Tag: tax increases

The American Roots of Tax Aversion

In last Sunday’s Washington Post, Jennifer Rubin wrote that Republicans must move beyond their adoration of Ronald Reagan and recognize, among other modernizations, that

America will not return to the pre-New Deal era. Limited government, not small government, must be the aim. That requires low taxes, not taxes that never increase.

She wants Republicans to give up “the pledge” and be willing to raise taxes if that’s the prudent thing in any circumstance.

Republicans and conservatives and libertarians who don’t want to follow her advice could find some historical support just a few inches away on the same page of the “Outlook” section. Reviewer Walter Isaacson quotes this line from a new book on the origins of the Boston Tea Party and the American Revolution, Bunker Hill by Nathaniel Philbrick:

Rather than propose a means of raising revenue that they deemed fair, the colonials were more than happy to direct their considerable energies toward opposing whatever plan the British ministry put forward.

That is, the American revolutionaries didn’t feel obligated to help the British government raise all the money it wanted. They were satisfied to oppose what they regarded as unwarranted taxation.

Tax resistance: an American tradition since 1773. Or 1767. Or 1687.

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.

Grover Norquist vs. Bill Kristol on Taxes and Pentagon Spending

Grover Norquist spoke yesterday at the Center for the National Interest, and the event drew a gaggle of skeptics convinced that President Obama’s victory over Mitt Romney might spell the end of Norquist’s vaunted Taxpayer Protection Pledge. He sounded an optimistic tone, pointing to past election cycles when the pledge was prematurely declared dead on arrival.

I was most interested in what he had to say about the tiny number of Congressional Republicans who have tried – and so far failed – to build support for tax increases in order to protect the Pentagon from spending cuts. In his opening remarks, Norquist peered into his crystal ball:

With divided government, I think you get the sequester. The President said he doesn’t want to change the money for the Pentagon; Mitch McConnell has said we’re not raising taxes to ransom the Pentagon budget cuts. And, interestingly,…a lot of the focus has been on the Pentagon. The Ds are a lot more concerned about the $50 billion in domestic discretionary spending restraint every year than the Rs are on the defense budget….And you did see the Republican Study Committee, the conservative caucus within the Republican House, which is a majority of House members (maybe 60 percent), announce the only thing worse than sequestration would be not having the savings. So this stampede that was attempted – the problem with the stampede is that there are only two people trying to start the stampede – and it didn’t take. You didn’t get a demand that the defense budget…remain untouched, either in public opinion or in the House and the Senate.

He’s right. You don’t see a groundswell of public opinion calling for tax increases to fund a still-larger military. On the contrary, most polls actually show more support for Pentagon cuts than for cuts in other spending. This poll (.pdf, Q56) found that 52 percent of Republicans, and 57 percent of Independents, are opposed to any increase in taxes in order to maintain the current advantage in military power. In this case, at least, members of Congress are accurately representing the wishes of their constituents.

I invited Norquist to expand on his comments about this failure to mobilize public support for more Pentagon spending in Washington and on Capitol Hill, and whether self-described conservatives risk undermining the GOP’s brand on taxes and spending. What does he think, for example, when Bill Kristol stumps for tax increases, opening the door for major media outlets to spin the story as ”even conservatives like Bill Kristol support tax increases to protect the Pentagon.”

Norquist replied:

Bill Kristol has been on record saying that if the conservatives didn’t want to be the war party that he’d join up with the … Democrat liberal hawks. … It was an odd sort of threat, but it was kind of an explanation that he doesn’t see himself as a mainstream Reagan Republican. Everything is hawkish foreign policy (not a Reaganite foreign policy, but a hawkish foreign policy). So that’s not surprising. That’s … what he does, but it’s not at all transferable. There isn’t a caucus in the House or the Senate that falls in that category.

He closed with a unscripted rant against the GOP’s situational Keynesianism. It’s “intellectually dishonest,” he said, to oppose Obama-Reid-Pelosi’s stimulus, but then embrace Romney’s version in the form of massive military spending. His remarks echo some of what he said a few months ago in a Cato podcast, but here are a few new gems:

I thought that the Romney people ill served the country and themselves when they ran these campaigns that if the defense budget was cut all these jobs would disappear. Now lets see, we just spent four years making fun of Obama’s multiplier that if the federal government spends x number of dollars you create jobs.

That’s like arguing that people who are involved in organ donations are creating additional kidneys. No they’re not, they’re just moving them around….the government creates jobs the way ticks create blood. No it doesn’t….You can move stuff around but you took it from somewhere and then you put it somewhere else. You take a dollar from here and kill a job and put it over there and then you hold a press conference over here….

For the Republicans to talk about how defense spending creates jobs, I think, was unfortunate. You can make an argument that you need this plane or this tank, or “The Canadians are being annoying again. Keep an eye on ‘em.” I’m all for that. We should have a strong national defense. But don’t sell it as a jobs program. It’s intellectually dishonest, and it was a shame that it was done.

