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Posts Tagged ‘Class warfare’

While Switzerland is one of the world’s most market-oriented nations, ranked #4 by Economic Freedom of the World, it’s not libertarian Nirvana.

Government spending, for instance, consumes about one-third of economic output. That may be the second-lowest level among all OECD nations (fast-growing South Korea wins the prize for the smallest public sector relative to GDP), but it’s still far too high when compared to Hong Kong and Singapore.*

Moreover, while the Swiss tax code is benign compared to what exists in other European nations, it also is not perfect. One of the warts is a wealth tax, which is a very pernicious levy that drains capital from the private sector.

Let’s look at some excerpts from a report in the Wall Street Journal, starting with a description of the Swiss system.

Switzerland has taxed wealth since the late 18th century. Its 26 cantons in 2014 levied taxes on net wealth with rates varying from 0.13% in the lighter taxing German-speaking parts to 1% in French-speaking Geneva. Swiss wealth taxes are also special because they apply from wealth as low as 25,000 Swiss francs, ensuring large swaths of the middle class incur them. Typical taxpayers pay a rate of just over 0.5%.

Here are the wealth tax rates in the various cantons, based on a recent study of the system.

As noted in the WSJ story, that study contains strong evidence that the tax is hurting Switzerland.

…according to a new paper, …taxing wealth leads declared wealth to disappear. Based on experience in Switzerland, which uses wealth taxes the most, reported wealth falls around 20 times as much in response to an increase in a wealth tax as it does to an equivalent increase in a tax on capital income, such as dividends or capital gains. …Economists at the University of Lausanne and Massachusetts Institute of Technology found that a 0.1 percentage point increase in Swiss wealth taxes caused a 3.5% reduction in reported wealth. That’s equivalent to 100,000 Swiss francs going missing for a person worth 3 million francs. …they conclude in a study investigating changes in wealth tax rates on Swiss taxpayers’ reported wealth from 2001 to 2012.

Why is there such a big response?

For the same reason that class-warfare taxes don’t work very well in the United States. Simply stated, taxpayers have considerable ability to rearrange their financial affairs when governments try to tax capital (or capital income). And that ability is especially pronounced for those with higher levels of income and wealth.

Individuals have greater control over their reported wealth–especially financial wealth such as bank deposits, stock and bonds–than their reported income.

By the way, the story also included this nugget of good news.

Thanks primarily to tax competition, many nations have eliminated wealth taxes over the past 20 years.

…only five members of the Organization for Economic Cooperation and Development still levy annual taxes on individuals’ total financial and non-financial wealth… That is down from 14 nations two decades ago.

And if you want more good news, the Swiss cantons also are lowering their tax rates on wealth.

Here’s another map from the study. It shows that a couple of French-speaking cantons have imposed very small increases in the tax since 2003, while the vast majority of cantons have moved in the other direction, in some cases slashing their wealth tax rates by substantial amounts.

Since I’m a big fan of Switzerland, let’s close with some more good news about the Swiss tax system. Not only are tax rates on wealth dropping, but there’s no capital gains tax. And there are no taxes on interest.

So while there is a wealth tax, which is a very unfortunate and destructive imposition, the Swiss avoid many other forms of double taxation on income that is saved and invested.

*The burden of government spending also is excessive in Hong Kong and Singapore. Based on historical data, economic performance will be maximized if total government spending is less than 10 percent of GDP.

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As I’ve pointed out before, the big difference between the United States and Europe is not taxes on the rich. We both impose similar tax burden on high-income taxpayers, though Europeans are more likely to collect revenue from the rich with higher income tax rates and the U.S. gets a greater share of revenue from upper-income taxpayers with double taxation on interest, dividends, and capital gains (we also have a very punitive corporate tax system, though it doesn’t collect that much revenue).

The real difference between America and Europe is that America has a far lower tax burden on lower- and middle-income taxpayers.

  • Tax rates in Europe, particularly the top rate, tend to take effect at much lower levels of income.
  • European governments all levy onerous value-added taxes that raise costs for all consumers.
  • Payroll tax burdens in many European nations are significantly higher than in the United States.

This makes for interesting cross-border comparisons, but it also raises an overlooked point about political attitudes. Why are leftists so hostile to successful people?

Think about it this way. If a farmer has five cows but one of the cows produces most of his milk, at the very least he would treat that cow with great care and concern.

Left-wing politicians in the United States, by contrast, express contempt and disdain for the upper-income taxpayers who finance our welfare state.

Let’s look at some of the numbers

The invaluable Mark Perry of the American Enterprise Institute points out that the top-20 percent bear the lion’s share of the fiscal burden in the United States.

