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The International Monetary Fund’s Recipe for Continued Poverty in the Developing World

Sun, 10/22/2017 - 12:03pm

The cossetted bureaucrats at the International Monetary Fund are on a roll. In the past few months, they’ve published reports pushing a very misguided and statist agenda.

  • In June, I wrote about the IMF pushing a theory that higher taxes would improve growth in the developing world.
  • In July, I wrote about the IMF complaining that tax competition between nations is resulting in lower corporate tax rates.
  • In October, I wrote about the IMF asserting that lower living standards are desirable if everyone is more equally poor.

Now let’s add to that awful collection.

new IMF report tries to quantify the fiscal implications of a new agenda for so-called sustainable development from the United Nations.

The Sustainable Development Goals (SDGs) launched in September 2015 establish ambitious objectives to end poverty, protect the planet, and ensure prosperity for all by 2030… From inception, it was clear this ambition would have to be accompanied by significant efforts to boost the financing resources available to developing countries.

By the way, “financing resources” is basically bureaucrat-speak for more revenue to finance bigger government.

But not just bigger government. We’re talking huge amounts of money and much, much bigger government.

…the numbers are likely to be very large. For example, Schmidt-Traub (2015) estimated that the average annual investment increase required in low-income countries (LICs) to attain these goals could reach up to $400 billion (or 50 percent of their GDP).

The article speculates that private investors and foreign aid will cover some of this cost, but the focus is on the degree to which poor nations independently have the capacity to expand the burden of government spending.

…the heavy burden imposed on the public sector cannot be overstated…requires assessing the fiscal space in LICs. … fiscal space captures the ability of a government to raise spending… The purpose of this paper is to develop a new metric of fiscal space in LICs.

The good news, from the IMF’s warped perspective, is that there’s lots of leeway to expand government in these countries, presumably enabled by big tax increases. The bad news is that there’s not enough “fiscal space” to finance the desired expansion of government.

…the fiscal space available in LICs may be in the double digits but, not surprisingly, it will be insufficient to undertake the spending needed to achieve the SDGs.

For those that care, here are some specific results.

…fiscal space in LICs is estimated to be in the double digits, with the median value reaching up to 16 percent of GDP for the full sample.

And here is a chart showing the estimates of fiscal space for resource-dependent poor countries are regular poor countries, based on various conditions.

And here’s another chart showing the potential “fiscal space” in low-income countries.

 

Though keep in mind that even very big increases in government would not produce the large public sectors envisioned by UN bureaucrats.

…the fiscal space available in LICs is dwarfed by the incremental annual spending needs that must be financed by the public sector to achieve the SDGs—estimated at around 30 percent of GDP.

Now that I’ve shared the IMF’s analysis, let me explain why it is anti-empirical nonsense.

Simply stated, the bureaucrats want us to reflexively assume that bigger government is the way to achieve the “sustainable development goals.” Yet the only sure-fire method of achieving those goals is to become a high-income nation. Those are the places, after all, that have achieved low poverty, clean environments, equal rights, and other desirable features that are part of the UN’s goals.

That being said, the world’s successful western countries all became rich when government was very small. Indeed, there was almost no redistribution spending in the western world as late as 1930. Yes, those nations generally adopted expensive and debilitating welfare states once they became rich, thus producing less growth and fiscal problems, but at least they they first achieved prosperity with lengthy periods of free markets and small government.

Moreover, there’s not a single example of a country that adopted big government and then became rich (and therefore capable of achieving the UN’s goals). So the notion that higher taxes and bigger governments can produce better outcomes for poor nations is utter bunk.

These issues were addressed in a recent CF&P video.

And I suppose I should link to my video on the recipe for growth and prosperity.

The bottom line is that the IMF has come up with analysis that – if followed – will ensure continued poverty and misery in the developing world. With that in mind, I think I was being too nice when I referred to that bureaucracy as the Dr. Kevorkian of global economic policy.

P.S. I don’t want anyone to conclude the IMF is biased against poor countries. They also push for higher taxes and bigger government in rich countries.

P.P.S. While they are infamous for urging higher taxes all around the world, IMF bureaucrats don’t have to suffer the consequences since they receive very lavish tax-free salaries. What a reprehensible scam.

Republicans Must Stand Firm On Ending State And Local Deduction

Sun, 10/22/2017 - 2:15am

Originally published by The Daily Caller on October 20, 2017.

No one thought tax reform would be easy. It was to be expected that as soon as a plan with any level of detail was announced, the special interests would line up to ensure that their carveouts were preserved. Since simplifying the tax code and eliminating loopholes are key objectives of reform, tax writers need to resist this pressure if there is any hope at all for a plan to make it through Congress. How they handle the misguided effort to preserve the state and local tax (SALT) deduction will likely demonstrate whether sufficient political courage exists to make tax reform a success.

To satisfy the requirements of budgetary rules, Congress needs to close enough loopholes (“base broadening” in Washington-speak) to at least partially offset proposed rate cuts. Without these offsets it will be impossible to pass tax reform through reconciliation, the process that will allow the Senate to bypass a certain Democratic filibuster and pass a tax reform package with just 50 votes (presuming support from V.P. Pence as the tie-breaker).

But it’s not just about the numbers. It is long past time to simplify the tax code. Not only does its excessive complexity impose high compliance costs on taxpayers, but the perception of widespread gaming of the system erodes public confidence in democratic political processes.

As the name implies, the SALT deduction allows some filers to reduce their federally taxable income based on taxes paid to their state or local governments. It benefits primarily wealthy taxpayers in high-tax states such as California, New York, and Illinois.

Aside from its narrow benefit to a select group of high-income taxpayers, what makes the deduction particularly troublesome is its perverse incentives.

State governments are partially kept in check by the ability of taxpayers to move to other states should tax burdens become excessive. Therefore, we see migration from high-tax states like California and New York to those with more reasonable tax burdens like Florida and Nevada. This tax competition partially combats the endless desire of politicians to tax and spend.

The SALT deduction undermines tax competition by effectively exporting part of their tax burden onto other parts of the country, which explains why over 100 state legislators from 34 states signed a letter calling for its elimination. The result is that states tax and spend more than they otherwise would.

Ending a distortionary loophole that encourages excessive growth of government and overwhelmingly benefits the wealthy is both good policy and good politics, which is why the wavering of some Republicans on the issue is incredibly distressing.

States with the most taxpayers who benefit from SALT are primarily run by Democrats. And they like its incentives to grow government. It’s thus little surprise that they oppose the change.

It should be easy for Republicans to hammer Democrats as hypocrites given their usual reliance on tax warfare to oppose all attempts at fixing the tax code or providing much-needed relief to taxpayers. But with the SALT deduction, they are fighting to preserve a benefit for the wealthiest just so that blue states can continue to overtax.

Unfortunately, some Republicans find it impossible to get out of their own way. Rather than embrace an easy opportunity to do the right thing, Republican representatives from blue states are siding with Democrats to preserve the SALT deduction. While this might seem the politically prudent choice given their constituencies, by threatening the viability of tax reform they are serving only the interests of opposition Democrats.

There’s really no excuse for Republicans to let this issue divide them. For the relatively fewer low- and middle-income earners who itemize and make use of the deduction, the rest of the tax reform plan with its lower rates will more than make up for losing it. For the wealthiest, it’s high time that they bear the full cost for choosing to live in high-tax states and voting for politicians who do nothing but tax and spend. If Republicans can’t even agree on that then there’s little hope for closing any other loopholes, leaving their “tax reform” largely absent of any real reforms.

Robin Hood Was the Original Tea Party Activist

Sat, 10/21/2017 - 12:02pm

One of my pet peeves is when people characterize Robin Hood as some sort of left-wing redistributionist. As I’ve explained, that’s utter nonsense.

If you read the book or watch the movie starring Errol Flynn, Prince John and the Sheriff of Nottingham were the bad guys because they over-taxed the peasants. Robin Hood was the good guy because he rescued the money from the tax collectors and returned it to the people who earned it.

Kudos to Ted Cruz, who tried to educate (a poorly informed) Bernie Sanders on this topic.

Cruz accidentally promoted Prince John to King John (or is my aging memory betraying me and did Prince John declare himself King at some point?), but he’s 100 percent correct on the fundamental point.

And now I’m wondering which modern leftists should play the roles of the bad guys from Robin Hood if there’s a remake of the movie. Perhaps Obama should be Prince John, which might be a better fit than the other movie roles people have imagined for our former president.

And the Sheriff of Nottingham obviously could be played by our corrupt IRS Commissioner. He would be a natural for the role.

But let’s not get too distracted. The focus today is on whether Robin Hood belongs to Occupy Wall Street or the Tea Party. This image reinforces the point that the latter is a better fit.

Just in case the message isn’t clear, here’s a nice clip from the cartoon version of Robin Hood.

I’m delighted that children actually were exposed to this message. I suggest sharing this clip widely with your kids, grandkids, nieces, nephew, etc, etc.

For what it’s worth, I also tried to correct the record about Robin Hood in a TV interview back in 2012.

P.S. Leftists aren’t the only people to mischaracterize Robin Hood, as I noted when discussing an otherwise-solid column by Cal Thomas.

P.P.S. Since Cal Thomas mentioned Robin Hood as part of a column explaining that Jesus wasn’t a socialist, I can’t resist showing Libertarian Jesus, who dispenses wisdom here and here.

Premiums are Skyrocketing Under Obamacare – Now Brace for Rationing Under Massachusetts Medicaid Waiver Request

Fri, 10/20/2017 - 12:36pm

Originally published by Townhall.com on October 19, 2017.

 

The U.S. healthcare system may have its problems, but one it does not face — unlike many other countries with government-run programs celebrated by liberals — is widespread government rationing.

It’s one of the most chilling aspects of centralizing the economy: that an unelected bureaucrat can decide whether you are permitted to use a potentially life-saving medicine.

Every month in the UK, hundreds of thousands of people enter their 18th month of waiting for surgery. Academics researching the problem in Canada estimated that tens of thousands of Canadian women have died because of waiting times under their system. In those and many other countries, there are few options for healthcare access outside the rationed care the government provides.

