Back to Top

Center for Freedom and Prosperity (CF&P)

Subscribe to Center for Freedom and Prosperity (CF&P) feed
Updated: 2 hours 55 min ago

The Economic Effects Of Proposed Changes to the Tax Treatment of Capital Gains

Fri, 08/27/2021 - 3:24am
The Economic Effects Of Proposed Changes to the Tax Treatment of Capital Gains

[PDF Version]

August 2021

John W. Diamond
Director, Center for Public Finance
Edward A. and Hermena Hancock Kelly Fellow in Public Finance
Rice University’s Baker Institute for Public Policy

Executive Summary

In this paper, we examine how rising inflation would exacerbate the economic effects of enacting a proposal by the Biden Administration and various legislators to tax long term capital gains at ordinary income tax rates for those with taxable income above $1 million and tax unrealized gains at the time of death (i.e., repealing step up of basis) for single (joint) filers with more than $1 million ($2 million) in unrealized gains.

First, rising inflation would exacerbate the negative economic effects associated with taxing capital gains income at a higher rate and repealing step up in basis. If inflation were to increase by just one percentage point—i.e., the inflation rate in the economy is on average ~3% instead of 2% (2% is roughly the U.S. average over the past two decades.)—then the negative economic effects associated with taxing capital gains at a higher rate and repealing step up in basis would be 1.5 times higher than the announced projections of models already in the public debate that do not account for the effects of worse than expected inflation.[1]  

Second, rising inflation makes it more likely that this proposal would result in the government taxing real losses as if they were gains.  Even non-exotic assets that are commonly assumed to be profitable—like the S&P 500 over the last 20 years—would be reduced to just barely breakeven after-tax if this proposal were to become law. And this breakeven result assumes actual inflation levels in the economy over the past two decades.  If, however, inflation were to increase by even just 1% as many expect, an investment in the S&P500 would deliver a real after-tax loss if the proposal were to become law.  

Third, higher inflation would exacerbate existing distortions in the allocation of capital across sectors, such as pushing investments into owner-occupied housing and out of other corporate and non-corporate investments.

Finally, this proposal is the wrong prescription for the ails of the current economy. The cure for the slow growth economy that existed before the pandemic was increased innovation and diffusion of new technologies. Higher capital gains taxes would reduce innovation and slow the diffusion of new technology. Higher inflation would make this approach more detrimental to the future growth of the economy. 

I. Introduction

In this paper, we examine the economic effects of enacting proposals to increase the taxation of long-term capital gains. The proposals would tax long-term capital gains at ordinary income tax rates for those with taxable income above $1 million and tax unrealized gains at the time of death (i.e., repealing step up of basis) for single (joint) filers with more than $1 million ($2 million) in unrealized gains. As under current law, capital gains from the sale of a primary residence would receive an exclusion of up to $250,000 ($500,000) for single (joint) filers.

We begin by discussing the structure of capital gains taxes. We then describe how inflation will likely exacerbate the negative economic effects of these policy changes. We present simulation results of the proposal analyzed in this study, and examine how inflation may affect the negative economic effects of the policy changes. In the final section, we offer some general conclusions.

II. Capital Gains Taxation

A capital gain is the difference between an estimate of the fair market value and the adjusted basis of an asset. The adjusted basis is the original cost of the asset (cost-basis) adjusted for changes in the asset’s value due to depreciation (which would decrease the value of an asset) or improvements to the asset (which would increase the value of the asset).  If an asset is transferred to another person or entity as a gift, then the value of the asset for calculating the capital gain is the carryover basis, which is equal to the adjusted basis at the time of the transfer of the asset. If a person or entity inherits an asset at the time of the donor’s death, then the value of the asset is equal to an estimate of the fair market value of the asset at the time of donor’s death (referred to as a step up in basis or stepped-up basis).            

A tax on capital gains is due at the time an asset is sold. Thus, under current law, capital gains taxes are deferred until realization instead of being taxed on an annual basis similar to many other types of income. Taxation at the time of realization and the treatment of inherited assets implies that when an asset is inherited, and the value of the asset is stepped-up due to tax paid pursuant to the estate tax regime, there is no tax on the existing capital gain (i.e., the difference in the fair market value and the adjusted basis at time of death). Repealing step up in basis would subject the existing capital gain to taxation at the time of death if the capital gains tax is imposed immediately regardless of whether the inheritor sold the asset. An alternative is to tax the asset at the time of sale with the value of the asset equal to the adjusted basis. The proposal examined in this paper assumes the tax occurs at the time of death regardless of whether the asset is sold. Note that in this case determining the value of many assets is difficult and liquidity issues can arise if the inheritor cannot afford to pay the tax from liquid assets. However, one of the most important issues is that capital gains are not adjusted for inflation and thus much of the taxable gains are not reflective of a real increase in wealth. Taxing nominal gains will reduce the after-tax rate of return and lead to less investment, especially in periods of higher inflation.

III. Inflation And Investment

Inflation increases nominal capital gains but these gains do not represent a real gain in wealth. The fact that the United States does not index capital gains for inflation implies that taxing the nominal value will reduce the real rate of return on investment, and may do so by enough to result in negative rates of return in periods of moderate to high inflation. Lower real rates of return reduce investment, the size of the capital stock, productivity, growth in wage rates, and labor supply.

Figure 1 shows inflation data from 1915 to 2021. In the first six months of this year, inflation has increased in each month. The latest data in June of 2021 shows that prices are increasing at the highest rate since August 2008. While a return to the runaway inflation of the 1970s is unlikely, risks of significant inflationary pressures in the short and medium term seem imminent. The risks include sizable new fiscal stimulus in the form of an infrastructure bill and more social spending in an omnibus budget bill, continued bottlenecks in production, massive budget deficits, the inability to adopt sustainable budget reforms, reduced labor force participation rates, and increases in inflation expectations. In addition, the Federal Reserve’s new policy of average inflation targeting may lead to higher price inflation in the short and medium term. It is likely that the United States will experience higher levels of inflation than in the past two decades on average (which averaged 2.2 percent). The negative macroeconomic effects of repealing step up of basis and raising capital gains tax rates are likely to be larger than expected because of this issue. Models used to simulate the economic effects of increasing capital gains tax rates understate the decline in investment because they do not account for the effects of inflation.

As an example of the impact of inflation, consider an investment of $1000 in year 2000, the $1000 investment would have to grow to $1577.79 in 2021 to maintain the same buying power as in 2000 given the actual price level increases over the 21-year period.[2] The nominal gain of $577.79 offsets the loss in purchasing power that occurs as prices increase. This implies a zero real before-tax rate of return on the investment from 2000 to 2021. Imposing a 43.4 percent tax on nominal capital gains in year 2021 would reduce the nominal gain from $577.79 to $327.03, and thus the real after-tax rate of return on the investment is -5.2 percent. In this specific case, indexing nominal capital gains for inflation and allowing for stepped-up basis in year 2021 yields an after-tax real return equal to zero.

The same general conclusion holds using actual investment data. For example, a $100 investment in the S&P 500 in 2000 would have yielded a nominal return of $294.90 ($394.90 – $100) by 2021. This implies an average before-tax nominal return of 6.8 percent from 2000 to 2021. Given that inflation averaged 2.2 percent from 2000 to 2021, the inflation-adjusted before-tax real return would be $150.29, or a 2 percent average before-tax real return. Imposing a capital gains tax of 43.4 percent in 2021 yields an after-capital-gains-tax real return of only 0.7 percent. Note the S&P returns also include dividend payments that are subject to tax each year if held in taxable accounts, thus it is likely that the after-tax real return in this example would be negative or close to zero given that dividends account for a significant fraction of total returns on the S&P 500.[3] This provides a solid case for allowing step up in basis and for preferential tax rates for capital gains since the tax code does not index capital gains for inflation. The potential for rising inflationary pressures makes the case stronger.        

Accounting for inflation in the model would exacerbate other existing distortions as well. For example, higher inflation would increase existing distortions in the allocation of capital across sectors. An increase in the capital gains tax rate or repealing step up of basis will make investments in owner-occupied housing more attractive relative to other corporate and non-corporate investments. This occurs because the first $250,000 ($500,000) of capital gains in owner-occupied housing are exempt from taxation, and current proposals extend this preferential treatment. Poterba (1980) shows that higher levels of inflation lowered the cost of housing services given the tax treatment of mortgage interest and capital gains in the 1970s. Feldstein (1980) argues that higher inflation increases the real price of land relative to corporate capital. In addition, the use of debt to buy housing assets acts as a potentially important hedge to expected inflation, since house prices increase with inflation but the value of nominal debt is constant (while the dollars used to pay off that debt can purchase less goods and services). Thus, models that only look at relative price effects (e.g., real models that do not explicitly include inflation) are likely to understate the negative economic effects related to the level of investment as well as the misallocation of investment across assets during periods of increasing inflation.

Another argument in favor of continued preferential treatment of capital gains and other capital income taxes relates to the state of the economy since the Great Recession. Ramey (2020) discusses the state of the United States economy since the Great Recession and specifically examines the slow recovery and historically low interest rates. Ramey concludes that by late 2019 (prior to the pandemic[4]) unemployment was relatively low and investment was relatively high – which is inconsistent with a period of little or no economic growth due to a lack of investment because of increased saving (i.e., secular stagnation).

Thus, increasing aggregate demand to increase long run economic growth is unlikely to be a successful policy response in the pre-pandemic economy (although this was not the case immediately after the onset of the pandemic). Instead, Ramey argued that the economy was in a period of “technological lull” and that the policy response should focus on increasing innovation and faster diffusion of new technologies. Increasing taxes on the return to investment (and specifically capital gains) is unlikely to achieve either goal suggested by Ramey, even if tax increases target the very wealthy. While the pandemic justified the use of demand side stimulus in the short run, as the economy continues to recover, we will need to alter our fiscal policy response to focus on increasing innovation and faster diffusion of new technologies. Increasing capital gains taxes will do exactly the opposite by reducing investment and shifting investment into owner-occupied housing rather non-housing assets, which would reduce innovation and the diffusion of new technologies. These impacts will be even more damaging during periods of relatively high inflation.   

