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Posts Tagged ‘Competitiveness’

Every single economic school of thought agrees with the proposition that investment is a key factor in driving wages and growth.

Even foolish concepts such as socialism and Marxism acknowledge this relationship, though they want the government to be in charge of deciding where to invest and how much to invest (an approach that has a miserable track record).

Another widely shared proposition is that higher tax rates will discourage whatever is being taxed. Even politicians understand this notion, for instance, when arguing for higher taxes on tobacco.

To be sure, economists will argue about the magnitude of the response (will a higher tax rate cause a big effect, medium effect, or a small effect?).

But they’ll all agree that a higher tax on something will lead to less of that thing.

Which is why I always argue that we need the lowest-possible tax rates on the activities – work, saving, investment, and entrepreneurship – that create wealth and prosperity.

That’s why it’s so disappointing that Joe Biden, as part of his platform in the presidential race, has embraced class-warfare taxation.

And it’s even more disappointing that he specifically supports policies that will impose a much higher tax burden on capital formation.

How much higher? Kyle Pomerleau of the American Enterprise Institute churned through Biden’s proposals to see what it would mean for tax rates on investment and business activity.

Former Vice President and Democratic presidential candidate Joe Biden has proposed several tax increases that focus on raising taxes on business and capital income. Taxing business and capital income can affect saving and investment decisions by reducing the return to these activities and distorting the allocation across different assets, forms of financing, and business forms. Under current law, the weighted average marginal effective tax rate (METR) on business assets is 19.6 percent… Biden’s tax proposals would raise the METR on business investment in the United States by 7.8 percentage points to 27.5 percent in 2021. The effective tax rate would rise on most assets and new investment in all industries. In addition to increasing the overall tax burden on business investment, Biden’s proposals would increase the bias in favor of debt-financed and noncorporate investment over equity-financed and corporate investment.

Here’s the most illuminating visual from Kyle’s report.

The first row of data shows that the effective tax rate just by almost 8 percentage points.

I also think it’s important to focus on the last two rows. Notice that the tax burden on equity increases by a lot while the tax burden on debt actually drops slightly.

This is very foolish since almost all economists will acknowledge that it’s a bad idea to create more risk for an economy by imposing a preference for debt (indeed, mitigating this bias was one of the best features of the 2017 tax reform).

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My view of the U.S. economic policy often depends on whether I’m writing about absolute levels of laissez-faire or relative levels of laissez-faire.

If my column is about the former, I generally complain about excessive spending, punitive taxation, senseless red tape, easy-money monetary policy, and trade protectionism.

But if I’m writing about relative levels of economic liberty, I often turn into a jingoistic, pro-American flag-waver.

That because – with a few exceptions such as Singapore, Hong Kong, New Zealand, and Switzerland – the United States enjoys more economic freedom than other nations.

And because of the relationship between policy and prosperity, this means that Americans tend to have much higher living standards than their counterparts in other nations. Even when compared to people in other developed countries.

(Which is why it’s so disappointing that many American politicians want to make the U.S. more like Europe.)

Let’s examine some data. In a column for National Review, Joseph Sullivan compares recent increases in living standards for major nations.

If you want to answer questions about how economic wellbeing for individuals in a country has evolved, the actual change in the value of real GDP per capita may tell you more than the rate of its change. Why? Individuals buy goods and services with dollars and cents — not the rates of change that economists, politicians, and pundits tend to focus on when it comes to growth. …By this metric, between 2016 and 2019, economic growth in the U.S. was the best in its class. …The U.S. surpasses…its peers…by no small margin. It bests the silver medalist in this category, Finland, by $1,100. That is almost as big as the $1,160 that separates the runner-up from the peer country that comes in dead last, Sweden.

Here’s the chat from his article.

The key takeaway is that Americans started the period with more per-capita GDP and the U.S. lead expanded.

That’s one way of looking at the data.

A 2017 report from the Pew Research Center also has some fascinating numbers about the relative well-being of the middle class in different nations.

…the middle class in a country consists of adults living in households with disposable incomes ranging from two-thirds to double the country’s own median disposable household income (adjusted for household size). This definition allows middle-class incomes to vary across countries, because national incomes vary across countries. …That raises a question: What shares of adults in Western European countries have the same standard of living as the American middle class? …When the Western European countries the Center analyzed are viewed through the lens of middle-class incomes in the U.S., the share of adults who are middle class decreases in most of them. …In most Western European countries studied, applying the U.S. standard shrinks the middle-class share by about 10 percentage points… Applying U.S. incomes as the middle-class standard also boosts the estimated shares of adults who are in the lower-income tier in most Western European countries… Overall, regardless of how middle class fortunes are analyzed, the material standard of living in the U.S. is estimated to be better than in most Western European countries examined.

The main thing to understand is that there’s a big difference between being middle class in a rich country and being middle class in a not-so-rich country.

And if you peruse the chart from the Pew Report, you’ll notice that a lot of middle-class Europeans would be lower-income if they lived in the United States.

And if you looked at the issue from the other perspective, as I did last year, many poor Americans would be middle class if they lived in Europe.

Let’s augment that analysis by looking at a graphic the Economist put together several years ago. It’s based on the OECD’s Better-Life Index, which is a bit dodgy since it includes measures such as the Paris-based bureaucracy’s utterly dishonest definition of poverty.

That being said, notice that the bottom 10 percent of Americans would be middle class (or above!) if they lived in other nations.

I’ll close with the data on Actual Individual Consumption from the OECD, which are the numbers that (I believe) most accurately measure relative living standards between nations (indeed, I shared data from this source in 2010, 2014, and 2017).

As you can see, the United States easily surpasses other industrialized nations, with a score of 145.9 in 2017 (compared to the average of 100).

My final observation is that all this data is contrary to traditional convergence theory, which assumes that poor nations should grow faster than rich nations.

In other words, Europe should be catching up to the United States.

Indeed, that actually happened for a couple of decades after World War II, but then many European nations expanded welfare states in the 1960s and 1970s, while the U.S. for more economic freedom under both Ronald Reagan and Bill Clinton in the 1980s and 1990s.

And since policies diverged, convergence stalled.

The bottom line is that rich nations can consistently out-perform poor nations if they have allow more economic freedom.

P.S. Not only do ordinary Americans have a big edge over their European counterparts, they also enjoy much lower taxes.

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New York is ranked dead last for fiscal policy according to Freedom in the 50 States.

But it’s not the worst state, at least according to the Tax Foundation, which calculates that the Empire State is ranked #49 in the latest edition of the State Business Tax Climate Index.

Some politicians from New York must be upset that New Jersey edged them out for last place (and the Garden State does have some wretched tax laws).

So in a perverse form of competition, New York lawmakers are pushing a plan to tax unrealized capital gains, which would be a form of economic suicide for the Empire State and definitely cement its status as the place with the worst tax policy.

Here are some excerpts from a CNBC report.

The tax, part of a new “Make Billionaires Pay” campaign by progressive lawmakers and activists, would impose a new form of capital gains tax on New Yorkers with $1 billion or more in assets. …“It’s time to stop protecting billionaires, and it’s time to start working for working families,” Rep. Alexandria Ocasio-Cortez, D-N.Y., said… Currently, taxpayers pay capital gains tax on assets only when they sell. The new policy would tax any gain in value for an asset during the calendar year, regardless of whether it’s sold. Capital gains are taxed in New York at the same rate as ordinary income, so the rate would be 8.8%.

Given her track record, I’m not surprised that Ocasio-Cortez has embraced this punitive idea.

That being said, the proposal is so radical that even New York’s governor understands that it would be suicidal.

Gov. Andrew Cuomo said raising taxes on billionaires and other rich New Yorkers will only cause them to move to lower-tax states. …“If they want a tax increase, don’t make New York alone do a tax increase — then they just have the people move… Because if you take people who are highly mobile, and you tax them, well then they’ll just move next door where the tax treatment is simpler.”

Actually, they won’t move next door. After all, politicians from New Jersey and Connecticut also abuse and mistreat taxpayers.

Instead, they’ll be more likely to escape to Florida and other states with no income taxes.

In a column for the New York Post, E.J. McMahon points out that residents already have been fleeing.

…there were clear signs of erosion at the high end of New York’s state tax base even before the pandemic. Between 2010 and 2017, according to the Internal Revenue Service, the number of tax filers with incomes above $1 million rose 75 percent ­nationwide, but just 49 percent in New York. …Migration data from the IRS point to a broader leakage. From 2011-12 through 2017-18, roughly 205,220 New Yorkers moved to Florida. …their average incomes nearly doubled to $120,023 in 2017-18, from $63,951 at the start of the period. Focusing on wealthy Manhattan, the incomes of Florida-bound New Yorkers rose at the same rate from a higher starting point— to $244,936 for 3,144 out-migrants in 2017-18, from $124,113 for 3,712 out-migrants in 2011-12.

What should worry New York politicians is that higher-income residents are disproportionately represented among the escapees.

And the author also makes the all-important observation that these numbers doubtlessly will grow, not only because of additional bad policies from state lawmakers, but also because the federal tax code no longer includes a big preference for people living in high-tax states.

These figures are from the ­period ending just before the new federal tax law temporarily virtually eliminated state and local tax deductions for high earners, raising New York’s effective tax rates higher than ever. …soak-the-rich tax sloganeering is hardly a welcome-home signal for high earners now on the fence about their futures in New York.

The bottom line is that it’s a very bad idea for a country to tax unrealized capital gains.

And it’s a downright suicidal idea for a state to choose that perverse form of double taxation. After all, it’s very easy for rich people to move to Florida and other states with better tax laws.

And since the richest residents of New York pay such a large share of the tax burden (Investor’s Business Daily points out that the top 1 percent pay 46 percent of state income taxes), even a small increase in out-migration because of the new tax could result in receipts falling rather than rising.

Another example of “Revenge of the Laffer Curve.”

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When looking at which nations have the best economic policy, the best options are the Fraser Institute’s Economic Freedom of the World and the Heritage Foundation’s Index of Economic Freedom.

But I also look forward to other measures, including the annual competitiveness ranking from the Swiss-based IMD business school, which was just released this month.

We’ll start with a look at the top nations. Singapore remains the most competitive nation, while Denmark made a big jump to #2, and Switzerland climbed a notch to #3.

The United States, which was 3rd last year, dropped to #10.

Only 63 nations are part of the survey, and no sentient being should be surprised about Venezuela being in that final spot. Nor should there be much surprise that Argentina is next-to-last.

Here are some highlights from the accompanying article.

The annual rankings, now in their 32nd year, have been released unlocking a wealth of data on the performance of 63 economies across the globe. Singapore was number one for the second year in a row. In second to fifth place, in order, came: Denmark, Switzerland, the Netherlands and Hong Kong SAR. A marked pattern in this year’s results, which are an amalgam of hard data taken from 2019 and survey responses from early 2020, is the strength of smaller economies. …The number of small economies – broadly defined as such by their GDP –  in the top ten is striking. However, this is not to say that we are seeing a triumph of democracies. Singapore, Hong Kong and the UAE remain in the top ten, whilst some democracies (such as Argentina) sit at the bottom of the scale.

Here are some of the more interesting observations about specific nations.

China this year dropped to 20th position from 14th last year.

My two cents is that China is still overrated.

But I sadly concur that the trendline for Hong Kong is not overly encouraging.

While Hong Kong SAR came in at 5th, this is a far cry from 2nd which it enjoyed last year. The decline can be attributed to a decline in its economic performance, social turmoil in Hong Kong as well as the rub-on effect of the Chinese economy.

It’s worth noting that Brexit is helping the United Kingdom, which is exactly what I predicted.

The UK climbed from 23rd to 19th… One interpretation is that Brexit may have created the sentiment of a business-friendly environment in the making. The UK ranked 20th on the business efficiency measure, compared to 31st least year.

But I take no satisfaction in my predictions that Trump’s protectionism would backfire on the United States.

…For the second year in a row, the USA failed to fight back having been toppled from its number one spot last year by Singapore, and coming in at 10th …Trade wars have damaged…the USA.

In a column for Forbes, Stuart Anderson elaborates on America’s decline.

America used to be number one but not anymore, according to the 2020 rankings of the world’s most competitive economies from the Institute for Management Development (IMD) in Switzerland. The Trump administration’s trade policies are the primary reason given for why America fell from 2018, when it was ranked number one, and from 2019, when it was ranked number three. …Christos Cabolis, IMD’s chief economist and an author of the report, told Fortune that Trump’s trade policies are the main reason for the significant drop in American competitiveness. “One of the pillars of competitiveness is how open an economy is, and we measure that in different ways, from the perceptions of executives, to trade [statistics],” said Cabolis. The trade war Donald Trump initiated with China “brings some of the results we see in how the numbers of the U.S. went down,” he said.

Let’s close with a closer look at IMD’s estimates of what’s good and bad about the United States.

We get very good (though declining in this year’s ranking) scores for economic performance and infrastructure (suggesting, by the way, that we don’t need a new boondoggle package from Washington).

But we’re not quite as impressive when looking at business efficiency and we’re mediocre when measuring government efficiency.

For what it’s worth, I’m not optimistic about America’s trajectory. If Trump gets reelected, I don’t expect big developments in the policy areas where he’s good (taxes and red tape), but I wouldn’t be surprised to see new initiatives in the areas where he is bad (trade and spending).

Biden, meanwhile, has a very statist policy agenda. So if he gets elected, we have to cross our fingers that he doesn’t really believe in his Bernie-lite agenda.

P.S. It is possible, of course, for a nation to adopt additional bad policy and still climb in the rankings. All that’s required is for other nations to adopt an even-greater amount of bad policy. Needless to say, that’s not the ideal way to climb a few spots. Which is why we should consider absolute and relative measures of economic liberty.

