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Posts Tagged ‘Taxation’

There are some fortunate people (in the Cayman Islands, BermudaMonacoVanuatuAntigua and Barbuda, and a few other places) who don’t have to pay income taxes.

The United States used to be in that lucky club. The income tax did not become a permanent blight upon the nation until 1913 (there was a temporary income tax during the Civil War and an attempted income tax in 1894 – ruled unconstitutional in 1895).

Indeed, this odious tax is a relatively new invention for the entire world. If my memory is correct, the first income tax was a temporary measure imposed by the United Kingdom to finance the fight against Napoleon. And the U.K. also was the first country to impose a permanent income tax (ironically, to help offset lower taxes on international trade).

In every case, politicians followed the same script. Income taxes originally were supposed to have low rates and only apply to the rich.

But it was simply a matter of time before small taxes on the wealthy became punitive taxes on everybody.

Since today is tax filing today for Americans, let’s take the opportunity to highlight two specific unfortunate consequences of the income tax.

First, it enabled the modern welfare state. You can see from the chart that the explosion of redistribution spending only occurred after politicians obtained a new source of revenue (a problem that was exacerbated in Europe when politicians adopted value-added taxes and were able to further increase the burden of government spending).

Needless to say, this is a reason to oppose an energy tax, a wealth tax, or a financial transactions tax. Giving politicians a new source of revenue is like giving alcoholics the keys to a liquor store.

Second, the income tax enabled costly economic discrimination. Prior to income taxes, governments largely relied on trade taxes and excise taxes, and those levies did not create many opportunities for mischief.

An income tax, by contrast, allows the government to impose all sorts of special penalties – either with discriminatory tax rates or with extra layers of tax on saving and investment – on people who generate a lot of economic output.

And it’s worth mentioning that the income tax also allows politicians to create all sorts of special credits, exemptions, deduction, exclusion, and other preferences (about 75,000 pages of them) for politically well-connected interest groups.

These penalties and preferences are both morally troubling (rampant cronyism) and economically damaging (back-door methods of central planning).

Let’s wrap up today’s column with this helpful reminder that the income tax is basically a penalty on productive behavior.

P.S. Politicians can play games with other revenue sources (i.e., special VAT rates or differential tariff burdens), but the income tax stands apart because it is capable of generating large amounts of revenue while simultaneously giving politicians considerable ability to pick winners and losers.

P.P.S. If you need some gallows humor to make it through tax day, go to the bottom of this column.

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Singapore is routinely ranked as the world’s 2nd-freest economy, trailing only Hong Kong.

The nation’s laissez-faire approach has yielded big dividends. Singapore is now über prosperous, richer than both the United States and United Kingdom.

But there are problems in paradise.

Advocates of class-warfare policy (see here and here) are urging higher tax burdens. And even though there’s no reason to raise taxes (Singapore has a huge budget surplus), politicians have catered to this noisy clique in recent years (see here and here).

In a column for the Straits Times that I co-wrote with Donovan Choy of Singapore’s Adam Smith Centre, we explain why the government should slam the door on all tax hikes, especially proposals targeting entrepreneurs and investors.

Singapore has shown that conventional theories about economic growth need to be updated to reflect that growth doesn’t necessarily need to weaken once a nation becomes prosperous. Singaporeans should be thankful for the sensible governance that has made the nation a role model. Unfortunately, some people are willing to threaten the country’s prosperity by urging higher tax burdens on the wealthy. They risk national competitiveness by advocating additional layers of tax on income that is saved and invested. This “class warfare” approach is deeply misguided, especially in a globalised economy.

We list six specific guidelines for sensible policy.

Two of them are worth highlighting, starting with the fact that Singapore so far has avoided the trap of “Wagner’s Law.”

What makes Singapore special is that it avoided the mistakes other nations made when they became rich. Countries in North America and Western Europe created costly welfare states once they became relatively prosperous. This is known to academics as Wagner’s Law, and it has serious consequences since larger public sectors reduce competitiveness and lead to less growth.

