Tag: Higher Taxes

Words I Don’t Say Very Often: ‘I Applaud Senate Republicans’

Much to my surprise, Senate Republicans held firm earlier today and blocked President Obama’s soak-the-rich proposal to raise tax rates next year on investors, entrepreneurs and small business owners.

I fully expected that GOPers would fold on this issue several months ago because Democrats were using the class-warfare argument that Republicans were holding the middle class hostage in order to protect “millionaires and billionaires.” Republicans usually have a hard time fighting back against such demagoguery, and I was especially pessimistic since every Republican senator had to stay united to block Senate Democrats from pushing through Obama’s plan for higher tax rates on the so-called rich.

But the GOP surprised me earlier this year with their united opposition to higher taxes, and they stayed strong again today in blocking a bill that would raise tax rates on upper-income taxpayers. Here’s an excerpt from the New York Times.

Republicans voted unanimously against the House-passed bill, and they were joined by four Democrats — Senators Russ Feingold of Wisconsin, Joe Manchin III of West Virginia, Ben Nelson of Nebraska, and Jim Webb of Virginia — as well as by Senator Joseph I. Lieberman, independent of Connecticut. “You don’t raise taxes if your ultimate goal, if the main thing is to create jobs,” said Senator John Thune, Republican of South Dakota, echoing an argument made repeatedly by his colleagues during the floor debate. The Senate on Saturday also rejected an alternative proposal, championed by Senator Charles E. Schumer of New York, to raise the threshold at which the tax breaks would expire to $1 million. Some Democrats said that the Republicans’ opposition to that plan showed them to be siding with “millionaires and billionaires” over the middle class.

Not only did GOPers stand firm, but they were joined by five other senators (including four that have to face the voters in 2012). This presumably means Democrats will now have to compromise and agree to a plan to extend all of the 2001 and 2003 tax cuts.

At the risk of being a Pollyanna, I wonder if the politics of hate and envy is falling out of fashion. Obama’s plan for higher tax rates hopefully is now dead, but that’s just one positive indicator. It’s also interesting that both of the big “deficit reduction” plans recently unveiled, the President’s Fiscal Commission and the Domenici-Rivlin Debt Reduction Task Force Report, endorsed lower marginal tax rates - including lower tax rates for those evil rich people. Both proposals also included lots of tax increases, so the overall tax burden would be significantly higher under both plans, but it is remarkable that the beltway insiders who dominated the two panels understood the destructive impact of class-warfare tax rates. Maybe they watched this video.

Washington’s Dishonest Budget Math

The Chairmen of President Obama’s Fiscal Commission have a new draft proposal that is filled, according to Reuters, with “sharp spending and benefit cuts.”

That’s music to my ears, so I quickly flipped to the back of the report in hopes of finding hard numbers showing that the federal government will be smaller in future years.

Much to my chagrin, it turns out that the federal government will increase by about $1.5 trillion between 2010 and 2020 according to the Commission’s numbers. Here’s a chart based on the data from page 57.

As I explain in the video below, this disconnect between supposed spending cuts and actual spending increases is the result of politicians creating a system where a spending increase can be called a “spending cut” if outlays don’t climb as fast as previously planned. This “baseline” or “current services” budgeting is a great gimmick for the politicians since they can simultaneously give more money to special interest groups while also telling voters that they are cutting the budget.

This does not mean that the folks at the Fiscal Commission are being deliberately dishonest. This process has been in use for decades and many budget wonks routinely rely on this common practice without giving any thought to whether it misleads voters.

And there are good reasons to collect “current services” data. Those numbers tell lawmakers how much spending has to increase if they, for instance, leave entitlement programs on autopilot (i.e., more senior citizens automatically leading to more Social Security spending).

Nonetheless, the debate about federal budget policy should be honest. If the Fiscal Commission thinks spending should increase at about twice the rate of inflation, and they want higher taxes to finance that spending growth, they should openly argue for that position. And if the hard left wants spending to increase three times faster than inflation, as it has during the era of Bush-Obama profligacy, they should openly make the case for why America should be more like France.

