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Posts Tagged ‘Taxation’

For the past 30 years, I’ve been criticizing both the tax code and the IRS. Which raises an interesting chicken-or-egg question about who should be blamed for our nightmarish tax system.

Should we blame IRS bureaucrats, who have a dismal track record of abusing taxpayers? Or should we blame politicians, who have been making the tax code more onerous ever since that dark day in 1913 when the income tax was adopted?

In this exchange with Stuart Varney, I take an ecumenical approach and blame both.

As you can see, I am slightly conflicted on this debate.

There are plenty of reasons to condemn the IRS, and not just because of what I mentioned in the interview about its deplorable campaign to suppress political speech by Tea Party organizations.

Yet there is an equally strong case to be made that politicians are the real problem. They are the ones who created the tax system. They are the ones who make it more complex with each passing year.

And they are the ones who constantly give more power and money to the IRS in hopes of generating more cash that can be used to buy votes.

Indeed, the most important thing I said in the interview is that the IRS budget has dramatically increased over the past few decades. And that’s after adjusting for inflation!

So while I’m surely not a fan of the IRS, I’m probably even more critical of politicians since they’re the ones responsible for the bad laws that empower bureaucrats.

But that doesn’t really matter because the solution is the same regardless of whether one blames politicians or the IRS. Throw the tax code in the garbage and replace it with a simple and fair flat tax (or, if there are ever sufficient votes to undo the 16th Amendment, replace the internal revenue code with a national consumption tax).*

Let’s close with some humor. First, here’s a painful reminder (h/t: Reddit‘s libertarian page) of the relationship between taxpayers and politicians, though it’s worth noting that they want to grab your income regardless of whether there’s a lot or a little. In other words, the taxpayer could be holding a minnow and nothing would change.

Maybe I should add this image to my archive of IRS humor, which already features a new Obama 1040 form, a death tax cartoon, a list of tax day tips from David Letterman, a Reason video, a cartoon of how GPS would work if operated by the IRS, an IRS-designed pencil sharpener, two Obamacare/IRS cartoons (here and here), a collection of IRS jokes, a sale on 1040-form toilet paper (a real product), a song about the tax agency, the IRS’s version of the quadratic formula, and (my favorite) a joke about a Rabbi and an IRS agent.

*In my libertarian fantasy world, we would return to the limited government created by the Founding Fathers, thus eliminating the need for any broad-based tax.

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Five former Democratic appointees to the Council of Economic Advisers have a column in today’s Washington Post asserting that we should not blame entitlements for America’s future fiscal problems.

The good news is that they at least recognize that there’s a future problem.

The bad news is that their analysis is sloppy, inaccurate, and deceptive.

They start with an observation about red ink that is generally true, though I think the link between government borrowing and interest rates is rather weak (at least until a government – like Greece – gets to the point where investors no longer trust its ability to repay).

The federal budget deficit is on track to exceed $1 trillion next year and get worse over time. Eventually, ever-rising debt and deficits will cause interest rates to rise. …the growing debt will take an increasing toll.

But the authors don’t want us to blame entitlements for ever-rising levels of red ink.

It is dishonest to single out entitlements for blame.

That’s a remarkable claim since the Congressional Budget Office (which is not a small government-oriented bureaucracy, to put it mildly) unambiguously shows that rising levels of so-called mandatory spending are driving our long-run fiscal problems.

CBO’s own charts make this abundantly clear (click on the image to see the original column with the full-size chart).

So how do the authors get around this problem?

First, they try to confuse the issue by myopically focusing on the short run.

The primary reason the deficit in coming years will now be higher than had been expected is the reduction in tax revenue from last year’s tax cuts, not an increase in spending.

Okay, fair enough. There will be a short-run tax cut because of the recent tax legislation. But the column is supposed to be about the future debt crisis. And that’s a medium-term and long-term issue.

Well, it turns out that they have to focus on the short run because their arguments become very weak – or completely false – when we look at the overall fiscal situation.

