Tag: Higher Taxes

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.

Wall Street Journal Condemns OECD Proposal to Increase Business Fiscal Burdens with Global Tax Cartel

What’s the biggest fiscal problem facing the developed world?

To an objective observer, the answer is a rising burden of government spending, which is caused by poorly designed entitlement programs, growing levels of dependency, and unfavorable demographics. The combination of these factors helps to explain why almost all industrialized nations—as confirmed by BIS, OECD, and IMF data—face a very grim fiscal future.

If lawmakers want to avert widespread Greek-style fiscal chaos and economic suffering, this suggests genuine entitlement reform and other steps to control the growth of the public sector.

But you probably won’t be surprised to learn that politicians instead are concocting new ways of extracting more money from the economy’s productive sector.

They’ve already been busy raising personal income tax rates and increasing value-added tax burdens, but that’s apparently not sufficient for our greedy overlords.

Now they want higher taxes on business. The Organization for Economic Cooperation and Development, for instance, put together a “base erosion and profit shifting” plan at the behest of the high-tax governments that dominate and control the Paris-based bureaucracy.

What is this BEPS plan? In an editorial titled “Global Revenue Grab,” The Wall Street Journal explains that it’s a scheme to raise tax burdens on the business community:

After five years of failing to spur a robust economic recovery through spending and tax hikes, the world’s richest countries have hit upon a new idea that looks a lot like the old: International coordination to raise taxes on business. The Organization for Economic Cooperation and Development on Friday presented its action plan to combat what it calls “base erosion and profit shifting,” or BEPS. This is bureaucratese for not paying as much tax as government wishes you did. The plan bemoans the danger of “double non-taxation,” whatever that is, and even raises the specter of “global tax chaos” if this bogeyman called BEPS isn’t tamed. Don’t be fooled, because this is an attempt to limit corporate global tax competition and take more cash out of the private economy.

The Journal is spot on. This is merely the latest chapter in the OECD’s anti-tax competition crusade. The bureaucracy represents the interests of
high-tax governments that are seeking to impose higher tax burdens—a goal that will be easier to achieve if they can restrict the ability of taxpayers to benefit from better tax policy in other jurisdictions.

More specifically, the OECD basically wants a radical shift in international tax rules so that multinational companies are forced to declare more income in high-tax nations even though those firms have wisely structured their operations so that much of their income is earned in low-tax jurisdictions.

New Academic Research Confirms the ‘High Price’ of High Tax Rates

I periodically cite new academic research about tax policy and economic activity. I sometimes even publicize research from international bureaucracies showing the link between taxes and growth.

I’m not naive enough to think that any particular study will change minds, but when the bulk of the research unambiguously tells us that lower tax rates are better for economic performance, I think (or at least hope) that it may have some impact on government officials.

That’s why I’m particularly interested in some new research by Cornell University’s Karel Mertens.

Here are some key findings from Mertens’ study, beginning with some observations on existing research.

To what extent do marginal tax rates matter for individual decisions to work and invest? The answer is essential for public policy and its role in shaping economic growth. The strand of the empirical literature that uses tax return data, surveyed in Saez, Slemrod and Giertz (2012), finds that incomes before taxes react only modestly to marginal tax rates and that the response is mostly situated at the very top of the income distribution.

So what does this mean? A lot depends on how one defines “modestly,” though it’s worth noting that even very small changes in growth—if sustained over time—can have big impacts on prosperity. That, in turn, has a significant effect on government finances.

And I have no objection to the assertion that upper-income taxpayers are most sensitive to changes in tax rates. After all, people like me who rely on wage and salary income don’t have much opportunity to alter our compensation in response to changes in tax rates.

But upper-income taxpayers get most of their compensation in the form of business profits and investment returns, and this gives them substantial control over the timing, level, and composition of their income. So it’s quite understandable that their taxable income is quite sensitive to changes in tax rates.

Siding with the Heritage Foundation in the “Austerity” Fight with Paul Krugman and the Washington Post

I’m not reluctant to criticize my friends at the Heritage Foundation. In some cases, it is good-natured ribbing because of the Cato-Heritage softball rivalry, but there are also real policy disagreements.

