Posts Tagged ‘Higher Taxes’

In early 2013, a reader asked me the best place to go if America suffered a Greek-style economic collapse.

I suggested Australia might be the best option, even if I would be too stubborn to take my own advice.

Perhaps because of an irrational form of patriotism, I’m fairly certain that I will always live in the United States and I will be fighting to preserve (or restore) liberty until my last breath.

But while I intend to stay in America, there is one thing that would make me very pessimistic about my country’s future.

Simply stated, if politicians ever manage to impose a value-added tax on the United States, the statists will have won a giant victory and it will be much harder to restrain big government.

But you don’t have to believe me. Folks on the left openly admit that a VAT is necessary to make America more like Europe.

Check out these excerpts from an article in Foreign Affairs by Professor Lane Kenworthy of the University of Arizona. He explicitly wants bigger government and recognizes the VAT is the only way to finance a European-sized welfare state.

…modern social democracy means a commitment to the extensive use of government…U.S. policymakers will recognize the benefits of a larger government role… Americans will need to pay more in taxes.The first and most important step would be to introduce a national consumption tax in the form of a value-added tax (VAT)… Washington…cannot realistically squeeze an additional ten percent of GDP in tax revenues solely from those at the top.

Pay special attention to the final sentence in that excerpt. Kenworthy is an honest statist. He knows that the Laffer Curve is real and that taxing the rich won’t generate the amount of revenue he wants.

That’s why the VAT is the key to financing bigger government. Heck, even the International Monetary Fund inadvertently provided very powerful evidence that a VAT is the recipe for bigger government.

Want more proof? Well, check out the recent New York Times column by John Harwood (the same guy who was criticized for being a biased moderator of CNBC’s GOP debate).

He starts by pointing out that Senators Cruz and Paul are proposing European-type value-added taxes.

Senator Ted Cruz of Texas and Senator Rand Paul of Kentucky do it most explicitly by proposing variations on “value-added tax” systems used by European countries.

But here’s the part that should grab your attention. He cites some folks on the left who admit that there’s no way to finance big expansions of the welfare state without a VAT.

Democratic economists…say…income trends…complicate their ability to raise enough revenue to finance government programs without increasing burdens on the middle class as well as the affluent. “We’ve come close to maxing out the amount of progressivity we can get from the existing tax system,” said Peter Orszag, President Obama’s first budget director. …as looming baby boomer retirements promise to swell Social Security and Medicare expenses beyond the current tax system’s ability to finance them, is in new thinking that expands the scope of possible solutions. “There’s no way we can keep the promises we’ve made to senior citizens and others without a new revenue source,” said Mr. Burman of the Tax Policy Center.

So if the statists are salivating for a VAT to make government bigger, why on earth are some otherwise sensible people pushing for this pernicious new tax?!?

Some journalists have asked this same question. Here are some passages from a Slate report.

…conservative policy thinkers…worry that it might accidentally set the stage for much, much higher taxes in the future should Democrats ever take back control of Washington. …Cruz would impose a new, roughly 19 percent “business flat tax.” This is his campaign’s creative rebranding of what the rest of the world typically calls a “value-added tax,” or VAT. And…it scares the living hell out of some conservatives.

The article notes that Cruz and Paul have decent intentions.

…for Cruz—and for Rand Paul, who…would similarly like to combine a VAT and flat income tax—the main appeal is that it could theoretically raise a lot of money to finance tax cuts elsewhere.

But good intentions don’t necessarily mean good results.

And just like you don’t give matches to a child, you don’t give a giant new tax to Washington.

How much could Cruz’s proposal net the government? The conservative-leaning Tax Foundation thinks $25.4 trillion over 10 years. … in the hands of a Democratic president, it could become a hidden money-making machine for the government. Passing a national sales tax would be hard, they say. But once it’s in place, slowly ratcheting it up to pay for additional spending would be relatively easy. “To be blunt, unless there’s a magic guarantee that principled conservatives such as Rand Paul and Ted Cruz (and their philosophical clones) would always hold the presidency, a VAT would be a very risky gamble,” Daniel Mitchell, a senior fellow at the libertarian Cato Institute, wrote recently. …The ironic thing here is that Ted Cruz, anti-tax preacher, may be doing his best to craft a tax plan that leaves Americans in the dark about the actual cost of running their government. Simultaneously, he might be making political room for Democrats to start talking about a VAT tax of their own.

By the way, this isn’t the first time that a Republican has broached the idea of a VAT.

One of the worst Presidents in American history, Richard Nixon, wanted a VAT to finance bigger government. Here are some passages from an article in the 1972 archives of Congressional Quarterly.

