Tag: taxation

Crocodile Dundee vs Australia’s Tax Police

Here’s a Reuters story about the Australian Tax Office harassing Paul Hogan, better known to Americans as Crocodile Dundee, because of a tax dispute. The grinches at the tax office took advantage of Hogan’s return for his mother’s funeral to hold him hostage, refusing to let him leave the country until he coughs up some cash. It appears that the tax police in Australia are just as politicized and above the law as the IRS. Hogan has never been charged with tax evasion and there are plenty of signs that the bureaucrats want to make him a high-profile victim to justify the amount of money that has been squandered in a probe of supposed offshore evasion.

Actor Paul Hogan, star of the “Crocodile Dundee” movies, has vowed to continue fighting the Australian tax office which has barred him from leaving Australia until he pays a massive bill, saying he’s victim of a witch hunt. Hogan, 70, was served with a departure prohibition order 10 days ago while in Australia to attend his 101-year-old mother’s funeral which has prevented him from leaving to return to Los Angeles where he lives with his wife and son. The Australian Tax Office refused to comment on reports of seeking tax on A$38 million ($34 million) of allegedly undeclared income from Hogan, saying it cannot give details of individual taxpayers. But the actor went public in the Australian media this week to put forward his side in his five-year row with the tax office, saying he had done nothing wrong and the tax office was on a witch hunt for a high-profile case. …”If I was a tax evader, which I’m not, I must be the dumbest one in the world to keep coming back here instead of fleeing to a tax haven … I know they’re absolutely desperate to nail some high-profile character with money to justify the expense to the taxpayer.” Hogan, who was once a painter on the Sydney Harbour Bridge, is under investigation as part of Australia’s biggest probe into offshore tax evasion, Operation Wickenby. The operation is budgeted to cost at least $300 million. The tax office has claimed he put tens of millions of dollars in film royalties in offshore tax havens, a claim that he has denied. He has never been charged with tax evasion.

This story is symbolic of a bigger issue, which is the the unfortunate tendency of governments to create ever-more oppressive and misguided laws in response to failures of existing policy. We see this in the failed War on Drugs, which leads to trampling of civil liberties and erosion of privacy. We see it in the failed War on Poverty, which leads to more redistribution that further traps people in dependency. We see it in the failed government-run education system, which wastes more money every year as outcomes remain stagnant and children from poor and minority communities suffer.

In the case of tax policy, politicians impose high tax rates and punitive forms of double taxation. As anybody with a modicum of common sense could predict, this bad tax policy undermines economic performance and drives economic activity to jurisdictions with better tax law. The politicians then have two ways to respond. They can lower tax rates and reform tax systems, an approach that simultaneously would boost growth and improve compliance (as happened during the Reagan years). Or they can tighten the thumbscrews on taxpayers, trample their rights, and conspire with other high-tax nations to punish the jurisdictions that do have good policy.

Not surprisingly, most politicians choose the latter approach. And the attack on low-tax jurisdictions is a particularly loathsome part of their response. As this video explains, tax competition is a liberalizing force in the world economy and the effort by high-tax nations to penalize so-called tax havens is driven by a statist impulse to prop up decrepit and inefficient welfare states:

Dishonest British Budgeting…Just Like We Do It in America

According to news coverage, United Kingdom Prime Minister Cameron is imposing deep and savage budget cuts. I was interviewed by the BBC recently, for instance, and asked whether 25 percent spending reductions were too harsh. And here’s an excerpt from a New York Times story that is very representative of the news coverage.

Like a shipwrecked sailor on a starvation diet, the new British coalition government is preparing to shrink down to its bare bones as it cuts expenditures by $130 billion over the next five years and drastically scales back its responsibilities. The result, said the Institute for Fiscal Studies, a research group, will be “the longest, deepest sustained period of cuts to public services spending” since World War II. …Public-sector unions are planning a series of strikes. Charities — which Mr. Cameron has said should take over some of the responsibilities now held by the state — say that they are at risk of collapse because they are so dependent on government money. And the chief executive of the Supreme Court, the country’s highest, said she did not know whether the court would be able to function at all if its budget were cut by 40 percent.