For instance, even though it is much better than current policy, I don’t like parts of Heritage’s “Saving the American Dream” budget plan. It’s largely designed to prop up the existing Social Security system rather than replace the existing tax-and-transfer entitlement system with personal retirement accounts. And while the plan contains a flat tax, it’s not the pure Hall-Rabushka version. One of the most alarming deviations, to cite just one example, is that it creates a tax preference for higher education that would enable higher tuition costs and more bureaucratic featherbedding.

That being said, I’m also willing to defend Heritage if the organization is being wrongly attacked. The specific issue we’ll review today is “austerity” in Europe and whether Senator Sheldon Whitehouse of Rhode Island is right to accuse Heritage of “meretricious” testimony.

Let’s look at the details.

Earlier this month, Paul Krugman wrote that, “a Heritage Foundation economist has been accused of presenting false, deliberately misleading data and analysis to the Senate Budget Committee.” Krugman was too clever to assert that the Heritage economist “did present” dishonest data, but if you read his short post, he clearly wants readers to believe that an unambiguous falsehood has been exposed.

Krugman, meanwhile, was simply linking to the Washington Post, which was the source of a more detailed critique. The disagreement revolves around  whether Europeans have cut spending or raised taxes, and by how much. The Heritage economist cited one set of OECD data, while critics have cited another set of data.

So who is right?

Conn Carroll of the Washington Examiner explains that the Heritage economist was looking at OECD data for 2007-2012 while critics are relying on an OECD survey of what politicians in various countries say they’ve done since 2009 as well as what they plan to do between now and 2015.

Whitehouse believed he had caught Furth and The Heritage Foundation in a bald face lie. …There is just one problem with Whitehouse’s big gotcha moment: The staffer who spoon-fed Whitehouse his OECD numbers on “the actual balance between spending cuts and tax increases” failed to also show Whitehouse the front page of the OECD report from which those numbers came. That report is titled: “Fiscal consolidation targets, plans and measures in OECD countries.” Turns out, the numbers Whitehouse used to attack Furth for misreporting “what took place in Europe” were actually mostly projections of what governments said they were planning to do in the future (the report was written in December 2011 and looked at data from 2009 and projections through 2015). At no point in Furth’s testimony did he ever claim to be reporting about what governments were going to do in the future. He very plainly said his analysis was of actual spending and taxing data “to date.” Odds are that Whitehouse made an honest mistake. Senators can’t be expected actually to read the title page of every report from which they quote. But, considering he was the one who was very clearly in error, and not Furth, he owes Furth, and The Heritage Foundation an apology. Krugman and Matthews would be well advised to revisit the facts as well.

In other words, critics of Heritage are relying largely on speculative data about what politicians might (or might not) do in the future to imply that the Heritage economist was wrong in his presentation of what’s actually happened over the past six years.

So far, we’ve simply addressed whether Heritage was unfairly attacked. The answer, quite clearly, is yes. If you don’t believe me, peruse the OECD data or peruse the IMF data.

Now let’s briefly touch on the underlying policy debate. Keynesians such as Krugman assert that there have been too many spending cuts in Europe. The “austerity” crowd, by contrast, argues that strong steps are needed to deal with deficits and debt, though they are agnostic about whether to rely on spending reforms or tax increases.

I’ve repeatedly explained that Europe’s real problem is an excessive burden of government spending. I want politicians to cut spending (or at least make sure it grows slower than the productive sector of the economy). And rather than increasing the tax burden, I want them to lower rates and reform punitive tax systems.

The bad news is that Europeans have raised taxes. A lot. The semi-good news is that spending no longer is growing as fast as it was before the fiscal crisis.

In the grand scheme of things, however, I think Europe is still headed down the wrong path. Here’s what I wrote back in January and it’s still true today.

I don’t sense any commitment to smaller government. I fear governments will let the spending genie out of the bottle at the first opportunity. And we’re talking about a scary genie, not Barbara Eden. And to make matters worse, Europe faces a demographic nightmare. These charts, reproduced from a Bank for International Settlements study, show that even the supposedly responsible nations in Europe face a tsunami of spending and debt over the next 25-plus years. So you can understand why I don’t express a lot of optimism about European economic policy.

