Topic: Finance, Banking & Monetary Policy

The Tax Policy Center’s $5 Trillion Blunder: “Nonpartisan” nonsense

By
Alan Reynolds

In “The $5 Trillion Question: How Big Is Romney’s Cut” Wall Street Journal reporters Damlan Paletta and John D. McKinnon echo, once again, the journalistic convention of contrasting “the nonpartisan Tax Policy Center” with “the conservative American Enterprise Institute.”  In the English language, the opposite of “conservative” is not “nonpartisan.”   On the contrary, the phrase “nonpartisan” applies equally to the American Enterprise Institute (or Cato Institute) as it does to Tax Policy Center (TPC) – a front for the Brookings Institution and Urban Institute.   To be “nonpartisan” does not mean non-ideological, unbiased or even competent.  It simply means following a few rules so the IRS will allow the organization to receive tax-deductible contributions.   Governor Romney wants to severely curb such deductions (including his own), which does not necessarily make the TPC a disinterested observer, even if there really were one or two closet Republicans (or even non-Keynesians) at the TPC.

 

The U.S. already cut marginal tax rates across-the-board by more than 20 percent in 1964 and 1984 (the 1981 law, like that of 2001, was foolishly phased-in).  In both cases, the Table shows that revenues from the individual income tax were higher than before, as a share of GDP.  The economy grew much faster too, raising payroll and corporate tax receipts.   Until the TPC can explain how and why that happened, they cannot even pretend to predict that Romney’s more modest tax reform will lose any revenue, much less $5 trillion.  Incidentally, deductions were not significantly curbed in the tax laws of 1964 or 1981, or in the Tax Reform of 1986 (which merely substituted reduced itemized deductions for a much larger standard deduction).  If Romney puts a cap on deductions, either as a percentage of AGI or as a dollar limit, the net effect of his plan would raise revenues, particularly from people like Warren Buffett and Mitt Romney (who deduct millions in charitable contributions).

The Tax Policy Center’s fundamental error is to assume no behavioral response at all to lower tax rates – an “elasticity of taxable income” (ETI) of zero.   The academic evidence is that ETI is at least 0.4 for all taxpayers, as Martin Feldstein observed, mostly because ETI is above 1.0 for the top 1 percent, as I recently explained in the Journal.  Cut top rates and the rich report more income; raise top rates and much of their income disappears – through reduced economic activity and increased avoidance.

 

Topics: 
Finance, Banking & Monetary Policy, General, Government and Politics, Tax and Budget Policy

Hyperinflation Has Arrived In Iran

By
Steve H. Hanke

Since the U.S. and E.U. first enacted sanctions against Iran, in 2010, the value of the Iranian rial (IRR) has plummeted, imposing untold misery on the Iranian people. When a currency collapses, you can be certain that other economic metrics are moving in a negative direction, too. Indeed, using new data from Iran’s foreign-exchange black market, I estimate that Iran’s monthly inflation rate has reached 69.6%. With a monthly inflation rate this high (over 50%), Iran is undoubtedly experiencing hyperinflation.

When President Obama signed the Comprehensive Iran Sanctions, Accountability, and Divestment Act, in July 2010, the official Iranian rial-U.S. dollar exchange rate was very close to the black-market rate. But, as the accompanying chart shows, the official and black-market rates have increasingly diverged since July 2010. This decline began to accelerate last month, when Iranians witnessed a dramatic 9.65% drop in the value of the rial, over the course of a single weekend (8-10 September 2012). The free-fall has continued since then. On 2 October 2012, the black-market exchange rate reached 35,000 IRR/USD – a rate which reflects a 65% decline in the rial, relative to the U.S. dollar.

The rial’s death spiral is wiping out the currency’s purchasing power. In consequence, Iran is now experiencing a devastating increase in prices – hyperinflation.  As Nicholas Krus and I document in our recent Cato Working Paper, World Hyperinflations, there have been 57 documented cases of hyperinflation in history, the most recent of which was North Korea’s 2009-11 hyperinflation. That said, North Korea’s hyperinflation did not come close to the magnitudes reached in the recent, second-highest hyperinflation in the world, that of Zimbabwe, in 2008, nor has Iran’s hyperinflation – at least not yet.

