Comparing Taxation in Sweden and the United States

I already shared my thoughts about the value-added tax when discussing fiscal policy with an economist at the Confederation of Swedish Enterprise.

Here’s some of what I said about tax progressivity and the welfare state.

The bottom line is that the American tax system targets the rich. But that’s not the case in Sweden.

If you don’t believe me, let’s see what some left-of-center sources say.

Here’s a chart from a study for the World Inequality Lab by three economists at the Paris School of Economics.

As you can see, the United States is an outlier. The rich pay a much bigger share of the tax burden in America compared to other nations.

Interestingly, it’s not because America imposes higher taxes on the rich. It’s because Europeans impose higher taxes on lower-income and middle-class households.

Want more confirmation from another left-of-center source?

Here are some excerpts from a column in the New York Times by Monica Prasad, a sociology professor at Northwestern.

We can learn from Sweden, but the lesson is not what many people think. Rich Swedes do get taxed at high rates, but so does everyone else: The average American worker’s total tax burden is 31.7 percent of earnings, compared with 42.9 percent for the average Swede. The Swedes actually tax corporations less… Estate tax? In the United States the average effective rate is 16.5 percent. In Sweden, it’s zero. Swedish national sales taxes, which fall disproportionately on the middle classes, are much higher than sales taxes in the United States. …Some scholars have drawn on this history to argue that the United States needs to give up its fixation with progressive taxation and adopt a national sales tax as every other advanced industrial country has done. …It’s hard to make a case for a big new tax in America on the middle classes and the poor…progressive taxation still has a role to play in the United States — but we do need to learn the larger lesson…the secret of the European welfare states.

Her view of the the “larger lesson” and “secret” is not the same as mine.

She wants an efficient welfare state and – to her credit – she acknowledges that means big tax burdens for lower-income and middle-class households.

I look at comparative living standards and say “are you $&(#)@* crazy!”

I’ll close by emphasizing a point I made at the end of the above video. Our friends on the left like to argue that big government is popular and they’ll cite polling data to make that case.

But people have much different answers to polling questions when they are asked if they are willing to pay higher taxes to finance bigger government.

And since there are not enough rich people to finance big government, the only way to have Swedish-sized government is to have Swedish-level taxes on ordinary people.

P.S. For those who want to focus solely on the taxation of rich households. Europeans tend to impose higher personal income tax rates but to also have less double taxation of income that is saved and invested.

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Norway’s Class-Warfare Tax Policy is Backfiring

Class-warfare tax policy is bad news.

Last year, I warned that, “rich people are not sheep, patiently waiting to be sheared. If their fiscal torture is too extreme, they will leave.”

Norway is a powerful example. Here’s a chart showing the rate at which Norwegians are moving to Switzerland.

You may be wondering what caused the sudden change after 2022.

The above chart comes from a Bloomberg report by Ott Ummelas, and he explains what happened after Norway “increased the wealth tax burden by 55%.”

Steep increases in wealth and dividend taxes by Norway’s left-leaning government have prompted dozens of the Nordic nation’s rich to move to another prosperous, mountainous country to the south. …the small but significant migration by wealthy entrepreneurs could become permanent, bolstering Switzerland’s status as a low-tax haven. …Eighty-two rich Norwegians with a combined net wealth of about 46 billion kroner ($4.3 billion) left the country in 2022-2023, with 34 moving out last year alone, according to data from the Finance Ministry. More than 70 of those have moved to Switzerland… Swiss taxation varies by canton, but the overall effect is a significantly lower percentage of wealth and income than most other European nations. …Hollup said…”it’s a two-fold issue of losing tax revenue for Norway and the risk that a lot of brain capital has left the country.”

I started today’s column by observing that rich people are not sheep.

Instead, they are geese. Or, to be more specific, they are golden geese that have flown away.

P.S. This is primarily a column about misguided wealth taxation by Norway. But tax competition produces winners and losers, so this is also a story about the economic success of Switzerland.

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Everything You Need to Know about the Value-Added Tax

While in Sweden last week, I wrote several columns (here, here, and here) about that nation’s fiscal policy.

But I also had a discussion about American fiscal policy with one of the tax experts at the Confederation of Swedish Enterprise. That included a discussion of the value-added tax (VAT).

If you don’t want to spend a few minutes watching the video, I made two theoretical observations and two practical observations.

Here are my theoretical points.

1. VATs tend to be less destructive than income taxes, largely because they don’t have “progressive” tax rates and also don’t exacerbate the tax bias against saving and investment.
2. A VAT has the same “tax base” as a flat tax. The structural difference is that a flat tax takes a slice of your income as you earn and a VAT takes a slice of your income as you spend.

So if there ever was an opportunity to swap the income tax for a VAT, I would take that trade (assuming, of course, repeal of the 16th Amendment so politicians couldn’t pull a bait-and-switch scam). Just like I would swap the income tax for a national sales tax.

But we’ll never be given a chance to make that swap.

Instead, some people claim that we are facing a different type of choice. Should we finance our (baked-in-the-cake) expanding burden of government with class-warfare taxes or a value-added tax?

The right answer, needless to say, is to restrain spending. But if someone is holding a gun to your head and demanding that you choose a tax increase, which one do you pick?

Seems like a VAT would be the less-harmful approach, but this is a good opportunity to raise my two practical points.

1. In the real world, adoption of a VAT almost surely will lead to more class warfare taxes because politicians will want to balance the harm to lower-income people by also imposing taxes that hurt higher-income people.
2. In the real world, the level of government spending is not exogenous. More specifically, VATs have been money machines to finance bigger government in Europe and the same thing likely will happen in the United States.

If you want evidence for my first point, this chart is very compelling.

And if you want evidence for my second point, this chart tells you what you need to know.

P.S. You can enjoy some amusing – but also painfully accurate – cartoons about the VAT by clicking here, here, and here.

P.P.S. VAT rates tend not to be as high as income tax rates, but they are nonetheless very onerous.

P.P.P.S. In 2016, I debunked some VAT myths.

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The Laffer Curve’s Latest Victim: California

The Laffer Curve is the common-sense notion that people respond to incentives.

And even Paul Krugman admits this has implications for tax revenue.

For instance, if tax rates increase, people may decide to earn and/or report less taxable income. When that happens, revenue won’t increase by as much as politicians hope.

And the reverse is true (in some cases, dramatically true) if tax rates decrease.

For today’s column, let’s look at a real-world example of the Laffer Curve.

Joshua Rauh of Stanford and Ryan Shyu of Amazon have new research that looks at what happened after California voters approved a big class-warfare tax increase in 2012.

Here are some excerpts from their study.

In this paper we study the question of the elasticity of the tax base with respect to taxation…on the universe of California taxpayers around the implementation of major 2012 ballot initiative, Proposition 30. …The Proposition 30 ballot initiative increased marginal income tax rates…by 3 percentage points for singles with over $500,000 in taxable income (married couples with over $1 million)…, the highest state-level marginal tax rate in the nation. …We…document a substantial onetime outflow of high-earning taxpayers from California in response to Proposition 30. …For those earning over $5 million, the rate of departures spiked from 1.5% after the 2011 tax year to 2.125% after the 2012 tax year, with a similar effect among taxpayers earning $2-5 million in 2012. …California top-earners on average report $522,000 less in taxable income in 2012, $357,000 less in 2013, and $599,000 less in 2014; this is relative to a baseline mean income of $4.15 million amongst our defined group of California top-earners in 2011. Compared to counterfactuals in similarly high-tax states, California top-earners on average report $352,000 less in taxable income in 2012, $373,000 less in 2013, and $481,000 less in 2014.

So some upper-income taxpayers moved and others (unsurprisingly) earned/reported less taxable income.

Did that have an impact on tax revenue?

The answer is yes.

…we assess the implications of our estimates for tax revenue in the context of California Proposition 30. A back of the envelope calculation based on our econometric estimates finds that the intensive and extensive margin responses to taxation combined to undo 45.2% of the revenue gains from taxation that otherwise would have accrued to California in the absence of behavioral responses within the first year and 60.9% within the first two years.

Wow, more than 60 percent of projected revenue evaporated within two years.

By the way, these estimates are based on data only through the middle of last decade. And something significant happened after that: The state and local tax deduction was curtailed as part of the Trump tax package.

The authors speculate that this will have very important implications.

…the “Tax Cuts and Jobs Act” (TCJA). Under this law, the top rate is 37% for single and head-of-household filers earning over $500,000, and for married filers earning over $600,000. Despite this nominal cut to top rates, the legislation on net increased rates on top earners because it capped state and local deductions at $10,000 total. … we use our top line intensive margin elasticity estimate to provide a ballpark quantification of the federal tax revenue implications of TCJA for the particular set of California high earners in our treatment group. …Consider a married California taxpayer earning $4.15 million of wage income. In 2017, this taxpayer pays a federal tax bill of $1,431,305. In 2018, incorporating the 8.6% income decrease, this taxpayer pays a federal tax bill of $1,333,946. This amounts to a 6.8% decrease in tax revenue, putting the TCJA on the wrong side of the Laffer Curve for high-earning individuals in California. … the TCJA increased incentives (in terms of the level of the average tax rate gap) to leave California for zero-tax states by 2.15 times the amount of Proposition 30 for those earning over $5 million, and by a factor of 2.43 for those earning from $2-5 million. Based on these scaling factors, we would predict an out-migration effect of 1.46% of those earning $2-5 million, and 1.51% of those earning $5 million.

None of this should be a surprise.

Indeed, I wrote back in 2012 that bad things would happen when Proposition 30 was approved.

I feel safe in stating that this measure is going to accelerate California’s economic decline. Some successful taxpayers are going to tunnel under the proverbial Berlin Wall and escape to states with better (or less worse) fiscal policy. …It goes without saying, of course, that California’s politicians…will act surprised when revenues fall short of projections because of the Laffer Curve.

To be fair, I don’t know if California politicians are genuinely surprised. I suspect many of them privately understand the adverse consequences of class-warfare tax policy. But they nonetheless support bad policy because they are motivated by a selfish desire to maximize votes.

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Class Warfare From an Economic Luddite

Perhaps the greatest living public intellectual is Thomas Sowell and one of his famous quotes asks our leftist friends to quantify how much of other people’s money they supposedly deserve.

Another way of looking at that issue is to ask what’s the maximum tax rate anyone should have to pay. Is it 30 percent? 40 percent? 70 percent?

Or, as we saw in France about 10 years ago, more than 100 percent?

I’m asking these questions because I just read a column for the U.K.-based Guardian by Atossa Araxia Abrahamian.

