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Posts Tagged ‘Taxation’

Last summer, I provided testimony to the United Nations’ High-Level Panel on Financial Accountability Transparency & Integrity.

I touched on many issues, but my testimony  focused on some core principles of sensible taxation.

Was my testimony effective? Did the bureaucrats at the U.N. incorporate any of my observations into their conclusions?

Nope. I had no impact. Zero. Nada. Zilch.

That’s my self-assessment after reading the report that the U.N.’s FACTI panel just released. Here are some excerpts.

…even before the present crisis, the international financial system was not conducive to directing investment of resources into sustainable development. …States need robust financing to revitalise transformative action to eradicate poverty, reduce inequalities… Mobilisation of public resources, internationally and domestically, can be enhanced… The Panel proposes a Global Pact for Financial Integrity for Sustainable Development… All taxpayers should pay their fair share, including a minimum global corporate income tax rate on profits… Establish an inclusive and legitimate global coordination mechanism at United Nations Economic and Social Council (ECOSOC) to address financial integrity on a systemic level.

The over-arching goal of the U.N. is to empower governments by weakening tax competition.

There were 14 specific recommendations in the report, each with multiple parts.

Here’s the one that deserves a bit of attention.

This policy, if ever enacted, would have all sorts of negative implications.

Here are four obvious concerns.

  1. For starters, no jurisdiction would be able to opt for the best-possible tax system of no income tax. So it would be very bad news for places such as Bermuda, Monaco, and the Cayman Islands.
  2. It also would mean higher taxes in many other places such the report calls for “setting a rate of 20-30% on profits.” So it would be very bad news for places with low rates, such as Ireland, Estonia, and Switzerland.
  3. Eventually it would mean higher taxes for everyone since politicians, once they have the power, would repeatedly raise the “global minimum tax rate” to extract more money from the economy’s productive sector.
  4. And once politicians have the power to set minimum tax rates for corporate taxation, it would merely be a matter of time before they adopted the same approach for the personal income tax.

I’ll close by zooming out to address one of the themes in the report.

Over and over again, it asserts that more tax money (the report repeatedly uses euphemisms such as “robust financing” and “public resources”) will translate into faster economic development.

This is a common theme at the U.N., but there’s never the slightest effort to provide any support for this assertion. No data, no evidence, no research, and no examples. It’s what i call the “magic beans” theory of growth.

As I’ve periodically asked, shouldn’t they provide a case study of this approach ever being successful, either now or at any point in history?

But don’t hold your breath.

Here’s a video that addresses this issue.

P.S. When I read the FACTI report, it reminded me that there’s plenty of waste and fat to cut at the United Nations.

P.P.S. Bureaucrats at the U.N. have asserted that low tax burdens somehow are a violation of human rights. But since those bureaucrats get tax-free salaries, perhaps they should lead by example and surrender a big chunk of their income before coming after the rest of us.

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I’m not a big fan of the Organization for Economic Cooperation and Development. Simply stated, the Paris-based international bureaucracy represents the interests of governments, and that means the OECD often pushes policies that serve the interests of politicians at the expense of taxpayers and consumers.

I’m particularly irked that OECD bureaucrats spend so much time and effort persecuting low-tax jurisdictions. And some of their work on issues such as poverty and inequality is grotesquely dishonest and sloppy.

But there are some good economists at the OECD. They’re apparently not allowed to have any role in policy, much to my dismay, but they occasionally produce very good research studies.

Such as the 2016 study that showed how many European welfare states would enjoy big increases in prosperity if they reduced the burden of government spending.

And the pair of studies that concluded spending caps were the most effective rule for sensible fiscal policy.

Or the study admitting that competition between governments leads to better tax policy.

Today, let’s look at another example of sensible analysis by OECD economists.

In a study published in late 2017, Oguzhan Akgun, Boris Cournède and Jean-Marc Fournier examined how different types of taxes impacted economic performance.

Lo and behold, they found that it’s good to have lower tax rates on businesses and it’s good to have lower tax rates on workers.

The present paper looks at the long-term effects of tax shifts on inequality and output for an unchanged size of government. …This study uses econometric analysis to provide estimates of distributional and output effects that can be expected based on the track record in OECD countries. …The main findings emerging from the analysis are: …Higher marginal effective rates of corporate income taxation are linked with significantly lower long-term output levels. …Greater progressivity in the upper half of the income distribution, in the form of higher tax wedges on above average income earners, is linked with lower long-term output. …taxes on net wealth are found to be associated with lower output levels, in line with the literature on their distortive effects.

These finding are not a surprise, particularly for people who read the Tax Foundation’s research back in 2016.

Here’s the key visual from the OECD study. The top half shows how many nations could enjoy significant gains in disposable income if tax rates were lowered on workers with above-average incomes. The lower half shows how many nations also could enjoy gains in disposable income

The obvious takeaway is that the study shows that Biden’s class-warfare tax agenda will be bad for American competitiveness and American prosperity.

There are many other findings in the study, not all of which I like, and not all of which make sense.

For instance, the authors want us to believe that death taxes may actually have a positive impact on the economy.

Greater reliance on inheritance and gift taxes…appears to be output-enhancing by comparison with other revenue sources.

I realize the study is only claiming that such taxes are less damaging than other taxes, but it still doesn’t make sense since death taxes directly drain capital out of the economy’s productive sector.

The study also look at the impact of various tax changes on “inequality,” leading the authors to give a negative assessment to some tax cuts even if those reforms would increase the well-being of those with lower incomes (thus confirming Margaret Thatcher’s warning that some folks on the left are willing to hurt the poor if the rich are hurt by a greater amount).

I’ll close with two other findings from the study, both of which are more to my liking.

First, we find that consumption taxes (such as the value-added tax) hurt the economy, but not as much as income taxes.

Consumption taxes entail some disincentive effects, which are generally found to be weaker than those of income taxes.

Second, green taxes hurt the poor more than they hurt the rich.

…environmental taxes can increase inequality.

Given all the rich hypocrites on this issue, this doesn’t surprise me. They know they won’t be the main victims.

For what it’s worth, the OECD nonetheless wants a big energy tax on American families (thus confirming once again that there’s a disconnect between the left-leaning political types who are in charge and the professional economists who do real research).

P.S. Even if some OECD economists do good work, American taxpayers should not be subsidizing the group.

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What nation serves as the most powerful example of how statism can wreck an economy and impoverish people?

Those are all good choices, but perhaps Argentina is the best example (or should we say worst example?).

If you go back 100 years, Argentina was one of the world’s richest nations. And, as recently as the late 1940s, it still ranked in the top 10 for per-capita economic output.

But then the nation veered to the left. Whether you call it Peronism or democratic socialism, there was a huge increase in the size and scope of government.

As you might expect, the results were terrible. Argentina since then has been the world’s worst-performing economy.

But things can always get worse.

In an article for National Review, Antonella Marty points out that President Fernandez is doing his part to continue the awful pattern of statism-generated crises in Argentina.

…it was already challenging for Argentines to maintain businesses and overcome the endless regulations and bureaucratic hurdles that comprise everyday life…the government of Alberto Fernández and Cristina Fernández de Kirchner has made matters worse… In brief: …The Argentine economy has been in recession since 2018. …Argentina ranks 126th in the World Bank’s Doing Business index, between Paraguay and Iran. It takes about five months to open a business in Argentina. …Argentina has public debt approaching 90 percent of GDP. …Argentina has one of the highest inflation rates in the world: 36.6 percent over the past year. Every month, wages steadily decline, and every 10 or 12 years, like clockwork, the Argentine peso crashes, diminishing household savings. …Argentine debt still trades at a steep discount, because investors rightfully recognize the dim prospects for a government that limits the creation of wealth through aggressive taxation, price controls, currency regulation, and skyrocketing levels of public spending. Argentina still does not realize the problem that has trapped us in a cycle of repeated crises for decades: the government. …The “solutions” invoked by left-wing Peronists — the progeny of the populist 20th-century president Juan Perón — always involve increased state intervention in the economy. Alberto Fernández has done nothing different. …As always, Argentina cannot solve the problem of big government with more government.

Perhaps the worst policy under Fernandez is the new wealth tax.

In an article for the Washington Post, Diego Laje and Anthony Faiola look at Argentina’s embrace of this destructive levy.

At least as far back as the 1940s, …class conflict has lingered just below the surface of this chronically indebted South American state. To dig itself out of a gaping fiscal hole made worse by the pandemic, Argentina is issuing a clarion call now echoing around the globe: Make the rich pay. …So why not, proponents argue, foist the cost of the epic global recession caused by the pandemic onto those who can most afford it? …Argentina, saddled with crippling debt exacerbated by the pandemic, adopted a one-time special levy on the rich in December, demanding up to 3.5 percent of the total net worth of citizens who hold at least $3.4 million of assets. …Argentina is turning to its wealthiest citizens after having lost the faith of foreign investors, and with little other means to plug financial holes. …fearful Argentines hoarded U.S. dollars, and the government, as it so often has in the past, turned to the printing press to make ends meet. Now Argentina is seeking another major bailout from the IMF… In recent months, Walmart, Latam Airlines, Uber Eats, Norwegian Airlines and Nike have reduced operations in Argentina or left the country. …Argentina crashed from its place at the top of the global wealth chain long ago, in a succession of economic crises, dictatorships and bruising political battles between the ruralistas and the Peronistas. 

The reporters don’t make the obvious connection between Peronist policies and the economy’s decline, but at least readers learn that Argentina hasn’t been doing well.

And the authors deserve credit for acknowledging that there are serious concerns about how wealth taxes can undermine prosperity.

But wealth taxes are notoriously tricky to get right, and they have a history of deeply negative side effects that can seriously undermine their intent. In France, for instance, a long-standing wealth tax, repealed in 2018, was blamed for an increase in tax dodging and the flight of thousands of the country’s richest citizens. …A decade ago, 12 of the world’s most-developed countries had wealth taxes on the books. The number has fallen to three.

I’m tempted to say the big takeaway from today’s column is that wealth taxes are a bad idea.

That’s true, of course, but the bigger lesson we should absorb is that a rich nation can become a poor nation.

Simply stated, if a government imposes enough bad policies – as has been the case in Argentina – then it’s just a matter of time before it declines relative to nations with sensible policies.

Perhaps there’s a lesson there for Joe Biden?

P.S. I sometimes fantasize that Argentina can experience a Chilean-style economic revitalization, but that seems very unlikely since even supposedly right-wing politicians pursue statist policies.

P.P.S. Though there is a small sliver of libertarianism in Argentina.

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When politicians target “the rich” with class-warfare schemes like wealth taxes, it’s often ordinary people that bear the costs.

For a painful example of how this works in the real world, check out the first 42 seconds of this video.

From an economic perspective, this is a story about secondary or indirect effects. Or, as noted in the video, there are unintended consequences.

In most cases, the fundamental problem with class-warfare taxes is that they penalize saving and investment with double taxation. This is bad for workers because there’s a strong link between the level of capital (i.e., machines, tools, technology) and productivity.

And since there’s also a strong link between productivity and pay, this explains why ordinary people generally don’t enjoy much opportunity in societies with spite-driven tax laws.

Now let’s consider the case of the luxury tax, which was part of President George H.W. Bush‘s disastrous 1990 tax increase.

Rather than being a broad tax on saving and investment, it was an excise tax on a group of products (the levy on expensive boats got most of the attention).

Let’s see what actually happened, and we’ll start with some excerpts from this 1993 column in the Washington Post by James Glassman.

Rich people aren’t happy about paying this extra money. Even if they can afford it, they think it’s unfair. And in some cases, they’re refusing to pay it — simply by refusing to buy new boats and planes. Of course, rich people don’t have to buy a new 90-foot Broward… So the federal government doesn’t get the tax money — and, worse, Broward doesn’t sell its yacht and various boat builders get put out of work. As a result, in its first year and a half, the yacht tax raised a pathetic $12,655,000 for the Treasury. …Meanwhile, the tax has contributed to the general devastation of the American boating industry — as well as the jewelers, furriers and private-plane manufacturers that were also targets of the excise tax… What went wrong with the luxury tax was that, in trying to go after the rich guys’ toys, Congress put the toymakers out of business. The rich guys, meanwhile, bought other toys (including foreign-made ones) not covered by the tax; or they bought used toys and refurbished them; or they simply saved the money, waiting to spend it another day.

The government still collected some money from the tax on the “toys,” but it’s also important to understand that it lost money when the “toymakers” lost their jobs.

So there was a Laffer Curve-type effect.

The great, late, Walter Williams opined on this issue more recently. Here are segments of his 2011 column.

Let’s look at what happened when…George H.W. Bush signed the Omnibus Budget Reconciliation Act of 1990 and broke his “read my lips” vow not to agree to new taxes. When Congress imposed a 10 percent luxury tax on yachts, private airplanes and expensive automobiles, Sen. Ted Kennedy and then-Senate Majority Leader George Mitchell crowed publicly about how the rich would finally be paying their fair share of taxes. What actually happened…In the first year, one-third of U.S. yacht-building companies stopped production, and according to a report by the congressional Joint Economic Committee, the industry lost 7,600 jobs. When it was over, 25,000 workers had lost their jobs building yachts, and 75,000 more jobs were lost in companies that supplied yacht parts and material. …Jobs shifted to companies in Europe and the Bahamas.

Walter explicitly explains why the government lost revenue.

