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Posts Tagged ‘Taxation’

I’ve been advocating for good tax reform for more than two decades, specifically agitating for a simple and fair flat tax.

I get excited when politicians make bold proposals, such as many of the plans GOP presidential candidates proposed over the past year or so.

But sometimes I wind up feeling deflated when there’s a lot of discussion about tax reform and the final result is a milquetoast plan that simply rearranges the deck chairs on the Titanic. For instance, back in 2014, the then-Chairman of the House Ways and Means Committee unveiled a proposal that – at best – was underwhelming. Shifts in the right direction in some parts of the plan were largely offset by shifts in the wrong direction in other parts of the plan. What really doomed the plan was a political decision that the tax code had to raise just as much money (on a static basis) as the current system and that there couldn’t be any reduction in the amount of class warfare embedded in the current system (i.e., the “distribution” of the tax burden couldn’t change).

Well, we have some good news. Led by the new Chairman of the Ways and Means Committee, Kevin Brady, House Republicans have unveiled a new plan that it far, far better. Instead of being hemmed in by self-imposed constraints of static revenue and distributional neutrality, their two guidelines were dynamic revenue neutrality and no tax increase for any income group.

With those far more sensible constraints, they were able to put together a plan that was almost entirely positive. Let’s look at the key features, keeping in mind these theoretical principles that should guide tax reform.

  1. The lowest possible tax rate – High tax rates on work and entrepreneurship make no sense if the goal is faster growth and more competitiveness.
  2. No double taxation – It is foolish to penalize capital formation (and thereby wages) by imposing extra layers of tax on income that is saved and invested.
  3. No loopholes or special preferences – The tax code shouldn’t be riddled with corrupt deductions, exemptions, exclusions, credits, and other goodies.

What’s Great

Here are the features that send a tingle up my leg (apologies to Chris Matthews).

No value-added tax – One worrisome development is that Senators Rand Paul and Ted Cruz included value-added taxes in their otherwise good tax plans. This was a horrible mistake. A value-added tax may be fine in theory, but giving politicians another source of revenue without permanently abolishing the income tax would be a tragic mistake. So when I heard that House Republicans were putting together a tax plan, I understandably was worried about the possibility of a similar mistake. I can now put my mind at rest. There’s no VAT in the plan.

Death tax repeal – Perhaps the most pure (and therefore destructive) form of double taxation is the death tax, which also is immoral since it imposes another layer of tax simply because someone dies. This egregious tax is fully repealed.

No state and local tax deduction – If it’s wrong to subsidize particular activities with special tax breaks, it’s criminally insane to use the tax code to encourage higher tax rates in states such as New York and California. So it’s excellent news that House GOPers are getting rid of the deduction for state and local taxes.

No tax bias against new investment – Another very foolish provision of the tax code is depreciation, which forces companies to pretend some of their current investment costs take place in the future. This misguided approach is replaced with expensing, which allows companies to deduct investments when they occur.

What’s Really Good

Here are the features that give me a warm and fuzzy feeling.

A 20 percent corporate tax rate – America’s corporate tax system arguably is the worst in the developed world, with a very high rate and onerous rules that make it difficult to compete in world markets. A 20 percent rate is a significant step in the right direction.

A 25 percent small business tax rate – Most businesses are not traditional corporations. Instead, they file using the individual portion of the tax code (using forms such as “Schedule C”). Lowering the tax rate on business income to 25 percent will help these Subchapter-S corporations, partnerships, and sole proprietorships.

Territorial taxation – For a wide range of reasons, including sovereignty, simplicity, and competitiveness, nations should only tax economic activity within their borders. The House GOP plan does that for business income, but apparently does not extend that proper treatment to individual capital income or individual labor income.

By shifting to this more sensibly designed system of business taxation, the Republican plan will eliminate any incentive for corporate inversions and make America a much more attractive place for multinational firms.

What’s Decent but Uninspiring

Here are the features that I like but don’t go far enough.

Slight reduction in top tax rate on work and entrepreneurship – The top tax rate is reduced to 33 percent. That’s better than the current top rate of 39.6 percent, but still significantly higher than the 28 percent top rate when Reagan left office.

Less double taxation of savings – The plan provides a 50-percent exclusion for individual capital income, which basically means that there’s double taxation of interest, dividends, and capital gains, but at only half the normal rate of tax. There’s also some expansion of tax-neutral savings accounts, which would allow some saving and investment fully protected from double taxation.

Simplification – House GOPers assert that all their proposed reforms, if enacted, would create a much simpler tax system. It wouldn’t result in a pure Hall-Rabushka-style flat tax, with a 10-line postcard for a tax return, but it would be very close. Here’s their tax return with 14 lines.

