Gilti was flawed from the start…but Mr. Biden would make it worse in every respect. …The 2017 tax law set the statutory Gilti rate at…10.5%. Mr. Biden would increase that to 21%… the effective rate companies actually pay is higher. This is because Gilti embedded double taxation in the tax code. …Gilti allows a credit of only 80% of foreign taxes, with no carry-forwards or carry-backs. …Raising the statutory rate to 21% increases that effective rate to 26.25%. This new Biden effective minimum tax would be higher than the statutory tax rates in most countries even in Western Europe… The Biden plan would further increase the effective Gilti rate by expanding the tax base on which it’s paid. …A third Biden whammy would require companies to calculate tax bills on a country-by-country basis. …Requiring companies to calculate taxable profits and tax credits individually for every country in which a company operates will create a mountain of compliance costs for business and work for the Internal Revenue Service. …The Biden Administration and its progressive political masters have decided they don’t care about the global competitiveness of American companies.

Let’s close with some international comparisons.

According to the most-recent International Tax Competitiveness Index, the United States ranks #21 out of 35 nations, which is a mediocre score.

But the United States had been scoring near the bottom, year after year, before the Trump tax reform bumped America up to #21. So there was some progress.

If the Biden plan is approved, however, it is a near-certainly that the U.S. will be once again mired at the bottom. And this bad policy will lead to unfortunate results for American workers and American competitiveness.

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I’ve shared all sorts of online quizzes that supposedly can detect things such as whether you’re a pure libertarian.

Or even whether you’re a communist.

Today, courtesy of the folks at the Committee for a Responsible Budget, you can agree or disagree with 24 statements to determine your “budget personality.”

I have some quibbles about some of the wording (for instance, I couldn’t answer “neither” when asked to react to: “The government should spend more money on children than on seniors”).

But I can’t quibble with the results. Given the potential outcomes, I’m glad to be a “Minimalist” who is “in favor of smaller government.”

Though I’m disappointed that I apparently didn’t get a perfect score on “Size of Government.”

And I need to explain why I got a mediocre score on the topic of “Fiscal Responsibility.”

The budget geeks at the Committee for a Responsible Federal Budget (CRFB) have a well-deserved reputation for rigorous analysis. I regularly cite their numbers and appreciate the work that they do.

That being said, they mistakenly focus on deficits and debt when the real problem is too much government.

I agree with Milton Friedman, who wisely observed that ““I would rather have government spend one trillion dollars with a deficit of a half a trillion dollars than have government spend two trillion dollars with no deficit.”

The folks at CRFB would disagree.

Indeed, they are so fixated on red ink that they would welcome tax increases.

At the risk of understatement, that would be a very bad approach.

The evidence from Europe shows that higher taxes simply lead to higher spending. And more debt.

Indeed, Milton Friedman also commented on this issue, warning that, “History shows that over a long period of time government will spend whatever the tax system raises plus as much more as it can get away with.”

The bottom line is that CRFB not only has the wrong definition of “Fiscal Responsibility,” but they also support policies that would make matters worse – even from their perspective!

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About one week ago, I shared some fascinating data from the Tax Foundation about how different nations penalize saving and investment, with Canada being the worst and Lithuania being the best.

I started that column by noting that there are three important principles for sensible tax policy.

  1. Low marginal tax rates on productive behavior
  2. No tax bias against capital (i.e., saving and investment)
  3. No tax preferences that distort the economy

Today, we’re going to focus on #1, specifically the tax burden on the average worker.

And, once again, we’ll be citing some of the Tax Foundation’s solid research. Here are their numbers showing the tax burden on the average worker in OECD nations. As you can see, Belgium is the worst place to be, followed by Germany, Austria, and France.

Colombia has the lowest tax burden on average workers, though that’s mostly a reflection of low earnings in that relatively poor nation.

Among advanced nations, Switzerland has the lowest tax burden when value-added taxes are part of the equation, while New Zealand is the best when looking just at income taxes and payroll taxes.

Here’s some of what the Tax Foundation wrote in its report, which was authored by Cristina Enache.

Average wage earners in the OECD have their take-home pay lowered by two major taxes: individual income and payroll (both employee and employer side). …The average tax burden among OECD countries varies substantially. In 2020, a worker in Belgium faced a tax burden seven times higher than that of a Chilean worker. …Accounting for VAT and sales tax, the average tax burden on labor in 2020 was 40.1 percent, 5.5 percentage points higher than when only income and payroll taxes are considered. …The tax burden on labor is referred to as a “tax wedge,” which simply refers to the difference between an employer’s cost of an employee and the employee’s net disposable income. …Tax wedges are particularly high in European countries—the 23 countries with the highest tax burden in the OECD are all European. …Chile and Mexico are the only countries that do not provide any tax relief for families with children but they keep the average tax wedge low.

Here’s a look at which countries in the past two decades that have made the biggest moves in the right direction and wrong direction. Kudos to Hungary and Lithuania.

And you can also see why I’m not overly optimistic about the long-run outlook for Mexico and South Korea.

The report also has a map focusing on tax burdens in Europe. The darker the nation, the more onerous the tax (notice how Switzerland is a light-colored oasis surrounded by dark-colored tax hells).

