David Cameron's Foolish (or Cynical) Naivete about the Laffer Curve

Even though he's allowing the budget to grow twice as fast as inflation, some people seem to think the new U.K. Prime Minster is a fiscal conservative. I'm skeptical. Not only is spending rising much too fast (there are promises of more restraint in the future, but I'll believe it when it happens), but Cameron and the Tory/Liberal coalition government are increasing the value-added tax and increasing the capital gains tax. Perhaps worst of all, they are leaving in place the new 50 percent tax rate that former Labor Prime Minister Gordon Brown imposed in hopes that class-warfare policy would help him get elected. But as this Daily Telegraph story suggests, it is quite likely that the higher tax rate will lose revenue as productive people escape to Switzerland and other jurisdictions not influenced by the politics of hate and envy.

One-in-four hedge fund employees has already left London to move to Switzerland, which is said to have a more stable tax regime, according to consultancy Kinetic partners. Calculations by the company claim the UK could have already forgone about £500m in tax revenues, based on the 1,000 or so hedge fund managers it says have already left the country. ...High-profile departures this year include Alan Howard, founder of Brevan Howard, and Mike Platt, founder of BlueCrest Capital.

This story shows both the power of the Laffer Curve and the importance of tax competition. The greedy politicians in England doubtlessly resent the "brain drain" to Switzerland. Like their U.S. counterparts, politicians view taxpayers as serfs who are supposed to blindly produce more income for the ruling class to expropriate and redistribute.

While I'm obviously not a big fan of British fiscal policy, America is worse in one important way. At least British taxpayers have the liberty to leave without being raped by the U.K. tax authority. Once they leave the United Kingdom and make their home in Switzerland, they are no longer British taxpayers. Americans who want to move, by contrast, are unable to escape the punitive internal revenue code. Indeed, the United States is one of the few nations in the world to have exit taxes, an odious approach generally associated with loathsome regimes such as the Soviet Union and Nazi Germany.

Warren Buffett: Good Investor, Crummy Economist

Warren Buffett once said that it wasn't right for his secretary to have a higher tax rate than he faced, leading me to point out that he didn't understand tax policy. The 15 percent tax rates on dividends and capital gains to which he presumably was referring represents double taxation, and when added to the tax that already was paid on the income he invested (and the tax that one imagines will be imposed on that same income when he dies), it is quite obvious that his effective marginal tax rates is much higher than anything his secretary pays. Though he is right that his secretary's tax rate is much too high.

Well, it turns out that Warren Buffett also doesn't understand much about other areas of fiscal policy. Like a lot of ultra-rich liberals who have lost touch with the lives of regular people, he thinks taxpayer anger is misguided. Not only does he scold people for being upset, but he regurgitates the most simplistic Keynesian talking points to justify Obama's spending spree. Here's an excerpt from his hometown paper.

Taxpayer anger against President Barack Obama and Congress is counterproductive because policy makers took measures including deficit spending to stimulate the economy, billionaire investor Warren Buffett told CNBC. ...“I hope we get over it pretty soon, because it’s not productive,’’ Buffett said. “We will come back regardless of how people feel about Washington, but it is not helpful to have people as unhappy as they are about what’s going on in Washington.” ...“The truth is we’re running a federal deficit that’s 9 percent of gross domestic product,” Buffett said. “That’s stimulative as all get out. It’s more stimulative than any policy we’ve followed since World War II.”

About the only positive thing one can say about Buffett's fiscal policy track record is that he is nowhere close to being the most inaccurate person in the United States, a title that Mark Zandi surely will own for the indefinite future.

The Democrats Unfurl the White Flag on Taxes and Class Warfare

I'm dumbfounded and amazed. When Democrats and Republicans have a game of chicken, the GOP blinks 99 percent of the time. And I thought for sure this was going to happen in the fight about whether to extend all the 2001 and 2003 tax cuts (the GOP position), or whether to impose a big, class-warfare tax increase on investors entrepreneurs (the Obama position to punsih the so-called rich). Democrats simply needed to get one Republican senator to surrender and they would have 60 votes in the Senate to overcome any procedural objection. But, to my astonishment, this didn't happen. Democrats threw in the towel. Not totally, the issue is simply being postponed to a "lame duck" session after the election, but it's hard to see how the left will feel any more emboldened after being kicked in the teeth by voters. But there is a very dark lining to this silver cloud. As the Wall Street Journal warns, many statists actually want a big tax increase on everybody, and they can make this happen by simply sitting on their hands.

Only a week ago, President Obama and his media supporters were asserting that they had Republicans caught in their class-war pincers: They'd lure the GOP into opposing an extension of lower tax rates for the middle class in order to defend lower tax rates for those making more than $200,000 a year. ...[but] the Democrats have cut and run, lest they get blamed for voting for a tax increase in a slow-growth economy. This is how legislative majorities behave when they've lost the political argument and can sense their days are numbered. ...Democrats will now enter the campaign's home stretch with the threat that all of the Bush-era tax rates could expire on January 1. That means the lowest tax bracket would revert to 15% from 10%, the per child tax credit would revert to $500 from $1,000, and millions of middle class families would pay thousands of dollars more in federal taxes. Keep in mind that this is the not-so-secret desire of many on the left who think the country "can't afford" to let Americans keep so much of their own money. Peter Orszag has already admitted this since leaving his post as White House budget director. What these Democrats really mean is that they think the only way to pay for their spending plans is by soaking the middle class—because that's where the real money is. ...Liberals pretend they can finance a European-style entitlement state by taxing only the rich because they know that soaking the middle class is unpopular.

