Tag: Income tax

Marriage Policy Is a Mess. Here’s How to Make Sense of It.

Give Rand Paul points for trying: His opinion piece about marriage policy in the wake of Obergefell did better than many other Republicans have done. He did not call for resurrecting the dead – and politically toxic – Federal Marriage Amendment. He would appear to be actually considering the issues at stake, which is a good start.

But contrary to the promise of the headline (which he probably didn’t write anyway), the measures that Senator Paul recommends would not get government “out of the marriage business altogether.” Judging by what he actually wrote, local government would still control entry and exit from civil marriage, and civil marriage itself would apparently still continue to exist. Many federal consequences, like Social Security survivorship and the ability to sponsor an immigrant spouse, would presumably continue to flow from marital status - and they’d still be unavailable in any other way.

This isn’t such a terrible thing, necessarily. Marriage policy is really, really complicated. As long as we have a government, and as long as it’s making important decisions about our families and property, at least some parts of civil marriage may actually be worth saving. Marriage can serve as a protection against the state, one that (among lots of other things) keeps families together and makes the Social Security system run marginally more justly: If anyone deserves to recoup some of what the government takes by way of the payroll tax, it’s the widow of the worker who “contributed.” And if anyone is competent to sponsor a new citizen, it must be that new citizen’s spouse.

The State of Washington Should Learn a Very Important Lesson from Connecticut about the Dangers of an Income Tax

Every so often, I get asked why I’m so rigidly opposed to tax hikes in general and so vociferously against the imposition of new taxes in particular.

In part, my hostility is an ideological reflex. When pressed, though, I’ll confess that there are situations - in theory - where more taxes might be acceptable.

But there’s a giant gap between theory and reality. In the real world, I can’t think of a single instance in which higher taxes led to a fiscally responsible outcome.

That’s true on the national level. And it’s also true at the state level.

Speaking of which, the Wall Street Journal is - to put it mildly - not very happy at the tax-aholic behavior of Connecticut politicians. Here’s some of what was in a recent editorial.

The Census Bureau says Connecticut was one of six states that lost population in fiscal 2013-2014, and a Gallup poll in the second half of 2013 found that about half of Nutmeg Staters would migrate if they could. Now the Democrats who run the state want to drive the other half out too. That’s the best way to explain the frenzy by Governor Dannel Malloy and the legislature to raise taxes again… Mr. Malloy promised last year during his re-election campaign that he wouldn’t raise taxes, but that’s what he also said in 2010. In 2011 he signed a $2.6 billion tax hike promising that it would eliminate a budget deficit. Having won re-election he’s now back seeking another $650 million in tax hikes. But that’s not enough for the legislature, which has floated $1.5 billion in tax increases. Add a state-wide municipal sales tax that some lawmakers want, and the total could hit $2.1 billion over two years.

In other words, higher taxes in recent years have been used to fund more spending.

And now the politicians are hoping to play the same trick another time.

Grading the Rubio-Lee Tax Reform Plan

In my 2012 primer on fundamental tax reform, I explained that the three biggest warts in the current system:

  1. High tax rates that penalize productive behavior.
  2. Pervasive double taxation that discourages saving and investment.
  3. Corrupt loopholes and cronyism that bribe people to make less productive choices.

These problems all need to be addressed, but I also acknowledged additional concerns with the internal revenue code, such as worldwide taxation and erosion of constitutional freedoms an civil liberties.

In a perfect world, we would shrink government to such a small size that there was no need for any sort of broad-based tax (remember, the United States prospered greatly for most of our history when there was no income tax).

In a good world, we could at least replace the corrupt internal revenue code with a simple and fair flat tax.

In today’s Washington, the best we can hope for is incremental reform.

But some incremental reforms can be very positive, and that’s the best way of describing the “Economic Growth and Family Fairness Tax Reform Plan” unveiled today by Senator Marco Rubio of Florida and Senator Mike Lee of Utah.