The U.S. Treasury collected zero revenue from the sales driven overseas. …Congress told us that the luxury tax on boats, aircraft and jewelry would raise $31 million in revenue a year. Instead, …job losses cost the government a total of $24.2 million in unemployment benefits and lost income tax revenues. The net effect of the luxury tax was a loss of $7.6 million in fiscal 1991. …Why did congressional dreams of greater revenues turn into a nightmare? Kennedy, Mitchell and their congressional colleagues simply assumed that the rich would act the same after the imposition of the luxury tax as they did before and that the only difference would be more money in the government’s coffers. Like most politicians then and now, they had what economists call a zero-elasticity vision of the world, a fancy way of saying they believed that people do not respond to price changes. People always respond to price changes. The only debatable issue is how much and over what period.

And Walter’s analysis also applies to Joe Biden’s proposed tax increases.

It’s quite possible that the government will collect more money if Biden’s fiscal plan is enacted, but not as much as politicians think. More important, there will be lots of collateral economic damage.

Call me crazy, but I don’t want ordinary people to lose jobs simply because greedy politicians want more money so they can try to buy more votes.

P.S. If it’s any consolation, politicians from other nations can be equally foolish and short-sighted. Both France and Italy suffered when governments went after yachts.

P.P.S. You won’t be surprised to learn that pro-tax former Senator John Kerry avoided taxes on his yacht.

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The 21st century has been bad news for proponents of limited government. Bush was a big spender, Obama was a big spender, Trump was a big spender, and now Biden also wants to buy votes with other people’s money.

That’s the bad news.

The good news is that there is still a simple solution to America’s fiscal problems. According to the just-released Budget and Economic Outlook from the Congressional Budget Office, tax revenues will grow by an average of 4.2 percent over the next decade. So we can make progress, as illustrated by this chart, if there’s some sort of spending cap so that outlays grow at a slower pace.

The ideal fiscal goal should be reducing the size of government, ideally down to the level envisioned by America’s Founders.

But even if we have more modest aspirations (avoiding future tax increases, avoiding a future debt crisis), it’s worth noting how modest spending restraint generates powerful results in a short period of time. And the figures in the chart assume the spending restraint doesn’t even start until the 2023 fiscal year.

The main takeaway is that the budget could be balanced by 2031 if spending grows by 1.5 percent per year.

But progress is possible so long as the cap limits spending so that it grows by less than 4.2 percent annually. The greater the restraint, of course, the quicker the progress.

In other words, there’s no need to capitulate to tax increases (which, in any event, almost certainly would make a bad situation worse).

P.S. The solution to our fiscal problem is simple, but that doesn’t mean it will be easy. Long-run spending restraint inevitably will require genuine reform to deal with the entitlement crisis. Given the insights of “public choice” theory, it will be a challenge to find politicians willing to save the nation.

P.P.S. Here are real-world examples of nations that made rapid progress with spending restraint.

P.P.P.S. Switzerland and Hong Kong (as well as Colorado) have constitutional spending caps, which would be the ideal approach.

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I periodically criticize pro-statism stories and columns in outlets such as the New York Times and Washington Post.

But I’ve only written one column specifically on the topic of whether the press is slanted. In that article, I pointed out that media bias rarely is based on lies.

Even when stories are overtly misleading (as is often the case with reports about poverty, for instance), journalists almost always are clever enough to avoid crossing a line to outright dishonesty.

In practice, media bias is largely about what gets covered and what doesn’t.

Media bias very rarely involves dishonesty. Deception yes, but not inaccuracies. It’s almost always about story selection and what gets emphasized.

Today, I want to share an example of this phenomenon.

A left-leaning group called the International Equalities Institute recently published a report claiming that lower tax rates on upper-income taxpayers don’t lead to faster growth.

The London-based group isn’t well known and neither are the two authors (David Hope and Julian Limberg), yet this study received a massive amount of attention.

To cite just a few examples, it got major coverage from the Washington Post.

It received a fawning write-up from CBS.

It was featured by Bloomberg.

Bloomberg liked it so much that there was a second story.

Many other news outlets also publicized the story, in many cases by simply republishing the stories from the above outlets.

Here’s the report from Al Jazeera.

Esquire even ran a puff piece on the study.

Here’s the headline from MSN.

Various CBS local stations recycled the network report.

Here’s an example from Oklahoma.

And an example from North Carolina.

The Gulf News wrote about the study.

And Business Insider also gave it lots of attention.

Even the New York Post featured the study.

The reason this report got so all this attention, in my humble opinion, is that it gave reporters an excuse to advance a pro-statism message.

And that meant writing press releases about the report rather than practicing real journalism. They praised the study as “comprehensive” and “sophisticated,” though presumably none of them know anything about its methodology.

And they certainly didn’t seek out any contrary views.

So allow me to point out a few problems with the Hope-Limberg report. Feel free to read the entire study, but I think these passages fairly summarize the two main arguments (tax cuts help the rich and tax cuts don’t help the economy) in the publication.

…it remains an open empirical question how cutting taxes on the rich affects economic outcomes. In this paper, we use data from 18 OECD countries covering the last fifty years to investigate the effects of major tax cuts for the rich on income inequality, economic growth, and unemployment. …Our results show that…major tax cuts for the rich increase the top 1% share of pre-tax national income in the years following the reform… The magnitude of the effect is sizeable; on average, each major reform leads to a rise in top 1% share of pre-tax national income of 0.8 percentage points. The results also show that economic performance, as measured by real GDP per capita and the unemployment rate, is not significantly affected by major tax cuts for the rich.

Regarding the two arguments, I’m not sure what point Hope and Limberg think they’re making with their first point about lower tax rates leading the rich to earn more income.

At the risk of stating the obvious, that’s one of the main selling points for better tax policy. Supporters of lower tax rates explicitly want entrepreneurs, investors, business owners, and other successful people to have better incentives to earn and report taxable income.

So the Hope-Limberg data actually confirm that lower tax rates on upper-income taxpayers are a great way of getting them to be more productive. Art Laffer would give them an A+ if they were students.

But what about the second argument? Is it true that there’s no positive impact when tax rates are reduced on work, saving, investment, risk-taking, and entrepreneurship?

Let’s examine their conclusions. Here’s the chart showing when selected nations reduced tax rates (in red). Hope and Limberg then calculated whether those countries enjoyed a bump in jobs and growth over the following five years and want us to accept their argument that there was no positive impact.

Since the report doesn’t include the underlying data or the model used to generate the results, we’re supposed to accept their results at face value.

At the risk of being the skunk at the garden party, I’m unconvinced. Hope and Limberg are political scientists rather than economists, but it seems like they overlooked some very important issues.

Most important, why didn’t they factor in the impact of other government policies (trade, regulation, government spending, monetary policy, etc)? Taxation is just one small piece of the economic policy puzzle. Maybe they covered these concerns in their undisclosed model and data, but estimating economic performance by looking solely at tax policy is like trying to figure out the score of a baseball game by just comparing the performance of shortstops.

And there are a couple of other concerns I have, such as why did they pick these 18 countries and ignore other nations? And why not examine economic performance beyond five years?

I’ll conclude by also noting that their study doesn’t pass the smell test.

The bottom line is that better tax policy isn’t some sort of elixir that guarantees prosperity. Especially if other policies in a nation are misguided.

That being said, lower tax rates are better for prosperity than higher tax rates (as illustrated by academic studies from economists). And since even small differences in economic performance can lead to big long-run benefits, the main takeaway is that it’s a good idea to enact policies to expand the economic pie.

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On the rare occasions when I write about the Supreme Court, it’s usually to grouse that the Justices don’t defend the Constitution’s limits on the federal government.

For example, the Court engaged in tortured reasoning to rule in favor of Obamacare even though there’s nothing in Article 1, Section 8, that gives Washington the power to mandate the purchase of health insurance (though that awful decision by Chief Justice John Roberts looks brilliant compared to the even-worse 1942 decision that gave Washington the power to control whether a farmer could grow grain on his own farm to feed his own hogs).

But perhaps the Supreme Court can make up for some past mistakes by accepting – and then properly deciding – a case from New Hampshire.

The Granite State wants to block the government of Massachusetts from imposing taxes on people who live and work in New Hampshire.

For some background on this legal battle, the Wall Street Journal has a new editorial on this topic.

Can a state collect income tax from nonresidents working remotely for in-state businesses? Massachusetts, New York and some other states claim they can, and now New Hampshire is asking the Supreme Court to protect its citizens from this tax grab. …New Hampshire, which imposes no income tax on wages, last fall sued Massachusetts and is asking the Supreme Court to hear its case (N.H. v. Mass.). “Massachusetts has unilaterally imposed an income tax within New Hampshire that New Hampshire, in its sovereign discretion, has deliberately chosen not to impose,” says the Granite State. Under longstanding Supreme Court precedent, states can only collect taxes that are “fairly apportioned” and “fairly related to the services provided by the State” within their borders. …Massachusetts and other states are forcing nonresidents to pay income taxes even though they don’t use public services. …If the Court doesn’t intervene, remote workers who are unfairly taxed by other states will have no recourse for redress beyond biased state tax tribunals. States like California may copy the Massachusetts and New York playbook.

Jeff Jacoby, a columnist for the Boston Globe, argues his state is one the wrong side of this fight.

In April, the Department of Revenue published an “emergency regulation” declaring that any income earned by a nonresident who used to work in Massachusetts but was now telecommuting from out of state “will continue to be treated as Massachusetts source income subject to personal income tax.” For the first time ever, Massachusetts was claiming the authority to tax income earned by persons who neither lived nor worked in Massachusetts. …Massachusetts has indeed injured New Hampshire… It has launched what amounts to an attack on a fundamental aspect of New Hampshire’s sovereign identity — its principled refusal to tax the income of New Hampshire residents earned in New Hampshire. It was one thing for Massachusetts to withhold taxes from New Hampshire residents for income earned within the borders of Massachusetts. With its new tax rule, however, Massachusetts is reaching over the border to extract taxes, thereby undermining a core New Hampshire policy. …the Supreme Court has the power to shut down such overreaching. And now, thanks to New Hampshire, it has the opportunity.

Professor Ilya Somin from George Mason University’s law school elaborates in a column for Reason.

New Hampshire v. Massachusettshas some real merit, and also has important implications for the future of American federalism. …New Hampshire’s motion…in the Supreme Court outlines two theories as to why the Massachusetts rule is unconstitutional: it violates the Dormant Commerce Clause (which prevents states from regulating and taxing economic activity beyond their borders), and the Due Process Clause of the Fourteenth Amendment, which has long been held to bar state taxation of people who neither live nor work within its borders. Both arguments build on one of the bedrock principles of American federalism: that state sovereignty is territorial in nature. States do not have the power to regulate and tax activity beyond their borders. …most of Massachusetts’ arguments rely on the notion that the NH workers in question have close connections to the Massachusetts economy and benefit from interacting with it . Therefore the state claims it has a right to keep taxing them as before. …If Massachusetts prevails…, it could potentially have dire implication for the growing number of people who work as remote employees for firms located in another state. The latter state could tax their income even if they never set foot there. This would also make it much harder for people to “vote with their feet” for states with lower taxes, better public policies, and other advantages. …The “Live Free or Die State” deserves to win this important case.

The above columns mostly focus on the legal aspects of the case.

From my perspective, I’m more concerned about upholding the principle that the economic powers of governments should be constrained by borders.

That’s the reason why I defend so-called tax havens, even when that leads to abuse (government officials engaging in everything from name calling to legal threats). Simply stated, high-tax nations shouldn’t have the right to tax economic activity that occurs inside the borders of low-tax jurisdictions.

After all, if we want to constrain “Goldfish Government,” taxpayers need some ability to escape oppressive tax regimes.

The bottom line is that the Supreme Court should take this opportunity to limit the Bay State’s greedy politicians.

P.S. This case is partly a fight between proponents of territorial taxation (the good guys) and proponents of extraterritorial taxation (the bad guys).

P.P.S. The Supreme Court unfortunately did recently rule on the wrong side of a case involving extraterritorial taxation.

P.P.P.S. If you want a practical example of what this means, read this column about the taxation of successful Olympic athletes.

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I’ve shared three reasons why Biden’s tax plan is misguided (the tax code is biased against rich taxpayers, the tax hike would have Laffer-Curve implications, and it would saddle America with the world’s highest corporate tax burden).

For Part IV of the series, let’s explain why every piece of his plan will backfire.

There are three main arguments for higher taxes, though I don’t find any of them convincing.

  1. Spite and envy against successful entrepreneurs, investors, innovators, and business owners.
  2. Bringing more money to Washington to finance a larger burden of government spending.
  3. Bringing more money to Washington to ostensibly lower the burden of deficits and debt.

For what it’s worth, Biden’s proposed spending increases are far larger than his proposed tax increases, so we can rule out reason #3.

So we have to ask ourselves whether reasons #1 and #2 are compelling.

And when considering those two arguments, we also should ask whether those reasons are sufficiently compelling to justify throwing millions of Americans into unemployment and reducing the nation’s competitiveness.

The answer should be a resounding no.

In a column in the Wall Street Journal from last July, Philip DeMuth elaborated on the damage that would be inflicted by Biden’s class-warfare agenda.

