When I wrote earlier this year about “Europe’s suicidal welfare state,” it wasn’t so that I could make points about excessive spending and demographic decline.

Yes, those are very important issues. But I was focusing instead on the fact that Europe’s welfare states have a masochistic habit of giving handouts to terrorists.

So I wasn’t surprised to learn that some of the dirtbags who launched the recent terror attacks in Paris have been sponging off taxpayers.

Here are some excerpts from a story in the U.K.-based Daily Mail.

The former wife of Paris bomber Ibrahim Abdeslam has broken her silence to say he was a jobless layabout… Speaking from her home in Moleenbeek, Brussels, Niama, 36, said: ‘…He often slept during the day...Despite his diploma as an electrician, he found no job,’… Money was tight for the couple. ‘We lived on unemployment benefit which was only €1,000 a month between us so we worried a lot about money.’

By the way, money wasn’t “tight for the couple.” The handouts they got from the Belgian taxpayers gave them an income higher than the world average. And I’m guessing that the unemployment benefit wasn’t the only bit of mooching they did given the destructive lavishness of European welfare systems.

Ibrahim wasn’t the only terrorist with a snout in the public trough.

Here are some details from a story in the American Spectator.

Before he blew himself up outside a French soccer stadium, Bilal Hadfi lived in state-subsidized housing. …Open wallets as much as open borders doom Europe. Harboring shiftless populations alienated from the surrounding culture by religion asks for trouble. Give them blank checks and watch them fill up the blank spaces of indolence with destruction. …They pay back the dole with gunfire.

These are just two of the terrorists, but I’m guessing we’ll soon learn that others also were mooching off taxpayers.

And I can’t help but wonder whether the self-loathing that presumably occurs among some welfare recipients actually contributes to radicalism.

By the way, the Moocher Hall of Fame has a special section for deadbeats who want to kill taxpayers. Members of this Terror Section of the MHoF include:

* Abdul from Australia is an esteemed member of the Hall of Fame’s terror wing, having received 19 years of welfare while plotting to kill the people who were paying for his life of leisure.

* Keeping with that theme, let’s also recognize Anjem, who got elected to the Hall of Fame for collecting about $40,000-per year in handouts while spewing hate and recruiting other “fanatics to copy him by going on benefits.”

* The Tsarnaev brothers are most infamous for the Boston Marathon bombing, but let’s also revile them for being scroungers who thought it was okay to live off the work of others.

* Jihadi John, the ISIS dirtbag who is infamous for beheading innocent people, grew up with a family that sponged off British taxpayers for two decades.

P.S. In a truly spectacular example of government incompetence, a British jihadist actually was employed in law enforcement, ostensibly to fight against Islamic extremism!

P.P.S. American readers shouldn’t get too smug about the stupidity of our terrorism-subsidizing cousins on the other side of the Atlantic. We also have self-destructive policies that subsidize terrorism.

In early 2013, a reader asked me the best place to go if America suffered a Greek-style economic collapse.

I suggested Australia might be the best option, even if I would be too stubborn to take my own advice.

Perhaps because of an irrational form of patriotism, I’m fairly certain that I will always live in the United States and I will be fighting to preserve (or restore) liberty until my last breath.

But while I intend to stay in America, there is one thing that would make me very pessimistic about my country’s future.

Simply stated, if politicians ever manage to impose a value-added tax on the United States, the statists will have won a giant victory and it will be much harder to restrain big government.

But you don’t have to believe me. Folks on the left openly admit that a VAT is necessary to make America more like Europe.

Check out these excerpts from an article in Foreign Affairs by Professor Lane Kenworthy of the University of Arizona. He explicitly wants bigger government and recognizes the VAT is the only way to finance a European-sized welfare state.

…modern social democracy means a commitment to the extensive use of government…U.S. policymakers will recognize the benefits of a larger government role… Americans will need to pay more in taxes.The first and most important step would be to introduce a national consumption tax in the form of a value-added tax (VAT)… Washington…cannot realistically squeeze an additional ten percent of GDP in tax revenues solely from those at the top.

Pay special attention to the final sentence in that excerpt. Kenworthy is an honest statist. He knows that the Laffer Curve is real and that taxing the rich won’t generate the amount of revenue he wants.

That’s why the VAT is the key to financing bigger government. Heck, even the International Monetary Fund inadvertently provided very powerful evidence that a VAT is the recipe for bigger government.

