Posts Tagged ‘Competitiveness’

On the one-year anniversary of his inauguration, I graded Trump’s overall record on economic policy and specifically observed that his trade rhetoric was worse than his trade policy. But I added a caveat about the North American Free Trade Agreement.

…he’s been doing a lot of saber-rattling, but fortunately not drawing too much blood. That being said, he is threatening to pull the United States out of NAFTA, which would be a very big mistake.

Unfortunately, this is not an idle threat. So let’s look at what some experts have said about the value of NAFTA to the American economy.

We’ll start with a column from today’s Washington Post by the CEO of Union Pacific. He worries that the good news on taxes will be offset by bad news on trade.

Freight railroads are the bloodstream of U.S. business, supporting the livelihoods of employees in nearly every sector of the economy. …From my vantage point, it is clear that the recently adopted tax-reform law will provide meaningful stimulus for the U.S. economy. …our economy is on the rise, and tax reform will help generate even more momentum. But America’s potential exit from the North American Free Trade Agreement threatens to undo much of that progress. …About 60 percent of U.S. imports are intermediate goods for U.S. production, so raising costs through what will be functionally higher taxes on production would make U.S. businesses less competitive — thwarting tax reform’s goal of allowing people and businesses to invest their money as they see fit. …executives who are excited about the economic benefits of the tax cuts are facing equal, if not greater, economic losses if NAFTA is eliminated. …At Union Pacific, …nearly 40 percent of our shipments now have an international component — coming from or headed to Canada, Mexico, Asia, Europe and beyond. …it will be critical for the United States to strengthen its most important trade partnerships, not abandon them. …the recent tax legislation is clearly a strong tail wind for future growth and expansion. Let’s not ruin the momentum by abandoning NAFTA.

I fully agree. It’s worth noting that trade policy is just as important as fiscal policy according to Economic Freedom of the World.

Which is why it makes no sense for Trump to undermine his achievement on tax reform.

Here are some excerpts from a study by a Dartmouth professor. He starts by outlining some of the benefits that have been produced by NAFTA.

U.S. trade in goods and services with Canada and Mexico has nearly quadrupled under NAFTA—from $337 billion in 1994 to about $1.4 trillion in 2016. …NAFTA partners have become the largest destination for U.S. small-business exporters. In 2014, more than 125,000 small and medium-sized businesses (SME) exported to Canada and/or Mexico: this was over 95 percent of all U.S. exporters into the NAFTA market. For these small U.S. exporters that year, Canada and Mexico were the top two export destinations. The total value of these 2014 exports was $136 billion, fully 25 percent of all U.S. SME exports. Under NAFTA, cross-border investment among the three member countries has surged as well: from $126.8 billion in 1993 to $731.3 billion in 2016. …A reasonable conclusion from…studies is that NAFTA in its entirety has elevated U.S. GDP by somewhere between 0.2 percent and 0.3 percent of GDP. …boosting U.S. GDP by between 0.2 percent and 0.3 percent means U.S. output and income is somewhere between about $40 billion to nearly $60 billion higher than it would be without NAFTA. …representative studies calculated that NAFTA raised average U.S. wages by somewhere between 0.2 and 0.3 percent–a boost to workers’ wages that, like the boost to national GDP, recurs every year.

Needless to say, wrecking NAFTA would unwind all these benefits.

…studies that have carefully modeled the United States withdrawing from NAFTA share a central estimate of withdrawal damages of about 0.3 percent of GDP. In 2017, a loss of national output approaching 0.3 percent of GDP would have been a loss of about $50 billion. …Withdrawing would reduce trade, lower national output and income, and destroy U.S. jobs and lower average U.S. real wages. In an increasingly competitive global economy, many U.S. companies and their workers would suffer, not win.

Another study had a similarly grim assessment.

…termination of the North American Free Trade Agreement (NAFTA) would have significant net negative impacts on the U.S. economy and U.S. employment, particularly over the immediate years after termination. Termination would re-impose high costs of tariffs on U.S. exports and imports, which would reduce the competitiveness of U.S. businesses both domestically and abroad. U.S. exports would drop, both to Canada and Mexico and globally, as U.S. output becomes more expensive and therefore U.S. businesses would be less competitive in these markets. Foreign purchasers would shift away from U.S. goods and services in favor of lower-cost goods and services made in other international markets, particularly those made in Asia.

This study calculated the economic damage in each state, including estimated job losses.

Mark Perry of the American Enterprise Institute put that data into a map.

Let’s close with Veronique de Rugy of the Mercatus Center, who echoes the observation that Trump may be about to sabotage the benefits of tax reform by throwing sand in the gears of international trade.

…for the first time in decades. U.S.-based businesses can now compete against their foreign counterparts without starting from an immediate disadvantage… The change should result in faster growth, higher wages and more jobs. Unfortunately, those gains may be undone this year with a wrong step on trade. …NAFTA has benefited American business. …But ramping up economic protectionism would undermine these gains and harm the economy. Many U.S. manufacturers have global supply chains, meaning they import materials and other inputs, even if the final product might then be exported. Raising the prices of these goods with tariffs makes it harder for U.S.-based businesses to compete. …Canada and Mexico are our top trading partners. If they were to increase foreign tariffs on U.S.-manufactured goods — absent a free trade pact or as retaliation for new tariffs imposed by Trump — that would significantly harm U.S. exporters.