In an ideal world, there should be no double taxation of income that is saved and invested, so line 2 could disappear (in Hall-Rabushka flat tax, investment income/capital income is taxed once and only once at the business level). All savings receives back-ended IRA (Roth IRA) treatment in a pure flat tax, so there’s no need for line 3. There is a family-based allowance in a flat tax, which is akin to lines 4 and 9, but there are no deductions, so line 5 and line 6 could disappear. Likewise, there would be no redistribution laundered through the tax code, so line 10 would vanish. As would line 11 since there are no special preferences for higher education.

But I don’t want to make the perfect the enemy of the good. The postcard shown above may have four more lines than I would like, but it’s obviously far better than the current system.

What’s Bad but acceptable

Increase in the double taxation of interest – Under current law, companies can deduct the interest they pay and recipients of interest income must pay tax on those funds. This actually is correct treatment, particularly when compared to dividends, which are not deductible to companies (meaning they pay tax on those funds) while also being taxable for recipients. The House GOP plan gets rid of the deduction for interest paid. Combined with the 50 percent exclusion for individual capital income, that basically means the income is getting taxed 1-1/2 times. But that rule would apply equally for shareholders and bondholders, so that pro-debt bias in the tax code would be eliminated. And the revenue generated by disallowing any deduction for interest would be used for pro-growth reforms such as a lower corporate tax rate.

What’s Troublesome

No tax on income generated by exports and no deduction for cost of imported inputs for companies – The House GOP proposal is designed to be “border adjustable,” which basically means the goal is to have no tax on exports while levying taxes on imports. I’ve never understood why politicians think it’s a good idea to have higher taxes on what Americans consume and lower taxes on what foreigners consume. Moreover, border adjustability normally is a feature of a “destination-based” value-added tax (which, thankfully, is not part of the GOP plan), so it’s not completely clear how the tax-on-imports  portion would be achieved. If I understand correctly, there would be no deduction for the cost of foreign purchases by American firms. That’s borderline protectionist, if not over-the-line protectionist. And it’s unclear whether this approach would pass muster with the World Trade Organization.

To conclude, the GOP plan isn’t perfect, but it’s very good considering the self-imposed boundaries of dynamic revenue neutrality and favorable outcomes for all income groups.

And since those self-imposed constraints make the plan politically viable (unlike, say, the Trump plan, which is a huge tax cut but unrealistic in the absence of concomitant savings from the spending side of the budget), it’s actually possible to envision it becoming law.

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When I was younger, my left-wing friends said conservatives unfairly attacked them for being unpatriotic and anti-American simply because they disagreed on how to deal with the Soviet Union.

Now the shoe is on the other foot.

Last decade, a Treasury Department official accused me of being disloyal to America because I defended the fiscal sovereignty of low-tax jurisdictions.

And just today, in a story in the Washington Post about the Center for Freedom and Prosperity (I’m Chairman of the Center’s Board of Directors), former Senator Carl Levin has accused me and others of “trading with the enemy” because of our work to protect and promote tax competition.

Here’s the relevant passage.

Former senator Carl Levin (D-Mich.)…said in a recent interview that the center’s activities run counter to America’s values and undermine the nation’s ability to raise revenue. “It’s like trading with the enemy,” said Levin, whose staff on a powerful panel investigating tax havens regularly faced public challenges from the center. “I consider tax havens the enemy. They’re the enemy of American taxpayers and the things we try to do with our revenues — infrastructure, roads, bridges, education, defense. They help to starve us of resources that we need for all the things we do. And this center is out there helping them to accomplish that.”

Before even getting into the issue of tax competition and tax havens and whether it’s disloyal to want limits on the power of governments, I can’t resist addressing the “starve us of resources” comment by Levin.

He was in office from 1979-2015. During that time, federal tax receipts soared from $463 billion to $3.2 trillion. Even if you only count the time the Center for Freedom and Prosperity has existed (created in late 2000), tax revenues have jumped from $2 trillion to $3.2 trillion.

At the risk of understatement, Senator Levin has never been on a fiscal diet. And he wasn’t bashful about spending all that revenue. He received an “F” rating from the National Taxpayers Union every single year starting in 1993.

Let’s now address the main implication of the Washington Post story, which is that it’s somehow wrong or improper for there to be an organization that defends tax competition and fiscal sovereignty, particularly if some of its funding comes from people in low-tax jurisdictions.

The Post offer[s] an inside look at how a little-known nonprofit, listing its address as a post office box in Alexandria, became a persistent opponent of U.S. and global efforts to regulate the offshore world. …the center met again and again with government officials and members of the offshore industry around the world… Quinlan and Mitchell launched the center in October 2000. …The center had two stated goals. Overseas, the center set out to persuade countries on the blacklist not to cooperate with the OECD, which it derided as a “global tax cartel.” In Washington, the center lobbied the Bush administration to withdraw its support for the OECD and also worked to block anti-tax haven legislation on Capitol Hill. To spread the word, the center testified before Congress, published reports and opinion pieces in leading financial publications, and drafted letters to lawmakers and administration officials. Representatives of the center crisscrossed the globe and sponsored discussions in 2000 and 2001, traveling to London, Paris, the Cayman Islands, the Bahamas, Panama, Barbados and the British Virgin Islands.

