Taxation 101

I’ve written a few columns that explain tax principles, but this video from the Tax Foundation may be the best place to start if you have friends or colleagues who need to learn the basics.

As part of the article that accompanies the video, the Tax Foundation explains that not all taxes are created equal. In other words, some taxes impose more damage than other taxes.

And this chart from the article is a nice summary of the three types of tax, along with the potential damage caused by varying ways of collecting tax.

As a general rule, this chart is totally accurate.

Corporate income taxes, gross receipts taxes (mentioned here), and wealth taxes do a lot of economic damage on a per-dollar-collected basis.

But I want to add a caveat to the first column.

As currently designed, there’s no question that the personal income tax and the corporate income tax are very bad taxes.

But it is possible to dramatically reduce the damage imposed by those levies. For instance, the personal income tax could be largely defanged if the current system was repealed and replaced by a simple and fair flat tax.

Likewise, it’s possible to reform the corporate income tax (full expensing, territoriality, no double tax on dividends, etc) so that it does comparatively little damage.

By the way, I’m sure the experts at the Tax Foundation would agree with these observations, so I’m augmenting rather than criticizing.

And since I’m doing some augmenting, another observation is that the first two taxes on the bottom row generally are very similar, at least with regard to their economic impact (and also similar to a properly designed individual income tax).

Here’s some of what I wrote in a column back in 2012.

…anything that expands the “tax wedge” between pre-tax income and post-tax consumption is going to impose similar levels of economic harm. Here’s a simple example. If I earn $100, does it matter to me if the government takes $25 as I earn that income (either with a payroll tax or income tax) or as I spend that income (either with a sales tax or value-added tax)? Is there any reason that my incentives to earn and produce will be altered by shifting from one approach to the other?

I explain that the answer is no. My incentive to earn income is affected by my ability to use income to enjoy consumption. But if taxes take a big bite, I’ll have less reason to be productive, regardless of how politicians collect the tax.

For what it is worth, I’ve used Belgium as an example to explain why shifting from payroll taxes to sales taxes, or vice-versa, is not a recipe for greater prosperity.

P.S. Those who want more advanced primers on taxes and growth should click here and here.

Read Full Post »

The State With the Greediest Politicians, Part II

Yesterday, in Part I of our series about greedy state politicians, we looked at top income tax rates.

The worst state, not surprisingly, was California with a top tax rate of 13.3 percent.

This onerous tax rate, combined with low-quality government and absurd levels of red tape, helps to explain why so many people have fled the Golden State.

(And because California’s problems are self-inflicted, that’s the biggest reason why the state should not get a bailout from Uncle Sam.)

Today, we’re going to look at another major source of tax revenue for state politicians.

Here are some excerpts from the Tax Foundation’s report on sales tax rates.

While graduated income tax rates and brackets are complex and confusing to many taxpayers, sales taxes are easier to understand; consumers can see their tax burden printed directly on their receipts. In addition to state-level sales taxes, consumers also face local sales taxes in 38 states. These rates can be substantial, so a state with a moderate statewide sales tax rate could actually have a very high combined state and local rate compared to other states. This report provides a population-weighted average of local sales taxes… Five states do not have statewide sales taxes: Alaska, Delaware, Montana, New Hampshire, and Oregon. Of these, Alaska allows localities to charge local sales taxes. The five states with the highest average combined state and local sales tax rates are Tennessee (9.55 percent), Arkansas (9.53 percent), Louisiana (9.52 percent), Washington (9.23 percent), and Alabama (9.22 percent). The five states with the lowest average combined rates are Alaska (1.76 percent), Hawaii (4.44 percent), Wyoming (5.34 percent), Wisconsin (5.43 percent), and Maine (5.50 percent). California has the highest state-level sales tax rate, at 7.25 percent.

Here’s the map that accompanied the report.

It’s good to be gray. By contrast the states with the darkest colors have the most onerous rates.

As noted in the excerpt above, Tennessee, Arkansas, Louisiana, and Washington have the greediest politicians, at least measured by sales tax rates.

But this is the point where it makes sense to merge today’s map with yesterday’s map. Because Tennessee and Washington don’t impose income taxes, while Louisiana and Arkansas both make that mistake.

And if you combine the tax rates from both maps, you’ll find that Tennessee and Washington are relatively low-tax states while Louisiana and Arkansas are relatively high-tax states.

So one of the lessons to be learned is that it’s never a good idea to give politicians multiple sources of revenue (something to remember every time greedy officials in D.C. broach the idea of a value-added tax).

But let’s keep our focus on the main topic, which is identifying the state with the greediest politicians?

If we continue with the methodology of combining the numbers from both maps, California easily ranks as the worst state, with a combined rate of 21.98 percent.

Indeed, it has a huge lead compared to the next-worst states (New York, New Jersey, and Minnesota), all of which have combined rates of between 17-18 percent.

What’s the best state?

Depends on the approach. If you count only wages and salaries, then New Hampshire wins with a combined rate of 0.0 percent. But if you include New Hampshire’s unfortunate policy of imposing income tax on interest and dividends, then Alaska wins with a combined rate of 1.76 percent.

Wyoming, South Dakota, and Florida also deserve applause. Those states are ranked #3, #4, and #5 because they have no income taxes and also manage to keep sales taxes at semi-reasonable levels.

P.S. Alaska and Wyoming both collect large amounts of energy taxes, so their good scores don’t necessarily reflect a commitment to low overall tax burdens.

Read Full Post »

The Right Way to Adopt a Consumption Tax

I’ve written dozens of columns explaining why it would be a terrible idea for the United States to enact a value-added tax.

But that’s not because I think consumption taxes are worse than income taxes. Indeed, sales taxes and VATs are less destructive because tax rates tend to be reasonable and there’s no double taxation of saving and investment.

My opposition is solely based on the fact that we shouldn’t give politicians an extra source of revenue to finance bigger government. That would effectively guarantee that the United States would morph into a stagnant European-style welfare state.

In other words, I’d be willing to accept a trade. Politicians get a VAT, but only if they permanently abolish the income tax.

There’s no chance of that happening in Washington, but it may happen in Nebraska, as reported by the North Platte Telegraph.

If Nebraskans can’t agree on reform…, state Sen. Steve Erdman of Bayard has a sweeping answer: …Income and property taxes in Nebraska would be abolished — and the state sales tax replaced by a “consumption tax” to fund state and local governments — if a constitutional amendment spearheaded by Erdman were approved by lawmakers and voters. …It would need “yes” votes from 30 of the 49 senators on final reading to appear on November’s general election ballot. …Nebraska’s state and local governments now collect a combined $9.5 billion annually in taxes, which would require a 10% consumption tax rate to replace, Erdman said. …If income and property taxes go away, Erdman said, all the state and local departments or agencies that enforce, set and collect them wouldn’t be needed, either.

Here’s some additional coverage from KETV.

Imagine not having to pay any property or income taxes in Nebraska, but there’s a catch you’d pay a new consumption tax on just about everything you buy, such as food and medical services, things that are not taxed right now. That is the idea behind a new constitutional resolution introduced by state Sen. Steve Erdman. …He and nine other lawmakers introduced LR300CA on Thursday. The resolution would allow voters to decide whether to replace all those taxes with a consumption tax. It is like a sales tax and would be about 10.6% on everything, including services and food. …He said under this proposal, everyone would get a payment called a prebate of about $1,000, which would offset the cost for low-income families. Erdman said it would also eliminate the need for property tax relief and the state having to offer costly tax incentives to attract businesses. “This is fixing the whole issue, everything. This is eliminating all those taxes and replacing it with a fair tax,” Erdman said. “Nothing is exempt,” Erdman said.

I have no idea if this proposal has any chance of getting approval by the legislature, but Senator Erdman’s proposal for a broad-based neutral tax (i.e., no exemptions) would make Nebraska more competitive.

Which would be a good idea considering that the state is only ranked #28 according to the Tax Foundation and is way down at #44 according to Freedom in the 50 States.

In one fell swoop, Nebraska would join the list of states that have no income tax, which is even better than the states that have flat taxes.

P.S. The switch to a consumption tax would address the revenue side of the fiscal equation. Nebraska should also fix the spending side by copying its neighbors in Colorado and adopting a TABOR-style spending cap.

P.P.S. Unlike advocates of the value-added tax, proponents of a national sales tax support full repeal of the income tax. I don’t think that’s realistic since it’s so difficult to amend the Constitution, but their hearts are in the right place.

Read Full Post »

America’s Best and Worst States for Taxes

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

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

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

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

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

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

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

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

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

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

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

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

Read Full Post »

Will the Supreme Court Grant States Extraterritorial Tax Powers?

On April 17, the Supreme Court heard oral arguments in South Dakota v. Wayfair, Inc., a case dealing with whether states should have the power to levy taxes on companies in other states.