President Nixon…asked both the Advisory Commission on Intergovernmental Relations and his Commission on School Finance, a group he appointed in 1970, to study and report on a proposal for a value added tax. …The tax had the advantages that…it yielded relatively large amounts of revenue. …Two major reasons were apparent for the Nixon administration’s consideration of a value added tax. The first was the condition of federal finances. …Projected costs of existing and proposed programs were expected to absorb all revenues from existing taxes and other sources. This meant that no new programs could be inaugurated without new taxes to finance them or reduction of existing programs to release funds. Though initially pledged for education, revenues from an expanding value added tax might provide future funding for other programs.

My colleague, Chris Edwards, deserves credit for unearthing this disturbing bit of fiscal history. Here’s some of what he wrote about Nixon’s sinister effort.

Richard Nixon appears to have been the first U.S. leader to push for a VAT, which is not surprising given that he was perhaps the most statist GOP president of the 20th century. …Thankfully, the Nixon proposal went nowhere in Congress, the ACIR came out against it, and it was dropped. America’s economy dodged a bullet. If Nixon had been successful, the rate would probably have soared over time from an initial 3 percent to maybe 20 percent today—just as rates in Europe have risen—and that would have fueled growth in new and expanded entitlement programs. 

Amen. Chris hits the nail on the head.

It doesn’t really matter what the initial rate is. The VAT is an easy tax to raise because it’s so non-transparent.

Moreover adopting a VAT is a sure-fire way of enabling higher income tax rates because the statists will say it’s “unfair” to raise the VAT burden on lower-income and middle-income taxpayers unless there’s a concomitant increase in the income tax burden on the evil rich.

Which is exactly what happens in Europe. Look at how recent VAT hikes have been paired with higher income tax rates.

But here’s the chart that should scare any sensible person.

The bottom line is that the VAT is the Ebola Virus of big government.

P.S. You can enjoy some good VAT cartoons by clicking here, here, and here.

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Whatever happened to Elizabeth Warren?

A couple of years ago, she was the pin-up girl for the crazy left thanks to fatuous statements about “you didn’t build that.”

But now she’s faded into the background and other politicians are getting more attention for their absurd statements (yes, I’m thinking of Hillary and Bernie).

So what accounts for Warren’s decline? Is that because even statists are embarrassed by her use of fake claims of Indian ancestry to climb the career ladder? Is it because the self-styled fighter against corporate fat cats revealed herself to be a hypocritical fraud after choosing to support the corrupt dispenser of subsidies that is otherwise known as the Export-Import Bank?

I don’t know the answer to those questions, but I suspect Senator Warren wants to get back in the spotlight. After all, that’s the only logical explanation for her recent upside-down comments about corporate taxation.

And “upside-down” doesn’t even begin to capture the absurdity of what she said, which revealed she has no clue that there’s not a linear relationship between tax rates and tax revenue. Here are some excerpts from a remarkable report in The Hill.

Sen. Elizabeth Warren (D-Mass.) says the big issue with the U.S. corporate tax code is not that taxes are too high — it’s that the revenue generated from the taxes is too low. …“Only one problem with the over-taxation story: It’s not true,” Warren said at the National Press Club on Wednesday. …Warren laid out…principles for corporate tax reform: Permanently increase the share of long-term revenues paid by large corporations.


When I read this story, something seemed very familiar.

And then I realized that I read a very similar statement a few years ago in the Washington Post. Writing about fiscal woes in Detroit, a reporter apparently thought it was a mystery that “tax collections are down 20 percent and income tax collections are down by more than a third…despite some of the highest tax rates in the state.”

What Senator Warren and some journalists fail to understand is that there are cases when tax revenues are very low because tax rates are high.

That’s clearly the case with the corporate tax. The United States has the second-highest corporate tax rate in the entire world.

And to add icing on this distasteful cake, we also have arguably the world’s worst worldwide tax system, combined with one of the world’s worst corporate tax structures.

Which makes this statement from Senator Warren particularly laughable.

“Our tax code should protect jobs and investments at home, period,” she said.

I’m almost speechless. Our tax treatment of business already is punitive and Warren wants to make it even worse (who does she think she is, an OECD bureaucrat?), yet she has the gall to pontificate about promoting jobs and investment in the United States?!?

Sort of like murdering your parents and then asking a judge for mercy because you’re an orphan.

In any event, here’s a video that Senator Warren should watch if she actually wants to understand corporate taxation (though I won’t hold my breath).

P.S. Switching to a completely different topic, I’m the first to admit that economists are easy to mock, especially the ones who think they know enough to fine tune the economy.

But it turns out that we’re not total dorks. If a report from the New York Times is accurate (a risky assumption, to be sure), we actually have pretty good social skills.

But I don’t think this means I suddenly have the ability to go into a bar and successfully chat up some ladies (which would be an untenably risky proposition, anyhow, because the PotL has a fiery temper).

