Washington is teeing up "the rich" for a big tax hike next year, as a way to make them "pay their fair share." Well, the latest IRS data have arrived on who paid what share of income taxes in 2006, and it's going to be hard for the rich to pay any more than they already do. The data show that the 2003 Bush tax cuts caused what may be the biggest increase in tax payments by the rich in American history.

The nearby chart shows that the top 1% of taxpayers, those who earn above $388,806, paid 40% of all income taxes in 2006, the highest share in at least 40 years. The top 10% in income, those earning more than $108,904, paid 71%. Barack Obama says he's going to cut taxes for those at the bottom, but that's also going to be a challenge because Americans with an income below the median paid a record low 2.9% of all income taxes, while the top 50% paid 97.1%. Perhaps he thinks half the country should pay all the taxes to support the other half.

Aha, we are told: The rich paid more taxes because they made a greater share of the money. That is true. The top 1% earned 22% of all reported income. But they also paid a share of taxes not far from double their share of income. In other words, the tax code is already steeply progressive.

We also know from income mobility data that a very large percentage in the top 1% are "new rich," not inheritors of fortunes. There is rapid turnover in the ranks of the highest income earners, so much so that people who started in the top 1% of income in the 1980s and 1990s suffered the largest declines in earnings of any income group over the subsequent decade, according to Treasury Department studies of actual tax returns. It's hard to stay king of the hill in America for long.

The most amazing part of this story is the leap in the number of Americans who declared adjusted gross income of more than $1 million from 2003 to 2006. The ranks of U.S. millionaires nearly doubled to 354,000 from 181,000 in a mere three years after the tax cuts.

This is precisely what supply-siders predicted would happen with lower tax rates on capital gains, dividends and income. The economy and earnings would grow faster, which they did; investors would declare more capital gains and companies would pay out more dividends, which they did; the rich would invest less in tax shelters at lower tax rates, so their tax payments would rise, which did happen.

The idea that this has been a giveaway to the rich is a figment of the left's imagination. Taxes paid by millionaire households more than doubled to $274 billion in 2006 from $136 billion in 2003. No President has ever plied more money from the rich than George W. Bush did with his 2003 tax cuts. These tax payments from the rich explain the very rapid reduction in the budget deficit to 1.9% of GDP in 2006 from 3.5% in 2003.

This year, thanks to the credit mess and slower growth, taxes paid by the rich may fall and the deficit will rise. (The nonstimulating tax rebates will also hurt the deficit.) Mr. Obama proposes to close this deficit by raising tax rates on the rich to their highest levels since the late 1970s. The very groups like the Congressional Budget Office and Tax Policy Center that wrongly predicted that the 2003 investment tax cuts would cost about $1 trillion in lost revenue are now saying that repealing those tax cuts would gain similar amounts. We'll wager it'd gain a lot less.

If Mr. Obama does succeed in raising tax rates on the rich, we'd also wager that the rich share of tax payments would fall. The last time tax rates were as high as the Senator wants them -- the Carter years -- the rich paid only 19% of all income taxes, half of the 40% share they pay today. Why? Because they either worked less, earned less, or they found ways to shelter income from taxes so it was never reported to the IRS as income.

The way to soak the rich is with low tax rates, and last week's IRS data provide more powerful validation of that proposition.

-- Wall Street Journal

Labels: Economics, tax cuts, taxes

[WSJ] For those who still claim that tax rates don't matter to economic decisions or U.S. competitiveness, we present Exhibit A: the 2004 American Jobs Creation Act.

This law gave American companies a one-year window in 2005 to repatriate earnings from foreign subsidiaries to the United States at a 5.25% tax rate. Normally companies must pay the 35% U.S. corporate tax rate, minus a credit for whatever foreign taxes they paid on those earnings.

The IRS examined the results from this tax cutting experiment and found that the money came back in a flood. More than 800 U.S. corporations repatriated $362 billion from foreign operations. Congress's Joint Committee on Taxation had predicted closer to $200 billion. These dollars are now being invested in the U.S., rather than remaining in Europe or China. This capital infusion may be one reason that U.S. business investment rose 9.6% in 2005 – the highest rate in more than a decade.

Many Democrats, liberal groups and even some economists in the Bush Treasury opposed the measure four years ago, predicting it would lose revenue and merely be a tax holiday for profitable corporations. The Joint Tax Committee estimators also blundered again by predicting a mere $2.8 billion in revenue gains in the first year and then big losses after 2005. As always, they underestimated how tax reductions change behavior. The tax incentive raised $18 billion in 2005, and revenues have continued to exceed estimates. Instead of getting 35% of nothing, as U.S. companies kept their cash abroad, the Treasury took in 5.25% of the hundreds of billions the companies brought home.

Labels: Economics, tax cuts, taxes

Forget Oil, Tax Lawyers' Windfalls
June 25, 2008; Page A14

Recent investigations of some plaintiffs tort law firms have resulted in criminal pleas or massive settlements in the hundreds of millions of dollars, as you've documented in several editorials including "The Firm" (June 18). More investigations are to follow, according to the news. My point is that these cases have finally disclosed an inconvenient truth: The plaintiffs tort bar makes obscene profits at incredible profit margins.

Meanwhile, the Democrat-controlled Congress wants to tax oil companies on their "windfall profits." Why are they not targeting the plaintiffs tort bar for their outrageous profits? The profit margins they make would likely be found to be obscene to most Americans, especially when people are made to realize that the oil companies' profit margins are not only below most other industries, but far, far less than that of the plaintiffs bar.

The reason we hear nothing about these law firms is simple: The tort lawyers are among the biggest contributors to the Democratic Party. Not only does Congress ignore the obscene profits of the tort bar, but new laws are being proposed or passed that protect or enhance those profits. An example is the recent bill to allow tort lawyers to deduct "loans" made to clients to finance their litigation.

If taxing "windfall" profits is truly the goal, then the tort bar is certainly an appropriate target. Personally, I have no problem with anyone making as much profit as they can in a free market, but then I am not the one grandstanding and demanding new taxes on "windfall profits." For me, I bet on Congress's hypocrisy to win out over its alleged principle on this one.

John Watson
Marietta, Ga.

Labels: Economics, energy, Oil, tax cuts, taxes

New Evidence on Government and Growth
By KEITH MARSDEN
June 16, 2008; Page A15

In the early 1980s, Ronald Reagan embraced the ideas of a small group of economists dubbed "supply-siders." They argued that lower taxes and slimmer government would stimulate growth, enterprise, harder work and higher levels of saving and investment. These views were widely ridiculed at the time, dismissed as "voodoo economics."

