The California Legislature is back from its summer recess and has frantically resumed its quest for new revenue sources.
One of the latest ideas is Assembly Bill 1253. This proposed legislation would add new income tax brackets for high earners on top of the existing ones.
Income between $1 million and $2 million would receive a one percentage point surcharge, bringing the marginal rate to 14.3 percent. Those earning between $2 million and $5 million would pay an additional three percentage points, and those earning over $5 million would pay an additional 3.5 percentage points, bringing their marginal rates to 16.3 percent and 16.8 percent respectively.
This plan constitutes a continuation of California’s soak-the-rich approach to raising revenues.
While some seem to believe that high earners can provide unlimited resources, the evidence from prior tax hikes suggests that the introduction of these tax rates is not even likely to raise revenue for the state. At the same time, it will hammer job creation.
The problem is that high earners do not simply sit there and take it when the state goes after their income.
In a detailed study of the 2012 California ballot measure that raised the top state rate to 13.3 percent, Ryan Shyu and I found that just two years later, the state was only collecting 40 cents of every dollar that it had hoped to raise from the tax increase.
High income taxpayers affected by the 2012 tax increase suddenly began to flee the state at higher rates, especially to zero tax states like Nevada, Texas, and Florida.
Even more importantly for the state budget, those that stayed began declaring considerably less taxable income than they would have otherwise, apparently either scaling back their productive activities or engaging in tax avoidance.
The economist Arthur Laffer has famously argued that there is a tax rate beyond which a government’s revenue will decline if it raises taxes further, due to the disincentive effects of high taxes.
While the federal government may be helped by limits on what American citizens can do to escape federal taxation, state governments tread on much thinner ice when faced with the ability of taxpayers to move their residences and their earnings generation to other states.
In 2012, California was at least still at the point where raising top income tax rates led to some increase in near-term revenue, albeit with grave long-term consequences.
Today, however, the state is starting from a 13.3 percent tax rate that is the highest in the nation.
Furthermore, Congress has since moved to protect federal taxpayers against bloated state spending by placing a $10,000 cap on state and local tax deductions as part of the 2017 Tax Cut and Jobs Act.
So while the blow of a 3 percentage point tax increase in 2012 was strongly cushioned by deductibility against top-bracket federal rates, California taxpayers today would feel the full force of this proposed round of increases.
Once taxpayers have responded by voting with their feet, reducing their business activities, and re-upping with their tax attorneys, the state will likely lose revenue if it attempts to increase rates.
To make matters worse, Sacramento’s narrow focus on tax revenues ignores that fact that this tax avoidance behavior will lead to job losses. These rates also apply to business income to non-corporate entities (such as partnerships and LLCs) which account for over half of all employment in the US.
In another study, Xavier Giroud and I found that each percentage point increase in individual tax rates that the average state implements leads to losses of up to 0.4 percent of all non-corporate jobs in the state.
Starting from California’s already astronomical top rate, the impact would be expected to be even larger.
These job losses will negatively impact the well-being of Californians and further reduce state tax revenues.
California’s approach to relying on the taxation of top earners has sown the seeds of its own destruction. The top 0.5 percent of taxpayers pay over 40 percent of individual income taxes in the state.
Officials are blaming COVID-19 for the budgetary havoc, but this structure means that in any downturn, California revenues will tank due to the excessive reliance on both the ordinary income and capital gains of top earners.
If the Legislature is interested in promoting economic growth and prosperity in the California, and securing the state’s own fiscal future, it should reject further top income tax rate increases.
Instead, it should work towards putting the state back on a path towards being a competitive place for high-income individuals and businesses to locate their economic activity.
President Donald Trump has so much on his plate right now, it’s difficult to see how he prioritizes the actions he must take for the country’s good. There’s so much going on in so many different areas it’s hard to recall any president in recent memory having to face so much at any one time at any one time.
All presidents must deal with crises. How they lead is part of the way we judge their fitness for office. And there are a lot of folks who say his leadership lately has been lacking as the nation deals with the novel coronavirus.
That’s remarkably ungenerous. The president mobilized the federal government and private industry to respond in ways not seen in decades. It’s impossible to be certain but is nonetheless highly likely the interventions he led produced faster testing on a broader scale, more ventilators than needed, and helped keep the spread of COVID-19 under control.
We may never know. All the models produced by the so-called public health experts working in the smart institutions were way off, even when early-stage interventions are accounted for. Meanwhile, as the result of actions taken by many of the nation’s governors, mostly in blue states, the U.S. economy tanked, a record number of jobs were lost in a single month, and Congress spent so much money on relief that might not even have been necessary it will take at least a decade of above-average economic growth to recover.
For the immediate future, President Trump would be both politically smart and doing the best thing for the country if he focused on measures to get the economy open and off its back. Businesses need to reopen. Lockdowns, if they are needed again (if a still-at-this-point hypothetical second wave hits), need to be localized, targeted, and well thought out. People need to get back to work, pay down their debt, and start saving again.
Several steps can be taken to help bring about the V-shaped recovery most everyone is hoping for. There are lots of positive indicators in the economy that its possible. Every policy decision from now until at least the end of summer ought to be taken specifically to enhance the possibility that will occur.
Just as the president was right to postpone tax filings and payments from April 15 to July at the height of the crisis, he would be right to have Secretary of the Treasury Steve Mnuchin tell the U.S. Internal Revenue Service to postpone the payment of those taxes until sometime in 2021.
The economy has just started showing signs of life. Taking $1 trillion out of it – which is what it would be if all the federal personal and corporate income taxes, estimated payments for the self-employed, federal excise taxes, the taxes paid by job-creating small businesses, and the outstanding balance due on returns from prior years – would almost assuredly plunge it back into a recession and push the recovery off by months.
