Tag: tax burdens

Prime Minister of Finland Commits Gaffe, Admits that Anti-Tax Competition Schemes Are Designed to Enable Higher Tax Burdens

Most politicians and other advocates of tax harmonization are clever enough to pretend that they do not want higher tax rates. Instead, they assert that their proposals are merely ways of reducing evasion and making tax systems more efficient. So it is rather surprising that the Prime Minister of Finland has a column in the Financial Times, where he admits that various governments should conspire to simultaneously raise tax rates in order to finance big government:

The overall tax rate will have to rise as well over the longer term. In some areas that can be done without much consultation between the countries. For example, property taxes or inheritance taxes can largely be determined at the national level without adverse economic consequences. But such taxes will not raise significant amounts of revenue. Only changes in value added tax, various excise taxes or taxes on earned and capital income can make a real difference. However, raising such taxes can have detrimental effects on economic activity. This is especially so when a country acts on its own: capital and people can respond by migrating to jurisdictions with lower rates. Deeper co-operation is therefore necessary if tax revenues are to be increased in a way that truly helps fiscal consolidation. …It is important that different countries do not find themselves with very different tax solutions. We should avoid tax competition and the damage this would cause to Europe’s economic growth. …member countries could agree, for example, to change the levels of certain taxes in parallel. Parallel measures would help all of Europe: tax competition risk would be reduced and the public finances of individual countries would improve. Such co-ordinated tax changes could set also an important global example. In particular, it might encourage the US – with lower tax levels in most areas – to do what has to be done to address its spiralling budget deficit.

In the column, Prime Minister Vanhanen even suggests that the United States might be tempted to join the tax cartel. This has always been a goal of the Europeans since an OPEC for politicians without the United States will not work any better than the real OPEC without Saudi Arabia. One of my first videos – back in late 2007 – was on this topic, and it is embedded below for those who did not have a chance to view it.

Revenge of the Laffer Curve

Steve Moore and Art Laffer have an excellent column in today’s Wall Street Journal. They explain that high-tax states drive repel entrepreneurs and investors, leading to a pronounced Laffer Curve effect. Productive people either leave the state or choose to earn and report less taxable income. And because growth is weaker than in low-tax states, there also is a negative impact on lower-income and middle-class people:

Here’s the problem for states that want to pry more money out of the wallets of rich people. It never works because people, investment capital and businesses are mobile: They can leave tax-unfriendly states and move to tax-friendly states. …Updating some research from Richard Vedder of Ohio University, we found that from 1998 to 2007, more than 1,100 people every day including Sundays and holidays moved from the nine highest income-tax states such as California, New Jersey, New York and Ohio and relocated mostly to the nine tax-haven states with no income tax, including Florida, Nevada, New Hampshire and Texas. We also found that over these same years the no-income tax states created 89% more jobs and had 32% faster personal income growth than their high-tax counterparts. …Dozens of academic studies – old and new – have found clear and irrefutable statistical evidence that high state and local taxes repel jobs and businesses. …Examining IRS tax return data by state, E.J. McMahon, a fiscal expert at the Manhattan Institute, measured the impact of large income-tax rate increases on the rich ($200,000 income or more) in Connecticut, which raised its tax rate in 2003 to 5% from 4.5%; in New Jersey, which raised its rate in 2004 to 8.97% from 6.35%; and in New York, which raised its tax rate in 2003 to 7.7% from 6.85%. Over the period 2002-2005, in each of these states the “soak the rich” tax hike was followed by a significant reduction in the number of rich people paying taxes in these states relative to the national average.

Interestingly, the Baltimore Sun last week published an article noting that the soak-the-rich tax imposed last year is backfiring. There are fewer rich people, less taxable income, and lower tax revenue. To be sure, some of this is the result of a nationwide downturn, but the research cited by Moore and Laffer certainly suggest that the state revenue shortfall will continue even after than national economy recovers:

A year ago, Maryland became one of the first states in the nation to create a higher tax bracket for millionaires as part of a broader package of maneuvers intended to help balance the state’s finances and make the tax code more progressive. But as the state comptroller’s office sifts through this year’s returns, it is finding that the number of Marylanders with more than $1 million in taxable income who filed by the end of April has fallen by one-third, to about 2,000. Taxes collected from those returns as of last month have declined by roughly $100 million. …Karen Syrylo, a tax expert with the Maryland Chamber of Commerce, which lobbied against the millionaire bracket, said she has heard from colleagues who are attorneys and accountants that their clients moved out of state to avoid the new tax rate. She said that some Maryland jurisdictions boast some of the highest combined state and local income tax burdens in the country. “Maryland is such a small state, and it is so easy to move a few miles south to Virginia or a few miles north to Pennsylvania,” Syrylo said. “So there are millionaires who are no longer going to be filing Maryland tax returns.”

With President Obama proposing higher tax rates for the entire nation, perhaps this is a good time to remind people about the three-part video series on the Laffer Curve that I narrated. If you have not yet had a chance to watch them, the videos are embedded here for your viewing pleasure:

Obama’s Spending Theory

President Obama focused on budget and economic issues in his press conference last night. One concern raised by reporters was that federal deficits were exploding and that Obama’s big spending plans would seem to make the problem worse.

Obama’s response was essentially that higher spending reduces the debt problem, which would strike most people as paradoxical to say the least:

Here’s what I do know: If we don’t tackle energy, if we don’t improve our education system, if we don’t drive down the costs of health care, if we’re not making serious investments in science and technology and our infrastructure, then we won’t grow [the economy by] 2.6 percent, we won’t grow 2.2 percent. We won’t grow. And so what we’ve said is, let’s make the investments that ensure that we meet our growth targets that put us on a pathway to growth as opposed to a situation in which we’re not making those investments and we still have trillion-dollar deficits.

First note that Obama’s budget would drive government health care costs up, not down. But aside from that technicality, the economics of Obama’s theory don’t make any sense.

Government spending on infrastructure, education, science and energy are already at high levels. For example, infrastructure spending today is as high as it was during the 1950s, and higher than it has been in recent decades. If government worked efficiently—as liberals believe it does—then all the highest-valued uses of taxpayer money would already be funded. At the margin, the only place for Obama’s new spending would be on low-value items of less economic importance.

Thus, Obama’s new college subsidies might induce some added young people to attend college, but most of those people are probably pretty marginal students because the high-quality students are already going to college. The marginal students might pick up some added skills, but at the cost of higher tax burdens and less economic output in the years when those folks are out of the workforce. Liberals assume that more spending on any activity they are interested in, whether public or private, is always better, but the real goal of economic policy is to find the optimum because all spending has a cost. (And the optimum level of government spending on most things is pretty darn low, or zero, in my view).

Obama is essentially claiming that even with federal, state and local spending at about one-third of GDP, there are government spending projects left over that are so powerful that “we won’t grow” if they don’t happen.

Serious economists know that that is nonsense. Most government activities have negative effects on growth, not positive effects. Take the largest federal program, Social Security, which will consume about $660 billion in taxpayer money this year. The program is a negative on economic growth because it suppresses personal savings and the taxes to fund it create large distortions. Lots of liberal economists support such transfer programs for non-economic or “social” reasons, but few economists would argue that they expand GDP on net.