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The Real Motive for Class-Warfare Taxation

Thu, 10/10/2019 - 12:25pm

In addition to being a contest over expanding the burden of government spending, the Democratic primary also is a contest to see who wants the biggest tax increases.

Bernie Sanders and Elizabeth Warren have made class-warfare taxation an integral part of their campaigns, but even some of the supposedly reasonable Democrats are pushing big increases in tax rates.

James Pethokoukis of the American Enterprise Institute opines about the anti-growth effect of these proposed tax hikes, particularly with regard to entrepreneurship and successful new firms.

The Democratic presidential candidates have plenty of ideas about taxes. Wealth taxes. Wall Street taxes. Inequality taxes. And probably more to come. So lots of creative thinking about wealth redistribution. Wealth creation? Not so much. …one way to look at boosting GDP growth is thinking about specific policies to boost labor force and productivity growth. But there’s another way of approaching the issue: How many fast-growing growing new firms would need to be generated each year to lift the economy-wide growth rate each year by one percent? …a rough calculation by analyst Robert Litan figures there about 15 billion-dollar (in sales) companies formed every year. But what if the American entrepreneurial ecosystem were so vibrant that it produced 60 such companies annually? …The big point here is that the American private sector is key to growth. No other large economy is as proficient as the US in creating high-impact startups. But it doesn’t appear that the Democratic enthusiasm for big and bold tax plans is matched by concern about unwanted trade-offs.

If you want a substantive economic critique of class-warfare tax policy, Alan Reynolds has a must-read article on the topic.

He starts by explaining why it’s important to measure how sensitive taxpayers are (the “elasticity of taxable income”) to changes in tax rates.

Elasticity of taxable income estimates are simply a relatively new summary statistic used to illustrate observed behavioral responses to past variations in marginal tax rates. They do so by examining what happened to the amount of income reported on individual tax returns, in total and at different levels of income, before and after major tax changes. …For example, if a reduced marginal tax rate produces a substantial increase in the amount of taxable income reported to the IRS, the elasticity of taxable income is high. If not, the elasticity is low. ETI incorporates effects of tax avoidance as well as effects on incentives for productive activity such as work effort, research, new business start-ups, and investment in physical and human capital.

Alan then looks at some of the ETI estimates and what they imply for tax rates, though he notes that the revenue-maximizing rate is not the optimal rate.

Diamond and Saez claim that, if the relevant ETI is 0.25, then the revenue-maximizing top tax rate is 73 percent. Such estimates, however, do not refer to the top federal income tax rate, …but to the combined marginal rate on income, payrolls, and sales at the federal, state, and local level. …with empirically credible changes in parameters, the Diamond-Saez formula can more easily be used to show that top U.S. federal, state, and local tax rates are already too high rather than too low. By also incorporating dynamic effects — such as incentives to invest in human capital and new ideas — more recent models estimate that the long-term revenue-maximizing top tax rate is between 22 and 49 percent… Elasticity of taxable, or perhaps gross income…can be “a sufficient statistic to approximate the deadweight loss” from tax disincentives and distortions. Although recent studies define revenue-maximization as “optimal,” Goolsbee…rightly emphasizes, “The fact that efficiency costs rise with the square of the tax rate are likely to make the optimal rate well below the revenue-maximizing rate.”

These excerpts only scratch the surface.

Alan’s article extensively discusses how high-income taxpayers are especially sensitive to high tax rates, in part because they have considerable control over the timing, level, and composition of their income.

He also reviews the empirical evidence from major shifts in tax rates last century.

All told, his article is a devastating take-down of the left-of-center economists who have tried to justify extortionary tax rates. Simply stated, high tax rates hinder the economy, create deadweight loss, and don’t produce revenue windfalls.

That being said, I wonder whether his article will have any impact. As Kevin Williamson points out is a column for National Review, the left isn’t primarily motivated by a desire for more tax money.

Perhaps the strangest utterance of Barack Obama’s career in public office…was his 2008 claim that raising taxes on the wealthy is a moral imperative, even if the tax increase in question ended up reducing overall federal revenue. Which is to say, Obama argued that it did not matter whether a tax increase hurt the Treasury, so long as it also hurt, at least in theory and on paper, certain wealthy people. …ideally, you want a tax system with low transaction costs (meaning a low cost of compliance) and one that doesn’t distort a lot of economic activity. You want to get enough money to fund your government programs with as little disruption to life as possible. …Punitive taxes aren’t about the taxes — they’re about the punishment. That taxation should have been converted from a technical question into a moral crusade speaks to the basic failure of the progressive enterprise in the United States…the progressive demand for a Scandinavian welfare state at no cost to anybody they care about…ends up being a very difficult equation to balance, probably an impossible one. And when the numbers don’t work, there’s always cheap moralistic histrionics.

So what leads our friends on the left to pursue such misguided policies? What drives their support for punitive taxation?

Is is that they’re overflowing with compassion and concern for the poor?

Hardly.

Writing for the Federalist, Emily Ekins shares some in-depth polling data that discovers that envy is the real motive.

Supporters often contend their motivation is compassion for the dispossessed… In a new study, I examine…competing explanations and ask whether envy and resentment of the successful or compassion for the needy better explain support for socialism, raising taxes on the rich, redistribution, and the like. …Statistical tests reveal resentment of the successful has about twice the effect of compassion in predicting support for increasing top marginal tax rates, wealth redistribution, hostility to capitalism, and believing billionaires should not exist. …people who agree that “very successful people sometimes need to be brought down a peg or two even if they’ve done nothing wrong” were more likely to want to raise taxes on the rich than people who agree that “I suffer from others’ sorrows.” …I ran another series of statistical tests to investigate the motivations behind the following beliefs: 1) It’s immoral for our system to allow the creation of billionaires, 2) billionaires threaten democracy, and 3) the distribution of wealth in the United States is “unjust.” Again, the statistical tests find that resentment against successful people is more influential than compassion in predicting each of these three beliefs. In fact, not only is resentment more impactful, but compassionate people are significantly less likely to agree that it’s immoral for our system to allow people to become billionaires.

Here’s one of her charts, showing that resentment is far and away the biggest driver of support for class-warfare proposals.

These numbers are quite depressing.

They suggest that no amount of factual analysis or hard data will have any effect on the debate.

And there is polling data to back up Emily’s statistical analysis. Heck, some folks on the left openly assert that envy should be the basis for tax policy.

In other words, Deroy Murdock and Margaret Thatcher weren’t creating imaginary enemies.

P.S. If you think Kevin Williamson was somehow mischaracterizing or exaggerating Obama’s spiteful position on tax policy, just watch this video.

More Sloppy Analysis from the New York Times

Wed, 10/09/2019 - 12:18pm

The New York Times is going overboard with disingenuous columns.

A few days ago, I pointed out the many errors in David Leonhardt’s column extolling the wealth tax.

I also explained back in August how Steven Greenhouse butchered the data when he condemned the American economy.

And Paul Krugman is infamous for his creative writing.

But Mr. Leonhardt is on a roll. He has a new column promoting class warfare tax policy.

Almost a decade ago, Warren Buffett made a claim that would become famous. He said that he paid a lower tax rate than his secretary, thanks to the many loopholes and deductions that benefit the wealthy. …“Is it the norm?” the fact-checking outfit Politifact asked. “No.” Time for an update: It’s the norm now. …the 400 wealthiest Americans last year paid a lower total tax rate — spanning federal, state and local taxes — than any other income group, according to newly released data. …That’s a sharp change from the 1950s and 1960s, when the wealthy paid vastly higher tax rates than the middle class or poor.

Here’s the supposed proof for Leonhardt’s claim, which is based on a new book from two professors at the University of California at Berkeley, Emmanuel Saez and Gabriel Zucman.

Here are the tax rates from 1950.

And here are the tax rates from last year, showing the combined effect of the Kennedy tax cut, the Reagan tax cuts, the Bush tax cuts, and the Trump tax cut (as well as the Nixon tax increase, the Clinton tax increase, and the Obama tax increase).

So is Leonhardt (channeling Saez and Zucman) correct?

Are these charts evidence of a horrid and unfair system?

Nope, not in the slightest.

But this data is evidence of dodgy analysis by Leonhardt and the people he cites.

First and foremost, the charts conveniently omit the fact that dividends and capital gains earned by high-income taxpayers also are subject to the corporate income tax.

Even the left-leaning Organization for Economic Cooperation and Development acknowledges that both layers of tax should be included when measuring the effective tax rate on households.

Indeed, this is why Warren Buffett was grossly wrong when claiming he paid a lower tax rate than his secretary.

But there’s also another big problem. There’s a huge difference between high tax rates and high tax revenues.

Simply stated, the rich didn’t pay a lot of tax when rates were extortionary because they can choose not to earn and declare much income.

Indeed, there were only eight taxpayers in 1960 who paid the top tax rates of 91 percent.

Today, by contrast, upper-income taxpayers are paying an overwhelming share of the tax burden.

It’s especially worth noting that tax collections from the rich skyrocketed when Reagan slashed the top tax rate in the 1980s.

Let’s close by pointing out that Saez and Zucman are promoting a very radical tax agenda.

Saez and Zucman sketch out a modern progressive tax code. The overall tax rate on the richest 1 percent would roughly double, to about 60 percent. The tax increases would bring in about $750 billion a year, or 4 percent of G.D.P…. One crucial part of the agenda is a minimum global corporate tax of at least 25 percent. …Saez and Zucman also favor a wealth tax

Punitive income tax rates, higher corporate tax rates, and a confiscatory wealth tax.

Does anybody think copying France is a recipe for success?

P.S. I pointed out that Zucman and Saez make some untenable assumptions when trying to justify how a wealth tax won’t hurt the economy.

P.P.S. It’s also worth remembering that the income of rich taxpayers will be subject to the death tax as well, which means Leonhardt’s charts are doubly misleading.

The World Trade Organization Is Good News for American Taxpayers, Consumers, and Businesses

Tue, 10/08/2019 - 12:00pm

Earlier this year, I shared a short video about the benefits of the World Trade Organization.

Here’s a more substantive version (though still only four minutes).

I wanted to keep the video short, so I focused primarily on how the United States disproportionately benefits because other nations are pressured to reduce their trade taxes down to American levels.

Though I also pointed out that all countries benefit as global trade increases.

This is particularly relevant when you ponder President Trump’s trade spat with China. Yes, it would be good for the United States if China liberalized its economy and got rid of its mercantilist policies.

But it also would be good for China.

