But I guess I’m not very persuasive. The bureaucrats have just released a new report entitled, “In Search of New Development Finance.”

As you can probably guess, what they’re really searching for is more money for global redistribution.

But here’s the most worrisome part of their proposal. They want the U.N. to be in charge of collecting the taxes, sort of a permanent international bureaucracy entitlement.

I’ve written before about the U.N.’s desire for tax authority (on more than one occasion), but this new report is noteworthy for the size and scope of taxes that have been proposed.

Here’s the wish list of potential global taxes, pulled from page vi of the preface.

Here’s some of what the report had to say about a few of the various tax options. We’ll start with the carbon tax, which I recently explained was a bad idea if imposed inside the U.S. by politicians in Washington. It’s a horrible idea if imposed globally by the kleptocrats at the United Nations.

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

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

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

Next, here’s what the U.N. says about a financial transactions tax.

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

This is an issue that already has attracted my attention, and I also mentioned that it was a topic in my meeting with the E.U.’s Tax Commissioner.

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

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

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

…the least distorting, most fair and most efficient tax is a “lump sum” payment, such as a levy on the accumulated wealth of the world’s richest individuals (assuming the wealthy could not evade the tax). In particular, it is estimated that in early 2012, there were 1,226 individuals in the world worth $1 billion or more, 425 of whom lived in the United States, 90 in other countries of the Americas, 315 in the Asia-Pacific region, 310 in Europe and 86 in Africa and the Middle East. Together, they owned $4.6 trillion in assets, for an average of $3.75 billion in wealth per person.21 A 1 per cent tax on the wealth of these individuals would raise $46 billion in 2012.

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

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

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

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

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

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

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

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

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

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

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

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

Jimmy John Liautaud is moving part of the sandwich chain that bears his name to Florida next year, making good on a threat issued in 2011 after Illinois hiked its corporate tax rate.

The founder of Jimmy John’s Gourmet Sandwiches said during a Sept. 18 panel discussion in Chicago that he will relocate the company’s licensing division to Florida, where he plans to move in early 2013. Mr. Liautaud said in January 2011 that he applied for residency in Florida out of anger when Gov. Pat Quinn raised the corporate tax rate to 5 percent from 3 percent.

via Crain’s Chicago Business.

Ya see!!  This is what happens when you raise taxes.  It’s called the Laffer Curve and it’s a real phenomenon.  Illinois is in the down portion of the curve where when you raise taxes you get less income.  Can someone explain that to Gov. Quinn, Michael Madigan, John Cullerton, Rahm, and the rest of The Machine?

Raising taxes — especially on “the rich” — only shifts the actual tax burden further down into the middle class.

What we need is a wholesale rewrite of the tax code.  But that’s a much, much longer post.

World map showing countries by nominal GDP per capita in 2008, IMF estimates as of April 2009. Sbw01f’s work, but converted to an SVG file instead. (Photo credit: Wikipedia)

I’ve pulled evidence from IRS publications to show that rich people paid a lot more to Uncle Sam after Reagan reduced the top tax rate from 70 percent to 28 percent…….. The United Kingdom saw similar dramatic results when Margaret Thatcher lowered the top tax rate from 83 percent to 40 percent. Allister Heath explains.

During the 1970s, when the tax system specialised in inflicting pain, the top one per cent of earners contributed 11pc of income tax. By 1986-87, with the top rate down to 60pc, that had increased to 14pc. After the top rate fell to 40pc in 1988, the top 1pc’s share jumped, reaching 21.3pc by 1999-2000, 24.4pc in 2007-08 and 26.5pc in 2009-10. Lower taxes fuelled a hard-work culture and an entrepreneurial revolution. Combined with globalisation and the much greater rewards available for skilled workers, Britain’s most successful individuals earned a lot and paid a lot in tax.

via Evidence from England Shows that If You Want to “Soak the Rich,” Keep Tax Rates Low « International Liberty.

The good ol’ days

But the Gipper wasn’t the only one to unleash the Laffer Curve. The United Kingdom saw similar dramatic results when Margaret Thatcher lowered the top tax rate from 83 percent to 40 percent. Allister Heath explains.

During the 1970s, when the tax system specialised in inflicting pain, the top one per cent of earners contributed 11pc of income tax. By 1986-87, with the top rate down to 60pc, that had increased to 14pc. After the top rate fell to 40pc in 1988, the top 1pc’s share jumped, reaching 21.3pc by 1999-2000, 24.4pc in 2007-08 and 26.5pc in 2009-10. Lower taxes fuelled a hard-work culture and an entrepreneurial revolution. Combined with globalisation and the much greater rewards available for skilled workers, Britain’s most successful individuals earned a lot and paid a lot in tax.

In other words, Margaret Thatcher’s supply-side tax rate reductions paid big dividends, both for the economy and for the Treasury.

Unfortunately, just as American politicians have forgotten (or decided to ignore) the lessons of the Reagan era, British politicians also have gravitated to a class-warfare approach. Allister points out that this is having a negative impact.

Yet times are changing, and not just because of the recession. HMRC recently slashed its forecasts for revenues from the top 1pc. It now believes the number of people expected to report £500,000 or more in earnings will fall by a tenth this year; those on £2m are set to drop by a third.

Why have the numbers headed in the wrong direction? There are almost certainly lots of factors, but tax policy has moved in the wrong direction and presumably deserves part of the blame. The top income tax rate is now 45 percent. The value-added tax has jumped to 20 percent. Allister provides more details.

Capital gains tax is too high. Luxury homes transactions are falling because of higher stamp duty. Britain is now a high tax economy; this is distorting work and investment decisions, gradually shifting talent and capital overseas. The overwhelming majority of high earners are already contributing disproportionately to the exchequer; tightening the screws further will be disastrously counter-productive. The lesson of the past 30 years is clear: the best way to entice the rich to pay even more tax is to keep rates low and allow them to get even richer.

