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Three Reasons to Reject Biden’s Tax Harmonization Scheme for “Global Minimum Taxation”

Wed, 04/07/2021 - 12:25pm

Way back in 2007, I narrated this video to explain why tax competition is very desirable because politicians are likely to overtax and overspend (“Goldfish Government“) if they think taxpayers have no ability to escape.

The good news is that tax competition has been working.

As explained in the above video, there have been big reductions in personal tax rates and corporate tax rates. Just as important, governments have reduced various forms of double taxation, meaning lower tax rates on dividends and capital gains.

Many governments have also reduced – or even eliminated – death taxes and wealth taxes.

These pro-growth tax reforms didn’t happen because politicians read my columns (I wish!). Instead, they adopted better tax policy because they were afraid of losing jobs and investment to countries with better fiscal policy.

Now for the bad news.

There’s been an ongoing campaign by high-tax governments to replace tax competition with tax harmonization. They’ve even conscripted international bureaucracies such as the Organization for Economic Cooperation and Development (OECD) to launch attacks against low-tax jurisdictions.

And now the United States is definitely on the wrong side of this issue.

Here’s some of what the Biden Administration wants.

The United States can lead the world to end the race to the bottom on corporate tax rates. A minimum tax on U.S. corporations alone is insufficient. …President Biden is also proposing to encourage other countries to adopt strong minimum taxes on corporations, just like the United States, so that foreign corporations aren’t advantaged and foreign countries can’t try to get a competitive edge by serving as tax havens. This plan also denies deductions to foreign corporations…if they are based in a country that does not adopt a strong minimum tax. …The United States is now seeking a global agreement on a strong minimum tax through multilateral negotiations. This provision makes our commitment to a global minimum tax clear. The time has come to level the playing field and no longer allow countries to gain a competitive edge by slashing corporate tax rates.

As Charlie Brown would say, “good grief.” Those passages sound like they were written by someone in France, not America

And Heaven forbid that  countries “gain a competitive edge by slashing corporate tax rates.” Quelle horreur!

There are three things to understand about this reprehensible initiative from the Biden Administration.

  1. Tax harmonization means ever-increasing tax rates – It goes without saying that if politicians are able to create a tax cartel, it will merely be a matter of time before they ratchet up the tax rate. Simply stated, they won’t have to worry about an exodus of jobs and investment because all countries will be obliged to have the same bad approach.
  2. Corporate tax harmonization will be followed by harmonization of other taxes – If the scheme for a harmonized corporate tax is imposed, the next step will be harmonized (and higher) tax rates on personal income, dividends, capital gains, and other forms of work, saving, investment, and entrepreneurship.
  3. Tax harmonization denies poor countries the best path to prosperity – The western world became rich in the 1800s and early 1900s when there was very small government and no income taxes. That’s the path a few sensible jurisdictions want to copy today so they can bring prosperity to their people, but that won’t be possible in a world of tax harmonization.

P.S. If you want more information, here’s a three-part video series on tax havens, and even a video debunking some of Obama’s demagoguery on the topic.

New York’s Fiscal Suicide

Tue, 04/06/2021 - 12:42pm

The state of New York is an economic disaster area.

  • New York is ranked #50 in the Economic Freedom of North America.
  • New York is ranked #48 in the State Business Tax Climate Index.
  • New York is ranked #50 in the Freedom in the 50 States.
  • New York is next-to-last in measures of inbound migration.
  • New York is ranked #50 in the State Soft Tyranny Index.

The good news is that New York’s politicians seem to be aware of these rankings and are taking steps to change policy.

The bad news is that they want they apparently want to be in last place in every index, so they’re looking at a giant tax increase.

The Wall Street Journal opined on the potential tax increase yesterday.

…lawmakers in Albany should be shouting welcome home. Instead they’re eyeing big new tax increases that would give the state’s temporary refugees to Florida—or wherever—one more reason to stay away for good. …Here are some of the proposals… Impose graduated rates on millionaires, up to 11.85%. …Since New York City has its own income tax, running to 3.88%, the combined rate would be…a bigger bite than even California’s notorious 13.3% top tax, and don’t forget Uncle Sam’s 37% share. …The squeeze is worse when you add the new taxes President Biden wants. A second factor: In 2017 the federal deduction for state and local taxes was capped at $10,000, so New Yorkers will now really feel the pinch. As E.J. McMahon of the Empire Center for Public Policy writes: “The financial incentive for high earners to move themselves and their businesses from New York to states with low or no income taxes has never—ever—been higher than it already is.”

The potential deal also would increase the state’s capital gains tax and the state’s death tax, adding two more reasons for entrepreneurs and investors to escape.

Here are some more details from a story in the New York Times by Luis Ferré-Sadurní and Jesse McKinley.

Gov. Andrew M. Cuomo and New York State legislative leaders were nearing a budget agreement on Monday that would make New York City’s millionaires pay the highest personal income taxes in the nation… Under the proposed new tax rate, the city’s top earners could pay between 13.5 percent to 14.8 percent in state and city taxes, when combined with New York City’s top income tax rate of 3.88 percent — more than the top marginal income tax rate of 13.3 percent in California… Raising taxes on the rich in New York has been a top policy priority of the Democratic Party’s left flank… The business community has warned that raising income taxes could prompt millionaires who have left the state during the pandemic and are working remotely to make their move permanent, damaging the state’s tax base. Currently, the top 2 percent of the state’s highest earners pay about half of the state’s income taxes. …The corporate franchise tax rate would also increase to 7.25 percent from 6.5 percent.

There are two things to keep in mind about this looming tax increase.

That second item is a big reason why so many taxpayers already have escaped New York and moved to states with better tax policy (most notably, Florida).

And even more will move if tax rates are increased, as expected.

Indeed, if the left’s dream agenda is adopted, I wouldn’t be surprised if every successful person left New York. In a column for the Wall Street Journal, Mark Kingdon warns about other tax hikes being considered, especially a wealth tax.

Legislators in Albany are considering two tax bills that could seriously damage the economic well-being and quality of life in New York for many years to come: a wealth tax and a stock transfer tax. …Should New York enact a 2% wealth tax, a wealthy New Yorker could wind up paying a 77% tax on short-term stock market profits. And that’s a conservative estimate: It assumes that stocks return 9% a year. If the return is 4.4% or less, the tax would be more than 100%. …65,000 families pay half of the city’s income taxes, and they won’t stay if the taxes become unreasonable… The trickle of wealthy émigrés out of New York has become a steady stream… It will be a flood if New York enacts a wealth tax with an associated tax on unrealized gains, which would lower, not raise, tax revenues, as those who leave take with them jobs and related services, such as legal and accounting. …The geese who have laid golden eggs for years see what is happening in Albany, and they’ll fly south to avoid being carved up.

The good news – at least relatively speaking – is that a wealth tax is highly unlikely.

But that a rather small silver lining on a very big dark cloud. The tax increases that will happen are more than enough to make the state even more hostile to private sector growth.

I’ll close with a few observations.

There are a few states that can get away with higher-than-average taxes because of special considerations. California, for instance, has climate and scenery. In the case of New York, it can get away with some bad policy because some people think of New York City as a one-of-a-kind place. But there’s a limit to how much those factors can be exploited, as both California and New York are now learning.

What politicians don’t realize (or don’t care about) is that people look at a range of factors when deciding where to live. This is especially true for successful entrepreneurs, investors, and business owners, who have both resources and knowledge to assess the costs and benefits of different locations. The problem for New York is that it looks bad on almost all policy metrics.

If the tax increases is enacted, expect to see a significant drop in taxable income as upper-income taxpayers either leave the state or figure out other ways of protecting their income. I don’t know if the state will be on the downward-sloping portion of the Laffer Curve, but it’s safe to assume that revenues over time will fall far short of projections. And it’s very safe to assume that the economic damage will easily offset any revenues that are collected.

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Image credit: Zack Seward | CC BY-ND 2.0.

Dishonest Tax Analysis from the New York Times

Mon, 04/05/2021 - 12:07pm

There are two big policy debates about business profits.

The first is whether profits are good or evil. I pick the former. Profits are something to applaud, assuming they are earned honestly (i.e., not the result of subsidiesindustrial policyprotectionism, or other forms of cronyism).

The second is how profits should be taxed, and that’s the focus of today’s column.

My perfect-world answer is that there should be no tax on profits because we have a government that is so small that there’s no need for any type of income tax. But I’m in the United States rather than a fiscal paradise such as BermudaMonaco, or the Cayman Islands. So if we start with the assumption that a corporate income tax is going to exist, how should it operate?

To answer that question, let’s start with this simple example of a kid’s lemonade stand. Here’s how much money it spent and how much revenue it generated (before it was shut down by overzealous bureaucrats).

How much profit did our budding entrepreneur make?

The correct answer, of course, is that the business didn’t earn any profits. Indeed, it lost $2. So there obviously should not be any tax.

But some people don’t understand the difference between taxable income (which is largely based on cash flow in one year) and “book income” (which is largely a backward-looking, accrual-based estimate of profits to help inform shareholders about the overall financial condition of a corporation).

