But I wrote two months ago that Milei was surprisingly successful in his first month. Thanks to his executive actions to reduce the burden of spending, Argentina achieved its first monthly balanced budget in more than 10 years.
That was a remarkable development.
But that was just the beginning. Here’s a chart showing that Argentina’s currency has dramatically strengthened since Milei took office.
The chart comes from a Bloomberg report by Ignacio Olivera Doll. Here’s some of what he wrote.
Four months into office, Argentine President Javier Milei has pulled off a critical feat in a country long ravaged by runaway inflation: He stabilized the currency. The peso has, in fact, not only stopped plunging day after day but in one key foreign exchange market…it’s actually rallying sharply. The peso has soared 25% against the dollar over the past three months in the market, known as the blue-chip swap… That’s more than the gains posted by any of the 148 currencies that Bloomberg tracks against the dollar. It’s a shocking statistic in a country where the currency is seemingly in a never-ending state of freefall. (The smallest annual decline in the past decade was 15%.) And it underscores the lengths that Milei has gone to to rein in bloated government spending…and tame inflation that’s skyrocketed to an annual pace of almost 300%. …The cuts he imposed add up to the equivalent of almost 4% of the country’s economic output, an adjustment so aggressive that central bank officials estimate it’s larger than 90% of all those carried out in the world over the last several decades.
Spending restraint has not only reduced inflation and strengthened the currency, it also produced a balanced budget in the first quarter of 2024.
Here are some details from an AFP report published by Yahoo!Finance.
Argentina’s spending-slashing new President Javier Milei has hailed his country’s first quarterly budget surplus since 2008 as an “historic achievement.” In the first quarter of 2024, the South American country recorded a budget surplus of about 275 billion pesos… This amounted to a surplus of 0.2 percent of GDP. …”If the state does not spend more than it collects and does not issue (money), there is no inflation. This is not magic,” the self-described “anarcho-capitalist” said. …Thousands of public servants have lost their jobs. “Don’t expect a way out through public spending,” Milei warned on Monday.
To give you an idea of what Milei has accomplished, a 4-percentage point reduction in the burden of government spending would be over $1 trillion in the United States. If we had a leader like Milei, we could almost immediately eliminate three-fourths of the deficit.
It’s only April, but I suspect Senator Elizabeth Warren, a doctrinairestatist from Massachusetts, is going to win Politician of the Year for 2024.
Which is noteworthy because she’ll be the first multi-year winner of the award, having previously won the prize in 2021 (and she deserved to win it in 2017 and 2019).
Most important, at least for purposes of today’s column, I also told the BBC that a corporate tax cartel would be very dangerous since politicians would quickly try to apply the same approach to other types of taxes.
Well, I was right.
As reported in Barron‘s, some of the world’s greediest governments are now pushing a global wealth tax cartel. Here are some excerpts from the story by Daniel Avis.
Brazil, which is chairing the G20 this year, has been pushing for the group of nations which together account for 80 percent of the world’s economy to adopt a shared stance… “Fair international taxation is not just a topic of choice for progressive economists, but a key concern at the very heart of macroeconomic management today,” Brazilian finance minister Fernando Haddad said during an IMF event in Washington. “Without international cooperation, there is a limit to what states can do, both rich and developing ones,” he added. …Sitting alongside Haddad at the IMF event, French finance minister Bruno Le Maire renewed his calls for a global minimum tax… “The future of the world cannot be a race to the bottom,” Le Maire said.
Haddad seems like a not-very-good person. He’s been a political science professor, according to Wikipedia, and he’s authored some publications that suggest he’s a leftist ideologue.
In Defense of Socialism
Theses on Karl Marx
Work and Language for the Renewal of Socialism
This crank is now trying to set tax policy for the entire world!
Marcela Ayres and Andrea Shalal of Reuters also reported on Haddad’s iniiative, and their article noted the predictably pernicious role of the International Monetary Fund.
Brazil’s proposal to tax the super-rich globally gained momentum among Group of Twenty members…with France’s finance minister and the head of the International Monetary Fund backing a coordinated push to generate new revenue… IMF chief Kristalina Georgieva said…ensuring that the richest paid their fair share would mobilize funds… She said IMF research…also estimated that setting a minimum floor for carbon pricing could boost revenue by $1.4 trillion a year. …Gabriel Zucman, director of the European Tax Observatory, …has proposed that very-high-net-worth individuals…pay at least the equivalent of 2% of their wealth in income tax each year. That would generate $250 billion per year.
I can’t resist pointing out that Ms. Georgieva (like all IMF bureaucrats) gets a very lavish salary that is exempt from taxation. Yet this hypocritical parasite agitates for higher taxes on everyone else.
Fortunately, at least one major government is skeptical of this money grab.
In a separate report from Reuters, Christian Kraemer and Maria Martinez note that Germany’s Finance Minister is not a fan.
German Finance Minister Christian Lindner rejected on Thursday Brazil’s proposal to tax the super-rich, indicating a challenging path for it to gain widespread G20 support. …Speaking after meeting U.S. Senator Bernie Sanders on Thursday, Brazil’s Finance Minister Fernando Haddad said of Lindner’s opposition to the proposal: “He will change (his mind).” Sanders said he “strongly” supports the proposal… But the Brazilian government is aware that other countries like Japan and Italy have shown resistance to the initiative, added the source. …Le Maire said that moving to tax the rich was the logical next step for a series of global taxation reforms launched in 2017, including agreement on a global corporate minimum tax.
Let’s hope Germany holds firm, and that Japan and Italy also are on the right side.
But I worry because the statist countries will be relentless.
Remember, the corporate tax cartel seemed crazy when it was first proposed about 10 years ago. But the left kept pushing and now it’s in the process of being implemented.
I worry the same thing will now happen with a global wealth tax cartel.
P.P.S. It was nice of Monsieur Le Maire to confirm what I told the BBC about the corporate tax cartel being the first step on the path to other tax cartels.
P.P.P.S. I have not bothered to make the economic case against the wealth tax in this column, but feel free to click here, here, here, and here for that type of analysis.
