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Posts Tagged ‘Competitiveness’

Yesterday’s column discussed Caterpillar’s decision to move its headquarters from high-tax Illinois to low-tax Texas.

Today, we have more bad news for the Prairie State.

A major investment fund, Citadel, also has decided to leave Illinois.

Is the company moving to a different high-tax state, perhaps California or New York? Maybe Connecticut or New Jersey?

Nope. Citadel is going to Florida, a state famous for having no income tax.

The Wall Street Journal opined this morning about Citadel’s move.

The first step to recovery is supposed to be admitting you have a problem. But Illinois Gov. J.B. Pritzker still won’t, even after billionaire Ken Griffin on Thursday said he’s moving his Citadel hedge fund and securities trading firm to Miami from Chicago. …Meantime, Democrats in Springfield continue to threaten businesses and citizens with higher taxes… It’s no wonder so many companies and people are leaving, and mostly to low-tax states. …In 2020, $2.4 billion in net adjusted gross income moved to Florida from Illinois, about $298,000 per tax filer. …Mr. Griffin has spent tens of millions of his personal fortune trying to rescue Illinois from bad progressive governance. Maybe he figures it’s time to cut his losses.

Other (former) Illinois residents cut their losses last decade.

Scott Shackford of Reason shared grim data at the end of 2020 about the ongoing exodus from Illinois.

For the seventh year in a row, census figures show residents moving out of Illinois in significant numbers. …Perhaps demanding that your excessively taxed residents give the government even more money is not the best way to keep those residents in your state… Over the course of the last decade, Illinois lost more than a quarter-million people…not even California…has seen Illinois’ population loss. …Government leaders have responded not with better fiscal management (the state’s powerful unions blocked pension reforms), but with more taxes and fees, even as residents leave.

The bottom line is that Illinois is currently losing people and businesses.

Just as it lost people and businesses last decade.

And you can see from this map that taxpayers also were fleeing the state earlier this century.

I’m guessing the state’s hypocritical governor probably thinks this is a good thing because the people who left probably didn’t vote for tax-and-spend politicians.

But that’s a very short-sighted viewpoint.

After all, parasites need a healthy host. If you’re a flea or a tick, it’s bad news if you’re on a dog that dies.

As Michael Barone noted many years ago, that’s a lesson that Illinois politicians haven’t learned.

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I wrote a couple of days ago about California’s grim future.

But now I’ll share some good news. No matter how bad California gets, the Golden State probably won’t have to worry about people and businesses fleeing to Illinois.

That’s because the Prairie State is an even bigger mess. If California is committing “slow motion suicide,” Illinois is opting for the quickest-possible fiscal demise.

Politicians in Springfield (the Illinois capital) have a love affair with higher taxes. A very passionate love affair.

But the state’s productive people have a different point of view. More and more of them have been escaping.

And they are now being joined by the state’s most-famous company, as Matt Paprocki of the Illinois Policy Institute explains in a column for the Washington Post.

When Boeing announced last month that it was moving its headquarters from Chicago to Arlington, Va., it sent shudders through the Illinois business community and state capital. But last week, when the heavy-equipment manufacturer Caterpillar said it was moving its headquarters to Texas, it felt more like a bulldozer ramming into the news. …If you’re an Illinois business owner or resident, as I am, the economics of staying are tough and the enticements to move away are many. …According to the U.S. Census Bureau, last year the state had the third-largest loss of residents due to domestic migration in the nation (-122,460), trailing only California and New York.

It’s easy to understand why people and businesses are leaving.

In 2017, Illinois lawmakers raised the personal income tax rate to 4.95 percent, from 3.75 percent, and hiked the corporate rate to 7 percent, from 5.25 percent. When J.B. Pritzker took office as governor in 2019, he passed another 24 tax and fee hikes costing taxpayers over $5 billion. …With 278,475 regulatory restrictions and requirements — double the national average — Illinois has the third most heavily regulated environment in the country. …Illinois owes over $139 billion in state pension debt as of last year, and local governments owe about $75 billion, which is the primary driver for Illinois’ spiraling property taxes, second-highest in the nation.

Mr. Paprocki offers all sorts of suggestions for reform, including a spending cap.

But the chances of pro-growth reform are effectively zero. The governor is a hard-core leftist (as well as a hypocrite) and the state legislature is controlled by government employee unions.

So if you’re hoping for a TABOR-style spending cap, there’s little reason to be optimistic.

And if you’re hoping for reforms that will improve the state’s “least friendly” tax climate, don’t hold your breath.

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I’ve been warning for many years that California is committing “slow-motion suicide.” I discussed the not-so-golden future of the Golden State as part of a longer interview with Chile’s Axel Kaiser.

If you don’t want to spend a couple of minutes to watch the interview, the key takeaway is that California has lots of natural advantages, but the state is suffering from too much government.

Both fiscal policy and regulatory policy are a nightmare, and the net result is that people and business are now leaving the state.

I wrote about the state’s problems back in January, and I also addressed the link with California’s bad policy in columns in 2016 and 2020.

So instead of regurgitating some of my thoughts, let’s use today’s column to see what others have written.

For instance, Joel Kotkin wrote a very depressing assessment of California for Real Clear Investigations.

…most Californians, according to recent surveys, see things differently. They point to rising poverty and inequality, believe the state is in recession and that it is headed in the wrong direction. …Reality may well be worse… In a new report for Chapman University, my colleagues and I find California in a state of existential crisis, losing both its middle-aged and middle class, while its poor population faces dimming prospects. …Worse than just a case of progressive policies creating regressive outcomes, it appears California is descending into something resembling modern-day feudalism… California also suffers the widest gap between middle- and upper-middle-income earners of any state. …California lags all peer competitors – Texas, Arizona, Tennessee, Nevada, Washington and Colorado – in creating high wage jobs in fields like business and professional services… California’s “renewable energy” push has generated high energy prices and the nation’s least-reliable power grid… The state now ranks 49th in homeownership rate… California ranked 49th in the performance of poor, largely minority, students. …since 2000, California has lost 2.6 million net domestic migrants… In 2020, California accounted for 28 percent of all net domestic outmigration in the nation.

In a column for the Washington Examiner, Cole Lauterbach shares some of the findings from a new study published by the Hoover Institution.

A report studying business headquarter migration says California’s businesses are moving their centers of operations at a much higher rate in 2021 compared to previous years. …The authors use several different sources to track business migration out of the state, finding the number of companies who either announce or file that they’re in another state has risen sharply… The authors stress that the numbers are likely understated since smaller companies aren’t required to disclose a move. In their research, the authors found “high tax rates, punitive regulations, high labor costs, high utility and energy costs, and declining quality of life for many Californians which reflects the cost of living and housing affordability,” as reasons for the moves. …The most common destinations for states leaving California are Texas, Arizona and Nevada.

Notice, by the way, that Texas and Nevada have no income tax and Arizona has a low-rate flat tax.

But let’s keep the focus on California’s overall problems.

Conor Friedersdorf, in an article for the Atlantic, offers a grim assessment of the Golden State.

This place inspires awe. If I close my eyes I can see silhouettes of Joshua trees against a desert sunrise; seals playing in La Jolla’s craggy coves of sun-spangled, emerald seawater; fog rolling over the rugged Sonoma County coast at sunset into primeval groves of redwoods that John Steinbeck called “ambassadors from another time.” …Yet I fear for California’s future. …the state’s leaders and residents shut the door on economic opportunity… Indeed, blue America’s model faces its most consequential stress test… the Institute for Justice, a public-interest law firm, released a report on barriers to work that disproportionately affect the middle and working classes. “California is the most broadly and onerously licensed state,” the report found, and is also “the worst licensing environment for workers in lower-income occupations.” …a survey of 383 CEOs by Chief Executive magazine, which weighed regulations and tax policy above all other metrics, ranked California the worst state for business, and Forbes ranked it among the worst for its high business costs and stifling regulatory environment.

Speaking of regulatory environment, California’s screwy approach to marijuana legalization/taxation tells you everything you need to know about the state.

P.S. If you want to laugh about California’s plight, click here, here, here, here, here, here, and here.

P.P.S. My seven-part series comparing Texas and California appeared in March 2010February 2013April 2013October 2018June 2019, December 2020, and February 2021.

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Based on research from the Congressional Budget Office, I’ve shared estimates of the potential economic damage from the fiscal plan Joe Biden unveiled last year.

But now he has a new budget. So what if we simply focus on the tax portion of that plan and ignore all the new spending?

The Tax Foundation has crunched the numbers from Biden’s tax agenda and has published some very sobering numbers about this latest version of the President’s class-warfare proposals.

What caught my attention was this chart showing the United States (light-blue bars) already is out of whack with major competitors and trading partners (green bars) – and Joe Biden wants to make a bad situation much worse (red bars).

And when I write “out of whack,” that’s not an idle statement.

it turns out that the United States would have the highest income tax rates in the world.

Higher than Greece. Higher than France. Higher than Italy. Here are some of the grim details.

…the tax increases in the Build Back Better Act (BBBA)…would raise revenues by $4 trillion on a gross basis over the next decade. The Biden tax increases in the budget and BBBA would come at the cost of economic growth, harming investment incentives and productive capacity… The budget proposes several new tax increases on high-income individuals and businesses, which combined with the BBBA would give the U.S. the highest top tax rates on individual and corporate income in the developed world… Taxing capital gains at ordinary income tax rates would bring the combined top marginal rate in the U.S. to 48.9 percent, up from 29.2 percent under current law and well-above the OECD average of 18.9 percent. …Raising the corporate income tax rate to 28 percent would once again bring the U.S. near the top of the OECD at a combined rate of 32.3 percent, versus 25.8 percent under current law and an OECD average (excluding the U.S.) of 22.8 percent.

The good news, relatively speaking, is that the United States would not have the highest aggregate tax burden (taxes as a share of economic output).

And the U.S. would not have the highest tax burden on consumption (no value-added tax in America, fortunately).

But with all of Biden’s new spending (along with the built-in expansions of government that already have been legislated), it may just be a matter of time before the U.S. copies those features of Europe’s stagnant welfare states.

The net result is lower living standards for the American people. The only open question is how far we drop.

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I’ve already shared the “feel-good story” for 2022, so today I’m going to share this year’s feel-good map.

Courtesy of the Tax Foundation, here are the states that have lowered personal income tax rates and/or corporate income tax rates in 2021 and 2022. I’ve previously written about these reforms (both this year and last year), but more and more states and lowering tax burdens, giving us a new reason to write about this topic.

