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Posts Tagged ‘Taxation’

The worst-international-bureaucracy contest is heating up.

In recent years, the prize has belonged to the Paris-based Organization for Economic Cooperation and Development for reasons outlined in this interview. Indeed, I’ve even argued that subsidies for the OECD are the worst expenditure in the federal budget, at least when measured on a damage-per-dollar-spent basis.

But the International Monetary Fund stepped up its game in 2017, pushing statism to a much higher level.

  • In June, I wrote about the IMF pushing a theory that higher taxes would improve growth in the developing world.
  • In July, I wrote about the IMF complaining that tax competition between nations is resulting in lower corporate tax rates.
  • In 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.
  • In November, I wrote about the IMF publishing a study expanding on its claim that equal poverty is better than unequal prosperity.

And the IMF is continuing its jihad against taxpayers in 2018.

The head bureaucrat at the IMF just unleashed a harsh attack on the recent tax reform in the United States, warning that other nations might now feel compelled to make their tax systems less onerous.

IMF Managing Director Christine Lagarde said the Trump administration’s $1.5 trillion tax cut could prompt other nations to follow suit, fueling a “race to the bottom” that risks hemming in public spending. …It also will fuel inflation, she said. “What we are beginning to see already and what is of concern is the beginning of a race to the bottom, where many other policy makers around the world are saying: ‘Well, if you’re going to cut tax and you’re going to have sweet deals with your corporates, I’m going to do the same thing,”’ Lagarde said.

Heaven forbid we have lower tax rates and more growth!

Though the really amazing part of that passage is that Ms. Lagarde apparently believes in the silly notion that tax cuts are inflationary. Leftists made the same argument against the Reagan tax cuts. Fortunately, their opposition we ineffective, Reagan slashed tax rates and inflation dramatically declined.

What’s also noteworthy, as illustrated by this next excerpt, is that Lagarde doesn’t even bother with the usual insincere rhetoric about using new revenues to reduce red ink. Instead, she openly urges more class-warfare taxation to finance ever-bigger government.

The IMF chief’s blunt assessment follows an unusually public disagreement between the fund and President Donald Trump’s administration last fall over an IMF paper arguing that developed nations can share prosperity more evenly, without sacrificing growth, by shifting the income-tax burden onto the rich. Competitive tax cuts risk holding back governments in spending on anything from defense and infrastructure to health and education, Lagarde said.

What makes her statements so absurd is that even IMF economists have found that higher taxes and bigger government depress economic activity. But Ms. Largarde apparently doesn’t care because she’s trying to please the politicians who appointed her.

By the way, keep in mind that Ms. LaGarde’s enormous salary is tax free, as are the munificent compensation packages of all IMF employees. So it takes enormous chutzpah for her to push for higher taxes on the serfs in the economy’s productive sector.

But it’s not just Lagarde. We also have a new publication by two senior IMF bureaucrats that urges more punitive taxes on saving and investment.

Although Thomas Piketty has famously proposed a coordinated global wealth tax of the wealthiest at two percent, there are now very few effective explicit wealth taxes in either developing or advanced economies. Indeed between 1985 and 2007, the number of OECD countries with an active wealth tax fell from twelve to just four. And many of those were, and are, of limited effectiveness. …This hot topic of how tax systems can assist in addressing excessive increases in wealth inequality was discussed at the regular IMF-World Bank session on taxation last October. …some among the very rich recognize some social benefit from being taxed more heavily (for instance, Bill Gates’ father). Perhaps then there is more that can be done to foster that sense of social responsibility… The exchange of tax information between countries is a powerful tool…and perhaps ultimately game-changing approach to the taxation of the wealthy…we do see good cause to be less pessimistic than even a few years ago.

Once again, we can debunk the IMF by….well, by citing the IMF. The professional economists at the bureaucracy have produced research showing that discriminatory taxes on capital are very bad for prosperity.

But the top bureaucrats at the organization are driven by either by statist ideology or by self interest (i.e., currying favor with the governments that decide senior-level slots).

The bottom line is that perhaps the IMF should be renamed the Anti-Empirical Monetary Fund.

And with regards to worst-international-bureaucracy contest, I fully expect the OECD to quickly produce something awful to justify its claim to first place.

P.S. I’m not a fan of the United Nations, but that bureaucracy generally is too ineffective to compete with the IMF and OECD.

P.P.S. The World Bank also does things I don’t like (as well as some good things), but it generally doesn’t push a statist policy agenda, at least compared to the nefarious actions of OECD and IMF.

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I strongly applauded the tax reform plan that was enacted in December, especially the lower corporate tax rate and the limit on the deduction for state and local taxes.

But I’m not satisfied. Our long-run goal should be fundamental tax reform. And that means replacing the current system with a simple and fair flat tax.

And the recent tax plan only took a small step in that direction. How small? Well, the Tax Foundation just calculated that it only improved the United States from #30 to #25 in their International Tax Competitiveness Ranking. In other words, we have a long way to go before we catch up to Estonia.