The National Bureau of Economic Research says the recession caused by the lockdowns resulting from the coronavirus panic started in February. The NBER – and they’re the ones who get to make the decision – called it steep but short-lived. July 2020 should be a month of recovery because of strong, perhaps stronger than normal, economic activity. But that only happens if people are engaged in productive activity, buying and selling goods and services in the marketplace rather than sending Uncle Sam back a good chunk of the so-called stimulus.
Several prominent economists have endorsed this idea as being curative. Influential political groups including the National Taxpayers Union and Americans for Tax Reform have also signed on. The president and Secretary Mnuchin have it within their power to make this happen. They should order it be done with all dispatch. Certainty is important as businesses plan what to do next, whether to hire or fire, whether to stay open or close, and whether to expand. Knowing that the taxes due would not have to be paid until sometime early next year gives them that much more time to use their available cash to put people back to work. Making America Great and Keeping America Great can only be accomplished if America is working.
Democrats in the U.S. House of Representatives may have been stuck in their districts because of the coronavirus but Speaker Nancy Pelosi has been working hard on their behalf. On Tuesday she introduced the next in what’s getting to be a long line of COVID relief bills that, true to form, is loaded with tax and spending increases.
According to a quick but probably not definitive analysis of what she’s calling The Heroes Act by the good folks at Americans for Tax Reform, the Pelosi bill:
The new Pelosi bill also bails out her political allies, whether they be the cashed strapped, heavily indebted blue states like California, New York, and Illinois or cities like Baltimore, Los Angeles, and Philadelphia or her wealthy coterie of San Francisco sophisticates who probably also have freezers full of designer ice cream.
First off, she’s calling for $500 billion in funding to assist state governments with the fiscal impacts from the public health emergency caused by the coronavirus, followed by $375 billion in funding to assist local governments. Then she wants $20 billion to assist Tribal governments, $20 billion for the governments of the Territories, and an additional $755 million for the District of Columbia.
But the biggest kick of all is the two-year suspension — for 2020 and 2021 — of the elimination of the cap on the deductibility of state and local taxes on federal tax returns. That deduction, called SALT by the tax policy experts, helps ease the burden of living in high cost, high tax states like California while increasing the total burden of the federal budget sitting on the shoulders of low tax and no tax states like South Dakota, Texas, Tennessee, and Florida. To put it another way, it’s a way to get the red states to pay for the upgraded standard of living enjoyed by blue voters in blue states.
Congress and President Donald Trump capped the deductibility of SALT in the Tax Cut and Job Acts, making everything fairer to all. Pelosi wants to undo that permanently, which is probably why her proposed suspension lasts two years — which she figures is enough time for a Biden administration to get repeal through a Democratic Congress. What’s especially galling is how no one is going to call her out on how she and her husband will personally benefit if the cap is lifted. The Pelosis stand to save a lot of money if the SALT cap comes off while many of the rest of us end up paying more. Didn’t she recently call a scheme like that where an elected official stood to profit personally from political action they’d proposed or undertaken an impeachable offense?
'Over 86% of all households would lose' from free tuition policies
The “free” college plans touted by Sen. Elizabeth Warren (D., Mass.) and other Democratic presidential hopefuls will require radical tax hikes and leave 86 percent of American households worse off, a recent study found.
Warren and Sen. Bernie Sanders (I., Vt.) often promise tuition-free higher education and student debt cancellation on the campaign trail. However, a National Bureau of Economic Research study conducted by University of Wisconsin researchers found that free college translates to a hollowed-out higher education system that leaves many Americans worse off.
Researchers simulated two scenarios: one in which the federal government forces states to adopt tuition-free public colleges and another in which it provides subsidies to encourage states to do so. They calculated how each plan would affect the welfare of American households. The welfare function was derived from, among other things, the positive and negative impacts of higher tax rates and lower education costs.
“Over 86% of all households would lose while about 60% of the lowest income quintile would gain from such policies,” the study found.
In both scenarios, the free tuition policy benefited a group of the poorest Americans at the expense of everyone else. For the vast majority of U.S. households, any benefit derived from a free college plan was outweighed by its negative consequences.
Sens. Warren and Sanders, as well as former Obama official Julián Castro, want to make public college free for all Americans. Other presidential candidates, including South Bend mayor Pete Buttigieg and Rep. Tulsi Gabbard (D., Hawaii), backed a less ambitious plan that removed tuition costs only for middle- and low-income families.
Such proposals could end up hurting students before they get to college. For example, Warren said she would pay for her free-tuition plan by levying an up to 2 percent wealth tax on “ultra-millionaires.” She claims in her policy plan that states will split the cost of college tuition with the federal government but still “maintain their current levels of funding” for academic instruction even after her plan is implemented.
Warren’s plan would force state governments to withdraw resources from public K-12 education to fund the free college program, worsening the overall quality of education students receive before college. The lower education quality, along with higher tax rates, would contribute to a decline in welfare for U.S. households, according to researchers.
“The idea of ‘free’ public colleges is politically seductive. But of course a college education can’t actually be free—someone must pay for it,” the study said. “Allocating additional resources to the college stage may be self-defeating if this entails a reduction of public expenditure in the earlier stages.”
Some scholars, however, argue that lower per-pupil costs do not necessarily lead to lower education quality, but may reflect a more efficient school system. Analysts at the Heritage Foundation found that D.C. public school students drastically underperformed despite the district spending nearly double the national average per pupil.
