Boston University Study Says Regulation INCREASES Corporate Profits

Bernie Bros, listen up: Federal Regulations increase corporate profits. Unfortunately, Sandernistas refuse to acknowledge the true source of the problem–big government–in order to simply focus on “soaking the rich,” which would have deleterious impacts on our economy.

According to a recent Boston University study, “since 2000 much of the rise in profits is caused by growing political rent seeking.”

For those who don’t know what rent-seeking his, here is a definition: “Rent-seeking is the use of the resources of a company, an organization or an individual to obtain economic gain from others without reciprocating any benefits to society through wealth creation. An example of rent-seeking is when a company lobbies the government for loan subsidies, grants or tariff protection. These activities don’t create any benefit for society; they just redistribute resources from the taxpayers to the company.”

So how do more regulations enable rent-seeking behavior? Simple. The bigger the government, the more incentive a company has to invest in the government.

A more complex tax system works in favor of established businesses because smaller businesses and upstarts cannot afford to hire lawyers and accountants to sift through the rules, whereas big companies do have those resources.

Regulations benefit large companies as they can afford to not only incur the costs, but also have the influence to decide how they are written. Regulations harm small businesses that cannot incur the costs and, oftentimes, are written in ways meant to reduce competition from new up-and-comers.

Sandernistas, take note: Citizens United is not the source of the problem–big government is. And this is no longer just theory; there’s now evidence to prove it.

The Need For The X-Tax

We at Rekonomics all agree the current U.S. tax code is a mess. The tax code is messy, frequently double taxes earnings, and hampers economic growth. Flat taxes are often attacked as being unfair to the poor whereas progressive income taxes reduce economic efficiency and harm economic growth.  The X-Tax, a progressive consumption tax, is both pro-growth and economically “fair.”

There are two parts of the X-Tax: the personal side and the business side. On the personal side, households would pay taxes on their wages—they would not pay taxes on investment income, savings, or anything else. These taxes would levied in a progressive manner, with wealthier people being taxed at higher rates and poorer people being taxed at lower rates. The rates could be adjusted by policy makers to make it as progressive or flat as they wanted. On the business side, businesses would pay a flat tax rate on their cash flow equal to the highest rate paid by workers, and then would immediately deduct their investment income. The X-Tax would tax money people had taken out of the economy, but would leave what people put back into the economy untouched. This would eliminate double taxation and encourage people to save and invest more than they do today, prompting long-term economic growth.

A few empirical studies have looked at the X-Tax, and the results are resoundingly positive. A study reviewing the effects of multiple tax reforms—including flat taxes and VAT taxes—calculated that replacing the current tax code with an X-Tax would increase economic growth by 6.4% over the long-run, and by 1.8% and 3.1% over the short- and medium-run time periods, respectively. A flat VAT tax would increase growth the most over the long term, at 9.4%, but VAT taxes are regressive and harm the middle- and lower-classes. The X-Tax, on the other hand, increases the wellbeing of all income groups. Flat taxes were found to have only modest growth impacts.[1]

The X-Tax would reduce tax complexity, which has been estimated to cost the economy $431.1 billion each year,[2] and it would eliminate capital taxation, which is extremely bad for the economy.[3]

The X-Tax is the closest thing to a free lunch in economic policymaking, and we should all hope policy makers begin to closely look at such reforms.

[1] Auerbach, David Altig, Lawrence Kotlikoff, Kent Smetters and Jan Walliser, “Simulating Fundamental Tax Reform in the United States,” American Economic Review 91 (2001): 587.

[2] Arthur B. Laffer, Wayne H. Winegarden, and John Childs, “The Economic Burden Caused by Tax Code Complexity” (The Laffer Center, 2011), 4.

[3] Jason Clemens, Charles Lammam, and Matthew Lo, “The Economic Costs of Capital Gains Taxes in Canada” (Fraser Institute, 2014), 3.

 

You Want to Copy Scandinavia? Trust Me, You Don’t Want to Be Scandanavia

In a previous post about the Nordic economic model, I noted how the Scandinavian countries are not as “liberal” or “progressive” as Bernie Sanders and his sycophants would have you believe. Indeed, there are many things we should copy from the Nordic Model, like free trade, school choice, and low business taxes.

Now let’s talk about the things we should not copy. And I am not going to talk about nationalized health care or any of the other goodies: I am talking about things no reasonable person would favor. And that’s high taxes… On everyone, not just the rich.

Want free college, healthcare, and welfare? OK, how will you pay for it? Taxes! Unfortunately the rich won’t be the only ones paying it. It will be you, it will be me, it will be the working middle class. Sure, the rich will be paying for it too, but they do not have nearly enough money to pay for all of our needs. We’ll be forced to pick up the bill.

According to the Tax Foundation, America’s revenue as a percent of GDP from individual income taxes and payroll taxes is about 15%. Compare this to Denmark (26.4 percent), Norway (19.7 percent), and Sweden (22.1 percent).

Don’t get me wrong, the rich pay a lot of that. The following graph is the top marginal tax rate in each of the aforementioned countries.

Now, I know what you’re thinking: Ha, told ya so, the reason Sweden and Denmark have such high tax burdens is because the rich pay higher tax rates.