There’s going to be a big tax fight in Washington next year, regardless of who wins the House, the Senate, and/or the presidency. That’s because major portions of Trump’s 2017 Tax Cuts and Jobs Act will expire on December 31, 2025.
Will those tax cuts be extended? Will they be expanded? Will they be curtailed? Politicians will be forced to choose.
In general, I’m rather pessimistic about the outcome for the simple reason that there’s been a huge increase in the burden of government spending.
I wrote about that problem two days ago and highlighted how politicians used the pandemic as an excuse to permanently increase the cost of government.
One result of all that wasteful spending is that we now have enormous deficits. And even though I don’t worry much about red ink (the real problem is spending, not how it’s financed), the practical reality is that it is well nigh impossible to have good tax policy when there is bad spending policy.
But that doesn’t mean we shouldn’t try. In an article for Bloomberg, Stephanie Lai, Amanda L Gordon, and Enda Curran write about the advice Trump is getting on tax policy.
Donald Trump is under pressure from economists in his circle to embrace a flat tax rate… The efforts demonstrate how people around the former president are already lobbying for their preferred economic policies ahead of a potential second term where both taxes and tariffs will be top priorities. …Forbes said…he is advocating for Trump to support a flat 17% tax rate for all income brackets with “generous” exemptions… For a family of four, he said, he would suggest the first $54,000 of income be exempt from federal income tax. …Whoever wins the White House in November will be forced to negotiate a tax deal next year because key portions of Trump’s 2017 tax cuts — including individual rates — expire at the end of 2025. That will set up a complex negotiation — particularly if control of Washington is split between Republicans and Democrats… Trump has not detailed what his tax plan would look like.
I’m glad that people are pushing Trump to be bold on taxes, but that advice needs to be augmented by a big push to make him better on spending.
When asked about tax loopholes, my first reaction is to determine whether something is an actual tax preference or merely a mitigation of a tax penalty.
Today, let’s examine a different strange loophole. As reported by Politico‘s Joseph Spector, New York politicians are creating a special tax break for journalists.
The state budget, set to be finalized Saturday, includes the nation’s first payroll tax credit for local news organizations in a bid to encourage new hiring… Lawmakers and independent media companies praised the tax break, which will designate $30 million a year to the program, called the Local Journalism Sustainability Act. …New York spends more than $8 billion a year on tax incentives and grants to attract and retain businesses in the high-tax state, and advocates of the measure have for years sought to extend the largesse to the newspaper and local TV industry. The late addition to the $237 billion budget allows eligible outlets to receive a 50 percent refundable credit for the first $50,000 of a journalist’s salary, up to a total of $300,000 per outlet. …The money is largely focused on independently owned publications, but also can cover hiring journalists in print media outlets that “demonstrate a reduction in circulation or in the number of full-time equivalent employees of at least 20 percent over the previous five years.”
There are three things to understand about this proposal.
First, a “refundable credit” is actually government spending. So the new law would be a direct handout for media companies.
Second, it should be obvious why New York’s Democrats want to subsidize a sector that acts as cheerleaders for big government.
Third, the law is written in a way that big media firms like the New York Times theoretically could benefit.
All told, not a good idea. And not what I had in mind when I asked what should be done about media bias.
P.S. If you want to know the best way of dealing with tax loopholes (properly defined), click here and here.
That was bad news, but what’s far more worrisome is that politicians used the pandemic as an excuse to permanently increase the spending trendline.
Here’s a chart based on CBO’s historical data and future projections. I added a yellow line to show the trend line based on spending growth from 2000 to 2019.
As you can see, spending soared above the trend line during the pandemic, came down slightly in 2022 and 2023, but now is projected to stay way above pre-pandemic levels.
At the risk of understatement, this added spending burden is the main reason America is in fiscal trouble.
To get an idea of how much spending has exploded in recent years, it makes 2008-2010 (Bush’s corrupt TARP bailout and Obama’s failed stimulus) look like a tiny blip by comparison.
Now I’ll add a caveat. Even without the pandemic spending orgy, America’s budgetary was on track to deteriorate. The retirement of the baby boom generation, combined with poorly designed old-age entitlements, translates to a higher spending trend line.
That being said, Trump and Biden combined to make a bad situation much worse.
Another caveat is that the headline on this column is an exaggeration. I simply like using everything-you-need-to-know as a rhetorical device when I have a very compelling visual or example.
To show that living standards are much higher in the United States than they are in Europe, I periodically share OECD data on average individual consumption (2012, 2014, 2017, 2019, and 2022).
Today, let’s look at another example, courtesy of a tweet by Jeff Weniger.
For what it’s worth, I think the chart overstates the American advantage (unless I’m misreading, I don’t think the numbers are adjusted for purchasing power parity).
That being said, the trend lines are very consistent with other data showing faster growth in the United States.
To wrap up, let’s look at a specific example of how Americans enjoy higher levels of consumption.
In this case, for housing. Here’s a map of square feet per dwelling that was shared by Prof. Garett Jones of George Mason University.
A dramatic difference, to put it mildly.
When I share this type of data with some of my left-leaning friends, they sometimes tell me that Europeans simply choose to work less and consume less because they value a better quality of life.
Sadly, here’s a more up-to-date chart showing that the loss of economic freedom is a problem for the entire western world (the advanced nations of North America, Western Europe, and the Pacific Rim).
As you can see, a big increase in economic liberty during the era of the “Washington Consensus” followed by a decline since the turn of the century.
Sadly, only three nations – Israel, South Korea, and Taiwan – improved their economic freedom scores between 2000 and 2021. Every other country declined.
Moreover, it pains me to acknowledge that the United States suffered the biggest decline, dropping from 8.84 to 8.14.
The situation has become so bad that even the New York Times has noticed. Here are some excerpts from a story by Patricia Cohen.