Supreme Court Strikes Another Blow against IRS

As if the IRS weren’t reeling enough already, today the unanimous Supreme Court dealt the beleaguered agency another blow, unanimously ruling that companies who paid a British “windfall tax” could get credit for that payment against their U.S. tax liabilities. This should’ve been a simple case, and the federal tax court got it right – the tax code credits foreign income taxes – but the court of appeals found a convoluted way to rule for the IRS.

As Cato’s brief explained, however, taxpayers have the right to be free from double taxation and here the IRS improperly disregarded the substance of the windfall tax. A foreign tax’s form or label can’t mask its substantive character for legal purposes. American businesses operating overseas should be able to rely on a stable, substantive application of U.S. tax law instead of arbitrary interpretations and constructions manipulated to generate payments to the IRS.

The Supreme Court had to invoke and explain complicated equations to reach its decision – I’ve never seen so much math in an opinion – but this ruling ultimately boils down to the longstanding doctrine regarding how to evaluate a tax: (1) A tax’s “predominant character,” or the normal manner in which it applies, controls what kind of tax it is for other legal purposes; and (2) foreign tax creditability depends not on the way a foreign government characterizes its tax but on is economic effect – whether the tax, if enacted in the United States, would be an income tax or something else.

That’s the big takeaway here: The specific since-repealed UK tax at issue in PPL Corp. v. Commissioner of Internal Revenue isn’t likely to come up again, but the IRS is on notice that it doesn’t have discretion to err in favor of the Treasury whenever it feels like it. The tax code provides rules –albeit often overly complicated ones – that courts will enforce.

Identifying the Right “Depreciation” Tax Policy

I’m normally reluctant to write about “depreciation” because I imagine eyes glazing around the world. After all, not many people care about the tax treatment of business investment expenses.

But I was surprised by the positive response I received after writing a post about Obama’s demagoguery against “tax loopholes” for corporate jets. So with considerable trepidation let’s take another look at the issue.

First, a bit of background. Every economic theory agrees that investment is a key for long-run growth and higher living standards. Even Marxist and socialist theory agrees with this insight (though they foolishly think government somehow is competent to be in charge of investments).

Let’s look at two remarkable charts, starting with one that shows the very powerful link between total investment and wages for workers.


As you can see, if we want people to earn more money, it definitely helps for there to be more investment. More “capital” means that workers have higher productivity, and that’s the primary determinant of wages and salary.

Our second chart shows how the internal revenue code treats income that is consumed compared to how it penalizes income that is saved and invested. Simply stated, the current system is very biased against capital formation because of the combined impact of capital gains taxes, corporate income taxes, double taxes on dividends, and death taxes.

Indeed, one of the reasons why the right kind of tax reform will generate more prosperity is that double taxation of saving and investment is eliminated. With either a flat tax or national sales tax, economic activity is taxed only one time. No death tax, no capital gains tax, no double tax on dividends in either plan.

All of this background information helps underscore why it is especially foolish for the tax code to specifically penalize business investment. And this happens because companies have to “depreciate” rather than “expense” their investments.

The 100th Anniversary of the Income Tax…and the Lesson We Should Learn from that Mistake

What’s the worst thing about Delaware?

No, not Joe Biden. He’s just a typical feckless politician and the butt of some good jokes.

Instead, the so-called First State is actually the Worst State because almost exactly 100 years ago, on February 3, 1913, Delaware made the personal income tax possible by ratifying the 16th Amendment.

Though, to be fair, I suppose the 35 states that already had ratified the Amendment were more despicable since they were even more anxious to enable this noxious levy.

But let’s not get bogged down in details. The purpose of this post is not to re-hash history, but to instead ask what lessons we can learn from the adoption of the income tax.

The most obvious lesson is that politicians can’t be trusted with additional powers. The first income tax had a top tax rate of just 7 percent and the entire tax code was 400 pages long. Now we have a top tax rate of 39.6 percent (even higher if you include additional levies for Medicare and Obamacare) and the tax code has become a 72,000-page monstrosity.

