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Posts Tagged ‘Taxation’

While speaking last year in Hawaii on the topic of good tax policy, I explained why it is misguided to impose extra layers of tax on saving and investment.

Regarding the problem of double taxation, I’ve addressed how various features of the tax code need to be fixed.

Today, we’re going to focus on the fixing the tax treatment of household savings. And the problem that needs fixing is that the federal government taxes you when you earn money and also taxes any interest you earn if you decide to save some of your after-tax income.

As you can see from the chart, this creates a tax wedge.

And that tax wedge distorts people’s decisions and makes them more likely to choose immediate consumption rather than savings (which can be viewed as deferred consumption).

As mentioned in the video, every economic theory recognizes that saving and investment (again, just another way of saying deferred consumption) are critical to future growth and rising living standards. So there are good reasons to fix the tax code.

The good news is that there are two ways to fix this problem.

  1. Tax income only one time when it is first earned.
  2. Tax income only one time when it is consumed.

In practical terms, the first option treats all savings like a “Roth IRA,”, which means you pay tax the year you earn your income, but the IRS does not get another bit at the apple if you save some of your after-tax income and it earns interest or otherwise grows in value.

The second option treats all savings like a 401(k), which means you are not taxed on any income that you place in a savings vehicle, but you are taxed on any money (including any interest or other returns) that you withdraw from the account.

As shown by Adam Michel of the Heritage Foundation, both of these approaches lead to the same long-run result (and thus are superior to what happens when people save without being protected from double taxation).

The good news is that Americans can protect their savings from double taxation by using either individual retirement accounts (IRAs) or 401(k)s.

The bad news is that those “qualified accounts” are restricted. Only people who are saving for retirement can protect themselves from double taxation.

That needs to change.

Here’s what I wrote back in 2012 and I think it’s reasonably succinct and accurate.

…all saving and investment should be treated the way we currently treat individual retirement accounts. If you have a traditional IRA (or “front-ended” IRA), you get a deduction for any money you put in a retirement account, but then you pay tax on the money – including any earnings – when the money is withdrawn. If you have a Roth IRA (or “back-ended” IRA), you pay tax on your income in the year that it is earned, but if you put the money in a retirement account, there is no additional tax on withdrawals or the subsequent earnings. From an economic perspective, front-ended IRAs and back-ended IRAs generate the same result. Income that is saved and invested is treated the same as income that is immediately consumed. From a present-value perspective, front-ended IRAs and back-ended IRAs produce the same outcome. All that changes is the point at which the government imposes the single layer of tax.

The key takeaways are in the first and last sentences. All savings should be protected from double taxation, not just what you set aside for retirement. And that means government can tax you one time, either when you first earn the income or when you consume the income.

This means we need universal savings accounts, sort of like they have in Canada.

Here’s what Robert Bellafiore of the Tax Foundation wrote about the idea back in 2019.

USAs do not penalize withdrawals on account of their purpose or timing. In contrast, some types of existing savings accounts are not neutral, penalizing people who withdraw their money for anything but approved purposes at approved times. For example, withdrawals from 529 accounts can only be made without penalty if they are used to fund education. If a parent has a 529 account for a child but must make a withdrawal to cover emergency expenses, he or she must pay income taxes on the earnings, plus a 10 percent penalty. Withdrawals from 401(k)s before the age of 59½ incur the same penalty, though there are certain exceptions. USAs’ neutrality would likely boost saving, for two reasons. First, when savings are not hit by multiple layers of taxation, savers can expect a higher return and are therefore likely to save more. Both IRAs and 401(k)s tax savings only once, and studies have estimated that roughly half of 401(k) balances, and roughly a quarter of all IRA contributions, constitute new saving—in other words, dollars that would have been spent are saved instead.

The bottom line is that we need to copy jurisdictions such as Hong Kong and Singapore that have little or no double taxation of any kind.

Especially since we now live in a world where inflation has become an issue, which acts as a hidden tax on saving and investment.

I’ll close with this chart from the OECD. It’s a few years old, so I’m sure some nations have changed their policies, but it gives one a good idea of how savings is treated around the world.

The bottom line is that it’s good to avoid Norway and the United States is unimpressive.

I’m very surprised to see that Argentina and Germany have good policy.

P.S. For some of our friends on the left, policies that protect from double taxation are akin to an entitlement.

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

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

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

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

The two charts we just examined are very depressing.

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

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

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

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

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

Some people, however, have a different perspective

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

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

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

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

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

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

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

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

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

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I wrote last week about the ever-expanding burden of government spending in California.

And that was after writing two columns last year (here and here) about the state’s economic decline.

But sometimes a specific story is more compelling than broad economic trends. So here’s a tweet that caught my eye. It tells us a lot about the nature of government contracting, inefficiency, and cost overruns.

But it also tells us a lot about California (sort of like this story from 2021).

By the way, I don’t know if the above numbers are correct. But even if they are only half right, they are a damning indictment of California budgeting.

As you might expect, bad budgeting and extravagant waste also mean high taxes.

And high taxes mean economic decline, and that’s the focus of today’s column.

In a recent column for the Washington Post, Henry Olsen offers a depressing assessment of the California’s future.

California’s…falling population coupled with its $22.5 billion budget deficit suggest it could experience a swift and wrenching decline. …California offers natural beauty…, but people decide how much they want to pay for these things just like other goods. The state’s…high taxes are a significant deterrent to living there, driving many people to flee. …That outward flow of people is turning into a flood. The state’s population dropped by more than 500,000 people between July 2020 and July 2022. Outmigration to other states fueled the decline: Almost 900,000 more people have moved to other states from California in the past three years than have moved in. …This exodus poses massive risks for the state’s finances because of its reliance on revenue from the rich. As of 2018, almost 35 percent of California’s personal income tax revenue came from the sliver of taxpayers earning $1 million or more. Nearly two-thirds come from those earning more than $200,000. That means a small change in these people’s residence can cost the state billions. …It could take a New York-style collapse to force significant change. Given the direction California is heading, that unhappy prospect is no longer unthinkable.

Writing for the City Journal, Steven Malanga has a similarly grim view.

California’s net domestic outmigration ranks highest among the states…In fact, the biggest leavers by far are lower- and middle-income people. And middle-class losses have grown in the last five years to about 200,000 adult residents. Meantime, some 300,000 adult Californians from lower-income categories have also left in that time… Taxes don’t exist in a vacuum; they are one component of a governing philosophy. High taxes represent an approach that favors bigger, more pervasive government, which takes many other forms besides taxes: a tendency to greater regulation and differing spending priorities than those of lower-taxed states, for example. …Fueled by its taxes on high earners and on businesses, California has an enormous budget. Its general fund alone tops $200 billion. You might expect, for that money, top-notch services from government, but the opposite is true. …Advocates for higher taxes often argue that progressive tax systems like California’s are fairer because wealthier residents pay at higher rates. …And yet high-taxing states like California, New York, and New Jersey also have among the highest rates of outmigration. These states are so “fair” that a significant number of their lower- and middle-income residents can’t wait to leave.

The most important insight of Malanga’s column is that California politicians say that they are trying to punish the rich, but lower-income and middle-class people are suffering a lot of collateral damage.

Which should come as no surprise.

P.S. If you want to enjoy some California-themed humor, click here and here.

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It’s fun to write about big-picture tax issues such as tax reform (for instance, should we have a flat tax or national sales tax?).

It’s also fun to write about contentious issues such as whether there should be tax increases or whether the tax code should be based on class warfare.

Many tax topics, however, are tedious and boring. But they nonetheless involve important issues.

  1. Depreciation vs. expensing for new business investment.
  2. International tax rules and the choice of worldwide taxation vs territorial taxation.
  3. The debate on consumption-base taxation vs. Haig-Simons taxation.
  4. Choosing the right way of treating prior-years business losses.
  5. The fight over whether border-adjustable taxation should be part of tax reform.

Building on that list, today we’re going to wade into the boring topic of “tax expenditures.”

For those unfamiliar with the term, tax expenditures are special preferences in the tax code. In other words, tax loopholes.

But here’s the challenge: In order to figure out what’s a loophole, you first need to define a neutral tax system. And that means the debate over tax expenditures is actually a fight over consumption-base taxation vs. Haig-Simons taxation (the third item in the above list).

At the risk of over-simplifying, here’s what both sides believe:

  • Proponents of consumption-base tax believe you get a neutral system by taxing all income one time, but only one time (i.e., there should be no discriminatory extra layers of taxation on income that is saved and invested).
  • Proponents of Haig-Simons taxation, by contrast, believe that a neutral tax system also requires double taxation of income that is saved and invested (for all intents and purposes, taxing income and changes in net worth).

I’m motivated to write about this topic because the Committee for a Responsible Federal Budget put out a report last year entitled, “Addressing Tax Expenditures Could Raise Substantial Revenue.”

Since I don’t think our fiscal problem of excessive spending can be solved by giving politicians more revenue, I obviously disagree with the folks at CRFB about whether it would be desirable to “raise substantial revenue.”

For what it’s worth, I want to get rid of tax loopholes, but only if we use the revenues to facilitate lower tax rates. Indeed, that’s the goal of reforms such as the flat tax.

But let’s set aside that fight over tax increases and instead look at CRFB’s list of supposed tax expenditures. They rely on the Haig-Simons approach and thus include items (circled in red) that are not actually loopholes.

In a neutral tax system with no double taxation, there is no capital gains tax, no death tax, and no double taxation of dividends. In a neutral tax system, all savings is treated like IRAs and 401(k)s, which means the provisions circled above should be viewed as mitigations of penalties rather than loopholes.