More than 2,500 industrial policies were introduced last year, roughly three times the number in 2019, according to a new study. And most were imposed by the richest, most advanced economies — many of which could previously be counted on to criticize such tactics. …the trend is worrying some international leaders and economists who warn that such top-down economic interventions could end up slowing worldwide growth. …“There are different ways of shooting yourself in the foot,” M. Ayhan Kose, the deputy chief economist of the World Bank, said about the trend of rich countries pursuing industrial policies. “This is one way of doing it.” …The current wave of policies…is a stark contrast to the classic open markets, hands-off government ideology championed by the citadels of capitalism in recent decades. …After years of complaints about China’s subsidies of private and state-owned industries, the United States and Europe have increasingly copied Beijing’s playbook, undertaking multibillion-dollar industrial policies.
It’s rather strange that those mistakes were not mentioned. Or, perhaps not so strange since the reporter was talking to people at the annual meeting of the International Monetary Fund and World Bank. And the IMF this century has been controlled by political types who preach a dirigiste message of bigger government and higher taxes.
I’ll close by citing an additional passage that is very discordant.
…faith in the superiority of free-market policies was deeply shaken in recent years by a string of global jolts — the pandemic, supply chain meltdowns, soaring inflation and interest rates, Russia’s invasion of Ukraine, and rising tensions between the United States and China.
Why on earth did the reporter assert that faith in free enterprise was shaken by things that have nothing to do with capitalism?!?
To illustrate the importance of higher growth rates, I sometimes inform audiences that the United States today would be as poor as Mexico if the American economy had grown 1-percentage point slower over the past 130 years.
Needless to say, I then point out that we avoided that fate because we were fortunate enough to have decent economic policy.
But I also ask people to imagine how much richer we could be if we had great economic policy (sort of like Hong Kong before China’s crackdown) rather than decent economic policy.
I now have a new example to share. Here’s a fascinating tweet from Jason Furman, who was Chairman of President Obama’s Council of Economic Advisers.
As you can see, it does not seem like there has been a huge difference in per-capita economic growth between the United States and Argentina. But it turns out that 0.5 percentage points actually is enormous when looking at 100-plus years of data.
If you want even more evidence about why 0.5 percentage points of growth is important, the Economistreported a few years ago that Argentina was the world’s worst-performing economy over the past century.
The most important thing to understand is that a trade deficit is the same thing as a financial account surplus (formerly known as a capital surplus), which is easy to understand when reviewing this graph.
And that type of surplus occurs when foreigners obtain dollars (by selling to Americans) and then decide that the best use of that money is to invest in the U.S. economy.
That’s generally a sign of a country’s economic strength.
Unfortunately, some people don’t grasp this relationship. And that leads them to supporting misguided ideas, such as protectionist trade restrictions.
But sometimes they want an indirect approach. For instance, one of Trump’s main advisers wants to weaken the dollar. In a column for Forbes, Christine McDaniel explains why this is a very foolish idea.
Robert Lighthizer, a former U.S. trade negotiator and a potential Treasury Secretary pick for a second Trump administration, is reportedly discussing ways to devalue the dollar in order to reduce the U.S. trade deficit. But…a devaluation is a cut in a nation’s standard of living. …Currency devaluation might sound like an appealing way to trim the trade deficit: All else equal, weakening the U.S. dollar would make U.S. exports cheaper, imports more expensive, and potentially reduce the trade deficit. But all other things don’t remain constant in such scenarios, and devaluing your own currency ends up having the opposite intended effect. It makes the economy less competitive and less efficient. … Anything the United States would gain through a devaluation in terms of cheaper exports, it would lose through its relatively pricier imports. Raw materials, intermediate goods, and capital goods comprise over half of U.S. imports. …So, either American consumers and businesses would face higher prices here at home, U.S. exports would become less competitive, or a bit of both. …Currency devaluation is a race to the bottom that you can’t win. You might be able to get quick hits on the board in the immediate term, but within months, those are inevitably followed by punishing penalties.
Catherine Rampell of the Washington Post makes similar points in her column.
Trump’s policy team is reportedly scheming to devalue the U.S. dollar. …Trump’s objective…is to boost U.S. exports and reduce imports. Basically, if a dollar buys, say, fewer euros or Japanese yen than it currently does, that makes U.S.-made products look a little cheaper and potentially more attractive to European and Japanese customers (among others). …That is, until you consider everything else that might happen if we deliberately tried to weaken our currency… how would Team Trump weaken our currency? That’s not totally clear. He might try to force the Federal Reserve to cut interest rates. …a weaker dollar would likely lead to higher prices for American consumers… So much for Trump’s pledge to vanquish inflation.
Both of these columns make good points, but they’re understating the main argument. What everyone needs to realize is that devaluation is inflation.
And presumably there’s no need nowadays to explain why inflation is bad, considering the damage caused when central banks decided to devalue currencies during the pandemic.
Moreover, it’s a bad policy that won’t work. Because once the Fed’s easy-money policy leads to rising prices, that will boost the cost of American-produced goods.
So the long-run impact may be a higher trade deficit.
P.S. Ms. Rampell makes another observation that deserves attention.
Deliberately weakening the dollar, or even attempting to, also threatens its role as the world’s “reserve currency.”
If you want to know more about that issue, click here.
While in Sweden last week, I wrote several columns (here, here, and here) about that nation’s fiscal policy.
But I also had a discussion about American fiscal policy with one of the tax experts at the Confederation of Swedish Enterprise. That included a discussion of the value-added tax (VAT).
If you don’t want to spend a few minutes watching the video, I made two theoretical observations and two practical observations.
A VAT has the same “tax base” as a flat tax. The structural difference is that a flat tax takes a slice of your income as you earn and a VAT takes a slice of your income as you spend.
But we’ll never be given a chance to make that swap.
Instead, some people claim that we are facing a different type of choice. Should we finance our (baked-in-the-cake) expanding burden of government with class-warfare taxes or a value-added tax?
The right answer, needless to say, is to restrain spending. But if someone is holding a gun to your head and demanding that you choose a tax increase, which one do you pick?
Seems like a VAT would be the less-harmful approach, but this is a good opportunity to raise my two practical points.
In the real world, adoption of a VAT almost surely will lead to more class warfare taxes because politicians will want to balance the harm to lower-income people by also imposing taxes that hurt higher-income people.
