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There’s a very powerful statement, variously attributed to Alexis de Toqueville, Benjamin Franklin, or Alexander Tytler, that basically warns that democracy is doomed when people figure out they can vote themselves money.

There’s no evidence that any of them actually spoke or wrote those words, though I guess it doesn’t matter that the quote didn’t originate with someone like Franklin. What does matter is that it accurately captures something very important, which is the tendency for governments to over-tax and over-spend once people decide that it’s okay to use government coercion to take other people’s money.

But it’s still nice to be able to cite something accurate. With this in mind, I came up with my Theorem of Societal Collapse. And I think it’s actually more accurate than the vote-themselves-money quote because democracy doesn’t necessarily lead to statism. What leads to bad outcomes is democracy combined with bad values.

And a pervasive belief in redistributionism is a bad value. Heck, it’s a self-destructive value. Consider Greece. When you add together the people getting welfare and disability to the people getting pension payments to the people on the government payroll, it turns out that a majority of people in the country are riding in the wagon of government dependency.

That’s bad. But what makes the Greek situation so hopeless is that those are the same people who vote. Which means there’s very little chance of getting a government that would implement good policy.

After all, why would the recipients of other people’s money vote for politicians who support limits on redistribution?

But I’m not just blaming voters. Politicians also deserve scorn and disdain because they are the ones who often seek votes by promising to take other people’s money.

Some observers would like to believe that these politicians will use their supposed superior expertise and knowledge about public policy to make appropriate tradeoffs and prevent the system from becoming over-burdened.

But that’s somewhat naive.

Indeed, there’s an entire school of thought in economics, known as “public choice,” which is based on making real-world assumptions about the self-interested behavior of politicians and interest groups. Here’s a partial description from the Library of Economics and Liberty.

As James Buchanan artfully defined it, public choice is “politics without romance.” The wishful thinking it displaced presumes that participants in the political sphere aspire to promote the common good. …public officials are portrayed as benevolent “public servants” who faithfully carry out the “will of the people.” …public choice, like the economic model of rational behavior on which it rests, assumes that people are guided chiefly by their own self-interests… As such, voters “vote their pocketbooks,” supporting candidates and ballot propositions they think will make them personally better off; bureaucrats strive to advance their own careers; and politicians seek election or reelection to office. Public choice, in other words, simply transfers the rational actor model of economic theory to the realm of politics. …collective decision-making processes allow the majority to impose its preferences on the minority.

In other words, both voters and politicians can have an incentive for ever-larger government, even if the end result is Greek-style fiscal chaos because taxes and spending reach ruinous levels.

I call this “Goldfish Government” because some think that a goldfish lacks the ability to control its appetite and therefore will eat itself to death when presented with unlimited food.

Indeed, public choice scholars explicitly recognize that unconstrained democracy can lead to bad results.

Public choice scholars have identified…deep…problems with democratic decision-making processes.

That’s the bad news.

The good news is that their research suggests ways to compensate for the natural tendency of ever-expanding government.

Like that founding father of the American constitutional republic, public choice recognizes that men are not angels and focuses on the importance of the institutional rules… If, for example, democratic governments institutionally are incapable of balancing the public budget, a constitutional rule that limits increases in spending and taxes to no more than the private sector’s rate of growth will be more effective.

Hmmm…., a rule that limits the government so it doesn’t grow faster than the private sector.

Sounds like an idea worth embracing.

But while I like anything that builds support for the Golden Rule, I’m not sure it’s a sufficient condition for good policy.

Simply stated, we have too many examples of nations that followed the Golden Rule for several years, only to then fall off the wagon with a new splurge of spending.

There are two ways to deal with this problem. First, make the spending restraint part of a jurisdiction’s constitution, as we see in Switzerland and Hong Kong.

Second, augment the internal constraint of a spending cap with the external constraint of tax competition. Bluntly stated, destructive tax policies will be less likely when politicians are afraid that taxpayers will move across borders.

I spoke about this topic at a recent conference in Slovakia.

I also discuss the critical role of demographic change toward the end of my speech.

P.S. America’s Founding Fathers had the right solution. They set up a democratic form of government, but they strictly limited the powers of the central government. This system worked remarkably well for a long period, but then the Supreme Court decided that the enumerated powers listed in the Constitution were just a suggestion.

P.P.S. While it’s bad news to combine democracy with bad value, I want to emphasize that the problem is bad values. Most non-democratic societies have policies that are so evil and destructive (think Cuba and North Korea) that they make France seem like a beacon of economic liberty.

What do left-wing firebrand Congressman Alan Grayson, Treasury Secretary Jacob Lew, Obama’s top trade negotiator Michael Froman, liberal financier Donald Sussman, and big-money Democratic donor Tom Steyer. all have in common?

The answer is that they all engage in tax avoidance and tax planning by utilizing tax havens. Like many other Democrats (and Democrat donors), they understand it would be very foolish to deliberately pay more tax than is required.

Yet they all want the rest of us to pay higher taxes!

And now we can add Secretary of State John Kerry to our list of tax haven hypocrites.

Here’s some of what we know from, the Daily Caller‘s exposé.