 IV. Simulation Results

We use a computable general equilibrium model of the U.S. economy to simulate the economic effects of these policy changes assuming that additional revenues increase non-social security transfers. This section provides a brief description of the model used in this analysis.[5] The model is a dynamic, overlapping generations, computable general equilibrium model of the U.S. economy that focuses on the macroeconomic and transitional effects of tax reforms.

The model is a general equilibrium model in which households act to maximize utility over their lifetimes, and firms act to maximize firm value, with behavioral responses dictated by parameter values taken from the literature; these responses include changes in consumption, labor supply, and changes in the time path of investment by firms that take into account the costs of adjusting their capital stocks. Households and firms are characterized by perfect foresight. By construction, the model tracks the responses to a tax policy change every year after its enactment and converges to a steady-state long-run equilibrium characterized by an exogenous growth rate. Thus, the model tracks both the short-run and long-run responses to a tax policy change. All values in the model are real values (i.e., only relative values matter) as there is no inflation in the model.

The conventional revenue effect of repealing step up in basis and raising capital gains tax rates on returns with over $1 million in earned income is assumed to be $212.8 billion over 10 years (Watson et al., 2021). The simulation results in Table 1 show that GDP falls by roughly 0.1 percent 10 years after reform and 0.3 percent 50 years after reform, which implies per household income declines by roughly $310 after 10 years and $1,200 after 50 years. The long run decline in GDP is due to a decline in the capital stock of 1.0 percent and a decline in total hours worked of 0.1 percent. Aggregate consumption falls by 0.1 percent in the long run. Initially hours worked declines by 0.1 percent in a full employment economy; if instead labor hours worked per individual were held constant, this would be roughly equivalent to a loss of approximately 209,000 jobs in that year. Real wages decrease initially by 0.2 percent and by 0.6 percent in the long run.

However, as noted above, the model fails to account for how inflation would affect the taxation of capital gains. Assuming the inflation rate is one percentage point higher on average (3.2 percent instead of 2.2 percent) implies that a rough estimate of the capital gains tax rate on nominal plus real returns would be 1.5 times higher than the real increase in the capital gains tax rate used in the standard model with no inflation. Table 2 shows the results of adjusting the capital gains tax rates by a factor of 1.5 to account for the effects of inflation.  In this case, GDP falls by roughly 0.1 percent 10 years after reform and 0.4 percent 50 years after reform, which implies per household income declines by roughly $453 after 10 years and $1,700 after 50 years. The long run decline in GDP is due to a decline in the capital stock of 1.4 percent and a decline in total hours worked of 0.1 percent. Aggregate consumption falls by 0.1 percent in the long run. Initially hours worked decline by 0.1 percent in a full employment economy; if instead labor hours worked per individual were held constant, this would be roughly equivalent to a loss of approximately 296,000 jobs in that year. Real wages decrease initially by 0.3 percent, by 0.4 percent five years after enactment, and by 0.9 percent in the long run. Higher levels of inflation would lead to larger negative economic effects.

While these results are informative, current economic conditions in the US and the rest of the world imply additional analysis may add important insights. Particularly given the large debts and deficits in the United States and the rest of the world, the easy money stance of monetary authorities, and the recent data showing increases in inflationary pressures in the economy. Given the current inability of policymakers to deal with long-term structural budget deficits, it seems likely that monetary authorities will continue to target higher levels of inflation than otherwise necessary to stabilize and support the economy.

V. Conclusion

In this paper, we discuss the economic effects of enacting a proposal by the Biden Administration to tax long term gains at ordinary income tax rates for those with taxable income above $1 million and tax unrealized gains at the time of death (i.e., repeal step up of basis) for single (joint) filers with more than $1 million ($2 million) in unrealized gains. The current exclusion of $250,000 ($500,000) of the capital gain on the sale of a primary residence for single (joint) filers would remain. We discuss the importance of considering how current economic conditions may exacerbate the problems associated increasing the taxation of capital gains. In particular, rising inflation would exacerbate the negative economic effects associated with taxing capital gains income at a higher rate as well as repealing step up in basis, including the decrease in investment, the misallocation of capital between owner-occupied and other assets, and the portfolio of investors. It also exacerbates the differential treatment of current and future consumption, that is it discourages saving, that occurs under an income tax. Higher levels of inflation (above a one percentage point increase) would increase the negative economic effects of raising capital gains tax rates and repealing step up in basis by 1.5 times.

[1] For example, the projections in EY (2021) and Watson et al. (2021).

[2] All data on inflation and returns on the S&P 500 in this section is from “$1,000 in 2000 → 2021 | Inflation Calculator.” Official Inflation Data, Alioth Finance, 19 Jul. 2021, https://www.officialdata.org/us/inflation/2000?amount=1000.

[3] From 1990 to 2015 total returns on the S&P 500 were 988.8 percent while returns from stock price increases were 517 percent according to Bespoke (https://www.bespokepremium.com/think-big-blog/sp-500-total-return-vs-price/).  This implies that dividends provided almost half of the total returns from 1990 to 2015.

[4] The pandemic led to increased unemployment and a decline in investment and justified increases in aggregate demand to support the economy. However, the economic effects of the pandemic are dissipating as shown by a reduction in the unemployment rate closer to pre-pandemic levels and a significant rebound in investment. Thus, the appropriate policy response is shifting back towards increasing innovation and the diffusion of new technology and away from supporting aggregate demand.

[5] Zodrow and Diamond (2013) provide details for the full model.

References

EY, 2021. “Repealing step-up of basis on inherited assets: Macroeconomic impacts and effects on illustrative family businesses.” https://www.fb.org/files/FBETC_Stepped-Up_Basis_Report_2021.

Feldstein, Martin, 1980. “Inflation, Tax Rules, and the Prices of Land and Gold.” Journal of Public Economics, Volume 14, Issue 3, 309-317.

Poterba, James M., 1980.  “Inflation, Income Taxes, and Owner-Occupied Housing.” NBER Working Paper No. w0553. NBER, Boston, Massachusetts.

Ramey, Valerie, 2020. “Secular stagnation or technological lull?” Journal of Policy Modeling, 42, issue 4, 767-777.

Watson, Garrett, Huaqun Li, Alex Durante and Erika York, 2021 “Details and Analysis of Tax Proposals in President Biden’s American Families Plan.” Tax Foundation, May 6, 2021, https://taxfoundation.org/american-families-plan.

Zodrow, George R., and John W. Diamond, 2013. “Dynamic Overlapping Generations Computable General Equilibrium Models and the Analysis of Tax Policy.” In Dixon, Peter B., and Dale W. Jorgenson (eds.), Handbook of Computable General Equilibrium Modeling,743–813. Elsevier Publishing, Amsterdam, Netherlands.

———
Image credit: Nick Youngson | Pix4free | CC BY-SA 3.0.

The (Accelerated) Europeanization of America

Thu, 08/26/2021 - 12:59pm

periodically warn that the United States is on a path to become a European-style welfare state.

That sounds good to some people since it implies lots of goodies paid for by other people.

So I always explain that there’s a downside. The economic data clearly show that there’s been less growth in Europe and this has real-world consequences.

This is why it’s so depressing that Joe Biden has a radical agenda of higher tax rates and much bigger government.

He wants us to copy an approach that has produced inferior outcomes.

The editorial page of the Wall Street Journal has been sounding the alarm.

In a recent column, Professor Josef Joffe contemplates the impact of more dependency on America’s economy.

America is the land of “predatory capitalism,” German chancellor Helmut Schmidt liked to say. …President Biden’s tax plans might soon make Europe look like a capitalist heaven by comparison. …The middle class will pay the bill. …Reversing course won’t be easy because gifts, once given, are hard to take back, whether in the U.S. or in Europe. …As government expands and hands out more goodies, it also tightens its grip on the economy. It shrinks the private sector, the engine of U.S. wealth creation. It is no accident that Europe has grown more slowly over the past 40 years as government spending, regulations and taxes have increased.

Prof. Joffe’s point about the durability of entitlements (“once given, are hard to take back”) is vitally important.

This is why it is so important to block Biden’s per-child handouts.

Dan Henninger made similarly important points a couple of months ago.

The club Mr. Biden is joining…is one the U.S. has stayed out of since World War II. That is the club known as the European welfare state. It is the government-directed system of lifetime paternalism built up by the nations of Western Europe after 1945. …Public welfare has never been America’s reason for being, notwithstanding our substantial spending on social support programs. Despite the entitlement creations of FDR’s New Deal and LBJ’s Great Society, the U.S., unlike Europe, has remained a nation driven and led by capitalist initiative. For current-generation Democrats, that fact is anathema. …The March stimulus bill already had one foot inside the economic club of Europe’s door.

For what it’s worth, I’m not quite as positive about the United States as Henninger. Our welfare state is a significant burden, though he is right that it is smaller than the welfare states in Europe.

Let’s not quibble about that point, though, because Henninger has another observation that is spot on.

Biden’s agenda is a recipe for big tax increases on the middle class.

Europe became famous for its perpetual-motion tax machine, which suppressed the continent’s entrepreneurial instincts. Besides income taxes, Europe relies heavily on the collection of notoriously high value-added taxes…total tax revenue from all governments in the U.S. as a percentage of GDP is 24%, compared with an average of more than 40% in seven European nations… Those European tax levels will never fall. Their governments gotta have the money. Mr. Biden purports that his proposed $3 trillion in tax increases hit only corporations and “the wealthiest.” But if his entitlements become law, European levels of middle-class taxation—perhaps a VAT or carbon tax—are inevitable. Mr. Biden’s plans to increase Internal Revenue Service audits lay the groundwork for that.