Reagan did succeed in lowering some taxes. But a Democrat-controlled Congress weakened their impact by raising government spending sharply, resulting in large budget deficits.

A quarter of a century later, many more countries have cut taxes and reined in heavy-handed government intervention. How far have they gone down this path, and with what success?

My study, "Big, Not Better?" (Centre for Policy Studies, 2008), looks at the performance of 20 countries over the past two decades. The first 10 have slimmer governments with revenue and expenditure levels below 40% of GDP. This group includes Australia, Canada, Estonia, Hong Kong, Ireland, South Korea, Latvia, Singapore, the Slovak Republic and the U.S.

I compared their records to the 10 higher-taxed, bigger-government economies:
Austria, Belgium, Denmark, France, Germany, Italy, the Netherlands, Portugal, Sweden and the United Kingdom. Both groups cover a representative range of large, medium and small economies measured by their gross national incomes. The average incomes per capita of the two groups are similar ($27,046 and $30,426 respectively in 2005).

Most governments have reduced their top tax rates and spending-to-GDP ratios over the last decade or so, according to data published by the OECD, IMF and World Bank.
But slimmer governments have done so at a faster pace, and to significantly lower levels. Their highest tax rate on personal income fell to a group average of 30% in 2006 from 36% in 1996. Top corporate rates were lowered to an average of 22% from 30%. Their average ratio of total government outlays to GDP fell to 31.6% in 2007, from an average peak level during the previous two decades of 40.4%
Investment growth jumped to an average annual rate of 5.9% in 2000-2005, from 3.8% over the previous decade. Exports have risen by 6.3% annually since 2000. The net result was a surge in economic growth. The IMF reports that GDP soared in the slimmer-government group at a 5.4% average annual rate from 1999-2008 (including its forecast for the current year), up from a 4.6% rate over the previous decade.

Over that same period, the bigger-government group was more timid in its tax reductions. Their highest individual rates declined to an average of 45% from 49%, and corporate rates to 29% from 35%. Furthermore, their average spending-to-GDP ratio only fell to 48.3% from a peak of 55.2%.

The bigger-government group therefore failed to gain any competitive advantages in global markets by generating or attracting larger investment funds. Their investment growth slowed to an average annual rate of 0.8% in 2000-2005, from 4.1% in 1990-2000. Their export growth rate almost halved to 3.1% annually in 2000-2005, down from 6.1% in 1990-2000. The bottom line is a drop in their average annual GDP growth rate to 2.1% in 1999-2008, from 2.3% over the previous decade.

Nor did they balance their books. They ran budgetary deficits averaging 1.1% of GDP in 2006, whereas slimmer governments generated an average surplus of 0.3% of GDP. Their net government debt averaged 39.2% of GDP in 2006, more than four times higher than the latter's. Interest payments on their debt took 2.3% of their GDP, compared with an average of just 0.5% in the slimmer-government group.

Slimmer-government countries also delivered more rapid social progress in some areas. They have, on average, higher annual employment growth rates (1.7% compared to 0.9% from 1995-2005). Their youth unemployment rates have been lower for both males and females since 2000. The discretionary income of households rose faster in the first group. This allowed their real consumption to increase by 4.1% annually from 2000-2005, up from 2.8% in 1990-2000. In the bigger-government group, the growth of household consumption has slowed to a 1.3% average annual rate, from 2.1% during the 1990-2000 period.

Faster economic growth in the first group also generated a more rapid increase in government revenue, despite (or rather, because of, supply-siders suggest) lower overall tax burdens.

Slimmer-government countries seem to have made better use of their smaller health resources. Total spending on health programs reached 9.5% of GDP in the bigger government group in 2004, 1.6 percentage points above the average in the slimmer-government group. Yet slimmer-government countries have raised their average life expectancy at birth at a faster pacer since 1990, reaching an average level of 78 years in 2005, just one year below the average for bigger spenders. Average life expectancy is now 80 years in Singapore, although government and private health programs combined cost only 3.7% of its GDP.

Finally, spending by bigger governments on social benefits (such as unemployment and disability benefits, housing allowances and state pensions) was higher (20.3% of GDP in 2006) than that of slimmer governments (9.6%). But these transfers do not appear to have resulted in greater equality in the distribution of income. The Gini index measuring income distribution is similar for both groups.

Other forces clearly helped to narrow income disparities in slimmer-government economies. These forces include wage-setting practices, saving habits, the availability of employer-funded pension schemes, and income sharing among extended families.

Both groups reduced the share of defense spending in GDP over the past decade. The slimmer-government average fell 0.1 points to 2.2% in 2005, but this level was 0.5 percentage points above the bigger-government average. The average share of armed forces personnel in the total labor force in the bigger-government group fell to 1.1% from 1.5% in 1995, whereas it grew to 1.7% from 1.5% in the slimmer-government group.

Information on public order and safety expenditures is incomplete. But for the 11 countries for which data are available, slimmer governments seem to take their responsibilities more seriously. They spent an average of 1.8% of GDP on these functions in 2006, compared with 1.5% by bigger governments.

The early supply-siders were right. My findings firmly reject the widely held view that lower taxes inevitably result in cuts in public services, slower growth and widening income inequalities. Today's policy makers should take note of how tax cuts and the pruning of inefficient government programs can stimulate sluggish economies.
Mr. Marsden, a fellow of the Centre for Policy Studies in London, was previously an adviser at the World Bank and senior economist in the International Labour Organization.

Labels: Economics, tax cuts, taxes

Okay,I have to admit that Charles Krauthammer gets me to rethink my thought that energy wonks who want to raise taxes on gas are nuts. Krauthammer cites some strong economic arguments... Having said that, Krauthammer can't really believe that the government (at least the Democrats) would ever lower regulation of the energy industry or use gas tax proceeds to offset other taxes. I think that's a pipe dream.

On top of that, it's simply against the conservative viewpoint that the government should see fit to tell other people what's "good" for them by artifically legislating what kind of car they should drive or how they should consume.

So now we know: The price point is $4.

At $3 a gallon, Americans just grin and bear it, suck it up and, while complaining profusely, keep driving like crazy. At $4, it is a world transformed. Americans become rational creatures. Mass transit ridership is at a 50-year high. Driving is down 4 percent. (Any U.S. decline is something close to a miracle.) Hybrids and compacts are flying off the lots. SUV sales are in free fall.

The wholesale flight from gas guzzlers is stunning in its swiftness, but utterly predictable. Everything has a price point. Remember that "love affair" with SUVs? Love, it seems, has its price too.