She frets that the world may soon have a trillionaire, and she has a crazy idea to stop that from happening.

Oxfam…reported that, within a decade, the world will probably see its first trillionaire. …reported that, within a decade, the world will probably see its first trillionaire… Raising taxes, bolstering democratic institutions and seeking to redistribute resources to those who need them are all excellent initiatives worthy of widespread public support. And they should be envisioned not just nationally, but globally: inequality between countries and peoples matters, too. But governments shouldn’t rule out more radical measures, such as limitarianism – that is, capping how much wealth a person can legally have. Once you reach a certain number of zeros, …time to knock a few of them off.

The good news, relatively speaking, is that the author only wants the government to confiscate wealth about $1 trillion.

That’s not nearly as awful as the writer for the New York Times who wants the government to steal everything above $1 billion.

But confiscatory tax rates are a terrible idea at any level. What Ms. Abrahamian does not understand is that super-successful entrepreneurs make the rest of us better off.

Indeed, if Yale Professor William Nordhaus is correct, someone who amasses $1 trillion of wealth will have created tens and tens of trillions of dollars of wealth for everyone else in society.

I’ll take that deal in a nanosecond.

There are two other comments from her article that cry out for correction.

First, she wants readers to believe that people who take risks by investing money in the economy somehow benefit from “unearned income.”

The earnings of the ultra-rich are literally unearned..money made through “investment-type income such as taxable interest, ordinary dividends and capital gain distributions”.

Amazing. She obviously has never talked to anyone who created a business or invested in a company. And she clearly doesn’t realize how the rest of us benefit when people are willing to save and invest (there is a cartoon version if she needs a very simple explanation).

Second, she seems to think that billionaires control the media and are using that control to push a right-wing agenda.

The billionaire class…skews the balance of power in the marketplace, in politics and in society. Its members own newspapers that shape public opinion.

I don’t know the control structure of media companies, other than Jeff Bezos owning the Washington Post. Suffice to say that anyone who thinks the media in general, or the Post in particular, are pushing a right-of center agenda needs psychiatric help.

P.S. One of America’s worst presidents proposed a 100 percent tax rate.

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A State Suicide Pact, Part II

Almost exactly one year ago, I wrote a column about a coordinated effort to impose class-warfare tax increases in seven left-wing states.

Fortunately, that effort fizzled.

Meanwhile, there was continued progress in other states to lower tax rates. The net effect was “the feel-good map of 2023.”

And we have more and more evidence that taxpayers are “voting with their feet” by moving to the lower-tax states.

So it would seem that the issue is settled, right?

Not exactly. Our friends on the left have not given up.

David Chen of the New York Times reports that there’s now an effort to impose class-warfare taxes in 10 states.

Here are some excerpts from his story.

Lawmakers in Vermont are introducing legislation this week that would impose new taxes on the state’s wealthiest residents, joining a growing national campaign… One proposal in Vermont would tax people with more than $10 million in net worth on their capital gains, even if the gains have not yet been realized. Another would add a 3 percent marginal tax on individual incomes exceeding $500,000 a year… The package of bills is part of a broader push across the country by progressive groups… the campaign began in earnest a year ago, when legislators in seven states…coordinated the introduction of bills… None of those proposals got out of committee. But this year, with Vermont, Pennsylvania and possibly other states joining the fold, organizers are redoubling their efforts… Some of the ultrawealthy agree: More than 250 billionaires and millionaires, including heirs to the Rockefeller and Disney fortunes, recently signed an open letter, coinciding with the World Economic Forum in Davos, Switzerland, that urged world leaders to tax them more.

With regards to the rich people who claim to want higher taxes, I invite them to follow these instructions on how to voluntarily pay extra money to Washington.

But since none of them ever go for that option, we can safely assume that they are virtue-signalling hypocrites.

So let’s instead consider what will happen if politicians succeed in raising taxes in any of the 10 states mentioned in the article. And we’ll use Vermont as an example.

The top tax rate in Vermont is currently 8.75 percent and some politicians want to push that rate to 11.75 percent. If they are successful, Vermont will have the nation’s second-highest top tax rate, with only California being worse.

That’s economic suicide, especially since Vermont is right next to zero-tax New Hampshire.

And if Vermont politicians also impose a tax on unrealized capital gains (an idea so crazy that no other government has ever imposed such a levy), then the state’s suicide timetable will get even more compressed.

For what it’s worth, part of me perversely hopes Vermont goes down this path.

Just like it is helpful to have good examples, it’s also helpful to have bad examples. New Hampshire vs. Vermont could be the domestic version of Switzerland vs Greece.

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Debunking Deceptive Class-Warfare Data

Assuming that income and wealth are honestly earned (rather than from government favoritism), I don’t worry or object to some people being rich. Indeed, I celebrate their success.

Some friends on the left, however, mistakenly think the economy is a fixed pie. They want us to believe that if Person A gets more income, then Person B gets less.

That’s wrong. Wildly wrong.

Other people on the left are simply motivated by envy. A few of them are so spiteful that they would gladly lower everyone’s incomes so long as rich people suffered the biggest drop.

That’s despicable. Utterly despicable.

Regardless of motive, advocates of class warfare often point to the data produced by left-leaning economists such as Thomas Piketty, along with others such as Gabriel Zucman and Emmanuel Saez.

But it turns out that Piketty, et al, have concocted bad numbers.

Phil Magness of the American Institute for Economic Research and Vincent Geloso of George Mason University have a new article summarizing the latest scholarly research. They start by noting that Piketty is beloved by the media for his “U-curve” that supposedly shows “US inequality today is higher than it was in 1929.”

Thomas Piketty is well-known for his work on estimating income and wealth inequality. That work made him an “economics rockstar” in the eyes of the media… The main culprit behind rising inequality, according to his story, is a series of tax cuts beginning with the Reagan administration. …academic articles — often co-authored with Gabriel Zucman and Emmanuel Saez — are deemed as novel and important contributions to the scholarly literature on inequality.

Magness and Geloso then document some of their mistakes.

What if Piketty and his team got the numbers wrong though? …There would no longer be an empirical case for hiking taxes or expanding government redistribution. …In a recent working paper, we…looked at the ways that Piketty and his coauthors handled the underlying tax statistics. …errors pervade the entire Piketty-Saez series. After correcting for these problems, we found that Piketty and his co-authors tend to underestimate total personal income earnings, thereby artificially pumping up the income shares of the richest earners. They do so inconsistently though… In earlier works published in The Economic Journal and Economic Inquiry, we also found other signs of carelessness by Piketty and his acolytes… When we corrected all of these issues, we found that inequality was far lower… As the study and measurement of inequality progresses, Piketty’s (and his team’s) main estimates have become obsolete and might be properly consigned to the field of the history of economic thought. …Piketty’s own data are deeply suspect and open to challenges that he simply does not want to answer.

The authors cite other scholarly research, including this chart from David Splinter and Gerald Auten in the Journal of Political Economy.

They discuss that paper, as well as other academic articles.

Auten and Splinter revisited many of the data construction assumptions made by Piketty and his acolytes in dealing with data from 1960 to 2020. Most notably, they made sure that income definitions were consistent over time, that the proper households were considered… After accounting for transfers and taxes (something that Piketty and Saez fail to do), Auten and Splinter find virtually no changes since 1960. …Other works have confirmed these points differently. A small list of these suffices to show this. Miller et al. in an article in Review of Political Economy showed that most of the increase from 1986 onward is due to tax shifting behavior linked to the 1986 Tax Reform. Armour et al. in an article in the American Economic Review showed that properly measuring capital gains eliminates all the increase since 1989. In subsequent work in the Journal of Political Economy, Armour et al. confirmed this finding. Finally, a National Bureau of Economic Research by Smith et al. confirmed that all of these findings also apply to wealth inequality. Moreover, work by Sylvain Catherine et al. from the University of Pennsylvania shows that Piketty and his team failed to properly consider the role of social security.

The whole AIER article is worth reading.

I also recommend this thread from one of the authors.

Thread: Let us be clear — the work of Gabriel Zucman should be taken with a major/huge grain of salt. Largely because he and his colleagues have been sloppy as hell. I will not mince words here and list the litany of sloppiness #econtwitter https://t.co/4icOSMcZc7

— וינסנט (Vincent Geloso) (@VincentGeloso) June 16, 2023

Today’s column already is too long, but there are many other articles that debunk Piketty and the rest of the class-warfare crowd.  To see the views of other authors, click here, here, here, here, here, here, here, here, here, here, here, and here.

My views, for what it’s worth, are summarized here.

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There Are Not Enough Rich People to Finance European-Sized Government

Mostly because of an aging population, entitlement spending in the United States is projected to become a much bigger burden.

Without reform of those programs, the U.S. within a few decades will have a European-sized level of government spending.

Joe Biden and Donald Trump have both stated that they oppose entitlement reform, so this raises the very important question of how they would finance this massive expansion in the burden of government.

Biden’s answer is “tax the rich” while Trump simply pretends the problem doesn’t exist.

Since there’s no way of dealing logically with Trump’s head-in-the-sand approach, let’s address Biden’s supposed solution of soak-the-rich taxes (and keep in mind Biden wants several trillion dollars of new spending on top of the trillions of dollars of higher spending that’s already in the pipeline for existing entitlements).

I’ve written about this issue before, but this is an opportune time for some new data since Brian Riedl of the Manhattan Institute has a new study on the topic.

Here’s the table he put together of the revenue that might be generated by the various class-warfare tax proposals the left has offered.

As you can see, establishment sources estimate the maximum revenue from all of these soak-the-rich tax increases is 2 percent of GDP.

And the actual revenue collected would be lower because all of these tax hikes would significantly undermine incentives to engage in productive behavior by entrepreneurs, investors, small business owners, and others.

Would 1-2 percent of GDP be enough to finance existing spending promises, as well as Biden’s proposals for more spending?

Not even close. As Brian explains, it doesn’t even deal with current levels of spending.

Budget deficits have risen to nearly 6% of GDP and are projected to rise to 10% of GDP over three decades. …To close these baseline deficits and finance additional expansions, most progressives reject most spending cuts as well as middle-class tax increases. Instead, just “tax the rich” has become an easy and popular answer. However, …the plausible revenue estimates from these proposals fall far short of closing these budget gaps. …America’s federal tax code is already the most progressive in the Organisation for Economic Co-operation and Development (OECD) and has become sharply more progressive over the past 40 years. Much of this tax progressivity is the result of drastic cuts to low- and middle-income taxes while leaving upper-income-tax rates closer to international norms. …Europe’s significantly higher tax revenues are driven overwhelmingly by broad-based consumption and payroll taxes, rather than by notably higher tax rates on the wealthy.

