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The Congressional Budget Office just released its new long-run fiscal forecast.

Most observers immediately looked at the estimates for deficits and debt. Those numbers are important, especially since America has an aging population, but they should be viewed as secondary.

What really matters are the trends for both taxes and spending.

Here are the three things that you need to know.

First, America’s tax burden is increasing. Immediately below are two charts. The first one shows that revenues will consume an addition three percentage points of GDP over the next three decades. As I’ve repeatedly pointed out, our long-run problem is not caused by inadequate revenue.

The second of the two charts shows that most of the increase is due to “real bracket creep,” which is what happens when people earn more income and wind up having to pay higher tax rates.

So even if Congress extends the “Cadillac tax” on health premiums and extends all the temporary provisions of the 2017 Tax Act, the aggregate tax burden will increase.

Second, the spending burden is growing even faster than the tax burden.

And if you look closely at the top section of Figure 1-7, you’ll see that the big problems are the entitlements for health care (i.e., Medicare, Medicaid, and Obamacare).

By the way, the lower section of Figure 1-7 shows that corporate tax revenues are projected to average about 1.3 percent of GDP, which is not that much lower than what CBO projected (about 1.7 percent of GDP) before the rate was reduced by 40 percent.

Interesting.

Third, we have our most important chart.

It shows that the United States is on a very bad trajectory because the burden of government spending is growing faster than the private economy.

In other words, Washington is violating my Golden Rule.

And this leads to all sorts of negative consequences.

  • Government consumes a greater share of the economy over time.
  • Politicians will want to respond by raising taxes.
  • Politicians will allow red ink to increase.

The key thing to understand is that more taxes and more debt are the natural and inevitable symptoms of the underlying disease of too much spending.

We know the solution, and we have real world evidence that it works (especially when part of a nation’s constitution), but don’t hold your breath waiting for Washington to do the right thing.

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I wrote five years ago about the growing threat of a wealth tax.

Some friends at the time told me I was being paranoid. The crowd in Washington, they assured me, would never be foolish enough to impose such a levy, especially when other nations such as Sweden have repealed wealth taxes because of their harmful impact.

But, to paraphrase H.L. Mencken, nobody ever went broke underestimating the foolishness of politicians.

I already wrote this year about how folks on the left are demonizing wealth in hopes of creating a receptive environment for this extra layer of tax.

And some masochistic rich people are peddling the same message. Here’s some of what the Washington Post reported.

A group of ultrarich Americans wants to pay more in taxes, saying the nation has a “moral, ethical and economic responsibility” to ensure that they do. In an open letter addressed to the 2020 presidential candidates and published Monday on Medium, the 18 signatories urged political leaders to support a wealth tax on the richest one-tenth of the richest 1 percent of Americans. “On us,” they wrote. …The letter, which emphasized that it was nonpartisan and not to be interpreted as an endorsement of anyone in 2020, noted that several presidential candidates, including Sen. Elizabeth Warren (D-Mass.), Pete Buttigieg and Beto O’Rourke, have already signaled interest in addressing the nation’s staggering wealth inequality through taxation.

I’m not sure a please-tax-us letter from a small handful of rich leftists merits so much news coverage.

Though, to be fair, they’re not the only masochistic rich people.

Another guilt-ridden rich guy wrote for the New York Times that he wants the government to have more of his money.

My parents watched me build two Fortune 500 companies and become one of the wealthiest people in the country. …It’s time to start talking seriously about a wealth tax. …Don’t get me wrong: I am not advocating an end to the capitalist system that’s yielded some of the greatest gains in prosperity and innovation in human history. I simply believe it’s time for those of us with great wealth to commit to reducing income inequality, starting with the demand to be taxed at a higher rate than everyone else. …let’s end this tired argument that we must delay fixing structural inequities until our government is running as efficiently as the most profitable companies. …we can’t waste any more time tinkering around the edges. …A wealth tax can start to address the economic inequality eroding the soul of our country’s strength. I can afford to pay more, and I know others can too.

When reading this kind of nonsense, my initial instinct is to tell this kind of person to go ahead and write a big check to the IRS (or, better yet, send the money to me as a personal form of redistribution to the less fortunate). After all, if he really thinks he shouldn’t have so much wealth, he should put his money where his mouth is.