Most observers see this issue as a fight over taxing the Internet, taxing online sales, or a battle between Main Street merchants and Silicon Valley tech firms. Those are all parts of the story, but I’ve explained that this also is a contest between two competing approaches to taxation.

On one side are pro-market people who favor origin-based taxation, which is based on the notion that sales should be taxed where the merchant is based.

On the other side are pro-government people who want destination-based taxation, which is based on the notion that sales should be taxed where the consumer lives.

Needless to say, I’m not on the pro-government side of the battle. Here’s some of what I wrote when I was at the Heritage Foundation way back in 2001.

Requests to establish this destination-based tax authority should be denied. Such a regime would create an anti-consumer sales tax cartel for the benefit of profligate governments. It also would undermine privacy by requiring the collection of data on individual purchases. And it would violate important constitutional principles by giving state and local governments the power to impose their own taxes on businesses in other states.

All of that is still true today, but let’s look at some more recent analysis of the issue, all of which is tied to last week’s hearing at the Supreme Court.

George Will opines on South Dakota’s revenue grab for the Washington Post.

South Dakota has enacted a law contradicting a 26-year-old court decision concerning interstate commerce, and a law Congress passed and extended 10 times. It wants to tax purchases that are made online from vendors that have no physical presence in the state. South Dakota wants to increase its revenue and mollify its Main Street merchants. …In 1992, in the Internet’s infancy, the court held that retailers are required to collect a state’s sales taxes only when the retailers have a “substantial nexus” — basically, a physical, brick-and-mortar presence — in the state where the item sold is purchased. Such a nexus would mean that the retailer benefits from, and should pay for, local government services. Absent such a nexus, however, states’ taxation of sales would violate the Constitution, which vests in Congress alone the power to impose such burdens on interstate commerce. …Internet commerce…could not have flourished if vendors bore the burden of deciphering and complying with the tax policies of 12,000 state and local taxing jurisdictions, with different goods exempted from taxation. …the Internet Tax Freedom Act…is intended to shield small Internet sellers from discriminatory taxes and compliance burdens. …South Dakota is seeking the court’s permission for its extraterritorial grasping. …Governments often are reflexively reactionary when new technologies discomfort established interests with which the political class has comfortable relations of mutual support. The state’s sales-tax revenue has grown faster than the state’s economy even as Internet retailing has grown. …Traditional retailing will…prosper or not depending on market forces, meaning Americans’ preferences. State governments should not try to prevent this wholesome churning from going where it will.

The Wall Street Journal also has opined in favor of limits on the ability of states to impose their laws outside their borders.

The Supreme Court’s landmark 1992 Quill decision protects small businesses across the country from tax-grubbing politicians across the country. …At issue in South Dakota v. Wayfair is whether governments can tax and regulate remote retailers that don’t enjoy the state’s representation or benefit from its public services. …Fast forward 25 years. States complain that online commerce is eroding their tax base. Brick-and-mortar stores grouse that remote retailers are dodging taxes, putting them at a competitive disadvantage. …Politicians would prefer to soak out-of-state retailers rather than their own taxpayers. But America’s founders devised the Commerce Clause to prevent states from burdening interstate commerce and making long-arm tax grabs.

Here’s a troubling tidbit from the WSJ editorial. The Trump Administration is siding with South Dakota politicians, using the same statist rationale as the European politicians who are trying to grab more money from high-tech American companies.

The Justice Department has filed a brief supporting South Dakota… Seriously? According to Justice, businesses that operate a website have a “virtual” presence everywhere. The European Commission has invoked the same argument to impose a digital tax on Silicon Valley tech giants, which the Trump Administration has denounced as an extraterritorial tax grab.

Wow, the incompetence is staggering. The Stupid Party strikes again.

Veronique de Rugy explains in her Reason column that state governments want to overturn Quill because they don’t want tax competition.

If you think internet companies aren’t paying any taxes for online sales and that’s killing bricks-and-mortar retailers and states’ budgets, you, my friend, have been duped. Nothing could be further from the truth. …Most state lawmakers want to see Quill overturned, allowing them to force out-of-state companies to collect sales taxes on their behalf. This argument was just heard by the Supreme Court… If the states were to win, they would be able to reach into the pockets of that mom selling her paintings on Etsy, even though she may live on the other side of the country, didn’t elect other states’ officials, and never agreed to those states’ tax laws. …tax competition among states would also be lost if Quill were overturned. Under the new regime, online consumers—no matter where they shop or what they buy—would lose the ability to shop around for a better tax system. Without the competitive pressure and the fear of losing consumers to lower-tax states, lawmakers would not feel the need to try to rein in their sales tax burden. It’s that pressure, which limits their tax grabbing abilities, that these lawmakers resent and want the Supreme Court to put an end to. …There is a lot to be lost in the Wayfair case. If Quill were to be overturned, compliance costs could skyrocket for many retailers, and good principles of taxation would be thrown out the window. Healthy tax competition is at stake. Let’s hope the highest court in the land makes the right decision.

In a column for the Wall Street Journal, Chris Cox, former Congressman and former Chairman of the Securities and Exchange Commission, debunks the notion that states are suffering for a loss of tax revenue.

‘Our states are losing massive sales-tax revenues that we need for education, health care, and infrastructure,” South Dakota’s Attorney General Marty Jackley told the U.S. Supreme Court… His state’s Supreme Court opined that sales tax revenues have “declined.” The state Legislature, citing its own “finding” to this effect, enacted a law requiring out-of-state retailers to collect sales tax on purchases shipped to South Dakota.

Here’s the data debunking Jackley’s claim about South Dakota “losing massive sales-tax revenues.”

…the law is based on a false premise. The state’s own data show that sales and use tax revenue grew from $787.7 million in 2013 to $974.7 in 2017—considerably faster than the state’s rate of economic growth. The governor’s budget for 2018 projects the state’s sales and use tax revenue will be more than $1 billion, 4% higher than last year, with no change in rate. That’s 29% higher than five years earlier. Sales-tax revenues have been booming in other states, too.

In other words, politicians are greedy and they’re willing to prevaricate. They want more and more revenue and they don’t want to face competitive pressure that might limit their ability to extract more money that can be used to buy votes.

Is anyone shocked?

P.S. The fight between “origin-based” and “destination-based” approaches to consumption taxation is very analogous to the fight between “territorial” and “worldwide” approaches to income taxation.

P.P.S. Given that it arguably has the best (or least-destructive) tax system of any state, it’s disappointing to see South Dakota politicians taking a lead role in an effort that would undermine tax competition.

Read Full Post »

The Fight over “Internet Taxation” Is Really a Proxy for an Important Battle on Whether Government Power Should Be Constrained by Borders

One of the key principles of a free society is that governmental power should be limited by national borders.

Here’s an easy-to-understand example. Gambling is basically illegal (other than government-run lottery scams, of course) in my home state of Virginia. So they can arrest me (or maybe even shoot me) if I gamble in the Old Dominion.

I think that’s bad policy, but it would be far worse if Virginia politicians also asserted extraterritorial powers and said they could arrest me because I put a dollar in a slot machine during my last trip to Las Vegas.

And if Virginia politicians tried to impose such an absurd policy, I certainly would hope and expect that Nevada authorities wouldn’t provide any assistance.

This same principle applies (or should apply) to taxation policy, both globally and nationally.

On a global level, I’m a big supporter of so-called tax havens. I’m glad when places with pro-growth tax policy attract jobs and capital from high-tax nations. This process of tax competition rewards good policy and punishes bad policy. Moreover, I don’t think those low-tax jurisdictions should be under any obligation to enforce the bad tax laws of uncompetitive countries.

There’s a very similar debate inside America. Some states – particularly those with punitive sales taxes – want to force merchants in other states to be deputy tax enforcers.

I’ve written about this topic and I think even my writings from 2009 and 2010 are still completely relevant. But let’s check some other sources, starting with a column in the Wall Street Journal. It’s from 2016, but the issue hasn’t changed.

The state of Alabama is openly defying the U.S. Supreme Court in an effort to squeeze millions of dollars of tax revenue from businesses beyond its borders. …This unconstitutional tax grab cuts to the heart of the Commerce Clause, which gives Congress the power to regulate trade “among the several States.” Alabama’s regulation directly contravenes the Supreme Court’s 1992 ruling in Quill v. North Dakota. In that case, the court held that North Dakota could not require an out-of-state office-supply company to collect sales taxes because the firm had no offices or employees there. …Alabama’s revenue commissioner, Julie Magee, is putting forward an untested and suspect legal theory: The state claims that if its residents buy more than $250,000 a year from a remote business, then the seller has an “economic presence”… There are around 10,000 sales-tax jurisdictions in the U.S., with varying rates, rules and holidays, and different definitions of what is taxable. Keeping track of this ever-changing patchwork is a burden, and forcing retailers to scramble to comply would profoundly hinder interstate commerce in the Internet age.