And it doesn’t even capture the entire truth since very few taxpayers know that their payroll taxes are actually twice as high as what they see on their pay stubs and W-2 forms.
Perhaps because I grew up reading the Peanuts comic strip, this is today’s favorite item.
If only opting out of the tax code was this simple!
That being said, not every leftist is a hypocrite. Some do lead by example.
Here are some excerpts from a New York Timescolumn by Matthew Desmond, a Princeton sociologist.
Alejandro Narváez is OK taking less. …when it comes to paying taxes, he forgoes many deductions…filing his taxes with TurboTax, not to save money but to lose it. “I see it as my responsibility to pay my fair share of taxes,” Mr. Narváez, who is 70, told me. “I have so many opportunities to reduce my taxes, but I choose not to.” …this time of year also provides us the opportunity to ask ourselves: Is it ethical to take tax breaks that primarily make the rich richer? …Besides the occasional statement from liberal elites asking to be taxed more, many of the biggest beneficiaries of the government’s largess have done very little to bring about fair tax reform. Why do we keep waiting for Congress to act when we could effectively tax ourselves more by following Mr. Narváez’s example and refusing to take some deductions? …My family has struggled with this question. …I have criticized the mortgage-interest deduction… My family qualifies for this ridiculous deduction. But we don’t want it. …So we’ve decided to create that society in miniature form, and with full recognition that we have the privilege of doing so, by donating what we receive from the mortgage-interest deduction to affordable housing initiatives on top of our regular giving. …I honestly don’t know if it’s better to donate tax deductions or, like Mr. Narváez, refuse them outright. I only know that it feels unfair to keep it all for ourselves. …Imagine if we all came to view tax breaks not as entitlements but as money that is not rightfully ours.
Kudos to Mr. Narváez and Mr. Desmond for putting their money where their mouths are.
I think it’s crazy to give more money to the nation’s most venal and corrupt people, but at least they’re not hypocrites.
However, I can’t resist pointing out that Mr. Desmond made several inaccurate statements in his column.
Today, let’s look at another visual that captures what’s wrong with the Washington welfare state. As you can see, taxpayers are footing the bill for a system that spends more than twice what would be required to eliminate all poverty.
The chart comes from a new report by Matt Dickerson for the Economic Policy Innovation Center. And the purpose of the chart is to show that the welfare system is grotesquely inefficient.
Here’s some of what he wrote.
…the welfare bureaucracy is broken, making it more difficult for millions of people to achieve the American Dream. …It is demeaning to believe that many Americans are simply unable to be successful and should be relegated to a life of dependence on perpetual government subsidization of their basic needs. …the welfare bureaucracy undermines and discourages employment. Only 18% of able-bodied adults receiving Food Stamps, who are expected to meet work requirements, actually work 20 hours or more per week. …Many welfare programs undermine the institution of the family — and the benefits brought by stable two-parent households — by including marriage penalties. …The principle of subsidiarity dictates that the independent sector, communities, and local and state governments should be empowered rather than the distant and bureaucratic central government. …The welfare bureaucracy is also filled with duplication and overlapping programs. According to the Congressional Research Service, there are 15 different food aid, 13 housing, 12 health care, and five cash aid programs. …Welfare is one of the largest categories of the federal budget, comprising about 20% of annual spending. …the federal government spent more than $28,100 per person in poverty — providing benefits $15,000 above the poverty threshold for individuals
So why does it exist? This clever cartoon tells part of the answer.
But this is only a partial explanation.
Don’t forget all the bureaucrats, consultants, and contractors who make a lot of money administering the programs. Walter Williams called them “poverty pimps” and they have an obvious incentive to maintain the current system.
Unfortunately, policy veered in the wrong direction, especially starting in the 1960s.
But things have gotten better in recent decades. Ten years ago, I wrote about a very impressive period of spending restraint in the 1990s. That was worthy of praise, but what’s noteworthy is there has been no backsliding.
Indeed, IMF data shows that Sweden has continued to make progress, albeit at a slow pace.
It goes without saying (but I’ll say it anyhow) that the burden of government spending is still far too high. But a government that consumes 48 percent of GDP is better than one that consumes 52 percent of GDP.
And 52 percent of GDP is far better than 66 percent of GDP.
But Sweden has made progress is areas other than fiscal policy. Here are some excerpts from a 2014 report by Stefan Fölster and Johan Kreicbergs of the Reform Institute.
The seventies and eighties saw Sweden’s tax burden rise from an average European level to the world’s highest. The public sector expanded vastly. All facets of the welfare system were made more generous… Meanwhile, labour market regulation increased… Throughout these years, Swedes’ individual after-tax real income stagnated, private sector job creation ceased, and public debt spiralled higher. This culminated in a severe economic crisis in the early 1990s. …many Swedes began to react to the country’s lacklustre economic performance… At first, a few public utilities and the financial markets were opened to competition, and an important tax reform was implemented. …emphasis at the time was placed on reforms that opened significant sectors in the economy to greater competition. …significant changes were introduced to the tax system, macroeconomic policy framework, and social insurance system. …The results of this wave of reforms are remarkable. During the twenty years before 1995, GDP and productivity growth was substantially lower than in other countries. Virtually no net jobs were created in the private sector and government debt increased rapidly. Moreover, disposable income of Swedish households grew only in a very slowly. Since 1995, every aspect of the Swedish economy has changed. GDP and productivity growth have been higher than in comparable countries. Employment in the private sector has grown by more than 1% annually, while public sector employment has decreased. Public finances are now stronger than in most countries. Furthermore, median disposable income of Swedish households has grown 4 times faster after 1995, compared to the previous 20 years.
Here’s my favorite chart from the report.
It shows how the numbers of bureaucrats skyrocketed in the 1960s and 1970s, while jobs in the economy’s productive sector languished.
As a result of reforms, however, the number of bureaucrats has decline and jobs in the private sector have increased.
The net effect of all the reforms – lower tax rates, reduced spending burden, deregulation, etc – has been very positive.