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As part of my recent presentation to IES Europe, here’s what I said (and what I’ve said many times before) about the relationship between economic policy and national prosperity.

My remarks focused in part on the difference between absolute economic liberty and relative economic liberty.

  • The absolute level of economic liberty is the degree to which a nation relies on markets or statism (see, for instance, the Fraser Institute’s Economic Freedom of the World).
  • The relative level of economic liberty is a measure of whether one country is more market-oriented than another country (basically a measure of national competitiveness).

Understanding these two concepts explains why it is possible to criticize nations in North America and Western Europe for having too much government while also recognizing that those same nations tend to have better policies than most countries in other parts of the world.

An obvious example is Denmark. It certainly has some foolish and misguided government policies, but it is very pro-market when compared to the 90 percent of nations that have even lower levels of economic liberty (a distinction that Bernie Sanders has never grasped).

The obvious takeaway is that economic liberty matters, regardless of whether we’re looking at absolute levels or relative levels.

During my remarks, the audience got to see a two-question challenge, which asks our friends on the left to give an example of their dirigiste policies generating good economic outcomes.

But I’ve never been happy with the clunky wording of that challenge (just as I wasn’t happy with the original wording of fiscal policy’s Golden Rule).

So here’s a new version, which I’m now calling “The Never-Answered Question.”

I frequently unveil this question during debates.

And it’s quite common that my opponent will claim Sweden.

But as I noted in the above video clip, Sweden became a rich nation when government was very small. It didn’t have an income tax until 1902, and the welfare state was tiny until the 1960s. And I then explain that Sweden’s economic performance has been inversely correlated with the size and scope of government.

Unsurprisingly, the same is true for every other prosperous country in Europe and North America.

The bottom line is that my leftist friends will never successfully answer this question.

P.S. When considering the second part of The Never Answered Question, I don’t want a cherry-picked one- or two-year period. I want several decades of data, so we can be sure of a real trend. Much as I’ve done when making comparisons.

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I wrote last week about the ongoing shift of successful people from high-tax states to low-tax states.

And I’ve periodically confirmed this trend by doing comparisons of high-profile states, such as Texas vs. California and Florida vs. New York.

Today, I’m going to focus on Connecticut.

I actually grew up in the Nutmeg State and I wish there was some good news to share. But Connecticut has been drifting in the wrong direction ever since an income tax was imposed about 30 years ago.

And the downward trend may be accelerating.

A former state lawmaker has warned that the golden geese are escaping the state.

A former state representative says wealthy Connecticut residents are leaving the state at “an alarming pace.” Attorney John Shaban says when he returned to private practice in Greenwich in 2016, one of his most popular services became helping some of the state’s top earners relocate to places like Florida… “Connecticut started to thrive 20, 30 years ago because people came here. We were a tax haven, we were a relatively stable regulatory and tax environment, and we were a great place to live,” says Shaban. …Shaban says many small businesses now require little more than a laptop to operate, and that’s making it easier for small business owners to relocate out of state.

The exodus of rich people has even caught the attention of the U.K.-based Economist.

Greenwich, Connecticut, with a population of 60,000, has long been home to titans of finance and industry. …It has one of America’s greatest concentrations of wealth. …You might think a decade in which rich Americans became richer would have been kind to Greenwich. Not so. …the state…raised taxes, triggering an exodus that has lessons for the rest of America…  Connecticut increased income taxes three times. It then discovered the truth of the adage “easy come, easy go”. …Others moved to Florida, which still has no income tax—and no estate tax. …Between 2015 and 2016 Connecticut lost more than 20,000 residents—including 2,050 earning more than $200,000 per year. The state’s taxable-income base shrank by 1.6% as a result… Its higher income taxes have bitten harder since 2018, when President Donald Trump limited state and local tax deductions from income taxable at the federal level to $10,000 a year.

For what it’s worth, the current Democratic governor seems to realize that there are limits to class-warfare policy.

Connecticut Governor Ned Lamont said he opposes higher state income tax rates and he linked anemic growth with high income taxes. …when a caller to WNPR radio on Tuesday, January 7 asked Lamont why he doesn’t support raising the marginal tax rate on the richest 1 percent of Connecticut residents, Lamont responded: “In part because I don’t think it’s gonna raise any more money. Right now, our income tax is 40 percent more than it is in neighboring Massachusetts. Massachusetts is growing, and Connecticut is not growing. We no longer have the same competitive advantage we had compared to even Rhode Island and New York, not to mention, you know, Florida and other places. So I am very conscious of how much you can keep raising that incremental rate. As you know, we’ve raised it four times in the last 15 years.” …Connecticut has seven income tax rate tiers, the highest of which for tax year 2019 is 6.99 percent on individuals earning $500,000 or more and married couples earning $1 million or more. That’s 38.4 percent higher than Massachusetts’s single flat-tax rate for calendar year 2019, which is 5.05 percent.

I suppose it’s progress that Gov. Lamont understands you can’t endlessly pillage a group of people when they can easily leave the state.

In other words, he recognizes that “stationary bandits” should be cognizant of the Laffer Curve (i.e., high tax rates don’t lead to high tax revenues if taxable income falls due to out-migration).

But recognizing a problem and curing a problem are not the same. Lamont opposes additional class-warfare tax hikes, but I see no evidence that he wants to undo any of the economy-sapping tax increases imposed in prior years.

So don’t be surprised if Connecticut stays near the bottom in rankings of state economic policy.

P.S. The last Republican governor contributed to the mess, so I’m not being partisan.

P.P.S. Though even I’m shocked by the campaign tactics of some Connecticut Democrats.

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I looked last year at how Florida was out-competing New York in the battle to attract successful taxpayers, and then followed up with another column analyzing how the Sunshine State’s low-tax policies are attracting jobs, investment, and people from the Empire State.

Time for Round #3.

A new article in the Wall Street Journal explains how successful investors, entrepreneurs, and business owners can save a massive amount of money by escaping states such as New York and moving to zero-income-tax states such as Florida.

This table has the bottom-line numbers.

As explained in the article, taxpayers are discovering that the putative benefits of living in a high-tax state such as New York simply aren’t worth the loss of so much money to state politicians (especially now that the 2017 tax reform sharply reduced the tax code’s implicit subsidy for high-tax states).

There’s a way for rich homeowners to potentially shave tens of thousands of dollars from their tax bills. They can get that same savings the next year and the following years as well. They can cut their taxes even further after they die. What’s the secret? Moving to Florida, a state with no income tax or estate tax. Plenty of millionaires and billionaires have been happy to ditch high-tax states like New York, New Jersey, Connecticut and California. …A New York couple filing jointly with $5 million in taxable income would save $394,931 in state income taxes by moving to Florida… If they had moved from Boston, they’d save $252,500; from Greenwich, Conn., they’d knock $342,700 off their tax bill. …Multimillionaires aren’t just moving their families south, they are taking their businesses with them, says Kelly Smallridge, president and CEO of the Business Development Board of Palm Beach County. “We’ve brought in well over 70 financial-services firms” in the past few years, she says. “The higher the taxes, the more our phone rings.”

An article in the Wall Street Journal late last year explained how states such as Florida are big beneficiaries of tax migration.

David Tepper, Paul Tudor Jones and Barry Sternlicht are among the prominent transplants who have pulled up roots in New York, New Jersey or Connecticut in recent years for Florida. New Yorker Carl Icahn has said he is moving his company to Miami next year. …The loss of the super-wealthy isn’t just a matter of reputation. The exodus of billionaires can crimp state budgets. …The SALT cap has widened the gap between Florida and other states with no income tax, such as Wyoming, and New York City, where residents can owe income taxes at rates that approach 13%.

In a column for National Review, Kevin Williamson analyzes the trade-offs for successful people…and the implications for state budgets.

…one of the aspects of modern political economy least appreciated by the class-war Left: Rich people have options. …living in Manhattan or the nice parts of Brooklyn comes with some financial burdens, but for the cool-rich-guy set, the tradeoff is worth it. …metaphorically less-cool guys are in Florida. They have up and left the expensive, high-tax greater New York City metropolitan coagulation entirely. …Florida has a lot going for it…: Lower taxes, better governance, superior infrastructure… The question is not only the cost, but what you get for your money. Tampa is not as culturally interesting as New York City. …the governments of New York City and New York State both are unusually vulnerable to the private decisions of very wealthy households, because a relatively small number of taxpayers pays an enormous share of New York’s city and state taxes: 1 percent of New Yorkers pay almost half the taxes in the state, and they know where Florida is. New York City has seen some population loss in recent years, and even Andrew Cuomo, one of the least insightful men in American politics, understands that his state cannot afford to lose very many millionaires and billionaires. “God forbid if the rich leave,” he has said. New York lost $8.4 billion in income to other states in 2016 because of relocating residents.

Earlier in 2019, the WSJ opined on the impact of migration on state budgets.

Democrats claim they can fund their profligate spending by taxing the rich, but affluent New Yorkers are now fleeing to other states. The state’s income-tax revenue came in $2.3 billion below forecast for December and January. Mr. Cuomo blamed the shortfall on the 2017 federal tax reform’s $10,000 limit on state-and-local tax deductions. But the rest of the country shouldn’t have to subsidize New York’s spending, and Mr. Cuomo won’t cut taxes.

To conclude, this cartoon cleverly captures the mentality of politicians in high-tax states.

Needless to say, grousing politicians in high-tax states have no legitimate argument. If they don’t provide good value to taxpayers, they should change policies rather than whining about out-migration.

By the way, this analysis also applies to analysis between nations. Why, for instance, should successful people in France pay so much money to their government when they can move to Switzerland and get equivalent services at a much-lower cost.

Heck, why move to Switzerland when you can move to places where government provides similar services at even lower cost (assuming, of course, that anti-tax competition bureaucracies such as the OECD don’t succeed in their odious campaign to thwart the migration of people, jobs, and money between high-tax nations and low-tax nations).

P.S. If you want to see how states rank for tax policy, click here, here, here, and here.

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I’m currently in London for discussions about public policy, particularly the potential for the right kind of free-trade pact between the United States and United Kingdom.

I deliberately picked this week for my visit so I also could be here for the British election. As a big fan of Brexit, I’m very interested in seeing whether the U.K. ultimately will escape the slowly sinking ship otherwise known as the European Union.

But the election also is an interesting test case of whether people are willing to vote for socialism. The Brits actually made this mistake already, voting for Clement Attlee back in 1945. That led to decades of relative decline, culminating in a bailout from the International Monetary Fund.

Margaret Thatcher then was elected in 1979 to reverse Attlee’s mistakes and she did a remarkable job of restoring the British economy.

But do voters understand this history?

We’ll find out on Thursday because they’ll have the opportunity to vote for the Labour Party, led by Jeremy Corbyn, who is the British version of Bernie Sanders.

And he doesn’t hide his radical vision for state control of economic life. Here’s how the Economist describes Corbyn’s agenda.

…the clear outlines of a Corbyn-led government emerged in the manifesto. Under Labour, Britain would have a larger, deeper state… Its frontiers would expand to cover everything from water supply to broadband to how much a landlord may charge a tenant. Where the state already rules, such as in education or health, the government would go deeper, with the introduction of free child-care for pre-schoolers and a “National Care Service” for the elderly. …The government would spend £75bn on building 100,000 council homes per year, paid for from a £150bn “transformation fund”, a pot of money for capital spending on public services. Rent increases would be capped at inflation. The most eye-catching proposal, a plan to nationalise BT’s broadband operations and then offer the service free of charge… Surviving policies from 2017 include a plan to nationalise utilities, alongside Royal Mail and the rail network, and a range of new rights for workers, from a higher minimum wage to restored collective-bargaining rights. All told, government spending would hit 45.1% of GDP, the highest ratio in the post-war era outside of a recession and more than in Germany… To pay for it all, very rich people and businesses would be clobbered. Corporation tax would rise to 26% (from 19% now), which Labour believes, somewhat optimistically, would raise another £24bn by 2024.

As reported by City A.M., the tax increases target a small slice of the population.

Jeremy Corbyn…is planning to introduce a new 45 per cent income tax rate for those earning more than £80,000 and 50 per cent on those with incomes of £125,000 or more. The IFS…estimates that would affect 1.6m people from the outset, rising to 1.9m people by 2023-24. Labour’s policy would add further burden to the country’s biggest tax contributors, with the top five per cent of income tax payers currently contributing half of all income tax revenues, up from 43 per cent just before the financial crisis.  But the IFS warned the amount this policy would raise was “highly uncertain”, with estimates ranging from a high of £6bn to an actual cost of around £1bn, if the policy resulted in a flight of capital from the UK. Lawyers have previously warned that high net worth individuals are poised to shift billions out of the country in the event of a Corbyn government.

Is that a smart idea?

We could debate the degree to which upper-income taxpayers will have less incentive to be productive.

But the biggest impact is probably that the geese with the golden eggs will simply fly away.

Even the left-leaning Guardian seems aware of this possibility.

The super-rich are preparing to immediately leave the UK if Jeremy Corbyn becomes prime minister, fearing they will lose billions of pounds if the Labour leader does “go after” the wealthy elite with new taxes, possible capital controls and a clampdown on private schools. Lawyers and accountants for the UK’s richest families said they had been deluged with calls from millionaire and billionaire clients asking for help and advice on moving countries, shifting their fortunes offshore and making early gifts to their children to avoid the Labour leader’s threat to tax all inheritances above £125,000. …Geoffrey Todd, a partner at the law firm Boodle Hatfield, said many of his clients had already put plans in place to transfer their wealth out of the country within minutes if Corbyn is elected. …“There will be plenty of people on the phone to their lawyers in the early hours of 13 December if Labour wins. Movements of capital to new owners and different locations are already prepared, and they are just awaiting final approval.” …On Thursday, Corbyn singled out five members of “the elite” that a Labour government would go after in order to rebalance the country. …The shadow Treasury minister Clive Lewis went further than the Labour leader, telling the BBC’s Newsnight programme: “Billionaires shouldn’t exist. It’s a travesty that there are people on this planet living on less than a dollar a day.