For instance, they make an inaccurate observation about the recent tax reform legislation.

…the tax cuts passed last year actually added an amount to America’s long-run fiscal challenge that is roughly the same size as the preexisting shortfalls in Social Security and Medicare.

That’s wrong. The legislation actually increases the long-run tax burden.

And that’s in addition to the long-understood reality that the tax burden already is scheduled to gradually increase, even measured as a share of economic output.

Once again, the CBO has a chart with the relevant data. Note especially the steady rise in the burden of the income tax (once again, feel free to click on the image to see the original column with the full-size chart).

The authors do pay lip service to the notion that there should be some spending restraint.

There is some room for…spending reductions in these programs, but not to an extent large enough to solve the long-run debt problem.

But even that admission is deceptive.

We don’t actually need spending reductions. We simply need to slow down the growth of government. Indeed, our long-run debt problem would be solved if imposed some sort of Swiss-style or Hong Kong-style spending cap so that the budget couldn’t grow faster than 3 percent yearly.

In any event, they wrap up their column by unveiling their main agenda. They want higher taxes.

Additional revenue is critical…responding to the looming fiscal challenge required a balanced approach that combined increased revenue with reduced spending. Two bipartisan commissions, Simpson-Bowles and Domenici-Rivlin, proposed such approaches that called for tax reform to raise revenue as a percent of GDP…set tax policy to realize adequate revenue.

As I already noted, the tax burden already is going to climb as a share of GDP. But the authors want an increase on top of the built-in increase.

And it’s very revealing that they cite Simpson-Bowles, which is basically a left-wing proposal of higher taxes combined with the wrong type of entitlement reform. To be fair, the Domenici-Rivlin plan  has the right kind of entitlement reform, but that proposal is nonetheless bad news since it contains a value-added tax.

The bottom line if that the five Democratic CEA appointees who put together the column (I’m wondering why Austan Goolsbee didn’t add his name) do not make a compelling case for higher taxes.

Unless, of course, the goal is to enable a bigger burden of government.

Which is the message of this very appropriate cartoon.

Needless to say, this belongs in my “Government in Cartoons” collection.

P.S. Entitlement spending is not only to blame for our future spending problems. It’s also the cause of our current spending problems.

P.P.S. In a perverse way, I actually like the column we discussed today. Five top economists on the left put their heads together and tried to figure out the most compelling argument for higher taxes. Yet what they produced is shoddy and deceptive. In other words, they didn’t make a strong argument because they don’t have a strong argument. Reminds me of Robert Rubin’s anemic argument last year against the GOP tax plan.

P.P.P.S. Four former presidents offer good advice on the topic of taxation.

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I’m a big fan of federalism because states have the flexibility to choose good policy or bad policy.

And that’s good news for me since I get to write about the consequences.

One of the main lessons we learn (see here, here, here, here, and here) is that high-earning taxpayers tend to migrate from states with onerous tax burdens and they tend to land in places where there is no state income tax (we also learn that welfare recipients move to states with bigger handouts, but that’s an issue for another day).

In this interview with Stuart Varney, we discuss whether this trend of tax-motivated migration is going to accelerate.

I mentioned in the interview that restricting the state and local tax deduction is going to accelerate the flight from high-tax states, which underscores what I wrote earlier this year about that provision of the tax bill being a “big [expletive deleted] deal.”

I suggested that Stuart create a poll on which state will be the first to go bankrupt.

And there’s a lot of data to help people choose.

Technically, I don’t think bankruptcy is even possible since there’s no provision for such a step in federal law.

But it’s still an interesting issue, so I decided to create a poll on the question. To make it manageable, I limited the selection to 10 states, all of which rank poorly in one of more of the surveys listed above. And, to avoid technical quibbles, the question is about “fiscal collapse” rather than bankruptcy, default, or bailouts. Anyhow, as they say in Chicago, vote early and vote often.

