Tag: tax rate

Robert H. Frank’s Non-argument for Higher Tax Rates

In The New York Times, Robert H. Frank of Cornell University repeated his perpetual argument that high tax rates on the rich do no harm to demand (not supply) because the rich can just draw down savings, year after year,  to pay more taxes yet maintain a showy lifestyle.   Then he resorts to the old trick of asserting there is no “credible” evidence that tax disincentives and distortions have any ill effects on the economy.

Frank asks, rhetorically, if an increase in top tax rates might reduce economic growth.  And he replies, “There’s no credible evidence that it would.”   This is a timeworn trick among people too intellectually lazy to look for a single academic study or statistical fact.  

As I have shown before, Mr. Frank has a history of abusing bogus statistics culled from dubious sources. 

To simply assert “there’s no credible evidence,” however, is much worse than distorting the facts. 

It amounts to claiming that he has the ability and the right to suppress facts not to his liking. 

Over the past year I have repeatedly cited several major studies showing that pushing the highest marginal tax rates even higher is extremely dangerous to economic growth; Stanford economist Michael Boskin lists half a dozen of them in his latest Wall Street Journal op-ed.   

For Mr. Frank to assert that such studies are not “credible” simply reveals his own inability to find credible evidence to support his own untenable position.

Bright Spots in Fiscal Commission Report

President Obama’s Fiscal Commission has produced a serious and sobering analysis of the government’s budget mess, and it provides some of the needed solutions. Three of the report’s main themes are on target: the need to make government leaner, the need to cut business taxes to generate economic growth, and the need to impose tighter budget rules to discipline spending.

The report rejects the view of many Democratic leaders that the welfare state built over the last 80 years must be defended against any and all budget cuts. “Every aspect of the discretionary budget must be scrutinized, no agency can be off limits, and no program that spends too much or achieves too little can be spared. The federal government can and must adapt to the 21st century by transforming itself into a leaner and more efficient operation.” How lean the government should be, and how many agencies to eliminate, will be the central fiscal debate in coming years. Downsizing government is the order of the day.

The report recognizes the need to spur economic growth, particularly by cutting the corporate tax rate. “The corporate income tax, meanwhile, hurts America’s ability to compete… statutory rates in the U.S. are significantly higher than the average for industrialized countries … and our method of taxing foreign income is outside the norm…. the current system puts U.S. corporations at a competitive disadvantage against their foreign competitors.” The report recommends cutting the 35 percent federal corporate tax rate to 28 percent or less to respond to the Global Tax Revolution and to “make America the best place to start a business and create jobs.”

Finally, the report suggests that Congress impose new procedures to enforce budget restraint. However, the rules suggested by the commission are complex and not tight enough. It would be simpler and more powerful to impose a cap on overall federal spending. For example, a law could require that the government’s overall budget not grow faster than general inflation each year else the president would sequester spending across-the-board. Such a cap would be easy for the public to understand and enforce.

In sum, the report provides a useful menu of reform options that incoming members of a more conservative Congress can pursue next year. We need bigger spending cuts than the commission has laid out—as I’ve outlined in this balanced-budget plan—but the commission deserves credit for spurring a national discussion on how to downsize the federal government.

New York State Should Cut Property Taxes

The New York Times editorialists are at it again.  June 12th’s lead editorial, “The Latest Work Dodge: A Shutdown,” frets over the specter of the New York state government being shut down because Albany’s legislators can’t agree on a budget.  Well, the Times must have breathed a collective sigh of relief late Monday (June 14th).  That’s when the State Senate passed Governor Paterson’s 11th temporary budget extender, which allowed state offices to hang out “open for business” signs on Tuesday.

But, the Times wants a final state budget and claims that more taxing and borrowing and maybe some cuts in school aid will do the trick.  One item that the Times wants off the table in Albany is property taxes.  According to the Times, Democratic state senators outside New York City should stop pushing for restrictions on the rate of growth of property taxes.  I agree.  Instead, the legislators should start pushing for sharp cuts in New York’s oppressive property taxes.  When every U.S. county is ranked according to its average property-tax bill, as a percent of home values, 14 of the highest 15 are in New York state.

As Prof. Steve Walters and I concluded in “A Property Tax Cut Could Help Save Buffalo” (Wall Street Journal, December 6, 2008),  New York should follow California and Massachusetts and cut property taxes.  Voters capped property taxes in California at 1% of market value with Proposition 13 in 1978. That forced San Francisco to cut its rate by 57% overnight and brought forth a tidal wave of investment, even amidst a recession. By 1982, inflation-adjusted city revenues were two-thirds higher than they had been before Prop. 13. Massachusetts voters passed Prop 2 ½ in 1980, forcing Boston’s property tax rate down by an estimated 75% within two years. Massive reinvestment, repopulation and urban renewal followed.