That’s why free trade is a good idea. It’s good if it’s unilateral free trade. It’s good if it’s bilateral free trade. And it’s good if it’s multilateral free trade.

Since we’re discussing the WTO, let’s look at some scholarly evidence.

An article by three Stanford political scientists for International Organization finds that the WTO has been beneficial for global trade.

The General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO) have been touted as premier examples of international institutions, but few studies have offered empirical proof. This article comprehensively evaluates the effects of the GATT/WTO and other trade agreements since World War II. Our analysis is organized around two factors: institutional standing and institutional embeddedness. We show that many countries had rights and obligations, or institutional standing, in the GATT/WTO even though they were not formal members of the agreement. We also expand the analysis to include a range of other commercial agreements that were embedded with the GATT/WTO. Using data on dyadic trade since 1946, we demonstrate that the GATT/WTO substantially increased trade for countries with institutional standing, and that other embedded agreements had similarly positive effects. Moreover, our evidence suggests that international trade agreements have complemented, rather than undercut, each other.

Meanwhile, a French think tank looks at some of the evidence in favor of the WTO’s rules-based approach to reducing trade taxes.

…the World Trade Organisation (WTO) which held a dominant position after WWII with its multilateral rules has lost influence…. From the point of view of a consumer or producer, the higher volatility of trade policy is nothing positive. …Handely and Limao (2015), Handley (2014), Pelc (2013) as well as Bacchetta and Piermartini (2011) also find empirical support for welfare gains from a rules compliant trade policy. …After WWII the average level of tariffs decreased constantly and predictably as part of the General Agreement on Tariffs and Trade (GATT), and its successor the WTO, which are based on member commitment and reciprocity. …multilateral agreements such as the WTO offer mechanisms which provide incentives even for mercantilist politicians to reduce barriers of trade.

Here’s a chart from the study, which shows how trade taxes have been falling in the post-World War II era.

In other words, the WTO process has been successful. President Trump’s tactic of escalating tariffs, by contrast, has not worked.

By way of background, the WTO is actually nothing more than a dispute-resolution forum for the GATT system (General Agreement on Tariffs and Trade) that was created back in the late 1940s.

And, unlike the International Monetary Fund or Organization for Economic Cooperation and Development, this is a part of the “post-war order” that’s worth preserving.

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Image credit: World Trade Organization | CC BY-SA 2.0.

New Video Argues for Use of WTO to Advance Trade Agenda

Mon, 10/07/2019 - 2:27pm

Center for Freedom and Prosperity Foundation

For Immediate Release
Monday, October 7, 2019
202-285-0244

www.freedomandprosperity.org

New Video Argues for Use of WTO to Advance Trade Agenda

(Washington, DC, Monday, October 7, 2019) A new video narrated by Dan Mitchell, Chairman of the Center for Freedom and Prosperity Foundation, explains why policymakers should be using the World Trade Organization (WTO), instead of attacking it. The 4-minute presentation is titled, “The World Trade Organization: Reducing Taxes on Global Commerce,” explains why the Trump administration’s attacks on the WTO are misguided and counterproductive. The organization overwhelming benefits the United States, and should be used to advance a free trade agenda.

Dan Mitchell is a leading expert on fiscal policy and international tax competition. In addition to being Chairman of CF&P, Dan previously served as a senior fellow at the Cato Institute and Heritage Foundation, and as an economist for Senator Bob Packwood and the Senate Finance Committee. He is the author of The Flat Tax: Freedom Fairness, Jobs, and Growth, a co-author of Global Tax Revolution, and is a frequent TV commentator.

This new video is part of CF&P Foundation’s Economic Lessons Series, which includes over 50 videos with more than 2 million views.

###

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Image credit: World Trade Organization | CC BY-SA 2.0.

Great Moments in Foreign Government

Mon, 10/07/2019 - 12:46pm

I get quite agitated when the folks in Washington make dumb choices that waste money and hinder prosperity.

That being said, I take comfort in the fact that governments in other nations also do stupid things.

I guess this is the policy version of “misery loves company.” And it’s also a source of horror and/or amusement.

So let’s update our collection of “great moments in foreign government.”

We’ll start in China, where a local government proved that incentives mattered.

In March, a man in Zhejiang, China…divorced his wife. He then married his sister-in-law. Shortly after, he divorced her too, in order to marry another sister-in-law. Several other members of the Pan family started to do the same with other relatives and eventually, 11 members of the brood married and divorced each other 23 times over a two-week period. Their motivation? To cash in on a compensation scheme… As part of an urban village renovation project, those living in the area are given a minimum compensation of one 40-square meter apartment, even though they didn’t own property. This was provided to any family whose hukou (household registration) was filed by April 10. But the Pan family learned that they could game the process by getting married, registering as residents of the village, and divorcing to do it again… By doing so, each family member would get their own household registration, which means more compensation. …The 11 family members involved have been arrested… Upon interrogation, one suspect said they didn’t think there was anything illegal with what they were doing.

I wonder if the Chinese government will learn anything about incentives from this episode.

Maybe, just maybe, it will then apply those lessons to tax policy (at the very least, by ignoring poisonous advice from the IMF and OECD).

In Spain, we re-confirm that governments are just as capable of wasting money on defense spending as they do on domestic programs.

A new, Spanish-designed submarine has a weighty problem: The vessel is more than 70 tons too heavy, and officials fear if it goes out to sea, it will not be able to surface. And a former Spanish official says the problem can be traced to a miscalculation — someone apparently put a decimal point in the wrong place. “It was a fatal mistake,” said Rafael Bardaji, who until recently was director of the Office of Strategic Assessment at Spain’s Defence Ministry. The Isaac Peral, the first in a new class of diesel-electric submarines, was nearly completed when engineers discovered the problem. …The Isaac Peral, named for a 19th century Spanish submarine designer, is one of four vessels in the class that are in various stages of construction. The country has invested about $2.7 billion in the program. The first was scheduled to be delivered in 2015 but the Spanish state-owned shipbuilder, Navantia, has said the weight problems could cause delays of up to two years.

Last but not least, we travel to Germany, where the government is trying to outdo New York City for the prize of most over-budget infrastructure boondoggle.

As a structure, it looks impressive enough. Until you pause, look around you, and absorb the silence. This is Berlin Brandenburg…, the new, state-of-the-art international airport… It is a bold new structure, costing billions, and was supposed to be completed in 2012. But it has never opened. BER has become for Germany not a new source of pride but a symbol of engineering catastrophe. …a “national trauma” and an ideal way “to learn how not to do things”. No passengers have ever emerged from the railway station, which is currently running only one “ghost train” a day, to keep the air moving. No-one has stayed at the smart airport hotel, which has a skeleton staff forlornly dusting rooms and turning on taps to keep the water supply moving. …Huge luggage carousels are being given their daily rotation to stop them from seizing up. …The company running the airport promises it will finally open next year, which would make it at least eight years late as well as billions over budget. …So what on Earth has happened…? politicians…set up a company to build an ambitious new airport. “The supervisory board was full of politicians who had no idea how to supervise the project,” says Prof Genia Kostka, of the Free University of Berlin. “They were in charge of key decisions.” …the politicians supervising the airport…insisted new departure gates were added to accommodate giant Airbus A380 aircraft, whose production has ended before the airport can open. …the overall cost of the project will be 6bn euros (£5.3bn) – if it opens as planned next year – up from an original projection of about 2bn euros. The final sum will be paid mostly by German taxpayers.

Of course taxpayers will get stuck with the tab. That’s the ongoing scam we call government.

But there is another question to ponder: How can a nation that is so aggressive (not to mention dogmatic and inventive) about collecting taxes be so incompetent at spending money?

The bottom line is that waste seems to be an inevitable part of government, regardless of the nation or the continent.

The moral of these stories, both from America and around the world, it that government is not the answer.

Unless, of course, you’ve asked a really strange question.

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Image credit: Eugenio Castillo Pert | CC BY-SA 3.0.

A Lost Generation of Socialist Youth?

Sun, 10/06/2019 - 12:40pm

I’ve opined that statist policies harm young people.

I also shared this video explaining why big government is bad for millennials and the Gen-Z crowd.

This should be a slam-dunk issue. After all, don’t they know how the communist world collapsed?

Aren’t they aware of the problems in places such as Greece and Venezuela?

Or, to make it personal, don’t they have any inkling of the fact that they are going to get screwed by entitlement programs?

And what about the fact that they lose out because of Obamacare?

Sadly, it appears many of them haven’t learned the right lesson.

Support for socialism is disturbingly high among the young.

I’ve wondered, only half-jokingly, whether they’re too clueless to vote.

David Grasso opines on this topic for the New York Post.

It’s important to look at the typical millennial trajectory, and why unprecedented government intervention into our daily lives is now widely seen as the only solution to the problems that bedevil us as a generation. …the only choice was to go to a college or university. We took this journey on the faith that a college education would give us the necessary skills to kick-start our careers. After graduation, we quickly found out that our alma maters did little to prepare us to be job-ready. …Just as we get our first student-loan bill, we find ourselves navigating unpaid and low-paid internships… The next predictable step is working a service-industry job that doesn’t require a degree while trying to get set up in a city with job openings in our fields. Yet a booming job market often also means a housing horror show. Misguided housing policies in places like New York, Los Angeles, Washington and San Francisco have created such a tight market that it is often financially impossible for a young person to move there. …We pay through the nose for health insurance, have zero job security and pray we advance as soon as possible. …Many of us are eternally disappointed with the unjust system that blocked us from doing things past generations did, like get married, have kids and have a lovely oak-shaded, picket-fence life.

Grasso notes that government is the underlying problem.

Then we turn on our streaming services and find politicians who seem to understand us, who are tapping into the spirit of a generation that’s reacting to the post-Great Recession era. …Given such a journey, it is easy to see why socialism seduces young Americans. We desperately need change if we are ever going to progress as a generation. The problem is, what the socialists are proposing — more government — is exactly the opposite of what we need. In fact, many of the most prominent obstacles we have faced are the result, at least in part, of heavy-handed government interference. …Truth is, young people need exactly the opposite of socialism — pro-growth policies and restrained, common-sense regulation. This will create more economic opportunities and more avenues into the middle class. Socialist policies will only choke economic opportunity and make our tough existence far worse.

More young people need to reach this conclusion.

At least if this horrifying poll is even close to accurate.

In other words, it seems like Americans are morphing into Europeans.

This is such a depressing thought that I’ll end today’s column with a bit of humor.

Here’s some gallows humor from Remy.

P.S. For what it’s worth, there is some polling data indicating young people aren’t totally hopeless.

