Are Tax Cuts Useless?

A lot of conservatives and libertarians were complaining that the ‘Obamacare repeal’ passed by the House last week did not do enough to fully eradicate the monstrosity in root and branch. One overlooked aspect of the GOP bill, however, is that it contained very substantial tax cuts. Americans for Tax Reform provides a compendium of the cuts, which ATR says amount to over $1 trillion, presumably over ten years. Here is just a partial list of some of the biggest cuts:

-Abolishes the Obamacare Individual Mandate Tax which hits 8 million Americans each year.

-Abolishes the Obamacare Employer Mandate Tax. Together with repeal of the Individual Mandate Tax repeal this is a $270 billion tax cut.

-Abolishes Obamacare’s Flexible Spending Account tax on 30 million Americans. This is a $20 billion tax cut.

-Abolishes Obamacare’s Chronic Care Tax on 10 million Americans with high out of pocket medical expenses. This is a $126 billion tax cut.

-Abolishes Obamacare’s 10% excise tax on small businesses with indoor tanning services. This is a $600 million tax cut.

-Abolishes the Obamacare health insurance tax. This is a $145 billion tax cut.

-Abolishes the Obamacare 3.8% surtax on investment income. This is a $172 billion tax cut.

Gotta love that last one–a tax cut exclusively for rich people. In contrast, on the spending side, the GOP left Obamacare’s massive system of subsidies largely intact. And in the latest budget deal, they couldn’t even defund the Corporation for Public Broadcasting. But they’re all about tax cuts for the rich. Never change, GOP.

Of course, it’s always politically easier to cut taxes than to cut spending. So, should we be thankful that at least we got tax cuts? Or are the tax cuts useless without accompanying spending cuts?

The science of tax cuts vs. spending cuts is not settled. There are two conflicting schools of thought. One school of thought says that spending cuts are more important than tax cuts because it is spending in the long run that drives taxes, and not the other way around. From this perspective, tax cuts without spending cuts can only be temporary, because in the long run, taxes will have to rise to match the level of spending. This theory implies that the GOP’s tax cuts are useless, because taxes in the future will have to rise by necessity in order to pay for the ongoing Obamacare spending. It is indeed indisputable that, eventually, all spending has to be paid for with taxes.

Nonetheless, the causal relationship between spending and taxes may work in reverse–taxes might drive spending. Lower taxes might effectively restrain the size of government simply because the government will have less money to spend. This is the so-called Starve the Beast theory of tax cuts.

In reality, the causality between taxes and spending probably runs in both directions; to a considerable degree, taxes and spending both influence each other. But if so, then tax cuts can have at last some influence on spending. At least to some degree, it is possible to starve the beast, or at least force the beast to count calories. The late, great Milton Friedman implicitly endorsed Starve the Beast when he famously declared that he was “in favor of cutting any tax, at any time, for any excuse.” That rule would obviously validate all of the House GOP’s tax cuts.

Personally, I’ve often thought that the strongest evidence that taxes can drive spending is the fact that Democrats generally hate all tax cuts, and always try to raise taxes whenever they think they can get away with it. That’s how all these Obamacare taxes got enacted in the first place. “At what level would tax rates be too high?” is a question to which Democrats never have an answer. That’s because Democrats must suspect, at least intuitively, that limits on taxes can restrain spending, and Democrats have no desire to restrain spending.

In the long run, perhaps the greatest weapon against big government is tax resistance, and tax resistance should therefore always be encouraged. The main thing–perhaps the only thing–that prevents boundless growth of government is the simple fact that people do not like to pay taxes.

If the Republican Congress does not have the guts to cut spending, then cutting taxes–any taxes–is still better than nothing.

Want to eliminate ‘perverse incentives’? Abolish the Corporate Income Tax

Democrats in Congress recently engaged in some political grandstanding that reveals the typical twisted economic logic of liberalism. They want to tax “excessive” employee pay.

The bill, from Rep. Lloyd Doggett, D-Texas, and Sen. Jack Reed, D-R.I., is meant to stop senior employees from getting huge bonuses that their companies can deduct from their corporate tax bill each year.

