Tax Policy

[Crafty_Dog]

WSJ 
By ARTHUR LAFFER

It is tempting to dismiss the role played by incentives in economics, but the persistence of poverty in the inner city and elsewhere is difficult to explain with any other view of human behavior. Poor people, like everyone else, respond to incentives. The dilemma is how to introduce market incentives while still maintaining a generous system of helping those in need.

The first step is to consider the role played by disincentives, whether they are disincentives to work because government benefits fall away as income rises, or disincentives that make employers reluctant to hire entry-level workers likely to come from the ranks of the young unemployed.

More than three decades ago, I began enumerating a myriad of government "needs tested" programs that diminished welfare benefits as their recipients earned more income. The loss of government benefits made earning more income less attractive to many low-income families, an effect similar to that of raising marginal tax rates.

In the intervening years, alas, very little has changed. Gary Alexander, secretary of public welfare for the State of Pennsylvania, made that quite clear in a July presentation to the American Enterprise Institute entitled "Welfare's Failure and the Solution," an analysis of the welfare benefits plus wages of a single mother of two young children living in Pennsylvania.

Mr. Alexander reports that a single mother of two in the Keystone State earning no wages will obtain welfare benefits—such as food stamps, child care and Medicaid services—worth more than $45,000 annually. If the woman begins earning wages, her total annual income, including the value of her welfare benefits, will rise as well—up to about $9,000 in wages. But the next $5,000 in wages will not increase her total income, because she will lose some Medicaid and other benefits. In short, she faces the equivalent of a 100% marginal tax.

From about $14,000 to $29,000 of gross wages, she will also lose government benefits such that her total annual income will rise only about $5,000—an effective marginal tax rate of 67%. At $29,000 of wages, the woman will realize a little less than $57,000 in net income plus benefits. Once she earns more than $29,000 in wages her housing subsidies and food subsidies drop way down. With wages above $43,000, her child-care subsidies disappear, and once her wages top $57,000 her family will no longer qualify for the Children's Health Insurance Program.

What this means is that her total income—welfare benefits plus wages, minus taxes—won't reach $57,000 until her gross wage income rises to $69,000. In other words, the money earned by her between $29,000 and $69,000 faces a marginal tax rate, on average, of 100%. She receives no net benefit from her labor. Now if that doesn't motivate you to get up and go to work, I don't know what will.

This example is particular to a single mother in Pennsylvania with two children, but the principles apply generally across the country. People with low incomes who receive various forms of welfare subsidies in any number of states—with and without children, whether married or not—face enormous disincentives in trying to improve their lives by working. And these barriers to self-improvement through work have been rising over time.

According to the most recent Census Bureau data, the percentage of the American population in 2011 living below the poverty line was 15%, tied for a 50-year high and well above the 11.4% in the late 1970s when I began calling attention to "needs tested" disincentives to work.

Using employment as a share of total population for especially vulnerable demographics, the consequences of poorly thought-out policies are stark.

Consider the predicament of teenagers 16 to 19 years old, whose employment-to-population ratio has been 26%—about one in four young people employed—for the past three years. In the period 1975-2002, the ratio was in a healthier 40%-50% range. For African-Americans 16 to 19 years old, the employment-to-population ratio for the past four years has been in the anemic 14.5% to 16.5% range. Minimum-wage laws ostensibly intended to help the young and poor may have put a bit more money in the pockets of those who found work, but study after study indicates that governmental minimum-wage interventions discourage employers from hiring.

How to counter these disincentives? My preferred solution is to enact a form of enterprise zone where marginal tax rates would be greatly lowered for both employers and employees in areas with high poverty. For starters, employer and employee payroll taxes could be eliminated for people who both live and work in the enterprise zones. There would be scant revenue loss to the U.S. Treasury because few people are working in these areas anyway.

Second, tax rates on corporate profits and personal income could also be reduced in the enterprise zones for businesses and employees whose principal residence is in the enterprise zone. Potential workers need employers after all. Once these residents see that their pay will not be whittled away by payroll and income taxes, they will not be so disinclined to sacrifice the government benefits that would recede as their income increases.

Developing business and life skills through on-the-job training is crucial for populations suffering generational poverty. To help make youth employment in the country's poorest areas more attractive, enterprise zones should eliminate job-killing state and federal minimum wage requirements for workers under 21. (The "youth minimum wage" provision allows payment of $4.25 an hour to workers under age 20 instead of the federal $7.25 minimum wage, but the rate expires after 90 days.)

After being unemployed for a number of years, poor, unskilled youths often become unemployable. And, after being unemployable for a number of years, many of them quite understandably become hostile to the world, and society has to spend fortunes protecting itself from them. It is a dispiriting Catch-22.

In the spirit of the late, great New York Rep. Jack Kemp, the time is right to take up the cause of a bipartisan pro-growth agenda for America's pockets of poverty.

Mr. Laffer, chairman of Laffer Associates and the Laffer Center for Supply-Side Economics, is co-author, with Stephen Moore, of "Return to Prosperity: How America Can Regain Its Economic Superpower Status" (Threshold, 2010).

[DougMacG]

Prof. Laffer analyzes the problem superbly IMO, recognizing that the disincentives are on both sides, the employer and the potential employee. 

It is astounding to know that a small family in ordinary circumstances makes $45,000 (after taxes) without working at all.  You could stop the search for the disincentives right there but that isn't the worst of it.  He gives a specific example where a single mother of two faces marginal tax rates of 67 - 100% as they try to better themselves above that level.  The massive disincentive to improve one's lot ought to catch the attention of everyone who cares about either side of the problem, revenues to the government or the human side of getting people onto a more productive track.  It is the dilemma of these programs that should concern everyone involved, yet seldom is it written or spoken, especially in terms this precise.  (Maybe David Gregory will confront Dick Durbin with this tomorrow, or Steve Kroft will follow up with the President about real failure and solutions.)

Laffer skips one other key component: it is about risk, not just money.  A potential new job especially with a new company involves very high risk.  What if you don't like the work?  What if you aren't good at it?  What if the company goes under? What if the company does fine and you like the job but they let you go for all the wrong reasons?  The answer is that you just gave up your food, housing or healthcare subsidy for a high risk and a very low return.  It isn't happening.  Recipients of section 8 for example know you don't give up your qualification in a program, once you land it.  Far more likely under these perverse disincentives if you are conscientious and responsible is that you learn to live within the guidelines that are housing your family and keep reported income within the requirements. and stay on the program.  If not for yourself, you do it for the children.