In other words, Brian’s research confirms my Twelfth Theorem of Government.

This is true even in Nordic nations, as Brian explains.

American progressives often hold up Europe—and especially the Scandinavian social democracies of Denmark, Finland, Norway, and Sweden—as successful tax-the-rich utopias that the U.S. should replicate. In reality, European tax systems do not fit the American progressive stereotype, as their higher revenues are overwhelmingly raised through steep income, payroll, and consumption taxes on the middle class.

Here’s a table from the study showing that Denmark, Finland, Norway, and Sweden have slightly higher taxes on income and capital gains, but that’s offset by lower taxes on corporations and lower death taxes.

So what’s the bottom line?

Simply stated, as explained in my Fifteenth Theorem of Government, there is no way to have European-sized government without European-level taxes on lower-income and middle-class households.

As you can see from this table, it’s the only place where there is substantial potential tax revenue.

P.S. There’s one final excerpt from the study I want to share.

I mentioned above that class-warfare taxes would be very detrimental to growth. Well, don’t forget that payroll and consumption taxes are bad for growth as well. And a bigger burden of government spending also is very harmful to prosperity.

So if we go down the wrong path of bigger government and higher taxes, we can expect European-style economic anemia. And Brian explains that also has fiscal consequences.

…a tax package that reduces annual economic growth rates by 1 percentage point would, in turn, reduce tax revenues by $3.3 trillion over the decade—likely canceling all static tax-revenue gains while also costing jobs and reducing incomes. In other words, tax-the-rich advocates cannot afford to ignore economic considerations. Raising every upper-income-tax rate to its revenue-maximizing level—the point at which the economic damage cancels out any additional revenues—is a recipe for economic stagnation, job losses, and declining incomes.

At the risk of understatement, we don’t want to copy Europe.

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When Thieves Blame Victims

Wealth taxation is one of the most self-destructive policies that politicians can impose on a nation.

Such laws directly divert existing capital from the private sector and discourage the accumulation of new capital.

This means less long-run prosperity, with ordinary workers losing out.

I also view such laws as immoral, which means we should cheer for taxpayers who take steps to protect their (already-taxed) assets from greedy politicians.

This is why I applauded earlier this year when reading about successful Norwegians fleeing to Switzerland in response to an increase in the burden of the wealth tax.

Let’s revisit that issue today. Ott Ummelas wrote a story for Bloomberg about the ongoing damage of that nation’s wealth tax.

Some of Norway’s richest citizens…rage at a fiscal regime that drove dozens of them into exile in Switzerland. One of the world’s most prosperous diasporas has swapped the fjords for the Alps to escape a double whammy of higher wealth and dividend taxes since…Prime Minister Jonas Gahr Store stepped in less than two years ago. …Tord Kolstad, an entrepreneur listed among Norway’s 400 richest people by local media, is among expatriates fuming at the clampdown. “There are people coming down here every week from Norway, still,” he said in a phone interview from Lucerne in central Switzerland. “A lot of people do it because they feel they are forced. The main thing is the taxation system.” …Kolstad isn’t alone in voting with his feet. Some 65 rich Norwegians with combined net wealth exceeding 47 billion kroner moved to Switzerland in the space of a year… They include oil billionaire, Aker ASA Chairman Kjell Inge Rokke, the country’s seventh-wealthiest person, according to Kapital; Kristoffer Reitan, an heir to retail tycoon Odd Reitan, and more recently, Alfie Haaland, the father of soccer superstar Erling Haaland. Bjorn Daehlie, a multiple Olympic champion in cross-country skiing, and Jorgen Dahl, a home security tycoon, have also emigrated, as has Norway’s richest woman, Ninja Tollefsen.

I’m glad all of these people escaped.

But that’s not the purpose of today’s column. Instead, I want to focus on the whining and entitled mindset of Norway’s Prime Minister.

This economically illiterate buffoon (just like a former French Prime Minister) believes in victim-blaming.

The 63-year-old prime minister has called the emigration of wealthy people “a breach of a social contract.”

Maybe I’m just a cranky libertarian, but I don’t think successful people have an obligation to be passive victims of bad government policy.

Though, as explained by Wikipedia’s page about social contract, it depends on whether you believe in “negative rights” or “positive rights.”

That being said, nobody signs a contract to be a victim. As such, I don’t think there’s an obligation to surrender to expropriation.

Let the people who believe in redistribution and entitlements all live with each other. We’ll see how well that works out.

P.S. By the way, I’ve been wondering why so many rich Norwegians decided to escape when the wealth tax was increased.

Such a tax is economically foolish and a terrible example of double taxation, to be sure, but boosting the rate from 0.85 percent to 1.1 percent did not seem that dramatic. At least not dramatic enough to produce a sudden and massive exodus.

But the story notes that effective rate almost doubled because of other changes. And politicians also increased the double taxation of dividends and capital gains.

Norway’s maximum wealth tax rate, applicable to fortunes in excess of 20 million kroner, was increased to 1.1% by Store’s cabinet from 0.85%.., Conservative-led government. A reduction in rebates means the effective rate almost doubled. On top of that, the effective tax rate on dividends and capital gains on shares rose to 37.8% last October, up six percentage points from two years ago.

P.P.S. The article states that the leftist prime minister is wealthy. But it also notes that he “inherited money from his grandfather.” By contrast, the vocal opponent of the Norway’s class-warfare, Tord Kolstad, “has a self-made fortune.”

All of which supports the stereotype that self-made people (i.e., ones who create wealth) are much more sensible than those who inherit wealth (and thus tend to be leftists who try to assuage their guilt by supporting higher taxes on other people).

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Prosperity and Taxation: What Can We Learn from the 1950s (Part II)?

I wrote in 2017 that class warfare in the 1950s did not work because well-to-do taxpayers could choose to earn less, evade taxes, or avoid taxes.

In this video, Brian Domitrovic elaborates on the failure of confiscatory tax rates.

Let’s dig deeper into this topic, and we’ll start with this table from a 2012 article by James Pethokoukis.

It shows that income tax revenues during the 1950s were lower than they were in the 1960s (after the Kennedy tax cuts) and the 1980s (after the Reagan tax cuts).

Here’s some of what he wrote to accompany the table.

1950s tax rates actually generated less tax revenue than subsequent periods of lower rates. From 1950 to 1963, income tax revenue averaged 7.5 percent of GDP; that’s less than in the Reagan years when rates were being slashed. This could suggest that rates are right around the Laffer Curve equilibrium point in the current economy. …And, of course, an ultrahigh tax rate on an initially small slice of the population…would neither raise very much revenue nor do anything to create jobs. And look at what just happened in Great Britain. Their Independent Fiscal Oversight Commission—which reviews all of the budgetary assumptions—just ruled that cutting the top rate of tax from 50 to 45 was revenue neutral, implying the revenue maximizing rate is in that range. The Brits don’t have state income taxes, which implies by extension that our revenue maximizing federal rate is lower than theirs—a whole lot lower than 70, 80, or 90%. Back to the 1950s? Forget it.

In a 2023 article for the Foundation for Economic Education, Rainer Zitelmann also explains that the high tax rates didn’t produce high revenues (gee, I think there’s a way of describing this insight).

Left-wing politicians who demand higher taxes on the rich argue that the United States has, in the past, prospered when tax rates were very high, proving that high taxes do not harm the economy. …In the 1950s and early 1960s, the top federal personal income tax rate in the US was a horrendous 91 percent… Interestingly, the actual percentage paid by the top 1 percent of earners in the US was only 16.1 percent in 1962, when the top marginal rate was 91 percent. However, in 1988, when the top rate was only 28 percent, the percentage paid by the top 1 percent of earners had risen to 21.5 percent! …This seems paradoxical, but it is logical, because it is not only the tax rate that is decisive, but the amount of income that is actually taxable. …So the myth that the US experienced strong economic growth when the top marginal tax rate was high is false.

The bottom line is that the economy sputtered in the 1950s because of high tax rates and tax revenues languished for the same reason.

P.S. While the 1950s were bad, President Franklin Roosevelt actually tried to impose a 100 percent tax rate in the 1940s (and that’s not even the worst thing he advocated).

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The Swiss Are Sensible…Even in the French-Speaking Cantons

Last month (May), I wrote that Switzerland was the world’s best-governed nation, based on the latest Misery Index.

The month before that (April), I wrote about Switzerland ranking #1 in the Human Freedom Index.

And the month before that (March), I wrote about the ongoing success of the country’s spending cap.

This small country gets a lot of attention because it is a role model.

It has a wide range of good policies (low taxes, private retirement savings, federalism, etc), but it also has very sensible people.

The Swiss have opportunities to engage in direct democracy, and over and over and over again they make sensible choices.

And it just happened again. Voters in Geneva were just asked whether they wanted to increase the Canton’s wealth tax.

Bastian Benrath of Bloomberg reported on the conclusive rejection of the class-warfare scheme.

Geneva voters rejected a “solidarity” tax hike for the richest 1% living in Switzerland’s second-largest city. The measure failed with 55.12% of people voting against, according to final government results published on Sunday. The plan to temporarily lift the wealth tax from 1% to 1.5% for individuals with assets worth more than 3 million francs ($3.4 million) -— proposed by a coalition of leftist lawmakers, unions and activists… Business groups had also warned that the city’s richest inhabitants might move to neighboring states with lower rates. This had happened in Norway, where a wealth-tax increase to between 1% and 1.1% — notably lower than that proposed in Geneva — spurred millionaires to leave the country. Cantonal wealth-tax data show more than 19,000 of Geneva’s about 500,000 inhabitants reach the millionaire threshold. A smaller number, somewhere between 4,200 and 10,000, would have been affected by the proposal.

By the way, it’s not just Geneva voters that reject class warfare. The entire nation overwhelmingly voted against class-warfare proposals in 2010 and 2021.

Nonetheless, the French-speaking part of Switzerland leans to the left (at least by Swiss standards), so I was relieved that the people of Geneva made the right choice.

Maybe they did learn the right lesson from what happened in Norway. Too bad we can’t say the same about voters in Massachusetts.

P.S. Needless to say, it is disappointing that a wealth tax exists in such a sensible nation.

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Class Warfare and School Choice

No matter how you slice the data (federal income tax, all federal taxes, state taxes, local taxes, total taxes, etc), rich people shoulder a disproportionate share of America’s fiscal burden.

Indeed, the United States has a more “progressive” tax code than any other industrialized nation.