By the way, I’m not optimistic about the long-term fiscal outlook for the United States either. In the absence of genuine entitlement reform, we’ll sooner or later have our own fiscal crisis.

The Real Reason Politicians Want a Bigger Bite of Apple

Earlier this month, I explained four reasons why the Apple “tax avoidance” issue is empty political demagoguery.

And Rand Paul gave some great remarks at a Senate hearing, excoriating some of his colleagues for trying to pillage the company.

But this Robert Ariail cartoon may be the best summary of the issue.

Arial Apple Cartoon

What makes this cartoon so effective is that it properly and cleverly identifies what’s really driving the political class on this issue. They want more revenue to finance a bigger burden of government spending.

When I did my contest for best political cartoonist, I picked a cartoon about Greece and euro for Robert Ariail’s entry. While I still think that was a very good cartoon, this Apple cartoon would probably take its place if I did a new contest.

Targeting Multinationals, the OECD Launches New Scheme to Boost the Tax Burden on Business

I’ve been very critical of the Organization for Economic Cooperation and Development. Most recently, I criticized the Paris-based bureaucracy for making the rather remarkable assertion that a value-added tax would boost growth and employment.

But that’s just the tip of the iceberg.

Now the bureaucrats have concocted another scheme to increase the size and scape of government. The OECD just published a study on “Addressing Base Erosion and Profit Shifting” that seemingly is designed to lay the groundwork for a radical rewrite of business taxation.

In a new Tax & Budget Bulletin for Cato, I outline some of my concerns with this new “BEPS” initiative.

…the BEPS report…calls for dramatic changes in corporate tax policy based on the presumption that governments are not seizing enough revenue from multinational companies. The OECD essentially argues that it is illegitimate for businesses to shift economic activity to jurisdictions that have more favorable tax laws. …The core accusation in the OECD report is that firms systematically—but legally—reduce their tax burdens by taking advantage of differences in national tax policies.

Ironically, the OECD admits in the report that revenues have been trending upwards.

…the report acknowledges that “… revenues from corporate income taxes as a share of gross domestic product have increased over time. …Other than offering anecdotes, the OECD provides no evidence that a revenue problem exists. In this sense, the BEPS report is very similar to the OECD’s 1998 “Harmful Tax Competition” report, which asserted that so-called tax havens were causing damage but did not offer any hard evidence of any actual damage.

To elaborate, the BEPS scheme should be considered Part II of the OECD’s anti-tax competition project. Part I was the attack on so-called tax havens, which began back in the mid- to late-1990s.

Exposing the Absurdity of Washington’s Anti-sequester Hysteria

To save America from the supposedly “savage” and “draconian” budget cuts caused by sequestration, President Obama has instead asked Congress to approve an alternative fiscal package containing additional tax increases.

So why is the sequester so bad? Does it slash the budget by 50 percent? Does it shut down departments, programs, and agencies?

Sounds good to me. We need to reduce the burden of government spending, so some genuine budget cuts would be very desirable.

The pro-spending lobbies in Washington certainly are acting as if spending would be “cut to the bone.” As documented by my colleague Tad DeHaven, they’re claiming horrible things will happen.

So what’s the real story? Well, the Congressional Budget Office today released its annual Budget and Economic Outlook, and Tables 1-1 and 1-5 allow us to see the “brutal” impact of the sequester.

As you can see from this chart, the sequester will “cut” spending so much that the budget will grow by “only” $2.4 trillion over the next 10 years.

Sequester 2013

Rather anticlimactic, I admit. No widows dying in snowbanks. No blood flowing in the streets.

So you can let the women and children back in the room. It turns out that all the hyperbole and hysteria about the sequester is based on the dishonest Washington definition of a budget cut—i.e., when spending doesn’t rise as fast as projected in some artificial baseline.

Yes, some parts of the budget are disproportionately impacted, such as defense. But even the defense budget climbs over the 10-year period and the United States will still account for close to 50 percent of global military outlays when the dust settles.

The bottom line is that there’s no reason to worry about the sequester and there’s certainly no reason to go along with Obama’s plan to replace the sequester with a tax-heavy budget deal.