To Senator Levin and other folks on the left, I guess this is the fiscal equivalent of “trading with the enemy.”

In reality, this is a fight over whether there should be any limits on the fiscal power of governments. On one side are high-tax governments and international bureaucracies like the OECD, along with their ideological allies. They want to impose a one-size-fits-all model based on the extra-territorial double-taxation of income that is saved and invested, even if it means blacklisting and threatening low-tax jurisdictions (the so-called tax havens).

On the other side are proponents of good tax policy (including many Nobel Prize-winning economists), who believe that income should not be taxed more than one time and that the power to tax should be constrained by national borders.

And, yes, that means we sometimes side with Switzerland or Panama rather than the Treasury Department. Our patriotism is to the ideals of the Founding Fathers, not to the bad tax policy of the U.S. government.

In any event, I’m proud to say that the Center’s efforts have been semi-successful.

In May 2001, the center claimed a key victory. In a dramatic departure from the Clinton administration, Paul O’Neill, the incoming Treasury Secretary appointed by Bush, announced that the United States would back away from the reforms pushed by the OECD. …fewer than half of the nations on the OECD blacklist pledged to become more transparent in their tax systems, a victory for anti-tax forces such as the center.

Even the other side says the Center is effective.

…said Elise Bean, former staff director and chief counsel of Levin’s Homeland Security Permanent Subcommittee on Investigations, which started investigating tax havens in 2001. “They travel all around the world and they have had a tremendous impact.” …“They were very effective at painting the OECD’s work as end-times are here for tax competition, and we’re going to have European tax rates imposed upon the whole world if the OECD’s work continued,” said Will Davis, the former head of OECD public affairs in Washington.

What’s most impressive is that all this was accomplished with very little funding.

Tax returns for the center and a foundation set up in its name reported receiving at least $1.4 million in revenue from 2003 to 2010.

In other words, the Center and its affiliated Foundation managed to thwart some of the world’s biggest and most powerful governments with a very modest budget averaging about $175,000 per year. And I don’t even get compensation from the Center, even though I’m the one who almost got thrown in a Mexican jail for opposing the OECD!

So while Senator Levin had decades of experience spending other people’s money in a promiscuous fashion, I work for an organization, the Cato Institute, that is ranked as the most cost-effective major think tank, and I’m on the Board of a small non-profit that has a track record of achieving a lot with very little money.

Yet another example of why we should be thankful that tax competition makes it more difficult for politicians to extract more revenue from the economy’s productive sector.

P.S. I mentioned to the Post reporters that the world’s biggest tax haven is the United States, but that important bit of information was omitted from the article. Which is a shame since it would have given me a chance to laud Senator Rand Paul for blocking a very dangerous agreement that would undermine America’s attractive tax laws for overseas investors.

P.P.S. If politicians really want to hurt tax havens, they should adopt a flat tax. That would dramatically boost tax compliance.

P.P.P.S. All things considered, I think the reporters who put together the story were reasonably fair, though there was a bit of editorializing such as referring to one low-tax jurisdiction as a “notorious tax haven.” When they write about France, do they ever refer to it as a “notorious tax hell”?

Also, when writing about trips the Center arranged for congressional staff to low-tax jurisdictions, the article stated, “The staffers reported receiving from $900 to $2,360 for the trips”, which makes it sound as if the staffers got paid. That’s wrong. The sentence should have read, “The staffers reported that the Center’s travel and lodging expenses ranged from $900 to $2,360 for the trips.”

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Who is the worst President in U.S. history?

No, regardless of polling data, the answer is not Barack Obama. Or even Jimmy Carter. Those guys are amateurs.

At the bottom of the list is probably Woodrow Wilson, who gave us both the income tax and the Federal Reserve. And he was a disgusting racist as well.

However, Wilson has some strong competition from Franklin Delano Roosevelt, who advocated and implemented policies that exacerbated the bad policies of Herbert Hoover and thus deepened and lengthened the Great Depression.

Today we’re going to look at a new example of FDR’s destructive statism. Something so malicious that he may actually beat Wilson for the prize of being America’s most worst Chief Executive.

Wilson, after all, may have given us the income tax. But Roosevelt actually proposed a top tax rate of 99.5 percent and then tried to impose a 100 percent tax rate via executive order! He was the American version of Francois Hollande.

These excerpts, from an article by Professor Burton Folsom of Hillsdale College, tell you everything you need to know.

Under Hoover, the top rate was hiked from 24 to 63 percent. Under Roosevelt, the top rate was again raised—first to 79 percent and later to 90 percent. In 1941, in fact, Roosevelt proposed a 99.5 percent marginal rate on all incomes over $100,000. “Why not?” he said when an adviser questioned him. After that proposal failed, Roosevelt issued an executive order to tax all income over $25,000 at the astonishing rate of 100 percent. Congress later repealed the order, but still allowed top incomes to be taxed at a marginal rate of 90 percent. …Elliott Roosevelt, the president’s son, conceded in 1975 that “my father may have been the originator of the concept of employing the IRS as a weapon of political retribution.”