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Image credit: nrkbeta | CC BY-SA 2.0.

Belated Applause for the “Washington Consensus”

Sat, 10/05/2019 - 12:31pm

Last century, I remember reading about the “Washington Consensus,” which was a term that was used to describe the kind of policy advice in those days provided to (or imposed upon) the developing world by the IMF, World Bank, and U.S. Treasury.

I never studied the topic since I was focused at the time on domestic issues such as tax reformSocial Security reform, and the economic effect of government spending.

But I recall thinking that the Washington Consensus was pro-market, but nonetheless a bit timid because it did not include a plank to limit the size of government.

Wikipedia helpfully lists the 10 policies that defined this consensus.

  1. Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP;
  2. Redirection of public spending from subsidies (“especially indiscriminate subsidies”) toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;
  3. Tax reform, broadening the tax base and adopting moderate marginal tax rates;
  4. Interest rates that are market determined and positive (but moderate) in real terms;
  5. Competitive exchange rates;
  6. Trade liberalization: liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;
  7. Liberalization of inward foreign direct investment;
  8. Privatization of state enterprises;
  9. Deregulation: abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions;
  10. Legal security for property rights.

With the benefit of hindsight, I now want to praise the Washington Consensus.

Yes, it would be nice if there had been some focus on the size of government, but all of the advice on trade, regulation, monetary policy, and quality of governance was very sound. And those policies account for 80 percent of a nation’s grade according to Economic Freedom of the World.

Moreover, the planks on fiscal policy were good, even if they didn’t go far enough.

Additionally, it was good to have multilateral institutions such as the International Monetary Fund and World Bank using their leverage to push for pro-market reforms (unlike today, when international bureaucracies often push a statist agenda).

So what was the effect of – to use the terms of opponents – this emphasis on “neoliberalism” or “market fundamentalism”?

Well, it seems to have made a difference. Here the data from the Fraser Institute on economic freedom for all nations. As you can see, economic liberty around the world increased significantly between 1980-2000, the years when the Washington Consensus was most influential.

But did that period of pro-market reform lead to better outcomes?

The answer is a resounding yes, at least in my humble opinion.

Here’s the most persuasive evidence, showing the dramatic decline in extreme poverty.

Let’s also look at some new research from Professor William Easterly, who worked for many years as an economist at the World Bank.

He notes that many people think the Washington Consensus was a failure. So he took a fresh look at the data.

Many authors…have proclaimed the failure of a package of market-oriented reforms proposed in the 1980s and 1990s — variously known as the Washington Consensus, …globalization, or neoliberalism. This paper seeks to update the stylized facts on policies and growth that influenced this verdict. …The earlier stylized facts featured the zero or low per capita growth in the regions that were the focus of reform: Africa and Latin America. …these stylized facts have not been updated in the literature, as much more data have become available with the passage of time. …This paper will report new stylized facts. First, there has been additional and quite remarkable progress on reform outcomes since the late 1990s — this is a principal finding of this paper. Earlier judgments on the reforms often happened before the reform process was complete and/or had enough post-reform growth data to evaluate reforms. …The second stylized fact is that there is a strong correlation between improvements in policy outcomes and changes in growth outcomes. The third stylized fact is that growth has recovered in Africa and Latin America in the new millennium, and the regression of growth on policy outcomes explains a substantial part of the growth recovery. …This paper will extend the method of analyzing extremely bad and moderately bad policy outcomes to other policies, specifically — in addition to inflation — the black market premium on foreign exchange, overvaluation of the domestic currency, negative real interest rates on bank savings deposits, and abnormally low trade shares to GDP. Updating the data on these outcomes is not trivial and constitutes one of the main contributions of this paper.

And what did Prof. Easterly discover?

It turns out that the prevalence of bad outcomes has declined.

Figure 6 shows a summary measure of share of countries with any bad policy. Any bad policy is defined as having any of the moderate or extreme policy dummies set to one, with a minimum of 4 policy observations available for that country-year. The summary measure shows a downward trend in bad policy outcomes worldwide, in Latin America, and in Sub-Saharan Africa. The sharpest break is around the mid-1990s, somewhat after the formulation of the Washington Consensus and the first negative reactions it received.

Here’s the aforementioned Figure 6.

And he also looks at the prevalence of extremely bad poliicy.

Figure 7 shows a similar graph to Figure 6, but now limited to extremely bad policy outcomes. It shows if any of the extremely bad policy dummies is set to one, for the sample with a minimum of at least two out of five policy outcomes available. The decline in the prevalence of any extreme policy is even more dramatic beginning in the early 1990s, going from surprisingly common (above 35 percent of countries up to the early 1990s) to almost non-existent for the world. The same pattern is even more striking for Africa and for Latin America.

Here’s Figure 7.

Most important, these better outcomes also are associated with stronger growth.

This paper showed these changes in policy outcomes – especially away from extreme policies — were accompanied by growth increases. It documented that the policy reforms can explain the growth increases in the regions most emphasized earlier – Africa and Latin America. We have seen that the old data available through 1998 was indeed consistent with the reform pessimism, partly because of weaker results on growth payoffs associated with reform outcomes and partly because less reform had happened.

Prof. Easterly acknowledges that there are still many issues to investigate and that his research is just one slice at a big pie.

But the bottom line is that we now have some good evidence that the Washington Consensus led to better results. Simply stated, capitalism produces more growth and less poverty. Too bad the IMF and other international bureaucracies have forgotten this lesson.

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Image credit: Bjoertvedt | CC BY-SA 3.

Court Declines to Reinstate Obama Era Internet Regulations

Fri, 10/04/2019 - 12:26pm

The DC Circuit Court of Appeals this week handed down its opinion in Mozilla v. Federal Communications Commission, the effort to reimpose through litigation the Obama administration’s internet takeover. Thankfully, the court opted to follow precedent and acknowledge the validity of the FCC’s Restoring Internet Freedom Act, which reversed the Obama-era reclassification of broadband services under 1930s era rules that threatened the internet with unprecedented levels of government control.

Advocates for a regulated internet claim their concern is “net neutrality,” but they ignore that the principle was enforced by the FTC before the FCC usurped authority over the internet using Title II.

At the prospect of reversing that power grab, they conjured all manner of scenarios to support their predictions of doom. But it’s now been over a year, and none of it has come true.

Those committed to 1930’s style regulation of the internet under Title II appear committed to their path despite the contradictory evidence. They’ve scared up a lot of public support (remember the ridiculous spectacle of website “blackouts” when the FCC was voting?) by spreading fear and misinformation.

The hope of turning that passion into votes, while advancing their ideological agenda of growing the power and scope of government beyond all imaginable boundaries, means this fight is far from done.

 

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Image credit: andibreit | Pixabay License.

More Economic Illiteracy from the New York Times

Thu, 10/03/2019 - 12:48pm

sometimes mock the New York Times for dodgy and inaccurate writing about economics.

Though, to be fair, the paper has many sound journalists who do a good job, so I should be more careful about explaining that the mistakes are the result of specific reporters and columnists.

Paul Krugman is an obvious example.

And we should add David Leonhardt to the list. He actually claims that imposing a wealth tax and confiscating private capital can lead to more growth.

There are two problems with the arguments from these opponents. First, they’re based on a premise that the American economy is doing just fine and we shouldn’t mess with success. …Second, …it’s also plausible that a wealth tax would accelerate economic growth. …A large portion of society’s resources are held by a tiny slice of people, who aren’t using the resources very efficiently. …Sure, it’s theoretically possible that some entrepreneurs and investors might work less hard… But it’s more likely that any such effect would be small — and more than outweighed by the return that the economy would get on the programs that a wealth tax would finance, like education, scientific research, infrastructure and more.

Wow. It’s rare to see so much inaccuracy in so few words.

Let’s review his arguments.

His first claim is utter nonsense. I’ve been following the debate over the wealth tax for years, and I’ve never run across a critic who argued that the wealth tax is a bad idea because the economy is “doing just fine.”

Instead, critics invariably explain that the tax is a bad idea because it would exacerbate the tax code’s bias against saving and investment and thus have a negative effect on jobs, wages, productivity, and competitiveness.

And those arguments are true and relevant whether the economy is booming, in a recession, or somewhere in between.

His second claim is equally absurd. He wants readers to believe that government spending is good for growth and that those benefits will more than offset the economic harm from the punitive tax.

To be fair, at least this is not a make-believe argument. Left-leaning bureaucracies such as the International Monetary Fund and Organization for Economic Cooperation and Development have been pushing this idea in recent years. They use phrases such as “resource mobilization” and “financing for development” to argue that higher taxes will lead to more growth because governments somehow will use money wisely.

Needless to say, that’s a preposterousanti-empirical assertion. Especially when dealing with a tax that would do lots of damage on a per-dollar-collected basis.

Interestingly, a news report in the New York Times had a much more rational assessment, largely focusing on the degree of damage such a tax would cause.

Progressive Democrats are advocating the most drastic shift in tax policy in over a century as they look to redistribute wealth…with new taxes that could fundamentally reshape the United States economy. …Senators Elizabeth Warren of Massachusetts and Bernie Sanders of Vermont have proposed wealth taxes that would shrink the fortunes of the richest Americans. Their plans envision an enormous transfer of money from the wealthy… the idea of redistributing wealth by targeting billionaires is stirring fierce debates at the highest ranks of academia and business, with opponents arguing it would cripple economic growth, sap the motivation of entrepreneurs who aspire to be multimillionaires and set off a search for loopholes. …At a conference sponsored by the Brookings Institution in September, N. Gregory Mankiw, a Harvard economist, …offered a searing critique, arguing that a wealth tax would skew incentives that could alter when the superrich make investments, how they give to charity and even potentially spur a wave of divorces for tax purposes. He also noted that billionaires, with their legions of lawyers and accountants, have proven to be experts at gaming the system to avoid even the most onerous taxes. …“On the one hand it’s a bad policy, and then the other thing is it’s a feckless policy,” Mr. Mankiw said. Left-leaning economists have expressed their own doubts about a wealth tax. Earlier this year, Lawrence Summers, who was President Bill Clinton’s Treasury secretary, warned…that wealth taxes would sap innovation by putting new burdens on entrepreneurial businesses while they are starting up. In their view, a country with more millionaires is a sign of economic vibrancy.

This is an example of good reporting. It cited supporters and opponents and fairly represented their arguments.

Readers learn that the real debate is over the magnitude of economic harm.

Speaking of which, a Bloomberg column explains how much money might get siphoned from the private economy if a wealth tax is imposed.