Mr. Biden has proposed to reinstate the Obama tax rates for top earners while simultaneously imposing an unlimited 12.4% Social Security payroll tax on earnings over $400,000. …Mr. Biden proposes to eliminate the capital gains reset to fair market value at death. For long-term holdings, much of that gain is merely inflation, created by the government’s failure to maintain price stability, so this is effectively a tax on a tax. The remaining gains are usually from corporate earnings, which were already taxed once, when they came in the door. It will be difficult to keep your business or farm in the family if the Biden scheme forces it to be liquidated to pay the death taxes. …If a President Biden has his way, the top capital-gains tax rate will be 39.6%—the same as for ordinary income. This could be a triple whammy: cutting the estate tax exemption in half, eliminating the capital gains reset to fair market value, and then doubling the capital-gains tax rate. A small step for the government, a giant loss for the American family. …The former vice president’s ambitious spending programs would more than offset any new revenue from his tax proposals. …This isn’t a debate between growing the pie vs. redistributing the pie; it is about everyone settling for a smaller pie.

The final two sentences deserve extra attention.

First, nobody should be deluded that tax increases will be used to reduce red ink. Yes, Biden is proposing to collect a lot more money, but he’s proposing about $2 of new spending for every $1 of projected tax revenue.

Brian Riedl’s Chartbook has the grim details on Biden’s spending agenda.

Second, the point about “growing the pie” is critically important since even a very small reduction in long-run growth will have a surprisingly large impact on household finances within a few decades.

The bottom line is that living standards in the United States are significantly higher than living standards in Europe, in large part because fiscal burdens are not as onerous in America.

Biden’s plan to make America more like France, Italy, and Greece is not a good idea.

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After November’s election, I figured we would have gridlock. Biden would propose some statist ideas, but they would be blocked by Republicans in the Senate.

All things considered, not a bad outcome.

But Democrats won the run-off elections yesterday for both Georgia Senate seats, which means they now have total control of Washington.

And that means, as I recently warned, a much bigger threat that Biden’s proposed tax increases may get enacted.

That won’t be good news for America’s economy or American competitiveness.

Today, let’s focus on the biggest tax increase that the President Elect is proposing.

In an article for National Review, Joseph Sullivan writes about the adverse impact of Biden’s increase in the corporate tax rate.

Biden’s corporate-tax proposal is remarkable. …If the U.S. adopted Biden’s proposed federal tax rate, its overall corporate-tax rate would not be “in line” with the rest of the G7. Assuming U.S. state and local corporate taxes stayed the same, Biden’s proposal would result in nearly the highest overall corporate-tax rate in the G7, according to data from the OECD. The U.S. would be tied with France. …The average overall corporate rate among the G7 has fallen to 25 percent… With the G7 average trending in one direction, Biden would move the U.S. in the opposite direction.

In other words, while the Biden team claims that a higher corporate tax won’t be too damaging because it will be similar to the rate in other major nations, the U.S. actually will be tied with France once you include the impact of state corporate tax burdens.

Here’s the chart included with the article.

And don’t forget that there are many other economies where the corporate tax rate is well below the G7 average.

The bottom line is that the United States currently ranks only #19 out of 35 nations in the Tax Foundation’s competitiveness ranking for OECD nations.

The good news is that being #19 is much better than being #31, which is where the U.S. was in 2016.

The bad news is that Biden wants to undo much of the 2017 reform, as well as impose other tax increases. And that means a much lower competitiveness score in the future.

Which ultimately means lower wages for American workers.

P.S. Although the proposed increase in the corporate rate is theoretically the biggest revenue raiser in Biden’s tax plan, I will safely predict that it won’t raise nearly as much revenue as projected by static revenue estimates. I wasn’t able to educate Obama on this issue, and I’m even less hopeful of getting through to Biden.

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In an interview with Fox Business last week, I touched on three policies (easy money from the Fed, Biden’s class-warfare tax agenda, and the ever-increasing burden of federal spending) that create risks for the economy in 2021.

I didn’t have a chance to elaborate in the interview, but it’s worth noting that Biden will inherit two of the aforementioned problems.

Trump has been profligate with our money, and he was that way even before the coronavirus became an excuse to open the budgetary spigot. Moreover, he was just like Obama in pressuring the Federal Reserve for Keynesian-style monetary policy.

Unfortunately, there’s no reason to think Biden will try to reverse those mistakes.

Indeed, he wants expand the burden of federal spending. And, regarding monetary policy, appointing Janet Yellen as Secretary of Treasury certainly suggests he is comfortable with the current approach.

And to make matters worse, he definitely wants a more punitive tax system. We will shortly learn whether Democrats take control of the Senate, which presumably would give Biden more leeway to enact his class-warfare tax agenda.

As I said in the interview, that would create economic headwinds.

P.S. I mentioned in the interview that we have “three Americas” with regards to coronavirus. I’m not sure I was completely clear, so here’s what I was trying to get across.

  1. Tourism-reliant states – They are going to be in bad shape until coronavirus is in the rear-view mirror and people feel comfortable with traveling and socializing.
  2. Lock-down states – They have higher unemployment rates because more businesses are shut down.
  3. Laissez-faire states – These are the states that generally allow businesses to remain open and have lower unemployment rates.

For what it’s worth, I think it’s best to let businesses stay open and to allow them and their customers to assess safety risks. It will be interesting to see whether any link is discovered between state policy and coronavirus rates.

P.P.S. At the risk of over-simplification, bad fiscal policy erodes the economy’s long-run growth rate. Bad monetary policy, by contrast, is what causes economic volatility and downturns.

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I don’t like higher taxes, whether looking at levies on income, capital gains, payroll, death, or consumption. But if asked to identify the worst way of hiking taxes, the wealth tax might lead the list because of the economic damage caused per dollar collected.

If you don’t want to spend two minutes watching the video, which is excerpted from an online debate organized by my left-leaning friends at TaxCOOP, everything I said can be boiled down to the following four points.

  1. A wealth tax might reduce inequality, but only because the rich would suffer even greater losses than the poor.
  2. Punishing saving and investing is a bad idea since all economic theories agree capital formation is key to long-run prosperity.
  3. A wealth tax is a huge tax increase on saving and investment, perhaps equal to a 50 percent or 100 percent marginal tax rate.
  4. A wealth tax would be an administrative nightmare, requiring a bigger IRS, since many assets are difficult to measure.

I first addressed the issue back in 2012 and 2014, but I’m now writing more often about the wealth tax because it’s evolved from being a bad idea to being a real threat.

Joe Biden didn’t include a wealth tax in his class-warfare campaign manifesto, but Bernie Sanders and Elizabeth Warren both pushed for the idea. And there are plenty of other Democrats in Congress who also support this punitive levy.

So let’s add to our arguments.

In a report for the Manhattan Institute, Allison Schrager and Beth Akers summarize why a wealth tax is misguided.

Wealth taxes are inefficient and ineffective because wealth is inherently more difficult to measure. Privately held companies, for example, are not traded in public markets, which means that there are no stock prices by which one can objectively gauge their value. Also, financial assets can be hidden or moved abroad with the click of a mouse or converted into other assets that are hard to value. A dozen European countries had a wealth tax in 1990, but most abandoned them because they were ineffective and expensive to administer. In part, the taxes failed to raise much revenue because wealthy individuals easily moved their assets across borders to avoid taxation. …Wealth taxes distort behavior in a way that is harmful to economic growth and national prosperity. By taking a fraction of people’s wealth each year, the tax reduces the return to investing and discourages saving. This can reduce growth because investing and capital accumulation are critical to innovation. …think of it as a tax on capital income. And when you put the tax in income terms, 2% can be enormous. For example, if your assets return 4%, a 2% wealth tax is equivalent to a 50% tax on capital income! 

Writing for National Review, Philip Cross highlights why a wealth tax is economic malpractice.

The temptation to adopt a wealth tax will grow in the aftermath of record budget deficits resulting from the pandemic-induced recession. …However, the case for a wealth tax rests on questionable or unfounded assumptions. …Proponents argue that wealth taxes generate substantial net revenues… However, Europe’s experiment with wealth taxes yielded little revenue. …wealth taxes raised only 1.0 percent of GDP in Spain and Switzerland, 0.4 percent in Norway, and 0.2 percent in France in 2017, not enough to significantly affect either government finances or wealth distribution. As a result, most European nations abandoned wealth taxes years ago. …A wealth tax is rife with administrative problems because it creates the incentive to minimize reported wealth. …Besides, taxpayers can easily circumvent a wealth tax. Canada’s former Prime Minister Jean Chretien warned that “there is nothing more nervous than a million dollars — it moves very fast, and it doesn’t speak any language.” …Compounding the mobility of capital is the willingness of people to move to avoid or minimize taxes. One study of estate taxes found that 21.4 percent of the 400 richest Americans moved from states levying an estate tax to a state without one, while only 1.2 percent did the reverse. …A wealth tax also distorts economic incentives, encouraging consumption while penalizing the savings and investments that foster higher long-term growth. This is especially true when wealth taxes are layered on top of taxes on the capital income that wealth generates.

Even folks who might otherwise be sympathetic are throwing cold water on the idea of a wealth tax.

In a column for Bloomberg, Ferdinando Giugliano points out that it would be foolish to impose big taxes on coronavirus-weakened economies.

A growing number of economists are recommending a one-off wealth tax… In its latest World Economic Outlook, the International Monetary Fund has…recommended higher taxes on richer individuals — including taxing high-end property, capital gains and wealth — to reduce public debt. …I can see why a government would want to introduce a one-off levy on the rich after an extraordinary shock such as a pandemic or a war. …The main problem right now is that it’s too soon to be talking about a wealth tax. …A wealth tax would simply depress spending at a time of shrinking economic output. …There will be a time for redistribution. But…governments must focus on…growth now — and come back to that wealth tax later.

Mr. Giugliano is wrong, of course, to imply or think that there’s ever a good time for a wealth tax.

And he’s also wrong to make the Keynesian argument (that a wealth tax would depress spending), when the correct argument is that it would depress savings and investment, which then leads to foregone wages and lower living standards.

But I wanted to cite his column largely to give me an excuse to criticize the International Monetary Fund.

It galls me that a bunch of bureaucrats recommend tax increases on the rest of us – particularly since they are not only lavishly compensated, but also because they get tax-free salaries.

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In a new documentary film, Race to the Bottom, I had an opportunity to pontificate briefly about corporate tax and the Laffer Curve.

At the risk of understatement, I represented a minority viewpoint in the documentary. Most of the people interviewed had a negative view of tax competition, considering it to be (as suggested by the title) a “race to the bottom.”

By contrast, I view tax competition as a way of constraining the “stationary bandit” so that we don’t wind up with “goldfish government.”

For purposes of today’s column, though, I want to focus on the narrower issue of the relationship between corporate tax rates and corporate tax revenue.

In the above video, I asserted that lower rates did not result in lower revenue. Indeed, I even made the bold statement that revenues increased.

Is that correct?

Fortunately, I don’t need to do any elaborate calculations to prove my point. I’ll simply direct readers to the work of two left-leaning international bureaucracies.

Back in 2017, I cited an article form the International Monetary Fund that included a graph clearly illustrating that the drop in tax rates has not been accompanied by a drop in tax revenue.

This was a remarkable admission considering that the article argued in favor of higher tax burdens.

Likewise, last year I cited a study from the Organization for Economic Cooperation and Development that also acknowledged that falling tax rates on companies did not translate into lower revenues.

Given that the OECD has a big project to increase business tax burdens, that also was a startling admission.

None of this means, by the way, that lower rates always lead to more revenue.

Indeed, most tax cuts cause revenue to decline (though not as much as predicted by static estimates).

The bottom line is that lower tax rates are good for economic performance and my friends on the left shouldn’t get too worried about disappearing tax revenue.

P.S. There’s also some 2017 OECD data and 2018 OECD data about business tax rates and business tax revenues.

P.P.S. Earlier this year, I cited OECD data that also included personal income tax rates and tax revenue.

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Public finance experts sometime differ in how to describe a value-added tax.

  • Is it a hidden form of a national sales tax, imposed at each stage of the production process?
  • Is it a hidden withholding tax on income, imposed at each stage of the production process?

Both answers are actually correct. The VAT is both a tax on consumption and a tax on income because – notwithstanding its other flaws – it has the right “tax base.”

In other words, like the flat tax, a VAT taxes all economic activity, but only one time (i.e., no double taxation of income that is saved and invested). And it usually has a single rate, which is another feature of a flat tax.

That’s why a VAT (in theory!) would be acceptable if it was used to finance the complete abolition of the income tax.

But that’s not a realistic option. Heck, it’s not even an unrealistic option.

Instead, many politicians in the United States want to keep the income tax and also impose a VAT so they can finance a bigger burden of government – which is exactly what’s been happening in Europe.

Unfortunately, they’re getting some support from the American Enterprise Institute. Alan Viard, a resident scholar at AEI, has a new column urging the adoption of a VAT.

Let’s review what he wrote and explain why he’s wrong.

The U.S. faces a large long-term imbalance between projected federal tax revenue and federal spending… To narrow the fiscal imbalance, we should follow the lead of 160 other countries by adopting a value-added tax (VAT), a consumption tax that is economically similar to a retail sales tax. …Adopting a VAT would significantly curb the debt buildup.

I’ve never been impressed with the argument that the U.S. should adopt a policy simply because other nations have done the same thing.

The United States is much richer than other countries in large part because we haven’t replicated their mistakes. So why start now?

But let’s deal with Viard’s assertion that a VAT would “significantly curb the debt buildup.”

I recently showed the opposite happened in Japan. They adopted a VAT (and have repeatedly increased the VAT rate), but debt has increased.

But I think the strongest evidence is from Europe since we have several additional decades of data. Those nations started imposing VATs in the late 1960s and they now all have very high VAT rates.

And what’s happened to debt?