P.S. I asked a similar question about bankruptcies in developed nations back in 2011. Back then, it appeared Portugal might be the right answer. Today, I’d pick Italy.

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If you were exempted from taxation, you’d presumably be very happy. After all, even folks on the left do everything they can to minimize their tax payments.

Now imagine that you are put in charge of tax policy.

Like Elizabeth Warren, you obviously won’t volunteer to start paying tax, but what would you recommend for other people?

Would you want them to also enjoy tax-free status, or at least get to experience a smaller tax burden? Or would you take a malicious approach and suggest tax increases, comforted by the fact that you wouldn’t be affected?

In this theoretical scenario, I hope most of us would choose the former approach and seek tax cuts.

But not everybody feels the same way. The bureaucrats at the International Monetary Fund actually do receive tax-free salaries. Yet instead of seeking to share their good fortune with others, they routinely and reflexively urge higher taxes on the rest of us. Here are some articles, all from the past 12 months, that I’ve written about the IMF’s love affair with punitive taxation.

  • Last June, I wrote about the IMF pushing a theory that higher taxes would improve growth in the developing world.
  • Last July, I wrote about the IMF complaining that tax competition between nations is resulting in lower corporate tax rates.
  • Last October, I wrote about the IMF asserting that lower living standards are desirable if everyone is more equally poor.
  • Also in October, I wrote about the IMF concocting a measure of “fiscal space” to justify higher taxes across the globe.
  • Last November, I wrote about the IMF publishing a study expanding on its claim that equal poverty is better than unequal prosperity.
  • This February, I wrote about the IMF advocating more double taxation of income that is saved and invested.

Needless to say, I especially don’t like it when the IMF urges higher taxes in America.

But I think everybody should have more freedom and prosperity, so I also don’t like it when the IMF pushes tax hikes elsewhere. I don’t like it when the tax-free bureaucrats advocate higher taxes on an entire region. I don’t like it when they push a high-tax agenda on big countries. I don’t like it when they urge tax increases on small countries.

What upsets me most of all, however, is that the IMF is trying to punish very poor nations is sub-Saharan Africa.

This came to my attention when I saw a Bloomberg report about the IMF recommending policy changes in Ivory Coast. At first glance, I thought the IMF was doing something sensible, supporting faster growth and higher income.

Ivory Coast must improve its tax system if the world’s biggest cocoa producer wants to maintain economic growth of at least 7 percent, the International Monetary Fund said. Jose Gijon, the resident representative for the Washington-based lender, said in an interview in the commercial capital of Abidjan Wednesday. “…if it wants to become an emerging country and for that, it needs higher income.”

But I found out that the bureaucrats wanted higher income for the government.

“The key for Ivory Coast is revenue…The government needs to create sufficient fiscal space…”

Unsurprisingly, local politicians like the idea of getting more loot.

The government seeks to gradually increase its tax revenue to 20 percent of gross domestic product from 15.9 percent now, Prime Minister Amadou Gon Coulibaly said in 2017.

How sad. Ivory Coast (now usually known as Côte d’Ivoire) is a very poor country, with living standards akin to those of the United States in 1860. Yet rather than recommend the policies that allowed the United States and other western nations to become rich, such as no income tax and very small government, the IMF wants to fatten the coffers of a corrupt and ineffective public sector.

Here’s something else that is sad. This seems to be the advice the IMF gives to all nations in sub-Saharan Africa.

Consider this story from Kenya.

Kenyans should brace themselves for higher taxes after the Government caved in to the International Monetary Fund’s (IMF) demands. …It made the commitment to the IMF in a letter of intent that spells out a raft of measures that are likely to eat into consumers’ pockets. …The sectors to be hit include agriculture, manufacturing, education, health, tourism, finance, social work, and energy. …The Government hopes to squeeze an extra Sh40 billion in taxes from these sectors. This is likely to have a ripple effect by pushing up the cost of goods and services… The Government intends to increase income tax by over Sh100 billion in the financial year 2018/19.

