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Posts Tagged ‘Taxation’

When I first started writing this daily column, the Congressional Budget Office was infamous for dodgy economics.

That was the bad news.

The good news is that CBO is more of a mainstream organization today.

It’s far from being libertarian, to be sure, but it no longer seems to have the left-leaning bias that plagued the bureaucracy in the past (it had gotten so bad that I advised Republicans not to cite CBO numbers even when they seemed helpful to the cause of less government).

For instance, I grudgingly acknowledged a few years ago that CBO was better (but still not good) when analyzing potential repeal of Obamacare.

And I was actually impressed last year when CBO published a report showing that a bigger burden of government spending would reduce growth.

And now we have another report that reaches similar conclusions.

The new study, released last month, considers what would happen if lawmakers decided to control red ink by either raising taxes of by restraining spending.

A perpetually rising debt-to-GDP ratio is unsustainable over the long term because financing deficits and servicing the debt would consume an ever-growing proportion of the nation’s income. In this report, CBO analyzes the effects of measures that policymakers could take to prevent debt as a percentage of GDP from continuing to climb. Policymakers could restrain the growth of spending, raise revenues, or pursue some combination of those two approaches. …or this analysis, CBO examined two simplified policies. The first would raise federal tax rates on different types of income proportionally. The second would cut spending for certain government benefit programs—mostly for Social Security, Medicare, and Medicaid. Under each of the two stylized policy options, debt as a percentage of GDP would be fully stabilized 10 years after the changes were implemented.

By the way, I would have greatly preferred if CBO estimated the impact of genuine entitlement reforms.

Trimming spending for existing programs is better than nothing, of course, but the goal should be to achieve both structural reforms and budgetary savings.

But I’m digressing. Let’s get back to what was actually in the report. Here’s what CBO projects if policy makers choose to raise taxes.

…the higher tax rates that would be required if implementation of the policy was delayed would reduce after-tax wages, which would discourage work and lower the aggregate supply of labor. Those reductions in capital stock and the labor supply would cause GDP to be lower… As a result, GDP would be 0.9 percent lower in 2051 if implementation of the policy was delayed by 5 years and 2.6 percent lower if it was delayed by 10 years.

And here’s what happens if they decide to trim benefits.

…a drop in benefits would reduce people’s income and induce some people to work more to, at least partially, maintain their standard of living, thereby increasing the aggregate labor supply. …a drop in expected future retirement benefits would induce workers to save more before they retired, and that increased saving would, in turn, increase the aggregate capital stock.

Figure 3 from the report allows readers to compare how the different options affect the economy’s output.

In other words, we get lower living standards if taxes go up and higher living standards if spending is restrained.

How big is the difference? As you can see, the tax increase options (light green) cause significant long-run reductions in gross domestic product.

Trimming benefits by contrast (the dark green lines) actually lead to a slight increase in economic output.

The report accurately explains why the two policy choices produce such different results.

…GDP would be lower after an increase in income tax rates than it would be after cuts in benefit payments… Whereas benefit cuts strengthen people’s incentives to work and save, tax increases weaken those incentives and thus reduce the capital stock, the labor supply, and output.

In other words, it’s not a good idea to copy nations such as France, Italy, and Greece.

Which is a good description of Biden’s so-called plan to Build Back Better.

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As part of my (reality-based) opposition to a value-added tax, I testified to the Ways & Means Committee back in 2011.

My primary argument against the VAT is that it would enable a bigger burden of government spending.

I frequently share this chart, for instance, that shows that the nations in Western Europe were quite similar to the United States back in the 1960s, with government budgets that consumed about 30 percent of economic output.

That was before they enacted VATs.

But once European politicians got that new source of revenue, the spending burden diverged, with the welfare state becoming a much larger burden in Western Europe than in the United States.

In other words, the VAT was a money machine for big government.

That argument is just as accurate today as it was back in 2011.

For today’s column, however, I want to focus on what I said in the last minute of my testimony (beginning about 4:00).

I pointed out that VAT supporters are wrong when they claim that adoption of this new tax would enable reductions in the income tax.

And if you peruse my written testimony, you’ll see that I included several charts showing how tax burdens changed between 1965 and 2008. In every case, I showed that European politicians actually increased the burden of income taxes after they enacted their VATs.

Is that still true?

Of course.

Here’s an updated version of the chart showing that the overall tax burden dramatically increased after VATs were imposed.

In the United States, by contrast, the overall tax burden only increased during this time period from 23.6 percent of GDP to 25 percent of GDP.

Still bad news, but nowhere near as bad as Western Europe, where the overall tax burden jumped by more than 13 percentage points.

Now let’s peruse the updated version of the chart showing what happened to taxes on income and profits.

As you can see, European governments definitely did not use VAT revenues to lower other taxes.

In the United States, by contrast, the tax burden on income and profits only increased during this time period from 11.3 percent of GDP to 11.6 percent of GDP.

Still bad news, but nowhere near as bad as Western Europe, where the tax burden on income and profits jumped by nearly 5 percentage points.

Now let’s peruse the updated version of the chart showing what happened to taxes on corporations (this chart is especially important because there are very naive people in the business community who think that they can avoid higher taxes on their companies if they surrender to a VAT).

As you can see, governments in Europe have been grabbing more money from corporations since VATs were imposed.

In the United States, by contrast, the tax burden on corporations actually decreased during this time period from 3.9 percent of GDP to 1.3 percent of GDP.

By every possible measure, the value-added tax is a big mistake (as even the IMF inadvertently shows).

Unless, of course, politicians first get rid of the income tax – including repealing the 16th Amendment and replacing it with an ironclad prohibition against any future income tax.

But that’s about as likely as me playing the outfield for the New York Yankees in this year’s World Series.

P.S. I mentioned at the very end of my testimony that we did not have clear evidence from other nations that subsequently adopted VATs. In the case of Japan, we now do have data showing how the VAT is financing bigger government.

P.P.S. Some VAT advocates actually claim the levy is good for growth. That’s a nonsensical claim. VATs drive a wedge between pre-tax income and post-tax consumption. What they really mean to say is that VATs don’t do as much damage, on a per-dollar-raised basis, as conventional income taxes (with punitive rates and double taxation).

P.P.P.S. You can enjoy some good anti-VAT cartoons herehere, and here.

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About 14 years ago, I narrated this video about the flat tax and national sales tax (sometimes referred to as a “Fair Tax”).

I used the video as an opportunity to explain that both plans effectively rip up the current internal revenue code. And both would solve the major problems that plague today’s income tax.

As I stated in the video, the only big difference between a flat tax and national sales tax is the collection point.

A flat tax is collected as income is earned. A sales tax, or Fair Tax, is collected as income is spent.

But the economic benefits of both plans are identical because the core features of both plans are identical.

Sadly, big-picture tax reform no longer is a major issue. Proponents of good policy are mostly focused today on stopping plans that would make a bad tax code even worse.

But maybe it is time to think about going on offense.

In a column for the New York Sun, John Childs makes the case for replacing the current mess with the national sales tax.

There is a better way — replace the entire income tax monstrosity with a national consumption tax, i.e. a national sales tax. Let Walmart and Amazon be the tax collectors. Odds are they will be vastly more efficient than the IRS, which at this point can’t even return the phone calls of bewildered taxpayers. All retailers already perform sales tax collection services for state governments. So it is hardly a leap of faith to ask them to do it for the Feds. …This would be bad news for tax lawyers and accountants. As some of the brightest minds in the country now devote themselves to crafting fiendishly clever tax avoidance schemes, though, imagine what an unexpected dividend would flow from redirecting all of that creativity to productive activities.

I agree that a national sales tax would be much better than the current system.

That’s why I’ve promoted the idea on many occasions.

But always with the very big caveat that I mentioned in the video, which is that any sort of direct consumption tax (sales tax, Fair Tax, value-added tax) has to be a total replacement for the income tax.

However, that’s just one must-have requirement. Since politicians are untrustworthy, we also should not allow a direct consumption tax until and unless the 16th Amendment is repealed and replaced with a new amendment that unambiguously prohibits any future Congress from reinstating an income tax.

The bad news is that I don’t think either of these requirements will be met. And this is why I am more focused on supporting the flat tax.

After all, the worst thing that happens with a flat tax is that future politicians reinstate the current system.

But the worst thing that happens with a national sales tax is that future politicians have a new source of revenue to fuel bigger government (sort of what happened in Europe when value-added taxes financed a major expansion in the burden of government spending).

P.S. The same principles apply at the state level. Policymakers should use consumption taxes to help finance the repeal of income taxes.

P.P.S. A Fair Tax (or any form of national sales tax) will reduce the underground economy, but not by a greater amount than the flat tax.

P.P.P.S. Here are very succinct explanations of major tax reforms proposals.

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A few months ago, I reiterated my opposition to Biden’s proposed corporate tax cartel as part of a longer discussion with Australia’s Gene Tunny.

The main takeaway is that the proposed “minimum global tax” is an agreement by politicians for the benefit of politicians.

As I stated in the discussion. companies do not bear the burden of corporate taxes. Those costs are borne by workers, consumers, and shareholders.

Sadly, those costs will increase if the agreement is finalized. Politicians openly admit they are pushing this cartel to undermine jurisdictional tax competition.

At the risk of stating the obvious, their plan is to give themselves more leeway to increase tax rates.

I’m sharing the above interview and rehashing some of these basic arguments because Barack Obama’s former top economist, Jason Furman, has a column in today’s Wall Street Journal.

Here’s some of what he wrote in favor of the scheme.

Policy makers have the best chance in generations to reform and improve this system while bringing the rest of the world along. Treasury Secretary Janet Yellen has already helped craft an international agreement signed by more than 130 countries. Congress now needs to do its part and lock it in. …The arguments for…fixing Mr. Trump’s reforms were already strong, but the global agreement secured by Ms. Yellen makes them much stronger. In particular, the global agreement removes the main objection to more aggressively taxing overseas income because other countries have all agreed to adopt similar systems. The concerns that U.S. companies would be less competitive or would try to avoid U.S. taxes by incorporating overseas are considerably smaller than they would otherwise be. …The global minimum tax agreement signals the dawn of a new era of international economic cooperation. It will be good for the countries involved and…relatively minimal in only establishing a 15% rate floor.

Notice that Mr. Furman openly acknowledges that the goal is to create a cartel so that politicians will feel less constrained by the liberalizing force of tax competition.

For what it’s worth, I think Professor Bruce Gilley had better analysis in his column, which appeared in the WSJ earlier this year..

World leaders announced a new global corporate minimum tax to great fanfare last year. …The contorted language of the guidance, as well as political foot-dragging in several countries, makes clear that the ballyhooed global tax plan would be a great and expensive flop. Better to let this hydra-headed monster die. The agreement was always a tax grab. …Europe wanted to raise revenue by taxing U.S. companies. The Biden administration has cheered the agreement along with familiar claims that big companies should “pay their fair share.” …Digital multinationals like Amazon, Google, Airbnb and Meta are the target. …the agreement…seeks to establish a 15% minimum global tax rate for international companies… The only plausible way the tax leads to more revenue for the U.S. is if it is used as a cover to raise corporate taxes here, which was perhaps why the Biden administration joined. …According to an International Monetary Fund study, 45% to 75% of the burden of corporate taxes is recouped through lower employee wages.