So why is Trump threatening to do something so foolish?

Based on his public statements, he simply doesn’t understand trade. He thinks it is a contest between countries and whichever one has a trade surplus is the winner. And to fix this supposed problem, he wants to wreck NAFTA unless politicians and bureaucrats somehow have the power to dictate equal levels of trade (sort of like the way class-warfare advocates want to dictate equal levels of income).

This is wrong on many levels.

  • There is zero evidence that a trade deficit is an indication of economic weakness. Indeed, since wealthier people can afford to buy more goods and services than poor people, a trade deficit oftentimes is a sign that a nation has a prosperous economy.
  • Moreover, the flip side of a trade deficit is a capital surplus. In other words, foreigners who earn dollars by selling to consumers in the United States sometimes decide that investing in America is the best use of those dollars. That’s a positive indicator.
  • Last but not least, it’s worth noting that countries don’t trade. Instead, trade is between consumers and businesses and those transaction are – by definition – mutually beneficial. Interfering with those transactions is pernicious government intervention.

The bottom line is that I’m still waiting for someone to successfully answer my eight questions for protectionists.

P.S. Unlike the current president, Reagan had the right approach.

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I’ve just finished up a week of lectures and meetings in India. It was an interesting trip, but not an encouraging trip.

My first observation is that Indians are enormously successful when they emigrate to the United States. And they also do very well when they migrate to Singapore, South Africa, and other place around the world.

Yet Indians in India remain comparatively poor. Per-capita income is only $5,350 based on purchasing power parity (and far lower on a exchange-rate basis).

Why the difference? Let’s start with Economic Freedom of the World, which measures the degree to which misguided government policy suppresses the private sector.

The bad news is that India is ranked only #95, which puts it in the bottom half of the world.

Its worst score is on trade, where India is a miserable #142. And since there are only 159 nations that are included in the Fraser Institute’s ranking, that’s close to the bottom.

The regulation score also is quite bad. Not quite in the bottom third of nations, but close. Monetary policy and legal system/property rights (i.e., rule of law) are a bit better, but still in the bottom half of the EFW rankings.

The country’s only good score is for fiscal policy. But I would argue that the #22 ranking is an overstatement. India does well mostly because the government is too disorganized and incompetent to collect a lot of revenue. That’s the only reason why the burden of government spending is modest.

Below is a chart from EFW that maps India’s score starting in 1970. The good news is that India’s score – though still depressingly low – did improve considerably in the 1990s.

But here’s a very important caveat. India’s score increased, but its relative ranking has declined. Simply stated, other nations have improved their scores at a much faster rate.

Here’s some data on fiscal policy from a report by the Organization for Economic Cooperation and Development.

We’ll start with data on tax revenue as a share of economic output. By that measure, India is a low-tax country.

But now check out corporate tax rates. As you can see, the system is relatively onerous.

So a possible conclusion, as I noted above, is that revenues are low because of an unfriendly tax system. Hello Laffer Curve.

I’ll close by shifting from macro data to personal observations based on my trip.

Here are four reasons why I’m leaving India with a pessimistic feeling.

  1. I had lots of meetings with people in the business community and there is not only skepticism of free trade, but also considerable support for protectionism.
  2. Similarly, the business community has a semi-favorable view of big government because the state is a source of subsidies and handouts.
  3. India has a federalist system, but state governments are basically administrators of programs designed by the central government (unlike Switzerland).
  4. The big “pro-market reform” in India has been the “single window” for regulatory clearances, when the right policy would be to abolish red tape altogether.

But I’ll close with a bit of optimism (above and beyond what I wrote the other day about the burgeoning role of the private sector in education). There’s a saying in the country that “India grows at night, while government sleeps.” And there’s even a book with that title. In other words, policy is generally not friendly, but the private sector manages to find “breathing room” to operate in spite of government.

So poverty is falling, slowly but surely. And hopefully globalization will gradually lead the government to be more open to trade liberalization and open markets.

P.S. Another reason to be pessimistic about India is that the government recently imposed “demonetization.” Any nation that joins the war against cash generally has the wrong mindset.

P.P.S. I can’t resist linking again to a truly bizarre case in India of government handouts encouraging very bizarre behavior.

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To put it mildly, Italy’s economy is moribund. There’s been almost no growth for the entire 21st century.

Bad government policy deserves much of the blame.

According to Economic Freedom of the World, Italy is ranked only 54th, the worst score in Western Europe other than Greece. The score for fiscal policy is abysmal and regulatory policy and rule of law are also problem areas.

Moreover, thanks to decades of excessive government spending, the nation also has very high levels of public debt. Over the last few years, it has received official and unofficial bailouts from the International Monetary Fund and the European Central Bank, and Italy is considered at high risk for a budgetary meltdown when another recession occurs.

And let’s not forget that the country faces a demographic death spiral.

You don’t have to believe me (though you should).

Others have reached similar conclusions. Here are excerpts from some VoxEU research.

Italy will increasingly need to rely on growth fundamentals to sustain its public debt. Unfortunately, the fundamentals do not look good. Not only was Italy severely battered by Europe’s double dip recession (its GDP is lower today than it was in 2005) but when we look at the growth of labour productivity…, we can see that Italy has been stagnating since the mid-90s. …At the end of 2016, Italy’s central government debt was the third-largest in the world…, at $2.3 trillion. …a debt crisis in Italy could trigger a global financial catastrophe, and could very possibly lead to the disintegration of the Eurozone. To avoid such a scenario, Italy must revive growth…a tentative policy prescription is for Italy, to remove those institutional barriers (such as corruption, judicial inefficiency and government interference in the financial sector) that stifle merit and contribute to cronyism.

