Time to (Finally) Defund the OECD?

Nearly 13 years ago, I narrated this video about the Organization for Economic Cooperation and Development, a Paris-based international bureaucracy that uses American tax dollars to advocate for bigger government and higher taxes.

Everything I said in that video is still true, except now the federal budget is far bigger and the OECD has had about a dozen more years to push for dirigiste policies.

It is particularly disgusting (and hypocritical) that the OECD is a big cheerleader for higher taxes, yet its bureaucrats get tax-free salaries.

Not only does the OECD urge higher taxes in countries all around the world (even poor countries!), it also lobbies to undermine tax competition by advocating for policies such as Joe Biden’s corporate tax cartel.

And it adds insult to injury that American taxpayers are subsidizing this nonsense.

But maybe that will come to an end. Reporting for Bloomberg Tax, Samantha Handler and Chris Cioffi explain that Republicans are threatening to end U.S. subsidies for the Paris-based bureaucracy.

Republicans are plotting ways to push back on the landmark global tax deal agreed to by nearly 140 countries, including by calling to pull US funding for the OECD that’s leading the negotiations. …“There’s concerns about the work product of the OECD,” said Rep. Adrian Smith (R-Neb.), the Ways and Means trade subcommittee chairman. …The US currently funds 19.1% of Part I of the OECD’s budget, according to the letter addressed to House Appropriations State, Foreign Operations, and Related Programs Chairman Mario Diaz-Balart (R-Fla.) and ranking member Rep. Barbara Lee (D-Calif.). …Chairman Jason Smith (R-Mo.) sent a letterlast month to the OECD Secretary-General Mathias Cormann, urging him to reject all proposals that would affect US jobs and tax revenue. Jason Smith called Pillar Two’s undertaxed profits rule “fundamentally flawed.”

Needless to say, Republicans should defund the OECD. Giving American tax dollars to the bureaucrats in Paris is a subsidy for the left.

For all intents and purposes, this is an IQ test for Republicans. Presumably, they are smart enough to understand that they should not send money to the Democratic National Committee or MSNBC. You would think they would also be smart enough not to subsidize a bureaucracy that advocates for the DNC/MSNBC agenda.

Unfortunately, Republicans have a well-deserved reputation for being the “stupid party.”

• They had total control of Washington from 2002-2006 during the Bush year. Did they defund the OECD? No.
• They had todal control of Washington from 2017-2018 during the Trump years. Did they defund the OECD? No.

To make matters worse, Republicans are sometimes so stupid that they actively help the OECD push for bad policy. Here’s another blurb from the article.

Momentum started building on the global tax talks under the Trump administration, with the US participating actively in the negotiations.

To be fair, the Trump Administration sort of proposed to defund the OECD back in 2017, but there was zero follow-through (hardly a surprise since Trump wound up being a big spender).

Instead, his dilettante Treasury Secretary actively supported the OECD.

The bottom line is that I’m happy that some Republicans are threatening to defund the OECD but I’m not overflowing with confidence that they will have the intelligence and diligence to make it happen. Even if they wind up back in power after the 2024 election.

P.S. There is at least one Republican who is very principled on the issue of the OECD.

P.P.S. The OECD sometimes resorts to grotesque dishonesty while pushing for bigger government.

P.P.P.S. I’ve been accused of “trading with the enemy” because I argue against the OECD. Heck, the bureaucrats even threatened to throw me in a Mexican jail.

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Prosperity and Taxation: What Can We Learn from the 1960s?

Back in 2010, I shared a comparison of Obama and JFK on tax policy. For an update, here’s a comparison of Biden’s class-warfare agenda with JFK’s supply-side agenda.

I’m sharing this video for two reasons.

The first reason is that it shows that some Democrats in the past were very sensible about tax policy.

The second reason is that it gives me a good excuse to discuss what we can learn from tax policy in the 1960s, thus adding to our collection.

• Tax Lessons from the 1920s
• Tax Lessons from the 1930s
• Tax Lessons from the 1950s
• Tax Lessons from the 1980s

I’ll start with the caveat that tax policy does not necessarily overlap with 10-year periods. But we can learn by examining significant tax policy changes that occurred (or, in the case of the 1950s, did not occur) during various eras.

For the 1960s, the key change was the Revenue Act of 1964, generally known as the Kennedy tax cuts (proposed by President Kennedy in 1963 and then adopted in 1964 after his assassination).

Here’s what Kennedy proposed, as explained by the JFK library.

Declaring that the absence of recession is not tantamount to economic growth, the president proposed in 1963 to cut income taxes from a range of 20-91% to 14-65% He also proposed a cut in the corporate tax rate from 52% to 47%. …arguing that “a rising tide lifts all boats” and that strong economic growth would not continue without lower taxes.

And here’s what was enacted, as summarized by Wikipedia.

The act cut federal income taxes by approximately twenty percent across the board, and the top federal income tax rate fell from 91 percent to 70 percent. The act also reduced the corporate tax from 52 percent to 48 percent and created a minimum standard deduction.

The good news is that the Kennedy tax cuts were the right kind of tax cuts. Marginal tax rates were reduced on work, saving, investment, and entrepreneurship.

The bad news is that the top tax rate was still confiscatory, though 70 percent obviously was not as bad as 91 percent. And a 48 percent corporate rate was not much of an improvement compared to 52 percent.

That being said, moving in the right direction produced good outcomes.

People often talk about the booming economy in the 1960s. And there is some evidence to support that view since inflation-adjusted economic output grew rapidly as the tax cuts were implemented – by 6.5 percent in 1965 and 6.5 percent in 1966.

But I’m cautious about drawing sweeping conclusions from short-run data, especially since we know many other policies also have an impact on economic performance.

So let’s focus instead on some tax-related variables. Here’s a chart that I shared back in 2015, showing that upper-income taxpayers paid more when tax rates were reduced (the same thing happened in the 1980s).

That chart was taken from a report I wrote way back in 1996.

And here’s another chart from the same publication. This one shows that lower tax rates were associated with rising revenues. Especially as the changes were being implemented.

By the way, this does not mean that the tax cut was self-financing.

The core lesson of the Laffer Curve is not that tax cuts “pay for themselves.” That only happens in rare circumstances.

Instead, the lesson is that lower tax rates encourage more productive behavior, which means more taxable income. It then becomes an empirical question of how much of the revenue lost from lower rates is offset by the revenue gained from more taxable income.

And, in the 1960s, we know there was a big Laffer Curve response from upper-income taxpayers. Why? Because they have considerable control over the timing, level, and composition of this income.

Which brings us to the final lesson, which is that class-warfare tax policy was a bad idea in the 1960s and it is still a very bad idea today.

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The Case Against Biden’s Class-Warfare Tax Policy, Part VI

Last week, I wrote about Biden’s proposed budget, focusing on the aggregate increase in the fiscal burden.

Today, let’s take a closer look at his class-warfare tax proposals. Consider this Part VI in a series (Parts I-V can be found here, here, here, here, and here), and we’ll use data from the folks at the Tax Foundation.

We’ll start with this map, which shows each state’s top marginal tax rate on household income if Biden’s budget is enacted.

The main takeaway is that five state would have combined top tax rates of greater than 50 percent if Biden is successful in pushing the top federal rate from 37 percent to 39.6 percent.

At the risk of understatement, that’s not a recipe for robust entrepreneurship.

While it is a very bad idea to have high marginal tax rates, it’s also important to look at whether the government is taxing some types of income more than one time.

That’s already a pervasive problem.

Yet the Tax Foundation shows that Biden wants to make the problem worse. Much worse.

His proposed increase in the corporate tax rate is awful, but his proposal to nearly double the tax burden on capital gains is incomprehensibly foolish.

I guess we should be happy that Biden didn’t propose to also increase the 40 percent rate imposed by the death tax.

But that’s not much solace considering what Biden would do to American competitiveness. Here’s our final visual for today.

As you can see, the president wants to make the US slightly worse than average for personal income taxes, significantly worse than average for the corporate income tax, and absurdly worse than average for taxes on capital gains and dividends.

I’ll close by observing that some of my leftist friends defend these taxes since they target the “evil rich.”

I have a moral disagreement with their view that people should be punished simply because they are successful investors, entrepreneurs, or business owners.

But the bigger problem is that they don’t understand economics. Academic research shows that ordinary workers benefit when top tax rates are low, and there’s even more evidence that workers are hurt when there is punitive double taxation on saving and investment.

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The Most Important Thing to Understand about Biden’s New Budget

President Biden has released his 2024 budget, which mostly recycles the tax-and-spend proposals that he failed to achieve as part of his original “Build Back Better” plan.

It is not easy figuring out his worst policy.

• Is it one of the proposed tax increases, such as the higher corporate tax rate or the increased burden of the death tax?
• Is it one of the expansions of the welfare state, such as the per-child handouts that would gut Bill Clinton’s welfare reform?

I could probably write dozens of columns (as I did the past two years) about the many bad policies that Biden is pushing.

For today, though, let’s focus on the aggregate numbers.

We’ll start with the fact that Biden’s budget violates the Golden Rule of fiscal policy. He wants the burden of government spending over the next 10 years to increase at twice the rate of inflation (based on Table S-1 and S-9 of his budget)

If you want raw numbers, Biden wants the spending burden to rise from about $6.4 trillion this year to $10 trillion-plus in 2033.

On the revenue side, he wants the tax burden to jump from $4.8 trillion this year to nearly $8 trillion in 2033.

To be fair, spending and taxes automatically increase every year, thanks to inflation, demographic change, and previously enacted legislation.

You can see those “baseline” numbers in Table S-3 of Biden’s budget.

So if we want to see the net effect of what Biden is proposing, we should compared the “baseline” data to his budget numbers.

And when we do that, we find that he wants an additional $1.85 trillion of spending over the next 10 years. Even more shocking, he wants an additional $4.85 trillion of tax revenue.

I’ll close with a couple of observations.

First, Biden has a giant gimmick in his budget. If you look at the details for his proposed per-child handout (Table S-6 of his budget, bottom of page 142), you’ll notice that he’s only proposing the policy for one year.

Why? Because it is enormously expensive, with an annual cost of more than $250 billion.