Billionaires such as Jeff Bezos, Bill Gates and Warren Buffett could have collectively lost hundreds of billions of dollars in net worth over decades if presidential candidate Elizabeth Warren’s wealth tax plan had been in effect — and they had done nothing to avoid it. That’s according to calculations in a new paper by two French economists, who helped her devise the proposed tax on the wealthiest Americans. The top 15 richest Americans would have seen their net worth decline by more than half to $433.9 billion had Warren’s plan been in place since 1982, according to the paper by University of California, Berkeley professors Emmanuel Saez and Gabriel Zucman. …The calculations underscore how a wealth tax of just a few percentage points might erode fortunes over time.

Here’s the chart that accompanied the article.

What matters to the economy, though, is not the amount of wealth owned by individual entrepreneurs.

Instead, it’s the amount of saving and investment (i.e., the stock of capital) in the economy.

A wealth tax is bad news because it diverts capital from the private sector and transfers it to Washington where politicians will squander the funds (notwithstanding David Leonhardt’s fanciful hopes).

So I decided to edit the Bloomberg chart so that is gives us an idea of how the economy will be impacted.

The bottom line is that wealth taxation would be very harmful to America’s economy.

P.S. Several years ago, bureaucrats at the IMF tried to argue that a wealth tax wouldn’t damage growth if two impossible conditions were satisfied: 1) It was a total surprise, and 2) It was only imposed one time.

New Tax Rankings: Estonia on Top, France at the Bottom, and Progress for the USA

Wed, 10/02/2019 - 11:46am

The Tax Foundation churns out lots of good information, but I especially look forward to their International Tax Competitiveness Index.

It shows how nations rank based on key tax variables such as corporate taxationpersonal income tax, and international tax rules.

The latest edition shows good news and bad news for the United States. The good news, as you see in this chart, is that the 2017 tax reform improved America’s ranking from 28 to 21.

The bad news is that the United States is still in the bottom half of industrialized nations.

We should copy Estonia, which has been in first place for six consecutive years.

For the sixth year in a row, Estonia has the best tax code in the OECD. Its top score is driven by four positive features of its tax code. First, it has a 20 percent tax rate on corporate income that is only applied to distributed profits. Second, it has a flat 20 percent tax on individual income that does not apply to personal dividend income. Third, its property tax applies only to the value of land, rather than to the value of real property or capital. Finally, it has a territorial tax system that exempts 100 percent of foreign profits earned by domestic corporations from domestic taxation, with few restrictions. …For the sixth year in a row, France has the least competitive tax system in the OECD. It has one of the highest corporate income tax rates in the OECD (34.4 percent), high property taxes, a net tax on real estate wealth, a financial transaction tax, and an estate tax. France also has high, progressive, individual income taxes that apply to both dividend and capital gains income.

Here are some other important observations from the report, including mostly positive news on wealth taxation as well as more information on France’s fiscal decay.

…some countries like the United States and Belgium have reduced their corporate income tax rates by several percentage points, others, like Korea and Portugal, have increased them. Corporate tax base improvements have been put in place in the United States, United Kingdom, and Canada, while tax bases were made less competitive in Chile and Korea. Several EU countries have recently adopted international tax regulations like Controlled Foreign Corporation rules that can have negative economic impacts. Additionally, while many countries have removed their net wealth taxes in recent decades, Belgium recently adopted a new tax on net wealth. …Over the last few decades, France has introduced several reforms that have significantly increased marginal tax rates on work, saving, and investment.

For those who like data, here are the complete rankings, which also show how countries score in the various component variables.

Notice that the United States (highlighted in red) gets very bad scores for property taxation and international tax rules. But that bad news is somewhat offset by getting a very good score on consumption taxation (let’s hope politicians never achieve their dream of imposing a value-added tax!).

And it’s no big surprise to see countries like New Zealand and Switzerland get high scores.

P.S. My only complaint about the International Tax Competitiveness Index is that I would like it to include even more information. There presumably would be challenges in finding apples-to-apples comparative data, but I’d be curious to find out whether Hong Kong and Singapore would beat out Estonia. And would zero-tax jurisdictions such as Monaco and the Cayman Islands get the highest scores of all? Also, what would happen if a variable on the aggregate tax burden was added to the equation? I’m guessing some nations such as Sweden and the Netherlands might fall, while other countries such as Chile and Poland (and probably the U.S.) would climb.

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Image credit: geralt | Pixabay License.

China: From Mao’s Failure to Partial Economic Reform to…?

Tue, 10/01/2019 - 12:38pm

Today, October 1, is the 70th anniversary of communists seizing power in China.

Given the horrible consequences of Mao’s rule, including tens of millions of deaths from famine and tyranny, this tweet from President Trump seems rather inappropriate.

Congratulations to President Xi and the Chinese people on the 70th Anniversary of the People’s Republic of China!

— Donald J. Trump (@realDonaldTrump) October 1, 2019

That being said, it’s also worth pointing that today’s China is far better than Mao’s China. Simply stated, it’s no longer a communist nation, at least in the sense that there’s been a decent amount of economic liberalization (starting in a small village in 1979). China is now ranked #113 by Economic Freedom of the World. That’s definitely not anything to cheer about, but its score of 6.42 is way higher than the 3.59 of 1980. And, for what it’s worth, China is currently ranked higher than Kuwait (#114), Brazil (#120), Ukraine (#135), and Pakistan (#136). And none of those are considered communist nations. This isn’t merely my opinion. In an article for Project Syndicate, Zhang Jun explains that a shift toward capitalism – even if only partial – explains what China has enjoyed impressive growth.

The rise of China is widely attributed to its state capitalism, whereby the government, endowed with huge assets, can pursue a wide-ranging industrial policy and intervene to mitigate risks. Accordingly, China owes its success, first and foremost, to the government’s “control” over the entire economy. This explanation is fundamentally wrong. …China is using its long-term planning and robust implementation capacity not to entrench state capitalism, but rather to advance economic liberalization and structural reform. It is this long-term strategy – which has remained unswerving, despite some stumbles and short-term deviations – that lies at the heart of the country’s decades-long run of rapid economic growth. …this process of economic liberalization and structural reform is also uniquely Chinese, insofar as it has emphasized local-level competition and experimentation… The result is a kind of de facto fiscal federalism – and a powerful driver of economic transformation. …China has traveled far along the path of reform and opening up. But it should not underestimate the challenges ahead, let alone forget how it got this far in the first place.

You won’t be surprised to learn that Crazy Bernie hasn’t learned from this experience. Here are some excerpts from a column in the Wall Street Journal by Joshua Muravchik.

Sen. Bernie Sanders’s praise for the government of China should raise eyebrows… In an interview last month with the Hill, Mr. Sanders…asserted that “what we have to say about China, in fairness to China and its leadership, is . . . they have made more progress in addressing extreme poverty than any country in the history of civilization.” …Mr. Sanders’s comment about China has a basis in fact. According to the World Bank, 88% of Chinese lived on less than $1.90 a day in 1981. Today less than 1% do. (These figures are in 2011 dollars, adjusted for purchasing power parity.) Yet that success didn’t come from socialism. It’s a product of China’s move away from socialism. And it came at the cost—at least by Mr. Sanders’s usual lights—of heightened inequality. …Mr. Sanders urges a “political revolution” and a “wholesale transformation of our society” from capitalism to socialism—the reverse of what China did 40 years ago. …Yet Mr. Sanders’s accurate observation about China’s record in ending poverty ought to give him pause. Mao Zedong’s China was the apotheosis of class warfare…and shared poverty (except Mao himself, who lived like royalty with a few of his cohorts). …the core difference between socialism, which focuses on how to distribute wealth, and capitalism, which is concerned primarily with how to produce it. China’s experience teaches anew that the latter is more important than the former, for the poor as well as the rich.

But what about the future? Is China on a reform trajectory? There’s no way to answer that question with any certainty, but there are some worrisome signs. Here’s a tweet from a journalist for the Economist (hopefully he has more sense than some of his colleagues). It shows a shift toward more state-driven investment.

Regression of China’s economy towards more of a state-led model continues. In the decade before Xi’s presidency, growth of private-sector investment outstripped that of state investment 90% of the time. Since 2015, state has been on top 75% of the time. (1/2) pic.twitter.com/tl5hghuj2G

— Simon Rabinovitch (@S_Rabinovitch) September 16, 2019

I’m not sure if we’re seeing a trend or a blip.

But I am sure that much more reform is needed. One area is the “hukou” system, which Leo Austin describes in an article for CapX.

China has had a ‘hukou’ (or similar) household registration system…, which identifies and determines the rightful home of each individual, the place where they enjoy state education and medical services. If you are very lucky this is Beijing, Shanghai, Guangzhou or Shenzhen. …But for most people it is a rural county. …It is very difficult for the children of rural migrants to graduate from an urban school… The hukou system has led to a long history of wage suppression in China. Compared to its Asian neighbours, wages in China have historically been much lower than they should be at the same level of GDP. …People weren’t free to move to where the best jobs were. The huge state enterprises in their hometowns provided free education and free medical services, but they didn’t have to compete for workers and they didn’t have to pay the best wages. …If you look at consumption as a share of GDP and compare China to the other Asian Tigers, by 2016 China was consuming 20% less than Japan and 30% less than Korea did at the same level of development.

And China also is being held back by the politicized allocation of capital.

Resources go to the wrong people. State owned enterprises represent maybe a third of GDP in China today, but they still received around 82% of all the corporate bank loans in 2018, at least in the legal banking system. The money is not invested wisely. According to the Nikkei Asian Review, for the nearly 300 non-financial state owned enterprises (SOE) listed in China, returns on equity fell by half in the loose-money boom years between 2007 and 2017. Over the same period, the return on equity for comparable US and European companies rose – ending more than double the level of Chinese SOEs. All this has a serious impact on productivity – as Conference Board research shows, China’s Total Factor Productivity for the period 2013 to 2018 was negative.  In most economies, productivity improvements drive GDP growth every year in the absence of population or capital growth. In China, productivity was a drag on growth… China cannot be a true competitor to the US until it allows merit and innovation to allocate capital and rewards. An economy built on wage suppression and state investment can be large, but it cannot be competitive in the long-term. …Unless the state retreats, it may yet bankrupt the country.

My two cents is that state-directed investment is a big problem, and it is an indirect cause of bad trade relations with the rest of the world.

Let’s wrap up with a look at the history of economic freedom in China.

As you can see, there was a big improvement from 1980-2000, then very incremental improvements this century.

