The United Nation’s Hypocritical Opposition to Higher Taxes

Like other international bureaucracies (most notably the IMF and OECD), the United Nations routinely advocates for higher taxes.

According to the bureaucrats, we are supposed to believe that higher taxes are necessary because a bigger burden of government will increase growth.

I’m not joking. The Center for Freedom and Prosperity produced a video outlining – and debunking – this silly theory.

What’s especially galling is that international bureaucrats at places like the U.N. get tax-free salaries, so they are exempt from the negative impact of the bad policies they want for everyone else.

I’ve sometimes speculated that they might have a more sensible attitude if they had to pay tax.

Well, we now have a test case. In an article for ABC News, Deng Machol writes about the U.N. deciding that taxes are a bad idea.

Following an appeal from the United Nations, South Sudan removed recently imposed taxes and fees that had triggered suspension of U.N. food airdrops. Thousands of people in the country depend on aid from the outside. The U.N. earlier this week urged South Sudanese authorities to remove the new taxes, introduced in February. The measures applied to charges for electronic cargo tracking, security escort fees and fuel. …The U.N said the new measures would have increased the mission’s monthly operational costs to $339,000. The U.N. food air drops feed over 16,300 people every month. At the United Nations in New York, U.N. spokesman Stéphane Dujarric said the taxes and charges would also impact the nearly 20,000-strong U.N. peacekeeping mission in South Sudan, “which is reviewing all of its activities, including patrols, the construction of police stations, schools and  centers, as well as educational support.”

What a revelation. The U.N. suddenly realizes that higher taxes decrease whatever is being taxed. The “philoso-raptor” won’t be surprised.

Maybe, just maybe, the bureaucrats will now realize that high taxes on the rest of us also are a bad idea.

But I won’t hold my breath. After all, some (untaxed) bureaucrats at the United Nation think it is a violation of human rights if the rest of us don’t pay more tax.

P.S. As you might suspect, the U.N. budget has plenty of waste.

P.P.S. I had the surreal experience of being a credentialed observer at a United Nations conference where it seemed like I was the only person who did not favor higher taxes.

Read Full Post »

Dishonest Pimping for a Global Wealth-Tax Cartel

Everything you need to know about wealth taxation can be summarized in two sentences.

• The biggest problem with most tax systems is the pervasive tax bias against income that is saved and invested, which discourages the accumulation of capital that helps to finance future growth.
• Wealth taxes would dramatically increase the tax bias against saving and investment and easily could result in implicit marginal tax rates on capital of more than 100 percent.

Unfortunately, economic arguments don’t matter to the class-warfare crowd. They mistakenly think the economy is a fixed pie, so if Jeff Bezos and Elon Musk have a lot of money, then the rest of us have less money.

This is empirically nonsensical.

Or perhaps they simply resent people who are very successful. There’s certainly a good amount of evidence that folks on the left have a hate-and-envy mentality.

I don’t know Prof. Gabriel Zucman’s motives, but he’s a big advocate of a global wealth tax. Here are some passages from his recent column in the New York Times.

…the ultrawealthy consistently avoid paying their fair share in taxes. …Why do the world’s most fortunate people pay among the least in taxes, relative to the amount of money they make? The simple answer is that while most of us live off our salaries, tycoons like Jeff Bezos live off their wealth. In 2019, when Mr. Bezos was still Amazon’s chief executive, he took home an annual salary of just $81,840. But he owns roughly 10 percent of the company, which made a profit of $30 billion in 2023. …Unless Mr. Bezos, Warren Buffett or Elon Musk sell their stock, their taxable income is relatively minuscule. …There is a way to make tax dodging less attractive: a global minimum tax. …The idea is simple. Let’s agree that billionaires should pay income taxes equivalent to a small portion — say, 2 percent — of their wealth each year. …the proposal would allow countries to collect an estimated $250 billion in additional tax revenue per year, which is even more than what the global minimum tax on corporations is expected to add.

There are many problems with Zucman’s analysis.

One concern is that it’s a bad idea to finance bigger government, which is a goal of the class-warfare crowd.

Another problem is that Zucman never acknowledges or addresses the disincentive effect of higher taxes on saving and investment.

Here are some excerpts from the Wall Street Journal‘s editorial on the topic.

In our new socialist age, the demand to tax and redistribute income is insatiable. The latest brainstorm arrives in a proposal by four countries in the G-20 group of nations to impose a 2% wealth tax on the world’s billionaires. …As you might expect, this would principally be a tax raid on Americans, who are the most numerous billionaires. It would also be taxation without representation, since it would be a body of global elites attempting to impose a tax without having passed Congress. …Once a global wealth tax is in place, you can be sure that billionaires won’t be the last target. …the G-20 is becoming a vehicle for the world’s left-wing governments to gang up on the U.S. …For this crowd, taxing American billionaires to redistribute income around the world is all too imaginable.

By the way, Zucman’s problem is not merely bad economics.

He also uses misleading numbers. Phil Magness of the Independent Institute exposes his dodgy manipulations in a thread on Twitter (now called X).

There are dozens of tweets in his thread, but here’s his summary if you don’t have time to read everything.

P.S. Another French economist, Thomas Piketty, also uses dodgy numbers while pushing for class-warfare taxes. Seems to be a pattern on the left (as illustrated by one of Biden’s tweets that was based on make-believe numbers).

Read Full Post »

Comparing Taxation in Sweden and the United States

I already shared my thoughts about the value-added tax when discussing fiscal policy with an economist at the Confederation of Swedish Enterprise.

Here’s some of what I said about tax progressivity and the welfare state.

The bottom line is that the American tax system targets the rich. But that’s not the case in Sweden.

If you don’t believe me, let’s see what some left-of-center sources say.

Here’s a chart from a study for the World Inequality Lab by three economists at the Paris School of Economics.

As you can see, the United States is an outlier. The rich pay a much bigger share of the tax burden in America compared to other nations.

Interestingly, it’s not because America imposes higher taxes on the rich. It’s because Europeans impose higher taxes on lower-income and middle-class households.

Want more confirmation from another left-of-center source?

Here are some excerpts from a column in the New York Times by Monica Prasad, a sociology professor at Northwestern.

We can learn from Sweden, but the lesson is not what many people think. Rich Swedes do get taxed at high rates, but so does everyone else: The average American worker’s total tax burden is 31.7 percent of earnings, compared with 42.9 percent for the average Swede. The Swedes actually tax corporations less… Estate tax? In the United States the average effective rate is 16.5 percent. In Sweden, it’s zero. Swedish national sales taxes, which fall disproportionately on the middle classes, are much higher than sales taxes in the United States. …Some scholars have drawn on this history to argue that the United States needs to give up its fixation with progressive taxation and adopt a national sales tax as every other advanced industrial country has done. …It’s hard to make a case for a big new tax in America on the middle classes and the poor…progressive taxation still has a role to play in the United States — but we do need to learn the larger lesson…the secret of the European welfare states.

Her view of the the “larger lesson” and “secret” is not the same as mine.

She wants an efficient welfare state and – to her credit – she acknowledges that means big tax burdens for lower-income and middle-class households.

I look at comparative living standards and say “are you $&(#)@* crazy!”

I’ll close by emphasizing a point I made at the end of the above video. Our friends on the left like to argue that big government is popular and they’ll cite polling data to make that case.

But people have much different answers to polling questions when they are asked if they are willing to pay higher taxes to finance bigger government.

And since there are not enough rich people to finance big government, the only way to have Swedish-sized government is to have Swedish-level taxes on ordinary people.

P.S. For those who want to focus solely on the taxation of rich households. Europeans tend to impose higher personal income tax rates but to also have less double taxation of income that is saved and invested.

Read Full Post »

Leftist Governments (and the IMF) Pushing Global Wealth Tax

When Joe Biden began his push for a global corporate tax cartel back in 2021, I explained why the idea was very bad news for the world’s workers, consumers, and shareholders.

And I pointed out it was specifically bad news for developing nations since they would be prevented from using good tax policy to encourage rapid growth.

Most important, at least for purposes of today’s column, I also told the BBC that a corporate tax cartel would be very dangerous since politicians would quickly try to apply the same approach to other types of taxes.

Well, I was right.

As reported in Barron‘s, some of the world’s greediest governments are now pushing a global wealth tax cartel. Here are some excerpts from the story by Daniel Avis.

Brazil, which is chairing the G20 this year, has been pushing for the group of nations which together account for 80 percent of the world’s economy to adopt a shared stance… “Fair international taxation is not just a topic of choice for progressive economists, but a key concern at the very heart of macroeconomic management today,” Brazilian finance minister Fernando Haddad said during an IMF event in Washington. “Without international cooperation, there is a limit to what states can do, both rich and developing ones,” he added. …Sitting alongside Haddad at the IMF event, French finance minister Bruno Le Maire renewed his calls for a global minimum tax… “The future of the world cannot be a race to the bottom,” Le Maire said.

Haddad seems like a not-very-good person. He’s been a political science professor, according to Wikipedia, and he’s authored some publications that suggest he’s a leftist ideologue.

• In Defense of Socialism
• Theses on Karl Marx
• Work and Language for the Renewal of Socialism

This crank is now trying to set tax policy for the entire world!

Marcela Ayres and Andrea Shalal of Reuters also reported on Haddad’s iniiative, and their article noted the predictably pernicious role of the International Monetary Fund.