Desmond Lachman of the American Enterprise Institute paints a grim picture.

Italy’s economic performance since the Euro’s 1999 launch has been appalling. …an over-indebted Italian economy needs a coherent and reform-minded government to get the country quickly onto a higher economic growth path. …since 2000, German per capita income has increased by around 20 percent, that in Italy has actually declined by 5 percent. Talk about two lost economic decades for the country. …if Italy is to get itself onto a higher economic growth path, it has to find ways improve the country’s labor market productivity… It has to do so through major economic reforms, especially to its very rigid labor market…being the Eurozone’s third largest economy, Italy is simply too big to fail for the Euro to survive in its present form. However, it is also said that being roughly ten times the size of the Greek economy, a troubled Italian economy would be too big for Germany to save.

Even the IMF thinks pro-market reforms are needed.

Average Italians still earn less than two decades ago. Their take-home pay took a dip during the crisis and has still not yet caught up with the growth in key euro area countries. …a key question for policymakers is how to enhance incomes and productivity… In the decade before the global financial crisis, Italy’s spending grew faster than its income, in important part because of increases in pensions. …The tax burden is heavy…a package of high-quality measures on the spending and revenue side the country could balance the need to support growth on the one hand with the imperative of reducing debt on the other. Such a package includes…lower pension spending that is the second highest in the euro area; and lower tax rates on labor, and bringing more enterprises and persons into the tax net. …together with reforms of wage bargaining and others outlined above, can raise Italian incomes by over 10 percent, create jobs, improve competitiveness, and substantially lower public debt.

There’s a chance, however, that all this bad news may pave the way for good news. There are elections in early March and Silvio Berlusconi, considered a potential frontrunner to be the next Prime Minister, has proposed a flat tax.

Bloomberg has some of the details.

A flat tax for all and 2 million new jobs are among the top priorities in the draft program of former premier Silvio Berlusconi’s Forza Italia party… The program aims to relaunch the euro region’s third-biggest economy…and recoup the ground lost in the double-dip, record-long recession of the 2008-2013 period. …Forza Italia’s plan doesn’t cite a level for the planned flat income tax for individuals, Berlusconi has said in recent television interviews it should be 23 percent or even below that. The written draft plan says a flat tax would also apply to companies. The program pursues the balanced budget of the Italian state and calls public debt below 100 percent of GDP a “feasible” goal. It is currently above 130 percent.

Wow. As a matter of principle, I think a 23-percent rate is too high.

But compared to Italy’s current tax regime, 23 percent will be like a Mediterranean version of Hong Kong.

So can this happen? I’m not holding my breath.

The budget numbers will be the biggest obstacle to tax reform. The official number crunchers, both inside the Italian government and at pro-tax bureaucracies such as the International Monetary Fund, will fret about the potential for revenue losses.

In part, those concerns are overblown. The high tax rates of the current system have hindered economic vitality and helped to produce very high levels of evasion. If a simple, low-rate flat tax is adopted, two things will happen.

  • There will be more revenue than expected because of better economic performance.
  • There will be more revenue than expected because of a smaller underground economy.

These things are especially likely in Italy, where dodging tax authorities is a national tradition.

That being said, “more revenue than expected” is not the same as “more revenue.” The Laffer Curve simply says that good policy produced revenue feedback, not that tax cuts always pay for themselves (that only happens in rare circumstances).

So if Italy wants tax reform, it will also need spending reform. As I noted when commenting on tax reform in Belgium, you can’t have a bloated public sector and a decent tax system.

Fortunately, that shouldn’t be too difficult. I pointed out way back in 2011 that some modest fiscal restraint could quickly pay big dividends for the nation.

But can a populist-minded Berlusconi (assuming he even wins) deliver? Based on his past record, I’m not optimistic.

Though I’ll close on a hopeful note. Berlusconi and Trump are often linked because of their wealth, their celebrity, and their controversial lives. Well, I wasn’t overly optimistic that Trump was going to deliver on his proposal for a big reduction in the corporate tax rate.

Yet it happened. Not quite the 15 percent rate he wanted, but 21 percent was a huge improvement.

Could Berlusconi – notwithstanding previous failures to reform bad policies – also usher in a pro-growth tax code?

To be honest, I have no idea. We don’t know if he is serious. And, even if his intentions are good, Italy’s parliamentary system is different for America’s separation-of-powers systems and his hands might be tied by partners in a coalition government. Though I’m encouraged by the fact that occasional bits of good policy are possible in that nation.

And let’s keep in mind that there’s another populist party that could win the election And its agenda, as reported by Bloomberg, includes reckless ideas like a “basic income.”

