Feeds:
Posts
Comments

Posts Tagged ‘Flat Tax’

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Illinois Policy Institute has also analyzed the plan.

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

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

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

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

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

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

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

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

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

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

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

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

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

Yet that tax hike won’t work.

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

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

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

Read Full Post »

Normally when I write about Georgia, it’s to wax poetic about the Glorious Bulldogs. But I’m currently in Tbilisi, the capital of the nation of Georgia, which is wedged between Russia, Turkey, Armenia, and Azerbaijan.

So allow me to take this opportunity to highlight the benefits of sweeping pro-market reform. Georgia is ranked #8 according to Economic Freedom of the World and it doesn’t get nearly enough attention considering that lofty score.

This chart from EFW shows Georgia’s score since the reform wave started in 2004.

The fact that Georgia’s score jumped by one full point over 11 years is impressive, but it’s even more impressive to see how the country’s relative ranking has increased from #56 to #8.

Here are the numbers for 2004 and 2015. As you can see, there were particularly dramatic improvements in trade, regulation, and quality of governance (legal system and property rights).

My friend from Georgia, Gia Jandieri, said one of the worst legacies of Soviet rule was corruption. He and his colleagues at the local pro-market think tank explained to policymakers that reducing the size and scope of government was a good strategy to address this problem.

And they were right.

Georgia was ranked near the bottom by Transparency International in 2004, scoring just a 2 (on a 1-10 scale) and tied for #133 out of 146 nations. Now Georgia’s score has jumped to 56 (on a 1-100 scale), which puts it #46 out of 180 nations.

And a big reason why corruption has plummeted is that you no longer need all sorts of permits when setting up a business. Indeed, Georgia ranks #9 in the World Bank’s Ease of Doing Business.

For what it’s worth, Georgia is only three spots behind the United States (the previous year, they were eight spots behind America).

And I definitely shouldn’t forget to mention that Georgia is part of the global flat tax revolution.

So what does all this mean? Well, according to both the IMF data and the Maddison database, per-capita GDP in Georgia has more than doubled since pro-market reforms were enacted.

In other words, ordinary people have been the winners, thanks to a shift to capitalism.

P.S. Since I just wrote about my visit to the anti-Nazi/anti-Marxist House of Terror Museum in Budapest, I should mention that the “lowlight” of my visit to Georgia was seeing Stalin’s boyhood home earlier today. I realize “thumbs down” is a grossly inadequate way of expressing disapproval for a tyrant who butchered millions of people, but I didn’t want to get arrested for urinating in public.

I wonder if Hitler’s boyhood home still exists? I could visit and then say I covered both ends of the socialist spectrum.

Read Full Post »

The best policy for a state (assuming it wants growth and competitiveness) is to have no income tax. Along with a modest burden of government spending, of course.

The next-best approach is for a state to have a flat tax. If nothing else, a flat tax inevitably will have a reasonable rate since it’s politically difficult to pillage everyone (though Illinois is trying very hard to be an exception to that rule).

Moreover, a flat tax also sends a signal that politicians in the state don’t (or can’t) play the divide-and-conquer game of periodically raising taxes on different income groups.

Today, we have some good news. Kentucky has ditched its so-called progressive income tax and joined the flat tax club. The Tax Foundation has the details (including the changes in the state’s ranking).

…legislators in Kentucky overrode Governor Matt Bevin’s veto to pass HB 366, a tax reform package, in the last few days of the session. Ultimately, HB 366…increases Kentucky’s ranking on the State Business Tax Climate Index from 33rd to 18th. …Here’s how HB 366 changes Kentucky’s tax code: Replacing the current six-bracket individual income tax, which has a top rate of 6.0 percent, with a 5 percent single rate individual income tax; …Replacing the current three-bracket corporate income tax, with its top rate of 6.0 percent, with a 5 percent flat rate; …Expanding the sales tax base to include select services…; and Raising the cigarette tax from 60 cents to $1.10 per pack. …the changes in this tax reform package dramatically improve the state’s tax climate. By broadening bases while lowering rates, starting to correct the inequities in the sales tax base, and taking steps to make the state more friendly to investment, policymakers in the state took a responsible approach to comprehensive tax reform.

Kentucky will have a better tax system, but there is a dark lining to the silver cloud of reform.

The legislation is a net tax increase, meaning state politicians will have more money to spend (which is a variable that is not included in the Tax Foundation’s Business Tax Climate Index).

As a big fan of the no-tax-hike pledge, that makes me sympathetic to some of those who opposed the legislation.

But I confess that I’m nonetheless happy that there’s now another state with a flat tax.

Which motivated me to create a five-column ranking for states with regards to the issue of personal income tax.

