Tag: tax rates

Trevor Ariza: NBA Champion, Tax Refugee

Do some people think taxes don’t affect economic choices? If so, they should talk to Trevor Ariza and the Washington Wizards. Ariza, a member of the Los Angeles Lakers’ 2009 NBA championship team and “a key part of the Wizards’ playoff run,” has decided to leave Washington and join the Houston Rockets. Why?

Washington was disappointed but hardly shaken when Ariza chose to accept the same four-year, $32 million contract offer in Houston, where the 29-year-old could pocket more money because the state doesn’t tax income.

Yes, a $32 million salary – or indeed a $32,000 salary – goes further in Texas than in the District of Columbia. What economists call the “tax wedge” is the gap between what an employer pays for an employee’s services and what the employee receives after taxes. It causes some jobs to disappear entirely, as employees and employers may not be able to agree on a wage once taxes are taken out of the paycheck. It causes some employees to flee to lower-tax countries, states, or cities. The Beatles, the Rolling Stones, Bono, and Gerard Depardieu are some of the better-known “tax exiles.” Now Trevor Ariza has joined their ranks.

Tax Reform Error #1: Confusing Tax Expenditures with Revenues

House Ways and Means Chairman Dave Camp has released a complex 182-page “discussion draft” called The Tax Reform Act of 2014. Rather get bogged down in details, I will take this opportunity to review several fundamental errors that repeatedly plagued most past and present efforts to reform the federal income tax, including the Camp proposal.

One of the most pernicious errors among would-be tax reformers is to assume that, as the Tax Policy Center asserts, “tax expenditures are revenue losses” attributable to various “loopholes.” On the contrary, the Joint Committee on Taxation (JCT) clearly states that the estimated dollar value of any “tax expenditure … is not the same as a revenue estimate for the repeal of the tax expenditure provision.” As the JCT explains, “unlike revenue estimates, tax expenditure calculations do not incorporate the effects of the behavioral changes that are anticipated to occur in response to the repeal of a tax expenditure provision…. Taxpayer behavior is assumed to remain unchanged for tax expenditure estimate purposes … to simplify the calculation.”

One glaring difference between revenue estimates and tax expenditure estimates involves taxation of capital gains if those gains are realized by selling assets from a taxable account (unlike IRAs or most home sales). Estimated tax expenditures from not taxing realized capital gains at the top income tax rate of 43.4 percent is listed as a big revenue-losing tax expenditure, even though Treasury, the JCT and the Congressional Budget Office (CBO) revenue estimates would rightly predict that the behavioral response to such a high tax would crush asset sales and thus lose revenue. 

Mainly because the artificially estimated “tax expenditure” from a lower capital gains tax is wrongly equated with estimated revenues, the Simpson-Bowles plan hopes to raise an extra $585 billion over ten years. In reality, investors realize fewer gains when the tax rate goes up, so the higher tax on fewer transactions means revenues fall rather than rise.

If There’s a Grand Bargain, Taxpayers Should Get a Tax Cut Rather than a Tax Hike

The Washington metropolitan area has become America’s wealthiest region because trillions of dollars are taken every year from the productive sector of the economy and then divvied up by the politicians, bureaucrats, lobbyists, and interest groups that benefit from federal largess.

But there’s always an appetite in Washington for even more money. Former senator Kent Conrad (D-ND) just wrote in the Washington Post that “Our country needs more revenue to help us get back on track.”

I guess that means back on track to becoming Greece, though I suspect he would have an alternative explanation. All I can say for sure is that he probably wasn’t paying attention when I testified to his committee last year about pro-growth tax policy.

But it’s not just Democrats who are greedy for more of our money. Republican Congressman Tom Cole of Oklahoma joined the Charlie Brown Club by stating, “we’re willing to put more revenue on the table.”

If you ask politician why they want more revenue in Washington, they invariably state that America’s long-term fiscal challenges are so large that you need a “balanced” package.

But why should there be “balance” between tax hikes and spending cuts (which would merely be reductions in planned increases) when more than 100 percent of America’s long-run fiscal problem is because of a rising burden of government spending?

Does that sound like an exaggeration? Well, check out this data from the Congressional Budget Office’s 2013 Long-Term Budget Outlook.

Larry Summers Redefines Balanced Budgets as Stimulus and Big Deficits as Austerity

Former Treasury Secretary Larry Summers, in June 4 testimony before the Senate Budget Committee, offers a scatter diagram which allegedly shows “that countries that pursued harsher austerity policies in recent years also had lower real GDP growth.”  He acknowledges, but does not adequately explain, that the causality may well be backwards: Bond markets would not allow countries in severe economic distress (Portugal, Ireland, Greece and Spain) to continue financing deficits at the peak levels of 2010.

Summers defines “austerity” as the three-year change (regardless of the level) from 2010 to 2013 in cyclically-adjusted “primary” deficits (excluding interest expense) as a percent of potential GDP.  His scatter diagram then compares those changes to average real GDP growth from 2010 to 2013, using unexplained estimates for 2013.

Measuring fiscal stimulus by the change in budget deficits means several countries with little or no budget deficit in both 2010 and 2013 appear as employing the most “fiscal stimulus” in Summers’ graph. Sweden’s deficit is estimated at 0.1 percent of GDP for 2013, according to The Economist, and was literally zero in 2010.  Keeping the budget balanced puts Sweden on the admirable left side of Summers’ diagram – the side ostensibly choosing growth rather than austerity.  Germany is another country Summers counts as avoiding austerity, even though Germany’s brief cyclically-adjusted deficit of 3.5 percent of GDP in 2010 was cut to zero in 2012-2013.

When it comes to real GDP Growth, Hong Kong, Singapore, the Slovak Republic and South Korea appear near the top of Summers’ graph.  It is revealing that Hong Kong is also far to the left on the pro-growth side of the austerity axis.  This may appear paradoxical since Hong Kong ran budget surpluses in 7 of the past 8 years, and will do so again in 2013. No amount of cyclical adjusting could turn chronic surpluses into deficits.  Simply because Hong Kong has not switched from a big deficit to a smaller one, that alone suffices to place it among the least “austere” economies on list.  Similarly, South Korea’s budget surplus is estimated at 1.3-1.4 percent of GDP in both 2010 and 2013, according to the OECD, but keeping the budget in surplus between those years counts as stimulative policy in Summers’ reckoning.

The Poverty of Affordability Arguments

In the bargaining over avoiding the fiscal cliff, President Obama has taken to framing the argument this way:

We can solve this problem. All Congress needs to do is pass a law that would prevent a tax hike on the first $250,000 of everybody’s income – everybody. (Applause.) That means 98 percent of Americans – and probably 100 percent of you – (laughter) – 97 percent of small businesses wouldn’t see their income taxes go up a single dime. Even the wealthiest Americans would still get a tax cut on the first $250,000 of their income. But when they start making a million, or $10 million, or $20 million you can afford to pay a little bit more. (Applause.) You’re not too strapped.

I’m no political expert, but this seems like a pretty effective, if demagogic, frame: “Ol’ Boehner is just doing the bidding of his bazillionaire paymasters, trying to stick it to regular folks like you.” By framing the debate as being about whether very wealthy people “can afford to pay a little bit more,” Obama skews things in his favor. (On the substance of the argument about increasing taxes to close the gaping fiscal maw, try this from Alan Reynolds or this from Sen. Rob Portman (R-OH).)

And what does John Boehner think about Obama’s framing? Not much, obviously: “We have a huge national debt because Washington spends too much, not because it doesn’t tax people enough.” Boehner rejects the whole affordability frame, proposing his own—“is the problem taxes or spending?”—and adding on an argument that increasing taxes will hurt economic growth. So you’ve got dueling frames.

But what’s of interest to me is the analog of Obama’s frame in the foreign policy/defense spending discussion. In that debate, neoconservatives and liberal imperialists have framed the debate the same way Obama has framed the fiscal cliff debate: except in that case, it’s not about whether wealthy people can afford to pay higher taxes, but whether the United States can afford to continue spending around 50 percent of world military expenditures. Take it away, Robert Kagan:

What about the financial expense? Many seem to believe that the cost of these deployments, and of the armed forces generally, is a major contributor to the soaring fiscal deficits that threaten the solvency of the national economy. But this is not the case, either. As the former budget czar Alice Rivlin has observed, the scary projections of future deficits are not “caused by rising defense spending,” much less by spending on foreign assistance. The runaway deficits projected for the coming years are mostly the result of ballooning entitlement spending. Even the most draconian cuts in the defense budget would produce annual savings of only $50 billion to $100 billion, a small fraction—between 4 and 8 percent—of the $1.5 trillion in annual deficits the United States is facing.

Here again, if the debate is about whether the United States—let’s call us the One Percenters here—can afford to continue frittering away money playing globocop, the advantage is with Kagan and his confreres. But in both cases, Obama and Kagan try to substitute an affordability argument for a propriety/desirability argument. Of course wealthy people can “afford” to pay higher taxes—they’ve done so before, after all. By the same token, the United States can afford to continue funding its globe-girdling military presence. But in neither case do these affordability arguments answer the question: What should happen? To say something is affordable is not to say it is preferable

Obama doesn’t say, “We’ve spent a ton of money over the past 10 years and entitlement costs are ballooning so we’re going to squeeze as much as we can out of the rich and then see where we go from there.” Similarly, Kagan doesn’t lead with his argument that the debt and deficit should be fixed by increasing taxes and sprinkling pixie dust on entitlement costs. Instead, he wants to have the affordability debate. As well he ought to, since the public is increasingly disenchanted with the interventionist foreign policy program.

In neither case should we let the affordability argument carry the day. Boehner rejects the affordability framing of the tax increase debate. Conservatives ought to realize in both cases that something’s affordability is not synonymous with its propriety.

France Will Show U.S. How (Not) to Do It

Francois Hollande is a man on a mission—to increase the top rate of tax on income to 75 percent. The Socialist candidate, who is poised to beat Nicolas Sarkozy in the French presidential election, said, “Above 1m euros [£847,000; $1.3m], the tax rate should be 75% because it’s not possible to have that level of income.”

Hollande’s “unassailable” logic aside, the measure would remind those who are too young to remember the 1970s of what happens when the rapacious state makes work really unprofitable. I can just see the Whitehall mandarins wring their hands with joy as thousands of French high-earners, from actors to businessmen, pour across the English Channel to London. If anything, the disastrous effect of the French tax will be greater than four decades ago—the world, after all, has become even more competitive and the cost of relocation has fallen appreciably. Karl Marx is supposed to have said that “history repeats itself, first as tragedy, second as farce.” Hollande may well prove him right.

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