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Repealing the State and Local Tax Deduction Will Help the Republican Party in High-Tax Blue States

Tue, 11/21/2017 - 12:21pm

Time for a confession. My left-wing friends are correct. I’m an idiot.

Why?

Because I’m an anti-tax libertarian, yet I keep writing favorably about a provision that will raise my taxes. I’m talking specifically about the provision, currently in both the House and Senate tax plans, to eliminate the deduction for state and local income taxes (and maybe also property taxes, though the House proposal will retain deductibility for the first $10,000).

I think this distortion in the tax code is very bad policy and I hope the loophole is entirely eliminated (including the property tax deduction).

But as I look at all the provisions in both bills and speculate about the contours of a final agreement, it’s highly likely that the net result will be a tax hike on one of my favorite people – me!

Sigh. I’ve joked in the past that “it ain’t easy being libertarian,” but it will definitely hurt to put my money where my mouth is (and it reminded me why GOPers should have made tax reform a tax cut by including some spending restraint).

That being said, let’s remind ourselves why the deduction is a bad idea.

Citing the self-destructive example of a recent tax hike in Illinois, Andrew Wilford of the National Taxpayers Union points out that the deduction enables and encourages state and local politicians to impose higher taxes.

…eliminating SALT would…remove this incentive for local governments to overtax its citizens. … this incentive to hike taxes can prove significant enough to drive state policy. In Illinois, residents were forced to bear the burden of a 32 percent hike on their taxes because of the state’s unwillingness to tackle its growing pension funding problem. Tax increases did not solve this underlying spending problem, but it was politically expedient— in part because state lawmakers knew that the federal government would pick up part of the tab.

It also violates my ethical-bleeding-heart rule, as Brian Riedl explains in the New York Post.

Wealthy families are four times more likely to utilize SALT than other families. Only 24 million of 125 million tax filers earning under $100,000 take the deduction, typically lowering their taxes by $1,000. By contrast, 20 million of the 25 million filers earning over $100,000 take the deduction… In fact, half the savings accrue to the richest 5 percent of taxpayers — and in New York, half of the SALT savings go to families making over $500,000.

But I don’t want today’s column to fixate on the policy argument.

Instead, let’s look at whether voting to get rid of the deduction is electoral suicide for Republicans from high-tax states such as New York and California.

Looking at the situation in the Golden State, that’s certainly the argument from the folks at Vox.

Just three of the 14 California House Republicans went against leadership… Republicans in California clearly ran on cutting taxes — but this tax bill could raise taxes on their constituents. …it also sets up their constituents for more risk. Cutting the state and local tax deduction puts undue burden on the state’s budget… “At this point it looks like California Republicans are eager to lose their seats in 2018,” Tyler Law, a spokesperson for the Democratic Congressional Campaign Committee, said.

Though Kimberly Strassel of the Wall Street Journal has a more upbeat (if you’re a Republican) assessment. She starts by explaining how California GOPers were targeted.

The House GOP passed its tax-reform bill on Thursday, and special medals of valor go to the 11 of 14 California Republicans who voted in support. The lobbyist brigade had joined with Democrats to target the Golden State delegation, seeing it as their best shot at peeling off enough Republicans to kill the bill. The assault was brutal, dishonest and all-out. …Gov. Jerry Brown unleashed on state Republicans, calling them “sheep” for supporting an end to most state and local tax, or SALT, deductions, and sending them letters deploring the tax hit on residents of high-tax California. Minority Leader Nancy Pelosi accused them of “looting” the state. Her Senate counterpart, New York’s Chuck Schumer, warned of “political fallout” that would be “catastrophic.”

They fought back by arguing that the Democrats are the high-tax party.

What proved most effective, however, was the state Republicans’ willingness to go on offense and throw SALT in Gov. Brown’s face. California has the heaviest tax burden in the country and only just implemented a punishing new 12-cent-a-gallon-increase in its gasoline tax. Mr. McCarthy used the occasion to release a video pouncing on that hike and noting that “if Gov. Brown is worried about the tax burden, let’s make cutting [taxes] a federal and state project.” Other state Republicans ran with that message, even more bluntly. “Why punish the rest of the nation because California is stupid?” asked Rep. Duncan Hunter in a local TV interview. Even Rep. Darrell Issa, who voted “no” on Thursday (along with Dana Rohrabacher and Tom McClintock ), zapped a letter back to Gov. Brown, noting that if SALT had become a big issue, it was “a direct result of the tremendous weight that your misguided policies have put on California taxpayers.”

At the risk of sounding like a mealy-mouthed Washington apparatchik, I’m going to agree with both Vox and the Wall Street Journal.

The bottom line is that voting for tax reform probably does endanger GOP lawmakers from high-tax states, which is the message that the leftists at Vox are peddling in hopes of preserving the awful status quo.

But I want to close with the observation that enacting tax reform will improve the electoral outlook for blue-state Republicans even if it’s not necessarily good for current GOP incumbents.

That’s because voters in high-tax states will be much more likely to resist bad state tax policy if there’s no federal deduction to mitigate the burden.

And that means politicians in blue states will be under even greater pressure to lower tax rates rather than increase tax rates. If they don’t do the right thing, more and more taxpayers will escape, as the Wall Street Journal opines.

The liberal tax model is to fleece the rich to finance spending on entitlements and government programs that invariably grow faster than the economy and revenues. IRS data on tax migration show this model is now breaking down in progressive states as the affluent run for cover and the middle class is left paying the bills. Between 2012 and 2015 (the most recent data), a net $8.5 billion in adjusted gross income left New Jersey while $6.2 billion poured out of Connecticut—4% of the latter state’s total income. Illinois lost $13.6 billion. During that period, Florida with no income tax gained $39.3 billion in AGI. …As these state laboratories of Democratic governance show, dunning the rich ultimately hurts people of all incomes by repressing the growth needed to create jobs, boost wages and raise government revenues that fund public services. If the Republican House and Senate tax-reform bills follow through with eliminating all or part of the state and local tax deduction, progressive states will have an even harder time hiding the damage. They should be the next candidates for reform.

Indeed, the mere prospect of tax reform already is causing statists to rethink their approach.

Even in New Jersey.

The Republican tax reform…already it’s having a political impact in at least one high-tax, ill-governed state. Democrat Steve Sweeney, president of the New Jersey Senate, said last week that the GOP decision to eliminate the state and local tax deduction could throw a new tax increase on millionaires into doubt. …Excellent news. Making politicians in Trenton, Albany, Sacramento and Springfield nervous about raising taxes is one desirable outcome of tax reform. These politicians have been passing the burden of their tax-and-spend policies onto taxpayers in other states via the state and local deduction. If that goes away, Democrats will have to rethink their policies lest they drive from their states the affluent taxpayers who finance most of state government. …Here’s a radical idea: Cut taxes and make New Jersey more desirable for people to work and invest. Tax reform in Washington could also spur reform in the states.

If tax reform happens and the deduction for state and local taxes is eliminated, the left’s class-warfare agenda will become much less appealing – and much harder to implement.

And in that kind of environment, it should be much easier for Republican politicians to win votes.

For all intents and purposes, tax reform for Republicans could be like Obamacare for Democrats.

Allow me to explain. When Obamacare was enacted, I worried that it might be a long-term political victory for the left even though it was very painful for Democrats in the short run. Simply stated, voters in the future (and we’re now entering that future) would become more reluctant to vote for Republicans once they were hooked on the heroin of government dependency.

Federal tax reform would have a similar impact, except the GOP will be the long-run winners. Voters in high-tax states will be more reluctant to vote for Democrats once a $100 tax hike (for instance) actually costs $100. Which is why genuine tax reform is a win-win situation.

The Economic Tragedy of Zimbabwe

Mon, 11/20/2017 - 12:57pm

When I write about the negative impact of statist policy, I focus on two types of nations.

From the developed world, I highlight countries such as FranceGreece, and Italy.

And from the developing world, my favorite examples are places like VenezuelaCuba, and North Korea.

Given that Zimbabwe is in the news because the nation’s long time dictator may be on the way out, it’s time to add that country to that latter list. James Pethokoukis of the American Enterprise Institute writes about “Mugabenomics.”

It’s especially compelling when reality makes your economic and and political points vividly clear and intellectually inescapable. Nothing like a natural experiment to drive a message home. …At unification, West German living standards were more than twice those in the communist East… Venezuela shows what happens when full authoritarian populism gets put into action. And who hasn’t seen the stark image of the two Koreas at night, the prosperity of the South glowing brightly. Then there’s the case of Zimbabwe, which just saw a coup removing dictator Robert Mugabe after nearly four decades in power.

Here’s the chart showing how Zimbabwe has fallen behind some peer nations.

Why has Zimbabwe gone downhill?

The answer, you won’t be surprised to learn, is bad policy. They’ve taken the recipe for good policy and done the opposite.

In 1995, Zimbabwe was ranked #70 by Economic Freedom of the World. Not great, but not awful. Now. as you can see from the chart, it’s down to #144. Some of that is due to more nations being added to the rankings and many nations improving their scores, but Mugabe’s statism deserves much of the blame.

Assuming Mugabe is deposed, that’s Step 1.

If the goal is prosperity and opportunity for the people of Zimbabwe, Step 2 is needed. And that’s an agenda of liberalization.

At the very least, Zimbabwe should copy the neighboring nation of Botswana. Ideally, it could go farther and become the Chile or Estonia of Africa.

100 Years of Communism, 100 Million Deaths, and the Lingering Horror of North Korea

Sun, 11/19/2017 - 12:47pm

It’s time to continue our series on the 100th anniversary of Russia’s Bolshevik revolution, which unleashed a century of brutal, deadly, and oppressive communism.

But at least it’s a series that sort of has a happy ending. The Soviet Union collapsed and China is now only nominally communist.

Though there are a few holdouts. Cuba is still suffering from communist tyranny, for instance, and there are socialist hellholes like Venezuela that could descend into full-blown Marxist tyranny.

Speaking of tyranny, North Korea wins the prize for practicing the purest remaining form of communism. But that’s not a prize worth winning. Unless the goal is horrific poverty and suffering.

It’s such a horrible system that even Bernie Sanders has never said anything favorable about it.

We’re going to focus today on that unfortunate country.

Let’s start with a stomach-churning story from the BBC about the joy of communist life.

A North Korean soldier who was shot while fleeing across the border has an extremely high level of parasites in his intestines, his doctors say. The defector crossed the demilitarised zone on Monday, but was shot several times by North Korean border guards. Doctors say the patient is stable – but “an enormous number” of worms in his body are contaminating his wounds and making his situation worse. His condition is thought to give a rare insight into life in North Korea.

And he’s not an exception.

“North Korea is a very poor country and like any other poor country it has serious health problems,” Prof Andrei Lankov of Kookmin University in Seoul told the BBC. “North Korea does not have the resources to have a modern medical system,” he says. “Its doctors are relatively poorly trained and have to work with primitive equipment.” In 2015 South Korean researchers studied the health records of North Korean defectors who had visited a hospital in Cheonan between 2006 and 2014. They found that they showed higher rates of chronic hepatitis B, chronic hepatitis C, tuberculosis and parasite infections, compared to South Koreans. …”I don’t know what is happening in North Korea, but I found many parasites when examining other defectors,” Professor Seong Min of Dankook University Medical School was quoted by the Korea Biomedical Review as saying. …Parasites, especially worms, are thought to be widespread in North Korea.

Defectors have helped inform us about the horrors of that nation. Here are some blurbs from a Washington Post story.

When Kim Jong Un became the leader of North Korea almost six years ago, many North Koreans thought that their lives were going to improve. …But the “Great Successor,” as he is called by the regime, has turned out to be every bit as brutal as his father and grandfather before him. …The Washington Post talked with more than 25 North Koreans from different walks of life who lived in Kim Jong Un’s North Korea and managed to escape from it. …in talking about their personal experiences, including torture and the culture of surveillance, they recounted the hardships of daily life under Kim Jong Un’s regime. They paint a picture of a once-communist state that has all but broken down, its state-directed economy at a standstill. …In theory, North Korea is a bastion of socialism, a country where the state provides everything, including housing, health care, education and jobs. In reality, the state economy barely operates anymore. People work in factories and fields, but there is little for them to do, and they are paid almost nothing. …Bribery and corruption have become endemic… Those working only in official jobs, whether they be on a state-owned ostrich farm or in a government ministry in Pyongyang, earn only a few dollars a month and get little in the way of rations.