CBO provides detailed data on American households for each income quintile in 2013 for: a) average household “market income”(includes labor income, business income, income from capital gains, and retirement/pension income), b)average household transfer payments (payments and benefits from federal, state and local governments including Social Security, Medicare, Medicaid, unemployment insurance, and Supplemental Nutrition Assistance Program (SNAP)), and c) average federal taxes paid by households (including income, payroll, corporate, and excise taxes).

Mark presents that data in an easy-to-understand format and highlights the relevant numbers in red. The key takeaway is that the top-20 percent basically finance our Leviathan.

To make the issue even clearer, Mark created a chart showing the data from the sixth line in the above table.

Again, the only possible conclusion to reach is that higher-income households are the net financiers of big government.

Now let’s augment Mark’s analysis by examining some research from Scott Greenberg and John Olson of the Tax Foundation.

They also review the new CBO numbers and their focus in the tax burden on the top-1 percent (i.e., people who actually are rich).

One of the main takeaways from this year’s report is that the richest Americans pay a lot in taxes. In 2013, the top 1 percent of households paid an average of 34.0 percent of their income in federal taxes. To compare, the middle 20 percent of households paid only 12.8 percent of their income in taxes. Moreover, taxes on the rich are much higher than they’ve been in recent years. …in 2013, the top 1 percent of taxpayers paid a higher tax rate (34.0 percent) than in the year President Reagan took office (33.2 percent).

And here’s the chart accompanying their analysis.

There are all sorts of interesting stories inside this graph, such as the interaction of capital gains taxes and stock market performance (the top-1 percent tend to be significant investors).

There are also interesting stories that aren’t captured by this graph, such as the fact that rich people have great ability to adjust their taxable income when tax rates climb and fall (which was one of the reasons rich people paid a lot more tax when Reagan dropped the top tax rate from 70 percent to 28 percent). Also, the average tax rate is less important than marginal tax rates if you want to understand how much damage the tax code imposes on the economy.

But for our purposes today, all that matters is that rich people over the past several decades have coughed up, on average, about 31 percent of their income to Uncle Sam.

That’s a lot of money. In effect, the federal government gets a dividend when successful taxpayers earn money.

Which brings us back to the perplexing fact that leftists have nothing but scorn for the folks who finance the welfare state.

Indeed, some statists have so much contempt for successful people that they want to push tax rates to high that the rich no longer would want to earn additional money. Which means, of course, that the IRS wouldn’t be collecting any money.

I don’t know whether the right metaphor is a farmer abusing the cow that produces most of the milk or a shareholder who sabotages the company paying good dividends, but the only possible conclusion is that leftists hate rich people more than they like big government.

If you think I’m exaggerating and such people don’t exist, watch this video – especially beginning about the 4:30 mark.

P.S. To be fair, leftists don’t hate all rich people. They’re willing to shower bailouts, subsidies, and handouts on wealthy people who give them lots of campaign contributions.

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My favorite Margaret Thatcher moment might be when she pointed out there’s no such thing as public money, only taxpayer money.

Or perhaps when she exposed leftists for being so fixated on class warfare that they would be willing to hurt the poor if they could hurt the rich even more.

That being said, I wouldn’t be surprised if most people instead chose Thatcher’s famous line about socialism and running out of other people’s money.

Which is a great line that cleverly pinpoints the ultimate consequence of statism. Just think Greece or Venezuela.

But what can we say about starting point rather than end point? Why do people get seduced by socialism in the first place?

For part of the answer, let’s turn to the famous quote from George Bernard Shaw about how “A government which robs Peter to pay Paul can always count on the support of Paul.”

Very insightful, I hope you’ll agree.

Though it’s an observation on all governments, not just socialist regimes.

So I’m going to propose a new quote: “Socialism is fun so long as someone else is paying for it.”

And the reason I concocted that quote is because it’s a perfect description of many of the people supporting Bernie Sanders.

According to a poll conducted by Vox, they want freebies from the government so long as they aren’t the ones paying for them.

When we polled voters, we found most Sanders supporters aren’t willing to pay more than an additional $1,000 in taxes for his biggest proposals. That’s well short of how much more the average taxpayer would pay under his tax plan. …In other words, even Sanders supporters are saying they don’t want to pay as much to the federal government for health care as they are paying right now in the private sector. …The kicker for all of this? Some analysts believe Sanders’s plan will cost twice as much as his campaign estimates. …Sanders supporters are far and away the most likely to want free public college tuition. Still, 14 percent said they don’t want to pay additional taxes for it — and another half said they would only pay up to $1,000 a year…the majority of Sanders supporters in our poll (much less all voters) aren’t willing to pay enough to actually support those nationalized services.

As you can see from this chart, they want government to pick up all their medical expenses, but they’re only willing to pay $1,000 or less.

