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Posts Tagged ‘Tax Increase’

I’m not a fan of President Bush. The first one or the second one.

Both adopted policies that, on net, reduced economic liberty.

Today, let’s focus on the recently deceased George H.W. Bush (a.k.a., Bush 41). By all accounts, he was a very good man, but that doesn’t mean he was a very good president. Or even a mildly good one.

Steve Moore’s column in the Washington Times is a damning indictment of his infamous read-my-lips tax betrayal.

Liberals love George H.W. Bush for the very tax increase betrayal that destroyed his presidency. …This was not just the political blunder of the half-century, it was a fiscal policy catastrophe. …What the history books are writing is that Mr. Bush showed political “courage” in breaking his “Read my lips: No new taxes” pledge, and he was thrown out of office for doing the right thing. Wrong. The quick story is that the Reagan expansion — in no small part due to the reduction of the highest tax rates from 70 percent to 28 percent — was shrinking deficit spending dramatically by the end of Ronald Reagan’s presidency. The budget deficit had fallen in half down to 2.9 percent of GDP by 1988. It was headed to below 2 percent if Mr. Bush simply had did nothing. …the 1990 budget deal became a license for Democrats to spend and spend. …Government expenditures accelerated at a faster pace than at any time in 30 years. In two years time, the domestic budget grew by almost 20 percent above inflation. …The tax increases either caused the recession or exacerbated it — ending the Reagan expansion. The economy lost 100,000 jobs and the unemployment rate rose and the unemployment rate rose from 5.5 percent to 7.4 percent. Real disposable income fell from 1990 to the eve of the 1992 election. If this tax hike was a success, so was the Hindenburg.

There’s a lot of good analysis in Steve’s column.

But I want to emphasize the part about the budget deficit being on a downward trajectory when Reagan left the White House. That’s absolutely accurate, as confirmed by both OMB and CBO projections.

All Bush needed to do was maintain the Gipper’s pro-market policies.

Unfortunately, he decided that “kinder and gentler” meant putting Washington first and giving politicians and bureaucrats more power over the economy.

And not just on fiscal policy.

Jim Bovard points out in USA Today that Bush 41 also had some very unseemly bouts of protectionism.

Bush was the most protectionist president since Herbert Hoover. Like Trump, he spoke of the need for level playing fields and fair trade. But Bush-style fairness gave federal bureaucrats practically endless vetoes over Americans’ freedom to choose foreign goods. Bush’s Commerce Department ravaged importers with one bureaucratic scam after another, using the dumping law to convict 97 percent of imports investigated, claiming that their prices were unfairly low to American producers (not consumers). Bush also ordered the U.S. International Trade Commission to investigate after ice cream imports threatened to exceed one percent of the U.S. market. And he perpetuated import quotas on steel and machine tools. …he slapped new textile import quotas on Nigeria, Indonesia, Egypt, the Philippines, Burma (now Myanmar), Costa Rica, Panama, Pakistan and many other nations. Mexico was allowed to sell Americans only 35,292 bras in 1989 — part of a byzantine regime that also restricted imports of tampons, typing ribbons, tarps, twine, table linen, tapestries, ties and thousands of other products.

To be fair, George H.W. Bush played a key role in moving forward NAFTA and the WTO/GATT, so his record on trade is mixed rather than bad.

Let’s return to the tax issue. Alan Reynolds explains that the Bush 41 tax hike was a painful example of the Laffer Curve in action.

The late President G.H.W. Bush famously reneged on his “no new taxes” pledge… The new law was intended to raise more revenue from high-income households and unincorporated businesses.  It was supposed to raise revenue partly by raising the top tax rate from 28% to 31% but more importantly by phasing-out deductions and personal exemptions… Treasury estimates expected revenues after the 1990 budget deal to be higher by a half-percent of GDP.  What happened instead is that revenues fell from 17.8% of GDP in 1989 to 17.3% in 1991, and then to 17% in 1992 and 1993.  Instead of rising from 17.8% of GDP to 18.3% as initial estimates assumed, revenues fell to 17%. …A recession began in October 1990, just as the intended tax increase was being enacted.  To blame the weak revenues of 1991-93 entirely on that brief recession begs the obvious question: To what extent was a recession that began with a tax increase caused or at least worsened by that tax increase?  …When discussing tax increases (or tax cuts), journalists and economists must take care to distinguish between intended effects on revenue and actual effects.

