Last month, I shared a very interesting video from Canada’s Fraser Institute that explored the link between economic performance and the burden of government spending.
There’s now an article in the American Enterprise Institute’s online magazine about this research.
The first half of the article unveils the overall findings, explaining that there is a growth-maximizing size of government (which, when put onto a graph, is shaped like a hump, sort of a spending version of the Laffer Curve).
One recent addition to the mounting evidence against large government is a study published by Canada’s Fraser Institute, entitled “Measuring Government in the 21st Century,” by Canadian economist and university professor Livio Di Matteo. Di Matteo’s analysis confirms other work showing a positive return to economic growth and social progress when governments focus their spending on basic, needed services like the protection of property. But his findings also demonstrate that a tipping point exists at which more government hinders economic growth and fails to contribute to social progress in a meaningful way. …Government spending becomes unproductive when it goes to such things as corporate subsidies, boondoggles, and overly generous wages and benefits for government employees. …Di Matteo examines international data and finds that, after controlling for confounding factors, annual per capita GDP growth is maximized when government spending consumes 26 percent of the economy. Economic growth rates start to decline when relative government spending exceeds this level.
This is standard Rahn Curve analysis and it shows that the public sector is far too large in almost all industrialized nations.
And if you happen to think that 26 percent overstates the growth-maximizing size of government (as I argued last month), then it’s even more apparent that significant fiscal restraint would be desirable.
But I’m more interested today in the specific topic of Canada and the Rahn Curve. The article has some very interesting data.
For a real-life example of how scaling back government has led to positive and practical economic benefits, Americans should look north. …total government spending as a share of GDP went from 36 percent in 1970 (just over 2 percentage points higher than in the United States) to 53 percent when it peaked in 1992 (14 percentage points higher than in the United States). …the federal and many provincial governments took sweeping action to cut spending and reform programs. This led to a major structural change in the government’s involvement in the Canadian economy. The Canadian reforms produced considerable fiscal savings, reduced the size and scope of government, created room for important tax reforms, and ultimately helped usher in a period of sustained economic growth and job creation. This final point is worth emphasizing: Canada’s total government spending as a share of GDP fell from a peak of 53 percent in 1992 to 39 percent in 2007, and despite this more than one-quarter decline in the size of government, the economy grew, the job market expanded, and poverty rates fell dramatically.
Simply stated, none of this should be a surprise.
The Canadian economy had the breathing room to expand when the burden of spending was reduced. Why? Because more labor and capital were available to be allocated by market forces.
And it’s also worth noting that spending restraint has facilitated significant tax cuts in Canada. Indeed, some American companies are moving north of the border!
Here’s my video that includes a discussion of Canada’s dramatically successful period of spending restraint in the 1990s.
P.S. You won’t be surprised to learn that Paul Krugman would rather misrepresent supposed austerity in the United Kingdom rather than address the real success story of Canada.
P.P.S. More generally, I’ve challenged all Keynesians to explain why Canada’s economy enjoyed good growth when there was genuine spending restraint.
P.P.P.S. While I’m a big fan of Canada, I’m not fully confident about the nation’s long-term outlook.
One of the big obstacles to good tax policy is that many statists think that higher tax rates on the rich are a simple and easy way of financing bigger government.
I’ve tried to explain that soak-the-rich tax policies won’t work because upper-income taxpayers have considerable ability to change the timing, level, and composition of their income. Simply stated, when the tax rate goes up, their taxable income goes down.
And that means it’s not clear whether higher tax rates lead to more revenue or less revenue. This is the underlying principle of the Laffer Curve.
For more information, here’s a video from Prager University, narrated by UCLA Professor of Economics Tim Groseclose.
The video would have been even better if it emphasized that the tax rate shouldn’t be at the top of the “hump.”
Why? Because as tax rates get closer and closer to the revenue-maximizing point, the economic damage becomes very significant. Here’s some of what I wrote about that topic back in 2012.
…labor taxes could be approximately doubled before getting to the downward-sloping portion of the curve. But notice that this means that tax revenues only increase by about 10 percent. …this study implies that the government would reduce private-sector taxable income by about $20 for every $1 of new tax revenue. Does that seem like good public policy? Ask yourself what sort of politicians are willing to destroy so much private sector output to get their greedy paws on a bit more revenue.
Since it was basically a do-it-yourself production, the graphics aren’t as fancy as the ones you find in the Prager University video, but I’m pleased that I emphasized on more than one occasion that it’s bad to be at the revenue-maximizing point on the Laffer Curve.
Not as bad as putting rates even higher, as some envy-motivated leftists would prefer, but still an example of bad tax policy.
P.P.S. Switching to a different topic, it’s been a while since I’ve mocked Sandra Fluke, a real-life Julia.
To fix this oversight, here’s an amusing image based on Ms. Fluke’s apparent interest in becoming a politician.
But she’s apparently reconsidered her plans to run for Congress and instead now intends to seek a seat in the California state legislature.
P.P.P.S. And since I’m making one of left-wing women, we may as well include some humor about Wendy Davis.
Check out this excerpt from a story in the Daily Caller.
A dating service that pairs wealthy “sugar daddies” with “sugar babies” for “mutually beneficial dating arrangements” has endorsed Texas Democratic gubernatorial candidate Wendy Davis. SeekingArrangement.com’s Friday announcement followed a recent report in the Dallas Morning News which detailed a number of discrepancies in Davis’ personal narrative, including that she left a man 13 years her senior the day after he made the last payment for her Harvard Law School education. “Wendy Davis is proof that the sugar lifestyle is empowering,” seeking arrangements founder and CEO Brandon Wade said in his endorsement.
Mr. Wade obviously is a clever marketer, but he may also be a closet libertarian.
After all, he also mocked Obamacare with an ad telling young women to join his site so they could find a sugar daddy to pay for the higher premiums caused by government-run healthcare.
Then again, I’ve also speculated that Jay Leno and Bill Maher may be closet libertarians, so I may be guilty of bending over backwards to find allies.
But that video is only six minutes long, so I only skim the surface. For those of you who feel that you’re missing out, you can listen to me pontificate on public policy and growth for more than sixty minutes in this video of a class I taught at the Citadel in South Carolina (and if you’re a glutton for punishment, there’s also nearly an hour of Q&A).
There are two points that are worth some additional attention.
1. In my discussion of regulation, I mention that health and safety rules can actually cause needless deaths by undermining economic performance. I elaborated on this topic when I waded into the election-season debate about whether Obama supporters were right to accuse Romney of causing a worker’s premature death.
2. In my discussion of deficits and debt, I criticize the Congressional Budget Office for assuming that government fiscal balance is the key determinant of economic growth. And since CBO assumes you maximize growth by somehow having large surpluses, the bureaucrats actually argue that higher taxes are good for growth and their analysis implies that the growth-maximizing tax rate is 100 percent.
P.S. If you prefer much shorter doses of Dan Mitchell, you can watch my one-minute videos on tax reform that were produced by the Heartland Institute.
They also don’t like the IRS, in part because it has so much arbitrary power to ruin lives.
But it’s not just that is has the power to ruin lives. That can be said about the FBI, the DEA, the BATF, and all sorts of other enforcement agencies.
What irks people about the IRS is that it has so much power combined with the fact that the internal revenue code is a nightmare of complexity that can overwhelm even the most well-intentioned taxpayer. Just spend a couple of minutes watching this video if you don’t believe me.