Or, maybe they do understand and simply prefer to engage in dishonest demagoguery. For instance, let’s look at a recent report by Patricia Cohen in the New York Times.

…a new study finds that at least 55 of America’s largest paid no taxes last year on billions of dollars in profits…thanks to a range of legal deductions and exemptions that have become staples of the tax code, according to the analysis. Salesforce, Archer-Daniels-Midland and Consolidated Edison were among those named in the report, which was done by the Institute on Taxation and Economic Policy, a left-leaning research group in Washington. …Twenty-six of the companies listed, including FedEx, Duke Energy and Nike, were able to avoid paying any federal income tax for the last three years even though they reported a combined income of $77 billion. Many also received millions of dollars in tax rebates.

Sounds terrible, right.

Except if you read the fine print, in which case you’ll find out the report discussed in the article isn’t based on company tax returns. Instead, the leftist group, the Institute on Taxation and Economic Policy (ITEP), used financial statements to make up some numbers.

And ITEP’s use of book income meant it didn’t properly measure things such as business investment expenditures and net operating losses, which are necessary to determine whether a company has an actual cash-flow profit.

Ms. Cohen never should have written a story about ITEP’s shoddy and dishonest report, though at least she acknowledged that there are reasons to question the findings.

A provision in the 2017 tax bill allowed businesses to immediately write off the cost of any new equipment and machinery. The $2.2 trillion CARES Act…included a provision that temporarily allowed businesses to use losses in 2020 to offset profits earned in previous years, according to the institute. …many deductions and credits are there for good reason — to encourage research and development, to promote expansion and to smooth the ups and downs of the business cycle, taking a longer view of profit and loss than can be calculated in a single year.

The bottom line is that the ITEP report is garbage.

There’s no reason to expect taxable income to match up with financial statements or “book income.”

Indeed, the differences between those measures is why there are also companies that – according to ITEP’s sloppy methodology – pay tax when they supposedly have losses.

For those who actually care about the truth, the top half of this visual shows how a proper business tax system should work (i.e., one that taxes profits when they actually occur).

P.S. The issue of “depreciation” is probably the main reason why we get all sorts of silly tax controversies, involving everything from corporate jets to ABBA’s stage outfits.

The Boondoggle of Long-Distance Passenger Rail

Sat, 04/03/2021 - 12:24pm

Infrastructure often is a good thing. Government-financed infrastructure is a questionable thing. Infrastructure financed by Uncle Sam is a bad thing. Those three rules guide my thinking and make for a perfect introduction to this must-watch video from Reason on high-speed rail.

The core message from the video is that Californian’s disastrous experience with high-speed rail should be a warning for the entire nation.

Simply stated, the government is incapable of doing infrastructure without jaw-dropping cost overruns.

But even if – by some impossible miracle – the government spent the money wisely and efficiently, long-distance rail doesn’t make sense.

Why? Well, if I do a tweet-of-the-year contest for 2021, this entry from Rory Cooper would be an early favorite to win the prize.

Instead of expanding the federal government role, it’s time to end Washington’s involvement.

That means shutting down the entire Department of Transportation.

But let’s focus specifically on Amtrak. Chris Edwards wrote wisely on the topic for the Foundation for Economic Education.

The federal government does a lot of things poorly… After the government helped ruin private passenger rail in the post-WWII years, it took over the remaining passenger rail routes in the 1970s under the Amtrak brand. Amtrak was supposed to become self-supporting, but it has consumed tens of billions of taxpayer dollars over the years. …Amtrak operates 44 routes on 21,000 miles of track in 46 states. Amtrak owns the trains, but freight rail companies own nearly all the track. A Pew analysis found that Amtrak loses money on 41 of its 44 routes… The few routes that earn positive returns are in the Northeast, and the biggest money losers are the long-distance routes. …the best fit for the future would be a privatized Amtrak. Privatization would allow for innovation and cost-cutting to improve service and make rail more financially viable. A private rail company (or companies) could…end harmful union rules. It would be able to close the routes that are losing the most money and shift resources to the core routes to improve service quality.  Congress should get out of the passenger rail business and give rail the private-sector flexibility it needs to better compete against other transportation modes.

Amen. If inter-city rail travel makes sense, it can and will attract funding from the private sector.

Sadly, President Biden wants to move in the opposite direction. His so-called infrastructure plan makes taxpayers foot the bill.

The White House wants $80 billion for rail, though it’s unclear how much money would be allocated specifically to Amtrak compared to other rail projects.

What is clear, by contrast, is that the money will be wasted and America’s economy will be harmed.

P.S. Biden’s “stimulus” boondoggle included a bailout for mass transit, but no funds for intercity rail travel.

P.P.S. If you’re transportation wonk, here’s a very informative 45-minute video on rail and highway transportation.

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Image credit: WikimediaImages | Pixabay License.

Another Honest Leftist Admits Big Government Requires Big Tax Hikes on the Middle Class

Fri, 04/02/2021 - 12:10pm

It’s simple to mock Democrats like Joe BidenAlexandria Ocasio-Cortez, and Bernie Sanders. One reason they’re easy targets is they want people to believe that America can finance a European-style welfare state with higher taxes on the rich.

That’s nonsensical. Simply stated, there are not enough rich people and they don’t earn enough money (and they have relatively easy ways of protecting themselves if their tax rates are increased).

Some folks on the left admit this is true. I’ve shared many examples of big-government proponents who openly acknowledge that lower-income and middle-class people will need to be pillaged as well.

I disagree with these people on policy, but I applaud them for being straight shooters. They get membership in my “Honest Leftists” club.

And we have a new member of that group.

Catherine Rampell opines in the Washington Post that President Biden should openly embrace tax increases on everybody.

President Biden is trying to address…big, thorny problems…with one hand tied behind his back. Yet he’s the one who tied it, with a pledge to bankroll every solution solely by soaking the rich. …Some have compared Biden’s efforts to Franklin D. Roosevelt’s New Deal, Lyndon B. Johnson’s Great Society or other ambitious endeavors of the pre-Reagan era — when government was more commonly seen as a solution rather than the problem. …Like many Democrats before him, Biden has promised to pay for government expansions by raising taxes only on corporations and the “rich,” everyone else spared. Exactly who counts as “rich” is an ever-shrinking sliver of the population. Barack Obama defined it as households making $250,000 or more a year; now, Biden says it’s anyone making $400,000 or more. …more than 95 percent of Americans are excluded from helping to foot the bill… But…there aren’t enough ultrarich people and megacorporations out there to fund the massive new economic investments and social services Democrats say they want… Democrats sometimes point to Sweden or Denmark as examples of generous, successful welfare states. But in those countries, taxes are higher and broader-based. Here, the middle class pays much lower taxes… Here’s the argument I wish Biden would make: These new spending projects are worth doing. …we should all be financially invested in their success, at least a little. Taxation is the price we pay for a civilized society, as Supreme Court Justice Oliver Wendell Holmes Jr. put it. …If Biden wants to permanently transform the role of government, that may need to be his trajectory.

Needless to say, I fundamentally disagree with Ms. Rampell’s support for an even bigger welfare state, regardless of which taxpayers are being pillaged.

But at least she wants to pay for it and knows that means the IRS reaching into all of our pockets. And kudos to her for acknowledging the high tax burdens on lower-income and middle-class people in nations such as Sweden and Denmark.

Though I can’t resist commenting on the quote (“Taxation is the price we pay for a civilized society”) from Oliver Wendell Holmes.

People on the left love to cite that sentence, but they conveniently never explain that Holmes reportedly made that statement in 1904, nine years before there was an income tax, and then again in 1927, when federal taxes amounted to only $4 billion and the federal government consumed only about 5 percent of economic output.

As I wrote in 2013, “I’ll gladly pay for that amount of civilization.”

Let’s close with a couple of tweets that underscore how Democrats are pushing for giant spending increases, well beyond what can be financed by confiscating more money from the rich.

First, a reporter from the Washington Post lists some of the insanely expensive spending schemes being pushed on Capitol Hill.

I assume the “recurring checks” is a reference to the new per-child handouts in Biden’s so-called American Rescue Plan.

And “SALT change” refers to restoring the state and local tax deduction, which is supported by many Democrats from high-tax states even though (or perhaps because) it is a huge tax break for the rich.

Next we have a couple of tweets from Brian Riedl of the Manhattan Institute. He correctly points out that Democrats are using just about every available class-warfare tax scheme, yet that money will only finance a fraction of their spending wish list.

Brian is right.

What tax increases (on the rich) will be left when the left want to push their “green new deal“? Or the “public option” for Medicare? Or any of the other spending schemes circulating in Washington.

The bottom line is that – sooner or later – politicians will follow Ms. Rampell’s advice and squeeze you and me.

P.S. It’s not a good idea to turn America into a European-style welfare state – unless the goal is much lower living standards.