Brazil’s proposal to tax the super-rich globally gained momentum among Group of Twenty members…with France’s finance minister and the head of the International Monetary Fund backing a coordinated push to generate new revenue… IMF chief Kristalina Georgieva said…ensuring that the richest paid their fair share would mobilize funds… She said IMF research…also estimated that setting a minimum floor for carbon pricing could boost revenue by $1.4 trillion a year. …Gabriel Zucman, director of the European Tax Observatory, …has proposed that very-high-net-worth individuals…pay at least the equivalent of 2% of their wealth in income tax each year. That would generate $250 billion per year.

I can’t resist pointing out that Ms. Georgieva (like all IMF bureaucrats) gets a very lavish salary that is exempt from taxation. Yet this hypocritical parasite agitates for higher taxes on everyone else.

Fortunately, at least one major government is skeptical of this money grab.

In a separate report from Reuters, Christian Kraemer and Maria Martinez note that Germany’s Finance Minister is not a fan.

German Finance Minister Christian Lindner rejected on Thursday Brazil’s proposal to tax the super-rich, indicating a challenging path for it to gain widespread G20 support. …Speaking after meeting U.S. Senator Bernie Sanders on Thursday, Brazil’s Finance Minister Fernando Haddad said of Lindner’s opposition to the proposal: “He will change (his mind).” Sanders said he “strongly” supports the proposal… But the Brazilian government is aware that other countries like Japan and Italy have shown resistance to the initiative, added the source. …Le Maire said that moving to tax the rich was the logical next step for a series of global taxation reforms launched in 2017, including agreement on a global corporate minimum tax.

Let’s hope Germany holds firm, and that Japan and Italy also are on the right side.

But I worry because the statist countries will be relentless.

Remember, the corporate tax cartel seemed crazy when it was first proposed about 10 years ago. But the left kept pushing and now it’s in the process of being implemented.

I worry the same thing will now happen with a global wealth tax cartel.

P.S. The corporate tax cartel seemed crazy because it is crazy (assuming one wants more prosperity)

P.P.S. It was nice of Monsieur Le Maire to confirm what I told the BBC about the corporate tax cartel being the first step on the path to other tax cartels.

P.P.P.S. I have not bothered to make the economic case against the wealth tax in this column, but feel free to click here, here, here, and here for that type of analysis.

Read Full Post »

Trump and the Flat Tax?

There’s going to be a big tax fight in Washington next year, regardless of who wins the House, the Senate, and/or the presidency. That’s because major portions of Trump’s 2017 Tax Cuts and Jobs Act will expire on December 31, 2025.

Will those tax cuts be extended? Will they be expanded? Will they be curtailed? Politicians will be forced to choose.

In general, I’m rather pessimistic about the outcome for the simple reason that there’s been a huge increase in the burden of government spending.

I wrote about that problem two days ago and highlighted how politicians used the pandemic as an excuse to permanently increase the cost of government.

One result of all that wasteful spending is that we now have enormous deficits. And even though I don’t worry much about red ink (the real problem is spending, not how it’s financed), the practical reality is that it is well nigh impossible to have good tax policy when there is bad spending policy.

But that doesn’t mean we shouldn’t try. In an article for Bloomberg, Stephanie Lai, Amanda L Gordon, and Enda Curran write about the advice Trump is getting on tax policy.

Donald Trump is under pressure from economists in his circle to embrace a flat tax rate… The efforts demonstrate how people around the former president are already lobbying for their preferred economic policies ahead of a potential second term where both taxes and tariffs will be top priorities. …Forbes said…he is advocating for Trump to support a flat 17% tax rate for all income brackets with “generous” exemptions… For a family of four, he said, he would suggest the first $54,000 of income be exempt from federal income tax. …Whoever wins the White House in November will be forced to negotiate a tax deal next year because key portions of Trump’s 2017 tax cuts — including individual rates — expire at the end of 2025. That will set up a complex negotiation — particularly if control of Washington is split between Republicans and Democrats… Trump has not detailed what his tax plan would look like.

I’m glad that people are pushing Trump to be bold on taxes, but that advice needs to be augmented by a big push to make him better on spending.

Alas, that’s one of his worst areas.

Not as bad as he is on trade, but he record on spending is nonetheless mediocre. And that was the case even before the pandemic spending orgy.

The bottom line is that Trump needs to change his mind on entitlements if we want to have any hope of better tax policy. I won’t be holding me breath.

Read Full Post »

Dumbest Tax Loophole, or Most Self-Serving Loophole?

When asked about tax loopholes, my first reaction is to determine whether something is an actual tax preference or merely a mitigation of a tax penalty.

And that means understanding the “tax base.”

For instance, IRAs and 401(k)s are not loopholes. They are a way for taxpayers to protect their savings from double taxation. Similarly, the “preferential” tax rates for dividends and capital gains reduce (but sadly don’t eliminate) the burden of double taxation.

But there are genuine loopholes, meaning types of income that totally escape tax. And some of which are very bad policy.

• The exemption for muni-bond interest (the interest paid to people who lend money to state and local government).
• The exclusion for employer-provided health benefits (which is a major cause of the third-party-payer problem in the health sector).
• The deduction for state and local tax payments (which fortunately was limited thanks to the 2017 Tax Cut and Jobs Act).

There are also loopholes that are misguided, but too small to do much economic damage.

Some of them are downright weird, such as the tax break for brothels in Nevada. Or the tax deduction for sex change operations.

Today, let’s examine a different strange loophole. As reported by Politico‘s Joseph Spector, New York politicians are creating a special tax break for journalists.

The state budget, set to be finalized Saturday, includes the nation’s first payroll tax credit for local news organizations in a bid to encourage new hiring… Lawmakers and independent media companies praised the tax break, which will designate $30 million a year to the program, called the Local Journalism Sustainability Act. …New York spends more than $8 billion a year on tax incentives and grants to attract and retain businesses in the high-tax state, and advocates of the measure have for years sought to extend the largesse to the newspaper and local TV industry. The late addition to the $237 billion budget allows eligible outlets to receive a 50 percent refundable credit for the first $50,000 of a journalist’s salary, up to a total of $300,000 per outlet. …The money is largely focused on independently owned publications, but also can cover hiring journalists in print media outlets that “demonstrate a reduction in circulation or in the number of full-time equivalent employees of at least 20 percent over the previous five years.”

There are three things to understand about this proposal.

• First, a “refundable credit” is actually government spending. So the new law would be a direct handout for media companies.
• Second, it should be obvious why New York’s Democrats want to subsidize a sector that acts as cheerleaders for big government.
• Third, the law is written in a way that big media firms like the New York Times theoretically could benefit.

All told, not a good idea. And not what I had in mind when I asked what should be done about media bias.

P.S. If you want to know the best way of dealing with tax loopholes (properly defined), click here and here.

Read Full Post »

Everything You Need to Know about the Value-Added Tax

While in Sweden last week, I wrote several columns (here, here, and here) about that nation’s fiscal policy.

But I also had a discussion about American fiscal policy with one of the tax experts at the Confederation of Swedish Enterprise. That included a discussion of the value-added tax (VAT).

If you don’t want to spend a few minutes watching the video, I made two theoretical observations and two practical observations.

Here are my theoretical points.

1. VATs tend to be less destructive than income taxes, largely because they don’t have “progressive” tax rates and also don’t exacerbate the tax bias against saving and investment.
2. A VAT has the same “tax base” as a flat tax. The structural difference is that a flat tax takes a slice of your income as you earn and a VAT takes a slice of your income as you spend.

So if there ever was an opportunity to swap the income tax for a VAT, I would take that trade (assuming, of course, repeal of the 16th Amendment so politicians couldn’t pull a bait-and-switch scam). Just like I would swap the income tax for a national sales tax.

But we’ll never be given a chance to make that swap.

Instead, some people claim that we are facing a different type of choice. Should we finance our (baked-in-the-cake) expanding burden of government with class-warfare taxes or a value-added tax?

The right answer, needless to say, is to restrain spending. But if someone is holding a gun to your head and demanding that you choose a tax increase, which one do you pick?

Seems like a VAT would be the less-harmful approach, but this is a good opportunity to raise my two practical points.

1. In the real world, adoption of a VAT almost surely will lead to more class warfare taxes because politicians will want to balance the harm to lower-income people by also imposing taxes that hurt higher-income people.
2. In the real world, the level of government spending is not exogenous. More specifically, VATs have been money machines to finance bigger government in Europe and the same thing likely will happen in the United States.

If you want evidence for my first point, this chart is very compelling.

And if you want evidence for my second point, this chart tells you what you need to know.

P.S. You can enjoy some amusing – but also painfully accurate – cartoons about the VAT by clicking here, here, and here.

P.P.S. VAT rates tend not to be as high as income tax rates, but they are nonetheless very onerous.

P.P.P.S. In 2016, I debunked some VAT myths.

Read Full Post »

Tax Day Humor

I used to write serious columns every April 15, but that’s too depressing.

This decade (2021, 2022, 2023), I switched to sharing tax humor to commemorate the deadline for filing taxes in the United States.

Sticking with that new tradition, let’s start with this look at parasites.

Though, the real parasites are the interest groups that ultimately get the money. The IRS is just the middleman.

Next, the Onion reports on a new IRS enforcement campaign.

New IRS Campaign Fucking Dares You To Take Deduction For Home Office pic.twitter.com/iwIeMb3EPM

— The Onion (@TheOnion) April 13, 2017

I work from home, but I would never dare claim a home-office deduction, so the campaign is working.