Adam Michel of the Heritage Foundation illustrated the differences between consumption-base and Haig-Smons taxation in a 2019 report.

Here’s his table looking at what’s a loophole under both systems and the bottom part of the visual is where you will see the stark difference in how both systems treat saving and investment.

I’ll close by observing that my friends on the left generally support double taxation because they view such policies as a way of getting rich people to pay more (or as a way of punishing success, regardless of whether more revenue is collected).

I try to remind them that saving and investment is what leads to higher productivity, which means it is the most effective way of boosting wages for those of us who are not rich.

Sadly, it’s not easy to get them to understand that labor and capital are complementary factors of production (apologies for the economic jargon).

P.S. While CRFB uses the wrong definition when measuring tax loopholes, they are not alone. The Joint Committee on Taxation,  the Government Accountability Office, and the Congressional Budget Office make the same mistake. Heck, you even see Republicans foolishly use this flawed benchmark.

P.P.S. Here’s my award for the strangest tax loophole.

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Fundamental tax reform is back on the agenda, with House Republicans promising a vote this year on a national sales tax, so I dug into C-Span’s archives so I could share a few of my thoughts from 2007 on the Fair Tax.

As you might suspect, the principles I believed in back in 2007 and the principles I still support in 2023.

If anything, I have even greater disdain for the IRS and our awful tax system.

Politicians have combined the worst of two worlds, giving us a tax code that simultaneously is filled with class-warfare provisions that punish success while also containing thousands of special tax breaks that benefit the well-heeled friends of politicians.

As I said in the video, it would be nice to toss the current tax code in the trash and replace it with something that collects revenue is a less-damaging and less-corrupt fashion.

For what it’s worth, I’ve always preferred the flat tax over a national sales tax.

Not because one is theoretically better than the other, but because of two political reasons.

  1. As noted in the above clip, I’m very worried about giving untrustworthy politicians a new source of tax revenue without unambiguously and permanently getting rid of the income tax (so that we don’t repeat the European mistake of giving politicians a way of expanding government).
  2. I also worry that a Fair Tax is vulnerable to demagoguery since lawmakers will get hit with election-year ads stating they want a big 30 percent tax on everything people buy (while overlooking that our paychecks will be much bigger once income taxes and payroll taxes are abolished).

Indeed, many sympathizers openly admit that the Fair Tax has vulnerabilities.

And there’s plenty of less-friendly opposition. In an article for the Bulwark, Jim Swift pours cold water on the idea.

…nobody has ever taken the Fair Tax seriously. Not in the years after the Tea Party wave… Not in 2011, when Texas Gov. Rick Perry briefly campaigned in support of the Fair Tax, only to quietly walk back his support and switch to a flat tax proposal.Not in 2017, when the Republican-controlled Congress passed the Tax Cuts and Jobs Act. …Do moderate House Republicans really want to be forced to vote on the Fair Tax? …In light of all this, why promise a vote on such a loser? Going straight to the floor poses risks, given the slim GOP majority. It’s a lose-lose situation: Vote yes, and the House Republican Conference looks frivolous, to say nothing of the messaging gift they would give Democratic speechwriters in 2024 (“Republicans want to instate a 30-plus percent federal sales tax!”). Vote no, and invite primaries by far-right candidates who will accuse you of siding with Democrats when given a chance to abolish the IRS. …It’s possible that McCarthy agreed to a floor vote expecting moderates to break ranks and the bill to fail by a spectacular margin. That would drive a stake through the heart of the Fair Tax. …What’s likelier is that McCarthy knew this was a promise he could break. He never said anything about when he would bring the bill to the floor.

While I do worry about the political blowback against a Fair Tax, I hope Speaker McCarthy keeps his promise and there is a floor vote.

Not because I’m deluded about something good getting through the Senate or surviving a sure-veto from Biden.

But if tax reform becomes a big issue this year, that may set the stage for a bigger debate in 2024 and maybe one of my fantasies will come true and we’ll get something good in 2025.

P.S. Here’s another video from the archives, in which I discuss the flat tax and national sales tax.

P.P.S. Speaking of archives, here are my brief thoughts from 2011 about the various proposals for tax reform.

P.P.P.S. And click here, here, here, or here if you want to peruse my arguments for the flat tax.

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I’m not a big fan of the Internal Revenue Service, but our awful (and anti-growth) tax system is mostly the fault of politicians.

Ever since that dark day in 1913 when the income tax was enacted, presidents and members of Congress have been making the system more and more complicated.

The net result is that we now have a tax system that – according to the IRS website – requires more than 2,700 separate forms, instructions, or publications (a huge increase over the past two decades).

In my fantasy world, we would throw all those forms in the trash and replace today’s convoluted tax system with a simple and fair flat tax.

Instead of 2,700-plus forms, we would have one simple postcard-sized tax return for households and another simple postcard-sized tax form for businesses.

Yes, there would be a few other forms for instructions and things like that, but compliance costs would drop by more than 90 percent.

Seems like a win-win approach, but the Washington Post has a different perspective, editorializing instead in favor of simply giving the IRS more money and power.

For the past three years, the IRS has failed to do its most basic job: processing tax returns in a timely manner. There are many reasons. The pandemic upended almost everything for a while. …Ancient computer systems hampered operations. And Congress kept asking the IRS to do more: implement the sweeping 2017 GOP tax code overhaul, then send stimulus checks — three times — to the vast majority of Americans during the pandemic. …Yet House Republicans made it their first priority this year to pass legislation slashing IRS funding, which would worsen the agency’s problems — and the service it provides Americans. …Congress’s priority should be modernizing the IRS and getting it back to full functionality. That’s why Democrats passed $80 billion in extra funding for the agency… This isn’t the time to cut. It’s the time to resuscitate.

By the way, “slashing” is a very inaccurate word when describing the GOP plan to cancel a giant budget increase for the IRS. Indeed, the IRS budget (adjusted for inflation) has dramatically expanded in recent decades.

But we should expect misleading analysis from the Washington Post.

So let’s conclude by instead asking a fundamental question: Is it better to continue on the current path (an ever-more-complex tax system requiring ever-more-money for the IRS) or is it better to have a clean tax system?

The answer should be obvious.

P.S. I’m sure that not every additional form on the IRS website represents additional complexity. But I’m also sure that the tax code is far worse than it was in the past. Perhaps the most compelling evidence is the huge increase in the number of pages needed for the instruction manual for the 1040 tax form.

P.P.S. Also keep in mind that there is a lot of evidence that tax complexity is a major source of political corruption.

P.P.P.S. If you like gallows humor, click here.

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I’m a big fan of tax competition.

Why? Because politicians are far more likely to keep tax rates low when they are afraid that jobs and investment can move to countries (or states) with better tax system.

It also explains why tax rates fell dramatically around the world after Ronald Reagan and Margaret Thatcher triggered a virtuous cycle of jurisdictional competition.

And it explains why politicians are fighting to curtail tax competition. They want taxpayers to be akin to captive customers. When that happens, they can push tax rates back up.

Given my cheerleading for tax competition, you won’t be surprised to learn that I get a jolt of pleasure anytime I read about a government being pressured to lower tax rates.

Which is why I’m going to share some excerpts from a story in the New York Times.

Dubai started the new year by suspending its 30 percent tax on alcohol, a move that could help the Gulf emirate attract more tourists and businesses amid growing regional competition. Dubai removed the tax on Sunday, along with the fee for a license that individuals need to buy alcohol, local beverage distributors said. …Offering significantly cheaper liquor is likely to bolster Dubai’s position as the Middle East’s center for tourism and business at a time when economists are warning of a global economic slowdown that could dent spending on travel and leisure. …The changes are likely to give a boost to the local hospitality industry… The decision was the latest in a series of measures that appear to be designed to cement Dubai’s position as the dominant hub for tourism and investment in the Middle East. …Dubai is facing increasing competition from Qatar and Saudi Arabia.

I’ve been to Dubai a few times, but never Qatar or Saudi Arabia, so I can’t personally comment on the relative attractiveness of the three jurisdictions.

But I’m glad that they feel pressure to compete with each other. The net result is more liberty.

P.S. I can’t resist pointing out that our leftist friends should not be overly upset about tax competition. After all, even data from the OECD shows that governments are collecting more money now that tax rates have significantly dropped. Though that data may not be very convincing if folks on the left are motivated by something other than greed for more tax revenue.

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Continuing a tradition that began back in 2013, let’s look at the best and worst developments of the past year.

Since I try to be optimistic (notwithstanding forces and evidence to the contrary), let’s start with the good news.

I’ll start by mentioning that we will now have gridlock in Washington. That’s probably a positive development, but I’ll explore that issue tomorrow as part of my “Hopes and Fears” column for 2023.

For today, let’s focus on three concrete developments from 2022 that unambiguously are positive.

States cutting tax rates and enacting tax reform – Since I’m a long-time advocate for better tax policy, I’m very pleased that more states are moving in the right direction. I especially like that the flat tax club is expanding. I’m also amused that a bad thing (massive handouts from Washington) backfired on the left (because many states decided to cut taxes rather than squander the money on new spending).

Chileans vote against a statist constitution – There was horrible news in 2021 when Chileans voted a hard-core leftist into the presidency. But we got very good news this year when the same voters overwhelmingly rejected a proposed constitution that would have dramatically expanded the power of government.

More families have school choice – Just like last year, we can celebrate that there was more progress on education this year. In 2021, West Virginia led the way. In 2022, Arizona was the best example. And we’ll discuss tomorrow why there are reasons to be optimistic about 2023.

Now let’s shift to the bad news of 2022.