Well, as you can see from the chart, big increases in the tax burden were matched by even bigger increases in government debt.

The moral of the story is that Milton Friedman was right when he warned that, “History shows that over a long period of time government will spend whatever the tax system raises plus as much more as it can get away with.”

So why would Viard support a VAT when the evidence overwhelmingly shows that a big tax increase will worse a nation’s fiscal outlook?

He argues that a VAT would be the least-worst way to finance bigger government.

Although tax increases on the affluent place the burden on those with the most ability to pay, they impede long-run economic growth by penalizing saving and investment and distorting business decisions. The economic costs become larger as tax rates are pushed higher. …The VAT is more growth-friendly than high-income tax increases because it does not penalize saving and investment and poses fewer economic distortions.

He’s right that a VAT doesn’t do as much damage as class-warfare tax, but he’s wildly wrong to assert that it is “growth-friendly.”

Simply stated, a VAT will drive a further wedge between pre-tax income and post-tax consumption. That not only will discourage work. It also will discourage saving and investment.

The only positive thing to say is that a VAT doesn’t discourage those good things as much as some other types of tax increases.

But that’s sort of like saying that it’s better to lose your hand in an accident instead of losing your entire arm. Call me crazy, but I think the best outcome is to avoid the accident in the first place.

In other words, the bottom line is that we shouldn’t have any tax increase. Especially since 100 percent of America’s fiscal problem is the consequence of excessive government spending.

I’ll close by debunking the notion that a VAT is a simple tax.

As you can see from this European map, VATs can impose huge complexity burdens on businesses.

Yes, the map shows that some nations have relatively simple VATs, but American politicians already have shown with the income tax that they can’t resist turning a tax system into a Byzantine nightmare. Of course they would do the same with the VAT, creating special loopholes and penalties to please their donors.

P.S. Here’s my video from 2009, which explains how a VAT works and why it would be a bad idea.

Everything I said back then is even more true today.

P.P.S. The clinching argument is that one of America’s best presidents opposed a VAT and one of America’s worst presidents supported a VAT. That tells you everything you need to know.

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

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In Part I of this series, I expressed some optimism that Joe Biden would not aggressively push his class-warfare tax plan, particularly since Republicans almost certainly will wind up controlling the Senate.

But the main goal of that column was to explain that the internal revenue code already is heavily weighted against investors, entrepreneurs, business owners and other upper-income taxpayers.

And to underscore that point, I shared two charts from Brian Riedl’s chartbook to show that the “rich” are now paying a much larger share of the tax burden – notwithstanding the Reagan tax cuts, Bush tax cuts, and Trump tax cuts – than they were 40 years ago.

Not only that, but the United States has a tax system that is more “progressive” than all other developed nations (all of whom also impose heavy tax burdens on upper-income taxpayers, but differ from the United States in that they also pillage lower-income and middle-class residents).

In other words, Biden’s class-warfare tax plan is bad policy.

Today’s column, by contrast, will point out that his tax increases are impractical. Simply stated, they won’t collect much revenue because people change their behavior when incentives to earn and report income are altered.

This is especially true when looking at upper-income taxpayers who – compared to the rest of us – have much greater ability to change the timing, level, and composition of their income.

This helps to explain why rich people paid five times as much tax to the IRS during the 1980s when Reagan slashed the top tax rate from 70 percent to 28 percent.

When writing about this topic, I normally use the Laffer Curve to help people understand why simplistic assumptions about tax policy are wrong (that you can double tax revenue by doubling tax rates, for instance). And I point out that even folks way on the left, such as Paul Krugman, agree with this common-sense view (though it’s also worth noting that some people on the right discredit the concept by making silly assertions that “all tax cuts pay for themselves”).

But instead of showing the curve again, I want to go back to Brian Riedl’s chartbook and review his data on of revenue changes during the eight years of the Obama Administration.

It shows that Obama technically cut taxes by $822 billion (as further explained in the postscript, most of that occurred when some of the Bush tax cuts were made permanent by the “fiscal cliff” deal in 2012) and raised taxes by $1.32 trillion (most of that occurred as a result of the Obamacare legislation).

If we do the math, that means Obama imposed a cumulative net tax increase of about $510 billion during his eight years in office

But, if you look at the red bar on the chart, you’ll see that the government didn’t wind up with more money because of what the number crunchers refer to as “economic and technical reestimates.”

Indeed, those reestimates resulted in more than $3.1 trillion of lost revenue during the Obama years.

I don’t want the politicians and bureaucrats in Washington to have more tax revenue, but I obviously don’t like it when tax revenues shrink simply because the economy is stagnant and people have less taxable income.

Yet that’s precisely what we got during the Obama years.

To be sure, it would be inaccurate to assert that revenues declined solely because of Obama’s tax increase. There were many other bad policies that also contributed to taxable income falling short of projections.

Heck, maybe there was simply some bad luck as well.

But even if we add lots of caveats, the inescapable conclusion is that it’s not a good idea to adopt policies – such as class-warfare tax rates – that discourage people from earning and reporting taxable income.

The bottom line is that we should hope Biden’s proposed tax increases die a quick death.

P.S. The “fiscal cliff” was the term used to describe the scheduled expiration of the 2001 and 2003 Bush tax cuts. According to the way budget data is measured in Washington, extending some of those provisions counted as a tax cut even though the practical impact was to protect people from a tax increase.

P.P.S. Even though Biden absurdly asserted that paying higher taxes is “patriotic,” it’s worth pointing out that he engaged in very aggressive tax avoidance to protect his family’s money.

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During the campaign, Joe Biden proposed a massive tax increase, far beyond what either Barack Obama or Hillary Clinton put forth when they ran for the White House.

Some people speculate that Biden isn’t actually that radical, and that his class-warfare agenda was simply a tactic to fend off Bernie Sanders, so it will be interesting to see how much of his political platform winds up as actual legislative proposals in 2021.

That being said, we can safely assume three things.

  1. Biden will propose higher taxes.
  2. Those tax increases will target upper-income taxpayers such as entrepreneurs, investors, and business owners.
  3. Those tax increases will be a very bad idea.

The main argument that Biden and his supporters will use to justify such a plan is that “rich” taxpayers are not paying their fair share.

More specifically, we’ll be told that upper-income households are not pulling their weight thanks to the cumulative impact of the Reagan tax cuts, the Bush tax cuts, and the Trump tax cuts.

There’s just one problem with this argument. As shown by this multi-decade data from Brian Riedl’s chartbook, it’s wildly, completely, and utterly inaccurate. The richest 20 percent are now shouldering a much greater share of the tax burden.

Every other group, by contrast, is now paying a smaller share of the tax burden.

Some folks on the left assert that the above chart is misleading. They say the chart merely shows that the rich have been getting richer and everyone else is falling behind.

The solution, they argue, is to catch up with the rest of the world by making the tax system more “progressive.”

Their assertions about income trends are wrong, but let’s leave that for another day and focus on so-called progressivity.

Once again, Riedl’s chartbook is the go-to source. As shown in this chart, it turns out that rich people pay a higher share than their counterparts in every other developed nation.

Please notice, by the way, the additional explanation in the lower-left portion of the chart, The numbers displayed do not include the value-added taxes that are imposed by every other nation, which are regressive or proportional depending on the time horizon. This means that the overall American tax code is far more tilted against the rich than shown by this chart.

But the key point to understand, as I’ve noted before, is that difference between Europe and the United States is not the taxation of the rich. The real reason that America has the most progressive tax system is that European nations impose much heavier taxes on lower-income and middle-class taxpayers.

P.S. At the risk of stating the obvious, this is not desirable since class-warfare taxes generally cause the most economic damage on a per-dollar-collected basis.

P.P.S. It’s also worth remembering that higher tax rates on the rich don’t necessarily lead to higher tax revenues.

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Back in 2013, I wrote about Phil Mickelson escaping high-tax California and moving to zero-income tax Florida.

The famed golfer grew up in California, but decided that the 2012 decision to boost the top tax rate to 13.3 percent mattered more than beautiful climate and wonderful scenery.

Needless to say, Mickelson’s not the only tax exile. Florida, Texas, Nevada, and other zero-income tax states receive a steady stream of entrepreneurs, investors, business owners, and others who are tired of California’s predatory politicians.

And celebrities as well. Yahoo! Entertainment reports that a famous rock star is leaving the not-so-Golden State.

Gene Simmons has put his longtime Beverly Hills mansion on the market for $22 million, citing California’s “unacceptable” tax rates as the reason for his move. After 34 years at the home, the KISS rocker and his wife Shannon are heading to Washington state. …In an interview with the Wall Street Journal, Simmons explained, “California and Beverly Hills have been treating folks that create jobs badly and the tax rates are unacceptable. I work hard and pay my taxes and I don’t want to cry the Beverly Hills blues, but enough is enough.”

When I read stories like this, I wonder if my friends on the left will learn any lessons about tax competition, the Laffer Curve, or the economic consequences of bad tax policy.

But I also confess that I’m amused by stories like this.

And so are the folks at America’s top site for satire, the Babylon Bee.

Here are some of their recent articles about California, starting with Governor Newsom’s plan to hinder the exodus of taxpayers.

In a move to prevent Californians from fleeing by the millions, Gavin Newsom announced a ban on gasoline automobiles this week. The law will make it so that Californians can’t drive away and escape the state in a matter of hours… “Now, they’ll have to cross the desert on foot,” Newsom said as he handed down the order. “I’ll show them, trying to flee my progressive utopia! Ha ha ha ha ha!”

The Governor apparently forgot to also ban trucks.

And U-Haul is taking advantage with a new advertising campaign.

To help meet the demand of millions of people desperately trying to escape the dark, ravaged wasteland of California, U-Haul is introducing a new product in its moving van line-up: the War Rig. These weaponized, armored moving vehicles will ensure you and your belongings stay safe during the long and perilous journey out of the state. …said local U-Haul franchise owner Glax Destroyer, who manages 12 locations in Southern California. “We brought in the War Rig to supplement our completely depleted fleet of moving vans. With everyone leaving in droves, we don’t have much left. We’re pretty much salvaging old trucks from the junkyard and then adding armor plating and mounted weapons.”

One problem, though, is that the people escaping from California bring along their bad political preferences.

Which has convinced Texas officials to impose a ban on their ability to vote.

To the relief of Texans across the state, Governor Greg Abbott has signed a law prohibiting escaping Californians from voting after they move to Texas. Experts say this will prevent the happy and prosperous slice of heaven from sliding into the endless despair and crushing poverty of leftist policy. …According to sources, emergency legislation was drafted after it was discovered that 97% of Californians favor destroying every small business on the planet and salting the earth where the businesses once stood. They also favor mandatory gay marriage and banning all country music to avoid hurting the ears of sea turtles. …Californians have marched on the state capital to demand their voting rights back, and have promised they’ll move on to Oklahoma after they finish destroying Texas.

On a serious note, there’s actually some evidence that the folks moving into Texas are more conservative than average.

And with regards to the big-picture issue of California policy, I recommend these columns from 2016 and 2020.

P.S. If you want data comparing Texas and California, click herehereherehere, and here.

P.P.S. My favorite California-themed jokes (not counting the state’s elected officials) can be found herehere, here, and here.

P.P.P.S. Here’s some tongue-in-cheek advice for California from Walter Williams.

P.P.P.P.S. Even Bill Maher is upset about California taxes, though he hasn’t (yet) voted with his feet.

 

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When I opine about class-warfare taxation, I generally focus on the obvious argument that it’s not a good idea to penalize people for creating prosperity.

This argument against punitive tax policy is based on the fact that entrepreneurs, investors, business owners, and other successful people can choose to reduce their levels of work, saving, investment, and risk taking.

And it’s also based on the fact that they can shift their economic activity to tax-favored (but generally unproductive) sectors such as municipal bonds.

Moreover, I don’t want politicians to have more money to finance a bigger burden of government.

But we should also consider how class-warfare taxes also can cause the “geese with the golden eggs” to simply fly away.

The New York Times reports that one of the New York’s richest taxpayers is moving his business to Florida.

…on Wednesday, Mr. Singer, a billionaire who is one of the wealthiest people in the United States, revealed that he was moving his firm’s headquarters from Midtown Manhattan to West Palm Beach, Fla. …The departure by Elliott Management…follows a similar migration in recent years by other aging billionaire investors, including Carl C. Icahn, who left New York City for Florida, home to sunny weather, beaches and generous tax benefits… Mr. Singer’s move could bode ill for the city… New York City’s personal income tax revenue, which is heavily reliant on wealthy New Yorkers, is expected to drop by $2 billion this fiscal year. …For wealthy taxpayers, moving to Florida can provide a significant windfall. Unlike New York State, Florida has no individual income tax, estate tax or capital gains tax.

Singer’s move is just the tip of the iceberg.

A story in the Wall Street Journal earlier this year documented some of the tax-driven migration happening in the United States.