For our third item, the IRS loves to use exaggerated estimates of a “tax gap.” This is what it means in reality.

Since I’m not a fan of withholding, this next tweet hits home.

And it doesn’t even capture the entire truth since very few taxpayers know that their payroll taxes are actually twice as high as what they see on their pay stubs and W-2 forms.

Perhaps because I grew up reading the Peanuts comic strip, this is today’s favorite item.

If only opting out of the tax code was this simple!

P.S. My archive of IRS humor features a new Obama 1040 form, a death tax cartoon, a list of tax day tips from David Letterman, a Reason video, a cartoon of how GPS would work if operated by the IRS, an IRS-designed pencil sharpener, two Obamacare/IRS cartoons (here and here), a collection of IRS jokes, a sale on 1040-form toilet paper (a real product), a song about the tax agency, the IRS’s version of the quadratic formula, and (my favorite) a joke about a Rabbi and an IRS agent.

Read Full Post »

An Inaccurate – But at Least Not Hypocritical – Leftist

Our friends on the left are often very hypocritical. I’ve written many times, for instance, about statist politicians who oppose school choice while sending their kids to private schools.

I’ve also shared columns about hypocrisy on issues such as the environment, pandemic, and minimum wage.

And, given my interest in fiscal policy, I especially enjoy mocking the leftists who urge higher taxes yet fail to lead by example.

In some cases, they aggressively seek to minimize their taxes (Joe Biden, John Kerry, and Hillary Clinton). In other cases, they say they want to pay more but don’t take the simple step that would make that happen (Elizabeth Warren).

That being said, not every leftist is a hypocrite. Some do lead by example.

Here are some excerpts from a New York Times column by Matthew Desmond, a Princeton sociologist.

Alejandro Narváez is OK taking less. …when it comes to paying taxes, he forgoes many deductions…filing his taxes with TurboTax, not to save money but to lose it. “I see it as my responsibility to pay my fair share of taxes,” Mr. Narváez, who is 70, told me. “I have so many opportunities to reduce my taxes, but I choose not to.” …this time of year also provides us the opportunity to ask ourselves: Is it ethical to take tax breaks that primarily make the rich richer? …Besides the occasional statement from liberal elites asking to be taxed more, many of the biggest beneficiaries of the government’s largess have done very little to bring about fair tax reform. Why do we keep waiting for Congress to act when we could effectively tax ourselves more by following Mr. Narváez’s example and refusing to take some deductions? …My family has struggled with this question. …I have criticized the mortgage-interest deduction… My family qualifies for this ridiculous deduction. But we don’t want it. …So we’ve decided to create that society in miniature form, and with full recognition that we have the privilege of doing so, by donating what we receive from the mortgage-interest deduction to affordable housing initiatives on top of our regular giving. …I honestly don’t know if it’s better to donate tax deductions or, like Mr. Narváez, refuse them outright. I only know that it feels unfair to keep it all for ourselves. …Imagine if we all came to view tax breaks not as entitlements but as money that is not rightfully ours.

Kudos to Mr. Narváez and Mr. Desmond for putting their money where their mouths are.

I think it’s crazy to give more money to the nation’s most venal and corrupt people, but at least they’re not hypocrites.

However, I can’t resist pointing out that Mr. Desmond made several inaccurate statements in his column.

For instance, he echoes Joe Biden’s laughably dishonest assertion about tax rates.

…tax breaks benefit the billionaire class, which has the lowest effective tax rate in the country.

He also doesn’t understand (or doesn’t care) that both dividends and capital gains are example of double taxation.

…dividends and capital gains…are taxed at lower rates than other sources of income

And the same is true with regards to the death tax.

U.S. law allows wealth to be passed onto heirs almost tax-free.

Last but not least, he regurgitates the leftist trope that being allowed to keep your own money is a subsidy or handout.

…money the country dedicates to subsidizing private affluence.

Though I guess we need to acknowledge that at least they are being honest about their radical agenda.

P.S. Here’s the humor version of leftist hypocrisy.

Read Full Post »

Swedish Tax Policy: From Good to Horrible to Bad

Since I’m currently in Stockholm and just gave a speech about fiscal policy, let’s take a look at Swedish taxation.

Like most western nations, Sweden became a rich nation in the 1800s and early 1900s when taxes were modest and the burden of government was very small.

How small? Government spending consumed less than 10 percent of economic output.

And limited government meant low tax burdens. Here’s a chart from a 2015 report on the history of Swedish taxation. As you can see, even rich people faced marginal tax rates of less than 5 percent in the 1800s and just a bit over 10 percent up until about 1920.

Sadly, tax rates jumped in the 1920s and then skyrocketed in the 1940s. At least for rich people. Close to 90 percent!

But as is so often the case, higher taxes on the rich were a precursor for higher taxes on everyone else. The chart also shows that marginal tax rates for middle income and lower-middle income taxpayers jumped dramatically in the 1950s and 1960s.

By the 1970s and 1980s, everyone was facing confiscatory marginal tax rates.

And don’t forget that Swedish taxpayers also had an onerous value-added tax which grabbed about 20 percent of whatever was left after income and payroll taxes.

That sounds horrible and it was horrible, but the tax burden on investment and entrepreneurship was even worse.

Here’s another chart from the report looking at the effective marginal tax rate on investment.

Before the income tax, there was no problem. And the tax burden was modest during the first half of the 1900s. But look at what happened to tax rates in the 1970s and 1980s. The effective marginal tax rate was way above 100 percent on investments financed with new shares.

In other words, investors would have been better off dumping their money in an incinerator. And the tax rates on other types of investment also peaked about 75 percent-85 percent.

The good news, though, is that Sweden learned from mistakes. Lawmakers began lowering tax rates in the 1980s and especially in the 1990s.

But that simply meant Sweden has gone from horrible tax policy to bad policy. A step in the right direction, to be sure, but marginal tax rates on labor income are still absurdly high

There has been a bigger improvement in business taxation, which is positive, though effective marginal tax rates of 20 percent-35 percent are tolerable rather than good.

But I’ll close with some positive observations. In addition to lowering marginal tax rates, Sweden in recent years also has eliminated both death taxes and wealth taxes.

And the overall tax burden has declined.

Interesting, a declining tax burden does not mean declining tax revenue. Here’s a final chart on taxation in the 21st century. The orange line shows the overall tax burden as a share of GDP and the grey bars show inflation-adjusted tax revenue.

It’s almost as if the Laffer Curve is working its magic (and even Paul Krugman might agree). As it has before.

P.S. Sweden has some very admirable policies, such as school choice and a partially privatized Social Security system.

Read Full Post »

Beware Bad Budget Deals, Part III

I’ve already written two columns (here and here) about why a “bipartisan” budget deal would be a recipe for higher taxes and bigger government.

To start our third installment in this series, here’s a clip from my recent appearance on Vance Ginn’s Let People Prosper.

Simply stated, America’s long-run fiscal problems are entirely the result of government being too big and growing too fast.

So there is no need to make our bad tax system even worse with tax increases. Especially since (as I explained in the above video clip) politicians almost surely would spend any extra revenue.

By the way, my opposition to “putting taxes on the table” is practical rather than ideological. Back in 2012, I wrote that I would accept a big tax increase, but only if the other side would accept various changes to control the burden of government spending.

Needless to say, none of those options are acceptable to the big spenders in Washington. Not in 2012 and not today.

Since I’m focusing on practicality, I’ll share two additional pieces of evidence against having a pro-tax increase fiscal commission.

1. In 2011, a reporter from the New York Times inadvertently showed that the only budget deal that actually led to a balanced budget was the 1997 agreement that cut taxes. All the other budget deals raised taxes and the net result was more spending and continued red ink.
2. Tax burdens in Europe have dramatically increased over the past 50-plus years, usually because politicians claimed people needed to surrender more money in order to reduce red ink. But over that same time period, government debt more than doubled because politicians spent all the new revenue.

Given all this data, you might think I’m happy about this tweet from a Bloomberg reporter.

But I’m only half-happy. I’m glad the Speaker of the House is ruling out tax increases.

However, his anti-tax position is not credible when he also says that entitlement programs can’t be touched.

That’s the Biden–Trump view and it’s a recipe for fiscal chaos and – sooner or later – huge tax increases on lower-income and middle-class Americans.

The bottom line is that there’s an unavoidable choice to be made in the United States. We either reform the entitlement programs or we agree to let politicians take more of our money.

Read Full Post »

The 2024 Version of America’s Dismal Fiscal Future

The Congressional Budget Office has released its new Long-Term Budget Outlook and I will continue my annual tradition (see 2018, 2019, 2020, 2021, 2022, 2023) of sharing some very bad news about America’s fiscal future.

Most budget wonks focus on what CBO says about deficits and debt. And those numbers are grim.

But it’s much more important to focus on the underlying problem of excessive spending. After all, red ink is merely one of the symptoms of a government that is too big.

So here’s CBO’s forecast of spending and revenue over the next three decades. As you can see, both taxes and spending are becoming bigger burdens.

The bad news is that the tax burden is rising over time

The worse news is that the spending burden also is rising over time. And the worst news is that the spending burden is rising even faster than the tax burden in rising.

Here’s what CBO wrote in the report.