But it’s better than people think. And its economic history shows that bad policy lowers living standards and that good reforms improve living standards.
Interestingly, Sweden also had better fiscal policy during the pandemic. Trump squandered $2 trillion-plus in 2020 and Biden squandered $1 trillion-plus in 2021.
According to IMF data, by contrast, Swedish fiscal policy was much more responsible, with the burden of government spending increasing at a much slower pace. And that’s true whether looking at the change between 2019 and 2020 or the change between 2019 and 2021.
Sweden even did a better than Switzerland, the country that usually has the best fiscal policy in Europe. Swiss politicians increased spending by 12 percent in 2020, more than twice as fast as overall spending increased in Sweden that year.
But, thanks to its spending cap, Switzerland is doing much better over time. If you look at the past five years, it easily wins the prize for fiscal responsibility (the “debt brake” allowed a big emergency spending increase in 2020, but it also has required extra spending restraint in subsequent years to compensate).
By the way, nobody will be surprised to learn that Switzerland was much more prudent than the United States during the pandemic.
Since I’m currently in Stockholm and just gave a speech about fiscal policy, let’s take a look at Swedish taxation.
Like most western nations, Sweden became a rich nation in the 1800s and early 1900s when taxes were modest and the burden of government was very small.
How small? Government spending consumed less than 10 percent of economic output.
And limited government meant low tax burdens. Here’s a chart from a 2015 report on the history of Swedish taxation. As you can see, even rich people faced marginal tax rates of less than 5 percent in the 1800s and just a bit over 10 percent up until about 1920.
Sadly, tax rates jumped in the 1920s and then skyrocketed in the 1940s. At least for rich people. Close to 90 percent!
But as is so often the case, higher taxes on the rich were a precursor for higher taxes on everyone else. The chart also shows that marginal tax rates for middle income and lower-middle income taxpayers jumped dramatically in the 1950s and 1960s.
By the 1970s and 1980s, everyone was facing confiscatory marginal tax rates.
And don’t forget that Swedish taxpayers also had an onerous value-added tax which grabbed about 20 percent of whatever was left after income and payroll taxes.
That sounds horrible and it was horrible, but the tax burden on investment and entrepreneurship was even worse.
Here’s another chart from the report looking at the effective marginal tax rate on investment.
Before the income tax, there was no problem. And the tax burden was modest during the first half of the 1900s. But look at what happened to tax rates in the 1970s and 1980s. The effective marginal tax rate was way above 100 percent on investments financed with new shares.
In other words, investors would have been better off dumping their money in an incinerator. And the tax rates on other types of investment also peaked about 75 percent-85 percent.
The good news, though, is that Sweden learned from mistakes. Lawmakers began lowering tax rates in the 1980s and especially in the 1990s.
But that simply meant Sweden has gone from horrible tax policy to bad policy. A step in the right direction, to be sure, but marginal tax rates on labor income are still absurdly high
There has been a bigger improvement in business taxation, which is positive, though effective marginal tax rates of 20 percent-35 percent are tolerable rather than good.
But I’ll close with some positive observations. In addition to lowering marginal tax rates, Sweden in recent years also has eliminated both death taxes and wealth taxes.
And the overall tax burden has declined.
Interesting, a declining tax burden does not mean declining tax revenue. Here’s a final chart on taxation in the 21st century. The orange line shows the overall tax burden as a share of GDP and the grey bars show inflation-adjusted tax revenue.
To explain why the “war on cash” is misguided, I have a seven-part series (here, here, here, here, here, here, and here) explaining why it is dangerous to eliminate currency and rely solely on government-provided digital money.
Using the information in those columns, I gave a speech earlier today in Sweden as part of the Free Market Road Show.
In this PowerPoint slide, I summarized (fairly, I think) the left’s arguments in favor of getting rid of cash.
Simply stated, they want the ability to impose a turbo-charged version of Keynesian monetary policy, and they also want the government to have a record of every transaction so that politicians can collect more tax.
But a ban on cash would enable politicians to go way beyond normal Keynesian monetary policy.
Instead of low (or zero) interest rates, the government could impose negative interest rates. In other words, financial repression.
In simpler terms, governments could – and would – confiscate part of your savings.
Later in my presentation, I also had a slide that summarized why it would be a bad idea if government forced us all to use a central bank digital currency.
Since I already debunked Keynesian monetary policy, I’ll conclude by reiterating something I said today in Stockholm, which is that not every government is equally untrustworthy.
China, for instance, already is monitoring purchases (and everything else) as part of its totalitarian social credit system.
I don’t think the folks in Washington are nearly that bad, but policies such as Operation Choke Point and various anti-money laundering rules show that our politicians and bureaucrats are willing to impose bad policy via the financial system.
And “wasteful” is not an idle adjective when writing about Canadian fiscal policy.
Here are some excerpts from a story from Bloomberg about a pipeline being built by Canada’s government. And since it’s being built by government, there are giant cost overruns.
The expansion of the Trans Mountain oil pipeline will cost about $3.1 billion more than the Canadian government-owned company running the project projected in May, another financial setback for a project beset by spiralling expenses and years of delays. …That brings the total cost to about $34 billion, more than six times the original estimate of $5.4 billion in 2013. …another setback for a project that Prime Minister Justin Trudeau has expended significant political capital on. …The expansion, years behind schedule, is set to go into operation in the second quarter, a delay from the previous first quarter start date, according to Trans Mountain.
I wrote about Botswana yesterday, but focused on the narrow issue of how some of that nation’s leaders dunked on virtue-signalling politicians in Germany and the United Kingdom.
But I did share a chart about how Botswana has out-performed other African nations thanks to more economic liberty.
How much more economic liberty? As you can see from the map, Botswana is one of only three nations is sub-Saharan Africa to be in the second quartile (green) for economic liberty according the Fraser Institute’s Economic Freedom of the World.
Being in the second quartile normally is nothing to brag about. Indeed, I criticize countries such as Greece, Italy, and France for being in that group.
But almost every other African country does worse. A few are in the third quartile (orange) and most are in the fourth and last quartile (red).