…the federal tax overhaul that Congress passed in late 2017…made it costlier to own a house in many high-price, high-tax areas… its effects are rippling through local economies and housing markets, pushing some people to move from high-tax states where they have long lived. Parts of Florida, for example, are getting an influx of buyers from states such as New York, New Jersey and Illinois. …the 2017 law…curbed how much homeowners can subtract from their federal taxes for paying local property and income taxes, by capping the state and local tax deduction at $10,000. …many residents in New York, New Jersey, Connecticut and California had been deducting well over $10,000 a year. …Mr. Lee estimates the move to Nevada, which has no state income tax, whacked his state tax bill by 90%. …Rick Bechtel, head of U.S. residential lending at TD Bank, lives in the Chicago area and said he recently went to a party where it felt like everyone was planning their moves to Florida. “It’s unbelievable to me the number of conversations that I’m listening to that begin with ‘When are you leaving?’ and ‘Where are you going?’ ” he said. …California has lost residents to Nevada for years, but that accelerated after the tax law passed. Nevada picked up a net of 28,000 people from California in 2018, according to the U.S. Census Bureau. …Mr. Belardi and Ms. LaPorte, who are planning to leave San Francisco, …have been growing tired of state and local politics, as well as the difficulty of running their two small businesses in California. …They estimate the move will save them tens of thousands of dollars annually. “I just hope all the Californians going to Nevada don’t turn Nevada into a California,” Mr. Belardi said.

By the way, there’s even tax-driven migration from some low-tax states to states with even lower taxes.

The dynamic is affecting even states typically thought to have low taxes. Mauricio Navarro and his family left Texas last year for Weston, Fla. Neither state collects its own income tax, but Mr. Navarro was paying more than $25,000 annually in property taxes in the Houston area, he said. …Filling out his 2018 tax returns helped motivate him to move with his wife and two children, said Mr. Navarro, who owns a software-development business.

And there’s tax-driven migration from high-tax nations to low-tax nations.

Here are some excerpts from some scholarly research in the Journal of Economic Perspectives, authored by Henrik Kleven, Camille Landais, Mathilde Muñoz, and Stefanie Stantcheva.

Here’s some of their background data.

Tax rates differ substantially across countries and across locations within countries. An important question is whether people choose locations in response to these tax differentials, thus reducing the ability of local and national governments to redistribute income… In this paper, we review what we know about mobility responses to personal taxation and discuss the policy implications. Our main focus is on the mobility of people, especially high-income people, but we will also discuss the mobility of wealth in response to personal taxes. It is clear that high-income individuals sometimes move across borders to avoid taxes. …The Rolling Stones left England for France in the early 1970s in order to avoid the exceptionally high top marginal tax rates—well above 90 percent—in the UK at the time. Many other British rock stars moved to lower tax jurisdictions, including David Bowie (Switzerland), Ringo Starr (Monte Carlo), Cat Stevens (Brazil), Rod Stewart (United States), and Sting (Ireland). In more recent years, actor Gérard Depardieu moved to Belgium and eventually Russia in response to the 75 percent millionaire tax in France, while a vast number of sports stars in tennis, golf, and motor racing have taken residence in tax havens such as Monte Carlo, Switzerland, and Dubai.

The authors point out that there are challenges, however, when trying to move from interesting anecdotes to statistically supported conclusions.

They overcome that challenge by examining a special tax regime in Denmark.

…the introduction of special tax schemes to foreigners provides such compelling quasi-experimental settings. Consider for instance the Danish tax scheme for foreigners… This scheme was enacted in 1992 and applied to the earnings of foreign workers from June 1991 onwards. Eligibility for the scheme requires annual earnings above a threshold located around the ninety-ninth percentile of the earnings distribution. Initially, the scheme offered a flat income tax rate of 30 percent in lieu of the regular progressive income tax with a top marginal tax rate of 68 percent. …The design of the scheme lends itself to a difference-in-differences approach in which we compare the evolution of the number of foreigners above the eligibility threshold (treatments) and below the eligibility threshold (controls). Such an analysis is presented in Figure 3. It shows the stock of foreigners between 1980–2005 in the treated earnings range and in two untreated earnings ranges, between 80–90 percent of the threshold and between 90–99 percent of the threshold. …The graph provides exceptionally compelling evidence of mobility responses.

Here’s a chart from the study showing a pronounced increase in migration from those (the red line) who could benefit from the lower tax rates.

The study also includes some evidence from the 1986 Tax Reform Act in the United States.

Can elasticities be sizable even for large countries that start with a large base of foreigners? Akcigit, Baslandze, and Stantcheva (2016) shed light on this question. They study the effects of top tax rates on the international mobility of “superstar” inventors—those with the most and best patents. …panel B considers the US Tax Reform Act of 1986 which sharply reduced the top marginal income tax rate. … the US Tax Reform Act of 1986 had a strong effect on the growth of foreign superstar inventors. In fact, the estimated mobility elasticity of top 1 percent superstar inventors for the US economy is extremely large, above 3.

Here’s the chart showing how lower tax rates in the United States helped to attract valuable inventors.

If you want more data, I wrote about the tax-driven mobility of super-entrepreneurs in 2015 and I wrote about the tax-driven mobility of super-inventors in 2016

There are two obvious lessons from all of the data and evidence in today’s column.

First, high tax rates are very costly because high-value taxpayers are far more likely to move. This means there are greater-than-ever penalties for bad policy and greater-than-ever rewards for good policy. Bad news for states like New Jersey and nations such as France. Good news for Florida and Switzerland.

Second, tax competition is a very valuable check on the greed of politicians (a.k.a., the “stationary bandits“). Simply stated, governments no longer have unconstrained ability to tax and spend. Which explains, of course, why international bureaucracies (acting at the behest of politicians) are working very hard to replace the liberalizing force of tax competition with some sort of global tax cartel.

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The good news is that the election season is almost over. The bad news is that we’ll have a president next year who does not embrace classical liberal principles of free markets and social tolerance.

But that doesn’t mean Trump and Biden are equally bad. Depending on what issues you think are most important, they’re not equally bad in what they say. And, because politicians often make insincere promises, they’re not equally bad in what they’ll actually do.

Regarding Trump, we have a track record. We know he’s pro-market on some issues (taxes and red tape) and we know he’s anti-market on other issues (spending and trade).

Regarding Biden, we have his track record in the United States Senate, where he routinely voted to expand the burden of government.

But we also have his presidential platform. And that’s the topic for today’s column. We’re going to review the major economic analyses that have been conducted on his proposals.

We’ll start with a report from Moody’s Analytics, authored by Mark Zandi and Bernard Yaros, which compares the economic impacts of the Trump and Biden agendas.

The economic outlook is strongest under the scenario in which Biden and the Democrats sweep Congress and fully adopt their economic agenda. In this scenario, the economy is expected to create 18.6 million jobs during Biden’s term as president, and the economy returns to full employment, with unemployment of just over 4%, by the second half of 2022. During Biden’s presidency, the average American household’s real after-tax income increases by approximately $4,800, and the homeownership rate and house prices increase modestly. Stock prices also rise, but the gains are limited. …Near-term economic growth is lifted by Biden’s aggressive government spending plans, which are deficit-financed in significant part. …Greater government spending adds directly to GDP and jobs, while the higher tax burden has an indirect impact through business investment and the spending and saving behavior of high-income households. …The economic outlook is weakest under the scenario in which Trump and the Republicans sweep Congress and fully adopt their economic agenda. …Trump has proposed much less expansive support to the economy from tax and spending policies.

Here’s the most relevant set of graphs from the report.

The Moody’s study is an outlier, however. Most other comprehensive analyses are less favorable to Biden.

For instance, a study for the Hoover Institution by Timothy Fitzgerald, Kevin Hassett, Cody Kallen, and Casey Mulligan, finds that Biden’s plan will weaken overall economic performance.

We estimate possible effects of Joe Biden’s tax and regulatory agenda. We find that transportation and electricity will require more inputs to produce the same outputs due to ambitious plans to further cut the nation’s carbon emissions, resulting in one or two percent less total factor productivity nationally. Second, we find that proposed changes to regulation as well as to the ACA increase labor wedges. Third, Biden’s agenda increases average marginal tax rates on capital income. Assuming that the supply of capital is elastic in the long run to its after-tax return and that the substitution effect of wages on labor supply is nontrivial, we conclude that, in the long run, Biden’s full agenda reduces fulltime equivalent employment per person by about 3 percent, the capital stock per person by about 15 percent, real GDP per capita by more than 8 percent, and real consumption per household by about 7 percent.

Wonkier readers may be interested in these numbers, which show that there’s a modest benefit from unwinding some of Trump’s protectionism, but there’s a lot of damage from the the other changes proposed by the former Vice President.

In a report authored by Garrett Watson, Huaqun Li, and Taylor LaJoie, the Tax Foundation estimated the impact of Biden’s proposed policies. Here are some of the highlights.

According to the Tax Foundation General Equilibrium Model, Biden’s tax plan would reduce the economy’s size by 1.47 percent in the long run. The plan would shrink the capital stock by just over 2.5 percent and reduce the overall wage rate by a little over 1 percent, leading to about 518,000 fewer full-time equivalent jobs. …Biden’s tax plan would raise about $3.05 trillion over the next decade on a conventional basis, and $2.65 trillion after accounting for the reduction in the size of the U.S. economy. While taxpayers in the bottom four quintiles would see an increase in after-tax incomes in 2021 primarily due to the temporary CTC expansion, by 2030 the plan would lead to lower after-tax income for all income levels.

Table 2 from the report is worth sharing because it shows what policies have the biggest economic impact.

The bottom line is that it’s not a good idea to raise the corporate tax burden and it’s not a good idea to worsen the payroll tax burden.

Here are some excerpts by a study authored by Professor Laurence Kotlikoff for the Goodman Institute.

The micro analysis is based on The Fiscal Analyzer (TFA), which uses data from the Federal Reserve’s Survey of Consumer Finance to calculate how much representative American households will pay in taxes net of what they will receive in benefits over the rest of their lives. …The key micro issues…are the degree to which the Vice President’s reforms alter relative remaining lifetime net tax burdens and lifetime spending of the rich and poor within specific age cohorts and the impact of the reforms on incentives to work, i.e., remaining lifetime marginal net tax rates. The macro analysis is based on the Global Gaidar Model (GGM)…a dynamic, 90-period OLG, 17-region general equilibrium model. …The analysis includes three sets of findings. The first is the change in lifetime net taxes defined as the change in lifetime net taxes. The second is the percentage change in lifetime spending, defined as the change in the present value of outlays on all goods and services as well as bequests, averaged across all survivor path. The third is the lifetime marginal net tax rate from earning an extra $1,000. TFA’s lifetime marginal net tax rate measure takes full account of so-called double taxation. …The GGM predicts a close to 6 percent reduction in the U.S. capital stock. The GGM predicts close to a 2 percent permanent reduction in annual U.S. GDP.  The GGM predicts a roughly 2 percentage-point reduction in wages of U.S. workers, with a larger reduction in the wages of high-skilled workers.

In a study for the Committee to Unleash Prosperity, Professor Casey Mulligan estimated the following effects.

This study addresses the impact of these tax rate changes on economic behavior – work, investment, output and growth. This study finds that the Biden tax agenda will reduce production, incomes, and employment per capita by increasing taxation of both labor and business capital. Employment will be about 3 million workers less in the long run (five to ten years). This employment effect is primarily due to the agenda’s expansion of health insurance credits, which raises the average marginal tax rates on labor income by 2.4 percentage points. Biden also plans to increase taxes on businesses and their owners by a combined 6 to 10 percentage points. These taxes will reduce long-run wages, GDP per worker, and business capital per worker in the long run. By decreasing both the number of workers per capita and GDP per worker, respectively, these two key elements of Biden’s agenda reinforce to significantly reduce GDP per capita and average household incomes. I estimate that, as a result of Biden’s tax agenda, real GDP per capita would be 4 to 5 percent less, which is about $8,000 per household per year in the long run. The two parts of the tax agenda combine to reduce real per capita business capital by 7 to 12 percent in the long run.

Here’s a table from the study.

I’ll add two points to the above analyses.

First, the reason that the Moody’s study produces wildly different results is that its model is based on Keynesian principles. As such, a bigger burden of government spending is assumed to stimulate growth.

For what it’s worth, I think borrowing and spending can lead to short-run increases in consumption, but I’m very skeptical that Keynesian policies can generate increases in national income (i.e., what we produce rather than what we consume) over the medium-run or long-run.

All of the other studies rely on models that estimate how government policies impact incentives to engage in productive behavior. They don’t all measure the same things (some of the studies look solely at taxes, some look at overall fiscal policy, and some also include a look at regulatory proposals) but the methodologies are similar.

Second, I’ll re-emphasize the point I made at the beginning about how politicians routinely say things during campaigns that are either insincere or impractical.

For instance, Trump promised to restrain domestic discretionary spending by $750 billion and he actually increased it by $700 billion.

Likewise, I don’t expect Biden (assuming he prevails) to deliver on his campaign promises. In this case, that’s good news since he won’t increase taxes and spending by nearly as much as what he’s embraced during the campaign (in my fantasy world, he turns out be like Bill Clinton and actually delivers a net reduction in the burden of government).

P.S. For those on the losing side of the upcoming election, I’ll remind you that Australia is probably the best option if you want to escape the United States. Though you may want to pick Switzerland if you have a lot of money.

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Since Americans are not as sensible as the Swiss, I’m generally not a fan of direct democracy in the United States.

Simply stated, I don’t like untrammeled majoritarianism, which occurs when 51 percent of voters can pillage 49 percent of voters.

But I’ll admit that the level of my angst fluctuates depending on whether voters make wise choices. With that in mind, here are the six ballot initiatives that I’ll be closely watching on election day.

1. Proposed Amendment to the 1970 Illinois Constitution

The most important ballot initiative is the proposal by the hypocritical governor of Illinois to undo the state’s flat tax. I’ve already dedicated an entire column to this issue, so I’ll simply add some additional analysis from a Wall Street Journal editorial.