I have to admit that I don’t want anyone to pay more tax, but I’m even less happy about punitively high tax rates. So I’m reluctantly willing to let the clowns in government have more money in exchange for a tax system that is more conducive to economic growth.

Here’s my Laffer Curve video, which explains more about the relationship of tax rates, taxable income, and tax revenue.

The ultimate goal, of course, is to shrink the central government so that the legitimate functions of the state can be financed at very low tax rates. Heck, if the United States and the United Kingdom had the kind of limited governments that existed 100 years ago, neither nation would even need a flat tax. A few user fees and excise taxes would suffice. Now that’s hope and change.

P.S. I periodically share two great Reagan videos, which can be seen here and here, but I also have a couple of inspiring videos of Thatcher in action, which can be viewed here and here.

This isn’t very prudent or wise since every economic theory agrees that capital formation is key to long-run growth and higher living standards. Even Marxist and socialist theory is based on this notion (they want government to be in charge of investing, so they want to do the right thing in a very wrong way – think Solyndra on steroids).

To help explain this issue, the Wall Street Journal today published a very good primer on taxing capital gains.

The editors begin with an uncontroversial proposition.

The current Democratic obsession with raising the capital gains tax comes from a mistaken belief that the preferential rate applied to the sale of a family business, farm or financial asset is a “loophole” that mainly benefits the rich.

They offer three reasons why this view is wrong, starting with a basic inequity in the tax code.

Far from being a loophole, the low tax rate applied to capital gains is beneficial and fair for several reasons. First, under current tax rules, all gains from investments are fully taxed, but all losses are not fully deductible. This asymmetry is a disincentive to take risks. A lower tax rate helps to compensate for not being able to write-off capital losses.

Next, the editors highlight the unfairness of not letting investors take inflation into account when calculating capital gains. As explained in this video, this can lead to tax rates of more than 100 percent on real gains.

Second, capital gains aren’t adjusted for inflation, so the gains from a dollar invested in an enterprise over a long period of time are partly real and partly inflationary. It’s therefore possible for investors to pay a tax on “gains” that are illusory, which is another reason for the lower tax rate.

Third, since the U.S. also taxes businesses on profits when they are earned, the tax on the sale of a stock or a business is a double tax on the income of that business. When you buy a stock, its valuation is the discounted present value of the earnings. The main reason to tax capital investment at low rates is to encourage saving and investment. If someone buys a car or a yacht or a vacation, they don’t pay extra federal income tax. But if they save those dollars and invest them in the family business or in stock, wham, they are smacked with another round of tax.

There’s also good research to back up this theory – some produced by prominent leftists.

Many economists believe that the economically optimal tax on capital gains is zero. Mr. Obama’s first chief economic adviser, Larry Summers, wrote in the American Economic Review in 1981 that the elimination of capital income taxation “would have very substantial economic effects” and “might raise steady-state output by as much as 18 percent, and consumption by 16 percent.”

Summers is talking about more than just the capital gains tax, so his estimate is best viewed as the type of growth that might be possible with a flat tax that eliminated all double taxation.

Nobel laureate Robert Lucas also thinks that such a reform would have large beneficial effects.

Almost all economists agree—or at least used to agree—that keeping taxes low on investment is critical to economic growth, rising wages and job creation. A study by Nobel laureate Robert Lucas estimates that if the U.S. eliminated its capital gains and dividend taxes (which Mr. Obama also wants to increase), the capital stock of American plant and equipment would be twice as large. Over time this would grow the economy by trillions of dollars.

So why aren’t these reforms happening, either the medium-sized goal of getting rid of the capital gains tax, or the larger goal of junking the corrupt internal revenue code for a simple and fair flat tax?

A big obstacle is that too many politicians believe in class-warfare tax policy, even though lower-income people are among the biggest victims when the economy is weak.

For more information, here’s my video explaining that the right capital gains tax rate is zero.

P.S. Some of you may be wondering why I didn’t make a Laffer Curve argument for a lower capital gains tax. The main reason is because I have no interest in maximizing revenue for the government. I simply want good policy, which is why the rate should be zero.

P.P.S. I also didn’t bother to make a competitiveness argument, mostly because the WSJ’s editorial didn’t focus on that subtopic. But check out this post to see how Obama’s policy is putting America at a significant disadvantage.

Mayor Rahm Emanuel is considering an increase in city taxes on cigarettes and entertainment to help close an anticipated $369 million gap in next year’s budget, City Hall sources said Wednesday.  …

It’s unclear how much the cigarette tax might be raised. A city tobacco tax increase would come on the heels of a $1-a-pack state hike that took effect July 1. The city last increased its cigarette tax by 20 cents — to 68 cents a pack — in 2006.

Taxes on a pack of cigarettes in Chicago total $5.67, the second-highest per-pack tax in the nation, behind New York City’s $5.85 a pack. The city expects to bring in $18.7 million in cigarette taxes this year, compared with $32.9 million just six years ago, according to city financial records.

via Chicago Tribune.

Cook County has already proven that when you raise cigarette taxes you lose revenue.  The city’s own numbers are another example of that.

Does Rahm have any plan to cut ANY spending?  Anything other than police officers?

Why don’t we shut down the TIFs?  Take fund necessary to pay off the bonds and do so; take the rest of the funds and return them to the general fund.  That would be quick and easy.

Enough with the !@#$^ taxes.

Save as much money as you can.

Live well below your means.

The pension time-bomb is coming.

One of the most vexing problems for Chicago and its teachers went virtually unmentioned during the strike: The pension fund is about to hit a wall.