I thought about listing inflation, which definitely caused a lot of economic damage this year. But the bad monetary policy actually occurred in 2020 and 2021 when central bankers overreacted to the pandemic.

So I’m going to write instead about bad things that specifically happened in 2022.

Biden semi-successfully expands the burden of government – The president was able to push through several bad proposals, such as the so-called Inflation Reduction Act and some cronyist subsidies for the tech industry. Nothing nearly as bad as his original “build back better” scheme, but nonetheless steps in the wrong direction.

The collapse of small-government conservatism in the United Kingdom – Just as today’s Republicans have deviated from Reaganism, the Conservatives in the United Kingdom have deviated from Thatcherism. Except even worse. Republicans in the USA acquiesce to higher spending. Tories in the UK acquiesce to higher spending and higher taxes.

Massachusetts voters opt for class warfare – Starting tomorrow, Massachusetts no longer will have a flat tax of 5 percent. That’s because voters narrowly approved a class-warfare based referendum to replace the flat tax with a new “progressive” system with a top rate of 9 percent. Though bad news for the state’s economy will be offset by good news for moving companies.

P.S. I almost forget to mention that the best thing about 2022 occurred on January 10 when the Georgia Bulldogs defeated Alabama to win the national championship of college football.

P.P.S. While 2022 was a mixed bag, history buffs may be interested in knowing that it was the 100th anniversary of a big tax rate reduction (top rate lowered from 73 percent to 58 percent) implemented in 1922 during the under-appreciated presidency of Warren Harding.

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I applauded when Joe Biden used clever tax strategies to reduce his (apparently unpatriotic) tax bill to the IRS. I also applauded when Bill and Hillary Clinton engaged in clever tax avoidance, as well as John Kerry and Gov. Pritzker of Illinois.

In the spirit of bipartisanship, I also applaud when Donald Trump does the same thing, and that part of what we’re going to discuss today.

First, some background: The ongoing battle over Donald Trump’s personal tax information has finally ended. If you’re curious, the New York Times has a detailed report on what Trump earned (or lost) in recent years.

And the NYT also tells us how much tax he paid during those years.

When I look at these numbers, my first thought is that Trump is not a very good businessman since he has a negative income most years.

My second thought is that I’m glad he paid a low tax rate of about 3 percent in 2018 and approximately 4 percent in 2019, the two years when his income was positive.

Why am I glad? Because money in private hands is far more likely to be utilized wisely than money that gets diverted to the IRS and then spent by the politicians in Washington.

That’s the first part of today’s column.

The second part of today’s column is to use Trump’s tax return to show why the tax system would be much better if we junked the internal revenue code and replaced it with a simple and fair flat tax.

The flat is based on the principle of equality.

  • All income tax taxed at the same low rate.
  • No income is exempt from tax, other than a family-based allowance.
  • No income is subject to double taxation.

A tax system based on equality also means radical simplicity. The hundreds of different tax forms in today’s tax code would get dumped in the garbage.

All that would be left is a simple tax form for households.

And a simple tax form for businesses.

What would this mean for Trump’s tax returns? I’m sure the implications would be enormous, but I want to focus on just two issues.

First, under the flat tax, business losses can not be used to lower taxes on household income (wages, salaries, and pensions). So that would probably mean a higher tax burden for Trump.

Second, the tax treatment of business changes in ways that would both help Trump and hurt Trump. The most important thing to realize is that the convoluted corporate income tax (as well as parts of the personal income tax such as Schedule C) are replaced by a very simple cash-flow system.

Here’s how Professors Robert Hall and Alvin Rabushka describe the business portion of the flat tax.

The business tax is a giant, comprehensive withholding tax on all types of income other than wages, salaries, and pensions. It is carefully designed to tax every bit of income outside of wages, but to tax it only once. The business tax does not have deductions for interest payments, dividends, or any other type of payment to the owners of the business. As a result, all income that people receive from business activity has already been taxed. …The resulting simplification and improvement in the tax system is enormous. …Eliminating the deduction for interest paid by businesses is a central part of our general plan to tax business income at the source.

One very important implication of this approach is there there no longer would be a bias for debt. This would not be good news for people like Trump who usually rely on debt to finance their businesses.

On the other hand, the net result would be a tax code more favorable to investment and entrepreneurship. So if Trump is a good businessman, he will benefit.

I’m agnostic on Trump’s entrepreneurial ability, but I’m an unabashed fan of having a better tax system for America. Replacing the internal revenue code with a sensible tax system would mean a more prosperous country and a less corrupt Washington.

P.S. Under a flat tax, a business would be allowed to “carry forward” losses from previous years, just as is usually the case for the current system.

P.P.S. A flat tax also would replace depreciation with expensing, which is another policy favorable to smart entrepreneurs.

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

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

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

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

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

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

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

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

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

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

I’ll conclude with two further observations.

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

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

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

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

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

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

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

But maybe a turnaround is possible.

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

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

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

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

Now let’s shift to the state level.

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

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

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

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

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

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

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

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

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Since my specialty in economics is fiscal policy, I’m used to wonky (and perhaps boring) debates about topics such as marginal tax rates, Keynesianism, and the Armey-Rahn Curve.

But there’s also a moral component to fiscal policy.

Though immoral might be a better word. That’s because some of our friends on the left actually think that all money belongs to the government.

As such, they think that it is a “subsidy” if we are allowed to keep any of our earnings.

If you think I’m exaggerating, let’s look at some excerpts from a column in the New York Times by Ron Lieber. He starts by equating Biden’s student loan bailout with a provision in the tax code.

For months now, we’ve been in a nationwide debate over whether we should cancel up to $20,000 in student loan debt for tens of millions of people. …But hiding in plain sight is another federal program — 529 college savings plans — that offers the biggest benefits to wealthy families. …With some careful planning, no taxes will come due for most people as long as future generations use the money to pay for college…, graduate school…and any other related educational costs.

Mr. Lieber wants people to think these two policies (the student loan bailout and the tax provision) are both ways of giving benefits to people.

But there’s a big moral difference.

Student loans take money from taxpayers and gives the funds to other people (the real beneficiaries are college administrators rather than students, but that a topic for another day).

By contrast, Section 529 accounts allow people to keep their own money.

Here are some further excerpts from the column.

In 2015, President Obama proposed taxing future earnings in 529 accounts. The blowback from the upper middle class was so severe — and from Democrats and Republicans alike — that he rescinded the plan in the same month that he introduced it. …we did not, as a nation, feel the need to call on The Supremes to weigh in on the legality of maintaining tax-favored savings for millions of people who could afford many college educations anyway. We just canceled the cancellation of their sweet, juicy subsidy without a vote in Congress or a trial. …it is the wealthy who have the best opportunity to extract the largest breaks from the federal government when it comes to saving and paying for college. 

I’m not surprised Obama was on the wrong side, but let’s ignore that and instead focus on Lieber’s assertion that Section 529 accounts are a “sweet, juicy subsidy.”

As already noted, I don’t think it’s right to say it’s a subsidy when people get to keep their own money. That’s reminiscent of the offensive “tax expenditure” term used by some of the people in Washington.

But it is true that some provisions of the tax code create distortions and should be eliminated as part of tax reform.

However, Section 529 accounts are not loopholes. They are simply ways for people to save and invest without being subject to double taxation. Very similar to IRAs and 401(k)s.

And eliminating all forms of double taxation should be a top goal if we want fundamental tax reform.

The bottom line is that folks on the left are wrong about IRAs and 401(k)s and they are wrong about Section 529 accounts.

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It is economically foolish to have high tax rates, double taxation, and corrupt loopholes.

The answer, as Steve Forbes explains in this video, is the flat tax.

He makes excellent points, similar to the analysis I shared in my 2010 video.

Though there’s one difference. He got to share the good news about the wave of tax reform taking place at the state level.

In my video, by contrast, I got to share the good news about the tax reform that was taking place in Eastern Europe.

And what happened in Eastern Europe is our topic for today.

A new study by Brian Wheaton, a professor at UCLA who examined what happened after those nations adopted flat tax systems after the breakup of the Soviet Empire.

Here’s a map from the study, showing the nations that adopted the flat tax.

What were the economic results?

Here are some excerpts from Prof. Wheaton’s study.

Would a flat income tax substantially improve…incentives? To answer these questions, I study the experience of twenty post-Communist countries, which introduced flat taxation on income. I find that the flat tax reforms increase annual per-capita GDP growth by 1.38 percentage points for a transitionary period of approximately one decade. …Further, I find that the growth effect primarily operates through increases in investment and, to a lesser extent, labor supply. It is driven by the reductions in progressivity resulting from the reforms rather than merely the reductions in the average marginal tax rate.

And here’s a chart showing the pro-growth impact.

I wrote a column about this study yesterday for Townhall.

Here’s some of my analysis.

Starting about 30 years ago, there was serious interest in replacing the internal revenue code with a simple and fair flat tax. What motivated the desire to adopt a system based on one low rate, no double taxation of saving and investment, and no special loopholes? In part, it may have been because lawmakers at the time had a decent understanding of fiscal policy, having spent much of the 1980s lowering tax rates and seeing how that led to better economic performance. …With Bill Clinton in the White House, however, it was not possible to turn enthusiasm into reality. And in the following few decades, tax reform has fallen off the radar. …That’s unfortunate. America’s tax system has punitive features that reduce incentives for productive behavior. ..it would be a very good idea to resuscitate tax reform.

I explain that Professor Wheaton’s growth estimates are very important.