Other academics have found flaws in existing free college programs. A Harvard University study found that a Massachusetts tuition-free college program for high-performing students actually lowered the students’ college completion rate, complicating claims from 2020 Democrats that their education plans would allow more students to graduate.
If you’ve been having trouble finding someone to walk your dog, don’t worry. Any day now, Elizabeth Warren will announce “a plan for that.” It will undoubtedly be comprehensive, detailed, and replete with subsidies for lower- and middle-class dog walkers and underserved breeds. It will cost tens of billions of dollars and will receive widespread positive notice from the media. However, to judge by her other recent plans, the one thing it won’t include is any discussion of how she plans to pay for it.
The Massachusetts senator has challenged and possibly overtaken former vice president Joe Biden as the front-runner for the Democratic nomination, largely based on having a plan for the government to tackle every problem facing this country, no matter how big or how small, from issues with military housing to Puerto Rican debt to climate change.
The price tag for this massive expansion of government is enormous. Much of the attention in recent weeks has been focused on Warren’s embrace of Medicare for All, which she refuses to admit would require an increase in middle-class taxes. Even Vermont senator Bernie Sanders has conceded that such proposals, which would cost $30–40 trillion over 10 years, cannot be financed without tax hikes. Warren’s refusal to address this obvious fact makes her look less like a would-be policy wonk and more like a typical politician.
But even setting aside Medicare for All, Warren’s plans are likely to dump oceans of red ink onto our growing national debt. Her non-health-care spending proposals already total some $7.5 trillion per year over the next 10 years. Although these are not quite Bernie levels of government largesse, her proposals would still require nearly double our current levels of spending.
To pay for all this, Warren proposes a variety of tax hikes, mostly designed to hit corporations or high-earners: higher payroll taxes for those earning more than $250,000 per year; a 7 percent profits tax on companies earning more than $100 million; a 60 percent lobbying tax on firms that spend a million or more on lobbying, and so forth. But the biggest chunk of money would come from Warren’s proposed “wealth tax,” a 2 to 3 percent levy on net worth above $50 million. Warren estimates that this wealth tax will pull in more than $2.75 trillion over ten years. It won’t.
First, there is the slight problem that a wealth tax is probably unconstitutional. Of course, constitutional constraints are quaint notions in the Age of Trump. Regardless, it is worth noting that the Constitution permits the federal government to impose only “direct taxes,” such as a property tax. That’s why it required a constitutional amendment to enact the federal income tax. Many constitutional scholars warn that a wealth tax is neither a direct tax nor income tax.
Even if Warren can find a way around the constitutional guardrails — perhaps by something such as a retrospective wealth tax in which you wait until a taxpayer sells assets or passes away — a wealth tax is unlikely to raise anywhere near the amount of money she predicts.
Simply look at Europe’s experiments with wealth taxes. At one time, a dozen European countries imposed wealth taxes. Today, all but three have abandoned those levies. Among those repealing their wealth tax are the Scandinavian social democracies that Warren admires, Denmark, Finland, and Sweden. Norway retains a wealth tax but has significantly reduced it in recent years. Additional countries abandoning the tax include Austria, France, Germany, Iceland, Ireland, Luxembourg, and the Netherlands. Other countries, such as Great Britain, have considered wealth taxes and rejected them.
They did so because wealth taxes are administratively complex and difficult to enforce. Also, they significantly reduce investment, entrepreneurship, and, ultimately, economic growth. According to the Organization for Economic Cooperation and Development, European wealth taxes raised, on average, only about 0.2 percent of GDP in revenues. By comparison, the U.S. federal income tax raises 8 percent of GDP.
Two groups, however, would benefit substantially from a wealth tax. The tax would be a full-employment opportunity for the tax-preparation industry and for lawyers. After all, we would now have to determine fair market value for everything from homes and vehicles to artwork and jewelry to family pension rights and intellectual property. The other big winner would be lobbyists, who could be expected to descend on Washington en masse seeking exemptions and exceptions for their clients. If you think the tax code is a mess today, just wait until D.C. is done with Warren’s plan.
There is an old Yiddish proverb that goes “Mann tracht, un Gott Lacht,” or “Man plans, and God laughs.” It is all well and good that Senator Warren has a plan for everything. But until she actually figures out how to pay for everything without crippling our economy, such plans really don’t add up
An individual earning near the national median at $50,000 a year would pay more than $17,450 more per year in taxes to fund Democrats’ Medicare for All proposal. That’s not even half of it.
Democratic candidates for president continue to evade questions on how they will pay for their massive, $32 trillion single-payer health care scheme. But on Monday, the Committee for a Responsible Federal Budget (CRFB) released a 10-page paperproviding a preliminary analysis of possible ways to fund the left’s socialized medicine experiment.
Worth noting about the organization that published this document: It maintains a decidedly centrist platform. While perhaps not liberal in its views, it also does not embrace conservative policies. For instance, its president, Maya MacGuineas, recently wrote a blog post opposing the 2017 Tax Cuts and Jobs Act, stating that the bill’s “shortcomings outweigh the benefits,” because it will increase federal deficits and debt.
That centrist position makes CRFB’s analysis of single payer all the more devastating, because one cannot write it off as coming from a right-wing group. And its analysis is devastating, carrying it three main messages, as follows.
Consider some of the options to pay for single payer CRFB examines, along with how they might affect average families.
A 32 percent payroll tax increase. No, that’s not a typo. Right now, employers and employees pay a combined 15.3 percent payroll tax to fund Social Security and Medicare. (While employers technically pay half of this 15.3 percent, most economists conclude the entire amount ultimately comes out of workers’ paychecks, in the form of lower wages.) This change would more than triple current payroll tax rates.