The Chicago Teachers’ Pension Fund has about $10 billion in assets, but is paying out more than $1 billion in benefits a year — much more than it has been taking in. That has forced it to sell investments, worth hundreds of millions of dollars a year, to pay retired teachers. Experts say the fund could collapse within a few years unless something is done.

via NYTimes.com.

and;

“Each day we wait to enact comprehensive pension reform, the problem gets worse,” Quinn said in a statement. “The unfunded liability will grow to more than $92 billion by the end of next fiscal year. Illinois is currently on track to spend more on pensions than education by 2016 and that is unacceptable.
– Pat Quinn

via Des Plaines, IL Patch.

If you think that taxpayers are going to fund your pensions, forget-about it.

If you think you can tax the rich to fund your pensions, forget-about it.

If you think that people are going to move into a community where their property taxes increase by 7% every year in order to fund failing schools, forget-about it.

If you think you’re going to get your COLA every year, forget-about it.

You have two options:  Save every nickel and dime you can, or plan to work until you’re in your 70′s.

Consider:

Illinois has an unfunded pension liability of at least $83 billion, according to state figures. It had 45 percent of what it needed to pay future retiree obligations as of 2010, the lowest among U.S. states, data compiled by Bloomberg show.  …

Illinois had about $28 billion of general-obligation debt as of May 8, according to bond documents. The state of about 13 million people plans to sell $50 million of debt next month for technology projects, John Sinsheimer, the state’s director of capital markets, said in an interview.

via Businessweek.

Further:

Illinois’s backlog of unpaid bills has risen to more than $9 billion because of pension costs and falling federal aid, leaving the state “essentially treading water,” Comptroller Judy Baar Topinka said.

via Bloomberg.

$83B + $28B + $9B = $120,000,000,000 in debt.  The extra $50 million at 0.42% of the total is a rounding error.  It should also be noted that this does not include the City of Chicago (or any other municipality or county debt) which is another $12-16 billion in debt depending on who you ask.

12,869,257 people in the state of Illinois.  Every man, woman, and child owed owes $9,324.54 to the state.  If you live in Chicago you owe another 5,910.34 locally for total of $15,234.89.  (Are you feeling good about your new contract yet?)

I was just looking over the FY2013 Illinois State Budget as prepared by Gov. Quinn.  On Pg 37 we’re told that Debt Service is 5.42% of all outlays.  That’s over $3.3B per year paying principle and interest on money we borrowed.  That’s $3.3B per year we could use to hire police officers, or teachers, or fully fund the pension funds but will instead go to pay for our bad fiscal decisions of the past.

More importantly, total expenditures are $61.0B.  That means that if we (a/k/a the State of Illinois) completely stopped operating, fired all the employees, shuttered all the buildings, and spend 100% of the budget on paying off debt we’d be debt free in 2 years.

Oh, I know what you’re going to say… You’re going to tell me all about how the Chicago Teachers’ Pension Fund is not as underwater as the general state fund.  True, but it’s still broke and broken.  And there’s no money to fix it.

Then you’re going to say that this is a right guaranteed by the Illinois Constitution.  Oh ya?  Well where’s the money going to come from?  The rich?  You wish:

When New Jersey governor Chris Christie heard British Prime Minister David Cameron invite France’s wealthy to decamp to England to escape a proposed 75% tax rate, he felt something akin to déjà vu. Every day top executives of Johnson & Johnson (JNJ), Merck (MRK), and other companies commute from their homes in Pennsylvania to offices in Christie’s state, saving roughly two-thirds on their state income tax bill — and costing New Jersey’s treasury $50 million, by one estimate.

via Fortune (a/k/a CNN).

You don’t understand the Laffer Curve.

The study, by the anti-tax group Change Maryland, says that a net 31,000 residents left the state between 2007 and 2010, the tenure of a “millionaire’s tax” pushed through by Gov. Martin O’Malley. The tax, which expired in 2010, in imposed a rate of 6.25 percent on incomes of more than $1 million a year.

The Change Maryland study found that the tax cost Maryland $1.7 billion in lost tax revenues. A county-by-county analysis by Change Maryland also found that the state’s wealthiest counties also had some of the largest population outflows.

via CNBC.

You’re confused how a state and raise taxes and lose revenue.  It happens all the time.  I wrote a piece about cigarette taxes in Cook County; raised taxes, lost revenue.

The more you tax something the less of it you get.

You tax income, you get less income.  You tax babies, you get less babies.

Even the left-loving Bono (of U2 fame) moves his wealth around to avoid taxes.

In Illinois, if we quadrupled the state income tax on those with adjusted gross income over $500k it would take over 13 years just to get current state pension liabilities square.  This would not cover the additional debt of Chicago Teachers, Chicago Police & Fire, or any of the billions and billions of general debt.

So take your 16% raise and start saving.  Save like your life depends on it.  Because it does.

Uploaded by afq2007 on Jan 28, 2008

By PragerU (September 9, 2012)

The study mentioned in the video can be found here.

Prager University: Do High Taxes Raise More Money? – YouTube.

Possibly the best short explanation of the Laffer Curve I’ve seen. Of course there is more to be discussed because this example focuses on the morally reprehensible “progressive” tax system wherein 47% of filers wither pay no income taxes or receive a cash bonus for filing. However, we’ll save that for another time.

Tim Groseclose, in addition to being a faculty member at Prager University, is a professor of political science and economics at UCLA. His article on this subject is here.

The Laffer Curve and New Evidence that Taxes Stifle Economic Output

Here is the link to download the Romer & Romer paper (in pdf) from the UC Berkeley website:

The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks

Standard Laffer Curve

Most economists know the Laffer Curve isn’t true. An IGM survey of economists found that not a single one of them agreed that a tax cut will increase revenue. They all agreed that there was little or no supporting evidence. As David Autor said: “Not aware of any evidence in recent history where tax cuts actually raise revenue. Sorry, Laffer.” Or Kenneth Judd: “That did not happen in the past. No reason to think it would happen now.” It is rather politicians who use the Laffer Curve to defend polices they already had. Despite its abandonment by all main economists, it is still clung to by a small group more driven by ideology than evidence.