By the way, 1.38 percentage points of additional annual growth may not sound like much to some people, but the net effect is that flat tax nations wound up with about 15 percent more economic output after a decade. And that’s in addition to whatever growth they would have experienced without tax reform. A similar boost in growth in the United States would means several thousand dollars of additional economic output for every man, woman, and child.

And I close with a political observation.

It will be interesting to see whether some of the potential 2024 presidential hopefuls decide to battle these people and make tax reform part of their campaigns. Combined with other good ideas such as spending caps and federalism, there might be a winning message for the right candidate.

By the way, I’m not the only person to write about resuscitating tax reform.

Here are some excerpts from a column earlier this year by Cal Thomas for Jewish World Review.

The next time Republicans control all three branches of government they may wish to visit an old idea – the flat tax. …The Tax Code is a foreign language to many. As of 2018, it comprised 60 thousand pages in 54 volumes. According to The Tax Foundation, …the U.S. ranks 21st out of 37 nations in tax simplicity. Estonia has been first for eight straight years. Maybe we could learn from them. Look at states with no state taxes to see their prosperity. It is a major reason so many Americans are moving from high tax states to those with lower, or no state taxes. Unfortunately, one cannot escape the long arm of the IRS. A flat tax and the elimination of the IRS might help reduce the anger many people have about Washington and big spending politicians.

Since I’m a policy wonk, I mostly care about tax reform in hopes of reducing what economists refer to as “deadweight loss” in the economy.

But let’s also remember what Steve Forbes said in the video about the current system being corrupt.

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I’ve written dozens of articles about the Laffer Curve and most of that verbiage can be summarized in these five points.

  • The Laffer Curve helps to illustrate that excessive tax rates result in less taxable activity.
  • All public finance economists – even those on the left – agree there is a Laffer Curve.
  • The Laffer Curve does not mean tax cuts are self-financing or that tax increases lose revenue.
  • Different types of taxes produce different responses, so there is more than one Laffer Curve.
  • There is a real debate about the shape of the Laffer Curve and the ideal point on the curve.

The fifth point recognizes that well-meaning and knowledgeable people can vigorously disagree.

Do changes in tax policy have big effects or small effects on the economy? How much revenue feedback will occur if there is a change in tax rates?

Just a couple of examples of questions that I have endlessly debated with reasonable folks on the left.

But let’s focus today on the unreasonable left. Or, to be more specific, let’s look at an editorial from the St. Louis Post-Dispatch.

Here are some portions of that newspaper’s simplistic screed.

…the deficit explosion…effectively disproved his theory that cutting taxes on the rich would increase government tax revenue. …Laffer continues to be unchastened…, even as Britain reels from a leadership shuffle caused by the catastrophic application of his very theories. Hand it to Laffer: Seldom does someone who is so often proven wrong have the gumption to maintain he’s right… His famous “Laffer curve” presumes to prove that tax cuts for the rich will spur economic investment, causing such strong economic growth that the government’s tax revenue would actually rise instead of falling. …Yes, the economy was robust in the 1980s after Reagan’s historic tax cuts. But that’s also when the era of big budget deficits began. …congressional Republicans and President Donald Trump in 2017 slashed corporate taxes in what they claimed was a necessary economy-booster… Then-Treasury Secretary Stephen Mnuchin’s famous vow that the tax-cut plan would “pay for itself” in growth — the very definition of Laffer’s theory — has since been exposed as the voodoo it always was.

Almost every sentence in the above excerpt cries out for correction.

For instance, Reagan and his team never claimed that the 1981 tax cuts would be self-financing (though IRS data shows that lower tax rates on the rich did produce more revenue).

There were big deficits because of the 1980-1982 double-dip recession, and that spike in red ink mostly took place before Reagan’s tax cuts went into effect.

And it’s absurd to blame the United Kingdom’s political instability on tax cuts that never occurred.

If Secretary Mnunchin claimed the entire tax cut would pay for itself, he clearly deserves to be mocked, but it’s worth noting that the lower corporate tax rate from the 2017 reform is very close to being self-financing.

Not that we should be surprised. Both the IMF and OECD have research showing that lower corporate tax rates do not necessarily lead to lower corporate tax revenues.

The bottom line is that the editorial board of the St. Louis Post-Dispatch obviously puts ideology above accuracy.

P.S. I can’t resist sharing one other excerpt from the editorial.

“The Kansas Experiment,” was a debacle. The state’s economy didn’t skyrocket, but the deficit did, forcing deep cuts to education before the legislature finally acknowledged defeat and reversed the tax cuts.

Once again, the editors are showing that ideology trumps accuracy. Here’s what really happened in Kansas. I hope we can have more defeats like that! Though I’ll be the first to admit that North Carolina is a much better role model.

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Looking at reforms at the state level, the past two years have produced very good news on education policy and tax policy.

Regarding the latter, many states have lowered tax rates and several of them have junked so-called progressive tax systems and replaced them with simple and fair flat taxes.

But I’m greedy for even bigger improvements.

I want to see some states move not just to Column 2 in my ranking of state tax policy. I want them to be in Column 1.

And that means they need to get rid of income taxes.

The good news is that some states are having that discussion.

Here are some excerpts from an Associated Press report from Mississippi, written by Michael Goldberg.

Mississippi Gov. Tate Reeves promised to push for a full elimination of the state’s income tax during the 2023 legislative session. The move would make Mississippi the 10th state with no income tax. …Mississippi’s Republican-controlled legislature passed legislation in 2022 that will eliminate the state’s 4% income tax bracket starting in 2023. In the following three years, the 5% bracket will be reduced to 4%. …Supporters of the 2022 Mississippi tax cut said it would spur economic growth and attract new residents to Mississippi. …Republican House speaker Philip Gunn has said full elimination of the state income tax is “achievable,” though he hasn’t committed to doing so in the 2023 session. …Tax-cut proposals are a direct effort to compete with states that don’t tax earnings, including Texas, Florida and Tennessee.

And here are portions of an article in National Review about Colorado, authored by Ben Murrey, which also notes that the TABOR spending limit will need to be strengthened if lawmakers are serious about getting rid of the state’s income tax.

When an interviewer recently asked Colorado’s Democratic governor Jared Polis what the state’s income-tax rate should be, he answered without hesitation: “It should be zero.” …The effort to chisel away at the income tax has already gained steam in the state. Last year, voters reduced the tax with Proposition 116 — a ballot initiative that brought the rate from 4.63 percent to 4.55 percent. …Eliminating the tax would provide an enormous direct windfall to Colorado households. …every reduction in income tax will allow Coloradans to keep more of every dollar they earn, and it invites more jobs and opportunities for residents. …To eliminate the income tax entirely, the state would probably need to begin lowering the revenue limit along with the rate reductions in the future. …these two reforms would put the state on a road to zero.

By the way, Colorado voters once again just cut the state’s flat tax in a referendum earlier this month.

Would Mississippi and Colorado be doing the right thing if they joined the zero-income-tax club?

Yes. I cited some evidence on this issue about 10 years ago.

Here’s some updated analysis from Chris Edwards.

The nine states without an individual income tax are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. …What they have in common is providing needed state‐​local services to their residents without complex, anti‐​freedom, and anti‐​growth individual income taxes. Most of the nine run leaner and more efficient governments than most other states. They only partly make up for the income tax revenue gap with other revenues. In terms of overall tax burdens, eight of the nine states are toward the bottom of the 50 states and Washington is in the middle. …Total taxes in the seven states average 8.1 percent of income. The average in the 40 other states is 9.6 percent. Thus, the lack of individual income tax restrains the overall tax burden. …Repealing state individual income taxes is a good goal. …Residents get the state‐​local services they need, but at lower cost. 

Here’s the chart that accompanied Chris’ article. He separates Alaska and Wyoming because they get so much money from energy taxes and are not realistic role models for other states.

The bottom line is that states without an income tax tend to have smaller government.

This is especially true for Florida, Tennessee, South Dakota, and New Hampshire. And Texas may join those states now that it has strengthened its spending cap.

One should-be-obvious conclusion from this data is that states with no income taxes should not make the mistake of adopting that punitive levy. Unless, of course, they want to repeat Connecticut’s unhappy experience.

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In the past couple of months, I’ve repeatedly addressed the fiscal and economic mess in the United Kingdom.

Today, we’re going to zoom out and identify the main cause of all the problems.

If you look at the annual budget numbers published by the Treasury Department in the United Kingdom, the first thing to notice is that there was a big surge of spending for the pandemic.

One can certainly argue that pandemic-related spending was necessary to deal with a one-time emergency.

Indeed, the same thing happened in the United States.

This second chart, however, shows the real problem with fiscal policy in the United Kingdom. Politicians have used the one-time emergency has an excuse to impose a permanent increase in the country’s spending burden.

This is an indictment of former Prime Minister Boris Johnson’s profligacy.

Johnson was then replaced by the short-lived Liz Truss, who proposed lower taxes but offered no plan to restrain spending.

And now the new Prime Minister, Rishi Sunak, seems committed to an ongoing policy of higher taxes to finance permanently larger government.

In an article for Reuters, William Schomberg reports that the Chancellor of the Exchequer (akin to the U.S. Treasury Secretary) apparently thinks higher taxes are needed to save the economy.

British finance minister Jeremy Hunt said he will have to raise taxes in next week’s budget plan in order to fix the public finances and soften a potentially long recession… “This is going to be a big moment of choice for the country and we will put people ahead of ideology,” Hunt told the Sunday Times in an interview. …Hunt and Sunak are trying to prepare their Conservative Party for the tax increases which could reignite tensions in the party… Hunt was also considering a multi-billion-pound package of support to shield pensioners and benefit claimants from higher power bills, the newspaper said.