Under current law, companies can deduct employee salaries from their taxable income as long as those salaries don’t exceed $1 million per year. Democrats say companies are getting around that limit by paying out millions in bonuses that they also get to deduct from their tax bill.

Doggett said the bill would require companies to pay taxes on those millions in bonus awards.

Yeah, well, maybe first Lloyd Doggett and Jack Reed can explain why it’s any of their business how much a company voluntarily pays its employees. Top talent does not come cheap, and if the shareholders and their representatives on the Board of Directors are OK with paying top dollar, it’s their business and nobody else’s.

“Our tax code has a perverse incentive for companies: the more you pay your executives, the less you’ll pay in taxes,” Doggett said. “It is wrong to compel working families and small businesses to foot part of the bill for lavish executive bonuses.”

This deceptive rhetoric is intended to convey the false impression that the executive incomes are being unfairly subsidized. But in fact, by using bonuses to reduce their tax liability, firms are properly restoring the tax treatment of executive pay as a legitimate business expense. The way the corporate tax is supposed to work is that business expenses are fully deductible–and that should include paying for corporate talent just like any other resource.

Doggett’s objection to the fact that “the more you pay your executives, the less you’ll pay in taxes” is absurd because the same can be said of every other business expense. The more the firm pays its manual laborers, the less it pays in taxes. Does that mean the firm has a perverse incentive to pay its manual laborers too much? No, because any overpayents would have to come at the expense of corporate profits.

Doggett talks about wanting to get rid of a perverse incentive, but his bill would have the opposite effect–it would give firms a perverse incentive to employ less scarce executive talent than they should optimally use. Doggett’s bill singles out executive pay for a special tax that does not apply to other business expenses. That gives firms a perverse incentive to skimp on executive talent in favor of other resources that are taxed at a relatively lower rate. Doggett and Reed propose to get rid of a perverse incentive while actually creating one.

Moreover, if Democrats were really serious about removing perverse economic incentives, they would render this debate about taxing executive bonuses altogether moot by abolishing the corporate income tax altogether. The corporate income tax creates a hugely destructive perverse incentive by double-taxing future consumption.

It works like this. People earn income in order to pay for consumption. People have the option, however, of taking their consumption now, or saving their income to consume in the future. Current consumption is taxed only once, by the personal income tax. But future consumption gets taxed a second time by the corporate income tax.

You save your money by purchasing stock that you hope will pay you a dividend so you can consume more in the future. But before the company can pay you that dividend out of its profits, the profits get taxed by the corporate income tax. So now you’ve effectively paid taxes a second time on the same income you earned originally. This double taxation of future consumption creates a perverse incentive for people to favor current consumption since it is only taxed once. That is, people will save less, which reduces capital accumulation, and lowers the growth and efficiency of the whole economy.

Of course, the Democrats are not serious about eliminating perverse incentives. Doggett and Reed know they can never get this bill passed in a GOP Congress. They’re just engaging in political grandstanding. Sad.

Plutocrats Plotting Payroll Tax Hike?

Key elements of America’s ruling class think you’re not giving enough money to Wall Street, so they have a plan to force you to give more. The so-called James-Ghilarducci plan would force workers to pay a new three percent payroll tax to fund a personal retirement account to be managed by Wall Street firms. The cost to workers would be partially offset by a tax credit of up to $600, and the government would (somehow) guarantee at least a 2 percent annual return, regardless of market conditions.

The plan is being pushed by Blackstone president Tony James, who just by coincidence also happens to be raising millions of dollars for Hillary. As a result, Hillary’s top aides are reportedly warming to his plan.

You have to be a fool to think that James is doing this out of goodwill and public spiritedness. The plan promises to provide firms like his with a huge spigot of cash for accounts on which the firms will charge lucrative fees.

Right now, laws prohibit retirees from investing 401(k) balances in risky and sometimes opaque ‘alternative investments’ offered by hedge funds and private equity firms. Maybe that restriction should be lifted, but James’ plan forces savers to participate.