America's sudden change in car-buying habits makes suitable mockery of that absurd debate Congress put on last December on fuel efficiency standards. At stake was precisely what miles-per-gallon average would every car company's fleet have to meet by precisely what date.

It was one out-of-a-hat number (35 mpg) compounded by another (by 2020). It involved, as always, dozens of regulations, loopholes and throws at a dartboard. And we already knew from past history what the fleet average number does. When oil is cheap and everybody wants a gas guzzler, fuel efficiency standards force manufacturers to make cars that nobody wants to buy. When gas prices go through the roof, this agent of inefficiency becomes an utter redundancy.

At $4 a gallon, the fleet composition is changing spontaneously and overnight, not over the 13 years mandated by Congress. (Even Stalin had the modesty to restrict himself to five-year plans.) Just Tuesday, GM announced that it would shutter four SUV and truck plants, add a third shift to its compact and midsize sedan plants in Ohio and Michigan, and green-light for 2010 the Chevy Volt, an electric hybrid.

Some things, like renal physiology, are difficult. Some things, like Arab-Israeli peace, are impossible. And some things are preternaturally simple. You want more fuel-efficient cars? Don't regulate. Don't mandate. Don't scold. Don't appeal to the better angels of our nature. Do one thing: Hike the cost of gas until you find the price point.

Unfortunately, instead of hiking the price ourselves by means of a gasoline tax that could be instantly refunded to the American people in the form of lower payroll taxes, we let the Saudis, Venezuelans, Russians and Iranians do the taxing for us -- and pocket the money that the tax would have recycled back to the American worker.

This is insanity. For 25 years and with utter futility (starting with "The Oil-Bust Panic," the New Republic, February 1983), I have been advocating the cure: a U.S. energy tax as a way to curtail consumption and keep the money at home. On this page in May 2004 (and again in November 2005), I called for "the government -- through a tax -- to establish a new floor for gasoline," by fully taxing any drop in price below a certain benchmark. The point was to suppress demand and to keep the savings (from any subsequent world price drop) at home in the U.S. Treasury rather than going abroad. At the time, oil was $41 a barrel. It is now $123.

But instead of doing the obvious -- tax the damn thing -- we go through spasms of destructive alternatives, such as efficiency standards, ethanol mandates and now a crazy carbon cap-and-trade system the Senate is debating this week. These are infinitely complex mandates for inefficiency and invitations to corruption. But they have a singular virtue: They hide the cost to the American consumer.

Want to wean us off oil? Be open and honest. The British are paying $8 a gallon for petrol. Goldman Sachs is predicting we will be paying $6 by next year. Why have the extra $2 (above the current $4) go abroad? Have it go to the U.S. Treasury as a gasoline tax and be recycled back into lower payroll taxes.

Announce a schedule of gas tax hikes of 50 cents every six months for the next two years. And put a tax floor under $4 gasoline, so that as high gas prices transform the U.S. auto fleet, change driving habits and thus hugely reduce U.S. demand -- and bring down world crude oil prices -- the American consumer and the American economy reap all of the benefit.

Herewith concludes my annual exercise in futility. By the time I write next year's edition, you'll be paying for gas in bullion.

Labels: CAFE, Economics, energy, Oil, tax cuts, taxes

Health-care providers – not consumers – are always asking for tighter regulation, because they profit from making everyone subsidize generous plans that cover, say, podiatry or infertility treatment. Given the choice, consumers might choose policies that cover some services but not others.
Regulation is a very misunderstood and often mistaught concept (the above comment, by the way, was taken from a WSJ editorial touting a new Florida state law that would get the Florida government out of health insurance).

We were all taught when we were young that regulators like Teddy Roosevelt "fought" against the powerful big businesses to provide a more governed and regulated (and thus, the argument goes, more "fair" or safe) industrial world. But the truth is that the so-called "fat cats," the Rockefellers, Vanderbilts, etc., co-authored the very regulations that Teddy Roosevelt, among others, was supposedly shoving down their throats.

And why would big business so readily agree to MORE regulation?

Simple. Regulation kills competition. The "fat cats," then, no longer need worry about smaller, more nimble companies undercutting their profit margins. Instead, the government makes the business of doing business so expensive that only the largest corporations will survive.

Whatever the regulation costs the corporations the cost is far less then the cost of competing, and what's more, those costs can just be passed onto the customers, and the customers will just have to eat it because the government killed whatever competitive choice there would have been had government never involved itself in order to "save" us.

The law of unintended consequences strikes again!

Labels: Economics, healthcare, tax cuts, taxes

By David Ranson:

Will increasing tax rates on the rich increase revenues, as Barack Obama hopes, or hold back the economy, as John McCain fears? Or both?

[Economist] Mr. [Kurt] Hauser uncovered the means to answer these questions definitively. On this page in 1993, he stated that "No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP." What a pity that his discovery has not been more widely disseminated.

...The federal tax "yield" (revenues divided by GDP) has remained close to 19.5%, even as the top tax bracket was brought down from 91% [during WWII] to the present 35%. This is what scientists call an "independence theorem," and it cuts the Gordian Knot of tax policy debate.

The data show that the tax yield has been independent of marginal tax rates over this period, but tax revenue is directly proportional to GDP. So if we want to increase tax revenue, we need to increase GDP.

What happens if we instead raise tax rates? Economists of all persuasions accept that a tax rate hike will reduce GDP, in which case Hauser's Law says it will also lower tax revenue. That's a highly inconvenient truth for redistributive tax policy, and it flies in the face of deeply felt beliefs about social justice. It would surely be unpopular today with those presidential candidates who plan to raise tax rates on the rich – if they knew about it.

...What makes Hauser's Law work? For supply-siders there is no mystery. As Mr. Hauser said: "Raising taxes encourages taxpayers to shift, hide and underreport income. . . . Higher taxes reduce the incentives to work, produce, invest and save, thereby dampening overall economic activity and job creation."

Labels: Economics, laffer curve, tax cuts, taxes

Oh, what a surprise, our Congressmen waste our tax dollars for personal luxury.

Labels: Congress, Economics, tax cuts, taxes

"People say all the time: 'We can't pick winners and losers.' Well then fine. Take every single dollar of subsidy out of the federal tax code. Get rid of it all. . . . Let's have a real level playing field where nobody gets a penny in subsidy."
– Hillary Clinton, quoted in USA Today, April 5, 2008

Now, there's a capital idea – and just in time for April 15. The simplest, fairest and most economically efficient tax code would end all special interest tax advantages and flatten tax rates. Except Mrs. Clinton was ridiculing this idea. She went on to say that if subsidies vanish from the tax code, we'd "hear the squeals of protest from Wall Street to Houston to Silicon Valley."