If Tax Policy Is any Indication, Birthers Should Accuse Obama of Being Born in Denmark

I’m not a big fan of government conspiracy theories, largely because the people in Washington are too bloody incompetent to do anything effectively. Heck, sometimes they can’t even waste money properly even though they have lots of practice.

But it recently crossed my mind that maybe President Obama was born in Denmark. Not in a serious way, of course, but you’ll understand my thought process when you read this passage from a report by the government-appointed Danish Economic Council. It doesn’t mention the Laffer Curve, but the report openly states that an increase in the top tax rate would lose revenue because of changes in taxpayer behavior.

…increased taxation on high income earners in Denmark at best is revenue neutral, and may even reduce total tax revenue. This result applies whether one considers the top 10, the top 5 or the top 1 per cent income group. …Using the base estimate of the elasticity of taxable labour income of 0.2, the conclusion is thus that the existing Danish tax system implies an effective tax rate on high income earners that is above - though close to - the tax rate that generates the highest tax revenue. …As an example, the revenue effect of an increase in the marginal tax rate by 6 percentage points for high-income earners is calculated. Using the base estimate of the behavioural response to taxation, this leads to a revenue loss of about ½ billion DKK. …Overall, the scope for acquiring extra tax revenue from high income earners in Denmark is very limited.

Yet there are some politicians in Denmark who want to raise tax rates, even though the damage to the economy will be so significant that the government loses revenue!

If you’re thinking this sounds familiar, you probably remember President Obama’s infamous statement during the 2008 campaign that he wanted to raise the capital gains tax rate for reasons of “fairness” regardless of whether tax revenues decreased (if you think I’m somehow exaggerating or distorting his words, just go to the 4:20 mark of this video).

By the way, the Danish study probably understates how much revenue the government would lose. Their base estimate about the elasticity of taxable labor income (economist jargon for how sensitive labor income is to changes in tax rates) is much lower than Alan Reynolds reported in his recent Wall Street Journal column.

Rich people, unlike the rest of us, have tremendous ability to change the timing, composition, and level of their income, which is a big reason why upper-income taxpayers paid much more to the IRS in the 1980s after President Reagan slashed the top tax rate from 70 percent to 28 percent.

I’m constantly amazed - in a bad way - that politicians and bureaucrats have been so successful in resisting the insights of the Laffer Curve. The U.S. Treasury Department, for instance, is to the left of the Danish Economic Council and basically assumes that tax policy has no impact on economic performance. The same can be said about the Joint Committee on Taxation on Capitol Hill.

This has to be a case of leftist ideology trumping reality, because the evidence for the Laffer Curve is quite powerful - some of it even being produced by international bureaucracies.

None of this is to suggest that “all tax cuts pay for themselves.” That only happens in unusual cases where a group of taxpayers - such as wealthy entrepreneurs and investors - have considerable flexibility in their economic affairs.

In most cases, the government will collect more revenue when tax rates increase. This is because the impact of the change in the tax rate is larger than the impact of the change in taxable income.

But the real question is whether it is ever a good idea to reduce private economic output in order to give politicians more money to spend. To sensible people, that’s the most important insight of the Laffer Curve.

P.S. While this discussion has focused on the foolishness of setting tax rates so high that the government loses revenue, this does not mean politicians should seek the revenue-maximizing tax rate. The ideal point on the Laffer Curve is the growth-maximizing tax rate.

Jonah Goldberg’s Good Advice for the GOP: Confess Your Spending Sins and Repent

In a post last week, I explained that Obama has been a big spender, but noted his profligacy is disguised because TARP outlays caused a spike in spending during Bush’s last fiscal year (FY2009, which began October 1, 2008). Meanwhile, repayments from banks in subsequent years count as “negative spending,” further hiding the underlying trend in outlays.

When you strip away those one-time factors, it turns out that Obama has allowed domestic spending to increase at the fastest rate since Richard Nixon.

I then did another post yesterday in which I looked at total spending (other than interest payments and bailout costs) and showed that Obama has presided over the biggest spending increases since Lyndon Johnson.

Looking at the charts, it’s rather obvious that party labels don’t mean much. Bill Clinton presided during a period of spending restraint, while every Republican other than Reagan has a dismal track record.

President George W. Bush, for instance, scores below both Clinton and Jimmy Carter, regardless of whether defense outlays are included in the calculations. That’s not a fiscally conservative record, even if you’re grading on a generous curve.

This leads Jonah Goldberg to offer some sage advice to the GOP:

Here’s a simple suggestion for Mitt Romney: Admit that the Democrats have a point. Right before the Memorial Day weekend, Washington was consumed by a debate over how much Barack Obama has spent as president, and it looks like it’s picking up again.

…[A]ll of these numbers are a sideshow: Republicans in Washington helped create the problem, and Romney should concede the point. Focused on fighting a war, Bush—never a tightwad to begin with—handed the keys to the Treasury to Tom DeLay and Denny Hastert, and they spent enough money to burn a wet mule. On Bush’s watch, education spending more than doubled, the government enacted the biggest expansion in entitlements since the Great Society (Medicare Part D), and we created a vast new government agency (the Department of Homeland Security).