Want more proof? Well, check out the recent New York Times column by John Harwood (the same guy who was criticized for being a biased moderator of CNBC’s GOP debate).

He starts by pointing out that Senators Cruz and Paul are proposing European-type value-added taxes.

Senator Ted Cruz of Texas and Senator Rand Paul of Kentucky do it most explicitly by proposing variations on “value-added tax” systems used by European countries.

But here’s the part that should grab your attention. He cites some folks on the left who admit that there’s no way to finance big expansions of the welfare state without a VAT.

Democratic economists…say…income trends…complicate their ability to raise enough revenue to finance government programs without increasing burdens on the middle class as well as the affluent. “We’ve come close to maxing out the amount of progressivity we can get from the existing tax system,” said Peter Orszag, President Obama’s first budget director. …as looming baby boomer retirements promise to swell Social Security and Medicare expenses beyond the current tax system’s ability to finance them, is in new thinking that expands the scope of possible solutions. “There’s no way we can keep the promises we’ve made to senior citizens and others without a new revenue source,” said Mr. Burman of the Tax Policy Center.

So if the statists are salivating for a VAT to make government bigger, why on earth are some otherwise sensible people pushing for this pernicious new tax?!?

Some journalists have asked this same question. Here are some passages from a Slate report.

…conservative policy thinkers…worry that it might accidentally set the stage for much, much higher taxes in the future should Democrats ever take back control of Washington. …Cruz would impose a new, roughly 19 percent “business flat tax.” This is his campaign’s creative rebranding of what the rest of the world typically calls a “value-added tax,” or VAT. And…it scares the living hell out of some conservatives.

The article notes that Cruz and Paul have decent intentions.

…for Cruz—and for Rand Paul, who…would similarly like to combine a VAT and flat income tax—the main appeal is that it could theoretically raise a lot of money to finance tax cuts elsewhere.

But good intentions don’t necessarily mean good results.

And just like you don’t give matches to a child, you don’t give a giant new tax to Washington.

How much could Cruz’s proposal net the government? The conservative-leaning Tax Foundation thinks $25.4 trillion over 10 years. … in the hands of a Democratic president, it could become a hidden money-making machine for the government. Passing a national sales tax would be hard, they say. But once it’s in place, slowly ratcheting it up to pay for additional spending would be relatively easy. “To be blunt, unless there’s a magic guarantee that principled conservatives such as Rand Paul and Ted Cruz (and their philosophical clones) would always hold the presidency, a VAT would be a very risky gamble,” Daniel Mitchell, a senior fellow at the libertarian Cato Institute, wrote recently. …The ironic thing here is that Ted Cruz, anti-tax preacher, may be doing his best to craft a tax plan that leaves Americans in the dark about the actual cost of running their government. Simultaneously, he might be making political room for Democrats to start talking about a VAT tax of their own.

By the way, this isn’t the first time that a Republican has broached the idea of a VAT.

One of the worst Presidents in American history, Richard Nixon, wanted a VAT to finance bigger government. Here are some passages from an article in the 1972 archives of Congressional Quarterly.

President Nixon…asked both the Advisory Commission on Intergovernmental Relations and his Commission on School Finance, a group he appointed in 1970, to study and report on a proposal for a value added tax. …The tax had the advantages that…it yielded relatively large amounts of revenue. …Two major reasons were apparent for the Nixon administration’s consideration of a value added tax. The first was the condition of federal finances. …Projected costs of existing and proposed programs were expected to absorb all revenues from existing taxes and other sources. This meant that no new programs could be inaugurated without new taxes to finance them or reduction of existing programs to release funds. Though initially pledged for education, revenues from an expanding value added tax might provide future funding for other programs.

My colleague, Chris Edwards, deserves credit for unearthing this disturbing bit of fiscal history. Here’s some of what he wrote about Nixon’s sinister effort.

Richard Nixon appears to have been the first U.S. leader to push for a VAT, which is not surprising given that he was perhaps the most statist GOP president of the 20th century. …Thankfully, the Nixon proposal went nowhere in Congress, the ACIR came out against it, and it was dropped. America’s economy dodged a bullet. If Nixon had been successful, the rate would probably have soared over time from an initial 3 percent to maybe 20 percent today—just as rates in Europe have risen—and that would have fueled growth in new and expanded entitlement programs. 