To be blunt, this type of analysis is completely false. There are no budget cuts in the United Kingdom, at least in terms of total government spending. Instead, the politicians are measuring cuts against some imaginary baseline, which is the same scam that happens in Washington. So if spending increases by 4 percent instead of 7 percent, that is characterized as a 3 percent budget reduction. The chart shows what is happening with overall government spending in the United Kingdom. Notwithstanding phony stories about budget cuts, spending in Prime Minister Cameron’s first year is climbing by more than 4 percent – twice as fast as needed to keep pace with inflation.

This doesn’t mean that Cameron isn’t doing anything right. There is a two-year pay freeze for bureaucrats, for instance, which is at least a small step in the right direction. But the Tory-Liberal Democrat coalition is not a good role model for those who want limited government and fiscal responsibility. There are promises of spending restraint in future years, but those belong in the I’ll-believe-it-when-I-see-it category. Spending is supposed to increase by less than 1 percent in next year’s budget, for instance, but politicians are very good with tough talk of fiscal discipline in future years. But if we judge them by what they’re doing today rather than what they’re claiming will happen in the future, Cameron’s policies leave much to be desired.

The tax side of the fiscal equation is even more depressing. There is small reduction in the corporate tax rate, but otherwise there is considerable bad news. The new government is leaving in place the new 50 percent top tax rate imposed by Gordon Brown as an election-year class-warfare gimmick. It is boosting the capital gains tax rate from 18 percent to 28 percent. And it increased the VAT rate from 17.5 percent to 20 percent.

The Laffer Curve Strikes Again

In the private sector, no business owner would be dumb enough to assume that higher prices automatically translate into proportionately higher revenues. If McDonald’s boosted hamburger prices by 30 percent, for instance, the experts at the company would fully expect that sales would decline. Depending on the magnitude of the drop, total revenue might still climb, but by far less than 30 percent. And it’s quite possible that the company would lose revenue. In the public sector, however, there is very little understanding of how the real world works. Here’s a Reuters story I saw on Tim Worstall’s blog, which reveals that Bulgaria and Romania both are losing revenue after increasing tobacco taxes.

Cash-strapped Bulgaria and Romania hoped taxing cigarettes would be an easy way to raise money but the hikes are driving smokers to a growing black market instead. Criminal gangs and impoverished Roma communities near borders with countries where prices are lower – Serbia, Macedonia, Moldova and Ukraine – have taken to smuggling which has wiped out gains from higher excise duties. Bulgaria increased taxes by nearly half this year and stepped up customs controls and police checks at shops and markets. Customs office data, however, shows tax revenues from cigarette sales so far in 2010 have fallen by nearly a third. …Overall losses from smuggling will probably outweigh tax gains as Bulgaria struggle to fight the growing black market, which has risen to over 30 percent of all cigarette sales and could cost 500 million levs in lost revenues this year, said Bezlov at the Center for the Study of Democracy. While the government expected higher income from taxes in 2010 it has already revised that to the same level as last year. “However, this (too) looks unlikely at present,” Bezlov added. Romania, desperately trying to keep a 20 billion-euro International Monetary Fund-led bailout deal on track, has a similar problem after nearly doubling cigarette prices in 2009 then hiking value added tax. Romania’s top three cigarette makers – units of British American Tobacco, Japan Tobacco International and Philip Morris – contributed roughly 2 billion euros to the budget in taxes in 2009, or just under 2 percent of GDP. They estimate about a third of cigarettes in Romania are smuggled and say this could cost the state over 1 billion euros.