We also have the IMF’s perverse approach to “tax reform” in Nigeria.

The International Monetary Fund (IMF) has advised Nigeria to embark on a full Value Added Tax (VAT) reform. …The lender’s Mission Chief for Nigeria, African Department, Mr Amine Mati, …said government must raise taxes… In addition, government should also increase taxes on alcohol and tobacco and broaden VAT.

The bureaucrats also want more tax revenue in Tanzania.

The International Monetary Fund (IMF) Deputy Managing Director, Tao Zhang has hailed Tanzania for managing to boost tax collection… The visiting IMF leader said it was vital to mobilise more…public resources by strengthening tax collection… “it is crucial to mobilise more…public resources within Tanzania, especially by strengthening tax collection…” he said at a public lecture he gave in Dar es Salaam yesterday.

The IMF is even using a $190 million bribe to advocate higher taxes in Ghana.

Ghana needs to improve revenue collection…to achieve its fiscal targets, the International Monetary Fund said. …“Fiscal consolidation has to be revenue-based,” Koliadina told reporters in the capital, Accra. …A positive outcome of the fifth and sixth reviews of the program will lead to the IMF disbursing $190 million to Ghana, Koliadina said.

Last but not least, let’s look at the IMF’s misguided advice for Botswana.

The Government of Botswana should seek to strengthen its revenue base…, the International Monetary Fund has said. …”The authorities agreed that there is a significant potential to boost domestic revenues through tax administration and tax policy reforms that could…provide additional funding for future fiscal expenditures,” the report stated.

Higher taxes to finance bigger government? Wow, talk about economic malpractice.

Since Botswana has been one of the few bright spots in Africa, I hope lawmakers tell the IMF to get lost. But I worry that politicians will be happy to take the IMF’s bad advice.

How tragic.

These are the only nations I investigated, so I guess it’s possible that there’s a sub-Saharan nation where the IMF hasn’t recommended higher taxes. Heck, it’s even theoretically possible that the bureaucrats may have suggested lower taxes somewhere on the continent (though that’s about as likely me playing pro football next season).

I’ll simply note that the IMF openly admits that it wants higher taxes all across the region.

Tax revenues play a critical role for countries to create room in their budgets to increase spending on social services…raising tax revenues is the most growth-friendly way to stabilize debt. More broadly, building a country’s tax capacity is at the center of any viable development strategy…we see potential in many countries of sub-Saharan Africa to raise tax revenues by about one percent of GDP per year over the next five or so years. …Since building the capacity to collect more from personal income taxes takes time, in the next few years VAT and excise taxes likely offer the biggest potential for additional revenue. For example, recent studies by the IMF indicate a revenue potential of about 3 percent of GDP from VAT in Cape Verde, Senegal, and Uganda, and ½ percent of GDP from excises for all countries in sub-Saharan Africa. …It is also important to consider newer sources of revenue, such as property taxes. …Raising revenues is often a politically difficult task. But the current economic junction in sub-Saharan Africa together with sustained development needs creates an imperative for action now.

I’m almost at a loss for words. It’s mind-boggling that anybody could look at policy in sub-Saharan Africa and conclude that the recipe for growth is giving more money to politicians.

And I’m equally flabbergasted that the IMF openly claims that bigger government is good for growth. Unsurprisingly, the bureaucrats never try to justify that bizarre and anti-empirical assertion.

For those who are interested in genuinely sensible information on how poor nations can become rich nations, I strongly recommend this video from the Center for Freedom and Prosperity.

P.S. Back in 2015, to mock the pervasive statism at the Organization for Economic Cooperation and Development, I created a fake fill-in-the-blanks/multiple-choice template. A similar exercise for the IMF would only require one short sentence: “The nation of __ should raise taxes.”

P.P.S. In other words, this cartoon is very accurate.

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One of the key principles of a free society is that governmental power should be limited by national borders.