Amen. Chris hits the nail on the head.

It doesn’t really matter what the initial rate is. The VAT is an easy tax to raise because it’s so non-transparent.

Moreover adopting a VAT is a sure-fire way of enabling higher income tax rates because the statists will say it’s “unfair” to raise the VAT burden on lower-income and middle-income taxpayers unless there’s a concomitant increase in the income tax burden on the evil rich.

Which is exactly what happens in Europe. Look at how recent VAT hikes have been paired with higher income tax rates.

But here’s the chart that should scare any sensible person.

The bottom line is that the VAT is the Ebola Virus of big government.

P.S. You can enjoy some good VAT cartoons by clicking here, here, and here.

Federalism is great for many reasons. When you have dozens of states with the freedom to choose different policies, you get lots of innovation and diversity, which helps identify policies that work.

You also can minimize the cost of mistakes. When a policy error occurs in one state (for example, government-run healthcare in Vermont), it quickly becomes obvious and the damage can be contained and maybe even reversed. But when a mistake is made nationally (such as Obamacare), it’s not as easy to pinpoint why the economy is weakening and fixing the error thus becomes more difficult.

And it should go without saying that federalism is desirable because it facilitates and enables competition among jurisdictions. And that limits the power of governments to impose bad policy.

These are some of the reasons why I’m a huge fan of the Tax Foundation’s State Business Tax Climate Index. It’s a rigorous publication that calculates the good and bad features of every state’s tax system. It then add together all that data to generate a very helpful ranking of the nation’s best and worst state tax systems.

And since that’s what people care most about, let’s cut to the chase and look at the states at the top and the bottom of the Index.

There are a couple of things which should be obvious from these two lists.

First, it’s a very good idea to be part of the no-income-tax club. It’s no coincidence that 7 out of the top 10 states don’t have that pernicious levy.

Second, perhaps the biggest lesson from the states in the bottom 10 is that it’s basically impossible for a state with a big government to have a good tax system.

Third (and here’s where I’m going to be a contrarian), I’m not sure that Wyoming and Alaska really deserve their high rankings. Both states use energy severance taxes to finance relatively large public sectors. And while it’s true that energy severance taxes don’t do as much damage to a state’s competitiveness as other revenue sources, I nonetheless think there should be an asterisk next to those two states.

So I actually put South Dakota in first place (though I realize I’m implicitly incorporating government spending into the equation while the Tax Foundation is only measuring the tax environment for business).

Now that we’ve hit the main highlights, here’s some explanatory information from the Index.

…the Index is designed to show how well states structure their tax systems, and provides a roadmap for improvement. …The absence of a major tax is a common factor among many of the top ten states. …This does not mean, however, that a state cannot rank in the top ten while still levying all the major taxes. Indiana and Utah, for example, levy all of the major tax types, but do so with low rates on broad bases. The states in the bottom 10 tend to have a number of afflictions in common: complex, non-neutral taxes with comparatively high rates.

And here’s some details about the Index’s methodology.

The Index…comparing the states on over 100 different variables in the five major areas of taxation (corporate taxes, individual income taxes, sales taxes, unemployment insurance taxes, and property taxes)… Using the economic literature as our guide, we designed these five components to score each state’s business tax climate…The five components are not weighted equally… This improves the explanatory power of the State Business Tax Climate Index as a whole. …this edition is the 2016 Index and represents the tax climate of each state as of July 1, 2015, the first day of fiscal year 2016 for most states.

Here’s a map showing the ranking of every state.

Top-10 states are in blue and bottom-10 states are in orange. At the risk of repeating myself, notice how zero-income tax states rank highly.

The Wall Street Journal editorial page combed through the report for highlights. The biggest success story in recent years is North Carolina, which joined the flat tax club.

…North Carolina, which in 2013 slashed its top 7.75% income tax to a flat 5.75% and its corporate rate to 5% from 6.9%. The former 44th is now ranked 15th.

Given Martin O’Malley’s horrible record in Maryland, I’m surprised that he hasn’t picked up more support from crazy lefties in the Democratic Party.

As Governor of Maryland from 2007 to 2015, Democrat Martin O’Malley increased some 40 taxes including the corporate rate to 8.25% from 7% and the sales tax to 6% from 5%.

And here’s some good news from an unexpected place.