The best states are in the first column, since they don’t impose any income tax. The second-best option is a flat tax, and then I have three options for so-called progressive tax regimes. A “low-rate” state means the top bracket is less than 5 percent and a “class-warfare” state means the top bracket is higher than 8 percent (with other states in a middle group).

Kentucky has moved from the fourth column to the second column, which is a nice step. Very similar to what North Carolina did a few years ago.

Kansas, by contrast, recently went from the fourth column to the third column and then back to the fourth column.

And I may have to create a special sixth column for states such as California.

Read Full Post »

I strongly applauded the tax reform plan that was enacted in December, especially the lower corporate tax rate and the limit on the deduction for state and local taxes.

But I’m not satisfied. Our long-run goal should be fundamental tax reform. And that means replacing the current system with a simple and fair flat tax.

And the recent tax plan only took a small step in that direction. How small? Well, the Tax Foundation just calculated that it only improved the United States from #30 to #25 in their International Tax Competitiveness Ranking. In other words, we have a long way to go before we catch up to Estonia.

 

It’s possible, of course, to apply different weights and come up with a different list. I think the Tax Foundation’s numbers could be improved, for instance, by including a measure of the aggregate tax burden. And that presumably would boost the U.S. score.

But the fact would remain that the U.S. score would be depressingly low. In other words, the internal revenue code is still a self-imposed wound and huge improvements are still necessary.

That’s why we need another round of tax reform, based on the three core principles of good tax policy.

  1. Lower tax rates
  2. Less double taxation
  3. Fewer loopholes

But how is tax reform possible in a fiscal environment of big government and rising deficits?

This is a challenge. In an ideal world, there would be accompanying budget reforms to save money, thus creating leeway for tax reform to be a net tax cut.

But even in the current fiscal environment, tax reform is possible if policy makers finance pro-growth reforms by closing undesirable loopholes.

Indeed, that’s basically what happened in the recent tax plan. The lower corporate rate was financed by restricting the state and local tax deduction and a few other changes. The budget rules did allow for a modest short-run tax cut, but the overall package was revenue neutral in the long run (i.e., starting in 2027).

It’s now time to repeat this exercise.

The Congressional Budget Office periodically issues a report on Budget Options, which lists all sort of spending reforms and tax increases, along with numbers showing what those changes would mean to the budget over the next 10 years.

I’ve never been a huge fan of this report because it is too limited on the spending side. You won’t find fleshed-out options to shut down departments, for instance, which is unfortunate given the target-rich environment (including TransportationHousing and Urban DevelopmentEducationEnergy, and Agriculture).

And on the tax side, it has a lengthy list of tax hikes, generally presented as ways to finance an ever-expanding burden of government spending. The list must be akin to porn for statists like Bernie Sanders.

It includes new taxes.

And it includes increases in existing taxes.

But the CBO report also includes some tax preferences that could be used to finance good tax reforms.

Here are four provisions of the tax code that should be the “pay-fors” in a new tax reform plan.

We’ll start with two that are described in the CBO document.

Further reductions in itemized deductions – The limit on the state and local tax deduction should be the first step. The entire deduction could be repealed as part of a second wave of tax reform. And the same is true for the home mortgage interest deduction and the charitable contributions deduction.

Green-energy pork – The House version of tax reform gutted many of the corrupt tax preferences for green energy. Unfortunately, those changes were not included in the final bill. But the silver lining to that bad decision is that those provisions can be used to finance good reforms in a new bill.

Surprisingly, the CBO report overlooks or only gives cursory treatment to a couple of major tax preferences that each could finance $1 trillion or more of pro-growth changes over the next 10 years.

Municipal bond interest – Under current law, there is no federal tax on the interest paid to owners of bonds issued by state and local governments. This “muni-bond” loophole is very bad tax policy since it creates an incentive that diverts capital from private business investment to subsidizing the profligacy of cities like Chicago and states like California.

Healthcare exclusion – Current law also allows a giant tax break for fringe benefits. When companies purchase health insurance plans for employees, that compensation escapes both payroll taxes and income taxes. Repealing – or at least capping – this exclusion could raise a lot of money for pro-growth reforms (and it would be good healthcare policy as well).

What’s potentially interesting about the four loopholes listed above is that they all disproportionately benefit rich people. This means that if they are curtailed or repealed and the money as part of tax reform, the left won’t be able to argue that upper-income taxpayers are getting unfair benefits.

Actually, they’ll probably still make their usual class-warfare arguments, but they will be laughably wrong.

The bottom line is that we should have smaller government and less taxation. But even if that’s not immediately possible, we can at least figure out revenue-neutral reforms that will produce a tax system that does less damage to growth, jobs, and competitiveness.

Read Full Post »

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

Bad government policy deserves much of the blame.

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

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

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

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

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

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

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

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

Even the IMF thinks pro-market reforms are needed.