Note that FDR also began the odious practice of using the IRS as a political weapon, something that tragically still happens today.

For more detail about Roosevelt’s confiscatory tax policy, here are some blurbs from a 2011 CBS News report.

When bombers struck on December 7, 1941, taxes were already high by historical standards. There were a dizzying 32 different tax brackets, starting at 10% and topping out at 79% on incomes over $1 million, 80% on incomes over $2 million, and 81% on income over $5 million. In April 1942, just a few short months after the attack, President Roosevelt proposed a 100% top rate. At a time of “grave national danger,” he argued, “no American citizen ought to have a net income, after he has paid his taxes, of more than $25,000 a year.” (That’s roughly $300,000 in today’s dollars). Roosevelt never got his 100% rate. However, the Revenue Act of 1942 raised top rates to 88% on incomes over $200,000. By 1944, the bottom rate had more than doubled to 23%, and the top rate reached an all-time high of 94%.

And here are some excerpts from a column that sympathized with FDR’s money grab.

FDR proposed a 100 percent top tax rate. …Roosevelt told Congress in April 1942, “no American citizen ought to have a net income, after he has paid his taxes, of more than $25,000 a year.” That would be about $350,000 in today’s dollars. …lawmakers would quickly reject FDR’s plan. Four months later, Roosevelt tried again. He repeated his $25,000 “supertax” income cap call in his Labor Day message. Congress shrugged that request off, too. FDR still didn’t back down. In early October, he issued an executive order that limited top corporate salaries to $25,000 after taxes. The move would “provide for greater equality in contributing to the war effort,” Roosevelt declared. …lawmakers…ended up attaching a rider repealing the order to a bill… FDR tried and failed to get that rider axed, then let the bill with it become law without his signature.

Regarding FDR’s infamous executive order, here are the relevant passages.

In order to correct gross inequities…, the Director is authorized to take the necessary action, and to issue the appropriate regulations, so that, insofar as practicable no salary shall be authorized under Title III, Section 4, to the extent that it exceeds $25,000 after the payment of taxes allocable to the sum in excess of $25,000.

And from the archives at the University of California Santa Barbara, here is what FDR wrote when Congress used a debt limit vote to slightly scale back the 100 percent tax rate.

First, from a letter on February 6, 1943.

…there is a proposal before the Ways and Means Committee to amend the Public Debt Bill by adding a provision which in effect would nullify the Executive Order issued by me under the Act of Oct. 2, 1942 (price and wage control), limiting salaries to $25,000 net after taxes. …It is my earnest hope that the Public Debt Bill can be passed without the addition of amendments not related to the subject matter of the bill.

And here are excerpts from another letter from FDR later that month.

When the Act of October 2, 1942, was passed, it authorized me to adjust wages or salaries whenever I found it necessary “to correct gross inequities…” Pursuant to this authority, I issued an Executive Order in which, among other things, it was provided that in order to correct gross inequities and to provide for greater equality in contributing to the war effort no salary should be authorized to the extent that it exceeds $25,000 net after the payment of taxes.

Even though Congress was overwhelmingly controlled by Democrats, there was resistance to FDR’s plan to confiscate all income.

So Roosevelt had a back-up plan.

If the Congress does not approve the recommendation submitted by the Treasury last June that a flat 100 percent supertax be imposed on such excess incomes, then I hope the Congress will provide a minimum tax of 50 percent, with steeply graduated rates as high as 90 percent. …If taxes are levied which substantially accomplish the purpose I have indicated, either in a separate bill or in the general revenue bill you are considering, I shall immediately rescind the section of the Executive Order in question.

And, sadly, Congress did approve much higher tax rates, not only on the so-called rich, but also on ordinary taxpayers.

Indeed, this was early evidence that tax hikes on the rich basically serve as a precedent for higher burdens on the middle class, something that bears keeping in mind when considering the tax plans of Bernie Sanders and Hillary Clinton (or, tongue in cheek, the Barack Obama flat tax).

Let’s close by considering why FDR pushed a confiscatory tax rate. Unlike modern leftists, he did have the excuse of fighting World War II.

But if that was his main goal, surely it was a mistake to push the top tax rate far beyond the revenue-maximizing level.

That hurt the economy and resulted in less money to fight Nazi Germany and Imperial Japan.

So what motivated Roosevelt? According to Burton and Anita Folsom, it was all about class warfare.