Five Visuals that Explain Why Higher Corporate Income Tax Rates Are Bad for America

Thu, 04/01/2021 - 12:44pm

I have a four-part series (hereherehere, and here) about the conceptual downsides of Joe Biden’s class-warfare approach to tax policy.

Now it’s time to focus on the component parts of his agenda. Today’s column will review his plan for a big increase in the corporate tax rate. But since I’ve written about corporate tax rates over and over and over again, we’re going to approach this issue is a new way.

I’m going to share five visuals that (hopefully) make a compelling case why higher tax rates on companies would be a big mistake.

Visual #1

One thing every student should learn from an introductory economics class is that corporations don’t actually pay tax. Instead, businesses collect taxes that are actually borne by workers, consumers, and investors.

There’s lots of debate in the profession, of course, about which group bears what share of the tax. But there’s universal agreement that higher taxes lead to less investment, which leads to less productivity, which leads to lower pay.

Here’s a depiction of the relationship of corporate taxes and worker pay.

Visual #2

The previous image explains the theory. Now it’s time for some evidence.

Here’s a look at how much faster wages have grown in countries with low corporate tax rates compared to nations with high corporate tax rates.

Biden, for reasons beyond my comprehension, wants America on the red line.

And his staff economists apparently don’t understand (or don’t care about) the link between investment and wages.

Visual #3

Here’s some more evidence.

And it comes from an unexpected source, the pro-tax Organization for Economic Cooperation and Development (OECD).

Even economists at that Paris-based bureaucracy have produced studies confirming that lower tax rates lead to higher disposable income for people.

Needless to say, if lower tax rates lead to more disposable income, then higher tax rates will lead to less disposable income.

We should have learned during the Obama years that ordinary people pay the price when politicians practice class warfare.

Visual #4

It’s very bad news that Biden wants a big increase in the corporate tax rate, but let’s not forget that the IRS double-taxes corporate income (i.e., that same income is subject to a second layer of tax when shareholders receive dividends).

The combined effect, as shown in this visual, is that the United States will have the dubious honor of having the highest effective corporate tax rate in the entire developed world.

Call me crazy, but I don’t think that’s a recipe for jobs and investment in America.

Visual #5

The economic damage of higher corporate tax rates means that there is less taxable income (i.e., we need to remember the Laffer Curve).

Will the damage be so extensive, causing taxable income to fall so much, that the IRS collects less revenue with a higher tax rate?

We’ll learn the answer to that question over time, but we have some very strong evidence from the IMF that lower corporate tax rates don’t lead to less revenue. As you can see from this chart, revenues held steady as tax rates plummeted over the past few decades.

In other words, lower rates led to enough additional economic activity that governments have collected just as much money with lower tax rates. But now Biden wants to run this experiment in reverse.

It’s possible the government will collect more revenue, of course, but only at a very high cost to workers, consumers, and shareholders.

By the way, there’s OECD data showing the exact same thing.

Those pictures probably tell you everything you need to know about this issue.

But let’s add some more analysis. The Wall Street Journal opined today on Biden’s class-warfare agenda. Here are some of the key passages from the editorial.

The bill for President Biden’s agenda is coming due, starting with Wednesday’s proposal for the largest corporate tax increase in decades. …Mr. Biden’s corporate increase amounts to the restoration of the Obama-era corporate tax burden, only much more so. …Mr. Biden wants to raise the corporate rate back up to 28%, but that’s the least of his proposals. He also wants to add penalties that would make inversions punitive, and he’d impose a global minimum corporate tax of 21%. This would shoot the tax burden on U.S. companies back toward the top of the developed world list. …The larger Biden goal is to end global tax competition… “The United States can lead the world to end the race to the bottom on corporate tax rates,” says the White House fact sheet. Mr. Biden says he wants “other countries to adopt strong minimum taxes on corporations” so nations like Ireland can no longer compete for capital with lower tax rates. This has long been the dream of the French and Germans, working through the Organization for Economic Cooperation and Development. …All of this is in addition to the looming Biden tax increases on dividends, capital gains and other investment income. …Mr. Biden’s corporate tax increases will hit the middle class hard—in the value of their 401(k)s, the size of their pay packets, and what they pay for goods and services.

Amen.

Let’s conclude with some gallows humor.

This meme shows how some of our leftist friends will celebrate if the tax increase is imposed.

P.S. Here’s a depressing final observation. Decades of experience have led me to conclude that many folks on the left support class-warfare tax policy because they are primarily motivated by a spiteful desire to punish success rather than provide upward mobility for the poor.

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Image credit: geralt | Pixabay License.

School Choice on the March!

Wed, 03/31/2021 - 12:46pm

I wrote one week ago about a big victory for education in West Virginia. The Mountain State arguably now has the most extensive system of school choice in the country.

This will be great for parents and children.

There’s a lot of research showing better educational outcomes when families have options other than low-performingmonopoly-based government schools.

Now we have some additional good news.

Kentucky legislators have just overridden the governor’s veto, meaning that students in the state will now have expanded educational opportunities. Eric Boehm of Reason has some of the details.

The new law, originally House Bill 563, allows students in Kentucky public schools to switch school districts, and it creates a new tax-advantaged education savings program for families to use for private school tuition, to pay for tutoring, or to cover other educational expenses. The most controversial part of the proposal was the creation of a $25 million scholarship fund—to be filled by donations from private businesses, for which they would receive state tax credits—that students in Kentucky’s largest counties can tap to help pay for private school tuition. …With the passage of the first school choice bill in state history, Kentucky is now the 28th state with some form of school choice.

Speaking of other states, the Wall Street Journal editorialized about the beginning of a very good trend.

The pandemic has been a revelation for many Americans about union control of public schools… That awakening is helping to spur some welcome reform progress as several state legislatures are moving to expand school choice. One breakthrough is in West Virginia, where the Legislature passed a bill creating the state’s first education savings account (ESA) program. …Meanwhile in Georgia, the House passed a bill last week that would expand eligibility for the state’s voucher program for special-education students. The Senate, which had already passed the legislation, voted to approve House amendments on Monday and the bill is headed to Republican Gov. Brian Kemp’s desk. In South Dakota this month, Republican Gov. Kristi Noem signed a bill that expands eligibility for the state’s tax-credit scholarship program to students already enrolled in private schools. …in Kentucky, where Democratic Gov. Andy Beshear vetoed a bill last week that would establish a new tax-credit scholarship program. But the state legislature voted late Monday to override the veto… Nearly 50 school-choice bills have been introduced this year in 30 states. It’s a testament to how school shutdowns have made the advantage of education choice more evident, and its need more urgent.

By the way, school choice has existed for a long time in Vermont. Yes, the state that regularly reelects Crazy Bernie has dozens of small towns that give vouchers to students. Laura Williams explains in an article for the Foundation for Economic Education.

Vermont’s “tuition towns”…distribute government education funds to parents, who choose the educational experience that is best suited to their family’s needs. If the school doesn’t perform up to parents’ expectations, they can take their children, and the tuition dollars they control, elsewhere. …Ninety-three Vermont towns (36 percent of its 255 municipalities) have no government-run school at all. …the funds local governments expect to spend per pupil are instead given directly to the parents of school-age children. This method gives lower- and middle-income parents the same superpower wealthy families have always had: school choice. …parents have the ability to put their kids in school anywhere, to buy the educational experience best suited to each child. …A variety of schools has arisen to compete for these tuition dollars. …Eligibility for tuition vouchers actually increased home values in towns that closed their public schools. Outsiders were eager to move to these areas… Having watched these models develop nearby, two more Vermont towns voted in 2013 to close their government-run schools and become “tuition towns” instead.

Rhode Island is another unexpected example. That deep-blue state recently expanded charter schools in Providence.

That’s not as good a genuine school choice, but it gives parents some ability to escape traditional government schools. The Wall Street Journal opined last year on this development.

…this particular hell may have frozen over, as last week the state’s education council voted to expand and open more charter schools to rescue students in the district. About 13% of Providence’s 30,000 students attend 28 charter schools, some in other districts. But demand far exceeds supply. Only 18% of the 5,000 or so charter school applicants were offered a seat this school year, according to the state education department. …The state education council last week gave preliminary approval for more than 5,700 new charter seats in Providence and other districts. Three of four new charters that applied got a green-light to open, pending final approval in the spring, and three existing charters (two of which serve Providence) are expanding. …The teachers union isn’t happy. In a letter to Gov. Gina Raimondo, three union leaders including American Federation of Teachers President Randi Weingarten complained… This is the usual rhetorical union trick. Charters are public schools, albeit without the barnacles and costs of union control.

Let’s now add to our collection of evidence about the benefits of school choice.

In an article for National Review, James Piereson and Noami Schaefer Riley discuss the track record of the Children’s Scholarship Fund.