Her philosophy certainly fits with that of the current Congress, which is becoming a tax loophole production factory for the powerful. Exhibit A is the "Foreclosure Prevention Act," which passed the Senate last week and contains $25 billion in tax subsidies for home builders and industry interests hurt by the housing crunch. Builders will be able to offset current losses against taxes paid in the past three years, which will mean billions of dollars of tax rebate checks from Uncle Sam.

This giveaway came only a few weeks after the National Association of Home Builders threatened to suspend their PAC contributions to Congress "until further notice" – meaning until they saw more return on their political investments. Congratulations.

That gambit paid off big time. Other winners include the large Wall Street banks that have lost money in the subprime mortgage meltdown, including Citigroup, Merrill Lynch and Morgan Stanley, which also qualify for rebates to offset current losses.
Republican Johnny Isakson of Georgia won Senate passage of a $7,000 tax credit for those who buy foreclosed properties. This won't prevent foreclosures or make these properties more affordable. Instead it will only prop up the sales price of the inventory of abandoned homes that the banks now own. Meanwhile, the House bill contains a $7,500 tax credit for first-time middle-income home buyers. The powerful Realtors' lobby and mortgage banks that own foreclosed properties blazed the money trail across Capitol Hill to get that one passed.

Oh, and while they were at it, the Senators voted 88-8 to add $6 billion in tax deductions for renewable energy producers. (If you wonder what this has to do with the mortgage "crisis," you just arrived off the turnip truck.) This industry is already teed up to get nearly $10 billion in tax breaks in the energy bill, including subsidies for wind and solar power producers, hybrid vehicles and biodiesel. Much of this social engineering comes from the same people on Capitol Hill who insist that taxes don't change industry or personal behavior.

With this loophole factory open for business on Capitol Hill again, business lobbies are spending more money than ever to curry Congressional favor. The real-estate industry may be in dire financial straits, but housing industry PACs have already contributed $56 million to political campaigns this election cycle, according to the Center for Responsive Politics. Politico.com reported last week that 40 new business lobbying firms have registered since January to represent the likes of concrete makers, home builders, Freddie Mac and the Realtors. Wall Street investment banks are also pumping up the volume of campaign contributions as they seek financial relief from the subprime mess.

Congress is creating all of these new loopholes even as overall tax revenues are slowing and this year's budget deficit could reach $450 billion to $500 billion. This will play nicely into the hands of Democrats who contend that the lower tax rates of 2001 and 2003 must expire to pay the government's bills. So we could soon have the worst of all worlds: a leaky tax code full of exceptions for powerful interests, but with ever higher rates to make up for the loopholes. Congress gets PAC contributions in return for the loopholes, plus any extra revenue from the tax hike. The losers are taxpayers who aren't powerful or rich enough to afford a tax lobbyist.

At least this exercise is making clear what Democrats really mean by tax "fairness." It means raising tax rates so they can then sell tax breaks to the highest corporate bidder. We have certainly come a long way from 1986, when a Democratic Congress joined with Ronald Reagan to strip the tax code of most tax deductions and lower tax rates to a high of 28%. That reform spirit is dead on Capitol Hill.

Senators Clinton and Barack Obama are racing across the country promising Americans that they will clean up a process that "favors Wall Street over Main Street." Fat chance. Their party and most Republicans just voted for a housing bill that is the biggest victory for corporate special interests in years – and there's much more to follow. Happy Tax Day.

-- Wall Street Journal

Labels: Clinton, Congress, earmarks, Economics, tax cuts, taxes

To hear Mr. [Senator Chuck] Schumer and his fellow-traveling columnists tell it, [President Herbert] Hoover's great policy blunder was to do nothing, all the while insisting that everything was fine. But the problem with Hoover's economic policy isn't that it was passive but that it was actively destructive.

In 1930, he signed the Smoot-Hawley Tariff Act, setting off a wave of protectionist retaliation that undid the globalization of the preceding decades and did far more harm to the world economy than the stock-market crash ever did. Two years later, amid a bad recession, he undid the Calvin Coolidge-Andrew Mellon tax cuts, raising the top marginal income-tax rate to 63% from 25%. The recession became a Depression.

Now, since we're talking Hoover, which Presidential candidate has a similar agenda of protectionism and tax increases? Hmmm.

Oh, that's right. Just the other day, one of the candidates for President was saying she'd withdraw from Nafta if the Mexicans didn't do what she demanded, and she wants "a pause" in free trade. She also wants to repeal the Bush tax cuts, more than doubling the rate on dividends back to 39.6% from 15%.

Her Democratic opponent agrees with her, except that he'd raise taxes even more, including by eliminating the $102,000 cap on income subject to the 6.2% payroll tax (12.4% when you include employers), and raising the capital gains tax to at least 25%, and maybe even 28%, from 15%. Add up all of Barack Obama's tax increases and his proposals would get entirely too close to Hoover's top marginal rate of 63%.

-- Wall Street Journal

Labels: 2008, Clinton, democrats, Economics, Obama, tax cuts, taxes

A proposed "Patriot Business act," sponsored by Barack Obama, would have the US imitate double-digit unemployment rates that most of Europe has suffered for decades. The WSJ explains:

Mr. Obama's proposal would designate certain companies as "patriot employers" and favor them over other, presumably not so patriotic, businesses.

The legislation takes four pages to define "patriotic" companies as those that: "pay at least 60 percent of each employee's health care premiums"; have a position of "neutrality in employee [union] organizing drives"; "maintain or increase the number of full-time workers in the United States relative to the number of full-time workers outside of the United States"; pay a salary to each employee "not less than an amount equal to the federal poverty level"; and provide a pension plan.

In other words, a patriotic employer is one which fulfills the fondest Big Labor agenda, regardless of the competitive implications. The proposal ignores the marketplace reality that businesses hire a work force they can afford to pay and still make money. Coercing companies into raising wages and benefits above market rates may only lead to fewer workers getting hired in the first place.
This goes along with my post on the demonization of outsourcing -- corporate outsourcing is a direct result of our US government legislating such high tax rates (currently 2nd highest in the free world) that they've made it more profitable for companies to do business overseas.

Apparently, Mr. Obama isn't satisfied with the fact that the US business environment has gradually eliminated incentives of doing business in the states. One must further assume that he doesn't mind that the US dollar is only half of a Euro.

Apparently Mr. Obama believes that by making U.S. companies less profitable and less competitive world-wide, they will somehow be able to create more jobs in America.