We’ll never know, of course, how the 1990 tax increase impacted the economy. As a general rule, I think monetary policy is the first place to look when assigning blame for downturns.

But there’s no question that the tax increase wasn’t helpful.

That being said, my biggest complaint about Bush 41 was not his tax increase. It was all the new spending.

Not just new spending in general. What’s especially galling is that he allowed domestic spending to skyrocket. Almost twice as fast as it increased under Obama and more than twice the rate of increase we endured under Clinton and Carter.

The opposite of Reaganomics, to put it mildly.

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With the exception of 2010-2014, when the Tea Party briefly had a grip on the Republican Party, the burden of government spending has been increasing in the United States.

This unfortunate trend can’t continue indefinitely, so sooner or later we’ll reach a point where politicians will feel pressured to address growing fiscal imbalances.

The crowd in Washington will want some sort of “budget summit,” which – if history is any guide – means that the senior lawmakers who created the problem go behind closed doors to craft a deal involving real tax increases and fake spending cuts.

Unsurprisingly, that approach doesn’t work. At best, the tax hike is a substitute for much-needed spending restraint. And in many cases, politicians treat the expectation of higher revenues as an excuse to increase outlays.

This isn’t just the pattern in the United States. Politicians all over the world have been raising taxes, yet debt levels continue to climb.

The right solution, indeed the only solution, is spending restraint. Which is the lesson Steve Davies expounds upon in this video for Learn Liberty.

Every single example Steve cites is supported by strong evidence.

Indeed, I’ve written about each and every nation he mentions.

What makes this debate so frustrating is that all the evidence is on the side of spending restraint.

It’s not just academic scholars who have shown that fiscal consolidations based on spending restraint are far more successful. Even left-leaning bureaucracies have admitted that spending control is the only approach that produces good results.

I’ve shown how limiting the growth of spending is the sensible way to reduce the fiscal burden of government and control red ink. And when I share this table during debates, I always ask my friends on the left to show their collection of nations that got good results with tax increases.

They’ve never answered my challenge.

Not once.

The bottom line is that we know that the Golden Rule of spending restraint is good for growth, and we know spending restraint is the way to reduce red ink.

That’s the good news. The bad news is that politicians have a “public choice” incentive to instead raise taxes. That game doesn’t end well.

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The most disturbing outcome of the recent mid-term election isn’t that Alexandria Ocasio-Cortez will be a Member of Congress. I actually look forward to that because of the humor value.

Instead, with the Democrats now controlling the House of Representatives, I’m more worried about Donald Trump getting tricked into a “budget summit” that inevitably would produce a deal with higher taxes and more spending. Just in case you think I’m being paranoid, here are some excerpts from a recent Politico report.

The dust has barely settled on the midterm elections, yet tax talk is already in the air thanks to President Donald Trump signaling openness to higher taxes, at least for some. …Trump said he’d be open to making an “adjustment” to recent corporate and upper-income tax cuts… Those off-the-cuff comments are sure to spark concerns among Republican leaders… Trump also suggested he could find common ground with Democrats on health care and infrastructure.

To be fair, Trump was only talking about higher taxes as an offset to a new middle-class tax package, but Democrats realize that getting Trump to acquiesce to a net tax hike would be of great political value.

And I fear they will be successful in any fiscal negotiations. Just look at how Trump got rolled on spending earlier this year (and that orgy of new spending took place when Democrats were in the minority).

I fear a deal in part because I object to higher taxes. But also because it’s quite likely that we’ll get the worst kind of tax hikes – i.e., class-warfare increases in tax rates or work, saving, investment, and entrepreneurship.

The political dynamic of budget deals is rather straightforward. So long as the debate is whether to raise taxes or not, the anti-tax crowd has the advantage since most Americans don’t want to give more of their money to politicians.

But if both parties agree with the notion that taxes should increase, then most Americans will – for reasons of self defense – want higher taxes on the rich (with “rich” defined as “making more money than me”). And those are the tax increases that do the most damage.

Interestingly, even economists from the International Monetary Fund agree with me about the negative consequences of higher tax rates. Here’s the abstract of a recent study.