Amen.

Honest folks on the left openly admit that this is true.

I’ll close with two final points.

First, it would be a mistake to copy Europe’s welfare states, but there are worse things that could happen. Those nations may lag the United States, but they are generally richer than other parts of the world.

But I’m not sure “better than Venezuela” is a persuasive selling point.

Second, because of demographic change and poorly designed entitlement programs, we’re already on a path to become a European welfare state.

But I’m not sure “let’s drive faster over the cliff” is a persuasive selling point.

———
Image credit: Sébastien Bertrand | CC BY 2.0.

Honest Leftists: “Your Money Is Our Money”

Wed, 08/25/2021 - 12:57pm

What motivates the tax-and-spend crowd? Why do they want high tax rates and a big welfare state?

The most charitable answer is that they don’t want anyone to suffer from poverty and they mistakenly think big government can solve problems.

But there’s another answer that may be more accurate.

As Margaret Thatcher observed about three decades ago, it seems that many folks on the left are primarily motivated by jealousy and resentment against their successful neighbors.

I realize I’m making an ugly accusation. But in my defense, I’m simply reporting what they write. Or what they admit to pollsters.

And now we have another example. Christine Emba of the Washington Post opined earlier this year that politicians should somehow put a ceiling on how much wealth any American can create.

The most shocking thing about ProPublica’s extensive report on the leaked tax returns of the super-rich wasn’t what the report contained — it was the fact that we’re barely shocked anymore. …we, as a society, let them do it. …every billionaire is a policy failure. But more than that, every billionaire is a failure of our own moral imagination. …Should we tax capital gains at a higher rate? Raise the corporate tax rate? Create a wealth tax? (I’d vote yes to all three.) But these debates are small bore. …Instead of debating tweaks at the edges of our tax system, what we should be…focused less on what is “allowed”… Such a philosophy already exists. It’s called limitarianism. …Just as there is a poverty line under which we agree that no one should fall, limitarianism holds that one can construct a “wealth line” over which no one should rise, and that the world would be better off for it.

Ms. Emba doesn’t explain how her “limitarian” policy might be implemented.

But since she’s embraced a wealth tax, the simple way to achieve her goal would be adding a 100 percent rate to that levy for any taxpayers who create so much wealth for society that they wind up with assets of $1 billion.

In case you think I’m joking, here’s part of her conclusion.

…the prospect of having “only” $999 million dollars would not stop innovators in their tracks. And even if it did stop some, would the trade-off be so bad?

I’ll close this column by answering her rhetorical question.

The trade-off wouldn’t just be bad, it would be terrible. A wealth tax (or any other possible policy to achiever her “limitarian” utopia) necessarily would reduce saving and investment.

And that would mean less innovation, slower (or negative) productivity growth, and wage stagnation (or decline).

Which is a good excuse to recycle my Eighth Theorem of Government.

Simply stated, here’s little reason to think that the folks who hate their successful neighbors actually care about their poor neighbors.

P.S. The New York Times also has published a column embracing the resentment-fueled limitarian notion.

P.P.S. Plenty of folks on the left explicitly argue that government has first claim on income. And that you’re the beneficiary of a favor if you get to keep some of what you earn. Once again, I’m not joking.

What Happens When Politicians Get Too Greedy?

Tue, 08/24/2021 - 12:40pm

I’ve been asked why I periodically mock politicians. The simple answer is that they often deserve our scorn.

It’s not that they’re evil or bad people, but their incentive structure generally leads them to make shallow, short-run, and self-serving decisions.

Such as setting tax rates so high that they even backfire on politicians (i.e., by discouraging economic activity and thus producing less revenue).

It looks like we may have a new example of this phenomenon.

In an article for the Las Vegas Review-Journal, Richard Velotta reports on Chicago’s bungled attempt to attract a big-name casino.

If everything had gone according to plan, we would all be buzzing this week about which company would have the best opportunity to build a casino resort in Chicago. But it hasn’t gone according to plan. …companies have stated that they won’t be bidding. Four of the largest Strip operators — MGM Resorts International, Las Vegas Sands Corp., Wynn Resorts Ltd. and Caesars Entertainment Inc. — have indicated they have no plans to bid on Chicago. …The biggest issue for Las Vegas operators looking at Chicago is the tax rate Illinois would impose on gross gaming revenue from the Chicago resort — 40 percent. By comparison, the maximum rate in Nevada is 6.75 percent.

I guess we shouldn’t be surprised that Illinois politicians would over-tax something.

But I’m amazed they thought they could impose a tax six times higher than the one in Nevada without any negative consequences.

No wonder the big-name casinos aren’t submitting bids. After all, their job is to generate revenue for shareholders, not loot for politicians.

Though there is a silver lining to this dark cloud.

As mentioned in the story, Illinois politicians apparently did realize it wouldn’t work to have a tax rate more than ten times higher than the one in Nevada.

At one time, Illinois floated a tax rate of around 70 percent, but gaming companies persuaded the Illinois Legislature to modify that.

How generous of Illinois politicians to forgo a 70 percent tax rate!

Reminds me of the former French president who “mercifully” chose to limit personal taxes to 80 percent of household income.

P.S. There is a compelling case that Chicago is America’s most poorly governed city. But that’s hard to decide because there’s strong competition from places such as New YorkSeattleMinneapolisDetroit, and San Francisco.

P.P.S. In this case, though, it’s a state law that is causing the problem. So we should ask whether Illinois is America’s most poorly governed state. There’s certainly evidence for that claim, but New YorkCalifornia, and New Jersey also would be in the running.

———
Image credit: Allen McGregor | CC BY 2.0.

A Primer on Free Enterprise vs. Big Government

Mon, 08/23/2021 - 12:25pm

I’ve made the case for capitalism (Part IPart IIPart IIIPart IV, and Part V) and the case against socialism (Part IPart II, and Part III), while also noting that there’s a separate case to be made against redistribution and the welfare state.

This video hopefully ties together all that analysis.

If you don’t want to spend 10-plus minutes watching the video, I can sum everything up in just two sentences.

  1. Genuine socialism (government ownershipcentral planning, and price controls) is an utter failure and is almost nonexistent today (only in a few basket-case economies like Cuba and North Korea).
  2. The real threat to free enterprise and economic liberty is from redistributionism, the notion that politicians should play Santa Claus and give us a never-ending stream of cradle-to-grave goodies.

For purposes of today’s column, though, I want to focus on a small slice of the presentation (beginning about 2:00).

Here’s the slide from that portion of the video.

I make the all-important point that profits are laudable – but only if they are earned in the free market and not because of bailoutssubsidiesprotectionism, or a tilted playing field.

This is hardly a recent revelation.

I first wrote about this topic back in 2009.

And many other supporters of genuine economic liberty have been making this point for much longer.

Or more recently. In a new article for City Journal, Luigi Zingales emphasizes that being pro-market does not mean being pro-business.

The first time I visited the Grand Canyon many years ago, I was struck…by a sign that said, “Please don’t feed the wild animals.” Underneath was an explanation: you shouldn’t feed them because it’s not good for them. …We should post something of this kind on Capitol Hill as well—with the difference being that the sign would read, “Please don’t feed the businesses.” That’s not because we don’t like business. Quite the opposite: we love business so much that we don’t want to create a situation where business is so dependent on…a system of subsidies, that it is unable to compete and succeed… This is the…difference between being pro-market and being pro-business. If you are pro-business, you like subsidies for businesses; you want to make sure that they make the largest profits possible. If, on the other hand, you are pro-markets, you want to behave like the ranger in the Grand Canyon: …ensuring that markets remain competitive and…preventing businesses from becoming too dependent on a crony system to survive.

Amen.

Cronyism is bad economic policy because government is tilting the playing field and luring people and businesses into making inefficient choices.

But I also despise cronyism because some people mistakenly think it is a feature of free enterprise (particularly the people who incorrectly assume that being pro-market is the same as being pro-business).

The moral of the story is that we should have separation of business and state.

P.S. There’s one other point from Prof. Zingales’ article that deserves attention.

He gives us a definition of capitalism (oops, I mean free enterprise).

We use the term “free markets” so often that we sometimes forget what it actually means. If you look up “free markets” in the dictionary, you might see “an economy operating by free competition,” or better, “an economic market or system in which prices are based on competition among private businesses and not controlled by a government.”

For what it’s worth, I did the same thing for my presentation (which was to the New Economic School in the country of Georgia).

Here’s what I came up with.

By the way, the last bullet point is what economists mean when they say things are “complementary.”

In other words, capital is more valuable when combined with labor and labor is more valuable when combined with capital – as illustrated by this old British cartoon (and it’s the role of entrepreneurs to figure out newer and better ways of combining those two factors of production).

One takeaway from this is that Marx was wrong. Capital doesn’t exploit labor. Capital enriches labor (just as labor enriches capital).

———
Image credit: Vinícius Pimenta | Pexels License.

Economic Backsliding by China, Part I

Sun, 08/22/2021 - 12:30pm

Long-time readers know that I periodically pour cold water on the notion that China is an economic superstar.

Yes, China did engage in some economic liberalization late last century, and those reforms should be applauded because they were very successful in reducing severe poverty.

But from a big-picture perspective, all that really happened is that China went from terrible policy (Maoist communism) to bad policy (best described as mass cronyism).

Economic Freedom of the World has the best data. According to the latest edition, China’s score for economic liberty rose from a horrible 3.69 in 1990 to 6.21 in 2018.

That’s a big improvement, but that still leaves China in the bottom quartile (ranking #124 in the world). Better than Venezuela (#162), to be sure, but way behind even uncompetitive welfare states such as Greece (#92), France (#58), and Italy (#51).

And I fear China’s score will get even worse in the near future.

Why? Because it seems President Xi is going to impose class-warfare tax increases.

In an article for the Guardian, Phillip Inman shares some of the details.

China’s president has vowed to “adjust excessive incomes” in a warning to the country’s super-rich that the state plans to redistribute wealth… The policy goal comes amid a sweeping push by Beijing to rein in the country’s largest private firms in industries, ranging from technology to education. …Xi…is expected to expand wealth taxes and raise income tax rates… Some reforms could be far reaching, including higher taxes on capital gains, inheritance and property. Higher public sector wages are also expected to be part of the package.

And here are some excerpts from a report by Jane Li for Quartz.

Chinese president Xi Jinping yesterday sent a stark message to the country’s wealthy: It is time to redistribute their excessive fortunes. …Another reason for the Party’s focus on outsize wealth is to reduce rival centers of power and influence in China, which has also been an impetus for its crackdown on the tech sector… China already has fairly high income tax rates for its wealthiest. That includes a top income tax rate of 45% for those who earn more than 960,000 yuan ($150,000) a year… Upcoming moves could include…a nationwide property tax.

These stories may warm the hearts of Joe Biden and Bernie Sanders, but they help to explain why I’m not optimistic about China’s economy.

If you review the Economic Freedom of the World data, you find that China is especially bad on fiscal policy (“size of government”), ranking #153.

That’s worse than China does even on regulation.

Yet the Chinese government is now going to impose higher taxes to fund even bigger government?!?

Is the goal to be even worse than Venezuela and Zimbabwe?

P.S. Many wealthy people in China (maybe even most of them) achieved their high incomes thanks to government favoritism, so there’s a very strong argument that their riches are undeserved. But the best policy response is getting rid of industrial policy rather than imposing tax increases that will hit both good rich people and bad rich people.

P.P.S. I’ve criticized both the OECD and IMF for advocating higher taxes in China. A few readers have sent emails asking whether those international bureaucracies might be deliberately trying to sabotage China’s economy and thus preserve the dominance of Europe and the United States. Given the wretched track records of the OECD and IMF, I think it’s far more likely that the bureaucrats from those organizations sincerely support those bad policies (especially since they get tax-free salaries and are sheltered from the negative consequences).

———
Image credit: Foreign and Commonwealth Office | CC BY 2.0.

Policy Lessons from Marijuana Legalization

Sat, 08/21/2021 - 12:09pm

Like most libertarians, I favor drug legalization for the simple reason that people should have control over their own bodies, even if they’re doing something stupid.

But I’ve never claimed legalization is a zero-cost policy. Instead, as I wrote in 2018, “I think the social harm of prohibition is greater than the social harm of legalization.”

This flowchart makes the point about why the War on Drugs is foolish.

Apparently, voters and politicians are beginning to get the message. More and more states have moved in the direction of legalization.

Have the results been positive?

In an article for National Review, Aron Ravin has a very critical assessment of legalization.

…the old-fashioned, party-pooper folk with whom I find myself sympathizing tend to fall back on one point: Weed is unhealthy. Since 2002, the proportion of Americans twelve and older who reported having used marijuana in the last year has increased by over 60 percent. …Pot smoke can cause lung cancer in the same way tobacco can, and secondhand marijuana smoke may have even more carcinogens than cigarettes. Marijuana smoke can also compromise the immune system, and there’s a growing amount of scientific literature indicating a significant correlation between any form of cannabis consumption and psychosis.

As a non-user, I’m very sympathetic to the health argument.

Regularly drawing any kind of smoke into one’s lungs simply can’t be healthy.

That being said, regularly eating big mounds of french fries also can’t be healthy, but that’s not an argument for criminalization.

Ravin then asserts that legalization is a failure because there are still black markets.

Advocates claimed that legalization would cripple the black market and weaken Mexican cartels. They argued that legalizing weed would reduce children’s access to it, as licensed distributors would have a greater incentive to card than criminal dealers, and that users would actually be healthier, as the government would be better able to regulate and inspect the stuff they were smoking. …Top that all off with the Cato Institute’s promises of billions of dollars in new tax revenue and billions more in law-enforcement expenses saved, and you’d have to be silly to disagree. But the libertarians got it wrong.

And he has some good evidence about the continued presence of illegal sales.

…the predicted benefits rested on one assumption: that legal weed would render criminal dealers obsolete much in the same way that repealing prohibition weakened bootlegging mobsters. But that has not happened. It has been nearly a decade since Colorado became the first state to legalize recreational marijuana, and the state is dealing with a larger black market than ever before. …Upwards of 80 percent of all of California’s marijuana sales go through the black market. Massachusetts (70 percent) isn’t faring much better, and Nevada is growing desperate. …Legal dispensaries simply cannot match the low prices offered by their criminal competition when they’re being stifled by so much regulation and taxation, legalization advocates say. Yet weren’t generating tax revenue and protecting users major arguments for legalization in the first place?

I will admit that Ravin makes one very strong point. If libertarians were arguing that legalization would simultaneously deliver lots of tax revenue and also eliminate the black market, that doesn’t make sense.

Simply stated, excessive taxation means illegal sellers will stay in business because their prices will be much lower than their legal (but highly taxed) competitors.

That being said, at least one libertarian (ahem, me) explicitly pointed out that generating additional tax revenue was actually an argument against legalization (I included this issue in my collection of Libertarian Quandaries).

Let’s look at another perspective on legalization.

Jacob Sullum has a largely upbeat assessment of what’s happened, though he agrees that excessive taxation is a problem.

Here are some excerpts from his Reason column.

…when it comes to taxes, New York legislators do not seem very keen on helping the industry—or consumers. …The THC levy may amount to a tax as high as 30 percent, depending on costs, THC content, and product type. That’s on top of a 13 percent marijuana sales tax, which is in addition to general state and local sales taxes that can run as high as 8.9 percent. New Jersey plans to impose an excise tax ranging from less than 3 percent to more than 30 percent, depending on the average retail price per ounce… The state also will allow local governments to collect multiple taxes from growers, manufacturers, wholesalers, and retailers… New Mexico’s marijuana sales tax is simple and modest by comparison: 12 percent initially, rising gradually to 18 percent by July 2030. States such as Alaska, Illinois, Maine, Massachusetts, and Michigan tax marijuana even more lightly. These states seem to recognize that heavy taxes make it harder for licensed retailers to compete with black-market dealers. It’s a lesson that some politicians will have to learn all over again.

A 2018 Bloomberg article is a good primer on the issue of pot taxation.

What’s the optimal tax rate on legal marijuana if the goal is to eliminate the black market? …There are signs that California, with its longstanding pot culture and thriving black market, is taxing weed too much, while Washington state has already moved to lower its rate. …Lawmakers debating the issue are typically trying to balance two goals: generating revenue to boost state coffers while also creating a legal market that will put street dealers out of business. …The economics of elastic demand hold that consumers will buy less of a product as it gets more expensive, and the theory is being tested in the various legal markets around the U.S. …Oregon and California…have struggled to eliminate the black market, in part because high tax rates and regulatory red tape have made it attractive for some producers, sellers and customers to stay underground. …Light taxation and liberal licensing under Colorado’s adult-use law slashed the black market to 33 percent of cannabis sales last year, Adams said. In contrast, illicit sales were 78 percent of California cannabis sales and were even higher this year under adult-use laws that imposed extraordinary taxes and regulatory hurdles.

For those interested, I’ve written a few times (herehere, here, and here) about California’s over-taxation of marijuana.

I also have two columns (here and here) about Colorado’s experience.

So what’s the bottom line?

I fully expect that politicians in most states will continue to set tax rates to high, which means black market sales of marijuana will remain strong.

Why will they make this mistake? For the same reason they have excessively high tax rates on income, on sales, on property, on booze, and everything else.

Greedy politicians can’t resist the temptation to over-tax anything and everything in hopes of getting their hands on more money to buy more votes.

That’s America’s real (and bipartisan) addiction problem.

———
Image credit: ashton | CC BY 2.0.

Primitive Keynesianism from the Joint Economic Committee

Thu, 08/19/2021 - 12:34pm

Washington is filled with dishonest and self-serving analysis. Much of that shoddy output is driven by privileged groups seeking bailoutssubsidiesprotectionism, or a tilted playing field.

But that’s not the only type of dishonest and self-serving you find in Washington.

Let’s take the example of President Biden’s proposal to gut welfare reform with per-child handouts.

The micro-economic problem with that policy is that it reduces incentives to work – as illustrated by this Wizard-of-Id parody or this cartoon about socialism.

The macro-economic problem with that policy is that it’s part of a radical expansion in the burden of government that will make the U.S. more like Europe.

For today’s topic, though, I want to call attention to a recent report by the Democratic staff of the Joint Economic Committee. It relies on the sloppiest and most disingenuous analysis imaginable.

To recycle a term from 2015, let’s call it primitive Keynesianism.

Here’s the relevant excerpt.

The Treasury Department released information on how much money went to each state, which allows us to estimate the impact of the newly expanded CTC on local economies. Using an estimated multiplier of 1.25—or how much additional spending each $1 in CTC payments will generate, as people use their funds to buy goods and services that in turn generate income for other people and businesses—implies that the expanded CTC will generate nearly $19.3 billion in spending in local economies each month. This increased economic activity is a boon to local businesses, creating jobs in communities across the United States.

You’ll notice an astounding omission.

Nowhere in the JEC “report” is there any acknowledgement that politicians can’t “inject” money into local economies without first taxing or borrowing the money from the private sector.

Honest Keynesians acknowledge that there’s no magic money tree. They know the government can’t put money in our right pocket without first removing from our left pocket.

So they make arguments about things such as the “marginal propensity to consume.”

disagree with that argument, but at least the folks making that case are being ethical.

The JEC report, by contrast, is utter garbage.

But I guess we shouldn’t be surprised. They’re trying to sell very bad policy, so the staff have no choice but to produce nonsensical “research.”

P.S. Arthur Okun would be very disappointed.

———
Image credit: Bjoertvedt | CC BY-SA 3.

Will High-Value Taxpayers Vote with their Feet Against Biden?

Wed, 08/18/2021 - 12:22pm

For most of the world, American citizenship is highly coveted. Indeed, foreigners have even been willing to invest a lot of money to increase the odds of getting to the United States.

But changing one’s nationality is a two-way street. Beginning with the Obama years, there’s been a big jump in the number of Americans willing to give up U.S. citizenship.

This is mostly because of bad tax policy (high ratesdouble taxationFATCA, etc).

Simply stated, these successful households make a completely rational assessment that the benefits of being an American aren’t worth the fiscal costs.

Especially if they already live overseas and are being victimized by “worldwide taxation.”

Sadly, it’s quite likely that more Americans will be giving up their citizenship if Biden is able to push through his class-warfare tax agenda.

Jennifer Kingson explains in an article for Axios.

The number of Americans who renounced their citizenship in favor of a foreign country hit an all-time high in 2020: 6,707, a 237% increase over 2019. …While the numbers are down this year, that’s probably because many U.S. embassies and consulates remain closed for COVID-19, and taking this grave step requires taking an oath in front of a State Department officer. …The people who flee tend to be ultra-wealthy, and many of them are seeking to reduce their tax burden. New tax and estate measures proposed by the Biden administration could, if implemented, accelerate this trend. …The IRS publishes a quarterly list of the names of people who have renounced their citizenship or given up their green cards. The numbers started swelling in 2010, when Congress passed the Foreign Account Tax Compliance Act, or FATCA, which increased reporting requirements and penalties for expats.

Here’s a chart from the article.

speculated last year that the 2016-2019 drop was an indicator that Trump’s tax cut was having a positive impact.  But the spike in 2020 suggests I was being too optimistic.

Here’s some more analysis from the article.

As you can see, there’s a big backlog, so we only speculate how many Americans will be escaping the IRS in coming years.

David Lesperance, an international tax lawyer based…who specializes in helping people renounce U.S. citizenship, says that with coronavirus shutting down interviews for renunciation, the next lists will only contain relinquished green card holders, who can do it by mail. “There are probably 20,000 or 30,000 people who want to do this, but they can’t get the appointment,”…”It’s a year-and-a-half to get an appointment at a Canadian embassy,” he tells Axios. “Bern [Switzerland] alone has a backlog of over 300 cases.” …A lot of people who take this drastic step are tech zillionaires: Eric Schmidt, the former Alphabet CEO, has applied to become a citizen of Cyprus. …President Biden has proposed raising the top capital gains tax to 43.4%, and while it’s unclear whether that will pass, it did prompt a lot of calls to Lesperance from people wanting to find out which foreign countries might grant them citizenship.

By the way, this issue has macro consequences for the rest of us. Given the economic importance of innovatorsentrepreneurs, and inventors, it’s bad news for the United States when they move to low-tax nations such as Singapore.

P.S. Companies also move from one country to another so they can protect workers, consumers, and shareholders from bad tax policy.

P.P.S. One of the most odious parts of American tax law is the imposition of Soviet-style exit taxes on people who want to change citizenship.

P.P.P.S. Today’s column is about tax migration across national borders, but don’t forget there’s far more tax migration across state borders.

———
Image credit: Masai Mara | CC BY 2.0.

Elizabeth Warren’s Demagoguery on “Book Income”

Tue, 08/17/2021 - 12:52pm

I’ve written about some boring and arcane tax issues – most of which are only relevant because we don’t have a simple and fair flat tax.

But I always try to explain why these complicated tax issues are important – assuming we want a competitive tax system that doesn’t needlessly undermine growth.

Today, we’re going to add to our collection of nerdy tax topics by discussing the issue of “book income” vs “tax income.”

I’m motivated to address this topic because the oleaginous senior senator from Massachusetts, Elizabeth Warren, indirectly addressed this issue in a recent column for the Washington Post.

Here’s some of what she wrote.

…scores of giant U.S. corporations pay zero. …In the three years following the 2017 Republican tax cuts, 39 megacorporations, including Amazon and FedEx, reported more than $122 billion in profits to their shareholders while using loopholes, deductions and exemptions to pay zero in federal income taxes. These companies boosted their stock prices and increased CEO pay by telling their shareholders they raked in hundreds of millions of dollars in profits, while simultaneously telling the Internal Revenue Service that they don’t owe any taxes. …We would require any company that earns more than $100 million in profits to pay a 7 percent tax on every dollar earned above that amount.

To assess Warren’s proposal, here are a couple of things that you need to understand.

  1. What corporations report to their shareholders is “book income,” and that number is governed by a specific set of rules (“generally accepted accounting principles” or GAAP) determined by the Financial Accounting Standards Board. The goal is to make sure investors and others have accurate information.
  2. What companies report to the Internal Revenue Service is “tax income” and that number is governed by a specific set of laws (the tax code) enacted over the past 100-plus years by politicians.

In other words, companies are not choosing to play games. They have no choice. They are following two separate sets of requirements that were set up for two separate reasons.

For purposes of public policy, the key thing to understand is that the tax code is based largely on cash flow (what was taxable income over the past 12 months, for instance).

That means it produces annual numbers that can be quite different than book income’s long-run data based on accrual accounting (the GAAP rules).

The Tax Foundation has a recent report, authored by Erica York and Alex Muresianu, that shows why it would be a major mistake to use book income for tax purposes.

Under corporate book income rules, companies spread out the cost of investments across roughly its useful life, also known as economic depreciation. The purpose of this rule is to match costs to the revenues they generate to best inform creditors and shareholders: deducting, say, the entire cost of a new factory the year it’s constructed could make it seem like a company is unprofitable to shareholders. While the economic depreciation approach makes some sense for accounting purposes, it’s a bad framework for tax policy. Spreading out the deductions over time creates a tax bias against investment. Deductions in future years are worth less than deductions in the current year, thanks to the time value of money and inflation. It also creates a bias against companies that rely heavily on physical capital (think energy production and high-tech manufacturing), and towards companies that mostly rely on labor (think financial services or fast food).

It’s unclear whether Senator Warren (or her staff) actually understand these technical details.

Not that it really matters. Her goal is to play class warfare. She’s engaging in demagoguery (a long-standing pattern) in hopes of enacting legislation that will give her a lot more money to spend.

If she’s successful, it will be very bad news for the economy, as Kyle Pomerleau explained in a 2019 report for the Tax Foundation.

According to the Tax Foundation General Equilibrium Model, this proposal would reduce economic output (GDP) by 1.9 percent in the long run. We also estimate that the capital stock would be 3.3 percent smaller and wages 1.5 percent lower, with about 454,000 fewer full-time equivalent jobs. …We estimate that the service price would rise by 2.6 percent under this proposal. A higher service price means that capital investment would become less attractive, leading to reduced investment and, eventually, a smaller capital stock. The smaller capital stock would lead to lower output, lower worker productivity, and lower wages. …Taxpayers in the bottom four income quintiles…would see a reduction in after-tax income of between 1.64 percent and 1.95 percent.

And here’s a table from Kyle’s report with all the economic consequences.

P.S. In her column, Sen. Warren also reiterated her support for a destructive wealth tax and more funding to reward a corrupt IRS.

———
Image credit: Gage Skidmore | CC BY-SA 2.0.

The World’s Freest Nation?

Mon, 08/16/2021 - 12:13pm

When writing Friday’s column about Somalia, I noticed that I have not written about the Human Freedom Index (HFI) since 2016 and 2018.

Let’s rectify that oversight by highlighting the results from the most-recent edition of that publication.

But first, some background. The Human Freedom Index is 50-percent-based on the data from Economic Freedom of the World and 50-percent-based on a set of variables that measure personal liberty.

Back in 2016, the world’s freest nation wasn’t actually a nation. It was Hong Kong, the autonomous (at the time) region of China. Switzerland was in second place, followed by New Zealand, Ireland, and Denmark (the United States was 23rd).

And in 2018, the top five were New Zealand, Switzerland, Hong Kong, Australia, and Canada (the United States was 17th).

The newest edition of the HFI shows that things have not changed much. New Zealand is still at the top, narrowly edging out Switzerland.

Hong Kong is next, followed by Denmark and Australia. Here are the top-10 jurisdictions.

For what it’s worth, the United States is tied for #17, which is an improvement compared to 2016 but identical to the 2018 score.

Here are some excerpts from the new HFI.

The Human Freedom Index (HFI) presents a broad measure of human freedom, understood as the absence of coercive constraint. This sixth annual index uses 76 distinct indicators of personal and economic freedom… The HFI covers 162 countries for 2018, the most recent year for which sufficient data are available. …the regions with the highest levels of freedom are North America (Canada and the United States), Western Europe, and East Asia. The lowest levels are in the Middle East and North Africa, sub-Saharan Africa, and South Asia. Countries in the top quartile of freedom enjoy a significantly higher average per capita income ($50,340) than those in other quartiles; the average per capita income in the least free quartile is $7,720.

As a general rule, there’s a reasonably strong correlation between economic freedom and personal freedom.

Nations that have one tend to have the other.

But there are some interesting exceptions.

Some countries ranked consistently high in the human freedom subindexes, including Switzerland, New Zealand, and Australia, each of which ranked in the top 10 in both personal and economic freedom. By contrast, some countries that ranked high on personal freedom ranked significantly lower in economic freedom. For example, Sweden ranked 1st in personal freedom but 46th in economic freedom; Norway ranked 3rd in personal freedom but 43rd in economic freedom; and Argentina ranked 37th in personal freedom but 144th in economic freedom. Similarly, some countries that ranked high in economic freedom found themselves significantly lower in personal freedom. For example, Singapore ranked 2nd in economic freedom while ranking 53rd in personal freedom; Jordan ranked 39th in economic freedom but 113th in personal freedom; and Malaysia ranked 46th in economic freedom but tied Jordan in personal freedom by ranking 113th.

By the way, Hong Kong’s score seems improbably high, but that’s because the report is based on data through 2018.

It’s quite likely that the jurisdiction’s score will take a tumble in the near future.

Although Hong Kong’s ratings and rankings have decreased since 2008, the impact of the Chinese Communist Party’s unprecedented interventions in the territory in 2019 and 2020 are not reflected in this year’s report (which, as noted, is based on 2018 data). Those recent events will likely decrease Hong Kong’s score noticeably in the future.

Here’s one final bit of information. This visual shows the nations enjoying the biggest improvements and biggest declines between 2008-2018. Congratulations to Sri Lanka and Myanmar (Burma to those of us with lots of gray hair), but I think Taiwan deserves special praise because it started with relatively good scores, which makes a big increase harder to achieve.

By contrast, is anybody surprised that Venezuela has suffered the biggest decline? The only good news (grading on a curve) is that Venezuela isn’t in last place in the HFI because Sudan and Syria are slightly more oppressive.

P.S. Tucker Carlson of Fox News recently asserted that Hungary has more freedom than the United States. That’s a silly claim. The United States (#17) ranks much higher than Hungary (#49), with better scores for both economic freedom and personal freedom.

That being said, Hungary is among the top-third of nations, so accusations of authoritarianism seem overwrought (and I have knee-jerk fondness for Hungary because it’s often butting heads with the dirigiste bureaucrats with the European Union in Brussels).

———
Image credit: Lawrence Murray | CC BY 2.0.

Big Government and “Financial Repression”

Sun, 08/15/2021 - 12:30pm

I just got back from Medellin, Colombia, where I gave a presentation to the Liberty International World Conference.

My topic was “The Fatal Mix of Demographic Change and the Welfare State” and I made my usual points about how poorly designed entitlement programs are going to wreak havoc, in large part because of demographic change.

Simply stated, tax-and-transfer programs collapse when there are too many beneficiaries and too few taxpayers.

This means politicians will be forced to act and I included this slide to show some of their main options (including my favorite, genuine entitlement reform).

But I noted in my speech that this was just a partial list of how politicians can respond.

  • They can also reduce payments to beneficiaries (an option that I view as very unlikely)
  • They can also finance promised benefits by printing money (I hope this also is very unlikely).

But there’s another option that I didn’t mention.

Politicians can indirectly finance their vote buying with “financial repression.” If you’re not familiar with that concept, Joseph Sternberg tells you what you need to know in a must-read column in Wall Street Journal.

He starts with some discussion of how repression worked in the past.

Government spending is conventionally understood as a matter of increased taxation and debt, a framing that has the virtue of being true. But that conversation is incomplete without also exploring the concept of financial repression—which ultimately underlies both the taxes and debt. …in spendthrift developing countries. Governments would suppress interest rates on domestic savings to below the rate of inflation to reduce rates on lending. The point was to service government borrowing and subsidize credit to politically favored industries. In the process, they’d create a substantial wealth transfer from private creditors to debtors… Developed economies have deployed this gimmick too. Regulation of the rates banks paid on savings was an important, and not the only, bit of financial repression perpetrated against Americans.

And he warns how repression can work today.

Financial repression nowadays consists of several overlapping phenomena beyond the classic suppression of bank interest rates. A nonexhaustive list: more-intrusive management of assets and credit allocation in the banking system via reserve requirements, capital regulations and the like; a blurring of the line between fiscal and monetary policy such that monetary authorities subsidize the fiscal authority’s borrowing while the fiscal authority creates new credit subsidies for other parties; and any press release from Sen. Elizabeth Warren demanding a new regulation on this sort of lending or that sort of borrowing. …A gaze through the lens of financial repression offers a new view of how dangerous Washington’s spending boondoggles are. …Unfettered government spending also forces voters to pay via inflation and low returns on savings in the here and now. …The redirection of savers’ resources to politically favored “borrowers” (either directly via loan guarantees or more often indirectly via the disbursement of government grants raised via deficit financing) creates inefficiency and waste.

Here’s the bottom line.

…rampant misallocation of capital and the attendant distortions of saving and investment…will create a materially worse future.

In some sense, financial repression is a back-door form of industrial policy since politicians are putting their thumbs on the scale and hindering the efficient allocation of capital.

And that’s why there’s less growth and people wind up with lower living standards as time passes.

If you’re interested in this topic (and you should be), I shared some very worrisome analysis back in 2015.

P.S. If politicians succeed in their “war on cash,” that will give them another tool for financial repression.

P.P.S. History teaches us that there is a way of climbing out of a fiscal hole without using repression.

———
Image credit: Max Pixel | CC0 Public Domain.

The Libertarian Paradise of…Somalia?

Fri, 08/13/2021 - 12:03pm

Oozing sarcasm, I’ve asked whether GermanyNigeriaMexico, and Argentina are libertarian paradises.

But, according to this satirical video that I first shared ten years ago, there’s a real libertarian paradise in Somalia.

I will admit this is a very clever video. The cholera comment at the end was especially amusing (reminded me of the Ron Paul breakfast cereal).

Indeed, the video was one of the first selections for my libertarian humor page.

But is it true that Somalia is actually some sort of free-market paradise?

Have the warlords turned the Horn of Africa to a new version of what Hong Kong used to be?

That’s one of the implications of a recent report in the New York Times.

Authored by Jeffrey Gettleman, it paints a picture of a society that – if nothing else – is very resistant to taxes and organized government.

Here are some of the most relevant excerpts from his article.

A whole class of opportunists…have been feeding off the anarchy in Somalia for so long that they refuse to let go. …They do not pay taxes, their businesses are totally unregulated… They are attacking government troops… And they are surprisingly open about it. Omar Hussein Ahmed, an olive oil exporter in Mogadishu, the capital, said he and a group of fellow traders recently bought missiles to shoot at government soldiers. “Taxes are annoying,” he explained. Maxamuud Nuur Muradeeste, a squatter landlord…will do whatever it takes, he said, to thwart the government’s plan to reclaim thousands of pieces of public property. “If this government survives, how will I?” Mr. Muradeeste said. …opportunists sense that this transitional government, more than any other, poses the biggest threat yet to the gravy days of anarchy.

Interestingly, the article actually acknowledges that people did figure out how to make a lot of things work without any centralized authority.

…when the central government imploded in 1991, people quickly devised ways to fend for themselves. Businessmen opened their own hospitals, schools, telephone companies and even privatized mail services. …Business leaders then backed a grass-roots Islamist movement that drove the warlords out of Mogadishu… They delivered stability, which was good for most business, but they did not confiscate property or levy heavy taxes. They called themselves an administration, not a government. “Our best days were under them,” said Abdi Ali Jama, who owns an electrical supply shop in Mogadishu.

But does any of this make Somalia a libertarian paradise?

Not exactly. Because of a lack of data, Somalia does not receive a grade from either Economic Freedom of the World or the Human Freedom Index.

And Somalia also doesn’t get an official grade from the Index of Economic Freedom.

But there are some partial scores showing that Somalia is very bad on the rule of law.

And we also see a failing grade for “business freedom.”

The bottom line is Somalia is nowhere close to being a libertarian society. The best thing that can be said is that entrepreneurs try to figure out how to meet human needs and earn profits even in the worst of circumstances.

P.S. The NYT article mentioned that Mr. Ahmed bought missiles to deter tax collectors. Even I think that’s going too far, but he does belong with the other “great moments in tax avoidance” that I have cited (see herehere, and here).

———
Image credit: Kurious | Pixabay License.

Great Moments in Government Schooling

Thu, 08/12/2021 - 12:46pm

I don’t like Joe Biden being a lackey of the teacher unions, and I think the entire Department of Education should be eliminated.

That being said, intervention from Washington is the not the main cause of America’s education problems. The real problem is that we have an inefficient monopoly system that is – for all intents and purposes – run for the benefit of teachers and bureaucrats.

All of us should be upset that we see more and more money going to more and more employees, but we don’t get any progress in boosting academic outcomes.

I sometimes think the system can’t get any worse.

But then I read something that almost makes me think that politicians want the system to be a failure.

Here’s a story from Yahoo! News that I first assumed was from the Babylon Bee. But it’s not satire, it really happened.

Oregon Gov. Kate Brown privately signed a bill last month ending the requirement for high school students to prove proficiency in reading, writing, and arithmetic before graduation. Brown, a Democrat, did not hold a public signing or issue a press release regarding the passing of Senate Bill 744…, an unusually quiet approach to enacting legislation, according to the Oregonian. …The bill, which suspends the proficiency requirements for students for three years, has attracted controversy for at least temporarily suspending academic standards… Backers argued…the new standards for graduation would aid Oregon’s “Black, Latino, Latinx, Indigenous, Asian, Pacific Islander, Tribal, and students of color.” …Republicans criticized the proposal for lowering academic standards. “I worry that by adopting this bill, we’re giving up on our kids,” House Republican Leader Christine Drazan said.

I don’t know which part of the story is more reprehensible. Should we be more outraged that state politicians wants to eliminate standards, or should we be more outraged that supporters are implicitly (at the very least) racist in thinking that minority students can’t perform?

This is equivalent to breaking your bathroom scale because you don’t like your weight.

In any event, we have more evidence that government schools squander lots of money and deliver very poor results.

Which means we have more evidence in favor of school choice.

P.S. Since I’m pointing out the failure of government schools, I can’t resist sharing a couple of older stories

Here’s a bizarre story from New Jersey (h/t: Reason).

Ethan Chaplin, a Glen Meadow Middle School student, told News 12 last week that while he was twirling a pencil with a pen cap on in math class, a student who bullied him earlier in the day yelled “He’s making gun motions, send him to juvie.” He was suspended for two days and then underwent five hours of a physical and mental exam at Riverview Medical Center’s crisis unit, his father told NJ.com.

We have another crazy example of political correctness run amok, as reported by the New York Post (h/t: Daily Caller).

Meet 8-year-old Asher Palmer, who was tossed out of his special-needs Manhattan school for threatening other kids with a toy “gun’’ — which he made out of rolled-up paper. …[His mom] was incensed that Principal Micaela Bracamonte told other staffers in an email that Asher “had a model for physically aggressive behavior in his immediate family.’’ Spadone thinks Bracamonte was referring to her husband because he served in the military during the Kuwait war. If that was the reason for the comment, she said, “I find it offensive and inappropriate.’’ As far as the toy gun is concerned, she said Asher, a first-year student, made it out of a piece of paper after discussing military weapons with his dad.

I’ve previously shared many stories of anti-gun political correctness in government schools (see hereherehereherehere, and here). Makes me wonder whether that kind of nonsense is even more counterproductive to kids that some of the excesses of critical race theory.

———
Image credit: Ken Gallager | CC BY-SA 4.0.

A Grim Indirect Encounter with Venezuelan Socialism

Wed, 08/11/2021 - 12:01pm

When I share examples of socialism humor and communism humor, I sometimes wonder whether we should laugh about ideologies that have imposed so much death and misery on the world.

For instance, I’ve shared some jokes about the horrid consequences of Venezuelan socialism.

Including jokes dealing with widespread hunger.

But now I feel a bit guilty.

Not because I’ve been mocking communism and socialism. Both are evil and deserve endless scorn.

Instead, I feel a bit guilty because I’ve actually encountered real victims of Venezuelan statism.

I’m currently in Medellin, Colombia, where I’ll be speaking tomorrow to the Liberty International World Conference.

But I first spent a week with some friends in Cartagena, a beautiful colonial city on the Atlantic Ocean.

Great food, nice beaches, friendly people, and perfect weather, but I noticed there were quite a few beggars. But these were not like the well-fed panhandlers you can find at suburban intersections in the United States, or the bums in cities like New York, San Francisco, or Washington.

Many of them were gaunt mothers with young children, and I was told they were all from Venezuela.

I had no way of confirming that information, of course, but we were only a few hundred miles from the Venezuelan border. And since millions of people have fled that nation’s horrific conditions, it makes sense that some of them wound up in Cartagena.

The most heart-wrenching part of my experience is when we left a pizza restaurant one evening. I had a box with about six leftover slices (a nutritious breakfast for the next morning).

But within two blocks, I gave them all away to various children who must have sensed I was a soft touch.

And I couldn’t help but compare their suffering with the multi-billion stash of stolen loot amassed by Chavez’s daughter.

The bottom line is that I still plan on sharing satire about the misery that socialism has caused in Venezuela. But I’ll be very cognizant of the fact that there are countless stories of horrible suffering because of big government.

P.S. I wish Bernie Sanders and the other leftists could see (and understand) how Venezuelan socialism has caused so much human misery.

P.P.S. And I wish reporters from the New York Times had enough sense (or integrity) to recognize that the misery is a consequence of socialism.

———
Image credit: ZiaLater | CC BY-SA 3.0.

Social Security’s Inevitable Decline

Tue, 08/10/2021 - 12:02pm

It’s understandable that we’re now paying a lot of attention to Joe Biden’s risky proposals for higher taxes and a bigger welfare state.

After all, it’s a very bad idea to copy the economic policies of nations such as ItalyFrance, and Greece (unless, of course, you want much lower living standards).

But let’s not forget that that the United States also has some big economic challenges that existed before President Biden ever took office.

Most notably the entitlement programs.

Medicaid and Medicare are the biggest problems, but let’s focus today on Social Security.

Richard Rahn has a column in the Washington Times that summarizes the program’s grim outlook. Here are some excerpts.

Politicians love to talk about the Social Security “trust fund” and assure us that it will not be raided.  But the unfortunate fact is the “trust fund” is an accounting fiction without any real assets. In actuality, Social Security is a giant Ponzi scheme operated by the government. Benefits that are paid to existing retirees come from the current taxes from those working today and borrowing. …But now, Americans have fewer children, and life expectancies are growing rapidly. …There is no easy way out.  Future Social Security benefits will be cut (probably by not fully indexing for inflation), and/or taxes will be greatly and continuously increased until the system collapses.

The fact that Social Security is a Ponzi scheme isn’t necessarily fatal. After all, the government has the ability to coerce new workers into the system.

The problem is that there are fewer and fewer of those new workers to support the growing number of people getting benefits.

Here are the numbers from Richard’s column. As the old saying goes, read ’em and weep.

Richard ends his column by fretting that the United States is on a dangerous path.

The world has seen this play before.  In 1906, Argentina on a per-capita income basis was one of the richest countries in the world, rivaling the United States.  It has bountiful agricultural and mineral resources and had a relatively well-educated population of mainly European origin.  But after a century of fascist/socialist/welfare-state governments, it is now a poor country.  Venezuela went from a rich country with civil liberties to a poor oppressed country in only two decades.  As Margaret Thatcher famously said, “the problem with socialism is that eventually, you run out of other peoples’ money.”  The Greeks built a nice welfare state, largely using German taxpayers’ money – the Euro – until the Germans said, “no more.”  As a result, the Greeks have seen a drop in real incomes of more than 30 percent in seven or so years.

The good news is that our economic policy won’t be nearly as bad as Argentina and Venezuela, even if some of Biden’s crazy ideas – such a massive per-child handouts – are enacted.

The bad news is that we could become a lot more like Greece.

And that’s where Margaret Thatcher’s famous warning could become an American reality.

There is a solution to this problem, by the way. It’s been implemented in a couple of dozen nations around the world.

Sadly, American politicians are more interested in making the problem worse (with predictable consequences).

———
Image credit: 401kcalculator.org | CC BY-SA 2.0.

Fiscal Policy 101 for Politicians and other Dummies

Sun, 08/08/2021 - 12:54pm

Our friends on the left who want more government spending generally have a short-run argument and a long-run argument.

  • In the short run, they assert that more government spending can stimulate a weak economy. This is typically known as Keynesian economics and it means temporary borrowing and spending.
  • In the long run, they claim that big government is an investment that leads to better economic performance. This is the “Nordic Model” and it means permanent increases in taxes and spending.

In many ways, the debate about short-run Keynesianism is different than the debate about the appropriate long-run size of government.

But there is one common thread, which is that proponents of more government pay too much attention to consumption and too little attention to production.

I wrote a somewhat wonky column about this topic back in April, but let’s take another look at this issue.

In a column last month for the Wall Street Journal, Andy Kessler shared some economic fundamentals.

Here’s how capitalism works—pay attention if you took the social-justice version of Econ 101. SIPPC: Save. Invest. Produce. Profit. Consume. Save means postponing consumption, money and time. Only then you can invest, especially your human capital, in something productive. Usually this means doing more with less, being efficient and effective. This is when innovation happens. Wealth comes only from productivity, not from giving away money. …Supply first and then consume…, creating incentives to put money into the hands of entrepreneurs and clearing a path for them to innovate by getting government out of the way.

In some sense, this is simply the common-sense observation that you can’t consume (or redistribute) unless someone first produces.

But it’s also a deeper message about what actually drives production.

There are no shortcuts. You can’t induce demand without supply. Didn’t the lockdowns prove that? Stimulus checks did little good given that there were few places to spend them until businesses were allowed to reopen. We’re now perversely sitting on almost $3 trillion in excess savings and even more new government debt. Yet the government stimulus mentality continues in Congress. …Through taxes and currency depreciation, demand-side spending steals savings needed to invest in future supply, which is why it never works. It is why the Great Depression lasted so long, why Japan lost two decades, and why 2009-16 saw subpar U.S. economic growth. When demand drops, government spending and giveaways make things worse. The only solution to kickstart production is to increase investment and make jobs more plentiful by cutting taxes and easing regulation. ..Price signals tell entrepreneurs what to supply. But price signals are only as good as their inputs. Minimum-wage laws mess up labor price signals. Tariffs mess up trade price signals. The Federal Reserve’s bond-buying blowouts mess up interest-rate price signals.

Amen. We know the policies that lead to more prosperity, but politicians constantly throw sand in the gears.

Simply stated, bigger government diverts resources from the productive sector of the economy. And that makes it more difficult to get the innovation and investment that are necessary for rising wages.

To be sure, there are some types of government spending that arguably help a private economy function.

But that’s not what we get from much of the federal government (Department of Housing and Urban DevelopmentDepartment of EducationDepartment of EnergyDepartment of AgricultureDepartment of Transportation, etc).

Which is why the growth-maximizing size of government is far smaller than what we are burdened with today.

P.S. I can’t resist sharing this additional segment of Mr. Kessler’s column.

Modern Monetary Theory, known as MMT—what economist John Christensen called the “Magic Money Tree”—is the worst of demand-side nonsense. MMT believers think that to boost aggregate demand we can have government print money and spend, spend, spend. We tried this in the 1960s and ’70s with Great Society programs

At the risk of understatement, I agree with his concerns.

P.P.S. It’s worth noting that the World BankOECD, and IMF have all published research showing the benefits of smaller government.

———
Image credit: Bjoertvedt | CC BY-SA 3.

Promoting Upward Mobility Is a Better Goal than Pushing Class Warfare in Hopes of Reducing Inequality

Sat, 08/07/2021 - 12:28pm

There are divisions of the right between small-government conservativesreform conservativescommon-good capitalistsnationalist conservatives, and compassionate conservatives.

There are also divisions on the left, as illustrated by this flowchart, which shows the Nordic Model (a pro-free market welfare state) on one end, and then different versions of hard-core leftism on the other end.

I’m showing these different strains on the left because it will help decipher the editorial position of the Washington Post.

cited one of their editorials a couple of weeks ago that had some very sensible criticisms of a wealth tax. But it also embraced other class-warfare taxes (higher capital gains taxes and more onerous death taxes).

In other words, the Washington Post is on the left, but not as crazy as Bernie Sanders or Elizabeth Warren.

Now we have another editorial from the Post that illustrates this distinction.

The bad news is that the editorial (once again) endorses class-warfare tax policy.

…inequality of wealth is a serious problem in the United States. …to an unhealthy degree, wealth in the United States is being gained through unproductive activity — “rent-seeking”… Well-designed government interventions can reduce inequality from the top down, through more aggressive taxation of capital gains and estates… …everyone, poor and rich, has a lot to gain from curbing wealth inequality. The policies that can achieve that goal are neither radical nor complicated.

The good news is that the Post understands that there are serious consequences of going too far.

What remains to be considered are the counterarguments. …could a more aggressive attack on wealth inequality undermine incentives and result in an economic pie that is smaller and, inevitably, more difficult to distribute? If too aggressive, of course, at the bottom of that slippery slope lies Venezuela’s bankrupt socialism.

I suppose I should be happy that the editorial acknowledges the danger of hard-core leftism.

But my concern is that going in the wrong direction at 60 miles per hour still gets a nation to the wrong destination.

Yes, going in the wrong direction at 90 miles per hour gets to Venezuela even sooner, so I’d rather delay a very bad outcome.

That being said, it would be nice if the Washington Post (or any other rational leftists) drew some lines in the sand about limiting the size and scope of government.

Both numbers are far too high, of course, but setting some sort of limit would at least show that there is some long-run difference between the rational left and the AOC crowd.

Let’s conclude with some extracts that show why I’m worried that the Post will always be on the wrong side. After acknowledging that there are risks of going too far to the left, the editorial tell us we shouldn’t worry about going that direction.

In fact, too much inequality can undermine growth, too. …the perpetuation of steep inequalities, over generations, can turn into a drag on output…by wasting the potential of those who might have acquired skills or started businesses if not consigned by poverty to society’s margins. …extreme inequality fosters demands for populist policies, which, in turn, damage growth.

To be fair, the Washington Post is at least semi-good on the issue of school choice, so I take somewhat seriously their concerns about not wasting potential.

And it’s also worth noting that the editorial understands that populist policies (which presumably includes lots of anti-market nonsense such as protectionism) would be misguided. Though I’d feel much better about that part if the editorial recognized the difference between moral and immoral inequality.

P.S. The core problem is that our friends on the left don’t appreciate that low-income people will be better off if the focus is on growth rather than inequality.

———
Image credit: Steven Depolo | CC BY 2.0.

Coronavirus: Free Market to the Rescue, Part II

Thu, 08/05/2021 - 12:48pm

As I’ve repeatedly pointed out, capitalism (oops, I mean free enterprise) is far superior than the various forms of statism.

Just last month, I shared a video with 20 example of market-friendly jurisdictions growing much faster than government-dominated nations.

But markets aren’t just superior at producing mass prosperity. Or at reducing mass poverty (the normal state of human existence).

Free enterprise also is the best option for dealing with a pandemic.

wrote back in March about how free markets saved the day after the coronavirus struck.

In a column for the Wall Street Journal, Walter Russell Mead further elaborates on this theme.

The World Health Organization has been a shame and a disgrace, from its initial silence over China’s coverup of early data on the outbreak through its unreasoning hostility toward Taiwan and its collusion with Beijing’s efforts to discredit the lab-leak hypothesis. The premier international health agency has failed. Covax, the much-touted international program aimed at providing vaccines to citizens of countries too poor to purchase adequate supplies on the open market, has also fallen abysmally short. …What’s worked in the pandemic so far has been the dog everyone wants to kick: Big Pharma. Pfizer, Moderna, AstraZeneca and Johnson & Johnson succeeded where the internationalists failed. Scientists in free societies working with the resources that capitalism provides have given the world hope. The WHO, Covax, the Chinese and Russian vaccines, and the “global community,” not so much.

Amen. Let’s be thankful for pharmaceutical companies. Their pursuit of profit is what led to the vaccines that have saved millions of lives.

By contrast, the WHO has been very unhelpful.

And America’s domestic bureaucracies, the FDA and CDC, have arguably been harmful.

Notwithstanding this track record, the Biden Administration wants to weaken the private sector.

The Biden administration…seems to believe that the best response…is to sabotage the American pharmaceutical industry. The U.S. development bank—the International Development Finance Corp.—will provide billions of dollars to firms based in countries like Brazil, Rwanda, Senegal, South Africa and South Korea that agree to manufacture Covid-19 vaccines. Meanwhile, the State Department’s coordinator for global Covid response, Gayle Smith, said last week that she wants to push Big Pharma to share its technology with its new government-subsidized foreign competitors. …one wonders exactly how President Biden squares subsidizing cheap overseas competition for one of the most successful industries in the U.S. with promoting jobs for the American middle class.

This proposal is nuts.

Only curmudgeonly libertarians will get upset about an effort to subsidize vaccines for the developing world.

But every rational person should be horrified about a plan that would weaken one of America’s most successful industries.

P.S. Moreover, we should reject short-sighted policies such as European-style price controls on drug companies. Such an approach would undermine our ability to deal with future pandemics and also reduce the likelihood of new and improved treatments for things such as cancer, dementia, and heart disease.

P.P.S. I like pharmaceutical companies when they are being honest participants in a free market. I don’t like them when they get in bed with big government.

———
Image credit: Images Money | CC BY 2.0.

Baptists, Bootleggers, and (Pretend-) Meat

Wed, 08/04/2021 - 12:09pm

I’ve written many times about how big businesses often climb in bed with politicians to lobby for anti-market policies such as subsidiesbailouts, and protectionism.

To get these special favors, they often deploy the “baptists and bootleggers” strategy, which means finding some nice-sounding reason for special interest policies.

For instance, the big health insurance firms lobbied for Obamacare because they liked the idea of getting undeserved profits by having the government force people to buy their products.

But they pretended that their motive was more access to health care.

Another example is the way some large companies are embracing “stakeholder capitalism” to curry favor with politicians and interest groups.

Today, let’s look at an additional version of this unsavory phenomenon.

The BBC reports that the CEO of a pretend-meat company likes the idea of big tax on his more tasty competitors.

The founder of the world’s biggest plant-based meat company has suggested that a tax on meat could help tackle some of the problems from growing meat consumption. Asked if he backed a tax on meat, Beyond Meat’s Chief Executive, Ethan Brown told the BBC “the whole notion of a Pigouvian tax, which is to tax negative, you know, things that are high in externalities, I think is an interesting one. I’m not an economist, but overall that type of thing does appeal to me”. …A tax on meat consumption would definitely be beneficial to companies such as Beyond Meat because it would make their products cheaper in comparison, says Rebecca Scheuneman, an equity analyst at US financial services firm Morningstar. How much of an advantage it would give “depends how significant the tax would be”, she told the BBC.

The woman from Morningstar is quite correct that a tax on meat would help the bottom line of companies that offer competing products.

Just as I wrote in 2012 that a tax increase on small businesses would tilt the playing field in favor of big businesses.

Matthew Lesh of the London-based Adam Smith Institute wrote about a potential meat tax in an article for CapX.

Beyond Meat’s call for a meat tax is a textbook example of ‘bootleggers and baptists’: a policy supported by a coalition of profiteering rent seekers hiding on the moral high ground. …does any of that make a new meat tax a good idea? …a cost-benefit analysis conducted by the University of Bristol concluded that a meat tax “could do more harm than good”. The researchers found it would cost £242 million a year but only save £100 million per annum in reduced carbon emissions. …Then there’s the most simple argument of all – most people enjoy meat. We get satisfaction and it provides important nutrients. …most people do not want to stop eating meat and there is substantial growing demand from the rising middle class in Asia and Africa.

While he makes a good point about the costs and benefits of meat taxation, I especially like Mr. Lesh’s point about people wanting to consume meat.

This is also why I don’t want politicians imposing sugar taxes.

Or taxes on other things that fall into disfavor, such as tobacco.  Or things that rise into favor, such as marijuana.

There are plenty of things in life that are unhealthy and/or dangerous. Maybe I’m just a knee-jerk libertarian, but I think adults should be free to make their own choices about the levels of risk they’re willing to incur.

And I certainly don’t want nanny state policies that – in reality – are the result of big companies trying to get unearned profits.

Remember, only earned profits are moral.

———
Image credit: Jorge Royan | CC BY-SA 3.0.

Pages

Upcoming Events

Donate to Manatee Patriots





Follow us on social media

About

If you have Constitutional values, believe in fiscal restraint, limited government, and a free market economy - then join us or just come and listen to one of our excellent speakers. We meet every Tuesday from 6-8 pm at Mixon Fruit Farms in the Honeybell Hall, 2525 27th St. East, Bradenton, Florida. Map it

Manatee Patriots welcomes all constitution loving Americans.

Our core values are:

  • Defend the Constitution
  • Fiscal Responsibility
  • Limited Government
  • Free Markets
  • God and Country

Read more