And because governments jealously guard their power, even going around them to receive treatment is often prohibited. We saw that in the infuriating case of the UK’s Charlie Gard, whose parents were denied the right to bring their terminally ill baby to the US for an experimental treatment even though they had raised the necessary funds themselves.

America is, unfortunately, heading down the same path. Obamacare is slowly imploding with double or even triple-digit premium increases year over year, and now news comes from Massachusetts that “Romneycare,” the original Obamacare blueprint, is hoping to begin denying its citizens access to medicine in hopes of saving money.

In the past several days, Massachusetts officials initiated the formal process to limit which drugs are covered under its state Medicaid program. In justifying the decision to ration medicine, state officials cited the exploding costs of their program. “Since 2010, MassHealth drug spending has risen at a compound annual growth rate of 13 percent. If growth in drug costs continues at the current trajectory, it may crowd out important spending on health care and other critical programs,” Marylou Sudders, Massachusetts secretary of Health and Human Services, wrote in a Sept. 8 letter.

Although the prospect of government-controlled access to medicine is alarming, it’s doubly frustrating when you consider that rationing is an inevitably, irrevocably doomed strategy to reduce costs, and that government is largely responsible for the problem in the first place.

Prices provide fundamental information about market conditions. When they rise, it attracts new providers to enter a market and increase supply to meet rising demand. Unfortunately, prices in the drug market are heavily distorted by government barriers, like the high cost of bringing new drugs to the market, and the widespread use of third-party payers (Medicare, Medicaid, and private insurance) that insulates patients from the cost of drugs at the point of purchase and thus the need to shop around for the best priced alternative.

There’s little wonder that drug prices are seen as high in such an environment. But price controls attack the symptoms rather than the disease and end up only exacerbating the problem and creating shortages when prices no longer reflect market reality.

Rationing will, at best, temporarily slow the government’s exploding health care costs. But it can be guaranteed to produce one major change: the further politicization of the health care system.

Proponents justify the MassHealth change by comparing it to the behavior of private insurers. Never mind that part of the problem is over-reliance on insurance and other third-party payers, governments simply do not operate the same as for-profit entities. Decisions made through political processes inevitably become political. The result will be drug lists determined by which manufacturers hire the best lobbyists, or coverage based on what’s politically popular.

Democrats are seizing on Obamacare’s failures and skyrocketing premiums to demand single-payer, just as many predicted they would. It proves once again the truth of “Mitchell’s Law” that bad government policy begets more bad government policy. Rather than undoing the interference that has so distorted the drug market and left prices spiraling out of control, politicians intend to pile on. Rationing is hitting Romneycare now — Obamacare is next.

Ranking Presidents on Economic Policy: The Impressive Record of Ronald Reagan

Fri, 10/20/2017 - 12:08pm

Back in 2013, I put together a visual showing the good and bad policies that were enacted during the Clinton years. The big takeaway was that the overall burden of government was substantially reduced during his years in office.

Two days ago, I did the same thing for Richard Nixon, but noted that his record was universally awful. I couldn’t think of a single pro-growth policy when he was in the Oval Office.

Now let’s look at the Ronald Reagan. I analyzed his record last year, but mostly looking at the aggregate results.

So let’s look at the details, putting specific pro-growth policies in one column and specific anti-growth policies in another column. As you can see, there was a substantial net improvement during the Reagan years.

I gave extra credit for his tax cuts, the spending restraint, and the taming of inflation.

 

On the negative side of the ledger, Reagan did approve some post-1981 tax hikes, imposed some protectionism, and also supported Medicare expansion, so he certainly wasn’t perfect.

I also was tempted to give Reagan some credit for NAFTA and the WTO since those initiatives got their start during his presidency, but that would break my rule of only counting policies that were implemented while a president was in office.

The bottom line is that Reagan was a net plus for economic liberty. And if you count the collapse of the Soviet Empire, he was a net plus for global liberty.

Let’s close by discussing Henry Olsen’s new book on Ronald Reagan. Henry tried to make the case that Reagan was sort of a New Deal Democrat rather than a libertarian-ish ideologue. Writing for the Claremont Review of Books, Steven Hayward obviously is a fan of the book but is not entirely sympathetic to Henry’s hypothesis.

You should read Steven’s entire review, and also get Henry’s book and read it as well. I’ll simply cite two passages from the review for the simple reason that they match my beliefs (shocking, huh?). First, Reagan (quite correctly) was not a big fan of the New Deal.

Reagan’s long-time economic adviser Martin Anderson once told me that despite Reagan’s general kind words for FDR and the New Deal, he could not recall Reagan ever endorsing a specific New Deal policy… But if anyone wants to see Reagan as the heir of the New Deal, he has to get past one of Reagan’s most famous critiques of it—his 1976 remark that “Fascism was really the basis for the New Deal.” …Reagan, to his campaign managers’ consternation, stoutly defended his comments. In August 1980 Reagan told dumbfounded reporters: “Anyone who wants to look at the writings of the Brain Trust of the New Deal will find that President Roosevelt’s advisers admired the fascist system. . .  They thought that private ownership with government management and control a la the Italian system was the way to go, and that has been evident in all their writings.”

And he also opposed Washington-based income redistribution (another sensible view).

When Reagan opposed Nixon’s guaranteed annual income proposal, the Family Assistance Plan, in 1969 and 1970—the only governor in the country to do so—he said in a TV debate that “I believe that the government is supposed to promote the general welfare; I don’t think it is supposed to provide it.” If welfare was centralized in Washington, Reagan knew, reform would be all but impossible and there would be a bias toward increased spending in the future. …“If there is one area of social policy,” Reagan began to say in his standard stump speech, “that should be at the most local level of government possible, it is welfare. It should not be nationalized—it should be localized.” …In another 1982 speech to the NAACP (amidst a fierce recession), Reagan argued that the Great Society had done more harm than good for black Americans. Liberals howled with indignation about both of these heresies.

Amen.

I’m not a Reagan historian like Olson or Hayward, so I’ll wrap up this conversation with one small observation. Reagan was not as libertarian as I would like. I came to DC near the beginning of his second term and I remember feeling disappointed at the time that more progress could be made. I’ve now learned much more about the very weak records of other senior Republican and I now realize his accomplishment were large and meaningful.

It wasn’t just what he achieved. He also changed the “Overton Window,” meaning that he substantially expanded the acceptability of ideas about free markets and limited government. Prior to the Gipper’s tenure, Republicans rarely challenged the welfare state. They basically accepted the New Deal and Great Society. Reagan didn’t have much success unraveling welfare state programs, but he showed that such programs could be criticized and big-picture ideas about reform were not politically toxic.

P.S. Let’s also not forget that Reagan opposed the value-added tax. The rejection of a bad policy doesn’t belong on the above list, but it’s a notable piece of evidence about Reagan’s economic wisdom.

P.P.S. Reagan also showed that good policy can be good politics.

More Honesty from the Left: The Goal Is Big Tax Increases for the Middle Class

Thu, 10/19/2017 - 12:56pm

I’ve written several times that the left wants big tax hikes on poor and middle-class taxpayers. Simply stated, that’s the only way they can finance a European-sized welfare state.

Some of them even admit they want to pillage ordinary taxpayers.

Now we have another addition to our list. Writing in today’s Washington Post, two law professors from UCLA openly argue in favor of tightening the belts of average Americans to enable a bigger federal government.

…we need more tax revenue from the middle class, not less.

They start by complaining that middle-income taxpayers have benefited from big tax cuts over the past 35 years.

Middle-class tax burdens are at historic lows. The Congressional Budget Office reported in 2016 that the average federal income tax rate for the middle class — here meaning the middle 60 percent of the income distribution — declined from 7.8 percent in 1979 to 3.4 percent in 2013. Focusing on all federal taxes (not just income taxes), the average tax rate dropped from 19.2 to 13.8 percent over the same period. With these lower tax rates, the share of taxes paid by the middle class has also declined. The middle class paid 35 percent of income taxes in 1979 but only 16 percent in 2013, while its share of all federal taxes fell from 43 to 30 percent.

As far as I’m concerned, this is good news, not something to bemoan. Indeed, my goal is to have similar reductions in tax burdens for all taxpayers.

But the authors raise a very valid point. We will have giant tax increases in the future and people at all income levels will be adversely impacted. Though there is one way of avoiding that grim European future.

Unless Congress is willing to dramatically cut major entitlement programs.

Incidentally, we don’t need to “dramatically cut” those programs. The authors are relying on dishonest Washington budget math.

In reality, the problem is solved and tax increases are averted so long as reforms are adopted to ensure that entitlement programs no longer grow faster than the private sector.

But that’s not what the authors want. They actually look forward to big tax increases.

What the middle class needs is not meager tax cuts but a muscular commitment to robust public institutions designed to benefit middle-income individuals. The higher taxes could come from our current income tax (from tax increases on the middle class and the wealthy) or a broad-based consumption tax (such as a VAT or carbon tax).

I’m greatly amused by the language they use. They want readers to believe that bloated European-style welfare states are “robust public institutions” and that politicians grabbing more money to buy more votes is a way of showing “muscular commitment.”

I’m also not surprised that they embraced a carbon tax or value-added tax.

By the way, the column compares the United States with other industrialized nations. Simply stated, we win (at least from my perspective).

Data from the Organization for Economic Cooperation and Development reveal that American families with children face substantially lower average income-tax rates (in some cases, less than half) than similar families in other developed countries. And this is before factoring in consumption taxes, which represent a large share of middle-class tax burdens in most countries, but not in the United States.

Those are remarkable numbers. Income taxes grab a much bigger share of family income in Europe. And then governments take an even bigger slice thanks to onerous value-added taxes.

The authors would argue that Europeans get “robust public institutions” in exchange for all that money, but what they really get is less growth and lower living standards.

Indeed, it’s worth noting that the richest European nations are on the same level(or below) the poorest American states.

That’s not exactly a ringing endorsement for higher tax burdens.