Chris Tobe, a Democrat who advises institutional investors and who served on Kentucky’s pension board, put it just as bluntly: “James’ plan is a deliberate attempt to get around federal protections for retirees because alternative investments are not generally allowed in the 401(k) world. This is about making Blackstone and other private equity firms even richer than they already are.”

The most objectionable aspect of the James-Ghilarducci plan is its coercive nature. The retirement accounts would be mandatory, and workers would be forced to pay a new three percent tax. A typical household making $60,000 per year would have to cough up $150 every month. Maybe you had other plans for that $150, but the plutocrats have decided they know better; you have to hand the money over to Wall Street.

Worse, under the plan, individuals don’t even get to decide how their own money shall be invested. People can’t choose for themselves how to allocate their own portfolio. That will be decided by the plutocrats.

Under their proposal, “Retirement portfolios would be created by a board of professionals who would be fiduciaries appointed by the president and Congress,” James and Ghilarducci wrote in a New York Times editorial.

James is trying to sell the plan by promising real returns of 6 or 7 percent. In an economy that can’t manage even 3 percent growth, that promise is simply not realistic.

[E]conomist Eileen Appelbaum told IBT, the James-Ghilarducci plan is built on earnings projections that are fanciful.

“The plan’s promise of 6 to 7 percent returns is likely to prove unrealistic, and they fail to discuss the risks inherent in the risky investments that would have to dominate the savings portfolio that could yield such returns,” said Appelbaum, who co-authored the book “Private Equity at Work” and published a study suggesting lower private equity returns are a new normal.

“This proposal is about Wall Street getting more assets under management because that is where they make their money,” she said.

I also fail to see how government could conceivably guarantee the balances. The tax would generate something like $300 billion per year flowing into the new accounts. After one or two decades, the accounts would contain several trillion dollars. And these funds would largely be invested in assets that are relatively risky. In fact, investing in riskier assets is the whole point of the plan, which is to open up risky asset classes that are currently unavailable to 401(k)s. If we experience a crash like we did in 2009, and asset prices fall by 50% or more, the government would be on the hook for trillions in bailout money. Where would that money come from?

The other problem with the plan is that it would increase corruption by furthering ties between Wall Street and government. Wall Street would benefit from a steady source of cash, but the political class would get to dictate the terms of the deal to Wall Street. The government would decide how much Wall Street could charge in fees, and maybe even which firms could receive the cash. Government influence might also politicize the allocation of credit, which in the long term would impair the efficiency of financial markets and the growth of the economy.

What will happen, of course, is the same thing we saw with health care and pretty much every other part of the economy these days. It will be a bust out. The billions that pour into these new funds will be “invested” in things that benefit the rulers. Politicians will get advance notice on some new move so they can cash in their privileged status. The fund managers will kick back a piece of their rake to the politicians for the right to manage these funds. It will be systematic robbery of the middle class.

Will the plan be enacted? Hillary has not been campaigning on it, and when asked to comment on the article excerpted above, her campaign declined. So they won’t even talk about it. But if they don’t talk about it now, during the presidential campaign, then a future Clinton administration will have no political legitimacy for imposing it on the people. A policy change this significant should be debated during the campaign so that voters can have their say. To keep quiet and then spring the plan only after the election would betray the principles of representative democracy. That’s not to say it won’t happen, but if it does, it would be politically illegitimate.

Government Devastates Tanning Industry; Media Applauds

A recent article in Digital Journal reports that government regulations and taxes in recent years have dealt a devastating blow to the indoor tanning industry, and as a result, roughly half of the tanning salons in America have been driven out of business. The article is fascinating not just for the details of how government has unfairly targeted tanning, but also for the arrogant and tendentious attitude of the journalist who reports the story. Instead of a straight reporting of the facts, Digital Journal smears and belittles small business owners for objecting to government policies that make it difficult or impossible for them to make a living. This, apparently, is what passes for journalism nowadays.

[T]he tanning industry is blaming a little-noticed 10 percent tax on tanning that the Affordable Care Act contains as being the main reason for the closing of close to 10,000 of the more than 18,000 tanning salons in the country, according to Fox News.

The tax was “little noticed” by whom? Because I can assure the author that the tax was well noticed by both salon owners and their customers.