What this actually means is that we economists supposedly have decent verbal and communications skills.

P.P.S. Let’s return to the original topic. I don’t claim to be overly clever or creative when it comes to economic humor, but I think I modified this famous sarcastic statement in a very accurate fashion.

Not as good as my Uncle Fester/sequestration cartoon, but it does capture Sen. Warren’s mindset.

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Sometimes the best way to help the cause of freedom is to stop a bad idea. And that’s why I’m vociferously opposed to a value-added tax.

Here’s what I wrote today for National Review. I start by explaining that it’s a bad idea to give Washington a big new tax to finance a larger burden of government spending.

It’s especially good news that the United States has resisted the value-added tax (VAT), which is tempting because of its revenue-generating capacity. …Hostility to the VAT is justified by the European experience. Back in the mid 1960s, the burden of government spending in Europe was only slightly above the American level. But as VATs were implemented, the welfare state expanded, and now government consumes a much higher share of economic output on the other side of the Atlantic.

European politicians embraced the VAT because it’s the only way to finance leviathan-sized government.

…there’s a limit to how much revenue can be generated by an income tax. As honest leftists will admit (at least off the record), the Laffer Curve is real. …Indeed, income-tax revenues (personal and corporate) average less than 12 percent of GDP in OECD nations. …In other words, the only effective way to finance European-sized government is to have European-style taxation. Which is exactly why the Left desperately wants a VAT.

I then express dismay that a couple of very attractive candidates have inserted this pernicious tax in their otherwise good proposals.

…some conservatives think the VAT is an acceptable risk if it’s part of a bigger tax-reform plan. Senators Rand Paul and Ted Cruz, for instance, both have proposals that would lower personal-income-tax rates, reduce double taxation of income that is saved and invested, and eliminate corporate income taxes and payroll taxes. …Paul and Cruz would offset some of the revenue loss by imposing VATs.

The two Senators actually have good plans, at least on paper. My concern is about what happens once either one of them left the White House.

…something that looks pretty on a blackboard might not be so appealing once you add the sordid reality of politics to the equation. To be blunt, unless there’s a magic guarantee that principled conservatives such as Rand Paul and Ted Cruz (and their philosophical clones) would always hold the presidency, a VAT would be a very risky gamble. …What happens in the future when a statist wins the White House? …Raising the VAT rate would be a comparatively simple option for our hypothetical left-wing president. And because it has such a broad tax base (all “value added” in the economy, including wages paid to workers), even small rate increase would generate a lot of revenue to finance bigger government. …And I’m sure this future statist president also would boost tax rates on the “rich” and also impose higher levels of double taxation.

Incidentally, any good tax reform plan can be distorted by bad politicians in the future. But the downside risk of a VAT is monumentally greater because of its revenue-generating capacity.

…there’s a downside risk to other types of tax reform. But it’s a matter of magnitude. If we did something like Ben Carson’s flat tax or the more incremental tax-reform plans of Jeb Bush and Marco Rubio, it’s obviously possible for a future leftist to undo those reforms, in which case we could degenerate back to the current system. That’s obviously bad news, but it’s not nearly as bad as what might happen with the Cruz and Paul plans. When the wrong politicians got back in charge, they’d restore all the bad features of the income tax and also use the VAT as a money machine to expand the welfare state. And when the dust settles, we’d be France.

I realize that some people won’t believe what I just wrote. Maybe you lean left and you’re used to dismissing my arguments. Or maybe you’re a huge fan of Rand Paul or Ted Cruz and you think I’m somehow trying to knock them down because of some sinister agenda.

So maybe you’ll be more persuaded when a left-leaning columnist reaches the same conclusion. Here is some of what Catherine Rampell just wrote for the Washington Post.

Ted Cruz and Rand Paul have a really compelling tax proposal. …an interesting, serious and provocative idea: a value-added tax. …The VAT is also one of the first proposals out of the International Monetary Fund’s bag of tricks for countries that need to raise money. …it’s good these candidates have given voice to The Tax That Dare Not Speak Its Name. There’s only so much revenue a country can wring out of an income tax system, particularly one as Swiss-cheesed as ours. A well-designed VAT could help get our fiscal house in order.

This must be some sign of harmonic convergence. We both recognize that Paul and Cruz are proposing a VAT, and we both understand that there’s a limit to how much money can be raised from an income tax, and we both concur that a VAT will give politicians a way of dramatically boosting the tax burden.

But we don’t really agree. Because I’m horrified about the prospect of a new tax whereas Ms. Rampell thinks the VAT would be good because she favors bigger government.

By the way, Catherine confirms one of the fears I expressed in my article. The VAT would actually lead politicians to make the income tax even worse because of their fixation on distributional issues.