That’s because big welfare states – like they have in Europe – require very high tax burdens on lower-income and middle-class households (simply stated, there are not enough rich people to finance big government).

But today’s column is not about class warfare and tax policy. Instead, let’s look at class warfare and spending policy.

More specifically, let’s contemplate whether spending policy should also discriminate against upper-income taxpayers.

That already happens, of course. America’s huge welfare state – by definition – funnels money and services to lower-income households.

And there are programs – ranging from museum subsidies to ethanol handouts – that perversely channel money from the poor to the rich.

But what about basic government services, what are sometimes called “public goods“?

• Should rich people be allowed to visit national parks like poor people, or should there be an extra charge?
• Should rich people be allowed to drive on roads and highways like poor people, or should there be an extra charge?
• Should rich people be allowed to send their kids to school like poor people, or should there be an extra charge?

These sound like absurd examples, but we have a real-world controversy involving state education policy.

In a column for the Washington Post, Lizette Alvarez thinks it is unfair that Florida’s school choice system will now apply equally to all households.

Gov. Ron DeSantis (R) recently signed legislation that might radically undermine the state’s education system by making Florida’s already robust school voucher program the largest…in the country. Beginning in July, the state will make it possible for every K-12 student to receive a taxpayer-funded voucher or savings account worth $8,648. And for the first time in Florida, the vouchers will be available to children from wealthy families… The new policy is…revolutionary…even the child of a private-jet-flying tycoon will be eligible for a voucher. …The conservative rationale for doing away with income caps and sweeping in private and religious school students seems rooted in a twisted sense of “justice for all.” In their view, those parents are paying what amounts to a wasted tax for public schools their children don’t use — and returning that money to them to pay for their schools of choice is only fair.

For what it’s worth, I think Ms. Alvarez does not fully understand the conservative rationale.

But I’ll focus on giving the libertarian rationale. From a moral and legal perspective, we think the law should apply equally. If the government is going to operate schools, those schools should be open to all children. If government is going to allow school choice, all children should be allowed to participate.

P.S. I can’t resist commenting on Ms. Alvarez’s assertion that school choice will undermine the education system. That is a very bizarre assertion since kids get better test scores when they attend private schools or get home-schooled. Moreover, academic evidence shows that government schools actually get better when there is school choice (competition is a good thing).

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Class Warfare and Utility Pricing

Good folks on the left (and every other part of the spectrum) push for equality of opportunity. And what’s great about that approach is that more opportunity for one person does not require less opportunity for another person.

Bad folks on the left push for equality of outcomes. And that’s unfortunate because an agenda of coerced equality (based on the notion of “positive rights“) means that one person has to suffer for another person to benefit.

Or, in really crazy circumstances, the goal is simply to deny good things for some people simply because they are not available to other people.

Or they simply want to punish success because of spite and resentment.

I wrote about an example of this last week. Here’s another example, as reported by Marc Cota-Robles and Rob Hayes for a California TV station.

Three major utility companies in California are looking to restructure customer billing, and part of that means customers could be charged based on how much money they make. Southern California Edison, Pacific Gas & Electric and San Diego Gas & Electric filed a joint proposal this week for a flat-rate charge based on income. …Under the proposal, it would cost as little as $15 a month for low-income households and up to $85 more per month for households making more than $180,000 a year. …The income-based bill proposal is part of the companies’ compliance with legislation passed by the California state government last year requiring these types of plans for utilities. …The fixed rate could start showing up on bills as soon as 2025.

The Wall Street Journal opined on this policy. As you might imagine, class-warfare pricing was not celebrated.

Climate policies are driving up California electric rates… Now Democrats plan to double down on their policy distortions by charging electric customers based on income. Democrats snuck this second progressive income tax into a budget trailer bill last year… No other investor-owned utilities in the country link electricity costs to income. …Pacific Gas & Electric floated charging customers fixed fees ranging from $15 a month for those earning less than $28,000 annually, up to $92 a month for those making $180,000 or more. …California’s electric rates have surged over the last decade to an average of 26.5 cents a kWh—more than twice as much as in neighboring states… California’s electric rates are currently both regressive and progressive. Middle- and higher-income folks subsidize discounts for lower-income customers. However, lower- and middle-income households also subsidize the affluent with solar panels and electric vehicles. …Thus they want to impose this de facto graduated income tax to light up your home. This is another form of income redistribution… The very rich will cope, but the middle class will get soaked, as they always do.

I wonder if our friends on the left will expand this approach. Maybe require McDonald’s to charge rich people more for a Big Mac? Or tell gas stations that they have to lose money when poor people fill up their tanks?

That’s a recipe for quicksand and beatings.

As captured by my Eighth Theorem of Government, it is far smarter to push policies that are designed to reduce poverty rather than reduce inequality.

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Latin America and Fiscal Suicide

The economic policy lessons from Latin America are very clear.

There’s one unambiguous success story (at least until the past couple of years), one semi-decent success story, and then a bunch of utter failures.

What’s interesting (and tragic) is that the failures teach different lessons.

• We learn about long-run socialist suffering from Cuba.
• We learn about rapid socialist collapse from Venezuela.
• We learn about gradual socialist collapse from Argentina.

And if we pay attention to the region, we can expect more collapse.

Why? Because left-wing governments are now in charge and sensible people are moving their money where it can’t be confiscated.

In an article for Bloomberg, Ezra Fieser and Andrea Jaramillo report on people taking their money out of Latin America.

As every major country in Latin America shifts to the left…, capital is flying out of the region. Wealthy and, increasingly, middle-class investors are looking for a Plan B… People and corporations in the region’s five largest economies pulled roughly $137 billion out of their countries in 2022. That number—preliminary data from the Institute of International Finance, a group of banking institutions—is 41% higher than the 2021 figure and the most since 2010. …popular destinations include the Dominican Republic, Panama, Spain and the US. …Each time a leftist gets elected, money pours into South Florida, says Raul Henriquez, chairman of Insigneo Financial Group LLC, a wealth manager in Miami. …Often called a “pink tide,” this shift toward socialism dates to 2018, when Andrés Manuel López Obrador swept into power in Mexico. Leftists prevailed in Argentina in 2019, Chile and Peru in 2021, and Brazil and Colombia last year. “This is a historic event we’ve never before seen—the entire region has gone pink on us,” says Talbert Navia… Mauricio Cárdenas, a former Colombian finance minister, says capital flight is playing a role and could make it difficult to enact socialist policies.

If you want to know why people and/or their money are escaping, read this article from Americas Quarterly by José Antonio Ocampo, who is now Colombia’s Finance Minister.

Latin America can return, of course, to the path of growth, employment, and improvement in social conditions. But this implies a significant increase of fiscal resources… A key barrier is the generally weak level of tax revenue obtained by Latin American countries. In 2018, the average tax revenues in the region were 23.1% of GDP… One of the problems is the lack of income tax regimes with significant redistributive effects… supports the proposal for the introduction of a global minimum effective corporate tax rate of 25%. …countries should…adopt effective progressive wealth taxes on their residents.

By the way, Senor Ocampo used to be at the United Nations, where he enjoyed a tax-free salary while urging higher tax burdens on everyone else.

Also, I can’t resist pointing out that tax burdens in Latin America are already far too high. Ocampo wants a “path to growth,” but he apparently does not understand that today’s rich nations all became rich when the burden of government was very small.

Last but not least, the tax-free bureaucrats at the Organization for Economic Cooperation and Development in Paris continue to push for bad policies.

Here is some of the nonsense included in the bureaucracy’s latest Economic Outlook for the region.

…a fiscal sustainability framework focused on strengthening public revenues will be required… In the medium term, the region will have to focus on generating more progressive and greener fiscal pacts, with the aim of increasing tax collection and strengthening direct income and property revenues. …it is essential that social protection systems have funding sources that will ensure their financial sustainability. This can be achieved, in part, by increasing tax revenues… Innovative income support policies could be worth exploring to increase progressivity… A set of tax policy options are available in LAC that could help increase revenues… These include measures to…increase the progressivity of personal income taxes.

While the OECD should be condemned for pushing bad policy on poor nations, at least they deserve credit for consistency.

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More Evidence of China’s Faltering Economy

At the risk of oversimplifying, here’s the three-sentence trajectory of Chinese economic policy.

• Crippling communist failure and suffering under Mao.
• Partial reform during the “Washington Consensus” era.
• Backsliding to more statism under President Xi.

So what’s all that mean? Well, when you start with awful policy, then take a few steps in the right direction, only to then move back in the wrong direction, you probably won’t be an economic powerhouse.

And that’s exactly what we see in the data.

Here’s a chart showing that there is a huge gap between per-capita economic output in the United States and China. And that gap exists whether we rely on data from either the IMF, Maddison,* the UN, or World Bank.

That chart is the bad news (and it may be even worse than shown in the above data).

The good news is that China is no longer a miserably poor nation, like it was during the fully communist years under Mao.

But it also looks like China will never become a rich nation.

Especially when the government penalizes success. Which has very negative effects, as reported by the Economist.

Regulatory crackdowns have devastated once-thriving sectors like private education. Officials rage against “money worship”… China’s wealthy…have been looking to leave. …in 2022 some 10,800 high-net-worth individuals, who have an average wealth of $6m, left the country, with the flow accelerating at the end of the year as covid controls eased. …Even more are expected to leave in 2023… In recent years, Singapore has been favoured. The city-state is the top destination for Chinese billionaires considering emigration… According to data from Singapore’s central bank, …it is likely that as many as 750 Chinese family offices were registered in Singapore.

Needless to say, it’s not a good sign when the geese with the golden eggs are flying away.

That being said, the problems in China go well beyond class warfare.

The country has a major problem with cronyism (a.k.a., industrial policy).

But I’ve written many times about that issue, so let’s look at another example of China’s bad policy. Li Yuan has an article in The New York Times about wasteful spending and excessive debt in the nation’s cities.

As part of the ruling Communist Party’s all-in push for economic growth this year, local governments already in debt from borrowing to pay for massive infrastructure are taking on additional debt. They’re building more roads, railways and industrial parks even though the economic returns on that activity are increasingly meager. …China’s local governments..are in fiscal disarray. …According to official data, China’s 31 provincial governments owed around $5.1 trillion at the end of 2022, an increase of 66 percent from three years earlier. An International Monetary Fund report puts the number at $9.5 trillion, equivalent to half the country’s economy. …China is full of wasteful infrastructure that the government likes to brag about but that doesn’t serve the most urgent needs of the public. …The Chinese government likes to say the country has the longest and fastest high-speed railways in the world. But…most lines operate below capacity and at a great loss.

Sounds like Amtrak, but on steroids.