In the Congressional Budget Office’s projections, deficits…grow larger over the next 30 years because…spending…increases faster than revenues over the subsequent 30 years. Both federal spending and federal revenues equal a larger percentage of the nation’s gross domestic product (GDP) in coming years than they did, on average, over the past 50 years. Under current law, total federal outlays would equal 23.1 percent of GDP in 2024, remain near that level through 2028, and then increase each year as a share of the economy, reaching 27.3 percent in 2054… From 1974 to 2023, outlays averaged 21 percent of GDP; over the 2024–2054 period, projected outlays average about 25 percent of GDP… The key drivers of that increase over the next 30 years are higher net interest costs, which result from rising interest rates and growing federal debt, and growth in spending on major health care programs, particularly Medicare, which is caused by the rising cost of health care and the aging of the population.

To elaborate on that final sentence, our next visual is CBO’s forecast for both health entitlements and Social Security.

You can see that Social Security is becoming a bigger burden, but programs such as Medicare and Medicaid are easily the nation’s main budget problem.

By the way, this chart is why there is an inevitable and unavoidable choice to make.

We either have entitlement reform or we have massive tax increases. Sadly, the two main presidential candidates in 2024 prefer the wrong option.

P.S. Here’s one final excerpt from the report. CBO acknowledges that higher tax burdens will be bad for growth.

The agency’s economic projections…incorporate the effects of changes in federal tax policies scheduled under current law, including the expiration of certain provisions of the 2017 tax act. Under current law, tax rates on individuals’ income are scheduled to increase at the end of 2025, when those provisions are scheduled to expire. Those changes aside, as income rises faster than inflation, more income is pushed into higher tax brackets over time. That real bracket creep results in higher effective marginal tax rates on labor income and capital. Higher marginal tax rates on labor income reduce people’s after-tax wages and weaken their incentive to work. Likewise, an increase in the marginal tax rate on capital income lowers people’s incentives to save and invest, thereby reducing the stock of capital and, in turn, labor productivity. In CBO’s projections, that reduction in labor productivity puts downward pressure on wages. All told, less private investment and a smaller labor supply decrease economic output and income in CBO’s extended baseline projections.

This may seem obvious, especially for people familiar with the academic research on this topic, but CBO used to have some very silly views on tax policy.

P.P.S. CBO also used to produce some very silly analysis on spending policy, but in recent years has been much better.

Read Full Post »

Defending Supply-Side Economics

Three years ago, I debunked a very sloppy report about tax policy.

The authors, David Hope and Julian Limberg, wanted readers to believe that lower marginal tax rates did not improve economic performance.

But there were major methodological flaws in the report, perhaps because the authors were political scientists rather than economists.

And I pointed out some of the most absurd findings.

• Are we really supposed to believe Thatcher’s tax-rate reductions played no role in the U.K.’s impressive recovery?
• Are we really supposed to believe the Reagan tax cuts played no role in America’s economic renaissance?
• Are we really supposed to believe that Ireland’s lower tax rates didn’t help turn the “Sick man of Europe” into the Celtic Tiger?
• Are we really supposed to believe that New Zealand’s tax cuts didn’t contribute to that nation’s remarkable turnaround?
• Are we really supposed to believe that countries such as Italy, Finland, Belgium, etc, are examples of supply-side reform?

Perhaps the strongest evidence against the Hope-Limberg report is that serious left-leaning economists didn’t give it any attention, presumably because they recognized it was based on cherry-picked data and laughable assumptions.

So after the initial burst of (predictable) media publicity, it quickly faded from the public discourse.

But, like a bad penny, it has reappeared. In her Washington Post column, Jennifer Rubin resuscitates the Hope-Limberg study as part of an attack on pro-growth tax policy.

…the claimed economic benefits of tax cuts for the rich don’t hold up under scrutiny. …A 2020 paper by David Hope of the London School of Economics and Julian Limberg of King’s College London examined “18 developed countries — from Australia to the United States — over a 50-year period from 1965 to 2015…” It turns out that “per capita gross domestic product and unemployment rates were nearly identical after five years in countries that slashed taxes on the rich and in those that didn’t, the study found.” …Hope and Limberg…confirmed there is “strong evidence that cutting taxes on the rich increases income inequality but has no effect on growth or unemployment.” …Sold as a prosperity booster, trickle-down tax cuts for the very rich do not increase prosperity, growth or employment for the average American.

The economists who wrote these studies obviously would disagree with Rubin’s regurgitated analysis.

And these economists also would disagree.

The bottom line is that most academic economists lean to the left, but they generally make more sensible arguments than Hope and Limberg (and Rubin).

• They will acknowledge that lower tax rates are good for growth, but they will argue that the positive effects are small.
• They will acknowledge that lower tax rates are good for growth, but they will argue that sacrificing some growth is acceptable to achieve other goals.
• They will acknowledge that lower tax rates are good for growth, but they will argue other policies can achieve the same results.

Those are all legitimate arguments, even if I have a different perspective. The same cannot be said for the Hope-Limberg study.

Read Full Post »

In One Image, Everything You Need to Know about Supply-Side Economics

When trying to educate someone about the importance of low marginal tax rates, what’s the most-convincing visual?

• A supply-and-demand graph?
• A philoso-raptor meme?
• A cartoon with two doors?
• A Dan Mitchell hypothetical?

I’m partial to the image I created, of course, but let’s look at a real-world example that is very compelling.

In an article about Tory tax policy for the U.K.-based Telegraph, Charlotte Gifford included a graph showing that a family with two children can have more disposable income with an income of £99,000 rather than an income of £144,000.

In other words, there’s a de facto 100 percent tax rate on the additional £45,000.

At the risk of understatement, there’s not much incentive to earn more income if the government imposes a de facto 100 percent tax rate.

That’s the kind of policy you expect to see in France, not the United Kingdom.

So why is it happening? Ms. Gifford explains.

High-earning parents are better off only working four days a week as bizarre tax rules mean it no longer pays to work. …One of the biggest distortions in the tax system occurs once a parent earns more than £100,000. …One reader told The Telegraph they were considering shortening their working week from five days to four after realising they would keep more of their pay by earning £92,000 as opposed to £115,000. Reducing the working week makes perfect financial sense for many parents earning £100,000 or more. By working fewer days they would not only dodge the tax trap but also cut their childcare costs, which currently average at £285 per week full-time, or £13,695 a year.

If you want details, the de facto 100 percent-plus tax rate is the combined result of three factors.

1. A statutory tax rate of 40 percent.
2. The government’s clawback of the value of the personal allowance, pushing the effective marginal tax rate up to 60 percent. As stated in the article, “Once someone’s salary hits £100,000 they lose the personal allowance at a rate of £1 for every £2 until it disappears at £125,140.”
3. The loss of a government handout. As Ms. Gifford wrote, “…once a parent earns more than £100,000…they lose their entitlement to free childcare… This creates a perverse incentive for parents earning £99,000 to turn down a pay rise so they can hold on to the government benefit.”

The moral of the story is that people respond to incentives.

When the government makes it less attractive for people to be more productive and earn more income, they respond by…drum roll, please…being less productive and not earning more income.

Which means less taxable income for the government (hello, Laffer Curve).

That’s the simple lesson of supply-side economics.

P.S. American readers should know that there are also examples of implicit 100 percent-plus effective marginal tax rates in the United States.

P.P.S. The United Kingdom has bad tax policy because it has bad spending policy.

P.P.P.S. To avoid these problems, nations should have flat taxes and limited government.

Read Full Post »

Promote U.S. Prosperity by Rejecting the OECD Tax Cartel

I support tax competition because it is our best hope of avoiding “goldfish government.”

As such, I’m very opposed to tax harmonization schemes, all of which are designed to make it easier for politicians to impose higher tax burdens. .

That’s why I’m so hostile to the Organization for Economic Cooperation and Development. Politicians from high-tax nations have co-0pted that Paris-based bureaucracy and are using it to push for a global tax cartel.

Adam Michel of the Cato Institute recently wrote an in-depth study on the OECD’s proposed business tax cartel and explained why the United States should not participate.

I recommend that people read that report. But for those who have limited time, I’m going to share some excerpts from his new column for National Review, which addresses the same topic.

To protect their businesses from facing competition, the European Union and the Organization for Economic Co-operation and Development (OECD) have concocted an international tax cartel to weaken America’s most successful international businesses. The new tax rules discourage international investment by imposing tens of billions of dollars in compliance and economic costs. …Instead of endorsing the European plan, Congress should double down on America’s successful tax cuts by further cutting business rates and simplifying other tax rules. A low enough corporate-tax rate would break the OECD’s tax cartel, benefit domestic workers, and attract new businesses. …Republicans have raised concerns about the OECD plan and proposed retaliatory measures in response to the OECD taxes. But, as is too often the case, they are being too timid. …Supporters of the OECD plan will argue that the new world-order tax cartel is here to stay, so it’s time for the United States to get on board. They dubiously claim that United States will benefit from new tax revenue… Fortunately, the agreement is more fragile than they let on. Cartels are inherently unstable. Instead of ceding tax sovereignty and encouraging businesses to conduct their activity elsewhere, Congress should increase the attractiveness of the United States as an investment destination and reject the OECD’s tax tyranny.

Amen.

Tax competition is the right approach, not tax harmonization.

The simple – and accurate – way of summarizing the OECD’s plan is that some governments win and almost everyone else loses.

Note that only some governments win.

Countries with very sensible business tax systems (Ireland, Estonia, etc) will lose, as will jurisdictions with good overall tax policy (Bermuda, Cayman Islands, etc).