Obama's Class-Warfare Tax Policy Will Hit Small Business

Kevin Hassett and Alan VIard of the American Enterprise Institute have a column in the Wall Street Journal showing how Obama's proposed tax hikes will impose significant harm on small business owners and other entrepreneurs. Higher tax rates are damaging for the obvious reason that business cash flow gets diverted to the IRS, but also because they alter the price (or tradeoff) between work and leisure and between consumption and investment. This means less productive activity, which is just another way of saying reduced national income.

Vice President Joe Biden harshly rejected House Minority Leader John Boehner's assertion that the hikes would harm small businesses, saying that "he has created this myth that a tax cut for millionaires is actually a tax cut for small business. There aren't 3% of small businesses in America that would qualify for that tax cut." House Speaker Nancy Pelosi flipped the number around, saying that the planned tax increases would exempt "98% of American families and about 97% of small businesses." ...The 3% figure, which is computed from IRS data, is based on simply counting the number of returns with any pass-through business income. So, if somebody makes a little money selling products on eBay and reports that income on Schedule C of their tax return, they are counted as a small business. The fact that there are millions of people in the lower tax brackets with small amounts of business income may be interesting for some purposes, but it is irrelevant for the assessment of the economic impact of the tax hikes. The numbers are clear. According to IRS data, fully 48% of the net income of sole proprietorships, partnerships, and S corporations reported on tax returns went to households with incomes above $200,000 in 2007. That's the number to look at, not the 3%. ...A pair of papers by economists Robert Carroll, Douglas Holtz-Eakin, Harvey Rosen and Mark Rider that were published in 1998 and 2000 by the National Bureau of Economic Research analyzed tax return data and uncovered high responsiveness of sole proprietors' business activity to tax rates. Their estimates imply that increasing the top rate to 40.8% from 35% (an official rate of 39.6% plus another 1.2 percentage points from the restoration of a stealth provision that phases out deductions), as in Mr. Obama's plan, would reduce gross receipts by more than 7% for sole proprietors subject to the higher rate. These results imply a similar effect on proprietors' investment expenditures. A paper published by R. Glenn Hubbard of Columbia University and William M. Gentry of Williams College in the American Economic Review in 2000 also found that increasing progressivity of the tax code discourages entrepreneurs from starting new businesses.

Germany's Wealthy Über Statists

It's hard to believe that anybody would classify the Germans as a master race after reading this Spiegel article. Bill Gates and Warren Buffett plan have a nutty (but at least non-coercive) plan for rich people to give away big share of their fortunes. The German billionaires are rejecting this plan. But not because they are sensible and want capital in the hands of those who know how to create wealth. Instead, they think private charity intrudes upon the government's responsibility.

Germany's super-rich have rejected an invitation by Bill Gates and Warren Buffett to join their 'Giving Pledge' to give away most of their fortune. The pledge has been criticized in Germany, with millionaires saying donations shouldn't replace duties that would be better carried out by the state. Last week, Microsoft founder Bill Gates attempted to convince billionaires around the world to agree to give away half their money to charity. But in Germany, the "Giving Pledge," backed by 40 of the world's wealthiest people, including Gates and Warren Buffet, has met with skepticism, SPIEGEL has learned.

Here's an actual section of an interview with a rich German. The most astounding comment is when he basically says that private charity is bad because the state should decide how resources are allocated.

SPIEGEL: But doesn't the money that is donated serve the common good?

Krämer: It is all just a bad transfer of power from the state to billionaires. So it's not the state that determines what is good for the people, but rather the rich want to decide. That's a development that I find really bad. What legitimacy do these people have to decide where massive sums of money will flow?

SPIEGEL: It is their money at the end of the day.

Krämer: In this case, 40 superwealthy people want to decide what their money will be used for. That runs counter to the democratically legitimate state. In the end the billionaires are indulging in hobbies that might be in the common good, but are very personal.

The Destructive Economics of Class-Warfare Taxation

Caroline Baum of Bloomberg has an excellent column explaining why soak-the-rich taxes don't work. Simply stated, wealthy people are not like you and me. They have tremendous control over the timing, composition, and level of their income. When the rich are hit with higher tax rates, they adjust their behavior and protect themselves by reducing the amount of taxable income they earn and/or report to the IRS. That usually causes collateral damage for the economy, but the class-warfare crowd is either oblivious or uncaring about real-world effects.

Why, after all this time and an extensive body of data, are we still questioning whether reductions in marginal and capital- gains tax rates increase economic activity enough to generate more revenue for the federal government? “Because they don’t like the answer,” Laffer says of the doubters. “It’s not tax cuts that pay for themselves. Tax cuts on the poor cost you lots of money. Tax cuts on the rich pay for themselves. Rich people can afford lawyers, accountants, and can defer income.” ...The rich have the luxury to respond to incentives, to opt for more work and less leisure when the return on work is greater. They are motivated to take risks, maybe start a business, invent something, and get even richer while giving others the opportunity, through hiring, to do the same. The opposite is true for low-income workers. When the government raises taxes, someone struggling to put food on the table for his family may have to go out and get a second job to maintain his level of take-home pay. For this socio-economic group, higher taxes translate to more work. To ignore evidence that the rich behave differently is silly. The government can’t get more blood from a stone, yet it keeps trying. Instead of demagoguing tax cuts for the rich, Democrats should try embracing them for a change. ...Academics are busy churning out articles claiming tax cuts for the rich deliver less bang for the buck because the rich save more of the money than the poor. That’s true. It also misses the point. The goal isn’t spending, or distributing other people’s money to create “aggregate demand.” That’s a wealth transfer, not a net stimulus. (Fiscal policy gets its punch from monetary policy, from the increase in the money supply to pay for the spending.) The goal should be to incentivize individuals to work hard, save and invest in the future. It’s about growing the pie. Sound familiar? We’re right back to square one. I, for one, would like to see the debate shift from class warfare over tax rates and targeted tax relief to tax reform. Either scrap the tax code and introduce a simple flat tax with no deductions, or scrap the IRS and move to a consumption tax. If you want to get money out of politics, there’s only one way to do it. Take the tax code out of Congress’s hands.