Some companies also are taking steps to protect shareholders.

National Grid (NG.) and SSE (SSE) are certainly not adopting a wait-and-see approach to the general election. Both companies have moved ownership of large parts of their UK operations overseas in a bid to soften the blow of potential nationalisation. With the Labour manifesto reiterating the party’s intention to bring Britain’s electricity and gas infrastructure back into public ownership, energy companies (and their shareholders) face the threat of their assets being transferred to the state at a price below market value.

The Corbyn agenda violates the laws of economics.

It also violates the laws of math. The Labour Party, for all intents and purposes, wants a big expansion of the welfare state financed by a tiny slice of the population.

That simply doesn’t work. The numbers don’t add up when Elizabeth Warren tries to do that in the United States. And an expert for the Institute for Fiscal Studies notes that it doesn’t work in the United Kingdom.

The bottom line is that Corbyn and his team are terrible.

That being said, Boris Johnson and the current crop of Tories are not exactly paragons of prudence and responsibility.

They’re proposing lots of additional spending. And, as City A.M. reports, Johnson also is being criticized for promising company-specific handouts and protectionist rules for public procurement.

In a press conference today, Johnson promised to expand Britain’s state aid regime once the UK leaves the EU. “We will back British businesses by introducing a new state aid regime which makes it faster and easier for the government to intervene to protect jobs when an industry is in trouble,” a briefing document said. Head of regulatory affairs at the Institute of Economic Affairs (IEA) Victoria Hewson said support for state aid was “veiled support for cronyism.” …A spokesperson for the Institute of Directors said: “It’s not clear how these proposals will fit with ambitions of a ‘Global Britain’. The Conservatives must be wary of opening a can of worms on state aid, it’s important to have consistent rules in place to resist the impulse of unwarranted protectionism.” Johnson also promised to introduce a buy British rule for public procurement. …IEA economics fellow Julian Jessop said: “A ‘Buy British’ policy is pure protectionism, and it comes with heavy costs.

Perhaps this is why John O’Connell of the Taxpayers Alliance has a rather pessimistic view about future tax policy. Here are excerpts of a column he wrote for CapX.

Theresa May’s government implemented a series of big state, high tax policies. Promises of no strings attached cash for the NHS; new regulations on net zero; tax cuts shelved and the creation of more quangos. After his surprise non-loss in the election, Corbyn shifted even further to the political left, doubling down on his nationalisation plans. All in all, the 2017 election result was terrible for people who believe in a small state. …A report from the Resolution Foundation found that government spending is rising once again, and likely to head back towards the heights of the 1970s over the coming years. The Conservatives’ recent spending review suggests state spending could be 41.3% of GDP by 2023, while Labour’s spending plans could take it to 43.3%. This compares to the 37.4% average throughout the noughties. Based on the manifestos, Labour are working towards a German-sized state, while the Tories’ plan looks more Dutch. Unsurprisingly we see this mirrored by the tax burden, which at 34.6% of GDP has already reached a fifty-year high. It is likely to increase further. …British taxpayers are presented with something of a Hobson’s choice: Boris Johnson will see taxes increase and spending shoot up, while Jeremy Corbyn has £1.2 trillion worth of unfunded spending rises just waiting to become unimaginable tax hikes for everyone. Whoever you vote for, you’ll get higher taxes, the question is just about how high.

Let’s close by looking at the big picture.

Here’s a chart showing the burden of government spending in the United Kingdom since 1900. I’ve augmented the chart to show the awful trend started by Attlee (in red) and then the positive impact of Thatcher (in green).

You can also see that Tony Blair and Gordon Brown did a bad job early this century, followed by a surprisingly good performance by David Cameron.

Now it appears that British voters have to choose between a slow drift in the wrong direction under Boris Johnson or a rapid leap in the wrong direction under Jeremy Corbyn.

Normally I would be rather depressed by such a choice. I’m hoping, however, that Brexit (assuming it actually happens!) will cause Boris Johnson to make smart choices even if he is otherwise tempted to make bad choices.

P.S. Unsurprisingly, Corbyn has been an apologist for thugs and dictators.

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I’ve written many columns about Sweden and Denmark over the past 10-plus years, and I’ve also written several times about Norway and Iceland.

But I’ve mostly neglected Finland, other than some analysis of the country’s experiment with “basic income” in 2017 and 2018.

Now, thanks to a very interesting column in the New York Times, it’s time to rectify that oversight. According to the authors, Anu Partanen and , Finland is a great place with lots of goodies provided by taxpayers.

Finland, of course, is one of those Nordic countries that we hear some Americans, including President Trump, describe as unsustainable and oppressive — “socialist nanny states.”…We’ve now been living in Finland for more than a year. The difference between our lives here and in the States has been tremendous… What we’ve experienced is an increase in personal freedom. …in Finland, we are automatically covered, no matter what, by taxpayer-funded universal health care… Our child attends a fabulous, highly professional and ethnically diverse public day-care center that amazes us with its enrichment activities and professionalism. The price? About $300 a month — the maximum for public day care, because in Finland day-care fees are subsidized for all families. …if we stay here, …College would also be tuition free. If we have another child, we will automatically get paid parental leave, funded largely through taxes, for nearly a year… Compared with our life in the United States, this is fantastic.

Interestingly, the authors are not clueless Bernie Sanders-style leftists.

They fully understand and appreciate that Finland (like all Nordic nations) is not a socialist country.

…surely, many in the United States will conclude, Finnish citizens and businesses must be paying a steep price in lost freedoms, opportunity and wealth. …In fact, a recent report by the chairman of market and investment strategy for J.P. Morgan Asset Management came to a surprising conclusion: The Nordic region is not only “just as business-friendly as the U.S.” but also better on key free-market indexes, including greater protection of private property, less impact on competition from government controls and more openness to trade and capital flows. …What to make of all this? For starters, politicians in the United States might want to think twice about calling the Nordics “socialist.” …in Finland, you don’t really see the kind of socialist movement…, especially around goals such as curtailing free markets and even nationalizing the means of production. The irony is that if you championed socialism like this in Finland, you’d get few takers. …a 2006 study by the Finnish researchers Markus Jantti, Juho Saari and Juhana Vartiainen demonstrates…throughout the 20th century Finland remained — and remains to this day — a country and an economy committed to markets, private businesses and capitalism.

This is a very accurate assessment. Finland is more market-oriented than the United States in many categories.

Moreover, the country is ranked #21 for economic freedom out of 162 nations in Economic Freedom of the World, with a score of 7.80. That’s just .05 behind Taiwan and .09 behind Chile.

That being said, the burden of taxes and spending is rather onerous.

…after World War II, …Finnish capitalists also realized that it would be in their own long-term interests to accept steep progressive tax hikes. …the nation’s commitment to providing generous and universal public services…buffered and absorbed the risks and dislocations caused by capitalist innovation. …Visit Finland today and it’s obvious that the much-heralded quality of life is taking place within a bustling economy of upscale shopping malls, fancy cars and internationally competitive private companies. …Yes, this requires capitalists and corporations to pay fairer wages and more taxes than their American counterparts currently do.

The column concludes by suggesting that American capitalists follow the same model.

Right now might be an opportune moment for American capitalists to pause and ask themselves what kind of long-term cost-benefit calculation makes the most sense.

So should the United States copy Finland, as the authors suggest?

People would get lots of taxpayer-financed freebies, but there would be a heavy price. Taxes consume nearly 50 percent of an average family’s income (even higher according to some measures).

That’s compared to about 30 percent in the United States.

And there’s a very Orwellian aspect of the Finnish tax system. As the New York Times reported last year, everyone in the country has the right to know how much income you earn.

Pamplona can boast of the running of the bulls, Rio de Janeiro has Carnival, but Helsinki is alone in observing “National Jealousy Day,” when every Finnish citizen’s taxable income is made public at 8 a.m. sharp. The annual Nov. 1 data dump is the starting gun for a countrywide game of who’s up and who’s down. …Finland is unusual, even among the Nordic states, in turning its release of personal tax data — to comply with government transparency laws — into a public ritual of comparison. …A large dosage of Thursday’s reporting concerned the income of minor celebrities… The country’s best-known porn star, Anssi “Mr. Lothar” Viskari, was reported to have earned 23,826 euros (about $27,000).

Given the onerous level of Finnish taxes, it’s probably safe to say that “Mr. Lothar” is getting screwed more than he’s…um….well, you get the point.

So what’s the bottom line? Should America be more like Finland? Is the country reasonably successful because of high taxes, or in spite of high taxes?

The U.S. should not mimic Finland, at least if the goal is higher living standards. Finland has some advantages over the United States (including better business taxation), but the United States has more overall economic liberty.

And that presumably helps to explain why, based on data from the Organization for economic Cooperation and Development, the average American enjoys 40 percent higher living standards than the average Finn.

But the most compelling piece of data, for those who prefer apples-to-apples comparison, is that Americans of Finnish descent produce 47 percent more than Finns in Finland.

Is Finland a relatively rich nation? Yes.

Is Finland a relatively free nation? Definitely.

Is Finland a good example of western civilization? Unquestionably.

The bottom line is that Finland seems like a great country (I’ve never visited). All I’m saying is that Americans would not be as prosperous if we had Finnish-style taxation and Finnish-style spending.

P.S. Researchers at Finland’s central bank seem to agree with my concern.

P.P.S. And Finland’s former Prime Minister understood the downside of an excessive public sector.

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The World Bank has released its annual report on the Ease of Doing Business.

Unsurprisingly, the top spots are dominated by market-oriented jurisdictions, with New Zealand, Singapore, and Hong Kong (at least for now!) winning the gold, silver, and bronze. The United States does reasonably well, finishing in sixth place.

It’s also worth noting that Nordic nations do quite well. Denmark even beats the United States, and Norway and Sweden are both in the top 10.

Georgia gets a very good score, as does Taiwan. And I’m sure Pope Francis will be irked to see that Mauritius ranks highly.

I’m surprised, though, to see Russia at #28 and China at #31. That’s better than France!

And I’m even more surprised that normally laissez-faire Switzerland is down at #36.

What economic lessons can we learn from the report? First, the authors remind us that less red tape means more prosperity.

Research demonstrates a causal relationship between economic freedom and gross domestic product (GDP) growth, where freedom regarding wages and prices, property rights, and licensing requirements leads to economic development. … The ease of doing business score serves as the basis for ranking economies on their business environment: the ranking is obtained by sorting the economies by their scores. The ease of doing business score shows an economy’s absolute position relative to the best regulatory performance, whereas the ease of doing business ranking is an indication of an economy’s position relative to that of other economies.

By the way, here’s a simple depiction of the World Bank’s methodology.

It’s also worth noting that less intervention means less corruption.

There are ample opportunities for corruption in economies where excessive red tape and extensive interactions between private sector actors and regulatory agencies are necessary to get things done. The 20 worst-scoring economies on Transparency International’s Corruption Perceptions Index average 8 procedures to start a business and 15 to obtain a building permit. Conversely, the 20 best-performing economies complete the same formalities with 4 and 11 steps, respectively. Moreover, economies that have adopted electronic means of compliance with regulatory requirements—such as obtaining licenses and paying taxes—experience a lower incidence of bribery.

Poor countries, not surprisingly, have more red tape.

An entrepreneur in a low-income economy typically spends around 50 percent of the country’s per-capita income to launch a company, compared with just 4.2 percent for an entrepreneur in a high-income economy. It takes nearly six times as long on average to start a business in the economies ranked in the bottom 50 as in the top 20. There’s ample room for developing economies to catch up with developed countries on most of the Doing Business indicators. Performance in the area of legal rights, for example, remains weakest among low- and middle-income economies.

Africa and Latin America are especially bad.

Sub-Saharan Africa remains one of the weak-performing regions on the ease of doing business with an average score of 51.8, well below the OECD high-income economy average of 78.4 and the global average of 63.0. …Latin America and the Caribbean also lags in terms of reform implementation and impact. …not a single economy in Latin America and the Caribbean ranks among the top 50 on the ease of doing business.

I’m disappointed, by the way, that Chile is only ranked #59.

Now let’s shift to some very important graphs about the relationship between economic freedom and national prosperity.

We’ll start with a look at the relationship between employment regulation and per-capita income. Not surprisingly, countries that make it hard to hire workers and fire workers have lower levels of prosperity.

Here’s a chart showing the relationship between employment regulation and the underground economy.

The moral of the story is that lots of red tape drives employers and employees to the black market.

Perhaps most important, there’s a very clear link between good regulatory policy and overall entrepreneurship.

Here’s a bit of good news.

Developing nations have reduced the burden of red tape in some areas, in part because Ease of Doing Business puts pressure on governments.

We can see the results in this chart.

I’ll close with a look at the regulatory burden in the United States, which also can be considered good news.

Here’s the annual score for the past five years (a higher number is better).

I’m frequently critical of this White House, but I also believe in giving credit when it’s deserved. The bottom line is that Trump’s policies have been a net plus for businesses.

In other words, lower tax rates and less red tape have more than offset the pain of protectionism.

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Following their recent assessment of the best and worst countries, the Tax Foundation has published its annual State Business Tax Climate Index, which is an excellent gauge of which states welcome investment and job creation and which states are unfriendly to growth and prosperity.

Here’s the list of the best and worst states. Unsurprisingly, states with no income tax rank very high, as do states with flat taxes.

It’s also no surprise to see New Jersey in last place. The state has fallen dramatically, especially considering that it was like New Hampshire as recently as the 1960s, with no state income tax and no state sales tax.

And the bad scores for New York, California, and Connecticut also are to be expected. The Nutmeg State is an especially sad story. There was no state income tax 30 years ago. Once politicians got that additional source of revenue, however, Connecticut suffered a big economic decline.

Here’s a description of the methodology, along with the table showing how different factors are weighted.

…the Index is designed to show how well states structure their tax systems and provides a road map for improvement.The absence of a major tax is a common factor among many of the top 10 states. Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: the corporate income tax, the individual income tax, or the sales tax. …This does not mean, however, that a state cannot rank in the top 10 while still levying all the major taxes. Indiana and Utah, for example, levy all of the major tax types, but do so with low rates on broad bases.The states in the bottom 10 tend to have a number of afflictions in common: complex, nonneutral taxes with comparatively high rates. New Jersey, for example, is hampered by some of the highest property tax burdens in the country, has the second highest-rate corporate income tax in the country and a particularly aggressive treatment of international income, levies an inheritance tax, and maintains some of the nation’s worst-structured individual income taxes.

For those who want to delve into the details, here are all the states, along with their rankings for the five major variables.

If you want to know which states are making big moves, Georgia enjoyed the biggest one-year jump (from #36 to #32) and Kansas suffered the biggest one-year decline (from #27 to #34). Keep in mind that it’s easier to climb if you’re near the bottom and easier to fall if you’re near the top.

Looking over a longer period of time, the states with the biggest increases since 2014 are North Carolina (+19, from #34 to #15), Wisconsin (+12, from #38 to #26), Kentucky (+9, from #35 to #24), Nebraska (+8, from #36 to #28), Delaware (+7, from #18 to #11), and Rhode Island (+6, from #45 to #39).

The states with the biggest declines are Kansas (-9, from #25 to #34), Hawaii (-8, from #29 to #37), Massachusetts (-8, from #28 to #36), and Idaho (-6, from #15 to #21).

We’ll close with the report’s map, showing the rankings of all the states.

P.S. My one quibble with the Index is that there’s no variable to measure the burden of government spending, which would give a better picture of overall economic liberty. This means that states that finance large public sectors with energy severance taxes (which also aren’t included in the Index) wind up scoring higher than they deserve. As such, I would drop Wyoming and Alaska in the rankings and instead put South Dakota at #1 and Florida at #2.

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The Tax Foundation churns out lots of good information, but I especially look forward to their International Tax Competitiveness Index.

It shows how nations rank based on key tax variables such as corporate taxation, personal income tax, and international tax rules.

The latest edition shows good news and bad news for the United States. The good news, as you see in this chart, is that the 2017 tax reform improved America’s ranking from 28 to 21.

The bad news is that the United States is still in the bottom half of industrialized nations.

We should copy Estonia, which has been in first place for six consecutive years.

For the sixth year in a row, Estonia has the best tax code in the OECD. Its top score is driven by four positive features of its tax code. First, it has a 20 percent tax rate on corporate income that is only applied to distributed profits. Second, it has a flat 20 percent tax on individual income that does not apply to personal dividend income. Third, its property tax applies only to the value of land, rather than to the value of real property or capital. Finally, it has a territorial tax system that exempts 100 percent of foreign profits earned by domestic corporations from domestic taxation, with few restrictions. …For the sixth year in a row, France has the least competitive tax system in the OECD. It has one of the highest corporate income tax rates in the OECD (34.4 percent), high property taxes, a net tax on real estate wealth, a financial transaction tax, and an estate tax. France also has high, progressive, individual income taxes that apply to both dividend and capital gains income.

Here are some other important observations from the report, including mostly positive news on wealth taxation as well as more information on France’s fiscal decay.

…some countries like the United States and Belgium have reduced their corporate income tax rates by several percentage points, others, like Korea and Portugal, have increased them. Corporate tax base improvements have been put in place in the United States, United Kingdom, and Canada, while tax bases were made less competitive in Chile and Korea. Several EU countries have recently adopted international tax regulations like Controlled Foreign Corporation rules that can have negative economic impacts. Additionally, while many countries have removed their net wealth taxes in recent decades, Belgium recently adopted a new tax on net wealth. …Over the last few decades, France has introduced several reforms that have significantly increased marginal tax rates on work, saving, and investment.

For those who like data, here are the complete rankings, which also show how countries score in the various component variables.

Notice that the United States (highlighted in red) gets very bad scores for property taxation and international tax rules. But that bad news is somewhat offset by getting a very good score on consumption taxation (let’s hope politicians never achieve their dream of imposing a value-added tax!).

And it’s no big surprise to see countries like New Zealand and Switzerland get high scores.

P.S. My only complaint about the International Tax Competitiveness Index is that I would like it to include even more information. There presumably would be challenges in finding apples-to-apples comparative data, but I’d be curious to find out whether Hong Kong and Singapore would beat out Estonia. And would zero-tax jurisdictions such as Monaco and the Cayman Islands get the highest scores of all? Also, what would happen if a variable on the aggregate tax burden was added to the equation? I’m guessing some nations such as Sweden and the Netherlands might fall, while other countries such as Chile and Poland (and probably the U.S.) would climb.

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According to the most-recent edition of Economic Freedom of the World, Brazil is only ranked #120, which is lower than nations such as Greece, Haiti, and China.

Brazil gets a horrible grade on regulation, and it’s also in the bottom half of all nations when looking at fiscal policy, quality of governance, and trade.

But things may be about to change. Voters elected a president last year, Jair Bolsonaro, who is best known for populist rhetoric, but he also expresses support for market-friendly reforms.

And even though he’s sometimes referred to as the “Brazilian Trump,” President Bolsonaro seems to have a much better understanding of trade than his American counterpart.

At least if this report from the Wall Street Journal is any indication.

President Jair Bolsonaro ’s administration is opening up one of the world’s most closed big economies, slashing import tariffs on more than 2,300 products and exposing local industries long accustomed to protectionism to the challenges of free trade. With little fanfare, the conservative government has since taking office in January eased the entry of ultrasonic scalpels, cancer drugs, heavy machinery and more, in some cases with tariffs reduced to zero from as much as 20%. The tariff cuts…reflect a significant shift in the world’s eighth-largest economy, where duties were twice as high as in Mexico, China and the European Union last year. The new opening is a central feature in Economy Minister Paulo Guedes ’s plans to make the country of 210 million more competitive, part of an effort to rekindle a moribund economy historically shielded from foreign competition and bogged down by bureaucracy. …“Brazil’s model of protectionism has failed,” Deputy Economy Minister for Trade Marcos Troyjo, one of Brazil’s chief trade negotiators, said in an interview. “It’s been 40 years without sustainable economic growth.”

Here are some excerpts about how Brazil has been hurt by trade barriers.

The problems created by protectionism are evident throughout Brazil’s economy. When Mauá University outside São Paulo imported American equipment last year that it couldn’t find in Brazil to upgrade its physics lab, for example, import tariffs doubled the price tag to $70,000, said Francisco Olivieri, a business professor and head of Mauá’s technology department. …Protectionism hurts businesses that need to import supplies or parts and face high tariffs and bureaucracy to do so, which pushes them away from global supply chains. Red tape related to tariffs at Brazilian ports mean imported supplies can take weeks to reach buyers, causing production delays. Fifty-five percent of foreign products require the importing companies to obtain permits from as many as six different government agencies, according to a recent study by the National Confederation of Industry, or CNI, a trade group that represents Brazilian factories. Importers are subject to steep fines if they fail to request a permit, but it is often difficult to determine from which agencies they must seek approval.

In other words, Brazilian companies are hit by a double-whammy of trade barriers and red tape.

This is why liberalization is so important.

Incidentally, the EFW data only captures what happened up through 2017.

And since Brazil (#87) isn’t that far behind the United States (#55) in the trade rankings, I won’t be overly surprised in a few years if Brazil jumps the United States given the combination of Bolsonaro’s good policies and Trump’s bad policies.

P.S. Brazil is also in the process of curtailing pensions and already has adopted a constitutional spending cap.

P.P.S. President Bolsonaro is quite good on gun rights.

P.P.P.S. A few years ago, I fretted Brazil has passed a tipping point of dependency. I’m somewhat hopeful that assessment was too pessimistic.

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My primary job is dealing with misguided public policy in the United States.

I spend much of my time either trying to undo bad policies with good reform (flat tax, spending restraint, regulatory easing, trade liberalization) or fighting off additional bad interventions (Green New Deal, protectionism, Medicare for All, class warfare taxes).

Seems like there is a lot to criticize, right?

Yes, but sometimes the key to success is being “less worse” than your competitors. So while I’m critical of many bad policies in the United States, it’s worth noting that America nonetheless ranks #6 for overall economic liberty according to the Fraser Institute.

As such, it’s not surprising that America has higher living standards than most other developed nations according to the “actual individual consumption” data from the Organization for Economic Cooperation and Development.

And America’s advantage isn’t trivial. Our consumption levels are more than 46 percent higher than the average for OECD member nations.

The gap is so large that I’ve wondered how lower-income people in the United States would rank compared to average people in other countries.

Well, the folks at Just Facts have investigated precisely this issue using World Bank data and found some remarkable results.

…after accounting for all income, charity, and non-cash welfare benefits like subsidized housing and Food Stamps—the poorest 20% of Americans consume more goods and services than the national averages for all people in most affluent countries. …In other words, if the U.S. “poor” were a nation, it would be one of the world’s richest. …The World Bank publishes a comprehensive dataset on consumption that isn’t dependent on the accuracy of household surveys and includes all goods and services, but it only provides the average consumption per person in each nation—not the poorest people in each nation. However, the U.S. Bureau of Economic Analysis published a study that provides exactly that for 2010. Combined with World Bank data for the same year, these datasets show that the poorest 20% of U.S. households have higher average consumption per person than the averages for all people in most nations of the OECD and Europe… The high consumption of America’s “poor” doesn’t mean they live better than average people in the nations they outpace, like Spain, Denmark, Japan, Greece, and New Zealand. …Nonetheless, the fact remains that the privilege of living in the U.S. affords poor people with more material resources than the averages for most of the world’s richest nations.

There are some challenges in putting together this type of comparison, so the folks at Just Facts are very clear in showing their methodology.

They’ve certainly come up with results that make sense, particularly when comparing their results with OECD AIC numbers.

Here’s one of the charts from the report.

You can see that the bottom 20 percent of Americans do quite well compared to the average persons in other developed nations.

By the way, the report from Just Facts also criticizes the New York Times for dishonest analysis of poverty. Since I’ve felt compelled to do the same thing, I can definitely sympathize.

The bottom line is that free markets and limited government are the best way to help lower-income people enjoy more prosperity.

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I periodically mock the New York Times when editors, reporters, and columnists engage in sloppy and biased analysis.

Now we have another example.

Check out these excerpts from a New York Times column by Steven Greenhouse.

The United States is the only advanced industrial nation that doesn’t have national laws guaranteeing paid maternity leave. It is also the only advanced economy that doesn’t guarantee workers any vacation, paid or unpaid, and the only highly developed country (other than South Korea) that doesn’t guarantee paid sick days. …Among the three dozen industrial countries in the Organization for Economic Cooperation and Development, the United States has the lowest minimum wage as a percentage of the median wage — just 34 percent of the typical wage, compared with 62 percent in France and 54 percent in Britain. It also has the second-highest percentage of low-wage workers among that group… All this means the United States suffers from what I call “anti-worker exceptionalism.” …America’s workers have for decades been losing out: year after year of wage stagnation.

Sounds like the United States is some sort of Dystopian nightmare for workers, right?

Well, if there’s oppression of labor in America, workers in other nations should hope and pray for something similar.

Here’s a chart showing per-capita “actual individual consumption” for various nations that are part of the Organization for Economic Cooperation and Development. As you can see, people in the United States have much higher living standards.

By the way, I can’t resist pointing out another big flow in Greenhouse’s NYT column.

He wrote that the U.S. has “the second-highest percentage of low-wage workers.” That sounds like there’s lots of poverty in America. Especially since the U.S. is being compared to a group of nations that includes decrepit economies such as Mexico, Turkey, Italy, and Greece.

But this statement is nonsense because it is based on OECD numbers that merely measure the percent of workers in each nation that earn less than two-thirds of the national median level. Yet since median income generally is much higher in the United States, it’s absurd to use this data for international comparisons.

In other words, Greenhouse is relying on data that deliberately confuse absolute living standards and relative living standards. Why? Presumably to try to make the United States look bad and/or to advance a pro-redistribution agenda.

P.S. You can find similarly dishonest ways of measuring poverty from the United Nations, the Equal Welfare Association, Germany’s Institute of Labor Economics, the Obama Administration, and the European Commission.

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I’ve applauded China’s economic progress.

It’s economic liberty score jumped from 3.64 in 1980 to 6.46 in the most recent edition of Economic Freedom of the World.

That shift toward markets (which started in a village) helped to dramatically reduce poverty and turn China into a middle-income nation.

That’s the good news.

The bad news is that most of China’s economic liberalization (from 3.64 to 6.15) occurred between 1980 and 2003.

Since that time, China’s score has improved at a glacial pace. Moreover, because other nations have been more aggressive about reducing the burden of government, China’s relative ranking has actually dropped (from #88 to #107) since 2003.

Which is why I’ve warned that China needs another burst of pro-market reform if it wants to become a rich country.