 

It’s possible, of course, to apply different weights and come up with a different list. I think the Tax Foundation’s numbers could be improved, for instance, by including a measure of the aggregate tax burden. And that presumably would boost the U.S. score.

But the fact would remain that the U.S. score would be depressingly low. In other words, the internal revenue code is still a self-imposed wound and huge improvements are still necessary.

That’s why we need another round of tax reform, based on the three core principles of good tax policy.

  1. Lower tax rates
  2. Less double taxation
  3. Fewer loopholes

But how is tax reform possible in a fiscal environment of big government and rising deficits?

This is a challenge. In an ideal world, there would be accompanying budget reforms to save money, thus creating leeway for tax reform to be a net tax cut.

But even in the current fiscal environment, tax reform is possible if policy makers finance pro-growth reforms by closing undesirable loopholes.

Indeed, that’s basically what happened in the recent tax plan. The lower corporate rate was financed by restricting the state and local tax deduction and a few other changes. The budget rules did allow for a modest short-run tax cut, but the overall package was revenue neutral in the long run (i.e., starting in 2027).

It’s now time to repeat this exercise.

The Congressional Budget Office periodically issues a report on Budget Options, which lists all sort of spending reforms and tax increases, along with numbers showing what those changes would mean to the budget over the next 10 years.

I’ve never been a huge fan of this report because it is too limited on the spending side. You won’t find fleshed-out options to shut down departments, for instance, which is unfortunate given the target-rich environment (including TransportationHousing and Urban DevelopmentEducationEnergy, and Agriculture).

And on the tax side, it has a lengthy list of tax hikes, generally presented as ways to finance an ever-expanding burden of government spending. The list must be akin to porn for statists like Bernie Sanders.

It includes new taxes.

And it includes increases in existing taxes.

But the CBO report also includes some tax preferences that could be used to finance good tax reforms.

Here are four provisions of the tax code that should be the “pay-fors” in a new tax reform plan.

We’ll start with two that are described in the CBO document.

Further reductions in itemized deductions – The limit on the state and local tax deduction should be the first step. The entire deduction could be repealed as part of a second wave of tax reform. And the same is true for the home mortgage interest deduction and the charitable contributions deduction.

Green-energy pork – The House version of tax reform gutted many of the corrupt tax preferences for green energy. Unfortunately, those changes were not included in the final bill. But the silver lining to that bad decision is that those provisions can be used to finance good reforms in a new bill.

Surprisingly, the CBO report overlooks or only gives cursory treatment to a couple of major tax preferences that each could finance $1 trillion or more of pro-growth changes over the next 10 years.

Municipal bond interest – Under current law, there is no federal tax on the interest paid to owners of bonds issued by state and local governments. This “muni-bond” loophole is very bad tax policy since it creates an incentive that diverts capital from private business investment to subsidizing the profligacy of cities like Chicago and states like California.

Healthcare exclusion – Current law also allows a giant tax break for fringe benefits. When companies purchase health insurance plans for employees, that compensation escapes both payroll taxes and income taxes. Repealing – or at least capping – this exclusion could raise a lot of money for pro-growth reforms (and it would be good healthcare policy as well).

What’s potentially interesting about the four loopholes listed above is that they all disproportionately benefit rich people. This means that if they are curtailed or repealed and the money as part of tax reform, the left won’t be able to argue that upper-income taxpayers are getting unfair benefits.

Actually, they’ll probably still make their usual class-warfare arguments, but they will be laughably wrong.

The bottom line is that we should have smaller government and less taxation. But even if that’s not immediately possible, we can at least figure out revenue-neutral reforms that will produce a tax system that does less damage to growth, jobs, and competitiveness.

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According to bureaucrats at the Paris-based Organization for Economic Cooperation and Development, so-called tax havens are terrible and should be shut down. Their position is grossly hypocritical since they get tax-free salaries while pushing for higher taxes on everyone else, but not very surprising since the OECD’s membership is dominated by increasingly uncompetitive European welfare states.

Many economists, by contrast, view tax havens favorably since they discourage politicians from over-taxing and over-spending (thus protecting nations from “goldfish government“).

I agree with this economic argument for tax havens, but I also think there’s a very strong moral argument for these jurisdictions since there are so many evil and incompetent governments in the world.

But I don’t want to rehash the argument about the desirability of tax havens in this column. Instead, we’re going to focus on a nation that is becoming the world’s premier “offshore” center.

But it’s not a Caribbean island or a micro-state in Europe.

Instead, as noted in a recent Bloomberg editorial, the United States is now the magnet for global investment.