Gee, what profound and deep thinkers.

Maybe we should ask them if they also want private jets if they only have to pay $1,000. And Hollywood mansions as well.

The pie-in-the-sky fantasies of Bernie and his supporters are so extreme that even the statists at the Washington Post have editorialized against his proposals.

Mr. Sanders’s offerings to the American people are, quite simply, too good to be true, and much less feasible, politically or administratively, than he lets on. More expensive, as well. …Despite the substantial tax increases associated with Mr. Sanders’s policies, they would not be fully paid for — not even close. To the contrary, the tax hikes would be sufficient to cover just 46 percent of the spending increases, resulting in additional budget deficits of $18 trillion over 10 years. A deficit increase of that magnitude would cause an additional $3 trillion in interest payments over the same period — unless, of course, Mr. Sanders has another $18 trillion in tax increases or spending cuts up his sleeve.

The editorial writers at the Post, like so many people in Washington, make the mistake of fixating on the symptom of red ink instead of the underlying disease of excessive spending.

Would they actually favor his crazy ideas if he produced $18 trillion of additional tax hikes over the next 10 years?

Returning to the topic of whether Bernie voters actually would be willing to pay more tax, I recently appeared on Fox Business News to discuss the odd phenomenon of workers in the high-tech industry giving contributions to the anti-capitalist Senator from Vermont.

I confess that I don’t really know what would motivate someone to support Bernie Sanders, but I did share some thoughts.

  • Republicans in recent decades have been big spenders, so libertarian-minded voters in Silicon Valley may have decided to base their votes on social issues.
  • The high-tech industry may simply be sending “protection money” to leftist politicians, though that’s probably a motive only for senior executives.
  • It’s rather ironic that the left goes after companies like WalMart and Exxon when firms like Google and Apple have much bigger profit margins.

Don’t forget, by the way, that the only difference between Bernie and Hillary is how fast we travel on the road to Greece.

P.S. Unfortunately, I haven’t accumulated much Bernie humor, though the Sandersized version of Monopoly is quite clever.

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If you follow the contest between Hillary Clinton and Bernie Sanders, most of the tax discussion is about who has the best plan to squeeze the rich with ever-higher tax rates.

For those motivated by spite and envy, Bernie Sanders “wins” that debate since he wants bigger increases in the tax rates on investors, entrepreneurs, business owners, and other upper-income taxpayers.

For those of us who don’t earn enough to be affected by changes in the top tax rates, this may not seem to be a relevant discussion. Some of us like the idea of higher tax rates on our well-to-do neighbors because we expect to get a slice of the loot and we think it’s morally okay to use government to take other people’s money. Others of us don’t like those higher rates because we don’t resent success and we also worry about the likely impact on incentives to create jobs and wealth.

But all of us are making a mistake if we think that the policy proposals from Bernie and Hillary won’t mean higher taxes on ordinary Americans.

Here are three basic proposition to help explain why lower-income and middle-income taxpayers are the ones who face the biggest threat.

  1. Hillary and Bernie want government to be much bigger, because of both built-in expansions of entitlements and a plethora of new handouts and subsidies.
  2. There’s not much ability to squeeze more money from the “rich” and America already has the developed world’s most “progressive” tax system.
  3. The only practical way to finance bigger government is with big tax hikes on the middle class, both with higher income taxes and a value-added tax.

There’s not really any controversy about the first proposition. We know the two Democratic candidates are opposed to genuine entitlement reform, so that means the burden of government spending automatically will climb in coming decades. And we also know that Hillary and Bernie also want to create new programs and additional spending commitments, with the only real difference being that Bernie wants government to expand at a faster rate.

So let’s look at my second proposition, which may strike some people as implausible, particularly the assertion that America has the most “progressive” tax system. After all, don’t European nations impose higher tax rates on the “rich” than the United States?

Yes and no, but first let’s deal with the issue of whether the rich are a never-ending spigot of tax revenue. The most important thing to understand is that there’s a huge difference between tax rates and tax revenue. If you don’t believe me, simply look at the IRS data from the 1980s, which shows that upper-income taxpayers paid far more to Uncle Sam at a 28 percent tax rate in 1988 than they paid at a 70 percent tax rate in 1980.

And keep in mind that there are incredibly simple – and totally legal – steps that well-to-do taxpayers can take to dramatically lower their tax exposure.

The bottom line is that high tax rates penalize productive behavior and encourage inefficient tax planning, the net effect being that higher tax rates won’t translate into higher revenue.

Moreover, as shown by a different set of IRS data, the American tax system already is heavily biased against the so-called rich. Even when compared with other countries. There are some nations that impose higher top tax rates than America, to be sure, but that’s only part of the story. The “progressivity” of a tax system is based on what share of the burden is paid by the rich.