This paper examines the macroeconomic effects of tax changes during fiscal consolidations. We build a new narrative dataset of tax changes during fiscal consolidation years, containing detailed information on the expected revenue impact, motivation, and announcement and implementation dates of nearly 2,500 tax measures across 10 OECD countries. We analyze the macroeconomic impact of tax changes, distinguishing between tax rate and tax base changes, and further separating between changes in personal income, corporate income, and value added tax. Our results suggest that base broadening during fiscal consolidations leads to smaller output and employment declines compared to rate hikes, even when distinguishing between tax types.

Here’s a bit of the theory from the report.

Tax-based fiscal consolidations are generally associated with large output declines, but their composition can matter. In particular, policy advice often assumes that measures to broaden the tax base by reducing exemptions and deductions are less harmful to economic activity during austerity. …base broadening often tends to make taxation across sectors, firms, or activities more homogeneous, contrary to rate increases. This helps re-allocate resources to those projects with the highest pre-tax return, thereby improving economic efficiency.

By the way, “base broadening” is the term for when politicians collect more revenue by repealing or limiting deductions, exemptions, exclusions, credits, and other tax preferences (“tax reform” is the term for when politicians repeal or limit preferences and use the money to finance lower tax rates).

Anyhow, here are some of the findings from the IMF study on the overall impact of tax increases.

The chart on the right shows that higher taxes lead to less economic output, which certainly is consistent with academic research.

And the chart on the left shows the revenue impact declining over time, presumably because of the Laffer Curve (further confirming that tax hikes are bad even if they generate some revenue).

But the main purpose of the study is to review the impact of different types of tax increases. Here’s what the authors found.

Our key finding is that tax base changes during consolidations appear to have a smaller impact on output and employment than tax rate changes of a similar size. We find a statistically significant one-year cumulative tax rate multiplier of about 1.2, rising to about 1.6 after two years. By contrast, the cumulative tax base multiplier is only 0.3 after one year, and 0.4 after two years, and these estimates are not statistically significant.

And here’s the chart comparing the very harmful impact of higher rates (on the left) with the relatively benign effect of base changes (on the right).

For what it’s worth, the economic people in the Trump Administration almost certainly understand that there shouldn’t be any tax increases. Moreover, they almost certainly agree with the findings from the IMF report that class-warfare-style tax increases do the most damage.

Sadly, politicians generally ignore advice from economists. So I fear that Trump’s spending splurge has set the stage for tax hikes. And I fear that he will acquiesce to very damaging tax hikes.

All of which will lead to predictably bad results.

P.S. A columnist for the New York Times accidentally admitted that the only budget summit that actually led to a balanced budget was the 1997 that lowered taxes.

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The value-added tax was first imposed in Europe starting about 50 years ago. Politicians in nations like France approve of this tax because it is generally hidden, so it is relatively easy to periodically raise the rate.

And that’s the reason I am vociferously opposed to the VAT. I don’t think it’s a coincidence that the burden of government spending dramatically increased in Europe once politicians got their hands on a new source of revenue.

Simply stated, I don’t want that to happen in America.

Now I have new evidence to support that position.

We’ll start by crossing the Pacific to see what’s happening in Japan, as reported by Reuters.

Japanese Prime Minister Shinzo Abe vowed to proceed with next year’s scheduled sales tax hike “by all means”… Abe said his ruling Liberal Democratic Party (LDP) won last year’s lower house election with a pledge to use proceeds from the sales tax increase to make Japan’s social welfare system more sustainable. …his plan to raise the tax to 10 percent from 8 percent in October next year. Abe twice postponed the tax hike after an increase to 8 percent from 5 percent in 2014 tipped Japan into recession.

I give Prime Minister Abe credit for honesty. He openly admits that he wants more revenue to finance even bigger government.

But that doesn’t make it a good idea. Japan has been experimenting with bigger government for the past 25-plus years and it hasn’t led to good results. The VAT was just 3 percent in 1997 and the Prime Minster now wants it to be three times higher.

All of which is sad since Japan used to be one of the world’s most market-oriented nations.

You also won’t be surprised to learn that the OECD is being a cheerleader for a higher VAT in Japan.

Speaking of which, let’s look at what a new OECD report says about value-added taxes.

VAT revenues have reached historically high levels in most countries… Between 2008 and 2015, the OECD average standard VAT rate increased by 1.5 percentage points, from 17.6% to a record level of 19.2%, accelerating a longer term rise in standard VAT rates… VAT rates were raised at least once in 23 countries between 2008 and 2018, and 12 countries now have a standard rate of at least 22%, against only six in 2008… Raising standard VAT rates was a common strategy for countries…as increasing VAT rates provides immediate revenue.