But rich leftists like Elizabeth Warren don’t do this, and I’m guessing the author of the NYT column won’t, either. At least if the actions of other rich leftists are any guide.

But I don’t want to focus on hypocrisy.

Today’s column is about the destructive economics of wealth taxation.

A report from the Mercatus Center makes a very important point about how a wealth tax is really a tax on the creation of new wealth.

Wealth taxes have been historically plagued by “ultra-millionaire” mobility. …The Ultra-Millionaire Tax, therefore, contains “strong anti-evasion measures” like a 40 percent exit tax on any targeted household that attempts to emigrate, minimum audit rates, and increased funding for IRS enforcement. …Sen. Warren’s wealth tax would target the…households that met the threshold—around 75,000—would be required to value all of their assets, which would then be subject to a two or three percent tax every year. Sen. Warren’s team estimates that all of this would bring $2.75 trillion to the federal treasury over ten years… a wealth tax would almost certainly be anti-growth. …A wealth tax might not cause economic indicators to tumble immediately, but the American economy would eventually become less dynamic and competitive… If a household’s wealth grows at a normal rate—say, five percent—then the three percent annual tax on wealth would amount to a 60 percent tax on net wealth added.

Alan Viard of the American Enterprise Institute makes the same point in a column for the Hill.

Wealth taxes operate differently from income taxes because the same stock of money is taxed repeatedly year after year. …Under a 2 percent wealth tax, an investor pays taxes each year equal to 2 percent of his or her net worth, but in the end pays taxes each decade equal to a full 20 percent of his or her net worth. …Consider a taxpayer who holds a long term bond with a fixed interest rate of 3 percent each year. Because a 2 percent wealth tax captures 67 percent of the interest income of the bondholder makes each year, it is essentially identical to a 67 percent income tax. The proposed tax raises the same revenue and has the same economic effects, whether it is called a 2 percent wealth tax or a 67 percent income tax. …The 3 percent wealth tax that Warren has proposed for billionaires is still higher, equivalent to a 100 percent income tax rate in this example. The total tax burden is even greater because the wealth tax would be imposed on top of the 37 percent income tax rate. …Although the wealth tax would be less burdensome in years with high returns, it would be more burdensome in years with low or negative returns. …high rates make the tax a drain on the pool of American savings. That effect is troubling because savings finance the business investment that in turn drives future growth of the economy and living standards of workers.

Alan is absolutely correct (I made the same point back in 2012).

Taxing wealth is the same as taxing saving and investment (actually, it’s the same as triple- or quadruple-taxing saving and investment). And that’s bad for competitiveness, growth, and wages.

And the implicit marginal tax rate on saving and investment can be extremely punitive. Between 67 percent and 100 percent in Alan’s examples. And that’s in addition to regular income tax rates.

You don’t have to be a wild-eyed supply-side economist to recognize that this is crazy.

Which is one of the reasons why other nations have been repealing this class-warfare levy.

Here’s a chart from the Tax Foundation showing the number of developed nations with wealth taxes from1965-present.

And here’s a tweet with a chart making the same point.

 

P.S. I’ve tried to figure out why so many rich leftists support higher taxes. For non-rich leftists, I cite IRS data in hopes of convincing them they should be happy there are rich people.

P.P.S. I’ve had two TV debates with rich, pro-tax leftists (see here and here). Very strange experiences.

P.P.P.S. There are also pro-tax rich leftists in Germany.

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I’ve argued for many years that a Clean Brexit is the right step for the United Kingdom for the simple reason that the European Union is a slowly sinking ship.

Part of the problem is demographics. Europe’s welfare states are already very expensive and the relative costs will increase dramatically in coming years because of rising longevity and falling birthrates. So I expect more Greek-style fiscal crises.

The other part of the problem is attitudinal. I’m not talking about European-wide attitudes (though that also is something to worry about, given the erosion of societal capital), but rather the views of the European elites.

The notion of “ever closer union” is not just empty rhetoric in European treaties. It’s the ideological preference of senior European leaders, including in many nations and definitely in Brussels (home of the European Commission and the European Parliament).