Yet if you use inaccurate information from the IRS when filing your taxes, you’re still liable. To add insult to injury (or perhaps injury to injury is the right phrase), you’re then guilty until you prove yourself innocent – notwithstanding the Constitution’s guarantee of presumption of innocence.
Now we have some new information showing the difficulty of complying with a bad tax system.
A new report from the Treasury Department reveals that volunteers (who presumably have the best of intentions) make mistakes in more than 50 percent of cases.
Here are some key excerpts from the report.
Of the 39 tax returns prepared for our auditors, 19 (49 percent) were prepared correctly and 20 (51 percent) were prepared incorrectly. The accuracy rate should not be projected to the entire population of tax returns prepared at the Volunteer Program sites. Nevertheless, if the 20 incorrect tax returns had been filed: 12 (60 percent) taxpayers would not have been refunded a total of $3,996 to which they were entitled, one (5 percent) taxpayer would have received a refund of $303 more than the amount to which he or she was entitled, one (5 percent) taxpayer would have owed $165 less than the amount that should have been owed, and six (30 percent) taxpayers would have owed an additional total of $1,483 in tax and/or penalties. …The IRS also conducted 53 anonymous shopping visits during the 2012 Filing Season. Volunteers prepared tax returns for SPEC function shoppers with a 60 percent accuracy rate.
So here’s the bottom line. We have a completely corrupt tax system that is impossibly complex. Yet every year politicians add new provisions to please their buddies from the lobbyist community.
Sadly, tax reform is an uphill battle for four very big reasons.
Politicians don’t want tax reform since it reduces their power to micro-manage the economy and to exchange loopholes for campaign cash.
The IRS doesn’t want tax reform since there are about 100,000 bureaucrats with comfy jobs overseeing the current system.
Lobbyists obviously don’t want to reform since that would mean fewer clients paying big bucks to get special favors.
And the interest groups oppose the flat tax because they want a tilted playing field in order to obtain unearned wealth.
But there are now about 30 nations around the world that have adopted this simple and fair system, so reform isn’t impossible. But it will only happen when voters can convince politicians that they will lose their jobs if they don’t adopt the flat tax.
P.S. I’ll also take a national sales tax, like the Fair Tax, as a replacement. But since I don’t trust politicians, that option requires that we first replace the 16th Amendment with something so ironclad that not even Chief Justice John Roberts would be able to rationalize that an income tax was permissible.
But this raises a bigger issue. The only reason we expect the Fed to “know the right monetary policy” is because it’s been assigned a monopoly role in the economy. But not just a monopoly role, we also expect the Fed to be some sort of omniscient central planner, knowing when to step on the gas and when to hit the brakes.
And we also are asked to suspend reality and assume that the folks at the Fed will be good central planners and never be influenced by their political masters. Yeah, good luck with that.
With so many difficult – or perhaps impossible – demands placed upon them, no wonder the Fed has a lousy track record (as documented in this powerful George Selgin video).
So let’s ask a fundamental question. Is the Fed necessary? Are we stuck with a central-planning monopoly because there’s no alternative? Professor Larry White says no in this new video from Learn Liberty.
This is one of the best videos I’ve ever seen, so I strongly encourage everyone to share this post widely.
Professor White effectively demonstrates how private markets can replace the five different roles of the Fed. But his arguments are not just based on theory. He shows that the private sector used to handle those roles in the past.
And I especially like his point about how a decentralized market system would operate. Indeed, I would have stressed even more how such a system overcomes the knowledge problem that exists with a monopoly central planner.
Here’s my video on the Fed. I focus more on how central banks developed, but you’ll see some common themes in the two videos.
Ron Paul has made “End the Fed” a popular slogan, but some people worry that this is a radical untested idea. In part, this is because it is human nature to fear the unknown.
But there are plenty of examples of policy reforms that used to be considered radical but are now commonplace.
Self-styled progressives used to say that air traffic control system needs to be a government monopoly, but our Canadian neighbors privatized their system and now have more safety and efficiency.
Defenders of the status quo used to claim that school choice was a radical idea, but it’s hard to defend that position since nations such as Sweden, Chile, and the Netherlands have adopted competitive systems.
This list could go on, but the pattern is always the same. People assume something has to be done by government because “that’s the way it’s always been.” Then reform begins to happen and the myth is busted.
But is money somehow different? Not according to some experts.
Why must our government make currency competition illegal? …Competition is generally good. Why not competition in currencies? Most people I interviewed scoffed at the idea. They said private currency should be illegal. But impressive thinkers disagree. In 1975, a year after he won the Nobel Prize in economics, F.A. Hayek published “Choice in Currency,”which has inspired a generation of “free banking” economists. Hayek taught us that competition not only respects individual liberty, it produces essential knowledge we cannot obtain any other way. Any central bank is limited in its access to such knowledge, and subject to political pressure, no matter how independent it’s supposed to be. “This monopoly of government, like the postal monopoly, has its origin not in any benefit it secures for the people but solely in the desire to enhance the coercive powers of government,” Hayek wrote. “I doubt whether it has ever done any good except to the rulers and their favorites. All history contradicts the belief that governments have given us a safer money than we would have had without their claiming an exclusive right to issue it.” Former Federal Reserve economist David Barker discussed this idea recently with me. “There are a lot of ways that private money might be better,” Barker said. “It might have embedded chips that would make it easier to count.” The chips would also prevent counterfeiting. There used to be private currencies. A businessman who sold iron and tin made coins that advertised his business. The Georgia Railroad Co. also produced its own currency. This became illegal in 1864 — Abraham Lincoln was a fan of central banking.
Stossel’s historical references are particularly important. As I explain in this video, many nations – including the United States – used to have competing currencies.
And if you want a thorough analysis of the Fed’s performance, I urge you to watch this George Selgin speech. Then ask yourself whether we would have been in better shape with private currencies.
Almost exactly one year ago, I did a post entitled “A Laffer Curve Tutorial” because I wanted readers to have all the arguments and data in one place (and also because it meant I wouldn’t have to track down all the videos when someone asked me for the full set).
Riders from the fiscal policy short bus
Today, I’m doing the same thing on the issue of government spending. If you watch these four videos, you will know more about the economics of government spending than 99.9 percent of the people in Washington. That’s not a big achievement, to be sure, since you’re being compared to a remedial class, but it’s nonetheless good to have a solid understanding of an issue.
You may have noticed, by the way, that this post does not include any of the videos about Keynesian economics or Obama’s stimulus. That’s an entirely different issue, perhaps best described as being a debate over whether it’s good or bad in the short run to increase the burden of government spending. The videos in this post are about the appropriate size and scope of government in the long run.
Well, it turns out that even the International Monetary Fund agrees with me. Here’s what the IMF said in its latest analysis about the Greek fiscal situation.
…further progress in reducing the deficit is going to be hard without underlying structural fiscal reforms. The fiscal deficit is now expected to be 9 percent this year, against the program target of 7½ percent. “One of the things we have seen in 2011 is that we have reached the limit of what can be achieved through increasing taxes,” Thomsen said. “Any further measures, if needed, should be on the expenditure side.
This is a simple and common-sense observation, as explained in this video.
Unfortunately, even though the IMF now recognizes reality, the same can’t be said about the Obama Administration.
The President has proposed higher tax rates in his recent budget and it seems he can’t make a speech without making a class-warfare argument for penalizing producers, investors, entrepreneurs, and small business owners.
Yet if you compare American tax rates and Greek tax rates, it seems that the IMF’s lesson also applies in the United States.
