Soaking the rich won't work
And a fat French actor has helped draw attention to that
Governments that are raising tax rates on the wealthy to plug budget holes are doomed to disappointment.
The decision by French actor Gerard Depardieu to flee to lower-taxing Belgium serves as a high-profile example of the folly of targeting the rich for additional taxation.
While the actor stated his reasons for moving were numerous, the 2012 election commitment of French President Francois Hollande to impose a "temporary supertax" of 75 per cent on individuals earning more than €1 million ($1.3 million) annually clearly figured in Depardieu's decision.
Although the French Constitutional Court has recently declared Hollande's 75 per cent rate tax unconstitutional, the French government has signalled its determination to persist with its tax policy, albeit in revised form.
The concerning aspect of the "Depardieu Shrugged" affair is that the French policy stance is hardly an isolated instance in the post-global financial crisis economic environment.
Numerous Western governments have already implemented, or are advocating, extra taxes on the wealthy as an apparent quick-fix to plug burgeoning budget deficits and runaway public debts created by years of excessive expenditure.
Eurozone countries such as Greece, Ireland, Italy, Portugal and Spain have joined France in raising top marginal income tax rates, while France and Spain have increased or re-introduced wealth taxes respectively.
Over the past few years Britain has introduced a raft of tax increases, including on personal incomes and capital gains, targeting the wealthy. In the US, Barack Obama called for raising taxes on families earning more than $250,000 during his 2012 re-election campaign, and has used this proposal as a key plank of recent "fiscal cliff" negotiations with his Republican adversaries.
Those possessing wealth may well be regarded by politicians as an instant source from which to collect extra revenues, but cases abound where governments pursuing "soak the rich" tax policies are subsequently frustrated by lower-than-expected revenues.
An important reason for such outcomes, as has been witnessed, for example, in Britain, as tax increases have not translated into substantial extra revenues, is that increasing taxation tends to dampen labour supply and capital accumulation, thereby hampering economic growth.
As a result of the disincentive effects of taxation, it is conceivable that present tax rates may be set so high that further increases in rates will actually reduce tax revenues received by the government.
Another important dimension to the problem, which seems to be continually discounted by revenue-hungry governments, is that the wealthy can prevent tax discrimination against them by relocating to lower-taxing jurisdictions.
In France, more than 400 homes have been placed on the Paris luxury property market since Hollande's election victory last May, and a number of French high net worth individuals have reportedly already relocated to countries such as Belgium, Luxembourg and Switzerland. It has also been estimated that about two-thirds of Britain's millionaires left the country when the Cameron [It was actually Gordon Brown] government increased the top marginal income tax rate to 50 per cent.
Movements by the wealthy to escape the burden of high taxes are also prevalent within highly decentralised federal systems, such as the US.
Data from the US Internal Revenue Service indicates that the numbers of wealthy tax filers in high-tax states, such as California and New York, have declined in recent years.
By contrast, the numbers of wealthy individuals have grown significantly in recent years in the likes of Texas, which does not impose a state income tax, suggesting some element of mobility from high-tax to low-tax US states in the process.
Even if the wealthy decide to physically remain in their country or region of residence, the integration of the global economy ensures they could relocate their finances or capital to less fiscally oppressive areas of the world with fewer obstacles.
One of the great paradoxes is how the political popularity of taxing the wealthy often overshadows the lack of economic and financial success that such policies deliver.
There seems little question that exorbitant taxes on the wealthy might appeal to the economically prejudiced who believe that rich people attained their wealth through ill-gotten profits raked from poor consumers.
To the extent that tax policies are rationalised on these grounds, the imposition of higher taxes on those with higher incomes in fact represents a political disendorsement of consumer choices.
After all, Bill Gates and Steve Jobs made their abundant fortunes by providing products which pleased customers around the world, just as Gerard Depardieu earned an enormous salary by gaining numerous admirers of his films.
Another populist view is that losing extra dollars in taxation will be far less painful to the wealthy than it would be for those in low to middle income brackets, so the wealthy ought to have their wealth shared about by the force of taxation.
But if high taxes on the wealthy indeed come with little or no pain, why is it that the wealthy often don't sit still, making efforts to relocate their wealth, and even their own person, to lower-taxing environments?