Baum's column touches on most of the key issues, but she doesn't address the political economy of class-warfare taxation. In this video on soak-the-rich tax policy, I provide five reasons why high tax rates are misguided - including the oft-overlooked point that politicians impose punitive taxes on the rich as a prelude to hitting the rest of us with higher taxes.

Pontificating about Class Warfare Taxation in the New York Post

I have a column in today's New York Post about Obama's plan for higher taxes next year. My main point is that higher tax rates on the so-called rich have a very negative impact on the rest of us because even small reductions in economic growth have a big impact over time. This is a reason, I explain, why middle-income people in Europe have been losing ground compared to their counterparts in the United States. This is an argument I'm still trying to develop (this video is another example), so I'd welcome feedback.

The most important indirect costs are lost economic growth and reduced competitiveness. You don't have to be a radical supply-sider to recognize that higher tax rates -- particularly steeper penalties on investors and entrepreneurs -- are likely to slow economic growth. Even if growth only slows a bit, perhaps from 2.7 percent to 2.5 percent, the long-term impact can be big. After 25 years, a worker making $50,000 will make about $5,000 more a year if economic growth is at the slightly higher rate. So if this worker gets hit next year with a $1,000 tax hike, he or she understandably will be upset. In the long run, however, that worker may be hurt even more by weaker growth. ...The Obama administration's approach is to look at tax policy mainly through the prism of class warfare. This means that some of the 2001 and 2003 tax cuts can be extended, but only if there is no direct benefit to anybody making more than $200,000 or $250,000 per year. That's bad news for the so-called rich, but what about the rest of us? This is why the analysis about direct and indirect costs is so important. The folks at the White House presumably hope that we'll be happy to have dodged a tax bullet because only upper-income taxpayers will face higher direct costs. But it's the rest of us who are most likely to suffer indirect costs when higher tax rates on work, saving, investment and entrepreneurship slow economic growth. When the economy slows, that's bad news for the middle class -- and it can create genuine hardship for the working class and poor. Indeed, punitive taxation of the "rich" is one reason why middle-class people in high-tax European welfare states have lost ground in recent decades compared to Americans.

The White House Has Declared Class War on the Rich, but the Poor and Middle Class Will Suffer Collateral Damage

The 2001 and 2003 tax cuts are scheduled to expire at the end of this year, which means a big tax increase in 2011. Tax rates for all brackets will increase, the double tax on dividends will skyrocket from 15 percent to 39.6 percent, the child credit will shrink, the death tax will be reinstated (at 55 percent!), the marriage penalty will get worse, and the capital gains tax rate will jump to 20 percent. All of these provisions will be unwelcome news for taxpayers, but it's important to look at direct and indirect costs. A smaller paycheck is an example of direct costs, but in some cases the indirect costs - such as slower economic growth - are even more important. This is why higher tax rates on entrepreneurs and investors are so misguided. For every dollar the government collects from policies targeting these people (such as higher capital gains and dividend taxes, a renewed death tax, and increases in the top tax rates), it's likely that there will be significant collateral economic damage.

Unfortunately, the Obama Administration's approach is to look at tax policy only through the prism of class warfare. This means that some tax cuts can be extended, but only if there is no direct benefit to anybody making more than $200,000 or $250,000 per year. The folks at the White House apparently don't understand, however, that higher direct costs on the "rich" will translate into higher indirect costs on the rest of us. Higher tax rates on work, saving, investment, and entrepreneurship will slow economic growth. And, because of compounding, even small changes in the long-run growth rate can have a significant impact on living standards within one or two decades. This is one of the reasons why high-tax European welfare states have lost ground in recent decades compared to the United States.

When the economy slows down, that's not good news for upper-income taxpayers. But it's also bad news for the rest of us - and it can create genuine hardship for those on the lower rungs of the economic ladder. The White House may be playing smart politics. As this blurb from the Washington Post indicates, the President seems to think that he can get away with blaming the recession on tax cuts that took place five years before the downturn began. But for those of us who care about prosperity more than politics, what really matters is that the economy is soon going to be hit with higher tax rates on productive behavior. It's unclear whether that's good for the President's poll numbers, but it's definitely bad for America.

Treasury Secretary Timothy F. Geithner took the lead Sunday in continuing the Obama administration's push for extending middle-class tax cuts while allowing similar cuts for the nation's wealthiest individuals to expire in January. ...The tax cuts, put in place between 2001 and 2003, have become an intensely political topic ahead of the congressional elections this fall. Republicans have argued that extending the full spectrum of tax cuts is essential to strengthening the sluggish economic recovery. Geithner rejected that notion, telling ABC's "This Week" that letting tax cuts for the wealthiest expire would not hurt growth. ...On Saturday, the president used part of his weekly address to chide House Minority Leader John A. Boehner (Ohio) and other Republicans who oppose the administration's approach, saying the GOP was pushing "the same policies that led us into this recession."

Democrat Tax Cutters?

The Wall Street Journal ponders the mini-tax revolt among some Democrats, ranging from Kent Conrad in the Senate to Jerrold Nadler in the House, who are suddenly making arguments that it would be a bad idea to allow higher tax rates in 2011 (because the 2001 and 2003 tax cuts automatically expire).

I'm not holding my breath waiting for good results. Almost all of the Democrat "tax cutters" are making flawed Keynesian arguments, so they don't even understand why it's a good idea to focus on lowering marginal tax rates. But the WSJ's editorial makes a good point about accepting good policy even if it's based on bad analysis. But since extending the 2001 and 2003 tax cuts would require the support of almost 20 Democrat Senators and 40 Democrat Congressmen, I'm afraid it's a moot issue - especially since the Obama White House is dominated by the hate-n-envy class-warfare crowd.

