Tag: Arthur Laffer

Is the Carbon Tax looming?

I can not think of anything that would hit our ailing economy any harder than a carbon tax, and don’t you know that Obama might have such a tax in mind

According to one former member of the White House Climate Change Task Force under President Clinton, President Obama may have plans to implement a carbon tax as soon as the fiscal cliff negotiations are settled. 

Forget the fact that Obama and his minions have repeatedly protested that they won’t press for a carbon tax, Paul Bledsoe writes:

… the economic advantages of a carbon tax are so manifest that it is still possible, once the fiscal cliff negotiations are finished and talks turn to a truly transformative tax reform deal, that leaders in Congress will begin to reconsider it, especially it if is marketed on economic grounds.

Bledsoe continues that even the oil companies support the idea:

In fact, major oil companies, who played a powerful role in killing cap and trade and oppose a gasoline tax, generally favor a carbon tax as part of overall tax reform, as do many others segments of corporate America. A carbon tax is also supported by many economists from both parties. Arthur Laffer, Gregory Mankiw, and Douglas Holtz-Eakin are just a few of the politically prominent Republican economists to speak favorably about a carbon fee.

He states that a tax on carbon is better for overall US economic growth than the mix of higher taxes on work and capital. And Bledsoe avers that the U.S. would be better off in other ways:Such a tax may prove effective in producing a more robust U.S. clean technology sector and reducing greenhouse gas emission (RFF estimates a 10 percent drop in emissions over business as usual by 2020 from a $25 a ton CO2 tax)—but its main selling points are fiscal and budget policy.

Boy, that sounds great huh? But wait for the rest of the story

No gain — There would be virtually no environmental benefits to unilateral greenhouse gas emission reductions by developed countries (whose GHG levels are already flat and slowly declining), while developing countries are pouring out virtually every kind of pollutant with joyous abandon. Some argue that we’ll get “co-benefits” from reducing other pollutants, such as particulates. Well, we already have highly effective (if economically damaging) regulations for conventional pollutants. If they’re not working, they should be fixed. Establishing a new set of controls based on ancillary benefits is not simply wasteful, it’s dishonest.

A carbon tax would also have limited impact: If $4-per-gallon gas won’t reduce consumer demand, how is adding another 10 cents, 50 cents, or dollar going to do so? Low carbon taxes won’t have a significant effect, and high carbon taxes won’t retain political support long enough to provide environmental benefits. That’s not surprising: Houses, cars, and energy-consuming appliances are long-term investments that can’t easily be changed when fuel prices fluctuate. Jobs are also not abandoned lightly, so commuting distances aren’t easily adjusted.

Plenty of pain — Studies continue to show that carbon taxes, through their influence on energy prices, would cause considerable harm.

They’re recessionary: High energy costs reduce economic productivity and are passed along to consumers in everything they buy, from medical treatments to food and clothing. In fact, research at the American Enterprise Institute suggests that half of the total spending consumers do on energy is invisible to them: Its costs are embedded in the things they buy and the services they use. The more things cost, the less people consume, which means less production, less economic growth, and fewer jobs.

They’re regressive:  Most analysis shows that energy taxes are highly regressive. After all, it’s not the rich people who are driving around old cars with poor mileage, living in old houses with poor insulation and inefficient appliances, or having limited career mobility and lengthy commutes from poor communities into wealthier communities where there are jobs.

They’re anti-competitive: Energy taxes also make countries less competitive when it comes to exports, particularly when they’re competing against countries that don’t impose comparable taxes. Carbon tax proponents argue that such things can be handled with border taxes on imported goods from non-carbon-priced regimes, but does anyone really believe that such activities will not set off innumerable trade wars?

They are bait-and-switch: If climate alarmists really thought that the goal was to get the price right, you’d hear them promising to remove all of the other regulations of carbon emissions if they got their carbon tax. They’d talk about repealing vehicle efficiency standards, appliance standards, technology standards, emission standards, unraveling regional trading systems, ending low-carbon energy subsidies, and more. But they don’t. Climate change alarmists, like Al Gore, have never been shy in admitting that they will not be content with a carbon tax and will still want additional layers of carbon suppression through cap-and-trade as well as regulation. This will result in rampant over-pricing of carbon emissions and energy.

Just remember this folks, despite the claims of the Left, taxes, like manure roll downhill! The poorer you are the harder you get hit! And this tax, if it came to be, would raise the prices of just about everything we buy, again, hitting the poorest the hardest.

Taxmageddon And The Looming Economic Collapse

The Tax Cliff Is A Growth Killer – Arthur Laffer & Ford Scudder

The United States faces an economic collapse thanks to massive tax increases on Jan. 1, and continued deficit spending for years on end.