Topics: 
Finance, Banking & Monetary Policy, International Economics and Development

A Tip for Gov. Romney: Florida Seniors Hate the Fed’s Low Interest Rates

By
Alan Reynolds

A new poll by Money magazine (October) asked its readers, “What’s the single biggest way Washington could improve your finances?”  The most popular answer among Democrats and second among Republicans was to “Preserve Social Security and Medicare in current form.”  That pipe dream suggests many Money readers are close to 65 or older, since the young surely know it is impossible to keep paying current benefits for much longer without imposing brutal tax hikes on the rapidly dwindling portion of younger Americans still willing to work.

What was far more intriguing about the Money poll, however, is that the second or third most popular policy was to, “Raise interest rates so savers can earn more.”  In fact, higher interest rates for savers was the single most important issue for 15% of both Democrats and Republicans, compared with only 10-11% who found “more jobs” most important.  If the poll had been confined to seniors, that 15% figure might well have doubled.

The Wall Street Journal’s “Viewer’s Guide” to the first presidential debate (September 29-30) included the Federal Reserve as one of eight topics, noting that Romney has criticized the latest experiment with quantitative easing (monetizing debt) and suggested replacing Bernanke.  But the article went on to imply that everyone, including “a top Romney adviser,” thinks of Ben Bernanke as an untouchable or even heroic figure.  As a senior with a condo in Florida I can assure you that other Florida seniors (17.3% of the state’s population in 2010 and much larger share of voters) have a quite different opinion. They feel robbed, not helped, by the Fed.

Seniors in Florida absolutely hate the Fed for forcing them to settle for a negative real return on safe, liquid savings. In this and other states with many seniors, questioning ridiculously low interest rates is a potential winning issue for any presidential candidate willing to challenge the Fed for buying too many federal IOUs with funny money.  That includes several other battleground states where seniors make up an above-average share of the population – a list that includes Maine (15.9% seniors), Pennsylvania (15.4%), Iowa (14.9%), Ohio (14.1%), Missouri (14%) and Michigan (13.8%).

Absurdly low interest rates may be good news for borrowers, but they are simply a loss of income for savers.  Personal interest income in August was 28.6 percent lower than it was in 2008.   Lower income seems an unlikely way to stimulate spending.  After all, decades of miniscule interest rates haven’t helped Japan.

Aside from mortgage payments (which are tied to housing investments), personal interest payments were running at an annual rate of just $171.7 billion in August, which is far less important than personal interest receipts ($986.6 billion).

The Bernanke Fed has been showing blatant favoritism toward large borrowers – mainly governments and banks − at the expense of small savers, particularly those dependent on lifetime savings in their senior years.  Recent Fed policy rewards profligate speculation and punishes prudent thrift.  That is why 15 percent of both Democrats and Republicans in the Money poll say that ending the Fed’s bond-buying spree is the single most important thing the next President could do to help their personal finances.

Senior savers will be closely watching the campaign and debates to see if either candidate has their very legitimate interest in mind.

Topics: 
Finance, Banking & Monetary Policy, Government and Politics

Another UN Push for Global Taxation

By
Daniel J. Mitchell
But I guess I’m not very persuasive. The bureaucrats have just released a new report entitled, “In Search of New Development Finance.”
As you can probably guess, what they’re really searching for is more money for global redistribution.
But here’s the most worrisome part of their proposal: they want the UN to be in charge of collecting the taxes, sort of a permanent international bureaucracy entitlement.
I’ve written before about the UN’s desire for tax authority (on more than one occasion), but this new report is noteworthy for the size and scope of taxes that have been proposed.
Here’s the wish list of potential global taxes, pulled from page vi of the preface:

Below is some of what the report has to say about a few of the various tax options. We’ll start with the carbon tax, which I recently explained was a bad idea if it were to be imposed on Americans by politicians in Washington. It’s a horrible idea if imposed globally by the kleptocrats at the UN.

…a tax of $25 per ton of CO2 emitted by developed countries is expected to raise $250 billion per year in global tax revenues. Such a tax would be in addition to taxes already imposed at the national level, as many Governments (of developing as well as developed countries) already tax carbon emissions, in some cases explicitly, and in other cases, indirectly through taxes on specific fuels.