And here’s a chart from the study that tells you everything you need to know about how politicians behave once they have a new source of tax revenue.

Incidentally, there’s another part of the report that should be highlighted.

For all intents and purposes, the OECD admits that higher taxes are bad for growth and that class-warfare taxes are the most damaging method of taxation.

…increasing VAT rates…has generally been found to be less detrimental to economic growth than raising direct taxes.

What makes this excerpt amusing (at least to me) is that the bureaucrats obviously want readers to conclude that higher VAT burdens are okay. But by writing “less detrimental to growth,” they are admitting that all tax increases undermine prosperity and that “raising direct taxes” (i.e., levies that target the rich such as personal income tax) is the worst way to generate revenue.

Which is what I’ve been pointing out!

Last but not least, I’ll recycle my video explaining why a VAT would be very bad news for the United States.

Everything that has happened since that video was released in 2009 underscores why it would be incredibly misguided to give Washington a big new source of tax revenue. And that’s true even if the people pushing a VAT have their hearts in the right place.

The only exception to my anti-VAT rigidity is if the 16th Amendment is repealed, and then replaced by something that unambiguously ensures that the income tax is permanently abolished. A nice goal, but I’m not holding my breath.

P.S. One of America’s most statist presidents, Richard Nixon, wanted a VAT. That’s a good reason for the rest of us to be opposed.

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Shortly after the fiscal crisis began in Greece, I explained that the country got in trouble because of too much government spending.

More specifically, I pointed out that the country was violating my Golden Rule, which meant that the burden of spending was rising relative to the private economy.

That’s a recipe for trouble.

Unfortunately, thanks in large part to bad advice from the International Monetary Fund, Greek politicians decided to deal with an overspending problem by raising taxes.

Then doing it again.

And raising taxes some more.

And raising them again.

Then adding further tax hikes.

The tax burden is now so stifling that even the IMF admits the country may be on the wrong side of the Laffer Curve.

And establishment media sources are noticing. Here are some excerpts from a report in the Wall Street Journal.

Greece is…raising taxes so high that they are strangling the small businesses that form the backbone of its economy. …The tax increases have left Greece with some of Europe’s highest tax rates across several categories, including 29% on corporate income, 15% on dividends, and 24% on value-added tax (a rough equivalent of U.S. sales tax). Individuals pay as much as 45% income tax, plus an extra “solidarity levy” of up to 10%. Furthermore, workers and employers pay social-security levies of up to 27% of their salaries. …small and midsize businesses and self-employed people…are fighting the government in court over having to pay what they say is up to 80% of their average monthly takings in taxes and levies. Some also have to pay retroactive social-security contributions, to the point where professional associations say some of their members are having to pay more to the state than they make.

Paying more than they make? Francois Hollande will applaud when he learns that another nation has an Obama-style flat tax.

…economists and Greek entrepreneurs say heavy taxation doesn’t help. The tax burden is considered the most problematic factor for doing business in Greece, according to the World Economic Forum. “The tax burden creates a serious disincentive for economic activity. It mainly hits the most productive part of the Greek society… Aris Kefalogiannis, the CEO of olive-oil and food company Gaea, said the fiscal straitjacket is keeping highly qualified executives he would like to hire from coming to Greece. It has also made him more sparing with investments. …“But this abusive taxation is not backed by any actual reforms that would make the state efficient.”

Of course the state hasn’t been made more efficient. Why would politicians shrink government if higher taxes are an option?

It’s not as if Greek voters are poised to elect a Ronald Reagan or Margaret Thatcher, after all.

In any event, all of the tax increases are having predictably bad effects.

Tax evasion has led to higher tax rates on those Greeks who can’t or won’t evade taxes. The so-called gray economy is estimated at 26.5% of GDP… “Overtaxation is a vicious circle, which is not fixing the problem,” said 40-year-old electrician Antonis Alevizakis. “Only a third of customers want a receipt. The incentive to avoid a 24% value-added tax surcharge is big for them.” …More than 100,000 self-employed professionals have closed their businesses since mid-2016, to avoid rising taxation and social-security contributions, according to Finance Ministry data. Some of these people stopped self-employment, while others turned to the gray economy. …tax consultant Chrysoula Galiatsatou said. “A financially active part of the population sees no reason to try to do more.”