…the U.S. is becoming one of the world’s best places to hide money from the tax collector. …Congress rejected the Obama administration’s repeated requests to make the necessary changes to the tax code. As a result, the Treasury cannot compel U.S. banks to reveal information such as account balances and names of beneficial owners. The U.S. has also failed to adopt the so-called Common Reporting Standard, a global agreement under which more than 100 countries will automatically provide each other with even more data than FATCA requires. …the U.S. is rapidly becoming the new Switzerland. Financial institutions catering to the global elite, such as Rothschild & Co. and Trident Trust Co., have moved accounts from offshore havens to Nevada, Wyoming and South Dakota. New York lawyers are actively marketing the country as a place to park assets. …From a certain perspective, all this might look pretty smart: Shut down foreign tax havens and then steal their business.

The Economist also identified the U.S. as a haven.

America seems not to feel bound by the global rules being crafted as a result of its own war on tax-dodging. It is also failing to tackle the anonymous shell companies often used to hide money. …All this adds up to “another example of how the US has elevated exceptionalism to a constitutional principle,” says Richard Hay of Stikeman Elliott, a law firm. …America sees no need to join the CRS. …reciprocation is patchy. It passes on names and interest earned, but not account balances; it does not look through the corporate structures that own many bank accounts to reveal the true “beneficial” owner; and data are only shared with countries that meet a host of privacy and technical standards. That excludes many non-European countries. …The Treasury wants more data-swapping and corporate transparency, and has made several proposals to bring America up to the level of the CRS. But most need congressional approval, and politicians are in no rush to enact them. …Meanwhile business lobbyists and states with lots of registered firms, led by Delaware, have long stymied proposed federal legislation that would require more openness in corporate ownership. (Incorporation is a state matter, not a federal one.) …America is much safer for legally earned wealth that is evading taxes… It has shown little appetite for helping enforce foreign tax laws.

And here are some passages from a recent column in Forbes.

…foreign financial institutions are required to report the identities and assets of United States taxpayers to the IRS. Meanwhile, U.S. financial institutions cannot be compelled to reveal the same information to foreign countries. Additionally, the United States has not adopted the Common Reporting Standard. …So, the United States government obtains tax and wealth information from other countries, but fails to share information about what occurs in the U.S. with those other counties. …the U.S. is among the top five best countries for setting up anonymous shell companies. Tax havens deliver a set of benefits including secrecy, potential tax minimization, and the ability of the wealthy to access their monies from anywhere in the world. For a substantial percentage of the global super-rich, the United States is regularly unmatched.

Here’s some of what was reported by the U.K.-based Financial Times.

South Dakota is best known for its vast stretches of flat land and the Mount Rushmore monument… Yet despite its small town feel, Sioux Falls has become a magnet for the ultra-wealthy who set up trusts to protect their fortunes from taxes… Assets held in South Dakotan trusts have grown from $32.8bn in 2006 to more than $226bn in 2014, according to the state’s division of banking. The number of trust companies has jumped from 20 in 2006 to 86 this year. The state’s role as a prairie tax haven has gained unwanted attention… The Boston Consulting Group estimates that there is $800bn of offshore wealth in the US, nearly half of which comes from Latin America. …Bruce Zagaris, a Washington-based lawyer at Berliner, Corcoran & Rowe, says the US offshore industry is even bigger than people realise. “I think the US is already the world’s largest offshore centre. It has done a real good job disabling competition from Swiss banks.”

If this sounds like the United States is hypocritical, that’s a very fair accusation.

Indeed, it was the topic of an entire panel at an Offshore Alert conference. If you have a lot of interest in this topic, here’s the video.

This is an odd issue where I agree with statists (though only with regard to which jurisdictions are “havens”). For instance, the hard-left Tax Justice Network has calculated that the United States is not the biggest offshore jurisdiction. But America is close to the top.

In the TJN’s most-recent Financial Secrecy Index, the United States ranks #2. They think that’s a bad thing (indeed, one of their top people actually asserted that all income belongs to the government), but I’m happy we’ve risen in the rankings.

TJN also has specific details about U.S. law and I think they’ve put together a reasonably accurate summary.

The bottom line is that America is a haven, though it’s probably worth noting that we’ve risen in the rankings mostly because other nations have been coerced into weakening their human rights laws on financial privacy, not because the United States has improved.

At the risk of pointing out the obvious, TJN and I part ways on whether it’s good for the United States to be a tax haven.

I already explained at the start of this column why I like tax havens and tax competition. Simply stated, it’s good for taxpayers and the global economy when governments are forced to compete.

But there’s also a good-for-America argument. Here’s the data from the Commerce Department’s Bureau of Economic Analysis on indirect investment in the U.S. economy. As you can see, cross-border flows of passive investment have skyrocketed. It’s unknown how much of this increase is due to overall globalization and how much is the result of America’s favorable tax and privacy rules for foreigners.

But there’s no question the U.S. economy benefits enormously from foreigners choosing to invest in America.

All of which helps to explain why it would be a big mistake for the United States to ratify the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters.

Unless, of course, one thinks it would be good to undermine American competitiveness by creating a global tax cartel to enable bigger government.

P.S. The OECD doesn’t like me, but I don’t like them either.

P.P.S. The TJN folks and OECD bureaucrats claim that their goal is to reduce tax evasion. My response is that a global tax cartel is a destructive way of achieving that goal. There’s a much better option available.