The good news is that China continues to move in the right direction.

The bad news is that the pace of reform is very slow.

And the big worry is that China’s score could move in the wrong direction. Especially with policies that exacerbate the nation’s debt problem.

P.S. What happens with Hong Kong is a wild card. Hopefully, Beijing will resist any temptation to intervene.

P.P.S. China definitely needs to ignore the horrible advice it’s getting from the IMF and OECD. It should also ignore the New York Times.

P.P.P.S. If nothing else, China shows us why policy makers should focus on growth rather than equality.

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Image credit: wuwow | Pixabay License.

The Painful Impact of a Financial Transactions Tax

Mon, 09/30/2019 - 12:21pm

I was interviewed a couple of days ago about rival tax plans by various Democratic presidential candidates.

It’s the “Class Warfare Olympics,” and even Joe Biden is thinking about going hard left with a tax on financial transactions.

It’s not just Joe Biden’s crazy idea. Other Democratic candidates have endorsed the idea, as has Nancy Pelosi, and CNBC reports that legislation has been introduced in the House and the Senate.

House Democrats are reintroducing their proposal of a financial transaction tax on stock, bond and derivative deals, and this time they’ve signed on a key new supporter: left-wing firebrand Rep. Alexandria Ocasio-Cortez. …“This option would increase revenues by $777 billion from 2019 through 2028, according to an estimate by the staff of the Joint Committee on Taxation,” the Congressional Budget Office’s website says. …The House bill comes on the heels of its companion legislation introduced by Sen. Brian Schatz, D-Hawaii, in the other chamber. Republicans have a 53-47 majority in the Senate.

Needless to say, I’m not surprised to see that AOC is on board. I don’t think there’s a tax she doesn’t want to impose and/or increase.

By the way, I should note that she and other advocates generally are looking at more limited FTTs that would tax transactions only in financial markets, so there wouldn’t necessarily be any direct burden when we write a check or visit the ATM.

But even this more restrained FTT would be very bad news, with significant indirect costs on ordinary people.

Some analysis from the Tax Foundation highlights some of the drawbacks from this tax.

Policymakers should be wary about adopting a financial transactions tax. Like a gross receipts tax, a financial transactions tax results in tax pyramiding. The same economic activity is taxed multiple times. For example, an individual might sell a stock worth $100 to diversify her portfolio and then purchase stock in a new company with that same $100. The $100 is being taxed twice: first, when the individual sells the stock, and then again when the money is used to buy the new security. Imagine this happening thousands of times a day. …That is why this tax would generate nearly $770 billion over a decade. …Supporters, however, argue that the Wall Street Tax Act is needed, because it would reduce volatility in financial markets. It’s not clear that it would reduce volatility. In 2012, the Bank of Canada studied the issue and concluded that “little evidence is found to suggest that an FTT [financial transactions tax] would reduce speculative trading or volatility. In fact, several studies conclude that an FTT increases volatility and bid-ask spreads and decreases trading volume.” …Sweden’s imposition of a financial transactions tax in the 1980s illustrates the challenges perfectly. The country experienced a 60 percent decrease in trading volume as it moved to other markets, as well as a decrease in revenue.

Another report from the Tax Foundation notes the tax can increase volatility and cause direct and indirect revenue losses.

A financial transactions tax would distort asset markets, as types of securities traded more frequently would be taxed much more than assets traded less frequently. This distortion would lead to investors holding certain assets longer than they should in order to avoid the tax. The tax also decreases liquidity and increases transaction costs. …it will also discourage transactions between well-informed investors; furthermore, much of the research on the issue of volatility suggests that higher transaction costs correlate with more volatility, not less. Financial transactions taxes are also not surefire revenue generators. In the 1980s, Sweden imposed a financial transactions tax, and, thanks to the relative mobility of capital markets, 60 percent of trades moved to different markets. Not only did this behavior mean that the financial transactions tax raised little revenue, it also drove down revenue for the capital gains tax, ultimately lowering total government receipts.

column in the Wall Street Journal notes that such a levy would directly and indirectly hurt ordinary people.

The proposed 0.1% tax on all financial transactions—trades in stocks, bonds, derivatives—may sound small, but it could make markets less stable and hurt small investors. …advocates overlook the breadth of smaller investors… Each day, more than $1 trillion in securities are traded in the U.S., mostly by large investment managers that represent not only wealthy investors, but also 401(k) plans, public pensions and middle-income families. …even a small tax is significant enough to affect trading strategy and raise costs. Such firms…use the minimal cost of automated, high-frequency trading to reduce the need for paid traders, generating savings for investors. …high-frequency traders provide liquidity and have reduced the gap between bid and ask rates in almost every asset class. The disruptive effect of transaction taxes is more than theoretical. The Chinese government has taxed trades since the early 1990s, and its gradual reduction of the tax on certain types of stocks offers an occasion to measure the tax’s effects. A 2014 study by University of Southern California finance professor Yongxiang Wang found that as the tax decreased, affected companies saw corresponding increases in capital investment, innovation and equity financing. …Sweden and France similarly have introduced financial-transactions taxes over the past few decades, resulting in heightened market volatility and declining liquidity, respectively. …Even at a 0.1% rate, the Joint Committee on Taxation estimates the proposed tax would raise $777 billion over 10 years—all taken out of potentially productive private investment. …financial transactions are highly mobile and easy to move to another jurisdiction. Two parties to a financial contract settled in New York can just as easily sign and enforce the contract in the Cayman Islands, for instance, avoiding the tax.

Interestingly, the Washington Post‘s editorial on the topic back in 2016 noted some significant downsides.

It’s worth noting that the United States had a 0.02 percent tax on stock trades in force during the 1920s, and the market still crashed in 1929. If the tax is too high, however, you could stamp out needed price-discovery, hedging and liquidity, thus destroying efficiency and economic growth. Oh, and you also could end up collecting no revenue, or less than you expected, as market activity dried up or fled to more lightly taxed jurisdictions overseas. For these and other reasons, in 1991 Sweden had to repeal a financial transaction tax it had imposed just seven years earlier. An analysis of financial transaction taxes, both actual and proposed, by the nonpartisan Tax Policy Center…shows rapidly diminishing returns once the tax rate exceeds a certain level; a 0.5 percent tax brings in about the same amount of revenue as a 0.1 percent rate.

For what it’s worth, I expect that the Post will do an about-face and embrace the tax as we get closer to the 2020 election.

Though I hope I’m wrong about that.

Let’s close with some excerpts from three substantive studies.

Tim Worstall, in a report for London’s Institute for Economic Affairs, analyzes the harmful effect of a proposed European-wide FTT.

The Robin Hood Tax campaign seems to think that hundreds of billions of dollars can be extracted from the financial markets without anyone really noticing very much: a rather naïve if cute idea. The European Commission is continuing its decades-long campaign to have its ‘own resources’. Under its proposal, FTT revenue would be sent to the Commission, which would thus become less dependent on national governments for its budget. This is neither unusual nor reprehensible in a bureaucracy. It is the nature of the beast that it would like to have its own money to spend without being beholden. …The first and great lesson of tax incidence is that taxes on companies are not paid by companies. …The importance of this effect is still argued over. Various reports from various people with different assumptions about capital openness and so on lead to estimates of 30-70% of corporation tax really being paid by the workers, the rest by the shareholders. One study, Atkinson and Stiglitz (1980), points to the at least theoretical possibility that the incidence on the workers’ wages can be over 100%. That is, that the employees lose in wages more than the revenue raised by the tax. So what will be the incidence of an FTT? … the incidence of the FTT will be upon workers in the form of lower wages, upon consumers of financial products in higher prices and that the incidence, the loss of income resulting from the tax, will be over 100%. The loss will be greater than the revenues raised.

here’s some research from the Committee for Capital Markets Regulation.

For over 300 years, financial transaction taxes (“FTTs”) have been proposed, discussed, and implemented in various forms across global financial markets. And for over 300 years, FTTs have been a failure wherever imposed, frequently failing to raise the promised revenues, while simultaneously damaging the efficiency of the affected markets. Recent proposals for an FTT in the United States would likely have a similar result. …FTT proponents also ignore the empirical evidence from other countries that have imposed FTTs that universally demonstrates that (i) FTTs fall far short of revenue expectations and (ii) securities markets – and by extension the real economy as well as all investors and taxpayers – are significantly harmed by FTTs due to the wide array of beneficial trading activity that is indiscriminately targeted. In fact, many of the G20 countries that have experimented with FTTs in the past, including Germany, Italy, Japan, the Netherlands, Portugal and Sweden, ultimately repealed such taxes due to the damage that they caused.

Last but not least, a study from the Center for Capital Markets Competitiveness has lots of valuable information.

Lower stock prices make it harder for growing businesses to sell stock to raise the capital they need to grow their businesses. At the same time, business borrowing costs through the corporate bond market will go up for the same reason. Lenders will require a higher pre-tax return in order to retain the same after-tax return. …This increase in the cost of capital due to higher interest rates means that businesses will have to spend more in order to raise capital, resulting in less capital investment and fewer jobs. …For example, economists for the European Union conducted a 1,223-page study on the impact of a proposed 0.10% transaction tax under consideration, the same tax rate as that proposed by Sen. Schatz. They found that such a tax would lower GDP by 1.76% while raising revenue of only 0.08% of GDP.26 In other words, the cost to the economy is far more than the revenue raised. …We can learn from U.S. history how little revenue an FTT would raise. When the last FTT was abolished, the rate was approximately 0.4% with a limit of 8 cents per share. Congress estimated that the tax would raise a mere $195 million in 1966. This represents 0.0285% of 1966’s $813 billion GDP. Applying the same percentage to today’s $21 trillion GDP yields an annual revenue of less than $6 billon—less than one-tenth of Sen. Schatz’s projections for such a tax today.

This map from the study is especially helpful.

Just as is the case for wealth taxes, governments have not had positive experiences when they impose this levy.

P.S. Speaking of wealth taxes, I did note in the above interview that those levies are presumably the most destructive because of their negative effect on saving and investment.

P.P.S. If I’m a judge in the Class Warfare Olympics, I’m giving the Gold Medal to Bernie Sanders, the Silver Medal to Elizabeth Warren, and the Bronze Medal to Kamala Harris.

P.P.P.S. As I warned in the interview, the class-warfare taxes won’t collect much revenue, especially compared to the massive spending increases the candidates are proposing. That’s why the middle class is the real target.

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Image credit: geralt | Pixabay License.