The trophy for most-improved this year goes to Illinois, which jumped to 23rd from 31st… The Tax Foundation notes that the leap occurred “due to the sunset of corporate and individual income tax increases”… First-year Republican Governor Bruce Rauner has let the income-tax rate lapse to 3.75% from 5% and the corporate rate to 7.75% from 9.5%, though Democrats are trying to push them back up.

Given how the tax hike backfired, let’s hope the Governor holds firm in this fight.

Now let’s return to some of the analysis in the Tax Foundation’s Index. Here’s some of the academic evidence on the importance of low tax burdens.

Helms concluded that a state’s ability to attract, retain, and encourage business activity is significantly affected by its pattern of taxation. Furthermore, tax increases significantly retard economic growth when the revenue is used to fund transfer payments. …Bartik (1989) provides strong evidence that taxes have a negative impact on business startups. He finds specifically that property taxes, because they are paid regardless of profit, have the strongest negative effect on business. Bartik’s econometric model also predicts tax elasticities of –0.1 to –0.5 that imply a 10 percent cut in tax rates will increase business activity by 1 to 5 percent. …Agostini and Tulayasathien (2001)…determined that for “foreign investors, the corporate tax rate is the most relevant tax in their investment decision.” …Mark, McGuire, and Papke (2000) found that taxes are a statistically significant factor in private-sector job growth. Specifically, they found that personal property taxes and sales taxes have economically large negative effects on the annual growth of private employment. …the consensus among recent literature is that state and local taxes negatively affect employment levels. Harden and Hoyt conclude that the corporate income tax has the most significant negative impact on the rate of growth in employment. Gupta and Hofmann (2003)…model covered 14 years of data and determined that firms tend to locate property in states where they are subject to lower income tax burdens.

The message is that all the major revenue sources – income, sales, and property – can have negative effects.

Which explains, of course, why it’s important to control state government spending.

And one final point to make is that we should do everything possible to shrink the size of the central government in Washington and transfer activities to the private sector or states. This isn’t because states don’t make mistakes, but rather because competition between states will produce far better results than a one-size-fits-all approach from Washington.

P.S. A study from German economists finds that decentralization limits economically harmful redistribution outlays.

P.P.S. And a study from the IMF reveals that decentralized government is more competent and efficient.

Whatever happened to Elizabeth Warren?

A couple of years ago, she was the pin-up girl for the crazy left thanks to fatuous statements about “you didn’t build that.”

But now she’s faded into the background and other politicians are getting more attention for their absurd statements (yes, I’m thinking of Hillary and Bernie).

So what accounts for Warren’s decline? Is that because even statists are embarrassed by her use of fake claims of Indian ancestry to climb the career ladder? Is it because the self-styled fighter against corporate fat cats revealed herself to be a hypocritical fraud after choosing to support the corrupt dispenser of subsidies that is otherwise known as the Export-Import Bank?

I don’t know the answer to those questions, but I suspect Senator Warren wants to get back in the spotlight. After all, that’s the only logical explanation for her recent upside-down comments about corporate taxation.

And “upside-down” doesn’t even begin to capture the absurdity of what she said, which revealed she has no clue that there’s not a linear relationship between tax rates and tax revenue. Here are some excerpts from a remarkable report in The Hill.

Sen. Elizabeth Warren (D-Mass.) says the big issue with the U.S. corporate tax code is not that taxes are too high — it’s that the revenue generated from the taxes is too low. …“Only one problem with the over-taxation story: It’s not true,” Warren said at the National Press Club on Wednesday. …Warren laid out…principles for corporate tax reform: Permanently increase the share of long-term revenues paid by large corporations.


When I read this story, something seemed very familiar.

And then I realized that I read a very similar statement a few years ago in the Washington Post. Writing about fiscal woes in Detroit, a reporter apparently thought it was a mystery that “tax collections are down 20 percent and income tax collections are down by more than a third…despite some of the highest tax rates in the state.”

What Senator Warren and some journalists fail to understand is that there are cases when tax revenues are very low because tax rates are high.

That’s clearly the case with the corporate tax. The United States has the second-highest corporate tax rate in the entire world.

And to add icing on this distasteful cake, we also have arguably the world’s worst worldwide tax system, combined with one of the world’s worst corporate tax structures.

Which makes this statement from Senator Warren particularly laughable.

“Our tax code should protect jobs and investments at home, period,” she said.