While tax-baiting the wealthy minority might bring politicians some plaudits among the less-wealthy majority, such policies are strewn with dashed revenue expectations and a lack of investor confidence of doing business in countries or regions that partake in such practices.
The weight of economic history will surely adjudge the Hollande supertax experiment as being not unlike a French souffle collapsing upon itself.
Class Warfare Tax Policy Causes Portugal to Crash on the Laffer Curve, but Will Obama Learn from this Mistake?
Back in mid-2010, I wrote that Portugal was going to exacerbate its fiscal problems by raising taxes. Needless to say, I was right. Not that this required any special insight. After all, no nation has ever taxed its way to prosperity.
We’re now at the end of 2012 and Portugal is still saddled with a weak economy. And the higher taxes haven’t resulted in less red ink. Indeed, according to the Economist Intelligence Unit, government debt has jumped from 93 percent of GDP in 2010 to 124 percent of GDP this year.
Why did higher taxes backfire in Portugal? For the same reasons that higher taxes have failed in Greece, Spain, Bulgaria, France, Italy, the United Kingdom, and so many other nations.
Higher taxes undermine incentives for productive behavior, thus reducing an economy’s potential for growth. This means less economic output, which also means a smaller tax base. This Laffer Curve effect doesn’t necessarily mean less revenue, but it certainly means that tax increases rarely raise as much money as initially projected.
Higher taxes usually are a substitute for the real solution of spending restraint (i.e., Mitchell’s Golden Rule). Politicians oftentimes refuse to reduce the burden of government spending because of an expectation of additional tax revenue. Heck, in many cases, higher taxes trigger an increase in the size and scope of the public sector.
So did Portugal learn any lessons from this failed experiment in Obamanomics?
Hardly. Indeed, the government plans to double down on this approach – even though it’s increasingly apparent that higher tax burdens won’t translate into much – if any – additional tax revenue.
Amazing. The government imposes huge tax hikes, which don’t generate any positive results. Yet even though “tax revenue has fallen considerably below target,” confirming that there are significant Laffer Curve issues, the government chooses to repeat the snake-oil fiscal therapy of higher taxes.
Maybe it’s time for these fiscal pyromaniacs to realize that revenues might be falling because rates are higher. In other words, Portugal not only isn’t at the ideal point on the Laffer Curve (collecting the amount of revenue needed to finance legitimate activities of government), it may even be past the revenue-maximizing part of the curve.
To be fair, there are lots of factors that determine economic performance, so higher tax burdens are just one possible explanation for why the tax base is shrinking or stagnant.
The one thing we can state with certainty, though, is that Portugal’s fiscal problem is too much government spending. The failure to address this problem then leads to very unpleasant symptoms, such as lots of red ink and self-destructive class-warfare tax policy.
If all that sounds familiar, that’s because it’s also a description of what President Obama is proposing for the United States.
At the risk of bearing bad news to close the year, research from both the Bank for International Settlements and the Organization for Economic Cooperation and Development shows the United States actually faces a bigger long-run fiscal challenge than Portugal.
Austerity Economics Doesn’t Work?
Re: John Cassidy’s recent New Yorker piece, "It’s Official: Austerity Economics Doesn’t Work"
Is it official? Is austerity economics a failure? Here’s how Cassidy’s piece begins:
With all the theatrics going on in Washington, you might well have missed the most important political and economic news of the week: an official confirmation from the United Kingdom that austerity policies don’t work.
In making his annual Autumn Statement to the House of Commons on Wednesday, George Osborne, the Chancellor of the Exchequer, was forced to admit that his government has failed to meet a series of targets it set for itself back in June of 2010, when it slashed the budgets of various government departments by up to thirty per cent. Back then, Osborne said that his austerity policies would cut his country’s budget deficit to zero within four years, enable Britain to begin relieving itself of its public debt, and generate healthy economic growth. None of these things have happened. Britain’s deficit remains stubbornly high, its people have been suffering through a double-dip recession, and many observers now expect the country to lose its “AAA” credit rating.