Why “soak the rich” for 100 percent of their income (more or less) when they already face rates of 90 percent in both income and corporate taxes? He knew that rich people would shelter their income in foreign investments, tax-exempt bonds, or collectibles if tax rates were confiscatory. In fact, he saw it happen during his early New Deal years. When he raised the top rate to 79 percent in 1935, the revenue into the federal government from income taxes that year was less than half of what it was six years earlier when the top rate was 24 percent. …First, FDR, as a progressive, believed…that “swollen fortunes” needed to be taxed at punitive rates to redistribute wealth. In fact, as we can see, redistributing wealth was more important to FDR than increasing it. …Second, high taxes on the rich provided excellent cover for his having made the income tax a mass tax. How could a steelworker in Pittsburgh, for example, refuse to pay a new 24 percent tax when his rich factory owner had to pay more than 90 percent? Third, and possibly most important, class warfare was the major campaign strategy for FDR during his whole presidency. He believed he won votes when he attacked the rich.

In other words, FDR’s goal was fomenting resentment rather than collecting revenue.

And there are leftists today who still have that attitude. Heck, there’s an entire political party with that mentality.

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The Foreign Account Tax Compliance Act (FATCA) arguably is the worst feature of the internal revenue code. It’s an odious example of fiscal imperialism that is based on a very bad policy agenda.

But there is something even worse, a Multilateral Convention on Mutual Administrative Assistance in Tax Matters that has existed for decades but recently has been dangerously modified. MCMAATM is a clunky acronym, however, so let’s go with GATCA. That’s because this agreement, along with companion arrangements, would lead to a Global Tax Compliance Act.

Or, as I’ve argued, it would be a nascent World Tax Organization.

And the United States would be the biggest loser. That’s because FATCA was bad legislation that primarily imposed heavy costs on – and caused much angst in – the rest of the world.

GATCA, by contrast, is an international pact that would impose especially heavy costs on the United States and threaten our status as the world’s biggest haven for investment.

Let’s learn more about this bad idea, which will become binding on America if approved by the Senate.

James Jatras explains this dangerous proposal in a column for Accounting Today.

Treasury’s real agenda is…a so-called “Protocol amending the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.” The Protocol, along with a follow-up “Competent Authority” agreement, is an initiative of the G20 and the Organization for Economic Cooperation and Development (OECD), with the support, unsurprisingly, of the Obama Administration. …the Protocol cannot be repaired. It is utterly inconsistent with any concept of American sovereignty or Americans’ constitutional protections. Ratification of the Protocol would mean acceptance by the United States as a treaty obligation of an international “common reporting standard,” which is essentially FATCA gone global—sometimes called GATCA. Ratifying the Protocol arguably would also provide Treasury with backdoor legal authority to issue regulations requiring FATCA-like reporting to foreign governments by U.S. domestic banks, credit unions, insurance companies, mutual funds, etc. This would mean billions of dollars in costs passed on to American taxpayers and consumers, as well as mandating the delivery of private data to authoritarian and corrupt governments, including China, Saudi Arabia, Mexico and Nigeria.

The Foreign Relations Committee unfortunately has approved the GATCA Protocol.

But Rand Paul, like Horatius at the bridge protecting Rome, is throwing sand in the gears and isn’t allowing easy passage by the full Senate.

…the senator is right to insist that the OECD Protocol is dead on arrival.

Taxpayers all over the world owe him their gratitude.

In a column for Investor’s Business Daily, Veronique de Rugy of the Mercatus Center warns that this pernicious and risky global pact would give the IRS power to collect and automatically share massive amounts of our sensitive financial information with some of the world’s most corrupt, venal, and incompetent governments.

During a visit to the World Bank this week, I got a sobering lesson about the degree to which the people working at international bureaucracies, including the Organization for Economic Cooperation and Development, dislike tax competition. For years, these organizations — which are funded with our hard-earned tax dollars — have bullied low-tax nations into changing their tax privacy laws so uncompetitive nations can track taxpayers and companies around the world. …they never tire of trying to raise taxes on everyone else. Take the Organization for Economic Cooperation and Development’s latest attempt to impose a one-size-fits-all system of “automatic information exchange” that would necessitate the complete evisceration of financial privacy around the world. A goal of the Convention on Mutual Administrative Assistance in Tax Matters is to impose a global network of data collection and dissemination to allow high-tax nations to double-tax and sometimes triple-tax economic activity worldwide. That would be a perfect tax harmonization scheme for politicians and a nightmare for taxpayers and the global economy.

But she closes with the good news.

Somehow the bureaucrats persuaded the lawmakers on the Senate Foreign Relations Committee to approve it. Thankfully, it’s currently being blocked by Sens. Rand Paul, R-Ky., and Mike Lee, R-Utah.

Actually, all that’s being blocked is the ability to ram the Multilateral Convention through the Senate without any debate or discussion.

John Gray explains the procedural issues in a piece for Conservative Review.