And if you look at this data from the Tax Foundation, particularly the two measures of progressivity in columns 1 and 3, you can see that the United States gets a greater share of taxes from the rich than any other developed nation.

By the way, the data is from the middle of last decade, so the numbers are probably different today. But since we’ve taken more people off the tax rolls in the past 10 years in America while also increasing tax rates on upper-income households, I would be shocked if the United States didn’t still have the most “progressive” tax code.

In any event, the most important takeaway from the Tax Foundation data is that America has the most “progressive” tax system not because we impose the highest tax rates on the rich, but rather for the simple reason that the tax burden on lower-income and middle-income taxpayers is comparatively mild.

In other words, the tax burden on the rich in America is not particularly unusual. Some nations impose higher tax rates and some countries impose lower tax rates. But because other taxpayers in the U.S. pay very low effective tax rates, that’s why the overall tax code in the United States is so tilted against the rich.

Which brings us to the third proposition about the middle class being the main target of Hillary and Bernie.

Simply stated, the only practical way of financing bigger government is by raising the tax burden on lower-income and middle-income Americans. As already explained, there’s not much leeway to generate more tax revenue from the “rich.”

In other words, the rest of us have a bulls-eye painted on our backs. Our tax burden is relatively low by world standards and there are simple and effective ways that politicians could grab more of our income.

Let’s look at some of the details. The folks at the Pew Research Group crunched the data for 39 developed nations to compare tax burdens for various types of middle-income households. As you can see, taxpayers in the United States are relatively fortunate, particularly if they have kids.

Here are some excerpts from the article.

…most research has concluded that, at least among developed nations, the U.S. is on the low end of the range.  We looked at 2014 data from the Organization for Economic Cooperation and Development’s database of benefits, taxes and wages, which has standardized data from 39 countries going back to 2001 and allows comparisons across different family types. …We calculated this for four different family types: a single employed person with no children; two married couples with two children, one with both parents working and the other with one worker; and a single working parent. In all cases, the U.S. was below the 39-nation average – in some cases, well below. …Much of the difference in relative tax burdens among different countries is due to the taxes that fund social-insurance programs, such as Social Security and Medicare in the U.S. These taxes tend to be higher in other developed nations than they are in the U.S.

And here’s the most shocking part of the article. The aforementioned data only considers income taxes and payroll taxes.

…the OECD data don’t include…other national taxes, such as…value-added taxes.

This is a huge omission. The average VAT in Europe is now 21 percent, so the actual tax burden on taxpayers in other nations is actually much higher than shown in the chart prepared by Pew.

Let’s look at the scorecard.

  • Non-rich Europeans pay higher income tax rates.
  • Non-rich Europeans pay higher payroll taxes.
  • Non-rich Europeans pay the value-added tax.

And because all these taxes on lower-income and middle-income people are the only effective and realistic way to finance European-sized government, this is the future Hillary and Bernie want for America. Even though they won’t admit it.

P.S. I can’t resist pointing out that the countries most admired by Bernie Sanders, Denmark and Sweden, both have tax systems that are far less “progressive” than the United States according to the Tax Foundation data. And the reason for that relative lack of progressivity is because of a giant fiscal burden on lower-income and middle-income taxpayers. And that’s what will happen in the United States if entitlements aren’t reformed.

P.P.S. Since I’m a fan of the flat tax, does that mean I like the countries with lower scores in column 3 of the Tax Foundation table? Yes and no. A lower score obviously means that a nation’s tax code isn’t biased against successful taxpayers, but it’s also important to look at the overall size of the public sector. Sweden’s tax system isn’t very progressive, for instance, but everyone pays a lot because of a bloated government. It’s far better to be in Switzerland, which has the right combination of a modest-sized government and a non-discriminatory tax regime.

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Hillary Clinton and Bernie Sanders are basically two peas in a pod on economic policy. The only difference is that Sanders wants America to become Greece at a faster rate.

Folks on the left may get excited by whether we travel 60 mph in the wrong direction or 90 mph in the wrong direction, but this seems like a Hobson’s choice for those of us who would prefer that America become more like Hong Kong or Singapore.

Consider the issue of taxation. Clinton and Sanders both agree that they want to raise tax rates on investors, entrepreneurs, small business owners, and other “rich” taxpayers. The only difference is how high and how quickly.

Scott Winship of the Manhattan Institute has a must-read column on this topic in today’s Wall Street Journal.

He starts by speculating whether there’s a rate high enough to satisfy the greed of these two politicians.