Regarding this issue, the Wall Street Journal has a very interesting report about how China is under-performing.

The country’s state-led growth model is running out of gas. A recession or crisis may not be imminent, but the long-run implications are just as serious. Absent a change in direction, China may never become rich. …First, official statistics probably paint too flattering a picture. Per-capita income may be a quarter lower than reported, based on a study of nighttime light co-authored by Yingyao Hu of Johns Hopkins University. …Second, it doesn’t measure up to the economies China seeks to emulate. Taiwan, South Korea and Japan all opened their economies to global trade and investment, enjoyed superfast growth for several decades… In fact, China seems to be slowing sooner than the others.

Why is China underperforming?

Too much statism. Simply stated, the government has too much control over the allocation of labor and capital.

For 30 years the Communist Party opened ever more of the economy to private enterprise, trade, foreign investment and market forces. Yet it never relinquished its commitment to socialism and Mr. Brandt says that since the mid-2000s the government has tightened control over sectors… An inefficient state sector matters less if the private sector grows fast enough. But in recent years, private firms in China have faced multiple headwinds. State-controlled banks prefer to lend to state-owned enterprises… The domestic private sector’s share of total sales has dropped about 5 percentage points since 2016, according to Goldman, while the state sector’s share has risen roughly as much.

By the way, many observers (from the American Enterprise Institute, Peterson Institute for International Economics, the New York Times, the New York Post, and Investor’s Business Daily) echo the concern about China becoming more statist in recent years.

I’ll make a more restrained point.

I’ll start by sharing this very interesting chart from the WSJ story. It shows how China’s growth, while impressive, has not been as rapid as the growth enjoyed by other Asian economies.

If you look below, you’ll see I’ve now augmented the chart to explain why China has under-performed.

On the right side, I’ve added the historical rankings from Economic Freedom of the World. As you can see (and just as theory and evidence teaches us), the other nations on the chart enjoyed more growth because they had more economic freedom.

These numbers reinforce my argument that China needs more pro-market reform. Though I should add the caveat that EFW has added more nations over time, so this comparison overstates the degree to which China is lagging.

But it is lagging. The bottom line is that China needs to copy Hong Kong and Singapore if it wants to become a rich nation. Or even Taiwan, which is an under-appreciated success story.

P.S. Keep in mind that China also faces demographic decline, which makes good policy even more necessary and important.

P.P.S. Amazingly, both the OECD and IMF are trying to sabotage China’s economy.

P.P.P.S. The WSJ story is an example of good reporting. If you want an example of bad reporting about China, check out this bizarre story from the New York Times.

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The Nordic nations punch above their weight in global discussions of economic policy.

Advocates of bigger government in the United States, such as Bernie Sanders, claim that those countries are proof that socialism can work.

But there’s a big problem with that claim. The Nordic nations don’t have any of the policies – government ownership, central planning, or price controls – that are characteristics of a socialist economy.

But they do have high taxes and big welfare states. And since some politicians seem to think America should copy those policies, let’s see what we can learn by examining the Nordic nations.

NIma Sanandaji, writing for Foreign Policy, highlights what is good – and not so good – about government policy in the region. He starts by looking specifically at Norway.

Erlend Kvitrud, a member of the Norwegian Green Party, links democratic socialist economic policies and Nordic countries’ prosperity. …the left has for decades showcased the Nordic nations as proof that socialism can work not only in theory but also in practice. …Inconveniently for fans of the Nordic welfare model, though, Norway’s actual economic success rests on its wealth of natural resources. …Norway’s oil fund is the world’s largest sovereign wealth fund, worth around $200,000 per citizen. It wasn’t Norway’s social democratic economic policies that created the country’s wealth. It was nature. …The other Nordic countries, which lack Norway’s oil and natural gas riches, have lower living standards than the United States.

He’s certainly correct in highlighting the role of oil wealth in Norway.

And he also points out that Norway became a successful and prosperous nation before the welfare state was imposed.

What’s more, the Nordic countries’ social successes predate their high-tax, high-social spending policies. …economists Anthony Barnes Atkinson and Jakob Egholt Sogaard shows that most of the progress toward income inequality in Norway and Sweden happened before 1970, at a time when the two countries had low tax regimes and less redistributive policies. Similarly, the Nordic countries’ social successes were more pronounced in those years. Relative to the rest of the world, for example, they had a greater advantage in life span and child mortality in 1970 than they do today. In other words, the Nordic model arose after those countries were already prosperous and egalitarian.

These are all good points, but I think Nima actually overlooks one very powerful argument.

Yes, per-capita GDP in Norway is very similar to the United States, but gross domestic product is an imperfect measure of living standards. The data in relatively small economies can be misleading if there is a particular sector that distorts national statistics – such as financial services in Luxembourg or corporations in Ireland.

That’s why, if you want to measure the prosperity of households, it’s best to review the OECD’s data on “actual individual consumption.”

I’ve shared that data for all developed nations in the past, and the Council of Economic Advisers recently did a specific comparison of the United States and Nordic nations.

Norway is still impressive, ranked higher than its neighbors, but not in the same league as the United States.

By the way, in another article, this time for National Review, Nima explains that America actually has more women in management than any of the Nordic nations.

Science Daily once bluntly stated that “the Nordic countries are the most gender equal nations in the world.” There is some truth to this. …A common assumption is that the gender-equality progress of the Nordics is due to their social-democratic welfare policies. …The truth is that Nordic countries have a long history of gender equality, stretching back to the time of the Vikings. …One might expect this to translate into many women reaching the top of the business world. But this clearly is not the case. …the share of women among managers, as recorded by the International Labour Organization, is 43 percent in the United States, compared with 36 percent in Sweden and 28 percent in Denmark. …a pattern emerges: Those with more extensive welfare-state policies have fewer women on top. Iceland, which has a moderately sized welfare state, has the most women managers. Second is Sweden, which has opened up welfare services such as education, health care, and elder care for private-sector competition. Denmark, which has the highest taxes and the biggest welfare state in the modern world, has the lowest share of women in managerial positions. …The true lesson, that a large welfare state actually can impede women’s progress.

Let’s return to the big-picture economic comparisons.

Professor Hannes Gissurason of the University of Iceland authored a report on the Nordic model for the Foundation for European Reform.

It’s a very detailed study covering lots of issues.

The five Nordic countries, Sweden, Denmark, Finland, Norway, and Iceland, are rightly regarded as successful societies. They are affluent, but without a wide gap between rich and poor. They provide social security, but without a significant erosion, it seems, of their freedoms. They are small, but they all enjoy a good reputation around the world as peaceful, civilised democracies. The Nordic nations are healthy and well-educated and the crime rate is low. But what is it that other nations can learn from the Nordic success story?

For today, let’s focus on the third chapter, which look at three distinct eras of Swedish economic history.

…a distinction can be made between three Swedish models. The liberal model was developed in the mid-19th century, when liberal principles of free trade and unfettered competition were generally accepted and implemented in Sweden. The years between 1970 and 1990 were the heyday of the social democratic welfare model, although it had of course started its development much earlier and was to last for a few more years. The third model emerged in the 1990s after the experience of the social democratic model: this was the liberal welfare model.

The first era, which was based on classical liberal principles of free markets and limited government, is when Sweden became rich.

It was the liberal model which made Sweden wealthy, as Swedish economist Nima Sanandaji has well documented. Between 1870 and 1936, Sweden enjoyed the highest growth rate in the industrialised world… What produced the astonishing growth after 1870 was the introduction of economic freedom into a relatively poor society, but with strong traditions of self-reliance, hard work, thriftiness, and respect for the law and a high level of education. Money was sound, with the Swedish krona being on the gold standard… The environment was friendly to business and taxes were relatively low, even after the Social Democrats took over. In 1955, for example, tax revenues in Sweden, as a proportion of GDP, were the same as in the US, 24%.

The second era is when Sweden shifted to what some people call democratic socialism, but more accurately should be called the era of big government.

There were high taxes and lots of redistribution programs. And, not surprisingly, this led to economic stagnation.

…In 1975, tax revenues, as a proportion of GDP, had risen to 39% in Sweden, but was still only 25% in the US… In 2004, 38 of the largest companies in Sweden were entrepreneurial which means that they had been started as privately owned enterprises within the country. …Only two had been formed after 1970. While the public sector grew, the private sector stagnated. Between 1950 and 2000, the Swedish population grew from seven to almost nine million. Incredibly, the net job creation in the private sector during this period was close to zero. All the new jobs were in the public sector. …Many entrepreneurs left the country, including the founders of IKEA, Tetra Pak, and H&M.

Big government undermines initiative and weakens economic performance.

The study includes this data on how Swedes get richer in America than they do back home.

All this bad news created the conditions for the third era, which featured market-based reforms – regardless of which party or parties were in control of government.

Reluctantly, the Social Democrats started some reforms, deregulating credit and foreign exchange markets and changing the tax system, lowering marginal income tax from 73% to 51% and the capital gains tax to 30%. In 1991 a non-socialist government was voted in again. Now it was also anti-socialist, and it immediately abolished the wage earner funds… energy, postal, telephone, railway, and airline markets were all deregulated. …The government introduced school vouchers, sold stateowned companies, and carried out reforms in the labour market, especially designed for small businesses and private job agencies. The government also allowed for some choice in health care and assistance to the elderly. …when the Social Democrats returned to power in 1994…welfare benefits were cut; a new pension system was established, partly with self-funded pensions; collective bargaining was reformed; the inheritance tax was abolished. The centre-right government which was in power 2006–2014 continued liberalising the Swedish economy: the wealth tax was abolished, …property rights were strengthened, and the corporate tax was cut to 22%.

In other words, for the past twenty or so years, Sweden has been a leader in pro-market reforms.

Yes, there’s still a big government. But not as big as it used to be.

Yes, there are still high taxes. But not as high as they used to be.

And what’s the lesson we can learn?

This chart is very persuasive. It shows how Swedish prosperity, measured relative to the United States, declined during the era of big government.

But there’s been some convergence ever since policy makers started liberalizing the Swedish economy.

And we see a similar pattern if we compare Sweden to all other industrialized nations.

P.S. A very interesting study suggests that widespread migration to America made Sweden more statist.

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Regarding fundamental tax reform, there have been some interesting developments at the state level in recent years.

Utah, North Carolina, and Kentucky have all junked their so-called progressive systems and joined the flat tax club.

That’s the good news.

The bad news is that Illinois politicians are desperately trying to gut that state’s flat tax.

And the same thing is true in Massachusetts.

The Tax Foundation has a good explanation of what’s been happening in the Bay State and why it matters for the competitiveness, job creation, and entrepreneurship.

A joint constitutional convention of Massachusetts lawmakers has voted 147-48 to approve H.86, dubbed the Fair Share Amendment, to impose a 4 percent income tax surcharge on annual income beyond $1 million. The new tax would be levied in addition to the existing 5.05 percent flat rate, bringing Massachusetts’ total top rate to 9.05 percent. …Massachusetts requires legislatively-referred constitutional amendments be passed in consecutive sessions, meaning that the same measure would need to be approved in the 2021-2022 legislative session before it would be sent to voters in November of 2022. The millionaires’ tax, though targeted at a wealthy minority of tax filers in the Bay State, would cause broader harm to Massachusetts’ tax structure and economic climate. It would eliminate Massachusetts’ primary tax advantage over regional competitors… The Bay State’s low, flat income tax on individuals and pass-through businesses is the most competitive element of its tax code, giving the Commonwealth a clear strength compared to surrounding states and regional competitors. Income tax rate reductions in recent years have helped shed the moniker of “Taxachusetts” while setting up the Bay State to be a beneficiary of harmful tax rate increases in surrounding states. However, a 9.05 percent top rate would be uncompetitive even in a high-tax region. The amendment would hit Massachusetts pass-through businesses with the sixth-highest tax rate of any state.

Here’s a map showing top tax rates in the region (New Hampshire has an important asterisk since the 5-percent rate only applies to interest and dividends), including where Massachusetts would rank if the new plan ever becomes law.

The Boston Globe reports that lawmakers are very supportive of this scheme to extract more money, while the business community is understandably opposed.

A measure to revive a statewide tax on high earners received a glowing reception on Beacon Hill Thursday, suggesting an easy path ahead despite staunch opposition from business groups. “We are in desperate need for revenue for our districts,” said Senator Michael D. Brady of Brockton, one of the proposal’s more than 100 sponsors and a member of the Joint Committee on Revenue…. “We have tremendous unmet needs in our Commonwealth that are hurting families, hurting our communities, and putting our state’s economic future at risk,” said Senator Jason M. Lewis of Winchester, the lead sponsor of the Senate version of the proposal. …business groups…came armed with arguments that hiking taxes on the state’s highest earners would drive entrepreneurs — and the jobs and tax revenue they create — out of the state, as well as unfairly harm small- and mid-sized business owners whose business income passes through their individual tax returns. “Look, we’re trying to prevent Massachusetts from becoming Connecticut,” said Christopher Anderson, president of the Massachusetts High Technology Council.

Meanwhile, the Boston Herald reports that the Republican governor is opposed to this class-warfare tax.

Gov. Charlie Baker cautioned the Legislature against asking for more money from taxpayers with the so-called millionaire tax… “I’ve said that we didn’t think we should be raising taxes on people and I certainly don’t think we should be pursuing a graduated income tax,” Baker told reporters yesterday. …Members of Raise Up Massachusetts, a coalition of community organizations, religious groups and labor unions, are staunchly supporting the tax that is estimated to raise approximately $2 billion a year. …The Massachusetts Republican Party is sounding the alarm on what they’re calling, “the Democrats’ newest scheme,” to “dump” the state’s flat tax system.