The bottom line is that China’s economy is both weak and fragile.

Which is unfortunate. A thriving China presumably is more likely to be a friendly China.

* The Maddison data is for 2018, and uses $2011 dollars rather than current dollars, which explains why it seems significantly different than the other sources.

P.S. Rather than invade Taiwan, China should copy its economic policies. Or copy the policies of other better-performing Asian Tigers. Heck, the recipe for prosperity is not complicated.

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There Are Not Enough Rich People to Finance Big Government

Leftists should be nice to rich people people because those entrepreneurs, investors, and business owners are the ones financing the federal government.

However, there are too few rich people to finance a European-sized welfare state.

The above video is a segment from a recent presentation to the Money Show, in which I explained that lower-income and middle-class taxpayers are going to get hit by massive future tax increases.

There are two inescapable reasons for this conclusion.

First, entitlement spending is exploding and, second, there are not enough rich people to pick up the tab. As such, you can’t finance a large welfare state without pillaging ordinary people.

You can’t do it if your name is Joe Biden.

You can’t do it if your name is Donald Trump.

But not everyone believes me

And that’s why I shared the charts in the video. The numbers clearly show that taxes on the rich will not suffice.

• There are not enough rich people to finance the current level of government spending.
• There are not enough rich people to finance future levels of government spending.
• There are not enough rich people to finance the new spending Biden is proposing.

Perhaps the strongest evidence is that even Bernie Sanders recognizes this reality. He favors every possible class-warfare tax increase, but it’s very revealing that he also proposed a massive 11.5 percent payroll tax on the wages of everyone to finance his plan for “free” government-run healthcare.

By the way, let me add one very important point that I didn’t make in the video. I’m sure folks on the left will go for class-warfare tax increases before going after the rest of us.

And if they succeed in enacting those tax increases, we can be very confident of terrible economic consequences. It will be the reverse of Reagan’s very successful approach, which actually led to dramatic increases in tax payments from upper-income taxpayers.

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Prosperity and Taxation: What Can We Learn from the 1960s?

Back in 2010, I shared a comparison of Obama and JFK on tax policy. For an update, here’s a comparison of Biden’s class-warfare agenda with JFK’s supply-side agenda.

I’m sharing this video for two reasons.

The first reason is that it shows that some Democrats in the past were very sensible about tax policy.

The second reason is that it gives me a good excuse to discuss what we can learn from tax policy in the 1960s, thus adding to our collection.

• Tax Lessons from the 1920s
• Tax Lessons from the 1930s
• Tax Lessons from the 1950s
• Tax Lessons from the 1980s

I’ll start with the caveat that tax policy does not necessarily overlap with 10-year periods. But we can learn by examining significant tax policy changes that occurred (or, in the case of the 1950s, did not occur) during various eras.

For the 1960s, the key change was the Revenue Act of 1964, generally known as the Kennedy tax cuts (proposed by President Kennedy in 1963 and then adopted in 1964 after his assassination).

Here’s what Kennedy proposed, as explained by the JFK library.

Declaring that the absence of recession is not tantamount to economic growth, the president proposed in 1963 to cut income taxes from a range of 20-91% to 14-65% He also proposed a cut in the corporate tax rate from 52% to 47%. …arguing that “a rising tide lifts all boats” and that strong economic growth would not continue without lower taxes.

And here’s what was enacted, as summarized by Wikipedia.

The act cut federal income taxes by approximately twenty percent across the board, and the top federal income tax rate fell from 91 percent to 70 percent. The act also reduced the corporate tax from 52 percent to 48 percent and created a minimum standard deduction.

The good news is that the Kennedy tax cuts were the right kind of tax cuts. Marginal tax rates were reduced on work, saving, investment, and entrepreneurship.

The bad news is that the top tax rate was still confiscatory, though 70 percent obviously was not as bad as 91 percent. And a 48 percent corporate rate was not much of an improvement compared to 52 percent.

That being said, moving in the right direction produced good outcomes.

People often talk about the booming economy in the 1960s. And there is some evidence to support that view since inflation-adjusted economic output grew rapidly as the tax cuts were implemented – by 6.5 percent in 1965 and 6.5 percent in 1966.

But I’m cautious about drawing sweeping conclusions from short-run data, especially since we know many other policies also have an impact on economic performance.

So let’s focus instead on some tax-related variables. Here’s a chart that I shared back in 2015, showing that upper-income taxpayers paid more when tax rates were reduced (the same thing happened in the 1980s).

That chart was taken from a report I wrote way back in 1996.

And here’s another chart from the same publication. This one shows that lower tax rates were associated with rising revenues. Especially as the changes were being implemented.

By the way, this does not mean that the tax cut was self-financing.

The core lesson of the Laffer Curve is not that tax cuts “pay for themselves.” That only happens in rare circumstances.

Instead, the lesson is that lower tax rates encourage more productive behavior, which means more taxable income. It then becomes an empirical question of how much of the revenue lost from lower rates is offset by the revenue gained from more taxable income.

And, in the 1960s, we know there was a big Laffer Curve response from upper-income taxpayers. Why? Because they have considerable control over the timing, level, and composition of this income.

Which brings us to the final lesson, which is that class-warfare tax policy was a bad idea in the 1960s and it is still a very bad idea today.

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Another Poverty Huckster

There are some policy fights that focus on technical disagreements (for instance, how much do deadweight losses increase when tax rates go up?) and other policy fights that involve moral disagreements (for instance, should drugs be legalized when that may lead some people to harm themselves?).

Other policy fights, however, involve dishonesty.

Poverty hucksters might be the most irritating example. These are the people who push an utterly dishonest definition of poverty, which I first wrote about back in 2010. But this article from 2019 has the best summary.

…folks on the left have decided to use an artificial and misleading definition of poverty. One that depends on the distribution of income rather than any specific measure of poverty. Which is insanely dishonest. It means that everyone’s income could double and the supposed rate of poverty would stay the same. Or a country could execute all the rich people and the alleged rate of poverty would decline. No wonder the practitioners of this approach often produce absurd data, such as the OECD’s assertion that there’s more poverty in the United States than in basket case economies such as Greece and Italy.

Sadly, the many complaints from me and others have not stopped the poverty hucksters.

Here’s a chart I just downloaded from the Organization for Economic Cooperation and Development, one of the organizations pushing the dishonest measure of poverty.

As you can see, they want people to believe that there’s more poverty in the United States than in nations such as Turkey, Italy, and Greece.

Heck, they also want people to think the wealthy nations of Luxembourg and Switzerland have more poverty than Hungary.

I’m sharing this information because it’s time to add a new member to our collection of poverty hucksters.

Timothy Noah of the New Republic has a column in the Washington Post that utilizes the OECD’s inaccurate definition of poverty. Here are some excerpts from his article.

How can the richest nation on Earth have so much poverty? …The Bible tells us that the poor are always with us. But devout resignation can’t explain why the United States, with the world’s largest economy (gross domestic product: $26.15 trillion) should house more poverty than many much poorer countries. In 2021, the Organization for Economic Cooperation and Development ranked 37 member nations by poverty rate. Costa Rica had the highest rate, followed by Bulgaria, but way up there at No. 10 was the United States. …We may not have the means to eliminate poverty. But we can certainly do better than Estonia.

If you read Noah’s entire article, you’ll quickly see why he uses the OECD’s dishonest data.

Like Biden, he wants a massive expansion of class-warfare taxation and a big increase in the welfare state, so it is in his interest to portray America as a dystopian hellscape of suffering and deprivation.

It would be nice, however, if he relied on accurate data. Then again, accurate data would backfire on him.

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The Case Against Biden’s Class-Warfare Tax Policy, Part V

In 2020 and 2021, I wrote a four-part series (here, here, here, and here) about Biden’s class-warfare tax agenda.

And I also wrote a series of columns about some of his worst ideas.

• Biden wants America to have the developed world’s highest capital gains tax rate.
• Biden wants America to have the developed world’s highest tax burden on business investment.
• Biden wants America to have the developed world’s highest personal income tax rates.

He even proposed taxes that don’t exist anywhere else in the world.

The main purpose of those columns was to explain why it would be economically harmful to impose punitive tax rates on productive behaviors such as work, saving, investment, and entrepreneurship.

Unsurprisingly, Biden still wants all these tax increases, even though Democrats lost control of the House of Representatives.

Today, let’s look at his awful proposal to tax unrealized capital gains (an idea so absurd that no other nation has enacted this destructive levy).

Eric Boehm’s article in Reason debunks Biden’s proposal (the president calls it a billionaire’s tax).

Say what you will about the Biden administration’s approach to tax-the-rich populism: It’s creative. …Taxpayers with net wealth above $100 million would have to pay a minimum effective tax rate of 20 percent on an expanded measure of income that adds unrealized capital gains to more conventional sources of income, like wages, business income, and investment income. …By raising the effective tax rate on capital gains, the proposal would reduce U.S. saving, discourage entrepreneurship, and decrease economic output. …An annual tax on paper gains would be conspicuously complex. The largest administrative problems relate to valuing non-tradable assets like privately held businesses and taxing illiquid taxpayers with large gains on paper but little cash on hand to pay a minimum tax bill. …Given these problems, it’s unsurprising the idea hasn’t caught on around the world.

And the Wall Street Journal has an editorial about this class-warfare scheme.

After the November midterm election, President Biden was asked what he would change in his last two years. “Nothing,” he said, and…he proved it by reproposing…enormous tax increases that he couldn’t get through even a Democratic Congress. Start with a reprise of his “billionaire minimum tax.” …For starters, it isn’t a billionaire tax and it isn’t an income tax. It would apply to households worth more than $100 million in accumulated assets, and its target is wealth. …if your assets rise in value during a year, you will pay taxes on that increase even if you realized no actual gains through a sale. …If your assets fell in value, you would not be able to deduct the full loss from your overall income. Heads the government wins, tails you lose.

The bottom line is that the capital gains tax is an awful levy.

But rather than abolishing the tax to boost American competitiveness, Biden has latched on to an idea to make a bad tax even worse.

And that’s in addition to his other proposals to make the capital gains tax more burdensome!

P.S. I guess we shouldn’t be surprised at bad ideas since the president is infamous for economically illiterate tax tweets.

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The Adverse Economic Consequences of Busting Social Security’s Wage Base Cap

Today we are going to look at proposals to expand the burden of Social Security payroll taxes, and let’s start by recycling this 2008 video.

All of the analysis in the video is still accurate, but two of the numbers need to be updated.