Three Cheers for Switzerland as Voters Reject Class-Warfare Tax Hike in National Referendum

I’ve always had a soft spot for Switzerland. The nation’s decentralized structure shows the value of federalism, both as a means of limiting the size of government and as a way of promoting tranquility in a nation with several languages, religions, and ethnic groups. I also admire Switzerland’s valiant attempt to preserve financial privacy in a world dominated by greedy, high-tax governments.

I now have another reason to admire the Swiss. Voters yesterday overwhelmingly rejected a class-warfare proposal to impose higher tax rates on the income and wealth of rich residents. The Social Democrats did their best to make the hate-and-envy scheme palatable. Only the very richest taxpayers would have been affected. But Swiss voters, like voters in Washington state earlier this month, understood that giving politicians more money is never a solution for any problem.

Here’s an excerpt from Bloomberg’s report on the vote.

In a referendum today, 59 percent of voters turned down the proposal by the Social Democrats to enact minimum taxes on income and wealth. Residents would have paid taxes of at least 22 percent on annual income above 250,000 francs ($249,000), according to the proposed changes. Switzerland’s executive and parliamentary branches had rejected the proposal, saying it would interfere with the cantons’ tax-autonomy regulations. The changes would also damage the nation’s attractiveness, the government, led by President Doris Leuthard, said before the vote. The Alpine country’s reputation as a low-tax refuge has attracted bankers and entrepreneurs such as Ingvar Kamprad, the Swedish founder of Ikea AB furniture stores, and members of the Brenninkmeijer family, who owns retailer C&A Group.

It’s never wise to draw too many conclusions from one vote, but it certainly seems that voters usually reject higher taxes when they get a chance to cast votes. Even tax increases targeting a tiny minority of the population generally get rejected. The only exception that comes to mind is the unfortunate decision by Oregon voters earlier this year to raise tax rates.

Tax Loopholes Are Corrupt and Inefficient, but They Should only Be Eliminated if Every Penny of New Revenue Is Used to Lower Tax Rates

There’s been a lot of heated discussion about various preferences, deductions, credits, shelters, and other loopholes in the tax code. Some of this debate has revolved around whether it is legitimate to refer to these provisions as “tax expenditures” or “subsidies.”

Michael Cannon vociferously argues that subsidies and expenditures only occur when the government takes money from person A and gives it to person B. On the other side of the debate are people like Josh Barro of the Manhattan Institute, who argues that tax preferences are akin to subsidies or expenditures since they can be just as damaging as government spending programs when looking at whether resources are efficiently allocated.

Since I’m a can’t-we-all-get-along, uniter-not-divider kind of person, allow me to suggest that this debate should be set aside. After all, we all agree that tax preferences can lead to inefficient outcomes. So let’s call them “tax distortions” and focus on the real issue, which is how best to eliminate them.

This is an important issue because both the Domenici-Rivlin Task Force and the Chairmen of the Simpson-Bowles Commission have unveiled plans that would reduce or eliminate many of these tax distortions and also lower marginal tax rates. That’s the good news.

The bad news is that their plans result in more revenue going to Washington. In other words, the tax increase resulting from fewer tax distortions is larger than the tax decrease resulting from lower tax rates. To put it bluntly, the plans would increase the overall tax burden.

Some argue that this is an acceptable price to pay. They point out, quite correctly, that lower tax rates will help the economy by improving incentives for productive behavior. And they also are right in arguing that fewer tax distortions will help the economy by improving efficiency. Seems like a win-win situation. What’s not to like?

The problem is on the spending side of the fiscal ledger. The Simpson-Bowles Commission and the Domenici-Rivlin Task Force were charged with figuring out how to reduce red ink. We already know from Congressional Budget Office data, however, that we can balance the budget fairly quickly by limiting the growth of government spending. As the chart illustrates, the deficit disappears by 2016-2017 with a hard freeze and goes away by 2019-2020 if spending increases by two percent each year (and this assumes all the 2001 and 2003 tax cuts are made permanent).

If tax revenue is increased, that simply means that the budget gets balanced at a higher level of spending. And since government spending, at current levels and composition, hinders economic growth by diverting labor and capital to less productive (or unproductive) uses, any proposal that enables higher levels of government spending will further undermine economic performance.