Here is a question to ask Hillary Clinton and Bernie Sanders: What is the best tax rate to impose on high-income earners…? Perhaps they think it is 83%, a rate that economists Thomas Piketty and Emmanuel Saez hypothesized in 2014… Or maybe it is 90%, which Sen. Sanders told CNBC last May was not out of the question.

He then points out that there were very high tax rates in America between World War II and the Reagan era.

…the U.S. had such rates in the past. From 1936 to 1980, the highest federal income-tax rate was never below 70%, and the top rate exceeded 90% from 1951 to 1963. …The discussion of these rates can easily create the impression that the federal government collected far more money from “the rich” before the Reagan administration.

But rich people aren’t fatted calves awaiting slaughter. They generally are smart enough to figure out ways to avoid high tax rates. And if they’re not smart enough, they know to hire bright lawyers, lobbyists, and accountants who figure out ways to protect their income.

Which is exactly what happened.

The effective tax rates actually paid by the highest income earners during the 1950s and early ’60s were far lower than the highest marginal rates. …In the 1960s, for example, the average rate paid by the top 0.1% of tax filers—the top 10th of the top 1%—ranged from 26.5% to 29.5%, according to a 2007 study by Messrs. Piketty and Saez. Even during the 20 years after the Reagan tax cuts, the top 10th of the top 1% paid an average rate of 23.7% to 33%—essentially the same as in the 1960s.

Gee, sounds like Hauser’s Law – a limit on how much governments can tax – is true, at least for upper-income taxpayers.

And Winship provides some data showing that high tax rate are not the way to collect more revenue.

When average tax rates went up from 27.6% in 1965 to 34% in 1975, revenues went down, from 0.6% to 0.5% of the sum of GDP plus capital gains. When average tax rates declined to 23.7% over the second half of the 1970s and the ’80s, tax revenues from the top went up, reaching 0.8% of GDP plus capital gains in 1990. …in the early 1990s, Presidents George H.W. Bush and Bill Clinton raised average tax rates at the top, and revenue from the top 0.1% eventually skyrocketed. But the flood of revenue overwhelmingly reflected not the increase in rates but the stock market’s takeoff… Consider: If the higher top tax rates had caused the growth in revenue, then revenues should have fallen when Mr. Clinton cut the top tax rate on capital gains to 20% from 28% in 1997. But revenues from the top 0.1% kept pouring in.

And if you want more detail, check out the IRS data from the 1980s, which shows that rich taxpayers paid a lot more tax when the top rate was dropped from 70 percent to 28 percent.

That was a case of the Laffer Curve on steroids!

No wonder some leftists admit that spite is their real reason for supporting confiscatory tax rates on the rich, not revenue.

But what if the high tax rates are imposed on a much bigger share of the population, not just the traditional target of the “top 1 percent”?

Well, even hardcore statists who favor punitive tax policy admit that this would be a recipe for economic calamity.

Mr. Piketty said, “I firmly believe, that imposing a 70% or 80% marginal rate on large segments of the population (say, 25% of the population, or even 10%, or even a few percentage points) would lead to an economic disaster.” In other words, sayonara increased tax revenue.

Heck, even the European governments with the biggest welfare states rarely impose tax rates at those levels.

And when they do (as in the case of Hollande’s 75 percent tax rate in France), they suffer severe consequences.

Which is why the real difference in taxation between the United States and Europe isn’t the way the rich are taxed. Government is bigger in Europe because of higher tax burdens on the poor and middle class, specifically onerous value-added taxes and top income tax rates that take effect at relatively modest levels of income.

In other words, the rich already pay the lion’s share of tax in the United States. But not because we have 1970s-style tax rates, but because the tax burden is relatively modest for lower- and middle-income people.

Which brings us to Winship’s final point.

Proposals to soak the rich by raising their tax rates are unlikely to yield the revenue windfall that Mr. Sanders or Mrs. Clinton are dangling before voters. Leveling with the American people means…admitting that they will have to raise the money from tax hikes on middle-class voters.

Though he “buried the lede,” as they say in the journalism business. The most important takeaway from his column is that the redistribution agenda being advanced by Clinton and Sanders necessarily will require big tax hikes on the middle class.

Indeed, the “tax-the-rich” rhetoric they employ is simply a smokescreen to mask their real goals.

Which is why I included that argument in my video that provided five reasons why class-warfare taxation is a bad idea.

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I’m never surprised when politicians make absurd statements, but I’m still capable of being shocked when other people make outlandish assertions.

Like the leftist policy wonk who claimed that capitalism is actually coercion, even though free markets are based on voluntary exchange. Or the statist columnist who argued people aren’t free unless they’re entitled to other people’s money, even though that turns some people into unfree serfs.

Now I have another example of upside-down thinking. It deals with the “inversion” issue, which involves American-chartered companies choosing to redomicile overseas.

