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Posts Tagged ‘Taxation’

Back in 2014, I shared some data from the Tax Foundation that measured the degree to which various developed nations punished high-income earners.

This measure of relative “progressivity” focused on personal income taxes. And that’s important because that levy often is the most onerous for highly productive residents of a nation.

But there are other taxes that also create a gap between what such taxpayers earn and produce and what they ultimately are able to consume and enjoy. What about the effects of payroll taxes? Of consumption taxes and other levies?

To answer that question, we have a very useful study from the European Policy Information Center on this topic. Authored by Alexander Fritz Englund and Jacob Lundberg, it looks at the total marginal tax rate on each nation’s most productive taxpayers.

They start with some sensible observations about why marginal tax rates matter, basically echoing what I wrote after last year’s Super Bowl.

Here’s what Englund and Lundberg wrote.

The marginal tax rate is the proportion of tax paid on the last euro earned. It is the relevant tax rate when deciding whether to work a few extra hours or accept a promotion, for example. As most income tax systems are progressive, the marginal tax rate on top incomes is usually also the highest marginal tax rate. It is an indicator of how progressive and distortionary the income tax is.

They then explain why they include payroll taxes in their calculations.

The income tax alone does not provide a complete picture of how the tax system affects incentives to work and earn income. Many countries require employers and/or employees to pay social contributions. It is not uncommon for the associated benefits to be capped while the contribution itself is uncapped, meaning it is a de facto tax for high-income earners. Even those social contributions that are legally paid by the employer will in the end be paid by the employee as the employer should be expected to shift the burden of the tax through lower gross wages.

Englund and Lunberg are correct. A payroll tax (sometimes called a “social insurance” levy) will be just as destructive as a regular income tax if workers aren’t “earning” some sort of additional benefit. And they’re also right when they point out that payroll taxes “paid” by employers actually are borne by workers.

They then explain why they include a measure of consumption taxation.

One must also take value-added taxes and other consumption taxes into account. Consumption taxes reduce the purchasing power of wage-earners and thus affect the return to working. In principle, it does not matter whether taxation takes place when income is earned or when it is consumed, as the ultimate purpose of work is consumption.

Once again, the authors are spot on. Taxes undermine incentives to be productive by driving a wedge between pre-tax income and post-tax consumption, so you have to look at levies that grab your income as it is earned as well as levies that grab your income as it is spent.

And when you begin to add everything together, you get the most accurate measure of government greed.

Taking all these taxes into account, one can compute the effective marginal tax rate. This shows how many cents the government receives for every euro of additional employee compensation paid by the firm. …If the top effective tax rate is 75 percent, as in Sweden, a person who contributes 100 additional euros to the economy will only be allowed to keep 25 euros while 75 euros are appropriated by the government. The tax system thus drives a wedge between the social and private return to work. …High marginal tax rates disconnect the private and social returns to economic activity and thereby the invisible hand ceases to function. For this reason, taxation causes distortions and is costly to society. High marginal tax rates make it less worthwhile to supply labour on the formal labour market and more worthwhile to spend time on household work, black market activities and tax avoidance.

Here’s their data for various developed nation.

Keep in mind that these are the taxes that impact each nation’s most productive taxpayers. So that includes top income tax rates, both for the central governments and sub-national governments, as well as surtaxes. It includes various social insurance levies, to the extent such taxes apply to all income. And it includes a measure of estimated consumption taxation.

And here’s the ranking of all the nations. Shed a tear for entrepreneurs in Sweden, Belgium, and Portugal.

Slovakia wins the prize for the least-punitive tax regime, though it’s worth noting that Hong Kong easily would have the best system if it was included in the ranking.

For what it’s worth, the United States does fairly well compared to other nations. This is not because our personal income tax is reasonable (see dark blue bars), but rather because Barack Obama and Hillary Clinton were unsuccessful in their efforts to bust the “wage base cap” and apply the Social Security payroll tax on all income. We also thankfully don’t have a value-added tax. These factors explain why our medium-blue and light-blue bars are the smallest.

By the way, this doesn’t mean we have a friendly system for upper-income taxpayers in America. They lose almost half of every dollar they generate for the economy. And whether one is looking at Tax Foundation numbers, Congressional Budget Office calculations, information from the New York Times, or data from the IRS, rich people in the United States are paying a hugely disproportionate share of the tax burden.