Secretary of State John Kerry and his wife Teresa Heinz have invested millions of U.S. dollars through family trusts in at least 11 offshore tax havens, according to The Daily Caller News Foundation’s Investigative Group. …Two other trusts appear to have been set up by the Heinz family since Kerry was appointed by President Barack Obama in 2013 to succeed Hillary Clinton as secretary of state. …that doesn’t sit well with some who would normally be supportive of Kerry. “Well I say it doesn’t look good by any means,” said Susan Harley, deputy director of Congress Watch, a progressive lobby organization founded by Ralph Nader.

Actually, since the only “tax havens” listed are the Cayman Islands, Gibraltar, Guernsey, and the British Virgin Islands, it appears that the story should have stated 11 trust investments in tax havens, not trust investments in 11 tax havens.

But I’m nitpicking. As you can see, the Kerry family makes wide use of structures in these low-tax jurisdictions.

Utilizing Cayman-based structures is a sensible choice for the Kerry family, by the way.

Just like it is perfectly appropriate for people to use Panama-organized structures when engaging in international business and investment.

The only reason this is even a story because John Kerry is a left-wing hypocrite who wants everyone else to pay high taxes, but he conveniently arranges his affairs so his family’s money is protected.

Heck, he even moored his yacht in Rhode Island to dodge several hundred thousand dollars of tax that otherwise would have been owed to the state of Massachusetts.

Once again, this was a perfectly reasonable choice. But it’s a bit galling that a wealthy statist like Kerry takes these steps while simultaneously supporting ever-higher tax burdens on those of us who weren’t born with silver spoons in our mouths.

And since we’re on the topic of leftist hypocrites and tax havens, it turns out that the crank who pushed for big government and high taxes when he was Greece’s Finance Minister also seems to like the “offshore” world for his own money.

Here are some blurbs from a story in the U.K.-based Times.

He describes himself as a Marxist libertarian but a lifestyle of glamorous photo-shoots, evenings in chic bars and weekends in luxurious island villas may have convinced the man who brought Greece to the verge of bankruptcy to become a highly-paid capitalist. Yanis Varoufakis, Greece’s former finance minister, is allegedly charging almost £40,000 for speeches he is invited to make worldwide, seeking payment via an HSBC bank account in Oman, according to reports.

Just like with Kerry, there’s nothing wrong or illegal in Varoufakis’ actions. Giving speeches for money and keeping money in another jurisdiction are perfectly legitimate behaviors.

Heck, given the Greek government’s rampant corruption and wasteful habits, I think it’s defensible for people to go one step farther and evade as well as avoid.

But not for Varoufakis. When an advocate of class warfare decides he doesn’t want to live under the rules he would like to impose on the rest of us, he’s simply being a hypocrite and is undeserving of any sympathy.

Not to mention that anyone who think that you can be a Marxist and a libertarian at the same time obviously is a blithering nincompoop.

Let’s shift to another issue for our final glaring example of left-wing hypocrisy. Writing for USA Today, Professor Glenn Reynolds of the University of Tennessee is irked by statists with very big carbon footprints who attend ritzy conferences to concoct plans to impose hardship on the rest of us.

…opulent conferences seem to be our political class’s response to pretty much everything, but they do ring hollow when the topic is what sort of sacrifices should be imposed on the rest of us. …Perhaps people aren’t inclined to treat climate change as a crisis because, despite all the talk, the political class itself isn’t acting as if it’s a crisis. Shouldn’t “shared sacrifice” start at the top?

Glenn has a few modest ideas to resolve this problem of inequity.

First, no more jetting around. Congress should provide that no federal money — either at agencies or at institutions receiving federal funds — should pay for travel to attend conferences or meetings. …Second, to set an example, no air conditioning in federal offices. Sure, it’s uncomfortable without it, but we won World War II with mostly un-air conditioned offices, so we can manage without A/C today. …Third, no more fundraising jaunts on Air Force One. Typically, presidents schedule a fundraiser, then find an elementary school or something to tour in the same town to make the trip “official business.” Congress should provide that no fundraising appearances can be made on any presidential trip charged to the taxpayers. …Fourth, no more UN conferences except online.

Those are all good ideas, but we also need some rules to help other hypocrites (like Leonardo DiCaprio and Prince Charles) practice what they preach.

P.S. In addition to being hypocrites, many leftists also have bad judgement about tyrannical regimes. I wrote last year about Paul Samuelson’s misguided endorsement of the Soviet economic system just as it was about to collapse.

Well, another well-know left-wing economist actually wrote an article to praise the “Korean Miracle.” But Joan Robinson was writing about North Korea rather than South Korea!

It’s true that she didn’t have this evidence available when she was gushing about the Pyongyang being a “city without slums,” but it’s still remarkable that she went out of her way to praise a totalitarian dictatorship.

Just like with nations, there are many factors that determine whether a state is hindering or enabling economic growth.

But I’m very drawn to one variable, which is whether there’s a state income tax. If the answer is no, then it’s quite likely that it will enjoy better-than-average economic performance (and if a state makes the mistake of having an income tax, then a flat tax will be considerably less destructive than a so-called progressive tax).

Which explains my two main lessons for state tax policy.

Anyhow, I’ve always included Tennessee in the list of no-income-tax states, but that’s not completely accurate because (like New Hampshire) there is a tax on capital income.

That’s the bad news. The good news is that the Associated Press reports that Tennessee is getting rid of this last vestige of  income taxation.