Workers and businesses lose everywhere, of course.

I’ll close with some bad news. The Biden Administration enthusiastically supports the OECD scheme, even though it largely targets American companies.

P.S. November’s election may not make a difference. The Trump Administration was bad on tax competition issues between 2017-2020, so it would be putting hope over experience to expect good policy if Trump wins a second term.

Read Full Post »

Florida’s One-Man Laffer Curve

Inflation is having an effect on everything, even policy analysis.

Back in 2013, I wrote that Phil Mickelson was “California’s One-Man Laffer Curve” because he wanted to escape the Golden State to save about $1.2 million per year in taxes.

But now, when a goose that lays golden eggs wants to escape, the numbers are much bigger.

How much bigger?

According to this story by CNBC, Jeff Bezos saved more than $600 million by moving from Seattle to Miami. That’s the steroid-fueled version of a one-man Laffer Curve.

Here are some excerpts from the report, which was authored by Robert Frank.

Jeff Bezos’ $2 billion stock sale last week came with an added perk: no state taxes. Last year, Bezos announced on Instagram that he was leaving Seattle after nearly 30 years to move to Miami. He said the move was to be closer to his parents and his rocket launches at Blue Origin. The timing also suggested another reason: taxes. In 2022 Washington state imposed a new, 7% capital gains tax on sales of stocks or bonds of more than $250,000. Washington state doesn’t have a personal income tax, so the new levy marked the first time Bezos would face state taxes on his stock sales. …In 2022, when the tax took effect, Bezos stopped selling. He didn’t sell any Amazon stock in 2022 or 2023… After his move to Miami, Bezos made up for lost time. Last week, a filing with the SEC revealed that Bezos launched a pre-scheduled stock-selling plan to unload 50 million shares before Jan. 31, 2025. At today’s price, that would total more than $8.7 billion. Florida has no state income tax or a tax on capital gains. So on the $2 billion sale last week, he saved $140 million that he would have paid to Washington state. On the entire sale of 50 million shares over the next year, he will save at least $610 million. …he’s more than paid for his 417-foot yacht, Koru, with just his Florida tax savings.

I have two reactions to this report, one analytical and one visceral.

• My analytical reaction is that this story is good news because it keeps money in the private sector where it will be used more productively and also because it sends a powerful signal to the proponents of a state suicide pact that it is foolish to overtax people who can easily move.
• My visceral reaction is to cheer that the greedy politicians in the state of Washington wound up with an exploding cigar rather then several hundred million dollars that they could use to buy votes. For what it’s worth, I expect more rich people follow in Bezos’ footsteps.

P.S. I wonder about the revenue implications of the state capital gains tax in Washington. Notwithstanding Bezos moving out, I’m sure there will be some revenue collected from this misguided levy. But that doesn’t mean the tax will be a net plus for politicians. You also need to consider that the exodus of successful taxpayers will lead to less revenue from sales taxes, property taxes, and other levies.

Read Full Post »

The Laffer Curve’s Latest Victim: California

The Laffer Curve is the common-sense notion that people respond to incentives.

And even Paul Krugman admits this has implications for tax revenue.

For instance, if tax rates increase, people may decide to earn and/or report less taxable income. When that happens, revenue won’t increase by as much as politicians hope.

And the reverse is true (in some cases, dramatically true) if tax rates decrease.

For today’s column, let’s look at a real-world example of the Laffer Curve.

Joshua Rauh of Stanford and Ryan Shyu of Amazon have new research that looks at what happened after California voters approved a big class-warfare tax increase in 2012.

Here are some excerpts from their study.

In this paper we study the question of the elasticity of the tax base with respect to taxation…on the universe of California taxpayers around the implementation of major 2012 ballot initiative, Proposition 30. …The Proposition 30 ballot initiative increased marginal income tax rates…by 3 percentage points for singles with over $500,000 in taxable income (married couples with over $1 million)…, the highest state-level marginal tax rate in the nation. …We…document a substantial onetime outflow of high-earning taxpayers from California in response to Proposition 30. …For those earning over $5 million, the rate of departures spiked from 1.5% after the 2011 tax year to 2.125% after the 2012 tax year, with a similar effect among taxpayers earning $2-5 million in 2012. …California top-earners on average report $522,000 less in taxable income in 2012, $357,000 less in 2013, and $599,000 less in 2014; this is relative to a baseline mean income of $4.15 million amongst our defined group of California top-earners in 2011. Compared to counterfactuals in similarly high-tax states, California top-earners on average report $352,000 less in taxable income in 2012, $373,000 less in 2013, and $481,000 less in 2014.

So some upper-income taxpayers moved and others (unsurprisingly) earned/reported less taxable income.

Did that have an impact on tax revenue?

The answer is yes.

…we assess the implications of our estimates for tax revenue in the context of California Proposition 30. A back of the envelope calculation based on our econometric estimates finds that the intensive and extensive margin responses to taxation combined to undo 45.2% of the revenue gains from taxation that otherwise would have accrued to California in the absence of behavioral responses within the first year and 60.9% within the first two years.

Wow, more than 60 percent of projected revenue evaporated within two years.

By the way, these estimates are based on data only through the middle of last decade. And something significant happened after that: The state and local tax deduction was curtailed as part of the Trump tax package.

The authors speculate that this will have very important implications.

…the “Tax Cuts and Jobs Act” (TCJA). Under this law, the top rate is 37% for single and head-of-household filers earning over $500,000, and for married filers earning over $600,000. Despite this nominal cut to top rates, the legislation on net increased rates on top earners because it capped state and local deductions at $10,000 total. … we use our top line intensive margin elasticity estimate to provide a ballpark quantification of the federal tax revenue implications of TCJA for the particular set of California high earners in our treatment group. …Consider a married California taxpayer earning $4.15 million of wage income. In 2017, this taxpayer pays a federal tax bill of $1,431,305. In 2018, incorporating the 8.6% income decrease, this taxpayer pays a federal tax bill of $1,333,946. This amounts to a 6.8% decrease in tax revenue, putting the TCJA on the wrong side of the Laffer Curve for high-earning individuals in California. … the TCJA increased incentives (in terms of the level of the average tax rate gap) to leave California for zero-tax states by 2.15 times the amount of Proposition 30 for those earning over $5 million, and by a factor of 2.43 for those earning from $2-5 million. Based on these scaling factors, we would predict an out-migration effect of 1.46% of those earning $2-5 million, and 1.51% of those earning $5 million.

None of this should be a surprise.

Indeed, I wrote back in 2012 that bad things would happen when Proposition 30 was approved.

I feel safe in stating that this measure is going to accelerate California’s economic decline. Some successful taxpayers are going to tunnel under the proverbial Berlin Wall and escape to states with better (or less worse) fiscal policy. …It goes without saying, of course, that California’s politicians…will act surprised when revenues fall short of projections because of the Laffer Curve.

To be fair, I don’t know if California politicians are genuinely surprised. I suspect many of them privately understand the adverse consequences of class-warfare tax policy. But they nonetheless support bad policy because they are motivated by a selfish desire to maximize votes.

Read Full Post »

The Case for a Flat Tax

I explained the benefits of a flat tax in a video 14 years ago. And I’ve since shared two videos (here and here) of Steve Forbes arguing for a flat tax.

If those are not enough, here’s a recent presentation I made about tax reform for Argentina’s Fundacion Internacional Bases.

I was one of three speakers and I encourage everyone to watch the entire one-hour program.

My role was to explain the three main features of the flat tax.

• A low tax rate on productive economic behavior.
• No double taxation of income that is saved and invested.
• Elimination of unfair and corrupt loopholes.

I’ve written many times on all of those topics, especially the first two.

So, for today’s column, let’s focus on the third point.

And I don’t even need to do a lot of writing because the most persuasive evidence about our complicated and unfair tax code can be found on this IRS webpage.

As of today, 2,883 forms are needed to theoretically comply with America’s nightmarish internal revenue code.

By the way, I wrote “theoretically” because many taxpayers have no idea whether they are accurately complying. The tax code is too much of a Byzantine mess.

As an economist, I want a flat tax so we can enjoy faster growth.

As a human being, I want a simple system to get rid of unfairness and complexity.

P.S. Sadly, some folks on the left don’t understand the flat tax.

Read Full Post »

Stifling VAT Burdens in Europe

I wrote 10 days ago about why a value-added tax would be a mistake for the United States.

To help reinforce that argument, here’s a new map from the Tax Foundation showing VAT rates on the other side of the Atlantic Ocean.

With a few exceptions (notably Switzerland), these hidden taxes are enormous burden. Indeed, the average EU VAT rate is approaching 22 percent, a huge increase over the past five decades.

From a tax policy perspective, high VAT rates are misguided since they increase the gap between pre-tax income and post-tax consumption. And lower-income households are especially disadvantaged.

But high VAT rates also are misguided since they enable bigger burdens of government spending.

Here’s a chart based on OECD tax data and OECD spending data. As you can see, when compared to the United States, higher VAT burdens among EU/OECD members are associated with higher spending burdens.

The bottom line is that the VAT is a money machine for bigger government.

As such, American politicians should not impose this levy and make the US more like Europe.

Unless, of course, the goal is slower growth and less prosperity.

Read Full Post »

The Simple Recipe for Abolishing a State Income Tax

The good news is that Louisiana voters recently voted to lower their state’s top income tax rate.