The top tax in Greece is 45 percent, which is higher than the 35 percent top rate in America. But this doesn’t count the impact of state income taxes, which add an average of about five percentage points to the burden. Or the Medicare payroll tax, which boosts the rate by another 2.9 percentage points.
So Obama’s proposed 4.6 percentage point hike in the top tax rate almost certainly would mean a higher tax burden in the United States.
But there are important cultural differences between the United States and Greece, so there’s no reason to think that the revenue-maximizing tax rates in both nations are the same (by the way, policy makers should strive for growth-maximizing tax rates, not the rates that generate the most money).
But all this analysis may miss the point. Why is the President willing to raise tax rates even if the economy suffers enough damage that the Treasury doesn’t collect any revenue? And if you’re wondering why I might ask such a crazy question, watch this video – especially beginning about the 4:30 mark.
But I also believe in being intellectually honest, so I’ll defend a politician I don’t like (even Obama) when they do the right thing or when they get attacked for the wrong reason.
In the case of Romney, some of his GOP opponents are criticizing him for job losses and/or bankruptcies at some of the companies in which he invested while in charge of Bain Capital. But I don’t need to focus on that issue, because James Pethokoukis of AEI already has done a great job of debunking that bit of anti-Romney demagoguery.
In this post, I want to focus on the issue of tax havens.
Regular readers know that I’m a big defender of these low-tax jurisdictions, for both moral and economic reasons, and I guess that reporters must know that as well because I’ve received a couple of calls from the press in recent weeks. But I suspect I”m not being called because reporters want to understand international tax policy. Instead, based on the questions, it appears that the establishment media wants to hit Romney for utilizing tax havens as part of his work at Bain Capital.
As far as I can tell, none of these reporters have come out with a story. And I’m also not aware that any of Romney’s political rivals have tried to exploit the issue.
But I think it’s just a matter of time, so I want to preemptively address this issue. So let’s go back to 2007 and look at some excerpts from a story in the Los Angeles Times about the use of so-called tax havens by Romney and Bain Capital.
While in private business, Mitt Romney utilized shell companies in two offshore tax havens to help eligible investors avoid paying U.S. taxes, federal and state records show. Romney gained no personal tax benefit from the legal operations in Bermuda and the Cayman Islands. But aides to the Republican presidential hopeful and former colleagues acknowledged that the tax-friendly jurisdictions helped attract billions of additional investment dollars to Romney’s former company, Bain Capital, and thus boosted profits for Romney and his partners. …Romney was listed as a general partner and personally invested in BCIP Associates III Cayman, a private equity fund that is registered at a post office box on Grand Cayman Island and that indirectly buys equity in U.S. companies. The arrangement shields foreign investors from U.S. taxes they would pay for investing in U.S. companies. …In Bermuda, Romney served as president and sole shareholder for four years of Sankaty High Yield Asset Investors Ltd. It funneled money into Bain Capital’s Sankaty family of hedge funds, which invest in bonds and other debt issued by corporations, as well as bank loans. Like thousands of similar financial entities, Sankaty maintains no office or staff in Bermuda. Its only presence consists of a nameplate at a lawyer’s office in downtown Hamilton, capital of the British island territory. … Investing through what’s known as a blocker corporation in Bermuda protects tax-exempt American institutions, such as pension plans, hospitals and university endowments, from paying a 35% tax on what the Internal Revenue Service calls “unrelated business income” from domestic hedge funds that invest in debt, experts say. …Brad Malt, who controls Romney’s financial trust, said Bain Capital organized the Cayman fund to attract money from foreign institutional investors. “This is not Mitt trying to do something strange,” he said. “This is Bain trying to raise some number of billions from investors around the world.”
There are a couple of things worth noting about these excerpts.
1. Nobody has hinted that Romney did anything illegal for the simple reason that using low-tax jurisdictions is normal, appropriate, and intelligent for any business or investor. Criticizing Romney for using tax havens would be akin to attacking me for living in Virginia, which has lower taxes than Maryland.
2. Jurisdictions such as Bermuda and the Cayman Islands are good platforms for business activity, which is no different than a state like Delaware being a good platform for business activity. Indeed, Delaware has been ranked as the world’s top tax haven by one group (though American citizens unfortunately aren’t able to benefit).
These three points are just the tip of the iceberg. Watch this video for more information about the economic benefit of tax havens.
Last but not least, here’s a prediction. I think it’s just a matter of time until Romney gets attacked for utilizing tax havens, though the press may wait until after he gets the GOP nomination.
Notwithstanding this dismal track record, some advocates of free markets argue that anybody would be better than Obama.
But that’s not necessarily the case. Economic history shows that the burden of government often expands the most under Republicans, with Nixon and Bush (either one) being obvious examples.
On the other hand, even a skeptic like me has admitted that Romney’s record in Massachusetts is difficult to assess because he was governor of a very left-wing state and he had to deal with a state legislature with heavy Democratic majorities.
That being said, there’s a new development that suggests Romney may be an unacceptable alternative to Obama. In an interview with the Wall Street Journal, he basically said he is willing to consider a value-added tax for the United States. Here’s the relevant passage.
He says he doesn’t “like the idea” of layering a VAT onto the current income tax system. But he adds that, philosophically speaking, a VAT might work as a replacement for some part of the tax code, “particularly at the corporate level,” as Paul Ryan proposed several years ago. What he doesn’t do is rule a VAT out.
For those who are not familiar with a VAT, it is a version of a national sales tax, but imposed at every stage in the production process and embedded in the price of goods and services. Perhaps more important, it is despised by everyone who wants to limit the size of government. This video explains how it works and why it is a money machine for big government.
Any politician that supports a VAT (or even hints at supporting a VAT) should not be allowed anywhere near the White House. That applies to Mitt Romney. And it should be the rule for Paul Ryan as well.
But what about Barack Obama, you may be asking. Hasn’t he said nice things about a VAT?
But there’s no way a VAT will happen if Obama gets reelected. Republicans will be overwhelmingly opposed, even if only for shallow reasons of partisanship.
But if Romney wins and decides to push a VAT, many Republicans will say yes because of loyalty (much as many GOPers went along with Bush’s statist agenda) and many Democrats will say yes in order to get a new source of revenue to expand government.
The consequences, as explained here, would be disastrous.
P.S. For a humorous – but accurate – perspective on the VAT, take a look at these clever cartoons (here, here, and here).
I’ve commented many times about the misguided big-government policies of both Hoover and FDR, so I can say with considerable admiration that this new video from the Center for Freedom and Prosperity packs an amazing amount of solid info into about five minutes.
Perhaps the most surprising revelation in the video is that America suffered a harsh depression after World War I, with GDP falling by a staggering 24 percent.
But we don’t read much about that downturn in the history books, in large part because it ended so quickly.
The key question, though, is why did that depression end quickly while the Great Depression dragged on for a decade?
One big reason for the different results is that markets were largely left unmolested in the 1920s. This meant resources could be quickly redeployed, minimizing the downturn.
But this doesn’t mean the crowd in Washington was completely passive. They did do something to help the economy recover. As Ms. Fields explains in the video, President Harding, unlike Presidents Hoover and Roosevelt, slashed government spending.
So it’s especially noteworthy that economists at the European Central Bank have just produced a study showing that government spending is unambiguously harmful to economic performance. Here is a brief description of the key findings.
