Posts Tagged ‘Taxation’

A couple of days ago, I wrote about the new rankings from the World Economic Forum’s Global Competitiveness Report and noted that America’s private sector is considered world class but that our public sector ranks poorly compared to many other developed nations.

To elaborate on the depressing part of that observation, let’s now look at the Tax Foundation’s recently released International Tax Competitiveness Index.

Lots of data and lots of countries. Estonia gets the top score, and deservedly so. It has a flat tax and many other good policies. It’s also no surprise to see New Zealand and Switzerland near the top.

If you’re curious about America’s score, you’ll have to scroll way down because the United States ranks #31, below even Belgium, Spain, and Mexico.

If you look at how the U.S. ranks in the various categories, we have uniformly poor numbers for everything other than “Consumption Taxes.” So let’s be very thankful that the United States doesn’t have a value-added tax (VAT). If we did, even France would probably beat us in the rankings (I hope Rand Paul and Ted Cruz are paying attention to this point).

And if you wonder why some nations with higher top tax rates rank above the U.S. in the “Individual Taxes” category, keep in mind that there are lots of variables for each category. And the U.S. does poorly in many of them, such as the extent to which there is double taxation of dividends and capital gains.

By the way, there is some “good” news. Compared to the 2014 ranking, the United States is doing “better.” Back then, there were only two nations with lower scores, Portugal and France. In the new rankings, the U.S. still beats those two nations, and also gets a better score than Greece and Italy.

But we’re only “winning” this contest of weaklings because the scores for those nations are falling faster than America’s score.

Here’s the 2014-2016 data for the United States. As you can see, we’ve dropped from 54.6 to 53.7.

P.S. The Tax Foundation’s International Tax Competitiveness Index is superb, but I hope they make it even better in the future by adding more jurisdictions. As of now, it only includes nations that are members of the OECD. That’s probably because there’s very good and comparable data for those countries (the OECD pushes very bad policy, but also happens to collect very detailed numbers for its member nations). Nonetheless, it would be great to somehow include places such as Hong Kong, Singapore, Bermuda, and the Cayman Islands (all of which punch way above their weight in the international economy). It also would be desirable if the Tax Foundation added an explicit size-of-government variable. Call me crazy, but Sweden probably shouldn’t be ranked #5 when the nation’s tax system consumes 50.4 percent of the economy’s output (this size-of-government issue is also why I asserted South Dakota should rank above Wyoming in the Tax Foundation’s State Business Tax Climate Index).

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As part of her collection of class-warfare tax proposals, Hillary Clinton wants a big increase in the death tax.

This is very bad tax policy. In a good system, there shouldn’t be any double taxation of income that is saved and invested, especially since that approach means a smaller capital stock (i.e., less machinery, technology, equipment, tools, etc). And every single economic school of thought – even Marxism and socialism – agrees that this means lower productivity for workers and therefore lower wages.

In a must-read column for the Wall Street Journal, Steven Entin of the Tax Foundation elaborates on why the death tax is pointlessly destructive. He starts by explaining that the tax is unfair.

…estate taxes are always double taxation. Estates are built with savings that have already been taxed as income, or soon will be. …The superrich can afford to give away assets during their lives or hire estate planners to help minimize the tax. …The main victims of the death tax are middle-income savers and small-business owners who die before transferring ownership to their children.

And because the tax reduces investment and wages, the revenue gained from imposing the tax is largely offset by lower income tax and payroll tax receipts.

The estate tax…produces so little revenue, only $19 billion last year. But because the tax has recoil effects, even this revenue is illusory. Because the tax reduces the stock of capital, it lowers the productivity of labor and reduces wages and employment. Much of the burden of the tax is shifted to working people. Research suggests that the estate tax depresses wages and employment enough to actually lower total federal revenue over time.

He then reports on some of the Tax Foundation’s analysis of the good things that happen if the tax is repealed.

…to eliminate the estate tax…would raise GDP by 0.7% over 10 years and create 142,000 full-time equivalent jobs. After-tax incomes for the bottom four-fifths of Americans would rise by 0.6% to 0.7%, mainly due to wage growth. …Revenue losses in the first six years would be almost entirely offset by gains later in the decade, with more gains thereafter. Both the public and the government would be net winners.

But he also warns of the bad things that will happen if Hillary’s class-warfare scheme is enacted.

Mrs. Clinton plans to lower the exempt amount to $3.5 million for estates and $1 million for gifts. She would raise the top rate to 45% for assets over $3.5 million, with further increases up to 65% for individual estates above $500 million. …Mrs. Clinton’s plan would lower GDP by 1% over 10 years and cost 194,000 full-time equivalent jobs. After-tax incomes for the bottom four-fifths of Americans would fall by 0.9% to 1%, due to slower wage growth. …the public and the government would be net losers.

So what’s the bottom line?

The revenue numbers cited here also do not take into account increased efforts to avoid the tax. If these imaginative and highly productive people plan ahead to direct their assets to causes they deem worthy, rather than cede their wealth by default to the government, Washington will not see a dime from an estate-tax increase. …Mrs. Clinton’s plan would not so much redistribute wealth as destroy it. Everyone would lose except estate lawyers and life insurers.