He has it backwards: The offshore activities of U.S. companies tend to increase rather than reduce domestic business. A 2005 National Bureau of Economic Research study by economists from Harvard and the University of Michigan found that more foreign investment by U.S. companies leads to greater domestic investment, and that U.S. firms' hiring of more offshore workers is positively, not negatively, associated with the number of American workers they hire. That's in part because often what is produced overseas by subsidiaries are component parts to final, higher-value-added products manufactured here.

Mr. Obama is also proposing to raise tax rates on affluent individuals, as well as on capital gains and dividends. This would also lead to more capital and jobs leaving the U.S. The after-tax return on U.S. investment would fall appreciably if these tax hikes were adopted, and no amount of tax-credit subsidy will keep capital from fleeing to lower tax jurisdictions.

If the U.S. didn't impose the second highest corporate income tax rate in the world, companies would have less incentive to move jobs overseas. Rather than giving politically correct companies a 1% tax credit, it makes more sense to reduce the U.S. corporate tax rate for everyone -- by at least 10 percentage points to the global average.

Economists have long understood that companies don't really pay taxes; they merely collect them. A study by the American Enterprise Institute has shown that U.S. workers bear the cost of the corporate income tax in lower wages and salaries. To borrow Mr. Obama's language, what's really unpatriotic is the 35% U.S. corporate tax rate.

Labels: 2008, Economics, Obama, tax cuts, taxes

Did you know that the United States now has the 2nd highest corporate tax rate -- a whopping 39.3 percent -- in all of the free world? We're second only to Japan (39.5%). And that's just federal; states tax an additional 1 to 12 percent on top of that!

Ireland, at just 12.5 percent, now has the most business-friendly economic environment in the world. No wonder Ireland's gross domestic product has been averaging about 10 percent growth each year, they have the 2nd highest per capita income in Europe, or 4th in the world! (Compare that the the US; we get excited when we break 3 percent GDP growth. Whoopee). The Irish have the highest rate of home ownership in all of Europe, where renting is the norm. "Ireland's GNI [gross national income] per head [is] at $41,140 - the seventh highest in the world, sixth highest in Western Europe, and the third highest of any EU member state." That's amazing given their population is a paltry 4.1 million people.

Indeed, even former Soviet bloc states are getting in the act of creating business-friendly tax rates: Hungary, the Slovak Republic, and Poland have corporate tax rates of 16, 19 and 19 percent, respectively.

So the next time you hear some misinformed corporation basher shriking about job outsourcing, you should remind them that the taxation policies of our government simply makes it more profitable for businesses -- and thus "their" jobs -- to locate elsewhere.

You want outsourcing to stop? Make the United States competitive again by lowering the tax rates.

Labels: Economics, tax cuts, taxes

Our friends on the left say Americans are willing to pay more taxes to get better government services, but their migration patterns reveal the opposite.
That's from a Wall Street Journal editorial comparing the immigration/emigration patterns between states with high taxes to states with low taxes.

While hardly surprising, the results are a notible reminder how taxation affects behavior -- to the tune of 20,000 people every day, or 8 million Americans annually from the North and Midwest to the South and West.

But one reason to conclude that taxes are also a motivator is because the eight states without an income tax are stealing talent from other states. They are Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming, and each one gained in net domestic migrants. Each one except Florida -- which has sky-high property taxes on new homesteaders -- also ranked in the top 12 of destination states. The nearby table ranks the top five destination and departure states.

Politicians who think taxes don't matter might want to explain the Dakotas. North Dakota ranked second worst in out-migration last year, while South Dakota ranked in the top 10 as a destination. The two are similar in most regards, with one large difference: North Dakota has an income tax and South Dakota doesn't.

...We invite readers to visit the U-Haul Moving Company Web site (www.uhaul.com), where you can type in a pair of U.S. cities to learn what it costs to move from point A to B. If you want to move, say, from Austin, Texas to Southern California, the moving van will cost you $407 to rent. But if you want to move out of California to Austin, the same van costs $1,831. A move from Dallas to Philadelphia costs $663, versus $2,433 to swap homes in the other direction. The biggest discrepancy we could find was $557 from Nashville, Tennessee to Los Angeles, but the trip costs nearly eight times more, or $4,285, to move to Nashville from L.A.

Labels: Economics, tax cuts, taxes

Today's Americans, their pain threshold lowered by the successful modulation of business cycles, now regard recessions as not mere misfortunes but as violations of an entitlement to perpetual economic serenity. In the 50 years prior to 1945, contractions were frequent and ferocious enough to fray the social fabric. There were three contractions of 5 percent of GDP, two of 10 percent and two of 15 percent. Since postwar demobilization, the most severe contraction -- that of 1982, when President Ronald Reagan and Fed Chairman Paul Volcker stifled inflation -- was 1.9 percent.

That recession ended in November 1982. If another recession did start last month, then in the 302 months from November 1982 through December 2007, the economy was in recession only 14 months -- 4.6 percent of the time. The economy was in recession 22.4 percent of the time between 1945 and 1982.

A recession-free economy is neither an entitlement nor, truth be told, desirable: The "wisdom of crowds" is real but even markets make mistakes and recessions, aka corrections, are, by definition, constructive. Even so, the modern economy's rhythms are much less alarming than any previous generation could have imagined.

-- George Will

Labels: Economics, tax cuts, taxes

Yesterday I noted that Steve Forbes is backing Giuliani for president. Speaking of, in today's Wall Street Journal, Mr. Forbes calls Giuliani's tax policy "the largest tax cut in modern American history and a dramatic simplification of the tax code."

That's a good start. Gotta love the first two paragraphs.

Mr. Giuliani's proposal is a remedy for a quintessentially Washingtonian problem: bloated bureaucracy. When the income tax was introduced in 1913, Congress adopted a one-page filing form and a maximum rate of 7%. The Office of Management and Budget estimates Americans now spend 6.5 billion hours a year filling out tax forms.

Our Founders drafted the Constitution with fewer than 5,000 words; with later amendments it is about 8,000 words. The federal tax code is more than 9 million words. So the document that created the government is less than 0.1% as long as the tax code that funds it. Such is the state of Washington today.

Mr. Giuliani understands how the tax code frustrates and confuses many Americans, and that's why he will give every taxpayer the option of using a one-page "Fair and Simple Tax Form." Under the FAST Form, there will be only three rates: 10%, 15% and 30%. Taxpayers who prefer to use the existing forms will remain free to do so. Prized deductions for mortgage payments, state and local taxes, charitable contributions, and child tax credits will all be preserved on the FAST Form.
Moreover, taxpayers can choose each year which plan works best for them. For instance, a small business owner might take advantage of the deductions in the current tax code one year, but choose the FAST Form the next.

