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Posts Tagged ‘Tax Increase’

I’m not a fan of what is sometimes called the “European Project.”

Yes, one of the original goals – free trade between European nations – was admirable and has generated significant benefits.

But what started as a positive idea has morphed into a Brussels-based superstate that pushes bureaucratization, centralization, and harmonization.

This is why I was – and still am – a fan of Brexit. And I hope other nations escape as well.

I’m sometimes asked whether it would be a better idea if there was sweeping reform in the European Union. In other words, would I favor the European Project if it basically focused on free trade and competition in a framework of “mutual recognition.”

Of course that would be preferable, but it’s not an option.

Instead, the bureaucrats keep pushing for more bad policy. Policies to penalize on tax competition. Policies to penalize low-tax jurisdictions. Policies to penalize American companies. Policies to penalize European companies.

And don’t forget bailouts, cartelization, subsidies, waste, corruption, and self-aggrandizement.

But if you really want to know why the European Union is a lost cause, just consider that the bureaucrats at the European Commission actually created an online game designed to brainwash students into supporting higher taxes.

I’m not joking. If you play Taxlandia (I selected the 18-25 age group), you’re asked to pick an aggregate tax burden.

So I selected 5 percent of GDP, which seems like the right level to provide core public goods (and also would be close to the tax burden that existed in the 1800s when Europe became rich).

As you can see, the game did not approve of low taxes and small government. I failed.

Needless to say, I automatically became very suspicious that the “correct” answer would be much higher.

So I selected a tax burden of 50 percent of GDP, basically about what you find in France and Greece.

And guess what? I passed!

So what happens if you go even farther and impose a tax burden of 75 percent of GDP?

Keep in mind that no country has ever been in this range (governments own all production in communist nations, so they don’t have conventional systems of taxation).

But if the kids in Europe choose that level of taxation it’s not a problem. They pass!

Heck, an 80 percent tax burden gets a passing grade. As does an 85 percent tax burden.

The good news is that even the EU bureaucrats don’t think a 100 percent tax is workable. As a matter of fact, once players picks a tax burden that exceeds 87.5 percent of economic output, they fail.

It’s good to see confirmation of my hypothesis that even EU bureaucrats are capable of recognizing that taxes can be excessive at some point. That’s not good new for the former French President. Or the ghost of FDR.

It’s difficult to pick the worst part of this taxpayer-funded propaganda exercise, but I was quite irked by the accompanying video that extolled the wonder and joy of paying tax and getting freebies from the government.

Just in case you think I’m exaggerating, this is how the bureaucrats describe the video.

To be fair, the Taxlandia game also allows passing grades for relatively low levels of taxation. Even a tax burden of 10 percent of GDP will allow students to get to the next round of the game.

But don’t be deceived by this seeming evidence of even-handedness. Once you pick a level of taxation that allows you to pass to the next fiscal year, you’re then presented with a bunch of options designed to make it seem like higher taxes are needed to have good dams, airports, railways, Internet, and sports facilities.

At no point is there any option for private provision of those supposed “public goods.”

That’s a rigged game.

Moreover, it’s also a dishonest game.

Given the options that are presented, unknowing students will think that government budgets are basically about physical capital (infrastructure, etc). In reality, though, the vast majority of government spending is for the ever-expanding social welfare state and the accompanying bureaucracy.

And it’s a misleading game since there’s no feedback mechanism showing that higher taxes are associated with slower growth and lower living standards.

As you might suspect, students never learn that high-tax Europe is much less prosperous than medium-tax America or low-tax Hong Kong and Singapore. Or that rich European nations would be poor states if they were part of America.

The bottom line is that European bureaucrats are the ones who deserve to fail for putting together such deceptive propaganda.

P.S. About what you would expect from a group that wants to censor Christmas.

P.P.S. Speaking of games from Brussels, can you pick the bigger clown?

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I’m currently in Tokyo for an Innovation Summit. Perhaps because I once referred to Japan as a basket case, I’ve been asked to speak about policies that are needed to boost the nation’s competitiveness.

That sounds like an easy topic since I can simply explain that free markets and small government are the universal recipe for growth and prosperity.