The bad news is that Louisiana’s economic policy still leaves much to be desired.

• Ranked #40 by the Tax Foundation.
• Ranked #26 by the Fraser Institute.
• Ranked #30 by the Cato Institute.

But there are signs of hope.

There’s a new governor, Jeff Landry, and that may mean a better approach.

In an article for the New Orleans newspaper, Tyler Bridges writes that the new governor’s transition team wants to eliminate Louisiana’s income tax.

Both the personal tax and corporate tax. Here are some excerpts from the article.

Gov. Jeff Landry and state legislators ought to begin phasing out corporate and personal income taxes. That’s the recommendation of the governor’s transition committee on economic development and fiscal policy… The committee provides no plan for how to offset the huge hit to the state treasury… Ditching the income tax has been a conservative rallying cry for years… The transition committee’s report blames Louisiana’s “antiquated” and “complex” tax system for stymieing investment and job creation. “While our total tax burden is competitive with our neighbors, our tax structure is not, ranking 40th in the latest Tax Foundation rankings,” the report said, “…We must look to other southern states and identify where they get it right and where we get it wrong.”

If they want to know how to get it right, they can look next door at Texas. The Lone Star State does just fine without an income tax.

But an even better option is Florida, which also has no income tax. But, even more important, Florida has a much lower burden of spending that Louisiana.

According to Census Bureau data (albeit from a few years ago), government in Florida spends more than $2,000 less per capita than government in Louisiana.

Is Louisiana getting better results for all that money?

Of course not.

So the simple recipe to make Louisiana’s dream a reality is to impose a spending cap. Sort of like TABOR in Colorado.

P.S. Louisiana does have a good rule for political corruption.

Read Full Post »

A State Suicide Pact, Part II

Almost exactly one year ago, I wrote a column about a coordinated effort to impose class-warfare tax increases in seven left-wing states.

Fortunately, that effort fizzled.

Meanwhile, there was continued progress in other states to lower tax rates. The net effect was “the feel-good map of 2023.”

And we have more and more evidence that taxpayers are “voting with their feet” by moving to the lower-tax states.

So it would seem that the issue is settled, right?

Not exactly. Our friends on the left have not given up.

David Chen of the New York Times reports that there’s now an effort to impose class-warfare taxes in 10 states.

Here are some excerpts from his story.

Lawmakers in Vermont are introducing legislation this week that would impose new taxes on the state’s wealthiest residents, joining a growing national campaign… One proposal in Vermont would tax people with more than $10 million in net worth on their capital gains, even if the gains have not yet been realized. Another would add a 3 percent marginal tax on individual incomes exceeding $500,000 a year… The package of bills is part of a broader push across the country by progressive groups… the campaign began in earnest a year ago, when legislators in seven states…coordinated the introduction of bills… None of those proposals got out of committee. But this year, with Vermont, Pennsylvania and possibly other states joining the fold, organizers are redoubling their efforts… Some of the ultrawealthy agree: More than 250 billionaires and millionaires, including heirs to the Rockefeller and Disney fortunes, recently signed an open letter, coinciding with the World Economic Forum in Davos, Switzerland, that urged world leaders to tax them more.

With regards to the rich people who claim to want higher taxes, I invite them to follow these instructions on how to voluntarily pay extra money to Washington.

But since none of them ever go for that option, we can safely assume that they are virtue-signalling hypocrites.

So let’s instead consider what will happen if politicians succeed in raising taxes in any of the 10 states mentioned in the article. And we’ll use Vermont as an example.

The top tax rate in Vermont is currently 8.75 percent and some politicians want to push that rate to 11.75 percent. If they are successful, Vermont will have the nation’s second-highest top tax rate, with only California being worse.

That’s economic suicide, especially since Vermont is right next to zero-tax New Hampshire.

And if Vermont politicians also impose a tax on unrealized capital gains (an idea so crazy that no other government has ever imposed such a levy), then the state’s suicide timetable will get even more compressed.

For what it’s worth, part of me perversely hopes Vermont goes down this path.

Just like it is helpful to have good examples, it’s also helpful to have bad examples. New Hampshire vs. Vermont could be the domestic version of Switzerland vs Greece.

Read Full Post »

Kenya Crashes on the Laffer Curve

The Laffer Curve is the common-sense notion that there is not a simplistic mechanical relationship between tax rates and tax revenue.

You also have to consider potential changes to what’s being taxed.

I’ve cited interesting case studies from Canada, Denmark, Hungary, Ireland, Italy, Portugal, Russia, France, and the United Kingdom.

Today we’re going to add Kenya to our list.

But before looking at Kenyan tax policy, let’s first look at some IMF data on the rapidly growing burden of government spending in that East African nation.

That’s a very depressing chart, showing about 10 times as much spending today compared to 20 years ago. But keep in mind that there’s been inflation.

If you look instead at spending as a share of economic output, the government budget is now consuming about 22.5 percent of GDP compared to 15.5 percent of GDP two decades ago.

A very troubling development, though not as bad as implied by the chart.

As is usually the case, bad spending policy has led to bad tax policy. Kenyan politicians have been trying to squeeze more money out of the private sector.

However, as reported by Victor Amadala for the Star, higher taxes are backfiring.

Kenyans…talked to the Star on measures they take to survive in a tough economic environment characterized by the high cost of goods and services due to high taxes… Last year, the government introduced several tax measures in the Finance Act, 2023 that added pressure on taxpayers, pushing up the cost of living. It, for instance, doubled Value Added Tax to 16 percent on fuel… Others are the introduction of a housing levy and raised deductions on national health coverage and social protection. …An analysis of official data by both the Kenya National Bureau of Statistics and the Energy and Petroleum Regulatory Authority (EPRA) shows kerosene consumption dropped by almost half, three months after VAT on fuel doubled in July last year. Only 15.3 million litres of kerosene were sold in the review period compared to 28.8 million litres same period in 2022, the lowest in past five years. …The state is on the receiving end as consumers become creative to escape high taxes. The latest report by the Parliamentary Budget Office (BPO) shows Kenya Revenue Authority (KRA) missed the tax revenue collection target for quarter one of the current financial year by Sh72.5 billion. …”You cannot defy the Laffer Curve theory and survive. Tax measures must be of mutual benefit between the public and the state. This is just the tip of the iceberg, winter is coming,” an economist Shem Mutonji opines. …This sentiment is echoed by his colleague, Joe Ngatia who says you cannot overmilk a cow to prosperity for “It will throw a hoaf in desperation.”

Sounds like we need Shem Mutonji and Joe Ngatia working for the U.S. Treasury. Maybe they could convince Joe Biden that overtaxing the American economy is not a good idea.

Read Full Post »

Why Is Someone at AEI Proposing a Massive Tax Increase to Finance Ever-Growing Government, Part II?

I wrote yesterday to criticize Andrew Biggs of the American Enterprise Institute and Alicia Munnell of Boston College for suggesting a $3 trillion 10-year tax increase on IRAs and 401(k)s.

My column explained that more double taxation was a bad idea, and I also pointed out that shifting to a savings-based system was the right way of addressing Social Security’s long-run fiscal problems.

But I committed a sin of omission, which needs to be rectified.

I did not challenge the Biggs-Munnell assumption that a big tax increase would deal with Social Security’s huge funding shortfall.

That was a mistake on my part. We have lots of evidence, as Milton Friedman wisely observed, that tax increases “feed the beast.”

In other words, politicians will increase the burden of spending when they get more revenue.

And this point is especially relevant because today’s column is going to analyze another giant tax increase being advocated by someone at the American Enterprise Institute.

Just last month, Alan Viard testified to a subommittee in Congress in favor of an add-on value-added tax. Here are some excerpts from his testimony.

A value-added tax (VAT) is an essential component… The United States should follow the lead of 170 other countries and territories by adding a VAT… We should act sooner rather than later to limit the debt buildup and ease the fiscal burden on future generations. …there is no viable way to fully address the fiscal imbalance without middle-class tax increases. …The European Union, the International Monetary Fund, and the World Bank have promoted the VAT. …To be sure, the VAT is not as economically efficient as entitlement benefit cuts. Notably, a VAT (or a retail sales tax) creates work disincentives similar to those created by income taxes. …When addressing the fiscal imbalance, time is not on our side. To promote long-term economic growth and ease the fiscal burden on future generations, we should adopt a VAT sooner rather than later.

I’m not sure why Viard thinks copying bad policies of other countries is a good idea. Especially since the United States is much richer than about 98 percent of those nations. Seems like they should be copying us.

But the main point I want to get across is that it is utterly naive to think that giving politicians a huge source of additional revenue will lead to less debt.

Why do I say that?

For the simple reason that the nations most similar to the United States tried Viard’s approach and the results were horrible.

I’m going to recycle three charts from last year. The first one shows that the tax burden increased dramatically in Western Europe over the past 50-plus years – in large part because all those nations adopted big value-added taxes.

My second chart than asked whether those massive tax increases in Europe reduced the debt, which averaged about 45 percent of GDP in the late 1960s.

The answer, unsurprisingly, is that debt increased. Dramatically.

Politicians spent every single penny of the additional revenue. And then spent even more.

So much more spending that debt in Western Europe now averages 90 percent of GDP, two times higher than it was before value-added taxes were imposed.

Needless to say, Viard did not address that point in his testimony.

But someone did touch on that issue when testifying to many years ago.

Here’s what that charming and lovable person said.