Real-Life Cost: An individual earning $50,000 in wages would pay $8,000 more per year ($50,000 times 16 percent), and so would that individual’s employer.
A 25 percent income surtax. This change would apply to all income above the standard deduction, currently $12,200 for individuals and $24,400 for families.
Real-Life Cost: An individual with $50,000 in income would pay $9,450 in higher taxes ($50,000 minus $12,200, times 25 percent).
A 42 percent Value Added Tax (VAT). This change would enact on the federal level the type of sales/consumption tax that many European countries use to support their social programs. Some proposals have called for rebates to some or all households, to reflect the fact that sales taxes raise the cost of living, particularly for poorer families. However, using some of the proceeds of the VAT to provide rebates would likely require an even higher tax rate than the 42 percent CRFB estimates in its report.
Real-Life Cost: According to CRFB, “the first-order effect of this VAT would be to increase the prices of most goods and services by 42 percent.”
Mandatory Public Premiums. This proposal would require all Americans to pay a tax in the form of a “premium” to finance single payer. As it stands now, Americans with employer-sponsored insurance pay an average of $6,015 in premiums for family coverage. (Employers pay an additional $14,561 in premium contributions; most economists argue these funds ultimately come from employees, in the form of lower wages—but workers do not explicitly pay these funds out-of-pocket.)
Real-Life Cost: According to CRFB, “premiums would need to average about $7,500 per capita or $20,000 per household” to fund single payer. Exempting individuals currently on federal health programs (e.g., Medicare and Medicaid) would prevent seniors and the poor from getting hit with these costs, but “would increase the premiums [for everyone else] by over 60 percent to more than $12,000 per individual.”
Reduce non-health federal spending by 80 percent. After re-purposing existing federal health spending (e.g., Medicare, Medicaid), paying for single payer would require reducing everything else from the federal budget—defense, transportation, education, and more—by 80 percent.
Real-Life Cost: “An 80 percent cut to Social Security would mean reducing the average new benefit from about $18,000 per year to $3,600 per year.”
The report includes other options, including an increase in federal debt to 205 percent of gross domestic product—nearly double its historic record—and a more-than-doubling of individual and corporate income tax rates. The impact of the last is obvious: Take what you paid to the IRS on April 15, or in your regular paycheck, and double it.
In theory, lawmakers could use a combination of these approaches to fund a single-payer health care system, which might blunt their impact somewhat. But the massive amounts of revenue needed gives one the sense that doing so would amount to little more than rearranging deck chairs on a sinking fiscal ship.
CRFB reinforced their prior work indicating that taxes on “the rich” could at best fund about one-third of the cost of single payer. Their proposals include $2 trillion in revenue from raising tax rates on the affluent, another $2 trillion from phasing out tax incentives for the wealthy, another $2 trillion from doubling corporate income taxes, $3 trillion from wealth taxes, and $1 trillion from taxes on financial transactions and institutions.
Several of the proposals CRFB analyzed would raise tax rates on the wealthiest households above 60 percent. At these rates, economists suggest that individuals would reduce their income and cut back on work, because they do not see the point in generating additional income if government will take 70 (or 80, or 90) cents on every additional dollar earned. While taxing “the rich” might sound publicly appealing, at a certain point it becomes a self-defeating proposition—and several proposals CRFB vetted would meet, or exceed, that point.
The report notes that “most of the [funding] options we present would shrink the economy compared to the current system.” For instance, CRFB quantifies the impact of funding single payer via a payroll tax increase as “the equivalent of a $3,200 reduction in per-person income and would result in a 6.5 percent reduction in hours worked—a 9 million person reduction in full-time equivalent workers in 2030.”
By contrast, deficit financing a single-payer system would minimize its drag on jobs, but “be far more damaging to the economy.” The increase in federal debt “would shrink the size of the economy by roughly 5 percent in 2030—the equivalent of a $4,500 reduction in per person income—and far more in the following years.”
Moreover, these estimates assume a great amount of interest by foreign buyers in continuing to purchase American debt. If the U.S. Treasury cannot find buyers for its bonds, a potential debt crisis could cause the economic damage from single payer to skyrocket.
To say single payer would cause widespread economic disruption would put it mildly. Hopefully, the CRFB report, and others like it, will inspire the American people to reject the progressive left’s march towards socialism.
ATR today released a coalition letter signed by 70 groups and activists in opposition to the Pelosi drug pricing proposal to create a 95 percent tax on pharmaceutical manufacturers.
As noted in the letter, this bill calls for a retroactive tax on sales that is imposed in addition to existing against income taxes:
Under Speaker Pelosi’s plan, pharmaceutical manufacturers would face a retroactive tax of up to 95 percent on the total sales of a drug (not net profits). This means that a manufacturer selling a medicine for $100 will owe $95 in tax for every product sold with no allowance for the costs incurred.
The tax is used to enforce price controls on medicines that will crush innovation and distort the existing supply chain as the signers note:
“The alternative to paying this tax is for the companies to submit to strict government price controls on the medicines they produce. While the Pelosi bill claims this is “negotiation,” the plan is more akin to theft.”
This proposal will create significant harm to American innovation to the detriment of jobs, wages, and patients, as the letter notes:
”[The Pelosi] proposal would crush the pharmaceutical industry, deter innovation, and dramatically reduce the ability of patients to access life-saving medicines.
The full letter is found here and is below:
Dear Members of Congress:
We write in opposition to the prescription drug pricing bill offered by House Speaker Nancy Pelosi that would impose an excise tax of up to a 95 percent on hundreds of prescription medicines.
In addition to this new tax, the bill imposes new government price controls that would decimate innovation and distort supply, leading to the same lack of access to the newest and best drugs for patients in other countries that impose these price controls.