P.P.P.S. Rand Paul is one of the few heroes on this issue.

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Judged by the amount of attention various provisions produced, last year’s fight over tax reform was about reducing the corporate tax rate and limiting the deduction for state and local taxes.

But there were many other important changes, including a a big increase in the standard deduction (i.e., the amount households can protect from the IRS), a shift that will reduce the number of people who utilize itemized deductions.

A report in the Washington Post suggests that this reform could hurt charities.

Many U.S. charities are worried the tax overhaul bill signed by President Trump…could spur a landmark shift in philanthropy, speeding along the decline of middle-class donors… The source of concern is how the tax bill is expected to sharply reduce the number of taxpayers who qualify for the charitable tax deduction — a big driver of gifts to nonprofits. …the number of people who qualify for the charitable deduction is projected to plummet next year from about 30 percent of tax filers to as low as 5 percent. That’s because the new tax bill nearly doubles the standard deduction and limits the value of other deductions, such as for state and local taxes.

Many charities opposed this change.

One study predicts that donations will fall by at least $13 billion, about 4.5 percent, next year. …“The tax code is now poised to de-incentivize the heart of civic action in America,” said Dan Cardinali, president of Independent Sector, a public-policy group for charities, foundations and corporate giving programs. “It’s deeply disturbing.”  The tax bill’s treatment of charities led the Salvation Army to express serious concerns, and it’s why United Way opposed the legislation, as did the U.S. Conference of Catholic Bishops. Cardinali’s group turned its home page — normally a place for a feel-good story — into a call to protest, with the banner headline: “KILL THE TAX REFORM BILL.” …Rep. Kevin Brady (R-Tex.), the main tax bill writer in the House…argued that people would soon have more money to donate because of the economic growth driven by the bill’s tax cuts

As an aside, here’s the part of the story that most irked me.

“The government has always seen fit to reward the goodness of Americans with a tax incentive,” said Lt. Col. Ron Busroe, development secretary at the Salvation Army.

Huh, how is it goodness if people are only doing it because they’re being bribed by the tax code?

But let’s stick with our main topic of whether the tax bill will hurt the non-profit sector.

A Bloomberg column also hypothesized that the GOP tax reform will be bad news for charities.

Will Americans give as generously now that the incentives have completely shifted? Recent research provides little hope for them. …last year’s tax reform…doubled the standard deduction, effectively eliminating most taxpayers’ ability to itemize deductions via contributions to charity…. Tax cost refers to the actual, post-tax price that someone pays when they make a donation. Imagine someone with a marginal tax rate of 25 percent. Every dollar donated only “costs” the taxpayer 75 cents after he or she takes the charitable deduction. …What happens when you change these “tax costs”? …Almost everyone who studied taxpayer behavior found that the charitable deduction encouraged people to donate more than they would if it didn’t exist. But studies yielded very different price elasticity figures ranging from -0.5 (a dollar in lost tax revenue generates an additional 50 cents in donations) to -4.0 (every dollar in forgone tax revenue generates a whopping four dollars of donations). A recent meta-analysis of approximately 70 of these studies yielded a price elasticity a median of -1.2. A recent study by Nicholas Duquette of the University of Southern California…examined how taxpayer contributions changed after the Tax Reform Act of 1986, which increased the tax cost of giving by dramatically lowering marginal tax rates. The result was eye-popping: A 1 percent rise in the tax cost of giving caused charitable donations to drop 4 percent.

I agree that lower tax rates increase the “tax cost” of giving money to charity.

And Reagan’s tax policy (the 1981 tax bill as well as the 1986 tax reform) had a huge impact. In 1980, it only cost 30 cents for a rich person to give a dollar to charity. By 1988, because of much lower tax rates, it cost 72 cents to give a dollar to charity.

Yet I’m a skeptic of Duquette’s research for the simple reason that real-world data shows that charitable contributions rose after Reagan slashed tax rates.

What Duquette overlooks is that charitable giving also is impact by changes in disposable income and net wealth. So the “tax cost” of donations increased, but that was more than offset by a stronger economy.

So our question today is whether we’re going to see a repeat of the 1980s. Will a reduction in the tax incentive for charitable giving be offset by better economic performance?

Some research from the Mercatus Center suggests that the non-profit sector should not fear reform.

…one study by William C. Randolph casts doubt on the claim that the deduction increases giving in the long run. Randolph’s paper analyzes both major tax reforms in the 1980s and follows individuals for 10 years, finding that taxpayers alter the timing of their giving in response to changes in tax policy, but not necessarily the total amount of giving. …lower-income households also donate to charities in large numbers. …However, very few of them benefit in terms of their tax burden, because many lower-income households have no positive tax liability. …For the 80 percent of middle-income filers who do not currently claim the charitable deduction, any cut in marginal tax rates is a pure benefit. Most taxpayers would be better served by eliminating the charitable contributions deduction and using the additional revenue to lower tax rates.