The report also notes that average tax wedges only tell part of the story. If you want to understand a tax system’s impact on incentives for productive behavior, it’s important to look at marginal tax rates.

The average tax wedge is…the combined share of labor and payroll taxes relative to gross labor income, or the tax burden. The marginal tax wedge, on the other hand, is the share of labor and payroll taxes applicable to the next dollar earned and can impact individuals’ decisions to work more hours or take a second job. The marginal tax wedge is generally higher than the average tax wedge due to the progressivity of taxes on labor across countries—as workers earn more, they face a higher tax wedge on their marginal dollar of earnings. …a drastic increase in the marginal tax wedge…might deter workers from pursuing additional income and working extra hours.

And here’s Table 1 from the report, which shows that marginal tax rates can be very high, even at relatively modest levels of income.

In what could be a world record for understatement, this data led Ms. Enache to conclude that Italy’s tax system “might” deter workers.

In 2020 an Italian worker making €38,396 (US $56,839) faced a marginal tax wedge as high as 117 percent on a 1 percent increase in earnings. Such marginal tax wedges might deter workers from pursuing additional income and working extra hours.

Though that’s not the most absurd example of over-taxation. Let’s not forget that thousands of French taxpayers have had tax bills that were greater than their entire income.

Sort of like an Obama-style flat tax, but in real life rather than a joke.

P.S. As I’ve previously noted, Belgium is an example of why a country can’t simultaneously have a big government and a good tax system.

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Tax increases are bad fiscal policy, but that doesn’t necessarily mean that they are politically unpopular.

Indeed, many voices in the establishment press are citing favorable polling data in hopes of creating an aura on inevitably for President Biden’s proposed tax hikes.

That’s a very worrisome prospect. If Biden succeeds, the United States could wind up toppling Canada for the dubious honor of having the world’s highest tax burden on saving and investment.

That would be bad news for American workers.

But are Biden’s media cheerleaders correct? Are tax increases popular?

According to a new scholarly working paper from the Federal Reserve (authored by Andrew C. Chang, Linda R. Cohen, Amihai Glazer, and Urbashee Paul), the answer is no.

At least if we judge politicians by what they do in election years. Here’s part of the study’s abstract.

We use new annual data on gasoline taxes and corporate income taxes from U.S.states to analyze whether politicians avoid tax increases in election years. These data contain 3 useful attributes: (1) when state politicians enact tax laws, (2) when state politicians implement tax laws on consumers and firms, and (3) the size of tax changes. Using a pre-analysis research plan that includes regressions of tax rate changes and tax enactment years on time-to-gubernatorial election year indicators, we find that elections decrease the probability of politicians enacting increases in taxes and reduce the size of implemented tax changes relative to non-election years. We find some evidence that politicians are most likely to enact tax increases right after an election. These election effects are stronger for gasoline taxes than for corporate income taxes and depend on no other political, demographic, or macroeconomic conditions.

For wonkier readers, Figure 7 has some of the major results of their statistical analysis. I’ve highlighted (in red) the most important conclusion of the research.

For regular readers, the main takeaway is that politicians almost always want more tax revenue. That’s what gives them the ability to distribute goodies and buy votes.

But notwithstanding their never-ending hunger to grab more money, they are very likely to reject tax increases in election years. They even reject higher corporate taxes, which are supposed to be popular (at least according to some in the establishment media).

Yet if tax increases were politically popular, we should see the opposite result.

I’ll close with the somewhat depressing observation that these results do not imply that voters want libertarian policy. It’s probably more accurate to say that people want goodies from the government, but they don’t want to pay for them. Politicians simply respond to those preferences (which brings to mind Garett Jones’ hypothesis that we have too much democracy).

Which is how Greece became a basket case. Which is why Italy is in the process of becoming a basket case. And it’s why the United States may not be that far behind (with states such as Illinois serving as early-warning signs).

P.S. The above-cited research should be a reminder of why a no-tax-hike pledge is important. Voters seem to be on the right side on the big-picture question of “Should taxes be higher?”, but if they think tax increases are going to happen, it’s quite likely that they will support the most economically damaging types of class-warfare levies.

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There are three important principles for sensible tax policy.

  1. Low marginal tax rates on productive behavior
  2. No tax bias against capital (i.e., saving and investment)
  3. No tax preferences that distort the economy

Today, let’s focus on #2.

I’ve written many times about why double taxation is a bad idea. This occurs when governments – thanks to capital gains taxes, dividend taxes, death taxes, etc – impose harsher tax burdens on income that is saved and invested compared to income that is immediately consumed.

Which is a bad idea since wages for workers are linked to productivity, which is linked to the amount of capital.

Which countries imposes the heaviest tax burdens on capital? According to a new report from the Tax Foundation, Canada is the worst of the worst (somewhat surprising), followed by Denmark (no surprise) and France (also no surprise).

The nations of Eastern Europe, along with Ireland, win the prize for the lowest tax burdens on capital.

The authors of the report, Jacob Lundberg and Johannes Nathell, make a much-needed point about why governments should not penalize saving and investment.