…we analyse a wide set of 108 countries composed of both developed and emerging and developing countries, using a long time span running from 1970-2008, and employing different proxies for government size… Our results show a significant negative effect of the size of government on growth. …Interestingly, government consumption is consistently detrimental to output growth irrespective of the country sample considered (OECD, emerging and developing countries).
The second key takeaway is that Europe’s corrupt political elite is engaging in a classic case of Mitchell’s Law, which is when one bad government policy is used to justify another bad government policy. In this case, they undermined prosperity by recklessly increasing the burden of government spending, and they’re now using the resulting fiscal crisis as an excuse to promote inflationary monetary policy by the European Central Bank.
The ECB study, by contrast, shows that the only good answer is to reduce the burden of the public sector. Moreover, the research also has a discussion of the growth-maximizing size of government.
… economic progress is limited when government is zero percent of the economy (absence of rule of law, property rights, etc.), but also when it is closer to 100 percent (the law of diminishing returns operates in addition to, e.g., increased taxation required to finance the government’s growing burden – which has adverse effects on human economic behaviour, namely on consumption decisions).
This may sound familiar, because it’s a description of the Rahn Curve, which is sort of the spending version of the Laffer Curve. This video explains.
The key lesson in the video is that government is far too big in the United States and other industrialized nations, which is precisely what the scholars found in the European Central Bank study.
Another interesting finding in the study is that the quality and structure of government matters.
Growth in government size has negative effects on economic growth, but the negative effects are three times as great in non-democratic systems as in democratic systems. …the negative effect of government size on GDP per capita is stronger at lower levels of institutional quality, and ii) the positive effect of institutional quality on GDP per capita is stronger at smaller levels of government size.
The simple way of thinking about these results is that government spending doesn’t do as much damage in a nation such as Sweden as it does in a failed state such as Mexico.
Last but not least, the ECB study analyzes various budget process reforms. There’s a bit of jargon in this excerpt, but it basically shows that spending limits (presumably policies similar to Senator Corker’s CAP Act or Congressman Brady’s MAP Act) are far better than balanced budget rules.
…we use three indices constructed by the European Commission (overall rule index, expenditure rule index, and budget balance and debt rule index). …The former incorporates each index individually whereas the latter includes interacted terms between fiscal rules and government size proxies. Particularly under the total government expenditure and government spending specifications…we find statistically significant positive coefficients on the overall rule index and the expenditure rule index, meaning that having these fiscal numerical rules improves GDP growth for these set of EU countries.
This research is important because it shows that rules focusing on deficits and debt (such as requirements to balance the budget) are not as effective because politicians can use them as an excuse to raise taxes.
At the risk of citing myself again, the number one message from this new ECB research is that lawmakers – at the very least – need to follow Mitchell’s Golden Rule and make sure government spending grows slower than the private sector. Fortunately, that can happen, as shown in this video.
But my Golden Rule is just a minimum requirement. If politicians really want to do the right thing, they should copy the Baltic nations and implement genuine spending cuts rather than just reductions in the rate of growth in the burden of government.
And I am very upset that the OECD gets a giant $100 million-plus subsidy every year from American taxpayers. For all intents and purposes, we’re paying for a bunch of left-wing bureaucrats so they can recommend that the United States adopt that policies that have caused so much misery in Europe. And to add insult to injury, these socialist pencil pushers receive tax-free salaries.
And now, just when you thought things couldn’t get worse, the OECD has opened a new front in its battle against America. The bureaucrats from Paris have climbed into bed with the hard left at the AFL-CIO and are pushing a class-warfare agenda. Next Wednesday, the two organizations will be at the union’s headquarters for a panel on “Divided We Stand – Tackling Growing Inequality Now.”
Co-sponsoring a panel at the AFL-CIO’s offices, it should be noted, doesn’t necessarily make an organization guilty of left-wing activism and mis-use of American tax dollars. But when you look at other information on the OECD’s website, it quickly becomes apparent that the Paris-based bureaucracy has launched a new project to promote class-warfare.
Over the last two decades, there was a move away from highly progressive income tax rates and net wealth taxes in many countries. As top earners now have a greater capacity to pay taxes than before, some governments are re-examining their tax systems to ensure that wealthier individuals contribute their fair share of the tax burden. This aim can be achieved in several different ways. They include not only the possibility of raising marginal tax rates on the rich but also…reassessing the role of taxes on all forms of property and wealth.
The OECD underlines the need for governments to review their tax systems to ensure that wealthier individuals contribute their fair share of the tax burden. This can be achieved by raising marginal tax rates on the rich.
Like Obama, the folks at the OECD like to talk about “fair share.” These passages sounds like they could have been taken from one of Obama’s hate-and-envy speeches on class warfare.
But the fact that a bunch of Europeans support Obama’s efforts to Europeanize America is not a surprise. The point of this post is that the OECD shouldn’t be using American tax dollars to promote Obama’s class-warfare agenda.
Here’s a video showing some of the other assaults against free markets by the OECD. This is why I’ve written that the $100 million-plus that American taxpayers send to Paris may be – on a per dollar basis – the most destructively wasteful part of the entire federal budget.
One last point is that the video was produced more than one year ago, which was not only before this new class-warfare campaign, but also before the OECD began promoting a global tax organization designed to undermine national sovereignty and promote higher taxes and bigger government.
In other words, the OECD is far more destructive and pernicious than you think.
About the only nice thing that can be said about this collection of bureaucrats is that they’re consistent, though I’m not sure being wrong all the time is something to brag about – especially when even cartoonists start to make fun of CBO’s flawed approach.
I’m not alone in my disdain for CBO. In a column for The Hill, Veronique de Rugy of the Mercatus Center makes two excellent points about the Congressional Budget Office: 1) the general inability of economists to predict (we’d be rich if we knew how to do that) and 2) the use of inaccurate models.
The CBO’s consistently flawed scoring of the cost of bills is used by Congress to justify legislation that rarely performs as promised and drags down the economy. Whether it scores the recent healthcare bill or the cost of the Capitol Hill Visitor Center, an ambitious three-floor underground facility, the price for taxpayers always ends up larger than originally predicted. …Like many economists, its analysts suffer from a misplaced belief in their forecasting prowess. …CBO relies heavily on Keynesian economic models, like the ones it used during the stimulus debate. Forecasters at the agency predicted the stimulus package would create more than 3 million jobs. …But unemployment stubbornly remained around 10 percent. What was wrong with the CBO’s numbers? …the stimulus and the ACA should serve as yet more evidence that Congress should take budget scores and economic projections with a grain of salt. What looks good in the spirit world of the computer model may be very bad in the material realm of real life because people react to changes in policies in ways unaccounted for in these models.
Let’s now move from the general to the specific. Peter Suderman reports from Reason on new research suggesting that costs for just one provision of Obamacare may be far higher than predicted by the jokers at CBO.
The Congressional Budget Office’s official cost estimate for last year’s health care overhaul projected that the law would cost a little less than $950 billion over its first decade. About half of that cost came from the law’s Medicaid expansion, which was projected to enroll 16 million new individuals in the joint federal-state health care program for the poor and disabled. But researchers at Harvard University are now warning that policymakers should be prepared for substantial uncertainty about the true enrollment effects of the Medicaid expansion. In a paper published in the journal Health Affairs earlier this week, a team of health economists estimated that, under the law, new Medicaid enrollment could be as low as 8.5 million people, but also as high as 22.4 million people—with additional costs to match…meaning that a full decade of the Medicaid expansion alone could end up costing nearly $1 trillion—more than the entire law was supposed to cost in its first ten year out of the gate.