It goes without saying (but I’ll say it anyhow) that this analysis is overly optimistic since it assumes that politicians actually will balance the budget. In all likelihood, as explained in today’s Wall Street Journal, any tax increase would probably be followed by even more spending. So if politicians raise the tax burden, we might still have a deficit of $685 billion in 2020 (CBO’s most-recent estimate assuming  all programs are left on auto-pilot), but the overall levels of both spending and taxes would be higher. This modified cartoon captures this real-world effect.

This is why revenue-neutral tax reform, like the flat tax, is the only pro-growth way of eliminating tax distortions.

Another Tax-Hike Scheme from Another ‘Bipartisan’ Group of Washington Insiders

I’ve already commented on the proposal from the Chairmen of President Obama’s Fiscal Commission (including a very clever cartoon, if it’s okay to pat myself on the back).

Now we have a similar proposal from the so-called Debt Reduction Task Force. Chaired by former Senator Pete Domenici and Clinton Administration Budget Director Alice Rivlin, the Task Force proposed a series of big tax increases to finance bigger government. I have five observations.

  1. Notwithstanding a claim of $2.68 trillion of “spending cuts” during the 2012-2020 period, government gets a lot bigger during the decade. All of the supposed “cuts” are measured against an artificial baseline that assumes bigger government. In other words, the report is completely misleading in that spending increases get portrayed as spending cuts simply because government could be growing even faster. Interestingly, nowhere in the report does it show what total spending is today and what it will be in 10 years, presumably because the authors realized that the fiction of spending cuts would be hard to maintain if people could see real-world numbers showing the actual size of government now and in the future.

    This chart shows what it would actually take to balance the budget over the next 10 years – and these numbers assume all of the tax cuts are made permanent and that the alternative minimum tax is extended.

  2. The Task Force proposes a value-added tax, which is estimated to generate more than $3 trillion between 2012 and 2020. They call this new tax a “debt reduction sales tax” and I can just imagine the members giggling as they came up with this term. They may think the American people are a bunch of yokels who will get tricked by this language, but one can only wonder why they think making our tax system more like those in Europe will lead to anything other than more spending and less growth.
  3. The Task Force proposes to dramatically increase the scope of the Social Security payroll tax. Since this is something Obama called for in the campaign and also something endorsed by the President’s Fiscal Commission, this proposed tax hike should be viewed as a real threat. I’ve explained elsewhere why this is bad tax policy, bad fiscal policy, bad entitlement policy, and bad Social Security policy.
  4. To add “stimulus” to the package, the Task Force proposes a one-year payroll tax holiday. The good news is that they didn’t call for more spending. The bad news is that temporary tax cuts have very little pro-growth impact, especially if a tax cut will only last for one year. Unfortunately, the Task Force relied on the Congressional Budget Office, which blindly claimed that this gimmicky proposal will create between 2.5 million-7.0 million jobs. But since these are the geniuses who recently argued that higher tax rates boost growth and also claimed that Obama’s faux stimulus created jobs, those numbers have very little credibility.
  5. While the Task Force’s recommendations are unpalatable and misleading, there is a meaningful distinction between this plan and the Obama Administration’s fiscal policy. The Task Force assumes that government should get even bigger than it is today, but the Obama Administration wants government to grow at a much faster rate. The Task Force endorses massive tax hikes, but generally tries to avoid marginal tax rate increases that have especially large negative supply-side consequences. The Obama White House, by contrast, is fixated on a class-warfare approach to fiscal policy. One way of characterizing the different approaches is that the Task Force represents the responsible left while the Obama Administration represents the ideological left.

Co-Chairmen of Obama’s Fiscal Commission Unveil Real Tax Increases and Fake Spending Cuts

I have many pet peeves, but one that causes me endless frustration is the Washington “spending cut” scam. This happens when politicians increase spending, but claim that they’re cutting spending because they previously had planned to make government even bigger.

The proposal unveiled yesterday by the Co-Chairman of President Obama’s Fiscal Commission is a good example. If you read through their report, it sounds like there are lots of spending cuts. But they never explain that these supposed cuts are really just reductions in previously-planned increases.