The bottom line is that the proposal for a global minimum tax is being sold as a way to go after big business and rich shareholders, but ordinary people will be the biggest victims.

We will pay more for products because as the higher taxes filter through the economy and we will have less disposable income because of a diminished job market.

P.S. I have written several times about the utterly fraudulent argument that supposedly profitable companies do not pay corporate taxes.

So this is a good opportunity to share this part of Professor Gilley’s column, which notes that companies are (currently) required to keep two different sets of books (which demagogues then deliberately mix up to advance their false claims).

Public companies already have to keep two sets of books, one for the Securities and Exchange Commission and one for the Internal Revenue Service. The first tells shareholders how well the business is doing; the second tells the government how much is owed and to whom. The new global tax would require multinationals to keep a third set of books to avoid being the target of tax raids by, say, France. The agreement would create many new jobs for accountants and lawyers.

Needless to say, requiring companies to keep a third set of books is a remarkably bad idea.

P.P.S. Here’s a primer on corporate taxation.

P.P.P.S. The bureaucrats at the OECD are big advocates of a global minimum tax. I wonder whether they are so pro-tax because they get tax-free salaries and thus are protected from the awful policies they pursue?

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April 15 is usually the worst day of the year, giving Americans ample reasons to both laugh and cry.*

Because of a holiday in Washington, D.C., however, tax returns this year are due on April 18.

So let’s celebrate (or commiserate) this awful day by wading into the debate about whether the Internal Revenue Service should have a bigger budget.

Proponents usually claim the IRS is under-funded by comparing today’s budget to how much the bureaucracy received in 2011.

But that was a one-year spike because of all the money in Obama’s failed stimulus package. If you review long-run data, you can see that the IRS’s budget has increased significantly.

And these numbers are adjusted for inflation.

But perhaps proponents are right, even if they use deceptive numbers.

The Washington Post has a new editorial on this topic, arguing that the bureaucracy needs more money.

The IRS is currently limping along without enough staff or funding. Congress, especially Republicans, needs to face up to reality. …It’s not a mystery how the IRS deteriorated. …the core problem is that Republicans slashed the IRS budget about 18 percent in the past decade. That’s not belt-tightening, it’s gutting an agency. …The Biden administration is rightly asking for a big increase for 2023 (a request of $14.1 billion). This isn’t some Democratic wish list item; it’s about restoring the basic functions of America’s tax collection agency.

When this topic was being debated last year, Ryan Ellis explained that the IRS will target small businesses if it gets a bigger budget.

Here are some excerpts from his piece in National Review.

…the idea is that if taxpayers fund the IRS to the tune of $40 billion over the next decade, the IRS will step up audits and collect an additional $100 billion in tax revenue, penalties, and interest. This is lauded as a good because of the supposed “tax gap,”… Apparently, it doesn’t occur to anyone that the IRS, which is seeking this extra $40 billion in taxpayer funding, has every incentive in the world to exaggerate this “tax gap” and to make wild promises about the new money that additional enforcement will yield for the Treasury. …Giving money to IRS bureaucrats to conduct fishing expedition audits on millions of honest self-employed people? The same IRS behind the Lois Lerner scandal a decade ago, when the IRS inappropriately targeted conservative political groups during the 2012 election season, when Obama was running for reelection?

Ryan is right to point out that the IRS is undeserving because of bad behavior.

He mentions the Lois Lerner/Tea Party scandal. I think the recent leak of taxpayer data is equally reprehensible.

Advocates of more funding will argue that the bureaucracy’s malfeasance is a separate issue and that more employees and more audits are needed regardless of whether criminals at the IRS are caught and punished.

But this brings us to another important topic, which is whether it would be best to fix the underlying tax laws instead of throwing more money at the IRS.

In a column for the Louisville Courier-Times, we get this point of view from Richard Williams of George Mason University’s Mercatus Center.

…money won’t fix this problem. …Another approach would be drastically reducing the complexity of federal taxes. …The Tax Foundation estimates that we give up 3.24 billion hours and $37 billion to comply with federal taxes each year. Given the headaches and anxiety that come with this, Americans don’t need more IRS workers. We need a leaner agency…individual filers and small businesses represent a huge proportion of the public who would gain from simplification. …There is no need to hire more people to oversee a reformed system. What’s not to like?

Amen.

When proponents say the IRS needs more money, they implicitly are arguing for the current, convoluted tax system.

They want the IRS to be in the business of collecting revenue. But that’s just one role.

And that’s just a brief list of the things that the IRS now does in addition to generating revenue.

Get rid of these added roles, ideally as part of a total replacement of the tax code with a flat tax, and the discussion would be about how much money could be saved by reducing the IRS’s budget.

But that means less power for politicians, so don’t hold your breath waiting for genuine tax reform.

That being said, supporters of good policy should feel no obligation to help prop up the current system by shoveling more money to the IRS.

An underfunded corrupt IRS administering a bad tax code is better than a well-funded corrupt IRS administering a bad tax code.

*April 15 may be the worst day of the year, but there’s an argument to be made that October 3 is the worst day in history.

P.S. From my archives, here are some examples of the bureaucrats who will benefit from a bigger IRS budget.

P.P.P.S. And since we’re recycling some oldies but goodies, here’s my collection of IRS humor, including a new Obama 1040 form, a death tax cartoon, a list of tax day tips from David Letterman, 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 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.

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Thomas Piketty is a big proponent of class-warfare tax policy because he views inequality as a horrible outcome.

But a soak-the-rich policy agenda, echoed by many other academics such as Emmanuel Saez and Gabriel Zucman, is fundamentally misguided. If people really care about helping the poor, they should focus instead on reforms that actually have a proven track record of reducing poverty.

The fact that they fixate on inequality makes me wonder about their motives.

And it also leads me to find their work largely irrelevant. I don’t care if they produce detailed long-run data on changes in inequality.

I prefer detailed long-run data on changes in poverty.

That being said, it appears that some of Piketty’s data is sloppy.

I shared some evidence about his bad numbers back in 2014. And, in a column for the Wall Street Journal, Phil Magness of the American Institute for Economic Research and Professor Vincent Geloso of George Mason University expose another glaring flaw

…the Piketty-Saez theory is less a matter of history than an accounting error caused by their misunderstanding of World War II-era tax statistics. …It’s true that income inequality declined in the early part of the 20th century, but the cause had more to do with the economic devastation of the Great Depression than the New Deal tax regime. …they failed to account properly for historical changes in how the Internal Revenue Service reported income-tax statistics. As a result, their numbers systematically overstate the levels of top income concentrations by as much as a third …Between 1943 and 1944 the tax collection agency shifted from tracking “net income” to “adjusted gross income,” or AGI…a truer depiction of annual earnings… Yet Messrs. Piketty and Saez didn’t bring pre-1944 IRS records into line with AGI accounting standards. Instead, they applied a fixed and arbitrary adjustment to all years before the AGI accounting change that conveniently scaled upward to the highest income brackets. …They used the wrong accounting definition for personal income and neglected to adjust their data for wartime distortions on tax reporting. When we corrected these problems, something stunning happened. The overall level of top income concentration flattened, and the timing of its leveling shifted away from the World War II-era tax rates that Messrs. Piketty and Saez place at the center of their story.

Here’s a chart that accompanied the column, showing how accurate data changes the story.

Since today’s column debunks sloppy class warfare, let’s travel back to 2014, when Deirdre McCloskey reviewed Pikittey’s tome for the Erasmus Journal of Philosophy and Economics.

She also thought his fixation on envy was misguided.

…in Piketty’s tale the rest of us fall only relatively behind the ravenous capitalists. The focus on relative wealth or income or consumption is one serious problem in the book. …What is worrying Piketty is that the rich might possibly get richer, even though the poor get richer too. His worry, in other words, is purely about difference, about the Gini coefficient, about a vague feeling of envy raised to a theoretical and ethical proposition. …Piketty and much of the left…miss the ethical point…of lifting up the poor…by the dramatic increase in the size of the pie, which has historically brought the poor to 90 or 95 percent of “enough”, as against the 10 or 5 percent attainable by redistribution without enlarging the pie. …the main event of the past two centuries was…the Great Enrichment of the average individual on the planet by a factor of 10 and in rich countries by a factor of 30 or more.

But she also explained that he doesn’t understand how the economy works.

The fundamental technical problem in the book…is that Piketty the economist does not understand supply responses. In keeping with his position as a man of the left, he has a vague and confused idea about how markets work, and especially about how supply responds to higher prices. …Piketty, it would seem, has not read with understanding the theory of supply and demand that he disparages, such as in Smith (one sneering remark on p. 9), Say (ditto, mentioned in a footnote with Smith as optimistic), Bastiat (no mention), Walras (no mention), Menger (no mention), Marshall (no mention), Mises (no mention), Hayek (one footnote citation on another matter), Friedman (pp. 548-549, but only on monetarism, not the price system). He is in short not qualified to sneer at self-regulated markets…, because he has no idea how they work.

And she concludes with a reminder that some of our left-wing friends seem most interested in punishing rich people rather than helping poor people.

The left clerisy such as…Paul Krugman or Thomas Piketty, who are quite sure that they themselves are taking the ethical high road against the wicked selfishness…might on such evidence be considered dubiously ethical. They are obsessed with first-act changes that cannot much help the poor, and often can be shown to damage them, and are obsessed with angry envy at the consumption of the uncharitable rich, of which they personally are often examples, and the ending of which would do very little to improve the position of the poor. They are very willing to stifle through taxing the rich the market-tested betterments which in the long run have gigantically helped the rest of us.

Amen. If you want to know what Deirdre means by “betterment,” click here and watch her video.

P.S. Click herehere, here, and here for my four-part series on poverty and inequality. Though what Deirdre wrote in 2016 may be even better.

P.P.S. I also can’t resist calling attention to the poll of economists at the end of this column.

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As a fan of sensible tax policy and tax competition, I could not resist the opportunity to visit Andorra on my current trip to Europe (as part of the Free Market Road Show).

Here’s a chart that will tells you everything you need to know. Andorra’s top tax rate is just 10 percent, while its neighbors (Spain and France) have top tax rates of more than 40 percent.

Not as good as the Cayman Islands and Monaco, to be sure, but it is obviously better to keep 90 percent of the income you earn rather than only about 50 percent in Spain or France.

Actually, you probably only get to benefit from the use of about 40 percent of your income in those two nations when you factor in the value-added tax.

Lawrence Reed of the Foundation for Economic Education recently wrote about the virtues of Andorra, including its superior tax regime.

…one of Europe’s seven “micro-states,” quaint and tiny nations which are political holdovers from the distant past. The other six are San Marino, Liechtenstein, Luxembourg, Monaco, Malta, and Vatican City. Andorra is landlocked and sandwiched in the eastern Pyrenees Mountains between France and Spain. …Micro-states are fascinating and among the freest enclaves in the world. …Freedom House ranks Andorra in its highest category—a “Free” country scoring an impressive 93 on a 100-point scale of political and civil liberties. …“The legal and regulatory framework,” the survey reports, “is generally supportive of property rights and entrepreneurship, and there are few undue obstacles to private business activity in practice.” …writes Guy Sharp, a native Andorran financial advisor…“you get many of the benefits of Europe without the high taxes.” …The maximum personal income tax rate, as well as the capital gains rate, is just 10 percent. …Most goods are subject to a modest value-added tax rate of less than five percent.