Does Botswana reap any benefits as a result of having the highest level of economic freedom in Africa (other than a couple of small island nations)?
Let’s update the chart I shared yesterday. Here are the new numbers, which include about 10 more years of economic data. As you can see, Botswana is still the continent’s big success story.
Let’s look at some analysis about Botswana’s economic policy.
We’ll start with some excerpts from a column that Marian Tupy wrote for CapX back in 2020.
Another success story that speaks to the universal applicability and adaptability of classical liberal principles is Botswana. While by no means perfect, Botswana has outperformed the rest of Africa economically… In 1966, when the Bechuanaland Protectorate gained independence from Britain, GDP per capita was just amounted to $518 a year. By 2018, it stood at $8,031 – an increase of 1,450%. Over the same period, the global average rose 136%, from $4,625 to $10,894. Put differently, Botswana’s economy grew 10 times faster than the rest of the world. The country’s economy is even more impressive compared to its immediate neighbors. Between 1966 and 2018, South Africa’s GDP per capita rose 32%, from $5,631 to $7,434, and Zimbabwe’s just 35%, from $981 to a meagre $1,322. …for much of its independence Botswana was, according to the Economic Freedom of the World report, one of Africa’s most economically free countries. While many other nations embraced some form of socialism, Botswana was, broadly speaking, capitalist.
And here are some excerpts from an article published by the Foundation for Economic Education in 2018.
Authored by Luis Pablo de la Horra, it reaches similar conclusions.
Whereas Asia has experienced tremendous economic growth, Africa is the continent that has benefited the least from global capitalism. …Despite Africa’s general economic underdevelopment, some countries have attained relatively-high levels of economic growth and prosperity. …Botswana gained independence from Britain in 1966. At the time, Botswana was an extremely poor country. …Today, Botswana has the highest income per capita (adjusted for purchasing power) of the region, comparable to countries like Costa Rica or Mexico. Economic growth in Botswana has been inclusive: the share of people living in poverty (i.e., with less than $1.90 a day) has declined dramatically, moving from 34.8 percent of the population in 1993 to 18.2 percent in 2009. Poverty levels are expected to fall even further, declining to 10.6 percent in 2019. …How did Botswana manage to get out of the poverty trap? Or put in another way, what differentiates Botswana from its less developed neighbors like Zimbabwe or Zambia? …Botswana is the second freest economy in Africa (only surpassed by Mauritius). It has a sensible regulatory environment and a reasonable rule of law. …In addition, trade barriers are relatively low while successive governments have managed to keep public finances under control.
Yesterday’s column was entitled “Great Moments in Botswana Government,” but ranking in the second quartile for economic liberty means today’s column is merely labeled as “Good Moments in Botswana Government.”
P.S. That being said, good is better than bad. To learn more about Botswana’s relative success, people should watch this video I shared in 2018.
P.P.S. International bureaucracies such as the OECD and IMF are giving terrible advice to African nations.
When I write a “Great Moments” column, that’s always been a sign that some government is going to be subject to mockery.
For today’s column, though, I’m going to break with that pattern. That’s because I’m writing about the success story of Botswana, a country in southern Africa that has enjoyed remarkable growth thanks to comparatively good economic policy.
But fast growth and free markets are not the reasons for a “Great Moments” column.
Instead, I want to applaud Botswana’s leaders for dunking on some vapid European politicians. Here are some excerpts from Jacqueline Howard’s BBC report.
The president of Botswana has threatened to send 20,000 elephants to Germany in a dispute over conservation. Earlier this year, Germany’s environment ministry suggested there should be stricter limits on importing trophies from hunting animals. Botswana’s President Mokgweetsi Masisi told German media this would only impoverish people in his country. He said elephant numbers had exploded as a result of conservation efforts, and hunting helped keep them in check.Germans should “live together with the animals, in the way you are trying to tell us to”, Mr Masisi told German newspaper Bild. “This is no joke.” Botswana is home to about a third of the world’s elephant population – over 130,000 – more than it has space for. …Botswana’s Wildlife Minister Dumezweni Mthimkhulu last month threatened to send 10,000 elephants to London’s Hyde Park so British people could “have a taste of living alongside” them. In March, UK MPs voted to support a ban on importing hunting trophies, but the legislation has further scrutiny to pass before becoming law.
Needless to say, British and German politicians won’t accept surplus elephants from Botswana. Instead, they’ll continue to engage in moral preening and virtue signalling.
Since politicians are almost always worthy of contempt, I could end the column at this point.
Sensible regulation requires cost-benefit analysis. In other words, do the positive effects of a government intervention outweigh the negative effects?
For instance, a nationwide, 5-miles-per-hour speed limit definitely would reduce traffic fatalities, but lawmakers fortunately don’t impose that kind of rule because it would be absurdly costly.
And since the scholarly research shows a clear link between health and wealth, it’s possible that some (supposedly) pro-safety regulations may wind up leading to a net loss of life.
Other regulations may not have that deadly effect, but they can still be bad news because they increase costs with no concomitant benefits.
For an example, let’s go back more than 20 years to look at an academic study on dentistry. The authors, Morris M. Kleiner and Robert T. Kudrle, found that red tape was not good news for consumers.
Here are some excerpts.
We have analyzed the impact of stricter occupational licensing requirements on economic outcomes, dental prices, and earnings using dental records of the consumers of these services. …we sketched a model linking regulation to the flow of new dentists as well as to quality and prices. …Alternative multivariate statistical models were used to test the impact of more restrictive licensing provisions, first on dental outcomes and then on the prices of dental service prices and practitioner earnings. …we are able to provide some evidence on how tougher dental regulation reduces the flow of dentists to the states over time. We also show that stricter regulation raises prices, but has no effect on untreated deterioration. …more stringent regulation does not appear to affect some indirect measures of service quality, such as lower malpractice premiums or fewer patient complaints. …Our multivariate estimates show that increased licensing restrictiveness did not improve dental health, but it did raise the prices of basic dental services. Further, using several tests for the robustness of our estimates, we found that the states with more restrictive standards provided no significantly greater benefits in terms of lower cost of untreated dental disease. Our estimates…show that more regulated states have somewhat higher dental prices. …Consequently, moving toward more restrictive policies that limit customer access to these services could reduce the welfare of consumers. …To the extent that states are considering a reduction in the pass rate on dental exams or making it more difficult for out of state practitioners to enter, our analysis suggests that there would be no gains to consumers in terms of overall dental health.