I would put this more bluntly. Only about 30 percent of taxpayers itemize, so 70 percent of taxpayers are completely unaffected by the charitable deduction. Yet many of these people still give to charity.

And they’ll presumably give higher donations if the economy grows faster.

This is one of the reasons the Wall Street Journal opined that tax reform will be beneficial.

…nonprofits…sell Americans short by assuming that most donate mainly because of the tax break, rather than because they believe in a cause or want to share their blessings with others. How little they respect their donors. …Americans don’t need a tax break to give to charities, which should be able to sell themselves on their merits. …The truth is that Americans will donate more if they have more money. And they will have more money if tax reform, including lower rates and simplification, helps the economy and produces broader prosperity. The 1980s were a boom time for charitable giving precisely because so much wealth was created. Like so many on the political left, the charity lobby doesn’t understand that before Americans can give away private wealth they first have to create it.

A column in the Wall Street Journal also augments the key points about generosity and giving patterns.

…a drop in the amount of deductible gifts does not necessarily mean an equivalent drop in actual giving. …recessions aside, Americans have steadily increased their giving despite numerous tax law changes. Individual donations increased by 4% in 2015 and another 4% in 2016. If donations continue to increase at such rates, it won’t take long to make up for changes brought about by tax reform. …Americans have continued to give to charities no matter what benefits the tax code conveys on them for doing so.

Last but not least, Hayden Ludwig, writing for the Washington Examiner, explains that charitable contributions increase as growth increases.

Liberal groups such as the National Council of Nonprofits claim that the plan will be “disastrous” for charities… The thrust of the Left’s argument is that allowing Americans to keep more of their money makes them stingier, and high taxes are needed to force Americans to take advantage of charitable tax write-offs. It’s ironic that anyone in the nonprofit sector, which is built entirely on the generosity of individuals and corporations, can argue that higher taxes encourage charity – or that charity needs to be legislated. …if the Left’s argument about tax incentives is true, we should see sharp declines in charitable donations after every tax cut in U.S. history. We don’t. According to a 2015 report in the Chronicle of Philanthropy, individuals’ charitable giving rose four percent in 1965 and more than two percent in 1966, following the Kennedy and Johnson tax cuts of 1964 and 1965, respectively. Between the Reagan tax cuts in 1981 and 1986, individual giving rose a whopping 21 percent from $119.7 billion to $144.9 billion. By 1989, individual giving grew another 4.7 percent. …The reason is simple: Prosperity and generosity are inextricably linked.

Amen. Make America more prosperous and two things will happen.

Fewer people will need charity and more people will be in a position to help them.

I’ll conclude by noting that the charitable deduction is the itemized deduction I would abolish last. Not because it is necessary, but because it doesn’t cause macroeconomic harm. The state and local tax deduction, by contrast, is odious and misguided because it subsidizes bad policy and the home mortgage interest deduction is harmful since it is part of a tax code that tilts the playing field and artificially lures capital from business investment to residential real estate.

Things to keep in mind for the next round of tax reform.

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I don’t like it when voters support tax increases.

Needless to say, voters rarely if ever vote to raise their own taxes. Instead, they get seduced into robbing their neighbors in exchange for the promise of new goodies from politicians.

Regardless, it’s still very unfortunate when it happens because it shows an erosion in the American spirit (we should be more like Switzerland!).

I raise this issue because the people of Oregon just gave fairly strong support to a tax-hike referendum. Here are some of the details.

…voters approved hundreds of millions of dollars in health care taxes in a special election. Measure 101, which led 62 percent to 38 percent with returns partially tallied, was the only issue on the ballot. It will raise $210 million to $320 million in taxes on Oregon’s largest hospitals and many health insurance policies by 2019.

At first glance, this is just another example of Oregon voters voting for bigger government and more class warfare.

But as you read further in the story, you’ll find something remarkable.

…the tax deal was a victory for…the health care industry, which bankrolled the “yes” campaign. …The largest contributor to the campaign to pass the taxes was the association that represents Oregon hospitals. Other health care companies also spent heavily to pass the measure.

Huh? Why would an industry support and bankroll an initiative to give more of their money to government?!?

It turns out that the industry isn’t filled with masochists (like the neurotic trust fund leftists who posture in favor of higher taxes). Instead, the special interests such as the hospital lobby viewed a couple of hundred million of taxes as an “investment” that will generate about $1 billion of taxpayer-financed loot.

…the health care industry…will benefit from the resulting $1 billion-plus that will be spent on Oregonians’ health care.

And taxpayers in other states will pick up a majority of the tab!

That tax revenue will enable Oregon to qualify for $630 million to $960 million in federal Medicaid matching funds that benefit the state’s health care industry. …state taxes would allow the state to keep federal matching funds.

This scam was exposed last year in a Wall Street Journal column.