• Social Security’s long-run deficit is now $56 trillion rather than $24.9 trillion as was the case back in 2008.
• Social Security payroll taxes now apply to income up to $162K rather than $102K as was the case back in 2008.

If you don’t have time to watch a 9-minute video, I can summarize the issue by noting that Social Security was designed as an “earned benefit,” which means workers contribute to the system in exchange for future benefits. The more you earn, the more you pay, and the more benefits you receive.

But because Social Security is supposed to be akin to an insurance program, there’s a limit on both the amount of benefits any retiree can receive and the amount of taxes that any worker must pay (the same principle applies in many other nations).

Some politicians want to get rid of the limit (the “wage base cap”) on the amount of taxes workers must pay. Instead of applying the 12.4 percent Social Security payroll tax on the first $162,000 of income, they want to impose the tax on all income.

In some cases, they want this big increase in marginal tax rates in order to prop up the Social Security system while in other cases they actually want to expand the program.

In either case, the economic consequences would be very bad.

In today’s Wall Street Journal, Travis Nix explains why this would be counterproductive.

…lawmakers in both parties are mulling the idea of lifting the payroll tax cap. The resulting increase in revenue would do little more than delay the inevitable by extending the program’s life a few more years. …European countries cap payroll taxes at much lower incomes than the U.S. does. Germany caps payroll taxes for health insurance at about $62,000 and the Netherlands caps theirs for social security at $40,370. Uncapping the payroll tax in the U.S. would only widen the disparity and make America a less attractive country in which to work and invest. …Uncapping the payroll tax would raise the top tax rate on Americans’ labor income—income and employee payroll tax combined—to as high as 43.2%. This excludes state taxes and the employer payroll tax, which make the rate even higher. The U.S. hasn’t seen labor tax rates that high since before Ronald Reagan. …European countries that cap their payroll taxes at relatively low incomes understand that you can’t fund a social-safety net without providing an incentive to work. The U.S. should too.

Let’s also look at what Mark Warshawsky of the American Enterprise Institute wrote last year.

…imposing a massive tax increase — 12.4 percentage points — on the earnings of about 10 million highly productive, mostly middle-class workers earning more than $160,200 would have several notable consequences. It would reduce their support for the program, severely discourage their labor market participation, and encourage payroll tax avoidance through converting earnings to incentive stock options and other forms of employee stock ownership. …In many instances, these workers would have their wages taxed at federal, state and local levels at rates exceeding 70 percent. …almost 20 percent of current and future covered workers are projected to earn above the taxable maximum in any one year.

And here is some of Allison Schrager’s analysis from 2020.

When it comes to financing the future of Social Security, many Democrats have a simple and wrong solution: lift the cap on earnings subject to the payroll tax. …there are costs to these plans. A 12.4% marginal tax increase is significant. If the cap is eliminated, an individual who makes $250,000 a year would see their Social Security tax liability increase by 88%. …many households—especially those in states with high state taxes—will be paying more than 60% in federal, state, and local income and payroll taxes… only 6% of the population earns more than the cap. But income varies over people’s lives: 36% of Americans will be in the top 5% of earners at least one year of their career.

I’ll close by observing that it we’ve had big fights under Bush, Obama, Trump, and Biden about whether the top personal income tax rate should go up by about 3 percentage points or down by 3 percentage points.

Since keeping marginal tax rates low helps encourage productive behavior, those were important fights.

Now we face a fight that should be far more important since some politicians want to raise the marginal tax rate by 12.4 percentage points.

It is true that Social Security is in deep financial trouble, but propping up (or expanding) the current system would be bad news for the economy and it would produce a bleaker future for young people.

It would be far better to begin a transition to personal retirement accounts.

P.S. Chile and Australia have created personal retirement accounts. You can also learn about reforms in Switzerland, Hong Kong, Netherlands, the Faroe Islands, Denmark, Israel, and Sweden.

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A State Suicide Pact, Part I

There are some very important long-run demographic and cultural trends in the United States.

The aging of the population – and the concomitant problem of poorly designed entitlement programs – probably belongs at the top of the list.

But another big trend is internal migration, which occurs when Americans move from one state to another.

There are many reasons why people (and businesses) relocate, but tax policy seems to be an important factor.

Simply stated, some state governments grab a lot of money and don’t provide much value in return.

So it makes sense that some people will move to states with lower tax burdens and better-quality governments.

That’s bad news for high-tax states.

But some of them have responded wisely by lowering tax rates (North Carolina, for instance, used to have one of America’s 10-worst tax systems and now is ranked in the top 10).

Others, however, want to double-down on bad policy. In a report earlier this month for the Washington Post, Julie Zauzmer Weil shares some details about a multi-state proposal for wealth taxes.

Left-leaning proponents of taxing the assets held by America’s billionaires have a new target: In lieu of a federal wealth tax, state lawmakers want to tax billionaires where they live, in states like California, Washington and New York. A group of legislators in statehouses across the country has coordinated to introduce bills simultaneously in seven states… The state legislators say they would like to try such ideas as a test case for future national policy while acting collectively to minimize the threat of people moving to a nearby lower-tax state. …said Noel Frame (D), a state senator in Washington. “…This is why we are all here together. No longer will states “get pitted against each other,”… Del. Jheanelle K. Wilkins (D-Montgomery),…said…“That’s quite a bit of funds that we’re leaving on the table.”

If you read the details, these state lawmakers are not proposing the same policy. They’re not even necessarily focusing on wealth taxes.

Yes, some of them have introduced state wealth taxes, but others are proposing higher capital gains taxes, some are proposing higher death taxes, and others want to impose mark-to-market taxes which are a strange combination of wealth taxation and capital gains taxation.

In every case, though, they are digging their own graves. The Wall Street Journal opined on the proposed multi-state cartel of greed.

Democrats finally have a strategy to stop billionaires from fleeing high tax states: Block the escape routes. That’s the logic behind coordinated moves in progressive states to tax wealth. …The legislators say their plans will fund social spending, but they have a specific recipient in mind. The multistate launch was coordinated by Fund Our Future, an advocacy group affiliated with the American Federation of Teachers. As usual, public unions are pushing the progressive lawmakers they fund to tap new streams of tax revenue so they can get bigger salaries and pensions. …Each of the new tax schemes would speed up the flight from the states trying to impose them, and our readers might think even Albany and Sacramento can’t be that dumb. But ideas that begin in the progressive fringes tend to become Democratic orthodoxy these days. For those planning ahead, real-estate agents in Texas and Florida are standing by.

Building on what the WSJ wrote, the class-warfare crowd is only partly blocking the escape routes.

If these proposals become law, it may not make sense to move from California to New York, or from Illinois to Connecticut.

But there are more than 40 states that are not part of this hate-and-envy cartel. Including a bunch of states with no income taxes and others with flat taxes.

And the editorial correctly observes that real-estate agents in Texas and Florida are probably salivating at the prospect of more tax refugees looking for nice homes.

The bottom line is that there are clever ways to push for tax cartels (for example, the OECD’s despicable campaign to squash tax competition). By contrast, the states mentioned in this column are pushing a really dumb, sure-to-fail approach.

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Best and Worst News of 2022

Continuing a tradition that began back in 2013, let’s look at the best and worst developments of the past year.

Since I try to be optimistic (notwithstanding forces and evidence to the contrary), let’s start with the good news.

I’ll start by mentioning that we will now have gridlock in Washington. That’s probably a positive development, but I’ll explore that issue tomorrow as part of my “Hopes and Fears” column for 2023.

For today, let’s focus on three concrete developments from 2022 that unambiguously are positive.

States cutting tax rates and enacting tax reform – Since I’m a long-time advocate for better tax policy, I’m very pleased that more states are moving in the right direction. I especially like that the flat tax club is expanding. I’m also amused that a bad thing (massive handouts from Washington) backfired on the left (because many states decided to cut taxes rather than squander the money on new spending).

Chileans vote against a statist constitution – There was horrible news in 2021 when Chileans voted a hard-core leftist into the presidency. But we got very good news this year when the same voters overwhelmingly rejected a proposed constitution that would have dramatically expanded the power of government.

More families have school choice – Just like last year, we can celebrate that there was more progress on education this year. In 2021, West Virginia led the way. In 2022, Arizona was the best example. And we’ll discuss tomorrow why there are reasons to be optimistic about 2023.

Now let’s shift to the bad news of 2022.

I thought about listing inflation, which definitely caused a lot of economic damage this year. But the bad monetary policy actually occurred in 2020 and 2021 when central bankers overreacted to the pandemic.

So I’m going to write instead about bad things that specifically happened in 2022.

Biden semi-successfully expands the burden of government – The president was able to push through several bad proposals, such as the so-called Inflation Reduction Act and some cronyist subsidies for the tech industry. Nothing nearly as bad as his original “build back better” scheme, but nonetheless steps in the wrong direction.

The collapse of small-government conservatism in the United Kingdom – Just as today’s Republicans have deviated from Reaganism, the Conservatives in the United Kingdom have deviated from Thatcherism. Except even worse. Republicans in the USA acquiesce to higher spending. Tories in the UK acquiesce to higher spending and higher taxes.

Massachusetts voters opt for class warfare – Starting tomorrow, Massachusetts no longer will have a flat tax of 5 percent. That’s because voters narrowly approved a class-warfare based referendum to replace the flat tax with a new “progressive” system with a top rate of 9 percent. Though bad news for the state’s economy will be offset by good news for moving companies.

P.S. I almost forget to mention that the best thing about 2022 occurred on January 10 when the Georgia Bulldogs defeated Alabama to win the national championship of college football.

P.P.S. While 2022 was a mixed bag, history buffs may be interested in knowing that it was the 100th anniversary of a big tax rate reduction (top rate lowered from 73 percent to 58 percent) implemented in 1922 during the under-appreciated presidency of Warren Harding.

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The IMF, the Laffer Curve, and Supply-Side Economics

The Laffer Curve is a very straightforward concept.

It graphically illustrates why politicians are wrong if they think you can double tax revenue by doubling tax rates (or that revenues will drop by 50 percent if tax rates are cut in half).

Simply stated, you also have to look at what happens to taxable income.

In cases where taxpayers have a lot of control over the timing, level, and composition of their income, changes in tax rates may cause big changes in taxable income (or “tax base” in the jargon of economists).

None of this should be controversial. Even Paul Krugman agrees that the Laffer Curve exists.

Today, we are going to see that the pro-tax International Monetary Fund also admits there is a Laffer Curve.

Indeed, a new study authored by David Amaglobeli, Valerio Crispolti, and Xuguang Simon Sheng openly states that politicians should be very cognizant of the fact that some tax policy changes can have a big effect on the “tax base.”