If 67% is too high for the Phil Mickelson family, how does a 67-100% rate work for an unworking single mom of two?  We know the empirical answer, people are migrating onto these programs, not off of them.  Baseline thinking acknowledges that and understates it.  People don't need a calculator to see the impact of a marginal tax rate over 50%, sometimes approaching 100%.  They know it isn't worth it.

I have mixed feelings about enterprise zones.  I don't like creating uneven rules for taxation, but he is correct to point out we have virtually no current revenues there to lose and everything to gain. 

A smaller idea is to just waive many of these things, certain taxes and payroll regulations, in the start up of a new business.  Give them a moment to get going before throwing the book at them on most things.  No withholding and limited payroll compliance requirements in the first calendar year of a new business, especially where they are hiring someone who wasn't previously working.  Let the business get started, build a product, perform a service and get some revenues coming in before they have to pay taxes and staff and house a payroll department, human resources, accountants and attorneys. 

With all the compliance requirements, only a rich person can start a business and those very few are the ones we chase away. 

Government will get plenty of forms and revenues from new businesses in the long run if they first launch and survive the startup.

[Crafty_Dog]

Calvin Coolidge for President
Silent Cal was an "economic general" who cut taxes and produced a run of surpluses. .
By ROBERT MERRY

'Debt takes its Toll.' Thus does Amity Shlaes begin her biography of Calvin Coolidge, the laconic, flinty-faced New Englander who became America's 30th president upon the death of Warren Harding in 1923 and then captured the office in his own right in 1924. Ms. Shlaes, the author of a best-selling history of the Great Depression, "The Forgotten Man" (2007), issues her debt admonition in the course of introducing Oliver Coolidge, a brother of Silent Cal's great-grandfather, who went to jail in 1849 because he couldn't pay a $29.48 debt to a neighbor. She then glides briskly from Oliver's plight to the problem of government debt, particularly when it reaches proportions that threaten the public fisc and undermine national confidence. "There have been times," Ms. Shlaes writes in the introduction to "Coolidge," "when debt pinned down the United States as it once pinned down Oliver.''

Coolidge
By Amity Shlaes
Harper, 565 pages, $35

Calvin Coolidge lived in such a time—as do we. At the end of World War I, the national debt stood at $27 billion, nine times its level before the war. But Coolidge, and Harding as well, slashed the country's credit obligation to just $17.65 billion. They did it by cutting taxes, generating economic growth and, in the process, flooding federal coffers with surplus dollars. This accomplishment merits attention today, with the national debt exceeding $16 trillion—more than 70% of gross domestic product. If that number hits 90%, some economists warn, it will squeeze the national economy inexorably.

And if that crisis hits, the country will face a binary choice. It can return to a free-market system of lower taxes, smaller government and the curtailment of the Federal Reserve's promiscuous fiat monetary policies—in short, abandoning Keynesian sensibilities and the trend toward European-style social democratic governance. Or it can opt for what energy-industry executive Jay Zawatsky has called "increasing financial repression"—further federal spending and intrusion into the economy, rising tax rates on the wealthy, ever greater federal debt financed by Fed money creation and, eventually, rising inflation.

To understand the first option, it is necessary to understand the 1920s. And we can't understand the 1920s without peering into the life and politics of Calvin Coolidge—"principally a man of work," as Ms. Shlaes describes him, "a minimalist president, an economic general of budgeting and tax cuts." Her biography is thus both timely and important.

Coolidge was born in 1872 in Plymouth Notch, Vt., where folks frowned on showy talk and artifice. Its physical and cultural center was the country store, run by Calvin's father, John, who also farmed and served in the Vermont legislature. Young red-haired Calvin was a quiet lad—and painfully shy. He "found it agonizing to meet even the adults who entered his parents' front rooms,'' Ms. Shlaes writes. But in that austere environment he learned the skills needed "for the eternal combat with the landscape." Life was harsh in that place and time: His mother died when Calvin was 12, his sister six years later.

At the Black River Academy, a boarding school in Ludlow, Vt., young Calvin posted mediocre grades initially and demonstrated little skill for athletics or the arts of social advancement. He loved to read, and legend had it that he devoured every book in the school library. By graduation he had managed to boost his marks to a respectable level, demonstrating a characteristic trait: He was a slow starter, disoriented in new situations but increasingly impressive as he gained comfort with his surroundings.

The pattern repeated itself at Amherst College. "I think I must be very home-sick,'' he wrote his father after his arrival on campus, "my hand trembles so I can't write so any one can read it.'' But over time he advanced academically and socially. "I am confident," he later wrote home, "I have gained a power of grappling with problems that will stand by me all my life.'' By graduation he had opted for a legal career, with an inclination toward politics.

After an apprenticeship, he joined a law firm in Northampton, Mass., where locals warmed to his terseness of expression (they didn't like being billed for long-winded advice) and his skill settling disputes without litigation. Small-town legal work didn't make him rich, but it gave him a base for political pursuits. In 1898, at age 26, he became a city councilman and thereafter interspersed his legal practice with ever-higher electoral positions—city solicitor, clerk of courts, state representative, Northampton mayor, state senator, Senate president, lieutenant governor. In 1918, at age 46, he was elected Massachusetts governor.

Along the way he gained a wife, Grace Goodhue, a pert and lovely graduate of the University of Vermont. A Coolidge exchange with Grace's father reflects the spare mode of New England expression: "Up here on some law business, Mr. Coolidge?'' "Come to see about marrying Grace.''

When the couple married in 1905, the wife of one friend observed, "I don't see how that sulky red-haired little man ever won that pretty, charming woman.'' Living simply, the Coolidges avoided debt, renting their home to avoid even the burden of a mortgage. "Coolidge,'' writes Ms. Shlaes, "did not like to be beholden to bankers or anyone else.''

As a politician, Coolidge came under the sway of the Republican progressive movement, personified with dramatic flair by Theodore Roosevelt. In the state Senate, Coolidge voted for women's suffrage, a state income tax, a minimum wage for female workers and salary increases for teachers. Like Roosevelt, he calculated that Republicans could thwart Democratic inroads on such causes by pre-empting them.