This flowchart from the study illustrates what the authors were trying to measure.
The bottom line is that we have yet another case study (for others, see here, here, here, here, here, here, here, here, here, and here) of red tape being bad news.
P.S. In recent decades, the U.S.A. has had two presidents (here and here) that pushed for less red tape.
In 2021, I shared a cartoon strip about a worker blaming capitalism after losing his job following an increase in the minimum wage.
One month ago, I shared a meme with a similar message. It showed the European Central Bank investigating supposedly mysterious price increases when the ECB’s bad monetary policy obviously deserves the blame.
Today, let’s look at another example of free enterprise being blamed for problems caused by government.
Heather Long of the Washington Postopines about young people not being big fans of free markets. Here’s some of what she wrote.
…whyAmericans under 40 are so disillusioned with capitalism. …Young people in America have come of age during the Great Recession, the sluggish recovery that followed and then the coronavirus pandemic. Unemployment has been 10 percent or higher twice in the past 15 years. …shore up Social Security. …Young people have seen the headlines that, if nothing changes, Social Security will start having to reduce benefits in 2034. …a better way to ensure that Social Security will be there for younger generations is to raise taxes slightly on corporations and the wealthy. …Young Americans have had a harsh introduction to capitalism. …a wise place to start would be to give workers a secure retirement again, starting with Social Security.
There are two major flaws in her analysis.
First, the 2008 financial crisis was not the fault of capitalism. It was bad monetary policy and foolish Fannie Mae/Freddie Mac subsidies. And while I don’t particularly blame government for the pandemic, it also would be absurd to blame capitalism for the accompanying economic troubles.
Second, it’s even more absurd to assert that Social Security is good for young people. Those are the people who are getting a terrible deal from the program. And even if young people aren’t directly hit by the author’s proposed tax increases, they will indirectly suffer as the economy gets weaker.
Since Ms. Long was writing an opinion column, I reckon we can’t say that her piece is an example of media bias. But she deserves a booby prize for poor analysis.
The money then goes to Washington, where some of it is spent on bureaucracy (including the shadow bureaucracy), and then funds are sent back out to communities.
That’s a recipe to make government more expensive and inefficient.
Let’s now apply this insight to the debate over how best to rebuild the bridge that recently collapsed in Baltimore after being hit by a cargo ship.
In his New York Timescolumn, Paul Krugman predictably argues that all taxpayers should be responsible for rebuilding the bridge in Maryland.
President Biden pledged that the federal government would “pay the entire cost of reconstructing” the bridge. This would clearly be the right thing to do… Biden will probably be able to get funds for rebuilding, but it’s by no means a sure thing. …It’s not foolish to worry that MAGA hard-liners will block aid to Maryland… It was clear through most of the Obama years that Republicans wanted to prevent good things from happening on a Democratic president’s watch. Under Obama, G.O.P. legislators squeezed federal spending after they took control of the House, supposedly because they were worried about government debt, only to open up the taps once Trump took office. …will partisanship and conspiracy theorizing get in the way of rebuilding the Key Bridge? …this is no time to be complacent.
By contrast, Richard Rahn explains in the Washington Times that there is a better approach.
Last week, Mr. Biden announced that the federal government would pay to replace the huge bridge that collapsed in the Baltimore harbor. More precisely, the president implicitly said that taxpayers across the country would pay for the bridge replacement (that is, if Congress agrees) rather than the good people of Baltimore and surrounding areas who actually use and reap the benefits of the bridge. Well before the country was formed, there was a long-standing tradition that those who directly benefited from infrastructure improvements ought to pay for them… Many roads and bridges were built by private parties or by local and state governments that charged tolls for their use. …Many large bridges — owned by government entities — charge tolls for their use. Typically, a bond issue is sold to fund the construction of the bridge, and the tolls are used to pay off the principal and interest on the bonds. Some states, including Virginia, have contracted with large construction companies to build and operate (including the collection of tolls) major highways or other transportation infrastructure projects. All of this makes sense in that those who directly benefit pay the costs. When all spending comes out of a common pot unrelated to its funding, it is too often viewed as “free money” by politicians and many citizens who fail to think through the consequences.
Richard is right, of course, about the dangers of “free money.” That’s a recipe for an entitlement mentality.
And he’s also right that the user-pays approach is morally and economically superior.
But I want to add to the debate by making a different point. What’s being overlooked is that the Francis Scott Key Bridge already was a toll bridge.
As such, it would be very simple (as Richard points out) to contract with a private company to build and operate a new bridge. The company pays the up-front costs and then gets repaid over time with money from tolls.
As is happening already with many bridges and highways across the nation (and world).
I’m guessing that Maryland’s greedy politicians are not in favor of that approach. Why? Because they probably want federal funding to build the bridge, and then they’ll still levy tolls so they have a new pot of money to spend.
P.S. The ship that crashed into the bridge presumably had insurance and I’m surprised that there has not been discussion about using a settlement to finance new construction.
It takes perverse and extreme naivete to think the folks in government want what is best. And the people who think that are probably naive in other ways as well.
Meanwhile, rational people realize that politicians and bureaucrats are looking our for their own interests rather than the national interest. There’s a field of study in economics about this, known as “public choice.”
But New York also belongs on that list. Some of the Empire State’s problems are summarized in my five-part Florida-vs-New York series (available here, here, here, here, and here).
Today, let’s look at some additional evidence. Jay Root of the New York Times has a sobering story that illustrates the blundering nature of the state’s government. Here are some excerpts.