At the risk of understatement, Jeremy Hunt knows nothing about economics. Or history.

I wish a reporter would ask him to name a single country, at any point in world history, that achieved more prosperity by raising taxes and increasing the burden of government spending.

I’ll close with a couple of additional observation.

P.S. I never thought I would be reminiscing fondly about the fiscal policies of David Cameron and Theresa May.

P.P.S. But Margaret Thatcher is still the gold standard for responsible U.K. fiscal policy.

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In yesterday’s column, I explained Republicans are not credible advocates of lower tax rates if they don’t also push for spending restraint.

And, as I explained to the Adam Smith Institute, they will be de facto advocates of higher taxes if they embrace the wrong version of national conservatism.

To understand why I’m concerned, look at the most-recent edition of the Congressional Budget Office’s long-run fiscal forecast.

It shows that the burden of government spending is going to substantially increase over the next three decades – largely due to the unchecked growth of entitlement programs such as Medicare and Medicaid.

Failure to control spending will mean two bad things – either huge tax increases or staggering levels of debt. Probably both.

And if politicians add more spending (as Biden has already done), then those long-run trend lines will get even worse.

My concern is that some national conservatives are unwilling to confront this problem and/or they support policies to make matters worse.

But first, in the interest of fairness, bigger government is not an inherent part of the national conservatism platform. At least based on the statement of principles published by The American Conservative.

That document, signed by the key advocates of national conservatism, lists 10 concepts, most of which are good from a libertarian perspective and only one of which is overtly troubling.

  1. National independence (I cheer for anyone opposed to global governance)
  2. Rejection of imperialism and globalism (they’re opposed to the bad form of globalism)
  3. National government (very akin to “state capacity libertarianism“)
  4. God and public religion (not a role for government, but they’re not pushing bad ideas)
  5. The rule of law (good idea)
  6. Free enterprise (they have a few unnecessary caveats)
  7. Public research (I’m skeptical of this one)
  8. Family and children (not a role for government, but they’re not pushing bad ideas)
  9. Immigration (I’m more sympathetic than they are, but agree on the importance of assimilation)
  10. Race (they want neutrality rather than preferences)

Unfortunately, some national conservatives go beyond this statement of principles and push for bigger government.

But don’t believe me. Bill McGurn of the Wall Street Journal makes similar points.

Mr. Cass’s movement insists (rightly) that purely economic and material measures are limited. But whenever they move beyond rhetoric to specifics, their preferred solutions almost always turn out to be economic interventions, from child tax credits to industrial policy. …Even a cursory glance at the record of the past half-century shows government often doing the most harm to people precisely when it is trying to help them. Federal efforts to promote homeownership ended up encouraging banks to lend people more than they could afford and feeding a housing bubble. Federal college loans helped drive up tuition while leaving Americans $1.6 trillion in debt. As we ought to have learned from the Great Society, well-intentioned government policies can do immense damage to families and communities. Unfortunately, when it comes to getting the toothpaste back in the tube, government has shown much less success.

The bottom line is that national conservatives always seem to advocate bigger government when they develop or endorse specific policies.

And, to the best of my knowledge, none of them have put forth any agenda to deal with the spending problem that already exists.

That’s an agenda that guarantees future tax increases. And, for what it’s worth, one of the advocates already has embraced a tax-the-rich agenda to help finance the national conservative agenda.

If Republicans go down that path, it won’t end well (just as it didn’t end well when they embraced other fads such as compassionate conservatismkinder-and-gentler conservatismcommon-good capitalismreform conservatism, etc).

As I’ve previously noted, there no alternative to Reaganism.

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As part of a recent discussion at the Adam Smith Institute in London, I explained why advocates of sensible taxation in the U.S. and U.K. need to be serious about controlling government spending.

At the risk of stating the obvious, it will be almost impossible to achieve better tax policy if the spending burden continues to increase and we enter an era of endless deficits and debt.

We presumably won’t get needed policy reforms from the Democratic Party (the era of JFK is long gone, and Bill Clinton’s moderate approach also is a distant memory).

But what about Republicans?

In part I of this series, I argued that Trump’s big-government populism was bad politics as well as bad policy.

But I was not arguing for establishment Republicans such as Bush or Romney.

Instead, I think the GOP needs to return to the era of Reagan-style libertarianism.

That means some things that Trumpies want, such as lower tax rates, but it also means genuine spending restraint. Which we didn’t get during the Trump years.

In part II, let’s contemplate whether this is a realistic hope, at least once we get past the Biden years.

If history is any guide, the answer is yes. Here’s another video, from more than 10 years ago, that shows the fiscal discipline the nation enjoyed under both Reagan and Clinton.

If you want more recent evidence, we also had a five-year spending freeze after the so-called Tea Party Republicans took power in 2010.

What about today? Can Republicans sober up and once again become fiscal hawks, morphing into good supply-siders who want better tax policy and spending restraint?

Or are they the bad supply-siders, meaning they spout rhetoric about tax cuts but don’t take the tough steps (such as entitlement reform) that are needed to make lower tax rates realistic?

I’ll close with a very depressing observation. The current fiscal situation is bad, but remember that things will get much worse because of demographic changes such as population aging.

Those who oppose entitlement reform necessarily are embracing huge tax increases and perpetual economic stagnation. Not to mention handing more power to Democrats.

There is no alternative.

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Most election watchers are focused on whether Republicans will take control of the House and/or the Senate in today’s midterm election in the United States.

That’s an interesting topic, and I’ll close today’s column with my predictions, but I’m going to continue my long-standing tradition (2010, 2012, 2016, 2018, 2019, 2020, 2021) of highlighting the year’s most important initiatives and referendums.

1. Regular readers already know that the class-warfare initiative in Massachusetts is at the top of my list. The left-controlled state legislature has placed an initiative on the ballot to replace the state’s 5 percent flat tax with a class-warfare system with a top rate of 9 percent. The Wall Street Journal recently warned, “A proposed millionaire tax would accelerate the exodus of wealth to New Hampshire and Florida” and National Review added that “The Bay State’s economic future is on the ballot.”

2. It has not attracted much attention, but my sentimental favorite is Proposition 132 in Arizona, which would strengthen the state’s constitution by requiring a 3/5ths vote to approve any ballot initiative to increase the tax burden. This would augment the 2/3rds supermajority that already exists for legislatively enacted tax increases.

3. Speaking of taxes, I can’t imagine that anyone is surprised to learn that there’s an initiative to (further) increase California’s top tax rate. The Tax Foundation explained that, “California Proposition 30 would create a 1.75 percentage point surtax on income above $2 million, which would bring the top marginal rate to 15.05 percent. (Separately, the scheduled uncapping of a 1.1 percent payroll tax in 2024, combined with the passage of Proposition 30, would yield a 16.15 percent top rate on wage income.)” This is so extreme that I’m predicting even California’s crazy voters will vote no.

4. Sticking to taxes, there’s a referendum in Colorado, Proposition 121, to lower the state’s flat tax. The Tax Foundation summarizes what’s at stake: “Colorado Proposition 121 would reduce the state’s flat statutory income tax rate from 4.55 percent to 4.4 percent, effective retroactively for tax year 2022.” Not a huge reduction, but a welcome step in the right direction.

5. For those who follow labor issues, there are two initiatives that merit attention. In Illinois, Amendment 1 would further empower and entrench the power of government bureaucrats. As noted by the Illinois Policy Institute, “Amendment 1 would allow government unions to pass their most unpopular demands at the bargaining table, and voters would have no way to hold them accountable.” By contrast, Tennessee voters will get to vote on whether to enshrine “right-to-work” in the state’s constitution.

6. Last but not least, voters in a couple of California communities will have the opportunity to demonstrate whether they understand economics. To be more specific, an article in Reason explains, “The most sweeping rent control initiative up for a vote next Tuesday is Measure H in Pasadena, California. It would cap rent increases at 75 percent of inflation as measured by the Consumer Price Index…A handful of other California cities have ballot initiatives that would tighten pre-existing rent caps.”

P.S. My predictions for Congress (which occasionally are accurate) are for Republicans to take the Senate by a 52-48 margin and the House by a 246-189 margin.

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The Laffer Curve is a very straightforward concept.

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

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

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

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

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

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

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

Here are some of the findings.

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

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

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

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

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

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

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

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

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

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

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Because I dedicated last week to European fiscal policy, I didn’t get a chance to write about the Tax Foundation’s latest version of the State Business Tax Climate Index, which was released October 25.

Last year, the top-4 states were Wyoming, South Dakota, Alaska, and Florida. This year’s report, authored by Janelle Fritts and Jared Walczak, says the top-4 states are… (drum roll, please) …exactly the same.

Here’s the map showing how states rank. The best states are blue and the worst states are dark grey.

Coincidentally, the bottom-4 states also stayed constant. New Jersey is in last place, followed by New York, California, and Connecticut.

But there were some very interesting changes if you look at the other 42 states.

Thanks to pro-growth tax reforms, Arizona and Oklahoma both jumped 5 spots in the past year.

The state of Washington suffered a huge fall, dropping 13 spots thanks to the imposition of a capital gains tax (the state constitution supposedly bars any taxes on income – and voters last fall overwhelmingly voted against the capital gains tax – but it appears the state’s politicians and a negligent judiciary may combine to put the state on a very bad path).

It’s also interesting to look at long-run trends. If you compare this year’s Index with the original 2014 Index, you’ll find that three states have jumped by at least 10 spots and three states have dropped by at least 10 spots.

Since I’m a Virginia resident, this is not encouraging news.