I can vouch for the fact that everything is more affordable in Andorra. That nation’s 4.5 percent value-added tax is akin to a modest sales tax in American states. When I’m in Spain, France, or other European countries, by contrast, you definitely feel the pain of 20 percent-plus VATs.

That being said, it’s the low-rate income tax that is a magnet for jobs and investment. The nation’s tax system is even attracting Spanish tax exiles.

Especially entrepreneurs who are making money online. Miodrag Pepic reports for the Valencian.

When the famous YouTube star ElRubius announced last month that he is permanently moving to Andorra, the Spanish public became aware for the first time that the most popular YouTubers are leaving the country, taking their earnings with them as well. The reason is very simple – Andorra has become a tax haven for this type of activity…many Spanish YouTubers have moved there. But ElRubius is one of the most famous. …In Spain, he would have paid up to 54% of his income in taxes, while in Andorra, the top income tax is only 10%. …The decision of ElRubius was criticised in the Spanish media as unpatriotic. …his popularity on YouTube remained undeterred, and in fact, his subscription base even grew. …There are quite a few other countries that have begun to lose their top earners, notably France and the Netherlands

Predictably, the Spanish government is not amused, as reported by Aida Pelaez-Fernandez of Reuters.

Spain’s tax agency said on Monday it would start using “big data” to track wealthy individuals who pretend to reside abroad for tax purposes. The crackdown comes after some of Spain’s most popular YouTube personalities moved their residency to Andorra, a wealthy microstate perched in the Pyrenees mountains between France and Spain, with lower tax rates than its larger neighbours. …In Spain, anyone who earns above 300,000 euros per year must pay income tax of 47%, compared with a 10% flat rate charged by Andorra on earnings of more than 40,000 euros.

As you might expect, the Spanish government is not considering lower tax rates, which would be the best way of retaining successful entrepreneurs.

Instead, politicians are pushing tax policy in the wrong direction.

P.S. Here’s my tourist shot from Andorra.

P.P.S. Of the seven European micro-states mentioned by Lawrence Reed, I’ve now visited San Marino, Liechtenstein, Luxembourg, Monaco, and Vatican City. I still need to get to Malta.

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I wrote a few days ago about Biden’s plan to impose punitive double taxation on dividends.

But that’s not an outlier in his budget. As you can see from this table from the Tax Foundation, he wants to violate the principles of sensible fiscal policy by having high tax rates on all types of income.

What’s especially disappointing is that he wants tax rates in the United States to be much higher than in other developed nations.

At the risk of understatement, that’s not a recipe for jobs and investment.

The Wall Street Journal editorialized about Biden’s taxaholic preferences.

Mr. Biden…is proposing $2.5 trillion in new taxes that would give the U.S. the highest or near-highest tax rates in the developed world. …The biggest jump is in taxes on capital gains, as the top combined rate would rise to 48.9% from 29.2% today. That’s a 67% increase in the government’s take on long-term capital investments. The new top rate would be more than 2.5 times the OECD average of 18.9%. Nothing like reducing the U.S. return on capital to get people to invest elsewhere. Mr. Biden would also lift the top combined tax rate on corporate income to 32.3% from 25.8%. That would leap over Australia and Germany, which have top rates of 30% and 29.9% respectively, and it would crush the 22.8% OECD average. …Mr. Biden would also put the U.S. at the top of the noncompetitive list for personal income taxes, with multiple increases that would put the combined American rate at 57.3%. Compare that with 42.9% today and an average of 42.6% across the OECD.

The WSJ‘s editorial contained this chart.

The United States would be on top for corporate tax rates if Biden’s plan is adopted (which actually means on the bottom for competitiveness).

The bottom line is that Biden wants the U.S. to have the highest corporate rate, highest double taxation of dividends, and highest double taxation of capital gains.

To reiterate, not a smart way of trying to get more jobs and investment.

P.S. The “good news” is that the United States would not be at the absolute bottom for international tax competitiveness.

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Modern tax systems tend to have three major deviations from good fiscal policy.

  1. High marginal tax rates on productive behavior like work and entrepreneurship.
  2. Multiple layers of taxation on income that is saved and invested.
  3. Distortionary loopholes that reward inefficiency and promote corruption.

Today, let’s focus on an aspect of item #2.

The Tax Foundation has just released a very interesting map (at least for wonks) showing the total tax rate on dividends in European nations, including both the corporate income tax and the double-tax on dividends.

Because it has a reasonably modest corporate income tax rate, some of you may be surprised that Ireland has the most onerous overall burden on dividends. But that’s because there are high tax rates on personal income and households have to pay those high rates on any dividends they receive (even though companies already paid tax on that income).

It’s less surprising that Denmark is the second worst and France is the third worst.

Meanwhile, Estonia and Latvia have the least-onerous systems thanks to low rates and no double taxation.

But what about the United States?

There’s a different publication from the Tax Foundation that shows the extent – a maximum rate of 47.47 percent – of America’s double taxation.

The bottom line is that the United States would rank #7, between high-tax Belgium and high-tax Germany, if it was included in the above map.

That’s not a very good spot, at least if the goal is more jobs and more competitiveness.

To make matters worse, Joe Biden wants America to be #1 on the list. I’m not joking.

I’ve already written about his plan for a higher corporate tax rate.

But he wants an even-bigger increases in the second layer of tax on dividends.

How much bigger?

Pinar Cebi Wilber of the American Council for Capital Formation shared the unpleasant details in a column last year for the Wall Street Journal.

The Biden administration has released a flurry of tax proposals, including a headline-grabbing tax hike on capital gains that would apply retroactively from April. Dividends would be subject to the same treatment, according to a recently released Treasury Department document. …the proposal would tax qualified dividends—dividends from shares in domestic corporations and certain foreign corporations that are held for at least a specified minimum period of time—at income-tax rates (currently up to 40.8%) rather than the lower capital-gains rates (23.8%).

I also like that the column includes references to some academic research.

A 2005 paper by economists Raj Chetty and Emmanuel Saez looked at the effect of the 2003 dividend tax cuts on dividend payments in the U.S. The authors “find a sharp and widespread surge in dividend distributions following the tax cut,” after a continuous two-decade decrease in distributions. …Princeton’s Adrien Matray and co-author Charles Boissel looked at the issue the other way around. In a 2019 study, they found that an increase in French dividend taxes led to decreased dividend payments. …Another study from 2011, looking at America’s major competitor, reached the same directional conclusion: A 2005 reduction in China’s dividend tax rate led to an increase in dividend payments.

Not that anyone should be surprised by these results. The academic literature clearly shows that it’s not smart to impose high tax rates on productive behavior such as work, saving, investment, and entrepreneurship.

Unless, of course, you want more people dependent on government.

P.S. Biden also wants American to be #1 for capital gains taxation. So at least he is consistent, albeit in a very perverse way.

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I’ve already written that massive spending increases for various bureaucracies is the most offensive part of Biden’s new budget.

But I explicitly noted that these huge budgetary increases (well above the rate of inflation, unlike what’s happening to incomes for American families) were not the most economically harmful feature of Biden’s plan.

That dubious honor belongs to either his massive expansion of the welfare state or his big tax increases.

In today’s column, we’re going to focus on his tax plan.

The Wall Street Journal editorialized a couple of days ago about what the president is proposing.

A President’s budget is a declaration of priorities, so it’s worth underscoring that President Biden’s new budget for fiscal 2023 proposes $2.5 trillion in tax increases over 10 years. His priority is taking money from the private economy and giving it to politicians to spend. …Raising the top income-tax rate to 39.6% from 37% would raise $187 billion. Raising capital-gains taxes, including taxing gains like ordinary income for taxpayers earning more than $1 million would snatch $174 billion. Raising the top corporate tax rate to 28% from 21%—a tax on workers and shareholders—would raise $1.3 trillion. Fossil fuels are hit up for $45 billion. We could go on… Let’s hope none of these tax-increases pass, but the Democratic appetite for your money really is insatiable.

That’s a damning indictment.

But the WSJ actually understates the problems with Biden’s tax agenda.

That’s because the White House also is being dishonest, as explained by Alex Brill of the American Enterprise Institute.

The budget proposes $2.5 trillion in net tax hikes, almost entirely from businesses and high-income households, and touts policies that would “reduce deficits by more than $1 trillion” over the next decade. But a short note in the preamble to the Treasury Department’s report on the budget reveals a sleight of hand: “The revenue proposals are estimated relative to a baseline that incorporates all revenue provisions of Title XIII of H.R. 5376 (as passed by the House of Representatives on November 19, 2021), except Sec. 137601.”In other words, the budget pretends that the failed effort to enact President Biden’s Build Back Better Act was a success and considers new budget proposals in addition to those policies. But you won’t find the price of the Build Back Better (BBB) Act (including its roughly $1 trillion in net tax hikes) in the budget tables.

I’m going to use this trick during my next softball tournament. I’m going to assume at the start that I’ve already had 20 at-bats and that I got an extra-base hit each time.

So even if I have a crummy performance during my real at-bats, my overall average and slugging percentage will still seem impressive.

Needless to say, my teammates would laugh at me, just as serious budget people understand that Biden’s budget is a joke.

But there is some good news. Barring something completely unexpected, Congress is not going to approve the president’s farcical plan.

P.S. Don’t fully celebrate. As I noted in my “Hopes and Fears for 2022” column, there is a risk that some sort of tax-and-spend plan might get approved. The only silver lining to that dark cloud is that it wouldn’t be nearly as bad as Biden’s full budget.

P.P.S. If that prospect gets you depressed, here are a couple of humorous images depicting Biden’s fiscal agenda.

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How do we know people don’t like taxes?

  • They tend to reject candidates who support higher taxes, as George H.W. Bush and other politicians have learned.
  • Then tend to vote against higher taxes when given an opportunity (though they sometimes will vote to tax other people)
  • They tend to migrate from high-tax jurisdictions to low-tax jurisdictions for direct and indirect reasons.

Today, we’re going to elaborate on the final reason.

Let’s start with this chart from one of the daily missives from the Committee to Unleash Prosperity. As you can see, it’s not just people that move. It’s their money as well.

The bottom line is that the two states – California and New York – with ultra-high tax rates are losing the most taxable income.

Let’s call this the revenge of the Laffer Curve because it shows us that high tax rates can backfire.

Jon Miltimore addressed this topic in a new column for the Foundation for Economic Education.

Here are some of the highlights, starting with some data on how some poorly governed cities are losing residents.

Three of the top five metros that saw sharp declines between July 1, 2020, and July 1, 2021 were in California. Leading the way was the Los Angeles-Long Beach metropolitan area, which lost 176,000 residents, a 1.3 percent drop. Next was the San Francisco-Oakland-Berkeley metro, which saw a decline of 116,000 residents (2.5 percent decline), followed by San Jose-Sunnyvale-Santa Clara, which shed some 43,000 residents (2.2 percent drop). …The New York-Newark-New Jersey metropolitan area saw a decline of 328,000 residents, the highest in the nation in raw numbers. The Chicago area, meanwhile, saw a decline of some 92,000 residents.

Here’s a chart from his article.

I’m definitely not surprised to see New York, San Francisco, and Chicago on the list. After all those cities have crummy governments.

The other two cities, by contrast, just have the misfortune of being in a poorly governed state.

Jon explains a big reason why this domestic migration is taking place.