Though none of this satisfies the statists. They actually would like us to think that letting well-to-do taxpayers keep any of their money is akin to a handout.

Now would be an appropriate time to remind everyone that imposing high tax rates doesn’t necessarily mean collecting high tax revenues.

In the 1980s, for instance, upper-income taxpayers paid far more revenue to the government when Reagan lowered the top income tax rate from 70 percent to 28 percent.

Also keep in mind that these calculations don’t measure the tax bias against saving and investment, so the tax burden on some upper-income taxpayers may be higher or lower depending on the degree to which countries penalize capital formation.

P.S. If one includes the perverse incentive effects of various redistribution programs, the very highest marginal tax rates (at least when measuring implicit rates) sometimes apply to a nation’s poor people.

P.P.S. Our statist friends sometimes justify punitive taxes as a way of using coercion to produce more equality, but the net effect of such policies is weaker growth and that means it is more difficult for lower-income and middle-income people to climb the economic ladder. In other words, unfettered markets are the best way to get social mobility.

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Back in 2009, I shared the results of a very helpful study by Pierre Bessard of Switzerland’s Liberal Institute (by the way, “liberal” in Europe means pro-market or “classical liberal“).

Pierre ranked the then-30 member nations of the Organization for Economic Cooperation and Development based on their tax burdens, their quality of governance, and their protection of financial privacy.

Switzerland was the top-ranked nation, followed by Luxembourg, Austria, and Canada.

Italy and Turkey were tied for last place, followed by Poland, Mexico, and Germany.

The United States, I’m ashamed to say, was in the bottom half. Our tax burden was (and still is) generally lower than Europe, but there’s nothing special about our quality of governance compared to other developed nations, and we definitely don’t allow privacy for our citizens (though we’re a good haven for foreigners).

Pierre’s publication was so helpful that I’ve asked him several times to release an updated version.

I don’t know if it’s because of my nagging, but the good news is that he’s in the final stages of putting together a new Tax Oppression Index. He just presented his findings at a conference in Panama.

But before divulging the new rankings, I want to share this slide from Pierre’s presentation. He correctly observes that the OECD’s statist agenda against tax competition is contrary to academic research in general, and also contrary to the Paris-based bureaucracy’s own research!

Yet the political hacks who run the OECD are pushing bad policies because Europe’s uncompetitive governments want to prop up their decrepit welfare states. And what’s especially irksome is that the bureaucrats at the OECD get tax-free salaries while pushing for higher fiscal burdens elsewhere in the world.

But I’m digressing. Let’s look at Pierre’s new rankings.

As you can see, Switzerland is still at the top, though now it’s tied with Canada. Estonia (which wasn’t part of the OECD back in 2009) is in third place, and New Zealand and Sweden also get very high scores.

At the very bottom, with the most oppressive tax systems, are Greece and Mexico (gee, what a surprise), followed by Israel and Turkey.

The good news, relatively speaking, is that the United States is tied with several other nations for 11th place with a score of 3.5.

So instead of being in the bottom half, as was the case with the 2009 Tax Oppression Index, the U.S. is now in the top half.

But that’s not because we’ve improved policy. It’s more because the OECD advocates of statism have been successful in destroying financial privacy in other nations. Even Switzerland’s human rights laws on privacy no longer protect foreign investors.

As such, Pierre’s new index basically removes financial privacy as a variable and augments the quality of governance variable with additional data about property rights and the rule of law.

P.S. When measuring the tax burden, the reason that America ranks above most European nations is not because they impose heavier taxes on rich people and businesses (indeed, the U.S. has a much higher corporate tax rate). Instead, we rank above Europe because they impose very heavy taxes on poor and middle-income taxpayers (mostly because of the value-added tax, which helps to explain why I am so unalterably opposed to that destructive levy).

P.P.S. Also in 2009, Pierre Bessard authored a great defense of tax havens for the New York Times.

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I don’t have strong views on global warming. Or climate change, or whatever it’s being called today.