The bottom line is that left-wing politicians usually pontificate about raising taxes on the rich, but the truly honest folks on the left openly admit that the real targets are lower-income and middle-class households.

Ranking Presidents on Economic Policy: The Awful Record of Richard Nixon

Wed, 10/18/2017 - 12:50pm

A few days ago, using several methodologies, I calculated how fast government spending increased during the presidencies of Lyndon Johnson, Richard Nixon, Jimmy Carter, Ronald Reagan, George H.W. Bush, Bill Clinton, George W. Bush, and Barack Obama.

One of my big takeaways was that Republican presidents – with the exception of Reagan – allowed the burden of government spending to increase far too rapidly. Oftentimes faster than budgets grew under Democratic presidents.

That column generated a lot of feedback. And whether the responses were positive or negative, a common theme was that presidents shouldn’t be judged solely based on the growth of federal spending – both because Congress plays a big role and because there are many other policies that also matter when assessing economic policy.

I fully agree, and I explicitly noted that the relatively good spending numbers during the Obama years were because of policies – sequestrationshutdowns, etc – he opposed.

And I also concur that other policies matter. That’s one of the reasons I’m always highlighting Economic Freedom of the World. Yes, fiscal policy is one of the variables, but monetary policy, trade policy, regulatory policy, and the rule of law are equally important.

Indeed, I did an overall assessment of Bill Clinton a few years ago, comparing the pro-growth policies that were adopted during his tenure with the anti-growth policies that were implemented.

The bottom line is that economic liberty increased during his presidency. Significantly. Others can debate about whether he deserves full credit, partial credit, or no credit, but what matters to me is that the overall burden of government shrank. And that was good for America.

It’s time to do an overall assessment of economic policy for other presidents. And we’ll start with one of America’s worst presidents, Richard Nixon.

He’s mostly infamous for Watergate, which led to his resignation, but he also should be scorned because every single major economic policy of his presidency expanded the size, scope, and power of the federal government. Here’s the list, with a couple of the items getting larger bars because the policies were so misguided.

Is it true that there were no good economic policies under Richard Nixon? I asked Art Laffer, who worked at the Office of Management and Budget at the time, whether there were any pro-market reforms during the Nixon years.

He mentioned that the top tax rate on labor and small business income was reduced from 70 percent to 50 percent as part of the Tax Reform Act of 1969. I would have included that law in the pro-growth column, except that was the legislation that also created the alternative minimum tax (for both households and corporations). And there was an increases in the tax burden on capital gains, as well as a more onerous tax regime for new investment. My assessment is that these bad provisions basically offset the lower tax rate.

For what it’s worth, Nixon also proposed a value-added tax, which is yet another piece of evidence that he was a terrible statist. But I only include policies that were enacted rather than merely proposed (if I did include proposed policies, Bill Clinton would take a hit for Hillarycare).

Australia, Donald Trump, and Limited Government

Tue, 10/17/2017 - 12:49pm

I gave a couple of speeches about fiscal policy in Australia late last week.

During the Q&A sessions (as so often happens when I speak overseas), the audiences mostly asked questions about Donald Trump. I generally give a three-part response.

So when I was asked to appear on Australian television, you won’t be surprised to learn that I was asked several questions about Trump.

But the good news is that the segment lasted for more than 18 minutes so I got a chance to pontificate about taxes and spending.

In particular, I had an opportunity to explain two very important principles of fiscal policy.

First, I explained the Rahn Curve and discussed why both Australia and the United States should worry that the public sector is too large. This means less growth in our respective nations because government spending (whether financed by taxes or borrowing) diverts resources from the productive sector of the economy.

Second, I explained the Laffer Curve and tried to get across why high tax rates are a bad idea (even if they raise more revenue). As always, my top goal was to explain that a nation should not seek to be at the revenue-maximizing point.

I also had an opportunity to take some potshots at international bureaucracies such as the IMF and OECD. Yes, we get good statistics from such organizations and even some occasional good research, but they have a statist policy agenda that undermines global growth. And I never cease to be offended that bureaucrats at these organizations get tax-free salaries, yet get to jet around the world urging higher taxes on the rest of us.

Mirror, Mirror, on the Wall, Obama Definitely Was Not the Biggest Spender of All

Mon, 10/16/2017 - 12:15pm

I’ve learned that it’s more important to pay attention to hard numbers rather than political rhetoric. Republicans, for instance, love to beat their chests about spending restraint, but I never believe them without first checking the numbers. Likewise, Democrats have a reputation as big spenders, but we occasionally get some surprising results when they’re in charge.

President Obama was especially hard to categorize. Republicans automatically assume he was profligate because he started his tenure with a Keynesian spending binge and the Obamacare entitlement. But after a few years in office, some were arguing he was the most frugal president of modern times.

Or, to be more accurate, what I basically discovered is that debt limit fightssequestration, and government shutdowns were actually very effective. Indeed, the United States enjoyed a de facto spending freeze between 2009 and 2014, leading to the biggest five-year reduction in the burden of federal spending since the end of World War II. And it’s unclear that Obama deserves any of the credit since he was on the wrong side of those battles.

Anyhow, I’ve decided to update the numbers now that we have 8 years of data for Obama’s two terms.

But first, a brief digression on methodology: All the numbers you’re about to see have been adjusted for inflation, so these are apples-to-apples comparisons. Moreover, all my calculations are designed to show average annual increases. I also made sure that the “stimulus” spending that took place in the 2009 fiscal year was included in Obama’s totals, even though that fiscal year began (on October 1, 2008) while Bush was President.

We’ll start with a look at total outlays. On this basis, Obama is actually the most conservative President since World War II. And Bill Clinton is in second place.

But total outlays doesn’t really capture a President’s track record because interest payments are included, which effectively means they get blamed for all the debt run up by their predecessors.

So if we remove payments for net interest, we get a measure of what is called primary spending (total outlays minus net interest). As you can see, Obama is still in first place and Reagan jumps up to second place.

I would argue that one other major adjustment is needed to make the numbers more accurate.

There have been two major financial bailouts in the past 30 years, the savings & loan bailout in the late 1980s and the TARP bailout at the end of last decade. Those bailouts created big one-time expenses, followed by an influx of money (from asset sales and repaid loans) that actually gets counted as negative spending.

Those bailouts added a big chunk of one-time spending at the end of the Reagan years and at the end of the George W. Bush years, while then producing negative outlays during the early years of the George H.W. Bush Administration and Obama Administration.

So if we take out the one-time effects of those two bailouts (which I categorize as “non-TARP” for reasons of brevity), we get a new ranking.

Reagan is now in first place, followed by Clinton and Obama.

By the way, Lydon Johnson has been in last place regardless of how the numbers are calculated, and George W. Bush has had the second-worst numbers.

For all intents and purposes, the above numbers are how a libertarian would rank the various Presidents since both domestic spending and military spending are part of the calculations.

So let’s close by looking at how a conservative would rank the presidents, which is a simple exercise because all that’s required is to remove military spending. Here are the numbers showing the average inflation-adjusted increase in overall domestic outlays for various Presidents (still excluding the one-time bailouts, of course).

By this measure, Reagan easily is in first place. Though it’s worth noting that three Democrats occupy the next positions (though Obama’s numbers are no longer impressive), while Republicans (along with LBJ) get the worst scores.

The bottom line is that Reaganomics was a comparative success. But should we also conclude that Obama was a fiscal conservative?

I don’t think he deserves credit, but I won’t add anything to what I wrote above. Instead, I’ll simply note that Brian Riedl of the Manhattan Institute has a good analysis of Obama’s fiscal record. Here’s his conclusion.

It is important to recognize that Obama did not stop trying to expand government after 2010. The president’s eight annual budget requests gradually upped their 10-year revenue demands from $1.3 trillion to $3.4 trillion, while proposing an average of $1.0 trillion in new program spending over the next decade. His play, in short, was to gradually trim the budget deficit by chasing large spending increases with even larger tax increases. The Republican Congress stopped him. My assessment: Obama’s most important fiscal legacy was a sin of omission. Despite promising to confront Social Security and Medicare’s unsustainable deficits, the president refused to endorse any plan that would come close to achieving solvency. This surrendered eight crucial years of baby-boomer retirements while costs accelerated. With baby boomers retiring and a national debt projected to exceed $90 trillion within 30 years, this was no small surrender.

In other words, the relatively good short-run numbers were in spite of Obama. And the long-run numbers were bad – and still are bad – because he chose to let the entitlement problem fester. But he was still better (less worse) than Bush IBush II, and Nixon.

New Jersey’s Continuing Fiscal Decays

Sun, 10/15/2017 - 12:00pm

When companies want to boost sales, they sometimes tinker with products and then advertise them as “new and improved.”

In the case of governments, though, I suspect “new” is not “improved.”

The British territory of Jersey, for instance, has a very good tax system. It has a low-rate flat tax and it overtly brags about how its system is much better than the one imposed by London.

In the United States, by contrast, the state of New Jersey has a well-deserved reputation for bad fiscal policy. To be blunt, it’s not a good place to live and it’s even a bad place to die.

And it’s about to get worse. A column in the Wall Street Journal warns that New Jersey is poised to take a big step in the wrong direction. The authors start by observing that the state is already in bad shape.

…painless solutions to New Jersey’s fiscal challenges don’t exist. …a massive structural deficit lurks… New Jersey’s property taxes, already the highest in the nation, are being driven up further by the state’s pension burden and escalating health-care costs for government workers.

In other words, interest groups (especially overpaid bureaucrats) control the political process and they are pressuring politicians to divert even more money from the state’s beleaguered private sector.

…politicians seem to think New Jersey can tax its way to budgetary stability. At a debate this week in Newark, the Democratic gubernatorial nominee, Phil Murphy, pledged to spend more on education and to “fully fund our pension obligations.” …But just taxing more would risk making New Jersey’s fiscal woes even worse. …New Jersey is grasping at the same straws. During the current fiscal year, the state’s pension contribution is $2.5 billion, only about half the amount actuarially recommended. The so-called millionaire’s tax, a proposal Gov. Chris Christie has vetoed several times since taking office in 2010, will no doubt make a comeback if Mr. Murphy is elected. Yet it would bring in only an estimated $600 million a year.