…the reasons people choose to migrate tend to be complex and varied… However, we can see the US flight from its largest metropolitan is part of a bigger trend. North American Van Lines (NAVL), a trucking company based in Indiana, puts out an annual report that tracks migration patterns in the United States. The states with the most inbound migration in 2021 were South Carolina, Idaho, Tennessee, North Carolina, and Florida. The leading outbound states were Illinois, California, New Jersey, Michigan, and New York. The pattern here is clear. Americans are fleeing highly-regulated, highly taxed states. They are flocking to freer states. …We heard a great deal about “the Great Reset” during the pandemic. …It may be that “the reset” involves Americans abandoning high-tax, high-regulatory cities and states for freer ones.

To be sure, there are factors other than taxation. And there are factors other than government policy (people really like California’s wonderful climate, for instance, but they will escape when policy becomes unbearable).

The bottom line is that people are slowly but surely voting with their feet against statism. They are choosing red states over blue states. There’s a lesson for Joe Biden, though he’s probably not listening.

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The economics of taxation is simple. The more you tax of something, the less you get of it.

In some cases, such as taxing tobacco, people sometimes argue this is a good result. In other cases, such as taxing work, entrepreneurship, and investment, it seems crazy.

The morality of taxation, by contrast, is more challenging. At least for me.

I’m not an anarcho-capitalist, so I can’t unilaterally declare that all taxes are evil and unjustified. And I’m definitely not a statist who thinks all of our incomes belong to the government.

At the risk of oversimplifying matters, I agree with Calvin Coolidge.

Taxes that are used to finance genuine “public goods” are justifiable. Taxes used to finance the schemes of vote-buying politicians are immoral.

Regarding morality, there’s another issue that’s worth discussing.

Consider this story from Governing.

Across the country, states that are flush with cash are cutting taxes on income, sales and Social Security benefits. …But good times never last forever. Some fiscal experts are worried that states are setting themselves up for a fall. …“I see this as a temporary increase in revenues that we’re likely going to see dry up in the next year or two,” says Kim Rueben, director of the State and Local Finance Initiative at the Urban-Brookings Tax Policy Center.

What’s galling about the story is that the focus is on whether governments can do without extra revenue.

But what about taxpayers? You know, the people who have to earn and produce before politicians can seize and squander?

That’s why I very much appreciate a recent column in the Washington Post by former Indiana Governor Mitch Daniels.

A newspaper account early this year reported on pending legislation that would “slash billions of dollars worth of taxes” in my home state of Indiana. The article was more interesting for its word choices than for its content. Twice, it stated that the proposal would “cost the state” money. Twice, it warned that the state would “lose out” on large sums. …The article simply showed the implicit biases now thoroughly ingrained across what these days is referred to as the corporate press. …property in a free society belongs not to the state but to its people, and it should be expropriated by the state only for truly necessary purposes, in truly necessary amounts. It’s more than just a matter of money, because every act of taxation imposes a diminution of freedom.

Kudos to Daniels for channeling Coolidge.

The bottom line is that taxes diminish freedom. Politicians should never take our money unless proposed spending is for the general welfare – as defined by the Founding Fathers and as authorized by the Constitution.

Now that we’ve discussed the economics of taxation and the morality of taxation, here’s a final observation about the math of taxation.

Tax cuts are not a “cost” to government, they’re a “savings” to taxpayers. This is why provisions in the tax code that allow taxpayers to keep more of their money should not be referred to as “tax expenditures.” Even if they are bad policy.

P.S. By modern political standards, Mitch Daniels is on the right side. But that doesn’t mean he is a poster boy for libertarianism. At one point, he flirted with the notion of a value-added tax, so I was happy when he decided against a presidential race. He also presided over irresponsible spending increases when he was head of the Office of Management and Budget for President George W. Bush.

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I’ve identified seven reasons to oppose tax increases, but explain in this interview that the biggest reason is that it would be a mistake to give politicians more money to finance an ever-larger burden of government spending.

I had two goals when responding this question (part of a longer interview).

First, I wanted to help viewers understand that America’s fiscal problem is too much government spending and that red ink is simply a symptom of that problem.

Over the years, I’ve concocted all sorts of visuals to make this point. Like this one.

And this one.

And this one.

Second, I wanted viewers to understand that higher taxes will simply make a bad situation even worse.

From my perspective, the biggest problem with tax increases is that they will enable a bigger burden of government spending.

But even the folks who fixate on red ink should adopt a no-tax increase position.

Why? Because politicians who want big tax increases want even bigger spending increases.

Joe Biden is pushing for a massive tax increase, for instance, but his proposed spending increase is far larger.

We also have decades of evidence from Europe. There’s been a huge increase in the tax burden in Western Europe since the 1960s (largely enabled by the enactment of value-added taxes).

Did that massive increase in revenue lead to less red ink?

Nope, just the opposite, as I showed in both 2012 and 2016.

If you don’t agree with me on this issue, maybe you should heed the words of these four former presidents.

P.S. Some people warn that endlessly increasing debt is a recipe for an eventual crisis. They’re probably right. Which is why it is important to oppose tax-increase deals that wind up saddling us with more red ink. Besides, the long-run damage of tax-financed spending is very similar to the long-run damage of debt-financed spending.

P.P.S. As I mention in the interview, the only real solution is spending restraint. And a spending cap is the best way of enforcing that approach.

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I regularly share reports that measure how states rank for economic policy.

Now we can augment this collection.

A website called Money Geek has issued a report, authored by Jeff Ostrowski, which ranks states that are most friendly and least friendly to a hypothetical middle-class family.

This map has the details. The best states (led by Wyoming, Nevada, and Alaska) are dark blue, while the worst states (led by Illinois, Connecticut, and New Jersey) are dark grey.

Here are some of the main findings, including the fact that people “vote with their feet” by moving to low-tax states.

Illinois has the highest tax burden in the U.S., with an estimated tax amount of $13,894 for the hypothetical family. Wyoming only imposes approximately $3,279 for the same family, making it the top state in terms of tax-friendliness. 4 out of 5 of the most tax-friendly states saw population growth at or above the national average (Wyoming, Nevada, Florida and Tennessee). Illinois and Connecticut received a grade of E for being the least tax-friendly states in the nation. Illinois experienced a population decline, while Connecticut’s population grew by just 0.1% — lower than the national average of 0.2%.

Interesting results. First and foremost, we have more evidence that Illinois is a basket case.

And it has a governor who wants to make a bad situation even worse.

I also think it’s worth noting that all the best states have no income tax.

The reports has lots of interesting data, but it doesn’t tell us everything we should know.

Before I explain why the numbers should be taken with a grain of salt, read the report’s methodology.

To calculate the least and most tax-friendly states, we researched income, sales and property tax rates by state. Using expenditure and income data from the Bureau of Labor Statistics’ Consumer Expenditure Survey, we constructed a hypothetical family with one dependent, gross income of $82,852, and a home worth $349,400 (the median new home price at the time we conducted our research). We then estimated the state taxes this hypothetical family would pay in each state. We ranked the states based on…the size of the tax payment.

There’s nothing wrong with this methodology, assuming the goal is simply to measure the tax burden on a particular type of household.

But if the goal is to rank tax systems, there are three reasons why the report is incomplete or misleading.

First, it is not a measure of how tax systems affect economic performance. The most bizarre results in the report is that California, with a very punitive, class-warfare tax system, ranks above Texas, which has no income tax.

Why is this misleading? Because it’s important not only to measure how much of a family’s income is grabbed by government, but also whether a government has policies that make it more difficult to earn money in the first place.

In other words, there’s a reason that taxpayers and businesses are moving from California to Texas, notwithstanding the results from Money Geek.

Second, it doesn’t tell us anything about whether states are providing good services in exchange for the taxes that are being collected.

In an ideal world, states would use tax revenues to finance genuine “public goods.” In reality, taxes often are used to funnel undeserved money to powerful constituencies such as state and local bureaucrats.

And it’s worth noting that there are big differences in how states perform on basic functions such as education, infrastructure, and crime control (and the same is true for cities).

Third, it is not adjusted for the cost of living in different states. A family in Nebraska with a $350,000 house and about $83,000 of income obviously lives much better than a similar family in New Jersey. Why? Because money goes much farther in states with a lower cost of living.

This map from the Tax Foundation shows that red and orange states can be much more expensive than green and blue states.

P.S. If you want a ranking of economic liberty for metropolitan areas, click here.

P.P.S. Click here if you want a ranking of states based on occupational licensing (a form of employment protectionism).

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I wrote two months ago about Iowa lawmakers voting for a simple and fair flat tax.

I explained how this reform would make the state more competitive, but I want to build upon that argument with some of the Tax Foundation’s data.

Starting with this map from the State Business Tax Climate Index, which shows Iowa in 38th place for individual income taxes.

That low ranking is where the state’s tax code was as of July 1, 2021, so it obviously doesn’t reflect the reforms enacted earlier this year.

So where will the state rank with the new flat tax?

The Tax Foundation crunched the data and shows the state will jump to #15 in the rankings.

The above table shows that the jump is even more impressive when you factor in some modest pro-growth changes that took place a few years ago.

What a huge improvement over just a few years. The only state that may beat Iowa for fastest and biggest increase in tax competitiveness is North Carolina, which jumped 30 spots in just one year.

P.S. Politicians in New York must be upset that there’s no way for them to drop lower than #50. But at least they can take comfort in the fact that they are worse than California.

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I’ve been writing a series of columns about the failure of Bidenomics (see here, here, and here), but let’s switch gears today and focus on some remarkably bad behavior by the bureaucrats at the Organization for Economic Cooperation and Development (OECD).

Regular readers know that I’m not a big fan of this Paris-based international bureaucracy. Yes, there are some economists at the OECD who do solid research, but the organization routinely advocates for higher taxes and bigger government, often by using dishonest data.

But even I was surprised to receive this email from the OECD, which explicitly urged a giant tax increase on the relatively impoverished people of Mexico.

And “giant” is not a throwaway adjective.

Joe Biden wants a massive tax increase for the United States, but his proposal to increases tax revenue by 1.3 percent of GDP makes him seem like a rabid libertarian compared to the OECD’s plan to increase taxes by nearly three times as much in Mexico.

What’s especially amazing is that the OECD is urging this huge tax increase in a report that supposedly shares “recommendations for improving medium-term growth prospects.”

While I’m shocked by the size of the OECD’s proposed tax increase, I’m not surprised that the bureaucrats are claiming that higher taxes and bigger government are good for growth.

They’ve done it before and I’m sure they’ll do it again.

In China. In Africa. Everywhere.

So at least they are consistent, albeit in a very bad way.

I’ll close by noting that Mexico actually is in desperate need of “recommendations for improving medium-term growth prospects.”

But if you peruse the data for Mexico in the most-recent edition of the Fraser Institute’s Economic Freedom of the World, you’ll see that the country’s economy is being hampered by bad scores for rule of law, monetary policy, trade, and regulation.

So it’s baffling that the OECD’s bureaucrats somehow decided to focus on pushing for bad fiscal policy.

P.S. For those who want more information, you can click here to access the OECD’s report, along with other accompanying materials.

P.P.S. Incidentally, OECD bureaucrats are exempt from paying tax on the very lavish salaries they receive.

P.P.P.S. Adding insult to injury, American taxpayers finance the largest share of the OECD’s budget.