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

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

Bloomberg has some of the details.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Ugh. Basic income is a very troubling idea.

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

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

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

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

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

Read Full Post »

Earlier this year, I pointed out that Trump and Republicans could learn a valuable lesson from Maine Governor Paul LePage on how to win a government shutdown.

Today, let’s look at a lesson from North Carolina on how to design and implement pro-growth tax policy.

In today’s Wall Street Journal, Senator Thom Tillis from the Tarheel State explains what happened when he helped enact a flat tax as Speaker of the State House.

In 2013, when I was speaker of the state House, North Carolina passed a serious tax-reform package. It was based on three simple principles: simplify the tax code, lower rates, and broaden the base. We replaced the progressive rate schedule for the personal income tax with a flat rate of 5.499%. That was a tax-rate cut for everyone, since the lowest bracket previously was 6%. We also increased the standard deduction for all tax filers and repealed the death tax. We lowered the 6.9% corporate income tax to 6% in 2014 and 5% in 2015. …North Carolina’s corporate tax fell to 3% in 2017 and is on track for 2.5% in 2019. We paid for this tax relief by expanding the tax base, closing loopholes, paring down spending, reducing the cost of entitlement programs, and eliminating “refundable” earned-income tax credits for people who pay no taxes.

Wow, good tax policy enabled by spending restraint. Exactly what I’ve been recommending for Washington.

Have these reforms generated good results?  The Senator says yes.

More than 350,000 jobs have been created, and the unemployment rate has been cut nearly in half. The state’s economy has jumped from one of the slowest growing in the country to one of the fastest growing.

What about tax revenue? Has the state government been starved of revenue?

Nope.

…a well-mobilized opposition on the left stoked fears that tax reform would cause shrinking state revenues and require massive budget cuts. This argument has been proved wrong. State revenue has increased each year since tax reform was enacted, and budget surpluses of more than $400 million are the new norm. North Carolina lawmakers have wisely used these surpluses to cut tax rates even further for families and businesses.

Senator Tillis didn’t have specific details on tax collections in his column. I got suspicious that he might be hiding some unflattering numbers, so I went to the Census Bureau’s database on state government finances. But it turns out the Senator is guilty of underselling his state’s reform. Tax revenue has actually grown faster in the Tarheel State, compared the average of all other states (many of which have imposed big tax hikes).

Another example of the Laffer Curve in action.

And here’s a chart from North Carolina’s Office of State Budget and Management. As you can see, revenues are rising rather than falling.

By the way, I’m guessing that the small drop in 2014 and the big increase in 2015 were caused by taxpayers delaying income to take advantage of the new, friendlier tax system. We saw the same thing in the early 1980s when some taxpayer deferred income because of the multi-year phase-in of the Reagan tax cuts.

But I’m digressing. Let’s get back to North Carolina.

Here’s what the Tax Foundation wrote earlier this year.

After the most dramatic improvement in the Index’s history—from 41st to 11th in one year—North Carolina has continued to improve its tax structure, and now imposes the lowest-rate corporate income tax in the country at 4 percent, down from 5 percent the previous year. This rate cut improves the state from 6th to 4th on the corporate income tax component, the second-best ranking (after Utah) for any state that imposes a major corporate tax. (Six states forego corporate income taxes, but four of them impose economically distortive gross receipts taxes in their stead.) An individual income tax reduction, from 5.75 to 5.499 percent, is scheduled for 2017. At 11th overall, North Carolina trails only Indiana and Utah among states which do not forego any of the major tax types.

And in a column for Forbes, Patrick Gleason was even more effusive.

…the Republican-controlled North Carolina legislature enacted a new budget today that cuts the state’s personal and corporate income tax rates. Under this new budget, the state’s flat personal income tax rate will drop from 5.499 to 5.25% in January of 2019, and the corporate tax rate will fall from 3% to 2.5%, which represents a 16% reduction in one of the most harmful forms of taxation. …This new budget, which received bipartisan support from a three-fifths super-majority of state lawmakers, builds upon the Tar Heel State’s impressive record of pro-growth, rate-reducing tax reform. …It’s remarkable how much progress North Carolina has made in improving its business tax climate in recent years, going from having one of the worst businesses tax climates in the country (ranked 44th), to one of the best today (now 11th best according to the non-partisan Tax Foundation).

Most importantly, state lawmakers put the brakes on spending, thus making the tax reforms more political and economically durable and successful.

Since they began cutting taxes in 2013, North Carolina legislators have kept annual increases in state spending below the rate of population growth and inflation. As a result, at the same time North Carolina taxpayers have been allowed to keep billions more of their hard-earned income, the state has experienced repeated budget surpluses. As they did in 2015, North Carolina legislators are once again returning surplus dollars back to taxpayers with the personal and corporate income tax rate cuts included in the state’s new budget.