The governor’s viewpoint is largely irrelevant, however, since he can’t block the legislature from moving forward with their class-warfare scheme.

But that doesn’t mean the big spenders in Massachusetts have a guaranteed victory.

Yes, the next session’s legislature is almost certain to give approval, but there’s a final step needed before the flat tax is gutted.

The voters need to say yes.

And in the five previous occasions when they’ve been asked, the answer has been no.

Overwhelmingly no.

Even in 1968 and 1972, proposals for a so-called progressive tax were defeated by a two-to-one margin.

Needless to say, that doesn’t mean voters will make the right choice in 2022.

The bottom line is that if the people of Massachusetts want investors, entrepreneurs, and other job creators to remain in the state, they should again vote no.

But if they want to destroy jobs and undermine the Bay State’s competitiveness, they should vote yes.

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When I wrote a few days ago that the Trump tax reform was generating good results, I probably should have specified that some parts of the country are not enjoying as much growth because of bad state tax policy.

As illustrated by my columns about Texas vs California and Florida vs New York, high-tax states are economic laggards compared to low-tax states.

This presumably helps to explain why Americans are voting with their feet by moving to states where the politicians are (at least in practice) less greedy.

Let’s look at some new evidence on the interaction of federal and state tax policy.

Writing for Forbes, Chuck DeVore of the Texas Public Policy Foundation shares data on how and why lower-tax state are out-performing higher-tax states.

Job growth has been running 80% stronger in low-tax states than in high-tax states since the passage of the Tax Cuts and Jobs Act of 2017 in December 2017. Understanding why holds important lessons for policy, economics, and politics. The new tax law scaled back the federal subsidy for high state and local taxes. …As a result of limiting the SALT deduction to $10,000, income tax filers in high-tax states saw a relatively smaller tax cut, losing out on about $84 billion since the tax code was changed. With $84 billion less to invest, the pace of job creation in the 23 high-tax states has slowed relative to the low-tax states, with the data suggesting a shift of almost 400,000 private sector jobs may have occurred.

Here are some of his numbers.

Prior to the tax reform’s enactment, annualized private sector job growth was 1.9% in the low-tax states from January 2016 to December 2017 compared to 1.4% in the high-tax states, giving the low-tax jurisdictions a comparatively modest advantage of 35% more rapid job growth over the 23-month period. Now, 17 months of federal jobs data suggest that the Tax Cuts and Jobs Act has increased the competitive advantage of 27 low-tax states where the average SALT deduction was under $10,000 in 2016 as compared to 23 high-tax taxes with average SALT deductions greater than $10,000. Private sector job growth is now running 80% faster in the low-tax states, 2% annualized compared to 1.1%, up from just a 35% advantage in the prior 23 months. …For California, the lost employment opportunity adds up to 153,000 positions since December 2017… New York’s employment growth was about 128,000 less than might have been the case had the SALT deduction not been capped.

And here’s his data-rich chart.

Based on previous evidence we’ve examined, these numbers are hardly a surprise.

Chuck suggests the right way for high-tax states to respond.

…if political leaders in states accustomed to taxing and spending far more than their more frugal peers wish to participate in higher rates of job creation, they should reform their own fiscal houses, rather than expect their neighbors to subsidize their high-spending ways.

Sadly, this doesn’t appear to be happening.

Politicians is high-tax states such as Illinois and New Jersey are trying to make their already-punitive systems even worse.

Based on what we’ve seen from Greece, that won’t end well.

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‘Two years ago, I wrote about how Connecticut morphed from a low-tax state to a high-tax state.

The Nutmeg State used to be an economic success story, presumably in large part because there was no state income tax.

But then an income tax was imposed almost 30 years ago and it’s been downhill ever since.

The last two governors have been especially bad news for the state.

As explained in the Wall Street Journal, Governor Malloy did as much damage as possible before leaving office.

The 50 American states have long competed for people and business, and the 2017 tax reform raises the stakes by limiting the state and local tax deduction on federal returns. The results of bad policy will be harder to disguise. A case in point is Connecticut’s continuing economic decline, and now we have even more statistical evidence as a warning to other states. The federal Bureau of Economic Analysis recently rolled out its annual report on personal income growth in the 50 states, and for 2017 the Nutmeg State came in a miserable 44th. …the state’s personal income grew at the slowest pace among all New England states, and not by a little. …The consistently poor performance, especially relative to its regional neighbors, suggests that the causes are bad economic policies… In Mr. Malloy’s case this has included tax increases starting in 2011 and continuing year after year on individuals and corporations… It is a particular tragedy for the state’s poorest citizens who may not be able to flee to other states that aren’t run by and for government employees.

Here’s some of the data accompanying the editorial.

Eric Boehm nicely summarized the main lesson from the Malloy years in a column for Reason.

If it were true that a state could tax its way to prosperity, Connecticut should be on a non-stop winning streak. Instead, state lawmakers are battling a $3.5 billion deficit. Companies including General Electric, Aetna, and Alexion, a major pharmaceutical firm, have left the state in search of a lower tax burden. Connecticut is looking increasingly like the Illinois of New England: A place where tax increases are no longer fiscally or politically realistic, even though budgetary obligations continue to grow and spending is completely out of control.

Unfortunately, the new governor isn’t any better than the old governor. The Wall Street Journal opined on Ned Lamont’s destructive fiscal policy.

Connecticut desperately needs a new economic direction. Unfortunately, the biennial budget soon to be signed by new Gov. Ned Lamont doubles down on policies that have produced abysmal results.The state’s economic indicators are grim. Connecticut routinely ranks near the bottom in surveys of economic competitiveness. Residents and businesses have been voting with their feet. According to the National Movers Study, only Illinois and New Jersey suffered more out-migration in 2018. General Electric left for Boston in 2016. This week, Farmington-based United Technologies Corp. announced it too will move its headquarters… Mr. Lamont’s budget seems designed to accelerate the decline. It increases spending by $2 billion while extending the state’s 6.35% sales tax to everything from digital movies to laundry drop-off services to “safety apparel.” It adds $50 million in taxes on small businesses, raises the minimum wage by 50%, and provides the country’s most generous mandated paid family medical leave. Florida and North Carolina must be licking their lips. …The state employee pension plan is underfunded by $100 billion—$75,000 per Connecticut household. A responsible budget would try to start filling the gap; the Lamont budget underfunds the teachers’ plan by another $9.1 billion, increasing the long-term liability by $27 billion. …Mr. Lamont proposes to slap a 2.25% penalty on people who sell a high-end home and move out of state. Having given up on attracting affluent families, he’s trying to prevent the ones who are here from leaving.

As one might expect, all this bad news is generating bad outcomes. Here are some details from an editorial in today’s Wall Street Journal.

…as a new study documents, more businesses are leaving Connecticut as they get walloped with higher taxes that are bleeding the state. Democrats in 2015 imposed a 20% surtax on top of the state’s 7.5% corporate rate, effectively raising the tax rate to 9%. They also increased the top income tax rate to 6.99% from 6.7% on individuals earning more than $500,000. The state estimated the corporate tax hike would raise $481 million over two years, but revenue increased by merely $323 million… Meantime, the state’s Department of Economic and Community Development, whose job is to strengthen “Connecticut’s competitive position,” in 2016 alone spent $358 million…to induce businesses to stay or move to the state. This means that Connecticut doled out twice as much in corporate welfare as it raked in from the corporate tax increase. …Thus we have Connecticut’s business model: Raise costs for everyone and then leverage taxpayers to provide discounts for a politically favored few. …The state has lost population for the last five years. …The exodus has depressed tax revenue.

And there’s no question that people are voting with their feet, as Bloomberg reports.

Roughly 5 million Americans move from one state to another annually and some states are clearly making out better than others. Florida and South Carolina enjoyed the top economic gains, while Connecticut, New York and New Jersey faced some of the biggest financial drains, according to…data from the Internal Revenue Service and the U.S. Census Bureau. Connecticut lost the equivalent of 1.6% of its annual adjusted gross income, as the people who moved out of the Constitution State had an average income of $122,000, which was 26% higher than those migrating in. Moreover, “leavers” outnumbered “stayers” by a five-to-four margin.

Here’s a chart from the article showing how Connecticut is driving away some of its most lucrative taxpayers.

Here’s a specific example of someone voting with their feet. But not just anybody. It’s David Walker, the former Comptroller General of the United States, and he knows how to assess a jurisdiction’s financial outlook.

…my wife, Mary, and I are leaving the Constitution State. We are saddened to do so because we love our home, our neighborhood, our neighbors, and the state. However, like an increasing number of people, the time has come to cut our losses… current state and local leaders have the willingness and ability to make the tough choices needed to create a better future in Connecticut, especially in connection with unfunded retirement obligations. …Connecticut has gone from a top five to bottom five state in competitive posture and financial condition since the late 1980s. In more recent years, this has resulted in an exodus from the state and a significant decline in home values.

All of this horrible news suggests that perhaps Connecticut should get more votes in my poll on which state will be the first to suffer fiscal collapse.

Incidentally, that raises a very troubling issue.

The former Governor of Indiana, Mitch Daniels, wrote last year for the Washington Post that we should be worried about pressure for a bailout of profligate states such as Connecticut.

…several of today’s 50 states have descended into unmanageable public indebtedness. …in terms of per capita state debt, Connecticut ranks among the worst in the nation, with unfunded liabilities amounting to $22,700 per citizen. …More and more desperate tax increases haven’t cured the problem; it’s possible that they are making it worse. When a state pursues boneheaded policies long enough, people and businesses get up and leave, taking tax dollars with them. …So where is a destitute governor to turn? Sooner or later, we can anticipate pleas for nationalization of these impossible obligations. …Sometime in the next few years, we are likely to go through our own version of the recent euro-zone drama with, let’s say, Connecticut in the role of Greece.

And don’t forget other states that are heading in the wrong direction. Politicians from California, New York, New Jersey, and Illinois also will be lining up for bailouts.

Here’s the bottom line on Connecticut: As recently as 1990, the state had no income tax, which put it in the most competitive category.

But then politicians finally achieved their dream and imposed an income tax.

And in a remarkably short period of time, the state has dug a big fiscal hole of excessive taxes and spending (with gigantic unfunded liabilities as well).

It’s now in the next-to-last category and it’s probably just a matter of time before it’s in the 5th column.

P.S. While my former state obviously has veered sharply in the wrong direction on fiscal policy, I must say that I’m proud that residents have engaged in civil disobedience against the state’s anti-gun policies.

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Because they directly measure economic liberty, my favorite global rankings are Economic Freedom of the World and the Index of Economic Freedom.

But I also like the World Economic Forum’s Global Competitiveness Report and the Institute of Management Development’s World Competitiveness Rankings, both of which basically measure the degree to which a nation is hospitable to business activity (which is correlated with economic liberty).

The United States dominated the IMD rankings until 2010, and America managed to reclaim the top spot for 2017. But according to new numbers from IMD’s World Competitiveness Center, Singapore and Hong Kong are now at the top.

I’m also not surprised to see Switzerland ranked highly.

And it’s worth noting that the Netherlands, Ireland, and Denmark are top-10 nations, similar to their scores in the Human Freedom Index.

Here’s some additional information from the press release.

Singapore has ranked as the world’s most competitive economy for the first time since 2010, according to the IMD World Competitiveness Rankings, as the United States slipped from the top spot… Singapore’s rise to the top was driven by its advanced technological infrastructure, the availability of skilled labor, favorable immigration laws, and efficient ways to set up new businesses. Hong Kong SAR held on to second place, helped by a benign tax and business policy environment and access to business finance. …The IMD World Competitiveness Rankings, established in 1989, incorporate 235 indicators from each of the 63 ranked economies. The ranking takes into account a wide range of “hard” statistics such as unemployment, GDP and government spending on health and education, as well as “soft” data from an Executive Opinion Survey covering topics such as social cohesion, globalization and corruption. This information feeds into four categories – economic performance, infrastructure, government efficiency and business efficiency – to give a final score for each country. There is no one-size-fits-all solution for competitiveness, but the best performing countries tend to score well across all four categories. Switzerland climbed to fourth place from fifth, helped by economic growth, the stability of the Swiss franc and high-quality infrastructure. …The United Arab Emirates – ranked 15th as recently as 2016 – entered the top five for the first time. …Venezuela remains anchored to the bottom of the ranking, hit by inflation, poor access to credit and a weak economy. The South American economy ranks the lowest for three out of four of the main criteria groups – economic performance, government efficiency and infrastructure.

Venezuela in last place? I’m shocked, shocked.

There are two specific items from the report I want to highlight.

First, notwithstanding the bleating from Trump and others about a supposed crisis of inadequate spending, notice that the United States is in first place for that category.

Also, notice that the jurisdictions with high scores for government efficiency are all places with (by modern standards) small government.

This is very similar to the “public sector efficiency” scores from the European Central Bank.

The moral of the story is that small government is the way to get competent government. It’s almost as if there’s a recipe that generates good outcomes.

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Time for another edition of our long-running battle between the Lone Star State and the Golden State.

Except it’s not really a battle since one side seems determined to lose.

For instance, Mark Perry of the American Enterprise Institute often uses extensive tables filled with multiple variables when comparing high-performing states and low-performing states.

But when comparing California and Texas, sometimes all you need is one data source because it makes a very powerful point. Which is what he recently did with that data on one-way U-Haul rental rates between California cities and Texas cities.

There’s a very obvious takeaway from this data, as Mark explains.

