Tag: taxation

In World Bank’s New Tax Report Card, ‘High Effort’ Is a Very Bad Thing

Remember when you were a kid and your parents would either be happy or angry depending on whether your report card said you were trying hard or being a slacker? No matter whether your grades were good or bad, it helped to get an “A for Effort.”

But sometimes a high level of effort isn’t a good thing.

The World Bank has a new study that measures national tax burdens. But instead of using conventional measures, such as top tax rates or tax collections as a share of GDP, the international bureaucracy has developed an index that measures “tax effort” and “tax capacity” after adjusting for variables such as per-capita GDP, corruption, and demographics.

One goal of the study is to develop an apples-to-apples way of comparing tax burdens for nations at various levels of development. Poor nations, for instance, tend to have low levels of tax revenue even though they often have high tax rates. This is partly because of Laffer Curve reasons, but perhaps even more so because of corruption and incompetence. Rich nations, by contrast, usually have much greater ability to enforce their tax codes. So if you want to compare the tax system of Paraguay with the tax system of Sweden, you need to take these factors into account.

Here’s a description of how the authors addressed this issue.

Measuring taxation performance of countries is both theoretically and practically challenging. …tax economists have attempted to deal with this problem by applying an empirical approach to estimate the determinants of tax collection and identify the impact of such variables on each country’s taxable capacity. The development of a tax effort index, relating the actual tax revenues of a country to its estimated taxable capacity, provides us with a tempting measure which considers country specific fiscal, demographic, and institutional characteristics. …Tax effort is defined as an index of the ratio between the share of the actual tax collection in GDP and the taxable capacity.

This is a worthwhile project. There sometimes are big differences between nations and those should be part of the equation when comparing tax policies. Indeed, this is why my recent post on the rising burden of the value-added tax looked at data for nations at different levels of development.

But I’m irked by the World Bank study because it’s really measuring “tax onerousness.” I’m not even sure onerousness is a word, but I sure don’t like the term “tax effort” because it implies that a higher tax burden is a good thing. After all, we learned from our report cards that it’s good to demonstrate high effort and not be a slacker.

And just so you know I’m not just imagining things, the authors explicitly embrace the notion that bigger tax burdens are desirable. They assert (without any evidence, of course) that higher levels of tax promote “development” and that more money for politicians is “desirable.”

The international development community is increasingly recognizing the centrality of effective taxation to development. …higher tax revenues are important to lower the aid dependency in low-income countries. They also encourage good governance, strengthen state building and promote government accountability. …many developing countries experience a chronic gap between the actual and desirable levels of tax revenues. Taxation reforms are needed to close this gap.

If the authors of the study looked at economic history, they would understand that they have things backwards. “Effective taxation” doesn’t lead to “development.” It’s the other way around. The western world became rich when the burden of government was very small and most nations didn’t even have income tax regimes. It was only after nations because prosperous that politicians figured out how to extract significant shares of economic output.

But let’s set that aside and see which nations have the most and least onerous tax systems. Here’s a table from the report and it seems that Papua New Guinea has the world’s worst tax system and Bahrain has the best tax system. Among developed nations, New Zealand is the worst and Japan is the best. The United States (circled in red) gets a decent score. We’re not nearly as good as Switzerland and we’re slightly worse than Canada, but our politicians expend less “effort” than their counterparts in nations such as France, Italy, and Belgium.

By the way, I’m not endorsing either the methodology or the results. I like what the authors are trying to do (at least in terms of creating an apples-to-apples measure), but some of the results seem at odds with reality. New Zealand’s tax system isn’t great, but it certainly doesn’t seem as bad as the French tax code. And I have a hard time believing that Japan’s tax code is less onerous than the Swiss system.

The World Bank study also breaks down the data so that countries can be put into a matrix based on how much money they collect and how much “effort” they expend.

Here’s where the authors let their bias show. In their descriptions of the various boxes, they reflexively assume that higher tax collections are a good thing. Here is some of what they wrote in that section of the study.