And here are some excerpts from a column published that same year by Fortune.

When politicians call for “fairness,” it’s important to take a closer look at their definition of fair. See, for example, the nationwide push in state capitols to slap online sales taxes on out-of-state retailers—a simple tax grab… states are constitutionally prohibited from collecting sales taxes from retailers that have no presence within their borders…thanks to the U.S. Supreme Court’s 1992 ruling in Quill Corp. v. North Dakota… Any national online sales-tax system will burden online retailers to a degree never felt by brick-and-mortar businesses. Local businesses only have to deal with a limited number of sales taxes—usually only the state, county, and local levies that apply to specific stores. Online retailers, on the other hand, would have to calculate and apply sales taxes across the entire nation—and roughly 10,000 jurisdictions have such taxes. Complying with this convoluted system would necessarily raise costs for consumers and stifle competition.

And the debate continues this year. The Wall Street Journal editorialized against extraterritorial state taxing last week.

A large faction of House Republicans are pressing GOP leaders to attach legislation to the omnibus spending bill that would let states collect sales tax from remote online retailers. South Dakota Rep. Kristi Noem’s legislation…would let some 12,000 jurisdictions conscript out-of-state retailers into collecting sales and use taxes from their customers. …Contrary to political lore, sales tax revenues have been increasing steadily in states with healthy economies. Over the past five years, Florida’s sales tax revenues have grown 27%. South Dakota’s are up by nearly 30% since 2013. …Twenty or so states have adopted “click-through” taxes to hit remote retailers that have contracts with local businesses. In 2016 South Dakota invited the High Court to revisit Quillby extending its sales tax to out-of-state sellers. …the Court could enable broader taxation and regulation of out-of-state businesses. This is what many states want to happen. …Raising taxes on small business and consumers won’t be a good look for Republicans in November, nor an inducement for investment and growth.

Jeff Jacoby also just wrote on this topic for his column in the Boston Globe.

First, the flow of interstate commerce must not be impeded by one state’s impositions. And second, there should be no taxation without representation; vendors should not be liable for taxes in states where they have no vote or political recourse. The Supreme Court upheld this “physical connection” standard in a 1992 case, Quill v. North Dakota. …the high court should reaffirm it. In the 26 years since the justices rebuffed North Dakota’s claim, the case against allowing states to exert their taxing power over remote sellers has grown even stronger. …there are now 12,000 taxing jurisdictions — not only states, counties, and cities, but also parishes, police districts, and Indian reservations. A lone online seller, unprotected by the Quill rule, could be obliged to remit taxes to any combination of them, with all their multitudinous rules and definitions, tax holidays and filing deadlines. …South Dakota can impose onerous burdens on companies operating within its borders, but not on vendors whose only connection to the state is that some of their customers happen to live there. The court got it right the first time. No merchant — whether selling online, via mail order, or in a traditional shop — is obliged to be a tax collector for states it doesn’t operate in.

And here are some passages from Jessica Melugin’s article for FEE. She makes the key point that extraterritorial tax powers would undermine – if not cripple – the liberalizing impact of tax competition.

…the Remote Transactions Parity Act (RTPA)…seeks to get rid of that physical presence limit on state taxing powers. It would let states reach outside their geographical borders and compel another state’s business to calculate, collect, and remit to that first state. …the long-term effect is that this arrangement will lessen the downward pressure on taxes between jurisdictions. Think of it like this: it’s the difference between driving your car across the D.C. border to Virginia to fill up with lower Virginia gas taxes—that’s how it works now and that’s what keeps at least some downward pressure on D.C. tax rates. If D.C. made the rate high enough, everyone would exit and fill up in Virginia. But if the approach in the RTPA is applied to this thought experiment, it would mean that when you pull into that Virginia gas station, they look at your D.C. plates and charge you the D.C. gas tax rate. …it’s a makeshift tax cartel among the states. …the RTPA is a small-business killer—which is why big box retailers support it. It crushes small competitors with compliance costs. State politicians are for it because they’d rather tax sellers in other states who can’t vote them out of office. Consumers will be left with less money in their pockets and fewer choices.

By the way, there are some pro-market people on the other side. Alex Brill of the American Enterprise Institute has written in favor of extraterritorial taxation.

…lawmakers have proposed legislation to allow (not require) states to collect sales tax on goods purchased from out-of-state sellers. …critics of this legislation…argue that “internet freedom is under attack by politicians willing to distort markets and tilt the playing field toward their favored businesses.” Internet freedom is certainly not being “attacked” by a policy to improve enforcement of existing tax liability. Second, these critics oppose the legislative reform based on the belief that just because the internet benefits people, online retail activities should be advantaged by public policy. If public finance were based on this type of specious logic, we would have a tax code far more unfair and distorted than it currently is.

I actually agree with both of his arguments. Giving states extraterritorial tax powers isn’t an attack on the Internet. And I also agree that tax policy shouldn’t provide special preferences.

But neither of his points address my concern that extraterritorial tax powers give too much power to governments and undermine tax competition.

Unless he’s going to argue that Nevada’s no-income-tax status is “distorted” compared to California’s punitive system. Or unless he’s going to argue that Delaware’s no-sales-tax status is “unfair” compared to New Jersey’s onerous system.

For more information, here’s my speech to congressional staffers from 2012.

P.S. For folks who like technical details, this fight is not about Internet taxation. It’s a battle between “origin-based” taxation (basically territorial taxation) and “destination-based” taxation (basically worldwide or extraterritorial taxation). I favor the former and oppose the latter, which helps to explain my opposition to the border-adjustment tax and the value-added tax.

P.P.S. I was afraid that congressional leaders would attach a provision to the new spending bill that would allow extraterritorial taxation by states. Fortunately, that didn’t happen. So the “omnibus” plan is a pork-filled affront to fiscal sanity, but at least it’s not a state-goverment-empowering, pork-filled affront to fiscal sanity.

Read Full Post »

World’s Best-Ever Receipt and a Serious Lesson about Tax Visibility

I don’t often use the literary tactic of referring to something as the “best-ever.” Indeed, the only time that phrase appeared in the title of a column was back in 2014 when I smugly wrote about the collapse of government-run single-payer healthcare in Vermont. Recalling what Justice Brandeis wrote about states being the “laboratories of democracy,” I asserted that the disaster in the Green Mountain State taught the entire nation a valuable lesson about the dangers of bad policy and that this was the “best-ever argument for federalism.”

Well, it’s time to once again use this superlative because consumers in California get the “best-ever receipt” when they make purchases at Firearms Unknown. Here’s the example that’s gone viral, and I’ve highlighted the relevant portion that gives an amusing description of California’s onerous sales tax.

By the way, not everything you see on the Internet is true (yes, shocking news). And since the folks at Independent Journal Review didn’t want to make the mistake of sharing without checking (like I did when trying to mock Justin Trudeau), they actually did some due diligence.

Many times, viral photos are too good to be true. So we contacted Firearms Unknown in National City, CA, to find out if this was one of those times. Sure enough, a representative with Firearms Unknown confirmed the receipt’s authenticity to Independent Journal Review. Then, he let out a chuckle. I guess if you’re going to operate a gun shop in a far-left state like California, you better have a good sense of humor. Bravo, Firearms Unknown.

Yes, kudos to the store, but I also want to take this opportunity to make a serious point about tax visibility.

One of the many reasons to oppose a value-added tax is that the tax almost always is hidden from consumers. When taxpayers make purchases in Europe, they don’t know that VATs are responsible, on average, for about 21 percent of the purchase price.

So it’s good that consumers in America know there’s a sales tax, both because it’s visible on their receipts and also because they can see the difference between the price on the shelf and the price at the cash register.

Though this system isn’t perfect. How many Americans, after all, know how much sales tax they paid last year?

The visibility issue also exists with the income tax. In theory, we all know what we paid the previous year based on our annual tax returns. But because of withholding, most Americans don’t really pay attention to that very important number and instead focus on whether they’re getting a refund. They actually think a big refund is a great outcome, even though it simply means that they gave the government an interest-free loan by over-paying their taxes during the year!

This is one of the reasons why I’m such a big fan of Hong Kong, in part because of the flat tax. Not only is there a low rate and no double taxation, but there’s also no withholding. Instead, taxpayers write checks to the government twice annually. So they are fully aware of the cost of government, which may explain why the fiscal burden of government is relatively low (it also helps that there is a constitutional spending cap).

In the United States, the only levies that are visible (at least some of the time) are property taxes. Taxpayers usually have to make annual or semiannual payments on cars and houses (though property taxes on homes are sometimes built into mortgage payments).

And when you have to write a lump-sum check to the government, that’s a wonderful opportunity for people to ponder whether they’re actually getting good value for their money.

And since the answer almost always is no, it’s easy to understand why politicians are big fans of policies (such as VATs and withholding) that disguise the burden of taxation.