The Tennessee Legislature has passed a measure that would reduce and eventually eliminate the Hall tax on investment income. The Hall tax imposes a general levy of 6 percent on investment income, with some exceptions. Lawmakers agreed to reduce it down to 5 percent before eliminating it completely by 2022.

It’s not completely clear if the GOP Governor of the state will allow the measure to become law, so this isn’t a done deal.

That being said, it’s a very positive sign that the state legislature wants to get rid of this invidious tax, which is a punitive form of double taxation.

Advocates are right that this will make the Volunteer State more attractive to investors, entrepreneurs, and business owners.

Keep in mind that this positive step follows the recent repeal of the state’s death tax, as noted in a column for the Chattanooga Times Free Press.

Following a four-year phase out, Tennessee’s inheritance tax finally expires on Jan. 1 and one advocacy group is hailing the demise of what it calls the “death tax.” “Tennessee taxpayers can finally breath a sigh of relief,” said Justin Owen, head of the free-market group, the Beacon Center of Tennessee, which successfully advocated for the taxes abolishment in 2012.

On the other hand, New York seems determined to make itself even less attractive. Diana Furchtgott-Roth of the Manhattan Institute writes for Market Watch about legislation that would make the state prohibitively unappealing for many investors.

New York, home to many investment partnerships, now wants to increase state taxes on capital gains… New York already taxes capital gains and ordinary income equally, but apparently that’s not good enough. …The New York legislators want to raise the taxes on carried interest to federal ordinary income tax rates, not just for New York residents, but for everyone all over the world who get returns from partnerships with a business connection to the Empire State. Bills in the New York State Assembly and Senate would increase taxes on profits earned by venture capital, private equity and other investment partnerships by imposing a 19% additional tax.

Diana correctly explains this would be a monumentally foolish step.

If the bill became law, New York would likely see part of its financial sector leave for other states, because many investors nationwide would become subject to taxes that were 19 percentage points higher….No one is going to pick an investment that is taxed at 43% when they could choose one that is taxed at 24%.

Interestingly, even the state’s grasping politicians recognize this reality. The legislation wouldn’t take effect until certain other states made the same mistake.

The sponsors of the legislation appear to acknowledge that by delaying the implementation of the provisions until Connecticut, New Jersey and Massachusetts enact “legislation having an identical effect.”

Given this condition, hopefully this bad idea will never get beyond the stage of being a feel-good gesture for the hate-n-envy crowd.

But it’s always important to reinforce why it would be economically misguided since those other states are not exactly strongholds for economic liberty. This video has everything you need to know about the taxation of carried interest in particular and this video has the key facts about capital gains taxation in general

Not let’s take a look at the big picture. Moody’s just released a “stress test” to see which states were well positioned to deal with an economic downturn.

Is anybody surprised, as reported by the Sacramento Bee, that low-tax Texas ranked at the top and high-tax California and Illinois were at the bottom of the heap?

California, whose state budget is highly dependent on volatile income taxes, is the least able big state to withstand a recession, according to a “stress test” conducted by Moody’s Investor Service. Arch-rival Texas, meanwhile, scores the highest on the test because of “lower revenue volatility, healthier reserves relative to a potential revenue decline scenario and greater revenue and spending flexibility,” Moody’s, a major credit rating organization, says. …California not only suffers in comparison to the other large states, but in a broader survey of the 20 most populous states. Missouri, Texas and Washington score highest, while California and Illinois are at the bottom in their ability to withstand a recession.

Of course, an ability to survive a fiscal stress test is actually a proxy for having decent policies.

And having decent policies leads to something even more important, which is faster growth, increased competitiveness, and more job creation.

Though perhaps this coyote joke does an even better job of capturing the difference between the two states.

The ongoing cluster-you-know-what of Obamacare is a source of unhappy satisfaction.

Part of me is glad the law is such a failure, but it’s tragic that millions of people are suffering adverse consequences. These are folks who did nothing wrong, but now are paying more, losing employment, suffering income losses, and/or being forced to find new plans and new doctors.

And it seems we get more bad news every day, as noted in a new editorial from Investor’s Business Daily.

ObamaCare rates will skyrocket next year, according to its former chief. Enrollment is tumbling this year. And a big insurer is quitting most exchanges. That’s what we learned in just the past few days.

Why do we know these three bad things are happening? Because that’s what we’re being told by Mary Tavenner, the former head of the Center for Medicare and Medicaid Services for the Obama Administration who has now cashed out and is pimping for the health insurance companies that got in bed with the White House to foist Obamacare on the American people.

IBD gives us the sordid details.

Why will 2017 rates spike even higher? In addition to the cost of complying with ObamaCare’s insurance regulations and mandates, there’s the fact that the ObamaCare exchanges have failed to attract enough young and healthy people needed to keep premiums down. Plus, two industry bailout programs expire this year, Tavenner notes. Oh, and she admits that people are gaming ObamaCare just like critics said they would: buying coverage after they get sick — since insurance companies can no longer turn them down or charge them more — then dropping it when they’re done with treatments. “That churn increases premiums. So you have to kind of price over that.”

And that’s just one slice of bad news.

Here’s more.