But Coolidge soon began to question progressivism, including Roosevelt's resolve to regulate railroad rates through his Hepburn Act. He saw that railroads, though rich and powerful, operated on the margin. As Ms. Shlaes explains: "The blow Roosevelt had struck to reduce the power of the railroads might be crippling them instead.'' And by undermining the profitability of cross-country shipping, the act undermined U.S. trade with China and Japan.

Coolidge was struck by the radicalism of some labor leaders when, as a state senator, he helped broker an employment agreement between woolen workers and their managers. In a letter he wrote that the leaders of the Industrial Workers of the World, the famed Wobblies, were "socialists and anarchists'' bent on destroying "all authority, whether of any church or government.''

As Massachusetts governor in 1919, Coolidge gained widespread fame when Boston policemen went on strike, unleashing looting, property destruction and street thuggery. A crippling general strike loomed, and violence was on the rise. A watchful nation feared spreading lawlessness. After trying a conciliatory approach, Coolidge turned implacably decisive. Working through the police chief, he fired the striking policemen and moved to restore order by calling in steel-helmeted state guardsmen. "There is no right to strike against the public safety,'' he declared, "by anybody, anywhere, any time.''

Ms. Shlaes's story, constructed as a kind of chronological diary, has a disjointed quality, as descriptions of powerful events that generate mounting reader interest get interrupted by less consequential matters that break the narrative. This is not a biography for those in search of gripping drama. But the research is exhaustive, and the political and economic analysis sound. These aspects come to the fore especially in the concluding sections of the book, as the White House comes into view.

In 1920, Coolidge emerged as the running mate to Republican presidential candidate Warren Harding, an intellectually lethargic man who nonetheless understood the need to remake the GOP into a more conservative party and move the country in a new direction. President Woodrow Wilson's postwar economy was in free fall, and the country needed a new economic philosophy to get beyond the Wilson mess.

Harding's watchword was "normalcy''—meaning, as Ms. Shlaes describes it, "low taxes, tariffs, less central government, and stability.'' He won in a landslide, a clear repudiation of Wilson's progressive policies, and quickly moved, at the counsel of Treasury Secretary Andrew Mellon, to cut taxes and restore the economy. The aim, says Ms. Shlaes: "to retire debt, not to expand it.''

The new direction was well-established by August 1923, when Harding died unexpectedly at age 57, most likely from congestive heart failure. But Mellon believed the new president could generate continuing economic growth through greater application of a "scientific taxation'' concept—"supply side'' economics, in today's parlance—designed to generate economic activity, and federal revenue, by reducing top marginal tax rates. In Coolidge's time, as today, the concept stirred widespread skepticism.

Coolidge sent to Congress a "scientific taxation" bill that he hoped to get passed before he faced the voters in 1924—proposing to lower the top tax rate to 30% or even 25% from 50% (it had been 77% when Harding took office). The party establishment in Congress watered it down, leaving the top tax rate at 43.5% and directing most of the tax relief to middle-income Americans. Though disappointed, Coolidge signed the bill with a resolve to revisit the matter after his election, in which he defeated Democratic candidate John W. Davis by a decisive margin.

He eventually got the top rate down to 25%. The GDP soared, increasing by 25% during the Harding-Coolidge years. The result, coupled with fiscal austerity, was a nation flush with tax receipts—surpluses of $100 million in 1925, $375 million in 1926 and nearly $600 million the next year.

The Coolidge years represent the country's most distilled experiment in supply-side economics—and the doctrine's most conspicuous success. That success is the central Coolidge legacy, brought home with telling authority in Ms. Shlaes's work. This book's time is propitious. As the nation faces a looming economic crisis wrought in large measure by mounting public debt, the Coolidge experiment offers insights into what an alternative course might look like. Ms. Shlaes has given us a detailed examination of that alternative course.


Mr. Merry, editor of the National Interest, is the author of "Where They Stand: The American Presidents in the Eyes of Voters and Historians."

[DougMacG]

"Coolidge
By Amity Shlaes
Harper, 565 pages

Amity Shlaes built a great credibility IMO with her extensive research and journalism, breaking against conventional thought on the economics of the Great Depression: http://www.amazon.com/Forgotten-Man-History-Great-Depression/dp/0060936428

The Coolidge story can be added the list of other supply side economic successes in our short, federal income tax history.  Along with evidence that the Kennedy tax rate cuts lifted all vessels, Reagan's tax rate cuts doubled revenues inside a decade, Clinton-Gingrich capital gains rate reductions balanced the budget, and the 50 month hiring surge and 44% revenue surge after the Bush tax rate cuts, this I think closes the argument against the challenge that marginal tax are not as closely tied to economic performance as some of us claimed.   

Abject failure of current policies, opposite of supply side, makes the same case.

[bigdog]

http://www.theatlantic.com/business/archive/2013/02/how-the-100-year-old-income-tax-unleashed-the-modern-us-economy/273470/

From the article:
"Progressive politicians embraced the income tax as way to raise money for the federal government without burdening the average household with the high living costs imposed by duties. Anyone who believed in free trade, who wanted to end protectionism and allow American markets to develop without obstruction, had to offer some revenue that didn't come from tariffs. Ratification of the Sixteenth Amendment let reformers finally welcome an alternative source of tax revenue: American incomes."

[G M]

http://www.theatlantic.com/business/archive/2013/02/how-the-100-year-old-income-tax-unleashed-the-modern-us-economy/273470/

From the article:
"Progressive politicians embraced the income tax as way to raise money for the federal government without burdening the average household with the high living costs imposed by duties. Anyone who believed in free trade, who wanted to end protectionism and allow American markets to develop without obstruction, had to offer some revenue that didn't come from tariffs. Ratification of the Sixteenth Amendment let reformers finally welcome an alternative source of tax revenue: American incomes."

Is that the pre-collapse or post-collapse America the income tax was to have created?

[Crafty_Dog]

http://scottgrannis.blogspot.com/2012/11/how-federal-largesse-traps-poor.html

[DougMacG]

http://scottgrannis.blogspot.com/2012/11/how-federal-largesse-traps-poor.html

Excellent work by Scott  G on a very important topic.