P.S. In the body of previous columns, I have used the “best-ever” superlative a handful of times.

• To describe a cartoon on the link between the economic policies of Obama and Hollande.
• To describe Margaret Thatcher’s debunking of the coerced equality ideology.
• To describe a cartoon about the folly of Keynesian stimulus schemes.
• To describe my favorite poster on the evil of gun control.

Read Full Post »

Learning from New Jersey’s Bad Tax Policy

Federalism is a great idea, and not just because America’s Founders wanted a small and limited central government.

It’s also a good idea because states are laboratories that teach us about the benefits of good policy and the costs of bad policy.

And when we specifically look at New Jersey, we can learn a lot about the negative consequences of excessive taxation.

Lesson Number 1: Don’t adopt new taxes.

Just fifty years ago, New Jersey was like New Hampshire with no income tax and no sales tax. It was a fast-growing and prosperous refuge for people escaping high tax burdens in New York and elsewhere.

But then a state sales tax was adopted in 1966, followed by the enactment of a state income tax in 1976. Not surprisingly, politicians used those revenue sources to finance an orgy of new spending, to such an extent that New Jersey is now in last place in a ranking of state fiscal conditions.

And ever since new taxes were adopted, politicians have routinely and repeatedly increased the rates, diverting ever-greater amounts of money from the state’s private sector.

The net result, as demonstrated by the Tax Foundation’s State Business Tax Climate Index, is that New Jersey now has the worst tax system in the entire nation.

A very high income tax burden is a major reason why New Jersey is so uncompetitive.

After thriving for centuries with no state income tax, it only took state politicians a few decades to create a very punitive system with the fifth-highest rate in the nation. Once again, the Tax Foundation has the data.

No wonder so many investors, entrepreneurs, and business owners are escaping New Jersey.

And this is exactly what’s been happening, with very negative effects on New Jersey’s economy. Here’s some of what I shared back in 2010.

More than $70 billion in wealth left New Jersey between 2004 and 2008 as affluent residents moved elsewhere, according to a report…Conducted by the Center on Wealth and Philanthropy at Boston College… The exodus of wealth, then, local experts and economists concluded, was a reaction to a series of changes in the state’s tax structure — including increases in the income, sales, property and “millionaire” taxes. “This study makes it crystal clear that New Jersey’s tax policies are resulting in a significant decline in the state’s wealth,” said Dennis Bone, chairman of the New Jersey Chamber of Commerce and president of Verizon New Jersey. …the report reinforces findings from a similar study he conducted in 2007 with fellow Rutgers professor Joseph Seneca, which found a sharp acceleration in residents leaving the state. That report, which focused on income rather than wealth, found the state lost nearly $8 billion in gross income in 2005.

Wow, that’s the Atlantic version of California.

By the way, politicians often impose taxes or increase tax rates using the excuse that they will lower other taxes.

And it hasn’t been uncommon for New Jersey politicians to tell voters that tax hikes will enable lower property taxes.

Yet if you look at this data from the Tax Foundation, the Garden State has the highest property tax burden in the nation.

The only “good news” is that New Jersey’s 6.97 percent state sales tax is only the 24th-highest in the United States.

Yet when you consider that there was no state sales tax until 1966, that’s hardly a sign of fiscal restraint.

Lesson Number 2: Get rid of taxes that are especially destructive.

New Jersey is one of only two states that impose both an inheritance tax and a death tax. The death tax is particularly pernicious since very successful taxpayers obviously have considerable ability to migrate to states with better policy.

But here’s where we might have a bit of good news. New Jersey may be about to eliminate its death tax.

A state Senate committee on Monday passed…bipartisan proposals to eliminate the estate tax… Proponents of the tax changes say people are leaving New Jersey to avoid its low thresholds on taxing inherited wealth and retirement income. More than 2 million people left New Jersey between 2005 and 2014, costing the state $18 billion in net adjusted income and $11.4 billion in economic activity, according to the New Jersey Business and Industry Association, which blames high taxes for the exodus. …State Sen. Steve Oroho (R-Sussex) said he expects the money New Jersey reaps from people who stay here will pay for the lost tax revenue. The bill (S1728) was approved 9-0 with four abstentions.

This is amazing evidence of the liberalizing impact of tax competition. New Jersey’s state legislature is dominated by leftists, yet even they realize that they won’t get any loot if their intended victims can move across states lines (a lesson that French politicians have a very hard time understanding).

Lesson Number 3: Politicians waste much of the revenue they collect.

Politicians generally like higher taxes because they can buy support and votes by redistributing other people’s money (though some leftists like higher taxes solely for reasons of spite).

So it’s also important to look at what’s happening on the spending side of the budget. And it turns out that New Jersey wastes a lot of money.

I’ve already written about state bureaucrats being grossly overpaid (see here and here for some jaw-dropping examples).

But now let’s look at New Jersey’s “rate of return” or “efficiency” on transportation spending. This great video from Reason tells you everything you need to know.

And one of the reasons I shared this video is because New Jersey politicians want to boost the gas tax so they can spend even more money. Indeed, they may even hold the death tax hostage to get what they want.

Democrats have said they hope to leverage these tax cuts into a deal with Gov. Chris Christie to raise the gas tax.

I rhetorically asked back in 2010 whether Chris Christie could save New Jersey. We now know the answer is no, but maybe he can partially redeem himself by winning the death tax fight without surrendering on the gas tax.

P.S. Another formerly low-tax state, Connecticut, decided to copy New Jersey and the results are similarly dismal. Let’s hope other states, especially Alaska and Washington, are paying attention.

Read Full Post »

The Case against the Value-Added Tax

Even though I fret about a growing burden of government and have little faith in the ability (or desire) of politicians to make wise decisions, I somehow convince myself that good things will happen.

Here’s some of what I wrote two years ago, when asked whether I thought America could be saved from a Greek-style fiscal collapse.

I think there’s a genuine opportunity to save the country. …we can at least hold the line and prevent government from becoming bigger than it is today. Sort of a watered-down version of Mitchell’s Golden Rule. The key is the right kind of entitlement reform.

But in that same article, I also issued this warning.

I may decide to give up if something really horrible happens, such as adoption of a value-added tax. Giving politicians a big new source of revenue, after all, would cripple any incentive for fiscal restraint.

To be blunt, imposing a big national sales tax – in addition to the income tax – would be a horrible defeat for advocates of limited government. A VAT would lead to more spending and more debt.

And that’s when folks might consider looking for escape options because America’s future will be very grim.

Here’s a video I narrated on why the value-added tax is awful public policy.

Thankfully, I’m not the only one raising the alarm.

In a recent editorial, the Wall Street Journal wisely opined on the huge downside risk of a value-added tax.

It’s the hottest trend among tax collectors, raising a gusher of revenue for spendthrift governments worldwide. …a new report from accounting firm Ernst & Young says that VAT “systems are spreading” around the world and “rates are rising.”

By the way, the comment about “rates are rising” is an understatement, as illustrated by the table prepared by the Heritage Foundation.

Politicians love VATs both because they generate huge amounts of revenue and because the tax is hidden in the price of products and thus can be increased surreptitiously.

The WSJ explains.

The VAT is a sort of turbo-charged national sales tax on goods and services… Politicians love it because it is the most efficient revenue-raiser known to man, and its rates can be raised gradually to finance new entitlements or fill budget holes. The VAT is typically introduced with a low rate but then moves up over time until it swallows huge chunks of national economies. …Because VATs are embedded in the price of products, they can often rise unnoticed by the consumer, which is why liberals love them as a vehicle for periodic stealth tax hikes.

And in this case, “periodic” is just another way of saying “whenever politician want more money.”

And if recent history is any indication, “whenever” is “all the time.”

E&Y says standard VAT rates now average a knee-buckling 21.6% in the European Union, up from 19.4% in 2008. Average standard rates in the industrial countries of the Organization for Economic Cooperation and Development have climbed to 19.2% from 17.8% in 2009. Japan is another example of the VAT upward ratchet. The Liberal Democratic Party tried to introduce the tax for years and finally succeeded with a 3% rate in 1989. Eight years later the shoguns raised it to 5%. Last year it climbed to 8%, whacking consumption and sending the economy back to negative growth.

The Japanese experience is especially educational since the VAT is a relatively new tax in that nation.

And here’s a chart showing what’s happened in the past few years to the average VAT rate in the European Union.

Now let’s look at another chart that is far more worrisome.

It shows that the burden of government spending in Europe, before VATs were adopted, wasn’t that much different than the fiscal burden of the public sector in the United States.

But once the VAT gave politicians a new source of revenue, spending exploded.

By the way, you won’t be surprised to learn that politicians increased spending even more  than they increased taxes.

So not only did VATs lead to more spending, they also led to more debt. I guess that’s a win-win from the perspective of statists.