But it’s not just poverty and deprivation. There’s also Orwellian spying.

North Korea operates as a vast surveillance state, with a menacing state security department called the Bowibu as its backbone. Its agents are everywhere and operate with impunity. The regime also operates a kind of neighborhood watch system. Every district in every town or city is broken up into neighborhood groups of 30 or 40 households, each with a leader who is responsible for coordinating grass-roots surveillance and encouraging people to snitch.

And the government isn’t spying simply to take people’s money, an odious tactic in some western nations.

The North Korean government is spying to see who should be killed or imprisoned.

Both of those options are terrible since the concentration camps are particularly horrific.

Escapees from North Korea’s gruesome political prisons have recounted brutal treatment over the years, including medieval torture with shackles and fire and being forced to undergo abortions by the crudest methods. …severe beatings and certain kinds of torture — including being forced to remain in stress positions for crippling lengths of time — are commonplace throughout North Korea’s detention systems, as are public executions. …Starvation is often part of the punishment, even for children. [A] 16-year-old lost 13 pounds in prison, weighing only 88 pounds when she emerged. …It is this web of prisons and concentration camps, coupled with the threat of execution, that stops people from speaking up. There is no organized dissent in North Korea, no political opposition.

The only good news, so to speak, is that the article explains that a black market economy has emerged.

And that’s better than nothing, as Richard Mason explains in a column for the Foundation for Economic Education.

From the state’s formation in 1948 up until the end of the 20th century, things were (relatively) unchanging; all industries were seized by the government and nationalized, with basic necessities such as food, clothing, and fuel all being provided by the state. This all changed following the fall of communism and the ‘Arduous March’ famine of the 1990’s. With the state no longer able to feed its people, a new system stepped in to take over. Black markets began to appear all over the country, where the distribution system’s failure hit especially hard, and effectively fed thousands of North Koreans. …Initially, these markets consisted of disorganized traders meeting in fields, facing seizure from police if they did not come up with a bribe. Today, the jangmadang practice has led to fully-fledged markets, complete with stalls selling street food, smuggled electronics, ingredients, and clothes; certain markets allegedly grew to encompass upwards of a thousand stalls. …the markets remain a crucial element of survival for many North Koreans, with some reports estimating that around 5 million (around a fifth of the overall population) are “directly or indirectly dependent on the markets”. …The regime has flip-flopped between giving official sanction to certain vendors (so long as they pay the state for the privilege) and imposing harsh restrictions.

In addition to saving lives, these black markets may be sowing the seeds of future liberalization.

…the rising prevalence of jangmadangs across the country has not only provided an effective alternative to the failed state distribution system, but is changing the attitudes of North Koreans as well. Since many now rely on the market for their dinner, rather than the state, old loyalties to the regime are slowly breaking down. Furthermore, increased smuggling into the country from China brings with it more outside media, such as American and South Korean movies and music. This means that more and more North Koreans have access to information not produced by the regime, allowing them a glimpse into the outside world.

Let’s hope exposure to the real world will help North Koreans eventually obtain freedom. Or at least a lesser form of oppression.

As part of my series on the 100th anniversary of communist brutality, mocked the dupes and fellow travelers who pimped for totalitarianism (including a few economists, I’m ashamed to admit).

But if there’s a special place in hell for communist apologists, it will be occupied by the disgusting people who laud North Korea’s supposed success in fighting obesity when in reality people have starved to death in that wretched land.

The hottest spot hopefully will be reserved for the World Health Organization bureaucrat who got the ball rolling a few years ago. The Wall Street Journalexplains.

World Health Organization Director-General Margaret Chan has returned from Pyongyang with wonderful news. The Democratic People’s Republic of Korea is making great strides in health care… Thanks to on-the-spot guidance from Dear Leader Kim Jong Il, North Korean doctors…have even conquered the decadent West’s problem of obesity! …Ms. Chan’s surreal statements last Friday, as reported by several wire services, really did include praise for North Korean health care and the lack of obesity. “They have something which most other developing countries would envy,” the global health administrator gushed.

The editorial points out that the WHO and UN have a long track record of covering up for communist health failure.

…this is nothing new for the WHO. In the 1970s, the United Nations agency promoted Mao Zedong’s vision of “barefoot doctors” to serve the rural poor—even as China’s health-care system was collapsing, along with the rest of society, under the strain of the Cultural Revolution. Today the WHO has become a cheerleader for Cuban health care. As long as a totalitarian state gives plenty of poorly trained people the title of doctor, fudges its health statistics and takes visiting officials on tours of Potemkin hospitals, the U.N. seems happy to give its seal of approval.

I’m surprised the WHO hasn’t been celebrating weight loss in Venezuela, another nation where people go hungry because of the failure of socialism.

Being an Olympic medalist and aspiring politician must not be a good combination. Here are some excerpts from a searing column in the Washington Examiner.

Famine can do wonders for your figure. Are you struggling to shed those stubborn final pounds? Food shortages, vitamin deprivation, and government rationing will help you get over the wall. You may die from it, but the weight loss will make you look fabulousAt least, that’s the takeaway from a Sky News interview this week featuring double Olympic gold medalist James Cracknell, a member of the Conservative Party who has aspirations of becoming a member of the U.K. Parliament. “If you think of the two countries in the world that got a handle on obesity, what do you think they are? Which two countries?” Cracknell asked. …”North Korea and Cuba. They’re quite controlling on behavioral change, so there is a place where it has to be worked..,” One host interjected with some fairly important background information, “Yeah, but people are starving in North Korea, aren’t they? You know, they’re not obese because they haven’t got any food.” …Cosmopolitan said basically the same thing a few years ago when it praised the “Cuban diet.”

Wow, if a potential Tory politicians says something this morally blind, the crazy leftism of Jeremy Corbyn no longer seems so out of place. Heck, they both think the suffering in Cuba should be celebrated.

Let’s close on a very grim note. The communist dictator of North Korea now has nuclear weapons.

I hope that he’s not sufficiently suicidal to use those weapons, but it’s unclear whether he’s crazy or simply brutal.

Though even if he’s “only” brutal, maybe he would launch a warhead if his hold on power was threatened by internal rebellion.

In which case, the final outcome of such a decision would be a country that is unlit at night because it’s been obliterated rather than because it has a Stone Age economy (see postscript).

P.S. That’s such an unpleasant thought that I feel compelled to add some good news. First, it is possible for North Korea to prosper if it does peacefully transition to capitalism. Second, we can at least laugh at communism, even though that seems morbid given the death and suffering it has caused.

Everything You Need to Know about Assigning Blame for the Great Depression, Captured by a Cartoon

Sat, 11/18/2017 - 12:37pm

The Great Depression was an unimaginably miserable period in American history. Income fell, unemployment rose, and misery was pervasive.

But there was still room for political satire in the 1930s. Here’s a cartoon that I shared back in 2012. Based on the notations in the upper right, I gather it’s from the Chicago Tribune, though I don’t know if that’s actually true. And I also don’t know the year.

But I certainly sympathized with the message since Hoover and Roosevelt were big-spending interventionists.

Hoover saddled the economy with taxes (an increase in the top tax rate from 25 percent to 63 percent!), spending, protectionism, regulation, and intervention. Roosevelt then doubled down on almost all of those bad policies, with further tax rate increases (up to 79 percent, and he even pushed for a 100 percent tax rate in the early 1940s!!), more spending, and lots of additional regulation and intervention.

And here’s a cartoon I posted the previous yearSince I don’t know whether public opinion was on the right side, I don’t know if it accurately captures the mood of taxpayers.

But it’s 100-percent accurate about the instinctive response of politicians. For “public choice” reasons, the crowd in Washington has an incentive to buy votes with other people’s money. One might even say they spend like drunken sailors, but that’s actually an understatement.

But I’m beginning to digress, as is my wont. Let’s get back to satire and the Great Depression.

And I’m going to be creative. That’s because I saw a cartoon on Reddit‘s libertarian page that makes a very general point about government causing a mess and politicians then blaming the private sector. But because I’m a goofy libertarian policy wonk, I immediately thought that this is a perfect summary of what happened in the 1930s.  Hoover and Roosevelt hammered the economy with bad policy, the economy stayed in the dumps for an entire decade, yet the political class someone convinced a lot of people it was all the fault of capitalism.

While I will always view this cartoon as the spot-on depiction of what happened in the 1930s, it obviously applies much more broadly.

Consider the recent financial crisis, which was the result of bad monetary policy and corrupt Fannie Mae/Freddie Mac subsidies. Yet countless politicians blamed greedy capitalism.

Maybe what we have is the cartoon version of Mitchell’s Law. That’s because when politicians cause a problem and blame the free market, they inevitably then claim that the problem justifies giving them more power and control. Lather, rinse, repeat.

Five Weak Arguments Against Tax Cuts from Bill Clinton’s Former Treasury Secretary

Fri, 11/17/2017 - 12:16pm

Left-wing columnists at the Washington Post have hit upon a theme. In late October, Ruth Marcus wrote a column asserting that tax cuts are “dangerous.”

I explained why her argument was nonsensical, but that clearly didn’t have any impact since Robert Rubin has a new column in the same paper with the same theme. He claims to have identified five “dangers” in the Republican tax plan.

It’s a remarkably weak list, but I guess it merits a response, both because Rubin served as Bill Clinton’s Treasury Secretary and because I feel compelled to once again slap down the claim that tax cuts are dangerous.

I debunk each one of Rubin’s points below, but you’ll also notice that I first restate (fairly, I think) what he’s really trying to say since his writing style is so bureaucratically obtuse.

Rubin Claim #1:

…business confidence would likely be negatively affected by creating uncertainty about future policy and heightening concern about our political system’s ability to meet our economic policy challenges.

What he’s really saying: We don’t know what will happen in the future (“uncertainty”) and it would be good if taxes were higher so politicians could spend more (“ability to meet…challenges”).

Why he’s wrong: Since it’s very difficult for today’s politicians to restrict the behavior of future politicians, it is true that there will be policy uncertainty. But that’s just as true if we leave the corporate tax rate at 35 percent as it will be if the rate is reduced the 20 percent. I’m also unimpressed by his desire for government to have more cash to meet challenges since it’s far more likely that government is the cause of problems rather than the solution.

Rubin Claim #2:

…our country’s resilience to deal with inevitable future economic and geopolitical emergencies, including the effects of climate change, would continue to decline.

What he’s really saying: If there’s a tax cut, politicians will have less money, which means it will be harder (a “decline” in “resilience”) to spend money in the future.

Why he’s wrong: Once again, I feel compelled to point out that very few problems can be solved with more government spending. Indeed, that’s usually a recipe for making a problem worse (the welfare state, for example). But the most glaring flaw with Rubin’s argument about “future…emergencies” is that there’s no long-run tax cut. The GOP tax plan is revenue-neutral after 10 years. So how can a plan that doesn’t lower the long-run revenue baseline impact the government’s ability to do anything?

Rubin Claim #3:

…funds available for public investment, national security and defense spending…would continue to decline as debt rises, because of rising interest costs and the increased risk of borrowing to fund government activities.

What he’s really saying: Less tax money going to Washington could mean higher interest payments (“increased risk of borrowing”), which would displace other forms of spending.

Why he’s wrong: There’s actually some truth to this argument, at least in the first 10 years when there actually is a tax cut. If I was being snarky, I could ask why Rubin wasn’t making the same argument when the faux stimulus was being debated. Or when the Obamacare boondoggle was being discussed. Why does he think deficits are only bad when tax cuts are on the agenda (just like CBO), but deficits are “stimulus” when spending goes up? I may sue for whiplash since folks on the other side keep changing their minds on red ink.