…there is a huge premium for trucks leaving California for Texas and a huge discount for trucks leaving Texas for California. …U-Haul’s one-way truck rental rates are market-based to reflect relative demand and relative supply. In California there’s a relatively low supply of trucks available and a relatively high demand for trucks destined for Texas; in Texas there’s a relatively high supply of trucks and a relatively low demand for trucks going to California. Therefore, U-Haul charges 3-4 times more for one-way truck rentals going from San Francisco or LA to Houston or Dallas than vice-versa based on what must be a huge net outflow of trucks leaving California (leading to low inventory) and a net inflow of trucks arriving in Texas (leading to high inventory). …in 2016…the ratios for the same matched cities were much smaller, 2.2 to 2.4 to 1, suggesting that the outbound migration from California to Texas as reflected in one-way U-Haul truck rental rates must have accelerated over the last three years.

So why is California so unattractive compared to Texas?

To answer that question, this map from the Tax Foundation is a good place to start. It shows that California has the most punitive income tax of any state, while Texas is one of the sensible states with no income tax.

By the way, I sometimes get pushback from my leftist friends who point out that California’s 13.3 percent tax rate only applies to millionaires.

I don’t think that’s an effective argument since it makes zero sense to penalize a state’s most productive citizens. Especially when they’re the ones who can easily afford to move (and many of them are doing exactly that).

That being said, California pillages middle-class taxpayers as well. If some trendy young millennial wants to live in San Francisco, I wish that person all the luck in the world – especially since the 8 percent tax rate kicks in at just $44,377.

Now let’s ask the question of whether California residents (rich, poor, or middle class) are getting something for all the taxes they have to pay.

  • Is there any evidence that they are getting better schools? No.
  • How about data showing that they get better health care? No.
  • What about research indicating better infrastructure in the state? No.

Instead, they’re paying for a giant welfare state and for a lavishly compensated collection of bureaucrats.

P.S. There’s also plenty of international data showing big government isn’t the way to get good roads, schools, and healthcare.

P.P.S. If you want more data comparing Texas and California, click herehere, and here.

P.P.P.S. Here’s my favorite California vs Texas joke.

P.P.P.P.S. Comparisons of New York and Florida tell the same story.

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I used to think Texas vs. California was the most interesting and revealing rivalry among states. It was even the source of some clever jokes and cartoons.

But the growing battle between Florida vs. New York may now be even more newsworthy.

I wrote last month about how many entrepreneurs, investors and business owners are escaping bad tax policy by moving from the Empire State to the Sunshine State.

Not that we should be surprised.

Florida ranks #1 for economic freedom while New York languishes in last place.

A big reason for the difference is that Florida has no state income tax, which compares very favorably to the punitive system in New York.

And because the federal tax code no longer provides an unlimited deduction for state and local taxes, I expect the exodus from New York to Florida to accelerate.

What’s especially amusing is that Alexandria Ocasio-Cortez’s mother is one of the tax refugees.

Here are some excerpts from a report in the New York Post.

The mother of soak-the-rich Congresswoman Alexandria Ocasio-Cortez said she was forced to flee the Big Apple and move to Florida because the property taxes were so high. “I was paying $10,000 a year in real estate taxes up north. I’m paying $600 a year in Florida. It’s stress-free down here,” Blanca Ocasio-Cortez told the Daily Mail… Her daughter raised eyebrows with her pitch to hike the top marginal tax rate on income earned above $10 million to 70 percent. She has also gotten behind the so-called Green New Deal, which would see a massive and costly government effort.

The former Governor of Florida (and new Senator from the state) obviously is enjoying the fact that New York politicians are upset.

Here’s some of what Rick Scott wrote in today’s Wall Street Journal.

America is a marketplace where states are competing with each other, and New York is losing. Their loss is Florida’s gain… I would like to tell New Yorkers on behalf of the rest of America that our hearts go out to you for your sagging luxury real-estate market. But you did this to yourself, and you can fix it yourself. If you cut taxes and make state and local government efficient, maybe you can compete… I made more than 20 trips to high-tax states like California, Connecticut, Illinois, New York and Pennsylvania to lure businesses to Florida. The tax-happy leaders of those states were furious, which made the visits all the more enjoyable for me. They called me every name in the book. But they were the ones who raised taxes, and bad decisions have consequences. The elites in New York and Washington should commission a study of Florida to see what happens when conservative ideas are put into practice. …Florida’s economy is thriving, expanding at a record pace. …There’s a reason Rep. Alexandria Ocasio-Cortez’s mom left New York for Florida. And there’s a reason companies are fleeing high-tax states, bringing jobs with them to Florida.

I mentioned above that having no state income tax gives Florida a big advantage over New York.

Courtesy of Mark Perry, here a comprehensive comparison of the two states.

Wow. If this was a tennis tournament, the announcers would be saying “game, set, and match.” And if it was a boxing contest, it would be a knock-out.

The bottom line is that we should expect more rich people to escape New York and move to Florida because they’ll get to keep more of their money.

And we should expect more lower-income and middle-class people to also make the same move because Florida’s better policy means more jobs and more opportunity (sadly, Rep. Ocasio-Cortez has learned nothing from her mother’s move).

P.S. New York actually doesn’t do terribly in nationwide rankings for pension debt, though it is still below Florida.

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I wrote a couple of weeks ago about how New York is committing slow-motion fiscal suicide.

The politicians in Illinois must have noticed because they now want (another “hold my beer” moment?) to accelerate the already-happening collapse of their state.

The new governor, J.B. Pritzker, wants to undo the state’s 4.95 percent flat tax, which is the only decent feature of the Illinois tax system.

And he has a plan to impose a so-called progressive tax with a top rate of 7.95.

Here are some excerpts from the Chicago Tribune‘s report., starting with the actual plan.

Democratic Gov. J.B. Pritzker embarked on a new and potentially bruising political campaign Thursday by seeking to win public approval of a graduated-rate income tax that he contended would raise $3.4 billion by increasing taxes for the wealthy…for his long-discussed plan to replace the state’s constitutionally mandated flat-rate income tax. Currently, all Illinois residents are taxed at 4.95 percent… Pritzker’s proposal is largely reliant on raising taxes significantly on residents making more than $250,000 a year, with those earning $1 million and up taxed at 7.95 percent of their total income. …The corporate tax rate would increase from the current 7 percent to 7.95 percent, matching the top personal rate. …The governor’s proposal would give Illinois the second-highest top marginal tax rate among its neighboring states.

And here’s what would need to happen for the change to occur.

Before Pritzker’s plan can be implemented, three-fifths majorities in each chamber of the legislature must approve a constitutional amendment doing away with the flat tax requirement. The measure would then require voter approval, which couldn’t happen until at least November 2020. …Democrats hold enough seats in both chambers of the legislature to approve the constitutional amendment without any GOP votes. Whether they’ll be willing to do so remains in question. Democratic leaders welcomed Pritzker’s proposal… voters in 2014 endorsed the idea by a wide margin in an advisory referendum.

The sensible people on the Chicago Tribune‘s editorial board are not very impressed, to put it mildly.

…how much will taxes increase under a rate structure Pritzker proposed? You might want to cover your eyes. About $3.4 billion annually… That extraction of dollars from taxpayers’ pockets would be in addition to roughly $5 billion raised annually in new revenue under the 2017 income tax hike. …How did Springfield’s collection of all that new money work out for state government and taxpayers? Here’s how: Illinois remains deeply in debt, continues to borrow to pay bills, faces an insurmountable unfunded pension liability and is losing taxpayers who are fed up with paying more. The flight of Illinoisans to other states is intensifying with 2018’s loss of 45,116 net residents, the worst of five years of consistent, dropping population. …Illinois needs to be adding more taxpayers and businesses, not subtracting them. When politicians raise taxes, they aren’t adding. A switch to a graduated tax would eliminate one of Illinois’ only fishing lures to attract taxpayers and jobs: its constitutionally protected flat income tax. …Pritzker’s proposal, like each tax hike before it, was introduced with no meaningful reform on the spending side of the ledger. This is all about collecting more money. …In fact, the tax hike would come amid promises of spending new billions.

And here’s a quirk that is sure to backfire.

For filers who report income of more than $1 million annually, the 7.95 percent rate would not be marginalized; meaning, it would be applied to every dollar, not just income of more than $1 million. Line up the Allied moving vans for business owners and other high-income families who’ve had a bellyful of one of America’s highest state and local tax burdens.

The Tax Foundation analyzed this part of Pritzker’s plan.

This creates a significant tax cliff, where a person making $1,000,000 pays $70,935 in taxes, while someone earning one dollar more pays $79,500, a difference of $8,565 on a single dollar of income.

That’s quite a marginal tax rate. I suspect even French politicians (as well as Cam Newton) might agree that’s too high.

Though I’m sure that tax lawyers and accountants will applaud since they’ll doubtlessly get a lot of new business from taxpayers who want to avoid that cliff (assuming, of course, that some entrepreneurs, investors, and business owners actually decide to remain in Illinois).

While the tax cliff is awful policy, it’s actually relatively minor compared to the importance of this table in the Tax Foundation report. It shows how the state’s already-low competitiveness ranking will dramatically decline if Pritzker’s class-warfare plan is adopted.

The Illinois Policy Institute has also analyzed the plan.

Unsurprisingly, there will be fewer jobs in the state, with the losses projected to reach catastrophic levels if the new tax scheme is adjusted to finance all of the Pritzker’s new spending.

And when tax rates go up – and they will if states like Connecticut, New Jersey, and California are any indication – that will mean very bad news for middle class taxpayers.

The governor is claiming they will be protected. But once the politicians get the power to tax one person at a higher rate, it’s just a matter of time before they tax everyone at higher rates.

Here’s IPI’s look at projected tax rates based on three different scenarios.

The bottom line is that the middle class will suffer most, thanks to fewer jobs and higher taxes.

Rich taxpayer will be hurt as well, but they have the most escape options, whether they move out of the state or rely on tax avoidance strategies.

Let’s close with a few observations about the state’s core problem of too much spending.

Steve Cortes, writing for Real Clear Politics, outlines the problems in his home state.

…one class of people has found a way to prosper: public employees. …over 94,000 total public employees and retirees in Illinois command $100,000+ salaries from taxpayers…former Chicago Mayor Richard M. Daley, who earned a $140,000 pension for his eight years of service in the Illinois legislature. …Such public-sector extravagance has fiscally transformed Illinois into America’s Greece – only without all the sunshine, ouzo, and amazing ruins.

So nobody should be surprised to learn that the burden of state spending has been growing at an unsustainable rate.

Indeed, over the past 20 years, state spending has ballooned from $34 billion to $86 billion according to the Census Bureau. At the risk of understatement, the politicians in Springfield have not been obeying my Golden Rule.

And today’s miserable fiscal situation will get even worse in the near future since Illinois is ranked near the bottom when it comes to setting aside money for lavish bureaucrat pensions and other retirement goodies.

Indeed, paying off the state’s energized bureaucrat lobby almost certainly is the main motive for Pritzker’s tax hike. As as happened in the past, this tax hike is designed to finance bigger government.

Yet that tax hike won’t work.

Massive out-migration already is wreaking havoc with the state’s finances. And if Pritzker gets his tax hike, the exodus will become even more dramatic.

P.S. Keep in mind, incidentally, that all this bad news for Illinois will almost certainly become worse news thanks to the recent tax reform. Restricting the state and local tax deduction means a much smaller implicit federal subsidy for high-tax states.

P.P.S. I created a poll last year and asked people which state will be the first to suffer a fiscal collapse. Illinois already has a big lead, and I won’t be surprised if that lead expands if Pritzker is able to kill the flat tax.

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According to Freedom in the 50 States, which we reviewed a couple of days ago, New Jersey is in the bottom 10 and has been moving in the wrong direction.

This dismal ranking is not an anomaly. New Jersey also is in the bottom 10 of states according to Economic Freedom of North America, and the Garden State is dead last according the State Business Tax Climate Index and State Fiscal Condition.

In a perverse way, I admire New Jersey’s politicians. They’re not satisfied with the state’s low scores. They want to become even less competitive. If that’s even possible.

As I noted in the interview, the latest proposal for a “rain tax” isn’t necessarily objectionable if examined in isolation.

But in the context of New Jersey’s fiscal deterioration, it’s almost as if politicians are writing another passage in a very long suicide note for the state.

Consider what happened recently with the gas tax, as explained by the Wall Street Journal.

…a silver lining used to be the Garden State’s relatively low gasoline tax of 14.5 cents a gallon—second lowest in the U.S. No more, and therein lies a tale of why taxing the rich to finance government is an illusion. In October 2016, then-Gov. Chris Christie signed a bill raising the gas tax by 22.6 cents to 37.1 cents a gallon…the bill also included a clause that automatically raises the gas tax if it doesn’t produce the expected revenue each year. This is a self-fulfilling economic prophesy. A higher gas tax causes people to drive less, which in turn has meant that revenues have fallen short of the expected $2 billion target. So on Oct. 1 the gas tax will rise another 4.3 cents to 41.4 cents per gallon, which will be the ninth highest in the U.S. …This will be the state’s third tax increase in four months, following June’s increase in income and corporate tax rates. …The larger lesson is that sooner or later the middle class always gets the bill for bigger government. Higher income and corporate taxes drive the affluent out of the state, which means less revenue. That leaves the middle class to pay in higher sales, property and now gasoline taxes.

Needless to say, New Jersey’s taxaholic lawmakers want even more revenue.

Here are some excerpts from a report by Politico.

Gov. Phil Murphy said Wednesday he may propose new tax increases when he unveils his budget in March, saying he’s worried that the state has not done enough to achieve what he called “tax fairness.” …The governor…had sought some $1.7 billion in new taxes… Murphy was met with fierce resistance from fellow Democrats in the Legislature… Murphy ultimately agreed to…$1.6 billion in annual revenue. …Murphy, speaking at a church in Newark where he delivered a speech on his first-year accomplishments, said he needs to leave his options open as he starts to prepare a budget… “I would say everything is on the table. Period, full stop,” he added when pressed again about the idea of new tax increases.