Congressional Budget Office Says We Can Maximize Long-Run Economic Output with 100 Percent Tax Rates

I hope the title of this post is an exaggeration, but it’s certainly a logical conclusion based on what is written in the Congressional Budget Office’s updated Economic and Budget Outlook. The Capitol Hill bureaucracy basically has a deficit-über-alles view of fiscal policy. CBO’s long-run perspective, as shown by this excerpt, is that deficits reduce output by “crowding out” private capital and that anything that results in lower deficits (or larger surpluses) will improve economic performance – even if this means big increases in tax rates.

CBO has also examined an alternative fiscal scenario reflecting several changes to current law that are widely expected to occur or that would modify some provisions of law that might be difficult to sustain for a long period. That alternative scenario embodies small differences in outlays relative to those projected under current law but significant differences in revenues: Under that scenario, most of the cuts in individual income taxes enacted in 2001 and 2003 and now scheduled to expire at the end of this year (except the lower rates applying to high-income taxpayers) are extended through 2020; relief from the AMT, which expired after 2009, continues through 2020; and the 2009 estate tax rates and exemption amounts (adjusted for inflation) apply through 2020. …Under those alternative assumptions, real GDP would be…lower in subsequent years than under CBO’s baseline forecast. …Under that alternative fiscal scenario, real GDP would fall below the level in CBO’s baseline projections later in the coming decade because the larger budget deficits would reduce or “crowd out” investment in productive capital and result in a smaller capital stock.

There’s nothing necessarily wrong with CBO’s concern about deficits, but looking at fiscal policy through that prism is akin to deciding who wins a baseball game by looking at what happened during the 6th inning. Yes, government borrowing drains capital from the productive sector of the economy. And nations such as Greece are painful examples of what happens when governments go too far down this path. But taxes also undermine economic performance by reducing incentives to work, save, and invest. And nations such as France are gloomy reminders of what happens when punitive tax rates discourage productive behavior.

What’s missing for CBO’s analysis is any recognition or understanding that the real problem is excessive government spending. Regardless of whether spending is financed by borrowing or taxes, resources are being diverted from the private sector to government. In other words, government spending is the disease and deficits are basically a symptom of that underlying problem. Indeed, it’s worth noting that there’s not much evidence that deficits cause economic damage but plenty of evidence that bloated public sectors stunt growth. This video is a good antidote to CBO’s myopic focus on budget deficits.

What’s the Ideal Point on the Laffer Curve?

There’s been a bit of chatter in the blogosphere about a recent post on Ezra Klein’s blog, featuring estimates from various economists about the revenue-maximizing tax rate. It won’t come as a surprise that people on the right tended to give lower estimates and folks on the left had higher guesses. Donald Luskin of National Review estimated 19 percent, for instance, while Emmanuel Saez, Dean Baker, Bruce Bartlett, and Brad DeLong all gave answers around 70 percent.

There are two things that are worth noting.

First, every single answer is to the right of the Joint Committee on Taxation. The revenue-estimators on Capitol Hill assume that taxes have no impact on overall economic performance. As such, even confiscatory tax rates have very little impact on taxable income. The JCT operates in a totally non-transparent fashion, so it is difficult to know whether they would say the revenue-maximizing tax rate is 90 percent, 95 percent, or 100 percent, but it is remarkable that a mini-bureaucracy with so much power is so far out of the mainstream (it’s even more remarkable that Republicans controlled Congress for 12 years, yet never fixed this problem, but that’s a separate story).

Second, very few of the respondents made the critically important observation that it should not be the goal of tax policy to maximize revenue. After all, the revenue-maximizing point is where the damage to the overall economy is so great that taxable income falls enough to offset the impact of the higher tax rates. Greg Mankiw of Harvard and Steve Moore of the Wall Street Journal indicated they understood this point since they both explained that the long-run revenue-maximizing rate was lower than the short-run revenue-maximizing rate. But Martin Feldstein of Harvard explicitly addressed this issue and hit the nail on the head.