[Crafty_Dog]

http://enews.earthlink.net/article/top?guid=20130303/cda94938-e315-42b3-b339-7a0b8d742782

Tax bills for rich families approach 30-year high
By STEPHEN OHLEMACHER
From Associated Press
March 03, 2013 7:38 AM EST
WASHINGTON (AP) — The poor rich.

With Washington gridlocked again over whether to raise their taxes, it turns out wealthy families already are paying some of their biggest federal tax bills in decades even as the rest of the population continues to pay at historically low rates.

President Barack Obama and Democratic leaders in Congress say the wealthy must pay their fair share if the federal government is ever going to fix its finances and reduce the budget deficit to a manageable level.

A new analysis, however, shows that average tax bills for high-income families rarely have been higher since the Congressional Budget Office began tracking the data in 1979. It's middle- and low-income families who aren't paying as much as they used to.

For 2013, families with incomes in the top 20 percent of the nation will pay an average of 27.2 percent of their income in federal taxes, according to projections by the Tax Policy Center, a research organization based in Washington. The top 1 percent of households, those with incomes averaging $1.4 million, will pay an average of 35.5 percent.

Those tax rates, which include income, payroll, corporate and estate taxes, are among the highest since 1979.

The average family in the bottom 20 percent of households won't pay any federal taxes. Instead, many families in this group will get payments from the federal government by claiming more in credits than they owe in taxes, including payroll taxes. That will give them a negative tax rate.

"My sense is that high-income people feel abused by being targeted always for more taxes," said Roberton Williams, a fellow at the Tax Policy Center. "You can understand why they feel that way."

Last week, Senate Democrats were unable to advance their proposal to raise taxes on some wealthy families for the second time this year as part of a package to avoid automatic spending cuts. The bill failed Thursday when Republicans blocked it. A competing Republican bill that included no tax increases also failed, and the automatic spending cuts began taking effect Friday.

The issue, however, isn't going away.

Obama and Democratic leaders in Congress insist that any future deal to reduce government borrowing must include a mix of spending cuts and more tax revenue.

"I am prepared to do hard things and to push my Democratic friends to do hard things," Obama said Friday. "But what I can't do is ask middle-class families, ask seniors, ask students to bear the entire burden of deficit reduction when we know we've got a bunch of tax loopholes that are benefiting the well-off and the well-connected, aren't contributing to growth, aren't contributing to our economy. It's not fair. It's not right."

The Democrats' bill included the "Buffett Rule," named after billionaire investor Warren Buffett. It gradually would phase in a requirement that people making more than $1 million a year pay at least 30 percent of their income in federal taxes.

The rule targets millionaires who make most of their money from investments — capital gains and qualified dividends, which have a top tax rate of 20 percent.

"It's fairness," said Sen. Claire McCaskill, D-Mo. "We're not raising taxes with the Buffett rule as much as we are correcting an inequity in terms of, one guy can be working at one end of the hall and because he's working with hedge funds, he gets taxed at 20 percent. Another guy at the other end of the hall is on a salary at an insurance company and he has to pay (39.6 percent). That's just not fair."

On average, households making more than $1 million this year will pay 37.2 percent of their income in federal taxes, according to the Tax Policy Center. But there are exceptions.

For example, the Internal Revenue Service tracks tax returns for the 400 highest-paid filers each year. Those taxpayers made an average of $202 million in 2009, the latest year available. Their average federal income tax rate: 19.9 percent.

That's still higher than the tax rate paid by most middle-income families, but not by much.

The middle 20 percent of U.S. households — those making an average of $46,600 — will pay an average of 13.8 percent of their income in federal taxes for this year, according to the Tax Policy Center. Over the past three decades, the average federal tax rate for this group has been about 16 percent.

The Associated Press analyzed two sets of data to compare tax burdens over time.

The CBO produces data from 1979 to 2009; the center has overlapping data from 2004 through 2013. Both get tax data from the IRS, but they use slightly different methodologies to calculate federal tax burdens.

Still, their numbers track closely enough to make some general observations. For example, it is clear that for 2013, average tax bills for the wealthy will be among the highest since 1979. It also is clear that federal taxes for middle- and low-income households will stay well below their averages for the same period.

Liberals and many Democrats say rich families can afford to pay higher taxes because their incomes have grown much more than incomes for middle- and low-income families.

Average after-tax incomes for the top 1 percent of households more than doubled from 1979 to 2009, increasing by 155 percent, according to the CBO. Average incomes for those in the middle increased by just 32 percent during the same period while those at the bottom saw their incomes go up by 45 percent.

"You've got to think about the context," said Chuck Marr, director of federal tax policy for the Center on Budget and Policy Priorities, a liberal think tank. "We just had three decades in the United States where we had a tremendous increase in inequality."

The growing disparity in income is a big reason why tax bills for the rich are approaching 30-year highs, Williams said. As the rich get richer, a greater share of their income is taxed at the top rate, he said.

High-income families also have been targeted by tax increases this year, including a new tax law passed by Congress on Jan. 1 as well as tax increases in the president's health care law.

The new tax law made the federal income tax more progressive, increasing the top tax rate from 35 percent to 39.6 percent, on taxable income above $400,000 for individuals and $450,000 for married couples filing jointly. Lower tax rates on income below those amounts were made permanent. Also, tax breaks for low-income families first enacted as part of Obama's 2009 stimulus package were extended through 2017.

[DougMacG]

That is pretty good reporting by the AP and pretty good analysis by the not always non-partisan TPC.  Still the problem is understated:

"Last week, Senate Democrats were unable to advance their proposal to raise taxes on some wealthy families for the second time this year as part of a package to avoid automatic spending cuts."

No.  They were trying to raise taxes on the rich for the 3rd, 4th or 5th time this year.  More Obamacare taxes just went into effect, plus one might include state taxes like in Calif and Minn if one is really trying to measure the combined effects of failed policies.

"For example, the Internal Revenue Service tracks tax returns for the 400 highest-paid filers each year. Those taxpayers made an average of $202 million in 2009, the latest year available. Their average federal income tax rate: 19.9 percent."

My apologies to civility on the board but it is such a God damned lie for informed people to write so inaccurately.  In order for a top income return to pay at the 15% rate, now 20% rate, they are including long term capital gains which by definition over our entire lifetimes includes an inflation component which is not income in any sense at all.  Also much of those gains were corporate and therefore quadruple taxed while they point out how 'small' one component out of four can be.