Over the years, I’ve shared other research on the death tax, including a recent column on Hillary’s grave-robber plan, as well as my own modest efforts to impact the overall debate in print and on TV.

But my favorite bit of research on the death tax comes from Australia, where repeal of the tax created a natural experiment and scholars found that death rates were affected as successful people lived longer so they could protect family money from the tax collector.

Now there’s research from another natural experiment.

An economist from the University of Chicago produced a study examining a policy change in Greece to determine what happens when taxes are reduced on the transfer of assets. Here’s a bit about her methodology.

I exploit a 2002 tax reform in Greece that reduced succession tax rates for transfers of limited liability companies to family members from 20% to less than 2.4%. …In the quasi-experimental setting made possible by the tax policy change, I employ two different methodologies to measure the effect of this policy change on investment. …by comparing the two groups before and after the tax reform, the analysis disentangles the effect of the identity of the new owner (family or unrelated) from the effect of the succession tax.

And here are her results. As you can see, there’s a notable negative impact on investment.

…estimates reveal a negative effect of transfer taxes on post-succession investment for firms that are transferred within the family. In the presence of higher succession taxes, investment drops from 17.6% of property, plant, and equipment (PPE) the three years before succession to 9.7% of PPE the two years after. This impact of succession taxes on investment is economically large: the implied fall in the investment ratio (0.079) is approximately 40% of the pre-transition level of investment. For those firms, successions are also associated with a depletion of cash reserves, a decline in profitability, and slow sales growth. Note that to the extent that entrepreneurs can plan ahead for the succession and the related tax liability, the estimates I report in the paper provide an underestimate of the true effect of succession taxes.

Even academics who seem to support the death tax for ideological reasons admit that it undermines economic performance, as seen in this study published by the National Bureau of Economic Research.

…aggregate capital and income go up as the estate tax is lowered. When the labor income tax is used to balance the government budget constraints, for given prices, reducing estate taxation does not reduce the rate of return to savings for anyone in the population and still increases the return to leaving a bequest… As a result, aggregate capital goes up a bit more…and so does aggregate output.

By the way, the economists who produced this study constrained their analysis by assuming other taxes would have to be increased to compensate for any reduction in the death tax. To my knowledge, there’s not a single lawmaker who wants to raise other taxes while reducing or eliminating the tax. As such, the results in the above study almost certainly understate the economic benefits of reform.

If you don’t like reading academic studies and dealing with equations and jargon, here’s what you really need to know.

  • Rich people aren’t idiots, or at least the tax advisors they have aren’t idiots.
  • Those upper-income taxpayers have tremendous ability to manage their finance.
  • Rich people (and their smart advisors) figure out how to protect themselves from tax.
  • The death tax is a voluntary tax it can be avoided by people with substantial assets.
  • But the various means of avoidance all tend to result in a less dynamic economy.

In other words, when politicians shoot at rich taxpayers, the rich taxpayers manage to dodge much of the incoming fire, but ordinary people like you and me suffer collateral damage.

Let’s close by shifting from economics to morality.

The death tax is odious in part because it is a pure (in a bad sense) form of double taxation, but it also is bad because the government shouldn’t be imposing double taxation simply because someone dies.

Actually, let’s add one more wrinkle to the discussion. If it’s immoral to impose tax simply because of a death, then it’s doubly immoral to impose such taxes while simultaneously (and hypocritically) taking steps to dodge the tax.

Which is a good description of Hillary’s behavior, as reported by the Washington Examiner.

Bill and Hillary, like most millionaires whose wealth is mostly in housing and liquid assets, have engaged in sophisticated estate planning to avoid the death tax. …the Clintons placed their Chappaqua home — the one that housed the secret servers Hillary used to evade transparency laws — into two separate trusts. For complex reasons, this protects Chelsea from having to pay the estate tax when she inherits the house. …The Clintons also hold five life insurance policies, worth somewhere around $2 million. This is “designed to transfer assets outside of the estate,” one estate planner told Time. Life insurance payouts are generally exempt from death taxes.

Oh, and you probably won’t be surprised to learn that Hillary has close ties to the special interest cronyists who profit from the death tax.

The death tax brings in a paltry sum for Uncle Sam, but it provides a windfall for a couple of tiny segments of the economy: estate planners, and well-funded investors who buy out the family businesses threatened by the death tax. Jeff Ricchetti is a longtime Clinton confidant, a revolving-door corporate lobbyist on K Street, and a donor to all of Hillary Clinton’s campaigns. …Jeff has spent two decades lobbying to preserve and expand the death tax. In 1999, When Jeff cashed out of the Clinton administration, he joined the Podesta Group, co-founded by Clinton’s current campaign manager John Podesta. One client there: the American Council of Life Insurers, where Ricchetti lobbied in favor of taxing inheritances. …Life insurers, such as the members of ACLI and AALU, sell estate-planning products that could become worthless — or at least worth less — if parents were simply able to hand the fruits of their life’s work to their children. That’s why in April, TheTrustAdvisor.com ran a piece headlined “Estate Tax Repeal: Has Hillary Become the Estate Planner’s Best Friend?”