Why look for the rate that maximizes revenue? As the tax rate rises, the “deadweight loss” (real loss to the economy) rises. So as the rate gets close to maximizing revenue the loss to the economy exceeds the gain in revenue…. I dislike budget deficits as much as anyone else. But would I really want to give up say $1 billion of GDP in order to reduce the deficit by $100 million? No. National income is a goal in itself. That is what drives consumption and our standard of living.

For more information, I think my three-part video series on the Laffer Curve is a good summary of the key issues. I posted them in May 2009, but Cato-at-Liberty has been growing rapidly and many people have not seen them. Part I addresses the theory, and explicitly notes that policy makers should target the growth-maximizing tax rate rather than the revenue-maximizing tax rate. Part II reviews some of the evidence, including analysis of the huge increase in taxable income and tax revenue from upper-income taxpayers following the Reagan tax-rate reductions. Part III looks at the Joint Committee on Taxation’s dismal performance.


When Keynesians Attack, Part II

I’m still dealing with the statist echo chamber, having been hit with two additional attacks for the supposed sin of endorsing Reaganomics over Obamanomics (my responses to the other attacks can be found here and here). Some guy at the Atlantic Monthly named Steve Benen issued a critique focusing on the timing of the recession and recovery in Reagan’s first term. He reproduces a Krugman chart (see below) and also adds his own commentary.

Reagan’s first big tax cut was signed in August 1981. Over the next year or so, unemployment went from just over 7% to just under 11%. In September 1982, Reagan raised taxes, and unemployment fell soon after. We’re all aware, of course, of the correlation/causation dynamic, but as Krugman noted in January, “[U]nemployment, which had been stable until Reagan cut taxes, soared during the 15 months that followed the tax cut; it didn’t start falling until Reagan backtracked and raised taxes.”

This argument is absurd since the recession in the early 1980s was largely the inevitable result of the Federal Reserve’s misguided monetary policy. And I would be stunned if this view wasn’t shared by 90 percent-plus of economists. So it is rather silly to say the recession was caused by tax cuts and the recovery was triggered by tax increases.

But even if we magically assume monetary policy was perfect, Benen’s argument is wrong. I don’t want to repeat myself, so I’ll just call attention to my previous blog post which explained that it is critically important to look at when tax cuts (and increases) are implemented, not when they are enacted. The data is hardly exact, because I haven’t seen good research on the annual impact of bracket creep, but there was not much net tax relief during Reagan’s first couple of years because the tax cuts were phased in over several years and other taxes were going up. So the recession actually began when taxes were flat (or perhaps even rising) and the recovery began when the economy was receiving a net tax cut. That being said, I’m not arguing that the Reagan tax cuts ended the recession. They probably helped, to be sure, but we should do good tax policy to improve long-run growth, not because of some misguided effort to fine-tune short-run growth.

The second attack comes from some blog called Econospeak, where my newest fan wrote:

I’m scratching my head here as I thought the standard pseudo-supply-side line was that the deficit exploded in the 1980’s because government spending exploded. OK, the truth is that the ratio of Federal spending to GDP neither increased nor decreased during this period. Real tax revenues per capita fell which is why the deficit rose but this notion that the burden of government fell is not factually based.

Those are some interesting points, and I might respond to them if I wanted to open a new conversation, but they’re not germane to what I said. In my original post (the one he was attacking), I commented on the “burden of government” rather than the “burden of government spending.” I’m a fiscal policy economist, so I’m tempted to claim that the sun rises and sets based on what’s happening to taxes and spending, but such factors are just two of the many policies that influence economic performance. And with regard to my assertion that Reagan reduced the “burden of government,” I’ll defer to the rankings put together for the Economic Freedom of the World Index. The score for the United States improved from 8.03 to 8.38 between 1980 and 1990 (my guess is that it peaked in 1988, but they only have data for every five years). The folks on the left may be unhappy about it, but it is completely accurate to say Reagan reduced the burden of government. And while we don’t yet have data for the Obama years, there’s a 99 percent likelihood that America’s score will decline.