Then for the middle and lower income taxpayers they include FICA to make comparisons which I did not think was part of the federal income tax.  But lower income workers get a nice return an social security and medicare payments while higher income people do not.

Other than that, good news that someone is pointing out that we are heading back to the Jimmy Carter days as the alarmists among us have warned.

[Crafty_Dog]

Laffer and Moore: The Red-State Path to Prosperity

By ARTHUR B. LAFFER
AND STEPHEN MOORE

You can tell a lot about prosperity in America by observing the places people are moving to and where they are packing up and moving from. New Census Bureau data on metropolitan areas indicate that the South and the Sunbelt regions continue to grow, while the Northeast and Midwest continue to shrink.

Among the 10 fastest-growing metro areas last year were Raleigh, Austin, Las Vegas, Orlando, Charlotte, Phoenix, Houston, San Antonio and Dallas. All of these are in low-tax, business-friendly red states. Blue-state areas such as Cleveland, Detroit, Buffalo, Providence and Rochester were among the biggest population losers.
 
Art Laffer, chairman of Laffer Associates, on how blue states with high taxes are struggling to compete for businesses and workers. Photo credit: Associated Press.
.
Americans for Prosperity president Tim Phillips on Republican opposition in some states to income tax cuts. Photos: Getty Images
..This migration isn't accidental. Workers and business owners are responding to clear economic incentives. Red states in the Southeast and Sunbelt are following the Reagan model by reducing tax rates and easing regulations. They also offer right-to-work laws as an enticement for businesses to come and set up shop. Meanwhile, the blue states of the Northeast, joined by California, Minnesota and Illinois, are implementing the Obama model of raising taxes on businesses and the wealthy to fund government "investments" and union power.

The contrast sets up a wonderful natural laboratory to test rival economic ideas.

Consider the South. We predict that within a decade five or six states in Dixie could entirely eliminate their income taxes. This would mean that the region stretching from Florida through Texas and Louisiana could become a vast state income-tax free zone.

Three of these states—Florida, Texas and Tennessee—already impose no income tax. Louisiana and North Carolina, both with bold Republican governors and legislatures, are moving quickly ahead with plans to eliminate theirs. Just to the west, Kansas and Oklahoma are also devising plans to replace their income taxes with more growth-friendly expanded sales taxes and energy extraction taxes. Utah, while not a Southern state, leads the tax-cutting pack under Republican Gov. Gary Herbert.

Much of this is the result of GOP victories in the 2010 and 2012 elections. Today 10 of the 12 governors in the Southern states are Republican, and in nine of those states the Republicans control both chambers of the legislature.

Meanwhile, the Northeast is bluer than ever. Consider Massachusetts, where only four of the 40 state senators and just 29 of the 160 House members are Republicans. In the past two elections, the GOP was crushed in Connecticut, New York, Rhode Island and Illinois. And in 2012, Democrats gained a supermajority in both houses of the California legislature for the first time since 1883. Not surprisingly, California, Illinois, New York, Oregon, Minnesota, Hawaii, Connecticut, Maryland and Massachusetts have all raised income taxes in recent years.

But it isn't just higher taxes that make these so-called progressive states less attractive to business. Red states Texas, Oklahoma, Wyoming, West Virginia, Montana and North Dakota (and a few blue states like Ohio and Pennsylvania) are getting rich from oil and gas drilling. Meanwhile, bluer-than-blue New York has extended its moratorium on the technological advance behind the boom, hydraulic fracturing, citing overblown environmental hazards, and Vermont has outlawed it altogether. California's regulations prohibit nearly all new drilling of any kind.

Moreover, the entire Northeast and West Coast is anti-right-to-work, meaning that workers employed in unionized workplaces may be required to join the union and pay dues that might go toward political causes they disagree with. Most of these blue states also have super-minimum wage laws that price low-income workers out of the job market.

All the empirical evidence shows that raising a state's tax burden weakens its tax base. Still, too many blue-state lawmakers believe that a primary purpose of government is to redistribute income from rich to poor, even if those policies make everyone, including the poor, less well off. The obsession with "fairness" puts growth secondary.

Meanwhile, in the South, watch for a zero-income-tax domino effect. Georgia can hardly sustain a 6% income tax if businesses can skip across the border into neighboring states like Florida, Tennessee or South Carolina. Oklahoma Gov. Mary Fallin has told her legislature that the Sooner State will face high economic hurdles in the future if it is an income-tax sandwich between Texas and Kansas. Last year, Tennessee Gov. Bill Haslam signed into law legislation repealing the state gift tax and phasing out the state estate tax. Next on the docket? Repealing the state's tax on "unearned income"—income from sources other than wages such as rent and investments.

Increasingly, under Republican leadership, the pro-growth movement is spreading north. Over the past two years, Michigan and Indiana passed right-to-work legislation, and the latter phased out its estate tax. Ohio Gov. John Kasich turned a $6 billion deficit into a budget surplus with no tax increases. Wisconsin Gov. Scott Walker made a number of positive budget and collective-bargaining reforms and wants tax cuts this year. Kansas Gov. Sam Brownback signed into law legislation slashing the state's highest personal income-tax rate to 4.9% from 6.45%, and says his ultimate goal is to eliminate the income tax.

In short, red states of the South and other areas of the country are moving forward with pro-growth tax reform, while California and the blue states of the Northeast are doubling down on Obamanomics and European progressivism. Who will come out on top? Our money is on the red states and those wisely following their lead.

Mr. Laffer is chairman of Laffer Associates. Mr. Moore is a member of the Journal's editorial board.

[DougMacG]

First this on the previous post - people are leaving failed liberal states and going to the freer, lower tax, supply side states for economic reasons.  Unfortunately they are not leaving their failed political ideas behind.  Case in point: Colorado.  Leading us to this:

http://www.politico.com/story/2013/03/buzzkill-cash-strapped-states-eye-pot-tax-89412.html
Cash-starved states eye pot tax     3/28/13

The legalization argument went something like this, make it legal, drive the price down and liberty will replace crime across the fruited plain.

