Tag: fiscal policy

New Video Explains that Tax Competition Is a Powerful Mechanism to Restrain the Greed of the Political Class

Here’s a new mini-documentary from the Center for Freedom and Prosperity, narrated by Natasha Montague of Americans for Tax Reform, that explains why the process of tax competition is a critical constraint on the propensity of governments to over-tax and over-spend.

The issue is very simple. When labor and capital have the ability to escape bad policy by moving across borders, politicians are more likely to realize that it is foolish to impose high tax rates. And they oftentimes compete for jobs and investment by lowering tax rates. This virtuous form of rivalry helps explain why so many nations in recent years have lowered tax rates and adopted simple and fair flat tax systems.

Another great feature of the video is the series of quotes from winners of the Nobel Prize. These economists all recognize competition between governments is just as desirable as competition between banks, pet stores, and supermarkets.

The video also discusses how politicians are attacking tax competition. It mentions a privacy-eroding scheme concocted by governors to tax out-of-state purchases (how dare consumers buy online and avoid state sales tax!).

And it also discusses a very destructive tax harmonization effort by a Paris-based bureaucracy (the Organization for Economic Cooperation and Development, subsidized with American tax dollars!), which would undermine fiscal sovereignty by punishing jurisdictions that adopt pro-growth tax systems that attract labor and capital.

The issues discussed in this video generally don’t get a lot of attention, but they are critical for the long-run battle to restrain government. Please share widely.

P.S. This speech by Florida’s new Governor is a good example of how tax competition encourages policy makers to do the right thing.

The Value-Added Tax Must Be Stopped - Unless We Want America to Become Greece

Sooner or later, there will be a giant battle in Washington over the value-added tax. The people who want bigger government (and the people who are willing to surrender to big government) understand that a new source of tax revenue is needed to turn the United States into a European-style social welfare state. But that’s exactly why the VAT is a terrible idea.

I explain why in a column for Reuters. The entire thing is worth reading, but here’s an excerpt of some key points.

Many Washington insiders are claiming that America needs a value-added tax (VAT) to get rid of red ink. …And President Obama says that a VAT is “something that has worked for other countries.” Every single one of these assertions is demonstrably false. …One of the many problems with a VAT is that it is a hidden levy. …VATs are imposed at each stage of the production process and thus get embedded in the price of goods. And because the VAT is hidden from consumers, politicians find they are an easy source of new revenue – which is one reason why the average VAT rate in Europe is now more than 20 percent! …Western European nations first began imposing VATs about 40 years ago, and the result has been bigger government, permanent deficits and more debt. According to the Economist Intelligence Unit, public debt is equal to 74 percent of GDP in Western Europe, compared to 64 percent of GDP in the United States (and the gap was much bigger before the Bush-Obama spending spree doubled America’s debt burden). The most important comparison is not debt, but rather the burden of government spending. …you don’t cure an alcoholic by giving him keys to a liquor store, you don’t promote fiscal responsibility by giving government a new source of revenue. …To be sure, we would have a better tax system if proponents got rid of the income tax and replaced it with a VAT. But that’s not what’s being discussed. At best, some proponents claim we could reduce other taxes in exchange for a VAT. Once again, though, the evidence from Europe shows this is a naive hope. The tax burden on personal and corporate income is much higher today than it was in the pre-VAT era. …When President Obama said the VAT is “something that has worked for other countries,” he should have specified that the tax is good for the politicians of those nations, but not for the people. The political elite got more money that they use to buy votes, and they got a new tax code, enabling them to auction off loopholes to special interest groups.

You can see some amusing – but also painfully accurate – cartoons about the VAT by clicking here, here, and here.

For further information on why the VAT is a horrible proposal, including lots of specific numbers and comparisons between the United States and Western Europe, here’s a video from the Center for Freedom and Prosperity.

Spending Restraint Works: Examples from Around the World

America faces a fiscal crisis. The burden of federal spending has doubled during the Bush-Obama years, a $2 trillion increase in just 10 years. But that’s just the tip of the proverbial iceberg. Because of demographic changes and poorly designed entitlement programs, the federal budget is going to consume larger and larger shares of America’s economic output in coming decades.

For all intents and purposes, the United States appears doomed to become a bankrupt welfare state like Greece.

But we can save ourselves. A previous video showed how both Ronald Reagan and Bill Clinton achieved positive fiscal changes by limiting the growth of federal spending, with particular emphasis on reductions in the burden of domestic spending. This new video from the Center for Freedom and Prosperity provides examples from other nations to show that good fiscal policy is possible if politicians simply limit the growth of government.

 

These success stories from Canada, Ireland, Slovakia, and New Zealand share one common characteristic. By freezing or sharply constraining the growth of government outlays, nations were able to rapidly shrinking the economic burden of government, as measured by comparing the size of the budget to overall economic output.