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When I compare the United States and Europe, it’s usually because I want to make the point that people on the other side of the Atlantic have lower living standards in large part because there is a more onerous fiscal burden of government.

Simply stated, America’s medium-sized welfare state doesn’t do as much damage as the large-sized welfare states in Europe.

But I also use US-vs.-Europe comparisons to make another point, namely that big welfare states mean big tax burdens for lower-income and middle-class households.

To be more specific, most of Europe’s redistribution spending is financed by high tax burdens on regular people.

Yes, European politicians impose onerous burdens on upper-income taxpayers, but there simply are not nearly enough rich people to finance big government.

So those politicians have responded by pillaging everyone else as well (onerous payroll taxes, harsh value-added taxes, high income tax rates on modest incomes, etc).

The United States takes a different approach. We also impose onerous burdens on upper-income taxpayers (as confirmed by IRS data), but we impose comparatively modest taxes on everyone else.

Indeed, the net result, as shown in the table, is that the United States actually has the most “progressive” tax system among OECD nations.

Today, let’s look at some research that makes similar points.

Three academics at the Paris School of Economics authored a study for the World Inequality Lab that uses a new database to measure redistribution and inequality.

Their main conclusion is that there are differences between the United States and Europe, but redistribution policies don’t have a big impact on inequality.

This article addresses…substantive and methodological issues by constructing distributional national accounts for twenty-six European countries from 1980 to 2017. To our knowledge, this is the first attempt at doing so. …our series are fully comparable with recently produced US distributional national accounts, allowing us to compare the dynamics of inequality and redistribution in the two regions in great detail. Two key findings emerge from the analysis of our new database. First, we show that, over the past four decades, inequality has increased in nearly all European countries as well as in Europe as a whole, both before and after taxes, but much less than in the United States. …Second, the main reason for Europe’s relative resistance to the rise of inequality has little to do with the direct impact of taxes and transfers. While Western and Northern European countries redistribute a larger fraction of output than the US (about 47% of national income is taxed and redistributed in Europe versus 35% in the US), the distribution of taxes and transfers does not explain the large gap between Europe and US posttax inequality levels. Quite the contrary: after accounting for all taxes and transfers, the US appears to redistribute a greater fraction of its national income to the poorest 50% than any European country.

What drives these results?

Simply stated, the most salient feature of European fiscal policy is that nations tax the middle class and have programs that benefit the middle class.

The United States, by contrast, focuses more on taxing the rich and giving benefits to the poor.

Look at what the study says about tax progressivity.

Figure Vb ranks European countries and the United States according to a simple measure of tax progressivity: the ratio of the total tax rate faced by the top 10% to that of the bottom 50%. The composition of bars correspond to the composition of taxes paid by the top 10%. The US stands out as the country with the highest level of tax progressivity: the top decile faces a tax rate that is more than 70% higher than that of the poorest half of the population. By this measure, the European country with the most progressive tax system is the United Kingdom, followed by Norway, the Czech Republic, and France. Many European countries have values close to 1 on this indicator, corresponding to relatively flat tax systems, in which top income groups face a tax rate approximately equal to that of the bottom 50%. …the US also stands out as one of the countries where the top 10% pay the largest share of their pretax income in the form of income and wealth taxes.

And here’s Figure V, which shows how the U.S. has (far and away) the most “progressive” tax system.

Again, I want to emphasize that this is not because the U.S. imposes higher taxes on the rich. The so-called progressivity of the American system is driven by the fact that there are low taxes on everyone else.

What about on the spending side of the fiscal ledger?

The study finds that the the United States has the most redistribution to lower-income people.

…the US tax-and-transfer system appears to be unequivocally more progressive. The bottom 50% in the US received a positive net transfer of 6% of national income in 2017, compared to about 4% in Western and Northern Europe and less than 3% in Eastern Europe. Meanwhile, the top 10% saw their average income decrease by 8% of national income in the US after taxes and transfers, compared to about 4% in Western and Northern Europe and 3% in Eastern Europe. …Figure VIIb represents the net transfer received by the bottom 50% in all European countries and the United States in 2017. Again, the US stands out as the country that redistributes the greatest fraction of national income to the bottom 50%.

Here’s the aforementioned Figure VII.

I’ll close by observing that there are multiple interpretations of this data. I suspect that authors want readers to conclude that there should be higher taxes and more redistribution. Both in Europe and the United States.

My big takeaway is that this research confirms why people with modest incomes in the United States have a better life than their counterparts in Europe.

Not only do they enjoy higher levels of income, but they also pay much lower tax burdens.

P.S. One other point to emphasize is that it’s wrong to fixate on inequality. In part, that’s because there’s nothing wrong with rich people getting richer (assuming they earn their money rather than getting special favors from politicians). But also because ethical people should be concerned about improving the lives of the less fortunate rather than tearing down the successful.

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It is not difficult to understand the economics of taxation. Simply stated, the more you tax of something, the less you get of it.

You can show the adverse impact of taxation with supply-and-demand curves (very helpful for understanding “deadweight loss“).

But you don’t need to be an economist to grasp the essential idea that we shouldn’t impose excessive penalties on productive behavior.

This is why I endlessly argue for lower tax rates on things that are very good for society, such as work, saving, investment, and entrepreneurship. Simply stated, governments should minimize barriers to the creation of wealth and prosperity.

But what about using the tax code to punish things that are bad for society?

Consider, for instance, taxes that are designed to discourage obesity. I personally don’t think politicians and bureaucrats should try to dictate our lifestyle choices, so I’m not overly sympathetic to imposing special taxes on things like sugar.

But I also recognize that people do respond to incentives, so maybe such taxes would work.

Though it’s also possible that we might get unintended consequences, which is the message of Baylen Linnekin’s new article for Reason.

A new study is pouring cold beer on Seattle’s soda tax. …since the city I call home adopted a soda tax in 2018, residents have swapped out soda and replaced that soda with beer. Pointedly, the study says Seattle’s soda tax “induced” consumers to buy more beer. …The PLoS study, by University of Illinois-Chicago researchers Lisa M. Powell and Julien Lader, compared sales of beer in Seattle both before and since adoption of the soda tax with comparable sales in nearby Portland, Oregon, which has no soda tax. “At two-years post-tax implementation, [the] volume sold of beer in Seattle relative to Portland increased by 7%,” the authors report. Though supporters of soda taxes claim (largely without evidence) that they’re a successful tool to combat obesity, the authors of the PLoS study note that the dangers of “excess alcohol consumption [include] higher risk of motor accidents/deaths, liver cirrhosis, sexually transmitted diseases, crime and violence, and workplace accidents.” Also: obesity. …”It’s hard to overstate the abject failure of soda taxes to deliver on their promised benefits,” Reason Foundation’s Guy Bentley wrote several years ago… “Nowhere in the world, let alone the United States, have soda taxes reduced obesity.”

Here’s a link to the study for those interested.

The obvious takeaway is that imposing an anti-obesity tax may not be very effective if consumers can easily switch to a different product with some of the same characteristics (i.e., lots of calories).

And such a tax may wind up making society worse off if the original problem (obesity) isn’t solved and new problems (drunk driving, etc) are created.

So what’s the solution? Politicians presumably will look at the results of the study and argue that beer taxes also should be increased.

And then when they learn that people will drive to different cities to buy beer and soda (as happened when Philadelphia imposed such a tax), they’ll argue for statewide tax harmonization. And when that leads to cross-state shopping, they’ll push for federal harmonization.

Maybe, just maybe, they should leave people alone. In a free society, you should have the right to control your own life, even if it means making decisions that some people don’t like.

P.S. Nobody should be surprised when Seattle politicians enact bad policy.

P.P.S. Since we now know that soda taxes backfire, you also won’t be surprised to learn that marijuana taxes backfire. And tobacco taxes.

P.P.P.S. To the extent these taxes are successful, we get more evidence of the Laffer Curve. That happened in Berkeley. And it happened in Mexico.

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State Tax Progress

Last year I shared a very encouraging map, which identified the many states that have been cutting tax rates.

After the November elections, I wrote a couple of encouraging columns about voters making sensible decisions when given the ability to vote for higher or lower taxes.

Later that month, I updated my five-column table showing which states have the best and worst tax systems.

And I ended the year with a look at the Tax Foundation’s State Tax Business Climate Index.

All things considered, not a bad year. At least at the state level.

Well, we may see more progress this year.

Grover Norquist of Americans for Tax Reform has a column in the Wall Street Journal about an ongoing revolution of pro-growth tax cuts at the state level.

…in the 50 states there is a dramatic increase in tax competition to provide the best government at the lowest cost. …Americans have noticed that high-tax states don’t provide better roads, education or other services. Florida (with 22 million residents) has no income tax and the state spends half as much as New York (20 million residents). New York has a top state income tax of 8.82% (soon rising to 10.9%) and was the only state to raise its personal income-tax rate during the pandemic. …state leaders have discovered that…marginal income-tax rate…reduction is enabled by spending restraint. North Carolina provided the best example of this strategy over the past seven years. …Louisiana, under the leadership of Senate Majority Leader Sharon Hewitt, has set a path to reduce its income tax every year triggers are met. These triggers could take Louisiana’s income tax to zero by 2034… Ten other states have begun the march to a zero rate.

The column also mentions other states, such as Iowa, that hopefully will replace discriminatory regimes with simple and fair flat taxes.

Not everyone is happy about these developments.

In a column for the Washington Post, Catherine Rampell points out that some of the tax cutting was enabled by Biden’s big handouts to state governments.

Democrats in Congress have made it much easier for state-level Republicans to slash taxes this year… That’s because Democrats have shoveled a ton of federal money onto the states… Big budget surpluses have inspired the governors of Missouri, South Carolina and Iowa to propose cuts to their income tax rates. Utah’s Senate recently approved a $160 million tax cut, with its state House of Representatives expected to make the proposal even more expansive. And Mississippi is working to cut taxes on food sales and car tags — and to phase out its income tax entirely. …Even blue and purple states may jump on the traditionally conservative tax-cut bandwagon, too. …after President Biden took office, Democrats decided to go big with their stimulus bill… Democrats sent states and localities an additional $500 billion, including direct state and local covid relief grants, plus separate funding for education, transit and other programs. …many states have more cash than they know what to do with. …total state and local receipts were 26 percent higher in 2021 than they were in 2019.

Here’s the part she doesn’t like.

Republicans are taking these deficit-financed federal dollars, passing them on to constituents in the form of lower taxes and reaping the political benefits — all while being able to blame Democrats for the enormous cost they add to the federal debt. …perhaps red states reasonably assume that Democrats won’t learn their lesson — and will keep the federal dollars flowing, even if doing so hands Republicans home-state political victories.

Interestingly, congressional Democrats recognized this might be a problem.

But the anti-tax cut language they included in their handout legislation has not been effective.

Democrats did include legislative language that forbade any pandemic relief funds from being used to “either directly or indirectly” finance tax cuts. But enforcing that provision was always going to be difficult… Federal judges have already blocked Treasury from enforcing the no-tax-cut provision in at least 15 states… More litigation is pending, but these developments have emboldened Republicans, who are eager to use Democrats’ sloppy bill design against them.

All of this may be a quandary for libertarians and conservatives.

Biden’s boondoggle stimulus was bad legislation. And the same can be said for major parts of Trump’s pandemic emergency spending bills.

Yet one fortunate side effect is that state governments have had so much money that some of them have been cutting taxes.