But then I figured I should be more focused and look at some of Japan’s specific challenges. So I began to ponder whether I should talk about Japan’s high debt levels. Or perhaps the country’s repeated (and failed) attempts to stimulate the economy with Keynesianism. And Japan’s demographic crisis is also a very important issue.

But since I only have 20 minutes (not even counting Q&A), I don’t really have time for a detailed examination on any of those topics. So I was still uncertain of how best to illustrate the need for pro-market reforms.

My job suddenly got a lot easier, though, because Eduardo Porter of the New York Times wrote a column today that includes a graph very effectively illustrating why Japan is in trouble. Simply stated, the country is on a very bad trajectory of ever-higher taxes.

To elaborate, Japan used to have a relatively modest tax burden, as least compared to other industrialized nations. But then, thanks in part to the enactment of a value-added tax, the aggregate tax burden began to climb. It has jumped from about 18 percent of economic output in 1965 to about 32 percent of gross domestic product in 2015.

Even the French didn’t raise taxes that dramatically!

By the way, I feel compelled to digress and point out that Mr. Porter’s column was not designed to warn about rising taxes in Japan. Instead, he was whining about non-rising taxes in the United States. I’m not joking.

American tax policy must stand as one of the great mysteries of the global political economy. In 1969…federal, state and local governments in the United States raised about the same in taxes, as a share of the economy, as the government of the average industrialized country: 26.6 percent of gross domestic product, against 27 percent among the nations in the Organization for Economic Cooperation and Development. Nearly 50 years later, the tax picture has changed little in the United States. By 2015, …the figure was 26.4 percent of G.D.P. But across the market democracies of the O.E.C.D., the share had climbed by an average of more than seven percentage points. …Americans are paying dearly as a result, as their comparatively small government has proved incapable of providing an adequate safety net…there is no credible evidence that countries with higher tax rates necessarily grow less.

Americans are “paying dearly”? Are we “paying dearly” because our living standards are so much higher? Are we “paying dearly” because our growth rates are higher and Europe is failing to converge? Are we “paying dearly” because America’s poorest states are rich compared to European countries.

Now that I got that off my chest, let’s get back to our discussion about Japan.

Looking at the data from Economic Freedom of the World, Japan ranked among the world’s 10-freest economies as recently as 1990. Today, it ranks #39. That is a very unfortunate development, though I should point out that the nation’s relative decline isn’t solely because of misguided fiscal policy.

I’ll close by noting that even the good news from Japan isn’t that good. Yes, the government did slight lower its corporate tax rate so it no longer has the highest burden among developed nations. But having the second-highest corporate tax rate is hardly something to cheer about.

P.S. Since today’s column looks at the most depressing Japanese chart, I should remind people that I shared the most depressing Danish PowerPoint slide back in 2015. I may need to create a collection.

P.P.S. I doubt anyone will be surprised to learn that the OECD and IMF have been encouraging bad policy for Japan.

P.P.P.S. If I had to guess, I would say that Japan’s government is probably more competent than average. But that doesn’t mean it’s incapable of some bone-headed policies, such as a regulatory regime for coffee enemas and a giveaway program that was so convoluted that no companies asked for the free money.

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The cossetted bureaucrats at the International Monetary Fund are on a roll. In the past few months, they’ve published reports pushing a very misguided and statist agenda.

  • In June, I wrote about the IMF pushing a theory that higher taxes would improve growth in the developing world.
  • In July, I wrote about the IMF complaining that tax competition between nations is resulting in lower corporate tax rates.
  • In October, I wrote about the IMF asserting that lower living standards are desirable if everyone is more equally poor.

Now let’s add to that awful collection.

A new IMF report tries to quantify the fiscal implications of a new agenda for so-called sustainable development from the United Nations.

The Sustainable Development Goals (SDGs) launched in September 2015 establish ambitious objectives to end poverty, protect the planet, and ensure prosperity for all by 2030… From inception, it was clear this ambition would have to be accompanied by significant efforts to boost the financing resources available to developing countries.

By the way, “financing resources” is basically bureaucrat-speak for more revenue to finance bigger government.

But not just bigger government. We’re talking huge amounts of money and much, much bigger government.

…the numbers are likely to be very large. For example, Schmidt-Traub (2015) estimated that the average annual investment increase required in low-income countries (LICs) to attain these goals could reach up to $400 billion (or 50 percent of their GDP).