I’m shocked, shocked.

By the way, one of the main practitioners of cronyism is Hillary’s political ally, Warren Buffett.

Buffett advocates the death tax because it has been so very good to him over the years. To fully understand the depth of Buffett’s cynicism and self-interest, let’s take a look at how one might avoid paying the death tax. If you’re a wealthy person and want to steer clear of this tax, you have three options: Set up complicated trust arrangements, which mostly serve to enrich lawyers and merely delay and shift a tax that must eventually be paid; arrange for your estate to make tax-deductible contributions to charitable organizations; or plow your wealth into life insurance before you die. By law, when your heirs are paid the life-insurance disbursement, it’s tax-free. It doesn’t take a genius to see how certain industries could make a tidy profit off these death-tax escape hatches. In fact, some of the most ardent opponents of permanent death-tax repeal are (surprise, surprise) estate lawyers (who set up the trusts), charities (who fear their spigots of money turning off), and the life-insurance lobby (which does all it can to preserve its tax loopholes). Buffett has major investments in companies that sell life insurance. The death tax has helped make him rich while it has made other families poor. What’s sad and ironic is that it takes families with the resources of the Buffetts (and the Hiltons and the Kardashians) to set up the trusts and life-insurance schemes that are necessary to avoid paying the death tax.

Once again, I’m shocked, shocked.

P.S. Our death tax is even more punitive that the ones imposed by left-wing hell-holes such as Greece and Venezuela.

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One (hopefully endearing) trait of being a policy wonk is that I have a weakness for jurisdictional rankings. At least if they’re methodologically sound.

This is why I was so happy a couple of weeks ago when I got to peruse and analyze the 2016 version of Economic Freedom of the World (even if the results for America were rather depressing).

Heck, sometimes I even can’t resist commenting on methodologically unsound rankings, such as the profoundly stupid “Happy Planet Index” that puts despotic hellholes such as Cuba and Venezuela above the United States.

Given my interest in rankings, you can appreciate how excited I am that my colleague at Cato, Chris Edwards, just unveiled the 2016 version of his Fiscal Policy Report Card on America’s Governors and that the Tax Foundation just released its annual State Business Tax Climate Index. It’s sort of like Christmastime for me.

Here’s the big news from Chris’ Report Card. As a Virginia resident, I’m not terribly happy the Governor McAuliffe scores a D (not that his GOP predecessor was any good). It’s also perhaps somewhat newsworthy that Governor Pence earned an A (so he seems committed to smaller government even if the guy he’s paired with doesn’t share the same philosophy).

And here’s the Tax Foundation’s map showing each state’s ranking, with top-10 states in blue and bottom-10 states in light orange.

If you pay close attention, you’ll notice that zero-income-tax states are disproportionately represented among the states with the best scores.

All this is quite interesting (at least to me), but it occurred to me that it might be even more illuminating to somehow meld these two rankings together.

After all, Chris’s Report Card is a measure of whether a state is moving in the right direction or wrong direction while the Tax Foundation is more of a comparative measure of how a state ranks at a given point in time compared to other states.

So I created the following matrix that looks only at the states that received A or F in the Cato Report Card and also were either in the top 10 or bottom 10 of the Tax Foundation Index.

As you might guess, the best place to be is in the top-left portion of the matrix since that shows a state that is both moving in the right direction while also having a very competitive tax system. So kudos to Florida and Indiana (with honorable mention for North Carolina, which received an A in the Cato Report Card but just missed cracking the top 10 in the Tax Foundation Index).

The bad news, if you look at the bottom-left quadrant, is that there are three states with good tax systems but bad governors. South Dakota, Oregon, and Nevada are in strong shape today, but it’s hard to be optimistic about those states preserving their lofty rankings since policy is moving in the wrong direction.

And the worst place to be is the bottom-right quadrant, which means that a state has both a bad tax system and a bad policy environment.

Last but not least, the sad news is that the top-right quadrant is empty, which means there aren’t any bad states moving aggressively in the right direction.

So the bottom line is that American citizens should think about moving to Florida and Indiana. Especially if they live in Vermont, California, or Connecticut.

P.S. It would be even better to move to Monaco, Hong Kong, or the Cayman Islands, but those presumably aren’t very practical options for most of us.

P.P.S. Actually, the best place for an American taxpayer to live is Puerto Rico since it’s a legal tax haven.

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Because of his support for big government, I don’t like Donald Trump. Indeed, I have such disdain for him (as well as Hillary Clinton) that I’ve arranged to be out of the country when the election takes place.

The establishment media, by contrast, is excited about the election and many journalists are doing everything possible to aid the election of Hillary Clinton. In some cases, their bias leads to them to make silly pronouncements on public policy in hopes of undermining Trump. Which irks me since I’m then in the unwanted position of accidentally being on the same side as “The Donald.”