Here’s an easy-to-understand example. Gambling is basically illegal (other than government-run lottery scams, of course) in my home state of Virginia. So they can arrest me (or maybe even shoot me) if I gamble in the Old Dominion.

I think that’s bad policy, but it would be far worse if Virginia politicians also asserted extraterritorial powers and said they could arrest me because I put a dollar in a slot machine during my last trip to Las Vegas.

And if Virginia politicians tried to impose such an absurd policy, I certainly would hope and expect that Nevada authorities wouldn’t provide any assistance.

This same principle applies (or should apply) to taxation policy, both globally and nationally.

On a global level, I’m a big supporter of so-called tax havens. I’m glad when places with pro-growth tax policy attract jobs and capital from high-tax nations. This process of tax competition rewards good policy and punishes bad policy. Moreover, I don’t think those low-tax jurisdictions should be under any obligation to enforce the bad tax laws of uncompetitive countries.

There’s a very similar debate inside America. Some states – particularly those with punitive sales taxes – want to force merchants in other states to be deputy tax enforcers.

I’ve written about this topic and I think even my writings from 2009 and 2010 are still completely relevant. But let’s check some other sources, starting with a column in the Wall Street Journal. It’s from 2016, but the issue hasn’t changed.

The state of Alabama is openly defying the U.S. Supreme Court in an effort to squeeze millions of dollars of tax revenue from businesses beyond its borders. …This unconstitutional tax grab cuts to the heart of the Commerce Clause, which gives Congress the power to regulate trade “among the several States.” Alabama’s regulation directly contravenes the Supreme Court’s 1992 ruling in Quill v. North Dakota. In that case, the court held that North Dakota could not require an out-of-state office-supply company to collect sales taxes because the firm had no offices or employees there. …Alabama’s revenue commissioner, Julie Magee, is putting forward an untested and suspect legal theory: The state claims that if its residents buy more than $250,000 a year from a remote business, then the seller has an “economic presence”… There are around 10,000 sales-tax jurisdictions in the U.S., with varying rates, rules and holidays, and different definitions of what is taxable. Keeping track of this ever-changing patchwork is a burden, and forcing retailers to scramble to comply would profoundly hinder interstate commerce in the Internet age.

And here are some excerpts from a column published that same year by Fortune.

When politicians call for “fairness,” it’s important to take a closer look at their definition of fair. See, for example, the nationwide push in state capitols to slap online sales taxes on out-of-state retailers—a simple tax grab… states are constitutionally prohibited from collecting sales taxes from retailers that have no presence within their borders…thanks to the U.S. Supreme Court’s 1992 ruling in Quill Corp. v. North Dakota… Any national online sales-tax system will burden online retailers to a degree never felt by brick-and-mortar businesses. Local businesses only have to deal with a limited number of sales taxes—usually only the state, county, and local levies that apply to specific stores. Online retailers, on the other hand, would have to calculate and apply sales taxes across the entire nation—and roughly 10,000 jurisdictions have such taxes. Complying with this convoluted system would necessarily raise costs for consumers and stifle competition.

And the debate continues this year. The Wall Street Journal editorialized against extraterritorial state taxing last week.

A large faction of House Republicans are pressing GOP leaders to attach legislation to the omnibus spending bill that would let states collect sales tax from remote online retailers. South Dakota Rep. Kristi Noem’s legislation…would let some 12,000 jurisdictions conscript out-of-state retailers into collecting sales and use taxes from their customers. …Contrary to political lore, sales tax revenues have been increasing steadily in states with healthy economies. Over the past five years, Florida’s sales tax revenues have grown 27%. South Dakota’s are up by nearly 30% since 2013. …Twenty or so states have adopted “click-through” taxes to hit remote retailers that have contracts with local businesses. In 2016 South Dakota invited the High Court to revisit Quillby extending its sales tax to out-of-state sellers. …the Court could enable broader taxation and regulation of out-of-state businesses. This is what many states want to happen. …Raising taxes on small business and consumers won’t be a good look for Republicans in November, nor an inducement for investment and growth.