We also explain that discriminatory taxes on saving and investment are the most destructive method of collecting revenue.

Proponents assert that dividend and capital gains taxes are needed so that upper-income people pay tax. But this line of thinking is misguided. Such income is already subject to 17 per cent corporate income taxation in Singapore. Imposing dividend and capital gains taxes would mean such income is subject to increasing layers of discriminatory taxation. The result is to discourage capital formation (savings and investment) – the very essence of entrepreneurship. And that approach is economically foolish, since all economic theories – even Marxism and socialism – agree that saving and investment are key to long-run growth and rising living standards.

Since today’s topic is Singapore, let’s look at some additional material.

We’ll start with two articles that Donovan wrote for the Foundation for Economic Education.

The first column explains a bit of the history.

The country’s first Prime Minister, Lee Kuan Yew, is often recognized as the father of Singapore. If that is so, then the grandfathers of Singapore would rightfully be three men: Sir Stamford Raffles, who founded the trade settlement, William Farquhar, whom Raffles put at the helm of Singapore in his periodic years of absences, and John Crawfurd, whom Raffles appointed to succeed Farquhar. …Raffles’s intentions were plain as he wrote in a letter in June 1819: “Our object is not territory but trade; a great commercial emporium…,” and to develop “the utmost possible freedom of trade and equal rights to all, with protection of property and person”. …Like Farquhar, Crawfurd shared Raffles’s strong free-market beliefs and pushed his laissez-faire policies even harder… The common denominator of the grandfathers of Singapore was their economic philosophies – capitalism and free enterprise were at the root of their beliefs. The first leaders of colonial Singapore were staunch classical liberals who professed strong beliefs in economic freedoms

You probably won’t be surprised to learn that this is somewhat similar to Hong Kong’s economic history.

Donovan’s next column looks at how Singapore has wisely limited redistribution.

The Singapore welfare system is considered one of the most successful by first-world standards. World Bank data shows that Singapore’s government health expenditure in 2015 is only 4.3 percent of GDP, a small fraction in comparison to other first-world countries…while achieving comparatively equal or better health outcomes… While most of Europe, Scandinavia, and North America spend 30-40 percent of GDP on social welfare programs, Singapore spends less than half as much… qualifying for welfare is notoriously difficult by the standards of most of the developed Western world. The Singapore government’s position on welfare handouts is undergirded by a staunch economic philosophy of self-reliance and self-responsibility where the first lines of welfare should be derived from one’s individual savings, the family unit, and local communities before turning to the government. …This philosophy of self-reliance and responsibility is prominent not only in social welfare but is also replicated in the Singapore government’s approach to retirement savings, health care, education, and housing. For instance, the state’s preferred policy of ensuring individuals have sufficient resources for a rainy day is via the Central Provident Fund, a government-mandated savings account.

Again, much like Hong Kong.

Singapore also has what is probably the most market-oriented healthcare system in the world.

Here are some excerpts from a story in the New York Times.

…it achieves some outcomes Americans would find remarkable. Life expectancy at birth is two to three years longer than in Britain or the United States. Its infant mortality rate is among the lowest in the world, about half that of the United States…about two-thirds of health care spending is private, and about one-third is public. It’s just about the opposite in the United States. …What also sets Singapore apart, and what makes it beloved among many conservative policy analysts, is its reliance on health savings accounts. All workers are mandated to put a decent percentage of their earnings into savings for the future. …why is Singapore so cheap? Some think that it’s the strong use of health savings accounts and cost-sharing. People who have to use their own money usually spend less.

The country is also remarkably free of crime, as noted by CNBC.

Singapore was recently ranked second on the Economist Intelligence Unit’s Safe Cities Index for 2017, coming in just behind Tokyo. In 2016, the island nation’s police reported 135 total days without any crimes including snatch-theft, house break-ins and robbery. That low crime rate means many small businesses enjoy little concern about shoplifting. …local businesses take few precautions when closing shop at night. For instance, in the ground floor lobby of a mixed-use building in the downtown business district, many shops don’t have windows, locks — or even doors.