The revelation that tax increases could hurt the economy has recently been heard from Senators Evan Bayh of Indiana, Ben Nelson of Nebraska, and, most surprising, even from Kent Conrad of North Dakota. On a scale of unlikely events, this is like the Pope coming out against celibacy. As Senate Budget Chairman, Mr. Conrad has rarely seen a tax increase he didn't like, but this week he averred that "As a general rule, you don't want to be cutting spending or raising taxes in the midst of a downturn." ...Even Jerrold Nadler, a liberal from central casting, is worrying publicly that the tax hike will hit his New York constituents too hard. And he's certainly right given that the combined top state and federal income tax rate will be close to 54% in 2011 in New York City. Mr. Nadler is proposing—seriously—to adjust the income tax brackets based on regional cost of living so fewer New Yorkers pay the rates ...These are hardly supply-side conversions, but they're a start. The economic recovery is far from robust, and socking it with one of the largest tax increases in history in January is not going to make anyone more eager to invest or create new jobs. Even Lord Keynes opposed raising taxes in a recession, and good Keynesian Democrats like the late economist Walter Heller persuaded JFK to cut tax rates in the 1960s. Those cuts kicked off that decade's economic boom. Only in the age of Obama have Democrats convinced themselves that the best "stimulus" is higher spending and higher taxes. ...even if all the 2001 and 2003 tax cuts are made permanent, the share of national output that goes toward federal income taxes will in every year stay well above the post-World War II average of 8.2%. Income tax receipts will rise gradually to 10% of GDP, even with the current tax rates intact, because as the economy grows the progressive tax code takes a larger share. If tax increases weaken the economy, revenues won't increase as fast as Democrats hope and the deficit won't fall by as much in any case. Which brings us back to the Speaker, Treasury Secretary Tim Geithner and Mr. Obama, who remain prisoners of their spend-and-tax dogma. Even as the Democratic tax revolt broke into the open yesterday morning, the White House rolled out Mr. Geithner to declare that the tax increases will arrive as scheduled. So the same Mr. Geithner who says the economy is weak enough that we must have new spending "stimulus" says it is strong enough to endure a huge tax increase.

The Deadly Impact of the Death Tax

There was a rather unsettling article in the Wall Street Journal over the weekend. The story begins with a description of how the death tax rate dropped from 45 percent in 2009 to zero in 2010, and then notes the huge implications of a scheduled increase to 55 percent in 2011.

Congress, quite by accident, is incentivizing death. When the Senate allowed the estate tax to lapse at the end of last year, it encouraged wealthy people near death's door to stay alive until Jan. 1 so they could spare their heirs a 45% tax hit. Now the situation has reversed: If Congress doesn't change the law soon—and many experts think it won't—the estate tax will come roaring back in 2011. ...The math is ugly: On a $5 million estate, the tax consequence of dying a minute after midnight on Jan. 1, 2011 rather than two minutes earlier could be more than $2 million; on a $15 million estate, the difference could be about $8 million.

The story then features several anecdotes from successful people, along with observations from those who deal with wealthy taxpayers. The obvious lesson is that taxpayers don't want the IRS to confiscate huge portions of what has been saved and invested over lifetimes of hard work.

"You don't know whether to commit suicide or just go on living and working," says Eugene Sukup, an outspoken critic of the estate tax and the founder of Sukup Manufacturing, a maker of grain bins that employs 450 people in Sheffield, Iowa. Born in Nebraska during the Dust Bowl, the 81-year-old Mr. Sukup is a National Guard veteran and high school graduate who founded his firm, which now owns more than 70 patents, with $15,000 in 1963. He says his estate taxes, which would be zero this year, could be more that $15 million if he were to die next year. ...Estate planners and doctors caution against making life-and-death decisions based on money. Yet many people ignore that advice. Robert Teague, a pulmonologist who ran a chronic ventilator facility at a Houston hospital for two decades, found that money regularly figured in end-of-life decisions. "In about 10% of the cases I handled at any one time, financial considerations came into play," he says. In 2009, more than a few dying people struggled to live into 2010 in hopes of preserving assets for their heirs. Clara Laub, a widow who helped her husband build a Fresno, Calif., grape farm from 20 acres into more than 900 acres worth several million dollars, was diagnosed with advanced cancer in October, 2009. Her daughter Debbie Jacobsen, who helps run the farm, says her mother struggled to live past December and died on New Year's morning: "She made my son promise to tell her the date and time every day, even if we wouldn't," Mrs. Jacobsen says. ...Mr. Aucutt, who has practiced estate-tax law for 35 years, expects to see "truly gruesome" cases toward the end of the year, given the huge difference between 2010 and 2011 rates.

The obvious question, of course, is whether politicians will allow the tax to be reinstated. The answer is almost certainly yes, but it's also going to be interesting to see if they try to impose the tax retroactively on people who died this year.

So far in 2010, an estimated 25,000 taxpayers have died whose estates are affected by current law, according to the nonpartisan Tax Policy Center. That group includes least two billionaires, real-estate magnate Walter Shorenstein and energy titan Dan Duncan. ..."Enough very wealthy people have died whose estates have the means to challenge a retroactive tax, and that could tie the issue up in the courts for years," says tax-law professor Michael Graetz of Columbia University.

It should go without saying, by the way, that the correct rate for the death tax is zero. It's also worth noting that this is an issue that shows that incentives do matter. Australia got rid of its death tax in 1979. A couple of Aussie academics investigated whether the elimination of the tax had any impact on death rates. They found the ultimate example of supply-side economics, as reported in the abstract of their study.

