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Cherry Picking Tax Policies

from Kevin Williamson at National Review, The U.S. Is Not the Highest-Taxed Nation in the World

The problem for the Left is that Democrats cannot, under most circumstances, tell the truth about U.S. taxes, either, because the American middle class does not want to hear that it isn’t paying enough in taxes to fund the benefits it wants. The Left insists that something, somewhere — somebody rich, preferably in a Republican-voting state — is getting over on us, that the rich are not paying “their fair share.” It is true that the highest-income Americans do make a great deal more money than do the poor and the middle class — that’s what it means to be high-income — but they already pay an even more disproportionate share of the taxes. The top 20 percent takes in about 55 percent of all income but pays about 70 percent of all federal taxes as Curtis Dubay, formerly of the Heritage Foundation, runs the numbers. Other analysts have come to similar conclusions. That’s what you’d expect: We have a progressive tax code, after all.

Country-to-country comparisons tend to be exercises in cherry-picking. Switzerland is generally considered one of the best-administered countries in the world, and its taxes and public spending are a bit higher than in the United States, though lower than in much of Europe. The Swiss pay higher income taxes, but pay very low business and investment taxes, and essentially no capital-gains tax. (There are local taxes on profits from real-estate sales in some parts of the country.) It also has high wages but no national minimum wage, very free trade, and very light regulation in most respects. On the other hand, most workers are covered by some sort of collective-bargaining agreement. There’s a lot more to economic policy than tax rates as such. Northern European welfare states may have tax rates that look confiscatory from the American point of view, but some of them have much more free economies in other respects. On the Heritage “economic freedom” index, Switzerland, the Netherlands, Ireland, Canada, and the United Kingdom all rank higher than does the United States.

HKO

Trying to compare tax systems, like comparing health care systems, isolates a single policy from its economic and political ecosystem. This includes the history that brought it there, its culture, its relative size, and the availability of other options. To think that a system that we believe is successful can be transplanted from a homogeneous small country to a giant federation of 50 states with widely differing dynamics is as politically naive as it is economically ignorant.

Statutory vs Actual Tax Rates

from Kevin Williamson at National Review, The U.S. Is Not the Highest-Taxed Nation in the World

We do have an extraordinarily high top corporate-tax rate — on paper, anyway. Our statutory top corporate rate is among the highest in the world, but the corporate tax code is a welfare program. You know how basically every president at every State of the Union address announces a special plan to encourage U.S. manufacturing or green energy or something like that? Those end up as exemptions and deductions in the corporate tax code, which, along with other tax-code favoritism, is why companies such as General Electric sometimes pay no taxes even in years in which they seem to be making a great deal of money. The effective corporate tax rate — what corporations actually pay — in the United States is not especially high, and it’s low if you have the right friends in Washington. The fact that corporate taxes vary so much from company to company and industry to industry is not an accident — the code is designed that way on purpose. It gives big powerful market incumbents a way to disadvantage potential competitors while giving power-brokers in Washington the power to make or break entire industries.

HKO

We conflate statutory tax rate with actual- those rates after deductions,credit, and loopholes you obtain through lobbying and political connections. The greater this difference the greater the government is influencing and polluting market decisions.

The Need for Permanence in the Tax Code

from The WSJ, Phil Gramm and Michael Salon, Reagan Cut Taxes, Revenue Boomed:

 As inflation plummeted from the CBO’s projected average annual rate of 8.3% for 1982-86 to an average of 3.8%, revenue compared with projections tumbled $22 billion in 1982 and $70.4 billion in 1983 solely because of reduced inflation and bracket creep. The Joint Committee on Taxation’s static cost estimate of the Reagan tax cuts was $37.6 billion in 1982 and $92.7 billion in 1983. In other words, the collapse of inflation and bracket creep and the double-dip recession caused revenue losses more than twice as big as the projected static cost of the Reagan tax cuts.

When Reagan left office, real federal revenue was more than 19% higher than it was the day of his first inauguration. A major recession had been overcome, inflation had been broken, the tax code had been indexed to eliminate bracket creep, and the largest tax cut of the postwar era had been implemented. The Reagan tax cuts and the boom they created stand as the most successful policy initiative and recovery of the postwar era—the polar opposite of Mr. Obama’s program and economy.

HKO

It is a little technical to isolate the drop in revenue from the reduction in inflation and bracket creep from the lowering of the rate, but it is an important distinction, It highlights the challenge of accurately understanding the dynamics of changes in tax rates and their impact.

But the conditions today are different.  We are not following the stagnation of the 70′s, we are lowering from a much lower number- even if it was increased under Obama.  We are challenged with a larger deficit and regulatory environment.  We must look at all friction costs and taxes are only one of them.

I agree that taxes should come down, but there is more that is needed.  One much needed element is permanence.  Improvements in the tax code and friction costs will have little impact if businesses and individual have no faith that the laws will remain valid through partisan changes.