The collection of taxes in this group of countries is currently low and lies below their respective taxable capacity. These countries have potential to succeed in deepening comprehensive tax policy and administration reforms focusing on revenue enhancement. …Botswana and Chile were originally in the low-effort, low-collection group, but they made it to the high-effort, high-collection group after recent improvements in revenue performance. …Although countries in this [high collection, low effort] group have already achieved a high tax collection, fiscally they still have the potential to implement reforms to reduce distortions and reach a higher level of efficiency of tax collection, since their tax effort index is low.

Very Orwellian, wouldn’t you say? We’re supposed to conclude that it’s bad if nations are “below their respective taxable capacity” because they can “succeed in deepening comprehensive tax policy” for purposes of “revenue enhancement.” Other nations, though, got gold stars because of “improvements in revenue performance.” And others were encouraged to try harder, even if they already collected a lot of revenue, in order to “reach of a higher level of efficiency of tax collection.”

But, to be fair, the study does include some semi-sensible comments acknowledging that there are limits to the greed of the political class. For all intents and purposes, the authors warn that there will be Laffer Curve effects if “high effort” nations seek to make their tax systems even more onerous.

Given that the level of tax intake in this group of countries is already high and stays above their respective taxable capacity, a further increase in tax revenue collection may lead to unintended economic distortions. …low-income countries with a low level of tax collection but high tax effort have less opportunity to increase tax revenues without possibly creating distortions or high compliance costs.

Just in case you’re not familiar with the lingo, “distortion” refers to the economic damage caused by high tax rates. This can be because high tax rates lead to a reduction in work, saving, investment, entrepreneurship, and other productive behaviors. Or it can be because high tax rates encourage people to make economically inefficient choices solely for tax planning purposes.

So the fact that the World Bank recognizes that taxes can hurt economic performance in at least some circumstances puts them ahead of the Congressional Budget Office and Joint Committee on Taxation. That’s damning with faint praise, to be sure, but I wanted to close on an upbeat note.

P.S. If you peruse the matrix, you’ll notice that New Zealand is considered a developing country. I’m sure that will be the source of amusement to my friends in Australia.

For the Sake of Intellectual Integrity, Republicans Should Not Cite the CBO When Arguing against Obama’s Proposed Fiscal-Cliff Tax Hike

I’ve commented before how the fiscal fight in Europe is a no-win contest between advocates of Keynesian deficit spending (the so-called “growth” camp, if you can believe that) and proponents of higher taxes (the “austerity” camp, which almost never seems to mean spending restraint).

That’s a left-vs-left battle, which makes me think it would be a good idea if they fought each other to the point of exhaustion, thus enabling forward movement on a pro-growth agenda of tax reform and reductions in the burden of government spending.

That’s a nice thought, but it probably won’t happen in Europe since almost all politicians in places such as Germany and France are statists. And it might never happen in the United States if lawmakers pay attention to the ideologically biased work of the Congressional Budget Office (CBO).

CBO already has demonstrated that it’s willing to take both sides of this left-v-left fight, and the bureaucrats just doubled down on that biased view in a new report on the fiscal cliff.

For all intents and purposes, the CBO has a slavish devotion to Keynesian theory in the short run, which means more spending supposedly is good for growth. But CBO also believes that higher taxes improve growth in the long run by ostensibly leading to lower deficits. Here’s what it says will happen if automatic budget cuts are cancelled.

Eliminating the automatic enforcement procedures established by the Budget Control Act of 2011 that are scheduled to reduce both discretionary and mandatory spending starting in January and maintaining Medicare’s payment rates for physicians’ services at the current level would boost real GDP by about three-quarters of a percent by the end of 2013.

Not that we should be surprised by this silly conclusion. The CBO repeatedly claimed that Obama’s faux stimulus would boost growth. Heck, CBO even claimed Obama’s spending binge was successful after the fact, even though it was followed by record levels of unemployment.

But I think the short-run Keynesianism is not CBO’s biggest mistake. In the long-run, CBO wants us to believe that higher tax burdens translate into more growth. Check out this passage, which expresses CBO’s view the economy will be weaker 10 years from now if the tax burden is not increased.