But some of them also have been spending more money, and that won’t lead to good results.

All things considered, this really shouldn’t be a quandary. We got two bad things (more federal spending and more spending in some states) and one good thing (tax cuts in some states).

P.S. At some point, the politicians in Washington will have to restore some fiscal sanity, but I’m not holding my breath for good policy.

P.P.S. I suspect we’ll see even more interstate tax migration over the next few years. Simply stated, many people would rather live in libertarian-oriented states rather than greed-oriented states.

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More than 11 years ago, the Center for Freedom and Prosperity released this video about the OECD, a Paris-based bureaucracy subsidized by American taxpayers.

As outlined in the video, there are many reasons to dislike the Organization for Economic Cooperation and Development.

As a fan of tax competition, I don’t like the OECD because the bureaucrats persecute jurisdictions with low tax burdens.

But the bureaucracy’s pro-tax harmonization campaign is a symptom of a broader problem, which is that the OECD relentlessly advocates for higher taxes.

Consider the recent publication entitled “Fighting Tax Crime – The Ten Global Principles.” As you can see, nine of those ten principles involve more power and authority for government.

Since I’m not an anarcho-capitalist, I realize some taxation is necessary (ideally only the amount needed to finance genuine public goods).

As such, I don’t necessarily condemn enforcement policies.

But I am irked by a big sin of omission. If the bureaucrats at the OECD should have added an 11th principle about modest tax rates.

Why?

Because the academic literature very clearly shows that low tax rates are correlated with better tax compliance.

And those low tax rates also are better for prosperity, which is something that should be of interest to a bureaucracy with the words “economic” and “development” as part of its name.

Heck, some OECD economists have written about these benefits of low tax rates.

But none of that now matters. The bureaucrats today are totally fixated on carrying water for the world’s uncompetitive, high-tax governments.

Which is why I’m a big fan of defunding the OECD.

P.S. I suppose we should be happy that the bureaucrats acknowledge that taxpayers should have rights.

P.P.S. In the interest of fairness, I’ll acknowledge that the OECD occasionally produces good work. I’ve even favorably cited research from the bureaucracy on issues such as government spending and expenditure limits.

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The Laffer Curve is a method for illustrating the relationship between tax rates, taxable income, and tax revenue.

But it’s important to realize that there are actually lots of varieties.

The Laffer Curve for capital gains taxes, for instance, will look different than the Laffer Curve for payroll taxes. Or corporate taxes. Or marijuana taxes.

In every case, the shape of the curve will depend on what’s being taxed and the ability of affected taxpayers to alter their behavior.

And the shape of the Laffer Curve also will depend on whether one is measuring the short-run revenue impact of tax changes or the long-run impact of tax changes.

Given all these varieties, no wonder so many people, both right and left, sometimes misstate its meaning.

Let’s try to expand our understanding of the Lafffer Curve by looking at some new research.

Professor Aaron Hedlund of the University of Missouri authored a study on the Laffer Curve for the Show Me Institute.

Here’s what he wants to understand.

Empirically, recent research provides a variety of estimates for the revenue-maximizing and welfare-maximizing tax rates, but one lesson that emerges is that analyses that only take into account the response of hours worked to tax increases are bound to greatly overestimate the amount of new revenue that can be raised while underestimating the economic damage from lost GDP growth and wages. This paper examines the relationship between tax rates and revenue by taking a broader view that encompasses the responses of skill acquisition, entrepreneurship, innovation, and the labor market behavior of dual-earner families. The bottom line that emerges is that these additional margins of adjustment imply significantly lower revenue-maximizing and welfare-enhancing tax rates.

He then explains that some economists fail to look at all possible behavioral responses.

Traditionally, much of the economic analysis aimed at finding this peak rate has focused on how the income tax rate affects an individual’s willingness to work, both with regard to hours worked and the decision to enter the labor force at all. Moreover, until the recent arrival of better data, much of the academic research considered only the response of heads of households. …This assumption of tax rate insensitivity led economists Peter Diamond and Emmanuel Saez to conclude that the optimal—revenue maximizing—top income tax rate is 73%. Moreover, in an analysis that also considers the social insurance benefits of progressive taxation—specifically, the ability of redistribution to soften the blow of unexpected economic hardship—economists Fabian Kindermann and Dirk Krueger provide justification for a top rate that approaches 90%. However, both studies omit the many other margins of behavioral adjustment that accompany any significant change to tax rates.

When all behavioral responses are measured, it turns out that the revenue-maximizing rate is much lower.

In one study that accounts for the sensitivity of entrepreneurs to tax rates, increasing the progressivity of the income tax code leads to a revenue-maximizing top rate of only 33%. Furthermore, in this case revenues only increase by 5%—amounting to less than one percentage point of GDP. Another study finds even starker results when looking at the subset of superstar entrepreneurs. In an analysis that incorporates the positive spillovers of ideas and innovation on economic growth, economist Charles Jones finds that the revenue-maximizing tax rate may even be as low as 29%. Furthermore, he shows that raising the top income tax rate to 75% could reduce GDP by over 8%, which would greatly blunt the impact on revenues by shrinking the tax base.

Figure 5 from the study shows how the revenue-maximizing rate varies depending on which factors are included in the study.

My two cents on this issue is to remind readers that we don’t want to maximize revenue for politicians.

As such, I don’t care if the revenue-maximizing rate in 29 percent or 73 percent.

I want to be at the growth-maximizing rate, which is where the government only collects the amount of money that is necessary to finance genuine public goods.

Needless to say, that means tax rates (and spending burdens) far lower than today.

P.S. Tax accountants have a very good understanding of the Laffer Curve.

P.P.S. Heck, even the thugs from ISIS understand the Laffer Curve.

P.P.P.S. Sadly, it doesn’t matter if some leftists understand the Laffer Curve.

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A key principle of economics is convergence, which is the notion that poorer nations generally grow faster than richer nations.

For instance, battle-damaged European nations grew faster than the United States in the first few decades after World War II.

But, starting in the 1980s, that convergence stopped. And not because Europe reached American levels of prosperity. Even the nations of Western Europe never came close to U.S. levels of per-capita economic output.

Moreover, European countries then began to lose ground for the rest of the 20th century.

And that process is continuing. Here’s a recent tweet from Robin Brooks, the Chief Economist of the Institute of International Finance, which shows that the United States was growing faster than Europe before the pandemic and is now growing faster than Europe after the pandemic.

In other words, we’re seeing divergence.

Sven Larson addressed this same issue in a new article on this topic for European Conservative.

Over the 20 years from 2000 to 2019, the U.S. economy outgrew the 27-member European Union by a solid 19%, adjusted for inflation. These numbers…are quite impressive, especially considering that during President Obama’s eight years in office, annual growth in gross domestic product, GDP, never reached 3%. …From 2010 to 2019, U.S. unemployment averaged 6.3%, dropping below 3.7% in the last year before the pandemic. By contrast, the EU economy never dropped below 6.7% unemployment (in 2019) with an average of 9.5% for the entire decade. …These differences between America and Europe are significant, and should be the subject of debate in Europe: what is it that the Americans are doing that Europeans could do better? Over time, even small differences in economic growth compound into large differences in the standard of living.

Here’s his chart showing the divergence.

So why is Europe falling behind the United States when it should be growing faster because of lower living standards?

Sven has a very good explanation.

There are many candidates for explaining this difference, but there is one that stands out compared to all the others: the size of government. Between 2010 and 2019, government spending in the European Union was equal to 48.3% of GDP, on average, compared to 37.1% in the U.S. economy. …The most hard-hitting impact does not come through taxes, as conventional wisdom suggests, but through spending. …government operates under a form of central economic planning. Its outlays are not based on the mechanisms and prices of free markets: instead, its spending is governed by ideological preferences… While government spending inflicts the most damage on the economy, taxes are not insignificant. Here, again, the U.S. comes out more competitive than its European counterpart, and it is not a new problem. …For the past 20 years, European governments in general have taxed their economies 10-12 percentage points higher, as a share of GDP, than is the case in America.

Having crunched the data from Economic Freedom of the World, I think Sven is correct.

With regards to factors other than fiscal policy, European nations have just as much economic liberty (or, if you’re a glass-half-empty type, just as little economic liberty) as the United States. Heck, many of them rank above the United States when just considering factors such as trade, red tape, monetary policy, and rule of law.

Yet the United States nonetheless earns a better overall score.

Why? Because the United States does much better on fiscal policy (or, to be more accurate, doesn’t do as poorly).

P.S. Both Europe and the United States are moving in the wrong direction with regard to fiscal policy. Almost as if there’s a contest to see who can be the most profligate. Let’s call it the Keynesian Olympics. Whoever wins a gold medal is the first to suffer a fiscal crisis.

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I wrote last year about an encouraging trend of lower tax rates at the state level.

As you can see from this map, one of the states moving in the right direction is Iowa.

But Governor Kim Reynolds isn’t satisfied with just lowering tax rates, which is a worthy goal, of course.

She is now proposing to get rid of the state’s so-called progressive tax and replace it with a flat tax.

This would be very good news for Iowa’s economy and Iowa’s taxpayers.

An article in the Quad-City Times explains Governor Reynolds’ proposal.

In four years, every Iowan’s income would be taxed at 4% by the state under a new proposal from Gov. Kim Reynolds. Reynolds introduced her flat income tax proposal during last week’s annual Condition of the State address to the Iowa Legislature, encouraging the lawmakers to pass her idea.“Flat and fair,” Reynolds proclaimed during the speech. …Ten states currently have a flat state income tax, including Iowa’s eastern neighbor, Illinois. The list includes more blue states like Michigan and Massachusetts, but also red states like Kentucky and Utah. …Under Reynolds’ new plan, top state income tax rate would be eliminated each year over the next four years, until in 2026 every Iowa worker, regardless of income level, pays 4 percent. …The plan would reduce state revenue by $226 million in the first year, and by $1.6 billion at full implementation… Reynolds said during her speech. “Yes, we’ll have less to spend once a year at the Capitol, but we’ll see it spent every single day on Main Streets, in grocery stores, and at restaurants across Iowa. We’ll see it spent in businesses instead of on bureaucracies.” …Republican legislative leaders praised Reynolds’ proposal and said they are eager to begin working on legislation.

The article also explains the previous tax reform, which focused on lowering marginal tax rates.

In 2021, Iowa had nine state income tax rates, tied for the second-most in the country. Most Iowa workers’ income was taxed at between 4.14%, with rates increasing as income increased, up to a top rate of 8.53% for those earning over $78,435 of taxable income. As a result of tax reform passed by the Iowa Legislature and signed into law by Reynolds in 2018, the number of tax brackets will be reduced to four, ranging between 4.4 and 6.5%.

I showed last year how that legislation moved Iowa up one level in a ranking of state income taxes.

Well, here’s an updated look at the state’s total improvement if the governor’s plan for a flat tax is enacted.

Iowa jumps from the worst column to the next-to-best column.

And if I ranked states by the rate of their flat tax, Iowa’s 4 percent rate would be lower than the rates in North Carolina, Kentucky, Illinois, Michigan, Utah, and Massachusetts.

Not as good as the states with no income taxes, but still impressive.

P.S. I’ll be curious to see how much Iowa will improve in the Tax Foundation’s rankings if the proposed flat tax gets approved.