The article does note that it’s possible that costs also might be lower than forecast, but Peter explains why the upper-bound estimate is more likely to be accurate because the law creates perverse incentives.
Indeed, CBO’s failure to recognize that new programs will lure people into greater dependency is one of the biggest reasons that the bureaucracy routinely under-estimates the cost of new programs. This is a point I stressed in my video explaining why Obamacare will be far more costly than CBO predicted.
That video looked at the relationship between economic freedom and various indices that measure quality of life. Not surprisingly, free markets and small government lead to better results.
The entire video is superb, but there are two things that merit special praise, one because of intellectual honesty and the other because of intellectual effectiveness.
1. The refreshingly honest aspect of the video is its non-partisan tone. It explains, in a neutral fashion, that Bush undermined prosperity by making government bigger and that Obama is undermining prosperity by increasing the burden of government.
It’s also worth pointing out that there are several policies that impact on economic performance. The Koch Institute video focuses primarily on the key issues of fiscal policy and regulation, but trade, monetary policy, property rights, and rule of law are examples of other policies that also are very important.
This video, narrated by yours truly, looks at economic growth from this more comprehensive perspective.
The moral of the story from both videos is very straightforward. If the answer is bigger government, you’ve asked a very strange question.
Earlier this year, President Obama’s IRS proposed a regulation that would force banks in America to report any interest they pay to accounts owned by non-resident aliens (that’s the technical term for foreigners who don’t live in the U.S.).
What made this regulation so bizarre, however, is that Congress specifically has exempted these account from taxation for the rather obvious reason that they want to attract this mobile capital to the American economy. Indeed, Congress repeatedly has ratified this policy ever since it was first implemented 90 years ago.
So why, you may be asking, would the IRS propose such a regulation? After all, why impose a regulatory burden on a weakened banking sector when it has nothing to do with enforcing American tax law?
The answer, if you can believe it, is that they want American banks to help enforce foreign tax law. And the bureaucrats at the IRS want to impose this burden even though the regulation is completely contrary to existing U.S. law.
Not surprisingly, this rogue behavior by the IRS already has generated considerable opposition. Senator Rubio has been a leader on the issue, being the first to condemn the proposed regulation.
And now we have two more important voices against the IRS’s rogue regulation.
The Chairman of the Oversight Subcommittee in charge of the IRS, Congressman Charles Boustany of Louisiana, just sent a very critical letter to Treasury Secretary Geithner, and these are some of his chief concerns.
If the regulation were to take effect, it would not only run counter to the will of the Congress, but would potentially drive foreign investments out of our economy, hurting individuals and small businesses by reducing access to capital. I write to request that IRS suspend the proposed regulation. …As the Internal Revenue Code imposes no taxation or reporting requirements on this deposit interest, the proposed regulation serves no compelling tax collection purpose. Instead, it is my understanding that the IRS seeks this new authority to help foreign governments collect their own taxes abroad. …It is disappointing to see the IRS once again try to impose unnecessary regulations and costs on U.S. banks. To attract investment of foreign dollars into the U.S. economy, the Internal Revenue Code generally exempts these deposits from taxation and reporting requirements. These foreign investments in turn help to finance a variety of products essential to economic growth, such as small business loans and home mortgages. Imposing reporting requirements on these deposits through regulatory fiat threatens to drive significant investments out of our economy by undermining the rules Congress has set in place specifically to attract it, and at exactly the time when our economy can least afford it.
And now the business community has become involved. Here’s some of what the Chamber of Commerce recently said, and you can click this PDF file (USCC S1506) to read the entire letter.
Given the fragile state of America’s economic recovery, it is disturbing to see actions by the Treasury that could jeopardize deposits at U.S. banks and credit unions held by nonresident aliens. These deposits, which are not subject to U.S. taxes, are at risk of being abruptly withdrawn and future deposits deterred, which could lead to a reallocation of deposits out of the U.S. banking system and, thus, reduce lending to businesses. Furthermore, complying with the proposed regulation places additional reporting requirements and expenses upon financial firms. Without any real benefit stemming from the collection of this information, imposition of this reporting requirement seems to be a solution in search of a problem.
This may seem like an arcane issue and international tax matters often are not terribly exciting, but a couple of minutes of watching this video will make you realize there are some very important principles at stake.
Only the IRS could manage to combine bad tax policy, bad regulatory policy, bad human rights policy, and bad sovereignty policy into one regulation.
Sometimes during speeches, when explaining why politicians shouldn’t double tax income that is saved and invested, I ask the audience whether it would make sense to harvest apples by cutting the branches off of trees filled with ripe fruit.
In every audience (at least when I’m not talking to politicians), people instinctively understand that this would be stupid. Cutting off the branches, after all, would reduce the crop in future years. This helps them realize why it is so short-sighted to use tax policy to penalize the capital formation that generates future income.
This new video is designed to make a broader point about the greed of the political class, but you’ll see why I thought about my story about taxation and the apple tree. (warning: one F-word at the end)
The bureaucrats at the Organization for Economic Cooperation and Development threatened to have me thrown in a Mexican jail for the horrible crime of standing in the public lobby of a hotel and giving advice to low-tax jurisdictions.
But if that makes it seem as if the battle is full of drama and (exaggerated) glory, that would be a gross exaggeration. More than 99 percent of my time on this issue is consumed by the difficult task of trying to convince policy makers that tax competition, fiscal sovereignty, and financial privacy should be celebrated rather than persecuted.
Sort of like convincing thieves that it’s a good idea for houses to have alarm systems.
And it means I’m also condemned to the never-ending chore of debunking left-wing attacks on tax havens. The big-government crowd viscerally despises these jurisdictions because tax competition threatens the ability of politicians to engage in class warfare/redistribution policies.
To determine whether tax havens are immoral, let’s peruse Mr. Vallely’s column. It begins with an attack on Ugland House in the Cayman Islands.
There is a building in the Cayman Islands that is home to 12,000 corporations. It must be a very big building. Or a very big tax scam.
If lying is immoral, this is a quick black mark on Mr. Vallely rather than tax havens. I’ve already explained, in a post eviscerating an empty-suit Senator from North Dakota, that a company’s home is merely the place where it is chartered for legal purposes. A firm’s legal domicile has nothing to do with where it does business or where it is headquartered.
In other words, there is nothing nefarious about Ugland House, just as there is nothing wrong with the small building in Delaware that is home to more than 200,000 companies. Obama, by the way, demagogued about Ugland House during the 2008 campaign.
Now that we’ve established that the author is a careless and know-nothing hack, let’s see what else he has to say.
Are there any legitimate reasons why anyone would want to have a secret bank account – and pay a premium to maintain their anonymity – or move their money to one of the pink dots on the map which are the final remnants of the British empire: the Caymans, Bermuda, the Turks and Caicos and the British Virgin Islands?
o Persecuted ethnic Chinese in Indonesia and the Philippines?
o Political dissidents in places such as Russia and Venezuela?
o Entrepreneurs in thug regimes such as Venezuela and Zimbabwe?
o Families threatened by kidnapping failed states such as Mexico?
o Homosexuals in murderous regimes such as Iran?
As this video explains, there are billions of people around the world that are subject to state-sanctioned (or at least state-permitted) religious, ethnic, racial, political, sexual, and economic persecution. These people are especially likely to be targeted if they have any money, so the ability to invest their assets offshore and keep that information hidden from venal governments can, in some cases, be a life-or-death matter.