Not so fast. As the Tax Foundation notes, “the United States’ top marginal income tax rate is higher than Norway’s and only 18 percent lower than Sweden’s, yet raises 40 percent less income and payroll tax revenue than Norway and 50 percent less than Sweden.” So the extra revenue (compared to the U.S.) that these countries are raising cannot be fully explained by the amount paid by top earners. The gap is explained by the amount paid by the working class.

The Tax Foundation lays this out clearly for everyone to see:

Scandinavian income taxes raise a lot of revenue because they are actually rather flat. In other words, they tax most people at these high rates, not just high-income taxpayers. The top marginal tax rate of 60 percent in Denmark applies to all income over 1.2 times the average income in Denmark. From the American perspective, this means that all income over $60,000 (1.2 times the average income of about $50,000 in the United States) would be taxed at 60 percent.

Sweden and Norway have similarly flat income tax systems. Sweden’s top marginal tax rate of 56.9 percent applies to all income over 1.5 times the average income in Sweden. Norway’s top marginal tax rate of 39 percent applies to all income over 1.6 times the average Norwegian income.

Compare this to The United States. The top marginal tax rate of 46.8 percent (state average and federal combined rates) kicks in at 8.5 times the average U.S. income (around $400,000). Comparatively, few taxpayers in the United States face the top marginal rate.

The following graphic from the Tax Foundation illustrates this point:

Yeah, so the rich aren’t the only ones paying insanely high tax rates. So much for “equality” and “fairness.”

This doesn’t even get into the fact these nations have high Value Added Taxes (VAT). VAT taxes are extremely regressive and impact the poor much more than they impact the rich.

If, after reading this, you think more services from the government are worth the extra tax burden, that’s fine. But don’t insult my intelligence by saying the rich are the only ones picking up the tab. Have fun on April 18th.

Stop Demonizing Tax Havens

With the release of the Panama papers, progressives flocked social media to vent their hatred towards those who hide their money from the government. They assumed these were evil bankers, investors, and Wall Street entrepreneurs who were trying to avoid paying all taxes. Pretty evil, right?

Well, no, it’s actually a good thing. Everyone should chill out for two reasons:

First, offshore accounts do not pose much of a threat to the United States, and, secondly, tax havens serve a legitimate economic purpose that make us all better off.

  1. Tax Havens Are Not Even an Issue

Michael Tanner of the Cato Institute debunks liberal arguments that a large number of American citizens were found on the list. In fact, very few American citizens were “exposed” by the Panama paper leaks. According to Tanner,

[T]he consortium of journalists studying the papers has identified only 211 people with U.S. addresses, and not all of these people are American citizens. … [E]ven if you cast a wider net, looking at offshore financial assets worldwide, U.S. citizens and companies keep only about 4 percent of their wealth offshore, tying us with Asia for the lowest percentage. By comparison, Europeans stash 10 percent of their wealth offshore, Latin Americans move 22 percent out of their countries, and Russians keep an overwhelming 52 percent in overseas accounts. Even Canadians hold more than twice as much of their financial assets offshore as Americans.

Many may still worry that 4% of wealth stored offshore is a lot of money, and it is money the U.S. government should have in order to reduce the deficit, fix crumbling infrastructure, or fund the newest pet project of the left. However, according to Tanner, even if 80% of the wealth stored offshore was done so in order to avoid paying taxes—likely a generous number considering storing wealth in other countries makes sense for businesses that operate abroad—the U.S. only loses out on about $28 billion dollars, or one percent of current revenue.

Even assuming the worst case scenario, the revenue lost due to greedy businessmen hiding their money is not even significant! Sorry, leftists, you will have to find another way to pay for your utopian society.

Oh, and I almost forgot: That means Sanders’s prediction that free trade with panama would lead to massive a mounts of tax evasion never came true! That hasn’t stopped his sycophants from thinking he is clairvoyant, though…

  1. Tax Havens Serve a Legitimate Economic Purpose

Economist Daniel Mitchell has a new fascinating blog post up about the “necessary economic role of tax havens.” According to Mitchell, economists have come to the following consensus regarding taxation:

1) Lower tax rates promote more work and entrepreneurship; higher taxes discourage work and entrepreneurship.

2) Reducing the current tax bias against capital investment—currently it is taxed twice—will increase economic growth by encouraging saving and investment.

Mitchell argues that tax havens force governments to reduce the rates and the progressivity of their tax codes because, if politicians have to worry about wealth leaving their country in order to avoid taxation, they have to set reasonable tax rates or else they risk losing a substantial source of revenue.

In fact, this already happens between high tax and low tax states. One multibillionaire, David Tepper, moved his assets from high tax New Jersey to no tax Florida. As a result, New Jersey is expected to lose $50 million—and he’s just one man.

So, with bureaucrats worried about disappearing sources of revenue, they have been forced to reduce rates around the world. This began in the 1980s during the Reagan revolution; indeed, nowadays everyone is trying to cut their corporate and income tax rates as much as possible in order to attract investors. Mitchell, quoting the OECD, notes that tax havens “hamper the application of progressive tax rates.”

Now, many will think that is a bad thing. That’s fine. You’re allowed to ignore the research proving that higher progressivity is bad for economic growth. (Oh, and here and here too). But the simple fact is, tax havens have led to reductions in progressivity and marginal tax rates for decades now. And that’s a good thing.

Now, if you really want to bring wealth back to this country so we can tax it, I have a simple solution: Stop complaining and cut those tax rates!