Let’s now return to the WSJ editorial. Proponents sometimes claim that VATs are neutral and efficient. That may be somewhat true in theory (just as an income tax, in theory, might be clean and simple), but in the real world, VATs simply make it possible for politicians to auction off a new source of loopholes.

…while VAT systems are often presented as models of simplicity that theoretically treat all goods and services alike, politicians can’t resist picking winners and losers, creating higher or lower rates for industries at their whim. “The politicians always start running with exemptions,” says E&Y’s Gijsbert Bulk.

Here’s the bottom line.

Americans, be warned. …don’t think it can’t happen here. Liberals campaign on soaking the rich, but they know there’s only so many rich to soak. To finance the growing entitlement state, they need a new broad-based tax that hits the middle class, where the big money is. That means either a VAT or a new energy tax, like the BTU tax Bill and Hillary Clinton proposed in 1993 or the cap-and-tax scheme that President Obama wanted.

The WSJ is correct. We need to be vigilant in the fight against the VAT.

But what makes this battle difficult is that some putative allies are on the wrong side.

Tom Dolan, Greg Mankiw, and Paul Ryan have all expressed pro-VAT sympathies. The same is true of Kevin Williamson, Josh Barro, and Andrew Stuttaford.

And I’ve written that Mitch Daniels, Herman Cain, and Mitt Romney were not overly attractive presidential candidates because they expressed openness to the VAT.

P.S. Some of you may be asking why leftists are so anxious for a VAT since they traditionally prefer class-warfare based tax hikes that extract revenue from the rich.

But here’s one of the dirty secrets of Washington. They may not admit it in public, but sensible leftists understand that there are Laffer-Curve constraints on extracting more revenue from upper-income taxpayers.

They’re familiar with the evidence from the 1980s about the sometimes-inverse link between tax rates and tax revenue and they are aware that “rich” people have substantial control over the timing, level, and composition of their income.

So if you want to collect more money, you have to go over lower-income and middle-income taxpayer.

Which is exactly what the IMF inadvertently revealed in a study showing that VATs are the “effective” way of financing bigger government.

P.P.S. I should have written that leftists generally don’t admit that they want higher taxes on the general population. Because every so often, some of them confess that their goal is to rape and pillage the middle class.

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

Read Full Post »

Some Good News on Tax Reform (if You Prefer the Flat Tax over the National Sales Tax)

I’m ecumenical on tax reform. I’ll support any plan that rips up the internal revenue code and instead lowers tax rates, reduces double taxation, and cuts out distorting loopholes.

And as I explain in this interview, both the flat tax and national sales tax have a low tax rate. They also get rid of double taxation and they both wipe out the rat’s nest of deductions, credits, exclusions, preferences, and exemptions.

You’ll notice, however, that I wasn’t very optimistic in the interview about the possibility of replacing the IRS with a simple and fair tax system.

But perhaps I’m being needlessly gloomy. New polling data from Reason-Rupe show that there’s very strong support for reform. At least if you favor a flat tax.

This doesn’t mean we can expect genuine tax reform tomorrow or the next day.

President Obama is viscerally committed to class-warfare tax policy, for instance, and special interest groups would vigorously resist if there was a real possibility (they would say threat) of scrapping the current tax code.

But it does suggest that tax reform – at least in the form of a flat tax – could happen if there was real leadership in Washington.

So maybe my fantasies will become reality!

And one of the best arguments for reform is that the internal revenue code is an unfair mess.

Consider how rich people are treated by the tax code. The system is so complicated that we can’t tell whether they’re paying too much (because of high rates and pervasive double taxation) or paying too little (because of special preferences and tax shelters).

Regardless, we do know that they can afford lots of lobbyists, lawyers, and accountants. So even though they are far more likely to be audited, they have ample ability to defend themselves.

But the real lesson, as I explain in this CNBC interview, is that the right kind of tax reform would lead to a simple system that treats everyone fairly.

I’m also glad I used the opportunity to grouse about the IRS getting politicized and corrupted.

But I wish there had been more time in the interview so I could have pointed out that IRS data reveal that you get a lot more revenue from the rich when tax rates are more reasonable.

And I also wish I had seen the Reason-Rupe poll so I could have bragged that there was strong support for a flat tax.

Unfortunately, I wouldn’t have been able to make the same claim about the national sales tax. I haven’t seen any recent public opinion data on the Fair Tax or other similar plans, but a poll from last year failed to find majority support for such a proposal.

And a Reason-Rupe poll from 2011 showed only 33 percent support for a national sales tax.

That won’t stop me from defending the national sales tax. After all, it is based on the same principles as a flat tax.

But the polls do suggest (as do anecdotes from the campaign trail) that a flat tax is a more politically viable option for reformers.

The moral of the story is that it makes more sense to push for the flat tax. After all, if I have an easy route and a hard route to get to the same destination, why make life more difficult?

Though the ultimate libertarian fantasy is shrinking government back to what the Founding Fathers had in mind. Then we wouldn’t need any broad-based tax of any kind.

P.S. Here’s my choice for the strangest-loophole award.

P.P.S. Since I shared a poll today with good news, I may as well link to a tax poll that left me somewhat depressed.

P.P.P.S. Let’s end with some IRS humor.

Read Full Post »

Sweden, Spending Restraint, and the Benefits of Obeying Fiscal Policy’s Golden Rule

When I first started working on fiscal policy in the 1980s, I never thought I would consider Sweden any sort of role model.

It was the quintessential cradle-to-grave welfare state, much loved on the left as an example for America to follow.

But Sweden suffered a severe economic shock in the early 1990s and policy makers were forced to rethink big government.

They’ve since implemented some positive reforms in the area of fiscal policy, along with other changes to liberalize the economy.

I even, much to my surprise, wrote a column in 2012 stating that it’s “Time to Follow Sweden’s Lead on Fiscal Policy.”

More specifically, I’m impressed that Swedish leaders have imposed some genuine fiscal restraint.

Here’s a chart, based on IMF data, showing that the country enjoyed a nine-year period where the burden of government spending grew by an average of 1.9 percent per year.

From a libertarian perspective, that’s obviously not very impressive, particularly since the public sector was consuming about two-thirds of economic output at the start of the period.

But by the standards of European politicians, 1.9 percent annual growth was relatively frugal.

And since Mitchell’s Golden Rule merely requires that government grow slower than the private sector, Sweden did make progress.

Real progress.

It turns out that a little bit of spending discipline can pay big dividends if it can be sustained for a few years.

This second chart shows that the overall burden of the public sector (left axis) fell dramatically, dropping from more than 67 percent of GDP to 52 percent of economic output.

By the way, the biggest amount of progress occurred between 1994 and 1998, when spending grew by just 0.27 percent per year. That’s almost as good as what Germany achieved over a four-year period last decade.

It’s also worth noting that Sweden hasn’t fallen off the wagon. Spending has been growing a bit faster in recent years, but not as fast as overall economic output. So the burden of spending is now down to about 48 percent of GDP.

And for those who mistakenly focus on the symptom of red ink rather than the underlying disease of too much spending, you’ll be happy to know that spending discipline in the 1990s turned a big budget deficit (right axis) into a budget surplus.

Now let’s get the other side of the story. While Sweden has moved in the right direction, it’s still far from a libertarian paradise. The government still consumes nearly half of the country’s economic output and tax rates on entrepreneurs and investors max out at more than 50 percent.

And like the United Kingdom, which is the source of many horror stories, there are some really creepy examples of failed government-run health care in Sweden.

• A man who had his penis amputated because he was first misdiagnosed and then forced to wait five months for a follow-up examination.
• Another man was forced to stitch up his own leg after a lengthy wait for medical treatment – and he then had to deal with insult added to injury when the bureaucrats reported him violating rules.
• And another man with no legs was denied a motorized wheelchair because the government ruled that he didn’t necessarily have a permanent condition.

Though I suppose if the third man grew new legs, maybe we would all reassess our views of the Swedish system. And if the first guy managed to grow a new…oh, never mind.

But here are the two most compelling pieces of evidence about unresolved flaws in the Swedish system.

First, the system is so geared toward “equality” that a cook at one Swedish school was told to reduce the quality of the food she prepared because other schools had less capable cooks.

Second, if you’re still undecided about whether Sweden’s large-size welfare state is preferable to America’s medium-size welfare state, just keep in mind that Americans of Swedish descent earn 53 percent more than native Swedes.

In other words, Sweden might be a role model on the direction of change, but not on the level of government.

P.S. On a separate topic, regular readers know that I’m a fan of lower taxes and a supporter of the Second Amendment. So you would think I’d be delighted if politicians wanted to lower the tax burden on firearms.

This is not a hypothetical issue. Here’s a passage from a local news report in Alabama about a state lawmaker who wants a special sales tax holiday for guns and ammo.