Addicted to the Devil

from Thomas Donlan at Barron’s, What Went Wrong in Kansas

Americans want government like they want services generally: “faster, better, and cheaper.” But economists know there’s a problem: The optimistic ones say, “Pick any two”; the pessimists say, “Choose one.”

Too many Democrats, however, pick all three and say they will squeeze more taxes out of the rich to pay for it. Sorry, even in this new gilded age, there aren’t enough rich people to pay for national health care, let alone the rest of the party’s wish list—bridges, roads, rail lines, broad band internet, and most recently, a national drive to cure opioid drug addiction.

Meanwhile, too many Republicans pick all three and say they will pay for it with economic growth. Sorry, Americans have enjoyed more economic growth in the past 228 years than any other big nation on Earth; there’s little that any government can do to push it along against the power of the law of diminishing returns. The results of even the best imaginable policies will come too slowly to satisfy most Americans.

Tax cuts can work to stimulate growth, but not everywhere, not every time. Kansas had and has a lot more problems than its tax cuts.

Letters to the editor on that article the following week:

Growing up in the 1980s, I felt that President Ronald Reagan’s policies were the great impetus for the ensuing growth. I still feel that freedom and low taxes are the root of growth, especially when that growth has been fettered by regulation and discouraged by high taxes for a long period. But I now think that the great growth we saw was as much a result of the baby boomers working through the system as the policies and tax cuts.

The baby boomers were starting to come into their own in the ’80s and making their mark on the economy, creating that tremendous growth. And I think that easily carried into the 1990s. Now, as time marches on and we’re nearing eight years of slower growth, I partially attribute that to slower population growth, as much as to the stifling effects of higher taxes and greater regulation.

So can we count on growth to save us? I don’t think so, and that means we have to do the hard work of cutting government expenses, because the money simply won’t be there to pay for larger and larger government in the future. The rich don’t have enough money to pay the bill, even if you taxed them at 100%, so either you start taxing the poor more or cut expenses.

HKO

The left is in a quandary.  Without generating growth the welfare state must shrink.  This growth may come from a business friendly environment or population growth, both of which are contrary to the policies of the left.  They have demonized the main source of support for the welfare state and now they are addicted to the devil.

Tax Psychotherapy

Another gem  from Kevin Williamson at National Review, Bad Medicine on ‘Carried Interest’

Nobody in Washington wants to face that particular angry mob of IRA investors with torches and pitchforks. What we are talking about is singling out a particular class of businessmen for punitive tax treatment because we resent how much money some of them make, and because what they do seems like voodoo to people who do not understand it.

As a matter of policy, changing the tax treatment of private-equity income would not raise a great deal of tax revenue relative to federal spending and liabilities, and it probably would not have as much of a flattening effect as our class warriors hope. For one thing, if we convert those investment managers’ income to salaries and bonuses, then the firms that employ them are going to deduct those salaries and bonuses as ordinary business expenses, which they would be entitled to do. For another, investors will respond to economic incentives. The people who run these kinds of businesses are pretty clever about moving money around. The gentlemen in Congress are not going to outsmart them.

The broader discussion about taxes and fairness and — odious phrase — “social justice” is a waste of time. Taxes are not an instrument of justice: They are an instrument of revenue. The federal government requires x dollars to do the things we demand of it, and the only end of tax policy should be raising those dollars in a way that causes as little economic disruption as possible and invades our privacy as little as possible. At the moment, our model is lots of disruption and maximal invasion of privacy — and all of it handled by the incompetent, corrupt, politicized agents of the Internal Revenue Service.

Those are the tax-code problems we should be addressing. Instead, we are addressing some unhappy Americans’ envy and resentment. That isn’t tax policy — it’s psychotherapy.

HKO

I confess to falling for the appeal of the ‘carried interest’ loophole canard. Given the lower rate, a businessman or investor will certainly overweight capital gains over earned income if he has the opportunity.  The lower rate is reflective of the risk.  Warren Buffet only draws a salary of $150,000. That is not how he became one of the wealthiest men in America.

Like so many solutions to unfairness and social justice, the cure stands a good chance of being worse than the disease.  Hillary complained about the short term thinking of American business. Her solution was a six tiered capital gains system that was the worse part of her awful economic plan. The greatest harm in short term thinking is from legislators who voice another change in tax policy whenever they walk past a microphone. The ink is still wet on the last tax increase when hear a new speech of how the the rich are not paying their fair share.  Who would invest in such a environment?

The economy and financial community is a very dynamic system and constantly adjusts to conditions much faster than any social justice legislator can match. Caps on executive pay led to stock options that made executives richer.  The Sarbanes Oxley Act passed in the shadows of the Enron scandal discouraged companies from going public and created opportunities for private equity, that now the ‘carried interest’ demonizers wish to address.

Regulators are often tasked to solve a problem created by the last round of regulations.  New sources of wealth and unfairness are often generated by the previous attempt to equalize them in a previous form.

Great kudos for Kevin for shedding light on this ruse in a way that few other media sources even attempt.