Notice that the tax would apply only to “developed countries,” so this scheme is best characterized as discriminatory taxation. If Obama is genuinely worried about jobs being “outsourced” to developing nations like China (as he implies in his recent attack on Romney), then he should announce his strong opposition to this potential tax.

But don’t hold your breath waiting for that to happen.

Next, here’s what the UN says about a financial transactions tax:

A small tax of half a “basis point” (0.005 per cent) on all trading in the four major currencies (the dollar, euro, yen and pound sterling) might yield an estimated $40 billion per year. …even a low tax rate would limit high-frequency trading to some extent. It would thus result in the earning of a “double dividend” by helping reduce currency volatility and raising revenue for development. While a higher rate would limit trading to a greater extent, this might be at the expense of revenue.

This is an issue that already has attracted my attention, and I also mentioned that it was a topic in my meeting with the European Union’s tax commissioner.

But rather than reiterate some of my concerns about taxing financial consumers, I want to give a bit of a compliment to the UN: the bureaucrats, by writing that “a higher rate … might be at the expense of revenue,” deserve credit for openly acknowledging the Laffer Curve.

By the way, this is an issue where both the United States and Canada have basically been on the right side, though the Obama administration blows hot and cold on the topic.

Now let’s turn to the worst idea in the UN report. Its authors want to steal wealth from rich people. But even more remarkable, they want us to think this won’t have any negative economic impact.

…the least distorting, most fair and most efficient tax is a “lump sum” payment, such as a levy on the accumulated wealth of the world’s richest individuals (assuming the wealthy could not evade the tax). In particular, it is estimated that in early 2012, there were 1,226 individuals in the world worth $1 billion or more, 425 of whom lived in the United States, 90 in other countries of the Americas, 315 in the Asia-Pacific region, 310 in Europe and 86 in Africa and the Middle East. Together, they owned $4.6 trillion in assets, for an average of $3.75 billion in wealth per person. A 1 percent tax on the wealth of these individuals would raise $46 billion in 2012.

I’ll be the first to admit that you can’t change people’s incentives to produce in the past. So if you steal wealth accumulated as the result of a lifetime of work, that kind of “lump sum” tax isn’t very “distorting.”

But here’s some news for the UN: rich people aren’t stupid (or at least their financial advisers aren’t stupid). So you might be able to engage in a one-time act of plunder, but it is naiveté to think that this would be a successful long-term source of revenue.

For more information, I addressed wealth taxes in this post, and the argument I was making applies to a global wealth tax just as much as it applies to a national wealth tax.

Now let’s conclude with a very important warning. Some people doubtlessly will dismiss the UN report as a preposterous wish list. In part, they’re right. There is virtually no likelihood of these bad policies getting implemented any time in the near future.

But UN bureaucrats have been relentless in their push for global taxation, and I’m worried they eventually will find a way to impose the first global tax. And if you’ll forgive me for mixing metaphors, once the camel’s nose is under the tent, it’s just a matter of time before the floodgates open.

The greatest threat is the World Health Organization’s scheme for a global tobacco tax. I wrote about this issue back in May, and it seems my concerns were very warranted. Those global bureaucrats recently unveiled a proposal—to be discussed at a conference in South Korea in November—that would look at schemes to harmonize tobacco taxes and/or impose global taxes.

Here’s some of what the Washington Free Beacon wrote:

The World Health Organization (WHO) is considering a global excise tax of up to 70 percent on cigarettes at an upcoming November conference, raising concerns among free market tax policy analysts about fiscal sovereignty and bureaucratic mission creep. In draft guidelines published this September, the WHO Framework Convention on Tobacco Control indicated it may put a cigarette tax on the table at its November conference in Seoul, Korea. …it is considering two proposals on cigarette taxes to present to member countries. The first would be an excise tax of up to 70 percent. …The second proposal is a tiered earmark on packs of cigarettes: 5 cents for high-income countries, 3 cents for middle-income countries, and 1 cent for low-income countries. WHO has estimated that such a tax in 43 selected high-/middle-/low-income countries would generate $5.46 billion in tax revenue. …Whichever option the WHO ends up backing, “they’re both two big, bad ideas,” said Daniel Mitchell, a senior tax policy fellow at the Cato Institute. …Critics also argue such a tax increase will not generate more revenue, but push more sales to the black market and counterfeit cigarette producers. “It’s already a huge problem,” Mitchell said. “In many countries, a substantial share of cigarettes are black market or counterfeit. They put it in a Marlboro packet, but it’s not a Marlboro cigarette. Obviously it’s a big thing for organized crime.” …The other concern is mission creep. Tobacco, Mitchell says, is easy to vilify, making it an attractive beachhead from which to launch future vice tax initiatives.