Under Speaker Pelosi’s plan, pharmaceutical manufacturers would face a retroactive tax of up to 95 percent on the total sales of a drug (not net profits). This means that a manufacturer selling a medicine for $100 will owe $95 in tax for every product sold with no allowance for the costs incurred. No deductions would be allowed, and it would be imposed on manufacturers in addition to federal and state income taxes they must pay.
The alternative to paying this tax is for the companies to submit to strict government price controls on the medicines they produce. While the Pelosi bill claims this is “negotiation,” the plan is more akin to theft.
If this tax hike plan were signed into law, it would cripple the ability of manufacturers to operate and develop new medicines.
It is clear that the Pelosi plan does not represent a good faith attempt to lower drug prices. Rather, it is a proposal that would crush the pharmaceutical industry, deter innovation, and dramatically reduce the ability of patients to access life-saving medicines.
We urge you to oppose the Pelosi plan that would impose price controls and a 95 percent medicine tax on the companies that develop and produce these medicines.
President, Americans For Tax Reform
James L. Martin
Founder/Chairman, 60 Plus Association
Saulius “Saul” Anuzis
President, 60 Plus Association
Chair, Alabama Center Right Coalition
President, AMAC Action
President, American Business Defense Council
President, American Commitment
Executive Director, American Conservative Union
President/CEO, The American Consumer Institute Center for Citizen Research
Lisa B. Nelson
CEO, American Legislative Exchange Council
Vice President of Policy, ALEC Action
President, Americans for a Balanced Budget
President, Americans for a Strong Economy
President, Campaign for Liberty
President, Center for a Free Economy
Andrew F. Quinlan
President, Center for Freedom & Prosperity
President, Center for Individual Freedom
Executive Director, Center for Innovation and Free Enterprise
Peter J. Pitts
President, Center for Medicine in the Public Interest
Senior Fellow, Center for Worker Freedom
President, Citizen Outreach
President, Club for Growth
President, The Committee for Justice
Vice President, Competitive Enterprise Institute
Executive Director, Conservatives for Property Rights
President, Consumer Action for a Strong Economy
Fred Cyrus Roeder
Managing Director, Consumer Choice Center
President, Council for Citizens Against Government Waste
Executive Director, Digital Liberty
Co-Chair, Florida Center Right Coalition
President, Frontiers of Freedom
President, Galen Institute
Director of Healthcare Policy, Goldwater Institute
The Honorable Frank Lasee
President, The Heartland Institute
Vice President, Heritage Action for America
Rodolfo E. Milani
Trustee, Hispanic American Center for Economic Research
Founder, Miami Freedom Forum
Mario H. Lopez
President, Hispanic Leadership Fund
President, Independent Women’s Forum
Heather R. Higgins
CEO, Independent Women’s Voice
Resident Scholar, Institute for Policy Innovation
President, Iowans for Tax Relief
Vice President of Policy, The James Madison Institute
The Honorable Paul R LePage
Governor of Maine 2011-2019
President, Less Government
Director, Lone Star Policy Institute
Chair, Maine Center Right Coalition
CEO, The Maine Heritage Policy Center
President, Maine State Chapter – Parents Involved in Education
President, Market Institute
Jameson Taylor, Ph.D.
Vice President for Policy, Mississippi Center for Public Policy
The Honorable Tim Jones
Leader, Missouri Center-Right Coalition
CEO, Montana Policy Institute
President, National Taxpayers Union
The Honorable Bill O’Brien
The Honorable Stephen Stepanek
Co-chairs, New Hampshire Center Right Coalition
The Honorable Beth A. O’Connor
Maine House of Representatives
The Honorable Niraj J. Antani
Ohio State Representative
Executive Director, Ohioans for Tax Reform
Honorable Jeff Kropf
Executive Director, Oregon Capitol Watch Foundation
CEO, Pelican Institute for Public Policy
Executive Director, Property Rights Alliance
President, Rio Grande Foundation
James L. Setterlund
Executive Director, Shareholder Advocacy Forum
President and CEO, Small Business Entrepreneurship Council
David Miller & Brian Shrive
Chairs, Southwest Ohio Center-right Coalition
Executive Director, Taxpayers Protection Alliance
President, Tea Party Nation
Director, Right on Healthcare – Texas Public Policy Foundation
President, Trade Alliance to Promote Prosperity
Executive Director, Wyoming Liberty Group
Average retirement account would lose $20,000 to tax
A financial transaction tax, though popular with 2020 Democrats, would raise little revenue and substantially shrink the U.S. economy, a recently released report concludes.
A transaction tax takes a percentage from financial trades, such as the sale or purchase of stocks, bonds, or derivatives. The United States levies an extremely small charge on each transaction to fund the Securities and Exchange Commission. A number of Democrats would like to bring a full-fledged financial transaction tax (FTT) back for the first time since 1965.
The idea’s most vocal proponent is presidential contender Sen. Bernie Sanders (I., Vt.) who has introduced a plan to charge a 0.5 percent fee on financial transactions. Sanders has made the tax “on Wall Street” a central revenue source to pay for his exorbitant spending proposals.
Sen. Elizabeth Warren (D., Mass.) introduced her own FTT proposal in 2015, Sen. Kamala Harris (D., Calif.) wants one to pay for expanding Medicare, and Mayor Pete Buttigieg has also said that he is “interested in” implementing an FTT. Congressional Democrats have supported the idea outside of the campaign trail. Sen. Brian Schatz (D., Hawaii) has his own0.1 percent proposed FTT — the bill has more than 200 co-sponsors in the House, including Rep. Alexandria Ocasio-Cortez (D., N.Y.).