Enter the tax man.  Pass these bills and your private transactions are no longer legal - or private.  I wonder if this is what the libertarian, just leave me alone, recreational users had in mind.

Half the states already tax it even while it is illegal:http://www.ksrevenue.org/perstaxtypesdrug.html  In 10 years under the stamp act in MN, fewer than 20 people bought the stamps and I doubt if the reasons were for tax law compliance.

[Crafty_Dog]

When I ran for Congress in 1992, I said the same thing:

Why We Support a Revenue-Neutral Carbon Tax
Coupled with the elimination of costly energy subsidies, it would encourage competition..
By GEORGE P. SHULTZ
AND GARY S. BECKER

Americans like to compete on a level playing field. All the players should have an equal opportunity to win based on their competitive merits, not on some artificial imbalance that gives someone or some group a special advantage.

We think this idea should be applied to energy producers. They all should bear the full costs of the use of the energy they provide. Most of these costs are included in what it takes to produce the energy in the first place, but they vary greatly in the price imposed on society by the pollution they emit and its impact on human health and well-being, the air we breathe and the climate we create. We should identify these costs and see that they are attributed to the form of energy that causes them.

At the same time, we should seek out the many forms of subsidy that run through the entire energy enterprise and eliminate them. In their place we propose a measure that could go a long way toward leveling the playing field: a revenue-neutral tax on carbon, a major pollutant. A carbon tax would encourage producers and consumers to shift toward energy sources that emit less carbon—such as toward gas-fired power plants and away from coal-fired plants—and generate greater demand for electric and flex-fuel cars and lesser demand for conventional gasoline-powered cars.

We argue for revenue neutrality on the grounds that this tax should be exclusively for the purpose of leveling the playing field, not for financing some other government programs or for expanding the government sector. And revenue neutrality means that it will not have fiscal drag on economic growth.

The imposition of such a tax raises questions about how it should be levied and what measures should be used to see that the revenues collected are refunded to the public so that the tax is clearly revenue-neutral.

The tax might be imposed at a variety of stages in the production and distribution of energy. You can make an argument for imposing it at the point most visible to the population at large, which would be the point of consumption such as gasoline stations and electricity bills. An administratively more efficient way of imposing the tax, however, would be to collect it at the level of production, which would reduce greatly the number of collection points.

Revenue neutrality comes from distribution of the proceeds, which could be done in many ways. On the grounds of ease of administration and visibility, we advocate having the tax collected and distributed by an existing unit of government, either the Internal Revenue Service or the Social Security Administration. In either case, we think the principle of transparency should be observed. Funds collected should go into an identified fund and the amounts flowing in and out should be clearly visible. This flow of funds should not be included in the unified budget, so as to keep the money from being spent on general government purposes, as happened to the earlier excess of inflows over outflows in the Social Security system.

In the case of administration by the IRS, an annual distribution could be made to every taxpayer and recipient of the Earned Income Tax Credit. In the case of the SSA, the distribution could be made, in terms proportionate to the dollars involved, to everyone either paying into the system or receiving benefits from it. In any case, checks to recipients should be identified as "Your carbon dividend."

The right level of the tax for the United States deserves careful study, but the principle of a lower starting rate with scheduled increases to an identified level has proven to be a good one in the five-year experience of a similar carbon tax in British Columbia. This gives time for producers and consumers to get accustomed to a carbon tax, and to discover how they can respond efficiently.

The tax should also further increase over time if the apparent severity of the climate effects is growing and, alternatively, the tax should fall over time if the severity appears to be decreasing. Finally, to equalize the present and future burdens, the carbon tax rate should rise over time approximately at the real interest rate (say, the real return on 10-year Treasurys), so that the present value of the burden would be the same to future consumers and producers as it is to present ones.

A revenue-neutral carbon tax should be supplemented by a reasonable and sustained support for research and development in the energy area. However, we would eliminate any program (loan guarantees, etc.) that tempts the government to get into commercial activities. Clearly, a revenue-neutral carbon tax would benefit all Americans by eliminating the need for costly energy subsidies while promoting a level playing field for energy producers.

Mr. Shultz is former secretary of labor, director of the Office of Management and Budget, secretary of the Treasury and secretary of state. Mr. Becker, a 1992 Nobel laureate in economics, is a professor of economics at the University of Chicago. Both are senior fellows at Stanford University's Hoover Institution.

[Crafty_Dog]

An abiding lesson of the Obama Presidency is that no tax increase is ever enough. So it's not surprising that the President's new budget includes an increase in the death tax only three months after the last increase.

In January Mr. Obama and Republicans agreed to tax estates at 40% with an exemption of $5 million ($10 million for couples). That was an increase from 35% and a $5 million exemption. Now only weeks later he's again looking for more, as his budget proposes to raise the rate to 45% and reduce the exemption to $3.5 million.

Mr. Obama's budget justifies this bait and switch by claiming that in the fiscal-cliff talks "Republicans insisted" on the 40% estate tax rate, which it also claims is a giveaway "averaging $1 million per estate to the very wealthiest Americans." That's the familiar soak-the-rich disguise for a tax increase, and note well that the White House proposal doesn't index its $3.5 million exemption for inflation.

This means that over time much smaller estates would be hit with a rate that would confiscate nearly half of a lifetime of savings or business success. That's exactly how a death tax that was originally sold in 1916 as hitting only billionaires like the Rockefellers gradually began to apply to middle-class families who own, say, a successful auto-repair shop or invested wisely during the stock market booms of the 1980s and 1990s.

The White House claims this tax increase would raise an extra $79 billion over a decade, but everyone knows the wealthy would change their behavior to shelter more of their estates. Mr. Obama's favorite billionaire, Warren Buffett, plans to shelter his fortune as a tax-exempt foundation, even as he argues for higher death taxes on everyone else.

Republicans are unlikely to go along with this death tax grab, but it once again reveals the disdain that Mr. Obama has for a lifetime of thrift and industry.

[Crafty_Dog]

WSJ

by ARTHUR B. LAFFER
Reinvigorating the economy should be priority No. 1 for federal and state leaders. After enjoying an average growth rate above 3.5% per year between 1960 and 1999, Americans have had to make do with less than one-half that pace since 2000.

The consequences are already dramatic and will become even more so over time. Overall we are 20% poorer today than we would be had the pre-2000 growth rate persisted. All other things being equal, less national income also means federal and state fiscal problems are more intractable.