…42 states tax hospitals. Why? One answer is the perverse incentives built into the Medicaid law. When a state returns tax money to hospitals through Medicaid “supplemental payments,” it qualifies for matching funds from Washington. …Medicaid supplemental payments, as the term implies, are separate and distinct from the reimbursements that cover the actual cost of services rendered to beneficiaries. But the federal government turns a blind eye to the circular nature of the arrangement: Hospitals and other providers are both the source and the recipient of most of the funds.

Here are more details on this oleaginous ripoff.

…supplemental-payment schemes…“have the effect of shifting costs to the federal government,” according to a 2014 study by the Governmental Accountability Office. The more a state taxes its hospitals and then gives them money back, the more federal funds it can obtain. …The hospital tax is the biggest revenue-raiser, but 44 states also tax nursing homes, and 34 tax at least one other type of health-care provider. The GAO study found that these taxes had almost doubled nationally, from about $9.5 billion in 2008 to $18.5 billion in 2012.

By the way, I have written on this topic before, and even included a handy infographic that explains a version of the scam.

Let’s now return to the column. The author cites an example from Connecticut.

Connecticut hospitals will pay $900 million in taxes, but the state will offset that with $600 million in supplemental Medicaid payments—matched with $450 million of federal funds. The state keeps those matching funds, plus the $300 million from the hospital tax, meaning Hartford comes out ahead in the whole scheme by $750 million. Nice work if you can get it.

I’m not a fan of my home state, but the Nutmeg State is hardly alone is playing this game.

What’s remarkable is that there are 8 states what don’t participate in the ripoff.

Anyhow, I can’t resist making one final point. Here’s a sordid tidbit from the earlier story about what happened in Oregon.

Democrats in the Oregon House helped achieve the deal by agreeing to fund three projects in a Medford Republican’s district, in exchange for that lawmaker providing the lone Republican “yes” vote in the state House.

One more piece of evidence that Republicans often are the most despicable people.

P.S. While today’s column focused on an odious quirk in the Medicaid program, let’s not lose sight of the forest by fixating on this particular tree. The reason we should care is that Medicaid is an initiative-sapping, money-draining program that greatly contributes to the mess in our overall healthcare system.

P.P.S. Which is why I encourage folks to watch the short video I narrated on the program. Pay close attention to the discussion that starts at 1:48. I explain that programs with both federal and state spending create perverse incentives for even more spending (e.g., what I wrote today). This is mostly because politicians in either Washington or state capitals can expand eligibility and take full credit for new handouts while only being responsible for a portion of the costs.

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Last November, I wrote about the lessons we should learn from tax policy in the 1950s and concluded that very high tax rates impose a very high price.

About six months before that, I shared lessons about tax policy in the 1980s and pointed out that Reaganomics was a recipe for prosperity.

Now let’s take a look at another decade.

Amity Shlaes, writing for the City Journal, discusses the battle between advocates of growth and the equality-über-alles crowd.

…progressives have their metrics wrong and their story backward. The geeky Gini metric fails to capture the American economic dynamic: in our country, innovative bursts lead to great wealth, which then moves to the rest of the population. Equality campaigns don’t lead automatically to prosperity; instead, prosperity leads to a higher standard of living and, eventually, in democracies, to greater equality. The late Simon Kuznets, who posited that societies that grow economically eventually become more equal, was right: growth cannot be assumed. Prioritizing equality over markets and growth hurts markets and growth and, most important, the low earners for whom social-justice advocates claim to fight.

Amity analyzes four important decades in the 20th century, including the 1930s, 1960s, and 1970s.

Her entire article is worth reading, but I want to focus on what she wrote about the 1920s. Especially the part about tax policy.

She starts with a description of the grim situation that President Harding and Vice President Coolidge inherited.

…the early 1920s experienced a significant recession. At the end of World War I, the top income-tax rate stood at 77 percent. …in autumn 1920, two years after the armistice, the top rate was still high, at 73 percent. …The high tax rates, designed to corral the resources of the rich, failed to achieve their purpose. In 1916, 206 families or individuals filed returns reporting income of $1 million or more; the next year, 1917, when Wilson’s higher rates applied, only 141 families reported income of $1 million. By 1921, just 21 families reported to the Treasury that they had earned more than a million.

Wow. Sort of the opposite of what happened in the 1980s, when lower rates resulted in more rich people and lots more taxable income.

But I’m digressing. Let’s look at what happened starting in 1921.

Against this tide, Harding and Coolidge made their choice: markets first. Harding tapped the toughest free marketeer on the public landscape, Mellon himself, to head the Treasury. …The Treasury secretary suggested…a lower rate, perhaps 25 percent, might foster more business activity, and so generate more revenue for federal coffers. …Harding and Mellon got the top rate down to 58 percent. When Harding died suddenly in 1923, Coolidge promised to “bend all my energies” to pushing taxes down further. …After winning election in his own right in 1924, Coolidge joined Mellon, and Congress, in yet another tax fight, eventually prevailing and cutting the top rate to the target 25 percent.

And how did this work?