Rep. Becky Nordgren of Gadsden said today that she has filed legislation to create an annual state sales tax holiday for gun and ammunition purchases. The firearms tax holiday would occur every weekend prior to the Fourth of July. Alabama currently has tax holidays for back-to-school shopping and severe weather preparedness. Nordgren says the gun and ammunition tax holiday would be a fitting way to celebrate the anniversary of the nation’s birth and Alabama’s status as a gun friendly state.

I definitely admire the intent, but I’m enough of a tax policy wonk that the proposal makes me uncomfortable.

Simply stated, I don’t want the government to play favorites.

For instance, I want to replace the IRS in Washington with a simple and fair flat tax in part because I don’t want the government to discriminate based on the source of income, the use of income, or the level of income.

And I want states to have the lowest-possible rate for the sales tax, but with all goods and services treated equally. Alabama definitely fails on the first criteria, and I wouldn’t be surprised if it also granted a lot of loopholes.

So put me in the “sympathetic skepticism” category on this proposal.

Though I imagine this Alabama lass could convince me to change my mind.

P.P.S. A few days ago, the PotL noticed that I shared some American-European humor at the end of a blog post. She suggests this would be a good addition to that collection.

I can’t comment on some of the categories, but I will say that McDonald’s in London is just as good as McDonald’s in Paris, Milan, Geneva, and Berlin.

Read Full Post »

Underwhelmed: Grading the New Tax Reform Plan from the Chairman of the Ways & Means Committee

To make fun of big efforts that produce small results, the famous Roman poet, Horace, wrote “The mountains will be in labor, and a ridiculous mouse will be brought forth.”

That line sums up my view of the new tax reform plan introduced by Congressman Dave Camp, Chairman of the House Ways & Means Committee.

To his credit, Congressman Camp put in a lot of work. But I can’t help but wonder why he went through the time and trouble. To understand why I’m so underwhelmed, let’s first go back in time.

Back in 1995, tax reform was a hot issue. The House Majority Leader, Dick Armey, had proposed a flat tax. Congressman Billy Tauzin was pushing a version of a national sales tax. And there were several additional proposals jockeying for attention.

To make sense of this clutter, I wrote a paper for the Heritage Foundation that demonstrated how to grade the various proposals that had been proposed.

As you can see, I included obvious features such as low tax rates, simplicity, double taxation, and social engineering, but I also graded plans based on other features such as civil liberties, fairness, and downside risk.

There obviously have been many new plans since I wrote this paper, most notably the Fair Tax (a different version of a national sales tax than the Tauzin plan), Simpson-Bowles, the Ryan Roadmap, Domenici-Rivlin, the Heritage Foundation’s American Dream proposal, the Baucus-Hatch blank slate, and – as noted above – the new tax reform plan by Congressman Dave Camp.

Given his powerful position as head of the tax-writing committee, let’s use the 1995 guide to assess the pros and cons of Congressman Camp’s plan.

Rates: The Top tax rate for individual taxpayers is reduced from 39.6 percent to 35 percent, which is a disappointingly modest step in the right direction. The corporate tax rate falls from 35 percent to 25 percent, which is more praiseworthy, though Camp doesn’t explain why small businesses (who file using the individual income tax) should pay higher rates than large companies.

Simplicity: Camp claims that he will eliminate 25 percent of the tax code, which certainly is welcome news since the internal revenue code has swelled to 70,000-plus pages of loopholes, exemptions, deductions, credits, penalties, exclusions, preferences, and other distortions. And his proposal does eliminate some deductions, including the state and local tax deduction (which perversely rewards states with higher fiscal burdens).

Saving and Investment: Ever since Reagan slashed tax rates in the 1980s, the most anti-growth feature of the tax code is probably the pervasive double taxation of income that is saved and invested. Shockingly, the Camp plan worsens the tax treatment of capital, with higher taxation of dividends and capital gains and depreciation rules that are even more onerous than current law.

Social Engineering: Some of the worst distortions in the tax code are left in place, including the healthcare exclusion for almost all taxpayers. This means that people will continue to make economically irrational decisions solely to benefit from certain tax provisions.

Civil Liberties: The Camp plan does nothing to change the fact that the IRS has both the need and the power to collect massive amounts of private financial data from taxpayers. Nor does the proposal end the upside-down practice of making taxpayers prove their innocence in any dispute with the tax authorities.

Fairness: In a non-corrupt tax system, all income is taxed, but only one time. On this basis, the plan from the Ways & Means Chairman is difficult to assess. Loopholes are slightly reduced, but double taxation is worse, so it’s hard to say whether the system is more fair or less fair.

Risk: There is no value-added tax, which is a critically important feature of any tax reform plan. As such, there is no risk the Camp plan will become a Trojan Horse for a massive expansion in the fiscal burden.

Evasion: People are reluctant to comply with the tax system when rates are punitive and/or there’s a perception of rampant unfairness. It’s possible that the slightly lower statutory rates may improve incentives to obey the law, but that will be offset by the higher tax burden on saving and investment.

International Competitiveness: Reducing the corporate tax rate will help attract jobs and investment, and the plan also mitigates some of worst features of America’s “worldwide” tax regime.

Now that we’ve taken a broad look at the components of Congressman Camp’s plan, let’s look at a modified version of my 1995 grades.

You can see why I’m underwhelmed by his proposal.

Congressman Camp’s proposal may be an improvement over the status quo, but my main reaction is “what’s the point?”

In other words, why go through months of hearings and set up all sorts of working groups, only to propose a timid plan?

Now, perhaps, readers will understand why I’m rather pessimistic about achieving real tax reform.

We know the right policies to fix the tax code.

And we have ready-made plans – such as the flat tax and national sales tax – that would achieve the goals of tax reform.

Camp’s plan, by contrast, simply rearranges the deck chairs on the Titanic.

P.S. If you need to be cheered up after reading all this, here’s some more IRS humor to brighten your day, including the IRS version of the quadratic formula, a new Obama 1040 form, a list of tax day tips from David Letterman, a cartoon ofhow GPS would work if operated by the IRS, an IRS-designed pencil sharpener, a sale on 1040-form toilet paper (a real product), and two songs about the tax agency (hereand here),  and a PG-13 joke about a Rabbi and an IRS agent.

Read Full Post »

Great Moments in Tax Enforcement

I’ll be first in line if there’s a contest over who thinks most strongly that politicians are corrupt, or whether they can waste money in creative ways.

But if somebody asserts that politicians are stupid, I’m going to argue on the other side.

This isn’t because I’m a fan of elected officials. Far from it. However, having been a student of public policy for three decades, I have a grudging admiration for their animal cunning. They’ve developed some remarkably clever ways of extracting more and more revenue from taxpayers.

The bureaucrats at the Paris-based Organization for Economic Cooperation and Development are turning an old pact on mutual administrative assistance between governments into something akin to a World Tax Organization that will have the power to penalize nations that don’t impose onerous tax burdens.

Showing amazing capacity for innovation, Pakistan’s tax police hires transgendered people to encourage (presumably homophobic) taxpayers to cough up more money.

The tax police in England have floated a proposal to have all paychecks go directly to the tax authority, which would then decide how much gets forwarded to taxpayers.

And since we’re talking about the United Kingdom, that nation’s despicable political class wants to improve compliance by indoctrinating kids to snitch on their parents.

Speaking of snitches, tax authorities in both the state of New York and the city of Chicago have programs encouraging neighbors to rat our neighbors.

World Bank bureaucrats put together a report card on the tax systems of different nations, and the way to get a high grade is to impose high tax burdens.

Our friends at the Internal Revenue Service have something called the Taxpayer Advocate Service that mostly exists to – get ready for a surprise – push policies to expand the size and power of the IRS.

And who among us isn’t impressed that the German tax authorities have figured out how to levy a prostitute tax using parking meters.

That last example is a good segue into our newest example of great moments in tax enforcement.

The state of New York has won the right to impose a sales tax on lap dances and other…um…services at strip clubs. Here are some excerpts from the Daily News.

The jiggling and gyrating strippers at Larry Flynt’s Hustler Club are selling sexual fantasy — not demonstrating their dance skills — in the private rooms at the Hell’s Kitchen skin palace, an administrative law judge ruled. “The dancing portion of the service is merely ancillary to the performer removing her clothes or creating the sexual fantasy,” Judge Donna Gardiner wrote in a decision released Monday that means the raunchy moves are subject to the state sales tax. …Gardiner said the Hell’s Kitchen jiggle joint will have to pay $2.1 million in sales tax on the $23.8 million worth of scrip, or the club’s in-house currency, that it sold between June 1, 2006 and November 2008.

And don’t think the government didn’t investigate this issue closely before rendering a decision.

After listening to strippers’ testimony and watching the club’s videotapes, Gardiner ruled that some of the strippers’ routines involve dance, choreography and music, but overall, these are not artistic performances.