These Democrats and others cite several justifications for an FTT. The tax is aimed at “Wall Street,” a preferred target of populist liberals—at least in principle, that means it also falls more heavily on those who hold a lot of wealth in investments. Additionally, such a tax would impose major restrictions on so-called high-frequency trading, which involves computer-run trades at fractions of a penny—profits that could be wiped out by the tax.
“This Wall Street speculation fee, also known as a financial transaction tax, will raise substantial revenue from wealthy investors that can be used to make public colleges and universities tuition free and substantially reduce student debt,” a brief from Sanders’s office reads. “It will also reduce speculation and high-frequency trading that is destabilizing financial markets. During the financial crisis, Wall Street received the largest taxpayer bailout in the history of the world. Now it is Wall Street’s turn to rebuild the disappearing middle class.”
The scope of the tax, however, would extend beyond the confines of Manhattan, according to a report from the Center for Capital Market Competitiveness, an affiliate of the Chamber of Commerce. The report argues that FTTs shrink the economy and hurt every-day Americans, not just Wall Street fat cats.
“Main Street will pay for the tax, not Wall Street,” the report argues. “The real burden [of an FTT] will be on ordinary investors, such as retirees, pension holders, and those saving for college.”
Much like a sales tax, the costs of a financial transaction tax would be passed on to consumers, who would pay more for each trade. Taxing transactions does not just drive up costs for the ultra-wealthy, but the 6 in 10 American households that own some kind of investment. Increased costs would have substantial effects on American savings. Under the Sanders plan, for example, the report estimates that a typical retirement investor will end up losing about $20,000 on average from his IRA.
These direct effects are arguably less significant than the overall effect that an FTT would have on the financial side of the economy. As multiple Democrats have acknowledged, the goal of an FTT would be to crack down on complicated financial instruments, such as high-frequency trades, to reduce what they perceive as dangerous market instability.
These instruments mostly serve vital functions greasing the wheels of the economy, according to the center’s report. An FTT would erase the razor-thin margins on which market makers operate, and severely constrain other forms of arbitrage. They would also reduce the use of vital risk-management tools, like many derivatives and futures contracts.
An FTT, the report argues, would thus serve to substantially slow the economy. Trade volume would fall; consumer good prices would rise; municipal bonds would generate less revenue for infrastructure; the cost of credit would increase, making mortgages more expensive—in turn exacerbating the homelessness crisis, depressing young home-ownership, and reducing family formation.
Obviously, each of these effects may not be massive—the U.S. economy grew substantially even during the 50-year period when we had an FTT. But, the new report argues, the experience of other nations indicates that the costs to the economy would substantially outweigh any benefit.
For example, they cite an economic analysis of a proposed 0.1 percent transaction tax in the EU—the authors found that “such a tax would lower GDP by 1.76 percent while raising revenue of only 0.08% percent of GDP.” Sweden’s 1 percent FTT caused a 5.3 percent drop in the Swedish market—meaning a 0.5 percent FTT, as Sanders proposes, would analogously cut nearly $800 billion from U.S. market capitalization. The evidence runs the other way, too: In the year following the repeal of the U.S. transaction tax, New York Stock Exchange trade volume increased by 33 percent.
All of this is why many countries—including Spain, the Netherlands, Germany, Sweden, Norway, Portugal, Italy, Denmark, Japan, Austria, and France—have eliminated such transaction taxes.
“Bad ideas have a habit of coming around again. The U.S., like many other nations, experimented with an FTT and wisely got rid of it. Yet each generation seems to be tempted by the false promise of a painless revenue stream,” the report said. “It would be wise to pay attention to the wisdom of experience and again avoid this false temptation. After all, those who fail to learn from history are doomed to repeat it.”
By Star Beacon•
To you and me, the meaning of the word “temporary” is generally clear. But not when the folks in Washington use the word.
Consider the “temporary” telephone tax Congress imposed to help fund the Spanish-American War. If you check your history books, you’ll see that the war lasted from April to August of 1893. The tax, on the other hand, survived into the second Bush Administration.
Another “temporary” law, one intended to speed the commercialization, expansion, and consumer adoption of new technology is set to expire at the end of 2019. The Satellite Television Extension and Localism Act Reauthorization (STELAR) should be allowed to fade away, but political pressure being applied by the parties who benefit from it most may unhelpfully keep it alive.
No only have growth in the satellite television industry and advancements in technology made the continuation of STELAR unnecessary, it may never have been needed in the first. It was enacted just about 30 years ago to provide a significantly discounted compulsory copyright license to give satellite companies the right to import out-of-market network television signals into a local market. The alternative, forcing their retransmission to local broadcast stations over the air, was financial prohibitively and technologically challenging.
These rules were supposed to give satellite television a boost in their push to compete with the cable giants. It worked. Today, DirectTV is worth $235 billion, Dish is worth $17 billion, and both networks offer just about every programming option available.
Letting the STELAR Act expire wouldn’t be the end of the world. No one would have missed the final episode of “The Big Bang Theory” or the “Game of Thrones” finale.
What would go away are:
• The discounted compulsory copyright license for satellite retransmission of distant (or imported) broadcast signals to “unserved households.”
• A corresponding exemption from retransmission consent requirements for the carriage of these out-of-market network signals by satellite TV providers.
• The requirement broadcast TV stations and satellite and cable TV companies both negotiate carriage of local broadcast signals in good faith.
According to the broadcasters, the number of satellite television subscribers who’d be impacted if the law expires as intended is now down to just about half a million. And there’s every reason to believe consumers in those markets could find other ways to pick up network signals, either by taking them down over the air or as the beneficiaries of private arrangements between providers and broadcasters.