Jeff Jacoby also just wrote on this topic for his column in the Boston Globe.

First, the flow of interstate commerce must not be impeded by one state’s impositions. And second, there should be no taxation without representation; vendors should not be liable for taxes in states where they have no vote or political recourse. The Supreme Court upheld this “physical connection” standard in a 1992 case, Quill v. North Dakota. …the high court should reaffirm it. In the 26 years since the justices rebuffed North Dakota’s claim, the case against allowing states to exert their taxing power over remote sellers has grown even stronger. …there are now 12,000 taxing jurisdictions — not only states, counties, and cities, but also parishes, police districts, and Indian reservations. A lone online seller, unprotected by the Quill rule, could be obliged to remit taxes to any combination of them, with all their multitudinous rules and definitions, tax holidays and filing deadlines. …South Dakota can impose onerous burdens on companies operating within its borders, but not on vendors whose only connection to the state is that some of their customers happen to live there. The court got it right the first time. No merchant — whether selling online, via mail order, or in a traditional shop — is obliged to be a tax collector for states it doesn’t operate in.

And here are some passages from Jessica Melugin’s article for FEE. She makes the key point that extraterritorial tax powers would undermine – if not cripple – the liberalizing impact of tax competition.

…the Remote Transactions Parity Act (RTPA)…seeks to get rid of that physical presence limit on state taxing powers. It would let states reach outside their geographical borders and compel another state’s business to calculate, collect, and remit to that first state. …the long-term effect is that this arrangement will lessen the downward pressure on taxes between jurisdictions. Think of it like this: it’s the difference between driving your car across the D.C. border to Virginia to fill up with lower Virginia gas taxes—that’s how it works now and that’s what keeps at least some downward pressure on D.C. tax rates. If D.C. made the rate high enough, everyone would exit and fill up in Virginia. But if the approach in the RTPA is applied to this thought experiment, it would mean that when you pull into that Virginia gas station, they look at your D.C. plates and charge you the D.C. gas tax rate. …it’s a makeshift tax cartel among the states. …the RTPA is a small-business killer—which is why big box retailers support it. It crushes small competitors with compliance costs. State politicians are for it because they’d rather tax sellers in other states who can’t vote them out of office. Consumers will be left with less money in their pockets and fewer choices.

By the way, there are some pro-market people on the other side. Alex Brill of the American Enterprise Institute has written in favor of extraterritorial taxation.

…lawmakers have proposed legislation to allow (not require) states to collect sales tax on goods purchased from out-of-state sellers. …critics of this legislation…argue that “internet freedom is under attack by politicians willing to distort markets and tilt the playing field toward their favored businesses.” Internet freedom is certainly not being “attacked” by a policy to improve enforcement of existing tax liability. Second, these critics oppose the legislative reform based on the belief that just because the internet benefits people, online retail activities should be advantaged by public policy. If public finance were based on this type of specious logic, we would have a tax code far more unfair and distorted than it currently is.

I actually agree with both of his arguments. Giving states extraterritorial tax powers isn’t an attack on the Internet. And I also agree that tax policy shouldn’t provide special preferences.

But neither of his points address my concern that extraterritorial tax powers give too much power to governments and undermine tax competition.

Unless he’s going to argue that Nevada’s no-income-tax status is “distorted” compared to California’s punitive system. Or unless he’s going to argue that Delaware’s no-sales-tax status is “unfair” compared to New Jersey’s onerous system.

For more information, here’s my speech to congressional staffers from 2012.

P.S. For folks who like technical details, this fight is not about Internet taxation. It’s a battle between “origin-based” taxation (basically territorial taxation) and “destination-based” taxation (basically worldwide or extraterritorial taxation). I favor the former and oppose the latter, which helps to explain my opposition to the border-adjustment tax and the value-added tax.