Ten years ago, the agency overseeing the upkeep of the majestic New York State Capitol reported that the granite staircase leading to the main entrance was warped and bulging so badly that part of it might collapse at any moment. …A thorough repair, estimated at $17 million, was recommended. …The entrance, known as the Eastern Approach, has been closed to this day… In a state capital known for its inefficiency and inability to meet deadlines, the staircase and the Capitol’s exterior are visual reminders of Albany’s tendency toward disrepair and dysfunction. …Gov. Kathy Hochul…pushed through a $41 million appropriation to fix it, more than double the estimated cost in 2014. …they’re lining up contractors, with an eye toward starting work next spring and finishing it in 2028. It’s possible…that the estimated cost could rise again.
And (assuming the stairs ever get renovated) I’ll make a very safe prediction that the final cost is over $50 million.
By the way, it’s also not a surprise to learn that the entire building has a history of inefficiency and incompetence.
The Capitol was painstakingly built over 32 years beginning in 1867, a period marked by mishap, contracting abuses and cost overruns. It was the most expensive government building of its time.
Let’s close by acknowledging that New York is consistent. It had the most expensive government building and now it has the most expensive mile of subway.
Today, let’s focus on the third item so we can remind ourselves that government is inefficient and incompetent.
And we’ll focus specifically on Biden’s push for more electric vehicles. The President wants to encourage consumers to transition away from the internal combustion engine, so his legislation has big subsidies for more electric charging stations.
How’s that working out?
Just as you might suspect. Here are some excerpts from Shannon Osaka’s report in the Washington Post.
President Biden has long vowed to build 500,000 electric vehicle charging stations in the United States by 2030. …But now, more than two years after Congress allocated $7.5 billion to help build out those stations, only 7 EV charging stations are operational across four states. …$5 billion was allocated to individual states in so-called “formula funding” to build a network of fast chargers along major highways… But after two years, that program has only delivered 7 open charging stations with a total of 38 spots where drivers can charge their vehicles… requirements…slow down the build-out of the chargers. “This funding comes with dozens of rules and requirements,” Laska said.
Since the article does not specify how much money has been spent so far, we don’t know the per-station cost, but it surely will be enormous.
To be fair, the per-station cost presumably will decline over time, but I’m sure it won’t be anywhere as low as the cost of private charting stations.
And the article notes that Tesla is doing a much better job than the klutzes in Washington.
The United States currently has close to 10,000 “fast” charging stations in the country, of which over 2,000 are Tesla Superchargers, according to the Department of Energy. Tesla Superchargers — some of which have been opened to drivers of other vehicles — are the most reliable fast-charging systems in the country.
So what’s the moral of the story? Maybe, just maybe, we should let market forces rather than a “green new deal” determine the number of charging stations.
P.S. Absurdly expensive charging stations are bad, but the behavior of electric-vehicle-promoting politicians is worse.
Their kick-the-can-down-the-road approach is a recipe for fiscal chaos in the future. The result would be either massive tax increases, massive debt increases, or massive money printing.
But I have wondered whether congressional Republicans would take the same head-in-the-sand approach.
Fortunately, it appears many of them have – as I noted in the above interview – a more patriotic perspective. Andrew Biggs of the American Enterprise Institute wrote about a new budget proposal from the House Republican Study Committee. Here are some excerpts.
To the RSC’s credit – and, honestly, to my own surprise – the RSC took on the dangerous issue of reforming Social Security, standing up not only to Democrats looking to demagogue the issue but to former President Trump’s efforts to duck the issue. The RSC’s proposals “include modest and delayed changes to the Primary Insurance Amount PIA) benefit formula, the retirement age, auxiliary benefits for high income earners, and gradually moving towards a flat benefit.” If you don’t want the biggest tax increase in history, those are the sorts of things you have to do. …cheers for the RSC: They’ve stood up to Congressional Democrats by at least putting a plan on the table. And, more importantly, they’ve stood up to Donald Trump’s position that Social Security reform can be ignored or hand-waved away.
If you want to learn more about the Republican Study Committee’s plan, click here and here.
The good news is that there is very little risk that President’s new budget – which is very similar to his previousbudgets – will be approved by Congress.
The bad news is that his budget is filled with terrible policy. Big expansions in the burden of spending and big increases in tax rates.
At the risk of understatement, the economic consequences of those policies would be unfortunate.
Given my interest in competitiveness, I think this visual from the Tax Foundation is the most important thing to understand. Biden wants tax rates in the United States to go from dark blue to light blue.
What makes this visual so disappointing is when you compare tax rates in the United States to other industrialized nations.
Tax rates in America already are high compared to those other countries, especially when looking at the taxation of saving and investment.
But the most shocking results are when you compare tax rates in other nations to Biden’s proposed tax rates. The United States would be shooting itself in the foot.
Given those terrible policies, this set of numbers from the Tax Foundation is hardly a surprise. Government would get more money and households would lose money.
I’ll close by observing that the Tax Foundation’s model is based on how higher tax rates discourage productive behavior. And there’s lots of academic evidence to support that approach.
As far as I know, though, the Tax Foundation does not quantify or estimate the economic damage from higher spending. So the actual consequences of Biden’s proposed budget surely would be even worse (the case for smaller government is bolstered by research from the Congressional Budget Office, as well as from generally left-leaning international bureaucracies such as the OECD, World Bank, ECB, and IMF).
That’s more than the gains posted by any of the 148 currencies that Bloomberg tracks against the dollar. It’s a shocking statistic in a country where the currency is seemingly in a never-ending state of freefall. (The smallest annual decline in the past decade was 15%.) And it underscores the lengths that Milei has gone to to rein in bloated government spending…and tame inflation that’s skyrocketed to an annual pace of almost 300%. …The cuts he imposed add up to the equivalent of almost 4% of the country’s economic output, an adjustment so aggressive that central bank officials estimate it’s larger than 90% of all those carried out in the world over the last several decades.
This amounted to a surplus of 0.2 percent of GDP. …”If the state does not spend more than it collects and does not issue (money), there is no inflation. This is not magic,” the self-described “anarcho-capitalist” said. …Thousands of public servants have lost their jobs. “Don’t expect a way out through public spending,” Milei warned on Monday.
International Liberty 