Illinois voters will decide next month whether to enact a progressive income tax, paving the way for a new top rate of 7.99%. …The Prairie State currently ranks 36th worst in overall tax burden because its flat individual rate of 4.95% offsets very high property and other taxes. …its proposed slate of new individual income tax rates, along with a corporate tax hike tied to the same ballot measure, would drop the state’s rank overall to 47th. That would move Illinois into Dante’s ninth ring of tax hell, ahead of only New Jersey, New York and California. …Iowa and Missouri have…slashed their top rates in recent years rather than jacking them up as Illinois Democrats intend. Kentucky lawmakers in 2018 replaced their progressive income tax with a flat rate of 5%. Heading in the opposite direction of neighboring states could push many of Illinois’s overburdened families and businesses across the border.

2. Arizona Proposition 208

There’s a class-warfare proposal to dramatically increase the top income tax rate in Arizona.

Once again, the editors at the Wall Street Journal have spot-on analysis.

Arizona has long been a refuge for Americans seeking relief from high-tax California and states in the Northeast. But a tax referendum on the ballot Nov. 3 would whack job creators and make people rethink retirement in Scottsdale or a business move to Tucson. …The current top rate of 4.5% would rise to 8%, which would move the state to the 10th highest income-tax rate in the country, from 11th lowest today… Arizona would move closer to California (13.3% top rate) than Nevada (no income tax). …about half of the targets would be small businesses that pay taxes at the individual rate… They employ a huge chunk of Arizona workers, and the added tax costs would trickle down in lower pay and fewer jobs. …One definition of fiscal insanity would be to raise state taxes when the Biden Democrats may soon raise federal tax rates to heights not seen since the 1970s.

3. California Proposition 16

In California, politicians want the state to have to power to engage in racial and sexual discrimination. In pursuit of that goal, they are asking voters to repeal Proposition 209, adopted by voters in 1996.

Gail Heriot, a law professor who also serves on the U.S. Civil Rights Commission, explains why this is a bad idea in a column for Real Clear Politics.

California’s deep-blue legislature has been itching to repeal Proposition 209 for years. …Proposition 209 amended California’s constitution to prohibit the state from engaging in preferential treatment based on race or sex. It was a rebuke to the identity politics obsessions of state and local governments. …By approving Proposition 209 by a wide margin, they aimed to end the race and sex spoils system. …The best reason for retaining Proposition 209 is…that the initiative has been good for Californians — of all races…the number of under-represented minority students in academic jeopardy collapsed. …in the years immediately following Proposition 209, it had three effects on under-represented minorities in the UC system. It increased (1) graduation rates, (2) GPAs, and (3) the number of science or engineering majors.

4. California Proposition 15

Since we just discussed one bad California proposition, we may as well mention another.

There’s also a scheme to (again) raise taxes. The Wall Street Journal opines on this misguided initiative.

Sooner or later California’s public unions had to hit up the hoi polloi to pay for their pensions after soaking what’s left of the state’s millionaire class, and here they come. On Nov. 3, Californians will vote on a “split roll” ballot initiative (Prop. 15) that seeks to enact the biggest tax hike in state history. …Under current law, tax rates on residential and commercial property are capped at 1% of their assessed value—i.e., the purchase price—and can increase by no more than 2% annually. …This is the only balm in California’s oppressive tax climate and acts as a modest restraint on the government spending ratchet. Unions know that attempting to repeal this entirely would spur a homeowner revolt, so they are targeting businesses. …Facebook CEO Mark Zuckerberg is Prop. 15’s second biggest donor. Perhaps he’s trying to atone for his wealth, but as the NAACP and minority business groups explained in a letter to him in August: “Unlike Facebook, restaurants, dry cleaners, nail salons and other small businesses can’t operate right now and many may never open again. The last thing they need is a billionaire pushing higher taxes on them under the false flag of social justice.” …Prop. 15 would raise property taxes by $8.5 billion to $12.5 billion a year by 2025.

5. Colorado Proposition 117

Proponents of fiscal responsibility in Colorado want to strengthen TABOR (or, to be more accurate, stop the erosion of TABOR) by requiring a public vote for non-trivial efforts to increase government revenue.

Here’s a summary from CPR.

Proposition 117..would add a new TABOR-like provision to state law, requiring the state government to get voter permission before it creates major new “enterprises,” which are partially funded by fees. Colorado voters already have authority over tax increases and rarely approve them. The state Supreme Court has held that a fee is different from a tax because it is reasonably connected to a specific purpose. And in the years that TABOR has been in effect, lawmakers have used them as a way to raise money without raising taxes. Critics see fees as an end-run around TABOR’s spending limits.

6. Colorado Proposition 116

Sticking with Colorado, there’s also a proposal to lower the state’s flat tax.

Once again, let’s use CPR as a source.

This initiative would cut the state’s income tax rate from 4.63 percent to 4.55 percent. …This change would reduce the state government’s revenue by an estimated $170 million in the next fiscal year. Supporters argue it would boost businesses and consumer spending, while opponents say it would weaken government services and social supports already severely cut by the downturn. The measure was originally intended to counter a progressive tax measure that failed to make the ballot.

Honorable Mention

There are many other ballot initiatives. Here are some that I care about, even if they were not important enough to be featured.

Proposition 21 for rent control in California. Bad idea.

Proposition 22 to penalize the gig economy in California. Also a bad idea. [Oops, got this backwards. Prop 22 would undo the legislation that penalizes the gig economy.]

Initiatives to legalize marijuana in Arizona, Montana, New Jersey, and South Dakota. The libertarian side of me is very supportive, but the fiscal side of me doesn’t like the fact that one of the motives is a desire to collect more tax revenue.

Ranked-choice voting in Alaska and Massachusetts. This is a system that requires voters rank all candidates and awards victory to whoever has the strongest support across all ballots. It is assumed that the impact will be more centrist candidates and more civil elections. I don’t have strong views, but it’s worth noting that Australia uses this approach and it’s one of my favorite nations.

13 initiatives in San Francisco. Lot of tax increases, as you might expect from that poorly governed city.

P.S. Voting for politicians who make bad decisions is unfortunate. Directly voting for bad propositions isn’t any better.

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Bernie Sanders was considered a hard-core leftist because his platform was based on higher taxes and higher spending.

Elizabeth Warren also was considered a hard-core leftist because she advocated a similar agenda of higher taxes and higher spending.

And Joe Biden, even though he is considered to be a moderate, is currently running on a platform of higher taxes and higher spending.

Want to know who else is climbing on the economically suicidal bandwagon of higher taxes and higher spending? You probably won’t be surprised to learn that the pro-tax International Monetary Fund just published its World Economic Outlook and parts of it read like the Democratic Party’s platform.

Here are some of the ways the IMF wants to expand the burden of government spending.

Investments in health, education, and high-return infrastructure projects that also help move the economy to lower carbon dependence… Moreover, safeguarding critical social spending can ensure that the most vulnerable are protected while also supporting near-term activity, given that the outlays will go to groups with a higher propensity to spend their disposable income… Some fiscal resources…should be redeployed to public investment—including in renewable energy, improving the efficiency of power transmission, and retrofitting buildings to reduce their carbon footprint. …social spending should be expanded to protect the most vulnerable where gaps exist in the safety net. In those cases, authorities could enhance paid family and sick leave, expand eligibility for unemployment insurance, and strengthen health care benefit coverage…social spending measures…strengthening social assistance (for example, conditional cash transfers, food stamps and in-kind nutrition, medical payments for low-income households), expanding social insurance (relaxing eligibility criteria for unemployment insurance…), and investments in retraining and reskilling programs.

And here’s a partial list of the various class-warfare taxes that the IMF is promoting.

Although adopting new revenue measures during the crisis will be difficult, governments may need to consider raising progressive taxes on more affluent individuals and those relatively less affected by the crisis (including increasing tax rates on higher income brackets, high-end property, capital gains, and wealth) as well as changes to corporate taxation that ensure firms pay taxes commensurate with profitability. …Efforts to expand the tax base can include reducing corporate tax breaks, applying tighter caps on personal income tax deductions, instituting value-added taxes.

Oh, by the way, if nations have any rules that protect the interests of taxpayers, the IMF wants “temporary” suspensions.

Where fiscal rules may constrain action, their temporary suspension would be warranted

Needless to say, any time politicians have a chance to expand their power, temporary becomes permanent.

When I discuss IMF malfeasance in my speeches, I’m frequently asked why the bureaucrats propose policies that don’t work – especially when the organization’s supposed purpose is to promote growth and stability.

The answer is “public choice.” Top IMF officials are selected by politicians and are given very generous salaries, and they know that the best way to stay on the gravy train is to support policies that will please those politicians.

And because their lavish salaries are tax free, they have an extra incentive to curry favor with politicians.

P.S. I wish there was a reporter smart enough and brave enough to ask the head of the IMF to identify a single nation – at any point in history – that became rich by expanding the size and cost of government.

P.P.S. There are plenty of good economists who work for the IMF and they often write papers pointing out the economic benefits of lower taxes and smaller government (and spending caps as well!). But the senior people at the bureaucracy (the ones selected by politicians) make all the important decisions.

 

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According to the Fraser Institute’s calculations of overall economic freedom, Delaware apparently has the worst politicians and New Hampshire has the best ones.

According to comprehensive estimates of economic liberty in Freedom in the 50 States, New York’s politicians seem to be the worst and Florida’s are the best.

But what if we focus just on fiscal policy?

Earlier this year, I wrote three columns that illustrated different ways – income taxes, sales taxes, and government spending burden – of measuring the quality of state fiscal policy.

Today, let’s look at a comprehensive assessment of the nation’s governors, courtesy of Chris Edwards. Here’s his core methodology.

…this year’s 15th biennial fiscal report card on the governors…examines state budget actions since 2018. It uses statistical data to grade the governors on their tax and spending records—governors who have restrained taxes and spending receive higher grades, while those who have substantially increased taxes and spending receive lower grades. …Scores ranging from 0 to 100 were calculated for each governor on the basis of seven tax and spending variables. Scores closer to 100 indicate governors who favored smaller-government policies. 

Only four governors got the highest grade (and that’s using a curve!), led by Chris Sununu of New Hampshire.

Those of you who follow politics may be interested in knowing that Kristi Noem (R-SD) and Ron DeSantis (R-FL), both potential presidential candidates in 2024, got “B” grades. So good, but not great.

Now let’s look at the most profligate chief executives.

The worst of the worst is Jay Inslee of Washington. So however bad Biden’s agenda is for the country, let’s be happy that Governor Inslee didn’t win the Democratic presidential nomination.

I’m not surprised by the other “F” governors. Though I am surprised that Gov. Pritzker isn’t in last place, given his efforts to get rid of the the Illinois flat tax.

For what it’s worth, the best-ranked Democrat (a “B” grade) is Steve Sisolak of Nevada. I assume this means he hasn’t tried to ruin the state’s zero-income-tax status. The worst-ranked Republican (a “D” grade) is Bill Lee of Tennessee and his bad score is because of huge increases in the state spending burden.

Last but not least, Chris identifies a systemic problem impacting almost all states. Simply stated, government spending has been growing too rapidly, more than double what would be needed to keep pace with inflation.

General fund spending grew at an annual average rate of 4.1 percent between 2010 and 2020, including increases of 5.5 percent in 2019 and 5.8 percent in 2020.

Here’s the accompanying chart.

In the study, Chris says states should use “rainy day funds” to avoid boom-and-bust budgeting (in other words, set aside some revenue when the economy is growing so it’s not necessary to make big adjustments when there’s a recession).

That’s definitely a prudent approach, and the study points out that some blue-leaning states like California follow that policy, while others (most notably, Illinois) recklessly spent surplus revenue.

My two cents is that a spending cap is the best long-run solution, and Colorado’s TABOR is easily the best fiscal rule among the 50 states.

P.S. Governor Sununu of New Hampshire needs to continue getting good scores to atone for his father’s terrible role, as Chief of Staff for George H.W. Bush, in pushing through the failed 1990 tax increase.

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On election day, most people focus on the big-ticket partisan battles, such as this year’s contest between Trump and Biden.

Let’s not forget, though, that there are sometimes very important referendum battles at the state (or even local) level.

This year, the most important referendum will be in Illinois, where hypocritical Governor J.B. Pritzker wants voters to approve an initiative to replace the state’s flat tax with a discriminatory progressive tax.

I’ve already explained that the flat tax is the only thing saving Illinois from going further and faster in the wrong direction. Let’s add some additional evidence, starting with excerpts from this editorial in the Wall Street Journal.

The last state to adopt a progressive income tax was Connecticut in 1996, and we know how that turned out. Now Democrats in Illinois want to follow Connecticut down the elevator shaft with a referendum replacing the state’s flat 4.95% income tax with progressive rates… Public unions have long wanted to enact a progressive tax to pay for increased spending and pensions, and they think the political moment has finally arrived. Democratic Gov. J.B. Pritzker says a progressive tax will hit only the wealthy… Don’t believe it. There aren’t enough wealthy in the state to pay for his spending promises, so eventually Democrats will come after the middle class. …Illinois has no fiscal room to fail. Since 2015 Illinois’s GDP has grown a mere 1% annually, about half as fast as the U.S. and slower than Ohio (1.4%), Indiana (1.7%), Wisconsin (1.7%) and Michigan (2.1%). About 11% of Illinois residents have left since 2001, the second biggest state exodus after New York. Taxpayer flight has been accelerating as income and property taxes have risen. …A progressive tax would be a gift to Florida and Texas.