A Just As Valid Laffer Curve With The Peak At 70%

There is very little evidence behind this theoretical concept. It is a purely hypothetical idea without any backing evidence. Let me repeat that, there is no proof it is real. Its supporters argue that if taxes are 0% revenues will be zero (obviously enough) and if taxes are 100% then revenue will also be 0% (as no one will have an incentive to work). From this a curve resembling the one above is drawn. However there is absolutely no reason why it would be a smooth curve with the peak in the middle. Rather it could rise continuously before dropping off rapidly at the end (see below).

Tax revenue rises before sharply dropping off near 100%

Or it could be a bunch of random squiggles as these “Neo-Laffer Curves” show.

Neo-Laffer Curve

Another curve equally valid as the standard one as it has 0 revenue at both 0% tax and 100%

Conservatives argue that if taxes are too high then people will avoid he tax or simply not work. Most advocates abandon any pretence of studying the facts. Instead they claim taxes are too high at any rate. For example Reagan cut taxes from 70% to 50% because he argued taxes were too high and we were the wrong side of the Laffer Curve. Taxes were cut from 50% to 35% for the same reason. Now some people argue that 35% is too high and if we cut some more revenue will still rise. It soon becomes clear that conservatives argue taxes are too high no matter what the tax rate is. Their solution to every problem is to cut taxes. In their world we are permanently on the wrong side of the Laffer Curve.

There are numerous flaws in the argument. For example a 100% tax rate is essentially communism. While it is a terrible economic system it is one where tax revenue is still above 0. Another example is during war-time. Taxes were crushingly high, yet people still worked as hard as ever. After the Second World War America’s highest tax rate was 91% (albeit for a tiny number of extremely wealthy people), yet America still went through a unprecendented economic boom.

Conservatives who subscribe to the Laffer Curve usually are full of praise for the rich. Yet the Laffer Curve describes entrepreneurs as quite lazy. It presumes that some will not bother earning 100 million is they can only keep 50 million of it. Why would the supposedly most imaginative, innovative, hard-working and entrepreneurial people give up so easily? It ignores other motivators such as fame, respect and the thrill of success itself. Most millionaires have more money then they could ever spend, yet they don’t retire. That’s because money for its own worth isn’t important, it is the challenge and thrill of making it that drives them. All humans have a desire for success at everything they do and this is what drives them. If you don’t believe me, note how so many millionaires end up giving away their money. Why would someone work so hard only to give their money away?

If the rich won’t work unless they are incentivised, then what hope do the poor have? If a millionaire lacks incentive, why should anyone work for minimum wage? The truth is that working is an essential part of our culture. It defines who we are. Even if we didn’t need money we would still work. Not working is as socially acceptable as not talking. People will work hard at something they enjoy regardless of the money. For example this blog requires an enormous amount of work for no pay, yet I still devote enormous amounts of my time into it, because it is something I love doing. Even if the money is terrible people will still work.

You could even argue that higher taxes mean people will work harder. For example say your bills are 100 and your income is 100. Then say taxes go up so your income is now 90. You could either cut spending (though this is unlikely as most spending is unavoidable, rent and electricity for example or you may be accustomed to a certain standard of living). So instead you work extra hours to bring your income back to 100. Even Adam Smith argued that there was a backward-bending supply curve (this means that at a certain point a person has enough money and will work less if their wage increases). In this case higher taxes would increase labour supply.

Warren Buffett denies taxes have ever stopped people from making money. “ have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off.” This is because no matter what the tax rate, people will always be richer by working more.

Attempts to measure it are difficult due to its vagueness and the multitude of taxes that affect the economy. Among economists the average laffer curve is estimated to be at 70%. This means that taxes have to be over 70% before cutting them will raise income. Seeing as no country collects 70% of its GDP in taxes, this essentially means the theory is useless. Diamond and Saez estimate you could raise income tax in America to 76% before the Laffer Curve would take effect.  Even the Reagan government’s own Treasury Department denied the existence of the Laffer Curve. They estimated that only 10% of the tax cuts would be replaced by increased revenue. That was the best case scenario. The worst case was that the tax cuts would decrease long run economic growth.

The Laffer Curve is not economic theory, but rather wishful thinking on behalf of conservatives who want an excuse to cut taxes for the rich. Cutting taxes leads to less not more revenue. This piece of common sense is acknowledged by economists but still clung to by delusional politicians.

Moreover, it’s not clear things will get any better in the next four years, regardless of what happens on November 6.

But whenever I begin to feel sorry for myself, I remind myself of how bad things could be if I lived in the United Kingdom.

The burden of government spending in the U.K. rose from 36.5 percent of economic output in 2000 up to 48.7 percent of GDP today. This mostly happened under Labor Party rule, but the coalition of so-called Conservatives and Liberal Democrats that took power in 2010 hasn’t done much to restrain government spending.

To augment the damage, taxes also have been increasing. The feckless Gordon Brown of the Labor Party boosted the top tax rate to 50 percent (a disaster from a Laffer-Curve perspective) before getting evicted by voters.

The Tory-Lib Dem coalition is similarly bad. In recent years, the capital gains tax has been increased (see these amusing posters to understand why this was a foolish idea), along with a big hike in the value-added tax (though, to be fair, the corporate rate has been slightly reduced and part of Gordon Brown’s higher income tax rate has been repealed).

But the Tories and Lib Dems aren’t through with their assault on the economy’s productive sector.

Both Prime Minster David Cameron and one of his deputies have argued that people have a moral obligation to turn more of their income over to the government.