P.P.S. I was afraid that congressional leaders would attach a provision to the new spending bill that would allow extraterritorial taxation by states. Fortunately, that didn’t happen. So the “omnibus” plan is a pork-filled affront to fiscal sanity, but at least it’s not a state-goverment-empowering, pork-filled affront to fiscal sanity.

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A couple of decades can make a huge difference in the political and economic life of a jurisdiction.

And here’s something especially amazing from a bit more than five decades in the past. New Jersey used to have no state income tax and no state sales tax.

Yes, your eyes are not deceiving you. The basket case of New Jersey used to be a mid-Atlantic version of New Hampshire. But once the sales tax was imposed in 1966 and the income tax was imposed in 1976, it’s been all downhill ever since.

An article in the City Journal helps to explain the state’s fiscal decay.

Brendan Byrne, a Democratic former governor of the Garden State, …told mayors that the state would need a “large revenue package”… The heart of the package would be a new statewide income tax, which went into permanent effect in 1977. Byrne promised that the additional money would help relieve the high property-tax burden on New Jersey’s citizens… Four decades later, the plan has failed. …politicians and special interests don’t see new streams of tax revenue as a means to replace or eliminate an existing stream, but rather as a way of adding to the public coffers. (For those who entertain fantasies of a value-added tax replacing the federal income tax, take heed.) New Jersey’s income tax started with a top rate of about 2.5 percent; it’s now around 9 percent.

Needless to say, nothing politicians promised has happened.

Property taxes haven’t been reduced. They’ve gone up. The government schools haven’t improved. Instead, the test scores in the state are embarrassing. And debt hasn’t gone down. Red ink instead has skyrocketed.

And what’s amazing – and depressing – is that New Jersey politicians continue to make a bad situation worse. Here are some excerpts from a Bloomberg report.

New Jersey Governor Phil Murphy proposed taxing online-room booking, ride-sharing, marijuana, e-cigarettes and Internet transactions along with raising taxes on millionaires and retail sales to fund a record $37.4 billion budget that would boost spending on schools, pensions and mass transit. …Murphy, a Democrat…has promised additional spending on underfunded schools and transportation in a credit-battered state with an estimated $8.7 billion structural deficit for the fiscal year that starts July 1. …Murphy said Tuesday in his budget address to lawmakers. “A millionaire’s tax is the right thing to do –- and now is the time to do it.” …The budget…would…restore the state’s sales tax to 7 percent from 6.625 percent… Murphy’s proposal would almost triple the direct state subsidy for New Jersey Transit, which has been plagued by safety and financial issues.

More taxes, more spending, followed by even more taxes and more spending.

I wonder if Greek taxpayers would want to tell their counterparts in New Jersey how that story ends.

Assuming, of course, there are any taxpayers left in the Garden State. There’s already been a big exodus of productive people who are tired of being treated like fatted calves.

And don’t forget that New Jersey taxpayers no longer have unlimited ability to deduct their state and local taxes on their federal tax return. So these tax hikes will hurt much more than past increases.

In any event, taxpayers better escape before the die.

Though I know one guy who won’t be leaving.

P.S. Anybody want to guess whether New Jersey collapses before California, Illinois, or Connecticut? They’re all in the process of committing slow-motion suicide.

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I’m not a fan of international bureaucracies, but they’re not universally bad. Yes, we almost always get a bad policy agenda from the left-leaning political appointees who run these organizations.

But it’s also true that the professional economists at these bureaucracies oftentimes produce solid reasearch. A good example is the new study of the American fiscal system by three economists at the International Monetary Fund.

They start with an observation that should be uncontroversial, but is nonetheless surprising given the tendency of the IMF’s leadership to advocate more taxes.

The consensus is that reducing distortionary taxes on labor and capital income can stimulate economic activity by encouraging an increase in labor supply and higher savings. Indeed, the empirical literature on tax multipliers is vast and points to measurable effects of reducing taxes on output and employment.