…Nearly every problem with spending and debt associated with the Bush years was made far worse under Obama. The man campaigned as an outsider who was going to change course before we went over a fiscal cliff. Instead, when he got behind the wheel, as it were, he hit the gas instead of the brakes—and yet has the temerity to claim that all of the forward momentum is Bush’s fault.

…Romney is under no obligation to defend the Republican performance during the Bush years. Indeed, if he’s serious about fixing what’s wrong with Washington, he has an obligation not to defend it. This is an argument that the Tea Party—which famously dealt Obama’s party a shellacking in 2010—and independents alike are entirely open to. Voters don’t want a president to rein in runaway Democratic spending; they want one to rein in runaway Washington spending.

Jonah’s point about “fixing what’s wrong with Washington” is not a throwaway line. Romney has pledged to voters that he won’t raise taxes. He also has promised to bring the burden of federal spending down to 20 percent of GDP by the end of a first term.

But even those modest commitments will be difficult to achieve if he isn’t willing to gain credibility with the American people by admitting that Republicans helped create the fiscal mess in Washington. Especially since today’s GOP leaders in the House and Senate were all in office last decade and voted for Bush’s wasteful spending.

It doesn’t take much to move fiscal policy in the right direction. All that’s required is to restrain spending so that it grows more slowly than the private sector. (With the kind of humility you only find in Washington, I call this “Mitchell’s Golden Rule.”) The entitlement reforms in the Ryan budget would be a good start, along with some much-needed pruning of discretionary spending.

And if you address the underlying problem by limiting spending growth to about 2 percent annually, you can balance the budget in about 10 years. No need for higher taxes, notwithstanding the rhetoric of the fiscal frauds in Washington who salivate at the thought of another failed 1990s-style tax hike deal.

Italy Slowly Recognizes that the Substance of ‘Austerity’ Matters

Apologists for big government have regularly warned that Europe’s austerity measures would push the European economy into a recession. To some extent they’ve been correct, but not for the reasons they claim. So far austerity in countries like Greece and Italy have been austerity for the private sector, not the public. They’ve attempted to close budget gaps by tax increases rather than spending cuts. Witness Mario Monti’s implementation of a tax on first home purchases (sure to do wonders for your housing and construction labor markets).

Fortunately there is some small ray of hope that Italy has come to recognize the error of its ways. As reported in today’s Financial Times, instead of pushing for an increase in the value-added tax, Italy will focus its next austerity measures on cutting government.  As the Financial Times goes on to explain:

The new government’s €30bn austerity package, passed in December, was heavily oriented towards tax increases rather than spending cuts, an emphasis that is now widely recognised by ministers as having driven Italy deeper into recession.

When even the Financial Times recognizes that tax increases are contractionary, then perhaps there is some hope for Italy (and Europe) after all. Now if we can actually get spending costs of real significance (€30 billion is a rounding error for the Italian government’s budget).

How Can Obama Look at these Two Charts and Conclude that America Should Have Higher Double Taxation of Dividends and Capital Gains?

As discussed yesterday, the most important number in Obama’s budget is that the burden of government spending will be at least $2 trillion higher in 10 years if the President’s plan is enacted.

But there are also some very unsightly warts in the revenue portion of the President’s budget. Americans for Tax Reform has a good summary of the various tax hikes, most of which are based on punitive, class-warfare ideology.

In this post, I want to focus on the President’s proposals to increase both the capital gains tax rate and the tax rate on dividends.

Most of the discussion is focusing on the big increase in tax rates for 2013, particularly when you include the 3.8 tax on investment income that was part of Obamacare. If the President is successful, the tax on capital gains will climb from 15 percent this year to 23.8 percent next year, and the tax on dividends will skyrocket from 15 percent to 43.4 percent.

But these numbers understate the true burden because they don’t include the impact of double taxation, which exists when the government cycles some income through the tax code more than one time. As this chart illustrates, this means a much higher tax burden on income that is saved and invested.

The accounting firm of Ernst and Young just produced a report looking at actual tax rates on capital gains and dividends, once other layers of tax are included. The results are very sobering. The United States already has one of the most punitive tax regimes for saving and investment.

Looking at this first chart, it seems quite certain that we would have the worst system for dividends if Obama’s budget is enacted.

The good news, so to speak, is that we probably wouldn’t have the worst capital gains tax system if the President’s plan is enacted. I’m just guessing, but it looks like Italy (gee, what a role model) would still be higher.

Let’s now contemplate the potential impact of the President’s tax plan. I am dumbfounded that anybody could look at these charts and decide that America will be in better shape with higher tax rates on dividends and capital gains.

This isn’t just some abstract issue about competitiveness. As I explain in this video, every single economic theory – even Marxism and socialism – agrees that saving and investment are key for long-run growth and higher living standards.

So why is he doing this? I periodically run into people who are convinced that the President is deliberately trying to ruin the nation. I tell them this is nonsense and that there’s no reason to believe elaborate conspiracies.

President Obama is simply doing the same thing that President Bush did: Making bad decisions because of perceived short-run political advantage.

Pages