…the agency has estimated the effect on output that would occur in 2022 under the alternative fiscal scenario, which incorporates the assumption that several of the policies are maintained indefinitely. CBO estimates that in 2022, on net, the policies included in the alternative fiscal scenario would reduce real GDP by 0.4 percent and real gross national product (GNP) by 1.7 percent. …the larger budget deficits and rapidly growing federal debt would hamper national saving and investment and thus reduce output and income.

In other words, CBO reflexively makes two bold assumption. First, it assumes higher tax rates generate more money. Second, the bureaucrats assume that politicians will use any new money for deficit reduction. Yeah, good luck with that.

To be fair, the CBO report does have occasional bits of accurate analysis. The authors acknowledge that both taxes and spending can create adverse incentives for productive behavior.

…increases in marginal tax rates on labor would tend to reduce the amount of labor supplied to the economy, whereas increases in revenues of a similar magnitude from broadening the tax base would probably have a smaller negative impact or even a positive impact on the supply of labor. Similarly, cutting government benefit payments would generally strengthen people’s incentive to work and save.

But these small concessions do not offset the deeply flawed analysis that dominates the report.

But that analysis shouldn’t be a surprise. The CBO has a track record of partisan and ideological work.

While I’m irritated about CBO’s bias (and the fact that it’s being financed with my tax dollars), that’s not what has me worked up. The reason for this post is to grouse and gripe about the fact that some people are citing this deeply flawed analysis to oppose Obama’s pursuit of class warfare tax policy.

Why would some Republican politicians and conservative commentators cite a publication that promotes higher spending in the short run and higher taxes in the long run? Well, because it also asserts - based on Keynesian analysis - that higher taxes will hurt the economy in the short run.

…extending the tax reductions originally enacted in 2001, 2003, and 2009 and extending all other expiring provisions, including those that expired at the end of 2011, except for the payroll tax cut—and indexing the alternative minimum tax (AMT) for inflation beginning in 2012 would boost real GDP by a little less than 1½ percent by the end of 2013.

At the risk of sounding like a doctrinaire purist, it is unethical to cite inaccurate analysis in support of a good policy.

Consider this example. If some academic published a study in favor of the flat tax and it later turned out that the data was deliberately or accidentally wrong, would it be right to cite that research when arguing for tax reform? I hope everyone would agree that the answer is no.

Yet that’s precisely what is happening when people cite CBO’s shoddy work to argue against tax increases.

It’s very much akin to the pro-defense Republicans who use Keynesian arguments about jobs when promoting a larger defense budget.

To make matters worse, it’s not as if opponents lack other arguments that are intellectually honest.

So why, then, would anybody sink to the depths necessary to cite the Congressional Budget Office?

If Oklahoma Wins Lawsuit, ‘The Whole Structure’ of ObamaCare ‘Starts to Fall Apart’

Oklahoma Attorney General Scott Pruitt has filed a lawsuit challenging the Internal Revenue Service’s unlawful attempt to impose ObamaCare’s taxes on exempt employers and individuals. (Jonathan Adler and I plumb this issue in our forthcoming Health Matrix article, “Taxation Without Representation: The Illegal IRS Rule to Expand Tax Credits Under the PPACA.”)

An article in the current issue of Business Insurance cites a couple of experts on the potential impact of the lawsuit:

While the ramifications of the suit pending in the U.S. District Court in Muskogee, Okla., are huge, the challenge brought last month has gotten little attention…

What is clear is that the outcome of the lawsuit could be crucial for the future of the health care reform law, observers said.

If premium subsidies are not available in federally established exchanges, “No one would go to those exchanges. The whole structure created by the health care reform law starts to fall apart,” said Gretchen Young, senior vice president-health policy at the ERISA Industry Committee in Washington.

“The health care reform law would become a meaningless law,” added Chantel Sheaks, a principal with Buck Consultants L.L.C. in Washington.

For more, read here, hereherehereherehere, here, and here.

GOP Vows to Keep Fighting IRS’s Illegal ObamaCare Taxes if Obama Wins

Roll Call reports that if President Obama wins re-election, House and Senate Republicans will hold votes on rescinding his illegal IRS rule that unlawfully taxes employers and individuals in the 30 or so states that do not create their own health insurance exchanges:

House Republicans are opening a new front in their drive to derail the 2010 health care overhaul, using an expedited legislative procedure to upend targeted parts of the law…

Republican leaders are preparing to launch the effort during the post-election session that begins Nov. 13.