…economic malaise is increasingly common across Italy, where unemployment tops 11 percent and the number of people living at or below the poverty line has nearly tripled since 2006, to 4.7 million last year, or almost 8 percent of the population… “Poverty will be center stage in the campaign,” says Giorgio Freddi, professor emeritus of political science at the University of Bologna. …Five Star is a fast-growing group fueled by anger at the old political class. …a €500 ($590) monthly subsidy to the disadvantaged…is a key plank in Five Star’s national platform, and the group’s leaders have promised to quickly implement such a program if they take power. Beppe Grillo, the former television comedian who co-founded the party, says fighting poverty should be a top priority. A basic income can “give people back their dignity,”… The Five Star program echoes universal basic income schemes being considered around the world. …Five Star says the plan would cost €17 billion a year, funded in part by…tax hikes on banks, insurance companies, and gambling.

Ugh. Basic income is a very troubling idea.

I’ve already speculated about whether Italy has “passed the point of no return.” If the Five Star Movement wins the election and makes government even bigger, I think I’ll have an answer to that question.

Which helps to explain why I wrote that Sardinians should secede and become part of Switzerland (where a basic income scheme was overwhelmingly rejected).

In conclusion, I suppose I should point out that a flat tax would be very beneficial for Italy’s economy, but other market-friendly reforms are just as important.

P.S. Some people, such as Eduardo Porter in the New York Times, actually argue that the United States should be more like Italy. I’m not kidding.

P.P.S. When asked about my favorite anecdote about Italian government, I’m torn. Was it when a supposedly technocratic government appointed the wrong man to a position that shouldn’t even exist? Or was it when a small town almost shut down because so many bureaucrats were arrested for fraud?

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Now that we have a final bill rather than a mere “agreement in principle,” let’s step back and consider some implications of tax reform.

There are three reasons to be pleased and one reason to worry.

Win: Less-destructive federal tax code

There are several provisions of the tax bill that will boost the economy, most notably dropping the federal corporate tax rate from 35 percent to 21 percent. Slightly lower individual tax rates will also help growth, as will provisions such as the expanded death tax exemption and the mitigation of the alternative minimum tax.

How much faster will the economy perform? There are several estimates, with microeconomic-based models predicting better outcomes that Keynesian-based models. Here are some findings from two market-based models.

From the Tax Foundation:

…we estimate that the plan would increase long-run GDP by 1.7 percent. The larger economy would translate into 1.5 percent higher wages and result in an additional 339,000 full-time equivalent jobs. Due to the larger economy and the broader tax base, the plan would generate $600 billion in additional permanent revenue over the next decade on a dynamic basis. Overall, the plan would decrease federal revenues by $1.47 trillion on a static basis and by $448 billion on a dynamic basis.

From the Heritage Foundations:

We project that the final bill will increase the level of gross domestic product (GDP) in the long run by 2.2 percent. To put that number in perspective, the increase in GDP translates into an increase of just under $3,000 per household. Though we only estimate the change in GDP over the long run, most of the increase in GDP would likely occur within the 10-year budget window. …the final bill would increase the capital stock related to equipment by 4.5 percent, and the capital stock related to structures by 9.4 percent. We also estimate that the number of hours worked would increase by 0.5 percent.

And here is an estimate from a partially market-based model at the Joint Committee on Taxation:

We estimate that this proposal would increase the level of output (as measured by real Gross Domestic Product (“GDP”) by about 0.7 percent on average over the 10-year budget window. That increase in output would increase revenues, relative to the conventional estimate of a loss of $1,436.8 billion by about $483 billion over that period. This budget effect would be partially offset by an increase in interest payments on the Federal debt of about $55 billion over the budget period. We expect that both an increase in GDP and resulting additional revenues would continue in the second decade after enactment, although at a lower level.*

And here is an estimate from a Keynesian-oriented model at the Tax Policy Center:

We find the legislation would boost US gross domestic product (GDP) 0.8 percent in 2018 and would have little effect on GDP in 2027 or 2037. The resulting increase in taxable incomes would reduce the revenue loss arising from the legislation by $186 billion from 2018 to 2027 (around 13 percent).

For what it’s worth, the market-based (or microeconomic-based) models are more accurate since they are based on the impact of tax-rate changes on incentives to engage in productive behavior.

That being said, proponents of tax reform should not expect Hong Kong-style growth. First, this is only a modest version of tax reform, not a game-changing step such as a simple and fair flat tax. As George Will opined today, “On a scale of importance from one (negligible) to 10 (stupendous), the legislation might be a three.”

Second, keep in mind that fiscal policy only accounts for about 20 percent of a nation’s economic performance. And if taxes and spending each account for half of that grade, policymakers in Washington have positively impacted a variable that determines 10 percent of America’s prosperity.

That may sound discouraging, but even small differences in economic growth make a big difference if sustained over time. As I noted in 2014:

…very modest changes in annual growth, if sustained over time, can yield big increases in household income. … long-run growth will average only 2.3% over the next 75 years. If good tax policy simply raised annual growth to 2.5%, it would mean about $4,500 of additional income for the average household within 25 years.

Win: Pressure for better tax policy in other nations

I consider myself to be the world’s bigger cheerleader and advocate of tax competition. I’ve even risked getting thrown in jail to promote fiscal rivalry between nations. And I’ve written several times about how this tax reform package is good because it will encourage better tax policy abroad (see here, here, and here).

I’ll bolster my argument today by sharing some excerpts from a Wall Street Journal editorial.