And now the leader of the Lib Dems, Nick Clegg, is proposing a wealth tax. He says it will be a temporary measure until the fiscal emergency ends, but I would be shocked if politicians changed its mind after getting their hands on a new source of revenue (just look, for instance, how British politicians went crazy after first imposing an airline ticket tax).

Here are some illuminating excerpts from a column in the UK-based Telegraph.

“Let them eat cake”

…from what can be gleaned, the Deputy Prime Minister seemed to be suggesting a one-off or short term tax hike rather than a permanent change in the way the wealthiest are taxed. He described it as a “time limited contribution” to the “national effort” – since it was becoming clear, he said, that the country was embarked not on a “short economic battle” but a “longer economic war”. Mr Clegg said it would be “people of considerable wealth” who would be asked to make such a contribution.

It doesn’t appear that this plan will get the necessary support from the Tories, but it’s remarkable that it has been proposed. Like the death tax, the wealth tax is a turbo-charged form of double taxation.

P.S. One of the leading Lib Dem politicians got caught dodging taxes, making him the British version of America’s tax-cheating Treasury Secretary. I generally don’t object when people try to protect their income from greedy and incompetent government, but when they also are the same people proposing higher taxes on everyone else, they deserve special scorn.

P.P.S. This post is describing the current dismal fiscal situation, but the title references “a miserable and hopeless fiscal outlook.” That’s because I see no hope of good fiscal policy in the remaining years of the current government, and I suspect the statist failures of the Tory-Lib Dem coalition government will pave the way for a new Labor Party government. Needless to say, that will be – at best – jumping from one frying pan to another. Incidentally, I’m also worried about the United States for the same reason.

But instead of writing about tax havens, as I’ve done in the past, today we’re going to look at incremental tax reform.

The left has been loudly asserting that the middle class would lose under Mitt Romney’s plan to cut tax rates by 20 percent and finance those reductions by closing loopholes.

That class-warfare accusation struck me as a bit sketchy because when I looked at the data a couple of years ago, I put together this chart showing that rich people, on average, enjoyed deductions that were seven times as large as the deductions of middle-income taxpayers.

And the chart includes only the big itemized deductions. There are dozens of other special tax preferences, as shown in this depressing image, and you can be sure that rich people are far more likely to have the lawyers, lobbyists, and accountants needed to exploit those provisions.

But that’s not a surprise since the internal revenue code has morphed into a 72,000-page monstrosity (this is why I sometimes try to convince honest leftists that a flat tax is a great way of reducing political corruption).

But this chart doesn’t disprove the leftist talking point, so I’m glad that Martin Feldstein addressed the issue in today’s Wall Street Journal. Here’s some of what he wrote.

The IRS data show that taxpayers with adjusted gross incomes over $100,000 (the top 21% of all taxpayers) made itemized deductions totaling $636 billion in 2009. Those high-income taxpayers paid marginal tax rates of 25% to 35%, with most $200,000-plus earners paying marginal rates of 33% or 35%. And what do we get when we apply a 30% marginal tax rate to the $636 billion in itemized deductions? Extra revenue of $191 billion—more than enough to offset the revenue losses from the individual income tax cuts proposed by Gov. Romney. …Additional revenue could be raised from high-income taxpayers by limiting the use of the “preferences” identified for the Alternative Minimum Tax (such as excess oil depletion allowances) or the broader list of all official individual “tax expenditures” (such as tax credits for energy efficiency improvements in homes), among other credits and exclusions. None of this base-broadening would require taxing capital gains or making other changes that would reduce the incentives for saving and investment. …Since broadening the tax base would produce enough revenue to pay for cutting everyone’s tax rates, it is clear that the proposed Romney cuts wouldn’t require any middle-class tax increase, nor would they produce a net windfall for high-income taxpayers. The Tax Policy Center and others are wrong to claim otherwise.

In other words, even with a very modest assumption about the Laffer Curve, it would be quite possible to implement something akin to what Romney’s proposing and not “lose” tax revenue.

This doesn’t mean, of course, that Romney seriously intends to push for good policy. I’m much more concerned, for instance, that he’ll wander in the wrong direction and propose something very bad such as a value-added tax.

But Romney certainly can do the right thing if he wins. Assuming that’s what he wants to do.

Just like he can fulfill his promise the reduce the burden of government spending by implementing Paul Ryan’s entitlement reforms. But don’t hold your breath waiting for that to happen.

So when I read a column suggesting that the United States should become more like Italy, I thought this must be some sort of practical joke. After all, Italy is teetering on the edge of bankruptcy, kept afloat by bailouts and subsidies. Its economy is in the toilet, with pervasively high unemployment, almost no growth for a decade, and living standards that are only about two-thirds of U.S. levels.

The Italian government is also famously incompetent (naming the wrong people to high-level posts), with stifling levels of regulation, a dysfunctional fiscal system, and a corrupt legal system (and when it’s not crooked, it’s inane).

Notwithstanding all these crippling flaws, Italy has something akin to catnip for the left. It has a punitive tax burden, and that means it must be a nation worth emulating.

Here’s some of what Eduardo Porter wrote for the New York Times.

Italy may be in a funk, with a shrinking economy and a high unemployment rate, but the United States can learn a lot from it, and not just about the benefits of public health care. Italians live longer. Their poverty rate is much lower than ours. If they lose their jobs or suffer some other misfortune, they can turn to a more generous social safety net. …The reason is not difficult to figure out: rich though we are, we can’t afford the policies needed to improve our record. …But though the nation’s fiscal challenge has taken center stage in the presidential election campaign, raising more taxes from American families remains stubbornly off the table.

I’m willing to believe Italians live longer, but every other assertion in that passage is upside down. Yes, they have more subsidies for joblessness, but that’s one of the reasons they have higher unemployment (as even Paul Krugman and Larry Summers have acknowledged).