The column warns that New Jersey may wind up repeating Connecticut’s mistakes.

Going down that path, however, is a recipe for a loss of high-value taxpayers and businesses.

Let’s look at a remarkable story from the New York Times. Published last year, it offers a very tangible example of how the state’s budgetary status will further deteriorate if big tax hikes drive away more successful taxpayers.

One man can move out of New Jersey and put the entire state budget at risk. Other states are facing similar situations…during a routine review of New Jersey’s finances, one could sense the alarm. The state’s wealthiest resident had reportedly “shifted his personal and business domicile

to another state,” Frank W. Haines III, New Jersey’s legislative budget and finance officer, told a State Senate committee. If the news were true, New Jersey would lose so much in tax revenue that “we may be facing an unusual degree of income tax forecast risk,” Mr. Haines said.

Here are some of the details.

…hedge-fund billionaire David Tepper…declared himself a resident of Florida after living for over 20 years in New Jersey. He later moved the official headquarters of his hedge fund, Appaloosa Management, to Miami. New Jersey won’t say exactly how much Mr. Tepper paid in taxes. …Tax experts say his move to Florida could cost New Jersey — which has a top tax rate of 8.97 percent — hundreds of millions of dollars in lost payments. …several New Jersey lawmakers cited his relocation as proof that the state’s tax rates, up from 6.37 percent in 1996, are chasing away the rich. Florida has no personal income tax.

By the way, Tepper isn’t alone. Billions of dollars of wealth have already left New Jersey because of bad tax policy. Yet politicians in Trenton blindly want to make the state even less attractive.

At the risk of asking an obvious question, how can they not realize that this will accelerate the migration of high-value taxpayers to states with better policy?

New Jersey isn’t alone in committing slow-motion suicide. I already mentioned Connecticut and you can add states such as California and Illinois to the list.

What’s remarkable is that these states are punishing the very taxpayers that are critical to state finances.

…states with the highest tax rates on the rich are growing increasingly dependent on a smaller group of superearners for tax revenue. In New York, California, Connecticut, Maryland and New Jersey, the top 1 percent pay a third or more of total income taxes. Now a handful of billionaires or even a single individual like Mr. Tepper can have a noticeable impact on state revenues and budgets. …Some academic research shows that high taxes are chasing the rich to lower-tax states, and anecdotes of tax-fleeing billionaires abound. …In California, 5,745 taxpayers earning $5 million or more generated more than $10 billion of income taxes in 2013, or about 19 percent of the state’s total, according to state officials. “Any state that depends on income taxes is going to get sick whenever one of these guys gets a cold,” Mr. Sullivan said.

The federal government does the same thing, of course, but it has more leeway to impose bad policy because it’s more challenging to move out of the country than to move across state borders.

New Jersey, however, can’t set up guard towers and barbed wire fences at the border, so it will feel the effect of bad policy at a faster rate.

P.S. I used to think that Governor Christie might be the Ronald Reagan of New Jersey. I was naive. Yes, he did have some success in vetoing legislation that would have exacerbated fiscal problems in the Garden State, but he was unable to change the state’s bad fiscal trajectory.

P.P.S. Remarkably, New Jersey was like New Hampshire back in the 1960s, with no income tax and no sales tax. What a tragic story of fiscal decline!

The IMF’s Creative New Rationale for Higher Tax Rates

Sat, 10/14/2017 - 12:20am

I’m not a fan of the International Monetary Fund. Like many other international bureaucracies, it pushes a statist agenda.

The IMF’s support for bad policy gets me so agitated that I’ve sometimes referred to it as the “dumpster fire” or “Dr. Kevorkian” of the global economy.

But, in a perverse way, I admire the IMF’s determination to advance its ideological mission. The bureaucrats will push for tax hikes using any possible rationale.

Even if it means promoting really strange theories like the one I just read in the bureaucracy’s most recent Fiscal Monitor.

Welfare-based measures can help policymakers when they face decisions that entail important trade-offs between equity and efficiency. …One way to quantify social welfare in monetary units is to use the concept of equally distributed equivalent income.

And what exactly is “equally distributed equivalent income”?

It’s a theory that says big reductions in national prosperity are good if the net result is that people are more equal. I’m not joking. Here’s more about the theory.

…a welfare-based measure of inequality…with 1 being complete inequality and 0 being complete equality. A value of, say, 0.3 means that if incomes were equally distributed, then society would need only 70 percent (1 − 0.3) of the present national income to achieve the same level of welfare it currently enjoys (in which incomes are not equally distributed). The level of income per person that if equally distributed would enable the society to reach the same level of welfare as the existing distribution is termed equally distributed equivalent income (EDEI).

Set aside the jargon and focus on the radical implications. The IMF is basically stating that “the same level of welfare” can be achieved with “only 70 percent of the present national income” if government impose enough coercive redistribution.

In other words, Margaret Thatcher wasn’t exaggerating when she mocked the left for being willing to sacrifice national well-being and hurt the poor so long as those with higher incomes were subjected to even greater levels of harm.

Not surprisingly, the IMF uses its bizarre theory to justify more class-warfare taxation.

Figure 1.16 shows how the optimal top marginal income tax rate would change as the social welfare weight on high-income individuals increases. Assuming a welfare weight of zero for the very rich, the optimal marginal income tax rate can be calculated as 44 percent, based on an average income tax elasticity of 0.4… Therefore, there would appear to be scope for increasing the progressivity of income taxation…for countries wishing to enhance income redistribution.

But not just higher statutory tax rates.

The bureaucrats also want more double taxation of income that is saved and invested. And wealth taxation as well.

Taxes on capital income play an equally important role in shaping the progressivity of a tax system. …An alternative, or complement, to capital income taxation for economies seeking more progressive taxation is to tax wealth.

The article even introduces a new measure called “progressive tax capacity,” which politicians doubtlessly will interpret as a floor rather than a ceiling.

Reminds me of the World Bank’s “report card” which gave better grades to nations with “high effort” tax systems.

Though I guess I should look at the bright side. It’s good news that the IMF estimates that the “optimal” tax rate is 44 percent rather than 100 percent (as the Congressional Budget Office implies). And I suppose I also should be happy that “progressive tax capacity” doesn’t justify a 100 percent tax rate.

I’m being sarcastic, of course. That being said, there is a bit of genuinely good analysis in the publication. The bureaucrats actually acknowledge that growth is the way of helping the poor, which is a point I’ve been trying to stress for several years.

…many emerging market and developing economies…experienced increases in inequality during periods of strong economic growth. …Although income growth has not been evenly shared in emerging market economies, all deciles of the income distribution have benefited from economic growth, even when inequality has increased. …Benefiting from high economic growth, East and South Asia and the Pacific region, in particular, showed remarkable success in reducing poverty between 1985 and 2015 (Figure 1.8). Likewise, a period of strong growth has led to a sustained decline in absolute poverty rates in sub-Saharan Africa and in Latin America and the Caribbean.

Here are two charts from this section of the Fiscal Monitor. Figure 1.7 shows that the biggest gains for the poor occurred in the emerging market economies that also saw big increases for the rich. And Figure 1.8 shows how global poverty has fallen.

I’m not saying, by the way, that inequality is necessary for growth.

My argument is merely that free markets and small government are a recipe for prosperity. And as a nation becomes richer thanks to capitalism, it’s quite likely that some people will get richer faster than others get richer.

I personally hope the poor get richer faster than the rich get richer, but the other way around is fine. So long as all groups are enjoying more prosperity and poverty is declining, that’s a good outcome.

P.S. My favorite example of rising inequality and falling poverty is China.

Is Australia Still the Best Country for American Refugees?

Fri, 10/13/2017 - 12:53pm

Back in 2013, when I was still doing a “question of the week” column, I suggested that Australian was the best option for those contemplating a new home in the event of some sort of Greek-style fiscal collapse in the United States.

I pointed out that America wasn’t in any immediate danger, though I can understand why some people are interested in the question since our long-run outlook is rather grim.

Anyhow, I picked Australia for several reasons, including its geographic position (no unstable welfare states on the border, which is why I didn’t select Switzerland), its private social security system (unfunded liabilities are small compared to the $44 trillion shortfall in America’s government-run system), and its relatively high level of economic freedom.

I’m not the only person to notice that Australia is a good place to live. A recent Bloomberg column noted that millionaires are moving Down Under.

They’re all going to the land Down Under. Australia is luring increasing numbers of global millionaires, helping make it one of the fastest growing wealthy nations in the world… Over the past decade, total wealth held in Australia has risen by 85 percent compared to 30 percent in the U.S. and 28 percent in the U.K., aided by the fact that Australia has gone 25 years without a recession. As a result, the average Australian is now significantly wealthier than the average American or Briton. …At the end of 2016 individuals held about $192 trillion of wealth worldwide…, with 13.6 million millionaires holding $69 trillion of this. There were 522,000 multi-millionaires, having net assets of $10 million or more.

The number of millionaires moving to Australia is especially impressive when looking at global data.

Here’s a map showing the nations with the most incoming and outgoing rich people (h/t: Steve Hanke). Maybe it’s because there’s no death tax in Australia, but it’s remarkable that a nation with less than one-tenth the population of the United States manages to attract more millionaires.

But not everybody is cheerful about Australia’s economic position.

I’m currently in Brisbane for a couple of speeches. I spoke earlier today about how market-oriented jurisdictions grow much faster over the long run when compared to nations with statist economic policy.

But I don’t want to focus on my remarks (much of which will be old news to regular readers). Instead, let’s look at the some of the information in a speech by Professor Tony Makin of Griffith University.

Two of his slides caught my attention. Let’s start with a depressing look at how Australia has declined in the global competitiveness rankings put together each year by the World Economic Forum.

This is not a good trend.

That being said, I think Economic Freedom of the World is a more accurate measure and it shows that Australia (whether looking at its absolute score or its relative ranking) has suffered only a small decline.

