Tag: economics

Ryan-Murray Budget Deal Replaces Real Spending Restraint of Sequester with Budget Gimmicks and Back-Door Tax Hikes

How disappointing, but how predictable.

Politicians approved legislation in 2011 that was supposed to impose a modest bit of spending restraint over the next 10 years.

It wasn’t much. The enforcement mechanism, known as sequestration, merely was supposed to guarantee that spending climbed by $2.3 trillion rather than $2.4 trillion over the 10-year period.

But something is better than nothing, and the sequester that took place this year was a bitter defeat for President Obama and other advocates of bigger government.

Progress on the Laffer Curve*

The title of this piece has an asterisk because, unfortunately, we’re not talking about progress on the Laffer Curve in the United States.

Instead, we’re discussing today how lawmakers in other nations are beginning to recognize that it’s absurdly inaccurate to predict the revenue impact of changes in tax rates without also trying to measure what happens to taxable income (if you want a short tutorial on the Laffer Curve, click here).

But I’m a firm believer that policies in other nations (for better or worse) are a very persuasive form of real-world evidence. Simply stated, if you’re trying to convince a politician that a certain policy is worth pursuing, you’ll have a much greater chance of success if you can point to tangible examples of how it has been successful.

That’s why I cite Hong Kong and Singapore as examples of why free markets and small government are the best recipe for prosperity. It’s also why I use nations such as New Zealand, Canada, and Estonia when arguing for a lower burden of government spending.

And it’s why I’m quite encouraged that even the squishy Tory-Liberal coalition government in the United Kingdom has begun to acknowledge that the Laffer Curve should be part of the analysis when making major changes in taxation.

UK Laffer CurveI don’t know whether that’s because they learned a lesson from the disastrous failure of Gordon Brown’s class-warfare tax hike, or whether they feel they should do something good to compensate for bad tax policies they’re pursuing in other areas, but I’m not going to quibble when politicians finally begin to move in the right direction.


The Wall Street Journal opines that this is a very worthwhile development.

Chancellor of the Exchequer George Osborne has cut Britain’s corporate tax rate to 22% from 28% since taking office in 2010, with a further cut to 20% due in 2015. On paper, these tax cuts were predicted to “cost” Her Majesty’s Treasury some £7.8 billion a year when fully phased in. But Mr. Osborne asked his department to figure out how much additional revenue would be generated by the higher investment, wages and productivity made possible by leaving that money in private hands.

By the way, I can’t resist a bit of nit-picking at this point. The increases in investment, wages, and productivity all occur because the marginal corporate tax rate is reduced, not because more money is in private hands.

I’m all in favor of leaving more money in private hands, but you get more growth when you change relative prices to make productive behavior more rewarding. And this happens when you reduce the tax code’s penalty on work compared to leisure and when you lower the tax on saving and investment compared to consumption.

What America Can Learn from the Faroe Islands about Social Security Reform

I’m currently in the Faroe Islands, a relatively unknown and semi-autonomous part of Denmark located in the North Atlantic. Sort of like Greenland, but too small to appear on most maps.Faroe Islands

I’m in this chilly archipelago for a speech to the annual meeting of the Faroese People’s Party. According to Wikipedia, “the party is supportive of the economic liberalism.” But liberal in this context is classical liberal, so they’re my kind of people.

I spoke on the economics of fiscal policy and talked about issues such as my Golden Rule and the Laffer Curve, but today’s post is about what I learned, not what I said.

The current government of the Faroe Islands, which includes the People’s Party, has modernized its Social Security regime with a system of personal retirement accounts. Starting next January, workers will begin setting aside some of their income to finance a comfortable retirement income. When fully implemented, workers will be putting 15 percent of their income in their accounts, creating a system that’s even larger than the private retirement models in Australia and Chile.

So why did Faroese politicians take this step? Well, unlike politicians in most nations, they looked at the long-run data, saw that they had an aging population, realized that a tax-and-transfer scheme no longer could work, and decided to reform now instead of waiting for the old system to collapse.

Here’s a chart put together by the Nordic Council. As you can see, the Faroe Islands were (and other jurisdictions are) heading to an intolerable and unsustainable situation of too few workers and too many retirees.

Faroe Islands Age-Dependency Ratio

By the way, the same situation exists in the United States.

Our population is aging, the Baby Boomers are going into retirement, and birth rates have dropped. Our long-run numbers aren’t as grim as some other nations, but our Social Security system is basically insolvent.

Indeed, Social Security’s long-run deficit is measured in trillions, not billions. According to the most recent Trustee’s Report, deficits over the next 75 years are expected to equal $36 trillion. And that’s after adjusting for inflation!

For what it’s worth, if a private insurance or pension company kept its books in the same was as Social Security, it would be forced into bankruptcy and its managers would be indicted for fraud..

But when politicians operate a Ponzi Scheme, we’re supposed to applaud them for compassion!

This is why it might be worth the cost if we sent the politicians in Washington on a junket (using their taxpayer-financed fleet of luxury jets) to Torshavn, the Faroese capital. They could eat some lamb and fish and learn what it’s like to responsibly address a problem before it becomes a crisis.

Or we could save the money and simply force them to watch my video on personal retirement accounts.

P.S. In you like gallows humor, you can enjoy some Social Security cartoons here, here, and here. And we also have a Social Security joke, though it’s not overly funny when you realize it’s a depiction of reality.