The Trump-Obama Approach on Fannie Mae and Freddie Mac Will Lead to Future Financial Instability

Sun, 09/29/2019 - 12:10pm

The 2008 financial crisis was largely the result of bad government policy, including subsidies for the housing sector from Fannie Mae and Freddie Mac.

This video is 10 years old, but it does a great job of explaining the damaging role of those two government-created entities.

The financial crisis led to many decisions in Washington, most notably “moral hazard” and the corrupt TARP bailout.

But the silver lining to that dark cloud is that Fannie and Freddie were placed in “conservatorship,” which basically has curtailed their actions over the past 10 years.

Indeed, some people even hoped that the Trump Administration would take advantage of their weakened status to unwind Fannie and Freddie and allow the free market to determine the future of housing finance.

Those hopes have been dashed.

Cronyists in the Treasury Department unveiled a plan earlier this year that will resuscitate Fannie and Freddie and recreate the bad incentives that led to the mess last decade.

This proposal may be even further to the left than proposals from the Obama Administration. And, as Peter Wallison and Edward Pinto of the American Enterprise Institute explained in the Wall Street Journal earlier this year, this won’t end well.

…the president’s Memorandum on Housing Finance Reform…is a major disappointment. It will keep taxpayers on the hook for more than $7 trillion in mortgage debt. And it is likely to induce another housing-market bust, for which President Trump will take the blame.The memo directs the Treasury to produce a government housing-finance system that roughly replicates what existed before 2008: government backing for the obligations of the government-sponsored enterprises Fannie Mae and Freddie Mac , and affordable-housing mandates requiring the GSEs to encourage and engage in risky mortgage lending. …Most of the U.S. economy is open to the innovation and competition of the private sector. Yet for no discernible reason, the housing market—one-sixth of the U.S. economy—is and has been controlled by the government to a far greater extent than in any other developed country. …The resulting policies produced a highly volatile U.S. housing market, subject to enormous booms and busts. Its culmination was the 2008 financial crisis, in which a massive housing-price boom—driven by the credit leverage associated with low down payments—led to millions of mortgage defaults when housing prices regressed to the long-term mean.

Wallison also authored an article that was published this past week by National Review.

He warns again that the Trump Administration is making a grave mistake by choosing government over free enterprise.

Treasury’s plan for releasing Fannie Mae and Freddie Mac from their conservatorships is missing only one thing: a good reason for doing it. The dangers the two companies will create for the U.S. economy will far outweigh whatever benefits Treasury sees. Under the plan, Fannie and Freddie will be fully recapitalized… The Treasury says the purpose of their recapitalization is to protect the taxpayers in the event that the two firms fail again. But that makes little sense. The taxpayers would not have to be protected if the companies were adequately capitalized and operated without government backing. Indeed, it should have been clear by now that government backing for private profit-seeking firms is a clear and present danger to the stability of the U.S. financial system. Government support enables companies to raise virtually unlimited debt while taking financial risks that the market would routinely deny to firms that operate without it. …their government support will allow them to earn significant profits in a different way — by taking on the risks of subprime and other high-cost mortgage loans. That business would make effective use of their government backing and — at least for a while — earn the profits that their shareholders will demand. …This is an open invitation to create another financial crisis. If we learned anything from the 2008 mortgage market collapse, it is that once a government-backed entity begins to accept mortgages with low down payments and high debt-to-income ratios, the entire market begins to shift in that direction. …why is the Treasury proposing this plan? There is no obvious need for a government-backed profit-making firm in today’s housing finance market. FHA could assume the important role of helping low- and moderate-income families buy their first home. …Why this hasn’t already happened in a conservative administration remains an enduring mystery.

I’ll conclude by sharing some academic research that debunks the notion that housing would suffer in the absence of Fannie and Freddie.

working paper by two economists at the Federal Reserve finds that Fannie and Freddie have not increased homeownership.

The U.S. government guarantees a majority of mortgages, which is often justified as a means to promote homeownership. In this paper, we estimate the effect by using a difference-in-differences design, with detailed property-level data, that exploits changes of the conforming loan limits (CLLs) along county borders. We find a sizable effect of CLLs on government guarantees but no robust effect on homeownership. Thus, government guarantees could be considerably reduced,with very modest effects on the homeownership rate. Our finding is particularly relevant for recent housing finance reform plans that propose to gradually reduce the government’s involvement in the mortgage market by reducing the CLLs.

For those who care about the wonky details, here’s the most relevant set of charts, which led the Fed economists to conclude that, “There appears to be no positive effect of the CLL increases in 2008 and no negative effect of the CLL reductions in 2011.”

And let’s not forget that other academic research has shown that government favoritism for the housing sector harms overall economic growth by diverting capital from business investment.

The bottom line is that Fannie and Freddie are cronyist institutions that hurt the economy and create financial instability, while providing no benefit except to a handful of insiders.

As I suggested many years ago, they should be dumped in the Potomac River. Unfortunately, the Trump Administration is choosing Obama-style interventionism over fairness and free markets.

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Image credit: futureatlas.com | CC BY 2.0.

Why Is The Economist Misleading Readers About Poverty?

Sat, 09/28/2019 - 12:32pm

I’ve created a new page to showcase various “Poverty Hucksters.”

These are people and institutions that use data about income distribution to mislead and lie about the prevalence of poverty in the United States.

This rogue’s gallery includes:

What is their dodgy tactic? Here’s how I described the methodology in 2018.

…the bureaucrats…have put together a measure of income distribution and decided that “relative poverty” exists for anyone who has less than 50 percent of the median level of disposable income.

More recently, I explained why this approach is senseless, at least if one wants to measure actual poverty

…an artificial and misleading definition of poverty. One that depends on the distribution of income rather than any specific measure of poverty. Which is insanely dishonest. It means that everyone’s income could double and the supposed rate of poverty would stay the same. Or a country could execute all the rich people and the alleged rate of poverty would decline.

Now we have a new member of this ill-begotten group of hucksters.

Here’s an excerpt from an article in the latest issue of the Economist.

…international comparisons…make…America a true outlier. When assessed on poverty relative to other countries (the share of families making less than 50% of the national median income after taxes and transfers), America is among the worst-performing in the OECD club of mostly rich countries (see chart). Despite its higher level of income, that is not because it starts with a very large share of poor people before supports kick in—it is just that the safety net does not do as much work as elsewhere. On this relative-poverty scale, more than a fifth of American children remain poor after government benefits, compared with 3.6% of Finnish children.

And here’s the accompanying chart.

Needless to say, any chart that purports to show less poverty in Mexico than the United States is laughably inaccurate.

But that’s the kind of perverse outcome that is generated when using a ridiculously dishonest approach.

I suppose the Economist deserves a bit of credit. In both the article and in the chart, they acknowledge (at least for careful readers) that they’re measuring the share of the population with less than 50 percent of a society’s median income, not the share of people living in poverty.

So why, then, do they refer to the “poverty rate”?

I have no idea if the reporter is dishonest or incompetent, but I can say with certainty that the Economist has done a disservice to readers.

P.S. The Economist relied on dodgy data from the Organization for Economic Cooperation and Development. And if you read the columns about the other Poverty Hucksters, you’ll find that most of them also relied on numbers from that left-leaning, Paris-based bureaucracy. Yet another example of why the OECD is the worst international bureaucracy, at least on a per-dollar-spent basis.

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Image credit: HonestReporting | CC BY-SA 2.0.

Yes to Globalization, No to Global Governance

Fri, 09/27/2019 - 12:13pm

I’m a big fan of globalization, so does that make me a globalist?

That depends on what is meant by that term. If it means free trade and peaceful interaction with other nations, the answer is yes.

But if it means global governance by anti-market bureaucracies such as the United NationsInternational Monetary Fund, and Organization for Economic Cooperation and Development, the answer is a resounding no.

So I have mixed feelings about this video from Dalibor Rohac of the American Enterprise Institute.

I can’t resist nit-picking on some of his points.

While I have disagreements with Dalibor, that definitely doesn’t put me in the same camp as Donald Trump.

The President is an incoherent mix. He combines odious protectionism with mostly-empty rhetoric about globalism. And he does all that without understanding issues – and, in some cases, his actions are contrary to his rhetoric.

Dan Henninger wrote about these issues two days ago for the Wall Street Journal.

He wisely warns that failures by national governments (most notably unaffordable welfare states and incompetent administrative states) are creating openings for unpalatable alternatives.

Global governance is one distressing possibility. Henninger worries about Chinese-style administrative authoritarianism.

President Trump at the United Nations this week elaborated on his long-running antagonism toward globalism. …There is merit to these concerns, but I think the critics of “globalism,” including most prominently Mr. Trump, underestimate the near-term danger of the serious difficulties appearing today in national democratic governance. Democracies maintain their legitimacy in the public’s eye only if they demonstrate a reasonable capacity to address society’s inevitably complex challenges. …it’s clear that many of the 21st century’s independent nations are having a remarkably difficult time executing their sovereign responsibilities. …Mr. Trump’s concerns about undemocratic governance by remote international bureaucracies are plausible, but the greater threat is more imminent. If the expansion of an increasingly dysfunctional administrative state inside the world’s sovereign democracies is inexorable and unreformable, the future will belong to China’s brand of administrative authoritarianism. …Elizabeth Warren and her multiple plans—heavily dependent on criminal prosecutions and intense oversight—is flirting with a milder version of this future.

Henninger is certainly correct that nations mostly get in trouble because of their own mistakes.

For instance, I’ve pointed out that the fiscal crisis in Europe should not be blamed on the euro.

That being said, global governance often creates moral hazard, which tends to exacerbate and encourage bad policy by national governments.

Let’s now look at an interesting column that John Bolton (Trump’s former National Security Advisor) wrote on global governance for the U.K.-based Times back in 2016. Here are some of the key passages.

He makes the should-be-obvious point that not all international bureaucracies are alike.

…international organisations sometimes act as if they are governments rather than associations of governments and sprout bureaucracies with pretensions beyond those of cosseted elites in national capitals. …International bodies take many different forms, and it serves no analytical purpose to treat them interchangeably. Nato, for example, is not equivalent to the United Nations. Neither is equivalent to the European Union. Each has different objectives, and different implications for constitutional and democratic sovereignty. …Nato is America’s kind of international partnership: a classic politico-military alliance of nation states. It has never purported to assume sovereign functions, and is as distant as is imaginable from the EU paradigm.

He explains that some of them – most notably the IMF – are counterproductive and should be shut down.