ObamaCare enrollment has already dropped an average of more than 14% in five states since February — a faster rate of decline than last year — as people get kicked off for not paying premiums. Finally, we learned on Tuesday that UnitedHealth Group (UNH) is planning to drop out of almost every ObamaCare market it currently serves after losing $1 billion on those policies. …Skyrocketing premiums, fewer choices in the marketplace, and people fleeing ObamaCare in droves after signing up. This isn’t exactly what Obama promised when he signed ObamaCare into law.

For those who were paying attention, none of this is a surprise. It was always a fantasy to think that more government intervention was going to improve a healthcare system that already was cumbersome and expensive because of previous government interventions.

By the way, IBD isn’t the only outlet to notice the ongoing disaster of Obamacare.

Let’s look at some other recent revelations.

Chris Jacobs writes that “For millions of Americans, the Left’s insurance utopia has rapidly deteriorated into a bleak dystopia” and that “the ‘cheaper prices’ that the president promised evaporated as quickly as the morning dew.”

John Graham explains that “CBO estimates Obamacare will leave 27 million uninsured through 2019 – an increase of almost one quarter” and that “CBO estimates 68 million will be dependent on the program this year through 2019 – an increase of almost one third in the welfare caseload.”

Betsy McCaughey opines that, “Obamacare is already hugely in the red. …over the next ten years Obamacare will add $1.4 trillion to the nation’s debt” and that “Insurers struggling with Obamacare are already drastically reducing your choice of doctors and hospitals to cut costs.”

Devon Herrick reveals that “Obamacare has caused more people to reach for their wallets after a medical encounter — not less” and that “all but the most heavily subsidized Obamacare enrollees would be better off financially if they skipped coverage and pay for their own medical care out of pocket.”

Jeffrey Anderson observes that “it seems possible that Obamacare has actually reduced the number of people with private health insurance” and that “Obamacare is basically an expensive Medicaid expansion coupled with 2,400 pages of liberty-sapping mandates.”

John Goodman notes that “Prior to Obamacare, many employers of low-wage workers offered their employees a “mini med” plan, covering, say, the first $25,000 of expenses” and that “Those plans are now gone… employees…are…completely uninsured”

The CEO of CKE Restaurants warns that “fewer people buying insurance through the exchanges, the economics aren’t holding up” and that “Ten of the 23 innovative health-insurance plans known as co-ops—established with $2.4 billion in ObamaCare loans—will be out of business by the end of 2015 because of weak balance sheets.”

Critics of Obamacare now get to say “we told you so.”

As the Washington Examiner opines:

…conservatives screamed a simple fact from the rooftops: Obamacare will not work. No one wanted to listen then, but their warnings are now coming into fruition. Obamacare, as constructed, attempted to fix a dysfunctional health care payment system by creating an even more complicated system on top of it, filled with subsidies, coverage mandates, and other artificial government incentives. But its result has been a system that plucked Americans out of coverage they like and forced them to pay more for less. …Taxpayers and insurance customers alike should demand replacing Obamacare with a system that reduces costs and improves quality by injecting actual choice and competition into the insurance market.

I especially like the last part of the excerpt. Which is why we need to go well beyond simply repealing Obamacare if we want to restore market forces to the healthcare sector.

P.S. I wrote about that it’s tragic that so many people are suffering because of Obamacare. I should add that there are some victims who actually are getting what they deserve.

P.P.S. In the long run, I fear taxpayers will be the biggest (and most undeserving) victims.

P.P.P.S.Though, in fairness, the law does have at least one redeeming feature.

As a general rule, I’m not overly concerned about debt, even when looking at government red ink.

I don’t like deficit and debt, to be sure, but government borrowing should be seen as the symptom. The real problem is excessive government spending.

This is one of the reasons I’m not a fan of a balanced budget amendment, Based on the experiences of American states and European countries, I fear politicians in Washington would use any deficit-limiting requirement as an excuse to raise taxes.

I much prefer spending caps, such as those found in Hong Kong, Switzerland, and Colorado. If you cure the disease of excessive government, you automatically ameliorate the symptom of too much borrowing.

That being said, the fiscal chaos plaguing European welfare states is proof that there is a point when a spending problem can also become a debt problem. Simply stated, the people and institutions that buy government bonds at some point will decide that they no longer trust a government’s ability to repay because the public sector is too big and the economy is too weak.

And even though the European fiscal crisis no longer is dominating the headlines, I fear this is just the calm before the storm.

For instance, the data in a report from Citi about the looming Social Security-style crisis are downright scary.

…the total value of unfunded or underfunded government pension liabilities for twenty OECD countries is a staggering $78 trillion, or almost double the $44 trillion published national debt number.

And the accompanying chart is rather appropriate since it portrays this giant pile of future spending promises as an iceberg.

And when you look at projections for ever-rising spending (and therefore big increases in red ink) in America, it’s easy to see why I’m such a strong advocate of genuine entitlement reform.

But it’s also important to realize that government policies also can encourage excessive debt in the private sector.

Before digging into the issue, let’s first make clear that debt is not necessarily bad. Households often borrow to buy big-ticket items like homes, cars, and education. And businesses borrow all the time to finance expansion and job creation.

But if there’s too much borrowing, particularly when encouraged by misguided government policies, then households and businesses are very vulnerable if there’s some sort of economic disruption and they no longer have enough income to finance debt payments. This is when debt becomes excessive.

Yet this is what the crowd in Washington is encouraging.