A column in the Huffington Post implies that Pfizer is some sort of economic traitor for making a sensible business decision to protect the interests of workers, consumers, and shareholders.

Pfizer…wants to turn its back on America by claiming to be an Irish company through an offshore merger, giving it access to Ireland’s low tax rates. The change would only be on paper. The company would still be run from the United States, enjoying all the benefits of being based in America—such as our taxpayer-supported roads, public colleges, and patent protections—without paying its part to support them.

There’s a remarkable level of inaccuracy in that short excerpt. Pfizer wouldn’t be claiming to be an Irish company. It would be an Irish company. And it would still pay tax to the IRS on all U.S.-source income. All that changes with an inversion is that the company no longer would have to pay tax to the IRS on non-U.S. income. Which is money the American government shouldn’t be taxing in the first place!

Here’s more from the article.

Pfizer could walk out on its existing U.S. tax bill of up to $35 billion if its Irish tax maneuver goes forward. That’s what it already owes the American people on about $150 billion in profits it has stashed offshore, much of it in tax havens.

Wrong again. The extra layer of tax on foreign-source income only applies if the money comes back to the United States. Pfizer won’t “walk out” on a tax liability. Everything the company is doing is fully compliant with tax laws and IRS rules.

Here’s another excerpt, which I think is wrong, but doesn’t involve misstatements.

When corporations dodge their taxes, the rest of us have to make up for what’s missing. We pay for it in higher taxes, underfunded public services, or more debt.

The “rest of us” aren’t losers when there’s an inversion. All the evidence shows that we benefit when tax competition puts pressure on governments.

By the way, the author wants Obama to arbitrarily and unilaterally rewrite the rules .

President Obama can stop Pfizer’s biggest cash grab: that estimated $35 billion in unpaid taxes it wants to pocket by changing its mailing address. There are already Treasury Department rules in place to prevent this kind of overseas tax dodge. As now written, however, they wouldn’t apply to Pfizer’s cleverly-crafted deal. The Obama Administration needs to correct those regulations so they cover all American companies trying to exploit the loophole Pfizer is using. It already has the authority to do it.

Needless to say, Pfizer can’t “grab” its own money. The only grabbing in this scenario would be by the IRS. Since I’m not an international tax lawyer, I have no idea if the Obama Administration could get away with an after-the-fact raid on Pfizer, but I will note that the above passage at least acknowledges that Pfizer is obeying the law.

Now let’s look at some analysis from someone who actually understands the issue. Mihir Desai is a Harvard professor and he recently explained the reforms that actually would stop inversions in a column for the Wall Street Journal.

Removing the incentive for American companies to move their headquarters abroad is a widely recognized goal. To do so, the U.S. will need to join the rest of the G-7 countries and tax business income only once, in the country where it was earned. …Currently, the U.S. taxes the world-wide income of its corporations at one of the highest rates in the world, but defers that tax until the profits are repatriated. The result is the worst of all worlds—a high federal statutory rate (35%) that encourages aggressive transfer pricing, a significant restriction on capital allocation that keeps cash offshore, very little revenue for the Treasury, and the loss of U.S. headquarters to countries with territorial tax systems.

In other words, America should join the rest of the world and adopt a territorial tax system. And Prof. Desai is right. If the U.S. government stopped the anti-competitive practice of “worldwide” taxation, inversions would disappear.

That’s a lesson other nations seem to be learning. There’s only a small handful of countries with worldwide tax systems and that group is getting smaller every year.

Japan in 2009 and the United Kingdom in 2010 shifted to a territorial tax regime and lowered their statutory corporate rates. The U.K. did so to stop companies from moving their headquarters abroad; Japan was primarily interested in encouraging its multinationals to reinvest foreign earnings at home.

Professor Desai closes with a broader point about how it’s good for the American economy with multinational firms earn market share abroad.

…it is mistaken to demonize the foreign operations of American multinationals as working contrary to the interests of American workers. Instead the evidence, including research by C. Fritz Foley, James R. Hines and myself, suggests that U.S. companies succeeding globally expand at home—contradicting the zero-sum intuition. Demonizing multinational firms plays to populist impulses today. But ensuring that the U.S. is a great home for global companies and a great place for them to invest is actually the best prescription for rising median wages.

Amen. You don’t get higher wages by seizing ever-larger amounts of money from employers.

This is why we should have a territorial tax system and a much lower corporate tax rate.

Which is what Wayne Winegarden of the Pacific Research Institute argues for in Forbes.