The main downside of a VAT is that it hurts the poor more than the rich, because the poor spend a larger share of their incomes on basic necessities. There’s an easy way to counteract that problem, though: Just make the income tax system more progressive.

By the way, while she’s right that the VAT is a money machine for big government, I can’t resist pointing out a mistake in her column.

Unlike an income tax, it doesn’t discourage saving or working

No, that’s not true. One of the good features of a VAT (assuming all other taxes could be abolished) is that it would generate revenue in a way that minimizes the negative impact on incentives.

But it would still drive a wedge between pre-tax income and post-tax consumption.

This is also the case for the flat tax. A “good” tax system is only “pro growth” in the sense that it does less damage than the current system.

Just in case you haven’t reached the point of VAT exhaustion, here’s my video explaining why the VAT is such a bad idea.

But if you don’t want to spend a few minutes watching a video, just keep this image in mind anytime sometime tells you we should roll the dice and adopt a VAT.

P.S. None of this suggests that Rand Paul and Ted Cruz should be rejected by voters. All candidates have some warts. I like the Jeb Bush tax plan, but I’m worried by his failure to take the no-tax pledge. I like the Marco Rubio tax plan, but I’m not a big fan of his big tax credits for kids. And I could come up with similar complaints about other candidates.

All I’m saying is that Paul and Cruz have one part of their agenda that should be jettisoned.

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I’m a big fan of the flat tax because a low tax rate and no double taxation will result in faster growth and more upward mobility.

I also like the flat tax because it gets rid of all deductions, credits, exemptions, preferences, exclusions, and other distortions. And a loophole-free tax code would be a great way of reducing Washington corruption and promoting simplicity.

Moreover, keep in mind that eliminating all favors from the internal revenue code also would be good for growth because people then will make decisions on the basis of what makes economic sense rather than because of peculiar quirks of the tax system.

Sounds great, right?

Well, it’s not quite as simple as it sounds because there’s a debate about how to measure loopholes. Sensible people want a tax code that’s neutral, which means the government doesn’t tilt the playing field. And one of the main implications of this benchmark is that the tax code shouldn’t create a bias against income that is saved and invested. In the world of public finance, this means they favor a neutral “consumption-base” tax system, but that’s simply another way of saying they want income taxed only one time.

Folks on the left, however, are advocates of a “Haig-Simons” tax system, which means they believe that there should be double taxation of all income that is saved and invested. You see this approach from the Joint Committee on Taxation. You see it from the Government Accountability Office. You see it from the Congressional Budget Office. Heck, you even sometimes see Republicans mistakenly use this benchmark.

Let’s look at three examples to see what this means in practice.

Example #1: Because they don’t want a bias that encourages people to spend their income today rather than in the future, advocates of a neutral tax code want to get rid of all double taxation of savings (Canada is moving in that direction). So that means they like IRAs and 401(k)s since those vehicles at least allow some savings to be protected from double taxation.

Proponents of Haig-Simons taxation, by contrast, think that IRAs and 401(k)s are loopholes.

Example #2: Another controversy revolves around the tax treatment of business investment. Advocates of neutral taxation believe in expensing, which is simply the common-sense view that investment expenditures should be recognized when they actually occur.

Proponents of Haig-Simons, however, think that investment expenditures should be “depreciated,” which means companies are forced to pretend that most of their investment costs which are incurred today actually take place in future years.

Example #3: Supporters of neutral taxation think capital gains taxes should be abolished because there already is tax on the income generated by assets such as stocks and bonds. So the “preferential rates” in the current system aren’t a loophole, but instead should be viewed as the partial mitigation of a penalty.

Proponents of Haig-Simons, not surprisingly, have the opposite view. Not only do they want to double tax capital gains, they also want them fully taxed, which would mean an economically jarring jump in the tax rate of more than 15 percentage points.

Now, having provided all this background information, let’s finally get to today’s topic.

If you’ve been following the presidential campaign, you’ll be aware that there’s a controversy over something called “carried interest.” It’s a wonky tax issue that seems very complicated, so I’m very happy that the Center for Freedom and Prosperity has produced a video that cuts through all the jargon and explains in a very clear and concise fashion that it’s really just an effort by some people to increase the capital gains tax.

There are four points from the video that deserve special emphasis.

  1. Partnerships are voluntary agreements between consenting adults, and both parties concur that carried interest helps create a good incentive structure for productive investment.
  2. Capital formation is very important for growth, which is one of the reasons why there shouldn’t be any capital gains tax.
  3. A capital gain doesn’t magically become labor income just because an investor decides to share a portion of the gain with a fund manager.
  4. An increase in the tax on carried interest would be the camel’s nose under the tent for more broad-based increases in the tax burden on capital gains.