The article speculates that private investors and foreign aid will cover some of this cost, but the focus is on the degree to which poor nations independently have the capacity to expand the burden of government spending.

…the heavy burden imposed on the public sector cannot be overstated…requires assessing the fiscal space in LICs. … fiscal space captures the ability of a government to raise spending… The purpose of this paper is to develop a new metric of fiscal space in LICs.

The good news, from the IMF’s warped perspective, is that there’s lots of leeway to expand government in these countries, presumably enabled by big tax increases. The bad news is that there’s not enough “fiscal space” to finance the desired expansion of government.

…the fiscal space available in LICs may be in the double digits but, not surprisingly, it will be insufficient to undertake the spending needed to achieve the SDGs.

For those that care, here are some specific results.

…fiscal space in LICs is estimated to be in the double digits, with the median value reaching up to 16 percent of GDP for the full sample.

And here is a chart showing the estimates of fiscal space for resource-dependent poor countries are regular poor countries, based on various conditions.

And here’s another chart showing the potential “fiscal space” in low-income countries.

Though keep in mind that even very big increases in government would not produce the large public sectors envisioned by UN bureaucrats.

…the fiscal space available in LICs is dwarfed by the incremental annual spending needs that must be financed by the public sector to achieve the SDGs—estimated at around 30 percent of GDP.

Now that I’ve shared the IMF’s analysis, let me explain why it is anti-empirical nonsense.

Simply stated, the bureaucrats want us to reflexively assume that bigger government is the way to achieve the “sustainable development goals.” Yet the only sure-fire method of achieving those goals is to become a high-income nation. Those are the places, after all, that have achieved low poverty, clean environments, equal rights, and other desirable features that are part of the UN’s goals.

That being said, the world’s successful western countries all became rich when government was very small. Indeed, there was almost no redistribution spending in the western world as late as 1930. Yes, those nations generally adopted expensive and debilitating welfare states once they became rich, thus producing less growth and fiscal problems, but at least they they first achieved prosperity with lengthy periods of free markets and small government.

Moreover, there’s not a single example of a country that adopted big government and then became rich (and therefore capable of achieving the UN’s goals). So the notion that higher taxes and bigger governments can produce better outcomes for poor nations is utter bunk.

These issues were addressed in a recent video from the Center for Freedom and Prosperity.

And I suppose I should link to my video on the recipe for growth and prosperity.

The bottom line is that the IMF has come up with analysis that – if followed – will ensure continued poverty and misery in the developing world. With that in mind, I think I was being too nice when I referred to that bureaucracy as the Dr. Kevorkian of global economic policy.

P.S. I don’t want anyone to conclude the IMF is biased against poor countries. They also push for higher taxes and bigger government in rich countries.

P.P.S. While they are infamous for urging higher taxes all around the world, IMF bureaucrats don’t have to suffer the consequences since they receive very lavish tax-free salaries. What a reprehensible scam.

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I’ve written several times that the left wants big tax hikes on poor and middle-class taxpayers. Simply stated, that’s the only way they can finance a European-sized welfare state.

Some of them even admit they want to pillage ordinary taxpayers.

Now we have another addition to our list. Writing in today’s Washington Post, two law professors from UCLA openly argue in favor of tightening the belts of average Americans to enable a bigger federal government.

…we need more tax revenue from the middle class, not less.

They start by complaining that middle-income taxpayers have benefited from big tax cuts over the past 35 years.

Middle-class tax burdens are at historic lows. The Congressional Budget Office reported in 2016 that the average federal income tax rate for the middle class — here meaning the middle 60 percent of the income distribution — declined from 7.8 percent in 1979 to 3.4 percent in 2013. Focusing on all federal taxes (not just income taxes), the average tax rate dropped from 19.2 to 13.8 percent over the same period. With these lower tax rates, the share of taxes paid by the middle class has also declined. The middle class paid 35 percent of income taxes in 1979 but only 16 percent in 2013, while its share of all federal taxes fell from 43 to 30 percent.

As far as I’m concerned, this is good news, not something to bemoan. Indeed, my goal is to have similar reductions in tax burdens for all taxpayers.