I wonder if they also read copies of Hustler magazine? This might be a case where government officials went above and beyond the call of duty to study a topic.

Regardless, the strip club didn’t prevail. I guess art, like beauty, is in the eye of the beholder.

I suppose this is the point where I should make some more jokes, but I’m enough of a tax dork that instead I’m going to make a serious point.

The problem in New York is not that the Hustler Club is now being taxed. The problem is that there’s an exemption from the sales tax for “artistic performances.”

Don’t get me wrong. I would prefer that there not be an income tax or sales tax in New York. But if the state is going to impose a sales tax, then all consumption should be treated equally.

This is also my view on the flat tax. I would prefer no income tax, and America did quite well with that approach until 1913. But if there is going to be an income tax, then you minimize corruption and economic damage by having the levy apply equally and neutrally.

At least one Judge in New York seems to have the right perspective on this issue. Here’s another blurb from the Daily News report.

One judge, Robert Smith, criticized the majority, arguing that it was making a distinction based on their preferences. …“Perhaps, for similar reasons I do not read Hustler magazine; I would rather read the New Yorker,” he wrote. “I would be appalled, however, if the state were to exact from Hustler a tax that the New Yorker did not have to pay, on the ground that what appears in Hustler is insufficiently ‘cultural and artistic.’”

Needless to say, I doubt politicians pay much attention to these philosophical and economic arguments for genuine fairness in the tax code.

They simply want more money. And even though I wish they were stupid and incompetent in this regard, they have great talents when it comes time to take our money.

But there is one easy way to avoid heavy taxation. Just drop out of the labor force and live off the government. Millions of your neighbors already have taken this route.

It’s not good for the nation, but it sure is the logical response to perverse government policies that make it less and less attractive to pull that wagon and more and more comfortable to ride in the wagon.

As Henry Payne sarcastically noted, it’s time to party like the Greeks!

Read Full Post »

Why the So-Called Marketplace Fairness Act Is a Misguided Expansion of Power for State Governments

I’m either a total optimist or a glutton for punishment. I recently explained the benefits of “tax havens” for the unfriendly readers of the New York Times.

Now I’m defending a different form of tax competition for CNN, another news outlet that leans left. In this case, the topic is whether states can reach beyond their borders for tax revenue.

Here’s some of what I wrote about the so-called Marketplace Fairness Act that was just approved by the Senate and presumably will soon be considered by the House. I start by explaining that the powers of governments should be constrained by borders.

Let’s assume you live in Utah, Hawaii or South Carolina, and you go to Nevada for a vacation. While in Las Vegas, you spend some money in the casinos. Gambling is illegal in the state where you live, so should the cops in your home state be able to track your activities and arrest you for what happened in Nevada? The answer, needless to say, is no. Or at least it should be no. Common sense tells us that state laws should only apply to things that happen inside a state’s borders. But this sensible principle is being tossed out the window by the U.S. Senate, which has approved a proposal that would give states the ability to impose their taxes on out-of-state sellers.

I also explain that this issue isn’t about whether the Internet should be taxed. Indeed, as a fan of the flat tax, I don’t want special favors or special penalties in the tax code. Internet profits and Internet sales should face the same (ideally low) taxes as all other sectors of the economy.

Instead, the fight is really about whether a state government has the right to force out-of-state merchants to act as deputy tax collectors. If you believe that borders should limit the power of governments, the answer is no.

But that rubs politicians the wrong way.

…some governors and state legislators don’t like this system because many states don’t bother imposing any tax on sales to out-of-state consumers. And even if states levied taxes on sales to out-of-state consumers, what about the five states that don’t have any sales tax? Wouldn’t those states become “tax havens” for Internet sales? For these reasons, some politicians fret that the Internet will put competitive pressure on them to keep their sales tax rates from getting too high.

But this is exactly why politicians shouldn’t be allowed to tax beyond their borders. We want tax competition in order to limit the greed of the political class.

States with no payroll income taxes, such as Nevada, Florida, Tennessee, Texas and New Hampshire, help restrain the greed of politicians in states that have punitive income tax systems, such as California, Illinois, New York and Massachusetts. And if politicians in the high-tax states refuse to adjust their bad tax policies, then people should have the freedom to escape and earn income in other states. The same principle applies to sales taxes. If politicians in, say, Arizona are worried that consumers will go online or travel across the border to avoid the punitive sales tax, then they should reduce their sales tax rate.

So what’s the bottom line?

Politicians can choose to maintain uncompetitive tax systems, of course, but they also should be prepared to accept the consequences. I don’t think California and Illinois should try to become the France and Greece of America, but that’s something for the voters of those states to figure out for themselves. In any event, they shouldn’t have the right to force out-of-state sellers to act as deputy tax collection officials if they decide to impose bad tax policy. …To be blunt, a sales tax cartel is bad news for tax policy and bad news for privacy. Let’s limit the power of state governments so they can only screw up things inside their own borders.

Let’s close on a light note. Here’s a clever cartoon from Nate Beeler.

I agree with the cartoon’s message, at least to the extent that onerous taxes can be very deadly to an industry. But, as noted above, I don’t want special tax-free status for the Internet.

So the ideal cartoon would show lots of surfers from all industries exercising the freedom to pick the waves with the smallest and least destructive sharks. Some might even call that federalism.

Read Full Post »

Why Art Laffer’s Unfortunate Endorsement of a State Sales Tax Cartel Is Misguided

Art Laffer has a guaranteed spot in the liberty hall of fame because he popularized the common-sense notion that you can’t make any assumptions about tax rates and tax revenue without also figuring out what happens to taxable income.

Lot’s of people on the left try to denigrate the “Laffer Curve,” but it’s worth noting that even left-wing economists now admit that you don’t maximize revenue with a 100 percent tax rate.*

Indeed, I think the only people who now cling to that absurd view are the bureaucrats at the Joint Committee on Taxation.

But this post isn’t about the Laffer Curve. It’s about a disappointing column that Art Laffer wrote for today’s Wall Street Journal.

The issue is whether states should have the power to impose taxes on sales that take place outside their borders. Art starts the column with a very good point about the link between growth and living standards.

After enjoying an average growth rate above 3.5% per year between 1960 and 1999, Americans have had to make do with less than one-half that pace since 2000. The consequences are already dramatic and will become even more so over time. Overall we are 20% poorer today than we would be had the pre-2000 growth rate persisted.

That’s a great point. I’ve also tried to get people to focus on the importance of long-run growth.

Heck, just look at what’s happened in Hong Kong and Singapore and you’ll agree.

In his column, Art also correctly defines good tax policy.

The principle of levying the lowest possible tax rate on the broadest possible tax base is the way to improve the incentives to work, save and produce—which are necessary to reinvigorate the American economy and cope with the nation’s fiscal problems.

But he then asserts that an Internet sales tax cartel somehow will result in better policy.

…there are reforms that can alleviate the problems associated with declining sales-tax bases and, at the same time, allow the states to move closer to a pro-growth tax system. One such reform would be to have Internet sellers collect the sales taxes that are owed by in-state consumers when they purchase goods over the Web. So-called e-fairness legislation addresses the inequitable treatment of retailers based on whether they are located in-state (either a traditional brick-and-mortar store or an Internet retailer with a physical presence in the state) or out of state (again as a brick-and-mortar establishment or on the Internet). …The exemption of Internet and out-of-state retailers from collecting state sales taxes reduced state revenues by $23.3 billion in 2012 alone, according to an estimate by the National Conference of State Legislatures. The absence of these revenues has not served to put a lid on state-government spending. Instead, it has led to higher marginal rates in the 43 states that levy income taxes.

This is a very disappointing collection of sentences. Let’s review.

1. States have declining sales-tax bases because state lawmakers treat that levy the same way that politicians in Washington treat the income tax – they put in loopholes in exchange for campaign cash and political support. For them to complain about declining sales-tax bases is sort of like the old joke about the guy who murders  his parents and then asks the court for mercy because he’s an orphan.

2. Art offers zero evidence that state governments would use the additional revenue from a state sales tax cartel to reduce income tax rates. What’s next, a column saying we should have a value-added tax because the politicians may use the revenue to get rid of the income tax? Yeah, good luck with that approach.

3. Why is it “inequitable” for there to be different tax policies in different states? That’s another way of describing federalism, and it’s something we should be celebrating and promoting. Particularly since it promotes tax competition, which is one of the most effective ways of restraining the greed of the political class.

4. The Internet sales tax cartel being promoted by Art and various politicians requires that governments have the ability to tax sales that tax place outside their borders. That’s an assault of sovereignty, particularly since out-of-state merchants will be coerced into being tax collectors for a distant government. This is the same dangerous ideology that is used by high-tax governments to promote global anti-tax competition policies.

5. Art offers zero evidence that the absences of a state sales tax cartel has led to higher income tax rates. Yes, some states have raised tax rates in recent years, but others have lowered tax rates.