Keynesians worry about spending cuts and to some extent the expiration of the temporary 2% payroll tax cut. But the looming expiration of the Bush tax rate cuts along with new levies enacted as part of ObamaCare pose the greatest threat.

The breadth of what will hit the country is extraordinary. The top federal rate on personal income will increase to 39.6% from 35%, with an additional 0.9% increase in the payroll tax for Medicare. The highest federal rate on dividends will increase to 43.4% from 15%, and the tax rate on capital gains will increase to 23.8% from 15%.

The rates on capital income are rising because of the expiration of the Bush tax cuts, and a 3.8% tax on investment income for the highest earners enacted as part of ObamaCare. As happens almost every year, there is a large scheduled expansion of the Alternative Minimum Tax (AMT) to ever-lower levels of income. The highest estate tax rate is scheduled to rise to 55% from 35%, with the lifetime individual exemption dropping to $1 million from $5 million. Meanwhile, tax rates will rise in many states.

In all, federal tax increases total almost $500 billion (over 3% of GDP) per year on a static-revenue basis. And that’s not counting the $1 trillion, 10-year increase in excess spending over tax receipts in the ObamaCare legislation. Given that many of the new taxes are rate increases at the margin, they will affect incentives to earn additional income. Thus it is a certainty that we face a lower level of output in 2013.

The blunt reality is that we cannot have a prosperous economy when government is overspending, raising tax rates, printing too much money, overregulating and restricting the free flow of goods and services across national boundaries.

In the 1980s and ’90s, Ronald Reagan’s tax cuts and Bill Clinton’s spending cuts (as a percentage of GDP) and his 1997 cut in the capital gains tax rate propelled the economy to grow rapidly. We’re looking at the mirror image of that in years ahead – a situation in which the economy deteriorates more than it might otherwise.

There are a number of reasons for dwelling on the tax cut experience during the Reagan years. First, tax cuts were ostensibly less important to the economy of the early 1980s than the Obama tax increases are to today’s economy.

Before he became President Obama’s budget director, Peter Orszag once estimated the static revenue losses to the federal government of Reagan’s tax cuts at 2.1% of the nation’s GDP. The tax increases scheduled for Jan. 1 amount to more than 3% of current GDP on a static-revenue basis as scored by the Congressional Budget Office, the Heritage Foundation and others. Mr. Obama’s tax increases will do more harm to the economy than Reagan’s tax cuts helped the economy.

Second is how the contrast between the Reagan tax cuts and the looming increases of next year affect overall economic performance. In anticipation of the legislated tax increases, individuals and businesses have already and will continue to shift income and output from 2013, the higher tax year, into 2012, the lower tax year. This income shift has and will continue to make 2012 look a lot better than it should. But next year will be much worse.

Reagan’s 1981 tax bill phased in the income tax cuts, thus providing people incentives to postpone taxable income from 1981 and 1982 into 1983 and beyond.

For example, 1¼ percentage points of Reagan’s tax cut took effect on Jan. 1, 1981, with the full tax cut increasing to 10% on Jan. 1, 1982, and 20% on Jan. 1, 1983. It was not until that late date that the bulk of his tax cuts went into effect. Under Reagan, people had enormous incentives to defer income. In today’s situation, they have enormous incentives to accelerate income.

For 1981 and 1982, real GDP growth was pretty close to zero, 3% below its long-term average. Then, in the first quarter of 1983, annual quarter-on-quarter real GDP growth was 5.1%, second quarter growth was 9.3%, third quarter 8.1%, and fourth quarter over 8% again.

And the growth continued. In the first quarter of 1984, growth was 8%, second quarter 7.1%, third quarter 3.9%, and by the fourth quarter of 1984 it had fallen to a still respectable 3.3%. Under the current administration, scheduled tax increases have been delayed, thereby providing people with enormous incentives to accelerate income into 2012 from 2013 and beyond. As a result, growth from 2013 on will be below trend.

Even if the 2013 tax increases do not take effect as legislated under current law, a good portion of the income-shifting is already set in stone. Consider what happened in 2010.

We wrote extensively at the time about the impending negative impact of the scheduled expiration of the Bush tax cuts on Jan. 1, 2011. In the lame duck session, President Obama and Republicans reached a compromise solution to extend the Bush tax cuts through the end of 2012. While that compromise prevented a decline in the long-term growth of economic output, the damage from the scheduled tax-boundary effect was already locked in place.