Yet we know the White House and congressional Democrats want this policy to be permanent. So if we extended the cost of the per-child handout for the full 10 years, the amount of new spending in Biden’s budget would be much closer to the level of new taxes in his budget.

Second, Biden’s budget shows why supporters of good fiscal policy should not focus on deficits. A myopic fixation on red ink allows a big spender like Biden to claim the moral high ground because his proposed tax increase is even bigger than his proposed spending increase.

The variable that matters is the overall burden of government spending. And the goal should be reducing that burden, regardless of whether it is financed with taxes, borrowing, or printing money.

P.S. At the risk of stating the obvious, Biden’s tax-and-spend agenda would cause considerable economic damage.

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Bad Math Leads to Bad Economics

The combination of demographic change and poorly designed entitlement programs is producing an ever-increasing burden of federal spending.

In my Twelfth Theorem of Government, I pointed out that this inevitably will mean big tax increases on lower-income and middle-class households.

As stated in the Theorem, if there was a way of financing big government by only taxing the rich, other nations already would have made that choice.

Some of them have tried, but there simply are not enough rich people to finance large welfare states.

But I don’t want any tax increases. Class-warfare tax increases are a bad idea, and so are tax increases on regular people.

It would be much better for the country to reform entitlement programs.

But many politicians (both Democrats and Republicans) disagree.

However, that means they want big tax increases on lower-income and middle-class household.

To emphasize this point, I unveiled my Fifteenth Theorem of Government, which drives home the point that you can’t have big government without pillaging ordinary people.

I pontificated on this issue today in a MoneyShow presentation.

There were lots of charts to justify my two theorems, but these six points hopefully are a good summary of my argument.

For what it’s worth, the first five points are basic math.

Indeed, there are some honest folks on the left (including Paul Krugman) who have made similar observations.

My final point is where the honest leftists and I have a big disagreement. They think it would be a good thing to copy Europe. But I think that would be crazy since European living standards are much lower because of bloated welfare states.

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Big-Spending Republicans Are Big-Taxing Republicans

My Fifteenth Theorem of Government points out there is an “unavoidable choice” between entitlement reform and tax policy.

Simply stated, the folks who oppose fixing entitlements – including so-called national conservatives and politicians such as Donald Trump – are in favor of giant tax increases on lower-income and middle-class Americans.

They don’t admit their support for huge tax hikes on regular people, of course, but that’s the inevitable outcome if fiscal policy is left on autopilot. Even Paul Krugman admits that’s what will happen.

This process already is underway in the United Kingdom.

The Conservative Party became recklessly profligate under Boris Johnson, causing a big bump in the country’s (already excessive) spending trajectory.

And bad spending policy is now leading to bad tax policy (the British pound no longer is the world’s reserve currency, so there’s not as much ability to finance ever-expanding spending by endlessly issuing new debt).

As explained in a Wall Street Journal editorial from last November, Prime Minister Rishi Sunak and his Chancellor of the Exchequer Jeremy Hunt have a tax agenda somewhat akin to Joe Biden’s.

The Chancellor and his boss, Prime Minister Rishi Sunak, are making a particular tax grab at highly mobile workers, especially in financial services, by reducing the threshold for the top 45% income-tax rate to £125,000 from £150,000. The Treasury pretends this will rake in an additional £3.8 billion in revenue over six years… Mr. Hunt is increasing the top corporate tax rate to 25% from 19% and imposing a global minimum tax not even the European Union has managed to implement. …Mr. Sunak’s Conservative Party ditched Ms. Truss’s supply-side tax and regulatory reforms in favor of this plan to tax and spend Britain to prosperity. One of those strategies boasts a proven track record of success and the other has a history of failure. The Tories can explain their choice to voters at the next election.

In a column for CapX, Conor Holohan made similar points, while also pointing out the corporate tax hike won’t raise nearly as much money and Sunak and Hunt are hoping to collect.

Hunt is right to want to balance the books and avoid passing on huge levels of debt to future generations. But to raise corporation tax on such a scale risks turning away those businesses which will be central to the growth and investment we need to generate the receipts that will pay the nation’s bills…. But that static approach doesn’t..reflect the fact that businesses are being discouraged from investing in Britain because of the planned increase in corporation tax. …The TaxPayers’ Alliance (TPA) dynamic tax model..suggests the planned corporation tax rise could cost £30.2bn of lost GDP after a decade. This slower growth would see almost two thirds of the expected revenue from the rise to be lost through lower receipts. …By raising corporation tax on this scale, the Government will be eroding that tax base, and we will see more companies like AstraZeneca deciding that there are more competitive places to be investing.

Steve Entin of the Tax Foundation also did some economic analysis and is not impressed with the Sunak-Hunt tax-and-spend agenda.

…the Sunak-Hunt tax plan will raise labor costs and reduce hours worked. It will increase tax hurdles for new corporate investment, discouraging capital formation. With less labor and capital, real output and employment will fall, increasing the economic pain… The system phases out the untaxed personal allowance for incomes between £100,000 and £125,140, at a rate of £1 for every £2 of income over £100,000. This results in a de facto 60 percent tax band in the middle of the 40 percent band. …The Sunak-Hunt plan…leaves the pending rise in the corporation tax in place. It raises the windfall profits tax on oil and gas producers and imposes a new tax on electricity generation, which will drive up the cost of energy, prompting the government to promise more spending on energy grants to consumers. …The Sunak-Hunt tax plan…estimates another 6 million workers will be pushed onto the tax roles due to the freezes. …History is clear. Lowering budget deficits via spending restraint frees resources for additional private output and jobs. …It is folly to think deficit reduction by means of a corporation tax increase would lower interest rates enough to spur investment despite the direct damage from the tax

Let’s close with a few passages from another Wall Street Journal editorial, this one published just yesterday.

U.K. Prime Minister Rishi Sunak promised economic expertise… British businesses think he needs a refresher. Witness the brewing revolt against the mammoth tax increases Mr. Sunak cooked up with Chancellor Jeremy Hunt. …they want to raise the top corporate tax rate to 25% from 19%; reduce the threshold for the top 45% personal income-tax rate to £125,140 from £150,000; and soak the middle class by freezing tax brackets… The ruling Conservatives have convinced themselves that only a balanced budget can induce businesses to invest in Britain. But…James Dyson of vacuum cleaner fame wrote in the Telegraph in January that the Tory policy of tax hikes and overregulation is “short-sighted” and “stupid.” …Pharma giant AstraZeneca last month said it will build a £320 million factory in low-tax Ireland instead of the U.K. “because the [U.K.] tax rate was discouraging.” Shell is reevaluating $25 billion in oil and gas investments after Mr. Hunt cranked up a windfall-profits tax on top of the regular corporate rate. …The business revolt is a warning that the taxes will be fiscal duds. …That may leave the Tories defending a record of slow growth, high taxes and more deficits and debt at the next election. A party of the right that loses its low-tax, pro-growth economic credibility is headed for defeat.

Some readers may not care about fiscal policy in the United Kingdom.

But today’s column is a warning sign about what will happen in the United States if Republicans surrender on spending and entitlement programs are left on autopilot.

I won’t pretend that genuine entitlement reform will be politically easy. But my message to my Republicans friends is that a tax-increase agenda is not just economically destructive, but also politically suicidal.

A GOP that strays from Reagan-style classical liberalism is bad news.

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European Commission Recommends Economic Suicide

What’s the main fiscal and/or economic problem in the European Union?

• Is it that the burden of taxes and spending is very onerous today?
• Or is it that the burden of taxes and spending will become more onerous in the future?

The easy and correct answer is that both are major problems.

But some people think the problem is that EU nations don’t tax and spend enough.

To make matters worse, this kind of thinking infects the bureaucrats at the European Commission, which has released a new report that reads like a Bernie Sanders campaign screed.

It starts by pretending that that Okun’s tradeoff doesn’t exist.

…taxation can contribute to both social justice and sustainable growth, as well as financing the benefits which underpin the social citizenship contract… Contrary to the rhetoric about the inevitability of a trade-off between social justice and economic growth and a fiscal crisis of the State, the problems of financing the welfare state are far from being inevitable. …everyone should be willing to pay their share of the costs involved, whether individuals or companies.

It then explicitly endorses “pay as you go” as a model for fiscal policy, even though that approach is utterly impractical for a region with aging populations and falling birthrates.

The first specific suggestion is that a PAYG approach is the best way to link the rights and duties of generations over time, in line with the social citizenship contract at the heart of the welfare state.

The report has 21 recommendations. Here are the ones that endorse and embrace new and expanded entitlements.

As you might expect, all that new spending is accompanied by a seemingly endless list of new and expanded taxes.

There are two main options for reforming the taxation of personal income. The first is to expand the tax base by limiting or reducing the many tax breaks that are currently present, from tax credits and tax allowances to tax exemptions and preferential treatment of different sources of income, such as income from capital… The second option for reform is to make the taxation of income more progressive. …Increasing corporate taxation. …As with preferential personal income tax regimes, the EU has an important role to play in levelling the playing field, so eliminating the negative externalities of tax competition and ending the ‘race to the bottom’, as well as making multinationals pay their fair share of tax. …there are a number of arguments for higher taxes on wealth. …Increasing taxes on wealth could help to achieve greater fairness, both in the tax system and in the distribution of resources… A tax on net wealth could complement taxes on income from capital… Indirect taxes…can make it easier to achieve social objectives, as in the case of ‘sin’ taxes… Measures such as the EU carbon tax border adjustment mechanism…can prevent unfair competition… Another option is to tax excess profits… A ‘web tax’ aimed at the excess profits of digital service companies, based on their turnover, could be a transitional step… A levy on financial transactions can also be justified, on grounds of fairness… A further option for Member States is to introduce a new tax, …a surcharge levied at source on all incomes… In summary, there are many options for achieving an adequate, fair, and sustainable means of financing of social protection at both EU and Member State levels.

That’s a frightening list.

And if it looks like it might get implemented, one can only imagine how productive people in Europe would start making plans to escape.

But the bureaucrats recommend Soviet-style exit taxes so they can continue grabbing more money.

Another option would be to tax expatriates for a given number of years after they leave the EU.

Let’s close by looking at one final excerpt.

Nations in the European Union supposedly are bound the “Maastricht Critieria” from something called the Stability and Growth Pact.