For more information on why a sales tax cartel among the states would be a bad idea, here’s my short speech to an audience on Capitol Hill.

*This should be an obvious point, but I can’t resist emphasizing that maximizing revenue should not be the goal of fiscal policy.

Read Full Post »

Debating Whether State Governments Can Impose Taxation without Representation on Out-of-State Merchants

If you saw my speech to Capitol Hill staff on the topic, you know I’m strongly opposed to schemes that would allow greedy state politicians to impose taxes on online sales that occur outside their borders.

I reiterated these sentiments in a debate that was posted today by U.S. News & World Report. Here’s some of what I wrote.

The debate over the so-called Marketplace Fairness Act is not about a level playing field. It is an attempt by politicians to grab more tax revenue to facilitate bigger government. …they want to create an elaborate and intrusive system to force out-of-state merchants to act as tax collectors. …To understand why this is a radical step, imagine if you took a trip to Las Vegas and played blackjack, but then got arrested when you returned home because your state doesn’t allow gambling. That would be an outrage because a state only has sovereign power to enforce laws (good ones or bad ones) on things that take place within its borders. And it would be equally outrageous if state governments tried to force Las Vegas casinos to discriminate against non-Nevada residents.

I also explain why this type of system is bad news for reasons other than fiscal policy.

This legislation also has very troubling implications for privacy. It can only work by creating a massive database that matches online purchases with the state and local sales tax rates for every consumer. I don’t know about you, but I’m not confident that this type of untested system will be secure. We’ve already seen major leaks of confidential data from both government and private companies. This database will be a magnet for identity thieves and other hackers looking for credit card information.

If you agree, feel free to give me an “up” vote on this U.S. News page featuring all the debate participants.

I’ve had good luck in these debates, coming in first place in debates on double taxation, European fiscal policy, flat tax, and Obamanomics, so I don’t want to break the streak.

Otherwise I may have to cry and sulk, like I did after Richard Epstein and I lost the Keynesian stimulus debate in New York City (you can click here to see why we should have prevailed!).

Read Full Post »

Debating Whether States Should Impose Class-Warfare Tax Policy

I wrote last week about the destructive and self-defeating impact of high state taxes. Simply stated, when states such as California, Illinois, and New York get too greedy, the geese with the golden eggs fly across the border.

And that was one of my main points in this CNBC debate about state governments and class-warfare tax policy with Jared Bernstein.

Since you never get the opportunity to make all your points in an interview, here are a few additional thoughts.

• Jared admits that tax rates can get too high, but then he claims that the Laffer Curve only exists “in the heads of people like Dan and Arthur Laffer.” Those are mutually inconsistent statements.
• Jared seems to think it’s important that big business is siding with big government in Oklahoma and supporting the income tax. But that’s hardly a surprise since large companies often prefer corporatism.
• Jared actually cited Massachusetts and New Jersey as low-tax states, a point that even the host thought was a bit kooky. I guess this means France is a low-tax country in Jared’s fantasy world.

But I also think I made a mistake. When asked how states can get rid of their income taxes, I mentioned that sales taxes do less damage – per dollar raised – than income taxes. That’s true, but I should have stated first and foremost that states should reduce the burden of government spending.

One final point. This cartoon shows what eventually happens in a tax-and-spend society.

P.S. Jared was the co-author of the infamous study claiming that Obama’s so-called stimulus would keep the unemployment rate below 8 percent. Look at this chart and draw your own conclusions.

Read Full Post »

Should States Be Allowed to Tax Outside their Borders, Particularly if It Means a Database of Your Online Purchases?

Tax competition, as I have explained to the point of being a nuisance, is an important restraint on the greed of the political class. Simply stated, politicians are less like to over-tax and over-spend if they know that geese with the golden eggs can fly across the border.

This is mostly an issue in the world of international tax policy, but the same principles apply for sub-national governments inside a nation.

State and local governments should compete with each by offering the best fiscal climate. Sadly, just as high-tax nations such as France and Germany are trying to hinder global tax competition, high-tax state governments are seeking to undermine fiscal rivalry inside the United States.

More specifically, they want to create a state sales tax cartel that would allow governments to force out-of-state businesses serve as deputy tax collectors. Greedy politicians are fearful that online shopping deprives them of revenue, so they are pushing for a privacy-threatening database that will enable them to track and tax these transactions.

I explained this issue last week for a standing-room-only audience on Capitol Hill.

The entire discussion is posted online, including the very astute observations of my former Heritage Foundation colleague, Adam Thierer, now at the Mercatus Center.

Investor’s Business Daily also has opined on why this is a bad idea, but if you want to get really worried, the clowns at the United Nations want to power to tax and regulate the Internet.

Read Full Post »

America’s Greediest State and Local Governments

I ran across two interesting lists showing how politicians at the state and local level are often just as bad as the ones in Washington, DC. First, Forbes has an article identifying the 10 states with the highest income tax rates. The top rate is a big deterrent to entrepreneurs and investors, but it’s also important to look at the income level where the top tax rate takes effect. Yes, Hawaii, Oregon, and California have terrible tax policy, but Iowa, Maine, and Washington, DC, deserve special scorn for raping the middle class.

Hawaii:                       11% (income over $400,000 (couple), $200,000 (single))
Oregon:                      11% (income over $500,000 (couple), $250,000 (single))
California:                   10.55% (income over $1 million)
Rhode Island:             9.9% (income over $373,650)
Iowa:                          8.98% (income over $64,261)
New Jersey                 8.97% (income over $500,000)
New York:                   8.97% (income over $500,000)
Vermont:                     8.95% (income over $373,650)
Maine:                        8.5% (income over $39,549 (couple), $19,749 (single))
Washington, D.C.:      8.5% (income over $40,000)

Looking at the other major source of revenue for state and local governments, the Tax Foundation identifies the cities with the highest total sales tax rate – a number that often includes three separate levies by state, county, and city governments. Here are the top 10. Or should I say worst 10?

Birmingham AL              10.000%
Montgomery AL             10.000%
Long Beach CA                9.750%
Los Angeles CA               9.750%
Oakland CA                    9.750%
Fremont CA                     9.750%
Chicago IL                     9.750%
Glendale AZ                    9.600%
Seattle WA                     9.500%
San Francisco CA           9.500%

One thing that stands out is that California is on both lists, which helps explain why the state is such a basket case. Seattle deserves a special mention because at least there is no state income tax in Washington.

Last but not least, it’s worth mentioning that there’s no sales tax or income tax in New Hampshire. Live Free or Die!

Read Full Post »

Seeking to Undermine Competition from the Internet, Politicians Pushing Privacy-Destroying State Sales Tax Cartel

One of the good features of the Internet is that it gives people more options. But this is bad news for politicians, who like to control – and tax – what people are doing. But it’s not easy for politicians at the state level to impose high sales taxes on consumers when people have the freedom to buy things sold in other states. Politicians do impose “use taxes,” which supposedly require people to pay taxes on goods purchased in other states, but 99 percent of consumers evade this tax since there’s no feasible way to enforce the levy. In an effort to gain more control (and more money), greedy politicians at the state and local level want Congress to impose a nationwide sales tax cartel. I wrote about why this was a bad idea back in 2001, both because it would undermine tax competition between states and because it would be a gross invasion of privacy. Here’s an excerpt from a report on the latest battle in this fiscal war:

The halcyon days of tax-free Internet shopping will, if Rep. Bill Delahunt gets his way, soon be coming to an abrupt end. Delahunt, a Massachusetts Democrat, introduced a bill on Thursday that would rewrite the ground rules for Internet and mail order sales by eliminating the option for many Americans to shop over the Internet without paying state sales taxes. At the moment, Americans who shop over the Internet from out-of-state vendors usually aren’t required to pay sales taxes. Californians buying books from Amazon.com or cameras from Manhattan’s B&H Photo, for example, won’t be required to cough up the sales taxes that they would if shopping at a local mall. …The National Conference of State Legislatures applauded Delahunt’s legislation, saying he should be commended for allowing states to collect as much as $23 billion in new taxes. …the pro-tax forces have offered a proposal that they hope Congress can be persuaded to adopt. The concept is called the Streamlined Sales Tax Agreement, invented in 2002 by state tax officials hoping to straighten out some of sales tax laws’ most notorious convolutions. Since then, some 24 states have signed on, either wholly or partially, to the agreement, meaning they agree to simplify their tax codes and make them uniform. If enough states participate, proponents believe it will be easier to convince Congress to make sales collection mandatory for out-of-state retailers. …State tax collectors haven’t exactly been idle while waiting for Congress. They’ve been trying to force Amazon to turn over purchase records in North Carolina, attempting to force retailers to become tax-tattlers in California and Tennessee, and putting the squeeze on affiliate programs in Colorado.

Read Full Post »