Why “try to do more” when the government gets the lion’s share of any additional income?

And why even stay in the country when there are better (less worse) tax systems in neighboring nations? Indeed, Greece is one of the few nations to raise corporate tax rates as the rest of the world is taking the opposite approach.

Here are some of the details. It appears that Bulgaria is a preferred destination for tax exiles.

Greece’s direct competitors for investment in its poorer, southeastern region of Europe have much lower taxes. For that reason, many Greek businesses and professionals are migrating to neighboring countries such as Bulgaria and Cyprus. …Around 15,000 Greek companies are registered in Bulgaria. Greece’s Finance Ministry estimates that 80% of them have a registration number but no activity in Bulgaria, and are only there to avoid Greek taxes. “If I stayed in Greece I would most certainly be in jail by now,” said John Douvis, who used his remaining savings in 2015 to move his family’s furniture factory from Athens to Blagoevgrad in Bulgaria. In Greece, he said, “it’s almost impossible for a company to survive unless it evades tax.”

In other words, the problem is tax rates, not tax evasion.

Lower the rates and evasion falls.

Let’s wrap up today’s column with a final observation. The WSJ story states that there have been spending cuts in addition to tax increases.

That’s basically true, but net effect of the Greek fiscal crisis is that government has become a bigger burden, relative to private economic output. Here’s a chart, based on data from the IMF.

The bottom line is that Greek politicians did way too much spending last decade and now they’re augmenting that mistake with way too much taxing this decade.

P.S. To reward everyone who read to the end, here’s some Greek-related humor.

This cartoon is quite  good, but this this one is my favorite. And the final cartoon in this post also has a Greek theme.

We also have a couple of videos. The first one features a video about…well, I’m not sure, but we’ll call it a European romantic comedy and the second one features a Greek comic pontificating about Germany.

Last but not least, here are some very un-PC maps of how various peoples – including the Greeks – view different European nations. Speaking of stereotypes, the Greeks are in a tight race with the Italians and Germans for being considered untrustworthy.

P.P.S. If you want some unintentional humor, did you know that Greece subsidizes pedophiles and requires stool samples to set up online companies?

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I’ve been writing about proposed carbon taxes since 2012.

My message is simple and straightforward. It’s possible to design a carbon tax that is theoretically appealing. Simply use all the revenue to get rid of some other tax that causes greater economic harm, such as the corporate income tax.

Which is basically the same argument that leads some folks to like the value-added tax.

But my argument against the carbon tax (like my argument against the VAT) is that we shouldn’t give politicians a new source of revenue without some sort of up-front, non-reversible repeal of an existing tax.

And since that’s not possible, the only good carbon tax is a dead carbon tax. However, it’s not very easy to kill this tax.

Columbia University’s Center on Global Energy Policy, working with several other organizations, just released four studies to boost the carbon tax.

Study #1.

Study #2.

Study #3.

Study #4.

And below you’ll see the most relevant table, which comes from study #4. It shows – in theory – what politicians might do with the additional money.

To add my two cents, I augmented the chart by numbering the options (in red) and then providing a short critique (in green).

In large part, I’m pointing out that “theory” may not resemble reality. For instance, how likely is it that politicians would impose this huge tax hike and allow all the funds to be used for deficit reduction (Option #3) instead of using a big chunk of the cash to buy votes?

Unfortunately, it’s not just academics and think tank people who are interested in this new tax.

The Wall Street Journal reports that a Republican congressman is pushing this levy.

A Florida Republican is set to propose a carbon-tax bill in Congress… The plan from Rep. Carlos Curbelo, who represents a Miami-area district…, would replace the federal gasoline tax with a tax on businesses including refineries, power plants and steel mills based on how much oil, coal and other fossil fuels they buy. The carbon tax would likely add three to 11 cents to the average pump price for a gallon of gasoline… he also views it as an infrastructure bill—it is crafted to raise additional revenue for bridges, roads and other projects—and as something he can sell as tax reform because it eliminates the gasoline tax. …Mr. Curbelo’s proposal would price carbon at $24 a metric ton and increase that every year by 2% plus the rate of inflation. It replaces the gasoline tax, which Mr. Cubelo frames as a version of tax overhaul. If enacted, his plan would raise an additional $57 billion to $106 billion a year.