…why would a company consider such a restructuring? The answer: the uncompetitive U.S. corporate income tax code. Attempts to punish companies that are pursuing corporate inversions misdiagnose the problem and, in so doing, make a bad situation worse. The problem that needs to be solved is the uncompetitive and overly burdensome U.S. corporate income tax code. The U.S. corporate income tax code puts U.S. companies at an unsustainable competitive disadvantage compared to their global competitors. The corporate income tax code in the U.S. imposes the highest marginal tax rate among the industrialized countries (a combined federal and average state tax rate of 39.1 percent), is overly-complex, difficult to understand, full of special interest carve-outs, taxes the same income multiple times, and taxes U.S. companies based on their global income.

Mr. Winegarden also makes the key point that a company that inverts still pays tax to the IRS on income earned in America.

…a corporate inversion does not reduce the income taxes paid by U.S. companies on income earned in the U.S. Following a corporate inversion, the income taxes owed by the former U.S. company on its income earned in the U.S. are precisely the same. What is different, however, is that the income that a company earns outside of the U.S. is no longer taxable.

Let’s now return to the specific case of Pfizer.

Veronique de Rugy of the Mercatus Center explains in National Review why the entire inversion issue is a classic case of blame-the-victim by Washington.

Almost 50 companies have chosen to “invert” over the last ten years. More than in the previous 20 years. …there are very good reasons for companies to do this. …for American businesses operating overseas, costs have become increasingly prohibitive. …Europe now sports a corporate-tax rate below 24 percent, while the U.S. remains stubbornly high at 35 percent, or almost 40 percent when factoring in state taxes. …it’s the combination with America’s worldwide taxation system that leaves U.S.-based corporations so severely handicapped. Unlike almost every other nation, the U.S. taxes American companies no matter where their income is earned. …So if a U.S.-based firm does business in Ireland they don’t simply pay the low 12.5 percent rate that everyone else pays, but also the difference between that and the U.S. rate.

Veronique explains why Pfizer made the right choice when it recently merged with an Irish company.

That’s a sensible reason to do what Pfizer has done recently with its attempt to purchase the Irish-based Allergan and relocate its headquarters there. The move would allow them to compete on an even playing field with every other company not based in the U.S. Despite the impression given by critics, they’ll still pay the U.S. rate when doing business here.

And she takes aim at the politicians who refuse to take responsibility for bad policy and instead seek to blame the victims.

…politicians and their ideological sycophants in the media wish to cast the issue as a moral failure on the part of businesses instead of as the predictable response to a poorly constructed corporate-tax code. …Clinton wants to stop the companies from moving with an “exit tax.” Clinton isn’t the first to propose such a silly plan. Lawmakers and Treasury officials have made numerous attempts to stop businesses from leaving for greener pastures and each time they have failed. Instead, they should reform the tax code so that businesses don’t want to leave.

Let’s close with an observation about the Pfizer controversy.

Perhaps the company did make a “mistake” by failing to adequately grease the palms of politicians.

Consider the case of Johnson Controls, for instance, which is another company that also is in the process of redomiciling in a country with better tax law.

Brent Scher of the Washington Free Beacon reports that the company has been a big donor to the Clinton Foundation, which presumably means it won’t be targeted if she makes it to the White House.

Hillary Clinton has spent the past few months going after Johnson Controls for moving its headquarters overseas, but during a campaign event on Monday, her husband Bill Clinton said that it is one of his “favorite companies.” …He described Johnson Controls as “one of my favorite companies” and praised the work it had done in the clean energy sector during an event in North Carolina on Monday. …Johnson Controls has contributed more than $100,000 to the Clinton Foundation and also partnered with it on numerous projects over the past eight years and as recently as 2015. Some of the Clinton Foundation projects included multi-million commitments from Johnson Controls. Bill Clinton pointed out in his speech that his foundation has done business with Johnson Controls—something that Hillary Clinton is yet to mention.

For what it’s worth, the folks at Johnson Controls may have made a wise “investment” by funneling money into the Clinton machine, but they shouldn’t delude themselves into thinking that this necessarily protects them. If Hillary Clinton ever decides that it is in her interest to throw the company to the wolves, I strongly suspect she won’t hesitate.

Though it’s worth pointing out that Burger King didn’t get attacked very much by the White House when it inverted to Canada, perhaps because Warren Buffett, a major Obama ally, was involved with the deal.

But wouldn’t it be nice if we had a reasonable tax code so that companies didn’t have to worry about currying favor with the political class?

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Federalism is a great idea, and not just because America’s Founders wanted a small and limited central government.

It’s also a good idea because states are laboratories that teach us about the benefits of good policy and the costs of bad policy.

And when we specifically look at New Jersey, we can learn a lot about the negative consequences of excessive taxation.

Lesson Number 1: Don’t adopt new taxes.

Just fifty years ago, New Jersey was like New Hampshire with no income tax and no sales tax. It was a fast-growing and prosperous refuge for people escaping high tax burdens in New York and elsewhere.