Writing for the Wall Street Journal, George Melloan warns that misguided “stimulus” and “QE” policies have created a debt bubble.

…while Mr. Bernanke and Ms. Yellen were trying to prevent deflation, the federal government was engineering its cause, excessive debt. And the Fed abetted the process by purchasing trillions of dollars of government paper, aka quantitative easing. Near-zero interest rates also have encouraged consumers and business to releverage. Cars are now financed with low or no-interest five-year loans. With the 2008 housing debacle forgotten, easier mortgage terms have made a comeback. Corporations also couldn’t let cheap money go to waste, so they have piled up debts to buy back their own stock. Such “investment” produces no economic growth, but it has to be paid back nonetheless. Amid the Great Recession, many worried that the entire economy of the U.S., or even the world, would be “deleveraged.” Instead, we have a new world-wide debt bubble.

The numbers he shares are sobering.

Global debt of all types grew by $57 trillion from 2007 to 2014 to a total of $199 trillion, the McKinsey Global Institute reported in February last year. That’s 286% of global GDP compared with 269% in 2007. The current ratio is above 300%.

Professor Noah Smith writes in Bloomberg about research showing that debt-fueled bubbles are especially worrisome.

…since debt bubbles damage the financial system, they endanger the economy more than equity bubbles, which transmit their losses directly to households. Financial institutions lend people money, and if people can’t pay it back — because the value of their house has gone down — it could cause bank failures. …Economists Oscar Jorda, Moritz Schularick, and Alan Taylor recently did a historical study of asset price crashes, and they found that, in fact, debt seems to matter a lot. …To make a long story short, they look at what happened to the economy of each country after each large drop in asset prices. …bubbles make recessions longer, and credit worsens the effect. …the message is clear: Bubbles and debt are a dangerous combination.

To elaborate, equity and bubbles aren’t a good combination, but there’s far less damage when an equity bubble pops because the only person who is directly hurt is the person who owns the asset (such as shares of a stock). But when a debt bubble pops, the person who owes the money is hurt, along with the person (or institution) to whom the money is owed.

Desmond Lachman of the American Enterprise Institute adds his two cents to the issue.

…the world is presently drowning in debt. Indeed, as a result of the world’s major central banks for many years having encouraged markets to take on more risk by expanding their own balance sheets in an unprecedented manner, the level of overall public and private sector indebtedness in the global economy is very much higher today than it was in 2008 at the start of the Great Economic Recession. Particularly troublesome is the very high level of corporate debt in the emerging market economies and the still very high public sector debt levels in the European economic periphery. …the Federal Reserve’s past policies of aggressive quantitative easing have set up the stage for considerable global financial market turbulence. They have done so by artificially boosting asset prices and by encouraging borrowing at artificially low interest rates that do not reflect the likelihood of the borrower eventually defaulting on the loan.

In other words, artificially low interest rates are distorting economic decisions by making something (debt) seem cheaper than it really is. Sort of financial market version of the government-caused third-party payer problem in health care and higher education.

And Holman Jenkins of the Wall Street Journal makes the very important point that debt is encouraged by bailouts and subsidies.

Big banks aren’t automatically bad or badly managed because they are big, but it’s hard to believe big banks would exist without an explicit and implicit government safety net underneath them. …None of this has changed since Dodd-Frank, none of it is likely to change. …we know where the crisis will come from and how it will be transmitted to the financial system. The Richmond Fed’s “bailout barometer” shows that, since the 2008 crisis, 61% of all liabilities in the U.S. financial system are now implicitly or explicitly guaranteed by government, up from 45% in 1999. …Six years after a crisis caused by excessive borrowing, McKinsey estimates that even visible global debt has increased by $57 trillion, while in the U.S., Europe, Japan and China growth to pay back these liabilities has been slowing or absent.

The bottom line is that government spending programs directly cause debt, but we should be just as worried about the private debt that is being encouraged and subsidized by other misguided government policies.

And surely we shouldn’t forget to include the pernicious role of the tax code, which further tilts the playing field in favor or debt.

P.S. Let’s briefly divert to another issue. I wrote last Christmas that President Obama may have given the American people a present.

But the Washington Examiner reports that gift has turned into a lump of coal.

The Department of Justice announced this week that it is resuming its Equitable Sharing program…that allows state and local police to get around tough state laws that limit how much property can be taken from citizens without being charged with wrongdoing, let alone convicted of a crime. …money-hungry police departments can exploit these lax federal rules about confiscating people’s property. The feds like this because they get a cut of the loot. …there is no presumption of innocence. …civil forfeitures by the feds amounted to $4.5 billion in 2014, which is more than the $3.9 billion that all of America’s burglars stole that year. It’s hard to imagine more compelling evidence of gross wrong.

Wow, so the government steals more money than burglars. I guess I’m not surprised.

But if you really want to get upset, check out real-world examples of asset forfeiture by clicking here, here, here, here, and here.

Thankfully, some states are seeking to curtail this evil practice.

My opinion on taxing corporate income varies with my mood.

When I’m in a fiery-libertarian phase, I want to abolish taxes on corporate income for the simple reason that all income taxes should be eliminated. Heck, I would also eliminate October 3 from the calendar because that’s the awful day in 1913 that the income tax was signed into low.