Here’s another chart that is depressing as well. It shows that the per-capita burden of taxes and spending has continuously increased even after adjusting for inflation.

To be fair, the numbers aren’t quite as bad when looking at taxes and spending as a share of gross domestic product.

Nonetheless, the trend isn’t favorable, which is a point I made back in 2014.

None of this changes my view that Australia is still a good choice for emigrating Americans. But it does leave me worried about whether it will still be the top choice in 10 years or 20 years.

For what it’s worth, the main recommendation in my speech was for Australia to adopt a spending cap, similar to the ones that exist in Hong Kong and Switzerland. I also should have suggested sweeping decentralization since the government actually is open to that idea.

P.S. One of the most disappointing things about Australia is that the country’s foreign aid bureaucrats are trying to bribe/coerce Vanuatu’s government into adopting an income tax.

P.P.S. Professor Makin was the author of the report I recently cited about the failure of Australia’s Keynesian spending binge.

The Upside-Down Logic of Subsidized Birth Control

Thu, 10/12/2017 - 12:36pm

When writing about the Obamacare and its birth-control mandate, I’ve made a handful of observations.

President Trump recently announced that his Administration would relax the mandate. I think that is good news for the above reasons.

Critics are very upset. But rather than argue about the desirability of insurance coverage and the wisdom of Washington mandates, they’re actually claiming that the White House has launched some sort of war on birth control. I’m not joking.

Jeff Jacoby of the Boston Globe analyzes the issue. He starts by observing that nobody is proposing to ban birth control

…the Supreme Court ruled, in Griswold v. Connecticut, that government may not ban anyone from using contraceptives. …That freedom is a matter of settled law, and hasn’t been challenged in the slightest by President Trump or his administration.

He then points out that some folks on the left have gone ballistic.

Hillary Clinton accused Trump of showing “blatant disregard for medicine, science, & every woman’s right to make her own health decisions.” Elizabeth Warren, denouncing “this attack on basic health care,” claimed that the GOP’s top priority is to deprive women of birth control.

Their arguments, however, are utter nonsense. If Person A no longer has to subsidize Person B, that doesn’t mean Person B can’t buy things. It simply means there won’t be third-party payer.

Jacoby agrees.

News flash to Warren, et al.: There is no attack on health care, and no in America is being deprived of birth control. You are losing nothing but the power to force nuns to pay for your oral contraceptives. …As a matter of economics and public policy, the Affordable Care Act mandate that birth control be supplied for free is absurd. …Especially since birth control will remain as available and affordable as ever.

Indeed, the Trump Administration was actually far too timid. There should be no birth-control mandate for any insurance plan. It should be something negotiated by employers and employees.

…the new White House rule leaves the birth-control mandate in place. Trump’s “tweak won’t affect 99.9 percent of women,” observes the Wall Street Journal, “and that number could probably have a few more 9s at the end.” Washington will continue to compel virtually every employer and insurer in America to supply birth control to any woman who wants one at no out-of-pocket cost.

Jacoby closes his column with some very sensible observations and recommendations.

…there is no legitimate rationale for such a mandate. Americans don’t expect to get aspirin, bandages, or cold medicine — or condoms — for free; by what logic should birth control pills or diaphragms be handed over at no cost? …By and large, birth control is inexpensive; as little as $20 a month without insurance. …access to birth control, as the Centers for Disease Control reported in 2010, was virtually universal before Obamacare. The White House is right to end the burden on religious objectors. But it is the birth-control mandate itself that should be scrapped. Contraception is legal, cheap, and available everywhere. Why are the feds meddling where they aren’t needed?

The last sentence is key. The federal government (heck, no level of government) should be involved with birth control. They shouldn’t ban it. And they shouldn’t mandate it, either.

Is Trump Right about America Being the “Highest Taxed Nation”?

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

In my ideal world, we’re having a substantive debate about corporate tax policydouble taxationmarginal tax rates, and fundamental tax reform (plus spending restraint so big tax cuts are feasible).

Sadly, we don’t live in my ideal world (other than my Georgia Bulldogs being undefeated). So instead of a serious discussion about things that matter, there’s a big fight in Washington about the meaning of Donald Trump’s words.

Politico has a report on this silly controversy. Here are some of highlights.

“We are the highest taxed nation in the world,” President Donald Trump has repeated over and over again. …He said it at a White House event last Friday. He’s tweeted it, repeated it in television interviews and declared it at countless rallies. It is his go-to talking point, his favorite line… It is also false — something fact checkers have been pointing out since 2015.

This fight revolves around the fact that Trump is referring to corporate taxes, but generally, does not make that explicit. So you have exchanges like this.

White House press secretary Sarah Huckabee Sanders sought for the second time in less than a week to defend the comment… “We are the highest taxed corporate tax [sic] in the developed economy. That’s a fact,” Sanders said when pressed on the comment during a briefing. “But that’s not what the president said,” a reporter retorted. “That’s what he’s talking about,” Sanders responded. “We are the highest taxed corporate nation.” “But that’s not what he said. He said we’re the highest taxed nation in the world,” said the reporter, Trey Yingst.

 Sigh. What a silly exchange. It reminds me of the absurd debate about “what the definition of is is” during the Clinton years.

I start with the assumption that all politicians aggressively manipulate words, either deliberately or instinctively. Or maybe just out of sloppiness.

So let’s look at three bits of data, starting with the numbers that are least favorable to Trump. Here’s a chart from the Organization for Economic Cooperation and Development. It’s definitely not my favorite international bureaucracy, but it has good apples-to-apples figures for developed nations. And you can see that the United States (highlighted in red) definitely does not have the highest overall tax burden.

For what it’s worth, we should be happy about these numbers. Indeed, I think they help to explain why Americans are much more prosperous than our European friends. And it’s also worth noting that Trump – at best – is being sloppy when he asserts that America is the “highest taxed nation.”

The President’s defenders can argue, with some legitimacy, that he often makes that claim while talking about business taxation. In those cases, it’s presumably obvious that “highest taxed” is a reference to corporate rates.

And if that’s the case, looking at a second set of numbers, the President is spot on. The United States unambiguously has the highest corporate tax rate among developed nations. And the U.S. may even have the highest corporate rate in the entire world depending on how certain severance taxes in developing nations are categorized.

Moreover, the United States has a very onerous system of worldwide taxation, accompanied by rules that rank very near the bottom.

In other words, Trump has a very strong case, but he undermines his argument when he doesn’t explicitly state that he’s talking about corporate taxation.

There’s even a third set of numbers that Trump could cite when discussing the “highest taxed nation.” As I’ve noted before, the United States actually has the most “progressive” tax system in the developed world.

But the President shouldn’t cite me when he can easily use quotes and data from the Washington Post on September 19, 2012.

The United States has by far the most progressive income, payroll, wealth and property taxes of any developed country.

Or the same newspaper on April 4, 2013.

…the American system remains the most progressive tax system in the developed world.

Or the Washington Post on April 5, 2013.

A few readers were surprised by my mention Thursday that the U.S. tax code…is actually the most progressive in the developed world. But it’s true! …Our top 10 percent…pays a much higher share of the tax burden than the upper classes in other countries do.

Here’s the most relevant chart.

These numbers may not be terribly relevant for the current controversy since Trump’s tax plan is focused more on business taxpayers rather than individual taxpayers.

But our friends on the left are very anxious to impose more class-warfare taxation, so we should file this data for future reference.

P.S. The April 4, 2013, story in the Washington Post includes this very important passage.

…social democracies like France, Germany and Sweden have actively regressive systems heavily reliant on value-added taxes.

This reinforces what I’ve repeatedly noted, which is that Europe’s costly welfare states are financed by lower-income and middle-class taxpayers (in large part because of punitive value-added taxes). The bottom line is that we should listen to Bernie Sanders and become more like Europe. But only if we want ordinary citizens to pay much higher taxes and to accept much lower living standards.

Higher Tax Rates = Fewer Superstar Innovators

Tue, 10/10/2017 - 12:32pm

shared some academic research last year showing that top-level inventors are very sensitive to tax policy and that they migrate from high-tax nations to low-tax jurisdictions.

Now we have some new scholarly research showing that they also migrate from high-tax states to low-tax states.

Let’s look at some of the findings from this new study, which was published by the Federal Reserve Bank of San Francisco. We’ll start with the issue the economists chose to investigate.

…personal taxes vary enormously from state to state. These geographical differences are particularly large for high income taxpayers. …the average tax rate (ATR) component due solely to state individual income taxes for a taxpayer with income at the 99th percentile nationally in 2010…in California, Oregon, and Maine were 8.1%, 9.1%, and 7.7%, respectively. By contrast, Washington, Texas, Florida, and six other states had 0 income tax. Large differences are also observed in business taxes. …Iowa, Pennsylvania, and Minnesota had corporate income taxes rates of 12%, 9.99%, and 9.8%, respectively, while Washington, Nevada, and three other states had no corporate tax at all. And not only do tax rates vary substantially across states, they also vary within states over time. …If workers and firms are mobile across state borders, these large differences over time and place have the potential to significantly affect the geographical allocation of highly skilled workers and employers across the country.

Here’s a map showing the tax rates on these very successful taxpayers, as of 2010. Many of these states (CaliforniaIllinoisNew Jersey, and Connecticut) have moved in the wrong direction since that time, while others (such as North Carolina and Kansas) have moved in the right direction.

Anyhow, here’s more information about the theoretical issue being explored.

Many states aggressively and openly compete for firms and high-skilled workers by offering low taxes. Indeed, low-tax states routinely advertise their favorable tax environments with the explicit goal of attracting workers and business activity to their jurisdiction. Between 2012 and 2014, Texas ran TV ads in California, Illinois and New York urging businesses and high-income taxpayers to relocate….In this paper, we seek to quantify how sensitive is internal migration by high-skilled workers to personal and business tax differentials across U.S. states. Personal taxes might shift the supply of workers to a state: states with high personal taxes presumably experience a lower supply of workers for given before-tax average wage, cost of living and local amenities. Business taxes might shift the local demand for skilled workers by businesses: states with high business taxes presumably experience a lower demand for workers, all else equal.