In practical terms, this means a relentless effort for more centralization.

All policies that will accelerate Europe’s decline.

What’s happening with the taxation of air travel is a good example. Here are some excerpts from a story in U.S. News & World Report.

The Netherlands and France are trying to convince fellow European nations at a conference in The Hague to end tax exemptions on jet fuel and plane tickets… In the first major initiative on air travel tax in years, the conference on Thursday and Friday – which will be attended by about 29 countries – will discuss ticket taxes, kerosene levies and value-added tax (VAT) on air travel. …The conference will be attended by European Union economics commissioner Pierre Moscovici and finance and environment ministers. …The conference organizers hope that higher taxes will lead to changes in consumer behavior, with fewer people flying

The politicians, bureaucrats, and environmental activists are unhappy that European consumers are enjoying lightly taxed travel inside Europe.

Oh, the horror!

A combination of low aviation taxes, a proliferation of budget airlines and the rise of Airbnb have led to a boom in intra-European city-trips. …Research has shown that if the price of air travel goes up by one percent, demand will likely fall by about one percent, according to IMF tax policy division head Ruud De Mooij. He said that in a typical tank of gas for a car, over half the cost is tax…”Airline travel is nearly entirely exempt from all tax… Ending its undertaxation would level the playing field versus other modes of transport,” he said. …Environmental NGOs such as Transport and Environment (T&E) have long criticized the EU for being a “kerosene tax haven”.”Europe is a sorry story. Even the U.S., Australia and Brazil, where climate change deniers are in charge, all tax aviation more than Europe does,” T&E’s Bill Hemmings said. …The EU report shows that just six out of 28 EU member states levy ticket taxes on international flights, with Britain’s rates by far the highest at about 14 euros for short-haul economy flights and up to 499 euros for long-haul business class. …Friends of the Earth says there are no easy answers and that the only way to reduce airline CO2 emissions is by constraining aviation trough taxation, frequent flyer levies and limiting the number of flights at airports.

The only semi-compelling argument in the story is that air travel is taxed at preferential rates compared to other modes of transportation.

Assuming that’s true, it would be morally and economically appropriate to remove that distortion.

But not as part of a money-grab by European politicians who want more money and more centralization.

As you can see from this chart, the tax burden in eurozone nations is almost 50 percent higher than it is in the United States (46.2 percent of GDP compared to 32.7 percent of GDP according to OECD data for 2018).

And it’s lower-income and middle-class taxpayers who are paying the difference.

So here’s a fair trade. European nations (not Brussels) can impose additional taxes on air travel if they are willing to lower other taxes by a greater amount. Maybe €3 of tax cuts for every €1 of additional taxes on air travel?

Needless to say, nobody in Brussels – or in national capitals – is contemplating such a swap. The discussion is entirely focused on extracting more tax revenue.

P.S. There’s some compelling academic evidence that the European Union has undermined the continent’s economic performance. Which is sad since the EU started as a noble idea of a free trade area and instead has become a vehicle for statism.

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When I wrote a few days ago that the Trump tax reform was generating good results, I probably should have specified that some parts of the country are not enjoying as much growth because of bad state tax policy.

As illustrated by my columns about Texas vs California and Florida vs New York, high-tax states are economic laggards compared to low-tax states.

This presumably helps to explain why Americans are voting with their feet by moving to states where the politicians are (at least in practice) less greedy.

Let’s look at some new evidence on the interaction of federal and state tax policy.

Writing for Forbes, Chuck DeVore of the Texas Public Policy Foundation shares data on how and why lower-tax state are out-performing higher-tax states.

Job growth has been running 80% stronger in low-tax states than in high-tax states since the passage of the Tax Cuts and Jobs Act of 2017 in December 2017. Understanding why holds important lessons for policy, economics, and politics. The new tax law scaled back the federal subsidy for high state and local taxes. …As a result of limiting the SALT deduction to $10,000, income tax filers in high-tax states saw a relatively smaller tax cut, losing out on about $84 billion since the tax code was changed. With $84 billion less to invest, the pace of job creation in the 23 high-tax states has slowed relative to the low-tax states, with the data suggesting a shift of almost 400,000 private sector jobs may have occurred.