And let’s not forget the residents of failed states, where crime, expropriation, kidnapping, corruption, extortion, and economic mismanagement are ubiquitous. These people also need havens where they can safely and confidentially invest their money.
The author of the column is probably oblivious to these practical, real-world concerns. Instead, he is content with sweeping proclamations.
The moral case against is clear enough. Tax havens epitomise unfairness, cheating and injustice. .
But if he is against unfairness, cheating, and injustice, why does he want to empower the institution – government – that is the source of oppression in the world?
To be fair, our left-wing friend does attempt to address the other side of the argument.
Apologists insist that tax havens protect individual liberty. They promote the accumulation of capital, fair competition between nations and better tax law elsewhere in the world. They also foster economic growth. …Yet even if all that were true – and it is not – does it outweigh the ethical harm they do? The numbered bank accounts of tax havens are notoriously sanctuaries for the spoils of theft, fraud, bribery, terrorism, drug-dealing, illegal betting, money-laundering and plunder by Arab despots such as Gaddafi, Mubarak and Ben Ali, all of whom had Swiss accounts frozen.
But he can’t resist trying to discredit the economic argument by resorting to more demagoguery, asserting that tax havens are shadowy regimes. Not surprisingly, he offers no supporting data. Moreover, you won’t be surprised to learn that the real-world evidence directly contradicts what he wrote. The most comprehensive analysis of dirty money finds 28 problem jurisdictions, and only one could be considered a tax haven.
Last but not least, the author addresses the issue that really motivates the left – the potential loss of access to other people’s money, funds that they want the government to confiscate and redistribute.
Christian Aid reckons that tax dodging costs developing countries at least $160bn a year – far more than they receive in aid. The US research centre Integrity estimated that more than $1.2trn drained out of poor countries illicitly in 2008 alone. …Some say an attack on tax havens is an attack on wealth creation. It is no such thing. It is a demand for the good functioning of capitalism, balancing the demands of efficiency and of justice, and placing a value on social harmony.
There are several problems with this passage, including the (perhaps deliberate) mixing of tax evasion and tax avoidance. But the key point is that the burden of government spending in most nations is now at record levels, undermining prosperity and reducing growth. Why should add more fuel to the fire by giving politicians even more money to waste?
Let’s now shift from the inaccurate ramblings of a left-winger to some real-world evidence. The Wall Street Journal has an article on the Canton of Zug, Switzerland’s tax haven within a tax haven. This hopefully won’t surprise anyone, but low-tax policies have been very beneficial for Zug.
Developed nations from Japan to America are desperate for growth, but this tiny lake-filled Swiss canton is wrestling with a different problem: too much of it. Zug’s history of rock-bottom tax rates, for individuals and corporations alike, has brought it an A-list of multinational businesses. Luxury shops abound, government coffers are flush, and there are so many jobs that employers sometimes have a hard time finding people to fill them. …If Switzerland is the world’s most famous tax haven, Zug amounts to a haven within a haven.
Here’s some of the evidence of how better fiscal policy promotes prosperity. This is economic data, to be sure, but isn’t the choice between growth and stagnation also a moral issue?
Zug long was a poor farming region, but in 1947 its leaders began to trim tax rates in an effort to attract companies and the well-heeled. In Switzerland, two-thirds of total taxes, including individual and corporate income taxes, are levied by the cantons, not the central government. The cantons also wield other powers that enable them compete for business, such as the authority to make residency and building permits easy to get. …businesses moved in, many establishing regional headquarters. Over the past decade, the number of companies with operations of some sort in the canton jumped to 30,000 from 19,000. The number of jobs in Zug rose 20% in six years, driven by the economic boom and foreign companies’ efforts to minimize their taxes. At a time when the unemployment rate in the European Union (to which Switzerland doesn’t belong) is 9.4%, Zug’s is 1.9%.
It turns out that Zug is growing so fast that lawmakers actually want to discourage more investment. What a nice problem to have.
Describing Zug’s development as “astonishing,” Matthias Michel, the head of the canton government, said, “We are too small for the success we have had.” …Zug has largely stopped trying to lure more multinationals, according to Mr. Michel.
…the Swiss are mostly holding fast to their fiscal beliefs. Last November, in a national referendum, they overwhelmingly rejected a proposal that would have established a minimum 22% tax rate on incomes over 250,000 francs, or about $315,000.
This global tax cartel will be akin to an OPEC for politicians, and the impact on taxpayers will be quite similar to the impact of the real OPEC on motorists.
If that’s a moral outcome, then I want to be a hedonist.
To conclude, here are two other videos on tax havens. This one looks at the economic issues.
And here’s a video debunking some of the usual attacks on low-tax jurisdictions.
Just last week, I made fun of Paul Krugman after he publicly said that a fake threat from invading aliens would be good for the economy since the earth would waste a bunch of money on pointless defense outlays.
Yesterday, there were rumors that Krugman stated that it would have been stimulative if the earthquake had been stronger and done more damage, but he exposed this as a prank (though it is understandable that many people – including me, I’m embarrassed to admit – initially assumed it was true since he did write that the 9-11 terrorist attacks boosted growth).
But while Krugman is owed an apology by whoever pulled that stunt, the real problem is that President Obama and his advisers actually take Keynesian alchemy seriously.
And since President Obama is promising to unveil another “jobs plan” after his vacation, that almost certainly means more faux stimulus.
We don’t know what will be in this new package, but there are rumors of an infrastructure bank, which doubtlessly would be a subsidy for state and local governments. The only thing “shovel ready” about this proposal is that tax dollars will be shoveled to interest groups.
The other idea that seems to have traction is extending the current payroll tax holiday, which lowers the “employee share” of the payroll tax from 6.2 percent to 4.2 percent. The good news is that the tax holiday doesn’t increase the burden of government spending. The bad news is that temporary tax rate reductions probably have very little positive effect on economic output.
Lower tax rates are the right approach, to be sure (particularly compared to useless rebates, such as those pushed by the Bush White House in 2001 and 2008), but workers, investors, and entrepreneurs are unlikely to be strongly incentivized by something that might be seen as a one-year gimmick. Though I suppose if the holiday keeps getting extended, people may begin to think it is a semi-durable feature of the tax code, so maybe there will be some pro-growth impact.
In any event, we will see what the President unveils next month. I’ll be particularly interested in how his supposed short-run jobs proposal fits in with his long-run plan for dealing with red ink. He has been advocating for a “balanced approach” and “shared sacrifice” – but that’s Obama-speak for higher taxes, and we know that’s a damper on job creation and new investment.
As you can tell, I’m not optimistic. The best thing for growth would be to get the government out of the way. The Obama White House, though, thinks bigger government is good for the economy.
This stimulus video was produced last year and was designed for another jobs plan concocted by the Adminisration, but the message is still very appropriate.
Warren Buffett’s at it again. He has a column in the New York Times complaining that he has been coddled by the tax code and that “rich” people should pay higher taxes.
But I no longer give that advice. I’m worried he might actually do it. And even though Buffett is wildly misguided about fiscal policy, I know he will invest his money much more wisely than Barack Obama will spend it.
Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.
His numbers are flawed in two important ways.
1. When Buffett receives dividends and capital gains, it is true that he pays “only” 15 percent of that money on his tax return. But dividends and capital gains are both forms of double taxation. So if he wants honest effective tax rate numbers, he needs to show the 35 percent corporate tax rate.