P.S. As I’ve noted before, the rankings for Alaska and Wyoming are somewhat misleading. Both states have lots of energy production and their state governments collect enormous amounts of taxes from that sector. This allows them to keep other taxes low while still financing bloated state budgets.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sigh.

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

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Most people don’t know how to define a “tax haven,” but we assume places with no income tax are on the list. And there’s a lot to admire when looking at jurisdictions such as Bermuda, Monaco, and the Cayman Islands.

But what if we want to identify the opposite of a tax haven. What is a “tax hell” and how can they be identified?

A new study for the 1841 Foundation undertakes that task and it lists 12 nations that deserve this unflattering label. Belarus is the worst of the worst, followed by Venezuela, Argentina, and Russia.

But this isn’t just a list of places with high tax burdens.

To be a tax hell, a nation has to have punitive taxation and a lousy government. Here’s how the report describes the methodology.

The Tax Hells Index is an in-depth look at both the qualitative and quantitative data that is released annually by both the IMF and The World Bank. By drawing out critical insights from this data, The 1841 Foundation was able to create a comprehensive index and critically examine 94 countries against a stringent framework. …we believe that a “Tax Hell” is not only a country with high taxes, but rather a country with a weak rule of law and where the rights to privacy and property are not enforced or protected as required. …Therefore, when considering the results, countries with high government quality and economic and legal stability may have high taxes (i.e., Denmark), but are very far from being considered Tax Hells. In fact, there are countries with both low and high taxes in the Top-12 tax hells; all of them, however, have low quality of government, high levels of corruption and discretion, poor economic management, and weak institutions.

By the way, the report identified 12 tax hells, but also lists 14 other nations that are “risky.”

These are countries that should be perceived as high risk.

I’ll close by noting that the report only considers nations in North America, Europe, and South America. If subsequent editions include Asia and Africa, I’m sure there will be more tax hells and more risky jurisdictions.

P.S. The five best-scoring nations are Ireland, Denmark, San Marino, Switzerland, and Luxembourg. Remember, these are not necessarily low-tax jurisdictions. Indeed, Denmark is a high-tax nation. But all of these jurisdictions at least provide high-quality governance.

P.P.S. If you want a defense of tax havens, click here, here, and here.

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In the case of business taxation, the most visually powerful evidence for the Laffer Curve is what happened to corporate tax revenue in Ireland after the corporate tax rate was slashed from 50 percent to 12.5 percent.

Tax revenue increased dramatically. Not just in nominal terms. Not just in inflation-adjusted terms.

Corporate receipts actually climbed as a share of GDP.

And this was during the decades when economic output was rapidly expanding.

In other words, the Irish government got a much bigger slice of a much bigger pie after tax rates were dramatically lowered.

Now let’s look at some evidence from a new study. Three professors from the University of Utah (Jeffrey Coles, Elena Patel, and Nather Seegert), and a Treasury Department economist (Matthew Smith) estimated what happens to taxable income for U.S. companies when there is a change in the corporate tax rate.

In response to a 10% increase in the expected marginal tax rate, private U.S. firms decrease taxable income by 9.1%, which indicates a discernibly more elastic response than prevailing estimates. This response reflects a decrease in taxable income of 3.0% arising from real economic responses to a firm’s scale of operations and 6.1% arising from accounting transactions via (for example) revenue and expense timing. Responsiveness to the corporate tax rate is more elastic if a firm uses cash (9.9%) rather than accrual accounting (7.4%), if the firm is small (9.9%) rather than large (8.6%), and if the firm discounts future cash flows at a lower rate.

The paper is filled with equation, graphs, and jargon, but the above excerpt tells us everything we need to know.

When tax rates go up, taxable income goes down (both because there is less economic activity and because companies have more incentive to manipulate the tax code).

Thus confirming what I wrote back in 2016 about taxable income being the key variable.

By the way, this does not mean that lower tax rates lead to more revenue. Or that higher tax rate produce less revenue.

Such big swings only happen in rare circumstances.

But it does mean that politicians will not grab as much money as they hope when they increase tax rates. And that they won’t lose as much revenue as they fear when they lower tax rates (and we saw that most recently with the 2017 tax reform).

I’ll close by noting that this is additional evidence for why we should be thankful that Biden’s proposal for higher corporate tax rates was not enacted.

P.S. The chart at the beginning of this column may be the most visually powerful evidence for the corporate Laffer Curve. The most empirically powerful evidence, however, comes from very unlikely sources – the pro-tax IMF and the pro-tax OECD.

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There is not a lot of suspense when the Tax Foundation releases its annual International Tax Competitiveness Index.

The “improbable success” of Estonia once again ranks #1. Just like in 2021, 2020, 2019, etc, etc.

Its Baltic neighbor Latvia is #2, followed by New Zealand and Switzerland.

It’s also worth noting that France is continuing its proud tradition of being in last place.

The United States, for what it is worth, has a mediocre #22 rank, dragged down by a horrible score – last among developed nations – for “cross-border tax rules” (but helped by a good score for consumption taxes since the U.S. has not made the mistake of imposing a value-added tax).

If you want to understand the Tax Foundation’s methodology, here’s a description from the report.

The structure of a country’s tax code is a determining factor of its economic performance. …The International Tax Competitiveness Index (ITCI) seeks to measure the extent to which a country’s tax system adheres to two important aspects of tax policy: competitiveness and neutrality. A competitive tax code is one that keeps marginal tax rates low. …businesses will look for countries with lower tax rates on investment to maximize their after-tax rate of return. If a country’s tax rate is too high, it will drive investment elsewhere, leading to slower economic growth. In addition, high marginal tax rates can impede domestic investment and lead to tax avoidance. …Separately, a neutral tax code…means that it doesn’t favor consumption over saving, as happens with investment taxes and wealth taxes. It also means few or no targeted tax breaks for specific activities carried out by businesses or individuals.

If you’re interested in which nations got better and worse over the past year, Greece and Turkey tied for the biggest improvement, both climbing four spots (easier for Greece since it started near the bottom of the rankings).

Ireland suffered the biggest decline, dropping seven spots, in part because of depreciation laws that penalize investment.

I’ll close with a wish that the report eventually gets expanded to include jurisdictions such Bermuda, Hong Kong, Monaco, Liechtenstein, Singapore, and the Cayman Islands. It would be very interesting to see if all of those places are ahead of Estonia.

It also would be interesting if the Tax Foundation augmented the report by speculating about potential big developments. For instance, how much would the U.S. score have declined if Biden’s tax plan had been adopted? And how much would the U.K. score have increased if Prime Minister Truss’ original tax plan was approved?

P.S. The Tax Foundation has very interesting comparative data showing international tax burdens on saving and investment.

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Because of her support for lower tax rates, I was excited when Liz Truss became Prime Minister of the United Kingdom.

Especially since her predecessor, Boris Johnson, turned out to be an empty-suit populist who supported higher taxes and a bigger burden of government spending.

But I’m not excited anymore.

Indeed, it’s more accurate to say that I’m despondent since the Prime Minister is abandoning (or is being pressured to abandon) key parts of her pro-growth agenda.

For details, check out this Bloomberg report, written by Julian Harris, about the (rapidly disappearing) tax-cutting agenda of the new British Prime Minister.

Westminster’s most hard-line advocates of free markets and lower taxes are looking on in despair as their agenda crumbles… When Liz Truss became prime minister just over five weeks ago, she promised to deliver a radical set of policies rooted in laissez-faire economics — an attempt to boost the UK‘s sluggish rate of growth. Yet her chancellor of the exchequer, Kwasi Kwarteng, faced a quick reality check when his mini-budget, packed with unfunded tax cuts and unaccompanied by independent forecasts, …triggered mayhem… Truss fired Kwarteng and replaced him with Jeremy Hunt as she was forced into a dramatic u-turn over her tax plans. …Truss conceded…and dropped her plan to freeze corporation tax. …Still, some believers are sticking by “Trussonomics”…Patrick Minford,..a professor at Cardiff University, said..“Liz Truss’s policies for growth are absolutely right, and to be thrown off them by a bit of market turbulence is insane.” …Eamonn Butler, co-founder of the Adam Smith Institute, similarly insisted that Truss “is not the source of the problem — she’s trying to cure the problem.”

Eamonn is right.

The United Kingdom faces serious economic challenges. But the problems are the result of bad government policies that already exist rather than the possibility of some future tax cuts.

In a column for the Telegraph, Allister Heath says the U.K.’s central bank deserves a big chunk of the blame.

Liz Truss and Kwasi Kwarteng have been doubly unlucky. While almost everybody else in Britain remained in denial, they correctly identified this absurd game for the con-trick that it truly was, warned that it was about to implode and pledged to replace it with a more honest system. Instead of a zombie economy based on rising asset prices and fake, debt-fuelled growth, their mission was to encourage Britain to produce more real goods and services, to work harder and invest more by reforming taxes and regulation. What happened next is dispiriting in the extreme. …Truss and her Chancellor moved too quickly and, paradoxically, given their warnings about the rottenness of the system, ended up pulling out the last block from the Jenga tower, sending all of the pieces tumbling down. …they didn’t crash the economy – it was about to come tumbling down anyway – but they had the misfortune of precipitating and accelerating the day of reckoning. …Andrew Bailey, the Governor of the Bank of England…, has been deeply unimpressive in all of this, helping to keep interest rates too low… The idea, now accepted so widely, that the price of money must be kept extremely low and quantitative easing deployed at every opportunity has undermined every aspect of the economy and society. …Too few people realise how terribly the easy money, high tax, high regulation orthodoxy has failed.

Allister closes with some speculation about possible alternatives. If the Tories in the U.K. decide to reject so-called “free-market fundamentalism,” what’s their alternative?