And the claim about less poverty is laughable. I’m guessing the author naively relied upon the slipshod analysis from the statists at the Organization for Economic Cooperation and Development. Those bureaucrats put together a moving-goalposts measure of income distribution and falsely categorized it as a tool for measuring poverty.

Setting aside these mistakes, the column is designed to convince people that we should give more money to Washington.

Citizens of most industrial countries have demanded more public services as they have become richer. And they have been by and large willing to pay more taxes to finance them. Since 1965, tax revenue raised by governments in the developed world have risen to 34 percent of their gross domestic product from 25 percent, on average. The big exception has been the United States. …the United States raises less tax revenue, as a share of the economy, than every other industrial country. No wonder we can’t afford to keep more children alive. In 2007, the most recent year for which figures are available, the United States government spent about 16 percent of its output on social programs — things like public health, food and housing for the poor. In Italy, that figure was 25 percent. …Every other industrial country has a national consumption tax, which can be used to raise a lot of money.

I will give the author credit. If you read the entire column, it’s clear he wants all Americans to pay higher taxes, not just the so-called rich. So at least he’s being honest, unlike a lot of statists (click here for a list of honest leftists who admit you can’t finance big government without screwing the middle class).

But honesty about goals doesn’t mean desirability of policy. If America becomes more like Italy, it will mean Italian-style stagnation and joblessness.

And it’s particularly worrisome to see that the author wants a value-added tax, which is a sure-fire way of giving politicians a big pile of money that will be used to expand the burden of government spending.

I have nothing against copying other nations, either when they get one policy right (such as Estonia’s flat tax or Australia’s system of personal retirement accounts), or when they get a bunch of policies right and routinely rank at the top for economic freedom and prosperity (such as Hong Kong and Singapore).

But I’m mystified by those who look at failure and conclude America should do likewise.

P.S. The Italians have a bad tax system, but they don’t meekly comply. Whether they’re firebombing tax offices or sailing yachts to other countries, they are a powerful example of the Laffer Curve insight that higher tax rates don’t necessarily translate into higher tax revenues.

If instead, you invest in a small business venture, income generated from that endeavor would also produce tax liabilities. If the business goes well and you hire people, they too would produce income that results in taxes payable to the government.

This fallacy that lower taxes only benefit the rich? The rich benefit no matter what happens. We may as well consider that a cost of doing business.

Me opposing affirmative-action makes me a Civil Rights Activist.

Warning you about beliefs in the Koran makes me Insightful.

Warning you about overspending on social programs makes me Prudent.

Me Opposing socialism makes me a Constitutionalist.

Me wanting to keep the right to keep and bear arms to maintain the balance of power, makes me a Rationalist.

Me Understanding the progression of government control and regulations, makes me a Historian.

My concept of taxation makes me an Economist.

My stricter use of the scientific laws and only accepting empirical evidence makes me a Scientist.

My correcting of the modern church, demonstrates that I’m a follower of Jesus; That would Make Me a Christian

Me pointing out that a woman should not go to a hotel room at three in the morning without certain intentions makes me Pragmatic.

Me pointing out that the divorce rate is directly related to a profit motive put in place by modern society that is not biblical shows that I can apply the word of God; Make me a Scriptural Scholar.

Me pointing out, that you taking your dog everywhere is unhealthy for others in society, means I understand infectious diseases and epidemics.

Me pointing out, that borders language and culture are critical for any countries long-term sustainability, makes me a Historical Sociologist.

Me pointing out, certain behaviors that are not acceptable, makes me Behaviorist.

Me pointing out, that condoms do not work to save you from AIDS HIV and STDs but giving you other solutions that are realistic, makes me a Realist.

It’s one of the richest counties in the nation, but not because of entrepreneurship and wealth creation. Instead, it’s a bedroom community for over-paid bureaucrats, corrupt lobbyists, fat-cat contractors, and other ne’er-do-wells who commute into Washington and live off the blood, sweat, and tears of people in the economy’s productive sector.

To give you an idea of its political leanings, Obama won 72 percent of the vote in Montgomery County in 2008 and all nine members of the County Council are Democrats.

So you wouldn’t think this is a place where lawmakers ever have anything sensible to say about tax policy. But, lo and behold, one Councilman recognizes that there’s no Berlin Wall surrounding the County. As such, higher tax rates may not generated additional tax revenue if people vote with their feet.

You can listen to George Leventhal by clicking here, but here’s the relevant quote.

Secret Cato supporter?

We may be reaching a tipping point with tax rates. There’s a point beyond which you can keep raising the tax rates, but you won’t get more revenue because if people leave the county or if new businesses don’t start you’re not getting new revenue.

For the uninitiated, Leventhal is talking about…gasp…the Laffer Curve.

Folks like Paul Krugman would like you to believe that the Laffer Curve is a twisted fantasy concocted by stooges for the rich. He writes that it is “junk economics” to consider the relationship between tax rates, taxable income, and tax revenue.

In the real world, though, at least some left-leaning lawmakers realize that higher tax rates backfire if the geese that lay the golden eggs fly away (as has happened in Italy, France, and the United Kingdom).

Maybe we can take up a collection and hire Mr. Leventhal to do a bit of economics tutoring for a certain Nobel laureate?

P.S. Just in case you’re not convinced by the experiences of a local politician, there is lots of empirical evidence for the Laffer Curve.

• Such as this study by economists from the University of Chicago and Federal Reserve.
• Or this study by the IMF, which not only acknowledges the Laffer Curve, but even suggests that the turbo-charged version exists.
• Or this European Central Bank study showing substantial Laffer-Curve effects.
• Or this research from the American Enterprise Institute about the Laffer Curve for the corporate income tax.