These fiscal rules focus on limiting deficits and debt and thus are not nearly as good as the spending cap in Switzerland’s “debt brake.”

But even these weak rules apparently are too stringent according to the report.

…there is widespread agreement on the value of social investment for sustaining the inclusive welfare state in the EU… But…the long-term benefits of social investment constantly come up against short-term pressure for fiscal consolidation. …A new system is needed for monitoring public finances in the EU that would allow policy-makers to identify productive social investment…a golden rule should be applied, allowing borrowing for social investment… A starting point should be to exempt social investment from the new Stability and Growth Pact rules.

The bottom line is that Europe already suffers from excessive fiscal burdens.

Yet the European Commission wants to drive even faster in the wrong direction.

I feel sorry for European taxpayers. Their tax dollars were used to prepare a report that outlines various ways of confiscating an even greater share of their money. That’s adding insult to injury.

P.S. The report discussed today is terrible, but probably not as bad as the European Commission’s lies about poverty or attempted brainwashing of children.

P.P.S. That being said, the EC will never be the worst international bureaucracy. The OECD and IMF compete for that honor.

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The IMF’s Dirigiste Tax Agenda, Part II

Yesterday’s column reviewed a new report from the International Monetary Fund and criticized that bureaucracy for celebrating how the world’s most-powerful governments are going to take more money from the private sector thanks to a corporate tax cartel.

But that’s not the worst part of the IMF document.

The report also asserts that low-income countries (LICs) can grow faster if they increase their fiscal burdens.

This is not April Fool’s Day. I’m not joking. The bureaucrats at the IMF apparently want readers to believe that higher taxes and more spending are a route to prosperity.

Let’s look at some excerpts from the report, which was authored by Ruud de Mooij, Alexander Klemm, and Christophe Waerzeggers.

Global revenue from the 2-pillar reform…might rise to around 0.4 percent of GDP in the longer term. If a proportional share of this revenue flows to LICs, this would provide a welcome contribution to their revenue objective. However, the impact is dwarfed by the…expenditure needs in LICs of nearly 16 percent of GDP (and a significant share of this will need to come from taxation)… Estimates…suggest a potential revenue increase in LICs of 8 percent of GDP. …compared with that in emerging market economies as an aspirational level…suggests a revenue potential of around 5 percent of GDP. …Several options present themselves to raise revenues in LICs, both in tax policy and revenue administration. …Some promising avenues in tax policy include: Value-Added Tax (VAT)…specific excises…on select products such as alcohol, tobacco, unhealthy foods, passenger vehicles, fuel, and carbon emissions. …Strengthening the progressive personal income tax… Making greater use of recurrent real property taxes.

Here’s a chart from the study which shows how much bigger the IMF thinks government should be in poor nations (the second column) compared to various potential sources of revenue (columns 1, 3, and 4).

For those not familiar with the jargon, “SDG” is the abbreviation for “sustainable development goals,” as defined by the United Nations.

And the UN now robotically asserts that more taxes are needed to government can boost growth with more spending (other international bureaucracies sing from the same songsheet).

I actually went to the United Nations a few years ago and explained why this “magic beans” theory of government-led economic development is wrong.

Simply stated, there are two parts of the world that have become rich and in both cases prosperity arose when government was far smaller than what the IMF and UN want us to believe is necessary.

• First, empirical data shows that some western nations became rich in the 1800s when fiscal burdens were trivially small.
• Second, some East Asian nations became rich after World War II when their fiscal burdens were very modest.

I’ll close by challenging folks from the IMF or UN (as well as other people who agree with their agenda) to answer this very simple question.

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The IMF’s Dirigiste Tax Agenda, Part I

Thanks in large part to the pro-growth agendas of Margaret Thatcher and Ronald Reagan, but also giving credit to policymakers in nations like Ireland and Switzerland, businesses (and their workers, consumers, and shareholders) have benefited from four decades of tax competition.

How much have they benefited?

As shown by this chart, average corporate tax rates have dropped by about half since the early 1980s.

Not everybody is happy that corporate tax rates have declined.

Politicians in high-tax nations have always resented tax competition and they have been working through left-leaning international bureaucracies to push for various forms of tax harmonization.

Unfortunately, they have been partially successful.

Over the past 20 years, the human right of financial privacy has been substantially eroded so that uncompetitive governments can track – and tax – money that migrates to low-tax jurisdictions.

As a result, politicians recently have been raising personal income tax rates.

And they want to also raise corporate income tax rates, which is why many pro-tax politicians (including Joe Biden) are supporting a global tax cartel on business income.

The International Monetary Fund has a new report praising this effort. Authored by Ruud de Mooij, Alexander Klemm, and Christophe Waerzeggers, it celebrates the fact that politicians will be diverting more money from the productive sector of the economy

P1 is estimated to reallocate about 2 percent of total profits of MNEs, mainly from low-tax investment hubs to other countries, raising global Corporate Income Tax (CIT) revenue by $12 billion. …P2 would raise global CIT revenues by 5.7 percent, which is before any behavioral responses by firms (Figure 1b). According to staff simulations, 18.5 percent of global profit of MNEs is taxed below 15 percent ($1.47 trillion in 2019). On average, the current tax rate on these profits is 5 percent, so that profits exceeding the substance-based income exclusion would be subjected to a average top-up tax of 10 percent. …An additional positive revenue impact from P2 could come from reduced competition over corporate tax rates, which could boost global CIT revenues by an extra 8.1 percent. …a 1 percentage point increase in the world average CIT rate will, on average, induce a country to raise its own rate by 0.6 percentage points. By putting a floor of 15 percent, the simulations above suggest that 18.5 percent of MNE profit will indeed face a higher CIT burden, implying that countries will feel less pressure to keep their own tax rates low. Using simulations of the tax competition model, we find that the average CIT rate would rise from 22.2 to 24.3 percent due to the global minimum tax. The associated boost in global CIT revenues would be 8.1 percent, exceeding the direct effect on revenue.

By the way P1 is Pillar 1, which is the proposal to give powerful nations a bigger claim on the taxable income of big companies. By contrast, P2 is Pillar 2, which is the proposal for a mandatory minimum tax of at least 15 percent on corporate income.

In other words, a tax cartel.

As you can see from this next chart, most of the additional revenue is the result of the scheme for a 15 percent tax cartel.

I’ll close with two observations about this depressing data.

First, the IMF’s own research shows that reductions in corporate tax rates have not resulted in lower revenues. But I guess they now want to ignore the Laffer Curve since politicians want to grab more money.

Second, we should all be outraged that IMF bureaucrats (including the authors of the paper cited above) receive tax-free salaries while pushing for higher taxes on the rest of us.

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The Case Against Biden’s Class-Warfare Tax Policy, Part V

In 2020 and 2021, I wrote a four-part series (here, here, here, and here) about Biden’s class-warfare tax agenda.

And I also wrote a series of columns about some of his worst ideas.

• Biden wants America to have the developed world’s highest capital gains tax rate.
• Biden wants America to have the developed world’s highest tax burden on business investment.
• Biden wants America to have the developed world’s highest personal income tax rates.

He even proposed taxes that don’t exist anywhere else in the world.

The main purpose of those columns was to explain why it would be economically harmful to impose punitive tax rates on productive behaviors such as work, saving, investment, and entrepreneurship.

Unsurprisingly, Biden still wants all these tax increases, even though Democrats lost control of the House of Representatives.

Today, let’s look at his awful proposal to tax unrealized capital gains (an idea so absurd that no other nation has enacted this destructive levy).

Eric Boehm’s article in Reason debunks Biden’s proposal (the president calls it a billionaire’s tax).

Say what you will about the Biden administration’s approach to tax-the-rich populism: It’s creative. …Taxpayers with net wealth above $100 million would have to pay a minimum effective tax rate of 20 percent on an expanded measure of income that adds unrealized capital gains to more conventional sources of income, like wages, business income, and investment income. …By raising the effective tax rate on capital gains, the proposal would reduce U.S. saving, discourage entrepreneurship, and decrease economic output. …An annual tax on paper gains would be conspicuously complex. The largest administrative problems relate to valuing non-tradable assets like privately held businesses and taxing illiquid taxpayers with large gains on paper but little cash on hand to pay a minimum tax bill. …Given these problems, it’s unsurprising the idea hasn’t caught on around the world.

And the Wall Street Journal has an editorial about this class-warfare scheme.

After the November midterm election, President Biden was asked what he would change in his last two years. “Nothing,” he said, and…he proved it by reproposing…enormous tax increases that he couldn’t get through even a Democratic Congress. Start with a reprise of his “billionaire minimum tax.” …For starters, it isn’t a billionaire tax and it isn’t an income tax. It would apply to households worth more than $100 million in accumulated assets, and its target is wealth. …if your assets rise in value during a year, you will pay taxes on that increase even if you realized no actual gains through a sale. …If your assets fell in value, you would not be able to deduct the full loss from your overall income. Heads the government wins, tails you lose.

The bottom line is that the capital gains tax is an awful levy.

But rather than abolishing the tax to boost American competitiveness, Biden has latched on to an idea to make a bad tax even worse.

And that’s in addition to his other proposals to make the capital gains tax more burdensome!

P.S. I guess we shouldn’t be surprised at bad ideas since the president is infamous for economically illiterate tax tweets.

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Does America Have an Under-Taxation Problem?

When leftists (or misguided rightists) tell me that Americans are under-taxed and that the government has lots of red ink because of insufficient revenue, I sometimes will direct them to the Office of Management and Budget’s Historical Tables in hopes of changing their minds.

I’ll specifically ask them to look at the data in Table 1-3 so they can see what’s happened to federal tax revenue over time. As you can see from this chart, nominal tax revenues have skyrocketed.

The reason that I send them to Table 1-3 is that they can also peruse the numbers after adjusting for inflation.

On that basis, we see the same story. Inflation-adjusted federal tax revenues have grown enormously.

The two charts we just examined are very depressing.

So now let’s peruse at a chart that is just mildly depressing.

If you look at federal tax revenues as a share of economic output, you’ll see that Uncle Sam currently is collecting slightly more than 18 percent of economic output. Since the long-run average is about 17 percent of GDP, that’s not a horrific increase.