Though it is not a total libertarian paradise.

A column in Bloomberg warns the Brexit crowd that there are statist components to Singapore’s regime.

Over 80 percent of the population lives in public housing… In industrial policy, the government oversees a plethora of schemes targeting mostly off-budget public funding to particular sectors such as biopharma and aerospace, as well as activities such as R&D and skills training. Government-linked companies, whose controlling shareholder is the sovereign wealth fund Temasek Holdings Pte. Ltd., are the dominant players in transport, communications, real estate and media.

Let’s close with a column Professor Steve Hanke authored for Forbes.

Singapore validates Adam Smith’s counsel on economic development: “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice.” …Singapore, Hong Kong, and even the Cayman Islands exemplify commerce-oriented city-states. How can such a small player, like Singapore, achieve prominence on the world’s stage? …acting as a commercial republic and embracing a regime of entrepreneurial public finance. …the culture of an entrepreneurial inclined city-state – like Singapore – differs significantly from that of a parasitical state that feeds on tax extractions.

Here’s his comparison of a predatory government compared to a pro-market government.

Singapore is a successful example of the right column.

Sounds like a model the United States should follow.

Assuming, of course, Singapore retains good policy.

P.S. I’ve also had to explain why the Cayman Islands should retain good policy.

P.P.S. Regular readers won’t be surprised to learn that the OECD tries very hard to overlook the success of Singapore’s low-tax model.

P.P.P.S. Singapore is in first place in my “laissez-faire index.”

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Why do I relentlessly defend tax competition and tax havens?

Sadly, it’s not because I have money to protect. Instead, I’m motivated by a desire to protect the world from “goldfish government.”

Simply stated, politicians have a “public choice” incentive for never-ending expansions of government, even if they actually understand such policies will lead to Greek-style collapse.

Speaking at a recent conference in Moldova, I explained why tax competition is the best hope for averting that grim outcome.

In my remarks, I basically delivered a results-based argument for tax competition.

Which is why I shared data on lower tax rates and showed these slides on what politicians want compared to what they’ve been pressured to deliver.

Likewise, I also talked about reductions in the tax bias against saving and investment and shared these slides on what politicians want compared to what they’ve been pressured to deliver.

There’s also a theoretical side to the debate about tax competition and tax havens.

In a 2013 article for Cayman Financial Review, I explained (fairly, I think) the other side’s theory.

…there also has been a strain of academic thought hostile to tax competition. It’s called “capital export neutrality” and advocates of the “CEN” approach assert that tax competition creates damaging economic distortions. They start with the theoretical assumption of a world with no taxes. They then hypothesize, quite plausibly, that people will allocate resources in that world in ways that maximise economic output. They then introduce “real world” considerations to the theory, such as the existence of different jurisdictions with different tax rates. In this more plausible world, advocates of CEN argue that the existence of different tax rates will lead some taxpayers to allocate at least some resources for tax considerations rather than based on the underlying economic merit of various options. In other words, people make less efficient choices in a world with multiple tax regimes when compared to the hypothetical world with no taxes. To maximise economic efficiency, CEN proponents believe taxpayers should face the same tax rates, regardless of where they work, save, shop or invest. …One of the remarkable implications of capital export neutrality is that tax avoidance and tax evasion are equally undesirable. Indeed, the theory is based on the notion that all forms of tax planning are harmful and presumably should be eliminated.

And I then explained why I think the CEN theory is highly unrealistic.

…the CEN is flawed for reasons completely independent from preferences about the size of government. Critics point out that capital export neutrality is based on several highly implausible assumptions. The CEN model, for instance, assumes that taxes are exogenous – meaning that they are independently determined. Yet the real-world experience of tax competition shows that tax rates are very dependent on what is happening in other jurisdictions. Another glaring mistake is the assumption that the global stock of capital is fixed – and, more specifically, the assumption that the capital stock is independent of the tax treatment of saving and investment. Needless to say, these are remarkably unrealistic conditions.

Since economists like numbers, I even created an equation to illustrate whether tax competition is a net plus or a net minus.

Basically, the CEN argument is only defensible if the economic inefficiency associated with tax minimization is greater than the economic damage caused by higher tax rates, plus the damage caused by more double taxation, plus the damage caused by a bigger public sector.

Needless to say, honest empirical analysis will never support the CEN approach (as even the OECD admits).

That being said, politicians and special interests are not overly sympathetic to my arguments.

Which is why I very much identify with the guy in this cartoon strip.

P.S. If you want more information, about 10 years ago, I narrated a video on tax competition, a three-part video series on tax havens, and even a video debunking some of Obama’s demagoguery on the topic.

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President Kennedy’s tax rate reductions were a big success. Sadly, very few modern Democrats share JFK’s zeal for pro-growth tax policy.

And there’s another arrow in the class-warfare quiver.

The Wall Street Journal reports on a misguided new idea from Ron Wyden, the ranking Democrat on the Senate Finance Committee.

The top Democrat on the Senate’s tax-writing committee proposed taxing unrealized gains in investment assets every year at the same rates as other income…an idea that would transform how the U.S. taxes the wealthiest people. …Under Mr. Wyden’s concept, capital gains would be taxed annually based on how much assets have gained in value. Now, by contrast, gains are taxed only when assets are sold and at a top rate of 23.8% instead of 37% for ordinary income.

There are two big reasons why this is a terrible idea.

First, the right policy is to abolish any tax on capital gains. Drop the rate to zero.

Simply stated, there shouldn’t be an added layer of tax on people who earn money, pay tax on that money, and then buy assets with some of the remaining after-tax income.

Especially since the income generated by that additional investment already would be hit by the corporate income tax and the extra layer of tax on dividends.

This system is also very bad for workers because of the long-standing relationship between investment and employee compensation.

Second, levying such a tax would be a logistical nightmare. Here’s another brief excerpt from the article.

Mr. Wyden’s concept would present logistical challenges. He would need to figure out how to value complex assets, handle declines in value, deal with people without enough cash to pay the tax and address illiquid investments such as closely held businesses and real estate.

So why would Sen. Wyden propose such a clunky class-warfare scheme?

Because it would generate (at least on paper) a lot of money that could be used to buy votes.

This mark-to-market tax concept…could raise substantial money. A similar proposal…would generate an estimated $125 billion in 2025 alone… Democrats, who are campaigning on wide-ranging and costly ideas for more spending on health care, infrastructure and education, can point to plans by Mr. Wyden and others to explain how they would pay for policy proposals.

Of course, no amount of tax increases would generate the revenue to finance the so-called Green New Deal.

In reality, a major reason for Wyden’s plan is that the left is motivated by class warfare rather than revenue collection.

Democrats have frequently found unfairness in the different ways that the U.S. tax system approaches wage and investment income. They have focused their response, in part, on the “Buffett Rule”, inspired by Warren Buffett’s claim that he pays a lower tax rate than his secretary.

I added this final excerpt simply so I can point out that Buffett’s claim is utter nonsense.

And so is the “Buffett rule” that some folks on the left have proposed.

I’ll close by noting that the United States has one of the world’s least friendly tax codes for investment.

The lower corporate rate in the Trump tax plan was a step in the right direction.

But even with that positive reform, the overall tax burden on capital gains is very high compared to America’s major trading partners.

And now Senator Wyden wants to make a bad situation worse.

For further information, here’s my video explaining why there shouldn’t be any tax on capital gains.

P.S. Uncle Sam also forces investors to pay capital gains tax when assets rise in value because of inflation.