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. Although we cannot rule out the possibility that our results are driven by misreporting, our results imply that over the very short run, the death rate may be highly elastic with respect to the inheritance tax rate.

Obama Is Repeating Roosevelt's Other Mistakes

Much of the economic debate in Washington revolves around the silly Keynesian notion that politicians can stimulate an economy by borrowing money from the private sector and using the funds to make government bigger. That didn't work for Hoover and Roosevelt during the 1930s, Japan during the 1990s, Bush in 2008, or Obama last year and this year, but the theory is convenient for politicians seeking ways to justify their natural tendencies. There are other factors that impact economic performance, however, and Amity Shlaes explains in the Washington Post that Obama is making the same mistakes as Roosevelt in some of these other areas. Here's a blurb from her column, comparing Obama's class-warfare tax agenda with FDR's disastrous "soak the rich" law.

By fixating on the debt and stimulus plans, Obama and Congress are overlooking challenges to the economy from taxes, employment and the entrepreneurial environment. President Roosevelt's great error was to ignore such factors -- and the result was that sickening double dip. ...Income taxes, the dividend tax and capital gains taxes are all set to rise as the Bush tax cuts expire. The Obama administration portrays these increases as necessary for budgetary and social reasons. ...The administration and congressional Democrats are also striving to ensure that businesses pony up. ...Roosevelt, too, pursued the dual purposes of revenue and social good. In 1935 he signed legislation known as the "soak the rich" law. FDR, more radical than Obama in his class hostility, spoke explicitly of the need for "very high taxes." Roosevelt's tax trap was the undistributed-profits tax, which hit businesses that chose not to disgorge their cash as dividends or wages. The idea was to goad companies into action. The outcome was not what the New Dealers envisioned. Horrified by what they perceived as an existential threat, businesses stopped buying equipment and postponed expansion. They hired lawyers to find ways around the
undistributed-profits tax. In May 1938, after months of unemployment rates in the high teens, the Democratic Congress cut back the detested tax. That bill became law without the president's signature.

Top House Democrat Calls for Middle-Class Tax Hikes

I've frequently argued that the main purpose of "taxing the rich" is not to collect more revenue. Smart leftists, after all, understand that there are very strong Laffer Curve effects at the top of the income scale since investors and entrepreneurs have considerable ability to control the timing, level, and composition of their income. So if higher tax rates on upper-income taxpayers don't collect much revenue, why is the left so insistent on class-warfare taxation? The answer, I think, is that soak-the-rich taxes are a "loss-leader" that politicians impose in order to pave the way for higher taxes on the middle class. Indeed, I made this point in my video on class warfare taxation, and noted that are not enough rich people to finance big government. As such, politicians that want to tax the middle class hope to soften opposition among ordinary people by first punishing society's most productive people. We already know that tax rates on the so-called rich will jump next January thanks to higher income tax rates, higher capital gains tax rates, more double taxation of dividends, and higher death taxes. Now the politicians are preparing to drop the other shoe. Excerpted below is a blurb from the Washington Post about a member of the House Democratic leadership urging middle-class tax hikes, and let's not forgot all the politicians salivating for a value-added tax.

Tax cuts that benefit the middle class should not be "totally sacrosanct" as policymakers try to plug the nation's yawning budget gap, House Majority Leader Steny Hoyer (D-Md.) said Monday, acknowledging that it would be difficult to reduce long-term deficits without breaking President Obama's pledge to protect families earning less than $250,000 a year. Hoyer, the second-ranking House Democrat, said in an interview that he expects Congress to extend middle-class tax cuts enacted during the Bush administration that are set to expire at the end of this year. But he said the extension should not be permanent. Hoyer said he plans to call for a "serious discussion" about the affordability of the tax breaks. ...The overarching point in Hoyer's remarks is the need for a bipartisan plan that includes spending cuts and tax increases, in the tradition of deficit-reduction deals cut under former presidents George H.W. Bush and Bill Clinton. Drafting such a plan would require a reexamination of tax cuts enacted in 2001 and 2003, Hoyer says -- cuts that benefited most taxpayers.

America Will Now Be the Unquestioned World Leader...But in the Wrong Way

The United States has a very anti-competitive corporate tax regime. The federal tax rates is 35 percent and the average of state corporate tax systems brings the rate to nearly 40 percent. In Europe, by contrast, the average corporate tax rate is about 25 percent. Depending on which measure is used, the United States and Japan have been rivals for the dubious prize of having the highest corporate tax rate in the developed world. But that's about to change. According to a story that I saw linked on the Tax Foundation blog, the new Japanese government intends to lower its corporate tax rate by 10 to 15 percentage points. This means America will have no rivals in the contest for having the most anti-growth business tax system in the world. This is something to keep in mind the next time you hear a politician complaining about jobs going to China and India.

Japan's new government plans to cut corporate tax closer to international norms as it tries to haul Asia's biggest economy out of a long slump, the economy minister said in a report Friday. The government is aiming to cut tax on company earnings by five percentage points next fiscal year, from an effective 40 percent now, the Nikkei business daily quoted Economy, Trade and Industry Minister Masayuki Naoshima as saying. "It's a fact that international corporate tax rates are 10 to 15 points lower than Japan's," said Naoshima, who is part of Prime Minister Naoto Kan's new cabinet sworn in this week. "Over the medium term, the government will aim to bring the rate down to around the global standard," he said. ..."It is now the time to decide (on cutting corporate tax) for the sake of future economic vitality, employment and securing increased tax revenues," the minister said. "Japan's economy has basically been in a slump for the past 20 years and people have been overwhelmed by a sense of stagnation."

Guilt-Ridden German Millionaires Endorse More Class-Warfare Taxation

CNBC is reporting that 51 German millionaires and billionaires have endorsed the idea of that rich people should have to give an extra 10 percent of their income to the government. I'm tempted to dismiss this story since (according to my rudimentary math skills) these clowns represent only 6/1000th of 1 percent of all wealthy Germans, but there's a more important point to discuss. There's no law stopping these neurotic people from giving extra money to government, so the real story is that they want the government to impose this bad policy on all successful people. I've debated this topic with a couple of ultra-rich American leftists (see here and here) and they never have a good answer when I ask them why they don't give away their fortunes to the politicians and stop trying to impose their neurotic views on others.

A group of 51 German millionaires and billionaires founded a Club of the Wealthy and wrote to Chancellor Angela Merkel proposing to give up 10 percent of their income in the form of a "Rich Tax" for 10 years to consolidate the budget. With an estimated 800,000 millionaires (in dollars) — about 1 percent of the total population — Germany is eye-to-eye with the USA and has long overtaken the UK as Europe's number one "millionaire-land", both in terms of absolute numbers and as a percentage of the population. But traditionally, the Germans don't dare to feel good about their riches.

When Billionaires Attack!

Here's a cheerful story I saw linked on Drudge, which shows that sometimes rich people are not guilt-ridden statists and instead stand shoulder to shoulder with ordinary people to fight bad government policy. In Australia, the leftist government wants to impose a class-warfare tax on the mining industry, but the scheme is backfiring as opponents point out such a levy will undermine national competitiveness.

It was, by any measure, a most unusual rally. Many of the placard-waving protesters gathered in a Perth park wore suits and ties, and impassioned speeches were delivered from the back of a flat-bed truck by two billionaires, including Australia's richest woman. Gina Rinehart's pearls glistened in the sunlight as she bellowed through a megaphone: "Axe the tax!" Ms Rinehart has a personal fortune of $4.8bn (£2.7bn). Andrew Forrest, in monogrammed worker's overalls, told the well-mannered crowd that Australia was "turning Communist". Mr Forrest is the country's fourth richest person, worth an estimated $4.2bn. ...Now Kevin Rudd's Labour government is planning to levy an extra tax on the mining industry, and the industry is furious. The issue has dominated the political agenda for weeks, and is even threatening to torpedo Mr Rudd's chance of being returned to power at an election due to be held before the end of this year. Labour, which had an unassailable lead over the conservative Liberal-National Party coalition six months ago, is now trailing by six percentage points, according to a poll this week. If that were translated into votes on election day, Mr Rudd would become the first prime minister for nearly 80 years to lose office after just one term. ...the mining companies, led by the multi-nationals BHP Billiton and Rio Tinto, claim the tax will reduce their competitiveness and threaten thousands of jobs. Amid much fanfare, they have already shelved a number of projects. They have also launched a major advertising campaign. The government has responded with its own advertisements, using $38m of public money. Before coming to power, Mr Rudd promised to curb taxpayer-funded advertising on political issues. So far, the miners appear to be winning the argument. A poll commissioned by the industry, and conducted in nine marginal seats, found 48 per cent of people opposed to the super tax, with 28 per cent in favour. Nearly one in three said they were less likely to vote for Labour because of it.

Hillary Clinton's Misguided (and Dangerous) Advice for Latin America

In an amusing coincidence, Secretary of State Hillary Clinton and I were both in Latin America this week offering fiscal policy advice. But it won't surprise you to know that Mrs. Clinton's suggestions are radically different than the advice I provided. She spoke in Ecuador and, according to an AFP report, said it was time for "the wealthy across the Americas to pay their 'fair share' of taxes in order to eliminate poverty and promote economic opportunity for all." She also claimed that "her appeal to overhaul tax systems did not amount to 'class warfare' and was instead a recognition that the 'winner-take-all-approach' was a drag on progress." The AFP story concludes with Mrs. Clinton asserting, "We can't mince words about this. Levels of tax evasion are unacceptably high,"

By contrast, in my remarks to the Fundacion Libertad in Panama and the Chamber of Commerce in El Salvador, I explained that academic research shows that better tax compliance is best achieved by lowering tax rates and eliminating inefficient and corrupt spending programs so that taxpayers have more confidence that their money is not being wasted. But let's touch on something even more important than economics. I also made a moral argument about the danger of giving national tax authorities too much power and information - especially in a region where governments oftentimes are the source of oppression, expropriation, and tyranny. Simply stated, there are some things that are more important than obeying tax laws. This Center for Freedom and Prosperity video explains that so-called tax havens are an extremely important refuge for people who are subject to persecution and other forms of government malfeasance.

Let's consider some Latin American examples. Imagine a political dissident in Venezuela. Hugo Chavez has turned that country into a thugocracy and opponents of his sinister regime are vulnerable to having their assets expropriated (and worse). Thankfully, many Venezuelans are able to protect themselves from socialist tyranny by putting their money in Cayman, Panama, or Miami (the U.S. is a tax haven for non-U.S. people). But if Mrs. Clinton got to make the rules, tax havens would no longer exist and Chavez would be empowered.

Or what about families in Mexico, who rightfully are afraid that if they keep their money in the country and report it on their tax returns, corrupt bureaucrats in the national tax office will sell their names to criminal gangs and suddenly their children will be kidnapped and they will have to deal with the horror of getting a ransom note accompanied by a child's finger. Fortunately, many Mexicans can guard against this horrific possibility by placing their assets in Cayman, Panama, or Miami. But in Mrs. Clinton's ideal world, those options would not exist and many more people would experience the nightmare of vicious crime.

And consider the plight of Argentinians. A few years ago, the nation's venal government stole the private pension assets of the people. This is in addition to radical currency devaluations that have wiped out a big chunk of people's savings. Prudent Argentinians have avoided these forms of back-door thievery by moving funds to Cayman, Panama, and Miami. In the Orwellian world envisioned by Mrs. Clinton, however, tax havens wouldn't exist and governments would have carte blanche to engage in bad policy.

This is not the first indication of Mrs. Clinton's government-über-alles mindset as Secretary of State. Let's remember that she urged class-warfare tax policy for Pakistan and more recently said Brazil was a role model for soak-the-rich tax policy (a strange assertion since the top tax rate there is only 27.5 percent). If nothing else, at least we can give her credit for being consistent.

But if I have to choose between Mrs. Clinton's consistent statism and protecting the liberty and freedom of oppressed and persecuted people, it's no contest. Politicians and senior government appointees all over the world act as if folks in the private sector are nothing more than serfs and peasants who have an obligation to pay ever-higher tax burdens, so we should be happy that so-called tax havens offer a refuge - even if we don't live in failed states such as Venezuela, Mexico, and Argentina. Actually, since Obama is trying to turn us into Greece, maybe this issue will be important for Americans even sooner than we think.

Governor Christie Is a Taxpayer Hero

I may as well confess that I have a man-crush on Governor Christie. It's not nearly as bad as Andrew Sullivan's fixation on Obama (and it certainly hasn't involved me changing my views), but this video and the excerpt below are two examples of a politician actually doing the right thing and giving intelligent and coherent explanations to justify his actions. The video shows him taking on the teacher unions and the story is about his veto of a class-warfare tax bill.



Christie may wind up "growing in office" and becoming a squish, but so far he is the nation's most impressive Republican politician. That's normally damning with faint praise, but not in this case.

It took about two minutes from the time Senate President Steve Sweeney certified the passage of the millionaires tax package for Gov. Chris Christie to veto the bills at his desk. "While I have little doubt that the sponsors and supporters of this bill sincerely believe that the state can tax its way out of this financial crisis, I believe that this bill does nothing more than repeat the failed, irresponsible and unsustainable fiscal policies of the past," wrote Christie in his veto statement. "Now is not the time for more of the same. Ultimately, another tax increase will punish the state’s struggling small businesses and set our economy further back from recovery."

Is Hillary Clinton Ignorant about Geography, Fiscal Policy, or Both?

Hillary Clinton recently opined that Brazil was a great role model for the idea of soaking the rich with higher tax rates. She didn't really offer evidence for that specific assertion, but Politico reports that she did say that ""Brazil has the highest tax-to-GDP rate in the Western Hemisphere and guess what — they're growing like crazy."

I'm not sure if "growing like crazy" is an accurate description, particularly since poor nations normally have decent growth rates because they start from such a low baseline.

But let's excuse that bit of rhetorical excess and focus on the really flawed portion of her remarks.

Contrary to her direct quote, Brazil does not have the "highest tax-to-GDP rate in the Western Hemisphere." It may have the highest tax burden in South America. And it may even have the highest tax burden in all of Latin America, but its overall tax burden of about 24 percent of GDP is slightly below the aggregate tax burden in America.

I suppose I should issue a caveat and say there's a very slight chance that the recession has temporarily pushed American tax receipts as a share of GDP below the Brazilian level, but that isn't apparent from the IMF data. Moreover, there's no doubt that the tax burden in Canada is significantly higher than the Brazilian burden.

So Mrs. Clinton either was unaware that the United States and Canada are in the Western Hemisphere, or has no clue how to read fiscal statistics.

But let's suspend reality and assume that Brazil has a higher tax-to-GDP ratio. Would that somehow be proof that Brazil is a role model for class-warfare taxation? There is no precise definition of that term, to be sure, but high tax rates on the rich presumably are a necessary component of any class-warfare system. Yet Brazil's top tax rate is 27.5 percent. That's not exactly a low-rate system such as Hong Kong, and it's 27.5 percentage points higher than the zero-percent rate in the Cayman Islands, but it also happens to be significantly lower than the 35 percent (soon to be 39.6 percent) rate in the United States. If that's class warfare, sign me up for the Brazilian approach.

I suppose it's possible that Brazil's top tax rate recently has been boosted, but that didn't show up in a Google search. And even if the rate was just increased, that would hardly be proof of Mrs. Clinton's strange hypothesis that high tax rates and/or high tax-to-GDP rates are a magical formula for growth. That would require looking at future growth rates with the higher rate, not the recent growth rates with the 27.5 percent top tax rate.

But pointing out Mrs. Clinton's mistakes seems a bit rude and I do like to be a gentleman, so let's at least give her points for consistency. Earlier this year, she urged higher tax rates on the so-called rich in Pakistan, so at least she doesn't discriminate in her desire to punish success.

Say Goodbye to England

Okay, the title of this post is an absurd exaggeration, but I am not optimistic about the future of the United Kingdom. Government spending has exploded over the last ten-plus years (the largest expansion in the burden of government spending among developed nations), and this unsurprisingly has led to punitive class-warfare policies. I saved this article from the Daily Mail from a couple of months ago because I was curious to see whether predictions about talent fleeing London would prove accurate:

London will become the most highly taxed financial centre in the world when the new 50 per cent income tax rate for those earning £150,000 or more comes into force next month. Taxes will be higher than for financial workers living in the other key centres of New York, Paris, Frankfurt, Geneva, Zurich, Dubai and Hong Kong, KPMG calculated. The findings will raise fears that Labour's levies are driving businesses and bankers overseas and threatening Britain's competitiveness. ...Tullett announced last December that it will help employees move abroad if they want to avoid the top rate of tax, and Mr Smith said workers are already looking at relocating. Graeme Leach of the Institute of Directors said: 'The 50 per cent rate is a policy that should never have been announced. The indirect impact on entrepreneurial aspiration, business confidence and foreign investment is likely to be significant.