However, there are still some reasons to be quite concerned.

• The Congressional Budget Office projects the tax burden as a share of GDP will expand even further over the next few decades.
• That means that politicians in DC not only are getting more money because of inflation, but also because the economy is expanding.
• Third, not only are politicians getting more money because the economy expanding, they’re slowly but surely expanding their share.

That’s very bad news for those of us who don’t like higher taxes and bigger government.

Some people, however, have a different perspective

In one of his columns for the New York Times, Binyamin Appelbaum argues that Americans are undertaxed.

…the United States really does have a debt problem. …Americans need more federal spending. The United States invests far less than other wealthy nations in providing its citizens with the basic resources necessary to lead productive lives. …Measured as a share of G.D.P., public spending in the other Group of 7 nations is, on average, more than 50 percent higher than in the United States. …There is another, better way to fund public spending: collecting more money in taxes. …If the debt ceiling serves any purpose, it is the occasional opportunity for Congress to step back and consider the sum of all its fiscal policies. The nation is borrowing too much but not because it is spending too much. The real crisis is the need to collect more money in taxes.

I give Appelbaum credit for honesty. He openly advocates for higher taxes and bigger government, explicitly writing that “Americans need more federal spending.”

And he is envious that spending in other major nations is “more than 50 percent higher than in the United States.”

But this raises the very obvious point about whether we should copy other nations with their bigger welfare states and higher tax burdens. After all, European nations suffer from weaker economic performance and lower living standards.

Does Appelbaum think we’ll have “productive lives” if our living standards drop by 50 percent?

Does he think that “invest” is the right word for policies that lead to lower economic performance?

The bottom line is that I’m completely confident that Appelbaum would be stumped by the never-answered question.

P.S. Dishonest leftists claim tax increases will lead to less red ink while honest leftists like Appelbaum admit the real goal is a bigger burden of government.

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The Unavoidable Choice: Entitlement Reform or Massive Middle-Class Tax Increases

I worry about big tax increases because of America’s grim long-run fiscal outlook.

The video clip is less than two minutes (taken from this longer discussion with Fergus Hodgson), but I can summarize my key point in just one very important sentence

Anybody who opposes entitlement reform is unavoidably in favor of big tax increases on lower-income and middle-class Americans.

There are three reasons for this bold (and bolded) statement.

1. The burden of spending in the United States is going to dramatically expand in coming decades because of demographic change combined with poorly designed entitlement programs.
2. There presumably is a limit to how much of this future spending burden can be financed by borrowing from the private sector (or with printing money by the Federal Reserve).
3. Many politicians claim that future spending on entitlements (as well spending on new entitlements!) can be financed with class-warfare taxes, but there are not enough rich people.

My left-leaning friends almost surely would agree with the first two points. But some of them (particularly the ones who don’t understand budget numbers) might argue with the third point.

To confirm the accuracy of the argument, let’s look at this chart from Brian Riedl’s famous Chartbook.

As you can see, even confiscatory 100-percent taxes on the rich (which obviously would cripple the economy) would not be nearly enough to eliminate America’s medium-term fiscal gap.

Heck, even if we look at just the next 10 years and include every possible tax hike, it’s obvious that a class-warfare agenda (which also would have negative economic effects) would not be enough to finance all the spending that is currently in the pipeline.

Here’s another Riedl chart (which even includes some proposals that would hit the middle class).

I’ll conclude with two further observations.

• First, there are plenty of honest leftists (the ones who understand budget numbers, including Paul Krugman) who openly admit that big tax increases will be needed if the burden of government spending is allowed to increase.
• Second, there are plenty of disingenuous (or perhaps naive) folks on the right who oppose entitlement reform while not admitting that their approach means massive tax increases on lower-income and middle-class taxpayers.

Needless to say, genuine entitlement reform would be far preferable to any type of tax increase.

P.S. In the absence of entitlement reform, politicians will first choose class warfare taxes, of course, but that simply will be a precursor to higher taxes on the rest of us.

P.P.S. The bottom line is that you can’t have European-sized government without European-style taxes. Including a money-siphoning value-added tax.

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An Overdue Wake-Up Call for New York Democrats?

The economic outlook in New York (both the state and the city) has been very depressing in recent years.

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

That’s a very depressing list. New York’s low rankings are rivaled only by a few other outlier states such as California and New Jersey.

But maybe a turnaround is possible.

There are two recent signs of rationality, one in New York City and one in Albany (the state’s capital).

Let’s start with this tweet from Phil Kerpen, which features some comments from Mayor Adams of New York City.

Remarkably, the Mayor understands it is not a good idea if the geese with the golden eggs fly away.

"To continually attack high income earners when 51% of our taxes are paid by 2% of New Yorkers — this blows my mind when I hear people say 'so what if they leave.' No you leave! I want my high income earners right here in this city!" pic.twitter.com/iBONQoNZI4

— Phil Kerpen (@kerpen) December 15, 2022

I don’t know if the Mayor’s comments will actually translate into better policy, but it certainly seems like he has a better understanding of reality than his predecessor.

Now let’s shift to the state level.

The Wall Street Journal opines about a potential outbreak of rationality by the state’s governor.

’Tis the season for epiphanies, and what do you know? It’s finally dawning on some New York Democrats that the state’s steep income tax rates are driving away top earners who fund essential public services. …miracles of miracles, Gov. Kathy Hochul last week ruled out tax increases and said she planned to hold the line on spending next year. “I don’t believe that raising taxes…makes sense,” she said. …A New York City Independent Budget Office report this month showed that the number of taxpayers who earned between $1 million and $5 million plunged 11% in 2020 from the prior year. …The culprits are high taxes and Covid lockdowns. According to IRS data, New York County lost $14.5 billion in adjusted gross income from out-migration between 2019 and 2020. And this was before Democrats in Albany last spring raised income taxes on individuals making more than $1 million, jacking up the combined state and New York City top rate to 14.8% from 12.7%. Even New York Comptroller Thomas DiNapoli, who is no moderate, told Bloomberg News last week that the exodus of taxpayers at the upper end “should be a concern for everybody.” He added that “we might be getting near that tipping point where we do make it economically unsustainable for enough of those folks to stay here.”

For what it’s worth, I think New York already passed the tipping point. Thousand and thousands of well-to-do taxpayers have already escaped and moved to zero-income-tax Florida.

That means New York’s parasitical politicians have lost billions and billions of tax revenue. And I suspect that’s why we are seeing some semi-sensible comments from the Mayor and the Governor.

Let’s close with a depressing observation. The reason the comments from the Mayor and Governor are “semi-sensible” is that they are only saying there should be no more tax increases.

That’s not the same as saying that there should be tax cuts. Or TABOR-style spending caps.

In other words, the “good news” from New York is that politicians want to freeze the current (very bad) policy in place. That’s better than galloping faster in the wrong direction, of course, but a far cry from what’s needed.

Especially when many other states are seizing opportunities to become more competitive.

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Hoover, FDR, Taxes, and the Great Depression

The 1930s arguably was America’s worst decade for economic policy and economic results.

Herbert Hoover and Franklin Roosevelt both increased the burden of government and the net result was a decade-long depression.

The insult to injury was that some people then blamed free enterprise. Indeed, there are still people who think government actually saved the economy.

Sort of like applauding an arsonist after a fire is extinguished.

Whenever I deal with people who harbor these illusions, I ask them a series of questions, none of which have good answers (at least if the goal if to maintain the illusion).

• Was it the fault of capitalism that the Fed pursued bad monetary policy?
• Was it the fault of capitalism that Hoover imposed protectionism?
• Was it the fault of capitalism that Hoover and FDR expanded intervention?
• Was it the fault of capitalism that Hoover and FDR increased spending?

Today, let’s look at the role of tax policy in the 1930s. Chris Edwards wrote on this topic last week, citing a new book by Art Laffer, Brian Domitrovic, and Jeanne Cairns Sinquefield.

Here are some excerpts from Chris’ article.

Many economists would point to monetary policy mistakes for causing the initial slide into the Great Depression. …But Laffer and coauthors argue that the “chief cause of the Great Depression was taxation.” That is a bold claim because policymakers made many mistakes during the 1930s. …Let’s explore the major tax increases of the 1930s… Herbert Hoover signed the first two laws listed here and Franklin Roosevelt the others.

• Smoot‐​Hawley Tariff Act of 1930.
• Revenue Act of 1932.
• Gold Confiscation.
• Agricultural Adjustment Act.
• National Industrial Recovery Act.
• Alcohol.
• Revenue Act of 1934.
• Revenue Act of 1935.
• Social Security Act of 1935.
• Revenue Act of 1936.
• Revenue Act of 1937.
• Revenue Act of 1938.

State and local governments jacked up taxes during the 1930s. …high earners responded strongly to the income tax increases of the 1930s… the reported incomes of high earners got slugged in the early 1930s and remained low the rest of the decade. This suggests major economic damage. …Despite these taxpayer responses to higher tax rates, …governments did manage to squeeze substantially more money out of the public during the 1930s. Tax revenues as a percentage of GDP rose from 10.3 percent in 1929, to 15.4 percent in 1933, and then to 16.6 percent in 1940. Meanwhile, government spending soared from 9.9 percent of GDP in 1929 to 18.0 percent in 1932, and then remained near the higher level the rest of the decade.

Here’s a chart that accompanied the article showing the aggregate increases in the fiscal burden of government.

You’ll notice that aggregate tax revenues increased by about 60 percent during the 1930s.

Yet tax rates increased by a far greater amount. There’s a lesson to be learned, as I explained last year, about the Laffer Curve.

P.S. Our friends on the left like class-warfare tax increases because they hurt the rich, but they don’t seem to care that everyone else suffers collateral damage.

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The IMF, the Laffer Curve, and Supply-Side Economics

The Laffer Curve is a very straightforward concept.

It graphically illustrates why politicians are wrong if they think you can double tax revenue by doubling tax rates (or that revenues will drop by 50 percent if tax rates are cut in half).

Simply stated, you also have to look at what happens to taxable income.

In cases where taxpayers have a lot of control over the timing, level, and composition of their income, changes in tax rates may cause big changes in taxable income (or “tax base” in the jargon of economists).