For instance, some of Trump’s private tax data was leaked to the New York Times, which breathlessly reported that he had a huge loss in 1995, and that he presumably used that “net operating loss” (NOL) to offset income in future years.

As I pointed out in this interview, Trump did nothing wrong based on the information we now have. Nothing morally wrong. Nothing legally wrong. Nothing economically wrong.

All that people really need to know is that NOLs exist in the tax code because businesses sometimes lose money (the worst thing that happens to individuals, by contrast, is that we get laid off and have zero income). With NOLs, companies basically get a version of “income averaging” so that they’re taxed on their long-run net income (i.e., total profits minus total losses).

In other words, this is not a controversy. Or it shouldn’t be.

But if you don’t believe me, let’s peruse the pages of The Flat Tax, which was written by Alvin Rabushka and Robert Hall at Stanford University’s Hoover Institution and is considered the Bible for tax reformers.

Here’s what it says about business losses in Chapter 5.

Remember that self-employed persons fill out the business tax form just as a large corporation does. Business losses can be carried forward without limit to offset future profits (assuming your bank or rich relatives will keep lending you money). There is no such thing as a tax loss under the individual wage tax. You can’t reduce your compensation tax by generating business losses. Well-paid individuals who farm as a hobby or engage in other dubious sidelines to shelter their wages from the IRS had better enjoy their costly hobbies; the IRS will not give them any break under the flat tax.

And here’s the business postcard for the flat tax. As you can see, it’s a very simple system based on the common-sense notion that profits equal total receipts minus total expenses.

And it allows “carry-forward” of losses, which is just another term for a company being able to use NOLs in one year to offset profits in a subsequent year.

But it’s not just advocates of the flat tax how hold this view.

A news report for the Wall Street Journal notes that NOLs are very normal in the business world for the simple reason that companies sometimes lose money.

The tax treatment of losses, bound to become a subject of national debate, is a typically uncontroversial feature of the income-tax system. The government doesn’t pay net refunds when business owners lose money, but it lets taxpayers use those losses to smooth their tax payments as they make money. That reflects the fact that “the natural business cycle of a taxpayer may exceed 12 months,” according to a congressional report.

Megan McArdle of Bloomberg also comments on this make-believe controversy.

At issue is the “net operating loss,” an accounting term that means basically what it sounds like: When you net out your expenses against the money you took in, it turns out that you lost a bunch of money. However, in tax law, this has a special meaning, because these NOLs can be offset against money earned in other years. …this struck many people as a nefarious bit of chicanery. And to be fair, they were probably helped along in this belief by the New York Times description of it, which made it sound like some arcane loophole wedged into our tax code at the behest of the United Association of Rich People and Their Lobbyists. …Every tax or financial professional I have heard from about the New York Times piece found this characterization rather bizarre. The Times could have just as truthfully written that the provision was “particularly prized by America’s small businesses, farmers and authors,” many of whom depend on the NOL to ensure that they do not end up paying extraordinary marginal tax rates — possibly exceeding 100 percent — on income that may not fit itself neatly into the regular rotation of the earth around the sun.

I like how she zings the NYT for its biased treatment of the issue.

She also explains why the law allows NOLs and why businesses (including, presumably, Trump’s companies) would prefer to never be in a position to utilize them.

“If someone has a $20 million gain in one year and a $10 million loss in the second year, that person should be treated the same as someone who had $5 million in each of the two years,” says Alan Viard, a tax specialist at the American Enterprise Institute, who like all the other experts, seemed somewhat surprised that this was not obvious. “There are definitely tax provisions narrowly targeted to various industries that you could take issue with,” says Ron Kovacev, a tax partner at Steptoe and Johnson. “The NOL is not one of them.” …Losing $900 million dollars may save you $315 million or so on future or past taxes. But astute readers will have noticed that it is not actually smart financial strategy to lose $900 million in order to get out of paying $315 million to the IRS. Most of us would rather have the other $585 million than a tax bill of $0. …If Trump managed to pay no taxes for years, the most likely way he did this was by losing sums much vaster than the unpaid taxes. This is fair, it is right, it is good tax policy.

In other words, Trump used NOLs, but he would have greatly preferred to avoid the big $916 million loss in the first place.

Ryan Ellis, writing for Forbes, doesn’t suffer fools gladly on this issue.

…political reporters don’t know a damned thing about taxes. …That ignorance was on display in vivid colors over the weekend. We were told that this tricky NOL was some sort of “loophole” that only super-rich bad guys like Donald Trump got to use. We were told that this relieved him of having to pay taxes for 18 years, a laughably arbitrary, made up number that is the tautological output of simple arithmetic and wild assumptions. …It’s not difficult to see how political reporters got played like a fiddle here. Most of them have never actually run a business, much less learned about the tax rules surrounding them.

I especially like that Ryan also nails the NYT for bias, in this case because the reporters used made-up number to imply that he didn’t pay tax for almost two decades.

And Ryan also notes that NOLs are very common (and were even used in 2015 by Trump’s opponent).