But I’ve generally been skeptical about government action for the simple reason that the people making the most noise are statists who would use any excuse to increase the size and power of government. To be blunt, I simply don’t trust them. In Washington, they’re called watermelons – green on the outside (identifying as environmentalists) but red on the inside (pushing a statist agenda).

But there are some sensible people who think some sort of government involvement is necessary and appropriate.

George Schultz and James Baker, two former Secretaries of State, argue for a new carbon tax in a Wall Street Journal column as part of an agenda that also makes changes to regulation and government spending.

…there is mounting evidence of problems with the atmosphere that are growing too compelling to ignore. …The responsible and conservative response should be to take out an insurance policy. Doing so need not rely on heavy-handed, growth-inhibiting government regulations. Instead, a climate solution should be based on a sound economic analysis that embodies the conservative principles of free markets and limited government. We suggest…creating a gradually increasing carbon tax…, returning the tax proceeds to the American people in the form of dividends. And…rolling back government regulations once such a system is in place.

A multi-author column in the New York Times, including Professors Greg Mankiw and Martin Feldstein from Harvard, also puts for the argument for this plan.

On-again-off-again regulation is a poor way to protect the environment. And by creating needless uncertainty for businesses that are planning long-term capital investments, it is also a poor way to promote robust economic growth. By contrast, an ideal climate policy would reduce carbon emissions, limit regulatory intrusion, promote economic growth, help working-class Americans and prove durable when the political winds change. …Our plan is…the federal government would impose a gradually increasing tax on carbon dioxide emissions. It might begin at $40 per ton and increase steadily. This tax would send a powerful signal to businesses and consumers to reduce their carbon footprints. …the proceeds would be returned to the American people on an equal basis via quarterly dividend checks. With a carbon tax of $40 per ton, a family of four would receive about $2,000 in the first year. As the tax rate rose over time to further reduce emissions, so would the dividend payments. …regulations made unnecessary by the carbon tax would be eliminated, including an outright repeal of the Clean Power Plan.

They perceive this plan as being very popular.

Environmentalists should like the long-overdue commitment to carbon pricing. Growth advocates should embrace the reduced regulation and increased policy certainty, which would encourage long-term investments, especially in clean technologies. Libertarians should applaud a plan premised on getting the incentives right and government out of the way.

I hate to be the skunk at the party, but I’m a libertarian and I’m not applauding. I explain some of my concerns about the general concept in this interview.

In the plus column, there would be a tax cut and a regulatory rollback. In the minus column, there would be a new tax. So two good ideas and one bad idea, right? Sounds like a good deal in theory, even if you can’t trust politicians in the real world.

However, the plan that’s being promoted by Schultz, Baker, Feldstein, Mankiw, etc, doesn’t have two good ideas and one bad idea. They have the good regulatory reduction and the bad carbon tax, but instead of using the revenue to finance a good tax cut such as eliminating the capital gains tax or getting rid of the corporate income tax, they want to create universal handouts.

They want us to believe that this money, starting at $2,000 for a family of four, would be akin to some sort of tax rebate.

That’s utter nonsense, if not outright prevarication. This is a new redistribution program. Sort of like the “basic income” scheme being promoted by some folks.

And it creates a very worrisome dynamic since people will have an incentive to support ever-higher carbon taxes in order to get ever-larger checks from the government. Heck, the plan being pushed explicitly envisions such an outcome.

I’ve made the economic argument against carbon taxes and the cronyism argument against carbon taxes. Now that we have a real-world proposal, we have the practical argument against carbon taxes.

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What best symbolizes France’s statist political culture?

Those are good examples, to be sure, but I’ve actually already shared an everything-you-need-to-know story dealing with lavish perks for France’s protected bureaucrat class.

But there’s no rule that says I can’t have multiple everything-you-need-to-know anecdotes.

Here’s a story that reveals why France is in trouble. The Wall Street Journal reports that a French presidential candidate is arguing people shouldn’t get upset that he used taxpayer money to give his wife a no-show job because a big chunk of the money then went back to the government because of punitive taxes.

François Fillon…apologiz[ed] to the country for having employed his wife and children as parliamentary aides while rejecting accusations the jobs were phony. …Mr. Fillon characterized it as unfair for media reports to state his wife received nearly a million euros over a 15-year period, saying after taxes her monthly average income came to only €3,677 ($3,964). …The privileges traditionally available to France’s ruling class were exposed with rare candor.