None of this should be controversial. Even Paul Krugman agrees that the Laffer Curve exists.

Today, we are going to see that the pro-tax International Monetary Fund also admits there is a Laffer Curve.

Indeed, a new study authored by David Amaglobeli, Valerio Crispolti, and Xuguang Simon Sheng openly states that politicians should be very cognizant of the fact that some tax policy changes can have a big effect on the “tax base.”

This paper investigates the potential revenue impact of different tax policy changes using the Tax Policy Reform Database (TPRD)… Revenue responses to tax policy changes depend on many factors… However, one of most important factors is the nature of the tax policy change itself. For example, while a tax rate cut will directly lower revenue intake, it could also encourage more economic activity, hence expand the tax base. Estimating the revenue response to a tax policy change, therefore, requires granular information on the nature of this change, including on the tax instrument used (e.g., VAT or personal income tax), the type of change adopted (e.g., tax base, tax rate), and its timing and size.

Here are some of the findings.

We assess the impact of tax policy changes on tax revenues using Jordà (2005)’s local projections method. Our baseline results are based on tax shocks identified in the year when a tax change is announced. Our main empirical findings suggest that the revenue yield of tax policy changes varies significantly across taxes and types of changes, with tax rate changes generally having a more transitory revenue impact than tax base changes for most taxes. Specifically, base broadening changes in PIT, CIT, EXE, and PRO have on average a more significant and long-lasting impact on tax collection than rate changes. At the same time, rate hikes have relatively more significant effects on taxes in the case of VAT and SSC measures.

Most notably, the report finds tax increases hurt prosperity, especially higher marginal tax rates.

Gechert and Groß (2019) conclude that measures to broaden the tax base are less harmful to economic growth than tax hikes. Dabla-Norris and Lima (2018) find that during fiscal consolidations, tax base-broadening measures lead to smaller output and employment declines compared to measures to increase tax rates.

And we learn that it is very foolish to raise corporate tax rates.

Mertens and Ravn (2013) find that…increases in CIT are approximately revenue neutral for the United States. …Announcements of CIT increases are associated with a somewhat transitory rise in tax collection, suggesting that companies have quickly adapted their business to reduce the tax burden.

For wonky readers, here’s a chart from the study. Note how, in many cases, there’s not much difference in revenue between tax increases (blue line) and tax cuts (red lines).

P.S. One big takeaway is that there is not a single Laffer Curve. There are multiple Laffer Curves depending on the tax that’s being changed and the ability of taxpayers to change their behavior.

P.P.S. A less-obvious takeaway is that class-warfare taxes cause the most economic damage, meaning the most harm to ordinary people.

P.P.P.S. You can call it the “Khaldun Curve” if you prefer.

P.P.P.P.S. I have trouble deciding what evidence is most powerful, the views of CPAs or the data from the OECD?

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European Fiscal Policy Week, Part III: A Continent-Wide Spending Problem

I discussed Italy’s looming fiscal crisis on Monday and then argued against a potential bailout on Tuesday.

Today, let’s focus on the rest of Europe.

I gave a presentation yesterday in Brussels about “Public Finances in the Eurozone” and used the opportunity to explain that governments are too big in Europe and to warn that demographic changes were going to lead to an even-bigger burden of government in the future.

My assessment is very mainstream, at least with regards to what will happen to national budgets in European nations.

A study from the Organization for Economic Cooperation and Development, authored by Yvan Guillemette and David Turner, examines the long-run fiscal position of member nations.

It warns that government debt levels will increase dramatically if they don’t change current policies.

… secular trends such as population ageing and the rising relative price of services will keep adding pressure on government budgets. Without policy changes, maintaining current public service standards and benefits while keeping public debt ratios stable at current levels would increase fiscal pressure in the median OECD country by nearly 8 percentage points of GDP between 2021 and 2060, and much more in some countries. …governments will need to re-assess long-run fiscal sustainability in the context of higher initial government debt levels…when considering expenditure pressures associated with ageing…, the OECD structural primary balance would deteriorate rapidly and net government debt would more than double as a share of GDP by 2050 (Figure 12).

Here is the aforementioned Figure 12. As you can see, both deficits (left chart) and debt (right chart) are driven by the cost of age-related entitlement programs.

The report also explains that the increase in red ink is being caused by a bigger burden of government spending.

Under a ‘business-as-usual’ hypothesis, in which no major reforms to government programmes are undertaken, public expenditure is projected to rise substantially in most countries… Public health and long-term care expenditure is projected to increase by 2.2 percentage points of GDP in the median country between 2021 and 2060… Public pension expenditure is projected to increase by 2.8 percentage points of GDP in the median country between 2021 and 2060… Other primary expenditures are projected to rise by 1½ percentage points of GDP in the median country between 2021 and 2060 (Figure 13, Panel A). This projection excludes potential new sources of expenditure pressure, such as climate change adaptation.

Here’s Figure 13, mentioned above. Notice the projected increases in spending in most European nations.

So what’s the best response to this slow-motion fiscal disaster?

Since more government spending is the problem, you might think the OECD would recommend ways to restrain budgetary expansion.

But that would be a mistake. As is so often the case, OECD bureaucrats think giving politicians more money is the best approach.

The present study…uses an indicator of long-run fiscal pressure that is premised on the idea that governments would seek to stabilise public debt ratios at projected 2022 levels by adjusting structural primary revenue from 2023 onward. … all OECD governments would need to raise taxes in this scenario to prevent gross government debt ratios from rising over time… The median country would need to increase structural primary revenue by nearly 8 percentage points of GDP between 2021 and 2060, but the effort would exceed 10 percentage points in 11 countries.

To be fair, the authors acknowledge that there might be some complications.

Raising taxes…appears feasible in some countries…, in other countries it may present a substantial challenge. In Belgium, Denmark, Finland and France, for instance, structural primary revenue is already around 50% of GDP… Pushing mainstream taxes on incomes or consumption further up, even by only a few percentage points of GDP, may be politically difficult and fiscally counter-productive if it means reaching the downward-sloping segment of the Laffer curve… Lundberg…identifies five OECD countries where top effective marginal tax rates (accounting for income, payroll and consumption taxes) are already beyond revenue-maximizing levels (Austria, Belgium, Denmark, Finland and Sweden). Thus, if taxes are to rise, it might be necessary to look to other bases, such as housing, capital gains, inheritance or wealth. Recent international efforts to establish a minimum global corporate tax could also enable more revenue to be raised from corporate taxes.

I’m happy that the study acknowledges the Laffer Curve, though that is not much of a concession since even Paul Krugman agrees that it exists.

And even when OECD bureaucrats admit that it may be unwise to increase some taxes, their response is to suggest that other taxes can be increased.

Sigh.

Now you understand why I’ve argued that the OECD may be the world’s worst international bureaucracy. Especially since OECD bureaucrats get tax-free salaries while urging higher taxes on the rest of us.

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New York City’s Grim Fiscal Outlook

Back in 2020, I warned that then-Mayor Bill de Blasio was setting the stage for fiscal crisis.

During his eight years in office, he violated fiscal policy’s golden rule by increasing the burden of government spending at three times the rate of inflation.

And all that spending requires lots of taxes, which helps to explain why residents were escaping New York City even before the pandemic.

But the pandemic accelerated the exodus, and that is turning a bad fiscal situation into a terrible fiscal situation for the new Mayor, Eric Adams.

Reporting for the New York Times, Nicole Hong and Matthew Haag write about how rich people (and their tax revenue) have been escaping New York City.

…roughly 300,000 New York City residents left during the early part of the pandemic… Now, new data from the Internal Revenue Service shows that the residents who moved to other states by the time they filed their 2019 taxes collectively reported $21 billion in total income, substantially more than those who departed in any prior year on record. …a potential loss that could have long-term effects on a city that relies heavily on its wealthiest residents to support schools, law enforcement and other public services. …The top 1 percent of earners, who make more than $804,000 a year, contributed 41 percent of the city’s personal income taxes in 2019. …The exodus to Florida was especially robust, and not just for the retiree crowd. …The pandemic accelerated the relocation of several New York-based financial firms to new offices or headquarters in Florida. …The Manhattan residents who moved to Palm Beach County had an average income of $728,351, IRS data showed.

So why are people leaving the City?

Some of it was temporary, caused by the pandemic.

But it’s very likely that most high-income emigrants won’t return. Why? Because New York City has bad governance. Everything from big problems like crummy schools to small problems like regulatory overkill.

So why pay lots of taxes when you get very little in return?

In a column last year for the New York Post, Nicole Gelinas warned about job losses in the financial industry.

…the city’s financial-industry jobs (not including real estate) were down 5 percent, to 338,800, compared with pre-COVID August 2019. Commercial-banking jobs are down 7 percent, to 67,300. Investment-related jobs are also down 7 percent, to 177,600. If we weren’t distracted by huge, double-digit percentage losses in other parts of the city’s economy, like arts and entertainment, these would be big numbers. …Some of this job destruction is a gain for other states. In Florida, financial jobs…are up 6 percent since August 2019, to 422,000. …yet another small investment firm, ARK, said it would close its New York headquarters and move…, with most of its dozens of workers going. …We used to fret about what happened when Wall Street crashed; now, we should fret that we have these woes when Wall Street hasn’t crashed.

When jobs are lost, that’s bad news for politicians because they miss out on tax revenue. And that’s true if jobs simply disappear and it’s true if the jobs move to low-tax states like Florida.

And it’s a big problem because Mayor Adams inherited a big mess. Simply stated, revenues are running away at the same time that spending is going up.

Emma Fitzsimmons wrote for the New York Times that the former Mayor’s legacy is a bloated city budget, which is connected to an ever-expanding bureaucracy.

Bill de Blasio will be remembered for many things…But one central element of his administration has received less attention: his passion for spending money. Under Mr. de Blasio, the city’s budget has soared to a record $102.8 billion, and the city work force rose to more than 325,000 employees, its highest level ever. His final budget, more than $25 billion higher than his first budget in 2014… Mr. de Blasio’s spending spree could create problems for Mr. Adams… The city work force…quickly began to rise…after Mr. de Blasio took office — pleasing the city’s municipal unions, some of which were major donors to the mayor’s political endeavors. …The increases to the city work force will create long-term costs for the city for health care, pensions and retiree benefits.