Since Congressman Curbelo largely wants the new tax to fund bigger government, he’s proposing a version of Option #5.

Alex Brill of the American Enterprise Institute wants a different type of carbon tax.

One worthy candidate for the next tax reform effort is a cut in the most distortionary taxes in exchange for a tax on carbon emissions, combined with permanent carbon deregulation of the energy sector. …here are the three key components of a deregulatory carbon tax reform… Roll back burdensome carbon-related regulations. …The motivation is not disregard for the environment or climate, but distrust in the regulatory state as an efficient instrument. …A transparent carbon tax would…raise the price of certain consumer goods, including electricity and gasoline. That is a reality… It is, in fact, the policy’s intent. …a carbon tax would generate revenue that could be used to offset the cost of eliminating other taxes that impose greater harm on the economy. …Turning carbon tax revenues into universal welfare payments, as some have suggested, would not promote long-run economic growth.

The good news is that Alex wants Option #4 and is opposed to Option #2.

But that still doesn’t make it a good idea since Congress would never get rid of the corporate income tax.

Writing for the Washington Examiner, Michael Marlow also wants advocates of smaller government to support a carbon tax.

…conservatives should embrace the political opportunity it presents to reduce the harmful distortions imposed by other taxes and shrink the regulatory morass of federal agencies such as the Environmental Protection Agency. conservatives can achieve these goals with a well-crafted revenue-neutral carbon tax. …Because it would trade “good” policy (a carbon tax) for “bad” policy (regulations and taxes with high excess burdens), it would make government more efficient. And packaging together the benefits from deregulation and tax reform would compensate the public for any adverse economic impact… Ensuring that a carbon tax would not simply finance more government spending requires a strict commitment by conservatives that any legislation establishing a tax on carbon emissions must also include, first, an equal tax cut, preferably targeting existing taxes that impose the highest excess burdens on the economy, and second, a significant rollback of carbon regulations. On these points, conservatives should not negotiate.

Like Alex Brill, Michael Marlow is proposing to do the wrong thing in the best way.

But Option #4 would only be acceptable if the corporate tax is being totally abolished. And that’s not what he’s proposing.

Which is why many sensible voices are explaining that there’s no acceptable argument for a carbon tax.

The Wall Street Journal, for instance, opined on this issue last year.

…never changing is the call from some Republicans to neutralize the issue by handing more economic power to the federal government through a tax on carbon. …George Shultz and James Baker…have joined a group of GOP worthies for a carbon tax… They propose a gradually increasing tax that would be redistributed to Americans as a “dividend.” This tax on fossil fuels would replace the Obama Administration’s Clean Power Plan and a crush of other punitive regulations. …A carbon tax would be better than bankrupting industries by regulation and more efficient than a “cap-and-trade” emissions credit scheme. Such a tax might be worth considering if traded for radically lower taxes on capital or income.

The WSJ shares my concern that Option #4 eventually would turn into Option #2 or Option #5.

…in the real world the Shultz-Baker tax is likely to be one more levy on the private economy. Even if a grand tax swap were politically possible, a future Congress might jack up rates or find ways to reinstate regulations. Another problem is the “dividend.” …the purpose of taxes is to fund government services, not shuffle money from one payer to another. No doubt politicians would take a cut to funnel into renewable energy or some other vote-buying program. The rebates would also become a new de facto entitlement… all methods of calculating a price for carbon are susceptible to political manipulation. The Obama Administration spent years fudging “social cost of carbon” estimates to justify its regulatory agenda. The tax rate would also be influenced by international climate models that have overestimated the increase in global temperature for nearly two decades.

A column in National Review is similarly skeptical.

…a small but persistent group of Republicans are trying to persuade conservatives to abandon…principles and embrace a national energy tax. …the Climate Leadership Council, a group led by James Baker and George Shultz…recently met with the Trump administration to encourage the adoption of a $40-per-ton carbon tax. …There is nothing free-market about their massive new tax hike… A carbon tax would punish users of natural gas, oil, and coal, which make up 80 percent of the energy we consume. This means that all American families would face higher electricity bills and gasoline prices. In fact, it’s estimated that the Council’s carbon tax would hike gasoline prices by 36 cents per gallon. …these hikes would have a disproportionate impact on poor and middle-class families, who spend a higher percentage of their income on energy.