P.P.S. You probably don’t want to know how Obama would like to “fix” the Social Security shortfall.

P.P.P.S. On Monday, I continue my tour of the North Atlantic with a speech in Iceland on the Laffer Curve. I don’t know if I’ll say anything memorable, but I’ll use the opportunity to learn more about some of that nation’s policies, including their very successful privatized fishery system. Iceland has some bad policies, of course, but it’s also worth noting that they wisely have rejected membership in the European Union, they’ve reduced the burden of government spending in recent years, and they also made the right decision when they decided (with help from an outraged electorate) to limit bailouts when their banks went bust. You won’t be surprised to learn, though, that the Paris-based OECD has been using American tax dollars to advocate bad fiscal policy in Iceland.

Keynesian Economics, Government Shutdowns, and Economic Growth

Keynesian economics is the perpetual motion machine of the left. You build a model that assumes government spending is good for the economy and you assume that there are zero costs when the government diverts money from the private sector.

With that type of model, you then automatically generate predictions that bigger government will “stimulate’ growth and create jobs. Heck, sometimes you even admit that you don’t look at real world numbers.

This perhaps explains why Keynesian economics has a long track record of failure. It didn’t work for Hoover and Roosevelt in the 1930s. It didn’t work for Nixon, Ford, and Carter in the 1970s. It didn’t work for Japan in the 1990s. And it hasn’t worked this century for either Bush or Obama.

For Any Fiscal Policy Question, Spending Restraint Is the Answer

Okay, I’ll admit the title of this post is an exaggeration. How to fix the mess at the IRS is a fiscal policy question, and that requires tax reform rather than spending restraint.

But allow me a bit of literary license. We just had a big debt limit battle in Washington and, after a lot of political drama, politicians kicked the can down the road.

So we need to ask ourselves whether that fight accomplished anything?

It did focus attention of the flaws of Obamacare, and I suppose there’s some value in that.

But the debt limit was not a vehicle - as has been the case in the past - for changes in fiscal policy. We didn’t get something good, like the sequester which resulted from the 2011 debt limit legislation. And we didn’t get something bad, like the tax hike in the 1985 debt limit legislation

Some are asking whether we should even have a debt limit. A number of critics have suggested we should get rid of the borrowing cap because it creates the risk of default. I think those concerns are very overblown.

I’m more persuaded by those who argue that the debt limit diverts attention from better options to improve fiscal policy.

It’s Amazingly Simple to Balance the Budget

I’m testifying tomorrow to the Joint Economic Committee about “The Economic Costs of Debt-Ceiling Brinkmanship.”

I won’t give away what I’m going to say (though you can probably figure out my views rather easily by reading this, this, and this), but I do want to share a chart from my testimony.

It shows that it is remarkably simple to balance the budget with a modest amount of spending restraint.

Based on Congressional Budget Office data, we can balance the budget in just three years if spending grows by “only” 1 percent per year.

Balanced Budget with Spending Restraint

The chart also shows that you can balance the budget in just four years if spending is allowed to grow “just” two percent annually.

And if you for some reason think that the burden of government spending should rise faster than inflation, then we can balance the budget in seven years by restraining spending so that it grows 3 percent each year.

Here are a couple of relevant observations.

Turning New York City into Detroit?

I recently speculated whether Detroit’s fiscal problems should be a warning sign for the crowd in Washington.

The answer, of course, is yes, though it’s not a perfect analogy. The federal government is in deep trouble because of unsustainable entitlement programs while Detroit got in trouble because of a combination of too much compensation for bureaucrats and too many taxpayers escaping the city.

A better analogy might be to compare Detroit to other local governments. Some large cities in California already have declared bankruptcy, for instance, and you can find the same pattern of overcompensated bureaucrats and escaping taxpayers.

And the same thing may happen to New York City if the next mayor is successful in pushing for more class-warfare tax policy. Here are some excerpts from an excellent New York Post column by Nicole Gelinas:

Mayoral candidate Bill de Blasio…thinks New York can hike taxes on the rich and not suffer… De Blasio’s scheme is this: Hike income taxes by 13.8 percent on New Yorkers making above half a million dollars annually….After five years, de Blasio would let this tax surcharge lapse, and — he says — find another way to pay.

But there’s a big problem with de Blasio’s plan. Rich people are not fatted calves meekly awaiting slaughter.

In 2009, the top 1 percent of taxpayers (the 34,598 households making above $493,439 annually) paid 43.2 percent of city income taxes (they made 33.9 percent of income), according to the city’s Independent Budget Office. Each of these families paid an average $75,477. No, most people won’t up and leave (though if 20 percent did, they’d leave New York with less money than before the tax hike). But they can rearrange their incomes. Unlike most of us, folks making, say, $10 million have considerable control over how and when they get paid. That’s because much of their money comes from cashing out a partnership, or selling stock or a house or a painting. To avoid a tax hike, it’s easy enough for them to pay themselves earlier by selling their stuff earlier — before the tax hike. The city made $800 million in extra taxes last year because rich people sold their stuff before President Obama increased investment taxes in December. Or, people can pay themselves later — after the five years’ worth of higher taxes are up.

Gelinas makes some very important points. She warns that the city would have less money if just 20 percent of rich people escaped. She doesn’t think that will happen, but she does explain that rich people can stay but take some simple steps to reduce their taxable income.