…the tax cuts worked—the government did draw more revenue than predicted, as business, relieved, revived. The rich earned more than the rest—the Gini coefficient rose—but when it came to tax payments, something interesting happened. The Statistics of Income, the Treasury’s database, showed that the rich now paid a greater share of all taxes. Tax cuts for the rich made the rich pay taxes.

To elaborate, let’s cite one of my favorite people. Here are a couple of charts from a study I wrote for the Heritage Foundation back in 1996.

The first one shows that the rich sent more money to Washington when tax rates were reduced and also paid a larger share of the tax burden.

And here’s a look at the second chart, which illustrates how overall revenues increased (red line) as the top tax rate fell (blue).

So why did revenues climb after tax rates were reduced?

Because the private economy prospered. Here are some excerpts about economic performance in the 1920s from a very thorough 1982 report from the Joint Economic Committee.

Economic conditions rapidly improved after the act became law, lifting the United States out of the severe 1920-21 recession. Between 1921 and 1922, real GNP (measured in 1958 dollars) jumped 15.8 percent, from $127.8 billion to $148 billion, while personal savings rose from $1.59 billion to $5.40 -billion (from 2.6 percent to 8.9 percent of disposable personal income). Unemployment declined significantly, commerce and the construction industry boomed, and railroad traffic recovered. Stock prices and new issues increased, with prices up over 20 percent by year-end 1922.8 The Federal Reserve Board’s index of manufacturing production (series P-13-17) expanded 25 percent. …This trend was sustained through much of 1923, with a 12.1 percent boost in GNP to $165.9 billion. Personal savings increased to $7.7 billion (11 percent of disposable income)… Between 1924 ‘and 1925 real GNP grew 8.4 percent, from $165.5 billion to $179.4 billion. In this same period the amount of personal savings rose from an already impressive $6.77 billion to about $8.11 billion (from 9.5 percent to 11 percent of personal disposable income). The unemployment rated dropped 27.3 percents interest rates fell, and railroad traffic moved at near record levels. From June 1924 when the act became law to the end of that year the stock price index jumped almost 19 percent. This index increased another 23 percent between year-end 1924 and year-end 1925, while the amount of non-financial stock issues leapt 100 percent in the same period. …From 1925 to 1926 real GNP grew from $179.4 billion to $190 billion. The index of output per man-hour increased and the unemployment rate fell over 50 percent, from 4.0 percent to 1.9 percent. The Federal Reserve Board’s index of manufacturing production again rose, and stock prices of nonfinancial issues increased about 5 percent.

Now for some caveats.

I’ve pointed out many times that taxes are just one of many policies that impact economic performance.

It’s quite likely that some of the good news in the 1920s was the result of other factors, such as spending discipline under both Harding and Coolidge.

And it’s also possible that some of the growth was illusory since there was a bubble in the latter part of the decade. And everything went to hell in a hand basket, of course, once Hoover took over and radically expanded the size and scope of government.

But all the caveats in the world don’t change the fact that Americans – both rich and poor – immensely benefited when punitive tax rates were slashed.

P.S. Since Ms. Shlaes is Chairman of the Calvin Coolidge Presidential Foundation, I suggest you click here and here to learn more about the 20th century’s best or second-best President.

P.P.S. I assume I don’t need to identify Coolidge’s rival for the top spot.

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Here are three things I’ve written about tax policy. See if you can detect a pattern:

  • I’ve written that I don’t want a value-added tax because the money would be used to finance bigger government.
  • I’ve also explained I don’t want a carbon tax because the revenue from such a levy would finance bigger government.
  • I’ve given thumbs down to financial transactions taxes as well because I don’t want to finance bigger government.

Just in case it’s not obvious, the common theme is that I don’t want to give politicians new sources of revenue that would be used to expand the burden of government spending.

Some of my technocrat friends get upset by these writings. They argue, often correctly, that some of these taxes are not as destructive as the current tax code.

My response is that they’re making an irrelevant argument. Politicians who advocate the above taxes are not proposing to eliminate the income tax and repeal the 16th Amendment. Instead, they simply want to levy a new tax without fully repealing the awful system that already exists.

And now there’s a new tax idea gaining steam.

The Task Force on Fiscal Policy for Health…will examine the evidence on excise tax policy for health, including barriers to implementation, and make recommendations on how countries can best leverage fiscal policies to yield improved health outcomes for their citizens with the added benefit of bringing in additional revenue.

For readers who aren’t familiar with DC bureaucrat-speak, “leverage fiscal policies” means higher taxes. More specifically, advocates want higher “sin taxes” on unhealthy food and drink.

This Task Force is being spearheaded by Larry Summers (yes, that Larry Summers) and Mike Bloomberg (yes, that Mike Bloomberg), so it’s no surprise that this pair of leftists view “additional revenue” as an “added benefit.”

While my focus is on the negative fiscal and economic consequences of higher taxes and more spending, it’s worth pointing out the moral and practical argument against sin taxes.