This corporate to corporate stuff shouldn’t have any impact on what almost every viewer in America can watch. In fact, without STELAR, it might give individual communities a lift since the incentive for satellite carries to offer network affiliates from outside the coverage area instead of local news goes away. The playing field, as it were, becomes level.
Mature, multibillion-dollar satellite companies don’t need crony capitalist legislation protecting their interests, especially when those interests include denying consumers local news, weather, sports, and emergency information. It’s time to let it go.
Since the Tax Cuts and Jobs Act became law in 2017, government officials in high-tax states have been frantically trying to find a way to overturn the provision that limits taxpayers’ deduction for state and local taxes to $10,000. That limit makes taxpayers in high-tax jurisdictions feel the impact of their local governments’ tax-and-spend policies more keenly, and those governments will do anything (short of actually cutting taxes) to prevent that from happening.
First they resorted to weird workarounds that will surely be ignored by the Internal Revenue Service and struck down by the courts as the ruses that they are. Then they sued in federal court to stop Congress from changing the tax law. The lawsuit is without merit—it’s so bad, even California declined to join it.
Now at least one state, Connecticut, is considering radically reordering its tax system in a way that will be objectively worse for its citizens, all to spite the federal government. Sooner or later, these tricks will be used up and the high-taxing states will have to face reality.
Any analysis of the federal income-taxing power must begin with the Sixteenth Amendment to the Constitution, which is brief but sweeping: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” While Article I always gave Congress the power to impose direct taxes, the Sixteenth Amendment removed the constitutional restrictions on that power that made its exercise practically impossible.
That power, with the pre-1916 restrictions removed, is as broad as it gets. If you have income, the federal government can tax it. From the beginning, courts have recognized the sweeping nature of the Sixteenth Amendment and, in 1955, clarified further just how broad the amendment is in the landmark case of Commissioner v. Glenshaw Glass Co. In that case, the upheld the Internal Revenue Code’s definition of income as being truly “all-inclusive.”
To admit this does not require an endorsement of high taxes, or indeed of any taxes at all. To say that the government can tax all income does not mean you think they shouldtax all income. It is only to admit a fact that, until recently, Democrats were especially fond of acknowledging: the government has the power to tax your income.
Admitting that also does not mean that the government must tax all income. We have never had a truly flat tax. The 1916 Revenue Act, for example, allowed a deduction for foreign taxes as well as state and local taxes (commonly abbreviated as SALT). It also contained deductions for depreciation, depletion, and interest that are similar to those still in the code.
But none of these deductions were a matter of right; they were legislative choices, undertaken to reduce the burden of taxation in ways that Congress thought made the income tax fairer. That’s a fine idea, but it does not create an inalienable right to that tax deduction.
Connecticut’s plan to beat the system is clever—too clever, really. Jared Walczak of the Tax Foundation explained the details in a recent article: “the state’s graduated-rate income tax would be largely replaced by a 5 percent payroll tax, plus an additional 2 percent tax on income above $200,000, which would raise more money than the current income tax. The state’s Earned Income Tax Credit (EITC) would be increased to offset the higher tax liability for low-income earners, and because the payroll tax is a deductible expense for businesses, taxpayers subject to the $10,000 [SALT] deduction cap would get a federal tax cut even as the state generates more money.”
Walczak’s article points out the main problems with the complicated proposed tax structure. Getting the thing to work at all without creating bizarre incentives is a problem. For example, a payroll tax with multiple brackets will inevitably require massive end-of-year adjustments for anyone working multiple jobs. It also results in a different tax structure for wage workers and independent contractors, as well as people who live off investments.
Does the Nutmeg State really want to shift the tax burden away from one group of people based purely on the terms of their employment? If so, regular jobs are going to shift to other states and freelancers are going to move in, creating a hole in the state budget. The idle rich will come out ahead, too, as their non-wage income becomes non-taxed.
That’s a strange thing for a supposedly liberal state to do, but ordinary concerns fly out the window when the overriding goal of thwarting the president enters the equation. Democrats have made a cottage industry out of saying richer people need to pay more taxes. When that becomes slightly true because of a Republican initiative, however, all of the well-heeled blue staters want to use corporations to hide income from the federal government.
The pending case of New York v. Mnuchin, to which Connecticut is also a party, makes even less sense. The attorneys general of these four high-tax states suggest that the federal taxing power was never intended to interfere with the states’ taxing power. There is no citation for this point, which tells you about all you need to know: the claim is invented out of thin air.
The idea that the reduced SALT deduction impairs the states’ taxing power is also nonsensical; the states retain the power to tax, they just can’t use a federal deduction to hide how high their taxes are. As Joseph Bishop-Henchman wrote for the Tax Foundation, “Tax deductions and carve-outs are a matter of legislative grace.”
Even the idea that federal taxation must exempt all state taxes is unsupported by history. Bishop-Henchman cites several instances when the deduction was limited, including in 1964, 1969, 1986, and 1993. And from the start, federal tax never completely excluded state and local taxes: it was a deduction, not a credit. While taxpayers did not pay taxes on the portion of their income that they paid to their state, they did not get a full credit for that amount, either. The deduction only saves the marginal rate on the income devoted to state taxes—the fraction of the fraction.
The complainants say that “at ratification, it was widely understood that the federalism principles enshrined in the Constitution would serve as a check on the federal government’s tax power.” That’s true, but not in the way they think it is.