So I guess Fillon wants people to think it’s okay to divert funds to family members if they “only” pocket about $48,000 per year after paying taxes.

This is disgusting. At least Fillon should have wasted taxpayer money more elegantly, like France’s current president, who doesn’t have much hair but still gave his stylist big bucks.

What makes Fillon’s story especially amusing is that he is the candidate trying to appeal to French voters who want to reduce the role of the state.

Considering that two of his major opponents are Marine Le Pen, a big-government populist, and Benoît Hamon, a socialist who favors a taxpayer-provided basic income for everyone, maybe Fillon actually is the only choice for French voters with libertarian impulses, but that’s a rather sad commentary on the state of French politics. So I don’t even know if I’ll endorse a candidate, like I did back in 2012.

What makes the situation particularly tragic is that the fiscal mess in France has become so bad that even parts of the government are concluding that some market-based reforms are necessary.

Corporation tax in France is too far above the European average, according to a report by the French Court of Auditors. The experts said a cut from 33.3% to 25% would allow companies to compete with their European counterparts. EurActiv France reports. The amount of tax paid by businesses in France has been steadily climbing for the last two decades. Today, they pay the highest rates in Europe. But this growth has not been good for the country, according to a report published by the Court… France has not always been a high tax jurisdiction, compared to other EU countries. In 1995 it was more or less at the European average. But it has steadily increased over the last 20 years. At the same time, other EU member states have been moving in the opposite direction. According to the report, most member states have lowered tax on business revenues, or have imminent plans to do so. The UK, for example plans to cut corporation tax to 17% by 2020. The average tax rate paid by EU companies fell from 33% in 1999 to 25% in 2015.

France’s suicidal fiscal regime is why – with my tongue planted firmly in cheek – I agreed with Paul Krugman back in 2013 that there is a plot against France. But I pointed out the conspirators against France were the nation’s politicians.

P.S. Actually, perhaps the story that tells you everything you need to know about France was the poll last decade revealing that more than half the population would flee to America if they had the opportunity.

P.P.S. If it wasn’t for France, we never would have had the opportunity to enjoy this very clever and amusing Scott Stantis cartoon.

P.P.P.S. Or watch this rather revealing Will Smith interview about French taxation.

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I’ve put forth lots of arguments against tax increases, mostly focusing on why higher tax rates will depress growth and encourage more government spending.

Today, let’s look at a practical, real-world example.

I wrote a column for The Hill looking at why Greece is a fiscal and economic train wreck. I have lots of interesting background and history in the article, including the fact that Greece got into the mess by overspending and also explaining that politicians like Merkel only got involved because they wanted to bail out their domestic banks that foolishly lent lots of money to the Greek government.

But the most newsworthy part of my column was to expose the fact that “austerity” hasn’t worked in Greece because the private sector has been suffocated by giant tax hikes.

…the troika…imposed the wrong kind of fiscal reforms. …what mostly happened is that Greek politicians dramatically increased the nation’s already punitive tax burden. The Organization for Economic Cooperation and Development’s fiscal database tells a very ugly story. …on the eve of the crisis, the tax burden in Greece totaled 38.9 percent of GDP. This year, taxes are projected to reach 52.0 percent of economic output. Every major tax in Greece has been dramatically increased, including personal income taxes, corporate income taxes, value-added taxes, and property taxes. It’s been a taxpalooza… What’s happened on the spending side of the fiscal ledger? Have there been “savage” and “draconian” budget cuts? …there have been some cuts, but the burden of government spending is still a heavy weight on the Greek economy. Outlays totaled 54.1 percent of GDP in 2009 and now government is consuming 52.2 percent of economic output.

For what it’s worth, the spending numbers would look better if the economy was stronger. In other words, Greece’s performance wouldn’t be so dismal if GDP was growing rather than shrinking.

And that’s why tax increases are so misguided. They give politicians an excuse to avoid much-needed spending cuts while also hindering growth, investment and job creation.