Unfortunately, this is the only data in the article and it’s pretty strange data. Which data am I referring to? The fact that in June of 2010, Cameron “slashed the budgets of various government departments by up to thirty per cent.” That’s the official confirmation that austerity doesn’t work. If you slash the budgets of “some government departments” and you still get a recession, that confirms that austerity isn’t good for the economy.
That’s like a guy who drinks too much wine, beer and scotch every day claiming he’s not an alcoholic anymore because he reduced his consumption of some varieties of wine by up to 30%. Wouldn’t you want to pay attention to his overall consumption of alcohol? Some government department budgets were reduced by up to 30%? What happened to overall government spending? Cassidy never tell us. There are no data in the article about the overall level of spending in the UK. Cassidy continues:
One of the frustrations of economics is that it is hard to carry out scientific experiments and prove things beyond reasonable doubt. But not in this case. Thanks to Osborne’s stubborn refusal to change course—“Turning back would be a disaster,” he told Parliament—what has been happening in Britain amounts to a “natural experiment” to test the efficacy of austerity economics. For the sixty-odd million inhabitants of the U.K., living through it hasn’t been a pleasant experience—no university institutional-review board would have allowed this kind of brutal human experimentation. But from a historical and scientific perspective, it is an invaluable case study.
At every stage of the experiment, critics (myself included) have warned that Osborne’s austerity policies would prove self-defeating. Any decent economics textbook will tell you that, other things being equal, cutting government spending causes the economy’s overall output to fall, tax revenues to decrease, and spending on benefits to increase. Almost invariably, the end result is slower growth (or a recession) and high budget deficits. Osborne, relying on arguments about restoring the confidence of investors and businessmen that his forebears at the U.K. Treasury used during the early nineteen-thirties against Keynes, insisted (and continues to insist) otherwise, but he has been proven wrong.
If decent economics textbooks teach their students that “cutting government spending causes the economy’s overall output to fall, tax revenues to decrease, and spending on benefits to increase,” and “the end result is slower growth (or a recession) and high budget deficits” then we should be using the indecent ones. Because there’s no conclusive evidence or natural experiment to support that view.
After mentioning how important it is for Americans to learn the lesson that the UK has now learned, Cassidy continues:
Just like the Bush Administration (2008) and the Obama Administration (2009), Gordon Brown’s Labour government had introduced a fiscal stimulus to help turn the economy around. G.D.P. was growing at an annual rate of about 2.5 per cent. Once Osborne’s cuts in spending started to be felt, however, things changed dramatically. In the fourth quarter of 2010, growth turned negative and a double-dip recession began. So far, it has lasted two years. While G.D.P. did expand in the third quarter of this year, the Office of Budget Responsibility, an independent economic agency that Osborne set up, has said that it expects another decline in the current quarter. For 2013, the O.B.R. is forecasting G.D.P. growth of just 1.3 per cent. With the economy so weak, the O.B.R. says that the unemployment rate will tick up from eight per cent to 8.2 per cent next year. That austerity has led to recession is undeniable.
But Cassidy does not give the reader any actual data on those budget cuts of Osborne’s that undeniably caused the recession other than to say that some departments were cut by 30%. So let’s take a look at what actually happened.
I am not an expert on UK economic data so I’m going to give you the two sources I know about, the UK’s Office of National Statistics (ONS) and Eurostat.
There is no reduction in nominal spending in either the Eurostat or ONS data. So no nominal austerity.
In real terms, the Eurostat data show a slight drop in 2010. Less than 1%. Let me write that again. Less than 1%. That’s the austerity that plunged the UK into a double-dip recession according to Cassidy and provided the natural experiment that makes our understanding of austerity official. In 2011, according to Eurostat, real spending fell 4.1%.
Draw your own conclusions.
And of course, these changes in government spending are not the only things that are changing in the world. As Jeffrey Sachs writes in the Financial Times:
And the UK’s slowdown has more to do with the eurozone crisis, declining North Sea oil and the inevitable contraction of the banking sector, than multiyear moves towards budget balance.
Mr. Cassidy has helped his readers know something that probably is not true. There has either been no austerity in the UK or at best, very little. There is no natural experiment here.
SOURCE (See the original for links and graphics)
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