P.S. In the above charts, I used averages for five-year periods so that nobody could accuse me of cherry-picking a single year that might not be representative of actual trends.

P.P.S. Some readers may be wondering if debt skyrocketed in Europe because of emergency pandemic spending instead of the value-added tax. Nope. I also did similar sets of charts in 2012 and 2016 and you see the same pattern. All that has changed is that taxes, spending, and debt get higher every time I update the numbers.

Read Full Post »

Not All Tax Cuts Are Created Equal

There are three reasons to be a knee-jerk supporter of tax cuts (or to be a knee-jerk opponent of tax increases).

1. The morality-driven libertarian argument that people should be able to keep the income they earn.
2. The starve-the-beast argument that less revenue at some point may translate into less spending.
3. The economic argument that lower taxes lead to better economic performance and more growth.

Today, let’s focus on the third argument.

To elaborate, lower taxes generally are good for growth, but not all tax cuts are created equal.

Some tax cuts (lower marginal tax rates on high earners, lower capital gains tax rates, lower corporate tax rates, etc) can be very powerful because affected taxpayers have a lot of control over the timing, level, and composition of their income. So if their tax rates change, they have the incentive and ability to increase their economic activity.

Other tax cuts (child credits, lower sales taxes, etc) may not have much economic impact because there is no significant change in incentives to work, save, invest, or be entrepreneurial. Or maybe taxpayers don’t simply don’t have much flexibility to respond. For instance, I’m a regular wage earner so I don’t have much ability or incentive to change my economic activity if my tax rate changes.

Understanding the economics of taxation is important because major parts of the Trump tax cuts will expire at the end of next year and it is very likely that politicians in Washington soon will decide that only some parts are worth keeping.

But which of the expiring tax cuts should be preserved? Here’s a chart showing how much “bang for the buck” the economy gets from different parts of the Trump tax cuts.

The chart comes from some new research by Erica York of the Tax Foundation. Here’s some of what she wrote.

…most of the 2017 tax reform law will expire after the end of next year. If lawmakers allow full expiration to occur, most Americans will see their personal tax bills rise and incentives for working and investing worsen. Extending the entire tax reform, however, would come with a $3.7 trillion price tag at a time when the country’s fiscal outlook is already bleak. Lawmakers should…prioritize policies that best boost work and investment incentives in a fiscally responsible manner. …The 11 tax cuts vary widely in how they would affect people’s decisions to work and invest. Some tax cuts create a larger economic boost than others. One indicator is to compare the estimated change in long-run GDP to the estimated change in annual tax revenue in the final year of the budget window. Using the last year of revenue is a proxy for the ongoing, long-run cost of a policy change. The most powerful provision under that metric is full expensing for business investment in equipment, followed by expensing for research and development costs. At the other end, some tax cuts counterintuitively reduce economic output because of their interactive effects with marginal tax rates. Other tax cuts have middling effects, improving incentives to work or invest but not as powerfully as full expensing.

None of this means that you have to agree with the exact details of the Tax Foundation’s model, or that economic bang for the buck should be the only consideration when deciding tax policy.

That being said, I think the Tax Foundation’s model is based on sound economic  principles and that pro-growth tax cuts are important if the goal is to maximize long-run income for average households.

Read Full Post »

The Prudent Case for the Laffer Curve, Part II

The Laffer Curve is the common-sense notion that changes in tax rates lead to changes in taxable income.

But, as I explain in this clip from a TV program in Hawaii, that doesn’t mean tax cuts “pay for themselves.”

Before any readers accuse me of being an apologist for class warfare, I’m a strong advocate of the Laffer Curve.

And I’ve cited examples of tax cuts that have produced more revenue.

• Lower personal income tax rates on rich people in the 1980s.
• Lower corporate income tax rates in Ireland in the 1980s and 1990s.
• Maybe even Trump’s corporate tax cut (though we need a few more years of evidence).

But most tax cuts are not self-financing. There will almost always be revenue feedback, of course, but the revenue loss from the lower rate generally will be larger than the revenue gain from higher taxable income.

However, that is not an argument against lowering taxes. As I stated in the discussion, it would be a win-win situation if we could convince politicians to lower tax rates and restrain government spending.

Heck, because of the starve-the-beast theory, I’d applaud a revenue-losing tax cut precisely because it would reduce the amount of loot available to politicians.

P.S. I mentioned that Hawaii has a spending cap. That’s the good news. The bad news is that the legislature routinely waives it. To build on an analogy I’ve used before, having a speed limit in a school zone is a good idea, but not if it’s set at 70 MPH. Or, in the case of Hawaii, a speed limit in a school zone is pointless if the cops announce they will never patrol that road.

Read Full Post »

Estonia’s Transition from Socialist Misery to Free-Market Prosperity, Part II

In Part I of this series, we looked at the many pro-market reforms that turned Estonia into an “improbable success.”

For Part II, let’s look at fiscal policy. And we’ll start with the country’s best feature: Estonia has a very simple and fair flat tax with a relatively low rate.

Here’s the Estonian income tax compared to the average of other developed nations.

The above chart comes from a new book, The Road to Freedom, which describes Estonia’s escape from communist oppression.

Here’s some of what the authors, Matthew Mitchell, Peter Boettke, and Konstantin Zhukov, wrote about the nation’s tax reform.

Laar’s government implemented the world’s first flat tax in 1994. Initially set at 26 percent, it was reduced in several steps to 20 percent by 2015… In 2021, it was the second-lowest top rate and less than half the average rate in the OECD (see Figure 6.3). Estonia’s flat tax applies to all personal and corporate income above a minimum threshold, with no exemptions, deductions, or credits. To avoid double-taxation, it does not apply to dividends when the underlying profits have already been taxed. …Estonians soon found that their simple and easy to administer flat tax raised revenue without discouraging economic activity. …Estonia’s flat tax also applies to corporate income. The marginal effective corporate tax rate…is close to the statutory rate, reflecting the system’s minimal loopholes. And while many countries distinguish between different forms of businesses (LLC, S-Corp, etc.), and between service companies and manufacturers, Estonia taxes all corporate income the same. …Estonia’s flat tax also applies to corporate income. The marginal effective corporate tax rate…is close to the statutory rate, reflecting the system’s minimal loopholes. And while many countries distinguish between different forms of businesses (LLC, S-Corp, etc.), and between service companies and manufacturers, Estonia taxes all corporate income the same. …Estonian firms only spend about five hours a year on tax compliance, whereas American firms spend 87 hours on compliance.

As you just read, it’s not just that Estonia has a flat tax. It’s also a properly designed flat tax, with no double taxation and expensing rather than depreciation.

No wonder Estonia routinely ranks at the top of the Tax Foundation’s International Tax Competitiveness Index.

But it’s important to understand that Estonia isn’t the Cayman Islands or Monaco. It’s not even Singapore or Jersey (the island in the English Channel, not the over-taxed American state).

In a column last year for National Review, Meelis Kitsing provided a balanced assessment of his country’s tax regime. Here are some excerpts.

A maximum of 20 percent tax on any income exceeding 2,100 euros per month may seem a good deal, but, on top of that, employers have to pay social taxes of 33 percent on salaries, which can (even if there are no direct employee contributions) operate as an indirect tax on income. …According to the OECD, Estonia had a tax-to-GDP ratio of 33.5 percent in 2021. This was slightly lower than the OECD average of 34.1 percent. …it is far from being a tax haven. The U.S. tax-to-GDP ratio was 26.6 percent. …Estonia has…consumption taxes above the OECD average. …Tax policy has been an important ingredient in Estonia’s reform efforts that have been among the most radical and far-reaching of all those seen in Central and Eastern Europe since the breakup of the Soviet Union and the fall of communism in its satellite states. …Tax policy should not be seen in isolation; carried out well, it can be key to a sound economic environment. In Estonia, that has been the case.

To put it in simple terms, Estonia has a well-designed tax system, but it is not a low-tax economy.

Which brings us to the bad news. The reason Estonia is not a low-tax nation is because it is not a small-government nation.

Here’s the latest data from the OECD on the burden of government spending in member nations.

Yes, Estonia is not as bad as most other European countries, but that’s hardly a big achievement given the continent’s propensity for profligacy. What matters most is that the public sector is far above the growth-maximizing level.

To make matters worse, Estonia has major demographic challenges, which means there will be long-run pressure for even more spending.

Which helps to explain our final bit of bad news, which is that Estonia recently increased its flat tax to 22 percent as part of a broad tax-hike pacakge.

The moral of the story, as I have written before, is that you can’t have a good tax system with big government.

P.S. Estonia should have learned a lesson after a tax increase backfired a few years ago.

Read Full Post »

Blue-to-Red Tax Migration, Part V

Time for the final segment of my five-part series for 2023 on blue-to-red tax migration (previous versions here, here, here, and here).

We’ll start with this table showing what has happened in America’s 10-largest states.

You should notice a pattern.

The table comes from a column for National Review written by Dan McLaughlin. He explains what these numbers mean.

The Census Bureau has announced its year-end estimates of state population changes… They once again show the continuing trend of America’s population shifting out of its bluest states and into red states… The biggest boom states in the past year? In terms of raw numbers, Texas and Florida dwarf everyone else, followed by North Carolina and Georgia… In percentage terms, South Carolina was the biggest winner… Eight states lost population. New York was by far the biggest loser, dropping over 100,000 people, 0.5 percent of its population in a single year. Five of the eight states have been governed by Democratic trifectas for this entire decade.