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

Some days, I’m tempted to pick the Organization for Economic Cooperation and Development. After all, the Paris-based bureaucracy is infamous for pushing bigger government and higher taxes.

Other days, I want to select the International Monetary Fund, which leverages its bailout authority to relentlessly coerce governments into imposing higher taxes to finance bigger budgets.

At least for today, I’m going to argue that the IMF wins the dubious prize of being the worst.

That’s because the bureaucracy is doubling down on its ideological zeal for bigger government. Here are some excerpts from a speech earlier this week by the organization’s top bureaucrat, Christine Lagarde (who, incidentally, receives a lavish tax-free salary).

Our issue today is international corporate taxation. …I believe we need new rules in this area. …reasons why a new approach is urgent. …the three-decade long decline in corporate tax rates, undermines faith in the fairness of the overall tax system. …New IMF research published two weeks ago analyzes various options in…better addressing profit-shifting and tax competition.

Ms. Lagarde wants to boost the tax burden on business, and she complained about the fact that corporate tax rates have come down in recent decades.

What she cleverly didn’t acknowledge, though, is that the IMF’s own research shows that lower rates have not resulted in less revenue.

But you have to give Lagarde and her minions credit. They act on their beliefs.

The IMF has been pushing for big tax increases in Bahrain.

The International Monetary Fund (IMF) has called on the Bahrain government to take further action to shore up its shaky financial position, saying a large package of revenue and expenditure measures – including new taxes – is “urgently needed”. …the IMF set out a number of policy ideas – including the controversial tax proposal – in a statement… Bikas Joshi, the official who led the IMF team that visited Bahrain…went on to say that a “large fiscal adjustment is a priority” for the country…he said. “The implementation of a value-added tax, as planned, would be important. Additional revenue measures—including consideration of a corporate income tax—would be welcome.”

The IMF has been warning against tax cuts and instead pushing for tax increases in Ireland.

The International Monetary Fund (IMF) has urged the Government not to cut taxes in the upcoming budget, warning it risked “over-stimulating” Ireland’s fast-growing economy. …The fund recommended boosting housing supply through State-backed social housing projects… It recommended the Government pursues a small budget surplus in 2019… To achieve this, it advised broadening the tax base. One way this could be done was by increasing the tax on diesel… In addition, the IMF recommended getting rid of various tax exemptions and preferential rates such as the lower 9 per cent VAT rate for the hospitality sector.

The IMF has urged so many taxes that it created a backlash in Jordan.

Thousands of Jordanians heeded a strike call…to protest at major, IMF-guided tax rises they say will worsen an erosion in living standards. …warning the government that sweeping tax amendments…would impoverish employees already hit by unprecedented tax hikes implemented earlier this year. …tens of thousands of public and private sector employees accused the government of caving in to International Monetary Fund (IMF) demands and squeezing a middle class… The amendments, which would double the income tax base, are a key condition of a three-year IMF economic program that aims to generate more state revenue… Jordan earlier…raised taxes on hundreds of food and consumer items.

The examples are part of a pattern. I’ve also written about the IMF pimping for higher taxes in big countries, in small countries, and even entire continents.

Needless to say, the IMF also agitates for tax increases in the United States.

And it’s even specifically targeted poor nations for tax increases! Maybe now you’ll understand why I joked about nations not allowing IMF bureaucrats to visit.

I want to close today’s column by returning to Lagarde’s speech because there was another part of her speech that belies belief. She actually wants people to think that higher taxes and bigger government are a recipe for more growth.

…the current situation is especially harmful to low-income countries, depriving them of much-needed revenue to help them achieve higher economic growth.

Yes, your eyes are not deceiving you. The IMF’s top bureaucrat made the absurdly anti-empirical argument that higher taxes are good for growth.

Even though that’s directly contrary to evidence on the factors that enabled North America and Western Europe to become rich.

Sadly, this is now a common rhetorical tactic by international bureaucracies. The OECD does the same thing, as does the United Nations.

I guess they all think if they repeat nonsense often enough, people will somehow conclude up is down and black is white.

For what it’s worth, I’ll wait for them to name a single country that ever became rich by imposing higher taxes and bigger government.

P.S. There are some good economists working in the research division of the IMF, and they periodically publish good research on topics such as spending caps, debt, decentralization, the size of government, demographics, government spending, and taxation. Too bad the bureaucrats working on policy never read those studies.

P.P.S. My favorite IMF study was the one that accidentally provided very compelling evidence against the value-added tax.

P.P.P.S. My least favorite IMF studies were the ones that actually suggested that it would be desirable if everyone had lower living standards so long as rich people disproportionately suffered. Disgusting.

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I wrote a couple of weeks ago about how New York is committing slow-motion fiscal suicide.

The politicians in Illinois must have noticed because they now want (another “hold my beer” moment?) to accelerate the already-happening collapse of their state.

The new governor, J.B. Pritzker, wants to undo the state’s 4.95 percent flat tax, which is the only decent feature of the Illinois tax system.

And he has a plan to impose a so-called progressive tax with a top rate of 7.95.

Here are some excerpts from the Chicago Tribune‘s report., starting with the actual plan.

Democratic Gov. J.B. Pritzker embarked on a new and potentially bruising political campaign Thursday by seeking to win public approval of a graduated-rate income tax that he contended would raise $3.4 billion by increasing taxes for the wealthy…for his long-discussed plan to replace the state’s constitutionally mandated flat-rate income tax. Currently, all Illinois residents are taxed at 4.95 percent… Pritzker’s proposal is largely reliant on raising taxes significantly on residents making more than $250,000 a year, with those earning $1 million and up taxed at 7.95 percent of their total income. …The corporate tax rate would increase from the current 7 percent to 7.95 percent, matching the top personal rate. …The governor’s proposal would give Illinois the second-highest top marginal tax rate among its neighboring states.

And here’s what would need to happen for the change to occur.

Before Pritzker’s plan can be implemented, three-fifths majorities in each chamber of the legislature must approve a constitutional amendment doing away with the flat tax requirement. The measure would then require voter approval, which couldn’t happen until at least November 2020. …Democrats hold enough seats in both chambers of the legislature to approve the constitutional amendment without any GOP votes. Whether they’ll be willing to do so remains in question. Democratic leaders welcomed Pritzker’s proposal… voters in 2014 endorsed the idea by a wide margin in an advisory referendum.

The sensible people on the Chicago Tribune‘s editorial board are not very impressed, to put it mildly.

…how much will taxes increase under a rate structure Pritzker proposed? You might want to cover your eyes. About $3.4 billion annually… That extraction of dollars from taxpayers’ pockets would be in addition to roughly $5 billion raised annually in new revenue under the 2017 income tax hike. …How did Springfield’s collection of all that new money work out for state government and taxpayers? Here’s how: Illinois remains deeply in debt, continues to borrow to pay bills, faces an insurmountable unfunded pension liability and is losing taxpayers who are fed up with paying more. The flight of Illinoisans to other states is intensifying with 2018’s loss of 45,116 net residents, the worst of five years of consistent, dropping population. …Illinois needs to be adding more taxpayers and businesses, not subtracting them. When politicians raise taxes, they aren’t adding. A switch to a graduated tax would eliminate one of Illinois’ only fishing lures to attract taxpayers and jobs: its constitutionally protected flat income tax. …Pritzker’s proposal, like each tax hike before it, was introduced with no meaningful reform on the spending side of the ledger. This is all about collecting more money. …In fact, the tax hike would come amid promises of spending new billions.

And here’s a quirk that is sure to backfire.

For filers who report income of more than $1 million annually, the 7.95 percent rate would not be marginalized; meaning, it would be applied to every dollar, not just income of more than $1 million. Line up the Allied moving vans for business owners and other high-income families who’ve had a bellyful of one of America’s highest state and local tax burdens.

The Tax Foundation analyzed this part of Pritzker’s plan.

This creates a significant tax cliff, where a person making $1,000,000 pays $70,935 in taxes, while someone earning one dollar more pays $79,500, a difference of $8,565 on a single dollar of income.

That’s quite a marginal tax rate. I suspect even French politicians (as well as Cam Newton) might agree that’s too high.

Though I’m sure that tax lawyers and accountants will applaud since they’ll doubtlessly get a lot of new business from taxpayers who want to avoid that cliff (assuming, of course, that some entrepreneurs, investors, and business owners actually decide to remain in Illinois).

While the tax cliff is awful policy, it’s actually relatively minor compared to the importance of this table in the Tax Foundation report. It shows how the state’s already-low competitiveness ranking will dramatically decline if Pritzker’s class-warfare plan is adopted.

The Illinois Policy Institute has also analyzed the plan.

Unsurprisingly, there will be fewer jobs in the state, with the losses projected to reach catastrophic levels if the new tax scheme is adjusted to finance all of the Pritzker’s new spending.

And when tax rates go up – and they will if states like Connecticut, New Jersey, and California are any indication – that will mean very bad news for middle class taxpayers.

The governor is claiming they will be protected. But once the politicians get the power to tax one person at a higher rate, it’s just a matter of time before they tax everyone at higher rates.

Here’s IPI’s look at projected tax rates based on three different scenarios.

The bottom line is that the middle class will suffer most, thanks to fewer jobs and higher taxes.

Rich taxpayer will be hurt as well, but they have the most escape options, whether they move out of the state or rely on tax avoidance strategies.

Let’s close with a few observations about the state’s core problem of too much spending.

Steve Cortes, writing for Real Clear Politics, outlines the problems in his home state.

…one class of people has found a way to prosper: public employees. …over 94,000 total public employees and retirees in Illinois command $100,000+ salaries from taxpayers…former Chicago Mayor Richard M. Daley, who earned a $140,000 pension for his eight years of service in the Illinois legislature. …Such public-sector extravagance has fiscally transformed Illinois into America’s Greece – only without all the sunshine, ouzo, and amazing ruins.

So nobody should be surprised to learn that the burden of state spending has been growing at an unsustainable rate.

Indeed, over the past 20 years, state spending has ballooned from $34 billion to $86 billion according to the Census Bureau. At the risk of understatement, the politicians in Springfield have not been obeying my Golden Rule.

And today’s miserable fiscal situation will get even worse in the near future since Illinois is ranked near the bottom when it comes to setting aside money for lavish bureaucrat pensions and other retirement goodies.

Indeed, paying off the state’s energized bureaucrat lobby almost certainly is the main motive for Pritzker’s tax hike. As as happened in the past, this tax hike is designed to finance bigger government.

Yet that tax hike won’t work.

Massive out-migration already is wreaking havoc with the state’s finances. And if Pritzker gets his tax hike, the exodus will become even more dramatic.

P.S. Keep in mind, incidentally, that all this bad news for Illinois will almost certainly become worse news thanks to the recent tax reform. Restricting the state and local tax deduction means a much smaller implicit federal subsidy for high-tax states.

P.P.S. I created a poll last year and asked people which state will be the first to suffer a fiscal collapse. Illinois already has a big lead, and I won’t be surprised if that lead expands if Pritzker is able to kill the flat tax.

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When I write about the benefits of trade, I periodically point out that America has a trade deficit because it has a foreign investment surplus.

And since investment is a key driver of economic growth and rising wages, that’s a good outcome.

It basically means that foreigners who earn dollars by exporting to America are helping to finance America’s future prosperity by then plowing that money back into our financial markets (see this video for more details).

That’s the good news.

The bad news is that politicians are making cross-border investment more difficult.

They are using tax and regulatory policies to hinder the flow of money, just like they use protectionist policies to hinder the flow of goods and services.