By the way, I liked that the video also took a gentle swipe at some of the ignorant politicians who want to boost the tax burden on carried interest. They claim they’re going after hedge funds, when the tax actually is much more targeted at private equity partnerships.

But what really matters is not the ignorance of politicians. Instead, we should be focused on whether tax policy is being needlessly destructive because of high – and duplicative – taxes on saving and investment.

Such levies would reduce investment. And that means lower levels of productivity and concomitantly lower wages.

In other words, ordinary people will suffer a lot of collateral damage if this tax-the-rich scheme for carried interest is implemented.

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Some honest statists understand and acknowledge that you can’t have bigger government unless you target middle-income taxpayers.

And why do all these statists want higher taxes on ordinary people?

The answer is that they understand you can’t finance a giant welfare state unless there’s a huge increase in the tax burden on lower-income and middle-income taxpayers.

Which is exactly what’s happened in Europe.

Of course, you don’t need to favor that outcome to predict (of fear) that it will happen. My opposition to tax hikes, for instance, is precisely because I don’t want America to have a Greek-style fiscal future.

It’s a simple matter of math. The income tax simply isn’t capable of generating enough revenue to fulfill the fantasies of folks like Hillary Clinton and Bernie Sanders.

Robert Samuelson, writing in the Washington Post, explains that the middle class will need to be targeted if politicians actually want to finance an ever-expanding welfare state.

Democrats retort that raising taxes on the rich will provide needed revenues to expand progressive government. …They obviate the need for middle-class tax increases to pay for government. …of Democrats’ faith in soaking the rich. …The trouble is that the math doesn’t match the rhetoric, as a new Brookings Institution study shows. In it, economists William Gale, Melissa Kearney and Peter Orszag asked this question: What would happen if the top income tax rate were increased from 39.6 percent to 50 percent? The answer — less than you think. …it would raise about $100 billion in tax revenues…, but it’s actually slightly less than a quarter of the $439 billion budget deficit for fiscal 2015. …Even if the $100 billion were directly distributed to the poorest fifth of Americans (an average $2,650 per household), the effect on overall inequality would be “exceedingly modest,” the authors say. …tax policies don’t come close to covering the real costs of government.

In other words, there aren’t enough rich people to finance big government, even if you somehow assume that huge tax hikes don’t have negative effects on taxable income (and the evidence from the 1980s shows that upper-income taxpayers have very strong responses to changes in tax rates).

So, given all this evidence, what’s Samuelson’s bottom line?

If middle-class Americans need or want bigger government, they will have to pay for it. Sooner or later, a tax increase is coming their way.

And he’s right.

Which makes it all the more puzzling that some good lawmakers want to give the other side a value-added tax.

One of my colleagues at the Cato Institute, Chris Edwards, wrote a column on this topic for National Review. Here are some key excerpts.

Senators Ted Cruz and Rand Paul are strong advocates of limited government. …That is why their embrace of the value-added tax (VAT) in their presidential campaigns is so baffling. VATs are the revenue engine of big-government welfare states, not a proper funding source for the small federal government that both senators favor for America. …the candidates hide behind innocuous names — “business flat tax” for Cruz and “business transfer tax” for Paul.

But calling something a “business tax” doesn’t mean the burden is borne by businesses.

The tab for taxes collected from businesses is ultimately passed through to individuals in the form of lower wages, reduced dividends, or higher prices. …VATs have huge bases. That’s because — unlike income taxes — they do not allow businesses to deduct employee compensation when calculating the taxable amount. …The result would be that tax revenues from businesses under the Cruz and Paul VATs would be enormous.

In other words, the VAT is – among other things – a withholding tax on labor income. And that’s why this levy generates a huge amount of revenue.

To make matters worse, this giant tax is hidden from voters.

Because Cruz and Paul shift much of the collection to businesses, more of the tax burden gets hidden from citizens and voters. …If the government is going to take our money, it should mug us on the street in broad daylight, rather than sneak into our homes at night and burglarize us unnoticed. The VAT would encourage more burglary.

And this hidden tax also will give statists an easy method of financing an ever-expanding burden of government spending

Cruz and Paul want smaller government, but down the road, other politicians looking to shore up entitlement programs will say, “They could be financed with just a small tax increase on businesses.” But each “small” increase in the VAT rate would transfer huge amounts of additional cash from the private economy to the government.


When I wrote about Sen. Cruz’s plan and Sen. Paul’s plan, I specifically pointed out that the VATs needed to be jettisoned.

But Chris makes an even stronger case. And he’s correct. Adopting a VAT would be a cataclysmic error for advocates of limited government.

It would be a truly perverse tragedy if the other side eventually gets a VAT because well-meaning (but misguided) conservatives paved the way.