German economists at the Center for European Economic Research (ZEW) released a study last week finding that U.S. corporate tax reform will sharply improve incentives for foreigners to invest in America—at the expense of high-tax countries such as Germany. …In the ZEW model, U.S. firms needed a return of around 7.6% for an investment to be profitable under pre-reform tax law, compared to an EU average of 6%, and 5.7% in low-tax Ireland. The U.S. reform changes all this. America’s statutory and effective corporate rates will both be near the EU average, essentially even with Britain and the Netherlands and well below France (a 39% headline rate) and Germany (31%). …Companies from low-tax Ireland, high-tax Germany and the EU as a whole would all see their effective tax rates and their cost of capital for U.S. investment plummet under the reform.

Another German think tank reached a similar conclusion.

US administrations have refrained from any major corporate tax reform since that implemented by Reagan in 1986. This passivity has been remarkable in the sense that most industrial countries have put forward considerable corporate tax cuts in the last decades. This long period of inaction has now come to an end. …Without doubt, this far reaching corporate tax reform of the largest economy will change the setting of international tax competition.

And how will it change the setting?

First, a caveat. The German study looked at the likely impact of a 20-percent corporate rate, so keep in mind that updated numbers to reflect the 21-percent rate in the final deal would look slightly different.

Second, the corporate tax burden in the United States is still going to higher than the European average, even after the 21-percent rate is implemented. Here’s a chart from the German study and I’ve highlighted the current U.S. position and the post-tax reform position (“US_20%_Dep” is where we would be if “expensing” had been included).

Third, even though the reduction in the corporate rate is just a modest step in the right direction, it’s going to yield major benefits.

The US tax reform will affect the net-of-tax profitability of both inbound and outbound FDI as well as domestic investments. …in the case of Germany the reduction in the tax burden for German FDI in the US outweighs the reduction of the tax burden for US outbound FDI in Germany by almost factor 3. …FDI stocks in a country increases by 2.49% if the tax rate is reduced by one percentage point. … despite the overall expansion after the US tax reform which is expected to foster FDI in all countries, the US will benefit disproportionally by additional inward FDI. This comes at the cost of European countries which will face increasing outbound FDI flows to the US which are not accompanied with inbound FDI flows from the US in the same amount. …After the implementation of the US corporate tax reform, manufacturing FDI be particularly expanded. The US will attract additional inbound FDI of 113.5 billion EUR from investors located in the EU28. … European high-tax jurisdictions such as Germany will most likely be confronted with a higher net outflow of investments than European low-tax jurisdictions such as Ireland. Ultimately, the European high-tax jurisdictions will lose ground in the competition for FDI.

And here’s another chart from the study. It shows that it will be somewhat more profitable for U.S. companies to compete abroad, and a lot more profitable for foreign investors to put money in America.

Win: Pressure for better state tax policy

As I’ve repeatedly argued, getting rid of the deduction for state and local taxes is a very desirable policy. On the federal level, it’s good because that reform frees up some revenue that can be used to offset lower tax rates. On the state level, it’s good because politicians in high-tax areas will now feel a lot of pressure to lower tax rates.

Or, if you look at the glass being half empty, they’ll feel pressure not to further increase tax rates.

The Wall Street Journal has a new editorial on this topic, asking “how much will they have to cut income-tax rates to retain and attract the high-income earners who finance so much of their state budgets?”

The mere possibility is caused great angst in some circles.

New York Gov. Andrew Cuomo last weekend declared that the GOP bill’s limit on the state-and-local tax deduction will trigger “an economic civil war” between high- and low-tax states. California Governor Jerry Brown has likened Republicans to “mafia thugs” while Mr. Cuomo calls the bill a “dagger at the economic heart of New York.”

Though only a select slice of taxpayers will be impacted, and some of them are in red states.

…the tax math will be tricky for many high-earners in states with the highest tax rates. …high earners in states with top rates exceeding 6.56% could see their tax bills increase. The nearby table shows the 17 states with top income-tax rates exceeding 6.56%. The four with the highest income tax rates have Democratic Governors—California, New York, Oregon and Minnesota—and liberal political cultures heavily influenced by public unions. …Iowa ranks fifth with a top rate of 8.98% that hits at a mere $70,785 for married couples, which is more punitive than even New Jersey’s 8.87% that hits households making more than $500,000. Wisconsin (7.65%), Idaho (7.4%), South Carolina (7%), Arkansas (6.9%) and Nebraska (6.84%) are among Donald Trump -voting states that also make the high-tax list. …This ought to put pressure on high-tax Midwestern states such as Wisconsin, Iowa and Minnesota to reduce their rates.

But the ultra-high-tax blue states are the ones that will really feel the squeeze to lower tax rates.

…limiting the deduction will increase the existing rate divide between high- and low-tax states. New York, New Jersey and Connecticut have been losing billions of dollars each year in adjusted gross income from high earners fleeing to lower tax climes like Florida. Nevada will become an even more attractive tax haven for wealthy Californians. The problem is more acute when you consider that the top 1% of earners pay nearly 50% of state income taxes in California and New York, and 37% in New Jersey. States may experience significant budget carnage if more high earners defect. To head off a high-earner revolt, Mr. Cuomo could seek to eliminate the millionaire’s tax he campaigned against in 2010 but has repeatedly extended. Mr. Brown could campaign to repeal the 3% surcharge on millionaires he championed in 2012.

Loss: Failure to restrain federal spending puts tax reform at risk

Now that we’ve looked at three reasons to be optimistic about tax reform, let’s close with some grim news.