I can say “I told you so” because I warned that de Blasio was bad news when he was running for office in 2013.

Now the chickens are coming home to roost.

P.S. Just as many states compete to be the worst, the same is true for cities. Yes, New York City is a mess, but is it better or worse than places such as Chicago, Seattle, Minneapolis, Detroit, and San Francisco?

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Biden Wants America to be #1…in a Bad Way

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

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

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

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

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

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

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

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

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

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

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

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

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The IMF’s Tax-Free Bureaucrats Target Bulgaria

I’m not a fan of the International Monetary Fund, in part because the international bureaucracy is infamous for pressuring nations to impose higher taxes.

The bureaucrats at the IMF have even claimed that higher taxes somehow will produce more economic growth.

Even worse, the IMF has argued for class-warfare taxes that do the most economic damage, even using the twisted rationale that it is okay to hurt the poor so long as the rich suffer even greater losses.

To be fair, there are some good fiscal economists at the IMF (even with regards to tax policy), but the political types who run the bureaucracy almost always ignore their research.

Instead, the bureaucracy highlights second-rate analysis in pursuit of bad policy.

The latest example if that the IMF is pressuring Bulgaria to replace its flat tax with a system based on discriminatory rates.

Fiscal policy needs to be flexible given the large uncertainty, but some changes are already advisable in the mid-year budget revision. …Room to address long-term social and investment needs could be significantly increased by…Reviewing the tax system to increase revenue and redistribution . A reform of the low flat personal income tax rate could help create fiscal space and reduce inequalities.

By the way, just in case it’s not obvious, “social and investment needs” is bureaucrat-speak for more redistribution spending.

Some of you may be wondering whether a new system is needed because the flat tax caused a big drop in revenue.

But as you can see from this chart, income tax revenues continued to grow after the flat tax was approved in 2008.

I’ll close by noting that Bulgaria is ranked #36 in the latest edition of Economic Freedom of the World, which is a good but not great score.

But it gets its lowest score for “size of government,” which is the measure for fiscal policy. The flat income tax is a positive, of course, but that policy is offset by low scores for other features of fiscal policy (payroll tax, redistribution, etc).

So the bottom line is that the IMF wants to get rid of the good part of Bulgaria’s fiscal policy and drive its overall score even lower.

P.S. I also disapprove of the IMF because it subsidizes and encourages debt and instability with endless bailouts.

P.P.S. And I am disgusted that IMF bureaucrats get tax-free salaries while advocating for higher taxes for everyone else.

P.P.P.S. The IMF has a reprehensible track record of bullying nations in Eastern Europe. Though, to be fair, they also push for bad tax policy in big and powerful nations. And in weak and poor nations.

P.P.P.P.S. Here’s my solution to the IMF problem.

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Biden’s Nonsensical Class-Warfare Tweet

Trump had some economically illiterate tweets about trade during his presidency, including the infamous one about being “Tariff Man.”

I think Joe Biden must be feeling envious that Trump got so much attention, so he has issued a tweet showing that he also suffers from economic illiteracy.

Or maybe Biden’s problem is dishonesty because his tweet is based on a make-believe number about the the average tax rate paid by billionaires.

For what it’s worth, this isn’t the first time that Biden has issued a tweet based on fake numbers.

In the previous instance, he deliberately confused the distinction between the financial concept of book income and and cash-flow concept of taxable income.

What accounts for his most recent error?

Reporting for the Wall Street Journal, Richard Rubin and Rachel Louise Ensign explain how the Biden Administration concocted this number.

What do the wealthy pay in federal taxes? On paper, the top marginal income-tax rate is 37% on ordinary income and 23.8% on capital gains. Government estimates put high-income filers’ average rates in the mid-20s. A new Biden administration analysis, however, pegs the average tax rate for the 400 wealthiest households at 8.2% from 2010 to 2018. …It’s far below traditional estimates from government number crunchers… Recent estimates of a broader group of rich people from the Congressional Budget Office, Treasury Department and the Joint Committee on Taxation fall between 23% and 26%.

So how does the Biden Administration get a number that is radically different than other sources?

By artificially inflating the income of rich people by asserting that changes in wealth should count as income.

White House…economists Greg Leiserson and Danny Yagan..include increases in unrealized capital gains. That is the change in the value of assets, including stocks, that haven’t been sold. …Conventional analyses and the current income-tax law don’t include unrealized gains.

At the risk of making a wonky point, “conventional analysis” and “income-tax law” don’t include unrealized capital gains as income because, well, changes in net worth are not income.

And the fact that some folks on the left want to tax people on unrealized capital gains doesn’t change that reality.

To understand why that would be wretched policy, let’s cite examples that apply to those of us who, sadly, are not billionaires.

• Imagine filing your taxes next year and having to pay more money to the IRS simply because Zillow estimated that your house rose in value.
• Imagine that you’re filling out your 1040 form next year and you have to pay more money to the IRS  simply because your IRA or 401(k) rose in value.

Both of these examples sound absurd because they would be absurd. And if a policy is absurd and unfair for regular people, it’s also absurd and unfair for rich people.

Since I’m a fiscal wonk, I’ll close by making the point that the Biden Administration wants to take a bad tax (capital gains tax) and make it worse (by taxing paper gains in addition to actual gains).

The net result is that we would have a backdoor wealth tax – a approach that is so anti-growth that even most European governments have repealed those levies.

But since Joe Biden is motivated by class warfare (see here, here, here, and here), he apparently doesn’t care about the economic consequences.

P.S. Biden once claimed that it is “patriotic” to pay higher taxes, but he then played Benedict Arnold with his own tax return.

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Bigger Government Means Less Prosperity

When I first started writing this daily column, the Congressional Budget Office was infamous for dodgy economics.

• In the short run, CBO believed in the very simplistic Keynesian notion that a bigger burden of government spending somehow stimulated the economy. The bureaucracy was infamous for reflexively claiming that job losses were actually job gains.
• In the long run, CBO believed in the very simplistic notion that budget deficits were the main determinant of economic performance. The bureaucracy even produced reports that implied you could maximize growth with 100 percent tax rates.

That was the bad news.

The good news is that CBO is more of a mainstream organization today.

It’s far from being libertarian, to be sure, but it no longer seems to have the left-leaning bias that plagued the bureaucracy in the past (it had gotten so bad that I advised Republicans not to cite CBO numbers even when they seemed helpful to the cause of less government).

For instance, I grudgingly acknowledged a few years ago that CBO was better (but still not good) when analyzing potential repeal of Obamacare.

And I was actually impressed last year when CBO published a report showing that a bigger burden of government spending would reduce growth.

And now we have another report that reaches similar conclusions.

The new study, released last month, considers what would happen if lawmakers decided to control red ink by either raising taxes of by restraining spending.

A perpetually rising debt-to-GDP ratio is unsustainable over the long term because financing deficits and servicing the debt would consume an ever-growing proportion of the nation’s income. In this report, CBO analyzes the effects of measures that policymakers could take to prevent debt as a percentage of GDP from continuing to climb. Policymakers could restrain the growth of spending, raise revenues, or pursue some combination of those two approaches. …or this analysis, CBO examined two simplified policies. The first would raise federal tax rates on different types of income proportionally. The second would cut spending for certain government benefit programs—mostly for Social Security, Medicare, and Medicaid. Under each of the two stylized policy options, debt as a percentage of GDP would be fully stabilized 10 years after the changes were implemented.

By the way, I would have greatly preferred if CBO estimated the impact of genuine entitlement reforms.

Trimming spending for existing programs is better than nothing, of course, but the goal should be to achieve both structural reforms and budgetary savings.

But I’m digressing. Let’s get back to what was actually in the report. Here’s what CBO projects if policy makers choose to raise taxes.

…the higher tax rates that would be required if implementation of the policy was delayed would reduce after-tax wages, which would discourage work and lower the aggregate supply of labor. Those reductions in capital stock and the labor supply would cause GDP to be lower… As a result, GDP would be 0.9 percent lower in 2051 if implementation of the policy was delayed by 5 years and 2.6 percent lower if it was delayed by 10 years.

And here’s what happens if they decide to trim benefits.

…a drop in benefits would reduce people’s income and induce some people to work more to, at least partially, maintain their standard of living, thereby increasing the aggregate labor supply. …a drop in expected future retirement benefits would induce workers to save more before they retired, and that increased saving would, in turn, increase the aggregate capital stock.

Figure 3 from the report allows readers to compare how the different options affect the economy’s output.

In other words, we get lower living standards if taxes go up and higher living standards if spending is restrained.

How big is the difference? As you can see, the tax increase options (light green) cause significant long-run reductions in gross domestic product.

Trimming benefits by contrast (the dark green lines) actually lead to a slight increase in economic output.

The report accurately explains why the two policy choices produce such different results.

…GDP would be lower after an increase in income tax rates than it would be after cuts in benefit payments… Whereas benefit cuts strengthen people’s incentives to work and save, tax increases weaken those incentives and thus reduce the capital stock, the labor supply, and output.

In other words, it’s not a good idea to copy nations such as France, Italy, and Greece.

Which is a good description of Biden’s so-called plan to Build Back Better.

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The Value-Added Tax Leads to Higher Income Tax Burdens

As part of my (reality-based) opposition to a value-added tax, I testified to the Ways & Means Committee back in 2011.

My primary argument against the VAT is that it would enable a bigger burden of government spending.

I frequently share this chart, for instance, that shows that the nations in Western Europe were quite similar to the United States back in the 1960s, with government budgets that consumed about 30 percent of economic output.

That was before they enacted VATs.

But once European politicians got that new source of revenue, the spending burden diverged, with the welfare state becoming a much larger burden in Western Europe than in the United States.

In other words, the VAT was a money machine for big government.

That argument is just as accurate today as it was back in 2011.

For today’s column, however, I want to focus on what I said in the last minute of my testimony (beginning about 4:00).

I pointed out that VAT supporters are wrong when they claim that adoption of this new tax would enable reductions in the income tax.

And if you peruse my written testimony, you’ll see that I included several charts showing how tax burdens changed between 1965 and 2008. In every case, I showed that European politicians actually increased the burden of income taxes after they enacted their VATs.