Rubin Claim #4:

Treasury bond interest rates would be highly likely to increase over time because of increased demand for the supply of savings and increased concern about future imbalances.

What he’s really saying: A tax cut will lead to higher deficits, which will lead to higher interest rates (“increased demand for the supply of savings”).

Why he’s wrong: I believe in supply-and-demand curves, so it’s theoretically true that interest rates should increase when government competes against private borrowers. That being said, even big shifts in U.S. deficits are just a drop in the bucket in a world where global capital markets amount to tens of trillions of dollars. Here’s a slide from a speech I gave to the Leadership Program of the Rockies earlier this month in Denver. If I had space, I would have added “but in reality the impact is minimal” to the third sentence.

Rubin Claim #5:

…at some unpredictable point, fiscal conditions…would likely be seen as sufficiently serious to cause severe market and economic destabilization.

What he’s really saying: Tax cuts will mean more red ink, which could ultimately lead to a Greek-style fiscal crisis (“severe..destabilization”).

Why he’s wrong: It’s certainly true that America faces very worrisome long-run fiscal problems, but those challenges are entirely due to a rising burden of government spending. And since the GOP plan is only a tax cut in the first 10 years, it’s absurd to say the GOP plan will have any meaningful impact on that dismal outlook. If Rubin really was concerned about America’s fiscal situation, he would be aggressively arguing for genuine entitlement reform.

I could have shortened that entire section by collapsing his five “dangers” into one teenager-type rant: “OMG, the economy will be in danger with tax cuts and the government won’t be able to spend on good things.”

To which I could have replied: “LOL.”

To be fair, there actually is a semi-serious section in Rubin’s column. He summarizes the left’s economic argument against lower tax rates.

…tax cuts will not increase growth and, given their fiscal effects, would likely have a significant and increasingly negative impact. The nonpartisan Tax Policy Center’s latest report estimated that, over 10 years, the average increase in our growth rate would be roughly zero, counting the crowding out of private investment by increasing deficits but not counting other adverse effects of worsening our fiscal outlook. The Penn Wharton Budget Model, using the same approach, estimates virtually no increase in long-term growth. …These estimates reflect three underlying views held by mainstream economists. First, individual tax cuts will not materially induce people to work more. Second, corporate tax cuts will likely have limited effect on investment or decisions about where to locate business activity, given the many other variables at play. Third, deficit-funded tax cuts will have little short-term effect on growth, except perhaps for some temporary overheating, because we are at roughly full employment.

Now allow me to translate: It is quite possible to generate bad numbers if you build models that, 1) assume lower tax rates have very little impact on incentives to engage in productive behavior, and 2) assume larger deficits cause interest rates to increase significantly and therefore measurably reduce investment.

The real question is whether those theoretical models are correct given so much of the empirical evidence on the other side. After all, what are you going to believe, the models or your lying eyes?

The Most Depressing Chart about Japan

Thu, 11/16/2017 - 12:02pm

I’m currently in Tokyo for an Innovation Summit. Perhaps because I once referred to Japan as a basket case, I’ve been asked to speak about policies that are needed to boost the nation’s competitiveness.

That sounds like an easy topic since I can simply explain that free markets and small government are the universal recipe for growth and prosperity.

But then I figured I should be more focused and look at some of Japan’s specific challenges. So I began to ponder whether I should talk about Japan’s high debt levels. Or perhaps the country’s repeated (and failed) attempts to stimulate the economy with Keynesianism. And Japan’s demographic crisis is also a very important issue.

But since I only have 20 minutes (not even counting Q&A), I don’t really have time for a detailed examination on any of those topics. So I was still uncertain of how best to illustrate the need for pro-market reforms.

My job suddenly got a lot easier, though, because Eduardo Porter of the New York Times wrote a column today that includes a graph very effectively illustrating why Japan is in trouble. Simply stated, the country is on a very bad trajectory of ever-higher taxes.

To elaborate, Japan used to have a relatively modest tax burden, at least compared to other industrialized nations. But then, thanks in part to the enactment of a value-added tax, the aggregate tax burden began to climb. It has jumped from about 18 percent of economic output in 1965 to about 32 percent of gross domestic product in 2015.

Even the French didn’t raise taxes that dramatically!

By the way, I feel compelled to digress and point out that Mr. Porter’s column was not designed to warn about rising taxes in Japan. Instead, he was whining about non-rising taxes in the United States. I’m not joking.

American tax policy must stand as one of the great mysteries of the global political economy. In 1969…federal, state and local governments in the United States raised about the same in taxes, as a share of the economy, as the government of the average industrialized country: 26.6 percent of gross domestic product, against 27 percent among the nations in the Organization for Economic Cooperation and Development. Nearly 50 years later, the tax picture has changed little in the United States. By 2015, …the figure was 26.4 percent of G.D.P. But across the market democracies of the O.E.C.D., the share had climbed by an average of more than seven percentage points. …Americans are paying dearly as a result, as their comparatively small government has proved incapable of providing an adequate safety net…there is no credible evidence that countries with higher tax rates necessarily grow less.

Americans are “paying dearly”? Are we “paying dearly” because our living standards are so much higher? Are we “paying dearly” because our growth rates are higher and Europe is failing to converge? Are we “paying dearly” because America’s poorest states are rich compared to European countries.

Now that I got that off my chest, let’s get back to our discussion about Japan.

Looking at the data from Economic Freedom of the World, Japan ranked among the world’s 10-freest economies as recently as 1990. Today, it ranks #39. That is a very unfortunate development, though I should point out that the nation’s relative decline isn’t solely because of misguided fiscal policy.

I’ll close by noting that even the good news from Japan isn’t that good. Yes, the government did slightly lower its corporate tax rate so it no longer has the highest burden among developed nations. But having the second-highest corporate tax rate is hardly something to cheer about.

P.S. Since today’s column looks at the most depressing Japanese chart, I should remind people that I shared the most depressing Danish PowerPoint slide back in 2015. I may need to create a collection.

P.P.S. I doubt anyone will be surprised to learn that the OECD and IMF have been encouraging bad policy for Japan.

P.P.P.S. If I had to guess, I would say that Japan’s government is probably more competent than average. But that doesn’t mean it’s incapable of some bone-headed policies, such as a regulatory regime for coffee enemas and a giveaway program that was so convoluted that no companies asked for the free money.

The IMF’s Recipe for Equal Levels of Decline and Stagnation

Wed, 11/15/2017 - 12:10pm

Inequality is now a major dividing line in the world of public policy.

Supporters of limited government think it’s not a big issue and instead focus on the policies that are most likely to generate growth. Simply stated, they tend not to care if some people get richer faster than other people get richer (assuming, of course, that income is honestly earned and not the result of cronyism).

Folks on the left, by contrast, think inequality is inherently bad. It’s almost as if they think that the economy is a fixed pie and that a big slice for the “rich” necessarily means smaller slices for the rest of us. They favor lots of redistribution via punitive taxes and an expansive welfare state.

When talking to such people, my first priority is getting them to understand that it’s possible for an economy to grow and for all income groups to benefit. I explain how even small differences in long-run growth make a big difference over just a few decades and that it is very misguided to impose policies that will discourage growth by penalizing the rich and discouraging the poor.

I sometimes wonder how vigorously to present my argument. Is it actually true, as Thatcher and Churchill argued, that leftists are willing to hurt poor people if that’s what is necessary to hurt rich people by a greater amount?

Seems implausible, so when I recently noticed this amusing humor on Reddit‘s libertarian page, I was not going to share it. After all, it presumes that our friends on the left genuinely would prefer equal levels of poverty rather than unequal levels of prosperity.

But, after reading a new study from the International Monetary Fund, I’m wondering if I’m underestimating the left’s fixation with inequality and the amount of economic damage they’re willing to inflict to achiever greater equality of outcomes.

Here are some introductory passages to explain the goal of the research.

…it is worth reemphasizing some lessons from the “old masters” in economics who addressed this topic a few decades ago—including Arthur M. Okun and Anthony B. Atkinson in the 1970s. Their lessons—on how to elicit people’s views on inequality and how to summarize societal welfare using a monetary indicator encompassing both average incomes and their distribution—remain relevant for fiscal policymakers today. …a satisfactory theory of welfare must recognize that welfare depends on both the size and the distribution of national income. …This primer seeks to encourage more widespread use by policymakers of the tools developed by welfare theory. …the primer provides an in-depth, step-by-step refresher on two specific tools chosen because of their simplicity and intuitive appeal: Okun’s “leaky bucket” and Atkinson’s “equally-distributed-equivalent income.”

Please note that the IMF explicitly is saying that it wants policymakers to change laws based on what’s in the study.

And, as you continue reading, it should become obvious that the bureaucrats are pushing a very radical agenda (not that we should be surprised given the IMF’s track record).

Here’s the bureaucracy’s take on Okun and his pro-redistribution agenda.

Okun (1975) proposed a thought experiment capable of eliciting people’s attitudes toward the trade -off between equality and efficiency: Okun asked the reader to consider five families: a richer one making $45,000 (in 1975) and four poorer ones making $5,000. Would the reader favor a scheme that taxed the rich family $4,000 and transferred the proceeds to the poorer families? In principle, each poorer family would receive $1,000. But what if 10 percent leaked out, with only $900 reaching the recipients? What would the maximum acceptable leak be? The leak represented not only the administrative costs of tax-and-transfer programs (and, one might add, potential losses due to corruption), but also the fact that such programs reduce the economic incentives to work. …Okun reported his own answers to the specific exercise he proposed (his personal preference was for a leakage of no more than 60 percent). ….Okun was willing to accept that a $4,000 tax on the rich household [would] translate, with a 60 percent leakage, into a $400 transfer to each of the four poor households.

The only good part about Okun’s equity-efficiency tradeoff is that he acknowledges that redistribution harms the economy. The disturbing part is that he was willing to accept 60 percent leakage in order to take money from some and give it to others.

It gets worse. When the IMF mixes Okun with Atkinson, that’s when things head in the wrong direction even faster. As I noted last month, Atkinson has a theory designed to justify big declines in national income if what’s left is distributed more equally. I’m not joking.

And that IMF wants to impose this crazy theory on the world.

Atkinson (1970) showed that under the assumptions above and having identified a coefficient of aversion to inequality, it becomes easy to summarize the well-being of all households in an economy with a single, intuitive measure: the equally-distributed-equivalent income (EDEI), i.e., the income that an external observer would consider just as desirable as the existing income distribution. …The percentage loss in mean income—compared with the initial situation—that an observer would find acceptable to have a perfectly equal distribution of incomes was introduced by Atkinson (1970) as a measure of inequality.

The study then purports to measure “aversion to inequality” in order to calculate equally-distributed-equivalent income (EDEI).

The greater the observers’ aversion to inequality, the lower the EDEI. Table (2) reports for a few alternative ε coefficients, for the example above.

Here’s a table from the study, which is based on a theoretical rich person with $45,000 and a theoretical poor person with $5,000 of income. A society that isn’t very worried about inequality (ε = 0.2) is willing to sacrifice about $4,000 in overall income to achieve the desired EDEI. But a nation fixated on equality of outcomes might be willing to sacrifice $32,000 (more than 60 percent of overall income!).

I’ve augmented the table with a few of the aggregate income losses in red.

In other words, nations that have a higher aversion to inequality are the ones that prefer lots of misery and deprivation so long as everyone suffers equally.

Another use of this data is that it allows the IMF to create dodgy data on income (sort of like what the OECD does with poverty numbers).

It appears the bureaucrats want to use EDEI to claim that poorer nations have more income than richer nations.

…the ranking of countries based on the EDEI often differs significantly from that based on mean income alone. For instance, South Africa’s mean income is more than double that of the Kyrgyz Republic, and substantially above that of Albania. However, those countries’ lower inequality implies that their EDEI is significantly higher than South Africa’s. …Similarly, the United States’ mean income is considerably above that of the United Kingdom or Sweden. However, for an inequality aversion coefficient of ε=1.5, Sweden’s EDEI is above that of the United States, and for ε=2.0 also the United Kingdom’s EDEI is above that of the United States.