He thinks the Labour Party will take control, and with very bad results. Jeremy Corbyn will not be in charge, but his economic policies will get enacted.

If Truss is destroyed, the alternative won’t even be social democracy: it will be Labour, the hard Left, the full gamut of punitive taxation, including of wealth and housing, and even more spending, culminating rapidly in economic oblivion.

That is an awful scenario. Basically turning the United Kingdom into Greece.

I want to take a different approach, though, and contemplate what will happen if the Conservative Party rejects the Truss approach and embraces big-government conservatism.

Here are some questions I’d like them to answer:

  • Do you want improved competitiveness and more economic growth?
  • If you want more growth, which of your spending increases will lead to those outcomes?
  • Which of your tax increases will lead to more competitiveness or more prosperity?
  • Will you reform benefit programs to avert built-in spending increases caused by an aging population?
  • If you won’t reform entitlements, which taxes will you increase to keep debt under control?
  • If you don’t plan major tax increases, do you think the economy can absorb endless debt?

I’m asking these questions for two reasons. First, there are no good answers and I’d like to shame big-government Tories into doing the right thing.

Second, these questions are also very relevant in the United States. Even since the Reagan years, opponents of libertarian economic policies have flitted from one trendy idea to another (national conservatism, compassionate conservatism, kinder-and-gentler conservatismcommon-good capitalism, reform conservatism, etc).

To be fair, they usually don’t try to claim their dirigiste policies will produce higher living standards. Instead, they blindly assert that it will be easier to win elections if Republicans abandon Reaganism.

So I’ll close by observing that Ronald Reagan won two landslide elections and his legacy was strong enough that voters then elected another Republican (the same can’t be said for big-government GOPers like Nixon, Bush, Bush, or Trump).

Switching back to the United Kingdom, Margaret Thatcher repeatedly won election and her legacy was strong enough that voters then elected another Conservative.

The bottom line is that good policy can lead to good political outcomes, whereas bad policy generally leads to bad political outcomes.

P.S. To be sure, there were times when Reagan’s poll numbers were very bad. And the same is true for Thatcher. But because they pursued good policies, economic growth returned and they reaped political benefits. Sadly, it appears that Truss won’t have a chance to adopt good policy, so we will never know if she also would have benefited from a similar economic renaissance.

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A big division among economists is whether taxes have a big or small impact on incentives.

If taxpayers are very responsive, that means more economic damage (to use the profession’s jargon, a greater level of deadweight loss).

If you’re wondering which economists are right, there’s a lot of evidence that taxpayers are sensitive to changes in tax rates, Especially upper-income taxpayers, in part because they have significant control over the timing, levels, and composition of their income.

This is why entrepreneurs, innovators, inventors, and investors respond to difference in tax rates.

And athletes also make decisions based on tax policy. Here’s a tweet about Tyreek Hill, one of the best wide receivers in the National Football League. When deciding which team to sign with for this year, he picked the Miami Dolphins, located in a state with no income tax.

Mr. Hill also had the option to sign with the New York Jets.

But that would have meant letting greedy politicians in either New York or New Jersey (where the Jets play their home games) grab almost 11 percent of each additional dollar he earns.

According to this map, star athletes should be big fans of gray states and steer clear of dark-brown (or is that maroon?) states.

There’s research, incidentally, showing that teams based in low-tax states actually win more games.

P.S. I’ll close by reiterating my caveat about taxes being just one piece of the puzzle. After all, I speculated many years ago that taxes may have played a role in LeBron James going from Cleveland to Miami. But he then migrated to high-tax California. Though many pro athletes have moved away from the not-so-Golden States, so the general points is still accurate.

P.P.S. I feel sorry for Cam Newton, who paid a marginal tax rate of nearly 200 percent on his bonus for playing in the 2016 Super Bowl.

P.P.P.S. Taxes also impact choices on how often to box and where to box.

P.P.P.P.S. Needless to say, these principles also apply in other nations.

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It is disappointing that the bureaucrats at the International Monetary Fund routinely advocate for higher taxes and bigger government in nations from all parts of the world (for examples, see here, here, here, here, here, and here).

It is disturbing that the IMF engages in bailouts that encourage bad fiscal policy by governments and reckless lending policies by financial institutions.

And it is disgusting that those IMF bureaucrats get tax-free salaries and are thus exempt from the damaging consequences of those misguided policies.

One set of rules for the peasants and one set of rules for the elite.

The latest example of IMF misbehavior revolves around the bureaucracy’s criticism of recently announced tax cuts in the United Kingdom.

A BBC report by Natalie Sherman and Tom Espiner summarizes the controversy.

The International Monetary Fund has openly criticised the UK government over its plan for tax cuts…In an unusually outspoken statement, the IMF said the proposal was likely to increase inequality and add to pressures pushing up prices. …Chancellor Kwasi Kwarteng unveiled the country’s biggest tax package in 50 years on Friday. But the £45bn cut has sparked fears that government borrowing could surge along with interest rates. …Lord Frost, the former Brexit minister and close ally of Prime Minister Liz Truss, criticised the IMF’s statement. …”The IMF has consistently advocated highly conventional economic policies. It is following this approach that has produced years of slow growth and weak productivity. The only way forward for Britain is lower taxes, spending restraint, and significant economic reform.” …Moody’s credit rating agency said on Wednesday that the UK’s plan for “large unfunded tax cuts” was “credit negative” and would lead to higher, persistent deficits “amid rising borrowing costs [and] a weaker growth outlook”. Moody’s did not change the UK’s credit rating.

So what should be done about the IMF’s misguided interference?

Writing for the Spectator in the U.K., Kate Andrews has some observations about the underlying philosophical and ideological conflict..

…the International Monetary Fund has weighed in on the UK’s mini-Budget, offering a direct rebuke of Liz Truss and Kwasi Kwarteng’s tax cuts. …its spokesperson said…‘Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture’… But this rebuke from the IMF is the kind of battle the Truss camp might be happy to have. …The IMF takes a political stance on inequality, viewing its reduction as a good thing in itself. Truss and Kwarteng reject this premise – summed up in the Chancellor’s statement last Friday when he called for the end of redistribution politics – and think it’s far more important to focus on ‘growing the size of the pie.’ The IMF’s ‘intervention’ is likely to become an example of the ‘Treasury orthodoxy’ that Truss was so vocal about during the leadership campaign: her belief that a left-wing economic consensus will not tolerate any meaningful shake-up of the tax code or supply-side reform.

Truss and Kwarteng are correct to reject the IMF’s foolish – and immoral – fixation on inequality.

All you really need to know is that the IMF publishes research implying it is okay to hurt poor people if rich people are hurt by a greater amount.

Let’s close by addressing whether tax cuts are bad for Britain’s currency and financial markets

Paul Marshall explained the interaction (and non-interaction) of fiscal and monetary policy in a column for the U.K.-based Financial Times.

Since 2010, the G7 policy framework has been one of tight fiscal and loose monetary policy. …This combination of fiscal austerity and monetary largesse has not been a success. Austerity has not prevented government debt ratios steadily climbing to historic highs. …Meanwhile quantitative easing has fuelled asset inflation for the super-rich and has more or less abolished risk pricing in financial markets. And…it has produced inflation which is still out of control. But now the global policy consensus is in the process of pivoting… A distinctive feature of the UK’s fiscal pivot is the emphasis on reducing the burden of tax on work and business. This is sensible. …the bigger problem for Liz Truss’s government is the Bank of England. It seems that the governor, Andrew Bailey, did not get the memo. Our central bank has been behind the curve since inflation first started to rise sharply in 2021. …The Bank of England effectively lost control of the UK bond market last Thursday when it raised interest rates by 50 basis points, instead of the 75bp that the US Federal Reserve and the European Central Bank raised by. Its timidity is now having an impact on both the gilt market and sterling. That is the essential context for the market reaction to the mini-Budget. Once you lose market confidence, it is doubly hard to win it back. …a more muscular stance from the BoE to underpin financial market confidence in the UK, even at the expense of some short-term pain.

He is right.

The Bank of England should be focused on trying to unwind its mistaken monetary policy that produced rising prices. That’s the approach that will strengthen the currency.

And Truss and Kwarteng should continue their efforts for better tax policy so the economy can grow faster.

But better tax policy needs to be accompanied by much-need spending restraint, which is what the United Kingdom enjoyed not only during the Thatcher years, but also under Prime Ministers Cameron and May.

P.S. The IMF also interfered in British politics when it tried to sabotage Brexit.

P.P.S. One obvious takeaway is that the IMF should be eliminated.

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I strongly supported Brexit in part because I wanted the United Kingdom to have both the leeway and the incentive to adopt pro-market policies.

Imagine my disappointment, then, when subsequent Conservative Prime Ministers did nothing (Theresa May) or expanded the burden of government (Boris Johnson).

Where was the reincarnation of Margaret Thatcher? Didn’t the Tory Party understand the need to restrain big government?

Perhaps my prayers have finally been answered. After jettisoning Boris Johnson (albeit for scandal rather than bad policy), the Tories elected Liz Truss to lead the nation.

And she appointed Kwasi Kwarteng to be Chancellor of the Exchequer (akin to U.S. Treasury Secretary). The two of them have just unveiled some major changes in U.K. fiscal policy.

Allister Heath’s editorial for the Telegraph has a celebratory tone.