Proposals to reform the UN and its affiliated bodies such as the World Bank and the IMF are almost endless. The real question is whether serious, sweeping reform of these organisations…is ever possible. …In 1998, during the Asian financial crisis, the former secretaries of the Treasury William Simon and George Shultz, and Walter Wriston, a former chairman of Citibank, wrote in The Wall Street Journal: “The IMF is ineffective, unnecessary, and obsolete. We do not need another IMF, as Mr. [George] Soros recommends. Once the Asian crisis is over, we should abolish the one we have.” …We should consider privatising all the development banks… We should ask why US taxpayers are compelled to provide subsidised interest rates for loans by international development banks.

Amen.

He also opines about Brexit.

…the Brexit referendum was, above all else, a reassertion of British sovereignty, a declaration of independence from would-be rulers who, while geographically close, were remote from the peasantry they sought to rule. …The Brexit decision was deplored by British and American elites alike… It does not surprise Americans that British elites have not reconciled themselves to losing… London and Washington can fashion a new economic relationship, perhaps involving Canada, with the potential for significant economic growth. Let the EU wallow in strangling economic regulation, and the euro albatross that Britain wisely never joined.

He’s right, especially the final sentence of that excerpt.

I’ll conclude by reiterating my observation that we should distinguish between good globalization and bad globalization.

The good kind involves trade, peaceful interaction, and jurisdictional competition, all of which are consistent with sovereignty.

The bad kind of globalism involves international bureaucracies acting as supranational governments – almost always (as Nobel laureate Edward Prescott observed) with the goal of enabling and facilitating a larger burden of government.

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Image credit: Basil D Soufi | CC BY-SA 3.0.

The Deadly Campaign Against Vaping and E-Cigarettes

Thu, 09/26/2019 - 12:19pm

Moral panics in Washington are not a recipe for good policy.

That’s why the current attack on vaping (the use of e-cigarettes) is so misguided.

Policy makers want to ban and/or restrict e-cigarettes (especially flavored varieties) for two reasons.

  • Consuming e-cigarettes may cause harm to users.
  • Vaping may lure some young people into using nicotine.

Both of these concerns are reasonable, at least from a utilitarian perspective.

But if we’re taking that approach, policy makers also should be looking at the other side of the cost-benefit equation (the Food and Drug Administration sadly does a lousy job of comparing costs and benefits).

And the under-appreciated benefit of e-cigarettes is that they reduce tobacco consumption, which is far more risky.

The Wall Street Journal opined recently on this issue.

A campaign against vaping products is moving at land speed records, with the Trump Administration announcing this week it will pull flavored e-cigarettes from the market. This is becoming a political pile on, and regulators risk foreclosing one of the best opportunities in public health, which is to reduce cigarette smoking. …Vaping devices include an array of products from pens to tanks. …The point is to offer the buzz of a cigarette without the combustion of tobacco that releases carcinogens and makes smoking so dangerous. …agencies like Public Health England have said such e-cigs are 95% safer than smokes. …No one wants kids addicted to nicotine, and the question is how to balance these competing equities. It is hardly obvious that banning flavors will keep teens from vaping. …A Juul executive told Congress this summer that a result of exiting convenience stores has been other actors exploiting the vacuum by selling illegal flavor pods. Expect more such unintended consequences. And if the flavor ban doesn’t reduce the number of teen vapers, then what? The next step looks like an even broader ban, which won’t be a net positive to public health. …The question is not whether vaping is healthy—it isn’t—but whether the frenzy against e-cigarettes is moving faster than the evidence. …forgotten in the rush are the 480,000 Americans who die each year from smoking.

In addition to his attacks on the twin scourges of salt and large-sized drinks, Michael Bloomberg is a leading advocate of vaping restrictions.

Jacob Sullum of Reason explains why, if successful, his efforts will cause more death.

Former New York City Mayor Michael Bloomberg, the billionaire busybody who can be counted on to oppose individual freedom in almost every area of life, is launching a prohibition crusade against flavored e-cigarettes. …The premise of Bloomberg’s $160 million campaign, which aims to persuade “at least 20 cities and states” to “pass laws banning all flavored tobacco and e-cigarettes,” is that flavored e-liquids are obviously designed to entice “children,” because only children like them. That is demonstrably false. ..Last year, Vaping360, a site aimed at former smokers who have switched to vaping and current smokers who are thinking about it, surveyed readers about their favorite Juul pod flavors. It got more than 38,000 responses, and the top pick by far was Mango (46 percent), followed by Cool Mint (29 percent), Crème Brulée (11 percent), and Fruit Medley (8 percent). …Surveys of former smokers find that flavor variety plays an important role in the process of switching to vaping. The Food and Drug Administration has acknowledged “the role that flavors…may play in helping some smokers switch to potentially less harmful forms of nicotine delivery.” …Bloomberg has “committed nearly $1 billion to aid anti-tobacco efforts.” Now he is committing $160 million to pro-tobacco efforts, lobbying for laws that will drastically reduce the alternatives to conventional cigarettes, resulting in more smoking-related disease and death.

Robert Verbruggen also explains cost-benefit analysis in his column for National Review.

The Trump administration’s Food and Drug Administration is gearing up to ban e-cigarette flavorings besides the ones that taste like tobacco. It’s unclear if this would have any benefits for public health. …Upstart products such as e-cigarettes, which deliver nicotine without all the tar and other nasty chemicals that cigarettes contain, and are estimated to be 95 percent safer as a result. …even for minors it’s far better to vape than to puff Camels, and it’s not as if no adult enjoys, say, strawberry flavoring. Better taste is one reason to vape instead of smoke for pretty much anyone who has to decide between the two, and if e-cigs are limited to tobacco flavoring, this rule could push some people back toward traditional cigarettes. And if real cigarettes are 20 times as dangerous as e-cigs, it doesn’t take much switching to cancel out the benefit of a reduction in vaping.

But I also like his article because he points out that this is another example of the “administrative state” in action.

…this is not a decision that Congress ever should have left in the executive branch’s hands. …in 2009 Congress, in its infinite wisdom, gave the FDA the authority to regulate tobacco products — except for all the products that were already on the market. This meant that the agency would have authority over upstart products competing with cigarettes, but the rules would not apply to cigarettes themselves. ……Congress should write laws, especially laws that ban entire product categories, not turn that power over to unelected busybodies who will opt for regulation over personal freedom every single time they encounter a choice between the two.

Best of all, he makes the libertarian argument that people should enjoy liberty.

What is clear is that it will be a disaster for personal freedom… Smoking cigarettes is one of those things that we allow adults to do even though it’s obviously bad for them, causing numerous cancers and other health problems. …It’s a free country. …One does not need to be a dyed-in-the-wool libertarian to be disgusted at this affront to personal freedom and responsibility. …Adults should be free to do what they want, so long as they take responsibility for the consequences of their actions. That includes smoking. And it definitely includes the far safer alternative of vaping fruit-flavored e-juice.

Amen.

I think the utilitarian argument for vaping is strong. As this visual from an anti-cancer group in the U.K. notes, it passes a cost-benefit test for savings lives.

But utilitarianism isn’t everything.

I can’t resist also unleashing my inner libertarian as we conclude today’s column.

The bottom line is that people should be allowed to take risks. They should even be allowed to make dumb choices.

That includes drug use, sugary drinks, gambling, over-eating, smoking, voting for socialists, hang gliding, alcohol usage, and standing between a politician and a TV camera.

It’s called freedom.

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Image credit: Vaping360 | CC BY 2.0.

Elizabeth Warren’s Reckless Scheme to Expand the Social Security Burden and Undermine American Competitiveness

Wed, 09/25/2019 - 12:17pm

Social Security is projected to consume an ever-larger share of America’s national income, mostly thanks to an aging population.

Indeed, demographic change is why the program is bankrupt, with an inflation-adjusted cash-flow deficit of more than $42 trillion.

Yet Senator Elizabeth Warren wants to make a bad situation even worse.

In a blatant effort to buy votes, she is proposing a radical expansion in the old-age entitlement program. Here’s how USA Today describes her proposal.

Warren’s strategy would make major changes to Social Security, boosting benefits for all and imposing new taxes on high-income earners to finance them. …Under the proposal, everyone would get a $200 increase in monthly payments from Social Security, including both retirement and disability benefits. …Certain groups would see even larger increases. …In order to cover these benefits and shore up Social Security’s future finances, Warren would impose two new taxes. First, a new payroll tax would apply to wages above $250,000, with employees paying 7.4% and employers matching with 7.4% of their own. This is above the 6.2% employee rate that applies to current wages up to $132,900 in 2019, …Second, individual filers making more than $250,000 or joint filers above $400,000 would owe a heightened net investment income tax at a rate of 14.8%. …The Warren proposal breaks new ground by largely disconnecting the benefits that Social Security pays from the wages on which the program collects taxes.

In a column for the Wall Street Journal, John Cogan of the Hoover Institution explains why the proposal is so irresponsible.

It’s a strange campaign season, loaded with fantastical promises of government handouts for health care, college and even a guaranteed national income. But Sen. Elizabeth Warren ’s Social Security plan takes the cake. With trillion-dollar federal budget deficits and Social Security heading for bankruptcy, Ms. Warren proposes to give every current and future Social Security recipient an additional $2,400 a year. She plans to finance her proposal, which would cost more than $150 billion annually, with a 14.8% tax on high-income individuals. …the majority of Ms. Warren’s proposed Social Security bonanza would go to middle- and upper-income seniors. …The plan would cost taxpayers about $70,000 for each senior citizen lifted out of poverty.

Cogan also explains that Warren’s scheme upends FDR’s notion that Social Security should be an “earned benefit.”

The cornerstone of FDR’s Social Security program is its “earned right” principle, under which benefits are earned through payroll-tax contributions. …in a major break from one of FDR’s main Social Security principles, the plan provides no additional benefits in return for the new taxes. …Such a large revenue stream to fund unearned benefits, aptly called “gratuities” in FDR’s era, would put Social Security on a road to becoming a welfare program. …Ms. Warren’s proposal returns the country to an era when elected officials regularly used Social Security as a vote-buying scheme.

For all intents and purposes, Warren has put forth a more radical version of the plan introduced by Congressman John Larson, along with most of his colleagues in the House Democratic Caucus.

And that plan is plenty bad.

Andrew Biggs of the American Enterprise Institute wrote about the economic damage it would cause.