Here’s a table from the study and you can see how the United States becomes a comparatively poor nation (highlighted in red) when there’s an “aversion” to inequality.

In other words, even though the United States has much higher living standards than European nations, the IMF is peddling dodgy numbers implying just the opposite.

But the real tragedy is that low-income people will be much more likely to remain poor with the policies that the IMF advocates.

P.S. Fans of satire may appreciate this “modest proposal” to reduce inequality. I imagine the IMF would approve so long as certain rich people are excluded.

 

CF&P Supports Passage of House Tax Reform Bill

Wed, 11/15/2017 - 2:49am

Center for Freedom and Prosperity

For Immediate Release
Wednesday, November 15, 2017
202-285-0244

www.freedomandprosperity.org

CF&P Supports Passage of
House Tax Reform Bill

(Washington, D.C., Wednesday, November 15, 2017) – The Center for Freedom and Prosperity urges all members of Congress to deliver tax reform on behalf the American people. The Tax Cuts and Jobs Act, H.R. 1, contains a number of needed reforms that will make the tax code fairer for all while boosting economic growth.

Over the last 30 years, the tax code has grown increasingly complex while also failing to keep up with changes to the global economy. H.R. 1 would make the U.S. an attractive place to do business once again by slashing the corporate tax rate to 20 percent and moving to a territorial system. It would further benefit workers by removing barriers to capital formation through the elimination of the destructive and unfair death tax, and finances lower taxes for families by eliminating or scaling back many special interest credits and deductions.

H.R. 1 is not perfect and like all legislation must balance desired policy goals with the hard reality of politics. But no one will be served by failing to pass tax reform, and the House will have an opportunity to further improve the legislation in conference with the Senate. The economy needs tax reform and Americans deserve tax relief.

The Center for Freedom & Prosperity is a Washington, DC-based think-tank dedicated to the promotion of tax competition, financial privacy, and fiscal sovereignty.

For additional comments:
Andrew Quinlan can be reached at 202-285-0244, [email protected]

###

100 Years of Communism, 100 Million Deaths, and the Economic Performance of Nations that Escaped Soviet Tyranny

Tue, 11/14/2017 - 12:41pm

Over the past few weeks, I’ve written several columns about the 100th anniversary of communism. I’ve looked at that evil ideology’s death toll, and I’ve written about the knaves and fools who defended and promoted communism in the west (included, sad to say, some economists). And I’ve even shared some anti-communist humor to offset the dour material in the other columns.

Let’s continue that series today by looking at the very practical question of what happens when a nation breaks free from communist enslavement?

Professor James Gwartney and Hugo Montesinos from Florida State University analyzed the economic performance of former Soviet Bloc nations (they refer to them as formerly centrally planned – or FCP – countries) over the past 20 years.

The good news is that these countries have been growing, especially if they get decent scores from Economic Freedom of the World.

The economic record of the FCP countries during 1995-2015 was impressive. This was particularly true for the seven FCP countries that moved the most toward economic liberalization. The average growth of real per capita GDP of these seven countries exceeded 5 percent during 1995-2015. Real per capita GDP more than doubled in six of the seven countries during the two decades. …While the real GDP growth of the middle group was slower, it was still impressive. The population weighted annual real growth of per capita GDP of the middle group was 3.78 percent.

And to elaborate on the good news, growth rates in FCP nations has been faster than growth rates in rich countries.

But that’s to be expected. Convergence theory tells us that poorer places should grow faster than richer places (at least in the absence of unusual circumstances).

But government policy can be a wild card. As you can see from Table 14 of the report, Gwartney and Montesinos parsed the data and found that the FCP nations that adopted the most pro-market reforms have enjoyed the fastest growth rates, while growth rates were less impressive in the FCP countries with lesser amounts of economic liberalization (relative growth rates highlighted in red below).

The goal, of course, is for FCP nations to catch up with rich nations.

And there has been a decent amount of convergence.

…the relative income increases are impressive. The ratio of the mean per capita GDP of the most economically free group compared to the high-income economies more than doubled, soaring from 19.9 percent in 1995 to 40.6 percent in 2015. The parallel ratio for the middle group increased by approximately 50 percent from 36.9 percent in 1995 to 53.0 percent in 2015. Finally, the ratio for the bottom group increased from 13.0 percent in 1995 to 24.6 percent in 2015, an increase of 90 percent. The largest increases in relative income were registered by Georgia, Lithuania, Latvia, Armenia, Albania, Kazakhstan, Azerbaijan, and Bosnia and Herzegovina. The ratio for each of these countries more than doubled between 1995 and 2015. Note that five of these eight countries are in the group with the highest 2015 EFW ratings.

There’s country-specific data in Table 13 of the report.

And you can see, once again, that the nations with the most economic freedom and enjoying the fastest convergence rates. From the top group, I’ve highlighted both Georgia and the Baltic countries for their impressive results. And I also highlighted Poland and Slovakia from the second group because both countries have converged at a rapid pace thanks to some good policies.

Looking at the bottom group, it’s sad to see Ukraine doing so poorly, but that’s a predictable result given the near-total absence of economic freedom in that unfortunate country.

The obvious moral of the story is that nations will grow faster and generate more prosperity if they follow the recipe of free markets and limited government.

So let’s take a look at that recipe by examining how FCP nations have performed when looking at the various ingredients. More specifically, Economic Freedom of the World looks at five major policy areas: fiscal, trade, money, regulation, and legal.

And it’s that final category (which measures factors such as property rights, the rule of law, and government corruption) where these countries have not done a good job.

…the FCP countries…have a major shortcoming: their legal systems are weak and little progress has been made in this area. Given their historic background, this is not surprising. Under socialism, legal systems are designed to serve the interests of the government. Judges, lawyers, and other judicial officials are trained and rewarded for serving governmental interests. Protection of the rights of individuals and private businesses and organizations is unimportant under socialism.

Here’s some fascinating data from Table 17, which shows how scores for the five major categories have changed over time in both FCP nations and countries from Western Europe. You’ll see that FCP countries have liberalized policy and closed the gap in Area 3 (money), Area 4 (trade), and Area 5 (regulation). And you’ll also see how the FCP nations do a better job in Area 1 (fiscal), which I’ve highlighted in red. But the most startling – and depressing – result in the absence of progress in Area 2 (legal), which is also highlighted in red.

These results, for all intents and purposes, are a much more detailed version of an article I wrote for the Alliance of Conservatives and Reformers in Europe earlier this year.

Unfortunately, even though we have the same diagnosis, we don’t really have an easy solution. In this final excerpt, the authors explain that it’s not that easy to change the culture of a nation’s political class.

It is a major challenge to convert a socialist legal system into one that enforces contracts in an unbiased manner, protects property rights, permits markets to direct economic activity, and operates under rule of law principles. …Economists have provided policy-makers with step by step directions about how to achieve monetary and price stability, liberalized trade regimes, and adopt tax structures more consistent with growth and prosperity. …But, a recipe for developing a sound legal system is largely absent. We know what a sound legal system looks like, but we have failed to explain how it can be achieved.

I don’t even thank socialism deserves the full blame (though it deserves the blame for many bad things). There are many nations in many regions of the world that get very bad scores because of inadequate rule of law and weak property rights. But I fully agree that it’s not easy to fix.

But I’ll close with a very upbeat observation that all of the FCP nations are better off because the Soviet Union collapsed and communism is fading from the world. Liberal socialism may not be good for an economy, but it’s paradise compared to Marxist socialism.

If Millionaire Leftists Don’t Want a Tax Cut, Here’s How They Can Continue Paying their “Fair Share”

Mon, 11/13/2017 - 12:07pm

There’s an amusing ritual that takes place in Washington every time there’s a big debate about tax policy. A bunch of rich leftists will sign a letter or hold a press conference to announce that they should be paying higher taxes rather than lower taxes.

I’ve debated some of these people in the past, pointing out that they are “neurotic” and “guilt-ridden.”

But they apparently didn’t take my criticisms seriously and go into therapy, They’re now back and the Washington Post provides very favorable coverage to their latest exercise in masochism.

More than 400 American millionaires and billionaires are sending a letter to Congress this week urging Republican lawmakers not to cut their taxes. The wealthy Americans — including doctors, lawyers, entrepreneurs and chief executives — say the GOP is making a mistake by reducing taxes on the richest families… Instead of petitioning tax cuts for the wealthy, the letter tells Congress to raises taxes on rich people like them. …The letter was put together by Responsible Wealth, a group that advocates progressive causes. Signers include Ben & Jerry’s Ice Cream founders Ben Cohen and Jerry Greenfield, fashion designer Eileen Fisher, billionaire hedge fund manager George Soros… Most of the signers of the letter come from California, New York and Massachusetts.

Earlier in the month, I would have told these “limousine liberals” not to worry because I was pessimistic about the chances of a tax bill getting enacted. But then the Senate GOP unveiled a better-than-expected plan and I’m now semi-hopeful that something will make its way through the process.

That doesn’t mean, however, that these rich leftists should be despondent.

Because I’m a nice guy, today’s column is going to let them know that they don’t have to accept a tax cut. The Treasury Department has a website that they can use to voluntarily send extra money to Washington. It’s called “gifts to reduce the public debt,” and people like George Soros can have their accountants and lawyers calculate the value of any tax cut and then use this form to send that amount of money to D.C.

 

And if these guilt-ridden rich people take my advice and send extra money to Washington, I surely won’t object if they want to give me a modest commission.

But I don’t think I’ll get any money for the simple reason that these wealthy statists already have been exposed for being hypocrites. When given the option to pay extra to Washington, they run for the hills. In other words, they talk the talk, but won’t walk the walk.

It’s the same at the state level. Massachusetts also gives people the option to pay more to the government, yet Elizabeth Warren has never volunteered to cough up extra cash.

By the way, if there was a prize for the most economically illiterate comment in the article, it would go to Bob Crandall, who apparently doesn’t realize that the money he puts in a bank is then lent to entrepreneurs and others who then invest the funds.

“I have a big income. If my income gets bigger, I’m not going to invest more. I’ll just save more,” said Crandall, who is retired.

Remarkable. I’m at a loss for words.

And I can’t resist sharing one final blurb from the article.

Former labor secretary Robert Reich…also signed the letter.

Huh, how did he become eligible to sign? He certainly never contributed to growth in the private sector, and I’m not aware that he inherited a bunch of money. Well, upon closer inspection, it turns out that fretting about inequality is a good way to become part of the top-1 percent.

P.S. Germany also has guilt-ridden leftists who push for higher taxes.

P.P.S. It’s not just that rich leftists don’t pay extra tax. They also go out of their way to figure out how to pay lower taxes. Just look at the Clintons. And Warren Buffett. And John Kerry. Or any of the other rich leftists who want higher taxes for you and me while engaging in very aggressive tax avoidance.

Prosperity and Taxation: What Can We Learn from the 1950s?

Sun, 11/12/2017 - 12:00pm

In my decades of trying to educate policymakers about the downsides of class-warfare tax policy, I periodically get hit with the argument that high tax rates don’t matter since America enjoyed a golden period of prosperity in the 1950s and early 1960s when the top tax rate was more than 90 percent.

Here’s an example from Politico of what I’m talking about.

Well into the 1950s, the top marginal tax rate was above 90%. …both real GDP and real per capita GDP were growing more than twice as fast in the 1950s as in the 2000s.

This comparison grates on me in part because both Bush and Obama imposed bad policy, so it’s no surprise that the economy did not grow very fast when they were in office.

But I also don’t like the comparison because the 1950s were not a halcyon era, as Brian Domitrovic explains.