The column discusses a specific plan that envisions a new entitlement (Option #2), warning that it eventually would trigger other types of new spending (Option #5).

Shultz and Halstead want to offset the tax by redistributing to the American people the $300 billion in anticipated revenue from the carbon tax. This is not practical in the real world. The idea that Washington politicians would perpetually refund a massive new revenue stream is incredibly naïve… The more likely scenario is that the government would eventually begin to spend the new revenue… Carbon taxes make energy more expensive. They also destroy jobs, particularly in the manufacturing sector.

Benjamin Zycher of AEI also has a skeptical assessment.

The view is widespread among economists that a (Pigouvian) tax on emissions would be more efficient than the regulatory approach because regulations impose a rough, one-size-fits-all framework for reducing emissions, while a tax allows each emitter to find the least expensive method of achieving its emissions goal. …The central problem with the consensus view is straightforward: The emissions goal is not fixed. Instead, it must be chosen. …Once government derives revenues from a system of carbon taxes, with ensuing political competition for those revenues, it is not difficult to predict that under a broad range of conditions the emissions reduction goal will be inefficiently stringent. That is, the tax rate will be too high.

And what about the notion that at least the revenues can be used to reduce other taxes?

Fanciful thinking, Zycher explains.

Why should we predict that the interests benefiting from the reduction in the corporation income tax would prove to be the marginal members of whatever congressional coalition imposes the carbon tax? That certainly is possible, but other outcomes seem far more likely. Some industries and geographic regions will bear disproportionate burdens attendant upon the carbon tax, and their votes will be necessary to enact it, particularly in the US Senate. …The list of potential supplicants is long indeed, each comprising some combination of constituencies to protect and campaign contributions and votes to offer.

For all intents and purposes, he’s explaining that “public choice” will turn a bad idea into a really bad reality.

Paul Blair of Americans for Tax Reform summarizes another new proposal for a carbon tax, which is largely a version of Option #2.

Just last month, seven-figure swamp lobbyists Trent Lott and John Breaux rolled out their support for a “simple and elegant” tax on carbon dioxide emissions. Realizing the insufficient appetite for a new “tax,” the former senators disingenuously relabeled it as a “fee.” Their $40 per ton carbon tax would immediately result in a 36 cent per gallon increase in the gas tax. Proponents of the tax admit that the price of home heating would increase by 22 percent and coal would increase by an average of 264 percent. The revenue generated from this tax would constitute the largest tax increase in U.S. history. To offset some of these astronomical increases in energy costs, the plan would create a new national federally managed welfare program, paying the average family of four $2,000 a year…a program of that scale would greatly exceed the size of Obamacare, giving Uncle Sam the responsibility of managing another $1.7 trillion over a decade.

His conclusion is not subtle.

It’s a plan designed to harm American manufacturers, raise prices for every single American consumer, and prop up uncompetitive expensive sources of energy like solar and wind. It places trust in the federal government to manage yet another massive welfare program, while giving the Left a significant opportunity to extract more and more money from taxpayers. Killing a carbon tax dead in its tracks isn’t only good policy, it’s a basic IQ test for modern day conservatives.

Since Republicans have failed many IQ tests in recent years (see here, here, and here), this doesn’t leave me overflowing with optimism.

Last but not least, Ryan Ellis opines on Cong. Curbelo’s carbon tax.

Rep. Carlos Curbelo, R-Fla., will introduce a costly carbon tax bill on manufacturers… Curbelo’s own press release indicate that his carbon tax is structured to be a net tax increase. While it will eliminate the $0.184 per gallon federal tax on gasoline, the carbon tax will raise taxes higher (on net?) to the tune of $57 billion to $106 billion per year. Over a decade that’s a trillion dollar tax increase… Structurally, the Curbelo carbon tax is typical tax-and-spend liberalism. With the extra resources from the net tax increase, the plan proposes throwing money at so-called “infrastructure projects,” which comes right out of the 2009 Obama stimulus playbook.

As you can see, Ryan is not a fan of what Curbelo is proposing, which is a version of Option #5.

And Ryan also doesn’t want to enrich and empower the swamp.