But then a state sales tax was adopted in 1966, followed by the enactment of a state income tax in 1976. Not surprisingly, politicians used those revenue sources to finance an orgy of new spending, to such an extent that New Jersey is now in last place in a ranking of state fiscal conditions.

And ever since new taxes were adopted, politicians have routinely and repeatedly increased the rates, diverting ever-greater amounts of money from the state’s private sector.

The net result, as demonstrated by the Tax Foundation’s State Business Tax Climate Index, is that New Jersey now has the worst tax system in the entire nation.

A very high income tax burden is a major reason why New Jersey is so uncompetitive.

After thriving for centuries with no state income tax, it only took state politicians a few decades to create a very punitive system with the fifth-highest rate in the nation. Once again, the Tax Foundation has the data.

No wonder so many investors, entrepreneurs, and business owners are escaping New Jersey.

And this is exactly what’s been happening, with very negative effects on New Jersey’s economy. Here’s some of what I shared back in 2010.

More than $70 billion in wealth left New Jersey between 2004 and 2008 as affluent residents moved elsewhere, according to a report…Conducted by the Center on Wealth and Philanthropy at Boston College… The exodus of wealth, then, local experts and economists concluded, was a reaction to a series of changes in the state’s tax structure — including increases in the income, sales, property and “millionaire” taxes. “This study makes it crystal clear that New Jersey’s tax policies are resulting in a significant decline in the state’s wealth,” said Dennis Bone, chairman of the New Jersey Chamber of Commerce and president of Verizon New Jersey. …the report reinforces findings from a similar study he conducted in 2007 with fellow Rutgers professor Joseph Seneca, which found a sharp acceleration in residents leaving the state. That report, which focused on income rather than wealth, found the state lost nearly $8 billion in gross income in 2005.

Wow, that’s the Atlantic version of California.

By the way, politicians often impose taxes or increase tax rates using the excuse that they will lower other taxes.

And it hasn’t been uncommon for New Jersey politicians to tell voters that tax hikes will enable lower property taxes.

Yet if you look at this data from the Tax Foundation, the Garden State has the highest property tax burden in the nation.

The only “good news” is that New Jersey’s 6.97 percent state sales tax is only the 24th-highest in the United States.

Yet when you consider that there was no state sales tax until 1966, that’s hardly a sign of fiscal restraint.

Lesson Number 2: Get rid of taxes that are especially destructive.

New Jersey is one of only two states that impose both an inheritance tax and a death tax. The death tax is particularly pernicious since very successful taxpayers obviously have considerable ability to migrate to states with better policy.

But here’s where we might have a bit of good news. New Jersey may be about to eliminate its death tax.

A state Senate committee on Monday passed…bipartisan proposals to eliminate the estate tax… Proponents of the tax changes say people are leaving New Jersey to avoid its low thresholds on taxing inherited wealth and retirement income. More than 2 million people left New Jersey between 2005 and 2014, costing the state $18 billion in net adjusted income and $11.4 billion in economic activity, according to the New Jersey Business and Industry Association, which blames high taxes for the exodus. …State Sen. Steve Oroho (R-Sussex) said he expects the money New Jersey reaps from people who stay here will pay for the lost tax revenue. The bill (S1728) was approved 9-0 with four abstentions.

This is amazing evidence of the liberalizing impact of tax competition. New Jersey’s state legislature is dominated by leftists, yet even they realize that they won’t get any loot if their intended victims can move across states lines (a lesson that French politicians have a very hard time understanding).

Lesson Number 3: Politicians waste much of the revenue they collect.

Politicians generally like higher taxes because they can buy support and votes by redistributing other people’s money (though some leftists like higher taxes solely for reasons of spite).

So it’s also important to look at what’s happening on the spending side of the budget. And it turns out that New Jersey wastes a lot of money.

I’ve already written about state bureaucrats being grossly overpaid (see here and here for some jaw-dropping examples).

But now let’s look at New Jersey’s “rate of return” or “efficiency” on transportation spending. This great video from Reason tells you everything you need to know.

And one of the reasons I shared this video is because New Jersey politicians want to boost the gas tax so they can spend even more money. Indeed, they may even hold the death tax hostage to get what they want.

Democrats have said they hope to leverage these tax cuts into a deal with Gov. Chris Christie to raise the gas tax.

I rhetorically asked back in 2010 whether Chris Christie could save New Jersey. We now know the answer is no, but maybe he can partially redeem himself by winning the death tax fight without surrendering on the gas tax.

P.S. Another formerly low-tax state, Connecticut, decided to copy New Jersey and the results are similarly dismal. Let’s hope other states, especially Alaska and Washington, are paying attention.

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