…capital should not be taxed at all. Taxing capital distorts individuals’ savings decisions. By reducing the return on savings, capital taxes penalize those who postpone their consumption rather than consuming their income as it is earned. Due to compounding interest, capital taxation penalizes saving more the longer the saving horizon is. For long saving horizons, the distortion is very large. This leads to lower saving, a lower capital stock, and lower GDP. Therefore, not taxing capital is in the interest of everyone, even those who spend everything they earn.

The report also contains this fascinating map comparing capital taxation in European nations.

At the risk of stating the obvious, it’s better to be a lighter-colored nation.

This is fascinating data for tax wonks, but it might not perfectly capture the relative attractiveness (or unattractiveness) of various countries. I think two caveats are warranted.

First, it’s quite likely that some Western European nations accumulated lots of capital and generated lots of wealth back in the 1800s and early 1900s when the burden of government was very small and taxes were very low. If some of the capital from that period is still generating returns (and thus tax revenue), it may overstate the tax burden on current saving and investment.

Second, the methodology looks at capital revenues as a percentage of capital income. This perfectly reasonable approach overlooks the fact that tax rates have an effect on the amount of income that is both earned and reported. This is the core insight of the Laffer Curve and it could mean that some countries show high levels of revenue in part because tax burdens are modest (and vice-versa).

That being said, I wouldn’t expect major changes in the rankings, even if there was a way to address these concerns.

The bottom line is that we know how to define good tax policy, but very few governments have an interest in maximizing liberty and prosperity. The challenge is that politicians 1) usually want more money so they can buy more votes, but 2) sometimes let envy trump their desire for more revenue.

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Back in 2015, I joked that my life would be simpler if I had an “automatic fill-in-the-blanks system” for columns dealing with the Organization for Economic Cooperation and Development.

Here’s what I proposed.

We can use this shortcut today because the OECD has just churned out a report embracing the death tax. So all we need to do is fill in the blanks and we have an appropriate intro:

The bureaucrats at the Paris-based OECD, working in cooperation with greedy politicians, have released a new study urging more power for governments in order to increase death taxes.

But the purpose of this column is not to mock the OECD, even though its reflexive statism makes it an easy target. Let’s actually dig into this new report and explain why it is so misguided.

This paragraph is a summary of the bureaucracy’s main argument, which is basically an envy-driven cry for more tax revenue.

The report explores the role that inheritance taxation could play in raising revenues, addressing inequalities and improving efficiency in the future. …taxes on wealth transfers – including inheritance, estate, and gift taxes – are levied in 24 of the 36 OECD countries… In 2018, only 0.5% of total tax revenues were sourced from those taxes on average across the countries that levied them. …Overall, the report finds that there is a good case for making greater use of well-designed inheritance and gift taxation… There are strong equity arguments in favour of inheritance taxation..

Here’s some more of the OECD’s dirigiste analaysis.

The report finds that well-designed inheritance taxes can raise revenue and enhance equity… There are strong equity arguments in favour of inheritance taxation… From an equality of opportunity perspective, inheritances and gifts can create a divide between the opportunities that people face. Wealth transfers might give recipients a head start… By breaking down the concentration of wealth…, inheritance and gift taxation can contribute to levelling the playing field… ‘The recent progress made on international tax transparency…is greatly increasing countries’ ability to tax capital… Progressive tax rates have several advantages compared to flat tax rates. …Taxing unrealised gains at death may be the most efficient and equitable approach.

As you can see, the OECD’s argument revolves around class warfare. They think it’s unfair that some parents want to help their children.

By contrast, the argument against the OECD revolves around economics. More specifically, the death tax is a terrible idea because it directly and unambiguously reduces private savings and investment, thus undermining productivity and putting a damper on wages.

Interestingly, the OECD admits this happens. Here’s Figure 2.4 from the OECD report, showing how death taxes (combined with annual income taxes) reduce saving and investment over five generations.

And the above charts don’t even show the true impact because there’s no line showing how much saving and investment would exist with no death tax and no double taxation.

For what it’s worth, the OECD report does acknowledge some practical and economic problems with death taxes.

An inheritance tax directly reduces wealth accumulation over generations. …inheritance taxes may also affect wealth accumulation prior to being levied by encouraging changes in donors’ behaviours. …Susceptibility to tax planning is one of the most common criticisms levelled against inheritance taxes. …There is evidence of widespread inheritance tax planning… Inheritance taxes might lower entrepreneurship by heirs… Inheritance taxes may also jeopardise existing businesses when they are transferred if business owners do not have enough liquid assets to pay the tax. …Double taxation is a popular objection to inheritance taxes…wage earnings, savings, or personal business income…will have in many cases already been taxed. …There might be challenges associated with estimating fair market value for some assets.

If you wade through the report, you’ll notice that the OECD doesn’t have good answers for these problems.

Instead, the basic message is, “yeah, there are a bunch of downsides, but we want to finance bigger government and we resent successful people.”

The only good news is that the report gives us a list of nations that have eliminated (or never adopted) death taxes.