The resolution backed by Rep. Darrell Issa, the California Republican who heads the Oversight and Government Reform Committee, and Rep. Scott DesJarlais, a Tennessee Republican and the measure’s chief sponsor, is meant to nullify the upcoming IRS rule authorizing the distribution of subsidies through tax credits in every state, even the 35 that have not yet established state health care exchanges…

House leaders plan to bring the resolution to a vote during the lame-duck session if Obama wins re-election but will lay the groundwork for using the budget reconciliation process to strike parts of the law instead if former Massachusetts Gov. Mitt Romney wins, Republican aides said.

The resolution aimed at the IRS rule is the first in a series of Republican initiatives intended to block parts of heath care law if Obama is given a second term, a senior Senate Republican aide said.

“If Obama wins, you will see more of them. If Romney wins, you will see fewer,” said the Senate Republican aide, who added that even if such resolutions ultimately fail, they could require Democrats to cast votes that could pose re-election problems in 2014.

I don’t see why they wouldn’t hold the vote regardless of the outcome of the election. President RomneyCare would probably need some reminding that his own party is serious about repealing ObamaCare.

Jonathan Adler and I first called attention to the IRS’s ploy here, and we’ve been hammering away at it herehereherehere, here, and here. If you really want to nerd out, read our forthcoming Health Matrix article, ”Taxation Without Representation: The Illegal IRS Rule to Expand Tax Credits Under the PPACA.” Oklahoma’s attorney general has filed a lawsuit challenging the IRS’s illegal ObamaCare taxes.

John Goodman says stopping the IRS’s illegal ObamaCare taxes could deal “a fatal blow to ObamaCare.”

Dissecting Obama’s Record on Tax Policy

The folks at the Center for Freedom and Prosperity have been on a roll in the past few months, putting out an excellent series of videos on Obama’s economic policies.

Now we have a new addition to the list. Here’s Mattie Duppler of Americans for Tax Reform, narrating a video that eviscerates the President’s tax agenda.

I like the entire video, as you can imagine, but certain insights and observations are particularly appealing.

1. The rich already pay a disproportionate share of the total tax burden - The video explains that the top-20 percent of income earners pay more than 67 percent of all federal taxes even though they earn only about 50 percent of total income. And, as I’ve explained, it would be very difficult to squeeze that much more money from them.

2. There aren’t enough rich people to fund big government - The video explains that stealing every penny from every millionaire would run the federal government for only three months. And it also makes the very wise observation that this would be a one-time bit of pillaging since rich people would quickly learn not to earn and report so much income. We learned in the 1980s that the best way to soak the rich is by putting a stop to confiscatory tax rates.

3. The high cost of the death tax - I don’t like double taxation, but the death tax is usually triple taxation and that makes a bad tax even worse. Especially since the tax causes the liquidation of private capital, thus putting downward pressure on wages. And even though the tax doesn’t collect much revenue, it probably does result in some upward pressure on government spending, thus augmenting the damage.

4. High taxes on the rich are a precursor to higher taxes on everyone else - This is a point I have made on several occasions, including just yesterday. I’m particularly concerned that the politicians in Washington will boost income tax rates for everybody, then decide that even more money is needed and impose a value-added tax.

The video also makes good points about double taxation, class warfare, and the Laffer Curve.

Please share widely.

Higher Taxes on the Rich Are a Precursor to Higher Taxes on the Rest of Us

President Obama repeatedly assures us that he only wants higher taxes on the rich as part of his class-warfare agenda.

But I don’t trust him. In part because he’s a politician, but also because there aren’t enough rich people to finance big government (not to mention that the rich easily can alter their financial affairs to avoid higher tax rates).

Honest leftists are beginning to admit that their real target is the middle class. Here are a few examples.

In other words, politicians often say they want to tax the rich, but the real target is the middle class. Indeed, this is the history of tax policy. In a post earlier this year, warning the folks in the Cayman Islands not to impose an income tax, I noted how the U.S. income tax began small and then swallowed up more and more people.