At the state level, there are reforms that can alleviate the problems associated with declining sales-tax bases and, at the same time, allow the states to move closer to a pro-growth tax system. One such reform would be to have Internet sellers collect the sales taxes that are owed by in-state consumers when they purchase goods over the Web.

So-called e-fairness legislation addresses the inequitable treatment of retailers based on whether they are located in-state (either a traditional brick-and-mortar store or an Internet retailer with a physical presence in the state) or out of state (again as a brick-and-mortar establishment or on the Internet).

In-state retailers collect sales taxes at the time of purchase. When residents purchase from retailers out of state (including over the Internet) they are supposed to report these purchases and pay the sales taxes owed—which are typically referred to as a "use tax." As you can imagine, few people do.

The result is to narrow a state's sales-tax base. It also leads to several inefficiencies that, on net, diminish potential job and economic growth.

Exempting Internet purchases from the sales tax naturally encourages consumers to buy goods over the Web; worse, the exemption incentivizes consumers to use in-state retailers as a showroom before they do so. This increases in-state retailers' overall costs and reduces their overall productivity.

The exemption of Internet and out-of-state retailers from collecting state sales taxes reduced state revenues by $23.3 billion in 2012 alone, according to an estimate by the National Conference of State Legislatures. The absence of these revenues has not served to put a lid on state-government spending. Instead, it has led to higher marginal rates in the 43 states that levy income taxes.

Therefore—as with any pro-growth tax reform—the sales tax base in the states should be broadened by treating Internet retailers similarly to in-state retailers, and the marginal income-tax rate should be reduced such that the total static revenue collected by the state government is held constant.

One difficulty in imposing an Internet sales tax is the existence of dozens, if not hundreds, of sales-tax jurisdictions in many states, often with the tax rates and tax classification of the same goods varying by jurisdiction. It is overly burdensome to task companies with remitting sales taxes to more than 9,500 such tax jurisdictions. Instead, each state should set up a single sales-tax system, making compliance as easy as possible for today's modern sellers.

Addressing e-fairness from a pro-growth perspective creates several benefits for the economy. A gross inequity is addressed—all retailers would be treated equally under state law. It also provides states with the opportunity to make their tax systems more efficient and better aligned toward economic growth, as well as improve the productivity of local retailers.

The principle of levying the lowest possible tax rate on the broadest possible tax base is the way to improve the incentives to work, save and produce—which are necessary to reinvigorate the American economy and cope with the nation's fiscal problems. Properly addressing the problem of e-fairness on the state level is a small, but important, step toward achieving this goal.

Mr. Laffer is the chairman of Laffer Associates.

[DougMacG]

Arthur Laffer is usually right and always worth reading.  That said, I have mixed feelings about this one.

From the conclusion:  "The principle of levying the lowest possible tax rate on the broadest possible tax base is the way to improve the incentives to work, save and produce—which are necessary to reinvigorate the American economy and cope with the nation's fiscal problems."

Yes.

"The exemption of Internet and out-of-state retailers from collecting state sales taxes reduced state revenues by $23.3 billion in 2012 alone, according to an estimate by the National Conference of State Legislatures. The absence of these revenues has not served to put a lid on state-government spending. Instead, it has led to higher marginal rates in the 43 states that levy income taxes."

This I find less convincing.

"It is overly burdensome to task companies with remitting sales taxes to more than 9,500 such tax jurisdictions."

Yes.  Tracking the sales tax to 50 states is burdensome enough for the casual seller or buyer, but it is my county, not my state that is paying a sales tax for the Minnesota Twins stadium for example, and my zip code overlaps the neighboring county that does not pay that tax. 

The "use tax" is bad joke.  For example, Minneapolis has such high property taxes (and extra sales tax) that it has no hope of ever having certain types of large stores locate within the city limits.  But if you go outside the city to buy things and carry them in, you are 'required' to track those purchases and send in the tax, or be in violation of the law.  The compliance rate is zero, leaving otherwise law abiding citizens in perpetual violation of an overly burdensome law.

[DougMacG]

In general should we be broadening the base and lowering the rate of most of our taxes ?  Yes. 

Does the 'internet sales tax' do that?  No.  This is just more taxes on more transactions.  Why give that away without the winning the accompanying lower of the rates?  It is a continuous and permanent transfer of more and more private sector resources over to the public sector. 

Why are the Feds getting involved with state and local tax collections anyway?

We already tried to kill off the supply side of the economy.  Now we are trying to kill off demand.  We hit the savers.  We hit the employers.  It's time to hit the consumers a little harder. 

The policy of the Fannie Mae, government-knows-best Left has gone from risking economic failure to guaranteeing it.

[Crafty_Dog]

Red Jahncke: The Federal Revenue Surge Won't Last
Large capital gains were taken as the low tax rates enacted by Bush neared their expiration date.
By RED JAHNCKE

There were many happy faces in Washington on Friday with the Treasury Department's announcement of robust tax revenues for April. Individual income-tax receipts surged to $240 billion for the month, taking the total for 2013 to $483 billion. This is far greater than the $393 in tax revenues the federal government collected for the first four months of 2012. The increase far surpassed the Congressional Budget Office projections in February.

The influx surprised the CBO and many other observers, but it shouldn't have. Neither should the dramatic drop that is likely to follow, though policy makers will be tempted to behave as if the revenue flood will continue.

Much of the increase in 2013 receipts is due to final tax payments for 2012 deriving from a rush to realize long-term capital gains before the 15% "Bush" tax rate on such gains expired at the end of 2012—and before the new 23.8% rate on long-term capital gains for higher-income taxpayers took effect on Jan. 1. How do we know this? Because virtually the same tax change occurred during the Reagan years, when the long-term capital gains tax rate jumped eight points, to 28% in 1987, when the Tax Reform Act took effect, from 20% in 1986.

Here are the 1980s data expressed in current dollars: In 1985, before any talk of the Tax Reform Act, individual taxpayers reported about $310 billion in long-term capital gains. In 1986, with the Tax Reform Act signed into law but not yet in effect, reported long-term capital gains ballooned to $580 billion. The following year, with the act's 28% rate in place, reported gains plunged to $250 billion. Tax revenues naturally followed—long-term capital gains tax revenue doubled to $90 billion in 1986, or 14.7% of total individual incomes taxes, before falling off again in 1987.