For many families, the FAST Form will be an easy choice. A family of four earning $80,000 per year could see their estimated federal income tax burden reduced by $2,207 -- 24%. A single person earning $35,000 -- who pays approximately 10% using the 1040 Form -- will save 13%.

The FAST form is the centerpiece of Mr. Giuliani's tax plan, but it contains many other advantageous features. He will make the Bush tax cuts permanent. He will cut the corporate tax rate, currently second-highest in the industrialized world, to 25% from 35%, helping American businesses compete while protecting and creating American jobs. He will reinstate the Research and Development Tax Credit, a spur to American innovation that Democrats recently let expire. He will repeal the death tax, which unfairly forces relatives of the recently deceased to sell small family farms or businesses to pay the tax collector. He will cut the capital gains tax to 10% from 15%, sparking private-sector investment and economic prosperity. And he will index the Alternative Minimum Tax for inflation and put in on the course to eventual elimination.

Mr. Giuliani's reforms also include a trio of tax-free savings vehicles to encourage middle-class saving: a retirement savings account; a general-purpose lifetime savings account; and a lifetime skills account (for training and education). All three would function as Roth-style accounts (funded with after tax income, but subject to no taxes upon withdrawal), and would be available to all Americans, regardless of income level.

The retirement savings account and the lifetime savings account would have $5,000 annual limits per individual, and the lifetime skills account would have a $1,000 annual limit, with an available employer match. Mr. Giuliani also champions a health-care tax exclusion of $15,000 annually for families ($7,500 for individuals) to increase Americans' access to affordable, portable, privately controlled health care.

Rudy Giuliani knows self-government, not centralized government, makes America great. His proposals demonstrate an opposition to centralized power and a commitment to a growth society. He'll have to work with congressional Democrats to make such proposals a reality, but he has done so before in New York, an overwhelmingly Democratic city.

In the presidential race, the Democrats' idea of "change" is in reality more of the same -- more power and more money for Washington. Mr. Giuliani has another idea. It begins by fixing the complicated mess of our tax code by offering something simpler, flatter and fairer.

Mr. Forbes is president and CEO of Forbes Inc. and editor in chief of Forbes Magazine.

Labels: Economics, tax cuts, taxes

Michael Stroup, a professor of economics and associate dean of the Nelson Rusche College of Business at Stephen F. Austin State University in Texas, shows that the U.S. tax code has in reality grown more progressive after every major tax bill over the last 15 years.

In a study for the National Center for Policy Analysis, Stroup shows that from 1986 to 2004, the total share of the income tax burden paid by the top 1% of income earners grew by nearly half, rising from 25.8% to 36.9% . Over that same time, the burden of the bottom 50% of earners was almost halved, falling from 6.5% to 3.3%.

... More telling, though, is the group's contention that the 58 million U.S. households — out of roughly 115 million total — that have no tax liabilities or simply don't have to file would get nothing.

Seems to us that if Washington is having a hard time finding taxpayers who are eligible for tax rebates, then a lot of Americans must have been wiped off the tax rolls.

And if they're not paying the taxes, then who is? Despite fewer taxpayers, the flood of tax revenues into the capital hasn't abated. In 2008, personal income tax receipts will have increased for four straight years following a recession-caused dip in the early 2000s.

The shrinking of the tax rolls is no secret. The Tax Foundation has noted that in 2000, a year before the first tax cuts under Bush, roughly 30 million tax returns had no income tax liability; every dollar those earners made they kept. By 2004, a year after the second round of cuts was passed, 43 million returns had no tax.
In all, the Tax Foundation says, more than 25 million Americans have been wiped off the federal tax rolls. Thanks to President Bush.

No honest person could look at the data and say that the system favors the rich over the poor. So that leaves two possibilities for those who continue to say the Bush tax cuts foster inequality: They are lying for political gain, or they are ignorant.

Either way, those who hold such divisive and plainly wrong views disqualify themselves from political office by failing to live up to even minimal standards.

-- Investors Business Daily

Labels: Economics, tax cuts, taxes

Democrats in Congress remain committed to raising taxes on grounds that tax rates don't much matter to economic growth, and in any case they only help the rich. They may be the last public officials on the planet to believe this. In recent weeks alone, some of the unlikeliest political leaders have endorsed tax rate cuts in the name of making their economies better.

Start in Europe, where Socialist Party Prime Minister José Luis Rodríguez Zapatero pledged in December that if re-elected, "One of the first decisions I would take is to eliminate the wealth tax [up to 2.5%]," which he says is one of the highest in Europe and "punishes savings." Mr. Zapatero is no conservative. But he's joining the European march down the Laffer Curve on taxes, having already phased in reductions in Spain's corporate tax rate to 30% from 35% and its personal income tax rate to 43% from 45%.

Like France and Germany, Spain is cutting rates because of the tax competition from their European Union neighbors such as Ireland and East Europe. There are now at least 11 nations formerly behind the Iron Curtain with flat rate taxes of 25% or lower. On January 1, a new flat tax of 10% became law in Bulgaria, replacing its progressive rate structure and as far as we know the lowest such rate in the world. The newly elected Polish parliament is also planning to cut taxes, though an earlier flat-tax proposal earned a veto threat from the president.

And this just in: In the Middle East, Kuwait has decided to slash its corporate income tax on foreign companies to 15% from 55%. Finance Minister Mostafa al-Shemali argued for the cut, noting that Kuwait attracted less than $300 million in foreign investment last year, compared to some $18 billion in lower-tax Saudi Arabia (which has a religious tax but no corporate or income tax on Saudi nationals). "This law will encourage foreign investors to enter Kuwait," says Ahmed Baqer, head of the parliament's finance panel.

It's getting lonelier all the time at the top for America, which with a corporate tax rate of 35% is one of the few developed nations left with a rate of more than 30%. Economist Dan Mitchell tracks these trends for the Cato Institute, and he finds that 26 developed nations have cut either personal or corporate income tax rates since 2005. Since 1980, OECD nations have sliced their average personal income tax rate by 24 percentage points, to 40% from 64%. Corporate tax rates have fallen by more than 20 percentage points. Foreign leaders have learned that, in a world of easy global capital flows, high tax rates chase away investment and entrepreneurs.
Some of these tax-cutting nations -- such as Estonia, Ireland, Russia and Spain -- have seen revenues rise even as rates have fallen. This is what turns socialists into supply-siders in Spain, if regrettably not in the U.S.