…you may be thinking, “But wait a minute. The 1950s, that was the greatest economic era ever. That’s when everybody had a job. Those jobs were for life. People got to live in suburbia and go on vacation and do all sorts of amazing things. It was post-war prosperity, right?” Actually, all of these things are myths. In the 1950s, the United States suffered four recessions. There was one in 1949, 1953, 1957, 1960 — four recessions in 11 years. The rate of structural unemployment kept going up, all the way up to 8% in the severe recession of 1957-58. …there wasn’t significant economic growth in the 1950s. It only averaged 2.5 percent during the presidency of Dwight D. Eisenhower.

For today’s purposes, though, I want to focus solely on tax policy. And my leftist friends are correct that the United States had a punitive top tax rate in the 1950s.

This chart from the Politico story shows the top tax rate beginning on that dark day in 1913 when the income tax was adopted. It started very low, then jumped dramatically during the horrible presidency of Woodrow Wilson, followed by a big reduction during the wonderful presidency of Calvin Coolidge. Then it jumped again during the awful presidencies of Herbert Hoover and Franklin Roosevelt. The rate stayed high in the 1950s before the Kennedy tax cuts and Reagan tax cuts, which were followed by some less dramatic changes under George H.W. BushBill ClintonGeorge W. Bush, and Barack Obama.

What do we know about the impact of the high tax rates put in place by Hoover and Roosevelt? We know the 1930s were an awful period for the economy, we know the 1940s were dominated by World War II, and we know the 1950s was a period of tepid growth.

But we also know that high tax rates don’t result in high revenues. I don’t think Hauser’s Law always applies, but it’s definitely worked so far in the United States.

This is because highly productive taxpayers have three ways to minimize and/or eliminate punitive taxes. First, they can simply choose to live a more relaxed life by reducing levels of work, saving, and investment. Second, they can engage in tax evasion. Third, they can practice tax avoidance, which is remarkably simple for people who have control over the timing, level, and composition of their income.

All these factors mean that there’s not a linear relationship between tax rates and tax revenue (a.k.a., the Laffer Curve).

And if you want some evidence on how high tax rates don’t work, Lawrence Lindsey, a former governor at the Federal Reserve, noted that extortionary tax rates are generally symbolic – at least from a revenue-raising perspective – since taxpayers will arrange their financial affairs to avoid the tax.

…if you go back and look at the income tax data from 1960, as a place to start, the top rate was 91 percent. There were eight — eight Americans who paid the 91 percent tax rate.

Interestingly, David Leonhardt of the New York Times inadvertently supported my argument in a recent column that was written to celebrate the era when tax rates were confiscatory.

A half-century ago, a top automobile executive named George Romney — yes, Mitt’s father — turned down several big annual bonuses. He did so, he told his company’s board, because he believed that no executive should make more than $225,000 a year (which translates into almost $2 million today). …Romney didn’t try to make every dollar he could, or anywhere close to it. The same was true among many of his corporate peers.

I gather the author wants us to think that the CEOs of the past were somehow better people than today’s versions.

But it turns out that marginal tax rates played a big role in their decisions.

The old culture of restraint had multiple causes, but one of them was the tax code. When Romney was saying no to bonuses, the top marginal tax rate was 91 percent. Even if he had accepted the bonuses, he would have kept only a sliver of them. The high tax rates, in other words, didn’t affect only the post-tax incomes of the wealthy. The tax code also affected pretax incomes. As the economist Gabriel Zucman says, “It’s not worth it to try to earn $50 million in income when 90 cents out of an extra dollar goes to the I.R.S.”

By the way, Zucman is far from a supply-sider (indeed, he’s co-written with Piketty), yet he’s basically agreeing that marginal tax rates have a huge impact on incentives.

The only difference between the two of us is that he thinks it is a good idea to discourage highly productive people from generating more income and I think it’s a bad idea.

Meanwhile, Leonhardt also acknowledges the fundamental premise of supply-side economics.

For more than 30 years now, the United States has lived with a top tax rate less than half as high as in George Romney’s day. And during those same three-plus decades, the pay of affluent Americans has soared. That’s not a coincidence.

But he goes awry by then assuming (as is the case for many statists) the economy is a fixed pie. I’m not joking. Read for yourself.

..,the most powerful members of organizations have fought to keep more money for themselves. They have usually won that fight, which has left less money for everyone else.

A market economy, however, is not a zero-sum game. It is possible for all income groups to become richer at the same time.

That’s why lower tax rates are a good idea if we want more prosperity – keeping in mind the important caveat that taxation is just one of many policies that impact economic performance.

P.S. Unbelievably, President Franklin Roosevelt actually tried to impose a 100 percent tax rate (and that’s not even the worst thing he advocated).

Grading the Senate Republican Tax Plan

Sat, 11/11/2017 - 12:15pm

Back on November 2, I summarized the good and not-so-good features of the tax plan put forth by House Republicans. Here are the parts that made me happy.

And what was the most disappointing part of the plan?

  • Absence of spending restraint.

Regarding my disappointment, I’m not just being a curmudgeonly libertarian. The bill is filled with timid and convoluted provisions, as well as some undesirable revenue-raising provisions, precisely because of congressional rules on long-run deficit neutrality. As I’ve noted in some of my TV interviews, Republicans are pushing sub-par policy because you can’t fit a football player’s body into Pee Wee Herman’s clothes.

If Republicans were willing to impose some modest spending restraint, by contrast, that would have given them enormous flexibility for large tax cuts (while also balancing the budget!).

But I’m a semi-realist about Washington. I’m not going to make the perfect the enemy of the good (or, in this case, the sort-of-decent the enemy of the I-guess-this-is-acceptable).

Now let’s look at what Senate Republicans have unveiled. In some cases, my grades are identical to the House bill because many of the major provisions are quite similar. But there are some noteworthy differences.

Lower corporate rate: A-

America’s high corporate tax rate is probably the most self-destructive feature of the current system. If the rate is permanently reduced from 35 percent to 20 percent, that will be a huge boost to competitiveness. The only downside is that the lower rate is deferred until 2019.

Lower individual rates: C+

The proposal is relatively timid on rate reductions for households. This is disappointing, but not unexpected since lower individual tax rates mean considerable revenue loss.

Ending deduction for state and local taxes: A+

Next to the lower corporate tax rate, this is the best part of the proposal. It generates revenue to use for pro-growth provisions while also eliminating a subsidy for bad policy on the part of state and local governments. Indeed, the Senate bill goes farther than the House bill since it includes property taxes. So I’ve retroactively changed my grade for the House bill from A+ to A- so I can give the Senate bill an A+.

Curtailing mortgage interest deduction: C

The deduction remains for home mortgages, but is curtailed for home equity loans. A timed improvement that will only slightly reduce the distortion that creates a bias for residential real estate compared to business investment.

Death tax repeal: C+

There’s no repeal. Just an increase in the amount of family savings that can be protected from the tax. Better than nothing, to be sure, but disappointing.

Change to consumer price index: C

It is quite likely that the consumer price index overstates inflation because it doesn’t properly capture increases in the quality of goods and service. Shifting to a different price index will lead to higher revenues because tax brackets and other provisions of the tax code won’t adjust at the same rate. That’s fine, but I’m dissatisfied with this provision since it should apply to spending programs as well as the tax code.

Reduced business interest deduction: C+

The business interest deduction is partially undone, which is a step toward equal treatment of debt and equity. It’s not the right way of achieving that goal, but it does generate revenue to finance other pro-growth changes in the legislation.

Now let’s zoom out and grade the overall plan in terms of major fiscal and economic goals.

And you’ll see that all I’ve done is repeat exactly what I wrote about the House bill.

Restraining the growth of government: F

In my fantasy world, I want a return to the very small federal government created and envisioned by the Founding Fathers. In the real world, I simply hope for a modest bit of spending restraint. This legislation doesn’t even pretend to curtail the growth of government, which is unfortunate since some fiscal prudence (federal budget growing about 2 percent per year) would have allowed a very large tax cut while also balancing the budget within 10 years.

Collecting revenue in a less-destructive manner: B

This is a positive proposal. It will mean more jobs, increased competitiveness, and higher incomes. The wonks in Washington doubtlessly will debate whether these positive effects are small or large, but I’m not overly fixated on that issue. Yes, I think the growth effects will be significant, but I also realize that many other policies also determine economic performance. The most important thing to understand, though, is that even small increases in growth make a big difference over time.

Now let’s take a closer look at how the House and Senate plans differ.

The Tax Foundation put together a very helpful comparison. I’ve broken it into three parts so I can interject some final commentary.

For this first section, since I already gave my two cents about itemized deductions, I’ll simply observe that the Senate plan is slightly better on individual income tax rates.

For this second section, I’ll merely note that the first provision is basically an attempt to give relief to small businesses that are subject to the individual income tax.

The provisions are complicated because it’s not easy to lower tax rates for “Schedule C” income in a way that doesn’t benefit taxpayers who aren’t perceived as being conventional small businesses.

 

For this final section, the part that’s disappointing to me is “international income.” Both the House and Senate adopt territorial taxation for businesses, which is very good.

But the congressional plans then claw back a bunch of money with OECD-style “base-erosion” policies and Obama-style global minimum taxes. It’s unclear if the net effect is modestly positive or modestly negative, but it’s not what many of us wanted when we pushed for territoriality.

I’ll close by noting that I’m actually pleasantly surprised by the two plans. Yes, I’m grading on a curve, but I had very low expectations this year. I basically hoped to get a lower corporate rate with a bit of window dressing.

And at one point we were actually forced to play defense because Republicans were looking at a very troubling proposal for a “border-adjusted tax.”

So even though I fantasize about a flat tax, I’m reasonably happy about where we are now.

The bottom line is that there’s now a good chance of getting legislation that drops the corporate rate to 20 percent while also eliminating the deduction for state and local income taxes. Those are two very good policies. And if we somehow get death tax repeal, that means three substantive, pro-growth reforms. Fingers crossed.

South Africa’s Failing Experiment with Higher Taxes

Fri, 11/10/2017 - 12:42pm

Since there’s a big debate about whether there should be tax cuts and tax reform in the United States, let’s see what we can learn from abroad.

And let’s focus specifically on whether changes in tax policy actually produce “revenue feedback” because of the Laffer CurveIn other words, if tax rates change, does that incentive people to alter how much they work, save, and invest, thus changing the amount of taxable income they earn and report?

I’ve written about how the Laffer Curve has impacted revenue in nations such as FranceRussiaIrelandCanada, and the United Kingdom.

Now let’s go to Africa. In a column for BizNis Africa, Kyle Mandy of PwC explicitly warns that South Africa is at the wrong spot on the Laffer Curve.

At the time of the 2017 Budget in February, a number of commentators, including myself, warned National Treasury and Parliament that the tax increases announced in the Budget, particularly on personal income tax, would likely push tax revenues very close to the top of the Laffer curve, i.e. the point at which tax revenues are maximised and beyond which tax rate increases will actually result in a decrease in tax revenues.

Before continuing with the article, I can’t resist making an important point. The author understands that it is a bad idea to be on the downward-sloping part of the Laffer Curve. As he points out, that’s when tax rates are so punitive that “tax rate increases will actually result in a decrease in tax revenues.”

That’s correct, of course, but it’s almost as important to understand that it’s also a very bad idea to be at the “top of the Laffer Curve.” As noted in a study by economists from the Federal Reserve and the University of Chicago, that’s the point where economic damage is so great that a dollar of tax revenue can be associated with $20 of damage to the private sector.

Now that I got that off my chest, let’s look at some of the details in the article about South Africa.

The evidence…suggests that, in the current environment, South Africa has maximised the tax revenues that it can extract from its citizens and has possibly even gone past that point and is now on the downward slope of the curve. Why do I say this? The last few years have seen significant tax increases… These tax increases saw the main budget tax: GDP ratio increase from 24.5% in 2012/13 to 26% in 2015/16, primarily led by increases in personal income tax. However, since then the tax:GDP ratio has stalled at 26% in both 2016/17 and in the revised forecast for 2017/18. It is not unreasonable to expect that the tax:GDP ratio for 2017/18 may fall below 26% in the final outcome. The stalling of the tax:GDP ratio comes despite significant tax increases in each of 2016/17 and 2017/18 which were expected to deliver ZAR18 billion and ZAR28 billion of additional tax revenues respectively.