But the main lesson I want to discuss today is that giving politicians a new source of money inevitably leads to much higher spending.

Here’s Why the Cayman Islands Is Considering Fiscal Suicide

What Do Greece, the United States, and the Cayman Islands Have in Common?

At first, this seems like a trick question. After all, the Cayman Islands are a fiscal paradise, with no personal income tax, no corporate income tax, no capital gains tax, and no death tax.

By contrast, Greece is a bankrupt, high-tax welfare state, and the United States sooner or later will suffer the same fate because of misguided entitlement programs.

But even though there are some important differences, all three of these jurisdictions share a common characteristic in that they face fiscal troubles because government spending has been growing faster than economic output.

I’ve written before that the definition of good fiscal policy is for the private sector to grow faster than the government. I’ve humbly decided to refer to this simple principle as Mitchell’s Golden Rule, and have pointed out that bad things happen when governments violate this common-sense guideline.

In the case of the Cayman Islands, the “bad thing” is that the government is proposing to levy an income tax, which would be akin to committing fiscal suicide.

The Cayman Islands are one of the world’s richest jurisdictions (more prosperous than the United States according to the latest World Bank data), in part because there are no tax penalties on income and production.

So why are the local politicians considering a plan to kill the goose that lays the golden eggs? For the simple reason that they have been promiscuous in spending other people’s money. This chart shows that the burden of government spending in the Cayman Islands has climbed twice as fast as economic output since 2000.

Much of this spending has been to employ and over-compensate a bloated civil service (in this respect, Cayman is sort of a Caribbean version of California).

In other words, the economic problem is that there has been too much spending, and the political problem is that politicians have been trying to buy votes by padding government payrolls (a problem that also exists in America).

The right solution to this problem is to reduce the burden of government spending back to the levels in the early part of last decade. The political class in Cayman, however, hopes it can prop up its costly bureaucracy with a new tax—which euphemistically is being called a “community enhancement fee.”

The politicians claim the tax will only be 10 percent and will only be imposed on the expat community. But it’s worth noting that the U.S. income tax began in 1913 with a top rate of only seven percent and it affected less than one percent of the population. But that supposedly benign tax has since become a monstrous internal revenue code that plagues the nation today.

Except the results will be even worse in Cayman because the thousands of foreigners who are being targeted easily can shift their operations to other zero-income tax jurisdictions such as Bermuda, Monaco, or the Bahamas. Or they can decide that to set up shop in places such as Hong Kong and Singapore, which have very modest income tax burdens (and the ability to out-compete Cayman in other areas).

As a long-time admirer of the Cayman Islands, I desperately hope the government will reconsider this dangerous step. The world already has lots of examples of nations that are following bad policy. We need a few places that are at least being semi-sensible.

By they way, I started this post with a rhetorical question about the similarities of Greece, the United States, and the Cayman Islands. Let’s elaborate on the answer.

Here’s a post that shows how Greece’s fiscal nightmare developed. But let’s show a separate chart for the burden of federal spending in the United States.

What’s remarkable is that the federal government and the Cayman Islands government have followed very similar paths to fiscal trouble. Indeed, Caymanian politicians have achieved the dubious distinction of increasing the burden of government spending at a faster rate than even Bush and Obama. No mean feat.

This data for the U.S. chart doesn’t include the burden of state and local government spending, so the Cayman Islands still has an advantage over the United States, but I’ll close with a prediction.

If the Cayman Islands adopts an income tax—regardless of whether they call it a community enhancement fee (to misquote Shakespeare, a rotting fish on the beach by any other name would still smell like garbage), it will be just a matter of time before the burden of government spending becomes even more onerous and Cayman loses its allure and drops from being one of the world’s 10-richest jurisdictions.

Which will be very sad since I’ll now have to find a different place to go when America suffers its Greek-style fiscal collapse.