Republicans could have produced a far bolder tax reform plan had they been willing to restrain spending. That didn’t happen.

Instead, they only were able to produce a tax bill that featured a very modest – and temporary – amount of tax relief.

And because they were constrained by the budget numbers, many of the provisions impacting individuals are sunset at the end of 2025.

It’s not just a question of not doing the right thing. Republicans are actually making matters worse on the spending side of the budget. They are busting the budget caps and doing a lot of so-called emergency spending.

All this will come back to bite them when it’s time extend (or, better yet, make permanent) the provisions that are scheduled to expire. The bottom line if that it’s impossible to have a good tax code with an ever-growing burden of government spending.

* The Joint Committee on Taxation estimate is for the House-passed version of tax reform. An estimate of the final bill hasn’t been released, though it presumably will be similar.

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Greece has confirmed that a nation can spend itself into a fiscal crisis.

And the Greek experience also has confirmed that bailouts exacerbate a fiscal crisis by enabling more bad policy, while also rewarding spendthrift politicians and reckless lenders (as I predicted when Greece’s finances first began to unravel).

So now let’s look at a third question: Can a country tax itself to death? Greek politicians are doing their best to see if this is possible, with a seemingly endless parade of tax increases (so many that even the tax-loving folks at the IMF have balked).

At the very least, they’ve pushed the private sector into hospice care.

Let’s peruse a couple of recent stories from Ekathimerini, an English-language Greek news outlet. We’ll start with a rather grim look at a very punitive tax regime that is aggressively grabbing money from taxpayers with arrears.

Tax authorities have confiscated the salaries, pensions and assets of more that 180,000 taxpayers since the start of the year, but expired debts to the state have continued to rise, reaching almost 100 billion euros, as the taxpaying capacity of the Greeks is all but exhausted. In the month of October, authorities made almost 1,000 confiscations a day from people with debts to the state of more than 500 euros. In the first 10 months of the year, the state confiscated some 4 billion euros.

But the Greek government is losing a race. The more it raises taxes, the more people fall behind.

in October alone, the unpaid tax obligations of households and enterprises came to 1.2 billion euros. Unpaid taxes from January to October amounted to 10.44 billion euros, which brings the total including unpaid debts from previous years to almost 100 billion euros (99.8 billion), or about 55 percent of the country’s gross domestic product. The inability of citizens and businesses to meet their obligations is also confirmed by the course of public revenues, which this year have declined by more than 2.5 billion euros. The same situation is expected to continue into next year, as the new tax burdens and increased social security contributions look set to send debts to the state soaring.

The fact that revenues have declined should be a glaring signal to politicians that they are past the revenue-maximizing point on the Laffer Curve.

But the government probably won’t be satisfied until everyone in the private sector is in debt to the state.

There are now 4.17 million taxpayers who owe the state money. This means that one in every two taxpayers is in arrears to the state, with 1,724,708 taxpayers facing the risk of forced collection measures. Of the 99.8 billion euros of total debt, just 10-15 billion euros is still considered to be collectible.

Here’s another article from Ekathimerini that looks at how Greece is doubling down on suicidal fiscal policy.

Greece is defying the prevalent trend among the world’s industrialized nations for reducing tax rates in order to boost investment and competitiveness… According to the report, in contrast to the majority of OECD member states, Greece has raised taxes and social security contributions as government policy is geared toward reaching fiscal targets, even though this inevitably harms the crisis-hit country’s competitiveness.

It’s hard to think of a tax that Greek politicians haven’t increased.

Greece…is also the only one among them that increased taxes on labor and corporate profits. …eight OECD member states reduced rates in 2017 on an average of 2.7 percent…, in stark contrast to Greece, which…has the highest corporate tax rates in the OECD compared to 2008. Many countries also offered breaks and reductions on income tax, …also cutting social contributions in 2015-2016. Not so Greece, which in 2016 raised both, thereby increasing the overall burden on low-income earners by 1.5 percent. Greece was also the only country in the OECD to raise value-added tax rates in 2016.

And what was accomplished by all these tax increases? Less tax revenue and recession. That’s a lose-lose scenario by almost any standard.

…in the 2014-2015 period, 25 of the 32 countries for which data is available recorded an increase in tax-to-GDP levels. The report…mentions Greece as an exception to this trend as well, noting that the country was in recession in that two-year period.

Even an establishment outlet like the U.K.-based Financial Times has noticed.

Unemployment is at 23 per cent and 44 per cent of those aged 15-24 are out of work. More than a fifth of Greeks get by without basics such as heating or a telephone connection. …Sweeping new taxes imposed across the economy have already left communities scrabbling to survive. …this year will bring €1bn worth of new taxes on cars, telecoms, television, fuel, cigarettes, coffee and beer… New taxes have eroded disposable incomes still further. Value added tax has increased to 24 per cent on food, disproportionately hurting the poor, for whom living costs represent a far higher proportion of income. Most detested is the Enfia property levy, which brings in €2.65bn a year – roughly €650 from each of Greece’s four million households. …recent direct taxes like the new estate tax have affected households that have seen their income decline greatly during the crisis. The rise of VAT, meanwhile, only adds to the cost of life of poor families.” …this month, new levies will mean the taxes paid by his business will jump 29 per cent.

Interestingly, the article acknowledges that profligate politicians created the mess, while also noting that the Greek people also deserve blame.