Once again, I can’t resist the temptation to interject. That final sentence should be changed to read “the stalling of the tax:GDP ratio comes because of significant tax increases.”

Mr. Mandy concludes his column by warning that the current approach is leading to bad results and noting that further tax hikes would make a bad situation even worse.

…the South African Revenue Service has acknowledged that it has seen a decline in levels of compliance. …So what does all of this mean for tax policy and fiscal policy generally? Simply put, National Treasury have been placed in an invidious position. Increasing taxes further in the current environment could be self-defeating and result in a decline in the tax:GDP ratio. This risk is particularly prevalent insofar as further tax increases in the form of personal income tax are concerned. Increasing the corporate tax rate would further dent investor confidence and economic growth.

The good news is that even South Africa’s government seems to realize there is a problem.

Here are some excerpts from a recent story.

Finance minister Malusi Gigaba has received President Jacob Zuma’s stamp of approval for an inquiry into tax administration and governance at the South African Revenue Service (Sars). According to the Medium-Term Budget Policy Statement (MTBPS), tax revenue is expected to fall almost R51 billion short of earlier estimates in the current fiscal year. …The probe also comes amid warnings that further tax hikes could be futile and may even result in a decline in the country’s tax-to-GDP ratio. …National Treasury has introduced various tax hikes over the past few years. The main budget tax-to-GDP ratio increased from 24.5% in 2012/13 to 26% in 2015/16, mainly as a result of higher effective personal income tax rates. But the tax-to-GDP ratio has subsequently stalled at 26% in 2016/17 and in the latest 2017/18 forecast and it is not inconceivable that the final outcome for the current fiscal year could fall below 26%… Gigaba seems to be aware of the dangers of additional tax hikes and warned in his MTBPS that it could be “counterproductive”.

I’m glad that there’s a recognition that higher taxes would backfire, but that’s not going to fix any problems.

The pressure for higher taxes will be relentless unless the South African government begins to control spending. The government should adopt a constitutional spending cap, which would alleviate budget pressures and create some “fiscal space” for lower tax rates.

But I’m not confident that will happen, particularly if the International Monetary Fund gets involved. Desmond Lachman, formerly of the IMF and now with the American Enterprise Institute, writes that the country is in trouble.

South Africa is in trouble. Per capita income has been in decline for several years and its economy is in recession for the second time in eight years. Unemployment remains at over 27%. Meanwhile, the rand is floundering on the foreign exchange market… In view of the favourable global economic environment, the country’s predicament is even more troubling. Interest rates have rarely been lower and capital flows to emerging markets have seldom been stronger. …If South Africa’s economy is performing poorly in this environment, it will probably struggle even more when central banks start to normalise their interest rate policies and when the global economic environment becomes more challenging.

He has the right description of the problem, but I’m worried about his proposed solution.

IMF assistance can hasten restoration of confidence. …An IMF programme would not be popular politically within South Africa but the government does not appear to have any realistic alternative.

Simply stated, the IMF has a very bad track record of pushing for higher taxes.

That doesn’t necessarily mean its bureaucrats will push for bad policy in South Africa, but past performance sometimes is a good predictor of future behavior.

For what it’s worth, the IMF is fully aware that the burden of government has been increasing. Here’s a blurb from the most recent Article IV report on South Africa.

During the past few years, the share of both revenues and expenditures continued its rising trend. The size of general government in South Africa is one of the highest among international peers at a similar level of development. Primary expenditures rose by 1.5 percentage points of GDP between 2012/13 and 2015/16, owing primarily to public enterprise-related transfers (0.8 percent of GDP, including a 0.6 percent of GDP equity injection for Eskom in 2015/2016) as well as relatively generous wage agreements combined with an increase in consolidated government employment (0.3 percent of GDP). In recent years, including the 2017 budget, higher personal income taxation has been the main tax  policy instrument to collect revenue combined with higher excise rates.

And here’s a section of the data table showing the expanding burden of both taxes and spending.

Unfortunately, the IMF never says that this growing fiscal burden is a problem. Instead, the focus is solely on the fact that spending is higher than revenue. In other words, the IMF mistakenly fixates on the symptom of red ink instead of addressing the real problem of excessive government.

So if the bureaucrats do an intervention, it almost certainly will result in bailout money for South Africa’s politicians in exchange for a “balanced” package of spending cuts and tax increases.

But the spending cuts likely will be either phony (reductions in planned increases, just like they do it in Washington) or will quickly evaporate. But the higher taxes will be real and permanent. Just like in most other nations where the IMF has intervened. Lather, rinse, repeat.

Speaking of misguided international bureaucracies, the Organization for Economic Cooperation and Development already has been pushing bad policy on South Africa. The bureaucrats even brag about their impact, as you can see from this Table in the OECD’s recent Economic Survey on South Africa.

The OECD is happy that income tax rates have increased and that there’s more double taxation on dividends, but the bureaucrats are still hoping for a new energy tax, expansion of the value-added tax, and more property taxes.

They must really hate the people of South Africa. No wonder the OECD is known as the world’s worst international bureaucracy.

I’ll close by noting that the country’s problems are not limited to fiscal policy. The country is only ranked #95 by Economic Freedom of the World. And it was as high as #46 in 2000.

Instead of pushing for higher taxes, that’s the problem the OECD and IMF should be trying to fix. But given their track record, that’s about as likely as me playing centerfield next year for the Yankees.

100 Years of Communism, 100 Million Deaths, and the Moral Blindness of (some) Economists

Thu, 11/09/2017 - 12:38pm

To “commemorate” the 100th anniversary of the Bolshevik revolution in Russian, I’ve been sharing a series of columns on the evil of communism.

  • On October 30, I looked at the death toll resulting from communist tyranny.
  • On November 5, I discussed the shameful actions of communist apologists.
  • On November 7, I shared some amusing mockery of totalitarian communism.

Today, I’m going to target my profession.

But I’m going to bend over backwards to be fair. I’m not going to condemn the economists back in the 1920s and 1930s who were sympathetic to central planning. They were horribly wrong, but that was before economists from the Austrian School prevailed in the “Socialist Calculation Debate.” So we’ll give them an undeserved pass.

And we’ll even excuse the wrongheaded thinking of economists who sympathized with communism in the first couple of decades after World War II. After all, maybe they were just naive when they blindly accepted and regurgitated statistics from the Soviet Union (just as I think some people today are being somewhat gullible when they accept stats today from Beijing).

But there’s no excuse for any sentient being – especially an economist – to have praised the decrepit communist economic model by the time we got to the 1980s.

Yet some very prominent economists were guilty of whitewashing the sins of communism. I condemned Paul Samuelson two years ago (albeit only in a postscript) for his Pollyannish assessment of the Soviet economy. There was absolutely no excuse for him to write that, “…the Soviet economy is proof that…a socialist command economy can function and even thrive.”

Especially since he made that claim shortly before the Berlin Wall collapsed. That takes a special type of ignorance.

But Samuelson wasn’t the only academic economist to disseminate nonsense. Alex Tabarrok of Marginal Revolution shares some additional examples of mal-education.

…an even more off-course analysis can also be found in another mega-selling textbook, McConnell’s Economics (still a huge seller today).  Like Samuelson, McConnell estimated Soviet GNP as half that of the United States in 1963 but he showed that the Soviets were investing a much larger share of GNP and thus growing at rates “two to three times” higher than the U.S.  Indeed, through at least ten (!) editions, the Soviets continued to grow faster than the U.S. and yet in McConnell’s 1990 edition Soviet GNP was still half that of the United States!

Professor Tabarrok speculates on why some economists were so wrong.

To make their predictions, Samuelson and McConnell relied heavily on the production possibilities frontier (PPF), the idea that the fundamental tradeoff for any society was between “guns and butter.”

To be sure, the production possibilities frontier is a useful analytical tool for economists.

But these economists erred in assuming that central planners could allocate resources efficiently. More specifically, they looked at high levels of supposed investment in communist nations and assumed that would mean faster rates of growth.

That theory is correct, but only if capital is being allocated by the private sector in a system governed by market prices. Government investment, by contrast, is a recipe for pork, inefficiency, corruption, and waste.

If we were constructing an Economist Hall of Shame, we’d also want to include Lester Thurow, who was basically the Paul Krugman of the 1980s. As recounted in this Hoover Institution interview, he also pimped for the Soviet Union right up until the point it collapsed.

ZINSMEISTER But why have persons proven to have been calamitously mistaken been allowed to wriggle away? For instance, here’s a quote from Lester Thurow—dean of MIT’s business school, for heaven’s sake—writing in 1989: “Can economic command significantly accelerate the growth process? The remarkable performance of the Soviet Union suggests it can. Today it is a country whose economic achievements bear comparison with those of the United States.” Why isn’t this fellow laughed out of court?

CONQUEST These people were had for suckers. They believed figures and images and statements about the Soviet Union that did not accord with reality. This was also enforced in the Soviet Union. You had to believe the place was happy, well fed, and so forth. …there were two different Soviet Unions, the real one and the one put forward in the West. Often the unreal one was backed by huge amounts of impressive, phony statistics. It takes two to sell the Brooklyn Bridge; you need both a crook and a sucker. The apologists in this country swallowed the rubbish about communism because they didn’t like the people putting forth the opposite view.

Let’s close with an amazing – and depressing – observation.

An article by Professor Bryan Caplan for the Foundation for Economic Education looks at Princeton Review‘s AP Economics and notes that there are still some economists suffering from moral blindness.

When I was first learning economics, I was surprised by how pro-communist many economics textbooks were. …textbooks were very positive relative to communism’s historical record. …Many textbook authors were, in a phrase, communist dupes.

Sadly, some communist dupes still exist and they work at Princeton Review. Caplan highlights this excerpt from the book.

Communism is a system designed to minimize imbalance in wealth via the collective ownership of property. Legislators from a single political party – the communist party – divide the available wealth for equal advantage among citizens. The problems with communism include a lack of incentives for extra effort, risk taking, and innovation. The critical role of the central government in allocating resources and setting production levels makes this system particularly vulnerable to corruption.

Bryan then explains why AP Economics is nonsense.

The official communist line was that collective ownership would lead to high economic growth – and ultimately cornucopia. And in practice, communist regimes made collective ownership an end in itself. Just look at their repeated farm collectivizations that caused horrifying famines in the short-run, and low agricultural productivity in the long-run. …Communist regimes began with the mass murder of their political enemies, businessmen, and their families. Next, they seized the peasants’ land, leading to hellish famines. …And no communist regime has ever tried to “divide wealth for equal advantage.” Bloodbaths aside, communist regimes always put Party members’ comfort above the very lives of ordinary citizens.

I don’t know whether to laugh or cry.

Good people rejected communism from its inception because it was based on the immoral notion that individuals should be subjugated to the state (the same ideology in fascism and other collectivist movements).

As I noted above, I’m willing to forgive others (at least in the early decades) for thinking that communism might be economically successful.

But I have nothing but scorn for those who were pimping for totalitarianism in the 1980s (or still today). Economists already are the subject of derision and it’s easy to understand why after seeing how some of them excused an evil system.

Law-Abiding Texans, Gun Ownership, and Saving Lives

Wed, 11/08/2017 - 12:58pm

It’s impossible to imagine the evil and/or the sickness that would lead a person to massacre strangers in a church.

But it’s very easy to predict the political aftermath of such a tragedy. Folks on the left (some well-meaning, some not) immediately urge more gun control.

I have constitutional objections to their approach, but I realize that line of reasoning doesn’t matter to the anti-Second Amendment crowd, so I generally focus the conversation on the practical shortcomings of such initiatives.