Rather than admit to health violations or refusing to follow state and federal rules governing tanning salons, the tanning industry has instead gathered in force to blame Obamacare for the closure of what they claim is 10,000 facilities across the nation.

The sentence is ungrammatical, but let’s leave that aside. What does ‘admit to health violations’ have to do with small business owners complaining about a tax? Is every salon in the country guilty of health violations? Or is it just all 10,000 of the salons that went under? Is the right to complain about a tax contingent on not having health violations anywhere in an industry with thousands of independent firms? Also, why say that the industry “claims” 10,000 salons have closed. Is that true or not? Isn’t verification of this claim part of the job of the journalist?

Of course, many people believe the industry is overstating Obamacare’s impact on the tanning industry, pointing out that state and federal regulations restricting minors from using tanning salons, health violations, as well as public service announcements warning of the adverse health effects of using tanning salons have had the greatest impact on salon closings.

So the war against tanning has not been limited to the tax, but has been multifaceted.

And there is the hint of political motivation that has been thrown into the mix. Many salon owners are saying the overhaul of the health care act will be on their minds come election day, citing the Republican “promise” to repeal the Affordable Care Act when and if they are elected.
“When I go to vote, I’m supporting candidates who are pro-business and who want less government involvement, less government regulation,” said Chris Sternberg, senior vice president of Sun Tan City, a Louisville, Kentucky-based chain with nearly 300 salons in 22 states.

The author apparently believes not only that it’s OK for government to pick winners and losers, but that the losers shouldn’t be able to try to defend themselves by participating in the political process.

It does the heart good to know there are some tanning salon owners that really don’t care about the health of their customers, putting profits before anything else.

How do you know that the owners “don’t care about the health of their customers?” Is that something you can back up with hard evidence, or do you just like to impugn people’s motives? Also, let us know when you find that society that runs on selflessness rather than self interest. Pol Pot tried in Cambodia but couldn’t make it work.

In New York state in February this year, 42 tanning salons were cited for violations that included, “failing to warn patrons of the danger of overexposure to ultraviolet rays, failing to post signs that serving minors is prohibited, failing to test disinfectants and failing to have manufacturing manuals for UV devices on the premises,”

Not enough signs? Disinfectants that weren’t “tested”? Didn’t have the owner’s manual handy? THE HORROR. But what does that have to do with the failure of 10,000 salons?

The tax is not meant to single out tanning salons or their customers.

Regardless of what was “meant,” the tax does effectively single out salons and their customers. Every penny of the tax is paid by salons and their customers and to a lesser degree by people in supporting industries.

The American Cancer Society Cancer Action Network says those who use tanning beds before age 35 increase their lifetime risk of melanoma, the deadliest type of skin cancer, by 59 percent.

Maybe, but tanning creates Vitamin D, which is perhaps the most effective anti-cancer nutrient known to man. In fact, people diagnosed with non-melanoma skin cancer (not the deadly one), which is a proxy for sun exposure, actually have a lower overall risk of death from all other causes, including heart attacks.

But of course, the pros and cons of tanning are a different subject from the effects of the tax on the industry or the right of the industry to fight the tax by participating in the political process.

We don’t know anything about the author of this Digital Journal piece, but we’d bet a lot of money she is under 35, probably under 30. Sad.

Patriotism means paying as little tax as possible

Throughout history, statist scolds have tried to convince people that they should feel good about paying a lot of taxes. For instance, on display above the entrance to the IRS building in Washington, DC, is a quote from Oliver Wendell Holmes, Jr.: “Taxes are the price we pay for a civilized society.” Similarly, Joe Biden in 2008 and again in 2012 argued that high-earning Americans had a patriotic duty to pay high taxes.

“It’s time to be patriotic,” Biden said. “Time to jump in, time to be part of the deal, time to help get America out of the rut.”

Biden’s view, however, was recently contradicted by Donald Trump. In an interview, Trump and Democrat operative George Stephanopoulos had the following exchange:

TRUMP: I fight very hard to pay as little tax as possible.

STEPHANOPOULOS: What is your tax rate?