But when I’m going through a pragmatic-libertarian phase, I grudgingly accept that my fantasies won’t be realized and focus on incremental reform. And that means I want a simple and fair system like the flat tax, which is based on the principle that all income should be taxed, but only one time and at one low rate.

And that means corporate income should be taxed.

That being said, while it may be appropriate to tax corporate income, that does not mean the U.S. corporate income tax is ideal.

That’s the bad news.

The good news is that all of these problems can be solved with a flat tax, which would rip of the current corporate income tax and replace it with a very simple, low-rate system that properly measures income (i.e., expensing and territorial taxation) and taxes it only one time (i.e., no double taxation).

By the way, corporate income can be taxed without a corporate income tax. Simply tax the income when it is distributed to shareholders (the people who own the company) instead of taxing it at the business level. The goal, of course, is to make sure it no longer gets taxed twice.

A good business tax system isn’t a fantasy. Jurisdictions such as Estonia and Hong Kong have business tax systems that are very close to the aforementioned ideal. And it goes without saying that jurisdictions such as Bermuda, Monaco, and the Cayman Islands. are even better since they fulfill my dream of no income tax whatsoever.

With this background on good business tax policy, let’s now look at some contentious issues and see how they should be addressed.

We’ll start with the kerfuffle over companies that don’t pay tax, a controversy that was triggered by a somewhat disingenuous report from the Government Accountability Office.

One of the takeaway headlines from the GAO report is the supposedly startling revelation that 70 percent of corporations paid no tax.

But Aparna Mathur of the American Enterprise Institute explained the real story, which is that they didn’t pay tax because they didn’t have profits.

In 2012, out of 1.6 million corporate tax returns, only 51% were returns that had positive “net incomes,” and only 32% were returns that had positive “incomes subject to tax.” …“income subject to tax” allows companies with positive “net incomes” to claim an additional deduction as a result of prior-year operating losses. These losses can be carried forward to offset taxable incomes in years when firms are making a profit or have positive net incomes; this is known as a net operating loss deduction (NOLD). For 2012, the data show that approximately 20% of companies with positive “net incomes” (or profits) claimed a net operating loss deduction resulting in a zero tax liability.

There’s a bit of jargon in that passage, but the main thing to understand is that companies get to use losses from one year to offset profits from another year, which means – for all intents and purposes – that the government’s definition of taxable income does a better job of measuring profits over a longer period of time.

Here are some more details.

…the data shows two things: first, the GAO claim that 70% of companies paid no income tax is largely because more than 50% of these companies had zero profits or net incomes, and therefore they had zero tax liability. Secondly, some of these currently “profitable” (positive net income) companies have experienced large losses in prior years. For these companies, the NOL deduction allowed them to reduce their tax liability to zero. …The intent of this provision is, for example, to avoid a company with 5 years of consecutive operating losses of $20 million each having to pay income tax in year 6 simply because it realizes income of $20 million in that year. The principle underlying NOLD is intended to allow companies to get out of the hole of accumulated losses before the government can start claiming…the company’s income.

Her conclusion is completely sensible and appropriate.

…the GAO clearly acknowledges that the reason 70% of companies are paying no taxes is because they are either not currently profitable or they are able to offset taxes because of prior-year losses.

The Tax Foundation also has weighed in on this issue.

…the Government Accountability Office (GAO) published a report on corporate income taxes, which found that 19.5 percent of “profitable large corporations” paid zero corporate income taxes in 2012. …Should you be…outraged…about the number of U.S. corporations that pay no corporate income tax? In fact, there is good reason to think that many of the corporations that the GAO identifies as “profitable” did not actually earn a profit. In such cases, it would have been a mistake to collect corporate income taxes from these companies.

Echoing the explanation from Ms. Mathur, the Tax Foundations makes the same point about current year profits being offset by prior years’ losses, but also add a few additional reasons why “profitable” companies aren’t paying tax.

…some of the corporations that were categorized as “profitable” by the GAO in 2012 did not actually earn positive profits in the United States. …To the extent that some of the “profitable” corporations in the GAO report earned only foreign profits, rather than domestic profits, it is entirely reasonable that these corporations should not be subject to any U.S. corporate tax burden.

Particularly since they already are paying lots of tax on their foreign-source income to foreign governments.

There’s also the issue of depreciation, which journalists always have a hard time understanding.

…when calculating a corporation’s economic profit, it is appropriate to treat the entire cost of an investment as a current year expense. …imagine a corporation with $1 million in operating profits and $2 million in investment costs. Depending on how much of the investment the corporation treats as a current-year expense, the corporation could be making a large profit, no profit, or negative profit.

The bottom line is that you have look closely at how government defines “profit” to correctly ascertain whether companies are somehow avoiding taxation.

And in most cases, you’ll discover that the firms that don’t pay tax are the ones that don’t actually have income, properly defined.

…some U.S. corporations with positive book income might have negative taxable income: not because of any tricks or loopholes, but simply because the tax code operates under different accounting rules. …there are real, legitimate reasons why a “profitable” corporation would not and should not be required to pay corporate income taxes in a given year.

Now let’s return to the issue of double taxation, which occurs when income is taxed at the business level and then a second time when distributed as dividends to shareholders.

The Tax Foundation nicely summarize the issues in a new study, including some much-deserved focus on how this creates a bias for debt.