  • Why, for instance, will it make a difference to ban scary-looking rifles when other weapons have the exact same functionality?
  • Or if they want a total ban, I ask them if they have a feasible plan to confiscate the hundreds of millions of guns in the country?
  • Do they actually think signs declaring so-called gun-free zones will discourage or deter murderers from butchering innocent people?
  • Is it likely that criminals will obey gun control laws when they already disregard laws against murder, rape, robbery, and assault?
  • If they argue guns cause crime, what is their response to the link between expanded gun ownership or decreases in violent crime?

Let’s focus on that last point, which is especially relevant since the death toll in Texas presumably would have been much higher if a good person with a gun didn’t put a stop to the mayhem.

Here are some excerpts from the Washington Post‘s report on what happened.

Johnnie Langendorff stumbled into the crossfire in a total accident. …As he passed the church…he saw…A man clad all in black was…trading shots with another man holding a rifle. …The man in black hauled off in his SUV. The second man with the rifle — a neighbor identified Monday by Arkansas-based 40/29 News as Stephen Willeford — approached Langendorff. The two men were strangers. Willeford said his daughter heard gunshots at the nearby First Baptist Church and told him she’d seen a man in all-black attire… A former NRA instructor…, Willeford immediately sprung into action. …Willeford raced across the street to the church and confronted Kelley… Langendorff said Willeford “briefed me quickly on what had just happened and said he had to get him.” “So that’s what I did.” …the two men shot off in pursuit in Langendorff’s truck… Langendorff wove his truck at high speed through traffic while trying to catch the fleeing SUV. The speedometer crossed 95 mph while the driver narrated everything to law enforcement. …Kelley’s vehicle…veered off the roadway and into a ditch… Langendorff pulled his own truck within 25 yards. …Police were on the scene within five to seven minutes… An autopsy of Kelley showed that he was shot twice — once in the leg and again in the torso — before shooting himself in the head… On Sunday night, Langendorff explained that his reaction — jumping into a car chase — was a simple calculation. “He just hurt so many people, he affected so many people’s lives, why wouldn’t you want to take him down?”

The Wall Street Journal editorializes on some of the implications.

…forgive us if we focus on Stephen Willeford, the local plumber who saved lives by grabbing his rifle and firing at Kelley. …The two locals are being hailed as heroes since their quick action was the only deterrent to more murders until police arrived. Kelley, who was discharged from the Air Force for bad conduct, should not have been able to obtain a gun legally, but the Journal reports that the military failed to send his conviction record to the FBI. The harsh reality of mass murders is that often only the presence of someone with a legal weapon to shoot back can stop the rampage. …No one wants crowds of vigilantes looking for someone to shoot, but we’re sure glad Stephen Willeford had a rifle and knew how to use it.

Rich Lowry of National Review applauds the heroism of the two Texans who acted to save lives.

Before the Texas church shooter encountered any police officers, he was run off a highway and dead. He had been shot and chased by two private citizens who took it upon themselves to respond to a heinous crime when no one with a badge was anywhere to be found. …The response by the two bystanders who refused to stand by…was a characteristically small-town American act of self-reliance that shows, no matter how tattered our civil society may be, it still produces people who will risk life and limb for others without hesitation, unbidden by anything other than their own sense of obligation. When Stephen Willeford, 55, heard of the shooting, he left his house barefoot with his AR-15 and started exchanging fire with Kelley outside the church. An expert shot, Willeford hit Kelley and reportedly aimed for the gaps on his body armor. When Kelley got in an SUV and sped off, Willeford jumped in Johnnie Langendorff’s truck and told him to give chase. …Willeford and Langendorff would have been justified in considering their work done when the shooter left the scene of his massacre. They would have been justified in considering it done when he crashed his vehicle. They instead were prepared for another gunfight in the cause of incapacitating him themselves.

And he warns about the real-world implications of gun control.

Any gun-control measure that is sweeping enough to make a dent in the country’s gun stock and render gun ownership difficult enough to, at the margins, keep firearms out of the hands of psychopaths will inevitably affect law-abiding people as well. In places like rural Texas that would rightly be considered a serious imposition. Without a gun, if something goes wrong, the only option is sitting and waiting for the authorities to show up.

Amen. Cops play an important role, but usually after a crime is committed. As this image illustrates, when seconds count, the police are minutes away.

So let’s make life harder for bad people by letting good people defend themselves.

By the way, some people are blaming the Air Force for failing to place the murderer into the system since that would have barred him from legally buying a gun. I’m sure that was an oversight rather than a deliberate decision, so I’m reluctant to make that a big issue. I’m actually more concerned that this dirtbag abused his family and fractured the skull of a one-year old child, yet was jailed for only one year.

Call me crazy, but that seems ludicrously lax. Heck, we put old people in jail for five times longer for trivial offenses such as failing to file a form. Shouldn’t grievous bodily harm to an infant have harsher implications? This is almost as crazy as fining a gun owner $1,000 after he saved a child’s life.

Let’s conclude by returning to the main issue of today’s column. In the past, I’ve joked about gun-loving Texans (the difference between conservatives, liberals, and Texans, the Texas v. Europe approach to fighting terrorism, and Texas, California, and the coyote), but today let’s be glad one of those guys used his “assault rifle” to save lives.

The Importance of Eliminating State and Local Tax Deductions

Tue, 11/07/2017 - 3:44pm

On Monday the Heritage Foundation hosted a panel discussion on the importance of eliminating the state and local tax deduction as part of tax reform.

If you don’t want to watch the entire event, here are the basic highlights.

  • Ending the SALT deduction will finance rate reductions and other pro-growth reforms
  • SALT deduction benefits are concentrated, benefiting only itemizers (currently about 30% of filers, but will go down under the new plan), with a majority going to only 7 states
  • It creates perverse incentives for state governments to overtax and overspend. As much as 5percentage points of California’s top-in-the-nation 13.3% income tax is financed by the rest of federal taxpayers thanks to the SALT deduction.
  • The Tax Cuts and Jobs Act would mostly eliminate the state and local deduction, keeping an allowance for property taxes up to $10,000 in order to secure votes from Republicans in high-tax states. Doing so leaves roughly $400-$500 billion less can be used to lower marginally tax rates, which are more important for driving growth.
  • Keeping the property tax deduction could also harm some middle-class homeowners if it encourages states to shift taxes on income or sales to property taxes.

Jonathan Williams of the American Legislative Exchange Council relayed an interesting anecdote illustrating the deduction’s impact on state behavior. The Governor of Alaska, which is the only state to ever eliminate its personal income tax as it did 40 years ago, is seeking to enact an income tax to close a budget hole. A part of his selling point is that state taxpayers will be able to write-off part of the cost of the federal taxes.

This fits with a key CF&P objection to the SALT deduction. Namely, that it interferes with tax competition between the states and its role in keeping taxes lower than they otherwise would be. Not only does it encourage states to raise taxes, but it directs them toward particular taxes and thereby reduces experimentation and the opportunity to compare how different systems fare in the 50 laboratories of democracy.

 

100 Years of Communism, 100 Million Deaths, but a Silver Lining of Clever Jokes and Satire

Tue, 11/07/2017 - 12:47pm

There’s no way to sugarcoat the monstrous evil of communism. The death toll is simply too large.

But the silver lining to the dark cloud of Marxist socialism is that we have some clever jokes and satire.

We’ll start with the Gipper. Here are some of his anti-communism jokes that I should have included in my collection of Reagan videos.

Makes me miss Reagan even more. The only great president of my lifetime, and either the best or second-best president of the 20th century.

But let’s stay on topic. Here’s a cartoon that sums up the “success” of communist systems.

The folks at Redpanels, by the way, also have produced great cartoons on Keynesian economics, the minimum wagebasic income, and infrastructure.

Perhaps because of the rise of Antifa, even the Onion is mocking communism. Here are some excerpts, but the entire article is worth reading.

The filthy, disorganized apartment shared by three members of the Amherst College Marxist Society is a microcosm of why the social and economic utopia described in the writings of Karl Marx will never come to fruition, sources reported Monday. …Upon moving in together at the beginning of the fall 2001 semester, Dorff, Josh Foyle, and Tom Eaves sat down and devised an egalitarian system for harmonious living. Each individual roommate would be assigned a task, which he would be required to carry out on a predetermined day of the week. A bulletin board in the kitchen was chosen as the spot for household announcements, and to track reimbursements for common goods like toothpaste and toilet paper. “We were creating an exciting new model for living,” said Dorff, stubbing his cigarette into an ashtray that had not been emptied in six days. …Despite the roommates’ optimism, the system began to break down soon after its establishment. To settle disputes, the roommates held weekly meetings of the “Committee of Three.” …After weeks of complaining that he was the only one who knew how to clean “halfway decent,” Foyle began scaling back his efforts, mirroring the sort of production problems experienced in the USSR and other Soviet bloc nations. …The roommates have also tried to implement a food-sharing system, with similarly poor results. The dream of equal distribution of shared goods quickly gave way to pilferage, misallocation, and hoarding. “I bought the peanut butter the first four times, and this Organic Farms shit isn’t cheap,” Eaves said. “So ever since, I’ve been keeping it in my dresser drawer. If Kirk wants to make himself a sandwich, he can run to the corner store and buy some Jif.” …The lack of funds and the resulting scarcity breeds not only discontent but also corruption. Although collectivism only works when all parties contribute to the fullest extent, Foyle hid the existence of a $245 paycheck from roommates so he would not have to pay his back rent, in essence refusing to participate in the forced voluntary taxation that is key to socialism. Even worse, Dorff, who is entrusted with bill collection and payment, recently pocketed $30, a theft he claimed was “for the heating bill” but was put toward buying drinks later that night.

If you don’t want to read the entire story from the Onionthis cartoon basically has the same message.

Here’s a cartoon mocking the common excuse that Marxist socialism only fails because the right people haven’t been in charge.

There’s nothing subtle about this next bit of satire.

Though I wonder if the Occupy Wall Street crowd would even recognize that it’s a joke rather than serious.

Reminds me of this socialism poster.

Here’s a video from Reason‘s John Stossel. It makes very serious points, but has a mocking tone that I appreciate, so I decided to include it in today’s column.

Last but not least, let’s make fun of the guy who gave Marxism its name.

I have no idea if the various factoids in this image are true, but since Marx unleashed so much evil on the world, I’m more than willing to share unfair attacks on his “good name.”

At the risk of repeating myself, communism is an utterly evil system.

If you have some good anti-communist humor, please share in the comments section.

I’ll close by wondering whether the people who mocked communism when the Soviet Union still existed played a role in winning the Cold War. Yes, I realize that sounds like a bit of stretch, but I think mockery is an under-appreciated weapon. Anti-communism humor attacked the moral foundations of the Marxist system, something that was important since there were plenty of dupes and apologists who gave aid and comfort to tyranny.

A Humorous Lesson about Socialism

Mon, 11/06/2017 - 12:14pm

I should probably be writing about the tax bill, or augmenting my series on the 100th anniversary (deathiversary?) of communism, but I can’t resist sharing some humor about socialism that appeared in my inbox this morning.

Earlier this year, I posted a column entitled, “Everything you need to know about socialism in three pictures.”

Today, we’ll look at three more images to learn about socialism.

And the first one, which I received today, is my favorite since it might actually help educate Crazy Bernie about the inherent unfairness of socialism (sort of like this yard sign).

I wonder, by the way, if the Democratic National Committee and the rest of the Democrat establishment now regrets rigging the rules in favor of Hillary? And why did they even bother when DNC Chair Debbie Wasserman Schultz couldn’t even explain the difference between a Democrat and a socialist?

But let’s stick to the topic of socialism. I shared an amusing image back in January making the point that nobody ever has to crawl under barbed wire to escape free markets. Though, as illustrated below, I sometimes wish advocates of socialism in America would stop trying to impose that awful ideology on the rest of us and just move someplace that already practices that poisonous system.

I do wonder whether a year in some hellhole such as VenezuelaNorth Korea, or Cuba would change their opinions.

Last but not least, I like this third image because it cleverly makes two points.