The map is actually even better than it looks because there are several states that don’t have any income taxes, so it’s impossible for them to lower rates. I’ve labelled them with a red zero.

And when you add together the states with no income tax with the states that are reducing income tax rates, more than half of them are either at the right destination (zero) or moving in that direction.

That’s very good news.

And here’s more good news from the Tax Foundation. The flat tax club is expanding.

I prefer the states with no income taxes, but low-rate flat taxes are the next best approach.

P.S. According to the Tax Foundation, New York and Washington, D.C. have moved in the wrong direction. Both increased income tax burdens in 2021. No wonder people are moving away.

P.P.S. If I had to pick the states with the best reforms, I think Iowa and Arizona belong at the top of the list.

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I wrote a few days ago about Biden’s plan to impose punitive double taxation on dividends.

But that’s not an outlier in his budget. As you can see from this table from the Tax Foundation, he wants to violate the principles of sensible fiscal policy by having high tax rates on all types of income.

What’s especially disappointing is that he wants tax rates in the United States to be much higher than in other developed nations.

At the risk of understatement, that’s not a recipe for jobs and investment.

The Wall Street Journal editorialized about Biden’s taxaholic preferences.

Mr. Biden…is proposing $2.5 trillion in new taxes that would give the U.S. the highest or near-highest tax rates in the developed world. …The biggest jump is in taxes on capital gains, as the top combined rate would rise to 48.9% from 29.2% today. That’s a 67% increase in the government’s take on long-term capital investments. The new top rate would be more than 2.5 times the OECD average of 18.9%. Nothing like reducing the U.S. return on capital to get people to invest elsewhere. Mr. Biden would also lift the top combined tax rate on corporate income to 32.3% from 25.8%. That would leap over Australia and Germany, which have top rates of 30% and 29.9% respectively, and it would crush the 22.8% OECD average. …Mr. Biden would also put the U.S. at the top of the noncompetitive list for personal income taxes, with multiple increases that would put the combined American rate at 57.3%. Compare that with 42.9% today and an average of 42.6% across the OECD.

The WSJ‘s editorial contained this chart.

The United States would be on top for corporate tax rates if Biden’s plan is adopted (which actually means on the bottom for competitiveness).

The bottom line is that Biden wants the U.S. to have the highest corporate rate, highest double taxation of dividends, and highest double taxation of capital gains.

To reiterate, not a smart way of trying to get more jobs and investment.

P.S. The “good news” is that the United States would not be at the absolute bottom for international tax competitiveness.

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Modern tax systems tend to have three major deviations from good fiscal policy.

  1. High marginal tax rates on productive behavior like work and entrepreneurship.
  2. Multiple layers of taxation on income that is saved and invested.
  3. Distortionary loopholes that reward inefficiency and promote corruption.

Today, let’s focus on an aspect of item #2.

The Tax Foundation has just released a very interesting map (at least for wonks) showing the total tax rate on dividends in European nations, including both the corporate income tax and the double-tax on dividends.

Because it has a reasonably modest corporate income tax rate, some of you may be surprised that Ireland has the most onerous overall burden on dividends. But that’s because there are high tax rates on personal income and households have to pay those high rates on any dividends they receive (even though companies already paid tax on that income).

It’s less surprising that Denmark is the second worst and France is the third worst.

Meanwhile, Estonia and Latvia have the least-onerous systems thanks to low rates and no double taxation.

But what about the United States?

There’s a different publication from the Tax Foundation that shows the extent – a maximum rate of 47.47 percent – of America’s double taxation.

The bottom line is that the United States would rank #7, between high-tax Belgium and high-tax Germany, if it was included in the above map.

That’s not a very good spot, at least if the goal is more jobs and more competitiveness.

To make matters worse, Joe Biden wants America to be #1 on the list. I’m not joking.

I’ve already written about his plan for a higher corporate tax rate.

But he wants an even-bigger increases in the second layer of tax on dividends.

How much bigger?

Pinar Cebi Wilber of the American Council for Capital Formation shared the unpleasant details in a column last year for the Wall Street Journal.

The Biden administration has released a flurry of tax proposals, including a headline-grabbing tax hike on capital gains that would apply retroactively from April. Dividends would be subject to the same treatment, according to a recently released Treasury Department document. …the proposal would tax qualified dividends—dividends from shares in domestic corporations and certain foreign corporations that are held for at least a specified minimum period of time—at income-tax rates (currently up to 40.8%) rather than the lower capital-gains rates (23.8%).

I also like that the column includes references to some academic research.

A 2005 paper by economists Raj Chetty and Emmanuel Saez looked at the effect of the 2003 dividend tax cuts on dividend payments in the U.S. The authors “find a sharp and widespread surge in dividend distributions following the tax cut,” after a continuous two-decade decrease in distributions. …Princeton’s Adrien Matray and co-author Charles Boissel looked at the issue the other way around. In a 2019 study, they found that an increase in French dividend taxes led to decreased dividend payments. …Another study from 2011, looking at America’s major competitor, reached the same directional conclusion: A 2005 reduction in China’s dividend tax rate led to an increase in dividend payments.

Not that anyone should be surprised by these results. The academic literature clearly shows that it’s not smart to impose high tax rates on productive behavior such as work, saving, investment, and entrepreneurship.

Unless, of course, you want more people dependent on government.

P.S. Biden also wants American to be #1 for capital gains taxation. So at least he is consistent, albeit in a very perverse way.

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How do we know people don’t like taxes?

  • They tend to reject candidates who support higher taxes, as George H.W. Bush and other politicians have learned.
  • Then tend to vote against higher taxes when given an opportunity (though they sometimes will vote to tax other people)
  • They tend to migrate from high-tax jurisdictions to low-tax jurisdictions for direct and indirect reasons.

Today, we’re going to elaborate on the final reason.

Let’s start with this chart from one of the daily missives from the Committee to Unleash Prosperity. As you can see, it’s not just people that move. It’s their money as well.

The bottom line is that the two states – California and New York – with ultra-high tax rates are losing the most taxable income.

Let’s call this the revenge of the Laffer Curve because it shows us that high tax rates can backfire.

Jon Miltimore addressed this topic in a new column for the Foundation for Economic Education.

Here are some of the highlights, starting with some data on how some poorly governed cities are losing residents.

Three of the top five metros that saw sharp declines between July 1, 2020, and July 1, 2021 were in California. Leading the way was the Los Angeles-Long Beach metropolitan area, which lost 176,000 residents, a 1.3 percent drop. Next was the San Francisco-Oakland-Berkeley metro, which saw a decline of 116,000 residents (2.5 percent decline), followed by San Jose-Sunnyvale-Santa Clara, which shed some 43,000 residents (2.2 percent drop). …The New York-Newark-New Jersey metropolitan area saw a decline of 328,000 residents, the highest in the nation in raw numbers. The Chicago area, meanwhile, saw a decline of some 92,000 residents.

Here’s a chart from his article.

I’m definitely not surprised to see New York, San Francisco, and Chicago on the list. After all those cities have crummy governments.

The other two cities, by contrast, just have the misfortune of being in a poorly governed state.

Jon explains a big reason why this domestic migration is taking place.

…the reasons people choose to migrate tend to be complex and varied… However, we can see the US flight from its largest metropolitan is part of a bigger trend. North American Van Lines (NAVL), a trucking company based in Indiana, puts out an annual report that tracks migration patterns in the United States. The states with the most inbound migration in 2021 were South Carolina, Idaho, Tennessee, North Carolina, and Florida. The leading outbound states were Illinois, California, New Jersey, Michigan, and New York. The pattern here is clear. Americans are fleeing highly-regulated, highly taxed states. They are flocking to freer states. …We heard a great deal about “the Great Reset” during the pandemic. …It may be that “the reset” involves Americans abandoning high-tax, high-regulatory cities and states for freer ones.

To be sure, there are factors other than taxation. And there are factors other than government policy (people really like California’s wonderful climate, for instance, but they will escape when policy becomes unbearable).

The bottom line is that people are slowly but surely voting with their feet against statism. They are choosing red states over blue states. There’s a lesson for Joe Biden, though he’s probably not listening.

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When debating big issues such as the size and scope of government, I like to think that facts matter. Maybe I’m being naive, but people should look at evidence before deciding whether to make government bigger or smaller.

And with Biden proposing a big expansion in the size of the welfare state, this is why I regularly compare the economic performance of the United States and various European nations.

After all, if we’re going to make America more like Europe, shouldn’t we try to understand what that might mean for the well being of the citizenry?

With this in mind, I want to share this tweet (based on this data) from Stefan Schubert at the London School of Economics.

The obvious takeaway is that the average person in the United States enjoys much higher living standards (more than 50 percent higher) than the average person in the European Union.

Even more astounding, the United States even has a big 20-percent advantage of the wealthy tax haven of Luxembourg.

By the way, the above data may understate the gap if you make apples-to-apples comparisons.

Nima Sanandaji compared the economic output of Scandinavians who emigrated to the United States with Scandinavians who stayed home.

He found even bigger gaps, one example of which is the data about Swedes in this chart.

Let’s look at one more bit of data.

Another way of illustrating the gap is see how European nations no longer are converging with the United States (and may actually be diverging).

The only good news for Europeans (if we’re grading on a curve) is that there’s been a decline in both the relative and absolute levels of economic freedom in the United States during the 21st century.

If that continues, the U.S. may “catch up” to Europe at some point in the future. Joe Biden certainly is working for that outcome.

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I wrote two months ago about Iowa lawmakers voting for a simple and fair flat tax.

I explained how this reform would make the state more competitive, but I want to build upon that argument with some of the Tax Foundation’s data.

Starting with this map from the State Business Tax Climate Index, which shows Iowa in 38th place for individual income taxes.

That low ranking is where the state’s tax code was as of July 1, 2021, so it obviously doesn’t reflect the reforms enacted earlier this year.

So where will the state rank with the new flat tax?

The Tax Foundation crunched the data and shows the state will jump to #15 in the rankings.

The above table shows that the jump is even more impressive when you factor in some modest pro-growth changes that took place a few years ago.

What a huge improvement over just a few years. The only state that may beat Iowa for fastest and biggest increase in tax competitiveness is North Carolina, which jumped 30 spots in just one year.

P.S. Politicians in New York must be upset that there’s no way for them to drop lower than #50. But at least they can take comfort in the fact that they are worse than California.