Moreover, as I noted in a previous post, Buffett completely ignores the impact of the death tax, which will result in the federal government seizing 45 percent of his assets. To be sure, Buffett may be engaging in clever tax planning, so it is hard to know the impact on his effective tax rate, but it will be signficant.
2. Buffett also mischaracterizes the impact of the Social Security payroll tax, which is dedicated for a specific purpose. The law only imposes that tax on income up to about $107,000 per year because the tax is designed so that people “earn” a corresponding retirement benefit (which actually is tilted in favor of low-income workers).
Imposing the tax on multi-millionaire income, however, would mean sending rich people giant checks from Social Security when they retire. But nobody thinks that’s a good idea. Or you could apply the payroll tax to all income and not pay any additional benefits. But this would turn Social Security from an “earned benefit” to a redistribution program, which also is widely rejected (though the left has been warming to the idea in recent years because their hunger for more tax revenue is greater than their support for Social Security).
If we consider these two factors, Buffett’s effective tax rate almost surely is much higher than the burden on any of the people who work for him.
But this entire discussion is a good example of why we should junk the corrupt, punitive, and unfair tax code and replace it with a simple flat tax. With no double taxation and a single, low tax rate, we would know that rich people were paying the right amount, neither too much based on class-warfare tax rates nor too little based on loopholes, deduction, preferences, exemptions, shelters, and credits.
So why doesn’t Buffett endorse this approach? Tim Carney offers a very plausible answer.
For more information about why class-warfare taxes are misguided, this video may be helpful.
Sen. Marco Rubio (R-Fla.) and other Senate Republicans on Tuesday introduced a bill aimed at blocking pending regulations that would require banks to report to the Internal Revenue Service all interest deposits paid to nonresident aliens (NRA). Rubio, along with Texas GOP Sens. John Cornyn and Kay Bailey Hutchison, introduced S. 1506 because they believe the pending regulations have the potential to drive billions of dollars of deposits away from U.S. banks. A summary of the bill provided by Rubio’s office argues that this could leave U.S. banks undercapitalized and less able to lend in the U.S. “Simply put, this rule will cause billions of dollars in important NRA deposits to be withdrawn from American banks and invested in countries with less onerous reporting requirements,” the lawmakers state in the bill summary. “A capital flight of any magnitude will hurt the lending capacity of community banks and damage local and state economies — not to mention endanger those who invest in U.S. banks due to corruption, inflation, and violence in their home countries, particularly in nations like Mexico and Venezuela.” The summary also notes that Congress has explicitly exempted NRA deposits from taxation… Rubio’s bill is a companion bill to H.R. 2568, which was introduced by Reps. Bill Posey (R-Fla.), Francisco Canseco (R-Texas), Mario Diaz-Balart (R-Fla.), Ruben Hinojosa (D-Texas) and Gregory Meeks (D-NY).
Here’s a new video, less than 2-1/2 minutes, pointing out some of the key differences between rich nations and poor nations. Not surprisingly, small government, free markets, and sound institutions are critical.
I narrated a similar video, released more than two years ago, that makes similar points. The production values are not as high, but I had six minutes to play with, so it gave me an opportunity to elaborate on the various factors that contribute to growth. I think the videos are good complements.
This new video from the Center for Freedom and Prosperity explains why Medicaid should be shifted to the states. As I note in the title of this post, it’s good federalism policy and good fiscal policy. But the video also explains that Medicaid reform is good health policy since it creates an opportunity to deal with the third-party payer problem.
One of the key observations of the video is that Medicaid block grants would replicate the success of welfare reform. Getting rid of the federal welfare entitlement in the 1990s and shifting the program to the states was a very successful policy, saving billions of dollars for taxpayers and significantly reducing poverty. There is every reason to think ending the Medicaid entitlement will have similar positive results.
Medicaid block grants were included in Congressman Ryan’s budget, so this reform is definitely part of the current fiscal debate. Unfortunately, the Senate apparently is not going to produce any budget, and the White House also has expressed opposition. On the left, reducing dependency is sometimes seen as a bad thing, even though poor people are the biggest victims of big government.
It’s wroth noting that Medicaid reform and Medicare reform often are lumped together, but they are separate policies. Instead of block grants, Medicare reform is based on something akin to vouchers, sort of like the health system available for Members of Congress. This video from last month explains the details.
In closing, I suppose it would be worth mentioning that there are two alternatives to Medicaid and Medicare reform. The first alternative is to do nothing and allow America to become another Greece. The second alternative is to impose bureaucratic restrictions on access to health care – what is colloquially known as the death panel approach. Neither option seems terribly attractive compared to the pro-market reforms discussed above.
It doesn’t get much attention, but one of the most interesting economic experiments in American history occurred right after World War II. Despite warnings of Armageddon from Keynesian economists, government spending was slashed as the United States demobilized from the war.
Writing last year in the Cato Policy Report, economists Jason Taylor and Richard Vedder showed that the great post-World War II economic boom was ushered in by the swift rollback of what had been the largest economic “stimulus” in US history. At the time, leading Keynesians cautioned that the abrupt withdrawal of federal dollars would plunge the economy into a new depression. Their warnings were ignored. “Government canceled war contracts, and its spending fell from $84 billion in 1945 to under $30 billion in 1946,” Taylor and Vedder wrote. “By 1947, the government was . . . running a budget surplus of close to 6 percent of GDP. The military released around 10 million Americans back into civilian life. Most economic controls were lifted, and all were gone less than a year after V-J Day. In short, the economy underwent . . . the ‘shock of de-stimulus.'” Fearful predictions of massive unemployment — 14 percent, Business Week said — never materialized. Far from collapsing, “labor markets adjusted quickly and efficiently once they were finally unfettered.” Even with millions of demobilized soldiers re-entering the workforce, “unemployment rates . . . remained under 4.5 percent in the first three postwar years.” Workers who lost government-funded jobs quickly replaced them in the surging private sector. “In fact,” Taylor and Vedder add, “civilian employment grew, on net, by over 4 million between 1945 and 1947 when so many pundits were predicting economic Armageddon. Household consumption, business investment, and net exports all boomed as government spending receded.” America’s postwar experience indicates that vibrant growth is generated not by massive government interference in the economy, but by the reverse. The way to revive a gasping private sector is for government to get out of its way, not to choke it with trillions of dollars in new spending.
Not surprisingly, Reagan understood this issue, as he said in this video. Also, here’s one of my videos, which looks more broadly at the issue of whether government spending is a help or hindrance to economic growth.
My good friend Veronique de Rugy of the Mercatus Center at George Mason University did a very illuminating interview with Bloomberg about the serial inaccuracy of government fiscal forecasts.
Veronique uses health care as an example, giving particular attention to the Medicare program. One obvious implication is that we should have zero faith in the White House’s estimates for the cost of Obamacare.
Indeed, that was the main point of a video I did, which tore apart the Administration’s absurd claim that a giant new entitlement program would lower costs.
Also keep in mind that the same principles operate on the tax side of the fiscal ledger. This Laffer Curve tutorial has all the details.
A good (perhaps “reprehensible” would be a better word to use) example if the scam created by international bureaucracies. The folks who work for entities such as the International Monetary Fund, World Bank, United Nations, and Organization for Economic Cooperation get wildly excessive compensation packages. To add insult to injury, their income is tax free!