TRUMP: It’s none of your business. You’ll see it when I release. But I fight very hard to pay as little tax as possible.

We’ve got to side with Trump on this one. There may have been times in history when paying taxes was patriotic such as during the Civil War or World War II, when the nation was engaged in a mortal struggle for a moral cause. But these days, an extra dollar in taxes doesn’t buy us more ‘civilized society.’ On the contrary, an extra dollar in taxes probably does more harm than good. The government wasting that dollar or giving it to someone undeserving–like the owners of politically connected solar companies–is almost a best-case scenario. Worst case, that dollar goes to finance literal mayhem and oppression, like funding the War on Drugs, or destabilizing Libya.

The law and the Constitution say we have to pay our taxes. But that obligation exists only so long as the government itself obeys the law and the Constitution. And the fact is that our federal government broke free of constitutional restraints long ago. A federal government that is so intrusive that it

  • tells you that you must, as a condition of lawful citizenship, purchase medical insurance
  • tells you what treatments and procedures your medical insurance must cover
  • regulates the flow of your shower head and the flush of your toilet
  • regulates sex between adults on college campuses
  • sets bathroom policy for local schools


is a federal government that is in no meaningful sense restrained by the Constitution. As such, the government lacks legal and moral legitimacy. It follows that no one should feel guilty about paying less in tax. Nor should anyone feel good about paying more in tax. Indeed, we would argue that the moral position is to, like Trump, “fight very hard to pay as little tax as possible.” That does not mean we are advocating law breaking, but people should try to take as many legal deductions as possible.

But that’s a position that’s clearly contrary to the interests of America’s political class. While Biden argued that paying taxes was patriotic, his colleague Barack Obama maintained that paying taxes was just “neighborliness.”

If I am sitting pretty, and you’ve got a waitress who is making minimum wage plus tips, and I can afford it and she can’t — what’s the big deal for me to say, ‘I’m going to pay a little bit more.’ That is neighborliness.

We have a better idea. Instead of paying more in tax, pay less in tax, and then with the money you save, give the waitress a bigger tip.

Redistribute GPAs? (Revised)

In chapter three of The Road to Freedom, Arthur Brooks points out that many of his students at Syracuse University believed that the government should redistribute wealth from rich to poor. Brooks proposed to the students the following idea. He would “take a quarter of the points earned by the top half of the class and pass them on to the students in the lower half of the class.” Despite their support for wealth redistribution, the students “were in unanimous agreement that this was a stupid idea.” Of course, but what’s the difference between grade-point redistribution and wealth distribution? If redistributing GPAs is wrong, doesn’t it follow that redistributing wealth is also wrong?

Turns out that Brooks is not alone in making this analogy, and many students have taken the opportunity to post amusing Youtube videos in which their fellow students struggle to explain why they support redistribution of wealth but not GPAs.


The GPA analogy must have hit a nerve, because “progressive” students got out their video cameras to make responses. Check out this reply by the young tax experts at something called TYT (The Young Turks) University.


To the best we can discern, the young people in this video make two main points.

First, the top 1% of rich people are not paying their fair share of taxes, as evinced by the fact that Mitt Romney paid only 13% of his income, while middle-class people typically have to pay a higher rate.

We agree that rich people should pay more in taxes than should middle-class or poor people. But the U.S. tax code is already very progressive. The top 1% of earners account for more than one-third of the income-tax revenue, and the top 10% account for more than one-half.

Furthermore, the 13% figure is grossly misleading. As the Young Turks themselves acknowledge, Romney’s tax rate was relatively low because the vast majority of his income was derived from investments, which are taxed at 15%, lower than the rate on “ordinary” income. What the Young Turks probably don’t realize is that there was a time, years ago, in this country when investment income was in fact taxed at a rate similar to that on ordinary income. That policy didn’t work out very well because the tax deterred investment and didn’t do much to generate revenue. As a result, something like a bipartisan consensus formed to tax investment income–dividends and capital gains–at a lower rate.

Nevertheless, it is not true that investors like Romney are taxed at only 15%, and that is because taxing investment income amounts to double taxation. The money that investors use to purchase securities comes from after-tax income. The money that Romney invested was already taxed–as ordinary income–at the time that he first earned it. If he had immediately blown the money he earned on hookers and booze, he would have owed no further tax. That’s because current consumption is taxed only once. But since Romney invested the money instead of spending it, he’s taxed again. Future consumption is taxed more than once, which creates a distortion and an inefficiency. It follows that the efficient tax rate on investment income is (approximately) ZERO, which happens to be the actual rate in Japan. The Young Turks think 15% is too low, but in fact the rate should be near zero!

Future consumption, however, is not just double taxed, it is triple taxed. That’s because, before the corporations get around to paying Romney his dividends, they must first pay the corporate income tax. At 35%, the U.S. has one of the highest corporate income tax rates of any country in the world. The tax accountants, however, usually find enough deductions so that corporations pay on average about 25%. Still, that means that Romney’s dividends were already taxed at 25% before being payed out to him, and then taxed another 15% when he received them. The combined effect of these taxes is 36.25%, and again, this falls on top of the taxes Romney already paid during the year in which he first saved the money.

Maybe the Young Turks should learn something about our tax system before they upload their thoughts about it to youtube.

The second major point the Turks try to make is that competition in the marketplace, unlike competition for school grades, is fundamentally unfair. Indeed, the female Turk argues that “the 1%” are “mostly bankers” who got rich by “cheating” or otherwise doing unspecified things “that society frowns upon,” and so they do not “deserve” the money that they have. The male Turk then uses bribery as a metaphor to describe how the rich got rich. In short, the whole system, according to the Turks, is rigged.

But can this be true? Did Henry Ford get rich by bribery, or by revolutionizing the auto industry? Did Bill Gates get rich by bribery, or by revolutionizing the computer industry? Was Steve Jobs a crooked banker? Look, nobody said life was fair, and we can always dig up examples of people trying to gain unfair advantage by engaging in various shenanigans. The fact remains, however, that our largely (for now) market-oriented system does, for the most part, reward hard work and ingenuity.

We do find it disturbing that young people in particular should argue that the system is rigged and opportunity a mirage. Young people, with the chance before them to shape their entire adult lives, should be optimistically planning and pursuing their dreams, not whining about how the deck is hopelessly stacked against them. For this failure, some of the blame must be assigned to the schools.

Furthermore, even if we accept the Young Turk argument that people are cheating, how does this justify redistribution? For instance, to pursue their own metaphor, suppose that some people were obtaining high grades by resorting to bribery. In that case, would the obvious solution be to redistribute grades by giving extra marks to those who have not earned them, and in the process perhaps also taking marks away from those who did earn them? Or would the proper response be to, you know, put a stop to the bribery?

And which is the economic system that facilitates getting ahead through ‘bribery’ of one sort or another? That would be a socialistic system, where government officials have the power to determine who gets what, where, when, and how. If the Young Turks really want to abolish the role of ‘bribery,’ they should advocate for free markets.

The really interesting thing, however, is that the Turks felt compelled to argue that the rich did not earn their wealth legitimately. Inadvertently, they have effectively conceded the point that wealth earned legitimately should not be redistributed! Since different people have widely varying willingness and abilities to legitimately create wealth, it follows that wide disparities of wealth can exist without justifying distribution, just as wide disparities exist in GPAs. That was indeed the exact point that the GPA analogy was intended to make. As the kids say, “Game over.”

We cannot conclude this post, however, without noting Female Turk’s really jaw-dropping argument that the way the rich “give people opportunities” is by “paying taxes.” Oh, is that where opportunity comes from? Only through government? Gosh, all these years we thought that rich people gave opportunities by starting and expanding businesses and thereby creating jobs, and by developing new products and services that improve our standard of living.

Female Turk–another proud product of modern America’s schools.

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The Costs of Socialism, Seen and Unseen

Four days ago, under the heading “Socialism is Theft,” we wrote the following.

We suppose a lot of freeloaders do comfort themselves that it’s greedy billionaires who will be forced to pay. The fact, however, is that there simply aren’t enough billionaires out there to tax. The only way to provide the general population with the usual panoply of giveaways is to tax the middle class and even the working class. That’s why Western Europe taxes basically all income classes at very high rates.

Two days later, David (not Arthur) Brooks, almost as if he had read our post, wrote in his New York Times column as follows.

[Socialist Bernie] Sanders would centralize power in Washington. If you radically increase the amount of money going to the Washington establishment, as Sanders would, you’re giving that establishment greater resources to control American life.

Second, Sanders would weaken the ability of members of the middle class to make choices about their own lives. He would raise taxes on the rich, but there is only so much money you can squeeze out of such a small group of people. European welfare states generally rely on a highly regressive value-added/sales tax — usually around 20 to 25 percent.

Middle classes across Europe bear a much higher tax load than the American middle class. As Austan Goolsbee, a former economic adviser to President Obama, has noted, you really can’t have a Swedish-style welfare state without a broad high tax burden. That means less spending power for most Americans, and fewer resources to choose one’s own lifestyle.

The taxes people have to pay, however, constitute only a part, and not necessarily the largest part, of the total cost of socialism. People, if they care to look, can (mostly) see how much they pay in taxes. But socialism imposes potentially even larger costs that are unseen. As David “Don’t Call Me Arthur” Brooks points out

Sanders would change the incentive structure for the country’s most successful people. He proposes raising the top tax rate to 52 percent. As Josh Barro noted in The Times, when you add in state, local and other taxes, top earners would be paying a combined tax rate over 73 percent. In high-tax locales like New York City and California, it would be even more.

It’s possible that entrepreneurs, company founders and others would pay these rates without changing their behavior, but I wouldn’t count on it. When you make risk-taking less rewarding, you get fewer risk-takers, which is exactly what you see across the Atlantic. When you raise taxes that high, the Elon Musks of the world find other places to build their companies.

Indeed, no one ever sees the new businesses not started, and the new products and technologies not developed, because some budding entrepreneur was dissuaded by high taxes and burdensome regulations.

On a similar note, check out this column by Harvard economist Greg Mankiw, who says, “I can afford higher taxes. But they’ll make me work less.”

So again, taxes involve two costs. There’s the money that must be paid, most obviously. But less obviously there is an additional cost from the distortion of people’s economic choices and behavior.

The Welfare State: No Free Lunch

Self-proclaimed socialist Bernie Sanders likes to hold up Denmark’s welfare state as some sort of ideal. Sanders believes that America should emulate Denmark by offering ‘free’ university education, ‘free’ healthcare, ‘free’ childcare, generous parental leave, etc.. In response, the Washington Post published an interview with Michael Booth, a Brit who lived for several years in Denmark and wrote a book about the experience. The part of the interview that caught our attention involved taxes.

Denmark has the highest direct and indirect taxes in the world, and you don’t need to be a high earner to make it into the top tax bracket of 56% (to which you must add 25% value-added tax, the highest energy taxes in the world, car import duty of 180%, and so on).

Adding the value-added tax to the income tax implies a marginal tax rate of about 65%. And keep in mind that this is not for someone who’s rich–just middle class. Socialists like Sanders admire Denmark’s high degree of equality. But no wonder everyone’s so equal with those tax rates. How can anyone get ahead when for every extra three dollars you earn the government takes two and lets you keep only one?

But of course the high taxes are necessary to pay for all that ‘free’ stuff. If Sanders and other socialists were honest, they’d have to acknowledge that a Danish-style welfare state requires taxing the bejeezus out of the middle class.


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Cradle-to-Grave Socialism: Who Pays?

The central swindle of socialists is that they convince people that government will supply them with free stuff, and that somebody else–billionaires, corporations–will pay for it. But the problem with socialism, as Margaret Thatcher famously said, is that eventually you run out of other people’s money. There simply are not enough billionaires to tax to support a massive welfare state. And so, taxes end up higher on virtually everyone.

Although the United States maintains a trillion-dollar welfare state, European governments give out even more free stuff. For instance, in France, university students not only get free tuition, they even get free meals. Who pays for all that? Answer: Just about everybody.