Think Progress

A survey of forty economists from across the ideological and partisan spectrum has concluded that on some of its most cherished issues, the Republican Party has simply taken leave of economic reality. For instance, economists Betsey Stevenson and Justin Wolfers noted that one of the results from the survey — run by the University of Chicago’s Booth School of Business, which is hardly known for a left-wing slant — is an overwhelming agreement that the 2009 Recovery Act (i.e. the stimulus) brought down unemployment. But GOP leaders have spent years roundly denouncing the stimulus as a failure:

And while there was a bit more disagreement as to whether the benefits of the stimulus bill outweighed its costs, the bulk of the economists surveyed came down in the “Agree” or “Strongly Agree” camps. Other points from the survey’s respondents worth noting:

The nation needs new revenues. Contrary to nearly every Republican, the economists overwhelmingly agreed that the federal budget deficit cannot and should not be closed without increased tax revenue.

No gold standard. They roundly rejected the belief that a return to the gold standard would stabilize prices or lower unemployment. Enthusiasm for the gold standard made a significant comeback in Republican circles during the presidential primaries.

The “Laffer Curve” won’t help. Virtually all of them rejected the notion that cutting income tax rates would actually increase total tax revenue in future years.

Rethink the drug war. The respondents were also generally in favor of softer approaches to the nation’s drug problem.

While there were a few survey results that could be interpreted as hard on progressive causes as well, none struck at their heart in the same way as the positions taken on core Republican beliefs.

Related articles

• Those Idiots In Washington Don’t Know Jack About The Economy (businessinsider.com)
• The U.S. Economic Policy Debate Is a Sham – Bloomberg (bloomberg.com)
• Economists Fail Republicans on Laffer Curve (crooksandliars.com)
• The Secret Consensus Among Economists (freakonomics.com)
• Senior Economists Feel That GOP Jobs Package Is More Likely To Make People Sick Than Create Jobs (thinkprogress.org)
• GOP to make rich tax cuts permanent, while doing away with tax cuts for middle class and poor (americablog.com)
• Memo to Republicans: Economists Laffer at you, not with you (dailykos.com)

Profile of Adam Smith (Photo credit: Wikipedia)

Adam Smith way back in the 18th Century while he was busy inventing the concept we now call Capitalism, attempted to explain why, despite the fact that we have a moral obligation to tax our superrich at the peak of the Laffer Curve: to tax them so heavily that we raise the most possible money from them — to the point beyond which their diversion of energy and enterprise into tax avoidance and sheltering would mean that any extra taxes would not raise but reduce revenue, we in society feel it is wrong to so tax their incomes. In the case of the hard-working rich (as opposed to inherited wealth), he posited that we sympathize with the type of person who:

“devotes himself forever to the pursuit of wealth and greatness….With the most unrelenting industry he labors night and day….serves those whom he hates, and is obsequious to those whom he despises….[I]n the last dregs of life, his body wasted with toil and diseases, his mind galled and ruffled by the memory of a thousand injuries and disappointments….he begins at last to find that wealth and greatness are mere trinkets of frivolous utility…. Power and riches….keep off the summer shower, not the winter storm, but leave him always as much, and sometimes more exposed than before, to anxiety, to fear, and to sorrow; to diseases, to danger, and to death…”
Adam Smith, The Theory of Moral Sentiments.

Tax (Photo credit: 401(K) 2012)

According to the modern economist Brad deLong, “we don’t wish to disrupt the perfect felicity of the lifestyles of the rich and famous; and we don’t wish to add to the burdens of those who have spent their most precious possession — their time and energy — pursuing baubles.”

These two arguments are not consistent, but that does not matter. They both have a purchase on our thinking. Unlike today’s public-finance economists, Smith understood that we are not rational utilitarian calculators. Indeed, that is why we have collectively done a very bad job so far in dealing with the enormous rise in inequality between the industrial middle class and the plutocratic superrich that we have witnessed.

Related articles

• Barack, Mitt, and Adam Smith (newyorker.com)
• QOTD: Adam Smith on Banking (ritholtz.com)
• Connie Mack campaign: Tampa Bay Times and Adam Smith are lefty pinkos (tampabay.com)
• Hubris (cafehayek.com)
• So the Laffer curve says tax cuts for the rich? This isn’t going to be funny | Michael Burke (guardian.co.uk)
• The Betrayal Of Adam Smith (clubtroppo.com.au)
• The 70% Solution: Taxing the Rich Department (delong.typepad.com)
• ADAM SMITH: Our Record-High Profit Margins Are A Sign The U.S. Is “Going To Ruin” (businessinsider.com)
• Connie Mack?s war on Adam Smith (politico.com)

When they’re not firebombing tax offices to show their displeasure, they’re taking to the high seas to escape.

Here are some excerpts from a report in the UK-based Telegraph about runaway yachts.

Thousands are weighing anchor and fleeing with their gin palaces to quiet corners of the Mediterranean to escape a tax evasion crackdown – part of efforts by the government of Mario Monti, the prime minister, to tackle Italy’s €1.9 trillion public debt. …in the ports and marinas they are going after the owners of luxury yachts. Uniformed officers of the Guardia di Finanza, or tax police, are performing on-the-spot checks, boarding boats and checking owners’ details against their tax records. …The unwelcome attention has led many yacht owners to flee Italy’s marinas for friendlier foreign ports, from Corsica and the Cote d’Azur in the west to Croatia, Slovenia, Montenegro and Greece in the east. Others are heading southwards, to Malta and Tunisia – where they can access their boats on low-cost budget flights from Italy for a fraction of the tax bill they might otherwise face.

Not surprisingly, a lot of middle-class people are suffering because of lost business.

Arriverderci, Polizia Fiscale!

Around 30,000 yachts have fled Italy this year, costing €200 million in lost revenue from mooring fees, port services and fuel sales, according to Assomarinas, the Italian Association of Marinas. “We’ve lost 10 to 15 per cent of our regular customers,” said Roberto Perocchio, the president of Assomarinas. “This is the worst crisis in Italian boating history. The authorities are using scare tactics and creating a climate of fear.” …Plans for a further 30,000 new berths have been put on hold. Business is down by more than a third in many marinas, with some half empty compared to last summer. “We’ve lost 40 boats in the last few months, all between 20 and 25 metres long,” said Giovanni Sorci, director of a marina at Rimini, on the Adriatic coast. “Most went to Slovenia – in fact it is so popular that there’s now barely a berth to be had there. …At Porto Rotondo in Sardinia, Giacomo Pileri, the general manager of a 700-berth marina, said at least 150 boats had fled to nearby Corsica. …A steep new tax of up to €700 per day on the largest yachts mooring in Italian ports, introduced by the Monti government in December, was watered down in March to exclude foreign-owned boats. But it has further fuelled the exodus of Italian boats abroad.

And it’s not just yachts that are being targeted by a revenue-hungry government. Here’s a remarkable report from Reuters on what’s happened to the luxury car market (h/t: suyts space).

Italians spooked by rising car taxes and highly publicized tax fraud spot checks cut back their purchases of Fiat’s high-end sports car brands Ferrari and Maserati in the first quarter of 2012, an industry body said on Tuesday. Ferrari sales slumped 51.5 percent, in Italy, and Maserati sales plummeted by 70 percent, said Italian car dealers group Federauto in a statement. Prime Minister Mario Monti’s government has stepped up its fight on tax evasion with spot checks on supercar drivers, as well as higher taxes on large cars. “These figures show how the choices made by the government are literally terrorizing potential clients,” said Federauto chairman Filippo Pavan Bernacchi.

I assume those awful sales numbers are partly because the economy is weak, but well-to-do Italians obviously don’t want to attract attention from the tax police.

The moral of the story is that Italy’s government should try a new strategy. The politicians need to understand that taxpayers don’t meekly acquiesce, like lambs in a slaughterhouse.

• When tax rates increase, sometimes people engage in tax avoidance, lowering their tax liabilities legally.
• When tax rates change, sometimes people choose to alter their levels of work, saving, and investment.
• And when tax rates go up, sometimes people resort to illegal steps to protect themselves from the tax authority.

Heck, even the folks at the International Monetary Fund (a crowd not known for rabid free-market sympathies) have acknowledged that excessive taxation is the leading cause of the shadow economy.

So rather than trying to squeeze more blood from an unwilling stone, maybe the Italian government should junk the current tax code and adopt a simple and fair flat tax.

To conclude, here’s Part II of the three-part video series on the Laffer Curve, which focuses on historical evidence (including what happened to the yacht market in the U.S. when politicians went after the “rich”).

Sort of makes you wonder why politicians never seem to learn from their mistakes – especially when thoughtful people like me give them free lessons about the relationship between tax rates, tax revenue, and taxable income.

P.S. While I’m very happy to defend tax evasion in cases where government is excessive, venal, and/or corrupt, I suspect that Italians would evade even if they lived under a Hong Kong-style fiscal regime. If that ever happened (don’t hold your breath), even I wouldn’t get upset about crackdowns on yacht owners and Maserati drivers who aren’t declaring any income.

Indeed, I just appeared on Fox Business Network to talk about a new study showing an exodus from Maryland following the imposition of some class warfare tax hikes (which simply confirms earlier analysis showing the same trend), and at no point was there any discussion about whether the state’s taxpayers had some sort of moral obligation to stay put and get fleeced by Obama-style tax policy.

But when a successful taxpayer decides to move from the United States to Singapore, there’s a different reaction. All of a sudden, that person becomes selfish, greedy, and unpatriotic.

Even though I’ve defended the right of people to protect themselves from greedy governments by moving across national borders, I can sort of understand why people tend to react in a negative fashion.

Simply stated, we self-identify as Americans (if we have any patriotism) and don’t have instinctive loyalty to individual states. So we don’t think there’s anything wrong when an American flees from New Jersey to Florida. But it rubs us the wrong way when American citizens renounce their citizenship. Even when we rationally understand that they are making the best possible choice for their families.

This issue has become hot again now that another big name has decided to escape the IRS, and I discuss the issue on Fox News. In my first soundbite, I warn that expatriation is driven by a combination of punitive tax policy and a growing perception that America will suffer a Greek-style fiscal crisis thanks to poorly designed entitlement programs.

At this point, I can’t resist a detour. Shepard Smith goofed big time when he remarked that taxpayers would “lose” because of Denise Rich’s expatriation. Nonsense. If my neighbor puts locks on his doors and bars on his windows and no longer is being robbed, that doesn’t impose any cost on me. Indeed, I’m probably helped because thieves may get discouraged and decide to live honestly instead. And even if thieves now target me because my neighbor’s house is less vulnerable, that’s not the fault of my neighbor. We should always remember that the blame should fall on the thieves. Or, in this case, the politicians. As if there’s a difference.

Now, back to the main topic, Fox did the same report at a different point in the day, but they used a different soundbite. In my second appearance (only an excerpt, not the entire segment), I explain that it doesn’t make sense to drive the geese with the golden eggs out of the country.

Interestingly (or perhaps I should say disturbingly), even France has a better approach to tax expatriation than the U.S. government. That tells us something about how American policy has veered in the wrong direction.

The big picture, as I’ve noted before, is that we want people to have the freedom to cross borders as a means of disciplining politicians who will over-tax and over-spend if they think taxpayers have no choice but to meekly submit.

Which is why all of us should be very happy that tax havens exist. Imagine how high taxes would be if politicians didn’t have to worry that people had escape options.