…a net operating loss is very common in businesses. As Alan Cole of the Tax Foundation pointed out this morning, about 1 million taxpayers had an NOL in 1995. It results from business deductions exceeding business income in a particular year. …Trump’s not the only presidential candidate this year who once had a big loss on his taxes. In 2015, the Clintons realized a capital loss of nearly $700,000. That will be available in perpetuity to offset capital gains they might incur. Unlike an NOL, a capital loss can slowly be used to offset other income, albeit at a slow $3000 per year net of any other gains offset.

Now that we’ve established that there’s nothing remotely scandalous about NOLs, let’s see whether there are any lessons we can from this kerfuffle.

Let’s return to the Wall Street Journal story cited earlier in this column.

Real-estate developers can generate losses more easily than other taxpayers. …Unlike investors in other businesses, they can use those losses to offset other income. …Bryan Skarlatos, a tax lawyer at Kostelanetz & Fink LLP, said…“Trump appears to have a perfect storm of allowable real-estate losses that can be offset against streams of income from salaries from his companies and royalty fees from the use of his name,” Mr. Skarlatos said. “Most taxpayers who have large real-estate losses don’t have such large steady streams of other ordinary income; they just have losses that may turn into profits in the future when they sell the real estate.”

This doesn’t tell us whether Trump actually did use his NOLs to offset other income, though I’m guessing the answer is yes. And as I speculated in the above interview, I wonder whether the losses were real losses or paper losses.

And others have suggested that Trump actually lost other people’s money and he was able to use their losses to offset some of his income.

I have no idea if that’s even possible, just as I have no idea whether his losses were real.

But I do know that a flat tax would put an end to any possible gamesmanship since it is a cash-flow system (which means it is based on actual transactions that take place, not whether companies use currency).

In a world with a flat tax, Trump would be allowed to “carry forward” losses, but only if they are real. And as explained above, he wouldn’t be able to use those losses to offset income that gets reported on the individual postcard.

So as I argued in the interview, let’s rip up the corrupt and destructive internal revenue code and copy the simple and fair flat tax that is used by Hong Kong.

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If nothing else, Belgian politicians deserve credit for perseverance. One year ago, the nation was considering a “tax shift” that would reduce taxes on labor and increase taxes on consumption.

I pointed out that this didn’t make much sense since it wouldn’t alter the wedge between pre-tax income and post-tax consumption. In other words, the government might not take as much when you earned your income, but it would compensate by taking more when you consumed your income, so there would be no improvement in your living standards and therefore no incentive to be more productive and earn more money.

Now the government in Belgium is considering a different “tax shift.” Here are some excerpts from a report in the Financial Times.

The Belgian government is rolling out a “tax shift” policy that Charles Michel, the country’s 40 year-old prime minister, says is aimed…to support people on low to medium incomes by reducing the taxes and social security charges on labour — some of the highest in Europe — and to make up the shortfall by boosting taxes on capital.

I’m underwhelmed by this approach.

Though let’s start with what’s good. The government should be lowering taxes on work. As the article notes, employees in Belgium are treated worse than medieval serfs, who only had to surrender one-third of their output to the Lord of the Manor.

…according to 2015 OECD data, is that an unmarried Belgian worker without children faced the highest “tax wedge” as a proportion of income of any citizen in the 35-country club. It stood at 55.3 per cent, compared with an average of 35.9 per cent. The burden results from a combination of high social security charges and a 50 per cent tax rate kicking in at a relatively low level — around €38,000.

Here’s one of the charts from the article. As you can see, greedy politicians get the lion’s share of the money when a Belgian worker chooses to earn income.

At the risk of understatement, the overall tax burden in Belgium is stifling.

Here’s another chart, this one showing how long European workers must toil before satisfying the tax demands of their governments.

I don’t know if the methodology is similar to the Tax Freedom Day calculations for the United States, and it’s unclear whether this is just a measure of the tax burden on labor income, or whether it also captures other taxes that workers pay (corporate income tax, value-added tax, excise taxes, etc). But it’s clear than Belgian workers have a terrible system.

Now for the bad news. Belgian politicians want to cut taxes on workers, but they say they want to compensate by imposing higher taxes on saving and investment.

That’s not a good idea since the productivity – and therefore compensation – of workers is very much linked to the amount of machinery, tools, and technology that’s available. So when politicians increase the tax burden on saving and investment, that reduces an economy’s stock of capital, and workers wind up with less pre-tax income than they would have earned otherwise.

Let’s see what Belgium’s government is trying to achieve. Here’s another blurb from the article.

Some changes, including a new financial speculation tax, were driven through last year and there are more to come. One of Mr Michel’s coalition partners, the Flemish Christian Democrats, is even pushing for a French-style wealth tax. …The speculation tax is estimated to bring in only about €20m this year, considerably less than the €34m initially predicted by the government. Also, there is little support for a more comprehensive inheritance tax. To Michel Maus, a tax law professor at Brussels Free University, the government’s efforts so far to increase taxation of capital amount to “window dressing” and “a bit political propaganda”.