Is that still true?

Of course.

Here’s an updated version of the chart showing that the overall tax burden dramatically increased after VATs were imposed.

In the United States, by contrast, the overall tax burden only increased during this time period from 23.6 percent of GDP to 25 percent of GDP.

Still bad news, but nowhere near as bad as Western Europe, where the overall tax burden jumped by more than 13 percentage points.

Now let’s peruse the updated version of the chart showing what happened to taxes on income and profits.

As you can see, European governments definitely did not use VAT revenues to lower other taxes.

In the United States, by contrast, the tax burden on income and profits only increased during this time period from 11.3 percent of GDP to 11.6 percent of GDP.

Still bad news, but nowhere near as bad as Western Europe, where the tax burden on income and profits jumped by nearly 5 percentage points.

Now let’s peruse the updated version of the chart showing what happened to taxes on corporations (this chart is especially important because there are very naive people in the business community who think that they can avoid higher taxes on their companies if they surrender to a VAT).

As you can see, governments in Europe have been grabbing more money from corporations since VATs were imposed.

In the United States, by contrast, the tax burden on corporations actually decreased during this time period from 3.9 percent of GDP to 1.3 percent of GDP.

By every possible measure, the value-added tax is a big mistake (as even the IMF inadvertently shows).

Unless, of course, politicians first get rid of the income tax – including repealing the 16th Amendment and replacing it with an ironclad prohibition against any future income tax.

But that’s about as likely as me playing the outfield for the New York Yankees in this year’s World Series.

P.S. I mentioned at the very end of my testimony that we did not have clear evidence from other nations that subsequently adopted VATs. In the case of Japan, we now do have data showing how the VAT is financing bigger government.

P.P.S. Some VAT advocates actually claim the levy is good for growth. That’s a nonsensical claim. VATs drive a wedge between pre-tax income and post-tax consumption. What they really mean to say is that VATs don’t do as much damage, on a per-dollar-raised basis, as conventional income taxes (with punitive rates and double taxation).

P.P.P.S. You can enjoy some good anti-VAT cartoons here, here, and here.

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Say No to Biden’s Global Tax Cartel

A few months ago, I reiterated my opposition to Biden’s proposed corporate tax cartel as part of a longer discussion with Australia’s Gene Tunny.

The main takeaway is that the proposed “minimum global tax” is an agreement by politicians for the benefit of politicians.

As I stated in the discussion. companies do not bear the burden of corporate taxes. Those costs are borne by workers, consumers, and shareholders.

Sadly, those costs will increase if the agreement is finalized. Politicians openly admit they are pushing this cartel to undermine jurisdictional tax competition.

At the risk of stating the obvious, their plan is to give themselves more leeway to increase tax rates.

I’m sharing the above interview and rehashing some of these basic arguments because Barack Obama’s former top economist, Jason Furman, has a column in today’s Wall Street Journal.

Here’s some of what he wrote in favor of the scheme.

Policy makers have the best chance in generations to reform and improve this system while bringing the rest of the world along. Treasury Secretary Janet Yellen has already helped craft an international agreement signed by more than 130 countries. Congress now needs to do its part and lock it in. …The arguments for…fixing Mr. Trump’s reforms were already strong, but the global agreement secured by Ms. Yellen makes them much stronger. In particular, the global agreement removes the main objection to more aggressively taxing overseas income because other countries have all agreed to adopt similar systems. The concerns that U.S. companies would be less competitive or would try to avoid U.S. taxes by incorporating overseas are considerably smaller than they would otherwise be. …The global minimum tax agreement signals the dawn of a new era of international economic cooperation. It will be good for the countries involved and…relatively minimal in only establishing a 15% rate floor.

Notice that Mr. Furman openly acknowledges that the goal is to create a cartel so that politicians will feel less constrained by the liberalizing force of tax competition.

For what it’s worth, I think Professor Bruce Gilley had better analysis in his column, which appeared in the WSJ earlier this year..

World leaders announced a new global corporate minimum tax to great fanfare last year. …The contorted language of the guidance, as well as political foot-dragging in several countries, makes clear that the ballyhooed global tax plan would be a great and expensive flop. Better to let this hydra-headed monster die. The agreement was always a tax grab. …Europe wanted to raise revenue by taxing U.S. companies. The Biden administration has cheered the agreement along with familiar claims that big companies should “pay their fair share.” …Digital multinationals like Amazon, Google, Airbnb and Meta are the target. …the agreement…seeks to establish a 15% minimum global tax rate for international companies… The only plausible way the tax leads to more revenue for the U.S. is if it is used as a cover to raise corporate taxes here, which was perhaps why the Biden administration joined. …According to an International Monetary Fund study, 45% to 75% of the burden of corporate taxes is recouped through lower employee wages.

The bottom line is that the proposal for a global minimum tax is being sold as a way to go after big business and rich shareholders, but ordinary people will be the biggest victims.

We will pay more for products because as the higher taxes filter through the economy and we will have less disposable income because of a diminished job market.

P.S. I have written several times about the utterly fraudulent argument that supposedly profitable companies do not pay corporate taxes.

So this is a good opportunity to share this part of Professor Gilley’s column, which notes that companies are (currently) required to keep two different sets of books (which demagogues then deliberately mix up to advance their false claims).

Public companies already have to keep two sets of books, one for the Securities and Exchange Commission and one for the Internal Revenue Service. The first tells shareholders how well the business is doing; the second tells the government how much is owed and to whom. The new global tax would require multinationals to keep a third set of books to avoid being the target of tax raids by, say, France. The agreement would create many new jobs for accountants and lawyers.

Needless to say, requiring companies to keep a third set of books is a remarkably bad idea.

P.P.S. Here’s a primer on corporate taxation.

P.P.P.S. The bureaucrats at the OECD are big advocates of a global minimum tax. I wonder whether they are so pro-tax because they get tax-free salaries and thus are protected from the awful policies they pursue?

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Thomas Piketty: Bad Numbers and Bad Economics

Thomas Piketty is a big proponent of class-warfare tax policy because he views inequality as a horrible outcome.

But a soak-the-rich policy agenda, echoed by many other academics such as Emmanuel Saez and Gabriel Zucman, is fundamentally misguided. If people really care about helping the poor, they should focus instead on reforms that actually have a proven track record of reducing poverty.

The fact that they fixate on inequality makes me wonder about their motives.

And it also leads me to find their work largely irrelevant. I don’t care if they produce detailed long-run data on changes in inequality.

I prefer detailed long-run data on changes in poverty.

That being said, it appears that some of Piketty’s data is sloppy.

I shared some evidence about his bad numbers back in 2014. And, in a column for the Wall Street Journal, Phil Magness of the American Institute for Economic Research and Professor Vincent Geloso of George Mason University expose another glaring flaw

…the Piketty-Saez theory is less a matter of history than an accounting error caused by their misunderstanding of World War II-era tax statistics. …It’s true that income inequality declined in the early part of the 20th century, but the cause had more to do with the economic devastation of the Great Depression than the New Deal tax regime. …they failed to account properly for historical changes in how the Internal Revenue Service reported income-tax statistics. As a result, their numbers systematically overstate the levels of top income concentrations by as much as a third …Between 1943 and 1944 the tax collection agency shifted from tracking “net income” to “adjusted gross income,” or AGI…a truer depiction of annual earnings… Yet Messrs. Piketty and Saez didn’t bring pre-1944 IRS records into line with AGI accounting standards. Instead, they applied a fixed and arbitrary adjustment to all years before the AGI accounting change that conveniently scaled upward to the highest income brackets. …They used the wrong accounting definition for personal income and neglected to adjust their data for wartime distortions on tax reporting. When we corrected these problems, something stunning happened. The overall level of top income concentration flattened, and the timing of its leveling shifted away from the World War II-era tax rates that Messrs. Piketty and Saez place at the center of their story.

Here’s a chart that accompanied the column, showing how accurate data changes the story.

Since today’s column debunks sloppy class warfare, let’s travel back to 2014, when Deirdre McCloskey reviewed Pikittey’s tome for the Erasmus Journal of Philosophy and Economics.

She also thought his fixation on envy was misguided.

…in Piketty’s tale the rest of us fall only relatively behind the ravenous capitalists. The focus on relative wealth or income or consumption is one serious problem in the book. …What is worrying Piketty is that the rich might possibly get richer, even though the poor get richer too. His worry, in other words, is purely about difference, about the Gini coefficient, about a vague feeling of envy raised to a theoretical and ethical proposition. …Piketty and much of the left…miss the ethical point…of lifting up the poor…by the dramatic increase in the size of the pie, which has historically brought the poor to 90 or 95 percent of “enough”, as against the 10 or 5 percent attainable by redistribution without enlarging the pie. …the main event of the past two centuries was…the Great Enrichment of the average individual on the planet by a factor of 10 and in rich countries by a factor of 30 or more.

But she also explained that he doesn’t understand how the economy works.

The fundamental technical problem in the book…is that Piketty the economist does not understand supply responses. In keeping with his position as a man of the left, he has a vague and confused idea about how markets work, and especially about how supply responds to higher prices. …Piketty, it would seem, has not read with understanding the theory of supply and demand that he disparages, such as in Smith (one sneering remark on p. 9), Say (ditto, mentioned in a footnote with Smith as optimistic), Bastiat (no mention), Walras (no mention), Menger (no mention), Marshall (no mention), Mises (no mention), Hayek (one footnote citation on another matter), Friedman (pp. 548-549, but only on monetarism, not the price system). He is in short not qualified to sneer at self-regulated markets…, because he has no idea how they work.

And she concludes with a reminder that some of our left-wing friends seem most interested in punishing rich people rather than helping poor people.

The left clerisy such as…Paul Krugman or Thomas Piketty, who are quite sure that they themselves are taking the ethical high road against the wicked selfishness…might on such evidence be considered dubiously ethical. They are obsessed with first-act changes that cannot much help the poor, and often can be shown to damage them, and are obsessed with angry envy at the consumption of the uncharitable rich, of which they personally are often examples, and the ending of which would do very little to improve the position of the poor. They are very willing to stifle through taxing the rich the market-tested betterments which in the long run have gigantically helped the rest of us.

Amen. If you want to know what Deirdre means by “betterment,” click here and watch her video.