Among the OECD countries that do not levy inheritance or estate taxes, nine have abolished them since the early 1970s. …Austria, Czech Republic, Norway, Slovak Republic, ans Sweden have abolished their inheritance or estate taxes since 2000. Israel and New Zealand abolished these taxes between 1980 and 2000. Australia, Canada, and Mexico abolished these taxes before 1980, and Estonia and Latvia have never levied inheritance or estate taxes. …This is consistent with evidence that inheritance and estate taxes tend to be unpopular.

Here’s the part of Table 3.1 that shows when these taxes were implemented and when they were repealed.

Needless to say, I’d like to see the United States on this list at some point (we were there for one year!).

The OECD closed with some cheerleading and strategizing on how to overcome popular opposition.

…this section considers ways in which governments may enhance the public acceptability of inheritance tax reform… Reframing reforms aiming to raise more revenue.around notions of equality of opportunity and inequality reduction may help increase their public acceptability. …packaging may also be helpful. …If the introduction of an inheritance tax or an increase in existing inheritance or estate taxes…goes hand-in-hand with a decrease in other taxes, especially in labour taxes, which a majority of people are subject to, it may be more acceptable politically.

I can’t resist pointing out that it’s utter nonsense to think that governments would use revenue from a death tax to lower other taxes.

The goal of politicians is always to finance bigger government. That’s true with the death tax. It’s true with the carbon tax. It’s true with the value-added tax. It’s true with the financial transactions tax.

Which is why I wrote four years ago that, “Some people say the most important rule to remember is to never feed gremlins after midnight, but I think it’s even more important not to give politicians a new source of revenue.”

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The United States conducted an experiment in the 1980s. Reagan dramatically lowered the top tax rate on households, dropping it from 70 percent to 28 percent.

Folks on the left bitterly resisted Reagan’s “supply-side” agenda, arguing that “the rich won’t pay enough” and “the government will be starved of revenue.”

Fortunately, we can look at IRS data to see what happened to tax payments from those making more than $200,000 per year.

Lo and behold, it turns out that Reaganomics was a big success. Uncle Sam collected five times as much money when the rate was slashed.

As I’ve previously written, this was the Laffer Curve on steroids. Even when you consider other factors (population growth, inflation, other reforms, etc), there’s little doubt that we got a big “supply-side effect” from Reagan’s tax reforms.

Now Biden wants to run this experiment in reverse.

Based on basic economics, his approach won’t succeed. But let’s augment theory by examining what actually happened when Hoover and Roosevelt raised tax rates in the 1930s.

Alan Reynolds reviewed tax policy in the 1920s and 1930s, but let’s focus on what he wrote about the latter decade. He starts with some general observations.

Large increases in marginal tax rates on incomes above $50,000 in the 1930s were almost always matched by large reductions in the amount of high income reported and taxed… An earlier generation of economists found that raising tax rates on incomes, profits, and sales in the 1930s was inexcusably destructive. In 1956, MIT economist E. Cary Brown pointed to the “highly deflationary impact” of the Revenue Act of 1932, which pushed up rates virtually across the board, but notably on the lower‐​and middle‐​income groups.

He then gets to the all-important issue of higher tax rates leading to big reductions in taxable income.

In Figure 1, the average marginal tax rate is an unweighted average of statutory tax brackets applying to all income groups reporting more than $50,000 of income. After President Hoover’s June 1932 tax increase (retroactive to January) the number of tax brackets above $50,000 quadrupled from 8 to 32, ranging from 31 percent to 63 percent. The average of many marginal tax rates facing incomes higher than $50,000 increased from 21.5 percent in 1931 to 47 percent in 1932, and 61.9 percent in 1936. One of the most striking facts in Figure 1 is that the amount of reported income above $50,000 was almost cut in half in a single year—from $1.31 billion in 1931 to $776.7 million in 1932.

Here’s the aforementioned Figure 1. You can see that taxable income soared when tax rates were slashed in the 1920s.

But when tax rates were increased in the 1930s, taxable income collapsed and never recovered.

What’s the lesson from this chart? As Alan explained, the lesson is that high tax rates lead to rich people earning and declaring less taxable income (they still have that ability today).

In the eight years from 1932 to 1939, the economy was in cyclical contraction for only 28 months. Even in 1940, after two huge increases in income tax rates, individual income tax receipts remained lower ($1,014 million) than they had been in the 1930 slump ($1,045 million) when the top tax rate was 25 percent rather than 79 percent. Eight years of prolonged weakness in high incomes and personal tax revenue after tax rates were hugely increased in 1932 cannot be easily brushed away as merely cyclical, rather than a behavioral response to much higher tax rates on additional (marginal) income. Just as income (and tax revenue) from high‐​income taxpayers rose spectacularly after top tax rates fell from 1921 to 1928, high incomes and revenue fell just as spectacularly in 1932 when top tax rates rose.

One big takeaway is that Hoover and FDR were two peas in a pod.

Both imposed bad tax policy.

From 1930 to 1937, unlike 1923–25, virtually all federal and state tax rates on incomes and sales were repeatedly increased, and many new taxes were added, such as the Smoot‐​Hawley tariffs in 1930, taxes on alcoholic beverages in December 1933, and a Social Security payroll tax in 1937. Annual growth of per capita GDP from 1929 to 1939 was essentially zero. …To summarize: all the repeated increases in tax rates and reductions of exemptions enacted by presidents Hoover and Roosevelt in 1932–36 did not even manage to keep individual income tax collections as high in 1939–40 (in dollars or as a percent of GDP) as they had been in 1929–30. The experience of 1930 to 1940 decisively repudiated any pretense that doubling or tripling marginal tax rates on a much broader base proved to be a revenue‐​maximizing plan.