…income that is earned by corporations and funded by equity (stocks) is subject to a double tax: once on the corporate level, when it is earned, and once on the shareholder level, when it is distributed as dividends. The double taxation of equity-financed corporate income leads to several major economic distortions. It encourages investors to shift their investments from corporate to non-corporate businesses, leading to a less efficient allocation of capital. Furthermore, it incentivizes corporations to fund their operations with debt, rather than equity, leading to excessive leverage.

The solution, needless to say, is something called “corporate integration,” which is simply a wonky way of saying that income should be taxed only one time.

Corporate integration refers to a set of proposals to standardize the taxation of business income across legal forms and methods of financing. The chief advantage of corporate integration is that it would end the double taxation of equity-financed corporate income… The principle of tax neutrality – that a tax system should neither encourage nor discourage specific economic decisions – is embraced by public policy scholars throughout the political spectrum. Corporate integration – taxing all business income at the same top rate, regardless of the legal form of the business or how the income was financed – would minimize the economic distortions created by the U.S. tax code and conform to the principle of neutrality.

Here’s a chart showing how neutrality is violated by double taxing income that is generated by equity. Once again, there’s a bit of jargon, but the main thing to understand is that companies deduct interest payments they make to bondholders, so there’s a tax at the household level but no tax at the business level. But they can’t deduct dividend payments, which effectively means the company is taxed on that money in addition to the household paying tax as well.

The Tax Foundation helpfully suggests how this inequity could be resolved. Allow companies to deduct dividend payments, just as they now deduct interest payments.

Perhaps the simplest way to integrate the corporate and individual tax codes would be to tax dividends received by individuals at ordinary income rates and allow corporations to deduct all of their dividends paid.

Incidentally, this would basically mean that there’s no longer a corporate income tax, though (as discussed above) all corporate income would still be taxed (at the household level).

Let’s close by looking at two pieces of legislation and applying the lessons we’ve learned.

Congressman Devin Nunes (R-CA) has legislation that would address many of the problems outlined above. Here’s how the Tax Foundation describes his plan.

Major elements of his plan are: Cutting the corporate income tax to 25 percent; Limiting the top tax rate on non-corporate business income to 25 percent; Allowing businesses to deduct investment costs when they occur (full expensing); Eliminating most business tax credits and many deductions; Moving to a territorial tax system like most developed nations; …Applying the same tax-rate limitation to individuals’ interest income as now applies to their capital gains and dividend income; and Eliminating the individual and corporate alternative minimum taxes (AMTs).

Wow, that’s fixing many of the problems outlined above.

But here’s the catch. To make the numbers add up, he gets rid of the bias for debt. But he does it by adding a second layer of taxation to interest income rather than abolishing the second layer of tax on dividend income.

The Nunes plan would not let nonfinancial businesses deduct interest payments, but would not tax them on interest receipts. It would generally not allow individuals to deduct interest payments, except that home mortgage interest would remain deductible, and it would apply the same tax-rate limitation to individuals’ interest income as to dividends (top rate of 20 percent). These changes would have a mixed effect on tax biases. On the one hand, they would lessen the tax distortion at the corporate level between debt and equity financing. Because debt is riskier than equity (debt payments are legally required regardless of business cash flow), corporate businesses would be better able to weather economic adversity if the tax system did not push them so strongly toward debt financing. On the other hand, the changes would mean that corporate returns financed through debt would be taxed at both the corporate and individual levels, as is now the case with corporate equity.

For what it’s worth, the Tax Foundation projects that Cong. Nunes’ plan would be very beneficial to growth and job creation, so the benefits of the good reforms are much larger than the harm associated with extending double taxation to interest payments.

That sounds right to me, particularly when you include the fact that companies will make sounder decisions once there’s no longer a bias for debt.

Last but not least, let’s review some recent legislation from Congressman Tom Emmer (R-MN).

Here’s what Americans for Tax Reform wrote about his proposal.

Currently, the U.S. corporate rate is the highest amongst the 34 country Organisation for Economic Development (OECD). At 39 percent, it far exceeds the OECD average rate of 25 percent, and is even further behind developed countries like Ireland, Canada, and the U.K. which have rates of 20 percent or less. The CREATE Jobs act would fix this by reducing the U.S. corporate rate to five points below the OECD average and creating a process by which the U.S. rate is regularly reviewed to ensure economic competitiveness. …bringing the rate below the OECD average would have strong and immediate effects. A 20 percent U.S. corporate rate could create more than 600,000 jobs, increase GDP by 3.3 percent, and increase wages by 2.8 percent over the long-term, according to the Tax Foundation.

P.S. Here’s a video from the Center for Freedom and Prosperity that describes some of the warts associated with the corporate income tax.

P.P.S. If you think my video is a bit amateurish, it’s because it was a first-time experiment and originally wasn’t going to be released. But once it was finished, we figured it was adequate. And I think it compares well to some corporate tax videos put together by other groups.

P.P.P.S. For those worried about corporate inversions, it’s worth noting that the types of reforms listed above would make companies far less likely to re-domicile in other jurisdictions.

Regulation Nation

If you look at the methodology behind the major measures of economic liberty, such as Economic Freedom of the World and Index of Economic Freedom, you’ll notice that each nation’s regulatory burden is just as important as the overall fiscal burden.