I suppose the relative dearth of specific tax hikes on saving and investment is the good news inside the bad news.

Indeed, while the government did impose a tax on “speculation” (and discovered a Laffer Curve-effect when revenues came in below projections), there actually are some proposals to reduce the tax burden on saving and investment. For instance, the government has announced a move to lower the nation’s 33.99 percent corporate tax rate.

Under Minister Van Overtveldt’s current plan, the corporate tax rate would be reduced to 28% in 2017, 24% in 2018 and 20% in 2020, and would ultimately apply to companies of all sizes. At 20%, Belgium’s corporate tax rate would fall just below the EU average and would place the country in a more competitive – but not a leading – position within its peer group. …In addition, the Finance Minister is considering abolishing the Fairness Tax as well as the minimum tax on capital gains on shares, as advocated by the Chamber. The plan also includes a full tax deduction on qualifying dividends received from subsidiaries, as is the case in the Netherlands and Luxembourg, in lieu of the current deduction of 95%.

There are some offsetting tax hikes in this new plan, so this proposal presumably isn’t as good as it sounds, but it’s hard to argue with an initiative that drops the corporate rate by almost 14 percentage points.

So while I don’t like the theoretical concept of a tax shift from labor to capital, the net effect of all the tax changes in Belgium may be positive for the simple reason that the anti-growth part of the shift isn’t happening.

But regardless of what eventually happens, it is unlikely that Belgium will make much long-run progress because the country is burdened by one of the largest public sectors in the world.

Here some data from the OECD on the burden of government spending in Western Europe (and the United States). As you can see, Belgium isn’t as bad as France, but it’s worse than Greece, Sweden, and Italy.

The bottom line is that you can’t have a non-punitive tax system when government is consuming half of what the private sector produces.

So I think I’m semi-happy with what Belgian politicians are doing in the short run (reserving the right to change my mind as more details are unveiled), but I don’t have much long-term hope in the absence of effective reforms to shrink the burden of government spending.

But hope springs eternal. Maybe the government will adopt a Swiss-style spending cap.

P.S. Here’s a story that tells you everything you need to know about Belgium’s bloated public sector.

P.P.S. And if you look at America’s long-run fiscal projections, the problems in Belgium today will be problems in the United States in the not-too-distant future.

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I must be perversely masochistic because I have the strange habit of reading reports issued by international bureaucracies such as the International Monetary Fund, World Bank, United Nations, and Organization for Economic Cooperation and Development.

But one tiny silver lining to this dark cloud is that it’s given me an opportunity to notice how these groups have settled on a common strategy of urging higher taxes for the ostensible purpose of promoting growth and development.

Seriously, this is their argument, though they always rely on euphemisms when asserting that politicians should get more money to spend.

  • The OECD, for instance, has written that “Increased domestic resource mobilisation is widely accepted as crucial for countries to successfully meet the challenges of development and achieve higher living standards for their people.”
  • The Paris-based bureaucrats of the OECD also asserted that “now is the time to consider reforms that generate long-term, stable resources for governments to finance development.”
  • The IMF is banging on this drum as well, with news reports quoting the organization’s top bureaucrat stating that “…economies need to strengthen their fiscal frameworks…by boosting…sources of revenues.” while also reporting that “The IMF chief said taxation allows governments to mobilize their revenues.”
  • And the UN, which has “…called for a tax on billionaires to help raise more than $400 billion a year” routinely categorizes such money grabs as “financing for development.”

As you can see, these bureaucracies are singing from the same hymnal, but it’s a new version.

In the past, the left agitated for higher taxes simply in hopes for having more redistribution.

And they’ve urged higher taxes because of spite and hostility against those with high incomes.

Some folks on the left also have supported higher taxes on the theory that the economy’s performance is boosted when deficits are smaller.

But now, they are advocating higher taxes (oops, excuse me, I mean they are urging “resource mobilization” to generate “stable resources” so there can be “financing for development” in order to “strengthen fiscal frameworks”) on the theory that bigger government is the way to get more growth.

You probably won’t be surprised to learn, however, that these reports from international bureaucracies never provide any evidence for this novel hypothesis. None. Zero. Zilch. Nada. The null set.

They simply assert that governments will be able to make presumably wonderful growth-generating “investments” if politicians can squeeze more money from the private sector.

And I strongly suspect that this absence of evidence is deliberate. Simply stated, international bureaucracies are willing to produce shoddy research (just look at what the IMF and OECD wrote about the relationship between growth and inequality), but there’s a limit to how far data can be tortured and manipulated.

Especially when there’s so much evidence from real scholars that economic performance is weakened when government gets bigger.

Not to mention that most sentient beings can look around the world and look at the moribund economies of nations with large governments (such as France, Italy, and Greece) and compare them with the better performance of places with smaller government (such as Hong Kong, Switzerland, and Singapore).

But if you read the aforementioned reports from the international bureaucracies, you’ll notice that some of them focus on getting more growth in poor nations.

Perhaps, some statists might argue, government is big enough in Europe, but not big enough in poorer regions such as sub-Saharan Africa.