This paper investigates the potential revenue impact of different tax policy changes using the Tax Policy Reform Database (TPRD)… Revenue responses to tax policy changes depend on many factors… However, one of most important factors is the nature of the tax policy change itself. For example, while a tax rate cut will directly lower revenue intake, it could also encourage more economic activity, hence expand the tax base. Estimating the revenue response to a tax policy change, therefore, requires granular information on the nature of this change, including on the tax instrument used (e.g., VAT or personal income tax), the type of change adopted (e.g., tax base, tax rate), and its timing and size.

Here are some of the findings.

We assess the impact of tax policy changes on tax revenues using Jordà (2005)’s local projections method. Our baseline results are based on tax shocks identified in the year when a tax change is announced. Our main empirical findings suggest that the revenue yield of tax policy changes varies significantly across taxes and types of changes, with tax rate changes generally having a more transitory revenue impact than tax base changes for most taxes. Specifically, base broadening changes in PIT, CIT, EXE, and PRO have on average a more significant and long-lasting impact on tax collection than rate changes. At the same time, rate hikes have relatively more significant effects on taxes in the case of VAT and SSC measures.

Most notably, the report finds tax increases hurt prosperity, especially higher marginal tax rates.

Gechert and Groß (2019) conclude that measures to broaden the tax base are less harmful to economic growth than tax hikes. Dabla-Norris and Lima (2018) find that during fiscal consolidations, tax base-broadening measures lead to smaller output and employment declines compared to measures to increase tax rates.

And we learn that it is very foolish to raise corporate tax rates.

Mertens and Ravn (2013) find that…increases in CIT are approximately revenue neutral for the United States. …Announcements of CIT increases are associated with a somewhat transitory rise in tax collection, suggesting that companies have quickly adapted their business to reduce the tax burden.

For wonky readers, here’s a chart from the study. Note how, in many cases, there’s not much difference in revenue between tax increases (blue line) and tax cuts (red lines).

P.S. One big takeaway is that there is not a single Laffer Curve. There are multiple Laffer Curves depending on the tax that’s being changed and the ability of taxpayers to change their behavior.

P.P.S. A less-obvious takeaway is that class-warfare taxes cause the most economic damage, meaning the most harm to ordinary people.

P.P.P.S. You can call it the “Khaldun Curve” if you prefer.

P.P.P.P.S. I have trouble deciding what evidence is most powerful, the views of CPAs or the data from the OECD?

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Another Guilt-Ridden Neurotic Leftist

At the risk of sounding like a “snowflake,” there are some things that “trigger” me.

It drives me crazy, for instance, when rich leftists support tax increases, particularly since many of them (Elizabeth Warren, Joe Biden, Bill and Hillary Clinton, John Kerry, etc, etc, etc, etc, etc, etc) lower their tax bills by using expensive lawyers and accountants.

If they really think politicians in Washington should have more money, they can easily volunteer extra money via a website maintained by the Treasury Department.

But they never seem to do that. Instead, all their moral posturing is focused on raising other people’s taxes.

This is not just a problem in the United States.

Indeed, Emma Bubola of the New York Times recently reported on one of these neurotic people from Europe.

By the time her extraordinarily wealthy grandmother died last month, Marlene Engelhorn already knew who she wanted to be the ultimate beneficiary of the enormous inheritance coming her way: the tax man. “The dream scenario is I get taxed,” said Ms. Engelhorn, the co-founder of a group called Tax Me Now. …For more than a year, Ms. Engelhorn has been campaigning for tax policies that would redistribute her eight-figure windfall — and anyone else’s. …she entered the orbit of groups of pro-tax millionaires, whose members meet in person or on video calls to discuss their privileges — and how to get the state to strip them away. …members are expected to share how they are engaged in what they typically term “reparations” to society. …Its policy goal is to implement or to increase inheritance and wealth taxes (Austria, where Ms. Engelhorn lives, abolished its inheritance tax in 2008). …Ms. Engelhorn’s multiple radio and TV appearances have resulted in dozens of people reaching out to ask her directly for financial help. She said it wrecks her to say no, but she believes it should not be on her to decide who gets her money. “I would like tax justice to take this impossible decision off my hands,” she said.

This type of nonsense triggers three reactions from me.

• First, I’m sure European governments have provisions in their law to accept voluntary payments. Strange how Ms. Engelhorn is not taking advantage of the opportunity.
• Second, she seems completely oblivious to the research showing how rich entrepreneurs (like her ancestors) created wealth – most of which goes to other people.
• Third, I didn’t know whether to laugh or cry when I read how it “wrecks her” to say no to people suffering hardship. She must be a sad joke of a person.

Though there was one part of the story that produced a genuine smile on my face.

It seems one of Ms. Engelhorn’s ancestors cleverly (and appropriately) did the German version of a corporate inversion.

It is not the first time a member of Ms. Engelhorn’s family has made headlines with tax-related issues. When her great-uncle and archaeology donor Curt Engelhorn sold Boehringer Mannheim, German tax authorities didn’t collect a dime because he had previously moved the company’s legal seat abroad.

Let’s close by looking at a different perspective.

In a column for the Foundation for Economic Education, Rainer Zitelmann opined on the existence of guilt-ridden rich people.

I know hundreds of multimillionaires and plenty of billionaires and conducted in-depth interviews with 45 of them for my doctoral dissertation The Wealth Elite. But I have yet to meet anyone who felt they weren’t paying enough tax. The 100 millionaires and billionaires from nine countries who have signed the latest letter asking to pay more tax might sound like a lot, but there are 2,755 billionaires around the world. There are also more than 20 million millionaires in the world, so 100 is equivalent to 0.0005 percent.

Though I’m not sure I fully embrace Rainer’s optimistic numbers.

After all, there’s strong evidence that rich people are now a reliable leftist voting bloc. At least in the United States.

P.S. You can see me debate guilt-ridden neurotic leftists by clicking here and here.

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The Most Important Ballot Referendum of 2022

Post-Election Addendum: Sadly, Massachusetts voters narrowly approved this class-warfare scheme.

While most people pay attention to which political party enjoys success when there’s an election, I think it’s also important to look at ballot initiatives.

• In 2021, voters in the left-leaning state of Washington overwhelmingly registered their opposition to capital gains taxation.
• In 2020, voters in the deep-blue state of Illinois said no to the big spenders by voting to preserve the state’s flat tax.
• In 2019, voters in left-leaning Colorado also said no to the big spenders by voting to protect the state’s spending cap.

But, as we’ve seen in California and Oregon, not every referendum produces a sensible result.

Today, we’re going to look at the most important ballot initiative of 2022. But before looking at the details, here’s a map showing the states gaining and losing population when Americans move across borders.

You’ll notice that Massachusetts is one of the top states for outbound migration, which means people are “voting with their feet” against the Bay State.

But bad news can become worse news. And that will definitely be the case if voters in Massachusetts approve a referendum next month to junk the state’s flat tax and replace it with a class-warfare system that has a top rate of 9 percent.

Jeff Jacoby wrote last year about the idea in a column for the Boston Globe.

A century-old provision of the Massachusetts Constitution commands that if the commonwealth taxes income, it must do so at a “uniform rate.” Five times in the modern era — in 1962, 1968, 1972, 1976, and 1994 — tax-and-spend liberals have invited voters to discard that rule and make it legal to soak the rich at higher tax rates. Five times voters have said no. …There is considerable arrogance in the way advocates of the surtax blithely disregard the voters’ repeated refusal to overturn the constitutional ban. Their attitude seems to be that no matter how many times the people uphold the uniform-rate rule, there is no reason to take them seriously. …more than 150 Massachusetts businesses representing almost 16,000 workers sent lawmakers an open letter imploring them not to hobble the state’s economy with a stiff new tax, and expressing “alarm” at the proposed constitutional amendment. They…know that a surtax aimed at millionaires is bound to injure countless people who will never earn anywhere close to a million bucks.

The Wall Street Journal has editorialized against the proposal.

…progressives in Boston want to join New York and other nearby states in a high-tax arms race. …Bay State ballots in November will give voters the choice to place a 4% surtax on incomes above $1 million, bringing the top rate to 9% from 5%. The proposal would amend the state constitution to remove its flat-tax mandate. Passing the measure would rocket Massachusetts to seventh from 31st on the list of states with the highest marginal income-tax rates. …A $2.3 billion revenue surplus shows that the state is already taxing more than it needs. This year’s tax haul was so big it triggered a largely forgotten state law that caps revenue. Residents may soon receive checks that refund a portion of last year’s taxes. …Approving the tax would speed up a wealth exodus already under way. The Pioneer Institute last year noted that Massachusetts’ tax base has been eroding, and there’s no surprise about where the escapees are going. The top two destinations are Florida and New Hampshire, both of which lack an income tax. …The constitution’s flat rate mandate is a crucial limit on the demands of interest groups for ever-more spending. If tax rates rise and the revenue cap goes away, spending will soar to snatch the new revenue and soon the politicians will return to seek even higher rates, as they always do.

The economic consequences of class-warfare taxation are never positive.

And that will be true in Massachusetts. A study from the Beacon Hill Institute in Massachusetts estimates the economic damage that the surtax would cause.

…we find, using our in-house computer model (MA-STAMP) that the effects on the economy will be as follows: In its first year of implementation, the amendment will cause the state to lose 4,388 working families due to outmigration. This outmigration plus a reduction in labor hiring and labor-force participation will cause a loss of 9,329 jobs. …the state economy, real (inflation-adjusted) gross domestic product, will shrink by $431 million… Advocates of the measure claim that it will make possible a $2 billion annual in state spending. …Instead, we find that the revenue yield of the tax will be far less, the result of the expected shrinkage in economic activity. (See Table E-2.) In its first year of implementation, combined state and local revenues will rise by only about $1.2 billion.

Here’s a table showing some of the negative effects.

Alex Brill of the American Enterprise Institute also estimated that revenues would be lower than expected once the effects of the Laffer Curve are incorporated into the analysis.

Here are some excerpts from his article in the Hill.

Modifying the revenue forecast to incorporate evidence from the academic literature about likely behavioral changes yields a significantly lower estimated revenue pickup. I estimate that about 400 of the 22,000 taxpayers affected by the surtax would exit the state and many others would reduce work or shift and relabel their income to avoid the tax. By my estimate, the surtax would generate approximately $1.5 billion in 2023, since these behavioral responses would offset 32 percent of the revenue gain that would occur if taxpayers kept their behavior unchanged. Using a similar approach, Tufts University’s Center for State Policy Analysis recently estimated that the proposed surtax would generate only $1.3 billion in 2023.