I’m almost speechless. Our tax treatment of business already is punitive and Warren wants to make it even worse (who does she think she is, an OECD bureaucrat?), yet she has the gall to pontificate about promoting jobs and investment in the United States?!?

Sort of like murdering your parents and then asking a judge for mercy because you’re an orphan.

In any event, here’s a video that Senator Warren should watch if she actually wants to understand corporate taxation (though I won’t hold my breath).

P.S. Switching to a completely different topic, I’m the first to admit that economists are easy to mock, especially the ones who think they know enough to fine tune the economy.

But it turns out that we’re not total dorks. If a report from the New York Times is accurate (a risky assumption, to be sure), we actually have pretty good social skills.

But I don’t think this means I suddenly have the ability to go into a bar and successfully chat up some ladies (which would be an untenably risky proposition, anyhow, because the PotL has a fiery temper).

What this actually means is that we economists supposedly have decent verbal and communications skills.

P.P.S. Let’s return to the original topic. I don’t claim to be overly clever or creative when it comes to economic humor, but I think I modified this famous sarcastic statement in a very accurate fashion.

Not as good as my Uncle Fester/sequestration cartoon, but it does capture Sen. Warren’s mindset.

Washington is a horribly corrupt city. The tax code is riddled with special favors for politically powerful interest groups. The budget is filled with handouts and subsidies for well-connected insiders. The regulatory apparatus is a playground for cronyism.

I’ve previously explained that shrinking the size and scope of government is the most effective way of curtailing corruption. Simply stated, people won’t try to get favors and politicians won’t have the ability to sell favors if government doesn’t have power to redistribute income and dictate behavior.

To be sure, this isn’t a recipe for zero corruption. There doubtlessly was corruption in the 1700s and 1800s when Washington was just a tiny fraction of its current size. But it’s a matter of scale. A smaller government means less opportunity for mischief.

Some folks argue that campaign finance laws would be an effective way of curtailing sleaze in Washington. And there are some compelling arguments for this approach.

After all, would we have unsavory examples of corruption like the Export-Import Bank if wealthy insiders from big companies weren’t able to generate buckets of campaign cash for politicians?

But let’s be realistic. So long as politicians have the power to provide subsidies for big business, they’ll have an incentive to offer those handouts. And companies will have an incentive to seek those handouts.

Campaign finance laws might cut back on one pathway to buy and sell favors, but the incentive to cut deals will still exist. Sort of like pressing down on one part of a balloon simply causes another part of the balloon to expand.

But, you may ask, isn’t it worth taking such steps in hopes of at least creating some roadblocks to graft in Washington.

Perhaps in theory, but let’s not forget that it’s very naïve to think that politicians will enact laws that reduce their power or weaken their chances of being reelected. That’s about as likely as burglars being in favor of armed homeowners.

As such, we actually should be concerned that new laws and rules somehow would be structured to make things worse rather than better.

That’s the message of this superb video from Prager University. Narrated by George Will, the video explains why so-called campaign finance rules are not the answer (unless, of course, the question is “how can we give more power to the entrenched political class?”).

Let me add something that wasn’t addressed in the video. Incumbent politicians like the idea of limiting campaign contributions because they start each election cycle with a giant advantage. They already are well known in their states or districts. They’ve already curried favor with voters by engaging in taxpayer-financed “constituent service.” They already get themselves in front of cameras at every opportunity when there’s a ribbon cutting for a new bridge or road project. And they’ve already built relationships with the power brokers in each community.

Challengers, for all intents and purposes, need to spend a lot of money – potentially millions of dollars depending on the electorate – simply to create a level playing field. But if there are laws that limit total spending or restrict contribution amounts, it makes it a lot harder to conduct a credible campaign.

No wonder incumbent politicians so often pontificate about “getting money out of politics.” What they’re really saying is “let’s make it impossible for anybody to threaten my reelection.”

The bottom line is that limits on campaign contributions and other restrictions on political speech make elections less fair.

And they don’t solve the bigger issue of graft, corruption, and sleaze. No wonder they’re willing to impose dozens – if not hundreds – of laws governing public malfeasance and campaign finance. They know that such rules are largely ineffective because much of what happens in Washington is legalized forms of corruption.

Which brings us back to the real issue. If you want less sleaze in Washington, reduce the size and scope of the federal government.

Everything else is window dressing.