 

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As part of a recent discussion with Gene Tunny in Australia, I explained why I support “Starve the Beast,” which means keeping taxes as low as possible to help achieve the goal of spending restraint.

The premise of Starve the Beast is very simple.

Politicians like to spend money and they don’t particularly care whether that spending is financed by taxes or financed by borrowing (both bad options).

As Milton Friedman sagely observed, that means they will spend every penny they collect in taxes plus as much additional spending financed by borrowing that the political system will allow.

The IMF published a study on this issue about 10 years ago. The authors (Michael Kumhof, Douglas Laxton, and Daniel Leigh) assert that there’s no way of knowing whether Starve the Beast will lead to good or bad results.

…there is no consensus regarding the macroeconomic and welfare consequences of implementing a starve-the-beast approach, henceforth referred to as STB. …it could be beneficial in the ideal case in which it results in cuts in entirely wasteful government spending. In particular, lower spending frees up resources for private consumption, and the associated lower tax rates reduce distortions in the economy. On the other hand, …lower government spending may itself entail welfare losses…if it augments the productivity of private factors of production. …the paper examines whether the principal macroeconomic variables such as GDP and consumption, both in the United States and in the rest of the world, respond positively to this policy. …In addition, the paper assesses how the welfare effects depend on the degree to which government spending directly contributes to household welfare or to productivity.

The authors don’t really push any particular conclusion. Instead, they show various economic outcomes depending on with assumptions one adopts.

Since plenty of research shows that government spending is not a net plus for the economy (even IMF economists agree on that point), and because I think a less-punitive tax system is possible (and desirable) if there’s a smaller burden of government spending, I think the findings shown in Figure 4 make the most sense.

Now let’s shift from academic analysis to policy analysis.

In a piece for National Review back in July 2020, Jim Geraghty notes that Starve the Beast has an impact on government finances at the state level.

…we’re probably not going to see a massive expansion of government at the state level in the coming year or two. …Thanks to the pandemic lockdown bringing vast swaths of the economy to a halt, state tax revenues are plummeting. …So states will have much less tax revenue, constitutional balanced-budget requirements that are not easily repealed, and a limited amount of budgetary tricks to work around it. State governments could attempt to raise taxes, but that’s going to be unpopular and hurt state economies when they’re already struggling. Add it all up and it’s a tough set of circumstances for a dramatic expansion of government, no matter how ardently progressive the governor and state legislatures are.

For what it’s worth, Geraghty warned in the article that fiscal restraint by state governments wouldn’t happen if the federal government turned on the spending spigot.

And that, of course, is exactly what happened.

Now let’s look at the most unintentional endorsement of Stave the Beast.

A couple of years ago, Paul Krugman sort of admitted that cutting taxes was a potentially effective strategy for spending restraint.

…the same Republicans now wringing their hands over budget deficits…blew up that same deficit by enacting a huge tax cut for corporations and the wealthy. …this has been the G.O.P.’s budget strategy for decades. First, cut taxes. Then, bemoan the deficit created by those tax cuts and demand cuts in social spending. Lather, rinse, repeat. This strategy, known as “starve the beast,” has been around since the 1970s, when Republican economists like Alan Greenspan and Milton Friedman began declaring that the role of tax cuts in worsening budget deficits was a feature, not a bug. As Greenspan openly put it in 1978, the goal was to rein in spending with tax cuts that reduce revenue, then “trust that there is a political limit to deficit spending.” …voters should realize that the threat to programs… Social Security and Medicare as we know them will be very much in danger.

In other words, Krugman doesn’t like Starve the Beast because he fears it is effective (just like he also acknowledges the Laffer Curve, even though he’s opposed to tax cuts).

Let’s close by looking at some very powerful real-world evidence. Over the past 50 years, there’s been a massive increase in the tax burden in Western Europe.

Did all that additional tax revenue lead to lower deficits and less debt?

Nope, the opposite happened. European politicians spent every penny of the new tax revenue (much of it from value-added taxes). And then they added even more spending financed by additional borrowing.

To be fair, one could argue that this was an argument for the view of “Don’t Feed the Beast” rather than “Starve the Beast,” but it nonetheless shows that more money in the hands of politicians simply means more spending. And more red ink.

P.S. I had a discussion last year with Gene Tunny about the issue of “state capacity libertarianism.”

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I wrote back in 2012 that California voters opted for “slow-motion economic suicide” by voting to raise the state’s top income tax rate to 13.3 percent.

Sure enough, having the nation’s highest state income tax rate has been bad news.

More and more companies and households are leaving the (no-longer) Golden State for zero-income-tax states such as Texas, Nevada, and Florida.

Unfortunately, it appears that California politicians aren’t learning any lessons from this exodus.

They’re now pushing for a massive tax increase to fund a government takeover of health care.

The Wall Street Journal opined about the new plan.

California Democrats are busy reviving government-run, single-payer health care, despite its failure in the state five years ago. …Their revived legislation would replace Medicare, Medicaid and private health insurance with a state-run system… Californians would also be entitled to an expansive list of benefits including vision, dental, hearing and long-term care. A board of bureaucrats would control costs—i.e., ration care. …While Californians would technically be entitled to a “free” knee replacement, they might not get one if bureaucrats consider them too old—but the state won’t let people know that’s the reason. …Arizona could soon become a hot destination for medical tourism. …As for the tax increases… Start with a 2.3% excise tax on business with more than $2 million in annual gross receipts… Employers with 50 or more workers would also pay a 1.25% payroll tax, which would be passed onto workers. Workers earning more than $49,900 would pay an additional 1% payroll tax. …would raise the effective income tax on wage earners making more than $61,213 to 11.55%—more than millionaires pay in every state but New York. …An additional progressive surtax would start at 0.5% on income over $149,509 and rise to 2.5% at $2,484,121. …The top marginal rate would rise to 15.8% on unearned income, including capital gains, and 18.05% on wage income.

In a column for Reason, Joe Bishop-Henchman and Andrew Wilford of the National Taxpayers Union explain the likely impact of the proposed tax increases.

As the mad scientist laboratory for bad tax policy in America, California is constantly striving to come up with poorly designed and harmful taxes to pay for ever-increasing spending. But even by its own lofty standards, California has truly outdone itself with its latest proposal to fund a state single-payer health care system. …Not only would the proposed $163 billion in new tax revenue nearly double last year’s total revenue for the tax-happy state, but California would structure these new taxes in such a way as to be even more harmful than doubled tax liabilities already imply. …the 2.3 percent gross receipts tax sticks out. …whether a business has a profit margin of 0.1 percent or 10 percent, it would still have to pay the same percentage of its total revenues. …a rate that is three times the level of the nation’s current highest. …the proposal to institute a payroll tax on businesses with 50 or more employees…would create an obvious disincentive for businesses to hire their 50th employee. …the payroll tax would discourage both hiring employees and paying them higher wages, a disastrous outcome for workers. …individual income tax rates…would effectively be…an 18-bracket tax structure with a top marginal tax rate of 18.05 percent. …a trend that California appears to have its head in the sand about: overtaxed businesses and individuals fleeing for greener pastures.

Let’s elaborate on that final sentence and ask ourselves what the tipping point will be for various taxpayers.

  • Imagine you run a business and you have to pay a 2.3 percent tax on all your receipts, even if you happen to be losing money? Do you leave the state?
  • Imagine if you are a typical employee and government takes more than 10 percent of your income in exchange for bad roads and bad schools? Do you leave the state?
  • Imagine that you are a high-value entrepreneur facing the possibility of having to pay more than 18 percent of your income to state politicians? Do you leave?
  • Imagine being an investor who is thinking about forgoing consumption in order to make an investment that might result in a punitive capital gains tax? Do you leave?

And while you contemplate those questions, remember that California is already very unfriendly to taxpayers, ranking #48 according to the Tax Foundation and ranking #49 according to the Fraser Institute.

Moreover, while California politicians consider a massive tax increase, other states are lowering tax rates.

In other words, California already is in trouble and many state politicians now want to double down on a losing bet.

P.S. California considered a government-run health plan a few years ago and backed off, so maybe there’s hope.

P.P.S. Illinois has been the long-time leader in the poll that asks which state will be the first to suffer political collapse. That may change if this California plan is enacted.

P.P.P.S. When I’m feeling petty and malicious, I sometime hope jurisdictions adopt bad policy because that will give me more evidence showing the adverse consequences of bad policy.

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In my recent column listing the “Best and Worst News of 2021,” I included Joe Biden’s global tax cartel as one of the awful things that happened in the past 12 months.

It’s bad news for workers, consumers, and shareholders that politicians approved a system that will require all nations to have a corporate tax rate of at least 15 percent.

From the perspective of politicians, it’s easy to understand why they want a tax cartel. it’s a way for them to get their hands on more money. Just as gas stations would want a system that rigs gas prices at a high level. Or grocery stores would want a system to rig high food prices.

From the perspective of taxpayers, however, tax competition is much better. Politicians have a much harder time raising tax rates (and in many cases feel pressure to lower tax rates) when they know that jobs and investment can shift across borders from high-tax nations to low-tax nations.

As illustrated by this visual.

To explore this issue in greater detail, let’s look at a new article, written by Sven Larson for the European Conservative.

First, a quick history of the global campaign against low taxes. …it has been spearheaded by the Organization for Economic Cooperation and Development, OECD. This government-funded international think tank has built an international cartel of more than 130 governments to battle tax competition. …People who want to keep more of their own money, and who want to enjoy strong privacy laws, are being told by the OECD and the tax cartel that their financial planning is “harmful.” The purpose behind the OECD-led campaign is both sinister and transparent: to make sure taxpayers in high-tax countries have no low-tax options. …It won a big victory this past summer when the countries in the G-7 group complied with the directives of the OECD and agreed to create a global minimum corporate-income tax.

This is spot on.

The OECD is a pro-statism international bureaucracy that looks after the interests of politicians rather than citizens.

Sven also makes a great point about how the corporate tax cartel is just the beginning.

This tax cartel is only the beginning. Once countries with costly governments have created a Berlin Wall around their high-tax jurisdictions, they will be free to collude on other taxes beyond the corporate income tax. Personal income taxes, wealth taxes, death taxes… there is no end to the imagination of a government that does not have to worry about tax competition.

Also spot on.

You should read the entire article. But for purposes of my column, I’m going to highlight one additional point – which is Sven’s observation about how human rights are better protected in a world where people can safely invest their money where national governments can’t grab it.

There are also reasons related to individual freedom to preserve low-tax jurisdictions. To take just one example, in 2017, …Turkish President Erdogan accused investors of “treason” if they moved their assets out of the country. Erdogan’s comments, France24 explains, came on the heels of Turkish prosecutors seizing the assets of an investor who had testified in a court in New York on how a Turkish bank circumvented U.S. sanctions against Iran. The asset seizure easily comes across as retaliatory and meant to send a signal to others who might act in ways that would displease Mr. Erdogan. A total of 23 individuals were affected by the asset seizure. If these individuals had been able to shield their assets from the Turkish government, they would have been free to oppose the Erdogan regime while working, investing, and developing their businesses.

Another argument that is spot on.

The bottom line is that low-tax jurisdictions should be celebrated rather than persecuted.

If the goal is better lives for ordinary people, policy makers should be criticizing tax hells rather than tax havens.

Especially when you consider that politicians have a very strong tendency to over-tax and over-spend (leading to goldfish government) in the absence of some sort of external constraint.