P.S. The left also is salivating for a broad-based energy tax.

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More than two years ago, I cited some solid research from the Tax Foundation to debunk some misguided analysis from the New York Times about the taxation of multinational companies.

Well, it’s déjà vu all over again, as the late Yogi Berra might say. That’s because we once again find something in the New York Times that cries out for correction.

Here’s some of what Patricia Cohen recently wrote about ostensibly generating lots of tax revenue by pillaging America’s top-1 percent taxpayers.

…what could a tax-the-rich plan actually achieve? As it turns out, quite a lot…the government could raise large amounts of revenue exclusively from this small group, while still allowing them to take home a majority of their income.

Oh, how generous of her for deciding that the awful, evil rich people can keep perhaps keep 50.1 percent of what they earn. Sounds like she should join the other cranks advising Jeremy Corbyn in the United Kingdom.

But I’m getting distracted. Let’s focus on the more important topic, which is her claim that it’s easy to generate a lot of tax revenue by soaking the rich.

The top 1 percent on average already pay roughly a third of their incomes to the federal government, according to a Treasury Department analysishow much more revenue could be generated by asking the rich to pay a larger share of their income in taxes?

Interestingly, Ms. Cohen shares some data showing that the rich already are paying far higher tax rates than the rest of us. Here’s the table that accompanied her article.

Normal people would look at those numbers, or at similar data produced by the IRS, and conclude that we’re already selectively over-penalizing upper-income taxpayers.

But statists see income in the private sector as belonging to the state, so there’s no such thing as too much money for government.

And Ms. Cohen seems to have this attitude. She engages in some simplistic calculations to estimate how much loot could be seized.

Raising their total tax burden to, say, 40 percent would generate about $157 billion in revenue the first year. Increasing it to 45 percent brings in a whopping $276 billion. Move a rung down the ladder and expand the contribution of those in the 95th to 99th percentile — who earn on average $405,000. Raising their total tax rate to 30 percent from a quarter of their total yearly income would generate an additional $86 billion. …A 35 percent share produces $176 billion.

Gee, how easy, at least on paper. If the politicians can figure out how to raise average tax rates to 45 percent for the rich (and 35 percent for the upper-middle class), then they get about $450 billion of additional tax revenue every year.

And you can buy a lot of votes with that much of other people’s money.

But sometimes things that are simple on paper are not so simple in reality.

It turns out that raising someone’s average tax rate (total tax payments/total income) requires some very big (and very bad) decisions on marginal tax rates (tax paid on the last dollar of income/last dollar of income).

Scott Greenberg of the Tax Foundation does that heavy lifting and his analysis makes mincemeat out of Ms. Cohen’s argument.

…how exactly would Congress go about raising the effective tax rate of the 1% from 33.4 percent to 45 percent? The article is not specific about this point. In fact, the article acknowledges that it is “sidestepping… the messy question of just which taxes would be increased.” This is irresponsible policy analysis… When one examines exactly which taxes would have to be increased to raise the effective tax rate of the 1% from 33.4 percent to 45 percent, the endeavor begins to appear much more difficult than the New York Times portrays.

For instance.

…the top tax bracket on ordinary income is 39.6%. How high would Congress have to raise this rate, in order to raise the effective tax rate of the 1% to 45 percent? According to our estimates, Congress would have to raise the top rate on ordinary income to 74 percent, in order to raise the effective rate of the 1% from 33.4 percent to 45 percent.What if Congress decided to increase, not only the top rate on ordinary income, but also the top rate on capital gains and dividends? …According to our estimates, Congress would have to raise the top rate on ordinary income, capital gains, and dividends to 56 percent, in order to increase the effective rate of the 1% to 45 percent.

In other words, if you target the rich with higher income tax rates, you’d have to have a rate higher than the confiscatory structure that existed before any of the Reagan tax cuts.

Or you could boost the top rate “only” to 56 percent, but only by also dramatically increasing the double taxation of dividends and capital gains.

And that might not be very smart, at least if you care about economic performance. Scott explains.

The high rates that would need to be in place to tax the 1% at a 45 percent effective rate would almost certainly have negative economic consequences. According to our Taxes and Growth model, raising the top rate on ordinary income to 74 percent would shrink the size of the U.S. economy by 3.5 percent in the long run, by discouraging labor and pass-through business. While this tax increase would raise $3.49 trillion over 10 years under conventional scoring, after taking its economic effects into account, it would only raise $2.37 trillion. This is a significantly smaller figure than that cited by the New York Times. Furthermore, raising the top rate on ordinary income, capital gains, and dividends to 56 percent would lead to an even larger decline in GDP, of 4.9 percent. This is because taxes on investment income are especially harmful to long-term economic growth. After taking economic effects into account, this proposal would only raise $1.96 trillion over 10 years.