Alan closes with an observation that should raise alarm bells.

It turns out that the higher tax rates on the rich were simply the camel’s nose under the tent. The real agenda was extending the income tax to those with more modest incomes.

The most effective and sustained changes in personal taxes after 1931 were not the symbolic attempts to “soak the rich,” but rather the changes deliberately designed to convert the income tax from a class tax to a mass tax. The exemption for married couples was reduced from $3,500 to $2,500 in 1932, $2,000 in 1940, and $1,500 in 1941. Making more low incomes taxable quadrupled the number of tax returns from 3.7 million in 1930 to 14.7 million in 1940… The lowest tax rate was also raised from 1.1 percent to 4 percent in 1932, 4.4 percent in 1940, and 10 percent in 1941.

The same thing will happen today if Biden succeeds in raising taxes on the rich. Those tax hikes won’t collect much revenue, but politicians will increase spending anyhow. They’ll then use high deficits as an excuse for higher taxes on lower-income and middle-class taxpayers (some of the options include financial taxes, carbon taxes, and value-added taxes).

Lather, rinse, repeat. Until the United States is Europe. And that will definitely be bad news for ordinary people.

P.S. Here’s what we can learn about tax policy in the 1920s. And the 1950s.

P.P.S. The 1920s and 1930s also can teach us an important lesson about growth and inequality.

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Good fiscal policy means low tax rates and spending restraint.

And that’s a big reason why I’m a fan of Reaganomics.

Unlike other modern presidents (including other Republicans), Reagan successfully reduced the tax burden while also limiting the burden of government spending.

President Biden wants to take the opposite approach.

A few days ago, Dan Balz of the Washington Post provided some “news analysis” about Biden’s fiscal agenda. Some of what he wrote was accurate, noting that the president wants to increase spending by an additional $6 trillion over the next 10 years.

…the scope and implications of his domestic agenda have come sharply into focus. Together they represent the most dramatic shift in federal economic and social welfare policy since Ronald Reagan was elected 40 years ago. …The politics of redistribution, which are at the heart of what Biden is proposing, could test decades of assumptions that Democrats should be afraid of being tagged as the party of big government. …Together, the already approved coronavirus relief plan, the infrastructure proposal that was unveiled a few weeks ago and the newly proposed plan to invest in social welfare programs would total roughly $6 trillion.

But Mr. Balz then decided to be either sloppy or dishonest, writing that we’ve had decades of Reagan-style policies that have squeezed domestic spending and disproportionately lowered tax burden for rich people.

Reagan’s small-government philosophy resulted in a decades-long squeeze on the federal government, especially domestic spending, and on tax policies that mainly benefited the wealthiest Americans. …Government spending on social safety-net programs has been reduced compared with previous years.

Balz is wrong, wildly wrong.

You don’t have to take my word for it. Here’s a chart, taken from an October 2020 report by the Congressional Budget Office. As you can see, people in the lowest income quintile have been the biggest winners,, with their average tax rate dropping from about 10 percent to about 2 percent..

Here’s a chart showing marginal tax rates from a January 2019 CBO report. As you can see, Reagan lowered marginal tax rates for everyone, but Balz’s assertion that the rich got the lion’s share of the benefits is hard to justify considering that people in the bottom quintile now have negative marginal tax rates.

Balz’s mistakes on tax policy are significant.

But his biggest error (or worst dishonesty) occurred when he wrote about a “decades-long squeeze” on domestic spending and asserted that “spending on social safety-net programs has been reduced.”

A quick visit to the Office of Management and Budget’s Historical Tables is all that’s needed to debunk this nonsense. Here’s a chart, based on Table 8.2, showing the inflation-adjusted growth of entitlements and domestic discretionary programs.

Call me crazy, but I’m seeing a rapid increase in domestic spending after Reagan left office.

P.S. There’s a pattern of lazy/dishonest fiscal reporting at the Washington Post.

P.P.S. I also can’t resist noting that Balz wrote how Biden wants to “invest” in social welfare programs, as if there’s some sort of positive return from creating more dependency. Reminds me of this Chuck Asay cartoon from the Obama years.

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When I ask my left-leaning friends what they think about the flight of investors, entrepreneurs, and business owners from high-tax states, I tend to get three responses.

  1. It isn’t actually happening (these are my friends who apparently don’t know how to read).
  2. It’s happening, but it doesn’t matter (data from the IRS suggests it actually is significant).
  3. It’s happening, but high-tax states will be better off without these selfish and greedy people.

The folks making the third point actually have a decent argument, at least in terms of short-run political outcomes. Democrats rarely have to worry about retaining control of states like California, New York, Illinois, and New Jersey now that many Republican-leaning voters have moved away.

But sometimes short-run benefits are exceeded by long-run costs, and the recent data on congressional redistricting from the Census Bureau is a good example.

As you can see, there’s a continuing shift of political power – as measured by seats in Congress – from blue states to red states.

Patrick Gleason of Americans for Tax Reform explains what this means in a column for Forbes.

Over the past decade Americans have been voting with their feet in favor of states with lower overall tax burdens… As a result, high tax states…are set to lose congressional clout for the next decade, to the benefit of low tax states… the seven states that will lose congressional seats due to stagnant population growth have higher top income tax rates and greater overall tax burdens, on average, than do the six states gaining seats. In fact, the average top personal income tax rate for states losing seats in congress is 6.5%, which is 46% greater than the 4.45% average top income tax rate for states gaining seats.

Some people may want to dismiss Mr. Gleason’s column since he works for a group that supports smaller government.

But you can find the same analysis in this column in the Washington Post by Aaron Blake.

…what does the new breakdown mean from a partisan perspective? All told, five seats will migrate from blue states to red ones — owing to population shifts from the Rust Belt, the Northeast and California to the South and other portions of the West. Five of the seven seats being added also go to states under complete GOP control of redistricting, with three of seven being taken away coming from states in which Democrats have some measure of control over the maps. …That should help Republicans… The Cook Political Report estimates the shifts are worth about 3.5 seats… As for the electoral college in future presidential elections, …Michigan and Pennsylvania…are states Democrats probably need to win in the near future, meaning it’s probably a bigger loss for them. …If we reran the 2020 electoral college with the new electoral votes by state, Biden’s margin would shrink from 306-232 to 303-235. That seems negligible. But if you overlay the 2000 presidential results — three reapportionments ago — on the current electoral vote totals, George W. Bush’s narrow win with 271 electoral votes becomes a much more decisive win with 290. That gives you a sense where things have trended.

Let’s now return to the hypothesis that tax-motivated migration is playing a role.

Here’s an instructive tweet from Andrew Wilford of the National Taxpayers Union.

I’ll wrap up today’s column by augmenting the data in Mr. Wilford’s tweet.

Because not only are there, on average, lower tax burdens in the states gaining congressional seats, but every one of them has some very desirable feature of its tax code.

To be sure, not all of the state-to-state migration is due to tax policy. There are all sorts of other policies that determine whether a state is an attractive place for people looking to relocate.

And there are other factors (family, climate, etc) that have nothing to do with public policy.

All things considered, however, being a low-tax state means more jobs, growth, and people, at least when compared with being a high-tax state.

P.S. If you’re interested in seeing how states rank in various indices, click here, here, and here.

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Because of the negative impact on competitiveness, productivity, and worker compensation, it’s a very bad idea to impose double taxation of saving and investment.

Which is why there should be no tax on capital gains, and a few nations sensibly take this approach.

But they’re outnumbered by countries that do impose this pernicious form of double taxation. For instance, the Tax Foundation has a new report about the level of capital gains taxation in Europe, which includes this very instructive map.

As you can see, some countries, such as Denmark (gee, what a surprise), have very punitive rates.

However, other nations (such as Switzerland, Belgium, Czech Republic, Slovakia, Luxembourg, and Slovenia) wisely don’t impose this form of double taxation.

If the United States was included, we would be in the middle of the pack. Actually, we would be a bit worse than average, especially when you include the Obamacare tax on capital gains.

But if Joe Biden succeeds, the United States soon will have the dubious honor of being the worst of the worst.

The Wall Street Journal opined this morning about the grim news.

Biden officials leaked that they will soon propose raising the federal tax on capital gains to 43.4% from a top rate of 23.8% today. …Mr. Biden will tax capital gains for taxpayers who earn more than $1 million at the personal income tax rate, which he also wants to raise to 39.6% from 37%. Add the 3.8% ObamaCare tax on investment, and you get to 43.4%. And that’s merely the federal rate. Add 13.3% in California and 11.85% in New York (plus 3.88% in New York City), which also tax capital gains as regular income, and you are heading toward the 60% rate range. Keep in mind this is on the sale of gains that are often inflated as assets are held for years without adjustment for inflation. Oh, and Mr. Biden also wants to eliminate the step-up in basis on capital gains that accrues at death.

Beating out Denmark for the highest capital gains tax rate is bad.

But it’s even worse when you realize that capital gains often occur because investors expect an asset to generate more future income. But that future income gets hit by the corporate income tax (as well as the tax on dividends) when it actually materializes.

So the most accurate way to assess the burden on new investment is to look at the combined rate of corporate taxation and capital gains (as as well as the combined rate of corporate taxation and dividend taxation).

By that measure, the United States already has one of the world’s most-punitive tax regimes, And Biden wants to increase all of those tax rates.

Sort of a class-warfare trifecta, and definitely not a recipe for good economic results.

For those interested in more details, here’s a video I narrated on the topic back in 2010.

And I also recommend these columns (here, here, and here) for additional information on why we should be eliminating the capital gains tax rather than increasing it.

P.S. Don’t forget that there’s no indexing to protect taxpayers from having to pay tax on gains that are due only to inflation.

P.P.S. And also keep in mind that some folks on the left want to impose tax on capital gains that only exist on paper.

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Whenever I’m asked about the “tax gap,” I point to the academic evidence, from multiple sources, and explain that lower tax rates and tax reform are the best way to get higher levels of tax compliance.