Let’s close by reviewing Greece’s performance according to Economic Freedom of the World. The overall score for Greece has dropped slightly since 2009, but the real story is that the nation’s fiscal score has dramatically worsened, falling from 5.61 to 4.66 on a 0-10 scale. In other words, during a period of time in which Greece was supposed to sober up and become more fiscally responsible, the politicians engaged in an orgy of tax hikes and Greece went from a failing grade for fiscal policy to a miserably failing grade.

Here’s a the relevant graph from the EFW website. As you can see, the score has been dropping for a decade, not just since 2009.

This is remarkable result. Greek politicians should have been pushing the nation’s fiscal score to at least 7 out of 10, if not 8 out of 10. Instead, the score has gone in the wrong direction because of tax increases.

Though I don’t expect Hillary and Bernie to learn the right lesson.

P.S. For more information, here’s my five-picture explanation of the Greek mess.

P.P.S. And if you want to know why I’m so dour about Greece’s future, how can you expect good policy from a nation that subsidizes pedophiles and requires stool samples to set up online companies?

P.P.P.S. Let’s close by recycling my collection of Greek-related humor.

This cartoon is quite  good, but this this one is my favorite. And the final cartoon in this post also has a Greek theme.

We also have a couple of videos. The first one features a video about…well, I’m not sure, but we’ll call it a European romantic comedy and the second one features a Greek comic pontificating about Germany.

Last but not least, here are some very un-PC maps of how various peoples – including the Greeks – view different European nations.

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February 5 Addendum: For my left-wing friends and others who are bending over backwards to misread this column, saying nice things about Russia’s flat tax doesn’t mean (as noted below) that Russia’s overall economic policy is admirable. And it obviously doesn’t imply anything favorable about Russia’s dismal political system or Putin himself. I like the Russia flat tax for the same reason that I like trade liberalization in China and Social Security reform in Chile. Every so often, bad governments stumble upon a good policy and I think that’s laudable because I want people to have better lives. Sadly, I don’t think the Putin-Trump “bromance” will lead to a flat tax in the US, but that would be an unexpected and nice silver lining to that dark cloud.

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I’m obviously a big fan of a simple and fair flat tax.

In part, my support for fundamental reform is driven by my desire for a low rate, for no double taxation, and for the elimination of loopholes. Those are the economic reasons for reform.

But I also am very much motivated by the moral case for tax reform. It offends me that we have 70,000-plus pages of special favors for the friends and contributors of politicians. I value the rule of law, so I want everyone in America to play by the same rules.

And I confess that I’m jealous that other nations have adopted this common-sense reform while we’re still stuck with a punitive and unfair internal revenue code.

But the silver lining to this dark cloud is that we can learn from the experiences of other nations.

A recent report looks at what’s happened in Russia following the introduction of the flat tax.

On December 23, 2016, in his annual end-of-year press conference, Russian President Vladimir Putin said that despite his “many doubts” at the initial stage of introducing a flat 13-percent personal income tax in 2001, tax reform in Russia has been a major success. …Putin claimed that in 2001, when the tax reform was introduced, he was “concerned that the budget would lose revenue, because those who earn more would have to pay less.” He said he was also concerned “whether social justice would be ensured and so on.” However, as the reform gained traction, “personal-income tax collection has increased – pay attention – seven times,” Putin said. …Daniel Mitchell, a senior fellow at the Cato Institute, told Polygraph.info that two factors contributed to a significant increase in personal income tax revenue: “the low rate made tax evasion and avoidance much less attractive, and increased incentives to earn income.”

I appreciated the chance to talk to the reporter and get quoted in the story, but I am naturally suspicious about the claims of government officials. So I wondered about Putin’s claim about a seven-fold increase in income tax receipts.

I know there were good results in the first few years after reform. I authored a study for the Center for Freedom and Prosperity last decade, and there was data at the time showing an impressive increase in revenues from the personal income tax. That data certainly bolstered the argument for tax reform.

But we now have almost another full decade of data. Has the Russian flat tax continued to produce good results? Is the low tax rate continuing to encourage both the earning of income and reporting of income?

To answer these questions, I had my intern cull through various IMF Article IV consultation reports on Russia to get up-to-date data on personal income tax receipts in Russia. And what did I learn? Was Putin wrong?

Yes, Putin’s claim of a seven-fold increase in tax receipts was completely misleading. There was actually a 10-fold jump in personal income tax revenue.