Bill Wirtz, in a column for CapX, warns that nanny-state policies treat people as infants.

2017 has seen yet another increase in lifestyle regulations and sin taxes… Historically, it was social conservatives pushing for this kind of meddling. …How different is today’s excruciatingly irritating public health lobby…? Food and non-alcoholic drinks are…under fire, and blamed for a range of health issues. France and Ireland are now cracking down on that scourge on society: fizzy drinks. Ireland introduced a new tax on sugary drinks, while France increased the tax created in 2012 under French president Nicolas Sarkozy. Such policies are highly regressive… When Denmark introduced its controversial tax on fatty foods, consumers simply switched to cheaper – but equally unhealthy – alternatives. The country’s diet did not improve. …We are adults and we sometimes make decisions for ourselves which are unhealthy. The answer is for us to moderate our consumption, not quasi-prohibition. It’s time to stop infantilising the…consumer.

Charles Hughes of the Manhattan Institute reviews what happened with a new sin tax on sweetened beverages in Seattle.

Seattle recently became the latest major city to enact a sweetened beverage tax. …customers are reeling from sticker shock. One local reporter found that the tax added $10.34 to a case of Gatorade, bringing the final price to more than $26.00. …One of the justifications for beverage taxes is that customers will respond to price changes by reducing consumption of taxed beverages. The mechanism here is straightforward: tax something to get less of it. If people were to substitute diet sodas or other, less-harmful beverages for sugared sodas, they would be healthier.

But will such a policy work?

Many people are likely to avoid the tax by traveling to other untaxed locations to purchase groceries. Costco tells its customers about locations outside the city that are not subject to the beverage tax. …so the tax will have limited success in its health-related goals while also harming local businesses and failing to generate revenue.

Yet the fact the tax will be a failure at generating revenue isn’t stopping the city was squandering the money.

…revenue has already been allocated to a smorgasbord of causes, ranging from $500,000 for displaced worker retraining, to more than $1 million in tax administration costs, to vouchers to purchase fruits and vegetables.

While I’m glad consumers are escaping the tax by buying beverages from outside the city’s borders, in an ideal world, they would react in a bolder fashion.

If nothing else, the pro-tax crowd has a very elastic definition of sin.

They even want to tax meat.

Move over, taxes on carbon and sugar: the global levy that may be next is meat. Some investors are betting governments around the world will find a way to start taxing meat production… Meat could encounter the same fate as tobacco, carbon and sugar, which are currently taxed in 180, 60, and 25 jurisdictions around the world, respectively, according to a report Monday from investor group the FAIRR (Farm Animal Investment Risk & Return) Initiative. Lawmakers in Denmark, Germany, China and Sweden have discussed creating livestock-related taxes in the past two years.

By the way, the supposed Conservative Party in the United Kingdom is pushing sin taxes to finance bigger government.

The sugar tax was announced by Chancellor Philip Hammond in his budget statement in 2017. He said the money raised as part of the levy would go to the Department for Education. The former Chancellor said the new levy would be put on drinks companies and they would be taxed according to how much sugar was in their beverages. Two categories of taxation are set to come into force. One on the total sugar content on drinks with more than 5g per 100ml and a higher levy for drinks with 8g per 100ml or more. …The new tax could whack up the cost of a 2 litre bottle of Coca-Cola (10.6g per 100ml) by as much as 48p.

The nanny-state crowd complains that this isn’t enough.

Health campaigners have said the fizzy drinks tax should be extended to cover all chocolate, sweets and other confectionery containing the highest levels of sugar. …Action on Sugar is urging a mandatory levy set at a minimum of 20 per cent on all confectionery products that contain high levels of sugar.

Politicians in other nations also are using this excuse to extract more money from the citizenry.

Other countries have introduced similar measures and have seen some success in reducing the drinking of fizzy drinks. Mexico introduced a 10 per cent tax on sugary drinks in 2014 and saw a 12 per cent reduction over the first year. Hungary brought in a tax on the drinks companies and saw a 40 per cent decrease in the amount of sugar in the products. Brits will be joining some of our European neighbours with the move with similar measures in place on drinks in France and Finland and the Norwegians chocolate tax.

Let’s sum this up. The case against sin taxes is based on two simple principles.

  1. Politicians want to seize more of our money in order to have greater ability to buy votes. Saying no to tax increases is a necessary (though sadly not sufficient) condition for good fiscal policy.
  2. Politicians want to tell us how to live our lives. But that’s not their job, even in cases where I agree with the underlying advice. Coerced good behavior is not a sign of virtue.

The bottom line is that some proponents of sin taxes presumably have their hearts in the right place. But they need their brains in a good place as well. If they want to be taken seriously, at the very least they should match their proposed sin taxes with permanent repeal of an existing tax of similar magnitude.

For example, offer to trade a sugar tax for repeal of the death tax. Or suggest a fat tax accompanied by elimination of the capital gains tax.

Until we see such offers, advocates of sin taxes should be met with unyielding opposition.

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