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When I first wrote about the Index of Economic Freedom back in 2010, the United States was comfortably among the world’s 10-freest nations with a score of 78 out of 100.

By last year, America had dropped to #20, with a very mediocre score of 74.8.

Sadly, the United States is continuing to decline. The Heritage Foundation recently released the 2022 version of the Index and the United States is now down to #25, with an even-more-mediocre score of 72.1.

As you can see, the biggest reason for the decline is bad fiscal policy (we can assume that Biden’s so-called stimulus deserves much of the blame).

So what nations got the best scores?

Our next visual shows that Singapore has the world’s freest economy, narrowly edging out Switzerland.

Notice, though, that Singapore’s score dropped and Switzerland’s improved. So it will be interesting to see if the “sensible nation” takes the top spot next year.

Also notice that only 7 nations qualified as “Free,” meaning scores of 80 or above.

The United States is in the “Mostly Free” category, which is for nations with scores between 70 and 80.

By the way, notice that the United States trails all the Nordic nations. Indeed, Finland, Denmark, Sweden, Iceland, and Norway get scores in the upper-70s.

How is this possible when those countries have high-tax welfare states? Because they follow a very laissez-faire approach for all of their other policies (trade, regulation, monetary policy, etc).

I’ll close with a depressing look at how the United States has declined over the past two decades. I already mentioned that the U.S. gets a score of 72.1 in the 2022 version. That’s far below 81.2, which is where America was back in 2006.

P.S. The Fraser Institute’s Economic Freedom of the World shows a similar decline for the United States.

P.P.S. Taiwan is an under-appreciated success story.

P.P.P.S. New Zealand is still in the “Free” group, but it’s decline is worrisome.

P.P.P.P.S. Kudos to Estonia for climbing into the top group.

P.P.P.P.P.S. The bottom three nations are Cuba, Venezuela, and North Korea.

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A key principle of economics is convergence, which is the notion that poorer nations generally grow faster than richer nations.

For instance, battle-damaged European nations grew faster than the United States in the first few decades after World War II.

But, starting in the 1980s, that convergence stopped. And not because Europe reached American levels of prosperity. Even the nations of Western Europe never came close to U.S. levels of per-capita economic output.

Moreover, European countries then began to lose ground for the rest of the 20th century.

And that process is continuing. Here’s a recent tweet from Robin Brooks, the Chief Economist of the Institute of International Finance, which shows that the United States was growing faster than Europe before the pandemic and is now growing faster than Europe after the pandemic.

In other words, we’re seeing divergence.

Sven Larson addressed this same issue in a new article on this topic for European Conservative.

Over the 20 years from 2000 to 2019, the U.S. economy outgrew the 27-member European Union by a solid 19%, adjusted for inflation. These numbers…are quite impressive, especially considering that during President Obama’s eight years in office, annual growth in gross domestic product, GDP, never reached 3%. …From 2010 to 2019, U.S. unemployment averaged 6.3%, dropping below 3.7% in the last year before the pandemic. By contrast, the EU economy never dropped below 6.7% unemployment (in 2019) with an average of 9.5% for the entire decade. …These differences between America and Europe are significant, and should be the subject of debate in Europe: what is it that the Americans are doing that Europeans could do better? Over time, even small differences in economic growth compound into large differences in the standard of living.

Here’s his chart showing the divergence.

So why is Europe falling behind the United States when it should be growing faster because of lower living standards?

Sven has a very good explanation.

There are many candidates for explaining this difference, but there is one that stands out compared to all the others: the size of government. Between 2010 and 2019, government spending in the European Union was equal to 48.3% of GDP, on average, compared to 37.1% in the U.S. economy. …The most hard-hitting impact does not come through taxes, as conventional wisdom suggests, but through spending. …government operates under a form of central economic planning. Its outlays are not based on the mechanisms and prices of free markets: instead, its spending is governed by ideological preferences… While government spending inflicts the most damage on the economy, taxes are not insignificant. Here, again, the U.S. comes out more competitive than its European counterpart, and it is not a new problem. …For the past 20 years, European governments in general have taxed their economies 10-12 percentage points higher, as a share of GDP, than is the case in America.

Having crunched the data from Economic Freedom of the World, I think Sven is correct.

With regards to factors other than fiscal policy, European nations have just as much economic liberty (or, if you’re a glass-half-empty type, just as little economic liberty) as the United States. Heck, many of them rank above the United States when just considering factors such as trade, red tape, monetary policy, and rule of law.

Yet the United States nonetheless earns a better overall score.

Why? Because the United States does much better on fiscal policy (or, to be more accurate, doesn’t do as poorly).

P.S. Both Europe and the United States are moving in the wrong direction with regard to fiscal policy. Almost as if there’s a contest to see who can be the most profligate. Let’s call it the Keynesian Olympics. Whoever wins a gold medal is the first to suffer a fiscal crisis.

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As I warned a few days ago, Biden’s so-called Build Back Better plan is not dead.

There’s still a significant risk that this economy-sapping plan will get enacted, resulting in big tax increases and a larger burden of government spending.

Proponents of a bigger welfare state say the President’s plan should be approved so that the United States can be more like Europe.

This argument is baffling because it doesn’t make sense to copy countries where living standards are significantly lower.

In some cases dramatically lower.

Let’s explore this issue in greater detail.

In a column for Bloomberg, Allison Schrager analyzes America’s supply-chain problems and the impact on consumption patterns.

But what caught my eye were the numbers comparing the United States and Europe.

Americans can’t spend like they used to. Store shelves are emptying, and it can take months to find a car, refrigerator or sofa. If this continues, we may need to learn to do without — and, horrors, live more like the Europeans. That actually might not be a bad thing, because the U.S. economy could be healthier if it were less reliant on consumption. …We consume much more than we used to and more than other countries.  Consumption per capita grew about 65% from 1990 to 2015, compared with about 35% growth in Europe. …What would that mean for the U.S. economy? European levels of consumption coexist with lower levels of growth.

Here’s the chart that accompanied her article.

As you can see, consumption in the United States is far higher than it is in major European nations – about $15,000-per-year higher than the United Kingdom and about double the levels in Germany, Belgium, and France.

So when someone says we should expand the welfare state and be more like Europe, what they’re really saying is that we should copy nations that are far behind the United States.

Some of you may have noticed that Ms. Schrager is citing per-capita consumption data from the World Bank and you may be wondering whether other numbers tell a different story.

After all, if higher levels of consumption in America are simply the result of borrowing from overseas, that would be a negative rather than a positive.

So I went to the same website and downloaded the data for per-capita gross domestic product instead. I then created this chart (going all the way back to 1971). As you can see, it shows that Americans not only consume more, but we also produce more.

For those interested, I also included Japan and China, as well as the average for the entire world.

The bottom line is that it’s good to be part of western civilization. But it’s especially good to be in the United States.

Since we’re on the topic of comparative economics, David Harsanyi of National Review recently wrote about the gap between the United States and Europe.

More than anything, it is the ingrained American entrepreneurial spirit and work ethic that separates us from Europe and the rest of the world. …Europe, despite its wealth, its relatively stable institutions, its giant marketplace, and its intellectual firepower, is home to only one of the top 30 global Internet companies in the world (Spotify), while the United States is home to 18 of the top 30. …One of the most underrated traits we hold, for instance, is our relative comfort with risk — a behavior embedded in the American character. …Americans, self-selected risk-takers, created an individual and communal independence that engendered creativity. …Because of a preoccupation with “inequality” — one shared by the modern American Left — European rules and taxation for stock-option remuneration make it difficult for start-up employees to enjoy the benefits of innovation — and make it harder for new companies to attract talent. …But the deeper problem is that European culture values stability over success, security over invention…in Europe, hard work is less likely to guarantee results because policies that allow people to keep the fruits of their labor and compete matter far less.

In other words, there’s less economic dynamism because the reward for being productive is lower in Europe (which is simply another way of saying taxes are higher in Europe).

P.S. The main forcus of Ms. Schrager’s Bloomberg article was whether the U.S. economy is too dependent on consumption.

It feels like our voracious consumption is what fuels the economy. But that needn’t be the case. Long-term, sustainable growth doesn’t come from going deep into debt to buy stuff we don’t really need. It comes from technology and innovation, where we come up with new products and better ways of doing things. An economy based on consumption is not sustainable.

I sort of agree with her point.

Simply stated high levels of consumption don’t cause a strong economy. It’s the other way around. A strong economy enables high levels of consumption.

But this doesn’t mean consumption is bad, or that it would be good for America to be more like Europe.

Instead, the real lesson is that you want the types of policies (free markets and limited government) that will produce innovation and investment.

That results in higher levels of income, which then allows higher levels of consumption.

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Back in 2016, I shared a television program about the “Improbable Success” of Switzerland. Today, here’s a follow-up look at that “sensible country.”

There are elements to this video that are outside my area of expertise, such as the role of the reformation.

But the video mentions policies that I find very appealing, such as the country’s strong federalist system (unlike the United States, federalism hasn’t eroded).

This means jurisdictional competition, which has played a big role in curtailing bad policy.

And there was a brief indirect mention of the nation’s spending cap, which also has been a big success.

Interestingly, Switzerland’s strong track record is getting noticed in unusual places.

Here are some excerpts from a New York Times column by Ruchir Sharma.

There is…a country far richer and just as fair as any in the Scandinavian trio of Sweden, Denmark and Norway. ….with lighter taxes, smaller government, and a more open and stable economy. Steady growth recently made it the second richest nation in the world…with an average income of $84,000, or $20,000 more than the Scandinavian average. …surveys also rank this nation as one of the world’s 10 happiest. This less socialist but more successful utopia is Switzerland. …Wealth and income are distributed across the populace almost as equally as in Scandinavia, with the middle class holding about 70 percent of the nation’s assets. The big difference: The typical Swiss family has a net worth around $540,000, twice its Scandinavian peer. …Capitalist to its core, Switzerland imposes lighter taxes on individuals, consumers and corporations than the Scandinavian countries do. In 2018 its top income tax rate was the lowest in Western Europe at 36 percent, well below the Scandinavian average of 52 percent. Government spending amounts to a third of gross domestic product, compared with half in Scandinavia. And Switzerland is more open to trade, with a share of global exports around double that of any Scandinavian economy. …Only one in seven Swiss work for the government, about half the Scandinavian average. …The Swiss have become the world’s richest nation by getting it right, and their model is hiding in plain sight.

Kristian Niemietz of London’s Institute of Economic Affairs also pointed out that Switzerland is a role model.

Classical liberal ideas work. But they are usually counterintuitive, and often hard to explain. …It is therefore helpful for classical liberals if we can point to a practical example…it is Switzerland which, in many ways, represents such an example. Switzerland is not a libertarian paradise. But it is a country which, through its mere existence and its economic success, refutes a lot of…conventional wisdoms. …Take decentralisation. …the Swiss example shows that local autonomy and pluralism can be a recipe for success. In Switzerland, even tiny cantons like Glarus or Obwalden, which have far fewer inhabitants than a typical London borough, enjoy a degree of political autonomy that London, which has more inhabitants than the whole of Switzerland, can only dream of. …the Swiss system shows that a healthcare system based on choice and competition can work exceptionally well. The Swiss system offers ample choice between insurers, insurance plans, providers and delivery models. …Liberal market economists…can simply refer to the successful example of Switzerland. We can end a lot of tedious discussions by simply saying, “Of course it works – just look at Switzerland”.

Amen.

Switzerland is a great role model.

By the way, neither the video nor the two articles mentions Switzerland’s private pension system, which is another big advantage the country has over most other nations.

If you want to see a chart that illustrates Switzerland’s stunning success, this look at both life expectancy and per-capita economic output is very revealing.

The link between prosperity and longevity isn’t big news, but Switzerland’s rapid upward ascent is very remarkable.

To conclude, there are numerous reasons to rank Switzerland above the United States, at least with regard to public policy.

P.S. The video mentions that Switzerland is the closest example in the world of a direct democracy. I’m instinctively opposed to that approach, because of the dangers of majoritarianism.

That being said, Swiss voters usually vote the right way.

P.P.S. It wasn’t mentioned in the video, but I like that Switzerland is one of the few European nations with widespread gun ownership.

P.P.P.S. We should not be surprised that some folks in Sardinia would like to secede from Italy and join Switzerland.

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If you want to understand why some nations enjoy much stronger economic growth than other nations, the best place to start is the Fraser Institute’s Economic Freedom of the World.

And if you want to understand why some states have more vibrant economies than other states, you should check out the latest edition of the Fraser Institute’s Economic Freedom of North America.

Since most readers are from the United States, I’ll start with a look at the publication’s sub-national index, which shows how American states rank in terms of economic liberty. Unsurprisingly, a bunch of jurisdictions with no income tax are at the top of the list and California and New York are at the bottom.

By the way, the authors (Dean Stansel, José Torra, and Fred McMahon) specifically note that the rankings are based on 2019 data (the latest-available data) and thus “do not capture the effect on economic freedom of COVID-19 and government responses to it.

With that caveat out of the way, here are some of the findings for the sub-national index (which is where Figure 1.2b from above can be found).

Since the Fraser Institute is based in Canada, they understandably start by looking at Canadian provinces, but you can then read about results for the rest of North America.

For the purpose of comparing jurisdictions within the same country, the subnational indices are the appropriate choice. There is a separate subnational index for each country. In Canada, the most economically free province in 2019 was again Alberta with 6.17, followed by British Columbia with 5.44, and Ontario at 5.31. However, the gap between Alberta and second-place British Columbia continues to shrink, down from 2.30 points in 2014 to 0.73 in 2019. The least free by far was Quebec at 2.83, following New Brunswick at 4.09, and Prince Edward Island and Nova Scotia at 4.20. In the United States, the most economically free state was New Hampshire at 7.83, followed closely by Tennessee at 7.82, Florida at 7.78, Texas at 7.75, and Virginia at 7.59. …In Mexico, the most economically free state was Baja California at 6.01.

Here are the provincial rankings from Canada.

Alberta is the best place for economic growth and Quebec is the worst (by a significant margin).

Here are the some of the findings for the all-government index (which uses a different methodology than the sub-national index mentioned above).

The good news, from the perspective of folks in the U.S., is that most states rank above every other jurisdiction in North America (and the Mexican state all rank at the bottom).

The top jurisdiction is New Hampshire at 8.23, followed by Florida (8.17), Idaho (8.16), and then South Carolina, Utah, and Wyoming tied for fourth (8.15). Alberta is the highest ranking Canadian province, tied for 33rd place with a score of 8.00. The next highest Canadian province is British Columbia in 47th at 7.91. Alberta had spent seven years at the top of the index but fell out of the top spot in the 2018 report (reflecting 2016 data). The highest-ranked Mexican state is Baja California with 6.65, followed by Nayarit (6.62)… Seven of the Canadian provinces are ranked behind all 50 US states.

By the way, here’s some historical context showing that all three nations had their best scores back in the early 2000s (when the “Washington Consensus” for pro-market policy still had some impact.

Historically, average economic freedom in all three countries peaked in 2004 at 7.74 then fell steadily to 7.24 in 2011. Canadian provinces saw the smallest decline, only 0.19, whereas the decline in the United States was 0.51 and, in Mexico, 0.58. Since then average economic freedom in North America has risen slowly to 7.43 but still remains below that peak in 2004. However, economic freedom has increased in the United States and Mexico since 2013. In contrast, in Canada, after an increase in 2014, it has fallen back below its 2013 level.

P.S. If you want some additional historical context, Alberta’s fall from the top (mentioned in the first excerpt) can be partly blamed on the provincial government’s fiscal profligacy when it was collecting a lot of energy-related tax revenue.

P.P.S. I first wrote about Economic Freedom of North America in 2013 and more recently shared commentary about the 2019 and 2020 versions.

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Motivated in part by an excellent graphic that I shared in 2016, I put together a five-column ranking of state personal income tax systems in 2018.

Given some changes that have since occurred, it’s time for a new version. The first two columns are self explanatory and columns 3 and 5 are based on whether the top tax rate on households is less than 5 percent (“Low Rate”) or more than 8 percent (“Class Warfare”).

Column 4, needless to say, is for states where the top tax rate in between 5-8 percent.

The good news is that the above table is better than the one I created in 2018. Thanks to tax competition between states, there have been some improvements in tax policy.

I recently wrote about Louisiana’s shift in the right direction.

Now we have some good news from the Tarheel state. The Wall Street Journal opined today about a new tax reform in North Carolina.

The deal phases out the state’s 2.5% corporate income tax between 2025 and 2031. …The deal also cuts the state’s flat 5.25% personal income tax rate in stages to 3.99% by July 1, 2027. …North Carolina ranks tenth on the Tax Foundation’s 2021 state business tax climate index, and these reforms will make it even more competitive. …North Carolina has an unreserved cash balance of $8.55 billion, and legislators are wisely returning some of it to taxpayers.

What’s especially noteworthy is that North Carolina has been moving in the right direction for almost 10 years.

P.S. Arizona almost moved from column 3 to column 5, but that big decline was averted.

P.P.S. There are efforts in Mississippi and Nebraska to get rid of state income taxes.

P.P.P.S. Kansas tried for a big improvement a few years ago, but ultimately settled for a modest improvement.

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The good news is that President Biden wants the United States to be at the top. The bad news is that he wants America to be at the top in bad ways.

  • The highest corporate income tax rate.
  • The highest capital gains tax rate.
  • The highest level of double taxation.

We can now add another category, based on the latest iteration of his budget plan.

According to the Tax Foundation, the United States would have the developed world’s most punitive personal income tax.

Worse than France and worse than Greece. How embarrassing.

In their report, Alex Durante and William McBride explain how the new plan will raise tax rates in a convoluted fashion.

High-income taxpayers would face a surcharge on modified adjusted gross income (MAGI), defined as adjusted gross income less investment interest expense. The surcharge would equal 5 percent on MAGI in excess of $10 million plus 3 percent on MAGI above $25 million, for a total surcharge of 8 percent. The plan would also redefine the tax base to which the 3.8 percent net investment income tax (NIIT) applies to include the “active” part of pass-through income—all taxable income above $400,000 (single filer) or $500,000 (joint filer) would be subject to tax of 3.8 percent due to the combination of NIIT and Medicare taxes. Under current law, the top marginal tax rate on ordinary income is scheduled to increase from 37 percent to 39.6 percent starting in 2026. Overall, the top marginal tax rate on personal income at the federal level would rise to 51.4 percent. In addition to the top federal rate, individuals face taxes on personal income in most U.S. states. Considering the average top marginal state-local tax rate of 6.0 percent, the combined top tax rate on personal income would be 57.4 percent—higher than currently levied in any developed country.

Needless to say, this will make the tax code more complex.

Lawyers and accountants will win and the economy will lose.

I’m not sure why Biden and his big-spender allies have picked a complicated way to increase tax rates, but that doesn’t change that fact that people will have less incentive to engage in productive behavior.

What matters is the marginal tax rate on people who are thinking about earning more income.

And they’ll definitely choose to earn less if tax rates increase, particularly since well-to-do taxpayers have considerable control over the timing, level, and composition of their income.

P.S. Based on what happened in the 1980s, we can safely assume that Biden’s class-warfare plan won’t raise much money.

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After the people of the United Kingdom voted to escape the European Union, I wondered whether the Conservative Party would “find a new Margaret Thatcher” to enact pro-market reforms and thus “take advantage of a golden opportunity” to “prosper in a post-Brexit world.”

The answer is no.

The current Prime Minister, Boris Johnson, deserves praise for turning the Brexit vote into Brexit reality, but his fiscal policy has been atrocious.

Not only is he failing to be another Margaret Thatcher, he’s a bigger spender than left-leaning Tory leaders such as David Cameron and Theresa May.

Let’s look at some British media coverage of how Boris Johnson and Rishi Sunak (the Chancellor of the Exchequer) have sided with government over taxpayers.

Allister Heath of the Telegraph has a brutal assessment of their profligacy.

Rishi Sunak’s message, repeated over and over again, as he unveiled a historic, epoch-defining rise in public spending financed by ruinous tax increases. It was a Labour Budget with a Tory twist and the kind of Spending Review that Gordon Brown would have relished… the cash was sprinkled in every possible direction. Sunak is Chancellor, but he was executing Boris Johnson’s cakeist vision: a meddling, hyperactive, managerialist, paternalistic and almost municipal state which refuses to accept any limits to its ambition or ability to spend. …The scale of the tax increases is staggering. …This will propel the tax burden from 33.5 per cent of GDP before the pandemic to 36.2 per cent by 2026-27, its highest since the early 1950s… The picture on spending is equally grim: we are on course for a new normal of around 41.6 per cent of GDP by 2026-27, the largest sustained share of GDP since the late 1970s. …The Budget and Spending Review are thus a huge victory for Left-wing ideas, even if the shift is being implemented by Right-wing Brexiteers who have forgotten that the economic case for Brexit wasn’t predicated on Britain becoming more like France or Spain. …Labour shouldn’t be feeling too despondent: the party may not be in office, but when it comes to the economy and public spending, they are very much in power.

Writing for CapX, James Heywood explains one of the adverse consequences of big-government Toryism.

Simply stated, the U.K. will go from bad to worse in the Tax Foundation’s International Tax Competitiveness Index.

…in the Cameron-Osborne era, the Conservatives focused on heavily on making Britain competitive and business-friendly, with significant cuts to the headline rate of corporation tax. …in his recent Tory conference speech, Boris Johnson trumpeted the virtues of an ‘open society and free market economy’, promising that his was a government committed to creating a ‘low tax economy’.  Unfortunately, when it comes to UK tax policy the direction of travel is concerningly divorced from the rhetoric. The latest iteration of the US-based Tax Foundation’s annual International Tax Competitiveness Index placed the UK 22nd out of 37 OECD countries when it comes to the overall performance of our tax system. …Nor does the UK’s current ranking factor in the Government’s plans for future tax rises. …the headline rate of corporation tax had fallen to 19% and was set to fall to 17% by 2020. That further fall had already been cancelled during Sajid Javid’s brief stint as Chancellor, in order to pay for additional NHS spending. At the last Budget, Rishi Sunak went much further, setting out plans to gradually raise the rate from 19% to 25% in April 2023. That is a huge tax measure by anyone’s standards… On top of that we have the recently announced Health and Social Care Levy… If we factor all these new measures into the Tax Foundation’s Competitiveness Index, the UK falls to a dismal 30th out of 37 countries.

For what it’s worth, the United Kingdom’s competitiveness decline will be very similar to the drop in America’s rankings if Biden’s fiscal plan is enacted.

In other words, there’s not much difference between the left-wing policy of Joe Biden and the (supposedly) right-wing policy of Britain’s Conservative Party.

No wonder a British cartoonist thought it was appropriate to show Rishi Sunak morphing into Gorden Brown, the high-tax, big-government Chancellor of the Exchequer under Tony Blair.

I’ll close with the observation that conservatives and libertarians in the United Kingdom need to create their own version of the no-tax-hike pledge.

That pledge, organized by Americans for Tax Reform, has helped protect many (but not all) Republicans from politically foolish tax hikes.

It is good politics to have a no-tax pledge, but I’m much more focused on the fact that opposing tax hikes is good policy.

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One of the my favorite publications from the Tax Foundation is the annual International Tax Competitiveness Index (here’s what I wrote in 2020 and 2019).

The 2021 Index, authored by Daniel Bunn and Elke Asen, has now been released, and you can see that Estonia has the most sensible policy.

Other Baltic nations also are highly ranked, as are Switzerland and New Zealand.

It’s probably no surprise to see nations such as France and Italy score so poorly, but Poland is a bit of a surprise.

Since most readers are from the United States, let’s specifically look at America’s rankings.

The U.S. does very will on consumption taxes (ranked #5), largely because we haven’t made the mistake of adding a value-added tax to our system.

By contrast, the U.S. is near the bottom (ranked #32) with regard to cross-border tax rules, though at least America is no longer in last place in that category, as was the case back in 2014.

Here are some additional details for the folks who like to get in the weeds.

The Tax Foundation also released a companion article looking at which nations have enjoyed the biggest improvements or suffered the biggest declines since the Index first began back in 2014.

The United States has been a big winner thanks to the 2017 tax reform, but Israel wins the prize by jumping all the way from #28 to #14.

Colombia has the dubious honor of suffering the biggest decline.

Makes me wonder whether joining the pro-tax OECD (a process that began in 2013) played a role in the country’s shift in the wrong direction.

I’ll close with the sad observation that America’s progress will be reversed if Biden’s class-warfare tax plan is enacted. Earlier this year, the Tax Foundation estimated that the President’s plan would cause the United States to drop eight spots.

Call me crazy, but I don’t understand why folks on the left want the U.S. tax system to be more like Italy’s.

P.S. I would like to see the aggregate tax burden added as one of the variables in the Index, and it also would be interesting if more jurisdictions were included (zero-tax jurisdictions such as Bermuda and the Cayman Islands presumably would beat out Estonia, and it also would be interesting to see where anti-market nations such as China got ranked).

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A very persuasive argument against Biden’s fiscal agenda is that it makes no sense to copy the fiscal policies of European welfare states.

Indeed, I routinely share this column from January, which looks at three different measures of comparative prosperity – all of which show the United States is way ahead of nations on the other side of the Atlantic Ocean.

One of the three data sources is this comparison of “actual individual consumption” (AIC) in the member nations of the Organization for Economic Cooperation and Development.

We now have updated AIC numbers. Here’s a look at the OECD’s latest data. As you can see, people in the United States enjoy levels of consumption 50 percent above the average for developed nations.

The U.S. is even way ahead of oil-rich Norway and the tax havens of Luxembourg and Switzerland.

By the way, if you look at the OECD’s technical definition, AIC includes “government expenditure on individual consumption goods and services,” so the gap between the United States and other nations is not a statistical quirk based on whether government is (or is not) paying for things.

P.S. I can’t resist a couple of closing observations. If you click on the OECD’s link for AIC, you’ll notice that there are seven years of data, thus showing which nations are moving in the right direction or wrong direction (relative to other OECD countries).

  • Eastern European nations tend to have the largest increases, as one might expect based on convergence theory (these nations fell way behind because of communist mismanagement). But the biggest increase was enjoyed by Lithuania, which also is very highly ranked for economic liberty. Not a coincidence.
  • Nations that suffered noticeable declines include Japan (no surprise), along with Italy and Greece (even less of a surprise).

The moral of the story is that smaller government is part of the recipe for greater prosperity, even if that’s not the approach preferred by vote-buying politicians.

P.P.S. Click here is you want an estimate of how much economic damage would be caused by Biden’s fiscal agenda.

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Two years ago, I wrote that China needed to choose between “Statism and Stagnation or Reform and Prosperity.”

Sadly, as I noted last month in Part I of this series, it seems that President Xi is opting for the former.

Which is unfortunate since China needs a lot more growth to get anywhere near U.S. levels of prosperity.

Yet that’s not very likely when the United States is ranked #6 and China is ranked #116 for economic liberty.

For what it’s worth, China’s score is likely to drop in future years rather than rise, and I’m certainly not the only one to notice that China has economic problems.

Writing for the Atlantic, David Frum looks at the country’s shaky economic outlook.

China’s economic, financial, technological, and military strength is hugely exaggerated by crude and inaccurate statistics. Meanwhile, U.S. advantages are persistently underestimated. The claim that China will “overtake” the U.S. in any meaningful way is polemical and wrong… China misallocates capital on a massive scale. More than a fifth of China’s housing stock is empty—the detritus of a frenzied construction boom that built too many apartments in the wrong places. China overcapitalizes at home because Chinese investors are prohibited from doing what they most want to do: get their money out of China. …More than one-third of the richest Chinese would emigrate if they could, according to research by one of the country’s leading wealth-management firms.

David mentioned “inaccurate statistics,” which is a big problem in China.

But I also worry about bubble statistics, which is an issue the Wall Street Journal editorialized about earlier this year.

…credit has exploded, with total public and private debt expected to exceed 270% of GDP in 2020, up 30 points in one year. Most of that has gone to state-owned firms and exporters. Smaller, more productive private companies that serve the domestic market report credit shortages. This undermines long-term growth… Unless China can unlock and expand its productive private economy, it will never be able to manage the burden of the debt Beijing has created.. China’s unbalanced recovery represents an enormous lost opportunity for the Chinese people.

David Ignatius of the Washington Post opines on President Xi’s embrace of bad policy.

President Xi Jinping has moved down a Maoist path this year toward tighter state control of the economy — including “self-criticism” sessions for Chinese business and political leaders whose crime, it seems, was being too successful. Xi’s leftward turn represents a major change… The result is a severe squeeze on what Xi views as “undisciplined” entrepreneurs. …Xi’s crackdown has rocked the Chinese economy. The top six technology stocks have lost more than $1.1 trillion in value over the past six months… Xi is animated by what he has called his “China Dream,” of a nation of unparalleled wealth and power — and also the egalitarian ideals of socialism.

In a column for the Wall Street Journal, Dennis Kwok and Johnny Patterson warn that private investors should not trust the Chinese government.

Beijing’s crackdown on private businesses has wiped out hundreds of billions of dollars in market value in the past two months. Under the policies of “advancement of the state, and retreat of private enterprises” and “common prosperity,” the state’s tightening of control will increase. …Beijing assails “foreign forces” for seeking to curb China’s rise as a great nation. That refrain is constantly pushed by state media… Investors and shareholders of Wall Street firms must understand that there has been a paradigm shift in Mr. Xi’s China. Long gone are the days of pragmatism. What the Chinese state wants, the Chinese state gets.

In an article for the Atlantic, Michael Schuman explains how China’s heavy subsidies for electric cars haven’t produced vehicles that can compete with Tesla and other western  vehicles.

Do Chinese state programs actually work? …bureaucrats have never stopped meddling with markets. State direction, state money, and state enterprises remain core features of the Chinese economic model. President Xi Jinping has even reversed the trend toward greater economic freedom, notably with a hefty dose of state-led programs aimed at accelerating the progress of specific sectors. …China’s industrial program has resulted in a lot of production, but only questionable competitiveness. Even Beijing’s spendthrift bureaucrats seem to have awoken to that—sort of. They’ve been rolling back direct subsidies to carmakers, with an eye on eliminating them.

In other words, industrial policy is backfiring on China.

The former Prime Minister of Australia, Kevin Rudd, opined for the Wall Street Journal about China’s resurgent statism

In recent months Beijing killed the country’s $120 billion private tutoring sector and slapped hefty fines on tech firms Tencent and Alibaba. Chinese executives have been summoned to the capitol to “self-rectify their misconduct” and billionaires have begun donating to charitable causes in what President Xi Jinping calls “tertiary income redistribution.” China’s top six technology stocks have lost more than $1.1 trillion in value in the past six months… Mr. Xi is executing an economic pivot to the party and the state… Demographics is also driving Chinese economic policy to the left. The May 2021 census revealed birthrates had fallen sharply to 1.3—lower than in Japan and the U.S. China is aging fast. The working-age population peaked in 2011… While the politics of his pivot to the state may make sense internally, if Chinese growth begins to stall Mr. Xi may discover he had the underlying economics very wrong.

That final sentence is key.

Free enterprise is only tried-and-true recipe for economic prosperity. Chinese leaders are wrong to think they can get faster growth with more intervention.

Simply stated, China appears to be moving further left on this spectrum when it desperately needs to move to the right.

The bottom line is that I’m not optimistic about the future of China.

The country needs a Reagan-style agenda (the approach used by Singapore, Hong Kong, and Taiwan) to achieve genuine convergence.

P.S. Amazingly, both the IMF and OECD are encouraging more statism in China.

P.P.S. I used to be hopeful about China. During the 1950s, 1960s, and 1970s, China was horrifically impoverished because of socialist policies. According to the Maddison database, the country was actually poorer under communism than it was 1,000 years ago. But there was then a bit of economic liberalization starting in 1979, which generated very positive results. As a result, there was a significant increase in living standards and a huge reduction in poverty. But that progress has ground to a halt.

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The Fraser Institute in Canada has released its latest edition of Economic Freedom of the World, an index that measure and ranks nations based on whether they follow pro-growth policy.

Based on the latest available data on key indicators such as taxes, spending, regulation, trade policy, rule of law, and monetary policy, here are the top-20 nations.

You may be wondering how Hong Kong is still ranked #1.

In this summary of the findings, the authors explain that EFW is based on 2019 data. In other words, before Beijing cracked down. This means Hong Kong will probably not be the most-free jurisdiction when future editions are released.

The most recent comprehensive data available are from 2019. Hong Kong remains in the top position. The apparent increased insecurity of property rights and the weakening of the rule of law caused by the interventions of the Chinese government during 2020 and 2021 will likely have a negative impact on Hong Kong’s score, especially in Area 2, Legal System and Property Rights, going forward. Singapore, once again, comes in second. The next highest scoring nations are New Zealand, Switzerland, Georgia, United States, Ireland, Lithuania, Australia, and Denmark.

The United States was #6 in last year’s edition and it remains at #6 this year.

There are some other notable changes. The country of Georgia jumped to #5 while Australia dropped to #9.

Perhaps the most discouraging development is that Chile dropped to #29, a very disappointing result (and perhaps a harbinger of further decline in the nation that used to be known as the Latin Tiger).

And it’s also bad news that Canada has deteriorated over the past five years, dropping from #6 to #14.

The good news is that the world, on average, is slowly but surely moving in the right direction. Not as rapidly as it did during the era of the “Washington Consensus,” but progress nonetheless.

By the way, the progress is almost entirely a consequence of better policy in developing nations, especially the countries that escaped the tyranny of Soviet communism.

Policy has drifted in the wrong direction, by contrast, in the United States and Western Europe.

Indeed, the United States currently would be ranked #3 if it still enjoyed the level of economic liberty that existed in 2000.

In other words, the BushObamaTrump years have been somewhat disappointing.

Let’s look at another chart from the report. I’ve previously pointed out that there’s a strong relationship between economic freedom and national prosperity.

Well, here’s some additional evidence.

Let’s close by considering some of the nations represented by the red bar in the above chart.

You probably won’t be surprised to learn that Venezuela is once again ranked last. Though it is noteworthy that its score dropped from 3.31 to 2.83. I guess Maduro and the other socialists in Venezuela have a motto, “when you’re in a hole, keep digging.”

Argentina isn’t quite as bad as Venezuela, but I also think it’s remarkable that its score dropped from 5.88 to 5.50. That’s a big drop from a nation that already has a bad score.

Given these developments (as well as what’s happening in Chile), it’s not easy to be optimistic about Latin America.

P.S. There isn’t enough reliable data to rank Cuba and North Korea, so it’s quite likely that Venezuela doesn’t actually have the world’s most-oppressive economic policies.

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At the risk of understatement, Illinois is not a well-governed state. Greedy (and hypocritical) politicians have taxed and spent the state into a fiscal hole.

Wow. No wonder people have overwhelmingly voted that it is the state most likely to go bankrupt.

As illustrated by the collection of links, there certainly is a lot of data to support the notion that Illinois is in a downward spiral.

But sometimes an anecdote can help drive home the point. The Wall Street Journal just published a story about the country in Illinois that has suffered the largest decline in population of anyplace in the United States.

What struck me most about the report was that it “buried the lede.” More specifically, it’s not until the 17th paragraph that we learn about the factor that is probably responsible for a big chunk of the out-migration.

This must be the journalistic equivalent of “Other than that, Mrs. Lincoln, how was the play?”

Though I’m sure the other factors listed in the article also are relevant.

I’ll close with some speculation about an oft-seen pattern in blue states, which is the way rural areas and poor urban areas keep falling farther and farther behind well-to-do suburbs and wealthy downturn business districts.

Is it random results or a consequence of policy choices? Do politicians in California only care about preserving quality of life for coastal elites? Do politicians in Illinois merely care about Chicago and its suburban counties? Do politicians in New York not care about upstate residents?

I don’t know the answer to those questions, but I do know that people are voting with their feet to escape the states with the most-punitive tax policy.

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I periodically warn that the United States is on a path to become a European-style welfare state.

That sounds good to some people since it implies lots of goodies paid for by other people.

So I always explain that there’s a downside. The economic data clearly show that there’s been less growth in Europe and this has real-world consequences.

This is why it’s so depressing that Joe Biden has a radical agenda of higher tax rates and much bigger government.

He wants us to copy an approach that has produced inferior outcomes.

The editorial page of the Wall Street Journal has been sounding the alarm.

In a recent column, Professor Josef Joffe contemplates the impact of more dependency on America’s economy.

America is the land of “predatory capitalism,” German chancellor Helmut Schmidt liked to say. …President Biden’s tax plans might soon make Europe look like a capitalist heaven by comparison. …The middle class will pay the bill. …Reversing course won’t be easy because gifts, once given, are hard to take back, whether in the U.S. or in Europe. …As government expands and hands out more goodies, it also tightens its grip on the economy. It shrinks the private sector, the engine of U.S. wealth creation. It is no accident that Europe has grown more slowly over the past 40 years as government spending, regulations and taxes have increased.

Prof. Joffe’s point about the durability of entitlements (“once given, are hard to take back”) is vitally important.

This is why it is so important to block Biden’s per-child handouts.

Dan Henninger made similarly important points a couple of months ago.

The club Mr. Biden is joining…is one the U.S. has stayed out of since World War II. That is the club known as the European welfare state. It is the government-directed system of lifetime paternalism built up by the nations of Western Europe after 1945. …Public welfare has never been America’s reason for being, notwithstanding our substantial spending on social support programs. Despite the entitlement creations of FDR’s New Deal and LBJ’s Great Society, the U.S., unlike Europe, has remained a nation driven and led by capitalist initiative. For current-generation Democrats, that fact is anathema. …The March stimulus bill already had one foot inside the economic club of Europe’s door.

For what it’s worth, I’m not quite as positive about the United States as Henninger. Our welfare state is a significant burden, though he is right that it is smaller than the welfare states in Europe.

Let’s not quibble about that point, though, because Henninger has another observation that is spot on.

Biden’s agenda is a recipe for big tax increases on the middle class.

Europe became famous for its perpetual-motion tax machine, which suppressed the continent’s entrepreneurial instincts. Besides income taxes, Europe relies heavily on the collection of notoriously high value-added taxes…total tax revenue from all governments in the U.S. as a percentage of GDP is 24%, compared with an average of more than 40% in seven European nations… Those European tax levels will never fall. Their governments gotta have the money. Mr. Biden purports that his proposed $3 trillion in tax increases hit only corporations and “the wealthiest.” But if his entitlements become law, European levels of middle-class taxation—perhaps a VAT or carbon tax—are inevitable. Mr. Biden’s plans to increase Internal Revenue Service audits lay the groundwork for that.

Amen.

Honest folks on the left openly admit that this is true.

I’ll close with two final points.

First, it would be a mistake to copy Europe’s welfare states, but there are worse things that could happen. Those nations may lag the United States, but they are generally richer than other parts of the world.

But I’m not sure “better than Venezuela” is a persuasive selling point.

Second, because of demographic change and poorly designed entitlement programs, we’re already on a path to become a European welfare state.

But I’m not sure “let’s drive faster over the cliff” is a persuasive selling point.

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Long-time readers know that I periodically pour cold water on the notion that China is an economic superstar.

Yes, China did engage in some economic liberalization late last century, and those reforms should be applauded because they were very successful in reducing severe poverty.

But from a big-picture perspective, all that really happened is that China went from terrible policy (Maoist communism) to bad policy (best described as mass cronyism).

Economic Freedom of the World has the best data. According to the latest edition, China’s score for economic liberty rose from a horrible 3.69 in 1990 to 6.21 in 2018.

That’s a big improvement, but that still leaves China in the bottom quartile (ranking #124 in the world). Better than Venezuela (#162), to be sure, but way behind even uncompetitive welfare states such as Greece (#92), France (#58), and Italy (#51).

And I fear China’s score will get even worse in the near future.

Why? Because it seems President Xi is going to impose class-warfare tax increases.

In an article for the Guardian, Phillip Inman shares some of the details.

China’s president has vowed to “adjust excessive incomes” in a warning to the country’s super-rich that the state plans to redistribute wealth… The policy goal comes amid a sweeping push by Beijing to rein in the country’s largest private firms in industries, ranging from technology to education. …Xi…is expected to expand wealth taxes and raise income tax rates… Some reforms could be far reaching, including higher taxes on capital gains, inheritance and property. Higher public sector wages are also expected to be part of the package.

And here are some excerpts from a report by Jane Li for Quartz.

Chinese president Xi Jinping yesterday sent a stark message to the country’s wealthy: It is time to redistribute their excessive fortunes. …Another reason for the Party’s focus on outsize wealth is to reduce rival centers of power and influence in China, which has also been an impetus for its crackdown on the tech sector… China already has fairly high income tax rates for its wealthiest. That includes a top income tax rate of 45% for those who earn more than 960,000 yuan ($150,000) a year… Upcoming moves could include…a nationwide property tax.

These stories may warm the hearts of Joe Biden and Bernie Sanders, but they help to explain why I’m not optimistic about China’s economy.

If you review the Economic Freedom of the World data, you find that China is especially bad on fiscal policy (“size of government”), ranking #153.

That’s worse than China does even on regulation.

Yet the Chinese government is now going to impose higher taxes to fund even bigger government?!?

Is the goal to be even worse than Venezuela and Zimbabwe?

P.S. Many wealthy people in China (maybe even most of them) achieved their high incomes thanks to government favoritism, so there’s a very strong argument that their riches are undeserved. But the best policy response is getting rid of industrial policy rather than imposing tax increases that will hit both good rich people and bad rich people.

P.P.S. I’ve criticized both the OECD and IMF for advocating higher taxes in China. A few readers have sent emails asking whether those international bureaucracies might be deliberately trying to sabotage China’s economy and thus preserve the dominance of Europe and the United States. Given the wretched track records of the OECD and IMF, I think it’s far more likely that the bureaucrats from those organizations sincerely support those bad policies (especially since they get tax-free salaries and are sheltered from the negative consequences).

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China is not going to surpass the United States as the world’s dominant economy.

As I first wrote back in 2010, China is a paper tiger. Yes, there was some pro-market reform last century, which helped reduce mass poverty, but China only took modest steps in the right direction.

According to the latest edition of Economic Freedom of the World, China scores just 6.21, which places it 124th out of 162 nations.

Is that better than a score of 3.69, which is where China was in 1990?

Yes, of course.

But does that score indicate that China will become richer than the United States, which has a current score of 8.22 (the world’s 6th-highest level of economic liberty)?

Of course not.

My answer might change of China engaged in more economic liberalization, as I have urged. But it seems the opposite is happening and China is backsliding toward more state control.

And that means the United States almost surely will remain far more prosperous.

(While Joe Biden is doing his best to drag economic policy in the wrong direction, but it would takes decades of far-worse policy to bring the U.S. down to the level of France (#58) or Greece (#92), much less all the way down to being on par with China).

But some people must not be very familiar with data about China and its economy.

For instance, President Trump’s former top trade official, Robert Lighthizer, wrote that the United States should copy China’s cronyism in a column in the New York Times.

I’m not joking. Mr. Lighthizer openly embraces industrial policy and protectionism.

…we need a multifaceted long-term strategy. …Our strategy must include…an industrial policy that includes subsidies to foster the development of the most advanced science and technology…and a robust plan to combat China’s unfair trade practices. …The Senate legislation would achieve some of what is needed. It calls for $200 billion to bolster scientific and technological innovation, $52 billion to rebuild our capacity to make semiconductors, and a supply-chain resiliency program… The House should perfect the provisions of the Senate bill that restructure and enhance federal support for science and innovation and strip out those that weaken our trade laws and encourage Chinese imports.

Geesh, no wonder Trump’s trade policy was such a disaster.

Lighthizer not only doesn’t understand economics, he also doesn’t know history.

Adam Thierer of the Mercatus Center points out that the current angst about China is a repeat verse of a song we heard over and over again in the late 1980s.

Back then, everyone though Japan was on the verge of overtaking the United States, ostensibly because that nation had wise politicians and bureaucrats who knew how to pick winners and losers.

Thierer’s article tells us what really happened.

In 1949, the Japanese government created the Ministry of International Trade and Industry (MITI) to work with other government bodies (especially the Bank of Japan) to devise plans for industrial sectors in which they hoped to make advances. Although not as heavy-handed as Chinese planning authorities are today, MITI came to have enormous influence over private-sector research and investment decisions during the next five decades. The organization used a variety of the same policy levers that Chinese officials do today, with a particular focus on trade management and industrial policy investments in sectors perceived to be “strategic” for future economic advance. …By the late 1970s…, U.S. officials and market analysts came to view MITI with a combination of reverence and revulsion, believing that it had concocted an industrial policy cocktail that was fueling Japan’s success at the expense of American companies and interests. …By the end of the 1980s, fears about “Japan Inc.” had reached a fever pitch. …Just as Japan phobia was reaching its zenith in the early 1990s, Japan’s fortunes began taking a turn for the worse. The Japanese stock market crashed in 1990… Japan suffered a brutal economic downturn that became known as the Lost Decade, which really lasted almost two decades. …by the late 1990s many scholars came to view most Japanese industrial policy initiatives as a costly bust.

Amen.

I wrote that Japan was a “basket case” back in 2013. A bit of hyperbole, to be sure, but I was trying to drive home the point that the nation’s politicians have made some costly mistakes.

Not just industrial policy, but also tax increases, Keynesian spending, and other forms of intervention.

No wonder the country has gone downhill in terms of competitiveness.

But let’s not focus too much on Japan (which, despite all my grousing, still ranks #20 for economic liberty).

For purposes of today’s column, the main points are 1) that China is no threat to overtake the United States, and 2) that copying that nation’s industrial policy would be a mistake.

P.S. If China wants to pursue industrial policy and other forms of cronyism, that’s a mistake that mostly hurts the Chinese people. To the extent such policies are designed to subsidize exports (as Lighthizer argues), the best response is to utilize the World Trade Organization, not to copy China’s misguided interventionism.

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In the world of public finance, Ireland is best known for its 12.5 percent corporate tax rate.

That’s a very admirable policy, as will be momentarily discussed, but my favorite Irish policy was the four-year spending freeze in the late 1980s.

I discussed that fiscal reform in a video about 10 years ago, and I subsequently shared data on how spending restraint reduced the overall burden of government in Ireland and also lowered red ink.

It’s a great case study showing the beneficial impact of my Golden Rule.

Spending restraint also paved the way for better tax policy, and that’s a perfect excuse to discuss Ireland’s pro-growth corporate tax system. The Wall Street Journal opined last week about that successful supply-side experiment.

Democrats want a high global minimum tax that would end national tax competition and reduce the harm from their huge tax increase on U.S. business. But tax competition has been a boon to global growth and investment, as Ireland’s famous low-tax policy makes clear. Far from a “race to the bottom,” Ireland adopted policies that were ahead of their time and helped its economy grow from a backwater into a Celtic tiger. …in the late 1990s …an EU mandate led Dublin to…pioneer…a new strategy: Apply the same low tax rate to every business. Policy makers settled on 12.5%, which was a tax increase for some companies but a cut for others. This was a classic flat-tax reform… Ireland has reaped the benefits. Between 1986 and 2006, the economy grew to nearly 140% of the EU average from a mere two-thirds. Employment nearly doubled to two million, and the brain drain of the 1970s and 1980s reversed. …Oh and by the way: After Ireland slashed its rate and broadened the corporate-tax base, tax revenue soared. Except for the post-2008 recession and its aftermath, corporate-profits taxes in some years account for about 13% of total revenue and exceed 3% of GDP. That’s up from as low as 5% of revenue and less than 2% of GDP before the current tax rate was introduced.

That’s a lot of great information, particularly the last couple of sentences about how Ireland collected more revenue when the corporate tax rate was slashed.

Indeed, I discussed that remarkable development in Part II of my video series on the Laffer Curve (and it’s not just an Irish phenomenon since both the IMF and OECD have persuasive global data on lower corporate tax rates and revenue feedback).

Though higher revenue is not necessarily a good thing.

I complained back in 2011, for example, about how Irish politicians began to spend too much money once a booming economy began to generate a lot of tax revenue.

Which is a good argument for a Swiss-style spending cap in Ireland.

Let’s wrap up by considering some fiscal lessons from Ireland. Here are four things everyone should know.

  1. Spending restraint is a powerful tool to achieve smaller government..
  2. Lower tax rates on productive behavior lead to jobs and prosperity.
  3. Lower corporate tax rates can generate substantial revenue feedback.
  4. A spending cap is needed to maintain long-run fiscal discipline.

Good rules for Ireland. Good rules for any nation.

P.S. Ireland has definitely prospered in recent decades, but GNI data gives a more accurate picture than GDP data.

July 29, 2021 Addendum: This chart shows the growth Ireland has experienced since starting to adopt pro-market policies in the mid-1980s.

Even though the nation got hit hard by the financial crisis, it is still far ahead of where it was before reforms.

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As explained here, here, here, and here, I don’t like Biden’s class-warfare tax policy.

I’m especially concerned about his approach to business taxation.

  1. He wants to penalize American-based companies with the highest corporate tax rate among all developed nations.
  2. He wants to export that bad policy to the rest of the world with a “global minimum tax” – sort of an OPEC for politicians.
  3. He wants to handicap American multinational companies with taxes that don’t apply to foreign-based firms.

Regarding the third point, I wrote a column on that topic for the Orange County Register.

Here’s how I described Biden’s proposal.

Biden has proposed several tax increases that specifically target American firms that compete in world markets. Most notably, the Administration has proposed to double the tax rate on “global intangible low-tax income” (GILTI) from 10.5 percent to 21 percent. Translated from tax jargon to English, this is largely a tax on the income American firms earn overseas from intellectual property, most notably patents and royalties. Keep in mind, by the way, that this income already is subject to tax in the nations where it is earned. Most other nations do not handicap their companies with similar policies, so this means that American firms will face a big competitive disadvantage – especially when fighting for business in low-tax jurisdictions such as Hong Kong, Ireland, Singapore, Switzerland, and most of Eastern Europe.

And here are some additional reasons why it is very bad news.

…let’s simply look at the bottom-line impact of what Biden is proposing. The Tax Foundation estimates that, “The proposal would impose a 9.4 percent average surtax on the foreign activities of U.S. multinationals above and beyond the taxes levied by foreign governments” and “put U.S. multinationals at a competitive disadvantage relative to foreign corporations.” …a stagging $1.2 trillion tax increase on these companies. …This is not just bad for the competitiveness of American-based companies, it is also bad policy. Good fiscal systems, such as the flat tax, are based on “territorial taxation,” which is the common-sense notion that countries only tax economic activity inside their borders. …Many other nations follow this approach, which is why they will reap big benefits if Biden’s plan to hamstring American companies is approved. The key thing to understand is that the folks in Washington have the power to raise taxes on American companies competing abroad, but they don’t have the ability to raise taxes on the foreign companies in those overseas markets.

The Wall Street Journal‘s editorial page has been sounding the alarm on this issue as well.

Here are some excerpts from an editorial back in April.