How ObamaCare Would Keep the Poor Poor

Suppose you’re a family of four at or near the federal poverty level.  Under current law, if you earn an additional dollar, you get to keep around 60-70 cents.

Under the House and Senate health care bills, however, you would get to keep maybe 38 cents.  Or 26 cents.  Or maybe just 18 cents.

The following graph (from my recent study, “Obama’s Prescription for Low-Wage Workers: High Implicit Taxes, Higher Premiums”) shows that under the House and Senate bills, the combination of (1) a mandate tax and (2) subsidies that disappear as income rises would impose implicit tax rates on poor families that reach as high as 82 percent over broad ranges of income.

This graph actually smooths out some rather bumpy implicit tax rates that spike as high as 174 percent.

In the 1980s and 1990s, the public saw that too-generous government subsidies can actually trap people in a cycle of poverty and dependence.  President Obama and his congressional allies seem not to have learned that lesson.

Crist and Cato

Florida’s airwaves are alive with the sound of Governor Charlie Crist’s radio advertisement trumpeting his grade of “A” on Cato’s “Fiscal Policy Report Card on America’s Governors.”

I am pleased that Gov. Crist values Cato’s ratings because we work hard to make them accurate and nonpartisan. But the radio ad is making many fiscally conservative Floridians scratch their heads because of the governor’s recent policy actions.

The governor earned his Cato grade in last year’s report mainly because of his large property tax cuts and moderate spending approach. The grade was based purely on quantitative data on revenues, general fund spending, and tax rate changes.

However, since I wrote the report in mid-2008, the governor seems to have fallen off the fiscal responsibility horse.

In particular, Crist approved a huge $2.2 billion tax increase for the fiscal 2010 budget, even though he had promised that $12 billion in federal “stimulus” money showered on Florida over three years would obviate the need for tax increases.

About $1 billion of the tax increases are on cigarette consumers, which will particularly harm moderate-income families. The rest of the increases are in the form of higher costs for often mandatory services, such as automobile registration, which is really just a sneaky form of tax increases.

These tax increases will be particularly painful to Floridians in the short-term because of the recession. But Crist has also jeopardized the state’s long-term finances with his expanded subsidies for hurricane insurance. Hurricanes are a major challenge in Florida, but giving big subsidies to coastal property owners, driving private insurers out of the state, and guaranteeing a massive state bailout when the next hurricane hits strikes me as the height of fiscally irresponsibility.

More on the Crist campaign here.

Revenge of the Laffer Curve, Part II

An earlier post revealed that higher tax rates in Maryland were backfiring, leading to less revenue from upper-income taxpayers. It seems New York politicians are running into a similar problem. According to an AP report, the state’s 100 richest taxpayers have paid $1 billion less than expected following a big tax hike. The story notes that several rich people have left the state, and all three examples are about people who have redomiciled in Florida, which has no state income tax. For more background information on why higher taxes on the rich do not necessarily raise revenue, see this three-part Laffer Curve video series (here, here, and here):

Early data from New York show the higher tax rates for the wealthy have yielded lower-than-expected state wealth.

…[New York Governor David] Paterson said last week that revenues from the income tax increases and other taxes enacted in April are running about 20 percent less than anticipated.

…So far this year, half of about $1 billion in expected revenue from New York’s 100 richest taxpayers is missing.

…State officials say they don’t know how much of the missing revenue is because any wealthy New Yorkers simply left. But at least two high-profile defectors have sounded off on the tax changes: Buffalo Sabres owner Tom Golisano, the billionaire who ran for governor three times and who was paying $13,000 a day in New York income taxes, and radio talk-show host Rush Limbaugh.

…Donald Trump told Fox News earlier this year that several of his millionaire friends were talking about leaving the state over the latest taxes.

Using Gasoline to Douse a Fire? OECD Thinks Higher Tax Rates Will Help Iceland’s Faltering Economy

Republicans made many big mistakes when they controlled Washington earlier this decade, so picking the most egregious error would be a challenge. But continued American involvement with the Organization for Economic Cooperation and Development would be high on the list. Instead of withdrawing from the OECD, Republicans actually increased the subsidy from American taxpayers to the Paris-based bureaucracy. So what do taxpayers get in return for shipping $100 million to the bureaucrats in Paris? Another international organization advocating for big government.

The OECD, for example, is infamous for trying to undermine tax competition. It also has recommended higher taxes in America on countless occasions. And now it is suggesting that Iceland impose high tax increases - even though Iceland’s economy is in big trouble and the burden of government spending already is about 50 percent of GDP:

Both tax increases and spending cuts will be needed, although the former are easier to introduce immediately. The starting point for the tax increases should be to reverse tax cuts implemented over the boom years, which Iceland can no longer afford. This would involve increases in the personal income tax… Just undoing the past tax cuts is unlikely to yield enough revenue. In choosing other measures, priority should be given to those that are less harmful to economic growth, such as broadening tax bases, or that promote sustainable development, such as introducing a carbon tax.