Here are some of his numbers.

Prior to the tax reform’s enactment, annualized private sector job growth was 1.9% in the low-tax states from January 2016 to December 2017 compared to 1.4% in the high-tax states, giving the low-tax jurisdictions a comparatively modest advantage of 35% more rapid job growth over the 23-month period. Now, 17 months of federal jobs data suggest that the Tax Cuts and Jobs Act has increased the competitive advantage of 27 low-tax states where the average SALT deduction was under $10,000 in 2016 as compared to 23 high-tax taxes with average SALT deductions greater than $10,000. Private sector job growth is now running 80% faster in the low-tax states, 2% annualized compared to 1.1%, up from just a 35% advantage in the prior 23 months. …For California, the lost employment opportunity adds up to 153,000 positions since December 2017… New York’s employment growth was about 128,000 less than might have been the case had the SALT deduction not been capped.

And here’s his data-rich chart.

Based on previous evidence we’ve examined, these numbers are hardly a surprise.

Chuck suggests the right way for high-tax states to respond.

…if political leaders in states accustomed to taxing and spending far more than their more frugal peers wish to participate in higher rates of job creation, they should reform their own fiscal houses, rather than expect their neighbors to subsidize their high-spending ways.

Sadly, this doesn’t appear to be happening.

Politicians is high-tax states such as Illinois and New Jersey are trying to make their already-punitive systems even worse.

Based on what we’ve seen from Greece, that won’t end well.

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I’m a big fan of the Laffer Curve, which is simply a graphical representation of the common-sense notion that punitively high tax rates can result in less revenue because of reductions in the economy-wide level of work, saving, investment, and entrepreneurship.

This insight of supply-side economics is so obviously true that even Paul Krugman has acknowledged its veracity.

What’s far more important, though, is that Ronald Reagan grasped the importance of Art’s message. And he dramatically reduced tax rates on productive behavior during his presidency.

And those lower tax rates, combined with similar reforms by Margaret Thatcher in the United Kingdom, triggered a global reduction in tax rates that has helped boost growth and reduce poverty all around the world.

In other words, Art Laffer was a consequential man.

So it was great news that President Trump yesterday awarded Art with the Presidential Medal of Freedom.

Let’s look at some commentary on this development, starting with a column in the Washington Examiner by Fred Barnes.

When President Trump announced he was awarding the Presidential Medal of Freedom to economist Arthur Laffer, there were groans of dismay in Washington… Their reaction was hardly a surprise. Laffer is everything they don’t like in an economist. He’s an evangelist for tax cuts. He believes slashing tax rates is the key to economic growth and prosperity. And more often than not, he’s been right about this. Laffer emerged as an influential figure in the 1970s as the champion of reducing income tax rates. He was a key player in the Reagan cuts of 1981 that touched off an economic boom lasting two decades. …Laffer, 78, is not a favorite of conventional, predominantly liberal economists. Tax cuts leave the job of economic growth to the private sector. Liberal economists prefer to give government that job. Tax cuts are not on their agenda. Tax hikes are. …His critics would never admit to Laffer envy. But they show it by paying attention to what he says and to whom he’s affiliated. They rush to criticize him at any opportunity. …Laffer was right…about tax cuts and prosperity.

And here are some excerpts from a Bloomberg column by Professor Karl Smith of the University of North Carolina.

Most important, he highlights how supply-side economics provided a misery-minimizing way of escaping the inflation of the 1970s.