Children’s Scholarship Fund enables low-income children to attend private schools — and thrive. …parents who receive financial aid from the organization…send their children to inner-city private (mostly Catholic) schools. …When it came to how satisfied they were with their children’s education, almost 90 percent graded their school a 4 or 5 out of 5. …Since its inception in 1998, the fund has helped more than 180,000 children attend private schools. CSF’s high-school graduation and college matriculation rates far surpass those of the urban public schools that surround them. In Philadelphia, for instance, 96 percent of CSF eighth-graders graduated from high school on schedule — compared with Philadelphia’s public-school graduation rate of only 62 percent. A study of CSF in Baltimore found that 84 percent of scholarship recipients were enrolled in college five to ten years after completing eighth grade, compared with fewer than half of students from local public schools. Nor are these high-priced private schools. The average tuition at these schools is about $5,300 per year, and the average scholarship award is $2,200.

Why do even low-cost private schools out-perform expensive government schools?

Because they have to deliver a good product. Either that, or parents will take their money elsewhere.

It’s a simple question of incentives, as illustrated by this meme about why private schools have been much better than government schools during the pandemic.

While the obvious argument for school choice is that it delivers better educational outcomes (and at lower cost), it’s worth noting that there are all sorts of secondary benefits.

As explained by W. Bradford Wilcox in an article for the American Enterprise Institute, private schools produce better families.

The public debate surrounding the efficacy of private versus public schools tends to revolve around their relative success in boosting test scores, graduation rates, and college admissions. …But there is more to life than excelling at school and work. For instance, there is the opportunity to be formed into a woman or man of good character, a good citizen, or a good partner and parent. …Until now, however, we have known little about how different types of schools are linked to students’ family life as adults. …In this report, we examine how enrollment in American Catholic, Protestant, secular private, and public schools is associated with different family outcomes later in life. …Adults who attended Protestant schools are more than twice as likely to be in an intact marriage as those who attended public schools. They are also about 50% less likely than public-school attendees to have a child out of wedlock. …Compared with public-school attendees, ever-married adults who attended a secular private school are about 60% less likely to have ever divorced. Catholic-school attendees are about 30% less likely to have had a child out of wedlock than those who attended public schools.

And Corey CeAngelis notes in this tweet that school choice reduces segregation.

The research generally suggests private school choice leads to more integration. pic.twitter.com/TBRmY7uVBI

— Corey A. DeAngelis (@DeAngelisCorey) September 15, 2020

And the Wall Street Journal editorialized last December about school choice improving mental health.

Teachers unions have pushed to shut down schools during the pandemic no matter the clear harm to children, just as they oppose charters and vouchers. Now comes a timely study suggesting school choice improves student mental health. Several studies have found that school choice reduces arrests and that private-school students experience less bullying. One reason is that charter and private schools enforce stricter discipline than traditional public schools. …The new study in the journal “School Effectiveness and School Improvement” is the first to…analyze the correlation between adolescent suicide rates and the enactment of private-school voucher and charter programs over the last several decades. They find that states that enacted charter school laws witnessed a 10% decrease in suicide rates among 15- to 19-year-olds. Private-school voucher laws were also associated with fewer suicides, though the change was not statistically significant. The effect would likely be larger if more students received vouchers. …The researchers also looked for any correlation between students who attended private school as teenagers and their mental health as adults. …individuals who attended private schools were two percentage-points less likely to report a mental health condition when they were roughly 30 years old.

Let’s conclude with some excerpts from a strong editorial from National Review. The magazine points out that teacher unions wield power in blue parts of the nation and schools are run for their benefit rather than for the best interests of children.

…the interests of children and their families take a distant second place to the desires of the public-sector unions that dominate Democratic politics around the country and run the show practically unopposed in California. …unionized teachers…have turned up their noses at the children they are supposed to be serving and looked instead to their own two-point agenda: (1) not going to work; (2) getting paid. Randi Weingarten exercises more real practical political power than any senator or cabinet secretary, and her power is exercised exclusively in the interest of public-sector workers and the Democratic Party, which they effectively control. Perhaps it is time for Americans to take back some of that power.

And what’s the way to take back power?

It’s possible to reform labor laws so teachers don’t have out-sized influence. That sort of happened in Wisconsin under Governor Scott Walker.

But that’s difficult to achieve and difficult to maintain.

The best long-run answer is to have school choice so parents are in charge rather than union bosses.

Karl Marx: Worst Person in World History?

Tue, 03/30/2021 - 12:14pm

Since more than 100 million people have been killed by communist regimes, should we conclude that Karl Marx is the worst person in world history?

To address that question, let’s start with this video from Prager University, which is narrated by Professor Paul Kengor of Grove City College.

At the risk of understatement, the video is a damning indictment of Marx’s legacy.

His political ideas provided the justification for the genocides of dictators such as Stalin, Mao, and Pol Pot.

His economic ideas led to policies that produced mass deprivation, starvation, and immense human suffering.

Now let’s take a closer look at Marx rather than just his ideas.

Was he a good person who simply had some horribly misguided ideals?

Hardly. Everything we know suggests he was a sickeningly despicable excuse for a human being.

Professor Richard Ebeling has some of the sordid details in an article for Intellectual Takeout.

Karl Marx was born on May 5, 1818, in the Rhineland town of Trier. …he was generally a lazy and good-for-nothing student. …Marx’s only real jobs during his lifetime were as occasional reporters for or editors of newspapers and journals most of which usually closed in a short period of time… He had sex enough times with the family maid that she bore him an illegitimate son… He often used racial slurs and insulting words to describe the mannerisms or appearance of his opponents in the socialist movement.  …In Marx’s mind, the Jew in bourgeois society encapsulated the essence of everything he considered despicable in the capitalist system… Marx’s caricaturing description of the asserted “Jewish mindset” rings amazingly similar to those that were later written by the Nazi “race-scientists” of the 1930s.

All told, it appears that Marx lacked a single redeeming feature. He was a very bad person with very bad ideas.

Indeed, it’s safe to assume that the best thing he did in his life occurred on March 14, 1883.

P.S. For those seeking more economic analysis, Marx advocated for the pure version of socialism, meaning government ownership of the means of production (state factories, collective farms, etc).

P.P.S. It’s disgusting that there’s a statue of Marx in his birth city and it’s equally disgusting that the former President of the European Commission went there to celebrate the 200th anniversary of his birth.

P.P.P.S. Marx gets featured frequently in my collection of jokes mocking communism.

Big-Government Republicans Enable Big-Government Democrats

Mon, 03/29/2021 - 12:51pm

I get asked why I frequently criticize Republicans.

My response is easy. I care about results rather than rhetoric. And while GOP politicians often pay lip service to the principles of limited government, they usually increase spending even faster than Democrats.

Indeed, Republicans are even worse than Democrats when measuring the growth of domestic spending!

This is bad news because it means the burden of government expands when Republicans are in charge.

And, as Gary Abernathy points out in a column for the Washington Post, Republicans then don’t have the moral authority to complain when Democrats engage in spending binges.

President Biden is proposing another $3 trillion in spending… There are objections, but none that can be taken seriously. …Republicans had lost their standing as the party of fiscal responsibility when most of them succumbed to the political virus of covid fever and rubber-stamped around $4 trillion in “covid relief,”… With Trump out and Biden in, Republicans suddenly pretended that their 2020 spending spree happened in some alternate universe. But the GOP’s united opposition to Biden’s $1.9 trillion package won’t wash off the stench of the hypocrisy. …I noted a year ago that we had crossed the Rubicon, that our longtime flirtation with socialism had become a permanent relationship. Congratulations, Bernie Sanders. The GOP won’t become irrelevant because of its association with Trump, as some predict. It will diminish because it is bizarrely opposing now that which it helped make palatable just last year. Fiscal responsibility is dead, and Republicans helped bury it. Put the shovels away, there’s no digging it up now.

For what it’s worth, I hope genuine fiscal responsibility isn’t dead.

Maybe it’s been hibernating ever since Reagan left office (like Pepperidge Farm, I’m old enough to remember those wonderful years).

Subsequent Republican presidents liked to copy Reagan’s rhetoric, but they definitely didn’t copy his policies.

  • Spending restraint was hibernating during the presidency of George H.W. Bush.
  • Spending restraint also was hibernating during the presidency of George W. Bush.
  • And spending restraint was hibernating during the presidency of Donald Trump.

I’m not the only one to notice GOP hypocrisy.

Here are some excerpts from a 2019 column in the Washington Post by Fareed Zakaria.

In what Republicans used to call the core of their agenda — limited government — Trump has been profoundly unconservative. …Trump has now added more than $88 billion in taxes in the form of tariffs, according to the right-leaning Tax Foundation. (Despite what the president says, tariffs are taxes on foreign goods paid by U.S. consumers.) This has had the effect of reducing gross domestic product and denting the wages of Americans. …For decades, conservatives including Margaret Thatcher and Ronald Reagan preached to the world the virtues of free trade. But perhaps even more, they believed in the idea that governments should not pick winners and losers in the economy… Yet the Trump administration…behaved like a Central Planning Agency, granting exemptions on tariffs to favored companies and industries, while refusing them to others. …In true Soviet style, lobbyists, lawyers and corporate executives now line up to petition government officials for these treasured waivers, which are granted in an opaque process… On the core issue that used to define the GOP — economics — the party’s agenda today is state planning and crony capitalism.