Last but not least, the Tax Foundation crunched the numbers and also found the surtax would cause significant economic damage.

…while no one would mistake Massachusetts for a low-tax state, it has carved out a place as a competitive area to live and work within the Northeast corridor. …but consider the Commonwealth’s ranking on the Tax Foundation’s State Business Tax Climate Index…in 2022, the Bay State still ranked 34th overall on the Index—well below the median. …Massachusetts’ competitive tax advantage in New England is primarily due to its individual income and sales tax systems, which rank 11th and 12th on the Index, respectively. With regard to its neighbors, only New Hampshire has a better overall Index ranking than Massachusetts. …In 2007, Christina Romer and David Romer, professors of economics at the University of California Berkeley, conducted a study to determine the impact of legislated tax changes on the economy. …The study found that a tax increase equal to 1 percent of gross domestic product (GDP) resulted in an estimated 3 percent decline in GDP after three years. …If the Romer and Romer study were applied to the Massachusetts surtax it would result in a 0.942 percent decline in GDP after three years. In other words, the Commonwealth’s total economic output could contract by $5.98 billion by the end of 2025.

Here’s a table from the report, showing that zero-income tax New Hampshire and Florida already are big winners when people escape Massachusetts.

If the referendum is approved, we can easily predict that future versions of this chart will show much bigger numbers.

Simply stated, some of the geese with the golden eggs will fly away (while the ones that stay will decide to produce fewer eggs – as well as figure out ways to protect the eggs that remain).

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Taxing Stock Buybacks: Bad for Workers and Investors

Whenever I discuss the varying types of double taxation on saving and investment (capital gains tax, dividend tax, corporate income tax, death tax, wealth tax, etc), I always emphasize that such levies discourage capital (machinery, tools, technology, etc) which leads to lower levels of productivity.

And lower levels of productivity mean less compensation for workers.

Some of my left-leaning friends dismiss this as “trickle-down economics,” but the relationship between capital and wages is a core component of every economic theory.

Even socialists and Marxists agree that investment is a key to rising wages (though they foolishly think government should be charge of making investments).

I’m providing this background because today’s column explains that politicians made a mistake when they included a tax on “stock buybacks” in the misnamed Inflation Reduction Act.

I’ve written once on this topic, mostly to explain that buybacks should be applauded. They are a way for companies to distribute profits to owners (shareholders) and have the effect of freeing up money for better investment opportunities.

Let’s look at some more recent analysis.

In a column for today’s Wall Street Journal, two Harvard Professors, Jesse Fried and Charles Wang, debunk the anti-buyback hysteria.

A 1% tax on stock buybacks is poised to become law as part of the Inflation Reduction Act just passed by the Senate. This is a victory for critics… But those critics are dead wrong. If anything, American corporations should be repurchasing more stock. Taxing buybacks will increase corporate bloat, lead to higher CEO pay, harm employees and reduce innovation in the economy. …A tax on buybacks will harm shareholders. It creates an incentive for managers to hoard cash, leading to even more corporate bloat and underused stockholder capital. Because CEO pay is tied closely to a firm’s size, this bloating will drive up executive compensation, further hurting investors. …Taxing buybacks will harm employees as well. …Our research shows that 85% of this value flows to employees below the top executive level. Increasing the tax burden will tend to lower equity pay, to the detriment of workers. …A tax that inhibits buybacks will also reduce the capital available to smaller private firms. The cash from shareholder payouts by public companies often flows to private ones, such as those backed by venture capital or private equity. These private firms account for half of nonresidential fixed investment, employ almost 70% of U.S. workers, are responsible for nearly half of business profit, and have been important generators of innovation and job growth. Bottling up cash in public companies will reduce the capital flowing to private ventures—and thus their ability to invest, innovate and hire more workers.

Professor Tyler Cowen of George Mason University makes similar points, in a very succinct manner.

This is flat out a new tax on capital, akin to a tax on dividends. …Are you worried about corporations being too big and monopolistic?  This makes it harder for them to shrink!  Think of it also as a tax on the reallocation of capital to new and growing endeavors.

Catherine Rampell of the Washington Post is far from a libertarian, but even she warned that the hostility to stock buybacks makes no sense.

You’ve probably heard some ranting recently about “stock buybacks,” the term for when a public company repurchases shares of its own stock on the open market. …Why do Democrats hate buybacks so much? …they proposed legislation to ban buybacks. They excoriated companies for returning cash to shareholders… Share buybacks themselves aren’t necessarily bad — particularly when the alternative is wasting investor money… Yelling at companies to stop their buybacks won’t cause them to increase investment… In fact, some policy measures Democrats are considering, ostensibly to discourage firms from returning so much cash to shareholders, would do the opposite.

The only good news to share is that the tax being enacted by Democrats is just 1 percent, so the damage will be somewhat limited (the main economic damage will be because of another provision in the legislation, the tax on “book income“).

Though I suppose we should be aware that a small tax can grow into a big tax (the original 1913 income tax had a top rate of just 7 percent and we all know that the internal revenue code has since morphed into an anti-growth monstrosity).

The bottom line is that the crowd in Washington has made a bad tax system even worse.

P.S. Since we have been discussing how taxes on capital are bad for workers, this is an opportunity to share an old cartoon from the British Liberal Party (meaning “classical liberal,” of course). The obvious message is that labor and capital are complementary factors of production.

And the obvious lesson is that you can’t punish capital without simultaneously punishing labor. Sadly, I’m not holding my breath waiting for Washington to enact sensible tax policy.

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The Case against Confiscatory Tax Rates, Part I

Back in 2009, I narrated a video about the downsides of class-warfare tax policy.

But if you don’t want to spend eight minutes watching the video (or 14 minutes watching this video), here’s a visual that summarizes why high tax rates discourage people from engaging in productive behavior.

The most important thing to understand is that a high marginal tax rate (i.e., the tax rate on earning more money) has a big effect on incentives to work, save, invest, and be entrepreneurial.

But how big is that effect?

Let’s review some new research from Professor Charles Jones.

The classic tradeoff in the optimal income tax literature is between redistribution and the incentive effects that determine the “size of the pie.” …However, what is in some ways the most natural effect on the size of the pie has not been adequately explored. …To the extent that top income taxation distorts…innovation, it can impact not only the income of the innovator but also the incomes of everyone else in the economy. …High incomes are a prize that partly motivates entrepreneurs to turn basic insights into a product or process that ultimately benefits consumers. High marginal tax rates deter this effort and therefore reduce innovation and overall GDP. …For example, consider raising the top marginal tax rate from 50% to 75%. …the change raises about 2.5% of GDP in revenue before the behavioral response. In the baseline calibration…, this increase in the top tax rate reduces innovation and lowers GDP per person in the long run by around 7 percent. …even redistributing the 2.5% of GDP to the bottom half of the population would leave them worse off on average: the 7% decline in their incomes is not offset by the 5% increase from redistribution. In other words, raising the top marginal rate from 50% to 75% reduces social welfare…the rate that incorporates innovation and maximizes the welfare of workers is much lower: the benchmark value is just 9%.

Here’s a table from the study showing how the optimum tax rate is very low if the goal is to help workers and society rather than politicians.

If you want more evidence, there’s a never-ending supply.

But if we want to be concise, start with this list.

• Higher tax rates on the rich will reduce capital formation.
• Higher tax rates on the rich will lower economic output.
• Higher tax rates on the rich will shrink the labor supply.
• Higher tax rates on the rich will depress levels of entrepreneurship.
• Higher tax rates on the rich will lead to lower middle-class wages.
• Higher tax rates on the rich will reduce economic mobility.
• Higher tax rates on the rich will drive away superstar inventors.
• Higher tax rates on the rich will lower levels of innovation.
• Higher tax rates on the rich will lead to higher taxes for everyone else.
• Higher tax rates on the rich will encourage tax complexity.

Heck, higher tax rates can even hurt your favorite sports team.

P.S. Joe Biden wants people to think that it’s patriotic to pay more tax, though he exempts himself with clever tax planning.

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The IMF’s Tax-Free Bureaucrats Target Bulgaria

I’m not a fan of the International Monetary Fund, in part because the international bureaucracy is infamous for pressuring nations to impose higher taxes.

The bureaucrats at the IMF have even claimed that higher taxes somehow will produce more economic growth.

Even worse, the IMF has argued for class-warfare taxes that do the most economic damage, even using the twisted rationale that it is okay to hurt the poor so long as the rich suffer even greater losses.

To be fair, there are some good fiscal economists at the IMF (even with regards to tax policy), but the political types who run the bureaucracy almost always ignore their research.

Instead, the bureaucracy highlights second-rate analysis in pursuit of bad policy.

The latest example if that the IMF is pressuring Bulgaria to replace its flat tax with a system based on discriminatory rates.

Fiscal policy needs to be flexible given the large uncertainty, but some changes are already advisable in the mid-year budget revision. …Room to address long-term social and investment needs could be significantly increased by…Reviewing the tax system to increase revenue and redistribution . A reform of the low flat personal income tax rate could help create fiscal space and reduce inequalities.

By the way, just in case it’s not obvious, “social and investment needs” is bureaucrat-speak for more redistribution spending.

Some of you may be wondering whether a new system is needed because the flat tax caused a big drop in revenue.

But as you can see from this chart, income tax revenues continued to grow after the flat tax was approved in 2008.

I’ll close by noting that Bulgaria is ranked #36 in the latest edition of Economic Freedom of the World, which is a good but not great score.

But it gets its lowest score for “size of government,” which is the measure for fiscal policy. The flat income tax is a positive, of course, but that policy is offset by low scores for other features of fiscal policy (payroll tax, redistribution, etc).

So the bottom line is that the IMF wants to get rid of the good part of Bulgaria’s fiscal policy and drive its overall score even lower.

P.S. I also disapprove of the IMF because it subsidizes and encourages debt and instability with endless bailouts.

P.P.S. And I am disgusted that IMF bureaucrats get tax-free salaries while advocating for higher taxes for everyone else.

P.P.P.S. The IMF has a reprehensible track record of bullying nations in Eastern Europe. Though, to be fair, they also push for bad tax policy in big and powerful nations. And in weak and poor nations.

P.P.P.P.S. Here’s my solution to the IMF problem.

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Biden’s Nonsensical Class-Warfare Tweet

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

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

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

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

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

What accounts for his most recent error?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Thomas Piketty: Bad Numbers and Bad Economics

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

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

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

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

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

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

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

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

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

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

She also thought his fixation on envy was misguided.

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

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

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

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

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

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

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

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

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