In Europe the middle class pays a higher fraction of their income in taxes. In Europe, even the poor pay more in tax. The poor pay more in tax because Europe largely funds its welfare states with regressive value-added taxes that make almost all goods and services more expensive for poor people.

Now self-proclaimed socialist Bernie Sanders says he wants America to give away the same free stuff that Europe does, in particular, “paid family and medical leave.” Who pays for that? Sanders is honest enough to admit that he wants to raise taxes on virtually everyone.

Sanders said, “I think if you are looking about guaranteeing paid family and medical leave, which every other major country has so that when a mom gives birth she doesn’t have to go back to work in two weeks. Dad or mom can stay home with the kids. That will require a small increase in the payroll tax.”

Stephanopoulos said, “That’s going to hit everybody.”

Sanders agreed saying, “That would hit everybody, yeah, It would but it would mean we were drawing the rest of the industrialized world and make sure that when a mom has a baby she can in fact stay home with that baby for three months rather than go back to work at the end of one week. We are the only country, only major country that doesn’t guarantee paid family and medical leave. We do a lot of great things in this country but we are behind many other countries in protecting the middle class and working families.”

By the way, what sense does it make to argue that, because the “rest of the industrialized world” does X, the U.S. should also do X? Since when are these countries in the “rest of the industrialized world” the authorities on social policy? The two largest economies in that group–Japan and Germany–were within living memory run by genocidal mass murderers. Some of them, like Spain, Portugal, and Greece, were run by military dictators as recently as the 1970s.

The “rest of the industrialized world” has no First Amendment and no Second Amendment. Most of the industrialized world has no legal protections equivalent to the Fourth and Fifth Amendments. Would Bernie Sanders recommend that the U.S., in order to become more like the rest of the industrialized world, repeal the Bill of Rights?

The fact is that the United States was founded primarily by people who left Europe because they didn’t like how things were done there. The United States is supposed to be an alternative to Europe, not an imitation of Europe. What point would there be to living in the U.S. if the U.S. were to become just like Europe except with less art and worse food? Might as well just move to Europe.





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How Taxes Changed Boxing

Came across this older piece for the Atlantic that both presents Joe Louis’s sad battle with the IRS and suggests a possibly interesting research topic:

It is April 15, Tax Day, and so a sports fan’s fancy turns to thoughts of…boxing?

It’s now on the periphery of sporting awareness or interest, but there was once a time—and a very long time it was—when there was no bigger event in sports than a heavyweight title fight. And no bigger pay day. That’s where taxes come in.

For a very long time, boxing was the only really big-money sport for athletes. Not for nothing did Marlon Brando’s Terry Malloy regret taking the dive that cost him “the title shot outdoors in the ballpark” in On the Waterfront. At a time when Babe Ruth was being razzed for his $80,000 salary (more than the President of the United States, it was pointed out, to which Babe supposedly replied in 1930, “Well, I had a better year than he [President Hoover] did”), heavyweight champion Jack Dempsey made about nine times as much—over $700,000, for his unsuccessful title defense against Gene Tunney in 1926. And Tunney made $990,000 when he defended the title (and survived the infamous “long count”) against Dempsey the next year. Between the two of them, they earned more than the entire 1929 payroll of baseball’s American League in their two championship fights.


The 1950s was the era of the 90 percent top marginal tax rate, and by the end of that decade live gate receipts for top championship fights were supplemented by the proceeds from closed circuit telecasts to movie theaters. A second fight in one tax year would yield very little additional income, hardly worth the risk of losing the title. And so, the three fights between Floyd Patterson and Ingemar Johansson stretched over three years (1959-1961); the two between Patterson and Sonny Liston over two years (1962-1963), as was also true for the two bouts between Liston and Cassius Clay (Muhammad Ali) (1964-1965). Then, the Tax Reform Act of 1964 cut the top marginal tax rate to 70 percent effective in 1965. The result: two heavyweight title fights in 1965, and five in 1966. You can look it up.

So, do the number of heavyweight boxing matches per year move inversely with the top marginal tax rate? I found some data here that students needing an econometrics, forecasting, or applied statistics paper topic may find useful.