So the politicians would still have some extra revenue, but they would destroy several dollars of private economic activity for every one dollar of revenue they would collect.

In what world would that be a good trade?

Oh, and by the way, those revenue estimates overstate how much money the politicians would collect. In the real world, higher tax rates also would increase tax avoidance and tax evasion.

…none of these figures take into account the effects of increased tax evasion and profit shifting by wealthy Americans that would surely occur in response to such high rates. After all, when taxes rise, taxpayers have more incentives to avoid them. And it is well-documented that, when rates on capital gains rise, shareholders simply defer their realizations, making it difficult to raise much revenue from tax increases on capital gains income.

So here’s the bottom line.

…the New York Times claims that the federal government could raise large amounts of revenue by taxing the rich just a little bit more. In fact, taxes on the rich would have to go up enormously in order to bring in the sorts of revenue figures cited by the article. The negative economic effects of these tax increases would then reduce these revenues considerably.

I’d like to think Scott’s analysis will change minds and cause statists to reassess their desire to impose high tax rates.

But I’m not overly hopeful. Let’s not forget that some of these people aren’t particularly interested in generating more revenue for politicians. Their real motive is hate and envy.

P.S. Let’s hope American statists never learn about Francois Hollande’s flat tax.

P.P.S. Speaking of which, here are some amusing cartoons about class-warfare tax policy.

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Most normal Americans have never heard of the “Base Erosion and Profit Shifting” project being pushed by the tax-loving bureaucrats at the Paris-based Organization for Economic Cooperation and Development.

But in the world of tax policy, BEPS is suddenly attracting a lot of attention, mostly because the business community has figured out it’s a scheme that would require them to pay more money to greedy governments.

I’m happy that BEPS is finally getting some hostile attention, but I wonder why it took so long. I started criticizing the project from the moment it was announced. Given the OECD’s dismal track record of promoting statist policy, there was zero chance that this project would result in good policy proposals.

Though I will say that the Wall Street Journal quickly recognized that the BEPS scheme was a ruse for tax increases on the business community.

And the editors of the paper have continued their criticisms as BEPS has morphed from bad concept to specific policy. Here are some passages from an editorial earlier this week.

…the Organization for Economic Cooperation and Development this week released its final proposals for combatting “base erosion and profit shifting,” or BEPS. …The OECD claims governments lose anywhere between $100 billion and $240 billion in revenue each year to such legal strategies, and it has spent two years concocting complex rules and new compliance burdens to stop it. Perhaps the worst of the OECD’s ideas is…country-by-country reports to every jurisdiction in which a company operates would detail operations in that area, and where it has paid tax on any relevant profits.

The WSJ is particularly concerned about proposals to require sharing of information with irresponsible and corrupt governments.

Ostensibly this…data would be kept confidential. Fat chance about that, especially if a high-taxing government thinks it has spotted an opportunity to grab more revenue or indulge some political grandstanding. A related proposal would require companies to hand over their so-called master files to governments. Those files, which detail global operations and intra-company transfers, are essentially guides to proprietary business strategies. Passing them to the authorities, and especially governments that run state-owned enterprises competing with multinational firms, is an invitation to mischief.

The OECD’s proposals also will mean higher compliance costs.

Companies could also be forced to spend years in courts and arbitration challenging potential new instances of the double taxation the current global tax system was developed to avoid. …Underlying all of this is the belief that the fiscal problems of the world result from insufficient tax collection, when the real culprit is anemic growth.

The final point in the above passage deserves special attention. Economic growth in many industrialized nations is relatively anemic because of bad government policy. And since people are earning less income and businesses are earning fewer profits, this means less revenue for government.

But rather than fix the policies that are causing sub-par growth, the politicians want to impose higher tax rates.

Needless to say, this will simply lead to less taxable income, making it even harder to collect revenue (this is the core insight of the Laffer Curve).

It’s also worth citing what the Wall Street Journal wrote over the summer on the BEPS issue. The editors started with an important observation about companies being able to invest in high-tax nations because they can protect some of their profits.

The global war on low tax rates entered a new stage… Hang onto your wallets—and your proprietary corporate data. …Governments have noticed that companies try to protect themselves from rapacious tax policies. …This is all legal for now, and a good thing too. Shielding profits from growth-killing taxes helps make investment and job creation in high-tax jurisdictions more economical.

And the editorial also warns about the dangers of giving dodgy governments access to more information, particularly when some of them will be incapable of protecting data from hackers.

The compliance burden these rules would impose counts as a new tax in itself. Despite some attempts to allow companies to file only one global disclosure in the jurisdiction of the corporate headquarters, in practice firms are likely to have to submit multiple, overlapping documents around the world. Sensitive corporate financial information would then be shared among global tax collectors. If you believe the OECD’s claim that all this will be kept confidential, have a chat with any of the millions of federal employees whose personnel files Uncle Sam allowed China to hack.