…the tax on global intangible low-tax income, known as Gilti, which was created by the 2017 tax reform. …Gilti was flawed from the start…but Mr. Biden would make it worse in every respect. …The 2017 tax law set the statutory Gilti rate at…10.5%. Mr. Biden would increase that to 21%… the effective rate companies actually pay is higher. This is because Gilti embedded double taxation in the tax code. …Gilti allows a credit of only 80% of foreign taxes, with no carry-forwards or carry-backs. …Raising the statutory rate to 21% increases that effective rate to 26.25%. This new Biden effective minimum tax would be higher than the statutory tax rates in most countries even in Western Europe… The Biden plan would further increase the effective Gilti rate by expanding the tax base on which it’s paid. …A third Biden whammy would require companies to calculate tax bills on a country-by-country basis. …Requiring companies to calculate taxable profits and tax credits individually for every country in which a company operates will create a mountain of compliance costs for business and work for the Internal Revenue Service. …The Biden Administration and its progressive political masters have decided they don’t care about the global competitiveness of American companies.

Let’s close with some international comparisons.

According to the most-recent International Tax Competitiveness Index, the United States ranks #21 out of 35 nations, which is a mediocre score.

But the United States had been scoring near the bottom, year after year, before the Trump tax reform bumped America up to #21. So there was some progress.

If the Biden plan is approved, however, it is a near-certainly that the U.S. will be once again mired at the bottom. And this bad policy will lead to unfortunate results for American workers and American competitiveness.

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The state of New York is an economic disaster area.

  • New York is ranked #50 in the Economic Freedom of North America.
  • New York is ranked #48 in the State Business Tax Climate Index.
  • New York is ranked #50 in the Freedom in the 50 States.
  • New York is next-to-last in measures of inbound migration.
  • New York is ranked #50 in the State Soft Tyranny Index.

The good news is that New York’s politicians seem to be aware of these rankings and are taking steps to change policy.

The bad news is that they apparently want to be in last place in every index, so they’re looking at a giant tax increase.

The Wall Street Journal opined on the potential tax increase yesterday.

…lawmakers in Albany should be shouting welcome home. Instead they’re eyeing big new tax increases that would give the state’s temporary refugees to Florida—or wherever—one more reason to stay away for good. …Here are some of the proposals… Impose graduated rates on millionaires, up to 11.85%. …Since New York City has its own income tax, running to 3.88%, the combined rate would be…a bigger bite than even California’s notorious 13.3% top tax, and don’t forget Uncle Sam’s 37% share. …The squeeze is worse when you add the new taxes President Biden wants. A second factor: In 2017 the federal deduction for state and local taxes was capped at $10,000, so New Yorkers will now really feel the pinch. As E.J. McMahon of the Empire Center for Public Policy writes: “The financial incentive for high earners to move themselves and their businesses from New York to states with low or no income taxes has never—ever—been higher than it already is.”

The potential deal also would increase the state’s capital gains tax and the state’s death tax, adding two more reasons for entrepreneurs and investors to escape.

Here are some more details from a story in the New York Times by Luis Ferré-Sadurní and .

Gov. Andrew M. Cuomo and New York State legislative leaders were nearing a budget agreement on Monday that would make New York City’s millionaires pay the highest personal income taxes in the nation… Under the proposed new tax rate, the city’s top earners could pay between 13.5 percent to 14.8 percent in state and city taxes, when combined with New York City’s top income tax rate of 3.88 percent — more than the top marginal income tax rate of 13.3 percent in California… Raising taxes on the rich in New York has been a top policy priority of the Democratic Party’s left flank… The business community has warned that raising income taxes could prompt millionaires who have left the state during the pandemic and are working remotely to make their move permanent, damaging the state’s tax base. Currently, the top 2 percent of the state’s highest earners pay about half of the state’s income taxes. …The corporate franchise tax rate would also increase to 7.25 percent from 6.5 percent.

There are two things to keep in mind about this looming tax increase.

That second item is a big reason why so many taxpayers already have escaped New York and moved to states with better tax policy (most notably, Florida).

And even more will move if tax rates are increased, as expected.

Indeed, if the left’s dream agenda is adopted, I wouldn’t be surprised if every successful person left New York. In a column for the Wall Street Journal, Mark Kingdon warns about other tax hikes being considered, especially a wealth tax.

Legislators in Albany are considering two tax bills that could seriously damage the economic well-being and quality of life in New York for many years to come: a wealth tax and a stock transfer tax. …Should New York enact a 2% wealth tax, a wealthy New Yorker could wind up paying a 77% tax on short-term stock market profits. And that’s a conservative estimate: It assumes that stocks return 9% a year. If the return is 4.4% or less, the tax would be more than 100%. …65,000 families pay half of the city’s income taxes, and they won’t stay if the taxes become unreasonable… The trickle of wealthy émigrés out of New York has become a steady stream… It will be a flood if New York enacts a wealth tax with an associated tax on unrealized gains, which would lower, not raise, tax revenues, as those who leave take with them jobs and related services, such as legal and accounting. …The geese who have laid golden eggs for years see what is happening in Albany, and they’ll fly south to avoid being carved up.

The good news – at least relatively speaking – is that a wealth tax is highly unlikely.

But that a rather small silver lining on a very big dark cloud. The tax increases that will happen are more than enough to make the state even more hostile to private sector growth.

I’ll close with a few observations.

There are a few states that can get away with higher-than-average taxes because of special considerations. California, for instance, has climate and scenery. In the case of New York, it can get away with some bad policy because some people think of New York City as a one-of-a-kind place. But there’s a limit to how much those factors can be exploited, as both California and New York are now learning.

What politicians don’t realize (or don’t care about) is that people look at a range of factors when deciding where to live. This is especially true for successful entrepreneurs, investors, and business owners, who have both resources and knowledge to assess the costs and benefits of different locations. The problem for New York is that it looks bad on almost all policy metrics.

If the tax increases is enacted, expect to see a significant drop in taxable income as upper-income taxpayers either leave the state or figure out other ways of protecting their income. I don’t know if the state will be on the downward-sloping portion of the Laffer Curve, but it’s safe to assume that revenues over time will fall far short of projections. And it’s very safe to assume that the economic damage will easily offset any revenues that are collected.

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I have a four-part series (here, here, here, and here) about the conceptual downsides of Joe Biden’s class-warfare approach to tax policy.

Now it’s time to focus on the component parts of his agenda. Today’s column will review his plan for a big increase in the corporate tax rate. But since I’ve written about corporate tax rates over and over and over again, we’re going to approach this issue is a new way.

I’m going to share five visuals that (hopefully) make a compelling case why higher tax rates on companies would be a big mistake.

Visual #1

One thing every student should learn from an introductory economics class is that corporations don’t actually pay tax. Instead, businesses collect taxes that are actually borne by workers, consumers, and investors.

There’s lots of debate in the profession, of course, about which group bears what share of the tax. But there’s universal agreement that higher taxes lead to less investment, which leads to less productivity, which leads to lower pay.

Here’s a depiction of the relationship of corporate taxes and worker pay.

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Visual #2

The previous image explains the theory. Now it’s time for some evidence.

Here’s a look at how much faster wages have grown in countries with low corporate tax rates compared to nations with high corporate tax rates.

Biden, for reasons beyond my comprehension, wants America on the red line.

And his staff economists apparently don’t understand (or don’t care about) the link between investment and wages.

Visual #3

Here’s some more evidence.

And it comes from an unexpected source, the pro-tax Organization for Economic Cooperation and Development (OECD).

Even economists at that Paris-based bureaucracy have produced studies confirming that lower tax rates lead to higher disposable income for people.

Needless to say, if lower tax rates lead to more disposable income, then higher tax rates will lead to less disposable income.

We should have learned during the Obama years that ordinary people pay the price when politicians practice class warfare.

Visual #4

It’s very bad news that Biden wants a big increase in the corporate tax rate, but let’s not forget that the IRS double-taxes corporate income (i.e., that same income is subject to a second layer of tax when shareholders receive dividends).

The combined effect, as shown in this visual, is that the United States will have the dubious honor of having the highest effective corporate tax rate in the entire developed world.

Call me crazy, but I don’t think that’s a recipe for jobs and investment in America.

Visual #5

The economic damage of higher corporate tax rates means that there is less taxable income (i.e., we need to remember the Laffer Curve).

Will the damage be so extensive, causing taxable income to fall so much, that the IRS collects less revenue with a higher tax rate?

We’ll learn the answer to that question over time, but we have some very strong evidence from the IMF that lower corporate tax rates don’t lead to less revenue. As you can see from this chart, revenues held steady as tax rates plummeted over the past few decades.

In other words, lower rates led to enough additional economic activity that governments have collected just as much money with lower tax rates. But now Biden wants to run this experiment in reverse.

It’s possible the government will collect more revenue, of course, but only at a very high cost to workers, consumers, and shareholders.

By the way, there’s OECD data showing the exact same thing.

Those pictures probably tell you everything you need to know about this issue.

But let’s add some more analysis. The Wall Street Journal opined today on Biden’s class-warfare agenda. Here are some of the key passages from the editorial.

The bill for President Biden’s agenda is coming due, starting with Wednesday’s proposal for the largest corporate tax increase in decades. …Mr. Biden’s corporate increase amounts to the restoration of the Obama-era corporate tax burden, only much more so. …Mr. Biden wants to raise the corporate rate back up to 28%, but that’s the least of his proposals. He also wants to add penalties that would make inversions punitive, and he’d impose a global minimum corporate tax of 21%. This would shoot the tax burden on U.S. companies back toward the top of the developed world list. …The larger Biden goal is to end global tax competition… “The United States can lead the world to end the race to the bottom on corporate tax rates,” says the White House fact sheet. Mr. Biden says he wants “other countries to adopt strong minimum taxes on corporations” so nations like Ireland can no longer compete for capital with lower tax rates. This has long been the dream of the French and Germans, working through the Organization for Economic Cooperation and Development. …All of this is in addition to the looming Biden tax increases on dividends, capital gains and other investment income. …Mr. Biden’s corporate tax increases will hit the middle class hard—in the value of their 401(k)s, the size of their pay packets, and what they pay for goods and services.

Amen.

Let’s conclude with some gallows humor.

This meme shows how some of our leftist friends will celebrate if the tax increase is imposed.

P.S. Here’s a depressing final observation. Decades of experience have led me to conclude that many folks on the left support class-warfare tax policy because they are primarily motivated by a spiteful desire to punish success rather than provide upward mobility for the poor.

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