And here’s their methodology.

We focus on the locational outcomes of star scientists, defined as scientists…with patent counts in the top 5% of the distribution. Using data on the universe of U.S. patents filed between 1976 and 2010, we identify their state of residence in each year. We compute bilateral migration flows for every pair of states (51×51) for every year. We then relate bilateral outmigration to the differential between the destination and origin state in personal and business taxes in each year. …Our models estimate the elasticity of migration to taxes by relating changes in number of scientists who move from one state to another to changes in the tax differential between the two states.

So what did the economists find? Given all the previous research on this topic, you won’t be surprised to learn that high tax rates are a way of redistributing people.

We uncover large, stable, and precisely estimated effects of personal and business taxes on star scientists’ migration patterns. …For the average tax rate faced by an individual at the 99th percentile of the national income distribution, we find a long-run elasticity of about 1.8: a 1% increase in after-tax income in state d relative to state o is associated with a 1.8 percent long-run increase in the net flow of star scientists moving from o to d. …To be clear: The flow elasticity implies that if after tax income in a state increases by one percent due to a personal income tax cut, the stock of scientists in the state experiences a percentage increase of 0.4 percent per year… We find a similar elasticity for state corporate income tax… In all, our estimates suggest that both the supply of, and the demand for, star scientists are highly sensitive to state taxes.

Wonky readers may appreciate these graphs from the study.

For everyone else, the important lesson from this research is that high tax rates discourage productive behavior and drive away the people who create a lot of value.

Two years ago, I shared some research showing that entrepreneurs flee high-tax nations to low-tax jurisdictions. Now we know the same thing happens with top-level inventors.

And let’s not forget that it’s even easier for investment to cross borders, which is why high corporate tax rates and high levels of double taxation are so damaging to U.S. workers and American competitiveness.

P.S. I don’t expect many leftists to change their minds because of this research. Some of them openly admit they want high tax rates solely for reasons of spite. Sensible people, by contrast, should be even more committed to pro-growth tax reform.

Big Government: Puerto Rico’s Man-Made Disaster

Mon, 10/09/2017 - 12:28pm

Puerto Rico is getting lots of attention because Hurricane Maria caused a tremendous amount of economic damage.

That leads to an important discussion about the role of government – particularly the federal government – when there is a natural disaster (and a secondary discussion about the silly Keynesian argument that disasters are good for prosperity).

But let’s focus today on a man-made disaster. Puerto Rico is the Greece of America, and it was a fiscal mess well before the hurricane hit. Indeed, there’s already been partial-bailout legislation from Washington.

The Wall Street Journal opined wisely on the topic, starting with the observation that we shouldn’t feel too much sympathy for investors who purchased bonds from the island’s profligate government.

…they knew what they were getting into. Lenders piled into Puerto Rican bonds that paid high yields that are “triple tax-exempt”—they can’t be taxed by federal, state or local governments in the U.S. Yet lenders also knew that the Puerto Rican government was heading toward a debt crisis. The economy has been contracting for a decade, and the commonwealth has $48 billion in unfunded pensions on top of $72 billion in bond debt. Creditors bet that the high yield was worth the political risk, but the music was bound to stop. One lesson of the last decade that creditors don’t want to learn, even after Detroit and Greece, is that sovereign debt to lousy governments is high risk. The abrogation of debt contracts that will now take place is regrettable, but there is a price for betting on politicians.

It would be a nice lesson if investors learned not to trust governments, especially the ones most prone to destructive statist policies.

But that doesn’t address the underlying problem of how to generate growth in Puerto Rico. The answer, needless to say, is free markets and small government.

…the territory will have to grow faster. This is where bankruptcy alone is inadequate. Puerto Rico will have to cut taxes on investment, rationalize welfare programs that deter working, and pare back labor protections that make France look like Hong Kong. If Mr. Rossello won’t do it, then the control board will have to. Puerto Rico will continue to flounder even with reduced debt if labor participation remains stuck at 40% and unemployment is in the double digits.

Unfortunately, the government has been doubling down on bad policy.

Investor’s Business Daily delves deeper into the issue of how big government is strangling prosperity.

The key is to create the correct incentives for the island’s people to encourage — rather than discourage — their policymakers to implement necessary and difficult reforms. This is particularly true with regard to pension reform. …Emphasis should instead be put on the many necessary changes to Puerto Rican labor laws, welfare programs and business and tax regulations which could spur more private sector business and job creation, encourage more people to work, and allow economic growth to resume. …Changes to U.S. laws and regulations discouraging labor force participation in Puerto Rico, such as the high minimum wage and easier eligibility for Social Security disability benefits for Spanish speakers, would also help greatly. And most importantly, Puerto Rico’s lingering pension crisis must be solved, both because of its fiscal significance and because it illustrates the lack of political courage and imagination by the government and the oversight board. …economic activity in Puerto Rico is now so severely depressed by a heavy government presence.

And even the most establishment-leaning Economist noted that government dependency is a major problem.

The island is distinguished by its poverty and joblessness, which are far worse than in any of the 50 states. The territory’s economy, moreover, has fallen further behind the national one over the past three decades. Bad government—not just locally, but also federally—is largely to blame. …Puerto Rico’s annual income per person was around $12,000 in 2004, less than half that of Mississippi, the poorest state. More than 48% of the island’s people live below the federally defined poverty line.

Why is income so low and why is there so much poverty?

Simply stated, idleness is being heavily subsidized. The welfare state reduces labor supply on the mainland. And the same thing happens in Puerto Rico.

Half the working-age men in Puerto Rico do not work. …Many things have gone wrong. Most important, however, is that the United States government assumed too big a role in the Puerto Rican economy, and its largesse enabled the commonwealth’s government to do the same. …the island’s economy is now lost in a thicket of bad incentives…an oversized welfare state…transfers…make up more than 20% of the island’s personal income. These federal handouts…by Puerto Rican economic standards, they are huge. And the more a man or woman earns through paid work, the more they decrease. …federal disability allowances are much higher than the United States average as a share of wages and pension income. Unsurprisingly, therefore, one in six working-age men in Puerto Rico are claiming disability benefits. …For many people, …the money that can be earned through federal transfers and a little informal work is more than the market wage—and requires much less effort.

In other words, Puerto Rico is just another layer of evidence on the well-established link between government and poverty.

And when people do have jobs, all too often they are employed by a bloated and inefficient government bureaucracy.

Puerto Rico’s bloated government… Around 30% of the territory’s jobs are in the public sector. Among other things, a big and coddled bureaucracy undermines Puerto Rico’s educational achievements…nearly half those on the education department’s payroll are not teachers; quality has fallen because of low accountability and mismanagement. …As he walked through Aguadilla’s town hall recently, Mr Méndez…says, is that “All they want to do is find security only. They have no ambition…Everybody wants to work for the government.” Manuel Reyes, of the Puerto Rico Manufacturers Association, also sees little hope that the government’s role will shrink.

It’s almost as if Puerto Rico is a perfect storm (no pun intended) of bad policy.

The solution is – or should be – obvious. And it’s the same one I suggested for Greece. Allow the government to default on existing debt, but only in exchange for pro-market reforms such as a long-run spending cap, privatization, a freeze on the size and compensation of the island’s bloated bureaucracy, and elimination of destructive regulation.

For all intents and purposes, Puerto Rico should become the Hong Kong of America. The island does have substantial autonomy and local policymakers have demonstrated that they sometimes are willing to do the right thing (they made Puerto Rico a legal tax haven for U.S. citizens). Now it’s time to make a great leap forward.

Child Labor, Economic Development, and the Folly of Good Intentions

Sun, 10/08/2017 - 12:58pm

One of my great frustrations (and there are many) is that the conventional wisdom about economic history oftentimes is wrong. It is very common for students to learn things that simply are not true.

Let’s add to that list by looking at the issue of child labor. The conventional wisdom is that child labor was a regular feature of an oppressive capitalist system and that children were eventually saved from abuse thanks to government intervention.

Hardly. Child labor was – and still is, in some places – a way for desperately poor people to stay alive and perhaps create a stepping stone for a better future. And capitalism-enabled prosperity is the best way to end the unfortunate practice.

I previously cited some World Bank research, in a postscript to a column on bureaucracy, showing that restrictions on child labor had negative long-run effects on income for poor people.

Let’s augment that research. Here are some passages from a very sobering study about the unintended consequences of restricting child labor (h/t: Dev Patel via Tyler Cowen).

While bans against child labor are a common policy tool, there is very little empirical evidence validating their effectiveness. In this paper, we examine the consequences of India’s landmark legislation against child labor, the Child Labor (Prohibition and Regulation) Act of 1986. Using data from employment surveys conducted before and after the ban, and using age restrictions that determined who the ban applied to, we show that child wages decrease and child labor increases after the ban.

Some basic economic analysis shows why this happens.

…families use child labor to reach subsistence constraints and where child wages decrease in response to bans, leading poor families to utilize more child labor.

And it’s worth noting that there are all sorts of harmful secondary effects.

The increase in child labor comes at the expense of reduced school enrollment. We also examine the effects of the ban at the household level. Using linked consumption and expenditure data, we find that along various margins of household expenditure, consumption, calorie intake and asset holdings, households are worse off after the ban.

The bottom line on this issue is that some children are born to very poor families in very poor nations. In those tragic situations, child labor is a matter of survival rather than a lifestyle choice.

I don’t think that the businesses employing children are noble. Indeed, I wouldn’t be surprised if some of them mistreat kids. And even the nice ones probably would seem horrifying to those of us lucky enough to live in rich western nations.

But I also don’t believe in putting good intentions above real-world results. Businesses that employ child labor are offering a better (or, to be more accurate, offering a less-worse) opportunity for people stuck in horrid poverty. Capitalism is the only effective escape from economic misery.

Let’s close with some libertarian satire. It’s focused more on sweatshops, but it also applies to child labor (and “neoliberal” refers to “classical liberal” rather than modern leftism).