Zakaria is right about Republicans going along with most of Trump’s bad policies (as illustrated by this cartoon strip).*

The bottom line is that Republicans would be much more effective arguing against Biden’s spending orgy had they also argued for spending restraint when Trump was in the White House.

P.S. It will be interesting to see what happens in the near future. Will the GOP be a small-government Reagan party or a big-government Trump party?

Or maybe it will go back to being a Nixon-type party, which would mean bigger government but without mean tweets. And there are plenty of options.

If they make the wrong choice (anything other than Reaganism), Margaret Thatcher has already warned us about the consequences.

*To be fair, Republicans also went along with Trump’s good policies. It’s just unfortunate that spending restraint wasn’t one of them.

More Stimulus Failure

Sun, 03/28/2021 - 12:32pm

According to data on jobs and growth, President Obama’s so-called stimulus was a failure.

But at least politicians and bureaucrats were able to concoct new and clever ways to waste money. Including research grants to interview people about their sexual histories and to study erectile dysfunction.

In other words, stimulus spending on stimulus (though at least we did get some clever humor in exchange for nearly $1 trillion of wasted money).

Now we’re wasting nearly $2 trillion on Biden’s spending spree.

And we’re getting more stimulus spending on stimulus.

But not the economic kind of stimulus. Paul Bedard of the Washington Examiner reports that people are using handout cash for interesting purchases.

An analysis of spending on Amazon following the distribution of the latest coronavirus stimulus, a massive $1.9 trillion package, suggests that people are using it to let off some steam. The global e-commerce firm Pattern said that the biggest surges in sales were for the PlayStation 5 and a female sex toy called the “Rose Flower Sex Toy.” …Rose’s sales (check Amazon for the description) shot up 334%. …“Distribution of stimulus checks on Wednesday, March 17…may have represented an opportunity for some retail therapy,” said the company.

I’m sure there’s probably some interesting social commentary to make about guys playing video games and neglecting their wives and girlfriends.

But I’m a policy nerd, so I’m focused on how we’re now saddled with a bigger burden of government spending.

The problem is much bigger than the humorous/irritating example discussed above.

In a column for the Foundation for Economic Education, Brad Polumbo shares some big-picture data on how politicians have squandered our money.

Whenever the government spends money, a significant portion is lost to bureaucracy, waste, and fraud. But the…unprecedented scope of federal spending in response to the COVID-19 pandemic—an astounding $6 trillion total—has led to truly unthinkable levels of fraud. Indeed, a new report shows that the feds potentially lost $200 billion in unemployment fraud alone. …More than $200 billion of unemployment benefits distributed in the pandemic may have been pocketed by thieves… To put that $200 billion figure in context, it is equivalent to $1,400 lost to fraud per federal taxpayer. (There goes your stimmy check!) Or, comparing it to the $37 billion the federal government spent on vaccine and treatment development, it’s more than five times more lost to fraud than went to arguably the most crucial COVID initiative of all. That’s just scratching the surface. According to the American Enterprise Institute, “unemployment fraud” now ranks as the 4th biggest federal COVID expenditure out of more than 17 different categories.

If you’re a taxpayer, hundreds of billions of dollars in fraud sounds like a bad outcome.

But if you’re a Keynesian economist, it’s not a problem. All they care about is having the government borrow and spend a bunch of money. They think that making government bigger automatically generates benefit for the economy, even if the money goes to thieves and crooks.

I’m not joking. This is why people like Paul Krugman said a fake attack by space aliens would be good for the economy because Washington would spend a bunch of money in response.

And it’s why Nancy Pelosi actually said the economy benefits if we subsidize joblessness.

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Image credit: geralt | Pixabay License.

Immigration, Part II: Turning America into a Welfare Magnet

Sat, 03/27/2021 - 12:44pm

In Part I of this series, I explained why it’s absurd to think illegal immigration can be stopped by sending foreign aid to less-developed countries, such as many of those in Central America.

Simply stated, government-to-government handouts have never been a successful strategy for turning poor nations into rich nations. Indeed, aid actually discourages countries from following the recipe that does deliver prosperity.

In today’s column, let’s address Milton Friedman’s famous dilemma about the incompatibility of open borders and welfare.

Like most libertarians, I want to solve the problem by getting rid of the welfare state.

Immigrants are a big net plus so long as they are coming to work and be productive.

Indeed, because of their entrepreneurial skills and work ethic, immigrants from many nations wind up earning more than native-born Americans.

That’s something to celebrate. The American Dream in action!

But will that story of success continue if the welfare state is expanded?

Two advocates of increased immigration are worried. First, Jason Riley of the Wall Street Journal recently explained that Biden’s agenda is a recipe for immigrant dependency.

…it is a growing belief on the political left that people should be allowed to enter the U.S. on their terms rather than ours, and that it is our collective responsibility to take care of them if they can’t take care of themselves. Milton Friedman said that open immigration and large welfare states are incompatible, and today’s progressives in Congress and the White House are eager to test that proposition. …Another concern is the left’s determination to sever any connection between work and benefits, something all the more worrisome since it is occurring while destitute foreign nationals with little education are being lured here en masse. …Earlier this month, the Biden administration quietly announced that it would no longer enforce a policy that limited the admission of immigrants who were deemed likely to become overly dependent on government benefits. What could go wrong? …In countries like Italy and France, generous aid programs have attracted poor migrants who are more likely than natives to be heavy users of welfare and less likely to be working. It’s a mistake to think it can’t happen here.

In a column last year for Reason, Shikha Dalmia warned that welfare programs undermine support for immigration.

…economists Alberto Alesina, Armando Miano, and Stefanie Stantcheva…administered online questionnaires to 24,000 respondents in six countries: U.S., U.K., France, Germany, Italy, and Sweden. The explicit aim was to study attitudes toward legal, not illegal, immigration. …restrictionists have succeeded most spectacularly is in depicting immigrants as welfare queens. …In America, over 25 percent of respondents said the person with the  ..immigrant-sounding name would pay less in taxes than he collected in welfare… The study’s findings pose a particular dilemma for Democrats like Sen. Elizabeth Warren (D–Mass.), who wants to combine grandiose welfare schemes like free health care, pre-K, and college for everyone with generous immigration policies, because the mere mention of immigration reduces support for such schemes. Respondents who were asked about immigration became less concerned about inequality and less supportive of soak-the-rich schemes. …as long as immigrants are seen as succeeding through their own grit, natives may have no real objection to them. What is most likely to sour the public on immigration are the grandiose universal freebies… Immigrants should be wary of Democrats bearing gifts.

Both Riley and Dalmia raise good points.

My modest contribution to this discussion is to provide a practical example.

In his so-called American Rescue Plan, Joe Biden included a huge giveaway program that will shower $3,000-$3,600 to non-rich households for every kid they have.

This is a one-year, one-time handout, but many Democrats (and some Republicans!) want to make these enormous per-child payments a permanent part of America’s welfare state.

If that happens, the incentive to move to the United States almost surely will skyrocket.

Here’s a map I made, showing the annual handout for two children in the United States and the average per-capita income in some nearby nations.

At the risk of stating the obvious, there will be a huge incentive to migrate to America – but not for the right reasons. And my little example doesn’t include the value of any of the dozens of other redistribution programs in Washington.

The bottom line is that we shouldn’t have a welfare system that rewards dependency, whether for people in the country legally or illegally.

And if you like immigration in theory, you should be especially opposed to handouts that will undermine public support for newcomers in practice.

P.S. It’s much better to have immigration policies such as the ones proposed by former Congressman Jared Polis and current George Mason University Professor Tyler Cowen.

Coronavirus: The Free Market to the Rescue

Fri, 03/26/2021 - 12:56pm

I’ve authored a five-part series about coronavirus and the failure of big government (herehereherehere, and here), as well as columns specifically highlighting the failures of the FDACDC, and WHO bureaucracies.

Today, let’s look at how free enterprise came to the rescue when government barriers were reduced. Starting with this video.

To elaborate on this message, millions of lives are now being saved because pharmaceutical companies have produced multiple vaccines.

I even got my first shot yesterday before leaving town for a softball tournament.

Will this save my life? I like to think I’m reasonably healthy and would have survived if I caught the virus, but I’m very happy to now put that possibility in the rear-view mirror.

So I’m feeling very happy that I live in a nation where private companies, in their pursuit of profits, have had a big incentive to produce vaccines.

Yes, I realize the government dumped a bunch of taxpayer money into vaccine production, so I don’t want to pretend Uncle Sam played no role. But I also have great faith that the profit motive would have led to vaccines being developed regardless.

And we would have had the vaccines even sooner if the FDA was even better about getting out of the way.

Allysia Finley celebrated capitalism’s key role in a recent column for the Wall Street Journal. Here’s some of what she wrote about the decades of research and investment that enabled pharmaceutical companies to deliver miracles for humanity.