Here’s the bottom line. As shown in the graph, it is quite simple to balance the budget (and permanently extend all of the 2001 and 2003 tax cuts) if politicians simply limit spending growth. You can balance the budget within a few years with an overall cap on spending at current-year levels. But if you prefer a more moderate approach, you can let spending increase 2 percent each year and balance the budget by the end of the decade.

The proposal from the Fiscal Commission, incidentally, does not balance the budget - even though they have a big tax increase (which they assume will have zero negative impact on economic performance).

So what does this mean? Well, we know that the budget can be balanced (with the 2001 and 2003 tax cuts) if spending grows two percent each year. And we also know that the Fiscal Commission increases the tax burden, yet still doesn’t achieve fiscal balance. So this means that they must be letting spending grow much faster than 2 percent each year. I’m guessing 4-5 percent annual spending growth.

In other words, the Fiscal Commission is asking us to pay higher taxes so that government spending can grow at twice the rate of inflation. That’s not a good deal.

Moreover, that’s almost certainly a ridiculously naive best-case scenario. If past behavior is any indication (and it is), politicians will spend any additional tax revenue. Whenever there’s a budget summit, the folks who want higher taxes make all sorts of empty promises about spending discipline. And when the other side caves in on taxes, they grab the money and have a party.

Our Tax Dollars Are Funding Bureaucrats Who Advise Congress that Higher Taxes Increase Prosperity

I’ve already written about the terrible work of the Congressional Budget Office. The CBO did an awful job on the stimulus, for instance, repeatedly asserting that diverting money from the private sector to government somehow would create jobs. CBO also was a disaster on Obamacare, claiming that a giant new entitlement program would reduce budget deficits. And the legislative bureaucracy even has argued that higher tax rates boost growth.

That sounds absurd (and it is), but CBO is not the only taxpayer-funded bureaucracy on Capitol Hill producing this kind of nonsensical analysis. The Congressional Research Service just published a new report asserting that higher tax rates will boost economic performance. Here’s an excerpt from that CRS publication.

…it is ambiguous whether tax cuts lead to more or less work, saving, and investment. The expiration of the tax cuts would nevertheless reduce the budget deficit, absent other policy changes, which economic theory predicts would have a positive effect on the economy in the long run.

To be fair, CRS doesn’t actually claim higher taxes are good for growth. And neither does CBO. But CRS and CBO both assert that there is no clear evidence that higher taxes hurt growth. Budget deficits, however, supposedly have a very negative impact on economic performance according to these Capitol Hill bureaucrats. More specifically, CRS and CBO believe that government borrowing leads to higher interest rates, and they think that higher interest rates reduce investment. And since investment is a key to long-run growth, this leads them to endorse any policy – including higher taxes – that reduces red ink.

Taking the CRS and CBO analysis to its logical extreme (and neither bureaucracy has stated that there are limits to their methodology), tax rates of 100 percent would be the most effective way of maximizing prosperity.

This video explains that the real problem is spending, and that deficits are just a symptom of a government that is too big. This is not to say that CRS and CBO are completely wrong. We have record budget deficits and very low interest rates today, but it’s possible that interest rates might be even lower without all the red ink. And it’s certainly true that interest rates are one of the many factors that determine investment choices, so there’s nothing wrong with including them in the equation.

But magnitudes matter. For all intents and purposes, CRS and CBO want us to believe that more government borrowing will have a very significant impact on interest rates and that those higher interest rates will have a very negative impact on investment. Yet neither bureaucracy offers any evidence for these linkages, in large part because the academic research shows that the relationships between deficits, interest rates, and investment are weak.

By contrast, CRS and CBO have no problem supporting higher tax rates – including more double taxation of income that is saved and invested. Yet there is considerable evidence that punitive tax rates have a significant impact not only on decisions to earn income and be productive, but also on decisions whether to consume today or to save and invest (and thus consume in the future). CRS and CBO also assume, rather naively, that politicians would use any additional revenue for deficit reduction instead of new spending.

Let’s call this the triumph of left-wing theory over real-world evidence. To add insult to injury, the sloppy analysis at CRS and CBO is financed by our tax dollars. So we pay bureaucrats so they can tell politicians to seize more money from us. Gee, what’s not to love about a scam like that?

P.S. If Republicans are actually serious about restraining government spending, CRS and CBO are target-rich environments. Just saying.