-- Wall Street Journal

Labels: tax cuts, taxes

Fred Thompson has a great idea...

Fred Thompson's Presidential campaign has been struggling, in part because of a sense that he lacks passion and an agenda. But late last week he unveiled a tax reform that is more ambitious than anything we've seen so far from the rest of the GOP field.

Mr. Thompson wants to abolish the death tax and the Alternative Minimum Tax and cut the corporate income tax rate to 27% from 35%. But his really big idea is a voluntary flat tax that would give every American the option of ditching the current code in favor of filing a simple tax return with two tax rates of 10% and 25%.

Mr. Thompson is getting aboard what has become a global bandwagon, with more than 20 nations having adopted some form of flat tax. Most -- especially in Eastern Europe -- have seen their economies grow and revenues increase as they've adopted low tax rates of between 13% and 25% with few exemptions.

The main political obstacle to such a reform in the U.S. has come from liberals, who favor punitive taxes for "class" reasons, and K Street corporate lobbyists who want to retain their tax-loophole empires. The housing and insurance industries, states and localities, charities, bond traders and tax preparers are all foes of low tax rates.

That's why the idea of a voluntary flat tax -- introduced on these pages a dozen years ago -- makes political sense. The Thompson plan would allow taxpayers to keep their mortgage and charitable deductions if they prefer, by adhering to the current tax code and rates. But it would also allow the option to abandon those credits and deductions except for a single allowance based on family size ($39,000 for a family of four). Most taxpayers would pay a 10% rate on income above that allowance, with a 25% rate kicking in at $100,000 for a couple. There would only be five lines on the tax form and most taxpayers could fill it out in minutes.

Liberals are already objecting that the plan is not "paid for," by which they mean it doesn't raise taxes the way they hope the next President will. But Mr. Thompson is right in refusing to play by the "static revenue" scoring game that demands that one dollar in estimated tax cuts be offset by one dollar in estimated tax increases somewhere else. "The experts always overrate the revenue losses from tax cuts," Mr. Thompson says, and history supports him going back to the Mellon reductions of the 1920s, the Kennedy tax cuts of the 1960s, the Gipper's in the 1980s, and this decade's success with President Bush's reductions.

Mr. Thompson's plan is based on one introduced by GOP Representatives Paul Ryan and Jeb Hensarling that is in any case not designed to lose revenue. It is intended to allow federal receipts to grow at the rate of the economy, which would leave them at some 18% or 19% of GDP -- roughly their average of recent decades. When critics object to revenue losses, they are really saying that the tax share of GDP should be allowed to rise to 20% and higher, which is where we are headed if the Bush tax rates expire.

We'd prefer a flat tax with one rate instead of Mr. Thompson's two. Once the concession is made that richer people should pay a higher tax rate, the political temptation is always to raise the rate on the wealthy. The virtue of the single-rate flat tax isn't merely its efficiency but also its moral component: It treats all taxpayers equally. If a person makes five times more money than his neighbor, he should pay five times more taxes, not 10 or 20 times more.

However, what's refreshing about the Thompson plan is that it goes well beyond the current Republican mantra to make "the Bush tax cuts permanent." That is certainly needed, but the GOP also needs a more ambitious agenda, especially with economic growth slowing. The flat tax has the added political benefit of assaulting the special interests who populate the Gucci Gulch outside Congress's tax-writing committee rooms. Lower rates and simplify the tax code, and you instantly reduce the opportunities for Beltway corruption. It is both a tax policy and political reform.

The two apparent Republican front runners, Rudy Giuliani and Mitt Romney, should be paying attention. Both have called for tax cuts in general but have dodged any endorsement of the flat tax -- presumably because they think it is too politically risky. The politically calculating Mr. Romney has questioned whether the flat tax is "fair." Mr. Giuliani is more open to the idea, saying the flat tax "would be a lot easier. It would probably bring in a lot more revenue and it would not have some of the burdens on the economy that the massive tax code has." That's right, so why not go all the way?

Mr. Thompson's voluntary proposal is one way to deflect some of the inevitable political opposition. Anyone who prefers the current tax code can stick with it. The rest of us can have a better choice.

Labels: Economics, supply-side, tax cuts, taxes

The Washington Post has a surprisingly good article contrasting political rhetoric to reality on the topic of income tax and wealth. Democrats have long used the "rich" scapegoat to score easy political points with their constituents. The Washington Post asks, in summary: Yo! Define rich!

Barak Obama's answer is kind of scary, I think.

Who's rich? Who's middle class? How can you tell the difference? By the "upper class," do we mean the yacht-club set, the ascot-wearing folks with the Thurston Howell III lockjaw diction and the monogrammed jodhpurs? Or does the upper class include all those harried, two-income suburban families who somehow burn through 200 grand a year and fret about orthodontic bills?

Class, always an awkward topic in the United States, made a rare cameo appearance at a recent candidates debate in Las Vegas . The two front-running Democratic presidential contenders, Sen. Barack Obama (Ill.) and Sen. Hillary Rodham Clinton (N.Y.), sparred over tax policy and quickly got entangled in the question of whether someone making more than $97,000 a year is middle class or upper class. That's upper class, Obama said. Not necessarily, suggested Clinton.

The exchange between Obama and Clinton began when the senator from Illinois said he was open to adjusting the cap on wages subject to the payroll tax. That's the tax that the government prefers to call a "contribution" to Social Security. Under current law, a worker pays a flat percentage (and employers match it) of wages up to $97,500. Wages beyond that aren't taxed.

Clinton responded by saying that lifting the payroll tax would mean a trillion-dollar tax increase, adding that she did not want to "fix the problems of Social Security on the backs of middle-class families and seniors."

Obama replied: "Understand that only 6 percent of Americans make more than $97,000 a year. So 6 percent is not the middle class. It is the upper class."
It continues shortly. But let's pause for a moment to think about Obama's answer and "Understand" that married couples file jointly, and thus two persons making $97K a year (or $48.5K each) would be considered "upper class" and worthy of Obama's highest tax bracket!

Even so. The notion that making $97,000 a year makes one "upper class" is infantile. It reminds me of being in college, thinking like a kid, that a first job of, say, $25K would allow me to buy a new car and have X thousand dollars remaining. The world of expenses and debt just don't work like that, senator. One can be making $97K and under certain circumstances -- say running their own business, or contracting -- not saving any money, be unable to make their next mortgage payment, etc.

Obama's answer is particularly silly given that the IRS doesn't bill you based on cost of living indexes or location.