While the bill by statute includes coal, petroleum, and natural gas, the EPA administrator is also given free rein to expand this carbon taxable list of industries at will. Imagine what an Obama administration would have done with that kind of power. …the Curbelo carbon tax also creates a United Nations NGO-style “National Climate Commission.” If that doesn’t sound scary enough, it also empowers this commission with an unlimited authorization to procure the services of “experts and consultants.” This section of the bill might as well be called the “DC swamp deep state full employment act.” How many of these taxpayer-funded “consultants” would an Obama-like administration use to enforce left-wing policies on the rest of us?

This is a long column, so let me conclude by noting that my opposition to a new tax has nothing to do with partisan politics. I’ve criticized Republicans for backing a carbon tax and I’ve also skewered Democrats for supporting that levy.

Heck, I’ve even gone after self-styled libertarians who advocate for this new tax. Especially when they pull a bait and switch, claiming initially that the revenue from a carbon tax could be used to lower other taxes, but then later admitting that they’re willing to acquiesce to a huge net tax increase.

Which confirms all my fears that a carbon tax would wind up being a gusher of money that would trigger an orgy of new spending in Washington.

P.S. I hope nobody will be surprised to learn that both the International Monetary Fund and the Organization for Economic Cooperation and Development support higher energy taxes for the United States.

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When I argue against tax increases, I generally rely on two compelling points.

  1. Higher taxes will undermine prosperity by penalizing productive behavior.
  2. More money for politicians will trigger more spending, so red ink will increase.

When I argue against centralization and urge Swiss-style federalism, I also rely on two very strong points.

  1. Local governments will be more responsible if they raise and spend their own funds.
  2. Competition among local jurisdictions will encourage better public policy.

Now let’s mix these issues together by looking at some academic research on what happens when politicians get a windfall of revenue from a  centralized source.

Well, according to new research from Italy’s central bank, bigger government means more corruption.

…large financial transfers from a central unit of government to lower levels of government…come with the risk of exacerbating the agency problem due to the fact that the funds are collected at a higher level and then managed locally with typically little transparency on the actual amount of resources received by each local area. This moral hazard problem may increase incentives for local administrators to extract rents from the funds received. …growing evidence suggests that illegal practices and rent seeking are still often associated with the receipt of transfers from a central government. …we investigate the relationship between financial transfers from a central level of government to local administrations and the coincident occurrence of white collar crimes at the same local level drawing from the case of EU funding to Southern Italy. …The South of Italy has been one of the largest recipients of EU funds: in the most recent programming period it received 25 billion euro out of the 35 billion total allocated to Italy and managed at the local level. The empirical analysis exploits a unique administrative dataset of criminal episodes in Italy and matches them to the records of all the transfers from the EU to each single municipality over the period 2007-2014. We find evidence of a significant positive relationship between EU funds and the occurrence of corruption and fraudulent behaviors in the recipient municipality in the same year. …the robustness analysis we performed provided evidence that the correlation between transfers and corruption that we estimate is likely not just spurious or due to confounding effects

As far as I’m concerned, these results belong in the “least surprising” category. Of course you get more corruption when government gets bigger.

Now let’s look at another study. A few years ago, academic scholars produced even more compelling research from Brazil.

The paper studies the effect of additional government revenues on political corruption and on the quality of politicians, both with theory and data. The theory is based on a version of the career concerns model of political agency with endogenous entry of political candidates. The evidence refers to municipalities in Brazil, where federal transfers to municipal governments change exogenously according to given population thresholds. We exploit a regression discontinuity design to test the implications of the theory and identify the causal effect of larger federal transfers on political corruption and the observed features of political candidates at the municipal level. In accordance with the predictions of the theory, we find that larger transfers increase political corruption and reduce the quality of candidates for mayor. …The empirical findings accord well with the implications of the theory. Specifically, an (exogenous) increase in federal transfers by 10% raises the incidence of a broad measure of corruption by 12 percentage points (about 17% with respect to the average incidence), and the incidence of a more restrictive measure—including only severe violation episodes—by 10.1 percentage points (about 24%).

By the way, this persuasive research isn’t just an argument for smaller government and fewer transfers.

It’s also why foreign aid generally has harmful effects on recipient countries. Handouts line the pockets of the political elite and enable a bigger burden of government.

It’s also one of the reasons why I’ve referred to the International Monetary Fund as a “dumpster fire.” That bureaucracy leverages its money (the U.S. is the biggest backer) to encourage higher tax burdens and more redistribution in countries that already are suffering from too much bad policy.

The two studies we’ve reviewed today are simply an exclamation point.

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