The Wall Street Journal editorialized a few days ago about this internal migration. Here are some excerpts.

The U.S. population increased by 1.6 million between July 2022 and July 2023, with states in the South accounting for about 1.4 million of the growth. Leading the boom were Texas (473,453), Florida (365,205)… Eight states saw population declines, with the biggest in New York (-101,984), California (-75,423) and Illinois (-32,826). …what these states have in common: High taxes, burdensome business regulation and inflated energy and housing prices. ….An interesting natural experiment has been Washington state, which gained tens of thousands of people from other states on net each year in the last decade. But since enacting a 7% capital-gains tax on higher earners in 2021, Washington has been losing residents to other states at an accelerating pace—15,276 this past year. …A big problem for Democratic-run states is that their affluent residents are leading the exodus, and they pay the majority of income tax that supports their expansive welfare programs.

By the way, the WSJ‘s editorial explains that there are political implication of America’s internal migration.

State migration has long-tail political consequences. California, New York, Illinois, Minnesota and Rhode Island and Oregon on present trend would lose a combined 12 House seats in the 2030 reapportionment, which is as many as Florida, Georgia, Texas, Tennessee, North Carolina, Utah and Idaho would collectively gain.

And the National Review column includes a map for those of us who like visuals.

I’ll close by noting that blue states aren’t just losing political power. They’re also losing lots of taxable income.

P.S. I think taxes are a major factor in driving internal migration, but there are other factors as well (see here, here, here, here, and here).

Read Full Post »

Great Moments in Tax Avoidance

Since governments have a terrible tendency to waste money, I’m a big fan of tax avoidance.

For instance, even though I don’t like itemized deductions for things like charitable contributions and home mortgage interest, I am glad when taxpayers are able to use those tax preferences to reduce the amount of money going to the “wretched” people in Washington.

And I also applaud clever and unusual ways of reducing tax liabilities, both in America and around the world.

• Trump and Biden dodging taxes.
• American companies redomiciling.
• American investors redomiciling.
• Crossing the English Channel for lower taxes.
• Tax-free prostitutes in Austria.
• Scandinavian butter smuggling.
• Straight men will marry each other.
• Gay men will adopt their lovers.
• Pretending you are your mother.

Now I have a new example to applaud.

As reported by The Athletic, Shohei Ohtani has figured out how to keep nearly $100 million out of the clutches of despicable California politicians

…the unique structure of Ohtani’s heavily deferred $700 million contract with the Los Angeles Dodgers has opened the eyes of other high earners. …Ohtani this month agreed to play for the Dodgers for a decade at $70 million per season, but from 2024-33, he’ll draw just $2 million per season. Ohtani is deferring $680 million — more than 97 percent of his earnings — until after his 10-year deal with the Dodgers expires, when that money comes back to him in equal annual payments from 2034-43. …the structure of the contract appears likely to save Ohtani between $90 and $100 million in state taxes, so long as he lives outside of California when the deferred money is paid out. …A 1996 federal law forbids states from taxing retirement income on out-of-state residents when payments are made in “substantially equal periodic” amounts over at least 10 years.

I’m a Yankees fan, but I’ll also be cheering for Ohtani. Especially between 2034 and 2043 when he’ll be getting $680 million and living in a state with no income tax.

And I’ll cheer even more boisterously if other successful Californians figure out ways to mimic his successful strategy.

P.S. I’m guessing Dwight Howard and Phil Mickelson are upset their tax advisors didn’t think of this strategy.

Read Full Post »

Why – and How – to Squeeze Tax Loopholes

Public-finance economists generally agree about three principles of good tax policy.

1. Avoid high marginal tax rates on productive behaviors such as work.
2. Don’t have extra layers of tax on income that is saved and invested.
3. Eliminate tax loopholes that cause harmful economic distortions.

For what it’s worth, I would add a fourth bullet point about limiting the overall tax burden (in hopes of making it harder for politicians to increase the spending burden), and that’s somewhat important for purposes of today’s column.

George Callas, a former senior Republican tax staffer on Capitol Hill, recently authored a column for the Wall Street Journal on indefensible tax preferences that benefit big businesses and upper-income taxpayers. Here are some excerpts.

The Limit, Save, Grow Act would have cut trillions of dollars in spending and raised $515 billion in revenue by ending many of the Inflation Reduction Act’s green-energy subsidies. By raising revenue in a way that advanced conservative principles, the party showed it could promote deficit reduction… House and Senate Republicans should seize every opportunity to end tax loopholes incongruent with conservative values and direct the revenue to repairing our nation’s balance sheet. Here are five such fixes. …First, eliminate the deduction for state and local taxes. …Second, revisit tax exemptions for large nonprofits that generate billions in revenue. …Third, close the so-called round-tripping loophole that allows multinational corporations to route profits from sales to the U.S. through foreign tax havens. …Fourth, treat corporate stock buybacks more like dividends for tax purposes. …Fifth, repeal the preferential qualified small-business-stock exemption for venture-capital profits. …These proposals are consistent with free-market governance.

There is a lot to like in the above analysis. But there is also a glaring problem. He writes that “raising revenue” would be a way to “promote deficit reduction.”

In other words, he thinks Republicans should support tax increases. That’s wrong.

• It’s wrong because we have a spending problem in Washington and replacing debt-financed spending with tax-financed spending would not solve the problem.
• It’s also wrong because giving politicians more money inevitably means they will spend more money. In other words, it’s futile to think tax increases will be used to reduce red ink.

The willingness to give politicians more money to waste is a fundamental mistake.

That being said, I also think Mr. Callas missed the mark somewhat in his list of so-called tax loopholes. In part, this is because I think he is wrong to target stock buybacks.

But I think the bigger sin of omission is that he missed out on a couple of major tax preferences that each could finance $1 trillion or more of pro-growth changes over the next 10 years.

Municipal bond interest – Under current law, there is no federal tax on the interest paid to owners of bonds issued by state and local governments. This “muni-bond” loophole is very bad tax policy since it creates an incentive that diverts capital from private business investment to subsidizing the profligacy of cities like Chicago and states like California.

Healthcare exclusion – Current law also allows a giant tax break for fringe benefits. When companies purchase health insurance plans for employees, that compensation escapes both payroll taxes and income taxes. Repealing – or at least capping – this exclusion could raise a lot of money for pro-growth reforms (and it would be good healthcare policy as well).

The bottom line is that we need real tax reform, such as a flat tax. That means getting rid of all loopholes to generate trillions of dollars of revenue…so long as every penny of that money is used to finance good things like lower tax rates and less double taxation.

Read Full Post »

The IMF’s Campaign to Keep Poor Countries Impoverished

What’s the best way of helping poor countries achieve faster growth so they can converge with rich nations?

Sensible people respond with a range of good answers.

• Removing trade barriers.
• Lowering corruption.
• Improved rule of law.
• Minimizing red tape.
• Reducing fiscal burdens.
• Sound monetary policy.

Unfortunately, the world has plenty of people who are not sensible (or who have a self-interested reason to make senseless arguments). And some of them have congregated at the International Monetary Fund.

That bureaucracy recently published its recipe for economic development and – keeping with long-standing IMF tradition – endorsed massive tax increases for poor nations. Here’s their main recommendation.

You may be wondering why IMF bureaucrats want to make life more difficult for people in developing nations.

Here’s some of what was written by Vitor Gaspar, Mario Mansour, and Charles Vellutini.

Emerging markets and developing economies need $3 trillion annually through 2030 to finance their development goals … That amounts to about 7 percent of these countries’ combined 2022 gross domestic product and poses a formidable challenge… Our new research finds that many countries have the potential to increase their tax-to-GDP ratios—enabling them to provide critical government services—by as much as 9 percentage points… Countries have considerable room to collect more revenue based on their tax potential… We find that low-income countries could raise their tax-to-GDP ratio by as much as 6.7 percentage points on average. …The total revenue-raising potential, at 9 percentage points of GDP—a staggering two-thirds increase relative to their tax-to-GDP ratio in 2020… Similarly, emerging market economies can raise their tax-to-GDP ratio by 5 percentage points on average.

There are two things to address in the above excerpt.

First is it possible that developing nations, with sufficient “tax effort,” can increase their tax burdens by an average of 9 percentage points of GDP? Perhaps.

Second (and far more important), would that be a good idea? For people who care about empirical reality, definitely not.

Allow me to briefly elaborate on this second point. Bureaucrats at the IMF want readers to blindly accept the assertion that $3 trillion of additional tax revenue will help achieve development goals.

But notice that the IMF does not provide any supporting evidence. And neither do any of the other international bureaucracies making similar arguments.

Why don’t they offer any evidence? Why have not responded to my repeated requests to provide at least one example of a country that got rich by increasing fiscal burdens?

For the simple reason that every rich country in the world got rich when it had small government and low taxes.

In other words, the nations that achieved “development goals” took the opposite approach of what the IMF is recommending.

P.S. If the world truly is suffering from inadequate tax revenue, you would think that IMF bureaucrats would give up their special perk of tax-free salaries. But don’t hold your breath waiting for that to happen.

P.P.S. To give the IMF credit, the bureaucrats don’t discriminate. Yes, they push for bad fiscal policy in relatively poor parts of Africa, Asia, and Latin America, but they also argue for higher taxes and bigger government in relatively rich places, like Japan, Europe, and the United States.

Read Full Post »