…blame is laid on the politicians who spent the 27 years of Greece’s EU membership before the crisis loading the country with debt to fund increased defence expenditure, more public sector jobs and higher pension and other social benefit payments. …“The Greek people should be blamed. We voted for these people,” he concludes.

The problem, of course, is that Greek voters don’t show any interest in now voting for politicians who will clean up the mess. Simply stated, too many people in the country are living off the government.

In other words, even though it’s mathematically possible to fix the problems, the erosion of societal capital suggests that Greece may have reached the point of collapse.

From a fiscal perspective, this chart from OECD data confirms that policy is getting worse rather than better. Measured as a share of economic output, taxes and spending have both become a bigger burden over the past 10 years.

What makes this chart especially depressing is that economic output is lower today than it was in 2005, which means that the problem isn’t so much that annual tax receipts and spending level are climbing, but rather that the private economy is declining.

Let’s close with an additional look at the moribund Greek economy and a discussion of how the bailouts have made a bad situation even worse.

The Wall Street Journal editorialized on the impact of ever-higher taxes and a still-stifling bureaucratic business environment.

…the bailout is not in fact working, if you think the goal should be to restore Athens to sound public finances and to offer Greeks economic hope for the future. The European Commission’s autumn forecast predicts eurozone economic growth of 2.2% this year, the fastest in a decade. But Greece is falling further behind. …Investment has collapsed in the country, to 11% of GDP last year from 26% of GDP in 2007. …The bailouts are creating a dangerous situation in which the government has enough cash to meet its debts but no one else in Greece can thrive.

And here’s the scary part. What happens when there’s another global recession? The already-bad numbers in Greece will get even worse. Not a pleasant thought.

P.S. If you want to know why I’m not optimistic about Greece’s future, how can you expect good policy from a nation that subsidizes pedophiles and requires stool samples to set up online companies? I’d be more hopeful if Greek politicians instead had learned some lessons from Slovakia or Latvia.

P.P.S. Notwithstanding a the constant stream of bad policy, I am capable of feeling sorry for Greece.

P.P.P.S. Newer readers may not be familiar with my collection of Greek-related humor. This cartoon is quite  good, but this this one is my favorite. And the final cartoon in this post also has a Greek theme.

We also have a couple of videos. The first one features a European romantic comedy and the second one features a Greek comic pontificating about Germany.

Last but not least, here are some very un-PC maps of how various peoples – including the Greeks – view different European nations. Speaking of stereotypes, the Greeks are in a tight race with the Italians and Germans for being considered untrustworthy.

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When companies want to boost sales, they sometimes tinker with products and then advertise them as “new and improved.”

In the case of governments, though, I suspect “new” is not “improved.”

The British territory of Jersey, for instance, has a very good tax system. It has a low-rate flat tax and it overtly brags about how its system is much better than the one imposed by London.

In the United States, by contrast, the state of New Jersey has a well-deserved reputation for bad fiscal policy. To be blunt, it’s not a good place to live and it’s even a bad place to die.

And it’s about to get worse. A column in the Wall Street Journal warns that New Jersey is poised to take a big step in the wrong direction. The authors start by observing that the state is already in bad shape.

…painless solutions to New Jersey’s fiscal challenges don’t exist. …a massive structural deficit lurks… New Jersey’s property taxes, already the highest in the nation, are being driven up further by the state’s pension burden and escalating health-care costs for government workers.

In other words, interest groups (especially overpaid bureaucrats) control the political process and they are pressuring politicians to divert even more money from the state’s beleaguered private sector.

…politicians seem to think New Jersey can tax its way to budgetary stability. At a debate this week in Newark, the Democratic gubernatorial nominee, Phil Murphy, pledged to spend more on education and to “fully fund our pension obligations.” …But just taxing more would risk making New Jersey’s fiscal woes even worse. …New Jersey is grasping at the same straws. During the current fiscal year, the state’s pension contribution is $2.5 billion, only about half the amount actuarially recommended. The so-called millionaire’s tax, a proposal Gov. Chris Christie has vetoed several times since taking office in 2010, will no doubt make a comeback if Mr. Murphy is elected. Yet it would bring in only an estimated $600 million a year.

The column warns that New Jersey may wind up repeating Connecticut’s mistakes.

Going down that path, however, is a recipe for a loss of high-value taxpayers and businesses.

Let’s look at a remarkable story from the New York Times. Published last year, it offers a very tangible example of how the state’s budgetary status will further deteriorate if big tax hikes drive away more successful taxpayers.

One man can move out of New Jersey and put the entire state budget at risk. Other states are facing similar situations…during a routine review of New Jersey’s finances, one could sense the alarm. The state’s wealthiest resident had reportedly “shifted his personal and business domicile to another state,” Frank W. Haines III, New Jersey’s legislative budget and finance officer, told a State Senate committee. If the news were true, New Jersey would lose so much in tax revenue that “we may be facing an unusual degree of income tax forecast risk,” Mr. Haines said.

Here are some of the details.

…hedge-fund billionaire David Tepper…declared himself a resident of Florida after living for over 20 years in New Jersey. He later moved the official headquarters of his hedge fund, Appaloosa Management, to Miami. New Jersey won’t say exactly how much Mr. Tepper paid in taxes. …Tax experts say his move to Florida could cost New Jersey — which has a top tax rate of 8.97 percent — hundreds of millions of dollars in lost payments. …several New Jersey lawmakers cited his relocation as proof that the state’s tax rates, up from 6.37 percent in 1996, are chasing away the rich. Florida has no personal income tax.