So let’s look at the numbers. Is it true that governments in the developing world don’t have enough money to provide core public goods?

The answer is no.

But before sharing those numbers, let’s look at some historical data. A few years ago, I shared some research demonstrating that countries in North America and Western Europe became rich in the 1800s and early 1900s when the burden of government spending was very modest.

One would logically conclude from this data that today’s poor nations should copy that approach.

Yet here’s the data from the International Monetary Fund on government expenditures in various poor regions of the world. As you can see, the burden of government spending in these areas is two or three times larger than it was in America and other nations that when they made the move from agricultural poverty to middle class prosperity.

The bottom line is that small government and free markets is the recipe for growth and prosperity in all nations.

Just don’t expect international bureaucracies to share that recipe since one of the obvious conclusions is that we therefore don’t need parasitical bodies like the IMF, OECD, World Bank, and UN.

P.S. Unsurprisingly, Hillary Clinton also has adopted the mantra of higher-taxes → bigger government → more growth.

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I’ve previously written about the bizarre attack that the European Commission has launched against Ireland’s tax policy. The bureaucrats in Brussels have concocted a strange theory that Ireland’s pro-growth tax system provides “state aid” to companies like Apple (in other words, if you tax at a low rate, that’s somehow akin to giving handouts to a company, at least if you start with the assumption that all income belongs to government).

This has produced two types of reactions. On the left, the knee-jerk instinct is that governments should grab more money from corporations, though they sometimes quibble over how to divvy up the spoils.

Senator Elizabeth Warren, for instance, predictably tells readers of the New York Times that Congress should squeeze more money out of the business community.

Now that they are feeling the sting from foreign tax crackdowns, giant corporations and their Washington lobbyists are pressing Congress to cut them a new sweetheart deal here at home. But instead of bailing out the tax dodgers under the guise of tax reform, Congress should seize this moment to…repair our broken corporate tax code. …Congress should increase the share of government revenue generated from taxes on big corporations — permanently. In the 1950s, corporations contributed about $3 out of every $10 in federal revenue. Today they contribute $1 out of every $10.

As part of her goal to triple the tax burden of companies, she also wants to adopt full and immediate worldwide taxation. What she apparently doesn’t understand (and there’s a lot she doesn’t understand) is that Washington may be capable of imposing bad laws on U.S.-domiciled companies, but it has rather limited power to impose bad rules on foreign-domiciled firms.

So the main long-run impact of a more onerous corporate tax system in America will be a big competitive advantage for companies from other nations.

The reaction from Jacob Lew, America’s Treasury Secretary, is similarly disappointing. He criticizes the European Commission, but for the wrong reasons. Here’s some of what he wrote for the Wall Street Journal, starting with some obvious complaints.

…the commission’s novel approach to its investigations seeks to impose unfair retroactive penalties, is contrary to well established legal principles, calls into question the tax rules of individual countries, and threatens to undermine the overall business climate in Europe.

But his solutions would make the system even worse. He starts by embracing the OECD’s BEPS initiative, which is largely designed to seize more money from US multinational firms.

…we have made considerable progress toward combating corporate tax avoidance by working with our international partners through what is known as the Base Erosion and Profit Shifting (BEPS) project, agreed to by the Group of 20 and the 35 member Organization for Economic Cooperation and Development.

He then regurgitates the President’s plan to replace deferral with worldwide taxation.

…the president’s plan directly addresses the problem of U.S. multinational corporations parking income overseas to avoid U.S. taxes. The plan would make this practice impossible by imposing a minimum tax on foreign income.

In other words, his “solution” to the European Commission’s money grab against Apple is to have the IRS grab the money instead. Needless to say, if you’re a gazelle, you probably don’t care whether you’re in danger because of hyenas or jackals, and that’s how multinational companies presumably perceive this squabble between US tax collectors and European tax collectors.

On the other side of the issue, critics of the European Commission’s tax raid don’t seem overflowing with sympathy for Apple. Instead, they are primarily worried about the long-run implications.

Veronique de Rugy of the Mercatus Center offers some wise insight on this topic, both with regards to the actions of the European Commission and also with regards to Treasury Secretary Lew’s backward thinking. Here’s what she wrote about the never-ending war against tax competition in Brussels.

At the core of the retroactive penalty is the bizarre belief on the part of the European Commission that low taxes are subsidies. It stems from a leftist notion that the government has a claim on most of our income. It is also the next step in the EU’s fight against tax competition since, as we know, tax competition punishes countries with bad tax systems for the benefit of countries with good ones. The EU hates tax competition and instead wants to rig the system to give good grades to the high-tax nations of Europe and punish low-tax jurisdictions.

And she also points out that Treasury Secretary Lew (a oleaginous cronyist) is no friend of American business because of his embrace of worldwide taxation and BEPS.