P.S. Click here, here, here, and here for my four-part series on poverty and inequality. Though what Deirdre wrote in 2016 may be even better.

P.P.S. I also can’t resist calling attention to the poll of economists at the end of this column.

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Biden’s Anti-Competitiveness Tax Grab

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

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

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

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

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

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

The WSJ‘s editorial contained this chart.

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

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

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

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

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Dividend Taxation in Europe and the United States

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

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

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

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

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

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

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

But what about the United States?

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

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

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

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

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

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

How much bigger?

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

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

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

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

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

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

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

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Biden’s Farcical Tax Plan

I’ve already written that massive spending increases for various bureaucracies is the most offensive part of Biden’s new budget.

But I explicitly noted that these huge budgetary increases (well above the rate of inflation, unlike what’s happening to incomes for American families) were not the most economically harmful feature of Biden’s plan.

That dubious honor belongs to either his massive expansion of the welfare state or his big tax increases.

In today’s column, we’re going to focus on his tax plan.

The Wall Street Journal editorialized a couple of days ago about what the president is proposing.

A President’s budget is a declaration of priorities, so it’s worth underscoring that President Biden’s new budget for fiscal 2023 proposes $2.5 trillion in tax increases over 10 years. His priority is taking money from the private economy and giving it to politicians to spend. …Raising the top income-tax rate to 39.6% from 37% would raise $187 billion. Raising capital-gains taxes, including taxing gains like ordinary income for taxpayers earning more than $1 million would snatch $174 billion. Raising the top corporate tax rate to 28% from 21%—a tax on workers and shareholders—would raise $1.3 trillion. Fossil fuels are hit up for $45 billion. We could go on… Let’s hope none of these tax-increases pass, but the Democratic appetite for your money really is insatiable.

That’s a damning indictment.

But the WSJ actually understates the problems with Biden’s tax agenda.

That’s because the White House also is being dishonest, as explained by Alex Brill of the American Enterprise Institute.

The budget proposes $2.5 trillion in net tax hikes, almost entirely from businesses and high-income households, and touts policies that would “reduce deficits by more than $1 trillion” over the next decade. But a short note in the preamble to the Treasury Department’s report on the budget reveals a sleight of hand: “The revenue proposals are estimated relative to a baseline that incorporates all revenue provisions of Title XIII of H.R. 5376 (as passed by the House of Representatives on November 19, 2021), except Sec. 137601.”In other words, the budget pretends that the failed effort to enact President Biden’s Build Back Better Act was a success and considers new budget proposals in addition to those policies. But you won’t find the price of the Build Back Better (BBB) Act (including its roughly $1 trillion in net tax hikes) in the budget tables.

I’m going to use this trick during my next softball tournament. I’m going to assume at the start that I’ve already had 20 at-bats and that I got an extra-base hit each time.

So even if I have a crummy performance during my real at-bats, my overall average and slugging percentage will still seem impressive.

Needless to say, my teammates would laugh at me, just as serious budget people understand that Biden’s budget is a joke.

But there is some good news. Barring something completely unexpected, Congress is not going to approve the president’s farcical plan.

P.S. Don’t fully celebrate. As I noted in my “Hopes and Fears for 2022” column, there is a risk that some sort of tax-and-spend plan might get approved. The only silver lining to that dark cloud is that it wouldn’t be nearly as bad as Biden’s full budget.

P.P.S. If that prospect gets you depressed, here are a couple of humorous images depicting Biden’s fiscal agenda.

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The Case Against Higher Taxes

I’ve identified seven reasons to oppose tax increases, but explain in this interview that the biggest reason is that it would be a mistake to give politicians more money to finance an ever-larger burden of government spending.

I had two goals when responding this question (part of a longer interview).

First, I wanted to help viewers understand that America’s fiscal problem is too much government spending and that red ink is simply a symptom of that problem.

Over the years, I’ve concocted all sorts of visuals to make this point. Like this one.

And this one.

And this one.

Second, I wanted viewers to understand that higher taxes will simply make a bad situation even worse.

From my perspective, the biggest problem with tax increases is that they will enable a bigger burden of government spending.

But even the folks who fixate on red ink should adopt a no-tax increase position.

Why? Because politicians who want big tax increases want even bigger spending increases.

Joe Biden is pushing for a massive tax increase, for instance, but his proposed spending increase is far larger.

We also have decades of evidence from Europe. There’s been a huge increase in the tax burden in Western Europe since the 1960s (largely enabled by the enactment of value-added taxes).

Did that massive increase in revenue lead to less red ink?

Nope, just the opposite, as I showed in both 2012 and 2016.

If you don’t agree with me on this issue, maybe you should heed the words of these four former presidents.

P.S. Some people warn that endlessly increasing debt is a recipe for an eventual crisis. They’re probably right. Which is why it is important to oppose tax-increase deals that wind up saddling us with more red ink. Besides, the long-run damage of tax-financed spending is very similar to the long-run damage of debt-financed spending.

P.P.S. As I mention in the interview, the only real solution is spending restraint. And a spending cap is the best way of enforcing that approach.

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The OECD’s Preposterous Fiscal Advice for Mexico

I’ve been writing a series of columns about the failure of Bidenomics (see here, here, and here), but let’s switch gears today and focus on some remarkably bad behavior by the bureaucrats at the Organization for Economic Cooperation and Development (OECD).

Regular readers know that I’m not a big fan of this Paris-based international bureaucracy. Yes, there are some economists at the OECD who do solid research, but the organization routinely advocates for higher taxes and bigger government, often by using dishonest data.

But even I was surprised to receive this email from the OECD, which explicitly urged a giant tax increase on the relatively impoverished people of Mexico.

And “giant” is not a throwaway adjective.

Joe Biden wants a massive tax increase for the United States, but his proposal to increases tax revenue by 1.3 percent of GDP makes him seem like a rabid libertarian compared to the OECD’s plan to increase taxes by nearly three times as much in Mexico.

What’s especially amazing is that the OECD is urging this huge tax increase in a report that supposedly shares “recommendations for improving medium-term growth prospects.”

While I’m shocked by the size of the OECD’s proposed tax increase, I’m not surprised that the bureaucrats are claiming that higher taxes and bigger government are good for growth.

They’ve done it before and I’m sure they’ll do it again.

In China. In Africa. Everywhere.

So at least they are consistent, albeit in a very bad way.

I’ll close by noting that Mexico actually is in desperate need of “recommendations for improving medium-term growth prospects.”

But if you peruse the data for Mexico in the most-recent edition of the Fraser Institute’s Economic Freedom of the World, you’ll see that the country’s economy is being hampered by bad scores for rule of law, monetary policy, trade, and regulation.

So it’s baffling that the OECD’s bureaucrats somehow decided to focus on pushing for bad fiscal policy.

P.S. For those who want more information, you can click here to access the OECD’s report, along with other accompanying materials.

P.P.S. Incidentally, OECD bureaucrats are exempt from paying tax on the very lavish salaries they receive.

P.P.P.S. Adding insult to injury, American taxpayers finance the largest share of the OECD’s budget.

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Economics 101 and Soda Taxes

It is not difficult to understand the economics of taxation. Simply stated, the more you tax of something, the less you get of it.

You can show the adverse impact of taxation with supply-and-demand curves (very helpful for understanding “deadweight loss“).

But you don’t need to be an economist to grasp the essential idea that we shouldn’t impose excessive penalties on productive behavior.

This is why I endlessly argue for lower tax rates on things that are very good for society, such as work, saving, investment, and entrepreneurship. Simply stated, governments should minimize barriers to the creation of wealth and prosperity.

But what about using the tax code to punish things that are bad for society?

Consider, for instance, taxes that are designed to discourage obesity. I personally don’t think politicians and bureaucrats should try to dictate our lifestyle choices, so I’m not overly sympathetic to imposing special taxes on things like sugar.

But I also recognize that people do respond to incentives, so maybe such taxes would work.

Though it’s also possible that we might get unintended consequences, which is the message of Baylen Linnekin’s new article for Reason.

A new study is pouring cold beer on Seattle’s soda tax. …since the city I call home adopted a soda tax in 2018, residents have swapped out soda and replaced that soda with beer. Pointedly, the study says Seattle’s soda tax “induced” consumers to buy more beer. …The PLoS study, by University of Illinois-Chicago researchers Lisa M. Powell and Julien Lader, compared sales of beer in Seattle both before and since adoption of the soda tax with comparable sales in nearby Portland, Oregon, which has no soda tax. “At two-years post-tax implementation, [the] volume sold of beer in Seattle relative to Portland increased by 7%,” the authors report. Though supporters of soda taxes claim (largely without evidence) that they’re a successful tool to combat obesity, the authors of the PLoS study note that the dangers of “excess alcohol consumption [include] higher risk of motor accidents/deaths, liver cirrhosis, sexually transmitted diseases, crime and violence, and workplace accidents.” Also: obesity. …”It’s hard to overstate the abject failure of soda taxes to deliver on their promised benefits,” Reason Foundation’s Guy Bentley wrote several years ago… “Nowhere in the world, let alone the United States, have soda taxes reduced obesity.”

Here’s a link to the study for those interested.

The obvious takeaway is that imposing an anti-obesity tax may not be very effective if consumers can easily switch to a different product with some of the same characteristics (i.e., lots of calories).

And such a tax may wind up making society worse off if the original problem (obesity) isn’t solved and new problems (drunk driving, etc) are created.

So what’s the solution? Politicians presumably will look at the results of the study and argue that beer taxes also should be increased.

And then when they learn that people will drive to different cities to buy beer and soda (as happened when Philadelphia imposed such a tax), they’ll argue for statewide tax harmonization. And when that leads to cross-state shopping, they’ll push for federal harmonization.

Maybe, just maybe, they should leave people alone. In a free society, you should have the right to control your own life, even if it means making decisions that some people don’t like.

P.S. Nobody should be surprised when Seattle politicians enact bad policy.

P.P.S. Since we now know that soda taxes backfire, you also won’t be surprised to learn that marijuana taxes backfire. And tobacco taxes.

P.P.P.S. To the extent these taxes are successful, we get more evidence of the Laffer Curve. That happened in Berkeley. And it happened in Mexico.

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