But the authors raise a very valid point. We will have giant tax increases in the future and people at all income levels will be adversely impacted. Though there is one way of avoiding that grim European future.

Unless Congress is willing to dramatically cut major entitlement programs.

Incidentally, we don’t need to “dramatically cut” those programs. The authors are relying on dishonest Washington budget math.

In reality, the problem is solved and tax increases are averted so long as reforms are adopted to ensure that entitlement programs no longer grow faster than the private sector.

But that’s not what the authors want. They actually look forward to big tax increases.

What the middle class needs is not meager tax cuts but a muscular commitment to robust public institutions designed to benefit middle-income individuals. The higher taxes could come from our current income tax (from tax increases on the middle class and the wealthy) or a broad-based consumption tax (such as a VAT or carbon tax).

I’m greatly amused by the language they use. They want readers to believe that bloated European-style welfare states are “robust public institutions” and that politicians grabbing more money to buy more votes is a way of showing “muscular commitment.”

I’m also not surprised that they embraced a carbon tax or value-added tax.

By the way, the column compares the United States with other industrialized nations. Simply stated, we win (at least from my perspective).

Data from the Organization for Economic Cooperation and Development reveal that American families with children face substantially lower average income-tax rates (in some cases, less than half) than similar families in other developed countries. And this is before factoring in consumption taxes, which represent a large share of middle-class tax burdens in most countries, but not in the United States.

Those are remarkable numbers. Income taxes grab a much bigger share of family income in Europe. And then governments take an even bigger slice thanks to onerous value-added taxes.

The authors would argue that Europeans get “robust public institutions” in exchange for all that money, but what they really get is less growth and lower living standards.

Indeed, it’s worth noting that the richest European nations are on the same level (or below) the poorest American states.

That’s not exactly a ringing endorsement for higher tax burdens.

The bottom line is that left-wing politicians usually pontificate about raising taxes on the rich, but the truly honest folks on the left openly admit that the real targets are lower-income and middle-class households.

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When companies want to boost sales, they sometimes tinker with products and then advertise them as “new and improved.”

In the case of governments, though, I suspect “new” is not “improved.”

The British territory of Jersey, for instance, has a very good tax system. It has a low-rate flat tax and it overtly brags about how its system is much better than the one imposed by London.

In the United States, by contrast, the state of New Jersey has a well-deserved reputation for bad fiscal policy. To be blunt, it’s not a good place to live and it’s even a bad place to die.

And it’s about to get worse. A column in the Wall Street Journal warns that New Jersey is poised to take a big step in the wrong direction. The authors start by observing that the state is already in bad shape.

…painless solutions to New Jersey’s fiscal challenges don’t exist. …a massive structural deficit lurks… New Jersey’s property taxes, already the highest in the nation, are being driven up further by the state’s pension burden and escalating health-care costs for government workers.

In other words, interest groups (especially overpaid bureaucrats) control the political process and they are pressuring politicians to divert even more money from the state’s beleaguered private sector.

…politicians seem to think New Jersey can tax its way to budgetary stability. At a debate this week in Newark, the Democratic gubernatorial nominee, Phil Murphy, pledged to spend more on education and to “fully fund our pension obligations.” …But just taxing more would risk making New Jersey’s fiscal woes even worse. …New Jersey is grasping at the same straws. During the current fiscal year, the state’s pension contribution is $2.5 billion, only about half the amount actuarially recommended. The so-called millionaire’s tax, a proposal Gov. Chris Christie has vetoed several times since taking office in 2010, will no doubt make a comeback if Mr. Murphy is elected. Yet it would bring in only an estimated $600 million a year.

The column warns that New Jersey may wind up repeating Connecticut’s mistakes.

Going down that path, however, is a recipe for a loss of high-value taxpayers and businesses.

Let’s look at a remarkable story from the New York Times. Published last year, it offers a very tangible example of how the state’s budgetary status will further deteriorate if big tax hikes drive away more successful taxpayers.

One man can move out of New Jersey and put the entire state budget at risk. Other states are facing similar situations…during a routine review of New Jersey’s finances, one could sense the alarm. The state’s wealthiest resident had reportedly “shifted his personal and business domicile to another state,” Frank W. Haines III, New Jersey’s legislative budget and finance officer, told a State Senate committee. If the news were true, New Jersey would lose so much in tax revenue that “we may be facing an unusual degree of income tax forecast risk,” Mr. Haines said.