Ireland and New Zealand actually froze spending for multi-year periods, while Canada and Slovakia limited annual spending increases to about 1 percent. By comparison, government spending during the Bush-Obama years has increased by an average of more than 7-1/2 percent. And the burden of domestic spending has exploded during the Bush-Obama years, especially compared to the fiscal discipline of the Reagan years. No wonder the United States is in fiscal trouble.

Heck, even Bill Clinton looks pretty good compared to the miserable fiscal policy of the past 10 years.

The moral of the story is that limiting the growth of spending works. There’s no need for miracles. If politicians act responsibly and restrain spending, that allows the private sector to grow faster than the burden of government. That’s the definition of good fiscal policy. The new video above shows that other nations have been very successful with that approach. And here’s the video showing how Reagan and Clinton limited spending in America.

Time to Get Rid of the Corporate Income Tax?

Here’s a video arguing for the abolition of the corporate income tax. The visuals are good and it touches on key issues such as competitiveness.

 

I do have one complaint about the video, though it is merely a sin of omission. There is not enough attention paid to the issue of double taxation. Yes, America’s corporate tax rate is very high, but that is just one of the layers of taxation imposed by the internal revenue code. Both the capital gains tax and the tax on dividends result in corporate income being taxed at least two times.

These are points I made in my very first video, which is a good companion to the other video.

There is a good argument, by the way, for keeping the corporate tax and instead getting rid of the extra layers of tax on dividends and capital gains. Either approach would get rid of double taxation, so the economic benefits would be identical. But the compliance costs of taxing income at the corporate level (requiring a relatively small number of tax returns) are much lower than the compliance costs of taxing income at the individual level (requiring the IRS to track down tens of millions of shareholders).

Indeed, this desire for administrative simplicity is why the flat tax adopts the latter approach (this choice does not exist with a national sales tax since the government collects money when income is spent rather than when it is earned).

But that’s a secondary issue. If there’s a chance to get rid of the corporate income tax, lawmakers should jump at the opportunity.

Obama’s Budget Means the Burden of Government Spending Will be $2 Trillion Higher in Ten Years

Fiscal policy wonks (like me, I’m forced to admit) sometimes miss the forest because we focus too much on individual trees.

So while I think my posts on the spending and revenue sides of Obama’s new budget contained lots of useful information, I didn’t pay any attention to the elephant in the room (I’m really going overboard with metaphors, huh?).

The most important number in Obama’s budget is that he is proposing $5.7 trillion of spending in 2021, about $2 trillion more than is being spent this year, according to table S-1 of the budget.

Here’s everything you need to know about Obama’s budget, in one chart.

It’s important to make three additional observations. First, Obama’s budget is based on all sorts of optimistic assumptions and rosy scenarios, as explained by Brian Riedl of the Heritage Foundation. When CBO produces a re-estimate of the President’s budget, it almost certainly will show hundreds of billions of dollars of additional spending.

Second, the slope of the line if the graph is very revealing. The first two years look very impressive, with almost no change in spending, but the goal of fiscal policy, to borrow a phrase from the health care debate, should be “bending the cost curve” of government. Short-run gimmicks, to put it mildly, don’t have any long-run impact. That’s why the most important number in Obama’s budget is the $5.7 trillion burden of spending in 2021. That’s a mark of fiscal failure, and it exists because Obama’s budget increases spending at twice the rate of inflation between 2013 and 2021.

Third, many people have appropriately criticized the White House for moving the fiscal goalposts (oops, another metaphor) and focusing on a technical budget concept known as “primary deficit” or “primary balance” instead of traditional budget measures. This is an arcane issue involving the difference between total spending compared to overall spending minus interest payments. Yes, the White House is being slippery, even earning a false rating from PolitiFact, but this is a red herring (there I go again) issue. What really matters is the size of government, not regular deficits or primary deficits. Too many Republicans are fixating on the symptom of too much borrowing and paying insufficient attention to the underlying disease of too much spending. This video explains further.

To Fix the Budget, Bring Back Reagan…or Even Clinton

President Obama unveiled his fiscal year 2012 budget today, and there’s good news and bad news. The good news is that there’s no major initiative such as the so-called stimulus scheme or the government-run healthcare proposal. The bad news, though, is that government is far too big and Obama’s budget does nothing to address this problem.

But perhaps the folks on Capitol Hill will be more responsible and actually try to save America from becoming a big-government, European-style welfare state. The solution may not be easy, but it is simple. Lawmakers merely need to restrain the growth of government spending so that it grows slower than the private economy.

Actual spending cuts would be the best option, of course, but limiting the growth of spending is all that’s needed to slowly shrink the burden of government spending relative to gross domestic product.