I’m delighted by these two sentences. Makes me wonder why the political types who run the IMF overlook these basic insights when they’re bullying governments into enacting higher tax rates!

But let’s set that aside and look at the specific findings in this report. Here’s what the IMF tried to calculate.

We simulate three types of tax policy changes (i) A “middle-class tax cut” which reduces the effective tax rates for households earning between 0.5 to 4 times the median income and is offset by lower government spending; (ii) A “middle-class tax cut” and an EITC expansion that is fully financed by an increase in consumption taxes; (iii) tax cut for high income groups that is also combined with an EITC expansion and financed by a higher consumption tax.

Since I’ve pointed out that not all tax cuts are created equal, I think this kind of research can be very helpful.

Here are the core findings from the IMF’s analysis.

The model generates positive effects on growth, consumption and investment that are broadly in line with the recent empirical literature on PIT multipliers. Despite the positive macro response, supply side effects are never strong enough to prevent cuts from being revenue losing (i.e., tax cuts do not “pay for themselves”). …A tax cut for the middle-class, financed from a lump-sum reduction in government spending, results in a loss of revenues of 0.8 percent of GDP but raises the steady state GDP by just under 1 percent after 5 years (i.e., a personal income tax multiplier of 1.1). …growth effects are smaller when lower personal income taxes are paid for with a VAT. …Tax cuts for higher income groups tend to have a stronger aggregate impact than tax cuts for the middle class. Indeed, in the simple case where the tax cuts are paid for by lump sum cuts in government spending, the personal income tax multiplier is around 3. … tax cuts that are incident on high income households increase income polarization.

This all makes sense. Lower tax rates are good for growth, particularly if offset by reductions in the burden of government spending.

And since lower tax rates are only self-financing in very rare circumstances, I have no problem with the conclusion about lower revenues.

Indeed, the concluding section about “income polarization” was the only part of the above excerpt that rubbed me the wrong way. And even then, I’m only irked because of the implication that lower tax rates might be a bad idea if the rich get richer faster than the poor get richer.

While I like the overall findings, I want to focus on two details from the study.

First, let’s look at the results for middle-class tax cuts. The IMF researchers looked at two versions, with one tax cut financed by lower spending and the other tax cut financed by higher consumption taxation.

As you can see from these two charts, you get more growth and higher wages when you simultaneously reduce taxes and spending.

Second, let’s look at the IMF’s comparison of middle-class tax cuts and tax cuts for high-income people. The conclusion is that you get more bang-for-the-buck when lowering tax rates at the top.

…there are larger growth effects when the tax cut is incident on the higher income groups. The reasons behind this are two-fold: First, the top quintile responds to lower taxes by saving more which, in the closed economy version of the model, leads to more capital formation and a decline in the equilibrium real interest rate. Second, those receiving a reduction in their tax rate supply more high-skilled labor which helps boost output.

By the way, I should hasten to add that this isn’t an argument against middle-class tax relief. As far as I’m concerned, all taxpayers are sending too much money to politicians.

I’m merely highlighting this analysis because some types of tax cuts have larger growth effects. For what it’s worth, I’m not even sure I agree with the IMF’s analysis of why lower tax rates on the rich produce more growth. I suspect the main reason for the stronger results is that high-income taxpayers have much greater ability to change their behavior in response to altered incentives.

In any event, here’s the IMF’s comparison of the two types of tax cuts and what happens to output, consumption, and investment.

P.S. Since we’re discussing the occasional good work of international bureaucracies, here’s my favorite World Bank study and here’s my favorite OECD study.

P.P.S. I’ve never seen any good research from the United Nations. I’m not claiming there’s never been an economically sound study from that bureaucracy. All I’m saying is that I’ve never run across an example.

P.P.P.S. I don’t know if the European Central Bank should be characterized as an international bureaucracy, but it definitely has the highest percentage of quality research (see here, here, here, here, here, and here for examples).

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