At the World Bank, Inter-American Development Bank, the African Development Bank, and at the IMF, you find extravagantly paid men and women who masquerade as anti-poverty fighters for the Third World. As one World Bank vice president said upon his resignation: “Poverty reduction is the last thing on most World Bank bureaucrats’ minds.” These global institutions are supposed to act as non-profits, but big salaries and big perks rule as the norm. And you’re paying for them: as the largest single contributor, American taxpayers pick up the tab. By now everyone knows about DSK’s extravagant $420,000 employment agreement that included an additional $73,000 for living expenses — a provision explained thusly by the IMF: “To enable you to maintain … a scale of living appropriate to your position.” …A PJM survey found that a common annual compensation package for senior management at the anti-poverty banks exceeds $500,000 — tax-free. World Bank President Robert Zoellick currently receives $441,980 in base salary and $284,500 in other benefits. Strauss-Kahn’s deputy, John Lipsky, receives $384,000 in base salary plus “living allowances.” …Ten of Zoellick’s deputies receive tax-free base pay of $321,00 to $347,000, plus enjoy an additional $210,000 in benefits. Even mid-level World Bank employees earn well into six digits: the average salary for a professional manager is $181,000, plus $97,000 in benefits. A senior adviser receives on average $238,000 plus $127,000 in benefits. A vice president receives $286,000 plus $153,000 in benefits. The biggest hidden benefits are the off-the-book perks called “living allowances.” These perks can nearly double a stated salary. Of the 2,600 IMF and 10,000 World Bank full-time employees, all receive some form of supplemental living allowances in addition to their base pay. These include home leave grants, dependent allowances, travel perks, and education “grants” for their children to attend private schools. In addition, they offer generous pensions and health insurance policies. According to a U.S. General Accounting Office study, the average cost for these additional perks added $197,300 per employee cost beyond their base pay in 1994 dollars.
The column doesn’t mention my “favorite” international bureaucracy, which is the Paris-based Organization for Economic Cooperation and Development. The OECD’s budget is small compared to some of the other parasitic bodies mentioned in the column, but this video explains how big-government policies are being financed with the $100 million-plus of American tax dollars sent to France to subsidize the OECD.
Michael Barone of the American Enterprise Institute goes to town on the selective, discriminatory, and politically motivated dispensation of Obamacare waivers. I particularly like how he zings the left by asking why, if Obamacare is so wonderful, so many millions of people trying to escape the President’s new scheme. But the more important message in his article is how arbitrary application undermines the rule of law.
1,372 businesses, state and local governments, labor unions and insurers, covering 3,095,593 individuals or families,…have been granted a waiver from Obamacare by Secretary of Health and Human Services Kathleen Sebelius. All of which raises another question: If Obamacare is so great, why do so many people want to get out from under it? More specifically, why are more than half of those 3,095,593 in plans run by labor unions, which were among Obamacare’s biggest political supporters? Union members are only 12 percent of all employees but have gotten 50.3 percent of Obamacare waivers. Just in April, Sebelius granted 38 waivers to restaurants, nightclubs, spas and hotels in former House Speaker Nancy Pelosi’s San Francisco congressional district. Pelosi’s office said she had nothing to do with it. On its website HHS pledges that the waiver process will be transparent. But it doesn’t list those whose requests for waivers have been denied. …One basic principle of the rule of law is that laws apply to everybody. If the sign says “No Parking,” you’re not supposed to park there even if you’re a pal of the alderman. Another principle of the rule of law is that government can’t make up new rules to help its cronies and hurt its adversaries except through due process, such as getting a legislature to pass a new law. …Punishing enemies and rewarding friends — politics Chicago style — seems to be the unifying principle that helps explain the Obamacare waivers, the NLRB action against Boeing and the IRS’ gift-tax assault on 501(c)(4) donors. They look like examples of crony capitalism, bailout favoritism and gangster government. One thing they don’t look like is the rule of law.
My contention is that this is the inevitable result of giving more power to Washington. And this gives me an excuse to reuse my video showing the link between big government and corruption.
One of the biggest threats against global prosperity is the anti-tax competition project of a Paris-based international bureaucracy known as the Organization for Economic Cooperation and Development. The OECD, acting at the behest of the European welfare states that dominate its membership, wants the power to tell nations (including the United States!) what is acceptable tax policy.
For all intents and purposes, high-tax nations want to create a global tax cartel, sort of an “OPEC for politicians.” This issue is increasingly important since politicians from those countries realize that all their overspending has created a fiscal crisis and they are desperate to figure out new ways of imposing higher tax rates. I don’t exaggerate when I say that stopping this sinister scheme is absolutely necessary for the future of liberty.
Along with Brian Garst of the Center for Freedom and Prosperity, I just wrote a paper about these issues. The timing is especially important because of an upcoming “Global Forum” where the OECD will try to advance its mission to prop up uncompetitive welfare states. Here’s the executive summary, but I encourage you to peruse the entire paper for lots of additional important info.
The Paris-based Organization for Economic Cooperation and Development has an ongoing anti-tax competition project. This effort is designed to prop up inefficient welfare states in the industrialized world, thus enabling those governments to impose heavier tax burdens without having to fear that labor and capital will migrate to jurisdictions with better tax law. This project received a boost a few years ago when the Obama Administration joined forces with countries such as France and Germany, which resulted in all low-tax jurisdictions agreeing to erode their human rights policies regarding financial privacy. The tide is now turning against high-tax nations – particularly as more people understand that ever-increasing fiscal burdens inevitably lead to Greek-style fiscal collapse. Political changes in the United States further complicate the OECD’s ability to impose bad policy. Because of these developments, low-tax jurisdictions should be especially resistant to new anti-tax competition initiatives at the Bermuda Global Forum.
To understand why this issue is so important, here’s a video I narrated for the Center for Freedom and Prosperity.
And here’s a shorter video on the same subject, narrated by Natasha Montague from Americans for Tax Reform.
Last but not least, here’s a video where I explain why the OECD is a big waste of money for American taxpayers.
And I’ve already added my two cents to the tax debate between Senator Coburn and Grover Norquist regarding the desirability of higher taxes.
So it won’t surprise anyone to know that I fully agree with this new video from the Center for Freedom and Prosperity, which offers seven reasons why higher taxes are a bad idea.
The video is narrated by Piyali Bhattacharya of Young Americans for Liberty, and here are her seven reasons.
Tax increases are not needed
Tax increases encourage more spending
Tax increases harm economic performance
Tax increases foment social discord
Tax increases almost never raise as much revenue as projected
Tax increases encourage more loopholes
Tax increases undermine competitiveness
I think reasons #1, #2, #3, and #5 are the most powerful.
And if tax increases are not needed to balance the budget, then the only purpose they serve is to facilitate a bigger burden of government spending, which is why I like reason #2.
There’s now an article in the American Enterprise Institute’s online magazine about this research.…the federal and many provincial governments took sweeping action to cut spending and reform programs. This led to a major structural change in the government’s involvement in the Canadian economy. The Canadian reforms produced considerable fiscal savings, reduced the size and scope of government, created room for important tax reforms, and ultimately helped usher in a period of sustained economic growth and job creation. This final point is worth emphasizing: Canada’s total government spending as a share of GDP fell from a peak of 53 percent in 1992 to 39 percent in 2007, and despite this more than one-quarter decline in the size of government, the economy grew, the job market expanded, and poverty rates fell dramatically.
Why? Because more labor and capital were available to be allocated by market forces.
But while Krugman is owed an apology by whoever pulled that stunt, the real problem is that President Obama and his advisers actually take Keynesian alchemy seriously.
International Liberty 