President Donald Trump’s decision to award Arthur Laffer the Presidential Medal of Freedom has met with no shortage of criticism… Laffer was a policy entrepreneur, and his..boldness was crucial in the development of what came to be known as the “Supply Side Revolution,” which even today is grossly underappreciated. In the 1980s, the U.S. economy avoided the malaise that afflicted Japan and much of Western Europe. The primary reason was supply-side economics. …Reducing inflation with minimal damage to the economy was the central goal of supply-side economics. …most economists agreed that inflation could be brought down with a severe enough recession. …Conservative economists argued that the long-term gain was worth that level of pain. Liberal economists argued that inflation was better contained with price and income controls. Robert Mundell, a future Nobel Laureate, argued that there was third way. Restricting the money supply, he said, would cause demand in the economy to contract, but making large tax cuts would cause demand to expand. If done together, these two strategies would cancel each other out, leaving room for supply-side factors to do their work. …Laffer suggested that permanent reductions in taxes and regulations would increase long-term economic growth. A faster-growing economy would increase foreign demand for U.S. financial assets, further raising the value of the dollar and reducing the price of foreign imports. These effects would speed the fall in inflation by increasing the supply of goods for sale. In the early 1980s, the so-called Mundell-Laffer hypothesis was put to the test — and it was, by and large, successful.

I’ve already written about how taming inflation was one of Reagan’s great accomplishments, and this column adds some meat to the bones of my argument.

And it’s worth noting that left-leaning economists thought it couldn’t be done. Professor Bryan Caplan shared this quote from Paul Samuelson.

Today’s inflation is chronic.  Its roots are deep in the very nature of the welfare state.  [Establishment of price stability through monetary policy would require] abolishing the humane society [and would] reimpose inequality and suffering not tolerated under democracy.  A fascist political state would be required to impose such a regime and preserve it.  Short of a military junta that imprisons trade union activists and terrorizes intellectuals, this solution to inflation is unrealistic–and, to most of us, undesirable.

It’s laughable to read that today, but during the Keynesian era of the 1970s, this kind of nonsense was very common (in addition to the Samuelson’s equally foolish observations on the supposed strength of the Soviet economy).

The bottom line is that Art Laffer and supply-side economics deserve credit for insights on monetary policy in addition to tax policy.

But since Art is most famous for the Laffer Curve, let’s close with a few additional observations on that part of supply-side economics.

Many folks on the left today criticize Art for being too aggressive about the location of the revenue-maximizing point of the Laffer Curve. In other words, they disagree with him on whether certain tax cuts will raise revenue or lose revenue.

While I think there’s very strong evidence that lower tax rates can increase revenue, I also think it doesn’t happen very often.

But I also think that debate doesn’t matter. Simply stated, I don’t want politicians to have more revenue, which means that I don’t want to be at the revenue-maximizing point of the Laffer Curve.

Moreover, there’s a lot of economic damage that occurs as tax rates approach that point, which is why I often cite academic research confirming that one additional dollar of tax revenue is associated with several dollars (or more!) of lost economic output.

Call me crazy, but I’m not willing to destroy $5 or $10 of private-sector income in order to increase Washington’s income by $1.

The bottom line is that the key insight of the Laffer Curve is that there’s a cost to raising tax rates, regardless of whether a nation is on the left side of the curve or the right side of the curve.

P.S. While I’m a huge fan of Art Laffer, that doesn’t mean universal agreement. I think he’s wrong in his analysis of destination-based state sales taxes. And I think he has a blind spot about the danger of a value-added tax.

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The crown jewel of the 2017 tax plan was the lower corporate tax rate.

I appeared on CNBC yesterday to debate that reform, squaring off against Jason Furman, who served as Chairman of Obama’s Council of Economic Advisers.

Here are a couple of observations on our discussion.

  • Jason Furman thinks it would be crazy to raise the corporate tax rate back to 35 percent. Yes, he wants to rate to be higher, but rational folks on the left know it would be very misguided to fully undo that part of the tax plan. That signifies a permanent victory.
  • Based on his comments about expensing and interest deductibility, he also seems to have a sensible view on properly and neutrally defining corporate income. These are boring and technical issues, but they have very important economic implications.
  • Critics say the lower corporate rate is responsible for big increases in red ink, but it’s noteworthy that the corporate rate was reduced by 40 percent and revenue is down by only 8.7 percent (a possible Laffer-Curve effect?). Here’s the relevant chart from the latest Monthly Budget Report from the Congressional Budget Office.