Yet there doesn’t seem to be adequate appreciation for the importance of restraining red tape. I’ve tried to highlight the problem with some very depressing bits of information.

Unfortunately, these bad numbers are getting worse.

We start with the fact that there’s a natural tendency for more intervention in Washington because of the Obama Administration’s statist orientation.

That’s the bad news. The worse news is that this tendency to over-regulate is becoming more pronounced as Obama’s time in office is winding down.

I’ve already opined on the record levels of red tape emanating from Washington, but it’s getting even worse in the President’s final year.

Here’s what the Wall Street Journal recently wrote about the regulatory wave.

…government-by-decree that is making Mr. Obama the most prolific American regulator of all time. Unofficially, Mr. Obama’s Administration has once again broken its own record by issuing a staggering 82,036 pages of new and proposed rules and instructions in the Federal Register in 2015. …That would not only eclipse Mr. Obama’s record of 81,405 set in 2010; it would also give him six of the seven most prolific years of regulating in the history of the American republic. He’s a champion when it comes to limiting economic freedom, and American workers have the slow growth in jobs and wages to prove it. …His Administration is also in a class by itself in issuing de facto rules as “notices” or “guidance” that are ignored by businesses at their peril. …And there’s much more to come.

Amen. The WSJ is correct to link the regulatory burden with anemic economic performance.

As I point out in this interview, red tape is akin to sand in the economy’s gears.

By the way, I can’t resist emphasizing that the Nordic nations, much beloved by Bernie Sanders and other leftists, generally are more free market than the United States on non-fiscal issues.

In other words, they have a more laissez-faire approach on matters such as regulation.

Now let’s try to quantify the cost of all this red tape.

The Washington Examiner reports on some new research.

The price of the Obama administration’s regulatory burden hit just shy of $200 billion last year, or $784 million for every day his government was open for business, according to a new analysis by American Action Forum.

To make matters worse, as I noted in the interview, I very much suspect the bulk of that new regulation was not accompanied by cost-benefit analysis. So the supposed benefits will be small and the actual costs will be high.

Let’s move from the general to the specific. The Heritage Foundation has a list of the worst regulations from last year. Here are some of the highlights, though lowlights would be a better term.

  • …a ban by New Jersey on sales of tombstones by churches — adopted in March at the behest of commercial monument makers.
  • Certain New York restaurants now have to include warnings on their menus about the sodium content in many popular dishes.
  • The Occupational Safety and Health Administration…expanded its mandate in June by declaring that businesses should allow employees to use whichever restroom corresponds to their “gender identity.”
  • …the Environmental Protection Agency and Army Corps of Engineers expanded their own jurisdiction to regulate virtually every wet spot in the nation.

And there are plenty more if you really want to get depressed.

But let’s not dwell on bad news. Instead, we’ll close by highlighting a potentially helpful bit of regulatory reform north of the border. Here are some blurbs from a story in the Washington Examiner.

…look to Canada for lessons from its experiment with regulatory budgeting. What is regulatory budgeting? It’s a process that seeks to use traditional budget concepts to better manage regulatory costs. The goal is to require government departments and agencies to prioritize and manage “regulatory expenditures,”… Regulatory budgeting imposes hard caps on departments and agencies and requires that new regulatory policies fit within their respective budgets. It may not be a silver bullet to the U.S. government’s regulatory profligacy, but with strong political leadership and a proper design, it can arrest the growth of new regulations and bring greater accountability, discipline and transparency to the process. …Departments and agencies are given a “baseline” calculation of regulatory requirements and the costs they impose on individuals and businesses, and then are expected to live within their respective budgets. This means — at least, in the case of the federal experiment — that any new regulatory requirements be offset by eliminating existing ones with equivalent “costs.” An independent, third-party panel verifies the government’s year-over-year compliance.

And it appears this new system is yielding dividends.

Over the past two years, the federal government estimates the system has saved Canadian businesses more than C$32 million in administrative burden, as well as 750,000 hours spent dealing with “red tape.” Most importantly, regulatory budgeting has gradually contributed to a more disciplined regulatory process by rewarding departments and agencies for finding lower-cost options and for making existing requirements smarter and less burdensome.

Hmmm…, maybe I should consider escaping to Canada rather than Australia if (when?) America falls apart.

In addition to this sensible approach on regulatory reform, Canada is now one of the world’s most economically free nations thanks to relatively sensible policies involving spending restraint, corporate tax reform, bank bailouts, the tax treatment of saving, and privatization of air traffic control. Heck, Canada even has one of the lowest levels of welfare spending among developed nations.

Though things are now heading in the wrong direction, which is unfortunate for our northern neighbors.

P.S. While the regulatory burden in the United States is stifling and there are some really inane examples of silly rules (such as the ones listed above), I think Greece and Japan win the record if you want to identify the most absurd specific examples of red tape.

P.P.S. Though I suspect America wins the prize for worst regulatory agency and most despicable regulatory practice.

P.P.P.S. Here’s what would happen if Noah tried to comply with today’s level of red tape when building an ark.

P.P.P.P.S. Just in case you think regulation is “merely” a cost imposed on businesses, don’t forget that bureaucratic red tape is the reason we’re now forced to use inferior light bulbs, substandard toilets, second-rate dishwashers, and inadequate washing machines.

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