This is not a partisan argument, by the way. The Economic Freedom of the World chart shows that America’s score improved during the Clinton years, particularly his second term. And the data also shows that the U.S. score dropped during the Bush years. This is why I wrote a column back in 2007 advocating Clintonomics over Bushonomics. Partisan affiliation is not what matters. If we want more prosperity, the key is shrinking the burden of government.

Last but not least, I try to make these arguments to the folks watching MSNBC.

Are These Examples of Washington Corruption?

The “appearance of impropriety” is often considered the Washington standard for corruption and misbehavior. With that in mind, alarm bells began ringing in my head when I read this Washington Times report about Jacob Lew, Obama’s nominee to head the Office of Management and Budget. A snippet:

President Obama’s choice to be the government’s chief budget officer received a bonus of more than $900,000 from Citigroup Inc. last year — after the Wall Street firm for which he worked received a massive taxpayer bailout. The money was paid to Jacob Lew in January 2009, about two weeks before he joined the State Department as deputy secretary of state, according to a newly filed ethics form. The payout came on top of the already hefty $1.1 million Citigroup compensation package for 2008 that he reported last year. Administration officials and members of Congress last year expressed outrage that executives at other bailed-out firms, such as American International Group Inc., awarded bonuses to top executives. State Department officials at the time steadfastly refused to say if Mr. Lew received a post-bailout bonus from Citigroup in response to inquiries from The Washington Times. But Mr. Lew’s latest financial disclosure report, provided by the State Department on Wednesday, makes clear that he did receive a significant windfall. …The records show that Mr. Lew received the $944,578 payment four days after he filed his 2008 ethics disclosure.

Why did Citigroup decide to hire Lew, a career DC political operator, for $1.1 million? As a former political aide, lobbyist, lawyer, and political appointee, what particular talents did he have to justify that salary to manage an investment division? Did the presence of Lew (as well as other Washington insiders such as Robert Rubin) help Citigroup get a big bucket of money from taxpayers as part of the TARP bailout? Did Lew’s big $900K in 2009 have anything to do with the money the bank got from taxpayers? Is it a bit suspicious that he received his big windfall bonus four days after filing a financial disclosure?

See if you can draw any conclusion other than this was a typical example of the sleazy relationship of big government and big business.

Lest anyone think I’m being partisan, let’s now look at another story featuring Senator Richard Shelby. The Alabama Republican and his former aides have a nice relationship that means more campaign cash for him, lucrative fees for them, and lots of our tax dollars being diverted to such recipients as the state’s university system. Here are some of the sordid details:

Since 2008, Alabama Sen. Richard Shelby has steered more than $250 million in earmarks to beneficiaries whose lobbyists used to work in his Senate office — including millions for Alabama universities represented by a former top staffer. In a mix of revolving-door and campaign finance politics, the same organizations that have enjoyed Shelby’s earmarks have seen their lobbyists and employees contribute nearly $1 million to Shelby’s campaign and political action committee since 1999, according to federal records. …Shelby’s earmarking doesn’t appear to run afoul of Senate rules or federal ethics laws. But critics said his tactics are part of a Washington culture in which lawmakers direct money back home to narrow interests, which, in turn, hire well-connected lobbyists — often former congressional aides — who enjoy special access on Capitol Hill.

Some people think the answer to such shenanigans is more ethics laws, corruption laws, and campaign-finance laws, but that’s like putting a band-aid on a compound fracture. Besides, it is quite likely that no laws were broken, either by Lew, Citigroup, Shelby, or his former aides. This is just the way Washington works, and the beneficiaries are the insiders who know how to milk the system. The only way to actually reduce both legal and illegal corruption in Washington is to shrink the size of government. The sleaze will not go away until politicians have less ability to steer our money to special interests — whether they are Wall Street banks or Alabama universities. This video elaborates: