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OECD Study Admits Income Taxes Penalize Growth, Acknowledges that Tax Competition Restrains Excessive Government
Daniel J. Mitchell
I have to start this post with a big caveat.
I’m not a fan of the Paris-based Organization for Economic Cooperation and Development. The international bureaucracy is infamous for using American tax dollars to promote a statist economic agenda. Most recently, it launched a new scheme to raise the tax burden on multinational companies, which is really just a backdoor way of saying that the OECD (and the high-tax nations that it represents) wants higher taxes on workers, consumers, and shareholders. But the OECD’s anti-market agenda goes much deeper.
- The OECD has allied itself with the so-called Occupy movement to push for bigger government and higher taxes.
- The OECD, in an effort to promote redistributionism, has concocted absurdly misleading statistics claiming that there is more poverty in the United States than in Greece, Hungary, Portugal, or Turkey.
- The OECD is pushing a “Multilateral Convention” that is designed to become something akin to a World Tax Organization, with the power to persecute nations with free-market tax policy.
- The OECD supports Obama’s class-warfare agenda, publishing documents endorsing “higher marginal tax rates” so that the so-called rich “contribute their fair share.”
- The OECD advocates the value-added tax based on the absurd notion that increasing the burden of government is good for growth and employment.
Now that there’s no ambiguity about my overall position, I can admit that the OECD isn’t always on the wrong side. Much of the bad policy comes from its committee system, which brings together bureaucrats from member nations.
The OECD also has an economics department, and they sometimes produce good work. Most recently, they produced a report on the Swiss tax system that contains some very sound analysis, including a rejection of Obama-style class warfare and a call to lower income tax burdens.
Shifting the taxation of income to the taxation of consumption may be beneficial for boosting economic activity (Johansson et al., 2008 provide evidence across OECD economies). These benefits may be bigger if personal income taxes are lowered rather than social security contributions, because personal income tax also discourages entrepreneurial activity and investment more broadly.
I somewhat disagree with the assertion that payroll taxes do more damage than VAT taxes. They both drive a wedge between pre-tax income and post-tax consumption. But the point about income taxes is right on the mark.
Interestingly, the report also endorses tax competition as a means of restraining the burden of government spending.
Evidence also suggests that tax autonomy may lead to a smaller and more efficient public sector, helping to limit the tax burden and improve tax compliance… Efficiency-raising effects of tax autonomy and tax competition on the public sector have also been reported in empirical research with Norwegian and German data… Tax autonomy generates opportunities to choose the level of public service provision and taxation, although in practice such “voting with your feet” seems mostly limited to young, highly educated and high-income households. Decentralised tax setting also fosters benchmarking of the performance of jurisdictions belonging to the same government level by voters, even in the absence of “voting with your feet”.
The report also notes that tax competition has reduced corporate tax rates.
Tax competition is likely to have contributed significantly to lowering corporate tax rates in Switzerland over the past 25 years. Indeed, empirical evidence shows that the responsiveness of sub-national governments to tax changes of other subnational governments (“tax mimicking”) is the strongest in the case of corporate taxation (Blöchliger and Pinero Campos, 2011). …Progressive corporate income taxes harm incentives for businesses to grow. Since growing businesses are likely to be high performers in terms of productivity, such disincentives are likely to hit high-performing businesses the most, with losses to aggregate productivity performance, which has been modest in Switzerland relative to best-performing high-income countries.
P.S.: This isn’t the first time the economists at the OECD have broken ranks with the political hacks that generally control the bureaucracy. In a 1998 Economic Outlook (see page 166) they wrote that “the ability to choose the location of economic activity offsets shortcomings in government budgeting processes, limiting a tendency to spend and tax excessively.” And in another publication (see page 1), the economists noted that “legal tax avoidance can be reduced by closing loopholes and illegal tax evasion can be contained by better enforcement of tax codes. But the root of the problem appears in many cases to be high tax rates.” These passages sound like they could have been authored by Pierre Bessard!
P.P.S.: I hasten to add that none of this justifies handouts from American taxpayers to the Paris-based bureaucracy any more than occasional bits of rationality from the World Bank (on government spending), IMF (on the Laffer Curve), or United Nations (also on the Laffer Curve) justify subsidies to those organizations.
View full post on Cato @ Liberty
Agriculture • Record US farmland growth continues
Thurs 16th May 2013
Record US farmland growth continues
Farmland values in key central-US agricultural areas continue to appreciate at a record pace according to the latest central bank figures, with values recording their third consecutive double-digit year-on-year growth in the first quarter of 2013.
Values for non-irrigated cropping land across key central-US agricultural areas, including Kansas, the top wheat-growing state, increased by a strong 19.3% over the first quarter compared with the same three month period of 2012.
However with some states still struggle against drought conditions land blessed by ready rains, or possessing irrigation, recording stronger growth of 21.5%.
The largest growth gap was seen in Oklahoma where irrigated farmland prices increased 12.1% compared with 6.5% growth in non-irrigated lands. Similar disparity was witnessed in Nebraska as irrigated prices increased 22.6% compared with 17.3% growth for non-irrigated lands.
Dry vs wet
Ranchland prices also benefitted from double-digit year-on-year growth in the first quarter, albeit at a slower pace than irrigated farmland values.
Oklahoma enjoyed the strongest growth over the quarter at 18.2%. However prices in the state were playing catch-up to others after increasing 6.9% in 2012 compared with the very strong 21.2% price growth in Nebraska, which overtook Kansas to second place among US cattle states last year as animals were moved north from the drought affected southern Plains.
"Dry weather conditions are having a big impact on our cattle producers," reported bankers from Northeast New Mexico.
Lower debt ratios
The ongoing growth in farmland values again helped reduce debt-to-asset ratios, with many banks reporting farmers with ratios lower than 40%, according to the US Federal Reserve’s Kansas City bank.
However, bankers across the region projected lower farm incomes. In particular livestock farmer profits were "hurting" from the double effect of high feed and forage costs and shrinking cattle and hog prices.
The bank also reported a substantial share of banks farm customers across the region had debt-to-asset ratios greater than 40%, with young and start-up farmers typically the most leveraged.
"Those borrowers with a high concentration of farm debt are typically younger farmers who have started their enterprise with little help from established family members," reported bankers in Eastern Colorado.
Some bankers remained concerned about the ability of more leveraged operations to meet debt obligations, should farm income or land values trend lower.
"Banks may start requiring more collateral on farm real estate loans as a ‘hedge’ against a potential softening of the real estate market," suggested bankers in Eastern Kansas.
http://www.agrimoney.com/news/record-us … -5844.html
Statistics: Posted by yoda — Thu May 16, 2013 9:48 am
View full post on opinions.caduceusx.com
American • 21 Statistics About The Explosive Growth Of Poverty In Amer
21 Statistics About The Explosive Growth Of Poverty In America That Everyone Should Know
By Michael, on April 4th, 2013
If the economy is getting better, then why does poverty in America continue to grow so rapidly? Yes, the stock market has been hitting all-time highs recently, but also the number of Americans living in poverty has now reached a level not seen since the 1960s. Yes, corporate profits are at levels never seen before, but so is the number of Americans on food stamps. Yes, housing prices have started to rebound a little bit (especially in wealthy areas), but there are also more than a million public school students in America that are homeless. That is the first time that has ever happened in U.S. history. So should we measure our economic progress by the false stock market bubble that has been inflated by Ben Bernanke’s reckless money printing, or should we measure our economic progress by how the poor and the middle class are doing? Because if we look at how average Americans are doing these days, then there is not much to be excited about. In fact, poverty continues to experience explosive growth in the United States and the middle class continues to shrink. Sadly, the truth is that things are not getting better for most Americans. With each passing year the level of economic suffering in this country continues to go up, and we haven’t even reached the next major wave of the economic collapse yet. When that strikes, the level of economic pain in this nation is going to be off the charts.
The following are 21 statistics about the explosive growth of poverty in America that everyone should know…
1 – According to the U.S. Census Bureau, approximately one out of every six Americans is now living in poverty. The number of Americans living in poverty is now at a level not seen since the 1960s.
2 – When you add in the number of low income Americans it is even more sobering. According to the U.S. Census Bureau, more than 146 million Americans are either "poor" or "low income".
3 – Today, approximately 20 percent of all children in the United States are living in poverty. Incredibly, a higher percentage of children is living in poverty in America today than was the case back in 1975.
4 – It may be hard to believe, but approximately 57 percent of all children in the United States are currently living in homes that are either considered to be either "low income" or impoverished.
5 – Poverty is the worst in our inner cities. At this point, 29.2 percent of all African-American households with children are dealing with food insecurity.
6 – According to a recently released report, 60 percent of all children in the city of Detroit are living in poverty.
7 – The number of children living on $2.00 a day or less in the United States has grown to 2.8 million. That number has increased by 130 percent since 1996.
8 – For the first time ever, more than a million public school students in the United States are homeless. That number has risen by 57 percent since the 2006-2007 school year.
9 – Family homelessness in the Washington D.C. region (one of the wealthiest regions in the entire country) has risen 23 percent since the last recession began.
10 – One university study estimates that child poverty costs the U.S. economy 500 billion dollars each year.
11 – At this point, approximately one out of every three children in the U.S. lives in a home without a father.
12 – Families that have a head of household under the age of 30 have a poverty rate of 37 percent.
13 – Today, there are approximately 20.2 million Americans that spend more than half of their incomes on housing. That represents a 46 percent increase from 2001.
14 – About 40 percent of all unemployed workers in America have been out of work for at least half a year.
15 – At this point, one out of every four American workers has a job that pays $10 an hour or less.
16 – There has been an explosion in the number of "working poor" Americans in recent years. Today, about one out of every four workers in the United States brings home wages that are at or below the poverty level.
17 – Right now, more than 100 million Americans are enrolled in at least one welfare program run by the federal government. And that does not even include Social Security or Medicare.
18 – An all-time record 47.79 million Americans are now on food stamps. Back when Barack Obama first took office, that number was only sitting at about 32 million.
19 – The number of Americans on food stamps now exceeds the entire population of Spain.
20 – According to one calculation, the number of Americans on food stamps now exceeds the combined populations of "Alaska, Arkansas, Connecticut, Delaware, District of Columbia, Hawaii, Idaho, Iowa, Kansas, Maine, Mississippi, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Dakota, Oklahoma, Oregon, Rhode Island, South Dakota, Utah, Vermont, West Virginia, and Wyoming."
21 – Back in the 1970s, about one out of every 50 Americans was on food stamps. Today, close to one out of every six Americans is on food stamps. Even more shocking is the fact that more than one out of every four children in the United States is enrolled in the food stamp program.
Unfortunately, all of these problems are a result of our long-term economic decline. In a recent article for the New York Times, David Stockman, the former director of the Office of Management and Budget under President Ronald Reagan, did a brilliant job of describing how things have degenerated over the last decade…
Since the S&P 500 first reached its current level, in March 2000, the mad money printers at the Federal Reserve have expanded their balance sheet sixfold (to $3.2 trillion from $500 billion). Yet during that stretch, economic output has grown by an average of 1.7 percent a year (the slowest since the Civil War); real business investment has crawled forward at only 0.8 percent per year; and the payroll job count has crept up at a negligible 0.1 percent annually. Real median family income growth has dropped 8 percent, and the number of full-time middle class jobs, 6 percent. The real net worth of the “bottom” 90 percent has dropped by one-fourth. The number of food stamp and disability aid recipients has more than doubled, to 59 million, about one in five Americans.
For the last couple of years, the U.S. economy has experienced a bubble of false hope that has been produced by unprecedented amounts of government debt and unprecedented money printing by the Federal Reserve.
Unfortunately, that bubble of false hope is not going to last much longer. In fact, we are already seeing signs that it is getting ready to burst.
For example, initial claims for unemployment benefits shot up to 385,000 for the week ending March 30th.
That is perilously close to the 400,000 "danger level" that I keep warning about. Once we cross the 400,000 level and stay there, it will be time to go into crisis mode.
In the years ahead, it is going to become increasingly difficult to find a job. Just the other day I saw an article about an advertisement for a recent job opening at a McDonald’s in Massachusetts that required applicants to have "one to two years experience and a bachelor’s degree".
If you need a bachelor’s degree for a job at McDonald’s, then what in the world are blue collar workers going to do when the competition for jobs becomes really intense once the economy experiences another major downturn?
Do not be fooled by the fact that the Dow has been setting new all-time highs. The truth is that we are in the midst of a long-term economic decline, and things are going to get a lot worse. If you know someone that is not convinced of this yet, just share the following article with them: "Show This To Anyone That Believes That ‘Things Are Getting Better’ In America".
http://theeconomiccollapseblog.com/arch … hould-know
Statistics: Posted by yoda — Thu Apr 04, 2013 3:52 pm
View full post on opinions.caduceusx.com
21 Statistics About The Explosive Growth Of Poverty In America That Everyone Should Know
If the economy is getting better, then why does poverty in America continue to grow so rapidly? Yes, the stock market has been hitting all-time highs recently, but also the number of Americans living in poverty has now reached a level not seen since the 1960s. Yes, corporate profits are at levels never seen before, but so is the number of Americans on food stamps. Yes, housing prices have started to rebound a little bit (especially in wealthy areas), but there are also more than a million public school students in America that are homeless. That is the first time that has ever happened in U.S. history. So should we measure our economic progress by the false stock market bubble that has been inflated by Ben Bernanke’s reckless money printing, or should we measure our economic progress by how the poor and the middle class are doing? Because if we look at how average Americans are doing these days, then there is not much to be excited about. In fact, poverty continues to experience explosive growth in the United States and the middle class continues to shrink. Sadly, the truth is that things are not getting better for most Americans. With each passing year the level of economic suffering in this country continues to go up, and we haven’t even reached the next major wave of the economic collapse yet. When that strikes, the level of economic pain in this nation is going to be off the charts.
The following are 21 statistics about the explosive growth of poverty in America that everyone should know…
1 – According to the U.S. Census Bureau, approximately one out of every six Americans is now living in poverty. The number of Americans living in poverty is now at a level not seen since the 1960s.
2 – When you add in the number of low income Americans it is even more sobering. According to the U.S. Census Bureau, more than 146 million Americans are either “poor” or “low income”.
3 – Today, approximately 20 percent of all children in the United States are living in poverty. Incredibly, a higher percentage of children is living in poverty in America today than was the case back in 1975.
4 – It may be hard to believe, but approximately 57 percent of all children in the United States are currently living in homes that are either considered to be either “low income” or impoverished.
5 – Poverty is the worst in our inner cities. At this point, 29.2 percent of all African-American households with children are dealing with food insecurity.
6 – According to a recently released report, 60 percent of all children in the city of Detroit are living in poverty.
7 – The number of children living on $2.00 a day or less in the United States has grown to 2.8 million. That number has increased by 130 percent since 1996.
8 – For the first time ever, more than a million public school students in the United States are homeless. That number has risen by 57 percent since the 2006-2007 school year.
9 – Family homelessness in the Washington D.C. region (one of the wealthiest regions in the entire country) has risen 23 percent since the last recession began.
10 – One university study estimates that child poverty costs the U.S. economy 500 billion dollars each year.
11 – At this point, approximately one out of every three children in the U.S. lives in a home without a father.
12 – Families that have a head of household under the age of 30 have a poverty rate of 37 percent.
13 – Today, there are approximately 20.2 million Americans that spend more than half of their incomes on housing. That represents a 46 percent increase from 2001.
14 – About 40 percent of all unemployed workers in America have been out of work for at least half a year.
15 – At this point, one out of every four American workers has a job that pays $10 an hour or less.
16 – There has been an explosion in the number of “working poor” Americans in recent years. Today, about one out of every four workers in the United States brings home wages that are at or below the poverty level.
17 – Right now, more than 100 million Americans are enrolled in at least one welfare program run by the federal government. And that does not even include Social Security or Medicare.
18 – An all-time record 47.79 million Americans are now on food stamps. Back when Barack Obama first took office, that number was only sitting at about 32 million.
19 – The number of Americans on food stamps now exceeds the entire population of Spain.
20 – According to one calculation, the number of Americans on food stamps now exceeds the combined populations of “Alaska, Arkansas, Connecticut, Delaware, District of Columbia, Hawaii, Idaho, Iowa, Kansas, Maine, Mississippi, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Dakota, Oklahoma, Oregon, Rhode Island, South Dakota, Utah, Vermont, West Virginia, and Wyoming.”
21 – Back in the 1970s, about one out of every 50 Americans was on food stamps. Today, close to one out of every six Americans is on food stamps. Even more shocking is the fact that more than one out of every four children in the United States is enrolled in the food stamp program.
Unfortunately, all of these problems are a result of our long-term economic decline. In a recent article for the New York Times, David Stockman, the former director of the Office of Management and Budget under President Ronald Reagan, did a brilliant job of describing how things have degenerated over the last decade…
Since the S&P 500 first reached its current level, in March 2000, the mad money printers at the Federal Reserve have expanded their balance sheet sixfold (to $3.2 trillion from $500 billion). Yet during that stretch, economic output has grown by an average of 1.7 percent a year (the slowest since the Civil War); real business investment has crawled forward at only 0.8 percent per year; and the payroll job count has crept up at a negligible 0.1 percent annually. Real median family income growth has dropped 8 percent, and the number of full-time middle class jobs, 6 percent. The real net worth of the “bottom” 90 percent has dropped by one-fourth. The number of food stamp and disability aid recipients has more than doubled, to 59 million, about one in five Americans.
For the last couple of years, the U.S. economy has experienced a bubble of false hope that has been produced by unprecedented amounts of government debt and unprecedented money printing by the Federal Reserve.
Unfortunately, that bubble of false hope is not going to last much longer. In fact, we are already seeing signs that it is getting ready to burst.
For example, initial claims for unemployment benefits shot up to 385,000 for the week ending March 30th.
That is perilously close to the 400,000 “danger level” that I keep warning about. Once we cross the 400,000 level and stay there, it will be time to go into crisis mode.
In the years ahead, it is going to become increasingly difficult to find a job. Just the other day I saw an article about an advertisement for a recent job opening at a McDonald’s in Massachusetts that required applicants to have “one to two years experience and a bachelor’s degree“.
If you need a bachelor’s degree for a job at McDonald’s, then what in the world are blue collar workers going to do when the competition for jobs becomes really intense once the economy experiences another major downturn?
Do not be fooled by the fact that the Dow has been setting new all-time highs. The truth is that we are in the midst of a long-term economic decline, and things are going to get a lot worse. If you know someone that is not convinced of this yet, just share the following article with them: “Show This To Anyone That Believes That ‘Things Are Getting Better’ In America“.
So what are all of you seeing in your own areas?
Are you seeing signs that poverty is getting worse?
Please feel free to post a comment with your thoughts below…
View full post on The Economic Collapse
The Sequester May Not Be ‘Fair,’ but It’s Real and It Would Slow the Growth of Government
Daniel J. Mitchell
Much to the horror of various interest groups, it appears that there will be a “sequester” on March 1.
This means an automatic reduction in spending authority for selected programs (interest payments are exempt, as are most entitlement outlays).
Just about everybody in Washington is frantic about the sequester, which supposedly will mean “savage” and “draconian” budget cuts.
If only. That would be like porn for libertarians.
In reality, the sequester merely means a reduction in the growth of federal spending. Even if we have the sequester, the burden of government spending will still be about $2 trillion higher in 10 years.
The other common argument against the sequester is that it represents an unthinking “meat-ax” approach to the federal budget.
But a former congressional staffer and White House appointee says this is much better than doing nothing.
Here’s some of what Professor Jeff Bergner wrote for today’s Wall Street Journal:
You know the cliché: America’s fiscal condition might be grim, but lawmakers should avoid the “meat ax” of across-the-board spending cuts and instead use the “scalpel” of targeted reductions. …Targeted reductions would be welcome, but the current federal budget didn’t drop from the sky. Every program in the budget—from defense to food stamps, agriculture, Medicare and beyond—is in place for a reason: It has advocates in Congress and a constituency in the country. These advocates won’t sit idly by while their programs are targeted, whether by a scalpel or any other instrument. That is why targeted spending cuts have historically been both rare and small.
Bergner explains that small across-the-board cuts are very reasonable:
The most likely way to achieve significant reductions in spending is by across-the-board cuts. Each reduction of 1% in the $3.6 trillion federal budget would yield roughly $36 billion the first year and would reduce the budget baseline in future years. Even with modest reductions, this is real money. …let’s give up the politically pointless effort to pick and choose among programs, accept the political reality of current allocations, and reduce everything proportionately. No one program would be very much disadvantaged. In many cases, a 1% or 3% reduction would scarcely be noticed. Are we really to believe that a government that spent $2.7 trillion five years ago couldn’t survive a 3% cut that would bring spending to “only” $3.5 trillion today? Every household, company and nonprofit organization across America can do this, as can state and local governments. So could Washington.
And he turns the fairness argument back on critics, explaining that it is a virtue to treat all programs similarly:
Across-the-board federal cuts would have to include all programs—no last-minute reprieves for alternative-energy programs, filmmakers or any other cause. All parties would know that they are being treated equally. Defense programs, food-stamp recipients, retired federal employees, the judiciary, Social-Security recipients, veterans and members of Congress—each would join to make a minor sacrifice. It would be a narrative of civic virtue.
It’s worth noting, however, that the sequester would not treat all programs equally. Defense spending is only about 20 percent of the budget, for instance, yet the Pentagon will absorb 50 percent of the savings (though defense spending still increases over the next 10 years).
At the risk of oversimplifying, the sequester basically applies to so-called discretionary spending. So-called mandatory spending accounts for a majority of federal spending, but it is largely exempt, so entitlement reform will still be necessary if we want to address the nation’s long-run fiscal challenges.
To close, Bergner notes that “meat-ax” isn’t the right term to describe very small across-the-board cuts:
Talk of axes versus scalpels is designed to deflect reform. Whatever carefully targeted budget cuts might animate our dreams, the actual world of divided government suggests only one realistic way to achieve real spending reductions. It is not a meat ax. A scalpel that shaves a bit off all programs equally would work just fine.
In other words, the sequester is simply a very modest step in the right direction.
And while we should be radically downsizing the federal government, it’s worth reiterating that modest steps are capable of yielding big results.
Simply restraining the budget so that it grows 2.5 percent annually, for instance, is all that would be needed to balance the budget in 10 years. Not big budget cuts. Not small budget cuts. Just a bit of measly fiscal restraint.
Yet President Obama thinks that’s asking too much and instead wants ever-higher taxes to support an ever-growing government.
View full post on Cato @ Liberty
Based on a Review of Studies Looking at the Impact of Taxes on Growth, Academic Research Gives Obama a Record of 0-23-3
Daniel J. Mitchell
How do you define a terrible team? No, this isn’t going to be a joke about Notre Dame foolishly thinking it could match up against a team from the Southeastern Conference in college football’s national title game (though the Irish win the contest for prettiest make-believe girlfriends). I’m asking the question because a winless record is usually a good indication of a team that doesn’t know what it’s doing and is in over its head. With that in mind, and given the White House’s position that class warfare taxation is good fiscal policy, how should we interpret a recent publication from the Tax Foundation, which reviews the academic research on taxes and growth and doesn’t find a single study supporting the notion that higher tax rates are good for prosperity. None. Zero. Nada. Zilch. Twenty-three studies found a negative relationship between taxes and growth, by contrast, while three studies didn’t find any relationship. For those keeping score at home, that’s a score of 0-23-3 for the view espoused by the Obama Administration. This new Tax Foundation report is also useful if you want more information to debunk the absurd study from the Congressional Research Service that claimed no relationship between tax policy and growth. Indeed, the TF report even explains that serious methodological flaws made “the CRS study unpublishable in any peer-reviewed academic journal.”
So what do we find in the Tax Foundation report?
…what does the academic literature say about the empirical relationship between taxes and economic growth? While there are a variety of methods and data sources, the results consistently point to significant negative effects of taxes on economic growth even after controlling for various other factors such as government spending, business cycle conditions, and monetary policy. In this review of the literature, I find twenty-six such studies going back to 1983, and all but three of those studies, and every study in the last fifteen years, find a negative effect of taxes on growth.
And what does this mean?
…results support the Neo-classical view that income and wealth must first be produced and then consumed, meaning that taxes on the factors of production, i.e., capital and labor, are particularly disruptive of wealth creation. Corporate and shareholder taxes reduce the incentive to invest and to build capital. Less investment means fewer productive workers and correspondingly lower wages. Taxes on income and wages reduce the incentive to work. Progressive income taxes, where higher income is taxed at higher rates, reduce the returns to education, since high incomes are associated with high levels of education, and so reduce the incentive to build human capital. Progressive taxation also reduces investment, risk taking, and entrepreneurial activity since a disproportionately large share of these activities is done by high income earners.
To be blunt, the report’s findings suggest the Obama White House is clueless about tax policy.
…there are not a lot of dissenting opinions coming from peer-reviewed academic journals. More and more, the consensus among experts is that taxes on corporate and personal income are particularly harmful to economic growth… This is because economic growth ultimately comes from production, innovation, and risk-taking.
Here’s my cut-and-paste copy of the table summarizing all the academic research. 
So what’s the bottom line? The Tax Foundation report concludes with the following.
In sum, the U.S. tax system is a drag on the economy. Pro-growth tax reform that reduces the burden of corporate and personal income taxes would generate a more robust economic recovery and put the U.S. on a higher growth trajectory, with more investment, more employment, higher wages, and a higher standard of living.
In other words, America would be more prosperous with a simple and fair system such as the flat tax. Too bad the political elite is more focused on maintaining (or even exacerbating) a corrupt status quo, even if it means less prosperity for the nation.
View full post on Cato @ Liberty
Disincentives to Work Have Slowed U.S. Economic Growth
The 21st century has not been kind to the U.S. economy: the annual rate of GDP growth for the past 12 years, once all the data are available, probably will prove to be about half the 3.5 percent annual rate the country enjoyed from its founding to the late 20th century.
One key factor behind this trend—at least in recent years—is the shrinking percentage of workers in the U.S. economy, according to economist Richard Vedder. A senior fellow at the Independent Institute, Vedder makes his case in an op-ed that appears in today’s Wall Street Journal.
In 2000, there were eight more workers for every 100 working-age Americans than there were in 1960, but since 2000, more than two-thirds of that increase has been erased. If the proportion of workers hadn’t fallen, the U.S. economy would have been growing probably at least 2.2 percent each year this century instead of 1.81 percent.
Vedder attributes the main cause of the trend to public policies that have reduced the incentive to work—especially changes in four particular federal programs:
- A sharp rise in food stamps. From 2000 to 2007, the number of Americans getting food stamps grew from 17.1 million to 26.3 million. Although the unemployment rate fell from 2010 to October 2012 (the latest month for which food-stamp data are available), the number of food-stamp recipients rose by 7,223,000—about 10,000 a day.
- A steady increase in Social Security disability payments. The number of Americans who received work-related disability checks from Social Security was about 3 million in 1990. It was about 5 million in 2000, 6.5 million in 2005, and is 8.6 million today.
- A significant boost in Pell Grant recipients. In 2000, fewer than 3.9 million young Americans were awarded Pell Grants to attend college. That number rose by nearly 6 million by 2011. This increase is hard to justify on economic grounds, according to Vedder, because “nearly half of four-year college graduates today work in jobs that the Labor Department has determined do not require a college degree,” he writes.
- Extended unemployment benefits. Unemployment benefits traditionally lasted up to 26 weeks, but that period has been increased over the past four years. Some recipients have received unemployment benefits for more than a year, which has weakened the incentive of the unemployed to take jobs outside of their comfort zone.
Vedder, who co-authored the award-winning book Out of Work: Unemployment and Government Policy in Twentieth-Century America, hastens to add that other factors have also dampened U.S. economic growth. He also notes that policymakers could adopt a variety of productive measures to increase employment—such as adopting a more worker-oriented immigration policy and cutting taxes on work-related income.
“Most American recognize the need to reduce government spending to rein in the national debt,” Vedder writes. “But there is another reason to cut government spending for specific programs: If more people have less incentive to stay out of the work force, they might seek jobs and help spur economic growth.”
View full post on MyGovCost | Government Cost Calculator
Do Higher Tax Rates Hurt Growth?
Daniel J. Mitchell
Because of Obama’s class-warfare tax hike and additional tax increases by kleptocrats at the state level, many successful taxpayers will now lose more than 50 percent of any additional income they generate for the American economy.
I discuss the implications of this punitive tax policy in this CNBC interview.
Normally, this is the section where I highlight certain points I made, or bemoan the fact that I failed to mention an important fact or overlooked a key argument. Today, though, I want to address the do-taxes-impact-growth issue raised by Robert Frank.
More specifically, I want to debunk the Congressional Research Service study that he indirectly mentioned about two minutes into the segment. This is the report that asserted that it doesn’t matter if we impose high tax rates on investors, entrepreneurs, small business owners, and other “rich” taxpayers.
The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie.
The good news is that I don’t really need to debunk this CRS study because Steve Entin already has undertaken that unpleasant task. Writing for the Tax Foundation, Steve points out some rather fatal flaws in the CRS study.
The study makes no effort to determine the channels through which the tax changes ought to work to affect the economy, looks at the wrong measure of progress over the wrong time frame, and takes inadequate account of what other tax or economic events are occurring at the same time that might mask the results. …Other changes in taxes and other influences on the economy occurring at the same time can easily hide or counteract the effect of the top tax rate changes alone. It is often impossible to hold other things constant to allow one to see the impact of the single item one wants to assess. When these other influences are omitted from the model, the “missing variables” problem poisons the results. …one should look at the long-term change in the capital stock and the ultimate level of output, not the short-term rise in investment and the short-term change in the growth rate. If one looks only at the growth rate, and not at the level of GDP, one could conclude that the tax rate change has only a temporary benefit, when in fact it is permanently helpful. …Looking only at the amount of investment triggered in the year following the tax change misses the point. The same holds true in the opposite direction for a tax increase. It takes years to retire through attrition the excess capital made redundant by a tax increase. Looking only at the change in investment in the year after the tax cut, rather than the cumulative increase in the stock of capital over time, misses about 95 percent of the impact. You can’t predict this fall’s apple crop by counting the number of seedlings planted this spring.The CRS study omits important variables and poisons its results by not holding other factors constant. The variables it does examine are indirectly related to the relationship one should be studying, but the study does not follow them for long enough to get the whole picture. The study is as weak now as it was when it was first issued. Grade: F.
By the way, the Wall Street Journal pointed out that the author of the CRS study is not exactly dispassionate and neutral on these matters.
You won’t be surprised to learn that Mr. Hungerford has donated to the Obama campaign and Senate Democrats and worked as an economist at the White House budget office under Bill Clinton.
In closing, I did address the taxes-growth issue last year. I wasn’t debunking the CRS study, but I was exposing the errors in some very similar analysis by a writer for the New York Times.
Here’s the key passage from that post.
Yes, lower tax rates are better for economic performance, just as wheels matter for a car’s performance. But if a car doesn’t have an engine, transmission, steering wheel, and brakes, it’s not going to matter how nice the wheels are.
In other words, I was focusing on the fact that you can’t accurately and honestly examine tax policy without looking at the impact of other public policy issues.
I made that point in the CNBC interview, of course, though it’s unclear whether the message got through.
But I think the Clinton years and Bush years make my point. Bill Clinton was bad on tax policy in 1993, but was good on almost everything else (including a cut in the capital gains tax rate in 1997), whereas George W. Bush was okay on tax policy, but was bad on just about everything else.
So here are a couple of very simple questions.
- Given what we now know about the increase in economic freedom under Clinton and the loss in economic freedom under Bush, is anybody surprised that the economy did better under Clinton than it did under Bush?
- Does anybody think that the economy prospered under Clinton because he raised tax rates in 1993?
- Does anybody think the economy was anemic under Bush because he lowered taxes in 2001 and 2003?
Depending on how you answer those questions, you may be qualified to work at the Congressional Research Service.
But if you understand that it’s important to look at the overall burden of government when measuring the impact of public policy on economic performance, then…well, I’m not sure whether I can promise anything other than you’ll have the satisfaction of knowing that you’re intellectually honest and economically literate.
View full post on Cato @ Liberty
Prosperity and World Population Growth
Marian L. Tupy
Readers of Matt Ridley’s The Rational Optimist and Ronald Bailey’s columns in the Reason magazine will not be surprised to hear that the rate of population growth is slowing—dramatically—throughout the world. Jeff Wise’s article in the Slate magazine, “About that Overpopulation Problem,” revisits that familiar territory and makes some interesting points. Ultimately, however, Wise fails to appreciate the real reasons for the fall in population growth rate.
First, the good news. As Wise notes, “[The] rate of global population growth has slowed. And it’s expected to keep slowing. Indeed, according to experts’ best estimates, the total population of Earth will stop growing within the lifespan of people alive today. And then it will fall… the long-dreaded resource shortage may turn out not to be a problem at all.”
“For hundreds of thousands of years,” Wise’s article continues, “in order for humanity to survive things like epidemics and wars and famine, birthrates had to be very high. Eventually, thanks to technology, death rates started to fall in Europe and in North America, and the population size soared. In time, though, birthrates fell as well, and the population leveled out.”
Why might that be? “The reason,” Wise avers, “for the implacability of demographic transition can be expressed in one word: education. One of the first things that countries do when they start to develop is educate their young people, including girls. That dramatically improves the size and quality of the workforce. But it also introduces an opportunity cost for having babies.”
True enough, better education is a by-product of development, but where does development come from?
For that we have to look to Ronald Bailey. As he writes, “In 2002, Seth Norton, a business economics professor at Wheaton College in Illinois, published a remarkably interesting study on the inverse relationship between prosperity and fertility. Norton compared fertility rates of over 100 countries with their index rankings for economic freedom and another index for the rule of law. ‘Fertility rate is highest for those countries that have little economic freedom and little respect for the rule of law,’ wrote Norton. ‘The relationship is a powerful one. Fertility rates are more than twice as high in countries with low levels of economic freedom and the rule of law compared to countries with high levels of those measures.’”
And, “Economic freedom and the rule of law produce prosperity which dramatically lowers child mortality which, in turn, reduces the incentive to bear more children. In addition, along with increased prosperity comes more education for women, opening up more productive opportunities for them in the cash economy. This increases the opportunity costs for staying at home to rear children. Educating children to meet the productive challenges of growing economies also becomes more expensive and time consuming.”
So, education is a proximate cause of population growth slowdown. The ultimate cause, however, rests with economic freedom and resulting prosperity.
View full post on Cato @ Liberty
We Need More Growth and Prosperity to Boost Charitable Contributions, not Bribery in the Tax Code
Daniel J. Mitchell
I’m a strong believer in fundamental tax reform. We need a system like the flat tax to improve economic performance.
No tax system is good for growth, of course, but the negative impact of taxation can be reduced by lowering marginal tax rate(s), eliminating double taxation of saving and investment, and getting rid of loopholes that encourage people to make decisions for tax reasons even if they don’t make economic sense.
While the general public is quite sympathetic to tax reform and would like to de-fang the IRS, there are three main pockets of resistance.
- The class-warfare crowd is opposed to the flat tax for ideological reasons. They want high tax rates and punitive double taxation – even if the government winds up collecting less money.
- The lobbyists and special interest groups also are opposed to tax reform, along with the politicians that they cultivate. The tax code is a major source of political corruption, after all, and there would be a lot fewer opportunities to game the system and swap loopholes for political support if the 72,000 page tax code was tossed in a dumpster.
- Beneficiaries of certain tax preferences such as the mortgage interest deduction, the charitable deduction, and the state and local tax deduction are worried about tax reform, either because they are taxpayers who utilize the preferences or because they represent interest groups that benefit because the government has tilted the playing field.
This post is designed to allay the fears of this third group, specifically the folks who worry that tax reform might be bad news for charities.
The Wall Street Journal today published a pro-con debate on the charitable deduction. As you might expect, my role is to argue in favor of a simple and fair system that would eliminate all tax preferences.
Here’s some of what I wrote on the charitable deduction, beginning with the key point that economic growth is key because the biggest determinants of charitable giving are disposable income and net wealth.
…the best way to help charities is to boost economic growth, which leaves people with more money to donate. And I think the best way to do that is to replace our current system with a simple and fair flat tax. …I don’t think there’s a compelling argument for the charitable deduction. …Over the decades, there have been major changes in tax rates and thus major changes in the tax treatment of charitable contributions. At some points, there has been a big tax advantage to giving, at others much less. Yet charitable giving tends to hover around 2% of U.S. gross domestic product, no matter what the incentive.
The final sentence in the above excerpt is key. The value of a tax deduction is determined by the tax rate. So in 1980, when the top tax rate was 70 percent, it only cost 30 cents to give $1 to charity. By 1988, though, the top tax rate was down to 28 percent, which means that the cost of giving $1 had jumped to 72 cents.
Yet charitable giving rose during the 1980s. Why? Because Reagan implemented reforms – such as lower tax rates – that produced a healthier economy.
Some may wonder whether the example I just cited is appropriate since it focuses on the tax rate (and therefore the value of the tax deduction) for upper-income taxpayers.
But there’s a good reason for that choice. The charitable deduction overwhelmingly goes to the rich.
Upper-income households are the biggest beneficiaries of the deduction, with those making more than $100,000 per year taking 81% of the deduction even though they account for just 13.5% of all U.S. tax returns. The data are even more skewed for households with more than $200,000 of income. They account for fewer than 3% of all tax returns, yet they take 55% of all charitable deductions.
I’m not against rich people, or against them lowering their tax liabilities. But I do want a tax system that generates more prosperity because that’s good news for the entire economy – including the nonprofit sector.
Speaking of which, I think tax-deductible groups will become better and more efficient without the deduction.
Charities, meanwhile, get fatter and lazier because of that dynamic. Think of all the exposés in recent years about charities that devote an overwhelming share of their budgets to administrative costs and marketing expenses. No system will create perfect nonprofit groups, but cutting back or cutting out the deduction would break the cycle of inefficiency that now exists.
My debating partner is Diana Aviv, the head of Independent Sector, which is basically a trade associate in DC for charities. Here are the most relevant excerpts from her piece.
…more than 80% of those who itemized their tax returns in 2009 claimed the charitable deduction and were responsible for more than 76% of all individual contributions to charitable organizations.
That’s all fine and well. What she’s basically saying is that almost all rich people itemize and those rich people get the lion’s share of the benefit from the deduction.
But that’s not the key issue. What matters is whether the deduction makes a big difference for the amount that people contribute. Diana addresses that point.
According to a 2010 Indiana University survey, more than two-thirds of high-net-worth donors said they would decrease their giving if they did not receive a deduction for donations.
I don’t put complete faith in public opinion data, but let’s assume that this poll is a completely accurate snapshot of how rich people think they would react. But let’s balance that off with the real-world evidence from the 1980s, which shows that rich people gave more money in the 1980s after Reagan cut tax rates and dramatically lowered the value of the tax deduction.
I’m not saying the lower tax rates caused the increase in giving, but I am saying that the lower tax rates and other reforms helped boost the economy. And I’m saying that rich people gave more to charity because they had more income and more wealth.
I also can’t resist a comment about this excerpt.
Finally, there’s another important consideration. The charitable deduction is unique in that it’s a government incentive to sacrifice on behalf of the commonweal. Unlike incentives to save for retirement or buy a home, it encourages behavior for which a taxpayer gets no direct, personal, tangible benefit.
Huh?!? Diana’s entire article is based on the notion that people need to be bribed in order to contribute, yet she simultaneously says that taxpayers get “no direct, personal, tangible benefit.”
Let me close by tying this debate to the fiscal cliff negotiations. There is some discussion of capping itemized deductions as a way of extracting more money from the rich. That creates a bit of a quandary. Here’s something else I wrote for my part of the debate.
I don’t want to give more revenue to Washington. That’s like putting blood in the water with hungry sharks around. But if politicians are going to extract more money from the private sector anyway, reducing or eliminating the deduction is much less damaging to growth than imposing higher marginal tax rates.
That being said, that type of change – while not as bad for the economy – probably would have a negative impact on charitable giving.
My argument is that real tax reform can benefit the nonprofit sector because the loss of the deduction is more than offset by the pro-growth impact of lower tax rates, less double taxation, etc.
But if all politicians are doing is limiting the deduction as part of a money grab, then nonprofits get some pain and no gain.
Incidentally, this is why the nonprofit community should join the rest of us in fighting against an ever-climbing burden of government spending. If we don’t rein in Leviathan, it’s just a matter of time before politicians get rid of the deduction as part of a relentless search for more revenue.
I think it would be better for nonprofits – and for the rest of us – if we limit the size and scope of government and enact a tax system that produces the kind of prosperity that is beneficial for all sectors of the economy.
View full post on Cato @ Liberty