Last but not least, I can’t resist sharing this 2016 editorial from the Charlotte Observer. If nothing else, the headline is an amusing reminder that journalists have a hard time understanding that higher tax rates don’t necessarily mean more revenue and that lower tax rates don’t automatically lead to less revenue.

A curious trend you might have noticed of late: North Carolina’s leaders keep cutting taxes, yet the state keeps taking in more money. We saw it happen last year, when the state found itself with a $400 million surplus, despite big cuts in personal and corporate tax rates. …Now comes word that in the first six months of the 2016 budget year (July to December), the state has taken in $588 million more than it did in the same period the previous year. …the overall surge in tax receipts certainly shouldn’t go unnoticed, especially since most of the increased collections for the 2016 cycle so far come from higher individual income tax receipts. They’re up $489 million, 10 percent above the same period of the prior year.

Though the opinion writers in Charlotte shouldn’t feel too bad. Their counterparts at the Washington Post and Wall Street Journal have made the same mistake. As did a Connecticut TV station.

P.S. My leftist friends doubtlessly will cite Kansas as a counter-example to North Carolina. According the narrative, tax cuts failed and were repealed by a Republican legislature. I did a thorough analysis of what happened in the Sunflower State earlier this year. I pointed out that tax cuts are hard to sustain without some degree of spending restraint, but also noted that the net effect of Brownback’s tenure is a permanent reduction in the tax burden. If that’s a win for the left, I hope for similar losses in Washington. It’s also worth comparing income growth in Kansas, California, and Texas if you want to figure out what tax policies are good for ordinary people.

Read Full Post »

While I realize there’s zero hope of ripping up America’s awful tax code and getting a simple and fair flat tax, I’m nonetheless hopeful that there will be some meaningful incremental changes as part of the current effort to achieve some sort of tax reform.

A package that lowers the corporate rate, replaces depreciation with expensing, and ends the death tax would be very good for growth, and those good reforms could be at least partially financed by eliminating the state and local tax deduction and curtailing business interest deductions so that debt and equity are on a level playing field.

All that sounds good, and a package like this should be feasible since Republicans control both Congress and the White House (especially now that the BAT is off the table), but I warn in this interview that there are lots of big obstacles that could cause tax reform to become a disaster akin to the Obamacare repeal effort.

Here’s my list of conflicts that need to be solved in order to get some sort of plan through Congress and on to the President’s desk.

  • Carried interest – Trump wants to impose a higher capital gains tax on a specific type of investment, but this irks many congressional GOPers who have long understood that any capital gains tax is a form of double taxation and should be abolished. The issue apparently has some symbolic importance to the President and it could become a major stumbling block if he digs in his heels.
  • Tax cut or revenue neutrality – Budget rules basically require that tax cuts expire after 10 years. To avoid this outcome (which would undermine the pro-growth impact of any reforms), many lawmakers want a revenue-neutral package that could be permanent. But that means coming up with tax increases to offset tax cuts. That’s okay if undesirable tax preferences are being eliminated to produce more revenue, but defenders of those loopholes will then lobby against the plan.
  • Big business vs small business – Everyone agrees that America’s high corporate tax rate is bad news for competitiveness and should be reduced. The vast majority of small businesses, however, pay taxes through “Schedule C” of the individual income tax, so they want lower personal rates to match lower corporate rates. That’s a good idea, of course, but would have major revenue implications and complicate the effort to achieve revenue neutrality.
  • Budget balance – Republicans have long claimed that a major goal is balancing the budget within 10 years. That’s certainly achievable with a modest amount of spending restraint. And it’s even relatively simple to have a big tax cut and still achieve balance in 10 years with a bit of extra spending discipline. That’s the good news. The bad news is that there’s very little appetite for spending restraint in the White House or Capitol Hill, and this may hinder passage of a tax plan.
  • Middle class tax relief – The main focus of the tax plan is boosting growth and competitiveness by reducing the burden on businesses and investment. That’s laudable, but critics will say “the rich” will get most of the tax relief. And even though the rich already pay most of the taxes and even though the rest of us will benefit from faster growth, Republicans are sensitive to that line of attack. So they will want to include some sort of provision designed for the middle class, but that will have major revenue implications and complicate the effort to achieve revenue neutrality.

There’s another complicating factor. At the risk of understatement, President Trump generates controversy. And this means he doesn’t have much power to use the bully pulpit.

Though I point out in this interview that this doesn’t necessarily cripple tax reform since the President’s most important role is to simply sign the legislation.

Before the 2016 election, I was somewhat optimistic about tax reform.

A few months ago, I was very pessimistic.

I now think something will happen, if for no other reason than Republicans desperately want to achieve something after botching Obamacare repeal.

Read Full Post »

Older Posts »

%d bloggers like this: