Tag: taxation

Words I Don’t Say Very Often: ‘I Applaud Senate Republicans’

Much to my surprise, Senate Republicans held firm earlier today and blocked President Obama’s soak-the-rich proposal to raise tax rates next year on investors, entrepreneurs and small business owners.

I fully expected that GOPers would fold on this issue several months ago because Democrats were using the class-warfare argument that Republicans were holding the middle class hostage in order to protect “millionaires and billionaires.” Republicans usually have a hard time fighting back against such demagoguery, and I was especially pessimistic since every Republican senator had to stay united to block Senate Democrats from pushing through Obama’s plan for higher tax rates on the so-called rich.

But the GOP surprised me earlier this year with their united opposition to higher taxes, and they stayed strong again today in blocking a bill that would raise tax rates on upper-income taxpayers. Here’s an excerpt from the New York Times.

Republicans voted unanimously against the House-passed bill, and they were joined by four Democrats — Senators Russ Feingold of Wisconsin, Joe Manchin III of West Virginia, Ben Nelson of Nebraska, and Jim Webb of Virginia — as well as by Senator Joseph I. Lieberman, independent of Connecticut. “You don’t raise taxes if your ultimate goal, if the main thing is to create jobs,” said Senator John Thune, Republican of South Dakota, echoing an argument made repeatedly by his colleagues during the floor debate. The Senate on Saturday also rejected an alternative proposal, championed by Senator Charles E. Schumer of New York, to raise the threshold at which the tax breaks would expire to $1 million. Some Democrats said that the Republicans’ opposition to that plan showed them to be siding with “millionaires and billionaires” over the middle class.

Not only did GOPers stand firm, but they were joined by five other senators (including four that have to face the voters in 2012). This presumably means Democrats will now have to compromise and agree to a plan to extend all of the 2001 and 2003 tax cuts.

At the risk of being a Pollyanna, I wonder if the politics of hate and envy is falling out of fashion. Obama’s plan for higher tax rates hopefully is now dead, but that’s just one positive indicator. It’s also interesting that both of the big “deficit reduction” plans recently unveiled, the President’s Fiscal Commission and the Domenici-Rivlin Debt Reduction Task Force Report, endorsed lower marginal tax rates - including lower tax rates for those evil rich people. Both proposals also included lots of tax increases, so the overall tax burden would be significantly higher under both plans, but it is remarkable that the beltway insiders who dominated the two panels understood the destructive impact of class-warfare tax rates. Maybe they watched this video.

Washington’s Dishonest Budget Math

The Chairmen of President Obama’s Fiscal Commission have a new draft proposal that is filled, according to Reuters, with “sharp spending and benefit cuts.”

That’s music to my ears, so I quickly flipped to the back of the report in hopes of finding hard numbers showing that the federal government will be smaller in future years.

Much to my chagrin, it turns out that the federal government will increase by about $1.5 trillion between 2010 and 2020 according to the Commission’s numbers. Here’s a chart based on the data from page 57.

As I explain in the video below, this disconnect between supposed spending cuts and actual spending increases is the result of politicians creating a system where a spending increase can be called a “spending cut” if outlays don’t climb as fast as previously planned. This “baseline” or “current services” budgeting is a great gimmick for the politicians since they can simultaneously give more money to special interest groups while also telling voters that they are cutting the budget.

This does not mean that the folks at the Fiscal Commission are being deliberately dishonest. This process has been in use for decades and many budget wonks routinely rely on this common practice without giving any thought to whether it misleads voters.

And there are good reasons to collect “current services” data. Those numbers tell lawmakers how much spending has to increase if they, for instance, leave entitlement programs on autopilot (i.e., more senior citizens automatically leading to more Social Security spending).

Nonetheless, the debate about federal budget policy should be honest. If the Fiscal Commission thinks spending should increase at about twice the rate of inflation, and they want higher taxes to finance that spending growth, they should openly argue for that position. And if the hard left wants spending to increase three times faster than inflation, as it has during the era of Bush-Obama profligacy, they should openly make the case for why America should be more like France.

Tax Loopholes Are Corrupt and Inefficient, but They Should only Be Eliminated if Every Penny of New Revenue Is Used to Lower Tax Rates

There’s been a lot of heated discussion about various preferences, deductions, credits, shelters, and other loopholes in the tax code. Some of this debate has revolved around whether it is legitimate to refer to these provisions as “tax expenditures” or “subsidies.”

Michael Cannon vociferously argues that subsidies and expenditures only occur when the government takes money from person A and gives it to person B. On the other side of the debate are people like Josh Barro of the Manhattan Institute, who argues that tax preferences are akin to subsidies or expenditures since they can be just as damaging as government spending programs when looking at whether resources are efficiently allocated.

Since I’m a can’t-we-all-get-along, uniter-not-divider kind of person, allow me to suggest that this debate should be set aside. After all, we all agree that tax preferences can lead to inefficient outcomes. So let’s call them “tax distortions” and focus on the real issue, which is how best to eliminate them.

This is an important issue because both the Domenici-Rivlin Task Force and the Chairmen of the Simpson-Bowles Commission have unveiled plans that would reduce or eliminate many of these tax distortions and also lower marginal tax rates. That’s the good news.

The bad news is that their plans result in more revenue going to Washington. In other words, the tax increase resulting from fewer tax distortions is larger than the tax decrease resulting from lower tax rates. To put it bluntly, the plans would increase the overall tax burden.

Some argue that this is an acceptable price to pay. They point out, quite correctly, that lower tax rates will help the economy by improving incentives for productive behavior. And they also are right in arguing that fewer tax distortions will help the economy by improving efficiency. Seems like a win-win situation. What’s not to like?

The problem is on the spending side of the fiscal ledger. The Simpson-Bowles Commission and the Domenici-Rivlin Task Force were charged with figuring out how to reduce red ink. We already know from Congressional Budget Office data, however, that we can balance the budget fairly quickly by limiting the growth of government spending. As the chart illustrates, the deficit disappears by 2016-2017 with a hard freeze and goes away by 2019-2020 if spending increases by two percent each year (and this assumes all the 2001 and 2003 tax cuts are made permanent).

If tax revenue is increased, that simply means that the budget gets balanced at a higher level of spending. And since government spending, at current levels and composition, hinders economic growth by diverting labor and capital to less productive (or unproductive) uses, any proposal that enables higher levels of government spending will further undermine economic performance.

It goes without saying (but I’ll say it anyhow) that this analysis is overly optimistic since it assumes that politicians actually will balance the budget. In all likelihood, as explained in today’s Wall Street Journal, any tax increase would probably be followed by even more spending. So if politicians raise the tax burden, we might still have a deficit of $685 billion in 2020 (CBO’s most-recent estimate assuming  all programs are left on auto-pilot), but the overall levels of both spending and taxes would be higher. This modified cartoon captures this real-world effect.

This is why revenue-neutral tax reform, like the flat tax, is the only pro-growth way of eliminating tax distortions.

Don’t Blame Ireland’s Mess on Low Corporate Tax Rates

Ireland is in deep fiscal trouble and the Germans and the French apparently want the politicians in Dublin to increase the nation’s 12.5 percent corporate tax rate as the price for being bailed out. This is almost certainly the cause of considerable smugness and joy in Europe’s high-tax nations, many of which have been very resentful of Ireland for enjoying so much prosperity in recent decades in part because of a low corporate tax burden.

But is there any reason to think Ireland’s competitive corporate tax regime is responsible for the nation’s economic crisis? The answer, not surprisingly, is no. Here’s a chart from one of Ireland’s top economists, looking at taxes and spending for past 27 years. You can see that revenues grew rapidly, especially beginning in the 1990s as the lower tax rates were implemented. The problem is that politicians spent every penny of this revenue windfall.

When the financial crisis hit a couple of years ago, tax revenues suddenly plummeted. Unfortunately, politicians continued to spend like drunken sailors. It’s only in the last year that they finally stepped on the brakes and began to rein in the burden of government spending. But that may be a case of too little, too late.

The second chart provides additional detail. Interestingly, the burden of government spending actually fell as a share of GDP between 1983 and 2000. This is not because government spending was falling, but rather because the private sector was growing even faster than the public sector.

This bit of good news (at least relatively speaking) stopped about 10 years ago. Politicians began to increase government spending at roughly the same rate as the private sector was expanding. While this was misguided, tax revenues were booming (in part because of genuine growth and in part because of the bubble) and it seemed like bigger government was a free lunch.

But big government is never a free lunch. Government spending diverts resources from the productive sector of the economy. This is now painfully apparent since there no longer is a revenue windfall to mask the damage.

There are lots of lessons to learn from Ireland’s fiscal/economic/financial crisis. There was too much government spending. Ireland also had a major housing bubble. And some people say that adopting the euro (the common currency of many European nations) helped create the current mess.

The one thing we can definitely say, though, is that lower tax rates did not cause Ireland’s problems. It’s also safe to say that higher tax rates will delay Ireland’s recovery. French and German politicians may think that’s a good idea, but hopefully Irish lawmakers have a better perspective.

Debunking White House Pro-Tax Increase Propaganda

The White House recently released a video, narrated by Austan Goolsbee of the Council of Economic Advisers, asserting that higher tax rates on the so-called rich would be a good idea.

Since Goolsbee’s video made so many unsubstantiated assertions and was guilty of so many sins of omission, here’s a rebuttal video, narrated by yours truly.

This new Center for Freedom and Prosperity video includes the full footage of the White House production, so viewers can decide for themselves which side is correct.

Ballot Initiatives Provide Underappreciated Election-Night Victories

Last week, I highlighted nine ballot initiatives that were worth watching because of their policy implications and/or their role is showing whether voters wanted more or less freedom. The results, by and large, are very encouraging. Let’s take a look at the results of those nine votes, as well as a few additional key initiatives.

1. The big spenders wanted to impose an income tax in the state of Washington, and they even had support from too-rich-to-care Bill Gates. The good news is that this initiative got slaughtered by a nearly two-to-one margin.  I was worried about this initiative since crazy  Oregon voters approved higher tax rates earlier this year. In a further bit of good news, Washington voters also approved a supermajority requirement for tax increases by a similar margin.

2. Nevada voters had a chance to vote on eminent domain abuse. This is an initiative that I mischaracterized in my original post. The language made it sound like it was designed to protect private property, but it actually was proposed by the political elite to weaken a property rights initiative that the voters previously had imposed. Fortunately, Nevada voters did not share my naiveté and the effort to weaken eminent domain protections was decisively rejected.  This is important, of course, because of the Supreme Court’s reprehensible Kelo decision.

3. California voters were predictably disappointing. They rejected the initiative to legalize marijuana, thus missing an opportunity to adopt a more sensible approach to victimless crimes. The crazy voters from the Golden State also kept in place a suicidal global warming scheme that is driving jobs out of the state. The only silver lining in California’s dark cloud is that voters did approve a supermajority requirement for certain revenue increases.

4. Nearly 90 percent of voters in Kansas approved an initiative to remove any ambiguity about whether individuals have the right to keep and bear arms. Let that be a warning to those imperialist Canadians, just in case they’re plotting an invasion.

5. Arizona voters had a chance to give their opinion on Obamacare. Not surprisingly, they were not big fans, with more than 55 percent of them supporting an initiative in favor of individual choice in health care. A similar initiative was approved by an even greater margin in Oklahoma. Shifting back to Arizona, voters also strongly rejected racial and sexual discrimination by government, but they narrowly failed to approve medical marijuana.

6. Shifting to the local level, San Francisco, one of the craziest cities in America rejected a proposal to require bureaucrats to make meaningful contributions to support their bloated pension and health benefits. On the other hand, voters did approve a proposal to ban people from sleeping on sidewalks. Who knew that was a big issue?

7. Sticking with the ever-amusing Golden State, voters unfortunately eliminated the requirement for a two-thirds vote in the legislature to approve a budget, thus making it even easier for politicians to increase the burden of government spending. The state almost certainly is already on a path to bankruptcy, and this result will probably hasten its fiscal demise. Hopefully, the new GOP majority in the House of Representatives will say no when soon-to-be Governor Brown comes asking for a bailout.

8. The entire political establishment in Massachusetts was united in its opposition to an initiative to to roll back the sales tax from 6.25 percent to 3 percent, and they were sucessful. But 43 percent of voters approved, so maybe there’s some tiny sliver of hope for the Bay State.

9. Louisiana voters approved an initiative to require a two-thirds vote to approve any expansion of taxpayer-financed benefits for government employees. With 65 percent of voters saying yes to this proposal, this is a good sign that the bureaucrat gravy train may finally be slowing down.

At the risk of giving a grade, I think voters generally did a good job when asked to directly make decisions. I give them a solid B.

Should We Blame Obama, Rangel, and Baucus if People Die to Escape the Death Tax?

The death tax is a punitive levy that discourages saving and investment and causes substantial economic inefficiency. But it’s also an immoral tax that seizes assets from grieving families solely because someone dies. The good news is that this odious tax no longer exists. It disappeared on January 1, 2010, thanks to the 2001 tax cut legislation. The bad news is that the death tax comes back with a vengeance on January 1, 2011, ready to confiscate as much as 55 percent of the assets of unfortunate families.

I’ve criticized the death tax on many occasions, including one column in USA Today explaining the economic damage caused by this perverse form of double taxation, and I highlighted a few of the nations around the world that have eliminated this odious tax in another column for the same paper.

Politicians don’t seem persuaded by these arguments, in part because they feel class warfare is a winning political formula. President Obama, House Ways & Means Committee Chairman Charlie Rangel, and Senate Finance Committee Chairman Max Baucus have been successful in thwarting efforts to permanently kill the death tax. But I wonder what they’ll say if their obstinate approach results in death?

Congresswoman Cynthia Lummis of Wyoming is getting a bit of attention (including a link on the Drudge Report) for her recent comments that some people may choose to die in the next two months in order to protect family assets from the death tax. For successful entrepreneurs, investors, and small business owners who might already be old (especially if they have a serious illness), there is a perverse incentive to die quickly. 

U.S. Rep. Cynthia Lummis says some of her Wyoming constituents are so worried about the reinstatement of federal estate taxes that they plan to discontinue dialysis and other life-extending medical treatments so they can die before Dec. 31. Lummis…said many ranchers and farmers in the state would rather pass along their businesses – “their life’s work” – to their children and grandchildren than see the federal government take a large chunk. “If you have spent your whole life building a ranch, and you wanted to pass your estate on to your children, and you were 88 years old and on dialysis, and the only thing that was keeping you alive was that dialysis, you might make that same decision,” Lummis told reporters.

The class-warfare crowd doubtlessly will dismiss these concerns, but they should set aside their ideology and do some research. Four years ago, two Australian scholars published an article on this issue in Topics in Economic Analysis & Policy, which is published by the Berkeley Electronic Press. Entitled “Did the Death of Australian Inheritance Taxes Affect Deaths?”, their paper looked at the roles of tax, incentives, and death rates. The abstract has an excellent summary.

In 1979, Australia abolished federal inheritance taxes. Using daily deaths data, we show that approximately 50 deaths were shifted from the week before the abolition to the week after. This amounts to over half of those who would have been eligible to pay the tax. …our results imply that over the very short run, the death rate may be highly elastic with respect to the inheritance tax rate.

And here’s a graph from the article, which shows how many affected taxpayers managed to delay death until the tax went away.

Obama and other class-warfare politicians now want to run this experiment in reverse. I already noted in another blog post that there are Americans who are acutely aware of the hugely beneficial tax implications if they die in 2010. In other words, Congresswoman Lummis almost certainly is right.

I don’t actually think that Obama, Rangel, Baucus and the rest of the big-government crowd should be blamed for any premature deaths that occur. But I definitely think that they should be asked if they feel any sense of guilt, remorse, and/or indirect responsibility.