First, it reveals how some on the left would actually prefer equal levels of poverty rather than unequal levels of prosperity (if you think I’m exaggerating, the IMF inadvertently confirmed Thatcher’s warning by trying to justify a 30 percent reduction in national income if it meant a society would have more equal levels of misery).

Second, it wryly observes that there’s always a rich elite in socialist nations.

The moral of the story is that socialism should be mocked, both in theory and practice.

P.S. I recommend my two-part series (here and here) on the bizarre allure of socialism, though here’s all you really need if you want to understand the economics of that awful ideology.

P.P.S. I shared some pro-socialist humor last year, both because I thought it was somewhat clever but also because it gave me the opportunity to point out that voluntary sharing isn’t socialism.

100 Years of Communism, 100 Million Deaths, and Far Too Many Dupes and Apologists

Sun, 11/05/2017 - 12:07pm

To observe the tragic 100th birthday of communism, I wrote last week about Karl Marx’s legacy of death, suffering, destruction, and misery.

Along with its sister ideology of national socialism, communism was the most potent killer of the 20th century.

But what’s really disgusting is that there were people in free nations who made excuses for this evil, totalitarian ideology. I wrote last year, for instance, about the western politicians who favorably eulogized the former dictator of Cuba.

Now let’s take a look at another collection of despicable people in the western world who carried water for tyranny and overlooked the horrific death toll of communism.

The New York Times, as part of its nostalgic series about the joy of the “red century,” featured a column that romanticized an evil ideology.

The people who came to our Bronx apartment or were present at the fund-raising parties we attended, the rallies we went to, and the May Day parades we marched in were all simply progressives. At the kitchen table they drank tea, ate black bread and herring, and talked “issues.” …When these people sat down to talk, Politics sat down with them, Ideas sat down with them; above all, History sat down with them. They spoke and thought within a context that lifted them out of the nameless, faceless obscurity into which they had been born, and gave them the conviction that they had rights as well as obligations. They were not simply the disinherited of the earth, they were proletarians…the party was possessed of a moral authority that lent shape and substance, through its passion for structure and the eloquence of its rhetoric, to an urgent sense of social injustice. …the Marxist vision of world solidarity as translated by the Communist Party induced in the most ordinary of men and women a sense of one’s own humanity that ran deep, made life feel large; large and clarified. It was to this clarity of inner being that so many became not only attached, but addicted. No reward of life, no love nor fame nor wealth, could compete with the experience.

Gee, how nice that members of the Communist Part felt they were part of a mission. I imagine many Nazis experienced the same “clarity of inner being.”

To be fair, though, the column at least noted how revelations of Stalin’s brutality caused many to lose faith and abandon the Communist Party.

And I guess some of those people had an excuse. Up until the 1950s, very little was known about the horrors unleashed by communism. So I grant that some well-meaning leftists, with legitimate grievances about America’s shortcomings in areas such as race, might channel their passions in the wrong way.

But is there any excuse for modern-day communist sympathizers?

Consider the contemptible views of Tom Hayden. I would disagree with him if he was a liberal socialist, but he waded deep into the swamp of Marxist socialism.

In the 1960s, Hayden helped define and popularize Students for a Democratic Society (SDS)… Newspapers now have produced glowing and inaccurate accounts of Hayden’s life and politics. Most egregious was The New York Times, which started incorrectly by writing that he “burst out of the 1960s counterculture as a radical leader of America’s civil rights and antiwar movements.” …The worst claim in the Times’ obituary is that Hayden was a “peace activist”… He could be called a peace activist only if one views someone who supported a Communist victory in Vietnam as a proponent of “peace.” …On foreign policy, Hayden always supported America’s enemies, be it North Vietnam  or Castro’s Cuba. …he referred to the work of the AFL-CIO to fund labor unions in authoritarian and totalitarian regimes, which opposed free labor unions, as part of CIA “covert operations”…he bragged to one and all that he opposed “the secret pro cold-war element within liberalism, directly and indirectly tied to the CIA.”  In making these claims, Hayden was using the exact terminology created by the Communists and pro-Soviet fellow-travelers of the Old Left.

Here’s a truly bizarre argument from a column in Prospect.

The Bolsheviks’ attempt to create a soviet democracy was a bold leap into the future… They acted quickly to end the war, institute workers’ control, and reform land ownership… Within a year, amid counter-revolution and international intervention, the new state was engulfed in civil war, and the bases of terror and authoritarianism were being laid. That failure should be mourned, but the attempt should not. …As liberal democracy proves weak and crisis-ridden in the face of far right challengers, we could do worse than take Walter Benjamin’s “tiger’s leap into the past,” and recover this valuable tradition.

I’m a loss for words. The amorality and immorality of someone who pines for a replay of the Russian revolution is beyond comprehension.

Speaking of moral blind spots. imagine the twisted thinking that leads someone to write a book extolling communism to children?!?

Once upon a time, people yearned to be free of the misery of capitalism. How could their dreams come true? This little book…presents political theory in the simple terms of a children’s story, accompanied by illustrations of lovable little revolutionaries experiencing their political awakening. …Before they know it, readers are learning about the economic history of feudalism, class struggles in capitalism, different ideas of communism, and more. …With an epilogue that goes deeper into the theoretical issues behind the story, this book is perfect for all ages and all who desire a better world.

Wow.

For what it’s worth, I prefer the Obama version of socialism for kids.

Writing for National Review, John O’Sullivan mentions some of the morally blind people in the west, especially the awful crowd running the U.K. Labour Party.

…the West never confronted the radical evil of Communism as it confronted that of Nazism. …A recent series in the New York Times has treated Communism as — yes, you guessed it — a noble experiment conducted in less than ideal conditions. With the recent upsurge of quasi-revolutionary socialist politics in Britain, the Labour party now boasts leaders who have a relatively rosy view of the 1917 Revolution. Jeremy Corbyn’s senior aide, Seamus Milne, is on record as giving a low estimate that the USSR executed 799,455 people and going on to conclude: “For all its brutalities and failures, Communism in the Soviet Union, eastern Europe and elsewhere delivered rapid industrialization, mass education, job security and huge advances in social and gender equality.”

Douglas Murray expands on this theme in another article for National Review.

…the celebrated historian Eric Hobsbawm, who remained in the Communist Party even after the invasions of Hungary and Czechoslovakia and earned his place in infamy in 1994 by saying in an interview that, yes, if another 20 million deaths had been necessary to achieve the socialist utopia of his dreams, then 20 million deaths would have been fine by him. …It is over the genocide in Cambodia that America’s most cited public intellectual, Noam Chomsky, retains some notoriety. As reports of Pol Pot’s genocide emerged, Chomsky was one of those who wished to ignore the reporters accurately describing what was happening. …in Britain, Diane Abbott, a prominent Labour backbencher in Parliament…said in passing that “on balance Mao did more good than harm.” …shadow chancellor, John McDonnell, stood at the dispatch box in the House of Commons and waved a copy of Mao’s “Red Book” to give the Conservatives some lessons in economics.

Last but not least, consider the reprehensible decision of a senior minister from the Greek government.

A decision by Justice Minister Stavros Kontonis to turn down an invitation to participate in an international conference on crimes committed by communist regimes.

Understandably, an Estonia minister had a very strong response to the vapid preening of his Greek counterpart.

Let’s also not forget the morally bankrupt apologists for the quasi-Marxist Venezuelan dictatorship.

And I suppose Crazy Bernie deserves a mention as well.

I’ll close by observing that it should be the role of all decent people to condemn all forms of totalitarianism. Frankly, I’m not interested in the debate over whether communism was worse than Nazism, or vice-versa.

Why can’t we simply agree that both were awful and that those who make excuses for either should be shunned by all decent people?

Drugs, Prohibition, and Taxation

Sat, 11/04/2017 - 12:46pm

My view on the Drug War is somewhat schizophrenic. In my personal life, I’m basically a social conservative. I don’t like drugs, I’ve never tried drugs, and I urge others to behave the same way.

But I know that prohibition is a costly failure that leads to abusive government (such as intrusive money-laundering laws and Orwellian asset-forfeiture laws).

And even if one doesn’t care about individual rights, the Drug War is an irrational misallocation of law enforcement resources.

So does this make a libertarian on the issue? The answer is yes, of course, but I confess that legalization has a downside. And I’m not talking about more people wrecking their lives with drug abuse (indeed, evidence from Portugal suggests drug use may go down).

Instead, I don’t like the fact that politicians see legalization mostly as an opportunity to generate additional tax revenue.

My fears have materialized. sort of.

According to a CNN report, politicians in California want to be the biggest profiteers from legal pot.

Between customers, retailers and growers, taxes on cannabis may reach as high as 45% in parts of the state, according to a Fitch Ratings report. …Consumers will pay a sales tax ranging from 22.25% to 24.25%, which includes the state excise tax of 15%, and additional state and local sales taxes ranging from 7.25% to 9.25%. Local businesses will have to pay a tax ranging from 1% to 20% of gross receipts, or $1 to $50 per square foot of marijuana plants, according to the Fitch report. In addition, farmers will be taxed $9.25 per ounce for flower, and $2.75 per ounce for leaves. …Van Bustic, a specialist in the environmental impact of cannabis cultivation for Berkeley’s College of Natural Resources, said that registering with the state and becoming compliant will cost about $100,000.

Geesh, greedy governments can take the fun out of anything!

But not so fast. It seems that politicians are being so greedy that the geese with the golden eggs (or, in this case, drug-addled geese with golden buds) will stay in the shadow economy.

Not that we should be surprised. There is a wealth of evidence showing that high tax burdens lead to evasion and avoidance.

The Wall Street Journal looks at this issue and hits the nail on the head, editorializing that high tax rates on pot are a recipe for non-compliance.

…in California, where recreational pot was legalized last year, citizens now have a much clearer view of the unintended consequences that come from high tax rates. A new report from the global credit-rating firm Fitch Ratings highlights the effect of California’s high taxes on the marijuana market. The combined local and state rate on non-medical cannabis may be as high as 45% in some places, and Fitch says this acts as an incentive for Californians to shun legal pot dealers who pay the tax in favor of black-market sellers who don’t and can charge lower prices. …The irony is that one argument for legalizing pot has been to reduce illegal trafficking. But by imposing taxes that are too high on legal weed, politicians give pot heads an incentive to go back on the illegal market. This will come as no surprise to anyone who has followed the boon to illegal smokes from high cigarette taxes in places like New York City.

The CNN story cited above also addressed this issue.

Among the eight states where recreational marijuana is legal, only Washington has a higher tax rate at about 50%. Colorado and Nevada both follow with rates of 36%. Oregon has a tax rate of 20% and Alaska has a rate of up to 20%. …If taxes increase the price of cannabis beyond a certain point, the legal market becomes less competitive than the illicit market and then consumers become less likely to make the transition from the illicit market to the legal market,” said John Kagia, analyst for New Frontier Data, which tracks the cannabis industry. The Fitch report says this dynamic has already prompted Colorado, Washington and Oregon to lower their “initially uncompetitive” tax rates.

Indeed. I wrote about Colorado’s experience with pot taxation back in 2015.

story in the Washington Post confirms that the buzzed version of supply-side economics is alive and well.

High taxes on legal marijuana in California could have the potential to turn many consumers away from the state’s cannabis shops and toward the black market, according to a report from Fitch Ratings. …“The existing black market for cannabis may prove a formidable competitor to legal markets if new taxes lead to higher prices than available from illicit sources,” the report says. …These high tax rates have the potential to drive customers toward the black market. …Colorado, Oregon and Washington all reduced tax rates after the commencement of legalization to shift customers back toward the legal market.

That last sentence warms my heart. Isn’t it nice when politicians are forced to lower tax burdens even when they don’t want to?

P.S. Government is a buzz-kill in other ways. Deregulation helped unleash the craft beer industry, but also created a new source of tax revenue.

P.P.S. Since I’m a fiscal wonk, legalizing drugs has never been high (no pun intended) on my list of priorities. But when U.N. bureaucrats try to tell American states that they’re not allowed to end prohibition, I’m almost tempted to become a user.

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