P.S. The most pervasive form of corruption in Washington (and, sadly, in many other parts of America) is the moral corruption that exists when people think it’s perfectly acceptable to steal from their neighbors so long as 51 percent of the people approve of the theft. That’s why social capital is very important.

We’ve been suffering through the weakest recovery since the Great Depression. Labor force participation hasn’t recovered and median household income is stagnant.

So how are our benevolent and kind overseers in Washington responding?

Are they reducing the burden of spending? Nope, they just busted the spending caps (again).

Are they cutting back on red tape? No, they’re moving in the other direction.

Are they lowering taxes? With Obama in the White House, that’s not even a serious question.

But that doesn’t mean all the people in Washington is sitting on their collective hands. The folks at the Federal Reserve have been trying to goose the economy with an easy-money policy.

Unfortunately, as I argue in this recent interview, that’s not a recipe for success.

At best, an easy-money policy is ineffective, akin to “pushing on a string.” At worst, it creates bubbles and does serious damage.

Yet if you don’t like the Fed trying to manipulate the economy, you’re often perceived as a crank. And if you’re an elected official who questions the Fed’s actions, you’re often portrayed as some sort of uninformed demagogue.

I explored this issue today in The Federalist. In my column, I defended Senators Rand Paul and Ted Cruz.

Rand Paul and Ted Cruz…deserve credit for criticizing the Federal Reserve. …This irks some folks, who seem to think Fed critics are knuckle-dragging rubes and yahoos with a superstitious fealty to the gold standard.

This isn’t a debate over the gold standard, per se, but instead of fight over monetary Keynesianism vs. monetary rules.

The dispute isn’t really about a gold standard, but whether the Federal Reserve should have lots of discretionary power.  …On one side are the advocates of…the monetary component of Keynesian economics. Proponents explicitly want the Fed to fine-tune and micromanage the economy. …On the other side are folks who believe in rules to limit the Fed’s powers…because they believe discretionary power is more likely to give us bad results such as higher price inflation, volatility in output and employment, and financial instability.

And the Joint Economic Committee is on the side of rules. Here’s an excerpt from a JEC report that I cited in my article.

Well-reasoned, stable and predictable monetary policy reduces economic volatility and promotes long-term economic growth and job creation. Generally, ‘rules-based’ policies reduce uncertainties and facilitate long-term planning and investment. …Conversely, activist, interventionist, and discretionary monetary policies have been historically associated with increased economic volatility and subpar economic performance.

I then mention various rules-based methods of limiting the Fed’s discretion and conclude by commenting on the legitimacy of those who want to curtail the Federal Reserve.

Paul and Cruz may not be experts on monetary policy, just as left-wing senators doubtlessly have no understanding of the intricacies of discretionary monetary policy. But the two senators are on very solid ground, with an illustrious intellectual lineage, when they assert that it would be a good idea to constrain the Fed.

Now let’s expand on two issues. First, I mention in my article the gold standard as a potential rule to constrain the Fed. I’ve previously shared some analysis by George Selgin on this topic. He’s concluded that governments won’t ever allow its return and probably couldn’t be trusted with such a system anyway, but that doesn’t mean it doesn’t work.

Here are some excerpts from a recent article by George. Read the entire thing, but here’s the part that matters most for this discussion.

…the gold standard was hardly perfect, and gold bugs themselves sometimes make silly claims about their favorite former monetary standard. …the classical gold standard worked remarkably well (while it lasted). …it certainly did contribute both to the general abundance of goods of all sorts, to the ease with which goods and capital flowed from nation to nation, and, especially, to the sense of a state of affairs that was “normal, certain, and permanent.” The gold standard achieved these things mainly by securing a degree of price-level and exchange rate stability and predictability that has never been matched since.

And Norbert Michel of the Heritage Foundation touches on some of the same issues in a new column for Forbes.

Several candidates suggested the gold standard was a good system, and they’re all getting flak for talking about gold.

But here’s the most fascinating revelation from Norbert’s column. It turns out that even Ben Bernanke agrees with George Selgin that the classical gold standard worked very well. Norbert quotes this passage from Bernanke.

The gold standard appeared to be highly successful from about 1870 to the beginning of World War I in 1914. During the so-called “classical” gold standard period, international trade and capital flows expanded markedly, and central banks experienced relatively few problems ensuring that their currencies retained their legal value.