The head of the Illinois Chamber of Commerce, Todd Maisch, also worries that other states will benefit if voters make the wrong choice. Here are excerpts from his column in the Chicago Sun-Times.

The rest of the nation’s states are cheering on Illinois’ efforts to enact a progressive income tax. That’s because they know it will be one more self-inflicted blow to our state’s economy, certain to drive dollars, jobs and families into their waiting arms. …The reality is that this proposal is intended to do just one thing: Make it easier to raise taxes on all Illinoisans. …the spenders in Springfield are coming for you too, sooner or later. Proponents of the progressive tax know something they don’t want to tell you. Taxing millionaires will in no way meet their appetite for state spending. There simply isn’t enough money at the higher income levels to satisfy their demands. Tax rates will go up and tax brackets will reach lower and lower incomes. …Other states already are benefiting from the outmigration of Illinoisans and their money. Illinois passing the progressive tax is exactly what they are hoping for.

Amen. We already have lots of evidence showing that taxpayers move from high-tax states to low-tax states. And Illinois already has been bleeding taxable income to other states, so it’s very likely that a progressive tax would dramatically worsen the state’s position.

Illinois voters can and should learn from what’s happened elsewhere.

For instance, Orphe Divounguy of the Illinois Policy Institute shares evidence from California about the adverse impact of class-warfare taxation.

Illinois Gov. J.B. Pritzker finds himself in the same place as then-California Gov. Jerry Brown was in back in 2012 – trying to convince voters that a progressive state income tax hike will fix state finances in crisis. Brown claimed the burden of those tax hikes would only harm those earning $250,000 or more – the top 3% of earners. That’s exactly what Pritzker promises with his “fair tax” proposal. Brown was wrong. …Here are the main findings of the new study… The negative economic effects of the tax hike wiped out nearly half of the expected additional tax revenue. Among top-bracket California taxpayers, outward migration and behavioral responses by stayers together eroded 45% of the additional tax revenues from the tax hike… The “temporary” income tax hike, which has now been extended through 2030, made it about 40% more likely wealthy residents would move out of California, primarily to states without income taxes.

Illinois voters also should learn from the painful experiences of taxpayers in Connecticut and New Jersey.

The Wall Street Journal editorialized this morning about their negative experiences.

Illinois is the nation’s leading fiscal basket case, with runaway pension liabilities and public-union control of Springfield. But it has had one saving grace: a flat-rate income tax that makes it harder for the political class to raise taxes. Now that last barrier to decline is in jeopardy on the November ballot. …the pattern of other blue states is instructive. Democratic governors have often lowballed voters with modest rates when introducing a new tax, only to ratchet up the levels in each administration. …New Jersey first taxed individual income in 1976 amid a national revenue slump, with a top rate of 2.5%. …Democratic Gov. James Florio raised the tax to 7%… A decade later Democrats raised the top rate to 8.97%, and last year Gov. Murphy added the 10.75% rate… Or take Connecticut… For decades its lack of an income tax lured New York workers and businesses, but Gov. Lowell Weicker introduced the tax in 1991…and the original 1.5% rate has since been raised five times to today’s 6.99%.

And here’s the chart that every taxpayer should memorize before they vote next month.

And never forget that ever-increasing tax rates on high earners inevitably are accompanied by ever-increasing tax rates on everyone else – exactly as predicted by the Sixth Theorem of Government.

So if middle-class Illinois voters approve the so-called Fair Tax initiative, they’ll have nobody to blame but themselves when their tax rates also climb.

P.S. If voters in very-blue Illinois reject Pritzker’s class-warfare tax referendum, I wonder if that will discourage Democrats in Washington from embracing Biden’s class warfare agenda next year (assuming he wins the election)?

P.P.S. There’s a debate whether ballot initiatives and other forms of “direct democracy” are a good idea. Professor Garett Jones of George Mason University persuasively argues we’ll get better governance with less democracy. On the other hand, Switzerland is a very successful, very well-governed nation where voters directly decide all sorts of major policy issues.

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Yesterday’s column featured some of Milton Friedman’s wisdom from 50 years ago on how a high level of societal capital (work ethic, spirit of self-reliance, etc) is needed if we want to limit government.

Today, let’s look at what he said back then about that era’s high tax rates.

His core argument is that high marginal tax rates are self-defeating because the affected taxpayers (like Trump and Biden) will change their behavior to protect themselves from being pillaged.

This was in the pre-Reagan era, when the top federal tax rate was 70 percent, and notice that Friedman made a Laffer Curve-type prediction that a flat tax of 19 percent would collect more revenue than the so-called progressive system.

We actually don’t know if that specific prediction would have been accurate, but we do know that Reagan successfully lowered the top tax rate on the rich from 70 percent in 1980 to 28 percent in 1988.

So, by looking at what happened to tax revenues from these taxpayers, we can get a pretty good idea whether Friedman’s prediction was correct.

Well, here’s the IRS data from 1980 and 1988 for taxpayers impacted by the highest tax rate. I’ve circled (in red) the relevant data showing how we got more rich people, more taxable income, and more tax revenue.

The bottom line is that Friedman was right.

Good tax policy (i.e., lower rates on productive behavior) can be a win-win situation. Taxpayers earn more and keep more, while politicians also wind up with more because the economic pie expands.

Something to keep in mind since some politicians in Washington want a return to confiscatory taxes on work, saving, investment, and entrepreneurship.

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Washington is a cesspool of waste, fraud, and abuse.

All taxpayers, to avoid having their income squandered in D.C., should go above and beyond the call of duty to minimize the amount they send to the IRS.

Which is why today’s column is a bipartisan love fest for Donald Trump and Joe Biden – both of whom have been very aggressive in limiting their tax liabilities.

Here are some details from the report in the New York Times about Trump’s leaked tax returns.

Donald J. Trump paid $750 in federal income taxes the year he won the presidency. In his first year in the White House, he paid another $750. He had paid no income taxes at all in 10 of the previous 15 years — largely because he reported losing much more money than he made. …His reports to the I.R.S. portray a businessman who takes in hundreds of millions of dollars a year yet racks up chronic losses that he aggressively employs to avoid paying taxes. …They report that Mr. Trump owns hundreds of millions of dollars in valuable assets, but they do not reveal his true wealth. …Most of Mr. Trump’s core enterprises — from his constellation of golf courses to his conservative-magnet hotel in Washington — report losing millions, if not tens of millions, of dollars year after year. …Business losses can work like a tax-avoidance coupon: A dollar lost on one business reduces a dollar of taxable income from elsewhere. The types and amounts of income that can be used in a given year vary, depending on an owner’s tax status. But some losses can be saved for later use, or even used to request a refund on taxes paid in a prior year.

It’s worth noting that the leaked returns didn’t show any unknown business ties to Russia. Nor do they suggest any criminality.

Instead, Trump appears to have relied on using losses in some years to offset income in other years – a perfectly legitimate practice.

Now let’s look at some of what CNBC reported about Joe Biden’s clever tactic to save lots of money.

…consider borrowing a tax-planning tip from Joe Biden. The former vice president…reported about $10 million in income in 2017 from a pair of S-corporations… The two entities were paid for the couple’s book deals and speaking gigs. …both S-corps generated a lot of income, they paid out modest salaries in comparison. …In 2017, the two companies paid the couple a combined $245,833 in wages. …any amounts the Bidens received as a distribution wasn’t subject to the 15.3% combined Social Security and Medicare tax. …Tim Steffen, CPA and director of advanced planning at Robert W. Baird & Co. in Milwaukee. “…if you don’t report that income to the business as wages, then that portion of the income avoids Social Security and Medicare taxes,” he said.

So how much did this aggressive strategy save  the family?

The article doesn’t do all the math, but it certainly seems like the Biden household avoided having to cough up any payroll taxes on more than $9.75 million.

There’s a “wage base cap” on Social Security taxes (thankfully), so it’s possible that their tax avoidance only saved them about $283,000 (what they would have paid in Medicare taxes – 2.9 percent rather than 15.3 percent).

But that’s still a nice chunk of change – about four times as much as the average household earned that year.

As far as I’m concerned, we should applaud both Trump and Biden. Tax avoidance is legal. Even more important, it’s the right thing to do.

Though my applause for Biden is somewhat muted because he said in 2008 that paying more tax is patriotic. So he’s guilty of tax hypocrisy, which seems to be a common vice for folks on the left (the Clintons, John Kerry, Obama’s first Treasury Secretary, Obama’s second Treasury Secretary, Governor Pritzker of Illinois, etc).

For all his flaws, at least Trump isn’t a hypocrite on this issue (though all his spending may pave the way for future tax increases).

P.S. Here’s a story about the greatest-ever tactic for escaping taxes.

P.P.S. And here’s my favorite adults-only story about tax avoidance.

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New Jersey is a tragic example of state veering in the wrong direction.

Back in the 1960s, it was basically like New Hampshire, with no income tax and no sales tax. State politicians then told voters in the mid-1960s that a sales tax was needed, in part to reduce property taxes. Then state politicians told voters in the mid-1970s that an income tax was needed, again in part to reduce property taxes.

So how did that work out?

Well, the state now has a very high sales tax and a very high income tax. And you won’t be surprised that it still have very high property taxes – arguably the worst in the nation according to the Tax Foundation.

But you have to give credit to politicians from the Garden State.

They are very innovative at coming up with ways to make a bad situation even worse.

In an article for City Journal, Steven Malanga reviews the current status of New Jersey’s misguided fiscal policies.

Relative to the size of its budget, New Jersey’s borrowing is by far the largest. Jersey plans to cover most of the cost of its deficit with debt by tapping a last-resort Federal Reserve lending program. New Jersey is already the nation’s most fiscally unsound state, according to the Institute for Truth in Accounting. It bears some $234 billion in debt, including about $100 billion in unfunded pension liabilities. A recent Pew study estimated that, between 2003 and 2017, the state spent $1 for every 91 cents in revenue it collected. …Before the pandemic, Murphy had proposed a $40.7 billion budget for fiscal 2021, a spending increase of 5.4 percent. …The administration has taken only marginal steps to reduce spending by, for instance, delaying water infrastructure projects. Many other cuts Murphy has announced involve simply shelving plans to spend more money.

The very latest development is that the state’s politicians want to exacerbate New Jersey’s uncompetitive tax system by extending the state’s top tax rate of 10.75 percent to a larger group of taxpayers.

The New York Times reports on a new tax scheme concocted by the Governor and state legislature.

New Jersey officials agreed on Thursday to make the state one of the first to adopt a so-called millionaires tax… Gov. Philip D. Murphy, a Democrat, announced a deal with legislative leaders to increase state taxes on income over $1 million by nearly 2 percentage points, giving New Jersey one of the highest state tax rates on wealthy people in the country. …The new tax in New Jersey…is expected to generate an estimated $390 million this fiscal year… With every call for a new tax comes criticism from Republicans and some business leaders who warn that higher taxes will lead to an exodus of affluent residents.

As is so often the case, the Wall Street Journal‘s editorial does a good job of nailing the issue.

New Jersey Gov. Phil Murphy and State Senate President Steve Sweeney struck a deal on Thursday to raise the state’s top marginal tax rate to 10.75% from 8.97% on income of more than $1 million. Two years ago, Democrats increased the top rate to 10.75% on taxpayers making more than $5 million. …New Jersey’s bleeding budget can’t afford to lose any millionaires. In 2018 New Jersey lost a net $3.2 billion in adjusted gross income to other states, including $2 billion to zero-income tax Florida, according to IRS data. More will surely follow now.

The WSJ is right.

As shown by this map, there’s already been a steady exodus of people from the Garden State. More worrisome is that the people leaving tend to have higher-than-average incomes (and it’s been that way for a while since New Jersey’s been pursuing bad policy for a while).

I’ll add one additional point to this discussion. One of the best features of the 2017 tax reform is that there’s now a limit on deducting state and local taxes when filing with the IRS.

This means that people living in high-tax jurisdiction such as California, New York, and Illinois (and, of course, New Jersey) now bear the full burden of state taxes.

In other words, New Jersey’s politicians are pursuing a very foolish policy at a time when federal tax law now makes bad state policy even more suicidal.

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Every single economic school of thought agrees with the proposition that investment is a key factor in driving wages and growth.

Even foolish concepts such as socialism and Marxism acknowledge this relationship, though they want the government to be in charge of deciding where to invest and how much to invest (an approach that has a miserable track record).

Another widely shared proposition is that higher tax rates will discourage whatever is being taxed. Even politicians understand this notion, for instance, when arguing for higher taxes on tobacco.

To be sure, economists will argue about the magnitude of the response (will a higher tax rate cause a big effect, medium effect, or a small effect?).

But they’ll all agree that a higher tax on something will lead to less of that thing.

Which is why I always argue that we need the lowest-possible tax rates on the activities – work, saving, investment, and entrepreneurship – that create wealth and prosperity.

That’s why it’s so disappointing that Joe Biden, as part of his platform in the presidential race, has embraced class-warfare taxation.

And it’s even more disappointing that he specifically supports policies that will impose a much higher tax burden on capital formation.

How much higher? Kyle Pomerleau of the American Enterprise Institute churned through Biden’s proposals to see what it would mean for tax rates on investment and business activity.