…as Lew’s op-ed demonstrates, …they would rather be the ones grabbing that money through the U.S.’s punishing high-rate worldwide-corporate-income-tax system. …In other words, the more the EU grabs, the less is left for Uncle Sam to feed on. …And, as expected, Lew’s alternative solution for avoidance isn’t a large reduction of the corporate rate and a shift to a territorial tax system. His solution is a worldwide tax cartel… The OECD’s BEPS project is designed to increase corporate tax burdens and will clearly disadvantage U.S. companies. The underlying assumption behind BEPS is that governments aren’t seizing enough revenue from multinational companies. The OECD makes the case, as it did with individuals, that it is “illegitimate,” as opposed to illegal, for businesses to legally shift economic activity to jurisdictions that have favorable tax laws.

John O’Sullivan, writing for National Review, echoes Veronique’s point about tax competition and notes that elimination of competition between governments is the real goal of the European Commission.

…there is one form of European competition to which Ms. Vestager, like the entire Commission, is firmly opposed — and that is tax competition. Classifying lower taxes as a form of state aid is the first step in whittling down the rule that excludes taxation policy from the control of Brussels. It won’t be the last. Brussels wants to reduce (and eventually to eliminate) what it calls “harmful tax competition” (i.e., tax competition), which is currently the preserve of national governments. …Ms. Vestager’s move against Apple is thus a first step to extend control of tax policy by Brussels across Europe. Not only is this a threat to European taxpayers much poorer than Apple, but it also promises to decide the future of Europe in a perverse way. Is Europe to be a cartel of governments? Or a market of governments? A cartel is a group of economic actors who get together to agree on a common price for their services — almost always a higher price than the market would set. The price of government is the mix of tax and regulation; both extract resources from taxpayers to finance the purposes of government. Brussels has already established control of regulations Europe-wide via regulatory “harmonization.” It would now like to do the same for taxes. That would make the EU a fully-fledged cartel of governments. Its price would rise without limit.

Holman Jenkins of the Wall Street Journal offers some sound analysis, starting with his look at the real motives of various leftists.

…attacking Apple is a politically handy way of disguising a challenge to the tax policies of an EU member state, namely Ireland. …Sen. Chuck Schumer calls the EU tax ruling a “cheap money grab,” and he’s an expert in such matters. The sight of Treasury Secretary Jack Lew leaping to the defense of an American company when in the grips of a bureaucratic shakedown, you will have no trouble guessing, is explained by the fact that it’s another government doing the shaking down.

And he adds his warning about this fight really being about tax competition versus tax harmonization.

Tax harmonization is a final refuge of those committed to defending Europe’s stagnant social model. Even Ms. Vestager’s antitrust agency is jumping in, though the goal here oddly is to eliminate competition among jurisdictions in tax policy, so governments everywhere can impose inefficient, costly tax regimes without the check and balance that comes from businesses being able to pick up and move to another jurisdiction. In a harmonized world, of course, a check would remain in the form of jobs not created, incomes not generated, investment not made. But Europe has been wiling to live with the harmony of permanent recession.

Even the Economist, which usually reflects establishment thinking, argues that the European Commission has gone overboard.

…in tilting at Apple the commission is creating uncertainty among businesses, undermining the sovereignty of Europe’s member states and breaking ranks with America, home to the tech giant… Curbing tax gymnastics is a laudable aim. But the commission is setting about it in the most counterproductive way possible. It says Apple’s arrangements with Ireland, which resulted in low-single-digit tax rates, amounted to preferential treatment, thereby violating the EU’s state-aid rules. Making this case involved some creative thinking. The commission relied on an expansive interpretation of the “transfer-pricing” principle that governs the price at which a multinational’s units trade with each other. Having shifted the goalposts in this way, the commission then applied its new thinking to deals first struck 25 years ago.

Seeking a silver lining to this dark cloud, the Economist speculates whether the EC tax raid might force American politicians to fix the huge warts in the corporate tax system.

Some see a bright side. …the realisation that European politicians might gain at their expense could, optimists say, at last spur American policymakers to reform their barmy tax code. American companies are driven to tax trickery by the combination of a high statutory tax rate (35%), a worldwide system of taxation, and provisions that allow firms to defer paying tax until profits are repatriated (resulting in more than $2 trillion of corporate cash being stashed abroad). Cutting the rate, taxing only profits made in America and ending deferral would encourage firms to bring money home—and greatly reduce the shenanigans that irk so many in Europe. Alas, it seems unlikely.

America desperately needs a sensible system for taxing corporate income, so I fully agree with this passage, other than the strange call for “ending deferral.” I’m not sure whether this is an editing mistake or a lack of understanding by the reporter, but deferral is no longer an issue if the tax code is reformed to that the IRS is “taxing only profits made in America.”

But the main takeaway, as noted by de Rugy, O’Sullivan, and Jenkins, is that politicians want to upend the rules of global commerce to undermine and restrict tax competition. They realize that the long-run fiscal outlook of their countries is grim, but rather than fix the bad policies they’ve imposed, they want a system that will enable higher ever-higher tax burdens.

In the long run, that leads to disaster, but politicians rarely think past the next election.

P.S. To close on an upbeat point, Senator Rand Paul defends Apple from predatory politicians in the United States.

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