  • There’s a multi-factor recipe that determines prosperity, so it’s extremely unlikely that any specific reform will have a giant effect on growth, but even a small, sustained uptick in growth can be hugely beneficial for a nation.
  • There’s a big difference between a pro-market Democrat like Bill Clinton and some of the extreme statists currently seeking the Democratic nomination (just like there’s a big difference between Ronald Reagan and some of today’s big-government Republicans).
  • I close the discussion by explaining why “double taxation” is a profound problem with the current tax code. For all intents and purposes, we are punishing the savers and investors who generate future growth.

P.S. This wasn’t addressed in the interview, but I can’t resist pointing out that overall revenues for the current fiscal year have increased 2.2 percent, which is faster than needed to keep pace with inflation. So why has the deficit increased? Because spending has jumped by 5.8 percent. We have a spending problem in America, not a deficit problem. Fortunately, there’s a very practical solution.

P.P.S. It also wasn’t mentioned, but the other crown jewel of tax reform was the restriction on the state and local tax deduction.

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Welcome Instapundit readers! Thanks, Glenn

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Proponents of bigger government sometimes make jaw-dropping statements.

I even have collections of bizarre assertions by both Hillary Clinton and Barack Obama.

What’s especially shocking is when statists twist language, such as when they claim all income is the “rightful property” of government and that people who are allowed to keep any of their earnings are getting “government handouts.”

A form of “spending in the tax code,” as they sometimes claim.

Maybe we should have an “Orwell Award” for the most perverse misuse of language on tax issues.

And if we do, I have two potential winners.

The governor of Illinois actually asserted that higher income taxes are needed to stop people from leaving the state.

Gov. J.B. Pritzker…blamed the state’s flat income tax for Illinois’ declining population. …“The people who have been leaving the state are actually the people who have had the regressive flat income tax imposed upon them, working-class, middle-class families,” Pritzker said. Pritzker successfully got the Democrat-controlled state legislature to pass a ballot question asking voters on the November 2020 ballot if Illinois’ flat income tax should be changed to a structure with higher rates for higher earners. …Pritzker said he’s set to sign budget and infrastructure bills that include a variety of tax increases, including a doubling of the state’s gas tax, increased vehicle registration fees, higher tobacco taxes, gambling taxes and other tax increases

I’ve written many times about the fight to replace the flat tax with a discriminatory graduated tax in Illinois, so no need to revisit that issue.

Instead, I’ll simply note that Pritzker’s absurd statement about who is escaping the state not only doesn’t pass the laugh test, but it also is explicitly contradicted by IRS data.

In reality, the geese with the golden eggs already are voting with their feet against Illinois. And the exodus will accelerate if Pritzker succeeds in killing the state’s flat tax.

Another potential winner is Martin Kreienbaum from the German Finance Ministry. As reported by Law360.com, he asserted that jurisdictions have the sovereign right to have low taxes, but only if the rules are rigged so they can’t benefit.

A new global minimum tax from the Organization for Economic Cooperation and Development is not meant to infringe on state sovereignty…, an official from the German Federal Ministry of Finance said Monday. The OECD’s work plan…includes a goal of establishing a single global rate for taxation… While not mandating that countries match or exceed it in their national tax rates, the new OECD rules would allow countries to tax the foreign income of their home companies if it is taxed below that rate. …”We respect the sovereignty for states to completely, freely set their tax rates,” said Martin Kreienbaum, director general for international taxation at the German Federal Ministry of Finance. “And we restore sovereignty of other countries to react to low-tax situations.” …”we also believe that the race to the bottom is a situation we would not like to accept in the future.”

Tax harmonization is another issue that I’ve addressed on many occasions.

Suffice to say that I find it outrageous and disgusting that bureaucrats at the OECD (who get tax-free salaries!) are tying to create a global tax cartel for the benefit of uncompetitive nations.

What I want to focus on today, however, is how the principle of sovereignty is being turned upside down.

From the perspective of a German tax collector, a low-tax jurisdiction is allowed to have fiscal sovereignty, but only on paper.

So if a place like the Cayman Islands has a zero-income tax, it then gets hit with tax protectionism and financial protectionism.

Sort of like having the right to own a house, but with neighbors who have the right to set it on fire.

P.S. Trump’s Treasury Secretary actually sides with the French and supports this perverse form of tax harmonization.

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