Large corporations are political villains, derided on the left and right. Yet the main, and perhaps only, reason the Covid-19 scourge is easing is vaccines developed by Big Pharma. …There are…lessons for those who think capitalism is merely about rapacious profit. “We would never be in the position where we are today if we had not invested billions of dollars over decades so that we could respond,” Mr. Gorsky, 60, says in an interview… J&J’s vaccine is the third to obtain FDA approval, but preliminary results from trials on AstraZeneca and Novavax suggest they are also highly effective. All these Covid-19 vaccines use innovative technologies that have been developed and tested over decades on other diseases. …The Pfizer-BioNTech and Moderna vaccines inject the virus’s genetic code via mRNA… It seems like an incredible stroke of luck and science that we have so many Covid-19 vaccines so soon. But it’s more than that. Credit years of research and investment by drug makers… “I think this is a golden moment, not only for Johnson & Johnson, but the biopharmaceutical industry,” he says. “We fundamentally believe that having a market-based, innovation-based, biopharmaceutical as well as a medical-technology environment, is critical long term to produce the best overall outcomes for healthcare.”

There are a couple of big lessons for today.

The first lesson, as shown in the video, is that we can save lives by permanently reducing bureaucratic red tape at bureaucracies such as the Food and Drug Administration.

The second lesson is that we should celebrate the profit motive. The desire to make a buck is what drives companies to produce goods and services that make our lives better.

And one takeaway of that second lesson is that we should reject short-sighted policies such as European-style price controls on drug companies. Such an approach would undermine our ability to deal with future pandemics and also reduce the likelihood of new and improved treatments for things such as cancer, dementia, and heart disease.

P.S. I like pharmaceutical companies when they are being honest participants in a free market. I don’t like them when they get in bed with big government.

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Image credit: Christian Emmer | CC BY-NC 4.0.

Immigration, Part I: The Fantasy Solution of Foreign Aid

Thu, 03/25/2021 - 12:50pm

Illegal immigration is again becoming a big issue, which always leaves me with mixed feelings.

The combination of these conflicting factors helps to explain why I rarely write on this topic.

But sometimes there are aspects of the immigration debate that are so foolish that I feel compelled to comment. And high on that list is the anti-empirical notion that foreign aid can produce more prosperity in foreign countries.

How is this connected to the immigration debate, you may be wondering?

In a column for the Washington Post, Greg Sargent writes that putting Kamala Harris in charge of immigration policy is “a big deal” because she will use foreign aid to improve Central American economies and thus discourage migration to the United States.

President Biden has assigned Vice President Harris the task of overseeing the administration’s efforts to stem the flow of migrants at the Mexican border… Here’s why this could prove to be a big deal. …it could help shift part of the conversation…and focus it on the deeper causes of these migrations. …The real challenge…entails addressing problems in Central America to reduce “push factors,” i.e., conditions that spur these migrations in the first place — such as…poverty… Which is where Harris comes in. …“A large part of her portfolio will be to develop strategies regarding root causes that generate migrants and refugees,” Sharry continued… The Biden reading of the problem is that push factors matter. …The Biden plan would invest billions in improving economic conditions, combating corruption and strengthening democracy in Central America.

Congresswoman Veronica Escobar makes the same argument in a column for the New York Times.

…the real crisis is not at the border but outside it, and that until we address that crisis, this flow of vulnerable people seeking help at our doorstep will not end anytime soon. …Overwhelmingly and consistently, Central American refugees tell stories of fleeing…calamitous economic conditions in their countries. …The good news is that we now have an administration willing to work on the issue. …reinstating aid…is a good start.

I actually agree with Congresswoman Escobar on one point. It’s true that “reinstating aid…is a good start.”

But it’s only a good start if your goal, perversely, is to undermine prosperity in poor nations.

The bottom line is that we know the recipe for growth and prosperity.

And we also know that government-to-government handouts make that recipe less likely.

Let’s close with three simple questions for those who want to believe that foreign aid will help.

  1. Can you identify one country that has gone from poverty to prosperity thanks to foreign aid rather than capitalism?
  2. Is there any evidence that Kamala Harris understands the policies needed for a poor country to become a rich country?
  3. Do you really think politicians in developing countries will use aid dollars to help their people rather than themselves?

P.S. I’m not being partisan. I made this exact argument two years ago when a Republican was in the White House.

P.P.S. Some developing nations have sought bribes to curtail migration.

P.P.P.S. If you want some migration-themed humor, click here or here.

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Image credit: Oxfam East Africa | CC BY 2.0.

A Huge Victory for Education in West Virginia

Wed, 03/24/2021 - 12:24pm

As a public finance economist, I’m a huge fan of fiscal reforms such as a spending cap or a flat tax.

But, if asked to pick the reform that would have the biggest positive impact for the United States, I’d be very tempted to pick school choice.

Largely because of the pernicious effect of teacher unions, government schools are doing a poor job of educating children. Especially considering the record amounts of money that’s being dumped into the system.

Which is why I’m very excited that we’re about to see a massive expansion of school choice in West Virginia.

The state legislature has enacted and the governor is expected to sign (fingers crossed!) legislation creating education savings accounts (ESAs) providing $4,600 per child.

These accounts, called Hope Scholarships, will be available to all families with kids in government schools (and every single new kindergarten student). Parents then can use the funds for private school tuition, homeschooling expenses, and a range of other approved items.

The state’s leading think tank, the Cardinal Institute, has a primer on the issue.

ESAs allow parents to apply for eligible students to receive the state portion of education funds into a personal, parent-controlled account. Parents are then empowered to customize an education experience that meets the individual needs of their child, using their account to pay for approved services like tuition, therapy, tutoring, textbooks, and more. …the bill would extend ESAs to students who are enrolled in a public elementary or secondary school… parents will only be able to purchase approved items and services. This makes ESAs as—if not more—transparent than any other form of education spending. …The key aspect that distinguishes ESAs from vouchers is parent control and customization. Instead of the state sending funds directly from the state to a specific private school, the state instead deposits funds into a parent-controlled account. These funds can then be spent on wide array of approved education services, not only tuition

Corey DeAngelis and Neal McCluskey address some of the hot-button issues in an article for Reason.

West Virginia’s public schools spend an average of $12,644 per child per year, while the estimated amount of funding that would follow the child under HB 2013 would be about $4,600. If the legislation becomes law, public schools would keep large amounts of funding for children even after they left, meaning they would end up with more money per child. …choice opponents in the state also are claiming that $4,600 is too low to cover private school tuition. But do those same people oppose Pell Grants just because they don’t cover the full cost of attending many universities? …And $4,600 would actually go a long way in West Virginia as the average private school tuition in the state is just $6,068 and the average elementary school cost is $4,890. …The worst thing about anti-school choice myths is that they disproportionately prevent the least advantaged from access to much-needed education options.

Amen to the last point.

School choice should be the civil rights issue of the 21st century since black and brown kids are the biggest victims of the government school monopoly.

I’ll close by observing that teacher unions traditionally have done a very good job of protecting their monopoly. Every time I think a state is poised to make progress on school choice (most recently in Pennsylvania and Colorado), the unions dump tons of money into campaigns so they can maintain their privileges.

Assuming West Virginia’s Republican governor, Jim Justice, doesn’t betray children by unexpectedly vetoing the legislation, the union win streak will have ended.

P.S. Here’s a video explaining the benefits of school choice.

P.P.S. There’s international evidence from SwedenChileCanada, and the Netherlands, all of which shows superior results when competition replaces government education monopolies.

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Image credit: Gage Skidmore | CC BY-SA 2.0.

Bigger Government Will Reduce Living Standards According to New CBO Research

Tue, 03/23/2021 - 12:39pm

I’ve been warning that the United States should not copy Europe’s fiscal policy, largely because living standards are significantly lower in nations with large welfare states.

That’s true if you look at average levels of consumption in different nations, but the most compelling data is the fact that lower-income people in the United States generally enjoy living standards that are equal to or even higher than those for middle-class people in most European countries.

A bigger burden of government is not just a theoretical concern. President Biden has already pushed through a $1.9 trillion spending bill that includes some temporary provisions – such as per-child handouts – that, if made permanent, could add several trillion dollars to the burden of government spending.

And the White House has signaled support for $3 trillion of additional spending for items such as infrastructure, green energy, and other boondoggles.

This doesn’t even count the cost of other schemes, such as the “public option” that would strangle private health insurance and force more people to rely on an already-costly-and-and bankrupt government program.

So what will it mean for America if our medium-sized welfare state morphs into a European-style large welfare state?

The answer to that question is rather unpleasant, at least if some new research from the Congressional Budget Office is any indication. The study, authored by Jaeger Nelson and Kerk Phillips, considers the impact on growth based on six different scenarios (based on how much the spending burden increases and what taxes are increased).