Fortunately, we have two role models from recent history that show it is possible to control the federal budget. This video from the Center for Freedom and Prosperity uses data from the Historical Tables of the Budget to demonstrate the fiscal policy achievements of both Ronald Reagan and Bill Clinton.

Some people will want to argue about who gets credit for the good fiscal policy of the 1980s and 1990s.

Bill Clinton’s performance, for instance, may not have been so impressive if he had succeeded in pushing through his version of government-run healthcare or if he didn’t have to deal with a Republican Congress after the 1994 elections. But that’s a debate for partisans. All that matters is that the burden of government spending fell during Bill Clinton’s reign, and that was good for the budget and good for the economy. And there’s no question he did a much better job than George W. Bush.

Indeed, a major theme in this new video is that the past 10 years have been a fiscal disaster. Both Bush and Obama have dramatically boosted the burden of government spending – largely because of rapid increases in domestic spending.

This is one of the reasons why the economy is weak. For further information, this video looks at the theoretical case for small government and this video examines the empirical evidence against big government.

Another problem is that many people in Washington are fixated on deficits and debt, but that’s akin to focusing on symptoms and ignoring the underlying disease. To elaborate, this video explains that America’s fiscal problem is too much spending rather than too much debt.

Last but not least, this video reviews the theory and evidence for the “Rahn Curve,” which is the notion that there is a growth-maximizing level of government outlays. The bad news is that government already is far too big in the United States. This is undermining prosperity and reducing competitiveness.

Obama the Born-again Budget Cutter?!?

Chalk up another victory – at least on the rhetorical level – for the Tea Party.

President Obama will release his fiscal year 2012 budget tomorrow and he’s apparently become a born-again fiscal conservative. Here are some excerpts from a Washington Post story:

President Obama will respond to a Republican push for a drastic reduction in government spending by proposing sharp cuts of his own in a fiscal 2012 budget blueprint that aims to trim record federal deficits by $1.1 trillion over the next decade. …two-thirds of the savings would come from spending cuts that are draconian by Democratic standards… When it lands Monday on Capitol Hill, Obama’s plan will launch a bidding war with Republicans over how deeply and swiftly to cut, as the two parties seek a path to fiscal stability for a nation awash in red ink.

I’m skeptical of battlefield conversions, particularly when politicians utilize the dishonest Washington definition of a budget cutincreasing spending by less than previously planned. So the first thing I’ll do when the budget is released is to visit the Historical Tables of the Budget website and see what spending is projected to be in 2011 and what Obama is asking for in 2012.

Those numbers probably won’t be accurate since the Obama administration (like previous ones) will use best-case assumptions, but at least we’ll get a sense of whether:

a) spending actually is being cut (I’m not holding my breath for this miracle), or

b) spending is frozen at current levels (this approach would balance the budget by 2017, but it’s almost as unlikely at the first option), or

c) spending is being restrained (perhaps 2 percent growth, enough to keep pace with inflation), or

d) spending is growing far too fast (say 4 percent growth, pushing America quickly in the wrong direction), or

e) spending is continuing to explode (5 percent growth, 6 percent growth, or even more, meaning we’ll be Greece sooner than we think).

My guess, for what it’s worth, is that the Obama administration will claim (d) but will actually be proposing (e) if more realistic assumptions are used.

Needless to say, I hope I’m wrong. But other parts of the Washington Post story give me little reason for hope. The White House apparently is ignoring entitlements. Heck, the administration apparently isn’t even planning on meeting the President’s own deficit goal.

The blueprint ducks the harder task of tackling the biggest drivers of future deficits: Social Security, Medicare and Medicaid… Obama’s blueprint does not even hit the short-term goal he set for his commission - reducing deficits to 3 percent of the economy by 2015.

The White House also plans to play a shell game with certain parts of the budget. Supposed spending cuts in health care won’t generate taxpayer savings. Instead, they’ll be used to finance more spending on Medicare, enabling the President to cancel savings that were promised as part of Obamacare. The interest groups win and the taxpayers lose.

The Obama blueprint also seeks to eliminate two budget gimmicks that Congress has long used to mask the true depth of the red ink: His proposal would offset higher Medicare payments to doctors by cutting $62 billion from other areas of federal health spending. And it would adjust the alternative minimum tax through 2014 to prevent it from hitting middle-class taxpayers, covering the cost by limiting the value of itemized deductions such as charitable contributions and mortgage interest for wealthy households.

The same shell game takes place on the tax side of the fiscal ledger. The White House plans to cancel one future tax increase and “pay” for that change by imposing another future tax increase. Once again, taxpayers get the short end of the stick.

Unless the Washington Post story is completely inaccurate, the Obama administration is not changing course. There may not be any major initiatives to expand the burden of government, like the failed stimulus or the budget busting government-run healthcare scheme, but it certainly does not seem like there are any plans to reverse direction and shrink the burden of government.