It’s my final comment that has me most worried. The politicians and bureaucrats are going after tobacco because it’s low-hanging fruit. They may not even care that their schemes will boost organized crime and may not raise much revenue.

They’re more concerned about establishing a precedent that international bureaucracies can impose global taxes.

I wrote the other day about whether Americans should escape to Canada, Australia, Chile, or some other nation when the entitlement crisis causes a Greek-style fiscal collapse.

But if the statists get the power to impose global taxes, then what choice will we have?

Topics: 
Finance, Banking & Monetary Policy, International Economics and Development, Political Philosophy, Tax and Budget Policy

‘Has the Fed Been a Failure?’

By
Gerald P. O'Driscoll Jr.

That is the provocative title of the lead paper in the prestigious economics publication, the Journal of Macroeconomics. It is authored by George Selgin, William D. Lastrapes, and Lawrence H. White. (Selgin and White are professors, Cato scholars, and many-time participants in the annual Cato monetary conference).

The journal’s editor considered the paper so important that he devoted a section of the September issue to it, with discussion by a number of prestigious economists, including professors Allan Meltzer and Jeffrey Miron (a Cato senior fellow).

The Selgin et al. paper is largely a review of the historical literature on both the Fed and the pre-1913 U.S. monetary system. In recent years, the literature has reassessed the Fed’s performance in a less favorable light. And the literature has come to view the National Banking system more favorably. The historical assessment of the Fed’s performance, especially with respect to inflation, is quite damning. For even the period most favorable to the Fed, the post-World War II period, the record compared to the pre-Fed era is not favorable.

I predict this debate has only begun.

To purchase an electronic copy of their final paper from the publisher, click here; to read the Cato Working Paper draft of their paper, click here.

Topics: 
Finance, Banking & Monetary Policy

Just as ‘Fair Trade’ Means Protectionism for the Benefit of Special Interests, ‘Fair Tax Competition’ Means Tax Harmonization for the Benefit of Politicians

By
Daniel J. Mitchell

Very few people are willing to admit that they favor protectionism. After all, who wants to embrace a policy associated with the Great Depression?

But people sometimes say “I want free trade so long as it’s fair trade.” In most cases, they’re simply protectionists who are too clever to admit their true agenda.

In the Belly of the Beast at the European Commission

There’s a similar bit of wordplay that happens in the world of international taxation, and a good example of this phenomenon took place on my recent swing through Brussels.

While in town, I met with Algirdas Šemeta, the European Union’s Tax Commissioner, as part of a meeting arranged by some of his countrymen from the Lithuanian Free Market Institute.

Mr. Šemeta was a gracious host and very knowledgeable about all the issues we discussed, but when I was pontificating about the benefits of tax competition (are you surprised?), he assured me that he felt the same way, only he wanted to make sure it was “fair tax competition.”

But his idea of “fair tax competition” is that people should not be allowed to benefit from better policy in low-tax jurisdictions.

Allow me to explain. Let’s say that a Frenchman, having earned some income in France and having paid a first layer of tax to the French government, decides he wants to save and invest some of his post-tax income in Luxembourg.

In an ideal world, there would be no double taxation and no government would try to tax any interest, dividends, or capital gains that our hypothetical Frenchman might earn. But if a government wants to impose a second layer of tax on earnings in Luxembourg, it should be the government of Luxembourg. It’s a simple matter of sovereignty that nations get to determine the laws that apply inside their borders.

But if the French government wants to track - and tax - that flight capital, it has to coerce the Luxembourg government into acting as a deputy tax collector, and this generally is why high-tax governments (and their puppets at the OECD) are so anxious to bully so-called tax havens into emasculating their human rights laws on financial privacy.