If permanent spending is financed by new or increased taxes, then those taxes influence people’s decisions about how much to work and save. Those decisions then affect how much the economy produces and businesses invest and, ultimately, how much people can consume. Different types of taxes have different economic effects. Taxes on labor income reduce after-tax wages, so they reduce the return on each additional hour worked. …Higher taxes on capital income, such as dividends and capital gains, lower the average after-tax rate of return on private wealth holdings (or the return on investment), which reduces the incentive to save and invest and leads to reductions in saving, investment, and the capital stock. …we compare the effects of raising additional revenues through three illustrative tax policies: a flat tax on labor income, a flat tax on all income (including both labor and capital income), and a progressive tax on all income. The additional revenues generated by these policies are in addition to the revenues raised by taxes that already exist and are used to finance two specific increases in government spending. The two increases in government spending are set to 5 percent and 10 percent of GDP in 2020.

Here are some of the key results, as illustrated by the chart.

The least-worst result (the blue line) is a decline in GDP of about 3 percent, and that happens if the spending burden expand by 5-percentage points of GDP and is financed by a flat tax.

The worst-worst result (dashed red line) is a staggering decline in GDP of about 10 percent, and that happens if the spending burden climbs by 10-percentage points and is financed by a progressive tax.

Here’s some additional analysis, including a description of why progressive taxes impose the most damage.

This paper shows that flat labor and flat income tax policies have similar effects on output; labor taxes reduce the labor supply more, and income taxes reduce the capital stock more. For all three policies, the decline in income contracts the tax base considerably over time. As a result, to continuously generate enough revenues to finance the increase in government spending in each year, tax rates must steadily increase over time to account for the decline in the tax base. Moreover, labor and capital taxes put upward pressure on interest rates by reducing the capital-to-labor ratio over time… The largest declines in economic activity among the financing methods considered occur with the progressive tax on all income. Those declines occur because high-productivity workers reduce their hours worked and because higher taxes on asset income reduce the incentive to save and invest relatively more than under the two flat taxes.

There’s lots of additional information in the study, but I definitely want to draw attention to Table 4 because it shows that lower-income people will suffer big reductions in living standards if there’s an increase in the burden of government spending (circled in red).

What makes these results especially remarkable is that the authors only look at the damage caused by higher taxes.

Yet we know from other research that the economy also will suffer because of the higher spending burden. This is because of the various ways that growth is reduced when resources are diverted from the productive sector to the government.

For background, here’s a video on the theoretical reasons why government spending hinders growth.

And here’s a video with some of the scholarly evidence.

P.S. The CBO study also points out that financing new spending with a value-added tax wouldn’t avert economic damage.

…by reducing the cost of time spent not working for pay relative to other goods, a consumption tax could reduce hours worked through a channel like that of a tax on labor.

For what it’s worth, even the pro-tax International Monetary Fund agrees with this observation.

P.P.S. It’s worth noting that the CBO study also shows that young people will suffer much more than older people.

…older cohorts, on average, experience smaller declines in lifetime consumption than younger cohorts

Which raises an interesting question of why millennials and Gen-Zers don’t appreciate capitalism and instead are sympathetic to the dirigiste ideology that will make their lives more difficult.

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Image credit: Martin Jacobsen | CC BY-SA 3.0.

The Economics of Taxation

Mon, 03/22/2021 - 12:42pm

As part of a video debate last year (where I also discussed wealth taxationpoverty reduction, and the inadvisability of tax increases), I pontificated on the negative economic impact of class-warfare taxation.

To elaborate, I’m trying to help people understand why it is a mistake to impose class-warfare taxes on high-income taxpayers.

Back in 2019, I shared data from the Internal Revenue Service confirming that rich taxpayers get the vast majority of their income from business activity and investments.

And since it’s comparatively easy to control the timing, level, and composition of that income, class-warfare taxes generally backfire.

Heck, well-to-do taxpayers can simply shift all their investments into tax-free municipal bonds (that’s bad for the rest of us, by the way, since it’s better for growth if they invest in private businesses rather than buying bonds from state and local governments).

Or, they can simply buy growth stocks rather than dividend stocks because politicians (thankfully) haven’t figured out how to tax unrealized capital gains.

Some of my left-leaning readers probably think that my analysis can be ignored or dismissed because I’m a curmudgeonly libertarian.

But I’m simply recycling conventional economic thinking on these issues.

And to confirm that point, let’s review a study on taxes and growth that the International Monetary Fund published last December. Written by Khaled Abdel-Kader and Ruud de Mooij, there are passages that sound like they could have been written by yours truly.

Such as the observation that taxes hinder prosperity by reducing economic output (what economist refer to as deadweight loss).

…public finance…theories teach us some important lessons about efficient tax design. By transferring resources from the private to the public sector, taxes inescapably impose a loss on society that goes beyond the revenue generated. …deadweight loss (or excess burden) is what determines a tax distortion. Efficient tax design aims to minimize the total deadweight loss of taxes. The size of this loss depends on two main factors. First, losses are bigger the more responsive the tax base is to taxation. Second, the loss increases more than proportionately with the tax rate: adding a distortion to an already high tax rate is more harmful than adding it to a low tax rate. Two prescriptions for efficient tax policy follow: (i) it is efficient to impose taxes at a higher rate if things are in inelastic demand or supply; and (ii) it is best to tax as many things as possible to keep rates low. …empirical studies on the growth impact of taxes…generally find that income taxes are more distortive for economic growth than taxes on consumption.

There are several parts of the above passage that deserve extra attention, such as the observation about elasticity (similar to the point I made in the video about why higher tax rates on upper-income taxpayers are so destructive).

But the most important thing to understand is what the authors wrote about how “the [deadweight] loss increases more than proportionately with the tax rate.”

In other words, it’s more damaging to increase top tax rates.

This observation, which is almost certainly universally recognized in the economics profession, tells us why class-warfare taxes do the most economic damage, on a per-dollar-collected basis.

The IMF study also has worthwhile observations on different types of taxes, such as why it’s a good idea to have low income tax rates on people.

Optimal tax theory emphasizes the trade-off between equity and efficiency. …This requires balancing the revenue gain from a higher marginal top PIT rate at the initial base against the revenue loss induced by behavioral responses that a higher tax rate would induce—such as reduced labor effort, avoidance or evasion—measured by the elasticity of taxable income. …high marginal rates cause other adverse economic effects, e.g. on innovation and entrepreneurship, and thus create larger economic costs than is sometimes assumed.

Very similar to what I’ve written.

And low income tax rates on companies.

Capital income—interest, dividends and capital gains—is used for future consumption so that taxes on it correspond to a differentiated consumption tax on present versus future consumption—one that compounds if the time horizon expands. Prudent people who prefer to postpone consumption to later in life (or transfer it to their heirs) will thus be taxed more than those who do not, even though they have the same life-time earnings. This violates horizontal equity principles. Moreover, it causes a distortion by encouraging individuals to substitute future with current consumption, i.e. they reduce savings. The tax is therefore also inefficient. A classical result, formalized by Chamley (1986) and Judd (1985), is that the optimal tax on capital is zero.

Once again, very similar to what I’ve written.

Indeed, the study even asks whether there should be a corporate income tax when the same income already is subject to dividend taxation when distributed to shareholders.

…capital income taxes can be levied directly on the people that ultimately receive that income, i.e. shareholders and creditors. So: why is there a need for a CIT? It is hard to justify a CIT on efficiency grounds. As explained before, the incidence of the CIT in a small open economy falls largely on workers, not on the firm or its shareholders. Since it is more efficient to tax labor directly than indirectly, the optimal CIT is found to be zero. …CIT systems…in most countries…create two major economic distortions. First, by raising the cost of capital on equity they distort investment decisions. This hurts economic growth and adversely affects efficiency. Second, by differentiating between debt and equity, they induce a bias toward debt finance. This not only creates an additional direct welfare loss, but also threatens financial stability. Both distortions can be eliminated by…cash-flow taxes, which allow for full expensing of investment instead of deductions for tax depreciation

Also similar to what I’ve written.

And I like the fact that the study makes very sensible points about why there should not be a pro-debt bias in tax codes and why there should be “expensing” of business investment costs.

I’ll close by noting that the IMF study is not a libertarian document.

The authors are simply describing the economic costs of taxation and acknowledging the tradeoffs that exist when politicians impose various types of taxes (and the rates at which those taxes are imposed).

But that doesn’t mean the IMF is arguing for low taxes.

There are plenty of sections that make the (awful) argument that it’s okay to impose higher tax rates and sacrifice growth in order to achieve more equality.

And there are also sections that regurgitate the IMF’s anti-empirical argument that higher taxes can be good for growth if politicians wisely allocate the money so it is spent on genuine public goods.

Politicians doing what’s best for their countries rather than what’s best for themselves? Yeah, good luck with that.

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Image credit: Max Pixel | CC0 Public Domain.

The Upside-Down Morality and Economic Illiteracy of Class Warfare

Sun, 03/21/2021 - 12:32pm

My Eighth Theorem of Government is very simple.

If someone writes and talks about poverty, I generally assume that they care about poor people. They may have good ideas for helping the poor, or they may have bad ideas. But I usually don’t doubt their sincerity.

But when someone writes and talks about inequality, I worry that they don’t really care about the less fortunate and that they’re instead motivated by envy, resentment, and jealousy of rich people.