For what it’s worth, child labor was ubiquitous in the western world prior to the explosive growth that was unleashed by free markets and limited government.

If we want poor children in poor families from poor nations to have a better life, we should urge the same policies in the developing world. Assuming we prefer good results over good intentions, of course.

Prostitution Is Sad and Tragic…but Should Be Legal

Sat, 10/07/2017 - 12:44pm

While I focus on economic issues, particularly what’s happening with fiscal policy, I maintain my libertarian “cred” by periodically pointing out that victimless crimes should be legalized. Even if I don’t particularly like the activities.

  • I don’t approve of drugs and I’ve never used drugs, but I think the social harm of prohibition is greater than the social harm of legalization.
  • I don’t particularly like alcohol and I am almost a teetotaler, but I’m glad there’s now a consensus that the social harm of prohibition was greater than the social harm of legalization.
  • I find gambling to be boring and I worry about people who ruin their family’s finances by over-indulging, but the social harm of prohibition is greater than the social harm of legalization.

And now it’s time to dive into the issue of prostitution. Intellectually speaking, of course (even though people don’t like economists pontificating about sex).

It’s becoming an issue because some governments in the United States are looking to legalize sexual/monetary relations between consenting adults. Such as Washington, DC, which is famous for a different form of prostitution.

A D.C. lawmaker has proposed a bill aimed at decriminalizing sex work in the nation’s capital. David Grosso (I-At-Large) introduced the Reducing Criminalization to Improve Community Health and Safety Amendment Act of 2017 on Thursday. He said he developed the bill after working with the Sex Worker Advocates Coalition. “I believe that we as a society are coming to realize that excessive criminalization is causing more harm than good, from school discipline to drug laws to homelessness,” said Grosso.

And Hawaii.

Hawaii lawmakers are considering decriminalizing prostitution in the Aloha State after House Speaker Joseph Souki introduced a bill. …Transgender activist Tracy Ryan says she’s pushing the bill because transgender women in the sex trade are disproportionately impacted by criminalization laws. …Souki says he takes no position on the bill, but he introduced it as a favor to Ryan.

So what should lawmakers decide?

The Economist has a very sensible view on legalization.

…the sheer seediness of prostitution is just one reason governments have long sought to outlaw it, or corral it in licensed brothels or “tolerance zones”. NIMBYs make common cause with puritans, who think that women selling sex are sinners, and do-gooders, who think they are victims. …for many, both male and female, sex work is just that: work. …We have dissected data on prices, services and personal characteristics from one big international site that hosts 190,000 profiles of female prostitutes… The results show that gentlemen really do prefer blondes, who charge 11% more than brunettes. …Prostitutes themselves behave like freelancers in other labour markets. They arrange tours and take bookings online, like gigging musicians. They choose which services to offer, and whether to specialise. They temp, go part-time and fit their work around child care. …Moralisers will lament the shift online because it will cause the sex trade to grow strongly. …But everyone else should cheer. Sex arranged online and sold from an apartment or hotel room is less bothersome for third parties than are brothels or red-light districts. Above all, the web will do more to make prostitution safer than any law has ever done. …Governments should seize the moment to rethink their policies. Prohibition, whether partial or total, has been a predictable dud. It has singularly failed to stamp out the sex trade. …And prohibition has ugly results. Violence against prostitutes goes unpunished because victims who live on society’s margins are unlikely to seek justice, or to get it. …Criminalisation of clients perpetuates the idea of all prostitutes as victims forced into the trade. Some certainly are—by violent partners, people-traffickers or drug addiction. But there are already harsh laws against assault and trafficking. …When Rhode Island unintentionally decriminalised indoor prostitution between 2003 and 2009 the state saw a steep decline in reported rapes and cases of gonorrhoea. Prostitution is moving online whether governments like it or not. If they try to get in the way of the shift they will do harm.

My view, for what it’s worth, is that prostitution is sad and tragic in probably 95 percent of cases. But adding criminal penalties on top of the human cost doesn’t make a bad situation any better.

Prohibition may not stop prostitution, but it does make violence more likely.

Being a sex worker in the United States…means that you are likely vulnerable to extreme rates of physical, sexual and emotional violence, facilitated by the criminalization of the sex trade and the social stigma associated with those who engage in it. Sex worker advocates and the World Health Organization alike have recommended a fix that could dramatically improve sex worker safety, which has been proven to work in other parts of the world: decriminalize sex work. …in the U.S., …the rate of violence against sex workers is four times higher than it is in places where commercial sex is legal. …A study from the Urban Justice Center’s Sex Workers Project found 46% of sex workers experienced violence in the course of their work. Another study from SWP found that an overwhelming majority of street-based sex workers — 80% — reported being threatened or beaten. …Decriminalization of sex work would have a clear effect on sex worker safety, according to SWOP-USA communications director Katherine Koster, and it could be the key to reducing the threat of violence. …Koster told Mic. “When New Zealand decriminalized sex work, 70% of advocates, sex workers and social service providers who work with sex workers said that sex workers were more likely to reach out to the police if they experienced violence.”

Here’s a chart from the article.

This is simple common sense. In a legal market, it’s much easier for prostitutes to control their environment and to know the identity of customers. Both of those factors make crime more risky for bad guys.

Legalization not only would reduce violence against sex workers, it probably would reduce overall sex crimes.

 Does prostitution increase or decrease sex crimes? …Our research focuses on indoor prostitution. In states where prostitution is illegal, indoor prostitution usually occurs in strip clubs, gentlemen’s clubs, and as part of escort services. Indoor prostitution may increase sex crimes if prostitution reinforces the view of women as objects and therefore encourages violence against women. Alternatively, prostitution may reduce sex crimes if it is a substitute for sex crimes. In addition, indoor prostitution establishments may keep potential sex-crime offenders away from potential victims, leading to further substitution away from sex crimes. Our analysis benefits from a unique data set with daily precinct-level information for New York City (NYC). …We exploit exogenous variation in the date of registration of indoor prostitution establishments to provide causal evidence of these establishments on sex crimes using crime data at the daily level. …We find that the presence of an indoor prostitution establishment in a given precinct leads to a 0.4 percent daily reduction in sex crimes per precinct. …We find that sex crime is reduced since potential sex offenders are indoor prostitutes’ customers. …the results suggest that potential sex offenders prefer to use the services offered by these establishments rather than committing sex crimes. Furthermore, these results suggest that sex crimes and indoor prostitution are substitutes.

Unsurprisingly, former President Jimmy Carter isn’t on the right side. Though he wants to shift the punishment.

If paying for sex is normalized, then every young boy will learn that women and girls are commodities to be bought and sold. There is a much better policy option. …Pioneered in Sweden and adopted most recently in Canada and France, this strategy involves decriminalizing prostituted women and offering them housing, job training and other services. Instead of penalizing the victims, however, the approach treats purchasing and profiting from sex acts as serious crimes. …demand for prostitution has fallen dramatically under this model. Conversely, Germany and New Zealand, which have legalized all aspects of prostitution, have seen an increase in sex trafficking and demand for sexual services. Critics of the Nordic model assert that mature adults should be free to exchange money for sex. This argument ignores the power imbalance that defines the vast majority of sex-for-cash transactions, and it demeans the beauty of sexual relations when both parties are respected.

I actually like the world that Carter envisions. But wishing and hoping isn’t going to make the sex trade disappear.

Though prostitutes may get replaced by robots at some point. Needless to say, they don’t like competition.

Europe’s first sex robot brothel has been forced to move after real-life prostitutes complained sex dolls were stealing their trade. …the brothel, not far from La Rambla in the heart of the city has now moved to a mystery new location with a receptionist saying the address would only be given out to paying customers. Prostitutes who work in the city with Aprosex – the Association of Sex Professionals – objected saying a doll cannot match the services of a real person and denigrates real sex workers to merely being an object. …Janet, a prostitute with over 30 years in the industry, who works in the city’s Raval district said: “It is another strategy of the patriarchy that presents us as objects without rights or soul. A privilege of the wealthy classes.” …Municipal police in the Catalonian capital also launched an investigation into the legality of the brothel which offered clients sex with realistic state-of-the-art polymer sex dolls after it opened late last month. …The brothel offered the services of four life-like dolls which cost around £4,373 ($4,300, €5,000) to produce and are made in the US and made out of thermoplastic elastomer, charging punters around £105 (€120) for two hours.

Now that we’ve spent time looking at the serious side of the issue, let’s look at the quirky interaction of the world’s oldest profession and the world’s second-oldest profession. The Daily Caller reports on what’s being proposed in Germany.

The German Green Party wants to grant people with severe health issues taxpayer-funded access to prostitutes. Green Party Spokeswoman Elisabeth Scharfenberg imagines a system where doctors can issue prescriptions to sick people who can’t afford prostitutes on their own account. …The idea is modeled upon a similar system in the Netherlands, where people can receive need-based state grants with a medical note stating they can’t get sexual satisfaction any other way.

Taxpayer-financed hookers already exist in the United Kingdom, so I guess I’m not surprised that German politicians are contemplating something similar.

And since German politicians have figured out innovative ways of taxing hookers (the Spanish government has a more conventional approach), maybe it’s only fair that tax money gets plowed back into the industry.

In Nevada, for what it’s worth, prostitution gets a special tax loophole.

Meanwhile, Russia’s boss actually advertises on behalf of his nation’s streetwalkers.

President Putin bragged that Russian prostitutes were “without question the best in the world” yesterday.

Incidentally, since Putin already has recognized the Laffer Curve, he also should realize that it applies to…umm…adult entertainment. Indeed, excess taxation of prostitution has led to novel forms of tax avoidance in other countries.

By the way, here’s a tidbit from that Hawaii decriminalization story I already referenced.

The proposal also would end a state law that says police officers can’t have sex with prostitutes in the course of investigations.

P.S. Our left-wing friends have a strange fascination with prostitution.