By the way, I don’t doubt for one second that companies push the envelope as they try to protect their shareholders’ money from government.

But less money for government is a good outcome. Particularly when politicians are imposing taxes – like the corporate income tax – that hurt workers by impeding capital investment.

The main thing to understand, at least from an American perspective, is that businesses have a big incentive to shift money out of the United States because politicians have saddled our economy with the world’s highest corporate tax rate, combined with the globe’s most punitive worldwide tax system.

Dealing with those problems is the right approach, not some money grab from an international bureaucracy. I shared these ideas in this brief presentation I made to an audience on Capitol Hill.

For what it’s worth, the chart I shared is all the evidence you could ever want that governments aren’t suffering from a lack of corporate tax revenue.

Moreover, while I don’t like OECD schemes to enable higher tax burdens, the BEPS project won’t equally affect all businesses.

Let’s look at how the project specifically disadvantages American companies (above and beyond the self-imposed damage from Washington).

Aparna Mathur of the American Enterprise Institute explains how BEPS will make a bad system even worse for US-based multinationals.

The U.S. has much to lose from a shift to this system. …the U.S. today has the highest corporate tax rate in the OECD. Under BEPS, this would affect the real decisions of firms to locate jobs and capital investment in the U.S.. In a recent report Michael Mandel points out that the BEPS principles will give multinationals a strong incentive to move high-paying creative and research jobs out of the U.S. since that is the easiest way to take advantage of low tax rates. …The current U.S. system of corporate taxation has many flaws. …the changes envisaged under the OECD’s BEPS project would make matters even worse.

This doesn’t sound good.

Some people have complained about corporate inversions, but it doesn’t hurt America when a company technically redomiciles in a nation with better tax law. After all, the jobs, factories, and headquarters generally remain in the United States.

But the way BEPS is structured, companies will have to move economic activity out of America.

Last but not least, Veronique de Rugy of the Mercatus Center identifies some major systematic flaws in the BEPS project. She starts by pointing out what the OECD wants.

Europe’s largest welfare states…are leading the charge through the Organisation for Economic Co-operation and Development to raise corporate tax rates globally. …The underlying assumption behind the base erosion and profit shifting, or BEPS, project is that governments aren’t seizing enough revenue from multinational companies. …Its solution is to force those companies that wisely structured their operations to benefit from low-tax jurisdictions to declare more income in high-tax nations.

And then she explains what will be the inevitable result of higher tax burdens.

Far from filling government coffers in order to continue funding massive redistributive welfare regimes, BEPS will strangle global economic output and erode tax bases even further. …Corporations provide an easy political target for tax-hungry politicians, but the burden of corporate taxes falls on ordinary citizens. Employees, shareholders, and investors will bear the brunt of the OECD’s corporate tax grab, all because European politicians refuse to accept responsibility for building bigger governments than their economies can sustain.

So what is the Obama White House doing to protect American companies from this global tax grab?

The good news is that some folks from the Treasury Department have complained that the project is targeting U.S. multinationals.

The bad news is that the minor grousing from the United States hasn’t had an impact. Not that we should be surprised. Because of a shared belief in statism, the Obama Administration has worked to expand the OECD’s power to push bad tax policy around the world.

P.S. Since today’s topic is arcane yet important international tax issues, allow me to share an update on the horribly misguided FATCA law. As is so often the case, the op-ed page of the Wall Street Journal is the source of great wisdom.

Or, in this case, maybe it would be best to write “the source of great sadness and frustration.”

America is the only country that taxes citizens on their global earnings, and in 2010 Washington exacerbated that by passing the Foreign Account Tax Compliance Act, or Fatca. As this law comes into force, it is doing immense harm to…the 8.7 million U.S. citizens living abroad, who have essentially been declared guilty of financial crimes unless they can prove otherwise. …American leadership overseas, from volunteer organizations to the business world, has diminished. No one wants an American involved when their citizenship attracts a maze of rules, regulations, potential fines and criminal penalties. …It’s painful to witness the anguish of patriotic Americans as they contemplate giving up their U.S. citizenship, as record numbers have been doing. In 2014, 3,417 renounced their citizenship, a 266% increase over 2012, before Fatca came fully into effect.

Interestingly, the way to solve the FATCA problem is the same way to deal with the corporate inversion issue.

Simply shift to a territorial system.

The best solution is for the U.S. to join the rest of the world in taxing based on residency rather than citizenship. …Doing so would advance American fairness, mobility and economic competitiveness.

Sadly, only a handful of lawmakers, most notably Senator Rand Paul, are making noise on this issue.

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