Federalism did result in informal limits on federal power, but only because the states, represented in the Senate, kept the federal government from fully exercising its powers at their expense. If those limits have been eroded in the past century, it is because progressives went out of their way to erode them, first by requiring the direct election of senators and later by appointing judges who allowed them to ignore all limits on federal power, written and unwritten.
These same progressives now want you to believe that one of those unwritten, informal restrictions must override the law. The change of heart is cynical, if predictable. Rich people in high-tax states are paying more federal tax, not because the federal tax rate has gone up, but because Congress decided to stop helping the states hide the effect of their unsustainable tax-and-spend policies. Those who destroyed the norms of federalism now wish the courts to re-erect them—but only insofar as it helps their friends.
All of these lawsuits and legal hedges are rooted in the same complaint: the rich blue states want to keep imposing high taxes on their people and want the federal government to help them obscure the consequences.Their argument here is that imposing the same rule on all taxpayers is unfair.
“By decreasing state tax revenue and making state taxes more expensive,” they write in the complaint, “the new cap on the SALT deduction will ultimately force the Plaintiff States to choose between maintaining or cutting their public investments and level of services, and the taxes supporting them. As such, the new cap on the SALT deduction directly and unfairly interferes with the Plaintiff States’ sovereignty, by depriving them of their authority to determine their own taxation and fiscal policies without federal interference.”
Their argument here is that imposing the same rule on all taxpayers is unfair. That’s a definition of “unfair” that only a small child could love. What it really means is, “I didn’t get what I want.” What they want, as the complaint plainly acknowledges, is to avoid making hard choices to balance their budgets. Every other state has had to make hard choices, but these four states don’t want to. Unfair!
Even if it were true that the law is unfair, this would be a political argument, not a legal one. Politicians on the far left want the courts to impose rules that the people and their legislators have rejected. Even their own statements confuse to whom exactly the law is unfair.
New York Gov. Andrew Cuomo attacked the tax law as one “that benefits the 1% at the expense of middle-class families.” But the loss of the deduction hits only those families who pay more than $10,000 in state and local taxes—hardly the average Joes Cuomo awkwardly attempts to evoke.
This lawsuit will fail, and Connecticut’s too-clever workaround probably will, too. What happened in the Tax Cuts and Jobs Act of 2017 was a result that politicians from these four states found distasteful. It will force them to make the kind of hard choices that they were elected to make. It will make their previous bad decisions more obvious to their voters and put pressure on them to fix them. It will, in short, force them to govern.Twenty-first-century politicians will do nearly anything to avoid governing.
Twenty-first-century politicians will do nearly anything to avoid governing. The arguments are flimsy at best, and the remedy is uncertain. Asking the courts to strike down the partial limitation of a tax deduction is novel enough, but what comes in its place? Do they want the courts to impose taxes directly, an act that is at the core of a legislature’s functions?
They know this lawsuit is a damp squib, a feeble attempt to show the folks back home (and especially their rich donors) that they’re “doing something” to stop taxes on the rich from going up. Connecticut’s radical reform is somewhat better thought-out, but will certainly inflict unintended consequences on that state’s already struggling economy, even if the IRS doesn’t decide to ignore the whole shell game they are playing.
Like a child throwing a tantrum, they will flail and kick for as long as they can before finally having to do what they were elected to do: set a level of taxing and spending that their people can afford.
By Christopher Jacobs • The Federalist
Unless you’re a procrastinator, tax filing season officially ended Monday. That milestone means a likely reprise of the political battles from earlier this year about tax refunds and the effects of the Republican Tax Cuts and Jobs Act.
Early in the filing season, Democrats argued that smaller refunds for filers demonstrated the legislation’s ineffectiveness. (As of March 29, the Internal Revenue Service has processed $6 billion less in refunds than during last year’s filing season.) Republicans counter that, under the new law, most individuals will have smaller tax liabilities overall, meaning that individuals receiving smaller refunds this spring benefited from fatter paychecks throughout 2018.
By and large, Republicans have the better argument. Even the liberal Tax Policy Center concedes that most households will benefit from the tax legislation. Under their estimates, more than four in five tax filing units (80.4 percent) received a net tax cut, with fewer than one in twenty (4.8 percent) paying a net tax increase. (About 15 percent of households won’t see a major change, one way or the other.) As a result, most families with smaller refunds received larger net pay during the year, due to smaller tax withholding in their paychecks every month.
But the political back-and-forth misses the bigger point: Continue reading
By Glenn Kessler • Washington Post
“The average tax refund is down about $170 compared to last year. Let’s call the President’s tax cut what it is: a middle-class tax hike to line the pockets of already wealthy corporations and the 1%.”
— Sen. Kamala D. Harris (D-Calif.), in a tweet, Feb. 11, 2019
Harris, who is running for president in 2020, attacked President Trump’s tax law after the Internal Revenue Service reported that preliminary data shows that the average tax refund check is down 8 percent ($170) this year compared with last year.
Boy, talk about a non sequitur that turns out to be nonsensical and misleading. Let’s take a look.
The average tax refund is down, at least according to very preliminary data for returns processed through Feb. 1. (That’s essentially one week of filing data.) But the size of a refund tells you nothing about a person’s tax bill. Continue reading
By John Stossel • Reason
Today is the Super Bowl.
I look forward to playing poker and watching. It’s easy to do both because in a three-hour-plus NFL game there are just 11 minutes of actual football action.
So we’ll have plenty of time to watch Atlanta politicians take credit for the stadium that will host the game. Atlanta’s former mayor calls it “simply the best facility in the world.”
But politicians aren’t likely to talk about what I explain in my latest video—how taxpayers were forced to donate more than $700 million to the owner of Atlanta’s football team, billionaire Arthur Blank, to get him to build the stadium. Continue reading