Demographic Change and Entitlement Disaster

Fri, 10/06/2017 - 12:39pm

Imagine that we’re in a parallel universe and that you’re the lookout on the Titanic. But in this make-believe world, you have all sorts of fancy radar that allows you to detect icebergs with lots of advance notice. Furthermore, imagine that you detect danger and give lots of warning to the Captain and other officers.

How would you feel if they then decided to ignore your warnings and continued on their course to disaster? You’d probably tear your hair out in frustration.

And that’s a pretty good description of how I feel about the easy-to-predict, visible-to-the-naked-eye, baked-in-the-cake, bound-to-happen fiscal crisis that will occur because of the combination of demographic change and poorly designed entitlement programs.

It’s happening in the United States. It’s happening in Europe. It’s happening in Asia. Heck, this is a worldwide problem.

Simply stated, welfare states were created back when everyone assumed that there would always be a “population pyramid,” which means relatively few old people (who collect a lot of money from entitlement programs) at the top, plenty of workers (also known as taxpayers) in the middle, and lots of children (i.e., future taxpayers) at the bottom.

In that world, a modest-sized welfare state isn’t a good idea, but at least it is mathematically sustainable.

Today, by contrast, such a welfare state is a problem because we’re living longer and having fewer children.

And in the future, that kind of welfare state is a recipe for a Greek-style fiscal crisis because demographic trends will be even less favorable. To be blunt, there won’t be enough people pulling the wagon compared to the mass of people riding in the wagon.

At the risk of beating a dead horse, here’s some additional data on this global problem. We’ll start with this look at how the population pyramid is becoming a population cylinder. The key thing to notice is the growth of the over-65 cohort.

And here’s a different way of looking at the same data, but stretching out to 2100.

I didn’t add a red line at age 65, but it’s easy to see that the number of older people will dramatically increase without a concomitant increase in the number of working-age people who are expected to pay the taxes to finance pensions and health care.

So what’s all this mean? Here’s a sobering thought from Prospect.

The ageing populations of the advanced economies and the larger emerging ones combines with past falls in the birth rate to mean that the share of total world population who are of prime working age has been falling since 2012. After a four-decade rise, the trend has reversed with that fall projected to last throughout the 2020s, 2030s and 2040s. A slower-growing global workforce will be a big challenge for the global economy.

A “big challenge” may win the prize for understatement.

Bloomberg has a column on the implications of this massive demographic shift. Notice the data on the number of workers per retiree in various nations.

Rising dependency ratios — or the number of retirees per employed worker — provide one useful metric. In 1970, in the U.S., there were 5.3 workers for every retired person. By 2010 this had fallen to 4.5, and it’s expected to decline to 2.6 by 2050. In Germany, the number of workers per retiree will decrease to 1.6 in 2050, down from 4.1 in 1970. In Japan, the oldest society to have ever existed, the ratio will decrease to 1.2 in 2050, from 8.5 in 1970. Even as spending commitments grow, in other words, there will be fewer and fewer productive adults around to fund them.

The bottom line is that there are enormous unfunded liabilities.

Arnaud Mares of Morgan Stanley analyzed national solvency, or the difference between actual and potential government revenue, on one hand, and existing debt levels and future commitments on the other. The study found that by this measure the net worth of the U.S. was negative 800 percent of its GDP; that is, its future tax revenue was less than committed obligations by an amount equivalent to eight times the value of all goods and services America produces in a year. The net worth of European countries ranged from about negative 250 percent (Italy) to negative 1,800 percent (Greece). For Germany, France and the U.K., the approximate figures were negative 500 percent, negative 600 percent and negative 1,000 percent of GDP.

Wow, it’s depressing that the long-run outlook for the United States is worse than it is for some of Europe’s most infamous welfare states. Though I guess we shouldn’t be totally surprised since I’ve already shared similarly grim estimates from the IMFBIS, and OECD.

I’ll close with some (sort of) good news.

Notwithstanding some of the estimates I’ve shared, America actually is in better shape than these other nations. If we enact genuine entitlement reform, ideally sooner rather than later, the long-run numbers dramatically improve because spending and debt no longer would be projected to rise so dramatically (whereas government already is an enormous burden in Europe).

This isn’t idle theory. Policymakers don’t have much control over demographics, but they can reduce the fiscal impact of demographic change by adopting better policy.

To cite the most prominent examples, jurisdictions such as Hong Kong and Singapore have very long lifespans and very low birthrates, yet their public finances don’t face nearly as much long-run pressure because they never made the mistake of setting up western-style welfare states.

The solution, therefore, is for America and other nations to copy these successful jurisdictions by replacing tax-and-transfer entitlements with systems based on private savings.

P.S. For what it’s worth, I’m not overflowing with optimism that we’ll get the reforms that are needed with Trump in the White House.

The Goal of Business Tax Reform Should Be Enhanced Competitiveness, Not More Loot for Politicians

Thu, 10/05/2017 - 12:08pm

The Republican tax plan is based on some very attractive principles.

Unfortunately, the GOP isn’t planning to completely fix these policies, largely because there’s no commitment to control government spending. But any shift toward better tax policy will be good for the nation.

Another goal to add to the above list is that Republicans want to create a level playing field for American-based firms by replacing “worldwide taxation” of business income with “territorial taxation” of business income.

For those who have wisely avoided the topic of international business taxation, here’s all you need to know: Worldwide taxation means a company that earns income in another country is taxed both by the government where the income is earned and by the government back home. Territorial taxation, by contrast, is simply the common-sense notion that income is taxed only by the government where the income is earned.

In a column for the Wall Street Journal, two authors explain how America’s anti-competitive system of worldwide taxation undermines U.S.-domiciled companies.

…earlier this month Iconix , the U.S.-based company that owns the rights to Charles Schulz’s comic characters, announced it will sell them to Canada’s DHX Media. That makes Charlie Brown America’s latest expatriate. It’s a clear signal that U.S. corporate taxes are nudging business elsewhere. …why? In part because the U.S. corporate tax system hampers U.S.-based businesses by subjecting them to world-wide taxation. Canada’s aggregate corporate taxes are about 10 percentage points lower. …America’s high corporate tax rate and its practice of taxing international income is out of step with the rest of the world. The solution is so clear even a cartoon character should grasp it: Cut tax rates and adopt a system for taxing international income that more closely resembles those used by the country’s international competitors.

Indeed, it’s worth noting that the entire “inversion” controversy only exists because of America’s worldwide tax regime.

Simply stated, American-domiciled multinationals have a big competitive disadvantage compared to their foreign rivals. So it’s understandable that many of them try to protect shareholders, workers, and consumers by arranging (usually through a merger) to become foreign companies.

That’s the bad news.

The good news is that the Republican tax reform plan ostensibly will shift America to a territorial tax system. As explained above, this is the sensible notion of letting other nations tax income earned inside their borders while the IRS would tax the income earned by companies in the United States.

This would be good for competitiveness, particularly since the United States is one of only a handful of nations that impose a worldwide tax burden on domestic firms.

But not everybody likes the idea of territorial taxation.

One reason for opposition is that some people see corporations primarily as sources of tax revenue. So when there are discussions of international tax, their mindset is nations should compete on grabbing the most money. I’m not joking.

European Union regulators’ tax crackdown on Amazon.com Inc. — like the EU’s case against Apple Inc. — should spur U.S. policy makers to address companies’ aggressive offshore tax-avoidance strategies before it’s too late, experts said. …“Really, what we are seeing is a race by the different taxing jurisdictions to claim a share of the tax prize represented by the largely untaxed streams of income that U.S. multinationals have engineered for themselves,’’ said Ed Kleinbard, a professor at the University of Southern California and the former chief of staff for Congress’s Joint Committee on Taxation. “If the United States doesn’t join the race, it will just lose tax revenue to more aggressive host countries around the world.’’ The EU rulings “do make it clear that if we are not interested in protecting our corporate tax base, other countries will be more than happy to tax the income,’’ said Kimberly Clausing, a professor of economics at Reed College in Portland, Oregon.

Call me crazy, but I think American policymakers should be in a race to create jobs, boost investment, and increase wages. And that means doing the opposite of what these supposed experts want.

Unsurprisingly, left-wing groups also are opposed to territorial taxation. Here are some passages from a report published by the Hill.

One hundred organizations, including a number of progressive groups and labor unions, are urging Congress to reject a major international tax change proposed in Republicans’ framework for a tax overhaul. In a letter dated Monday, the groups speak out against the framework’s move toward a “territorial” tax system that would largely exempt American companies’ foreign profits from U.S. tax. …”Ending taxation of offshore profits would give multinational corporations an incentive to send jobs offshore, thereby lowering U.S. wages,” they wrote.

Both assertions in that excerpt are wrong and/or misleading.

First, territorial taxation doesn’t mean that profits are exempt from tax. It simply means that the IRS doesn’t impose an additional layer of tax on income that already has been subject to the tax system of another country.

And other countries impose plenty of tax on American firms operating overseas.

Second, the incentive to shift job overseas is caused by America’s high corporate tax rate. That’s what makes it attractive for firms to operate in other nations.

Worldwide taxation is not the way to fix that bias since foreign-domiciled companies wouldn’t be impacted and they easily can sell into the American market.

By the way, the Republican tax plan doesn’t even create a real territorial tax system. Returning to the Bloomberg story cited above, the GOP proposal basically copies a very bad idea that was being pushed a few years ago by the Obama Administration.

…the GOP tax framework contemplates a so-called “minimum foreign tax’’ on multinationals’ future earnings that would apply in cases where a company’s effective tax rate fell below a pre-determined threshold.

To be fair, the Republican approach is less punitive that what Obama wanted.

Nonetheless, I worry that if Republicans adopt some sort of global minimum tax, it will just be a matter of time before that rate increases. In which case a shift toward territoriality actually plants a seed for a more onerous worldwide system!

Without knowing what will happen in the future, there’s no right or wrong answer, but I’m wondering whether the smart approach is to simply leave the current system in place. Yet, it’s based on worldwide taxation, but at least companies have deferral, which creates de facto territoriality for firms that manage their affairs astutely.

Such a shame that the GOP isn’t capable of simply doing the right thing.

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