…the Social Security 2100 Act consists of more than 100% tax increases – because it not only raises payroll taxes to fund currently promised benefits, but increases benefits for all current and future retirees. …Social Security’s 12.4% payroll tax rate would rise to 14.8% while the $132,900 salary ceiling on which Social Security taxes apply would be phased out. Combined with federal income taxes, Medicare taxes and state income taxes, high-earning taxpayers could face marginal tax rates topping 60%. …Economists agree that tax increases reduce labor supply, the only disagreement being whether it’s by a little or a lot. Likewise, various research concludes that middle- and upper-income households factor Social Security into how much they’ll save for retirement on their own. If they expect higher Social Security benefits their personal saving will fall. Since higher labor supply and more saving are the most reliable routes to economic growth, the Social Security 2100 Act’s risk to the economy is obvious. …an economic model created by a team based at the University of Pennsylvania’s Wharton School…projects GDP in 2049 would be 2.0% lower than a hypothetical baseline in which the government borrowed to fund full promised Social Security benefits. The logic is straightforward: when taxes go up people work less; when Social Security benefits go up, people save less. If people work less and save less, the economy grows more slowly.

And the Wall Street Journal opined about the adverse impact of the proposal.

Among the many tax increases Democrats are now pushing is the Social Security 2100 Act sponsored by John Larson of House Ways and Means. The plan would raise average benefits by 2% and ties cost-of-living raises to a highly generous and experimental measure of inflation for the elderly known as CPI-E. The payroll tax rate for Social Security would rise steadily over two decades to 14.8% from 12.4% for all workers, and Democrats would also apply the tax to income above $400,000. …The proposal would also further tilt government spending to the elderly, who in general are doing well. …Democrats are also sneaky in the way they lift the income cap on Social Security taxes. The Social Security tax currently applies only on income up to $132,900, an amount that rises each year with inflation. But the new payroll tax on income above $400,000 isn’t indexed to inflation, which means the tax would ensnare ever more taxpayers over time. …The new 14.8% Social Security payroll-tax rate would come on top of the 37% federal income-tax rate, plus 2.9% for Medicare today (split between employer and employee), plus the 0.9% ObamaCare surcharge on income above $200,000 and 3.8% surcharge on investment income. …As lifespans increase, the U.S. needs more working seniors contributing to the economy. Yet higher Social Security benefits can induce earlier retirement if people think they don’t have to save as much. Higher marginal tax rates on Social Security benefits and income also discourage healthy seniors from working.

Now imagine those bad results and add in the economic damage from a 14.8 percentage point increase in the tax burden on saving and investment, which is the main wrinkle that Senator Warren has added.

Last but not least, using Social Security as an excuse to push higher taxes is not a new strategy. Back in 2008 when he was in the Senate and running for the White House, Barack Obama proposed a Warren-style increase in the payroll tax.

Here’s a video I narrated that year, which discusses the adverse economic effect of that type of class-warfare tax hike.

By the way, Hillary Clinton supported a similar tax increase in 2016.

Though it’s worth noting that neither Obama nor Clinton were as radical as Warren since they didn’t propose to exacerbate the tax code’s bias against saving and investment.

And don’t forget she also wants higher capital gains taxes and a punitive wealth tax.

Her overall tax agenda is unquestionably going to be very bad news for job creation and American competitiveness.

The “rich” are the primary targets of her tax hikes, but the rest of us will suffer the collateral damage.

P.S. Instead of huge tax increases, personal retirement accounts are a far better way of addressing Social Security’s long-run problem. I’ve written favorably about the Australian system, the Chilean system, the Hong Kong system, the Swiss system, the Dutch system, the Swedish system. Heck, I even like the system in the Faroe Islands.

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

Coalition Warns That New TTB Rule Violates Deregulatory Mandates

Tue, 09/24/2019 - 5:08pm

Center for Freedom and Prosperity

For Immediate Release
Tuesday, September 24, 2019
202-285-0244

www.freedomandprosperity.org

Coalition Warns That New TTB Rule Violates Deregulatory Mandates

(Washington, D.C., Tuesday, September 24, 2019) Today, the Center for Freedom & Prosperity, along with 12 other organizations dedicated to promoting free markets, limited government, and constitutional principles, sent a letter of caution to President Trump about Notice No. 176, a new, massive regulation proposed by the Alcohol and Tobacco Tax and Trade Bureau (TTB). Among other concerns, the letter warned that Notice No. 176 will add two and a half times the number of regulations governing the distilled spirits industry, seemingly violating both Executive Order 1771 and Executive Order 12866.

The coalition letter reads, in part:

“TTB contends that it released Notice No. 176 to ‘eliminate unnecessary regulatory requirements and provide consumers broader purchasing options.’ Although cloaking it as a deregulatory effort, No. 176 would add two and a half times the number of regulations governing the distilled spirits industry. This comes in stark violation to Executive Order 13771 that you signed on February 3, 2017, which directs all agencies to eliminate two regulations for each new one proposed. Given that Notice No. 176 has also been said to create hundreds of millions in new business costs, it also seemingly violates Executive Order 12866, which states that the OMB’s Office of Information and Regulatory Affairs must review any new significant regulatory action before it is formally proposed.”

The full letter is available here.

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

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Image credit: pxhere | CC0 Public Domain.

The “Trump of Brazil” Has a Much Better Understanding of Trade than the Trump of America

Tue, 09/24/2019 - 12:08pm

According to the most-recent edition of Economic Freedom of the World, Brazil is only ranked #120, which is lower than nations such as Greece, Haiti, and China.

Brazil gets a horrible grade on regulation, and it’s also in the bottom half of all nations when looking at fiscal policyquality of governance, and trade.

But things may be about to change. Voters elected a president last year, Jair Bolsonaro, who is best known for populist rhetoric, but he also expresses support for market-friendly reforms.

And even though he’s sometimes referred to as the “Brazilian Trump,” President Bolsonaro seems to have a much better understanding of trade than his American counterpart.

At least if this report from the Wall Street Journal is any indication.

President Jair Bolsonaro ’s administration is opening up one of the world’s most closed big economies, slashing import tariffs on more than 2,300 products and exposing local industries long accustomed to protectionism to the challenges of free trade. With little fanfare, the conservative government has since taking office in January eased the entry of ultrasonic scalpels, cancer drugs, heavy machinery and more, in some cases with tariffs reduced to zero from as much as 20%. The tariff cuts…reflect a significant shift in the world’s eighth-largest economy, where duties were twice as high as in Mexico, China and the European Union last year. The new opening is a central feature in Economy Minister Paulo Guedes ’s plans to make the country of 210 million more competitive, part of an effort to rekindle a moribund economy historically shielded from foreign competition and bogged down by bureaucracy. …“Brazil’s model of protectionism has failed,” Deputy Economy Minister for Trade Marcos Troyjo, one of Brazil’s chief trade negotiators, said in an interview. “It’s been 40 years without sustainable economic growth.”

Here are some excerpts about how Brazil has been hurt by trade barriers.

The problems created by protectionism are evident throughout Brazil’s economy. When Mauá University outside São Paulo imported American equipment last year that it couldn’t find in Brazil to upgrade its physics lab, for example, import tariffs doubled the price tag to $70,000, said Francisco Olivieri, a business professor and head of Mauá’s technology department. …Protectionism hurts businesses that need to import supplies or parts and face high tariffs and bureaucracy to do so, which pushes them away from global supply chains. Red tape related to tariffs at Brazilian ports mean imported supplies can take weeks to reach buyers, causing production delays. Fifty-five percent of foreign products require the importing companies to obtain permits from as many as six different government agencies, according to a recent study by the National Confederation of Industry, or CNI, a trade group that represents Brazilian factories. Importers are subject to steep fines if they fail to request a permit, but it is often difficult to determine from which agencies they must seek approval.

In other words, Brazilian companies are hit by a double-whammy of trade barriers and red tape.

This is why liberalization is so important.

Incidentally, the EFW data only captures what happened up through 2017.

And since Brazil (#87) isn’t that far behind the United States (#55) in the trade rankings, I won’t be overly surprised in a few years if Brazil jumps the United States given the combination of Bolsonaro’s good policies and Trump’s bad policies.

P.S. Brazil is also in the process of curtailing pensions and already has adopted a constitutional spending cap.

P.P.S. President Bolsonaro is quite good on gun rights.

P.P.P.S. A few years ago, I fretted Brazil has passed a tipping point of dependency. I’m somewhat hopeful that assessment was too pessimistic.

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Image credit: Palácio do Planalto | CC BY 2.0.

Basic Income, Public Choice, and the Slippery Slope

Mon, 09/23/2019 - 12:59pm

When “basic income” became an issue a few years ago, I was instinctively opposed because I don’t want Uncle Sam sending big checks to everyone in the country.

But I admitted that there were a few reasonable arguments for the idea. Most notably, plans for a basic income usually assumed that these checks would be a substitute for the existing social welfare state.

Since that system has been bad news for both taxpayers and poor people, a swap sounds very tempting.

But I’ve repeatedly warned (over and over again) that any theoretical attributes don’t matter because politicians almost certainly would pull a bait-and-switch by adding a basic income on top of all current redistribution programs.

Andrew Yang is now proving my point. When asked about potential budgetary savings to accompany his proposal for basic income, the candidate for the Democratic Party’s presidential nomination asserted that the new handouts would be in addition to the existing welfare state.’

.@cenkuygur asked @AndrewYang what welfare programs he’d end or decrease funding in order to do #UBI

“I would not touch any of our existing programs. The freedom dividend is meant as a complement.” #SteakFry #tytlive pic.twitter.com/wAW8TzHUzr

— The Young Turks (@TheYoungTurks) September 22, 2019

At the risk of understatement, Yang has turned his proposal into an expensive joke.

America’s social welfare state already is unaffordable and he wants to make it a larger burden with a big new entitlement.

But fiscal policy isn’t the focus of today’s column.

Instead, I want Yang’s announcement to be a teachable moment about the “slippery slope.”

Simply stated, we should always be wary about the potential downsides of any possible reform. Especially if the wrong people are in charge.

Indeed, this wariness shall be enshrined as our “Fifth Theorem of Government.”

This Theorem is rather useful when contemplating certain issues.

And now we know it applies to discussions of basic income.

P.S. Here are the other four theorems.

The “First Theorem” explains how Washington really operates.

The “Second Theorem” explains why it is so important to block the creation of new programs.

The “Third Theorem” explains why centralized programs inevitably waste money.

The “Fourth Theorem” explains that good policy can be good politics.

P.P.S. All these theorems are actually just elements of “public choice,” which is the common-sense economic theory that people in the public sector largely are seeking to benefit themselves.

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Image credit: Collision Conf | CC BY 2.0.

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