If all this sound worrisome, that’s because it is.

But it gets even worse. As I warned at the end of the interview, the 2017 tax law restricts the ability of federal taxpayers to deduct taxes paid to state and local governments.

And that means the full burden of those taxes is now much more explicit, which means more and more taxpayers in high tax rates are going to “vote with their feet” and move to states with less onerous fiscal regimes.

In other words, New Jersey politicians are making their tax system worse at precisely the moment that the geese with the golden eggs have more incentive to fly away.

Insane.

P.S. Given this grim news, I’m surprised that fewer than 9 percent of people picked New Jersey to be the first state that will suffer fiscal collapse.

P.P.S. What’s really remarkable – albeit in a very sad and tragic sense – is that New Jersey in my lifetime used to be like New Hampshire, with no state income tax and no state sales tax.

P.P.P.S. There is a Jersey with good tax policy, but it’s far away from the American version.

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There were several good features of the 2017 tax bill, including limitations on the state and local tax deduction.

But the 21 percent corporate tax rate was the unquestioned crown jewel of the Tax Cut and Jobs Act. The U.S. system had become extremely anti-competitive thanks to a 35 percent rate that was far above the world average, so reform was desperately needed.

That’s the good news.

The bad news is that Democrats in the House of Representatives already are pushing for a big increase in the corporate rate.

Rep. John Yarmuth, the new House Budget chairman, said his chamber’s budget blueprint will aim to claw back lost revenue by boosting the corporate tax rate from its current 21 percent to as high as 28 percent… he anticipates the budget resolution will envision changes to the 2017 GOP tax overhaul, including raising the corporate tax rate above its current 21 percent. “…We’ll see how much revenue we can get out of it.” The rate was 35 percent before it was cut in the GOP tax bill.

Since Republicans control the Senate and Trump is in the White House, there’s probably no short-term risk of a higher corporate tax rate.

But such an initiative could be a major threat after the 2020 election, so let’s augment our collection of evidence showing why a higher rate would be a very bad idea.

We’ll start with some analysis from the number crunchers at the Tax Foundation.

A corporate tax rate that is more in line with our competitors reduces the incentives for firms to realize their profits in lower-tax jurisdictions and encourages companies to invest in the United States. Raising the corporate income tax rate would dismantle the most significant pro-growth provision in the Tax Cuts and Jobs Act, and carry significant economic consequences. …Raising the corporate income tax rate would reduce economic growth, and lead to a smaller capital stock, lower wage growth, and reduced employment. …Raising the rate to 25 percent would reduce GDP by more than $220 billion and result in 175,700 fewer jobs.

Here’s the table showing the negative effect of a 22 percent rate and a 25 percent rate, so a bit of extrapolation will give you an idea of how the economy will suffer with a 28 percent rate.

By the way, since the adverse impact on wages is one of the main reasons to be against a higher corporate tax rate, I’ll also share this helpful flowchart from the article.

Now let’s look at some research from China, which underscores the importance of low rates if we want more innovation.

Here’s the unique set of data that created an opportunity for the research.

In November 2001, China implemented a tax collection reform on all manufacturing firms established on or after January 2002, which switched the collection of corporate income taxes from the local tax bureau to the state tax bureau. After the reform, similar firms established before or after 2002 could pay very different effective tax rates because of the differences in the management and incentives of those two types of tax bureaus…, resulting in a reduction of effective corporate income tax rates by almost 10% among newly established firms. …the policy change created exogenous variations in the effective tax rate among similar firms established before versus after 2002. We can thus apply a regression discontinuity design (RD) and use the generated variation in the effective tax rate to identify the impact of taxes on firm innovation.

And here are the findings.

Our analysis yields several interesting results. First, we show a strong and robust causal relationship between tax rate and firm innovation. Decreasing the effective tax rate by one standard deviation (0.01) increases the average number of patent application by a significant 5.7% (see Figure 2 for the graphical evidence). The reform also stimulated R&D expenditures and increased the skilled-labour ratio by 14%. Second, a lower tax rate also improves the quality of patents. The impact of tax reform on patent applications mainly comes from its effect on invention and utility patents – decreasing the effective tax rate by one standard deviation improves the probability of having an invention patent application by 4.4% and increases the number of utility patent applications by 4.7%.

Don’t forget that high personal tax rates also discourage innovation, so it’s a pick-your-poison menu.

Here’s a chart from the study, showing the difference in patents between higher-taxed firms and lower-taxed firms.

Last but not least, let’s review some of the findings from a study published by the National Bureau of Economic Research.

We present new data on effective corporate income tax rates in 85 countries in 2004. …In a cross-section of countries, our estimates of the effective corporate tax rate have a large adverse impact on aggregate investment, FDI, and entrepreneurial activity. For example, a 10 percent increase in the effective corporate tax rate reduces aggregate investment to GDP ratio by 2 percentage points. Corporate tax rates are also negatively correlated with growth, and positively correlated with the size of the informal economy. The results are robust to the inclusion of controls for other tax rates, quality of tax administration, security of property rights, level of economic development, regulation, inflation, and openness to trade

And here’s one of the many charts and tables in the study.

The bottom line is that a higher corporate tax rate will be bad for workers for the simple reason that less investment means lower productivity and lower productivity means lower wages.

P.S. It’s also likely that House Democrats will try to increase the top personal tax rate, though hopefully they’re not so crazy as to push for Ocasio-Cortez’s 70 percent rate.

P.P.S. it’s quite possible that an increase in the corporate tax rate would reduce revenues, especially in the long run.

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Today is my last day in Chile, so today’s column will build upon what I wrote last week.

I have three charts that illustrate how Chile’s pro-market reforms have been great news – especially for poor people (or, to be more accurate, for Chileans who used to be poor).

We’ll start with this chart from the most recent issue of Economía y Sociedad, which shows that there’s more mobility in Chile than any other OECD nation.

Honest folks on the left should view this as unambiguously positive.

Similarly, this Gini data (measuring the degree of inequality) should be slam-dunk evidence of progress for all left-of-center people.

For what it’s worth, I don’t care about the Gini coefficient. What matters to me is economic growth so that everyone can get richer.

If rich people happen to get richer faster than poor people (like in China), that’s fine.

And if poor people happen to get richer faster than rich people (like in Chile), that’s fine as well.

What irks me is that folks who fixate on inequality often support policies that retard growth. In other words, they’re so worried about rich people getting richer that they advocate for bigger government, which makes it harder for poor people to become richer.

Economic growth, by contrast, truly is the rising tide that lifts all boats.

Which is why this final chart (based on the Maddison database) is so powerful. It shows 1975-2016 income trends for Chile (red) and other major Latin American economies. As you can see, Chile started near the bottom and is now the region’s richest nation.

Wow, Chile didn’t just converge. It surpassed.

It’s also worth noting how nations such as Argentina, Venezuela, and Cuba have enjoyed very little income growth over the past 40 years.

The bottom line is that those nations are evidence of the costly impact of statism, while Chile is an amazing example of how capitalism generates widely shared prosperity.

P.S. I’m not claiming Chile is a perfect role model. It is #15 in Economic Freedom of the World, so there is considerable room for improvement. But I am arguing it is a successful example of how better policy is great news for all segments of society.

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I’m glad the United States is now ranked #1 in the World Economic Forum’s Global Competitiveness Report, though I point out in this interview that Trump’s performance is mostly a net wash.

His sensible approach to tax and regulation is offset by his weak approach to spending and his problematic view of monetary policy.

I’m embarrassed to admit that I forget to mention protectionism as another area where Trump is pushing in the wrong direction.

But let’s not focus on Trump. Instead, let’s take a closer look at the new data from the World Economic Forum.

And we’ll start with a look at the top 20. You’ll see some familiar jurisdictions, places that always get good grades, such as Singapore, Switzerland, and Hong Kong.

But you’ll also notice that there are several European welfare states with very good scores.

That’s because the GCR – unlike Economic Freedom of the World or the Index of Economic Freedom – does not rank nations based on economic policy. It’s more a measure of the business environment.

But since good policy tends to create a good business environment, there is a connection. Nations such as Germany and the Netherlands, as well as Scandinavian countries, have big welfare states. But the damage of those policies is offset by a very laissez-faire approach to businesses. So the big companies that help put together the GCR understandably give those places good scores.

By the way, it’s also worth mentioning that the 2018 edition uses a revised methodology. And based on this new approach, the United States retroactively gets the top score for 2017 as well.

All that being said, does it matter if a nation is ranked higher rather than lower?

Based on this strong relationship between competitiveness scores and economic output, the answer is yes.

The bottom line is that there’s a very meaningful link between economic liberty and national prosperity.

Now let’s take a closer look at the scores for the United States. As you can see, our top score is mostly due to our market efficiency and innovation environment.

For what it’s worth, I don’t fully agree with the report’s methodology. But that’s mostly because I prefer to look at the degree of economic liberty rather than whether a nation is business friendly. There’s an overlap, of course, but it’s nonetheless important to distinguish between pro-market and pro-business.

In any event, here are a couple of additional findings that caught my eye.

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I recently wrote about the Tax Foundation’s State Business Tax Climate Index, which is a snapshot of current competitiveness (New Jersey is in last place, which shouldn’t surprise anyone).

But what if we want to know which states are moving in the right direction or wrong direction?

If so, the best document to review is Chris Edwards’ Fiscal Policy Report Card on America’s Governors.

The new edition just came out, so I immediately looked at the rankings. The nation’s best governor – by a comfortable margin – is Susana Martinez of New Mexico.

She is joined by four other governors who earned top marks.

Eight governors, including two Republicans, were in the cellar.

The report has some other data worth sharing.

Here’s a chart that shows what has happened to state spending this century. What caught my eye is the boom-bust cycle of excessive spending growth when the economy is growing (and generating lots of revenue) and cutbacks during the downturn.

Yet another argument for spending caps, such as TABOR in Colorado.

Last but not least, the report included some analysis on tax-driven migration (the topic we covered last week).

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Yesterday, I wrote about the newest edition of Economic Freedom of the World, which is my favorite annual publication.

Not far behind is the Tax Foundation’s State Business Tax Climate Index, which is sort of the domestic version of their equally fascinating (to a wonk) International Tax Competitiveness Index.

And what can we learn from this year’s review of state tax policy? Plenty.

…the specifics of a state’s tax structure matter greatly. The measure of total taxes paid is relevant, but other elements of a state tax system can also enhance or harm the competitiveness of a state’s business environment. The State Business Tax Climate Index distills many complex considerations to an easy-to-understand ranking.

That’s the theory, but what about the results?

Here are the best and worst states.

If you pay close attention, there’s a common thread for the best states.

The absence of a major tax is a common factor among many of the top 10 states. …there are several states that do without one or more of the major taxes: the corporate income tax, the individual income tax, or the sales tax. Wyoming, Nevada, and South Dakota have no corporate or individual income tax (though Nevada imposes gross receipts taxes); Alaska has no individual income or state-level sales tax; Florida has no individual income tax; and New Hampshire, Montana, and Oregon have no sales tax.

By the way, both Utah and Indiana are among the nine states with flat tax systems, so every top-10 state has at least one attractive feature.

But if you peruse the bottom-10 states, you’ll find that every one of them has an income tax with “progressive” rates that punish people for contributing more to the economy.

Indeed, half of the states on that unfortunate list are part of the “Class-Warfare Graduated Tax” club.

Not a desirable group, assuming the goal is faster growth and more jobs.

The Tax Foundation’s report also is worth reading because it reviews some of the academic evidence about the superiority of pro-growth tax systems.

Helms (1985) and Bartik (1985) put forth forceful arguments based on empirical research that taxes guide business decisions. Helms concluded that a state’s ability to attract, retain, and encourage business activity is significantly affected by its pattern of taxation. Furthermore, tax increases significantly retard economic growth when the revenue is used to fund transfer payments. Bartik concluded that the conventional view that state and local taxes have little effect on business is false. Papke and Papke (1986) found that tax differentials among locations may be an important business location factor, concluding that consistently high business taxes can represent a hindrance to the location of industry. …Agostini and Tulayasathien (2001) examined the effects of corporate income taxes on the location of foreign direct investment in U.S. states. They determined that for “foreign investors, the corporate tax rate is the most relevant tax in their investment decision.” Therefore, they found that foreign direct investment was quite sensitive to states’ corporate tax rates. Mark, McGuire, and Papke (2000) found that taxes are a statistically significant factor in private-sector job growth. Specifically, they found that personal property taxes and sales taxes have economically large negative effects on the annual growth of private employment. …Gupta and Hofmann (2003) regressed capital expenditures against a variety of factors… Their model covered 14 years of data and determined that firms tend to locate property in states where they are subject to lower income tax burdens.

None of this research should come as a surprise.

Businesses aren’t moving from California to Texas because business executives prefer heat and humidity over ocean and mountains.

The bottom line is that tax rates matter, whether we’re looking at state data, national data, or international data.

Let’s close by sharing a map from the report. Simply stated, red is bad and teal (or whatever that color is) is good.

P.S. My one complaint about this report from the Tax Foundation is that it doesn’t include the overall fiscal burden. Alaska and Wyoming score well because they have small populations and easily fund much of their (extravagant) state budgets with energy-related taxes. If data on the burden of state government spending was included, South Dakota would be the best state.

P.P.S. Unsurprisingly, Americans are moving from high-tax states to low-tax states.

P.P.P.S. It’s also no surprise to find New Jersey in last place.

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