In other words, the flat tax is a success. In today’s Washington, you would say the Russian government is winning bigly.

But there are caveats.

  • Russia has experienced significant inflation, at least compared to the United States. So if you factor out increases in the price level, personal income tax revenues are “only” about three times higher today than they were before the flat tax was implemented.
  • Moreover, a flat tax is not a panacea. Notwithstanding the good results it has delivered, Russia has an unimpressive ranking of #102 from Economic Freedom of the World. In other words, there’s still a long way to go if Russia wants to become a rich nation.

But these caveats don’t change the main conclusion, which is that the Russian flat tax works. Just as it works in Hong Kong. And just as it works in Jersey. It works wherever it is tried.

Let’s look at another example. Writing for Forbes, Fahim Mostafa explains that the Hungarian flat tax also has been a big success.

A fair number of Eastern European nations have…chosen this system of taxation over its progressive counterpart. Among the latest to join this club is Hungary, replacing progressive rates from 17% to 32% with a flat tax of 16% on income effective from 2012 onward… There is reason to believe that the implementation of this system has largely benefited the Eastern European nation. …The results from the following years have been remarkable. Total government revenue in 2015 (the last year for which OECD data is available at this time) stood at 23.8% higher than the maximum prior to the flat tax reform… According to the OECD, public debt in Hungary has been decreasing steadily since 2011. Increased revenues allow for this debt to be paid. …The flat tax has boosted consumption in Hungary, greatly increasing taxes collected from sales. Total tax revenue has shot up despite the massive cuts made to income tax. Politicians seeking to implement this policy in their own nation would do well to point out the example of Hungary.

I’ll add two comments.

First, the same caveats I applied to Russia apply to Hungary. The country is ranked #57 from Economic Freedom of the World, so it’s great that there’s a successful flat tax, but a lot more reform is needed for Hungary to become a role model for overall market-friendly reform.

Second, the author should probably make a change to the column. Instead of writing that “tax revenue has shot up despite the massive cuts,” it might be more accurate to write that “tax revenue has shot up because of the massive cuts.”

Yes, every so often you can find examples of nations being on the downward-sloping portion of the Laffer Curve, either because tax rates are ridiculously high (the U.S. before Reagan) or because a nation is developing or transitioning and needs low tax burdens to boost growth and encourage compliance.

It’s never my goal to boost revenue for governments, of course, but there’s surely a lesson to be learned about the benefits of low tax rates when both taxpayers and the government wind up with more money.

P.S. If we really want to learn from other places about the ideal tax system, we should check out Bermuda, Monaco, and the Cayman Islands.

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House Republicans, as part of a generally laudable tax reform plan, want to replace the corporate income tax with a “destination-based cash-flow tax.”

I’ve addressed that topic a couple of times.

  • Left-leaning advocates like “destination-based” tax systems such as the DBCFT because such systems undermine tax competition and give politicians more ability to increase tax rates.
  • The “border adjustability” in the plan is contrary to the rules of the World Trade Organization (WTO) and there’s a significant risk that politicians might try to “fix” the plan by turning it into a value-added tax.
  • In theory, the import tax in the DBCFT is not necessarily protectionist, but the machinations of to justify that assertion, combined with the conflict it creates in the business community, undermine the consensus for reform.

I had a chance to speak about the DBCFT to a gathering put on by the Washington International Trade Association. I hit on all my main reasons for being worried about the border adjustable provisions.

For those who want additional information, I was preceded on the panel by Gordon Gray of the American Action Forum and followed by John Veroneau of Covington and Burling (and formerly with the Office of U.S. Trade Representative). You can watch the entire event by clicking here.

Regarding my remarks, I think the most relevant thing I said was when I shared new data from the Congressional Budget Office and pointed out that we can simultaneously balance the budget within 10 years and have a $3 trillion tax cut if politicians simply exercise a modest bit of spending restraint and limit annual budget increases to 1.96 per year.

And the most important thing that I said was when I warned that proponents of good policy should never do anything that might create the conditions for a value-added tax in the United States. Some people say the most important rule to remember is to never feed gremlins after midnight, but I think it’s even more important not to give politicians a new source of revenue.

Unless, of course, you want bigger government and more red ink.

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