Indeed, even the pro-tax International Monetary Fund has published research clearly identifying punitive tax policy as the leading cause of tax evasion and tax avoidance.

It’s time to take another look at this issue because the Biden Administration is trying to create a competing narrative.

The head of the IRS says that we need huge increases in the IRS’s budget in order to deal with a supposedly crisis of tax cheating.

Here are some excerpts from a story in the New York Times.

The United States is losing approximately $1 trillion in unpaid taxes every year, Charles Rettig, the Internal Revenue Service commissioner, estimated on Tuesday, arguing that the agency lacks the resources to catch tax cheats. …Most of the unpaid taxes are the result of evasion by the wealthy and large corporations, Mr. Rettig said. “We do get outgunned,” Mr. Rettig said during a Senate Finance Committee hearing… Senator Ron Wyden of Oregon, the Democratic chairman of the committee, called the $1 trillion tax gap a “jaw-dropping figure.” …The size of I.R.S.’s enforcement division has declined sharply in recent years, Mr. Rettig said, with its ranks falling by 17,000 over the last decade. The spending proposal that the Biden administration released last week asked for a 10.4 percent increase above current funding levels for the tax collection agency, to $13.2 billion.

There are a couple of points that cry out for correction.

First, the IRS is cherry picking data to make it seem like it is starved of resources. The bureaucrats got a record pile of money in 2010, so they use that year when making comparisons.

But if you look at long-run data, you can see that the IRS budget has almost doubled over the past four decades.

And that’s after adjusting for inflation.

Second, the $1 trillion figure is a make-believe number, more than twice as high as the IRS’s last official estimate.

Commissioner Rettig may as well have said $2 trillion. Or $5 trillion. After all, he’s simply pulling a number out of the air in an effort to convince Congress to give the IRS an even bigger budget.

By the way, since I mentioned the IRS’s official estimate, here’s a look at those numbers, which were published in September 2019. What deserves special attention is that there’s very little underpaying by corporations.

Indeed, it’s only 9 percent of the total (circled in red).

So where are the big sources of evasion?

It’s mostly small businesses. The IRS assumes modest-sized companies (especially family-owned firms) play lots of games so they can underreport income and overstate deductions.

So if the bureaucrats get a big budget increase, it basically means more IRS agents harassing lots of mom-and-pop businesses.

Can that approach shake loose some more money for the government? I’m sure the answer is yes, but I want to close by returning to my original point about why it would be better to instead focus on good tax policy.

Let’s take a look at a recent study from Mai Hassan and Friedrich Schneider (the world’s leading scholar on the underground economy). Here are some of their findings.

The shadow economy includes all of the economic activities that are deliberately hidden from official authorities for various reasons. …Monetary reasons include avoiding paying taxes and/or social security contributions… Given the purpose of our study, the shadow economy reflects mostly the legal economic and productive activities that, if recorded, should contribute to the national GDP. Therefore, the definition of the shadow economy in our study tries to avoid illegal or criminal activities …It is widely accepted in the literature that the most important cause leading to the proliferation of the shadow economy is the tax burden. The higher the overall tax burden, the stronger are the incentives to operate informally in order to avoid paying the taxes.

The study looks at all sorts of variables to see what else has an impact on tax evasion.

Considering the result of our MIMIC estimations…we clearly see that the tax burden has a positive (theoretically expected) sign and is statistically significant at the 5% confidence level. The regulatory burden variable (size of government) has also the theoretically expected sign and is highly statistically significant at the 1% confidence level. The estimated coefficient of the unemployment rate is also highly statistically significant and has the expected positive sign. The economic freedom index has the expected negative sign and is at the 10% confidence level statistically significant.

In other words, it’s not just tax policy, though that plays the biggest role.

But the part of the study that is relevant for today is that the United States has the world’s 2nd-highest level of tax compliance, trailing only Switzerland.

Here are the top-10 nations.

The obvious takeaway is that there’s no crisis. Not even close.

By all means, we can try to jump Switzerland and move into first place. But let’s increase tax compliance the smart way – by lowering tax rates and reforming the tax code.

P.S. The Biden Administration and the IRS are feeding us garbage data for self-interested reasons (a classic case of “public choice” in action).

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Just like last year, April 15 isn’t the official deadline this year for filing your annual tax return. But we’re still going to “celebrate” with some memes about the income tax and the IRS.

We’ll start with something that has always bothered me, which is the fact that many people look forward to filing their taxes because they get a refund.

Yet that simply means that they gave the government free use of their money because of excessive withholding!

It also galls me when IRS documents refer to customer service when none of us are voluntary participants.

That’s the point of this next meme.

And since we’re mocking our friends at the IRS, here’s another item worth sharing.

But we should have some sympathy for tax collectors.

They sometimes have a challenging job.

For our final IRS-focused bit of satire, let’s turn to the Babylon Bee‘s report on taxation in outer space.