Here are some of the details.

…hedge-fund billionaire David Tepper…declared himself a resident of Florida after living for over 20 years in New Jersey. He later moved the official headquarters of his hedge fund, Appaloosa Management, to Miami. New Jersey won’t say exactly how much Mr. Tepper paid in taxes. …Tax experts say his move to Florida could cost New Jersey — which has a top tax rate of 8.97 percent — hundreds of millions of dollars in lost payments. …several New Jersey lawmakers cited his relocation as proof that the state’s tax rates, up from 6.37 percent in 1996, are chasing away the rich. Florida has no personal income tax.

By the way, Tepper isn’t alone. Billions of dollars of wealth have already left New Jersey because of bad tax policy. Yet politicians in Trenton blindly want to make the state even less attractive.

At the risk of asking an obvious question, how can they not realize that this will accelerate the migration of high-value taxpayers to states with better policy?

New Jersey isn’t alone in committing slow-motion suicide. I already mentioned Connecticut and you can add states such as California and Illinois to the list.

What’s remarkable is that these states are punishing the very taxpayers that are critical to state finances.

…states with the highest tax rates on the rich are growing increasingly dependent on a smaller group of superearners for tax revenue. In New York, California, Connecticut, Maryland and New Jersey, the top 1 percent pay a third or more of total income taxes. Now a handful of billionaires or even a single individual like Mr. Tepper can have a noticeable impact on state revenues and budgets. …Some academic research shows that high taxes are chasing the rich to lower-tax states, and anecdotes of tax-fleeing billionaires abound. …In California, 5,745 taxpayers earning $5 million or more generated more than $10 billion of income taxes in 2013, or about 19 percent of the state’s total, according to state officials. “Any state that depends on income taxes is going to get sick whenever one of these guys gets a cold,” Mr. Sullivan said.

The federal government does the same thing, of course, but it has more leeway to impose bad policy because it’s more challenging to move out of the country than to move across state borders.

New Jersey, however, can’t set up guard towers and barbed wire fences at the border, so it will feel the effect of bad policy at a faster rate.

P.S. I used to think that Governor Christie might be the Ronald Reagan of New Jersey. I was naive. Yes, he did have some success in vetoing legislation that would have exacerbated fiscal problems in the Garden State, but he was unable to change the state’s bad fiscal trajectory.

P.P.S. Remarkably, New Jersey was like New Hampshire back in the 1960s, with no income tax and no sales tax. What a tragic story of fiscal decline!

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I’m not a fan of the International Monetary Fund. Like many other international bureaucracies, it pushes a statist agenda.

The IMF’s support for bad policy gets me so agitated that I’ve sometimes referred to it as the “dumpster fire” or “Dr. Kevorkian” of the global economy.

But, in a perverse way, I admire the IMF’s determination to advance its ideological mission. The bureaucrats will push for tax hikes using any possible rationale.

Even if it means promoting really strange theories like the one I just read in the bureaucracy’s most recent Fiscal Monitor.

Welfare-based measures can help policymakers when they face decisions that entail important trade-offs between equity and efficiency. …One way to quantify social welfare in monetary units is to use the concept of equally distributed equivalent income.

And what exactly is “equally distributed equivalent income”?

It’s a theory that says big reductions in national prosperity are good if the net result is that people are more equal. I’m not joking. Here’s more about the theory.

…a welfare-based measure of inequality…with 1 being complete inequality and 0 being complete equality. A value of, say, 0.3 means that if incomes were equally distributed, then society would need only 70 percent (1 − 0.3) of the present national income to achieve the same level of welfare it currently enjoys (in which incomes are not equally distributed). The level of income per person that if equally distributed would enable the society to reach the same level of welfare as the existing distribution is termed equally distributed equivalent income (EDEI).

Set aside the jargon and focus on the radical implications. The IMF is basically stating that “the same level of welfare” can be achieved with “only 70 percent of the present national income” if government impose enough coercive redistribution.