[T]he U.S. income tax began in 1913 with a top rate of only 7 percent and it affected less than 1 percent of the population. But that supposedly benign tax has since become a monstrous internal revenue code that plagues the nation today.

The same thing is true elsewhere in the world.

Allister Heath explains for London’s City A.M. newspaper.

The introduction of income taxes around the world have tended to follow a very similar pattern over the past couple of centuries. First, we get generally low income tax rates, with most people exempt and with the highest rate only affecting a few people relatively lightly. Eventually, tax rates shoot up for everybody – including to crippling levels for top earners – and millions more are caught by income tax. The next stage is that the ultra-high tax rates for top earners are reduced to manageable levels – but ever more people are brought into the tax system, with the higher brackets also catching vastly more folk.

By the way, you can see that Allister makes a reference to tax rates being reduced for top earners. That’s largely because many politicians learned an important lesson about the Laffer Curve. Sometimes, the best way to “soak the rich” is by lowering their tax rates. Unfortunately, President Obama still needs some remedial education on this topic.

Allister then looks at some specific United Kingdom data revealing how more and more middle class people are now subject to higher tax rates.

The biggest change in the UK has been the number of people paying what is now the 40p tax rate: up six-fold in thirty years, from 674,000 in 1979-80, 2.5m in 1999-2000 to 4.048m in 2011-12. This number will jump again to around 5m in 2014, according to the Institute for Fiscal Studies. When Margaret Thatcher came to power, just 2.6 per cent of taxpayers paid the top rate; by the time of the next election, 16.7 per cent will.

If Obama and other statists get their way, we’ll see similar statistic in the United States. Higher income tax rates for the rich will mean higher income tax rates for the rest of us. Though I’m even more worried about a value-added tax, which would be a huge burden on ordinary people and a revenue machine for greedy politicians.

It’s worth noting, by the way, that the American tax code actually is more “progressive” than the tax codes of Europe’s welfare states. This is largely because we don’t pillage poor and middle-class taxpayers with a VAT.

P.S.: Since I mentioned the Laffer Curve above, I should emphasize that the goal of good tax policy should be to maximize growth, not to maximize tax revenue.

P.P.S.: And don’t forget that poor and middle-income taxpayers also will be hurt because slower growth is an inevitable consequence when tax rates climb and the burden of government spending increases.

House Committee Threatens to Subpoena Documents Related to IRS’s Illegal ObamaCare Taxes

Last Friday, House Oversight Committee chairman Darrell Issa (R-CA) and colleagues sent a letter to Treasury Secretary Timothy Geithner and Internal Revenue Service Commissioner Douglas Shulman accusing Treasury of “either willfully misleading the Committee or…purposefully withholding information that is essential to the Committee’s oversight effort.”

As Jonathan Adler and I document in our forthcoming Health Matrix article, “Taxation Without Representation: The Illegal IRS Rule to Expand Tax Credits Under the PPACA,” the IRS has announced it will impose ObamaCare’s taxes on employers and individuals whom Congress expressly exempted from those taxes, and will send potentially hundreds of billions of taxpayer dollars to private health insurance companies, also contrary to the plain language of the statute. Oklahoma attorney general Scott Pruitt has filed a legal challenge to the IRS rule that imposes those illegal taxes.

On August 20, the committee sent IRS commissioner Shulman a letter requesting “all legal analysis, internal or external, conducted by the IRS which authorizes IRS to grant premium-assistance tax credits in federal Exchanges,” and “all documents and communications between IRS employees and employees of the White House Executive Office of the President or any other federal agency or department referring or relating to the proposed IRS rule or final IRS rule.”

When Treasury responded for the IRS on October 12, according to committee member Rep. Scott DesJarlais (R-TN), it “failed to include a single document, memorandum, communication, or email created before the publication of the proposed rule on August 17, 2011”—i.e., when all the interesting discussions would have occurred. The committee’s second letter complains, “Treasury did not provide a single piece of evidence to support its claim that IRS complied with the standard process when issuing this rule.”

Thus, the committee threatened, “If you do not provide all of the requested information by Thursday, October 25, 2012, the Committee will consider the use of compulsory process.” Developing…

For more on this issue, see here, herehere, here, here, here, and here.