By the way, Tepper isn’t alone. Billions of dollars of wealth have already left New Jersey because of bad tax policy. Yet politicians in Trenton blindly want to make the state even less attractive.

At the risk of asking an obvious question, how can they not realize that this will accelerate the migration of high-value taxpayers to states with better policy?

New Jersey isn’t alone in committing slow-motion suicide. I already mentioned Connecticut and you can add states such as California and Illinois to the list.

What’s remarkable is that these states are punishing the very taxpayers that are critical to state finances.

…states with the highest tax rates on the rich are growing increasingly dependent on a smaller group of superearners for tax revenue. In New York, California, Connecticut, Maryland and New Jersey, the top 1 percent pay a third or more of total income taxes. Now a handful of billionaires or even a single individual like Mr. Tepper can have a noticeable impact on state revenues and budgets. …Some academic research shows that high taxes are chasing the rich to lower-tax states, and anecdotes of tax-fleeing billionaires abound. …In California, 5,745 taxpayers earning $5 million or more generated more than $10 billion of income taxes in 2013, or about 19 percent of the state’s total, according to state officials. “Any state that depends on income taxes is going to get sick whenever one of these guys gets a cold,” Mr. Sullivan said.

The federal government does the same thing, of course, but it has more leeway to impose bad policy because it’s more challenging to move out of the country than to move across state borders.

New Jersey, however, can’t set up guard towers and barbed wire fences at the border, so it will feel the effect of bad policy at a faster rate.

P.S. I used to think that Governor Christie might be the Ronald Reagan of New Jersey. I was naive. Yes, he did have some success in vetoing legislation that would have exacerbated fiscal problems in the Garden State, but he was unable to change the state’s bad fiscal trajectory.

P.P.S. Remarkably, New Jersey was like New Hampshire back in the 1960s, with no income tax and no sales tax. What a tragic story of fiscal decline!

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Back in 2013, when I was still doing a “question of the week” column, I suggested that Australian was the best option for those contemplating a new home in the event of some sort of Greek-style fiscal collapse in the United States.

I pointed out that America wasn’t in any immediate danger, though I can understand why some people are interested in the question since our long-run outlook is rather grim.

Anyhow, I picked Australia for several reasons, including its geographic position (no unstable welfare states on the border, which is why I didn’t select Switzerland), its private social security system (unfunded liabilities are small compared to the $44 trillion shortfall in America’s government-run system), and its relatively high level of economic freedom.

I’m not the only person to notice that Australia is a good place to live. A recent Bloomberg column noted that millionaires are moving Down Under.

They’re all going to the land Down Under. Australia is luring increasing numbers of global millionaires, helping make it one of the fastest growing wealthy nations in the world… Over the past decade, total wealth held in Australia has risen by 85 percent compared to 30 percent in the U.S. and 28 percent in the U.K., aided by the fact that Australia has gone 25 years without a recession. As a result, the average Australian is now significantly wealthier than the average American or Briton. …At the end of 2016 individuals held about $192 trillion of wealth worldwide…, with 13.6 million millionaires holding $69 trillion of this. There were 522,000 multi-millionaires, having net assets of $10 million or more.

The number of millionaires moving to Australia is especially impressive when looking at global data.

Here’s a map showing the nations with the most incoming and outgoing rich people (h/t: Steve Hanke). Maybe it’s because there’s no death tax in Australia, but it’s remarkable that a nation with less than one-tenth the population of the United States manages to attract more millionaires.

But not everybody is cheerful about Australia’s economic position.

I’m currently in Brisbane for a couple of speeches. I spoke earlier today about how market-oriented jurisdictions grow much faster over the long run when compared to nations with statist economic policy.

But I don’t want to focus on my remarks (much of which will be old news to regular readers). Instead, let’s look at the some of the information in a speech by Professor Tony Makin of Griffith University.

Two of his slides caught my attention. Let’s start with a depressing look at how Australia has declined in the global competitiveness rankings put together each year by the World Economic Forum.

This is not a good trend.

That being said, I think Economic Freedom of the World is a more accurate measure and it shows that Australia (whether looking at its absolute score or its relative ranking) has suffered only a small decline.

Here’s another chart that is depressing as well. It shows that the per-capita burden of taxes and spending has continuously increased even after adjusting for inflation.

To be fair, the numbers aren’t quite as bad when looking at taxes and spending as a share of gross domestic product.

Nonetheless, the trend isn’t favorable, which is a point I made back in 2014.

None of this changes my view that Australia is still a good choice for emigrating Americans. But it does leave me worried about whether it will still be the top choice in 10 years or 20 years.

For what it’s worth, the main recommendation in my speech was for Australia to adopt a spending cap, similar to the ones that exist in Hong Kong and Switzerland. I also should have suggested sweeping decentralization since the government actually is open to that idea.

P.S. One of the most disappointing things about Australia is that the country’s foreign aid bureaucrats are trying to bribe/coerce Vanuatu’s government into adopting an income tax.

P.P.S. Professor Makin was the author of the report I recently cited about the failure of Australia’s Keynesian spending binge.

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