And this concern probably applies to a couple of law professors, Michael Heller of Columbia and James Salzman of UCLA. They recently wrote a column for the Washington Post on how the government should grab more money from the private sector when rich people die.

They seem particularly agitated that states such as South Dakota have strong asset-protection laws that limit the reach of the death tax.

Income inequality has widened. One…way to tackle the problem. Instead of focusing only on taxing wealth accumulation, we can address the hidden flip side — wealth transmission. …The place to start is South Dakota… The state has created…wealth-sheltering tools including the aptly named “dynasty trust.” …Congress can…plug holes in our leaky estate tax system. One step would be to tax trusts at the passage of each generation and limit generation-skipping tax-exempt trusts. A bigger step would be to ensure that appreciated stocks…are taxed… Better still, let’s start anew. Ditch the existing estate tax and replace it with an inheritance tax

There’s nothing remarkable in their proposals. Just a typical collection of tax-the-rich schemes one might expect from a couple of academics.

But I can’t resist commenting on their article because of two inadvertent admissions.

First, we have a passage that reveals a twisted sense of morality. They apparently think it’s a “heist” if people keep their own money.

America’s ultra-wealthy have pulled off a brilliantly designed heist, with a string of South Dakota governors as accomplices.

For all intents and purposes, the law professors are making an amazing claim that it’s stealing if you don’t meekly surrender your money to politicians.

Apparently they agree with Richard Murphy that all income belongs to the government and it’s akin to an entitlement program or “state aid” if politicians let you keep a slice.

Second, the law professors make the mistake of trying to be economists. They want readers to think the national economy suffers if money stays in the private sector.

Nearly no one in South Dakota complains, because the harm falls on the national economy… We all suffer high and hidden costs…getting less in government services. …South Dakota locks away resources that could spark entrepreneurial innovation.

According to their analysis, a nation such as Singapore must be very poor while a country such as Greece must be very rich.

Needless to say, the opposite is true. Larger burdens of government spending are associated with less prosperity and dynamism.

I’ll offer one final observation. Professors Heller and Salzman obviously want more and more taxes on the rich.

But I wonder what they would say if confronted with the data showing that the United States already collects a greater share of tax revenue from the rich than any other OECD country.

P.S. The reason the U.S. collects proportionately more taxes from the rich is that other developed countries have bigger welfare states, and that necessarily leads to much higher tax burdens on lower-income and middle-class taxpayers (as honest folks on the left acknowledge).

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Image credit: Chris Tolworthy | CC BY 2.0.

Socialism Humor

Fri, 03/19/2021 - 12:48pm

Socialism may be a miserable failureeverywhere and anywhere it is tried, but at least it provides comic relief.

Such as this Remy video.

Speaking of miserable failure, we have an example of Crazy Bernie trying to teach economics.

Though that could also be a depiction of spending policy under Trump and Biden.

This next meme is for the head-in-the-sand types who want us to believe that “real socialism has never been tried.”

This next meme should be shared with all deluded young people.

My favorite item from today’s collection is this bit of satire about redistribution from Arthur Chrenkoff. But not tax-and-spend redistribution.

…generations of radicals, socialists and progressives inspired by his vision have fought for a better world animated by egalitarian values; a classless world without the bourgeoisie and the proletariat, where from each it is taken according to their ability and to each given according to their needs. …but in its pursuit the Marxists have seemingly overlooked and done nothing about the even more glaring inequalities between men and women and the hot and the not. Sure, the control of the means of production is important, but what about the means of reproduction? …Shall we tolerate this outrageous situation where some people monopolise the attention and attraction of the opposite sex (or the same sex – we, progressives, don’t judge) while the great majority fight for scraps? Surely, it is not just and it is not equitable that a small minority of those with an unearned privilege (the good looks) should lord it over the aesthetically poor masses. …I now call for the redistribution from the few to the many. …the distinctions between the attractive and those less so will be abolished forever. Everyone will have an equal access to attention and love and everyone will be expected to be attracted to everyone else, without distinctions and discrimination.

Very clever. And akin to this mockery of Elizabeth Warren class warfare.

But there’s a serious point to be made. As noted by Prof. Robin Hanson, there is a great deal of attractiveness inequality yet nobody seriously (at least so far!) is proposing government-coerced redistribution of sex.

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Image credit: ZiaLater | CC BY-SA 3.0.

Defending Bill Clinton’s Welfare Reform

Thu, 03/18/2021 - 12:21pm

Here are four things to understand about poverty and dependency.

Now let’s add a fifth item.

  • The United States adopted welfare reform in the mid-1990s.

Today’s column examines whether this was a bad development or good development.

We’ll start with a harsh critic.

In his column for the New York Times, Charles Blow wants Democrats to repeal Clinton’s welfare reform.

Clinton’s record, particularly with respect to Black and brown Americans and the poor, was marked by catastrophic miscalculation. …the welfare reform bill, …Clinton promised would “end welfare as we know it.” One of its central provisions was block-grant assistance to the states. …the Center for Budget and Policy Priorities pointed out in 2020, the block grant to states “has been set at $16.5 billion each year since 1996; as a result, its real value has fallen by almost 40 percent due to inflation.” …With the passage of the “American Rescue Plan,” the Democrats, alone, took another major step away from the mistakes of the Clinton legacy by increasing aid to families with children and to workers.

Reading the column, it seems like blacks must have suffered immensely because of the 40 percent reduction in the block grant.

But now let’s consider whether welfare reform was a good thing.

According to the data, the answer is yes. This chart, based on the Census Bureau’s data (specifically Table B-5), shows that the poverty rate for African Americans has declined since welfare reform was enacted.

To be sure, one could argue that the post-welfare reform decline was simply a continuation of a positive trend. But that doesn’t change the fact that there’s certainly no evidence that the 1996 legislation led to bad results.

Moreover, research from the Brookings Institution makes a persuasive case that welfare reform deserves credit for some of the post-1996 progress.

Why? Because it sent a message – both practically and rhetorically – that permanent dependence on Uncle Sam was a bad thing. As a result, more people entered the workforce and poverty dropped.

That seems like a result that should be celebrated.

Unfortunately, Biden’s so-called American Rescue Plan contains big per-child handouts that are not dependent on being in the workforce.

The only silver lining to that dark cloud is that the handouts are only for 2021.

But the pro-redistribution crowd already is clamoring to make that provision a permanent giveaway. To paraphrase Bill Clinton, they want to “restore welfare as we knew it.”

P.S. Based on what I’ve read in his columns, Charles Blow is a hard-core leftist on economic issues. But he’s semi-reasonable on gun rights, so that’s one point in his favor.

P.P.S. Welfare reform is just one example of the good policies that were enacted during the Clinton years.

P.P.P.S. We can learn lessons about welfare and dependency by looking at data from Europe and Canada.

What Biden’s Corporate Tax Increase Means for American Competitiveness

Wed, 03/17/2021 - 12:15pm

Thanks to globalization (as opposed to globalism), jobs and investment are now very mobile. This means the costs of bad policy are higher than ever before, and it also means the benefits of good policy are higher than ever before.

Which is why it’s very useful to look at various competitiveness rankings, most notably the ones that are comprehensive (most notably Economic Freedom of the World and the Index of Economic Freedom).

But since my specialty is public finance, I’m also interested in measures of fiscal competitiveness (best tax systemworst tax systemcostliest welfare state, etc).

Today, let’s narrow our focus and look at business tax competitiveness. This is an area where the United States traditionally has lagged, both because we used to have one of the world’s highest corporate tax rates and because onerous tax rules put U.S.-based companies at an added disadvantage.

Trump lowered the federal corporate tax rate from 35 percent to 21 percent, which definitely helped, but now Biden wants to push the rate back up to 28 percent.

What will that mean for U.S. competitiveness?

It’s not good news.

The Tax Foundation calculated the combined tax rate on business income (including the double tax on dividends) for various developed nations.

As you can see, America will have the most onerous tax regime if Biden is successful.

What if we look only at the corporate tax rate? And what if we consider every jurisdiction in the world?

Professor Robert McGee pulled together all the numbers and ranked nations from #1 to #223.

The United States currently is in the bottom half, which isn’t good since we’re below average. But you can see from these two tables that Biden will drop America to the bottom 10 percent.

Needless to say, it’s not good to rank below France.

But let’s think of the glass as being 1/10th full rather than 9/10ths empty. At least the U.S. beats Venezuela!

The bottom line is that it will not be good news if Biden’s plan is enacted.

P.S. From Professor McGee’s study, here are the jurisdictions tied for 1st place.

P.P.S. Needless to say, politicians from high-tax nations resent the 15 jurisdictions that don’t have a corporate income tax.

Indeed, that’s why many of those politicians are pushing the “global minimum tax” that I wrote about yesterday.

Those politicians basically want to turn back the clock and reverse the progress depicted in this set of charts from the Tax Foundation.

P.P.S. This is why it’s important to defend the liberalizing process of tax competition.

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Image credit: Gage Skidmore | CC BY-SA 2.0.

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