President Trump’s new Space Force has been stealing the imagination of the public… Not to be outdone, the Democrats are now trying to show they can also look to the future with their new proposal: Space IRS. “We also are inspired by watching shows such as Star Wars,” Nancy Pelosi told the press, “and seeing someone like Han Solo, a smuggler who is obviously avoiding taxes. …there has to be a way to follow someone like that and see how much he’s spending at cantinas and sabacc tables and know that he’s hiding income. That’s the job of Space IRS.”

Now let’s shift to some satire about the economics of taxation.

Starting with this look at the Biden Administration’s philosophy.

Next we have a woman with a Bernie Sanders mindset. I suspect the guy is about to learn an important lesson about incentives and marginal tax rates.

Here’s a visual depiction of double taxation.

Here’s some tax satire from the left about companies using international tax rules to minimize their fiscal burdens.

I can’t resist pointing out two things in response.

  1. If the corporate tax rate is low, companies have less incentive to utilize existing preferences in the tax code or lobby for the creation of new ones.
  2. Our friends on the left don’t seem to realize that the foreign-source income of American-based companies is subject to tax by foreign governments.

As usual, I’ve saved the best (in my humble opinion) for last.

Biden recently attacked the 2nd Amendment, and some clever person applied his thinking to the 16th Amendment.

P.S. My archive of IRS humor features a new Obama 1040 form, a death tax cartoon, a list of tax day tips from David Letterman, a Reason video, 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 collection of IRS jokes, 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.

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The International Monetary Fund’s dogmatic support for higher taxes and bigger government makes it “the dumpster fire of the global economy.”

Wherever IMF bureaucrats go, it seems they push for high-tax policies that will weaken growth.

Call me crazy, but I’m baffled that the IMF seems to think nations will grow faster and be more prosperous if politicians seize more money from the economy’s productive sector.

Unfortunately, the IMF has been especially active in recent months..

In a column for the U.K.-based Guardian, Larry Elliott writes about the IMF using the pandemic as an excuse to push for higher taxes.

…the IMF called for domestic and international tax changes that would boost the money available to expand public services, make welfare states more generous… “To help meet pandemic-related financing needs, policymakers could consider a temporary Covid-19 recovery contribution, levied on high incomes or wealth,” the fiscal monitor said. …Paolo Mauro, the deputy director of the IMF’s fiscal affairs department, said there had been an “erosion” of the taxes paid by those at the top of the income scale, with the pandemic offering a chance to claw some of the money back. “Governments could consider higher taxes on property, capital gains and inheritance,” he said. “One specific option would be a Covid-19 recovery contribution – a surcharge on personal tax or corporate income tax.”

Mr. Mauro, like most IMF bureaucrats, is at “the top of the income scale,” but he doesn’t have to worry that he’ll be adversely impact if politicians seek to “claw some of the money back.”

Why? Because IMF officials get tax-free salaries (just like their counterparts at other international bureaucracies).

Writing for the IMF’s blog, Mr. Mauro is joined by David Amaglobeli and Vitor Gaspar in supporting higher taxes on other people.

Breaking the cycle of inequality requires both predistributive and redistributive policies. …The COVID-19 crisis has demonstrated the vital importance of a good social safety net that can be quickly activated to provide lifelines to struggling families. …Enhancing access to basic public services will require additional resources, which can be mobilized, depending on country circumstances, by strengthening overall tax capacity. Many countries could rely more on property and inheritance taxes.  Countries could also raise tax progressivity as some governments have room to increase top marginal personal income tax rates… Moreover, governments could consider levying temporary COVID-19 recovery contributions as supplements to personal income taxes for high-income households.

Needless to say, the IMF is way off base in fixating on inequality instead of trying to reduce poverty.

Meanwhile, Brian Cheung reports for Yahoo Finance about the IMF’s cheerleading for a global tax cartel.

The International Monetary Fund (IMF) says it backs a U.S. proposal for a global minimum corporate tax. IMF Chief Economist Gita Gopinath said that the fund has been calling for international cooperation on tax policy “for a long time,” adding that different corporate tax rates around the world have fueled tax shifting and avoidance. “That reduces the revenues that governments collect to do the needed social and economic spending,” Gopinath told Yahoo Finance Tuesday. “We’re very much in support of having this kind of global minimum corporate tax.” …Gopinath also backed Yellen’s push forward on an aggressive infrastructure bill… As the IMF continues to encourage countries with fiscal room to continue spending through the recovery, its chief economist said investment into infrastructure is one way to boost economic activity.

Based on the above stories we can put together a list of the tax increases embraced by the IMF, all justified by what I call “fairy dust” economics.

  • Higher income tax rates.
  • Higher property taxes.
  • More double taxation of saving/investment.
  • Higher death taxes.
  • Wealth taxes.
  • Global tax cartel.
  • Higher consumption taxes.

And don’t forget the IMF is a long-time supporter of big energy taxes.

All supported by bureaucrats who are exempt from paying tax on their own very-comfortable salaries.

P.S. I feel sorry for two groups of people. First, I have great sympathy for taxpayers in nations that follow the IMF’s poisonous advice. Second, I feel sorry for the economists and other professionals at the IMF (who often produce highquality research). They must wince with embarrassment every time garbage recommendations are issued by the political types in charge of the bureaucracy.

P.P.S. But since they’re actually competent, they will easily find new work if we shut down the IMF to protect the world economy.

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