Both Norbert’s article and George’s article have lots of good (but depressing) analysis of how governments went off the gold standard because of World War I and then put in place a hopelessly weak and impractical version of a gold standard after the war (the politicians didn’t want to be constrained by an effective system).

So here’s Norbert’s bottom line, which is very similar to the conclusion in my column for The Federalist.

Many who favor the gold standard recognize that it provided a nominal anchor as opposed to the discretionary fiat system we have now. Maybe the gold standard isn’t the best way to achieve that nominal anchor, but we shouldn’t just dismiss the whole notion.

The second issue worth mentioning is that the best way to deal with bad monetary policy may be to have no monetary policy.

At least not a monetary policy from government. This video explains the merits of this approach.

Gee, maybe Friedrich Hayek was right and private markets produce better results than government monopolies.

Since I’m a big fan of the Laffer Curve, I’m always interested in real-world examples showing good results when governments reduce marginal tax rates on productive activity.

Heck, I’m equally interested in real-world results when governments do the wrong thing and increase tax burdens on work, saving, investment, and entrepreneurship (and, sadly, these examples are more common).

My goal, to be sure, isn’t to maximize revenue for politicians. Instead, I prefer the growth-maximizing point on the Laffer Curve.

In any event, my modest hope is that politicians will learn that higher tax rates lead to less taxable income. Whether taxable income falls by a lot or a little obviously depends on the specific circumstance. But in either case, I want policy makers to understand that there are negative economic effects.

Writing for Forbes, Jeremy Scott of Tax Notes analyzes the supply-side policies of Israel’s Benjamin Netanyahu.

Netanyahu…argued that the Laffer curve worked, and that his 2003 tax cuts had transformed Israel into a market economy and an engine of growth. …He pushed through controversial reforms… The top individual tax rate was cut from 64 percent to 44 percent, while corporate taxes were slashed from 36 percent to 18 percent. …Netanyahu credits these reforms for making Israel’s high-tech boom of the last few years possible. …tax receipts did rise after Netanyahu’s tax cuts. In fact, they were sharply higher in 2007 than in 2003, before falling for several years because of the global recession. …His tax cuts did pay for themselves. And he has transformed Israel into more of a market economy…In fact, the prime minister recently announced plans for more cuts to taxes, this time to the VAT and corporate levies.

Pretty impressive.

Though I have to say that rising revenues doesn’t necessarily mean that the tax cuts were completely self-financing. To answer that question, you have to know what would have happened in the absence of the tax cut. And since that information never will be available, all we can do is speculate.

That being said, I have no doubt there was a strong Laffer Curve response in Israel. Simply stated, dropping the top tax rate on personal income by 20 percentage points creates a much more conducive environment for investment and entrepreneurship.

And cutting the corporate tax rate in half is also a sure-fire recipe for improved investment and job creation.

I’m also impressed that there’s been some progress on the spending side of the fiscal ledger.

Netanyahu explained that the public sector had become a fat man resting on a thin man’s back. If Israel were to be successful, it would have to reverse the roles. The private sector would need to become the fat man, something that would be possible only with tax cuts and a trimming of public spending. …Government spending was capped for three years.

The article doesn’t specify the years during which spending was capped, but the IMF data shows a de facto spending freeze between 2002 and 2005. And the same data, along with OECD data, shows that the burden of government spending has dropped by about 10 percentage points of GDP since that period of spending restraint early last decade.

Here’s the big picture from the Fraser Institute’s Economic Freedom of the World. As you can see from the data on Israel, the nation moved dramatically in the right direction after 1980. And there’s also been an upward bump in recent years.

Since I’m not an expert on Israeli economic policy, I don’t know the degree to which Netanyahu deserves a lot of credit or a little credit, but it’s good to see a country actually moving in the right direction.

Let’s close by touching on two other points. First, there was one passage in the Forbes column that rubbed me the wrong way. Mr. Scott claimed that Netanyahu’s tax cuts worked and Reagan’s didn’t.

Netanyahu might have succeeded where President Reagan failed.

I think this is completely wrong. While it’s possible that the tax cuts in Israel has a bigger Laffer-Curve effect than the tax cuts in the United States, the IRS data clearly shows that Reagan’s lower tax rates led to more revenue from the rich.

Second, the U.S. phased out economic aid to Israel last decade. I suspect that step helped encourage better economic policy since Israeli policy makers knew that American taxpayers no longer would subsidize statism. Maybe, just maybe, there’s a lesson there for other nations?


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