In other words, Margaret Thatcher wasn’t exaggerating when she mocked the left for being willing to sacrifice national well-being and hurt the poor so long as those with higher incomes were subjected to even greater levels of harm.

Not surprisingly, the IMF uses its bizarre theory to justify more class-warfare taxation.

Figure 1.16 shows how the optimal top marginal income tax rate would change as the social welfare weight on high-income individuals increases. Assuming a welfare weight of zero for the very rich, the optimal marginal income tax rate can be calculated as 44 percent, based on an average income tax elasticity of 0.4… Therefore, there would appear to be scope for increasing the progressivity of income taxation…for countries wishing to enhance income redistribution.

But not just higher statutory tax rates.

The bureaucrats also want more double taxation of income that is saved and invested. And wealth taxation as well.

Taxes on capital income play an equally important role in shaping the progressivity of a tax system. …An alternative, or complement, to capital income taxation for economies seeking more progressive taxation is to tax wealth.

The article even introduces a new measure called “progressive tax capacity,” which politicians doubtlessly will interpret as a floor rather than a ceiling.

Reminds me of the World Bank’s “report card” which gave better grades to nations with “high effort” tax systems.

Though I guess I should look at the bright side. It’s good news that the IMF estimates that the “optimal” tax rate is 44 percent rather than 100 percent (as the Congressional Budget Office implies). And I suppose I also should be happy that “progressive tax capacity” doesn’t justify a 100 percent tax rate.

I’m being sarcastic, of course. That being said, there is a bit of genuinely good analysis in the publication. The bureaucrats actually acknowledge that growth is the way of helping the poor, which is a point I’ve been trying to stress for several years.

…many emerging market and developing economies…experienced increases in inequality during periods of strong economic growth. …Although income growth has not been evenly shared in emerging market economies, all deciles of the income distribution have benefited from economic growth, even when inequality has increased. …Benefiting from high economic growth, East and South Asia and the Pacific region, in particular, showed remarkable success in reducing poverty between 1985 and 2015 (Figure 1.8). Likewise, a period of strong growth has led to a sustained decline in absolute poverty rates in sub-Saharan Africa and in Latin America and the Caribbean.

Here are two charts from this section of the Fiscal Monitor. Figure 1.7 shows that the biggest gains for the poor occurred in the emerging market economies that also saw big increases for the rich. And Figure 1.8 shows how global poverty has fallen.

I’m not saying, by the way, that inequality is necessary for growth.

My argument is merely that free markets and small government are a recipe for prosperity. And as a nation becomes richer thanks to capitalism, it’s quite likely that some people will get richer faster than others get richer.

I personally hope the poor get richer faster than the rich get richer, but the other way around is fine. So long as all groups are enjoying more prosperity and poverty is declining, that’s a good outcome.

P.S. My favorite example of rising inequality and falling poverty is China.

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I’m currently in Iceland for a conference organized by the European Students for Liberty. I spoke earlier today on the case for lower taxes and I made six basic points.

Sadly, not everyone agrees with my views, either in Iceland or the United States.

Regarding the latter, Robert Samuelson expressed a contrary position last month when writing about the tax debate in the Washington Post.

…we need higher, not lower, taxes. …We are undertaxed. Government spending, led by the cost of retirees, regularly exceeds our tax intake.

After reading his column, I thought about putting together a detailed response. I was especially tempted to debunk the carbon tax, which is his preferred way of generating additional tax revenue.

But then it occurred to me that could make an “appeal to authority.” In my Iceland presentation today, I cited very wise words from four former presidents on tax policy. And their statements are all that we need to dismiss Samuelson’s column.

We’ll start with Thomas Jefferson, who argues for small government and against income taxation.

We then take a trip through history so we can see what Grover Cleveland said about the topic.

Simply stated, he viewed any taxes – above what was needed to finance a minimal state – as “ruthless extortion.”

The great Calvin Coolidge said the same thing about four decades later.

Last but not least, the Gipper addresses Samuelson’s point about the difference between taxes and spending.

Reagan is right, of course. The burden of federal spending is the problem whether looking at pre-World War II data or post-World War II data.

Four good points of view from four good Presidents.

The only missing component is that I need to find a President who correctly explains that higher taxes will lead to higher spending and more red ink.

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