A new report from the Center for Freedom and Prosperity, authored by Bruce Zagaris, explains this unfortunate development. He starts by explaining some of the bad policies imposed by Washington.

The ever-growing complexity and reach of the U.S. tax system impinges on the ability of U.S. taxpayers to live abroad, work abroad, open bank accounts abroad, or conduct business abroad. …These developments create a challenging environment, with taxpayers being subject to onerous – and sometimes conflicting – requirements. The complex array of obligations put taxpayers in legal jeopardy as governments threaten to impose sanctions on investors and businesses… The U.S. has even proactively prosecuted individuals and companies for cross-border tax activities that do not violate American laws. …The paperwork and reporting requirements for cross-border economic activity are extensive. …The icing on the cake of intrusiveness and costly compliance is the Foreign Account Tax Compliance Act.

FATCA is horrid legislation, perhaps the single worst part of the internal revenue code.

And bad policy from the U.S. has given other nations an excuse to adopt similar bad rules – aided and abetted by statist international bureaucracies such as the European Commission and Organization for Economic Cooperation and Development.

The difficulties caused by extraterritorial taxation are exacerbated by similar moves by other nations, often implemented as a response to aggressive policies by the United States. … the OECD has developed compliance and enforcement initiatives. …extraterritorial tax rules also are impinging on corporations. …The EU has taken a series of aggressive steps to impose tax on cross-border transactions. …Overly aggressive tax compliance and enforcement initiatives erode globalization, impede the ability of normal commerce and the movement of people, capital, and goods, and threaten privacy.

I especially like Bruce’s conclusion. All of the rules that stifle and hinder cross-border investment only exist because politicians have adopted bad tax laws.

Most of the policies reviewed above are only necessary because governments not only tax income, but also impose extra layers of tax on income that is saved an invested, exacerbated by decisions to impose such tax laws on income earned outside national borders. In a neutral, territorial tax system that taxes economic activity only one time, such as the Hall-Rabushka flat tax, almost all international tax conflicts disappear.

Amen. If we had a flat tax, there would be no case to be made for these bad policies.

Writing for the Washington Times, Richard Rahn of the Institute for Global Economic Growth cites this new study as he warns that an ever-expanding web of global tax rules is throwing sand in the gears of the global economy.

Global economic growth, particularly foreign investment, is slowing. One reason is likely the growing complexity of engaging in cross-border financial transactions. Major companies, banks and other financial institutions have been required to pay, in some cases, multi-billion-dollar fines to various governments for some alleged tax or other violation. The question is: Why is this occurring when virtually all of these institutions have compliance officers, tax lawyers, accountants, auditors, etc.? Much of the problem seems to stem from the ever-changing regulations and laws among countries, which are increasingly impossible to understand and comply with, even by the most sophisticated businesses. …The Center for Freedom and Prosperity Foundation has just published an important paper by the highly regarded international tax lawyer Bruce Zagaris, titled “Why the U.S. and the Worldwide Tax Systems Have Run Amok.” …Overly complex and even incomprehensible rules govern many international wealth and business transfers, as well as very onerous reporting requirements for people that have foreign interests. …In his paper, Mr. Zagaris details the problems caused by FATCA and a number of other international tax-related rules and regulations. Many of the rules and regulations would never meet basic cost-benefit analysis. They create much pain for little or no gain.

I would modify that last sentence.

The only “gain” from all these tax rules is a comparatively small amount of additional tax revenue for politicians (Obama originally promised $100 billion annually from FATCA and the actual law is projected to collect than $1 billion per year).

Yet there is great pain imposed on the private sector.

Moreover, laws to hinder cross-border capital flows are especially disadvantageous for the United States, as illustrated by this chart from Bruce’s report.

Sadly, damage to the productive sector of the economy is not something that politicians lose sleep over.

After all, they wouldn’t be imposing risky extraterritorial policies if they actually cared about what’s best for the nation.

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