After these gyrations, long-term capital gains did not hit the 1986 peak again for a decade. This tax revenue pattern was replicated in many states whose tax systems peg off the federal system.

The pattern is likely to repeat today. Late last year, fear of a virtually certain steep impending tax increase gave investors every incentive to realize all available gains beforehand, raiding the gains that might have been reported in future years.  We don't know how many gains were taken late last year or, therefore, how much of recently reported income-tax revenues came from capital gains. But clearly they were substantial.  Such was the incentive to beat the impending tax hike that investors seem to have grabbed every available gain.

If 2012 resembles 1986 as a banner year for capital gains, then 2013 will look a lot like 1987, when there were hardly any to be had. Of course, the longer-term horizon depends on the performance of the stock market. It's hitting new all-time highs just now. Just as it was in 1987 before the famous crash.

The danger is that lawmakers and planners on the federal and state levels will mistake the current tax-revenue influx as a surge to a new, long-lasting plateau. It isn't.

Mr. Jahncke is president of the Townsend Group, a management consulting firm in Greenwich, Conn.

[G M]

The light at the end of the tunnel is an oncoming train.

Plan accordingly.

[Crafty_Dog]

President Obama named one of his budget functionaries, Danny Werfel, as the new acting Internal Revenue Service commissioner Thursday. Given that Mr. Werfel has spent the last year planning the sequester across the executive branch, he's more qualified to inflict more political abuse than prevent it. Allow us to propose a better candidate: National Taxpayer Advocate Nina Olson.

Ms. Olson is the ombudsman for the public inside the IRS. Her office parachutes in to aid individuals and businesses when the tax men are jerking them around, as well as making recommendations to Congress about modernizing the IRS and the tax code. She has held the post since 2001.

Ms. Olson seems to view the job as a moral calling, which is much-needed. The integrity of the tax system must be paramount when people are required to hand over giant chunks of their income to government. It usually falls to Ms. Olson to admonish the IRS that its chronic dysfunctions are—to borrow one of her favorite words—"unconscionable."

To take one example, Ms. Olson has been warning about tax-related identity theft since 2004, yet these crimes in which crooks fraudulently obtain someone else's refund have exploded to about half a million every year. The Taxpayer Advocate's identity theft caseload has increased 650% since 2008.

Ms. Olson's solution is for the IRS to create a single "traffic cop" to ensure innocent people get the money they're owed. Last year the IRS did the opposite and diffused accountability over 21 departments, using a "transfer matrix" to bounce victims from one to the next. "We see a lot of what I call the 'not my job' syndrome," Ms. Olson told the Journal of Accountancy in January, when fixing a problem is obvious "yet there's no one in the IRS who will accept responsibility."

Ms. Olson has also wielded a power called Taxpayer Advocate Directives that mandate changes in IRS procedure unless overruled by senior leadership. Four such directives had been issued until 2012 when Ms. Olson doubled the number, with plans to issue more.

She is trying to correct IRS misconduct such as a 2009 voluntary disclosure amnesty that was supposed to let taxpayers with overseas bank accounts amend their returns for errors and settle with a flat penalty. But the IRS merely announced the program on the Web, without the force of law. It then issued a memo telling examiners to treat those coming forward as criminal tax evaders, even for honest mistakes.

Ms. Olson tried to shut down this bait-and-switch violation of due process, but the IRS bureaucracy has responded by ignoring her directives while appealing to the chief IRS counsel to strip her of this authority.

A hundred years after the 16th Amendment created a four-page income tax return in 1913, Ms. Olson has also argued that the complexity of the modern code is the most serious problem for taxpayers. She often notes that tax credits and deductions this year will total $1.09 trillion while individual income tax revenue is about $1.36 trillion, which implies Congress could cut rates by 44% and still raise the same revenue.

That is not President Obama's version of tax reform, but perhaps he'll set aside his liberal preferences in favor of what is now his political interest to clean out the stables at 1111 Constitution Avenue.

[Crafty_Dog]

 The Autocrat Accountants
Once government is ensnared in every aspect of life, a bureaucracy grows increasingly capricious.
By Mark Steyn

Left-wing groups had their 501(c)(4) applications approved in weeks, right-wing groups were delayed for months and years and ordered to cough up everything from donor lists to Facebook posts, and those right-wing groups that were approved had their IRS files leaked to left-wing groups like ProPublica. The agency’s commissioner, a slippery weasel called Steven Miller, conceded before Congress that this was “horrible customer service” — which it was in the sense that your call is important to him and may be monitored by George Soros for quality control.
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A civil “civil service” requires small government. Once government is ensnared in every aspect of life a bureaucracy grows increasingly capricious. The U.S. tax code ought to be an abomination to any free society, but the American people have become reconciled to it because of a complex web of so-called exemptions that massively empower the vast shadow state of the permanent bureaucracy. Under a simple tax system, your income is a legitimate tax issue. Under the IRS, everything is a legitimate tax issue: The books you read, the friends you recommend them to. There are no correct answers, only approved answers. Drew Ryun applied for permanent non-profit status for a group called “Media Trackers” in July 2011. Fifteen months later, he’d heard nothing. So he applied again under the eco-friendly name of “Greenhouse Solutions,” and was approved in three weeks.

The president and the IRS commissioner are unable to name any individual who took the decision to target only conservative groups. It just kinda sorta happened, and, once it had, it growed like Topsy. But the lady who headed that office, Sarah Hall Ingram, is now in charge of the IRS office for Obamacare. Many countries around the world have introduced government health systems since 1945, but, as I wrote here last year, “only in America does ‘health’ ‘care’ ‘reform’ begin with the hiring of 16,500 new IRS agents tasked with determining whether your insurance policy merits a fine.” So now not only are your books and Facebook posts legitimate tax issues but so is your hernia, and your prostate, and your erectile dysfunction. Next time round, the IRS will be able to leak your incontinence pads to George Soros.

Big Government is erecting a panopticon state — one that sees everything, and regulates everything. It’s great “customer service,” except that you can never get out of the store.

— Mark Steyn, a National Review columnist, is the author of After America: Get Ready for Armageddon. © 2013 Mark Steyn