Or, to be more blunt, we need to restrain the “stationary bandit” that leads to “predatory government.”

P.S. Click here or here to learn about the economics of tax competition (and click here to see how many winners of the Nobel Prize agree).

P.P.S. Click here, here, and here for interesting examples of what happens when you oppose the left’s anti-tax competition agenda.

P.P.P.S. Leftists who don’t like tax competition occasionally can be clever.

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It’s an annual tradition (2021, 2020, 2019, 2018, etc) to list a handful of things that I hope might happen in the upcoming year, as well as the things I fear may happen.

Sadly, since I understand the economics of “public choice” (something Thomas Jefferson also implicitly understood) it’s always easier to envision the latter category.

But it’s good to begin a new year with optimism, so here are the good things that hopefully will happen in 2022.

Biden’s So-Called Build Back Better Stays Dead – The President squandered money on a fake stimulus and an infrastructure boondoggle, but we dodged the biggest bullet when Democrats couldn’t get all 50 of their Senators to support a multi-trillion dollar, growth-sapping expansion in taxes and spending.

The Supreme Court Ends Civil Asset Forfeiture – This was on my list last year, but the odious practice of “theft by government” continues. That being said, I still think it won’t survive if the Supreme Court has a chance to make a ruling (especially since America’s best Justice is very aware of the problem).

Republicans Win Congress in 2022 – I don’t have much faith in Republicans to do the right thing (especially when a Republican is in the White House), but I hope they win the House and Senate in November because they will oppose big tax increases while Democrats control the White House – even if only for partisan reasons.

In the “honorable mention” or “runner-up” category, I also hope to see further progress for school choice in 2022.

And I used to list a collapse of Venezuela’s reprehensible socialist government as one of my annual “hopes,” but I’ve largely given up (particularly since Latin Americans seem foolishly susceptible to “leftist saviors“).

Now let’s shift to the bad things that I fear will happen over the next 365 days.

Biden’s BBB Budget Plan Springs Back to Life – The President’s “Build Back Better” plan may be on life support, but sadly it’s not quite dead. I fear a scaled-down (but still horrible) version of the legislation may get approved this year. Senator Manchin of West Virginia, for instance, says he is willing to support a $1.5 trillion package and I fear the left eventually will decide that 50 percent of a (moldy and weevil-ridden) loaf is better than none.

Biden’s Remains a Protectionist – I hoped last year that Biden would reduce government trade taxes. Not because he believes in economic liberty, but simply because he wouldn’t want to continue a Trump-era policy. But that didn’t happen, and I now fear he’ll continue with protectionism in 2022. I don’t even have much hope that he’ll resuscitate the World Trade Organization.

New Tax Cartels – One of last year’s big defeats was the creation of a global tax cartel by governments. Barring some sort of miracle that prevents implementation, greedy politicians have set up a system that will require all nations to have a minimum corporate tax of 15 percent. That’s very bad news for workers, consumers, and shareholders, but I’m even more worried about the precedent it creates for additional tax cartels and ever-higher tax rates.

I’ll close by noting that last year’s list included the possibility of Kamala Harris becoming president.

But Biden has been so bad that it’s unclear that Harris would make things worse.

P.S. For the “fears” category, I could – and probably should – list entitlements every single year. Simply stated, the country is in deep long-run trouble because of an aging population and poorly designed tax-and-transfer programs. Years ago, I was semi-hopeful that we would get Medicaid and Medicare reform.

Now that seems like a distant dream and the real battle is preventing further entitlement expansions such as Biden’s per-child handout.

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Per tradition (2020, 2019, 2018, etc), we highlight the best and worst developments of the year on December 31.

The choices are based on whether a particular policy increases or decreases individual liberty, either in a big way or a symbolic way.

Interestingly, the coronavirus pandemic doesn’t show up on either the good list or bad list.

Why? Because governments continue to make things worse, but not in ways that are significantly new or different.

With that in mind, let’s look at what happened in 2021, starting with the good news.

The Death of (the horribly misnamed) Build Back Better – President Biden somehow decided a very narrow victory over a very unpopular incumbent meant that he had a mandate for a radical expansion of the welfare state, accompanied by a plethora of class-warfare tax increases. Fortunately, Congress did not approve Biden’s growth-sapping plan.

School Choice Advances – Led by a sweeping plan to empower parents in West Virginia, there were many encouraging victories this year for school choice. And as teacher unions continue to mishandle the pandemic, there’s hope for continued progress next year.

Arizona Tax Reform – Several states lowered tax rates in 2021, but what happened in Arizona deserves special attention. Lawmakers reversed the outcome of a class-warfare referendum, meaning the state’s top tax rate on households will be 4.5 percent rather than 8 percent.

Speaking of referendum results, if we had an “honorable mention” or “runner-up” category, I would list three results from  2021

Now let’s look at the three worst policy developments of 2021.

Biden’s Fake Stimulus and Infrastructure Boondoggle – Even though the so-called Build Back Better plan failed to advance, President Biden was able to significantly increase the burden of government spending with a supposed stimulus plan early in the year, followed by a grab-bag of special-interest handouts as part of “infrastructure” legislation later in the year.

Chile Elects a Hard-Core Leftist President – Much to my dismay, Chilean voters opted for a hard-core leftist president who wants to dismantle the nation’s very successful private social security system. The most economically successful nation in Latin America is now in danger of becoming another Argentina. Or worse.

Global Tax Cartel – While Biden’s proposal for a higher corporate tax rate in the United States did not succeed, he seems to have successfully paved the way for a global tax cartel that will require all nations to have a corporate tax rate of at least 15 percent. This is a victory for politicians over workers, consumers, and shareholders. And it creates a very dangerous precedent.

Let’s also have an honorable mention for bad news.

One positive development during the Trump years was the unwinding of regulations that forced Americans to use crummy, low-flow showerheads.

Well, that victory was short-lived, as captured by this headline from a Reason article.

For what it’s worth, I suspect this bit of bad news will be followed by some bad news on a related issue.

P.S. I thought about including inflation as one of the bad things that happened in 2021, but I think that’s the results of years of misguided monetary policy. Politicians from both parties seem perfectly happy with Keynesian policy from the Federal Reserve.

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Yesterday’s column included a map showing which states gained and lost the most population over the past year.

I speculated that some of America’s internal migration was driven by differences in tax policy.

So it’s appropriate today that I share this map from the Tax Foundation’s annual State Business Tax Climate Index, showing Wyoming, South Dakota, Alaska, and Florida with the best scores and Connecticut, California, New York, and New Jersey with the worst scores.

Comparing today’s map with yesterday’s map, I immediately noticed that two states losing a lot of people – New York and California – also are states that have very bad tax systems.

And if you examine other states, you’ll confirm that there’s a relationship between tax policy and people “voting with their feet.”

Does that mean taxes are the only thing that matters? Of course not.

But as Janelle Cammenga and Jared Walczak explain in their report, they definitely have an effect on where money gets invested and where jobs get created.

Taxation is inevitable, but the specifics of a state’s tax structure matter greatly. The measure of total taxes paid is relevant, but other elements of a state tax system can also enhance or harm the competitiveness of a state’s business environment. …all types of businesses, small and large, tending to locate where they have the greatest competitive advantage. The evidence shows that states with the best tax systems will be the most competitive at attracting new businesses and most effective at generating economic and employment growth. …State lawmakers are right to be concerned about how their states rank in the global competition for jobs and capital, but they need to be more concerned with companies moving from Detroit, Michigan, to Dayton, Ohio, than from Detroit to New Delhi, India. …Tax competition is an unpleasant reality for state revenue and budget officials, but it is an effective restraint on state and local taxes.

One of the more interesting parts of the report is that you get to see where states rank when considering different types of taxes.

Here’s Table 1, which has the overall ranking in the first column, followed by the rankings for the main revenue sources for states.

If you read the report’s methodology, you’ll notice that there are different weights.

The worst tax (assuming a state wants a competitive system) is the personal income tax, followed by the sales tax and corporate income tax.

No state ranks in the top 10 for all five categories, though Florida, North Carolina, and Utah have relatively good scores across the board.

P.S. One important caveat is that the report does not list energy severance taxes, which are major sources of revenue for states such as Alaska and Wyoming. To be sure, those taxes that largely are borne by out-of-state consumers, so there’s a reason for the omission. Nonetheless, those taxes enable excessive government spending, which is why I think South Dakota and Florida actually have the nation’s best fiscal systems.

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I’ve written many times about how Americans are moving from high-tax states to low-tax states.

Now we have even more evidence because the Census Bureau has issued its annual report on state population changes, along with this accompanying map.

You don’t need to be an expert in map reading to see that California, Illinois, and New York are losing people at the fastest rate (orange states).

Likewise, the states gaining population at the fastest rate (purple states) include Texas.

This chart from the Wall Street Journal shows the biggest changes, as measured by the number of people moving in and out.

To be sure, taxes are not the only factor that drive internal migration.

But it’s also clear that people tend to move to lower-tax states, either because they overtly want to keep more of their money, or because they are attracted to the job opportunities that tend to be more plentiful where taxes are lower.

As you might expect, the coverage from Fox News highlights the fact that people are leaving blue states and moving to red states.

Between 2020 and 2021, the country has seen the lowest population growth since its founding, at only a 0.1% increase, but the biggest declines have occurred in Washington, D.C., and Democrat-led states, according to a report Tuesday by the Census Bureau. …New York with a 1.6% decline, Illinois with a 0.9% decline, and Hawaii and California that both saw a 0.7% decline. Meanwhile, the states that saw the biggest increase in population growth were Republican-run states, starting with Idaho at a 2.9% increase, followed by Utah with 1.7%, Montana with 1.7%, Arizona with 1.4% and South Carolina with 1.2%. …Florida and Texas, each saw a population growth of 1%.

Citing a different report, he Wall Street Journal opined a few days ago about the implications of migration for Illinois.

The Land of Lincoln is one of only three states, including West Virginia and Mississippi, to have lost population since 2010. But its population over age 55 has grown as Baby Boomers have aged. …Illinois is losing young people while Florida is gaining them. State development specialist Zach Kennedy notes that “the U.S. population actually grew in the prime working age, young adult age cohorts, 25 to 29, 30 to 34 and 35 to 39 year olds.” Illinois was among the few states to see a decline in these age cohorts. …“Only New Jersey lost more college-aged individuals out of state who never returned,” Mr. Kennedy says. Hmmm. What do the two have in common? …a shrinking population of prime-age working people and children means a smaller tax base will have to support growing retirement liabilities. Folks who stick around will have to pay higher and higher taxes. …each Illinois household on average is on the hook for $110,000 in government-worker retirement debt, up from $90,000 in 2019. …The per-household pension burdens in Iowa and Wisconsin were $3,500 and $3,200, respectively. Both states have gained young people. State and local government in Illinois is run by public-worker unions, and people are fleeing the economic and fiscal consequences.

The most important sentence in the preceding excerpt points out that “Folks who stick around will have to pay higher and higher taxes.”

And that will encourage even more of them to leave, which leads to even-further pressure for higher taxes on the chumps who remain.

Needless to say, that won’t end well, for Illinois or other blue states. Either they go bankrupt or future politicians do a big blue-state bailout.

P.S. This helps to explain why curtailing the federal tax code’s subsidy for excessive state and local tax burdens was so important.

P.P.S. This is also why federalism is both good politics and good policy.

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