As we can see from this Bloomberg article, it appears that the feckless big-government policies of all the major parties are driving productive investors and entrepreneurs to jurisdictions with better tax law. Switzerland seems to be the biggest beneficiary. As you read the details below, one thing to keep in mind is that at least Brits are free to emigrate. The U.S. government imposes repugnant Soviet-style exit taxes designed to ransack successful people who want the freedom to move someplace with more liberty:

...more than 100 bankers, hedge fund managers and wealthy retirees are gathered on a cold March night to plot their escape from Britain. Swiss government officials and Geneva-based financial advisers have come to London to lure rich residents with glowing descriptions of the country’s low taxes, safe streets, private-banking options and convenient ski weekends. ...Next door, an overflow crowd of 50 more attendees enjoys wine and canapes as they watch the presentation on closed- circuit televisions in a mahogany-lined library, which includes a chart showing the prevalence of English as a language for doing business in Switzerland. A JPMorgan Chase & Co. banker who declined to be identified confides he’s planning to relocate next year. His main complaint: higher U.K. taxes, a theme the Swiss delegation has pounced upon. “Some people think it’s morally wrong to be working for the government for more than half the year,” says Jonathan Ivinson, a Geneva-based tax partner at international law firm Hogan & Hartson LLP... London’s highest earners must now pay a 50 percent tax on incomes above 150,000 pounds ($227,200) that came into force on April 6, replacing a 40 percent top rate. ...During the campaign, both Brown and Cameron said they backed additional curbs on the U.K. financial industry -- including a bank transaction levy -- and agreed that Britain’s dire financial state would lock in higher tax rates for the foreseeable future: ...As the taxman’s take grows larger, Switzerland is shaping up as the most-welcoming alternative for British exiles. Light- touch regulation and the willingness of cantons, as regional governments are called, to negotiate special tax rates for both individuals and businesses have prompted at least 30 London hedge fund managers to consider moving to Geneva in the past year, says Shelby du Pasquier, a Geneva-based partner at Lenz & Staehelin, a Swiss law firm. Investment management and advisory services aren’t regulated in Switzerland, apart from anti-money laundering rules, and the federal government and several cantons last year reduced taxes on dividend payments for entrepreneurs, including owners of hedge fund firms, he says. ...Geneva has already attracted some of London’s top talent. Alan Howard, co-founder of Brevan Howard Asset Management LLP, Europe’s largest hedge fund firm, has rented office space in Geneva for 60 traders relocating from London. ...BlueCrest Capital Management Ltd., Europe’s third-largest hedge fund firm, has opened a Geneva office for as many as 70 traders and analysts who have worked in London on its two biggest funds. They’re being joined by BlueCrest co-founder Michael Platt and Leda Braga, manager of the $9 billion BlueTrend fund, according to people familiar with the firm’s transitional plans. ...The departures of those principals prove that the threat to London’s prominence as a financial center is real, says Stuart Fraser, head of policy at the City of London Corporation, which runs the financial district. ...U.K. top tax rates will exceed those in Germany and France for the first time since 1989, according to a study by accounting firm KPMG. A banker earning 1 million pounds a year in London will now take home less than his counterparts in Frankfurt, Hong Kong, New York, Paris, Singapore and Zurich, KPMG says. “The U.K. has abandoned one of its key principles when it comes to tax, which is predictability,” says Bertrand des Pallieres, founder of SPQR Capital LLP, a London-based hedge fund firm with about $700 million in assets as of April. He left the U.K. last year and opened an office in Geneva after the new tax rate was announced. It’s not only funds looking at leaving. Broker Tullett Prebon said in December it would allow its 700 employees in London to move to “more certain tax regimes.” Several of Tullett Prebon’s major desks are now planning to move key personnel, the company says. ...London Mayor Boris Johnson estimates that up to 9,000 bankers, hedge fund managers and private-equity executives could leave the city, according to a letter he sent to the Labour government in January. ...Marcel Jouault is working to make sure that agitated Britons wind up in Pfaeffikon, a village on the shore of Lake Zurich. Pfaeffikon’s 11.8 percent corporate tax rate and 19 percent personal income levy are both Switzerland’s lowest, helping the village lure funds that handle about $100 billion in investments, according to hedge fund research firm Opalesque Ltd.

The Laffer Curve Strikes...Again

Here's a blurb from a Wall Street Journal Editorial this morning. It seems a high tax rate is leading to less revenue. When will the politicians finally learn?

What do you do about a tax that costs jobs and raises little money? Florida lawmakers have been pondering that question in relation to the 6% registration tax for owning a boat in the Sunshine State. If you buy a $1 million boat and register it in Florida, you currently pay $60,000 in sales taxes. If you buy the same boat and register it in another coastal state like North Carolina, you pay a maximum of $1,500, in South Carolina $500, and in Rhode Island $600. Even more common is to register the boat in a nearby foreign nation like the Cayman Islands, where you pay close to zero tax. So to refloat the boat business, the Florida House voted last Wednesday to cap the boat sales tax at $18,000. This is roughly the amount of legal costs to register a yacht in the Caymans. Opponents call the repeal a tax cut for the leisure class, and the state's official revenue estimators predict it will cost $1.4 million a year in lost revenue. This ignores some basic math: Collecting $18,000 per yacht beats getting nothing. ...An estimated eight in 10 expensive boats in Florida are registered somewhere else, mostly abroad, and a boating industry study estimates this costs the state $120 million in lost revenue. ...This tale is reminiscent of the 10% luxury tax on yachts costing more than $100,000 that Congress passed in 1990. That tax, also passed in the name of social justice, nearly ruined the boat-building industry in states like Florida and Maine, because the rich went to the Bahamas and elsewhere to buy their boats until Congress repealed the yacht tax in 1993.