…the best Budget I have ever heard a British Chancellor deliver, by a massive margin. The tax cuts were so huge and bold, the language so extraordinary, that at times, listening to Kwasi Kwarteng, I had to pinch myself to make sure I wasn’t dreaming, that I hadn’t been transported to a distant land that actually believed in the economics of Milton Friedman and FA Hayek. …The neo-Brownite consensus of the past 20 years, the egalitarian, redistributionist obsession, the technocratic centrism, the genuflections at the altar of a bogus class war, the spreadsheet-wielding socialists: all were blown to smithereens by Kwarteng’s stunning neo-Reaganite peroration. …All the taboos have been defiled: the fracking ban, the performative 45pc tax rate, the malfunctioning bonus cap, the previous gang’s nihilistic corporation tax and national insurance raids. The basic rate of income tax is being cut, as is stamp duty, that dumbest of levies. …Reforms of this order of magnitude should really have happened after the referendum in 2016, or after Boris Johnson became Prime Minister in 2019… Truss..has a fighting chance to save Britain, and her party, from oblivion.

The Wall Street Journal‘s editorial has a similarly hopeful tone while also explaining the difference between good supply-side policies and failed Keynesian demand-side policies.

This is a pro-growth agenda that is very different than the tax-and spend Keynesianism that has dominated the West’s economic policies for nearly two decades. …Mr. Kwarteng axed the 2.5-percentage-point increase in the payroll tax imposed by former Prime Minister Boris Johnson, and canceled a planned increase in the corporate income tax rate to 26% from 19%. …Kwarteng also surprised by eliminating the 45% tax rate on incomes above £150,000. The top marginal rate now will be 40%… A frequent complaint is that there’s no evidence tax cuts for corporations or higher earners will boost demand. Maybe not, but that’s also not the point. Britain doesn’t need a Keynesian demand-side stimulus. It needs the supply-side jolt Ms. Truss is trying to deliver by changing incentives to work and invest. A parallel complaint from the same crowd is that Ms. Truss’s policies—which they just said won’t stimulate demand—will stimulate so much demand the policies will stoke inflation. This has been the experience with debt-fueled fiscal blowouts since the pandemic, but Ms. Truss’s plan is different. She’s not throwing around money to fund consumption. She’s using the tax code to spur production.

The editorial concludes with a key observations.

Britain has become the most important economic experiment in the developed world because Ms. Truss is the only leader willing to abandon a stale Keynesian policy consensus that has produced stagflation everywhere.

Here’s a tweet that captures the current approach, with “liberal” referring to pro-market classical liberalism.

This is the “Singapore-on-Thames” approach that I’ve been promoting for years. Finally!

In a column for Reason, Robert Jackman gives a relatively optimistic libertarian assessment of what to expect from Truss.

…will her arrival in Downing Street bring an end to the big-state, big-spending style of her predecessor? …Within the Westminster village, Truss has long been regarded as a torchbearer for liberty—a reputation that stretches back to her days working at various small-state think tanks. Since entering Parliament in 2010, she has been a member of the Free Enterprise Group… As trade secretary, Truss was responsible for delivering on the good bit of Brexit—jetting around the world to sign tariff-busting trade deals. She was good at it too, quickly securing ambitious agreements with Australia and Japan. …But will Liz Truss’ premiership put Britain back on track to a smaller state? Some things aren’t that simple. …Truss has long been an advocate of relaxing Britain’s punitive planning laws, which would make it easier to build much-needed homes and energy infrastructure.

As you might expect, the analysis from the U.K.-based Economist left much to be desired.

Liz Truss, Britain’s new prime minister, is now implementing Reaganomics…comprising tax cuts worth perhaps £30bn ($34bn) per year (1.2% of gdp)… The fuel that fiscal stimulus will inject into the economy will almost certainly lead the boe to raise interest rates… No matter, say Ms Truss’s backers, because tax cuts will boost productivity. Didn’t inflation fall and growth surge under Reagan? …Ms Truss’s cheerleaders seem to have read only the first chapter of the history of Reaganomics. The programme’s early record was mixed. The tax cuts did not stop a deep recession, yet by March 1984 annual inflation had risen back to 4.8% and America’s ten-year bond yield was over 12%, reflecting fears of another upward spiral in prices. Inflation was anchored only after Congress had raised taxes. By 1987 America’s budget, excluding interest payments, was nearly balanced. By 1993 Congress had raised taxes by almost as much as it had cut them in 1981.

By the way, the article’s analysis of Reaganomics is laughably inaccurate.

Meanwhile, a report in the New York Times, writtten by Eshe Nelson, Stephen Castle and , also has a skeptical tone.

But I’m surprised and impressed that they admit Thatcher’s policies worked in the 1980s.

Britain’s new prime minister, Liz Truss, gambled on Friday that a heavy dose of tax cuts, deregulation and free-market economics would reignite her country’s growth — a radical shift in policy… the new chancellor of the Exchequer, Kwasi Kwarteng, abandoned a proposed rise in corporate taxation and, in a surprise move, also abolished the top rate of 45 percent of income tax applied to those earning more than 150,000 pounds, or about $164,000, a year. He also cut the basic rate for lower earners and cut taxes on house purchases. …It is hard to overstate the magnitude of the policy shift from Mr. Johnson’s government, which just one year ago had announced targeted tax increases to offset its increased public spending… The chancellor’s statement in Parliament on Friday underscored the free-market, small-state, tax-cutting instincts of Ms. Truss, who has modeled herself on Margaret Thatcher, who was prime minister from 1979 to 1990. Thatcher’s economic revolution in the 1980s turned the economy around.

The article includes 11 very worrisome words.

…so far there has been no indication of corresponding spending cuts.

Amen. Tax cuts are good for growth, but their effectiveness and durability will be in question if there is not a concomitant effort to restrain the burden of spending.

Truss and Kwarteng also should have announced a spending cap, modeled on either the Swiss Debt Brake or Colorado’s TABOR.

P.S. In addition to worrying about whether Truss will copy Thatcher’s track record on spending, I’m also worried about her support for misguided energy subsidies.

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Every American school kid presumably learns about the Boston Tea Party and other events that culminated with the United States gaining independence from from the rule of King George III.

Think of it as America’s first tax revolt.

But that’s not the only interesting story regarding taxes and English royalty.

I wrote in both 2017 and 2020 that Prince Harry and Meghan Markle (now the Duke and Duchess of Sussex) were going to suffer some adverse tax consequences by residing in the United States.

The recent death of Queen Elizabeth II gives us another opportunity to comment about tax policy. It seems the royal family has some very nice tax preferences.

For some background, Jyoti Mann reported on the topic for Business Insider.

King Charles III..spent half a century turning his royal estate into a billion-dollar portfolio and one of the most lucrative moneymakers in the royal family business. …Over the past decade, he has assembled a large team of professional managers who increased his portfolio’s value and profits by about 50 percent. …The conglomerate’s holdings are valued at roughly $1.4 billion, compared with around $949 million in the late queen’s private portfolio. These two estates represent a small fraction of the royal family’s estimated $28 billion fortune. …The growth in the royal family’s coffers and King Charles’s personal wealth over the past decade came at a time when Britain faced deep austerity budget cuts. …the Duchy of Cornwall…has funded his private and official spending, and has bankrolled William, the heir to the throne, and Kate, William’s wife. It has done so without paying corporation taxes like most businesses in Britain are obliged to, and without publishing details about where the estate invests its money. …leaked financial documents known as the Paradise Papers revealed that Charles’s duchy estate had invested millions in offshore companies, including a Bermuda-registered business.

Before continuing, I can’t resist making two comments.

First, the United Kingdom has not “faced deep austerity” or “budget cuts.” The most that can be said is that spending “only” grew at the rate of inflation when David Cameron and Theresa May were in charge.

Second, it is not newsworthy that the royal family uses so-called offshore companies. It’s probably safe to say that 99 percent of people with cross-border investments (including people like you and me with IRAs and 401(k)s) benefit from some form of financial interaction with tax-neutral jurisdictions such as Bermuda and the Cayman Islands.

Now let’s peruse a story for the New York Times by Jane Bradley and 

King Charles will not have to pay inheritance tax on the Duchy of Lancaster estate he inherited from the Queen due to a rule allowing assets to be passed from one sovereign to another. Charles automatically inherited the estate, the monarch’s primary source of income… The new king will avoid inheritance tax on the estate worth more than $750 million due to a rule introduced by the UK government in 1993 to guard against the royal family’s assets being wiped out if two monarchs were to die in a short period of time… The clause means that, to help protect its assets, members of the royal family do not have to pay the 40% levy on property valued at more than £325,000 ($377,000) that non-royal UK residents do. …The Queen began voluntarily paying income and capital gains tax on the estate in 1993 and Charles may decide to follow suit.

Let’s focus specifically on the death tax.

Is it unfair for the royal family to benefit from good tax policy (such as no death tax) when other residents of the United Kingdom don’t get the same treatment? The answer is yes, of course.

But the right way to deal with that inequity is for the U.K. to eliminate its death tax, not to extend it to Kings, Queens, and Princes.

Let’s focus, though, on a passage from the article that deserves a lot of attention. We are told that the exemption from the death tax was designed to “guard against the royal family’s assets being wiped out if two monarchs were to die in a short period of time.”

Technically, the assets wouldn’t be wiped out. But that scenario would result in a loss of nearly 65 percent of the family’s wealth.

I’m not expecting anyone to shed many tears about the plight of British royalty.

Instead, I want everyone to think about investors, entrepreneurs, and business owners in the United Kingdom. Is it okay for them to lose 65 percent of their money simply because there are two deaths “in a short period of time”?

The answer is no. The death tax is an evil and destructive tax. That’s true for royalty.

And, notwithstanding predictably bad analysis from the OECD,  it’s true for us peasants as well.

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