Former Vice President and Democratic presidential candidate Joe Biden has proposed several tax increases that focus on raising taxes on business and capital income. Taxing business and capital income can affect saving and investment decisions by reducing the return to these activities and distorting the allocation across different assets, forms of financing, and business forms. Under current law, the weighted average marginal effective tax rate (METR) on business assets is 19.6 percent… Biden’s tax proposals would raise the METR on business investment in the United States by 7.8 percentage points to 27.5 percent in 2021. The effective tax rate would rise on most assets and new investment in all industries. In addition to increasing the overall tax burden on business investment, Biden’s proposals would increase the bias in favor of debt-financed and noncorporate investment over equity-financed and corporate investment.

Here’s the most illuminating visual from Kyle’s report.

The first row of data shows that the effective tax rate just by almost 8 percentage points.

I also think it’s important to focus on the last two rows. Notice that the tax burden on equity increases by a lot while the tax burden on debt actually drops slightly.

This is very foolish since almost all economists will acknowledge that it’s a bad idea to create more risk for an economy by imposing a preference for debt (indeed, mitigating this bias was one of the best features of the 2017 tax reform).

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It’s not easy to identify the worst international bureaucracy.

As you can see, it’s hard to figure out which bureaucracy is the worst.

I’ve solved this dilemma by allowing a rotation. Today, the OECD is at the top of my list.

That’s because the top tax official at that Paris-based bureaucracy, Pascal Saint-Amans, has a new article about goals for future tax policy.

…policy flexibility and agility may be what is needed to help restore confidence. …Governments should seize the opportunity to build a greener, more inclusive and more resilient economy. Rather than simply returning to business as usual, the goal should be to “build back better” and address some of the structural weaknesses that the crisis has laid bare.

So how do we get a “more resilient economy” with less “structural weakness”?

According to the bureaucrats at the OECD, we achieve that goal with higher taxes. I’m not joking. Here are some additional excerpts.

Today, taxes on polluting fuels are nowhere near the levels needed… Seventy percent of energy-related CO2 emissions from advanced and emerging economies are entirely untaxed.

Here’s a chart from the article showing how nations supposedly are under-taxing energy use.

But it’s not just energy taxes.

The OECD wants a bunch of other tax increases, including a digital tax deal that specifically targets America’s high-tech firms.

It’s also disturbing that the bureaucrats want higher taxes on “personal capital income,” particularly since even economists at the OECD have specifically warned that those types of taxes are particularly harmful to prosperity.

Fair burden sharing will also be central going forward. …consideration should be given to strengthening…social protection in the longer run. …Governments will need to find alternative sources of revenues. The taxation of property and personal capital income will have an important role to play… Rising pressure on public finances as well as increased demands for fair burden sharing should provide new impetus for reaching an agreement on digital taxation.

By the way, “social protection” is OECD-speak for redistribution spending. In other words, “fair burden sharing” means a bigger welfare state financed by ever-higher taxes.

The bureaucrats apparently think we should all be like Greece and Italy.

I want to close by revisiting the topic of environmental taxation. If you peruse the above chart, you’ll see that the OECD wants all nations to impose (at a minimum) a €30-per-ton tax on carbon.

What would that imply for American taxpayers? Well, if we extrapolate from estimates by the Tax Policy Center and Tax Foundation, that would be a tax increase of more than $400-per-year for every man, woman, and child in the United States. That’s $1600 of additional tax for each family of four.

P.S. The OECD has traditionally tailored its analysis to favor Democrats, but even I am surprised that Saint-Amans used the Biden campaign slogan of “build back better” in his column. I’m sure that was no accident. The bureaucrats at the OECD must be quite confident that Biden will win. Or they must feel confident that Republicans will be too stupid to exact any revenge if Trump prevails (probably a safe assumption since Republicans gave the bureaucracy lots of American tax dollars even after a top OECD official compared Trump to Hitler).

P.P.S. To add insult to injury, OECD bureaucrats get tax-free salaries, so they have a special exemption from the bad policies they want for the rest of us.

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New York is in trouble from bad economic policy, especially excessive taxing and spending.

This is one of the reasons why there’s been a steady exodus of taxpayers from the Empire State.

The problem is especially acute for New York City, which has been suffering from Mayor Bill De Blasio’s hard-left governance.

To be sure, not all of the city’s problems are self-inflicted. The 2017 tax reform removed the IRS loophole for state and local tax payments, which means people living in places such as NYC no longer can artificially lower their tax liabilities. And the coronavirus hasn’t helped, either, particularly since Governor Cuomo bungled the state’s response.

The net result of bad policy and bad luck is that New York City has serious economic problems. And this leads, as one might expect, to serious fiscal problems.

What’s surprising, however, is that the normally left-leaning New York Times actually wrote an editorial pointing out that fiscal restraint is the only rational response.

New York is facing…a budget hole of more than $5 billion… Mayor Bill de Blasio has asked the State Legislature to give him the authority to borrow… But borrowing to meet operating expenses is especially hazardous. Cities that do so over and over again are at greater risk of the kind of bankruptcy faced by New York in the late 1970s and Detroit in 2013. …Before Mr. de Blasio adds billions to the city’s debt sheet…he needs to find savings. …The city’s budget grew under Mr. de Blasio, to $92 billion last year from about $73 billion in 2014, his first year in office. Complicating matters, the mayor has hired tens of thousands of employees over his tenure, adding significantly to the city’s pension and retirement obligations. …the mayor will have to be creative, make unpopular decisions and demand serious cost-saving measures… One way to begin is with a far stricter hiring freeze. …The mayor will need to do something he has rarely been able to: ask the labor unions to share in the sacrifice. …There are other cuts to be made.

Wow, this may be the first sensible editorial from the New York Times since it called for abolishing the minimum wage in 1987.*

Mayor De Blasio, needless to say, doesn’t want any form of spending restraint. Depending on the day, he either wants to tax-and-spend or borrow-and-spend.

Both of those approaches are misguided.

Kristin Tate explained in a column for the Hill that the middle class suffers most when class-warfare politicians such as De Blasio impose policies that penalize the private sector.

Finance giant JPMorgan is…slowly relocating many of its operations and jobs to lower tax locations in Ohio, Texas, and Delaware. The Lone Star State currently hosts 25,000 of its employees, and Texas will likely surpass the New York portion in coming years. The resulting move will harm the middle earners of New York far more than that of the wealthy… The exodus is part of a trend sweeping traditionally Democratic states over the last several years. …A whopping 1,800 businesses left California in 2016 alone, while manufacturing firm Honeywell moved its headquarters from New Jersey to greener pastures in North Carolina. …the primary losers in this formula are middle class workers. Between the loss of jobs and revenue, these states and cities press even harder on millions of middle income taxpayers to make up the difference. …Many of the Democrats…who are in charge of the blue state economic models…love to preach that their proposals will make the economy fairer by targeting the most productive members of their states and cities. However, the encompassing butterfly effect spells bad news for people like you and me. Every time you vote for a proposition or a candidate promising a repeat of bad policy, just remember that it will ultimately be the middle class that will pay the largest share.

My contribution to this discussion is to point out that New York City’s fiscal problems are the entirely predictable result of politicians spending too much money over an extended period of time.

In other words, they violated my Golden Rule.

Indeed, the burden of government spending has climbed more than three times faster than inflation during De Blasio’s time in office.

If this story sounds familiar, that’s because excessive spending is the cause of every fiscal crisis (as I’ve noted when writing about Cyprus, Alaska, Ireland, Alberta, Greece, Puerto Rico, California, etc).

My final observation is that New York City’s current $5 billion budget shortfall would be a budget surplus of more than $6 billion if De Blasio and the other politicians had adopted a spending cap back in 2015 and limited budget increases to 2 percent annually.

*The New York Times also endorsed the flat tax in 1982, so there have been rare outbursts of common sense.

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Two weeks ago, I shared some video from a presentation to the New Economic School of Georgia (the country, not the state) as part of my “Primer on the Laffer Curve.”

Here’s that portion of that presentation that outlines the principles of sensible taxation.

Just in case you don’t want to watch me pontificate for nearly 14 minutes, here’s the slide from the presentation that most deserves attention since it captures the key principle of good tax policy.

Simply stated, the more you tax of something, the less you get of that thing.

By the way, I had an opportunity earlier this year to share some similar thoughts about the principles of sound tax policy with the United Nations’ High-Level Panel on Financial Accountability Transparency & Integrity.

Given my past interactions with fiscal people at the U.N., I’m not overflowing with optimism that the following observations will have an impact, but hope springs eternal.

The ideal fiscal environment is one that has a vibrant and productive economy that generates sufficient revenue with modest tax rates that do not needlessly penalize productive behavior. Public finance experts generally agree on the following features

  • Low marginal tax rates. A tax operates by increasing the “price” of whatever is being taxed. This is most obvious in the case of some excise taxes –such as levies on tobacco –where governments explicitly seek to discourage certain behaviors. …but there should be a general consensus in favor of keeping tax rates reasonable on the behaviors –work, saving, investment, risk-taking, and entrepreneurship –that make an economy more prosperous.
  • A “consumption-base.” Because of capital gains taxes, death taxes, wealth taxes, and double taxation of interest and dividends, many nations impose a disproportionately harsh tax burden on income that is saved and invested. This creates a bias against capital formation, which is problematical since every economic theory –including various forms of socialism –share the view that saving and investment are necessary for rising wages and higher living standards.
  • Neutrality. Special preferences in a tax system distort the relative “prices” of how income is earned or how income is spent. Such special tax breaks encourage taxpayers to make economically inefficient choices simply to lower their tax liabilities. Moreover, loopholes, credits, deductions, exemptions, holidays, exclusions, and other preferences reduce tax receipts, thus creating pressure for higher marginal tax rates, which magnifies the adverse economic impact.
  • Territoriality. This is the simple notion that governments should not tax activity outside their borders. If income is earned in Brazil, for instance, the Brazilian government should have the authority over how that income is taxed.The same should be true for all other nations.

By the way, “consumption-base” is simply the jargon used by public-finance economists when referring to a tax system that doesn’t impose double taxation (i.e., extra layers of tax on income that is saved and invested).

Here’s a flowchart I prepared showing the double taxation in the current system compared to what happens with a flat tax.

P.S. At the risk of understatement, it’s impossible to have a good tax system with a bloated public sector, which means it’s not easy to be optimistic about future fiscal policy in the United States.

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Last week, I gave a presentation on the Laffer Curve to a seminar organized by the New Economic School in the nation of Georgia.

A major goal was to help students understand that you can’t figure out how changes in tax rates affect tax revenues without also figuring out how changes in tax rates affect taxable income.

As you might expect, I showed the students a visual depiction of the Laffer Curve, explaining that the government won’t collect any revenue if the tax rate is zero (the left point of the horizontal axis), but also pointing out that the government won’t collect any revenue if tax rates are 100 percent (the right point on the horizontal axis).

The curve between those two points shows how much tax is collected at various tax rates.

The upward-sloping part of the curve shows the “region of increasing revenue” (i.e., where higher tax rates produce more revenue) and the downward-sloping part of the curve shows the “region of declining revenue” (i.e., where higher tax rates produce less revenue).

I noted in my remarks that this is not a controversial concept.

Indeed, I’d wager that every economist in the world will agree.

Just in case you think I’m exaggerating, you can see in this video that even Paul Krugman agrees that there is a Laffer Curve.

Needless to say, this doesn’t mean that we agree on the shape of the Laffer Curve.

Even more important, we presumably don’t agree on the ideal point on the Laffer Curve.

I’m guessing he would want to be at the revenue-maximizing point, whereas I explained in the presentation that it’s much better to at the growth-maximizing point.

To show why this is an important distinction, I specifically cited research from two economists (one from the University of Chicago and one from the Federal Reserve) in hopes of getting students to understand that higher tax rates will destroy a lot of private income for every dollar of additional revenue that politicians will collect.

If you look at the nearby image, you’ll see that’s especially true for taxes on “capital” since households have much more control over the timing, level, and composition of business and investment income.

Maybe I’m just a wild-eyed libertarian, but I don’t think it’s a good idea to destroy lots of private income just so politicians get a bit of extra revenue to spend.

This does not mean, by the way, that the Laffer Curve is a panacea, or some sort of free lunch.

I should have shown the students this one-minute video clip of me pointing out that it’s only in rare circumstances that a tax cut generates enough additional growth (and therefore enough additional taxable income) to be self-financing.

To be sure, self-financing tax cuts do exist.

In the presentation, I shared the IRS data showing that the federal government collected fives times as much money from the rich after President Reagan reduced the top tax rate from 70 percent to 28 percent.

And I also shared the OECD data showing that industrialized nations are collecting more revenue from income taxes today, as a share of economic output, than they were back in 1980 when top tax rates on personal and corporate income were much higher.

And I also could have cited interesting results from Canada, Denmark, HungaryIreland, ItalyPortugal, Russia, France, and the United Kingdom.

I’ll close by recycling my three-part video series from 2008 on the Laffer Curve (assuming you’re not already tired of my voice after the 22-minute presentation at the start of today’s column).

The first video discusses the theory.

The second video looks at the evidence.

And the third video shines a spotlight on the Joint Committee on Taxation’s primitive methodology for producing revenue estimates.

The good news is that the Joint Committee on Taxation has been dragged kicking and screaming in the right direction since 2008, so the present process for estimating the revenue impact of change in tax policy is somewhat more accurate.

P.S. Here’s my response to Matt Yglesias’ supposed debunking of the Laffer Curve.

P.P.S. I used to think my friends on the left could be persuaded since they presumably don’t want tax rates to be so high that revenues decline. But it seems many of them actually are motivated by a desire to punish success rather than a desire to maximize revenue for government.

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