Senators Rand Paul (R-KY) and Mike Lee (R-UT)…aren’t blocking these treaties at all. Instead, they are just objecting to the Senate ratifying them by “unanimous consent.” The Senate leadership has the authority to bring these tax treaties to the floor for full consideration – debate, amendments, and votes. That is what Senators Paul and Lee are asking for. …Unanimous consent means that the process takes all of about 10 seconds; there is no time to review the treaties, there is no time for debate, and not a second of time to offer amendments.  They simply want them to be expedited through the Senate without transparency. …As sitting U.S. Senators, they have the right to ask for debate and amendments to these treaties. …These treaties are dangerous to our personal liberties.  Senator Paul and Senator Lee deserve the transparency and debate they’ve requested.

Amen.

For those of us who want good tax policy, rejecting this pact is vital.

An ideal fiscal system not only has a low rate, but also taxes income only one time and only taxes income earned inside national borders.

Yet the OECD Protocol to the Multilateral Convention is based on the notion that there should be pervasive double taxation of income that is saved and invested, and that these taxes should be levied on an extraterritorial basis.

For fans of the flat tax, national sales tax, or other proposals for tax reform, this would be a death knell.

But this isn’t just a narrow issue of tax policy. On the broader issue of privacy and government power, Professor Niall Ferguson of Harvard makes some very strong points in a column for the South China Morning Post.

I should be a paid-up supporter of the campaign to close down tax havens. I should be glad to see the back of 500-euro bills. …Nevertheless, I am deeply suspicious of the concerted effort to address all these problems in ways that markedly increase the power of states – and not just any states but specifically the world’s big states – at the expense of both small states and the individual.

He cites two examples, starting with the intrusive plan in the U.K. to let anybody and everybody know the owners of property.

The British government announced it will set up a publicly accessible register of beneficial owners (the individuals behind shell companies). In addition, offshore shell companies and other foreign entities that buy or own British property will henceforth be obliged to declare their owners in the new register. No doubt these measures will flush out or deter some villains. But there are perfectly legitimate reasons for a foreign national to want to own a property in Britain without having his or her name made public. Suppose you were an apostate from Islam threatened with death by jihadists, for example.

He also is uncomfortable with the “war against cash.”

…getting rid of bin Ladens is the thin end of a monetary wedge. …a number of economists…argue cash is an anachronism, heavily used in the black and grey economy, and easily replaced in an age of credit cards and electronic payments. But their motive is not just to shut down the mafia. It is also to increase the power of government. Without cash, no payment can be made without being recorded and potentially coming under official scrutiny. Without cash, central banks can much more easily impose negative interest rates, without fearing that bank customers may withdraw their money.

He’s right. The slippery slope is real. Giving governments some power invariably means giving governments a lot of power.

And that’s not a good idea if you’re a paranoid libertarian like me. But even if you have a more benign view of government, ask yourself if it’s a good idea to approve a global pact that is explicitly designed to help governments impose higher tax burdens?

Senators Paul and Lee are not allowing eight treaties to go forward without open debate and discussion. Seven of those pacts are bilateral agreements that easily could be tweaked and approved.

But the Protocol to the Multilateral Convention can’t be fixed. The only good outcome is defeat.

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Much of my work on fiscal policy is focused on educating audiences about the long-run benefits of small government and modest taxation.

But what about the short-run issue of how to deal with a fiscal crisis? I have periodically weighed in on this topic, citing research from places like the European Central Bank and International Monetary Fund to show that spending restraint is the right approach.

And I’ve also highlighted the success of the Baltic nations, all of which responded to the recent crisis with genuine spending cuts (and I very much enjoyed exposing Paul Krugman’s erroneous attack on Estonia).

Today, let’s look at Cyprus. That Mediterranean nation got in trouble because of an unsustainable long-run increase in the burden of government spending. Combined with the fallout caused by an insolvent banking system, Cyprus suffered a deep crisis earlier this decade.

Unlike many other European nations, however, Cyprus decided to deal with its over-spending problem by tightening belts in the public sector rather than the private sector.

This approach has been very successful according to a report from the Associated Press.

…emerging from a three-year, multi-billion euro rescue program, Cyprus boasts one of the highest economic growth rates among the 19 eurozone countries — an annual rate of 2.7 percent in the first quarter. Finance Minister Harris Georgiades says Cyprus turned its economy around by aggressively slashing costs but also by avoiding piling on new taxes that would weigh ordinary folks down and put a serious damper on growth. “We didn’t raise taxes that would burden an already strained economy,” he told The Associated Press in an interview. “We found spending cuts that weren’t detrimental to economic activity.”

Cutting spending and avoiding tax hike? This is catnip for Dan Mitchell!

But did Cyprus actually cut spending, and by how much?

That’s not an easy question to answer because the two main English-language data sources don’t match.

According to the IMF data, outlays were sliced to €8.1 billion in 2014, down from a peak of €8.5 in 2011. Though the IMF indicates that those numbers are preliminary.

The European Commission database shows a bigger drop, with outlays of €7.0 billion in 2015 compared to €8.3 billion in 2011 (also an outlay spike in 2014, presumably because of a bank bailout).

The bottom line is that, while it’s unclear which numbers are most accurate, Cyprus has experienced a multi-year period of spending restraint.

And having the burden of government grow slower than the private sector always has been and always will be the best gauge of good fiscal policy.

By contrast, there’s no evidence that tax increases are a route to fiscal probity.

Indeed, the endless parade of tax hikes in Greece shows that such an approach greatly impedes economic recovery.

Though not everybody in Cyprus supports prudent policy.

Critics have accused the government of working its fiscal gymnastics on the backs of the poor — essentially chopping salaries for public sector workers. Pambis Kyritsis, head of the left-wing PEO trade union, said the government’s “neo-liberal” policies coupled with the creditors’ harsh terms have widened the chasm between the have and have-nots to huge proportions. …Georgiades turned Kyritsis argument around to reinforce his point that there shouldn’t be any let-up in the government’s reform program and fiscal discipline.

In the European context, “liberal” or “neo-liberal” means pro-market and small government (akin to “classical liberal” or “libertarian” in the United States).

Semantics aside, it will be interesting to see whether Finance Minister Georgiades is correct about maintaining spending discipline as the economy rebounds.

As the above table indicates, there are several examples of nations getting good results by limiting the growth of government spending. But there are very few examples of long-run success since very few nations have politicians with the fortitude to control outlays if the economy is growing and generating an uptick in tax revenue (which is why states like California periodically get in trouble).

This is why the best long-run answer is some sort of constitutional spending cap, similar to what exists in Switzerland or Hong Kong.

The bottom line if that spending restraint is good short-run policy and good long-run policy. Though I doubt Hillary Clinton will learn the right lesson.

P.S. Cyprus also is a reasonably good role model for how to deal with a banking crisis.

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My favorite Margaret Thatcher moment might be when she pointed out there’s no such thing as public money, only taxpayer money.

Or perhaps when she exposed leftists for being so fixated on class warfare that they would be willing to hurt the poor if they could hurt the rich even more.

That being said, I wouldn’t be surprised if most people instead chose Thatcher’s famous line about socialism and running out of other people’s money.

Which is a great line that cleverly pinpoints the ultimate consequence of statism. Just think Greece or Venezuela.

But what can we say about starting point rather than end point? Why do people get seduced by socialism in the first place?

For part of the answer, let’s turn to the famous quote from George Bernard Shaw about how “A government which robs Peter to pay Paul can always count on the support of Paul.”

Very insightful, I hope you’ll agree.

Though it’s an observation on all governments, not just socialist regimes.

So I’m going to propose a new quote: “Socialism is fun so long as someone else is paying for it.”

And the reason I concocted that quote is because it’s a perfect description of many of the people supporting Bernie Sanders.

According to a poll conducted by Vox, they want freebies from the government so long as they aren’t the ones paying for them.

When we polled voters, we found most Sanders supporters aren’t willing to pay more than an additional $1,000 in taxes for his biggest proposals. That’s well short of how much more the average taxpayer would pay under his tax plan. …In other words, even Sanders supporters are saying they don’t want to pay as much to the federal government for health care as they are paying right now in the private sector. …The kicker for all of this? Some analysts believe Sanders’s plan will cost twice as much as his campaign estimates. …Sanders supporters are far and away the most likely to want free public college tuition. Still, 14 percent said they don’t want to pay additional taxes for it — and another half said they would only pay up to $1,000 a year…the majority of Sanders supporters in our poll (much less all voters) aren’t willing to pay enough to actually support those nationalized services.

As you can see from this chart, they want government to pick up all their medical expenses, but they’re only willing to pay $1,000 or less.

Gee, what profound and deep thinkers.

Maybe we should ask them if they also want private jets if they only have to pay $1,000. And Hollywood mansions as well.

The pie-in-the-sky fantasies of Bernie and his supporters are so extreme that even the statists at the Washington Post have editorialized against his proposals.

Mr. Sanders’s offerings to the American people are, quite simply, too good to be true, and much less feasible, politically or administratively, than he lets on. More expensive, as well. …Despite the substantial tax increases associated with Mr. Sanders’s policies, they would not be fully paid for — not even close. To the contrary, the tax hikes would be sufficient to cover just 46 percent of the spending increases, resulting in additional budget deficits of $18 trillion over 10 years. A deficit increase of that magnitude would cause an additional $3 trillion in interest payments over the same period — unless, of course, Mr. Sanders has another $18 trillion in tax increases or spending cuts up his sleeve.

The editorial writers at the Post, like so many people in Washington, make the mistake of fixating on the symptom of red ink instead of the underlying disease of excessive spending.

Would they actually favor his crazy ideas if he produced $18 trillion of additional tax hikes over the next 10 years?

Returning to the topic of whether Bernie voters actually would be willing to pay more tax, I recently appeared on Fox Business News to discuss the odd phenomenon of workers in the high-tech industry giving contributions to the anti-capitalist Senator from Vermont.

I confess that I don’t really know what would motivate someone to support Bernie Sanders, but I did share some thoughts.

  • Republicans in recent decades have been big spenders, so libertarian-minded voters in Silicon Valley may have decided to base their votes on social issues.
  • The high-tech industry may simply be sending “protection money” to leftist politicians, though that’s probably a motive only for senior executives.
  • It’s rather ironic that the left goes after companies like WalMart and Exxon when firms like Google and Apple have much bigger profit margins.

Don’t forget, by the way, that the only difference between Bernie and Hillary is how fast we travel on the road to Greece.

P.S. Unfortunately, I haven’t accumulated much Bernie humor, though the Sandersized version of Monopoly is quite clever.

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I have no idea whether Donald Trump believes in bigger government or smaller government. Higher taxes or lower taxes. More intervention or less. Sometimes he says things I like. Sometimes he says things that irk me.

Politicians are infamous for being cagey, but “The Donald” is an entirely different animal. Instead of using weasel words that create wiggle room, he simply makes bold statements that are impossible to reconcile.

Consider his views on government debt.

Here’s an interview with Dana Loesch of Blaze TV from earlier this week. I was in Zurich and it was past midnight, so I was a tad bit undiplomatic about Trump’s endlessly evolving views. Simply stated, it’s not a good idea to default. And it’s not a good idea to monetize debt either.

For what it’s worth, while Trump is oscillating between different position on debt, one of his top advisers is claiming that his plan will produce a multi-trillion dollar surplus.

Sigh.

The sensible approach would be for Trump to make simple points.

  1. Debt is a symptom and the real problem is too much spending.
  2. The solution is to follow the Golden Rule.
  3. Therefore, impose a Swiss-style spending cap.

But he hasn’t asked me for advice, so I’m not holding my breath waiting for him to say the right thing.

It’s also a challenge to decipher Trump’s position on tax policy.

He actually put forth a good tax proposal, but nobody takes it seriously since he doesn’t have a concomitant plan to restrain spending.

So his campaign supposedly designated Larry Kudlow and Steve Moore to modify the plan, but then said the original proposal would stay unchanged.

This does not create a sense of confidence.

Trump also is getting pressure on his personal tax situation. He said he would release his tax return(s). Now he says he won’t. I speculated on what this implies in an essay for Time, listing five reasons why he may decide to keep his returns confidential.

The first two reasons deal with a desire for privacy and a political concern that he may appear to be less wealthy than he’s led folks to believe.

First, he may resent the idea of letting the world look at his tax returns for reasons of personal privacy, which is an understandable sentiment. …Can Trump get away with stonewalling on his returns? Perhaps. President Barack Obama refused to release his college transcript and didn’t seem to suffer any political damage. …Second, Trump’s tax return will probably show a surprisingly low level of income, and he might be concerned that such a revelation would erode the super-successful-billionaire aura that he has created.

I also suspect he’s worried that his tax return will make him look like…gasp…a tax avoider.

Third, to the degree that Trump’s return shows a lower-than-expected amount of taxable income, this will probably be because his accountants and tax lawyers have carefully plumbed the 75,000-page internal revenue code for deductions, credits, exemptions, exclusions and other preferences… Since we all seek to legally minimize our tax liabilities, that shouldn’t be a political problem. …That normally would be a persuasive answer, but voters may look askance when they learn that Trump is taking advantage of mysterious provisions dealing with things they don’t understand, like depreciation, carryforwards, foreign tax credits, muni bonds and deferral. …Fourth, for very wealthy individuals and large companies, the complexity of the tax code means there’s no way of knowing if a tax return is accurate. …Given Trump’s persona, he presumably pushes the envelope.

Last but not least, I imagine Trump has “offshore” structures.

Fifth, it’s highly likely that Trump does business with so-called tax havens. For successful investors and entrepreneurs with cross-border economic activity, this is almost obligatory because jurisdictions like the Cayman Islands have ideal combinations of quality governance and tax neutrality. …But in a political environment where the left has tried to demonize “offshore” tax planning, any revelations about BVI companies, Panama law firms, Jersey trusts and Liechtenstein accounts will be fodder for Trump’s many enemies.

Needless to say, I greatly sympathize with Trump’s desire to minimize his tax burden and I applaud his use of so-called tax havens (which are routinely utilized by wealthy Democrats).

And I even sympathize with his desire for privacy even though divulging personal financial information is now a routine obligation for politicians.

The point I should have made in my essay is that Trump would be in a stronger position if he said from the start that his tax returns are nobody else’s business.

And shifting back to policy, he’ll be in a stronger position if he picks a message and sticks to it (though ideally not the same message as Hillary Clinton).

P.S. Since I mentioned Obama’s still-secret college transcript, I may as well share this very clever mock transcript that explains a lot about his misguided approach to policy.

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