Now let’s see the practical impact of “fair tax competition.” In the ideal world of Mr. Šemeta and his friends, a Frenchman will have the right to invest after-tax income in Luxembourg, but the French government will tax any Luxembourg-source earnings at French tax rates. In other words, there is no escape from France’s oppressive tax laws. The French government might allow a credit for any taxes paid to Luxembourg, but even in the best-case scenario, the total tax burden on our hypothetical Frenchman will still be equal to the French tax rate.

Imagine if gas stations operated by the same rules. If you decided you no longer wanted to patronize your local gas station because of high prices, you would be allowed to buy gas at another station. But your old gas station would have the right - at the very least - to charge you the difference between its price and the price at your new station.

Simply stated, you would not be allowed to benefit from lower prices at other gas stations.

So take a wild guess how much real competition there would be in such a system? Assuming your IQ is above room temperature, you’ve figured out that such a system subjects the consumer to monopoly abuse.

Which is exactly why the “fair tax competition” agenda of Europe’s welfare states (with active support from the Obama Administration) is nothing more than an indirect form of tax harmonization. Nations would be allowed to have different tax rates, but people wouldn’t be allowed to benefit.

For more information, here’s my video on tax competition.

And if you want information about the beneficial impact of “tax havens,” read this excellent column by Pierre Bessard and watch my three-part video series on the topic.

P.S. The Financial Transaction Tax also was discussed at the meeting, and it appears that the European actually intend on shooting themselves in the foot with this foolish scheme. Interestingly, when presented by other participants with some studies showing how the tax was damaging, Mr. Šemeta asked why we he should take those studies seriously since they were produced by people opposed to the tax. Since I’ve recently stated that healthy skepticism is warranted when dealing with anybody in the political/policy world (even me!), I wasn’t offended by the insinuation. But my response was to ask why we should act like the European Commission studies are credible since they were financed by governments that want a new source of revenue.

Topics: 
Finance, Banking & Monetary Policy, Government and Politics, International Economics and Development, Tax and Budget Policy

Observations on the Mortgage Market: 2011 HMDA Data

By
Mark A. Calabria

Yesterday the financial regulators released data on the 2011 mortgage market, as collected under the Home Mortgage Disclosure Act (HMDA).  Setting aside my belief that HMDA should be repealed and the data collection ended, the release, summarized here by the Federal Reserve, does offer a number of insights into both the mortgage markets and mortgage regulation.

The headline take-away is mortgage loans have fallen to 16 year lows, particularly among home purchase mortgages.  One of the reasons, not so much discussed, is that lenders are a whole lot less willing to hold mortgages on their own books.  In 2006, lenders actually held about 39% of purchase mortgages on their balance sheets.  By 2011, that percentage had fallen almost in half to 21%.  Now there have been a few exceptions.  Wells Fargo, for instance, is actually holding more purchase mortgages on their books in 2011 than in 2006.  Most lenders, however, have greatly reduced their balance sheet exposure.  Take at one extreme, Citibank, which went from holding over half (52%) in 2006, to just 8% in 2011.  While lenders are clearly, and understandably, trying to minimize their interest rate risk, I believe another fact is trying to control both their credit and legal (not to mention political) risk of holding mortgages.

If you aren’t holding mortgages, then the other option is to sell them, either to other banks or to Fannie/Freddie.  Here we see the impact of the GSEs increasing their credit standards (appropriately in my opinion).  Go back to 2001 and lenders were selling almost half their “unconventional” mortgage originations to the GSEs, by 2011 this had fallen to just over a third.  One does not see a similar trend in GSEs purchases of conventional mortgages, which remains just above a third in both 2001 and 2011.

Despite the increased concentration in banking, in general, share purchased by the Top 10 bank originators changed little between 2006 and 2011, increasing slightly from 35.2% to 36.9%.  The other trend to catch my eye was that most of the decline in mortgage activity from 2010 to 2011 was among low or moderate income households.  Purchase lending for high income was almost flat.

These are just some initial thoughts.  Still digesting what is a pretty large data dump.

Topics: 
Finance, Banking & Monetary Policy

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