The Washington Post, much to their credit (perhaps to give benefit to Ms. Clinton), expands upon that:

As for how people see themselves, location is key. Is Clinton right that firefighters make the kind of money mentioned in Las Vegas? Yes, sometimes, in some places. According to the Web site FactCheck.org, the base pay of a New York City firefighter with five years' experience is $68,475, but with overtime and holiday work, the same firefighter can make $86,518. A city fire captain can make $140,173 with overtime. Most school superintendents in New York state make more than $100,000.

Online calculators allow anyone to make an instant city-to-city cost-of-living comparison. One such Web site calculates that someone making $97,500 in Washington could live just as comfortably on $67,846 in Ames, Iowa.

The three richest large counties in the country are in the Washington suburbs: Fairfax, Loudoun and Howard. A recent survey showed that 43 percent of people in the core counties of metropolitan Washington live in households with incomes of at least $100,000 a year.

Median household income in America in 2006 was $48,201, which, adjusted for inflation, is lower than it was in 1999.

Edward Wolff, a professor of economics at New York University, thinks that the middle class in a major city includes people in households with incomes from $40,000 to $100,000. From there, up to $200,000, people are "upper middle class." They all have difficult financial issues to contend with, from health-care costs to college tuition.

"Financial stress: That's the key ingredient," Wolff said.

People making $200,000 to $350,000, he says, could be considered rich, but they still have to slog to work every day. To be really rich, in Wolff's scholarly judgment, you need not only an income upwards of $350,000 a year -- which happens to be right about the point where today's top marginal income tax rate of 35 percent kicks in -- you also need at least $10 million in accumulated wealth.

"These are people who can basically live off their wealth and don't have to work. You're talking about the top half of 1 percent," Wolff said.
These one percent, by the way, are often the whiners of the world: The people like Warren Buffet who complains that the government doesn't tax him or his ilk enough, all the while Buffet could simply pay more tax on his return as a gift to the US Treasury department.

I don't know if Clinton actually believes her figures or not -- she's just as guilty of class warfare demagoguery as anyone else -- but clearly she's going to clean Obama's clock on taxation if Obama sticks to his "$97K is upper class" policy.

Labels: Clinton, Economics, Obama, supply-side, tax cuts, taxes

I have a real problem when people like Warren Buffet seem to say 'now that I've made my fortune we need to make it harder for those coming after me.' That is, in essence, what Buffet told the Senate Finance Committee yesterday as he argued that the Estate Tax, aka Death Tax, needed to be more stringent. Worse is the ridiculous comparison between Buffet, a billionaire, capital B, versus the millionaires (read: small business owners, self-employed) who generally put all their savings back into economy.

"I think we need to ... take a little more out of the hides of guys like me," Buffett told the panel...In 2009, the exemption level rises to $3.5 million, and by 2010 the estate tax will be repealed—but only for a year....Unless Congress changes the law, it comes roaring back in 2011 with an exemption threshold of only $1 million and a top tax rate of 55 percent.

..."Instead of the free market determining when assets are bought or sold, the death tax makes that determination," said the panel's top Republican, Sen. Chuck Grassley of Iowa. "There is something fundamentally wrong when the government swoops in after a funeral to take a cut of what that person had worked their whole life for, and has already paid taxes on at least once."

Committee Chairman Max Baucus, D-Mont., citing information from the IRS, said that of nearly 2.5 million deaths in 2004, about 19,300 estates paid the estate tax.

Lawmakers and interest groups on both sides of the debate see several potential compromises, perhaps by freezing the exemption rate at $3.5 million and capping the tax rate at 35 percent.
Grassley is absolutely correct -- the sin here is that this money has already been taxed at least once, and often twice or more (income, capital gains, etc.).

Meanwhile, the so-called "inequality gap" becomes an argument that wealthy but guilt-ridden liberals often use in their demand to soak the rich in more taxes. The country's Buffets don't stop at the Estate Tax -- which at least isn't aimed at income -- but generally call for higher income taxes (i.e., a tax on being productive).

But there's nothing "fair" or sensible about addressing income gaps but punishing the successful.

Josh Hendrickson's analogy is spot on: For example, the most frequent solution to income inequality, and the one advocated by [NYT's Paul] Krugman in nearly every interview about his book, is higher taxes on those at the top of the income scale. While this may give the appearance of lessening inequality, in actuality it does very little. Essentially, it is equivalent to twisting the ankle of the fastest runner in the world in an attempt to make other runners faster. In no way does this make other runners faster.
As has been said for generations, socialism creates "equality" by making everyone equally miserable.

Call it what it is, limosuine liberal phoniness. Don Luskin brought up the obvious solution in a column yesterday: Were Warren Buffet, George Soros, Bill Gates, etc., truly concerned with Treasury Department revenues and they could certainly change that:

To be fair, our tax system is indeed voluntary in certain respects. For example, wealthy liberals like Warren Buffett, who call publicly for higher taxes on the rich in the name of fairness, can volunteer to pay more themselves any time they wish to do so. All Mr. Buffett has to do is send a check to Department G -- that's G for "gift" -- at the Bureau of the Public Debt in Parkersburg, W.Va.

Why not try an experiment in which the tax system is made truly voluntary? Already 42 states (as well as the District of Columbia and0 Puerto Rico) raise revenues with lotteries, through which citizens voluntarily paid $57 billion last year. It's a long and noble tradition. Before the birth of Christ, the Han Dynasty ran lotteries to raise the revenues used to build the Great Wall of China.

Government could be entirely financed by voluntary taxation. Yes, the government would have to be small enough to make do, and citizens would have to be sufficiently public-minded about it. But all 13 original American colonies ran lotteries, and playing them was considered a civic duty. Proceeds from lotteries established Harvard, Yale, Columbia, Dartmouth, Princeton, and William and Mary -- and paid for the cannons that defeated England in the Revolutionary War.

But today, Mr. [NY Rep. Charles] Rangel might find that the volunteerism in today's tax system is a dangerous thing. His bill would raise the tax rate on capital gains income, but the cap-gains tax is voluntary to the extent that one doesn't have to pay it until one chooses to sell an appreciated asset. That fact is not lost on Mr. Buffett, who believes the rich should pay more taxes, but who has never volunteered to sell even one share of his vast holdings in Berkshire Hathaway -- and thus has never volunteered to pay any cap-gains taxes.

What if every investor did that? It's nice to imagine a nation of long-term investors just like Mr. Buffett. But if stockholders never sold any of their investments, the economy, incomes and job creation would slow to a crawl because a growing economy depends on capital moving freely and continuously to its perceived highest and best use.

Labels: Economics, tax cuts, taxes