The first half of 2010 saw real GDP growth at slightly less than 4% per year, and the second half stood at 2.3%. And then in the first half of 2011, real GDP growth dropped to less than 1%, and the second half of 2011 was still anemic at 2.2%.

Third, and finally, ObamaCare will (according to the Congressional Budget Office estimate in March) add more than $1 trillion to government spending over a 10-year period over and above revenue raised by the higher taxes and penalties embedded in that legislation. As Milton Friedman taught, government spending is taxation – and therefore increases in government spending are increases in taxes.

America is going to get socked by a triple whammy on output, employment and income. No matter what happens from now on, 2013 will be a very tough year.

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The Bill Gates Income Tax

The Bill Gates Income Tax – Wall Street Journal

Framed on a wall in my office is a personal letter to me from Bill Gates the elder. “I am a fan of progressive taxation,” he wrote. “I would say our country has prospered from using such a system—even at 70% rates to say nothing of 90%.”

It’s one thing to believe in bad policy. It’s quite another to push it on others. But Mr. Gates Sr.—an accomplished lawyer, now retired—and his illustrious son are now trying to have their way with the people of the state of Washington.

Mr. Gates Sr. has personally contributed $500,000 to promote a statewide proposition on Washington’s November ballot that would impose a brand new 5% tax on individuals earning over $200,000 per year and couples earning over $400,000 per year. An additional 4% surcharge would be levied on individuals and couples earning more than $500,000 and $1 million, respectively.

Along with creating a new income tax on high-income earners, Initiative 1098 would also reduce property, business and occupation taxes. But raising the income tax is the real issue. Doing so would put the state’s economy at risk.

To imagine what such a large soak-the-rich income tax would do to Washington, we need only examine how states with the highest income-tax rates perform relative to their zero-income tax counterparts. Comparing the nine states with the highest tax rates on earned income to the nine states with no income tax shows how high tax rates weaken economic performance.

In the past decade, the nine states with the highest personal income tax rates have seen gross state product increase by 59.8%, personal income grow by 51%, and population increase by 6.1%. The nine states with no personal income tax have seen gross state product increase by 86.3%, personal income grow by 64.1%, and population increase by 15.5%.

It’s striking how the high-tax states have underperformed relative to those with no income tax. Especially noteworthy is how well Washington has performed compared to states with no income tax.

If Washington passes Initiative 1098, it will go from being one of the fastest-growing states in the country to one of the slowest-growing. And passage of I-1098 will only be the beginning. Just look at Ohio, Michigan and California to see that once a state adopts an income tax, there is no end to the number of reasons that such a tax could be extended, expanded and increased.

Over the past 50 years, 11 states have introduced state income taxes exactly as Messrs. Gates and their allies are proposing—and the consequences have been devastating.

The 11 states where income taxes were adopted over the past 50 years are: Connecticut (1991), New Jersey (1976), Ohio (1971), Rhode Island (1971), Pennsylvania (1971), Maine (1969), Illinois (1969), Nebraska (1967), Michigan (1967), Indiana (1963) and West Virginia (1961).

Each and every state that introduced an income tax saw its share of total U.S. output decline. Some of the states, like Michigan, Pennsylvania and Ohio, have become fiscal basket cases. As the nearby chart shows, even West Virginia, which was poor to begin with, got relatively poorer after adopting a state income tax.

Washington’s I-1098 proposes a state income tax with a maximum rate higher than any of those initially adopted by the other 11 states. In one fell swoop, Washington would move from being one of the lowest-tax states in the nation to being one of the top nine highest. It’s economic suicide.

The states that have high income tax rates or have adopted a state income tax over the past 50 years haven’t even gotten the money they hoped for. They haven’t avoided budget crises, nor have they provided better lives for the poor. The ongoing financial travails of California, New Jersey, Ohio, Michigan and New York are cases in point.

Over the past decade, the nine states with the highest tax rates have experienced tax revenue growth of 74%—a full 22% less than the states with no income tax. Washington state has done better than the average of the nine no-tax states. Why on earth would it want to introduce a state income tax when it means less money for state coffers?

What’s true for those states with the highest tax rates is doubly true for the 11 states that have instituted state income taxes over the past half-century. They too have lost huge sums of tax revenue.

A final thought for those who want to punish the rich for their success: As the nearby chart shows, those states with the highest tax rates, and those states that have introduced state income taxes, have seen standards of living (personal income per capita) substantially underperform compared to their no-tax counterparts.

If Mr. Gates Sr. and his son feel so strongly about taxing the rich, they should simply give the state a chunk of their own money and be done with it. Leave the rest of Washington’s taxpayers alone.

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